- The Washington Times - Monday, August 1, 2005

CapitalSource Inc. stock took a tumble last week, but analysts said the sell-off was an overreaction by investors who put too much weight on the bank’s credit quality.

The Chevy Chase financer of loans to small and midsized business reported surprisingly good earnings but said its percentage of nonperforming loans rose to 2.22 percent in the second quarter from 1.49 percent in the previous quarter.

“I believe a lot is being made of the credit quality, which has been going up,” said Craig J. Maurer, an analyst with Fulcrum Global Partners in New York. “People are making a mountain out of a molehill.”

Shares of CapitalSource plunged $2.78 Friday after Thursday’s earnings release. It fell another 8 cents yesterday to close at $19.50 on the New York Stock Exchange.

Analysts said that nonperforming loans are part of a lender’s cost of doing business.

“When you’re lending to midmarket companies, you have customers who don’t pay you. It’s natural,” according to Jason Stewart, a research analyst with Friedman, Billings, Ramsey & Co. in Arlington.

Neither Mr. Stewart nor his employer does business with or own stock in CapitalSource.

Analysts said that investors are overlooking the company’s strong earnings growth.

CapitalSource reported that net income for its second quarter ended June 30 rose 63 percent to $45.5 million (39 cents per diluted share) from $27.9 million (24 cents) a year ago. The results exceed expectations by Friedman, Billings, Ramsey & Co., which had forecast earnings of 34 cents per share.

Mr. Stewart said CapitalSource’s credit quality is likely to improve and he does not see it hurting the company in the long term.

The stock’s price is lower now than what it should be, he said.

CapitalSource’s positive earnings and strong revenue growth make it a good investment, he said.

“We don’t think those increases in nonperformers jeopardize CapitalSource’s earnings power,” Mr. Stewart said.

CapitalSource, which was founded in 2001, has 436 employees. Mr. Maurer said the company’s managers give it a strong foundation.

“They have a high-quality management team that is not going to act in a reckless way and cause losses in the portfolio,” he said.

Neither Mr. Maurer nor his employer do business with or own stock in CapitalSource.

Last week, the company reported that it plans to sell up to $2 billion in debt securities and stock. Details were not released, but analysts said the company is growing rapidly and would likely use the proceeds to pay down debt or make acquisitions.

The sale should not affect earnings, they said.

CapitalSource did not return calls for comment.

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