e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31,
2010
Commission File
No. 1-31753
CapitalSource Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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35-2206895
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(State of
Incorporation)
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(I.R.S. Employer Identification
No.)
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5404
Wisconsin Avenue, 2nd Floor
Chevy Chase, MD 20815
(Address of Principal Executive Offices, Including Zip Code)
(866) 695-3457
(Registrants
Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the
Act:
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(Title of Each Class)
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(Name of Exchange on Which Registered)
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Common Stock, par value $0.01 per
share
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New York Stock Exchange
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Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. þ Yes o No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. o Yes þ No
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. þ Yes o No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). þ
Yes o
No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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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þ Large
accelerated filer
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o Accelerated
filer
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o Non-accelerated
filer
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o Smaller
reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). o
Yes þ
No
The aggregate market value of the Registrants Common
Stock, par value $0.01 per share, held by nonaffiliates of the
Registrant, as of June 30, 2010 was $1,396,051,494.
As of February 24, 2011, the number of shares of the
Registrants Common Stock, par value $0.01 per share,
outstanding was 323,346,948.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of CapitalSource Inc.s Proxy Statement for the
2011 annual meeting of shareholders, a definitive copy of which
will be filed with the SEC within 120 days after the end of
the year covered by this
Form 10-K,
are incorporated by reference herein as portions of
Part III of this
Form 10-K.
PART I
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Form 10-K,
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 and capital ratios, our intention to originate
loans at CapitalSource Bank, our portfolio runoff and growth,
our expectations regarding future credit performance, our
delinquent, non-accrual and impaired loans, charge offs,
expected payments on securitized loans related to the maturities
of the term debt securitizations, 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, risk management, and our
valuation allowance with respect to, and our realization and
utilization of, net deferred tax assets, net operating loss
carryforwards and built-in losses. All statements contained in
this
Form 10-K
that are not clearly historical in nature are forward-looking,
and the words anticipate, assume,
intend, believe, forecast,
expect, estimate, plan,
continue, will, 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; 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 including a significant decline in market
interest spreads could adversely affect loan pricing; the
nature, extent, and timing of any governmental and regulatory
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 audited consolidated financial statements, and
other risk factors described in this
Form 10-K
and documents filed by us with the Securities and Exchange
Commission (the SEC). All forward-looking statements
included in this
Form 10-K
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 audited consolidated financial statements
and related notes and the information contained elsewhere in
this
Form 10-K,
including that set forth under Item 1A, Risk Factors.
2
Overview
References to we, us, the Company or CapitalSource refer to
CapitalSource Inc. together with its subsidiaries. References to
CapitalSource Bank include its subsidiaries, and references
and to Parent Company refer to CapitalSource Inc. and its
subsidiaries other than CapitalSource Bank.
We are a commercial lender that, 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. As of December 31, 2010, we had 1,401
loans outstanding, with an aggregate outstanding principal
balance of $6.4 billion. Included in the loan portfolio are
certain loans shared between CapitalSource Bank and the Parent
Company.
For the year ended December 31, 2010, we operated as two
reportable segments: 1) CapitalSource Bank and
2) Other Commercial Finance. For the years ended
December 31, 2009 and 2008, 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 the remaining assets related
to this segment during the year ended December 31, 2010. We
have reclassified all comparative period results to reflect our
two current reportable segments. For additional information, see
Note 24, Segment Data, in our audited consolidated
financial statements for the year ended December 31, 2010.
Through our CapitalSource Bank segment activities, we provide a
wide range of financial products primarily to small and middle
market businesses throughout the United States and also offer
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 December 31, 2010, CapitalSource Bank
had 1,031 loans outstanding, with an aggregate outstanding
principal balance of $3.8 billion and deposits of
$4.6 billion.
Through our Other Commercial Finance segment activities, the
Parent Company provides financial products primarily to small
and middle market businesses. Our activities in the Parent
Company consist primarily of satisfying existing loan
commitments made prior to CapitalSource Banks formation
and receiving payments on that loan portfolio. As of
December 31, 2010, our Other Commercial Finance segment had
400 loans outstanding, and the Parent Company held total loans
having an aggregate outstanding principal balance of
$2.6 billion.
As of December 31, 2010, our average loan size was
$4.5 million, and our average loan exposure by client was
$5.7 million. Our loans generally have a remaining maturity
of one to five years with a weighted average remaining term to
maturity of 3.6 years as of December 31, 2010. The
majority of our loans require monthly interest payments at
variable rates and, in many cases, our loans provide for
interest rate floors that help us maintain our yields when
interest rates are low or declining. We price our loans based
upon the risk profile of our clients. As of December 31,
2010, our geographically diverse client base consisted of 1,115
clients with headquarters in 49 states, the District of
Columbia, Puerto Rico and select international locations,
primarily in Canada and Europe.
Developments
During Fiscal Year 2010
During 2010, we further simplified our business and progressed
in our transformation to a banking model by continuing to
originate new loans in CapitalSource Bank, completely divesting
the remaining assets in our Healthcare Net Lease segment,
substantially eliminating our involvement in and exposure to our
2006-A term
debt securitization (the
2006-A
Trust), which resulted in our deconsolidating the entity,
broadening our lending platform, improving our Parent Company
liquidity, repaying a significant portion of Parent Company
indebtedness, strengthening our balance sheet and implementing
our strategy to convert our banks industrial charter to a
commercial charter.
3
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., and, as a
result, 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.
Deconsolidation
of the
2006-A Term
Debt Securitization
In July 2010, we delegated certain of our collateral management
and special servicing rights in our
2006-A Trust
and sold our equity interest and certain notes issued by the
2006-A Trust
for $7.0 million. 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 delegation and sale 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, net,
$55.6 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 year ended
December 31, 2010 reflect the impact of this
deconsolidation on certain categories of income and expense in
our audited consolidated statements of operations, including
interest income, interest expense and the provision for loan
losses.
Bank
Charter Conversion
We are pursuing our strategy of converting CapitalSource Bank to
a commercial bank. Our current strategy for achieving this goal
involves becoming a bank holding company under the Bank Holding
Company Act of 1956. Subject to ongoing discussions with
regulatory authorities, we expect to file an application to
convert the existing industrial charter of CapitalSource Bank to
a commercial charter and to file an application to become a bank
holding company. This process is moving forward and we continue
to expect it can be concluded during the second half of 2011.
There is no assurance that any of the regulatory authorities
will approve our applications.
Broadening
of Our Lending Platform
In 2010, we added three new lending platforms to our product
offerings: Small Business Lending, which provides loans to small
businesses, including loans guaranteed by the Small Business
Administration (SBA); Corporate Asset Finance, which
provides loans to clients for use in purchasing and leasing
equipment, machinery and other assets necessary for their
operations; and Professional Practice Lending, which provides
loans to professional practices including dentists, physicians,
pharmacists and optometrists.
Share
Repurchase Program
In December 2010, our Board of Directors authorized the
repurchase of up to $150.0 million of our common stock over
a period of up to two years. Any share repurchases made under
the stock repurchase plan will be made through open market
purchases or privately negotiated transactions. The amount and
timing of any repurchases will depend upon market conditions and
other factors and repurchases may be suspended or discontinued
at any time. In December 2010, we repurchased
1,415,000 shares of our common stock under the share
repurchase plan, at an average price of $7.01 per share for a
total purchase price of $9.9 million. All shares
repurchased under the share repurchase plan were retired upon
settlement.
Improvement
in Parent Company Liquidity
In 2010, we closed several transactions that strengthened our
balance sheet and improved liquidity at the Parent Company. As
of December 31, 2009, we had four secured credit facilities
with aggregate commitments of $691.3 million and an
aggregate outstanding principal balance of $542.8 million.
As of December 31, 2010, we had four secured credit
facilities with aggregate commitments of $167.5 million and
an aggregate outstanding principal balance of
$67.5 million. During the first quarter of 2011, we repaid
and terminated all of the credit facilities with the exception
of our syndicated bank facility, which had no outstanding
balance as of December 31, 2010.
4
As of December 31, 2010, the Parent Companys
unrestricted cash and immediately available borrowing capacity
was $466.9 million and $100.0 million, respectively,
representing increases of $50.5 million and
$15.7 million, respectively, from December 31, 2009.
Loan
Products and Service Offerings
Senior
Secured Loans
We make senior secured, asset-based, real estate and cash flow
loans, which have a first priority lien in the collateral
securing the loan. Asset-based loans are collateralized by
specified assets of the client, generally the clients
accounts receivable, inventory
and/or
machinery. Real estate loans are secured by senior mortgages on
real property. We make cash flow loans based on our assessment
of a clients ability to generate cash flows sufficient to
repay the loan and to maintain or increase its enterprise value
during the term of the loan. Our cash flow loans generally are
secured by a security interest in all or substantially all of a
clients assets.
Our lending activities are primarily focused on the following
sectors:
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Equipment leasing and finance: equipment loans
and leases collateralized by the specific equipment financed;
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Healthcare: real estate, asset-based and cash
flow loans to healthcare providers;
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Commercial real estate: mortgage loans on a
variety of commercial property types;
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Multifamily real estate;
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Lender finance loans secured by timeshare, auto and other
consumer receivables;
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Security: asset-based and cash flow loans to
companies in the physical security, government security, and
public safety sectors;
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Technology: loans to technology companies that
provide critical product or service offerings, including
wireless communication tower owner/operators, information
technology hosting providers and managed service providers;
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Small business lending: loans guaranteed in
part by the SBA to small businesses; and
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Professional practices: business loans
primarily to dentists, physicians, pharmacists and optometrists.
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Depository
Products and Services
Through CapitalSource Banks 21 branches in southern and
central California, we provide savings and money market
accounts, individual retirement account products and
certificates of deposit. These products are insured up to the
maximum amounts permitted by the Federal Deposit Insurance
Corporation (FDIC).
5
As of December 31, 2010, our portfolio of assets by type
was as follows (percentages by gross carrying values):
Loan
Products and Investments by Type
As of December 31, 2010, our loan portfolio by geographic
region was as follows:
Loan Portfolio by Geographic Region(1)
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(1) |
Geographic region is based on the legal address of the borrower.
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6
CapitalSource
Bank Segment Overview
As of December 31, 2010 and 2009, the CapitalSource Bank
segment included:
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December 31,
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2010
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2009
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($ in thousands)
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Assets:
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Cash and cash equivalents(1)
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$
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377,054
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$
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821,980
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Investment securities,
available-for-sale
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1,510,384
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901,764
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Investment securities,
held-to-maturity
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184,473
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242,078
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Commercial real estate A Participation Interest, net
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530,560
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Loans(2)
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3,848,511
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3,061,426
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Federal Home Loan Bank of San Francisco stock
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19,370
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20,195
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Total
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$
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5,939,792
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$
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5,578,003
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Liabilities:
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Deposits
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$
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4,621,273
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$
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4,483,879
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Federal Home Loan Bank of San Francisco borrowings
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412,000
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200,000
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Total
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$
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5,033,273
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$
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4,683,879
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(1) |
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As of December 31, 2010 and 2009, the amounts include
restricted cash of $23.5 million and $65.9 million,
respectively. |
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(2) |
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Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
Cash and
Cash Equivalents
Cash and cash equivalents consist of amounts due from banks,
U.S. Treasury securities, short-term investments and
commercial paper with original maturity of three months or less.
For additional information, see Note 4, Cash and Cash
Equivalents and Restricted Cash, in our accompanying audited
consolidated financial statements for the year ended
December 31, 2010.
Investment
Securities,
Available-for-Sale
Investment securities,
available-for-sale,
consists of discount notes issued by Fannie Mae, Freddie Mac and
the Federal Home Loan Bank (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 a significant
portion of its investment securities,
available-for-sale,
to the Federal Home Loan Bank of San Francisco (FHLB
SF) and the Federal Reserve Bank (FRB) as a
source of borrowing capacity as of December 31, 2010. For
additional information on our investment securities,
available-for-sale,
see Note 6, Investments, in our accompanying audited
consolidated financial statements for the year ended
December 31, 2010.
Investment
Securities,
Held-to-Maturity
Investment securities,
held-to-maturity,
consists of commercial mortgage-backed securities rated AAA. For
additional information on our investment securities,
held-to-maturity,
see Note 6, Investments, in our accompanying audited
consolidated financial statements for the year ended
December 31, 2010.
7
Commercial
Real Estate A Participation Interest
The A Participation Interest, representing our share
in a pool of commercial real estate loans and related assets,
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 accompanying audited consolidated
financial statements for the year ended December 31, 2010.
CapitalSource
Bank Segment Loan Portfolio Composition
Total CapitalSource Bank loan portfolio reflected in the
portfolio statistics below includes loans held for sale of
$14.2 million as of December 31, 2010. CapitalSource
Bank did not have loans held for sale as of December 31,
2009.
As of December 31, 2010 and 2009, the composition of the
CapitalSource Bank loan portfolio by loan type was as follows:
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December 31,
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2010
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2009
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($ in thousands)
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Commercial
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$
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2,029,407
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53
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%
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$
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1,594,974
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52
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%
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Real estate
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1,634,062
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42
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1,086,961
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36
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Real estate construction
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185,042
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5
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379,491
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12
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Total(1)
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$
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3,848,511
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100
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%
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$
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3,061,426
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100
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%
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(1) |
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Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
The CapitalSource Bank loan portfolio has original maturities
ranging from three to eight years. As of December 31, 2010,
the weighted average original term to maturity and weighted
average remaining term of our CapitalSource Bank loan portfolio
were approximately 6.5 years and 4.5 years,
respectively. As of December 31, 2010, the weighted average
remaining lives of the CapitalSource Bank loan portfolio by loan
type were as follows:
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Due in
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Due in
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One Year
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One to
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Due After
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or Less
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Five Years
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Five Years
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Total
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($ in thousands)
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Commercial
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$
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175,000
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$
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1,615,811
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$
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238,596
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$
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2,029,407
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Real estate
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350,087
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789,489
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494,486
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1,634,062
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Real estate construction
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138,680
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40,125
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6,237
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185,042
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Total(1)
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$
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663,767
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$
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2,445,425
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$
|
739,319
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$
|
3,848,511
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(1) |
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Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
As of December 31, 2010, approximately 68% of the
adjustable rate portfolio comprised loans that are subject to an
interest rate floor and are accruing interest. Due to low market
interest rates as of December 31, 2010, substantially all
loans with interest rate floors were bearing interest at such
floors. The weighted average spread between the floor rate and
the fully indexed rate on the loans was 1.91% as of
December 31, 2010. To the extent the underlying indices
subsequently increase, CapitalSource Banks interest yield
on this portfolio will not rise as quickly due to the effect of
the interest rate floors.
8
As of December 31, 2010, the composition of CapitalSource
Bank loan balances by index and by loan type was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate-
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Real Estate
|
|
|
Construction
|
|
|
Total
|
|
|
Percentage
|
|
|
|
($ in thousands)
|
|
|
1-Month LIBOR
|
|
$
|
625,619
|
|
|
$
|
979,972
|
|
|
$
|
47,360
|
|
|
$
|
1,652,951
|
|
|
|
43
|
%
|
2-Month LIBOR
|
|
|
33,925
|
|
|
|
|
|
|
|
|
|
|
|
33,925
|
|
|
|
1
|
|
3-Month LIBOR
|
|
|
464,228
|
|
|
|
41,089
|
|
|
|
|
|
|
|
505,317
|
|
|
|
13
|
|
6-Month LIBOR
|
|
|
52,384
|
|
|
|
57,800
|
|
|
|
|
|
|
|
110,184
|
|
|
|
3
|
|
Prime
|
|
|
519,111
|
|
|
|
79,278
|
|
|
|
5,742
|
|
|
|
604,131
|
|
|
|
15
|
|
Other
|
|
|
66,593
|
|
|
|
8,296
|
|
|
|
|
|
|
|
74,889
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable rate loans
|
|
|
1,761,860
|
|
|
|
1,166,435
|
|
|
|
53,102
|
|
|
|
2,981,397
|
|
|
|
77
|
|
Fixed rate loans
|
|
|
221,628
|
|
|
|
397,189
|
|
|
|
|
|
|
|
618,817
|
|
|
|
17
|
|
Loans on non-accrual status
|
|
|
45,919
|
|
|
|
70,438
|
|
|
|
131,940
|
|
|
|
248,297
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans(1)
|
|
$
|
2,029,407
|
|
|
$
|
1,634,062
|
|
|
$
|
185,042
|
|
|
$
|
3,848,511
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
As of December 31, 2010, our CapitalSource Bank loan
portfolio by industry was as follows (percentages by gross
carrying values as of December 31, 2010):
CapitalSource
Bank Loan Portfolio by Industry
9
As of December 31, 2010, CapitalSource Banks largest
loan had an outstanding balance of $129.2 million. As of
December 31, 2010, our CapitalSource Bank commercial loan
portfolio by loan balance was as follows:
CapitalSource
Bank Loan Portfolio by Loan Balance
As of December 31, 2010, the number of loans, average loan
size, number of clients and average loan size per client by loan
type for CapitalSource Bank were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Loan
|
|
|
|
Number
|
|
|
Average
|
|
|
Number of
|
|
|
Size per
|
|
|
|
of Loans(1)
|
|
|
Loan Size(2)
|
|
|
Clients
|
|
|
Client(2)
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
|
400
|
|
|
$
|
5,074
|
|
|
|
303
|
|
|
$
|
6,698
|
|
Real estate(3)
|
|
|
614
|
|
|
|
2,661
|
|
|
|
585
|
|
|
|
2,793
|
|
Real estate construction
|
|
|
17
|
|
|
|
10,885
|
|
|
|
14
|
|
|
|
13,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall CapitalSource Bank loan portfolio
|
|
|
1,031
|
|
|
|
3,733
|
|
|
|
902
|
|
|
|
4,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 30 loans shared with the Other Commercial Finance
segment. |
|
(2) |
|
Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
|
(3) |
|
Includes 237 multi-family loans with an average loan size of
$1.4 million. |
FHLB SF
Stock
Investments in FHLB SF stock are recorded at historical cost.
FHLB SF stock does not have a readily determinable fair value,
but can generally be sold back to the FHLB SF at par value upon
stated notice. The investment in FHLB SF stock is periodically
evaluated for impairment based on, among other things, the
capital adequacy of the FHLB and its overall financial
condition. No impairment losses have been recorded through
December 31, 2010.
10
Deposits
As of December 31, 2010 and 2009, a summary of
CapitalSource Banks deposit portfolio by product type and
the maturities of the certificates of deposit portfolio were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
|
($ in thousands)
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market
|
|
$
|
236,811
|
|
|
|
0.78
|
%
|
|
$
|
258,283
|
|
|
|
0.99
|
%
|
Savings
|
|
|
694,157
|
|
|
|
0.84
|
|
|
|
599,084
|
|
|
|
1.09
|
|
Certificates of deposit
|
|
|
3,690,305
|
|
|
|
1.27
|
|
|
|
3,626,512
|
|
|
|
1.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
$
|
4,621,273
|
|
|
|
1.18
|
|
|
$
|
4,483,879
|
|
|
|
1.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Remaining maturity of certificates of deposit:
|
|
|
|
|
|
|
|
|
0 to 3 months
|
|
$
|
1,027,182
|
|
|
|
1.09
|
%
|
4 to 6 months
|
|
|
965,723
|
|
|
|
1.09
|
|
7 to 9 months
|
|
|
446,046
|
|
|
|
1.26
|
|
10 to 12 months
|
|
|
464,873
|
|
|
|
1.37
|
|
Greater than 12 months
|
|
|
786,481
|
|
|
|
1.67
|
|
|
|
|
|
|
|
|
|
|
Total certificates of deposit
|
|
$
|
3,690,305
|
|
|
|
1.27
|
|
|
|
|
|
|
|
|
|
|
FHLB SF
Borrowings
FHLB SF borrowings increased to $412.0 million as of
December 31, 2010 from $200.0 million as of
December 31, 2009. These borrowings were used primarily for
interest rate risk management and short-term funding purposes.
The weighted average remaining maturities of the borrowings were
approximately 2.3 years and 1.9 years as of
December 31, 2010 and 2009, respectively.
As of December 31, 2010, the remaining maturity and the
weighted average interest rate of FHLB SF borrowings were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Less than 1 year
|
|
$
|
151,000
|
|
|
|
1.03
|
%
|
After 1 year through 2 years
|
|
|
53,000
|
|
|
|
2.01
|
|
After 2 years through 3 years
|
|
|
43,000
|
|
|
|
1.35
|
|
After 3 years through 4 years
|
|
|
55,000
|
|
|
|
2.34
|
|
After 4 years through 5 years
|
|
|
95,000
|
|
|
|
2.08
|
|
After 5 years
|
|
|
15,000
|
|
|
|
2.88
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
412,000
|
|
|
|
1.67
|
|
|
|
|
|
|
|
|
|
|
11
Other
Commercial Finance Segment Overview
As of December 31, 2010 and 2009, the Other Commercial
Finance segment included:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Investment securities,
available-for-sale
|
|
$
|
12,527
|
|
|
$
|
58,827
|
|
Loans(1)
|
|
|
2,509,699
|
|
|
|
5,220,814
|
|
Other investments(2)
|
|
|
71,889
|
|
|
|
96,517
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,594,115
|
|
|
$
|
5,376,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
|
(2) |
|
Includes investments carried at cost, investments carried at
fair value and investments accounted for under the equity method. |
Other
Commercial Finance Segment Loan Portfolio Composition
Total Other Commercial Finance loan portfolio reflected in the
portfolio statistics below includes loans held for sale of
$191.1 million and $0.7 million as of
December 31, 2010 and 2009, respectively.
As of December 31, 2010 and 2009, the composition of the
Other Commercial Finance loan portfolio by loan type was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
$
|
2,209,064
|
|
|
|
88
|
%
|
|
$
|
3,441,481
|
|
|
|
66
|
%
|
Real estate
|
|
|
192,096
|
|
|
|
8
|
|
|
|
939,598
|
|
|
|
18
|
|
Real estate construction
|
|
|
108,539
|
|
|
|
4
|
|
|
|
839,735
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(1)
|
|
$
|
2,509,699
|
|
|
|
100
|
%
|
|
$
|
5,220,814
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
Our loans generally have original maturities ranging from three
to ten years. As of December 31, 2010, the weighted average
term to maturity and weighted average remaining term of our
Other Commercial Finance loan portfolio were approximately
6.5 years and 2.3 years, respectively. As of
December 31, 2010, the weighted average remaining lives 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
|
|
$
|
494,657
|
|
|
$
|
1,462,661
|
|
|
$
|
251,746
|
|
|
$
|
2,209,064
|
|
Real estate
|
|
|
155,742
|
|
|
|
22,574
|
|
|
|
13,780
|
|
|
|
192,096
|
|
Real estate construction
|
|
|
67,648
|
|
|
|
40,891
|
|
|
|
|
|
|
|
108,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(1)
|
|
$
|
718,047
|
|
|
$
|
1,526,126
|
|
|
$
|
265,526
|
|
|
$
|
2,509,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
As of December 31, 2010, approximately 45% of the
adjustable rate loan portfolio comprised loans that are subject
to an interest rate floor and are accruing interest. Due to low
market interest rates as of December 31, 2010,
12
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 2.34% as
of December 31, 2010. To the extent the underlying indices
subsequently increase, the interest yield on these adjustable
rate loans will not rise as quickly due to the effect of the
interest rate floors.
As of December 31, 2010, the composition of Other
Commercial Finance loan balances by index and by loan type was
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate-
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Real Estate
|
|
|
Construction
|
|
|
Total
|
|
|
Percentage
|
|
|
|
($ in thousands)
|
|
|
1-Month LIBOR
|
|
$
|
923,755
|
|
|
$
|
91,681
|
|
|
$
|
|
|
|
$
|
1,015,436
|
|
|
|
40
|
%
|
2-Month LIBOR
|
|
|
23,172
|
|
|
|
|
|
|
|
|
|
|
|
23,172
|
|
|
|
1
|
|
3-Month LIBOR
|
|
|
265,046
|
|
|
|
|
|
|
|
|
|
|
|
265,046
|
|
|
|
11
|
|
6-Month LIBOR
|
|
|
38,146
|
|
|
|
|
|
|
|
|
|
|
|
38,146
|
|
|
|
2
|
|
1-Month
EURIBOR
|
|
|
103,759
|
|
|
|
|
|
|
|
|
|
|
|
103,759
|
|
|
|
4
|
|
3-Month
EURIBOR
|
|
|
28,363
|
|
|
|
|
|
|
|
|
|
|
|
28,363
|
|
|
|
1
|
|
6-Month
EURIBOR
|
|
|
22,294
|
|
|
|
|
|
|
|
|
|
|
|
22,294
|
|
|
|
1
|
|
Prime
|
|
|
430,131
|
|
|
|
8,455
|
|
|
|
39,868
|
|
|
|
478,454
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable rate loans
|
|
|
1,834,666
|
|
|
|
100,136
|
|
|
|
39,868
|
|
|
|
1,974,670
|
|
|
|
79
|
|
Fixed rate loans
|
|
|
53,900
|
|
|
|
30,640
|
|
|
|
|
|
|
|
84,540
|
|
|
|
3
|
|
Loans on non-accrual status
|
|
|
320,498
|
|
|
|
61,320
|
|
|
|
68,671
|
|
|
|
450,489
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans(1)
|
|
$
|
2,209,064
|
|
|
$
|
192,096
|
|
|
$
|
108,539
|
|
|
$
|
2,509,699
|
|
|
|
100
|
%
|
|
|
|
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|
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|
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|
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(1) |
|
Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
13
As of December 31, 2010, our Other Commercial Finance loan
portfolio by industry was as follows (percentages by gross
carrying values as of December 31, 2010):
Other
Commercial Finance Loan Portfolio by Industry
As of December 31, 2010, the largest commercial loan in our
Other Commercial Finance segment had an outstanding balance of
$325.0 million and is a mezzanine loan to a borrower that
owns, operates, leases or manages 211 skilled nursing
facilities, 24 assisted living facilities and three transition
care units in 13 states. As of December 31, 2010, our
Other Commercial Finance loan portfolio by loan balance was as
follows:
Other
Commercial Finance Loan Portfolio by Loan Balance
14
As of December 31, 2010, our Other Commercial Finance loan
portfolio by geographic region was as follows:
Other
Commercial Finance Loan Portfolio by Geographic
Region(1)
|
|
|
(1) |
|
Geographic region is based on the legal address of the borrower. |
As of December 31, 2010, the number of loans, average loan
size, number of clients and average loan size per client by loan
type were as follows:
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|
Average Loan
|
|
|
|
Number of
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|
Average
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|
Number of
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|
Size per
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|
|
|
Loans(1)
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|
|
Loan Size(2)
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Clients
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|
Client(2)
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|
($ in thousands)
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|
Commercial
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|
|
355
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|
|
$
|
6,223
|
|
|
|
218
|
|
|
$
|
10,133
|
|
Real estate
|
|
|
32
|
|
|
|
6,003
|
|
|
|
28
|
|
|
|
6,861
|
|
Real estate construction
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|
13
|
|
|
|
8,349
|
|
|
|
12
|
|
|
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9,045
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall Other Commercial Finance loan portfolio
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|
|
400
|
|
|
|
6,270
|
|
|
|
258
|
|
|
|
9,721
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
(1) |
|
Includes 30 loans shared with CapitalSource Bank. |
|
(2) |
|
Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. |
Other
Investments
The Parent Company has 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 interests
in the
2006-A Trust.
15
Enterprise
Risk Management
We take an enterprise-wide approach to risk management designed
to support our organizational and strategic objectives and to
enhance shareholder value. Global risk oversight is conducted by
senior management and overseen by the Board of Directors. As
part of its oversight responsibilities, the Board monitors how
management operates the Company and manages strategic, credit,
liquidity, financial, market, regulatory/compliance, legal,
fraud, reputation, compensation, and operational risks. The
involvement of the full Board in setting our business strategy
is a fundamental part of its assessment and establishment of
appropriate risk tolerances for the Company.
Board
Level Risk Oversight
While the full Board of Directors is responsible for risk
oversight, committees of the Board provide direct oversight of
risks arising from specific activities. The Audit Committee
oversees financial and accounting risk, including internal
controls, and operational and regulatory risk. The Audit
Committee receives periodic risk assessment reports from our
internal audit department assessing the primary accounting and
financial risks facing CapitalSource and managements
considerations for mitigating these risks. The Audit Committee
also assesses the guidelines and policies that govern the
processes for identifying and assessing significant financial
and accounting risks and formulating and implementing steps to
minimize such risks and exposures. The Audit Committee considers
risks in the financial reporting and disclosure process and
review policies on financial risk control assessment and
accounting risk exposure. The Audit Committee meets with
management, including our Co-Chief Executive Officers, Chief
Financial Officer, our internal audit department, auditors and
our independent registered public accounting firm in executive
sessions at least quarterly, and with our General Counsel as
necessary from time to time.
The Audit Committee also supervises the internal audit function,
which provides the Audit Committee with periodic assessments of
our risk management processes and internal quality-control
procedures. The Audit Committee periodically reviews our
internal audit department, including its independence and
reporting authority and obligations and the development and
coordination of proposed audit plans for coming years. The Audit
Committee receives notification of material adverse findings
from internal audits and a progress report at least quarterly on
the proposed internal audit plan, as appropriate, with
explanations for changes from the original plan. The Audit
Committee reviews with management and the independent audit
department the adequacy of our internal control structure and
procedures for financial reporting and the resolution of any
identified material weaknesses or significant deficiencies in
such internal control structure and procedures.
The Asset, Liability and Credit Policy (ALCP)
Committee meets periodically but no less frequently than
quarterly and assists the Board in overseeing and reviewing our
asset, liability and credit risk management and strategies,
including the significant policies, procedures and practices
employed to manage these risks. The ALCP Committee periodically
reviews our liquidity and cash management, the quality of our
loan portfolio, and our credit practices, policies and
procedures. The ALCP Committee also reviews information
regarding problem assets and portfolio concentrations and trends.
The Compensation Committee provides oversight with respect to
compensation-related risks and strives to ensure that the
Companys incentive and other compensation policies and
practices are consistent with the Companys business
strategies and in compliance with applicable laws and regulatory
guidance. Management regularly assesses our compensation
policies and practices to identify and mitigate
compensation-related risks as appropriate.
Management
Level Risk Oversight
While the Board has ultimate oversight responsibility for our
risk management, we have utilized management level committees to
actively assess and manage risks across the Company. As of
February 2011, our Board of Directors established a formal
enterprise-wide management level Enterprise Risk Management
(ERM) infrastructure that aligns with bank
regulatory guidance. The ERM infrastructure is governed by a
Board approved ERM Policy and administered by a management ERM
Committee (ERMC) chaired by our Chief Compliance
Officer. The ERMC comprises executive and senior level
management and reports to the Board on enterprise-wide risks and
risk management. The ERMC is responsible for implementing risk
identification, assessment and monitoring systems, where
applicable, and has oversight responsibility for the processes
that identify, measure, mitigate and
16
report on the Companys risk categories, including
strategic, credit, liquidity, financial, market, regulatory
compliance, legal, fraud, reputation, compensation and
operational risks.
Financing
We depend on depository and external financing sources to fund
our operations. We employ a variety of financing arrangements,
including deposits, secured credit facilities, term debt,
convertible debt, subordinated debt and equity. As a member of
the FHLB SF, one of 12 regional banks in the FHLB system,
CapitalSource Bank had financing availability with the FHLB SF
as of December 31, 2010 equal to 20% of CapitalSource
Banks total assets.
Competition
Our markets are competitive and characterized by varying
competitive factors. We compete with a large number of financial
services companies, including:
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commercial banks and thrifts;
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specialty and commercial finance companies;
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private investment funds;
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insurance companies; and
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investment banks.
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Some of our competitors have substantial market positions. Many
of our competitors are large companies that have substantial
capital, technological and marketing resources. Some of our
competitors also have access to a lower cost of capital. We
believe we compete based on:
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in-depth knowledge of our clients industries and their
business needs based upon information received from our
clients key decision-makers, analysis by our experienced
professionals and interaction between our clients
decision-makers and our experienced professionals;
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our breadth of product offerings and flexible and creative
approach to structuring products that meet our clients
business and timing needs; and
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our superior client service.
|
Supervision
and Regulation
Our bank operations are subject to regulation by federal and
state regulatory agencies. This regulation is intended primarily
for the protection of depositors and the deposit insurance fund,
and secondarily for the stability of the U.S. banking
system. It is not intended for the benefit of stockholders of
financial institutions. CapitalSource Bank is a California
industrial bank and is subject to supervision and regular
examination by the FDIC and the California Department of
Financial Institutions (DFI). CapitalSource
Banks deposits are insured up to the maximum amounts
permitted by regulation.
Although the Parent Company is not directly regulated or
supervised by the DFI, the FDIC, the Federal Reserve Board or
any other federal or state bank regulatory authority either as a
bank holding company or otherwise, the FDIC has authority
pursuant to arrangements with the Parent Company and
CapitalSource Bank to examine the Parent Company and its
relationship and transactions between it and CapitalSource Bank
and the effect of such relationships and transactions on
CapitalSource Bank. The Parent Company also is subject to
regulation by other applicable federal and state agencies, such
as the SEC. We are required to file periodic reports with these
regulators and provide any additional information that they may
require.
The following summary describes some of the more significant
laws, regulations, and policies that affect our operations; it
is not intended to be a complete listing of all laws that apply
to us. From time to time, federal, state and foreign legislation
is enacted and regulations are adopted which may have the effect
of materially increasing the
17
cost of doing business, limiting or expanding permissible
activities, or affecting the competitive balance between banks
and other financial services providers. We cannot predict
whether or when potential legislation will be enacted, and if
enacted, the effect that it, or any implementing regulations,
would have on our financial condition or results of operations.
General
CapitalSource Bank must file reports with the DFI and the FDIC
concerning its activities and financial condition in addition to
obtaining regulatory approvals prior to changing its approved
business plan or entering into certain transactions such as
mergers with, or acquisitions of, other financial institutions.
CapitalSource Bank will complete its initial three year de
novo period in July 2011. It is our expectation that upon
completion of the initial three year de novo time period,
both CapitalSource Bank and the Parent Company will cease being
subject to the various conditions contained in the FDIC Order
granting deposit insurance and the DFI Order establishing
CapitalSource Bank as is customarily the case for de novo
banks upon reaching their
three-year
anniversary date. Notwithstanding the termination of any such
conditions, we will remain subject to bank safety and soundness
requirements as well as to various regulatory capital
requirements established by federal and state regulatory
agencies, including any new conditions that our regulators may
determine.
Under current FDIC guidance CapitalSource Bank is required to
file a revised business plan for years four to seven of an
expanded de novo period. During this expanded time period,
CapitalSource Bank may be subject to increased supervision than
would otherwise be applicable to a bank that has been in
existence longer than three years, including enhanced FDIC
supervision for compliance examinations and Community
Reinvestment Act evaluations. There are periodic examinations by
the DFI and the FDIC to evaluate CapitalSource Banks
safety and soundness and compliance with various regulatory
requirements. The regulatory structure also gives the regulatory
authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies,
including policies with respect to the credit classification of
assets and the establishment of adequate loan loss reserves for
regulatory purposes. Any change in such policies, whether by the
regulators or Congress, could have a material adverse impact on
our operations.
The FDIC and DFI have enforcement authority over our operations,
which includes, among other things, the ability to assess civil
money penalties, issue
cease-and-desist
or removal orders and initiate injunctive actions. In general,
these enforcement actions may be initiated for violations of
laws and regulations and unsafe or unsound practices. Other
actions or inaction may provide the basis for enforcement
action, including misleading or untimely reports filed with the
FDIC or DFI. Except under certain circumstances, public
disclosure of final enforcement actions by the FDIC or DFI is
required.
In addition, the investment, lending and branching authority of
CapitalSource Bank is prescribed by state and federal laws and
CapitalSource Bank is prohibited from engaging in any activities
not permitted by these laws.
California law provides that industrial banks are generally
subject to a limit on loans to one borrower. An industrial bank
based in California may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of its
unimpaired capital and surplus. An additional amount may be
lent, equal to 10% of unimpaired capital and surplus, if secured
by specified readily marketable collateral. As of
December 31, 2010, CapitalSource Banks limit on loans
to one borrower was $157.4 million if unsecured and
$262.4 million if secured by collateral.
The FDIC and DFI, as well as the other federal banking agencies,
have adopted guidelines establishing safety and soundness
standards on such matters as loan underwriting and
documentation, asset quality, earnings, internal controls and
audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution that fails to comply
with these standards must submit a compliance plan.
The Parent Company has entered into a supervisory agreement with
the FDIC (the Parent Agreement) consenting to
examination of the Parent Company by the FDIC to monitor
compliance with the laws and regulations applicable to
CapitalSource Bank and its affiliates. The Parent Company and
CapitalSource Bank are parties to a Capital Maintenance and
Liquidity Agreement (CMLA) with the FDIC providing
that, 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 CapitalSource Banks total risk-based
capital ratio at all
18
times to meet or exceed the levels required for a bank to be
considered well-capitalized under the relevant
banking regulations. Additionally, pursuant to requirements of
the FDIC, the Parent Company has provided a $150.0 million
unsecured revolving credit facility that CapitalSource Bank may
draw on at any time it or the FDIC deems necessary. The Parent
Agreement also requires the Parent Company to maintain the
capital levels of CapitalSource Bank at the levels required in
the CMLA.
It is important to meet minimum capital requirements established
by the FDIC and the DFI for CapitalSource Bank to avoid
mandatory or additional discretionary actions initiated by these
regulatory agencies. These potential actions could have a direct
material effect on our audited consolidated financial
statements. Based upon the regulatory framework, we must meet
specific capital guidelines that involve quantitative measures
of the banking assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. Our
capital amounts, the ability to pay dividends and other
requirements and classifications are also subject to qualitative
judgments by the regulators about risk weightings and other
factors.
The international Basel Committee on Banking Supervision
published the final text of Basel III on December 16,
2010, which introduces new minimum capital requirements, two
liquidity ratios, a charge for credit value adjustment and a
leverage ratio, among other things. The Basel III
requirements will be implemented over an extended period of
time. This time period will not commence and will have a minimal
impact on us until such time as the U.S. banking regulators
adopt the Basel III requirements. We will continue to
monitor developments relating to Basel III adoption in the
U.S. and its potential impact on our operations.
Federal
Home Loan Bank System
CapitalSource Bank is a member of the FHLB SF. Among other
benefits, each FHLB serves as a reserve or central bank for its
members within its assigned region and makes available advances
and loans to its members. Each FHLB is funded primarily from
proceeds derived from the sale of consolidated obligations of
the FHLB System. As a member, CapitalSource Bank is required to
purchase and maintain stock in the FHLB SF. As of
December 31, 2010, CapitalSource Bank had
$19.4 million in FHLB SF stock, which was in compliance
with this requirement. There can be no assurance that the FHLB
SF will pay dividends at the same rate it has paid in the past,
or that it will pay any dividends in the future.
Dodd-Frank
Act
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 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.
19
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 previously 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%.
The Dodd-Frank Act also established requirements for financial
institutions with consolidated assets in excess of
$1 billion to established risk based incentive compensation
programs. Federal regulatory agencies are currently drafting
rules to implement this component of the Dodd-Frank Act. We are
monitoring the rulemaking process and reviewing current
incentive compensation programs for compliance with and in
preparation for future implementation of joint agency rules.
