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 September 30, 2010
Commission File
No. 1-31753
CapitalSource Inc.
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
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|
35-2206895
|
(State of
Incorporation)
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|
(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 þ 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):
|
|
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|
Large
accelerated
filer þ
|
Accelerated
filer o
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Non-accelerated
filer o
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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 October 29, 2010, the number of shares of the
registrants Common Stock, par value $0.01 per share,
outstanding was 323,265,407.
CapitalSource
Inc.
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September 30,
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December 31,
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2010
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2009
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(Unaudited)
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($ in thousands)
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ASSETS
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Cash and cash equivalents
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$
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633,050
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$
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1,171,195
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Restricted cash (including $64.8 million and
$98.1 million, respectively, of cash that can be used only
to settle obligations of consolidated VIEs)
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121,554
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168,468
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Investment securities:
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Available-for-sale,
at fair value
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1,545,838
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960,591
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Held-to-maturity,
at amortized cost
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208,222
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242,078
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Total investment securities
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1,754,060
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1,202,669
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Commercial real estate A Participation Interest, net
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5,409
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530,560
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Loans:
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Loans held for sale
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36,979
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670
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Loans held for investment
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6,590,728
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8,281,570
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Less deferred loan fees and discounts
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(118,411
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)
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(146,329
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)
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Less allowance for loan losses
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(393,642
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)
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(586,696
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)
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Loans held for investment, net (including $1.0 billion and
$3.1 billion, respectively, of loans that can be used only
to settle obligations of consolidated VIEs)
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6,078,675
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7,548,545
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Total loans
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6,115,654
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7,549,215
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Interest receivable
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61,742
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87,647
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Other investments
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82,526
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96,517
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Goodwill
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173,135
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173,135
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Other assets
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604,577
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656,994
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Assets of discontinued operations, held for sale
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624,650
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Total assets
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$
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9,551,707
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$
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12,261,050
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LIABILITIES AND SHAREHOLDERS EQUITY
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Liabilities:
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Deposits
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$
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4,627,206
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$
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4,483,879
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Credit facilities
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78,250
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542,781
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Term debt (including $860.6 million and $2.7 billion,
respectively, in obligations of consolidated VIEs for which
there is no recourse to the general credit of CapitalSource Inc.)
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1,145,638
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2,956,536
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Other borrowings
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1,274,876
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1,204,074
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Other liabilities
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356,540
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363,293
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Liabilities of discontinued operations
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527,228
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Total liabilities
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7,482,510
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10,077,791
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Shareholders equity:
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Preferred stock (50,000,000 shares authorized; no shares
outstanding)
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Common stock ($0.01 par value, 1,200,000,000 shares
authorized; 323,278,564 and 323,042,613 shares issued and
outstanding, respectively)
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3,233
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3,230
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Additional paid-in capital
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3,918,771
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3,909,364
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Accumulated deficit
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(1,873,369
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)
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(1,748,822
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)
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Accumulated other comprehensive income, net
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20,562
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19,361
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Total CapitalSource Inc. shareholders equity
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2,069,197
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2,183,133
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Noncontrolling interests
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126
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Total shareholders equity
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2,069,197
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2,183,259
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Total liabilities and shareholders equity
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$
|
9,551,707
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$
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12,261,050
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See accompanying notes.
3
CapitalSource
Inc.
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2010
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2009
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2010
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2009
|
|
|
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(Unaudited)
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($ in thousands, except per share data)
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Net investment income:
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|
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Interest income:
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|
|
|
|
|
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|
|
|
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Loans
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|
$
|
136,066
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$
|
191,928
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|
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$
|
437,009
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|
|
$
|
615,283
|
|
Investment securities
|
|
|
14,608
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|
|
|
13,421
|
|
|
|
44,818
|
|
|
|
47,443
|
|
Other
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|
|
302
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|
|
|
1,126
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|
|
|
1,179
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|
|
|
3,781
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|
|
|
|
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|
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|
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|
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Total interest income
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150,976
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206,475
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|
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483,006
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666,507
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Fee income
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6,821
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|
|
|
5,176
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|
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|
18,926
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16,843
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|
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|
|
|
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|
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Total investment income
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|
157,797
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|
|
211,651
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|
501,932
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683,350
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Interest expense:
|
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|
|
|
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|
|
|
|
|
|
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Deposits
|
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|
14,490
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|
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|
22,674
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|
|
|
46,127
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|
|
|
91,020
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|
Borrowings
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|
44,066
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|
|
|
79,658
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|
|
|
139,915
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246,928
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|
|
|
|
|
|
|
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|
|
|
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|
|
|
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Total interest expense
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58,556
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|
|
102,332
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|
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186,042
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337,948
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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Net investment income
|
|
|
99,241
|
|
|
|
109,319
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|
|
|
315,890
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|
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345,402
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Provision for loan losses
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38,771
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221,385
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|
|
|
282,973
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|
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580,499
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|
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|
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|
|
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Net investment income (loss) after provision for loan losses
|
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60,470
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(112,066
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)
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32,917
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|
(235,097
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)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Compensation and benefits
|
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28,565
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|
|
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29,339
|
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|
|
92,171
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|
|
|
99,184
|
|
Professional fees
|
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|
8,792
|
|
|
|
14,986
|
|
|
|
27,659
|
|
|
|
43,856
|
|
Other administrative expenses
|
|
|
17,410
|
|
|
|
20,101
|
|
|
|
51,733
|
|
|
|
58,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total operating expenses
|
|
|
54,767
|
|
|
|
64,426
|
|
|
|
171,563
|
|
|
|
201,670
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Gain (loss) on investments, net
|
|
|
29,943
|
|
|
|
(8,472
|
)
|
|
|
46,279
|
|
|
|
(29,566
|
)
|
Loss on derivatives
|
|
|
(1,968
|
)
|
|
|
(10,298
|
)
|
|
|
(9,919
|
)
|
|
|
(12,317
|
)
|
(Loss) gain on residential mortgage investment portfolio
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
15,308
|
|
Gain (loss) on extinguishment of debt
|
|
|
|
|
|
|
11,472
|
|
|
|
1,096
|
|
|
|
(41,091
|
)
|
Net expense of real estate owned and other foreclosed assets
|
|
|
(7,372
|
)
|
|
|
(8,981
|
)
|
|
|
(91,039
|
)
|
|
|
(32,460
|
)
|
Other income, net
|
|
|
16,128
|
|
|
|
5,143
|
|
|
|
26,960
|
|
|
|
3,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
36,731
|
|
|
|
(11,139
|
)
|
|
|
(26,623
|
)
|
|
|
(96,421
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations before income
taxes
|
|
|
42,434
|
|
|
|
(187,631
|
)
|
|
|
(165,269
|
)
|
|
|
(533,188
|
)
|
Income tax (benefit) expense
|
|
|
(35,668
|
)
|
|
|
97,089
|
|
|
|
(18,836
|
)
|
|
|
131,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
78,102
|
|
|
|
(284,720
|
)
|
|
|
(146,433
|
)
|
|
|
(664,377
|
)
|
Net income from discontinued operations, net of taxes
|
|
|
|
|
|
|
10,484
|
|
|
|
9,489
|
|
|
|
37,108
|
|
Net gain from sale of discontinued operations, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
21,696
|
|
|
|
2,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
78,102
|
|
|
|
(274,236
|
)
|
|
|
(115,248
|
)
|
|
|
(625,125
|
)
|
Net (loss) income attributable to noncontrolling interests
|
|
|
(83
|
)
|
|
|
10
|
|
|
|
(83
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to CapitalSource Inc.
|
|
$
|
78,185
|
|
|
$
|
(274,246
|
)
|
|
$
|
(115,165
|
)
|
|
$
|
(625,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.24
|
|
|
$
|
(0.90
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(2.20
|
)
|
From discontinued operations
|
|
$
|
|
|
|
$
|
0.03
|
|
|
$
|
0.10
|
|
|
$
|
0.13
|
|
Attributable to CapitalSource Inc.
|
|
$
|
0.24
|
|
|
$
|
(0.87
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(2.07
|
)
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.24
|
|
|
$
|
(0.90
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(2.20
|
)
|
From discontinued operations
|
|
$
|
|
|
|
$
|
0.03
|
|
|
$
|
0.10
|
|
|
$
|
0.13
|
|
Attributable to CapitalSource Inc.
|
|
$
|
0.24
|
|
|
$
|
(0.87
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(2.07
|
)
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
321,070,479
|
|
|
|
315,604,434
|
|
|
|
320,723,068
|
|
|
|
301,823,130
|
|
Diluted
|
|
|
325,337,737
|
|
|
|
315,604,434
|
|
|
|
320,723,068
|
|
|
|
301,823,130
|
|
Dividends declared per share
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
|
$
|
0.03
|
|
See accompanying notes.
4
CapitalSource
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Inc. Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Noncontrolling
|
|
|
Shareholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income, 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
|
|
|
|
|
|
|
|
|
|
|
(115,165
|
)
|
|
|
|
|
|
|
(83
|
)
|
|
|
(115,248
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,201
|
|
|
|
|
|
|
|
1,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(114,047
|
)
|
Divestiture of noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43
|
)
|
|
|
(43
|
)
|
Dividends paid
|
|
|
|
|
|
|
(336
|
)
|
|
|
(9,382
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,718
|
)
|
Stock option expense
|
|
|
|
|
|
|
3,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,504
|
|
Exercise of options
|
|
|
1
|
|
|
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
356
|
|
Restricted stock activity
|
|
|
2
|
|
|
|
5,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity as of September 30, 2010
|
|
$
|
3,233
|
|
|
$
|
3,918,771
|
|
|
$
|
(1,873,369
|
)
|
|
$
|
20,562
|
|
|
$
|
|
|
|
$
|
2,069,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
CapitalSource
Inc.
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Unaudited
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(115,248
|
)
|
|
$
|
(625,125
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
3,504
|
|
|
|
2,985
|
|
Restricted stock expense
|
|
|
7,851
|
|
|
|
17,962
|
|
(Gain) loss on extinguishment of debt
|
|
|
(1,096
|
)
|
|
|
41,091
|
|
Amortization of deferred loan fees and discounts
|
|
|
(55,295
|
)
|
|
|
(58,818
|
)
|
Paid-in-kind
interest on loans
|
|
|
2,092
|
|
|
|
(17,434
|
)
|
Provision for loan losses
|
|
|
282,973
|
|
|
|
580,499
|
|
Provision for unfunded commitments
|
|
|
(442
|
)
|
|
|
|
|
Amortization of deferred financing fees and discounts
|
|
|
43,890
|
|
|
|
48,146
|
|
Depreciation and amortization
|
|
|
1,582
|
|
|
|
25,309
|
|
Provision for deferred income taxes
|
|
|
14,091
|
|
|
|
130,607
|
|
Non-cash (gain) loss on investments, net
|
|
|
(7,045
|
)
|
|
|
31,495
|
|
Gain on assets acquired through business combination
|
|
|
(3,724
|
)
|
|
|
|
|
Gain on deconsolidation of
2006-A Trust
|
|
|
(16,723
|
)
|
|
|
|
|
Non-cash loss on foreclosed assets and other property and
equipment disposals
|
|
|
57,194
|
|
|
|
21,180
|
|
Unrealized (gain) loss on derivatives and foreign currencies, net
|
|
|
(2,079
|
)
|
|
|
22,280
|
|
Unrealized gain on residential mortgage investment portfolio, net
|
|
|
|
|
|
|
(60,567
|
)
|
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
|
|
|
(9,523
|
)
|
|
|
(20,487
|
)
|
Decrease in interest receivable
|
|
|
26,698
|
|
|
|
21,726
|
|
Decrease in loans held for sale, net
|
|
|
4,750
|
|
|
|
31,055
|
|
Decrease in other assets
|
|
|
18,522
|
|
|
|
485,411
|
|
Decrease in other liabilities
|
|
|
(28,410
|
)
|
|
|
(232,974
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
223,562
|
|
|
|
1,929,485
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
|
60,688
|
|
|
|
192,198
|
|
Decrease in mortgage-related receivables, net
|
|
|
|
|
|
|
215,090
|
|
Decrease in commercial real estate A participation
interest, net
|
|
|
534,674
|
|
|
|
702,860
|
|
Assets acquired through business combination, net of cash
acquired
|
|
|
(98,800
|
)
|
|
|
|
|
Cash received from
2006-A Trust
delegation and sale transaction
|
|
|
7,000
|
|
|
|
|
|
Decrease in loans, net
|
|
|
1,210,818
|
|
|
|
290,048
|
|
Cash received for real estate
|
|
|
339,643
|
|
|
|
15,710
|
|
Acquisition of marketable securities, available for sale, net
|
|
|
(561,613
|
)
|
|
|
(36,991
|
)
|
Reduction (acquisition) of marketable securities, held to
maturity, net
|
|
|
47,208
|
|
|
|
(227,591
|
)
|
Reduction of other investments, net
|
|
|
26,310
|
|
|
|
5,401
|
|
Acquisition of property and equipment, net
|
|
|
(3,089
|
)
|
|
|
(17,456
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by investing activities
|
|
|
1,562,839
|
|
|
|
1,139,269
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(5,913
|
)
|
|
|
(39,161
|
)
|
Deposits accepted, net of repayments
|
|
|
143,632
|
|
|
|
(653,552
|
)
|
Repayments under repurchase agreements, net
|
|
|
|
|
|
|
(1,595,750
|
)
|
Repayments on credit facilities, net
|
|
|
(453,906
|
)
|
|
|
(628,489
|
)
|
Borrowings of term debt
|
|
|
14,784
|
|
|
|
311,874
|
|
Repayments and extinguishment of term debt
|
|
|
(1,821,431
|
)
|
|
|
(907,634
|
)
|
(Repayments) borrowings under other borrowings
|
|
|
(198,175
|
)
|
|
|
76,174
|
|
Proceeds from issuance of common stock, net of offering costs
|
|
|
|
|
|
|
77,075
|
|
Repurchase of common stock
|
|
|
|
|
|
|
(800
|
)
|
Proceeds from exercise of options
|
|
|
356
|
|
|
|
|
|
Payment of dividends
|
|
|
(9,718
|
)
|
|
|
(9,236
|
)
|
|
|
|
|
|
|
|
|
|
Cash used in financing activities
|
|
|
(2,330,371
|
)
|
|
|
(3,369,499
|
)
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(543,970
|
)
|
|
|
(300,745
|
)
|
Cash and cash equivalents as of beginning of period
|
|
|
1,177,020
|
|
|
|
1,338,563
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end of period
|
|
$
|
633,050
|
|
|
$
|
1,037,818
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
Noncash transactions from investing and financing activities:
|
|
|
|
|
|
|
|
|
Third-party assumption of debt
|
|
$
|
203,679
|
|
|
$
|
|
|
Assets acquired through foreclosure
|
|
|
83,978
|
|
|
|
48,660
|
|
Exchange of common stock for convertible debentures
|
|
|
|
|
|
|
61,618
|
|
See accompanying notes.
6
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
CapitalSource Inc. (CapitalSource, and together with
its subsidiaries other than CapitalSource Bank and its
subsidiaries, 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. Substantially all new loans are 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.
For the three months ended September 30, 2010, we operated
as two reportable segments: 1) CapitalSource Bank and
2) Other Commercial Finance. For the six months ended
June 30, 2010 and three and nine months ended
September 30, 2009, we operated 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, and our Other Commercial Finance segment
comprises our loan portfolio and other business activities in
the Parent Company. Our Healthcare Net Lease segment comprised
our direct real estate investment business activities, which we
exited completely with the sale of all of the assets related to
this segment.
|
|
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 the nature of an entitys continuing
exposure to the risks related to transferred financial assets.
The amendment applies to all entities and eliminates the concept
of a qualifying special-purpose entity and changes
the requirements for derecognizing
7
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 guidance changing how a reporting
entity determines when an entity referred to as a variable
interest 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 provide users of financial
statements with more transparent information about an
enterprises involvement in a variable interest entity and
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 includes entities that were
previously considered qualifying special-purpose entities, as
the concept of a qualifying special-purpose entity 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 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 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.
In March 2010, the FASB amended its guidance on derivatives and
hedging to clarify the type of embedded credit derivative that
is exempt from embedded derivative bifurcation requirements.
Only an embedded credit derivative that is related solely to the
subordination of one financial instrument to another qualifies
for the exemption. Entities that have contracts containing an
embedded credit derivative feature in a form other than such
subordination may need to separately account for the embedded
credit derivative feature. This guidance is effective in the
first interim or annual fiscal period beginning after
June 15, 2010. We adopted this guidance effective
July 1, 2010, and it did not have a material impact on our
consolidated financial statements.
In April 2010, the FASB amended its guidance on loans to clarify
that modifications of loans that are accounted for within a pool
of loans do not result in the removal of those loans from the
pool even if the modification would otherwise be considered a
troubled debt restructuring. An entity continues to be required
to consider whether the pool of assets in which the loan is
included is impaired if expected cash flows for the pool change.
Loans accounted for individually continue to be subject to the
previously issued troubled debt restructuring accounting
provisions. This guidance is effective in the first interim or
annual fiscal period ending on or after July 15, 2010 and
should be applied prospectively. We adopted this guidance
effective July 1, 2010, and it did not have a material
impact on our consolidated financial statements.
|
|
Note 3.
|
Discontinued
Operations
|
In June 2010, we completed the sale of our long-term healthcare
facilities to Omega Healthcare Investors, Inc
(Omega). As a result of these sales, we exited the
skilled nursing home ownership business. Consequently, we
8
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
have presented the financial condition and results of operations
for this business 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 condensed balance sheets as of September 30, 2010 and
December 31, 2009 for our discontinued operations were as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and restricted cash
|
|
$
|
|
|
|
$
|
19,599
|
|
Direct real estate investments, net
|
|
|
|
|
|
|
554,157
|
|
Other assets
|
|
|
|
|
|
|
50,894
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
|
|
|
$
|
624,650
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Mortgage debt
|
|
$
|
|
|
|
$
|
447,683
|
|
Notes payable
|
|
|
|
|
|
|
20,000
|
|
Other liabilities
|
|
|
|
|
|
|
59,545
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
|
|
|
$
|
527,228
|
|
|
|
|
|
|
|
|
|
|
The condensed statements of operations for the three and nine
months ended September 30, 2010 and 2009 for our
discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease income
|
|
$
|
|
|
|
$
|
27,247
|
|
|
$
|
28,750
|
|
|
$
|
82,533
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
3,014
|
|
|
|
15,183
|
|
|
|
9,298
|
|
Depreciation
|
|
|
|
|
|
|
8,713
|
|
|
|
2,540
|
|
|
|
26,515
|
|
General and administrative
|
|
|
|
|
|
|
202
|
|
|
|
1,481
|
|
|
|
1,195
|
|
Other expense
|
|
|
|
|
|
|
3,730
|
|
|
|
57
|
|
|
|
4,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
|
|
|
|
15,659
|
|
|
|
19,261
|
|
|
|
41,022
|
|
Gain from sale of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
21,696
|
|
|
|
2,499
|
|
Income tax expense
|
|
|
|
|
|
|
1,104
|
|
|
|
|
|
|
|
4,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to discontinued operations
|
|
$
|
|
|
|
$
|
10,484
|
|
|
$
|
31,185
|
|
|
$
|
39,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 4.
|
Cash and
Cash Equivalents and Restricted Cash
|
As of September 30, 2010 and December 31, 2009, our
cash and cash equivalents and restricted cash balances were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Unrestricted
|
|
|
Restricted
|
|
|
Unrestricted
|
|
|
Restricted
|
|
|
|
($ in thousands)
|
|
|
Cash and cash equivalents and restricted cash from continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks(1)
|
|
$
|
399,623
|
|
|
$
|
49,208
|
|
|
$
|
566,711
|
|
|
$
|
24,575
|
|
Interest-bearing deposits in other banks(2)
|
|
|
6,490
|
|
|
|
5,272
|
|
|
|
16,331
|
|
|
|
7,012
|
|
Other short-term investments(3)
|
|
|
226,937
|
|
|
|
67,074
|
|
|
|
418,176
|
|
|
|
136,881
|
|
Investment securities(4)
|
|
|
|
|
|
|
|
|
|
|
169,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents and restricted cash from
continuing operations
|
|
|
633,050
|
|
|
|
121,554
|
|
|
|
1,171,195
|
|
|
|
168,468
|
|
Cash and cash equivalents and restricted cash from discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
|
|
|
|
|
|
|
|
5,825
|
|
|
|
13,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents and restricted cash
|
|
$
|
633,050
|
|
|
$
|
121,554
|
|
|
$
|
1,177,020
|
|
|
$
|
182,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes principal and interest collections, including those
related to loans held by securitization trusts or pledged to
credit facilities. A portion of these collections are invested
in money market funds that invest primarily in U.S. Treasury
securities. Cash and due from banks for CapitalSource Bank were
$152.7 million and $235.6 million as of
September 30, 2010 and December 31, 2009,
respectively. Included in these balances for CapitalSource Bank
were $72.6 million and $119.1 million in deposits at
the Federal Reserve Bank (FRB) as of
September 30, 2010 and December 31, 2009,
respectively. As of September 30, 2010, $14.3 million
of the cash and due from banks for CapitalSource Bank were
restricted. As of December 31, 2009, no cash and due from
banks were restricted. |
|
(2) |
|
Represents principal and interest collections on loan assets
pledged to credit facilities. |
|
(3) |
|
Represents principal and interest collections, including those
related to loans 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 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
$170.0 million as of December 31, 2009 issued by the
Federal Home Loan Bank System (FHLB) of
San Francisco (FHLB SF), Fannie Mae or Freddie
Mac. These investments had a remaining weighted average maturity
of 61 days as of December 31, 2009. We did not hold
any such investment securities as of September 30, 2010. |
|
|
Note 5.
|
Commercial
Lending Assets and Credit Quality
|
As of September 30, 2010 and December 31, 2009, our
commercial lending assets had an outstanding balance of
$6.6 billion and $8.8 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
September 30, 2010 and December 31, 2009, interest and
fee receivables totaled $56.9 million and
$83.3 million, respectively.
10
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Commercial
Real Estate A Participation Interest
As of September 30, 2010, the carrying value of the
A Participation Interest was $5.4 million,
representing our share of a $2.4 billion pool of commercial
real estate loans and related assets. The A
Participation Interest was fully paid off in October 2010.
The activity with respect to the A Participation
Interest for the nine months ended September 30, 2010 was
as follows ($ in thousands):
|
|
|
|
|
A Participation Interest as of December 31, 2009
|
|
$
|
530,560
|
|
Principal payments
|
|
|
(534,675
|
)
|
Discount accretion
|
|
|
9,524
|
|
|
|
|
|
|
A Participation Interest as of September 30,
2010
|
|
$
|
5,409
|
|
|
|
|
|
|
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. During the
three and nine months ended September 30, 2010, we
recognized $1.7 million and $12.9 million,
respectively, in interest income (including accretion) on the
A Participation Interest, and during the three and
nine months ended September 30, 2009, we recognized
$10.7 million and $35.3 million, respectively, in
interest income (including accretion) on the A
Participation Interest.
As of September 30, 2010 and December 31, 2009, 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 and
nine months ended September 30, 2010, we recognized net
pre-tax losses on the sale of loans of $3.8 million. During
the three and nine months ended September 30, 2009, we
recognized a net pre-tax loss of $7.7 million and
$10.7 million, respectively, on the sale of loans.
Our analysis to determine when to sell a loan is performed on a
loan-by-loan
basis and considers several factors, including the credit
quality of the loan, any financing secured by the loan and any
requirements related to the release of liens and use of sales
proceeds, the potential sale price relative to our loan
valuation, our liquidity needs, and the resources necessary to
ensure an adequate recovery if we continued to hold the loan.
When our analysis indicates that the proper strategy is to sell
a loan, we initiate the sale process and designate the loan as
held for sale.
During the three months ended September 30, 2010, we
transferred loans held for investment with a carrying value of
$40.1 million, including impaired loans with a carrying
value of $37.2 million, to loans held for sale based on
managements intent with respect to the loans, resulting in
$1.2 million in losses due to valuation adjustments and
$0.9 million in additional provision for loan losses,
respectively. We also reclassified $49.5 million of loans
from held for sale to held for investment during the three
months ended September 30, 2010.
During the nine months ended September 30, 2010, we
transferred loans held for investment with a carrying value of
$132.9 million to loans held for sale, including impaired
loans with a carrying value of $92.3 million, which were
transferred based on our decision to sell these loans as part of
an overall workout strategy and loans with a carrying value of
$31.8 million, which were transferred as part of a sale of
loan participations to a third party in conjunction with the
transaction surrounding the
2006-A term
debt securitization (the
2006-A
Trust). These transfers resulted in $8.7 million in
losses due to valuation adjustments and $4.0 million in
additional provision for loan losses, respectively, for the nine
months ended September 30, 2010.
11
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We recorded no fair value write-downs on non-accrual loans held
for sale during the three months ended September 30, 2010
and 2009, and we recorded $5.6 million and $21,000 of fair
value write-downs on non-accrual loans held for sale during the
nine months ended September 30, 2010 and 2009, respectively.
Loans
Held for Investment
Loans held for investment are recorded at the principal amount
outstanding, net of deferred loan costs or fees and any
discounts received or premiums paid on purchased loans. We
maintain an allowance for loan losses for loans held for
investment, which is calculated based on managements
estimate of incurred loan losses inherent in our loan portfolio
as of the balance sheet date. Activity in the allowance for loan
losses related to our loans held for investment for the three
and nine months ended September 30, 2010 and 2009,
respectively, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Balance as of beginning of period
|
|
$
|
578,633
|
|
|
$
|
447,728
|
|
|
$
|
586,696
|
|
|
$
|
423,844
|
|
Charge offs
|
|
|
(59,861
|
)
|
|
|
(111,273
|
)
|
|
|
(296,663
|
)
|
|
|
(409,042
|
)
|
Recoveries
|
|
|
275
|
|
|
|
|
|
|
|
578
|
|
|
|
11,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs(1)
|
|
|
(59,586
|
)
|
|
|
(111,273
|
)
|
|
|
(296,085
|
)
|
|
|
(397,538
|
)
|
Charge offs upon transfer to held for sale
|
|
|
(26,042
|
)
|
|
|
(23,400
|
)
|
|
|
(41,808
|
)
|
|
|
(23,400
|
)
|
Deconsolidation of
2006-A Trust
|
|
|
(138,134
|
)
|
|
|
|
|
|
|
(138,134
|
)
|
|
|
|
|
Provision for loan losses
|
|
|
38,771
|
|
|
|
204,350
|
|
|
|
282,973
|
|
|
|
514,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of period
|
|
$
|
393,642
|
|
|
$
|
517,405
|
|
|
$
|
393,642
|
|
|
$
|
517,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $11.4 million and $17.5 million, respectively
in charge offs related to loans in the 2006-A Trust for the
three and nine months ended September 30, 2009 and
$68.8 million in charge offs related to loans in the
2006-A Trust
for the nine months ended September 30, 2010. |
Non-performing
Loans
The outstanding unpaid principal balances of non-performing
loans in our loan portfolio as of September 30, 2010 and
December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Non-accrual loans(1)
|
|
$
|
787,864
|
|
|
$
|
1,068,085
|
|
Accruing loans contractually past-due 90 days or more(2)
|
|
|
8,286
|
|
|
|
66,993
|
|
Troubled debt restructurings(3)(4)
|
|
|
218,793
|
|
|
|
111,743
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans(3)
|
|
$
|
1,014,943
|
|
|
$
|
1,246,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $207.7 million of loans held in the
2006-A Trust
as of December 31, 2009. |
|
(2) |
|
Includes $5.0 million of loans held in the
2006-A Trust
as of December 31, 2009. |
|
(3) |
|
Includes $14.8 million of loans held in the
2006-A Trust
as of December 31, 2009. |
|
(4) |
|
Excludes non-accrual loans and accruing loans contractually
past-due 90 days or more. |
Of our non-accrual loans, $35.1 million were
30-89 days
delinquent and $354.3 million were over 90 days
delinquent as of September 30, 2010, and
$182.5 million were
30-89 days
delinquent and $388.5 million were over 90 days
delinquent as of December 31, 2009. Accruing loans
30-89 days
delinquent were $21.7 million and $95.3 million as of
September 30, 2010 and December 31, 2009, respectively.
12
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
September 30, 2010 and December 31, 2009, the carrying
value of impaired loans was $283.9 million and
$597.4 million, respectively, net of allocated reserves of
$79.1 million and $116.5 million, respectively.
Included in these loans as of December 31, 2009 was
$223.0 million related to the 2006-A Trust. As of
September 30, 2010 and December 31, 2009, we had loans
with a carrying value of $597.3 million and
$517.1 million, respectively, 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. Included in these loans as of
December 31, 2009 was $18.2 million related to the
2006-A Trust.
The average balances of impaired loans during the three and nine
months ended September 30, 2010 were $1.2 billion, and
were $1.2 billion and $1.0 billion, respectively,
during the three and nine months ended September 30, 2009.
The total amounts of interest income that were recognized on
impaired loans during the three and nine months ended
September 30, 2010 were $4.9 million and
$15.7 million, respectively, and were $10.8 million
and $25.4 million, respectively, during the three and nine
months ended September 30, 2009. The amounts of cash basis
interest income that were recognized on impaired loans during
the three and nine months ended September 30, 2010 were
$0.1 million and $0.4 million, respectively. There was
no cash basis interest income recognized on impaired loans
during the three and nine months ended September 30, 2009.
If the non-accrual loans had performed in accordance with their
original terms, interest income would have been increased by
$32.1 million and $111.5 million, respectively, for
the three and nine months ended September 30, 2010, and
$33.7 million and $85.6 million, respectively, for the
three and nine months ended September 30, 2009.
Troubled
Debt Restructurings
During the three and nine months ended September 30, 2010,
loans with an aggregate carrying value, which includes
principal, deferred fees and accrued interest, of
$278.4 million and $840.3 million, respectively, as of
their respective restructuring dates, were involved in troubled
debt restructurings (TDRs). During the three and
nine months ended September 30, 2009, loans with an
aggregate carrying value of $427.7 million and
$795.1 million, respectively, as of their respective
restructuring dates, were involved in TDRs. Loans involved in
these troubled debt restructurings are assessed as impaired,
generally for a period of at least one year following the
restructuring. A loan that has been involved in a TDR might no
longer be assessed as impaired one year subsequent to the
restructuring, assuming the loan performs under the restructured
terms and the restructured terms were at market. As of
September 30, 2010 and December 31, 2009, all of our
loans that were restructured in TDRs were classified as impaired
loans.
The carrying values of loans that had been restructured in TDRs
as of September 30, 2010 and December 31, 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Non-accrual
|
|
$
|
358,715
|
|
|
$
|
314,526
|
|
Accruing
|
|
|
218,143
|
|
|
|
111,880
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
576,858
|
|
|
$
|
426,406
|
|
|
|
|
|
|
|
|
|
|
We recorded charge offs related to these restructured loans of
$30.8 million and $125.5 million, respectively, for
the three and nine months ended September 30, 2010.
For a loan that accrues interest immediately after that loan is
restructured in a TDR, we generally do not charge off a portion
of the loan as part of the restructuring. If a portion of a loan
has been charged off, we will not accrue interest on the
remaining portion of the loan if the charged off portion is
still contractually due from the borrower. However, if the
charged off portion of the loan is legally forgiven through
concessions to the borrower, then the restructured loan may be
placed on accrual status if the remaining contractual amounts
due on the loan are reasonably assured of collection. In
addition, for certain TDRs, especially those involving a
commercial real estate
13
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
loan, we may split the loan into a performing A note and a B
note, placing the A note on accrual and charging off the B note.
