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CapitalSource Reports Second Quarter 2009 Results
Posted by: gurufocus (IP Logged)
Date: August 6, 2009 06:33AM

Press Release: CapitalSource Reports Second Quarter 2009 Results

CHEVY CHASE, Md., Aug. 6 /PRNewswire-FirstCall/ -- CapitalSource Inc. (NYSE: CSE) today announced financial results for the second quarter of 2009. Net loss for the quarter was $247 million, or $0.82 per diluted share, compared to a net loss of $104 million, or $0.36 per diluted share in the prior quarter and net income of $62 million, or $0.26 per diluted share in the second quarter of 2008.

"During the quarter and shortly thereafter we extended or paid off all of our credit facilities including our large syndicated bank facility, completing a critical phase of our 2009 strategy to extend the duration of our liabilities to better match the duration of parent company assets," said John K. Delaney, CapitalSource Chairman and CEO. "After a successful debt offering in July, we reduced the $900 million syndicated bank facility to $600 million and extended its term to 2012. For the remainder of 2009, we can now turn our attention to aggressively managing our credit book and growing assets at CapitalSource Bank," concluded Delaney.

"Our capital position, both at the parent company and at CapitalSource Bank, remains strong and liquidity is adequate to meet anticipated needs," commented CapitalSource Chief Financial Officer, Donald F. Cole. "The amendment and extension of our syndicated bank facility has significantly reduced our debt maturities in 2009 - 2010. Despite continued deterioration in the credit performance of our commercial real estate portfolio, it is encouraging to see signs of stabilization or slight improvement across the rest of our assets," added Cole.

"Our loan production this quarter is reflective of the continuing slow pace of market transactions which drive new loan opportunities. We do have a strong pipeline, however, as demonstrated by an additional $286 million of loans that were approved but not closed as of the end of the second quarter," said Tad Lowrey, President and CEO of CapitalSource Bank. "Our tangible common equity to tangible assets ratio is 12.49%, which is among the highest in the industry. At quarter end, we also had a total risk-based capital ratio of 16.77%," concluded Lowrey.

CapitalSource Bank Segment

  • Commercial loans, including accrued interest, decreased $45 million from the prior quarter to $2.9 billion. There were approximately $211 million in loans closed at CapitalSource Bank during the quarter, including $22 million of maturing parent company loans that were underwritten as new loans at CapitalSource Bank.
  • The "A" Participation Interest, net was $888 million at the end of the quarter, reflecting principal repayments of $193 million, partially offset by discount accretion of $3 million. At the end of the quarter, the "A" Participation Interest represented 23% of the total underlying loan and property balances, a decrease from 27% at the end of the prior quarter and 38% at acquisition in July 2008. Under the "A" Participation Interest structure, the Company receives 70% of all principal collections on the underlying loans and properties. Payments on the "A" Participation Interest are current and the Company\'s position remains well secured by the total underlying collateral pool, which was $3.8 billion at the end of the quarter. Management expects the "A" Participation Interest will be paid off in 2010.
  • Cash and cash equivalents totaled $800 million at the end of the quarter, an increase from $616 million at the end of the prior quarter. The increase was primarily due to the maturities of Agency discount notes and principal repayments on the "A" Participation Interest which were invested in cash equivalents.
  • Investment securities, available-for-sale, which consist primarily of investments in Agency discount notes and Agency and Non-Agency MBS, were $816 million at the end of the quarter, a decrease from $1.0 billion at the end of the prior quarter primarily due to the maturities of Agency discount notes and prepayments on Non-Agency MBS.
  • Investment securities, held-to-maturity increased $127 million during the quarter to $219 million due to purchases of an additional $129 million of AAA-rated CMBS during the quarter with an expected yield of 7.03%. CapitalSource Bank focuses on the most senior AAA-rated CMBS tranches with substantial credit support, including cash defeasance.
  • Deposits were $4.5 billion at the end of the quarter, a decrease of $179 million from the prior quarter primarily due to managing our cost of funds. Average rates on new and renewed certificates of deposit were 1.78% for the quarter, compared to 1.89% for the prior quarter.
  • Interest income was $67 million for the quarter, a decrease of $6 million from the prior quarter, primarily due to reduced discount accretion on the "A" Participation Interest as a result of expected slower rates of repayment.
  • Net finance margin for the quarter was 3.01% compared to 2.69% in the prior quarter, primarily due to our cost of funds decreasing more rapidly than asset yields.
  • Yield on average interest earning assets was 5.19% for the quarter, a decrease of 16 basis points from the prior quarter primarily due to reduced discount accretion on the "A" Participation Interest. Excluding the "A" Participation Interest, yield increased to 5.64% for the quarter from 5.26% in the prior quarter.

  • Cost of interest-bearing liabilities, which includes deposits and FHLB borrowings, was 2.58% for the quarter compared to 3.16% for the prior quarter. The cost of deposits was 2.60% for the quarter, a decrease of 56 basis points from the prior quarter primarily due to re-pricing higher rate maturing certificates of deposit, along with continued reductions in deposit rates offered. The cost of FHLB borrowings was 1.93% during the quarter.
  • Non-interest income, which consists primarily of loan servicing fee income earned by servicing loans for the parent company, was $8 million for the quarter, unchanged from the prior quarter.
  • Total operating expenses were $26 million in the quarter, an increase of $2 million from the prior quarter primarily due to a $2.5 million FDIC special assessment paid by CapitalSource Bank to the FDIC\'s Deposit Insurance Fund, which was part of a required payment for all insured institutions. During the quarter, $3 million of loan sourcing expense was paid to the parent company. Operating expenses as a percentage of average total assets were 1.83%, an increase of 21 basis points from the prior quarter.
  • Total Risk-Based Capital Ratio was 16.77% at the end of the quarter compared to 17.24% at the end of the prior quarter.
  • Tier 1 Leverage Ratio at the end of the quarter was 12.46% compared to 12.87% at the end of the prior quarter.
  • Tangible Common Equity to Tangible Assets at the end of the quarter was 12.49% compared to 13.12% at the end of the prior quarter.