Insurance
of Accounts and Regulation by the FDIC
CapitalSource Banks deposits are insured up to the maximum
amounts permitted by the DIF of the FDIC, currently $250,000. As
insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting
by FDIC insured institutions. It also may prohibit any FDIC
insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the
insurance fund. The FDIC also has the authority to initiate
enforcement actions against insured institutions.
On October 7, 2008, the FDIC established a Restoration Plan
for the DIF to return the DIF to its statutorily mandated
minimum reserve ratio of 1.15% within five years. In 2009, the
Restoration Plan was amended to extend the restoration period to
seven years and Congress subsequently amended the statute to
allow the FDIC up to eight years to return the DIF reserve ratio
to 1.15%, absent extraordinary circumstances. To meet this
reserve ratio by the end of 2016, the FDIC amended its
Restoration Plan and adopted a uniform 3 basis point
increase in the initial assessment rates effective
January 1, 2011.
The Dodd-Frank Act establishes a minimum designated reserve
ratio (DRR) of 1.35% of estimated insured deposits,
provides discretion to the FDIC to develop a new assessment
base, mandates the FDIC adopt a restoration plan should the fund
balance fall below 1.35%, and provides dividends to the industry
should the fund balance exceed 1.50%. The Dodd-Frank Act
requires the DRR to be achieved by September 30, 2020. On
February 7, 2011, the FDIC adopted a final rule that
revises the assessment base and assessment rate schedule
effective April 1, 2011, and, in lieu of dividends,
provides for reduced assessment rates once the DRR exceeds 2.00%
and again at 2.50%. Assessments generally will be calculated
using an insured depository institutions average assets
minus average tangible equity. The initial assessment rates
range between 5 basis points for a low risk institution to
35 basis points for a high risk institution, with further
rate adjustments for the level of unsecured debt and brokered
deposits held by an institution.
A significant increase in FDIC assessment rates would have an
adverse effect on the operating expenses and results of
operations of CapitalSource Bank. There can be no prediction as
to what assessment rates will be in the future. Insurance of
deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or
condition imposed by the FDIC or the DFI.
Prompt
Corrective Action
The FDIC and DFI are required to take certain supervisory
actions against undercapitalized banks, the severity of which
depends upon the institutions degree of
undercapitalization. Generally, an institution is considered to
be undercapitalized if it has a core capital ratio
of less than 4.0% (3.0% or less for institutions with the
highest examination rating), a ratio of total capital to
risk-weighted assets of less than 8.0%, or a ratio of
Tier 1 capital to
20
risk-weighted assets of less than 4.0%. An institution that has
a core capital ratio that is less than 3.0%, a total risk-based
capital ratio less than 6.0%, and a Tier 1 risk-based
capital ratio of less than 3.0% is considered to be
significantly undercapitalized and an institution
that has a tangible capital ratio equal to or less than 2.0% is
deemed to be critically undercapitalized. Subject to
a narrow exception, the FDIC or DFI is required to appoint a
receiver or conservator for a bank that is critically
undercapitalized. Regulations also require that a capital
restoration plan be filed with the FDIC and DFI within
45 days of the date an institution receives notice that it
is undercapitalized, significantly
undercapitalized or critically
undercapitalized. In addition, numerous mandatory
supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to,
increased monitoring by regulators and restrictions on growth,
capital distributions and expansion. Significantly
undercapitalized and critically
undercapitalized institutions are subject to more
extensive mandatory regulatory actions. The FDIC or DFI also
could take any one of a number of discretionary supervisory
actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
The risk-based capital standard requires banks to maintain
Tier 1 and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least
4% and 8%, respectively, to be considered adequately
capitalized. In determining the amount of risk-weighted
assets, all assets, including certain off-balance sheet assets,
recourse obligations, residual interests and direct credit
substitutes, are assigned by a risk-weight factor of 0% to 100%,
per regulation based on the risks believed inherent in the type
of asset. Core capital is defined as common stockholders
equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less
intangibles other than certain mortgage servicing rights and
credit card relationships. The components of supplementary
capital currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities,
subordinated debt and intermediate preferred stock, the
allowance for loan and lease losses limited to a maximum of
1.25% of risk-weighted assets and up to 45% of unrealized gains
on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of
supplementary capital included as part of total capital cannot
exceed 100% of core capital.
To remain in compliance with the conditions imposed by the FDIC,
CapitalSource Bank is required to maintain a total risk-based
capital ratio of not less than 15% and must at all times be
well-capitalized, which requires CapitalSource Bank
to have minimum total risk-based capital ratio of 15%,
Tier 1 risk-based capital ratio of 6% and Tier 1
leverage ratio of 5%. Further, 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 10.0%. As
of December 31, 2010, CapitalSource Bank had Tier-1
leverage, Tier-1 risked-based capital and total risk based
capital ratios of 13.15%, 16.86% and 18.13%, respectively, each
in excess of the minimum percentage requirements for
well-capitalized institutions. As of
December 31, 2010, CapitalSource Bank satisfied the DFI
capital ratio requirement with a ratio of 12.61%. For additional
information, see Note 18, Bank Regulatory Capital,
in our accompanying audited consolidated financial
statements for the year ended December 31, 2010.
Limitations
on Capital Distributions
FDIC and DFI regulations impose various restrictions on banks
with respect to their ability to make distributions of capital,
which include dividends, stock redemptions or repurchases,
cash-out mergers and other transactions charged to the capital
account. Generally, banks may make capital distributions during
any calendar year up to 100% of net income for the year-to-date
plus retained net income for the two preceding years if they are
well-capitalized both before and after the proposed
distribution. However, an institution deemed to be in need of
more than normal supervision by the FDIC and DFI may have its
dividend authority restricted by the regulating bodies.
CapitalSource Bank is prohibited from paying dividends without
consent from our regulators.
Transactions
with Affiliates
CapitalSource Banks authority to engage in transactions
with affiliates is limited by Sections 23A and
23B of the Federal Reserve Act as implemented by the Federal
Reserve Boards Regulation W. The term
affiliates for these purposes generally means any
company that controls or is under common control with an
institution, and includes the Parent Company as it relates to
CapitalSource Bank. In general, transactions with affiliates
must be on terms that are as favorable to the institution as
comparable transactions with non-affiliates. In addition,
specified
21
types of transactions are restricted to an aggregate percentage
of the institutions capital. Collateral in specified
amounts must be provided by affiliates to receive extensions of
credit from an institution. Federally insured banks are subject,
with certain exceptions, to restrictions on extensions of credit
to their parent holding companies or other affiliates, on
investments in the stock or other securities of affiliates and
on the taking of such stock or securities as collateral from any
borrower. In addition, these institutions are prohibited from
engaging in specified tying arrangements in connection with any
extension of credit or the providing of any property or service.
Community
Reinvestment Act
Under the Community Reinvestment Act, every FDIC insured
institution has a continuing and affirmative obligation
consistent with safe and sound banking practices to help meet
the credit needs of its entire community, including low and
moderate income neighborhoods. The Community Reinvestment Act
does not establish specific lending requirements or programs for
financial institutions nor does it limit an institutions
discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent
with the Community Reinvestment Act. The Community Reinvestment
Act requires the FDIC, in connection with the examination of
CapitalSource Bank, to assess the institutions record of
meeting the credit needs of its community and to take such
record into account in its evaluation of certain applications,
such as a merger or the establishment of a branch, by
CapitalSource Bank. The FDIC may use an unsatisfactory rating as
the basis for the denial of an application. Due to the
heightened attention being given to the Community Reinvestment
Act in the past few years, CapitalSource Bank may be required to
devote additional funds for investment and lending in its local
community.
Regulatory
and Criminal Enforcement Provisions
The FDIC and DFI have primary enforcement responsibility over
CapitalSource Bank and have the authority to bring action
against all institution-affiliated parties,
including stockholders, attorneys, appraisers and accountants
who knowingly or recklessly participate in wrongful action
likely to have an adverse effect on an insured institution.
Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of
officers or directors, receivership, conservatorship or
termination of deposit insurance. Civil penalties cover a wide
range of violations and can amount to $25,000 per day, or
$1.1 million per day in especially egregious cases. The
FDIC has the authority to take such action under certain
circumstances. Federal law also establishes criminal penalties
for specific violations.
Environmental
Issues Associated with Real Estate Lending
The Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA), a federal statute, generally
imposes strict liability on all prior and current owners
and operators of sites containing hazardous waste.
However, Congress acted to protect secured creditors by
providing that the term owner and operator excludes
a person whose ownership is limited to protecting its security
interest in the site. Since the enactment of the CERCLA, this
secured creditor exemption has been the subject of
judicial interpretations which have left open the possibility
that lenders could be liable for
clean-up
costs on contaminated property that they hold as collateral for
a loan. To the extent that legal uncertainty exists in this
area, all creditors, including the Parent Company and
CapitalSource Bank, that have made loans secured by properties
with potential hazardous waste contamination (such as petroleum
contamination) could be subject to liability for cleanup costs,
which costs often substantially exceed the value of the
collateral property.
Privacy
Standards
The Gramm-Leach-Bliley Financial Services Modernization Act of
1999 (GLBA) modernized the financial services
industry by establishing a comprehensive framework to permit
affiliations among commercial banks, insurance companies,
securities firms and other financial service providers.
CapitalSource Bank is subject to regulations implementing the
privacy protection provisions of the GLBA. These regulations
require CapitalSource Bank to disclose its privacy policy,
including identifying with whom it shares non-public
personal information to consumers at the time of
establishing the customer relationship and annually thereafter.
The State of Californias Financial Information Privacy Act
provides greater protection for consumers rights under
California Law to restrict affiliate data sharing.
22
Anti-Money
Laundering and Customer Identification
As part of the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001 (USA Patriot Act), Congress adopted the
International Money Laundering Abatement and Financial
Anti-Terrorism Act of 2001 (IMLAFATA). IMLAFATA
amended the Bank Secrecy Act (BSA) and adopted
additional measures that established or increased existing
obligations of financial institutions, including CapitalSource
Bank, to identify their customers, monitor and report suspicious
transactions, respond to requests for information by federal
banking regulatory authorities and law enforcement agencies,
and, at the option of CapitalSource Bank, share information with
other financial institutions. The U.S. Secretary of the
Treasury has adopted several regulations to implement these
provisions. Pursuant to these regulations, CapitalSource Bank is
required to implement appropriate policies and procedures
relating to anti-money laundering matters, including compliance
with applicable regulations, suspicious activities, currency
transaction reporting and customer due diligence. Our BSA
compliance program is subject to federal regulatory review.
Other
Laws and Regulations
We are subject to many other federal statutes and regulations,
such as the Equal Credit Opportunity Act, the Truth in Savings
Act, the Fair Credit Reporting Act, the Fair Housing Act, the
National Flood Insurance Act and various federal and state
privacy protection laws. These laws, rules and regulations,
among other things, impose licensing obligations, limit the
interest rates and fees that can be charged, mandate disclosures
and notices to customers mandate the collection and reporting of
certain data regarding customers, regulate marketing practices
and require the safeguarding of non-public information of
customers. Penalties for violating these laws could subject us
to lawsuits and could also result in administrative penalties,
including, fines and reimbursements. We are also subject to
federal and state laws prohibiting unfair or fraudulent business
practices, untrue or misleading advertising and unfair
competition.
In recent years, examination and enforcement by the state and
federal banking agencies for non-compliance with the
above-referenced laws and their implementing regulations have
become more intense. Due to these heightened regulatory
concerns, we may incur additional compliance costs or be
required to expend additional funds for investments in our local
community.
The federal government continues to evaluate possible new laws
and regulations, which if enacted, could have a material impact
on us, including among other things increased reporting
obligations, restrictions on current lending activities, federal
and state supervision and increased expenses to operate as a
bank.
Regulation
of Other Activities
Some other aspects of our operations are subject to supervision
and regulation by governmental authorities and may be subject to
various laws and judicial and administrative decisions imposing
various requirements and restrictions, which, among other things:
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regulate credit and lending activities, including establishing
licensing requirements in some jurisdictions;
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establish the maximum interest rates, finance charges and other
fees we may charge our clients;
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govern secured transactions;
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require specified information disclosures to our clients;
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set collection, foreclosure, repossession and claims handling
procedures and other trade practices;
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regulate our clients insurance coverage;
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prohibit discrimination in the extension of credit and
administration of our loans; and
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regulate the use and reporting of certain client information.
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In addition, many of our healthcare clients receive significant
funding from governmental sources and are subject to licensure,
certification and other regulation and oversight under the
applicable Medicare and Medicaid
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programs. These regulations and governmental oversight, both on
federal and state levels, indirectly affect our business in
several ways as discussed below.
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Failure to comply with the applicable laws and regulation by our
clients could result in loss of accreditation, denial of
reimbursement, imposition of fines, suspension or
decertification from federal and state health care programs,
loss of license and closure of the facility.
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With limited exceptions, the law prohibits payment of amounts
owed to healthcare providers under the Medicare and Medicaid
programs to be directed to any entity other than actual
providers approved for participation in the applicable programs.
Accordingly, while we lend money that is secured by pledges of
Medicare and Medicaid receivables, if we were required to invoke
our rights to the pledged receivables, we would be unable to
collect receivables payable under these programs directly. We
would need a court order to force collection directly against
these governmental payers.
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Hospitals, nursing facilities and other providers of healthcare
services are not always assured of receiving adequate Medicare
and Medicaid reimbursements to cover the actual costs of
operating the facilities and providing care to patients. In
addition, modifications to reimbursement payment mechanisms,
statutory and regulatory changes, retroactive rate adjustments,
administrative rulings, policy interpretations, payment delays,
and government funding restrictions could result in payment
delays or alterations in reimbursements affecting
providers cash flows with possible material adverse effect
on a facilitys liquidity.
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Many states are presently considering enacting, or have already
enacted, reductions in the amount of funds appropriated to
healthcare programs resulting in rate freezes or reductions to
their Medicaid payment rates and often curtailments of coverage
afforded to Medicaid enrollees. Most of our healthcare clients
depend on Medicare and Medicaid reimbursements, and reductions
in reimbursements, caused by either payment cuts, census
declines, staffing shortages, or other operational forces from
these programs may have a negative impact on their ability to
generate adequate revenues to satisfy their obligations to us.
There are no assurances that payments from governmental payors
will remain at levels comparable to present levels or will, in
the future, be sufficient to cover the costs allocable to
patients eligible for coverage under these programs.
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For our clients to remain eligible to receive reimbursements
under the Medicare and Medicaid programs the clients must comply
with a number of conditions of participation and other
regulations imposed by these programs, and are subject to
periodic federal and state surveys to ensure compliance with
various clinical and operational covenants. A clients
failure to comply with these covenants and regulations may cause
the client to incur penalties and fines and other sanctions, or
lose its eligibility to continue to receive reimbursements under
the programs, which could result in the clients inability
to make scheduled payments to us.
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Employees
As of December 31, 2010, we employed 625 people, 329
of whom were employed by CapitalSource Bank. We believe that our
relations with our employees are good.
24
Executive
Officers
Our executive officers and their ages and positions are as
follows:
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Name
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Age
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Position
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John K. Delaney
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47
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Executive Chairman
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Steven A. Museles
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Co-Chief Executive Officer
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James J. Pieczynski
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48
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Co-Chief Executive Officer
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Douglas H. (Tad) Lowrey
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Chief Executive Officer and President CapitalSource
Bank
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Donald F. Cole
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40
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Chief Financial Officer
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John A. Bogler
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45
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Chief Financial Officer CapitalSource Bank
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Bryan D. Smith
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40
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Senior Vice President and Chief Accounting Officer
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Biographies for our executive officers are as follows:
John K. Delaney, 47, a founder of the Company, has served
as our Executive Chairman since January 2010, as a director and
Chairman of our Board since our inception in 2000, and as our
Chief Executive Officer from our inception in 2000 until January
2010. Mr. Delaney received his undergraduate degree from
Columbia University and his juris doctor degree from Georgetown
University Law Center.
Steven A. Museles, 47, has served as a director and
Co-Chief Executive Officer since January 2010. Mr. Museles
previously served as our Executive Vice President, Chief Legal
Officer and Secretary from our inception in 2000 until January
2010, and in similar capacities for CapitalSource Bank from July
2008 through December 2009. Mr. Museles received his
undergraduate degree from the University of Virginia and his
juris doctor degree from Georgetown University Law Center.
James J. Pieczynski, 48, has served as a director and
Co-Chief Executive Officer since January 2010.
Mr. Pieczynski previously served as our
President Healthcare Real Estate Business from
November 2008 until January 2010, our Co-President
Healthcare and Specialty Finance from January 2006 until
November 2008, Managing Director Healthcare Real
Estate Group from February 2005 through December 2005, and
Director Long Term Care from November 2001 through
January 2005. Mr. Pieczynski served on the board of
directors and audit committee of Florida East Coast Industries
Inc. from June 2004 until June 2006. Mr. Pieczynski
received his undergraduate degree from the University of
Illinois, Urbana-Champaign.
Douglas H. (Tad) Lowrey, 58, has served as the Chief
Executive Officer and President of CapitalSource Bank since its
formation on July 25, 2008. Prior to his appointment,
Mr. Lowrey served as Executive Vice President of Wedbush,
Inc., a private investment firm and holding company, from
January 2006 until June 2008. Mr. Lowrey served as
Chairman, President and Chief Executive Officer of Jackson
Federal Bank from 1999 until February 2005 following its sale to
Union Bank of California. Mr. Lowrey is an elected director
of the Federal Home Loan Bank of San Francisco. He received
his undergraduate degree from Arkansas Tech University and was
licensed in 1977 in the state of Arkansas as a certified public
accountant.
Donald F. Cole, 40, has served as our Chief Financial
Officer since May 2009. Mr. Cole previously served as our
Chief Administrative Officer from September 2008 until May 2009,
our interim Chief Accounting Officer from March 2008 until
September 2008, our Chief Administrative Officer from January
2007 until March 2008, our Chief Operations Officer from
February 2005 until January 2007, and our Chief Information
Officer from July 2003 until February 2005. Mr. Cole
received his undergraduate degree and masters of business
administration from the State University of New York at Buffalo
and a juris doctor degree from the University of Virginia School
of Law. He was licensed in 1996 in the state of New York as a
certified public accountant.
John A. Bogler, 45, has served as Chief Financial Officer
of CapitalSource Bank since its formation on July 25, 2008.
Prior to his appointment, Mr. Bogler served as Chief
Financial Officer of Affinity Financial Corporation from January
2008 until July 2008. Mr. Bogler served as a financial
consultant specializing in bank acquisition and de novo
activities from February 2005 until January 2008 and was Chief
Financial Officer at Jackson Federal Bank from April 2000 until
February 2005. Mr. Bogler received his undergraduate degree
from Missouri State University
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in 1988, became a certified public accountant in the State of
Missouri in 1991 and became a chartered financial analyst in
1998.
Bryan D. Smith, 40, has served as our Chief Accounting
Officer since September 2008 and was appointed Senior Vice
President and Chief Accounting Officer in May 2009. Previously,
Mr. Smith worked as a consultant to us from June 2008 until
his appointment as our Chief Accounting Officer in September
2008, and served as our Controller Strategy
Execution from January 2007 until May 2008, and our Controller
from October 2003 until January 2007. Mr. Smith received
his undergraduate degree from Virginia Tech in 1993 and was
licensed in 1994 in the State of Maryland as a certified public
accountant.
Other
Information
Our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and all amendments to those reports are available free of charge
on our website at www.capitalsource.com as soon as reasonably
practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission or by
contacting CapitalSource Investor Relations, at
(800) 695-3457
or investor.relations@capitalsource.com.
We also provide access on our website to our Principles of
Corporate Governance, Code of Business Conduct and Ethics, the
charters of our Audit, Compensation, Asset, Liability and Credit
Policy and Nominating and Corporate Governance Committees and
other corporate governance documents. Copies of these documents
are available to any shareholder upon written request made to
our corporate secretary at our Chevy Chase, Maryland address. In
addition, we intend to disclose on our website any changes to or
waivers for our executive officers or directors from, our Code
of Business Conduct and Ethics.
26
Our business faces many risks. The risks described below may
not be the only risks we face. Additional risks that we do not
yet know of or that we currently believe are immaterial may also
impair our business operations. If any of the events or
circumstances described in the following risk factors actually
occur, our business, financial condition or results of
operations could suffer, and the trading price of our securities
could decline. The U.S. economy is still in the process of
recovering from an economic recession, and a slow recovery may
adversely impact on our business and operations, including,
without limitation, the credit quality of our loan portfolio,
our liquidity and our earnings. You should know that many of the
risks described may apply to more than just the subsection in
which we grouped them for the purpose of this presentation. As a
result, you should consider all of the following risks, together
with all of the other information in this Annual Report on
Form 10-K,
before deciding to invest in our securities.
Risks
Related to Our Lending Activities
Our
results of operation and financial condition would be adversely
affected if our allowance for loan losses is not sufficient to
absorb actual losses.
Experience in the financial services industry indicates that a
portion of our loans in all categories of our lending business
will become delinquent or impaired, and some may only be
partially repaid or may never be repaid at all. Our methodology
for establishing the adequacy of the allowance for loan losses
depends on subjective determinations and judgments about our
borrowers ability to repay. Despite managements
efforts to estimate the specific allowance, ultimate resolutions
of specific loans may result in actual losses that are greater
than our allowance. Deterioration in general economic conditions
and unforeseen risks affecting customers may have an adverse
effect on our borrowers capacity to repay their
obligations, whether our risk ratings or valuation analyses
reflect those changing conditions. Changes in economic and
market conditions may increase the risk that the allowance would
become inadequate if borrowers experience economic and other
conditions adverse to their businesses. Maintaining the adequacy
of our allowance for loan losses may require that we make
significant and unanticipated increases in our provisions for
loan losses, which would materially affect our results of
operations and capital adequacy. Recognizing that many of our
loans individually represent a significant percentage of our
total allowance for loan losses, adverse collection experience
in a relatively small number of loans could require an increase
in our allowance. Federal and State regulators, as an integral
part of their respective supervisory functions, periodically
review a portion of our loan portfolio. The regulatory agencies
may require changes to credit ratings or grades on loans, which
could lead to an increase in the allowance for loan losses,
increased provisions for loan losses and as appropriate,
recognition of further loan charge-offs based upon their
judgments, which may be different from ours. Increases in the
allowance for loan losses required by these regulatory agencies
could have a negative effect on our results of operations and
financial condition.
We may
not recover all amounts that are contractually owed to us by our
borrowers.
We expect to experience charge-offs and delinquencies on our
loans in the future. In addition, like other commercial lenders,
we have experienced missed and late payments, failures by
clients to comply with operational and financial covenants in
their loan agreements and client performance below that which we
expected when we originated the loan. Most of our loans bear
interest at variable interest rates. If interest rates increase,
interest obligations of our clients may also increase. Some of
our clients may not be able to make the increased interest
payments, resulting in defaults on their loans. If we experience
material losses on our portfolio, such losses would have a
material adverse effect on our revenues, net income, results of
operation and financial condition, to the extent the losses
exceed our allowance for loan losses.
We may
be unable to act in a timely fashion so as to prevent a loss of
our loan to a client and we may make errors in evaluating
information reported by our clients. As a result, we may suffer
losses on loans or may make advances that we would not have made
if we had properly evaluated the information.
Our clients may experience operational or financial problems
that, if not timely addressed, could result in a substantial
impairment or loss of the value of our loan to the client. We
may fail to identify problems because our
27
client did not report them in a timely manner or, even if the
client did report the problem, we may fail to address it quickly
enough or at all. Even if clients provide us with full and
accurate disclosure of all material information concerning their
businesses, we may misinterpret or incorrectly analyze this
information. Mistakes may cause us to make loans that we
otherwise would not have made or, to fund advances that we
otherwise would not have funded, or result in losses on one or
more of our loans. As a result, we could suffer loan losses
which could have a material adverse effect on our revenues, net
income and results of operations and financial condition, to the
extent the losses exceed our allowance for loan losses.
We
make loans to privately owned small and medium-sized companies
that present a greater risk of loss than loans to larger
companies.
Our portfolio consists primarily of commercial loans to small
and medium-sized, privately owned businesses. Compared to
larger, publicly owned firms, these companies generally have
limited access to capital and higher funding costs, may be in a
weaker financial position and may need more capital to expand or
compete. These financial challenges may make it difficult for
our clients to make scheduled payments of interest or principal
on our loans. Accordingly, loans made to these types of clients
entail higher risks than loans made to companies that are able
to access a broader array of credit sources.
In addition, there is generally no publicly available
information about the small and medium-sized privately owned
companies to which we lend. Therefore, we underwrite our loans
based on detailed financial information and projections provided
to us by our clients and we must rely on our clients and the due
diligence efforts of our employees to obtain the information
relevant to making our credit decisions. We rely upon the
management of these companies to provide full and accurate
disclosure of material information concerning their business,
financial condition and prospects. We may not have access to all
of the material information about a particular clients
business, financial condition and prospects, or a clients
accounting records may be poorly maintained or organized. The
clients business, financial condition and prospects may
also change rapidly in the current economic environment. In such
instances, we may not make a fully informed credit decision
which may lead, ultimately, to a failure or inability to recover
our loan in its entirety.
Some
of our clients require licenses, permits and other governmental
authorizations to operate their businesses, which may be revoked
or modified by applicable governmental authorities. Any
revocation or modification could have a material adverse effect
on the business of a client and, consequently, the value of our
loan to that client.
In addition to clients in the healthcare industry subject to
Medicare and Medicaid regulation, clients in other industries
require permits and licenses from various governmental
authorities to operate their businesses. These governmental
authorities may revoke or modify these licenses or permits if a
client is found to be in violation of any regulation to which it
is subject. In addition, these licenses may be subject to
modification by order of governmental authorities or periodic
renewal requirements or changes as a result of changes in the
law. The loss of a permit or license, whether by termination,
modification or failure to renew, could impair the clients
ability to operate its business, which could impair the
clients ability to generate cash flows necessary to
service our loan or repay indebtedness upon maturity, either of
which outcomes would reduce our revenues, cash flow and net
income. See the Supervision and Regulation section of
Item 1, Business, above for additional discussion of
specific regulatory and governmental oversight applicable to
many of our healthcare clients.
Our
concentration of loans to a limited number of clients within a
particular industry or region could impair our revenues if the
industry or region were to experience economic difficulties or
changes in the regulatory environment.
In our normal course of business, we engage in lending
activities with clients primarily throughout the
United States. As of December 31, 2010, the single
largest industry concentration was healthcare and social
assistance, which made up approximately 22% of our loan
portfolio. As of December 31, 2010, taken in the aggregate,
non-healthcare real estate loans made up approximately 24% of
our loan portfolio. As of December 31, 2010, the two
largest geographical concentrations were Florida and California,
which each making up approximately 10% of our loan portfolio. As
of December 31, 2010, $931.9 million, or 15%, of our
portfolio consisted of
28
loans to four clients with aggregate loan balances that are
individually greater than $100.0 million. Of this amount,
loans to one real estate client totaling $121.1 million
were on non-accrual. If any particular industry or geographic
region were to experience economic difficulties, the overall
timing and amount of collections on our loans to clients
operating in those industries or geographic regions may differ
from what we expected and it could have a material adverse
impact on our financial condition or results of operations.
Because
of the nature of our loans and the manner in which we disclose
client and loan concentrations, it may be difficult to evaluate
our risk exposure to any particular client or group of related
clients
We have several clients that are related to each other through
common ownership or management. In situations where clients are
related through common ownership, to the extent the common owner
suffers financial distress, the common owner may be unable to
continue to support our clients, which could, in turn, lead to
financial difficulties for those clients. Further, some of our
clients are managed by the same entity and, to the extent that
management entity suffers financial distress or is otherwise
unable to continue to manage the operations of the related
clients, those clients could, in turn, face financial
difficulties. In both of these cases, our clients could have
difficulty servicing their debt to us, which could have an
adverse effect on our financial condition.
Our
balloon loans and bullet loans may involve a greater degree of
risk than other types of loans.
As of December 31, 2010, approximately 88% of the
outstanding balance of our commercial loans comprised either
balloon loans or bullet loans. A balloon loan is a term loan
with a series of scheduled payment installments calculated to
amortize the principal balance of the loan so that, upon
maturity of the loan, more than 25%, but less than 100%, of the
loan balance remains unpaid and must be satisfied. A bullet loan
is a loan with no scheduled payments of principal before the
maturity date of the loan.
Balloon loans and bullet loans involve a greater degree of risk
than other types of loans because they generally require the
borrower to make a large, final payment upon the maturity of the
loan. The ability of a client to make this final payment upon
the maturity of the loan typically depends upon its ability to
generate sufficient cash flow to repay the loan prior to
maturity, to refinance the loan or to sell the related
collateral securing the loan, if any. The ability of a client to
accomplish any of these goals will be affected by many factors,
including the availability of financing at acceptable rates to
the client, the financial condition of the client, the
marketability of the related collateral, the operating history
of the related business, tax laws and the prevailing general
economic conditions. Consequently, a client may not have the
ability to repay the loan at maturity, and we could lose some or
all of the principal of our loan.
We are
limited in pursuing certain of our rights and remedies under our
Term B, second lien and mezzanine loans, which may increase our
risk of loss on these loans.
Term B loans generally are senior secured loans that are equal
as to collateral and junior as to right of payment to
clients other senior debt. Second lien loans generally are
junior as to both collateral and right of payment to
clients senior debt. Mezzanine loans may not have the
benefit of any lien against clients collateral and
generally are junior to any lienholder both as to collateral (if
any) and payment. Collectively, Term B, second lien and
mezzanine loans comprised 16% of the aggregate outstanding
balance of our commercial loan portfolio as of December 31,
2010. As a result of the subordinate nature of these loans, we
may be limited in our ability to enforce our rights to collect
principal and interest on these loans or to recover any of the
loan balance through our right to foreclose upon collateral. For
example, we typically are not contractually entitled to receive
payments of principal on a subordinated loan until the senior
loan is paid in full, and may only receive interest payments on
these loans if the client is not in default under its senior
loan. In many instances, we are also prohibited from foreclosing
on these loans until the senior loan is paid in full. Moreover,
any amounts that we might realize as a result of our collection
efforts or in connection with a bankruptcy or insolvency
proceeding under these loans must generally be turned over to
the senior lender until the senior lender has realized the full
value of its own claims. These restrictions may materially and
adversely affect our ability to recover the principal of any
non-performing Term B, second lien or mezzanine loans.
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The
collateral securing a loan may not be sufficient to protect us
from a partial or complete loss if we have not properly obtained
or perfected a lien on such collateral or if the loan becomes
non-performing, and we are required to foreclose.
While most of our loans are secured by a lien on specified
collateral of the client, there is no assurance that we have
obtained or properly perfected our liens, or that the value of
the collateral securing any particular loan will protect us from
suffering a partial or complete loss if the loan becomes
non-performing and we move to foreclose on the collateral. In
such event, we could suffer loan losses which could have a
material adverse effect on our revenue, net income, financial
condition and results of operations.
Our
leveraged loans are not fully covered by the value of assets or
collateral of the client and, consequently, if any of these
loans becomes non-performing, we could suffer a loss of some or
all of our value in the loan.
Leveraged lending involves lending money to a client based
primarily on the expected cash flow, profitability and
enterprise value of a client rather than on the value of its
assets. As of December 31, 2010, approximately 33% of the
loans in our portfolio were leveraged loans under which we had
advanced 38% of the aggregate outstanding loan balance of our
portfolio. The value of the assets which we hold as collateral
for these loans is typically substantially less than the amount
of money we advance to a client under these loans. When a
leveraged loan becomes non-performing, our primary recourse to
recover some or all of the principal of our loan is to force the
sale of the entire company as a going concern or restructure the
company in a way we believe would enable it to generate
sufficient cash flow over time to repay our loan. Neither of
these alternatives may be an available or viable option or
generate enough proceeds to repay the loan. Additionally, given
recent and current economic conditions, many of our leveraged
loan clients have and may continue to suffer decreases in
revenues and net income, making them more likely to underperform
and default on our loans and making it less likely that we could
obtain sufficient proceeds from a restructuring or sale of the
company. If we are a subordinate lender rather than the senior
lender in a leveraged loan, our ability to take remedial action
is constrained by our agreement with the senior lender and our
financial condition may suffer.
We are
not the agent for a portion of our loans and, consequently, have
little or no control over how those loans are administered or
controlled.
We are neither the agent of the lending group that receives
payments under, nor the agent of the lending group that controls
the collateral for purposes of administering, loans comprising
approximately 28% of the aggregate outstanding balance of our
loan portfolio as of December 31, 2010. We may not receive
the same financial or operational information as we receive for
loans for which we are the agent. As a result, it may be more
difficult for us to track or rate these loans than it is for the
loans for which we are the agent. Additionally, we may be
prohibited or otherwise restricted from taking actions to
enforce the loan or to foreclose upon the collateral securing
the loan or otherwise exercise remedies without the agreement of
other lenders holding a specified minimum aggregate percentage,
generally a majority or two-thirds of the outstanding principal
balance. It is possible that an agent for one of these loans may
not manage the loan to our standards or may choose not to take
the same actions to enforce the loan, to foreclose upon the
collateral securing the loan or to exercise remedies that we
would or would not take if we were agent for the loan. We also
could experience losses in the event of the bankruptcy of the
agent.
We are
the agent for loans in which syndicates of lenders participate
and, in the event of a loss on any such loan, we could have
liability to other members of the syndicate related to our
management and servicing of the loan.
As of December 31, 2010, we were either the paying,
administrative or the collateral agent or all for a group of
third-party lenders for loans with outstanding commitments of
$2.1 billion. When we are the agent representing a
syndicate of lenders for a loan in administering the loan,
receiving all payments under the loan
and/or
controlling the collateral for purposes of administering the
loan, we often receive financial
and/or
operational information directly from the borrower and are
responsible for providing some or all of this information to our
co-lenders. We may also be responsible for taking actions on
behalf of the lending group to enforce the loan, to foreclose
upon the collateral securing the loan or to exercise remedies.
It is possible that as agent for one of these loans we may not
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manage the loan to the applicable standard. In addition, we may
choose a different course of action than one or more of our
co-lenders would take to enforce the loan, to foreclose upon the
collateral securing the loan or to exercise remedies if our
co-lenders were in a position to manage the loan. If we do not
administer these loans in accordance with our obligations and
the applicable legal standards and the lending syndicate suffers
a loss on the loan, we may have liability to our co-lenders.
If we
do not obtain or maintain the necessary licenses and approvals,
we will not be allowed to acquire, fund or originate small
business loans or residential mortgage loans or other loans in
some states, which could adversely affect our
operations.
We engage in lending activities which involve the collection of
numerous accounts, as well as compliance with various federal,
state and local laws that regulate consumer lending. Many states
in which we do business require that we be licensed, or that we
be eligible for an exemption from the licensing requirement, to
conduct our business. We also engage in small business lending
which is regulated by the Small Business Administration. We
cannot assure you that we will be able to obtain all the
necessary licenses and approvals, or be granted an exemption
from the licensing requirements, that we will need to maximize
the acquisition, funding or origination of residential
mortgages, small business, or other loans or that we will not
become liable for a failure to comply with the myriad of
regulations applicable to our lines of business.
We are
in a competitive business and may not be able to take advantage
of attractive opportunities.
Our markets are competitive and characterized by varying
competitive factors. We compete with a large number of
companies, including:
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commercial banks and thrifts;
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specialty and commercial finance companies;
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private investment funds;
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insurance companies; and
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investment banks.
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Some of our competitors have greater financial, technical,
marketing and other resources and market positions than we do.
They also have greater access to capital than we do and at a
lower cost than is available to us. Furthermore, we would expect
to face increased price competition on deposits and if finance
companies, banks or other competitors seek to expand within or
enter our target markets. Increased competition could cause us
to reduce our pricing and lend greater amounts as a percentage
of a clients eligible collateral or cash flows. Even with
these changes, in an increasingly competitive market, we may not
be able to attract and retain depositors or clients or maintain
or grow our business and our market share and future revenues
may decline. If our existing clients choose to use competing
sources of credit to refinance their loans, the rate at which
loans are repaid may be increased, which could change the
characteristics of our loan portfolio as well as cause our
anticipated return on our existing loans to vary.
Risks
Impacting Funding our Operations
Our
ability to operate our business depends on our ability to
maintain our external financing and raise sufficient
deposits.
CapitalSource Banks ability to maintain or raise
sufficient deposits may be limited by several factors, including:
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competition from a variety of competitors, many of which offer a
greater selection of products and services and have greater
financial resources;
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as a California state-chartered industrial bank, CapitalSource
Bank is permitted to offer only savings, money market and time
deposit products, which limitations may adversely impact its
ability to compete effectively; and
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depositors negative views of the Company could cause
depositors to withdraw their deposits or seek higher rates.
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While we expect to maintain and continue to raise deposits at a
reasonable rate of interest, there is no assurance that we will
be able to do so successfully.
In addition, given the short average maturity of CapitalSource
Banks deposits to the maturity of its loans, the inability
of CapitalSource Bank to raise or maintain deposits could
compromise our ability to operate our business, impair our
liquidity and threaten our solvency.
Aside from deposit funding, CapitalSource Bank may obtain
back-up
liquidity from the Parent Company pursuant to the
$150.0 million revolving credit facility it has established
with the Parent Company, and other facilities it has established
with the FHLB SF, and the FRB. The availability of these sources
of funds may be limited or threatened in the event of a severe
economic crisis. If the liquidity or financial performance of
the Parent Company weakens, CapitalSource Bank may not be able
to draw on the $150.0 million revolving credit facility.
The access to borrowing from FHLB SF may be materially impacted
should Congress alter or dissolve the Federal Home Loan Bank
system. Our access to the FRB primary credit program may be
materially impacted should the FRB modify its credit program and
limit CapitalSource Banks access to the program. As a
result, if the ability of CapitalSource Bank to attract and
retain suitable levels of deposits weakens, this could
negatively impact our business, financial condition, results of
operations and the market price of our common stock.
CapitalSource Bank is prohibited from paying dividends without
the consent of our regulators, and we do not anticipate that
dividends from CapitalSource Bank will provide liquidity to find
the operations of the Parent Company for the foreseeable future.
The Parent Company is dependent on loan collections and the
proceeds of loan sales to fund its operations. A shortfall in
loan proceeds may impair our ability to fund our operations or
to repay our existing debt.
Mandatory
redemption provisions under our indebtedness may limit our
ability to maintain sufficient liquidity.
The terms of our outstanding convertible debentures require us
to make offers to repurchase them in 2011 and 2012. As of
December 31, 2010 the principal amounts of convertible
debentures that we may be required to purchase in those years
are $280.5 million in July 2011 and $250.0 million in
July 2012. If the conversion prices of all of these debentures
remain significantly out of the money, we would expect that all
of the holders would elect to tender their debentures to us in
response to these offers, requiring us to pay the respective
principal amounts in cash at the conclusion of each offer. If we
are unable to sell sufficient assets, raise new capital or
restructure these payment obligations, we may not have
sufficient liquidity to make these required prepayments by these
dates. Consequently, we could default on these payment
obligations, which would trigger cross-defaults under our other
debt. In such circumstances, our business, liquidity and
operations would be materially adversely affected, and we may
not be able to continue operating.
