Annual Conference for Debt & Equity Investors. September 29,

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Description
Forward Looking Statements Certain information included in this presentation and other statements or materials published or to be published by the Company are not historical facts but are forward-looking
Transcript
Forward Looking Statements Certain information included in this presentation and other statements or materials published or to be published by the Company are not historical facts but are forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new and existing products, expectations for market segment and growth, and similar matters. In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary remarks regarding important factors which, among others, could cause the Company s actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company s forward-looking statements. The risks and uncertainties that may affect the operations, performance, development, results of the Company s business, and the other matters referred to above include, but are not limited to: (i) changes in the business environment in which the Company operates, including inflation and interest rates; (ii) changes in taxes, governmental laws, and regulations; (iii) competitive product and pricing activity; (iv) difficulties of managing growth profitably; and (v) the loss of one or more members of the Company s management team. More detailed information about these factors is contained in CapitalSource s filings with the SEC, including the sections captioned Risk Factors and Business in our Form 10-K for the fiscal year ended December 31, The information herein is only relevant as of the date referenced. CapitalSource is under no obligation to (and expressly disclaims any such obligation to) update or alter its forward-looking statements, whether as a result of new information, future events or otherwise. 2 Agenda I. Overview with Revised Guidance John Delaney 10:00-11:30 Jason Fish II. Credit and Operations Overview Bryan Corsini 11:30-12:15 Don Cole III. Lunch Break 12:15-1:00 IV. Lending Group Updates 1:00-3:30 Corporate Finance Group Joe Kenary HealthCare Finance Group Dean Graham Break Structured Finance Group Michael Szwajkowski IV. Financial Updates Tom Fink 3:30-4:30 V. Wrap-Up John Delaney 4:30-5:00 VI. Cocktails 5:30 Dinner 6:30 3 Overview with Revised Guidance Roadmap For Discussion Business Overview The New Growth Trajectory Managing Growth Credit Performance Updated Guidance Business Metrics 5 Company History Formed September 2000 by John Delaney and Jason Fish Initial Capitalization of Over $500M (Largest Private Capitalization at the Time) Original Investors Still Own Approximately 60% of the Company, with Approximately 45% Held by Management and Affiliates of the Board of Directors Prior to CapitalSource John Delaney was the Founder and CEO of HealthCare Financial Partners NYSE-Listed (Ticker: HCF) Sold to Heller Financial in 1999 (46% IRR to Original IPO Investors) Jason Fish was a Partner at Farallon Capital Management Responsible for Real Estate and Distressed Credit Investing CapitalSource and HCF Met or Exceeded Street Estimates Every Quarter as Public Companies In Four Years, CapitalSource has Grown to Approximately 400 Employees, Over $3.3B in Loans at June 30, 2004 and Approximately $2.5B of Market Capitalization 6 The Business In Brief 3 Lending Groups and a Forensic Audit Firm Corporate Finance Senior Cash Flow Loans to Private Equity (LBO) Sponsored Companies Flexibility and Market Focus is a Clear Competitive Advantage Disciplined Approach to Lending at Low LTVs and Low Leverage Structured Finance Asset-Based Lending Practice Loans to Commercial Real Estate and Lender Finance Markets Sophisticated Structuring Capabilities HealthCare Finance Asset-Based Lending Practice Offering A/R and Real Estate Financing Targeting a Broad Range of Healthcare Companies Specialized Underwriting and Intense Collateral Control CapitalAnalytics Captive In-House Audit