e10vq
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 March 31, 2010
Commission File
No. 1-31753
CapitalSource Inc.
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
(State of
Incorporation)
|
|
35-2206895
(I.R.S. Employer
Identification No.)
|
4445 Willard Avenue, 12th Floor
Chevy Chase, MD 20815
(Address of Principal
Executive Offices, Including Zip Code)
(800) 370-9431
(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 o
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 o No o
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 o
|
Non-accelerated
filer o
|
Smaller
reporting
company o
|
(Do not check if a 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 o No þ
As of April 30, 2010, the number of shares of the
registrants Common Stock, par value $0.01 per share,
outstanding was 322,610,909.
CapitalSource
Inc.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
($ in thousands)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
697,378
|
|
|
$
|
1,172,785
|
|
Restricted cash
|
|
|
140,195
|
|
|
|
172,765
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value
|
|
|
1,545,098
|
|
|
|
960,591
|
|
Held-to-maturity,
at amortized cost
|
|
|
218,751
|
|
|
|
242,078
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
1,763,849
|
|
|
|
1,202,669
|
|
Commercial real estate A Participation Interest, net
|
|
|
327,992
|
|
|
|
530,560
|
|
Loans:
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
15,005
|
|
|
|
670
|
|
Loans held for investment
|
|
|
7,986,929
|
|
|
|
8,321,160
|
|
Less deferred loan fees and discounts
|
|
|
(131,824
|
)
|
|
|
(146,329
|
)
|
Less allowance for loan losses
|
|
|
(686,193
|
)
|
|
|
(586,696
|
)
|
|
|
|
|
|
|
|
|
|
Loans held for investment, net (including $2.8 billion and
$3.1 billion, respectively, of loans that can be used only
to settle obligations of consolidated VIEs)
|
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|
7,168,912
|
|
|
|
7,588,135
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|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
7,183,917
|
|
|
|
7,588,805
|
|
Interest receivable
|
|
|
25,213
|
|
|
|
33,949
|
|
Direct real estate investments, net
|
|
|
333,467
|
|
|
|
336,007
|
|
Other investments
|
|
|
93,868
|
|
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|
96,517
|
|
Goodwill
|
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|
173,135
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|
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|
173,135
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|
Other assets
|
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|
642,102
|
|
|
|
679,209
|
|
Assets of discontinued operations, held for sale
|
|
|
261,045
|
|
|
|
260,541
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
11,642,161
|
|
|
$
|
12,246,942
|
|
|
|
|
|
|
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LIABILITIES AND SHAREHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
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|
Deposits
|
|
$
|
4,582,641
|
|
|
$
|
4,483,879
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|
Credit facilities
|
|
|
407,833
|
|
|
|
542,781
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|
Term debt (including $2.4 billion and $2.7 billion,
respectively, in obligations of consolidated VIEs for which
there is no recourse to the general credit of CapitalSource Inc.)
|
|
|
2,681,107
|
|
|
|
2,956,536
|
|
Other borrowings
|
|
|
1,472,403
|
|
|
|
1,466,834
|
|
Other liabilities
|
|
|
317,987
|
|
|
|
390,504
|
|
Liabilities of discontinued operations
|
|
|
216,567
|
|
|
|
223,149
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
9,678,538
|
|
|
|
10,063,683
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock (50,000,000 shares authorized; no shares
outstanding)
|
|
|
|
|
|
|
|
|
Common stock ($0.01 par value, 1,200,000,000 shares
authorized; 322,765,940 and 323,042,613 shares issued and
outstanding, respectively)
|
|
|
3,228
|
|
|
|
3,230
|
|
Additional paid-in capital
|
|
|
3,913,634
|
|
|
|
3,909,364
|
|
Accumulated deficit
|
|
|
(1,963,492
|
)
|
|
|
(1,748,822
|
)
|
Accumulated other comprehensive income, net
|
|
|
10,127
|
|
|
|
19,361
|
|
|
|
|
|
|
|
|
|
|
Total CapitalSource Inc. shareholders equity
|
|
|
1,963,497
|
|
|
|
2,183,133
|
|
Noncontrolling interests
|
|
|
126
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
1,963,623
|
|
|
|
2,183,259
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
11,642,161
|
|
|
$
|
12,246,942
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
3
CapitalSource
Inc.
|
|
|
|
|
|
|
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|
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|
Three Months Ended March 31,
|
|
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|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands, except per share data)
|
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
154,384
|
|
|
$
|
223,198
|
|
Investment securities
|
|
|
14,591
|
|
|
|
20,553
|
|
Other
|
|
|
573
|
|
|
|
1,742
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
169,548
|
|
|
|
245,493
|
|
Fee income
|
|
|
6,442
|
|
|
|
5,859
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
175,990
|
|
|
|
251,352
|
|
Operating lease income
|
|
|
8,503
|
|
|
|
8,526
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
184,493
|
|
|
|
259,878
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
16,358
|
|
|
|
38,387
|
|
Borrowings
|
|
|
51,159
|
|
|
|
91,284
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
67,517
|
|
|
|
129,671
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
116,976
|
|
|
|
130,207
|
|
Provision for loan losses
|
|
|
218,940
|
|
|
|
155,267
|
|
|
|
|
|
|
|
|
|
|
Net investment loss after provision for loan losses
|
|
|
(101,964
|
)
|
|
|
(25,060
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
34,183
|
|
|
|
35,037
|
|
Depreciation of direct real estate investments
|
|
|
2,540
|
|
|
|
2,540
|
|
Professional fees
|
|
|
10,370
|
|
|
|
17,238
|
|
Other administrative expenses
|
|
|
18,749
|
|
|
|
16,876
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
65,842
|
|
|
|
71,691
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Gain (loss) on investments, net
|
|
|
6,079
|
|
|
|
(16,127
|
)
|
Loss on derivatives
|
|
|
(4,337
|
)
|
|
|
(686
|
)
|
Gain on residential mortgage investment portfolio
|
|
|
|
|
|
|
15,311
|
|
Gain (loss) on extinguishment of debt
|
|
|
698
|
|
|
|
(57,128
|
)
|
Other expense
|
|
|
(28,361
|
)
|
|
|
(15,140
|
)
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(25,921
|
)
|
|
|
(73,770
|
)
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations before income taxes
|
|
|
(193,727
|
)
|
|
|
(170,521
|
)
|
Income tax expense (benefit)
|
|
|
21,006
|
|
|
|
(55,341
|
)
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(214,733
|
)
|
|
|
(115,180
|
)
|
Net income from discontinued operations, net of taxes
|
|
|
3,043
|
|
|
|
9,653
|
|
Gain from sale of discontinued operations, net of taxes
|
|
|
|
|
|
|
1,207
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(211,690
|
)
|
|
|
(104,320
|
)
|
Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to CapitalSource Inc.
|
|
$
|
(211,690
|
)
|
|
$
|
(104,304
|
)
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share attributable to CapitalSource
Inc.:
|
|
|
|
|
|
|
|
|
Basic (loss) income per share:
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.67
|
)
|
|
$
|
(0.40
|
)
|
From discontinued operations
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
Attributable to CapitalSource Inc.
|
|
$
|
(0.66
|
)
|
|
$
|
(0.36
|
)
|
Diluted (loss) income per share:
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.67
|
)
|
|
$
|
(0.40
|
)
|
From discontinued operations
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
Attributable to CapitalSource Inc.
|
|
$
|
(0.66
|
)
|
|
$
|
(0.36
|
)
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
320,294,724
|
|
|
|
290,098,800
|
|
Diluted
|
|
|
320,294,724
|
|
|
|
290,098,800
|
|
See accompanying notes.
4
CapitalSource
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Inc. Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Income
|
|
|
Noncontrolling
|
|
|
Shareholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Loss), Net
|
|
|
Interests
|
|
|
Equity
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Total shareholders equity as of December 31, 2009
|
|
$
|
3,230
|
|
|
$
|
3,909,364
|
|
|
$
|
(1,748,822
|
)
|
|
$
|
19,361
|
|
|
$
|
126
|
|
|
$
|
2,183,259
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(211,690
|
)
|
|
|
|
|
|
|
|
|
|
|
(211,690
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,234
|
)
|
|
|
|
|
|
|
(9,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(220,924
|
)
|
Dividends paid
|
|
|
|
|
|
|
(248
|
)
|
|
|
(2,980
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,228
|
)
|
Stock option expense
|
|
|
|
|
|
|
1,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,349
|
|
Restricted stock activity
|
|
|
(2
|
)
|
|
|
3,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity as of March 31, 2010
|
|
$
|
3,228
|
|
|
$
|
3,913,634
|
|
|
$
|
(1,963,492
|
)
|
|
$
|
10,127
|
|
|
$
|
126
|
|
|
$
|
1,963,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
CapitalSource
Inc.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March, 31
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(211,690
|
)
|
|
$
|
(104,320
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
1,349
|
|
|
|
539
|
|
Restricted stock expense
|
|
|
4,050
|
|
|
|
5,933
|
|
(Gain) loss on extinguishment of debt
|
|
|
(698
|
)
|
|
|
57,128
|
|
Amortization of deferred loan fees and discounts
|
|
|
(18,685
|
)
|
|
|
(23,805
|
)
|
Paid-in-kind
interest on loans
|
|
|
(945
|
)
|
|
|
(8,278
|
)
|
Provision for loan losses
|
|
|
218,940
|
|
|
|
155,267
|
|
Amortization of deferred financing fees and discounts
|
|
|
12,633
|
|
|
|
18,784
|
|
Depreciation and amortization
|
|
|
1,725
|
|
|
|
8,387
|
|
Provision (benefit) for deferred income taxes
|
|
|
33,515
|
|
|
|
(73,652
|
)
|
Non-cash loss on investments, net
|
|
|
212
|
|
|
|
18,828
|
|
Non-cash loss on foreclosed assets and other property and
equipment disposals
|
|
|
35,741
|
|
|
|
14,774
|
|
Unrealized (gain) loss on derivatives and foreign currencies, net
|
|
|
(5,173
|
)
|
|
|
3,704
|
|
Unrealized gain on residential mortgage investment portfolio, net
|
|
|
|
|
|
|
(60,570
|
)
|
Net decrease in mortgage-backed securities pledged, trading
|
|
|
|
|
|
|
1,485,133
|
|
Amortization of discount on residential mortgage investments
|
|
|
|
|
|
|
11
|
|
Accretion of discount on commercial real estate A
participation interest
|
|
|
(5,853
|
)
|
|
|
(11,018
|
)
|
Decrease in interest receivable
|
|
|
8,976
|
|
|
|
23,492
|
|
(Increase) decrease in loans held for sale, net
|
|
|
(67
|
)
|
|
|
12,360
|
|
(Increase) decrease in other assets
|
|
|
(4,258
|
)
|
|
|
329,424
|
|
Decrease in other liabilities
|
|
|
(76,656
|
)
|
|
|
(254,560
|
)
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by operating activities
|
|
|
(6,884
|
)
|
|
|
1,597,561
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
|
36,109
|
|
|
|
237,434
|
|
Decrease in mortgage-related receivables, net
|
|
|
|
|
|
|
51,465
|
|
Decrease in commercial real estate A participation
interest, net
|
|
|
208,421
|
|
|
|
329,661
|
|
Decrease (increase) in loans, net
|
|
|
137,745
|
|
|
|
(41,817
|
)
|
Cash received for real estate
|
|
|
|
|
|
|
7,500
|
|
Acquisition of marketable securities, available for sale, net
|
|
|
(580,027
|
)
|
|
|
(353,432
|
)
|
Reduction (acquisition) of marketable securities, held to
maturity, net
|
|
|
27,591
|
|
|
|
(77,931
|
)
|
Reduction (acquisition) of other investments, net
|
|
|
2,942
|
|
|
|
(12,818
|
)
|
Acquisition of property and equipment, net
|
|
|
(467
|
)
|
|
|
(5,439
|
)
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by investing activities
|
|
|
(167,686
|
)
|
|
|
134,623
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(2,215
|
)
|
|
|
(6,173
|
)
|
Deposits accepted, net of repayments
|
|
|
99,067
|
|
|
|
(317,574
|
)
|
Repayments under repurchase agreements, net
|
|
|
|
|
|
|
(1,595,750
|
)
|
Repayments on credit facilities, net
|
|
|
(124,650
|
)
|
|
|
(35,515
|
)
|
Borrowings of term debt
|
|
|
14,395
|
|
|
|
26,000
|
|
Repayments of term debt
|
|
|
(290,507
|
)
|
|
|
(303,010
|
)
|
Borrowings (repayments) under other borrowings, net
|
|
|
5,137
|
|
|
|
(69,813
|
)
|
Proceeds from issuance of common stock, net of offering costs
|
|
|
|
|
|
|
22
|
|
Payment of dividends
|
|
|
(3,228
|
)
|
|
|
(3,031
|
)
|
|
|
|
|
|
|
|
|
|
Cash used in financing activities
|
|
|
(302,001
|
)
|
|
|
(2,304,844
|
)
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(476,571
|
)
|
|
|
(572,660
|
)
|
Cash and cash equivalents as of beginning of period
|
|
|
1,177,020
|
|
|
|
1,338,563
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end of period
|
|
$
|
700,449
|
|
|
$
|
765,903
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Noncash transactions from investing and financing activities:
|
|
|
|
|
|
|
|
|
Assets acquired through foreclosure
|
|
$
|
51,887
|
|
|
$
|
31,845
|
|
Exchange of common stock for convertible debentures
|
|
|
|
|
|
|
61,618
|
|
Conversion of noncontrolling interests into common stock
|
|
|
|
|
|
|
9,038
|
|
See accompanying notes.
6
CapitalSource
Inc.
CapitalSource Inc. (CapitalSource, and together with
its subsidiaries other than CapitalSource Bank, the Parent
Company), a Delaware corporation, is a commercial lender
that, through its wholly owned subsidiary, CapitalSource Bank,
provides financial products to small and middle market
businesses nationwide and provides depository products and
services in southern and central California. Prior to the
formation of CapitalSource Bank, CapitalSource conducted its
commercial lending business through its other subsidiaries.
Subsequent to CapitalSource Banks formation, substantially
all new loans have been originated at CapitalSource Bank. The
Parent Companys commercial lending activities consist
primarily of satisfying its existing commitments made prior to
CapitalSource Banks formation and receiving payments on
its existing loan portfolio. Consequently, we expect that our
loans at the Parent Company will gradually run off, while
CapitalSource Banks loan portfolio will continue to grow.
We operate as three reportable segments: 1) CapitalSource
Bank, 2) Other Commercial Finance, and 3) Healthcare
Net Lease. Our CapitalSource Bank segment comprises our
commercial lending and banking business activities; our Other
Commercial Finance segment comprises our loan portfolio and
other business activities in the Parent Company; and our
Healthcare Net Lease segment comprises our direct real estate
investment business activities.
|
|
Note 2.
|
Summary
of Significant Accounting Policies
|
Interim
Consolidated Financial Statements Basis of
Presentation
Our interim consolidated financial statements are prepared in
accordance with U.S. generally accepted accounting
principles (GAAP) for interim financial information
and pursuant to the requirements for reporting on
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, certain disclosures accompanying annual
consolidated financial statements prepared in accordance with
GAAP are omitted. In the opinion of management, all adjustments
and eliminations, consisting solely of normal recurring
accruals, considered necessary for the fair presentation of
financial statements for the interim periods, have been
included. The current periods results of operations are
not necessarily indicative of the results that ultimately may be
achieved for the year. The interim consolidated financial
statements and notes thereto should be read in conjunction with
the financial statements and notes thereto included in our
Annual Report on
Form 10-K
for the year ended December 31, 2009, as filed with the
Securities and Exchange Commission on March 1, 2010
(Form 10-K).
The financial statements reflect our consolidated accounts,
including all of our consolidated subsidiaries and the related
consolidated results of operations with all intercompany
balances and transactions eliminated in consolidation.
Reclassifications
Certain amounts in prior period consolidated financial
statements have been reclassified to conform to the current
period presentation, including the reclassification of certain
deferred fees and loan discounts from fee income to interest
income or other income in our consolidated statements of
operations.
Except as discussed below, our accounting policies are described
in Note 2, Summary of Significant Accounting
Policies, of our audited consolidated financial statements
as of December 31, 2009, included in our
Form 10-K.
New
Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board
(FASB) amended its guidance on the accounting for
transfers and servicing of financial assets and extinguishments
of liabilities and established additional disclosures about
transfers of financial assets, including securitization
transactions, and where entities have
7
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
continuing exposure to the risks related to transferred
financial assets. It applies to all entities and eliminates the
concept of a qualifying special-purpose entity and
changes the requirements for derecognizing financial assets.
This guidance is effective as of the beginning of the first
annual reporting period that begins after November 15, 2009
for all transfers occurring subsequent to the adoption date. We
adopted this guidance on January 1, 2010, and it did not
have a material impact on our consolidated financial statements.
In June 2009, the FASB issued new guidance changing how a
reporting entity determines when an entity that is
insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. This guidance also
requires enhanced disclosures about variable interest entities
that will provide users of financial statements with more
transparent information about an enterprises involvement
in a variable interest entity. This guidance also requires
ongoing reassessments of whether an enterprise is the primary
beneficiary of a variable interest entity. It does not change
the existing scope for accounting and assessment of variable
interest entities, however it adds entities previously
considered qualifying special-purpose entities, as the concept
of these entities was eliminated. This guidance is effective for
the first annual reporting period that begins after
November 15, 2009. We adopted this guidance on
January 1, 2010. As further explained in Note 5,
Commercial Lending Assets and Credit Quality, our
adoption has resulted in an increase in our number of variable
interest entities. This increase is primarily the result of
borrowers that have undergone troubled debt restructuring
transactions, requiring us to reconsider whether the borrowers
qualify as variable interest entities. However, based on our
analysis of each transaction, we have not met the
characteristics of a primary beneficiary with respect to these
entities, and thus, do not consolidate them. As a result, our
adoption of this new guidance did not have a material impact on
our consolidated financial statements.
In January 2010, the FASB amended its guidance on fair value
measurements and disclosure which was intended to improve
transparency in financial reporting by requiring enhanced
disclosures related to fair value measurements. These new
disclosures would provide for disclosure of transfers between
Level 1 and Level 2 of the fair value hierarchy, of
fair value measurements for each class of assets and liabilities
presented, of separate information for purchases, sales,
issuances, and settlements in the rollforward of activity of
Level 3 fair value measurements, and of valuation
techniques used in recurring and nonrecurring fair value
measurements for both Level 2 and Level 3
measurements. This guidance is effective for interim and annual
reporting periods ending after March 15, 2010, except for
the guidance related to purchases, sales, issuances, and
settlements in the rollforward of activity of Level 3 fair
value measurements, which is effective for annual reporting
periods ending after December 31, 2010. We adopted this
guidance effective January 1, 2010, and it did not have a
material impact on our consolidated financial statements.
|
|
Note 3.
|
Discontinued
Operations
|
During the year ended December 31, 2009, we sold 82
long-term healthcare facilities with a total net book value of
$400.3 million, realizing a pre-tax loss of
$9.4 million. In November 2009, we sold 37 long-term
healthcare facilities (the November Sale Assets) for
approximately $100.0 million in cash. In December 2009, in
the first step of a multi-step transaction, we sold 40 long-term
healthcare facilities (the Step 1 Assets) to Omega
Healthcare Investors, Inc. (Omega) for approximately
$184.2 million in cash and approximately 1.4 million
shares of Omega common stock valued at $25.6 million. In
addition, by acquiring our facilities in the December 2009
closing, Omega became obligated to pay us $59.4 million of
indebtedness associated with the Step 1 Assets that Omega fully
repaid in February 2010. Step two of the transaction with Omega
will include the sale of an additional 40 long-term healthcare
facilities (the Step 2 Assets) for approximately
$65.1 million in cash and the assumption of debt associated
with the Step 2 Assets, which totaled $204.3 million as of
March 31, 2010. We expect to complete this sale in 2010
subject to obtaining applicable approvals.
In December 2009, we received approximately 1.3 million
shares of Omega common stock valued at $25.0 million in
consideration for a non-refundable option that was exercisable
by Omega to acquire an additional 63 of our long-term healthcare
facilities (the Step 3 Assets) at any time through
December 31, 2011. Upon closing
8
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of the sale of these properties, Omega would pay us additional
consideration of $33.7 million in cash and repay the
outstanding debt on the properties, which totaled
$261.5 million as of March 31, 2010. The carrying
value of the properties as of March 31, 2010 was
$333.5 million. In April 2010, we received written notice
that Omega was electing to exercise the option to acquire the
properties, with a proposed closing date in June 2010.
Upon the completion of the sale of the Step 2 Assets and Step 3
Assets, we will exit the skilled nursing home ownership
business, but expect to continue to actively provide mortgage
and other financing for owners and operators in the long-term
healthcare industry.
We have presented the financial condition and results of
operations of all assets within our Healthcare Net Lease
segment, with the exception of the Step 3 Assets, as
discontinued operations for all periods presented. Additionally,
the results of the discontinued operations include the
activities of other healthcare facilities that have been sold
since the inception of the business. The Step 3 Assets have been
included in our continuing operations as they did not meet the
criteria to be held for sale as of March 31, 2010 and
December 31, 2009.
The condensed balance sheets as of March 31, 2010 and
December 31, 2009 for our discontinued operations were as
follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and restricted cash
|
|
$
|
9,008
|
|
|
$
|
13,712
|
|
Direct real estate investments, net
|
|
|
218,149
|
|
|
|
218,149
|
|
Other assets
|
|
|
33,888
|
|
|
|
28,680
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
261,045
|
|
|
$
|
260,541
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Mortgage debt
|
|
$
|
184,334
|
|
|
$
|
184,923
|
|
Notes payable
|
|
|
20,000
|
|
|
|
20,000
|
|
Other liabilities
|
|
|
12,233
|
|
|
|
18,226
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
216,567
|
|
|
$
|
223,149
|
|
|
|
|
|
|
|
|
|
|
9
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The condensed statements of operations for the three months
ended March 31, 2010 and 2009 for our discontinued
operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Operating lease income
|
|
$
|
6,763
|
|
|
$
|
19,354
|
|
Expenses:
|
|
|
|
|
|
|
|
|
Interest
|
|
|
2,926
|
|
|
|
1,364
|
|
Depreciation
|
|
|
|
|
|
|
6,424
|
|
General and administrative
|
|
|
727
|
|
|
|
164
|
|
Other expense (income)
|
|
|
67
|
|
|
|
(167
|
)
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
3,720
|
|
|
|
7,785
|
|
Gain from sale of discontinued operations
|
|
|
|
|
|
|
1,407
|
|
Income tax expense
|
|
|
|
|
|
|
2,116
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to discontinued operations
|
|
$
|
3,043
|
|
|
$
|
10,860
|
|
|
|
|
|
|
|
|
|
|
For additional information about our direct real estate
investments as of March 31, 2010, see Note 8,
Direct Real Estate Investments.
|
|
Note 4.
|
Cash and
Cash Equivalents and Restricted Cash
|
As of March 31, 2010 and December 31, 2009, our cash
and cash equivalents and restricted cash balances were as
follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Cash and cash equivalents and restricted cash from continuing
operations:
|
|
|
|
|
|
|
|
|
Cash and due from banks(1)
|
|
$
|
378,207
|
|
|
$
|
592,793
|
|
Interest-bearing deposits in other banks(2)
|
|
|
19,494
|
|
|
|
27,723
|
|
Other short-term investments(3)
|
|
|
419,877
|
|
|
|
555,057
|
|
Investment securities(4)
|
|
|
19,995
|
|
|
|
169,977
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents and restricted cash from
continuing operations
|
|
|
837,573
|
|
|
|
1,345,550
|
|
Cash and cash equivalents and restricted cash from discontinued
operations:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
9,008
|
|
|
|
13,712
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents and restricted cash
|
|
$
|
846,581
|
|
|
$
|
1,359,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes principal and interest collections, including those
related to loan assets held by securitization trusts or pledged
to credit facilities and escrows for future expenses related to
our direct real estate investments. A portion of these
collections are invested in money market funds that invest
primarily in U.S. Treasury securities. The restricted portion of
the balance was $31.3 million and $24.5 million as of
March 31, 2010 and December 31, 2009, respectively.
Cash and due from bank accounts for CapitalSource Bank were
$117.2 million and $235.6 million as of March 31,
2010 and December 31, 2009, respectively. Included in these
balances for |
10
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
CapitalSource Bank were $39.5 million and
$119.1 million in deposits at the Federal Reserve Bank
(FRB) as of March 31, 2010 and
December 31, 2009, respectively. The cash and due from bank
accounts for CapitalSource Bank were not restricted. |
|
(2) |
|
Represents principal and interest collections on loan assets
pledged to credit facilities. The restricted portion was
$11.3 million and $11.4 million as of March 31,
2010 and December 31, 2009, respectively. |
|
(3) |
|
Represents principal and interest collections, including those
related to loan assets held by securitization trusts or pledged
to credit facilities and also includes short-term investments
held by CapitalSource Bank. Principal and interest collections
are invested in money market funds that invest primarily in U.S.
Treasury securities. The restricted portion was
$97.6 million and $136.9 million as of March 31,
2010 and December 31, 2009, respectively. The CapitalSource
Bank cash is invested in (i) 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
(ii) in money market funds that invest primarily in U.S.
Treasury and Agency securities and repurchase agreements secured
by the same. |
|
(4) |
|
Includes discount notes with AAA ratings totaling
$20.0 million and $170.0 million as of March 31,
2010 and December 31, 2009, respectively, issued by the
Federal Home Loan Bank System (FHLB) of
San Francisco (FHLB SF), Fannie Mae or Freddie
Mac. These investments have a remaining weighted average
maturity of 65 days and 61 days as of March 31,
2010 and December 31, 2009, respectively. |
|
|
Note 5.
|
Commercial
Lending Assets and Credit Quality
|
As of March 31, 2010 and December 31, 2009, our total
commercial loan portfolio had an outstanding balance of
$8.3 billion and $8.9 billion, respectively. Included
in these amounts were loans held for investment, loans held for
sale, and a commercial real estate participation interest
(the A Participation Interest). As of
March 31, 2010 and December 31, 2009, interest and fee
receivables totaled $20.1 million and $29.6 million,
respectively.
Commercial
Real Estate A Participation Interest
As of March 31, 2010, the carrying value of the
A Participation Interest was $328.0 million,
representing our share of a $2.9 billion pool of commercial
real estate loans and related assets, net of a remaining
purchase discount of $3.7 million. The activity with
respect to the A Participation Interest for the
period from December 31, 2009 to March 31, 2010 was as
follows ($ in thousands):
|
|
|
|
|
A Participation Interest as of December 31, 2009
|
|
$
|
530,560
|
|
Principal payments
|
|
|
(208,421
|
)
|
Discount accretion
|
|
|
5,853
|
|
|
|
|
|
|
A Participation Interest as of March 31, 2010
|
|
$
|
327,992
|
|
|
|
|
|
|
The A Participation Interest is reported at the
outstanding principal balance less the associated discount.
Interest income on the A Participation Interest is
accrued as earned and recorded as a component of interest income
on loans in our consolidated statements of operations. The
discount is accreted into interest income over the estimated
life of the instrument using the interest method. For the three
months ended March 31, 2010 and 2009, we recognized
$7.8 million and $17.2 million, respectively, in
interest income (including accretion) on the A
Participation Interest.
As of March 31, 2010, no allowance for loan losses was
deemed necessary with respect to the A Participation
Interest.
Loans
Held for Sale
Loans held for sale are recorded at the lower of cost or fair
value in our consolidated balance sheets. During the three
months ended March 31, 2010 and 2009, we recognized a net
pre-tax gain and a net pre-tax loss on the sale of
11
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
loans of $0.1 million and $3.0 million, respectively.
As of March 31, 2010 and December 31, 2009, loans held
for sale with an outstanding balance of $15.0 million and
$0.7 million, respectively, were classified as non-accrual
loans.
During the three months ended March 31, 2010, loans held
for investment with a carrying amount of $29.0 million were
transferred to loans held for sale based on managements
intent with respect to the loans, resulting in $0.9 million
in losses due to valuation adjustments.
Loans
Held for Investment
Loans held for investment are recorded at the principal amount
outstanding, net of deferred loan costs or fees and any
discounts received or premiums paid on purchased loans. We
maintain an allowance for loan losses for loans held for
investment, which is calculated based on managements
estimate of incurred loan losses inherent in our loan portfolio
as of the balance sheet date. Activity in the allowance for loan
losses related to our loans held for investment for the three
months ended March 31, 2010 and 2009, respectively, was as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Balance as of beginning of period
|
|
$
|
586,696
|
|
|
$
|
423,844
|
|
Provision for loan losses
|
|
|
218,940
|
|
|
|
140,818
|
|
Charge offs, net of recoveries
|
|
|
(119,443
|
)
|
|
|
(119,378
|
)
|
|
|
|
|
|
|
|
|
|
Balance as of end of period
|
|
$
|
686,193
|
|
|
$
|
445,284
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010 and December 31, 2009, the
principal balances of contractually delinquent accruing loans
and non-accrual loans were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
($ in thousands)
|
|
Accruing loans
30-89 days
contractually delinquent
|
|
$
|
153,339
|
|
|
$
|
95,268
|
|
Accruing loans 90 or more days contractually delinquent
|
|
|
34,684
|
|
|
|
66,993
|
|
Non-accrual loans
|
|
|
1,124,554
|
|
|
|
1,067,415
|
|
Of our non-accrual loans, $97.7 million were
30-89 days
delinquent and $396.8 million were over 90 days
delinquent as of March 31, 2010, and $182.5 million
were
30-89 days
delinquent and $387.8 million were over 90 days
delinquent as of December 31, 2009.
