UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
Commission File No. 1-31753
CapitalSource Inc.
(Exact name of registrant as specified in its charter)
Delaware | 35-2206895 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) |
633 West 5th Street, 33rd Floor
Los Angeles, CA 90071
(Address of Principal Executive Offices, Including Zip Code)
(213) 443-7700
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer ¨ |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) |
Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of October 31, 2012, the number of shares of the registrants Common Stock, par value $0.01 per share, outstanding was 211,532,310.
Page | ||||||
PART I. FINANCIAL INFORMATION |
| |||||
Item 1. |
Financial Statements |
|||||
Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011 |
3 | |||||
4 | ||||||
5 | ||||||
6 | ||||||
7 | ||||||
8 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
45 | ||||
Item 3. |
80 | |||||
Item 4. |
80 | |||||
PART II. OTHER INFORMATION |
| |||||
Item 2. |
81 | |||||
Item 5. |
81 | |||||
Item 6. |
81 | |||||
82 | ||||||
83 |
2 |
Consolidated Balance Sheets
September 30, 2012 |
December 31, 2011 |
|||||||
(Unaudited) | ||||||||
($ in thousands, except share amounts) | ||||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 615,495 | $ | 458,548 | ||||
Restricted cash (including $1.9 million and $23.7 million, respectively, of cash that can only be used to settle obligations of consolidated VIEs) |
71,412 | 65,484 | ||||||
Investment securities: |
||||||||
Available-for-sale, at fair value |
1,094,070 | 1,188,002 | ||||||
Held-to-maturity, at amortized cost |
108,066 | 111,706 | ||||||
Total investment securities |
1,202,136 | 1,299,708 | ||||||
Loans held for sale |
84,883 | 193,021 | ||||||
Loans held for investment, gross |
5,948,119 | 5,758,990 | ||||||
Less deferred loan fees and discounts |
(53,907 | ) | (68,843 | ) | ||||
Total Loans held for investment (including $394.5 million and $504.5 million, respectively, of loans that can only be used to settle obligations of consolidated VIEs) |
5,894,212 | 5,690,147 | ||||||
Less allowance for loan and lease losses |
(126,630 | ) | (153,631 | ) | ||||
Total loans held for investment, net |
5,767,582 | 5,536,516 | ||||||
Interest receivable |
31,894 | 38,796 | ||||||
Other investments |
66,791 | 81,245 | ||||||
Goodwill |
173,135 | 173,135 | ||||||
Deferred tax assets, net |
370,577 | 45,445 | ||||||
Other assets |
293,396 | 408,170 | ||||||
Total assets |
$ | 8,677,301 | $ | 8,300,068 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Liabilities: |
||||||||
Deposits |
$ | 5,535,482 | $ | 5,124,995 | ||||
Term debt (including $203.3 million and $309.4 million, respectively, in obligations of consolidated VIEs for which there is no recourse to the general credit of CapitalSource Inc.) |
203,307 | 309,394 | ||||||
Other borrowings |
1,009,880 | 1,015,099 | ||||||
Other liabilities |
185,172 | 275,434 | ||||||
Total liabilities |
6,933,841 | 6,724,922 | ||||||
Commitments and contingencies (Note 13) |
||||||||
Shareholders equity: |
||||||||
Preferred stock (50,000,000 shares authorized; no shares outstanding) |
| | ||||||
Common stock ($0.01 par value, 1,200,000,000 shares authorized; 215,238,561 and 256,112,205 shares issued/outstanding, respectively) |
2,152 | 2,561 | ||||||
Additional paid-in capital |
3,217,582 | 3,487,911 | ||||||
Accumulated deficit |
(1,498,131 | ) | (1,934,732 | ) | ||||
Accumulated other comprehensive income, net |
21,857 | 19,406 | ||||||
Total shareholders equity |
1,743,460 | 1,575,146 | ||||||
Total liabilities and shareholders equity |
$ | 8,677,301 | $ | 8,300,068 |
See accompanying notes.
3 |
Consolidated Statements of Operations
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(Unaudited) | ||||||||||||||||
($ in thousands, except per share data) | ||||||||||||||||
Net interest income: |
||||||||||||||||
Interest income: |
||||||||||||||||
Loans |
$ | 105,066 | $ | 107,161 | $ | 322,437 | $ | 344,308 | ||||||||
Investment securities |
9,784 | 13,635 | 29,737 | 44,675 | ||||||||||||
Other |
384 | 680 | 1,119 | 2,070 | ||||||||||||
Total interest income |
115,234 | 121,476 | 353,293 | 391,053 | ||||||||||||
Interest expense: |
||||||||||||||||
Deposits |
12,738 | 13,422 | 38,669 | 40,203 | ||||||||||||
Borrowings |
6,775 | 21,066 | 21,866 | 86,844 | ||||||||||||
Total interest expense |
19,513 | 34,488 | 60,535 | 127,047 | ||||||||||||
Net interest income |
95,721 | 86,988 | 292,758 | 264,006 | ||||||||||||
Provision for loan and lease losses |
8,959 | 35,118 | 30,567 | 81,450 | ||||||||||||
Net interest income after provision for loan and lease losses |
86,762 | 51,870 | 262,191 | 182,556 | ||||||||||||
Non-interest income, net: |
||||||||||||||||
Loan fees |
4,174 | 3,421 | 11,899 | 11,435 | ||||||||||||
Leased equipment income |
3,299 | 901 | 9,815 | 974 | ||||||||||||
Gain on sales of investments, net |
1,856 | 19,141 | 929 | 51,381 | ||||||||||||
Loss on derivatives, net |
(978 | ) | (2,113 | ) | (649 | ) | (4,262 | ) | ||||||||
Other non-interest income, net |
946 | 11,134 | 7,303 | 15,445 | ||||||||||||
Total non-interest income |
9,297 | 32,484 | 29,297 | 74,973 | ||||||||||||
Non-interest expense: |
||||||||||||||||
Compensation and benefits |
25,523 | 31,047 | 77,347 | 90,524 | ||||||||||||
Professional fees |
2,469 | 3,097 | 9,158 | 12,985 | ||||||||||||
Occupancy expenses |
3,422 | 3,690 | 13,402 | 11,663 | ||||||||||||
FDIC fees and assessments |
1,507 | 1,375 | 4,419 | 4,706 | ||||||||||||
General depreciation and amortization |
1,330 | 1,662 | 4,536 | 5,283 | ||||||||||||
Other administrative expenses |
7,660 | 8,022 | 30,902 | 28,780 | ||||||||||||
Total operating expenses |
41,911 | 48,893 | 139,764 | 153,941 | ||||||||||||
Leased equipment depreciation |
2,307 | 668 | 6,883 | 708 | ||||||||||||
Expense of real estate owned and other foreclosed assets, net |
2,308 | 12,835 | 6,579 | 34,124 | ||||||||||||
Loss (gain) on extinguishment of debt |
| 113,679 | (8,059 | ) | 113,679 | |||||||||||
Other non-interest expense, net |
483 | 271 | (908 | ) | (1,095 | ) | ||||||||||
Total non-interest expense |
47,009 | 176,346 | 144,259 | 301,357 | ||||||||||||
Net income (loss) before income taxes |
49,050 | (91,992 | ) | 147,229 | (43,828 | ) | ||||||||||
Income tax expense (benefit) |
18,003 | (11,280 | ) | (296,305 | ) | 17,131 | ||||||||||
Net income (loss) |
$ | 31,047 | $ | (80,712 | ) | $ | 443,534 | $ | (60,959 | ) | ||||||
Basic income (loss) per share |
$ | 0.14 | $ | (0.26 | ) | $ | 1.94 | $ | (0.19 | ) | ||||||
Diluted income (loss) per share |
$ | 0.14 | $ | (0.26 | ) | $ | 1.88 | $ | (0.19 | ) | ||||||
Average shares outstanding: |
||||||||||||||||
Basic |
219,664,637 | 306,535,063 | 229,091,849 | 315,719,413 | ||||||||||||
Diluted |
226,441,294 | 306,535,063 | 235,712,522 | 315,719,413 | ||||||||||||
Dividends declared per share |
$ | 0.01 | $ | 0.01 | $ | 0.03 | $ | 0.03 |
See accompanying notes.
4 |
Consolidated Statements of Comprehensive Income
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
(Unaudited) | ||||||||||||||||
($ in thousands) | ||||||||||||||||
Net income (loss) |
$ | 31,047 | $ | (80,712 | ) | $ | 443,534 | $ | (60,959 | ) | ||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||
Unrealized gain (loss) on available-for-sale securities, net of tax |
2,315 | (4,078 | ) | 2,802 | 21,219 | |||||||||||
Unrealized (loss) gain on foreign currency translation, net of tax |
| (10,795 | ) | (351 | ) | 665 | ||||||||||
Other comprehensive income (loss) |
2,315 | (14,873 | ) | 2,451 | 21,884 | |||||||||||
Comprehensive income (loss) |
$ | 33,362 | $ | (95,585 | ) | $ | 445,985 | $ | (39,075 | ) |
See accompanying notes.
5 |
Consolidated Statement of Shareholders Equity
Common Stock |
Additional Paid-in Capital |
Accumulated Deficit |
Accumulated Other Comprehensive Income, net |
Total Shareholders Equity |
||||||||||||||||
(Unaudited) | ||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||
Total shareholders equity as of December 31, 2011 |
$ | 2,561 | $ | 3,487,911 | $ | (1,934,732 | ) | $ | 19,406 | $ | 1,575,146 | |||||||||
Net income |
| | 443,534 | | 443,534 | |||||||||||||||
Other comprehensive income |
| | | 2,451 | 2,451 | |||||||||||||||
Dividends paid |
| 106 | (6,933 | ) | | (6,827 | ) | |||||||||||||
Stock option expense |
| 1,229 | | | 1,229 | |||||||||||||||
Exercise of options |
7 | 3,188 | | | 3,195 | |||||||||||||||
Restricted stock activity |
(4 | ) | 7,370 | | | 7,366 | ||||||||||||||
Repurchase of common stock |
(412 | ) | (282,222 | ) | | | (282,634 | ) | ||||||||||||
Total shareholders equity as of September 30, 2012 |
$ | 2,152 | $ | 3,217,582 | $ | (1,498,131 | ) | $ | 21,857 | $ | 1,743,460 |
See accompanying notes.
6 |
Consolidated Statements of Cash Flows
Nine Months Ended September 30, |
||||||||
2012 | 2011 | |||||||
(Unaudited) ($ in thousands) |
||||||||
Operating activities: |
||||||||
Net income |
$ | 443,534 | $ | (60,959 | ) | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Stock option expense |
1,229 | 4,064 | ||||||
Restricted stock expense |
8,838 | 5,972 | ||||||
(Gain) loss on extinguishment of debt |
(8,059 | ) | 113,679 | |||||
Amortization of deferred loan fees and discounts |
(31,799 | ) | (53,972 | ) | ||||
Paid-in-kind interest on loans |
6,370 | 27,925 | ||||||
Provision for loan losses |
30,567 | 81,450 | ||||||
Amortization of deferred financing fees and discounts |
1,252 | 18,029 | ||||||
Depreciation and amortization |
14,032 | 1,901 | ||||||
(Benefit) provision for deferred income taxes |
(326,823 | ) | 44,762 | |||||
Non-cash gain on investments, net |
(2,133 | ) | (62,617 | ) | ||||
Non-cash loss on foreclosed assets and other property and equipment disposals |
816 | 26,448 | ||||||
Unrealized (gain) loss on derivatives and foreign currencies, net |
(950 | ) | 5,950 | |||||
Decrease in interest receivable |
6,902 | 18,127 | ||||||
Decrease in loans held for sale, net |
23,113 | 190,947 | ||||||
Decrease in other assets |
120,194 | 63,482 | ||||||
Decrease in other liabilities |
(102,153 | ) | (96,492 | ) | ||||
Cash provided by operating activities |
184,930 | 328,696 | ||||||
Investing activities: |
||||||||
(Increase) decrease in restricted cash |
(5,928 | ) | 78,448 | |||||
(Increase) decrease in loans, net |
(160,541 | ) | 125,335 | |||||
Reduction of marketable securities, available for sale, net |
75,594 | 119,013 | ||||||
Reduction of marketable securities, held to maturity, net |
4,893 | 90,556 | ||||||
Reduction of other investments, net |
13,920 | 42,699 | ||||||
Acquisition of property and equipment, net |
(5,462 | ) | (47,920 | ) | ||||
Cash (used in) provided by investing activities |
(77,524 | ) | 408,131 | |||||
Financing activities: |
||||||||
Deposits accepted, net of repayments |
410,487 | 264,558 | ||||||
Repayments on credit facilities, net |
| (68,792 | ) | |||||
Repayments and extinguishment of term debt |
(106,118 | ) | (724,080 | ) | ||||
Borrowings under (repayments of) other borrowings |
20,931 | (232,767 | ) | |||||
Repurchase of common stock |
(272,127 | ) | (291,424 | ) | ||||
Proceeds from exercise of options |
3,195 | 1,462 | ||||||
Payment of dividends |
(6,827 | ) | (9,390 | ) | ||||
Cash provided by (used in) financing activites |
49,541 | (1,060,433 | ) | |||||
Increase (decrease) in cash and cash equivalents |
156,947 | (323,606 | ) | |||||
Cash and cash equivalents as of beginning of period |
458,548 | 820,450 | ||||||
Cash and cash equivalents as of end of period |
$ | 615,495 | $ | 496,844 | ||||
Supplemental information |
||||||||
Supplemental information: |
||||||||
Noncash transactions from investing and financing activities: |
$ | 12,372 | $ | 10,911 |
See accompanying notes.
7 |
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
8 |
Note 3. Cash | and Cash Equivalents and Restricted Cash |
As of September 30, 2012 and December 31, 2011, our cash and cash equivalents and restricted cash balances were as follows:
September 30, 2012 | December 31, 2011 | |||||||||||||||
Unrestricted | Restricted(1) | Unrestricted | Restricted(1) | |||||||||||||
($ in thousands) | ||||||||||||||||
Cash and cash equivalents and restricted cash: |
||||||||||||||||
Cash and due from banks |
$ | 237,589 | $ | 29,554 | $ | 231,701 | $ | 41,808 | ||||||||
Interest-bearing deposits in other banks(2) |
157,970 | | 186,868 | 16 | ||||||||||||
Other short-term investments(3) |
219,936 | 41,858 | 39,979 | 23,660 | ||||||||||||
Total cash and cash equivalents and restricted cash |
$ | 615,495 | $ | 71,412 | $ | 458,548 | $ | 65,484 |
(1) | Restricted cash includes principal and interest collections received from loans held in securitization trusts, loan-related escrow and reserve accounts, and cash that has been pledged as collateral supporting letters of credit and derivative liabilities. |
(2) | Included in these balances for CapitalSource Bank were $155.2 million and $179.1 million in deposits at the Federal Reserve Bank (FRB) as of September 30, 2012 and December 31, 2011, respectively. |
(3) | Unrestricted cash is invested in short term investment grade commercial paper which is rated by at least two of the three major rating agencies (S&P, Moodys or Fitch) and has a rating of A1 (S&P), P1 (Moodys) or F1 (Fitch), and restricted cash is invested in a short-term money market fund which has ratings of AAAm (S&P) and Aaa (Moodys), as well as commercial paper, which is rated by at least two of the three major rating agencies (S&P, Moodys or Fitch) and has a rating of A1 (S&P), P1 (Moodys) or F1 (Fitch). |
Note 4. Loans | and Credit Quality |
As of September 30, 2012 and December 31, 2011, our outstanding loan balance was $6.0 billion and $5.9 billion, respectively. These amounts include loans held for sale and loans held for investment. As of September 30, 2012 and December 31, 2011, interest and fee receivables on these loans totaled $28.7 million and $35.0 million, respectively.
Loans held for sale are recorded at the lower of cost or fair value, less costs to sell. We determine when to sell a loan on a loan-by-loan basis and consider several factors, including the credit quality of the loan, any financing secured by the loan and any requirements related to the release of liens, the potential sale price relative to our loan valuation, our liquidity needs, and the resources necessary to ensure an adequate recovery if we continued to hold the loan. When our analysis indicates that the proper strategy is to sell a loan, we initiate the sale process and designate the loan as held for sale.
Loans held for investment are recorded at the principal amount outstanding, net of deferred loan costs or fees and any discounts received or premiums paid on purchased loans. We maintain an allowance for loan and lease losses for loans held for investment, which is calculated based on managements estimate of incurred loan and lease losses inherent in our loan and lease portfolio as of the balance sheet date. This methodology is used consistently to develop our allowance for loan and lease losses for all loans and leases in our loan portfolio.
During the three and nine months ended September 30, 2012, we transferred loans with a carrying value of $112.1 million and $213.0 million, respectively, which included $23.7 million and $55.0 million of impaired loans, respectively, from held for investment to held for sale. These transfers were based on our decision to sell these loans as part of overall portfolio management and workout strategies. We incurred $0.4 million of losses due to lower of cost or fair value adjustments at the time of transfer during the three and nine months ended September 30, 2012, which is recorded within Other Non-Interest Income on the Consolidated Statement of Operations. We reclassified $5.0 million of loans from held for sale to held for investment during the nine months ended September 30, 2012, based on our intent to retain these loans for investment. We did not make any such reclassifications during the three months ended September 30, 2012.
During the three and nine months ended September 30, 2011, we transferred loans with a carrying value of $38.7 million and $204.4 million, respectively, from held for investment to held for sale which included $4.5 million and $170.2 million of impaired loans, respectively. These transfers were based on our decision to sell these loans as part of overall portfolio management and workout strategies. We incurred $1.4 million of losses due to lower of cost or fair value adjustments at the time of transfer during the nine months ended September 30, 2011, which is recorded within Other Non-Interest Income on the Consolidated Statement of Operations. We did not incur any losses during the three months ended September 30, 2011. We reclassified $28.6 million of loans from held for sale to held for investment during the nine months ended September 30, 2011, based on our intent to retain these loans for investment. We did not make any such reclassifications during the three months ended September 30, 2011.
9 |
During the three months ended September 30, 2012, we recognized net losses on the sale of loans of $0.9 million. During the nine months ended September 30, 2012, we recognized net gains on the sale of loans of $2.1 million. During the three and nine months ended September 30, 2011, we recognized net gains on the sale of loans of $10.0 million and $14.4 million, respectively.
As of December 31, 2011, loans held for sale with an outstanding balance of $2.9 million were classified as non-accrual loans. We did not have any loans held for sale that were on non-accrual status as of September 30, 2012. We did not record any fair value write-downs on non-accrual loans held for sale during the three and nine months ended September 30, 2012 and 2011.
During the nine months ended September 30, 2012, we purchased loans held for investment with an outstanding principal balance at the time of purchase of $78.3 million. We did not purchase any loans held for investment during the three months ended September 30, 2012.
As of September 30, 2012 and December 31, 2011, CapitalSource Bank pledged loans held for investment with an unpaid principal balance of $738.7 million and $459.5 million, respectively, to the Federal Home Loan Bank of San Francisco (FHLB SF) as collateral for its financing facility.
As of September 30, 2012 and December 31, 2011, the outstanding unpaid principal balance of loans, by type of loan, was as follows:
September 30, 2012 | December 31, 2011 | |||||||||||||||
($ in thousands except percentages) | ||||||||||||||||
Commercial |
$ | 3,512,672 | 60 | % | $ | 3,491,259 | 61 | % | ||||||||
Real estate |
2,334,664 | 39 | 2,133,210 | 38 | ||||||||||||
Real estate construction |
46,876 | 1 | 65,678 | 1 | ||||||||||||
Total(1) |
$ | 5,894,212 | 100 | % | $ | 5,690,147 | 100 | % |
(1) | Includes deferred loan fees and discounts. Excludes loans held for sale carried at lower of cost or fair value. |
Non-performing loans include all loans on non-accrual status and accruing loans which are contractually past due 90 days or more as to principal or interest payments. Our remediation efforts on these loans are based upon the characteristics of each specific situation and include, among other things, one of or a combination of the following:
| request that the equity owners of the borrower inject additional capital; |
| require the borrower to provide us with additional collateral; |
| request additional guaranties or letters of credit; |
| request the borrower to improve cash flow by taking actions such as selling non-strategic assets or reducing operating expenses; |
| modify the terms of the loan, including the deferral of principal or interest payments, where we will appropriately classify the modification as a TDR; |
| initiate foreclosure proceedings on the collateral; or |
| sell the loan in certain cases where there is an interested third-party buyer. |
As of September 30, 2012 and December 31, 2011, the carrying value of loans by class, separated by performing and non-performing categories, was as follows:
September 30, 2012 | December 31, 2011 | |||||||||||||||||||||||
Class | Performing | Non-Performing | Total | Performing | Non-Performing | Total | ||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
Asset-based |
$ | 1,320,783 | $ | 48,616 | $ | 1,369,399 | $ | 1,238,807 | $ | 35,621 | $ | 1,274,428 | ||||||||||||
Cash flow |
1,881,909 | 68,326 | 1,950,235 | 1,833,103 | 110,280 | 1,943,383 | ||||||||||||||||||
Healthcare asset-based |
183,836 | | 183,836 | 268,604 | 822 | 269,426 | ||||||||||||||||||
Healthcare real estate |
514,112 | 17,001 | 531,113 | 561,882 | 23,600 | 585,482 | ||||||||||||||||||
Multifamily |
864,693 | 2,014 | 866,707 | 852,766 | 1,703 | 854,469 | ||||||||||||||||||
Real estate |
754,725 | 14,587 | 769,312 | 506,985 | 93,266 | 600,251 | ||||||||||||||||||
Small business |
215,367 | 8,243 | 223,610 | 152,206 | 10,502 | 162,708 | ||||||||||||||||||
Total(1) |
$ | 5,735,425 | $ | 158,787 | $ | 5,894,212 | $ | 5,414,353 | $ | 275,794 | $ | 5,690,147 |
(1) | Includes deferred loan fees and discounts. Excludes loans held for sale carried at lower of cost or fair value. |
10 |
11 |
As of September 30, 2012 and December 31, 2011, the carrying value of each class of loans by internal risk rating, was as follows:
Internal Risk Rating | ||||||||||||||||||||
Class | Pass | Special Mention |
Substandard | Doubtful | Total | |||||||||||||||
($ in thousands) | ||||||||||||||||||||
As of September 30, 2012: |
||||||||||||||||||||
Asset-based |
$ | 1,254,320 | $ | 34,901 | $ | 45,710 | $ | 34,468 | $ | 1,369,399 | ||||||||||
Cash flow |
1,654,652 | 41,877 | 210,793 | 42,913 | 1,950,235 | |||||||||||||||
Healthcare asset-based |
113,939 | 48,487 | 21,410 | | 183,836 | |||||||||||||||
Healthcare real estate |
450,558 | 47,515 | 33,040 | | 531,113 | |||||||||||||||
Multifamily |
843,556 | 20,547 | 2,604 | | 866,707 | |||||||||||||||
Real estate |
731,051 | 12,407 | 25,854 | | 769,312 | |||||||||||||||
Small business |
209,176 | 5,522 | 7,416 | 1,496 | 223,610 | |||||||||||||||
Total(1) |
$ | 5,257,252 | $ | 211,256 | $ | 346,827 | $ | 78,877 | $ | 5,894,212 | ||||||||||
As of December 31, 2011: |
||||||||||||||||||||
Asset-based |
$ | 953,406 | $ | 180,588 | $ | 132,848 | $ | 7,586 | $ | 1,274,428 | ||||||||||
Cash flow |
1,602,838 | 27,018 | 228,502 | 85,025 | 1,943,383 | |||||||||||||||
Healthcare asset-based |
177,996 | 75,980 | 15,397 | 53 | 269,426 | |||||||||||||||
Healthcare real estate |
489,099 | 72,783 | 23,600 | | 585,482 | |||||||||||||||
Multifamily |
849,251 | 3,516 | 1,702 | | 854,469 | |||||||||||||||
Real estate |
428,750 | 42,634 | 128,867 | | 600,251 | |||||||||||||||
Small business |
143,709 | 8,869 | 1,470 | 8,660 | 162,708 | |||||||||||||||
Total(1) |
$ | 4,645,049 | $ | 411,388 | $ | 532,386 | $ | 101,324 | $ | 5,690,147 |
(1) | Includes deferred loan fees and discounts. Excludes loans held for sale carried at lower of cost or fair value. |
Non-Accrual and Past Due Loans
We place a loan on non-accrual status when there is substantial doubt about the borrowers ability to service its debt and other obligations or if the loan is 90 or more days past due and is not well-secured and in the process of collection. When a loan is placed on non-accrual status, accrued and unpaid interest is reversed and the recognition of interest and fee income on that loan is discontinued until factors no longer indicate collection is doubtful and the loan has been brought current. Payments received on non-accrual loans are generally first applied to principal. A loan may be returned to accrual status when its interest or principal is current, repayment of the remaining contractual principal and interest is expected or when the loan otherwise becomes well-secured and is in the process of collection. Cash payments received from the client and applied to the principal balance of the loan while the loan was on non-accrual status are not reversed if a loan is returned to accrual status.
If our non-accrual loans had performed in accordance with their original terms, interest income on the outstanding legal balance of these loans would have been $21.2 million and $71.5 million higher for the three and nine months ended September 30, 2012, respectively, and $21.3 million and $83.0 million higher for the three and nine months ended September 30, 2011, respectively.