Function Independent Audit Capabilities Involvement with New Loans and Portfolio Reviews Crucial Role in Loan Approval and Loan Management Process 7 All Lending Groups Share Common Business Attributes Entrepreneurial CapitalSource Culture Value-Added Lending Products Market Leadership Positions Sustainable Competitive Advantages Common Operating Model 8 Tailored Operating Model Origination Underwriting Approval Servicing Reports to Group Head Reports to Group Head Investment Officer [43] +31 supporting professionals Loan Officer [33] +47 supporting professionals Development Officer [21] +18 Marketing staff (incl. Telemarketing) Underwriting Officer [27] 1 (CapitalAnalytics) Credit Committee [4] Loan Analyst [33] (CapitalAnalytics) Reports to Chief Credit Officer Reports to Chief Credit Officer Specially Designed to Minimize Losses and Optimize Execution Note: Staffing is as of June 30, 2004; number in brackets represents key personnel involved at each phase 1 Includes Directors of Credit and Director of Syndications 9 Our Strategy Attractive, Defensible, High Margin Niches Low The Area of Highest Risk-Adjusted Returns The CapitalSource Zone HealthCare Real Estate HealthCare Working Capital LIQUIDITY High Equipment Leasing Higher Risk Adjusted Returns Conduit Real Estate Small Structured Real Estate Large Structured Real Estate Large Sponsor Cash Flow Rediscount Small Sponsor Cash Flow Mezzanine Loans Low EXPERTISE 10 High Producing High Returns And Attractive Credit Outcomes CapitalSource s Loans are Typically Used to Fund Growth or an Acquisition High Value-Added Financings Less Price Sensitive CapitalSource s Borrowers View the Relationship as a 2-4 Year Commitment Yield of 11.4% for Six Months Ended June 30, 2004 Demonstrates Premium Pricing Capabilities Yield Includes Interest Income and Fee Income ( Core Fees and Prepayment- Related Fees) Other Income is a Significant Contributor to CapitalSource s Income Includes Diligence Deposits Forfeited, HUD Processing Fees and Other Servicing Income which are Directly Tied to Lending Activities Also Includes Equity Gains which we Expect to Realize Every Year CapitalSource s Portfolio is 95% Senior Secured Debt as of June 30, 2004 Our Credit Metrics Reflect a Strong Credit Focus 11 CapitalSource A Compelling Economic Model For Shareholders 27% 24% 21% 18% 15% 12% 9% Pretax Return on Equity CapitalSource Commercial Finance Composite BDC / REIT Composite 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 High, Stable Risk-Adjusted Returns High, Stable Return on Assets Lower Leverage & Lower Risk Higher Margin of Safety Superior Return on Equity 1 Data represent trailing four quarter results Simple Illustration of the CapitalSource Model % of Assets Effect of Leverage Total Return Yield & Other Income 12% Provision -1% Operating Expenses -2% Gross Return on Assets 9% Interest Expense -4% Return to Debt Capital 5% x 4.0 = 20% Return to Equity Capital 9% x 1.0 = 9% Long-Term Pretax Return on Equity = 29% 12 With Higher Margins Of Safety At Lower Leverage CapitalSource Commercial Finance Composite Regional Banks National Banks Net Interest Margin 9.40% 4.97% 3.95% 3.51% Provision/Average Loans 0.82% 0.86% 0.53% 0.53% Margin of Safety Ratio x 6.0x 7.9x 6.9x Debt/Tangible Equity 3.0x 5.2x 12.9x 12.9x Source: Company Filings; six months ended June 30, Margin of safety calculated as net interest margin/provision (rate) for losses 13 Superior Model For Commercial Finance Unique Credit Process Minimum Interest Rate Exposure High Customer Value Proposition Reinforces Franchise Value Best in Class Commercial Finance Firm Superior Technology Platform Correct Strategic Focus Entrepreneurial Management Culture 14 Historical Portfolio Growth $3.5 Portfolio Balance ($ Billions) $3.30 $3.0 $2.75 $2.5 $2.42 $2.0 $1.57 $1.74 $1.99 $1.5 $1.07 $1.0 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 15 Net Portfolio Growth Is Strong, But Tends To Be Lumpy $600 $500 Quarterly Net Portfolio Growth ($ Millions) $501 $430 $548 $400 $300 $311 $246 $336 $200 $166 $100 $0 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 16 Maintaining True Diversified Senior Debt Focus June 30, 2003 June 30, 2004 Senior Secured Asset Based Loans 36% Senior Secured Cash Flow Loans 30% Senior Secured Asset Based Loans 29% Senior Secured Cash Flow Loans 41% 5% 8% 26% First Mortgage Loans Mezzanine Loans 25% First Mortgage Loans Mezzanine Loans 17 Our Franchise Strength Is Growing YTD Closed Deals by Referral Source Existing Client/Sponsor 27% Sponsor 18% 10% Investment Bank 7% CS Marketing 16% Broker 22% Direct Note: YTD through August 31, We Have Increased Our Front End Resources 50 Front End Resources Jun. 30, 2003 Jun. 30, 2004 Development Officers Marketing Personnel 19 Strong And Growing Pipeline $50 Pipeline ($ Billions) $40 $42.0 $30 $23.5 $30.3 $20 $15.5 $10 $4.3 $4.6 $7.1 $9.6 $0 Dec. 31, 2002 Jun. 30, 2003 Dec. 31, 2003 Jun. 30, 2004 Screened Prospects Term Sheet Issued Note: Figures include deals reviewed and term sheets issued over the six month period ending on date shown 20 Proven Origination Capabilities Jan.-Aug. 03 Jan.-Aug. 04 % Increase Screened Prospects $33,151 $56,885 72% Term Sheet Issued $7,050 $12,199 73% Term Sheet Executed $3,212 $4,656 45% Deals Closed $1,740 $2,809 61% Deal Selectivity 1 5.2% 4.9% Source: Deal Tracker; loan commitments in $ millions 1 Deal selectivity equals deals closed divided by screened prospects 21 Key Take Away On Growth CapitalSource is Seeing More Opportunities Across All Lending Groups More Resources on the Front End More Established Brand Deeply Rooted Referral Sources Increasingly Recognized as the Go To Lender for Customized Solutions CapitalSource can Grow at a Faster Rate than Originally Forecast CapitalSource is Maintaining its Senior Debt Focus 22 We Are Managing Growth 250 Total Credit Professionals Dec. 30, 2002 Jun. 30, 2003 Dec. 31, 2003 Jun. 30, 2004 Note: Headcount is as of period end 1 Total credit professionals includes CapitalAnalytics staff, loan officers, account executives, investment officers, investment associates and investment analysts 23 Credit Related Staffing Metrics Jun. 30, 2003 Dec. 31, 2003 Jun. 30, 2004 Average New Assets Per Front End Credit Professional 1 $14.6M $14.9M $14.5M Average Total Assets Per Back End Credit Professional 2 $60.1M $59.2M $58.7M Average CapitalAnalytics Hours Per Loan Note: Assets as of period end; average employees over prior six months; new deals over prior six months; CA hours over prior six months 1 Front end credit professionals include: CapitalAnalytics staff, investment officers, investment associates and investment analysts 2 Back end credit professionals include: loan officers and account executives 24 Key Take Away On Managing Growth CapitalSource has Continued Investing in Infrastructure and Staffing to Accommodate Growth Front-End Credit Professionals Back-End Portfolio/Loan Management CapitalSource Credit Staff is Not Being Over-Burdened by Higher Growth Growth is the Result of Wider and Deeper Market Penetration NOT an Easing of Credit Standards 25 CapitalSource Compelling Credit Statistics 60 or More Days Contractual Delinquencies as a % of Loans as of Period End Loans on Non-Accrual Status Net Chargeoffs as a % of Average Loans 1 Allowance for Loan Losses as a % of Loans as of Period End YTD Jun. 30, % 0.98% 0.40% 0.75% 1 Annualized 26 CapitalSource Has Become More Selective 50% Deals by Stage as % of Screened Prospects 40% 30% 27.7% 19.6% 23.4% 22.9% 20% 10% 14.5% 9.5% 8.8% 8.4% 0% 5.1% 5.0% 5.5% 4.4% Dec. 31, 2002 Jun. 30, 2003 Dec. 31, 2003 Jun. 30, 2004 Deal Closed Term Sheet Executed Term Sheet Issued Note: Figures include deals closed, term sheets executed and term sheets issued over the six month period ending on date shown; based on commitment amount 27 Portfolio Has Performed Consistently 6.0 Average Portfolio Rating One-Time Change in Real Estate Rating Methodology Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 28 Tailored Loan Rating System How Loans are Rated The Rating Levels Step 1 Each