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Press release from GlobeNewswire (a Nasdaq OMX company)

CapitalSource Reports Second Quarter 2011 Results

Friday, July 29, 2011

CapitalSource Reports Second Quarter 2011 Results03:00 EDT Friday, July 29, 2011 Net Income of $17 Million or $0.05 Per Share   New Funded Loans of $543 Million   Parent Company Unrestricted Cash Tops $1.2 Billion   Credit Profile Improved   Capital Deployment Strategy Announced CHEVY CHASE, Md., July 28, 2011 (GLOBE NEWSWIRE) -- CapitalSource Inc. (NYSE:CSE) today announced financial results for the second quarter 2011. Net income for the quarter was $17 million or $0.05 per diluted share, compared to net income of $3 million or $0.01 per diluted share in the prior quarter and net income of $18 million or $0.06 per diluted share in the second quarter 2010.  "We have spent considerable time over the past few months evaluating how best to achieve two key strategic priorities – returning Parent Company capital to the shareholders and converting CapitalSource Bank to a California chartered commercial bank. While pursuing those goals simultaneously would be ideal, the options that potentially allow us to do so involve significant complexity, uncertainty and delay," said John K. Delaney, CapitalSource Executive Chairman. "As a result, after thorough analysis of our strategic options and with the advice of a financial advisor, our Board has decided to pursue a course of action that is within our control – expeditiously returning Parent Company capital to shareholders, while extending the timeframe for conversion to a commercial bank charter."  "As a result of our decision not to accelerate the normal course disposition of Parent Company assets, we do not anticipate filing an application for bank holding company status for at least 18 months. The Parent's regulatory credit metrics should be substantially improved by then, which we expect would simplify the Federal Reserve review process when it does occur," said Tad Lowrey, CapitalSource Bank President and CEO. "Converting to a commercial charter has many longer term benefits, so it remains an important strategic priority. Since our current industrial charter is an extremely efficient operating model, however, this delay should have little or no impact on our profitability and growth projections for CapitalSource Bank over the next two years." "New loans funded in the second quarter of $543 million were above our expected quarterly range and boosted our total production for the first half of 2011 to nearly $1.2 billion. As a result, we now expect full year originations to top $2 billion, which represents a 25% year-over-year increase," said James J. Pieczynski, CapitalSource Co-CEO. "Importantly, there was broad-based participation among our various specialty lending groups in originations this quarter. For the first six months of the year our multifamily, healthcare real estate, lender finance, corporate asset finance, and technology cash flow groups have had the highest production levels." "The second quarter at CapitalSource Bank was solidly profitable. Net interest margin remained above 5% and the fully-taxed return on average assets of 1.78% was above our expected range for the year of 1.25% – 1.50%," said Donald F. Cole, CapitalSource CFO. "On a consolidated basis the second quarter was a story of balance sheet strengthening, as our Parent Company liquidity increased to over $1.2 billion and the remaining legacy loan portfolio declined by $823 million or 25%. Following the quarter close, we also redeemed $281 million of convertible debentures – further reducing Parent Company debt."CAPITALSOURCE BANK SEGMENT This segment includes our commercial lending and banking business activities in CapitalSource Bank.Second Quarter 2011 HighlightsNet Income was $28 million, a decrease of $5 million from the prior quarter primarily due to a $16 million higher income tax expense this quarter, though pretax income increased from $35 million in the prior quarter to $47 million in the current quarter.  Loan Production was $543 million during the quarter compared to $627 million in the prior quarter, resulting in a 4.7% net increase in the loan portfolio balance despite loan pay-offs and charge-offs totaling $350 million during the quarter.     Net Interest Margin for the quarter was 5.07%, a decrease of 36 basis points from the prior quarter primarily due to a decline in investment and loan yields.  Capital – The risk-based capital ratio declined 13 basis points to 18.67% while the Tier 1 leverage ratio was unchanged at 13.47%.   