Other Commercial Finance Segment

  • Total commercial loans and loans held for sale, including accrued interest, were $6.2 billion at the end of the quarter, a decrease from $6.4 billion at the end of the prior quarter, primarily due to scheduled loan repayments and charge-offs.
  • Cash and cash equivalents were $199 million at the end of the quarter, an increase from $148 million at the end of the prior quarter.
  • Restricted cash was $168 million at the end of the quarter, an increase from $143 million at the end of the prior quarter. The increase was primarily due to higher collections on securitized loans.
  • Interest income was $133 million for the quarter, a decrease of $18 million from the prior quarter, primarily due to lower interest income on the residential mortgage assets and a decrease in loan yield. Excluding the legacy residential mortgage portfolio, interest income was $113 million for the quarter, compared to $120 million in the prior quarter.
  • Yield on average interest-earning assets was 7.84% for the quarter, a decrease of 49 basis points from the prior quarter, primarily due to lower prepayment related fee income, which accounted for 40 basis points of the decrease. Excluding the legacy residential mortgage portfolio, yield on average interest-earnings assets would have been 8.78% for the quarter compared to 9.68% in the prior quarter. Loan yield was 9.05% for the quarter, a decrease of 57 basis points from the prior quarter.
  • Prepayment-related fee income on loans was $1 million for the quarter, a decrease from $7 million in the prior quarter. Prepayment-related fee income contributed 8 basis points to yield.
  • Cost of funds was 4.23% for the quarter, a decrease of 2 basis points from the prior quarter, and funding spread to average one-month LIBOR decreased 4 basis points to 3.86%.
  • Total operating expenses were $51 million in the quarter, a decrease from $56 million in the prior quarter primarily due to a decrease in professional fees. Operating expenses as a percentage of average total assets were 2.27% for the quarter, a 2 basis point increase from the prior quarter.

Healthcare Net Lease Segment

  • Direct real estate investments, net were $959 million at the end of the quarter, a decrease of $16 million from the prior quarter, primarily due to depreciation and the sale of three properties during the quarter.
  • Operating lease income was $27 million, a decrease of $1 million from the prior quarter.
  • Three properties were sold during the quarter at a 7.91% capitalization rate of underlying lease payments. The total gain associated with the sales was $1 million.

Consolidated Metrics

Assets

  • Total commercial lending assets (including loans, loans held for sale, the "A" Participation Interest and related accrued interest) were $9.9 billion at the end of the quarter compared to $10.5 billion at the end of the prior quarter. The decrease was primarily due to the net reduction in the "A" Participation Interest, loan repayments, charge-offs, loan sales and foreclosures, partially offset by loans funded at CapitalSource Bank.

Credit

  • Loans on non-accrual were $884 million at the end of the quarter, an increase from $615 million at the end of the prior quarter. As a percentage of commercial lending assets, non-accruals were 8.91%. Non-accruals in CapitalSource Bank were $85 million at the end of the quarter compared to $23 million at the end of the prior quarter. As a percentage of commercial lending assets in CapitalSource Bank, non-accruals were 2.26%.
  • Loans 30-89 days delinquent were $118 million at the end of the quarter, a decrease from $126 million at the end of the prior quarter. As a percentage of commercial lending assets loans 30-89 days delinquent were 1.19%. CapitalSource Bank did not have any loans 30-89 days delinquent at the end of the quarter.
  • Loans 90 or more days delinquent were $412 million at the end of the quarter, an increase from $292 million at the end of the prior quarter. As a percentage of commercial lending assets, loans 90 or more days delinquent were 4.15%. CapitalSource Bank had two loans totaling $5 million that were 90 or more days delinquent at the end of the quarter, equal to 0.14% of commercial lending assets.
  • Net commercial charge-offs were $167 million, an increase of $48 million from the prior quarter. As a percentage of average commercial lending assets, net charge-offs for the trailing 12 months ended June 30, 2009, were 5.40%. CapitalSource Bank had $70 million in charge-offs in the quarter, relating principally to two loans. As a percentage of average commercial lending assets in CapitalSource Bank, net charge-offs for the trailing 12 months ended June 30, 2009, were 2.12%.
  • Provision for commercial loan losses was $169 million for the quarter, an increase of $29 million from the prior quarter. CapitalSource Bank added $90 million to its provision for loan losses in the quarter, an increase of $65 million from the prior quarter.
  • Allowance for loan losses was $448 million at the end of the quarter, a net increase of $3 million from the prior quarter. As a percentage of commercial lending assets, the allowance for loan losses was 4.51%. CapitalSource Bank\'s allowance for loan losses increased from $71 million to $92 million, or 2.43% of commercial lending assets.
  • Provision for loan losses on the mortgage-related receivables portion of the Other Commercial Finance segment increased to $35 million from $14 million in the prior quarter, due to the credit performance of the residential loans held in the Owner Trusts.
  • Net charge-offs on the mortgage-related receivables portion of the Other Commercial Finance segment increased to $19 million from $5 million in the prior quarter, due to the credit performance of the residential loans held in the Owner Trusts.

