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CapitalSource, Inc. (NYSE:CSE)

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

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.

The other thing that bank holding company status will do for us is that it will give us the opportunity to make acquisitions. Right now, because we are an unregulated holding company, we're precluded from doing any acquisitions. We believe that in the market that we're in, California, that there will be opportunities out there to acquire business banking platforms. And in an ideal world, we would be looking at a bank in the $500 million to $1.5 billion asset size range, with a good business banking platform that makes sense on its own as an acquisition.

But then you kind of say, you take that acquisition and couple it with the current business customers that we have on the lending side, we think you could create a lot of synergy. We also think being in the position that we're in makes us kind of a unique acquirer, and that to the extent we were to acquire a business bank, we would be able to acquire it with the infrastructure, with the team and with the management team in place, as opposed to having a typical one where you go in, you kind of get rid of everybody and you just meld it into your existing bank. So again, I think that would make us an attractive acquirer to somebody. And then, with that, once we have a business bank platform, it would then give us the ability to be able to do commercial deposits, 0-cost deposits versus the CDs, money market and savings accounts that we have right now.

2012 was a great year for us kind of no matter how you look at it. We had outlined our goals at the beginning of the year. And we share that with everybody within the company, and we always report to our employees on how we ultimately do relative to our goals. So our goal this year was to have loan growth at the bank of 15% to 20%. We were at roughly a 19% growth in 2012. Our expectation and our guidance this year is that we'll have double-digit growth. We're not saying how much -- how high in the double-digit zone, but we think 2012 was a very good year. The environment is a little more challenging this year, so we've kind of had said that we expect to have double-digit growth.

I talked about this earlier. Our goal is to have our NIM in the 4.75% to 5% range, and our full year NIM was at the 4.97% range. For the fourth quarter, we were at 4.84%, and we've communicated to the world that we would expect our NIM to be above 4.75% this year. And although we're seeing yields compressing and all that, we wouldn't be surprised to ultimately see that maybe drop to the 4.50% zone, as time goes on. But still nevertheless, we expect that to stay above our peer level.

Our goal is to reduce our consolidated OpEx by the 5% to 10%. We did it by 12%. Just to put it in perspective, our OpEx was roughly $186 million last year, which was down from $212 million in 2011. If you look where we were several years ago, like for 2009, our OpEx was at roughly $270 million. So we have very much focused on efficiency and integrating employees from the Parent into the bank, eliminating duplicative functions and maintaining a significant level of efficiency. While we don't expect to have a significant level of reduction in expenses going forward, we do believe that the infrastructure that we have in place is adequate to allow us to grow and continue the growth that we're at right now.

The other big event that happened for us in 2012 was to reverse our deferred tax asset valuation allowance. We -- our goal is to get to do that in the fourth -- by the fourth quarter. We did it in the second quarter. The nice part about that is I recognize, on the one hand, it's only an accounting entry. You reflect your deferred tax asset. But the real value that I look at is that we view that, that deferred tax asset will give us benefits over the next 3 to 4 years, where we expect to pay basically no federal taxes for the next 3 to 4 years, so again, that'll be realizable over the short term. And then, I also talked about returning excess capital to our shareholders during the year, and we did roughly just under $460 million of capital returned, bringing it to $919 million since we started the process.

Focusing on the bank itself. As I talked about, we're a specialty lender. We really focus on kind of small, midsized businesses. A lot of our lending is a function of either acquisitions or somebody acquiring a piece of property or something like that. So we view that the value-add that we provide is that we're there to close on a deal when our borrower needs to close on a deal. The people who run our businesses have been in the business for 15, some as many as 20 years or longer. They've got a great deal of strong relationship with sponsors, and the ability to be able to close when you say you're going to be able to close really leads to our advantage.

