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CapitalSource (NYSE:CSE)

Q1 2012 Earnings Call

April 30, 2012 5:30 pm ET

Executives

Dennis Oakes - Senior Vice President of Investor Relations

James J. Pieczynski - Co-Chief Executive Officer and Director

Douglas H. Lowrey - Chief Executive Officer of CapitalSource Bank, President of CapitalSource Bank and Director of CapitalSource Bank

John A. Bogler - Chief Financial Officer of CapitalSource Bank and Executive Vice President of CapitalSource Bank

Analysts

Mark C. DeVries - Barclays Capital, Research Division

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

John W. Stilmar - SunTrust Robinson Humphrey, Inc., Research Division

Donald Fandetti - Citigroup Inc, Research Division

Scott Valentin - FBR Capital Markets & Co., Research Division

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

Vivek Agrawal - Wells Fargo Securities, LLC, Research Division

Operator

Good afternoon, and welcome to the CapitalSource First Quarter 2012 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Dennis Oakes. Please go ahead.

Dennis Oakes

Well, good afternoon, and thank you for joining the CapitalSource First Quarter 2012 Earnings Call. With me today are CapitalSource CEO, Jim Pieczynski; CapitalSource Bank CEO, Tad Lowrey; and John Bogler, our Chief Financial Officer.

This call is being webcast live on the company website and a recording will be available later this evening. Our earnings press release and website provide details on accessing the archived call. We have also posted a presentation on our website. It provides additional detail on certain topics, which will be covered during our prepared remarks, though we will not be making specific reference to the presentation.

Investors are urged to carefully read the forward-looking statements' language in both our earnings release and investor presentation; but essentially, they say the following: statements made on this call, which are not historical facts, may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All forward-looking statements, including statements regarding future financial operating results, involve risks, uncertainties and contingencies, many of which are beyond the control of CapitalSource and which may cause actual results to differ materially from anticipated results.

CapitalSource is under no obligation to update or alter our forward-looking statements whether as a result of new information, future events or otherwise, and we expressly disclaim any obligation to do so. And finally, more detailed information about risk factors can be found in our reports filed with the SEC.

Jim will now begin the prepared portion of our call. Jim?

James J. Pieczynski

Thank you, Dennis, and good afternoon, everyone. Our financial results for the first quarter of 2012 represent a very solid beginning for the new year, exceeding our expectations by almost any measure.

CapitalSource Bank again demonstrated meaningful growth in both its loan portfolio and net interest income, while maintaining a strong net interest margin and showing a consistently improving credit profile.

We are also beginning to see the early benefits of our strategy to consolidate operations entirely into CapitalSource Bank as operating expense savings in the first quarter are consistent with our target of a 5% to 10% reduction from 2011.

We completed the move of approximately 200 employees into the bank on January 1, including all of our loan origination teams and support services. Since the move has been contemplated and planned for some time, the integration has been extremely smooth.

During the first quarter and through this month, we have continued to return excess Parent company capital to shareholders in the form of share buybacks, purchasing an additional 19 million shares in the first quarter and 5 million more during April. As a result, our outstanding shares as of today are approximately 232 million, which is 28% lower than the share count of 323 million when the repurchase program began 16 months ago.

Our remaining board authorized repurchase authority is $176 million. An interestingly and previously unanticipated use of available liquidity occurred earlier this month when we were approached about purchasing $25 million of the $437 million face amount of our outstanding trust preferred securities. We completed the purchase at a significant discount to par, which will result in a gain on debt extinguishment in the second quarter. Such opportunities may or may not present themselves again, but I wanted to highlight this potential alternative use of available liquidity.

Before turning the call over to Tad, I want to speak briefly about loan production and loan growth in the quarter. Originations were consistent with our expectations and full year projections, as well as being nicely spread among several of our lending groups.

Despite a higher level of loan repayments this quarter, net loan growth was 4% or 16% on an annualized basis, which is in line with our guidance of 15% to 20% growth for the year.

New loans closed and funded were $522 million, which likewise is consistent with our full year expectation of $2.2 billion in loan production. As stated previously, that projection excludes any large portfolio purchases of which there were none in the first quarter.