Credit Quality - Loan loss provision was a reversal of $1 million for the quarter, compared to an $11 million provision in the prior quarter. Net charge-offs were $23 million in the quarter, compared to net charge-offs of $3 million in the prior quarter, which included recoveries of $12 million. Non-accrual loans increased to $220 million, or 5.23% of loans, at quarter end compared to $175 million, or 4.35% of loans, at the end of the prior quarter primarily due to the addition of one large loan to non-accrual status. A $107 million non-accrual loan was sold on July 1, 2011, reducing the total non-accrual balance to approximately $112 million. The allowance for loan losses decreased to $109 million, or 2.58% of loans at quarter end compared to $133 million, or 3.31% of loans, at the end of the prior quarter.First Quarter 2011 DetailsInterest Income was $90 million, a decrease of $1 million from the prior quarter primarily due to lower investment and loan yields due to a shift in the loan mix to a higher percentage of lower yielding loans, partially offset by an increase in average loans.  Quarter Ended        6/30/11 vs. 3/31/116/30/11 vs. 6/30/10Net Income6/30/20113/31/20116/30/2010$%$%                 ($ in thousands)               Interest income  $ 90,490   $ 91,804   $ 78,926   $ (1,314) (1)%  $ 11,564   15  Interest expense  15,612   15,210   16,431  (402) (3)  819   5  Provision for loan losses (1,331)  11,242   5,094   12,573   112   6,425   126  Operating expenses  32,594   32,941   29,248   347   1  (3,346) (11) Other income  3,000   2,965   7,067   35   1  (4,067) (58) Income tax expense (benefit)  18,840   3,095  (2,463) (15,745) (509) (21,303) (865) Net income   27,775   32,281   37,683  (4,506) (14) (9,908) (26)          Quarter Ended  6/30/20113/31/2011Net Interest MarginAverage BalanceInterest Income/ExpenseAverage Yield/CostAverage BalanceInterest Income/ExpenseAverage Yield/Cost               ($ in thousands)             Total loans  $ 3,943,136   $ 78,488   7.98%  $ 3,792,412   $ 76,845   8.22% Investment securities  1,553,432   11,599   2.99   1,596,615   14,723   3.74  Cash and other interest earning assets  428,701   403   0.38   334,278   236   0.29  Total interest-earning assets  5,925,269   90,490   6.13   5,723,305   91,804   6.51  Deposits  4,738,233   13,398   1.13   4,673,752   13,383   1.16  Borrowings  426,484   2,214   2.08   373,278   1,827   1.98  Total interest-bearing liabilities  $  5,164,717    15,612   1.21   $ 5,047,030   15,210   1.22  Net interest spread    $ 74,878    4.92%    $ 76,594   5.29% Net interest margin      5.07%      5.43%Cash and Investments decreased by $18 million to $1.9 billion. The portfolio yield at quarter end decreased by 78 basis points to 2.45%, due to the extension of a CMBS bond which reduced the related discount accretion. Overall duration was unchanged at 2.6 years.Cash and Investments6/30/20113/31/2011 ($ in thousands)Book ValueYieldDurationBook ValueYieldDuration Cash and cash equivalents   382,065   0.29%  0.1   $ 440,928   0.28% --  Agency callable notes  124,984  2.01%  4.6   164,223  1.79%  4.2  Agency debt  55,918  2.11%  1.0   76,843  1.73%  1.0  Agency MBS  1,110,767  2.69%  3.4   944,968  2.83%  3.9  Non-agency MBS  87,558  4.39%  1.9   97,062  4.45%  2.7  CMBS  136,250  4.50%  2.5   179,077  13.17%  1.0  Corporate debt  4,998  3.04%  0.4   4,998  3.04%  0.7  Asset-back securities  18,874  11.69%  1.1   21,398  10.73%  2.0  U.S. Treasury and agency securities  19,796  2.99%  6.2   29,795  2.13%  4.2     1,941,210  2.45%  2.6   1,959,292  3.23%  2.6 Total Loans Held for Investment and Loans Held for Sale increased $189 million (4.7%) from the prior quarter as detailed below:  Quarter EndedLoan Roll Forward6/30/20113/31/20116/30/2010 ($ in thousands)       Beginning balance  $ 4,012,819    $ 3,848,511    $ 3,194,251   New fundings  542,728   627,470   549,043  Loans       Principal repayments (326,884) (428,426) (328,720) Sales  --  (17,373) (3,395) Transfers to foreclosed assets (3,270) (2,013)  --  Charge-offs (23,320) (15,350)  62,851  Ending balance  $ 4,202,073    $ 4,012,819    $ 3,474,030                    Quarter EndedLoan Portfolio Mix6/30/20113/31/20116/30/2010 ($ in thousands)       General asset-based $ 592,712   $ 756,851   $ 666,868   Healthcare asset-based  195,479   181,988   241,995  Equipment finance  283,494   274,669   81,952  Cash flow  1,052,187   835,030   812,859  General commercial real estate  729,316   794,345   964,651  Healthcare real estate  463,460   428,322   450,489  Multifamily  726,582   587,011   174,130  Small business  158,843   154,603   81,086  Total  $ 4,202,073    $ 4,012,819    $ 3,474,030  Deposits were $4.8 billion at quarter end, an increase of $77 million (2%) from the end of the prior quarter. The weighted average interest rate on deposits was 1.13% at the end of the quarter, a decline of 2 basis points from the end of the prior quarter.FHLB Borrowings were $480 million, an increase of $80 million from the end of the prior quarter. FHLB borrowings are used primarily for interest rate risk management and short-term funding purposes. As of June 30, 2011, the remaining maturities were extended to 3.2 years compared to 2.9 years at the end of the prior quarter.Allowance for Loan Losses was $109 million, or 2.58% of the loan portfolio, a decrease of $24 million from the end of the prior quarter.   