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Press release from GlobeNewswire (a Nasdaq OMX company)

CapitalSource Reports First Quarter 2013 Results

Monday, April 29, 2013

CapitalSource Reports First Quarter 2013 Results

13:15 EDT Monday, April 29, 2013
  • First Quarter Net Income of $29 Million or $0.14 Per Share
  • Loan Growth of $139 million (2.4%) at CapitalSource Bank, Excluding $67 Million of Loans Purchased from the Parent Company
  • Net Interest Margin at CapitalSource Bank of 5.08%
  • 15 Million Shares Repurchased - Outstanding Shares Reduced by 42% Since December 2010

LOS ANGELES, April 29, 2013 (GLOBE NEWSWIRE) -- CapitalSource Inc. (NYSE:CSE) today announced financial results for the first quarter of 2013. The Company reported net income for the quarter of $29 million or $0.14 per diluted share compared to net income of $47 million or $0.22 per diluted share in the prior quarter, which included $12 million or $0.06 per diluted share of non-recurring tax benefits, and net income of $25 million or $0.10 per diluted share in the first quarter of 2012.

"Overall, our first quarter financial performance represented a strong start to 2013 despite the very competitive lending environment," said James J. Pieczynski, CapitalSource CEO. "We continued to return excess Parent Company capital to shareholders in the first quarter - utilizing $140 million to repurchase 15 million shares and pay our usual quarterly dividend. That pushed total capital returned to shareholders since December of 2010 to well over $1 billion and over the last ten quarters we have reduced the outstanding share count by 42%."

"Interest income, net interest margin, total loans and leases and net income at CapitalSource Bank all increased in the first quarter from the prior quarter levels. As anticipated, all credit metrics remained within acceptable parameters and our cost of funds was down marginally as well. By any measure, it was another strong quarter of growth and profitability in a challenging environment," said Tad Lowrey, CapitalSource Bank Chairman and CEO. "The first quarter is typically seasonally weak and we have seen ongoing pricing pressure, but we were pleased with the level of loan growth which is consistent with our expectation for double-digit growth during 2013. We are maintaining underwriting discipline while continuing to benefit from the breadth of our national loan generation franchise, so remain confident we will reach our full year growth target," added Lowrey.

"A number of items contributed to a 24 basis point increase in the net interest margin at CapitalSource Bank in the first quarter, including the full quarter benefit of fourth quarter 2012 loan growth which occurred principally near quarter end and yield adjustments related to the investment portfolio. Due to ongoing pressure on loan yields and the one-time nature of certain components of NIM this quarter, however, we expect the first quarter level of 5.08% at the Bank to be a high water mark for 2013," said John Bogler, Chief Financial Officer. "Expense management continues to be a focus and we expect to hold total operating expenses (which exclude leased equipment depreciation, the expense of real estate owned and other foreclosed assets, and provision for unfunded commitments) flat with the 2012 level in the range of $180-190 million - despite our expected balance sheet growth."

CAPITALSOURCE BANK SEGMENT

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

First Quarter 2013 Highlights

  • Net Income was $35 million, an increase of $1 million from the prior quarter.
     
  • Loans and Leases increased $206 million or 3.6%, including $67 million of loans purchased from the Parent Company. New funded loan and lease production was $575 million, excluding the $67 million loan purchase, compared to $843 million in the prior quarter which was significantly boosted by year-end transactions. Total loans and leases were $6.0 billion at quarter end, an increase of 18% from a year ago.
     
  • Net Interest Margin was 5.08%, an increase of 24 basis points from the prior quarter, primarily due to the full quarter benefit of 4Q'12 loan growth which largely occurred late in the prior quarter and certain non-recurring items. Loan yield declined 12 bps in the quarter to 6.68%, primarily due to repayments and re-pricing of existing loans and lower yields on new loans as pricing pressure continued.
     
  • Capital - The Tier 1 leverage ratio increased 32 basis points to 13.38%, while the total risk-based capital ratio increased 18 basis points to 16.68%.
     
  • Credit Quality - All credit quality metrics were within acceptable parameters. Loan loss provision was $3.2 million, compared to $1.4 million in the prior quarter. Non-performing assets declined to $36 million or 0.48% of total assets compared to 0.65% at the end of the prior quarter. Net charge-offs were $2.2 million in the quarter, compared to $1.0 million in the prior quarter, and were 0.27% as a percentage of average loans for the twelve month period ended March 31, 2013, compared to 0.23% for the twelve month period ended December 31, 2012.
First Quarter Details
               
  Quarter Ended
        3/31/13 vs 12/31/12 3/31/13 vs 3/31/12
  3/31/2013 12/31/2012 3/31/2012 $ % $ %
($ in thousands)              
Interest income $102,356 $98,544 $98,620 $3,812 4% $3,736 4%
Interest expense 14,791 15,122 16,059 331 2 1,268 8
Provision for loan losses 3,152 1,447 1,903 (1,705) (118) (1,249) (66)
Non-interest income 13,533 18,243 15,469 (4,710) (26) (1,936) (13)
Non-interest expense 38,906 44,262 41,164 5,356 12 2,258 5
Income tax expense 24,397 22,008 23,159 (2,389) (11) (1,238) (5)
Net income 34,643 33,948 31,804 695 2 2,839 9

Net Interest Margin was 5.08%, an increase of 24 basis points from the prior quarter due primarily to an increase in interest income reflecting the full quarter benefit of 4Q'12 loan growth, which largely occurred late in the quarter, and certain non-recurring items detailed below.