As of September 30, 2012 and December 31, 2011, the carrying value of non-accrual loans by class was as follows:
September 30, 2012 | December 31, 2011 | |||||||
($ in thousands) | ||||||||
Asset-based |
$ | 48,616 | $ | 35,621 | ||||
Cash flow |
68,326 | 110,280 | ||||||
Healthcare asset-based |
| 822 | ||||||
Healthcare real estate |
17,001 | 23,600 | ||||||
Multifamily |
2,014 | 1,703 | ||||||
Real estate |
14,587 | 87,663 | ||||||
Small business |
8,243 | 10,502 | ||||||
Total(1) |
$ | 158,787 | $ | 270,191 |
(1) | Includes deferred loan fees and discounts. Excludes loans held for sale carried at lower of cost or fair value. |
12 |
As of September 30, 2012 and December 31, 2011, the delinquency status of loans by class was as follows:
30-89 Days Past Due |
Greater than 90 Days Past Due |
Total Past Due |
Current | Total Loans | Greater than 90 Days Past Due and Accruing |
|||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
As of September 30, 2012: |
||||||||||||||||||||||||
Asset-based |
$ | 29,785 | $ | 438 | $ | 30,223 | $ | 1,339,176 | $ | 1,369,399 | $ | | ||||||||||||
Cash flow |
312 | 5,217 | 5,529 | 1,944,706 | 1,950,235 | | ||||||||||||||||||
Healthcare asset-based |
| | | 183,836 | 183,836 | | ||||||||||||||||||
Healthcare real estate |
| 17,001 | 17,001 | 514,112 | 531,113 | | ||||||||||||||||||
Multifamily |
| 1,021 | 1,021 | 865,686 | 866,707 | | ||||||||||||||||||
Real estate |
| 14,351 | 14,351 | 754,961 | 769,312 | | ||||||||||||||||||
Small business |
214 | 5,123 | 5,337 | 218,273 | 223,610 | | ||||||||||||||||||
Total(1) |
$ | 30,311 | $ | 43,151 | $ | 73,462 | $ | 5,820,750 | $ | 5,894,212 | $ | | ||||||||||||
As of December 31, 2011: |
||||||||||||||||||||||||
Asset-based |
$ | 2,611 | $ | 11,063 | $ | 13,674 | $ | 1,260,754 | $ | 1,274,428 | $ | | ||||||||||||
Cash flow |
218 | 9,701 | 9,919 | 1,933,464 | 1,943,383 | | ||||||||||||||||||
Healthcare asset-based |
| | | 269,426 | 269,426 | | ||||||||||||||||||
Healthcare real estate |
| 17,951 | 17,951 | 567,531 | 585,482 | | ||||||||||||||||||
Multifamily |
1,565 | 188 | 1,753 | 852,716 | 854,469 | | ||||||||||||||||||
Real estate |
5,762 | 44,049 | 49,811 | 550,440 | 600,251 | 5,603 | ||||||||||||||||||
Small business |
2,213 | 9,182 | 11,395 | 151,313 | 162,708 | | ||||||||||||||||||
Total(1) |
$ | 12,369 | $ | 92,134 | $ | 104,503 | $ | 5,585,644 | $ | 5,690,147 | $ | 5,603 |
(1) | Includes deferred loan fees and discounts. Excludes loans held for sale carried at lower of cost or fair value. |
Impaired Loans
We consider a loan to be impaired when, based on current information, we determine that it is probable that we will be unable to collect all amounts due in accordance with the contractual terms of the original loan agreement. In this regard, impaired loans include loans for which we expect to encounter a significant delay in the collection of and/or a shortfall in the amount of contractual payments due to us.
Assessing the likelihood that a loan will not be paid according to its contractual terms involves the consideration of all relevant facts and circumstances and requires a significant amount of judgment. For such purposes, factors that are considered include:
| the current performance of the client; |
| the current economic environment and financial capacity of the client to preclude a default; |
| the willingness of the client to provide the support necessary to preclude a default (including the potential for successful resolution of a potential problem through modification of terms); and |
| the clients equity position in, and the value of, the underlying collateral, if applicable, based on our best estimate of the fair value of the collateral. |
In assessing the adequacy of available evidence, we consider whether the receipt of payments is dependent on the fiscal health of the client or the sale, refinancing or foreclosure of the loan.
We continue to recognize interest income on loans that have been identified as impaired but that have not been placed on non-accrual status.
13 |
As of September 30, 2012 and December 31, 2011, information pertaining to our impaired loans was as follows:
September 30, 2012 | December 31, 2011 | |||||||||||||||||||||||
Carrying Value(1) |
Legal Principal Balance(2) |
Related Allowance |
Carrying Value(1) |
Legal Principal Balance(2) |
Related Allowance |
|||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||
Asset-based |
$ | 59,814 | $ | 102,099 | $ | | $ | 55,445 | $ | 89,519 | $ | | ||||||||||||
Cash flow |
56,057 | 124,576 | | 80,453 | 143,131 | | ||||||||||||||||||
Healthcare asset-based |
| 12,011 | | 3,937 | 15,133 | | ||||||||||||||||||
Healthcare real estate |
17,001 | 21,183 | | 23,600 | 28,961 | | ||||||||||||||||||
Multifamily |
2,014 | 2,134 | | 1,703 | 2,988 | | ||||||||||||||||||
Real estate |
19,516 | 96,891 | | 123,766 | 226,359 | | ||||||||||||||||||
Small business |
9,414 | 16,416 | | 14,679 | 20,938 | | ||||||||||||||||||
Total |
163,816 | 375,310 | | 303,583 | 527,029 | | ||||||||||||||||||
With allowance recorded: |
||||||||||||||||||||||||
Asset-based |
10,729 | 10,921 | (4,017 | ) | 7,472 | 9,847 | (2,030 | ) | ||||||||||||||||
Cash flow |
91,546 | 104,667 | (15,796 | ) | 105,740 | 117,766 | (24,418 | ) | ||||||||||||||||
Total |
102,275 | 115,588 | (19,813 | ) | 113,212 | 127,613 | (26,448 | ) | ||||||||||||||||
Total impaired loans |
$ | 266,091 | $ | 490,898 | $ | (19,813 | ) | $ | 416,795 | $ | 654,642 | $ | (26,448 | ) |
(1) | Carrying value of impaired loans before applying specific reserves. Balances are net of deferred loan fees and discounts. Excludes loans held for sale. |
(2) | Represents the contractual amounts owed to us by borrowers. The difference between the carrying value and the contractual amounts owed relates to the previous recognition of charge offs and are net of deferred loan fees and discounts. |
14 |
Average balances and interest income recognized on impaired loans, by loan class, for the three and nine months ended September 30, 2012 and 2011 were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||||||||||
Average Balance |
Interest Income Recognized(1) |
Average Balance |
Interest Income Recognized(1) |
Average Balance |
Interest Income Recognized(1) |
Average Balance |
Interest Income Recognized(1) |
|||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||
No allowance recorded: |
||||||||||||||||||||||||||||||||
Asset-based |
$ | 85,203 | $ | 1,028 | $ | 64,154 | $ | 672 | $ | 70,495 | $ | 2,549 | $ | 71,759 | $ | 2,064 | ||||||||||||||||
Cash flow |
72,361 | 834 | 111,406 | 2,247 | 71,747 | 2,871 | 117,493 | 5,968 | ||||||||||||||||||||||||
Healthcare asset-based |
| 78 | 1,380 | | 1,342 | 233 | 1,166 | 101 | ||||||||||||||||||||||||
Healthcare real estate |
23,937 | | 27,194 | | 26,252 | | 22,550 | 165 | ||||||||||||||||||||||||
Multifamily |
1,595 | 17 | 2,510 | | 1,268 | 17 | 7,012 | | ||||||||||||||||||||||||
Real estate |
31,037 | 478 | 102,895 | 183 | 66,391 | 3,461 | 204,302 | 3,104 | ||||||||||||||||||||||||
Small business |
10,129 | | 8,998 | | 12,883 | | 9,673 | | ||||||||||||||||||||||||
Total |
224,262 | 2,435 | 318,537 | 3,102 | 250,378 | 9,131 | 433,955 | 11,402 | ||||||||||||||||||||||||
With allowance recorded: |
||||||||||||||||||||||||||||||||
Asset-based |
7,932 | | 39,038 | | 8,440 | 74 | 54,564 | | ||||||||||||||||||||||||
Cash flow |
86,207 | 1,030 | 77,553 | 824 | 100,313 | 2,422 | 119,464 | 2,487 | ||||||||||||||||||||||||
Healthcare asset-based |
| | 363 | | | | 1,023 | | ||||||||||||||||||||||||
Healthcare real estate |
| | | | 785 | | 6,507 | | ||||||||||||||||||||||||
Multifamily |
| | 154 | | | | 538 | | ||||||||||||||||||||||||
Real estate |
| | 22,261 | | | | 38,753 | | ||||||||||||||||||||||||
Small business |
| | 1,521 | | | | 739 | | ||||||||||||||||||||||||
Total |
94,139 | 1,030 | 140,890 | 824 | 109,538 | 2,496 | 221,588 | 2,487 | ||||||||||||||||||||||||
Total impaired loans |
$ | 318,401 | $ | 3,465 | $ | 459,427 | $ | 3,926 | $ | 359,916 | $ | 11,627 | $ | 655,543 | $ | 13,889 |
(1) | We recognized $0.1 million of cash basis interest income on impaired loans during the nine months ended September 30, 2011. We did not recognize any cash basis interest income on impaired loans during the three and nine months ended September 30, 2012 or the three months ended September 30, 2011. |
As of September 30, 2012 and December 31, 2011, the carrying value of impaired loans with no related allowance recorded was $163.8 million and $303.6 million, respectively. Of these amounts, $50.5 million and $136.3 million, respectively, related to loans that were charged off to their carrying values. These charge offs were primarily the result of impairment measurements of collateral dependent loans for which ultimate collection depends solely on the sale of the collateral. The remaining $113.3 million and $167.3 million related to loans that had no recorded charge offs or specific reserves as of September 30, 2012 and December 31, 2011, respectively, based on our estimate that we ultimately will collect all principal and interest amounts due.
Allowance for Loan and Lease Losses
Our allowance for loan and lease losses represents managements estimate of incurred loan and lease losses inherent in our loan and lease portfolio as of the balance sheet date. The estimation of the allowance for loan and lease losses is based on a variety of factors, including past loan and lease loss experience, the current credit profile and financial position of our borrowers, adverse situations that have occurred that may affect the borrowers ability to repay, the estimated value of underlying collateral and general economic conditions. Provisions for loan and lease losses are recognized when available information indicates that it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated.
We perform quarterly and systematic detailed reviews of our loan portfolio to identify credit risks and to assess the overall collectability of the portfolio. The allowance on certain pools of loans with similar characteristics is estimated using reserve factors derived from historical loss rates.
15 |
Each loan is assigned an internal risk rating that is based on defined credit review standards. While rating criteria vary by product, each loan rating focuses on: the clients financial performance and financial standing, the clients ability to repay the loan, and the adequacy of the collateral securing the loan. Subsequent to loan origination, risk ratings are monitored and reassessed on an ongoing basis. If necessary, risk ratings are adjusted to reflect changes in the clients financial condition, cash flow or financial position. We use risk rating aggregations to measure credit risk within the loan portfolio. In addition to risk ratings, we consider the market trend of collateral values and loan concentrations by client industries and real estate property types (where applicable).
These risk ratings, analysis of historical loss experience (updated quarterly), current economic conditions, industry performance trends, and any other pertinent information, including individual valuations on impaired loans are all considered when estimating the allowance for loan and lease losses.
If the recorded investment in an impaired loan exceeds the present value of payments expected to be received, the fair value of the collateral and/or the loans observable market price, a specific allowance is established as a component of the allowance for loan and lease losses.
When available information confirms that specific loans or portions thereof are uncollectible, these amounts are charged off against the allowance for loan and lease losses. To the extent we later collect from the original borrower amounts previously charged off, we will recognize a recovery through the allowance for loan and lease losses for the amount received.
We also consider whether losses may have been incurred in connection with unfunded commitments to lend. In making this assessment, we exclude from consideration those commitments for which funding is subject to our approval based on the adequacy of underlying collateral that is required to be presented by a borrower or other terms and conditions.
Activity in the allowance for loan and lease losses related to our loans held for investment for the three and nine months ended September 30, 2012 and 2011 was as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
($ in thousands) | ||||||||||||||||
Allowance for loan and lease losses at beginning of period |
$ | 133,359 | $ | 199,138 | $ | 153,631 | $ | 329,122 | ||||||||
Charge offs |
(23,090 | ) | (27,314 | ) | (69,032 | ) | (207,244 | ) | ||||||||
Recoveries |
7,590 | 1,478 | 12,911 | 17,454 | ||||||||||||
Net charge offs |
(15,500 | ) | (25,836 | ) | (56,121 | ) | (189,790 | ) | ||||||||
Charge offs upon transfer to held for sale |
(188 | ) | (68 | ) | (1,447 | ) | (12,430 | ) | ||||||||
Provision for loan and lease losses |
8,959 | 35,118 | 30,567 | 81,450 | ||||||||||||
Allowance for loan and lease losses at end of period |
126,630 | 208,352 | 126,630 | 208,352 | ||||||||||||
Allowance for credit losses on unfunded lending commitments at beginning of period(1) |
3,486 | 1,895 | 4,877 | 3,261 | ||||||||||||
Provision (release) for unfunded lending commitments |
483 | 270 | (908 | ) | (1,096 | ) | ||||||||||
Allowance for credit losses on unfunded lending commitments at end of period(1) |
3,969 | 2,165 | 3,969 | 2,165 | ||||||||||||
Total allowance for loan, lease and unfunded lending commitments |
$ | 130,599 | $ | 210,517 | $ | 130,599 | $ | 210,517 |
(1) | Represents additional credit loss reserves for unfunded lending commitments and letters of credit recorded in Other Liabilities on the Consolidated Balance Sheet. |
16 |
As of September 30, 2012 and December 31, 2011, the balances of the allowance for loan and lease losses and the carrying value of loans held for investment disaggregated by impairment methodology were as follows:
September 30, 2012 | December 31, 2011 | |||||||||||||||
Loans(1) | Allowance for Loan and Lease Losses |
Loans(1) | Allowance for Loan and Lease Losses |
|||||||||||||
($ in thousands) | ||||||||||||||||
Individually evaluated for impairment |
$ | 261,668 | $ | (19,813 | ) | $ | 409,902 | $ | (26,448 | ) | ||||||
Collectively evaluated for impairment |
5,628,122 | (106,817 | ) | 5,273,352 | (127,183 | ) | ||||||||||
Acquired loans with deteriorated credit quality |
4,422 | | 6,893 | | ||||||||||||
Total |
$ | 5,894,212 | $ | (126,630 | ) | $ | 5,690,147 | $ | (153,631 | ) |
(1) | Includes deferred loan fees and discounts. Excludes loans held for sale carried at lower of cost or fair value. |
Troubled Debt Restructurings
The types of concessions that are assessed to determine if modifications to our loans should be classified as troubled debt restructurings (TDRs) include, but are not limited to, interest rate and/or fee reductions, maturity extensions, payment deferrals, forgiveness of loan principal, interest, and/or fees, or multiple concessions comprised of a combination of some or all of these items. We also classify discounted loan payoffs and loan foreclosures as TDRs.
During the three and nine months ended September 30, 2012, the aggregate carrying value of loans involved in TDRs were $72.8 million and $164.5 million, respectively, as of their respective restructuring dates. During the three and nine months ended September 30, 2011, the aggregate carrying values of loans involved in a TDR were $47.1 million and $270.6 million, respectively, as of their respective restructuring dates. Aggregate carrying value includes principal, deferred fees and accrued interest. Loans involved in TDRs are classified as impaired upon closing on the TDR. Generally, a loan that has been involved in a TDR is no longer classified as impaired one year subsequent to the restructuring, assuming the loan performs under the restructured terms and the restructured terms are commensurate with current market terms. In most cases, the restructured terms of loans involved in TDRs are not commensurate with current market terms.
As loans involved in TDRs are deemed to be impaired, such impaired loans, including those that subsequently experienced defaults, are individually evaluated in accordance with our allowance for loan and lease losses methodology under the same guidelines as non-TDR loans that are classified as impaired. Our evaluation of whether collection of interest and principal is reasonably assured is based on the facts and circumstances of each individual client and our assessment of the clients ability and intent to repay in accordance with the revised loan terms. We generally consider such factors as historical operating performance and payment history of the client, indications of support by sponsors and other interest holders, the terms of the TDR, the value of any collateral securing the loan and projections of future performance of the client as part of this evaluation.
The accrual status for loans involved in a TDR is assessed as part of the evaluation mentioned above. For a loan that accrues interest immediately after that loan is restructured in a TDR, we generally do not charge off a portion of the loan as part of the restructuring. If a portion of a loan has been charged off, we will not accrue interest on the remaining portion of the loan if the charged off portion is still contractually due from the client. However, if the charged off portion of the loan is legally forgiven through concessions to the client, then the restructured loan may be placed on accrual status if the remaining contractual amounts due on the loan are reasonably assured of collection. In addition, for certain TDRs, especially those involving a commercial real estate loan, we may split the loan into an A note and a B note, placing the performing A note on accrual status and charging off the B note. For loans involved in a TDR that have been classified as non-accrual, the borrower is required to demonstrate sustained payment performance for a minimum of six months to return to accrual status.
17 |
The aggregate carrying values of loans that had been restructured in TDRs as of September 30, 2012 and December 31, 2011 were as follows:
September 30, 2012 | December 31, 2011 | |||||||
($ in thousands) | ||||||||
Non-accrual |
$ | 89,149 | $ | 130,389 | ||||
Accruing |
129,077 | 178,614 | ||||||
Total |
$ | 218,226 | $ | 309,003 |
The specific reserves related to these loans were $8.1 million and $7.3 million as of September 30, 2012 and December 31, 2011, respectively. As of September 30, 2012 and December 31, 2011, we had unfunded commitments related to these restructured loans of $46.8 million and $103.1 million, respectively.
The following table rolls forward the balance of loans modified in TDRs for the three and nine months ended September 30, 2012 and 2011:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
($ in thousands) | ||||||||||||||||
Beginning balance of TDRs |
$ | 246,209 | $ | 454,351 | $ | 309,003 | $ | 555,113 | ||||||||
New TDRs |
39,102 | 22,516 | 61,363 | 117,796 | ||||||||||||
Draws and pay downs on existing TDRs, net |
(36,606 | ) | (22,782 | ) | (74,378 | ) | (102,032 | ) | ||||||||
Loan sales and payoffs |
(24,317 | ) | (123,738 | ) | (50,448 | ) | (205,987 | ) | ||||||||
Charge offs post modification |
(6,162 | ) | (4,580 | ) | (27,314 | ) | (39,122 | ) | ||||||||
Ending balance of TDRs |
$ | 218,226 | $ | 325,767 | $ | 218,226 | $ | 325,768 |
18 |
The number and aggregate carrying values of loans involved in TDRs that occurred during the three and nine months ended September 30, 2012 were as follows:
Three Months Ended September 30, 2012 | Nine Months Ended September 30, 2012 | |||||||||||||||||||||||
Number of Loans |
Carrying Value Prior to TDR |
Carrying Value Subsequent to TDR |
Number of Loans |
Carrying Value Prior to TDR |
Carrying Value Subsequent to TDR |
|||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
Asset-based: |
||||||||||||||||||||||||
Maturity extension |
| $ | | $ | | 1 | $ | 350 | $ | 350 | ||||||||||||||
Discounted payoffs |
2 | 1,630 | | 3 | 1,818 | | ||||||||||||||||||
Foreclosures |
| | | 1 | 2,000 | | ||||||||||||||||||
Multiple concessions |
32 | 31,540 | 22,638 | 34 | 34,913 | 25,339 | ||||||||||||||||||
34 | 33,170 | 22,638 | 39 | 39,081 | 25,689 | |||||||||||||||||||
Cash flow: |
||||||||||||||||||||||||
Maturity extension |
| | | 2 | 3,886 | 3,886 | ||||||||||||||||||
Payment deferral |
1 | 736 | 736 | 1 | 736 | 736 | ||||||||||||||||||
Multiple concessions |
1 | 30,148 | 18,293 | 9 | 57,247 | 45,392 | ||||||||||||||||||
2 | 30,884 | 19,029 | 12 | 61,869 | 50,014 | |||||||||||||||||||
Healthcare real estate: |
||||||||||||||||||||||||
Discounted payoffs |
2 | 6,963 | | 2 | 6,963 | | ||||||||||||||||||
2 | 6,963 | | 2 | 6,963 | | |||||||||||||||||||
Multifamily: |
||||||||||||||||||||||||
Foreclosures |
| | | 2 | 1,040 | | ||||||||||||||||||
| | | 2 | 1,040 | | |||||||||||||||||||
Real estate: |
||||||||||||||||||||||||
Maturity extension |
| | | 2 | 48,709 | 48,709 | ||||||||||||||||||
Discounted payoffs |
| | | 1 | 4,246 | | ||||||||||||||||||
| | | 3 | 52,955 | 48,709 | |||||||||||||||||||
Small business: |
||||||||||||||||||||||||
Payment deferral |
1 | 558 | 558 | 1 | 558 | 558 | ||||||||||||||||||
Discounted payoffs |
1 | 252 | | 2 | 849 | | ||||||||||||||||||
Foreclosures |
3 | 969 | | 4 | 1,208 | | ||||||||||||||||||
5 | 1,779 | 558 | 7 | 2,615 | 558 | |||||||||||||||||||
Total(1) |
43 | $ | 72,796 | $ | 42,225 | 65 | $ | 164,523 | $ | 124,970 |
(1) | Includes deferred loan fees and discounts. |
19 |
A summary of concessions granted by loan type, including the accrual status of the loans as of September 30, 2012 and December 31, 2011 was as follows:
September 30, 2012 | December 31, 2011 | |||||||||||||||||||||||
Non-accrual | Accrual | Total | Non-accrual | Accrual | Total | |||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
Commercial |
||||||||||||||||||||||||
Maturity extension |
$ | 20,768 | $ | 58,505 | $ | 79,273 | $ | 24,208 | $ | 72,174 | $ | 96,382 | ||||||||||||
Payment deferral |
248 | | 248 | 252 | 8,335 | 8,587 | ||||||||||||||||||
Multiple concessions |
55,916 | 65,502 | 121,418 | 37,766 | 26,718 | 64,484 | ||||||||||||||||||
76,932 | 124,007 | 200,939 | 62,226 | 107,227 | 169,453 | |||||||||||||||||||
Real estate |
||||||||||||||||||||||||
Interest rate and fee reduction |
| | | 188 | | 188 | ||||||||||||||||||
Maturity extension |
62 | | 62 | 1,023 | 41,213 | 42,236 | ||||||||||||||||||
Payment deferral |
639 | | 639 | 47,849 | | 47,849 | ||||||||||||||||||
Multiple concessions |
| 5,070 | 5,070 | 861 | 146 | 1,007 | ||||||||||||||||||
701 | 5,070 | 5,771 | 49,921 | 41,359 | 91,280 | |||||||||||||||||||
Real estate construction |
||||||||||||||||||||||||
Maturity extension |
11,279 | | 11,279 | 18,242 | | 18,242 | ||||||||||||||||||
Multiple concessions |
237 | | 237 | | 30,028 | 30,028 | ||||||||||||||||||
11,516 | | 11,516 | 18,242 | 30,028 | 48,270 | |||||||||||||||||||
Total |
$ | 89,149 | $ | 129,077 | $ | 218,226 | $ | 130,389 | $ | 178,614 | $ | 309,003 |
We have experienced losses incurred on some TDRs subsequent to their initial restructuring. These losses include both additional specific reserves and charge offs on the restructured loans. The majority of such losses has been incurred on our commercial loans and is primarily due to the borrowers failure to consistently meet their financial forecasts that formed the bases for our restructured loans. Examples of circumstances that resulted in the borrowers not being able to meet their forecasts included acquisitions of other businesses that did not have the expected positive impact on financial results, significant delays in launching products and services, and continued deterioration in the pricing estimates of businesses and product lines that the borrower expected to sell to generate proceeds to repay the loan.
20 |
Losses incurred on TDRs since their initial restructuring by concession and loan type for the three and nine months ended September 30, 2012 and 2011 were as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
($ in thousands) | ||||||||||||||||
Commercial |
||||||||||||||||
Interest rate and fee reduction |
$ | | $ | | $ | | $ | 18,728 | ||||||||
Maturity extension |
325 | 733 | 4,174 | 9,444 | ||||||||||||
Payment deferral |
| 2,230 | 4 | 9,606 | ||||||||||||
Multiple concessions |
7,911 | 214 | 14,633 | 33,051 | ||||||||||||
8,236 | 3,177 | 18,811 | 70,829 | |||||||||||||
Real estate |
||||||||||||||||
Interest rate and fee reduction |
| | | 9 | ||||||||||||
Maturity extension |
| 29 | 950 | 428 | ||||||||||||
Payment deferral |
| | | 11,162 | ||||||||||||
Multiple concessions |
| | 23 | | ||||||||||||
| 29 | 973 | 11,599 | |||||||||||||
Real estate construction |
||||||||||||||||
Maturity extension |
| 4,541 | 4,709 | 19,159 | ||||||||||||
Multiple concessions |
613 | | 958 | | ||||||||||||
613 | 4,541 | 5,667 | 19,159 | |||||||||||||
Total |
$ | 8,849 | $ | 7,747 | $ | 25,451 | $ | 101,587 |
Of the additional losses recognized on commercial loan TDRs since their initial restructuring for the three and nine months ended September 30, 2012, 97.7% and 84.3%, respectively, related to loans that had additional modifications subsequent to their initial TDRs, and all related to loans that were on non-accrual status, as of September 30, 2012. We did not recognize any interest income for the three months ended September 30, 2012, on commercial loans that experienced losses during this period. We recognized approximately $74 thousand of interest income for the nine months ended September 30, 2012 on the commercial loans that experienced losses during these periods.
Of the additional losses recognized on commercial loan TDRs since their initial restructuring for the three and nine months ended September 30, 2011, 0.1% and 36.2%, respectively, related to loans for which the initial TDR on the borrower occurred prior to 2008, 7.1% and 77.0%, respectively, related to loans that had additional modifications subsequent to their initial TDRs, and all related to loans that were on non-accrual status as of September 30, 2011. We did not recognize any interest income for the three months ended September 30, 2011, on commercial loans that experienced losses during these periods. We recognized approximately $0.2 million of interest income for the nine months ended September 30, 2011 on the commercial loans that experienced losses during this period.
