CapitalSource Reports Second Quarter 2008 Results

2008-08-05 05:00:00

CapitalSource Reports Second Quarter 2008 Results

                - Credit Performance Within Historical Range

                - GAAP Net Income of $0.25 per Diluted Share

                  - CapitalSource Bank Opened for Business



    CHEVY CHASE, Md., Aug. 5 /EMWPresswire/ -- CapitalSource Inc.

(NYSE: CSE) today announced financial results for the second quarter 2008.

GAAP net income for the quarter was $60.1 million, or $0.25 per diluted

share, and Adjusted Earnings for the quarter was $29.1 million, or $0.12

per diluted share.



    



    "This is an exciting time for CapitalSource. Within the last 10 days we

have commenced operations at 22 branches of CapitalSource Bank in

California with $5.2 billion in deposits and started approving new loans in

the Bank," said John K. Delaney, Chairman and CEO of CapitalSource. "We are

now extremely well positioned to grow our market leading commercial lending

business inside our new bank -- while maintaining our uncompromising and

historically strong credit standards," added Delaney.



    "We are very pleased with the performance of our commercial lending

business, including our continued strong core lending spread," said Thomas

A. Fink, Chief Financial Officer. "We are also pleased with the credit

performance of our commercial loan portfolio this quarter. Our credit

metrics remain within our historical range, despite a modest decline in

loan balance over the past four quarters, and our newly established

depository makes our already strong balance sheet and liquidity even

stronger," added Fink.



    Commercial Finance Segment



    -- Total commercial loans were approximately $9.4 billion at quarter

end, a decrease of approximately $331.4 million from the prior quarter, as

loan runoff outpaced loan growth.



    -- Net investment income was $134.5 million for the quarter, a decrease

of $9.9 million from the prior quarter.



    -- Interest income was $201.6 million for the quarter, a decrease of

$22.8 million from the prior quarter, consistent with a decrease in short

term interest rates. In the second quarter weighted average LIBOR decreased

by 71 basis points and the weighted average prime rate decreased by 114

basis points. The negative impact of falling interest rates was partially

offset by interest rate floors in approximately 41% of the Company's

commercial loans as of June 30, 2008.



    -- Yield on average interest-earning assets was 9.75% for the quarter,

a decrease of 51 basis points from the prior quarter.



    -- Core lending spread, defined as loan yield less prepayment-related

fee income and average one-month LIBOR, was 7.05%, a decrease of 7 basis

points compared to the prior quarter.



    -- Prepayment-related fee income was $10.8 million for the quarter and

contributed 43 basis points to yield, an increase of $7.3 million from the

prior quarter when prepayment-related fee income contributed only 14 basis

points to yield.



    -- Cost of funds was 5.40% for the quarter, a decrease of 5 basis

points from the prior quarter primarily due to declining interest rates,

but largely offset by higher financing fees and higher credit spreads in

the quarter. Overall borrowing spread to average one-month LIBOR was 2.81%,

an increase of 66 basis points from the prior quarter.



    -- Leverage, as measured by the ratio of total debt-to-equity at the

end of the quarter, was 2.98x, a decrease from 4.37x at the end of the

prior quarter, primarily due to the underwritten equity offering the

Company completed during June.



    -- Net finance margin, defined as net investment income divided by

average interest-earning assets, was 5.40% for the quarter, a decrease of

34 basis points from the prior quarter primarily due to the increase in our

borrowing spread to LIBOR partially offset by higher prepayment-related fee

income.



    -- Provision for loan losses was $27.5 million for the quarter,

bringing the total allowance for loan losses to $141.1 million or 1.35% of

total commercial assets, an increase of 8 basis points from the prior

quarter.



    -- Adjusted earnings contributed by the Commercial Finance segment was

$60.1 million ($0.24 per diluted share), compared to $113.5 million in the

prior quarter. The lower adjusted earnings in the quarter was due primarily

to an increase in income taxes, an increase in charge-offs and realized

losses on derivatives.



    Commercial Credit Metrics



    -- Loans on non-accrual status, which the Company considers its primary

credit metric, increased by 37 basis points from the prior quarter to 1.99%

of commercial assets.



    -- Loans 60 or more days contractually delinquent as a percentage of

total commercial assets increased 36 basis points to 1.05%.



    -- Net charge-offs were $23.3 million, an increase of $18.2 million

from the prior quarter. As a percentage of average commercial assets,

annualized net charge-offs for the quarter were 90 basis points, which is

within the historical range.



    -- Allowance for loan losses was $141.1 million, an increase of $4.4

million from the prior quarter. As a percentage of commercial assets at

quarter end, the allowance for loan losses was 1.35%, an increase of 8

basis points from the prior quarter.



    Healthcare Net Lease Segment



    -- Direct real estate investments were consistent with the prior

quarter at approximately $1.0 billion, decreasing $9.3 million primarily

due to depreciation.



    Residential Mortgage Investment Portfolio



    -- Mortgage-backed securities declined from $3.31 billion to $1.60

billion, primarily due to the sale of approximately $1.5 billion of Agency

MBS and principal paydowns. There was a corresponding decrease in

repurchase agreements used to finance the Agency MBS from $3.43 billion to

$1.54 billion.



    -- Mortgage-related receivables declined from $1.98 billion to $1.91

billion, primarily due to paydowns during the quarter.



    Consolidated Other Income



    -- Gain (loss) on investments, net was ($4.8) million, a decrease from

$1.1 million in the prior quarter primarily due to write-downs on three

cost basis investments, partially offset by realized gains on investment

sales and dividends received.



    -- Gain (loss) on derivatives was $15.1 million, compared to ($38.1)

million in the prior quarter, primarily due to net realized and unrealized

gains in the fair value of interest rate swaps, used to hedge certain

assets and liabilities and, thereby, minimize the Company's exposure to

interest rate movements. In Adjusted Earnings for the quarter, the Company

removes the impact of unrealized gains and losses on derivatives and

foreign currency (net gain of approximately $33.1 million) which resulted

in an adjusted earnings loss of $18.0 million.