  Quarter Ended
  3/31/2013 12/31/2012
Net Interest Margin Average Balance Interest Income/Expense Average Yield/Cost Average Balance Interest Income/Expense Average Yield/Cost
($ in thousands)            
Loans $5,659,939 $93,295 6.68% (1) $5,342,683 $91,328 6.80%
Investment securities 1,116,772 8,772 3.19 1,191,851 6,770 2.26
Cash and other interest-earning assets 214,485 289 0.55 324,703 446 0.55
Total interest-earning assets 6,991,196 102,356 5.94 6,859,237 98,544 5.72
Deposits 5,638,528 12,106 0.87 5,557,241 12,366 0.89
Borrowings 599,278 2,685 1.82 597,772 2,756 1.83
Total interest-bearing liabilities 6,237,806 14,791 0.96 6,155,013 15,122 0.98
Net interest income / spread   $87,565 4.98%   $83,422 4.74%
Net interest margin     5.08%     4.84%
             
(1) Loan yield for the quarter included 55 basis points of fee and discount accretion, compared to 51 basis points in the prior quarter
  Quarter Ended
  3/31/2013 12/31/2012
Non-Recurring Items Impacting NIM Increase in NIM
     
MBS prepayment speed adjustment 0.09% —%
CMBS prepayment 0.05
Collection of non-accrual interest 0.01 0.03
Total 0.15% 0.03%
Net interest margin 5.08% 4.84%

Non-interest Expense was $39 million, a decrease of $5 million from the prior quarter. Incentive compensation related expenses declined by $3.7 million reflecting a higher accrual rate in the prior quarter on strong performance and a true up of 2012 incentive accruals. Third party expenses and loan servicing expense also declined in the quarter, but these expenses are expected to fluctuate from period to period.

Income Tax Expense was $24 million for the quarter, compared to $22 million in the prior quarter. The effective tax rate for the quarter was 41%, compared to 39% in the prior quarter, and included a $0.6 million tax true-up adjustment.

Cash and Investments decreased by $31 million to $1.4 billion. The decrease in the portfolio yield was primarily due to the payoff of higher yielding CMBS and a higher balance of cash and cash equivalents and restricted cash.     

Cash and Investments 3/31/2013 12/31/2012
($ in thousands) Balance Yield Duration
(Years)
Balance Yield Duration
(Years)
Cash and cash equivalents and restricted cash $309,943 0.23% 0.0 $230,305 0.17% 0.0
Agency callable notes —% 0.0 5,008 2.48% 2.8
Agency MBS 887,593 2.33% 2.9 978,513 2.32% 2.7
Non-agency MBS 37,285 4.20% 2.1 41,347 4.21% 2.1
CMBS 80,815 2.55% 1.9 108,233 4.00% 1.9
CLO 22,868 3.18% 7.7 —% 0.0
Asset-backed securities 4,597 11.65% 1.0 9,592 11.19% 0.8
U.S. Treasury and agency securities 17,431 2.19% 5.9 18,315 2.38% 6.0
  $1,360,532 1.95% 2.3 $1,391,313 2.21% 2.2

Loans and Leases increased $206 million (3.6%) from the prior quarter, including $67 million of loans purchased from the Parent Company. Excluding the loan purchase, loans and leases increased by $139 million (2.4%).

  Quarter Ended
Loan and Lease Roll Forward (1) 3/31/2013 12/31/2012 3/31/2012
($ in thousands)      
Beginning balance $5,803,690 $5,362,665 $4,894,292
New loans or commitment increases funded 574,616 843,208 521,476
Existing loans and leases      
Principal repayments, net (2) (402,306) (381,240) (320,550)
Leased equipment depreciation (3,400) (3,036) (2,288)
Transfers to held for sale, net (19,676) 5,000
Loan sales (3) (10,253) (15,810)
Transfers to foreclosed assets (728) (1,120) (9,567)
Net charge-offs (2,218) (977) 63
Loans purchased from the Parent 67,092
Ending balance - Net principal $6,006,817 $5,803,690 $5,088,426
Deferred fees and discounts (45,117) (47,729) (53,828)
Ending balance - Net book $5,961,700 $5,755,961 $5,034,598
       
       
(1) Includes operating leases and equity investments related to operating leases which are included in other assets and other investments, respectively, on our balance sheet
(2) Includes principal repayments on existing loans, changes in revolving lines of credit (repayments and draws), increases in existing term loans and other organic changes within the loan portfolio
(3) Loans that were transferred to HFS and sold within the period reported
 
  Quarter Ended
Loan and Lease Portfolio Detail 3/31/2013 12/31/2012 3/31/2012
($ in thousands)      
Healthcare Asset Based $143,190 $159,143 $194,608
Equipment Finance(1) 622,158 609,350 417,854
Lender Finance & Timeshare 868,865 844,776 744,065
Insurance Premium Finance 22,075 17,236
Other Asset Based 60,153 63,501 49,325
Total Asset Based 1,716,441 1,694,006 1,405,852
General Cash Flow 161,246 187,637 265,931
Technology Cash Flow 619,120 612,892 497,992
Healthcare Cash Flow 422,028 377,694 293,876
Security Cash Flow 336,890 306,134 293,135
Professional Practice 176,806 176,480 128,614
Total Cash Flow 1,716,090 1,660,837 1,479,548
General Commercial Real Estate 727,741 634,561 575,851
Multi Family 913,246 903,048 881,078
Healthcare Real Estate 677,612 671,060 560,053
Small Business 255,687 240,178 186,044
Total Real Estate 2,574,286 2,448,847 2,203,026
Total - Net Principal 6,006,817 5,803,690 5,088,426
Deferred fees and discounts (45,117) (47,729) (53,828)
Total - Net Book $5,961,700 $5,755,961 $5,034,598
 
(1)  Includes $141 million of operating leases and related equity investments as of March 31, 2013 and $137 million as of December 31, 2012, which are included in Other Assets and Other Investments, respectively.

Deposits were $5.7 billion at quarter end, an increase of $154 million (2.8%) from the prior quarter. The weighted average interest rate on total deposits increased 1 basis point to 0.88% at quarter end. The weighted average rate of new and renewing time deposits in the quarter was 0.87%, compared to 0.84% in the prior quarter.

FHLB Borrowings were $600 million, an increase of $5 million from the prior quarter. The weighted average rate of FHLB borrowings was 1.77% as of March 31, 2013, compared to 1.80% at the end of the prior quarter and the average remaining maturity was 3.1 years, compared to 3.2 years at the end of the prior quarter.

Allowance for Loan and Lease Losses was $100 million or 1.72% of the loan portfolio as detailed below.