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 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 of
March 31, 2010 and December 31, 2009, we had
$580.7 million and $597.4 million of impaired
commercial loans, respectively, net of allocated reserves of
$191.7 million and $116.5 million, respectively. As of
March 31, 2010 and December 31, 2009, we had
$600.7 million and $517.1 million, respectively, of
commercial loans that we assessed as impaired and for which we
did not record any allocated reserves based upon our belief that
it is probable that we ultimately will collect all principal
amounts due.
The average balances of impaired commercial loans during the
three months ended March 31, 2010 and 2009 were
$1.1 billion and $620.8 million, respectively. The
total amounts of interest income that were recognized on
impaired commercial loans during the three months ended
March 31, 2010 and 2009 were $5.1 million and
$5.4 million, respectively. The amount of cash basis
interest income that was recognized on impaired loans during the
three months ended March 31, 2010 was $0.1 million.
There was no cash basis interest income recognized for
12
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the three months ended March 31, 2009. If the non-accrual
commercial loans had performed in accordance with their original
terms, interest income would have been increased by
$39.5 million and $22.8 million for the three months
ended March 31, 2010, and 2009, respectively.
During the three months ended March 31, 2010 and 2009,
commercial loans with an aggregate carrying value of
$200.8 million and $174.9 million, respectively, as of
their respective restructuring dates, were involved in troubled
debt restructurings. As of March 31, 2010 and
December 31, 2009, the balance of loans that had been
restructured in troubled debt restructurings were
$476.1 million and $426.4 million, respectively.
Additionally, loans involved in these troubled debt
restructurings are assessed as impaired, generally for a period
of at least one year following the restructuring. A loan that
has been involved in a troubled debt restructuring might no
longer be assessed as impaired one year subsequent to the
restructuring, assuming the loan performs under the restructured
terms and the restructured terms were at market. The allocated
reserves for loans that were involved in troubled debt
restructurings were $30.7 million and $25.1 million as
of March 31, 2010 and December 31, 2009, respectively.
Foreclosed
Assets
Real
Estate Owned (REO)
When we foreclose on real estate assets that collateralize a
loan, we record the assets at their estimated fair value less
costs to sell at the time of foreclosure. Upon foreclosure, we
evaluate the assets fair value as compared to the
loans carrying amount and record a charge off when the
carrying amount of the loan 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 other income (expense), net
in our consolidated statements of operations. REO that does not
meet the criteria of held for sale is classified as held for use
and depreciated. Fair value adjustments on REO held for use are
recorded only if the carrying amount of an asset is not
recoverable and exceeds its fair value. We estimate fair value
at the assets liquidation value, based on market
conditions.
As of March 31, 2010 and December 31, 2009, we had
$136.3 million and $101.4 million, respectively, of
REO classified as held for sale, which was recorded in other
assets in our consolidated balance sheets. Activity in REO held
for sale for the three months ended March 31, 2010 and 2009
was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Balance as of beginning of period
|
|
$
|
101,401
|
|
|
$
|
84,437
|
|
Transfers from loans
|
|
|
54,566
|
|
|
|
21,321
|
|
Fair value adjustments
|
|
|
(16,048
|
)
|
|
|
(16,075
|
)
|
Transfers from REO held for use
|
|
|
2,850
|
|
|
|
|
|
Real estate sold
|
|
|
(6,492
|
)
|
|
|
(2,286
|
)
|
|
|
|
|
|
|
|
|
|
Balance as of end of period
|
|
$
|
136,277
|
|
|
$
|
87,397
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2010 and 2009, we
recognized losses of $0.3 million and $49,000,
respectively, on the sales of REO held for sale as a component
of other income (expense) in the consolidated statements of
operations.
As of March 31, 2010 and December 31, 2009, we had
$12.1 million and $19.7 million, respectively, of REO
classified as held for use, which was recorded in other assets
in our consolidated balance sheets. During the three months
ended March 31, 2010, we recognized impairment losses of
$4.6 million on REO held for use as a component of other
income (expense) in our consolidated statements of operations.
We did not recognize any impairment losses on REO held for use
during the three months ended March 31, 2009.
13
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Foreclosed Assets
When we foreclose on a borrower whose underlying collateral
consists of consumer loans, we record the acquired loans 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 fair
value of the acquired loans. We did not record any charge offs
for the three months ended March 31, 2009. As of
March 31, 2010 and December 31, 2009, we had
$108.8 million and $127.2 million, respectively, of
loans acquired through foreclosure, net of valuation allowances
of $5.2 million and $2.8 million, respectively, which
were recorded in other assets in our consolidated balance
sheets. We recorded a provision for loan receivables losses of
$15.2 million related to loans acquired through foreclosure
as a component of other income (expense) in our consolidated
statements of operations for the three months ended
March 31, 2010. We did not record a provision for loan
receivables losses related to loans acquired through foreclosure
for the three months ended March 31, 2009.
Investment
Securities,
Available-for-Sale
As of March 31, 2010 and December 31, 2009, our
investment securities,
available-for-sale
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
($ in thousands)
|
|
|
Agency discount notes
|
|
$
|
324,656
|
|
|
$
|
18
|
|
|
$
|
(54
|
)
|
|
$
|
324,620
|
|
|
$
|
49,988
|
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
49,996
|
|
Agency callable notes
|
|
|
243,392
|
|
|
|
354
|
|
|
|
(529
|
)
|
|
|
243,217
|
|
|
|
252,175
|
|
|
|
143
|
|
|
|
(1,788
|
)
|
|
|
250,530
|
|
Agency debt
|
|
|
107,345
|
|
|
|
487
|
|
|
|
(324
|
)
|
|
|
107,508
|
|
|
|
24,430
|
|
|
|
315
|
|
|
|
(273
|
)
|
|
|
24,472
|
|
Agency MBS
|
|
|
595,272
|
|
|
|
9,909
|
|
|
|
(465
|
)
|
|
|
604,716
|
|
|
|
412,853
|
|
|
|
5,999
|
|
|
|
(462
|
)
|
|
|
418,390
|
|
Non-agency MBS
|
|
|
141,346
|
|
|
|
1,205
|
|
|
|
(481
|
)
|
|
|
142,070
|
|
|
|
152,913
|
|
|
|
1,031
|
|
|
|
(669
|
)
|
|
|
153,275
|
|
Equity securities
|
|
|
32,140
|
|
|
|
1,486
|
|
|
|
|
|
|
|
33,626
|
|
|
|
51,074
|
|
|
|
2,246
|
|
|
|
(336
|
)
|
|
|
52,984
|
|
Corporate debt
|
|
|
12,406
|
|
|
|
730
|
|
|
|
(3,608
|
)
|
|
|
9,528
|
|
|
|
12,349
|
|
|
|
877
|
|
|
|
(3,608
|
)
|
|
|
9,618
|
|
Collateralized loan obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,018
|
|
|
|
308
|
|
|
|
|
|
|
|
1,326
|
|
U.S. Treasury bills
|
|
|
79,824
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
79,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,536,381
|
|
|
$
|
14,189
|
|
|
$
|
(5,472
|
)
|
|
$
|
1,545,098
|
|
|
$
|
956,800
|
|
|
$
|
10,927
|
|
|
$
|
(7,136
|
)
|
|
$
|
960,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in investment securities,
available-for-sale,
were discount notes issued by Fannie Mae, Freddie Mac and the
FHLB (Agency discount notes), callable notes issued
by Fannie Mae, Freddie Mac, the FHLB and Federal Farm Credit
Bank (Agency callable notes), bonds issued by the
FHLB (Agency debt), commercial and residential
mortgage-backed securities issued and guaranteed by Fannie Mae,
Freddie Mac or Ginnie Mae (Agency MBS), commercial
and residential mortgage-backed securities issued by
non-government agencies (Non-agency MBS), equity
securities, corporate debt, an investment in a subordinated note
of a collateralized loan obligation, and U.S. Treasury
bills. CapitalSource Bank pledged investment securities,
available-for-sale
with an estimated fair value of $987.2 million and
$786.4 million to the FHLB and $15.8 million and
$18.1 million to the FRB as sources of borrowing capacity
as of March 31, 2010 and December 31, 2009,
respectively. CapitalSource Bank also pledged investment
securities,
available-for-sale
with an estimated fair value of $59.8 million to a
correspondent bank as collateral for letters of credit and
foreign exchange contracts. There were no available-for-sale
securities pledged for that purpose at December 31, 2009.
During the three months ended March 31, 2010, we sold
investment securities,
available-for-sale
for $20.0 million, recognizing net pre-tax gains of
$0.7 million. We did not sell any of these investments
during the three months ended March 31, 2009.
14
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the three months ended March 31, 2010, we recorded
other-than-temporary
impairments in the fair value of our equity securities of
$0.3 million as a component of gain (loss) on investments,
net in our consolidated statements of operations. During the
three months ended March 31, 2009, we recorded
other-than-temporary
impairments in the fair value of our corporate debt and
collateralized loan obligation of $11.7 million and
$0.9 million, respectively, as a component of gain (loss)
on investments, net in our consolidated statements of operations.
During the three months ended March 31, 2010, we recognized
$0.8 million, of net unrealized after-tax gains, related to
our
available-for-sale
investment securities, as a component of accumulated other
comprehensive income, net in our consolidated balance sheets.
As of March 31, 2010 and December 31, 2009, the gross
unrealized losses and fair value of investment securities,
available-for-sale,
that were in an unrealized loss position, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
($ in thousands)
|
|
|
As of March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency discount notes
|
|
$
|
(54
|
)
|
|
$
|
164,497
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(54
|
)
|
|
$
|
164,497
|
|
Agency callable notes
|
|
|
(529
|
)
|
|
|
158,263
|
|
|
|
|
|
|
|
|
|
|
|
(529
|
)
|
|
|
158,263
|
|
Agency debt
|
|
|
(174
|
)
|
|
|
83,983
|
|
|
|
(150
|
)
|
|
|
7,120
|
|
|
|
(324
|
)
|
|
|
91,103
|
|
Agency MBS
|
|
|
(465
|
)
|
|
|
57,464
|
|
|
|
|
|
|
|
|
|
|
|
(465
|
)
|
|
|
57,464
|
|
Non-agency MBS
|
|
|
(481
|
)
|
|
|
42,655
|
|
|
|
|
|
|
|
|
|
|
|
(481
|
)
|
|
|
42,655
|
|
Corporate debt
|
|
|
(3,608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,608
|
)
|
|
|
|
|
Treasury bills
|
|
|
(11
|
)
|
|
|
79,813
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
79,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(5,322
|
)
|
|
$
|
586,675
|
|
|
$
|
(150
|
)
|
|
$
|
7,120
|
|
|
$
|
(5,472
|
)
|
|
$
|
593,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency callable notes
|
|
$
|
(1,788
|
)
|
|
$
|
209,397
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1,788
|
)
|
|
$
|
209,397
|
|
Agency debt
|
|
|
|
|
|
|
|
|
|
|
(273
|
)
|
|
|
15,167
|
|
|
|
(273
|
)
|
|
|
15,167
|
|
Agency MBS
|
|
|
(462
|
)
|
|
|
49,118
|
|
|
|
|
|
|
|
|
|
|
|
(462
|
)
|
|
|
49,118
|
|
Non-agency MBS
|
|
|
(669
|
)
|
|
|
48,868
|
|
|
|
|
|
|
|
|
|
|
|
(669
|
)
|
|
|
48,868
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
(336
|
)
|
|
|
178
|
|
|
|
(336
|
)
|
|
|
178
|
|
Corporate debt
|
|
|
(3,608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(6,527
|
)
|
|
$
|
307,383
|
|
|
$
|
(609
|
)
|
|
$
|
15,345
|
|
|
$
|
(7,136
|
)
|
|
$
|
322,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We do not believe that any unrealized losses greater than
12 months in our
available-for-sale
portfolio as of March 31, 2010 and December 31, 2009
represent an
other-than-temporary
impairment. These losses are related to agency debt securities
and equity securities, and are attributable to fluctuations in
market price due to current market conditions.
Investment
Securities,
Held-to-Maturity
As of March 31, 2010 and December 31, 2009, the
amortized cost of investment securities,
held-to-maturity,
was $218.8 million and $242.1 million, respectively
and consisted of AAA-rated commercial mortgage-backed
securities. In addition, CapitalSource Bank pledged investment
securities,
held-to-maturity,
with an amortized cost of $57.2 million and
$151.6 million, and $68.4 million and
$173.7 million, respectively, and estimated fair value of
15
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$59.5 million and $171.4 million, and
$70.3 million and $191.8 million, respectively, to the
FHLB SF and FRB as sources of borrowing capacity as of
March 31, 2010 and December 31, 2009.
Contractual
Maturities
As of March 31, 2010, the contractual maturities of our
investment securities,
available-for-sale,
and investment securities,
held-to-maturity,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities,
|
|
|
Investment Securities,
|
|
|
|
Available-for-Sale
|
|
|
Held-to-Maturity
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
($ in thousands)
|
|
|
Due in one year or less
|
|
$
|
428,405
|
|
|
$
|
428,308
|
|
|
$
|
56,309
|
|
|
$
|
57,694
|
|
Due after one year through five years
|
|
|
282,608
|
|
|
|
283,008
|
|
|
|
162,442
|
|
|
|
183,436
|
|
Due after five years through ten years(1)
|
|
|
129,967
|
|
|
|
127,814
|
|
|
|
|
|
|
|
|
|
Due after ten years(2)(3)
|
|
|
695,401
|
|
|
|
705,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,536,381
|
|
|
$
|
1,545,098
|
|
|
$
|
218,751
|
|
|
$
|
241,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in this category are Agency and Non-agency MBS with
fair values of $25.5 million and $48.9 million,
respectively, and weighted-average expected maturities of
approximately 2.74 years and 2.27 years, respectively, based on
interest rates and expected prepayment speeds as of
March 31, 2010. |
|
(2) |
|
Included in this category are Agency and Non-agency MBS with
fair values of $579.2 million and $93.1 million,
respectively, and weighted-average expected maturities of
approximately 3.34 years and 2.11 years, respectively, based on
interest rates and expected prepayment speeds as of
March 31, 2010. |
|
(3) |
|
Includes securities with no stated maturity. |
Other
Investments
As of March 31, 2010 and December 31, 2009, our other
investments were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Investments carried at cost
|
|
$
|
49,427
|
|
|
$
|
53,205
|
|
Investments carried at fair value
|
|
|
1,244
|
|
|
|
1,392
|
|
Investments accounted for under the equity method
|
|
|
43,197
|
|
|
|
41,920
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
93,868
|
|
|
$
|
96,517
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2010 and 2009, we
sold other investments for $9.4 million and
$2.0 million, respectively, recognizing a net pre-tax gain
of $6.4 million and a net pre-tax loss of
$1.1 million, respectively. During the three months ended
March 31, 2010 and 2009, we recorded
other-than-temporary
impairments of $2.0 million and $1.3 million,
respectively, relating to our investments carried at cost.
Residential
Mortgage-Backed Securities
Prior to the second quarter of 2009, we invested in residential
mortgage-backed securities that were issued and guaranteed by
Fannie Mae or Freddie Mac (Agency RMBS). All our
Agency RMBS were collateralized by adjustable rate residential
mortgage loans, including hybrid adjustable rate mortgage loans.
16
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the first quarter of 2009, we sold all of our Agency RMBS
and unwound all of the related derivatives remaining in our
residential mortgage investment portfolio, realizing a gain of
$15.3 million as a component of gain on residential
mortgage investment portfolio in our consolidated statements of
operations.
|
|
Note 7.
|
Guarantor
Information
|
The following represents the supplemental consolidating
condensed financial information as of March 31, 2010 and
December 31 2009 and for the three months ended March 31,
2010 and 2009 of (i) CapitalSource Inc., which as discussed
in Note 11, Borrowings, is the issuer of our 2014
Senior Secured Notes, as defined in Note 11, Borrowings,
as well as our Senior Debentures and Subordinated Debentures
(together, the Debentures), (ii) CapitalSource
Finance LLC (CapitalSource Finance), which is a
guarantor of our 2014 Senior Secured Notes and the Debentures,
and (iii) our subsidiaries that are not guarantors of the
2014 Senior Secured Notes or the Debentures. CapitalSource
Finance, a wholly owned indirect subsidiary of CapitalSource
Inc., has guaranteed our 2014 Senior Secured Notes and the
Senior Debentures, fully and unconditionally, on a senior basis
and has guaranteed the Subordinated Debentures, fully and
unconditionally, on a senior subordinate basis. Separate
consolidated financial statements of the guarantor are not
presented, as we have determined that they would not be material
to investors.
17
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Balance Sheet
March 31, 2010
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource
|
|
|
Non-Guarantor
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
CapitalSource
|
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Inc.
|
|
|
|
($ in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
32,941
|
|
|
$
|
418,035
|
|
|
$
|
184,045
|
|
|
$
|
62,357
|
|
|
$
|
|
|
|
$
|
697,378
|
|
Restricted cash
|
|
|
|
|
|
|
30,629
|
|
|
|
50,096
|
|
|
|
59,470
|
|
|
|
|
|
|
|
140,195
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value
|
|
|
|
|
|
|
1,507,079
|
|
|
|
|
|
|
|
38,019
|
|
|
|
|
|
|
|
1,545,098
|
|
Held-to-maturity,
at amortized cost
|
|
|
|
|
|
|
218,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
|
|
|
|
1,725,830
|
|
|
|
|
|
|
|
38,019
|
|
|
|
|
|
|
|
1,763,849
|
|
Commercial real estate A participation interest, net
|
|
|
|
|
|
|
327,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
327,992
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
|
|
|
|
|
|
|
|
15,005
|
|
|
|
|
|
|
|
|
|
|
|
15,005
|
|
Loans held for investment
|
|
|
|
|
|
|
5,256,489
|
|
|
|
298,513
|
|
|
|
2,431,933
|
|
|
|
(6
|
)
|
|
|
7,986,929
|
|
Less deferred loan fees and discounts
|
|
|
|
|
|
|
(90,225
|
)
|
|
|
12,962
|
|
|
|
(32,287
|
)
|
|
|
(22,274
|
)
|
|
|
(131,824
|
)
|
Less allowance for loan losses
|
|
|
|
|
|
|
(343,921
|
)
|
|
|
(77,472
|
)
|
|
|
(264,800
|
)
|
|
|
|
|
|
|
(686,193
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for investment, net
|
|
|
|
|
|
|
4,822,343
|
|
|
|
234,003
|
|
|
|
2,134,846
|
|
|
|
(22,280
|
)
|
|
|
7,168,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
|
|
|
|
4,822,343
|
|
|
|
249,008
|
|
|
|
2,134,846
|
|
|
|
(22,280
|
)
|
|
|
7,183,917
|
|
Interest receivable
|
|
|
|
|
|
|
8,202
|
|
|
|
41,357
|
|
|
|
(24,346
|
)
|
|
|
|
|
|
|
25,213
|
|
Direct real estate investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
333,467
|
|
|
|
|
|
|
|
333,467
|
|
Investment in subsidiaries
|
|
|
2,456,639
|
|
|
|
9,084
|
|
|
|
1,478,434
|
|
|
|
1,341,247
|
|
|
|
(5,285,404
|
)
|
|
|
|
|
Intercompany note receivable
|
|
|
375,000
|
|
|
|
9
|
|
|
|
147,758
|
|
|
|
324,053
|
|
|
|
(846,820
|
)
|
|
|
|
|
Other investments
|
|
|
|
|
|
|
63,740
|
|
|
|
14,451
|
|
|
|
15,677
|
|
|
|
|
|
|
|
93,868
|
|
Goodwill
|
|
|
|
|
|
|
173,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173,135
|
|
Other assets
|
|
|
47,437
|
|
|
|
181,110
|
|
|
|
107,574
|
|
|
|
405,627
|
|
|
|
(99,646
|
)
|
|
|
642,102
|
|
Assets of discontinued operations, held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
261,045
|
|
|
|
|
|
|
|
261,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,912,017
|
|
|
$
|
7,760,109
|
|
|
$
|
2,272,723
|
|
|
$
|
4,951,462
|
|
|
$
|
(6,254,150
|
)
|
|
$
|
11,642,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
|
|
|
$
|
4,582,641
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,582,641
|
|
Credit facilities
|
|
|
103,583
|
|
|
|
146,127
|
|
|
|
46,652
|
|
|
|
111,471
|
|
|
|
|
|
|
|
407,833
|
|
Term debt
|
|
|
283,596
|
|
|
|
1,351,814
|
|
|
|
|
|
|
|
1,045,697
|
|
|
|
|
|
|
|
2,681,107
|
|
Other borrowings
|
|
|
545,286
|
|
|
|
225,000
|
|
|
|
440,617
|
|
|
|
261,500
|
|
|
|
|
|
|
|
1,472,403
|
|
Other liabilities
|
|
|
16,021
|
|
|
|
63,780
|
|
|
|
98,836
|
|
|
|
255,441
|
|
|
|
(116,091
|
)
|
|
|
317,987
|
|
Intercompany note payable
|
|
|
|
|
|
|
46,850
|
|
|
|
324,053
|
|
|
|
460,404
|
|
|
|
(831,307
|
)
|
|
|
|
|
Liabilities of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,567
|
|
|
|
|
|
|
|
216,567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
948,486
|
|
|
|
6,416,212
|
|
|
|
910,158
|
|
|
|
2,351,080
|
|
|
|
(947,398
|
)
|
|
|
9,678,538
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
3,228
|
|
|
|
921,000
|
|
|
|
|
|
|
|
|
|
|
|
(921,000
|
)
|
|
|
3,228
|
|
Additional paid-in capital
|
|
|
3,913,637
|
|
|
|
116,686
|
|
|
|
506,972
|
|
|
|
3,007,996
|
|
|
|
(3,631,657
|
)
|
|
|
3,913,634
|
|
(Accumulated deficit) retained earnings
|
|
|
(1,963,461
|
)
|
|
|
299,921
|
|
|
|
845,036
|
|
|
|
(412,010
|
)
|
|
|
(732,978
|
)
|
|
|
(1,963,492
|
)
|
Accumulated other comprehensive income, net
|
|
|
10,127
|
|
|
|
6,290
|
|
|
|
10,557
|
|
|
|
4,274
|
|
|
|
(21,121
|
)
|
|
|
10,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CapitalSource Inc. shareholders equity
|
|
|
1,963,531
|
|
|
|
1,343,897
|
|
|
|
1,362,565
|
|
|
|
2,600,260
|
|
|
|
(5,306,756
|
)
|
|
|
1,963,497
|
|
Noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122
|
|
|
|
4
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
1,963,531
|
|
|
|
1,343,897
|
|
|
|
1,362,565
|
|
|
|
2,600,382
|
|
|
|
(5,306,752
|
)
|
|
|
1,963,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
2,912,017
|
|
|
$
|
7,760,109
|
|
|
$
|
2,272,723
|
|
|
$
|
4,951,462
|
|
|
$
|
(6,254,150
|
)
|
|
$
|
11,642,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Balance Sheet
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource
|
|
|
Non-Guarantor
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
CapitalSource
|
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Inc.
|
|
|
|
($ in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
99,103
|
|
|
$
|
760,343
|
|
|
$
|
265,977
|
|
|
$
|
47,362
|
|
|
$
|
|
|
|
$
|
1,172,785
|
|
Restricted cash
|
|
|
|
|
|
|
72,754
|
|
|
|
58,250
|
|
|
|
41,761
|
|
|
|
|
|
|
|
172,765
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value
|
|
|
|
|
|
|
902,427
|
|
|
|
663
|
|
|
|
57,501
|
|
|
|
|
|
|
|
960,591
|
|
Held-to-maturity,
at amortized cost
|
|
|
|
|
|
|
242,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
242,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
|
|
|
|
1,144,505
|
|
|
|
663
|
|
|
|
57,501
|
|
|
|
|
|
|
|
1,202,669
|
|
Commercial real estate A participation interest, net
|
|
|
|
|
|
|
530,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
530,560
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
|
|
|
|
|
|
|
|
670
|
|
|
|
|
|
|
|
|
|
|
|
670
|
|
Loans held for investment
|
|
|
|
|
|
|
5,323,957
|
|
|
|
286,709
|
|
|
|
2,710,500
|
|
|
|
(6
|
)
|
|
|
8,321,160
|
|
Less deferred loan fees and discounts
|
|
|
|
|
|
|
(77,853
|
)
|
|
|
(10,428
|
)
|
|
|
(38,154
|
)
|
|
|
(19,894
|
)
|
|
|
(146,329
|
)
|
Less allowance for loan losses
|
|
|
|
|
|
|
(285,863
|
)
|
|
|
(76,800
|
)
|
|
|
(224,033
|
)
|
|
|
|
|
|
|
(586,696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for investment, net
|
|
|
|
|
|
|
4,960,241
|
|
|
|
199,481
|
|
|
|
2,448,313
|
|
|
|
(19,900
|
)
|
|
|
7,588,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
|
|
|
|
4,960,241
|
|
|
|
200,151
|
|
|
|
2,448,313
|
|
|
|
(19,900
|
)
|
|
|
7,588,805
|
|
Interest receivable
|
|
|
|
|
|
|
14,143
|
|
|
|
15,850
|
|
|
|
3,956
|
|
|
|
|
|
|
|
33,949
|
|
Direct real estate investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
336,007
|
|
|
|
|
|
|
|
336,007
|
|
Investment in subsidiaries
|
|
|
2,716,099
|
|
|
|
10,702
|
|
|
|
1,522,375
|
|
|
|
1,347,149
|
|
|
|
(5,596,325
|
)
|
|
|
|
|
Intercompany note receivable
|
|
|
375,000
|
|
|
|
9
|
|
|
|
133,674
|
|
|
|
319,249
|
|
|
|
(827,932
|
)
|
|
|
|
|
Other investments
|
|
|
|
|
|
|
66,068
|
|
|
|
14,400
|
|
|
|
16,049
|
|
|
|
|
|
|
|
96,517
|
|
Goodwill
|
|
|
|
|
|
|
173,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173,135
|
|
Other assets
|
|
|
63,214
|
|
|
|
221,990
|
|
|
|
108,071
|
|
|
|
417,239
|
|
|
|
(131,305
|
)
|
|
|
679,209
|
|
Assets of discontinued operations, held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260,541
|
|
|
|
|
|
|
|
260,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,253,416
|
|
|
$
|
7,954,450
|
|
|
$
|
2,319,411
|
|
|
$
|
5,295,127
|
|
|
$
|
(6,575,462
|
)
|
|
$
|
12,246,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
|
|
|
$
|
4,483,879
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,483,879
|
|
Credit facilities
|
|
|
193,637
|
|
|
|
166,107
|
|
|
|
56,707
|
|
|
|
126,330
|
|
|
|
|
|
|
|
542,781
|
|
Term debt
|
|
|
282,938
|
|
|
|
1,539,915
|
|
|
|
|
|
|
|
1,133,683
|
|
|
|
|
|
|
|
2,956,536
|
|
Other borrowings
|
|
|
561,347
|
|
|
|
200,000
|
|
|
|
442,727
|
|
|
|
262,760
|
|
|
|
|
|
|
|
1,466,834
|
|
Other liabilities
|
|
|
32,328
|
|
|
|
129,604
|
|
|
|
134,460
|
|
|
|
240,270
|
|
|
|
(146,158
|
)
|
|
|
390,504
|
|
Intercompany note payable
|
|
|
|
|
|
|
46,850
|
|
|
|
319,249
|
|
|
|
447,730
|
|
|
|
(813,829
|
)
|
|
|
|
|
Liabilities of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
223,149
|
|
|
|
|
|
|
|
223,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,070,250
|
|
|
|
6,566,355
|
|
|
|
953,143
|
|
|
|
2,433,922
|
|
|
|
(959,987
|
)
|
|
|
10,063,683
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
3,230
|
|
|
|
921,000
|
|
|
|
|
|
|
|
|
|
|
|
(921,000
|
)
|
|
|
3,230
|
|
Additional paid-in capital
|
|
|
3,909,366
|
|
|
|
(224,375
|
)
|
|
|
705,847
|
|
|
|
3,082,775
|
|
|
|
(3,564,249
|
)
|
|
|
3,909,364
|
|
(Accumulated deficit) retained earnings
|
|
|
(1,748,791
|
)
|
|
|
676,881
|
|
|
|
641,102
|
|
|
|
(235,374
|
)
|
|
|
(1,082,640
|
)
|
|
|
(1,748,822
|
)
|
Accumulated other comprehensive income (loss), net
|
|
|
19,361
|
|
|
|
14,589
|
|
|
|
19,319
|
|
|
|
13,680
|
|
|
|
(47,588
|
)
|
|
|
19,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CapitalSource Inc. shareholders equity
|
|
|
2,183,166
|
|
|
|
1,388,095
|
|
|
|
1,366,268
|
|
|
|
2,861,081
|
|
|
|
(5,615,477
|
)
|
|
|
2,183,133
|
|
Noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124
|
|
|
|
2
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,183,166
|
|
|
|
1,388,095
|
|
|
|
1,366,268
|
|
|
|
2,861,205
|
|
|
|
(5,615,475
|
)
|
|
|
2,183,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
3,253,416
|
|
|
$
|
7,954,450
|
|
|
$
|
2,319,411
|
|
|
$
|
5,295,127
|
|
|
$
|
(6,575,462
|
)
|
|
$
|
12,246,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Operations
Three Months Ended March 31, 2010
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource
|
|
|
Non-Guarantor
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
CapitalSource
|
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Inc.