Quarter EndedAllowance for Loan Losses6/30/2011 ($ in thousands)GeneralSpecificTotal % Loans Beginning balance  $ 130,214  $ 2,756  $ 132,970  3.31% Provision for loan losses (22,903)  21,572  (1,331)   Charge-offs, net  --  (23,047) (23,047) 2.31% Ending balance $ 107,311  $ 1,281  $ 108,592  2.58%                      Quarter Ended 3/31/2011  GeneralSpecificTotal % Loans Beginning balance $ 122,997  $ 1,881  $ 124,878  3.25% Provision for loan losses  7,217   4,025   11,242    Charge-offs, net  --  (3,150) (3,150) 0.33% Ending balance $ 130,214  $ 2,756  $ 132,970  3.31%Non-Performing Assets were $238 million, an increase of $32 million (16%) from the prior quarter primarily due to one loan that was previously restructured but placed on non-accrual status this quarter, partially offset by a decrease in REO assets. A $107 million non-accrual loan was sold on July 1, 2011, reducing non-performing assets to approximately $131 million.Non-performing Assets6/30/20113/31/2011   Loan Balance% of Total Assets Loan Balance% of Total Assets ($ in thousands)         Non-accrual loans - current  $ 183,593   2.88%  $ 116,568   1.89%  Non-accrual loans - delinquent 30-89 days  1,266   0.02   1,688   0.03  Non-accrual loans - delinquent 90+ days  34,802   0.55   56,338   0.91  Total non-accrual loans  219,661   3.45%   174,594   2.83%  Accruing loans - delinquent 90+ days  136   --   186   --  REO  17,807   0.28   30,416   0.49  Total non-performing assets $ 237,604   3.73%  $ 205,196  3.32%Accruing Troubled Debt Restructurings were $36 million, a decrease of $67 million from the prior quarter primarily due to one loan that was previously restructured but placed on non-accrual status this quarter. In addition, there were $169 million of TDRs which were on non-accrual, though current as to payment status, at quarter end (included in the "Non-accrual loans – current" line in the table above).Operating Expenses were $33 million, consistent with the prior quarter. Operating expenses included $11 million related to loan referral services provided by the Parent Company.Income Tax Expense was $19 million for the quarter which reflects an effective tax rate of 40.0%.OTHER COMMERCIAL FINANCE SEGMENT This segment includes the CapitalSource Inc. loan portfolio and other business activities at the Parent Company.Net Loss was $8 million, compared to $35 million in the prior quarter. The decrease in net loss was primarily due to the decrease in provision for loan losses of $31 million.Interest Income was $41 million, a decrease of $7 million from the prior quarter primarily due to a significant decline in interest-earning assets as paydown of legacy loans totaled $566 million during the quarter.UnrestrictedCash was $1.2 billion, an increase of $485 million from the prior quarter primarily due to loan repayments and sales.Total Loans Held for Investment and Loans Held for Sale decreased by $673 million from the prior quarter as detailed below:  Quarter EndedLoan Roll Forward6/30/20113/31/20116/30/2010 ($ in thousands)       Beginning balance  $ 2,072,904  $ 2,509,699  $ 4,766,913  New fundings  --   12,925   16,858  Loans       Principal repayments (566,085) (184,715) (622,223) Sales (34,469) (176,285) (9,374) Transfers to foreclosed assets (7,538)  --  (23,765) Charge-offs (64,902) (88,720)  70,267  Ending balance $ 1,399,910  $ 2,072,904  $ 4,198,676 Allowance for Loan Losses was $91 million, or 6.46% of the loan portfolio, a decline of $60 million from the end of the prior quarter.   Quarter EndedAllowance for Loan Losses6/30/2011 ($ in thousands)GeneralSpecificTotal % Loans Beginning balance $ 91,873  $ 58,431  $ 150,304  7.25% Provision for loan losses (17,906)  20,760   2,854    Charge-offs, net  --  (62,612) (62,612) 15.63% Ending balance $ 73,967  $ 16,579  $ 90,546  6.46%            Quarter Ended 3/31/2011  GeneralSpecificTotal % Loans Beginning balance  $ 127,156  $ 77,088  $ 204,244  8.14% Provision for loan losses (35,283)  68,850   33,567    Charge-offs, net  --  (87,507) (87,507) 14.97% Ending balance $ 91,873  $ 58,431  $ 150,304  7.25%Non-Performing Assets were $327 million, a decline of $136 million (29%) from the prior quarter primarily due to a $118 million decrease in non-accrual loans as a result of loan sales and charge-offs. As of June 30, 2011, 41 loans totaling $128 million were considered impaired and on non-accrual, but were current as to payment status.  All collections on those loans are applied to the outstanding principal balance. Non-performing Assets6/30/20113/31/2011   Loan Balance% of Total Assets Loan Balance% of Total Assets ($ in thousands)         Non-accrual loans - current $ 135,729  4.49% $ 163,974   5.23%  Non-accrual loans - delinquent 30-89 days  756   0.02   31,853   1.02  Non-accrual loans - delinquent 90+ days  120,149   3.98   178,946   5.71  Total non-accrual loans  256,634   8.49%   374,773   11.96%  Accruing loans - delinquent 90+ days  39,941   1.32   46,885   1.50  REO  30,624   1.01   41,053   1.31  Total non-performing assets $ 327,199   10.82%  $ 462,711   14.77% Accruing Troubled Debt Restructurings were $127 million, an increase of $12 million from the prior quarter primarily due to two loans totaling $9 million that were restructured in the quarter. In addition, there were $77 million of TDRs at quarter end which were on non-accrual, though current as to