  Quarter Ended
Allowance for Loan and Lease Losses 3/31/2013
($ in thousands) General Specific Total % Loans
Beginning balance $97,073 $1,832 $98,905  
Provision 1,439 1,713 3,152  
Charge-offs, net (2,218) (2,218)  
Ending balance $98,512 $1,327 $99,839 1.72%
         
         
  Quarter Ended
  12/31/2012
  General Specific Total % Loans
Beginning balance $90,154 $8,281 $98,435  
Provision / (Release) 6,919 (5,472) 1,447  
Charge-offs, net (977) (977)  
Ending balance $97,073 $1,832 $98,905 1.76%

Non-performing Assets declined to $36 million due to a $12 million decline in non-accrual loans.

Non-performing Assets 3/31/2013 12/31/2012
  Balance % of Total Assets Balance % of Total Assets
($ in thousands)        
Non-accrual loans - current $24,169 0.32% $14,841 0.20%
Non-accrual loans - delinquent 30-89 days 2,567 0.03 20,253 0.27
Non-accrual loans - delinquent 90+ days 3,725 0.05 6,907 0.10
Total non-accrual loans 30,461 0.40 42,001 0.57
REO and foreclosed assets 5,545 0.08 6,255 0.08
Total non-performing assets $36,006 0.48% $48,256 0.65%

Troubled Debt Restructurings were $22 million, all of which were on non-accrual and $0.1 million of which were delinquent as to payment status. At December 31, 2012 troubled debt restructurings were $45 million, $31 million of which were on non-accrual and $19 million of which were delinquent as to payment status.

OTHER COMMERCIAL FINANCE SEGMENT

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

First Quarter 2013 Details

Net Loss was $5 million, compared to net income of $14 million in the prior quarter. On a pretax basis, earnings decreased $10 million due to lower interest income on a 35% lower average loan balance compared to the prior quarter, a higher provision for loan losses and lower non-interest income.

  Quarter Ended
        3/31/13 vs. 12/31/12 3/31/13 vs. 3/31/12
  3/31/2013 12/31/2012 3/31/2012 $ % $ %
($ in thousands)              
Interest income $9,966 $16,050 $22,702 $(6,084) (38)% $(12,736) (56)%
Interest expense 3,372 3,750 4,799 378 10 1,427 30
Provision for loan losses 9,353 7,428 9,169 (1,925) (26) (184) (2)
Non-interest income 5,242 7,998 3,491 (2,756) (34) 1,751 50
Non-interest expense 10,653 11,118 15,560 465 4 4,907 32
Income tax (benefit) expense (2,755) (11,857) 2,550 (9,102) (77) 5,305 208
Net (loss) income (5,415) 13,609 (5,885) (19,024) 140 470 8

Interest Income was $10 million, a decrease of $6 million from the prior quarter due primarily to a lower average loan balance as the Parent Company portfolio continues to liquidate.

Non-interest Income was $5 million compared to $8 million in the prior quarter, due to lower gains on loan sales and lower investment income which will continue to be uneven from quarter to quarter. The equity investments on the Parent Company's balance sheet which produced higher capital gains and dividends in the prior quarter are legacy assets and any future gains or dividends are not predictable.

Non-interest Expense was $11 million, unchanged from the prior quarter. Operating expenses were $11 million, a decrease of $1 million from the prior quarter due primarily to lower professional fees. Non-operating expenses resulted in income of $0.1 million, compared to income of $1 million in the prior quarter.

Unrestricted Cash at quarter end was $71 million, a decrease of $46 million from the prior quarter. The largest sources of cash were tax payments from the Bank to the Parent Company of $23 million, loan sales and principal collections of $79 million from the non-securitized loan portfolio and $68 million from the loan portfolio sale to the Bank. The principal uses of cash in the quarter were share repurchases totaling $138 million and the repayment of $47 million of outstanding debt on the 2007-1 securitization.

Loans decreased by $171 million from the prior quarter as detailed below, including $67 million of loans sold to CapitalSource Bank. The securitized loan balance was $226 million, a decrease of $129 million from the prior quarter, including the repayment of all outstanding debt on the 2007-1 securitization which had an outstanding balance of $47 million at December 31, 2012. The non-securitized loan balance was $123 million, a decrease of $48 million from the prior quarter.

  Quarter Ended
Loan and Lease Roll Forward 3/31/2013 12/31/2012 3/31/2012
($ in thousands)      
Beginning balance $526,319 $687,576 $971,601
Existing loans and leases      
Principal repayments, net (1) (42,389) (58,285) (46,634)
Transfers to held for sale, net (8,299) (22,698) (10,557)
Loan sales (2) (47,875) (63,019)
Transfers to foreclosed assets (1,710)
Net charge-offs (9,267) (17,255) (12,864)
Intercompany sales (67,092)
Ending balance - Net principal $351,397 $526,319 $899,836
Deferred fees and discounts (1,978) (5,713) (16,051)
Ending Balance - Net book $349,419 $520,606 $883,785
       
(1) Includes principal repayments on existing loans, changes in revolving lines of credit (repayments and draws), increases in existing term loans and other organic changes within the loan portfolio
(2) Loans that were transferred to HFS and sold within the period reported

Allowance for Loan and Lease Losses was $18 million. There were specific reserve increases of $13 million (primarily related to two previously impaired loans where new credit weaknesses were identified), net charge-offs of $9.3 million, and a $3.3 million reduction in general reserve which together resulted in no change in the total allowance from the prior quarter. The allowance for loan and lease losses ratio increased, however, from 3.53% to 5.28% as the Parent loan portfolio declined from $521 million to $349 million.

