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CapitalSource Reports First Quarter 2011 Results

CHEVY CHASE, Md., April 29, 2011 (GLOBE NEWSWIRE) -- CapitalSource Inc. (NYSE:CSE) today announced financial results for the first quarter 2011. Net income for the quarter was $3 million or $0.01 per diluted share, compared to net income in the prior quarter of $6 million or $0.02 per diluted share and a net loss of $212 million or $0.66 per diluted share in the first quarter 2010.
/ Source: GlobeNewswire
  • Net Income of $3 Million or $0.01 Per Share
  • New Funded Loans of $627 Million at CapitalSource Bank
  • CapitalSource Bank Net Interest Margin Increased to 5.43%
  • Stable Credit Profile / Non-Accrual Loans Decline by 21%
  • Parent Company Unrestricted Cash Tops $1 Billion after Quarter Close

CHEVY CHASE, Md., April 29, 2011 (GLOBE NEWSWIRE) -- CapitalSource Inc. (NYSE:CSE) today announced financial results for the first quarter 2011. Net income for the quarter was $3 million or $0.01 per diluted share, compared to net income in the prior quarter of $6 million or $0.02 per diluted share and a net loss of $212 million or $0.66 per diluted share in the first quarter 2010.

"Our financial results for the first quarter demonstrate growing profitability at CapitalSource Bank, on-going progress on liquidation of the Parent Company legacy loan portfolio and a sustained pattern of stable credit performance," said John K. Delaney, CapitalSource Executive Chairman. "Significant progress in each of these areas over the past four quarters has allowed us to reorient our short-term strategic focus from a defensive stance to an intensive, proactive and forward looking effort to both fund new loans at CapitalSource Bank and improve its profitability."

"New loans funded in the first quarter of $627 million represented the highest quarterly production since the formation of CapitalSource Bank in July 2008. The largest concentration of new loans in the quarter was multifamily, although our equipment finance and timeshare receivables businesses were also significant contributors," said James J. Pieczynski, CapitalSource Co-CEO. "With such a solid start, we now see a reasonable chance for full year originations to exceed our previous guidance of $1.8-1.9 billion."

"The first quarter was a strong beginning to the new year for CapitalSource Bank. We had net loan growth of 4% despite a high level of pre-payments, deposit growth of 2%, margin expansion of 39 basis points to 5.43%, and improving credit performance," said Tad Lowrey, CapitalSource Bank President and CEO. "Our capital levels remain above industry norms, with risk-based capital at 18.80% and a Tier 1 leverage ratio of 13.47%."

"Converting CapitalSource Bank from a California industrial charter to a commercial charter and deploying excess capital at the Parent Company remain top strategic priorities," said Steven A. Museles, CapitalSource Co-CEO. "We are continuing to work on the optimal next steps for both of these objectives, while growing assets and profitability at CapitalSource Bank with the deposit franchise we operate today."

"Unrestricted cash at the Parent Company grew to $723 million at March 31, 2011 and increased to over $1 billion on April 1st when we received the Genesis loan pay-off," said Donald F. Cole, CapitalSource CFO. "At the Parent Company, we expect the loan portfolio will continue to generate cash throughout 2011, as we have fully repaid our secured credit facilities and the only recourse debt maturing during 2011 will be the mandatory redemption of $281 million of convertible debentures in July."

Revised Metrics and Earnings Presentation – We have made certain revisions to the format of our earnings press release in order to provide a presentation which is more consistent with our banking peers. This quarterly results release highlights the key drivers of our financial performance utilizing new roll forward tables and quarterly comparisons which are designed to enhance transparency and provide helpful analysis of the major factors impacting the quarter.

CAPITALSOURCE BANK SEGMENT

This segment includes our commercial lending and banking business activities in CapitalSource Bank.

First Quarter 2011 Highlights

  • Net Income was $32 million, an increase of $16 million from the prior quarter primarily due to higher interest income and lower tax expense.
     
  • Loan Production increased to $627 million during the quarter from $536 million in the prior quarter, driving a 4% increase in the loan portfolio balance. The three new origination platforms added in 2010 - equipment finance, small business and professional practice lending - accounted for 20% of the new production volume in the quarter.
     
  • Liquidity - Cash and investments was $2.0 billion, or nearly 32% of total assets, at quarter end, which we forecast will be sufficient liquidity to support projected net loan growth for the balance of 2011.
     
  • Net Interest Margin for the quarter was 5.43%, an increase of 39 basis points from the prior quarter primarily due to accelerated accretion of loan discounts and deferred loan fees from increased prepayment levels and a decrease in non-accrual loans.
     