payment status (included in the "Non-accrual loans – current" line in the table above).Other income was $25 million for the quarter, compared to $32 million for the prior quarter, primarily due to decreased gains on investment sales, partially offset by lower expenses of real estate owned and other foreclosed assets and decreased losses on derivatives.CONSOLIDATED Net Income was $17 million or $0.05 per diluted share, compared to $3 million, or $0.01 per diluted share, in the prior quarter as detailed below:  Quarter Ended        6/30/11 vs. 3/31/116/30/11 vs. 6/30/10Net Income6/30/20113/31/20116/30/2010$%$%                 ($ in thousands)               Interest income $ 127,425  $ 142,152  $ 164,720  $ (14,727) (11)% $ (37,295) (23)% Interest expense  45,807   46,752   60,757   945   2   14,950   25  Provision for loan losses  1,523   44,809   25,262   43,286   97   23,739   94  Operating expenses  55,322   54,261   53,591  (1,061) (2) (1,731) (3) Other income (expense)  9,070   17,991  (34,806) (8,921) (50)  43,876   126  Income tax expense (benefit)  17,249   11,162  (4,174) (6,087) (55) (21,423) (513) Net income   16,594   3,159   18,340   13,435   425  (1,746) (10)Interest Income was $127 million, a decrease of $15 million (11%) from the prior quarter primarily due to a decline in the average balance of interest-earning assets.Total Loans Held for Investment and Loans Held for Sale decreased $484 million from the prior quarter as detailed below:Loan Roll Forward6/30/20113/31/20116/30/2010 ($ in thousands)       Beginning balance  $ 6,085,723    $ 6,358,210    $ 7,961,164   New fundings  542,728   640,395   565,901  Loans       Principal repayments (892,969) (613,141) (950,943) Sales (34,469) (193,658) (12,769) Transfers to foreclosed assets (10,808) (2,013) (23,765) Charge-offs (88,222) (104,070)  133,118  Ending balance $ 5,601,983  $ 6,085,723  $ 7,672,706 Allowance for Loan Losses was $199 million, or 3.55% of the loan portfolio, compared to $283 million or 4.65% at the end of the prior quarter. Net Charge-Offs were $86 million in the quarter, a decrease of $5 million from the prior quarter.  Net charge-offs as a percentage of average loans for the twelve month period ended June 30, 2011 were 5.55%, compared to 5.78% for the twelve month period ended March 31, 2011.   Quarter EndedAllowance for Loan Losses6/30/2011 ($ in thousands)GeneralSpecificTotal % Loans Beginning balance $ 222,087  $ 61,187  $ 283,274  4.65% Provision for loan losses (40,809)  42,332   1,523    Charge-offs, net  --  (85,659) (85,659) 6.12% Ending balance $ 181,278  $ 17,860  $ 199,138  3.55%            Quarter Ended 3/31/2011  GeneralSpecificTotal % Loans Beginning balance  $ 250,153  $ 78,969  $ 329,122  5.17% Provision for loan losses (28,066)  72,875   44,809    Charge-offs, net  --  (90,657) (90,657) 5.90% Ending balance $ 222,087  $ 61,187  $ 283,274  4.65%Non-Performing Assets were $565 million, a decline of $103 million (15%) from the prior quarter primarily due to a $73 million decrease in non-accrual loans. As of June 30, 2011, 52 loans totaling $204 million were considered impaired and on non-accrual but were current as to payment status.  All collections on those loans are applied to the outstanding principal balance. A $112 million non-accrual loan was sold on July 1, 2011, reducing non-performing assets to approximately $453 million.Non-performing Assets6/30/20113/31/2011   Loan Balance% of Total Assets Loan Balance% of Total Assets ($ in thousands)         Non-accrual loans - current $ 319,322   3.43%  $ 280,542  3.03% Non-accrual loans - delinquent 30-89 days  2,022   0.02   33,541   0.36  Non-accrual loans - delinquent 90+ days  154,951   1.66   235,284   2.54  Total non-accrual loans  476,295   5.11%   549,367   5.92%  Accruing loans - delinquent 90+ days  40,077   0.43   47,071   0.51  REO  48,431   0.52   71,469   0.77  Total non-performing assets $ 564,803   6.06%  $ 667,907   7.20% Troubled Debt Restructurings Accruing were $163 million, a decrease of $55 million from the prior quarter. In addition, there were $246 million of TDRs which were on non-accrual, but current as to payment status, at quarter end (included in the "Non-accrual loans – current" line in the table above).Operating Expenses were $55 million, an increase of $1 million from the prior quarter, primarily due to an increase in professional fees.        