Foreclosed Assets
Real Estate Owned (REO)
When we foreclose on a real estate asset that collateralizes a loan or other assets, we record the acquired assets at its estimated fair value less costs to sell at the time of foreclosure if the related REO is classified as held for sale. Upon foreclosure, we evaluate the assets fair value as compared to the assets carrying amount and record a charge off when the carrying amount of the asset exceeds fair value less costs to sell. For REO determined to be held for sale, subsequent valuation adjustments are recorded as a valuation allowance, which is recorded as a component of net expense of real estate owned and other foreclosed assets. REO that does not meet the criteria of held for sale is classified as held for use and initially recorded at its fair value. Except for land acquired, the real estate asset is subsequently depreciated over its estimated useful life. Fair value adjustments on REO held for use are recorded only if the carrying amount of an asset is not recoverable and exceeds its estimated fair value less cost to sell.
21 |
As of September 30, 2012 and December 31, 2011, we had $16.3 million and $23.6 million, respectively, of REO classified as held for sale, which was recorded as a component of other assets. Activity related to REO held for sale for the three and nine months ended September 30, 2012 and 2011 was as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
($ in thousands) | ||||||||||||||||
Balance as of beginning of period |
$ | 17,528 | $ | 47,012 | $ | 23,649 | $ | 92,265 | ||||||||
Transfers from loans held for investment and other assets |
3,215 | 1,543 | 14,832 | 15,132 | ||||||||||||
Fair value adjustments |
(1,135 | ) | (6,725 | ) | (3,564 | ) | (19,849 | ) | ||||||||
Real estate sold |
(3,294 | ) | (13,266 | ) | (18,603 | ) | (58,984 | ) | ||||||||
Balance as of end of period |
$ | 16,314 | $ | 28,564 | $ | 16,314 | $ | 28,564 |
During the three and nine months ended September 30, 2012, we recognized gains of $28 thousand and losses of $0.3 million, respectively, on the sales of REO held for sale as a component of expense of real estate owned and other foreclosed assets, net. During the three and nine months ended September 30, 2011, we recognized losses of $3.0 million and $1.6 million, respectively, on the sales of REO held for sale as a component of net expense of real estate owned and other foreclosed assets in our consolidated statements of operations.
As of December 31, 2011, we had $1.4 million of REO classified as held for use, which was recorded in other assets. As of September 30, 2012, we had no REOs classified as held for use. During the three and nine months ended September 30, 2012, we recorded an impairment charge of $1.4 million relating to REO held for use as a component of expense of real estate owned and other foreclosed assets, net. During the three and nine months ended September 30, 2011, we did not recognize any impairment losses on REO held for use.
Other Foreclosed Assets
When we foreclose on a borrower whose underlying collateral consists of loans or other assets, we record the acquired assets at the estimated fair value less costs to sell at the time of foreclosure. At the time of foreclosure, we record charge offs when the carrying amount of the original loan exceeds the estimated fair value of the acquired assets. We may also write down or record allowances on the acquired loans or assets subsequent to foreclosure if such loans or assets experience additional deterioration. As of September 30, 2012 and December 31, 2011, we had $9.0 million and $14.7 million, respectively, of loans acquired through foreclosure, net of valuation allowances of $0.1 million and $0.9 million, respectively, which were recorded in other assets. The reserve release and provision for losses and gains on sales of other foreclosed assets, which were recorded as a component of expense of real estate owned and other foreclosed assets, net for the three and nine months ended September 30, 2012 and 2011 were as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
($ in thousands) | ||||||||||||||||
Provision (reserve release) for losses on other foreclosed assets |
$ | 77 | $ | 2,475 | $ | (948 | ) | $ | 9,880 | |||||||
Gains on sales of other foreclosed assets |
| | | 1,647 |
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Note 5. Investments |
Investment Securities, Available-for-Sale
As of September 30, 2012 and December 31, 2011, our investment securities, available-for-sale were as follows:
September 30, 2012 | December 31, 2011 | |||||||||||||||||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value | |||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||
Agency securities |
$ | 971,379 | $ | 24,283 | $ | (416 | ) | $ | 995,246 | $ | 1,031,275 | $ | 25,656 | $ | (103 | ) | $ | 1,056,828 | ||||||||||||||
Asset-backed securities |
10,557 | 428 | | 10,985 | 15,023 | 604 | (20 | ) | 15,607 | |||||||||||||||||||||||
Collateralized loan obligation |
13,141 | 11,078 | (72 | ) | 24,147 | 11,915 | 5,848 | | 17,763 | |||||||||||||||||||||||
Corporate debt |
| | | | 742 | | (42 | ) | 700 | |||||||||||||||||||||||
Equity security |
| | | | 202 | 191 | | 393 | ||||||||||||||||||||||||
Municipal bond |
| | | | 3,235 | | | 3,235 | ||||||||||||||||||||||||
Non-agency MBS |
44,619 | 813 | (36 | ) | 45,396 | 67,662 | 831 | (1,563 | ) | 66,930 | ||||||||||||||||||||||
U.S. Treasury and agency securities |
17,632 | 664 | | 18,296 | 25,902 | 644 | | 26,546 | ||||||||||||||||||||||||
Total |
$ | 1,057,328 | $ | 37,266 | $ | (524 | ) | $ | 1,094,070 | $ | 1,155,956 | $ | 33,774 | $ | (1,728 | ) | $ | 1,188,002 |
Included in investment securities, available-for-sale, were agency securities which included Federal Home Loan Bank (FHLB) issued callable and non-callable notes and commercial and residential mortgage-backed securities issued and guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae; asset-backed securities; investments in a collateralized loan obligation; commercial and residential mortgage-backed securities issued by non-government agencies (Non-agency MBS) and U.S. Treasury and agency asset-backed securities issued by the Small Business Administration (SBA ABS).
The amortized cost and fair value of investment securities, available-for-sale pledged as collateral as of September 30, 2012 and December 31, 2011 were as follows:
September 30, 2012 | December 31, 2011 | |||||||||||||||
Source | Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
||||||||||||
($ in thousands) | ||||||||||||||||
FHLB |
$ | 209,790 | $ | 218,115 | $ | 475,694 | $ | 490,437 | ||||||||
Government Agency(1) |
11,197 | 11,319 | 44,462 | 45,816 | ||||||||||||
$ | 220,987 | $ | 229,434 | $ | 520,156 | $ | 536,253 |
(1) | Represents the amounts pledged as collateral to secure funds deposited by a local or state government agency. |
Realized gains or losses resulting from the sale of investments are calculated using the specific identification method and are included in gain on sales of investments, net. We had proceeds from sales of $1.3 million on available-for-sale investment securities and recognized $0.4 million of related net pre-tax gains during the nine months ended September 30, 2012. We did not sell any available-for-sale investment securities during the three months ended September 30, 2012. We had proceeds from sales of $67.5 million and $137.7 million on available-for-sale securities and recognized $1.6 million and $16.1 million of related pre-tax gains during the three and nine months ended September 30, 2011, respectively.
During the three and nine months ended September 30, 2012, we recorded $140 thousand and $1.2 million, respectively, of other-than-temporary impairments (OTTI) in our available-for-sale portfolio relating to a decline in the fair value of our municipal bond which was recorded as a component of gain on sales of investments, net. We recorded no OTTI during the three months ended September 30, 2011. We recorded $1.5 million of OTTI during the nine months ended September 30, 2011, relating to a decline in the fair value of our municipal bond, which was recorded as a component of gain on sales of investments, net.
23 |
Investment Securities, Held-to-Maturity
As of September 30, 2012 and December 31, 2011, the balances of our investment securities, held-to-maturity were $108.1 million and $111.7 million, respectively, and consisted of commercial mortgage-backed securities rated BBB or higher. The amortized costs and estimated fair values of the investment securities, held-to-maturity pledged as collateral as of September 30, 2012 and December 31, 2011
were as follows:
September 30, 2012 | December 31, 2011 | |||||||||||||||
Source: | Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
||||||||||||
($ in thousands) | ||||||||||||||||
FHLB |
$ | 4,057 | $ | 4,550 | $ | 7,177 | $ | 7,681 | ||||||||
FRB |
86,673 | 88,690 | 93,899 | 94,305 | ||||||||||||
$ | 90,730 | $ | 93,240 | $ | 101,076 | $ | 101,986 |
Unrealized Losses on Investment Securities
As of September 30, 2012 and December 31, 2011, the gross unrealized losses and fair values of investment securities that were in unrealized loss positions were as follows:
Less Than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value |
Gross Unrealized Losses |
Fair Value |
|||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
As of September 30, 2012 |
||||||||||||||||||||||||
Investment securities, available-for-sale: |
||||||||||||||||||||||||
Agency securities |
$ | (345 | ) | $ | 65,688 | $ | (71 | ) | $ | 9,309 | $ | (416 | ) | $ | 74,997 | |||||||||
Collateralized loan obligation |
(72 | ) | 4,772 | | | (72 | ) | 4,772 | ||||||||||||||||
Non-agency MBS |
(0 | ) | 274 | (36 | ) | 2,869 | (36 | ) | 3,143 | |||||||||||||||
Total investment securities, available-for-sale |
$ | (417 | ) | $ | 70,734 | $ | (107 | ) | $ | 12,178 | $ | (524 | ) | $ | 82,912 | |||||||||
Total investment securities, held-to-maturity |
$ | | $ | | $ | (641 | ) | $ | 58,836 | $ | (641 | ) | $ | 58,836 | ||||||||||
As of December 31, 2011 |
||||||||||||||||||||||||
Investment securities, available-for-sale: |
||||||||||||||||||||||||
Agency securities |
$ | (103 | ) | $ | 35,704 | $ | | $ | | $ | (103 | ) | $ | 35,704 | ||||||||||
Asset-backed securities |
(20 | ) | 4,826 | | | (20 | ) | 4,826 | ||||||||||||||||
Corporate debt |
(42 | ) | 700 | | | (42 | ) | 700 | ||||||||||||||||
Non-agency MBS |
(169 | ) | 14,921 | (1,394 | ) | 13,406 | (1,563 | ) | 28,327 | |||||||||||||||
Total investment securities, available-for-sale |
$ | (334 | ) | $ | 56,151 | $ | (1,394 | ) | $ | 13,406 | $ | (1,728 | ) | $ | 69,557 | |||||||||
Total investment securities, held-to-maturity |
$ | (3,018 | ) | $ | 64,012 | $ | | $ | | $ | (3,018 | ) | $ | 64,012 |
Investment securities in unrealized loss positions are analyzed individually as part of our ongoing assessment of OTTI. As of September 30, 2012 and December 31, 2011, we do not believe that any unrealized losses in our investment securities portfolio represent an OTTI. The
24 |
unrealized losses are primarily related to one Agency MBS and one commercial MBS. The losses are attributable to fluctuations in the market prices of the securities due to market conditions and interest rate levels. Agency securities have the highest debt rating and are backed by government-sponsored entities. As of September 30, 2012, each of the non-agency MBS with unrealized losses was investment grade and well supported. As of September 30, 2012, one held-to-maturity security, a commercial MBS, was in an unrealized loss position. The commercial MBS is rated AAA, has credit support over 50% and has minimal delinquencies. Based on our analysis of each security in an unrealized loss position, we expect to recover the entire amortized cost basis of the impaired securities.
Contractual Maturities
As of September 30, 2012, the contractual maturities of our available-for-sale and held-to-maturity investment securities were as follows:
Investment Securities, Available-for-Sale |
Investment Securities, Held-to-Maturity |
|||||||||||||||
Amortized Cost |
Estimated Fair Value |
Amortized Cost |
Estimated Fair Value |
|||||||||||||
($ in thousands) | ||||||||||||||||
Due in one year or less |
$ | 23,315 | $ | 23,359 | $ | | $ | | ||||||||
Due after one year through five years |
5,000 | 5,031 | 27,195 | 29,853 | ||||||||||||
Due after five years through ten years(1) |
44,946 | 47,201 | 59,477 | 58,837 | ||||||||||||
Due after ten years(2)(3) |
984,067 | 1,018,479 | 21,394 | 23,133 | ||||||||||||
Total |
$ | 1,057,328 | $ | 1,094,070 | $ | 108,066 | $ | 111,823 |
(1) | Includes Agency, Non-agency MBS and CMBS, with fair values of $20.6 million, $15.6 million and $58.8 million, respectively, and weighted-average expected maturities of 2.21 years, 1.41 years and 1.71 years, respectively, based on interest rates and expected prepayment speeds as of September 30, 2012. |
(2) | Includes Agency, Non-agency MBS, CMBS and SBA ABS, with fair values of $946.2 million, $29.8 million, $23.1 million and $18.3 million, respectively, and weighted-average expected maturities of 2.78 years, 2.58 years, 4.74 years and 7.31 years, respectively, based on interest rates and expected prepayment speeds as of September 30, 2012. |
(3) | Includes securities with no stated maturity. |
Other Investments
As of September 30, 2012 and December 31, 2011, our other investments were as follows:
September 30, 2012 | December 31, 2011 | |||||||
($ in thousands) | ||||||||
Investments carried at cost |
$ | 30,241 | $ | 36,252 | ||||
Investments carried at fair value |
| 192 | ||||||
Investments accounted for under the equity method |
36,550 | 44,801 | ||||||
Total |
$ | 66,791 | $ | 81,245 |
Proceeds and net pre-tax gains from sales of other investments for the three and nine months ended September 30, 2012 were as follows:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
($ in thousands) | ||||||||||||||||
Proceeds from sales |
$ | 1,860 | $ | 9,803 | $ | 6,200 | $ | 29,823 | ||||||||
Net pre-tax gain from sales |
924 | 5,020 | 3,943 | 22,271 |
During the three and nine months ended September 30, 2012, we recorded $0.5 million and $5.2 million, respectively, of OTTI in our other investments portfolio relating to a decline in the fair value of investments carried at cost which was recorded as a component of gain on sale of investments, net. During the three and nine months ended September 30, 2011, we recorded $0.3 million and $0.7 million, respectively, of OTTI relating to a decline in the fair value of other investments carried at cost.
25 |
Note 6. Deposits |
As of September 30, 2012 and December 31, 2011, CapitalSource Bank had $5.5 billion and $5.1 billion, respectively, in deposits insured up to the maximum limit by the Federal Deposit Insurance Corporation (FDIC). As of September 30, 2012 and December 31, 2011, CapitalSource Bank had $534.9 million and $383.9 million, respectively, of certificates of deposit in the amount of $250,000 or more and $2.4 billion and $2.0 billion, respectively, of certificates of deposit in the amount of $100,000 or more.
As of September 30, 2012 and December 31, 2011, the weighted-average interest rates were 0.51% and 0.75% for savings and money market deposit accounts, respectively, and 1.00% and 1.14% for certificates of deposit, respectively. The weighted-average interest rates for all deposits as of September 30, 2012 and December 31, 2011 were 0.91% and 1.06%, respectively.
As of September 30, 2012 and December 31, 2011, interest-bearing deposits at CapitalSource Bank were as follows:
September 30, 2012 | December 31, 2011 | |||||||
($ in thousands) | ||||||||
Interest-bearing deposits: |
||||||||
Money market |
$ | 270,929 | $ | 260,032 | ||||
Savings |
761,416 | 836,521 | ||||||
Certificates of deposit |
4,503,137 | 4,028,442 | ||||||
Total interest-bearing deposits |
$ | 5,535,482 | $ | 5,124,995 |
As of September 30, 2012, certificates of deposit detailed by maturity were as follows ($ in thousands):
Maturing by: | ||||
September 30, 2013 |
$ | 3,634,768 | ||
September 30, 2014 |
752,560 | |||
September 30, 2015 |
54,767 | |||
September 30, 2016 |
44,528 | |||
September 30, 2017 |
16,514 | |||
Total |
$ | 4,503,137 |
For the three and nine months ended September 30, 2012 and 2011, interest expense on deposits was as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
($ in thousands) | ||||||||||||||||
Savings and money market |
$ | 1,374 | $ | 2,176 | $ | 4,801 | $ | 6,215 | ||||||||
Certificates of deposit |
11,409 | 11,310 | 34,020 | 34,169 | ||||||||||||
Fees for early withdrawal |
(45 | ) | (64 | ) | (152 | ) | (181 | ) | ||||||||
Total interest expense on deposits |
$ | 12,738 | $ | 13,422 | $ | 38,669 | $ | 40,203 |
Note 7. Variable | Interest Entities |
Troubled Debt Restructurings
Certain of our loan modifications qualify as events that require reconsideration of our borrowers as variable interest entities. Through reconsideration, we determined that certain of our borrowers involved in TDRs did not hold sufficient equity at risk to finance their activities without subordinated financial support. As a result, we concluded that these borrowers were VIEs.
We also determined that we should not consolidate these borrowers because we do not have a controlling financial interest. The equity investors of these borrowers have the power to direct the activities that will have the most significant impact on the economics of these borrowers. These equity investors interests also provide them with rights to receive benefits in the borrowers that could potentially be significant. As a result, we have determined that the equity investors continue to have a controlling financial interest in the borrowers subsequent to the restructuring.
26 |
27 |
Note 8. Borrowings |
As of September 30, 2012 and December 31, 2011, the composition of our outstanding borrowings was as follows:
September 30, 2012 |
December 31, 2011 |
|||||||
($ in thousands) | ||||||||
Term debt, net(1) |
$ | 203,307 | $ | 309,394 | ||||
Other borrowings: |
||||||||
Convertible debt, net(2) |
| 28,903 | ||||||
Subordinated debt |
409,880 | 436,196 | ||||||
FHLB SF borrowings |
600,000 | 550,000 | ||||||
Total other borrowings |
1,009,880 | 1,015,099 | ||||||
Total borrowings |
$ | 1,213,187 | $ | 1,324,493 |
(1) | Amounts presented are net of debt discounts of $31 thousand and $0.1 million as of September 30, 2012 and December 31, 2011, respectively. |
(2) | Amounts presented are net of debt discounts of $0.1 million as of December 31, 2011. |
Convertible Debt
We have issued convertible debentures as part of our financing activities. Our 3.5% Senior Convertible Debentures due 2034 (originally issued in July 2004) and our 4.0% Senior Subordinated Convertible Debentures due 2034 (originally issued in April 2007) were repurchased in full during 2011 and extinguished.
During the three and nine months ended September 30, 2012, we repurchased $23.2 million and $29.0 million, respectively, of the outstanding principal of the 7.25% Convertible Debentures for $23.2 million and $29.1 million, respectively, and recorded related pre-tax losses of $0.1 million for the nine months ended September 30, 2012, on the extinguishment of debt. We did not incur any related pre-tax gain or loss for the three months ended September 30, 2012. The repurchase of $23.2 million in July 2012 amounted to the remaining outstanding balance of the 7.25% Convertible Debentures and therefore resulted in an extinguishment of debt.
For the three and nine months ended September 30, 2012 and 2011, the interest expense recognized on our Convertible Debentures and the effective interest rates on the liability components were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
($ in thousands) | ||||||||||||||||
Interest expense recognized on: |
||||||||||||||||
Contractual interest coupon |
$ | 72 | $ | 4,223 | $ | 1,006 | $ | 18,926 | ||||||||
Amortization of deferred financing fees |
1 | 72 | 7 | 677 | ||||||||||||
Amortization of debt discount |
5 | 636 | 66 | 5,896 | ||||||||||||
Total interest expense recognized |
$ | 78 | $ | 4,931 | $ | 1,079 | $ | 25,499 | ||||||||
Effective interest rate on the liability component: |
||||||||||||||||
3.5% Senior Convertible Debentures due 2034 |
| 7.16 | % | | 7.16 | % | ||||||||||
4.0% Senior Subordinated Convertible Debentures due 2034 |
| 7.85 | % | | 7.85 | % | ||||||||||
7.25% Senior Subordinated Convertible Debentures due 2037 |
| 7.79 | % | | 7.79 | % |
28 |
Subordinated Debt
We have issued subordinated debt to statutory trusts (TP Trusts) that are formed for the purpose of issuing preferred securities to outside investors, which we refer to as Trust Preferred Securities (TPS). We generally retained 100% of the common securities issued by the TP Trusts, representing 3% of their total capitalization. The terms of the subordinated debt issued to the TP Trusts and the TPS issued by the TP Trusts are substantially identical.
The TP Trusts are wholly owned indirect subsidiaries of CapitalSource. However, we have not consolidated the TP Trusts for financial statement purposes. We account for our investments in the TP Trusts under the equity method of accounting pursuant to relevant GAAP requirements.
In March 2012, we purchased an aggregate of $26.1 million of preferred securities from our TP Trusts 2005-1 and 2006-4 at a discount from liquidation value. As a result of this purchase, the related subordinated debt of $26.1 million was exchanged and cancelled in June 2012, and we recognized a related pre-tax gain of $8.2 million on the extinguishment of debt.
The carrying value of our subordinated debt was $409.9 million and $436.2 million as of September 30, 2012 and December 31, 2011, respectively.
FHLB SF Borrowings and FRB Credit Program
CapitalSource Bank is a member of the FHLB SF. As of September 30, 2012 and December 31, 2011, CapitalSource Bank had borrowing capacity with the FHLB SF based on pledged collateral as follows:
September 30, 2012 |
December 31, 2011 |
|||||||
($ in thousands) | ||||||||
Borrowing capacity |
$ | 808,163 | $ | 838,531 | ||||
Less: outstanding principal |
(600,000 | ) | (550,000 | ) | ||||
Less: outstanding letters of credit |
(300 | ) | (600 | ) | ||||
Unused borrowing capacity |
$ | 207,863 | $ | 287,931 |
CapitalSource Bank is an approved depository institution under the primary credit program of the FRB SFs discount window and is eligible to borrow from the FRB for short periods, generally overnight. As of September 30, 2012 and December 31, 2011, collateral with amortized costs of $86.7 million and $93.9 million, respectively, and fair values of $88.7 million and $94.3 million, respectively, had been pledged under this program. As of September 30, 2012 and December 31, 2011, there were no borrowings outstanding.
Note 9. Shareholders | Equity |
Common Stock Shares Outstanding
Common stock share activity for the nine months ended September 30, 2012 was as follows:
Outstanding as of December 31, 2011 |
256,112,205 | |||
Repurchase of common stock |
(41,213,800 | ) | ||
Exercise of options |
767,429 | |||
Restricted stock and other stock activities |
(427,273 | ) | ||
Outstanding as of September 30, 2012 |
215,238,561 |
29 |
Accumulated other comprehensive income, net
Accumulated other comprehensive income, net, as of September 30, 2012 and December 31, 2011 was as follows:
September 30, 2012 | ||||||||||||
Unrealized Gain on Investment Securities, Available-for-Sale, net of tax |
Unrealized Gain on Foreign Currency Translation, net of tax |
Accumulated Other Comprehensive Income, Net |
||||||||||
($ in thousands) | ||||||||||||
Beginning balance |
$ | 19,055 | $ | 351 | $ | 19,406 | ||||||
Other comprehensive income (loss) |
2,802 | (351 | ) | 2,451 | ||||||||
Ending balance |
$ | 21,857 | $ | | $ | 21,857 |
December 31, 2011 | ||||||||||||
Unrealized Gain on Investment Securities, Available-for-Sale, net of tax |
Unrealized Gain on Foreign Currency Translation, net of tax |
Accumulated Other Comprehensive Income, Net |
||||||||||
($ in thousands) | ||||||||||||
Beginning balance |
$ | 5,763 | $ | 4,178 | $ | 9,941 | ||||||
Other comprehensive income (loss) |
13,292 | (3,827 | ) | 9,465 | ||||||||
Ending balance |
$ | 19,055 | $ | 351 | $ | 19,406 |
Note 10. Income | Taxes |
We provide for income taxes as a C corporation on income earned from operations. For the tax years ended 2010 and 2009, our subsidiaries were not able to participate in the filing of a consolidated federal tax return. We have reconsolidated our subsidiaries in 2011 for federal tax purposes. We are subject to federal, foreign, state and local taxation in various jurisdictions.
In 2009, we established a valuation allowance against a substantial portion of our net deferred tax assets where we determined that there was significant negative evidence with respect to our ability to realize such assets. Negative evidence we considered in making this determination included the history of operating losses and uncertainty regarding the realization of a portion of the deferred tax assets at future points in time. As of September 30, 2012 and December 31, 2011, the valuation allowance was $159.4 million and $515.2 million, respectively.
In June 2012, we reversed $347.4 million of the valuation allowance. Each of the deferred tax assets was evaluated based on our evaluation of the available positive and negative evidence with respect to our ability to realize the deferred tax asset, including considering their associated character and jurisdiction. The decision to reverse a large portion of the valuation allowance was based on our evaluation of all positive and negative evidence which did not include any significant tax planning strategies. A cumulative loss position, such as we had for the previous three-year period ended December 31, 2011, is generally considered significant negative evidence in assessing the realizability of a deferred tax asset. However, subsequent to the establishment of the valuation allowance in 2009, significant positive evidence had developed which overcame this negative evidence such that, during the nine months ended September 30, 2012, management determined that it is more likely than not that the deferred tax asset will be realized. This determination was made not based upon a single event or occurrence, but based upon the accumulation of all positive and negative evidence including recent trends in our earnings and taxable income. Other positive evidence included the projection of future taxable income based on strong CapitalSource Bank earnings, improving asset performance trends, substantial decline in the Parent Companys operations and assets, and one-time losses included in the three-year cumulative pre-tax loss (i.e., debt extinguishment loss). Additionally, we believe we will be in a cumulative pre-tax income position by the end of 2012, for the three-year period then ended.