|
|
|
|
($ in thousands)
|
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
9,850
|
|
|
$
|
109,100
|
|
|
$
|
10,578
|
|
|
$
|
39,634
|
|
|
$
|
(14,778
|
)
|
|
$
|
154,384
|
|
Investment securities
|
|
|
|
|
|
|
14,305
|
|
|
|
47
|
|
|
|
239
|
|
|
|
|
|
|
|
14,591
|
|
Other
|
|
|
|
|
|
|
570
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
9,850
|
|
|
|
123,975
|
|
|
|
10,626
|
|
|
|
39,875
|
|
|
|
(14,778
|
)
|
|
|
169,548
|
|
Fee income
|
|
|
|
|
|
|
2,647
|
|
|
|
1,807
|
|
|
|
1,988
|
|
|
|
|
|
|
|
6,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
9,850
|
|
|
|
126,622
|
|
|
|
12,433
|
|
|
|
41,863
|
|
|
|
(14,778
|
)
|
|
|
175,990
|
|
Operating lease income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,503
|
|
|
|
|
|
|
|
8,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
9,850
|
|
|
|
126,622
|
|
|
|
12,433
|
|
|
|
50,366
|
|
|
|
(14,778
|
)
|
|
|
184,493
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
16,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,358
|
|
Borrowings
|
|
|
30,240
|
|
|
|
8,211
|
|
|
|
7,743
|
|
|
|
17,364
|
|
|
|
(12,399
|
)
|
|
|
51,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
30,240
|
|
|
|
24,569
|
|
|
|
7,743
|
|
|
|
17,364
|
|
|
|
(12,399
|
)
|
|
|
67,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(20,390
|
)
|
|
|
102,053
|
|
|
|
4,690
|
|
|
|
33,002
|
|
|
|
(2,379
|
)
|
|
|
116,976
|
|
Provision for loan losses
|
|
|
|
|
|
|
85,548
|
|
|
|
792
|
|
|
|
132,600
|
|
|
|
|
|
|
|
218,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after provision for loan losses
|
|
|
(20,390
|
)
|
|
|
16,505
|
|
|
|
3,898
|
|
|
|
(99,598
|
)
|
|
|
(2,379
|
)
|
|
|
(101,964
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
222
|
|
|
|
13,270
|
|
|
|
20,691
|
|
|
|
|
|
|
|
|
|
|
|
34,183
|
|
Depreciation of direct real estate investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,540
|
|
|
|
|
|
|
|
2,540
|
|
Professional fees
|
|
|
681
|
|
|
|
602
|
|
|
|
7,385
|
|
|
|
1,702
|
|
|
|
|
|
|
|
10,370
|
|
Other administrative expenses
|
|
|
1,137
|
|
|
|
12,892
|
|
|
|
13,457
|
|
|
|
13,715
|
|
|
|
(22,452
|
)
|
|
|
18,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,040
|
|
|
|
26,764
|
|
|
|
41,533
|
|
|
|
17,957
|
|
|
|
(22,452
|
)
|
|
|
65,842
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on investments, net
|
|
|
|
|
|
|
5,219
|
|
|
|
(104
|
)
|
|
|
964
|
|
|
|
|
|
|
|
6,079
|
|
(Loss) gain on derivatives
|
|
|
|
|
|
|
(1,542
|
)
|
|
|
5,231
|
|
|
|
(8,026
|
)
|
|
|
|
|
|
|
(4,337
|
)
|
Gain on debt extinguishment
|
|
|
698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
698
|
|
Other income (expense), net
|
|
|
17
|
|
|
|
7,674
|
|
|
|
21,083
|
|
|
|
(34,864
|
)
|
|
|
(22,271
|
)
|
|
|
(28,361
|
)
|
Earnings in subsidiaries
|
|
|
(189,975
|
)
|
|
|
(514
|
)
|
|
|
(8,137
|
)
|
|
|
(21,760
|
)
|
|
|
220,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(189,260
|
)
|
|
|
10,837
|
|
|
|
18,073
|
|
|
|
(63,686
|
)
|
|
|
198,115
|
|
|
|
(25,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations before income
taxes
|
|
|
(211,690
|
)
|
|
|
578
|
|
|
|
(19,562
|
)
|
|
|
(181,241
|
)
|
|
|
218,188
|
|
|
|
(193,727
|
)
|
Income tax expense
|
|
|
|
|
|
|
2,169
|
|
|
|
|
|
|
|
18,837
|
|
|
|
|
|
|
|
21,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(211,690
|
)
|
|
|
(1,591
|
)
|
|
|
(19,562
|
)
|
|
|
(200,078
|
)
|
|
|
218,188
|
|
|
|
(214,733
|
)
|
Net income from discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,043
|
|
|
|
|
|
|
|
3,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to CapitalSource Inc.
|
|
$
|
(211,690
|
)
|
|
$
|
(1,591
|
)
|
|
$
|
(19,562
|
)
|
|
$
|
(197,035
|
)
|
|
$
|
218,188
|
|
|
$
|
(211,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Operations
Three Months Ended March 31, 2009
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource
|
|
|
Non-Guarantor
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
CapitalSource
|
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Inc.
|
|
|
|
($ in thousands)
|
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
649
|
|
|
$
|
132,305
|
|
|
$
|
13,023
|
|
|
$
|
79,679
|
|
|
$
|
(2,458
|
)
|
|
$
|
223,198
|
|
Investment securities
|
|
|
|
|
|
|
9,158
|
|
|
|
182
|
|
|
|
11,213
|
|
|
|
|
|
|
|
20,553
|
|
Other
|
|
|
|
|
|
|
1,598
|
|
|
|
22
|
|
|
|
122
|
|
|
|
|
|
|
|
1,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
649
|
|
|
|
143,061
|
|
|
|
13,227
|
|
|
|
91,014
|
|
|
|
(2,458
|
)
|
|
|
245,493
|
|
Fee income
|
|
|
|
|
|
|
2,097
|
|
|
|
2,961
|
|
|
|
801
|
|
|
|
|
|
|
|
5,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
649
|
|
|
|
145,158
|
|
|
|
16,188
|
|
|
|
91,815
|
|
|
|
(2,458
|
)
|
|
|
251,352
|
|
Operating lease income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,526
|
|
|
|
|
|
|
|
8,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
649
|
|
|
|
145,158
|
|
|
|
16,188
|
|
|
|
100,341
|
|
|
|
(2,458
|
)
|
|
|
259,878
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
38,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,387
|
|
Borrowings
|
|
|
28,186
|
|
|
|
15,345
|
|
|
|
8,736
|
|
|
|
40,968
|
|
|
|
(1,951
|
)
|
|
|
91,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
28,186
|
|
|
|
53,732
|
|
|
|
8,736
|
|
|
|
40,968
|
|
|
|
(1,951
|
)
|
|
|
129,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(27,537
|
)
|
|
|
91,426
|
|
|
|
7,452
|
|
|
|
59,373
|
|
|
|
(507
|
)
|
|
|
130,207
|
|
Provision for loan losses
|
|
|
|
|
|
|
16,352
|
|
|
|
72,067
|
|
|
|
66,848
|
|
|
|
|
|
|
|
155,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after provision for loan losses
|
|
|
(27,537
|
)
|
|
|
75,074
|
|
|
|
(64,615
|
)
|
|
|
(7,475
|
)
|
|
|
(507
|
)
|
|
|
(25,060
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
237
|
|
|
|
13,257
|
|
|
|
21,543
|
|
|
|
|
|
|
|
|
|
|
|
35,037
|
|
Depreciation of direct real estate investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,540
|
|
|
|
|
|
|
|
2,540
|
|
Professional fees
|
|
|
1,474
|
|
|
|
904
|
|
|
|
12,848
|
|
|
|
2,012
|
|
|
|
|
|
|
|
17,238
|
|
Other administrative expenses
|
|
|
10,798
|
|
|
|
12,521
|
|
|
|
14,378
|
|
|
|
3,183
|
|
|
|
(24,004
|
)
|
|
|
16,876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,509
|
|
|
|
26,682
|
|
|
|
48,769
|
|
|
|
7,735
|
|
|
|
(24,004
|
)
|
|
|
71,691
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on investments, net
|
|
|
|
|
|
|
(2,126
|
)
|
|
|
(1,476
|
)
|
|
|
(12,525
|
)
|
|
|
|
|
|
|
(16,127
|
)
|
(Loss) gain on derivatives
|
|
|
|
|
|
|
(1,590
|
)
|
|
|
2,996
|
|
|
|
(885
|
)
|
|
|
(1,207
|
)
|
|
|
(686
|
)
|
Loss on residential mortgage investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,311
|
|
|
|
|
|
|
|
15,311
|
|
Loss on debt extinguishment
|
|
|
(57,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57,128
|
)
|
Other income (expense), net
|
|
|
|
|
|
|
11,463
|
|
|
|
6,141
|
|
|
|
(9,851
|
)
|
|
|
(22,893
|
)
|
|
|
(15,140
|
)
|
Earnings in subsidiaries
|
|
|
(7,130
|
)
|
|
|
|
|
|
|
55,675
|
|
|
|
(47,093
|
)
|
|
|
(1,452
|
)
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
|
|
|
|
3,558
|
|
|
|
(3,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(64,258
|
)
|
|
|
7,747
|
|
|
|
66,894
|
|
|
|
(58,601
|
)
|
|
|
(25,552
|
)
|
|
|
(73,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations before income
taxes
|
|
|
(104,304
|
)
|
|
|
56,139
|
|
|
|
(46,490
|
)
|
|
|
(73,811
|
)
|
|
|
(2,055
|
)
|
|
|
(170,521
|
)
|
Income tax (benefit) expense
|
|
|
|
|
|
|
464
|
|
|
|
|
|
|
|
(55,805
|
)
|
|
|
|
|
|
|
(55,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations
|
|
|
(104,304
|
)
|
|
|
55,675
|
|
|
|
(46,490
|
)
|
|
|
(18,006
|
)
|
|
|
(2,055
|
)
|
|
|
(115,180
|
)
|
Net income from discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,653
|
|
|
|
|
|
|
|
9,653
|
|
Gain from sale of discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,207
|
|
|
|
|
|
|
|
1,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(104,304
|
)
|
|
|
55,675
|
|
|
|
(46,490
|
)
|
|
|
(7,146
|
)
|
|
|
(2,055
|
)
|
|
|
(104,320
|
)
|
Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to
CapitalSource Inc.
|
|
$
|
(104,304
|
)
|
|
$
|
55,675
|
|
|
$
|
(46,490
|
)
|
|
$
|
(7,130
|
)
|
|
$
|
(2,055
|
)
|
|
$
|
(104,304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Cash Flows
Three Months Ended March 31, 2010
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource
|
|
|
Non-Guarantor
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
CapitalSource
|
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Inc.
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(211,690
|
)
|
|
$
|
(1,591
|
)
|
|
$
|
(19,562
|
)
|
|
$
|
(197,035
|
)
|
|
$
|
218,188
|
|
|
$
|
(211,690
|
)
|
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
323
|
|
|
|
1,026
|
|
|
|
|
|
|
|
|
|
|
|
1,349
|
|
Restricted stock expense
|
|
|
|
|
|
|
466
|
|
|
|
3,584
|
|
|
|
|
|
|
|
|
|
|
|
4,050
|
|
Gain on extinguishment of debt
|
|
|
(698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(698
|
)
|
Amortization of deferred loan fees and discounts
|
|
|
|
|
|
|
(9,840
|
)
|
|
|
(5,837
|
)
|
|
|
(3,008
|
)
|
|
|
|
|
|
|
(18,685
|
)
|
Paid-in-kind
interest on loans
|
|
|
|
|
|
|
(1,683
|
)
|
|
|
(1,052
|
)
|
|
|
1,790
|
|
|
|
|
|
|
|
(945
|
)
|
Provision for loan losses
|
|
|
|
|
|
|
85,548
|
|
|
|
792
|
|
|
|
132,600
|
|
|
|
|
|
|
|
218,940
|
|
Amortization of deferred financing fees and discounts
|
|
|
9,651
|
|
|
|
1,992
|
|
|
|
105
|
|
|
|
885
|
|
|
|
|
|
|
|
12,633
|
|
Depreciation and amortization
|
|
|
|
|
|
|
(1,865
|
)
|
|
|
908
|
|
|
|
2,682
|
|
|
|
|
|
|
|
1,725
|
|
Provision (benefit) for deferred income taxes
|
|
|
|
|
|
|
11,596
|
|
|
|
(182
|
)
|
|
|
22,101
|
|
|
|
|
|
|
|
33,515
|
|
Non-cash loss (gain) on investments, net
|
|
|
|
|
|
|
431
|
|
|
|
56
|
|
|
|
(275
|
)
|
|
|
|
|
|
|
212
|
|
Non-cash loss on foreclosed assets and other property and
equipment disposals
|
|
|
|
|
|
|
3,127
|
|
|
|
293
|
|
|
|
32,321
|
|
|
|
|
|
|
|
35,741
|
|
Unrealized (gain) loss on derivatives and foreign
currencies, net
|
|
|
|
|
|
|
(2,522
|
)
|
|
|
(10,446
|
)
|
|
|
7,795
|
|
|
|
|
|
|
|
(5,173
|
)
|
Accretion of discount on commercial real estate A
participation interest
|
|
|
|
|
|
|
(5,853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,853
|
)
|
Decrease (increase) in interest receivable
|
|
|
|
|
|
|
5,958
|
|
|
|
(25,490
|
)
|
|
|
28,508
|
|
|
|
|
|
|
|
8,976
|
|
Increase in loans held for sale, net
|
|
|
|
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67
|
)
|
Increase in intercompany note receivable
|
|
|
|
|
|
|
|
|
|
|
(14,084
|
)
|
|
|
(4,804
|
)
|
|
|
18,888
|
|
|
|
|
|
Decrease (increase) in other assets
|
|
|
10,248
|
|
|
|
25,272
|
|
|
|
4,287
|
|
|
|
(12,406
|
)
|
|
|
(31,659
|
)
|
|
|
(4,258
|
)
|
(Decrease) increase in other liabilities
|
|
|
(16,330
|
)
|
|
|
(65,631
|
)
|
|
|
(34,753
|
)
|
|
|
9,991
|
|
|
|
30,067
|
|
|
|
(76,656
|
)
|
Net transfers with subsidiaries
|
|
|
254,767
|
|
|
|
(24,037
|
)
|
|
|
43,044
|
|
|
|
(53,388
|
)
|
|
|
(220,386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities, net of impact
of acquisitions
|
|
|
45,948
|
|
|
|
21,624
|
|
|
|
(57,311
|
)
|
|
|
(32,243
|
)
|
|
|
15,098
|
|
|
|
(6,884
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted cash
|
|
|
|
|
|
|
42,125
|
|
|
|
8,154
|
|
|
|
(14,170
|
)
|
|
|
|
|
|
|
36,109
|
|
Decrease in commercial real estate A participation
interest
|
|
|
|
|
|
|
208,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208,421
|
|
Decrease (increase) in loans, net
|
|
|
|
|
|
|
40,266
|
|
|
|
(30,107
|
)
|
|
|
125,206
|
|
|
|
2,380
|
|
|
|
137,745
|
|
Acquisition of marketable securities, available for
sale, net
|
|
|
|
|
|
|
(580,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(580,027
|
)
|
Reduction of marketable securities, held to maturity, net
|
|
|
|
|
|
|
27,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,591
|
|
(Acquisition) reduction of other investments, net
|
|
|
|
|
|
|
(17,950
|
)
|
|
|
(208
|
)
|
|
|
21,100
|
|
|
|
|
|
|
|
2,942
|
|
(Acquisition) disposal of property and equipment, net
|
|
|
|
|
|
|
(7,254
|
)
|
|
|
(383
|
)
|
|
|
7,170
|
|
|
|
|
|
|
|
(467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by investing activities
|
|
|
|
|
|
|
(286,828
|
)
|
|
|
(22,544
|
)
|
|
|
139,306
|
|
|
|
2,380
|
|
|
|
(167,686
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(833
|
)
|
|
|
(171
|
)
|
|
|
|
|
|
|
(1,211
|
)
|
|
|
|
|
|
|
(2,215
|
)
|
Deposits accepted, net of repayments
|
|
|
|
|
|
|
99,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,067
|
|
Increase in intercompany note payable
|
|
|
|
|
|
|
|
|
|
|
4,804
|
|
|
|
12,674
|
|
|
|
(17,478
|
)
|
|
|
|
|
Repayments on credit facilities, net
|
|
|
(90,055
|
)
|
|
|
(12,875
|
)
|
|
|
(6,861
|
)
|
|
|
(14,859
|
)
|
|
|
|
|
|
|
(124,650
|
)
|
Borrowings of term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,395
|
|
|
|
|
|
|
|
14,395
|
|
Repayments of term debt
|
|
|
|
|
|
|
(188,125
|
)
|
|
|
|
|
|
|
(102,382
|
)
|
|
|
|
|
|
|
(290,507
|
)
|
(Repayments) borrowings under other borrowings
|
|
|
(17,994
|
)
|
|
|
25,000
|
|
|
|
(20
|
)
|
|
|
(1,849
|
)
|
|
|
|
|
|
|
5,137
|
|
Payment of dividends
|
|
|
(3,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by financing activities
|
|
|
(112,110
|
)
|
|
|
(77,104
|
)
|
|
|
(2,077
|
)
|
|
|
(93,232
|
)
|
|
|
(17,478
|
)
|
|
|
(302,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(66,162
|
)
|
|
|
(342,308
|
)
|
|
|
(81,932
|
)
|
|
|
13,831
|
|
|
|
|
|
|
|
(476,571
|
)
|
Cash and cash equivalents as of beginning of period
|
|
|
99,103
|
|
|
|
760,343
|
|
|
|
265,977
|
|
|
|
51,597
|
|
|
|
|
|
|
|
1,177,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end of period
|
|
$
|
32,941
|
|
|
$
|
418,035
|
|
|
$
|
184,045
|
|
|
$
|
65,428
|
|
|
$
|
|
|
|
$
|
700,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Cash Flows
For the Three Months Ended March 31, 2009
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource
|
|
|
Non-Guarantor
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
CapitalSource
|
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Inc.
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(104,304
|
)
|
|
$
|
55,675
|
|
|
$
|
(46,490
|
)
|
|
$
|
(7,146
|
)
|
|
$
|
(2,055
|
)
|
|
$
|
(104,320
|
)
|
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
169
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
539
|
|
Restricted stock expense
|
|
|
|
|
|
|
1,047
|
|
|
|
4,886
|
|
|
|
|
|
|
|
|
|
|
|
5,933
|
|
Loss on debt extinguishment of debt
|
|
|
57,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,128
|
|
Amortization of deferred loan fees and discounts
|
|
|
|
|
|
|
(11,775
|
)
|
|
|
(9,581
|
)
|
|
|
(2,449
|
)
|
|
|
|
|
|
|
(23,805
|
)
|
Paid-in-kind
interest on loans
|
|
|
|
|
|
|
(6,492
|
)
|
|
|
3,929
|
|
|
|
(5,715
|
)
|
|
|
|
|
|
|
(8,278
|
)
|
Provision for loan losses
|
|
|
|
|
|
|
16,352
|
|
|
|
72,067
|
|
|
|
66,848
|
|
|
|
|
|
|
|
155,267
|
|
Amortization of deferred financing fees and discounts
|
|
|
7,811
|
|
|
|
5,071
|
|
|
|
105
|
|
|
|
5,797
|
|
|
|
|
|
|
|
18,784
|
|
Depreciation and amortization
|
|
|
|
|
|
|
1,332
|
|
|
|
860
|
|
|
|
6,195
|
|
|
|
|
|
|
|
8,387
|
|
Benefit for deferred income taxes
|
|
|
(19,979
|
)
|
|
|
(53,624
|
)
|
|
|
(13
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
|
(73,652
|
)
|
Non-cash loss on investments, net
|
|
|
|
|
|
|
3,399
|
|
|
|
3,093
|
|
|
|
12,336
|
|
|
|
|
|
|
|
18,828
|
|
Non-cash loss (gain) on property and equipment disposals
|
|
|
|
|
|
|
|
|
|
|
16,139
|
|
|
|
(1,365
|
)
|
|
|
|
|
|
|
14,774
|
|
Unrealized loss (gain) on derivatives and foreign currencies, net
|
|
|
|
|
|
|
3,091
|
|
|
|
748
|
|
|
|
(135
|
)
|
|
|
|
|
|
|
3,704
|
|
Unrealized gain on residential mortgage investment portfolio, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,570
|
)
|
|
|
|
|
|
|
(60,570
|
)
|
Net decrease in mortgage-backed securities pledged, trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,485,133
|
|
|
|
|
|
|
|
1,485,133
|
|
Amortization of discount on residential mortgage investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
11
|
|
Accretion of discount on commercial real estate A
participation interest
|
|
|
|
|
|
|
(11,018
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,018
|
)
|
Decrease in interest receivable
|
|
|
|
|
|
|
21,289
|
|
|
|
1,373
|
|
|
|
855
|
|
|
|
(25
|
)
|
|
|
23,492
|
|
Decrease (increase) in loans held for sale, net
|
|
|
|
|
|
|
4,955
|
|
|
|
9,372
|
|
|
|
(1,967
|
)
|
|
|
|
|
|
|
12,360
|
|
Decrease (increase) in intercompany note receivable
|
|
|
|
|
|
|
|
|
|
|
28,808
|
|
|
|
(89,598
|
)
|
|
|
60,790
|
|
|
|
|
|
(Increase) decrease in other assets
|
|
|
(58
|
)
|
|
|
21,924
|
|
|
|
10,796
|
|
|
|
268,671
|
|
|
|
28,091
|
|
|
|
329,424
|
|
(Decrease) increase in other liabilities
|
|
|
(13,744
|
)
|
|
|
(51,468
|
)
|
|
|
8,292
|
|
|
|
(224,522
|
)
|
|
|
26,882
|
|
|
|
(254,560
|
)
|
Net transfers with subsidiaries
|
|
|
235,718
|
|
|
|
(147,382
|
)
|
|
|
112,154
|
|
|
|
(145,525
|
)
|
|
|
(54,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities, net of impact
of acquisitions
|
|
|
162,572
|
|
|
|
(147,455
|
)
|
|
|
216,908
|
|
|
|
1,306,818
|
|
|
|
58,718
|
|
|
|
1,597,561
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in restricted cash
|
|
|
|
|
|
|
(7,005
|
)
|
|
|
3,440
|
|
|
|
240,999
|
|
|
|
|
|
|
|
237,434
|
|
Decrease in mortgage-related receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,465
|
|
|
|
|
|
|
|
51,465
|
|
Decrease in commercial real estate A participation
interest
|
|
|
|
|
|
|
329,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
329,661
|
|
Decrease (increase) in loans, net
|
|
|
|
|
|
|
138,759
|
|
|
|
(199,772
|
)
|
|
|
17,124
|
|
|
|
2,072
|
|
|
|
(41,817
|
)
|
Cash received for real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
|
|
|
|
|
|
|
7,500
|
|
(Acquisition) reduction of marketable securities, available for
sale, net
|
|
|
|
|
|
|
(365,850
|
)
|
|
|
417
|
|
|
|
12,001
|
|
|
|
|
|
|
|
(353,432
|
)
|
Acquisition of marketable securities, held to maturity, net
|
|
|
|
|
|
|
(77,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77,931
|
)
|
Acquisition of other investments, net
|
|
|
|
|
|
|
(1,275
|
)
|
|
|
(794
|
)
|
|
|
(10,749
|
)
|
|
|
|
|
|
|
(12,818
|
)
|
(Acquisition) disposal of property and equipment, net
|
|
|
|
|
|
|
(4,388
|
)
|
|
|
(14,274
|
)
|
|
|
13,223
|
|
|
|
|
|
|
|
(5,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities
|
|
|
|
|
|
|
11,971
|
|
|
|
(210,983
|
)
|
|
|
331,563
|
|
|
|
2,072
|
|
|
|
134,623
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(6,072
|
)
|
|
|
(261
|
)
|
|
|
|
|
|
|
160
|
|
|
|
|
|
|
|
(6,173
|
)
|
Deposits accepted, net of repayments
|
|
|
|
|
|
|
(317,574
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(317,574
|
)
|
Increase (decrease) in intercompany note payable
|
|
|
|
|
|
|
|
|
|
|
89,598
|
|
|
|
(28,808
|
)
|
|
|
(60,790
|
)
|
|
|
|
|
Repayments under repurchase agreements, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,595,750
|
)
|
|
|
|
|
|
|
(1,595,750
|
)
|
(Repayments) borrowings on credit facilities, net
|
|
|
(35,000
|
)
|
|
|
102
|
|
|
|
(16
|
)
|
|
|
(601
|
)
|
|
|
|
|
|
|
(35,515
|
)
|
Borrowings of term debt
|
|
|
|
|
|
|
6,000
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
26,000
|
|
Repayments of term debt
|
|
|
|
|
|
|
(214,444
|
)
|
|
|
|
|
|
|
(88,566
|
)
|
|
|
|
|
|
|
(303,010
|
)
|
(Repayments) borrowings under other borrowings
|
|
|
(118,502
|
)
|
|
|
50,000
|
|
|
|
(19
|
)
|
|
|
(1,292
|
)
|
|
|
|
|
|
|
(69,813
|
)
|
Proceeds from issuance of common stock, net of offering costs
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
Payment of dividends
|
|
|
(3,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by financing activities
|
|
|
(162,583
|
)
|
|
|
(476,177
|
)
|
|
|
89,563
|
|
|
|
(1,694,857
|
)
|
|
|
(60,790
|
)
|
|
|
(2,304,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(11
|
)
|
|
|
(611,661
|
)
|
|
|
95,488
|
|
|
|
(56,476
|
)
|
|
|
|
|
|
|
(572,660
|
)
|
Cash and cash equivalents as of beginning of period
|
|
|
11
|
|
|
|
1,230,254
|
|
|
|
38,866
|
|
|
|
69,432
|
|
|
|
|
|
|
|
1,338,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end of period
|
|
$
|
|
|
|
$
|
618,593
|
|
|
$
|
134,354
|
|
|
$
|
12,956
|
|
|
$
|
|
|
|
$
|
765,903
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 8.
|
Direct
Real Estate Investments
|
Our direct real estate investments primarily consist of
long-term healthcare facilities generally leased through
long-term,
triple-net
operating leases. As of March 31, 2010 and
December 31, 2009, our direct real estate investments were
as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
37,760
|
|
|
$
|
37,760
|
|
Buildings
|
|
|
313,576
|
|
|
|
313,576
|
|
Furniture and equipment
|
|
|
16,020
|
|
|
|
16,020
|
|
Accumulated depreciation
|
|
|
(33,889
|
)
|
|
|
(31,349
|
)
|
|
|
|
|
|
|
|
|
|
Total direct real estate investments from continuing operations
|
|
$
|
333,467
|
|
|
$
|
336,007
|
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
Direct real estate investments, net
|
|
|
218,149
|
|
|
|
218,149
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
551,616
|
|
|
$
|
554,156
|
|
|
|
|
|
|
|
|
|
|
The classification of $218.1 million of assets classified
as discontinued operations relates to assets that we expect to
be sold in 2010. For additional information, see Note 3,
Discontinued Operations, in our consolidated financial
statements for the three months ended March 31, 2010.
As of March 31, 2010 and December 31, 2009,
CapitalSource Bank had $4.6 billion and $4.5 billion,
respectively, in deposits insured up to the maximum limit by the
Federal Deposit Insurance Corporations (FDIC). In
2009, the United States Congress temporarily increased, until
the end of 2013, the deposit insurance level from $100,000 to
$250,000. As of March 31, 2010 and December 31, 2009,
CapitalSource Bank had $1.6 billion and $1.5 billion,
respectively, of certificates of deposit in the amount of
$100,000 or more. As of March 31, 2010 and
December 31, 2009, CapitalSource Bank had
$219.5 million and $199.7 million, respectively, of
certificates of deposit in the amount of $250,000 or more.
As of March 31, 2010 and December 31, 2009, the
weighted-average interest rates for savings and money market
deposit accounts were 0.95% and 1.06%, respectively, and for
certificates of deposit were 1.53% and 1.68%, respectively. The
weighted-average interest rate for all deposits as of
March 31, 2010 and December 31, 2009 was 1.41% and
1.56%, respectively.
As of March 31, 2010 and December 31, 2009,
interest-bearing deposits at CapitalSource Bank were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
Money market
|
|
$
|
260,309
|
|
|
$
|
258,283
|
|
Savings
|
|
|
706,601
|
|
|
|
599,084
|
|
Certificates of deposit
|
|
|
3,615,731
|
|
|
|
3,626,512
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
$
|
4,582,641
|
|
|
$
|
4,483,879
|
|
|
|
|
|
|
|
|
|
|
24
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of March 31, 2010, certificates of deposit at
CapitalSource Bank detailed by maturity were as follows ($ in
thousands):
|
|
|
|
|
Maturing by:
|
|
|
|
|
March 31, 2011
|
|
$
|
3,076,076
|
|
March 31, 2012
|
|
|
469,199
|
|
March 31, 2013
|
|
|
29,605
|
|
March 31, 2014
|
|
|
4,800
|
|
March 31, 2015
|
|
|
36,051
|
|
|
|
|
|
|
Total
|
|
$
|
3,615,731
|
|
|
|
|
|
|
For the three months ended March 31, 2010 and 2009,
interest expense on deposits was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Savings and money market deposit accounts
|
|
$
|
2,265
|
|
|
$
|
3,287
|
|
Certificates of deposit
|
|
|
14,146
|
|
|
|
34,827
|
|
Brokered certificates of deposit
|
|
|
|
|
|
|
388
|
|
Fees for early withdrawal
|
|
|
(53
|
)
|
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
Total interest expense on deposits
|
|
$
|
16,358
|
|
|
$
|
38,387
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10.
|
Variable
Interest Entities
|
Troubled
Debt Restructurings
On January 1, 2010, we adopted new accounting guidance
surrounding the consolidation of variable interest entities. The
new guidance removes the exemption for troubled debt
restructurings as events that may require the reconsideration of
whether or not an entity is a variable interest entity. As a
result, certain of our troubled debt restructurings, both those
preceding and following the adoption date, were determined to
qualify as events requiring the reconsideration of our borrowers
as variable interest entities. Through reconsideration, we
determined that certain of our borrowers involved in troubled
debt restructurings did not hold sufficient equity at risk to
finance their activities without subordinated financial support
and, as a result, we have concluded that these borrowers were
variable interest entities upon the adoption of the new guidance.