Quarter Ended Operating Expenses6/30/20113/31/2011 ($ in thousands)     Compensation and benefits $ 29,098  $ 30,379  Professional fees  10,914   7,188  Other operating expenses  15,310   16,694  Total operating expenses $ 55,322  $ 54,261 Income Tax Expense was $17 million for the quarter, primarily related to the change in net deferred tax assets with respect to CapitalSource Bank.Valuation Allowance related to the Company's deferred tax assets at quarter end was $437 million, a decrease of $20 million from the end of the prior quarter. The net deferred tax asset at quarter end, after subtracting the valuation allowance, was $47 million, a decrease of $16 million from the prior 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.Book Value Per Share was $6.53 at the end of the quarter, an increase of $0.12 from the end of the prior quarter. Total shareholders' equity was $2.1 billion at the end of the quarter, an increase of $39 million from the prior quarter primarily due to net income and an increase in accumulated other comprehensive income due to a tax benefit, unrealized gains on agency MBS, gains on foreign currency translation and mark-to-market gains on debt securities.Average Diluted Shares Outstanding were 327.1 million shares for the quarter, compared to 327.0 million shares for the prior quarter. Total outstanding shares at June 30, 2011 were 323.2 million.Quarterly Cash Dividend of $0.01 per common share was paid on June 30, 2011 to common shareholders of record on June 15, 2011.Conference Call Details A conference call to discuss the results will be hosted on Friday, July 29, 2011 at 8:30 a.m. EST. Interested parties may access the call via webcast on the Investor Relations section of the CapitalSource web site at http://www.capitalsource.com/investor_relations. An audio replay will also be available on the website from approximately 12 Noon EDT July 29, 2011 through October 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 June 30, 2011 (the Call Report) with the Federal Deposit Insurance Corporation (FDIC) on or before July 30, 2011. The Call Report may be found on the FDIC website at http://cdr.ffiec.gov/Public/ following filing by CapitalSource Bank and posting by the FDIC.About CapitalSource CapitalSource Inc. (NYSE:CSE) is a commercial lender that provides financial products to small and middle market businesses nationwide and offers depository products and services in southern and central California through its wholly owned subsidiary CapitalSource Bank. As of June 30, 2011, CapitalSource had total assets of $9.3 billion and $4.8 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, as well as the impact of the timing of the conversion on our profitability and growth, growing our business and assets, return of excess capital at the Parent Company to shareholders, and projected return on average assets, 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; 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; declines in asset values; expenses being higher than the income generated by the portfolio; additional capital needed by CS Bank to meet regulatory requirements; drawdown of unfunded commitments substantially in excess of historical drawings; loan losses; substantial run off of CapitalSource Bank portfolio; compression of spreads; higher than anticipated increases in operating expenses; 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.  CapitalSource Second Quarter 2011 – Financial SupplementTable of Contents Consolidated Balance Sheets Consolidated Statements of Income Segment Statements of Income Segment Balance Sheets Selected Financial Data Credit Quality Data CapitalSource Second Quarter 2011 – Financial Supplement CapitalSource Inc.Consolidated Balance Sheets($ in thousands)   June 30,December 31, 2011 2010    (Unaudited)           ASSETS Cash and cash equivalents $ 1,581,266  $ 820,450  Restricted cash  101,256   128,586  Investment securities:     Available-for-sale, at fair value  1,472,743   1,522,911  Held-to-maturity, at amortized cost  136,250   184,473  Total investment securities  1,608,993   1,707,384  Loans:     Loans held for sale  119,247   205,334  Loans held for investment  5,482,736   6,152,876  Less deferred loan fees and discounts  (77,591)  (106,438) Less allowance for loan losses  (199,138)  (329,122) Loans held for investment, net  5,206,007   5,717,316  Total loans  5,325,254   5,922,650  Interest receivable  38,117   57,393  Other investments  61,665   71,889  Goodwill  173,135   173,135  Other assets  425,258   563,920  Total assets $ 9,314,944  $ 9,445,407   LIABILITIES AND SHAREHOLDERS' EQUITYLiabilities:     Deposits $ 4,785,790  $ 4,621,273  Credit facilities  --   67,508  Term debt  697,910   979,254  Other borrowings  1,451,983   1,375,884  Other liabilities  268,911   347,546  Total liabilities  7,204,594   7,391,465       Shareholders' equity:     Preferred stock (50,000,000 shares authorized; no shares outstanding)  --   --  Common stock ($0.01 par value, 1,200,000,000 shares      authorized; 323,179,426 and 323,225,355 shares issued      and shares outstanding, respectively)  3,232   3,232  Additional paid-in capital  3,917,731   3,911,341  Accumulated deficit  (1,857,311)  (1,870,572) Accumulated other comprehensive income, net  46,698   9,941  Total shareholders' equity  2,110,350   2,053,942  Total liabilities and shareholders' equity $ 9,314,944  $ 9,445,407    CapitalSource Second Quarter 2011 – Financial Supplement CapitalSource Inc.Consolidated Statements of Income(Unaudited)($ in thousands, except per share data)   Three Months EndedSix Months Ended  June 30,March 31,June 30,June 30,June 30,  2011 2011 2010 2011 2010 Net interest income:    (Unaudited)  (Unaudited)   Interest income:           Loans $ 113,647  $ 123,500  $ 148,797  $ 237,147  $ 305,047  Investment securities  12,688   18,352   