First quarter production was also encouraging because the year-end push to close deals often makes the first quarter light. By comparison, the first quarter production last year of $627 million included 2 large portfolio purchases totaling $322 million.

In recent months, we have seen increasingly attractive opportunities for loan growth in Commercial Real Estate, principally refinancing of debt for fully cash flowing properties and the financing of discounted payoffs on stabilized assets. In fact, Commercial Real Estate accounted for 30% of our first quarter production.

Technology cash flow, Lender Finance and equipment finance were also significant contributors in the quarter. Though multifamily lending was a substantial growth area for us in 2011, we have found pricing to be overheated in recent months and have been highly selective in new loan originations, with only $41 million in new production for the first quarter.

The diversity and geographic scope of our national lending franchise gives us the ability to pull back from areas such as multifamily, similar to what we did with general cash flow lending in the first half of 2011, while still achieving our targeted growth. We are unwavering in our commitment to internal underwriting guidelines and return hurdles, such that we will not participate in what we view as noneconomic business for the sake of portfolio growth.

We feel strongly that this is the right strategy and that we have put in place the proper people and systems to implement it. Tad is up next, and his remarks will focus on the first quarter performance at CapitalSource Bank. Tad?

Douglas H. Lowrey

Thanks, Jim. Good afternoon, everyone. We're very pleased with the way 2012 has begun in CapitalSource Bank. Our total interest income increased 4% to $99 million, and the net interest margin was above our expectations at 5.12%, although we continue to believe it is more likely -- the NIM is more likely to settle in the 4.75% to 5% range over the course of the year.

Our loan and lease portfolio experienced strong growth, and our pretax income of $55 million was 17% above last quarter.

With our pipeline strong, we expect continued solid new loan production as well. Our deposit growth of 4% was strong and above planned, although the FDIC closing of a small bank in our footprint resulted in sizable new deposits for some of our offices.

Our overall deposit costs declined again this quarter by 5 basis points, and we were able to add new and renewing time deposits at an average of just 91 basis points. We expect our cost of total deposits will remain in a very narrow range relative to our current level at 98 basis points as our book renews over the course of the year and the current very low interest rates remain in place.

Based on our current loan growth expectations, the $224 million in the first quarter deposit growth and existing liquidity, we anticipate the need to raise just $200 million to $400 million of additional deposits over the balance of 2012. As a result, we expect only a small increase in deposits in the second quarter.

Our total assets at the bank at quarter end were above $7 billion for the first time, such that 85% of total CapitalSource assets are now in the bank. The bank surpassed $5 billion in loans and leases in the quarter, also a first.

Our credit performance continued to improve across all metrics, resulting in a provision of just $2 million and no net charge-offs. Our total nonperforming assets declined by $30 million or 24%, and our allowance for loan losses as a percentage of non-accruals increased to 116% by quarter end.

It's very satisfying to be able to report this strong financial performance, which has resulted from the execution of our strategy and lots of hard work by my colleagues throughout the company.

We will continue to pursue our core strategies in the coming months while taking the steps necessary to position the Parent to apply for and receive bank holding company status so that the bank can ultimately convert to a commercial charter.

John is up next. John?

John A. Bogler

Thank you, Tad, and good afternoon. As Jim and Tad both mentioned, the first quarter of 2012 was better than we expected, and we are pleased with the bottom line net income of $25 million or $0.10 per share, despite a $26 million tax expense in the quarter.

We indicated in our fourth quarter call that an outsize tax expense would occur in the first quarter as we completed the process of establishing a full valuation allowance for the bank-related deferred tax asset. $22 million of the first quarter tax expense was related to that one item, and we believe the process is now complete so no additional tax valuation charges are anticipated. To be clear, we expect to record consolidated tax expense of approximately $5 million per quarter over the balance of 2012 and prior to the partial reversal of the tax valuation allowance.