    -- Gain (loss) on the Residential Mortgage Investment Portfolio, net

was $9.1 million compared to ($55.4) million in the prior quarter,

primarily due to derivative gains and losses in the Agency MBS portfolio.

In Adjusted Earnings for the quarter, the Company realized a net loss of

$48.0 million related to the residential mortgage investment portfolio,

primarily due to $35.0 million net losses incurred in connection with the

sale of approximately $1.5 billion of Agency MBS.



    -- Other income (expense), net was $19.2 million compared to ($4.7)

million in the prior quarter, primarily due to a gain on extinguishment of

debt and equity earnings.



    Funding and Liquidity



    -- During the quarter, the Company raised $365.8 million in connection

with the issuance of 34.5 million shares in an underwritten equity

offering.



    -- During the quarter, the Company raised $64.7 million through the

issuance of approximately 4.7 million shares of common stock under its

Dividend Reinvestment and Stock Purchase Plan (DRIP). The Company does not

intend to accept direct purchase or waiver investments pursuant to the DRIP

program during the remainder of the third quarter of 2008.



    -- After the quarter closed, CapitalSource Bank commenced operations

with approximately $5.2 billion of retail deposits, 22 retail bank branches

in Southern and Central California and approximately $5.2 billion in cash

and other assets. The Bank used a portion of its cash to purchase

approximately $2.1 billion in commercials loans from CapitalSource and

began operations with a total capital ratio of more than 15.6%.



    -- The Company used the proceeds of the loan sale to CapitalSource Bank

to reduce its credit facility borrowings and certain securitizations by

approximately $1.6 billion and to fund approximately $500 million of the

initial Bank capitalization of $921 million.



    Operating Expenses



    -- Operating expenses as a percentage of average total assets

(excluding sale-leaseback depreciation) increased in the quarter to 1.56%,

an increase of 25 basis points from the prior quarter due largely to a

decline in average asset balance, resulting from the sale of Agency MBS and

the decrease in commercial loan balance.



    Income Tax Rate



    -- Income taxes in the quarter were $37.2 million, compared to $3.1

million in the prior quarter, primarily due to significantly higher pre-tax

GAAP income. The full year projected tax rate is 35%.



    Return on Equity



    -- Consolidated return on average equity, was 8.66% for the quarter,

compared to 1.02% in the prior quarter.



    Share Count



    -- Weighted average dilutive shares outstanding were 236.4 million

shares for the quarter ended June 30, 2008, compared to 221.5 million

shares at the end of the prior quarter.



    Dividends



    -- A regular quarterly cash dividend of $0.60 per common share was paid

on June 30, 2008 to common shareholders of record on June 16, 2008.



    CapitalSource will hold an analyst and investor conference call with a

simultaneous webcast on August 5, 2008 at 8:30 a.m. (Eastern Time) to

discuss the Company's second quarter 2008 results. To participate, analysts

and investors may call (888) 713-4218 from within United States or (617)

213-4870 from outside the United States, utilizing the pass code 67380064.

Other interested parties may access a webcast of the conference call at the

Investor Relations section of the CapitalSource website at

http://www.capitalsource.com.



    A telephonic replay will be available from approximately 10:30 a.m.

(Eastern Time) on August 5, 2008 through August 12, 2008. Please call (888)

286-8010 from the United States or (617) 801-6888 from outside the United

States with the pass code 72241169. An audio replay will also be available

on the Investor Relations section of the CapitalSource website. A

transcript of the earnings conference call will also be posted to the

Investor Relations section of the CapitalSource website on August 5, 2008.



    About CapitalSource



    CapitalSource Inc. (NYSE: CSE) is a commercial lender offering focused

lending products serving clients in the middle market. CapitalSource Inc.

and its subsidiaries collectively managed total assets of approximately

$17.3 billion as of June 30, 2008, including a commercial loan portfolio of

$9.4 billion and a healthcare net lease portfolio of $1.0 billion.

CapitalSource operates principally through its CapitalSource Bank

subsidiary, which had $5.2 billion in deposits and 22 retail banking

branches as of July 25, 2008. CapitalSource is headquartered in Chevy

Chase, MD. For more information about CapitalSource, visit

http://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, goals, and projections and including statements about

growing our commercial lending business and maintaining our credit

standards, the strength of our balance sheet and liquidity and our

intention not to accept direct purchase or waiver investments pursuant to

our DRIP program during the remainder of the third quarter of 2008, which

are subject to numerous assumptions, risks, and uncertainties. All

statements contained in this release that are not clearly historical in

nature are forward-looking, and the words "anticipate," "assume," "intend",

"believe," "expect," "estimate," "plan," "will," "look forward," and

similar expressions are generally intended to identify forward-looking

statements. All forward-looking statements (including statements regarding

future financial and operating results and future transactions and their

results) involve risks, uncertainties and contingencies, many of which are

beyond our control which may cause actual results, performance, or

achievements to differ materially from anticipated results, performance or

achievements. Actual results could differ materially from those contained

or implied by such statements for a variety of factors, including without

limitation: the recently completed bank transaction; changes in economic

conditions; continued or worsening disruptions in credit and other markets;

movements in interest rates and lending spreads; our ability to

successfully and cost effectively operate CapitalSource Bank; our ability

to successfully grow CapitalSource Bank's deposits or deploy its capital in

favorable lending transactions or acquire assets in accordance with our

strategic plan; competitive and other market pressures on product pricing

and services; success and timing of other business strategies; the nature,

extent, and timing of governmental actions and reforms; changes in tax laws

or regulations affecting REITs, extended disruption of vital

infrastructure; and other factors described in CapitalSource's 2007 Annual

Report on Form 10-K and documents subsequently filed by CapitalSource with

the Securities and Exchange Commission. All forward-looking statements

included in this news release are based on information available at the

time of the release. We are under no obligation to (and expressly disclaim

any such obligation to) update or alter our forward-looking statements,

whether as a result of new information, future events or otherwise.