15,619   31,040   30,210  Other  1,090   300   304   1,390   877  Total interest income  127,425   142,152   164,720   269,577   336,134  Interest expense:           Deposits  13,398   13,383   15,279   26,781   31,637  Borrowings  32,409   33,369   45,478   65,778   94,121  Total interest expense  45,807   46,752   60,757   92,559   125,758  Net interest income  81,618   95,400   103,963   177,018   210,376  Provision for loan losses  1,523   44,809   25,262   46,332   244,202  Net interest income (loss) after provision for loan losses  80,095   50,591   78,701   130,686   (33,826)            Operating expenses:           Compensation and benefits  29,098   30,379   29,423   59,477   63,606  Professional fees  10,914   7,188   8,497   18,102   18,867  Other administrative expenses  15,310   16,694   15,671   32,004   34,323  Total operating expenses  55,322   54,261   53,591   109,583   116,796             Other income (expense):           Gain on investments, net  8,725   23,515   10,257   32,240   16,336   Loss on derivatives  (271)  (1,878)  (3,614)  (2,149)  (7,951)  Net expense of real estate owned and other foreclosed assets  (10,355)  (10,173)  (43,175)  (20,528)  (83,667) Other income, net  10,971   6,527   1,726   17,498   18,201  Total other income (expense)  9,070   17,991   (34,806)  27,061   (57,081)            Net income (loss) from continuing operations before income taxes  33,843   14,321   (9,696)  48,164   (207,703) Income tax expense (benefit)  17,249   11,162   (4,174)  28,411   16,832 Net income (loss) from continuing operations  16,594   3,159   (5,522)  19,753   (224,535)Net income from discontinued operations, net of taxes  --   --   2,166   --   9,489 Net gain from sale of discontinued operations, net of taxes  --   --   21,696   --   21,696 Net income (loss) $ 16,594  $ 3,159  $ 18,340  $ 19,753  $ (193,350)            Basic income (loss) per share:           From continuing operations $ 0.05  $ 0.01  $ (0.02) $ 0.06  $ (0.70) From discontinued operations $ --  $ --  $ 0.08  $ --  $ 0.10  Net income (loss) per share  $0.05   $0.01  $ 0.06   $0.06   $(0.60)Diluted income (loss) per share:           From continuing operations  $0.05   $0.01   $(0.02)  $0.06   $(0.70) From discontinued operations $ --  $ --  $ 0.08  $ --  $ 0.10  Net income (loss) per share  $0.05   $0.01  $ 0.06   $0.06   $(0.60)Average shares outstanding:           Basic  320,426,484   320,196,690   320,802,358   320,311,588   320,547,818  Diluted  327,087,717   326,963,738   320,802,358   327,025,588   320,547,818             Dividends declared per share  $0.01   $0.01  $ 0.01   $0.02  $ 0.02     CapitalSource Inc.Segment Statements of Income(Unaudited)($ in thousands)    Three Months Ended June 30, 2011 Three Months Ended March 31, 2011Net interest income: CAPITALSOURCE BANK OTHER COMMERCIAL FINANCE INTERCOMPANY ELIMINATIONS CONSOLIDATED CAPITALSOURCE BANK OTHER COMMERCIAL FINANCE INTERCOMPANY ELIMINATIONS CONSOLIDATED Interest income $ 90,490  $ 40,701  $ (3,766) $ 127,425  $ 91,804  $ 47,614  $ 2,734  $ 142,152  Interest expense  15,612   30,195   --   45,807   15,210   31,542   --   46,752  Net interest income  74,878   10,506   (3,766)  81,618   76,594   16,072   2,734   95,400  Provision for loan losses  (1,331)  2,854   --   1,523   11,242   33,567   --   44,809  Net interest income (loss) after provision for loan losses  76,209   7,652   (3,766)  80,095   65,352   (17,495)  2,734   50,591  Compensation and benefits  11,926   17,759   (587)  29,098   11,708   19,502   (831)  30,379  Professional fees  449   10,465   --   10,914   364   6,824   --   7,188  Other operating expenses  20,219   13,452   (18,361)  15,310   20,869   15,000   (19,175)  16,694  Total operating expenses  32,594   41,676   (18,948)  55,322   32,941   41,326   (20,006)  54,261  Total other income  3,000   24,751   (18,681)  9,070   2,965   32,354   (17,328)  17,991 Net income (loss) before income taxes  46,615   (9,273)  (3,499)  33,843   35,376   (26,467)  5,412   14,321  Income tax expense (benefit)  18,840   (1,591)  --   17,249   3,095   8,067   --   11,162  Net income (loss)  $27,775  $ (7,682) $ (3,499) $ 16,594   $32,281   $(34,534) $ 5,412  $ 3,159                    Six Months Ended June 30, 2011 Six Months Ended June 30, 2010Net interest income: CAPITALSOURCE BANK OTHER COMMERCIAL FINANCE INTERCOMPANY ELIMINATIONS CONSOLIDATED CAPITALSOURCE BANK OTHER COMMERCIAL FINANCE INTERCOMPANY ELIMINATIONS CONSOLIDATED Interest income $ 182,294  $ 88,315  $ (1,032) $ 269,577  $ 160,380  $ 179,666  $ (3,912) $ 336,134  Interest expense  30,822   61,737   --   92,559   33,732   92,026   --   125,758  Net interest income  151,472   26,578   (1,032)  177,018   126,648   87,640   (3,912)  210,376  Provision for loan losses  9,911   36,421   --   46,332   92,798   151,404   --   244,202  Net interest income (loss) after provision for loan losses  141,561   (9,843)  (1,032)  130,686   33,850   (63,764)  (3,912)  (33,826) Compensation and benefits  23,634   37,261   (1,418)  59,477   22,138   41,468   --   63,606  Professional fees  813   17,289   --   18,102   997   17,870   --   18,867  