However, 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.
Our interests in borrowers qualifying as variable interest
entities were approximately $329.4 million as of
March 31, 2010 and are included in loans held for
investment in our consolidated balance sheet. For certain of
these borrowers, we may have obligations to fund additional
amounts through either unfunded commitments or letter of credit
arrangements issued to or on behalf of these borrowers.
Consequently, our maximum exposure to loss as a result of our
involvement with these entities was approximately
$412.2 million as of March 31, 2010.
25
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Term
Debt Securitizations
In conjunction with each of our commercial term debt
securitizations, we established and contributed commercial loans
to separate single purpose entities (collectively, referred to
as the Issuers). The Issuers are structured to be
legally isolated, bankruptcy remote entities. The Issuers issued
notes and certificates that are collateralized by the underlying
assets of the Issuers, primarily comprising contributed
commercial loans. We continue to service the underlying
commercial loans contributed to the Issuers and earn periodic
servicing fees paid from the cash flows of the underlying
commercial loans. We have no legal obligation to repay the
outstanding notes or certificates or contribute additional
assets to the entities. As of March 31, 2010 and
December 31, 2009, the total outstanding balances of these
commercial term debt securitizations were $3.5 billion and
$3.7 billion, respectively. These amounts include
approximately $1.0 billion of notes and certificates that
we held as of March 31, 2010 and December 31, 2009.
We have determined that the Issuers are variable interest
entities, subject to applicable consolidation guidance. Through
our assessment of the Issuers, we concluded that the entities
were designed to pass along risks related to the credit
performance of the underlying commercial loan portfolio. Upon
our initial investment in the Issuers, we expected our interests
to absorb a majority of the expected losses related to such
risks and concluded that we were the primary beneficiary of the
Issuers. Consequently, we have always reported the assets and
liabilities of the Issuers in our consolidated financial
statements, including the underlying commercial loans and the
issued notes and certificates held by third parties. As of
March 31, 2010 and December 31, 2009, the carrying
amounts of the consolidated liabilities related to the Issuers
and recorded in term debt in our consolidated balance sheets
were $2.4 billion and $2.7 billion, respectively, and
were related to obligations for which there is no recourse to
us. As of March 31, 2010 and December 31, 2009, the
carrying amounts of the consolidated assets related to the
Issuers and recorded in loans held for investment, net in our
consolidated balance sheets were $2.8 billion and
$3.1 billion, respectively, which were related to assets
that can only be used to settle obligations of the Issuers.
For additional information on our borrowings, see Note 12,
Borrowings, in our audited consolidated financial
statements for the year ended December 31, 2009, included
in our
Form 10-K.
26
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of March 31, 2010 and December 31, 2009, the
composition of our outstanding borrowings from continuing and
discontinued operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Outstanding borrowings from continuing operations:
|
|
|
|
|
|
|
|
|
Credit facilities
|
|
|
407,833
|
|
|
|
542,781
|
|
Term debt
|
|
|
2,681,107
|
|
|
|
2,956,536
|
|
Other borrowings:
|
|
|
|
|
|
|
|
|
Convertible debt, net(1)
|
|
|
545,286
|
|
|
|
561,347
|
|
Subordinated debt
|
|
|
437,611
|
|
|
|
439,701
|
|
Mortgage debt(2)
|
|
|
261,500
|
|
|
|
262,760
|
|
FHLB SF borrowings
|
|
|
225,000
|
|
|
|
200,000
|
|
Notes payable
|
|
|
3,006
|
|
|
|
3,026
|
|
|
|
|
|
|
|
|
|
|
Total other borrowings
|
|
|
1,472,403
|
|
|
|
1,466,834
|
|
|
|
|
|
|
|
|
|
|
Total outstanding borrowings from continuing operations
|
|
|
4,561,343
|
|
|
|
4,966,151
|
|
Outstanding borrowings from discontinued operations:
|
|
|
|
|
|
|
|
|
Mortgage debt
|
|
|
184,334
|
|
|
|
184,923
|
|
Notes payable
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
Total outstanding borrowings from discontinued operations
|
|
|
204,334
|
|
|
|
204,923
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
$
|
4,765,677
|
|
|
$
|
5,171,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts presented are net of debt discount of $15.4 million
and $18.7 million as of March 31, 2010 and
December 31, 2009, respectively. |
|
(2) |
|
In February 2010, we exercised the second of the three optional
one-year extensions resulting in the extension of the maturity
of these mortgage loans to April 9, 2011. |
Credit
Facilities
Our committed credit facility capacities were
$543.9 million and $691.3 million as of March 31,
2010 and December 31, 2009, respectively. Interest on our
credit facility borrowings is charged at variable rates that may
be based on one or more of one-month LIBOR, one-month EURIBOR,
and/or an
applicable commercial paper (CP) rate. As of
March 31, 2010 and December 31, 2009, total undrawn
capacities under our credit facilities were $136.1 million
and $148.5 billion, respectively, which was limited by
issued and outstanding letters of credit totaling
$50.1 million as of March 31, 2010.
In February 2010, to avoid potential events of default, we
amended the covenant for the minimum tangible net worth in our
syndicated bank credit facility and our CS Funding III, CS
Funding VII and CS Europe credit facilities to require that our
tangible net worth be no less than $1.7 billion, plus 70%
of net proceeds from the issuance of capital stock
and/or
conversion of debt after the amendment date. In addition, we
modified the maturity date on the syndicated bank credit
facility from March 31, 2012 to December 31, 2011 and
agreed to reduce the aggregate commitment amount on the facility
to $200.0 million as of April 30, 2010, to
$185.0 million by January 31, 2011 and thereafter by
an additional $15.0 million per month, unless otherwise
reduced by the receipt of collateral proceeds.
27
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FHLB
SF Borrowings and FRB Credit Program
As a member of the FHLB SF, CapitalSource Bank had financing
availability with the FHLB SF as of March 31, 2010 equal to
20% of CapitalSource Banks total assets. As of
March 31, 2010, the maximum financing available under this
formula was $1.1 billion. 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 March 31, 2010 and December 31, 2009,
CapitalSource Bank had $992.0 million and
$965.2 million, respectively, in borrowing capacity with
the FHLB SF based on pledged collateral. As of March 31,
2010 and December 31, 2009, respectively, there was
$225.0 million and $200.0 million of principal
outstanding and a letter of credit in the amount of
$0.8 million outstanding as of both dates. As of
March 31, 2010 and 2009, our unused borrowing capacity was
$766.2 million and $764.4 million, respectively.
As of March 31, 2010 and December 31, 2009, collateral
with an amortized cost of $167.3 million and
$191.8 million, respectively, and a fair value of
$187.2 million and $209.9 million, respectively, had
been pledged under 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, but there were no borrowings
outstanding.
Term
Debt
As of March 31, 2010 and December 31, 2009, the
carrying amounts of our term debt related to securitizations
were $2.4 billion and $2.7 billion, respectively. As
of March 31, 2010 and December 31, 2009, our 2014
Senior Secured Notes had balances of $283.6 million and
$282.9 million respectively, net of discounts of
$16.4 million and $17.1 million, respectively.
In February 2010, to avoid a potential event of default, we
amended our
2007-A term
debt securitization to require that our tangible net worth be no
less than $1.7 billion, plus 70% of net proceeds from the
issuance of capital stock
and/or
conversion of debt after the amendment. In addition, the
amendment required us to reduce the aggregate advances
outstanding to $123.5 million and modified the maximum
advance rate to 27.2% commencing May 2010, to 23.6% commencing
August 2010, 19.8% commencing November 2010 and 18.4% commencing
February 2011.
Convertible
Debt
As of March 31, 2010 and December 31, 2009, the
carrying amounts of the liability and equity components of our
convertible debt were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Convertible debt principal
|
|
$
|
560,704
|
|
|
$
|
580,000
|
|
Less:
|
|
|
|
|
|
|
|
|
Debt discount
|
|
|
15,418
|
|
|
|
18,653
|
|
|
|
|
|
|
|
|
|
|
Net carrying value
|
|
$
|
545,286
|
|
|
$
|
561,347
|
|
|
|
|
|
|
|
|
|
|
Equity components recorded in additional paid-in capital
|
|
$
|
101,220
|
|
|
$
|
101,220
|
|
As of March 31, 2010, the unamortized discounts on our
3.5%, 4.0% and 7.25% Convertible Debentures will be
amortized through July 15, 2011, July 15, 2011, and
July 15, 2012, respectively. As of March 31, 2010, the
28
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
conversion prices and the numbers of shares used to determine
the aggregate consideration that would be delivered upon
conversion of our convertible debentures were as follows:
|
|
|
|
|
|
|
|
|
|
|
Conversion Price
|
|
Number of Shares
|
|
3.5% Senior Convertible Debentures due 2034
|
|
$
|
20.92
|
|
|
|
403,686
|
|
4.0% Senior Subordinated Convertible Debentures due 2034
|
|
|
20.92
|
|
|
|
14,446,754
|
|
7.25% Senior Subordinated Convertible Debentures due 2037
|
|
|
27.09
|
|
|
|
9,226,975
|
|
For the three months ended March 31, 2010 and 2009, the
interest expense recognized on our convertible debt and the
effective interest rates on the liability components were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Interest expense recognized on:
|
|
|
|
|
|
|
|
|
Contractual interest coupon
|
|
$
|
7,668
|
|
|
$
|
8,323
|
|
Amortization of deferred financing fees
|
|
|
373
|
|
|
|
517
|
|
Amortization of debt discount
|
|
|
2,631
|
|
|
|
4,297
|
|
|
|
|
|
|
|
|
|
|
Total interest expense recognized
|
|
$
|
10,672
|
|
|
$
|
13,137
|
|
|
|
|
|
|
|
|
|
|
Effective interest rate on the liability component:
|
|
|
|
|
|
|
|
|
3.5% Senior Convertible Debentures due 2034
|
|
|
7.16
|
%
|
|
|
7.25
|
%
|
4.0% Senior Subordinated Convertible Debentures due 2034
|
|
|
7.78
|
%
|
|
|
7.68
|
%
|
7.25% Senior Subordinated Convertible Debentures due 2037
|
|
|
7.79
|
%
|
|
|
7.79
|
%
|
|
|
Note 12.
|
Shareholders
Equity
|
Common
Stock Shares Outstanding
Common stock share activity for the three months ended
March 31, 2010 was as follows:
|
|
|
|
|
Outstanding as of December 31, 2009
|
|
|
323,042,613
|
|
Restricted stock and other stock activities
|
|
|
(276,673
|
)
|
|
|
|
|
|
Outstanding as of March 31, 2010
|
|
|
322,765,940
|
|
|
|
|
|
|
We provide for income taxes as a C corporation on
income earned from operations. Currently, our subsidiaries
cannot participate in the filing of a consolidated federal tax
return. As a result, certain subsidiaries may have taxable
income that cannot be offset by taxable losses or loss
carryforwards of other entities. 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
29
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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 for
subsidiaries 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 incurrence of operating losses at
several of our subsidiaries, and uncertainty regarding the
realization of a portion of the deferred tax assets at future
points in time. As of March 31, 2010, the total valuation
allowance was $477.3 million. Although realization is not
assured, we believe it is more likely than not that the
remaining recognized net deferred tax assets of
$73.5 million as of March 31, 2010 will be realized.
We intend to maintain a valuation allowance with respect to our
deferred tax assets until sufficient positive evidence exists to
support its reduction or reversal.
We have net operating loss carryforwards for federal and state
income tax purposes that can be utilized to offset future
taxable income. If we were to undergo a change in ownership of
more than 50% of our capital stock over a three-year period as
measured under Section 382 of the Internal Revenue Code
(the Code), our ability to utilize our net operating
loss carryforwards, certain built- in losses and other tax
attributes recognized in years after the ownership change
generally would be limited. The annual limit would equal the
product of (a) the applicable long term tax exempt rate and
(b) the value of the relevant taxable entitys capital
stock immediately before the ownership change. These change of
ownership rules generally focus on ownership changes involving
stockholders owning directly or indirectly 5% or more of a
companys outstanding stock, including certain public
groups of stockholders as set forth under Section 382 of
the Code, and those arising from new stock issuances and other
equity transactions. The determination of whether an ownership
change occurs is complex and not entirely within our control. No
assurance can be given as to whether we have undergone, or in
the future will undergo, an ownership change under
Section 382 of the Code.
During the three months ended March 31, 2010, we recorded
$21.0 million of income tax expense. For the three months
ended March 31, 2009, we recorded $55.3 million of
income tax benefit. The effective income tax rate on our
consolidated net loss was (10.8)% and 32.5% for the three months
ended March 31, 2010 and 2009, respectively.
We file income tax returns with the United States and various
state, local and foreign jurisdictions and generally remain
subject to examinations by these tax jurisdictions for tax years
2004 through 2008. We are currently under examination by the
Internal Revenue Service for the tax years 2006 to 2008.
30
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 14.
|
Comprehensive
Loss
|
Comprehensive loss for the three months ended March 31,
2010 and 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Net loss from continuing operations
|
|
$
|
(214,733
|
)
|
|
$
|
(115,180
|
)
|
Net income from discontinued operations, net of taxes
|
|
|
3,043
|
|
|
|
9,653
|
|
Gain from sale of discontinued operations, net of taxes
|
|
|
|
|
|
|
1,207
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(211,690
|
)
|
|
|
(104,320
|
)
|
Unrealized gain on
available-for-sale
securities, net of taxes
|
|
|
760
|
|
|
|
488
|
|
Unrealized loss on foreign currency translation, net of taxes
|
|
|
(9,972
|
)
|
|
|
(9,506
|
)
|
Unrealized loss on cash flow hedges, net of taxes
|
|
|
(22
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
(220,924
|
)
|
|
|
(113,358
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to noncontrolling interests
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to CapitalSource Inc.
|
|
$
|
(220,924
|
)
|
|
$
|
(113,342
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, net, as of
March 31, 2010 and December 31, 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Unrealized gain on
available-for-sale
securities, net of tax
|
|
$
|
5,390
|
|
|
$
|
5,027
|
|
Unrealized gain on foreign currency translation, net of tax
|
|
|
4,675
|
|
|
|
14,647
|
|
Unrealized gain on cash flow hedge, net of tax
|
|
|
62
|
|
|
|
84
|
|
Effect of adoption of amended investment guidance
|
|
|
|
|
|
|
(397
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, net
|
|
$
|
10,127
|
|
|
$
|
19,361
|
|
|
|
|
|
|
|
|
|
|
31
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 15.
|
Net
(Loss) Income Per Share
|
The computations of basic and diluted net (loss) income per
share attributable to CapitalSource Inc. for the three months
ended March 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Net (loss) income:
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(214,733
|
)
|
|
$
|
(115,180
|
)
|
From discontinued operations, net of taxes
|
|
|
3,043
|
|
|
|
9,653
|
|
From sale of discontinued operations, net of taxes
|
|
|
|
|
|
|
1,207
|
|
|
|
|
|
|
|
|
|
|
Total from discontinued operations
|
|
|
3,043
|
|
|
|
10,860
|
|
Attributable to CapitalSource Inc.
|
|
|
(211,690
|
)
|
|
|
(104,304
|
)
|
Average shares basic
|
|
|
320,294,724
|
|
|
|
290,098,800
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Option shares
|
|
|
|
|
|
|
|
|
Unvested restricted stock
|
|
|
|
|
|
|
|
|
Stock units
|
|
|
|
|
|
|
|
|
Conversion premium on the Debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares diluted
|
|
|
320,294,724
|
|
|
|
290,098,800
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.67
|
)
|
|
$
|
(0.40
|
)
|
From discontinued operations, net of taxes
|
|
|
0.01
|
|
|
|
0.04
|
|
Attributable to CapitalSource Inc.
|
|
|
(0.66
|
)
|
|
|
(0.36
|
)
|
Diluted net (loss) income per share
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.67
|
)
|
|
$
|
(0.40
|
)
|
From discontinued operations, net of taxes
|
|
|
0.01
|
|
|
|
0.04
|
|
Attributable to CapitalSource Inc.
|
|
|
(0.66
|
)
|
|
|
(0.36
|
)
|
The weighted average shares that have an antidilutive effect in
the calculation of diluted net (loss) income per share
attributable to CapitalSource Inc. and have been excluded from
the computations above were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
March 31,
|
|
|
2010
|
|
2009
|
|
Stock units
|
|
|
3,616,480
|
|
|
|
2,207,528
|
|
Stock options
|
|
|
2,563,621
|
|
|
|
7,170,754
|
|
Shares subject to a written call option
|
|
|
|
|
|
|
7,253,392
|
|
Shares issuable upon conversion of convertible debt
|
|
|
15,013,163
|
|
|
|
22,504,797
|
|
Unvested restricted stock
|
|
|
1,080,046
|
|
|
|
2,979,427
|
|
|
|
Note 16.
|
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
32
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
for prompt corrective action, CapitalSource Bank must meet
specific capital guidelines that involve 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
for the year ended December 31, 2009 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 both well
capitalized and at all times have a total risk-based
capital ratio of 15%, a Tier-1 risk-based capital ratio of 6%
and a Tier 1 leverage ratio of 5%. CapitalSource
Banks capital ratios and the minimum requirement as of
March 31, 2010 and December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
Actual
|
|
Minimum Required
|
|
Actual
|
|
Minimum Required
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
($ in thousands)
|
|
Tier-1 Leverage
|
|
$
|
661,565
|
|
|
|
11.78
|
%
|
|
$
|
280,768
|
|
|
|
5.00
|
%
|
|
$
|
699,323
|
|
|
|
12.80
|
%
|
|
$
|
273,153
|
|
|
|
5.00
|
%
|
Tier-1 Risk-Based Capital
|
|
|
661,565
|
|
|
|
16.05
|
|
|
|
247,335
|
|
|
|
6.00
|
|
|
|
699,323
|
|
|
|
16.19
|
|
|
|
259,175
|
|
|
|
6.00
|
|
Total Risk-Based Capital
|
|
|
715,245
|
|
|
|
17.35
|
|
|
|
618,338
|
|
|
|
15.00
|
|
|
|
754,580
|
|
|
|
17.47
|
|
|
|
647,938
|
|
|
|
15.00
|
|
The California Department of Financial Institutions (the
DFI) approval order requires that CapitalSource
Bank, during the first three years of operations, maintain a
minimum ratio of tangible shareholders equity to total
tangible assets of at least 10.00%. As of March 31, 2010
and December 31, 2009, CapitalSource Bank satisfied the DFI
capital ratio requirement with ratios of 11.94% and 12.32%,
respectively.
|
|
Note 17.
|
Commitments
and Contingencies
|
As of March 31, 2010 and December 31, 2009, we had
issued $178.3 million and $182.5 million,
respectively, in letters of credit, which expire at various
dates over the next six 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. These arrangements had carrying
amounts totaling $5.4 million and $6.1 million, as
reported in other liabilities in our consolidated balance sheets
as of March 31, 2010 and December 31, 2009,
respectively.
As of March 31, 2010 and December 31, 2009, we had
unfunded commitments to extend credit to our clients of
$2.7 billion and $2.8 billion, respectively, including
unfunded commitments to extend credit by CapitalSource Bank of
$927.3 million and $914.9 million, respectively.
Additional information on these contingencies is included in
Note 20, Commitments and Contingencies, in our
audited consolidated financial statements for the year ended
December 31, 2009, included in our
Form 10-K.
As of March 31, 2010 and December 31, 2009, we had
identified conditional asset retirement obligations primarily
related to the future removal and disposal of asbestos that is
contained within certain of our direct real estate investment
properties. The asbestos is appropriately contained and we
believe we are compliant with current environmental regulations.
If these properties undergo major renovations or are demolished,
certain environmental regulations specify the manner in which
asbestos must be handled and disposed. We are required to record
the fair value of these conditional liabilities if they can be
reasonably estimated. As of March 31, 2010 and
December 31, 2009, sufficient information was not available
to estimate our liability for conditional asset retirement
obligations as the obligations to remove the asbestos from these
properties have indeterminable settlement dates. As such, no
liability for conditional asset retirement obligations was
recorded in our consolidated balance sheets as of March 31,
2010 and December 31, 2009.
In July 2009, we entered into a limited guarantee for the
principal balance and any accrued interest and unpaid fees with
respect to indebtedness owed by a company in which we hold an
investment. The guarantee can be called
33
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
by the lender on the earlier of an acceleration of our
syndicated bank credit facility or April 9, 2011. As of
March 31, 2010, the principal amount guaranteed was
$18.7 million. We have determined that we are not required
to recognize the assets and liabilities of this entity for
financial statement purposes as of March 31, 2010.
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 18.
|
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 March 31, 2010, none of our
derivatives were designated as hedging instruments pursuant to
GAAP.
We enter into various derivative instruments to manage our
exposure to interest rate risk. The objective is to manage
interest rate sensitivity by modifying the characteristics of
certain assets and liabilities to reduce the adverse effect of
changes in interest rates. We primarily use interest rate swaps
and basis swaps to manage our interest rate risks.
Interest rate swaps are contracts in which a series of interest
rate cash flows, based on a specific notional amount as well as
fixed and variable interest rates, are exchanged over a
prescribed period. To minimize the economic effect of interest
rate fluctuations specific to our fixed rate debt, certain
sale-leaseback transactions and certain fixed rate loans, we
enter into interest rate swap agreements whereby either we pay a
fixed interest rate and receive a variable interest rate or we
pay a variable interest rate and receive a fixed interest rate
over a prescribed period. The notional amounts of the derivative
instruments related to these exposures were approximately
$704.7 million and $710.2 million as of March 31,
2010 and December 31, 2009, respectively.
We also enter 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 typically 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. The notional amounts of basis swaps related to these
exposures were approximately $493.0 million and
$556.8 million as of March 31, 2010 and
December 31, 2009, respectively.
We enter 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.
The notional amounts of our foreign exchange contracts were
approximately $50.7 million and $54.6 million as of
March 31, 2010 and December 31, 2009, respectively.
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 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. 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 March 31,
2010, our gross derivative counterparty exposures, based on the
positive fair value of our derivative instruments, were
$20.3 million. Our master netting agreements with our
counterparties reduced this gross exposure by
$17.3 million, resulting in a net exposure of
$3.0 million as of March 31, 2010. We report our
derivatives in our consolidated
34
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
balance sheets at fair value on a gross basis irrespective of
our master netting arrangements. We held $3.1 million of
collateral against our derivative instruments that were in an
asset position as of March 31, 2010. For derivatives that
were in a liability position, we had posted collateral of
$59.8 million as of March 31, 2010.
As of March 31, 2010, the fair values of our various
derivative instruments as well as their locations in our
consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
Location
|
|
|
Fair Value
|
|
|
Location
|
|
|
Fair Value
|
|
|
|
($ in thousands)
|
|
|
Interest rate contracts
|
|
|
Other assets
|
|
|
$
|
20,308
|
|
|
|
Other liabilities
|
|
|
$
|
83,559
|
|
Foreign exchange contracts
|
|
|
Other assets
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
4,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
20,308
|
|
|
|
|
|
|
$
|
88,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the fair values of our various
derivative instruments as well as their locations in our audited
consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
|
Liability Derivatives
|
|
|
|
Location
|
|
|
Fair Value
|
|
|
Location
|
|
|
Fair Value
|
|
|
|
($ in thousands)
|
|
|
Interest rate contracts
|
|
|
Other assets
|
|
|
$
|
14,073
|
|
|
|
Other liabilities
|
|
|
$
|
78,736
|
|
Foreign exchange contracts
|
|
|
Other assets
|
|
|
|
256
|
|
|
|
Other liabilities
|
|
|
|
3,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
14,329
|
|
|
|
|
|
|
$
|
82,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gains and losses on our derivative instruments recognized
during the three months ended March 31, 2010 and 2009 as
well as the locations of such gains and losses in our
consolidated statements of operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Income During
|
|
|
|
|
|
the Three Months Ended March 31,
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
|
|
|
($ in thousands)
|
|
|
Interest rate contracts
|
|
(Loss) on derivatives
|
|
$
|
(2,703
|
)
|
|
$
|
(2,948
|
)
|
Interest rate contracts
|
|
Gain on residential mortgage investment portfolio
|
|
|
|
|
|
|
862
|
|
Foreign exchange contracts
|
|
(Loss) gain on derivatives
|
|
|
(1,634
|
)
|
|
|
2,263
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(4,337
|
)
|
|
$
|
177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 19.
|
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, direct real
estate investments, REO, and certain other investments.
Fair
Value Determination
Fair value is based on quoted market prices or by using market
based inputs where available. Given the nature of some of our
assets and liabilities, clearly determinable market based
valuation inputs are often not available;
35
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
therefore, these assets and liabilities are valued using
internal estimates. As subjectivity exists with respect to many
of our valuation estimates used, the fair values we have
disclosed may not equal prices that we may ultimately realize if
the assets are sold or the liabilities settled with third
parties.
Below is a description of the valuation methods for our assets
and liabilities recorded at fair value on either a recurring or
nonrecurring basis. While we believe the valuation methods are
appropriate and consistent with other market participants, the
use of different methodologies or assumptions to determine the
fair value of certain assets and liabilities could result in a
different estimate of fair value at the measurement date.
Assets
and Liabilities
Cash
Cash and cash equivalents and restricted cash are recorded at
historical cost. The carrying amount is a reasonable estimate of
fair value as these instruments have short-term maturities and
interest rates that approximate market.
Investment
Securities,
Available-for-Sale
Investment securities,
available-for-sale,
consist of U.S. Treasury bills, Agency discount notes,
Agency callable notes, Agency debt, Agency MBS, Non-agency MBS,
and corporate debt securities that are carried at fair value on
a recurring basis and classified as
available-for-sale
securities. Fair value adjustments on these investments are
generally recorded through other comprehensive income. However,
if impairment on an investment,
available-for-sale
is deemed to be
other-than-temporary,
all or a portion of the fair value adjustment may be reported in
earnings. The securities are valued using quoted prices from
external market participants, including pricing services. If
quoted prices are not available, the fair value is determined
using quoted prices of securities with similar characteristics
or independent pricing models, which utilize observable market
data such as benchmark yields, reported trades and issuer
spreads. These securities are primarily classified within
Level 2 of the fair value hierarchy.
Investment securities,
available-for-sale,
also include a collateralized loan obligation and corporate debt
securities which consist primarily of corporate bonds whose
values are determined using internally developed valuation
models. These models may utilize discounted cash flow techniques
for which key inputs include the timing and amount of future
cash flows and market yields. Market yields are based on
comparisons to other instruments for which market data is
available. These models may also utilize industry valuation
benchmarks, such as multiples of EBITDA, to determine a value
for the underlying enterprise. Given the lack of active and
observable trading in the market, our corporate debt securities
and collateralized loan obligation are classified in
Level 3.
Investment securities,
available-for-sale,
also consist of equity securities which are valued using the
stock price of the underlying company in which we hold our
investment. Our equity securities are classified in Level 1
or 2 depending on the level of activity within the market.
Investment
Securities,
Held-to-Maturity
Investment securities,
held-to-maturity
consist of commercial mortgage-backed-securities. These
securities are recorded at amortized cost and recorded at fair
value on a non-recurring basis to the extent we record an
other-than-temporary
impairment on the securities. Fair value measurements are
determined using quoted prices from external market
participants, including pricing services. If quoted prices are
not available, the fair value is determined using quoted prices
of securities with similar characteristics or independent
pricing models, which utilize observable market data such as
benchmark yields, reported trades and issuer spreads.
36
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Commercial
Real Estate A Participation Interest
The A Participation Interest is recorded at
outstanding principal, net of the unamortized purchase discount.
For disclosure purposes, the fair value is estimated based on a
discounted cash flow analysis, using rates currently being
offered for securities with similar characteristics as the
underlying collateral.
Loans
Held for Sale
Loans held for sale are carried at the lower of cost or fair
value, with fair value adjustments recorded on a nonrecurring
basis. The fair value is determined using actual market
transactions when available. In situations when market
transactions are not available, we use the income approach
through internally developed valuation models to estimate the
fair value. This requires the use of significant judgment
surrounding discount rates and the timing and amounts of future
cash flows. Key inputs to these valuations also include costs of
completion and unit settlement prices for the underlying
collateral of the loans. Fair values determined through actual
market transactions are classified within Level 2 of the
fair value hierarchy, while fair values determined through
internally developed valuation models are classified within
Level 3 of the fair value hierarchy.
Loans
Held for Investment
Loans held for investment are recorded at outstanding principal,
net of any deferred fees and unamortized purchase discounts or
premiums and net of allowance for loan losses. We may record
fair value adjustments on a nonrecurring basis when we have
determined that it is necessary to record a specific reserve
against a loan and we measure such specific reserve using the
fair value of the loans collateral. To determine the fair
value of the collateral, we may employ different approaches
depending on the type of collateral. Typically, we determine the
fair value of the collateral using internally developed models.
Our models utilize industry valuation benchmarks to determine a
value for the underlying enterprise. In certain cases where our
collateral is a fixed or other tangible asset, we will
periodically obtain a third party appraisal. When fair value
adjustments are recorded on these loans, we typically classify
them in Level 3 of the fair value hierarchy.