For an amortizing loan with monthly payments, the borrower is
required to demonstrate sustained payment performance for a
minimum of six months to return a non-accrual restructured loan
to accrual status.
Our evaluation of whether collection of interest and principal
is reasonably assured is based on the facts and circumstances of
each individual borrower and our assessment of the
borrowers ability and intent to repay in accordance with
the revised loan terms. We generally consider such factors as
historical operating performance and payment history of the
borrower, indications of support by sponsors and other interest
holders, the terms of the modified loan, the value of any
collateral securing the loan and projections of future
performance of the borrower.
The allocated reserves for loans that were involved in TDRs were
$35.4 million and $25.1 million as of
September 30, 2010 and December 31, 2009, respectively.
Pledged
Loans
As of September 30, 2010, CapitalSource Bank had loans held
for investment with an unpaid principal balance of
$52.6 million pledged to the FHLB as collateral for its
financing facility. There were no loans pledged as of
December 31, 2009.
Foreclosed
Assets
Real
Estate Owned (REO)
When we foreclose on a real estate asset that collateralizes a
loan, we record the asset at its estimated fair value less
estimated costs to sell at the time of foreclosure if the
related REO is classified as held for sale. Upon foreclosure, we
evaluate the assets fair value as compared to the
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 net expense of real estate
owned and other foreclosed assets in our consolidated statements
of operations. REO that does not meet the criteria of held for
sale is classified as held for use and initially recorded at its
fair value. The real estate asset is subsequently depreciated
over its estimated useful life. Fair value adjustments on REO
held for use are recorded only if the carrying amount of an
asset is not recoverable and exceeds its fair value. We estimate
fair value at the assets liquidation value, based on
market conditions.
As of September 30, 2010 and December 31, 2009, we had
$79.5 million and $101.4 million, respectively, of REO
classified as held for sale, which was recorded in other assets
in our consolidated balance sheets. Activity in REO held for
sale for the three and nine months ended September 30, 2010
and 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Balance as of beginning of period
|
|
$
|
138,950
|
|
|
$
|
95,149
|
|
|
$
|
101,401
|
|
|
$
|
84,437
|
|
Acquired in business combination
|
|
|
|
|
|
|
|
|
|
|
2,014
|
|
|
|
|
|
Transfers from loans held for investment
|
|
|
11,085
|
|
|
|
11,150
|
|
|
|
89,416
|
|
|
|
47,873
|
|
Fair value adjustments
|
|
|
(2,670
|
)
|
|
|
(2,298
|
)
|
|
|
(29,904
|
)
|
|
|
(18,923
|
)
|
Transfers from REO held for use
|
|
|
|
|
|
|
|
|
|
|
2,850
|
|
|
|
|
|
Transfers from property held for investment
|
|
|
|
|
|
|
(11,260
|
)
|
|
|
|
|
|
|
(11,260
|
)
|
Real estate sold
|
|
|
(67,849
|
)
|
|
|
(25,687
|
)
|
|
|
(86,261
|
)
|
|
|
(35,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of period
|
|
$
|
79,516
|
|
|
$
|
67,054
|
|
|
$
|
79,516
|
|
|
$
|
67,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2010,
we recognized gains of $3.9 million and $2.5 million,
respectively, on the sales of REO held for sale as a component
of net expense of real estate owned and other foreclosed assets
in our consolidated statements of operations. During the three
and nine months ended September 30, 2009, we recognized a
gain of $1.5 million and a loss of $0.3 million,
respectively, on the sales of REO as a component of net expense
of real estate owned and other foreclosed assets in our
consolidated statements of operations.
14
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of September 30, 2010 and December 31, 2009, we had
$1.4 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 and nine
months ended September 30, 2010, we recognized impairment
losses of $2.7 million and $12.9 million,
respectively, on REO held for use as a component of net expense
of real estate owned and other foreclosed assets in our
consolidated statements of operations. We did not record any
impairment on REO held for use during the three and nine months
ended September 30, 2009.
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. As of September 30, 2010 and
December 31, 2009, we had $65.7 million and
$127.2 million, respectively, of loans acquired through
foreclosure, net of valuation allowances of $6.2 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 $1.2 million and
$40.1 million related to loans acquired through foreclosure
as a component of net expense of real estate owned and other
foreclosed assets in our consolidated statements of operations
for the three and nine months ended September 30, 2010. We
did not record a provision for loan receivables losses related
to loans acquired through foreclosure for the three and nine
months ended September 30, 2009. We did not record any such
valuation adjustments for the three and nine months ended
September 30, 2009.
Investment
Securities,
Available-for-Sale
As of September 30, 2010 and December 31, 2009, our
investment securities,
available-for-sale
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency discount notes
|
|
$
|
264,767
|
|
|
$
|
99
|
|
|
$
|
(1
|
)
|
|
$
|
264,865
|
|
|
$
|
49,988
|
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
49,996
|
|
Agency callable notes
|
|
|
175,100
|
|
|
|
969
|
|
|
|
|
|
|
|
176,069
|
|
|
|
252,175
|
|
|
|
143
|
|
|
|
(1,788
|
)
|
|
|
250,530
|
|
Agency debt
|
|
|
104,480
|
|
|
|
1,112
|
|
|
|
(35
|
)
|
|
|
105,557
|
|
|
|
24,430
|
|
|
|
315
|
|
|
|
(273
|
)
|
|
|
24,472
|
|
Agency MBS
|
|
|
697,465
|
|
|
|
19,623
|
|
|
|
(30
|
)
|
|
|
717,058
|
|
|
|
412,853
|
|
|
|
5,999
|
|
|
|
(462
|
)
|
|
|
418,390
|
|
Non-agency MBS
|
|
|
140,029
|
|
|
|
2,847
|
|
|
|
(701
|
)
|
|
|
142,175
|
|
|
|
152,913
|
|
|
|
1,031
|
|
|
|
(669
|
)
|
|
|
153,275
|
|
Equity securities
|
|
|
201
|
|
|
|
3
|
|
|
|
|
|
|
|
204
|
|
|
|
51,074
|
|
|
|
2,246
|
|
|
|
(336
|
)
|
|
|
52,984
|
|
Corporate debt
|
|
|
8,606
|
|
|
|
152
|
|
|
|
(3,608
|
)
|
|
|
5,150
|
|
|
|
12,349
|
|
|
|
877
|
|
|
|
(3,608
|
)
|
|
|
9,618
|
|
Collateralized loan obligations
|
|
|
13,848
|
|
|
|
|
|
|
|
|
|
|
|
13,848
|
|
|
|
1,018
|
|
|
|
308
|
|
|
|
|
|
|
|
1,326
|
|
U.S. Treasury and agency securities
|
|
|
120,576
|
|
|
|
340
|
|
|
|
(4
|
)
|
|
|
120,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,525,072
|
|
|
$
|
25,145
|
|
|
$
|
(4,379
|
)
|
|
$
|
1,545,838
|
|
|
$
|
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 and
agency securities.
15
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amortized costs and estimated fair values of investment
securities,
available-for-sale
that CapitalSource Bank pledged to FHLB, FRB and a
non-government correspondent bank, as of September 30, 2010
and December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
FHLB
|
|
$
|
816,566
|
|
|
$
|
838,402
|
|
|
$
|
781,747
|
|
|
$
|
786,425
|
|
FRB
|
|
|
42,251
|
|
|
|
41,820
|
|
|
|
17,979
|
|
|
|
18,076
|
|
Non-government Correspondent Bank(1)
|
|
|
37,950
|
|
|
|
37,975
|
|
|
|
|
|
|
|
|
|
Government Agency(2)
|
|
|
38,448
|
|
|
|
39,408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
935,215
|
|
|
|
957,605
|
|
|
|
799,726
|
|
|
|
804,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the amounts CapitalSource Bank pledged as collateral
for letters of credit and foreign exchange contracts. |
|
(2) |
|
Represents the amounts CapitalSource Bank pledged as collateral
to secure funds deposited by a local government agency. |
During the three and nine months ended September 30, 2010,
we sold investment securities,
available-for-sale
for $40.0 million and $79.5 million, respectively,
recognizing net pre-tax gains of $4.3 million and
$5.9 million, respectively. During the three and nine
months ended September 30, 2009, we sold investment
securities,
available-for-sale
for $28.4 million and $46.5 million, respectively,
recognizing net pre-tax gains of $63,000 and $0.5 million,
respectively.
We recorded no
other-than-temporary
impairments (OTTI) during the three months ended
September 30, 2010, and $0.3 million in OTTI during
the nine months ended September 30, 2010, as a component of
gain (loss) on investments, net in our consolidated statements
of operations. During the three and nine months ended
September 30, 2009, we recorded OTTI of $0.4 million
and $13.5 million, respectively, related to the fair values
of our collateralized loan obligation and corporate debt as a
component of gain (loss) on investments, net in our consolidated
statements of operations.
During the three and nine months ended September 30, 2010,
we recognized $1.0 million and $7.5 million,
respectively, 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.
Investment
Securities,
Held-to-Maturity
As of September 30, 2010, and December 31, 2009, the
amortized cost of investment securities,
held-to-maturity,
was $208.2 million and $242.1 million, respectively
and consisted of AAA-rated commercial mortgage-backed securities
held by CapitalSource Bank. The amortized costs and estimated
fair values of the investment securities,
held-to-maturity,
that CapitalSource Bank pledged to FHLB SF and FRB as of
September 30, 2010 and December 31, 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
($ in thousands)
|
|
|
FHLB
|
|
$
|
43,780
|
|
|
$
|
45,449
|
|
|
$
|
68,351
|
|
|
$
|
70,330
|
|
FRB
|
|
|
154,816
|
|
|
|
168,516
|
|
|
|
173,702
|
|
|
|
191,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
198,596
|
|
|
|
213,965
|
|
|
|
242,053
|
|
|
|
262,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Unrealized
Losses on Investment Securities
As of September 30, 2010 and December 31, 2009, the
gross unrealized losses and fair values of investment securities
that were in unrealized loss positions were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
|
($ in thousands)
|
|
|
As of September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities,
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency discount notes
|
|
$
|
(1
|
)
|
|
$
|
42,471
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1
|
)
|
|
$
|
42,471
|
|
Agency debt
|
|
|
|
|
|
|
|
|
|
|
(35
|
)
|
|
|
6,295
|
|
|
|
(35
|
)
|
|
|
6,295
|
|
Agency MBS
|
|
|
(30
|
)
|
|
|
18,011
|
|
|
|
|
|
|
|
|
|
|
|
(30
|
)
|
|
|
18,011
|
|
Non-agency MBS
|
|
|
(701
|
)
|
|
|
30,888
|
|
|
|
|
|
|
|
|
|
|
|
(701
|
)
|
|
|
30,888
|
|
Corporate debt
|
|
|
(3,608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,608
|
)
|
|
|
|
|
U.S. Treasury and agency securities
|
|
|
(4
|
)
|
|
|
29,974
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
29,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities,
Available-for-Sale
|
|
$
|
(4,344
|
)
|
|
$
|
121,344
|
|
|
$
|
(35
|
)
|
|
$
|
6,295
|
|
|
$
|
(4,379
|
)
|
|
$
|
127,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities,
Held-to-Maturity(1)
|
|
$
|
(96
|
)
|
|
$
|
9,892
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(96
|
)
|
|
$
|
9,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities,
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Investment Securities,
Available-for-Sale
|
|
$
|
(6,527
|
)
|
|
$
|
307,383
|
|
|
$
|
(609
|
)
|
|
$
|
15,345
|
|
|
$
|
(7,136
|
)
|
|
$
|
322,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities,
Held-to-Maturity(1)
|
|
$
|
(143
|
)
|
|
$
|
9,990
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(143
|
)
|
|
$
|
9,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of AAA-rated commercial mortgage-backed securities held
by CapitalSource Bank. |
Securities in unrealized loss positions are analyzed
individually as part of our ongoing assessment of OTTI, and we
do not believe that any unrealized losses in our portfolio as of
September 30, 2010 and December 31, 2009 represent an
OTTI. The losses are primarily related to non-agency MBS and
corporate debt securities and are attributable to fluctuations
in their market prices due to current market conditions. As of
September 30, 2010, our unrealized losses primarily relate
to nine non-agency MBS and one corporate debt security. Each
non-agency MBS with unrealized losses as of September 30,
2010 was investment grade and had a credit coverage ratio that
exceeds 8x, which is the minimum required for purchases of this
type of security. For the corporate debt security that has an
unrealized loss as of September 30, 2010, financial
projections indicate that the issuer will have sufficient
liquidity to service upcoming scheduled principal and interest
payments to us. We have the ability and the intention to hold
these securities until their fair values recover to cost or
maturity.
17
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Contractual
Maturities
As of September 30, 2010, the contractual maturities of our
available-for-sale
and
held-to-maturity
investment securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities,
|
|
|
Investments 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
|
|
$
|
414,474
|
|
|
$
|
414,654
|
|
|
$
|
|
|
|
$
|
|
|
Due after one year through five years
|
|
|
225,676
|
|
|
|
227,645
|
|
|
|
25,880
|
|
|
|
30,695
|
|
Due after five years through ten years(1)
|
|
|
102,386
|
|
|
|
101,859
|
|
|
|
|
|
|
|
|
|
Due after ten years(2)(3)
|
|
|
782,536
|
|
|
|
801,680
|
|
|
|
182,342
|
|
|
|
192,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,525,072
|
|
|
$
|
1,545,838
|
|
|
$
|
208,222
|
|
|
$
|
223,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Agency and Non-agency MBS, including CMBS, with fair
values of $33.8 million and $52.9 million,
respectively, and weighted-average expected maturities of
approximately 2.24 years and 2.90 years, respectively,
based on interest rates and expected prepayment speeds as of
September 30, 2010. |
|
(2) |
|
Includes Agency and Non-agency MBS, including CMBS, with fair
values of $677.4 million and $282.1 million,
respectively, and weighted-average expected maturities of
approximately 3.47 years and 1.35 years, respectively,
based on interest rates and expected prepayment speeds as of
September 30, 2010. |
|
(3) |
|
Includes securities with no stated maturity. |
Other
Investments
As of September 30, 2010 and December 31, 2009, our
other investments were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Investments carried at cost
|
|
$
|
37,046
|
|
|
$
|
53,205
|
|
Investments carried at fair value
|
|
|
648
|
|
|
|
1,392
|
|
Investments accounted for under the equity method
|
|
|
44,832
|
|
|
|
41,920
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
82,526
|
|
|
$
|
96,517
|
|
|
|
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2010,
we sold other investments for $16.9 million and
$42.4 million, respectively, recognizing net pre-tax gains
of $13.7 million and $27.2 million, respectively. For
the three and nine months ended September 30, 2009, we sold
other investments for $10.6 million and $23.2 million,
respectively, recognizing a net pre-tax gain of
$0.7 million and a net pre-tax loss of $2.4 million,
respectively. During the three and nine months ended
September 30, 2010, we recorded OTTI of $0.5 million
and $2.7 million, respectively, relating to our investments
carried at cost. During the three and nine months ended
September 30, 2009, we recorded OTTI of $6.8 million
and $11.4 million, respectively, relating to our
investments carried at cost.
18
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 7.
|
Guarantor
Information
|
The following represents the supplemental consolidating
condensed financial information as of September 30, 2010
and December 31, 2009 and for the three and nine months
ended September 30, 2010 and 2009 of (i) CapitalSource
Inc., which as discussed in Note 10, Borrowings, is
the issuer of our 2014 Senior Secured Notes, as well as our
Senior Debentures and Subordinated Debentures (together, the
Debentures), (ii) CapitalSource Finance LLC
(CapitalSource Finance), which is a guarantor of our
2014 Senior Secured Notes and the Debentures, and (iii) our
subsidiaries that are not guarantors of the 2014 Senior Secured
Notes or the Debentures. CapitalSource Finance, a wholly owned
indirect subsidiary of CapitalSource Inc., has guaranteed our
2014 Senior Secured Notes and the Senior Debentures, fully and
unconditionally, on a senior basis and has guaranteed the
Subordinated Debentures, fully and unconditionally, on a senior
subordinate basis. Separate consolidated financial statements of
the guarantor are not presented, as we have determined that they
would not be material to investors.
19
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Balance Sheet
September 30, 2010
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource
|
|
|
Non-Guarantor
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
CapitalSource
|
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Inc.
|
|
|
|
($ in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
60,767
|
|
|
$
|
349,181
|
|
|
$
|
133,862
|
|
|
$
|
89,240
|
|
|
$
|
|
|
|
$
|
633,050
|
|
Restricted cash
|
|
|
|
|
|
|
22,138
|
|
|
|
97,595
|
|
|
|
1,821
|
|
|
|
|
|
|
|
121,554
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value
|
|
|
|
|
|
|
1,531,784
|
|
|
|
|
|
|
|
14,054
|
|
|
|
|
|
|
|
1,545,838
|
|
Held-to-maturity,
at amortized cost
|
|
|
|
|
|
|
208,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
|
|
|
|
1,740,006
|
|
|
|
|
|
|
|
14,054
|
|
|
|
|
|
|
|
1,754,060
|
|
Commercial real estate Aparticipation interest, net
|
|
|
|
|
|
|
5,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,409
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
|
|
|
|
34,156
|
|
|
|
2,823
|
|
|
|
|
|
|
|
|
|
|
|
36,979
|
|
Loans held for investment
|
|
|
|
|
|
|
5,183,832
|
|
|
|
324,015
|
|
|
|
1,082,881
|
|
|
|
|
|
|
|
6,590,728
|
|
Less deferred loan fees and discounts
|
|
|
|
|
|
|
(86,513
|
)
|
|
|
14,227
|
|
|
|
(19,026
|
)
|
|
|
(27,099
|
)
|
|
|
(118,411
|
)
|
Less allowance for loan losses
|
|
|
|
|
|
|
(246,604
|
)
|
|
|
(38,669
|
)
|
|
|
(108,369
|
)
|
|
|
|
|
|
|
(393,642
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for investment, net
|
|
|
|
|
|
|
4,850,715
|
|
|
|
299,573
|
|
|
|
955,486
|
|
|
|
(27,099
|
)
|
|
|
6,078,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
|
|
|
|
4,884,871
|
|
|
|
302,396
|
|
|
|
955,486
|
|
|
|
(27,099
|
)
|
|
|
6,115,654
|
|
Interest receivable
|
|
|
|
|
|
|
29,999
|
|
|
|
4,330
|
|
|
|
27,413
|
|
|
|
|
|
|
|
61,742
|
|
Investment in subsidiaries
|
|
|
2,375,865
|
|
|
|
4,065
|
|
|
|
1,568,562
|
|
|
|
1,519,766
|
|
|
|
(5,468,258
|
)
|
|
|
|
|
Intercompany receivable
|
|
|
375,000
|
|
|
|
9
|
|
|
|
145,641
|
|
|
|
305,009
|
|
|
|
(825,659
|
)
|
|
|
|
|
Other investments
|
|
|
|
|
|
|
57,872
|
|
|
|
14,377
|
|
|
|
10,277
|
|
|
|
|
|
|
|
82,526
|
|
Goodwill
|
|
|
|
|
|
|
173,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173,135
|
|
Other assets
|
|
|
91,654
|
|
|
|
216,139
|
|
|
|
150,649
|
|
|
|
286,431
|
|
|
|
(140,296
|
)
|
|
|
604,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,903,286
|
|
|
$
|
7,482,824
|
|
|
$
|
2,417,412
|
|
|
$
|
3,209,497
|
|
|
$
|
(6,461,312
|
)
|
|
$
|
9,551,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
|
|
|
$
|
4,627,206
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,627,206
|
|
Credit facilities
|
|
|
|
|
|
|
76,348
|
|
|
|
|
|
|
|
1,902
|
|
|
|
|
|
|
|
78,250
|
|
Term debt
|
|
|
284,991
|
|
|
|
860,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,145,638
|
|
Other borrowings
|
|
|
533,978
|
|
|
|
300,000
|
|
|
|
440,898
|
|
|
|
|
|
|
|
|
|
|
|
1,274,876
|
|
Other liabilities
|
|
|
15,262
|
|
|
|
125,729
|
|
|
|
126,378
|
|
|
|
250,234
|
|
|
|
(161,063
|
)
|
|
|
356,540
|
|
Intercompany payable
|
|
|
|
|
|
|
46,850
|
|
|
|
305,009
|
|
|
|
454,915
|
|
|
|
(806,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
834,231
|
|
|
|
6,036,780
|
|
|
|
872,285
|
|
|
|
707,051
|
|
|
|
(967,837
|
)
|
|
|
7,482,510
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
3,233
|
|
|
|
921,000
|
|
|
|
|
|
|
|
|
|
|
|
(921,000
|
)
|
|
|
3,233
|
|
Additional paid-in capital
|
|
|
3,918,601
|
|
|
|
143,204
|
|
|
|
537,993
|
|
|
|
2,598,748
|
|
|
|
(3,279,775
|
)
|
|
|
3,918,771
|
|
(Accumulated deficit) retained earnings
|
|
|
(1,873,341
|
)
|
|
|
363,242
|
|
|
|
984,313
|
|
|
|
(111,009
|
)
|
|
|
(1,236,574
|
)
|
|
|
(1,873,369
|
)
|
Accumulated other comprehensive income, net
|
|
|
20,562
|
|
|
|
18,598
|
|
|
|
22,821
|
|
|
|
14,709
|
|
|
|
(56,128
|
)
|
|
|
20,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CapitalSource Inc. shareholders equity
|
|
|
2,069,055
|
|
|
|
1,446,044
|
|
|
|
1,545,127
|
|
|
|
2,502,448
|
|
|
|
(5,493,477
|
)
|
|
|
2,069,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,069,055
|
|
|
|
1,446,044
|
|
|
|
1,545,127
|
|
|
|
2,502,446
|
|
|
|
(5,493,475
|
)
|
|
|
2,069,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
2,903,286
|
|
|
$
|
7,482,824
|
|
|
$
|
2,417,412
|
|
|
$
|
3,209,497
|
|
|
$
|
(6,461,312
|
)
|
|
$
|
9,551,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
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
|
|
|
$
|
45,772
|
|
|
$
|
|
|
|
$
|
1,171,195
|
|
Restricted cash
|
|
|
|
|
|
|
72,754
|
|
|
|
58,250
|
|
|
|
37,464
|
|
|
|
|
|
|
|
168,468
|
|
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
|
|
|
|
247,119
|
|
|
|
2,710,500
|
|
|
|
(6
|
)
|
|
|
8,281,570
|
|
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
|
|
|
|
159,891
|
|
|
|
2,448,313
|
|
|
|
(19,900
|
)
|
|
|
7,548,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
|
|
|
|
4,960,241
|
|
|
|
160,561
|
|
|
|
2,448,313
|
|
|
|
(19,900
|
)
|
|
|
7,549,215
|
|
Interest receivable
|
|
|
|
|
|
|
14,143
|
|
|
|
69,548
|
|
|
|
3,956
|
|
|
|
|
|
|
|
87,647
|
|
Investment in subsidiaries
|
|
|
2,716,099
|
|
|
|
10,702
|
|
|
|
1,522,375
|
|
|
|
1,347,149
|
|
|
|
(5,596,325
|
)
|
|
|
|
|
Intercompany 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
|
|
|
|
395,024
|
|
|
|
(131,305
|
)
|
|
|
656,994
|
|
Assets of discontinued operations, held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
624,650
|
|
|
|
|
|
|
|
624,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,253,416
|
|
|
$
|
7,954,450
|
|
|
$
|
2,333,519
|
|
|
$
|
5,295,127
|
|
|
$
|
(6,575,462
|
)
|
|
$
|
12,261,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
1,204,074
|
|
Other liabilities
|
|
|
32,328
|
|
|
|
129,604
|
|
|
|
148,568
|
|
|
|
198,951
|
|
|
|
(146,158
|
)
|
|
|
363,293
|
|
Intercompany payable
|
|
|
|
|
|
|
46,850
|
|
|
|
319,249
|
|
|
|
447,730
|
|
|
|
(813,829
|
)
|
|
|
|
|
Liabilities of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
527,228
|
|
|
|
|
|
|
|
527,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,070,250
|
|
|
|
6,566,355
|
|
|
|
967,251
|
|
|
|
2,433,922
|
|
|
|
(959,987
|
)
|
|
|
10,077,791
|
|
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, 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
|
|
|
$
|
2,333,519
|
|
|
$
|
5,295,127
|
|
|
$
|
(6,575,462
|
)
|
|
$
|
12,261,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Operations
Three Months Ended September 30, 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
|
|
$
|
10,193
|
|
|
$
|
104,084
|
|
|
$
|
15,294
|
|
|
$
|
22,882
|
|
|
$
|
(16,387
|
)
|
|
$
|
136,066
|
|
Investment securities
|
|
|
|
|
|
|
14,429
|
|
|
|
30
|
|
|
|
149
|
|
|
|
|
|
|
|
14,608
|
|
Other
|
|
|
|
|
|
|
299
|
|
|
|
2
|
|
|
|
1
|
|
|
|
|
|
|
|
302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
10,193
|
|
|
|
118,812
|
|
|
|
15,326
|
|
|
|
23,032
|
|
|
|
(16,387
|
)
|
|
|
150,976
|
|
Fee income
|
|
|
|
|
|
|
3,804
|
|
|
|
1,203
|
|
|
|
1,814
|
|
|
|
|
|
|
|
6,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
10,193
|
|
|
|
122,616
|
|
|
|
16,529
|
|
|
|
24,846
|
|
|
|
(16,387
|
)
|
|
|
157,797
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
14,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,490
|
|
Borrowings
|
|
|
24,707
|
|
|
|
7,384
|
|
|
|
7,703
|
|
|
|
17,649
|
|
|
|
(13,377
|
)
|
|
|
44,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
24,707
|
|
|
|
21,874
|
|
|
|
7,703
|
|
|
|
17,649
|
|
|
|
(13,377
|
)
|
|
|
58,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(14,514
|
)
|
|
|
100,742
|
|
|
|
8,826
|
|
|
|
7,197
|
|
|
|
(3,010
|
)
|
|
|
99,241
|
|
Provision for loan losses
|
|
|
|
|
|
|
25,362
|
|
|
|
(1,522
|
)
|
|
|
14,931
|
|
|
|
|
|
|
|
38,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after provision for loan losses
|
|
|
(14,514
|
)
|
|
|
75,380
|
|
|
|
10,348
|
|
|
|
(7,734
|
)
|
|
|
(3,010
|
)
|
|
|
60,470
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
218
|
|
|
|
12,089
|
|
|
|
16,258
|
|
|
|
|
|
|
|
|
|
|
|
28,565
|
|
Professional fees
|
|
|
776
|
|
|
|
594
|
|
|
|
5,332
|
|
|
|
2,090
|
|
|
|
|
|
|
|
8,792
|
|
Other administrative expenses
|
|
|
1,155
|
|
|
|
18,010
|
|
|
|
10,991
|
|
|
|
9,145
|
|
|
|
(21,891
|
)
|
|
|
17,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,149
|
|
|
|
30,693
|
|
|
|
32,581
|
|
|
|
11,235
|
|
|
|
(21,891
|
)
|
|
|
54,767
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on investments, net
|
|
|
|
|
|
|
8,925
|
|
|
|
(29
|
)
|
|
|
21,047
|
|
|
|
|
|
|
|
29,943
|
|
(Loss) gain on derivatives
|
|
|
|
|
|
|
(1,291
|
)
|
|
|
7,092
|
|
|
|
(7,769
|
)
|
|
|
|
|
|
|
(1,968
|
)
|
Net expense of real estate owned and other foreclosed assets
|
|
|
|
|
|
|
(2,486
|
)
|
|
|
(1,535
|
)
|
|
|
(3,351
|
)
|
|
|
|
|
|
|
(7,372
|
)
|
Other income, net
|
|
|
3
|
|
|
|
1,674
|
|
|
|
9,301
|
|
|
|
26,776
|
|
|
|
(21,626
|
)
|
|
|
16,128
|
|
Earnings (loss) in subsidiaries
|
|
|
58,644
|
|
|
|
(220
|
)
|
|
|
50,724
|
|
|
|
40,575
|
|
|
|
(149,723
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
58,647
|
|
|
|
6,602
|
|
|
|
65,553
|
|
|
|
77,278
|
|
|
|
(171,349
|
)
|
|
|
36,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations before income taxes
|
|
|
41,984
|
|
|
|
51,289
|
|
|
|
43,320
|
|
|
|
58,309
|
|
|
|
(152,468
|
)
|
|
|
42,434
|
|
Income tax (benefit) expense
|
|
|
(36,201
|
)
|
|
|
(957
|
)
|
|
|
|
|
|
|
1,490
|
|
|
|
|
|
|
|
(35,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
78,185
|
|
|
|
52,246
|
|
|
|
43,320
|
|
|
|
56,819
|
|
|
|
(152,468
|
)
|
|
|
78,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
78,185
|
|
|
|
52,246
|
|
|
|
43,320
|
|
|
|
56,819
|
|
|
|
(152,468
|
)
|
|
|
78,102
|
|
Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83
|
)
|
|
|
|
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to CapitalSource Inc.
|
|
$
|
78,185
|
|
|
$
|
52,246
|
|
|
$
|
43,320
|
|
|
$
|
56,902
|
|
|
$
|
(152,468
|
)
|
|
$
|
78,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Operations
Three Months Ended September 30, 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
|
|
$
|
7,638
|
|
|
$
|
116,389
|
|
|
$
|
10,575
|
|
|
$
|
68,237
|
|
|
$
|
(10,911
|
)
|
|
$
|
191,928
|
|
Investment securities
|
|
|
|
|
|
|
12,839
|
|
|
|
56
|
|
|
|
526
|
|
|
|
|
|
|
|
13,421
|
|
Other
|
|
|
|
|
|
|
1,086
|
|
|
|
25
|
|
|
|
15
|
|
|
|
|
|
|
|
1,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
7,638
|
|
|
|
130,314
|
|
|
|
10,656
|
|
|
|
68,778
|
|
|
|
(10,911
|
)
|
|
|
206,475
|
|
Fee income
|
|
|
|
|
|
|
3,631
|
|
|
|
493
|
|
|
|
1,052
|
|
|
|
|
|
|
|
5,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
7,638
|
|
|
|
133,945
|
|
|
|
11,149
|
|
|
|
69,830
|
|
|
|
(10,911
|
)
|
|
|
211,651
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
22,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,674
|
|
Borrowings
|
|
|
32,442
|
|
|
|
11,617
|
|
|
|
7,815
|
|
|
|
36,672
|
|
|
|
(8,888
|
)
|
|
|
79,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
32,442
|
|
|
|
34,291
|
|
|
|
7,815
|
|
|
|
36,672
|
|
|
|
(8,888
|
)
|
|
|
102,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(24,804
|
)
|
|
|
99,654
|
|
|
|
3,334
|
|
|
|
33,158
|
|
|
|
(2,023
|
)
|
|
|
109,319
|
|
Provision for loan losses
|
|
|
|
|
|
|
42,940
|
|
|
|
5,628
|
|
|
|
172,817
|
|
|
|
|
|
|
|
221,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after provision for loan losses
|
|
|
(24,804
|
)
|
|
|
56,714
|
|
|
|
(2,294
|
)
|
|
|
(139,659
|
)
|
|
|
(2,023
|
)
|
|
|
(112,066
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
230
|
|
|
|
12,999
|
|
|
|
16,110
|
|
|
|
|
|
|
|
|
|
|
|
29,339
|
|
Professional fees
|
|
|
2,886
|
|
|
|
696
|
|
|
|
8,791
|
|
|
|
2,613
|
|
|
|
|
|
|
|
14,986
|
|
Other administrative expenses
|
|
|
1,049
|
|
|
|
13,625
|
|
|
|
14,675
|
|
|
|
8,067
|
|
|
|
(17,315
|
)
|
|
|
20,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,165
|
|
|
|
27,320
|
|
|
|
39,576
|
|
|
|
10,680
|
|
|
|
(17,315
|
)
|
|
|
64,426
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on investments, net
|
|
|
|
|
|
|
(4,813
|
)
|
|
|
(221
|
)
|
|
|
(3,438
|
)
|
|
|
|
|
|
|
(8,472
|
)
|
Loss on derivatives
|
|
|
|
|
|
|
(3,259
|
)
|
|
|
(81
|
)
|
|
|
(6,958
|
)
|
|
|
|
|
|
|
(10,298
|
)
|
Loss on residential mortgage investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(3
|
)
|
Gain on debt extinguishment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,472
|
|
|
|
|
|
|
|
11,472
|
|
Net income (expense) of real estate owned and other foreclosed
assets
|
|
|
|
|
|
|
1,618
|
|
|
|
(2,626
|
)
|
|
|
(7,973
|
)
|
|
|
|
|
|
|
(8,981
|
)
|
Other income, net
|
|
|
10
|
|
|
|
2,333
|
|
|
|
15,899
|
|
|
|
3,884
|
|
|
|
(16,983
|
)
|
|
|
5,143
|
|
(Loss) earnings in subsidiaries
|
|
|
(254,378
|
)
|
|
|
(889
|
)
|
|
|
16,731
|
|
|
|
(14,359
|
)
|
|
|
252,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(254,368
|
)
|
|
|
(5,010
|
)
|
|
|
29,702
|
|
|
|
(17,375
|
)
|
|
|
235,912
|
|
|
|
(11,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations before income
taxes
|
|
|
(283,337
|
)
|
|
|
24,384
|
|
|
|
(12,168
|
)
|
|
|
(167,714
|
)
|
|
|
251,204
|
|
|
|
(187,631
|
)
|
Income tax (benefit) expense
|
|
|
(9,091
|
)
|
|
|
2,363
|
|
|
|
500
|
|
|
|
103,317
|
|
|
|
|
|
|
|
97,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations
|
|
|
(274,246
|
)
|
|
|
22,021
|
|
|
|
(12,668
|
)
|
|
|
(271,031
|
)
|
|
|
251,204
|
|
|
|
(284,720
|
)
|
Net income from discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,484
|
|
|
|
|
|
|
|
10,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(274,246
|
)
|
|
|
22,021
|
|
|
|
(12,668
|
)
|
|
|
(260,547
|
)
|
|
|
251,204
|
|
|
|
(274,236
|
)
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to
CapitalSource Inc.