We
must comply with various covenants and obligations under our
indebtedness and our failure to do so could adversely affect our
ability to operate our business, manage our portfolio or pursue
certain opportunities.
The Parent Company is subject to financial and non-financial
covenants under our indebtedness, including, without limitation,
with respect to restricted payments, interest coverage, minimum
tangible net worth, leverage, maximum delinquent and charged-off
loans, servicing standards, and limitations on incurring or
guaranteeing indebtedness, refinancing existing indebtedness,
repaying subordinated indebtedness, making investments,
dividends, distributions, redemptions or repurchases of our
capital stock, entering into transactions with affiliates
selling assets, creating liens and engaging in a merger, sale or
consolidation. If we were to default under our indebtedness by
violating these covenants or otherwise, our lenders
remedies would include the ability to, among other things,
transfer servicing to another servicer, foreclose on collateral,
accelerate payment of all amounts
32
payable under such indebtedness
and/or
terminate their commitments under such indebtedness. A default
under our indebtedness could have a material adverse affect on
our business, financial condition, liquidity position and our
ability to continue to operate our business.
In addition, upon the occurrence of specified servicer defaults
our lenders under our credit facility and the holders of the
notes issued in our term debt securitizations may elect to
terminate us as servicer of the loans under the applicable
facility or term debt securitizations and appoint a successor
servicer or replace us as cash manager for our secured
facilities and term debt securitizations. If we were terminated
as servicer, we would no longer receive our servicing fee. In
addition, because there can be no assurance that any successor
servicer would be able to service the loans according to our
standards, the performance of our loans could be materially
adversely affected and our income generated from those loans
significantly reduced.
Substantially all of the assets of the Parent Company are
pledged or otherwise encumbered by liens we have granted in
favor of our lenders. The restrictive covenants in our
indebtedness may, among other things, impair our ability and
reduce our flexibility to operate our business, restrict our
ability to optimally restructure our existing debt, plan for or
react to changes in our business, the economy
and/or
markets, or limit our ability to engage in activities that may
be in our long-term best interest, thereby negatively impacting
our financial condition or results of operations. Our failure to
comply with these restrictive covenants could result in an event
of default that, if not cured or waived, could result in the
acceleration of all or a substantial portion of our debt.
Our
commitments to lend additional amounts to existing clients
exceed our resources available to fund these
commitments.
As of December 31, 2010, we had $1.9 billion of
unfunded commitments to extend credit, of which
$958.7 million were commitments of CapitalSource Bank and
$977.7 million were commitments of the Parent Company. Due
to their nature, we cannot know with certainty the aggregate
amounts we will be required to fund under these unfunded
commitments. 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 the loan agreements,
and/or our
discretion pursuant to the terms of the loan agreements. In
other cases, however, there are no such prerequisites to future
fundings by us, and our clients may draw on these unfunded
commitments at any time. Clients may seek to draw on our
unfunded commitments to improve their cash positions. We expect
that these unfunded commitments will continue to exceed the
Parent Companys available funds. 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 irreparably damage our reputation in the marketplace,
which would have a material adverse effect on our ability to
continue to operate our business.
Fluctuating
interest rates could adversely affect our profit
margins.
We borrow money from our lenders at variable interest rates and
raise short-term deposits at prevailing rates in the relevant
markets. We generally lend money at variable rates based on
either prime or LIBOR indices. Our operating results and cash
flow depend on the difference between the interest rates at
which we borrow funds and raise deposits and the interest rates
at which we lend these funds. Because many of our loans are
currently below their contractual interest rate floors, upward
movements in interest rates will not immediately result in
additional interest income, although these movements would
increase our cost of funds. Therefore, any upward movement in
rates may result in a reduction of our net interest income. For
additional information about interest rate risk, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Market Risk
Management.
Interest on some of our borrowings is based in part on the rates
and maturities at which vehicles sponsored by our lenders issue
asset backed commercial paper. Changes in market interest rates
or the relationship between market interest rates and asset
backed commercial paper rates could increase the effective cost
at which we borrow funds under some of our indebtedness.
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In addition, changes in market interest rates, or in the
relationships between short-term and long-term market interest
rates, or between different interest rate indices, could affect
the interest rates charged on interest earning assets
differently than the interest rates paid on interest bearing
liabilities, which could result in an increase in interest
expense relative to our interest income.
Hedging
instruments involve inherent risks and costs and may adversely
affect our earnings.
We have entered into interest rate swap agreements and other
contracts for interest rate risk management purposes. Our
hedging activities vary in scope based on a number of factors,
including the level of interest rates, the type of portfolio
investments held, and other changing market conditions. Interest
rate hedging may fail to protect or could adversely affect us
because, among other things:
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interest rate hedging can be expensive, particularly during
periods of volatile interest rates;
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available interest rate hedging may not correspond directly with
the interest rate risk for which protection is sought;
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the duration of the hedge may not match the duration of the
related liability or asset;
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the credit quality of the party owing money on the hedge may be
downgraded to such an extent that it impairs our ability to sell
or assign our side of the hedging transaction; and
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the party owing money in the hedging transaction may default on
its obligation to pay.
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Because we do not employ hedge accounting, our hedging activity
may materially adversely affect our earnings. Therefore, while
we pursue such transactions to reduce our interest rate risks,
it is possible that changes in interest rates may result in
losses that we would not otherwise have incurred if we had not
engaged in any such hedging transactions. For additional
information, see Note 21, Derivative Instruments, in
our accompanying audited consolidated financial statements for
the year ended December 31, 2010.
The cost of using hedging instruments increases as the period
covered by the instrument increases and during periods of rising
and volatile interest rates. We may increase our hedging
activity and, thus, increase our hedging costs during periods
when interest rates are volatile or rising. Furthermore, the
enforceability of agreements associated with derivative
instruments we use may depend on compliance with applicable
statutory, commodity and other regulatory requirements and,
depending on the identity of the counterparty, applicable
international requirements. In the event of default by a
counterparty to hedging arrangements, we may lose unrealized
gains associated with such contracts and may be required to
execute replacement contract(s) on market terms which may be
less favorable to us. Although generally we seek to reserve the
right to terminate our hedging positions, it may not always be
possible to dispose of or close out a hedging position without
the consent of the hedging counterparty, and we may not be able
to enter into an offsetting contract in order to cover our risk.
We cannot assure you that a liquid secondary market will exist
for hedging instruments purchased or sold, and we may be
required to maintain a position until exercise or expiration,
which could result in losses.
We may
enter into derivative contracts that could expose us to future
contingent liabilities.
Part of our investment strategy involves entering into
derivative contracts that require us to fund cash payments in
certain circumstances. Our ability to fund these contingent
liabilities will depend on the liquidity of our assets and
access to funding sources at the time, and the need to fund
these contingent liabilities could materially adversely impact
our financial condition. For additional information, see
Note 21, Derivative Instruments, in our accompanying
audited consolidated financial statements for the year ended
December 31, 2010.
Risks
Related to Our Operations
We are
subject to extensive government regulation and supervision,
which limit our flexibility and could result in adverse actions
by regulatory agencies against us.
We are subject to extensive federal and state regulation and
supervision that govern, limit or otherwise affect almost all
aspects of our operations. Such banking regulation and
supervision is intended primarily to protect
34
customers, depositors and the FDIC Deposit Insurance
Fund not our shareholders. These laws and
regulations, among other matters, establish minimum capital
requirements, limit the business activities we can conduct,
prohibit various business practices, limit the dividends or
distributions CapitalSource Bank can pay, establish reporting
requirements, require approvals or consent for many types of
transactions or business changes, and establish standards for
financial and managerial safety and soundness. Our state and
federal regulators periodically conduct examinations of our
business, including for compliance with laws and regulations.
Failure to comply with laws, regulations, policies or the
regulatory orders pursuant to which we operate, even if
unintentional or inadvertent, could result in adverse actions by
regulatory agencies against us. Such actions could result in
higher capital requirements, higher insurance premiums,
additional limitations on our activities, termination of deposit
insurance, civil monetary penalties and fines, which in each
case could have material adverse effects on our business,
financial condition, results of operation or reputation. See the
Supervision and Regulation section of Item 1,
Business, above, Note 18, Bank Regulatory
Capital, in our accompanying audited consolidated financial
statements for the year ended December 31, 2010 and
Item 7, Financial Statements and Supplementary Data.
Changes
in laws and regulations, including the enactment of the
Dodd-Frank Act, may have a material effect on our
operations.
We are currently facing increased regulation and supervision of
our industry as a result of the financial crisis in the banking
and financial markets. Additional regulation and supervision may
increase our costs and limit our ability to pursue business
opportunities. Federal and state legislatures and regulatory
agencies continually review banking laws, regulations and
policies for possible changes. Changes to banking laws or
regulations, including changes in their interpretation or
implementation, could materially affect us in substantial and
unpredictable ways. Such changes could subject us to additional
costs, limit or restrict our ability to use capital for business
purposes, limit the types of financial services and products we
may offer or increase the ability of non-banks to offer
competing financial services and products, among other things.
In addition, increased regulatory requirements, whether due to
the adoption of new laws and regulations, changes in existing
laws and regulations, or more expansive or aggressive
interpretations of existing laws and regulations, may have a
material adverse effect on our business, financial condition,
results of operations and reputation.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010, or the Dodd-Frank Act, imposes a number of significant
regulatory and compliance changes in the banking and financial
services industry. Many provisions of the Dodd-Frank Act must be
implemented by regulations to be adopted by various government
agencies. These regulations, and other changes in the regulatory
regime, may include additional requirements, conditions, and
limitations that may impact us. Certain provisions of the
Dodd-Frank Act that may have a material effect on our business
are noted below.
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The Dodd-Frank Act requires a study regarding the continued
exemption of industrial banks from the Bank Holding Company Act
of 1956, as amended, or BHC Act. As a state-chartered industrial
bank, CapitalSource Bank is currently exempt from the definition
of bank under the BHC Act. If this exemption is
eliminated following this study, then, in order to continue to
own CapitalSource Bank, the Parent Company would be required to
register as a bank holding company, or BHC. If we were
unsuccessful in registering as a BHC or another exception does
not become available to us, our continued ownership of
CapitalSource Bank would not be permissible. We are in
discussions with regulators regarding our applications to become
a BHC, but there is no assurance that any of the regulatory
authorities will approve our applications.
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The Dodd-Frank Act directs the federal banking agencies to issue
regulations requiring that the parent company of any insured
depository institution serve as a source of financial
strength to its subsidiary depository institution. The
source of strength requirement had historically applied only to
bank holding companies and their subsidiary banks. The adoption
of these regulations under the Dodd-Frank Act would expand the
application of this requirement to us. Under the source of
strength doctrine, the Parent Company would be required to
support the safety and soundness of CapitalSource Bank. The
banking regulators could require the Parent Company to
contribute additional capital to CapitalSource Bank or to take,
or refrain from taking, other actions for the benefit of
CapitalSource Bank.
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The Dodd-Frank Act limits the acquisition of control of an
industrial bank by a non-financial firm. For a period of three
years beginning on July 21, 2010, the Dodd-Frank Act
generally requires that the banking regulators approve any
proposed change in control of an industrial bank, such as
CapitalSource Bank, if the proposed acquirer is engaged in
commercial activities not deemed financial.
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Pursuant to the Dodd-Frank Act, in July of this year, one or
more of our subsidiaries may be required to register as an
investment adviser with the SEC under the Investment Advisers
Act of 1940, as amended, or the Advisers Act, or alternatively,
with one or more states under relevant state securities laws in
which case such subsidiaries would become subject to
comprehensive investment advisor regulation at either a federal
or state level.
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The Dodd-Frank Act provision commonly referred to as the
Volcker Rule, once implemented, may place certain
restrictions on the Parent Company due to our ownership of and
affiliation with CapitalSource Bank, and we may need to take
certain actions that we determine to be necessary or advisable
to comply with the Volcker Rule.
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These rules and regulations, and other changes in the regulatory
regime, may include additional requirements, conditions, and
limitations that could increase our compliance costs and
materially adversely affect our business, operations, financial
results and the price of our common stock.
Regulators
are considering increased capital standards for banking
organizations, including under the Basel III framework,
which may have a material effect on our
operations.
We are required by regulators to satisfy minimum capital
standards. On September 12, 2010, the oversight body of the
Basel Committee on Banking Supervision announced an
international agreement to a heightened set of capital
requirements for internationally active banking organizations in
the United States and around the world, known as Basel III. The
Basel III changes, and other regulatory initiatives in the
wake of the financial crisis, are expected to result in higher
regulatory capital standards and expectations for banking
organizations. However, the timing and scope of
U.S. implementation of Basel III and other regulatory
capital initiatives remain uncertain, and it is difficult at
this time to predict how any new standards would be applied to
us and CapitalSource Bank. Higher capital requirements, or
changes in the manner in which regulatory capital standards are
implemented, could adversely affect our financial results.
We
face risks in connection with our strategic undertakings and new
businesses, products or services.
If appropriate opportunities present themselves, we may engage
in strategic activities, which could include acquisitions, joint
ventures, or other business growth initiatives or undertakings.
There can be no assurance that we will successfully identify
appropriate opportunities, that we will be able to negotiate or
finance such activities or that such activities, if undertaken,
will be successful.
In order to finance future strategic undertakings, we might
obtain additional equity or debt financing. Such financing might
not be available on terms favorable to us, or at all. If
obtained, equity financing could be dilutive and the incurrence
of debt and contingent liabilities could have material adverse
effect on our business, results of operations and financial
condition.
Our ability to execute strategic activities successfully will
depend on a variety of factors. These factors likely will vary
on the nature of the activity but may include our success in
integrating the operations, services, products, personnel and
systems of an acquired company into our business, operating
effectively with any partner with whom we elect to do business,
retaining key employees, achieving anticipated synergies,
meeting expectations and otherwise realizing the
undertakings anticipated benefits. Our ability to address
these matters successfully cannot be assured. In addition, our
strategic efforts may divert resources or managements
attention from ongoing business operations and may subject us to
additional regulatory scrutiny. If we do not successfully
execute a strategic undertaking, it could adversely affect our
business, financial condition, results of operations, reputation
and growth prospects. In addition, if we were able to conclude
that the value of an acquired business had decreased and that
the related goodwill had been impaired, that conclusion would
result in an impairment of goodwill charge to us, which should
adversely affect our results of operations.
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In addition, from time to time, we may develop and grow new
lines of business or offer new products and services within
existing lines of business. There are substantial risks and
uncertainties associated with these efforts, particularly in
instances where the markets are not fully developed. In
developing and marketing new lines of business
and/or new
products and services we may invest significant time and
resources. Initial timetables for the introduction and
development of new lines of business
and/or new
products or services may not be achieved and price and
profitability targets may not prove feasible. External factors,
such as compliance with regulations, competitive alternatives
and shifting market preferences, may also impact the successful
implementation of a new line of business or a new product or
service. Furthermore, any new line of business
and/or new
product or service could have a significant impact on the
effectiveness of our system of internal controls. Failure to
successfully manage these risks in the development and
implementation of new lines of business or new products or
services could have a material adverse effect on our business,
results of operations and financial condition.
The
change of control rules under Section 382 of the Internal
Revenue Code may limit our ability to use net operating loss
carryovers and other tax attributes to reduce future tax
payments or our willingness to issue equity.
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,
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 the applicable long term
tax exempt rate and 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, and those arising from new stock
issuances and other equity transactions, which may limit our
willingness and ability to issue new equity. 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 Internal Revenue
Code.
The
requirements of the Investment Company Act impose limits on our
operations that impact the way we acquire and manage our assets
and operations.
We conduct our operations so as not to be required to register
as an investment company under the Investment Company Act of
1940, as amended, or the Investment Company Act. We believe that
we are primarily engaged in the business of commercial lending,
and not in the business of investing, reinvesting, and trading
in securities, and therefore are not required to register under
the Investment Company Act.
While we do not believe we are engaged in an investment company
business, we nevertheless endeavor to conduct our operations in
a manner that would permit us to rely on one or more exemptions
under the Investment Company Act. Our ability to rely on these
exemptions may limit the types of loans and other assets we own.
One of our wholly owned subsidiaries, CapitalSource Finance LLC
(Finance), is a guarantor on certain of our
indebtedness, which guarantees could be deemed to cause Finance
to have outstanding securities for purposes of the Investment
Company Act. Finance or other subsidiaries may guarantee future
indebtedness from time to time. Even if one or more of our
subsidiaries were deemed to be engaged in investment company
business and the provisions of the Investment Company Act were
deemed to apply on an individual basis to our wholly owned
subsidiaries, we attempt to conduct our business in a manner
that we believe would permit our entities to rely on exemptions
from registration under the Investment Company Act.
If we or any subsidiary were required to register under the
Investment Company Act and could not rely on an exemption or
exclusion, we or such subsidiary could be characterized as an
investment company. Such characterization would require us to
either change the manner in which we conduct our operations, or
register the relevant entity as an investment company. Any
modification of our business for these purposes could have a
material adverse
37
effect on us. Further, if we or a subsidiary were determined to
be an unregistered investment company, we or such subsidiary:
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could be subject to monetary penalties and injunctive relief in
an action brought by the SEC and could be found to be in default
of some of our indebtedness;
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may be unable to enforce contracts with third parties, and third
parties could seek to rescind transactions undertaken during the
period it was established that we or such subsidiary was an
unregistered investment company;
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may have to significantly reduce the amount of leverage in our
business;
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may have to restructure operations dramatically;
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may have to raise substantial amounts of additional equity to
come into compliance with the limitations prescribed under the
Investment Company Act; and
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may have to terminate agreements with our affiliates.
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If changes in the market value of
and/or net
income from certain assets of one or more of our subsidiaries
would affect our ability to rely on certain exemptions from
registration under the Investment Company Act, we may need to
make decisions with respect to these assets that we otherwise
would not make absent the Investment Company Act consideration.
Such decisions may have a material adverse effect on our
business, operations, financial results and the price of our
common stock.
Our
systems may experience an interruption or breach in security
which could subject us to increased operating costs as well as
litigation and other liabilities.
We rely on the computer and telephone systems and network
infrastructure that we use to conduct our business. These
systems and infrastructure could be vulnerable to unforeseen
problems. Our operations are dependent upon our ability to
protect our computer and telephone equipment against damage from
fire, power loss, telecommunications failure or a similar
catastrophic event. Any damage or failure that causes an
interruption in our operations could have an adverse effect on
our clients. In addition, we must be able to protect the
computer systems and network infrastructure utilized by us
against physical damage, security breaches and service
disruption caused by the internet or other users. Such break-ins
and other disruptions would jeopardize the security of
information stored in and transmitted through our systems and
network infrastructure, which may result in significant
liability to us and deter potential clients. While we have
systems, policies and procedures designed to prevent or limit
the effect of the failure, interruption or security breach of
our systems and infrastructure, there can be no assurance that
these measures will be successful and that any such failures,
interruptions or security breaches will not occur or, if they do
occur, that they will be adequately addressed. In addition, the
failure of our clients to maintain appropriate security for
their systems also may increase our risk of loss in connection
with loans made to them. The occurrence of any failures,
interruptions or security breaches of systems and infrastructure
could damage our reputation, result in a loss of business
and/or
clients, result in losses to us or our clients, subject us to
additional regulatory scrutiny, cause us to incur additional
expenses, or expose us to civil litigation and possible
financial liability, any of which could have a material adverse
effect on our business, financial condition and results of
operations.
Our
controls and procedures may fail or be
circumvented.
We review and update our internal controls, disclosure controls
and procedures, and corporate governance policies and
procedures. Any system of controls, however well designed and
operated, is based in part on certain assumptions and can
provide only reasonable, not absolute, assurances that the
objectives of the system are met. Any failure or circumvention
of our controls and procedures or failure to comply with
regulations related to controls and procedures could have a
material adverse effect on our business, results of operations
and financial condition. In addition, if we identify material
weaknesses in our internal control over financial reporting or
are otherwise required to restate our financial statements, we
could be required to implement expensive and time-consuming
remedial measures and could lose investor confidence in the
accuracy and completeness of our financial reports. This could
38
have an adverse effect on our business, financial condition and
results of operations, including our stock price, and could
potentially subject us to litigation.
We
revoked our REIT election which could have adverse legal
implications.
We operated as a REIT through 2008, but revoked our REIT
election as of January 1, 2009. We had agreed in contracts
relating to some of our financings that we will use reasonable
efforts to remain qualified as a REIT. While we believe our
decision not to qualify as a REIT for 2009 was reasonable, it
could nevertheless be deemed to breach certain of our
agreements. If the counterparties to these financings allege
breaches of those agreements, we may be subject to lengthy and
costly litigation, and if we were not to prevail in such
litigation, we may be required to repay certain indebtedness
prior to stated maturity, which would materially impair our
liquidity.
We are
under audit for our 2006 through 2008 taxable years and, if the
Internal Revenue Service determined that we violated REIT
requirements and failed to qualify as a REIT or otherwise under
reported tax liabilities during those years which we operated as
a REIT, it could adversely impact our results of
operations.
We operated as a REIT from January 1, 2006 through
December 31, 2008. Our senior management had limited
experience in managing a portfolio of assets under the highly
complex tax rules governing REITs and we cannot assure you that
we operated our business within the REIT requirements. Given the
highly complex nature of the rules governing REITs and the
importance of factual determinations, the Internal Revenue
Service, or IRS, could contend that we violated REIT
requirements in one or more of these years. We are currently
under audit by the IRS for our 2006, 2007 and 2008 or otherwise
underreported tax liabilities tax returns. To the extent it were
to be determined that we did not comply with REIT requirements
for one or more of our REIT years or otherwise under reported
tax liability, we could be required to pay additional corporate
federal income tax and certain state and local income taxes for
the relevant years. Also, we could be required to pay taxes
(which could be significant in amount) that would be due if we
were to avail ourselves of certain savings provisions, if they
are available, to preserve our REIT status for the relevant
years, either of which could have adverse affects on our
financial results and the value of our common stock.
Risks
Related to our Common Stock
We may
not pay dividends on our common stock.
We expect to retain a majority of our earnings, consistent with
dividend policies of other commercial depository institutions,
to redeploy in our business. Our board of directors, in its sole
discretion, will determine the amount and frequency of dividends
to our shareholders based on a number of factors including, but
not limited to, our results of operations, cash flow and capital
requirements, economic conditions, tax considerations, borrowing
capacity and other factors, including debt covenant restrictions
prohibiting the payment of dividends after defaults. In
addition, for so long as our 2014 Senior Secured Notes are
outstanding, absent sufficient restricted payment capacity, we
cannot make cash dividend payments that exceed $0.01 per share
per quarter. As of December 31, 2010, we had
$142.5 million, or $0.44 per share, of restricted payment
capacity, however, we cannot assure we will have restricted
payment capacity in the future, or that even if we do, we will
utilize such restricted capacity to pay any dividend on our
common stock. If we change our dividend policy our stock price
could be adversely affected.
Some
provisions of Delaware law and our certificate of incorporation
and bylaws as well as certain banking laws may deter third
parties from acquiring us.
Our certificate of incorporation and bylaws provide for, among
other things:
|
|
|
|
|
a classified board of directors;
|
|
|
|
restrictions on the ability of our shareholders to fill a
vacancy on the board of directors;
|
|
|
|
the authorization of undesignated preferred stock, the terms of
which may be established and shares of which may be issued
without shareholder approval; and
|
|
|
|
advance notice requirements for shareholder proposals.
|
39
We also are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which
restricts the ability of any shareholder that at any time holds
more than 15% of our voting shares to acquire us without the
approval of shareholders holding at least
662/3%
of the shares held by all other shareholders that are eligible
to vote on the matter.
Federal banking laws, including regulatory approval
requirements, could make it more difficult for a third party to
acquire us, which could inhibit a business combination and
adversely affect the market price of our common stock.
These laws and anti-takeover defenses could discourage, delay or
prevent a transaction involving a change in control of our
company. These provisions could also discourage proxy contests
and make it more difficult for you and other shareholders to
elect directors of your choosing and cause us to take other
corporate actions than you desire.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
We lease office space in Los Angeles, California and Chevy
Chase, Maryland, a suburb of Washington, D.C., under
operating leases. We also maintain offices in Arizona,
California, Colorado, Connecticut, Delaware, Georgia, Florida,
Illinois, Massachusetts, Missouri, New York, North Carolina,
Pennsylvania, Tennessee, Texas, Wisconsin and in the United
Kingdom. We believe our leased facilities are adequate for us to
conduct our business.
In June 2010, we completed the sale of our long-term healthcare
facilities to Omega Healthcare Investors, Inc.
(Omega) and as a result, 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. For additional
information, see Note 3, Discontinued Operations, in
our accompanying audited consolidated financial statements for
the year ended December 31, 2010.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
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.
40
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Price
Range of Common Stock
Our common stock is traded on the New York Stock Exchange
(NYSE) under the symbol CSE. The high
and low sales prices for our common stock as reported by the
NYSE for the quarterly periods during 2010 and 2009 were as
follows:
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|
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|
|
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|
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High
|
|
|
Low
|
|
|
2010:
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
7.13
|
|
|
$
|
5.14
|
|
Third Quarter
|
|
|
5.68
|
|
|
|
4.57
|
|
Second Quarter
|
|
|
6.32
|
|
|
|
3.87
|
|
First Quarter
|
|
|
6.05
|
|
|
|
4.00
|
|
2009:
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
|
4.34
|
|
|
|
2.99
|
|
Third Quarter
|
|
|
5.08
|
|
|
|
3.55
|
|
Second Quarter
|
|
|
4.97
|
|
|
|
1.19
|
|
First Quarter
|
|
|
4.62
|
|
|
|
0.90
|
|
On February 24, 2011, the last reported sale price of our
common stock on the NYSE was $7.66 per share.
Holders
As of February 24, 2011, there were 750 holders of
record of our common stock. The number of holders does not
include individuals or entities who beneficially own shares, but
whose shares are held of record by a broker or clearing agency,
and each such broker or clearing agency is included as one
record holder. American Stock Transfer &
Trust Company serves as transfer agent for our shares of
common stock.
Dividend
Policy
For the years ended December 31, 2010 and 2009, we declared
and paid dividends as follows:
|
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|
|
|
|
|
|
|
|
Dividends Declared
|
|
|
|
and Paid per Share
|
|
|
|
2010
|
|
|
2009
|
|
|
Fourth Quarter
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
Third Quarter
|
|
|
0.01
|
|
|
|
0.01
|
|
Second Quarter
|
|
|
0.01
|
|
|
|
0.01
|
|
First Quarter
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Total dividends declared and paid
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
For shareholders who held our shares for the entire year, the
$0.04 per share dividend declared and paid in 2010 was
classified for tax reporting purposes as return of capital.
We expect to retain a majority of our earnings, consistent with
dividend policies of other commercial depository institutions,
to redeploy in our business. Our Board of Directors, in its sole
discretion, will determine the amount and frequency of dividends
to be provided to our shareholders based on a number of factors
including, but not limited to, our results of operations, cash
flow and capital requirements, economic conditions, tax
41
considerations, borrowing capacity and other factors, including
debt covenant restrictions prohibiting the payment of dividends
after defaults. In addition, for so long as our 2014 Senior
Secured Notes are outstanding, absent sufficient restricted
payment capacity , we cannot make cash dividend payments that
exceed $0.01 per share per quarter. As of December 31,
2010, we had $142.5 million, or $0.44 per share, of
restricted payment capacity, however, we cannot assure we will
have restricted payment capacity in the future.
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
A summary of our repurchases of shares of our common stock for
the three months ended December 31, 2010, was as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
of Shares (or
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Approximate Dollar
|
|
|
|
Total Number
|
|
|
Average
|
|
|
as Part of Publicly
|
|
|
Value) that May
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Announced Plans
|
|
|
Yet be Purchased
|
|
|
|
Purchased(1)
|
|
|
per Share
|
|
|
or Programs
|
|
|
Under the Plans
|
|
|
October 1 October 31, 2010
|
|
|
5,600
|
|
|
$
|
5.71
|
|
|
|
|
|
|
|
|
|
November 1 November 30, 2010
|
|
|
2,703
|
|
|
|
6.60
|
|
|
|
|
|
|
|
|
|
December 1 December 31, 2010
|
|
|
1,237,830
|
|
|
|
6.98
|
|
|
|
1,090,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,246,133
|
|
|
$
|
6.97
|
|
|
|
1,090,000
|
(2)
|
|
$
|
142,386,143
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the number of shares acquired as payment by employees
of applicable statutory minimum withholding taxes owed upon
vesting of restricted stock granted under our Third Amended and
Restated Equity Incentive Plan. |
|
(2) |
|
In December 2010, our Board of Directors authorized the
repurchase of up to $150.0 million of our common stock over
a period of up to two years. Any share repurchases made under
the stock repurchase plan will be made through open market
purchases or privately negotiated transactions. The amount and
timing of any repurchases will depend on market conditions and
other factors and repurchases may be suspended or discontinued
at any time. In December 2010, we repurchased
1,415,000 shares of our common stock under the share
repurchase plan, at an average price of $7.01 per share for a
total purchase price of $9.9 million. Of these purchases,
purchases of 325,000 shares at an average price of $7.08
per share were settled in January 2011, which, for accounting
purposes, were recorded in December 2010. All shares repurchased
under the share repurchase plan were retired upon settlement. |
42
Performance
Graph
The following graph compares the performance of our common stock
during the five-year period beginning on December 31, 2005
to December 31, 2010, with the S&P 500 Index and the
S&P 500 Financials Index. The graph depicts the results of
investing $100 in our common stock, the S&P 500 Index, and
the S&P 500 Financials Index at closing prices on
December 31, 2005, assuming all dividends were reinvested.
Historical stock performance during this period may not be
indicative of future stock performance.
Comparison
of Cumulative Total Return
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
Year Ended December 31,
|
|
Company/Index
|
|
12/31/05
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
CapitalSource Inc.
|
|
$
|
100
|
|
|
$
|
132.2
|
|
|
$
|
95.5
|
|
|
$
|
27.9
|
|
|
$
|
24.3
|
|
|
$
|
43.8
|
|
S&P 500 Index
|
|
|
100
|
|
|
|
115.8
|
|
|
|
122.2
|
|
|
|
77.0
|
|
|
|
97.3
|
|
|
|
112.0
|
|
S&P 500 Financials Index
|
|
|
100
|
|
|
|
119.2
|
|
|
|
97.0
|
|
|
|
43.3
|
|
|
|
50.8
|
|
|
|
57.0
|
|
43
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
You should read the data set forth below in conjunction with our
audited consolidated financial statements and related notes,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and other financial
information appearing elsewhere in this report. The following
tables show selected portions of historical consolidated
financial data as of and for the five years ended
December 31, 2010. We derived our selected consolidated
financial data as of and for the five years ended
December 31, 2010, from our audited consolidated financial
statements, which have been audited by Ernst & Young
LLP, independent registered public accounting firm.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands, except per share and share data)
|
|
|
Results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
639,641
|
|
|
$
|
871,946
|
|
|
$
|
1,209,469
|
|
|
$
|
1,378,690
|
|
|
$
|
1,119,336
|
|
Interest expense
|
|
|
232,096
|
|
|
|
427,312
|
|
|
|
677,707
|
|
|
|
838,072
|
|
|
|
615,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
407,545
|
|
|
|
444,634
|
|
|
|
531,762
|
|
|
|
540,618
|
|
|
|
504,216
|
|
Provision for loan losses
|
|
|
307,080
|
|
|
|
845,986
|
|
|
|
593,046
|
|
|
|
78,641
|
|
|
|
81,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision for loan losses
|
|
|
100,465
|
|
|
|
(401,352
|
)
|
|
|
(61,284
|
)
|
|
|
461,977
|
|
|
|
422,654
|
|
Operating expenses
|
|
|
228,554
|
|
|
|
277,503
|
|
|
|
254,600
|
|
|
|
234,182
|
|
|
|
204,116
|
|
Total other (expense) income
|
|
|
(33,235
|
)
|
|
|
(95,675
|
)
|
|
|
(142,830
|
)
|
|
|
(13,309
|
)
|
|
|
105,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations before income taxes
and cumulative effect of accounting change
|
|
|
(161,324
|
)
|
|
|
(774,530
|
)
|
|
|
(458,714
|
)
|
|
|
214,486
|
|
|
|
323,580
|
|
Income tax (benefit) expense(1)
|
|
|
(20,802
|
)
|
|
|
136,314
|
|
|
|
(190,583
|
)
|
|
|
87,563
|
|
|
|
37,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations before cumulative
effect of accounting changes
|
|
|
(140,522
|
)
|
|
|
(910,844
|
)
|
|
|
(268,131
|
)
|
|
|
126,923
|
|
|
|
286,403
|
|
Cumulative effect of accounting change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations
|
|
|
(140,522
|
)
|
|
|
(910,844
|
)
|
|
|
(268,131
|
)
|
|
|
126,923
|
|
|
|
286,773
|
|
Net income from discontinued operations, net of taxes
|
|
|
9,489
|
|
|
|
49,868
|
|
|
|
49,350
|
|
|
|
37,148
|
|
|
|
12,228
|
|
Gain (loss) from sale of discontinued operations, net of taxes
|
|
|
21,696
|
|
|
|
(8,071
|
)
|
|
|
104
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(109,337
|
)
|
|
|
(869,047
|
)
|
|
|
(218,677
|
)
|
|
|
164,227
|
|
|
|
299,001
|
|
Net (loss) income attributable to noncontrolling interests
|
|
|
(83
|
)
|
|
|
(28
|
)
|
|
|
1,426
|
|
|
|
4,938
|
|
|
|
4,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to CapitalSource Inc.
|
|
$
|
(109,254
|
)
|
|
$
|
(869,019
|
)
|
|
$
|
(220,103
|
)
|
|
$
|
159,289
|
|
|
$
|
294,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.44
|
)
|
|
$
|
(2.97
|
)
|
|
$
|
(1.07
|
)
|
|
$
|
0.66
|
|
|
$
|
1.72
|
|
From discontinued operations
|
|
|
0.10
|
|
|
|
0.14
|
|
|
|
0.20
|
|
|
|
0.19
|
|
|
|
0.07
|
|
Attributable to CapitalSource Inc.
|
|
$
|
(0.34
|
)
|
|
$
|
(2.84
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
0.83
|
|
|
$
|
1.77
|
|
Diluted (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.44
|
)
|
|
$
|
(2.97
|
)
|
|
$
|
(1.07
|
)
|
|
$
|
0.66
|
|
|
$
|
1.69
|
|
From discontinued operations
|
|
|
0.10
|
|
|
|
0.14
|
|
|
|
0.20
|
|
|
|
0.19
|
|
|
|
0.07
|
|
Attributable to CapitalSource Inc.
|
|
$
|
(0.34
|
)
|
|
$
|
(2.84
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
0.82
|
|
|
$
|
1.74
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
320,836,867
|
|
|
|
306,417,394
|
|
|
|
251,213,699
|
|
|
|
191,679,254
|
|
|
|
166,273,730
|
|
Diluted
|
|
|
320,836,867
|
|
|
|
306,417,394
|
|
|
|
251,213,699
|
|
|
|
193,282,656
|
|
|
|
169,220,007
|
|
Cash dividends declared per share
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
|
$
|
1.30
|
|
|
$
|
2.38
|
|
|
$
|
2.02
|
|
Dividend payout ratio attributable to CapitalSource
Inc.
|
|
|
(0.12
|
)
|
|
|
(0.01
|
)
|
|
|
(1.48
|
)
|
|
|
2.87
|
|
|
|
1.14
|
|
|
|
|
(1) |
|
As a result of our decision to elect REIT status beginning with
the tax year ended December 31, 2006, we provided for
income taxes for the years ended December 31, 2008, 2007
and 2006, based on effective tax rates of 36.5%, 39.4% and
39.9%, respectively, for the income earned by our taxable REIT
subsidiaries (TRSs). We did not provide for any
income taxes for the income earned by our qualified REIT
subsidiaries for the years |
44
|
|
|
|
|
ended December 31, 2008, 2007 and 2006. Effective
January 1, 2009, we revoked our REIT election. We provided
for income (benefit) expense on the consolidated (loss) incurred
or income earned based on effective tax rates of 12.9%, (17.6)%,
41.5%, 39.6%, 11.1% and 38.5% in 2010, 2009, 2008, 2007 and
2006, respectively. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities,
available-for-sale
|
|
$
|
1,522,911
|
|
|
$
|
960,591
|
|
|
$
|
679,551
|
|
|
$
|
13,309
|
|
|
$
|
61,904
|
|
Investment securities,
held-to-maturity
|
|
|
184,473
|
|
|
|
242,078
|
|
|
|
14,389
|
|
|
|
|
|
|
|
|
|
Mortgage-related receivables, net
|
|
|
|
|
|
|
|
|
|
|
1,801,535
|
|
|
|
2,033,296
|
|
|
|
2,286,083
|
|
Mortgage-backed securities pledged, trading
|
|
|
|
|
|
|
|
|
|
|
1,489,291
|
|
|
|
4,030,180
|
|
|
|
3,476,424
|
|
Commercial real estate A Participation Interest, net
|
|
|
|
|
|
|
530,560
|
|
|
|
1,396,611
|
|
|
|
|
|
|
|
|
|
Total loans, net(1)
|
|
|
5,922,650
|
|
|
|
7,549,215
|
|
|
|
8,857,631
|
|
|
|
9,525,454
|
|
|
|
7,563,718
|
|
Direct real estate investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations, held for sale
|
|
|
|
|
|
|
624,650
|
|
|
|
1,062,992
|
|
|
|
1,098,287
|
|
|
|
788,539
|
|
Total assets
|
|
|
9,445,407
|
|
|
|
12,261,050
|
|
|
|
18,419,632
|
|
|
|
18,039,364
|
|
|
|
15,209,295
|
|
Deposits
|
|
|
4,621,273
|
|
|
|
4,483,879
|
|
|
|
5,043,695
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
|
|
|
|
|
|
|
|
|
1,595,750
|
|
|
|
3,910,027
|
|
|
|
3,510,768
|
|
Credit facilities
|
|
|
67,508
|
|
|
|
542,781
|
|
|
|
1,445,062
|
|
|
|
2,207,063
|
|
|
|
2,251,658
|
|
Term debt
|
|
|
979,254
|
|
|
|
2,956,536
|
|
|
|
5,338,456
|
|
|
|
7,146,437
|
|
|
|
5,766,370
|
|
Other borrowings from continuing operations
|
|
|
1,375,884
|
|
|
|
1,204,074
|
|
|
|
1,223,502
|
|
|
|
1,318,288
|
|
|
|
949,919
|
|
Total borrowings from continuing operations
|
|
|
2,422,646
|
|
|
|
4,703,391
|
|
|
|
9,602,770
|
|
|
|
14,581,815
|
|
|
|
12,478,715
|
|
Liabilities of discontinued operations
|
|
|
|
|
|
|
363,293
|
|
|
|
420,505
|
|
|
|
439,937
|
|
|
|
368,460
|
|
Total shareholders equity
|
|
|
2,053,942
|
|
|
|
2,183,259
|
|
|
|
2,830,720
|
|
|
|
2,651,466
|
|
|
|
2,210,314
|
|
Portfolio statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans closed to date
|
|
|
3,543
|
|
|
|
2,815
|
|
|
|
2,596
|
|
|
|
2,457
|
|
|
|
1,986
|
|
Number of loans paid off to date
|
|
|
(2,142
|
)
|
|
|
(1,737
|
)
|
|
|
(1,524
|
)
|
|
|
(1,243
|
)
|
|
|
(914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans
|
|
|
1,401
|
|
|
|
1,078
|
|
|
|
1,072
|
|
|
|
1,214
|
|
|
|
1,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan commitments
|
|
$
|
8,592,968
|
|
|
$
|
11,600,297
|
|
|
$
|
13,296,755
|
|
|
$
|
14,602,398
|
|
|
$
|
11,929,568
|
|
Average outstanding loan size
|
|
$
|
4,538
|
|
|
$
|
7,720
|
|
|
$
|
8,857
|
|
|
$
|
8,128
|
|
|
$
|
7,323
|
|
Average balance of loans(2)
|
|
$
|
7,375,775
|
|
|
$
|
9,028,580
|
|
|
$
|
9,655,117
|
|
|
$
|
8,959,621
|
|
|
$
|
6,932,389
|
|
Employees as of year end
|
|
|
625
|
|
|
|
665
|
|
|
|
716
|
|
|
|
562
|
|
|
|
548
|
|
|
|
|
(1) |
|
Includes loans held for sale and loans held for investment, net
of deferred loan fees and discounts and the allowance for loan
losses. |
|
(2) |
|
Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Performance ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(1.36
|
)%
|
|
|
(6.41
|
)%
|
|
|
(1.62
|
)%
|
|
|
0.80
|
%
|
|
|
2.43
|
%
|
Net (loss) income
|
|
|
(1.06
|
)%
|
|
|
(5.69
|
)%
|
|
|
(1.25
|
)%
|
|
|
0.95
|
%
|
|
|
2.34
|
%
|
Return on average equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(6.97
|
)%
|
|
|
(43.86
|
)%
|
|
|
(11.73
|
)%
|
|
|
6.55
|
%
|
|
|
18.40
|
%
|
Net (loss) income
|
|
|
(5.42
|
)%
|
|
|
(31.96
|
)%
|
|
|
(7.53
|
)%
|
|
|
6.55
|
%
|
|
|
14.89
|
%
|
Yield on average interest-earning assets(1)
|
|
|
6.65
|
%
|
|
|
6.42
|
%
|
|
|
7.84
|
%
|
|
|
9.17
|
%
|
|
|
9.34
|
%
|
Cost of funds(1)
|
|
|
2.90
|
%
|
|
|
3.60
|
%
|
|
|
4.88
|
%
|
|
|
6.11
|
%
|
|
|
6.10
|
%
|
Net interest margin(1)
|
|
|
4.24
|
%
|
|
|
3.27
|
%
|
|
|
3.45
|
%
|
|
|
3.60
|
%
|
|
|
4.21
|
%
|
Operating expenses as a percentage of average total assets(1)
|
|
|
2.21
|
%
|
|
|
1.95
|
%
|
|
|
1.54
|
%
|
|
|
1.48
|
%
|
|
|
1.73
|
%
|
Core lending spread(1)
|
|
|
7.51
|
%
|
|
|
7.41
|
%
|
|
|
6.80
|
%
|
|
|
6.23
|
%
|
|
|
7.18
|
%
|
Credit quality ratios(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
30-89 days
contractually delinquent as a percentage of average loans (as of
year end)
|
|
|
0.44
|
%
|
|
|
3.33
|
%
|
|
|
3.17
|
%
|
|
|
0.85
|
%
|
|
|
2.16
|
%
|
Loans 90 or more days delinquent as a percentage of average
loans (as of year end)
|
|
|
5.03
|
%
|
|
|
5.50
|
%
|
|
|
1.49
|
%
|
|
|
0.60
|
%
|
|
|
0.80
|
%
|
Loans on non-accrual status as a percentage of average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loans (as of year end)
|
|
|
10.99
|
%
|
|
|
12.89
|
%
|
|
|
4.65
|
%
|
|
|
1.74
|
%
|
|
|
2.35
|
%
|
Impaired loans as a percentage of average loans (as of year end)
|
|
|
14.65
|
%
|
|
|
15.10
|
%
|
|
|
7.32
|
%
|
|
|
3.25
|
%
|
|
|
3.60
|
%
|
Net charge offs (as a percentage of average loans)
|
|
|
5.78
|
%
|
|
|
7.30
|
%
|
|
|
3.10
|
%
|
|
|
0.64
|
%
|
|
|
0.69
|
%
|
Allowance for loan losses as a percentage of average loans (as
of year end)
|
|
|
5.17
|
%
|
|
|
7.09
|
%
|
|
|
4.48
|
%
|
|
|
1.42
|
%
|
|
|
1.54
|
%
|
Capital and leverage ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt and deposits to equity (as of year end)(1)
|
|
|
3.43
|
x
|
|
|
4.40
|
x
|
|
|
5.34 x
|
|
|
|
5.69
|
x
|
|
|
10.82
|
x
|
Average equity to average assets(1)
|
|
|
19.49
|
%
|
|
|
14.61
|
%
|
|
|
13.85
|
%
|
|
|
12.20
|
%
|
|
|
13.19
|
%
|
Equity to total assets (as of year end)(1)
|
|
|
21.75
|
%
|
|
|
17.93
|
%
|
|
|
15.81
|
%
|
|
|
15.13
|
%
|
|
|
7.99
|
%
|
|
|
|
(1) |
|
Ratios calculated based on continuing operations. |
|
(2) |
|
Credit ratios calculated based on average gross loans, which
exclude the impact of deferred loan fees and discounts and the
allowance for loan losses. |
46
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
We are a commercial lender that, 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. As of December 31, 2010, we had 1,401
loans outstanding, with an aggregate outstanding principal
balance of $6.4 billion. Included in the loan portfolio are
certain loans shared between CapitalSource Bank and the Parent
Company.