As previously indicated, we expect approximately 60% of the $514 million valuation allowance will reverse by the end of this year. The amount of the realizable valuation allowance will naturally decline throughout the remainder of 2012 as we generate taxable consolidated earnings. As we said on numerous occasions, however, we still expect at least $1 per share to reverse and be added to book value by year end.

Parent company unrestricted cash at March 31 was $107 million, which was down approximately $35 million from the prior quarter. The principal uses of cash in the quarter were share repurchase of $29 million and ordinary operations. The 2 largest sources of cash were the $80 million dividend that was received from the bank in February and the $33 million in loan repayments from a non-securitized loan portfolio.

Available liquidity also supported the repurchase of an additional 5 million shares in the second quarter pursuant to a 10b5-1 plan at a cost of $33 million. As we have previously described, sources of cash at the Parent during the remainder of this year will include quarterly tax payments from the bank, which we expect to total approximately $35 million to $40 million based on projected bank taxable income. The other primary source is principal repayments from the $500 million in remaining non-securitized loans held at the Parent. We expect incremental liquidity from that source to be $120 million over the balance of this year.

Expense management remains a high priority and we are anticipating additional progress during 2012 in our effort to reduce consolidated operating expenses on top of the nearly 22% decline we achieved over the past 2 years. Specifically, we have forecasted a $15 million to $25 million reduction this year in our total operating expense base, resulting in full year consolidated operating expenses of $190 million to $200 million.

The move of approximately 200 Parent company employees into the bank on January 1 increased our operating expense ratio at the bank by 16 basis points to 2.28%, though we expect a gradual decline toward our 2% target -- 2% of assets' target over the next 2 years.

Also as projected, our efficiency ratio was up a bit at 41% for the quarter. Though still meaningfully below comparably-sized banks, we expect that percentage to decline back below 40% over the same 2-year period. I want to touch briefly on consolidated credit in the first quarter, then turn the call back to Jim for closing remarks.

Nonperforming assets declined 13% to $272 million, and the level of non-accruals declined 15% from the prior quarter to $238 million or 2.9% of total loans.

Charge-offs were dramatically lower at $13 million compared to a $66 million in the fourth quarter of last year, and trailing 12-month charge-offs continued their downward trajectory at 3.3% of average loans compared to 4.6% in the prior quarter. This is all good news as was the quarterly provision of $11 million compared to $12 million in the prior period.

Jim?

James J. Pieczynski

Thank you, John. We see our first quarter financial results as both an affirmation of our strategic direction and core business model, as well as a good indicator of the company's expected financial performance for the balance of 2012.

Our business model is built upon our national lending platform with its diverse and largely specialty niche businesses, which provides substantially more opportunities to make loans throughout the country than comparably-sized banks. The non-commodity nature of the majority of our lending is the primary reason we are able to produce the above average all-in yield, which make our business more profitable than most.

Equally important is the highly efficient deposit gathering franchise we have, 21 California branches with deposits now exceeding $5.3 billion and the capacity we believe to grow sufficiently to meet our funding needs for at least the next 3 years.

Our high-level strategic direction is quite simple: We are growing assets and profitability at CapitalSource Bank, responsibly reducing both the left and right side of the Parent company balance sheet, carefully monitoring the credit profile of new loans, while prudently reducing legacy problem loans and returning excess Parent company capital to shareholders.

As I said at the outset of this call, our first quarter results were characterized by meaningful loan growth, a strong net interest margin, higher net interest income, declining operating expenses and an improved credit profile.

Cash generation at the parent has allowed us to repurchase an additional 24 million shares since the first of the year, which brings the total buybacks since inception of the program in December 2010 to nearly 96 million shares. We look forward to strong performance on each of these measures as we move through the balance of 2012.

I also want to take this opportunity to congratulate our Founder and Chairman, John Delaney, on his convincing victory in the primary election earlier this month for the sixth Congressional District in Maryland. As previously announced, John has resigned as Executive Chairman, but his entrepreneurial spirit and strategic vision will forever permeate the CapitalSource organization. John has enriched the lives of countless individuals at the company, who have been fortunate enough to work with and learn from him. We are grateful for his many contributions in the past and the ongoing counsel he and the other board members provide. John's service to CapitalSource has been nothing short of extraordinary. If he is successful in the fall, the United States Congress will be much better for his presence.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Mark DeVries of Barclays.

