CapitalSource (CSE)

Q1 2012 Earnings Call

April 30, 2012 5:30 pm ET


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


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



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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.

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