For the year ended December 31, 2010, we operated as two
reportable segments: 1) CapitalSource Bank and
2) Other Commercial Finance. For the years ended
December 31, 2009 and 2008, 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 the remaining assets related
to this segment during the year ended December 31, 2010. We
have reclassified all comparative period results to reflect our
two current reportable segments. For additional information, see
Note 24, Segment Data, in our audited consolidated
financial statements for the year ended December 31, 2010.
Through our CapitalSource Bank segment activities, we provide a
wide range of financial products primarily to small and middle
market businesses throughout the United States and also offer
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 December 31, 2010, CapitalSource Bank
had 1,031 loans outstanding, with an aggregate outstanding
principal balance of $3.8 billion and deposits of
$4.6 billion.
Through our Other Commercial Finance segment activities, the
Parent Company provides financial products primarily to small
and middle market businesses. Our activities in the Parent
Company consist primarily of satisfying existing loan
commitments made prior to CapitalSource Banks formation
and receiving payments on our existing loan portfolio. As of
December 31, 2010, our Other Commercial Finance segment had
400 loans outstanding, and the Parent Company held total loans
having an aggregate outstanding principal balance of
$2.6 billion.
As of December 31, 2010, our average loan size was
$4.5 million, and our average loan exposure by client was
$5.7 million. Our loans generally have a remaining maturity
of one to five years with a weighted average remaining term to
maturity of 3.6 years as of December 31, 2010. The
majority of our loans require monthly interest payments at
variable rates and, in many cases, our loans provide for
interest rate floors that help us maintain our yields when
interest rates are low or declining. We price our loans based
upon the risk profile of our clients. As of December 31,
2010, our geographically diverse client base consisted of 1,115
clients with headquarters in 49 states, the District of
Columbia, Puerto Rico and select international locations,
primarily in Canada and Europe.
Consolidated
Results of Operations
We currently operate as two reportable segments:
1) CapitalSource Bank and 2) Other Commercial Finance.
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.
Explanation
of Reporting Metrics
Interest Income. Interest income represents
interest earned on loans, the senior participation interest in a
pool of commercial real estate loans and related assets (the
commercial A Participation Interest), investment
securities, other investments, cash and cash equivalents, and
collateral management fees as well as amortization of loan
origination fees, net of the 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.
47
Interest Expense. Interest expense is the
amount paid on deposits and borrowings, including the
amortization of deferred financing fees and debt discounts.
Interest expense includes borrowing costs associated with credit
facilities, term debt, convertible debt, subordinated debt, FHLB
SF borrowings and interest paid to depositors. 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 that trigger
mandatory or optional debt repayments and repurchases 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. The provision for
loan losses is the periodic cost of maintaining an appropriate
allowance for loan and lease losses inherent in our 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.
Operating Expenses. 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.
Other Income/Expense. 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, gain (loss) on our residential mortgage
investment portfolio, 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.
Income Taxes. We provide for income taxes as a
C corporation on income earned from operations. For
the tax years ended December 31, 2010 and 2009, our
subsidiaries were not able to participate in the filing of a
consolidated federal tax return. As a result, certain
subsidiaries had taxable income that was not offset by taxable
losses or loss carryforwards of other entities. We plan to
reconsolidate our subsidiaries for federal tax purposes starting
in 2011. 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.
From 2006 through 2008, we operated as a REIT. Effective
January 1, 2009, we revoked our REIT election and
recognized the deferred tax effects in our audited consolidated
financial statements as of December 31, 2008. During the
period we operated as a REIT, we were generally not subject to
federal income tax at the REIT level on our net taxable income
distributed to shareholders, but we were subject to federal
corporate-level tax on the net taxable income of our taxable
REIT subsidiaries, and we were subject to taxation in various
foreign, state and local jurisdictions. In addition, we were
required to distribute at least 90% of our REIT taxable income
to our shareholders and meet various other requirements imposed
by the Internal Revenue Code, through actual operating results,
asset holdings, distribution levels, and diversity of stock
ownership.
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.
48
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 December 31, 2010 and 2009, the total
valuation allowance was $413.8 million and $385.9 million,
respectively. Although realization is not assured, we believe it
is more likely than not that the December 31, 2010 net
deferred tax assets of $97.5 million will be realized. We intend
to maintain a valuation allowance with respect to our deferred
tax assets until sufficient positive evidence exists to support
its reduction or reversal.
Operating
Results for the Years Ended December 31, 2010, 2009 and
2008
As further described below, the most significant factors
influencing our consolidated results of operations for the year
ended December 31, 2010, compared to the year ended
December 31, 2009 were:
|
|
|
|
|
Decreased provision for loan losses;
|
|
|
|
Deconsolidation of the
2006-A Trust;
|
|
|
|
Decreased balance of Parent Company indebtedness;
|
|
|
|
Changes in income tax provisions (benefits) due to the
establishment in 2009 of valuation allowances with respect to
our deferred tax assets, and a net operating loss carryback in
2010 of one of our corporate entities;
|
|
|
|
Decreased balance of our commercial lending portfolio;
|
|
|
|
Repayment in full of the A Participation Interest;
|
|
|
|
Gains and losses on our investments;
|
|
|
|
Gains and losses on debt extinguishment;
|
|
|
|
Decreased operating expenses;
|
|
|
|
Net expense of real estate owned and other foreclosed assets;
|
|
|
|
Losses on derivatives;
|
|
|
|
Changes in lending and borrowing spreads; and
|
|
|
|
Divestiture of our Healthcare Net Lease segment.
|
49
For the years ended December 31, 2010, 2009 and 2008, our
consolidated average balances and the resulting average interest
yields and rates were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008(1)
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
Average
|
|
|
Income/
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
(Expense)
|
|
|
Rate
|
|
|
Balance
|
|
|
(Expense)
|
|
|
Rate
|
|
|
Balance
|
|
|
(Expense)
|
|
|
Rate
|
|
|
|
($ in thousands)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
512,034
|
|
|
$
|
1,399
|
|
|
|
0.27
|
%
|
|
$
|
1,111,218
|
|
|
$
|
4,562
|
|
|
|
0.41
|
%
|
|
$
|
871,111
|
|
|
$
|
23,738
|
|
|
|
2.73
|
%
|
Investment securities,
available-for-sale(2)
|
|
|
1,435,992
|
|
|
|
36,872
|
|
|
|
2.57
|
%
|
|
|
859,546
|
|
|
|
34,052
|
|
|
|
3.96
|
%
|
|
|
242,668
|
|
|
|
15,854
|
|
|
|
6.53
|
%
|
Investment securities, held to maturity
|
|
|
209,383
|
|
|
|
24,776
|
|
|
|
11.83
|
%
|
|
|
175,631
|
|
|
|
20,496
|
|
|
|
11.67
|
%
|
|
|
235
|
|
|
|
67
|
|
|
|
28.51
|
%
|
Mortgage related receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,612,254
|
|
|
|
74,276
|
|
|
|
4.61
|
%
|
|
|
1,921,538
|
|
|
|
94,485
|
|
|
|
4.92
|
%
|
Mortgage-backed securities pledged, trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,102
|
|
|
|
6,411
|
|
|
|
11.03
|
%
|
|
|
2,190,775
|
|
|
|
122,181
|
|
|
|
5.58
|
%
|
Commercial real estate A Participation Interest, net
|
|
|
188,801
|
|
|
|
12,961
|
|
|
|
6.86
|
%
|
|
|
907,613
|
|
|
|
47,457
|
|
|
|
5.23
|
%
|
|
|
700,973
|
|
|
|
54,226
|
|
|
|
7.74
|
%
|
Loans(3)
|
|
|
7,247,342
|
|
|
|
563,565
|
|
|
|
7.78
|
%
|
|
|
8,847,113
|
|
|
|
684,603
|
|
|
|
7.74
|
%
|
|
|
9,486,415
|
|
|
|
898,790
|
|
|
|
9.47
|
%
|
Other assets
|
|
|
19,704
|
|
|
|
68
|
|
|
|
0.35
|
%
|
|
|
20,745
|
|
|
|
89
|
|
|
|
0.43
|
%
|
|
|
8,651
|
|
|
|
128
|
|
|
|
1.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
9,613,256
|
|
|
$
|
639,641
|
|
|
|
6.65
|
%
|
|
$
|
13,592,222
|
|
|
$
|
871,946
|
|
|
|
6.42
|
%
|
|
$
|
15,422,366
|
|
|
$
|
1,209,469
|
|
|
|
7.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations, held for sale
|
|
|
312,326
|
|
|
|
|
|
|
|
|
|
|
|
1,062,992
|
|
|
|
|
|
|
|
|
|
|
|
1,098,288
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
389,871
|
|
|
|
|
|
|
|
|
|
|
|
81,645
|
|
|
|
|
|
|
|
|
|
|
|
475,441
|
|
|
|
|
|
|
|
|
|
Other non interest-earning assets
|
|
|
343,365
|
|
|
|
|
|
|
|
|
|
|
|
535,120
|
|
|
|
|
|
|
|
|
|
|
|
608,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,658,818
|
|
|
|
|
|
|
|
|
|
|
$
|
15,271,979
|
|
|
|
|
|
|
|
|
|
|
$
|
17,604,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
4,588,140
|
|
|
$
|
60,052
|
|
|
|
1.31
|
%
|
|
$
|
4,604,887
|
|
|
$
|
109,430
|
|
|
|
2.38
|
%
|
|
$
|
2,207,210
|
|
|
$
|
76,245
|
|
|
|
3.45
|
%
|
Repurchase agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124,549
|
|
|
|
1,874
|
|
|
|
1.50
|
%
|
|
|
2,374,890
|
|
|
|
85,458
|
|
|
|
3.60
|
%
|
Credit facilities
|
|
|
274,435
|
|
|
|
35,135
|
|
|
|
12.80
|
%
|
|
|
1,122,498
|
|
|
|
91,479
|
|
|
|
8.15
|
%
|
|
|
1,781,486
|
|
|
|
123,468
|
|
|
|
6.93
|
%
|
Term debt
|
|
|
1,919,086
|
|
|
|
69,901
|
|
|
|
3.64
|
%
|
|
|
4,806,129
|
|
|
|
152,989
|
|
|
|
3.18
|
%
|
|
|
6,240,744
|
|
|
|
300,723
|
|
|
|
4.82
|
%
|
Other borrowings
|
|
|
1,228,300
|
|
|
|
67,008
|
|
|
|
5.46
|
%
|
|
|
1,197,238
|
|
|
|
71,540
|
|
|
|
5.98
|
%
|
|
|
1,285,442
|
|
|
|
91,813
|
|
|
|
7.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
8,009,961
|
|
|
$
|
232,096
|
|
|
|
2.90
|
%
|
|
$
|
11,855,301
|
|
|
$
|
427,312
|
|
|
|
3.60
|
%
|
|
$
|
13,889,772
|
|
|
$
|
677,707
|
|
|
|
4.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest-bearing liabilities
|
|
|
320,127
|
|
|
|
|
|
|
|
|
|
|
|
277,070
|
|
|
|
|
|
|
|
|
|
|
|
330,668
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations(4)
|
|
|
263,615
|
|
|
|
|
|
|
|
|
|
|
|
420,505
|
|
|
|
|
|
|
|
|
|
|
|
439,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,593,703
|
|
|
|
|
|
|
|
|
|
|
|
12,552,876
|
|
|
|
|
|
|
|
|
|
|
|
14,660,378
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
2,065,115
|
|
|
|
|
|
|
|
|
|
|
|
2,719,103
|
|
|
|
|
|
|
|
|
|
|
|
2,944,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
10,658,818
|
|
|
|
|
|
|
|
|
|
|
$
|
15,271,979
|
|
|
|
|
|
|
|
|
|
|
$
|
17,604,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and net yield on interest-earning assets(5)
|
|
|
|
|
|
$
|
407,545
|
|
|
|
4.24
|
%
|
|
|
|
|
|
$
|
444,634
|
|
|
|
3.27
|
%
|
|
|
|
|
|
$
|
531,762
|
|
|
|
3.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
CapitalSource Bank commenced operations on July 25, 2008
and related average balances reflect 160 days of activity
in 2008. |
|
(2) |
|
The average yields for investment securities
available-for-sale
were calculated based on the amortized costs of the individual
securities and do not reflect any changes in fair value, which
were recorded in accumulated other comprehensive income (loss)
in our audited consolidated balance sheets. The average yields
for investment securities
held-to-maturity
have also been calculated using amortized cost balances. |
|
(3) |
|
Average loan balances are net of deferred fees and discounts on
loans. Non-accrual loans have been included in the average loan
balances to determine the average yield earned on loans. |
|
(4) |
|
For the years ended December 31, 2010, 2009 and 2008, there
was $15.2 million, $12.4 million and
$19.6 million, respectively, of interest expense related to
liabilities of discontinued operations. |
|
(5) |
|
Net interest income is defined as the difference between total
interest income and total interest expense which is calculated
on a continuing operations basis. Net yield on interest-earning
assets is defined as net interest-earnings divided by average
total interest-earning assets. |
50
For the years ended December 31, 2010 and 2009, changes in
interest income, interest expense and net interest income as a
result of changes in volume, changes in interest rates or both
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Compared to 2009
|
|
|
2009 Compared to 2008
|
|
|
|
Due to Change in:(1)
|
|
|
|
|
|
Due to Change in:(1)
|
|
|
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Net Change
|
|
|
Rate
|
|
|
Volume
|
|
|
Net Change
|
|
|
|
($ in thousands)
|
|
|
Increase (decrease) in interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
(1,211
|
)
|
|
$
|
(1,952
|
)
|
|
$
|
(3,163
|
)
|
|
$
|
(24,357
|
)
|
|
$
|
5,181
|
|
|
$
|
(19,176
|
)
|
Investment securities,
available-for-sale
|
|
|
(14,746
|
)
|
|
|
17,567
|
|
|
|
2,821
|
|
|
|
(8,367
|
)
|
|
|
26,565
|
|
|
|
18,198
|
|
Investment securities,
held-to-maturity
|
|
|
290
|
|
|
|
3,990
|
|
|
|
4,280
|
|
|
|
(63
|
)
|
|
|
20,492
|
|
|
|
20,429
|
|
Mortgage related receivables, net
|
|
|
|
|
|
|
(74,276
|
)
|
|
|
(74,276
|
)
|
|
|
(5,690
|
)
|
|
|
(14,519
|
)
|
|
|
(20,209
|
)
|
Mortgage-backed securities pledged, trading
|
|
|
|
|
|
|
(6,412
|
)
|
|
|
(6,412
|
)
|
|
|
61,212
|
|
|
|
(176,982
|
)
|
|
|
(115,770
|
)
|
Commercial real estate A Participation Interest, net
|
|
|
11,519
|
|
|
|
(46,015
|
)
|
|
|
(34,496
|
)
|
|
|
(20,287
|
)
|
|
|
13,518
|
|
|
|
(6,769
|
)
|
Loans
|
|
|
3,347
|
|
|
|
(124,385
|
)
|
|
|
(121,038
|
)
|
|
|
(156,601
|
)
|
|
|
(57,586
|
)
|
|
|
(214,187
|
)
|
Other assets
|
|
|
(17
|
)
|
|
|
(4
|
)
|
|
|
(21
|
)
|
|
|
(134
|
)
|
|
|
95
|
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total decrease in interest income
|
|
|
(818
|
)
|
|
|
(231,487
|
)
|
|
|
(232,305
|
)
|
|
|
(154,287
|
)
|
|
|
(183,236
|
)
|
|
|
(337,523
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
(48,981
|
)
|
|
|
(397
|
)
|
|
|
(49,378
|
)
|
|
|
(29,561
|
)
|
|
|
62,746
|
|
|
|
33,185
|
|
Repurchase agreements
|
|
|
|
|
|
|
(1,874
|
)
|
|
|
(1,874
|
)
|
|
|
(31,799
|
)
|
|
|
(51,785
|
)
|
|
|
(83,584
|
)
|
Credit facilities
|
|
|
35,245
|
|
|
|
(91,589
|
)
|
|
|
(56,344
|
)
|
|
|
19,127
|
|
|
|
(51,116
|
)
|
|
|
(31,989
|
)
|
Other borrowings
|
|
|
19,503
|
|
|
|
(102,591
|
)
|
|
|
(83,088
|
)
|
|
|
(88,079
|
)
|
|
|
(59,655
|
)
|
|
|
(147,734
|
)
|
Interest expense related to discontinued operations
|
|
|
(6,351
|
)
|
|
|
1,819
|
|
|
|
(4,532
|
)
|
|
|
(14,277
|
)
|
|
|
(5,996
|
)
|
|
|
(20,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total decrease in interest expense
|
|
|
(584
|
)
|
|
|
(194,632
|
)
|
|
|
(195,216
|
)
|
|
|
(144,589
|
)
|
|
|
(105,806
|
)
|
|
|
(250,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in net interest income
|
|
$
|
(234
|
)
|
|
$
|
(36,855
|
)
|
|
$
|
(37,089
|
)
|
|
$
|
(9,698
|
)
|
|
$
|
(77,430
|
)
|
|
$
|
(87,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The change in interest due to both volume and rates has been
allocated in proportion to the relationship of the absolute
dollar amounts of the change in each. |
51
Our consolidated operating results for the year ended
December 31, 2010, compared to the year ended
December 31, 2009, and for the year ended December 31,
2009, compared to the year ended December 31, 2008, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
639,641
|
|
|
$
|
871,946
|
|
|
$
|
1,209,469
|
|
|
|
(27
|
)%
|
|
|
(28
|
)%
|
Interest expense
|
|
|
232,096
|
|
|
|
427,312
|
|
|
|
677,707
|
|
|
|
46
|
|
|
|
37
|
|
Provision for loan losses
|
|
|
307,080
|
|
|
|
845,986
|
|
|
|
593,046
|
|
|
|
64
|
|
|
|
(43
|
)
|
Operating expenses
|
|
|
228,554
|
|
|
|
277,503
|
|
|
|
254,600
|
|
|
|
18
|
|
|
|
(9
|
)
|
Other expense
|
|
|
(33,235
|
)
|
|
|
(95,675
|
)
|
|
|
(142,830
|
)
|
|
|
65
|
|
|
|
33
|
|
Net loss from continuing operations before income taxes
|
|
|
(161,324
|
)
|
|
|
(774,530
|
)
|
|
|
(458,714
|
)
|
|
|
79
|
|
|
|
(69
|
)
|
Income tax (benefit) expense
|
|
|
(20,802
|
)
|
|
|
136,314
|
|
|
|
(190,583
|
)
|
|
|
115
|
|
|
|
(172
|
)
|
Net loss from continuing operations
|
|
|
(140,522
|
)
|
|
|
(910,844
|
)
|
|
|
(268,131
|
)
|
|
|
85
|
|
|
|
(240
|
)
|
Net income from discontinued operations, net of taxes
|
|
|
9,489
|
|
|
|
49,868
|
|
|
|
49,350
|
|
|
|
(81
|
)
|
|
|
1
|
|
Gain (loss) from sale of discontinued operations, net of taxes
|
|
|
21,696
|
|
|
|
(8,071
|
)
|
|
|
104
|
|
|
|
369
|
|
|
|
(7,861
|
)
|
Net loss
|
|
|
(109,337
|
)
|
|
|
(869,047
|
)
|
|
|
(218,677
|
)
|
|
|
87
|
|
|
|
(297
|
)
|
Net (loss) income attributable to noncontrolling interests
|
|
|
(83
|
)
|
|
|
(28
|
)
|
|
|
1,426
|
|
|
|
(196
|
)
|
|
|
(102
|
)
|
Net loss attributable to CapitalSource Inc.
|
|
|
(109,254
|
)
|
|
|
(869,019
|
)
|
|
|
(220,103
|
)
|
|
|
87
|
|
|
|
(295
|
)
|
Discontinued
Operations
In June 2010, we completed the sale of our remaining 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 decreased to $31.2 million,
including a gain on disposal of $21.7 million, for the year
ended December 31, 2010 from $41.8 million, including
a loss on disposal of $8.1 million, net of tax, for the
year ended December 31, 2009 and $49.5 million
including a gain on disposal of $0.1 million for the year
ended December 31, 2008. For additional information, see
Note 3, Discontinued Operations, in our accompanying
audited consolidated financial statements for the year ended
December 31, 2010.
Operating
Expenses
2010 vs. 2009. Consolidated operating expenses
decreased to $228.6 million for the year ended
December 31, 2010 from $277.5 million for the year
ended December 31, 2009. The decrease was primarily due to
a $20.5 million decrease in professional fees, a
$17.5 million decrease in compensation and benefits driven
by a decrease in headcount, a $4.2 million decrease in
provision for unfunded loan commitments related to CapitalSource
Bank, a $2.0 million decrease in depreciation and
amortization expense, and a $1.5 million decrease in FDIC
premiums.
2009 vs. 2008. Consolidated operating expenses
increased to $277.5 million for the year ended
December 31, 2009 from $254.6 million for the year
ended December 31, 2008. The increase was primarily due to
the inclusion of twelve months of operating expenses related to
CapitalSource Bank in 2009, while only five months were included
in 2008, which caused an $8.0 million increase in FDIC
premiums paid by CapitalSource Bank, including a one-time
special assessment of $2.5 million paid to the FDICs
Deposit Insurance Fund, which was part of a required payment for
all insured institutions. In addition, rental expenses increased
$7.2 million, primarily due to the addition of
CapitalSource Bank occupancy expenses as well as a new office
lease in Chevy Chase, Maryland, and a $4.7 million increase
in professional fees. These increases were partially offset by a
$1.8 million decrease in marketing expenses, related
primarily to the one-time promotion and advertising expenses
related to the commencement of CapitalSource Banks
operations and a $4.1 million decrease in travel and
entertainment expenses.
52
Income
Taxes
2010 vs. 2009. Consolidated income tax benefit
for the year ended December 31, 2010 was
$20.8 million, compared to income tax expense of
$136.3 million for the year ended December 31, 2009.
The change in income tax expense was caused primarily by the
establishment of valuation allowances at several corporate
entities during 2009 that did not recur in 2010, and the
carryback of a net operating loss of one of our corporate
entities in 2010.
2009 vs. 2008. Consolidated income tax expense
for the year ended December 31, 2009 was
$136.3 million, compared to an income tax benefit of
$190.6 million for the year ended December 31, 2008.
The change in income tax expense was caused primarily by
deferred tax asset valuation allowances established in 2009 and
deferred tax benefit recorded in 2008 related to the revocation
of our REIT election.
Comparison
of the Years Ended December 31, 2010, 2009 and
2008
We have reclassified all comparative prior period segment
information to reflect our two current reportable segments. The
discussion that follows differentiates our results of operations
between our segments.
CapitalSource
Bank Segment
CapitalSource Bank commenced operations on July 25, 2008.
As a result, the comparison of the results of operations for
this segment relates to the full years ended December 31,
2010 and 2009 and only 160 days of operations in 2008.
Our CapitalSource Bank segment operating results for the year
ended December 31, 2010, compared to the year ended
December 31, 2009, and for the year ended December 31,
2009, compared to the year ended December 31, 2008, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
333,625
|
|
|
$
|
310,741
|
|
|
$
|
148,104
|
|
|
|
7
|
%
|
|
|
110
|
%
|
|
|
|
|
Interest expense
|
|
|
65,267
|
|
|
|
111,873
|
|
|
|
76,246
|
|
|
|
42
|
|
|
|
(47
|
)
|
|
|
|
|
Provision for loan losses
|
|
|
117,105
|
|
|
|
213,381
|
|
|
|
55,600
|
|
|
|
45
|
|
|
|
(284
|
)
|
|
|
|
|
Operating expenses
|
|
|
113,696
|
|
|
|
100,474
|
|
|
|
43,287
|
|
|
|
(13
|
)
|
|
|
(132
|
)
|
|
|
|
|
Other income
|
|
|
27,686
|
|
|
|
38,060
|
|
|
|
12,451
|
|
|
|
(27
|
)
|
|
|
206
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
13,628
|
|
|
|
(6,228
|
)
|
|
|
(6,089
|
)
|
|
|
(319
|
)
|
|
|
2
|
|
|
|
|
|
Net income (loss)
|
|
|
51,615
|
|
|
|
(70,699
|
)
|
|
|
(8,489
|
)
|
|
|
173
|
|
|
|
(733
|
)
|
|
|
|
|
Interest
Income
2010 vs. 2009. Total interest income increased
to $333.6 million for the year ended December 31, 2010
from $310.7 million for the year ended December 31,
2009, with an average yield on interest-earning assets of 5.97%
for the year ended December 31, 2010 compared to 5.58% for
the year ended December 31, 2009. During the years ended
December 31, 2010 and 2009, interest income on loans was
$260.4 million and $212.4 million, respectively,
yielding 7.71% and 7.50% on average loan balances of
$3.4 billion and $2.8 billion, respectively. During
the years ended December 31, 2010 and 2009,
$29.4 million and $11.4 million, respectively, of
interest income was not recognized for loans on non-accrual,
which negatively impacted the yield on loans by 0.87% and 0.40%,
respectively.
Interest income on the commercial real estate A
Participation Interest was $13.0 million and
$47.5 million, during the years ended December 31,
2010 and 2009, respectively, yielding 6.86% and 5.23% on average
balances of $188.8 million and $907.6 million,
respectively. The commercial real estate A
Participation Interest was purchased at a discount and had a
stated coupon equal to one-month LIBOR plus 1.50%. The
unamortized discount was accreted into income using the interest
method. During the years ended December 31, 2010 and 2009,
we accreted $9.5 million and $29.8 million,
respectively, of discount into interest income on loans in our
audited
53
consolidated statements of operations. The commercial real
estate A Participation Interest was fully repaid in
October 2010.
During the years ended December 31, 2010 and 2009, interest
income from our investments, including
available-for-sale
and
held-to-maturity
securities, was $58.8 million and $46.5 million,
respectively, yielding 3.65% and 4.64% on average balances of
$1.6 billion and $1.0 billion, respectively. During
the year ended December 31, 2010, we purchased
$1.5 billion and $9.7 million of investment
securities,
available-for-sale
and
held-to-maturity,
respectively, while $946.8 million and $85.4 million
of principal repayments were received from our investment
securities,
available-for-sale
and
held-to-maturity,
respectively. For the year ended December 31, 2009, we
purchased $1.4 billion and $236.4 million of
investment securities,
available-for-sale
and
held-to-maturity,
respectively, while $1.2 billion and $23.4 million,
respectively, of principal repayments were received.
During the years ended December 31, 2010 and 2009, interest
income on cash and cash equivalents was $1.4 million and
$4.3 million, respectively, yielding 0.35% and 0.53% on
average balances of $391.1 million and $807.7 million,
respectively.
2009 vs. 2008. Total interest income increased
to $310.7 million for the year ended December 31, 2009
from $148.1 million for the year ended December 31,
2008, with an average yield on interest-earning assets of 5.58%
for the year ended December 31, 2009 compared to 5.75% for
the year ended December 31, 2008. The increase was
primarily due to the inclusion of only five months of its
operations in 2008 as CapitalSource Bank commenced operations on
July 25, 2008 compared to a full year in 2009. During the
years ended December 31, 2009 and 2008, interest income on
loans was $212.4 million and $75.8 million,
respectively, yielding 7.50% and 7.25% on average loan balances
of $2.8 billion and $1.0 billion, respectively. During
the year ended December 31, 2009, we reversed
$11.4 million of accrued interest on non-accrual loans,
negatively impacting the yield on loans by 0.40%. We did not
reverse any accrued interest on non-accrual loans during the
year ended December 31, 2008.
Interest income on the commercial real estate A
Participation Interest was $47.5 million and
$54.2 million during the years ended December 31, 2009
and 2008, respectively, yielding 5.23% and 7.74% on average
balances of $907.6 million and $701.0 million,
respectively. During the years ended December 31, 2009 and
2008, we accreted $29.8 million and $23.8 million,
respectively, of discount into interest income on loans in our
audited consolidated statements of operations.
During the years ended December 31, 2009 and 2008, interest
income from our investments, including
available-for-sale
and
held-to-maturity
securities, was $46.5 million and $7.5 million,
respectively, yielding 4.64% and 3.76% on average balances of
$1.0 billion and $200.0 million, respectively. During
the year ended December 31, 2009, we purchased
$1.4 billion and $236.4 million of investment
securities,
available-for-sale
and
held-to-maturity,
respectively, while $1.2 billion and $23.4 million of
principal repayments were received from our investment
securities,
available-for-sale
and
held-to-maturity,
respectively. For the year ended December 31, 2008, we
purchased $1.2 billion and $14.3 million of investment
securities,
available-for-sale
and
held-to-maturity,
respectively, while $478.1 million of principal repayments
were received from
available-for-sale
securities.
During the years ended December 31, 2009 and 2008, interest
income on cash and cash equivalents was $4.3 million and
$10.4 million, respectively, yielding 0.53% and 1.68% on
average balances of $807.7 million and $619.1 million,
respectively.
Interest
Expense
2010 vs. 2009. Total interest expense
decreased to $65.3 million for the year ended
December 31, 2010 from $111.9 million for the year
ended December 31, 2009. The decrease was primarily due to
a decrease in the average cost of interest-bearing liabilities
which was 1.34% and 2.36% during the years ended
December 31, 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 years ended December 31, 2010 and 2009,
respectively. Our interest expense on deposits for the years
ended December 31, 2010 and 2009 was $60.1 million and
$109.4 million, respectively, with an average cost of
deposits of 1.31% and 2.38%, respectively, on average balances
of $4.6 billion for both periods. During the year ended
December 31, 2010, $4.7 billion of our time deposits
matured with a weighted average interest rate of 1.44% and
$4.8 billion of new and renewed time deposits were issued
at a weighted average
54
interest rate of 1.11%. During the year ended December 31,
2009, $5.9 billion of our time deposits, including brokered
deposits, matured with a weighted average interest rate of 3.03%
and $5.3 billion of new and renewed time deposits were
issued at a weighted average interest rate of 1.64%.
Additionally, during the year ended December 31, 2010, our
weighted average interest rate of our liquid account deposits,
savings and money market accounts, declined from 1.06% at the
beginning of the year to 0.83% at the end of the year. During
the year ended December 31, 2010, our interest expense on
borrowings, consisting of FHLB SF borrowings, was
$5.2 million with an average cost of 1.92% on an average
balance of $271.7 million. During the year ended
December 31, 2010, there were $252.0 million in
advances taken and $40.0 million of maturities. During the
year ended December 31, 2009, our interest expense on
borrowings, consisting of FHLB SF borrowings, was
$2.5 million with an average cost of 1.83% on an average
balance of $133.2 million.
2009 vs. 2008. Total interest expense
increased to $111.9 million for the year ended
December 31, 2009 from $76.2 million for the year
ended December 31, 2008. The increase was primarily due to
the inclusion of only five months of its operations in 2008 as
CapitalSource Bank commenced operations on July 25, 2008
compared to a full year in 2009. During the years ended
December 31, 2009 and 2008, our average cost of
interest-bearing liabilities was 2.36% and 3.45%, respectively.
Our average balance of interest-bearing liabilities, consisting
of deposits and borrowings, was $4.7 billion and
$2.2 billion, during the years ended December 31, 2009
and 2008, respectively. Our interest expense on deposits for the
years ended December 31, 2009 and 2008, was
$109.4 million and $76.2 million, respectively, with
an average cost of deposits of 2.38% and 3.45% on an average
balance of $4.6 billion and $2.2 billion,
respectively. During the year ended December 31, 2009,
$5.9 billion of our time deposits matured with a weighted
average interest rate of 3.03% and $5.3 billion of new time
deposits were issued at a weighted average interest rate of
1.64%. During the year ended December 31, 2008,
$3.1 million of our time deposits, including brokered
deposits, matured with a weighted average interest rate of 3.47%
and $2.9 billion of new time deposits were issued at a
weighted average interest rate of 3.48%. Additionally, during
the year ended December 31, 2009, our weighted average
interest rate of our liquid deposits, savings and money market
accounts, declined from 2.66% at the beginning of the year to
1.06% at end of the year. During the year ended
December 31, 2009, our interest expense on borrowings,
consisting of FHLB SF borrowings, was $2.5 million with an
average cost of 1.83% on an average balance of
$133.2 million. For the year ended December 31, 2008,
our weighted average interest rate of our liquid deposits,
savings and money market accounts, increased from 2.62% to 2.66%
at the end of the period. During the year ended
December 31, 2009, no borrowings matured or were repaid.
There were no borrowings from the FHLB SF during the year ended
December 31, 2008.
