Goldman Sachs Small Cap Growth Conference. March 11, 2005

Transcription

1 Goldman Sachs Small Cap Growth Conference

2 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. CapitalSource is under no obligation to (and expressly disclaims any such obligation to) update or alter its forwardlooking statements, whether as a result of new information, future events or otherwise. 2

3 Who We Are National, Specialized Commercial Finance Provider Small and Mid-Sized Business Clients in Three Focused Areas: Corporate Finance HealthCare & Specialty Finance Structured Finance $4.3B of Loans to 452 Clients as of December 31, 2004 Well-Diversified by Loan Size and Type, Customer and Geography Well Positioned to be the Lender of Choice for Small and Medium-Sized Businesses that Require Customized and Sophisticated Debt Financing 3

4 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 Approx. 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, $4.3B in Loans and $3.0B of Market Capitalization, as of December 31,

5 Investment Highlights Large, Underserved Market Strategic Sector Focus Tailored Model Strong Credit Culture Credit First Approach Conservative Balance Sheet Leverage Experienced, Motivated Team Superior Growth and Returns Strong Risk-Adjusted Yields Stable, Improving Financing Spreads Scalable Platform Earnings Growth not Dependent on Volume Growth 5

6 Overview of Business

7 Large, Underserved Market Number of Companies Served by local banks CapitalSource s target market: 500,000 companies with revenues between $5MM and $250MM Underserved Specialization required Served by major banks Commodity pricing Non-commodity pricing Commodity pricing < $1 MM $1 MM $75 MM $75 MM+ Borrowing Needs 7

8 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 8 High

9 Corporate Finance $1,709 MM / 40% Of Portfolio President Joe Kenary Customers Private Equity Firms (Approx. 500 Primary Sponsors and 1,000 Secondary Sponsors) Small to Medium-Sized Sponsors are Underserved Sponsor Company Industries: - Business Services - Consumer Products & Services - Retail, Media - Value-Added Manufacturing Products Senior Secured Cash Flow Loans Term B, Second Lien and Mezzanine Loans; Limited Equity Asset-Based Revolvers Competitive Advantages Execution Creativity Flexibility Speed Expertise One-Stop Shop Reputation as Reliable Lender/Brand Note: Portfolio data as of December 31, Borrower Characteristics Strong Historical and Prospective Cash Flows Experienced Management Teams and Sponsors Limited Operating Leverage and Event Risk Leadership in Market Niches Underwriting & Structuring Cash Flow Loans Underwritten to Enterprise Value Senior Loans at 40-60% of Enterprise Value Mezzanine Loans at 60-75% of Enterprise Value Competition Core : <$25MM Borrowings (~75% of CFB Loans) - Foothill - BDC/RICS - Regional Banks Larger Deals: >$25MM Borrowings (~25% of Loans) - Commercial Banks - GE Capital - Merrill Lynch -CIT -Antares -Foothill - Hedge Funds - Abelco Finance

10 HealthCare & Specialty Finance $1,339 MM / 31% of Portfolio President Dean Graham Product Groups HealthCare Credit Group (HealthCare assetbased lending) HealthCare Real Estate Group Business Credit Services Group (general assetbased lending) Security Alarm Lending Group CapitalSource Mortgage Finance (FHA/HUD lending and advisory subsidiary) Competitive Advantages Expertise One-Stop Shop Experience Systems Brand Speed Note: Portfolio data as of December 31, Market Opportunity HealthCare is 1/6th of U.S. Economy Dominated by small and mid-sized borrowers Underserved by traditional lenders Unaffected by general economic conditions Undergoing rapid growth and change Asset-based lending expertise allows broadening to larger asset-based market Specialized Credit Skills Intense collateral review; daily borrowing base In-house reimbursement and clinical expertise Proprietary loan management capabilities Competition GE Capital Merrill Lynch HealthCare Business Credit GMAC

11 Structured Finance $1,227 MM / 29% Of Portfolio President Michael C. Szwajkowski Customers Specialty Lenders: Mortgage Companies Consumer and Commercial Lenders Real Estate Developers/Investors Products Asset-Based Lending Practice Lender Finance: Senior Asset-Based Revolvers Real Estate: Predominately First Mortgage Debt Enhanced Mezzanine Debt Market Opportunity Market Segments that Require Highly Specialized Lending Expertise Fragmented and Underserved Need for Highly Customized Solutions Specialized Credit Skills Lender Finance: Intense Collateral Analysis Real Estate: Property and Market Specific Analysis Portfolio Acquisition Experience/Expertise Competitive Advantages Sophisticated Structuring Capabilities Flexibility Speed Expertise One-Stop Shop Competition Lender Finance: Foothill, Textron, Regional Banks and Hedge Funds Real Estate: Conduits, Banks, Finance Companies and Hedge Funds Note: Portfolio data as of December 31,

12 All Lending Groups Share Common Business Attributes Entrepreneurial CapitalSource Culture Value-Added Lending Products Market Leadership Positions Sustainable Competitive Advantages Common Operating Model 12

13 Tailored Operating Model Origination Underwriting Approval Servicing Reports to Group Head Reports to Group Head Investment Officer Loan Officer Development Officer Credit Committee Underwriting Officer (CapitalAnalytics) Reports to Chief Credit Officer Loan Analyst (CapitalAnalytics) Reports to Chief Credit Officer Specially Designed to Minimize Losses and Optimize Execution 13