I talked about our loan sourcing. Although our company is based in Los Angeles, we have offices throughout the country. We have offices in Chicago, New York, Dallas, Denver, several other places. But because of the fact that we've got a national focus, one of the things that we've been able to attract, in terms of lending teams, is the fact that, since we have offices all over, that we can attract people to come to CapitalSource, and they don't have to worry about relocating or relocating their family. They -- we tend to have offices in the major metropolitan areas anyway, so it's a very easy ability to be able to do that.

We view that we're not in the commodity lending space. We think we do add value, and we do provide something that others don't have. And again, if you compare us to a traditional regional bank, there are -- they try to stay in their footprint. As a result, they're not going to be able to attract an acknowledged expert to just focus on their geographic footprint. Whereas, we're able to kind of do a much wider net, and as a result, it creates greater opportunities for the people that run our businesses.

And as a result of all of that, we believe we do have loyal customers. I pride myself on saying, we say -- we do what we say we're going to do. So when a borrower gets a term sheet from us, that's the deal that we're going to do. We're not into doing trading at the last minute or anything like that. I know maybe I could get a few more basis points by doing that, but I get that deal and I lose 10 others, so we're very focused on delivering what we say we're going to deliver. And our originator teams have a lot of interaction with credit committee, even before the deal is formally presented to credit committee, so that they get feedback from us unto -- as to what works, what doesn't work so that when they deliver a term sheet to somebody, they can deliver it with confidence knowing that, that deal has got a high likelihood of being approved.

Now this is a busy chart, but what it basically shows you is the bank's portfolio at the end of the year was $5.8 billion, and that was split between our real estate, our asset base and our cash flow. As I mentioned, we have 12 different specialty lending platforms. The largest of our platforms, out of our $5.8 billion, is multifamily, which is $900 million of the total portfolio. So again, it's very well diversified. Our focus has been on multifamily lending, health care real estate, commercial real estate, and we have a small business practice. That covers the real estate side.

On the asset base side, we have our lender finance and timeshare space, our equipment finance space, health care and then we also have a life insurance Premium Finance business, which is a new business that was started in 2012. And then finally, on the cash flow side, which is where we deal with a lot of the private equity sponsors, we've got expertise in technology, health care and security. And then, in the non-sponsored space on the cash flow side, we do professional practice lending, whereby we make loans to primarily dentists for the purpose of acquiring a practice and expanding their practice.

Again, in terms of the growth, you see the numbers there. One of the numbers that doesn't appear on here is, I talked about our net income was $123 million at the bank in 2012, which is up from $113 million in 2011. However, 2011 also had the benefit of being able to utilize some of the deferred tax assets that were at the bank in 2011 in terms of reversing the valuation allowance. So on a pretax basis, our pretax income at the bank in 2012 was $207 million, which was up from $171 million in 2011. As I mentioned, we had a 34% tax-- we did -- due to the tax benefits, we had a 34% tax rate in 2011 and a 41% tax rate in 2012.

No matter how we look at it, we thought 2012 was a very strong year for us. Our loans were up 19%. I talked about our cost of deposits, which was at the 0.87%, which was down from where we were the previous year. And with our $7.4 billion of total assets at the bank now, that makes us the fourth largest bank that's headquartered in Los Angeles County. From a profitability perspective, I talked about where we were on our pretax basis, where we were on our net basis. On a pretax, pre-provision, our pretax, pre-provision income increased by 12%. Our NIM was just under 5%. Our ROA was at 1.73%, and our ROE was at 11.73%. So again, we view that there is upside with that just based on where we're at from a capital perspective.

Our credit profile, we had -- like a lot of other banks, we had gone through kind of the credit crisis and the changes associated with that. We feel our credit has been largely stabilized. Our charge-offs were 23 basis points last year. Our nonaccrual was below 1%, and our nonperformers, we were at 66 basis points. So again, we kind of view credit as kind of, for lack of a better term, I'm going to just say the old story.