30 |
A valuation allowance of $159.4 million remains in effect as of September 30, 2012 with respect to deferred tax assets where we believe sufficient evidence does not exist at this time to support a reduction in the allowance. It is more likely than not that the remaining deferred tax assets subject to a valuation allowance will not be realized.
Consolidated income tax expense (benefit) for the three months ended September 30, 2012 and 2011 was $18.0 million and $(11.3) million, respectively. The expense for the three months ended September 30, 2012 was primarily the result of tax expense on pre-tax income from CapitalSource Bank. The tax benefit for the three months ended September 30, 2011 was primarily the result of the change in valuation allowance related to the deferred tax assets of CapitalSource Bank. Consolidated income tax (benefit) expense for the nine months ended September 30, 2012 and 2011 was $(296.3) million and $17.1 million, respectively. The tax benefit for the nine months ended September 30, 2012 was caused primarily by the reversal of a large portion of the valuation allowance against our deferred tax assets. The tax expense recorded for the nine months ended September 30, 2011 was primarily related to the reestablishment of a valuation allowance at the consolidated group level with respect to CapitalSource Banks net deferred tax assets, and state income tax expenses incurred by CapitalSource Bank.
The effective income tax rate on our consolidated net income (loss) was 36.7% and (201.3)% for the three and nine months ended September 30, 2012, respectively, and 12.3% and (39.1)% for the three and nine months ended September 30, 2011, respectively.
We file income tax returns with the United States and various state, local and foreign jurisdictions and generally remain subject to examinations by these tax jurisdictions for tax years 2006 through 2010. We are currently under examination by the Internal Revenue Service for the tax years 2006 through 2008, and by certain state jurisdictions for the tax years 2006 through 2010.
Note 11. Net | Income Per Share |
The computations of basic and diluted net income per share for the three and nine months ended September 30, 2012 and 2011, respectively, were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
($ in thousands, except per share data) | ||||||||||||||||
Net income (loss) |
$ | 31,047 | $ | (80,712 | ) | $ | 443,534 | $ | (60,959 | ) | ||||||
Average shares basic |
219,664,637 | 306,535,063 | 229,091,849 | 315,719,413 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Option shares |
2,383,884 | | 2,333,940 | | ||||||||||||
Stock units and unvested restricted stock |
4,392,773 | | 4,286,733 | | ||||||||||||
Average shares diluted |
226,441,294 | 306,535,063 | 235,712,522 | 315,719,413 | ||||||||||||
Basic net income (loss) per share |
$ | 0.14 | $ | (0.26 | ) | $ | 1.94 | $ | (0.19 | ) | ||||||
Diluted net income (loss) per share |
$ | 0.14 | $ | (0.26 | ) | $ | 1.88 | $ | (0.19 | ) |
The weighted average shares that have an anti-dilutive effect in the calculation of diluted net income per share attributable to CapitalSource Inc. and have been excluded from the computations above were as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Stock units |
5,881 | 3,427,158 | 7,433 | 3,427,158 | ||||||||||||
Stock options |
793,571 | 7,437,391 | 1,099,851 | 7,437,391 | ||||||||||||
Unvested restricted stock |
2,645 | 4,633,282 | 197,131 | 4,633,282 |
Note 12. Bank | Regulatory Capital |
CapitalSource Bank is subject to various regulatory capital requirements established by federal and state regulatory agencies. Failure to meet minimum capital requirements can result in regulatory agencies initiating certain mandatory and possibly additional discretionary actions that, if undertaken, could have a direct material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, CapitalSource Bank must meet specific capital guidelines that involve
31 |
quantitative measures of its assets and liabilities as calculated under regulatory accounting practices. CapitalSource Banks capital amounts and other requirements are also subject to qualitative judgments by its regulators about risk weightings and other factors. See Item 1, Business Supervision and Regulation, in our Form 10-K and Supervision and Regulation within Managements Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-Q for a further description of CapitalSource Banks regulatory requirements.
Under prompt corrective action regulations, a well-capitalized bank must have a total risk-based capital ratio of 10%, a Tier 1 risk-based capital ratio of 6%, and a Tier 1 leverage ratio of 5%. Under its approval order from the FDIC, CapitalSource Bank must be well-capitalized and at all times have a minimum total risk-based capital ratio of 15%, a minimum Tier-1 risk-based capital ratio of 6% and a minimum Tier 1 leverage ratio of 5%. CapitalSource Banks ratios and the minimum requirements as of September 30, 2012 and December 31, 2011 were as follows:
September 30, 2012 | December 31, 2011 | |||||||||||||||||||||||||||||||
Actual | Minimum Required | Actual | Minimum Required | |||||||||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||
Tier-1 Leverage |
$ | 896,768 | 12.82 | % | $ | 349,736 | 5.00 | % | $ | 877,746 | 13.61 | % | $ | 322,559 | 5.00 | % | ||||||||||||||||
Tier-1 Risk-Based Capital |
896,768 | 15.43 | 348,630 | 6.00 | 877,746 | 16.17 | 325,714 | 6.00 | ||||||||||||||||||||||||
Total Risk-Based Capital |
969,762 | 16.69 | 871,574 | 15.00 | 945,978 | 17.43 | 814,284 | 15.00 |
Note 13. Commitments | and Contingencies |
We provide standby letters of credit in conjunction with several of our lending arrangements and property lease obligations. As of September 30, 2012 and December 31, 2011, we had issued $58.0 million and $79.4 million, respectively, in stand-by letters of credit which expire at various dates over the next 5 years. If a borrower defaults on its commitment(s) subject to any letter of credit issued under these arrangements, we would be required to meet the borrowers financial obligation and would seek repayment of that financial obligation from the borrower.
As of September 30, 2012 and December 31, 2011, we had unfunded commitments to extend credit to our clients of $1.2 billion and $1.4 billion, respectively, including unfunded commitments to extend credit by CapitalSource Bank of $1.0 billion and $944.7 million, respectively, and by the Parent Company of $186.2 million and $408.0 million, respectively.
From time to time we are party to legal proceedings. We do not believe that any currently pending or threatened proceeding, if determined adversely to us, would have a material adverse effect on our business, financial condition or results of operations, including our cash flows.
Note 14. Derivative | Instruments |
We are exposed to certain risks related to our ongoing business operations. The primary risks managed through the use of derivative instruments are interest rate risk and foreign exchange risk. We do not enter into derivative instruments for speculative purposes. As of September 30, 2012, none of our derivatives were designated as hedging instruments pursuant to GAAP.
We may enter into various derivative instruments to manage our exposure to interest rate risk. The objective would be to reduce the volatility of our earnings that may otherwise result due to changes in interest rates.
We have entered into basis swaps to eliminate risk between our LIBOR-based term debt securitizations and the prime-based loans pledged as collateral for that debt. These basis swaps modify our exposure to interest rate risk by converting our prime rate loans to a one-month LIBOR rate. The objective of this swap activity is to protect us from risk that interest collected under the prime rate loans will not be sufficient to service the interest due under the one-month LIBOR-based term debt.
We have entered into forward exchange contracts to hedge foreign currency denominated loans we originate against foreign currency fluctuations. The objective is to manage the uncertainty of future foreign exchange rate fluctuations. These forward exchange contracts provide for a fixed exchange rate which has the effect of reducing or eliminating changes to anticipated cash flows to be received from foreign currency-denominated loan transactions as the result of changes to exchange rates.
Derivative instruments expose us to credit risk in the event of nonperformance by counterparties to such agreements. This risk exposure consists primarily of the termination value of agreements where we are in a favorable position. We manage the credit risk associated with
32 |
various derivative agreements through counterparty credit review and monitoring procedures. We obtain collateral from certain counterparties and monitor all exposure and collateral requirements daily. We continually monitor the fair value of collateral received from counterparties and may request additional collateral from counterparties or return collateral pledged as deemed appropriate. As of September 30, 2012, we also posted collateral of $10.0 million related to counterparty requirements for foreign exchange contracts at CapitalSource Bank. Our agreements generally include master netting agreements whereby we are entitled to settle our individual derivative positions with the same counterparty on a net basis upon the occurrence of certain events. As of September 30, 2012, we were in a liability position for the derivative instruments, therefore, we did not utilize the master netting agreement as of September 30, 2012.
We report our derivatives in our consolidated balance sheets at fair value on a gross basis irrespective of our master netting arrangements. We held no derivative instruments that were in an asset position as of September 30, 2012. For derivatives that were in a liability position, we had posted collateral of $1.5 million as of September 30, 2012.
There were no interest rate swaps terminated during the three months ended September 30, 2012. During the nine months ended September 30, 2012, we terminated interest rate swaps of $53.2 million which were in an asset position and $87.1 million which were in a liability position as of the respective termination dates. As a result of these terminations, we received $8.3 million, net of collateral held and posted.
As of September 30, 2012 and December 31, 2011, the notional amounts and fair values of our various derivative instruments as well as their locations in our consolidated balance sheets were as follows:
September 30, 2012 | December 31, 2011 | |||||||||||||||||||||||
Fair Value | Fair Value | |||||||||||||||||||||||
Notional Amount |
Other Assets |
Other Liabilities |
Notional Amount |
Other Assets |
Other Liabilities |
|||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
Interest rate contracts |
$ | 9,437 | $ | | $ | 17 | $ | 1,128,647 | $ | 58,935 | $ | 93,110 | ||||||||||||
Foreign exchange contracts |
30,611 | | 946 | 25,946 | 167 | 183 | ||||||||||||||||||
Total |
$ | 40,048 | $ | | $ | 963 | $ | 1,154,593 | $ | 59,102 | $ | 93,293 |
The gains and losses on our derivative instruments recognized during the three and nine months ended September 30, 2012 and 2011 as well as the locations of such gains and losses in our consolidated statements of operations were as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||
Location | 2012 | 2011 | 2012 | 2011 | ||||||||||||||
($ in thousands) | ||||||||||||||||||
Interest rate contracts |
(Loss) gain on derivatives, net | $ | (2 | ) | $ | (4,176 | ) | $ | 339 | $ | (4,792 | ) | ||||||
Foreign exchange contracts |
(Loss) gain on derivatives, net | (976 | ) | 2,063 | (988 | ) | 530 | |||||||||||
Total |
$ | (978 | ) | $ | (2,113 | ) | $ | (649 | ) | $ | (4,262 | ) |
Note 15. Fair | Value Measurements |
We use fair value measurements to record fair value adjustments to certain of our assets and liabilities and to determine fair value disclosures. Investment securities, available-for-sale, warrants and derivatives are recorded at fair value on a recurring basis. In addition, we may be required, in specific circumstances, to measure certain of our assets at fair value on a nonrecurring basis, including investment securities, held-to-maturity, loans held for sale, loans held for investment, REO and certain other investments.
33 |
34 |
35 |
36 |
37 |
Assets and Liabilities Carried at Fair Value on a Recurring Basis
Assets and liabilities have been grouped in their entirety within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. Assets and liabilities carried at fair value on a recurring basis on the balance sheet as of September 30, 2012 were as follows:
Fair Value Measurement as of September 30, 2012 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
($ in thousands) | ||||||||||||||||
Assets |
||||||||||||||||
Investment securities, available-for-sale: |
||||||||||||||||
Agency securities |
$ | 995,246 | $ | | $ | 995,246 | $ | | ||||||||
Assets-backed securities |
10,985 | | 10,985 | | ||||||||||||
Collateralized loan obligation |
24,147 | | | 24,147 | ||||||||||||
Non-agency MBS |
45,396 | | 45,396 | | ||||||||||||
U.S. Treasury and agency securities |
18,296 | | 18,296 | | ||||||||||||
Total assets |
$ | 1,094,070 | $ | | $ | 1,069,923 | $ | 24,147 | ||||||||
Liabilities |
||||||||||||||||
Other liabilities held at fair value: |
||||||||||||||||
Derivative liabilities |
$ | 963 | $ | | $ | 963 | $ | |
Assets and liabilities carried at fair value on a recurring basis on the balance sheet as of December 31, 2011 were as follows:
Fair Value Measurement as of December 31, 2011 |
Level 1 | Level 2 | Level 3 | |||||||||||||
($ in thousands) | ||||||||||||||||
Assets |
||||||||||||||||
Investment securities, available-for-sale: |
||||||||||||||||
Agency securities |
$ | 1,056,828 | $ | | $ | 1,056,828 | $ | | ||||||||
Asset-backed securities |
15,607 | | 15,607 | | ||||||||||||
Collateralized loan obligation |
17,763 | | | 17,763 | ||||||||||||
Corporate debt |
700 | | | 700 | ||||||||||||
Equity security |
393 | 393 | | | ||||||||||||
Municipal bond |
3,235 | | | 3,235 | ||||||||||||
Non-agency MBS |
66,930 | | 66,930 | | ||||||||||||
U.S. Treasury and agency securities |
26,546 | | 26,546 | | ||||||||||||
Total investment securities, available-for-sale |
1,188,002 | 393 | 1,165,911 | 21,698 | ||||||||||||
Investments carried at fair value: |
||||||||||||||||
Warrants |
193 | | | 193 | ||||||||||||
Other assets held at fair value: |
||||||||||||||||
Derivative assets |
59,102 | | 59,102 | | ||||||||||||
Total assets |
$ | 1,247,297 | $ | 393 | $ | 1,225,013 | $ | 21,891 | ||||||||
Liabilities |
||||||||||||||||
Other liabilities held at fair value: |
||||||||||||||||
Derivative liabilities |
$ | 93,293 | $ | | $ | 93,293 | $ | |
38 |
A summary of the changes in the fair values of assets and liabilities carried at fair value for the three months ended September 30, 2012 that have been classified in Level 3 of the fair value hierarchy was as follows:
Investment Securities, Available-for-Sale | ||||||||||||||||
Collateralized Loan Obligation |
Municipal Bond(1) |
Non-agency MBS |
Total | |||||||||||||
Balance as of July 1, 2012 |
$ | 19,864 | $ | 2,129 | $ | | $ | 21,993 | ||||||||
Realized and unrealized gains (losses): |
||||||||||||||||
Included in income |
695 | (140 | ) | 695 | 1,250 | |||||||||||
Included in other comprehensive income, net |
4,142 | | | 4,142 | ||||||||||||
Total realized and unrealized gains (losses) |
4,837 | (140 | ) | 695 | 5,392 | |||||||||||
Total settlements: |
||||||||||||||||
Settlements |
(554 | ) | (1,989 | ) | (695 | ) | (3,238 | ) | ||||||||
Balance as of September 30, 2012 |
$ | 24,147 | $ | | | $ | 24,147 |
(1) | In September 2012, the municipal bond was settled as the Company secured the collateral; the collateral was transferred to other assets at its fair value less cost of sales of $2.0 million. |
Realized and unrealized gains and losses on assets and liabilities classified in Level 3 of the fair value hierarchy included in income for the three months ended September 30, 2012 and 2011, reported in interest income and gain on investments, net were as follows:
Interest Income | (Loss) Gain on Investments, Net |
|||||||||||||||
Three Months Ended September 30, | ||||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
($ in thousands) | ||||||||||||||||
Total gains (losses) included in earnings for the period |
$ | 1,390 | $ | 748 | $ | (140 | ) | $ | (5 | ) | ||||||
Unrealized gains (losses) relating to assets still held at reporting date |
695 | 748 | | (10 | ) |
A summary of the changes in the fair values of assets and liabilities carried at fair value for the nine months ended September 30, 2012 that have been classified in Level 3 of the fair value hierarchy was as follows:
Investment Securities, Available-for-Sale | ||||||||||||||||||||||||||||
Corporate Debt |
Collateralized Loan Obligation |
Municipal Bond(1) |
Non-agency MBS |
Total | Warrants | Total Assets |
||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||
Balance as of January 1, 2012 |
$ | 700 | $ | 17,763 | $ | 3,235 | $ | | $ | 21,698 | $ | 193 | $ | 21,891 | ||||||||||||||
Realized and unrealized gains (losses): |
||||||||||||||||||||||||||||
Included in income |
11 | 2,312 | (1,246 | ) | 695 | 1,772 | 5 | 1,777 | ||||||||||||||||||||
Included in other comprehensive income, net |
(45 | ) | 5,159 | | | 5,114 | | 5,114 | ||||||||||||||||||||
Total realized and unrealized gains (losses) |
(34 | ) | 7,471 | (1,246 | ) | 695 | 6,886 | 5 | 6,891 | |||||||||||||||||||
Transfers out of Level 3 |
(666 | ) | | | | (666 | ) | | (666 | ) | ||||||||||||||||||
Sales and settlements |
||||||||||||||||||||||||||||
Sales |
| | | | | (198 | ) | (198 | ) | |||||||||||||||||||
Settlements(1) |
| (1,087 | ) | (1,989 | ) | (695 | ) | (3,771 | ) | | (3,771 | ) | ||||||||||||||||
Total settlements and sales |
| (1,087 | ) | (1,989 | ) | (695 | ) | (3,771 | ) | (198 | ) | (3,969 | ) | |||||||||||||||
Balance as of September 30, 2012 |
$ | | $ | 24,147 | $ | | $ | | $ | 24,147 | $ | | $ | 24,147 |
(1) | In September 2012, the municipal bond was settled as the Company secured the collateral; the collateral was transferred to other assets at its fair value less cost of sales of $2.0 million. |
39 |
Realized and unrealized gains and losses on assets and liabilities classified in Level 3 of the fair value hierarchy included in income for the nine months ended September 30, 2012 and 2011, reported in interest income and gain on investments, net were as follows:
Interest Income | (Loss) Gain on Investments, Net |
|||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
($ in thousands) | ||||||||||||||||
Total gains (losses) included in earnings for the period |
$ | 3,018 | $ | 4,494 | $ | (1,241 | ) | $ | 11,790 | |||||||
Unrealized gains (losses) relating to assets still held at reporting date |
2,312 | 3,095 | | (1,514 | ) |
Assets Carried at Fair Value on a Nonrecurring Basis
We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. As described above, these adjustments to fair value usually result from the application of lower of cost or fair value accounting or write downs of individual assets. The table below provides the fair values of those assets, excluding related transaction costs, for which nonrecurring fair value adjustments were recorded as of September 30, 2012 and December 31, 2011, classified by their position in the fair value hierarchy.
September 30, 2012 | December 31, 2011 | |||||||||||||||||||||||||||||||
Fair Value Measurement |
Level 1 | Level 2 | Level 3 | Fair Value Measurement |
Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||
Loans held for sale |
$ | 18,371 | $ | | $ | 18,371 | $ | | $ | 161,293 | $ | | $ | 161,293 | $ | | ||||||||||||||||
Loans held for investment |
34,256 | | | 34,256 | 92,909 | | | 92,909 | ||||||||||||||||||||||||
Investments carried at cost |
820 | | | 820 | 4,863 | | | 4,863 | ||||||||||||||||||||||||
Investments accounted for under the equity method |
| | | | 694 | | | 694 | ||||||||||||||||||||||||
Real estate owned |
15,960 | | 6,461 | 9,499 | 17,398 | | | 17,398 | ||||||||||||||||||||||||
Loans acquired through foreclosure, net |
| | | | 11,667 | | | 11,667 | ||||||||||||||||||||||||
Total assets |
$ | 69,407 | $ | | $ | 24,832 | $ | 44,575 | $ | 288,824 | $ | | $ | 161,293 | $ | 127,531 |
The following table presents the net losses of the above assets resulting from nonrecurring fair value adjustments for the three and nine months ended September 30, 2012 and 2011:
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Loans held for investments |
$ | 2,343 | $ | 27,711 | $ | 23,317 | $ | 103,180 | ||||||||
Loans held for sale |
397 | 397 | ||||||||||||||
Investments carried at cost |
492 | 363 | 5,192 | 717 | ||||||||||||
Investments accounted for under the equity method |
1 | 56 | 1 | 56 | ||||||||||||
REO |
1,433 | 6,725 | 3,419 | 15,413 | ||||||||||||
Loans acquired through foreclosure, net |
| 2,475 | | 9,880 | ||||||||||||
Total net loss (gain) from nonrecurring measurements |
$ | 4,666 | $ | 37,330 | $ | 32,326 | $ | 129,246 |
40 |
Significant Unobservable Inputs and Valuation Techniques of Level 3 Fair Value Measurements
For our fair value measurements classified in Level 3 of the fair value hierarchy as of September 30, 2012, a summary of the significant unobservable inputs and valuation techniques is as follows:
Fair Value Measurement as of September 30, 2012 |
Valuation Techniques | Unobservable Input | Range (Weighted Average) | |||||||
($ in thousands) | ||||||||||
Assets |
||||||||||
Loans held for investment |
||||||||||
Services |
$ | 11,885 | Market Comparables | EBITDA Multiple Marketablility Discount Price Per Square Foot Illiquidity Discount |
3.0x - 6.0x (5.0x) 20.0% - 57.0% (48.6%) $109.48 | |||||
Commercial Real Estate |
18,801 | Market Comparables | Recovery Rate Marketablility Discount Price Per Acre Foreign Discount |
52.0% $1,022.50 | ||||||
Residential Real Estate |
3,570 | Market Comparables | Recovery Rate Capitalization Rate |
19.7% - 34.3% (20.1%) 8.7% | ||||||
Total loans held for investment |
34,256 | |||||||||
Investments carried at cost |
820 | Market Comparables | Net Revenue Multiple EBITDA Multiple Illiquidity Discount |
9.3x 6.8x - 12.9x (9.5x) 25.0% | ||||||
REO |
9,499 | Third Party Appraisals | Marketability Discount Foreign Discount Price Per Square Foot |
30.0% - 54.6% (53.2%) 40.0% | ||||||
Total assets |
$ | 44,575 |
The table above excludes the collateralized loan obligation categorized within Level 3 of the fair value hierarchy because the fair value of this asset is measured using third-party pricing information without adjustments.
41 |
Fair Value of Financial Instruments
GAAP requires the disclosure of the estimated fair value of financial instruments which are not recorded at fair value. The table below provides fair value estimates for our financial instruments as of September 30, 2012 and December 31, 2011, excluding financial assets and liabilities for which carrying value is a reasonable estimate of fair value and those which are recorded at fair value on a recurring basis.
September 30, 2012 | December 31, 2011 | |||||||||||||||||||||||||||||||||||||||
Carrying Value |
Fair Value | Carrying Value |
Fair Value | |||||||||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||||||||||
Loans held for sale |
$ | 84,883 | $ | | $ | 86,385 | $ | | $ | 86,385 | $ | 193,021 | $ | | $ | 197,103 | $ | | $ | 197,103 | ||||||||||||||||||||
Loans held for investment, net |
5,948,119 | | | 5,675,453 | 5,675,453 | 5,536,516 | | | 5,410,511 | 5,410,511 | ||||||||||||||||||||||||||||||
Investments carried at cost |
30,241 | | | 66,321 | 66,321 | 36,252 | | | 64,076 | 64,076 | ||||||||||||||||||||||||||||||
Investment securities, held-to-maturity |
108,066 | | 111,823 | | 111,823 | 111,706 | | 112,972 | | 112,972 | ||||||||||||||||||||||||||||||
Liabilities: |
||||||||||||||||||||||||||||||||||||||||
Deposits |
5,535,482 | | 5,544,749 | | 5,544,749 | 5,124,995 | | 5,135,843 | | 5,135,843 | ||||||||||||||||||||||||||||||
Term debt |
203,307 | | | 165,017 | 165,017 | 309,394 | | | 252,739 | 252,739 | ||||||||||||||||||||||||||||||
Convertible debt, net |
| | | | | 28,903 | | 29,739 | | 29,739 | ||||||||||||||||||||||||||||||
Subordinated debt |
409,880 | | 272,570 | | 272,570 | 436,196 | | 252,994 | | 252,994 | ||||||||||||||||||||||||||||||
Loan commitments |
| | | 21,676 | 21,676 | | | | 20,636 | 20,636 |
Note 16. Segment | Data |
For the three and nine months ended September 30, 2012 and 2011, we operated as two reportable segments: CapitalSource Bank and Other Commercial Finance. Our CapitalSource Bank segment comprises our commercial lending and banking business activities, and our Other Commercial Finance segment comprises our legacy loan portfolio and investment activities in the Parent Company.