CapitalSource Inc. Consolidated Balance Sheets (Unaudited) ($ in thousands) June 30, March 31, June 30, 2008 2008 2007 ASSETS Cash and cash equivalents $169,667 $270,789 $271,492 Restricted cash 428,955 527,258 221,650 Mortgage-related receivables, net 1,907,229 1,978,852 2,162,715 Mortgage-backed securities pledged, trading 1,606,475 3,310,176 4,290,965 Receivables under reverse- repurchase agreements - - 26,237 Loans held for sale 98,817 37,989 154,229 Loans: Loans 9,329,068 9,721,333 8,761,127 Less deferred loan fees and discounts (169,954) (151,291) (128,785) Less allowance for loan losses (141,128) (136,745) (127,547) Loans, net 9,017,986 9,433,297 8,504,795 Direct real estate investments, net 1,007,699 1,016,972 1,032,838 Investments 289,943 270,481 197,543 Other assets 366,832 855,624 299,226 Total assets $14,893,603 $17,701,438 $17,161,690 LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS' EQUITY Liabilities: Repurchase agreements $1,541,795 $3,427,856 $4,217,086 Credit facilities 1,687,242 2,373,106 3,671,041 Term debt 6,562,841 7,021,686 5,652,228 Other borrowings 1,669,195 1,574,994 1,082,176 Other liabilities 357,765 605,586 214,806 Total liabilities 11,818,838 15,003,228 14,837,337 Noncontrolling interests 15,246 43,938 44,871 Shareholders' equity: Preferred stock (50,000,000 shares authorized; no shares outstanding) - - - Common stock ($0.01 par value, 1,200,000,000, 500,000,00 and 500,000,000 shares authorized; 276,139,152, 234,844,241 and 191,877,813 shares issued and shares outstanding, respectively) 2,761 2,348 1,918 Additional paid-in capital 3,586,096 3,097,310 2,361,158 Accumulated deficit (538,619) (455,041) (85,978) Accumulated other comprehensive income, net 9,281 9,655 2,384 Total shareholders' equity 3,059,519 2,654,272 2,279,482 Total liabilities, noncontrolling interests and shareholders' equity $14,893,603 $17,701,438 $17,161,690 CapitalSource Inc. Consolidated Statements of Income (Unaudited) ($ in thousands, except per share data) Three Months Ended June 30, March 31, June 30, 2008 2008 2007 Net investment income: Interest income $254,222 $308,325 $311,184 Fee income 41,267 33,641 45,056 Total interest and fee income 295,489 341,966 356,240 Operating lease income 24,210 27,690 22,118 Total investment income 319,699 369,656 378,358 Interest expense 160,083 188,945 200,291 Net investment income 159,616 180,711 178,067 Provision for loan losses 31,674 5,659 17,410 Net investment income after provision for loan losses 127,942 175,052 160,657 Operating expenses: Compensation and benefits 37,808 31,789 38,615 Depreciation of direct real estate investments 8,990 8,916 7,390 Other administrative expenses 23,844 26,804 20,438 Total operating expenses 70,642 67,509 66,443 Other income (expense): Diligence deposits forfeited 1,714 647 1,813 (Loss) gain on investments, net (4,827) 1,141 17,002 Gain (loss) on derivatives 15,098 (38,111) 3,153 Gain (loss) on residential mortgage investment portfolio 9,060 (55,377) (13,846) Other income (expense), net 19,241 (4,699) 12,957 Total other income (expense) 40,286 (96,399) 21,079 Noncontrolling interests expense 283 1,297 1,272 Net income before income taxes 97,303 9,847 114,021 Income taxes 37,243 3,076 29,693 Net income $60,060 $6,771 $84,328 Net income per share: Basic $0.26 $0.03 $0.45 Diluted $0.25 $0.03 $0.45 Adjusted earnings per share: Diluted $0.12 $0.51 $0.68 Average shares outstanding: Basic 235,076,287 220,085,148 185,371,033 Diluted 236,445,230 221,493,514 187,428,430 Dividends declared per share $0.60 $0.60 $0.60 Six Months Ended June 30, 2008 2007 Net investment income: Interest income $562,547 $600,738 Fee income 74,908 95,083 Total interest and fee income 637,455 695,821 Operating lease income 51,900 42,406 Total investment income 689,355 738,227 Interest expense 349,028 386,940 Net investment income 340,327 351,287 Provision for loan losses 37,333 32,336 Net investment income after provision for loan losses 302,994 318,951 Operating expenses: Compensation and benefits 69,597 78,629 Depreciation of direct real estate investments 17,906 14,152 Other administrative expenses 50,648 38,984 Total operating expenses 138,151 131,765 Other income (expense): Diligence deposits forfeited 2,361 2,675 (Loss) gain on investments, net (3,686) 23,165 Gain (loss) on derivatives (23,013) 898 Gain (loss) on residential mortgage investment portfolio (46,317) (19,544) Other income (expense), net 14,542 19,934 Total other income (expense) (56,113) 27,128 Noncontrolling interests expense 1,580 2,602 Net income before income taxes 107,150 211,712 Income taxes 40,319 48,694 Net income $66,831 $163,018 Net income per share: Basic $0.29 $0.89 Diluted $0.29 $0.88 Adjusted earnings per share: Diluted $0.60 $1.31 Average shares outstanding: Basic 227,580,584 182,274,147 Diluted 228,969,238 184,512,451 Dividends declared per share $1.20 $1.18 CapitalSource Inc. Segment Data (Unaudited) ($ in thousands) Three Months Ended June 30, 2008 Health- Residential Commercial care Net Mortgage Consolidated Finance Lease Investment Total Net investment income: Interest income $201,626 $347 $52,249 $254,222 Fee income 41,260 7 - 41,267 Total interest and fee income 242,886 354 52,249 295,489 Operating lease income - 24,210 - 24,210 Total investment income 242,886 24,564 52,249 319,699 Interest expense 108,425 10,859 40,799 160,083 Net investment income 134,461 13,705 11,450 159,616 Provision for loan losses 27,465 - 4,209 31,674 Net investment income after provision for loan losses 106,996 13,705 