Net
Interest Margin
The yields of income earning assets and the costs of
interest-bearing liabilities in this segment for the years ended
December 31, 2010, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Weighted
|
|
|
Net
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Net
|
|
|
|
|
|
|
Average
|
|
|
Interest
|
|
|
Average
|
|
|
Average
|
|
|
Net Interest
|
|
|
Average
|
|
|
Average
|
|
|
Interest
|
|
|
Average
|
|
|
|
Balance
|
|
|
Income
|
|
|
Yield/Cost
|
|
|
Balance
|
|
|
Income
|
|
|
Yield/Cost
|
|
|
Balance
|
|
|
Income
|
|
|
Yield/Cost
|
|
|
|
($ in thousands)
|
|
|
Total interest-earning assets(1)
|
|
$
|
5,588,812
|
|
|
$
|
333,625
|
|
|
|
5.97
|
%
|
|
$
|
5,571,407
|
|
|
$
|
310,741
|
|
|
|
5.58
|
%
|
|
$
|
2,573,993
|
|
|
$
|
148,104
|
|
|
|
5.75
|
%
|
Total interest-bearing liabilities(2)
|
|
|
4,859,847
|
|
|
|
65,267
|
|
|
|
1.34
|
|
|
|
4,738,114
|
|
|
|
111,873
|
|
|
|
2.36
|
|
|
|
2,207,210
|
|
|
|
76,246
|
|
|
|
3.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
$
|
268,358
|
|
|
|
4.63
|
%
|
|
|
|
|
|
$
|
198,868
|
|
|
|
3.22
|
%
|
|
|
|
|
|
$
|
71,858
|
|
|
|
2.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
4.80
|
%
|
|
|
|
|
|
|
|
|
|
|
3.57
|
%
|
|
|
|
|
|
|
|
|
|
|
2.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest-earning assets include cash and cash equivalents,
investments, the commercial real estate A
Participation Interest and loans. |
|
(2) |
|
Interest-bearing liabilities include deposits and borrowings. |
55
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 the Credit Quality and
Allowance for Loan Losses section.
Operating
Expenses
2010 vs. 2009. Operating expenses increased to
$113.7 million for the year ended December 31, 2010
from $100.5 million for the year ended December 31,
2009. The increase was primarily due a $22.9 million
increase in loan referral fees, partially offset by a
$4.2 million decrease in provision for unfunded
commitments, a $1.7 million decrease in employee benefit
costs, and a $1.5 million decrease in FDIC premiums.
2009 vs. 2008. Operating expenses increased to
$100.5 million for the year ended December 31, 2009
from $43.3 million, for the year ended December 31,
2008. The increase was primarily due to the inclusion of only
five months of its operations in 2008 as CapitalSource Bank
commenced operations on July 25, 2008 compared to a full
year in 2009. The increase also reflects an increase in deposit
premium expense due to an increase in the FDIC deposit premium
assessment rate and a special assessment of $2.5 million,
which was part of a required payment for all insured
institutions, offset by lower advertising and promotion costs of
$1.0 million related to the commencement of CapitalSource
Banks operations.
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 referral fees based upon the
commitment amount of each new loan funded by CapitalSource Bank
during the period. We do not capitalize loan referral fees.
These fees are eliminated in consolidation. These fees are
included in other operating expenses and were
$37.5 million, $14.6 million and $7.6 million for
the years ended December 31, 2010, 2009 2008, respectively.
CapitalSource Bank subleases from the Parent Company office
space in several locations and also leases space to the Parent
Company in other facilities in which CapitalSource Bank is the
primary lessee. Each sublease arrangement was established based
on then market rates for comparable subleases.
Other
Income
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 $4.7 billion and
$7.7 billion as of December 31, 2010 and 2009,
respectively, of which $2.5 billion and $5.2 billion
were owned by the Parent Company.
2010 vs. 2009. Other income, which primarily
consists of loan servicing fees paid to CapitalSource Bank by
the Parent Company, decreased to $27.7 million for the year
ended December 31, 2010 from $38.1 million for the
year ended December 31, 2009 primarily due to an
$8.3 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 also attributable to a $4.4 million decrease in
gains on loan sales, a $2.6 million increase in net expense
of real estate owned and other foreclosed assets and a
$2.4 million decrease in foreign currency exchange gains,
partially offset by a $4.3 million increase in loan fees
and a $2.8 million decrease in losses on derivatives.
2009 vs. 2008. Other income increased to
$38.1 million for the year ended December 31, 2009
from $12.5 million for the year ended December 31,
2008 primarily due to a $13.7 million increase in loan
servicing fees paid by the Parent Company to CapitalSource Bank.
The increase in loan servicing fees paid to CapitalSource Bank
was primarily due to the inclusion of only five months of its
operations in 2008 as CapitalSource Bank commenced operations on
July 25, 2008, compared to a full year in 2009. The
increase in other income was also attributable to a
$4.5 million gain on loan sales compared to no loan sales
in 2008, and a $3.1 million gain on foreign currency
exchange in 2009 compared to a $3.8 million loss on foreign
currency exchange in 2008.
56
Other
Commercial Finance Segment
Our Other Commercial Finance segment operating results for the
year ended December 31, 2010, compared to the year ended
December 31, 2009, and for the year ended December 31,
2009, compared to the year ended December 31, 2008, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2010 vs. 2009
|
|
|
2009 vs. 2008
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
% Change
|
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
315,934
|
|
|
$
|
567,214
|
|
|
$
|
1,056,867
|
|
|
|
(44
|
)%
|
|
|
(46
|
)%
|
Interest expense
|
|
|
166,829
|
|
|
|
315,439
|
|
|
|
601,461
|
|
|
|
47
|
|
|
|
48
|
|
Provision for loan losses
|
|
|
189,975
|
|
|
|
632,605
|
|
|
|
537,446
|
|
|
|
70
|
|
|
|
(18
|
)
|
Operating expenses
|
|
|
174,426
|
|
|
|
221,690
|
|
|
|
234,571
|
|
|
|
21
|
|
|
|
5
|
|
Other income (expense)
|
|
|
(1,932
|
)
|
|
|
(86,261
|
)
|
|
|
(117,204
|
)
|
|
|
98
|
|
|
|
26
|
|
Income tax (benefit) expense
|
|
|
(34,430
|
)
|
|
|
142,542
|
|
|
|
(184,494
|
)
|
|
|
124
|
|
|
|
(177
|
)
|
Net loss from continuing operations
|
|
|
(182,798
|
)
|
|
|
(831,323
|
)
|
|
|
(249,321
|
)
|
|
|
78
|
|
|
|
(233
|
)
|
Interest
Income
2010 vs. 2009. Interest income decreased to
$315.9 million for the year ended December 31, 2010
from $567.2 million for the year ended December 31,
2009, primarily due to a decrease in average total
interest-earning assets, including the impact of the
deconsolidation of the
2006-A Trust
in July 2010. The
2006-A Trust
contributed $28.1 million to interest income for the year
ended December 31, 2010, compared with $73.9 million
for the year ended December 31, 2009. During the year ended
December 31, 2010, the average balance of interest-earning
assets decreased by $4.0 billion, or 49.6%, compared to the
year ended December 31, 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
in 2010 and the runoff of Parent Company loans. During the year
ended December 31, 2010, yield on average interest-earning
assets increased to 7.80% from 7.06% for the year ended
December 31, 2009. During the year ended December 31,
2010, our lending spread to average one-month LIBOR was 7.77%
compared to 7.60% for the year ended December 31, 2009.
Fluctuations in yields are driven by a number of factors,
including changes in short-term interest rates, including
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.
2009 vs. 2008. Interest income decreased to
$567.2 million for the year ended December 31, 2009
from $1.1 billion for the year ended December 31,
2008, primarily due to an increase in non-accrual loans, a
decrease in average total interest-earning assets and a decrease
in yield on average interest-earning assets. During the year
ended December 31, 2009, our average balance of
interest-earning assets decreased by $4.8 billion, or
37.4%, compared to the year ended December 31, 2008,
primarily due to the sale of $1.6 billion of residential
mortgage-backed securities that were issued and guaranteed by
Fannie Mae or Freddie Mac (Agency RMBS) during the
first quarter of 2009 as well as a decrease in loans resulting
from the sale of $2.2 billion of loans to CapitalSource
Bank from the Parent Company in 2008. During the year ended
December 31, 2009, yield on average interest-earning assets
decreased to 7.06% compared to 8.23% for the year ended
December 31, 2008. This decrease was primarily the result
of an increase in non-accrual loans and the sale of the mortgage
related receivables, a decrease in short-term interest rates,
partially offset by an increase in our core lending spread.
Interest
Expense
2010 vs. 2009. Total interest expense
decreased to $166.8 million for the year ended
December 31, 2010 from $315.4 million for the year
ended December 31, 2009. The decrease was primarily due to
a decrease in average interest-bearing liabilities of
$4.0 billion, or 55.9%, 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 impact of the
deconsolidation of the
2006-A Trust
in July 2010 and the reduction of the outstanding balances on
our credit facilities and other term debt. Our cost of
borrowings increased to 5.30% for the year ended
December 31, 2010 from 4.42% for the year ended
December 31, 2009, as a result of higher deferred financing
fee amortization
57
and the change in the mix of our borrowing composition due to
the deconsolidation of the
2006-A
Trust, which had lower borrowing costs than the remainder of our
borrowings.
2009 vs. 2008. Total interest expense
decreased to $315.4 million for the year ended
December 31, 2009 from $601.5 million for the year
ended December 31, 2008. The decrease was primarily due to
a decrease in average interest-bearing liabilities of
$4.5 billion, or 38.8%, primarily due to repayment of
repurchase agreements of $1.6 billion during the first
quarter of 2009. Also contributing to the decrease in our
interest expense was a decrease in our cost of borrowings, which
was 4.42% and 5.16% for the years ended December 31, 2009
and 2008, respectively, as a result of lower LIBOR and CP rates
on which interest on our term securitizations and credit
facilities is based.
Net
Interest Margin
2010 vs. 2009. Net interest margin was 3.68%
for the year ended December 31, 2010, an increase of 0.55%
from 3.13% for the year ended December 31, 2009. This
increase was primarily due to the reduction in the ratio of
interest bearing liabilities to interest bearing assets,
partially offset by a decrease in our net interest spread. Net
interest spread was 2.50% for the year ended December 31,
2010, a decrease of 0.14% from 2.64% for the year ended
December 31, 2009, primarily due an increase in our cost of
borrowings.
2009 vs. 2008. Net interest margin was 3.13%
for the year ended December 31, 2009, a decrease of 0.42%
from 3.55% for the year ended December 31, 2008. The
decrease in net interest margin was primarily due to the
decrease in interest income offset by a decrease in our costs of
funds as measured by a spread to short-term market rates on
interest such as LIBOR. Net interest spread was 2.64% for the
year ended December 31, 2009, a decrease of 0.43% from
3.07% for the year ended December 31, 2008. The decrease in
net interest spread is attributable to the changes in its
interest-earning assets and interest-bearing liabilities as
described above.
The yields of income earning assets and the costs of
interest-bearing liabilities in this segment for the years ended
December 31, 2010, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
|
Average
|
|
|
Interest
|
|
|
Yield/
|
|
|
Average
|
|
|
Interest
|
|
|
Yield/
|
|
|
Average
|
|
|
Interest
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
|
($ in thousands)
|
|
|
Total interest-earning assets(1)
|
|
$
|
4,048,597
|
|
|
$
|
315,934
|
|
|
|
7.80
|
%
|
|
$
|
8,035,897
|
|
|
$
|
567,214
|
|
|
|
7.06
|
%
|
|
$
|
12,844,580
|
|
|
$
|
1,056,867
|
|
|
|
8.23
|
%
|
Total interest-bearing liabilities(2)
|
|
|
3,150,115
|
|
|
|
166,829
|
|
|
|
5.30
|
|
|
|
7,137,868
|
|
|
|
315,439
|
|
|
|
4.42
|
|
|
|
11,659,636
|
|
|
|
601,461
|
|
|
|
5.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
|
|
|
$
|
149,105
|
|
|
|
2.50
|
%
|
|
|
|
|
|
$
|
251,775
|
|
|
|
2.64
|
%
|
|
|
|
|
|
$
|
455,406
|
|
|
|
3.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
|
|
3.68
|
%
|
|
|
|
|
|
|
|
|
|
|
3.13
|
%
|
|
|
|
|
|
|
|
|
|
|
3.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
Operating
Expenses
2010 vs. 2009. Operating expenses decreased to
$174.4 million for the year ended December 31, 2010
from $221.7 million for the year ended December 31,
2009, primarily due to a $19.9 million decrease in
professional fees, a $16.6 million decrease in compensation
and benefits, and a $8.3 million decrease in loan servicing
fees paid to CapitalSource Bank. Operating expenses as a
percentage of average total assets increased to 3.80% for the
year ended December 31, 2010 from 2.59% for the year ended
December 31, 2009 primarily 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.
58
2009 vs. 2008. Operating expenses decreased to
$221.7 million for the year ended December 31, 2009
from $234.6 million for the year ended December 31,
2008, primarily due to a $28.3 million decrease in
compensation and benefits, primarily related to a
$18.4 million decrease in incentive compensation and the
transfer of employees from the Parent Company to CapitalSource
Bank, and a $4.3 million decrease in travel and
entertainment expenses, partially offset by a $15.7 million
increase in loan servicing fees paid to CapitalSource Bank, a
$3.0 million increase in professional fees and a
$2.7 million increase in rent expense resulting from a new
office lease in Chevy Chase, Maryland. Operating expenses as a
percentage of average total assets increased to 2.59% for the
year ended December 31, 2009, from 1.69% for the year ended
December 31, 2008.
Other
Income (Expense)
2010 vs. 2009. Other expense decreased to
$1.9 million for the year ended December 31, 2010 from
$86.3 million for the year ended December 31, 2009,
primarily due to gains on investments, gains on debt
extinguishment and a gain on the deconsolidation of the
2006-A
Trust, partially offset by an increase in net expense of real
estate owned and other foreclosed assets. Further explanation of
the decrease is described below.
Gains on investments were $54.1 million for the year ended
December 31, 2010, compared to losses of $30.7 million
for the year ended December 31, 2009. This change was
primarily due to a $42.2 million increase in realized gains
on sales of investments, a $19.4 million increase in
dividend income, an $11.7 million decrease in
other-than-temporary
impairments on our
available-for-sale
securities and cost-basis investments and a $12.1 million
decrease in unrealized losses on cost basis investments.
The year ended December 31, 2009 included
$15.3 million in gains on our residential mortgage
investment portfolio. Our residential mortgage-backed securities
were sold and the related derivatives were unwound during the
first quarter of 2009. As such, there was no activity related to
this portfolio during the year ended December 31, 2010.
Gains on extinguishment of debt were $0.9 million for the
year ended December 31, 2010, compared to losses of
$40.5 million on extinguishment of debt for the year ended
December 31, 2009. The gains during 2010 were primarily
attributable to the extinguishment of certain classes of our
convertible debt. The losses during 2009 were primarily the
result of exchanges of certain classes of our convertible debt
into common stock, partially offset by the extinguishment of
certain term debt securitizations.
Net expense of real estate owned and other foreclosed assets
increased to $108.2 million for the year ended
December 31, 2010 compared to $47.8 million for the
year ended December 31, 2009, primarily due to a
$41.7 million increase in provision for losses related to
loans acquired through foreclosure, a $17.1 million
increase in unrealized losses on real estate owned and a
$10.5 million increase in real estate impairments,
partially offset by a $12.9 million decrease in realized
losses on sales of real estate owned.
Other income was $59.0 million for the year ended
December 31, 2010 compared to $25.2 million for the
year ended December 31, 2009. This increase was primarily
due to a $22.9 million increase in referral fees, a
$16.7 million gain on the deconsolidation of the
2006-A
Trust, $8.0 million in earnings in the equity of
subsidiaries during the year ended December 31, 2010,
compared to $1.3 million in losses during the year ended
December 31, 2009 and a $7.0 million increase in gains
on foreign currency exchange. These increases were partially
offset by a $13.6 million increase in lower of cost or fair
value adjustments to our loans held for sale, and a
$7.7 million increase in litigation-related expenses in
2010.
2009 vs. 2008. Other expenses decreased to
$86.3 million for the year ended December 31, 2009
from $117.2 million for the year ended December 31,
2008, primarily due to decreases in losses on our investments,
decreases in losses on our derivative instruments and changes in
our residential mortgage investment portfolio, partially offset
by losses on debt extinguishment and increases in net expense of
real estate owned and other foreclosed assets.
Losses on investments decreased to $30.7 million for the
year ended December 31, 2009 from $73.8 million for
the year ended December 31, 2008, primarily due to a
$43.9 million decrease in unrealized losses on investments
and a $9.6 million decrease in impairments of investments,
partially offset by $0.8 million of net realized losses on
the sales of investments during the year ended December 31,
2009, compared to $5.9 million in net realized gains on
sales of investments during the year ended December 31,
2009.
59
Losses on derivatives decreased to $8.0 million for the
year ended December 31, 2009 from $36.8 million for
the year ended December 31, 2008, primarily due to changes
in fair value of swaps to minimize our exposure to variations in
interest rates. In addition, losses on derivatives during 2008
included $8.2 million in losses related to collateralized
loan obligations.
Gains on our residential mortgage investment portfolio
securities were $15.3 million for the year ended
December 31, 2009 compared with losses of
$102.8 million for the year ended December 31, 2008.
Our residential mortgage-backed securities were sold and the
related derivatives were unwound during the first quarter of
2009.
Losses on debt extinguishment were $40.5 million for the
year ended December 31, 2009, compared to gains on debt
extinguishment of $58.9 million for the year ended
December 31, 2008. The losses during 2009 were primarily
the result of exchanges of certain classes of our convertible
debt into common stock, partially offset by the extinguishment
of certain term debt securitizations. The gains during 2008 were
primarily attributable to the purchases of certain tranches of
our term debt at discounts, the exchange and retirement of
certain classes of our subordinated debt, partially offset by
losses incurred on the exchange of certain classes of our
convertible debt for our common stock.
Net expense of real estate owned and other foreclosed assets was
$47.8 million for the year ended December 31, 2009
compared to expense of $19.7 million for the year ended
December 31, 2008, primarily due a $15.5 million
increase in realized losses on sales of real estate owned and a
$5.3 million increase in operational expenses related to
real estate owned and other foreclosed assets.
Other income was $25.2 million for the year ended
December 31, 2009 compared to $56.3 million for the
year ended December 31, 2008. This decrease was primarily
due a to a $16.6 million decrease in income from loan fees,
$10.4 million in net losses from loans held for sale during
the year ended December 31, 2009, compared to net gains of
$7.7 million during the year ended December 31, 2008,
partially offset by $5.3 million in goodwill impairment
during 2008. We had no goodwill impairment during 2009.
Financial
Condition
Consolidated
Portfolio
Composition
As of December 31, 2010 and 2009, the composition of our
consolidated portfolio was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents(1)
|
|
$
|
949,036
|
|
|
$
|
1,339,663
|
|
Investment securities,
available-for-sale
|
|
|
1,522,911
|
|
|
|
960,591
|
|
Investment securities,
held-to-maturity
|
|
|
184,473
|
|
|
|
242,078
|
|
Commercial real estate A Participation Interest, net
|
|
|
|
|
|
|
530,560
|
|
Loans(2)
|
|
|
6,358,210
|
|
|
|
8,282,240
|
|
FHLB SF stock
|
|
|
19,370
|
|
|
|
20,195
|
|
Other investments
|
|
|
71,889
|
|
|
|
96,517
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,105,889
|
|
|
$
|
11,471,844
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
4,621,273
|
|
|
$
|
4,483,879
|
|
FHLB SF borrowings
|
|
|
412,000
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,033,273
|
|
|
$
|
4,683,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2010 and 2009, the amounts include
restricted cash of $128.6 million and $168.5 million,
respectively. |
|
(2) |
|
Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
60
Cash and
Cash Equivalents
Cash and cash equivalents consist of amounts due from banks,
U.S. Treasury securities, short-term investments and
commercial paper with an initial maturity of three months or
less. For additional information, see Note 4, Cash and
Cash Equivalents and Restricted Cash, in our accompanying
audited consolidated financial statements for the year ended
December 31, 2010.
Investment
Securities
As of December 31, 2010, 2009, and 2008, the outstanding
book values of our trading and investment securities were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands)
|
|
|
Trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,489,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency debt obligations(1)
|
|
$
|
431,292
|
|
|
$
|
324,998
|
|
|
$
|
495,337
|
|
Agency MBS
|
|
|
870,155
|
|
|
|
418,390
|
|
|
|
142,236
|
|
Non-agency MBS
|
|
|
113,684
|
|
|
|
153,275
|
|
|
|
377
|
|
Equity securities
|
|
|
263
|
|
|
|
52,984
|
|
|
|
213
|
|
Corporate debt
|
|
|
5,135
|
|
|
|
9,618
|
|
|
|
38,972
|
|
Collateralized loan obligations
|
|
|
12,249
|
|
|
|
1,326
|
|
|
|
2,416
|
|
U.S. Treasury and agency securities
|
|
|
90,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities,
available-for-sale
|
|
$
|
1,522,911
|
|
|
$
|
960,591
|
|
|
$
|
679,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities,
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities
|
|
$
|
184,473
|
|
|
$
|
242,078
|
|
|
$
|
14,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes discount notes, callable notes, and debt notes issued
by various Government Sponsored Enterprises (GSEs),
including $79.4 million, $5.0 million,
$249.0 million and $78.9 million of securities issued
by Fannie Mae, Freddie Mac, FHLB and Federal Farm Credit Bank,
respectively, as of December 31, 2010. |
61
Investments
by Maturity Dates
As of December 31, 2010, the carrying amounts, contractual
maturities and weighted average yields of our investment
securities were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in
|
|
|
Due Between
|
|
|
Due Between
|
|
|
|
|
|
|
|
|
|
One Year or
|
|
|
One and
|
|
|
Five and
|
|
|
Due after
|
|
|
|
|
|
|
Less
|
|
|
Five Years
|
|
|
Ten Years(1)
|
|
|
Ten Years(2)
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Investment securities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency debt obligations
|
|
$
|
208,856
|
|
|
$
|
202,963
|
|
|
$
|
5,109
|
|
|
$
|
14,364
|
|
|
$
|
431,292
|
|
Agency MBS
|
|
|
|
|
|
|
|
|
|
|
30,775
|
|
|
|
839,380
|
|
|
|
870,155
|
|
Non-agency MBS
|
|
|
|
|
|
|
|
|
|
|
47,214
|
|
|
|
66,470
|
|
|
|
113,684
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
263
|
|
|
|
263
|
|
Corporate debt
|
|
|
5,120
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
5,135
|
|
Collateralized loan obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,249
|
|
|
|
12,249
|
|
U.S. Treasury and agency securities
|
|
|
69,982
|
|
|
|
|
|
|
|
|
|
|
|
20,151
|
|
|
|
90,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities,
available-for-sale
|
|
$
|
283,958
|
|
|
$
|
202,963
|
|
|
$
|
83,113
|
|
|
$
|
952,877
|
|
|
$
|
1,522,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average yield(3)
|
|
|
0.37
|
%
|
|
|
1.91
|
%
|
|
|
4.50
|
%
|
|
|
3.05
|
%
|
|
|
2.47
|
%
|
Investment securities,
held-to-maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities
|
|
$
|
|
|
|
$
|
26,035
|
|
|
$
|
|
|
|
$
|
158,438
|
|
|
$
|
184,473
|
|
Total investment securities,
held-to-maturity
|
|
$
|
|
|
|
$
|
26,035
|
|
|
$
|
|
|
|
$
|
158,438
|
|
|
$
|
184,473
|
|
Weighted average yield(3)
|
|
|
|
%
|
|
|
8.28
|
%
|
|
|
|
%
|
|
|
13.44
|
%
|
|
|
12.71
|
%
|
|
|
|
(1) |
|
Includes Agency and Non-agency MBS, with fair values of
$30.8 million and $47.2 million, respectively, and
weighted average expected maturities of approximately
2.44 years and 3.22 years, respectively, based on
interest rates and expected prepayment speeds as of
December 31, 2010. |
|
(2) |
|
Includes Agency and Non-agency MBS, including CMBS, with fair
values of $839.4 million and $231.2 million,
respectively, and weighted average expected maturities of
approximately 4.47 years and 1.58 years, respectively,
based on interest rates and expected prepayment speeds as of
December 31, 2010. Includes securities with no stated
maturity. |
|
(3) |
|
Calculated based on the amortized costs of the individual
securities and does not reflect any changes in fair value of our
investment securities, available for sale, which were recorded
in accumulated other comprehensive income (loss) in our audited
consolidated balance sheets. |
Actual maturities of these securities may differ from
contractual maturity dates because issuers may have the right to
call or prepay obligations.
Investment
Securities,
Available-for-Sale
Investment securities,
available-for-sale,
consists of Agency discount notes, Agency callable notes, Agency
debt, Agency MBS, Non-agency MBS, corporate debt securities,
U.S. Treasury and agency securities, equity securities and
our interests in the
2006-A
Trust. CapitalSource Bank pledged substantially all of the
investment securities,
available-for-sale
to the FHLB SF and the FRB as a source of borrowing capacity as
of December 31, 2010. For additional information, see
Note 6, Investments, in our accompanying audited
consolidated financial statements for the year ended
December 31, 2010.
62
Investment
Securities,
Held-to-Maturity
As of December 31, 2010 and 2009, investment securities,
held-to-maturity
consisted of commercial mortgage-backed securities rated AAA.
For additional information, see Note 6, Investments,
in our accompanying audited consolidated financial statements
for the year ended December 31, 2010.
Loan
Portfolio Composition
The outstanding unpaid principal balance of loans in our loan
portfolio (including loans held for sale) by category as of
December 31, 2010, 2009, 2008, 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
$
|
4,238,471
|
|
|
$
|
5,036,455
|
|
|
$
|
6,118,609
|
|
|
$
|
6,334,670
|
|
|
$
|
5,003,978
|
|
Real estate
|
|
|
1,826,158
|
|
|
|
2,026,559
|
|
|
|
1,959,426
|
|
|
|
1,979,571
|
|
|
|
2,056,116
|
|
Real estate construction
|
|
|
293,581
|
|
|
|
1,219,226
|
|
|
|
1,377,757
|
|
|
|
1,497,232
|
|
|
|
754,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans(1)
|
|
$
|
6,358,210
|
|
|
$
|
8,282,240
|
|
|
$
|
9,455,792
|
|
|
$
|
9,811,473
|
|
|
$
|
7,814,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
As of December 31, 2010, the number of loans, average loan
size, number of clients and average loan size per client by loan
type were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Average
|
|
|
Number of
|
|
|
Loan Size
|
|
|
|
Loans(1)
|
|
|
Loan Size(2)
|
|
|
Clients
|
|
|
per Client(2)
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
|
729
|
|
|
$
|
5,814
|
|
|
|
484
|
|
|
$
|
8,757
|
|
Real estate(3)
|
|
|
644
|
|
|
|
2,836
|
|
|
|
607
|
|
|
|
3,008
|
|
Real estate construction
|
|
|
28
|
|
|
|
10,485
|
|
|
|
24
|
|
|
|
12,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans(1)
|
|
|
1,401
|
|
|
|
4,538
|
|
|
|
1,115
|
|
|
|
5,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 30 loans shared between CapitalSource Bank and the
Other Commercial Finance segment. |
|
(2) |
|
Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
|
(3) |
|
Includes 239 multi-family loans with an average loan size of
$1.5 million. |
Although our loan portfolio included borrowers from more than 18
industries as of December 31, 2010, we had a concentration
of over 10% of our loan balances in four industries in
particular. These industries and their respective percentage to
total loans were as follows:
|
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
|
|
|
|
Total Loans
|
|
|
|
|
|
Healthcare and social assistance
|
|
|
21.5
|
%
|
|
|
|
|
Accommodation and food services
|
|
|
17.5
|
%
|
|
|
|
|
Finance and insurance
|
|
|
10.9
|
%
|
|
|
|
|
Real estate
|
|
|
10.2
|
%
|
|
|
|
|
The 773 loans within these industries are to 664 borrowers
located throughout most of the United States (45 states and
the District of Columbia). The largest loan was
$325.0 million, which was 5.1% of total loans.
63
Loan
Balances by Maturities
As of December 31, 2010, the contractual maturities of our
loan portfolio (including loans held for sale) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
Due in One to
|
|
|
Due After
|
|
|
|
|
|
|
or Less
|
|
|
Five Years
|
|
|
Five Years
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
$
|
669,657
|
|
|
$
|
3,078,472
|
|
|
$
|
490,342
|
|
|
$
|
4,238,471
|
|
Real estate
|
|
|
505,829
|
|
|
|
812,063
|
|
|
|
508,266
|
|
|
|
1,826,158
|
|
Real estate construction
|
|
|
206,328
|
|
|
|
81,016
|
|
|
|
6,237
|
|
|
|
293,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(1)
|
|
$
|
1,381,814
|
|
|
$
|
3,971,551
|
|
|
$
|
1,004,845
|
|
|
$
|
6,358,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
Sensitivity
in Loans to Changes in Interest Rates
As of December 31, 2010, the total amount of loans due
after one year with predetermined interest rates and floating or
adjustable interest rates were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans with
|
|
|
|
|
|
|
Loans with
|
|
|
Floating
|
|
|
|
|
|
|
Predetermined
|
|
|
or Adjustable
|
|
|
|
|
|
|
Rates(1)
|
|
|
Rates
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
$
|
272,995
|
|
|
$
|
3,040,287
|
|
|
$
|
3,313,282
|
|
Real estate
|
|
|
416,553
|
|
|
|
861,739
|
|
|
|
1,278,292
|
|
Real estate construction
|
|
|
|
|
|
|
72,232
|
|
|
|
72,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans(2)
|
|
$
|
689,548
|
|
|
$
|
3,974,258
|
|
|
$
|
4,663,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents loans for which the interest rate is fixed for the
entire term of the loan. |
|
(2) |
|
Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
As of December 31, 2010, the composition of our loan
balances by adjustable rate index and by loan type was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate -
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Real Estate
|
|
|
Construction
|
|
|
Total
|
|
|
Percentage
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
1-Month LIBOR
|
|
$
|
1,549,374
|
|
|
$
|
1,071,653
|
|
|
$
|
47,360
|
|
|
$
|
2,668,387
|
|
|
|
42
|
%
|
2-Month LIBOR
|
|
|
57,097
|
|
|
|
|
|
|
|
|
|
|
|
57,097
|
|
|
|
1
|
|
3-Month LIBOR
|
|
|
729,274
|
|
|
|
41,089
|
|
|
|
|
|
|
|
770,363
|
|
|
|
12
|
|
6-Month LIBOR
|
|
|
90,530
|
|
|
|
57,800
|
|
|
|
|
|
|
|
148,330
|
|
|
|
2
|
|
1-Month
EURIBOR
|
|
|
103,759
|
|
|
|
|
|
|
|
|
|
|
|
103,759
|
|
|
|
2
|
|
3-Month
EURIBOR
|
|
|
28,363
|
|
|
|
|
|
|
|
|
|
|
|
28,363
|
|
|
|
|
|
6-Month
EURIBOR
|
|
|
22,294
|
|
|
|
|
|
|
|
|
|
|
|
22,294
|
|
|
|
|
|
Prime
|
|
|
949,242
|
|
|
|
87,733
|
|
|
|
45,610
|
|
|
|
1,082,585
|
|
|
|
17
|
|
Other
|
|
|
66,593
|
|
|
|
8,296
|
|
|
|
|
|
|
|
74,889
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable rate loans
|
|
|
3,596,526
|
|
|
|
1,266,571
|
|
|
|
92,970
|
|
|
|
4,956,067
|
|
|
|
78
|
|
Fixed rate loans
|
|
|
275,528
|
|
|
|
427,829
|
|
|
|
|
|
|
|
703,357
|
|
|
|
11
|
|
Loans on non-accrual status
|
|
|
366,417
|
|
|
|
131,758
|
|
|
|
200,611
|
|
|
|
698,786
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans(1)
|
|
$
|
4,238,471
|
|
|
$
|
1,826,158
|
|
|
$
|
293,581
|
|
|
$
|
6,358,210
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
64
Credit
Quality and Allowance for Loan Losses
Non-performing loans are loans accounted for on a non-accrual
basis, accruing loans which are contractually past due
90 days or more as to principal or interest payments, and
other loans identified as troubled debt restructurings
(TDRs) as defined by GAAP.
Loans accounted for on a non-accrual basis are loans on which
interest income is no longer recognized on an accrual basis and
loans for which a specific provision is recorded for the full
amount of accrued interest receivable. We will place a loan on
non-accrual status if there is substantial doubt about the
borrowers ability to service its debt and other
obligations or if the loan is 90 or more days past due and is
not well-secured and in the process of collection.
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.
The outstanding unpaid principal balances of non-performing
loans in our consolidated loan portfolio as of December 31,
2010, 2009, 2008, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Non-accrual loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial(1)
|
|
$
|
366,417
|
|
|
$
|
406,002
|
|
|
$
|
283,997
|
|
|
$
|
146,553
|
|
|
$
|
142,138
|
|
Real estate(2)
|
|
|
131,758
|
|
|
|
208,848
|
|
|
|
38,860
|
|
|
|
16,097
|
|
|
|
46,585
|
|
Real estate construction(3)
|
|
|
200,611
|
|
|
|
453,235
|
|
|
|
94,207
|
|
|
|
22,044
|
|
|
|
7,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans on non-accrual
|
|
$
|
698,786
|
|
|
$
|
1,068,085
|
|
|
$
|
417,064
|
|
|
$
|
184,694
|
|
|
$
|
196,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans contractually past-due 90 days or more
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
3,244
|
|
|
$
|
43,213
|
|
|
$
|
7,429
|
|
|
$
|
2,227
|
|
|
$
|
|
|
Real estate
|
|
|
6,238
|
|
|
|
|
|
|
|
24,135
|
|
|
|
|
|
|
|
12,600
|
|
Real estate construction
|
|
|
39,806
|
|
|
|
23,780
|
|
|
|
|
|
|
|
|
|
|
|
1,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accruing loans contractually past-due 90 days or more
|
|
$
|
49,288
|
|
|
$
|
66,993
|
|
|
$
|
31,564
|
|
|
$
|
2,227
|
|
|
$
|
14,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled debt restructurings(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
118,988
|
|
|
$
|
96,415
|
|
|
$
|
139,948
|
|
|
$
|
139,801
|
|
|
$
|
81,783
|
|
Real estate
|
|
|
35,689
|
|
|
|
15,328
|
|
|
|
1,404
|
|
|
|
1,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings
|
|
$
|
154,677
|
|
|
$
|
111,743
|
|
|
$
|
141,352
|
|
|
$
|
141,277
|
|
|
$
|
81,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
488,649
|
|
|
$
|
545,630
|
|
|
$
|
431,374
|
|
|
$
|
288,581
|
|
|
$
|
223,921
|
|
Real estate
|
|
|
173,685
|
|
|
|
224,176
|
|
|
|
64,399
|
|
|
|
17,573
|
|
|
|
59,185
|
|
Real estate construction
|
|
|
240,417
|
|
|
|
477,015
|
|
|
|
94,207
|
|
|
|
22,044
|
|
|
|
9,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
$
|
902,751
|
|
|
$
|
1,246,821
|
|
|
$
|
589,980
|
|
|
$
|
328,198
|
|
|
$
|
292,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $0.8 million and $1.5 million of loans held
for sale as of December 31, 2010 and 2008, respectively.
There were no non-accrual commercial loans held for sale as of
December 31, 2009, 2007 and 2006. |
|
(2) |
|
There were no non-accrual real estate loans held for sale as of
December 31, 2010, 2009, 2008, 2007 and 2006. |
|
(3) |
|
Includes $13.9 million, $0.7 million and
$7.0 million of loans held for sale as of December 31,
2010, 2009 and 2008, respectively. There were no non-accrual
real estate construction loans as of December 31, 2007 and
2006. |
|
(4) |
|
Excludes non-accrual loans and accruing loans contractually
past-due 90 days or more. |
65
Potential problem loans are loans that are not considered
non-performing loans, as disclosed above, but loans where
management is aware of information regarding potential credit
problems of a borrower that leads to serious doubts as to the
ability of such borrowers to comply with the loan repayment
terms. Such defaults could eventually result in the loans being
reclassified as non-performing loans. We had $83.0 million
in potential problem loans as of December 31, 2010,
primarily related to an impaired loan that was restructured
during the first quarter of 2011.
Of our non-accrual loans, $22.4 million were
30-89 days
delinquent and $270.5 million were over 90 days
delinquent as of December 31, 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 $5.4 million and $95.3 million as of
December 31, 2010 and 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 non-accrual status and
establish a specific reserve or charge off a portion of the
principal balance, as appropriate.
We maintain a comprehensive credit policy manual 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 DFI. Several examples of such requirements are the
loan-to-value
limitations for real estate secured loans, various real estate
appraisal and other third-party reports standards, and
collateral insurance requirements.
Our underwriting guidelines outline specific underwriting
standards and minimum specific risk acceptance criteria for each
lending product offered, including the use of interest reserves.
For additional information, see Credit Risk Management
within this section.
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 per 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 require 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 generally
is evaluated each time a risk rating conclusion is required or
rendered with particular 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.
Generally, our policy on updating appraisals is to obtain
current appraisals subsequent to the impairment date if there
are significant changes to the underlying assumptions from the
most recent appraisal. Some factors that could cause significant
changes include the passage of more than twelve months since the
time of the last appraisal; the volatility of the local market;
the availability of financing; the inventory of competing
properties; new improvements to, or lack of maintenance of, the
subject property or competing surrounding properties; a change
in zoning; environmental contamination; or failure of the
project to meet material assumptions of the original appraisal.
We generally consider appraisals to be current if they are dated
within the past twelve months. However, we may obtain an
66
updated appraisal on a more frequent basis if in our
determination there are significant changes to the underlying
assumptions from the most recent appraisal. As of
December 31, 2010, $62.4 million of our collateral
dependent loans had an appraisal older than twelve months. The
fair value of the collateral for these loans was determined
through inputs outside of appraisals, including actual and
comparable sales transactions, broker price opinions and other
relevant data. Of these loans, $24.5 million related to a
shared national credit reviewed by federal examiners during 2010.
Six of the 28 loans that comprise our real estate construction
portfolio as of December 31, 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, work-out efforts that were best
achieved via a restructuring or discounted pay off.
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 generally
considers the loans maturity, the likelihood of a
restructuring of the loan and if that restructuring constitutes
a troubled debt restructuring, 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 may lead to an impairment determination.
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 $20.9 million, $67.3 million and
$101.7 million for the years ended December 31, 2010,
2009 and 2008, respectively. Cumulative capitalized interest on
the real estate construction loan portfolio was
$301.8 million and $277.3 million as of
December 31, 2010 and 2009, respectively. As of
December 31, 2010 and 2009, $240.4 million, or 81.9%,
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 December 31, 2010 is primarily
due to the deconsolidation of the
2006-A
Trust. Non-performing loans related to 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 remaining $116.5 million
decrease in the non-performing loan balance was primarily due to
pay offs, charge offs, and foreclosures on those loans, and a
decrease in the number of loans that became non-performing
during 2010.