Other operating expenses  41,088   28,452   (37,536)  32,004   30,448   31,561   (27,686)  34,323  Total operating expenses  65,535   83,002   (38,954)  109,583   53,583   90,899   (27,686)  116,796  Total other income (expense)  5,965   57,105   (36,009)  27,061   15,226   (44,668)  (27,639)  (57,081)Net income (loss) from continuing operations before income taxes  81,991   (35,740)  1,913   48,164   (4,507)  (199,331)  (3,865)  (207,703) Income tax expense (benefit)  21,935   6,476   --   28,411   (2,519)  19,351   --   16,832  Net income (loss) from continuing operations $ 60,056  $ (42,216) $ 1,913  $ 19,753  $ (1,988)  $(218,682) $ (3,865)  $(224,535)    CapitalSource Inc.Segment Balance Sheets(Unaudited)($ in thousands)   June 30, 2011March 31, 2011  CAPITALSOURCE BANK OTHER COMMERCIAL FINANCE INTERCOMPANY ELIMINATIONS CONSOLIDATED CAPITALSOURCE BANK OTHER COMMERCIAL FINANCE INTERCOMPANY ELIMINATIONS CONSOLIDATEDASSETS                                   Cash and cash equivalents and restricted cash $ 382,065  $ 1,300,457  $ --  $1,682,522  $ 440,928  $ 787,144  $ --  $ 1,228,072  Investment securities:                 Available-for-sale  1,447,826   24,917   --   1,472,743   1,348,771   21,582   --   1,370,353  Held-to-maturity  136,250   --   --   136,250   179,077   --   --   179,077  Loans  4,146,466   1,374,776   3,150   5,524,392   3,947,080   2,037,692   7,438   5,992,210  Allowance for loan losses  (108,592)  (90,546)  --   (199,138)  (132,970)  (150,304)  --   (283,274) Loans, net of allowance for loan losses  4,037,874   1,284,230   3,150   5,325,254   3,814,110   1,887,388   7,438   5,708,936  Receivables due from affiliates  1,230   51,798   (53,028)  --   2,547   40,811   (43,358)  --  Other assets  366,561   363,082   (31,468)  698,175   394,648   396,042   (3,790)  786,900  Total assets $ 6,371,806  $ 3,024,484   $(81,346)  $9,314,944   $6,180,081   $3,132,967   $(39,710) $ 9,273,338                     LIABILITIES AND SHAREHOLDERS' EQUITY                                     Liabilities:                 Deposits $ 4,785,790  $ --  $ --   $4,785,790   $4,708,349  $ --  $ --  $ 4,708,349  Borrowings  480,000   1,669,893   --   2,149,893   400,000   1,832,261   --   2,232,261  Balance due to affiliates  51,798   1,230   (53,028)  --   40,811   2,547   (43,358)  --  Other liabilities  59,220   243,445   (33,754)  268,911   73,464   193,638   (5,810)  261,292  Total liabilities  5,376,808   1,914,568   (86,782)  7,204,594   5,222,624   2,028,446   (49,168)  7,201,902                      Shareholders' equity:                 Common stock  921,000   3,232   (921,000)  3,232   921,000   3,233   (921,000)  3,233  Additional paid-in capital/retained earnings/deficit  59,041   1,059,986   941,393   2,060,420   30,767   1,076,922   936,148   2,043,837  Accumulated other comprehensive income, net  14,957   46,698   (14,957)  46,698   5,690   24,366   (5,690)  24,366  Total shareholders' equity  994,998   1,109,916   5,436   2,110,350   957,457   1,104,521   9,458   2,071,436                      Total liabilities and shareholders' equity $ 6,371,806   $3,024,484   $(81,346)  $9,314,944   $6,180,081   $3,132,967   $(39,710) $ 9,273,338                      Book value per outstanding share $3.08  $3.43  $0.02  $6.53  $2.96  $3.42  $0.03  $6.41    CapitalSource Second Quarter 2011 – Financial Supplement CapitalSource Inc. Selected Financial Data (Unaudited)     Three Months EndedSix Months Ended  June 30,March 31,June 30,June 30,June 30,  2011 2011201020112010        CapitalSource Bank Segment:                      Performance ratios:           Return on average assets 1.78% 2.17% 2.63% 1.97% (0.07%) Return on average equity 11.46% 13.98% 17.85% 12.69% (0.47%) Yield on average interest earning assets 6.13% 6.51% 5.66% 6.31% 5.82% Cost of interest bearing liabilities 1.21% 1.22% 1.36% 1.22% 1.42%  Deposits 1.13% 1.16% 1.33% 1.15% 1.39%  Borrowings 2.08% 1.98% 1.89% 2.04% 1.87% Borrowing spread 1.01% 0.96% 1.05% 0.99% 1.15% Net interest margin   5.07% 5.43% 4.48% 5.24% 4.59% Operating expenses as a percentage of average total assets 2.09% 2.21% 2.04% 2.15% 1.87% Core lending spread 7.78% 7.96% 7.04% 7.87% 7.32% Loan yield 7.98% 8.22% 7.35% 8.10% 7.59%             Capital ratios:           Tier 1 leverage 13.47% 13.47% 12.54% 13.47% 12.54% Total risk-based capital 18.67% 18.80% 17.69% 18.67% 17.69% Tangible common equity to tangible assets 13.26% 13.06% 12.54% 13.26% 12.54%             Average balances ($ in thousands):           Average loans $ 3,943,136  $ 3,792,412  $ 3,265,340  $ 3,868,190  $ 3,153,854  Average assets    6,261,685   6,046,033   5,750,509   6,154,455   5,765,303  Average interest earning assets  5,925,269   5,723,305   5,592,803   5,824,845   5,558,555  Average deposits    4,738,233   4,673,752   4,595,065   4,706,171   4,579,623  Average borrowings  426,484   373,278   244,286   400,028   226,381  Average equity  972,310   936,476   846,691   954,492   860,758              Other Commercial Finance Segment:                      Performance ratios:           Return on average assets (1.00%) (4.21%) (3.31%) (2.66%) (8.04%) Return