We determine the fair value estimates of loans held for
investment primarily using external valuation specialists. These
valuation specialists group loans based on credit rating and
collateral type, and the fair value is estimated utilizing
discounted cash flow techniques. The valuations take into
account current market rates of return, contractual interest
rates, maturities and assumptions regarding expected future cash
flows. Within each respective loan grouping, current market
rates of return are determined based on quoted prices for
similar instruments that are actively traded, adjusted as
necessary to reflect the illiquidity of the instrument. This
approach requires the use of significant judgment surrounding
current market rates of return, liquidity adjustments and the
timing and amounts of future cash flows.
Direct
Real Estate Investments, net and Direct Real Estate Investments
Held for Sale
Direct real estate investments, net are generally recorded at
cost, net of accumulated depreciation. However, fair value
adjustments are recorded on a nonrecurring basis if the carrying
amount of an investment is not recoverable and exceeds its fair
value. Direct real estate investments held for sale are recorded
at the lower of cost or fair value with fair value adjustments
occurring on a nonrecurring basis. We determine the fair value
of these investments using actual market transactions where
available. If market transactions are not available, we use the
income approach through internally developed valuation models to
estimate the fair value. This requires the use of significant
judgment surrounding discount rates and the timing and amounts
of future cash flows. Fair values determined through actual
market transactions are classified within Level 2 of the
valuation hierarchy while fair values determined through
internally developed valuation models are classified within
Level 3.
37
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Investments
Other investments accounted for under the cost or equity methods
of accounting are carried at fair value on a nonrecurring basis
to the extent that they are determined to be
other-than-temporarily
impaired during the period. As there is rarely an observable
price or market for such investments, we determine fair value
using internally developed models. Our models utilize industry
valuation benchmarks, such as multiples of EBITDA, to determine
a value for the underlying enterprise. We reduce this value by
the value of debt outstanding to arrive at an estimated equity
value of the enterprise. When an external event such as a
purchase transaction, public offering or subsequent equity sale
occurs, the pricing indicated by the external event will be used
to corroborate our private equity valuation. Fair value
measurements related to these investments are typically
classified within Level 3 of the fair value hierarchy.
Warrants
Warrants are carried at fair value on a recurring basis and
generally relate to private companies. Warrants for private
companies are valued based on the estimated value of the
underlying enterprise. This fair value is derived principally
using a multiple determined either from comparable public
company data or from the transaction where we acquired the
warrant and a financial performance indicator based on EBITDA or
another revenue measure. Given the nature of the inputs used to
value private company warrants, they are classified in
Level 3 of the fair value hierarchy.
FHLB SF
Stock
Our investment in FHLB stock is recorded at historical cost.
FHLB stock does not have a readily determinable fair value, but
may be sold back to the FHLB at its par value with stated
notice; however, the FHLB SF has currently ceased repurchases of
excess stock. 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 during the
three months ended March 31, 2010.
Derivative
Assets and Liabilities
Derivatives are carried at fair value on a recurring basis and
primarily relate to interest rate swaps, caps, floors, basis
swaps and forward exchange contracts which we enter into to
manage interest rate risk and foreign exchange risk. Our
derivatives are principally traded in
over-the-counter
markets where quoted market prices are not readily available.
Instead, derivatives are measured using market observable inputs
such as interest rate yield curves, volatilities and basis
spreads. We also consider counterparty credit risk in valuing
our derivatives. We typically classify our derivatives in
Level 2 of the fair value hierarchy.
Real
Estate Owned
REO is initially recorded at its estimated fair value at the
time of foreclosure. REO held for sale is carried at the lower
of its carrying amount or fair value subsequent to the date of
foreclosure, with fair value adjustments recorded on a
nonrecurring basis. REO held for use is recorded at its carrying
amount, net of accumulated depreciation, with fair value
adjustments recorded on a nonrecurring basis if the carrying
amount of the real estate is not recoverable and exceeds its
fair value. When available, the fair value of REO is determined
using actual market transactions. When market transactions are
not available, the fair value of REO is typically determined
based upon recent appraisals by third parties. We may or may not
adjust these third party appraisal values based on our own
internally developed judgments and estimates. To the extent that
market transactions or third party appraisals are not available,
we use the income approach through internally developed
valuation models to estimate the fair value. This requires the
use of significant judgment surrounding discount rates and the
timing and amounts of future cash flows. Fair values determined
through actual market transactions are classified within
Level 2 of the fair value hierarchy while
38
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fair values determined through third party appraisals and
through internally developed valuation models are classified
within Level 3 of the fair value hierarchy.
Loan
Receivables
When we foreclose on a borrower whose underlying collateral
consists of consumer loans, we record the acquired loans at the
estimated fair value at the time of foreclosure. Fair value is
determined using internally developed models that segregate the
portfolio into performing and non-performing segments. Key
inputs into these models include default and recovery rates,
market discount rates and the underlying value of collateral.
When fair value adjustments are recorded on these loans, we
typically classify them in Level 3 of the fair value
hierarchy.
Deposits
Deposits are carried at historical cost. The carrying amounts of
deposits for savings and money market accounts and brokered
certificates of deposit are deemed to approximate fair value as
they either have no stated maturities or short-term maturities.
Certificates of deposit are grouped by maturity date, and the
fair value is estimated utilizing discounted cash flow
techniques. The interest rates applied are rates currently being
offered for similar certificates of deposit within the
respective maturity groupings.
Credit
Facilities
The fair value of our credit facilities is estimated based on
current market interest rates for similar debt instruments
adjusted for the remaining time to maturity.
Term
Debt
Term debt is comprised of term debt transactions in the form of
asset securitizations and our 2014 Senior Secured Notes. For
disclosure purposes, the fair values of our term debt
securitizations and 2014 Senior Secured Notes are determined
based on actual prices from recent third party purchases of our
debt when available and based on indicative price quotes
received from various market participants when recent
transactions have not occurred.
Other
Borrowings
Our other borrowings are comprised of convertible debt,
subordinated debt and mortgage debt. For disclosure purposes,
the fair value of our convertible debt is determined from quoted
market prices in active markets or, when the market is not
active, from quoted market prices for debt with similar
maturities. The fair value of our subordinated debt is
determined based on recent third party purchases of our debt
when available and based on indicative price quotes received
from market participants when recent transactions have not
occurred. The fair value of our mortgage debt is estimated using
discounted cash flow techniques, which take into account current
market interest rates and the fixed spread included in the debt.
39
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 March 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Measurement as of
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
March 31, 2010
|
|
|
Identical Assets (Level 1)
|
|
|
Inputs (Level 2)
|
|
|
Inputs (Level 3)
|
|
|
|
($ in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency discount notes
|
|
$
|
324,620
|
|
|
$
|
|
|
|
$
|
324,620
|
|
|
$
|
|
|
Agency callable notes
|
|
|
243,217
|
|
|
|
|
|
|
|
243,217
|
|
|
|
|
|
Agency debt
|
|
|
107,508
|
|
|
|
|
|
|
|
107,508
|
|
|
|
|
|
Agency MBS
|
|
|
604,716
|
|
|
|
|
|
|
|
604,716
|
|
|
|
|
|
Non-agency MBS
|
|
|
142,070
|
|
|
|
|
|
|
|
142,042
|
|
|
|
28
|
|
Equity securities
|
|
|
33,626
|
|
|
|
33,626
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
|
9,528
|
|
|
|
|
|
|
|
5,163
|
|
|
|
4,365
|
|
U.S. Treasury bills
|
|
|
79,813
|
|
|
|
|
|
|
|
79,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities,
available-for-sale
|
|
|
1,545,098
|
|
|
|
33,626
|
|
|
|
1,507,079
|
|
|
|
4,393
|
|
Investments carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
1,244
|
|
|
|
|
|
|
|
|
|
|
|
1,244
|
|
Other assets held at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
|
20,308
|
|
|
|
|
|
|
|
20,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,566,650
|
|
|
$
|
33,626
|
|
|
$
|
1,527,387
|
|
|
$
|
5,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities held at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
88,249
|
|
|
$
|
|
|
|
$
|
88,249
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Assets and liabilities carried at fair value on a recurring
basis on the balance sheet as of December 31, 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
Measurement as of
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31, 2009
|
|
|
Identical Assets (Level 1)
|
|
|
Inputs (Level 2)
|
|
|
Inputs (Level 3)
|
|
|
|
($ in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency discount notes
|
|
$
|
49,996
|
|
|
$
|
|
|
|
$
|
49,996
|
|
|
$
|
|
|
Agency callable notes
|
|
|
250,530
|
|
|
|
|
|
|
|
250,530
|
|
|
|
|
|
Agency debt
|
|
|
24,472
|
|
|
|
|
|
|
|
24,472
|
|
|
|
|
|
Agency MBS
|
|
|
418,390
|
|
|
|
|
|
|
|
418,390
|
|
|
|
|
|
Non-agency MBS
|
|
|
153,275
|
|
|
|
|
|
|
|
153,214
|
|
|
|
61
|
|
Equity securities
|
|
|
52,984
|
|
|
|
52,984
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
|
9,618
|
|
|
|
|
|
|
|
5,161
|
|
|
|
4,457
|
|
Collateralized loan obligation
|
|
|
1,326
|
|
|
|
|
|
|
|
|
|
|
|
1,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities,
available-for-sale
|
|
|
960,591
|
|
|
|
52,984
|
|
|
|
901,763
|
|
|
|
5,844
|
|
Investments carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
1,392
|
|
|
|
|
|
|
|
|
|
|
|
1,392
|
|
Other assets held at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
|
14,329
|
|
|
|
|
|
|
|
14,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
976,312
|
|
|
$
|
52,984
|
|
|
$
|
916,092
|
|
|
$
|
7,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities held at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
82,662
|
|
|
$
|
|
|
|
$
|
82,662
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the changes in the fair values of assets and
liabilities carried at fair value for the three months ended
March 31, 2010 that have been classified in Level 3 of
the fair value hierarchy was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized and Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
and
|
|
|
Sales,
|
|
|
Transfers
|
|
|
|
|
|
Gains (Losses)
|
|
|
|
Balance as of
|
|
|
|
|
|
Other
|
|
|
Unrealized
|
|
|
Issuances, and
|
|
|
In (Out)
|
|
|
Balance as of
|
|
|
As of
|
|
|
|
January 1,
|
|
|
Included in
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
Settlements,
|
|
|
of Level 3
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
Income
|
|
|
Income, net
|
|
|
(Losses)
|
|
|
Net
|
|
|
In
|
|
|
(Out)
|
|
|
2010
|
|
|
2010
|
|
|
|
($ in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency MBS
|
|
$
|
61
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(33
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
28
|
|
|
$
|
|
|
Corporate debt
|
|
|
4,457
|
|
|
|
57
|
|
|
|
(149
|
)
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,365
|
|
|
|
57
|
|
Collateralized loan obligation
|
|
|
1,326
|
|
|
|
636
|
|
|
|
(308
|
)
|
|
|
328
|
|
|
|
(1,654
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,844
|
|
|
$
|
693
|
|
|
$
|
(457
|
)
|
|
$
|
236
|
|
|
$
|
(1,687
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,393
|
|
|
$
|
57
|
|
Warrants
|
|
|
1,392
|
|
|
|
(148
|
)
|
|
|
|
|
|
|
(148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,244
|
|
|
|
(148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,236
|
|
|
$
|
545
|
|
|
$
|
(457
|
)
|
|
$
|
88
|
|
|
$
|
(1,687
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,637
|
|
|
$
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the changes in the fair values of assets and
liabilities carried at fair value for the three months ended
March 31, 2009 that have been classified in Level 3 of
the fair value hierarchy was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized and Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
Realized
|
|
|
Sales,
|
|
|
Transfers
|
|
|
|
|
|
Losses
|
|
|
|
Balance as of
|
|
|
|
|
|
Other
|
|
|
and
|
|
|
Issuances, and
|
|
|
In (Out)
|
|
|
Balance as
|
|
|
As of
|
|
|
|
January 1,
|
|
|
Included in
|
|
|
Comprehensive
|
|
|
Unrealized
|
|
|
Settlements,
|
|
|
of Level 3
|
|
|
of March 31,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
Income
|
|
|
Income, net
|
|
|
Losses
|
|
|
Net
|
|
|
In
|
|
|
(Out)
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities,
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency MBS
|
|
$
|
377
|
|
|
$
|
(13
|
)
|
|
$
|
(29
|
)
|
|
$
|
(42
|
)
|
|
$
|
(234
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
101
|
|
|
$
|
(13
|
)
|
Corporate debt
|
|
|
33,886
|
|
|
|
(11,734
|
)
|
|
|
(60
|
)
|
|
|
(11,794
|
)
|
|
|
132
|
|
|
|
|
|
|
|
|
|
|
|
22,224
|
|
|
|
(11,734
|
)
|
Collateralized loan obligation
|
|
|
2,361
|
|
|
|
(507
|
)
|
|
|
|
|
|
|
(507
|
)
|
|
|
(263
|
)
|
|
|
|
|
|
|
|
|
|
|
1,591
|
|
|
|
(507
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,624
|
|
|
$
|
(12,254
|
)
|
|
$
|
(89
|
)
|
|
$
|
(12,343
|
)
|
|
$
|
(365
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
23,916
|
|
|
$
|
(12,254
|
)
|
Warrants
|
|
|
4,661
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,596
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
41,285
|
|
|
$
|
(12,319
|
)
|
|
$
|
(89
|
)
|
|
$
|
(12,408
|
)
|
|
$
|
(365
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
28,512
|
|
|
$
|
(12,319
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
March 31, 2010, reported in interest income and gain (loss)
on investments, net were as follows:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
Gain (Loss) on
|
|
|
Income
|
|
Investments, net
|
|
|
($ in thousands)
|
|
Total gains included in earnings for the period
|
|
$
|
91
|
|
|
$
|
454
|
|
Unrealized gains (losses) relating to assets still held at
reporting date
|
|
|
57
|
|
|
|
(148
|
)
|
Realized and unrealized gains and losses on assets and
liabilities classified in Level 3 included in income for
the three months ended March 31, 2009, reported in interest
income and gain (loss) on investments, net were as follows:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
Loss on
|
|
|
Income
|
|
Investments, net
|
|
|
($ in thousands)
|
|
Total gains (losses) included in earnings for the period
|
|
$
|
352
|
|
|
$
|
(12,671
|
)
|
Unrealized gains (losses) relating to assets still held at
reporting date
|
|
|
352
|
|
|
|
(12,671
|
)
|
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 for which nonrecurring fair value adjustments were
recorded during the three months ended March 31, 2010 and
2009, classified by their position in the fair value hierarchy.
The table also provides the gains (losses) related to those
assets recorded during the three months ended March 31,
2010 and 2009.
42
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
Total Losses for
|
|
|
|
|
|
|
Measurement for the
|
|
|
Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
the Three Months
|
|
|
|
|
|
|
Three Months Ended
|
|
|
for Identical
|
|
|
Observable Inputs
|
|
|
Unobservable
|
|
|
Ended
|
|
|
|
|
|
|
March 31, 2010
|
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
Inputs (Level 3)
|
|
|
March 31, 2010
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
15,005
|
|
|
$
|
|
|
|
$
|
15,005
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
Loans held for investment(1)
|
|
|
412,718
|
|
|
|
|
|
|
|
|
|
|
|
412,718
|
|
|
|
(141,696
|
)
|
|
|
|
|
Investments carried at cost
|
|
|
910
|
|
|
|
|
|
|
|
|
|
|
|
910
|
|
|
|
(2,014
|
)
|
|
|
|
|
REO(2)
|
|
|
79,055
|
|
|
|
|
|
|
|
|
|
|
|
79,055
|
|
|
|
(20,689
|
)
|
|
|
|
|
Loan receivables
|
|
|
108,804
|
|
|
|
|
|
|
|
|
|
|
|
108,804
|
|
|
|
(15,170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
616,492
|
|
|
$
|
|
|
|
$
|
15,005
|
|
|
$
|
601,487
|
|
|
$
|
(179,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents impaired loans held for investment measured at fair
value of the collateral less transaction costs. Transaction
costs were not significant during the period. |
|
(2) |
|
Represents REO measured at fair value of the collateral less
transaction costs. Transaction costs were not significant during
the period. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
Total Losses for
|
|
|
|
|
|
|
Measurement for the
|
|
|
Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
the Three Months
|
|
|
|
|
|
|
Three Months Ended
|
|
|
for Identical
|
|
|
Observable Inputs
|
|
|
Unobservable
|
|
|
Ended
|
|
|
|
|
|
|
March 31, 2009
|
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
Inputs (Level 3)
|
|
|
March 31, 2009
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
8,500
|
|
|
$
|
|
|
|
$
|
8,500
|
|
|
$
|
|
|
|
$
|
(21
|
)
|
|
|
|
|
Loans held for investment(1)
|
|
|
324,292
|
|
|
|
|
|
|
|
|
|
|
|
324,292
|
|
|
|
(129,272
|
)
|
|
|
|
|
Investments carried at cost
|
|
|
3,515
|
|
|
|
|
|
|
|
|
|
|
|
3,515
|
|
|
|
(1,672
|
)
|
|
|
|
|
Investments accounted for under the equity method
|
|
|
1,312
|
|
|
|
|
|
|
|
|
|
|
|
1,312
|
|
|
|
(1,113
|
)
|
|
|
|
|
Direct real estate investments, net
|
|
|
4,847
|
|
|
|
|
|
|
|
|
|
|
|
4,847
|
|
|
|
(42
|
)
|
|
|
|
|
REO(2)
|
|
|
86,839
|
|
|
|
|
|
|
|
|
|
|
|
86,839
|
|
|
|
(20,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
429,305
|
|
|
$
|
|
|
|
$
|
8,500
|
|
|
$
|
420,805
|
|
|
$
|
(152,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents impaired loans held for investment measured at fair
value of the loans collateral less transaction costs.
Transaction costs were not significant during the period. |
|
(2) |
|
Represents REO measured at fair value of the collateral less
transaction costs. Transaction costs were not significant during
the period. |
Fair
Value of Financial Instruments
GAAP requires the disclosure of the estimated fair value of
financial instruments. A financial instrument is defined as
cash, evidence of an ownership interest in an entity, or a
contract that creates a contractual obligation or right to
deliver or receive cash or another financial instrument from a
second entity on potentially favorable terms. The methods and
assumptions used in estimating the fair values of our financial
instruments are described above.
The table below provides fair value estimates for our financial
instruments as of March 31, 2010 and December 31,
2009, 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.
43
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
December 31, 2009
|
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
|
($ in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate A Participation Interest, net
|
|
$
|
327,992
|
|
|
$
|
328,662
|
|
|
$
|
530,560
|
|
|
$
|
530,390
|
|
Loans held for investment, net
|
|
|
7,168,912
|
|
|
|
6,804,055
|
|
|
|
7,588,135
|
|
|
|
7,287,196
|
|
Investments carried at cost
|
|
|
49,427
|
|
|
|
88,588
|
|
|
|
53,205
|
|
|
|
87,940
|
|
Investment securities,
held-to-maturity
|
|
|
218,751
|
|
|
|
241,130
|
|
|
|
242,078
|
|
|
|
262,181
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
4,582,641
|
|
|
|
4,586,396
|
|
|
|
4,483,879
|
|
|
|
4,486,285
|
|
Credit facilities
|
|
|
407,833
|
|
|
|
376,885
|
|
|
|
542,781
|
|
|
|
497,036
|
|
Term debt
|
|
|
2,681,107
|
|
|
|
1,921,412
|
|
|
|
2,956,536
|
|
|
|
2,162,533
|
|
Convertible debt, net
|
|
|
545,286
|
|
|
|
535,303
|
|
|
|
561,347
|
|
|
|
525,860
|
|
Subordinated debt
|
|
|
437,611
|
|
|
|
253,814
|
|
|
|
439,701
|
|
|
|
255,027
|
|
Mortgage debt
|
|
|
445,834
|
|
|
|
428,588
|
|
|
|
447,683
|
|
|
|
426,865
|
|
Loan commitments and letters of credit
|
|
|
|
|
|
|
42,838
|
|
|
|
|
|
|
|
45,455
|
|
We operate as three reportable segments: 1) CapitalSource
Bank, 2) Other Commercial Finance, and 3) Healthcare
Net Lease. Our CapitalSource Bank segment comprises our
commercial lending and banking business activities; our Other
Commercial Finance segment comprises our loan portfolio and
other business activities in the Parent Company; and our
Healthcare Net Lease segment comprises our direct real estate
investment business activities.
44
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The financial results of our operating segments as of and for
the three months ended March 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource
|
|
|
Commercial
|
|
|
Healthcare
|
|
|
Intercompany
|
|
|
Consolidated
|
|
|
|
Bank
|
|
|
Finance
|
|
|
Net Lease
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Total interest and fee income
|
|
$
|
82,512
|
|
|
$
|
98,081
|
|
|
$
|
81
|
|
|
$
|
(4,684
|
)
|
|
$
|
175,990
|
|
Operating lease income
|
|
|
|
|
|
|
|
|
|
|
8,503
|
|
|
|
|
|
|
|
8,503
|
|
Interest expense(1)
|
|
|
17,323
|
|
|
|
48,607
|
|
|
|
3,898
|
|
|
|
(2,311
|
)
|
|
|
67,517
|
|
Provision for loan losses
|
|
|
87,704
|
|
|
|
131,236
|
|
|
|
|
|
|
|
|
|
|
|
218,940
|
|
Operating expenses(2)
|
|
|
24,335
|
|
|
|
48,925
|
|
|
|
4,219
|
|
|
|
(11,637
|
)
|
|
|
65,842
|
|
Other income (expense), net
|
|
|
7,123
|
|
|
|
(21,890
|
)
|
|
|
302
|
|
|
|
(11,456
|
)
|
|
|
(25,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations before income taxes
|
|
|
(39,727
|
)
|
|
|
(152,577
|
)
|
|
|
769
|
|
|
|
(2,192
|
)
|
|
|
(193,727
|
)
|
Income tax (benefit) expense
|
|
|
(56
|
)
|
|
|
21,062
|
|
|
|
|
|
|
|
|
|
|
|
21,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations
|
|
|
(39,671
|
)
|
|
|
(173,639
|
)
|
|
|
769
|
|
|
|
(2,192
|
)
|
|
|
(214,733
|
)
|
Net income from discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
3,043
|
|
|
|
|
|
|
|
3,043
|
|
Loss from sale of discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to CapitalSource Inc.
|
|
$
|
(39,671
|
)
|
|
$
|
(173,639
|
)
|
|
$
|
3,812
|
|
|
$
|
(2,192
|
)
|
|
$
|
(211,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of March 31, 2010
|
|
$
|
5,697,559
|
|
|
$
|
5,436,712
|
|
|
$
|
656,420
|
|
|
$
|
(148,530
|
)
|
|
$
|
11,642,161
|
|
Assets of discontinued operations, held for sale, as of
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
261,045
|
|
|
|
|
|
|
|
261,045
|
|
Total assets as of December 31, 2009
|
|
|
5,677,354
|
|
|
|
6,069,857
|
|
|
|
678,030
|
|
|
|
(178,299
|
)
|
|
|
12,246,942
|
|
Assets of discontinued operations, held for sale, as of
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
260,541
|
|
|
|
|
|
|
|
260,541
|
|
|
|
|
(1) |
|
Interest expense in our Healthcare Net Lease segment includes
interest on a secured credit facility, term debt and mortgage
debt. |
|
(2) |
|
Operating expenses of our Healthcare Net Lease segment include
depreciation of direct real estate investments, professional
fees, an allocation of overhead expenses (including compensation
and benefits) and other direct expenses. |
45
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The financial results of our operating segments as of and for
the three months ended March 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource
|
|
|
Commercial
|
|
|
Healthcare
|
|
|
Intercompany
|
|
|
Consolidated
|
|
|
|
Bank
|
|
|
Finance
|
|
|
Net Lease
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Total interest and fee income
|
|
$
|
77,424
|
|
|
$
|
176,729
|
|
|
$
|
85
|
|
|
$
|
(2,886
|
)
|
|
$
|
251,352
|
|
Operating lease income
|
|
|
|
|
|
|
|
|
|
|
8,526
|
|
|
|
|
|
|
|
8,526
|
|
Interest expense(1)
|
|
|
38,413
|
|
|
|
89,263
|
|
|
|
4,393
|
|
|
|
(2,398
|
)
|
|
|
129,671
|
|
Provision for loan losses
|
|
|
24,991
|
|
|
|
130,276
|
|
|
|
|
|
|
|
|
|
|
|
155,267
|
|
Operating expenses(2)
|
|
|
23,740
|
|
|
|
56,144
|
|
|
|
4,999
|
|
|
|
(13,192
|
)
|
|
|
71,691
|
|
Other income (expense), net
|
|
|
9,561
|
|
|
|
(70,034
|
)
|
|
|
(9
|
)
|
|
|
(13,288
|
)
|
|
|
(73,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations before income taxes
|
|
|
(159
|
)
|
|
|
(168,988
|
)
|
|
|
(790
|
)
|
|
|
(584
|
)
|
|
|
(170,521
|
)
|
Income tax (benefit) expense
|
|
|
(65
|
)
|
|
|
(58,023
|
)
|
|
|
2,747
|
|
|
|
|
|
|
|
(55,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(94
|
)
|
|
|
(110,965
|
)
|
|
|
(3,537
|
)
|
|
|
(584
|
)
|
|
|
(115,180
|
)
|
Net income from discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
9,653
|
|
|
|
|
|
|
|
9,653
|
|
Gain on sale of discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
1,207
|
|
|
|
|
|
|
|
1,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(94
|
)
|
|
|
(110,965
|
)
|
|
|
7,323
|
|
|
|
(584
|
)
|
|
|
(104,320
|
)
|
Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to CapitalSource Inc.
|
|
$
|
(94
|
)
|
|
$
|
(110,949
|
)
|
|
$
|
7,323
|
|
|
$
|
(584
|
)
|
|
$
|
(104,304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest expense in our Healthcare Net Lease segment includes
interest on a secured credit facility, term debt and mortgage
debt. |
|
(2) |
|
Operating expenses of our Healthcare Net Lease segment include
depreciation of direct real estate investments, professional
fees, an allocation of overhead expenses (including compensation
and benefits) and other direct expenses. |
The accounting policies of each of the individual operating
segments are the same as those described in Note 2,
Summary of Significant Accounting Policies, of our
audited consolidated financial statements for the year ended
December 31, 2009, included in our
Form 10-K.
Intercompany
Eliminations
The intercompany eliminations consist of eliminations for
intercompany activity among the segments. Such activities
primarily include services provided by the Parent Company to
CapitalSource Bank and by CapitalSource Bank to the Parent
Company; loan sales between the Parent Company and CapitalSource
Bank; daily loan collections received at CapitalSource Bank for
Parent Company loans and daily loan disbursements paid at the
Parent Company for CapitalSource Bank loans; and intercompany
notes and related interest between the segments.
46
|
|
ITEM 2.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Form 10-Q,
including the footnotes to our audited consolidated financial
statements included herein, contains forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995, which are subject to numerous
assumptions, risks, and uncertainties, including certain plans,
expectations, goals and projections and statements about our
deposit base, loan portfolios and operations, our expectations
regarding future credit performance, charge offs and loan
losses, particularly regarding commercial real estate and real
estate construction loans, our liquidity, capital position,
credit facilities and covenant compliance, our indebtedness,
payment obligations and restrictions thereunder and use of
proceeds from asset sales, CapitalSource Banks
capitalization and accessing of financing, our Omega transaction
with respect to our healthcare net lease portfolio, timing and
implications of future closings under this transaction and our
anticipated cash proceeds therefrom and intended use of such
proceeds, our discontinued operations, our intent to remain an
active lender in the healthcare industry, the expected repayment
of our commercial real estate participation interest (the
A Participation Interest), economic and market
conditions for our business, securitization markets, the
performance of our loans, loan yields, the impact of accounting
pronouncements, taxes and tax audits and examinations, our
unfunded commitments, our intention to originate loans at
CapitalSource Bank, our portfolio run off and growth, our
delinquent, non-accrual and impaired loans, our SPEs, risk
management, and our valuation allowance with respect to, and our
realization and utilization of, net deferred tax assets, net
operating loss carryforwards and built-in losses. All statements
contained in this
Form 10-K
that are not clearly historical in nature are forward-looking,
and the words anticipate, assume,
intend, believe, forecast,
expect, estimate, plan,
continue, will, look forward
and similar expressions are generally intended to identify
forward-looking statements. All forward-looking statements
(including statements regarding future financial and operating
results and future transactions and their results) involve
risks, uncertainties and contingencies, many of which are beyond
our control, which may cause actual results, performance, or
achievements to differ materially from anticipated results,
performance or achievements. Actual results could differ
materially from those contained or implied by such statements
for a variety of factors, including without limitation: changes
in economic or market conditions or investment or lending
opportunities may result in increased credit losses and
delinquencies in our portfolio and impair our ability to
consummate favorable loans; continued or worsening disruptions
in economic and credit markets may continue to make it very
difficult for us to obtain financing on attractive terms or at
all, could prevent us from optimizing the amount of leverage we
employ and could adversely affect our liquidity position;
movements in interest rates and lending spreads may adversely
affect our borrowing strategy; operating CapitalSource Bank
under the California and Federal Deposit Insurance Corporation
(FDIC) regulatory regime could be more costly and
restrictive than expected; we may not be successful in
maintaining or growing deposits or deploying capital in
favorable lending transactions or originating or acquiring
assets in accordance with our strategic plan; competitive and
other market pressures could adversely affect loan pricing; the
nature, extent, and timing of any governmental actions and
reforms; the success and timing of other business strategies and
asset sales; continued or worsening charge offs, reserves and
delinquencies may adversely affect our earnings and financial
results; changes in tax laws or regulations could adversely
affect our business; hedging activities may result in reported
losses not offset by gains reported in our audited consolidated
financial statements; and other risk factors described in our
Annual Report on
Form 10-K
for the year ended December 31, 2009 as filed with the SEC
on March 1, 2010
(Form 10-K),
and other documents filed by us with the SEC. All
forward-looking statements included in this
Form 10-Q
are based on information available at the time the statement is
made.