14 Disciplined Growth Story 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 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 Financial Model Produces Attainable, High-Growth Earnings and Profitability 14

15 Financial Data

16 Superior Financial Model CapitalSource Attributes Strong Risk-Adjusted Yields Efficient, Scalable Cost Structure Stable, Diverse Low Cost Funding Low Financial Leverage Recurring Revenues No Gain on Sale Accounting Stable, Manageable Loan Growth Targets Strong Credit Quality Produces Attainable, High- Growth Earnings and Profitability 16

17 CapitalSource A Compelling Economic Model For Shareholders 30% Pretax Return on Equity 1 25% 20% CapitalSource 15% 10% 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 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% 1 Data represent trailing four quarter results Long-Term Pretax Return on Equity = 29% 17

18 Strong And Growing Pipeline $90 $80 $70 $60 $50 $40 Pipeline ($ Billions) $53.8 $84.4 $30 $20 $10 $23.9 $7.7 $11.6 $18.1 $0 Dec. 31, 2002 Dec. 31, 2003 Dec Screened Prospects Term Sheet Issued Note: Figures include deals reviewed and term sheets issued over the twelve month period ending on date shown Source: CapitalSource DealTracker 18

19 Credit Related Staffing Metrics Dec. 31, 2003 Dec. 31, 2004 Average New Assets Per Front End Credit Professional 1 $29.4M $36.6M Average Total Assets Per Back End Credit Professional 2 $68.0M $68.2M Note: Assets as of period end; average employees over prior twelve months; new deals over prior twelve 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 19

20 Growth Since IPO Portfolio ($ Billions) $7.0 $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $2.4 $0.77 * $4.3 $1.06 $1.42 $5.8 $1.50 $1.40 $1.30 $1.20 $1.10 $1.00 $0.90 $0.80 $0.70 EPS $0.0 Dec. 31, 2003 Dec. 31, 2004 Dec. 31, 2005 ** Portfolio EPS $0.60 * Adjusted to reflect C corporation taxes at 38% for 2003 ** Guidance provided in September

21 Investment Highlights Large, Underserved Market Strategic Sector Focus Tailored Model Strong Credit Culture Credit First Approach Conservative Balance Sheet Leverage Experienced, Motivated Team Superior Growth and Returns Strong Risk-Adjusted Yields Stable, Improving Financing Spreads Scalable Platform Earnings Growth not Dependent on Volume Growth 21

22 Supplemental Information

23 Balance Sheet ($000s) FY 2003 FY 2004 Growth Cash $ 69,865 $ 206, % Restricted Cash 79, , % Loans 2,416,907 4,274,525 77% Deferred Loan Fees (59,793) (98,936) 65% Allowance for Loan Losses (18,025) (35,208) 95% Loans, net 2,339,089 4,140,381 77% Investments 39,788 44,044 11% Other Assets 38, , % Total Assets $ 2,567,091 $ 4,736,829 85% Credit Facilities $ 746,444 $ 966,961 30% Term Debt 923,208 2,189, % Unsecured Debt - 561,371 NA Total Borrowings 1,669,652 3,717, % Other Liabilities 30,307 72, % Total Liabilities 1,699,959 3,790, % Total Equity 867, ,391 9% Total Liabilities and Equity $ 2,567,091 $ 4,736,829 85% 23

24 Income Statement ($000s, except per share data) FY 2003 FY 2004 Growth Total Interest and Fee Income $ 225,765 $ 400,151 77% Interest Expense (39,956) (79,053) 98% Net Interest and Fee Income 185, ,098 73% General Reserves (8,609) (14,547) 69% Specific Reserves (2,728) (11,163) 309% Net Interest & Fee Income after Chargeoffs & Provision 174, ,388 69% Total Operating Expenses (67,807) (107,748) 59% Total Other Income 25,815 17,781-31% Pre-tax Income 132, ,421 55% Taxes (50,342) (80,570) 60% Net Income $ 82,138 $ 124,851 52% EPS (Fully Diluted) $ 0.77 $ % Note: After-tax net income for 2003 is pro forma based on a 38% effective tax rate 24

25 Financial Metrics FY 2004 FY 2004 ($ millions, except per share data) Guidance Actual Net Originations $ 1,800 $ 1,858 Yield on IEA 11.4% 11.6% Cost of Funds 3.0% 3.1% Net Interest Margin 9.1% 9.3% Other Income $ 18.3 $ 17.8 General Reserves 73 bps 70 bps Specific Provisions 40 bps 34 bps Op Exp to Assets 3.2% 3.1% ROA 3.5% 3.6% ROE 13.4% 14.2% Leverage (Period End) 3.6x 3.9x Diluted EPS $ 1.02 $

26 Credit Quality Ratios Q04 2Q04 3Q04 4Q Days Delinquencies as % of Loans 0.18% 0.00% 0.00% 0.66% 0.76% Loans on Nonaccrual Status 0.36% 0.37% 0.98% 1.16% 0.53% Net Charge-Offs as % of Avg. Loans, Annualized 0.00% 0.36% 0.44% 0.00% 0.29% Allowance for Loan Losses as % of Loans 0.75% 0.84% 0.75% 0.86% 0.82% Debt/Equity 1.93x 2.39x 3.04x 3.41x 3.93x 26

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