Other Income/(Expense)

  • Loss on investments, net was $5 million for the quarter primarily due to write-downs on certain cost-based investments and realized losses on sales. Loss on investments was $16 million for the prior quarter.
  • Loss on derivatives, net was $1 million for the quarter primarily due to lower interest rates having an adverse impact on our pay fixed swaps. Loss on derivatives, net was $0.7 million for the prior quarter.
  • Gain/loss on extinguishment of debt was a $5 million gain for the quarter primarily due to the gain on extinguishment of term debt recognized in the quarter. Loss on extinguishment of debt for the prior quarter, which reflected a loss related to a convertible debt exchange, was $57 million.
  • Other income/loss, net was an $11 million loss for the quarter primarily due to adjustments on loans held for sale and losses on REO, partially offset by gains from healthcare property sales. Other loss, net was $15 million for the prior quarter.

Income Taxes

  • Due to continuing operating losses in the second quarter at some of our taxable entities, we are required by GAAP to establish a valuation allowance against a portion of our deferred tax assets. During the quarter, we recorded a valuation allowance totaling $137 million, or $0.46 per diluted share. The remaining net deferred tax asset totaled $142 million at the end of the quarter. The valuation allowance is a non-cash, accounting charge that will exist until there is sufficient positive evidence to support its reduction or reversal. Such evidence would include a period of positive pre-tax income for those entities. Prior to a reversal, the Company will not recognize tax expense or benefit for those entities with an allowance.

Book Value

  • Book Value per share was $8.60 at the end of the quarter a decrease from $9.33 at the end of the prior quarter, primarily due to the current quarter loss. Total shareholder equity was $2.6 billion at the end of the quarter, a decrease of $209 million from the prior quarter primarily due to the loss during the quarter and the dividend payment made to shareholders during the quarter.
  • Tangible book value per share at the end of the quarter was $7.98 compared to $8.70 at the end of prior quarter, primarily due to the current quarter loss. Tangible equity was $2.4 billion at the end of the quarter, a decrease of $208 million from the prior quarter.

Subsequent Events

  • In July, we issued $300 million of 12.75% senior secured notes due July 2014 at an issue price of 93.966% in a private offering to "qualified institutional buyers" as defined in Rule 144A under the Securities Act of 1933 (the "Securities Act"), and outside the United States in reliance on Regulation S under the Securities Act. In July, we also sold 20.1 million shares of our common stock in an underwritten public offering at a price of $4.10 per share, including 2.6 million shares purchased by the underwriters pursuant to their over-allotment option. We received aggregate net proceeds of $351 million from these transactions, which were used to reduce our syndicated bank credit facility by $300 million and for general corporate purposes.

  • In July, lenders holding $778 million of indebtedness under our $900 million senior secured syndicated bank facility consented to amend and extend the facility until March 31, 2012, upon satisfaction of certain payment conditions and on July 27, 2009, we reduced commitments under this facility from $900 million to $600 million, in conjunction with the issuance of the Notes, satisfying the payment preconditions for extending the facility. The non-extending lenders\' commitments are approximately $122 million and mature on March 13, 2010.

Share Count

  • Average diluted shares outstanding were 299.5 million shares for the quarter, compared to 290.1 million shares for the prior quarter, primarily due to the full quarter impact of the issuance of 19.8 million shares in February for the convertible debt exchange. Total outstanding shares at June 30, 2009 were 303.3 million.

Dividends

  • A quarterly cash dividend of $0.01 per common share was paid on June 30, 2009 to common shareholders of record on June 16, 2009.

A conference call to discuss the results will be hosted on Thursday, August 6, 2009 at 8:30 a.m. EDT. Analysts and investors interested in participating are invited to call (866) 843-0890 from within the United States or (412) 317-9250 from outside the United States, with passcode 1338893. A webcast of the call will be available on the Investor Relations section of the CapitalSource web site at [www.capitalsource.com].

A telephonic replay will also be available from approximately 12 noon EDT August 6, 2009 through August 14, 2009. Please call (877) 344-7529 from the United States or (412) 317-0088 from outside the United States with passcode 432668. An audio replay will also be available on the Investor Relations section of the CapitalSource website.

A transcript of the earnings conference call will also be posted to the Investor Relations section of the CapitalSource website on August 6, 2009.

Supplemental financial tables and a slide presentation that may be referred to on the conference call will be posted to the Investor Relations homepage of the CapitalSource website prior to the call at the following address: [www.capitalsource.com].

About CapitalSource

CapitalSource Inc. (NYSE: CSE) is a commercial lender that provides financial products to middle market businesses and offers depository products and services in southern and central California through its wholly owned subsidiary CapitalSource Bank. As of June 30, 2009, CapitalSource had total commercial assets of $10.9 billion and $4.5 billion in deposits. The Company is headquartered in Chevy Chase, MD. Visit www.capitalsource.com for more information.