7,241 127,942 Other operating expenses 57,843 11,380 1,419 70,642 Total other income (expense) 33,880 (1,416) 7,822 40,286 Noncontrolling interests expense (369) 652 - 283 Net income (loss) before income taxes 83,402 257 13,644 97,303 Income taxes 37,243 - - 37,243 Net income (loss) $46,159 $257 $13,644 $60,060 Three Months Ended March 31, 2008 Health- Residential Commercial care Net Mortgage Consolidated Finance Lease Investment Total Net investment income: Interest income $224,383 $482 $83,460 $308,325 Fee income 33,630 11 - 33,641 Total interest and fee income 258,013 493 83,460 341,966 Operating lease income - 27,690 - 27,690 Total investment income 258,013 28,183 83,460 369,656 Interest expense 113,643 10,796 64,506 188,945 Net investment income 144,370 17,387 18,954 180,711 Provision for loan losses 2,971 - 2,688 5,659 Net investment income after provision for loan losses 141,399 17,387 16,266 175,052 Other operating expenses 53,137 11,173 3,199 67,509 Total other income (expense) (39,757) - (56,642) (96,399) Noncontrolling interests expense (117) 1,414 - 1,297 Net income (loss) before income taxes 48,622 4,800 (43,575) 9,847 Income taxes 3,076 - - 3,076 Net income (loss) $45,546 $4,800 $(43,575) $6,771 Six Months Ended June 30, 2008 Health- Residential Commercial care Net Mortgage Consolidated Finance Lease Investment Total Net investment income: Interest income $426,009 $829 $135,709 $562,547 Fee income 74,890 18 - 74,908 Total interest and fee income 500,899 847 135,709 637,455 Operating lease income - 51,900 - 51,900 Total investment income 500,899 52,747 135,709 689,355 Interest expense 222,068 21,655 105,305 349,028 Net investment income 278,831 31,092 30,404 340,327 Provision for loan losses 30,436 - 6,897 37,333 Net investment income after provision for loan losses 248,395 31,092 23,507 302,994 Other operating expenses 110,980 22,553 4,618 138,151 Total other (expense) income (5,877) (1,416) (48,820) (56,113) Noncontrolling interests expense (486) 2,066 - 1,580 Net income (loss) before income taxes 132,024 5,057 (29,931) 107,150 Income taxes 40,319 - - 40,319 Net income (loss) $91,705 $5,057 $(29,931) $66,831 Six Months Ended June 30, 2007 Health- Residential Commercial care Net Mortgage Consolidated Finance Lease Investment Total Net investment income: Interest income $436,155 $294 $164,289 $600,738 Fee income 95,083 - - 95,083 Total interest and fee income 531,238 294 164,289 695,821 Operating lease income - 42,406 - 42,406 Total investment income 531,238 42,700 164,289 738,227 Interest expense 214,616 19,148 153,176 386,940 Net investment income 316,622 23,552 11,113 351,287 Provision for loan losses 32,336 - - 32,336 Net investment income after provision for loan losses 284,286 23,552 11,113 318,951 Other operating expenses 110,265 18,520 2,980 131,765 Total other (expense) income 46,672 - (19,544) 27,128 Noncontrolling interests expense (457) 3,059 - 2,602 Net income (loss) before income taxes 221,150 1,973 (11,411) 211,712 Income taxes 48,694 - - 48,694 Net income (loss) $172,456 $1,973 $(11,411) $163,018 CapitalSource Inc. Adjusted Earnings (Unaudited) We evaluate our performance based on several measures, including adjusted earnings. Management views adjusted earnings and the related per share measures as useful and appropriate supplements to net income and earnings per share. These measures serve as an additional measure of our operating performance because they facilitate evaluation of the company without the effects of certain adjustments in accordance with U.S. generally accepted accounting principles ("GAAP") that may not necessarily be indicative of current operating performance. We define adjusted earnings as net income as determined in accordance with GAAP, adjusted for certain items, including real estate depreciation, amortization of deferred financing fees, non-cash equity compensation, certain realized and unrealized gains and losses on residential mortgage investments held in our portfolio as of the balance sheet date and related derivatives, unrealized gains and losses on other derivatives and foreign currencies, net unrealized gains and losses on investments, provision for loan losses, charge offs, recoveries, nonrecurring items and the cumulative effect of changes in accounting principles. Adjusted earnings should not be considered as an alternative to net income or cash flows from operating activities (each computed in accordance with GAAP). Instead, adjusted earnings should be reviewed in connection with net income and cash flows from operating, investing and financing activities in our consolidated financial statements, to help analyze how our business is performing. Adjusted earnings and other supplemental performance measures are defined in various ways throughout the REIT industry. Investors should consider these differences when comparing our adjusted earnings to other REITs.
CapitalSource Inc. Adjusted Earnings Reconciliations (Unaudited) ($ in thousands, except per share data) Reconciliation of our reported net income to adjusted earnings for the three months ended June 30, 2008, March 31, 2008 and June 30, 2007, and the six months ended June 30, 2008 and 2007 was as follows:
Three Months Ended June 30, March 31, June 30, 2008 2008 2007 Net income (loss) $60,060 $6,771 $84,328 Add: Real estate depreciation and amortization (1) 8,459 8,760 7,896 Amortization of deferred financing fees (2) 26,810 11,953 6,823 Non-cash equity compensation 12,030 6,514 9,859 Net realized and unrealized (gains) losses on residential mortgage investment portfolio including related derivatives (3) (57,022) 27,394 15,846 Unrealized (gain) loss on derivatives and foreign currencies, net (33,140) 47,634 (1,287) Unrealized loss on investments, net 4,475 4,657 1,170 Provision for loan losses 32,028 5,659 17,410 Recoveries (4) (356) - - Less: Charge offs 24,237 6,076 13,625 Non-recurring items - - - Adjusted earnings $29,107 $113,266 $128,420 Net income per share: Basic - as reported $0.26 $0.03 $0.45 Diluted - as reported $0.25 $0.03 $0.45 Average shares outstanding: Basic - as reported 235,076,287 220,085,148 185,371,033 Diluted - as reported 236,445,230 221,493,514 187,428,430 Adjusted earnings per share: Basic $0.12 $0.51 $0.69 Diluted (5) $0.12 $0.51 $0.68 Average shares outstanding: Basic 235,076,287 220,085,148 185,371,033 Diluted (6) 236,445,230 221,493,514 189,425,285 Six Months Ended June 30, 2008 June 30, 2007 Net income (loss) $66,831 $163,018 Add: Real estate depreciation and amortization (1) 17,219 14,658 Amortization of deferred financing fees (2) 38,763 12,332 Non-cash equity compensation 18,544 20,571 Net realized and unrealized (gains) losses on residential mortgage investment portfolio including related derivatives (3) (29,628) 23,381 Unrealized (gain) loss on derivatives and foreign currencies, net 14,492 (959) Unrealized loss on investments, net 9,132 1,217 Provision for loan losses 37,689 32,336 Recoveries (4) (356) - Less: Charge offs 30,313 23,876 Non-recurring items - - Adjusted earnings $142,373 $242,678 Net income per share: Basic - as reported $0.29 $0.89 Diluted - as reported $0.29 $0.88 Average shares outstanding: Basic - as reported 227,580,584 182,274,147 Diluted - as reported 228,969,238 184,512,451 Adjusted earnings per share: Basic $0.63 $1.33 Diluted (5) $0.62 $1.31 Average shares outstanding: Basic 227,580,584 182,274,147 Diluted (6) 228,969,238 186,737,699 (1) Depreciation and amortization for direct real estate investments only. Excludes depreciation for corporate leasehold improvements, fixed assets and other non-real estate items. (2) Includes amortization of deferred financing fees and other non-cash interest expense. (3) Includes adjustments to reflect certain realized and unrealized gains and losses on residential mortgage investments held in our portfolio as of the balance sheet date and related derivative instruments. (4) Includes all recoveries on loans during the period. (5) Adjusted to reflect the impact of adding back noncontrolling interests expense of $1.3 million and $2.6 million for the three and six months ended June 30, 2007, respectively, to adjusted earnings due to the application of the if-converted method on non-managing member units, which are considered dilutive to adjusted earnings per share, but are antidilutive to GAAP net income per share for this period. (6) Adjusted to include average non-managing member units of 1,996,855 and 2,225,248 for the three and six months ended June 30, 2007, respectively, which are considered dilutive to adjusted earnings per share, but are antidilutive to GAAP net income per share for this period. CapitalSource Inc. Adjusted Earnings Reconciliations (Unaudited) ($ in thousands, except per share data) For our Commercial Finance segment, Healthcare Net Lease segment and Residential Mortgage segment, reconciliations of reported net income to adjusted earnings for the three months ended June 30, 2008 and March 31, 2008, were as follows: Three Months Ended June 30, 2008 Residential Commercial Healthcare Mortgage Consolidated Finance Net Lease Investment Total Net income $46,160 $257 $13,643 $60,060 Add: Real estate depreciation and amortization (1) - 8,459 - 8,459 Amortization of deferred financing fees (2) 26,432 145 233 26,810 Non-cash equity compensation 12,030 - - 12,030 Net realized and unrealized gains on residential mortgage investment portfolio including related derivatives(3) - - (57,022) (57,022) Unrealized gain on derivatives and foreign currencies, net (33,140) - - (33,140) Unrealized loss on investments, net 4,475 - - 4,475 Provision for loan losses 27,819 - 4,209 32,028 Recoveries (4) (356) - - (356) Less: Charge offs 23,325 - 912 24,237 Non-recurring items - - - - Adjusted earnings $60,095 $8,861 $(39,849) $29,107 Net income per share: Basic - as reported $0.20 $- $0.06 $0.26 Diluted - as reported $0.19 $- $0.06 $0.25 Average shares outstanding: Basic - as reported 235,076,287 235,076,287 235,076,287 235,076,287 Diluted - as reported 236,445,230 236,445,230 236,445,230 236,445,230 Adjusted earnings per share: Basic $0.25 $0.04 $(0.17) $0.12 Diluted $0.25 $0.04 $(0.17) $0.12 Average shares outstanding: Basic 235,076,287 235,076,287 235,076,287 235,076,287 Diluted 236,445,230 236,445,230 236,445,230 236,445,230 Three Months Ended March 31, 2008 Residential Commercial Healthcare Mortgage Consolidated Finance Net Lease Investment Total Net income Add: $45,546 $4,800 $(43,575) $6,771 Real estate depreciation and amortization (1) - 8,760 - 8,760 Amortization of deferred financing fees (2) 11,316 312 325 11,953 Non-cash equity compensation 6,514 - - 6,514 Net realized and unrealized gains on residential mortgage investment portfolio including related derivatives(3) - - 27,394 27,394 Unrealized gain on derivatives and foreign currencies, net 47,634 - - 47,634 Unrealized loss on investments, net 4,657 - - 4,657 Provision for loan losses 2,971 - 2,688 5,659 Recoveries (4) - - - - Less: Charge offs 5,155 - 921 6,076 Non-recurring items - - - - Adjusted earnings $113,483 $13,872 $(14,089) $113,266 Net income per share: Basic - as reported $0.21 $0.02 $(0.20) $0.03 Diluted - as reported $0.21 $0.02 $(0.20) $0.03 Average shares outstanding: Basic - as reported 220,085,148 220,085,148 220,085,148 220,085,148 Diluted - as reported 221,493,514 221,493,514 221,493,514 221,493,514 Adjusted earnings per share: Basic $0.51 $0.06 $(0.06) $0.51 Diluted $0.51 $0.06 $(0.06) $0.51 Average shares outstanding: Basic 220,085,148 220,085,148 220,085,148 220,085,148 Diluted 221,493,514 221,493,514 221,493,514 221,493,514 (1) Depreciation and amortization for direct real estate investments only. Excludes depreciation for corporate leasehold improvements, fixed assets and other non-real estate items. (2) Includes amortization of deferred financing fees and other non-cash interest expense. (3) Includes adjustments to reflect certain realized and unrealized gains and losses on residential mortgage investments held in our portfolio as of the balance sheet date and related derivative instruments. (4) Includes all recoveries on loans during the period. CapitalSource Inc. Adjusted Earnings Reconciliations (Unaudited) ($ in thousands, except per share data) For our Commercial Finance segment, Healthcare Net Lease segment and Residential Mortgage segment, reconciliations of reported net income to adjusted earnings for the three months ended June 30, 2007, were as follows:
Three Months Ended June 30, 2007 Residential Commercial Healthcare Mortgage Consolidated Finance Net Lease Investment Total Net income (loss) $93,727 $715 $(10,114) $84,328 Add: Real estate depreciation and amortization (1) - 7,896 - 7,896 Amortization of deferred financing fees (2) 6,063 438 322 6,823 Non-cash equity compensation 9,859 - - 9,859 Net realized and unrealized losses on residential mortgage investment portfolio including related derivatives(3) - - 15,846 15,846 Unrealized gain on derivatives and foreign currencies, net (1,287) - - (1,287) Unrealized loss on investments, net 1,170 - - 1,170 Provision for loan losses 17,410 - - 17,410 Recoveries (4) - - - - Less: Charge offs 13,625 - - 13,625 Non-recurring items - - - - Adjusted earnings $113,317 $9,049 $6,054 $128,420 Net income per share: Basic - as reported $0.51 $- $(0.06) $0.45 Diluted - as reported $0.50 $- $(0.05) $0.45 Average shares outstanding: Basic - as reported 185,371,033 185,371,033 185,371,033 185,371,033 Diluted - as reported 187,428,430 187,428,430 187,428,430 187,428,430 Adjusted earnings per share: Basic $0.61 $0.05 $0.03 $0.69 Diluted (5) $0.60 $0.05 $0.03 $0.68 Average shares outstanding: Basic 185,371,033 185,371,033 185,371,033 185,371,033 Diluted (6) 189,425,285 189,425,285 189,425,285 189,425,285 (1) Depreciation and amortization for direct real estate investments only. Excludes depreciation for corporate leasehold improvements, fixed assets and other non-real estate items. (2) Includes amortization of deferred financing fees and other non-cash interest expense. (3) Includes adjustments to reflect certain realized and unrealized gains and losses on residential mortgage investments held in our portfolio as of the balance sheet date and related derivative instruments. (4) Includes all recoveries on loans during the period. (5) Adjusted to reflect the impact of adding back noncontrolling interests expense of $1.3 million to adjusted earnings due to the application of the if-converted method on non-managing member units, which are considered dilutive to adjusted earnings per share, but are antidilutive to GAAP net income per share for this period. (6) Adjusted to include average non-managing member units of 1,996,855 which are considered dilutive to adjusted earnings per share, but are antidilutive to GAAP net income per share for this period. CapitalSource Inc. Selected Financial Data (Unaudited) Three Months Ended June 30, March 31, June 30, 2008 2008 2007 Commercial Finance Segment: Performance ratios: Return on average assets 1.78% 1.74% 4.06% Return on average equity 8.83% 9.58% 21.76% Adjusted return on average assets 2.32% 4.34% 4.91% Adjusted return on average equity 11.49% 23.87% 26.31% Yield on average interest earning assets 9.75% 10.26% 12.08% Cost of funds 5.40% 5.45% 6.12% Net finance margin 5.40% 5.74% 7.12% Operating expenses as a percentage of average total assets 2.24% 2.03% 2.39% Efficiency ratio (operating expenses / net investment income and other income) 34.36% 50.79% 28.14% Core lending spread 7.05% 7.12% 6.44% Leverage ratios: Total debt to equity (as of period end) 2.98x 4.37x 4.51x Equity to total assets (as of period end) 24.79% 18.07% 17.97% Average balances ($ in thousands): Average loans $9,715,111 $9,848,101 $8,708,240 Average assets 10,376,831 10,487,426 9,262,898 Average interest earning assets 9,992,540 10,082,728 9,053,082 Average income earning assets 9,992,540 10,082,728 9,053,082 Average borrowings 8,053,850 8,366,784 7,327,650 Average equity 2,097,063 1,906,553 1,727,297 Healthcare Net Lease Segment: Performance ratios: Return on average assets 0.10% 1.76% 0.31% Return on average equity 0.28% 5.47% 0.80% Adjusted return on average assets 3.29% 5.07% 3.95% Adjusted return on average equity 9.68% 15.82% 10.18% Yield on average income earning assets 9.08% 10.41% 10.16% Cost of funds 7.16% 7.07% 7.11% Net finance margin 5.02% 6.32% 5.18% Operating expenses as a percentage of average total assets 4.23% 4.09% 4.13% Operating expenses (excluding direct real estate depreciation) as a percentage of average total assets 0.89% 0.83% 0.91% Efficiency