Mark C. DeVries - Barclays Capital, Research Division

Could you provide us the details for the items that benefited -- the nonrecurring items that benefited the NIM that you referenced in the earnings release?

John A. Bogler

Sure, I'll address that one. During the latter part of the first quarter, we saw an uptick in the general level of interest rates, which caused a slowdown in the prepayments versus the expected prepayment speed assumptions for our agency MBS securities. And so that slowdown, and although securities sit at a premium, caused us to reverse some of the premium amortization that was previously recorded. So that impact was approximately 8 basis points on the overall -- on NIM. The second component was about 5 basis points due to the payoff of some non-accrual loans during the quarter. And then the last piece is about 8 basis points of accelerated amortization from the loan payoffs over the level that we would normally expect to see on a quarterly basis.

Mark C. DeVries - Barclays Capital, Research Division

Okay. So that -- the slowdown in the prepayment speeds, is that also what caused the yield in the securities book to go up pretty significantly Q-over-Q?

John A. Bogler

Yes, that's correct. And then just one kind of caution on it. Since we ran those prepayment speed models when we had the assumptions from the third party, the interest rates have come back down. So most likely, some of this benefit will reverse out during the second quarter.

Mark C. DeVries - Barclays Capital, Research Division

Okay, got it. And then Tad, could you give us a little color on the different situations under which you might trend towards the higher end or the lower end of the guidance of 4.75% to 5% NIM?

Douglas H. Lowrey

Well, you know what we've been talking about the most has been the competition and the impact of the repayments, and our loan book has started to repay very dramatically. And as you might expect, most of those repayments are interest rates well above the average rate on our portfolio. So just a simple act of repayments occurring and the new production occurring at lower levels is what we expect to drive the long-term NIM. However, despite having said that for the last 3 quarters, and also having said our cost of funds can't get any lower, our cost of funds has continued to go down, and we're now projecting it to go down slightly in the next quarter, although we're not raising a lot of new deposits. We've not seen that competitive impact. We have seen the competitive impact Jim mentioned in the multifamily, but we've kind of scaled back from that. And some of the businesses that we're in continue to be specialty in nature. And although we hear about competition, it hasn't flowed through in our new production yet. But we continue to expect that to occur. So that's a long way of saying we still think the NIM will go down. All these one-timers that John mentioned will ultimately go away, and we will see that compression. As far as the low end and the high end, it's just a matter of how much weight you place on those various factors that I described.

Mark C. DeVries - Barclays Capital, Research Division

Okay, great. And then finally, given your guidance of that NIM range and the target of the 2% OpEx ratio and kind of where your capital requirements are at the bank, what do you view as kind of a near-term, medium-term sustainable ROE at the bank?

James J. Pieczynski

10% to 12%?

John A. Bogler

Yes. For the bank, I would put...

Douglas H. Lowrey

Fully taxed?

John A. Bogler

Yes, 10% to 12% at fully taxed level.

Operator

The next question comes from Aaron Deer at Sandler O'Neill.

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

A question on the -- over the past several quarters, you've had some securities investment gains that you've realized. This quarter, you did not. I'm just wondering what you're thinking is on -- I should -- your appetite for taking gains as we go forward and where the unrealized gain was at quarter end?.

John A. Bogler

The majority of the investment securities, I think, that you referenced to are held at the Parent company. And some of those were taken into the foreclosures and others were equity investments that were made in -- alongside making loans previously. A number of those are illiquid, so the opportunities to realize gains are not always in our control. We'll look for opportunities to dispose of them when it's reasonable, but it's a number that I don't think is easily predictable in terms of what we'd expect to see in terms of gain. Relative to where we hold those securities, the unrealized gain -- Aaron, I'm going to have to get back to you. I think it's about $20 million or so, but I'll have to get back to you on that number.

Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division

Okay. And then the -- it looked like the principal repayments slowed some in the commercial finance segment from maybe the pace we've had more recently. Kind of given a maturity schedule and what you've seen with early prepayments, what's your kind of expected level of paydowns going forward?

Douglas H. Lowrey

Well, as you said, as that balance gets smaller, by definition, the level of prepayments that we're going to have is going to get smaller. And John discussed this in his comments as well in terms of what we're expecting and which is on the non-securitized portfolio, we're looking to get roughly $100 million to $120 million over the rest of this year.

Operator

The next question comes from Moshe Orenbuch at Crédit Suisse.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Just a couple of things. Could you talk a little bit about the credit performance at the bank in terms of the charge-offs? I mean, obviously, the net recovery is a wonderful thing. What -- was there anything unusual there? And what might that look like as we go forward?

James J. Pieczynski

Well, the -- no, there was nothing unusual. This trend of continuing has been ongoing for some time. The largest mover in this quarter was the removal of a fairly large loan from non-accrual. And that's what drove most of the improvement. We still have that loan, but a large principal payment was received on that. And that, combined with some other factors, caused us to remove that from non-accrual. So you see a -- you saw a pretty good pickup there. But most of the really large Commercial Real Estate loans, not all, but most at the bank have been resolved, such that we did not experience charge-offs in this quarter. And the credit nonperforming asset ratio is trending down close to 1%. I don't know that we've guided towards a charge-off number...

John A. Bogler

No, we haven't. And I'm just looking at the list and the largest single charge-off was $2.4 million. So there were a number of other smaller ones that range from roughly $1 million to $1.5 million, so there was nothing that stands out.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Got it. And you had mentioned the multifamily kind of being an area in which competition had increased. What about -- which areas are you seeing the best results in terms of your originations? Which of the specialty areas?

James J. Pieczynski

Well, I think for us, there's -- first of all, the Commercial Real Estate area has been a very solid area for us, whereas multifamily, I think, every -- a lot of banks have flocked to that. I think kind of the traditional Commercial Real Estate, we've got a lot of -- we do feel that we've got a lot of opportunity there, and that represented roughly 30% of our production this quarter. In addition to that, our technology cash flow business has still been doing very well. Our equipment finance business has been doing well, and our Lender Finance business has been doing well. I also feel good about where we're at on our Healthcare Real Estate business. And I think SBA has also been an area of pickup for us. So we've had a lot of areas that are doing well. I think what we're recognizing out there is that it is getting more competitive and where we do not want to compete on proceeds, to a large extent, we can compete to the extent we need to on price. But even on multifamily, we found that, that was just getting too overheated, and so we've pulled back our reins on that a little bit.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Got it. Also, as you had told us in advance, you did pay an $80 million dividend from the bank to the Parent. What's -- what happens going forward? Is the bank able to pay out a percentage of its earnings or do you just ask permission periodically? How should we think about that?

Douglas H. Lowrey

We are -- this bank has been subject to a lot of regulatory oversight since its formation, but future dividends are formulaic and are not subject to pre-approval from the regulators. And you're correct, it's a function of your retained earnings and your future earnings going forward. We're not modeling any dividend payments for the remainder of 2012 out of the bank because we pretty much used up that allocation. We're expecting to resume or to initiate a payout ratio in 2013 of quarterly payments from the bank to the Parent. They will be a combination of our earnings and capital stress test at the bank.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Great. And then just the last thing is, I mean, this, I guess, being the first time you bought back some of the trust prefers, is there -- do you have a sense as to how much more might come to you in terms of that? Or is it just going to -- you're just going to wait and see?

James J. Pieczynski

No, we really don't know what will come to us. As I said, I think that was an opportunity that presented itself. So we can't predict in advance what will come to us and when it will come to us. Obviously, as you know, our focus has been on doing share repurchases over the last 16 months. And so when we look relative to the trust, we have to worry about tender offer rules to consider. And quite honestly, we just have no way of knowing if any additional sellers will present themselves to us.

Operator

The next question comes from John Stilmar with SunTrust.