Forward Looking Statements

This release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including certain plans, expectations, goals, and projections and including statements about growing our business and our assets, managing our credit book, the impact of the U.S. economy on our business, our expectations regarding future credit performance, our liquidity and capital position, the performance and payment of the "A" Participation Interest, match funding our portfolio, and our valuation allowance against a portion of our deferred tax assets, all of which are subject to numerous assumptions, risks, and uncertainties. All statements contained in this release that are not clearly historical in nature are forward-looking, and the words "anticipate," "assume," "intend," "believe," "expect," "estimate," "plan," "goal," "will," "outlook," "continue," "look forward," "should," and similar expressions are generally intended to identify forward-looking statements. All forward-looking statements (including statements regarding future financial and operating results and future transactions and their results) involve risks, uncertainties and contingencies, many of which are beyond our control which may cause actual results, performance, or achievements to differ materially from anticipated results, performance or achievements. Actual results could differ materially from those contained or implied by such statements for a variety of factors, including without limitation: changes in economic or market conditions; continued or worsening disruptions in the economy and credit and other markets; movements in interest rates and lending spreads; continued or worsening charge-offs, reserves and delinquencies; our ability to successfully and cost effectively operate our business, including CapitalSource Bank; our ability to successfully grown deposits and commercial loan assets or deploy capital in favorable lending transactions; competitive and other market pressures on product pricing and services; success and timing of other business strategies; the nature, extent, and timing of governmental actions and reforms; changes in tax laws or regulations affecting our business; and other factors described in CapitalSource\'s 2008 Annual Report on Form 10-K and documents subsequently filed by CapitalSource with the Securities and Exchange Commission. All forward-looking statements included in this news release are based on information available at the time of the release. We are under no obligation to (and expressly disclaim any such obligation to) update or alter our forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

CapitalSource Inc.
                            Consolidated Balance Sheets
                                 ($ in thousands)

                                                    June 30,   December 31,
                                                      2009         2008
                                                   ----------  ------------
                                                   (Unaudited)

                                 ASSETS
    Cash and cash equivalents                     $1,002,407    $1,338,563
    Restricted cash                                  202,920       419,383
    Investment securities:
      Available-for-sale, at fair value              829,326       679,551
      Held-to-maturity, at amortized cost            219,154        14,389

      Total investment securities                  1,048,480       693,940
    Mortgage-backed securities pledged, trading            -     1,489,291
    Mortgage-related receivables, net              1,626,387     1,801,535
    Commercial real estate "A" participation
     interest, net                                   887,569     1,396,611
    Loans:
      Loans held for sale                             59,460         8,543
      Loans held for investment                    8,884,252     9,396,751
        Less deferred loan fees and discounts       (155,924)     (174,317)
        Less allowance for loan losses              (447,728)     (423,844)

      Loans held for investment, net               8,280,600     8,798,590

      Total loans                                  8,340,060     8,807,133
    Interest receivable                              104,703       117,516
    Direct real estate investments, net              958,909       989,716
    Other investments                                106,673       127,746
    Goodwill                                         173,135       173,135
    Other assets                                     654,988     1,065,063

    Total assets                                 $15,106,231   $18,419,632



                      LIABILITIES AND SHAREHOLDERS\' EQUITY
    Liabilities:
      Deposits                                    $4,547,939    $5,043,695
      Repurchase agreements                                -     1,595,750
      Credit facilities                            1,249,698     1,445,062
      Term debt                                    4,770,352     5,338,456
      Other borrowings                             1,598,141     1,573,813
      Other liabilities                              330,661       592,136

      Total liabilities                           12,496,791    15,588,912

    Shareholders\' equity:
      Preferred stock (50,000,000 shares
       authorized; no shares outstanding)                  -             -
      Common stock ($0.01 par value, 1,200,000,000
       shares authorized; 303,306,840 and
       282,804,211 shares issued and shares
       outstanding, respectively)                      3,033         2,828
      Additional paid-in capital                   3,818,943     3,686,765
      Accumulated deficit                         (1,224,344)     (868,425)
      Accumulated other comprehensive income, net     11,185         9,095

      Total CapitalSource Inc. shareholders\'
       equity                                      2,608,817     2,830,263
      Noncontrolling interests                           623           457

      Total shareholders\' equity                   2,609,440     2,830,720

      Total liabilities and shareholders\' equity $15,106,231   $18,419,632



                                CapitalSource Inc.
                        Consolidated Statements of Income
                                   (Unaudited)
                      ($ in thousands, except per share data)

                          Three Months Ended               Six Months Ended
                     June 30,   March 31,    June 30,    June 30,    June 30,
                       2009       2009         2008        2009        2008
                     --------   ---------    --------    --------    --------
    Net investment
     income:
      Interest income:
        Loans        $183,093    $199,392    $222,118    $382,485    $468,619
        Investment
         securities    13,469      20,553      29,417      34,022      86,757
        Other             913       1,742       2,687       2,655       7,171
        Total interest
         income       197,475     221,687     254,222     419,162     562,547
      Fee income       24,906      31,396      41,267      56,302      74,908
      Total interest
       and fee income 222,381     253,083     295,489     475,464     637,455
      Operating lease
       income          27,406      27,880      24,210      55,286      51,900
      Total investment
       income         249,787     280,963     319,699     530,750     689,355
      Interest expense:
        Deposits       29,959      38,387           -      68,346           -
        Borrowings     80,906      92,648     158,115     173,554     348,587
        Total interest
         expense      110,865     131,035     158,115     241,900     348,587
    Net investment
     income           138,922     149,928     161,584     288,850     340,768
    Provision for
     loan losses      203,847     155,267      31,674     359,114      37,333
    Net investment
     (loss) income after
     provision for loan
     losses           (64,925)     (5,339)    129,910     (70,264)    303,435