Quarter, Loan Officers Rate All Loans Using Customized Rating Spreadsheets Level 1 Investment Grade (Based on Structure, Collateral or Credit) Step 2 Portfolio Review Specialist Reviews All New Loan Rating Spreadsheets and Tests Objective and Subjective Criteria Level 2 Very High Quality Credit in All Respects, Supported by a Combination of Strong Collateral and Cash Flow Step 3 Step 4 Step 5 Portfolio Review Specialist Submits Ratings Change Recommendations to the Chief Credit Officer Chief Credit Officer Approves the Final Ratings Allowance for Loan Loss Calculated Using Final Ratings Level 3 Level 4 Level 5 Level 6 Strong Credit or Collateral Position Acceptable Collateral or Credit Position with Enhanced Monitoring Problem Loan with a Limited Credit Risk; Actively Out-Placing the Credit Active Work Out; Expectation of Credit Loss 29 General Loan Loss Reserves Are Based On Loan Ratings Loan Type Loan Rating Reserve Factor Senior Loans: Asset Based 1 0 Asset Based 2 & 3 25 bps Asset Based 4 & 5 50 bps Mortgage Debt 1 0 Mortgage Debt 2 & 3 50 bps Mortgage Debt 4 & bps Cash Flow 1 0 Cash Flow 2 & bps Cash Flow 4 & bps Subordinate Loans (Term B or Mezzanine): Mortgage Debt 1 0 Mortgage Debt 2 & bps Mortgage Debt 4 & bps Cash Flow 1 0 Cash Flow 2 & bps Cash Flow 4 & bps Note: All 6-Rated Loans are Discounted and Specific Reserves are Established as Appropriate 30 Allowance For Loan Loss Includes General And Specific Reserves 100 Allowance as % of Ending Loan Balance (Basis Points) Q02 1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 General Reserves Specific Reserves 31 Key Take Away On Credit CapitalSource has Become More Selective Credit Statistics have Remained Very Positive, Supporting the Company s View on Reserves CapitalSource has had and will Continue to have Losses Specific Reserves Likely in Every Quarter Going Forward CapitalSource Model Includes a Prudent Level of Reserves Nothing Systemic in Losses Incurred to Date CapitalSource s High Touch Lending Style and Proactive Loan Monitoring Practices Promote Early Identification and Active Management of Potential Loss Situations 32 Updated Guidance Higher Asset Growth 12/31/04 Portfolio of Approximately $4.2B Net Loan Growth of $1.8B in 2004 and $1.5B in Full Year Diluted EPS of $ Full Year Diluted EPS of $1.42 Long-Term EPS Growth Rate ( ) of 25% 33 Details On 2005 Guidance YTD 6/30/04 FY2004 Guidance FY2005 Guidance Net Originations $884M $1.8B $1.5B Yield % 11.4% 11.1% Cost of Funds 1 2.8% 3.0% 3.7% Net Interest Margin 9.4% 9.1% 8.2% Other Income $7.3M $18.3M $21.1M General Reserves 73 bps 73 bps 77 bps Chargeoffs/Specific Reserves 2 40 bps 40 bps 40 bps Operating Expenses to Avg Assets 3.4% 3.2% 2.7% Tax Rate 38.0% 39.2% 39.0% 1 Assumes short-term interest rates consistent with the forward U.S. 1-Month LIBOR curve 2 Annualized; 2004 periods include specific reserves provided in FY2003 that were charged-off in New Growth Trajectory $2.0 $1.5 $1.0 $0.5 Annual Net Growth in Loans ($ Billions) $1.8 $1.6 $1.2 $1.5 $0.0 Prior Guidance TTM 06/ Guidance Guidance Growth Drivers Growth Sensitivities Increase in Number and Experience of Front End Staff CapitalSource Established Brand Increased Demand in Core Markets Originations will be Lumpy Competitive Environment may Change 35 Yield And Other Income Detail Components of Yield Include Interest Income Commitment Fees Collateral Management Fees Prepayment Fees Etc. All are Recurring Prepayments are Not Predictable Other Income also is a Recurring Revenue Source HUD Fees, Due Diligence Deposits Forfeited and Other Servicing Income, which are Tied to Lending Activities Equity Gains, which we Expect to See Every Year Yield on Interest Earning Assets (%) YTD 6/ Est Est. Interest and Core Fees Prepayment-Related Fees Other Income / Avg Int Earn Assets (bps) YTD 6/30/04* *Annualized Est Est. 36 Financing The Growth Of The Business Key Assumptions Total Near-Term Leverage of 4.5x Secured Leverage of Up to 4.0x Net Portfolio Growth of $1.8B in 2004 and $1.5B in 2005 Key Objectives