|
|
$
|
(274,246
|
)
|
|
$
|
22,021
|
|
|
$
|
(12,668
|
)
|
|
$
|
(260,557
|
)
|
|
$
|
251,204
|
|
|
$
|
(274,246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Operations
Nine Months Ended September 30, 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
|
|
$
|
30,234
|
|
|
$
|
312,969
|
|
|
$
|
39,576
|
|
|
$
|
99,598
|
|
|
$
|
(45,368
|
)
|
|
$
|
437,009
|
|
Investment securities
|
|
|
|
|
|
|
44,068
|
|
|
|
107
|
|
|
|
643
|
|
|
|
|
|
|
|
44,818
|
|
Other
|
|
|
|
|
|
|
1,169
|
|
|
|
5
|
|
|
|
5
|
|
|
|
|
|
|
|
1,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
30,234
|
|
|
|
358,206
|
|
|
|
39,688
|
|
|
|
100,246
|
|
|
|
(45,368
|
)
|
|
|
483,006
|
|
Fee income
|
|
|
|
|
|
|
9,675
|
|
|
|
3,816
|
|
|
|
5,435
|
|
|
|
|
|
|
|
18,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
30,234
|
|
|
|
367,881
|
|
|
|
43,504
|
|
|
|
105,681
|
|
|
|
(45,368
|
)
|
|
|
501,932
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
46,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,127
|
|
Borrowings
|
|
|
79,793
|
|
|
|
24,351
|
|
|
|
22,948
|
|
|
|
51,638
|
|
|
|
(38,815
|
)
|
|
|
139,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
79,793
|
|
|
|
70,478
|
|
|
|
22,948
|
|
|
|
51,638
|
|
|
|
(38,815
|
)
|
|
|
186,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(49,559
|
)
|
|
|
297,403
|
|
|
|
20,556
|
|
|
|
54,043
|
|
|
|
(6,553
|
)
|
|
|
315,890
|
|
Provision for loan losses
|
|
|
|
|
|
|
122,943
|
|
|
|
(24,769
|
)
|
|
|
184,799
|
|
|
|
|
|
|
|
282,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after provision for loan losses
|
|
|
(49,559
|
)
|
|
|
174,460
|
|
|
|
45,325
|
|
|
|
(130,756
|
)
|
|
|
(6,553
|
)
|
|
|
32,917
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
1,078
|
|
|
|
37,931
|
|
|
|
53,162
|
|
|
|
|
|
|
|
|
|
|
|
92,171
|
|
Professional fees
|
|
|
1,937
|
|
|
|
1,839
|
|
|
|
19,244
|
|
|
|
4,639
|
|
|
|
|
|
|
|
27,659
|
|
Other administrative expenses
|
|
|
3,522
|
|
|
|
49,075
|
|
|
|
35,874
|
|
|
|
21,342
|
|
|
|
(58,080
|
)
|
|
|
51,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
6,537
|
|
|
|
88,845
|
|
|
|
108,280
|
|
|
|
25,981
|
|
|
|
(58,080
|
)
|
|
|
171,563
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on investments, net
|
|
|
|
|
|
|
22,871
|
|
|
|
118
|
|
|
|
23,290
|
|
|
|
|
|
|
|
46,279
|
|
(Loss) gain on derivatives
|
|
|
|
|
|
|
(1,996
|
)
|
|
|
23,229
|
|
|
|
(31,152
|
)
|
|
|
|
|
|
|
(9,919
|
)
|
Gain on debt extinguishment
|
|
|
1,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,096
|
|
Net expense of real estate owned and other foreclosed assets
|
|
|
|
|
|
|
(11,670
|
)
|
|
|
(2,537
|
)
|
|
|
(76,832
|
)
|
|
|
|
|
|
|
(91,039
|
)
|
Other income, net
|
|
|
32
|
|
|
|
29,943
|
|
|
|
35,288
|
|
|
|
19,465
|
|
|
|
(57,768
|
)
|
|
|
26,960
|
|
(Loss) earnings in subsidiaries
|
|
|
(97,174
|
)
|
|
|
(3,839
|
)
|
|
|
102,996
|
|
|
|
89,898
|
|
|
|
(91,881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(96,046
|
)
|
|
|
35,309
|
|
|
|
159,094
|
|
|
|
24,669
|
|
|
|
(149,649
|
)
|
|
|
(26,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations before income
taxes
|
|
|
(152,142
|
)
|
|
|
120,924
|
|
|
|
96,139
|
|
|
|
(132,068
|
)
|
|
|
(98,122
|
)
|
|
|
(165,269
|
)
|
Income tax (benefit) expense
|
|
|
(36,977
|
)
|
|
|
(834
|
)
|
|
|
|
|
|
|
18,975
|
|
|
|
|
|
|
|
(18,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations
|
|
|
(115,165
|
)
|
|
|
121,758
|
|
|
|
96,139
|
|
|
|
(151,043
|
)
|
|
|
(98,122
|
)
|
|
|
(146,433
|
)
|
Net income from discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,489
|
|
|
|
|
|
|
|
9,489
|
|
Net gain from sale of discontinued operations, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,696
|
|
|
|
|
|
|
|
21,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(115,165
|
)
|
|
|
121,758
|
|
|
|
96,139
|
|
|
|
(119,858
|
)
|
|
|
(98,122
|
)
|
|
|
(115,248
|
)
|
Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83
|
)
|
|
|
|
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to CapitalSource Inc.
|
|
$
|
(115,165
|
)
|
|
$
|
121,758
|
|
|
$
|
96,139
|
|
|
$
|
(119,775
|
)
|
|
$
|
(98,122
|
)
|
|
$
|
(115,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Operations
Nine Months Ended September 30, 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
|
|
$
|
8,930
|
|
|
$
|
368,671
|
|
|
$
|
31,083
|
|
|
$
|
223,822
|
|
|
$
|
(17,223
|
)
|
|
$
|
615,283
|
|
Investment securities
|
|
|
|
|
|
|
33,790
|
|
|
|
290
|
|
|
|
13,363
|
|
|
|
|
|
|
|
47,443
|
|
Other
|
|
|
|
|
|
|
3,551
|
|
|
|
79
|
|
|
|
151
|
|
|
|
|
|
|
|
3,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
8,930
|
|
|
|
406,012
|
|
|
|
31,452
|
|
|
|
237,336
|
|
|
|
(17,223
|
)
|
|
|
666,507
|
|
Fee income
|
|
|
|
|
|
|
6,203
|
|
|
|
7,666
|
|
|
|
2,974
|
|
|
|
|
|
|
|
16,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
8,930
|
|
|
|
412,215
|
|
|
|
39,118
|
|
|
|
240,310
|
|
|
|
(17,223
|
)
|
|
|
683,350
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
91,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,020
|
|
Borrowings
|
|
|
86,059
|
|
|
|
39,831
|
|
|
|
24,867
|
|
|
|
109,071
|
|
|
|
(12,900
|
)
|
|
|
246,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
86,059
|
|
|
|
130,851
|
|
|
|
24,867
|
|
|
|
109,071
|
|
|
|
(12,900
|
)
|
|
|
337,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(77,129
|
)
|
|
|
281,364
|
|
|
|
14,251
|
|
|
|
131,239
|
|
|
|
(4,323
|
)
|
|
|
345,402
|
|
Provision for loan losses
|
|
|
|
|
|
|
179,746
|
|
|
|
85,516
|
|
|
|
315,237
|
|
|
|
|
|
|
|
580,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after provision for loan losses
|
|
|
(77,129
|
)
|
|
|
101,618
|
|
|
|
(71,265
|
)
|
|
|
(183,998
|
)
|
|
|
(4,323
|
)
|
|
|
(235,097
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
1,044
|
|
|
|
39,195
|
|
|
|
58,945
|
|
|
|
|
|
|
|
|
|
|
|
99,184
|
|
Professional fees
|
|
|
6,664
|
|
|
|
2,534
|
|
|
|
27,997
|
|
|
|
6,661
|
|
|
|
|
|
|
|
43,856
|
|
Other administrative expenses
|
|
|
3,452
|
|
|
|
41,022
|
|
|
|
43,884
|
|
|
|
32,364
|
|
|
|
(62,092
|
)
|
|
|
58,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
11,160
|
|
|
|
82,751
|
|
|
|
130,826
|
|
|
|
39,025
|
|
|
|
(62,092
|
)
|
|
|
201,670
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on investments, net
|
|
|
|
|
|
|
(10,357
|
)
|
|
|
(2,723
|
)
|
|
|
(16,486
|
)
|
|
|
|
|
|
|
(29,566
|
)
|
(Loss) gain on derivatives
|
|
|
|
|
|
|
(7,876
|
)
|
|
|
279
|
|
|
|
(3,368
|
)
|
|
|
(1,352
|
)
|
|
|
(12,317
|
)
|
Gain on residential mortgage investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,308
|
|
|
|
|
|
|
|
15,308
|
|
(Loss) gain on extinguishment of debt
|
|
|
(57,128
|
)
|
|
|
|
|
|
|
|
|
|
|
16,037
|
|
|
|
|
|
|
|
(41,091
|
)
|
Net expense of real estate owned and other foreclosed assets
|
|
|
|
|
|
|
(4,383
|
)
|
|
|
(6,399
|
)
|
|
|
(21,678
|
)
|
|
|
|
|
|
|
(32,460
|
)
|
Other income, net
|
|
|
10
|
|
|
|
23,817
|
|
|
|
36,211
|
|
|
|
4,272
|
|
|
|
(60,605
|
)
|
|
|
3,705
|
|
(Loss) earnings in subsidiaries
|
|
|
(488,760
|
)
|
|
|
(889
|
)
|
|
|
2,076
|
|
|
|
(173,777
|
)
|
|
|
661,350
|
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
|
|
|
|
3,558
|
|
|
|
(3,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(545,878
|
)
|
|
|
312
|
|
|
|
33,002
|
|
|
|
(183,250
|
)
|
|
|
599,393
|
|
|
|
(96,421
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations before income
taxes
|
|
|
(634,167
|
)
|
|
|
19,179
|
|
|
|
(169,089
|
)
|
|
|
(406,273
|
)
|
|
|
657,162
|
|
|
|
(533,188
|
)
|
Income tax (benefit) expense
|
|
|
(9,070
|
)
|
|
|
7,682
|
|
|
|
500
|
|
|
|
132,077
|
|
|
|
|
|
|
|
131,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations
|
|
|
(625,097
|
)
|
|
|
11,497
|
|
|
|
(169,589
|
)
|
|
|
(538,350
|
)
|
|
|
657,162
|
|
|
|
(664,377
|
)
|
Net income from discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,108
|
|
|
|
|
|
|
|
37,108
|
|
Net gain from sale of discontinued operations, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,144
|
|
|
|
|
|
|
|
2,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(625,097
|
)
|
|
|
11,497
|
|
|
|
(169,589
|
)
|
|
|
(499,098
|
)
|
|
|
657,162
|
|
|
|
(625,125
|
)
|
Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to CapitalSource Inc.
|
|
$
|
(625,097
|
)
|
|
$
|
11,497
|
|
|
$
|
(169,589
|
)
|
|
$
|
(499,070
|
)
|
|
$
|
657,162
|
|
|
$
|
(625,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Cash Flows
For the Nine Months Ended September 30, 2010
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource
|
|
|
Non-Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
CapitalSource
|
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Inc.
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(115,165
|
)
|
|
$
|
121,758
|
|
|
$
|
96,139
|
|
|
$
|
(119,858
|
)
|
|
$
|
(98,122
|
)
|
|
$
|
(115,248
|
)
|
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
1,205
|
|
|
|
2,299
|
|
|
|
|
|
|
|
|
|
|
|
3,504
|
|
Restricted stock expense
|
|
|
|
|
|
|
1,585
|
|
|
|
6,266
|
|
|
|
|
|
|
|
|
|
|
|
7,851
|
|
Gain on extinguishment of debt
|
|
|
(1,096
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,096
|
)
|
Amortization of deferred loan fees and discounts
|
|
|
|
|
|
|
(26,995
|
)
|
|
|
(19,384
|
)
|
|
|
(8,916
|
)
|
|
|
|
|
|
|
(55,295
|
)
|
Paid-in-kind
interest on loans
|
|
|
|
|
|
|
(2,595
|
)
|
|
|
2,932
|
|
|
|
1,755
|
|
|
|
|
|
|
|
2,092
|
|
Provision for loan losses
|
|
|
|
|
|
|
122,943
|
|
|
|
(24,769
|
)
|
|
|
184,799
|
|
|
|
|
|
|
|
282,973
|
|
Provision for unfunded commitments
|
|
|
|
|
|
|
(442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(442
|
)
|
Amortization of deferred financing fees and discounts
|
|
|
21,490
|
|
|
|
13,599
|
|
|
|
314
|
|
|
|
8,487
|
|
|
|
|
|
|
|
43,890
|
|
Depreciation and amortization
|
|
|
|
|
|
|
(2,676
|
)
|
|
|
2,818
|
|
|
|
1,440
|
|
|
|
|
|
|
|
1,582
|
|
(Benefit) provision for deferred income taxes
|
|
|
|
|
|
|
(8,169
|
)
|
|
|
(209
|
)
|
|
|
22,469
|
|
|
|
|
|
|
|
14,091
|
|
Non-cash loss (gain) on investments, net
|
|
|
|
|
|
|
902
|
|
|
|
(173
|
)
|
|
|
(7,774
|
)
|
|
|
|
|
|
|
(7,045
|
)
|
Non-cash loss on foreclosed assets and other property and
equipment disposals
|
|
|
|
|
|
|
8,827
|
|
|
|
4,294
|
|
|
|
44,073
|
|
|
|
|
|
|
|
57,194
|
|
Gain on assets acquired through business combination
|
|
|
|
|
|
|
(3,724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,724
|
)
|
Gain on deconsolidation of
2006-A Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,723
|
)
|
|
|
|
|
|
|
(16,723
|
)
|
Unrealized (gain) loss on derivatives and foreign currencies, net
|
|
|
|
|
|
|
(2,206
|
)
|
|
|
(30,453
|
)
|
|
|
30,580
|
|
|
|
|
|
|
|
(2,079
|
)
|
Accretion of discount on commercial real estate A
participation interest
|
|
|
|
|
|
|
(9,523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,523
|
)
|
(Increase) decrease in interest receivable
|
|
|
|
|
|
|
(15,056
|
)
|
|
|
65,235
|
|
|
|
(23,481
|
)
|
|
|
|
|
|
|
26,698
|
|
Decrease (increase) in loans held for sale, net
|
|
|
|
|
|
|
335
|
|
|
|
(3,053
|
)
|
|
|
7,468
|
|
|
|
|
|
|
|
4,750
|
|
(Increase) decrease in intercompany receivable
|
|
|
|
|
|
|
|
|
|
|
(11,967
|
)
|
|
|
14,240
|
|
|
|
(2,273
|
)
|
|
|
|
|
(Increase) decrease in other assets
|
|
|
(37,925
|
)
|
|
|
(2,091
|
)
|
|
|
(19,909
|
)
|
|
|
69,456
|
|
|
|
8,991
|
|
|
|
18,522
|
|
(Decrease) increase in other liabilities
|
|
|
(17,160
|
)
|
|
|
(8,662
|
)
|
|
|
(23,600
|
)
|
|
|
35,917
|
|
|
|
(14,905
|
)
|
|
|
(28,410
|
)
|
Net transfers with subsidiaries
|
|
|
350,745
|
|
|
|
(83,974
|
)
|
|
|
26,946
|
|
|
|
(385,772
|
)
|
|
|
92,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities
|
|
|
200,889
|
|
|
|
105,041
|
|
|
|
73,726
|
|
|
|
(141,840
|
)
|
|
|
(14,254
|
)
|
|
|
223,562
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted cash
|
|
|
|
|
|
|
50,616
|
|
|
|
(39,345
|
)
|
|
|
49,417
|
|
|
|
|
|
|
|
60,688
|
|
Decrease in commercial real estate A participation
interest
|
|
|
|
|
|
|
534,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
534,674
|
|
Assets acquired through business combination, net of cash
acquired
|
|
|
|
|
|
|
(98,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98,800
|
)
|
Cash received from
2006-A Trust
delegation and sale transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
|
|
|
|
|
|
7,000
|
|
Decrease (increase) in loans, net
|
|
|
|
|
|
|
65,289
|
|
|
|
(95,146
|
)
|
|
|
1,233,476
|
|
|
|
7,199
|
|
|
|
1,210,818
|
|
Cash received for real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339,643
|
|
|
|
|
|
|
|
339,643
|
|
Acquisition of marketable securities, available for sale, net
|
|
|
|
|
|
|
(561,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(561,613
|
)
|
Reduction of marketable securities, held to maturity, net
|
|
|
|
|
|
|
47,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,208
|
|
(Acquisition) reduction of other investments, net
|
|
|
|
|
|
|
(27,229
|
)
|
|
|
126
|
|
|
|
53,413
|
|
|
|
|
|
|
|
26,310
|
|
(Acquisition) disposal of property and equipment, net
|
|
|
|
|
|
|
(980
|
)
|
|
|
(2,978
|
)
|
|
|
869
|
|
|
|
|
|
|
|
(3,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities
|
|
|
|
|
|
|
9,165
|
|
|
|
(137,343
|
)
|
|
|
1,683,818
|
|
|
|
7,199
|
|
|
|
1,562,839
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(2,082
|
)
|
|
|
(7,963
|
)
|
|
|
|
|
|
|
4,132
|
|
|
|
|
|
|
|
(5,913
|
)
|
Deposits accepted, net of repayments
|
|
|
|
|
|
|
143,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143,632
|
|
(Decrease) increase in intercompany payable
|
|
|
|
|
|
|
|
|
|
|
(14,240
|
)
|
|
|
7,185
|
|
|
|
7,055
|
|
|
|
|
|
Repayments on credit facilities, net
|
|
|
(193,637
|
)
|
|
|
(81,643
|
)
|
|
|
(54,199
|
)
|
|
|
(124,427
|
)
|
|
|
|
|
|
|
(453,906
|
)
|
Borrowings of term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,784
|
|
|
|
|
|
|
|
14,784
|
|
Repayments and extinguishment of term debt
|
|
|
|
|
|
|
(679,394
|
)
|
|
|
|
|
|
|
(1,142,037
|
)
|
|
|
|
|
|
|
(1,821,431
|
)
|
(Repayments of) borrowings under other borrowings
|
|
|
(34,144
|
)
|
|
|
100,000
|
|
|
|
(59
|
)
|
|
|
(263,972
|
)
|
|
|
|
|
|
|
(198,175
|
)
|
Proceeds from exercise of options
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
356
|
|
Payment of dividends
|
|
|
(9,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in financing activities
|
|
|
(239,225
|
)
|
|
|
(525,368
|
)
|
|
|
(68,498
|
)
|
|
|
(1,504,335
|
)
|
|
|
7,055
|
|
|
|
(2,330,371
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(38,336
|
)
|
|
|
(411,162
|
)
|
|
|
(132,115
|
)
|
|
|
37,643
|
|
|
|
|
|
|
|
(543,970
|
)
|
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
|
|
$
|
60,767
|
|
|
$
|
349,181
|
|
|
$
|
133,862
|
|
|
$
|
89,240
|
|
|
$
|
|
|
|
$
|
633,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Cash Flows
Nine Months Ended September 30, 2009
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
Combined
|
|
|
Other
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
CapitalSource,
|
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Inc.
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(625,097
|
)
|
|
|
11,497
|
|
|
|
(169,589
|
)
|
|
|
(499,098
|
)
|
|
|
657,162
|
|
|
|
(625,125
|
)
|
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
792
|
|
|
|
2,193
|
|
|
|
|
|
|
|
|
|
|
|
2,985
|
|
Restricted stock expense
|
|
|
|
|
|
|
2,841
|
|
|
|
15,121
|
|
|
|
|
|
|
|
|
|
|
|
17,962
|
|
Loss (gain) on extinguishment of debt
|
|
|
57,128
|
|
|
|
|
|
|
|
|
|
|
|
(16,037
|
)
|
|
|
|
|
|
|
41,091
|
|
Amortization of deferred loan fees and discounts
|
|
|
|
|
|
|
(20,983
|
)
|
|
|
(26,767
|
)
|
|
|
(11,068
|
)
|
|
|
|
|
|
|
(58,818
|
)
|
Paid-in-kind
interest on loans
|
|
|
|
|
|
|
(11,194
|
)
|
|
|
606
|
|
|
|
(6,846
|
)
|
|
|
|
|
|
|
(17,434
|
)
|
Provision for loan losses
|
|
|
|
|
|
|
179,746
|
|
|
|
85,516
|
|
|
|
315,237
|
|
|
|
|
|
|
|
580,499
|
|
Amortization of deferred financing fees and discounts
|
|
|
22,131
|
|
|
|
11,894
|
|
|
|
314
|
|
|
|
13,807
|
|
|
|
|
|
|
|
48,146
|
|
Depreciation and amortization
|
|
|
|
|
|
|
(280
|
)
|
|
|
2,829
|
|
|
|
22,760
|
|
|
|
|
|
|
|
25,309
|
|
Provision (benefit) for deferred income taxes
|
|
|
8,224
|
|
|
|
(3,508
|
)
|
|
|
(36
|
)
|
|
|
125,927
|
|
|
|
|
|
|
|
130,607
|
|
Non-cash loss on investments, net
|
|
|
|
|
|
|
15,085
|
|
|
|
2,998
|
|
|
|
13,412
|
|
|
|
|
|
|
|
31,495
|
|
Non-cash loss on foreclosed assets and other property and
equipment disposals
|
|
|
|
|
|
|
1,993
|
|
|
|
5,737
|
|
|
|
13,450
|
|
|
|
|
|
|
|
21,180
|
|
Unrealized loss on derivatives and foreign currencies, net
|
|
|
|
|
|
|
8,891
|
|
|
|
1,307
|
|
|
|
12,082
|
|
|
|
|
|
|
|
22,280
|
|
Unrealized gain on residential mortgage investment portfolio, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,567
|
)
|
|
|
|
|
|
|
(60,567
|
)
|
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
|
|
|
|
|
|
|
(20,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,487
|
)
|
Decrease (increase) in interest receivable
|
|
|
|
|
|
|
7,815
|
|
|
|
24,611
|
|
|
|
(10,675
|
)
|
|
|
(25
|
)
|
|
|
21,726
|
|
Decrease in loans held for sale, net
|
|
|
|
|
|
|
11,887
|
|
|
|
19,168
|
|
|
|
|
|
|
|
|
|
|
|
31,055
|
|
(Increase) decrease in intercompany receivable
|
|
|
(300,000
|
)
|
|
|
|
|
|
|
54,735
|
|
|
|
(148,180
|
)
|
|
|
393,445
|
|
|
|
|
|
(Increase) decrease in other assets
|
|
|
(5,172
|
)
|
|
|
(69,776
|
)
|
|
|
169,308
|
|
|
|
463,300
|
|
|
|
(72,249
|
)
|
|
|
485,411
|
|
(Decrease) increase in other liabilities
|
|
|
(47,528
|
)
|
|
|
(107,818
|
)
|
|
|
78,293
|
|
|
|
(226,544
|
)
|
|
|
70,623
|
|
|
|
(232,974
|
)
|
Net transfers with subsidiaries
|
|
|
1,164,901
|
|
|
|
(338,186
|
)
|
|
|
213,752
|
|
|
|
(378,882
|
)
|
|
|
(661,585
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities
|
|
|
274,587
|
|
|
|
(319,791
|
)
|
|
|
480,096
|
|
|
|
1,107,222
|
|
|
|
387,371
|
|
|
|
1,929,485
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in restricted cash
|
|
|
|
|
|
|
(39,534
|
)
|
|
|
(11,178
|
)
|
|
|
242,910
|
|
|
|
|
|
|
|
192,198
|
|
Decrease in mortgage-related receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
215,090
|
|
|
|
|
|
|
|
215,090
|
|
Decrease in commercial real estate A participation
interest, net
|
|
|
|
|
|
|
702,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
702,860
|
|
Decrease (increase) in loans, net
|
|
|
|
|
|
|
665,671
|
|
|
|
(326,951
|
)
|
|
|
(54,746
|
)
|
|
|
6,074
|
|
|
|
290,048
|
|
Cash received for real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,710
|
|
|
|
|
|
|
|
15,710
|
|
Acquisition of marketable securities, available for sale, net
|
|
|
|
|
|
|
(36,991
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,991
|
)
|
Acquisition of marketable securities, held to maturity, net
|
|
|
|
|
|
|
(227,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(227,591
|
)
|
Disposal (acquisition) of other investments, net
|
|
|
|
|
|
|
13,794
|
|
|
|
2,573
|
|
|
|
(10,966
|
)
|
|
|
|
|
|
|
5,401
|
|
(Acquisition) disposal of property and equipment, net
|
|
|
|
|
|
|
(14,134
|
)
|
|
|
(17,051
|
)
|
|
|
13,729
|
|
|
|
|
|
|
|
(17,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities
|
|
|
|
|
|
|
1,064,075
|
|
|
|
(352,607
|
)
|
|
|
421,727
|
|
|
|
6,074
|
|
|
|
1,139,269
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(30,523
|
)
|
|
|
(738
|
)
|
|
|
|
|
|
|
(7,900
|
)
|
|
|
|
|
|
|
(39,161
|
)
|
Deposits accepted, net of repayments
|
|
|
|
|
|
|
(653,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(653,552
|
)
|
Increase in intercompany payable
|
|
|
|
|
|
|
|
|
|
|
148,180
|
|
|
|
245,265
|
|
|
|
(393,445
|
)
|
|
|
|
|
Repayments under repurchase agreements, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,595,750
|
)
|
|
|
|
|
|
|
(1,595,750
|
)
|
(Repayments of) borrowings on credit facilities, net
|
|
|
(470,512
|
)
|
|
|
(261,358
|
)
|
|
|
(29,683
|
)
|
|
|
133,064
|
|
|
|
|
|
|
|
(628,489
|
)
|
Borrowings of term debt
|
|
|
281,898
|
|
|
|
6,000
|
|
|
|
|
|
|
|
23,976
|
|
|
|
|
|
|
|
311,874
|
|
Repayments and extinguishment of term debt
|
|
|
|
|
|
|
(531,272
|
)
|
|
|
|
|
|
|
(376,362
|
)
|
|
|
|
|
|
|
(907,634
|
)
|
(Repayments of) borrowings under other borrowings
|
|
|
(118,503
|
)
|
|
|
200,000
|
|
|
|
(55
|
)
|
|
|
(5,268
|
)
|
|
|
|
|
|
|
76,174
|
|
Proceeds from issuance of common stock, net of offering costs
|
|
|
77,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,075
|
|
Repurchase of common stock
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(800
|
)
|
Payment of dividends
|
|
|
(9,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by financing activities
|
|
|
(270,601
|
)
|
|
|
(1,240,920
|
)
|
|
|
118,442
|
|
|
|
(1,582,975
|
)
|
|
|
(393,445
|
)
|
|
|
(3,369,499
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
3,986
|
|
|
|
(496,636
|
)
|
|
|
245,931
|
|
|
|
(54,026
|
)
|
|
|
|
|
|
|
(300,745
|
)
|
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
|
|
$
|
3,997
|
|
|
$
|
733,618
|
|
|
$
|
284,797
|
|
|
$
|
15,406
|
|
|
$
|
|
|
|
$
|
1,037,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of September 30, 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 Corporation (FDIC). In
2010, the United States Congress permanently increased the
deposit insurance level from $100,000 to $250,000. As of
September 30, 2010 and December 31, 2009,
CapitalSource Bank had $1.7 billion and $1.5 billion,
respectively, of certificates of deposit in the amount of
$100,000 or more. As of September 30, 2010 and
December 31, 2009, CapitalSource Bank had
$260.3 million and $199.7 million, respectively, of
certificates of deposit in the amount of $250,000 or more.
As of September 30, 2010 and December 31, 2009, the
weighted-average interest rates for savings and money market
deposit accounts were 0.79% and 1.06%, respectively, and for
certificates of deposit were 1.37% and 1.68%, respectively. The
weighted-average interest rates for all deposits as of
September 30, 2010 and December 31, 2009 were 1.25%
and 1.56%, respectively.
As of September 30, 2010 and December 31, 2009,
interest-bearing deposits at CapitalSource Bank were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
Money market
|
|
$
|
246,837
|
|
|
$
|
258,283
|
|
Savings
|
|
|
712,768
|
|
|
|
599,084
|
|
Certificates of deposit
|
|
|
3,667,601
|
|
|
|
3,626,512
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
$
|
4,627,206
|
|
|
$
|
4,483,879
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010, certificates of deposit at
CapitalSource Bank detailed by maturity were as follows ($ in
thousands):
|
|
|
|
|
Maturing by:
|
|
|
|
|
September 30, 2011
|
|
$
|
2,951,428
|
|
September 30, 2012
|
|
|
622,008
|
|
September 30, 2013
|
|
|
37,206
|
|
September 30, 2014
|
|
|
15,800
|
|
September 30, 2015
|
|
|
41,159
|
|
|
|
|
|
|
Total
|
|
$
|
3,667,601
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2010 and
2009, interest expense on deposits was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Savings and money market
|
|
$
|
1,937
|
|
|
$
|
2,571
|
|
|
$
|
6,381
|
|
|
$
|
8,641
|
|
Certificates of deposit
|
|
|
12,613
|
|
|
|
20,181
|
|
|
|
39,923
|
|
|
|
82,210
|
|
Brokered certificates of deposit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
456
|
|
Fees for early withdrawal
|
|
|
(60
|
)
|
|
|
(78
|
)
|
|
|
(177
|
)
|
|
|
(287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense on deposits
|
|
$
|
14,490
|
|
|
$
|
22,674
|
|
|
$
|
46,127
|
|
|
$
|
91,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 9.
|
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 TDRs as events that may
require the reconsideration of whether or not an entity is a
variable interest entity. As a result, certain of our TDRs, 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 TDRs 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 $548.6 million as of
September 30, 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 letters of credit
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 $616.1 million as of
September 30, 2010.