  Quarter Ended
Allowance for Loan and Lease Losses 3/31/2013
($ in thousands) General Specific Total % Loans
Beginning balance $13,717 $4,651 $18,368  
(Release) / Provision (3,294) 12,647 9,353  
Charge-offs, net (9,267) (9,267)  
Ending balance $10,423 $8,031 $18,454 5.28%
         
  Quarter Ended
  12/31/2012
  General Specific Total % Loans
Beginning balance $16,663 $11,532 $28,195  
(Release) / Provision (2,946) 10,374 7,428  
Charge-offs, net (17,255) (17,255)  
Ending balance $13,717 $4,651 $18,368 3.53%

Non-performing Assets were $134 million, an increase of $39 million from the prior quarter due to a $40 million increase in non-accrual loans. The increase was primarily due to the two Parent Company loans referenced above. All collections on non-accrual loans are applied to the outstanding principal balance.

Non-performing Assets 3/31/2013 12/31/2012
  Balance % of Total Assets Balance % of Total Assets
($ in thousands)        
Non-accrual loans current $40,371 4.26% $45,464 3.82%
Non-accrual loans - delinquent 30-89 days 38,578 4.07 60 0.01
Non-accrual loans - delinquent 90+ days 39,238 4.15 32,186 2.70
Total non-accrual loans 118,187 12.48 77,710 6.53
Accruing loans - delinquent 90+ days
REO and foreclosed assets 15,787 1.67 17,537 1.47
Total non-performing assets $133,974 14.15% $95,247 8.00%

Troubled Debt Restructurings were $98 million, $89 million of which were on non-accrual and $53 million of which were delinquent as to payment status. At December 31, 2012 troubled debt restructurings were $100 million, $32 million of which were on non-accrual and $11 million of which were delinquent as to payment status. Non-accrual and delinquent TDRs increased from the prior quarter due to two loans placed on non-accrual status during the quarter that were previously impaired and performing under TDRs, as described in the ALLL section above.

CONSOLIDATED

First Quarter 2013 Details

Net Income was $29 million or $0.14 per diluted share compared to net income of $47 million or $0.22 per diluted share in the prior quarter, which included $12 million or $0.06 per diluted share of non-recurring tax benefits, as detailed below. Pretax income declined to $51 million compared to $58 million in the prior quarter, primarily due to higher provision for loan and lease losses and lower non-interest income partially offset by lower non-interest expense.

  Quarter Ended
        3/31/13 vs. 12/31/12 3/31/13 vs. 3/31/12
  3/31/2013 12/31/2012 3/31/2012 $ % $ %
($ in thousands)              
Interest income $113,095 $114,921 $120,077 $(1,826) (2)% $(6,982) (6)%
Interest expense 18,163 18,872 20,858 709 4 2,695 13
Provision for loan and lease losses 12,505 8,875 11,072 (3,630) (41) (1,433) (13)
Non-interest income 13,218 20,549 11,550 (7,331) (36) 1,668 14
Non-interest expense 44,655 49,423 49,050 4,768 10 4,395 9
Income tax expense 21,642 11,224 25,709 (10,418) (93) 4,067 16
Net income 29,348 47,076 24,938 (17,728) (38) 4,410 18

Interest Income was $113 million, a decrease of $2 million from the prior quarter.

Net Interest Margin was 5.11%, an increase of 11 basis points from the prior quarter due primarily to certain non-recurring items. Net interest income was $95 million, a decrease of $1 million from the prior quarter.

Non-interest Income was $13 million compared to $21 million in the prior quarter, due to lower gains on loan sales and investments and lower dividends on investments.

Non-Interest Expense was $45 million, a decrease of $5 million from the prior quarter. The decline was largely due to a true up of 2012 incentive accruals and the timing of certain expenses, including professional fees and loan servicing expenses. For the full year, operating expenses are projected to total $180-190 million and non-operating expenses are projected to total approximately $20 million.

  Quarter Ended
Non-Interest Expense 3/31/2013 12/31/2012 % Change
($ in thousands)      
Compensation and benefits $24,982 $28,083 (11)%
Professional fees 1,468 3,656 (60)
Occupancy expenses 4,215 3,438 23
FDIC fees and assessments 1,554 1,538 1
General depreciation and amortization 1,526 1,398 9
Loan servicing expense 1,469 1,782 (18)
Other administrative expenses 6,810 6,826
Total operating expenses 42,024 46,721 (10)
Leased equipment depreciation 3,400 3,036 12
Expense of real estate owned and other foreclosed assets, net (62) 211 (129)
Other non-interest expense, net (707) (545) 30
Total non-interest expense $44,655 $49,423 (10)%

Loans and Leases increased $34 million from the prior quarter as detailed below.

  Quarter Ended
Loan and Lease Roll Forward (1) 3/31/2013 12/31/2012 3/31/2012
($ in thousands)      
Beginning balance $6,330,009 $6,050,241 $5,865,893
New loans or commitment increases funded 574,616 843,208 521,476
Existing loans and leases      
Principal repayments, net (2) (444,695) (439,525) (367,184)
Leased equipment depreciation (3,400) (3,036) (2,288)
Transfers to held for sale, net (27,975) (22,698) (5,557)
Loan sales (3) (58,128) (78,829)
Transfers to foreclosed assets (728) (1,120) (11,277)
Net charge-offs (11,485) (18,232) (12,801)
Ending balance - Net principal $6,358,214 $6,330,009 $5,988,262
Deferred fees and discounts (47,426) (53,628) (67,809)
Ending balance - Net book $6,310,788 $6,276,381 $5,920,453
 
(1)  Includes operating leases and equity investments related to operating leases which are included in Other Assets and Other Investments
(2) Includes principal repayments on existing loans, changes in revolving lines of credit (repayments and draws), increases in existing term loans and other organic changes within the loan portfolio
(3)  Loans that were transferred to HFS and sold within the period reported

Allowance for Loan and Lease Losses was $118 million, or 1.92% of the loan portfolio, compared to $117 million, or 1.91% at the end of the prior quarter. Net charge-offs as a percentage of average loans for the twelve month period ended March 31, 2013 were 1.24%, compared to 1.27% for the twelve month period ended December 31, 2012.