In terms of our originations, I talked about the loan growth that we had last year, which was roughly $900 million. That was $900 million of loan growth on $2.6 billion of originations. So we had $2.6 billion, that generate -- that resulted in roughly the $900 million of loan growth. So clearly, we had a significant level of payoffs last year. This year, we're guiding to doing roughly $2.2 billion of originations. A lot of that is, if you look at the fourth quarter, you'll see that we had -- it was our largest quarter ever in terms of originations at the bank, and I think you have your historical "everybody wants to get deals closed by the end of the year" and there's kind of always -- I always call it, there was a self-imposed push to get deals done by the end of the year, so it's kind of a created deadline.

Last year, it was a real deadline. With the fiscal cliff and changing tax rates and people not knowing what was going to happen, there was a huge push to get deals closed by the end of the year by our borrowers or by -- if somebody was selling their business, by the sellers of that business. So we do think some of the production that would have naturally been in 2013 actually just kind of slid over into 2012, and that's why that explains the significant level of originations that we had in the fourth quarter.

In addition to the loan growth that I talked about, we had roughly $450 million of deposit growth. And I think this is -- I view this candidly as one of the unsung benefits of our model that people don't give credit for. Whenever I talk to investors now, everybody says, "Jeez, what's great about you is you've got the specialty lending platform and it's nationwide and it's different and it's unique." And I agree with that. Everybody -- nobody ever really talks about the deposit base that we have.

I think a lot of times, people say, "Oh, you're an ILC and you've got CDs, so you must have a lot of hot money there, and money is going in and out and all that." We don't. We have a very loyal group of depositors that have been there for a long time. The stickiness of our deposits is very significant. And so we actually -- our branches have been opened for a while. We have some of our branches that have been in existence for over 20 years. The branch manager has been there for over 20 years. And so as a result, you do have relationships with your customers.

I mentioned that the average branch has roughly $260 million in deposits. Some of that's money market, some of that's CDs, some of that's savings. But largely, you've got people that want to be there for a long time. Candidly, if you sit there and say, "What's the #1 people -- #1 reason deposits leave your bank?" It's due to people dying, where they die and it moved into their estate, and that's how your deposits leave.

So we do go out of our way to take extra care of our customers. On the deposit side, the average age of our depositor is probably 70 years old. They want to make sure that they've got somebody that -- they want to make sure that they're FDIC insured, and they want to make sure that they're getting a reasonable interest rate relative to the rest of the market. So while on our hand, we're saying we're paying less than 1%, that's still significantly more than what you would see from the larger banks that are out there. And again, that's really what they're looking for.

I talked about our loan portfolio. One of the other things that's important, I talked about prior to the bank, we had CapitalSource, which was operating as a commercial finance company. And there are things that we did differently back then versus what we did right -- what we do now. Previously, we had done land loans, construction loans, mezzanine loans, repositioning of real estate loans and things that, quite frankly, I would put on the higher-risk profile. As the years have gone on, that legacy portfolio has run off, and you'll see here that of our portfolio at the end of $5.8 billion, $5.3 billion of that is our loans that were originated at the bank since the bank was formed, and you only have $0.5 million of legacy loans in the bank that were previously originated at the Parent.

As I said, we're talking about doing $2.2 billion of originations this year. And the other thing is there are businesses that we're in now that we weren't in before we did the bank. So I talked about our equipment finance business, we've done that. Multifamily is new. Our SBA lending is new. Our professional practice lending is new, and our Premium Finance business is new. So these -- those are specialty lines that we think are more akin to seeing in the bank that complements the other specialty lines that we have.

I talked about our NIM. As I said, our NIM for the year was 4.84% compared to our peers of 3.78%. So we have consistently been above our peers. You're seeing that spread narrowing somewhat. But I think if you look -- no matter how you look at us relative to the peers, we're probably going to continue to be at about that point or so above our peers. Again, I've talked about our leverage ratio. As I said, our Tier 1 leverage ratio was at 13% at the end of the year. That compares to 10% for our peer group. Again, we think there's no reason we shouldn't be able to be down to that level as time goes on.