Term
Debt Securitizations
In conjunction with our commercial term debt securitizations, we
established and contributed 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 loans. We service the
underlying loans contributed to the Issuers and earn periodic
servicing fees paid from the cash flows of the underlying loans.
We have no legal obligation to repay the outstanding notes or
certificates or contribute additional assets to the entities. As
of September 30, 2010 and December 31, 2009, the total
outstanding balances of these commercial term debt
securitizations were $1.2 billion and $3.7 billion,
respectively. These amounts include approximately
$328.2 million of notes and certificates that we held as of
September 30, 2010 and December 31, 2009.
We have determined that the Issuers are variable interest
entities, subject to applicable consolidation guidance and have
concluded that the entities were designed to pass along risks
related to the credit performance of the underlying loan
portfolio. Except as set forth below, as a result of our power
to direct the activities that most significantly impact the
credit performance of the underlying loan portfolio and our
economic interests in the Issuers, we have concluded that we are
the primary beneficiary of each of the Issuers. Consequently,
except as set forth below, we report the assets and liabilities
of the Issuers in our consolidated financial statements,
including the underlying loans and the issued notes and
certificates held by third parties. As of September 30,
2010 and December 31, 2009, the carrying amounts of the
consolidated liabilities related to the Issuers were
$860.6 million and $2.7 billion, respectively. These
amounts are recorded in term debt in our consolidated balance
sheets and represent obligations for which there is no recourse
to us. As of September 30, 2010 and December 31, 2009,
the carrying amounts of the consolidated assets related to the
Issuers were $1.0 billion and $3.1 billion,
respectively. These amounts are recorded in loans held for
investment, net in our consolidated balance sheets and relate to
assets that can only be used to settle obligations of the
Issuers.
During the three months ended September 30, 2010, we
delegated certain of our collateral management and special
servicing rights in the
2006-A Trust
and sold our equity interest and certain notes issued by the
2006-A Trust
for $7.0 million. As a result of the transaction, we
determined that we no longer had the power to direct the
activities
29
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
that most significantly impact the economic performance of the
2006-A
Trust. In making this determination, we assessed the
significance of the servicing and collateral management fees
paid to the delegate and concluded that such fees represented an
implicit variable interest in the
2006-A
Trust. This assessment involved significant judgment surrounding
the credit performance and timing of cash flows of the
underlying assets of the
2006-A
Trust, including the performance of additional assets to be
purchased by the
2006-A
Trust, pursuant to the terms of the indenture. In October 2010,
we assigned our special servicing rights so that we are no
longer the named special servicer of the
2006-A Trust.
As a result of the determination above, we concluded that we
were no longer the primary beneficiary and deconsolidated the
2006-A
Trust. We also concluded that the deconsolidation of the 2006-A
Trust qualified as a financial asset transfer and that the
transaction resulted in our surrendering control over the
financial assets held by the 2006-A Trust. This resulted in the
removal of carrying amounts of $801.9 million of loans,
$55.7 million of restricted cash and $891.3 million of
term debt from our consolidated balance sheet and the
recognition of a gain of $16.7 million, recorded in other
income, net in our consolidated statements of income. As of
September 30, 2010, the fair value of beneficial interests
in the
2006-A Trust
that we had repurchased in the market subsequent to the initial
securitization was $13.8 million and were classified as
investment securities, available for sale in our consolidated
balance sheets. During the three months ended September 30,
2010, there were no realized or unrealized gains or losses
recorded to this beneficial interest from the date of initial
purchase. We have no additional funding commitments or other
obligations related to these beneficial interests. Except for a
guarantee provided to a swap counterparty of the
2006-A
Trust, we have not provided any additional financial support to
the 2006-A
Trust during the nine months ended September 30, 2010. This
swap had a fair value of $19.7 million as of
September 30, 2010. The beneficial interests in the Trust
and the swap guarantee comprise our maximum exposure to loss
related to the 2006-A Trust.
For additional information on our borrowings, see Note 12,
Borrowings, in our audited consolidated financial
statements for the year ended December 31, 2009, included
in our
Form 10-K.
As of September 30, 2010 and December 31, 2009, the
composition of our outstanding borrowings from continuing and
discontinued operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Outstanding borrowings from continuing operations:
|
|
|
|
|
|
|
|
|
Credit facilities
|
|
$
|
78,250
|
|
|
$
|
542,781
|
|
Term debt(1)
|
|
|
1,145,638
|
|
|
|
2,956,536
|
|
Other borrowings:
|
|
|
|
|
|
|
|
|
Convertible debt, net(2)
|
|
|
533,978
|
|
|
|
561,347
|
|
Subordinated debt
|
|
|
437,930
|
|
|
|
439,701
|
|
FHLB SF borrowings
|
|
|
300,000
|
|
|
|
200,000
|
|
Notes payable
|
|
|
2,968
|
|
|
|
3,026
|
|
|
|
|
|
|
|
|
|
|
Total other borrowings
|
|
|
1,274,876
|
|
|
|
1,204,074
|
|
|
|
|
|
|
|
|
|
|
Total outstanding borrowings from continuing operations
|
|
|
2,498,764
|
|
|
|
4,703,391
|
|
Outstanding borrowings from discontinued operations:
|
|
|
|
|
|
|
|
|
Mortgage debt(3)
|
|
|
|
|
|
|
447,683
|
|
Notes payable
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
Total outstanding borrowings from discontinued operations
|
|
|
|
|
|
|
467,683
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
$
|
2,498,764
|
|
|
$
|
5,171,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts presented are net of debt discounts of
$15.2 million and $17.4 million as of
September 30, 2010 and December 31, 2009, respectively. |
|
(2) |
|
Amounts presented are net of debt discounts of $9.7 million
and $18.7 million as of September 30, 2010 and
December 31, 2009, respectively. |
30
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(3) |
|
In June 2010, all mortgage debt was assumed or repaid upon the
sale of the related properties to Omega. |
Credit
Facilities
Our committed credit facility capacities were
$218.3 million and $691.3 million as of
September 30, 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
September 30, 2010 and December 31, 2009, total
undrawn capacities under our credit facilities were
$140.0 million and $148.5 million, respectively, which
were limited by issued and outstanding letters of credit
totaling $28.7 million and $55.7 million, respectively.
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 our 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. In May 2010, we modified the
maturity date on our CS Europe credit facility from May 28,
2010 to May 6, 2011.
Term
Debt
As discussed above, during the three months ended
September 30, 2010, we delegated certain of our collateral
management and special servicing rights in the
2006-A Trust
and sold our equity interest and certain notes issued by the
2006-A Trust
for $7.0 million. As a result of this transaction, we
concluded that we were no longer the primary beneficiary and
deconsolidated the
2006-A
Trust, which resulted in the removal of all of its assets and
liabilities, including $891.3 million of term debt from our
consolidated balance sheet. For additional information on the
deconsolidation of the
2006-A
Trust, see Note 9, Variable Interest Entities.
As of September 30, 2010 and December 31, 2009, the
carrying amounts of our term debt related to securitizations
were $860.6 million and $2.7 billion, respectively. As
of September 30, 2010 and December 31, 2009, our 2014
Senior Secured Notes had balances of $285.0 million and
$282.9 million respectively, net of discounts of
$15.0 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 $123.5 million and modified the maximum
advance rate to 27.2% commencing May 2010, 23.6% commencing
August 2010, 19.8% commencing November 2010 and 18.4% commencing
February 2011.
Convertible
Debt
As of September 30, 2010 and December 31, 2009, the
carrying amounts of the liability and equity components of our
convertible debt were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Convertible debt principal
|
|
$
|
543,704
|
|
|
$
|
580,000
|
|
Less: debt discount
|
|
|
(9,726
|
)
|
|
|
(18,653
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying value
|
|
$
|
533,978
|
|
|
$
|
561,347
|
|
|
|
|
|
|
|
|
|
|
Equity components recorded in additional paid-in capital
|
|
$
|
101,220
|
|
|
$
|
101,220
|
|
31
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of September 30, 2010, the unamortized discounts on our
3.5%, 4.0% and 7.25% Convertible Debentures will be
amortized through the first put dates of July 15, 2011,
July 15, 2011, and July 15, 2012, respectively. As of
September 30, 2010, the 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
|
|
$
|
20.83
|
|
|
|
405,402
|
|
4.0% Senior Subordinated Convertible Debentures due 2034
|
|
|
20.83
|
|
|
|
13,692,184
|
|
7.25% Senior Subordinated Convertible Debentures due 2037
|
|
|
27.09
|
|
|
|
9,226,975
|
|
For the three and nine months ended September 30, 2010 and
2009, the interest expense recognized on our Convertible
Debentures and the effective interest rates on the liability
components were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Interest expense recognized on:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual interest coupon
|
|
$
|
7,491
|
|
|
$
|
7,821
|
|
|
$
|
22,745
|
|
|
$
|
23,964
|
|
Amortization of deferred financing fees
|
|
|
299
|
|
|
|
299
|
|
|
|
1,029
|
|
|
|
1,109
|
|
Amortization of debt discount
|
|
|
2,595
|
|
|
|
2,595
|
|
|
|
7,870
|
|
|
|
9,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense recognized
|
|
$
|
10,385
|
|
|
$
|
10,715
|
|
|
$
|
31,644
|
|
|
$
|
34,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective interest rate on the liability component:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5% Senior Convertible Debentures due 2034
|
|
|
7.25
|
%
|
|
|
7.25
|
%
|
|
|
7.25
|
%
|
|
|
7.25
|
%
|
4.0% Senior Subordinated Convertible Debentures due 2034
|
|
|
7.68
|
%
|
|
|
7.68
|
%
|
|
|
7.68
|
%
|
|
|
7.68
|
%
|
7.25% Senior Subordinated Convertible Debentures due 2037
|
|
|
7.79
|
%
|
|
|
7.79
|
%
|
|
|
7.79
|
%
|
|
|
7.79
|
%
|
For information on the contingent interest feature of the
3.5% Debentures, see Note 12, Borrowings, in
our audited consolidated financial statements for the year ended
December 31, 2009, included in our
Form 10-K.
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 September 30, 2010
equal to 20% of CapitalSource Banks total assets. The
financing is subject to various terms and conditions including
pledging acceptable collateral, satisfaction of the FHLB SF
stock ownership requirement and certain limits regarding the
maximum term of debt.
As of September 30, 2010 and December 31, 2009,
CapitalSource Bank had borrowing capacity with the FHLB SF based
on pledged collateral as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Borrowing capacity
|
|
$
|
847,393
|
|
|
$
|
965,195
|
|
Less: outstanding principal
|
|
|
(300,000
|
)
|
|
|
(200,000
|
)
|
Less: outstanding letters of credit
|
|
|
(750
|
)
|
|
|
(750
|
)
|
|
|
|
|
|
|
|
|
|
Unused borrowing capacity
|
|
$
|
546,643
|
|
|
$
|
764,445
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010 and December 31, 2009,
collateral with amortized costs of $197.1 million and
$191.8 million, respectively, and fair values of
$210.3 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
32
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
institutions are eligible to borrow from the FRB for periods of
up to 90 days, but there were no borrowings outstanding.
|
|
Note 11.
|
Shareholders
Equity
|
Common
Stock Shares Outstanding
Common stock share activity for the nine months ended
September 30, 2010 was as follows:
|
|
|
|
|
Outstanding as of December 31, 2009
|
|
|
323,042,613
|
|
Restricted stock and other stock activities
|
|
|
133,653
|
|
Exercise of options
|
|
|
102,298
|
|
|
|
|
|
|
Outstanding as of September 30, 2010
|
|
|
323,278,564
|
|
|
|
|
|
|
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 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 September 30, 2010, the total
valuation allowance was $429.7 million. Although
realization is not assured, we believe it is more likely than
not that the remaining recognized net deferred tax assets of
$83.5 million as of September 30, 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
33
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 and nine months ended September 30, 2010,
we recorded income tax benefit of $35.7 million and
$18.8 million, respectively. The benefit for the three and
nine months ended September 30, 2010 was primarily due to a net
operating loss carryback election made by one of our corporate
entities during the three months ended September 30, 2010. For
the three and nine months ended September 30, 2009, we
recorded income tax expense of $97.1 million and
$131.2 million, respectively. The effective income tax rate
on our consolidated net income and loss from continuing
operations was (84.1)% and 11.4% for the three and nine months
ended September 30, 2010, respectively, and (51.7)% and
(24.6)% for the three and nine months ended September 30,
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 2009. We are currently under examination by the
Internal Revenue Service for the tax years 2006 to 2008. Due to
the potential for resolution of federal and state examinations,
and the expiration of various statutes of limitations, it is
reasonably possible that CapitalSources gross unrecognized
tax benefits may decrease within the next twelve months by a
range of zero to $50.0 million.
|
|
Note 13.
|
Comprehensive
Income (Loss)
|
Comprehensive income (loss) for the three and nine months ended
September 30, 2010 and 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Net income (loss) from continuing operations
|
|
$
|
78,102
|
|
|
$
|
(284,720
|
)
|
|
$
|
(146,433
|
)
|
|
$
|
(664,377
|
)
|
Net income from discontinued operations, net of taxes
|
|
|
|
|
|
|
10,484
|
|
|
|
9,489
|
|
|
|
37,108
|
|
Gain from sale of discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
21,696
|
|
|
|
2,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
78,102
|
|
|
|
(274,236
|
)
|
|
|
(115,248
|
)
|
|
|
(625,125
|
)
|
Unrealized gain on
available-for-sale
securities, net of taxes
|
|
|
1,016
|
|
|
|
6,911
|
|
|
|
7,491
|
|
|
|
522
|
|
Unrealized gain (loss) on foreign currency translation, net of
taxes
|
|
|
23,749
|
|
|
|
7,836
|
|
|
|
(6,224
|
)
|
|
|
16,754
|
|
Unrealized loss on cash flow hedges, net of taxes
|
|
|
(22
|
)
|
|
|
(22
|
)
|
|
|
(66
|
)
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
102,845
|
|
|
|
(259,511
|
)
|
|
|
(114,047
|
)
|
|
|
(607,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income attributable to noncontrolling
interests
|
|
|
(83
|
)
|
|
|
10
|
|
|
|
(83
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to
CapitalSource Inc.
|
|
$
|
102,928
|
|
|
$
|
(259,521
|
)
|
|
$
|
(113,964
|
)
|
|
$
|
(607,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accumulated other comprehensive income, net, as of
September 30, 2010 and December 31, 2009 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Unrealized gain on
available-for-sale
securities, net of tax
|
|
$
|
12,121
|
|
|
$
|
5,027
|
|
Unrealized gain on foreign currency translation, net of tax
|
|
|
8,423
|
|
|
|
14,647
|
|
Unrealized gain on cash flow hedge, net of tax
|
|
|
18
|
|
|
|
84
|
|
Effect of adoption of amended investment guidance
|
|
|
|
|
|
|
(397
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, net
|
|
$
|
20,562
|
|
|
$
|
19,361
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 14.
|
Net
Income (Loss) Per Share
|
The computations of basic and diluted net income (loss) per
share attributable to CapitalSource Inc. for the three and nine
months ended September 30, 2010 and 2009, respectively,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
Three Months Ended September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands, except per share data)
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
78,102
|
|
|
$
|
(284,720
|
)
|
|
$
|
(146,433
|
)
|
|
$
|
(664,377
|
)
|
From discontinued operations, net of taxes
|
|
|
|
|
|
|
10,484
|
|
|
|
9,489
|
|
|
|
37,108
|
|
From sale of discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
21,696
|
|
|
|
2,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from discontinued operations
|
|
|
|
|
|
|
10,484
|
|
|
|
31,185
|
|
|
|
39,252
|
|
Attributable to CapitalSource Inc.
|
|
|
78,185
|
|
|
|
(274,246
|
)
|
|
|
(115,165
|
)
|
|
|
(625,097
|
)
|
Average shares basic
|
|
|
321,070,479
|
|
|
|
315,604,434
|
|
|
|
320,723,068
|
|
|
|
301,823,130
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option shares
|
|
|
884,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock
|
|
|
158,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock units
|
|
|
3,224,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion premium on the Debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares diluted
|
|
|
325,337,737
|
|
|
|
315,604,434
|
|
|
|
320,723,068
|
|
|
|
301,823,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.24
|
|
|
$
|
(0.90
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(2.20
|
)
|
From discontinued operations, net of taxes
|
|
|
|
|
|
|
0.03
|
|
|
|
0.10
|
|
|
|
0.13
|
|
Attributable to CapitalSource Inc.
|
|
|
0.24
|
|
|
|
(0.87
|
)
|
|
|
(0.36
|
)
|
|
|
(2.07
|
)
|
Diluted net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.24
|
|
|
$
|
(0.90
|
)
|
|
$
|
(0.46
|
)
|
|
$
|
(2.20
|
)
|
From discontinued operations, net of taxes
|
|
|
|
|
|
|
0.03
|
|
|
|
0.10
|
|
|
|
0.13
|
|
Attributable to CapitalSource Inc.
|
|
|
0.24
|
|
|
|
(0.87
|
)
|
|
|
(0.36
|
)
|
|
|
(2.07
|
)
|
35
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted average shares that have an antidilutive effect in
the calculation of diluted net income (loss) per share
attributable to CapitalSource Inc. and have been excluded from
the computations above were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Stock units
|
|
|
|
|
|
|
2,570,429
|
|
|
|
3,678,837
|
|
|
|
2,420,071
|
|
Stock options
|
|
|
3,532,444
|
|
|
|
5,911,081
|
|
|
|
2,987,379
|
|
|
|
5,527,284
|
|
Shares subject to a written call option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,137,696
|
|
Shares issuable upon conversion of convertible debt
|
|
|
14,074,972
|
|
|
|
|
|
|
|
14,647,963
|
|
|
|
|
|
Unvested restricted stock
|
|
|
661,023
|
|
|
|
1,562,336
|
|
|
|
833,531
|
|
|
|
2,161,833
|
|
|
|
Note 15.
|
Bank
Regulatory Capital
|
CapitalSource Bank is subject to various regulatory capital
requirements established by federal and state regulatory
agencies. Failure to meet minimum capital requirements can
result in regulatory agencies initiating certain mandatory and
possibly additional discretionary actions that, if undertaken,
could have a direct material effect on our consolidated
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, CapitalSource
Bank must meet specific capital guidelines that involve
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 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 requirements as of
September 30, 2010 and December 31, 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
December 31, 2009
|
|
|
Actual
|
|
Minimum Required
|
|
Actual
|
|
Minimum Required
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
($ in thousands)
|
|
Tier-1 Leverage
|
|
$
|
739,226
|
|
|
|
13.03
|
%
|
|
$
|
283,737
|
|
|
|
5.00
|
%
|
|
$
|
699,323
|
|
|
|
12.80
|
%
|
|
$
|
273,153
|
|
|
|
5.00
|
%
|
Tier-1 Risk-Based Capital
|
|
|
739,226
|
|
|
|
16.99
|
|
|
|
261,110
|
|
|
|
6.00
|
|
|
|
699,323
|
|
|
|
16.19
|
|
|
|
259,175
|
|
|
|
6.00
|
|
Total Risk-Based Capital
|
|
|
794,610
|
|
|
|
18.26
|
|
|
|
652,776
|
|
|
|
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 September 30,
2010 and December 31, 2009, CapitalSource Bank satisfied
the DFI capital ratio requirement with ratios of 12.85% and
12.32%, respectively.
|
|
Note 16.
|
Commitments
and Contingencies
|
As of September 30, 2010 and December 31, 2009, we had
issued $159.5 million and $182.5 million,
respectively, in stand-by letters of credit, which expire at
various dates over the next fifteen 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 $4.6 million and
$6.1 million, as reported in other liabilities in our
consolidated balance sheets as of September 30, 2010 and
December 31, 2009, respectively.
36
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of September 30, 2010 and December 31, 2009, we had
unfunded commitments to extend credit to our clients of
$2.2 billion and $2.8 billion, respectively, including
unfunded commitments to extend credit by CapitalSource Bank of
$959.2 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 September 30, 2010, we had sold all of our direct
real estate investment properties. We are responsible for
indemnifying the current owners for any remediation, including
costs of removal and disposal of asbestos that existed prior to
the sales, through the third anniversary date of the sale. We
will recognize any remediation costs if notified by the current
owners of their intention to exercise their indemnification
rights, however, no such notification has been received to date.
As of September 30, 2010, sufficient information was not
available to estimate our potential liability for conditional
asset retirement obligations as the obligations to remove the
asbestos from these properties continue to have indeterminable
settlement dates.
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 17.
|
Derivative
Instruments
|
We are exposed to certain risks related to our ongoing business
operations. The primary risks managed through the use of
derivative instruments are interest rate risk and foreign
exchange risk. We do not enter into derivative instruments for
speculative purposes. As of September 30, 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 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.
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.
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.
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. We also posted collateral of $10.0 million
related to counterparty requirements for foreign exchange
contracts at
37
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CapitalSource Bank. Our agreements generally include master
netting agreements whereby we are entitled to settle our
individual derivative positions with the same counterparty on a
net basis upon the occurrence of certain events. As of
September 30, 2010, our derivative counterparty exposure
was as follows ($ in thousands):
|
|
|
|
|
Gross derivative counterparty exposure
|
|
$
|
57,783
|
|
Master netting agreements
|
|
|
(38,099
|
)
|
|
|
|
|
|
Net derivative counterparty exposure
|
|
$
|
19,684
|
|
|
|
|
|
|
We report our derivatives in our consolidated balance sheets at
fair value on a gross basis irrespective of our master netting
arrangements. We held $20.1 million of collateral against
our derivative instruments that were in an asset position as of
September 30, 2010. For derivatives that were in a
liability position, we had posted collateral of
$62.8 million as of September 30, 2010.
As of September 30, 2010, the notional amounts and fair
values of our various derivative instruments as well as their
locations in our consolidated balance sheets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Notional Amount
|
|
|
Other Assets
|
|
|
Other Liabilities
|
|
|
|
($ in thousands)
|
|
|
Interest rate contracts
|
|
$
|
770,312
|
|
|
$
|
57,468
|
|
|
$
|
99,905
|
|
Foreign exchange contracts
|
|
|
26,253
|
|
|
|
315
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
796,565
|
|
|
$
|
57,783
|
|
|
$
|
100,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the notional amounts and fair
values of our various derivative instruments as well as their
locations in our audited consolidated balance sheets were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Notional Amount
|
|
|
Other Assets
|
|
|
Other Liabilities
|
|
|
|
($ in thousands)
|
|
|
Interest rate contracts
|
|
$
|
1,267,049
|
|
|
$
|
14,073
|
|
|
$
|
78,736
|
|
Foreign exchange contracts
|
|
|
54,621
|
|
|
|
256
|
|
|
|
3,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,321,670
|
|
|
$
|
14,329
|
|
|
$
|
82,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gains and losses on our derivative instruments recognized
during the three and nine months ended September 30, 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
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
($ in thousands)
|
|
|
Interest rate contracts
|
|
Loss on derivatives
|
|
$
|
(1,101
|
)
|
|
$
|
(6,010
|
)
|
|
$
|
(8,424
|
)
|
|
$
|
(5,605
|
)
|
Interest rate contracts
|
|
Gain on residential mortgage investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
862
|
|
Foreign exchange contracts
|
|
Loss on derivatives
|
|
|
(867
|
)
|
|
|
(4,288
|
)
|
|
|
(1,495
|
)
|
|
|
(6,712
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(1,968
|
)
|
|
$
|
(10,298
|
)
|
|
$
|
(9,919
|
)
|
|
$
|
(11,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 18.
|
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
38
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assets at fair value on a nonrecurring basis, including
investment securities,
held-to-maturity,
loans held for sale, loans held for investment, REO, and certain
other investments.
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; 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 consist of collateralized loan obligations, which include
the beneficial interests we hold in the deconsolidated
2006-A
Trust, 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 collateralized loan
obligations and corporate debt securities 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 generally recorded at amortized cost, but are
recorded at fair value on a non-recurring basis to the extent we
record an OTTI on the securities. Fair value measurements are
determined using quoted prices from external market
39
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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.
In cases where our collateral is a fixed or other tangible
asset, including commercial real estate, our determination of
the appropriate method to use to measure fair value depends on
several factors including the type of collateral that we are
evaluating, the age of the most recent appraisal performed on
the collateral, and the time required to obtain an updated
appraisal. Typically, we obtain an updated third-party appraisal
to estimate fair value using external valuation specialists.
For impaired loans, we typically obtain an updated appraisal as
of the date the loan is deemed impaired to measure the amount of
impairment. In situations where we are unable to obtain an
updated appraisal within the necessary timeframe, we will
consider internally developed estimates that utilize assumptions
and calculations similar to those customarily utilized by
third-party appraisers. If we are unable to obtain an updated
appraisal on the date of impairment within the necessary
timeframe, we may seek to obtain an updated appraisal shortly
thereafter to confirm our internally developed estimates.
We may make adjustments to outdated appraisals by analyzing the
changes in market conditions and asset performance since the
appraisal was performed. The appraisal value may be discounted
by a percentage that is determined by analyzing the change in
market conditions since the appraisal, consulting databases,
comparable market sale prices, brokers opinions of value
and other relevant data.
In cases where our collateral is not a fixed or tangible asset,
we typically use industry valuation benchmarks to determine the
value of the asset or the underlying enterprise.
When fair value adjustments are recorded on loans held for
investment, we typically classify them in Level 3 of the
fair value hierarchy.
We determine the fair value estimates of loans held for
investment for fair value disclosures primarily using external
valuation specialists. These valuation specialists group loans
based on credit rating and collateral type, and
40
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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 privately held companies. Warrants for
privately held 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 privately held 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 and nine months ended September 30, 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
41
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 fair values determined through
third party appraisals and through internally developed
valuation models are classified within Level 3 of the fair
value hierarchy.
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 at the time of foreclosure. Valuation of
that collateral, which often is a pool of many small balance
loans, is typically performed utilizing internally developed
estimates. These estimates rely upon default and recovery rates,
market discount rates and the underlying value of collateral
supporting the consumer loans. Underlying collateral values may
be supported by appraisals or broker price opinions. 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 comprises term debt 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 comprise convertible debt and subordinated
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.