  Quarter Ended
Allowance for Loan and Lease Losses 3/31/2013
($ in thousands) General Specific Total % Loans
Beginning balance $110,790 $6,483 $117,273  
(Release) / Provision  (1,855) 14,360 12,505  
Charge-offs, net (11,485) (11,485)  
Ending balance $108,935 $9,358 $118,293 1.92%
         
  Quarter Ended
  12/31/2012
  General Specific Total % Loans
Beginning balance $106,817 $19,813 $126,630  
Provision 3,973 4,902 8,875  
Charge-offs, net (18,232) (18,232)  
Ending balance $110,790 $6,483 $117,273 1.91%

Non-performing Assets were $170 million, an increase of $26 million from the prior quarter primarily due to two Parent Company loans totaling $29 million that were previously impaired and performing under troubled debt restructurings, but new credit weaknesses were identified causing those loans to be placed on non-accrual status in the quarter. All collections on non-accrual loans are applied to the outstanding principal balance.

Non-performing Assets 3/31/2013 12/31/2012
  Balance % of Total Assets Balance % of Total Assets
($ in thousands)        
Non-accrual loans - current $64,540 0.76% $60,305 0.71%
Non-accrual loans - delinquent 30-89 days 41,145 0.49 20,313 0.24
Non-accrual loans - delinquent 90+ days 42,963 0.50 39,094 0.45
Total non-accrual loans 148,648 1.75 119,712 1.40
Accruing loans - delinquent 90+ days
REO and foreclosed assets 21,332 0.25 23,791 0.28
Total non-performing assets $169,980 2.00% $143,503 1.68%

Troubled Debt Restructurings were $120 million, $111 million of which were on non-accrual and $53 million of which were delinquent as to payment status. At December 31, 2012 troubled debt restructurings were $145 million, $62 million of which were on non-accrual and $31 million of which were delinquent as to payment status.

Valuation Allowance related to the Company's deferred tax assets was $128 million, a decrease of $1 million from the end of the prior quarter, primarily due to changes in DTA balances for which we maintain a full valuation allowance. The net deferred tax asset at quarter end after subtracting the valuation allowance was $346 million, a decrease of $16 million from the prior quarter.

Consolidated Tax Expense was $22 million, which equates to an effective tax rate of 42.4%. The increase from a more normalized rate of 40-41% was caused primarily by tax true-up adjustments of approximately $1.5 million.

Book Value Per Share was $7.75 at the end of the quarter, unchanged from the prior quarter.Total shareholders' equity was $1.5 billion at the end of the quarter, a decrease of $107 million from the prior quarter.

Tangible Book Value Per Share was $6.87 at the end of the quarter, a decrease of $0.06 from the end of the prior quarter primarily due to share repurchases.

Average Diluted Shares Outstanding were 206.2 million shares for the quarter, compared to 213.5 million shares for the prior quarter. Total outstanding shares at March 31, 2013 were 195.8 million.

Share Repurchases during the quarter totaled 15 million shares at a total cost of $138 million or $9.18 per diluted share. From December 2010 through March 31, 2013, the Company repurchased 135.9 million shares, or approximately 42% of the December of 2010 starting balance of 323 million shares, at an average purchase price of $6.83 per share. The remaining authority for share repurchases under the Board approved share buyback program as of March 31, 2013 was $88.7 million.

Any share repurchases made pursuant to the Company's stock repurchase program will be made through open market purchases or privately negotiated transactions from time to time until December 2013. The amount and exact timing of any repurchases will depend upon market conditions and other factors. There are no assurances the Company will repurchase any shares in the future and the plan may be suspended or discontinued at any time.

Quarterly Cash Dividend of $0.01 per common share was paid on March 28, 2013 to common shareholders of record on March 14, 2013.

Conference Call Details

A conference call to discuss the Company's first quarter 2013 results will be hosted on Monday, April 29, 2013 at 2:30 p.m. PDT / 5:30 p.m. EDT. Interested parties may access the call via webcast on the Investor Relations section of the CapitalSource web site at http://ir.capitalsource.com. An audio replay will also be available on the website from approximately 5:00 p.m. PDT / 8:00 p.m. EDT April 29, 2013 through October 30, 2013.

CapitalSource Bank Call Report

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, 2013 (the "Call Report") with the Federal Deposit Insurance Corporation ("FDIC") on April 30, 2013. The Call Report will subsequently be posted by the FDIC on its website at http://cdr.ffiec.gov/Public/.

About CapitalSource

CapitalSource Inc. (NYSE:CSE), through its wholly owned subsidiary CapitalSource Bank, makes commercial loans to small and middle-market businesses nationwide and offers depository products and services in 21 retail branches in southern and central California. CapitalSource, headquartered in Los Angeles, CA, had total assets of $8.5 billion and total deposits of $5.7 billion as of March 31, 2013. For more information, visit www.capitalsource.com.

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 our expectations regarding CapitalSource Bank net interest margin, and loan and lease portfolio growth and consolidated operating expenses, 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: change in interest rates and lending spreads; compression of spreads; unfavorable changes in asset mix; continued or worsening credit losses, charge-offs, reserves and delinquencies; changes in economic or market conditions or investment or lending opportunities; competitive and other market pressures on product pricing and services; reduced demand for our services; loan repayments higher than expected; higher than anticipated increases in operating expenses; increased asset workout and loan servicing expenses; higher compensation costs to retain and/or incent employees; CapitalSource Bank's inability to adjust expenses as part of the consolidated effort; and other factors described in CapitalSource's 2011 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 First Quarter 2013 - Financial Supplement

Table of Contents

Consolidated Balance Sheets

Consolidated Statements of Comprehensive Income

Segment Balance Sheets

Segment Statements of Operations

Selected Financial Data

Credit Quality Data

     
CapitalSource First Quarter 2013 - Financial Supplement
 
CapitalSource Inc.
Consolidated Balance Sheets
 ($ in thousands)
     
     
  March 31, December 31,
  2013 2012
  (Unaudited)  
     