So I talked about the 15% risk-based capital requirement. We're at 13% Tier 1. Again, if you look at our peers out there, a lot of them are at 12% risk-based capital and 10% Tier 1. So again, we think that's kind of the upside that we can have for the bank. Our ROA was nearly double of our competitors, our peers out there. We were at 1.84% last year. I would expect -- if you sit there and say, "Where is that going to be over time?" I could see that dipping in kind of that long term being in the 1.50% or 1.75% range. Again, it will still be a very solid ROA.

The key credit metrics, I talked about that a little bit already. You'll see that, I think, 2012 was a significant transitional year for us, where we really reduced the level of our troubled assets, obviously, including our classified assets. Our nonperforming assets went from 1.87% at the end of '11 to 0.66% in 2012. Our nonaccrual loans have dropped significantly from roughly 2.5% of our loans to 74 basis points on our loans. Our loan loss provision is still at a relatively healthy level of just over 1.75%, and our net charge-offs, again, when you look at where we were in the fourth quarter, was very low.

So that was the bank. So that was kind of the first part, that's the growth story. And whenever I talk to somebody they go, "Well, that's great. I'd love to just buy the bank. But I can't buy the bank and I have to buy the Parent." So with that, it's good to show you the other piece of the puzzle, which is the Parent. And I think the big story is, I think, the investment community has had a very difficult time getting their arms around the Parent and what's at the Parent, what equity is there, what can be realized. And this slide really sums up what we've done at the Parent over the last 3 years.

You'll see that our total assets had declined by over $5.5 billion since we started the liquidation of the Parent. You'll see our debt has gone down by $4.7 billion. Our equity has gone down by $800 million, and that's after, as I'd mentioned, doing roughly -- between dividend, share repurchase and all that, it was over $900 million that was returned to shareholders during that period of time. So if you just kind of say, "Okay, well, jeez, what's at the Parent?" And I think a lot of times people look and may go, "Oh, there's really no value in the Parent because it's just a group of liquidating assets." We view that -- there's $500 million of net equity that's still left in the Parent, our goal is to liquidate that as quickly as possible.

If you go through it, you'll see the cash and investments that we have is clearly cash and investments. Some of that is in the form of restricted cash. At the end of the year, roughly $113 million of that was unrestricted cash that we had at the end of the year. Our loan portfolio, you'll see has declined dramatically. That number is down to $525 million as of the end of the year, and it's our goal and expectation that roughly half of that loan portfolio will run off this year and the other half will run off in 2014. And then, you've got the other. The largest asset that's sitting in the other is our $360 million deferred tax asset, and so that's an asset that, as I said, we'll be realizing over time.

The bank, last year, made roughly, as I said, $200 million of pretax, it was $207 million. The taxes associated with that were $80 million. And because of the fact that the Parent has an NOL and we file a consolidated return, we have a tax sharing arrangement with the bank -- a tax sharing agreement with the bank, so taxes that the bank would otherwise be paying to the federal government, they're paying to the Parent. So when we say, "Well, jeez, how does the Parent liquidate this deferred tax asset?" That's how we liquidate it, and we expect that to happen over the next 3 to 4 years, as I said, where we won't be paying any federal taxes. But the bank will be paying taxes to -- the taxes that otherwise would be due, to the Parent.

The liabilities that we have outstanding, there's basically 2 levels of debt left. We have trust preferred securities, which is $430 million of trust preferred securities. Those are roughly at a cost of 2% and don't begin maturing until 2035. Then the rest of the debt that we have is securitization debt, underlying loans that we have in our -- in CLOs, and those will be paid off sometime this year. So again, you're going to see, if I -- come here and see me a year from now, you're going to go, "Okay, wow, it's shrunk even more from where it was."