John W. Stilmar - SunTrust Robinson Humphrey, Inc., Research Division

You highlighted previously the CRE, Commercial Real Estate, technology cash flow and Lender Finance. Can you just spend a minute walking through the CapitalSource value proposition in each one of those businesses relative to -- obviously, banks don't do technology cash flow or really that much in the Lender Finance, but specifically, the differentiation in CRE. I was wondering if you could kind of take us through each one of those major business lines this quarter and what your competitive advantage has been. Or what kind of niche are you servicing that allows you to be as competitive as it seems like you're succeeding in?

James J. Pieczynski

Well, I think -- I'll first address the Commercial Real Estate, and it will probably be difficult to go through every business, but I'll try and touch on some of the key drivers. I think in the Commercial Real Estate, the fact that we have a national presence with existing relationships, I think, is very helpful to us. And so we are having deals that are coming to us that may be outside of the sweet spot of some of the other banks or too large for a local bank to do, and that falls right in -- into our wheelhouse. So when you sit there and say, what do we do that others don't do? I think it's been our ability to respond to customers' needs, particularly the timing for closing and understanding the assets. And so I think that's where our value proposition is, is in the team that we have and our ability to close the deals and close them efficiently and effectively.

John W. Stilmar - SunTrust Robinson Humphrey, Inc., Research Division

And then on the technology cash flow and Lender Finance?

James J. Pieczynski

That I would attribute to the teams that we have in place, who have had a long-standing relationship with a lot of the private equity sponsors that are behind these deals. I think we have been in this space for a long time. We have treated our borrowers well and delivered on what we promised we were going to deliver. And I think in this day and age, people do value the ability to close and the ability to be there. So our teams have good relationships. They get initial feedback from credit community very early, and they can tell a sponsor early on that we can or cannot do the deal. And I think what I've always found is a quick no is better than a long protracted yes. So people know very early on in the process if this is a deal that we can or cannot do. And I think that does separate us.

John W. Stilmar - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And you're not seeing in terms of like either one of those businesses getting pushed by virtue or the fact of the specialty nature of that, correct?

James J. Pieczynski

No, not at all, no.

John W. Stilmar - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And then in terms of my second question, so when you talked about the bank ROEs of 10% to 12%, was that just sort of long-term thinking about the business model, and ultimately, where pricing and capital end up? Or is there a little bit more refinement to that, and which -- one which we can just kind of think about what the business mix might look like under that and what the associated capital levels might be? I was wondering if you could share a little bit more on that.

Douglas H. Lowrey

Okay. Your last statement was the most accurate in my opinion, and that it's been difficult to predict the capital level because not only has our capital been artificially high at the bank, we've operated under that high capital level for quite some time. I've heard other bank CEOs comment on the same thing. In their case, it might be Basel and some of those other things. In our case, it's operating under a regulatory order that we don't believe will change until we convert to bank holding company. So once that occurs, if you assume our capital is more normal, then you can just project the ROEs that we've been guiding to, which has been in the 150 to 180 range -- ROA, I'm sorry. We can't control the ROA. We can't control the ROE. So I think the ROA this quarter at the bank was 185. It's probably a little bit high. We've been guiding to the 150 to 170 range. So it depends on what capital you place on that. But as far as the business mix of loans versus securities and the funding mix, we pretty much have that where we want it. So it's really a function of the equity.

Operator

The next question comes from Don Fandetti of Citigroup.

Donald Fandetti - Citigroup Inc, Research Division

Jim, I know we've talked about the valuation allowance reversal for some time now. I mean, is that pretty much as locked in as it can be in terms of the timing? Or is there still some things that need to be worked out?

James J. Pieczynski

Yes, relative to -- you're talking about the valuation allowance reversal on our deferred tax asset. We have -- in the last call, we communicated that we were expecting that to be a fourth quarter item, and we still feel as strongly about it today as we did when we talked last quarter. So we strongly feel that to be a fourth quarter item.

Donald Fandetti - Citigroup Inc, Research Division

Okay. And can you remind me on the timing of your BHC in terms of when you might apply for that and the best case scenario on achieving that?