42
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 September 30, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
Fair Value
|
|
|
Quoted Prices in
|
|
|
Other
|
|
|
Significant
|
|
|
|
Measurement as of
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
September 30, 2010
|
|
|
Identical Assets (Level 1)
|
|
|
Inputs (Level 2)
|
|
|
Inputs (Level 3)
|
|
|
|
($ in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency discount notes
|
|
$
|
264,865
|
|
|
$
|
|
|
|
$
|
264,865
|
|
|
$
|
|
|
Agency callable notes
|
|
|
176,069
|
|
|
|
|
|
|
|
176,069
|
|
|
|
|
|
Agency debt
|
|
|
105,557
|
|
|
|
|
|
|
|
105,557
|
|
|
|
|
|
Agency MBS
|
|
|
717,058
|
|
|
|
|
|
|
|
717,058
|
|
|
|
|
|
Non-agency MBS
|
|
|
142,175
|
|
|
|
|
|
|
|
142,175
|
|
|
|
|
|
Equity securities
|
|
|
204
|
|
|
|
204
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
|
5,150
|
|
|
|
|
|
|
|
5,150
|
|
|
|
|
|
Collateralized loan obligations
|
|
|
13,848
|
|
|
|
|
|
|
|
|
|
|
|
13,848
|
|
U.S. Treasury and agency securities
|
|
|
120,912
|
|
|
|
|
|
|
|
120,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities,
available-for-sale
|
|
|
1,545,838
|
|
|
|
204
|
|
|
|
1,531,786
|
|
|
|
13,848
|
|
Investments carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
648
|
|
|
|
|
|
|
|
|
|
|
|
648
|
|
Other assets held at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
|
57,783
|
|
|
|
|
|
|
|
57,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,604,269
|
|
|
$
|
204
|
|
|
$
|
1,589,569
|
|
|
$
|
14,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities held at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
100,025
|
|
|
$
|
|
|
|
$
|
100,025
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
Fair Value
|
|
|
Quoted Prices in
|
|
|
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
September 30, 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
|
|
|
|
July 1,
|
|
|
Included in
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
Settlements,
|
|
|
of Level 3
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
Income
|
|
|
Income, Net
|
|
|
(Losses)
|
|
|
Net
|
|
|
In
|
|
|
(Out)
|
|
|
2010
|
|
|
2010
|
|
|
|
($ in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
$
|
4,772
|
|
|
$
|
1,101
|
|
|
$
|
(903
|
)
|
|
$
|
198
|
|
|
$
|
(4,970
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Collateralized loan obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,848
|
|
|
|
|
|
|
|
|
|
|
|
13,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,772
|
|
|
|
1,101
|
|
|
|
(903
|
)
|
|
|
198
|
|
|
|
8,878
|
|
|
|
|
|
|
|
|
|
|
|
13,848
|
|
|
|
|
|
Warrants
|
|
|
684
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
648
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
5,456
|
|
|
$
|
1,065
|
|
|
$
|
(903
|
)
|
|
$
|
162
|
|
|
$
|
8,878
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14,496
|
|
|
$
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
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
September 30, 2009 that have been classified in
Level 3 of the fair value hierarchy was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized and Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
Unrealized Gains
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
and
|
|
|
Sales,
|
|
|
|
|
|
|
|
|
(Losses)
|
|
|
|
Balance as of
|
|
|
|
|
|
Other
|
|
|
Unrealized
|
|
|
Issuances, and
|
|
|
Transfers
|
|
|
Balance as of
|
|
|
As of
|
|
|
|
July 1,
|
|
|
Included in
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
Settlements,
|
|
|
In (Out)
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
Income
|
|
|
Income, Net
|
|
|
(Losses)
|
|
|
Net
|
|
|
of Level 3
|
|
|
2009
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency MBS
|
|
$
|
101
|
|
|
$
|
(4
|
)
|
|
$
|
(23
|
)
|
|
$
|
(27
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
74
|
|
|
$
|
(4
|
)
|
Corporate debt
|
|
|
12,526
|
|
|
|
222
|
|
|
|
1,360
|
|
|
|
1,582
|
|
|
|
(6,223
|
)
|
|
|
|
|
|
|
7,886
|
|
|
|
51
|
|
Collateralized loan obligation
|
|
|
790
|
|
|
|
(346
|
)
|
|
|
746
|
|
|
|
400
|
|
|
|
|
|
|
|
|
|
|
|
1,189
|
|
|
|
(345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
13,417
|
|
|
|
(128
|
)
|
|
|
2,083
|
|
|
|
1,955
|
|
|
|
(6,223
|
)
|
|
|
|
|
|
|
9,149
|
|
|
|
(298
|
)
|
Warrants
|
|
|
5,068
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
|
|
(3,568
|
)
|
|
|
|
|
|
|
1,498
|
|
|
|
(166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
18,485
|
|
|
$
|
(130
|
)
|
|
$
|
2,083
|
|
|
$
|
1,953
|
|
|
$
|
(9,791
|
)
|
|
$
|
|
|
|
$
|
10,647
|
|
|
$
|
(464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized and unrealized gains and losses on assets and
liabilities classified in Level 3 of the fair value
hierarchy included in income for the three months ended
September 30, 2010 and 2009, reported in interest income
and gain (loss) on investments, net were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on Residential Mortgage
|
|
|
Interest Income
|
|
Gain (Loss) on Investments, Net
|
|
Investment Portfolio
|
|
|
Three Months Ended September 30,
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
($ in thousands)
|
|
Total gains (losses) included in earnings for the period
|
|
$
|
|
|
|
$
|
116
|
|
|
$
|
1,065
|
|
|
$
|
(242
|
)
|
|
$
|
|
|
|
$
|
(4
|
)
|
Unrealized gains (losses) relating to assets still held at
reporting date
|
|
|
|
|
|
|
102
|
|
|
|
(36
|
)
|
|
|
(562
|
)
|
|
|
|
|
|
|
(4
|
)
|
A summary of the changes in the fair values of assets and
liabilities carried at fair value for the nine months ended
September 30, 2010, that have been classified in
Level 3 of the fair value hierarchy was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized and Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
and
|
|
|
Sales,
|
|
|
Transfers
|
|
|
|
|
|
(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
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
Income
|
|
|
Income, Net
|
|
|
(Losses)
|
|
|
Net
|
|
|
In
|
|
|
(Out)
|
|
|
2010
|
|
|
2010
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities, available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency MBS
|
|
$
|
61
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(61
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Corporate debt
|
|
|
4,457
|
|
|
|
1,226
|
|
|
|
(713
|
)
|
|
|
513
|
|
|
|
(4,970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized loan obligation
|
|
|
1,326
|
|
|
|
636
|
|
|
|
(308
|
)
|
|
|
328
|
|
|
|
12,194
|
|
|
|
|
|
|
|
|
|
|
|
13,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,844
|
|
|
|
1,862
|
|
|
|
(1,021
|
)
|
|
|
841
|
|
|
|
7,163
|
|
|
|
|
|
|
|
|
|
|
|
13,848
|
|
|
|
|
|
Warrants
|
|
|
1,392
|
|
|
|
(744
|
)
|
|
|
|
|
|
|
(744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
648
|
|
|
|
(744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,236
|
|
|
$
|
1,118
|
|
|
$
|
(1,021
|
)
|
|
$
|
97
|
|
|
$
|
7,163
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14,496
|
|
|
$
|
(744
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
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 nine months ended
September 30, 2009, that have been classified in
Level 3 of the fair value hierarchy was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized and Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
and
|
|
|
Sales,
|
|
|
Transfers
|
|
|
|
|
|
(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
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2009
|
|
|
Income
|
|
|
Income, Net
|
|
|
(Losses)
|
|
|
Net
|
|
|
In
|
|
|
(Out)
|
|
|
2009
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities, available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency MBS
|
|
$
|
377
|
|
|
$
|
(17
|
)
|
|
$
|
(52
|
)
|
|
$
|
(69
|
)
|
|
$
|
(234
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
74
|
|
|
$
|
(17
|
)
|
Corporate debt
|
|
|
33,886
|
|
|
|
(10,991
|
)
|
|
|
814
|
|
|
|
(10,177
|
)
|
|
|
(15,823
|
)
|
|
|
|
|
|
|
|
|
|
|
7,886
|
|
|
|
196
|
|
Collateralized loan obligation
|
|
|
2,361
|
|
|
|
(1,326
|
)
|
|
|
20
|
|
|
|
(1,306
|
)
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
1,189
|
|
|
|
(1,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
36,624
|
|
|
|
(12,334
|
)
|
|
|
782
|
|
|
|
(11,552
|
)
|
|
|
(15,923
|
)
|
|
|
|
|
|
|
|
|
|
|
9,149
|
|
|
|
(1,147
|
)
|
Warrants
|
|
|
4,661
|
|
|
|
85
|
|
|
|
|
|
|
|
85
|
|
|
|
(3,248
|
)
|
|
|
|
|
|
|
|
|
|
|
1,498
|
|
|
|
(79
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
41,285
|
|
|
$
|
(12,249
|
)
|
|
$
|
782
|
|
|
$
|
(11,467
|
)
|
|
$
|
(19,171
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,647
|
|
|
$
|
(1,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized and unrealized gains and losses on assets and
liabilities classified in Level 3 of the fair value
hierarchy included in income for the nine months ended
September 30, 2010 and 2009, reported in interest income
and gain (loss) on investments, net were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on Residential Mortgage
|
|
|
|
Interest Income
|
|
|
Gain (Loss) on Investments, Net
|
|
|
Investment Portfolio
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Total gains (losses) included in earnings for the period
|
|
$
|
159
|
|
|
$
|
703
|
|
|
$
|
959
|
|
|
$
|
(12,948
|
)
|
|
$
|
|
|
|
$
|
(4
|
)
|
Unrealized gains (losses) relating to assets still held at
reporting date
|
|
|
|
|
|
|
689
|
|
|
|
(744
|
)
|
|
|
(1,911
|
)
|
|
|
|
|
|
|
(4
|
)
|
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 and nine months ended
September 30, 2010, classified by their position in the
fair value hierarchy. The table also provides the gains (losses)
related to those assets recorded during the three and nine
months ended September 30, 2010.
46
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
Total Gains (Losses)
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
Three
|
|
|
Nine
|
|
|
|
Fair Value
|
|
|
Markets
|
|
|
Other
|
|
|
Significant
|
|
|
Months
|
|
|
Months
|
|
|
|
Measurement
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Ended
|
|
|
Ended
|
|
|
|
as of
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
September 30, 2010
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2010
|
|
|
2010
|
|
|
|
($ in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
36,979
|
|
|
$
|
|
|
|
$
|
36,979
|
|
|
$
|
|
|
|
$
|
(988
|
)
|
|
$
|
(41,060
|
)
|
Loans held for investment(1)
|
|
|
315,358
|
|
|
|
|
|
|
|
|
|
|
|
315,358
|
|
|
|
(26,641
|
)
|
|
|
(70,131
|
)
|
Investments carried at cost
|
|
|
1,090
|
|
|
|
|
|
|
|
|
|
|
|
1,090
|
|
|
|
(486
|
)
|
|
|
(2,732
|
)
|
REO(2)
|
|
|
52,393
|
|
|
|
|
|
|
|
|
|
|
|
52,393
|
|
|
|
(6,090
|
)
|
|
|
(37,800
|
)
|
Loan receivables
|
|
|
61,560
|
|
|
|
|
|
|
|
|
|
|
|
61,560
|
|
|
|
(1,250
|
)
|
|
|
(40,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
467,380
|
|
|
$
|
|
|
|
$
|
36,979
|
|
|
$
|
430,401
|
|
|
$
|
(35,455
|
)
|
|
$
|
(191,842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
The table below provides the fair values of those assets for
which nonrecurring fair value adjustments were recorded during
the three and nine months ended September 30, 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 and nine months ended
September 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
Total Losses
|
|
|
|
|
|
|
Active
|
|
|
Significant
|
|
|
|
|
|
Three
|
|
|
Nine
|
|
|
|
Fair Value
|
|
|
Markets
|
|
|
Other
|
|
|
Significant
|
|
|
Months
|
|
|
Months
|
|
|
|
Measurement
|
|
|
for Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
Ended
|
|
|
Ended
|
|
|
|
as of
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
September 30, 2009
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
2009
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
32,743
|
|
|
$
|
|
|
|
$
|
32,743
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(21
|
)
|
Loans held for investment(1)
|
|
|
345,288
|
|
|
|
|
|
|
|
|
|
|
|
345,288
|
|
|
|
(40,525
|
)
|
|
|
(167,226
|
)
|
Investments carried at cost
|
|
|
11,199
|
|
|
|
|
|
|
|
|
|
|
|
11,199
|
|
|
|
(6,743
|
)
|
|
|
(10,749
|
)
|
Investments accounted for under the equity method
|
|
|
555
|
|
|
|
|
|
|
|
|
|
|
|
555
|
|
|
|
(2,048
|
)
|
|
|
(2,802
|
)
|
Direct real estate investments, net
|
|
|
1,650
|
|
|
|
|
|
|
|
1,650
|
|
|
|
|
|
|
|
(3,737
|
)
|
|
|
(3,737
|
)
|
REO(2)
|
|
|
58,057
|
|
|
|
|
|
|
|
1,225
|
|
|
|
56,832
|
|
|
|
(2,971
|
)
|
|
|
(7,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
449,492
|
|
|
$
|
|
|
|
$
|
35,618
|
|
|
$
|
413,874
|
|
|
$
|
(56,024
|
)
|
|
$
|
(192,312
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
47
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 September 30, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
December 31, 2009
|
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
|
($ in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate A Participation Interest, net
|
|
$
|
5,409
|
|
|
$
|
5,424
|
|
|
$
|
530,560
|
|
|
$
|
530,390
|
|
Loans held for investment, net
|
|
|
6,078,675
|
|
|
|
5,931,027
|
|
|
|
7,548,545
|
|
|
|
7,255,318
|
|
Investments carried at cost
|
|
|
37,046
|
|
|
|
70,417
|
|
|
|
53,205
|
|
|
|
87,940
|
|
Investment securities,
held-to-maturity
|
|
|
208,222
|
|
|
|
223,495
|
|
|
|
242,078
|
|
|
|
262,181
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
4,627,206
|
|
|
|
4,634,118
|
|
|
|
4,483,879
|
|
|
|
4,486,285
|
|
Credit facilities
|
|
|
78,250
|
|
|
|
75,956
|
|
|
|
542,781
|
|
|
|
497,036
|
|
Term debt
|
|
|
1,145,638
|
|
|
|
1,010,970
|
|
|
|
2,956,536
|
|
|
|
2,162,533
|
|
Convertible debt, net
|
|
|
533,978
|
|
|
|
535,469
|
|
|
|
561,347
|
|
|
|
525,860
|
|
Subordinated debt
|
|
|
437,930
|
|
|
|
254,000
|
|
|
|
439,701
|
|
|
|
255,027
|
|
Mortgage debt
|
|
|
|
|
|
|
|
|
|
|
447,683
|
|
|
|
426,865
|
|
Loan commitments and letters of credit
|
|
|
|
|
|
|
47,141
|
|
|
|
|
|
|
|
45,455
|
|
For the three months ended September 30, 2010, we operated
as two reportable segments: 1) CapitalSource Bank and
2) Other Commercial Finance. For the six months ended
June 30, 2010 and three and nine months ended
September 30, 2009, we operated 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, and our Other Commercial Finance segment
comprises our loan portfolio and residential mortgage business
activities in the Parent Company. Our Healthcare Net Lease
segment comprised our direct real estate investment business
activities, which we exited completely with the sale of all of
the assets related to this segment, and, consequently, we have
presented the financial condition and results of operations for
this business as discontinued operations for all periods
presented. For comparative purposes, overhead and other
intercompany allocations have been reclassified from the
Healthcare Net Lease segment into the Other Commercial Finance
segment for the nine months ended September 30, 2010 and
the three and nine months ended September 30, 2009.
48
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The financial results from continuing operations of our
operating segments as of and for the three months ended
September 30, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2010
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
CapitalSource
|
|
|
Commercial
|
|
|
Intercompany
|
|
|
Consolidated
|
|
|
|
Bank
|
|
|
Finance
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Total investment income
|
|
$
|
88,031
|
|
|
$
|
72,593
|
|
|
$
|
(2,827
|
)
|
|
$
|
157,797
|
|
Interest expense
|
|
|
16,066
|
|
|
|
42,490
|
|
|
|
|
|
|
|
58,556
|
|
Provision for loan losses
|
|
|
14,552
|
|
|
|
24,219
|
|
|
|
|
|
|
|
38,771
|
|
Operating expenses
|
|
|
28,597
|
|
|
|
40,795
|
|
|
|
(14,625
|
)
|
|
|
54,767
|
|
Other income, net
|
|
|
5,371
|
|
|
|
45,720
|
|
|
|
(14,360
|
)
|
|
|
36,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations before income taxes
|
|
|
34,187
|
|
|
|
10,809
|
|
|
|
(2,562
|
)
|
|
|
42,434
|
|
Income tax benefit
|
|
|
(2,707
|
)
|
|
|
(32,961
|
)
|
|
|
|
|
|
|
(35,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
36,894
|
|
|
$
|
43,770
|
|
|
$
|
(2,562
|
)
|
|
$
|
78,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of September 30, 2010
|
|
$
|
5,959,318
|
|
|
$
|
3,691,728
|
|
|
$
|
(99,339
|
)
|
|
$
|
9,551,707
|
|
Total assets as of December 31,2009
|
|
|
5,682,949
|
|
|
|
6,680,576
|
|
|
|
(102,475
|
)
|
|
|
12,261,050
|
|
The financial results from continuing operations of our
operating segments as of and for the three months ended
September 30, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2009
|
|
|
|
|
|
|
Other Commercial
|
|
|
Intercompany
|
|
|
Consolidated
|
|
|
|
CapitalSource Bank
|
|
|
Finance
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Total investment income
|
|
$
|
78,785
|
|
|
$
|
134,868
|
|
|
$
|
(2,002
|
)
|
|
$
|
211,651
|
|
Interest expense
|
|
|
23,602
|
|
|
|
78,730
|
|
|
|
|
|
|
|
102,332
|
|
Provision for loan losses
|
|
|
48,451
|
|
|
|
172,934
|
|
|
|
|
|
|
|
221,385
|
|
Operating expenses
|
|
|
25,365
|
|
|
|
51,014
|
|
|
|
(11,953
|
)
|
|
|
64,426
|
|
Other income (expense), net
|
|
|
7,409
|
|
|
|
(6,933
|
)
|
|
|
(11,615
|
)
|
|
|
(11,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations before income taxes
|
|
|
(11,224
|
)
|
|
|
(174,743
|
)
|
|
|
(1,664
|
)
|
|
|
(187,631
|
)
|
Income tax expense
|
|
|
3,925
|
|
|
|
93,164
|
|
|
|
|
|
|
|
97,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(15,149
|
)
|
|
$
|
(267,907
|
)
|
|
$
|
(1,664
|
)
|
|
$
|
(284,720
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The financial results from continuing operations of our
operating segments as of and for the nine months ended
September 30, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2010
|
|
|
|
CapitalSource
|
|
|
Other Commercial
|
|
|
Intercompany
|
|
|
Consolidated
|
|
|
|
Bank
|
|
|
Finance
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Total investment income
|
|
$
|
250,723
|
|
|
$
|
257,948
|
|
|
$
|
(6,739
|
)
|
|
$
|
501,932
|
|
Interest expense
|
|
|
49,865
|
|
|
|
136,177
|
|
|
|
|
|
|
|
186,042
|
|
Provision for loan losses
|
|
|
107,350
|
|
|
|
175,623
|
|
|
|
|
|
|
|
282,973
|
|
Operating expenses
|
|
|
82,180
|
|
|
|
131,694
|
|
|
|
(42,311
|
)
|
|
|
171,563
|
|
Other income (expense), net
|
|
|
18,352
|
|
|
|
(2,976
|
)
|
|
|
(41,999
|
)
|
|
|
(26,623
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations before income taxes
|
|
|
29,680
|
|
|
|
(188,522
|
)
|
|
|
(6,427
|
)
|
|
|
(165,269
|
)
|
Income tax benefit
|
|
|
(5,226
|
)
|
|
|
(13,610
|
)
|
|
|
|
|
|
|
(18,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
34,906
|
|
|
$
|
(174,912
|
)
|
|
$
|
(6,427
|
)
|
|
$
|
(146,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The financial results from continuing operations of our
operating segments as of and for the nine months ended
September 30, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2009
|
|
|
|
CapitalSource
|
|
|
Other Commercial
|
|
|
Intercompany
|
|
|
Consolidated
|
|
|
|
Bank
|
|
|
Finance
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Total investment income
|
|
$
|
229,005
|
|
|
$
|
458,610
|
|
|
$
|
(4,265
|
)
|
|
$
|
683,350
|
|
Interest expense
|
|
|
92,566
|
|
|
|
245,382
|
|
|
|
|
|
|
|
337,948
|
|
Provision for loan losses
|
|
|
163,912
|
|
|
|
416,587
|
|
|
|
|
|
|
|
580,499
|
|
Operating expenses
|
|
|
75,307
|
|
|
|
162,199
|
|
|
|
(35,836
|
)
|
|
|
201,670
|
|
Other income (expense), net
|
|
|
25,334
|
|
|
|
(86,055
|
)
|
|
|
(35,700
|
)
|
|
|
(96,421
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations before income taxes
|
|
|
(77,446
|
)
|
|
|
(451,613
|
)
|
|
|
(4,129
|
)
|
|
|
(533,188
|
)
|
Income tax expense
|
|
|
8,641
|
|
|
|
122,548
|
|
|
|
|
|
|
|
131,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(86,087
|
)
|
|
$
|
(574,161
|
)
|
|
$
|
(4,129
|
)
|
|
$
|
(664,377
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accounting policies of each of the individual operating
segments are the same as those 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.
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, and daily loan collections received at CapitalSource Bank
for Parent Company loans and daily loan disbursements paid at
the Parent Company for CapitalSource Bank loans.
50
|
|
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 capital ratios, our intention to originate loans at
CapitalSource Bank, our portfolio runoff and growth, our
expectations regarding future credit performance, charge offs,
loan losses and adequacy of reserves, particularly regarding
commercial real estate and real estate construction loans, our
liquidity and capital position, repayment of our indebtedness,
our plans regarding the 3.5% and 4.0% Convertible
Debentures, CapitalSource Banks capitalization and
accessing of financing, expected prepayment speeds of and our
intention to hold our investment securities, economic and market
conditions for our business, our expectations regarding our
application to become a bank holding company and convert
CapitalSource Banks charter to a commercial charter, the
performance of our loans, in particular our high balance loans,
loan yields, the impact of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (Dodd-Frank) on our
operations, the impact of accounting pronouncements, taxes and
tax audits and examinations, our unfunded commitments, our
delinquent, non-accrual and impaired loans, 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-Q
that are not clearly historical in nature are forward-looking,
and the words anticipate, assume,
intend, believe, forecast,
expect, estimate, plan,
continue, will, should,
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; disruptions in economic and credit markets may make
it very difficult for us to obtain financing on attractive terms
or at all, our strategy regarding the 3.5% and
4.0% Convertible Debentures could be restricted by our
other indebtedness; 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 and rate of growth;
operating under the Dodd-Frank 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; we may not receive the regulatory approvals needed to
become a bank holding company within our expected time frame or
at all, 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.
51
Overview
CapitalSource Inc. (CapitalSource, and together with
its subsidiaries other than CapitalSource Bank, the Parent
Company) is 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 services in
southern and central California. Substantially all new loans are
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 September 30, 2010,
we had 1,340 loans outstanding, and our total loans had an
aggregate outstanding principal balance of $6.6 billion.
Included in the loan portfolio are certain loans shared between
CapitalSource Bank and the Parent Company.
For the three months ended September 30, 2010, we operated
as two reportable segments: 1) CapitalSource Bank and
2) Other Commercial Finance. For the six months ended
June 30, 2010 and three and nine months ended
September 30, 2009, we operated 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, and our Other Commercial Finance segment
comprises our loan portfolio and residential mortgage business
activities in the Parent Company. Our Healthcare Net Lease
segment comprised our direct real estate investment business
activities, which we exited completely with the sale of all of
the assets related to this segment and consequently, we have
presented the financial condition and results of operations
within our Healthcare Net Lease segment as discontinued
operations for all periods presented. For additional
information, see Note 19, Segment Data, in our
consolidated financial statements for the three and nine months
ended September 30, 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 Federal Deposit Insurance
Corporation (FDIC) to the maximum amounts permitted
by regulation. As of September 30, 2010, CapitalSource Bank
had 895 loans outstanding, with an aggregate outstanding
principal balance of $3.7 billion.
Through our Other Commercial Finance segment activities, the
Parent Company has provided financial products primarily to
small and middle market businesses. As of September 30,
2010, our Other Commercial Finance segment had 484 loans
outstanding, and the Parent Company held total loans having an
aggregate outstanding principal balance of $2.9 billion.
Deconsolidation
of the
2006-A term
debt securitization
During the three months ended September 30, 2010, we
delegated certain of our collateral management and special
servicing rights in our
2006-A term
debt securitization (the
2006-A
Trust) and sold our equity interest and certain notes
issued by the
2006-A Trust
for $7.0 million. As a result of this transaction, we
concluded that we were no longer the primary beneficiary and
deconsolidated the
2006-A
Trust, which resulted in the removal of all of its assets and
liabilities, including $801.9 million of loans,
$55.7 million of restricted cash and $891.3 million of
term debt from our consolidated balance sheet. Consequently,
comparisons made to our operating results for the three and nine
months ended September 30, 2010 reflect the impact of this
deconsolidation on certain categories of income and expense in
our consolidated income statements, including interest income,
interest expense and the provision for loan losses. During the
fourth quarter of 2010, we assigned our special servicing rights
so that we are no longer the named special servicer of the
2006-A Trust.
Exit
of skilled nursing home ownership business
In June 2010, we completed the sale of our long-term healthcare
facilities to Omega Healthcare Investors, Inc. As a result of
these sales, we exited the skilled nursing home ownership
business. Consequently, we have presented the financial
condition and results of operations for this business 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.
52
Bank
holding company application
We are pursuing our strategy of converting CapitalSource Bank to
a commercial bank and becoming a bank holding company under the
Bank Holding Company Act of 1956. Subject to forthcoming
conversations with Federal Reserve staff, we expect to file an
application to become a bank holding company in the first
quarter of 2011. We also plan to file with the FDIC and the
California Department of Financial Institutions to convert the
existing industrial charter of CapitalSource Bank to a
commercial charter. For such conversion to become effective, we
must be approved by the Federal Reserve as a bank holding
company. There is no assurance that any of the foregoing
regulators will approve our applications, in which case
CapitalSource Bank would not convert to a commercial bank.
Explanation
of Reporting Metrics
Interest Income. In our CapitalSource Bank
segment, interest income represents interest earned on loans,
the senior participation interest in a pool of commercial real
estate loans and related assets (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.
Fee Income. In our CapitalSource Bank and
Other Commercial Finance segments, fee income represents net fee
income earned from our loan operations. Fee income includes
prepayment-related fees as well as other fees charged to
borrowers.
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 credit facilities, term debt, convertible debt
and subordinated 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.
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, dividends,
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,
gains (losses) on debt extinguishment at the Parent Company, net
expense of real estate owned and other foreclosed assets, and
other miscellaneous fees and expenses not attributable to our
commercial lending and banking operations.
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.
53
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 September 30, 2010, the total
valuation allowance was $429.7 million. 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. Although realization is not assured, we
believe it is more likely than not that the remaining recognized
net deferred tax assets of $83.5 million as of
September 30, 2010 will be realized.
Operating
Results for the Three and Nine Months Ended September 30,
2010
Our results of operations for the three and nine months ended
September 30, 2010 and 2009 were impacted by the global
recession, a challenging credit market environment and the
availability of liquidity. As further described below, the most
significant factors influencing our consolidated results of
operations for the three and nine months ended
September 30, 2010, compared to the three and nine months
ended September 30, 2009 were:
|
|
|
|
|
Decreased provision for loan losses;
|
|
|
|
Deconsolidation of the
2006-A Trust;
|
|
|
|
Changes in income tax provisions (benefits) due to the
establishment in 2009 of valuation allowances with respect to
our deferred tax assets, and a net operating loss carryback in
2010 of one of our corporate entities;
|
|
|
|
Decreased balance of our commercial lending portfolio;
|
|
|
|
Gains and losses on our investments;
|
|
|
|
Gains and losses on debt extinguishment;
|
|
|
|
Decreased operating expenses;
|
|
|
|
Net expense of real estate owned and other foreclosed assets;
|
|
|
|
Sale of our residential mortgage investment portfolio in 2009;
|
|
|
|
Losses on derivatives;
|
|
|
|
Changes in lending and borrowing spreads; and
|
|
|
|
Divestiture of our Healthcare Net Lease segment.
|
54
Our consolidated operating results for the three and nine months
ended September 30, 2010 compared to the three and nine
months ended September 30, 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
|
September 30,
|
|
|
|
|
2010
|
|
2009
|
|
% Change
|
|
2010
|
|
2009
|
|
% Change
|
|
|
($ in thousands)
|
|
Interest income
|
|
$
|
150,976
|
|
|
$
|
206,475
|
|
|
|
(27
|
)
|
|
$
|
483,006
|
|
|
$
|
666,507
|
|
|
|
(28
|
)
|
Fee income
|
|
|
6,821
|
|
|
|
5,176
|
|
|
|
32
|
|
|
|
18,926
|
|
|
|
16,843
|
|
|
|
12
|
|
Interest expense
|
|
|
58,556
|
|
|
|
102,332
|
|
|
|
43
|
|
|
|
186,042
|
|
|
|
337,948
|
|
|
|
45
|
|
Provision for loan losses
|
|
|
38,771
|
|
|
|
221,385
|
|
|
|
82
|
|
|
|
282,973
|
|
|
|
580,499
|
|
|
|
51
|
|
Operating expenses
|
|
|
54,767
|
|
|
|
64,426
|
|
|
|
15
|
|
|
|
171,563
|
|
|
|
201,670
|
|
|
|
15
|
|
Other income (expense)
|
|
|
36,731
|
|
|
|
(11,139
|
)
|
|
|
430
|
|
|
|
(26,623
|
)
|
|
|
(96,421
|
)
|
|
|
72
|
|
Net income (loss) from continuing operations before income taxes
|
|
|
42,434
|
|
|
|
(187,631
|
)
|
|
|
123
|
|
|
|
(165,269
|
)
|
|
|
(533,188
|
)
|
|
|
69
|
|
Income tax (benefit) expense
|
|
|
(35,668
|
)
|
|
|
97,089
|
|
|
|
137
|
|
|
|
(18,836
|
)
|
|
|
131,189
|
|
|
|
114
|
|
Net income (loss) from continuing operations
|
|
|
78,102
|
|
|
|
(284,720
|
)
|
|
|
127
|
|
|
|
(146,433
|
)
|
|
|
(664,377
|
)
|
|
|
78
|
|
Net income from discontinued operations, net of taxes
|
|
|
|
|
|
|
10,484
|
|
|
|
(100
|
)
|
|
|
9,489
|
|
|
|
37,108
|
|
|
|
(74
|
)
|
Gain from sale of discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
|
21,696
|
|
|
|
2,144
|
|
|
|
912
|
|
Net income (loss)
|
|
|
78,102
|
|
|
|
(274,236
|
)
|
|
|
128
|
|
|
|
(115,248
|
)
|
|
|
(625,125
|
)
|
|
|
82
|
|
Net (loss) income attributable to noncontrolling interests
|
|
|
(83
|
)
|
|
|
10
|
|
|
|
(930
|
)
|
|
|
(83
|
)
|
|
|
(28
|
)
|
|
|
(196
|
)
|
Net income (loss) attributable to CapitalSource Inc.
|
|
|
78,185
|
|
|
|
(274,246
|
)
|
|
|
129
|
|
|
|
(115,165
|
)
|
|
|
(625,097
|
)
|
|
|
82
|
|
Our consolidated yields on interest-earning assets and the costs
of interest-bearing liabilities for the nine months ended
September 30, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
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
|
|
|
|
|
|
$
|
483,006
|
|
|
|
6.11
|
%
|
|
|
|
|
|
$
|
666,507
|
|
|
|
6.26
|
%
|
Fee income
|
|
|
|
|
|
|
18,926
|
|
|
|
0.24
|
|
|
|
|
|
|
|
16,843
|
|
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets(1)
|
|
$
|
10,574,525
|
|
|
|
501,932
|
|
|
|
6.35
|
|
|
$
|
14,246,416
|
|
|
|
683,350
|
|
|
|
6.41
|
|
Total interest-bearing liabilities(2)
|
|
|
8,339,492
|
|
|
|
186,042
|
|
|
|
2.98
|
|
|
|
12,244,987
|
|
|
|
337,948
|
|
|
|
3.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
315,890
|
|
|
|
3.37
|
%
|
|
|
|
|
|
$
|
345,402
|
|
|
|
2.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
3.99
|
%
|
|
|
|
|
|
|
|
|
|
|
3.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest-earning assets include cash and cash equivalents,
restricted cash, marketable securities, mortgage-related
receivables, residential mortgage-backed securities, 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. |
55
Discontinued
Operations
In June 2010, we completed the sale of our long-term healthcare
facilities and exited the skilled nursing home ownership
business. As a result, all consolidated comparisons below
reflect the continuing results of our operations. Income from
discontinued operations increased to $31.2 million,
including a gain on disposal of $21.7 million, for the nine
months ended September 30, 2010 from $39.3 million,
including a gain on disposal of $2.1 million, for the nine
months ended September 30, 2009. For additional
information, see Note 3, Discontinued Operations, in
our consolidated financial statements for the three and nine
months ended September 30, 2010.
Operating
Expenses
Consolidated operating expenses decreased to $54.8 million
for the three months ended September 30, 2010 from
$64.4 million for the three months ended September 30,
2009. The decrease was primarily due to a $6.2 million
decrease in professional fees and a $2.7 million decrease
in general administrative expenses, which primarily include
rent, depreciation and amortization, and marketing expenses.
Consolidated operating expenses decreased to $171.6 million
for the nine months ended September 30, 2010 from
$201.7 million for the nine months ended September 30,
2009. The decrease was primarily due to a $16.2 million
decrease in professional fees, a $7.0 million decrease in
compensation and benefits and a $6.9 million decrease in
general administrative expenses, which included a
$2.0 million decrease in FDIC premiums.
Income
Taxes
Consolidated income tax benefit for the three months ended
September 30, 2010 was $35.7 million, compared to an
income tax expense of $97.1 million for the three months
ended September 30, 2009. The 2009 tax expense was caused
primarily by the establishment of a valuation allowance at one
of our corporate entities, and the 2010 tax benefit was
primarily due to a net operating loss carryback election made by
of one of our corporate entities during the three months ended
September 30, 2010.
Consolidated income tax benefit for the nine months ended
September 30, 2010 was a benefit of $18.8 million,
compared to an income tax expense of $131.2 million for the
nine months ended September 30, 2009. The 2009 tax expense
was caused primarily by valuation allowances established for
several of corporate entities, and the 2010 tax benefit was
primarily due to a net operating loss carryback election made by
one of our corporate entities during the three months ended
September 30, 2010.
