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CapitalSource, Inc. (CSE)

Citigroup US Financial Services Conference

March 06, 2013 2:50 pm ET

Executives

James J. Pieczynski - Chief Executive Officer, Director, Member of Asset, Liability & Credit Policy Committee and President of Capitalsource Bank

Analysts

Donald Fandetti - Citigroup Inc, Research Division

Presentation

James J. Pieczynski

All right. Does it work? All right, great. Thanks, everybody, and thanks, Don.

In terms of -- what I'd like to do is talk a little bit about CapitalSource and why we do think we are different. We are a bank that is very different when you compare us to other banks that are out there. We are currently structured as an industrial loan corporation, so we have, as we call it, our ILC charter, which we had from when the bank was initially formed in 2008. Our goal is ultimately to convert to a commercial bank charter, and I'll talk about the reasons why as I go through the presentation.

But I think where we're different is that we are a specialty lender. We've got 12 different lending platforms across the country. And so what's different about us, as opposed to what you might see in another regional bank, is the fact that we have our diverse national specialty lending platform, coupled with our regional geographic deposit-gathering platform. As I said, we are structured as an ILC. All of our branches are based in Southern and Central California. We've got 21 branches, an average of about $260 million of deposits per the branch. And the only depository products that we offer are CDs, money market accounts and savings accounts. So that's what's a little bit different about us. However, in this low-cost interest rate environment, our cost of funds are below 1% right now. We've got a low cost at the actual branch network itself, which is running at about 40 basis points. So again, I view what we have as something very, very different than what you're used to seeing in regional banks.

As it relates to the bank, and I'll talk about this -- when you hear me talk today, I'm going to talk about kind of the bank, and I'm going to talk about the Parent. The Parent was previously a commercial finance company, ultimately converted to a REIT status. And then, we went on the banking -- we went the bank route beginning in 2008. So we kind of have the tale of 2 cities at the company. We've got the bank, which is rapidly growing, and that's where we're doing all of our lending out of. And then, you've got the Parent, which is in a runoff mode, and I've got some slides where I'll go through the shrinking side of the Parent.

So kind of when I talk about it, I just kind of want to -- you'll hear me talk about the bank and the Parent, and they're 2 very different animals and operated in very different ways. In terms of the bank, the bank is our growth vehicle. We had roughly $123 million in bank net income in 2012, which is up from $112 million in 2011. Our NIM was just below 5% at the bank, which, again, is going to look very, very favorable relative to our peer group. The bank also operates at a 41% efficiency ratio. Again, I talked about that. I talked -- we operate very efficiently, and that pours out on that.

The other part is our strong capital. We have a -- we do have a very strong balance sheet. At the end of the year, our bank had a 16.5% risk-based capital and a 13% both Tier 1 leverage and a tangible equity ratio. The bank, because of its ILC charter, is currently required to operate at a 15% risk-based capital ratio. That's what we had when we started the bank. One of the reasons we want to convert to a commercial bank charter is we believe that if you look at the risk-based capital ratio requirements for most commercial banks out there, there really aren't any banks that are at the 15% level, and we think we've got upside by converting to a commercial bank charter.

On a consolidated basis, when you add in the Parent, the Parent is wildly overcapitalized. I'll talk about that. But the Parent has got roughly 50% of its assets in the form of equity. And so on a consolidated basis, our tangible equity ratio jumps to 17%. And that's the same as it was in 2011 despite the fact that we did $340 million of share repurchases this year and $100 million of a special dividend. So again, we're generating consistent growth profitability, and we're returning capital in a significant way.

So I talked about the capital -- the strong capital return that we had. Since we started consciously returning capital to our shareholders, which was in December of 2010, we've returned over $919 million. That's in the form of share repurchases, regular dividends and special dividends. And as I mentioned, our goal is to obtain bank holding company status sometime this year for the Parent, which would then put us in the position to be able to convert CapitalSource Bank into a commercial bank charter.

The reasons that we want to do it is, number one, by getting bank holding company, as I said, we do get to convert the bank to a commercial bank charter. With that, we believe we would get a reduction in capital levels, which we believe will ultimately read to -- lead to a higher ROE. The bank last year operated at roughly an 11% ROE, and that was with the 15% risk-based capital requirement. And as I mentioned, although 15% was our requirement, 16.5% is where we were at, at the end of the year.

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