UPDATE 2-CapitalSource swings to profit; shares rise

* Q2 EPS $0.06 vs est loss/shr $0.10

* Says to remain profitable in 2010 and beyond

* Says cut provision for loan losses 87 pct

* Sees provisions to remain in Q2 levels in '10

* Shares up 4 pct

July 30 (Reuters) - Commercial lender CapitalSource Inc (CSE.N) swung to a quarterly profit after posting losses for more than a year, as provision for bad loans fell sharply, and said it expects to remain profitable, sending its shares up 4 percent.

Earnings growth is expected over the next two to three years, as CapitalSource Bank continues to make high yielding loans, co-Chief Executive James Pieczynski said on a conference call with analysts.

For the second quarter, provisions for bad loans fell sharply to $25.3 million from $203.8 million.

CapitalSource said it expects provisions to remain consistent with the second-quarter level for the rest of 2010.

"The current level of reserves projected are sufficient to cover all future anticipated charge-offs in the legacy portfolio," Chairman John Delaney said.

Net charge-offs, however, rose to $133 million from $119 million sequentially and the company expects charge-offs to remain elevated for the rest of 2010. By 2011, charge-offs should return to more normalized levels, Pieczynski said.

New funded loans increased to $441 million in the second quarter, the highest level since the fourth quarter of 2007, and CapitalSource Bank reduced its cost of funds to 1.37 percent, the company said.

POSTS SURPRISE PROFIT

Net income for the second quarter was $18 million, or 6 cents a share. The company posted a net loss of $212 million, or 66 cents a share, a year ago.

Analysts on average had expected the company to post a loss of 10 cents a share, excluding items, according to Thomson Reuters I/B/E/S.

Net investment income fell 5 percent to $106.6 million and total interest income fell 24 percent to $162.5 million.

Shares of the Chevy Chase, Maryland-based company were up 2 percent to $5.36 in morning trade Friday. They touched a high of $5.45 earlier in the session on the New York Stock Exchange. (Reporting by Archana Shankar in Bangalore; Editing by Prem Udayabhanu and Don Sebastian)