The financial results of our operating segments as of and for the three months ended September 30, 2012 were as follows:
Three Months Ended September 30, 2012 | ||||||||||||||||
CapitalSource Bank |
Other Commercial Finance |
Intercompany Eliminations |
Consolidated Total |
|||||||||||||
($ in thousands) | ||||||||||||||||
Total interest income |
$ | 99,807 | $ | 16,899 | $ | (1,472 | ) | $ | 115,234 | |||||||
Interest expense |
15,521 | 3,992 | | 19,513 | ||||||||||||
Provision for loan and lease losses |
273 | 8,686 | | 8,959 | ||||||||||||
Non-interest income |
13,585 | 1,439 | (5,727 | ) | 9,297 | |||||||||||
Non-interest expense |
39,964 | 13,037 | (5,992 | ) | 47,009 | |||||||||||
Net income (loss) before income taxes |
57,634 | (7,377 | ) | (1,207 | ) | 49,050 | ||||||||||
Income tax expense (benefit) |
23,782 | (5,779 | ) | | 18,003 | |||||||||||
Net income (loss) |
$ | 33,852 | $ | (1,598 | ) | $ | (1,207 | ) | $ | 31,047 | ||||||
Total assets as of September 30, 2012 |
$ | 7,285,953 | $ | 1,412,243 | $ | (20,895 | ) | $ | 8,677,301 | |||||||
Total assets as of December 31, 2011 |
6,793,496 | 1,534,698 | (28,126 | ) | 8,300,068 |
42 |
The financial results of our operating segments for the three months ended September 30, 2011 were as follows:
Three Months Ended September 30, 2011 | ||||||||||||||||
CapitalSource Bank |
Other Commercial Finance |
Intercompany Eliminations |
Consolidated Total |
|||||||||||||
($ in thousands) | ||||||||||||||||
Total interest income |
$ | 92,173 | $ | 28,653 | $ | 650 | $ | 121,476 | ||||||||
Interest expense |
15,982 | 18,506 | | 34,488 | ||||||||||||
Provision for loan and lease losses |
13,725 | 21,393 | | 35,118 | ||||||||||||
Non-interest income |
14,614 | 35,015 | (17,145 | ) | 32,484 | |||||||||||
Non-interest expense |
35,345 | 158,305 | (17,304 | ) | 176,346 | |||||||||||
Net income (loss) before income taxes |
41,735 | (134,536 | ) | 809 | (91,992 | ) | ||||||||||
Income tax expense (benefit) |
16,513 | (27,793 | ) | | (11,280 | ) | ||||||||||
Net income (loss) |
$ | 25,222 | $ | (106,743 | ) | $ | 809 | $ | (80,712 | ) |
The financial results of our operating segments for the nine months ended September 30, 2012 were as follows:
Nine Months Ended September 30, 2012 | ||||||||||||||||
CapitalSource Bank |
Other Commercial Finance |
Intercompany Eliminations |
Consolidated Total |
|||||||||||||
($ in thousands) | ||||||||||||||||
Total interest income |
$ | 294,539 | $ | 62,579 | $ | (3,825 | ) | $ | 353,293 | |||||||
Interest expense |
46,974 | 13,561 | | 60,535 | ||||||||||||
Provision for loan and lease losses |
14,745 | 15,822 | | 30,567 | ||||||||||||
Non-interest income |
42,252 | 6,524 | (19,479 | ) | 29,297 | |||||||||||
Non-interest expense |
124,307 | 40,226 | (20,274 | ) | 144,259 | |||||||||||
Net income (loss) before income taxes |
150,765 | (506 | ) | (3,030 | ) | 147,229 | ||||||||||
Income tax expense (benefit) |
62,047 | (358,352 | ) | | (296,305 | ) | ||||||||||
Net income |
$ | 88,718 | $ | 357,846 | $ | (3,030 | ) | $ | 443,534 |
The financial results of our operating segments for the nine months ended September 30, 2011 were as follows:
Nine Months Ended September 30, 2011 | ||||||||||||||||
CapitalSource Bank |
Other Commercial Finance |
Intercompany Eliminations |
Consolidated Total |
|||||||||||||
($ in thousands) | ||||||||||||||||
Total interest income |
$ | 274,467 | $ | 116,968 | $ | (382 | ) | $ | 391,053 | |||||||
Interest expense |
46,804 | 80,243 | | 127,047 | ||||||||||||
Provision for loan and lease losses |
23,636 | 57,814 | | 81,450 | ||||||||||||
Non-interest income |
27,954 | 100,173 | (53,154 | ) | 74,973 | |||||||||||
Non-interest expense |
108,255 | 249,360 | (56,258 | ) | 301,357 | |||||||||||
Net income (loss) before income taxes |
123,726 | (170,276 | ) | 2,722 | (43,828 | ) | ||||||||||
Income tax expense |
38,448 | (21,317 | ) | | 17,131 | |||||||||||
Net income (loss) |
$ | 85,278 | $ | (148,959 | ) | $ | 2,722 | $ | (60,959 | ) |
43 |
44 |
45 |
46 |
Our consolidated operating results for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011, were as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
2012 | 2011 | % Change |
2012 | 2011 | % Change |
|||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
Interest income |
$ | 115,234 | $ | 121,476 | -5.1 | % | $ | 353,293 | $ | 391,053 | -9.7 | % | ||||||||||||
Interest expense |
19,513 | 34,488 | -43.4 | 60,535 | 127,047 | -52.4 | ||||||||||||||||||
Provision for loan and lease losses |
8,959 | 35,118 | -74.5 | 30,567 | 81,450 | -62.5 | ||||||||||||||||||
Non-interest income |
9,297 | 32,484 | -71.4 | 29,297 | 74,973 | -60.9 | ||||||||||||||||||
Non-interest expense |
47,009 | 176,346 | -73.3 | 144,259 | 301,357 | -52.1 | ||||||||||||||||||
Income tax expense (benefit) |
18,003 | (11,280 | ) | 259.6 | (296,305 | ) | 17,131 | -1,829.6 | ||||||||||||||||
Net income (loss) |
31,047 | (80,712 | ) | 138.5 | 443,534 | (60,959 | ) | 827.6 |
Our consolidated yields on interest-earning assets and the costs of interest-bearing liabilities for the nine months ended September 30, 2012 and 2011 were as follows:
Nine Months Ended September 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Weighted Average Balance |
Net Interest Income/Expense |
Average Yield/Cost |
Weighted Average Balance |
Net Interest Income/Expense |
Average Yield/Cost |
|||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
Loans(1) |
$ | 5,929,715 | $ | 322,437 | 7.26 | % | $ | 5,698,156 | $ | 344,308 | 8.08 | % | ||||||||||||
Investment securities |
1,257,571 | 29,737 | 3.16 | 1,597,382 | 44,675 | 3.74 | ||||||||||||||||||
Cash and other interest-earning assets |
397,327 | 1,119 | 0.38 | 1,018,800 | 2,070 | 0.27 | ||||||||||||||||||
Total asset-related balances |
7,584,613 | 353,293 | 6.22 | 8,314,338 | 391,053 | 6.29 | ||||||||||||||||||
Deposits |
5,347,534 | 38,669 | 0.97 | 4,749,229 | 40,203 | 1.13 | ||||||||||||||||||
Borrowings(2) |
1,272,592 | 21,866 | 2.30 | 2,083,481 | 86,844 | 5.57 | ||||||||||||||||||
Total liabilities-related balances |
6,620,126 | 60,535 | 1.22 | 6,832,710 | 127,047 | 2.49 | ||||||||||||||||||
Net interest income/spread |
$ | 292,758 | 5.00 | % | $ | 264,006 | 3.80 | % | ||||||||||||||||
Net interest margin |
5.16 | % | 4.25 | % |
(1) | Loans balances are net of deferred loan fees and discounts. |
(2) | Borrowings include term debt and other borrowings, such as subordinated debt, convertible debt and FHLB borrowings. |
Income Taxes
We provide for income taxes as a C corporation on income earned from operations. For the tax years ended 2010 and 2009, our subsidiaries were not able to participate in the filing of a consolidated federal tax return. We have consolidated our subsidiaries in 2011 for federal tax purposes. We are subject to federal, foreign, state and local taxation in various jurisdictions.
We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates for the periods in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the change.
Periodic reviews of the carrying amount of deferred tax assets are made to determine if the establishment of a valuation allowance is necessary. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized. All evidence, both positive and negative, is evaluated when making this determination. Items considered in this analysis include the ability
47 |
to carry back losses to recoup taxes previously paid, the reversal of temporary differences, tax planning strategies, historical financial performance, expectations of future earnings and the length of statutory carryforward periods. Significant judgment is required in assessing future earning trends and the timing of reversals of temporary differences.
In 2009, we established a valuation allowance against a substantial portion of our net deferred tax assets where we determined that there was significant negative evidence with respect to our ability to realize such assets. Negative evidence we considered in making this determination included the history of operating losses and uncertainty regarding the realization of a portion of the deferred tax assets at future points in time. As of September 30, 2012 and December 31, 2011, the valuation allowance was $159.4 million and $515.2 million, respectively.
In June 2012, we reversed $347.4 million of the valuation allowance. Each of the deferred tax assets was evaluated based on our evaluation of the available positive and negative evidence with respect to our ability to realize the deferred tax asset, including considering their associated character and jurisdiction. The decision to reverse a large portion of the valuation allowance was based on our evaluation of all positive and negative evidence which did not include any significant tax planning strategies. A cumulative loss position, such as we had for the previous three-year period ended December 31, 2011, is generally considered significant negative evidence in assessing the realizability of a deferred tax asset. However, subsequent to the establishment of the valuation allowance in 2009, significant positive evidence had developed which overcame this negative evidence such that, during the nine months ended September 30, 2012, management determined that it is more likely than not that the deferred tax asset will be realized. This determination was made not based upon a single event or occurrence, but based upon the accumulation of all positive and negative evidence including recent trends in our earnings and taxable income. Other positive evidence included the projection of future taxable income based on strong CapitalSource Bank earnings, improving asset performance trends, substantial decline in the Parent Companys operations and assets, and one-time losses included in the three-year cumulative pre-tax loss (i.e., debt extinguishment loss). Additionally, we believe we will be in a cumulative pre-tax income position by the end of 2012, for the three-year period then ended.
Consolidated income tax expense/(benefit) for the three months ended September 30, 2012 and 2011 was $18.0 million and $(11.3) million, respectively. The expense for the three months ended September 30, 2012 was primarily the result of the tax expense on the pre-tax book income from CapitalSource Bank. The tax benefit for the three months ended September 30, 2011 was primarily the result of the change in valuation allowance related to the deferred tax assets of CapitalSource Bank. Consolidated income tax (benefit) expense for the nine months ended September 30, 2012 and 2011 was $(296.3) million and $17.1 million, respectively. The tax benefit for the nine months ended September 30, 2012 was caused primarily by the reversal of a large portion of the valuation allowance against our deferred tax assets. The tax expense recorded for the nine months ended September 30, 2011 was primarily related to the reestablishment of a valuation allowance at the consolidated group level with respect to CapitalSource Banks net deferred tax assets, and state income tax expenses incurred by CapitalSource Bank.
Comparison of the Three and Nine Months Ended September 30, 2012 and 2011
CapitalSource Bank Segment
Our CapitalSource Bank segment operating results for the three and nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011, were as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
2012 | 2011 | % Change |
2012 | 2011 | % Change |
|||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
Interest income |
$ | 99,807 | $ | 92,173 | 8.3 | % | $ | 294,539 | $ | 274,467 | 7.3 | % | ||||||||||||
Interest expense |
15,521 | 15,982 | -2.9 | 46,974 | 46,804 | 0.4 | ||||||||||||||||||
Provision (benefit) for loan and lease losses |
273 | 13,725 | -98.0 | 14,745 | 23,636 | -37.6 | ||||||||||||||||||
Non-interest income |
13,585 | 14,614 | -7.0 | 42,252 | 27,954 | 51.1 | ||||||||||||||||||
Non-interest expense |
39,964 | 35,345 | 13.1 | 124,307 | 108,255 | 14.8 | ||||||||||||||||||
Income tax expense |
23,782 | 16,513 | 44.0 | 62,047 | 38,448 | 61.4 | ||||||||||||||||||
Net income |
33,852 | 25,222 | 34.2 | 88,718 | 85,278 | 4.0 |
48 |
49 |
50 |
Net Interest Margin
Three months ended September 30, 2012 and 2011
The yields of income earning assets and the costs of interest-bearing liabilities for the three months ended September 30, 2012 and 2011 were as follows:
Three Months Ended September 30 | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Weighted Average Balance |
Net Interest Income |
Average Yield/Cost |
Weighted Average Balance |
Net Interest Income |
Average Yield/Cost |
|||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
Loans(1) |
$ | 5,231,242 | $ | 91,367 | 6.95 | % | $ | 4,192,610 | $ | 79,346 | 7.51 | % | ||||||||||||
Investment securities |
1,206,868 | 8,123 | 2.68 | 1,581,170 | 12,499 | 3.14 | ||||||||||||||||||
Cash and other interest-earning assets |
314,439 | 317 | 0.40 | 350,143 | 327 | 0.37 | ||||||||||||||||||
Total interest-earning assets |
6,752,549 | $ | 99,807 | 5.88 | 6,123,923 | 92,173 | 5.97 | |||||||||||||||||
Deposits |
5,469,501 | 12,738 | 0.93 | 4,833,941 | 13,422 | 1.10 | ||||||||||||||||||
Borrowings(2) |
597,674 | 2,783 | 1.85 | 506,413 | 2,560 | 2.01 | ||||||||||||||||||
Total interest-bearing liabilities |
6,067,175 | 15,521 | 1.02 | 5,340,354 | 15,982 | 1.19 | ||||||||||||||||||
Net interest spread |
$ | 84,286 | 4.86 | % | $ | 76,191 | 4.78 | % | ||||||||||||||||
Net interest margin |
4.97 | % | 4.94 | % |
(1) | Loans balances are net of deferred loan fees and discounts. |
(2) | Borrowings include term debt and other borrowings, such as subordinated debt, convertible debt and FHLB borrowings. |
Nine months ended September 30, 2012 and 2011
The yields of income earning assets and the costs of interest-bearing liabilities in this segment for the nine months ended September 30, 2012 and 2011 were as follows:
Nine Months Ended September 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Weighted Average Balance |
Net Interest Income |
Average Yield/Cost |
Weighted Average Balance |
Net Interest Income |
Average Yield/Cost |
|||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
Loans(1) |
$ | 5,046,915 | $ | 267,905 | 7.09 | % | $ | 3,977,518 | $ | 234,679 | 7.87 | % | ||||||||||||
Investment securities |
1,229,735 | 25,625 | 2.78 | 1,577,016 | 38,821 | 3.28 | ||||||||||||||||||
Cash and other interest-earning assets |
321,395 | 1,008 | 0.42 | 371,099 | 967 | 0.35 | ||||||||||||||||||
Total interest-earning assets |
6,598,045 | $ | 294,538 | 5.96 | 5,925,633 | 274,467 | 6.19 | |||||||||||||||||
Deposits |
5,347,534 | 38,669 | 0.97 | 4,749,229 | 40,203 | 1.13 | ||||||||||||||||||
Borrowings(2) |
583,785 | 8,305 | 1.90 | 435,879 | 6,601 | 2.02 | ||||||||||||||||||
Total interest-bearing liabilities |
5,931,319 | 46,974 | 2.87 | 5,185,108 | 46,804 | 1.21 | ||||||||||||||||||
Net interest spread |
$ | 247,564 | 3.10 | % | $ | 227,663 | 4.98 | % | ||||||||||||||||
Net interest margin |
5.01 | % | 5.14 | % |
(1) | Loans balances are net of deferred loan fees and discounts. |
(2) | Borrowings include term debt and other borrowings, such as subordinated debt, convertible debt and FHLB borrowings. |
51 |
Provision for Loan and Lease Losses
Our provision for loan and lease losses is based on our evaluation of the adequacy of the existing allowance for loan and lease losses in relation to total loan portfolio and our periodic assessment of the inherent risks relating to the loan portfolio resulting from our review of selected individual loans. For details of activity in our provision for loan and lease losses, see the Credit Quality and Allowance for Loan and Lease Losses section.
Non-Interest Income
Comparison of three and nine months ended September 30, 2012 vs. 2011
CapitalSource Bank acts as servicer and agent for loans and other assets, which are owned by the Parent Company and partially owned by third parties, for which it receives fees based on the level of servicing effort for the loans and other assets. Such fee income is included as part of non-interest income. Loans serviced by CapitalSource Bank for the benefit of others were $6.6 billion and $2.5 billion as of September 30, 2012 and December 31, 2011, respectively, of which $5.7 billion and $1.0 billion, respectively, were owned by the Parent Company. CapitalSource Bank also provides tax, credit, treasury and other similar services to the Parent Company for which it receives fees.
In addition, we summarize the other various components of non-interest income for the three and nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011 as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
9/30/2012 | 9/30/2011 | $ Change |
% Change |
9/30/2012 | 9/30/2011 | $ Change |
% Change |
|||||||||||||||||||||||||
($ in thousands) | ($ in thousands) | |||||||||||||||||||||||||||||||
Loan fees |
$ | 3,469 | $ | 1,804 | $ | 1,665 | 92.3 | % | $ | 9,566 | $ | 5,373 | $ | 4,193 | 78.0 | % | ||||||||||||||||
Leased equipment income |
3,299 | 901 | 2,398 | 266.1 | 9,814 | 974 | 8,840 | 907.6 | ||||||||||||||||||||||||
(Loss) gain on investments, net |
(1 | ) | 1,624 | (1,625 | ) | -100.1 | (1 | ) | 2,845 | (2,846 | ) | -100.0 | ||||||||||||||||||||
(Loss) gain on derivatives |
(976 | ) | 1,017 | (1,993 | ) | -196.0 | (989 | ) | 346 | (1,335 | ) | -385.8 | ||||||||||||||||||||
Bank fees |
150 | 156 | (6 | ) | -3.8 | 180 | 192 | (12 | ) | -6.3 | ||||||||||||||||||||||
(Loss) gain on sale of assets |
(554 | ) | 4,962 | (5,516 | ) | -111.2 | (520 | ) | 5,701 | (6,221 | ) | -109.1 | ||||||||||||||||||||
Intercompany loan servicing revenue |
2,305 | 2,866 | (561 | ) | -19.6 | 8,273 | 9,977 | (1,704 | ) | -17.1 | ||||||||||||||||||||||
Other |
5,893 | 1,284 | 4,609 | 359.0 | 15,929 | 2,546 | 13,383 | 525.6 | ||||||||||||||||||||||||
Total |
$ | 13,585 | $ | 14,614 | $ | (1,029 | ) | -7.0 | % | $ | 42,252 | $ | 27,954 | $ | 14,298 | 51.1 | % |
| Loan fees increased $1.7 million, or 92.3%, from the three months ended September 30, 2011 to the three months ended September 30, 2012 primarily due an increase in average loan balances of $1.0 billion, or 24.8%, increasing related loan termination fees due to greater late fees, penalties, and recurring fees. Loans fees increased $4.2 million, or 78.0%, from the nine months ended September 30, 2011 to the nine months ended September 30, 2012 primarily due to loan termination fees, penalties and recurring fees. |
| Leased equipment income increased $2.4 million, or 266.1%, from the three months ended September 30, 2011 to the three months ended September 30, 2012 primarily due to $74.7 million, or 644.2%, increase in average equipment on operating leases from $11.5 million as of September 30, 2011 to $85.9 million as of September 30, 2012. Leased equipment income increased $8.8 million, or 907.6% from the nine months ended September 30, 2011 to the nine months ended September 30, 2012 primarily due to $80.7 million, or 1,771.0%, increase in average equipment on operating leases from $4.6 million as of September 30, 2011 to $85.2 million as of September 30, 2012. |
| Gain on investments, net, decreased $1.6 million, or 100.1%, from the three months ended September 30, 2011 to the three months ended September 30, 2012 primarily due to realized losses on the sale of equity securities and relatively decreased equity investments as of September 30, 2012. Gain on investments decreased $2.8 million, or 100.0%, from the nine months ended September 30, 2011 to the nine months ended September 30, 2012 due to the reasons mentioned above. |
| Gain on derivatives decreased $2.0 million to a loss position, or 196.0%, from the three months ended September 30, 2011 to the three months ended September 30, 2012 due to market adjustment of forward exchange contracts with the Canadian dollar. Gain on derivatives decreased $1.3 million, or 385.8%, from the nine months ended period September 30, 2011 to September 30, 2012 due to the reason mentioned above. |
52 |
| Gain on sale of assets decreased $5.5 million, or 111.2%, from the three months ended September 30, 2011 to the three months ended September 30, 2012 primarily due to $4.8 million decreased gain on sales of commercial loans to third parties and $765 thousand decrease in intercompany loan sales. Sale activities on loans have decreased since prior year, as the Bank continues to improve the asset quality of the loan portfolio. Gain on sale of assets decreased $6.2 million, or 109.1%, from the nine months ended September 30, 2011 to the nine months ended September 30, 2012 primarily due to $4.8 million decreased gain on sale of commercial loans, $818 thousand decrease in loans held for sale adjustments for lower of market or cost, and $765 thousand decrease in intercompany loan sales. |
| Other income increased $4.6 million, or 359.0%, from the three months ended September 30, 2011 to the three months ended September 30, 2012 primarily due a $2.7 million increase in gains on foreign currency translations arising from loans denominated in foreign currencies. In addition, shared service revenue increased by $1.8 million as administrative and service functions have been transferred to the Bank. Other income increased $13.4 million, or 525.7%, from the nine months ended September 30, 2011 to the nine months ended September 30, 2012 primarily due a $2.1 million increase in gains on foreign currency translations arising from loans denominated in foreign currencies. In addition, shared service revenue increased by $7.3 million as administrative and service functions have been transferred to the Bank, and SBA loan fees contributed to a $1.7 million increase. |
Non-Interest Expense
Comparison of three and nine months ended September 30, 2012 vs. 2011
Prior to 2012, CapitalSource Bank relied on the Parent Company to refer loans and to provide loan origination due diligence services. For these services CapitalSource Bank paid the Parent Company fees based upon the commitment amount of each new loan funded by CapitalSource Bank during the period. CapitalSource Bank also paid the Parent Company to perform certain underwriting and other services. These fees were eliminated in consolidation. Effective January 1, 2012, the Parent Company no longer performed these services and CapitalSource Bank directly assumed the expenses for these services. The expenses are included in other non-interest expense and were $2.3 million and $11.2 million for the three months ended September 30, 2012 and 2011, respectively.
CapitalSource Bank subleases from the Parent Company office space in several locations and also leases space to the Parent Company in other facilities in which CapitalSource Bank is the primary lessee. In addition, we summarize the other various components of non-interest expense for three and nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011 as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
9/30/2012 | 9/30/2011 | $ Change |
% Change |
9/30/2012 | 9/30/2011 | $ Change |
% Change |
|||||||||||||||||||||||||
($ in thousands) | ($ in thousands) | |||||||||||||||||||||||||||||||
Compensation and benefits |
$ | 25,254 | $ | 13,185 | $ | 12,069 | 91.5 | % | $ | 74,818 | $ | 36,819 | $ | 37,999 | 103.2 | % | ||||||||||||||||
Professional fees |
1,404 | 500 | 904 | 180.8 | 4,615 | 1,107 | 3,508 | 316.9 | ||||||||||||||||||||||||
Occupancy expenses |
2,520 | 1,798 | 722 | 40.2 | 7,660 | 5,249 | 2,411 | 45.9 | ||||||||||||||||||||||||
FDIC fees and assessments |
1,507 | 1,375 | 132 | 9.6 | 4,419 | 4,706 | (287 | ) | -6.1 | |||||||||||||||||||||||
General depreciation and amortization |
953 | 1,021 | (68 | ) | -6.7 | 2,920 | 3,239 | (319 | ) | -9.8 | ||||||||||||||||||||||
Other administrative expenses |
5,464 | 15,118 | (9,654 | ) | -63.9 | 21,629 | 47,319 | (25,690 | ) | -54.3 | ||||||||||||||||||||||
Total operating expenses |
37,102 | 32,997 | 4,105 | 12.4 | 116,061 | 98,439 | 17,622 | 17.9 | ||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||
Leased equipment depreciation |
2,307 | 668 | 1,639 | 245.4 | 6,883 | 708 | 6,175 | 872.2 | ||||||||||||||||||||||||
Expense of real estate owned and other foreclosed assets, net |
16 | 1,410 | (1,394 | ) | -98.9 | 1,334 | 10,225 | (8,891 | ) | -87.0 | ||||||||||||||||||||||
Total non-interest expense |
539 | 270 | 269 | 99.6 | 29 | (1,117 | ) | 1,146 | -102.6 | |||||||||||||||||||||||
Total |
$ | 39,964 | $ | 35,345 | $ | 4,619 | 13.1 | % | $ | 124,307 | $ | 108,255 | $ | 16,052 | 14.8 | % |
53 |
| Compensation and benefits increased $12.1 million, or 91.5%, from the three months ended September 30, 2011 to the three months ended September 30, 2012 primarily due the transfer of Parent Company employees to the Bank during the current year. Compensation and benefits increased $38.0 million, or 103.2%, from the nine months ended September 30, 2011 to the nine months ended September 30, 2012 due to the reason mentioned above. |
| Other administrative expenses decreased $9.7 million, or 63.9%, from the three months ended September 30, 2011 to the three months ended September 30, 2012 primarily due to a $10.1 million decrease in intercompany loan sourcing fees, which is an expense paid to the Parent for loan referrals. The overall increase is offset by slight increases various other administrative expenses, such as FDIC premiums, Bank IT expenses, and marketing. Other administrative expenses decreased $25.7 million, or 54.3 %, from the nine months ended September 30, 2011 to the nine months ended September 30, 2012 primarily due to a $36.4 million decrease in intercompany loan sourcing fees, offset by slight increases various other administrative expenses. |
| Leased equipment depreciation increased $1.6 million, or 245.4%, from the three months ended September 30, 2011 to the three months ended September 30, 2012 primarily due an increased asset base during 2012, which is managed by the equipment leasing unit of the Bank. Equipment increased from $45.1 million as of September 30, 2011 to $102.1 million as of September 30, 2012, representing a 126.6% increase which in line with the 245.4% increases in depreciation expense. Leased equipment depreciation increased $6.2 million, or 872.2%, from the nine months ended September 30, 2011 to the nine months ended September 30, 2012 due to the reason mentioned above. |
Other Commercial Finance Segment
Our Other Commercial Finance segment operating results for the three and nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011, were as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||||||||||
2012 | 2011 | % Change | 2012 | 2011 | % Change | |||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
Interest income |
$ | 16,899 | $ | 28,653 | -41.0 | % | $ | 62,579 | $ | 116,968 | -46.5 | % | ||||||||||||
Interest expense |
3,992 | 18,506 | -78.4 | 13,561 | 80,243 | -83.1 | ||||||||||||||||||
Provision for loan and lease losses |
8,686 | 21,393 | -59.4 | 15,822 | 57,814 | -72.6 | ||||||||||||||||||
Non-interest income |
1,439 | 35,015 | -95.9 | 6,524 | 100,173 | -93.5 | ||||||||||||||||||
Non-interest expense |
13,037 | 158,305 | -91.8 | 40,226 | 249,360 | -83.9 | ||||||||||||||||||
Income tax (benefit) expense |
(5,779 | ) | (27,793 | ) | 79.2 | (358,352 | ) | (21,317 | ) | -1,581.1 | ||||||||||||||
Net (loss) income |
(1,598 | ) | (106,743 | ) | 98.5 | 357,846 | (148,959 | ) | 340.2 |
Interest Income
Three months ended September 30, 2012 and 2011
Interest income decreased to $16.9 million for the three months ended September 30, 2012 from $28.7 million for the three months ended September 30, 2011, primarily due to a decrease in average total interest-earning assets. During the three months ended September 30, 2012, our average balance of interest-earning assets decreased by $1.1 billion, or 56.2%, compared to the three months ended September 30, 2011, due to the runoff of Parent Company loans. During the three months ended September 30, 2012, yield on average interest-earning assets increased to 7.66% from 5.67% for the three months ended September 30, 2011. During the three months ended September 30, 2012, our lending spread to average one-month LIBOR was 8.37% compared to 8.58% for the three months ended September 30, 2011. Fluctuations in loan yields are driven by various factors, such as prime rates or one-month LIBOR which impact lending rates, the coupon on loans that pay down or pay off, non-accrual loans, and modifications of interest rates on existing loans.