ratio (operating expenses / net investment income and other income) 92.60% 64.26% 81.36% Efficiency ratio (operating expenses excluding direct real estate depreciation) / net investment income and other income) 19.45% 12.98% 17.95% Leverage ratios: Total debt to equity (as of period end) 1.63x 1.57x 1.54x Equity to total assets (as of period end) 34.69% 35.75% 36.33% Average balances ($ in thousands): Average assets $1,079,855 $1,096,445 $919,839 Average interest earning assets 26,652 35,296 29,937 Average income earning assets 1,095,916 1,102,592 902,906 Average borrowings 608,298 612,468 601,463 Average equity 367,297 351,756 356,522 Six Months Ended June 30, 2008 2007 Commercial Finance Segment: Performance ratios: Return on average assets 1.76% 3.89% Return on average equity 9.19% 19.96% Adjusted return on average assets 3.34% 4.80% Adjusted return on average equity 17.39% 24.61% Yield on average interest earning assets 10.01% 12.27% Cost of funds 5.42% 6.09% Net finance margin 5.57% 7.31% Operating expenses as a percentage of average total assets 2.13% 2.49% Efficiency ratio (operating expenses / net investment income and other income) 40.66% 30.35% Core lending spread 7.08% 6.48% Leverage ratios: Total debt to equity (as of period end) 2.98x 4.51x Equity to total assets (as of period end) 24.79% 17.97% Average balances ($ in thousands): Average loans $9,781,606 $8,413,903 Average assets 10,432,128 8,935,328 Average interest earning assets 10,037,634 8,731,605 Average income earning assets 10,037,634 8,731,605 Average borrowings 8,210,315 7,108,002 Average equity 2,001,808 1,742,379 Healthcare Net Lease Segment: Performance ratios: Return on average assets 0.93% 0.45% Return on average equity 2.82% 1.37% Adjusted return on average assets 4.19% 3.94% Adjusted return on average equity 12.68% 11.90% Yield on average income earning assets 9.74% 10.30% Cost of funds 7.12% 7.92% Net finance margin 5.67% 5.54% Operating expenses as a percentage of average total assets 4.16% 4.25% Operating expenses (excluding direct real estate depreciation) as a percentage of average total assets 0.86% 1.00% Efficiency ratio (operating expenses / net investment income and other income) 76.00% 78.63% Efficiency ratio (operating expenses excluding direct real estate depreciation) / net investment income and other income) 15.66% 18.55% Leverage ratios: Total debt to equity (as of period end) 1.63x 1.54x Equity to total assets (as of period end) 34.69% 36.33% Average balances ($ in thousands): Average assets $1,088,150 $878,692 Average interest earning assets 30,974 27,127 Average income earning assets 1,099,254 857,162 Average borrowings 610,384 487,628 Average equity 359,527 290,915 CapitalSource Inc. Selected Financial Data (Unaudited) Three Months Ended June 30, March 31, June 30, 2008 2008 2007 Consolidated CapitalSource Inc.: Performance ratios: Return on average assets 1.52% 0.15% 2.06% Return on average equity 8.66% 1.02% 14.66% Adjusted return on average assets 0.74% 2.53% 3.14% Adjusted return on average equity 4.20% 17.05% 22.33% Yield on average interest earning assets 8.43% 8.41% 9.51% Cost of funds 5.10% 5.14% 5.87% Net finance margin 4.23% 4.17% 4.49% Operating expenses as a percentage of average total assets 1.78% 1.51% 1.63% Operating expenses (excluding direct real estate depreciation) as a percentage of average total assets 1.56% 1.31% 1.44% Efficiency ratio (operating expenses / net investment income and other income) 35.34% 80.07% 33.36% Efficiency ratio (operating expenses excluding direct real estate depreciation) / net investment income and other income) 30.84% 69.50% 29.65% Leverage ratios: Total debt to equity (as of period end) 3.75x 5.42x 6.42x Equity to total assets (as of period end) 20.54% 14.99% 13.28% Average balances ($ in thousands): Average loans $9,715,111 $9,848,101 $8,708,240 Average assets 15,881,032 17,936,953 16,392,440 Average interest earning assets 14,066,691 16,302,258 15,028,300 Average income earning assets 15,135,956 17,369,554 15,901,269 Average borrowings 12,595,070 14,753,537 13,691,403 Average equity 2,782,676 2,664,986 2,306,554 Six Months Ended June 30, 2008 2007 Consolidated CapitalSource Inc.: Performance ratios: Return on average assets 0.79% 2.07% Return on average equity 4.92% 14.61% Adjusted return on average assets 1.69% 3.09% Adjusted return on average equity 10.48% 21.74% Yield on average interest earning assets 8.42% 9.60% Cost of funds 5.12% 5.88% Net finance margin 4.20% 4.59% Operating expenses as a percentage of average total assets 1.64% 1.68% Operating expenses (excluding direct real estate depreciation) as a percentage of average total assets 1.43% 1.50% Efficiency ratio (operating expenses / net investment income and other income) 48.61% 34.82% Efficiency ratio (operating expenses excluding direct real estate depreciation) / net investment income and other income) 42.31% 31.08% Leverage ratios: Total debt to equity (as of period end) 3.75x 6.42x Equity to total assets (as of period end) 20.54% 13.28% Average balances ($ in thousands): Average loans $9,781,606 $8,413,903 Average assets 16,908,992 15,848,296 Average interest earning assets 15,184,475 14,620,118 Average income earning assets 16,252,755 15,450,153 Average borrowings 13,674,303 13,278,448 Average equity 2,723,831 2,250,658 CapitalSource Inc. Commercial Asset Portfolio (Unaudited) ($ in thousands) June 30, 2008 March 31, 2008 Composition of portfolio by type: Senior secured loans (1) $5,475,500 52% $5,702,771 53% First