We are under no obligation to (and expressly disclaim any such
obligation to) update or alter our forward-looking statements,
whether as a result of new information, future events or
otherwise, except as required by law.
The information contained in this section should be read in
conjunction with our consolidated financial statements and
related notes and the information contained elsewhere in this
Form 10-Q
and in our
Form 10-K.
Overview
and Highlights
We are a commercial lender which, primarily through our wholly
owned subsidiary, CapitalSource Bank, provides financial
products to small and middle market businesses nationwide and
provides depository products and
47
services in southern and central California. Prior to the
formation of CapitalSource Bank, CapitalSource Inc.
(CapitalSource, and together with its subsidiaries
other than CapitalSource Bank, the Parent Company)
conducted its commercial lending business through its other
subsidiaries. Subsequent to CapitalSource Banks formation,
substantially all new loans have been originated at
CapitalSource Bank. Our commercial lending activities in the
Parent Company consist primarily of satisfying existing
commitments made prior to CapitalSource Banks formation
and receiving payments on our existing loan portfolio.
Consequently, we expect that our loans at the Parent Company
will gradually run off, while CapitalSource Banks loan
portfolio will continue to grow. As of March 31, 2010, we
had 1,096 loans outstanding, of which 57 were shared between
CapitalSource Bank and the Parent Company, and our total loans
had an aggregate outstanding balance of $8.0 billion.
We operate as three reportable segments: 1) CapitalSource
Bank, 2) Other Commercial Finance, and 3) Healthcare
Net Lease. Our CapitalSource Bank segment comprises our
commercial lending and banking business activities; our Other
Commercial Finance segment comprises our loan portfolio and
other business activities in the Parent Company; and our
Healthcare Net Lease segment comprises our direct real estate
investment business activities. For additional information, see
Note 20, Segment Data, in our consolidated financial
statements for the three months ended March 31, 2010.
Through our CapitalSource Bank segment activities, CapitalSource
Bank provides financial products primarily to small and middle
market businesses across the United States and also offers
depository products and services in southern and central
California, which are insured by the FDIC to the maximum amounts
permitted by regulation. As of March 31, 2010,
CapitalSource Bank held a $328.0 million senior
participation interest in a pool of commercial real estate loans
and related assets (the A Participation Interest),
had 502 loans outstanding of which 57 loans were shared with the
Parent Company, and held total loans having an aggregate
principal balance of $3.2 billion.
Through our Other Commercial Finance segment activities, the
Parent Company has provided financial products primarily to
small and middle market businesses. As of March 31, 2010,
our Other Commercial Finance segment had 651 loans outstanding
of which 57 loans were shared with CapitalSource Bank, and the
Parent Company held total loans having an aggregate balance of
$4.8 billion.
During the year ended December 31, 2009, we sold 82
long-term healthcare facilities with a total net book value of
$400.3 million, realizing a pre-tax loss of
$9.4 million. In November 2009, we sold 37 long-term
healthcare facilities (the November Sale Assets) for
approximately $100.0 million in cash. In December 2009, in
the first step of a multi-step transaction, we sold 40 long-term
healthcare facilities (the Step 1 Assets) to Omega
Healthcare Investors, Inc. (Omega) for approximately
$184.2 million in cash and approximately 1.4 million
shares of Omega common stock valued at $25.6 million. In
addition, by acquiring our facilities in the December 2009
closing, Omega became obligated to pay us $59.4 million of
indebtedness associated with the Step 1 Assets that Omega fully
repaid in February 2010. Step two of the transaction with Omega
will include the sale of an additional 40 long-term healthcare
facilities (the Step 2 Assets) for approximately
$65.1 million in cash and the assumption of debt associated
with the Step 2 Assets, which totaled $204.3 million as of
March 31, 2010. We expect to complete this sale in 2010
subject to obtaining applicable approvals.
In December 2009, we received approximately 1.3 million
shares of Omega common stock valued at $25.0 million in
consideration for a non-refundable option that were exercisable
by Omega to acquire an additional 63 of our long-term healthcare
facilities (the Step 3 Assets) at any time through
December 31, 2011. Upon the closing of the sale of these
properties, Omega would pay us additional consideration of
$33.7 million in cash and repay the outstanding debt on the
properties, which totaled $261.5 million as of
March 31, 2010. The carrying value of the properties as of
March 31, 2010 was $333.5 million. In April 2010, we
received written notice that Omega was electing to exercise the
option to acquire the properties, with a proposed closing date
in June 2010.
Upon the completion of the sale of the Step 2 Assets and Step 3
Assets, we will exit the skilled nursing home ownership
business, but expect to continue to actively provide mortgage
and other financing for owners and operators in the long-term
healthcare industry.
We have presented the financial condition and results of
operations of all assets within our Healthcare Net Lease
segment, with the exception of the Step 3 Assets, as
discontinued operations for all periods presented.
48
Additionally, the results of the discontinued operations include
the activities of other healthcare facilities that have been
sold since the inception of the business. The Step 3 Assets have
been included in our continuing operations as they did not meet
the criteria to be held for sale as of March 31, 2010 and
December 31, 2009.
Consolidated
Results of Operations
Explanation
of Reporting Metrics
Interest Income. In our CapitalSource Bank
segment, interest income represents interest earned on loans,
the A Participation Interest, investment securities
and cash and cash equivalents, as well as amortization of loan
origination fees, net of the direct costs of origination. In our
Other Commercial Finance segment, interest income represents
interest earned on loans, coupon interest, other investments and
cash and cash equivalents. In addition, interest income includes
amortization of loan origination fees, net of direct costs of
origination and the amortization of purchase discounts and
premiums, which are amortized into income using the interest
method. Although the majority of our loans charge interest at
variable rates that adjust periodically, we also have loans
charging interest at fixed rates. In our Healthcare Net Lease
segment, interest income represents interest earned on cash and
restricted cash.
Fee Income. In our CapitalSource Bank and
Other Commercial Finance segments, fee income represents net fee
income earned from our commercial loan operations. Fee income
includes prepayment-related fees as well as other fees charged
to borrowers. We currently do not generate any fee income in our
Healthcare Net Lease segment.
Operating Lease Income. In our Healthcare Net
Lease segment, operating lease income represents lease income
earned in connection with direct real estate investments. Our
operating leases typically include fixed rental payments,
subject to escalation over the life of the lease. We generally
project a minimum escalation rate for the leases and recognize
operating lease income on a straight-line basis over the life of
the lease. We currently do not generate any operating lease
income in our CapitalSource Bank and Other Commercial Finance
segments.
Interest Expense. Interest expense is the
amount paid on deposits and borrowings, including the
amortization of deferred financing fees and debt discounts. In
our CapitalSource Bank segment, interest expense includes
interest paid to depositors and interest paid on Federal Home
Loan Bank System (FHLB) of San Francisco
(FHLB SF) borrowings. In our Other Commercial
Finance segment, interest expense includes borrowing costs
associated with secured credit facilities, term debt,
convertible debt and subordinated debt. In our Healthcare Net
Lease segment, interest expense includes borrowing costs
associated with mortgage debt. The majority of our borrowings
charge interest at variable rates based primarily on one-month
LIBOR or CP rates plus a margin. Our 2014 Senior Secured Notes,
convertible debt and three series of our subordinated debt bear
a fixed rate of interest. Deferred financing fees, debt
discounts and the costs of issuing debt, such as commitment fees
and legal fees, are amortized over the estimated life of the
borrowing. Loan prepayments may materially affect interest
expense on our term debt since in the period of prepayment the
amortization of deferred financing fees and debt acquisition
costs is accelerated.
Provision for Loan Losses. We record a
provision for loan losses in our CapitalSource Bank and Other
Commercial Finance segments. The provision for loan losses is
the periodic cost of maintaining an appropriate allowance for
loan losses inherent in our commercial lending portfolio. As the
size and mix of loans within these portfolios change, or if the
credit quality of the portfolios change, we record a provision
to appropriately adjust the allowance for loan losses. Due to
the nature of our assets in our Healthcare Net Lease segment, we
do not record a provision for loan losses in this segment.
Other (Expense) Income. In our CapitalSource
Bank and Other Commercial Finance segments, other income
(expense) consists of gains (losses) on the sale of loans, gains
(losses) on the sale of debt and equity investments, unrealized
appreciation (depreciation) on certain investments,
other-than-temporary
impairment on investment securities, available for sale, gains
(losses) on derivatives, due diligence deposits forfeited,
unrealized appreciation (depreciation) of our equity interests
in certain non-consolidated entities, servicing income, income
from our management of various loans held by third parties,
income (expenses) on operations of and gains (losses) on the
sales of our REO, provision for loan receivables losses, gains
(losses) on debt extinguishment at the Parent Company, and other
miscellaneous fees and expenses not attributable to our
commercial lending and banking
49
operations. In our Healthcare Net Lease segment, other income
(expense) consists of gain (loss) on the sale of assets.
Operating Expenses. In our CapitalSource Bank
and Other Commercial Finance segments, operating expenses
include compensation and benefits, professional fees, travel,
rent, insurance, depreciation and amortization, marketing and
other general and administrative expenses, including deposit
insurance premiums. In our Healthcare Net Lease segment,
operating expenses include depreciation of direct real estate
investments, professional fees, an allocation of overhead
expenses (including compensation and benefits) and other direct
expenses.
Income Taxes. We provide for income taxes as a
C corporation on income earned from operations.
Currently, our subsidiaries cannot participate in the filing of
a consolidated federal tax return. As a result, certain
subsidiaries may have taxable income that cannot be offset by
taxable losses or loss carryforwards of other entities. The
Company and its subsidiaries 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 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 for
subsidiaries 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 incurrence of operating losses at
several of our subsidiaries, and uncertainty regarding the
realization of a portion of the deferred tax assets at future
points in time. As of March 31, 2010, the total valuation
allowance was $477.3 million. Although realization is not
assured, we believe it is more likely than not that the
remaining recognized net deferred tax assets of
$73.5 million as of March 31, 2010 will be realized.
We intend to maintain a valuation allowance with respect to our
deferred tax assets until sufficient positive evidence exists to
support its reduction or reversal.
Operating
Results for the Three Months Ended March 31,
2010
Our results of operations for the three months ended
March 31, 2010 were impacted by the global recession, a
challenging credit market environment and the availability of
liquidity. As further described below, the most significant
factors influencing our consolidated results of operations for
the three months ended March 31, 2010, compared to the
three months ended March 31, 2009 were:
|
|
|
|
|
Increased provision for loan losses;
|
|
|
|
Increased income tax expense due to additions to the valuation
allowance for our deferred tax assets;
|
|
|
|
Decreased balance of our commercial lending portfolio;
|
|
|
|
Gains and losses on our investments;
|
|
|
|
Gains and losses on debt extinguishment;
|
|
|
|
Decreased operating expenses;
|
|
|
|
Losses on REO and loan receivables
|
|
|
|
Sale of our residential mortgage investment portfolio in 2009;
|
50
|
|
|
|
|
Losses on derivatives;
|
|
|
|
Changes in lending and borrowing spreads; and
|
|
|
|
Divestiture of a substantial portion of our Healthcare Net Lease
segment.
|
Our consolidated operating results for the three months ended
March 31, 2010 compared to the three months ended
March 31, 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2010
|
|
2009
|
|
% Change
|
|
|
(In thousands)
|
|
|
|
Interest income
|
|
$
|
169,548
|
|
|
$
|
245,493
|
|
|
|
(31
|
)%
|
Fee income
|
|
|
6,442
|
|
|
|
5,859
|
|
|
|
10
|
|
Operating lease income
|
|
|
8,503
|
|
|
|
8,526
|
|
|
|
|
|
Interest expense
|
|
|
67,517
|
|
|
|
129,671
|
|
|
|
(48
|
)
|
Provision for loan losses
|
|
|
218,940
|
|
|
|
155,267
|
|
|
|
41
|
|
Depreciation of direct real estate investments
|
|
|
2,540
|
|
|
|
2,540
|
|
|
|
|
|
Operating expenses
|
|
|
63,302
|
|
|
|
69,151
|
|
|
|
(8
|
)
|
Other expense
|
|
|
25,921
|
|
|
|
73,770
|
|
|
|
(65
|
)
|
Net loss from continuing operations before income taxes
|
|
|
(193,727
|
)
|
|
|
(170,521
|
)
|
|
|
(14
|
)
|
Income tax expense (benefit)
|
|
|
21,006
|
|
|
|
(55,341
|
)
|
|
|
138
|
|
Net loss from continuing operations
|
|
|
(214,733
|
)
|
|
|
(115,180
|
)
|
|
|
(86
|
)
|
Net income from discontinued operations, net of taxes
|
|
|
3,043
|
|
|
|
9,653
|
|
|
|
(68
|
)
|
Gain from sale of discontinued operations, net of taxes
|
|
|
|
|
|
|
1,207
|
|
|
|
(100
|
)
|
Net loss
|
|
|
(211,690
|
)
|
|
|
(104,320
|
)
|
|
|
(103
|
)
|
Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
(16
|
)
|
|
|
100
|
|
Net loss attributable to CapitalSource Inc.
|
|
|
(211,690
|
)
|
|
|
(104,304
|
)
|
|
|
(103
|
)
|
Our consolidated yields on income earning assets and the costs
of interest-bearing liabilities for the three months ended
March 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
$
|
169,548
|
|
|
|
6.03
|
%
|
|
|
|
|
|
$
|
245,493
|
|
|
|
6.63
|
%
|
Fee income
|
|
|
|
|
|
|
6,442
|
|
|
|
0.23
|
|
|
|
|
|
|
|
5,859
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets(1)
|
|
$
|
11,407,322
|
|
|
|
175,990
|
|
|
|
6.26
|
|
|
$
|
15,015,679
|
|
|
|
251,352
|
|
|
|
6.79
|
|
Total direct real estate investments
|
|
|
367,356
|
|
|
|
8,503
|
|
|
|
9.39
|
|
|
|
367,281
|
|
|
|
8,526
|
|
|
|
9.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income earning assets
|
|
|
11,774,678
|
|
|
|
184,493
|
|
|
|
6.35
|
|
|
|
15,382,960
|
|
|
|
259,878
|
|
|
|
6.85
|
|
Total interest-bearing liabilities(2)
|
|
|
9,329,909
|
|
|
|
67,517
|
|
|
|
2.93
|
|
|
|
13,488,202
|
|
|
|
129,671
|
|
|
|
3.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
116,976
|
|
|
|
3.42
|
%
|
|
|
|
|
|
$
|
130,207
|
|
|
|
2.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
4.03
|
%
|
|
|
|
|
|
|
|
|
|
|
3.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest-earning assets include cash and cash equivalents,
restricted cash, marketable securities, mortgage-related
receivables, RMBS, loans, the A Participation
Interest and investments in debt securities. |
|
(2) |
|
Interest-bearing liabilities include deposits, repurchase
agreements, credit facilities, term debt, convertible debt and
subordinated debt. |
51
Discontinued
Operations
During the year ended December 31, 2009, we sold 82
healthcare facilities, and expect to sell our remaining
healthcare facilities in 2010. Upon the completion of these
asset sales, we will exit the skilled nursing facility ownership
business, but expect to continue to actively provide mortgage
and other financing for owners and operators in the long-term
healthcare industry. As a result, all consolidated comparisons
below reflect the continuing results of our operations. For
operating information about our discontinued operations, see the
Healthcare Net Lease Segment section.
Operating
Expenses
The decrease in consolidated operating expenses to
$63.3 million for the three months ended March 31,
2010 from $69.2 million for the three months ended
March 31, 2009 was primarily due to a $6.9 million
decrease in professional fees.
Income
Taxes
Consolidated income tax expense for the three months ended
March 31, 2010 was $21.0 million, compared to an
income tax benefit of $55.3 million for the three months
ended March 31, 2009. The expense was caused in part by the
increase in the valuation allowance for the deferred tax assets
of a subsidiary that continued to incur operating losses during
the quarter.
Comparison
of the Three Months Ended March 31, 2010 and
2009
CapitalSource
Bank Segment
Our CapitalSource Bank segment operating results for the three
months ended March 31, 2010, compared to the three months
ended March 31, 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2010
|
|
2009
|
|
% Change
|
|
|
($ in thousands)
|
|
|
|
Interest income
|
|
$
|
80,732
|
|
|
$
|
75,751
|
|
|
|
7
|
%
|
Fee income
|
|
|
1,780
|
|
|
|
1,673
|
|
|
|
6
|
|
Interest expense
|
|
|
17,323
|
|
|
|
38,413
|
|
|
|
(55
|
)
|
Provision for loan losses
|
|
|
87,704
|
|
|
|
24,991
|
|
|
|
251
|
|
Operating expenses
|
|
|
24,335
|
|
|
|
23,740
|
|
|
|
3
|
|
Other income
|
|
|
7,123
|
|
|
|
9,561
|
|
|
|
(25
|
)
|
Income tax benefit
|
|
|
(56
|
)
|
|
|
(65
|
)
|
|
|
14
|
|
Net loss
|
|
|
(39,671
|
)
|
|
|
(94
|
)
|
|
|
N/A
|
|
Interest
Income
Total interest income increased to $80.7 million for the
three months ended March 31, 2010 from $75.8 million
for the three months ended March 31, 2009, with an average
yield on interest-earning assets of 5.87% for the three months
ended March 31, 2010 compared to 5.35% for the three months
ended March 31, 2009. During the three months ended
March 31, 2010 and 2009, interest income on loans was
$58.1 million and $48.1 million, respectively,
yielding 7.51% and 7.01% on an average loan balance of
$3.1 billion and $2.8 billion, respectively. During
the three months ended March 31, 2010 and 2009,
$6.3 million and $1.1 million, respectively, of our
accrued interest was reversed on non-accrual loans and
negatively impacted the yield on loans by 0.80% and 0.16%,
respectively.
Interest income on the A Participation Interest was
$7.8 million and $17.2 million, during the three
months ended March 31, 2010 and 2009, respectively,
yielding 7.15% and 5.67% on an average balance of
$442.8 million and $1.2 billion, respectively. The
A Participation Interest was purchased at a discount
and has a stated coupon equal to one-month LIBOR plus 1.50%. The
unamortized discount is accreted into income using the interest
52
method. During the three months ended March 31, 2010 and
2009, we accreted $5.9 million and $11.0 million,
respectively, of discount into interest income on loans in our
consolidated statements of operations. Changes from one period
to the next in actual or expected repayments may have a material
impact on our interest income and yield recognized during the
period.
During the three months ended March 31, 2010 and 2009,
interest income from our investments, including
available-for-sale
and
held-to-maturity
securities, was $14.3 million and $8.9 million,
respectively, yielding 4.41% and 4.27% on an average balance of
$1.3 billion and $847.2 million, respectively. During
the three months ended March 31, 2010, we purchased
$814.2 million of investment securities,
available-for-sale
while $213.9 million and $27.6 million of principal
repayments were received from our investment securities,
available-for-sale
and
held-to-maturity,
respectively. For the three months ended March 31, 2009,
$685.7 million and $76.1 million of investment
securities,
available-for-sale
and
held-to-maturity
were purchased, respectively, while $319.9 million and
$0.2 million, respectively, of principal repayments were
received.
During the three months ended March 31, 2010 and 2009,
interest income on cash and cash equivalents was
$0.6 million and $1.6 million, respectively, yielding
0.28% and 0.66% on an average balance of $790.7 million and
$980.1 million, respectively.
Fee
Income
Fee income increased to $1.8 million for the three months
ended March 31, 2010 from $1.7 million for the three
months ended March 31, 2009, with an average yield on
interest-earning assets of 0.13% and 0.10%, respectively,
primarily due to an increase in new loans at CapitalSource Bank.
Interest
Expense
Total interest expense decreased to $17.3 million for the
three months ended March 31, 2010 from $38.4 million
for the three months ended March 31, 2009. The decrease was
primarily due to a decrease in the average cost of
interest-bearing liabilities which was 1.47% and 3.16%, during
the three months ended March 31, 2010 and 2009,
respectively. Our average balance of interest-bearing
liabilities, consisting of deposits and borrowings, was
$4.8 billion and $4.9 billion, during the three months
ended March 31, 2010 and 2009, respectively. Our interest
expense on deposits for the three months ended March 31,
2010 and 2009, was $16.4 million and $38.4 million,
respectively, with an average cost of deposits of 1.45% and
3.16% on an average balance of $4.6 billion and
$4.9 billion, respectively. During the three months ended
March 31, 2010, $1.4 billion of our time deposits
matured with a weighted average interest rate of 1.69% and
$1.3 billion of new time deposits were issued at a weighted
average interest rate of 1.28%. During the three months ended
March 31, 2009, $1.5 billion of our time deposits,
including brokered deposits, matured with a weighted average
interest rate of 3.53% and $1.1 billion of new time
deposits were issued at a weighted average interest rate of
1.89%. Additionally, during the three months ended
March 31, 2010, our weighted average interest rate of our
liquid account deposits, savings and money market accounts,
declined from 1.06% at the beginning of the quarter to 0.95% at
end of the quarter. During the three months ended March 31,
2010, our interest expense on borrowings, primarily consisting
of FHLB SF borrowings, was $1.0 million with an average
cost of 1.88% on an average balance of $208.3 million.
During the three months ended March 31, 2010, there were
$35.0 million in advances taken and $10.0 million of
maturities. During the three months ended March 31, 2009,
our interest expense on borrowings, primarily consisting of FHLB
SF borrowings, was $26,000 with an average cost of 2.07% on an
average balance of $5.0 million.
53
Net
Finance Margin
The yields of income earning assets and the costs of
interest-bearing liabilities in this segment for the three
months ended March 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
Balance
|
|
|
Income(1)
|
|
|
Cost
|
|
|
|
($ in thousands)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
$
|
80,732
|
|
|
|
5.74
|
%
|
|
|
|
|
|
$
|
75,751
|
|
|
|
5.25
|
%
|
Fee income
|
|
|
|
|
|
|
1,780
|
|
|
|
0.13
|
|
|
|
|
|
|
|
1,673
|
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets(1)
|
|
$
|
5,705,452
|
|
|
|
82,512
|
|
|
|
5.87
|
|
|
$
|
5,857,175
|
|
|
|
77,424
|
|
|
|
5.35
|
|
Total interest-bearing liabilities(2)
|
|
|
4,772,299
|
|
|
|
17,323
|
|
|
|
1.47
|
|
|
|
4,928,789
|
|
|
|
38,413
|
|
|
|
3.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
65,189
|
|
|
|
4.40
|
%
|
|
|
|
|
|
$
|
39,011
|
|
|
|
2.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
4.63
|
%
|
|
|
|
|
|
|
|
|
|
|
2.69
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest-earning assets include cash and cash equivalents,
investments, A Participation Interest and loans. |
|
(2) |
|
Interest-bearing liabilities include deposits and borrowings. |
Provision
for Loan Losses
Our provision for loan losses is based on our evaluation of the
adequacy of the existing allowance for loan 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 Managements
Discussion and Analysis of Financial Condition and Results of
Operations Credit Quality and Allowance for Loan
Losses.
Operating
Expenses
Operating expenses remained constant with $24.3 million for
the three months ended March 31, 2010 compared with
$23.7 million for the three months ended March 31,
2009.
CapitalSource Bank relies on the Parent Company to source loans,
provide loan origination due diligence services and perform
certain underwriting services. For these services, CapitalSource
Bank pays the Parent Company loan sourcing fees based upon the
funded amount of each new loan funded by CapitalSource Bank
during the period. We do not capitalize loan sourcing fees, as
these fees are eliminated in consolidation. These fees are
included in other operating expenses and were $4.1 million
and $2.4 million for the three months ended March 31,
2010 and 2009, 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. Each sublease
arrangement was established based on then market rates for
comparable subleases.
Other
Income
Other income, which primarily consists of loan servicing fees
paid to CapitalSource Bank by the Parent Company, decreased to
$7.1 million for the three months ended March 31, 2010
from $9.6 million for the three months ended March 31,
2009. CapitalSource Bank provides loan servicing for loans and
other assets, which are owned by the Parent Company and third
parties, for which it receives fees based on number of loans
serviced. Loans and other assets being serviced by CapitalSource
Bank for the benefit of others were $7.2 billion and
$7.7 billion as of March 31, 2010 and
December 31, 2009, respectively, of which $4.8 billion
and $5.2 billion were owned by the Parent Company. All loan
servicing fees paid by the Parent Company to CapitalSource Bank
are eliminated in consolidation.
54
Other
Commercial Finance Segment
Our Other Commercial Finance segment operating results for the
three months ended March 31, 2010, compared to the three
months ended March 31, 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2010
|
|
2009
|
|
% Change
|
|
|
($ in thousands)
|
|
|
|
Interest income
|
|
$
|
93,419
|
|
|
$
|
172,543
|
|
|
|
(46
|
)%
|
Fee income
|
|
|
4,662
|
|
|
|
4,186
|
|
|
|
11
|
|
Interest expense
|
|
|
48,607
|
|
|
|
89,263
|
|
|
|
(46
|
)
|
Provision for loan losses
|
|
|
131,236
|
|
|
|
130,276
|
|
|
|
1
|
|
Operating expenses
|
|
|
48,925
|
|
|
|
56,144
|
|
|
|
(13
|
)
|
Other expense
|
|
|
(21,890
|
)
|
|
|
(70,034
|
)
|
|
|
69
|
|
Income tax expense (benefit)
|
|
|
21,062
|
|
|
|
(58,023
|
)
|
|
|
136
|
|
Net loss
|
|
|
(173,639
|
)
|
|
|
(110,965
|
)
|
|
|
(56
|
)
|
Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
(16
|
)
|
|
|
100
|
|
Net loss income attributable to CapitalSource Inc.
|
|
|
(173,639
|
)
|
|
|
(110,949
|
)
|
|
|
(57
|
)
|
Interest
Income
Interest income decreased to $93.4 million for the three
months ended March 31, 2010 from $172.5 million for
the three months ended March 31, 2009, primarily due to a
decrease in average total interest-earning assets, an increase
in non-accrual loans, and a decrease in yield on average
interest-earning assets. During the three months ended
March 31, 2010, our average balance of interest-earning
assets decreased by $3.5 billion, or 37.8%, compared to the
three months ended March 31, 2009. This decrease was
primarily due to the sale of $1.6 billion of residential
mortgage-backed securities that were issued and guaranteed by
Fannie Mae or Freddie Mac (Agency RMBS) during the
first quarter of 2009, the deconsolidation of mortgage related
receivables related to the sale of our beneficial interests in
securitization special purpose entities in December 2009, and
the run off of Parent Company loans since substantially all new
loans have been originated at CapitalSource Bank. During the
three months ended March 31, 2010, yield on average
interest-earning assets decreased to 7.00% compared to 7.84% for
the three months ended March 31, 2009. This decrease was
primarily the result of a decrease in the interest component of
yield to 6.66% for the three months ended March 31, 2010,
from 7.65% for the three months ended March 31, 2009, due
to a decrease in our core lending spread. During the three
months ended March 31, 2010, our lending spread to average
one-month LIBOR was 7.35% compared to 8.09% for the three months
ended March 31, 2009. Fluctuations in yields are driven by
a number of factors, including changes in short-term interest
rates (such as changes in the prime rate or one-month LIBOR),
the coupon on new loan originations, the coupon on loans that
pay down or pay off, non-accrual loans and modifications of
interest rates on existing loans.
Fee
Income
Fee income increased to $4.7 million for the three months
ended March 31, 2010 from $4.2 million for the three
months ended March 31, 2009, with an average yield on
interest-earning assets of 0.34% and 0.19%, respectively,
primarily due to an increase in prepayment fees and unused line
fees.
Interest
Expense
We fund our Other Commercial Finance segment activities largely
through debt. The decrease in interest expense to
$48.6 million for the three months ended March 31,
2010 from $89.3 million for the three months ended
March 31, 2009 was primarily due to a decrease in average
interest-bearing liabilities of $4.0 billion, or 48.1%,
primarily due to repayment of repurchase agreements of
$1.6 billion during the first quarter of 2009 and the
deconsolidation of term debt related to the sale of our
beneficial interests in securitization special purpose entities
in December 2009. This decrease was partially offset by an
increase in our cost of borrowings which was 4.57% for the
55
three months ended March 31, 2010, compared to 4.36% for
the three months ended March 31, 2009, as a result of
higher deferred financing fee amortization.
Net
Finance Margin
Net finance margin was 3.53% for the three months ended
March 31, 2010, a decrease of 0.35% from 3.88% for the
three months ended March 31, 2009. The decrease in net
finance margin was primarily due to a decrease in interest
income and an increase in our cost of funds as measured by the
spread to short-term market rates on interest such as LIBOR. Net
finance spread was 2.43% for the three months ended
March 31, 2010, a decrease of 1.05% from 3.48% for the
three months ended March 31, 2009. The decrease in net
finance spread was due to the changes in its components as
described above.
The yields of income earning assets and the costs of
interest-bearing liabilities in this segment for the three
months ended March 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
$
|
93,419
|
|
|
|
6.66
|
%
|
|
|
|
|
|
$
|
172,543
|
|
|
|
7.65
|
%
|
Fee income
|
|
|
|
|
|
|
4,662
|
|
|
|
0.34
|
|
|
|
|
|
|
|
4,186
|
|
|
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets(1)
|
|
$
|
5,686,483
|
|
|
|
98,081
|
|
|
|
7.00
|
|
|
$
|
9,143,704
|
|
|
|
176,729
|
|
|
|
7.84
|
|
Total interest-bearing liabilities(2)
|
|
|
4,315,838
|
|
|
|
48,607
|
|
|
|
4.57
|
|
|
|
8,310,324
|
|
|
|
89,263
|
|
|
|
4.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
49,474
|
|
|
|
2.43
|
%
|
|
|
|
|
|
$
|
87,466
|
|
|
|
3.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
3.53
|
%
|
|
|
|
|
|
|
|
|
|
|
3.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest-earning assets include cash and cash equivalents,
restricted cash, mortgage-related receivables, loans and
investments in debt securities. |
|
(2) |
|
Interest-bearing liabilities include repurchase agreements,
secured and unsecured credit facilities, term debt, convertible
debt and subordinated debt. |
Provision
for Loan Losses
Our provision for loan losses is based on our evaluation of the
adequacy of the existing allowance for loan 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 Losses section.