Nine months ended September 30, 2012 and 2011
Interest income decreased to $62.6 million for the nine months ended September 30, 2012 from $117.0 million for the nine months ended September 30, 2011, primarily due to a decrease in average total interest-earning assets. During the nine months ended September 30, 2012, our average balance of interest-earning assets decreased by $1.4 billion, or 58.7%, compared to the nine months ended September 30, 2011, due to the runoff of Parent Company loans. During the nine months ended September 30, 2012, yield on
54 |
average interest-earning assets increased to 8.49% from 6.56% for the nine months ended September 30, 2011. During the nine months ended September 30, 2012, our lending spread to average one-month LIBOR was 8.35% compared to 8.57% for the nine months ended September 30, 2011. Fluctuations in loan yields are driven by various factors, such as prime rates or one-month LIBOR which impact lending rates, the coupon on loans that pay down or pay off, non-accrual loans, and modifications of interest rates on existing loans.
Interest Expense
Three months ended September 30, 2012 and 2011
Interest expense decreased to $4.0 million for the three months ended September 30, 2012 from $18.5 million for the three months ended September 30, 2011, primarily due to a decrease in average interest-bearing liabilities from $1.3 billion as of September 30, 2011 to $0.6 billion as of September 30, 2012. The decrease in interest-bearing liabilities was primarily attributed to a 51.8% decrease from the reduction of the outstanding balances on our credit facilities and other term debt. Our cost of borrowings decreased to 2.56% for the three months ended September 30, 2012 from 5.70% for the three months ended September 30, 2011, as a result of the reduction and termination of certain of our credit facilities and decreases in our remaining securitization balances, all of which generally had higher borrowing costs than the remainder of our borrowings.
Nine months ended September 30, 2012 and 2011
Interest expense decreased to $13.6 million for the nine months ended September 30, 2012 from $80.2 million for the nine months ended September 30, 2011, primarily due to a decrease in average interest-bearing liabilities of $1.6 billion as of September 30, 2011 to $0.7 billion as of September 30, 2012. The decrease in interest-bearing liabilities was primarily attributed to a 58.2% decrease from the reduction of the outstanding balances on our credit facilities and other term debt. Our cost of borrowings decreased to 2.63% for the nine months ended September 30, 2012 from 6.51% for the nine months ended September 30, 2011, as a result of the reduction and termination of certain of our credit facilities and decreases in our remaining securitization balances, all of which generally had higher borrowing costs than the remainder of our borrowings.
Net Interest Margin
Three months ended September 30, 2012 and 2011
The yields of income earning assets and the costs of interest-bearing liabilities in this segment for the three months ended September 30, 2012 and 2011 were as follows:
Three Months Ended September 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Weighted Average Balance |
Net Interest Income |
Average Yield/Cost |
Weighted Average Balance |
Net Interest Income |
Average Yield/Cost |
|||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
Loans(1) |
$ | 763,361 | $ | 15,171 | 7.91 | % | $ | 1,256,049 | $ | 27,165 | 5.60 | % | ||||||||||||
Investment securities |
21,140 | 1,661 | 31.26 | 25,142 | 1,136 | 17.98 | ||||||||||||||||||
Cash and other interest-earning assets |
93,222 | 67 | 0.29 | 722,463 | 352 | 0.19 | ||||||||||||||||||
Total interest-earning assets |
877,723 | $ | 16,899 | 7.66 | 2,003,654 | 28,653 | 5.67 | |||||||||||||||||
Borrowings(2) |
621,371 | 3,992 | 2.56 | 1,288,808 | 18,506 | 5.70 | ||||||||||||||||||
Total interest-bearing liabilities |
621,371 | 3,992 | 2.56 | 1,288,808 | 18,506 | 5.70 | ||||||||||||||||||
Net interest spread |
$ | 12,907 | 5.11 | % | $ | 10,147 | -0.03 | % | ||||||||||||||||
Net interest margin |
5.85 | % | 2.01 | % |
(1) | Loans balances are net of deferred loan fees and discounts. |
(2) | Borrowings include term debt and other borrowings, such as subordinated debt, convertible debt and FHLB borrowings. |
55 |
Nine months ended September 30, 2012 and 2011
The yields of income earning assets and the costs of interest-bearing liabilities in this segment for the nine months ended and 2011 were as follows:
Nine Months Ended September 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Weighted Average Balance |
Net Interest Income |
Average Yield/Cost |
Weighted Average Balance |
Net Interest Income |
Average Yield/Cost |
|||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||
Loans(1) |
$ | 881,071 | $ | 58,357 | 8.85 | % | $ | 1,717,146 | $ | 110,011 | 8.56 | % | ||||||||||||
Investment securities |
27,836 | 4,112 | 19.73 | 20,366 | 5,854 | 38.40 | ||||||||||||||||||
Cash and other interest-earning assets |
75,931 | 110 | 0.19 | 647,702 | 1,103 | 0.23 | ||||||||||||||||||
Total interest-earning assets |
984,838 | 62,579 | 8.49 | 2,385,213 | 116,968 | 6.56 | ||||||||||||||||||
Borrowings(2) |
688,807 | 13,560 | 2.63 | 1,647,602 | 80,243 | 6.51 | ||||||||||||||||||
Total interest-bearing liabilities |
688,807 | 13,560 | 2.63 | 1,647,602 | 80,243 | 6.51 | ||||||||||||||||||
Net interest spread |
$ | 49,019 | 5.86 | % | $ | 36,725 | 0.05 | % | ||||||||||||||||
Net interest margin |
6.65 | % | 2.06 | % |
(1) | Loans balances are net of deferred loan fees and discounts. |
(2) | Borrowings include term debt and other borrowings, such as subordinated debt, convertible debt and FHLB borrowings. |
Provision for Loan and Lease Losses
Our provision for loan and lease losses is based on our evaluation of the adequacy of the existing allowance for loan and lease losses in relation to total loan portfolio and our periodic assessment of the inherent risks relating to the loan portfolio resulting from our review of selected individual loans. For details of activity in our provision for loan losses, see Credit Quality and Allowance for Loan and Lease Losses section.
Non-Interest Income
Comparison of three and nine months ended September 30, 2012 vs. 2011
We summarize the various components of non-interest income for the segment three and nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011 as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
9/30/2012 | 9/30/2011 | $ Change |
% Change |
9/30/2012 | 9/30/2011 | $ Change |
% Change |
|||||||||||||||||||||||||
($ in thousands) | ($ in thousands) | |||||||||||||||||||||||||||||||
Loan fees |
$ | 705 | $ | 1,617 | $ | (912 | ) | -56.4 | % | $ | 2,334 | $ | 6,062 | $ | (3,728 | ) | -61.5 | % | ||||||||||||||
Leased equipment income |
| | | | | | | | ||||||||||||||||||||||||
Gain on investments, net |
1,856 | 17,517 | (15,661 | ) | -89.4 | 930 | 48,536 | (47,606 | ) | -98.1 | ||||||||||||||||||||||
(Loss) gain on derivatives |
(2 | ) | (3,130 | ) | 3,128 | -99.9 | 339 | (4,608 | ) | 4,947 | -107.4 | |||||||||||||||||||||
Bank fees |
| | | | | | | | ||||||||||||||||||||||||
(Loss) gain on sale of assets |
(386 | ) | 5,138 | (5,524 | ) | -107.5 | 1,676 | 8,760 | (7,084 | ) | -80.9 | |||||||||||||||||||||
Intercompany loan servicing revenue |
6 | | 6 | | 92 | | 92 | | ||||||||||||||||||||||||
Other |
(740 | ) | 13,873 | (14,613 | ) | -105.3 | 1,153 | 41,423 | (40,270 | ) | -97.2 | |||||||||||||||||||||
Total |
$ | 1,439 | $ | 35,015 | $ | (33,576 | ) | -95.9 | % | $ | 6,524 | $ | 100,173 | $ | (93,649 | ) | -93.5 | % |
| Gains on investments, net decreased $15.7 million, or 89.4%, from the three months ended September 30, 2011 to the three months ended September 30, 2012 primarily due to a $10.8 million decrease in realized gain on investment securities accounted for under the |
56 |
equity method, a $2.7 million decrease in realized gain on investments carried at cost, and a $2.5 million decrease in dividend income. Gains on investments, net decreased $47.6 million, or 98.1%, from the nine months ended September 30, 2011 to the nine months ended September 30, 2012 primarily due to a $10.2 million decrease in realized gain on investment securities accounted for under the equity method, a $21.4 million decrease in realized gain on investments carried at cost, a $12.3 million decrease in realized gain on available-for-sale securities, and a $3.7 million decrease in dividend income. |
| Loss on derivatives decreased $3.1 million, 99.9%, from the three months ended September 30, 2011 to the three months ended September 30, 2012 primarily due to a $1.5 million decrease in unrealized loss on derivatives and a $1.9 million decrease in interest expense. Loss on derivatives decreased $4.9 million, or 107.4%, from a loss of $4.6 million for the nine months ended September 30, 2011 to a gain of $0.3 million for the nine months ended September 30, 2012. This decrease is primarily due to a $2.5 million realized gain on derivatives for the nine months ended September 30, 2012 compared to a $0.9 million gain for the nine months ended September 30, 2011, and a $3.3 million decrease in interest expense. |
| Gain on sale of assets decreased $5.5 million, or 107.5%, from the three months ended September 30, 2011 to the three months ended September 30, 2012 primarily due to a $5.6 million decrease of gain on loan sales and related lower of cost or market adjustments. Gain on sale of assets decreased $7.1 million, or 80.9%, from the nine months ended September 30, 2011 to the nine months ended September 30, 2012 primarily due to a $6.2 million decrease of gain on loan sales and related lower of cost or market adjustments, and a $0.9 million increase in losses from other company asset sale. |
| All other non-interest income decreased $14.6 million, or 105.3%, from the three months ended September 30, 2011 to the three months ended September 30, 2012 primarily due to a decrease of $12.2 million in intercompany revenue from CapitalSource Bank, and a $1.5 million decrease of equity in earnings from subsidiaries. All other non-interest income decreased $40.3 million, or 97.2%, from the nine months ended September 30, 2011 to the nine months ended September 30, 2012 primarily due to a decrease of $35.9 million in intercompany revenue from CapitalSource Bank, and a $3.6 million decrease of equity in earnings from subsidiaries. |
Non-Interest expense
Comparison of three and nine months ended September 30, 2012 vs. 2011
We summarize the various components of non-interest expense for the three and nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011 as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
9/30/2012 | 9/30/2011 | $ Change |
% Change |
9/30/2012 | 9/30/2011 | $ Change |
% Change |
|||||||||||||||||||||||||
($ in thousands) | ($ in thousands) | |||||||||||||||||||||||||||||||
Compensation and benefits |
269 | $ | 19,197 | $ | (18,928 | ) | -98.6 | % | $ | 2,529 | 56,458 | $ | (53,929 | ) | -95.5 | % | ||||||||||||||||
Professional fees |
1,065 | 2,597 | (1,532 | ) | -59.0 | 4,543 | 11,879 | (7,336 | ) | -61.8 | ||||||||||||||||||||||
Occupancy expenses |
1,046 | 2,035 | (989 | ) | -48.6 | 6,172 | 6,844 | (672 | ) | -9.8 | ||||||||||||||||||||||
General depreciation and amortization |
500 | 764 | (264 | ) | -34.6 | 1,984 | 2,411 | (427 | ) | -17.7 | ||||||||||||||||||||||
Other administrative expenses |
7,922 | 8,608 | (686 | ) | -8.0 | 28,749 | 34,168 | (5,419 | ) | -15.9 | ||||||||||||||||||||||
Total operating expenses |
10,802 | 33,201 | (22,399 | ) | -67.5 | 43,977 | 111,760 | (67,783 | ) | -60.7 | ||||||||||||||||||||||
Expense of real estate owned and other foreclosed assets, net |
2,292 | 11,425 | (9,133 | ) | -79.9 | 5,245 | 23,899 | (18,654 | ) | -78.1 | ||||||||||||||||||||||
(Gain) loss on extinguishment of debt |
| 113,679 | (113,679 | ) | -100.0 | (8,059 | ) | 113,679 | (121,738 | ) | -107.1 | |||||||||||||||||||||
Other non-interest expense, net |
(57 | ) | | (57 | ) | -100.0 | (937 | ) | 22 | (959 | ) | -4,359.1 | ||||||||||||||||||||
Total |
$ | 13,037 | $ | 158,305 | $ | (145,268 | ) | -91.8 | % | $ | 40,226 | $ | 249,360 | $ | (209,134 | ) | -83.9 | % |
| Compensation and benefits decreased $18.9 million, or 98.6%, from the three months ended September 30, 2011 to the three months ended September 30, 2012 primarily due to the transfer of Parent Company employees to CapitalSource Bank on January 1, 2012. Compensation and benefits also decreased $53.9 million, or 95.5%, from nine months ended September 30, 2011 to the nine months ended September 30, 2012 due to the reason mentioned above. |
57 |
| Loss on extinguishment of debt of $113.7 million for the nine months ended September 30, 2011 changed to a gain of $8.1 million for the nine months ended September 30, 2012, primarily due to the repurchase of 12.75% 2014 Senior Secured Notes during the three months ended September 30, 2011 that resulted in a $111.1 pre-tax loss, and the repurchase of TP Trusts Subordinated Debt in March 2012 which resulted in a $8.2 million gain and $0.1 million loss on convertible debt. |
Financial Condition
CapitalSource Bank Segment
As of September 30, 2012 and December 31, 2011, the CapitalSource Bank segment included:
September 30, 2012 |
December 31, 2011 |
|||||||
($ in thousands) | ||||||||
Assets: |
||||||||
Cash and cash equivalents(1) |
$ | 508,862 | $ | 317,455 | ||||
Investment securities, available-for-sale |
1,069,923 | 1,159,119 | ||||||
Investment securities, held-to-maturity |
108,066 | 111,706 | ||||||
Loans held for sale |
44,952 | 129,946 | ||||||
Loans held for investment, net(2) |
5,214,572 | 4,734,470 | ||||||
Allowance for loan and lease losses |
(98,435 | ) | (94,650 | ) | ||||
Interest receivable |
23,968 | 28,960 | ||||||
Other investments(3) |
23,018 | 23,774 | ||||||
Goodwill |
173,135 | 173,135 | ||||||
Deferred tax assets, net(4) |
2,019 | 12,586 | ||||||
FHLB SF stock |
28,200 | 27,792 | ||||||
Other assets |
183,918 | 168,244 | ||||||
Total |
$ | 7,282,198 | $ | 6,792,537 | ||||
Liabilities: |
||||||||
Deposits |
$ | 5,535,482 | $ | 5,124,995 | ||||
FHLB SF borrowings |
600,000 | 550,000 | ||||||
Other liabilities |
69,211 | 51,548 | ||||||
Total |
$ | 6,204,693 | $ | 5,726,543 |
(1) | As of September 30, 2012 and December 31, 2011, the amounts include restricted cash of $49.5 million and $0.8 million, respectively. |
(2) | Includes deferred loan fees and discounts. |
(3) | Includes investments carried at cost, investments carried at fair value and investments accounted for under the equity method. |
(4) | Includes short-term and long-term deferred income tax assets, net of related valuation allowance. |
Cash and Cash Equivalents
Cash and cash equivalents consist of amounts due from banks, U.S. Treasury securities, short-term investments and commercial paper with an initial maturity of three months or less. For additional information, see Note 3, Cash and Cash Equivalents and Restricted Cash, in our accompanying consolidated financial statements for the three and nine months ended September 30, 2012.
Investment Securities, Available-for-Sale
Investment securities, available-for-sale, consists of Agency callable notes, Agency debt, Agency MBS, Non-agency MBS and U.S. Treasury and agency securities. CapitalSource Bank pledges a portion of its investment securities, available-for-sale, to the FHLB SF, the FRB and various state and local agencies as a source of borrowing capacity as of September 30, 2012. For additional information, see Note 5, Investments, in our accompanying consolidated financial statements for the three and nine months ended September 30, 2012.
58 |
Investment Securities, Held-to-Maturity
Investment securities, held-to-maturity, consists of commercial mortgage-backed securities rated BBB or higher. CapitalSource Bank pledges a portion of its investment securities, held-to-maturity, to the FHLB SF and the FRB as a source of borrowing capacity. For additional information on our investment securities, held-to-maturity, see Note 5, Investments, in our accompanying consolidated financial statements for the three and nine months ended September 30, 2012.
Loan Portfolio Composition
The CapitalSource Bank loan balances reflected in the portfolio statistics below exclude loans held for sale of $45.0 million and $129.9 million as of September 30, 2012 and December 31, 2011, respectively.
As of September 30, 2012 and December 31, 2011, the composition of the CapitalSource Bank loan portfolio by loan type was as follows:
September 30, 2012 | December 31, 2011 | |||||||||||||||
($ in thousands except percentages) | ||||||||||||||||
Commercial |
$ | 2,898,718 | 55 | % | $ | 2,640,777 | 56 | % | ||||||||
Real estate |
2,280,493 | 44 | 2,082,130 | 43 | ||||||||||||
Real estate construction |
35,361 | 1 | 11,563 | 1 | ||||||||||||
Total(1) |
$ | 5,214,572 | 100 | % | $ | 4,734,470 | 100 | % |
(1) | Includes deferred loan fees and discounts. Excludes loans held for sale carried at lower of cost or fair value. |
As of September 30, 2012, the scheduled maturities of the CapitalSource Bank loan portfolio by loan type were as follows:
Due in One Year Or Less |
Due in One to Five Years |
Due After Five Years |
Total | |||||||||||||
($ in thousands) | ||||||||||||||||
Commercial |
$ | 222,073 | 2,463,299 | $ | 258,971 | $ | 2,944,343 | |||||||||
Real estate |
51,194 | 1,292,261 | 982,202 | 2,325,657 | ||||||||||||
Real estate construction |
10,838 | 2,612 | 22,045 | 35,495 | ||||||||||||
Total loans(1) |
$ | 284,105 | $ | 3,758,172 | $ | 1,263,218 | $ | 5,305,495 |
(1) | Includes loans held for sale carried at lower of cost or fair value. Excludes deferred loan fees and discounts. |
As of September 30, 2012, approximately 82% of the CapitalSource Bank accruing adjustable rate portfolio was subject to an interest rate floor. Due to low market interest rates as of September 30, 2012, substantially all loans with interest rate floors were bearing interest at such floors. The weighted average spread between the floor rate and the fully indexed rate on the loans was 1.06% as of September 30, 2012. To the extent the underlying indices subsequently increase, CapitalSource Banks interest yield on this portfolio will not rise as quickly due to the effect of the interest rate floors.
59 |
As of September 30, 2012, the composition of CapitalSource Bank loan balances by adjustable rate index and by loan type was as follows:
Loan Type | ||||||||||||||||||||
Commercial | Real Estate |
Real Estate - Construction |
Total | Percentage | ||||||||||||||||
($ in thousands) | ||||||||||||||||||||
1-Month LIBOR |
$ | 1,083,232 | $ | 928,825 | $ | 12,651 | $ | 2,024,708 | 38 | % | ||||||||||
2-Month LIBOR |
49,019 | 695 | | 49,714 | 1 | |||||||||||||||
3-Month LIBOR |
645,313 | 90,359 | | 735,672 | 14 | |||||||||||||||
6-Month LIBOR |
139,520 | 70,531 | | 210,051 | 4 | |||||||||||||||
6-Month EURIBOR |
| 4,110 | | 4,110 | | |||||||||||||||
Prime |
371,196 | 168,351 | 20,508 | 560,055 | 10 | |||||||||||||||
Other |
25,578 | 58,318 | | 83,896 | 2 | |||||||||||||||
Total adjustable rate loans |
2,313,858 | 1,321,189 | 33,159 | 3,668,206 | 69 | |||||||||||||||
Fixed rate loans |
578,013 | 992,692 | 2,337 | 1,573,042 | 30 | |||||||||||||||
Loans on non-accrual status |
52,473 | 11,774 | | 64,247 | 1 | |||||||||||||||
Total loans(1) |
$ | 2,944,344 | $ | 2,325,655 | $ | 35,496 | $ | 5,305,495 | 100 | % |
(1) | Includes loans held for sale carried at lower of cost or fair value. Excludes deferred loan fees and discounts. |
FHLB SF Stock
Investments in FHLB SF stock are recorded at historical cost. FHLB SF stock does not have a readily determinable fair value, but can generally be sold back to the FHLB SF at par value upon stated notice. The investment in FHLB SF stock is periodically evaluated for impairment based on, among other things, the capital adequacy of the FHLB and its overall financial condition. No impairment losses have been recorded through September 30, 2012.
Deposits
As of September 30, 2012 and December 31, 2011, a summary of CapitalSource Banks deposits by product type and the maturities of the certificates of deposit were as follows:
September 30, 2012 | December 31, 2011 | |||||||||||||||
Balance | Weighted Average Rate |
Balance | Weighted Average Rate |
|||||||||||||
($ in thousands) | ||||||||||||||||
Interest-bearing deposits: |
||||||||||||||||
Money market |
$ | 270,929 | 0.49 | % | $ | 260,032 | 0.73 | % | ||||||||
Savings |
761,416 | 0.52 | 836,521 | 0.76 | ||||||||||||
Certificates of deposit |
4,503,137 | 1.00 | 4,028,442 | 1.14 | ||||||||||||
Total interest-bearing deposits |
$ | 5,535,482 | 0.91 | % | $ | 5,124,995 | 1.06 | % |
September 30, 2012 | ||||||||
Balance | Weighted Average Rate |
|||||||
($ in thousands) | ||||||||
Remaining maturity of certificates of deposit: |
||||||||
0 to 3 months |
$ | 1,813,724 | 0.97 | % | ||||
4 to 6 months |
759,043 | 0.80 | ||||||
7 to 9 months |
340,162 | 0.97 | ||||||
10 to 12 months |
721,839 | 1.02 | ||||||
Greater than 12 months |
868,369 | 1.25 | ||||||
Total certificates of deposit |
$ | 4,503,137 | 1.00 | % |
60 |
FHLB SF Borrowings
FHLB SF borrowings increased to $600.0 million as of September 30, 2012 from $550.0 million as of December 31, 2011. These borrowings were used primarily for interest rate risk management and short-term funding purposes. The weighted-average remaining maturities of the borrowings were approximately 3.4 years and 3.7 years as of September 30, 2012 and December 31, 2011, respectively.
As of September 30, 2012, the remaining maturity and the weighted average interest rate of FHLB SF borrowings were as follows:
Balance | Weighted Average Rate |
|||||||
($ in thousands) | ||||||||
Less than 1 year |
$ | 33,000 | 1.61 | % | ||||
After 1 year through 2 years |
85,000 | 1.57 | ||||||
After 2 years through 3 years |
87,500 | 1.90 | ||||||
After 3 years through 4 years |
199,000 | 2.08 | ||||||
After 4 years through 5 years |
128,000 | 1.31 | ||||||
After 5 years |
67,500 | 2.21 | ||||||
Total |
$ | 600,000 | 1.81 | % |
Other Commercial Finance Segment
As of September 30, 2012 and December 31, 2011, the Other Commercial Finance segment included:
September 30, 2012 |
December 31, 2011 |
|||||||
($ in thousands) | ||||||||
Assets: |
||||||||
Cash and cash equivalents(1) |
$ | 178,045 | $ | 206,577 | ||||
Investment securities, available-for-sale |
24,147 | 28,883 | ||||||
Loans held for sale |
39,931 | 63,205 | ||||||
Loans held for investment, net(2) |
680,153 | 955,677 | ||||||
Allowance for loan and lease losses |
(28,195 | ) | (58,981 | ) | ||||
Interest receivable |
7,926 | 9,836 | ||||||
Other investments(3) |
43,773 | 57,472 | ||||||
Deferred tax asset, net(4) |
368,559 | 32,858 | ||||||
Other assets |
82,282 | 225,964 | ||||||
Total |
$ | 1,396,621 | $ | 1,521,491 | ||||
Liabilities: |
||||||||
Borrowings |
$ | 613,187 | $ | 774,493 | ||||
Other liabilities |
120,580 | 240,534 | ||||||
Total |
$ | 733,767 | $ | 1,015,027 |
(1) | As of September 30, 2012 and December 31, 2011, the amounts include restricted cash of $21.9 million and $64.6 million, respectively. |
(2) | Includes deferred loan fees and discounts. |
(3) | Includes investments carried at cost, investments carried at fair value and investments accounted for under the equity method. |
(4) | Includes short-term and long-term deferred income tax assets, net of related valuation allowance. |
Investment Securities, Available-for-Sale
Investment securities, available-for-sale consists of our interests in the 2006-A Trust of $24.1 million.
61 |
Other Investments
The Parent Company has made investments in some of our borrowers in connection with the loans provided to them. These investments usually include equity interests such as common stock, preferred stock, limited liability company interests, limited partnership interests and warrants.