  • Capital – Capital ratios increased with risk-based capital and Tier 1 leverage ratios of 18.80% and 13.47%, respectively, at quarter end, compared to 18.13% and 13.15%, respectively, at the end of the prior quarter.
     
  • Credit Quality - Loan loss provision was $11 million for the quarter, compared to $10 million in the prior quarter. Net charge-offs, including an $11 million recovery on a previously charged off real estate loan, were $3 million in the quarter, a decrease of $13 million from the prior quarter. Non-accrual loans decreased to $175 million, or 4.35% of loans, at quarter end, compared to $248 million, or 6.45% of loans, in the prior quarter. The allowance for loan losses increased to $133 million, or 3.31% of loans, as of March 31, 2011, compared to $125 million, or 3.25% of loans, at the end of the prior quarter.

First Quarter 2011 Details

Interest Income was $92 million, an increase of $5 million, or 5%, from the prior quarter due to loan portfolio growth, accelerated accretion of loan discounts and deferred loan fees from increased prepayment levels and a decrease in non-accrual loans.

Cash and Investments declined by $103 million from the prior quarter as lower yielding cash and investments were redeployed to fund net loan growth. The portfolio yield at quarter end increased by 25 basis points and the overall duration increased to 2.6 years from 2.4 years.

Total Loans Held for Investment and Loans Held for Sale increased $164 million from the prior quarter as detailed below:

Deposits were $4.7 billion at quarter end, an increase of $87 million from the end of the prior quarter. The weighted average interest rate on deposits was 1.15% at the end of the quarter, a decline of 3 basis points from the end of the prior quarter.

FHLB Borrowings were $400 million, compared to $412 million at the end of the prior quarter. These borrowings are used primarily for interest rate risk management and short-term funding purposes. As of March 31, 2011, the weighted average rate and remaining maturities of FHLB borrowings were 2.01% and 2.9 years, respectively, compared to 1.67% and 2.3 years, respectively, at the end of the prior quarter.

Allowance for Loan Losses was $133 million, or 3.31% of the loan portfolio, an increase of $8 million from the end of the prior quarter.

Non-performing Assets were $308 million, a decline of $23 million, or 7%, from the prior quarter primarily due to decreases in non-accrual loans and REO assets, partially offset by an increase in troubled debt restructured loans due primarily to a $67 million real estate loan that was restructured. 

Operating Expenses were $33 million, which includes $2 million of additional costs related to the transfer of certain Parent Company support personnel to CapitalSource Bank in the quarter. Those costs were largely offset by reimbursements from the Parent Company which are reported in Other Income. Operating expenses also include $11 million in loan referral fees paid to the Parent Company, which was $1 million higher than the previous quarter due to increased loan production.

Other income was $3 million, a 44% decrease from the prior quarter primarily due to losses from the sale of assets offset by fees from the Parent Company for shared services provided by CapitalSource Bank.

Income Tax Expense was $3 million for the quarter, reflecting a $14 million tax expense related to pre-tax income, offset by a benefit of $11 million for the release of a valuation allowance that CapitalSource Bank maintained with respect to its state net deferred tax assets.

OTHER COMMERCIAL FINANCE SEGMENT

This segment includes the CapitalSource Inc. loan portfolio and other business activities at the Parent Company.

Net Loss was $35 million, or $0.11 per share, compared to a net loss of $8 million, or $0.02 per share in the prior quarter.

Interest Income was $48 million, a decrease of $19 million or 28% from the prior quarter primarily due to the continuing run-off of the Parent Company loan portfolio.

UnrestrictedCash was $723 million, an increase of $256 million from the prior quarter primarily due to loan sales of $133 million related to the European portfolio, loan pay-offs and the disposition of non-performing loans.

Total Loans Held for Investment and Loans Held for Sale were $2.1 billion, a decrease of $437 million from the prior quarter primarily due to loan payoffs and sales of $361 million and loans charged off of $89 million.

Allowance for Loan Losses was $150 million, or 7.25% of the loan portfolio, a decline of $54 million from the end of the prior quarter. 

Net Charge-Offs were $88 million in the quarter an increase of $15 million from the prior quarter.  Net charge-offs as a percentage of average loans for the twelve months ended March 31, 2011 were 8.20%, as compared to 7.17% for the twelve months ended December 31, 2010.

Non-Performing Assets were $578 million, a decline of $87 million, or 13%, from the prior quarter primarily due to a $76 million decrease in non-accrual loans. 46 loans totaling $164 million are considered impaired and on non-accrual, but are current as to payment status.  All collections on these loans are applied to the outstanding principal balance. 

Operating Expenses were $41 million, a decline of $1 million from prior quarter.

Other income was $32 million for the quarter, compared to other expenses of $5 million for the prior quarter, primarily due to increased gains on sales of investments, lower expenses of real estate owned and other foreclosed assets, and the net loss on the European portfolio that we recognized in the prior quarter.