ASSETS
Cash and cash equivalents $103,532 $178,880
Interest-bearing deposits in other banks 196,301 110,208
Other short-term investments 35,000 9,998
Restricted cash 104,468 104,044
Investment securities:    
Available-for-sale, at fair value 972,420 1,079,025
Held-to-maturity, at amortized cost 103,683 108,233
Total investment securities 1,076,103 1,187,258
Loans held for sale 27,938 22,719
Loans held for investment 6,216,998 6,192,858
Less deferred loan fees and discounts (47,426) (53,628)
Total loans held for investment 6,169,572 6,139,230
Less allowance for loan and lease losses (118,293) (117,273)
Total loans held for investment, net 6,051,279 6,021,957
Interest receivable 26,887 29,112
Other investments 58,385 60,363
Goodwill 173,135 173,135
Deferred tax asset, net 345,877 362,283
Other assets 283,772 289,048
Total assets $8,482,677 $8,549,005
     
     
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:    
Deposits $5,732,950 $5,579,270
Term debt 74,167 177,188
Other borrowings 1,009,774 1,005,738
Other liabilities 147,605 161,637
Total liabilities 6,964,496 6,923,833
     
     
Shareholders' equity:    
Preferred stock (50,000,000 shares authorized; no shares outstanding)
Common stock ($0.01 par value, 1,200,000,000 shares authorized; 195,810,779 and 209,551,674 shares issued and outstanding, respectively) 1,958 2,096
Additional paid-in capital 3,024,947 3,157,533
Accumulated deficit (1,531,745) (1,559,107)
Accumulated other comprehensive income, net 23,021 24,650
Total shareholders' equity 1,518,181 1,625,172
Total liabilities and shareholders' equity $8,482,677 $8,549,005
 
CapitalSource First Quarter 2013 - Financial Supplement
       
CapitalSource Inc.
Consolidated Statements of Comprehensive Income
(Unaudited)
($ in thousands, except per share data)
       
       
       
  Three Months Ended
  March 31, 2013 December 31, 2012 March 31, 2012
Net interest income:      
Interest income:      
Loans and leases $102,889 $105,960 $109,070
Investment securities 9,893 8,493 10,717
Other 313 468 290
Total interest income 113,095 114,921 120,077
Interest expense:      
Deposits 12,106 12,366 13,291
Borrowings 6,057 6,506 7,567
Total interest expense 18,163 18,872 20,858
Net interest income 94,932 96,049 99,219
Provision for loan and lease losses 12,505 8,875 11,072
Net interest income after provision for loan and lease losses 82,427 87,174 88,147
Non-interest income:      
Loan fees 3,112 6,662 4,668
Leased equipment income 4,825 4,298 3,258
Gain (loss) on investments, net 1,878 6,453 (307)
Gain (loss) on derivatives, net 814 (174) (103)
Other non-interest income, net 2,589 3,310 4,034
Total non-interest income 13,218 20,549 11,550
Non-interest Expense:      
Compensation and benefits 24,982 28,083 26,416
Professional fees 1,468 3,656 3,600
Occupancy expenses 4,215 3,438 3,759
FDIC fees and assessments 1,554 1,538 1,449
General depreciation and amortizations 1,526 1,398 1,695
Loan servicing expense 1,469 1,782 3,771
Other administrative expenses 6,810 6,826 5,849
Total operating expenses 42,024 46,721 46,539
Leased equipment depreciation 3,400 3,036 2,288
Expense of real estate owned and other foreclosed assets, net (62) 211 450
Loss on extinguishment of debt 83
Other non-interest expense, net (707) (545) (310)
Total non-interest expense 44,655 49,423 49,050
Net income before income taxes 50,990 58,300 50,647
Income tax expense 21,642 11,224 25,709
Net income 29,348 47,076 24,938
       
Other comprehensive (loss) income, net of tax      
Unrealized (loss) gain on available-for-sale securities, net of tax (1,629) 2,793 1,447
Unrealized loss on foreign currency translation, net of tax (351)
Other comprehensive (loss) income (1,629) 2,793 1,096
Comprehensive income $27,719 $49,869 $26,034
       
Net income per share:      
Basic $0.15 $0.23 $0.10
Diluted $0.14 $0.22 $0.10
Average shares outstanding:      
Basic 201,408,526 208,438,784 241,078,624
Diluted 206,190,977 213,482,389 247,598,531
Dividends declared per share $0.01 $0.51 $0.01
 
CapitalSource Inc.
Segment Balance Sheets
(Unaudited)
($ in thousands)
                 
  March 31, 2013 December 31, 2012
  CAPITALSOURCE BANK OTHER COMMERCIAL FINANCE INTERCOMPANY ELIMINATIONS CONSOLIDATED CAPITALSOURCE BANK OTHER COMMERCIAL FINANCE INTERCOMPANY ELIMINATIONS CONSOLIDATED
ASSETS                
                 
Cash and cash equivalents and restricted cash $309,943 $129,358 $ — $439,301 $230,305 $172,825 $ — $403,130
Investment securities:                
Available-for-sale 946,906 25,514 972,420 1,052,775 26,250 1,079,025
Held-to-maturity 103,683 103,683 108,233 108,233
Loans 5,840,160 357,682 (332) 6,197,510 5,618,810 543,325 (186) 6,161,949
Allowance for loan and lease losses (99,839) (18,454) (118,293) (98,905) (18,368) (117,273)
Loans, net of allowance for loan and lease losses 5,740,321 339,228 (332) 6,079,217 5,519,905 524,957 (186) 6,044,676
Receivables due from affiliates 1,738 11,069 (12,807) 1,742 11,347 (13,089)
Other assets 453,508 441,975 (7,427) 888,056 458,683 454,665 593 913,941
Total assets $7,556,099 $947,144 $(20,566) $8,482,677 $7,371,643 $1,190,044 $(12,682) $8,549,005
                 
LIABILITIES AND SHAREHOLDERS' EQUITY                
                 
Liabilities:                
Deposits $5,732,950 $ — $ — $5,732,950 $5,579,270 $ — $ — $5,579,270
Borrowings 600,000 483,941 1,083,941 595,000 587,926 1,182,926
Balance due to affiliates 11,069 1,738 (12,807) 11,347 1,742 (13,089)
Other liabilities 75,834 82,271 (10,500) 147,605 85,179 78,672 (2,214) 161,637
Total liabilities 6,419,853 567,950 (23,307) 6,964,496 6,270,796 668,340 (15,303) 6,923,833
                 