Operating
Expenses
Operating expenses decreased to $48.9 million for the three
months ended March 31, 2010 from $56.1 million for the
three months ended March 31, 2009, primarily due to a
$6.8 million decrease in professional fees. Operating
expenses as a percentage of average total assets increased to
3.41% for the three months ended March 31, 2010 from 2.25%
for the three months ended March 31, 2009.
Other
Expenses
Other expenses decreased to $21.9 million for the three
months ended March 31, 2010 from $70.0 million for the
three months ended March 31, 2009, primarily due to gains
on our investment portfolio and gains on debt extinguishment,
partially offset by changes in our residential mortgage
investment portfolio and losses related to loan receivables.
Gains on investments were $5.1 million for the three months
ended March 31, 2010 compared with losses of
$16.1 million for the three months ended March 31,
2009, primarily due to a $12.3 million decrease in
impairments
56
on
available-for-sale
investments as well as a $6.1 million gain on our
cost-basis investments. Gains on debt extinguishment were
$0.7 million for the three months ended March 31, 2010
compared with losses of $57.1 million for the three months
ended March 31, 2009.
Gains on our residential mortgage investment portfolio
securities were $15.3 million for the three months ended
March 31, 2009. Our residential mortgage-backed securities
were sold and the related derivatives were unwound during the
three months ended March 31, 2009. Provision for loan
receivables losses was $15.2 million for the three months
ended March 31, 2010 and related to $108.8 million of
loans acquired through foreclosure as of March 31, 2010. We
did not acquire any loans through foreclosure for the three
months ended March 31, 2009.
Healthcare
Net Lease Segment
Healthcare Net Lease segment operating results for the three
months ended March 31, 2010, compared to the three months
ended March 31, 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
March 31,
|
|
|
|
|
2010
|
|
2009
|
|
% Change
|
|
Interest income
|
|
$
|
81
|
|
|
$
|
85
|
|
|
|
(5
|
)%
|
Operating lease income
|
|
|
8,503
|
|
|
|
8,526
|
|
|
|
|
|
Interest expense
|
|
|
3,898
|
|
|
|
4,393
|
|
|
|
(11
|
)
|
Depreciation of direct real estate investments
|
|
|
2,540
|
|
|
|
2,540
|
|
|
|
|
|
Other operating expenses
|
|
|
1,679
|
|
|
|
2,459
|
|
|
|
(32
|
)
|
Other income (expense)
|
|
|
302
|
|
|
|
(9
|
)
|
|
|
3,456
|
|
Net income (loss) from continuing operations
|
|
|
769
|
|
|
|
(790
|
)
|
|
|
197
|
|
Net income from discontinued operations, net of taxes
|
|
|
3,043
|
|
|
|
9,653
|
|
|
|
(68
|
)
|
Gain from sale of discontinued operations, net of taxes
|
|
|
|
|
|
|
1,207
|
|
|
|
(100
|
)
|
Income tax expense
|
|
|
|
|
|
|
2,747
|
|
|
|
(100
|
)
|
Net income attributable to CapitalSource Inc.
|
|
|
3,812
|
|
|
|
7,323
|
|
|
|
(48
|
)
|
Discontinued
Operations
We sold 82 healthcare facilities during 2009 and expect to sell
our remaining healthcare facilities in 2010. Upon the completion
of these asset sales, we will exit the skilled nursing facility
ownership business, but expect to continue to actively provide
mortgage and other financing for owners and operators in the
long-term healthcare industry. Comparisons provided reflect only
the results of the Step 3 Assets, as they did not meet the
criteria to be held for sale as of March 31, 2010.
Income from discontinued operations was $3.0 million for
the three months ended March 31, 2010, compared with
$10.9 million, including a gain on disposal of
$1.2 million, for the three months ended March 31,
2009. For additional information, see Note 3,
Discontinued Operations, in our consolidated financial
statements for the three months ended March 31, 2010.
Operating
Lease Income
Operating lease income remained constant for the three months
ended March 31, 2010 compared with the three months ended
March 31, 2009.
Interest
Expense
Interest expense decreased to $3.9 million for the three
months ended March 31, 2010 from $4.4 million for the
three months ended March 31, 2009, due to a decrease in the
cost of borrowings to 4.99% from 4.52% for the three months
ended March 31, 2010 and 2009, respectively. The overall
borrowing spread to average one-month LIBOR for the three months
ended March 31, 2010 was 4.76% compared with 4.06% for the
three months ended March 31, 2009.
57
Depreciation
of Direct Real Estate Investments
Depreciation on our direct real estate investments remained
constant for the three months ended March 31, 2010 compared
with the three months ended March 31, 2009.
Operating
Expenses
Operating expenses decreased to $1.7 million for the three
months ended March 31, 2010 from $2.5 million for the
three months ended March 31, 2009, primarily due to a
decrease in allocated overhead. Operating expenses as a
percentage of average total assets decreased to 4.19% for the
three months ended March 31, 2010 from 5.52% for the three
months ended March 31, 2009.
Financial
Condition
CapitalSource
Bank Segment
Portfolio
Composition
As of March 31, 2010 and December 31, 2009, the
composition of the CapitalSource Bank segment portfolio was as
follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents(1)
|
|
$
|
439,597
|
|
|
$
|
821,980
|
|
Investment securities,
available-for-sale
|
|
|
1,507,079
|
|
|
|
901,764
|
|
Investment securities,
held-to-maturity
|
|
|
218,751
|
|
|
|
242,078
|
|
Commercial real estate A Participation Interest, net
|
|
|
327,992
|
|
|
|
530,560
|
|
Loans(2)
|
|
|
3,214,362
|
|
|
|
3,076,267
|
|
FHLB SF stock
|
|
|
20,195
|
|
|
|
20,195
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,727,976
|
|
|
$
|
5,592,844
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
4,582,641
|
|
|
$
|
4,483,879
|
|
FHLB SF borrowings
|
|
|
225,000
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,807,641
|
|
|
$
|
4,683,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of March 31, 2010 and December 31, 2009, the
amounts include restricted cash of $24.2 million and
$65.9 million, respectively. |
|
(2) |
|
Excludes deferred loan fees and discounts and the allowance for
loan losses. |
Cash and
cash equivalents
As of March 31, 2010 and December 31, 2009,
CapitalSource Bank had $439.6 million and
$822.0 million, respectively, in cash and cash equivalents,
including restricted cash of $24.2 million and
$65.9 million, respectively. Cash and cash equivalents
consist of collections from our borrowers, 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 4, Cash and
Cash Equivalents and Restricted Cash, in our consolidated
financial statements for the three months ended March 31,
2010.
Investment
Securities,
Available-for-Sale
As of March 31, 2010 and December 31, 2009,
CapitalSource Bank owned $1.5 billion and
$901.8 million, respectively, in investment securities,
available-for-sale.
Included in these investment securities,
available-for-sale,
58
were discount notes issued by Fannie Mae, Freddie Mac and the
FHLB (Agency discount notes), callable notes issued
by Fannie Mae, Freddie Mac, the FHLB and Federal Farm Credit
Bank (Agency callable notes), bonds issued by the
FHLB (Agency debt), residential mortgage-backed
securities issued and guaranteed by Fannie Mae, Freddie Mac or
Ginnie Mae (Agency MBS), residential mortgage-backed
securities rated AAA issued by non-government-agencies
(Non-agency MBS), corporate debt securities and
U.S. Treasury bills. CapitalSource Bank pledged
substantially all of the investment securities,
available-for-sale,
to the FHLB SF and the Federal Reserve Bank (FRB) as
a source of borrowing capacity as of March 31, 2010. For
additional information on our investment securities,
available-for-sale,
see Note 6, Investments, in our consolidated
financial statements for the three months ended March 31,
2010.
Investment
Securities,
Held-to-Maturity
As of March 31, 2010 and December 31, 2009,
CapitalSource Bank owned $218.8 million and
$242.1 million, respectively, in investment securities,
held-to-maturity,
consisting of AAA-rated commercial mortgage-backed securities.
For additional information on our investment securities,
held-to-maturity,
see Note 6, Investments, in our consolidated
financial statements for the three months ended March 31,
2010.
Commercial
Real Estate A Participation Interest
As of March 31, 2010 and December 31, 2009, the
A Participation Interest had an outstanding balance
of $328.0 million and $530.6 million, respectively,
net of discount. We expect the A Participation
Interest to be fully repaid during 2010. For additional
information on the A Participation Interest, see
Note 5, Commercial Lending Assets and Credit
Quality, in our consolidated financial statements for the
three months ended March 31, 2010.
CapitalSource
Bank Segment Loan Portfolio Composition
As of March 31, 2010 and December 31, 2009, the
CapitalSource Bank loan portfolio had outstanding balances of
$3.2 billion and $3.1 billion, respectively. Total
CapitalSource Bank loan portfolio reflected in the portfolio
statistics below includes gross loans held for investment.
As of March 31, 2010 and December 31, 2009, the
composition of the CapitalSource Bank loan portfolio by loan
type was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
$
|
1,686,414
|
|
|
|
52
|
%
|
|
$
|
1,599,667
|
|
|
|
52
|
%
|
Real estate
|
|
|
1,148,986
|
|
|
|
36
|
|
|
|
1,095,780
|
|
|
|
36
|
|
Real estate construction
|
|
|
378,962
|
|
|
|
12
|
|
|
|
380,820
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,214,362
|
|
|
|
100
|
%
|
|
$
|
3,076,267
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010, the scheduled maturities of the
CapitalSource Bank loan portfolio by loan type were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in
|
|
|
Due in
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
One to
|
|
|
Due After
|
|
|
|
|
|
|
or Less
|
|
|
Five Years
|
|
|
Five Years
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
$
|
229,439
|
|
|
$
|
1,351,977
|
|
|
$
|
104,998
|
|
|
$
|
1,686,414
|
|
Real estate
|
|
|
266,711
|
|
|
|
747,884
|
|
|
|
134,391
|
|
|
|
1,148,986
|
|
Real estate construction
|
|
|
296,577
|
|
|
|
82,385
|
|
|
|
|
|
|
|
378,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
792,727
|
|
|
$
|
2,182,246
|
|
|
$
|
239,389
|
|
|
$
|
3,214,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Substantially all of the CapitalSource Bank loan portfolio bears
interest at adjustable rates pegged to an interest rate index
plus a specified margin. Approximately 68% of the portfolio is
subject to an interest rate floor. Due to low market interest
rates as of March 31, 2010, 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 2.48% as
59
of March 31, 2010. 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.
As of March 31, 2010, the composition of CapitalSource Bank
loan balances by index and by loan type was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Real Estate
|
|
|
Construction
|
|
|
Total
|
|
|
Percentage
|
|
|
|
($ in thousands)
|
|
|
1-Month LIBOR
|
|
$
|
440,477
|
|
|
$
|
697,414
|
|
|
$
|
375,535
|
|
|
$
|
1,513,426
|
|
|
|
47
|
%
|
3-Month LIBOR
|
|
|
26,125
|
|
|
|
96,443
|
|
|
|
|
|
|
|
122,568
|
|
|
|
4
|
|
6-Month LIBOR
|
|
|
|
|
|
|
25,597
|
|
|
|
|
|
|
|
25,597
|
|
|
|
1
|
|
Prime
|
|
|
537,252
|
|
|
|
64,076
|
|
|
|
3,427
|
|
|
|
604,755
|
|
|
|
19
|
|
Canadian Prime
|
|
|
20,630
|
|
|
|
|
|
|
|
|
|
|
|
20,630
|
|
|
|
1
|
|
Canadian Bankers
|
|
|
51,000
|
|
|
|
|
|
|
|
|
|
|
|
51,000
|
|
|
|
1
|
|
Blended
|
|
|
578,341
|
|
|
|
122,946
|
|
|
|
|
|
|
|
701,287
|
|
|
|
22
|
|
Treasuries
|
|
|
|
|
|
|
4,597
|
|
|
|
|
|
|
|
4,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable rate loans
|
|
|
1,653,825
|
|
|
|
1,011,073
|
|
|
|
378,962
|
|
|
|
3,043,860
|
|
|
|
95
|
|
Fixed rate loans
|
|
|
32,589
|
|
|
|
137,913
|
|
|
|
|
|
|
|
170,502
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
1,686,414
|
|
|
$
|
1,148,986
|
|
|
$
|
378,962
|
|
|
$
|
3,214,362
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit
Quality and Allowance for Loan Losses
As of March 31, 2010 and December 31, 2009, the
principal balances of contractually delinquent accruing loans
and non-accrual loans in the CapitalSource Bank loan portfolio
were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
($ in thousands)
|
|
Accruing loans
30-89 days
contractually delinquent
|
|
$
|
|
|
|
$
|
1,057
|
|
Accruing loans 90 or more days contractually delinquent
|
|
|
|
|
|
|
17,695
|
|
Non-accrual loans
|
|
|
326,224
|
|
|
|
173,931
|
|
Of our non-accrual loans, $0.6 million and
$28.6 million were
30-89 days
delinquent, and $61.9 million and $84.1 million were
over 90 days delinquent as of March 31, 2010 and
December 31, 2009, respectively.
60
The activity in the allowance for loan losses for the three
months ended March 31, 2010 and 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Allowance for loan losses as of beginning of period
|
|
$
|
152,508
|
|
|
$
|
55,600
|
|
Provision for loan losses:
|
|
|
|
|
|
|
|
|
General
|
|
|
20,568
|
|
|
|
12,500
|
|
Specific
|
|
|
67,136
|
|
|
|
12,491
|
|
|
|
|
|
|
|
|
|
|
Total provision for loan losses
|
|
|
87,704
|
|
|
|
24,991
|
|
Charge offs
|
|
|
(17,894
|
)
|
|
|
(10,018
|
)
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses as of end of period
|
|
$
|
222,318
|
|
|
$
|
70,573
|
|
|
|
|
|
|
|
|
|
|
Total gross loans as of end of period
|
|
$
|
3,214,362
|
|
|
$
|
2,933,145
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses ratio
|
|
|
6.92
|
%
|
|
|
2.41
|
%
|
Provision for loan losses ratio (annualized)
|
|
|
11.07
|
%
|
|
|
3.46
|
%
|
Net charge off ratio (annualized)
|
|
|
2.26
|
%
|
|
|
1.39
|
%
|
As of March 31, 2010, no allowance for loan losses was
deemed necessary with respect to the A Participation
Interest.
During the three months ended March 31, 2010, loans with an
aggregate carrying value of $54.9 million as of their
respective restructuring dates were involved in troubled debt
restructurings. Loans involved in these troubled debt
restructurings 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 troubled debt restructurings were
$2.9 million and $2.2 million as of March 31,
2010 and December 31, 2009, respectively. During the three
months ended March 31, 2009, CapitalSource Bank did not
have any loans involved in troubled debt restructurings.
Of the total $67.1 million specific provision for loan
losses for the three months ended March 31, 2010,
$65.3 million related to commercial real estate and real
estate construction loans. There was no specific provision for
loan losses related to commercial real estate and real estate
construction loans for the three months ended March 31,
2009. Due to the large individual credit exposures and
characteristics of commercial real estate and real estate
construction loans, we expect the level of charge offs in this
area to be volatile.
Given our loss experience, we consider our higher-risk loans
within the commercial real estate portfolio to be loans secured
by collateral that has not reached stabilization. As of
March 31, 2010 and December 31, 2009, commercial real
estate loans that have not reached stabilization had an
outstanding balance of $377.0 million and
$381.6 million, respectively. This amount was net of charge
offs taken on these loans of $65.7 million and
$52.1 million, respectively. In addition, specific reserves
allocated to these loans totaled $46.7 million and
$15.6 million as of March 31, 2010 and
December 31, 2009, respectively.
FHLB SF
Stock
As of both March 31, 2010 and December 31, 2009,
CapitalSource Bank owned FHLB SF stock with a carrying value of
$20.2 million. 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; however, the FHLB SF
has currently ceased repurchases of excess stock. 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 March 31, 2010.
61
Deposits
Total deposits increased by $98.8 million, or 2.2%, to
$4.6 billion as of March 31, 2010 from
$4.5 billion as of December 31, 2009.
As of March 31, 2010 and December 31, 2009, a summary
of CapitalSource Banks deposit portfolio by product type
and the maturity of the certificates of deposit portfolio was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
|
($ in thousands)
|
|
|
Money market
|
|
$
|
260,309
|
|
|
|
0.90
|
%
|
|
$
|
258,283
|
|
|
|
0.99
|
%
|
Savings
|
|
|
706,601
|
|
|
|
0.96
|
|
|
|
599,084
|
|
|
|
1.09
|
|
Certificates of deposit
|
|
|
3,615,731
|
|
|
|
1.53
|
|
|
|
3,626,512
|
|
|
|
1.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
4,582,641
|
|
|
|
1.41
|
|
|
$
|
4,483,879
|
|
|
|
1.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
|
($ in thousands)
|
|
|
Remaining maturity of certificates of deposit:
|
|
|
|
|
|
|
|
|
0-3 months
|
|
$
|
1,262,381
|
|
|
|
1.55
|
%
|
4-6 months
|
|
|
714,671
|
|
|
|
1.13
|
|
7-9 months
|
|
|
749,290
|
|
|
|
1.53
|
|
10-12 months
|
|
|
349,734
|
|
|
|
1.44
|
|
Longer than 12 months
|
|
|
539,655
|
|
|
|
2.06
|
|
|
|
|
|
|
|
|
|
|
Total certificates of deposit
|
|
$
|
3,615,731
|
|
|
|
1.53
|
|
|
|
|
|
|
|
|
|
|
FHLB SF
Borrowings
As of March 31, 2010 and December 31, 2009, FHLB SF
borrowings were $225.0 million and $200.0 million,
respectively. These borrowings were primarily for interest rate
risk management purposes. The weighted-average remaining
maturity of the borrowings was approximately 2.0 years and
1.9 years as of March 31, 2010 and December 31,
2009, respectively.
As of March 31, 2010, the remaining maturity and the
weighted average interest rate of FHLB SF borrowings were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
|
($ in thousands)
|
|
|
Less than 1 year
|
|
$
|
39,000
|
|
|
|
1.22
|
%
|
1 to 2 years
|
|
|
88,000
|
|
|
|
1.63
|
|
2 to 3 years
|
|
|
58,000
|
|
|
|
2.06
|
|
3 to 4 years
|
|
|
20,000
|
|
|
|
2.58
|
|
4 to 5 years
|
|
|
20,000
|
|
|
|
2.74
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
225,000
|
|
|
|
1.85
|
|
|
|
|
|
|
|
|
|
|
62
Other
Commercial Finance Segment
Portfolio
Composition
Total Other Commercial Finance loan portfolio reflected in the
portfolio statistics below includes gross loans held for
investment and loans held for sale, including lower of cost or
fair value adjustments. As of March 31, 2010 and
December 31, 2009, the composition of the Other Commercial
Finance segment portfolio was as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Investment securities,
available-for-sale
|
|
$
|
4,594
|
|
|
$
|
6,022
|
|
Loans
|
|
|
4,787,572
|
|
|
|
5,245,563
|
|
Other investments(1)
|
|
|
93,868
|
|
|
|
96,517
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,886,034
|
|
|
$
|
5,348,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes investments carried at cost, investments carried at
fair value and investments accounted for under the equity method. |
Other
Commercial Finance Segment Loan Portfolio Composition
As of March 31, 2010 and December 31, 2009, our total
Other Commercial Finance loan portfolio had outstanding balances
of $4.8 billion and $5.2 billion, respectively.
Included in these amounts were loans held for sale of
$15.0 million and $0.7 million as of March 31,
2010 and December 31, 2009, respectively.
As of March 31, 2010 and December 31, 2009, the
composition of the Other Commercial Finance loan portfolio by
loan type was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
December 31, 2009
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
$
|
3,300,626
|
|
|
|
69
|
%
|
|
$
|
3,452,903
|
|
|
|
66
|
%
|
Real estate
|
|
|
833,040
|
|
|
|
17
|
|
|
|
951,626
|
|
|
|
18
|
|
Real estate construction
|
|
|
653,906
|
|
|
|
14
|
|
|
|
841,034
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,787,572
|
|
|
|
100
|
%
|
|
$
|
5,245,563
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010, the scheduled maturities of the Other
Commercial Finance loan portfolio by loan type were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in
|
|
|
Due in
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
One to
|
|
|
Due After
|
|
|
|
|
|
|
or Less
|
|
|
Five Years
|
|
|
Five Years
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
$
|
670,972
|
|
|
$
|
2,362,951
|
|
|
$
|
266,703
|
|
|
$
|
3,300,626
|
|
Real estate
|
|
|
404,548
|
|
|
|
309,322
|
|
|
|
119,170
|
|
|
|
833,040
|
|
Real estate construction
|
|
|
480,202
|
|
|
|
173,704
|
|
|
|
|
|
|
|
653,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,555,722
|
|
|
$
|
2,845,977
|
|
|
$
|
385,873
|
|
|
$
|
4,787,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
As of March 31, 2010, the composition of Other Commercial
Finance loan balances by index and by loan type was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Real Estate
|
|
|
Construction
|
|
|
Total
|
|
|
Percentage
|
|
|
|
($ in thousands)
|
|
|
1-Month LIBOR
|
|
$
|
642,603
|
|
|
$
|
572,561
|
|
|
$
|
443,893
|
|
|
$
|
1,659,057
|
|
|
|
35
|
%
|
2-Month LIBOR
|
|
|
23,605
|
|
|
|
|
|
|
|
|
|
|
|
23,605
|
|
|
|
1
|
|
3-Month LIBOR
|
|
|
121,683
|
|
|
|
|
|
|
|
|
|
|
|
121,683
|
|
|
|
2
|
|
6-Month LIBOR
|
|
|
4,909
|
|
|
|
|
|
|
|
|
|
|
|
4,909
|
|
|
|
|
|
1-Month
EURIBOR
|
|
|
45,782
|
|
|
|
|
|
|
|
|
|
|
|
45,782
|
|
|
|
1
|
|
3-Month
EURIBOR
|
|
|
15,963
|
|
|
|
|
|
|
|
|
|
|
|
15,963
|
|
|
|
|
|
Prime
|
|
|
947,809
|
|
|
|
31,345
|
|
|
|
156,470
|
|
|
|
1,135,624
|
|
|
|
24
|
|
Blended
|
|
|
1,318,052
|
|
|
|
41,964
|
|
|
|
|
|
|
|
1,360,016
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable rate loans
|
|
|
3,120,406
|
|
|
|
645,870
|
|
|
|
600,363
|
|
|
|
4,366,639
|
|
|
|
91
|
|
Fixed rate loans
|
|
|
180,220
|
|
|
|
187,170
|
|
|
|
53,543
|
|
|
|
420,933
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
3,300,626
|
|
|
$
|
833,040
|
|
|
$
|
653,906
|
|
|
$
|
4,787,572
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 51% of the adjustable rate loan portfolio is
subject to an interest rate floor. Due to low market interest
rates as of March 31, 2010, 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 2.64% as of March 31, 2010.
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.
Credit
Quality and Allowance for Loan Losses
As of March 31, 2010 and December 31, 2009, the
principal balances of contractually delinquent accruing loans
and non-accrual loans in Other Commercial Finance loan portfolio
were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
|
($ in thousands)
|
|
Accruing loans
30-89 days
contractually delinquent
|
|
$
|
153,339
|
|
|
$
|
94,211
|
|
Accruing loans 90 or more days contractually delinquent
|
|
|
34,684
|
|
|
|
49,298
|
|
Non-accrual loans
|
|
|
798,330
|
|
|
|
893,484
|
|
Of our non-accrual loans, $97.1 million and
$153.9 million were
30-89 days
delinquent, and $334.9 million and $303.7 million were
over 90 days delinquent as of March 31, 2010 and
December 31, 2009, respectively.
64
The activity in the allowance for loan losses for the three
months ended March 31, 2010 and 2009 was follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Allowance for loan losses as of beginning of period
|
|
$
|
434,188
|
|
|
$
|
368,244
|
|
Provision for loan losses:
|
|
|
|
|
|
|
|
|
General
|
|
|
3,713
|
|
|
|
282
|
|
Specific
|
|
|
127,523
|
|
|
|
115,545
|
|
|
|
|
|
|
|
|
|
|
Total provision for loan losses
|
|
|
131,236
|
|
|
|
115,827
|
|
Charge offs, net of recoveries
|
|
|
(101,549
|
)
|
|
|
(109,360
|
)
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses as of end of period
|
|
$
|
463,875
|
|
|
$
|
374,711
|
|
|
|
|
|
|
|
|
|
|
Total gross loans as of end of period
|
|
$
|
4,787,572
|
|
|
$
|
6,365,368
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses ratio
|
|
|
9.69
|
%
|
|
|
5.89
|
%
|
Provision for loan losses ratio (annualized)
|
|
|
11.12
|
%
|
|
|
7.38
|
%
|
Net charge off ratio (annualized)
|
|
|
8.60
|
%
|
|
|
6.97
|
%
|
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.
During the three months ended March 31, 2010 and 2009,
loans with an aggregate carrying value of $145.9 million
and $174.9 million, respectively, as of their respective
restructuring dates, were involved in troubled debt
restructurings. Additionally, loans involved in these troubled
debt restructurings 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 troubled debt
restructurings were $27.8 million and $22.8 million as
of March 31, 2010 and December 31, 2009, respectively.
During the three months ended March 31, 2010, continued
stress experienced in our commercial real estate loan portfolio
was largely responsible for driving the increase in provision
for loan losses, charge offs, and delinquent and non-accrual
loan categories. Refinancing options with commercial real estate
loans are currently limited. Accordingly, most commercial real
estate loans that mature require restructuring or extension and
may become classified as impaired or be restructured through
troubled debt restructurings.
Provision for loan losses and charge offs for the three months
ended March 31, 2010 were driven largely from charge offs
in our commercial real estate portfolio. Due to the large
individual credit exposures and characteristics of commercial
real estate loans, we expect the level of charge offs in this
area to be volatile.
Given our loss experience, we consider our higher-risk loans to
be land, second lien real estate and mortgage rediscount loans.
As of March 31, 2010 and December 31, 2009, the total
outstanding principal balance of these higher-risk loans was
$507.1 million and $561.5 million, respectively.
Other
Investments
We have made investments in some of our borrowers in connection
with the loans provided to them. These investments usually
comprised equity interests such as common stock, preferred
stock, limited liability company interests, limited partnership
interests and warrants.
As of March 31, 2010 and December 31, 2009, the
carrying values of our other investments in the Other Commercial
Finance segment were $93.9 million and $96.5 million,
respectively. Included in these balances were investments
carried at fair value totaling $1.2 million and
$1.4 million, respectively.
65
Healthcare
Net Lease Segment
Direct
Real Estate Investments
We own real estate for long-term investment
purposes. These real estate investments are
generally long-term healthcare facilities leased through
long-term,
triple-net
operating leases. Under a typical
triple-net
lease, the client agrees to pay a base monthly operating lease
payment and all facility operating expenses as well as make
capital improvements. As of March 31, 2010 and
December 31, 2009, we had $551.6 million and
$554.2 million, respectively, in direct real estate
investments, which consisted primarily of land and buildings. We
anticipate selling our remaining healthcare facilities in 2010.
Upon the completion of these asset sales, we will exit the
skilled nursing home ownership business, but expect to continue
to actively provide mortgage and other financing for owners and
operators in the long-term healthcare industry. As a result,
much of the Healthcare Net Lease segment activity and assets are
classified as discontinued operations in our consolidated
balance sheets and consolidated statements of operations. For
additional information, see Note 3, Discontinued
Operations, in our consolidated financial statements for the
three months ended March 31, 2010.
Liquidity
and Capital Resources
Liquidity is a measure of our sources of funds available to meet
our obligations as they arise. We require cash to fund new and
existing commercial loan commitments, repay and service
indebtedness, make new investments, fund net deposit outflows
and pay expenses related to general business operations. Our
sources of liquidity are cash and cash equivalents, new
borrowings and deposits, proceeds from asset sales, servicing
fees from securitizations and credit facilities, principal and
interest collections, lease payments and additional equity and
debt financings.
We separately manage the liquidity of CapitalSource Bank and the
Parent Company. Our liquidity forecasts indicate that we have
adequate liquidity to conduct our business. These forecasts are
based on our business plans for the Parent Company and
CapitalSource Bank and assumptions related to expected cash
inflows and outflows that we believe are reasonable; however, we
cannot assure you that our forecasts or assumptions will prove
to be accurate. Some of our liquidity sources such as cash and
deposits are generally available on an immediate basis. Other
sources of liquidity, such as proceeds from asset sales,
borrowings on existing facilities and the ability to generate
additional liquidity through new equity or debt financings, are
less certain and less immediate, are in some cases restricted by
our existing indebtedness or borrowing availability, and are
dependent on and subject to market and economic conditions and
the willingness of counterparties to enter into transactions
with us. Accordingly, these sources of additional liquidity may
not be sufficient or accessible to meet our needs.
Unless otherwise specified, the figures presented in the
following paragraphs are based on current forecasts and take
into account activity since March 31, 2010. The information
contained in this section should be read in conjunction with,
and is subject to and qualified by the information set forth in
our Risk Factors and the Cautionary Note Regarding
Forward Looking Statements in our
Form 10-K
for the year ended December 31, 2009.