    Operating expenses:
      Compensation and
       benefits        34,808      35,037      37,808      69,845      69,597
      Depreciation of
       direct real
       estate
       investments      8,838       8,964       8,990      17,802      17,906
      Professional
       fees            11,860      17,420       8,989      29,280      21,923
      Other
       administrative
       expenses        22,254      16,858      14,855      39,112      28,725
    Total operating
     expenses          77,760      78,279      70,642     156,039     138,151

    Other income
     (expense):
      Loss on
       investments,
       net             (4,967)    (16,127)     (4,961)    (21,094)     (3,993)
      (Loss) gain on
       derivatives     (1,333)       (686)     15,098      (2,019)    (23,013)
      Gain (loss) on
       residential
       mortgage
       investment
       portfolio            -      15,311       9,060      15,311     (46,317)
      Gain (loss) on
       extinguishment
       of debt          4,565     (57,128)     12,725     (52,563)     12,725
      Other (expense)
       income, net    (10,970)    (15,497)      8,364     (26,467)      4,485
    Total other
     (expense) income (12,705)    (74,127)     40,286     (86,832)    (56,113)

    Net (loss) income
     before income
     taxes           (155,390)   (157,745)     99,554    (313,135)    109,171
      Income tax
       expense
       (benefit)       91,179     (53,425)     37,243      37,754      40,319
    Net (loss)
     income          (246,569)   (104,320)     62,311    (350,889)     68,852
    Net (loss) income
     attributable to
     noncontrolling
     interests            (22)        (16)        283         (38)      1,580
    Net (loss) income
     attributable to
     CapitalSource
     Inc            $(246,547)  $(104,304)    $62,028   $(350,851)    $67,272

    Net (loss) income
     per share
     attributable to
     CapitalSource Inc.:
      Basic            $(0.82)     $(0.36)      $0.26      $(1.19)      $0.30
      Diluted          $(0.82)     $(0.36)      $0.26      $(1.19)      $0.29

    Average shares
     outstanding:
      Basic       299,452,870 290,098,800 235,076,287 294,818,311 227,580,584
      Diluted     299,452,870 290,098,800 236,445,230 294,818,311 228,969,238

    Dividends
     declared
     per share          $0.01       $0.01       $0.60       $0.02       $1.20



                                CapitalSource Inc.
                                   Segment Data
                                   (Unaudited)
                                 ($ in thousands)

                                Three Months Ended June 30, 2009

                                        OTHER  HEALTHCARE
    Net investment      CAPITALSOURCE COMMERCIAL   NET   INTERCOMPANY CONSOL-
     income:                BANK       FINANCE    LEASE  ELIMINATIONS IDATED
                        ------------- ---------- ------- ------------ -------
      Interest income     $66,744     $133,059      $97    $(2,425)  $197,475
      Fee income            6,052       20,629        -     (1,775)    24,906
      Total interest and
       fee income          72,796      153,688       97     (4,200)   222,381
      Operating lease
       income                   -            -   27,406          -     27,406
      Total investment
       income              72,796      153,688   27,503     (4,200)   249,787
      Interest expense     30,551       77,215    5,524     (2,425)   110,865
    Net investment income  42,245       76,473   21,979     (1,775)   138,922
    Provision for
     loan losses           90,470      113,377        -          -    203,847
    Net investment (loss)
     income after
     provision for
     loan losses          (48,225)     (36,904)  21,979     (1,775)   (64,925)

    Compensation
     and benefits          11,005       23,179      624          -     34,808
    Depreciation of
     direct real estate
     investments                -            -    8,838          -      8,838
    Professional fees         615       11,046      199          -     11,860
    Other operating
     expenses              14,582       16,347    2,016    (10,691)    22,254
    Total operating
     expenses              26,202       50,573   11,676    (10,691)    77,760

    Total other income
     (expense)              8,364      (11,277)   1,005    (10,797)   (12,705)

    Net (loss) income
     Before income taxes  (66,063)     (98,754)  11,308     (1,881)  (155,390)
      Income tax
       expense (benefit)    4,781       89,702   (3,304)         -     91,179
    Net (loss) income     (70,844)    (188,456)  14,612     (1,881)  (246,569)
    Net loss
     attributable to
     noncontrolling
     interests                  -          (22)      -          -        (22)
    Net (loss)
     income
     attributable to
     CapitalSource Inc   $(70,844)   $(188,434) $14,612    $(1,881) $(246,547)



                               Three Months Ended March 31, 2009

                                        OTHER  HEALTHCARE
    Net investment      CAPITALSOURCE COMMERCIAL   NET   INTERCOMPANY CONSOL-
     income:                BANK       FINANCE    LEASE  ELIMINATIONS IDATED
                        ------------- ---------- ------- ------------ -------
      Interest income     $72,867     $151,133      $85   $(2,398)   $221,687
      Fee income            4,557       27,327        -      (488)     31,396
      Total interest and
       fee income          77,424      178,460       85    (2,886)    253,083
      Operating lease
       income                   -            -   27,880         -      27,880
      Total investment
       income              77,424      178,460   27,965    (2,886)    280,963
      Interest expense     38,413       89,263    5,757    (2,398)    131,035
      Net investment
       income              39,011       89,197   22,208      (488)    149,928
      Provision for
       loan losses         24,991      130,276        -         -     155,267
      Net investment (loss)
       income after
       provision for
       loan losses         14,020     (41,079)   22,208      (488)     (5,339)