Shareholders' equity:                
Common stock 921,000 1,958 (921,000) 1,958 921,000 2,096 (921,000) 2,096
Additional paid-in capital/retained earnings/deficit 202,726 354,215 936,261 1,493,202 165,398 494,958 938,070 1,598,426
Accumulated other comprehensive income, net 12,520 23,021 (12,520) 23,021 14,449 24,650 (14,449) 24,650
Total shareholders' equity 1,136,246 379,194 2,741 1,518,181 1,100,847 521,704 2,621 1,625,172
                 
Total liabilities and shareholders' equity $7,556,099 $947,144 $(20,566) $8,482,677 $7,371,643 $1,190,044 $(12,682) $8,549,005
 
CapitalSource Inc.
Segment Statements of Operations
(Unaudited)
($ in thousands)
                 
  Three Months Ended March 31, 2013 Three Months Ended December 31, 2012
Net interest income: CAPITALSOURCE BANK OTHER COMMERCIAL FINANCE INTERCOMPANY ELIMINATIONS CONSOLIDATED CAPITALSOURCE BANK OTHER COMMERCIAL FINANCE INTERCOMPANY ELIMINATIONS CONSOLIDATED
Interest income:                
Loans and leases $93,295 $8,821 $773 $102,889 $91,328 $14,305 $327 $105,960
Investment securities 8,772 1,121 9,893 6,770 1,723 8,493
Other 289 24 313 446 22 468
Total interest income 102,356 9,966 773 113,095 98,544 16,050 327 114,921
Interest expense:                
Deposits 12,106 12,106 12,366 12,366
Borrowings 2,685 3,372 6,057 2,756 3,750 6,506
Total interest expense 14,791 3,372 18,163 15,122 3,750 18,872
Net interest income 87,565 6,594 773 94,932 83,422 12,300 327 96,049
Provision for loan and lease losses 3,152 9,353 12,505 1,447 7,428 8,875
Net interest income (loss) after provision for loan and lease losses 84,413 (2,759) 773 82,427 81,975 4,872 327 87,174
Non-interest income:                
Loan fees 2,944 168 3,112 6,524 138 6,662
Leased equipment income 4,825 4,825 4,298 4,298
Other non-interest income, net 5,764 5,074 (5,557) 5,281 7,421 7,860 (5,692) 9,589
Total non-interest income, net 13,533 5,242 (5,557) 13,218 18,243 7,998 (5,692) 20,549
Non-interest expense:                
Compensation and benefits 24,568 414 24,982 27,599 484 28,083
Professional fees 1,003 465 1,468 1,013 2,643 3,656
Leased equipment depreciation 3,400 3,400 3,036 3,036
Expense of real estate owned and other foreclosed assets, net (12) (50) (62) 835 (624) 211
Other non-interest expense, net 9,947 9,824 (4,904) 14,867 11,779 8,615 (5,957) 14,437
Total non-interest expense, net 38,906 10,653 (4,904) 44,655 44,262 11,118 (5,957) 49,423
Net income (loss) before income taxes 59,040 (8,170) 120 50,990 55,956 1,752 592 58,300
Income tax expense (benefit) 24,397 (2,755) 21,642 22,008 (11,857) 1,073 11,224
Net income (loss) $ 34,643 $(5,415) $120 $29,348 $33,948 $13,609 $(481) $47,076
                 
  Three Months Ended March 31, 2012        
Net interest income: CAPITALSOURCE BANK OTHER COMMERCIAL FINANCE INTERCOMPANY ELIMINATIONS CONSOLIDATED        
Interest income:                
Loans and leases $88,858 $21,457 $(1,245) $109,070        
Investment securities 9,474 1,243 10,717        
Other 288 2 290        
Total interest income 98,620 22,702 (1,245) 120,077        
Interest expense:                
Deposits 13,291 13,291        
Borrowings 2,768 4,799 7,567        
Total interest expense 16,059 4,799 20,858        
Net interest income 82,561 17,903 (1,245) 99,219        
Provision for loan and lease losses 1,903 9,169 11,072        
Net interest income after provision for loan and lease losses 80,658 8,734 (1,245) 88,147        
Non-interest income:                
Loan fees 3,337 1,331 4,668        
Leased equipment income 3,258 3,258        
Other non-interest income, net 8,874 2,160 (7,410) 3,624        
Total non-interest income, net 15,469 3,491 (7,410) 11,550        
Non-interest expense:                
Compensation and benefits 24,583 1,833 26,416        
Professional fees 1,367 2,233 3,600        
Leased equipment depreciation 2,288 2,288        
Expense of real estate owned and other foreclosed assets, net (298) 748 450        
Loss on extinguishment of debt 83 83        
Other non-interest expense, net 13,224 10,663 (7,674) 16,213        
Total non-interest expense, net 41,164 15,560 (7,674) 49,050        
Net income (loss) before income taxes 54,963 (3,335) (981) 50,647        
Income tax expense 23,159 2,550 25,709        
Net income (loss) $31,804 $(5,885) $(981) $24,938      
 
CapitalSource Inc.
Selected Financial Data
(Unaudited)
       
  Three Months Ended
  March 31, 2013 December 31, 2012 March 31, 2012
CapitalSource Bank Segment:      
       