mortgage loans (1) 2,720,814 26 2,858,991 27 Subordinate loans (1) 1,231,571 12 1,197,560 11 Direct real estate investments 1,007,699 10 1,016,972 9 Total commercial assets $10,435,584 100% $10,776,294 100% Composition of portfolio by business: Corporate Finance $2,783,694 27% $2,940,112 28% Healthcare and Specialty Finance 3,879,318 37 3,960,284 36 Structured Finance 3,772,572 36 3,875,898 36 Total commercial assets $10,435,584 100% $10,776,294 100% June 30, 2007 Composition of portfolio by type: Senior secured loans (1) $5,365,138 54% First mortgage loans (1) 2,864,816 29 Subordinate loans (1) 711,639 7 Direct real estate investments 1,032,838 10 Total commercial assets $9,974,431 100% Composition of portfolio by business: Corporate Finance $2,609,451 26% Healthcare and Specialty Finance 3,830,840 39 Structured Finance 3,534,140 35 Total commercial assets $9,974,431 100% (1) "Loans" include loans, loans held for sale and receivables under reverse-repurchase agreements. CapitalSource Inc. Credit Quality Data (Unaudited) June 30, March 31, December 31, 2008 2008 2007 Loans 60 or more days contractually delinquent: As a % of total Commercial Assets(1) 1.05% 0.69% 0.68% As a % of total Commercial Loans(2) 1.16% 0.77% 0.75% Loans on non-accrual (3) : As a % of total Commercial Assets 1.99% 1.62% 1.57% As a % of total Commercial Loans 2.20% 1.79% 1.73% Impaired loans(4) : As a % of total Commercial Assets 4.88% 3.67% 2.93% As a % of total Commercial Loans 5.40% 4.06% 3.23% Total (excluding assets in multiple categories): As a % of total Commercial Assets 5.14% 3.77% 3.10% As a % of total Commercial Loans 5.69% 4.17% 3.42% Allowance for Loan Loss: As a % of total Commercial Assets 1.35% 1.27% 1.28% As a % of total Commercial Loans 1.50% 1.40% 1.41% Net Charge Offs (three months annualized): As a % of total Average Commercial Assets 0.90% 0.22% 0.22% As a % of total Average Commercial Loans 1.00% 0.25% 0.25% September June 30, March 31, 30, 2007 2007 2007 Loans 60 or more days contractually delinquent: As a % of total Commercial Assets(1) 0.67% 0.97% 0.77% As a % of total Commercial Loans(2) 0.74% 1.09% 0.85% Loans on non-accrual (3) : As a % of total Commercial Assets 1.59% 1.77% 1.63% As a % of total Commercial Loans 1.76% 1.97% 1.78% Impaired loans(4) : As a % of total Commercial Assets 3.12% 3.50% 2.97% As a % of total Commercial Loans 3.46% 3.91% 3.24% Total (excluding assets in multiple categories): As a % of total Commercial Assets 3.30% 3.72% 3.16% As a % of total Commercial Loans 3.66% 4.15% 3.46% Allowance for Loan Loss: As a % of total Commercial Assets 1.05% 1.28% 1.33% As a % of total Commercial Loans 1.16% 1.43% 1.45% Net Charge Offs (three months annualized): As a % of total Average Commercial Assets 1.04% 0.57% 0.47% As a % of total Average Commercial Loans 1.15% 0.63% 0.51% December 31, September June 30, 2006 30, 2006 2006 Loans 60 or more days contractually delinquent: As a % of total Commercial Assets(1) 1.03% 0.81% 1.27% As a % of total Commercial Loans(2) 1.12% 0.84% 1.31% Loans on non-accrual (3) : As a % of total Commercial Assets 2.14% 2.31% 1.94% As a % of total Commercial Loans 2.34% 2.39% 2.01% Impaired loans(4) : As a % of total Commercial Assets 3.28% 3.50% 3.18% As a % of total Commercial Loans 3.58% 3.63% 3.28% Total (excluding assets in multiple categories): As a % of total Commercial Assets 3.76% 3.70% 3.78% As a % of total Commercial Loans 4.11% 3.83% 3.91% Allowance for Loan Loss: As a % of total Commercial Assets 1.41% 1.35% 1.36% As a % of total Commercial Loans 1.54% 1.40% 1.41% Net Charge Offs (three months annualized): As a % of total Average Commercial Assets 0.63% 1.18% 0.72% As a % of total Average Commercial Loans 0.66% 1.22% 0.74% (1) Includes commercial loans, loans held for sale, receivables under reverse-repurchase agreements and direct real estate investments. (2) Includes commercial loans, loans held for sale and receivables under reverse-repurchase agreements. (3) Includes loans with an aggregate principal balance of $58.3 million, $49.9 million, $55.5 million, $21.0 million, $31.0 million, $41.5 million, $47.0 million, $46.9 million and $49.4 million as of June 30, 2008, March 31, 2008, December 31, 2007, September 30, 2007, June 30, 2007, March 31, 2007, December 31, 2006, September 30, 2006 and June 30, 2006, respectively, that were also classified as loans 60 or more days contractually delinquent. Also includes non-accrual loans held for sale with an aggregate principal balance of $14.9 million as of June 30, 2008 and $3.0 million as of September 30, 2007 and June 30, 2007. (4) Includes loans with an aggregate principal balance of $81.7 million, $64.2 million, $55.5 million, $55.1 million, $78.7 million, $54.4 million, $47.0 million, $46.9 million and $49.4 million, as of June 30, 2008, March 31, 2008, December 31, 2007, September 30, 2007, June 30, 2007, March 31, 2007, December 31, 2006, September 30, 2006 and June 30, 2006, respectively, that were also classified as loans 60 or more days contractually delinquent, and loans with an aggregate principal balance of $192.4 million, $174.5 million, $170.5 million, $166.4 million, $173.1 million, $153.8 million, $183.5 million, $175.8 million and $143.8 million as of June 30, 2008, March 31, 2008, December 31, 2007, September 30, 2007, June 30, 2007, March 31, 2007, December 31, 2006, September 30, 2006 and June 30, 2006, respectively, that were also classified as loans on non-accrual status.

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