So as I talked about it, our loan portfolio, there's the total of over $500 million. Roughly $200 million of that is sitting in non-securitized loans and $350 million of that is sitting in securitized loans. During the year, as I mentioned, we did just under 50 million shares of total repurchases at a cost $340 million. Since December of 2010, we've purchased back roughly 35% of our outstanding shares. So I know people talk about returning capital and I'm pretty confident in saying I don't think there's anybody out there that's returned anywhere near the level of capital that we've returned on a percentage basis.

And then in addition to that, we did our special dividend at the end of last year, which was roughly $100 million.

So wrapping it up and saying, "Well, jeez, what's your investment thesis or what should people be walking away with here?" I think our -- we've got a very, very strong lending franchise out there. I think we're recognized as the leader in middle market lending, and I think the fact that we have a nationwide lending platform, again, is something that separates us out from other banks that are out there.

In terms of the other side of it, I think we've got the retail branches that I talked about. We've got -- they average roughly $260 million in deposits, and that entire cost of running that branch network equates to roughly 40 basis points of the cost of deposit. So when you sit there and say, "Well, jeez, what's your cost?" You add in the cost of the funds plus your cost of deposits, again, I still think we would match up very favorably with other peers that are out there, and I think that's borne out when you look at our efficiency ratio compared to everybody else.

The other nice part is that this branch network, which had roughly $5.5 billion of deposits at the end of the year, in its heyday, had $8.5 billion of deposits. So this is a branch -- so we believe that the existing branch network that we have and the footprint that it operates in is adequate to take us to achieve our growth objectives over the next few years.

Again, we think we've got strong core earnings. I've talked about our pretax. I've talked about our pretax, pre-provision, I've talked about our net income. And again, our NIM is expected to stay above the 4.75% for 2013. And then, finally, in addition to all that and the growth prospects, we're one of the few out there that are continuing to return capital at a very significant pace. One of the other things is at the end of the year, we had roughly $200 million to $300 million of excess liquidity that was sitting in cash and investments that will able to be moved into our loan portfolio easily, which, again, will give us -- which will help us out from a NIM perspective.

And then, finally, as I said, the bank is growing. It's growing its loans. We're growing our profitability. The competitive environment is getting stiffer right now. We are seeing spreads being compressed. But our mantra has been, "We can compete on price, but I don't want to compete on structure and I don't want to compete on proceeds," and that's served us well. I think the next kind of real significant event for us will be the obtaining of bank holding company status for the Parent. I think that's kind of built in, in the upside. I think in terms of -- my sense is, the way the market looks at it is "I'll believe it, when I see it." We believe very strongly that we'll be able to see it. And again, I think that's kind of the next catalyst in terms of good news for us.

We're going to continue to return excess capital to the shareholders. We've done it in the form of repurchases. We've done it in the form of special dividends as well. As time goes on, we'll also be looking at what level of common dividend should we have. And then I think just, if you look at us, I think the bank is outperforming our peers on every metric that you have out there.

So with that, if anybody has any questions, I'd be happy to answer.

Donald Fandetti - Citigroup Inc, Research Division

Yes, so we'll open it up to questions.

Question-and-Answer Session

Donald Fandetti - Citigroup Inc, Research Division

Maybe I'll just kick it off real quick to get things going. So Jim, assuming you get bank holding company status this year and you make some of these acquisitions, smaller banks, are you going to have to pay up for those banks and are there a lot of them? Or are there just sort of a handful of them around?

James J. Pieczynski

I think the way that we look at it is in terms of paying up, we don't believe we'll have to pay up. The reason we believe that is if you look -- the size we're talking about is kind of a $500 million to $1.5 billion in terms of assets. So the nice part about it is no matter how you look at it, kind of the equity level on which you're buying is not a significant number to begin with. So even to the extent you're paying a premium, you're actually paying a smaller premium due to the small size. We also believe that by doing that, we've got a lot of upside, and so when we think about an acquisition, we think an acquisition needs to make sense and stand on its own. And then, to the extent you can pair it with the synergies that we have through our commercial customers, we'll get a significant level of upside. So the answer is yes, there's going to be a premium involved, but our expectation is for that premium to be low because of the size of the bank that we would be looking at.