The activity in the allowance for loan losses for the years
ended December 31, 2010, 2009, 2008, 2007 and 2006 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Balance as of beginning of year
|
|
$
|
586,696
|
|
|
$
|
423,844
|
|
|
$
|
138,930
|
|
|
$
|
120,575
|
|
|
$
|
87,370
|
|
Charge offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(145,681
|
)
|
|
|
(308,554
|
)
|
|
|
(206,822
|
)
|
|
|
(46,314
|
)
|
|
|
(43,399
|
)
|
Real estate
|
|
|
(112,504
|
)
|
|
|
(76,919
|
)
|
|
|
(16,173
|
)
|
|
|
(2,416
|
)
|
|
|
(4,592
|
)
|
Real estate construction
|
|
|
(126,912
|
)
|
|
|
(204,381
|
)
|
|
|
(49,188
|
)
|
|
|
(9,664
|
)
|
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge offs
|
|
|
(385,097
|
)
|
|
|
(589,854
|
)
|
|
|
(272,183
|
)
|
|
|
(58,394
|
)
|
|
|
(48,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
827
|
|
|
|
11,299
|
|
|
|
1,122
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
97
|
|
|
|
16
|
|
|
|
|
|
|
|
13
|
|
|
|
|
|
Real estate construction
|
|
|
6
|
|
|
|
46
|
|
|
|
161
|
|
|
|
892
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
930
|
|
|
|
11,361
|
|
|
|
1,283
|
|
|
|
905
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs
|
|
|
(384,167
|
)
|
|
|
(578,493
|
)
|
|
|
(270,900
|
)
|
|
|
(57,489
|
)
|
|
|
(48,006
|
)
|
Charge offs upon transfer to held for sale
|
|
|
(42,353
|
)
|
|
|
(33,907
|
)
|
|
|
(20,991
|
)
|
|
|
(1,732
|
)
|
|
|
|
|
Deconsolidation of
2006-A Trust
|
|
|
(138,134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
307,080
|
|
|
|
775,252
|
|
|
|
576,805
|
|
|
|
77,576
|
|
|
|
81,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of year
|
|
$
|
329,122
|
|
|
$
|
586,696
|
|
|
$
|
423,844
|
|
|
$
|
138,930
|
|
|
$
|
120,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs as a percentage of average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
loans outstanding
|
|
|
5.8
|
%
|
|
|
6.4
|
%
|
|
|
2.8
|
%
|
|
|
0.6
|
%
|
|
|
0.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
The allowance for loan losses allocated to each category of
loans and the percentage of each category to our total loan
portfolio as of December 31, 2010, 2009, 2008, 2007 and
2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Allocation by Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
229,144
|
|
|
$
|
261,392
|
|
|
$
|
306,505
|
|
|
$
|
112,374
|
|
|
$
|
97,867
|
|
Real estate
|
|
|
78,572
|
|
|
|
138,575
|
|
|
|
67,698
|
|
|
|
14,413
|
|
|
|
14,982
|
|
Real estate construction
|
|
|
21,406
|
|
|
|
186,729
|
|
|
|
49,641
|
|
|
|
12,143
|
|
|
|
7,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan loss allowance
|
|
$
|
329,122
|
|
|
$
|
586,696
|
|
|
$
|
423,844
|
|
|
$
|
138,930
|
|
|
$
|
120,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Total Loan Portfolio by Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
66.7
|
%
|
|
|
60.7
|
%
|
|
|
64.7
|
%
|
|
|
64.6
|
%
|
|
|
64.0
|
%
|
Real estate
|
|
|
28.7
|
%
|
|
|
24.6
|
%
|
|
|
20.7
|
%
|
|
|
20.2
|
%
|
|
|
26.3
|
%
|
Real estate construction
|
|
|
4.6
|
%
|
|
|
14.7
|
%
|
|
|
14.6
|
%
|
|
|
15.2
|
%
|
|
|
9.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our allowance for loan losses decreased by $257.6 million
to $329.1 million as of December 31, 2010 from
$586.7 million as of December 31, 2009. This decrease
comprised a $220.0 million decrease in general reserves and
a $37.6 million decrease in specific reserves on impaired
loans as further described below.
The decrease in the general reserves was primarily due 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 the portfolio due to a shift in loan mix and the
deconsolidation of the
2006-A
Trust, which resulted in the removal of $91.9 million of
general reserves related to the loans held for investment which
were derecognized from our balance sheet during the period. As
of December 31, 2010, the unpaid principal balance of
non-impaired loans had decreased to $5.4 billion and the
general reserves allocated to that portfolio had decreased to
$250.2 million, representing an effective reserve
percentage of 4.6%. As of December 31, 2009, the unpaid
principal balance of non-impaired 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%. The lower effective reserve percentage
reflects the lower historical losses generally experienced by
the non-impaired loans remaining in our portfolio as of
December 31, 2010 as a result of the shift in loan mix. Our
loans in categories with the greatest historical loss experience
continue to pay off. Additionally, the majority of our new
originations are in those categories with lower historical loss
experience.
The decrease in the specific reserves was primarily related to
$426.5 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
as described above. These decreases were partially offset by the
addition of $435.2 million of specific reserves on impaired
loans outstanding as of December 31, 2010. The carrying
values of our impaired loans reflect incurred losses that are
inherent in our loan portfolio.
We employ a formal quarterly process to both identify impaired
loans and record appropriate specific reserves based on
available collateral and other borrower-specific information. As
of December 31, 2010, the unpaid principal balance of
impaired loans was $931.2 million with a specific allowance
attributable to that portfolio of $79.0 million.
Additionally, as of December 31, 2010, $463.1 million
of the original legal balance of that portfolio had been
previously charged off as collection was deemed remote for
portions of these loans. The total prior charge offs and
specific reserves as of December 31, 2010 of
$505.3 million represented an expected total loss of 37.2%
of the legal balance of $1.4 billion (the December 31,
2010 balance plus amounts previously charged off). As of
December 31, 2009, the total unpaid principal balance of
impaired loans was $1.3 billion with a specific reserve
attributable to that portfolio of $116.5 million.
Additionally, 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
68
reserves as of December 31, 2009 of $559.0 million
represented an expected total loss of 33.0% of the original
legal balance of $1.7 billion (the December 31, 2009
balance plus amounts previously charged off).
Analysis
of Short-term Borrowings
Short-term borrowings are borrowings with an original maturity
of one year or less, of which securities sold under repurchase
agreements, was our only significant category for the year ended
December 31, 2008. We had no significant categories of
short-term borrowings for the years ended December 31, 2010
and 2009.
As of and for the years ended December 31, 2010, 2009 and
2008, information about our securities sold under repurchase
agreements was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands)
|
|
|
Balance as of year end
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,499,250
|
|
Average daily balance during the year
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,268,868
|
|
Maximum outstanding month-end balance
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,780,942
|
|
Weighted average interest rate during the year
|
|
|
|
%
|
|
|
|
%
|
|
|
3.5
|
%
|
Weighted average interest rate as of year end
|
|
|
|
%
|
|
|
|
%
|
|
|
2.6
|
%
|
CapitalSource
Bank Segment
As of December 31, 2010 and 2009, the CapitalSource Bank
segment included:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents(1)
|
|
$
|
377,054
|
|
|
$
|
821,980
|
|
Investment securities,
available-for-sale
|
|
|
1,510,384
|
|
|
|
901,764
|
|
Investment securities,
held-to-maturity
|
|
|
184,473
|
|
|
|
242,078
|
|
Commercial real estate A Participation Interest, net
|
|
|
|
|
|
|
530,560
|
|
Loans(2)
|
|
|
3,848,511
|
|
|
|
3,061,426
|
|
FHLB SF stock
|
|
|
19,370
|
|
|
|
20,195
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,939,792
|
|
|
$
|
5,578,003
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
4,621,273
|
|
|
$
|
4,483,879
|
|
FHLB SF borrowings
|
|
|
412,000
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,033,273
|
|
|
$
|
4,683,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2010 and 2009, the amounts include
restricted cash of $23.5 million and $65.9 million,
respectively. |
|
(2) |
|
Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
Cash and
Cash Equivalents
Cash and cash equivalents consist of amounts due from banks,
U.S. Treasury securities, short-term investments and
commercial paper with an initial maturity of three months or
less. For additional information, see Note 4, Cash and
Cash Equivalents and Restricted Cash, in our accompanying
audited consolidated financial statements for the year ended
December 31, 2010.
69
Investment
Securities,
Available-for-Sale
Investment securities,
available-for-sale,
consists of Agency discount notes, Agency callable notes, Agency
debt, Agency MBS, Non-agency MBS, corporate debt securities and
U.S. Treasury and agency securities. CapitalSource Bank
pledged a significant portion of its investment securities,
available-for-sale,
to the FHLB SF and the FRB as a source of borrowing capacity as
of December 31, 2010. For additional information, see
Note 6, Investments, in our accompanying audited
consolidated financial statements for the year ended
December 31, 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 accompanying audited
consolidated financial statements for the year ended
December 31, 2010.
Commercial
Real Estate A Participation Interest
The commercial real estate A Participation Interest
was fully repaid during the fourth quarter of 2010. For
additional information on the commercial real estate
A Participation Interest, see Note 5,
Commercial Lending Assets and Credit Quality, in our
accompanying audited consolidated financial statements for the
year ended December 31, 2010.
CapitalSource
Bank Segment Loan Portfolio Composition
Total CapitalSource Bank loan portfolio reflected in the
portfolio statistics below includes loans held for sale of
$14.2 million as of December 31, 2010. CapitalSource
Bank did not have loans held for sale as of December 31,
2009.
As of December 31, 2010 and 2009, the composition of the
CapitalSource Bank loan portfolio by loan type was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
$
|
2,029,407
|
|
|
|
53
|
%
|
|
$
|
1,594,974
|
|
|
|
52
|
%
|
Real estate
|
|
|
1,634,062
|
|
|
|
42
|
|
|
|
1,086,961
|
|
|
|
36
|
|
Real estate construction
|
|
|
185,042
|
|
|
|
5
|
|
|
|
379,491
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,848,511
|
|
|
|
100
|
%
|
|
$
|
3,061,426
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, the scheduled maturities of the
CapitalSource Bank loan portfolio by loan type were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
Due in One
|
|
|
Due After
|
|
|
|
|
|
|
or Less
|
|
|
to Five Years
|
|
|
Five Years
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
$
|
175,000
|
|
|
$
|
1,615,811
|
|
|
$
|
238,596
|
|
|
$
|
2,029,407
|
|
Real estate
|
|
|
350,087
|
|
|
|
789,489
|
|
|
|
494,486
|
|
|
|
1,634,062
|
|
Real estate construction
|
|
|
138,680
|
|
|
|
40,125
|
|
|
|
6,237
|
|
|
|
185,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans(1)
|
|
$
|
663,767
|
|
|
$
|
2,445,425
|
|
|
$
|
739,319
|
|
|
$
|
3,848,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
As of December 31, 2010, approximately 68% of the
adjustable rate portfolio is subject to an interest rate floor
and is accruing interest. Due to low market interest rates as of
December 31, 2010, substantially all loans with interest
rate floors were bearing interest at such floors. The weighted
average spread between the floor rate and the fully indexed rate
on the loans was 1.91% as of December 31, 2010. To the
extent the underlying indices subsequently increase,
CapitalSource Banks interest yield on this portfolio will
not rise as quickly due to the effect of the interest rate
floors.
70
As of December 31, 2010, the composition of CapitalSource
Bank loan balances by adjustable rate index and by loan type was
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate-
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Real Estate
|
|
|
Construction
|
|
|
Total
|
|
|
Percentage
|
|
|
|
($ in thousands)
|
|
|
1-Month LIBOR
|
|
$
|
625,619
|
|
|
$
|
979,972
|
|
|
$
|
47,360
|
|
|
$
|
1,652,951
|
|
|
|
43
|
%
|
2-Month LIBOR
|
|
|
33,925
|
|
|
|
|
|
|
|
|
|
|
|
33,925
|
|
|
|
1
|
|
3-Month LIBOR
|
|
|
464,228
|
|
|
|
41,089
|
|
|
|
|
|
|
|
505,317
|
|
|
|
13
|
|
6-Month LIBOR
|
|
|
52,384
|
|
|
|
57,800
|
|
|
|
|
|
|
|
110,184
|
|
|
|
3
|
|
Prime
|
|
|
519,111
|
|
|
|
79,278
|
|
|
|
5,742
|
|
|
|
604,131
|
|
|
|
15
|
|
Other
|
|
|
66,593
|
|
|
|
8,296
|
|
|
|
|
|
|
|
74,889
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable rate loans
|
|
|
1,761,860
|
|
|
|
1,166,435
|
|
|
|
53,102
|
|
|
|
2,981,397
|
|
|
|
77
|
|
Fixed rate loans
|
|
|
221,628
|
|
|
|
397,189
|
|
|
|
|
|
|
|
618,817
|
|
|
|
17
|
|
Loans on non-accrual status
|
|
|
45,919
|
|
|
|
70,438
|
|
|
|
131,940
|
|
|
|
248,297
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans(1)
|
|
$
|
2,029,407
|
|
|
$
|
1,634,062
|
|
|
$
|
185,042
|
|
|
$
|
3,848,511
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
As of December 31, 2010, the number of loans, average loan
size, number of clients and average loan size per client by loan
type were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Average Loan
|
|
|
Number of
|
|
|
Loan Size
|
|
|
|
Loans(1)
|
|
|
Size(2)
|
|
|
Clients
|
|
|
per Client(2)
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Commercial
|
|
|
400
|
|
|
$
|
5,074
|
|
|
|
303
|
|
|
$
|
6,698
|
|
Real estate(3)
|
|
|
614
|
|
|
|
2,661
|
|
|
|
585
|
|
|
|
2,793
|
|
Real estate construction
|
|
|
17
|
|
|
|
10,885
|
|
|
|
14
|
|
|
|
13,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall CapitalSource Bank loan portfolio
|
|
|
1,031
|
|
|
|
3,733
|
|
|
|
902
|
|
|
|
4,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 30 loans shared with the Other Commercial Finance
segment. |
|
(2) |
|
Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
|
(3) |
|
Includes 237 multi-family loans with an average loans size of
$1.4 million. |
71
Credit
Quality and Allowance for Loan Losses
The outstanding unpaid principal balances of non-performing
loans in the CapitalSource Bank loan portfolio as of
December 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Non-accrual loans
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
45,919
|
|
|
$
|
41,809
|
|
Real estate
|
|
|
70,438
|
|
|
|
57,190
|
|
Real estate construction
|
|
|
131,940
|
|
|
|
74,932
|
|
|
|
|
|
|
|
|
|
|
Total loans on non-accrual
|
|
$
|
248,297
|
|
|
$
|
173,931
|
|
|
|
|
|
|
|
|
|
|
Accruing loans contractually past-due 90 days or more
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
272
|
|
|
$
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
Real estate construction
|
|
|
|
|
|
|
17,695
|
|
|
|
|
|
|
|
|
|
|
Total accruing loans contractually past-due 90 days or more
|
|
$
|
272
|
|
|
$
|
17,695
|
|
|
|
|
|
|
|
|
|
|
Troubled debt restructurings(1)
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
|
|
|
$
|
|
|
Real estate
|
|
|
35,689
|
|
|
|
|
|
Real estate construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings
|
|
$
|
35,689
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
46,191
|
|
|
$
|
41,809
|
|
Real estate
|
|
|
106,127
|
|
|
|
57,190
|
|
Real estate construction
|
|
|
131,940
|
|
|
|
92,627
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
$
|
284,258
|
|
|
$
|
191,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes non-accrual loans and accruing loans contractually
past-due 90 days or more. |
We had one $76.2 million potential problem loan as of
December 31, 2010.
Of our non-accrual loans, $3.9 million and
$28.6 million were
30-89 days
delinquent, and $69.8 million and $84.1 million were
over 90 days delinquent as of December 31, 2010 and
2009, respectively. Accruing loans
30-89 days
delinquent were $5.3 million and $1.1 million as of
December 31, 2010 and 2009, respectively.
72
The activity in the allowance for loan losses for the years
ended December 31, 2010 and 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands)
|
|
|
Balance as of beginning of year
|
|
$
|
152,508
|
|
|
$
|
55,600
|
|
|
$
|
|
|
Charge offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(4,854
|
)
|
|
|
(10,919
|
)
|
|
|
|
|
Real estate
|
|
|
(70,437
|
)
|
|
|
(21,134
|
)
|
|
|
|
|
Real estate construction
|
|
|
(46,103
|
)
|
|
|
(73,245
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge offs
|
|
|
(121,394
|
)
|
|
|
(105,298
|
)
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs
|
|
|
(121,394
|
)
|
|
|
(105,298
|
)
|
|
|
|
|
Charge offs upon transfer to held for sale
|
|
|
(23,341
|
)
|
|
|
(11,175
|
)
|
|
|
|
|
Provision for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General
|
|
|
(11,003
|
)
|
|
|
78,400
|
|
|
|
55,600
|
|
Specific
|
|
|
128,108
|
|
|
|
134,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for loan losses
|
|
|
117,105
|
|
|
|
213,381
|
|
|
|
55,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of year
|
|
$
|
124,878
|
|
|
$
|
152,508
|
|
|
$
|
55,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses ratio
|
|
|
3.2
|
%
|
|
|
5.0
|
%
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses ratio
|
|
|
3.0
|
%
|
|
|
6.9
|
%
|
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs as a percentage of average loans outstanding
|
|
|
4.2
|
%
|
|
|
3.8
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2010 and 2009, loans
with an aggregate carrying value of $374.2 million and
$36.8 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. There were no specific reserves allocated
to loans that were involved in TDRs as of December 31,
2010, and there were $2.2 million in specific reserves
allocated to loans that were involved in TDRs as of
December 31, 2009.
Of the total $128.1 million and $135.0 million
specific provisions for loan losses for the years ended
December 31, 2010 and 2009, respectively,
$124.0 million and $110.0 million, respectively,
related to commercial real estate and real estate construction
loans. 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
December 31, 2010 and 2009, commercial real estate loans
that have not reached stabilization had an outstanding principal
balance of $178.8 million and $381.6 million,
respectively. This amount was net of cumulative charge offs
taken on these loans of $21.0 million and
$52.1 million, respectively. No specific reserves were
allocated to these loans as of December 31, 2010. There was
$15.6 million of specific reserves allocated to these loans
as of December 31, 2009.
During the year ended December 31, 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
73
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 December 31, 2010, the
carrying value of the A notes was $56.5 million, and the B
notes had no carrying value.
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 TDRs. The A notes are deemed
impaired and remain so classified for at least one year from the
date of the restructuring. After one year, the A notes are
evaluated quarterly to determine if the loan performance has
complied with the terms of the TDR such that the impairment
classification may be removed.
FHLB SF
Stock
Investments in FHLB SF stock are recorded at historical cost.
FHLB SF stock does not have a readily determinable fair value,
but can generally be sold back to the FHLB SF at par value upon
stated notice. The investment in FHLB SF stock is periodically
evaluated for impairment based on, among other things, the
capital adequacy of the FHLB and its overall financial
condition. No impairment losses have been recorded through
December 31, 2010.
Deposits
As of December 31, 2010 and 2009, a summary of
CapitalSource Banks deposits by product type and the
maturities of the certificates of deposit were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
|
($ in thousands)
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market
|
|
$
|
236,811
|
|
|
|
0.78
|
%
|
|
$
|
258,283
|
|
|
|
0.99
|
%
|
Savings
|
|
|
694,157
|
|
|
|
0.84
|
|
|
|
599,084
|
|
|
|
1.09
|
|
Certificates of deposit
|
|
|
3,690,305
|
|
|
|
1.27
|
|
|
|
3,626,512
|
|
|
|
1.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
$
|
4,621,273
|
|
|
|
1.18
|
|
|
$
|
4,483,879
|
|
|
|
1.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
|
($ in thousands)
|
|
|
Remaining maturity of certificates of deposit:
|
|
|
|
|
|
|
|
|
0 to 3 months
|
|
$
|
1,027,182
|
|
|
|
1.09
|
%
|
4 to 6 months
|
|
|
965,723
|
|
|
|
1.09
|
|
7 to 9 months
|
|
|
446,046
|
|
|
|
1.26
|
|
10 to 12 months
|
|
|
464,873
|
|
|
|
1.37
|
|
Greater than 12 months
|
|
|
786,481
|
|
|
|
1.67
|
|
|
|
|
|
|
|
|
|
|
Total certificates of deposit
|
|
$
|
3,690,305
|
|
|
|
1.27
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2010 and 2009, the average
balances and the weighted average interest rates on deposit
categories in excess of 10% of average total deposits were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
Balance
|
|
|
Rate
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Savings deposits
|
|
$
|
956,736
|
|
|
|
0.87
|
%
|
|
$
|
776,807
|
|
|
|
1.42
|
%
|
Time deposits
|
|
|
3,631,404
|
|
|
|
1.43
|
|
|
|
3,828,080
|
|
|
|
2.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
4,588,140
|
|
|
|
1.31
|
%
|
|
$
|
4,604,887
|
|
|
|
2.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, the composition of certificates of
deposit in the amount of $100,000 or more and categorized by
time remaining to maturity was as follows ($ in thousands):
|
|
|
|
|
0 to 3 months
|
|
$
|
414,197
|
|
4 to 6 months
|
|
|
468,796
|
|
7 to 12 months
|
|
|
433,335
|
|
Greater than 12 months
|
|
|
415,897
|
|
|
|
|
|
|
Total certificates of deposit in the amount of $100,000 or more
|
|
|
1,732,225
|
|
|
|
|
|
|
All other certificates of deposit
|
|
|
1,958,080
|
|
|
|
|
|
|
Total certificates of deposit
|
|
$
|
3,690,305
|
|
|
|
|
|
|
FHLB SF
Borrowings
FHLB SF borrowings increased to $412.0 million as of
December 31, 2010 from $200.0 million as of
December 31, 2009. These borrowings were used primarily for
interest rate risk management and short-term funding purposes.
The weighted average remaining maturities of the borrowings were
approximately 2.3 years and 1.9 years as of
December 31, 2010 and 2009, respectively.
75
As of December 31, 2010, the remaining maturity and the
weighted average interest rate of FHLB SF borrowings were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Balance
|
|
|
Rate
|
|
|
|
($ in thousands)
|
|
|
Less than 1 year
|
|
$
|
151,000
|
|
|
|
1.03
|
%
|
After 1 year through 2 years
|
|
|
53,000
|
|
|
|
2.01
|
|
After 2 years through 3 years
|
|
|
43,000
|
|
|
|
1.35
|
|
After 3 years through 4 years
|
|
|
55,000
|
|
|
|
2.34
|
|
After 4 years through 5 years
|
|
|
95,000
|
|
|
|
2.08
|
|
After 5 years
|
|
|
15,000
|
|
|
|
2.88
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
412,000
|
|
|
|
1.67
|
|
|
|
|
|
|
|
|
|
|
Other
Commercial Finance Segment
As of December 31, 2010 and 2009, the Other Commercial
Finance segment included:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Investment securities,
available-for-sale
|
|
$
|
12,527
|
|
|
$
|
58,827
|
|
Loans(1)
|
|
|
2,509,699
|
|
|
|
5,220,814
|
|
Other investments(2)
|
|
|
71,877
|
|
|
|
96,517
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,594,103
|
|
|
$
|
5,376,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
|
(2) |
|
Includes investments carried at cost, investments carried at
fair value and investments accounted for under the equity method. |
Investment
Securities,
Available-for-sale
Investment securities,
available-for-sale
consist of corporate debt, equity securities and our interests
in the
2006-A Trust.
Other
Investments
The Parent Company has made investments in some of our borrowers
in connection with the loans provided to them. These investments
usually include equity interests such as common stock, preferred
stock, limited liability company interests, limited partnership
interests and warrants.
Other
Commercial Finance Segment Loan Portfolio Composition
Total Other Commercial Finance loan portfolio reflected in the
portfolio statistics below includes loans held for sale of
$191.1 million and $0.7 million as of
December 31, 2010 and 2009, respectively.
76
As of December 31, 2010 and 2009, the composition of the
Other Commercial Finance loan portfolio by loan type was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
$
|
2,209,064
|
|
|
|
88
|
%
|
|
$
|
3,441,481
|
|
|
|
66
|
%
|
Real estate
|
|
|
192,096
|
|
|
|
8
|
|
|
|
939,598
|
|
|
|
18
|
|
Real estate construction
|
|
|
108,539
|
|
|
|
4
|
|
|
|
839,735
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,509,699
|
|
|
|
100
|
%
|
|
$
|
5,220,814
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, the scheduled maturities of the
Other Commercial Finance loan portfolio by loan type were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in
|
|
|
Due in
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
One to
|
|
|
Due After
|
|
|
|
|
|
|
or Less
|
|
|
Five Years
|
|
|
Five Years
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
$
|
494,657
|
|
|
$
|
1,462,661
|
|
|
$
|
251,746
|
|
|
$
|
2,209,064
|
|
Real estate
|
|
|
155,742
|
|
|
|
22,574
|
|
|
|
13,780
|
|
|
|
192,096
|
|
Real estate construction
|
|
|
67,648
|
|
|
|
40,891
|
|
|
|
|
|
|
|
108,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
718,047
|
|
|
$
|
1,526,126
|
|
|
$
|
265,526
|
|
|
$
|
2,509,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, the composition of Other
Commercial Finance loan balances by adjustable rate index and by
loan type was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Type
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate-
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Real Estate
|
|
|
Construction
|
|
|
Total
|
|
|
Percentage
|
|
|
|
($ in thousands)
|
|
|
1-Month LIBOR
|
|
$
|
923,755
|
|
|
$
|
91,681
|
|
|
$
|
|
|
|
$
|
1,015,436
|
|
|
|
40
|
%
|
2-Month LIBOR
|
|
|
23,172
|
|
|
|
|
|
|
|
|
|
|
|
23,172
|
|
|
|
1
|
|
3-Month LIBOR
|
|
|
265,046
|
|
|
|
|
|
|
|
|
|
|
|
265,046
|
|
|
|
11
|
|
6-Month LIBOR
|
|
|
38,146
|
|
|
|
|
|
|
|
|
|
|
|
38,146
|
|
|
|
2
|
|
1-Month
EURIBOR
|
|
|
103,759
|
|
|
|
|
|
|
|
|
|
|
|
103,759
|
|
|
|
4
|
|
3-Month
EURIBOR
|
|
|
28,363
|
|
|
|
|
|
|
|
|
|
|
|
28,363
|
|
|
|
1
|
|
6-Month
EURIBOR
|
|
|
22,294
|
|
|
|
|
|
|
|
|
|
|
|
22,294
|
|
|
|
1
|
|
Prime
|
|
|
430,131
|
|
|
|
8,455
|
|
|
|
39,868
|
|
|
|
478,454
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustable rate loans
|
|
|
1,834,666
|
|
|
|
100,136
|
|
|
|
39,868
|
|
|
|
1,974,670
|
|
|
|
79
|
|
Fixed rate loans
|
|
|
53,900
|
|
|
|
30,640
|
|
|
|
|
|
|
|
84,540
|
|
|
|
3
|
|
Loans on non-accrual status
|
|
|
320,498
|
|
|
|
61,320
|
|
|
|
68,671
|
|
|
|
450,489
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans(1)
|
|
$
|
2,209,064
|
|
|
$
|
192,096
|
|
|
$
|
108,539
|
|
|
$
|
2,509,699
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
As of December 31, 2010, approximately 45% of the
adjustable rate loan portfolio comprised loans that are subject
to an interest rate floor and were accruing interest. Due to low
market interest rates as of December 31, 2010,
substantially all loans with interest rate floors were bearing
interest at such floors. The weighted average spread between the
floor rate and the fully indexed rate on the loans was 2.34% as
of December 31, 2010. To the extent the underlying indices
subsequently increase, the interest yield on these adjustable
rate loans will not rise as quickly due to the effect of the
interest rate floors.
77
As of December 31, 2010, the number of loans, average loan
size, number of clients and average loan size per client by loan
type were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Loan
|
|
|
Number of
|
|
|
Loan Size
|
|
|
|
Loans(1)
|
|
|
Size(2)
|
|
|
Clients
|
|
|
per Client(2)
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
|
355
|
|
|
$
|
6,223
|
|
|
|
218
|
|
|
$
|
10,133
|
|
Real estate
|
|
|
32
|
|
|
|
6,003
|
|
|
|
28
|
|
|
|
6,861
|
|
Real estate construction
|
|
|
13
|
|
|
|
8,349
|
|
|
|
12
|
|
|
|
9,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
400
|
|
|
|
6,270
|
|
|
|
258
|
|
|
|
9,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 30 loans shared with CapitalSource Bank. |
|
(2) |
|
Excludes the impact of deferred loan fees and discounts and the
allowance for loan losses. Includes lower of cost or fair value
adjustments on loans held for sale. |
Credit
Quality and Allowance for Loan Losses
The outstanding unpaid principal balances of non-performing
loans in Other Commercial Finance loan portfolio as of
December 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Non-accrual loans
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
320,498
|
|
|
$
|
364,193
|
|
Real estate
|
|
|
61,320
|
|
|
|
151,658
|
|
Real estate construction
|
|
|
68,671
|
|
|
|
378,303
|
|
|
|
|
|
|
|
|
|
|
Total loans on non-accrual
|
|
$
|
450,489
|
|
|
$
|
894,154
|
|
|
|
|
|
|
|
|
|
|
Accruing loans contractually past-due 90 days or more
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
2,972
|
|
|
$
|
43,213
|
|
Real estate
|
|
|
6,238
|
|
|
|
|
|
Real estate construction
|
|
|
39,806
|
|
|
|
6,085
|
|
|
|
|
|
|
|
|
|
|
Total accruing loans contractually past-due 90 days or more
|
|
$
|
49,016
|
|
|
$
|
49,298
|
|
|
|
|
|
|
|
|
|
|
Troubled debt restructurings(1)
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
118,988
|
|
|
$
|
96,415
|
|
Real estate
|
|
|
|
|
|
|
15,328
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings
|
|
$
|
118,988
|
|
|
$
|
111,743
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
442,458
|
|
|
$
|
503,821
|
|
Real estate
|
|
|
67,558
|
|
|
|
166,986
|
|
Real estate construction
|
|
|
108,477
|
|
|
|
384,388
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
$
|
618,493
|
|
|
$
|
1,055,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes non-accrual loans and accruing loans contractually
past-due 90 days or more. |
We had $6.8 million in potential problem loans as of
December 31, 2010.
78
Of our non-accrual loans, $18.5 million and
$153.9 million were
30-89 days
delinquent, and $200.7 million and $304.4 million were
over 90 days delinquent as of December 31, 2010 and
2009, respectively. Accruing loans
30-89 days
delinquent were $0.1 million and $94.2 million as of
December 31, 2010 and 2009, respectively.
The activity in the allowance for loan losses for the years
ended December 31, 2010 and 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands)
|
|
|
Balance as of beginning of year
|
|
$
|
434,188
|
|
|
$
|
368,244
|
|
|
$
|
138,930
|
|
Charge offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(140,827
|
)
|
|
|
(297,635
|
)
|
|
|
(206,822
|
)
|
Real estate
|
|
|
(42,067
|
)
|
|
|
(55,785
|
)
|
|
|
(16,173
|
)
|
Real estate construction
|
|
|
(80,809
|
)
|
|
|
(131,136
|
)
|
|
|
(49,188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge offs
|
|
|
(263,703
|
)
|
|
|
(484,556
|
)
|
|
|
(272,183
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
827
|
|
|
|
11,299
|
|
|
|
1,122
|
|
Real estate
|
|
|
97
|
|
|
|
16
|
|
|
|
|
|
Real estate construction
|
|
|
6
|
|
|
|
46
|
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
930
|
|
|
|
11,361
|
|
|
|
1,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs
|
|
|
(262,773
|
)
|
|
|
(473,195
|
)
|
|
|
(270,900
|
)
|
Charge offs upon transfer to held for sale
|
|
|
(19,012
|
)
|
|
|
(22,732
|
)
|
|
|
(20,991
|
)
|
Deconsolidation of
2006-A term
debt securitization
|
|
|
(138,134
|
)
|
|
|
|
|
|
|
|
|
Provision for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General
|
|
|
(117,161
|
)
|
|
|
55,303
|
|
|
|
167,044
|
|
Specific
|
|
|
307,136
|
|
|
|
506,568
|
|
|
|
354,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for loan losses
|
|
|
189,975
|
|
|
|
561,871
|
|
|
|
521,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of year
|
|
$
|
204,244
|
|
|
$
|
434,188
|
|
|
$
|
368,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses ratio
|
|
|
8.1
|
%
|
|
|
8.3
|
%
|
|
|
5.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses ratio
|
|
|
7.6
|
%
|
|
|
10.7
|
%
|
|
|
7.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs as a percentage of average loans
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
|
7.2
|
%
|
|
|
9.5
|
%
|
|
|
4.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 years ended December 31, 2010 and 2009, loans
with an aggregate carrying value of $645.6 million and
$884.5 million, respectively, as of their respective
restructuring dates, were involved in troubled debt
restructurings. Additionally, loans involved in these TDRs are
assessed as impaired, generally for a period of at least one
year following the restructuring, assuming the loan performs
under the restructured terms and the restructured terms were at
market. The specific reserves allocated to loans that were
involved in TDRs were $35.5 million and $22.8 million
as of December 31, 2010 and 2009, respectively.
The decrease in the provision for loan losses and charge offs
for the year ended December 31, 2010 compared to the year
ended December 31, 2009 was primarily driven by a decrease
in charge offs related to impaired commercial and real estate
construction loans. Our loans in categories with the greatest
historical loss experience
79
continue to pay off. Additionally, the majority of our new
originations are in categories with lower historical loss
experience. The increase in provision for loan losses and charge
offs for the year ended December 31, 2009 compared to the
year ended December 31, 2008 was 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
in the past. However, we have few remaining large real estate
loans in our portfolio and believe that we have appropriately
reserved for all incurred losses. As of December 31, 2010
and 2009, the total outstanding principal balance of these
higher-risk loans was $84.5 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 primary sources of
liquidity are cash and cash equivalents, new borrowings and
deposits, proceeds from asset sales, servicing fees from
securitizations, principal and interest collections, and
additional equity and debt financings.
We separately manage the liquidity of CapitalSource Bank and the
Parent Company as required by regulation. Our liquidity
management is 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. These
business plans include the assumption that substantially all
newly originated loans will be funded by CapitalSource Bank.
As of December 31, 2010, we had $1.9 billion of
unfunded commitments to extend credit, of which
$958.7 million were commitments of CapitalSource Bank and
$977.7 million were commitments of the Parent Company. Due
to their nature, we cannot know with certainty the aggregate
amounts we will be required to fund under these unfunded
commitments. 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 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. Although we expect that
these unfunded commitments will continue to exceed the Parent
Companys available funds, we forecast adequate liquidity
to fund the expected borrower draws under these commitments. To
the extent there are unfunded commitments with respect to a loan
that is owned partially by CapitalSource Bank and the Parent
Company, unless our client is in default, CapitalSource Bank is
obligated in some cases, pursuant to intercompany agreements, to
fund its portion of the unfunded commitment before the Parent
Company is required to fund its portion. 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 irreparably damage our reputation in the marketplace.
Unless otherwise specified, the figures presented in the
following paragraphs are based on current forecasts and take
into account activity since December 31, 2010. The
information contained in this section should be read in
conjunction with, and is subject to and qualified by the
information set forth under Item 1A, Risk Factors,
and the Cautionary Note Regarding Forward Looking
Statements in this Annual Report on
Form 10-K.
CapitalSource
Bank Liquidity
The most significant variable in CapitalSource Banks
liquidity management is our expectation regarding the net growth
in the loan and deposit portfolios. CapitalSource Banks
primary sources of liquidity include: deposits, payments of
principal and interest on loans and securities, cash
equivalents, and borrowings from the FHLB SF. Secondary sources
of liquidity may also include: capital contributions and
borrowings from the Parent Company, bank borrowings, and the
issuance of debt securities. We intend to maintain sufficient
liquidity at CapitalSource Bank to meet depositor demands and
fund loan commitments and operations as well as to maintain
liquidity ratios required by our regulators.
CapitalSource Banks primary uses of liquidity include:
funding new and existing loans, purchasing investment
securities, funding net deposit outflows, and paying operating
expenses, including intercompany payments to
80
the Parent Company for origination and other services performed
on CapitalSource Banks behalf. CapitalSource Bank operates
in accordance with the conditions imposed in connection with
regulatory approvals obtained upon its formation, including
requirements applicable until July 2011 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%. 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. 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 December 31, 2010, deposits at CapitalSource
Bank were $4.6 billion. We utilize various product,
pricing, and promotional strategies in our deposit business, so
that we are able to obtain and maintain sufficient deposits to
meet our liquidity needs. For additional information, see
Note 9, Deposits, in our accompanying audited
consolidated financial statements for the year ended
December 31, 2010.
CapitalSource Bank supplements its deposit funding with
borrowings from the FHLB SF. As a member of the FHLB SF,
CapitalSource Bank had financing availability with the FHLB SF
as of December 31, 2010 equal to 20% of CapitalSource
Banks total assets. The maximum financing available under
this formula was $1.2 billion and $1.1 billion as of
December 31, 2010 and 2009, respectively. The financing is
subject to various terms and conditions including pledging
acceptable collateral, satisfaction of the FHLB SF stock
ownership requirement and certain limits regarding the maximum
term of debt. As of December 31, 2010, collateral with an
estimated fair value of $912.3 million was pledged to the
FHLB SF.
As of December 31, 2010 and 2009, CapitalSource Bank had
borrowing capacity with the FHLB SF based on pledged collateral
as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Borrowing capacity
|
|
$
|
885,842
|
|
|
$
|
965,195
|
|
Less: outstanding principal
|
|
|
(412,000
|
)
|
|
|
(200,000
|
)
|
Less: outstanding letters of credit
|
|
|
(600
|
)
|
|
|
(750
|
)
|
|
|
|
|
|
|
|
|
|
Unused borrowing capacity
|
|
$
|
473,242
|
|
|
$
|
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 December 31,
2010, collateral with an estimated fair value of
$188.0 million had been pledged under this program, and
there were no borrowings outstanding under this program.
CapitalSource Bank also maintains a portfolio of investment
securities. As of December 31, 2010, CapitalSource Bank had
$353.6 million of cash and cash equivalents and
$1.5 billion in investment securities,
available-for-sale.
The investment portfolio comprises primarily highly liquid
securities that can be sold and converted to cash if additional
liquidity needs arise.
Parent
Company Liquidity
The Parent Companys 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.
The Parent Companys primary sources of liquidity include:
cash and cash equivalents, principal and interest payments,
asset sales, and servicing fees from securitizations. A portion
of the proceeds from some of these sources is required to be
used to make mandatory repayments on our indebtedness. The
Parent Company also has access to secondary sources of liquidity
including: bank borrowings and the issuance of debt securities,
subject to restrictions under existing indebtedness; and the
issuance of additional shares of equity. CapitalSource Bank is
prohibited from paying dividends until July 2011
81
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 primary uses of liquidity include:
interest and principal payments on our existing debt, operating
expenses; share repurchases; any dividends that we may pay; and
the funding of unfunded commitments. The Parent Company is
required to redeem its 3.5% and 4.0% Convertible Debentures
at the option of the noteholders on July 15, 2011. As of
December 31, 2010, outstanding balances on the 3.5% and
4.0% Convertible Debentures were $8.4 million and
$272.1 million, respectively. We currently intend to
repurchase these Convertible Debentures with cash at or prior to
July 15, 2011.
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 December 31,
2010, this facility was undrawn.
The Parent Company is subject to financial and non-financial
covenants under our indebtedness, including, with respect to
restricted payments, leverage, servicing standards, and
limitations on incurring or guaranteeing indebtedness,
refinancing existing indebtedness, repaying subordinated
indebtedness, making investments, dividends, distributions,
redemptions or repurchases of our capital stock, selling assets,
creating liens and engaging in a merger, sale or consolidation.