    Compensation and       10,954       23,807      276         -      35,037
     benefits
    Depreciation of direct
     real estate
     investments                -            -    8,964         -       8,964
    Professional fees         595       16,614      211         -      17,420
    Other operating
     expenses              12,191       15,723    2,136   (13,192)     16,858
    Total operating
     expenses              23,740       56,144   11,587   (13,192)     78,279
    Total other income
     (expense)              9,561      (71,765)   1,365   (13,288)    (74,127)
    Net (loss) income
     before income taxes     (159)    (168,988)  11,986      (584)   (157,745)
      Income tax
       expense (benefit)     (65)      (58,023)   4,663         -     (53,425)
    Net (loss) income        (94)     (110,965)   7,323      (584)   (104,320)
    Net loss attributable to
     noncontrolling interests  -           (16)       -         -         (16)
    Net (loss) income
     attributable to
     CapitalSource Inc      $(94)    $(110,949)   $7,323    $(584)  $(104,304)



                                Six Months Ended June 30, 2009

                                        OTHER  HEALTHCARE
    Net investment      CAPITALSOURCE COMMERCIAL   NET   INTERCOMPANY CONSOL-
     income:                BANK       FINANCE    LEASE  ELIMINATIONS IDATED
                        ------------- ---------- ------- ------------ -------
    Interest income      $139,611     $284,192     $182    $(4,823)  $419,162
      Fee income           10,609       47,956        -     (2,263)    56,302
      Total interest and
       fee income         150,220      332,148      182     (7,086)   475,464
      Operating lease
       income                   -            -   55,286          -     55,286
      Total investment
       income             150,220      332,148   55,468     (7,086)   530,750
      Interest expense     68,964      166,478   11,281     (4,823)   241,900
    Net investment income  81,256      165,670   44,187     (2,263)   288,850
    Provision for loan
     losses               115,461      243,653        -          -    359,114
    Net investment (loss)
     income after
     provision for
     loan losses          (34,205)     (77,983)   44,187    (2,263)   (70,264)
    Compensation and
     benefits              21,959       46,986       900         -     69,845
    Depreciation of direct
     real estate
     investments                -            -    17,802         -     17,802

    Professional fees       1,210       27,660       410         -     29,280

    Other operating
     expenses              26,773       32,070     4,152   (23,883)    39,112
    Total operating
     expenses              49,942      106,717    23,263   (23,883)   156,039
    Total other income
     (expense)             17,925      (83,042)    2,370   (24,085)   (86,832)
    Net (loss) income
     before income taxes  (66,222)    (267,742)   23,294    (2,465)  (313,135)
    Income tax expense      4,716       31,679     1,359         -     37,754
    Net (loss) income     (70,938)    (299,421)   21,935    (2,465)  (350,889)
    Net loss attributable
     to noncontrolling
      interests                 -          (38)        -         -        (38)
    Net (loss) income
     attributable to
     CapitalSource Inc   $(70,938)   $(299,383)  $21,935   $(2,465) $(350,851)



                                Six Months Ended June 30, 2008

                                        OTHER  HEALTHCARE
    Net investment      CAPITALSOURCE COMMERCIAL   NET   INTERCOMPANY CONSOL-
     income:                BANK       FINANCE    LEASE  ELIMINATIONS IDATED
                        ------------- ---------- ------- ------------ -------
      Interest income          $-     $568,153     $829    $(6,435)  $562,547
      Fee income                -       74,890       18          -     74,908
      Total interest and
       fee income               -      643,043      847     (6,435)   637,455
      Operating lease
       income                   -            -   51,900          -     51,900
      Total investment
       income                   -      643,043   52,747     (6,435)   689,355
      Interest expense          -      333,367   21,655     (6,435)   348,587
    Net investment income       -      309,676   31,092          -    340,768
    Provision for
     loan losses                -       37,333        -          -     37,333
    Net investment (loss)
     income after provision
     for loan losses            -      272,343   31,092          -    303,435

    Compensation and
     benefits                   -       68,622      975          -     69,597
    Depreciation of direct
     real estate investments    -            -   17,906          -     17,906
    Professional fees           -       21,476      447          -     21,923
    Other operating expenses    -       25,500    3,225          -     28,725
    Total operating expenses    -      115,598   22,553          -    138,151

    Total other income
     (expense)                  -      (54,697)  (1,416)         -    (56,113)

    Net (loss) income
     before income taxes        -      102,048    7,123          -    109,171
      Income tax expense        -       40,319        -          -     40,319
    Net (loss) income           -       61,729    7,123          -     68,852
    Net loss attributable
     to noncontrolling
     interests                  -         (486)   2,066          -      1,580
    Net (loss) income
     attributable to
     CapitalSource Inc         $-      $62,215   $5,057         $-    $67,272




                                CapitalSource Inc.
                              Selected Financial Data
                                   (Unaudited)

                                Three Months Ended          Six Months Ended
                           June 30,   March 31,  June 30,  June 30,   June 30,
                             2009       2009       2008      2009       2008
                           --------   ---------  --------  --------   --------
    CapitalSource Bank Segment:

    Performance ratios:
      Return on average
       assets               (4.94%)    (0.01%)       N/A     (2.45%)       N/A
      Return on average
       equity              (30.84%)    (0.04%)       N/A    (15.45%)       N/A
      Yield on average
       interest earning
       assets                5.19%      5.35%        N/A      5.27%        N/A
      Cost of funds          2.58%      3.16%        N/A      2.87%        N/A
      Net finance margin     3.01%      2.69%        N/A      2.85%        N/A
      Operating expenses
       as a percentage of
       average total assets  1.83%      1.62%        N/A      1.72%        N/A
      Core lending spread    6.96%      6.81%        N/A      6.85%        N/A
      Loan yield             7.33%      7.29%        N/A      7.28%        N/A

    Capital ratios:
      Tier 1 leverage       12.46%     12.87%        N/A     12.46%        N/A
      Total risk-based
       capital              16.77%     17.24%        N/A     16.77%        N/A
      Tangible common equity
       to tangible assets   12.49%     13.12%        N/A     12.49%        N/A

    Average balances
     ($ in thousands):
      Average loans     $2,947,753 $2,791,350        N/A $2,870,021        N/A
      Average assets     5,748,682  5,943,750        N/A  5,845,714        N/A
      Average interest
      earning assets     5,626,428  5,872,004        N/A  5,748,737        N/A
      Average deposits   4,629,352  4,923,789        N/A  4,775,757        N/A
      Average borrowings   123,033      5,000        N/A     64,343        N/A
      Average equity       921,405    930,552        N/A    925,953        N/A

    Other Commercial
     Finance Segment:

    Performance ratios:
      Return on average
       assets               (8.37%)    (4.44%)     1.64%     (6.31%)     0.78%
      Return on average
       equity              (49.69%)   (29.00%)    10.25%    (39.41%)     5.28%
      Yield on average
       interest earning
       assets                7.84%      8.33%      8.55%      8.10%      8.51%
      Cost of funds          4.23%      4.25%      4.96%      4.29%      5.02%
      Net finance margin     3.90%      4.27%      4.22%      4.04%      4.10%
      Operating expenses
       as a percentage
       of average
       total assets          2.25%      2.25%      1.58%      2.25%      1.44%
      Core lending spread    8.59%      8.68%      7.07%      8.47%      7.11%
      Loan yield             9.05%      9.62%     10.11%      9.18%     10.36%

    Leverage ratios:
      Total debt to equity
       (as of period end)    5.65x      5.32x      4.15x      5.65x      4.15x
      Equity to total assets
       (as of period end)   14.59%     15.40%     19.01%     14.59%     19.01%

    Average balances
     ($ in thousands):
      Average loans     $6,405,635 $6,733,765 $9,715,111 $6,568,794 $9,781,606
      Average assets     9,034,419 10,125,135 15,067,109  9,574,897 16,084,727
      Average interest
       earning assets    7,856,362  8,692,688 14,040,040  8,272,665 15,153,501
      Average
       borrowings        7,329,372  8,310,324 12,234,515  7,817,138 13,311,662
      Average equity     1,521,013  1,551,346  2,416,071  1,531,820  2,364,971



                                CapitalSource Inc.
                              Selected Financial Data
                                   (Unaudited)

                                Three Months Ended          Six Months Ended
                           June 30,   March 31,  June 30,  June 30,   June 30,
                             2009       2009       2008      2009       2008
                           --------   ---------  --------  --------   --------
    Healthcare Net Lease Segment:

    Performance ratios:
      Return on average
       assets                5.63%      2.82%      0.10%      4.22%      0.93%
      Return on average
       equity               11.83%      5.85%      0.27%      8.74%      2.60%
      Yield on average
       income earning
       assets               10.37%     10.58%      9.08%     10.47%      9.74%
      Cost of funds          4.72%      4.77%      7.16%      4.84%      7.12%
      Net finance margin     8.18%      8.31%      5.02%      8.24%      5.67%
      Operating expenses as
       a percentage of
       average total assets  4.50%      4.46%      4.23%      4.48%      4.16%
      Operating expenses
       (excluding direct real
       estate depreciation)
       as a percentage of
       average total assets  1.09%      1.01%      0.89%      1.05%      0.86%

    Leverage ratios:
      Total debt to equity
       (as of period end)    0.93x      0.96x      1.63x      0.93x      1.63x
      Equity to total
       assets (as of
       period end)          48.37%     47.65%     34.69%     48.37%     34.69%

    Average balances
     ($ in thousands):
      Average assets    $1,040,676 $1,053,377 $1,079,855 $1,046,992 $1,088,150
      Average interest
       earning assets       17,394     15,175     26,652     16,291     30,974
      Average income
       earning assets    1,077,872  1,084,124  1,095,916  1,080,981  1,099,254
      Average borrowings   469,284    474,497    608,298    470,009    610,384
      Average equity       495,576    507,863    383,841    505,962    390,004

    Consolidated
     CapitalSource Inc.:

    Performance ratios:
      Return on average
       assets               (6.35%)    (2.51%)     1.57%     (4.36%)     0.80%
      Return on average
       equity              (33.79%)   (14.20%)     8.89%    (23.96%)     4.90%
      Yield on average
       interest earning
       assets                6.61%      7.04%      8.43%      6.83%      8.42%
      Cost of funds          3.58%      3.92%      5.04%      3.76%      5.11%
      Net finance margin     3.83%      3.89%      4.28%      3.86%      4.20%
      Operating expenses
       as a percentage of
       average total assets  2.00%      1.88%      1.78%      1.94%      1.64%
      Operating expenses
       (excluding direct
       real estate
       depreciation) as a
       percentage of average
       total assets          1.77%      1.67%      1.56%      1.72%      1.43%