Comparison
of the Three and Nine Months Ended September 30, 2010 and
2009
CapitalSource
Bank Segment
Our CapitalSource Bank segment operating results for the three
and nine months ended September 30, 2010, compared to the
three and nine months ended September 30, 2009, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 30,
|
|
|
|
September 30,
|
|
|
|
|
2010
|
|
2009
|
|
% Change
|
|
2010
|
|
2009
|
|
% Change
|
|
|
($ in thousands)
|
|
Interest income
|
|
$
|
85,445
|
|
|
$
|
76,985
|
|
|
|
11
|
|
|
$
|
244,285
|
|
|
$
|
223,955
|
|
|
|
9
|
|
Fee income
|
|
|
2,586
|
|
|
|
1,800
|
|
|
|
44
|
|
|
|
6,438
|
|
|
|
5,050
|
|
|
|
27
|
|
Interest expense
|
|
|
16,066
|
|
|
|
23,602
|
|
|
|
32
|
|
|
|
49,865
|
|
|
|
92,566
|
|
|
|
46
|
|
Provision for loan losses
|
|
|
14,552
|
|
|
|
48,451
|
|
|
|
70
|
|
|
|
107,350
|
|
|
|
163,912
|
|
|
|
35
|
|
Operating expenses
|
|
|
28,597
|
|
|
|
25,365
|
|
|
|
(13
|
)
|
|
|
82,180
|
|
|
|
75,307
|
|
|
|
(9
|
)
|
Other income
|
|
|
5,371
|
|
|
|
7,409
|
|
|
|
(28
|
)
|
|
|
18,352
|
|
|
|
25,334
|
|
|
|
(28
|
)
|
Income tax (benefit) expense
|
|
|
(2,707
|
)
|
|
|
3,925
|
|
|
|
169
|
|
|
|
(5,226
|
)
|
|
|
8,641
|
|
|
|
(160
|
)
|
Net income (loss)
|
|
|
36,894
|
|
|
|
(15,149
|
)
|
|
|
344
|
|
|
|
34,906
|
|
|
|
(86,087
|
)
|
|
|
141
|
|
56
Interest
Income
Three
months ended September 30, 2010 and 2009
Total interest income increased to $85.4 million for the
three months ended September 30, 2010 from
$77.0 million for the three months ended September 30,
2009, with an average yield on interest-earning assets of 6.04%
for the three months ended September 30, 2010 compared to
5.62% for the three months ended September 30, 2009. During
the three months ended September 30, 2010 and 2009,
interest income on loans was $69.0 million and
$52.4 million, respectively, yielding 7.54% and 7.15% on
average loan balances of $3.6 billion and
$2.9 billion, respectively. During the three months ended
September 30, 2010 and 2009, $7.9 million and
$4.1 million, respectively, of interest income was not
recognized for loans on non-accrual, which negatively impacted
the yield on loans by 0.86% and 0.56%, respectively.
Interest income on the A Participation Interest was
$1.7 million and $10.7 million, during the three
months ended September 30, 2010 and 2009, respectively,
yielding 8.07% and 5.29% on an average balance of
$83.2 million and $801.1 million, 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
method. During the three months ended September 30, 2010
and 2009, we accreted $1.3 million and $6.9 million,
respectively, of discount into interest income on loans in our
consolidated statements of operations. The A
Participation Interest was fully repaid in October 2010.
During the three months ended September 30, 2010 and 2009,
interest income from our investments, including
available-for-sale
and
held-to-maturity
securities, was $14.4 million and $12.8 million,
respectively, yielding 3.41% and 5.02% on an average balance of
$1.7 billion and $1.0 billion, respectively. During
the three months ended September 30, 2010, we purchased
$327.9 million and $9.7 million of investment
securities,
available-for-sale
and
held-to-maturity,
respectively, while $282.7 million and $10.6 million
of principal repayments were received from our investment
securities,
available-for-sale
and
held-to-maturity,
respectively. For the three months ended September 30,
2009, $182.4 million and $31.4 million of investment
securities,
available-for-sale
and
held-to-maturity
were purchased, respectively, while $280.6 million and
$5.0 million, respectively, of principal repayments were
received.
During the three months ended September 30, 2010 and 2009,
interest income on cash and cash equivalents was
$0.3 million and $1.1 million, respectively, yielding
0.32% and 0.51% on average balances of $373.7 million and
$814.1 million, respectively.
Nine
months ended September 30, 2010 and 2009
Total interest income increased to $244.3 million for the
nine months ended September 30, 2010 from
$224.0 million for the nine months ended September 30,
2009, with an average yield on interest-earning assets of 5.84%
for the nine months ended September 30, 2010 compared to
5.37% for the nine months ended September 30, 2009. During
the nine months ended September 30, 2010 and 2009, interest
income on loans was $186.1 million and $151.7 million,
respectively, yielding 7.40% and 7.04% on an average loan
balance of $3.4 billion and $2.9 billion,
respectively. During the nine months ended September 30,
2010 and 2009, $23.2 million and $8.5 million,
respectively, of interest income was not recognized for loans on
non-accrual, which negatively impacted the yield on loans by
0.92% and 0.40%, respectively.
Interest income on the A Participation Interest was
$12.9 million and $35.3 million during the nine months
ended September 30, 2010 and 2009, respectively, yielding
6.86% and 4.71% on average balances of $252.2 million and
$1.0 billion, respectively. During the nine months ended
September 30, 2010 and 2009, we accreted $9.5 million
and $20.5 million, respectively, of discount into interest
income on loans in our consolidated statements of operations.
During the nine months ended September 30, 2010 and 2009,
interest income from our investments, including
available-for-sale
and
held-to-maturity
securities, was $44.1 million and $33.5 million,
respectively, yielding 3.72% and 4.52% on average balances of
$1.6 billion and $990.5 million, respectively. During
the nine months ended September 30, 2010, we purchased
$1.3 billion and $9.7 million of investment
securities,
available-for-sale
and
held-to-maturity,
respectively, while $673.2 million and $56.8 million
of principal repayments were received
57
from our investment securities,
available-for-sale
and
held-to-maturity,
respectively. For the nine months ended September 30, 2009,
$1.1 billion and $236.4 million of investment
securities,
available-for-sale
and
held-to-maturity
were purchased, respectively, while $1.0 billion and
$10.9 million, respectively, of principal repayments were
received.
During the nine months ended September 30, 2010 and 2009,
interest income on cash and cash equivalents was
$1.2 million and $3.5 million, respectively, yielding
0.30% and 0.58% on average balances of $519.8 million and
$807.1 million, respectively.
Fee
Income
Three
months ended September 30, 2010 and 2009
Fee income increased to $2.6 million for the three months
ended September 30, 2010 from $1.8 million for the
three months ended September 30, 2009, with average yields
on interest-earning assets of 0.18% and 0.13%, respectively,
primarily due to an increase in new loans at CapitalSource Bank.
Nine
months ended September 30, 2010 and 2009
Fee income increased to $6.4 million for the nine months
ended September 30, 2010 from $5.1 million for the
nine months ended September 30, 2009, with an average yield
on interest-earning assets of 0.15% and 0.12%, respectively,
primarily due to an increase in new loans at CapitalSource Bank.
Interest
Expense
Three
months ended September 30, 2010 and 2009
Total interest expense decreased to $16.1 million for the
three months ended September 30, 2010 from
$23.6 million for the three months ended September 30,
2009. The decrease was primarily due to a decrease in the
average cost of interest-bearing liabilities which was 1.30% and
2.01% during the three months ended September 30, 2010 and
2009, respectively. Our average balances of interest-bearing
liabilities, consisting of deposits and borrowings, were
$4.9 billion and $4.7 billion during the three months
ended September 30, 2010 and 2009, respectively. Our
interest expense on deposits for the three months ended
September 30, 2010 and 2009 was $14.5 million and
$22.7 million, respectively, with an average cost of
deposits of 1.26% and 2.02%, respectively, on average balances
of $4.6 billion and $4.5 billion, respectively. During
the three months ended September 30, 2010,
$780.2 million of our time deposits matured with a weighted
average interest rate of 1.08% and $872.5 million of new
and renewed time deposits were issued at a weighted average
interest rate of 0.99%. During the three months ended
September 30, 2009, $1.5 billion of our time deposits,
including brokered deposits, matured with a weighted average
interest rate of 2.56% and $1.3 billion of new and renewed
time deposits were issued at a weighted average interest rate of
1.47%. Additionally, during the three months ended
September 30, 2010, our weighted average interest rate of
our liquid account deposits, savings and money market accounts,
declined from 0.82% at the beginning of the quarter to 0.79% at
the end of the quarter. During the three months ended
September 30, 2010, our interest expense on borrowings,
primarily consisting of FHLB SF borrowings, was
$1.6 million with an average cost of 1.98% on an average
balance of $315.2 million. During the three months ended
September 30, 2010, there were $55.0 million in
advances taken and $20.0 million of maturities. During the
three months ended September 30, 2009, our interest expense
on borrowings, primarily consisting of FHLB SF borrowings, was
$0.9 million with an average cost of 1.84% on an average
balance of $200.0 million.
Nine
months ended September 30, 2010 and 2009
Total interest expense decreased to $49.9 million for the
nine months ended September 30, 2010 from
$92.6 million for the nine months ended September 30,
2009. The decrease was primarily due to a decrease in the
average cost of interest-bearing liabilities which was 1.38% and
2.59%, during the nine months ended September 30, 2010 and
2009, respectively. Our average balances of interest-bearing
liabilities, consisting of deposits and borrowings, were
$4.8 billion during the nine months ended
September 30, 2010 and 2009. Our interest expense on
deposits for the nine months ended September 30, 2010 and
2009 was $46.1 million and $91.0 million,
58
respectively, with an average cost of deposits of 1.35% and
2.61% on average balances of $4.6 billion and
$4.7 billion, respectively. During the nine months ended
September 30, 2010, $3.5 billion of our time deposits
matured with a weighted average interest rate of 1.50% and
$3.5 billion of new time deposits were issued at a weighted
average interest rate of 1.16%. During the nine months ended
September 30, 2009, $4.8 billion of our time deposits,
including brokered deposits, matured with a weighted average
interest rate of 3.15% and $4.1 billion of new time
deposits were issued at a weighted average interest rate of
1.69%. During the nine months ended September 30, 2010, our
interest expense on borrowings, primarily consisting of FHLB SF
borrowings, was $3.8 million with an average cost of 1.95%
on an average balance of $256.3 million. During the nine
months ended September 30, 2010, there were
$135.0 million in advances taken and $35.0 million of
maturities. During the nine months ended September 30,
2009, our interest expense on borrowings, primarily consisting
of FHLB SF borrowings, was $1.5 million with an average
cost of 1.88% on an average balance of $110.1 million.
Net
Finance Margin
Three
months ended September 30, 2010 and 2009
The yields of income earning assets and the costs of
interest-bearing liabilities in this segment for the three
months ended September 30, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
|
($ in thousands)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
$
|
85,445
|
|
|
|
5.86
|
%
|
|
|
|
|
|
$
|
76,985
|
|
|
|
5.49
|
%
|
Fee income
|
|
|
|
|
|
|
2,586
|
|
|
|
0.18
|
|
|
|
|
|
|
|
1,800
|
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets(1)
|
|
$
|
5,783,365
|
|
|
|
88,031
|
|
|
|
6.04
|
|
|
$
|
5,557,381
|
|
|
|
78,785
|
|
|
|
5.62
|
|
Total interest-bearing liabilities(2)
|
|
|
4,894,955
|
|
|
|
16,066
|
|
|
|
1.30
|
|
|
|
4,659,811
|
|
|
|
23,602
|
|
|
|
2.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
71,965
|
|
|
|
4.74
|
%
|
|
|
|
|
|
$
|
55,183
|
|
|
|
3.61
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
4.94
|
%
|
|
|
|
|
|
|
|
|
|
|
3.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest-earning assets include cash and cash equivalents,
investments, A Participation Interest and loans. |
|
(2) |
|
Interest-bearing liabilities include deposits and borrowings. |
59
Nine
months ended September 30, 2010 and 2009
The yields of income earning assets and the costs of
interest-bearing liabilities in this segment for the nine months
ended September 30, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Weighted
|
|
|
Net
|
|
|
|
|
|
Weighted
|
|
|
Net
|
|
|
|
|
|
|
Average
|
|
|
Investment
|
|
|
Average
|
|
|
Average
|
|
|
Investment
|
|
|
Average
|
|
|
|
Balance
|
|
|
Income
|
|
|
Yield/Cost
|
|
|
Balance
|
|
|
Income
|
|
|
Yield/Cost
|
|
|
|
($ in thousands)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
$
|
244,285
|
|
|
|
5.69
|
%
|
|
|
|
|
|
$
|
223,955
|
|
|
|
5.25
|
%
|
Fee income
|
|
|
|
|
|
|
6,438
|
|
|
|
0.15
|
|
|
|
|
|
|
|
5,050
|
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets(1)
|
|
$
|
5,740,258
|
|
|
|
250,723
|
|
|
|
5.84
|
|
|
$
|
5,700,846
|
|
|
|
229,005
|
|
|
|
5.37
|
|
Total interest-bearing liabilities(2)
|
|
|
4,835,988
|
|
|
|
49,865
|
|
|
|
1.38
|
|
|
|
4,779,343
|
|
|
|
92,566
|
|
|
|
2.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
200,858
|
|
|
|
4.46
|
%
|
|
|
|
|
|
$
|
136,439
|
|
|
|
2.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
4.68
|
%
|
|
|
|
|
|
|
|
|
|
|
3.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
Three
months ended September 30, 2010 and 2009
Operating expenses increased to $28.6 million for the three
months ended September 30, 2010 from $25.4 million for
the three months ended September 30, 2009. The increase was
primarily due to a $3.8 million increase in loan sourcing
fees, partially offset by a $0.7 million decrease in
compensation and benefits.
Nine
months ended September 30, 2010 and 2009
Operating expenses increased to $82.2 million for the nine
months ended September 30, 2010 from $75.3 million for
the nine months ended September 30, 2009. The increase was
primarily due to an $11.4 million increase in loan sourcing
fees, partially offset by a $2.0 million decrease in FDIC
premiums.
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
commitment amount of each new loan funded by CapitalSource Bank
during the period. We do not capitalize loan sourcing fees.
These fees are eliminated in consolidation. These fees are
included in other operating expenses and were $9.7 million
and $4.7 million for the three months ended
September 30, 2010 and 2009, respectively, and
$24.8 million and $9.8 million for the nine months
ended September 30, 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.
60
Other
Income
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 the number of loans or other
assets serviced. Loans being serviced by CapitalSource Bank for
the benefit of others were $5.9 billion and
$7.7 billion as of September 30, 2010 and
December 31, 2009, respectively, of which $2.9 billion
and $5.2 billion were owned by the Parent Company.
Three
months ended September 30, 2010 and 2009
Other income, which primarily consists of loan servicing fees
paid to CapitalSource Bank by the Parent Company, decreased to
$5.4 million for the three months ended September 30,
2010 from $7.4 million for the three months ended
September 30, 2009 primarily due to a $1.5 million decrease
in foreign exchange gains and a $2.3 million decrease in
loan servicing fees paid by the Parent Company to CapitalSource
Bank. The decrease in loan servicing fees was primarily a result
of the sale of the remaining direct real estate investments and
a decrease in the Parent Companys loan portfolio. The
decrease in other income was partially offset by a $1.5 million
decrease in losses on derivatives.
Nine
months ended September 30, 2010 and 2009
Other income decreased to $18.4 million for the nine months
ended September 30, 2010 from $25.3 million for the
nine months ended September 30, 2009 primarily due to a
$2.4 decrease in foreign exchange gains and a $6.2 million
decrease in loan servicing fees paid by the Parent Company to
CapitalSource Bank. This decrease in loan servicing fees was
primarily a result of the sale of the remaining direct real
estate investments and a decrease in the Parent Companys
loan portfolio. The decrease in other income was partially
offset by a $2.4 million decrease in losses on derivatives.
Other
Commercial Finance Segment
Our Other Commercial Finance segment operating results for the
three and nine months ended September 30, 2010, compared to
the three and nine months ended September 30, 2009, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
2010
|
|
|
2009
|
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
Interest income
|
|
$
|
68,358
|
|
|
$
|
131,492
|
|
|
|
(48
|
)
|
|
$
|
245,460
|
|
|
$
|
446,817
|
|
|
|
(45
|
)
|
Fee income
|
|
|
4,235
|
|
|
|
3,376
|
|
|
|
25
|
|
|
|
12,488
|
|
|
|
11,793
|
|
|
|
6
|
|
Interest expense
|
|
|
42,490
|
|
|
|
78,730
|
|
|
|
46
|
|
|
|
136,177
|
|
|
|
245,382
|
|
|
|
45
|
|
Provision for loan losses
|
|
|
24,219
|
|
|
|
172,934
|
|
|
|
86
|
|
|
|
175,623
|
|
|
|
416,587
|
|
|
|
58
|
|
Operating expenses
|
|
|
40,795
|
|
|
|
51,014
|
|
|
|
20
|
|
|
|
131,694
|
|
|
|
162,199
|
|
|
|
19
|
|
Other income (expense)
|
|
|
45,720
|
|
|
|
(6,933
|
)
|
|
|
759
|
|
|
|
(2,976
|
)
|
|
|
(86,055
|
)
|
|
|
97
|
|
Income tax (benefit) expense
|
|
|
(32,961
|
)
|
|
|
93,164
|
|
|
|
135
|
|
|
|
(13,610
|
)
|
|
|
122,548
|
|
|
|
111
|
|
Net income (loss) from continuing operations
|
|
|
43,770
|
|
|
|
(267,907
|
)
|
|
|
116
|
|
|
|
(174,912
|
)
|
|
|
(574,161
|
)
|
|
|
70
|
|
Interest
Income
Three
months ended September 30, 2010 and 2009
Interest income decreased to $68.4 million for the three
months ended September 30, 2010 from $131.5 million
for the three months ended September 30, 2009, primarily
due to a decrease in average total interest-earning assets,
including the deconsolidation of the
2006-A Trust
in July 2010. During the three months ended September 30,
2010, our average balance of interest-earning assets decreased
by $4.2 billion, or 52.8%, compared to the three months
ended September 30, 2009, due to the derecognition of
mortgage related receivables related to the sale of our
beneficial interests in securitization special purpose entities
in December 2009, the derecognition of loans related to the
deconsolidation of the
2006-A Trust
and the runoff of parent company loans. During the three months
ended September 30, 2010, yield on average interest-earning
assets increased to 7.64% from 6.69% for the three months ended
September 30, 2009. This increase was primarily the result
of an increase in the interest component of yield to
61
7.19% for the three months ended September 30, 2010, from
6.52% for the three months ended September 30, 2009,
primarily related to the deconsolidation of the
2006-A Trust
which included a large pool of nonaccrual loans and had a lower
yield than the rest of the loan portfolio. During the three
months ended September 30, 2010, our lending spread to
average one-month LIBOR was 8.61% compared to 7.47% for the
three months ended September 30, 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 loans that pay down or pay off,
non-accrual loans and modifications of interest rates on
existing loans.
Nine
months ended September 30, 2010 and 2009
Interest income decreased to $245.5 million for the nine
months ended September 30, 2010 from $446.8 million
for the nine months ended September 30, 2009, primarily due
to a decrease in average total interest-earning assets and a
decrease in yield on average interest-earning assets. During the
nine months ended September 30, 2010, our average balance
of interest-earning assets decreased by $3.7 billion, or
43.4%, compared to the nine months ended September 30,
2009, due to the deconsolidation of mortgage related receivables
related to the sale of our beneficial interests in
securitization special purpose entities in December 2009, the
deconsolidation of the
2006-A Trust
and the runoff of parent company loans. During the nine months
ended September 30, 2010, yield on average interest-earning
assets decreased to 7.13% from 7.17% for the nine months ended
September 30, 2009. This decrease was primarily the result
of a decrease in the interest component of yield to 6.79% for
the nine months ended September 30, 2010, from 6.99% for
the nine months ended September 30, 2009.
Fee
Income
Three
months ended September 30, 2010 and 2009
Fee income increased to $4.2 million for the three months
ended September 30, 2010 from $3.4 million for the
three months ended September 30, 2009, with average yields
on interest-earning assets of 0.45% and 0.17%, respectively,
primarily due to an increase in collateral management fees and
prepayment fees, partially offset by a decrease in unused line
fees.
Nine
months ended September 30, 2010 and 2009
Fee income increased to $12.5 million for the nine months
ended September 30, 2010 from $11.8 million for the
nine months ended September 30, 2009, with average yields
on interest-earning assets of 0.34% and 0.18%, respectively,
primarily due to an increase in prepayment fees and collateral
management fees, partially offset by a decrease in unused line
fees.
Interest
Expense
Three
months ended September 30, 2010 and 2009
The decrease in interest expense to $42.5 million for the
three months ended September 30, 2010 from
$78.7 million for the three months ended September 30,
2009 was primarily due to a decrease in average interest-bearing
liabilities of $4.3 billion, or 62.9%, primarily due to the
deconsolidation of term debt related to the sale of our
beneficial interests in securitization special purpose entities
in December 2009, combined with the deconsolidation of the
2006-A Trust
in July 2010. Our cost of borrowings increased to 6.65% for the
three months ended September 30, 2010 from 4.57% for the
three months ended September 30, 2009, as a result of
higher deferred financing fee amortization and the change in the
mix of our borrowing composition due the sale of our beneficial
interests in securitization special purpose entities in December
2009 and the deconsolidation of the
2006-A
Trust, which had lower borrowing costs than the rest of our
borrowings.
Nine
months ended September 30, 2010 and 2009
The decrease in interest expense to $136.2 million for the
nine months ended September 30, 2010 from
$245.4 million for the nine months ended September 30,
2009 was primarily due to a decrease in average interest-bearing
liabilities of $4.0 billion, or 53.2%, primarily due to the
deconsolidation of term debt related to the sale of
62
our beneficial interests in securitization special purpose
entities in December 2009, combined with the deconsolidation of
the 2006-A
Trust in July 2010. Our cost of borrowings increased to 5.20%
for the three months ended September 30, 2010, from 4.38%
for the nine months ended September 30, 2009, as a result
of higher deferred financing fee amortization and the change in
the mix of our borrowing composition due to the deconsolidation
of term debt and the
2006-A
Trust, which had lower borrowing costs than the rest of the
portfolio, partially offset by lower interest rates as LIBOR
dropped.
Net
Finance Margin
Three
months ended September 30, 2010 and 2009
Net finance margin was 3.17% for the three months ended
September 30, 2010, an increase of 0.39% from 2.78% for the
three months ended September 30, 2009. This increase was
primarily due to the deconsolidation of the
2006-A
Trust, which removed lower yielding loans and lower
interest-bearing debt from our balance sheet. Net finance spread
was 0.99% for the three months ended September 30, 2010, a
decrease of 1.13% from 2.12% for the three months ended
September 30, 2009, primarily due to an increase in our
cost of borrowings, partially offset by an increase in interest
component of yield.
The yields of income earning assets and the costs of
interest-bearing liabilities in this segment for the three
months ended September 30, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
Average
|
|
|
Net Investment
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
|
($ in thousands)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
$
|
68,358
|
|
|
|
7.19
|
%
|
|
|
|
|
|
$
|
131,492
|
|
|
|
6.52
|
%
|
Fee income
|
|
|
|
|
|
|
4,235
|
|
|
|
0.45
|
|
|
|
|
|
|
|
3,376
|
|
|
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets(1)
|
|
$
|
3,772,120
|
|
|
|
72,593
|
|
|
|
7.64
|
|
|
$
|
7,999,917
|
|
|
|
134,868
|
|
|
|
6.69
|
|
Total interest-bearing liabilities(2)
|
|
|
2,535,383
|
|
|
|
42,490
|
|
|
|
6.65
|
|
|
|
6,841,000
|
|
|
|
78,730
|
|
|
|
4.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
30,103
|
|
|
|
0.99
|
%
|
|
|
|
|
|
$
|
56,138
|
|
|
|
2.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
3.17
|
%
|
|
|
|
|
|
|
|
|
|
|
2.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
Nine
months ended September 30, 2010 and 2009
Net finance margin was 3.37% for the nine months ended
September 30, 2010, an increase of 0.03% from 3.34% for the
nine months ended September 30, 2009. Net finance spread
was 1.93% for the nine months ended September 30, 2010, a
decrease of 0.86% from 2.79% for the nine months ended
September 30, 2009, due to the changes in its components as
described above.
63
The yields of income earning assets and the costs of
interest-bearing liabilities in this segment for the nine months
ended September 30, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
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
|
|
|
|
|
|
$
|
245,460
|
|
|
|
6.79
|
%
|
|
|
|
|
|
$
|
446,817
|
|
|
|
6.99
|
%
|
Fee income
|
|
|
|
|
|
|
12,488
|
|
|
|
0.34
|
|
|
|
|
|
|
|
11,793
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets(1)
|
|
$
|
4,834,203
|
|
|
|
257,948
|
|
|
|
7.13
|
|
|
$
|
8,545,894
|
|
|
|
458,610
|
|
|
|
7.17
|
|
Total interest-bearing liabilities(2)
|
|
|
3,503,504
|
|
|
|
136,177
|
|
|
|
5.20
|
|
|
|
7,488,183
|
|
|
|
245,382
|
|
|
|
4.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
121,771
|
|
|
|
1.93
|
%
|
|
|
|
|
|
$
|
213,228
|
|
|
|
2.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
3.37
|
%
|
|
|
|
|
|
|
|
|
|
|
3.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
Three
months ended September 30, 2010 and 2009
Operating expenses decreased to $40.8 million for the three
months ended September 30, 2010 from $51.0 million for
the three months ended September 30, 2009, primarily due to
a $6.1 million decrease in professional fees, a
$2.3 million decrease in loan servicing fees paid to
CapitalSource Bank, and a $1.7 million decrease in
incentive compensation. Operating expenses as a percentage of
average total assets increased to 4.06% for the three months
ended September 30, 2010 from 2.46% for the three months
ended September 30, 2009 due to the decrease in total
assets as a result of the deconsolidation of the
2006-A
Trust, the sale of our mortgage related receivables during 2009
and the runoff of parent company loans.
Nine
months ended September 30, 2010 and 2009
Operating expenses decreased to $131.7 million for the nine
months ended September 30, 2010 from $162.2 million
for the nine months ended September 30, 2009, primarily due
to a $15.9 million decrease in professional fees, a
$6.4 million decrease in compensation and benefits, and a
$6.2 million decrease in loan servicing fees paid to
CapitalSource Bank. Operating expenses as a percentage of
average total assets increased to 3.57% for the nine months
ended September 30, 2010 from 2.40% for the nine months
ended September 30, 2009 due to the decrease in total
assets as a result of the deconsolidation of the
2006-A
Trust, the sale of our mortgage related receivables during 2009
and the runoff of parent company loans.
64
Other
Income (Expense)
Three
months ended September 30, 2010 and 2009
Other income for the three months ended September 30, 2010
was $45.7 million compared to other expense of
$6.9 million for the three months ended September 30,
2009. The change in other income was primarily due to gains on
investments, the deconsolidation of the
2006-A Trust
and decreases in losses on derivatives, partially offset by an
increase in losses on foreign currency exchange. Further
explanation on the change is described below.
Gains on investments were $29.9 million for the three
months ended September 30, 2010 compared to losses of
$8.4 million for the three months ended September 30,
2009. The gains were primarily due to $12.5 million in
dividend income, $9.3 million in realized gains on other
investment securities and $8.7 million in realized gains on
the sales of cost-basis investments, partially offset by
$0.5 million of other-than-temporary impairment on
cost-basis investments. Losses on derivatives were
$1.7 million for the three months ended September 30,
2010 compared to $8.5 million for the three months ended
September 30, 2009. There were no gains or losses on debt
extinguishment for the three months ended September 30,
2010 compared to an $11.5 million gain on debt
extinguishment for the three months ended September 30,
2009.
Other income increased to $24.9 million for the three
months ended September 30, 2010 from $18.9 million for
the three months ended September 30, 2009. This change was
primarily due to a $16.7 million gain recorded for the
three months ended September 30, 2010 on the
deconsolidation of the
2006-A
Trust, a $5.0 million increase in loan origination fees, a
$3.9 million decrease in losses on loan sales, and a
$3.4 million increase in earnings on equity investments,
partially offset by a $6.9 million increase in losses on
foreign currency exchange.
Nine
months ended September 30, 2010 and 2009
Other expense decreased to $3.0 million for the nine months
ended September 30, 2010 from $86.1 million for the
nine months ended September 30, 2009, primarily due to
gains on investments, increases in loan origination fees,
decreases in losses on trading securities, gains on foreign
currency exchange and decreases in losses on loan sales,
partially offset by decreases in gains on our residential
mortgage investment portfolio and increases in net expense of
real estate owned and other foreclosed assets.
Gains on investments were $46.3 million for the nine months
ended September 30, 2010 compared to losses of
$29.5 million for the nine months ended September 30,
2009. This change was primarily due to a $19.7 million
increase in realized gains on cost-basis investments, a decrease
in other-than-temporary impairment on cost-basis investments of
$8.7 million, a $16.5 million increase in dividend
income, and a $13.2 million decrease in impairments of our
available-for-sale
investments. Losses on derivatives were $9.4 million for
the nine months ended September 30, 2010 compared to
$8.1 million for the nine months ended September 30,
2009.
Net expense of real estate owned and other assets increased to
$91.0 million for the nine months ended September 30,
2010 compared to $32.5 million for the nine months ended
September 30, 2009, primarily due to a $36.8 million
increase in provision for loan receivables losses related loans
acquired through foreclosure, a $21.0 million increase in
unrealized losses on real estate owned and a $12.9 million
increase in direct real estate impairments, partially offset by
a $14.7 million increase in realized gains on real estate
owned.
Other income was $50.1 million for the nine months ended
September 30, 2010 compared to other expense of
$16.0 million for the nine months ended September 30,
2009. This change was primarily due to a $1.1 million gain
on debt extinguishment for the nine months ended
September 30, 2010, compared to a $41.1 million loss
on debt extinguishment for the nine months ended
September 30, 2009, a $16.7 million gain on the
deconsolidation of the
2006-A
Trust, a $15.0 million increase in loan origination fees, a
$7.8 million increase in gains on foreign currency
exchange, and a $7.3 million decrease in losses on loan
sales. These increases were partially offset by
$15.3 million in gains on our residential mortgage
investment portfolio and gains of $14.4 million on trading
securities for the nine months ended September 30, 2009
compared to no activity for the nine months ended
September 30, 2010 as these securities were sold in the
first quarter of 2009.
65
Financial
Condition
CapitalSource
Bank Segment
Portfolio
Composition
As of September 30, 2010 and December 31, 2009, the
composition of the CapitalSource Bank segment portfolio was as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents(1)
|
|
$
|
365,349
|
|
|
$
|
821,980
|
|
Investment securities,
available-for-sale
|
|
|
1,531,785
|
|
|
|
901,764
|
|
Investment securities,
held-to-maturity
|
|
|
208,222
|
|
|
|
242,078
|
|
Commercial real estate A Participation Interest, net
|
|
|
5,409
|
|
|
|
530,560
|
|
Loans(2)
|
|
|
3,705,992
|
|
|
|
3,061,426
|
|
FHLB SF stock
|
|
|
19,370
|
|
|
|
20,195
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,836,127
|
|
|
$
|
5,578,003
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
4,627,206
|
|
|
$
|
4,483,879
|
|
FHLB SF borrowings
|
|
|
300,000
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,927,206
|
|
|
$
|
4,683,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of September 30, 2010 and December 31, 2009, the
amounts include restricted cash of $16.3 million and
$65.9 million, respectively. |
|
(2) |
|
Excludes deferred loan fees and discounts and the allowance for
loan losses. |
Cash and
Cash Equivalents
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 and nine months ended September 30, 2010.
Investment
Securities,
Available-for-Sale
Investment securities,
available-for-sale,
consists of 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 and agency securities. 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 September 30, 2010.
For additional information on our investment securities,
available-for-sale,
see Note 6, Investments, in our consolidated
financial statements for the three and nine months ended
September 30, 2010.
Investment
Securities,
Held-to-Maturity
Investment securities,
held-to-maturity,
consists 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 and nine months ended
September 30, 2010.
66
Commercial
Real Estate A Participation Interest
The A Participation Interest was fully repaid during
the fourth quarter of 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 and nine months
ended September 30, 2010.
CapitalSource
Bank Segment Loan Portfolio Composition
As of September 30, 2010 and December 31, 2009, our
total CapitalSource Bank loan portfolio had outstanding balances
of $3.7 billion and $3.1 billion, respectively. The
portfolio statistics below include gross loans held for
investment and held for sale.