If we were to default under our indebtedness by violating these
covenants or otherwise, our investors remedies would
include the ability to, among other things, transfer servicing
to another servicer, foreclose on collateral,
and/or
accelerate payment of all amounts payable under such
indebtedness.
In addition, upon the occurrence of specified servicer defaults,
the holders of the asset-backed notes issued in our term debt
may elect to terminate us as servicer of the loans and appoint a
successor servicer or replace us as cash manager. If we were
terminated as servicer, we would no longer receive our servicing
fee. In addition, because there can be no assurance that any
successor servicer would be able to service the loans according
to our standards, the performance of our loans could be
materially adversely affected and income generated from those
loans significantly reduced.
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.
In December 2010, we completed a consent solicitation regarding
our 12.75% Notes and entered into a supplemental indenture
which (1) permits us to use available cash to purchase our
convertible debentures redeemable in July 2011 and July 2012;
(2) modified the formula for calculating our restricted
payment capacity; (3) permits us to contribute the equity
in our remaining four securitizations to CapitalSource Bank, and
(4) allows us to obtain secured debt with a minimum advance
rate of 40%, rather than the previous 75% requirement, in each
case, subject to our satisfying certain collateral coverage
tests.
As of December 31, 2010, the Parent Company had four
secured credit facilities with aggregate commitments of
$167.5 million and an aggregate outstanding principal
balance of $67.5 million. During the first quarter of 2011,
we terminated all of the credit facilities with the exception of
our syndicated bank facility, which had an aggregate commitment
of $100.0 million and no outstanding balance as of
December 31, 2010.
We terminated our Dividend Reinvestment and Stock Purchase Plan
effective March 1, 2010.
82
In December 2010, our Board of Directors authorized the
repurchase of $150.0 million of our common stock over a
period of up to two years. In December 2010, we repurchased
1,415,000 shares of our stock in open market transactions
for a total purchase price of $9.9 million. All shares
repurchased under this plan were retired upon settlement.
For additional information, see Note 12,
Shareholders Equity, in our accompanying audited
consolidated financial statements for the year ended
December 31, 2010.
Special
Purpose Entities
We use special purpose entities (SPEs) as part of
our funding activities, and we service loans that we have
transferred to these entities. The use of these special purpose
entities is generally required in connection with our
non-recourse secured term debt financings to legally isolate
from us loans that we transfer to these entities if we were to
enter into a bankruptcy proceeding.
We evaluate all SPEs with which we are affiliated to determine
whether such entities must be consolidated for financial
statement purposes. If we determine that such entities represent
variable interest entities, we consolidate these entities if we
also determine that we are the primary beneficiary of the
entity. For special purpose entities for which we determine we
are not the primary beneficiary, we account for our economic
interests in these entities in accordance with the nature of our
investments. The assets and related liabilities of all special
purpose entities that we use to issue our term debt are
recognized in our accompanying audited consolidated balance
sheets as of December 31, 2010 and 2009.
Commitments,
Guarantees & Contingencies
As of December 31, 2010 and 2009, we had unfunded
commitments to extend credit to our clients of $1.9 billion
and $2.8 billion, respectively, of which $29.7 million
and $86.5 million, respectively, was to related parties.
For additional information, see Note 20, Related Party
Transactions, in our accompanying audited consolidated
financial statements for the year ended December 31, 2010.
Due to their nature, we cannot know with certainty the aggregate
amounts we will be required to fund under these unfunded
commitments. Additional information on these contingencies is
included in Note 19, Commitments and Contingencies,
in our audited consolidated financial statements for the year
ended December 31, 2010, included in our
Form 10-K,
and Liquidity and Capital Resources herein.
We have non-cancelable operating leases for office space and
office equipment, which expire over the next fourteen years and
contain provisions for certain annual rental escalations. The
lease for our Chevy Chase, Maryland space requires estimated
minimum payments of $5.6 million per annum.
We provide standby letters of credit in conjunction with several
of our lending arrangements. As of December 31, 2010 and
2009, we had issued $143.4 million and $182.5 million,
respectively, in letters of credit which expire at various dates
over the next five 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. These arrangements
had carrying amounts totaling $3.8 million and
$6.1 million, as reported in other liabilities in our
accompanying audited consolidated balance sheets as of
December 31, 2010 and 2009, respectively. We also provide
standby letters of credit under certain of our property leases.
In connection with certain securitization transactions, we have
made customary representations and warranties regarding the
characteristics of the underlying transferred assets and
collateral. Prior to any securitization transaction, we
generally performed 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, 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.
During 2010, we sold all of our remaining 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 December 31, 2010, sufficient information was not
available to
83
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.
Contractual
Obligations
In addition to our scheduled maturities on our debt, we have
future cash obligations under various types of contracts. We
lease office space and office equipment under long-term
operating leases and we have committed to contribute up to an
additional $11.3 million to 18 private equity funds, and
$0.8 million to an equity investment. The contractual
obligations under our debt are included in our audited
consolidated balance sheet as of December 31, 2010. The
expected contractual obligations under our certificates of
deposit, debt, operating leases and commitments under
non-cancelable contracts as of December 31, 2010, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of
|
|
|
Credit
|
|
|
Term
|
|
|
Convertible
|
|
|
Subordinated
|
|
|
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit
|
|
|
Facilities(1)
|
|
|
Debt(2)
|
|
|
Debt(3)
|
|
|
Debt(4)
|
|
|
Payable
|
|
|
Other(5)
|
|
|
Total
|
|
|
|
|
|
|
($ in thousands)
|
|
|
2011
|
|
$
|
2,903,824
|
|
|
$
|
63,980
|
|
|
$
|
50,503
|
|
|
$
|
280,523
|
|
|
$
|
|
|
|
$
|
151,000
|
|
|
$
|
14,934
|
|
|
$
|
3,464,764
|
|
|
|
|
|
2012
|
|
|
689,031
|
|
|
|
3,528
|
|
|
|
74,372
|
|
|
|
250,000
|
|
|
|
|
|
|
|
53,000
|
|
|
|
13,921
|
|
|
|
1,083,852
|
|
|
|
|
|
2013
|
|
|
34,941
|
|
|
|
|
|
|
|
506,747
|
|
|
|
|
|
|
|
|
|
|
|
45,948
|
|
|
|
11,625
|
|
|
|
599,261
|
|
|
|
|
|
2014
|
|
|
31,386
|
|
|
|
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
55,000
|
|
|
|
9,639
|
|
|
|
396,025
|
|
|
|
|
|
2015
|
|
|
31,123
|
|
|
|
|
|
|
|
62,031
|
|
|
|
|
|
|
|
|
|
|
|
95,000
|
|
|
|
7,736
|
|
|
|
195,890
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437,286
|
|
|
|
15,000
|
|
|
|
51,441
|
|
|
|
503,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,690,305
|
|
|
$
|
67,508
|
|
|
$
|
993,653
|
|
|
$
|
530,523
|
|
|
$
|
437,286
|
|
|
$
|
414,948
|
|
|
$
|
109,296
|
|
|
$
|
6,243,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The contractual obligations for credit facilities are computed
based on the stated maturities of the facilities including
amortization periods but not considering optional annual
renewals and assume utilization of available term-out features.
During the first quarter of 2011, we terminated all of the
credit facilities with the exception of our syndicated bank
facility, which had a zero balance as of December 31, 2010. |
|
(2) |
|
The amounts are presented gross of net unamortized discounts of
$0.1 million on our term debt securitizations and
$14.3 million on the 2014 Senior Secured Notes. Contractual
obligations on our term debt securitizations are computed based
on their estimated lives. The estimated lives are based upon the
contractual amortization schedule of the underlying loans. These
underlying loans are subject to prepayment, which could shorten
the life of the term debt securitizations; conversely, the
underlying loans may be amended to extend their term, which may
lengthen the life of the term debt securitizations. At our
option, we may substitute loans for prepaid loans up to
specified limitations, which may also impact the life of the
term debt securitizations. |
|
(3) |
|
The contractual obligations for convertible debt are computed
based on the initial put/call date and are presented gross of
net unamortized discount of $6.9 million. The legal
maturities of the convertible debt are 2034 and 2037. For
additional information, see Note 2, Summary of
Significant Accounting Policies, and Note 11,
Borrowings, in our accompanying audited consolidated
financial statements for the year ended December 31, 2010. |
|
(4) |
|
The contractual obligations for subordinated debt are computed
based on the legal maturities, which are between 2035 and 2037. |
|
(5) |
|
Includes operating leases and non-cancelable contracts. |
We enter into derivative contracts under which we either receive
cash or are required to pay cash to counterparties depending on
changes in interest rates. Derivative contracts are carried at
fair value on our audited consolidated balance sheet as of
December 31, 2010, with the fair value representing the net
present value of expected future cash receipts or payments based
on market interest rates as of the balance sheet date. The fair
values of the contracts change daily as market interest rates
change. Further discussion of derivative instruments is included
in Note 2, Summary of Significant Accounting
Policies, and Note 21, Derivative Instruments,
in our accompanying audited consolidated financial
statements for the year ended December 31, 2010.
84
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 since its formation, 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 DFI. 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, which includes the lien positions, amortization
provisions and loan tenors;
|
|
|
|
Collateral descriptions and appropriate valuation methods;
|
|
|
|
Underwriting considerations which include minimum diligence and
verification requirements; and
|
|
|
|
Specific risk acceptance criteria which 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
|
We 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
generally is considered before an approval is granted.
Credit risk management for our 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.
85
Concentrations
of Credit Risk
In our normal course of business, we engage in lending
activities with clients primarily throughout the United States.
As of December 31, 2010, the single largest industry
concentration was healthcare and social assistance, which made
up approximately 22% of our loan portfolio. As of
December 31, 2010, taken in the aggregate, non-healthcare
real estate loans made up approximately 24% of our loan
portfolio. As of December 31, 2010, the two largest
geographical concentrations were Florida and California, which
each making up approximately 10% of our loan portfolio.
As of December 31, 2010, $931.9 million, or 15%, of
our portfolio consisted of loans to four clients with aggregate
loan balances that are individually greater than
$100.0 million. Of this amount, loans to one real estate
client totaling $121.1 million were on non-accrual. The
remaining loans were performing.
Selected information pertaining to our five largest credit
relationships as of December 31, 2010 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of
|
|
|
|
|
|
|
|
Allowance
|
|
|
|
Date of Last
|
|
Amount
|
|
Loan
|
|
|
% of Total
|
|
|
|
|
|
|
Loan(s)
|
|
|
Loan
|
|
|
|
|
for Loan
|
|
Underlying
|
|
Collateral
|
|
of Last
|
|
Balance
|
|
|
Portfolio
|
|
|
Loan Type
|
|
Industry
|
|
at Origination
|
|
|
Commitment
|
|
|
Performing
|
|
Losses
|
|
Collateral(1)
|
|
Appraisal
|
|
Appraisal
|
|
|
|
|
($ in thousands)
|
|
|
$
|
371,270
|
|
|
|
5.8
|
%
|
|
Commercial and Real Estate
|
|
Health Care and Social Assistance
|
|
$
|
607,180
|
|
|
$
|
371,270
|
|
|
Yes
|
|
$
|
|
Stock pledge
|
|
N/A
|
|
|
N/A
|
(2)
|
|
238,129
|
|
|
|
3.8
|
|
|
Commercial and Real Estate Construction
|
|
Accommodation and Food Services and Finance and Insurance
|
|
|
173,663
|
|
|
|
252,467
|
|
|
Partial(3)
|
|
|
|
Timeshare receivables
|
|
N/A
|
|
|
N/A
|
(4)
|
|
201,310
|
|
|
|
3.2
|
|
|
Real Estate
|
|
Accommodation and Food Services
|
|
|
5,006
|
|
|
|
205,171
|
|
|
Yes
|
|
|
|
Portfolio of vacation properties
|
|
December 2006 November 2010
|
|
$
|
449,694
|
(5)
|
|
121,148
|
|
|
|
1.9
|
|
|
Real Estate Construction
|
|
Accommodation and Food Services
|
|
|
60,130
|
|
|
|
141,731
|
|
|
No
|
|
|
|
Hotel
|
|
June 2010
|
|
|
182,000
|
(6)
|
|
96,021
|
|
|
|
1.5
|
|
|
Commercial and Real Estate
|
|
Health Care and Social Assistance
|
|
|
122,248
|
|
|
|
112,341
|
|
|
Yes
|
|
|
|
Nursing care facilities
|
|
January 2005
|
|
|
134,710
|
(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,027,878
|
|
|
|
16.2
|
%
|
|
|
|
|
|
$
|
968,227
|
|
|
$
|
1,082,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the primary collateral securing 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 December 31, 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 September 30, 2010.
Of our total loan balance, $46.3 million was senior debt. |
|
(3) |
|
This credit relationship includes multiple loans, one of which,
with a balance of $39.9 million, is non-performing. |
|
(4) |
|
The collateral that secures our loan balance of
$238.1 million primarily comprises timeshare receivables
and timeshare real estate and had a total value of
$737.4 million as of December 31, 2010. Total senior
debt, including our loan balance, secured by the collateral was
$338.2 million as of December 31, 2010. |
|
(5) |
|
Total senior debt, including our loan balance, was
$309.7 million as of December 31, 2010. |
|
(6) |
|
Total senior debt, including our loan balance, was
$185.7 million as of December 31, 2010. |
|
(7) |
|
Total senior debt, including our loan balance, was
$115.1 million as of December 31, 2010. The nursing
care facilities real estate secures $75.5 million of our
loan balance as of December 31, 2010. The remainder of the
loan balance of $20.5 million as of December 31, 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, 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;
|
86
|
|
|
|
|
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, where we will appropriately
classify the modification as a TDR;
|
|
|
|
initiate foreclosure proceedings on the collateral; or
|
|
|
|
sell the loan in certain cases where there is an interested
third-party buyer.
|
There were 118 credit relationships in the non-performing
portfolio as of December 31, 2010, and our largest
non-performing credit relationship totaled $121.1 million
and comprised 13.4% of our total non-performing loans. This
credit relationship comprises real estate construction loans to
a borrower in the accommodation and food services industry. The
primary collateral supporting these loans is a hotel. These
loans were originated in June 2007. The outstanding loan
balances as of December 31, 2010 for this relationship are
inclusive of charge offs taken to reduce the outstanding loan
balances to the estimated fair value of the collateral based
upon an appraisal received in 2010.
TDRs are loans that have been restructured as a result of
deterioration in the borrowers financial position and for
which we have granted a concession to the borrower that we would
not have otherwise granted if those conditions did not exist.
Our concession strategies in TDRs are intended to minimize our
economic losses as borrowers experience financial difficulty and
provide an alternative to foreclosure. The success of these
strategies is highly dependent on our borrowers ability
and willingness to repay under the restructured terms of their
loans. Continued adverse changes in the economic environment or
in borrower performance could negatively impact the outcome of
these strategies.
A summary of concessions granted by loan type, including the
accrual status of the loans as of December 31, 2010 and
2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Non-accrual
|
|
|
Accrual
|
|
|
Total
|
|
|
Non-accrual
|
|
|
Accrual
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate and fee reduction
|
|
$
|
24,185
|
|
|
$
|
|
|
|
$
|
24,185
|
|
|
$
|
23,501
|
|
|
$
|
|
|
|
$
|
23,501
|
|
Maturity extension
|
|
|
104,872
|
|
|
|
79,481
|
|
|
|
184,353
|
|
|
|
100,321
|
|
|
|
25,893
|
|
|
|
126,214
|
|
Payment deferral
|
|
|
18,235
|
|
|
|
4,189
|
|
|
|
22,424
|
|
|
|
29,909
|
|
|
|
32,423
|
|
|
|
62,332
|
|
Multiple concessions
|
|
|
57,912
|
|
|
|
35,121
|
|
|
|
93,033
|
|
|
|
56,003
|
|
|
|
38,199
|
|
|
|
94,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
205,204
|
|
|
|
118,791
|
|
|
|
323,995
|
|
|
|
209,734
|
|
|
|
96,515
|
|
|
|
306,249
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate and fee reduction
|
|
|
1,880
|
|
|
|
|
|
|
|
1,880
|
|
|
|
2,270
|
|
|
|
|
|
|
|
2,270
|
|
Maturity extension
|
|
|
25,910
|
|
|
|
35,471
|
|
|
|
61,381
|
|
|
|
36,420
|
|
|
|
10,927
|
|
|
|
47,347
|
|
Multiple concessions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,438
|
|
|
|
4,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,790
|
|
|
|
35,471
|
|
|
|
63,261
|
|
|
|
38,690
|
|
|
|
15,365
|
|
|
|
54,055
|
|
Real estate construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity extension
|
|
|
153,982
|
|
|
|
|
|
|
|
153,982
|
|
|
|
66,102
|
|
|
|
|
|
|
|
66,102
|
|
Multiple concessions
|
|
|
13,875
|
|
|
|
|
|
|
|
13,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167,857
|
|
|
|
|
|
|
|
167,857
|
|
|
|
66,102
|
|
|
|
|
|
|
|
66,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
400,851
|
|
|
$
|
154,262
|
|
|
$
|
555,113
|
|
|
$
|
314,526
|
|
|
$
|
111,880
|
|
|
$
|
426,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have experienced losses incurred on some TDRs subsequent to
their initial restructuring. These losses include both
additional specific reserves and charge offs on the restructured
loans. The majority of such losses has
87
been incurred on our commercial loans and is primarily due to
the borrowers failure to consistently meet their financial
forecasts that formed the bases for our restructured loans.
Examples of circumstances that resulted in the borrowers not
being able to meet their forecasts included acquisitions of
other businesses that did not have the expected positive impact
on financial results, significant delays in launching products
and services, and continued deterioration in the pricing
estimates of businesses and product lines that the borrower
expected to sell to generate proceeds to repay the loan. In
certain of these cases, the TDRs occurred prior to 2008, and the
borrowers performed under the terms of the restructured loans
for a period of time before their operations were negatively
impacted by recent market conditions.
Losses incurred on TDRs since their initial restructuring by
concession and loan type for the years ended December 31,
2010, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate and fee reduction
|
|
$
|
8,391
|
|
|
$
|
8,623
|
|
|
$
|
26,319
|
|
Maturity extension
|
|
|
15,513
|
|
|
|
30,460
|
|
|
|
17,274
|
|
Payment deferral
|
|
|
2,564
|
|
|
|
949
|
|
|
|
33,450
|
|
Multiple concessions
|
|
|
42,754
|
|
|
|
21,436
|
|
|
|
5,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,222
|
|
|
|
61,468
|
|
|
|
82,491
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity extension
|
|
|
1,484
|
|
|
|
10,666
|
|
|
|
3,686
|
|
Interest rate and fee reduction
|
|
|
390
|
|
|
|
|
|
|
|
11,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,874
|
|
|
|
10,666
|
|
|
|
14,733
|
|
Real estate-construction
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity extension
|
|
|
5,508
|
|
|
|
|
|
|
|
|
|
Multiple concessions
|
|
|
4,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
81,166
|
|
|
$
|
72,134
|
|
|
$
|
97,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the additional losses recognized on commercial loan TDRs
since their initial restructuring for the year ended
December 31, 2010, 0.8% related to loans for which the
initial TDR on the borrower occurred prior to 2008, 23.3%
related to loans that had additional modifications subsequent to
their initial TDRs, and all related to loans that were on
non-accrual status as of December 31, 2010. We recognized
approximately $2.8 million of interest income for the year
ended December 31, 2010 on the commercial loans that
experienced losses during this period.
Of the additional losses recognized on commercial loan TDRs
since their initial restructuring for year ended
December 31, 2009, 1.8% related to loans for which the
initial TDR on the borrower occurred prior to 2008, 73.8%
related to loans that had additional modifications subsequent to
their initial TDRs, and all of the additional losses related to
loans that were on non-accrual status as of December 31,
2009. We recognized approximately $2.8 million of interest
income for the year ended December 31, 2009 on the
commercial loans that experienced losses during this period.
Of the additional losses recognized on commercial loan TDRs
since their initial restructuring for year ended
December 31, 2008, 58.0% related to loans that had
additional modifications subsequent to their initial TDRs, and
all of the additional losses related to loans that were on
non-accrual status as of December 31, 2008. We recognized
approximately $7.8 million of interest income for the year
ended December 31, 2008 on the commercial loans that
experienced losses during this period.
88
Derivative
Counterparty Credit Risk
Derivative financial instruments expose us to credit risk in the
event of nonperformance by counterparties to such agreements.
This risk consists primarily of the termination value of
agreements where we are in a favorable position. Credit risk
related to derivative financial instruments is considered and
provided for separately from the allowance for loan losses. We
manage the credit risk associated with various derivative
agreements through counterparty credit review and monitoring
procedures. We obtain collateral from all counterparties based
on terms stipulated in the collateral support annex. We also
monitor all exposure and collateral requirements daily on a per
counterparty basis. We continually monitor the fair value of
collateral received from counterparties and may request
additional collateral from counterparties or return collateral
pledged as deemed appropriate. Our agreements generally include
master netting agreements whereby the counterparties are
entitled to settle their derivative positions net.
As of December 31, 2010 and 2009, the gross positive fair
value of our derivative financial instruments was
$41.3 million and $14.3 million, respectively. Our
master netting agreements reduced the exposure to this gross
positive fair value by $26.3 million and $13.7 million
as of December 31, 2010 and 2009, respectively. We held
$15.3 million and $0.5 million of collateral against
derivative financial instruments as of December 31, 2010
and 2009, respectively.
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 audited 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.
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 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 21,
Derivative Instruments, in our accompanying audited
consolidated financial statements for the year ended
December 31, 2010.
The estimated changes in net interest income for a twelve-month
period based on changes in the interest rates applied to the
combined portfolios of our segments as of December 31,
2010, were as follows ($ in thousands):
|
|
|
|
|
Rate Change
|
|
|
|
(Basis Points)
|
|
|
|
|
− 100
|
|
$
|
(640
|
)
|
− 50
|
|
|
(88
|
)
|
+ 50
|
|
|
2,727
|
|
+ 100
|
|
|
6,802
|
|
89
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
December 31, 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.
Approximately 49% of the aggregate outstanding principal amount
of our loans had interest rate floors and were accruing interest
as of December 31, 2010. Of the loans with interest rate
floors, approximately 47% 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
December 31, 2010, were as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Percentage of
|
|
|
|
Outstanding
|
|
|
Total Portfolio
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Loans with contractual interest rates:
|
|
|
|
|
|
|
|
|
Below the interest rate floor
|
|
$
|
2,989,300
|
|
|
|
47
|
%
|
Exceeding the interest rate floor
|
|
|
37,187
|
|
|
|
1
|
|
At the interest rate floor
|
|
|
86,849
|
|
|
|
1
|
|
Loans with interest rate floors on non-accrual
|
|
|
258,061
|
|
|
|
4
|
|
Loans with no interest rate floor
|
|
|
2,986,813
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,358,210
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, the outstanding unpaid principal
balance of loans subject to interest rate floors by adjustable
rate index and by the spread between the floor rate and the
fully indexed rate were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basis Points
|
|
|
|
|
|
|
Above Floor
|
|
|
0-100
|
|
|
101-200
|
|
|
201-300
|
|
|
300+
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
1-Month LIBOR
|
|
$
|
15,075
|
|
|
$
|
331,566
|
|
|
$
|
801,876
|
|
|
$
|
366,570
|
|
|
$
|
320,310
|
|
|
$
|
1,835,397
|
|
2-Month LIBOR
|
|
|
|
|
|
|
|
|
|
|
23,663
|
|
|
|
2,163
|
|
|
|
8,099
|
|
|
|
33,925
|
|
3-Month LIBOR
|
|
|
|
|
|
|
22,541
|
|
|
|
262,571
|
|
|
|
151,847
|
|
|
|
28,732
|
|
|
|
465,691
|
|
6-Month LIBOR
|
|
|
|
|
|
|
|
|
|
|
41,106
|
|
|
|
59,681
|
|
|
|
7,869
|
|
|
|
108,656
|
|
Prime
|
|
|
22,112
|
|
|
|
273,500
|
|
|
|
94,011
|
|
|
|
137,046
|
|
|
|
126,143
|
|
|
|
652,812
|
|
Other
|
|
|
|
|
|
|
13,869
|
|
|
|
1,028
|
|
|
|
1,958
|
|
|
|
|
|
|
|
16,855
|
|
Total adjustable rate loans
|
|
|
37,187
|
|
|
|
641,476
|
|
|
|
1,224,255
|
|
|
|
719,265
|
|
|
|
491,153
|
|
|
|
3,113,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loans subject to interest rate floors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
258,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans subject to interest rate floors
|
|
$
|
37,187
|
|
|
$
|
641,476
|
|
|
$
|
1,224,255
|
|
|
$
|
719,265
|
|
|
$
|
491,153
|
|
|
|
3,371,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans not subject to interest rate floors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,986,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,358,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
90
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. For
additional information, see Note 21, Derivative
Instruments and Note 22, Credit Risk, in our
accompanying audited consolidated financial statements for the
year ended December 31, 2010.
Goodwill
Impairment
Goodwill must be allocated to reporting units and tested for
impairment. We test goodwill for impairment at least annually,
and more frequently if events or circumstances, indicate that
there may be justification for conducting an interim test.
Impairment testing is performed at the reporting unit level. The
first step of the annual test is a comparison of the fair value
of each reporting unit to its carrying amount, including
goodwill. If the fair value is less than the carrying value,
then the second step of the test is needed to measure the amount
of potential goodwill impairment. The implied fair value of the
goodwill is calculated and compared with the carrying amount of
goodwill. If the carrying value of goodwill exceeds the implied
fair value of that goodwill, then we would recognize an
impairment loss in the amount of the difference, which would be
recorded as a charge against net (loss) income.
As of December 31, 2010, our annual test for goodwill
impairment on CapitalSource Bank, which represents the reporting
unit level at which goodwill is currently recorded, was
performed by an independent third party valuation specialist.
The valuation specialist employed various approaches to compute
values of CapitalSource Bank, including valuation of comparable
public companies, discounted cash flow analysis, recent merger
and acquisition precedent transactions, and regression analysis
based on return on tangible equity to price/tangible book value.
Critical assumptions that were used as part of these approaches
include the selection of a comparable set of public companies,
the selection of market comparable merger and acquisition
transactions, the discount rate applied to future earnings, and
the potential future earnings of CapitalSource Bank. The range
of values computed in this valuation assessment exceeded
CapitalSource Banks carrying value by 29.8% to 73.0% and,
accordingly, we concluded that goodwill was not impaired as of
December 31, 2010.
The comparable public companies approach yielded the lowest
value in the range of values computed for CapitalSource Bank by
the valuation specialist. For this approach, the valuation
specialist calculated an implied equity valuation based on price
to tangible book value using sixteen comparable banks with
similar characteristics to CapitalSource Bank. Selection of
comparable banks was based on bank size and loan portfolio mix.
To consider the degree of uncertainty in this approach, the
valuation specialist applied +/- 10% to the price to tangible
book value multiple assumption to generate a range of values.
The valuation of CapitalSource Bank may be negatively impacted
by operating losses or a downturn in the economy causing banks
to trade at reduced multiples of price to tangible book value.
We will continue to test goodwill for impairment at least
annually, and more frequently if events or circumstances, such
as adverse changes in the business climate, indicate that there
may be justification for conducting an interim test.
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
audited consolidated financial statements in conformity with
GAAP requires management to make certain judgments and
assumptions based on information that is available at the time
of the financial statements in determining accounting estimates
used in the preparation of such statements. Our significant
accounting policies are described in Note 2, Summary of
Significant Accounting Policies, in our audited consolidated
financial statements for the year ended December 31, 2010,
and our critical accounting estimates are described in this
section. 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
91
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.
Allowance
for Loan Losses
The allowance for loan losses is managements estimate of
probable losses inherent in the loan and lease portfolio.
Management performs detailed reviews of the portfolio quarterly
to determine if impairment has occurred and to assess the
adequacy of the allowance for loan losses, based on historical
and current trends and other factors affecting loan losses.
Additions to the allowance for loan losses are charged to
current period earnings through the provision for loan losses.
Amounts determined to be uncollectible are charged directly
against the allowance for loan losses, while amounts recovered
on previously charged-off accounts increase the allowance.
The loan portfolio includes balances with non-homogeneous
exposures. These loans are evaluated individually, and are
risk-rated based upon borrower, collateral and industry-specific
information that management believes is relevant to determining
the occurrence of a loss event and measuring impairment. Loans
are then segregated by risk according to our internal risk
rating scale. Higher risk loans are individually analyzed for
impairment. Management establishes specific allowances for loans
determined to be individually impaired. All impaired loans are
valued to determine if a specific allowance is warranted. The
valuation analysis for the specific allowance is based upon one
of the three valuation methods (i) the present value of
expected future cash flows discounted at the loans
initially contracted effective yield; (ii) the loans
observable market price; or (iii) the fair value of the
collateral. The appropriate valuation methodology generally
reflects the chosen loan resolution strategy being pursued to
maximize the loan recovery. Estimated costs to sell are
considered in the impairment valuation when such costs are
expected to reduce the cash flows available to repay or
otherwise satisfy the loan. Any guarantees provided by the
borrower are typically not considered when determining our
potential for specific loss.
In addition to the specific allowances for impaired loans, we
maintain allowances that are based on an evaluation of inherent
losses in our commercial loan portfolio. These allowances are
based on an analysis of historical loss experience, current
economic conditions and performance trends and any other
pertinent information within specific portfolio segments.
As set forth in detail below, the process for determining the
reserve factors and the related level of loan loss reserves is
subject to numerous estimates and assumptions that require
judgment about the timing, frequency and severity of credit
losses that could materially affect the provision for loan
losses and, therefore, net income. Within this process,
management is required to make judgments related, but not
limited, to: (i) risk ratings for loans; (ii) market
and collateral values and discount rates for individually
evaluated loans; (iii) loss rates used for commercial
loans; and (iv) adjustments made to assess certain factors,
including overall credit and economic conditions.
Our allowance for loan losses is sensitive to the risk ratings
assigned to loans and to corresponding reserve factors that we
use to estimate the allowance and that are reflective of
historical losses. We assign reserve factors to the loans in our
portfolio, which dictate the percentage of the total outstanding
loan balance that we reserve. We review the loan portfolio
information regularly to determine whether it is necessary for
us to further revise our reserve factors. The reserve factors
used in the calculation are determined by analyzing the
following elements:
|
|
|
|
|
the types of loans, for example, land, commercial real estate,
healthcare receivables or cash flow;
|
|
|
|
our historical losses with regard to the loan types;
|
|
|
|
borrower industry;
|
|
|
|
the relative seniority of our security interest;
|
92
|
|
|
|
|
our expected losses with regard to the loan types; and
|
|
|
|
the internal credit rating assigned to the loans.
|
We update these reserve factors periodically to capture actual
and recent behavioral characteristics of the portfolios. We
estimate the allowance by applying historical loss factors
derived from loss tracking mechanisms associated with actual
portfolio activity over a specified period of time. These
estimates are adjusted when necessary based on additional
analysis of long-term average loss experience, external loan
loss data and other risks identified from current and expected
credit market conditions and trends, including managements
judgment for estimated inaccuracy and uncertainty.
We also consider the need for qualitative factors which we use
to provide for uncertainties surrounding our estimation process
including changes in the volume of our problem loans, changes in
the value of collateral for our collateral dependent loans, and
the existence of certain loan concentrations.
The sensitivity of our allowance for loan losses to potential
changes in our reserve factors (in terms of percentage) applied
to our overall loan portfolio as of December 31, 2010, was
as follows:
|
|
|
|
|
|
|
Estimated Increase
|
|
|
(Decrease) in the
|
Change in Reserve Factors
|
|
Allowance for Loan Losses
|
|
|
($ in thousands)
|
|
0.25%
|
|
$
|
17,380
|
|
0.10%
|
|
|
6,952
|
|
(0.10)%
|
|
|
(6,902
|
)
|
(0.25)%
|
|
|
(16,944
|
)
|
These sensitivity analyses do not represent managements
expectations of the deterioration, or improvement, in risk
ratings, but are provided as hypothetical scenarios to assess
the sensitivity of the allowance for loan losses to changes in
key inputs. We believe the reserve factors currently in use are
appropriate. The process of determining the level of allowance
for loan losses involves a high degree of judgment. If our
internal credit ratings, reserve factors or specific reserves
for impaired loans are not accurate, our allowance for loan
losses may be misstated. In addition, our operating results are
sensitive to changes in the reserve factors utilized to
determine our related provision for loan losses.
We also consider whether losses might be incurred in connection
with unfunded commitments to lend although, in making this
assessment, we exclude from consideration those commitments for
which funding is subject to our approval based on the adequacy
of underlying collateral that is required to be presented by a
borrower or other terms and conditions.
For detailed analysis on the historical loan loss experience and
the roll-forwards of the allowance for loan losses for the last
five fiscal years, see Table 9, Summary of Loan Loss
Experience, within the Statistical Disclosures
included in Item 1, Business of this
Form 10-K.
Fair
Value Measurements
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability (i.e., the
exit price) in an orderly transaction between market
participants at the measurement date.
In accordance with GAAP, we prioritize the inputs into valuation
techniques used to measure fair value. This hierarchy,
consisting of three levels of inputs, prioritizes observable
data from active markets and gives the lowest priority to
unobservable inputs. Assets and liabilities that are actively
traded in the marketplace or that have values based on readily
available market value data require little, if any, subjectivity
to be applied when determining the fair value. These are
classified as either Level 1 or Level 2. Whether an
asset or liability is classified as Level 1 or Level 2
depends largely on its similarity with other items in the
marketplace and our ability to obtain corroborative data
regarding whether the market in which the instrument trades is
active. Fair value measurements on assets and liabilities that
are based on prices or valuation techniques that require inputs
that are both unobservable and are significant to the overall
measurement are classified as level 3.
93
As of December 31, 2010, 16.56% and 1.06% of total assets
and total liabilities, respectively, were recorded at fair value
on a recurring basis. Of these assets carried at fair value on a
recurring basis, $0.3 million (0.003% of total assets) were
classified as Level 1, $1.6 billion (16.43% of total
assets) were classified as Level 2 and $12.5 million
(0.13% of total assets) were classified as Level 3 as of
December 31, 2010. From a liability perspective,
$78.3 million (1.06% of total liabilities) were classified
as Level 2 as of December 31, 2010. As of
December 31, 2010, no liabilities were classified as
Level 1 or Level 3 within the fair value hierarchy.
It is our policy to maximize the use of observable market based
inputs, when appropriate, to value our assets and liabilities
carried at fair value on a recurring basis or to determine
whether an adjustment to fair value is needed for assets and
liabilities carried at fair value on a non-recurring basis.
Given the nature of some of our assets carried at fair value,
whether on a recurring or nonrecurring basis, clearly
determinable market based valuation inputs are often not
available. Therefore, the fair value measurements of these
instruments utilize unobservable inputs and are classified as
Level 3 within the fair value hierarchy. We may be required
to apply significant judgments in determining our fair value
estimates for these assets.
Due to the unavailability of observable inputs for our
Level 3 assets, management assumptions used in the
valuation models play a significant role in these fair value
estimates. In times of severe market volatility and illiquidity,
there may be more uncertainty and variability with lack of
market data to use in the valuation process. An illiquid market
is one in which little or no observable activity has occurred or
one that lacks willing buyers. To factor in market illiquidity,
management makes adjustments to certain inputs in the valuation
models and makes other assumptions to ensure fair values are
reasonable and reflect current market conditions.
Fair value is a market-based measure considered from the
perspective of a market participant who holds the asset or owes
the liability rather than an entity-specific measurement.
Therefore, even when market assumptions are not readily
available, managements own assumptions are set to reflect
those that market participants would use in pricing the asset or
liability at the measurement date. For additional information,
see Note 23, Fair Value Measurements, in our
accompanying audited consolidated financial statements for the
year ended December 31, 2010.
The estimates of fair values reflect our best judgments
regarding the appropriate valuation methods and assumptions that
market participants would use in determining fair value. The
amount of judgment involved in estimating the fair value of an
asset or liability is affected by a number of factors, such as
the type of instrument, the liquidity of the markets for the
instrument and the contractual characteristics of the
instrument. The selection of a method to estimate fair value for
each type of financial instrument depends on the reliability and
availability of relevant market data. Judgments in these cases
include, but are not limited to:
|
|
|
|
|
Selection of third-party market data sources;
|
|
|
|
Evaluation of the expected reliability of the estimate;
|
|
|
|
Reliability, timeliness and cost of alternative valuation
methodologies; and
|
|
|
|
Selection of proxy instruments, as necessary.
|
Due to the lack of observability of significant inputs, we must
make assumptions in deriving our valuation inputs based on
relevant empirical data surrounding interest rates, asset
prices, timing of future cash flows and credit performance. In
addition, assumptions must be made to reflect constraints on
liquidity, counterparty credit quality and other unobservable
factors. Imprecision surrounding our assumptions related to
unobservable market inputs may impact the fair value of our
assets and liabilities. Furthermore, use of different methods to
derive the fair value of our assets and liabilities could result
in different fair value estimates at the measurement date.
We record, on a recurring basis, fair value adjustments on our
loans held for investment when we have determined that it is
necessary to record a specific reserve against the loans. To
measure the required specific reserve for loans that are
collateral dependent, we utilize the fair value of collateral,
less costs to sell. During the year ended December 31,
2010, we recognized losses of $153.3 million related to our
loans held for investment measured at fair value on a
nonrecurring basis. These losses were attributable to an
increased number of loans requiring a specific reserve during
the year, as well as declines in the fair value of collateral
for these loans.
94
Income
Taxes
We are subject to the income tax laws of the United States, its
states and municipalities and the foreign jurisdictions in which
we operate. These tax laws are complex and subject to different
interpretations by the taxpayer and the relevant governmental
taxing authorities. In establishing a provision for income tax
expense, we must make judgments and interpretations about the
application of these inherently complex tax laws. We must also
make estimates about when, in the future, certain items will
affect taxable income in the various tax jurisdictions, both
domestic and foreign.
Disputes over interpretations of the tax laws may be subject to
review/adjudication by the court systems of the various tax
jurisdictions or may be settled with the taxing authority upon
examination or audit.
We provide for income taxes as a C corporation on
income earned from operations. For the tax years ended
December 31, 2010 and 2009, our subsidiaries were not able
to participate in the filing of a consolidated federal tax
return. As a result, certain subsidiaries had taxable income
that was not offset by taxable losses or loss carryforwards of
other entities. We plan to reconsolidate our subsidiaries for
federal tax purposes starting in 2011. We are subject to
federal, foreign, state and local taxation in various
jurisdictions.
We use the asset and liability method of accounting. Under the
asset and liability 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.
From 2006 through 2008, we operated as a real estate investment
trust (REIT). Effective January 1, 2009, we
revoked our REIT election and recognized the deferred tax
effects in our audited consolidated financial statements as of
December 31, 2008. During the period we operated as a REIT,
we were generally not subject to federal income tax at the REIT
level on our net taxable income distributed to shareholders, but
we were subject to federal corporate-level tax on the net
taxable income of our taxable REIT subsidiaries, and we were
subject to taxation in various foreign, state and local
jurisdictions. In addition, we were required to distribute at
least 90% of our REIT taxable income to our shareholders and
meet various other requirements imposed by the Internal Revenue
Code (the Code), through actual operating results,
asset holdings, distribution levels, and diversity of stock
ownership.
