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CAPITALSOURCE (CSE) is a commercial lender that providers financial products to small and middle market business nationwide while providing depository products in central and southern California. [1] It segments the company's operations into CapitalSource Bank and Other Commercial Finance. CapitalSource is a specialty lender operating in the health-care finance, structured finance, and corporate finance markets. [2] Recently, earnings growth has been hampered due to declining credit quality from many of the company's borrowers, which has led to higher levels of loan charge offs. [3]

Business Growth

CapitalSource reported net losses of $109 million on $374 million in 2010 revenues, compared to net losses of $869 million on $376 million in 2009 revenues.[4] CapitalSource was able to decrease losses by growing its Loan portfolio at the Bank.[5] In addition, interest margin improved after paying back 55%, or $2.5 billion, of Parent Company debt.[6]

Trends and forces

Declining Credit Quality Leaves CapitalSource with high levels of charge offs

As a result of the economic recession beginning in 2007, the credit quality of many residential and commercial borrowers has declined substantially.[7] For lenders like CapitalSource, periods of declining asset quality have resulted in rising loan loss provision expenses. Not only does this trend result in a decline in interest-earning assets held by lenders, but higher provision expenses cut into profit margins.[8] As a result, poor credit quality has significantly hampered earnings and led to losses for many banks.[9]

Although the company owns residential mortgages, they are government-backed and/or of the highest-quality prime variety only. The majority of the company's loans are commercial, with an emphasis on health-care finance, structured finance, and corporate finance markets.[10] In addition, CapitalSource has lent to lenders considered more risky due to the specialization of their operations. While CapitalSource received significantly higher interest on these riskier loans, their credit quality began to deteriorate with the recession. In recent years, CapitalSource has reported historically high provision expenses, which has led to losses for the company.[11]

CapitalSource's specialty lending potentially could provide growth as economy stabilizes

Although banks have suffered losses in recent years due to declining credit quality, industries that CapitalSource specializes in loaning to have the potential of growing when the economy improves.[12] One of these industries is health care industry, which has grown as a result of increased government spending and aging baby boomers. The growth of this industry has the potential of resulting in loan-demand growth. Such growth would benefit CapitalSource's loan growth not only due to higher demand but also because CapitalSource's specialization in the industry could allow the company to price loans more accurately than its competitors.[13] The expected long-term growth in health care has the potential of benefiting the long-term growth of CapitalSource's loan portfolio.[14]


CapitalSource competes with commercial lenders of various asset sizes. Since a large portion of CapitalSource's loans and deposits are based in California, the company closely competes with institutions with strong West Coast operations. While interest margins have suffered across the industry as a result of declining asset quality, margins have stabilized for many companies as loan losses begin to decline.

CapitalSource competes with the following companies:[15]


  1. Reuters.com: CapitalSource Company Profile
  2. Reuters.com: CapitalSource Company Profile
  3. Reuters.com: CapitalSource Company Profile
  4. Morningstar: CSE Financials
  5. Seeking Alpha: CapitalSource's CEO Discusses Q4 2010 Results - Earnings Call Transcript
  6. Seeking Alpha: CapitalSource's CEO Discusses Q4 2010 Results - Earnings Call Transcript
  7. Seeking Alpha: CapitalSource's CEO Discusses Q4 2010 Results - Earnings Call Transcript
  8. Seeking Alpha: CapitalSource's CEO Discusses Q4 2010 Results - Earnings Call Transcript
  9. Fool.com: Something for Capital Source...
  10. Seeking Alpha: CapitalSource's CEO Discusses Q4 2010 Results - Earnings Call Transcript
  11. Fool.com: Something for Capital Source...
  12. Washington Post: J.P. Morgan is advising on offers for CapitalSource, but it's unclear if a buyer is wanted
  13. Fool.com: Something for Capital Source...
  14. Fool.com: Something for Capital Source...
  15. Yahoo! Finance: CSE Competition

1. http://www.omaha.com/index.php?u_page=1200&u_sid=10197009

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