As of September 30, 2010 and December 31, 2009, the
composition of the CapitalSource Bank loan portfolio by loan
type was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
$
|
1,847,731
|
|
|
|
50
|
%
|
|
$
|
1,594,974
|
|
|
|
52
|
%
|
Real estate
|
|
|
1,639,269
|
|
|
|
44
|
|
|
|
1,086,961
|
|
|
|
36
|
|
Real estate construction
|
|
|
218,992
|
|
|
|
6
|
|
|
|
379,491
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,705,992
|
|
|
|
100
|
%
|
|
$
|
3,061,426
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 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
|
|
$
|
174,506
|
|
|
$
|
1,561,472
|
|
|
$
|
111,753
|
|
|
$
|
1,847,731
|
|
Real estate
|
|
|
386,839
|
|
|
|
904,438
|
|
|
|
347,992
|
|
|
|
1,639,269
|
|
Real estate construction
|
|
|
84,023
|
|
|
|
129,020
|
|
|
|
5,949
|
|
|
|
218,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
645,368
|
|
|
$
|
2,594,930
|
|
|
$
|
465,694
|
|
|
$
|
3,705,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 78% of the CapitalSource Bank loan portfolio bears
interest at adjustable rates pegged to an interest rate index
plus a specified margin and is accruing interest. Approximately
52% of the portfolio is subject to an interest rate floor and is
accruing interest. Due to low market interest rates as of
September 30, 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 2.42% as of September 30, 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.
67
As of September 30, 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
|
|
$
|
470,433
|
|
|
$
|
834,267
|
|
|
$
|
21,424
|
|
|
$
|
1,326,124
|
|
|
|
36
|
%
|
3-Month LIBOR
|
|
|
33,717
|
|
|
|
18,446
|
|
|
|
|
|
|
|
52,163
|
|
|
|
1
|
|
6-Month LIBOR
|
|
|
|
|
|
|
44,534
|
|
|
|
|
|
|
|
44,534
|
|
|
|
1
|
|
Prime
|
|
|
468,393
|
|
|
|
113,068
|
|
|
|
4,888
|
|
|
|
586,349
|
|
|
|
16
|
|
Canadian Bankers
|
|
|
51,000
|
|
|
|
4,592
|
|
|
|
|
|
|
|
55,592
|
|
|
|
2
|
|
Blended
|
|
|
675,073
|
|
|
|
122,446
|
|
|
|
|
|
|
|
797,519
|
|
|
|
22
|
|
Treasuries
|
|
|
13,239
|
|
|
|
2,953
|
|
|
|
|
|
|
|
16,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable rate loans
|
|
|
1,711,855
|
|
|
|
1,140,306
|
|
|
|
26,312
|
|
|
|
2,878,473
|
|
|
|
78
|
|
Fixed rate loans
|
|
|
100,274
|
|
|
|
326,826
|
|
|
|
50,636
|
|
|
|
477,736
|
|
|
|
13
|
|
Loans on nonaccrual
|
|
|
35,602
|
|
|
|
172,137
|
|
|
|
142,044
|
|
|
|
349,783
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
1,847,731
|
|
|
$
|
1,639,269
|
|
|
$
|
218,992
|
|
|
$
|
3,705,992
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB SF
Stock
Investments in FHLB SF stock are recorded at historical cost.
FHLB SF stock does not have a readily determinable fair value,
but can generally be sold back to the FHLB SF at par value upon
stated notice. The 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
September 30, 2010.
Deposits
Total deposits increased by $143.3 million, or 3.20%, to
$4.6 billion as of September 30, 2010 from
$4.5 billion as of December 31, 2009.
As of September 30, 2010 and December 31, 2009,
CapitalSource Banks interest-bearing deposit portfolio by
product type and the maturities of the certificates of deposit
portfolio were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market
|
|
$
|
246,837
|
|
|
|
0.74
|
%
|
|
$
|
258,283
|
|
|
|
0.99
|
%
|
Savings
|
|
|
712,768
|
|
|
|
0.80
|
|
|
|
599,084
|
|
|
|
1.09
|
|
Certificates of deposit
|
|
|
3,667,601
|
|
|
|
1.37
|
|
|
|
3,626,512
|
|
|
|
1.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
$
|
4,627,206
|
|
|
|
1.25
|
|
|
$
|
4,483,879
|
|
|
|
1.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
|
($ in thousands)
|
|
|
Remaining maturity of certificates of deposit:
|
|
|
|
|
|
|
|
|
0 to 3 months
|
|
$
|
1,287,688
|
|
|
|
1.28
|
%
|
4 to 6 months
|
|
|
1,016,529
|
|
|
|
1.12
|
|
7 to 9 months
|
|
|
383,820
|
|
|
|
1.40
|
|
10 to 12 months
|
|
|
263,391
|
|
|
|
1.52
|
|
Longer than 12 months
|
|
|
716,173
|
|
|
|
1.83
|
|
|
|
|
|
|
|
|
|
|
Total certificates of deposit
|
|
$
|
3,667,601
|
|
|
|
1.37
|
|
|
|
|
|
|
|
|
|
|
FHLB SF
Borrowings
FHLB SF borrowings were primarily for interest rate risk
management purposes. The weighted-average remaining maturities
of the borrowings were approximately 2.6 years and
1.9 years as of September 30, 2010 and
December 31, 2009, respectively.
As of September 30, 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
|
|
$
|
74,000
|
|
|
|
1.55
|
%
|
After 1 year through 2 years
|
|
|
68,000
|
|
|
|
1.94
|
|
After 2 years through 3 years
|
|
|
33,000
|
|
|
|
1.60
|
|
After 3 years through 4 years
|
|
|
35,000
|
|
|
|
2.52
|
|
After 4 years through 5 years
|
|
|
75,000
|
|
|
|
2.19
|
|
After 5 years
|
|
|
15,000
|
|
|
|
2.88
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
300,000
|
|
|
|
1.98
|
|
|
|
|
|
|
|
|
|
|
Other
Commercial Finance Segment
Portfolio
Composition
The portfolio statistics below include gross loans held for
investment and loans held for sale, including lower of cost or
fair value adjustments. As of September 30, 2010 and
December 31, 2009, the composition of the Other Commercial
Finance segment portfolio was as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Investment securities,
available-for-sale
|
|
$
|
14,053
|
|
|
$
|
58,827
|
|
Loans
|
|
|
2,921,715
|
|
|
|
5,220,814
|
|
Other investments(1)
|
|
|
82,514
|
|
|
|
96,517
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,018,282
|
|
|
|
5,376,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes investments carried at cost, investments carried at
fair value and investments accounted for under the equity method. |
69
Other
Commercial Finance Segment Loan Portfolio Composition
As of September 30, 2010 and December 31, 2009, our
total Other Commercial Finance loan portfolio had outstanding
balances of $2.9 billion and $5.2 billion,
respectively. Included in these amounts were loans held for sale
of $2.8 million and $0.7 million as of
September 30, 2010 and December 31, 2009, respectively.
As of September 30, 2010 and December 31, 2009, the
composition of the Other Commercial Finance loan portfolio by
loan type was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
$
|
2,610,748
|
|
|
|
89
|
%
|
|
$
|
3,441,481
|
|
|
|
66
|
%
|
Real estate
|
|
|
204,470
|
|
|
|
7
|
|
|
|
939,598
|
|
|
|
18
|
|
Real estate construction
|
|
|
106,497
|
|
|
|
4
|
|
|
|
839,735
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,921,715
|
|
|
|
100
|
%
|
|
$
|
5,220,814
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 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
|
|
$
|
561,788
|
|
|
$
|
1,802,018
|
|
|
$
|
246,942
|
|
|
$
|
2,610,748
|
|
Real estate
|
|
|
162,826
|
|
|
|
27,824
|
|
|
|
13,820
|
|
|
|
204,470
|
|
Real estate construction
|
|
|
25,958
|
|
|
|
80,539
|
|
|
|
|
|
|
|
106,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
750,572
|
|
|
$
|
1,910,381
|
|
|
$
|
260,762
|
|
|
$
|
2,921,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 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
|
|
$
|
597,271
|
|
|
$
|
101,549
|
|
|
$
|
|
|
|
$
|
698,820
|
|
|
|
24
|
%
|
2-Month LIBOR
|
|
|
22,905
|
|
|
|
|
|
|
|
|
|
|
|
22,905
|
|
|
|
1
|
|
3-Month LIBOR
|
|
|
52,542
|
|
|
|
|
|
|
|
|
|
|
|
52,542
|
|
|
|
2
|
|
6-Month LIBOR
|
|
|
4,842
|
|
|
|
|
|
|
|
|
|
|
|
4,842
|
|
|
|
|
|
1-Month
EURIBOR
|
|
|
91,005
|
|
|
|
|
|
|
|
|
|
|
|
91,005
|
|
|
|
3
|
|
3-Month
EURIBOR
|
|
|
18,740
|
|
|
|
|
|
|
|
|
|
|
|
18,740
|
|
|
|
1
|
|
Prime
|
|
|
514,983
|
|
|
|
8,828
|
|
|
|
45,768
|
|
|
|
569,579
|
|
|
|
19
|
|
Blended
|
|
|
897,178
|
|
|
|
|
|
|
|
|
|
|
|
897,178
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable rate loans
|
|
|
2,199,466
|
|
|
|
110,377
|
|
|
|
45,768
|
|
|
|
2,355,611
|
|
|
|
81
|
|
Fixed rate loans
|
|
|
108,122
|
|
|
|
17,442
|
|
|
|
2,459
|
|
|
|
128,023
|
|
|
|
4
|
|
Loans on nonaccrual
|
|
|
303,160
|
|
|
|
76,651
|
|
|
|
58,270
|
|
|
|
438,081
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
2,610,748
|
|
|
$
|
204,470
|
|
|
$
|
106,497
|
|
|
$
|
2,921,715
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010, approximately 34% of the
adjustable rate loan portfolio is subject to an interest rate
floor and were accruing interest. Due to low market interest
rates as of September 30, 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 2.36% as of September 30,
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.
70
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.
Investment
Securities, Available-for-sale
Investment securities, available-for-sale consist of corporate
debt, equity securities and our beneficial interests in the
2006-A Trust.
Credit
Quality and Allowance for Loan Losses
Consolidated
The outstanding unpaid principal balances of non-performing
loans in our consolidated loan portfolio as of
September 30, 2010 and December 31, 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Non-accrual loans
|
|
|
|
|
|
|
|
|
Commercial(1)
|
|
$
|
338,761
|
|
|
$
|
406,002
|
|
Real estate(2)
|
|
|
248,789
|
|
|
|
208,848
|
|
Real estate construction(3)
|
|
|
200,314
|
|
|
|
453,235
|
|
|
|
|
|
|
|
|
|
|
Total loans on non-accrual
|
|
$
|
787,864
|
|
|
$
|
1,068,085
|
|
|
|
|
|
|
|
|
|
|
Accruing loans contractually past-due 90 days or more
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,055
|
|
|
$
|
43,213
|
|
Real estate
|
|
|
6,231
|
|
|
|
|
|
Real estate construction
|
|
|
|
|
|
|
23,780
|
|
|
|
|
|
|
|
|
|
|
Total accruing loans contractually past-due 90 days or more
|
|
$
|
8,286
|
|
|
$
|
66,993
|
|
|
|
|
|
|
|
|
|
|
Troubled debt restructurings(4)
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
132,244
|
|
|
$
|
96,415
|
|
Real estate
|
|
|
35,708
|
|
|
|
15,328
|
|
Real estate construction
|
|
|
50,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings
|
|
$
|
218,793
|
|
|
$
|
111,743
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
473,060
|
|
|
$
|
545,630
|
|
Real estate
|
|
|
290,728
|
|
|
|
224,176
|
|
Real estate construction
|
|
|
251,155
|
|
|
|
477,015
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
$
|
1,014,943
|
|
|
$
|
1,246,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $0.3 million of loans held for sale as of
September 30, 2010. There were no non-accrual commercial
loans held for sale at December 31, 2009. |
|
(2) |
|
Includes $22.3 million of loans held for sale as of
September 30, 2010. There were no non-accrual real estate
loans held for sale at December 31, 2009. |
|
(3) |
|
Includes $14.9 million and $0.7 million of loans held
for sale as of September 30, 2010 and December 31,
2009. |
|
(4) |
|
Excludes non-accrual loans and accruing loans contractually
past-due 90 days or more. |
71
Potential problem loans are loans that are not considered one of
the non-performing loan categories, as disclosed above, but are
loans in which management is aware of information regarding
potential credit problems of a borrower that leads to serious
doubts as to the ability of the borrower to comply with the
present loan repayment terms and which may result in disclosure
of such loans as non-performing. We had no potential problem
loans as of September 30, 2010.
Of our non-accrual loans, $35.1 million and
$182.5 million were
30-89 days
delinquent, and $354.3 million and $388.5 million were
over 90 days delinquent as of September 30, 2010 and
December 31, 2009, respectively. Accruing loans
30-89 days
delinquent were $21.7 million and $95.3 million as of
September 30, 2010 and December 31, 2009, respectively.
Many of our real estate construction loans include an interest
reserve that is established upon origination of the loan. We
recognize interest income from the reserve during the
construction period as long as the interest is deemed
collectible. As part of our ongoing credit review process, we
monitor the construction of the underlying real estate to
determine whether the project is progressing as originally
planned. If we determine that adverse changes have occurred such
that full payment of principal and interest is no longer
expected, we will place the loan on nonaccrual status and
establish a specific reserve or charge off a portion of the
principal balance, as appropriate.
We maintain servicing procedures for real estate construction
loans, the objective of which is to maintain the proper
relationship between the loan amount funded and the value of the
collateral securing the loan. The principal servicing tasks
include, but are not limited to:
|
|
|
|
|
Monitoring construction of the project to evaluate the work in
place, quality of construction (compliance with plans and
specifications) and adequacy of the budget to complete the
project. We generally use a third party consultant for this
evaluation, but also maintain frequent contact with the borrower
to obtain updates on the project.
|
|
|
|
Monitoring compliance with the terms and conditions of the loan
agreement, which contains important construction and leasing
provisions.
|
|
|
|
Reviewing and approving advance requests pursuant to the loan
agreement which establishes the frequency, conditions and
process for making advances. Typically, each loan advance is
conditioned upon funding only for work in place, certification
by the construction consultant, and sufficient funds remaining
in the loan budget to complete the project.
|
Additionally, our risk rating policies provide that the
assignment of a risk rating should consider whether the
capitalization of interest may be masking other performance
related issues. The adequacy of the interest reserve is
generally evaluated when a risk rating conclusion is required or
rendered, with attention paid to the underlying value of the
collateral and its ongoing support of the transaction. Obtaining
updated third-party valuations is considered when significant
negative variances to expected performance exist.
Twelve of the eighteen loans that comprise our real estate
construction portfolio as of September 30, 2010 have been
extended, renewed or restructured since origination. These
modifications have occurred for various reasons including, but
not limited to, changes in business plans, workout efforts that
were best achieved via a restructuring or discounted pay offs.
In considering the performing status of a real estate
construction loan, the current payment of interest, whether in
cash or through an interest reserve, is only one of the factors
used in our analysis. Our impairment analysis considers the
loans maturity, the likelihood of a restructuring of the
loan and if that restructuring constitutes a TDR, whether the
borrower is current on interest and principal payments, the
condition of underlying assets and the ability of the borrower
to refinance the loan at market terms. Although an interest
reserve may mitigate a delinquency that could cause impairment,
other issues with the loan or borrower could lead to an
impairment determination. Based on the nature of the loan,
impairment is then measured based on a fair market or discounted
cash flow value to assess the current value of the loan relative
to the principal balance. If the valuation analysis indicates
that repayment in full is doubtful, the loan will be placed on
non-accrual status and designated as non-performing.
Interest income recognized on the real estate construction loan
portfolio was $3.9 million and $22.7 million for the
three and nine months ended September 30, 2010 and
$17.8 million and $59.2 million for the three and
nine
72
months ended September 30, 2009, respectively,. Cumulative
capitalized interest on the real estate construction loan
portfolio was $299.1 million and $277.3 million as of
September 30, 2010 and December 31, 2009,
respectively. As of September 30, 2010 and
December 31, 2009, $251.2 million, or 78.6%, and
$477.1 million, or 39.0%, respectively, of the total real
estate construction loan portfolio was non-performing.
The decrease in the non-performing loan balance from
December 31, 2009 to September 30, 2010 is primarily
due to the deconsolidation of the
2006-A
Trust. Non-performing loans included in the
2006-A Trust
as of December 31, 2009 were $227.5 million, including
$207.7 million of non-accrual loans, $5.0 million of
accruing loans contractually past due 90 days or more, and
$14.8 million of TDRs.
The activity in the allowance for loan losses for the three and
nine months ended September 30, 2010 and 2009 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Balance as of beginning of period
|
|
$
|
578,633
|
|
|
$
|
447,728
|
|
|
$
|
586,696
|
|
|
$
|
423,844
|
|
|
|
|
|
Charge offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(24,770
|
)
|
|
|
(52,715
|
)
|
|
|
(82,525
|
)
|
|
|
(230,631
|
)
|
|
|
|
|
Real estate
|
|
|
(17,809
|
)
|
|
|
(9,395
|
)
|
|
|
(95,985
|
)
|
|
|
(36,817
|
)
|
|
|
|
|
Real estate construction
|
|
|
(17,282
|
)
|
|
|
(49,163
|
)
|
|
|
(118,153
|
)
|
|
|
(141,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge offs
|
|
|
(59,861
|
)
|
|
|
(111,273
|
)
|
|
|
(296,663
|
)
|
|
|
(409,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
253
|
|
|
|
|
|
|
|
497
|
|
|
|
11,482
|
|
|
|
|
|
Real estate
|
|
|
22
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
Real estate construction
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
275
|
|
|
|
|
|
|
|
578
|
|
|
|
11,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs
|
|
|
(59,586
|
)
|
|
|
(111,273
|
)
|
|
|
(296,085
|
)
|
|
|
(397,538
|
)
|
|
|
|
|
Charge offs upon transfer to held for sale
|
|
|
(26,042
|
)
|
|
|
(23,400
|
)
|
|
|
(41,808
|
)
|
|
|
(23,400
|
)
|
|
|
|
|
Deconsolidation of
2006-A Trust
|
|
|
(138,134
|
)
|
|
|
|
|
|
|
(138,134
|
)
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
38,771
|
|
|
|
204,350
|
|
|
|
282,973
|
|
|
|
514,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of period
|
|
$
|
393,642
|
|
|
$
|
517,405
|
|
|
$
|
393,642
|
|
|
$
|
517,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs as a percentage of average loans outstanding
(annualized)
|
|
|
5.0
|
%
|
|
|
6.0
|
%
|
|
|
5.9
|
%
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our allowance for loan losses decreased by $193.1 million
to $393.6 million as of September 30, 2010 from
$586.7 million as of December 31, 2009. This decrease
was comprised of a $155.7 million decrease in general
reserves on non-impaired loans and a $37.4 million decrease
in specific reserves on impaired loans, primarily due to the
deconsolidation of the
2006-A Trust
as further described below.
The decrease in the general reserves was primarily due to the
deconsolidation of the
2006-A
Trust, which resulted in the removal of $91.9 million of
general reserves related to those loans held for investment
which were derecognized from our balance sheet during the
period. The remaining $63.8 million of the decrease in
general reserves relates to a reduction in the amount of unpaid
principal balance of non-impaired loans due to loan payoffs,
principal payments, loan sales, loans newly classified as
impaired, and lower expected losses in this portfolio. As of
December 31, 2009, the unpaid principal balance of
non-impaired commercial loans was $7.1 billion and the
general reserves allocated to that portfolio were
$470.2 million, representing an effective reserve
percentage of 6.6%. As of September 30, 2010, the unpaid
principal balance of non-impaired commercial loans had decreased
to $5.6 billion and the general reserves allocated to that
portfolio had decreased to $314.5 million, representing an
effective reserve percentage of 5.6%. The lower effective
reserve percentage reflects the lower historical losses
generally experienced by the non-impaired loans remaining in our
portfolio as of September 30, 2010, as there
73
continues to be a shift in the mix of loans as a result of
charge offs and pay downs in the legacy portfolio, offset by new
originations with lower inherent losses.
The decrease in the specific reserves was primarily related to
$84.4 million of charge offs taken on impaired loans and
the removal of $46.3 million in specific reserves due to
the deconsolidation of the
2006-A
Trust. These decreases were partially offset by the addition of
$58.5 million of specific reserves on impaired loans
outstanding as of September 30, 2010. The carrying values
of our impaired loans reflect incurred losses that we expect to
realize.
We employ a formal quarterly process to both identify impaired
loans and record appropriate specific reserves based on
available collateral and other borrower information. As of
December 31, 2009, the total unpaid principal balance of
impaired loans was $1.3 billion with specific reserves
attributable to that portfolio of $116.5 million. As of
December 31, 2009, $442.4 million of the original
legal balance of that portfolio had been previously charged off
as full collection was deemed remote for portions of these
loans. The total prior charge offs and specific reserves as of
December 31, 2009 of $559.0 million represented an
expected total loss of 33.0% of the original legal balance of
$1.7 billion (the December 31, 2009 balance plus
amounts previously charged off). As of September 30, 2010,
the total unpaid principal balance of impaired loans was
$1.0 billion with a specific reserve attributable to that
portfolio of $79.1 million. As of September 30, 2010,
$526.0 million of the original legal balance of that
portfolio had been previously charged off as full collection was
deemed remote for portions of these loans. The total prior
charge offs and specific reserves as of September 30, 2010
of $605.1 million represented an expected total loss of
39.3% of the legal balance of $1.5 billion (the
September 30, 2010 balance plus amounts previously charged
off).
CapitalSource
Bank Segment
The outstanding unpaid principal balances of non-performing
loans in the CapitalSource Bank loan portfolio as of
September 30, 2010 and December 31, 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Non-accrual loans
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
35,465
|
|
|
$
|
41,809
|
|
Real estate
|
|
|
172,140
|
|
|
|
57,190
|
|
Real estate construction
|
|
|
142,044
|
|
|
|
74,932
|
|
|
|
|
|
|
|
|
|
|
Total loans on non-accrual
|
|
$
|
349,649
|
|
|
$
|
173,931
|
|
|
|
|
|
|
|
|
|
|
Accruing loans contractually past-due 90 days or more
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
322
|
|
|
$
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
Real estate construction
|
|
|
|
|
|
|
17,695
|
|
|
|
|
|
|
|
|
|
|
Total accruing loans contractually past-due 90 days or more
|
|
$
|
322
|
|
|
$
|
17,695
|
|
|
|
|
|
|
|
|
|
|
Troubled debt restructurings(1)
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
|
|
|
$
|
|
|
Real estate
|
|
|
35,694
|
|
|
|
|
|
Real estate construction
|
|
|
50,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings
|
|
$
|
86,330
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
35,787
|
|
|
$
|
41,809
|
|
Real estate
|
|
|
207,834
|
|
|
|
57,190
|
|
Real estate construction
|
|
|
192,680
|
|
|
|
92,627
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
$
|
436,301
|
|
|
$
|
191,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes non-accrual loans and accruing loans contractually
past-due 90 days or more. |
74
Potential problem loans are loans that are not considered one of
the non-performing loan categories, as disclosed above, but are
loans in which management is aware of information regarding
potential credit problems of a borrower that leads to serious
doubts as to the ability of the borrower to comply with the
present loan repayment terms and which may result in disclosure
of such loans as non-performing. We had no potential problem
loans as of September 30, 2010.
Of our non-accrual loans, $15.6 million and
$28.6 million were
30-89 days
delinquent, and $148.9 million and $84.1 million were
over 90 days delinquent as of September 30, 2010 and
December 31, 2009, respectively. Accruing loans
30-89 days
delinquent were $0.7 million and $1.1 million as of
September 30, 2010 and December 31, 2009, respectively.
The activity in the allowance for loan losses for the three and
nine months ended September 30, 2010 and 2009 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Balance as of beginning of period
|
|
$
|
164,561
|
|
|
$
|
91,533
|
|
|
$
|
152,508
|
|
|
$
|
55,600
|
|
Charge offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(364
|
)
|
|
|
(2
|
)
|
|
|
(4,049
|
)
|
|
|
(10,922
|
)
|
Real estate
|
|
|
(15,910
|
)
|
|
|
(2,053
|
)
|
|
|
(57,387
|
)
|
|
|
(4,063
|
)
|
Real estate construction
|
|
|
(8,912
|
)
|
|
|
(222
|
)
|
|
|
(44,076
|
)
|
|
|
(66,820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge offs
|
|
|
(25,186
|
)
|
|
|
(2,277
|
)
|
|
|
(105,512
|
)
|
|
|
(81,805
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs
|
|
|
(25,186
|
)
|
|
|
(2,277
|
)
|
|
|
(105,512
|
)
|
|
|
(81,805
|
)
|
Charge offs upon transfer to held for sale
|
|
|
(22,922
|
)
|
|
|
(10,958
|
)
|
|
|
(23,341
|
)
|
|
|
(10,958
|
)
|
Provision for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
|
|
|
(6,556
|
)
|
|
|
27,000
|
|
|
|
(19,060
|
)
|
|
|
54,400
|
|
Specific
|
|
|
21,108
|
|
|
|
21,451
|
|
|
|
126,410
|
|
|
|
109,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for loan losses
|
|
|
14,552
|
|
|
|
48,451
|
|
|
|
107,350
|
|
|
|
163,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of period
|
|
$
|
131,005
|
|
|
$
|
126,749
|
|
|
$
|
131,005
|
|
|
$
|
126,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses ratio
|
|
|
3.5
|
%
|
|
|
4.2
|
%
|
|
|
3.5
|
%
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses ratio (annualized)
|
|
|
1.6
|
%
|
|
|
6.4
|
%
|
|
|
3.9
|
%
|
|
|
7.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs as a percentage of average loans outstanding
(annualized)
|
|
|
5.3
|
%
|
|
|
1.8
|
%
|
|
|
5.1
|
%
|
|
|
4.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010, no allowance for loan losses was
deemed necessary with respect to the A Participation
Interest.
During the three and nine months ended September 30, 2010,
loans with an aggregate carrying value of $145.9 million
and $343.3 million, respectively, 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
75
restructurings were $0.8 million and $2.2 million as
of September 30, 2010 and December 31, 2009,
respectively. As of September 30, 2009, CapitalSource Bank
had two loans involved in troubled debt restructurings.
Of the total $21.1 million and $126.4 million specific
provisions for loan losses for the three and nine months ended
September 30, 2010, respectively, $21.8 million and
$124.0 million, respectively, related to commercial real
estate and real estate construction loans. There was
$9.8 million and $84.7 million specific provision for
loan losses related to commercial real estate and real estate
construction loans for the three and nine months ended
September 30, 2009, respectively. Due to the large
individual credit exposures and characteristics of real estate
and real estate construction loans, the level of charge offs in
this area has been volatile.
Given our loss experience, we consider our higher-risk loans
within the commercial real estate portfolio to be loans secured
by collateral that have not reached stabilization. As of
September 30, 2010 and December 31, 2009, commercial
real estate loans that have not reached stabilization had an
outstanding principal balance of $213.0 million and
$381.6 million, respectively. This amount was net of
cumulative charge offs taken on these loans of
$92.2 million and $52.1 million, respectively. In
addition, specific reserves allocated to these loans totaled
$1.6 million and $15.6 million as of
September 30, 2010 and December 31, 2009,
respectively. During the nine months ended
September 30, 2009, no commercial real estate loans were
restructured into new loans using an A note /
B note structure.
During the nine months ended September 30, 2010,
CapitalSource Bank restructured three commercial real estate
loans into new loans using an A note / B
note structure where the B note component has been fully
charged off. The contractual principal balances of these three
loans prior to the restructurings totaled $91.6 million. In
connection with the restructurings, $8.8 million of debt
was forgiven and charged off, and $4.9 million was
collected as principal payments, leaving $59.9 million of A
notes and $18.2 million of B notes. As of
September 30, 2010, the carrying value of the A notes was
$57.2 million.
The workout strategy discussed above results in the A note
equaling a balance the borrower can service and is underwritten
to a loan to value ratio based on the current collateral
valuation. The A note may be upgraded based on the revised terms
and managements assessment of the borrowers ability
and intent to repay. The A note is structured at a market
interest rate, and the A note debt service is typically covered
by the in-place property operations allowing it to be placed on
accrual status. The reduced loan amount induces the borrower to
continue to support the loan and maintain the collateral despite
the observed reduction in the collateral value. The B note
usually bears no interest or an interest rate significantly
below the market rate. The A note contains amortization
provisions, and the B note requires amortization only after the
full repayment of the A note.
Accrual status for each loan, including restructured A notes, is
considered on a loan by loan basis. The newly established
principal balance of the A note is set at a level where the
borrower is expected to keep the loan current and where the
underlying collateral value adequately supports the loan. The
revised structure is intended to allow the A loan to be placed
on accrual status.
All loans that have undergone this A note / B note
restructuring are considered troubled debt restructurings. The A
notes are deemed impaired and remain so classified for at least
one year from the date of the restructuring. After one year, the
A notes are evaluated quarterly to determine if the loan
performance has complied with the terms of the troubled debt
restructuring such that the impairment classification may be
removed.
76
Other
Commercial Finance Segment
The outstanding unpaid principal balances of non-performing
loans in Other Commercial Finance loan portfolio as of
September 30, 2010 and December 31, 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Non-accrual loans
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
303,296
|
|
|
$
|
364,193
|
|
Real estate
|
|
|
76,649
|
|
|
|
151,658
|
|
Real estate construction
|
|
|
58,270
|
|
|
|
378,303
|
|
|
|
|
|
|
|
|
|
|
Total loans on non-accrual
|
|
$
|
438,215
|
|
|
$
|
894,154
|
|
|
|
|
|
|
|
|
|
|
Accruing loans contractually past-due 90 days or more
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
1,733
|
|
|
$
|
43,213
|
|
Real estate
|
|
|
6,231
|
|
|
|
|
|
Real estate construction
|
|
|
|
|
|
|
6,085
|
|
|
|
|
|
|
|
|
|
|
Total accruing loans contractually past-due 90 days or more
|
|
$
|
7,964
|
|
|
$
|
49,298
|
|
|
|
|
|
|
|
|
|
|
Troubled debt restructurings(1)
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
132,244
|
|
|
$
|
96,415
|
|
Real estate
|
|
|
14
|
|
|
|
15,328
|
|
Real estate construction
|
|
|
205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings
|
|
$
|
132,463
|
|
|
$
|
111,743
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
437,273
|
|
|
$
|
503,821
|
|
Real estate
|
|
|
82,894
|
|
|
|
166,986
|
|
Real estate construction
|
|
|
58,475
|
|
|
|
384,388
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
$
|
578,642
|
|
|
$
|
1,055,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes non-accrual loans and accruing loans contractually
past-due 90 days or more. |
Potential problem loans are loans that are not considered one of
the non-performing loan categories, as disclosed above, but are
loans in which management is aware of information regarding
potential credit problems of a borrower that leads to serious
doubts as to the ability of the borrower to comply with the
present loan repayment terms and which may result in disclosure
of such loans as non-performing. We had no potential problem
loans as of September 30, 2010.
Of our non-accrual loans, $19.5 million and
$153.9 million were
30-89 days
delinquent, and $205.4 million and $304.4 million were
over 90 days delinquent as of September 30, 2010 and
December 31, 2009, respectively. Accruing loans
30-89 days
delinquent were $21.0 million and $94.2 million as of
September 30, 2010 and December 31, 2009, respectively.