CONSOLIDATED METRICS

Net Income was $3 million, compared to $6 million from the prior quarter, as detailed below:

Interest Income was $142 million, a decrease of $8 million, or 6%, from the prior quarter primarily due to loan portfolio run-off.

Total Loans Held for Investment and Loans Held for Sale decreased $272 million from the prior quarter as detailed below:

Allowance for Loan Losses was $283 million, or 4.65% of the loan portfolio, compared to $329 million or 5.17% at the end of the prior quarter. 

Net Charge-Offs were $91 million in the quarter, an increase of $2 million from the prior quarter.  Net charge-offs as a percentage of average loans for the twelve months ended March 31, 2011 were 5.78%, which was consistent with the twelve months ended December 31, 2010. 

Non-Performing Assets were $886 million, a decline of $111 million, or 11%, from the prior quarter primarily due to a $149 million decrease in non-accrual loans. 56 loans totaling $281 million were considered impaired and on non-accrual at the end of the quarter, but were current as to payment status.  All collections on those loans are applied to the outstanding principal balance.

Operating Expenses were $54 million, a decrease of $3 million from the prior quarter, primarily due to a decrease in professional fees at the Parent Company.

Income Tax Expense was $11 million for the quarter, primarily related to the re-establishment of a valuation allowance at the consolidated group level with respect to CapitalSource Bank's net deferred tax assets. The valuation allowance was recorded in connection with our plan to reconsolidate our corporate entities for federal tax purposes in 2011.

Valuation Allowance related to the Company's deferred tax assets at quarter end was $457 million, an increase of $43 million from the end of the prior quarter. The net deferred tax asset at quarter end, after subtracting the valuation allowance, was $63 million.  The valuation allowance is a non-cash accounting charge that will exist until there is sufficient positive evidence to support its reduction or reversal.

Book Value Per Share was $6.41 at the end of the quarter, an increase of $0.06 from the end of the prior quarter. Total shareholders' equity was $2.1 billion at the end of the quarter, an increase of $17 million from the prior quarter primarily due to increases in accumulated other comprehensive income due to foreign currency translation and mark-to-market gains on available-for-sale securities.

Average Diluted Shares Outstanding were 327.0 million shares for the quarter, compared to 326.7 million shares for the prior quarter. Total outstanding shares at March 31, 2011 were 323.3 million.

Quarterly Cash Dividend of $0.01 per common share was paid on March 31, 2011 to common shareholders of record on March 16, 2011.

Conference Call Details

A conference call to discuss the results will be hosted on Friday, April 29, 2011 at 8:30 a.m. EDT. Interested parties may access the call via webcast on the Investor Relations section of the CapitalSource web site at . An audio replay will also be available on the website from approximately 12 Noon EDT April 29, 2011 through July 29, 2011.

CapitalSource Bank will file its Consolidated Reports of Condition and Income for A Bank With Domestic Offices Only FFIEC 041, for the quarter ended March 31, 2011 (the Call Report) with the Federal Deposit Insurance Corporation (FDIC) on April 29, 2011. The Call Report may be found on the FDIC's website at following CapitalSource Bank's filing with the FDIC.

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 March 31, 2011, CapitalSource had total assets of $9.3 billion and $4.7 billion in deposits. 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, strategies, goals, and projections and including statements about projected loan originations, our expectations regarding our application to become a bank holding company and convert CapitalSource Bank's charter to a commercial charter, liquidity position at the Parent Company, growing our business and assets, projected loan production levels, deployment of excess capital at the Parent Company, profitability, the maturities of our recourse debt, all 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,' 'forecast,' 'plan,' 'position,' 'project,' 'will,' 'should,' 'would,' 'seek,' 'continue,' 'outlook,' 'look forward,' and similar expressions are generally intended to identify forward-looking statements. All forward-looking statements (including statements regarding preliminary and 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 or investment or lending opportunities; regulatory restrictions, restrictions imposed by our debt agreements; continued or worsening disruptions in credit and other markets; increase in interest rates and lending spreads; competitive and other market pressures on product pricing and services; reduced demand for our services; success and timing of other business strategies; and other factors described in CapitalSource's 2010 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 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.

Table of Contents

  • Consolidated Balance Sheets
  • Consolidated Statements of Income
  • Segment Statements of Income
  • Segment Balance Sheets
  • Selected Financial Data
  • Credit Quality Data
CONTACT: Investor Relations: Dennis Oakes Senior Vice President, Investor Relations (212) 321-7212 doakes@capitalsource.com Media Relations: Michael Weiss Director of Communications (301) 841-2918 mweiss@capitalsource.com