Douglas H. Lowrey

Yes, this is Tad. When we -- Don, when we first started talking about this large amount of stock buybacks and postponing the application process, we said no earlier than 2013 or we said sometime in the middle of 2013. We also told the investors that the credit quality at the Parent company was -- there were a number of factors, but that was probably the largest single factor. The credit quality at both entities has improved dramatically in the last 12 months, and we're actually forecasting that to continue to occur through the remainder of this year. We're still not guiding any earlier than 2013, but I would say we feel much better about early 2013 to mid 2013 as far as an application process.

Operator

The next question comes from Scott Valentin at FBR Capital Markets.

Scott Valentin - FBR Capital Markets & Co., Research Division

Just with regard to cash at the holding company, I think end of the quarter, cash and cash equivalents and investment securities that were held for sale just over $200 million. But what's the right number in terms of cash you want to keep on hand going forward at the holding company?

John A. Bogler

Longer term, we think of it probably in the $75 million to $100 million-type range. Near term, we'll set aside $25 million for the converts that are due this coming July. So I think kind of in the short run, we'll hold something that's much closer to the $100 million to $125 million level, and then we'll begin to trend that down as the Parent company shrinks down to, say, $75 million to $100 million.

Scott Valentin - FBR Capital Markets & Co., Research Division

Okay. And then just with regard to origination volumes, you mentioned if you exclude portfolio purchases in the first quarter of last year, you had a pretty sharp increase in overall origination line. Does that reflect the hiring of personnel? Do you think it's a little bit macro-driven in terms of just the changing outlook by customers?

James J. Pieczynski

It's interesting. I think there -- I think what helped us this quarter is that there were just a lot of different businesses that were all hitting on the good -- their cylinders right now. And so I think from a macro perspective, we just had kind of a lot of deals that were teed up and ready to go. And so we felt really good about originations in the first quarter and we feel good about originations in the second quarter as well. I just feel in general, it seems to me that there is a lot -- there is more activity out there. We're seeing exposure to more deals. We're also seeing more competition, but I think it's -- you do see just kind of more activity out there than we would've seen a year ago.

Scott Valentin - FBR Capital Markets & Co., Research Division

Okay. And then one final question. Just on -- I think someone had mentioned the Parent holding company credit. It seems like the pace for improvement there has slowed. We're still at a pretty high level of NPAs to assets, but the pace of improvement seems to be slowing a little bit. Is that just a temporary timing issue or is that something that you expected going forward?

James J. Pieczynski

Well, I think that's something we'll have to -- the reality is you've got a lot of bigger loans in there, and so there's kind of big, kind of chunky loans that move those numbers. So I think for us, getting the resolution of these loans is the critical aspect of it. As we talked about, we expect $100 million to $120 million of our non-securitized loans to be paid off the rest of this year. And I think as that balance gets smaller and smaller and smaller, kind of the chunkiness, for lack of a better term, of that portfolio declines. And I think you start to get to a more normalized number. We're -- our clear focus has been reducing classified assets at the Parent. Some of that we're doing by selling off the loan if it makes sense, but more often than not, we're allowing these loans to kind of work through their natural maturity and have them pay off that way.

Operator

The next question comes from Henry Coffey at Sterne Agee.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

A couple of questions. When we look at your net equity, that's obviously a reasonable proximity for your sort of cash generation capacity at the holding company minus, like you said, $75 million or $100 million. Is that the right way to think about it?

James J. Pieczynski

Well, I think the other thing that you'd want to take into account that's not being shown at the Parent yet in its net equity number is the big impact will be the reversal of the valuation allowance for our taxes, which will result in additional cash payments coming from the bank over time, pursuant to our tax sharing agreement. So back when you sit there and look at the Parent as a standalone basis, that's that next component that you need to add in there from a what's going to be a realizable value.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

But it's still a -- basically large number.

James J. Pieczynski

It's -- what's still a large number?

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

The bolbest [ph] of -- the ability. You still have about $300 million of plus of net cash for buying back stock, paying dividends, et cetera, et cetera.