CapitalSource
Bank Liquidity
Our liquidity forecast is based on our business plan to
originate substantially all new loans through CapitalSource
Bank, and our expectations regarding the net growth in the
commercial loan portfolio at CapitalSource Bank and the
repayment of the A Participation Interest. Through
deposits, cash flow from operations, payments of principal and
interest on loans and the A Participation Interest,
cash equivalents, investments, capital contributions from the
Parent Company, borrowings from the FHLB SF and access to other
funding sources, we intend to maintain sufficient liquidity at
CapitalSource Bank to fund commercial loan commitments and
operations as well as to maintain minimum ratios required by our
regulators.
CapitalSource Bank uses its liquidity to fund new loans and
investment securities, fund commitments on existing loans, fund
net deposit outflows and pay operating expenses, including
intercompany payments to the Parent Company for origination and
other services performed on its behalf. CapitalSource Bank
operates in accordance with the conditions imposed in connection
with regulatory approvals obtained upon its formation, including
requirements that CapitalSource Bank maintain a total risk-based
capital ratio of not less than 15%, capital levels required for
a bank to be considered well-capitalized under
relevant banking regulations, and a ratio
66
of tangible equity to tangible assets of not less than 10% for
its first three years of operations. In addition, we have a
policy to maintain 10% of CapitalSource Banks assets in
cash, cash equivalents and investments. In accordance with
regulatory guidance, we have identified, modeled and planned for
the financial, capital and liquidity impact of various events
and scenarios that would cause a large outflow of deposits, a
reduction in borrowing capacity, a material increase in loan
funding obligations, a material increase in credit costs or any
combination of these events for CapitalSource Bank. We
anticipate that CapitalSource Bank would be able to maintain
sufficient liquidity and ratios in excess of its required
minimum ratios in these events and scenarios.
CapitalSource Banks primary source of liquidity is
deposits, most of which are in the form of certificates of
deposit. At March 31, 2010, deposits at CapitalSource Bank
were $4.6 billion. We believe we will be able to maintain a
sufficient level of deposits to fund CapitalSource Bank.
As of March 31, 2010, CapitalSource Bank had
$439.6 million of cash and cash equivalents and restricted
cash and $1.5 billion in investment securities,
available-for-sale.
As of March 31, 2010, the amount of CapitalSource
Banks unfunded commitments to extend credit with respect
to existing loans was $927.3 million. Due to their nature,
we cannot know with certainty the aggregate amounts we will be
required to fund under these unfunded commitments. Our failure
to satisfy our full contractual funding commitment to one or
more of our clients could create breach of contract and lender
liability for us and irreparable damage our reputation in the
market. We anticipate that CapitalSource Bank will have
sufficient liquidity to satisfy these unfunded commitments.
Parent
Company Liquidity
The Parent Companys need for liquidity is less than in
prior periods because our business plan is to make substantially
all new commercial loans through CapitalSource Bank, and it is
our expectation that the balance of our existing loan portfolio
and other assets held in the Parent Company will run off over
time. We intend to generate adequate liquidity at the Parent
Company to cover our estimated funding obligations for
commitments under existing loans, to repay recourse
indebtedness, and to pay operating expenses. CapitalSource Bank
is prohibited from paying dividends during its first three years
of operations without consent from our regulators. Consequently,
we do not anticipate that dividends from CapitalSource Bank will
provide any liquidity to fund the operations of the Parent
Company for the foreseeable future.
The Parent Companys uses of liquidity include payments
related to mandatory commitment reductions under our syndicated
bank credit facility, debt service, operating expenses, any
dividends that we may pay and the funding of unfunded
commitments. For additional information, see Note 11,
Borrowings, in our consolidated financial statements for
the three months ended March 31, 2010, and
Borrowings Credit Facilities within this
section.
Subject to restrictions in our existing indebtedness, sources of
liquidity for the Parent Company include cash flows from
operations, including, principal, interest, and lease payments,
credit facility borrowings, equity and debt offerings, our
ability to fund loans directly from our
2006-A term
debt securitization, asset sales, including sales of REO,
servicing fees from securitizations and credit facilities, and
proceeds from the sale of Omega stock and, subject to the
various conditions, future closings on asset sales to Omega. A
portion of the proceeds from some of these activities is
required to be used to make mandatory repayments on our
indebtedness.
As of March 31, 2010, the Parent Company had
$398.0 million of cash and cash equivalents and restricted
cash. The amount of the Parent Companys unfunded
commitments to extend credit with respect to existing loans as
of March 31, 2010 exceeded unused funding sources and
unrestricted cash by $1.3 billion, a decrease of
$28.9 million, or 2.2% from December 31, 2009. Due to
their nature, we cannot know with certainty the aggregate
amounts we will be required to fund under these unfunded
commitments. We expect that these unfunded commitments will
continue to exceed the Parent Companys available funds.
Our failure to satisfy our full contractual funding commitments
to one or more of our clients could create breach of contract
and lender liability for us and irreparably damage our
reputation in the marketplace
In many cases, our obligation to fund unfunded commitments is
subject to our clients ability to provide collateral to
secure the requested additional fundings, the collaterals
satisfaction of eligibility requirements, our clients
ability to meet specified preconditions to borrowing, including
compliance with all provisions of the loan agreements,
and/or our
discretion pursuant to the terms of the loan agreements. In
other cases, however, there are no
67
such prerequisites or discretion to future fundings by us, and
our clients may draw on these unfunded commitments at any time.
To the extent there are unfunded commitments with respect to a
loan that is owned partially by CapitalSource Bank and the
Parent Company, unless our client is in default, CapitalSource
Bank is obligated in some cases pursuant to intercompany
agreements to fund its portion of the unfunded commitment before
the Parent Company is required to fund its portion. In addition,
in some cases we may be able to borrow additional amounts under
our existing financing sources as we fund these unfunded
commitments.
In addition to these unfunded commitments, pursuant to
agreements with our regulators, to the extent CapitalSource Bank
independently is unable to do so, the Parent Company must
maintain CapitalSource Banks total risk-based capital
ratio at not less than 15% and must maintain the capital levels
of CapitalSource Bank at all times to meet the levels required
for a bank to be considered well-capitalized under
the relevant banking regulations. Additionally, pursuant to
requirements of our regulators, the Parent Company has provided
a $150.0 million unsecured revolving credit facility to
CapitalSource Bank that CapitalSource Bank may draw on at any
time it or the FDIC deems necessary. As of March 31, 2010,
this facility was undrawn, but we cannot assure you that the
FDIC will not require funding under this facility in the future.
Cash
and Cash Equivalents and Restricted Cash
As of March 31, 2010 and December 31, 2009, we had
$697.4 million and $1.2 billion, respectively, in cash
and cash equivalents. We invest cash on hand in short-term
liquid investments. We had $140.2 million and
$172.8 million of restricted cash as of March 31, 2010
and December 31, 2009, respectively. For additional
information about our cash, cash equivalents and restricted
cash, see Note 4, Cash and Cash Equivalents and
Restricted Cash, in our consolidated financial statements
for the three months ended March 31, 2010.
The restricted cash consists primarily of principal and interest
collections on loans collateralizing our secured non-recourse
debt. Restricted cash also includes client holdbacks and
escrows. Principal repayments, interest rate swap payments,
interest payable and servicing fees are deducted from the
monthly principal and interest collections funded by loans
collateralizing our credit facilities and term debt, and the
remaining restricted cash is returned to us and becomes
unrestricted at that time.
Deposits
Deposits gathered through 22 retail bank branches are the
primary source of funding for CapitalSource Bank. As of
March 31, 2010 and December 31, 2009, CapitalSource
Bank had deposits totaling $4.6 billion and
$4.5 billion, respectively. For additional information
about our deposits, see Note 9, Deposits, in our
consolidated financial statements for the three months ended
March 31, 2010.
Borrowings
As of March 31, 2010 and December 31, 2009, we had
outstanding borrowings totaling $4.6 billion and
$5.0 billion, respectively. For additional information on
our borrowings, see Note 11, Borrowings, in our
consolidated financial statements for the three months ended
March 31, 2010 included herein, and Note 12,
Borrowings, in our audited consolidated financial
statements for the year ended December 31, 2009 included in
our
Form 10-K.
68
Our maximum facility amounts, amounts outstanding and unused
capacity as of March 31, 2010, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
Facility
|
|
|
Amount
|
|
|
Unused
|
|
|
|
Amount
|
|
|
Outstanding
|
|
|
Capacity
|
|
|
|
($ in thousands)
|
|
|
Credit facilities(1)
|
|
$
|
543,889
|
|
|
$
|
407,833
|
|
|
$
|
136,056
|
|
Term debt
|
|
|
2,740,343
|
|
|
|
2,681,107
|
|
|
|
59,236
|
|
Other borrowings
|
|
|
2,379,071
|
|
|
|
1,472,403
|
|
|
|
906,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,663,303
|
|
|
$
|
4,561,343
|
|
|
$
|
1,101,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of April 19, 2010, unused capacity was reduced by
$79.1 million in connection with the maturity of the
revolving period under one of our credit facilities. The amount
shown is not reduced by issued and outstanding letters of credit
totaling $50.1 million as of March 31, 2010, which
further limit our ability to utilize capacity. |
As of March 31, 2010 and December 31, 2009,
approximately 79% and 80%, respectively, of our debt was secured
by our assets.
Credit
Facilities
As of March 31, 2010, our credit facilities
commitments and principal amounts outstanding were as follows:
|
|
|
|
|
|
|
|
|
|
|
Committed
|
|
|
Principal
|
|
|
|
Capacity
|
|
|
Outstanding
|
|
|
|
($ in thousands)
|
|
|
Credit Facilities:
|
|
|
|
|
|
|
|
|
CS Funding III secured credit facility scheduled to mature
May 29, 2012(1)
|
|
$
|
30,970
|
|
|
$
|
30,970
|
|
CS Funding VII secured credit facility scheduled to mature
April 17, 2012(2)
|
|
|
190,613
|
|
|
|
111,471
|
|
CS Europe secured credit facility scheduled to mature
May 28, 2010(1)(3)
|
|
|
115,157
|
|
|
|
115,157
|
|
CS Inc. syndicated bank credit facility scheduled to mature
December 31, 2011
|
|
|
207,149
|
|
|
|
150,235
|
|
|
|
|
|
|
|
|
|
|
Total credit facilities
|
|
$
|
543,889
|
|
|
$
|
407,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These credit facilities are in their amortization periods so
that committed capacities equal principal outstanding. In the
absence of a default and, until the final maturity date, amounts
due under these facilities are repaid from principal and
interest proceeds from the respective collateral pools. |
|
(2) |
|
The revolving period under this credit facility matured on
April 19, 2010 and, in the absence of a default, amounts
due under this credit facility are to be repaid from principal
and interest proceeds from the collateral pool. |
|
(3) |
|
CS Europe is a 85.2 million multi-currency facility
with borrowings denominated in Euro or British Pound Sterling.
The amounts presented were translated to USD using the
applicable spot rates on March 31, 2010. |
Term
Debt
As of March 31, 2010 and December 31, 2009, the
outstanding balances of our term debt securitizations were
$2.4 billion and $2.7 billion, respectively. As of
March 31, 2010 and December 31, 2009, our 2014 Senior
Secured Notes had balances of $283.6 million and
$282.9 million, respectively, net of unamortized discounts
of $16.4 million and $17.1 million, respectively.
Convertible
Debt
As of March 31, 2010 and December 31, 2009, the
outstanding aggregate balances of our convertible debt were
$545.3 million and $561.3 million, respectively, net
of unamortized discounts of $15.4 million and
$18.7 million as of March 31, 2010 and
December 31, 2009, respectively.
69
Subordinated
Debt
As of March 31, 2010 and December 31, 2009, the
outstanding balances of our subordinated debt were
$437.6 million and $439.7 million, respectively.
Mortgage
Debt
As of March 31, 2010 and December 31, 2009, the
outstanding balances of our mortgage debt were
$261.5 million and $262.8 million, respectively.
FHLB SF
Borrowings and Federal Reserve Bank Credit Program
As a member of the FHLB SF, CapitalSource Bank had financing
availability with the FHLB SF as of March 31, 2010 equal to
20% of CapitalSource Banks total assets. As of
March 31, 2010 and December 31, 2009, the maximum
financing available under this formula was $1.1 billion.
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 March 31, 2010, collateral
with an estimated fair value of $1.0 billion was pledged to
the FHLB SF creating aggregate borrowing capacity of $992.0
million. As of March 31, 2010 and December 31, 2009,
there was $225.0 million and $200.0 million,
respectively, of principal outstanding and a letter of credit in
the amount of $0.8 million outstanding as of both dates. As
of March 31, 2010 and December 31, 2009, our unused
borrowing capacity was $766.2 million and
$764.4 million, respectively.
In June 2009, CapitalSource Bank was approved for 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
March 31, 2010, collateral with an estimated fair value of
$187.2 million had been pledged under this program and
there were no borrowings outstanding under this program.
Commitments,
Guarantees & Contingencies
As of March 31, 2010 and December 31, 2009, we had
unfunded commitments to extend credit to our clients of
$2.7 billion and $2.8 billion, respectively.
Additional information on these contingencies is included in
Note 20, Commitments and Contingencies, in our
audited consolidated financial statements for the year ended
December 31, 2009, included in our
Form 10-K,
and Liquidity and Capital Resources Parent
Company Liquidity herein.
We have non-cancelable operating leases for office space and
office equipment. The leases expire over the next 15 years
and contain provisions for certain annual rental escalations.
For additional information, see Note 20, Commitments and
Contingencies, in our audited consolidated financial
statements for the year ended December 31, 2009, included
in our
Form 10-K.
We are obligated to provide standby letters of credit in
conjunction with several of our lending arrangements. As of
March 31, 2010 and December 31, 2009, we had issued
$178.3 million and $182.5 million, respectively, in
letters of credit which expire at various dates over the next
six years. If a borrower defaults on its commitment(s) subject
to any letter of credit issued under these arrangements, we
would be responsible to meet the borrowers financial
obligation and would seek repayment of that financial obligation
from the borrower. Addition information on these contingencies
is included in Note 17, Commitments and
Contingencies, in our consolidated financial statements for
the three months ended March 31, 2010 and in Note 20,
Commitments and Contingencies, in our audited
consolidated financial statements for the year ended
December 31, 2009, included in our
Form 10-K.
As of March 31, 2010 and December 31, 2009, we had
identified conditional asset retirement obligations primarily
related to the future removal and disposal of asbestos that is
contained within certain of our direct real estate investment
properties. The asbestos is appropriately contained and we
believe we are compliant with current environmental regulations.
If these properties undergo major renovations or are demolished,
certain environmental regulations are in place, which specify
the manner in which asbestos must be handled and disposed. We
are required to record the fair value of these conditional
liabilities if they can be reasonably estimated. As of
March 31, 2010 and December 31, 2009, sufficient
information was not available to estimate our liability for
conditional asset retirement obligations as the obligations to
remove the asbestos from these properties have indeterminable
70
settlement dates. As such, no liability for conditional asset
retirement obligations was recorded in our consolidated balance
sheet as of March 31, 2010 and December 31, 2009.
In July 2009, we entered into a limited guarantee for the
principal balance and any accrued interest and unpaid fees with
respect to indebtedness owing by a company in which we hold an
investment. The guarantee can be called by the lender on the
earlier of an acceleration of our syndicated bank credit
facility and April 9, 2011. As of March 31, 2010, the
principal amount guaranteed was $18.7 million. We have
determined that we are not required to recognize the assets and
liabilities of this entity for financial statement purposes as
of March 31, 2010.
In connection with certain securitization transactions and
secured financings, we have made customary representations and
warranties regarding the characteristics of the underlying
transferred assets and collateral. Prior to any securitization
transaction and secured financing, we generally perform due
diligence with respect to the assets to be included in the
securitization transaction and the collateral to ensure that
they satisfy the representations and warranties. In our capacity
as originator and servicer in certain securitization
transactions and secured financings, we may be required to
repurchase or substitute loans which breach a representation and
warranty as of their date of transfer to the securitization or
financing vehicle.
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.
Credit
Risk Management
Credit risk is the risk of loss arising from adverse changes in
a clients or counterpartys ability to meet its
financial obligations under
agreed-upon
terms. Credit risk exists primarily in our lending, leasing and
derivative portfolios. The degree of credit risk will vary based
on many factors including the size of the asset or transaction,
the credit characteristics of the client, the contractual terms
of the agreement and the availability and quality of collateral.
We manage credit risk of our derivatives and credit-related
arrangements by limiting the total amount of arrangements
outstanding with an individual counterparty, by obtaining
collateral based on managements assessment of the client
and by applying uniform credit standards maintained for all
activities with credit risk.
As appropriate, the Parent Company and CapitalSource Bank credit
committees evaluate and approve credit standards and oversee the
credit risk management function related to our commercial loans,
direct real estate investments and other investments. Their
primary responsibilities include ensuring the adequacy of our
credit risk management infrastructure, overseeing credit risk
management strategies and methodologies, monitoring economic and
market conditions having an impact on our credit-related
activities, and evaluating and monitoring overall credit risk
and monitoring our clients financial condition and
performance.
CapitalSource
Bank and Other Commercial Finance Segments
Credit risk management for the commercial loan portfolios begins
with an assessment of the credit risk profile of a client based
on an analysis of the clients financial position. As part
of the overall credit risk assessment of a client, each
commercial credit exposure or transaction is assigned a risk
rating that is subject to approval based on defined credit
approval standards. While rating criteria vary by product, each
loan rating focuses on the same two factors: collateral and
financial performance. Subsequent to loan origination, risk
ratings are monitored on an ongoing basis. If necessary, risk
ratings are adjusted to reflect changes in the clients or
counterpartys financial condition, cash flow or financial
situation. We use risk rating aggregations to measure and
evaluate concentrations within portfolios. In making decisions
regarding credit, we consider risk rating, collateral, industry
and single name concentration limits.
We use a variety of tools to continuously monitor a
clients or counterpartys ability to perform under
its obligations. Additionally, we syndicate loan exposure to
other lenders, sell loans and use other risk mitigation
techniques to manage the size and risk profile of our loan
portfolio.
71
Concentrations
of Credit Risk
In our normal course of business, we engage in commercial
lending and leasing activities with clients primarily throughout
the United States. As of March 31, 2010, the single largest
industry concentration was healthcare and social assistance,
which made up approximately 21% of our commercial loan
portfolio. As of March 31, 2010, taken in the aggregate,
non-healthcare commercial real estate made up approximately 27%
of our commercial loan portfolio. As of March 31, 2010, the
largest geographical concentration was Florida, which made up
approximately 12% of our commercial loan portfolio. As of
March 31, 2010, the single largest industry concentration
in our direct real estate investment portfolio was skilled
nursing, which made up approximately 99% of the investments. As
of March 31, 2010, the largest geographical concentration
in our direct real estate investment portfolio was Florida,
which made up approximately 45% of the investments.
As of March 31, 2010, $1.7 billion, or 21%, of our
portfolio consisted of loans to seven clients with aggregate
loan balances that are individually greater than
$100.0 million. Of this amount, loans to one commercial
real estate client totaling $157.0 million were on
non-accrual. The remaining $1.5 billion of loans, including
a $165.7 million land loan to one client, were performing;
however, if any of these loans were to experience problems, it
could have a material adverse impact on our financial condition
or results of operations.
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, which result in the recognition of assets and
liabilities in our consolidated financial statements, 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.
For additional information on our derivatives, see Note 22,
Derivative Instruments, of our audited consolidated
financial statements for the year ended December 31, 2009
included in our
Form 10-K.
Interest
Rate Risk Management
Interest rate risk in our normal course of business refers to
the change in earnings that may result from changes in interest
rates, primarily various short-term interest rates, including
LIBOR-based rates and the prime rate. We attempt to mitigate
exposure to the earnings impact of interest rate changes by
conducting the majority of our lending and borrowing on a
variable rate basis. The majority of our commercial 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 our borrowings bear interest at a
spread to LIBOR or CP, with the remainder bearing interest at a
fixed rate. Our deposits are fixed rate, but at short terms. We
are also exposed to changes in interest rates in certain of our
fixed rate loans and investments. We attempt to mitigate our
exposure to the earnings impact of the interest rate changes in
these assets by engaging in hedging activities as discussed
below. For additional information, see Note 18,
Derivative Instruments, in our consolidated financial
statements for the three months ended March 31, 2010.
72
The estimated changes in net interest income for a
12-month
period based on changes in the interest rates applied to the
combined portfolios of our segments as of March 31, 2010,
were as follows ($ in thousands):
|
|
|
|
|
Rate Change
|
|
|
(Basis Points)
|
|
|
|
− 100
|
|
$
|
1,956
|
|
− 50
|
|
|
2,151
|
|
+ 50
|
|
|
(21,384
|
)
|
+ 100
|
|
|
(41,836
|
)
|
For the purpose of the above analysis, we included loans, direct
real estate investments, borrowings, deposits and derivatives.
In addition, we assumed an 82% advance rate on our variable rate
borrowings, that LIBOR does not fall below 0.15% for loans and
borrowings, and that the prime rate does not fall below 3.0% for
loans.
Approximately 55% of the aggregate outstanding principal amount
of our commercial loans had interest rate floors as of
March 31, 2010. Of the loans with interest rate floors,
approximately 95% 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 March 31, 2010,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Percentage of
|
|
|
|
Outstanding
|
|
|
Total Portfolio
|
|
|
|
($ in thousands)
|
|
|
Loans with contractual interest rates:
|
|
|
|
|
|
|
|
|
Below the interest rate floor
|
|
$
|
4,191,263
|
|
|
|
52
|
%
|
Exceeding the interest rate floor
|
|
|
106,093
|
|
|
|
1
|
|
At the interest rate floor
|
|
|
124,192
|
|
|
|
2
|
|
Loans with no interest rate floor
|
|
|
3,580,386
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,001,934
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
We enter into interest rate swap agreements to minimize the
economic effect of interest rate fluctuations specific to our
fixed rate debt, certain fixed rate loans and certain
sale-leaseback transactions. We also enter into additional 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 fixed rate and prime rate loans
to one-month LIBOR. Our interest rate hedging activities
partially protect us from the risk that interest collected under
fixed-rate and prime rate loans will not be sufficient to
service the interest due under the one-month LIBOR-based term
debt.
We also use interest rate swaps to hedge the interest rate risk
of certain fixed rate debt. These interest rate swaps modify our
exposure to interest rate risk by synthetically converting fixed
rate debt to one-month LIBOR.
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
Accounting policies are integral to understanding our
Managements Discussion and Analysis of Financial
Condition and Results of Operations. The preparation of the
consolidated financial statements in conformity with GAAP
requires management to make certain judgments and assumptions
based on information that is available at the time of the
financial statements in determining accounting estimates used in
the preparation of such statements. Our significant accounting
policies are described in Note 2, Summary of Significant
Accounting Policies, in our audited consolidated financial
statements for the year ended December 31, 2009, included
in our
Form 10-K.
Accounting estimates are considered critical if the estimate
requires management to make assumptions and judgments about
matters that were highly uncertain at the time the accounting
estimate was made and if different estimates reasonably could
have been used in the reporting period, or if changes in the
accounting estimate are reasonably likely to occur from period
to period that would have a material impact on our financial
condition, results of operations or cash flows. We have
established detailed policies and procedures to ensure that the
73
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 disclosure related to these
estimates. Our critical accounting estimates are described 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, 2009.
|
|
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 18, Derivative Instruments, in our consolidated
financial statements for the three months ended March 31,
2010, and Note 23, Credit Risk, in our audited
consolidated financial statements for the year ended
December 31, 2009 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 Co-Chief
Executive Officers 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 Co-Chief Executive Officers and Chief
Financial Officer concluded that our disclosure controls and
procedures were effective as of March 31, 2010. There have
been no changes in our internal control over financial reporting
during the three months ended March 31, 2010, that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
74
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 March 31, 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
|
|
|
of Shares (or
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Dollar Value)
|
|
|
|
Total Number
|
|
|
Average
|
|
|
as Part of Publicly
|
|
|
that May
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Announced Plans
|
|
|
Yet be Purchased
|
|
|
|
Purchased(1)
|
|
|
per Share
|
|
|
or Programs
|
|
|
Under the Plans
|
|
|
January 1 January 31, 2010
|
|
|
58,875
|
|
|
$
|
4.81
|
|
|
|
|
|
|
|
|
|
February 1 February 28, 2010
|
|
|
60,929
|
|
|
|
5.35
|
|
|
|
|
|
|
|
|
|
March 1 March 31, 2010
|
|
|
47,706
|
|
|
|
5.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
167,510
|
|
|
|
5.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents 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. |
(a) Exhibits
The Index to Exhibits attached hereto is incorporated herein by
reference.
75
Signatures
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 May 5, 2010
|
|
/s/ STEVEN
A. MUSELES
Steven
A. Museles
Director and Co-Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
|
|
Date May 5, 2010
|
|
/s/ JAMES
J. PIECZYNSKI
James
J. Pieczynski
Director and Co-Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
|
|
Date May 5, 2010
|
|
/s/ DONALD
F. COLE
Donald
F. Cole
Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
|
|
|
Date: May 5, 2010
|
|
/s/ BRYAN
D. SMITH
Bryan
D. Smith
Chief Accounting Officer
(Principal Accounting Officer)
|
76
INDEX TO
EXHIBITS
|
|
|
|
|
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 November 15, 2009)(incorporated by
reference to exhibit 3.1 to the
Form 10-Q
filed by CapitalSource on November 17, 2009).
|
|
10
|
.1
|
|
Amendment No. 3 to Lease dated April 8, 2010, by and
between Wisconsin Place Office LLC and CapitalSource Finance
LLC.
|
|
10
|
.2
|
|
Credit Agreement dated as of March 14, 2006, among
CapitalSource Inc., as borrower, the guarantors and lenders as
listed in the Credit Agreement, Wells Fargo Bank, N.A. (f/k/a
Wachovia Bank, National Association), as administrative agent,
swingline lender and issuing lender, Bank of America, N.A., as
issuing lender, Wells Fargo Securities, LLC (f/k/a Wachovia
Capital Markets, LLC), as sole bookrunner and lead arranger, and
Bank of Montreal, Barclays Bank PLC and SunTrust Bank, as
co-documentation agents (composite version; reflects all
amendments through February 24, 2010)(incorporated by
reference to exhibit 10.9 to the
Form 10-K
filed by CapitalSource on March 1, 2010).
|
|
10
|
.3
|
|
Sale and Servicing Agreement dated as of May 29, 2009, by
and among CSE QRS Funding I LLC, as a seller, CapitalSource
Funding III LLC, as a seller, CSE Mortgage LLC, as QRS
originator, CapitalSource Finance LLC, as CS III originator and
servicer, CS Europe Finance Limited, as a guarantor, and CS UK
Finance Limited, as a guarantor, each of the conduit purchasers
and the institutional purchasers from time to time party
thereto, Wachovia Bank, National Association (WBNA),
as a purchaser, Wells Fargo Securities, LLC (f/k/a Wachovia
Capital Markets, LLC), as administrative agent and WBNA agent,
and Wells Fargo Bank, National Association, as backup servicer
and collateral custodian (composite version; reflects all
amendments through February 24, 2010).
|
|
10
|
.4
|
|
Second Amended and Restated Sale and Servicing Agreement by and
among CS Funding VII Depositor LLC, as the seller, CapitalSource
Finance LLC, as the servicer and originator, the issuers from
time to time party thereto, the liquidity banks from time to
time party thereto, Citicorp North America, Inc., as the
administrative agent and Wells Fargo Bank, National Association,
as the backup servicer and as the collateral custodian
(composite version; reflects all amendments through
February 26, 2010).
|
|
10
|
.5
|
|
Deed of Amendment Relating to the Servicing Agreement dated
February 24, 2010, between CS UK Finance Limited and CS
Europe Finance Limited, as borrowers, CapitalSource Finance LLC,
as servicer, CapitalSource Europe Limited, as subservicer and
parent, CapitalSource UK Limited, as parent, Wachovia Bank,
N.A., as administrative agent and security trustee, and Wachovia
Securities International Ltd., as lead arranger and sole
bookrunner (incorporated by reference to exhibit 10.17.1 to
the
Form 10-K
filed by CapitalSource on March 1, 2010).
|
|
10
|
.6
|
|
Fourth Amended and Restated Sale and Servicing Agreement by and
among CapitalSource Real Estate Loan LLC,
2007-A, as
the seller, CSE Mortgage LLC, as the originator and servicer,
the issuers from time to time party thereto, the liquidity banks
from time to time party thereto, Citicorp North America, Inc.,
as the administrative agent and Wells Fargo Bank, National
Association, as the backup servicer and as the collateral
custodian (composite version; reflects all amendments through
February 26, 2010).
|
|
10
|
.7*
|
|
Form of Restricted Stock Agreement (2010).
|
|
10
|
.8*
|
|
Form of Restricted Stock Agreement for Directors (April
2010).
|
|
10
|
.9*
|
|
Form of Restricted Stock Unit Agreement (2010).
|
|
10
|
.10*
|
|
Form of Restricted Stock Unit Agreement for Directors (April
2010).
|
|
12
|
.1
|
|
Ratio of Earnings to Fixed Charges.
|
|
31
|
.1.1
|
|
Rule 13a 14(a) Certification of Chairman of the
Board and Co-Chief Executive Officer.
|
|
31
|
.1.2
|
|
Rule 13a 14(a) Certification of Chairman of the
Board and Co-Chief Executive Officer.
|
|
31
|
.2
|
|
Rule 13a 14(a) Certification of Chief Financial
Officer.
|
|
32
|
|
|
Section 1350 Certifications.
|
|
|
|
|
|
Filed herewith. |
|
* |
|
Management contract or compensatory plan or arrangement |
77