Loan Portfolio Composition
As of September 30, 2012 and December 31, 2011, the composition of the Other Commercial Finance loan portfolio by loan type was as follows:
September 30, 2012 | December 31, 2011 | |||||||||||||||
($ in thousands except percentages) | ||||||||||||||||
Commercial |
$ | 613,954 | 90 | % | $ | 850,482 | 89 | % | ||||||||
Real estate |
54,170 | 8 | 51,080 | 5 | ||||||||||||
Real estate construction |
11,516 | 2 | 54,115 | 6 | ||||||||||||
Total(1) |
$ | 679,640 | 100 | % | $ | 955,677 | 100 | % |
(1) | Includes deferred loan fees and discounts. Excludes loans held for sale carried at lower of cost or fair value. |
As of September 30, 2012, the scheduled maturities of the Other Commercial Finance loan portfolio by loan type were as follows:
Due in One Year or Less |
Due in One to Five Years |
Due After Five Years |
Total | |||||||||||||
($ in thousands) | ||||||||||||||||
Commercial |
$ | 202,906 | $ | 457,554 | $ | | $ | 660,460 | ||||||||
Real estate |
20,044 | 35,028 | 129 | 55,201 | ||||||||||||
Real estate construction |
11,845 | | | 11,845 | ||||||||||||
Total(1) |
$ | 234,795 | $ | 492,582 | $ | 129 | $ | 727,506 |
(1) | Includes loans held for sale carried at lower of cost or fair value. Excludes deferred loan fees and discounts. |
As of September 30, 2012, approximately 94% of the Other Commercial Finance accruing adjustable rate loan portfolio was subject to an interest rate floor. Due to low market interest rates as of September 30, 2012, substantially all loans with interest rate floors were bearing interest at such floors. The weighted average spread between the floor rate and the fully indexed rate on the loans was 1.58% as of September 30, 2012. To the extent the underlying indices subsequently increase, the interest yield on these adjustable rate loans will not rise as quickly due to the effect of the interest rate floors.
As of September 30, 2012, the composition of Other Commercial Finance loan balances by adjustable rate index and by loan type was as follows:
Loan Type | ||||||||||||||||||||
Commercial | Real Estate | Real Estate - Construction |
Total | Percentage | ||||||||||||||||
($ in thousands) | ||||||||||||||||||||
1-Month LIBOR |
$ | 226,425 | $ | | $ | | $ | 226,425 | 31 | % | ||||||||||
3-Month LIBOR |
131,543 | | | 131,543 | 18 | |||||||||||||||
Prime |
233,784 | | | 233,784 | 32 | |||||||||||||||
Total adjustable rate loans |
591,752 | | | 591,752 | 81 | |||||||||||||||
Fixed rate loans |
1,938 | 35,098 | | 37,036 | 5 | |||||||||||||||
Loans on non-accrual status |
66,770 | 20,103 | 11,845 | 98,718 | 14 | |||||||||||||||
Total loans(1) |
$ | 660,460 | $ | 55,201 | $ | 11,845 | $ | 727,506 | 100 | % |
(1) | Includes loans held for sale carried at lower of cost or fair value. Excludes deferred loan fees and discounts. |
62 |
63 |
The following table presents the balance of non-performing real estate construction loans and the cumulative capitalized interest on our real estate construction loan portfolio as of the date of the balance sheet:
September 30, 2012(1) | December 31, 2011 | |||||||
($ in thousands except percentages) | ||||||||
Total real estate construction loans(2) |
$ | 47,341 | $ | 66,285 | ||||
Non-performing |
11,845 | 54,960 | ||||||
% of total real estate construction |
25 | % | 82.9 | % | ||||
Cumulative capitalized interest |
$ | 10,781 | $ | 11,565 |
(1) | As of September 30, 2012, 2 of the 22 loans that comprise our real estate construction portfolio have been extended, renewed or restructured since origination. These modifications have occurred for various reasons including, but not limited to, changes in business plans and/or work-out efforts that were best achieved via a restructuring. |
(2) | We recognized interest income on the real estate construction loan portfolio of $0.6 million and $1.4 million for the three and nine months ended September 30, 2012, and $0.7 million and $3.4 million for the three and nine months ended September 30, 2011, respectively. |
Non-performing loans
The outstanding unpaid principal balances of non-performing loans in our consolidated loan portfolio as of September 30, 2012 and December 31, 2011 were as follows:
September 30, 2012 | December 31, 2011 | |||||||
($ in thousands) | ||||||||
Non-accrual loans |
||||||||
Commercial |
$ | 116,880 | $ | 144,651 | ||||
Real estate |
30,391 | 101,453 | ||||||
Real estate construction |
11,516 | 24,087 | ||||||
Total loans on non-accrual |
$ | 158,787 | $ | 270,191 | ||||
Accruing loans contractually past-due 90 days or more |
||||||||
Commercial |
$ | | $ | | ||||
Real estate |
| 5,603 | ||||||
Real estate construction |
| | ||||||
Total accruing loans contractually past-due 90 days or more |
$ | | $ | 5,603 | ||||
Total non-performing loans |
||||||||
Commercial |
$ | 116,880 | $ | 144,651 | ||||
Real estate |
30,391 | 107,056 | ||||||
Real estate construction |
11,516 | 24,087 | ||||||
Total non-performing loans(1) |
$ | 158,787 | $ | 275,794 |
(1) | Includes deferred loan fees and discounts. Excludes loans held for sale carried at lower of cost or fair value. |
The decrease in the non-performing loan balance from December 31, 2011 to September 30, 2012 is primarily due to payoffs, charge offs, sales and foreclosures on those loans.
Additionally, certain loans within our portfolio have been identified as potential problem loans. Potential problem loans are loans that are not considered non-performing loans, as disclosed in the table above, or loans that have been restructured in a TDR, but loans where management is aware of information regarding potential credit problems of a borrower that leads to serious doubts as to the ability of such borrower to comply with the loan repayment terms. Such credit problems could eventually result in the loans being reclassified as non-performing loans. As of September 30, 2012 and December 31, 2011, we had $1.1 million and $4.8 million, respectively, in potential problem loans related to 4 and 11 loans, respectively, for which we have determined that it is probable that we will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement, but we have concluded that repayment in full of the loans is fully supported by existing collateral or an enterprise valuation of the borrower in accordance with our most recent valuation analysis.
64 |
Delinquent loans
The following table presents the balance of the non-accrual and accruing loans that are delinquent as of the date of the balance sheet:
September 30, 2012 | December 31, 2011 | |||||||
($ in thousands) | ||||||||
Non-accrual loans |
||||||||
30-89 days delinquent |
$ | 30,006 | $ | 4,317 | ||||
90+ days delinquent |
45,547 | 90,193 | ||||||
Total delinquent non-accrual loans |
$ | 75,553 | $ | 94,510 | ||||
Accruing loans |
||||||||
30-89 days delinquent |
$ | 228 | $ | 8,396 | ||||
90+ days delinquent |
| 5,603 | ||||||
Total delinquent accruing loans |
$ | 228 | $ | 13,999 |
Allowance for loan and lease losses
The activity in the allowance for loan and lease losses for the three and nine months ended September 30, 2012 and 2011 was as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
($ in thousands) | ||||||||||||||||
Balance as of beginning of period |
$ | 133,359 | $ | 199,138 | $ | 153,631 | $ | 329,122 | ||||||||
Charge offs: |
||||||||||||||||
Commercial |
(20,043 | ) | (15,715 | ) | (48,984 | ) | (132,612 | ) | ||||||||
Real estate |
(2,548 | ) | (8,485 | ) | (10,264 | ) | (46,245 | ) | ||||||||
Real estate construction |
(499 | ) | (3,114 | ) | (9,784 | ) | (28,387 | ) | ||||||||
Total charge offs |
(23,090 | ) | (27,314 | ) | (69,032 | ) | (207,244 | ) | ||||||||
Recoveries: |
||||||||||||||||
Commercial |
2,818 | 1,198 | 7,865 | 4,656 | ||||||||||||
Real estate |
4,772 | 280 | 5,046 | 11,693 | ||||||||||||
Real estate construction |
| | | 1,105 | ||||||||||||
Total recoveries |
7,590 | 1,478 | 12,911 | 17,454 | ||||||||||||
Net charge offs |
(15,500 | ) | (25,836 | ) | (56,121 | ) | (189,790 | ) | ||||||||
Charge offs upon transfer to held for sale |
(188 | ) | (68 | ) | (1,447 | ) | (12,430 | ) | ||||||||
Provision for loan and lease losses: |
||||||||||||||||
General |
(5,742 | ) | (2,356 | ) | (20,366 | ) | (71,231 | ) | ||||||||
Specific |
14,701 | 37,474 | 50,933 | 152,681 | ||||||||||||
Total provision for loan and lease losses |
8,959 | 35,118 | 30,567 | 81,450 | ||||||||||||
Balance as of end of period |
$ | 126,630 | $ | 208,352 | $ | 126,630 | $ | 208,352 | ||||||||
Allowance for loan and lease losses ratio |
2.15 | % | 3.58 | % | 2.15 | % | 3.58 | % | ||||||||
Provision for loan and lease losses as a percentage of average loans outstanding (annualized) |
0.60 | % | 2.39 | % | 0.68 | % | 1.87 | % | ||||||||
Net charge offs as a percentage of average loans outstanding (annualized) |
1.04 | % | 1.86 | % | 1.28 | % | 4.67 | % |
65 |
Our allowance for loan and lease losses decreased by $27.0 million to $126.6 million as of September 30, 2012 from $153.6 million as of December 31, 2011. This decrease was attributable to a $20.4 million decrease in general reserves and a $6.6 million decrease in specific reserves on impaired loans as further described below.
The decrease in the general reserves was driven by the sale and repayment of loans with higher historical loss factors stemming from those loans having unfavorable credit ratings. This decrease was partially offset by additions to the general reserve from new loan originations that were comprised of loan types with lower historical loss factors and certain qualitative increases to the general reserves related to the slow economic recovery, global economic conditions and changing loan portfolio concentrations. The lower effective reserve percentage was attributable to the loan composition of the portfolio as of September 30, 2012 having more favorable credit loss characteristics based on historical experience than the loan portfolio as of December 31, 2011.
Impaired loans
We employ a formal quarterly process to both identify impaired loans and record appropriate specific reserves based on available collateral and other borrower-specific information. We consider a loan to be impaired when, based on current information, we determine that it is probable that we will be unable to collect all amounts due according to the contractual terms of the original loan agreement. In this regard, impaired loans include those loans where we expect to encounter a significant delay in the collection of, and/or shortfall in the amount of contractual payments due to us as well as loans that we have assessed as impaired, but for which we ultimately expect to collect all payments. Each quarter, we determine each impaired loans fair value. The fair value is either i) the present value of payments expected to be received discounted at the loans effective interest rate, ii) the fair value of the collateral for collateral dependent loans, or iii), the impaired loans observable market price. Each impaired loans fair value is compared to the recorded investment in the impaired loan. If a shortfall exists, a specific reserve is established. The specific reserves in place at each period end are directly related to the population of impaired loans in place at each period end.
As of September 30, 2012 and December 31, 2011, our non-impaired and impaired loan balances was as follows:
September 30, 2012 | December 31, 2011 | |||||||
($ in thousands) | ||||||||
Non-impaired loans |
||||||||
Unpaid principal balance |
$ | 5,676,913 | $ | 5,333,669 | ||||
General reserves allocated |
106,817 | 127,183 | ||||||
Effective reserve % |
1.9 | % | 2.4 | % | ||||
Impaired loans |
||||||||
Unpaid principal balance |
$ | 271,206 | $ | 425,321 | ||||
Specific reserves allocated(1) |
19,813 | 26,448 | ||||||
Original legal balance previously charge off(2) |
171,077 | 191,278 | ||||||
Total cumulative charge offs and specific reserves |
190,890 | 217,726 | ||||||
Legal balance |
490,859 | 654,642 | ||||||
Expected total loss of the legal balance (%) |
38.9 | % | 33.3 | % |
(1) | The decrease in specific reserves from December 31, 2011 to September 30, 2012 stems from the net effect of i) loan resolutions of impaired loans with existing specific reserves of $7.1 million, ii) reversals of specific reserves for loans impaired as of December 31, 2011 net of related reversals or charge offs of $14.1 million, and iii) new specific reserves net of related charge offs for loans new to impairment status during the nine months ended September 30, 2012 of $14.6 million. The specific reserves in place at September 30, 2012 and at December 31, 2011 reduce the carrying values of our impaired loans to the amounts we expect to collect. |
(2) | The original legal balance of that portfolio had been previously charged off as collection was deemed remote for portions of these loans. |
66 |
CapitalSource Bank Segment
Non-performing loans
The outstanding unpaid principal balances of non-performing loans in the CapitalSource Bank loan portfolio as of September 30, 2012 and December 31, 2011 were as follows:
September 30, 2012 | December 31, 2011 | |||||||
($ in thousands) | ||||||||
Non-accrual loans |
||||||||
Commercial |
$ | 52,128 | $ | 46,777 | ||||
Real estate |
12,129 | 69,509 | ||||||
Real estate construction |
| | ||||||
Total loans on non-accrual |
$ | 64,257 | $ | 116,286 | ||||
Accruing loans contractually past-due 90 days or more |
||||||||
Commercial |
$ | | $ | | ||||
Real estate |
| | ||||||
Real estate construction |
| | ||||||
Total accruing loans contractually past-due 90 days or more |
$ | | $ | | ||||
Total non-performing loans |
||||||||
Commercial |
$ | 52,128 | $ | 46,777 | ||||
Real estate |
12,129 | 69,509 | ||||||
Real estate construction |
| | ||||||
Total non-performing loans(1) |
$ | 64,257 | $ | 116,286 |
(1) | Includes deferred loan fees and discounts. Excludes loans held for sale carried at lower of cost or fair value. |
Certain loans within our portfolio have been identified as potential problem loans. Potential problem loans are loans that are not considered non-performing loans, as disclosed in the table above, or loans that have been restructured in a TDR, but loans where management is aware of information regarding potential credit problems of a borrower that leads to serious doubts as to the ability of such borrower to comply with the loan repayment terms. Such credit problems could eventually result in the loans being reclassified as non-performing loans. We had four potential problem loans with an unpaid principal balance of $1.1 million as of September 30, 2012, and eleven potential problem loans with an unpaid principal balance of $4.8 million as of December 31, 2011.
Delinquent loans
The following table presents the balance of the non-accrual and accruing loans that are delinquent as of the date of the balance sheet:
September 30, 2012 | December 31, 2011 | |||||||
($ in thousands) | ||||||||
Non-accrual loans |
||||||||
30-89 days delinquent |
$ | 29,948 | $ | 1,910 | ||||
90+ days delinquent |
7,462 | 17,645 | ||||||
Total delinquent non-accrual loans |
$ | 37,410 | $ | 19,555 | ||||
Accruing loans |
||||||||
30-89 days delinquent |
$ | 228 | $ | 7,974 | ||||
90+ days delinquent |
| | ||||||
Total delinquent accruing loans |
$ | 228 | $ | 7,974 |
67 |
Allowance for loan and lease losses
The activity in the allowance for loan and lease losses for the three and nine months ended September 30, 2012 and 2011 was as follows:
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
($ in thousands) | ||||||||||||||||
Balance as of beginning of period |
$ | 101,784 | $ | 108,592 | $ | 94,650 | $ | 124,878 | ||||||||
Charge offs: |
||||||||||||||||
Commercial |
(7,687 | ) | | (9,786 | ) | (1,177 | ) | |||||||||
Real estate |
(874 | ) | (3,965 | ) | (7,091 | ) | (29,885 | ) | ||||||||
Real estate construction |
| | | (11,530 | ) | |||||||||||
Total charge offs |
(8,561 | ) | (3,965 | ) | (16,877 | ) | (42,592 | ) | ||||||||
Recoveries: |
||||||||||||||||
Commercial |
188 | 75 | 955 | 160 | ||||||||||||
Real estate |
4,751 | 257 | 4,962 | 11,626 | ||||||||||||
Real estate construction |
| | | 1,019 | ||||||||||||
Total recoveries |
4,939 | 332 | 5,917 | 12,805 | ||||||||||||
Net charge offs |
(3,622 | ) | (3,633 | ) | (10,960 | ) | (29,787 | ) | ||||||||
Charge offs upon transfer to held for sale |
| | | (43 | ) | |||||||||||
Provision for loan losses: |
||||||||||||||||
General |
2,242 | 1,605 | 5,567 | (14,081 | ) | |||||||||||
Specific |
(1,969 | ) | 12,120 | 9,178 | 37,717 | |||||||||||
Total provision for loan losses |
273 | 13,725 | 14,745 | 23,636 | ||||||||||||
Balance as of end of period |
$ | 98,435 | $ | 118,684 | $ | 98,435 | $ | 118,684 | ||||||||
Allowance for loan and lease losses ratio |
1.89 | % | 2.62 | % | 1.89 | % | 2.62 | % | ||||||||
Provision for loan and lease losses as a percentage of average loans outstanding (annualized) |
0.02 | % | 1.20 | % | 0.39 | % | 0.70 | % | ||||||||
Net charge offs as a percentage of average loans outstanding (annualized) |
0.28 | % | 0.34 | % | 0.29 | % | 0.99 | % |
Our allowance for loan and lease losses increased by $3.7 million to $98.4 million as of September 30, 2012 from $94.7 million as of December 31, 2011. This increase was attributable to a $5.5 million increase in general reserves and a $1.8 million decrease in specific reserves.
The increases in the general reserves was driven by additions to the general reserve from new loan originations and certain qualitative increases to the general reserves related to the slow economic recovery, global economic conditions and changing loan portfolio concentrations that were only partially offset by loans paying off or paying down. The reduction in the effective reserve percentage was attributable to the loan composition of the portfolio as of September 30, 2012 having more favorable credit loss characteristics based on historical experience than the loan portfolio as of December 31, 2011.
Impaired loans
We employ a formal quarterly process to both identify impaired loans and record specific reserves in accordance with the Company policy. For additional information, see Credit Quality and Allowance for Loan and Lease Losses Consolidated within this section.
68 |
As of September 30, 2012 and December 31, 2011, our non-impaired and impaired loan balances was as follows:
September 30, 2012 | December 31, 2011 | |||||||
($ in thousands) | ||||||||
Non-impaired loans |
||||||||
Unpaid principal balance |
$ | 5,174,914 | $ | 4,787,389 | ||||
General reserves allocated |
90,156 | 84,588 | ||||||
Effective reserve % |
1.7 | % | 1.8 | % | ||||
Impaired loans |
||||||||
Unpaid principal balance |
$ | 85,629 | $ | 124,138 | ||||
Specific reserves allocated(1) |
8,279 | 10,063 | ||||||
Original legal balance previously charge off(2) |
34,802 | 46,959 | ||||||
Total cumulative charge offs and specific reserves |
43,081 | 57,022 | ||||||
Legal balance |
128,384 | 179,100 | ||||||
Expected total loss of the legal balance (%) |
33.6 | % | 31.8 | % |
(1) | The decrease in specific reserves from December 31, 2011 to September 30, 2012 stems from the net effect of i) reversals of specific reserves for loans impaired as of December 31, 2011 net of related reversals or charge offs of $7.2 million, and ii) new specific reserves net of related charge offs for loans new to impairment status during the nine months ended September 30, 2012 of $5.4 million. The specific reserves in place at September 30, 2012 and at December 31, 2011 reduce the carrying values of our impaired loans to the amounts we expect to collect. |
(2) | The original legal balance of that portfolio had been previously charged off as collection was deemed remote for portions of these loans. |
We believe the origination strategy and underwriting practices in place support a loan portfolio with normal, acceptable degrees of credit risk. We acknowledge, however, that some of our lending products have greater credit risk than others. The categories with more credit risk than others are those that have comprised a greater degree of our historical charge offs. For the years ended December 31, 2011 and 2010 commercial real estate loans, excluding healthcare real estate loans, originated prior to the Banks July 2008 inception comprised 71% and 93%, respectively, of those years charge offs. As such, we believe commercial real estate loans, excluding healthcare real estate loans, originated prior to the Banks July 2008 inception have a higher degree of credit risk than other lending products in our portfolio. As of September 30, 2012 and December 31, 2011, commercial real estate loans, excluding healthcare real estate loans, originated prior to the Banks July 2008 inception totaled $59.3 million and $202.6 million, respectively, or 1.1% and 4.1% of total loans, respectively.
Troubled Debt Restructurings
During the three and nine months ended September 30, 2012, loans with an aggregate carrying value of $70.4 million and $135.3 million, respectively, as of their respective restructuring dates, were involved in TDRs. During the three and nine months ended September 30, 2011, loans with an aggregate carrying value of $17.7 million and $125.3 million, respectively, as of their respective restructuring dates, were involved in TDRs. Loans involved in these TDRs are assessed as impaired, generally for a period of at least one year following the restructuring, assuming the loan performs under the restructured terms and the restructured terms were at market. There were $6.2 million and $1.6 million of specific reserves allocated to loans that were involved in TDRs as of September 30, 2012 and December 31, 2011, respectively.
During 2010, CapitalSource Bank restructured, in TDRs, three commercial real estate loans into new loans using an A note / B note structure in which the B note component was fully charged off. The contractual principal balances of these three loans prior to the restructurings totaled $91.6 million. In connection with the restructurings, $8.8 million of debt was forgiven and $4.9 million was collected as principal payments, leaving $59.9 million of A notes and $18.2 million of B notes. In March 2011, one of these A / B note arrangements with an aggregate carrying value of $21.1 million as of December 31, 2010 was repaid in full, including the previously charged off $9.6 million B note. As of December 31, 2011, the aggregate carrying value of the remaining two A notes was $35.7 million and the remaining two B notes had no aggregate carrying value. In January 2012, one of the remaining two A/B note arrangements with an aggregate carrying value of $12.0 million as of December 31, 2011 was repaid in full. The $2.3 million B note of this arrangement was forgiven as part of the TDR restructure. In September 2012, the last remaining A/B note arrangement with an aggregate carrying value of $22.8 million as of June 30, 2012 was repaid in a discounted payoff that resulted on a recovery of $4.7 million.
The workout strategy discussed above results in the A note equaling a balance the borrower can service and is underwritten to a loan to value ratio based on the current collateral valuation. The A note may be assigned an internal risk rating of pass based on the revised terms and managements assessment of the borrowers ability and intent to repay. The A note is structured at a market interest rate, and the A
69 |
note debt service is typically covered by the in-place property operations allowing it to be placed on accrual status. The reduced loan amount induces the borrower to continue to support the loan and maintain the collateral despite the observed reduction in the collateral value. The B note usually bears no interest or an interest rate significantly below the market rate. The A note contains amortization provisions, and the B note requires amortization only after the full repayment of the A note.
Accrual status for each loan, including restructured A notes, is considered on a loan by loan basis. The newly established principal balance of the A note is set at a level where the borrower is expected to keep the loan current and where the underlying collateral value adequately supports the loan. The revised structure is intended to allow the A loan to be placed on accrual status.
All loans that have undergone this A note / B note restructuring are considered TDRs. The A notes are deemed impaired and remain so classified for at least one year from the date of the restructuring. After one year, the A notes are evaluated quarterly to determine if the loan performance has complied with the terms of the TDR such that the impairment classification may be removed.
In January 2012, Capital Source Bank restructured, as a TDR, a commercial real estate loan into new loans using an A note / B note / C note structure similar to the A note / B note structure described above. The contractual principal balance of the loan prior to the restructure totaled $61.0 million, of which $11.2 million was previously charged off during the year ended December 31, 2011. The January 2012 restructure resulted in a $47.4 million A note, a $2.4 million B note and a $11.2 million C note, in which the C note represents the amount of the loan previously charged off. During January 2012, the B note was repaid in full. As of September 30, 2012, the carrying value of the A note was $5.1 million and the C note had no carrying value.
Other Commercial Finance Segment
Non-performing loans
The outstanding unpaid principal balances of non-performing loans in Other Commercial Finance loan portfolio as of September 30, 2012 and December 31, 2011 were as follows:
September 30, 2012 | December 31, 2011 | |||||||
($ in thousands) | ||||||||
Non-accrual loans |
||||||||
Commercial |
$ | 64,752 | $ | 97,874 | ||||
Real estate |
18,262 | 31,944 | ||||||
Real estate construction |
11,516 | 24,087 | ||||||
Total loans on non-accrual |
$ | 94,530 | $ | 153,905 | ||||
Accruing loans contractually past-due 90 days or more |
||||||||
Commercial |
$ | | $ | | ||||
Real estate |
| 5,603 | ||||||
Real estate construction |
| | ||||||
Total accruing loans contractually past-due 90 days or more |
$ | | $ | 5,603 | ||||
Total non-performing loans |
||||||||
Commercial |
$ | 64,752 | $ | 97,874 | ||||
Real estate |
18,262 | 37,547 | ||||||
Real estate construction |
11,516 | 24,087 | ||||||
Total non-performing loans(1) |
$ | 94,530 | $ | 159,508 |
(1) | Includes deferred loan fees and discounts. Excludes loans held for sale carried at lower of cost or fair value. |
Certain loans within our portfolio have been identified as potential problem loans. Potential problem loans are loans that are not considered non-performing loans, as disclosed in the table above, or loans that have been restructured in a TDR, but loans where management is aware of information regarding potential credit problems of a borrower that leads to serious doubts as to the ability of such borrower to comply with the loan repayment terms. Such credit problems could eventually result in the loans being reclassified as non-performing loans. We had no potential problem loans as of September 30, 2012 and December 31, 2011.