James J. Pieczynski

Right. When you sit there and look at the equity that's left of the Parent, no, that's exactly right.

Douglas H. Lowrey

We still have excess -- we agree with you, we have excess capital, and that's why we've been returning it as fast as we...

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

Right. And then when you become a bank holding company, which is ultimately when you turn to your regulator and say, well, we have cash and cash at the holding company and lots of capital, can we become a bank holding company? They're almost compelled to say yes. So when you become a bank holding company, where is the level of -- where do you think your TCE requirements will go to or your capital requirements, depending on how you want to measure them? Or do you think they'll still keep you in the 15% box for a while?

Douglas H. Lowrey

That's the $64 million question. And each quarter, somebody has asked me that and my thoughts would've changed. We've kind of come full circle. The bank certainly has proven it can operate on a much lower capital base, as does our competition. So that would argue for a capital requirement closer to 12% risk-based as opposed to 15%, and a tangible in the 8% to 10% range versus, say, 12% to 13%, where we are now. However, the trend across all capital requirements is for increases not decreases. And we would be in a new commercial charter, the Parent would be a new bank holding company. And if you go back and look, there've been very few. I can count them on one hand, new bank holding companies approved over the last couple of years, so that would argue towards start slow and move slowly. So to tell you the truth, we haven't started, quote, "negotiating" those numbers yet. We've been focused on getting in as opposed to what the price of getting in is. So I could only speculate beyond what I've said there. Certainly, would have to -- you'd have to guess it would be lower over time than where it is now.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

It's somewhat -- it's not a risk factor in that basically, you're at the upper end of any bar they're going to create and ...

Douglas H. Lowrey

Exactly. It's not a risk of going up. It's a question of how quickly it can go down in my mind.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

Just 2 other questions. I missed your margin guidance. I know you've given it out before, but it would be helpful to hear it again.

John A. Bogler

So the -- we look for the guidance -- where we guide to is something that's in the 4.75% to 5% range, the same level that we indicated last quarter.

Douglas H. Lowrey

That's at the bank.

John A. Bogler

And that's at the bank, yes.

Henry J. Coffey - Sterne Agee & Leach Inc., Research Division

But you are in kind of a credit correction mode. Can you make the case that some of those reversals that you benefited from this quarter are likely to occur again at least over the next couple of quarters? Or do you think this is basically it?

John A. Bogler

If you're referencing towards NIM and the benefit of a non-accrual loan that's reversing, much like our other comments on credit, the portfolio is still kind of lumpy. So it's a bit of a challenge to try to predict that. It's not an assumption that we make in kind of our internal loan that's going to reverse.

Douglas H. Lowrey

I wouldn't count on any large dollars from reversals of nonperformers, but we expect loans to continue to pay off early and to realize some of those benefits there, but certainly, not as much as we have the last couple of quarters.

Operator

Our last question comes from Vivek Agrawal at Wells Fargo Securities.

Vivek Agrawal - Wells Fargo Securities, LLC, Research Division

I wanted to know -- just to clarify, did you say that you repurchased 125 billion of the trust preferreds in the quarter?

James J. Pieczynski

No. It was in the second quarter, and we repurchased $25 million face amount.

Vivek Agrawal - Wells Fargo Securities, LLC, Research Division

Okay. And on the non-accruals, how much was that, in your mind, was due to credits improving versus the actual charge-offs?

Douglas H. Lowrey

Are you talking about...

Vivek Agrawal - Wells Fargo Securities, LLC, Research Division

The decline of $38 million?

Douglas H. Lowrey

Yes, that was the loan that I referenced early, the large loan where they made a large principal payment. We put it on accrual status, so it was not -- that part was not related to a charge-off.

Vivek Agrawal - Wells Fargo Securities, LLC, Research Division

Okay. So the majority of that was due to that?

James J. Pieczynski

Correct.

Dennis Oakes

All right. Thank you very much, everybody. The transcript will be posted later today, as will the investor presentation, which has been up earlier. And the call -- replays of the call will be available as well. Thank you.

Operator

The conference has now concluded. Thank you for attending today's event. You may now disconnect.

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