77
The activity in the allowance for loan losses for the three and
nine months ended September 30, 2010 and 2009 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Balance as of beginning of period
|
|
$
|
414,072
|
|
|
$
|
356,195
|
|
|
$
|
434,188
|
|
|
$
|
368,244
|
|
Charge offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(24,406
|
)
|
|
|
(52,713
|
)
|
|
|
(78,476
|
)
|
|
|
(219,709
|
)
|
Real estate
|
|
|
(1,899
|
)
|
|
|
(7,342
|
)
|
|
|
(38,598
|
)
|
|
|
(32,754
|
)
|
Real estate construction
|
|
|
(8,370
|
)
|
|
|
(48,941
|
)
|
|
|
(74,077
|
)
|
|
|
(74,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge offs
|
|
|
(34,675
|
)
|
|
|
(108,996
|
)
|
|
|
(191,151
|
)
|
|
|
(327,237
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
253
|
|
|
|
|
|
|
|
497
|
|
|
|
11,482
|
|
Real estate
|
|
|
22
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
Real estate construction
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
275
|
|
|
|
|
|
|
|
578
|
|
|
|
11,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs
|
|
|
(34,400
|
)
|
|
|
(108,996
|
)
|
|
|
(190,573
|
)
|
|
|
(315,733
|
)
|
Charge offs upon transfer to held for sale
|
|
|
(3,120
|
)
|
|
|
(12,442
|
)
|
|
|
(18,467
|
)
|
|
|
(12,442
|
)
|
Deconsolidation of
2006-A term
debt securitization
|
|
|
(138,134
|
)
|
|
|
|
|
|
|
(138,134
|
)
|
|
|
|
|
Provision for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
|
|
|
(13,616
|
)
|
|
|
37,015
|
|
|
|
(44,756
|
)
|
|
|
35,136
|
|
Specific
|
|
|
37,835
|
|
|
|
118,884
|
|
|
|
220,379
|
|
|
|
315,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for loan losses
|
|
|
24,219
|
|
|
|
155,899
|
|
|
|
175,623
|
|
|
|
350,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of period
|
|
$
|
262,637
|
|
|
$
|
390,656
|
|
|
$
|
262,637
|
|
|
$
|
390,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses ratio
|
|
|
9.0
|
%
|
|
|
6.8
|
%
|
|
|
9.0
|
%
|
|
|
6.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses ratio (annualized)
|
|
|
3.3
|
%
|
|
|
10.8
|
%
|
|
|
8.0
|
%
|
|
|
8.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs as a percentage of average loans outstanding
(annualized)
|
|
|
4.6
|
%
|
|
|
8.1
|
%
|
|
|
6.5
|
%
|
|
|
6.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and nine months ended September 30, 2010,
loans with an aggregate carrying value of $132.5 million
and $497.0 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 $34.6 million and $22.8 million as
of September 30, 2010 and December 31, 2009,
respectively.
Provision for loan losses and charge offs for the three and nine
months ended September 30, 2010 were driven largely from
charge offs in our real estate portfolio which includes land,
second lien real estate and mortgage rediscount loans. Due to
the large individual credit exposures and characteristics of
real estate loans, the level of charge offs in this area has
been volatile. However, we have few remaining large real estate
loans in our portfolio and
78
believe that we have appropriately specifically reserved for all
incurred losses. As of September 30, 2010 and
December 31, 2009, the total outstanding principal balance
of these higher-risk loans was $126.0 million and
$561.5 million, respectively.
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 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, 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 September 30, 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 loan origination business
plan and our expectations regarding the net growth in the loan
portfolio at CapitalSource Bank. Through deposits, cash flow
from operations, payments of principal and interest on loans
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 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 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 unencumbered 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. As of September 30, 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.
79
As of September 30, 2010, CapitalSource Bank had
$365.3 million of cash and cash equivalents and restricted
cash and $1.5 billion in investment securities,
available-for-sale.
As of September 30, 2010, the amount of CapitalSource
Banks unfunded commitments to extend credit with respect
to existing loans was $959.2 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 based on 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. We do not anticipate that dividends
from CapitalSource Bank will provide any liquidity to fund the
operations of the Parent Company for the near term 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. In addition, the Parent Company is required to
repurchase its 3.5% and 4.0% Convertible Debentures at the
option of the noteholders on July 15, 2011. As of
September 30, 2010, outstanding balances on the 3.5% and
4.0% Convertible Debentures were $8.4 million and
$285.3 million, respectively. We currently intend to
repurchase these Convertible Debentures with cash generated from
our operations at or prior to July 15, 2011 to the extent
permitted under our other indebtedness. If we do not have
sufficient cash or are restricted from using our cash from
operations to repurchase these Convertible Debentures, we are
permitted to issue new debt or equity securities and use the
proceeds to repurchase these Convertible Debentures or offer to
exchange the existing Convertible Debentures for newly issued
debt or equity securities. For additional information, see
Note 10, Borrowings, in our consolidated financial
statements for the three and nine months ended
September 30, 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 and interest payments, credit
facility borrowings, equity and debt offerings, asset sales,
including sales of REO, and servicing fees from securitizations
and credit facilities. A portion of the proceeds from some of
these activities is required to be used to make mandatory
repayments on our indebtedness.
As of September 30, 2010, the Parent Company had
$389.3 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 September 30, 2010 exceeded unused funding sources and
unrestricted cash by $802.5 million, a decrease of
$542.2 million, or 40.3% 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 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
80
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.
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 September 30,
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 September 30, 2010 and December 31, 2009, we had
$633.1 million and $1.2 billion, respectively, in cash
and cash equivalents. We invest cash on hand in short-term
liquid investments. We had $121.6 million and
$168.5 million of restricted cash as of September 30,
2010 and December 31, 2009, respectively. The decrease in
cash and cash equivalents was primarily due to a change in
CapitalSource Banks investment portfolio, as cash and cash
equivalents on hand as of December 31, 2009 were reinvested
in
available-for-sale
securities and other investments during the nine months ended
September 30, 2010. 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 and nine months
ended September 30, 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
September 30, 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 8, Deposits, in our
consolidated financial statements for the three and nine months
ended September 30, 2010.
Borrowings
As of September 30, 2010 and December 31, 2009, we had
outstanding borrowings totaling $2.5 billion and
$4.7 billion, respectively. For additional information on
our borrowings, see Note 10, Borrowings, in our
consolidated financial statements for the three and nine months
ended September 30, 2010 included herein, and Note 12,
Borrowings, in our audited consolidated financial
statements for the year ended December 31, 2009 included in
our
Form 10-K.
Our maximum facility amounts, amounts outstanding and unused
capacity as of September 30, 2010, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
Facility
|
|
|
Amount
|
|
|
Unused
|
|
|
|
Amount
|
|
|
Outstanding
|
|
|
Capacity
|
|
|
|
($ in thousands)
|
|
|
Credit facilities(1)
|
|
$
|
218,250
|
|
|
$
|
78,250
|
|
|
$
|
140,000
|
|
Term debt
|
|
|
1,145,638
|
|
|
|
1,145,638
|
|
|
|
|
|
Other borrowings
|
|
|
2,130,552
|
|
|
|
1,274,876
|
|
|
|
855,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,494,440
|
|
|
$
|
2,498,764
|
|
|
$
|
995,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amount shown is not reduced by issued and outstanding
letters of credit totaling $28.7 million as of
September 30, 2010, which limit our ability to utilize
capacity. |
81
As of September 30, 2010 and December 31, 2009,
approximately 61% and 80%, respectively, of our debt was secured
by our assets.
Credit
Facilities
As of September 30, 2010, our credit facilities
commitments and principal amounts outstanding were as follows:
|
|
|
|
|
|
|
|
|
|
|
Committed
|
|
|
Principal
|
|
|
|
Capacity
|
|
|
Outstanding
|
|
|
|
($ in thousands)
|
|
|
Credit Facilities:
|
|
|
|
|
|
|
|
|
CS Funding III secured credit facility scheduled to mature
May 29, 2012(1)
|
|
$
|
9,116
|
|
|
$
|
9,116
|
|
CS Funding VII secured credit facility scheduled to mature
April 17, 2012(2)
|
|
|
1,902
|
|
|
|
1,902
|
|
CS Europe secured credit facility scheduled to mature
May 6, 2011(1)(3)
|
|
|
67,232
|
|
|
|
67,232
|
|
CS Inc. syndicated bank credit facility scheduled to mature
December 31, 2011
|
|
|
140,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit facilities
|
|
$
|
218,250
|
|
|
$
|
78,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 47.5 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 September 30, 2010. |
Term
Debt
During the three months ended September 30, 2010, we
delegated certain of our collateral management and special
servicing rights in the
2006-A Trust
and sold our equity interest and certain notes issued by the
2006-A Trust
for $7.0 million. As a result of this transaction, we
concluded that we were no longer the primary beneficiary and
deconsolidated the
2006-A
Trust, which resulted in the removal of all of its assets and
liabilities, including $891.3 million of term debt from our
consolidated balance sheet. During the fourth quarter of 2010,
we assigned our special servicing rights so that we are no
longer the named special servicer of the
2006-A
Trust. For additional information on the deconsolidation of the
2006-A
Trust, see Note 9, Variable Interest Entities, in
our consolidated financial statements for the three and nine
months ended September 30, 2010.
As of September 30, 2010 and December 31, 2009, the
outstanding balances of our term debt securitizations were
$860.6 million and $2.7 billion, respectively. As of
September 30, 2010 and December 31, 2009, our 2014
Senior Secured Notes had balances of $285.0 million and
$282.9 million, respectively, net of unamortized discounts
of $15.0 million and $17.1 million, respectively.
During the three months ended September 30, 2010, we paid
off the outstanding balance of the indebtedness associated with
our 2007-A
term debt securitization.
Convertible
Debt
As of September 30, 2010 and December 31, 2009, the
outstanding aggregate balances of our convertible debt were
$534.0 million and $561.3 million, respectively, net
of unamortized discounts of $9.7 million and
$18.7 million as of September 30, 2010 and
December 31, 2009, respectively. During the nine months
ended
82
September 30, 2010, we repurchased $36.3 million of
our 4.0% Convertible Debentures. We did not repurchase any
such Convertible Debentures during the three months ended
September 30, 2010.
Subordinated
Debt
As of September 30, 2010 and December 31, 2009, the
outstanding balances of our subordinated debt were
$437.9 million and $439.7 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 September 30, 2010
equal to 20% of CapitalSource Banks total assets. As of
September 30, 2010 and December 31, 2009, the maximum
financing available under this formula was $1.2 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 September 30, 2010,
collateral with an estimated fair value of $883.9 million
was pledged to the FHLB SF.
As of September 30, 2010 and December 31, 2009,
CapitalSource Bank had borrowing capacity with the FHLB based on
pledged collateral as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
($ in thousands)
|
|
|
Borrowing capacity
|
|
$
|
847,393
|
|
|
$
|
965,195
|
|
Less: outstanding principal
|
|
|
(300,000
|
)
|
|
|
(200,000
|
)
|
Less: outstanding letters of credit
|
|
|
(750
|
)
|
|
|
(750
|
)
|
|
|
|
|
|
|
|
|
|
Unused borrowing capacity
|
|
$
|
546,643
|
|
|
$
|
764,445
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Bank participates in the primary credit program of
the FRB of San Franciscos discount window under which
approved depository institutions are eligible to borrow from the
FRB for periods of up to 90 days. As of September 30,
2010, collateral with an estimated fair value of
$210.3 million had been pledged under this program, and
there were no borrowings outstanding under this program.
Commitments,
Guarantees & Contingencies
As of September 30, 2010 and December 31, 2009, we had
unfunded commitments to extend credit to our clients of
$2.2 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
September 30, 2010 and December 31, 2009, we had
issued $159.5 million and $182.5 million,
respectively, in letters of credit which expire at various dates
over the next fifteen 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. Additional
information on these contingencies is included in Note 16,
Commitments and Contingencies, in our consolidated
financial statements for the three and nine months ended
September 30, 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.
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
83
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.
As of September 30, 2010, we had sold all of our direct
real estate investment properties. We are responsible for
indemnifying the current owners for any remediation, including
costs of removal and disposal of asbestos that existed prior to
the sales, through the third anniversary date of the sale. We
will recognize any remediation costs if notified by the current
owners of their intention to exercise their indemnification
rights, however, no such notification has been received to date.
As of September 30, 2010, sufficient information was not
available to estimate our potential liability for conditional
asset retirement obligations as the obligations to remove the
asbestos from these properties continue to have indeterminable
settlement dates.
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 loan 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 loans 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.
Substantially all new loans have been originated at
CapitalSource Bank, and we maintain a comprehensive credit
policy manual for those loans that is supplemented by specific
loan product underwriting guidelines. Among other things, the
credit policy manual sets forth requirements that meet the
regulations enforced by both the FDIC and the state of
Californias Department of Financial Institutions. Examples
of such requirements include the loan to value limitations for
real estate secured loans, standards for real estate appraisals
and other third-party reports, and collateral insurance
requirements.
Our underwriting guidelines outline specific underwriting
standards and minimum specific risk acceptance criteria for each
lending product offered. Loan types defined within these
guidelines have three broad categories, within our commercial,
real estate, and real estate construction loan portfolios. These
categories include asset-based loans, cash flow loans, and real
estate loans, and each of these broad categories has specific
subsections that define in detail the following:
|
|
|
|
|
Loan structures that include the lien positions, amortization
provisions and loan tenors
|
|
|
|
Collateral descriptions and appropriate valuation methods
|
|
|
|
Underwriting considerations that include minimum diligence and
verification requirements
|
|
|
|
Specific risk acceptance criteria that enumerate for each loan
type the minimum acceptable credit performance standards.
Examples of these criteria include maximum
loan-to-value
amounts for real estate loans, maximum advance rate amounts for
asset-based loans and minimum historical and projected debt
service coverage amounts for all loans
|
84
We generally measure and document each loans compliance
with our specific risk acceptance criteria at underwriting. If
at underwriting, there is an exception to these criteria, an
explanation of the factors that mitigate this additional risk is
generally considered before an approval is granted.
CapitalSource
Bank and Other Commercial Finance Segments
Credit risk management for the 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.
Concentrations
of Credit Risk
In our normal course of business, we engage in lending
activities with clients primarily throughout the United States.
As of September 30, 2010, the single largest industry
concentration was healthcare and social assistance, which made
up approximately 21% of our loan portfolio. As of
September 30, 2010, taken in the aggregate, non-healthcare
real estate loans made up approximately 24% of our loan
portfolio. As of September 30, 2010, the largest
geographical concentration was Florida, which made up
approximately 11% of our loan portfolio.
As of September 30, 2010, $1.0 billion, or 16%, of our
portfolio consisted of loans to five clients with aggregate loan
balances that are individually greater than $100.0 million.
Of this amount, loans to one real estate client totaling
$117.1 million were on non-accrual. The remaining loans
were performing; however, if any of these loans or the loans
listed below were to experience problems, it could have a
material adverse impact on our financial condition or results of
operations.
Selected information pertaining to our five largest credit
relationships as of September 30, 2010 was as follows ($ in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
|
|
|
|
|
Allowance
|
|
|
|
Date of Last
|
|
Amount of
|
Loan
|
|
|
% of Total
|
|
|
|
|
|
|
Loan(s) at
|
|
|
Loan
|
|
|
|
|
for Loan
|
|
Underlying
|
|
Collateral
|
|
Last
|
Balance
|
|
|
Portfolio
|
|
|
Loan Type
|
|
Industry
|
|
Origination
|
|
|
Commitment
|
|
|
Performing
|
|
Losses
|
|
Collateral(1)
|
|
Appraisal
|
|
Appraisal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
371,270
|
|
|
|
5.6
|
%
|
|
Commercial and Real Estate
|
|
Health Care and Social Assistance
|
|
$
|
607,180
|
|
|
$
|
371,270
|
|
|
Yes
|
|
N/A
|
|
Stock Pledge
|
|
N/A
|
|
N/A(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245,410
|
|
|
|
3.7
|
|
|
Commercial and Real Estate - Construction
|
|
Accommodation and Food Services and Finance and Insurance
|
|
|
173,663
|
|
|
|
249,520
|
|
|
Yes
|
|
N/A
|
|
Timeshare
receivables
|
|
N/A
|
|
N/A(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
201,310
|
|
|
|
3.0
|
|
|
Real Estate
|
|
Accommodation and Food Services
|
|
|
5,006
|
|
|
|
205,171
|
|
|
Yes
|
|
N/A
|
|
Portfolio of
vacation
properties
|
|
August 2004 -
December 2009
|
|
674,914(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,097
|
|
|
|
1.8
|
|
|
Real Estate - Construction
|
|
Accommodation and Food Services
|
|
|
60,130
|
|
|
|
141,731
|
|
|
No
|
|
|
|
Hotel
|
|
June 2010
|
|
182,000(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,734
|
|
|
|
1.5
|
|
|
Commercial and Real Estate
|
|
Health Care and Social Assistance
|
|
|
122,248
|
|
|
|
111,772
|
|
|
Yes
|
|
N/A
|
|
Nursing Care
Facilities
|
|
January 2005
|
|
134,710(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,035,821
|
|
|
|
15.6
|
%
|
|
|
|
|
|
$
|
968,227
|
|
|
$
|
1,079,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the primary collateral securitizing the loan. In
certain cases, there may be additional types of collateral. |
|
(2) |
|
The primary collateral that secures our loan balance of
$371.3 million as of September 30, 2010 is a stock
pledge of the parent company that owns nursing care facilities
valued at $2.1 billion based on appraisals dated May and
June 2007. Total senior debt secured by the nursing care
facilities was $1.3 billion as of June 30, 2010. Of
our total loan balance, $46.3 million was senior debt. |
85
|
|
|
(3) |
|
The collateral that secures our loan balance of
$245.4 million primarily comprises timeshare receivables
and timeshare real estate and had a total value of
$745.1 million as of September 30, 2010. Total senior
debt, including our loan balance, secured by the collateral was
$348.4 million as of September 30, 2010. |
|
(4) |
|
Total senior debt, including our loan balance, was
$309.7 million as of September 30, 2010. |
|
(5) |
|
Total senior debt, including our loan balance, was
$179.2 million as of September 30, 2010. |
|
(6) |
|
Total senior debt, including our loan balance, was
$120.1 million as of September 30, 2010. The nursing
care facilities real estate secures $95.8 million of our
loan balance as of September 30, 2010. The remainder of the
loan balance of $24.3 million as of September 30, 2010
is secured by accounts receivable. |
Problem loans in our portfolio of loans held for investment may
include non-accrual loans, accruing loans contractually past-due
90 days or more, or TDRs. Our remediation efforts on
problem loans are based upon the characteristics of each
specific situation. The various remediation efforts that we may
undertake include, among other things, one of or a combination
of the following:
|
|
|
|
|
request that the equity owners of the borrower inject additional
capital,
|
|
|
|
require the borrower to provide us with additional collateral,
|
|
|
|
request additional guaranties or letters of credit,
|
|
|
|
request the borrower to improve cash flow by taking actions such
as selling non-strategic assets or reducing operating expenses,
|
|
|
|
modify the terms of our debt, including the deferral of
principal or interest payments,
|
|
|
|
initiate foreclosure proceedings on the collateral, or
|
|
|
|
sell the loan in certain cases where there is an interested
third-party buyer.
|
There are 126 credit relationships in the non-performing
portfolio as of September 30, 2010 and our three largest
non-performing credit relationships totaled $257.0 million and
comprise 25.3% of our total non-performing loans. These credit
relationships comprise real estate construction and real estate
loans to borrowers in the construction and accommodation and
food services industries. The collateral supporting these loans
include land, a hotel and multiple vacation properties. These
loans were originated between December 2005 and June 2007. Two
of these credit relationships contain loans that were on
non-accrual status as of September 30, 2010 and were placed
on non-accrual status in March 2010 and June 2010, respectively.
As of September 30, 2010, we have established an aggregate
allowance for loan losses of $9.4 million on the loans
comprising these three credit relationships. Additionally, the
outstanding loan balances as of September 30, 2010 for
these three credit relationships are inclusive of charge offs
taken to reduce the outstanding loan balances to the estimated
fair values of the collateral based upon appraisals received in
2010.
TDRs are loans that have been restructured as a result of
deterioration in the borrowers financial position and for
which we have granted a concession to the borrower that we would
not have otherwise granted if those conditions did not exist.
Our concession strategies in TDRs are intended to minimize our
economic losses as borrowers experience financial difficulty and
provide an alternative to foreclosure. The success of these
strategies is highly dependent on our borrowers ability
and willingness to repay under the restructured terms of their
loans. Continued adverse changes in the economic environment or
in borrower performance could negatively impact the outcome of
these strategies.
86
A summary of concessions granted by loan type, including the
accrual status of the loans as of September 30, 2010 and
December 31, 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Non-accrual
|
|
|
Accrual
|
|
|
Total
|
|
|
Non-accrual
|
|
|
Accrual
|
|
|
Total
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate and fee reduction
|
|
$
|
28,038
|
|
|
$
|
|
|
|
$
|
28,038
|
|
|
$
|
23,501
|
|
|
$
|
|
|
|
$
|
23,501
|
|
Maturity extension
|
|
|
78,555
|
|
|
|
90,408
|
|
|
|
168,963
|
|
|
|
100,321
|
|
|
|
25,893
|
|
|
|
126,214
|
|
Payment deferral
|
|
|
22,031
|
|
|
|
4,034
|
|
|
|
26,065
|
|
|
|
29,909
|
|
|
|
32,423
|
|
|
|
62,332
|
|
Multiple concessions
|
|
|
55,870
|
|
|
|
37,506
|
|
|
|
93,376
|
|
|
|
56,003
|
|
|
|
38,199
|
|
|
|
94,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184,494
|
|
|
|
131,948
|
|
|
|
316,442
|
|
|
|
209,734
|
|
|
|
96,515
|
|
|
|
306,249
|
|
Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate and fee reduction
|
|
|
2,270
|
|
|
|
|
|
|
|
2,270
|
|
|
|
2,270
|
|
|
|
|
|
|
|
2,270
|
|
Maturity extension
|
|
|
38,728
|
|
|
|
35,463
|
|
|
|
74,191
|
|
|
|
36,420
|
|
|
|
10,927
|
|
|
|
47,347
|
|
Multiple concessions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,438
|
|
|
|
4,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,998
|
|
|
|
35,463
|
|
|
|
76,461
|
|
|
|
38,690
|
|
|
|
15,365
|
|
|
|
54,055
|
|
Real Estate Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity extension
|
|
|
118,395
|
|
|
|
|
|
|
|
118,395
|
|
|
|
66,102
|
|
|
|
|
|
|
|
66,102
|
|
Multiple concessions
|
|
|
14,828
|
|
|
|
50,732
|
|
|
|
65,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133,223
|
|
|
|
50,732
|
|
|
|
183,955
|
|
|
|
66,102
|
|
|
|
|
|
|
|
66,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total TDRs
|
|
$
|
358,715
|
|
|
$
|
218,143
|
|
|
$
|
576,858
|
|
|
$
|
314,526
|
|
|
$
|
111,880
|
|
|
$
|
426,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We measure the success of our modifications by assessing if the
modified loans perform under the new contractual terms. As of
September 30, 2010, approximately 41.0% of the balance of
our loans restructured as TDRs had incurred losses since their
initial restructuring. These losses are incorporated into the
historical loss factors that are used in the determination of
the allowance for loan losses on our non-impaired loans.
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 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.
Approximately half 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
87
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 17, Derivative
Instruments, in our consolidated financial statements for
the three and nine months ended September 30, 2010.
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 September 30,
2010, were as follows ($ in thousands):
|
|
|
|
|
Rate Change
|
|
|
(Basis Points)
|
|
|
|
−100
|
|
$
|
(670
|
)
|
−50
|
|
|
(493
|
)
|
+ 50
|
|
|
3,061
|
|
+ 100
|
|
|
7,196
|
|
For the purpose of the above analysis, we included loans,
investment securities, borrowings, deposits and derivatives. In
addition, we assumed that the size of the current portfolio
remains the same as the existing portfolio as of
September 30, 2010. Loans, investment securities and
deposits are assumed to be replaced as they run off. The new
loans, investment securities and deposits are assumed to have
interest rates that reflect our forecast of prevailing market
terms. We also assumed 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.
As of September 30, 2010, approximately 45% of the
aggregate outstanding principal amount of our loans had interest
rate floors and were accruing interest. Of the loans with
interest rate floors, approximately 92% had contractual rates
below the interest rate floor and the floor was providing a
benefit to us. The loans with contractual interest rate floors
as of September 30, 2010, were as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Percentage of
|
|
|
|
Outstanding
|
|
|
Total Portfolio
|
|
|
|
($ in thousands)
|
|
|
Loans with contractual interest rates:
|
|
|
|
|
|
|
|
|
Below the interest rate floor
|
|
$
|
2,692,153
|
|
|
|
41
|
%
|
Exceeding the interest rate floor
|
|
|
120,109
|
|
|
|
2
|
|
At the interest rate floor
|
|
|
129,800
|
|
|
|
2
|
|
Loans with interest rate floors on non-accrual
|
|
|
362,137
|
|
|
|
5
|
|
Loans with no interest rate floor
|
|
|
3,323,508
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,627,707
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
We enter into interest rate swap agreements to minimize the
economic effect of interest rate fluctuations specific to our
fixed rate debt and certain fixed rate loans. 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
88
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
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.
Supervision
and Regulation
This is an update to certain sections from our discussion of
Supervision and Regulation in our
Form 10-K.
For further information and discussion of supervision and
regulation matters, see Item I. Business
Supervision and Regulation, in our
Form 10-K
for the year ended December 31, 2009.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 (the Dodd-Frank Act), an initiative directed at
the financial services industry, was signed into law by
President Obama on July 21, 2010. The Dodd-Frank Act
represents a comprehensive overhaul of the financial services
industry within the United States, establishes the new federal
Bureau of Consumer Financial Protection (the BCFP),
and will require the BCFP and other federal agencies, including
the SEC, to undertake assessments and rulemaking. The majority
of the provisions in the Dodd-Frank Act are aimed at financial
institutions that are significantly larger than the Parent
Company or CapitalSource Bank. Nonetheless, there are provisions
with which we will have to comply both as a public company and a
financial institution. At this time, it is difficult to predict
the full extent to which the Dodd-Frank Act or the resulting
regulations will impact our business and operations. As rules
and regulations are promulgated by the federal agencies
responsible for implementing and enforcing the provisions in the
Dodd-Frank Act, we will need to apply adequate resources to
ensure that we are in compliance with all applicable provisions.
Compliance with these new laws and regulations may result in
additional costs and may otherwise adversely impact our results
of operations, financial condition or liquidity, any of which
may impact our financial condition or results of operations.
A requirement of the Dodd-Frank Act is for the FDIC to set a
designated minimum Deposit Insurance Fund (DIF)
ratio of than 1.35% for any year, compared to the current
minimum DIF ratio of 1.15%, by September 30, 2020. The FDIC
is also required to offset the effect that this DIF rate
increase has on insured depository institutions
(IDI) with total consolidated assets of less than
$10.0 billion. The Dodd-Frank Act also provides that an
IDIs assessment base be changed from the IDIs
insured deposits to its average total consolidated assets minus
average tangible equity during the assessment period.
In the fourth quarter of 2010, in response to the Dodd-Frank
Act, the FDIC adopted a new Restoration Plan, which foregoes the
FDICs previously announced assessment rate increase of
three basis points scheduled to go into effect January 1,
2011, keeps the current assessment rate schedule in effect, and
aims to bring the DIF ratio to 1.35% by September 20, 2020
as mandated by the Dodd-Frank Act. The FDIC will also release a
new definition of the assessment base. The FDIC will pursue
further rulemaking in 2011 to establish its methods for reaching
the 1.35% DIF rate by the statutory deadline and the manner by
which the DIF rate offset will take effect.
With the goals of maintaining a positive fund balance and
steady, predictable assessment rates throughout economic and
credit cycles, the FDIC also adopted a notice of proposed
rulemaking to set the designated reserve ratio at 2.0% and to
lower assessment rates when the reserve ratio reaches 1.15%. In
addition, the FDIC would continue to adopt lower rate schedules
in lieu of issuing dividends when the reserve ratio exceeds 2.0%
and 2.5%.
89
|
|
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 17, Derivative Instruments, in our consolidated
financial statements for the three and nine months ended
September 30, 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 September 30, 2010. There
have been no changes in our internal control over financial
reporting during the three months ended September 30, 2010,
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
90
PART II.
OTHER INFORMATION
|
|
ITEM 2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
A summary of our repurchases of shares of our common stock for
the three months ended September 30, 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(2)
|
|
|
July 1 July 31, 2010
|
|
|
17,400
|
|
|
$
|
5.13
|
|
|
|
|
|
|
|
|
|
August 1 August 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 1 September 30, 2010
|
|
|
3,652
|
|
|
|
5.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
21,052
|
|
|
|
5.14
|
|
|
|
|
|
|
$
|
24,218,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
|
(2) |
|
In March 2009, our Board of Directors authorized us to
repurchase up to $25.0 million of our common stock through
open market purchases or privately negotiated transactions from
time to time for a period of up to two years. At the beginning
of the period, $24.2 million of our common stock was
available to be repurchased under the plan. There was no
repurchase activity during the three months ended
September 30, 2010. The amount and timing of any
repurchases will depend on market conditions and other factors
and repurchases may be suspended or discontinued at any time.
Our ability to repurchase additional shares may be limited by
the terms of our 2014 Senior Secured Notes, and there is no
assurance that we will repurchase any additional shares. |
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ITEM 5.
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OTHER
INFORMATION
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On October 29, 2010, CapitalSource Bank filed its
Consolidated Reports of Condition and Income for A Bank With
Domestic Offices Only FFIEC 041, for the quarter
ended September 30, 2010 (the Call Report) with
the Federal Deposit Insurance Corporation (FDIC).
(a) Exhibits
The Index to Exhibits attached hereto is incorporated herein by
reference.
91
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.
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Date: November 4, 2010
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/s/ STEVEN
A. MUSELES
Steven
A. Museles
Director and Co-Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
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|
Date: November 4, 2010
|
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/s/ JAMES
J. PIECZYNSKI
James
J. Pieczynski
Director and Co-Chief Executive Officer
(Principal Executive Officer)
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|
|
|
|
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Date: November 4, 2010
|
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/s/ DONALD
F. COLE
Donald
F. Cole
Chief Financial Officer
(Principal Financial Officer)
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Date: November 4, 2010
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/s/ BRYAN
D. SMITH
Bryan
D. Smith
Chief Accounting Officer
(Principal Accounting Officer)
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92
INDEX TO
EXHIBITS
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|
|
|
|
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).
|
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3
|
.2
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|
Amended and Restated Bylaws (composite version; reflects all
amendments through November 15, 2009)(incorporated by
reference to exhibit 3.1 to the
Form 8-K
filed by CapitalSource on November 17, 2009).
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10
|
.1
|
|
Sublease of Office Lease Agreement dated as of September 1,
2010 by and between CapitalSource Finance LLC and Brown
Investment Advisory and Trust Company.
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|
10
|
.2*
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|
Amended and Restated Deferred Compensation Plan.
|
|
12
|
.1
|
|
Ratio of Earnings to Fixed Charges.
|
|
31
|
.1.1
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|
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.
|
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31
|
.2
|
|
Rule 13a 14(a) Certification of Chief Financial
Officer.
|
|
32
|
|
|
Section 1350 Certifications.
|
|
99
|
.1
|
|
CapitalSource Banks Consolidated Reports of Condition and
Income for A Bank with Domestic Office only-FFIEC 041, for the
quarter ended September 30, 2010.
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|
|
|
|
|
Filed herewith. |
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* |
|
Management contract or compensatory plan or arrangement |
93