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Delinquent loans
The following table presents the balance of the non-accrual and accruing loans that are delinquent as of the date of the balance sheet:
September 30, 2012 | December 31, 2011 | |||||||
($ in thousands) | ||||||||
Non-accrual loans |
||||||||
30-89 days delinquent |
$ | 58 | $ | 2,407 | ||||
90+ days delinquent |
38,035 | 72,548 | ||||||
Total delinquent non-accrual loans |
$ | 38,093 | $ | 74,955 | ||||
Accruing loans |
||||||||
30-89 days delinquent |
$ | | $ | 422 | ||||
90+ days delinquent |
| 5,603 | ||||||
Total delinquent accruing loans |
$ | | $ | 6,025 |
Allowance for loan and lease losses
The activity in the allowance for loan and lease losses for the three and nine months ended September 30, 2012 and 2011 was as follows
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
($ in thousands) | ||||||||||||||||
Balance as of beginning of period |
$ | 31,575 | $ | 90,546 | $ | 58,981 | $ | 204,244 | ||||||||
Charge offs: |
||||||||||||||||
Commercial |
(12,356 | ) | (15,715 | ) | (39,198 | ) | (131,435 | ) | ||||||||
Real estate |
(1,674 | ) | (4,520 | ) | (3,173 | ) | (16,360 | ) | ||||||||
Real estate construction |
(499 | ) | (3,114 | ) | (9,784 | ) | (16,857 | ) | ||||||||
Total charge offs |
(14,529 | ) | (23,349 | ) | (52,155 | ) | (164,652 | ) | ||||||||
Recoveries: |
||||||||||||||||
Commercial |
2,630 | 1,123 | 6,911 | 4,496 | ||||||||||||
Real estate |
21 | 23 | 83 | 67 | ||||||||||||
Real estate construction |
| | | 86 | ||||||||||||
Total recoveries |
2,651 | 1,146 | 6,994 | 4,649 | ||||||||||||
Net charge offs |
(11,878 | ) | (22,203 | ) | (45,161 | ) | (160,003 | ) | ||||||||
Charge offs upon transfer to held for sale |
(188 | ) | (68 | ) | (1,447 | ) | (12,387 | ) | ||||||||
Provision for loan and lease losses: |
||||||||||||||||
General |
(7,984 | ) | (3,961 | ) | (25,934 | ) | (57,150 | ) | ||||||||
Specific |
16,670 | 25,354 | 41,756 | 114,964 | ||||||||||||
Total provision for loan and lease losses |
8,686 | 21,393 | 15,822 | 57,814 | ||||||||||||
Balance as of end of period |
$ | 28,195 | $ | 89,668 | $ | 28,195 | $ | 89,668 | ||||||||
Allowance for loan and lease losses ratio |
4.15 | % | 6.97 | % | 4.15 | % | 6.97 | % | ||||||||
Provision for loan and lease losses as a percentage of average loans outstanding (annualized) |
4.53 | % | 6.59 | % | 2.36 | % | 6.00 | % | ||||||||
Net charge offs as a percentage of average loans outstanding (annualized) |
6.29 | % | 6.90 | % | 6.96 | % | 13.18 | % |
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Our allowance for loan and lease losses decreased by $30.8 million to $28.2 million as of September 30, 2012 from $59.0 million as of December 31, 2011. This decrease was attributable to a $25.9 million decrease in general reserves and a $4.9 million decrease in specific reserves on impaired loans as further described below.
The decrease in general reserves was a result of loan payoffs, sales and foreclosures. Our loans in categories with the greatest historical loss experience continue to pay off or be otherwise resolved.
Impaired loans
We employ a formal quarterly process to both identify impaired loans and record specific reserves in accordance with the Company policy. For additional information, see Credit Quality and Allowance for Loan and Lease Losses Consolidated within this section.
As of September 30, 2012 and September 30, 2011, our non-impaired and impaired loan balances was as follows:
September 30, 2012 | December 31, 2011 | |||||||
($ in thousands) | ||||||||
Non-impaired loans |
||||||||
Unpaid principal balance |
$ | 501,998 | $ | 670,417 | ||||
General reserves allocated |
16,661 | 42,596 | ||||||
Effective reserve % |
3.3 | % | 6.4 | % | ||||
Impaired loans |
||||||||
Unpaid principal balance |
$ | 185,578 | $ | 301,183 | ||||
Specific reserves allocated(1) |
11,534 | 16,385 | ||||||
Original legal balance previously charge off(2) |
136,276 | 144,319 | ||||||
Total cumulative charge offs and specific reserves |
147,810 | 160,704 | ||||||
Legal balance |
362,514 | 475,500 | ||||||
Expected total loss of the legal balance (%) |
40.8 | % | 33.8 | % |
(1) | The decrease in specific reserves from December 31, 2011 to September 30, 2012 stems from the net effect of i) loan resolutions of impaired loans with existing specific reserves of $7.1 million, ii) new specific reserves net of related charge offs for loans new to impairment status during the nine months ended September 30, 2012 of $9.2 million and iii) reversals of reserves of $7.0 million on existing impaired. The specific reserves in place at September 30, 2012 and at December 31, 2011 reduce the carrying values of our impaired loans to the amounts we expect to collect. |
(2) | The original legal balance of that portfolio had been previously charged off as collection was deemed remote for portions of these loans. |
In the Other Commercial Finance portfolio, the areas with more credit risk than others are those that have comprised a greater degree of our historical charge offs. For the years ended December 31, 2011 and 2010, commercial real estate loans, excluding healthcare real estate loans, originated prior to the Banks July 2008 inception comprised 22% and 48%, respectively, of those years charge offs. As such, we believe commercial real estate loans, excluding healthcare real estate loans, originated prior to the Banks July 2008 inception have a higher degree of credit risk than other lending products in our portfolio. As of September 30, 2012 and December 31, 2011, commercial real estate loans, excluding healthcare real estate loans, originated prior to the Banks July 2008 inception totaled $50.5 million and $101.1 million, respectively, or 7.0% and 9.8% of total loans, respectively. Additionally, cash flow based commercial loans originated prior to the Banks July 2008 inception are considered to be higher risk based on historical charge offs. For the years ended December 31, 2011 and 2010, cash flow based commercial loans originated prior to the Banks July 2008 inception comprised 55% and 40%, respectively, of those years charge offs. As of September 30, 2012 and December 31, 2011, cash flow based commercial loans originated prior to the Banks July 2008 inception totaled $434.1 million and $588.7 million, respectively, or 59.7% and 56.9% of total loans, respectively.
Troubled Debt Restructurings
During the three and nine months ended September 30, 2012, loans with an aggregate carrying value of $2.4 million and $29.2 million, respectively, as of their respective restructuring dates, were involved in TDRs. During the three and nine months ended September 30, 2011, loans with an aggregate carrying value of $29.4 million and $145.3 million, respectively, as of their respective restructuring dates, were involved in TDRs. Additionally, loans involved in these TDRs are assessed as impaired, generally for a period of at least one year following the restructuring, assuming the loan performs under the restructured terms and the restructured terms were at market. The specific reserves allocated to loans that were involved in TDRs were $1.9 million and $5.8 million as of September 30, 2012 and December 31, 2011, respectively.
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had financing availability with the FHLB SF equal to 35% of CapitalSource Banks total assets. The maximum financing available under this formula was $2.6 billion and $2.3 billion as of September 30, 2012 and December 31, 2011, respectively. The financing is subject to various terms and conditions including pledging acceptable collateral, satisfaction of the FHLB SF stock ownership requirement and certain limits regarding the maximum term of debt. As of September 30, 2012, securities collateral with an estimated fair value of $222.7 million and loans with an unpaid principal balance of $738.7 million were pledged to the FHLB SF. Securities and loans pledged to the FHLB SF are subject to an advance rate in determining borrowing capacity.
As of September 30, 2012 and December 31, 2011, CapitalSource Bank had borrowing capacity with the FHLB SF based on pledged collateral as follows:
September 30, 2012 | December 31, 2011 | |||||||
($ in thousands) | ||||||||
Borrowing capacity |
$ | 808,163 | $ | 838,531 | ||||
Less: outstanding principal |
(600,000 | ) | (550,000 | ) | ||||
Less: outstanding letters of credit |
(300 | ) | (600 | ) | ||||
Unused borrowing capacity |
$ | 207,863 | $ | 287,931 |
CapitalSource Bank participates in the primary credit program of the FRB of San Franciscos discount window under which approved depository institutions are eligible to borrow from the FRB for periods of up to 90 days. As of September 30, 2012, collateral with an estimated fair value of $88.7 million had been pledged under this program, and there were no borrowings outstanding under this program.
CapitalSource Bank also maintains a portfolio of available-for-sale investment securities. As of September 30, 2012, CapitalSource Bank had $459.4 million of unrestricted cash and cash equivalents and $840.5 million of unrestricted investment securities, available-for-sale. The available-for-sale investment portfolio comprises primarily highly liquid securities that can be sold and converted to cash if additional liquidity needs arise.
Parent Company Liquidity
The Parent Companys liquidity sources and uses are as follows:
Liquidity Sources
| Cash and cash equivalents; |
| Income tax payments from CapitalSource Bank(1); |
| Payments of principal and interest on loans and securities; |
| Asset sales; |
| Dividends from CapitalSource Bank(2); |
| Bank borrowings(3); and |
| Issuance of debt and equity securities(3). |
Liquidity Uses
| Interest and principal payments on existing debt; |
| Tax payments; |
| Operating expenses; |
| Share repurchases(4); |
| Debt repurchases; |
| Dividends; and |
| Funding unfunded commitments. |
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we also measure a loans compliance with our specific risk acceptance criteria. A record of which loans have exceptions to our specific risk acceptance criteria at underwriting is maintained.
We continuously monitor a clients ability to perform under its obligations. Additionally, we manage the size and risk profile of our loan portfolio by syndicating loan exposure to other lenders and selling loans.
Under our credit risk management process, each loan is assigned an internal risk rating that is based on defined credit review standards. While rating criteria vary by product, each loan rating focuses on: the borrowers financial performance and financial standing, the borrowers ability to repay the loan, and the adequacy of the collateral securing the loan. Subsequent to loan origination, risk ratings are monitored and reassessed on an ongoing basis. If necessary, risk ratings are adjusted to reflect changes in the clients financial condition, cash flow or financial position. We use risk rating aggregations to measure credit risk within the loan portfolio. In addition to risk ratings, we consider the market trend of collateral values and loan concentrations by borrower industries and real estate property types (where applicable).
Concentrations of Credit Risk
In our normal course of business, we engage in lending activities with clients primarily throughout the United States. As of September 30, 2012, the largest borrower industry concentrations in our outstanding loan balance were real estate, rental and leasing; health care and social assistance; and information processing which represented approximately 20.9%, 18.9 % and 9.5% of the outstanding loan portfolio, respectively.
Apart from the borrower industry concentrations, loans secured by real estate represented approximately 40% of our outstanding loan portfolio as of September 30, 2012. Within this area, the largest property type concentration was the multifamily category, comprising approximately 31% and the largest geographical concentration was in California, comprising approximately 25% of this loan portfolio.
Selected information pertaining to our largest credit relationships as of September 30, 2012 was as follows:
Loan Balance |
% of Total Portfolio |
Loan Type | Industry | Amount of Loan(s) at Origination |
Loan Commitment |
Performing | Specific Reserves |
Underlying Collateral(1) |
Date of Last Collateral Appraisal |
Amount of Last Appraisal |
||||||||||||||||||||||||
($ in thousands) | ||||||||||||||||||||||||||||||||||
$177,070 | 2.9 | % | Commercial | Timeshare | $ | 173,663 | $ | 209,627 | Yes | $ | | Timeshare receivables |
N/A | N/A | (2) | |||||||||||||||||||
88,824 | 1.5 | Real Estate | Resort Vacation Club |
93,972 | 96,995 | Yes | | Portfolio of vacation properties |
Various ranging from May 2012 to September 2012 |
461,030 | (3) | |||||||||||||||||||||||
85,199 | 1.4 | Commercial | Security Systems Services |
31,496 | 99,200 | Yes | | Security alarm contracts |
N/A | N/A | (4) | |||||||||||||||||||||||
$351,093 | 5.8 | % | $ | 299,131 | $ | 405,822 | $ | |
(1) | Represents the primary collateral securing the loan. In certain cases, there may be additional types of collateral. |
(2) | The collateral that secures our loan balance of $177.1 million as of September 30, 2012 primarily consists of timeshare receivables and timeshare real estate that had a total value of $276.1 million as of September 30, 2012. Total senior debt, including our loan balance, secured by the collateral was $233.0 million as of September 30, 2012. $39.9 million of our loan balance of $177.1 million is classified as held for sale at September 30, 2012. |
(3) | Total senior debt, including our loan balance, was $240.3 million as of September 30, 2012. |
(4) | Total senior debt, including our loan balance, was $214.8 million as of September 30, 2012. |
Non-performing loans include all loans on non-accrual status and accruing loans which are contractually past due 90 days or more as to principal or interest payments. There were 106 credit relationships in the non-performing portfolio as of September 30, 2012, and our largest non-performing credit relationship totaled $29.6 million and comprised 18.7% of our total non-performing loans.
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Derivative Counterparty Credit Risk
Derivative financial instruments expose us to credit risk in the event of nonperformance by counterparties to such agreements. This risk consists primarily of the termination value of agreements where we are in a favorable position. Credit risk related to derivative financial instruments is considered and provided for separately from the allowance for loan and lease losses. We manage the credit risk associated with various derivative agreements through counterparty credit review and monitoring procedures. We obtain collateral from all counterparties based on terms stipulated in the collateral support annex. We also monitor all exposure and collateral requirements daily on a per counterparty basis. We continually monitor the fair value of collateral received from counterparties and may request additional collateral from counterparties or return collateral pledged as deemed appropriate. Our agreements generally include master netting agreements whereby the counterparties are entitled to settle their derivative positions net. As of December 31, 2011, the gross positive fair value of our derivative financial instruments was $59.1 million. Our master netting agreements reduced the exposure to this gross positive fair value by $40.3 million as of December 31, 2011. We held $18.8 million of collateral against derivative financial instruments as of December 31, 2011. We held no derivative instruments that were in an asset position as of September 30, 2012. For derivatives that were in a liability position, we had posted collateral of $1.5 million as of September 30, 2012.
Market Risk Management
Market risk is the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions such as interest rate fluctuations. This risk is inherent in the financial instruments associated with our operations and/or activities, including loans, securities, short-term borrowings, long-term debt, trading account assets and liabilities and derivatives.
The primary market risk to which we are exposed is interest rate risk, which is inherent in the financial instruments associated with our operations, primarily including our loans and borrowings. Our traditional loan products are non-trading positions and are reported at amortized cost. Additionally, debt obligations that we incur to fund our business operations are recorded at historical cost. While GAAP requires a historical cost view of such assets and liabilities, these positions are still subject to changes in economic value based on varying market conditions.
Interest Rate Risk Management
Interest rate risk refers to the timing and volume differences in the re-pricing of our rate-sensitive assets and liabilities, changes in the general level of market interest rates and changes in the shape and level of various indices, including LIBOR-based indices and the prime rate. We attempt to mitigate exposure to the earnings impact of the interest rate changes by conducting the majority of our loan and deposit activity using interest rate structures that resets on a periodic basis. The majority of our loan portfolio bears interest at a spread to the LIBOR rate or a prime-based rate with most of the remainder bearing interest at a fixed rate. The majority of the deposit portfolio is comprised of certificates of deposits that generally have an initial term between 3 and 18 months. Our investment and borrowings portfolios are used to offset a portion of the remaining re-pricing risk that exists between our loans and deposits.
The Company measures interest rate risk and the effect of changes in market interest rates using a net interest income simulation analysis. The analysis incorporates forecasted changes in the balance sheet and assumptions that reflect the current interest rate environment. The analysis estimates the interest rate impact of parallel increases in interest rates over a twelve-month horizon.
The estimated changes in net interest income for a twelve-month period based on changes in the interest rates applied to the combined portfolios of our segments as of September 30, 2012, were as follows ($ in thousands):
Rate Change (Basis Points) |
||||
+ 200 |
$ | 17,319 | ||
+ 100 |
2,588 | |||
- 100 |
414 | |||
- 200 |
(59 | ) |
The analysis above incorporates the Companys assumptions for the market yield curve, pricing sensitivities on loans and deposits, reinvestment of asset and liability cash flows, and prepayments on loans and securities. The simulation analysis includes managements projection for loan originations, investment and funding strategies. The new loans, investment securities, borrowings and deposits are assumed to have interest rates that reflect our forecast of prevailing market terms. We also assumed that LIBOR and prime rates do not fall
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below 0% for loans and borrowings. Parent Company loans, investment securities and borrowings are assumed to convert to cash as they run off. Actual results may differ from forecasted results due to changes in market conditions as well as changes in management strategies.
As of September 30, 2012, approximately 57% of the aggregate outstanding principal amount of our loans had interest rate floors and were accruing interest. Of the loans with interest rate floors and accruing interest, approximately 96% had contractual rates below the interest rate floor and the floor was providing a benefit to us. The loans with contractual interest rate floors as of September 30, 2012 were as follows:
Amount Outstanding |
Percentage of Total Portfolio |
|||||||
($ in thousands) | ||||||||
Loans with contractual interest rates: |
||||||||
Below the interest rate floor |
$ | 3,412,368 | 57 | % | ||||
Exceeding the interest rate floor |
72,597 | 1 | ||||||
At the interest rate floor |
86,695 | 1 | ||||||
Loans with interest rate floors on non-accrual |
61,217 | 1 | ||||||
Loans with no interest rate floor |
2,400,124 | 40 | ||||||
Total |
$ | 6,033,001 | 100 | % |
We enter into basis swap agreements to hedge basis risk between our LIBOR-based term debt and the prime-based loans pledged as collateral for that debt. These basis swaps modify our exposure to interest rate risk by synthetically converting prime rate loans to one-month LIBOR. Our basis swap agreements partially protect us from the risk that interest collected under prime rate loans will not be sufficient to service the interest due under the one-month LIBOR-based term debt.
We have also entered into relatively short-dated forward exchange agreements to minimize exposure to foreign currency risk arising from foreign currency denominated loans.
Critical Accounting Estimates
Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. This preparation requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, actual results could differ from the estimates, assumptions, and judgments reflected in the financial statements. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported. These policies relate to the allowance for loan and lease losses, fair value measurements, and income taxes. We have established detailed policies and procedures to ensure that the assumptions and judgments surrounding these areas are adequately controlled, independently reviewed and consistently applied from period to period. Management has discussed the development, selection and disclosure of these critical accounting estimates with the Audit Committee of the Board of Directors and the Audit Committee has reviewed our disclosures related to these estimates.
There have been no significant changes during the nine months ended September 30, 2012 to the items that we disclosed as our critical accounting policies and estimates in Critical Accounting Estimates within Managements Discussion and Analysis of Financial Condition and Results of Operations included in our Form 10-K for the year ended December 31, 2011.
Supervision and Regulation
This is an update to certain sections from our discussion of Supervision and Regulation in our Form 10-K. For further information and discussion of supervision and regulation matters, see Item I. Business Supervision and Regulation, in our Form 10-K for the year ended December 31, 2011. Together with the discussion of supervision and regulation matters in our Form 10-K for the year ended December 31, 2011, the following describes some of the more significant laws, regulations, and policies that affect our operations, but is not intended to be a complete listing of all laws that apply to us. From time to time, federal, state and foreign legislation is enacted and regulations are adopted which may have the effect of materially increasing the cost of doing business, limiting or expanding permissible activities, or
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affecting the competitive balance between banks and other financial services providers. We cannot predict whether or when potential legislation will be enacted, and if enacted, the effect that it, or any implementing regulations, would have on our financial condition or results of operations.
Our bank operations are subject to regulation by federal and state regulatory agencies. This regulation is intended primarily for the protection of depositors and the deposit insurance fund, and secondarily for the stability of the U.S. banking system. It is not intended for the benefit of stockholders of financial institutions. CapitalSource Bank is a California industrial bank and is subject to supervision and regular examination by the FDIC and the DFI. CapitalSource Banks deposits are insured by the FDIC up to the maximum amounts permitted by law.
Although the Parent Company is not directly regulated or supervised by the DFI, the FDIC, the FRB or any other federal or state bank regulatory authority either as a bank holding company or otherwise, the FDIC has authority pursuant to a contractual supervisory agreement with the Parent Company (the Parent Company Agreement) to examine the Parent Company, the relationship and transactions between it and CapitalSource Bank and the effect of such relationships and transactions on CapitalSource Bank. The Parent Company also is subject to regulation by other applicable federal and state agencies, such as the Securities and Exchange Commission. We are required to file periodic reports with these regulators and provide any additional information that they may require.
The international Basel Committee on Banking Supervision published the final text of Basel III on December 16, 2010 with revisions to update capital rules on June 1, 2011. The Basel III requirements will be implemented starting January 1, 2013 and its adoption will be phased-in over an extended period of time from 2013 through 2019. From January 1, 2013 onwards, banks will have to meet the following minimum capital requirements expressed in risk-weighted assets: 3.5% share capital, 4.5% Tier-1 capital and 8% total capital. During the transition period, these ratios will gradually be stepped up to 4.5% share capital, 6% Tier-1 capital and 8% total capital. The total capital ratio will be built-up with increases along gradual lines from 0.625% at January 1, 2016 to 2.5% at January 1, 2019. As a result, banks will ultimately have to hold 10.5% of their total capital expressed in risk-weighted assets as of January 1, 2019.
In addition, the international Basel Committee on Banking Supervision will begin to introduce minimum standards over bank leverage, liquidity coverage and net stable funding ratios after specified monitoring and observation periods. The Basel Committee on Banking Supervision will introduce the leverage ratio after an initial phase-in period starting January 1, 2013 with complete migration in effect by January 1, 2018. The liquidity coverage ratio and net stable funding ratio minimum standards will be in effect by January 1, 2015 and January 1, 2018, respectively.
We will continue to monitor developments relating to Basel III adoption in the U.S. and its potential impact on our operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain financial market risks, which are discussed in detail in Managements Discussion and Analysis of Financial Condition and Results of Operations in the Market Risk Management section of this Form 10-Q and our Form 10-K. In addition, for additional information on our derivatives, see Note 14, Derivative Instruments, in our consolidated financial statements for the three and nine months ended September 30, 2012, and Note 22, Credit Risk, in our audited consolidated financial statements for the year ended December 31, 2011 included in our Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2012. There have been no changes in our internal control over financial reporting during the three and nine months ended September 30, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
A summary of our repurchases of shares of our common stock for the three months ended September 30, 2012 was as follows:
Total Number of Shares Purchased(1) |
Average Price Paid |
Total Number of Shares Purchased as Part of Publicly Announced Plan or Programs(2) |
Maximum Number of Shares (or Approximate Dollar Value) that May Yet be Purchased Under the Plans(2) |
|||||||||||||
July 1 July 31, 2012 |
34,980 | $ | 6.51 | | ||||||||||||
August 1 August 31, 2012 |
448,494 | 6.98 | 300,000 | |||||||||||||
September 1 September 30, 2012 |
5,859,319 | 7.27 | 5,740,200 | |||||||||||||
Total |
6,342,793 | 7.24 | 6,040,200 | $ | 337,450,595 |
(1) | Includes the number of shares acquired as payment by employees of applicable statutory minimum withholding taxes owed upon vesting of restricted stock granted under our Third Amended and Restated Equity Incentive Plan. |
(2) | In December 2010, our Board of Directors authorized the repurchase of up to $150.0 million of our common stock over a period of up to two years, and through December 31, 2012, our Board of Directors authorized the repurchase of an additional $635.0 million of our common stock during such period. In November 2012, a new strategy to repurchase up to $250.0 million of our common stock through December 31, 2013 was authorized (in aggregate, the Stock Repurchase Program). In September, we repurchased 9.9 million shares of our common stock under the Stock Repurchase Program at an average price of $7.35 per share for a total purchase price of $72.8 million. Of these purchases, purchases of 4,165,100 shares at an average price of $7.47 per share were settled in October 2012 which, for accounting purposes, were recorded in September 2012. Any share repurchases made under the Stock Repurchase Program will be made through open market purchases or privately negotiated transactions. The amount and timing of any repurchases will depend on market conditions and other factors and repurchases may be suspended or discontinued at any time. All shares repurchased under the Stock Repurchase Program were retired upon settlement. |
On October 30, 2012, CapitalSource Bank filed its Consolidated Reports of Condition and Income for A Bank With Domestic Offices Only FFIEC 041, for the quarter ended September 30, 2012 (the Call Report) with the Federal Deposit Insurance Corporation (FDIC).
(a) | Exhibits |
The Index to Exhibits attached hereto is incorporated herein by reference.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CAPITALSOURCE INC. | ||
Date: November 6, 2012 | /s/ JAMES J. PIECZYNSKI | |
James J. Pieczynski | ||
Director and Chief Executive Officer (Principal Executive Officer) | ||
Date: November 6, 2012 | /s/ JOHN A. BOGLER | |
John A. Bogler | ||
Chief Financial Officer (Principal Financial Officer) | ||
Date: November 6, 2012 | /s/ MICHAEL A. SMITH | |
Michael A. Smith | ||
Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) |
82 |
Exhibit No |
Description | |
3.1 | Second Amended and Restated Certificate of Incorporation (composite version; reflects all amendments through May 1, 2008) (incorporated by reference to exhibit 3.1 to the Form 10-Q filed by CapitalSource on May 12, 2008). | |
3.2 | Amended and Restated Bylaws (composite version; reflects all amendments through February 16, 2011) (incorporated by reference to exhibit 3.1 to the Form 8-K filed by CapitalSource on February 18, 2011). | |
10.1 | Sublease of Office Lease Agreement dated as of July 17, 2012, by and between CapitalSource Finance LLC and DANAC, LLC. | |
12.1 | Ratio of Earnings to Fixed Charges. | |
31.1 | Rule 13a 14(a) Certification of Chief Executive Officer. | |
31.2 | Rule 13a 14(a) Certification of Chief Financial Officer. | |
32 | Section 1350 certifications. | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Calculation Linkbase Document | |
101.LAB | XBRL Taxonomy Label Linkbase Document | |
101.PRE | XBRL Taxonomy Presentation Linkbase Document | |
101.DEF | XBRL Taxonomy Definition Document |
| Filed herewith. |
83 |