    Leverage ratios:
      Total debt and
       deposits to equity (as
       of period end)        4.66x      4.48x      3.76x      4.66x      3.76x
      Equity to total assets
       (as of period end)   17.27%     17.85%     20.48%     17.27%     20.48%
      Tangible common equity
       to tangible assets   16.22%     16.85%     20.25%     16.22%     20.25%

    Average balances
     ($ in thousands):
      Average loans     $9,352,814 $9,524,747 $9,715,111 $9,438,343 $9,781,606
      Average assets    15,577,640 16,873,725 15,881,032 16,222,139 16,908,992
      Average interest
       earning assets   13,499,610 14,579,500 14,066,691 14,037,222 15,184,475
      Average income
       earning assets   14,560,088 15,648,449 15,135,956 15,101,912 16,252,755
      Average borrowings 7,780,606  8,644,983 12,595,070  8,210,407 13,674,303
      Average deposits   4,629,352  4,923,789        N/A  4,775,757        N/A
      Average equity     2,926,463  2,978,957  2,799,913  2,952,565  2,754,975



                                CapitalSource Inc.
                               Credit Quality Data
                                   (Unaudited)

                      June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
                        2009     2009      2008     2008      2008     2008
                      -------- --------- -------- --------- -------- ---------
    Loans 30-89 days
     contractually
     delinquent:
       As a % of total
        commercial lending
        assets(1)        1.19%     1.21%    2.75%     0.39%    0.74%     1.12%

    Loans 90 or more
     days contractually
     delinquent:
       As a % of total
        commercial lending
        assets           4.15%     2.79%    1.30%     1.72%    1.17%     0.59%

    Loans on
     non-accrual (2):
       As a % of total
        commercial lending
        assets           8.91%     5.88%    4.03%     2.39%     2.20%    1.79%

    Impaired loans(3) :
       As a % of total
        commercial lending
        assets          12.11%     8.24%    6.35%     6.35%     5.40%    4.06%

    Allowance for loan losses:
       As a % of total
        commercial lending
        assets           4.51%     4.26%    3.89%     1.48%     1.50%    1.40%

    Net charge offs
     (last twelve months):
       As a % of total average
        commercial lending
        assets           5.40%     3.95%    2.89%     1.22%     0.66%    0.57%



                                 Dec. 31, 2007  Sept. 30, 2007  June 30, 2007
                                 -------------  --------------  -------------
    Loans 30-89 days contractually
     delinquent:
       As a % of total commercial
        lending assets(1)                0.85%           0.22%          0.44%

    Loans 90 or more days contractually
     delinquent:
       As a % of total commercial
        lending assets                   0.59%           0.71%          0.88%

    Loans on non-accrual (2) :
       As a % of total commercial
        lending assets                   1.73%           1.76%          1.97%

    Impaired loans(3) :
       As a % of total commercial
        lending assets                   3.23%           3.46%          3.91%

    Allowance for loan losses:
       As a % of total commercial
        lending assets                   1.41%           1.16%          1.43%

    Net charge offs (last
       twelve months):
       As a % of total average
        commercial lending assets        0.64%           0.76%          0.75%


    (1) Includes commercial loans, loans held for sale, commercial real
        estate "A" participation interest and related accrued interest.

    (2) Includes loans with an aggregate principal balance of  $295.3 million,
        $115.2 million, $110.3 million, $96.3 million, $58.3 million, $47.2
        million, $55.5 million, $17.7 million and $31.1 million as of June 30,
        2009, March 31, 2009, December 31, 2008, September 30, 2008, June 30,
        2008, March 31, 2008, December 31, 2007, September 30, 2007 and June
        30, 2007, respectively, that were also classified as loans 90 or more
        days contractually delinquent.  Also includes non-performing loans
        held for sale that had an aggregate principal balance of $13.8
        million, $14.0 million, $14.5 million, $14.5 million, $14.9 million
        and $3.0 million as of June 30, 2009, March 31, 2009, December 31,
        2008, September 30, 2008, June 30, 2008 and September 30, 2007,
        respectively. As of March 31, 2008, December 31, 2007 and June 30,
        2007 there were no non-performing loans classified as held for sale.

    (3) Includes loans with an aggregate principal balance of $390.3 million,
        $179.3 million, $128.9 million, $163.8 million, $81.7 million,
        $47.2 million, $55.5 million, $57.4 million and $76.2 million as of
        June 30, 2009, March 31, 2009, December 31, 2008, September 30, 2008,
        June 30, 2008, March 31, 2008, December 31, 2007, September 30, 2007
        and June 30, 2007, respectively, that were also classified as loans
        90 or more days contractually delinquent, and loans with an aggregate
        principal balance of $870.6 million, $601.1 million, $423.4 million,
        $249.4 million, $192.4 million, $174.5 million, $170.5 million,
        $166.4 million and $173.1 million as of June 30, 2009, March 31, 2009,
        December 31, 2008, September 30, 2008, June 30, 2008, March 31, 2008,
        December 31, 2007, September 30, 2007 and June 30, 2007,
        respectively, that were also classified as loans on non-accrual
        status.

Source: PRNewsWire

CSE is in the portfolios of Seth Klarman of The Baupost Group, Michael Price of MFP Investors LLC, Kenneth Fisher of Fisher Asset Management, LLC.


Stocks Discussed: CSE,
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