Maintain Sufficient Credit Facility Capacity and Availability to Withstand External Capital Market Constraints Continue to Build a Capital Structure that Protects Shareholder Value by Minimizing the Risks and Minimizing the Cost of Funds Ultimately, Obtain an Investment Grade Rating to Maximize Unsecured Debt Opportunities 37 Credit Detail CapitalSource and HealthCare Financial Partners have Successfully Used the Same Credit Model for More than 10 Years The Model Works Every Deal is Reviewed by Approximately 10 Individuals 1 Dual Track Underwriting Model Same Team/Credit Committee has Approved All Loans to Date Credit Committee Approves Every Loan and All Material Modifications Proactive Loan Management Strategy Reduces Credit Losses Comprehensive and Timely Risk Rating Process CapitalSource has Become More Selective Since IPO Not Less 95% of Portfolio is Senior Secured Debt CapitalSource Forecasts Specific Reserves of 40 bps on an Annualized Basis Based on Historical Chargeoffs and Static Pool Analysis 1 Equals the average number of development officers, investment officers, investment associates, investment analysts and underwriting officers YTD through June 30, 2004 divided by the average number of deals closed per month YTD through June 30, 2004 plus credit committee members and in-house legal counsel 38 General And Specific Reserves Allowance for Loan Loss (As % of Loans in bps at Period End) YTD 6/30/04 General Reserves Est. Specific Reserves Est. Loan Loss Reserve Assumptions We will Maintain Matrix-based General Reserve Methodology Reserve Factors will be Based on Actual Experience Specific Reserves Assumed to be 40bps per Annum Charged-Off with Quarterly Lag 10bps Remain in Specific Reserve at All Times Actual Allowance Level will Fluctuate based on Amount of Specific Reserves and Timing of Chargeoffs 39 Improving Operating Efficiencies 5.0% 4.6% Operating Expenses/Avg Assets vs. Headcount % 3.6% % % 3.2% 2.7% % *Annualized YTD 6/30/04* 2004 Est Est. Op Exps/Avg Assets Headcount 100 Operating Expenses should Continue to Decline as a Percentage of Assets 40 Business Metrics Six Months Ended 6/30/ Guidance 2005 Guidance 4Q2005 Snapshot ROA 1 3.5% 3.5% 3.3% 3.3% ROE % 13.4% 16.5% 17.7% Yield 11.4% 11.4% 11.1% 11.2% Leverage (Period-End) 3.0x 3.6x 4.4x 4.4x Op. Exp. To Assets 3.4% 3.2% 2.7% 2.6% Diluted EPS $0.44 $1.02 $ Return on average assets and return on average equity are calculated on an after-tax basis 41 Credit and Operations Overview Credit Discussion Topics Underwriting Process 5 Elements Disciplined View Of Debt Risk Experienced, Focused and Specialized Professionals More (and Better) Resources in the Process Checks and Balances Allow for Controlled Growth CapitalAnalytics at the Core of the Credit Process Portfolio Management Audits and Site Visits Risk Rating Assessment Summary of Staff Qualifications 43 Element #1 Disciplined View Of Debt Risk All Loans are Either Secured by Assets, the Value of which is Known in All Market Conditions, or Secured by a Business Enterprise Value, which has Been Proven Over Time (Historical Cash Flow) and Predictable in All Market Conditions And have Been Underwritten in a Comprehensive and Focused Manner And Managed with The Most Sophisticated Collateral Control and Structural Integrity For a Zero Loss Tolerance 44 Element #2 Experienced, Focused And Specialized Professionals Underwriting Elements Industry Business Model Management Historical and Projected Performance Systems Collateral Balance Sheet Fraud Risk The Most In-Depth Credit Work Possible 45 Element #3 More (And Better) Resources In The Process CapitalAnalytics Underwriting Memoranda Compared to Lending Groups Credit Committee Memoranda Audits and Validates Historical Financial Performance Assesses Reasonableness of Projected Financial Performance Assesses Internal Control Environments Evaluates Adequacy of Information Systems Assesses Collateral and Financial Reporting Capabilities Assesses Management T
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