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CapitalSource (CSE)

Q1 2013 Earnings Call

April 29, 2013 5:30 pm ET

Executives

Dennis Oakes - Senior Vice President of Investor Relations & Corporate Communications

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

Douglas H. Lowrey - Chairman of Capitalsource Bank, Chief Executive Officer of Capitalsource Bank and President of Capitalsource Bank

John A. Bogler - Chief Financial Officer, Chief Financial Officer - Capitalsource Bank and Executive Vice President - Capitalsource Bank

Analysts

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

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

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

Daniel Furtado - Jefferies & Company, Inc., Research Division

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Preeti S. Dixit - JP Morgan Chase & Co, Research Division

Mark C. DeVries - Barclays Capital, Research Division

Presentation

Operator

Good afternoon, and welcome to the CapitalSource Inc. First Quarter 2013 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

And I would now like to turn the conference over to Mr. Dennis Oakes, Senior Vice President, Investor Relations and Corporate Communications. Please go ahead.

Dennis Oakes

Thank you, Amy. Good afternoon, and welcome to the CapitalSource First Quarter 2013 Earnings Call. With me today are CapitalSource CEO, Jim Pieczynski; CapitalSource Bank Chairman and CEO, Tad Lowrey; and Chief Financial Officer, John Bogler.

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

Investors are urged to carefully read the forward-looking statements' language in our earnings release and on the 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 begin our prepared remarks, and then we will take your questions. Jim?

James J. Pieczynski

Thank you, Dennis, and good afternoon, everyone. Our first quarter of 2013 represents a strong start to the New Year as our interest income, net interest margin, total loans and leases and net income each increased from fourth quarter levels at CapitalSource Bank. All of our credit metrics at the bank were also within acceptable parameters, and our total cost of funds was down marginally. For the parent, our loan portfolio declined by 1/3 and we repurchased an additional 15 million shares, bringing the total capital return to shareholders, since December 2010, to well over $1 billion. Over that same 10 quarters, we reduced the outstanding share count by 42% to 196 million shares and as of March 31, we still have $89 million in repurchase authority remaining from the original $250 million authority granted by our board last October.

The slowly recovering economy, abundant liquidity, and historically low interest rates and competitors' loosening terms, as they struggle to add assets, make for a very challenging business environment. We are successfully growing assets, however, despite those hurdles. John will provide some insight into some of our underlying financial performance metrics in the quarter and though some appear on the surface to be counter to industry trends, we are experiencing the same pressures. We are, however, at an advantage because we are starting at a point that is higher relative to our bank peers for net interest margin, loan growth, return on assets and other key performance metrics.

For example, the net interest margin at CapitalSource Bank increased by 24 basis points this quarter to 5.08%. That was primarily due to the full quarter benefit of our fourth quarter loan growth, which largely occurred late in the prior quarter. In addition, we've had some certain nonrecurring items, which also added to our margin. Those benefits, together, acted to offset what otherwise would have been a lower NIM due to declining loan yield.

Reflective of the pricing pressure we have seen over the last several quarters, the all-in yield for new loans was down 27 basis points this quarter at 5.5%, which is about 90 basis points lower than the overall underwritten yield on the bank's existing portfolio when you exclude the benefit of accelerated amortization and discounts. A new aspect of the intensely competitive environment for loans that we have more recently encountered is the repricing of our existing loans prior to maturity. So far this seems to be concentrated in our cash flow book, but we will be watching closely to see if it becomes more of a trend as it is another factor contributing to declining loan yields.

We do continue to reap the benefits of our diverse and national commercial lending franchise as a counterbalance to these business challenges. A month into the second quarter, our pipeline remains strong and our resolve to make properly structured loans to creditworthy borrowers is even stronger. New loans funded in the quarter was spread among various business lines but concentrated in commercial real estate, health care and technology cash flow, multi-family and lender finance.

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