Donald Fandetti - Citigroup Inc, Research Division

With that, let's open it up to questions in the audience.

Unknown Analyst

As you look across the lending portfolio, are there areas where you think that there is going to be tremendous or outsized growth within the -- I guess, it was Slide 9 that you focused on, or areas that you've under punched to date?

James J. Pieczynski

Yes. I think that's a good question. I think if you look at it, I think where we're going to get a lot of our outsized growth is in some of our newer businesses. So when I talk about kind of the double-digit growth that's over the entire portfolio. Obviously, that's going to be spread out among the different businesses. So my kind of nominees for where is the largest growth going to be coming is really in our newer businesses. So for example, if you look at our Premium Finance business, we only had $17 million of -- in the portfolio at the end of the year. We think that's a business that can ultimately be $1 billion business one day. There's a lot of opportunity there, and we're starting from a -- from basically a base of 0. Similarly, if you look at our small business group, that portfolio is $240 million. That group did roughly $80 million of originations last year. Most of that fell to the bottom line in terms of net loan growth. But the nice part is these tend to be longer-lived loans, and so as a result, I would expect a lot of those originations to translate into growth. So I expect that to be an area where we would have significant growth. Similarly, on the equipment finance side, that's a business we started in 2010. We typically have done $350-ish million of originations each year on that. Again, that -- typically, those loans are 5-year lived loans. We're in kind of the -- we've been through 3 years of a 5-year kind of cycle there, so I would expect significant growth to be happening in those businesses as well. I think as it relates to the other businesses, they would probably be kind of in the high -- kind of the single-digit growth. Some of those portfolios may even shrink a little bit. But in general, to answer your question, I'd say those are the groups that I would expect to see most of the growth.

Donald Fandetti - Citigroup Inc, Research Division

I think we had a question up here.

Unknown Analyst

Just piggybacking on that question. How much of the opportunity comes from the quality of lenders, lenders that either CapitalSource is homegrown versus higher talent that you find in the market and you think are especially adept at it? And then speaking specifically to the cash flow portion of your book, how do you do the credit underwriting of that? Because, clearly, you don't have that collateral you would have in the asset base or in the real estate portfolio.

James J. Pieczynski

We've done a combination of things. I think in terms of -- if you focus on kind of the initial DNA of the company and kind of say, "All right, where does the company's real DNA start?" Health care was a big impact on it. So for example, I joined the company 11 years ago, and I headed up our healthcare real estate group at the time. So health care has been there and has been homegrown and been there for a long time. The same is true in our lender finance, in our timeshare business, and the same is true in our commercial real estate space. As it relates to cash flow, when you look at that, we had a much wider net of loans that we did in the cash flow space before. And I'm going to say kind of in the pre-bank days, we did a lot of different deals. We put them into -- we were getting them ready to package them into CLOs and the like. And what we've done now is we really have actually a small concentrated group that really focuses on technology and the health care space. They've been -- that team has been here for probably almost 10 years. They've been here for a long time, so I kind of consider them homegrown as well. However, with the homegrown aspect of it being said, the other part of it is I've learned over the years that we don't really want somebody to learn a business while they're here and say, "Okay, start a business and go and learn." I -- the tuition for that is incredibly expensive. So what we've really done is really try to bring in specialty people. So, for example, our SBA group, we actually acquired an SBA lender. Our equipment finance group, we brought in a group that was previously at a bank and the same for our insurance premium and professional practice lending group. So the answer is we would be -- we'd be happy to add additional specialty lines here, however, I fully believe that we would do that by bringing in a group with known talent as opposed to, as I said, paying the tuition for people to learn about that space.

Donald Fandetti - Citigroup Inc, Research Division

I think we are officially over time. So we're -- unfortunately, we have to wrap it up here. Thank you, Jim. Appreciate your time.

James J. Pieczynski

Thank you, everybody.

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