CapitalSource Inc. Earnings Call Nuggets: Prepayment Speed, Securities Investment Gains

On Monday, CapitalSource Inc. (NYSE:CSE) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Prepayment Speed

Mark DeVries – Barclays: Could you provide us the detail for the items that benefitted, the non-recurring items that benefited the NIM that referenced in the earnings release?

John A. Bogler – CFO: 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 prepayment speed. We expect that the repayment speed assumptions for our agency MBS securities and so that slowdown and all those 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 NIM. The second component was about 5 basis points due to the payoff of some non-accrual loans during the quarter and 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 DeVries – Barclays: So, the slowdown in the prepayment speed, does that also what caused the yield and the securities book to go up pretty significantly Q-over-Q?

John A. Bogler – CFO: Yeah that’s correct. Then just one kind of caution on it, since we ran those prepayment speed models when we had these assumptions from them, 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 DeVries – Barclays: 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?

Tad Lowrey – CapitalSource Bank CEO: 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 fairly 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 in 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 three 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 seen not seen competitive impact. We’ve seen the competitive impact Jim mentioned in the multifamily but we’ve kind of scale 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 flow 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-time as the John mentioned will ultimately go away and we will see that compression. As far as the low-end and the high-end, it just a matter of how much weight you place on those various factors that I described.

Mark DeVries – Barclays: 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 a kind of a near term, medium term sustainable ROE at the Bank?

John A. Bogler – CFO: Yeah, for the Bank I would put the tax 10% to 12% of fully tax level.

Securities Investment Gains

Aaron Deer – Sandler O’Neill & Partners: 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 am just wondering what your thinking is – your appetite for taking gains as we go forward and where the unrealized gain was at quarter end?

John A. Bogler – CFO: 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 of making loans previously. A number of those are illiquid, so the opportunities to realize gain’s not always in our control. We’ll look for opportunities to dispose them when it’s reasonable, but it’s a number that I don’t think is easily predictable in terms of what we would expect to be in terms of gain relative to where we hold those securities, the unrealized gain and I am going to have get back, so I think it’s about 20 million or so, but I’ll have to get back to on that number.

Aaron Deer – Sandler O’Neill & Partners: It looked like the principal repayments slowed some in the commercial finance segment from may be the pace we had more recently, can you give on a maturity schedule, on what you’ve seen with early prepayments, what’s your kind of expected level of pay downs going forward?

James J. Pieczynski – CEO and Director; CapitalSource Bank President: As you said, as that balance gets smaller by definition the level of prepayments there 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 are looking to get into roughly $100 million to $120 million over the rest of this year.