Performance ratios:      
Return on average assets 1.89% 1.84% 1.85%
Return on average equity 12.61% 12.53% 12.36%
Return on average tangible equity 14.92% 14.93% 14.84%
Yield on average interest earning assets 5.94% 5.72% 6.12%
Cost of interest bearing liabilities 0.96% 0.98% 1.11%
Deposits 0.87% 0.89% 1.02%
Borrowings 1.82% 1.83% 1.96%
Net interest spread 4.98% 4.74% 5.01%
Net interest margin 5.08% 4.84% 5.12%
Operating expenses as a percentage of average total assets 1.95% 2.22% 2.26%
Efficiency ratio (1) 37.06% 41.32% 40.85%
Loan yield 6.68% 6.80% 7.24%
Capital ratios:      
Tier 1 leverage 13.38% 13.06% 12.39%
Total risk-based capital 16.68% 16.50% 16.22%
Tangible common equity to tangible assets 13.05% 12.89% 12.14%
Average balances ($ in thousands):      
Average loans $5,659,939 $5,342,683 $4,934,215
Average assets 7,443,015 7,327,136 6,910,757
Average interest earning assets 6,991,196 6,859,237 6,481,559
Average deposits 5,638,528 5,557,241 5,237,572
Average borrowings 599,278 597,772 567,736
Average equity 1,114,577 1,077,507 1,034,854
       
Other Commercial Finance Segment:      
       
Performance ratios:      
Return on average assets (2.02)% 4.05% (1.65)%
Return on average equity (4.58)% 8.65% (5.05)%
Yield on average interest earning assets 7.49% 8.17% 8.45%
Cost of interest bearing liabilities 2.67% 2.49% 2.57%
Net interest spread 4.82% 5.68% 5.88%
Net interest margin 4.95% 6.26% 6.66%
Operating expenses as a percentage of average total assets 3.95% 3.57% 4.21%
Loan yield 8.17% 8.41% 8.61%
Average balances ($ in thousands):      
Average loans $437,784 $676,349 $1,002,024
Average assets 1,084,606 1,335,561 1,435,297
Average interest earning assets 539,980 781,428 1,080,508
Average borrowings 511,270 600,328 752,330
Average equity 479,661 625,945 468,752
       
Consolidated CapitalSource Inc.:      
       
Performance ratios:      
Return on average assets 1.40% 2.17% 1.20%
Return on average equity 7.45% 10.97% 6.64%
Return on average tangible equity 8.36% 12.22% 7.50%
Yield on average interest earning assets 6.09% 5.98% 6.38%
Cost of interest bearing liabilities 1.09% 1.11% 1.28%
Net interest spread 5.00% 4.87% 5.10%
Net interest margin 5.11% 5.00% 5.27%
Efficiency ratio (1) 40.12% 41.14% 42.90%
Operating expenses as a percentage of average total assets 1.98% 2.16% 2.24%
Leverage ratios:      
Equity to total assets (as of period end) 17.90% 19.01% 17.72%
Tangible common equity to tangible assets 16.18% 17.33% 15.97%
Average balances ($ in thousands):      
Average loans $6,097,633 $6,018,343 $5,939,263
Average assets 8,509,511 8,642,344 8,323,937
Average interest earning assets 7,531,086 7,639,977 7,565,090
Average borrowings 1,110,547 1,198,100 1,320,066
Average deposits 5,638,528 5,557,241 5,237,572
Average equity 1,597,024 1,706,761 1,509,560
       
       
(1) Efficiency ratio is defined as operating expense (non-interest expense less REO expense, early debt term expense, provision for unfunded commitments and lease depreciation) divided by net interest and non-interest income, less leased equipment depreciation.
 
CapitalSource Inc.
Credit Quality Data
(Unaudited)
           
           
  March 31, 2013 December 31, 2012 September 30, 2012 June 30, 2012 March 31, 2012
           
Loans 30-89 days contractually delinquent:          
As a % of total loans(1) 0.71% 0.40% 0.51% 0.01% 0.31%
Loans 30-89 days contractually delinquent $43.7 $24.5 $30.3 $0.7 $18.5
           
Loans 90 or more days contractually delinquent:          
As a % of total loans(1) 0.69% 0.63% 0.72% 1.00% 1.19%
Loans 90 or more days contractually delinquent $43.0 $39.1 $43.2 $60.2 $71.1
           
Loans on non-accrual:(2)          
As a % of total loans(1) 2.40% 1.94% 2.66% 3.26% 3.87%
Loans on non-accrual $148.6 $119.7 $158.8 $196.0 $230.9
           
Impaired loans:(3)          
As a % of total loans(4) 2.41% 3.29% 4.51% 5.98% 6.61%
Impaired loans $148.9 $201.7 $266.1 $357.5 $384.3
           
Allowance for loan and lease losses:          
As a % of total loans(4) 1.92% 1.91% 2.15% 2.23% 2.61%
As a % of non-accrual loans 79.58% 97.96% 79.75% 68.02% 65.79%
Allowance for loan and lease losses $118.3 $117.3 $126.6 $133.4 $151.9
           
Net charge offs (last twelve months):          
As a % of total average loans 1.24% 1.27% 2.09% 2.30% 3.31%
Net charge offs (last twelve months) $74.4 $75.8 $123.7 $134.0 $190.6
           
(1)  Includes loans held for investment, loans held for sale and deferred loan fees and discounts. Excludes allowance for loan and lease losses.
(2)  Includes loans with an aggregate principal balance of $43.0 million, $39.1 million, $43.2 million, $60.2 million, and $71.1 million as of March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012 and March 31, 2012, 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 $8.3 million and $2.4 million, as of March 31, 2013 and December 31, 2012, respectively. As of September 30, 2012, June 30, 2012 and March 31, 2012 there were no non-performing loans classified as held for sale.
(3)  Includes loans with an aggregate principal balance of $43.0 million, $39.1 million, $43.2 million, $60.2 million, and $71.1 million as of March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012 and March 31, 2012, respectively, that were also classified as loans 90 or more days contractually delinquent, and loans with an aggregate principal balance of $148.6 million, $119.7 million, $158.8 million, $196.0 million, and $230.9 million as of March 31, 2013, December 31, 2012, September 30, 2012, June 30, 2012 and March 31, 2012, respectively, that were also classified as loans on non-accrual status.
(4) Includes loans held for investment and deferred loan fees and discounts. Excludes the allowance for loan and lease losses.
CONTACT: Investor Relations:
Dennis Oakes
Senior Vice President, Investor Relations
& Corporate Communications
(212) 321-7212
doakes@capitalsource.com
Media Relations:
Michael Weiss
Director of Communications
(301) 841-2918
mweiss@capitalsource.com

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