on average equity (2.78%) (12.40%) (15.79%) (7.61%) (38.53%) Yield on average interest earning assets 6.30% 7.53% 7.33% 6.91% 7.14% Cost of interest bearing liabilities 6.89% 6.73% 4.70% 6.80% 4.56% Borrowing spread 6.69% 6.47% 4.39% 6.57% 4.29% Net interest margin   1.63% 2.54% 3.61% 2.08% 3.48% Operating expenses as a percentage of average total assets 5.43% 5.04% 3.22% 5.23% 3.34% Core lending spread 9.71% 7.38% 7.47% 8.33% 7.30% Loan yield 9.91% 7.64% 7.78% 8.56% 7.57%             Leverage ratios:           Total debt to equity (as of period end) 1.50x 1.66x 3.25x 1.50x 3.25x Equity to total assets (as of period end) 36.70% 35.25% 22.30% 36.70% 22.30%             Average balances ($ in thousands):           Average loans $ 1,575,556  $ 2,331,652  $ 4,485,654  $ 1,951,515  $ 4,771,654  Average assets    3,077,378   3,327,142   5,036,228   3,201,570   5,483,028  Average interest earning assets  2,592,896   2,565,261   4,777,652   2,579,155   5,073,381  Average borrowings  1,758,963   1,901,770   3,779,755   1,829,972   4,073,172  Average equity  1,108,506   1,129,542   1,054,735   1,118,966   1,144,396             Consolidated CapitalSource Inc.: (1)                       Performance ratios:           Return on average assets 0.72% 0.14% (0.21%) 0.43% (4.09%) Return on average equity 3.19% 0.62% (1.18%) 1.92% (22.82%) Yield on average interest earning assets 6.00% 6.95% 6.39% 6.47% 6.39% Cost of interest bearing liabilities 2.65% 2.73% 2.85% 2.69% 2.88% Borrowing spread 2.45% 2.47% 2.54% 2.46% 2.61% Net interest margin   3.84% 4.67% 4.03% 4.25% 4.00% Operating expenses as a percentage of average total assets 2.39% 2.36% 2.01% 2.37% 2.12%             Leverage ratios:           Total debt to equity (as of period end) 3.29x 3.35x 4.26x 3.29x 4.26x Equity to total assets (as of period end) 22.66% 22.34% 18.38% 22.66% 18.38% Tangible common equity to tangible assets 21.17% 20.84% 17.02% 21.17% 17.02%             Average balances ($ in thousands):           Average loans  5,524,326   6,126,161   7,728,019   5,823,581   7,903,645  Average assets    9,289,804   9,319,796   10,691,819   9,304,717   11,084,237  Average interest earning assets  8,523,800   8,290,663   10,347,480   8,407,875   10,610,072  Average borrowings  2,185,447   2,275,048   3,949,041   2,230,000   4,224,554  Average deposits  4,738,233   4,673,752   4,595,065   4,706,171   4,579,623  Average equity  2,088,562   2,069,960   1,879,498   2,079,313   1,984,219   (1) Applicable ratios have been calculated on a continuing operations basis. CapitalSource Inc.Credit Quality Data(Unaudited)       June 30, 2011 March 31, 2011 December 31, 2010 September 30, 2010 June 30, 2010          Loans 30-89 days contractually delinquent:            As a % of total loans(1) 0.07%  0.77%  0.44%  0.86%  1.43%   Loans 30-89 days contractually delinquent $ 3.9 $ 46.6 $ 27.8 $ 56.8 $ 109.7                Loans 90 or more days contractually delinquent:            As a % of total loans 3.48%  4.64%  5.03%  5.47%  5.98%   Loans 90 or more days contractually delinquent $ 195.0 $ 282.4 $ 319.7 $ 362.6 $ 459.2                Loans on non-accrual:(2)            As a % of total loans 8.50%  9.03%  10.99%  11.89%  14.68%   Loans on non-accrual $ 476.3 $ 549.4 $ 698.7 $ 787.9 $ 1,126.4                Impaired loans:(3)            As a % of total loans 8.69%  12.17%  14.65%  14.75%  19.15%   Impaired loans $ 486.6 $ 740.6 $ 931.2 $ 977.5 $ 1,469.0                Allowance for loan losses:            As a % of total loans 3.55%  4.65%  5.17%  5.94%  7.54%  Allowance for loan losses   $ 199.1 $ 283.3 $ 329.1 $ 393.6 $ 578.6                Net charge offs (last twelve months):           As a % of total average loans 5.55%  5.78%  5.78%  6.78%  7.43%  Net charge offs (last twelve months) $ 350.5 $ 397.6 $ 426.5 $ 535.6 $ 623.3  (1) Includes loans held for investment and loans held for sale. Excludes deferred loan fees and discounts and the allowance for loan losses.(2) Includes loans with an aggregate principal balance of $155.0 million, $235.3 million, $270.5 million, $354.3 million, and $371.9 million as of June 30, 2011, March 31, 2011, December 31, 2010, September 30, 2010, and June 30, 2010 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 $118.7 million, $11.5 million, $14.7 million, $37.5 million, and $51.4 million as of June 30, 2011, March 31, 2011, December 31, 2010, September 30, 2010, and June 30, 2010, respectively. (3) Includes loans with an aggregate principal balance of $153.3 million, $243.8 million, $265.3 million, $340.0 million, and $423.2 million as of June 30, 2011, March 31, 2011, December 31, 2010, September 30, 2010, and June 30, 2010, respectively, that were also classified as loans 90 or more days contractually delinquent, and loans with an aggregate principal balance of $357.6 million, $549.4 million, $684.1 million, $787.9 million, and $1,075.0 million as of June 30, 2011, March 31, 2011, December 31, 2010, September 30, 2010, and June 30, 2010, respectively, that were also classified as loans on non-accrual status. CONTACT: For information 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