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 earnings trends and the timing
of reversals of temporary differences.
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
December 31, 2010 and 2009, the total valuation allowance
was $413.8 million and $385.9 million, respectively.
Although realization is not assured, we believe it is more
likely than not that the December 31, 2010 net
deferred tax assets of $97.5 million 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
95
term tax exempt rate and (b) the value of the relevant
taxable entitys capital stock immediately before the
ownership change. These change of ownership rules generally
focus on ownership changes involving stockholders owning
directly or indirectly 5% or more of a companys
outstanding stock, including certain public groups of
stockholders as set forth under Section 382 of the Code,
and those arising from new stock issuances and other equity
transactions. The determination of whether an ownership change
occurs is complex and not entirely within our control. No
assurance can be given as to whether we have undergone, or in
the future will undergo, an ownership change under
Section 382 of the Code.
During the years ended December 31, 2010 and 2009, we
recorded $20.8 million of income tax benefit and
$136.3 million of income tax expense, respectively, with
respect to our income from continuing operations. The effective
income tax rate for these periods was 12.9% and (17.6)%,
respectively.
We file income tax returns with the United States and various
state, local and foreign jurisdictions and generally remain
subject to examinations by these tax jurisdictions for tax years
2006 through 2009. In 2008, we settled an Internal Revenue
Service examination for the tax years 2005 and 2004 and in 2009
and 2008, we settled certain state examinations for the tax
years 2005, 2004 and 2003. In connection with the settlement and
conclusion of these examinations, we incurred penalty and
interest expense of $1.0 million in 2009 and paid taxes in
the amount of $4.3 million and $16.7 million in 2009
and 2008, respectively. We are currently under examination by
the Internal Revenue Service and certain states for the tax
years 2006 to 2008.
|
|
ITEM 7A.
|
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. In addition, for a
detailed discussion of our derivatives, see Note 21,
Derivative Instruments and Note 22, Credit
Risk, in an accompanying audited consolidated financial
statements for the year ended December 31, 2010.
96
MANAGEMENT
REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
The management of CapitalSource Inc. (CapitalSource)
is responsible for establishing and maintaining adequate
internal control over financial reporting. CapitalSources
internal control system was designed to provide reasonable
assurance to CapitalSources management and board of
directors regarding the preparation and fair presentation of
published financial statements.
All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
CapitalSources management assessed the effectiveness of
the companys internal control over financial reporting as
of December 31, 2010. In making this assessment, it used
the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control Integrated Framework. Based on such
assessment management believes that, as of December 31,
2010, the companys internal control over financial
reporting is effective based on those criteria.
CapitalSources independent registered public accounting
firm, Ernst & Young LLP, has issued an audit report on
the effectiveness of the Companys internal control over
financial reporting. This report appears on page 98.
97
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Shareholders of CapitalSource Inc.
We have audited CapitalSource Inc.s
(CapitalSource) internal control over financial
reporting as of December 31, 2010, based on criteria
established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). CapitalSources
management is responsible for maintaining effective internal
control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting
included in the accompanying Management Report on Internal
Controls over Financial Reporting. Our responsibility is to
express an opinion on the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, CapitalSource Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2010, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of CapitalSource Inc. as of
December 31, 2010 and 2009, and the related consolidated
statements of operations, shareholders equity, and cash
flows for each of the three years in the period ended
December 31, 2010 and our report dated February 28,
2011 expressed an unqualified opinion thereon.
/s/ Ernst &
Young LLP
McLean, Virginia
February 28, 2011
98
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Index to
Consolidated Financial Statements
For the Years Ended December 31, 2010, 2009 and
2008
99
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of CapitalSource Inc.
We have audited the consolidated balance sheets of CapitalSource
Inc. (CapitalSource) as of December 31, 2010
and 2009, and the related consolidated statements of operations,
shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2010. These
financial statements are the responsibility of
CapitalSources management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of CapitalSource Inc. at December 31,
2010 and 2009, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2010, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
CapitalSources internal control over financial reporting
as of December 31, 2010, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated February 28, 2011 expressed an
unqualified opinion thereon.
/s/ Ernst &
Young LLP
McLean, Virginia
February 28, 2011
100
CapitalSource
Inc.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands, except share amounts)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
820,450
|
|
|
$
|
1,171,195
|
|
Restricted cash (including $46.5 million and
$98.1 million, respectively, of cash that can only be used
to settle obligations of consolidated VIEs)
|
|
|
128,586
|
|
|
|
168,468
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value
|
|
|
1,522,911
|
|
|
|
960,591
|
|
Held-to-maturity,
at amortized cost
|
|
|
184,473
|
|
|
|
242,078
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
1,707,384
|
|
|
|
1,202,669
|
|
Commercial real estate A Participation Interest, net
|
|
|
|
|
|
|
530,560
|
|
Loans:
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
205,334
|
|
|
|
670
|
|
Loans held for investment
|
|
|
6,152,876
|
|
|
|
8,281,570
|
|
Less deferred loan fees and discounts
|
|
|
(106,438
|
)
|
|
|
(146,329
|
)
|
Less allowance for loan losses
|
|
|
(329,122
|
)
|
|
|
(586,696
|
)
|
|
|
|
|
|
|
|
|
|
Loans held for investment, net (including $889.7 million
and $3.1 billion, respectively, of loans that can only be
used to settle obligations of consolidated VIEs)
|
|
|
5,717,316
|
|
|
|
7,548,545
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
5,922,650
|
|
|
|
7,549,215
|
|
Interest receivable
|
|
|
57,393
|
|
|
|
87,647
|
|
Other investments
|
|
|
71,889
|
|
|
|
96,517
|
|
Goodwill
|
|
|
173,135
|
|
|
|
173,135
|
|
Other assets
|
|
|
563,920
|
|
|
|
656,994
|
|
Assets of discontinued operations, held for sale
|
|
|
|
|
|
|
624,650
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
9,445,407
|
|
|
$
|
12,261,050
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
4,621,273
|
|
|
$
|
4,483,879
|
|
Credit facilities
|
|
|
67,508
|
|
|
|
542,781
|
|
Term debt (including $693.5 million and $2.7 billion,
respectively, in obligations of consolidated VIEs for which
there is no recourse to the general credit of CapitalSource Inc.)
|
|
|
979,254
|
|
|
|
2,956,536
|
|
Other borrowings
|
|
|
1,375,884
|
|
|
|
1,204,074
|
|
Other liabilities
|
|
|
347,546
|
|
|
|
363,293
|
|
Liabilities of discontinued operations
|
|
|
|
|
|
|
527,228
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
7,391,465
|
|
|
|
10,077,791
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock (50,000,000 shares authorized; no shares
outstanding)
|
|
|
|
|
|
|
|
|
Common stock ($0.01 par value, 1,200,000,000 shares
authorized; 323,225,355 and 323,042,613 shares issued and
outstanding, respectively)
|
|
|
3,232
|
|
|
|
3,230
|
|
Additional paid-in capital
|
|
|
3,911,341
|
|
|
|
3,909,364
|
|
Accumulated deficit
|
|
|
(1,870,572
|
)
|
|
|
(1,748,822
|
)
|
Accumulated other comprehensive income, net
|
|
|
9,941
|
|
|
|
19,361
|
|
|
|
|
|
|
|
|
|
|
Total CapitalSource Inc. shareholders equity
|
|
|
2,053,942
|
|
|
|
2,183,133
|
|
Noncontrolling interests
|
|
|
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,053,942
|
|
|
|
2,183,259
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
9,445,407
|
|
|
$
|
12,261,050
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
101
CapitalSource
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands, except per share data)
|
|
|
Net interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
576,526
|
|
|
$
|
806,336
|
|
|
$
|
1,047,501
|
|
Investment securities
|
|
|
61,648
|
|
|
|
60,959
|
|
|
|
138,102
|
|
Other
|
|
|
1,467
|
|
|
|
4,651
|
|
|
|
23,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
639,641
|
|
|
|
871,946
|
|
|
|
1,209,469
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
60,052
|
|
|
|
109,430
|
|
|
|
76,245
|
|
Borrowings
|
|
|
172,044
|
|
|
|
317,882
|
|
|
|
601,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
232,096
|
|
|
|
427,312
|
|
|
|
677,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
407,545
|
|
|
|
444,634
|
|
|
|
531,762
|
|
Provision for loan losses
|
|
|
307,080
|
|
|
|
845,986
|
|
|
|
593,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision for loan losses
|
|
|
100,465
|
|
|
|
(401,352
|
)
|
|
|
(61,284
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
122,077
|
|
|
|
139,607
|
|
|
|
143,401
|
|
Professional fees
|
|
|
36,466
|
|
|
|
56,932
|
|
|
|
52,578
|
|
Other administrative expenses
|
|
|
70,011
|
|
|
|
80,964
|
|
|
|
58,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
228,554
|
|
|
|
277,503
|
|
|
|
254,600
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on investments, net
|
|
|
54,059
|
|
|
|
(30,724
|
)
|
|
|
(73,569
|
)
|
Loss on derivatives
|
|
|
(8,644
|
)
|
|
|
(13,055
|
)
|
|
|
(41,082
|
)
|
Gain (loss) on residential mortgage investment portfolio
|
|
|
|
|
|
|
15,308
|
|
|
|
(102,779
|
)
|
Gain (loss) on extinguishment of debt
|
|
|
925
|
|
|
|
(40,514
|
)
|
|
|
58,856
|
|
Net expense of real estate owned and other foreclosed assets
|
|
|
(110,814
|
)
|
|
|
(47,769
|
)
|
|
|
(19,750
|
)
|
Other income, net
|
|
|
31,239
|
|
|
|
21,079
|
|
|
|
35,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(33,235
|
)
|
|
|
(95,675
|
)
|
|
|
(142,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations before income taxes
|
|
|
(161,324
|
)
|
|
|
(774,530
|
)
|
|
|
(458,714
|
)
|
Income tax (benefit) expense
|
|
|
(20,802
|
)
|
|
|
136,314
|
|
|
|
(190,583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(140,522
|
)
|
|
|
(910,844
|
)
|
|
|
(268,131
|
)
|
Net income from discontinued operations, net of taxes
|
|
|
9,489
|
|
|
|
49,868
|
|
|
|
49,350
|
|
Net gain (loss) from sale of discontinued operations, net of
taxes
|
|
|
21,696
|
|
|
|
(8,071
|
)
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(109,337
|
)
|
|
|
(869,047
|
)
|
|
|
(218,677
|
)
|
Net (loss) income attributable to noncontrolling interests
|
|
|
(83
|
)
|
|
|
(28
|
)
|
|
|
1,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to CapitalSource Inc.
|
|
$
|
(109,254
|
)
|
|
$
|
(869,019
|
)
|
|
$
|
(220,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.44
|
)
|
|
$
|
(2.97
|
)
|
|
$
|
(1.07
|
)
|
From discontinued operations
|
|
$
|
0.10
|
|
|
$
|
0.14
|
|
|
$
|
0.20
|
|
Attributable to CapitalSource Inc.
|
|
$
|
(0.34
|
)
|
|
$
|
(2.84
|
)
|
|
$
|
(0.88
|
)
|
Diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.44
|
)
|
|
$
|
(2.97
|
)
|
|
$
|
(1.07
|
)
|
From discontinued operations
|
|
$
|
0.10
|
|
|
$
|
0.14
|
|
|
$
|
0.20
|
|
Attributable to CapitalSource Inc.
|
|
$
|
(0.34
|
)
|
|
$
|
(2.84
|
)
|
|
$
|
(0.88
|
)
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
320,836,867
|
|
|
|
306,417,394
|
|
|
|
251,213,699
|
|
Diluted
|
|
|
320,836,867
|
|
|
|
306,417,394
|
|
|
|
251,213,699
|
|
See accompanying notes.
102
CapitalSource
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Inc. Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Income,
|
|
|
Noncontrolling
|
|
|
Shareholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
net
|
|
|
Interests
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Total shareholders equity as of December 31, 2007
|
|
$
|
2,207
|
|
|
$
|
2,941,329
|
|
|
$
|
(342,466
|
)
|
|
$
|
4,950
|
|
|
|
45,446
|
|
|
$
|
2,651,466
|
|
Conversion of noncontrolling interests into CapitalSource Inc.
common stock
|
|
|
20
|
|
|
|
44,969
|
|
|
|
|
|
|
|
|
|
|
|
(44,989
|
)
|
|
|
|
|
Net (loss) income
|
|
|
|
|
|
|
|
|
|
|
(220,103
|
)
|
|
|
|
|
|
|
1,426
|
|
|
|
(218,677
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,145
|
|
|
|
|
|
|
|
4,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(214,532
|
)
|
Dividends paid
|
|
|
|
|
|
|
4,463
|
|
|
|
(305,856
|
)
|
|
|
|
|
|
|
(1,426
|
)
|
|
|
(302,819
|
)
|
Proceeds from issuance of common stock, net
|
|
|
539
|
|
|
|
601,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
601,586
|
|
Exchange of convertible debt
|
|
|
62
|
|
|
|
73,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,140
|
|
Stock option expense
|
|
|
|
|
|
|
1,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,019
|
|
Exercise of options
|
|
|
1
|
|
|
|
361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
362
|
|
Restricted stock activity
|
|
|
(1
|
)
|
|
|
31,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,139
|
|
Tax benefit on exercise of options
|
|
|
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
|
|
Tax benefit on vesting of restricted stock grants
|
|
|
|
|
|
|
(10,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity as of December 31, 2008
|
|
|
2,828
|
|
|
|
3,686,765
|
|
|
|
(868,425
|
)
|
|
|
9,095
|
|
|
|
457
|
|
|
|
2,830,720
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(869,019
|
)
|
|
|
|
|
|
|
(28
|
)
|
|
|
(869,047
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adoption of investment valuation guidance
|
|
|
|
|
|
|
|
|
|
|
397
|
|
|
|
(397
|
)
|
|
|
|
|
|
|
|
|
Unrealized gain, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,663
|
|
|
|
|
|
|
|
10,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(858,384
|
)
|
Divestiture of noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(303
|
)
|
|
|
(303
|
)
|
Repurchase of common stock
|
|
|
(6
|
)
|
|
|
(794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(800
|
)
|
Dividends paid
|
|
|
|
|
|
|
(724
|
)
|
|
|
(11,775
|
)
|
|
|
|
|
|
|
|
|
|
|
(12,499
|
)
|
Proceeds from issuance of common stock, net
|
|
|
203
|
|
|
|
76,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,105
|
|
Exchange of convertible debt
|
|
|
198
|
|
|
|
118,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118,556
|
|
Stock option expense
|
|
|
|
|
|
|
5,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,898
|
|
Restricted stock activity
|
|
|
7
|
|
|
|
22,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity as of December 31, 2009
|
|
$
|
3,230
|
|
|
$
|
3,909,364
|
|
|
$
|
(1,748,822
|
)
|
|
$
|
19,361
|
|
|
$
|
126
|
|
|
$
|
2,183,259
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(109,254
|
)
|
|
|
|
|
|
|
(83
|
)
|
|
|
(109,337
|
)
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,420
|
)
|
|
|
|
|
|
|
(9,420
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(118,757
|
)
|
Divestiture of noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43
|
)
|
|
|
(43
|
)
|
Repurchase of common stock
|
|
|
(14
|
)
|
|
|
(9,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,942
|
)
|
Dividends paid
|
|
|
|
|
|
|
(455
|
)
|
|
|
(12,496
|
)
|
|
|
|
|
|
|
|
|
|
|
(12,951
|
)
|
Stock option expense
|
|
|
|
|
|
|
4,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,752
|
|
Exercise of options
|
|
|
3
|
|
|
|
1,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,080
|
|
Restricted stock activity
|
|
|
13
|
|
|
|
6,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity as of December 31, 2010
|
|
$
|
3,232
|
|
|
$
|
3,911,341
|
|
|
$
|
(1,870,572
|
)
|
|
$
|
9,941
|
|
|
$
|
|
|
|
$
|
2,053,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
103
CapitalSource
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands)
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(109,337
|
)
|
|
$
|
(869,047
|
)
|
|
$
|
(218,677
|
)
|
Adjustments to reconcile net loss to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
4,752
|
|
|
|
5,898
|
|
|
|
1,019
|
|
Restricted stock expense
|
|
|
9,583
|
|
|
|
24,997
|
|
|
|
42,575
|
|
(Gain) loss on extinguishment of debt
|
|
|
(925
|
)
|
|
|
40,610
|
|
|
|
(58,856
|
)
|
Amortization of deferred loan fees and discounts
|
|
|
(76,810
|
)
|
|
|
(77,534
|
)
|
|
|
(90,967
|
)
|
Paid-in-kind
interest on loans
|
|
|
487
|
|
|
|
(12,676
|
)
|
|
|
15,852
|
|
Provision for loan losses
|
|
|
307,080
|
|
|
|
845,986
|
|
|
|
593,046
|
|
(Benefit) provision for unfunded commitments
|
|
|
(442
|
)
|
|
|
3,704
|
|
|
|
|
|
Amortization of deferred financing fees and discounts
|
|
|
50,926
|
|
|
|
63,538
|
|
|
|
118,140
|
|
Depreciation and amortization
|
|
|
(2,175
|
)
|
|
|
31,701
|
|
|
|
39,457
|
|
Provision (benefit) for deferred income taxes
|
|
|
4,343
|
|
|
|
67,397
|
|
|
|
(152,451
|
)
|
Non-cash (gain) loss on investments, net
|
|
|
(41,670
|
)
|
|
|
31,765
|
|
|
|
82,250
|
|
Gain on assets acquired through business combination
|
|
|
(3,724
|
)
|
|
|
|
|
|
|
|
|
Gain on deconsolidation of
2006-A Trust
|
|
|
(16,723
|
)
|
|
|
|
|
|
|
|
|
Impairment of Parent Company goodwill
|
|
|
|
|
|
|
|
|
|
|
5,344
|
|
Non-cash loss on foreclosed assets and other property and
equipment disposals
|
|
|
70,080
|
|
|
|
46,818
|
|
|
|
17,202
|
|
Unrealized (gain) loss on derivatives and foreign currencies, net
|
|
|
(5,556
|
)
|
|
|
16,721
|
|
|
|
41,093
|
|
Unrealized (gain) loss on residential mortgage investment
portfolio, net
|
|
|
|
|
|
|
(66,676
|
)
|
|
|
50,085
|
|
Net decrease in mortgage-backed securities pledged, trading
|
|
|
|
|
|
|
1,485,144
|
|
|
|
2,559,389
|
|
Amortization of discount on residential mortgage investments
|
|
|
|
|
|
|
|
|
|
|
(8,619
|
)
|
Accretion of discount on commercial real estate A
participation interest
|
|
|
(9,548
|
)
|
|
|
(29,781
|
)
|
|
|
(23,777
|
)
|
Decrease (increase) in interest receivable
|
|
|
31,196
|
|
|
|
(18,313
|
)
|
|
|
33,983
|
|
Decrease in loans held for sale, net
|
|
|
9,378
|
|
|
|
20,936
|
|
|
|
269,983
|
|
Decrease (increase) in other assets
|
|
|
99,310
|
|
|
|
458,583
|
|
|
|
(483,124
|
)
|
(Decrease) increase in other liabilities
|
|
|
(19,649
|
)
|
|
|
(199,075
|
)
|
|
|
123,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
|
300,576
|
|
|
|
1,870,696
|
|
|
|
2,956,890
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
|
53,656
|
|
|
|
237,141
|
|
|
|
94,420
|
|
Decrease in mortgage-related receivables, net
|
|
|
|
|
|
|
1,754,555
|
|
|
|
214,298
|
|
Decrease in commercial real estate A participation
interest, net
|
|
|
540,108
|
|
|
|
895,832
|
|
|
|
447,804
|
|
Assets acquired through business combination, net of cash
acquired
|
|
|
(98,800
|
)
|
|
|
|
|
|
|
|
|
Cash received from
2006-A Trust
delegation and sale transaction
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
Acquisition of CS Advisors CLO II
|
|
|
|
|
|
|
|
|
|
|
(18,619
|
)
|
Decrease (increase) in loans, net
|
|
|
1,345,895
|
|
|
|
462,036
|
|
|
|
(63,049
|
)
|
Cash received (paid) for real estate
|
|
|
339,643
|
|
|
|
292,837
|
|
|
|
(10,121
|
)
|
Acquisition of marketable securities, available for sale, net
|
|
|
(558,399
|
)
|
|
|
(241,018
|
)
|
|
|
(639,116
|
)
|
Reduction (acquisition) of marketable securities, held to
maturity, net
|
|
|
75,643
|
|
|
|
(213,048
|
)
|
|
|
|
|
Reduction (acquisition) of other investments, net
|
|
|
85,488
|
|
|
|
19,612
|
|
|
|
(48,956
|
)
|
Net cash acquired in FIL transaction
|
|
|
|
|
|
|
|
|
|
|
3,187,037
|
|
Acquisition of property and equipment, net
|
|
|
(6,600
|
)
|
|
|
(18,537
|
)
|
|
|
(5,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by investing activities
|
|
|
1,783,634
|
|
|
|
3,189,410
|
|
|
|
3,158,104
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(21,968
|
)
|
|
|
(45,573
|
)
|
|
|
(75,931
|
)
|
Deposits accepted, net of repayments
|
|
|
137,699
|
|
|
|
(560,497
|
)
|
|
|
(126,773
|
)
|
Repayments under repurchase agreements, net
|
|
|
|
|
|
|
(1,595,750
|
)
|
|
|
(2,314,277
|
)
|
Repayments on credit facilities, net
|
|
|
(463,920
|
)
|
|
|
(910,281
|
)
|
|
|
(912,276
|
)
|
Borrowings of term debt
|
|
|
14,784
|
|
|
|
326,449
|
|
|
|
56,108
|
|
Repayments and extinguishment of term debt
|
|
|
(1,988,592
|
)
|
|
|
(2,698,918
|
)
|
|
|
(1,808,720
|
)
|
(Repayments) borrowings under other borrowings, net
|
|
|
(99,277
|
)
|
|
|
199,071
|
|
|
|
(74,177
|
)
|
Proceeds from issuance of common stock, net of offering costs
|
|
|
|
|
|
|
77,105
|
|
|
|
601,755
|
|
Repurchase of common stock
|
|
|
(7,635
|
)
|
|
|
(800
|
)
|
|
|
|
|
Proceeds from exercise of options
|
|
|
1,080
|
|
|
|
|
|
|
|
362
|
|
Tax expense on share-based payments
|
|
|
|
|
|
|
|
|
|
|
(10,641
|
)
|
Payment of dividends
|
|
|
(12,951
|
)
|
|
|
(12,455
|
)
|
|
|
(290,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in financing activities
|
|
|
(2,440,780
|
)
|
|
|
(5,221,649
|
)
|
|
|
(4,955,130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(356,570
|
)
|
|
|
(161,543
|
)
|
|
|
1,159,864
|
|
Cash and cash equivalents as of beginning of year
|
|
|
1,177,020
|
|
|
|
1,338,563
|
|
|
|
178,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end of year
|
|
$
|
820,450
|
|
|
$
|
1,177,020
|
|
|
$
|
1,338,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
208,344
|
|
|
$
|
405,524
|
|
|
$
|
641,312
|
|
Income taxes, net
|
|
|
(17,347
|
)
|
|
|
(146,114
|
)
|
|
|
65,992
|
|
Noncash transactions from investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-party assumption of debt
|
|
$
|
203,679
|
|
|
$
|
|
|
|
$
|
|
|
Assets acquired through foreclosure
|
|
|
130,034
|
|
|
|
219,745
|
|
|
|
127,315
|
|
Stock received from Omega Healthcare Investors Inc.
|
|
|
|
|
|
|
50,561
|
|
|
|
|
|
Note receivable issued to Omega Healthcare Investors Inc.
|
|
|
|
|
|
|
59,354
|
|
|
|
|
|
Exchange of common stock for convertible debentures
|
|
|
|
|
|
|
61,618
|
|
|
|
44,880
|
|
Assumption of FIL assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
3,292,185
|
|
Assumption of note payable
|
|
|
|
|
|
|
|
|
|
|
25,729
|
|
Acquisition of real estate
|
|
|
|
|
|
|
|
|
|
|
2,120
|
|
Conversion of noncontrolling interests into common stock
|
|
|
|
|
|
|
|
|
|
|
44,989
|
|
Dividends declared but not paid
|
|
|
|
|
|
|
|
|
|
|
13,827
|
|
See accompanying notes.
104
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
References to we, us, the Company or CapitalSource refer to
CapitalSource Inc. together with its subsidiaries. References to
CapitalSource Bank include its subsidiaries, and references to
Parent Company refer to CapitalSource Inc. and its subsidiaries
other than CapitalSource Bank.
We are a commercial lender that, 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. As of December 31, 2010, we had 1,401
loans outstanding, with an aggregate outstanding principal
balance of $6.4 billion. Included in the loan portfolio are
certain loans shared between CapitalSource Bank and the Parent
Company.
Our primary commercial lending products and depository products
and services include:
|
|
|
|
|
Senior Secured Loans. We make senior secured,
asset-based, real estate and cash flow loans, which have a first
priority lien in the collateral securing the loan. Asset-based
loans are collateralized by specified assets of the client,
generally the clients accounts receivable, inventory
and/or
machinery. Real estate loans are secured by senior mortgages on
real property. We make cash flow loans based on our assessment
of a clients ability to generate cash flows sufficient to
repay the loan and to maintain or increase its enterprise value
during the term of the loan. Our cash flow loans generally are
secured by a security interest in all or substantially all of a
clients assets.
|
|
|
|
Depository Products and Services. Through
CapitalSource Banks 21 branches in southern and central
California, we provide savings and money market accounts,
individual retirement account products and certificates of
deposit. These products are insured up to the maximum amounts
permitted by the Federal Deposit Insurance Corporation
(FDIC).
|
For the year ended December 31, 2010, we operated as two
reportable segments: 1) CapitalSource Bank and
2) Other Commercial Finance. For the years ended
December 31, 2009 and 2008, 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. We have reclassified all
comparative period results to reflect our two current reportable
segments. For additional information, see Note 24,
Segment Data.
|
|
Note 2.
|
Summary
of Significant Accounting Policies
|
Our financial reporting and accounting policies conform to
U.S. generally accepted accounting principles
(GAAP).
Use of
Estimates
The preparation of our audited consolidated financial statements
in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of income and expenses during the reporting period. Management
has made significant estimates in certain areas, including
valuing certain financial instruments and other assets,
assessing financial instruments and other assets for
105
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
impairment, assessing the realization of deferred tax assets and
determining the allowance for loan losses. Actual results could
differ from those estimates.
Principles
of Consolidation
The accompanying financial statements reflect our consolidated
accounts and those of other entities in which we have a
controlling financial interest including our majority-owned
subsidiaries and variable interest entities (VIEs)
where we determined that we are the primary beneficiary. All
significant intercompany accounts and transactions have been
eliminated.
Discontinued
Operations
In June 2010, we completed the sale of our remaining long-term
healthcare facilities and exited the skilled nursing home
ownership business. Accordingly, the financial position and
results of operations of these direct real estate investments
have been removed from the detail line items and separately
presented as discontinued operations. As a result,
all consolidated financial results reflect the continuing
results of our operations. For additional information, see
Note 3, Discontinued Operations.
Fair
Value Measurements
In accordance with GAAP, we prioritize the inputs into valuation
techniques used to measure fair value. This hierarchy
prioritizes observable data from active markets, placing
measurements using those inputs in Level 1 of the fair
value hierarchy, and gives the lowest priority to unobservable
inputs and classifies these as Level 3 measurements. The
three levels of the fair value hierarchy are described below:
Level 1 Valuations based on unadjusted quoted
prices in active markets for identical assets or liabilities
that we have the ability to access at the measurement date;
Level 2 Valuations based on quoted prices for
similar instruments in active markets, quoted prices for
identical or similar instruments in markets that are not active
or models for which all significant inputs are observable in the
market either directly or indirectly; and
Level 3 Valuations based on models that use
inputs that are unobservable in the market and significant to
the overall fair value measurement.
A financial instruments level within the fair value
hierarchy is based on the lowest level of any input that is
significant to the fair value measurement. Fair value hierarchy
classifications are reviewed on a quarterly basis. Changes
related to the observability of inputs to a fair value
measurement may result in a reclassification between hierarchy
levels.
Fair value is a market-based measure considered from the
perspective of a market participant who holds the asset or owes
the liability rather than an entity-specific measurement.
Therefore, even when market assumptions are not readily
available, managements own assumptions attempt to reflect
those that market participants would use in pricing the asset or
liability at the measurement date. For additional information,
see Note 23, Fair Value Measurements.
Cash
and Cash Equivalents
We consider all highly liquid investments with original
maturities of three months or less to be cash equivalents. For
the purpose of reporting cash flows, cash and cash equivalents
include amounts due from banks, U.S. Treasury securities,
short-term investments and commercial paper with an original
maturity of three months or less.
106
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Loans
Loans held for investment in our portfolio are recorded at the
principal amount outstanding, net of deferred loan costs or fees
and any discounts received or premiums paid on purchased loans.
Deferred costs or fees, discounts and premiums are amortized
over the contractual term of the loan.
Loans held for sale are accounted for at the lower of cost or
fair value, which is determined on an individual loan basis, and
include loans we originated or purchased that we intend to sell,
in whole or in part, in the secondary market. Direct loan
origination costs or fees, discounts and premiums are deferred
at origination of the loan and not amortized into income.
As part of our management of the loans held in our portfolio, we
will occasionally transfer loans from held for investment to
held for sale. Upon transfer, any associated allowance for loan
loss is charged-off and the carrying value of the loans is
adjusted to the estimated fair value less costs to sell. The
loans are subsequently accounted for at the lower of cost or
fair value, with valuation changes recorded in other income, net
in our audited consolidated statements of operations. Gains or
losses on the sale of these loans are also recorded in other
income, net in our audited consolidated statements of
operations. In certain circumstances, loans designated as held
for sale may later be transferred back to the loan portfolio
based upon our intent and ability to hold the loans for the
foreseeable future. We transfer these loans to loans held for
investment at the lower of cost or fair value.
Credit
Quality
Credit risk within our loan portfolio is the risk of loss
arising from adverse changes in a clients or
counterpartys ability to meet its financial obligations
under
agreed-upon
terms. 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 use a variety of tools to continuously monitor a
clients 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.
Credit risk management for the loan portfolio begins with an
assessment of the credit risk profile of a client based on an
analysis of the clients payment performance, cash flow and
financial position. As part of the overall credit risk
assessment of a client, each commercial credit exposure is
assigned an internal 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 financial condition, cash flow or
financial position. We use risk rating aggregations to measure
and evaluate concentrations within the loan portfolio. In making
decisions regarding credit, we consider risk rating, collateral,
and, industry concentration limits.
We believe that the likelihood of not being paid according to
the contractual terms of a loan is, in large part, dependent
upon the assessed level of risk associated with the loan. The
internal rating that is assigned to a loan provides a view as to
the relative risk of each loan. We employ an internal risk
rating scale to establish a view of the credit quality of each
loan. This scale is based on the credit classifications of
assets as prescribed by government regulations and industry
standards.
Allowance
for Loan Losses
Our allowance for loan losses represents managements
estimate of incurred loan losses inherent in our loan and lease
portfolio as of the balance sheet date. The estimation of the
allowance for loan losses is based on a variety of factors,
including past loan loss experience, the current credit profile
of our borrowers, adverse situations that have occurred that may
affect the borrowers ability to repay, the estimated value
of underlying collateral and general economic conditions.
Provisions for loan losses are recognized when available
information indicates that it is probable that a loss has been
incurred and the amount of the loss can be reasonably estimated.
107
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We perform quarterly and systematic detailed reviews of our loan
portfolio to identify credit risks and to assess the overall
collectability of the portfolio. The allowance on certain pools
of loans with similar characteristics is estimated using reserve
factors that are reflective of historical loss rates.
Our portfolio is reviewed regularly, and, on a periodic basis,
individual loans are reviewed and assigned a risk rating. Loans
subject to individual reviews are analyzed and segregated by
risk according to our internal risk rating scale. These risk
ratings, in conjunction with an analysis of historical loss
experience, current economic conditions, industry performance
trends, and any other pertinent information, including
individual valuations on impaired loans, are factored in the
estimation of the allowance for loan losses. The historical loss
experience is updated quarterly to incorporate the most recent
data reflective of the current economic environment.
A loan is considered impaired when, based on current information
and events, it is probable that we will be unable to collect all
amounts due, including principal and interest, according to the
contractual terms of the agreement. Impairment on individual
loans is measured based on the present value of payments
expected to be received, observable market prices for the loan,
or the estimated fair value of the collateral. If the recorded
investment in an impaired loan exceeds the present value of
payments expected to be received or the fair value of the
collateral, a specific allowance is established as a component
of the allowance for loan losses.
When available information confirms that specific loans or
portions thereof are uncollectible, these amounts are charged
off against the allowance for loan losses. To the extent we
later collect amounts previously charged off, we will recognize
a recovery by increasing the allowance for loan losses for the
amount received.
We also consider whether losses may have been incurred in
connection with unfunded commitments to lend. In making this
assessment, we exclude from consideration those commitments for
which funding is subject to our approval based on the adequacy
of underlying collateral that is required to be presented by a
client or other terms and conditions. Reserves for losses
related to unfunded commitments are included within other
liabilities on our audited consolidated balance sheets.
Foreclosed
Assets
Foreclosed assets, includes foreclosed property and other assets
received in full or partial satisfaction of a loan. We recognize
foreclosed assets upon the earlier of the loan foreclosure event
or when we take physical possession of the asset (i.e., through
a deed in lieu of foreclosure transaction). Foreclosed assets
are initially measured at their fair value less estimated cost
to sell. We treat any excess of our recorded investment in the
loan over the fair value less estimated cost to sell the asset
as a charge off to the loan.
Real estate owned (REO) represents property obtained
through foreclosure. REO that we do not intend to sell is
classified separately as held for use, is depreciated and is
recorded in other assets in our audited consolidated balance
sheets. We report REO that we intend to sell, are actively
marketing and that are available for immediate sale in their
current condition as held for sale. These REO are reported at
the lower of their carrying amount or fair value less estimated
selling costs, from the date of foreclosure, and are not
depreciated. The fair value of our REO is determined by third
party appraisals, when available. When third party appraisals
are not available, we estimate fair value based on factors such
as prices for similar properties in similar geographical areas
and/or
assessment through observation of such properties. We recognize
a loss for any subsequent write-down of the REO to its fair
value less its estimated costs to sell through a valuation
allowance with an offsetting charge to net expense of real
estate owned and other foreclosed assets in our audited
consolidated statements of operations. A recovery is recognized
for any subsequent increase in fair value less estimated costs
to sell up to the cumulative loss previously recognized through
the valuation allowance. We recognize REO operating costs and
gains or losses on sales of REO through net expense of real
estate owned and other foreclosed assets in our audited
consolidated statements of operations.
Goodwill
Impairment
Goodwill must be allocated to reporting units and tested for
impairment. We test goodwill for impairment at least annually,
and more frequently if events or circumstances, such as adverse
changes in the business climate,
108
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
indicate that there may be justification for conducting an
interim test. Impairment testing is performed at the reporting
unit level. The first step of the test is a comparison of the
fair value of each reporting unit to its carrying amount,
including goodwill. The fair values of each reporting unit are
determined using either independent third party or internal
valuations. If the fair value is less than the carrying value,
then the second step of the test is needed to measure the amount
of potential goodwill impairment. The implied fair value of the
goodwill is calculated and compared with the carrying amount of
goodwill. If the carrying value of goodwill exceeds the implied
fair value of that goodwill, then we would recognize an
impairment loss in the amount of the difference, which would be
recorded as a charge against net (loss) income.
During the years ended December 31, 2010 and 2009, we did
not record any goodwill impairment. During the year ended
December 31, 2008, we recorded $5.3 million of
goodwill impairment. The balance of goodwill of
$173.1 million as of both December 31, 2010 and 2009
was attributable to the acquisition of CapitalSource Bank and
was not considered to be impaired.
Investments
in Debt Securities and Equity Securities That Have Readily
Determinable Fair Values
All debt securities, as well as all purchased equity securities
that have readily determinable fair values, are classified in
our audited consolidated balance sheets based on
managements intention on the date of purchase. Debt
securities which management has the intent and ability to hold
to maturity are classified as
held-to-maturity
and reported at amortized cost. Debt securities not classified
as
held-to-maturity
or trading, as well as equity investments in publicly traded
entities, are classified as
available-for-sale
and carried at fair value with net unrealized gains and losses
included in accumulated other comprehensive income (loss) on our
audited consolidated balance sheets on an after-tax basis.
Investments
in Equity Securities That Do Not Have Readily Determinable Fair
Values
Purchased common stock or preferred stock that is not publicly
traded
and/or does
not have a readily determinable fair value is accounted for
pursuant to the equity method of accounting if we have the
ability to significantly influence the operating and financial
policies of an investee. This is generally presumed to exist
when we own between 20% and 50% of a corporation, or when we own
greater than 5% of a limited partnership or similarly structured
entity. Our share of earnings and losses in equity method
investees is included in other income, net of expenses in our
audited consolidated statements of operations. If we do not have
this significant influence over the investee, the cost method is
used to account for the equity interest.
For investments accounted for using the cost or equity method of
accounting, management evaluates information such as budgets,
business plans, and financial statements of the investee in
addition to quoted market prices, if any, in determining whether
an
other-than-temporary
decline in value exists. Factors indicative of an
other-than-temporary
decline in value include, but are not limited to, recurring
operating losses and credit defaults. We compare the estimated
fair value of each investment to its carrying value quarterly.
For any of our investments in which the estimated fair value is
less than its carrying value, we consider whether the impairment
of that investment is
other-than-temporary.
If it has been determined that an investment has sustained an
other-than-temporary
decline in its value, the equity interest is written down to its
fair value through gain (loss) on investments, net and a new
carrying value for the investment is established.
Realized gains or losses resulting from the sale of investments
are calculated using the specific identification method and are
included in gain (loss) on investments, net in our audited
consolidated statements of operations.
In situations where we hold both a loan and an equity method
investment in an investee, we will continue to apply our pro
rata share of losses in the investee to the balance of the loan
once the equity investment has been fully written down.
109
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Transfers
of Financial Assets
We account for transfers of loans and other financial assets to
third parties or special purpose entities (SPEs)
that we establish as sales if we determine that we have
relinquished effective control over the transferred assets. In
such transactions, we derecognize the transferred assets,
recognize and measure at fair value any assets obtained and
liabilities assumed, including servicing assets and liabilities
and record a gain or loss on the sale based upon the difference
between the fair value of the assets obtained and liabilities
assumed and the carrying amount of the transferred assets. If we
transfer a portion of a financial asset that qualifies as a
participating interest, we allocate the previous carrying amount
of the entire financial asset between the participating
interests sold and the interest that we continue to hold based
on their relative fair values at the transfer date.
We account for transfers of financial assets in which we receive
cash consideration, but for which we determine that we have not
relinquished control, as secured borrowings.
Investments
in Warrants and Options
In connection with certain lending arrangements, we sometimes
receive warrants or options to purchase shares of common stock
or other equity interests from a client without any payment of
cash in connection with certain lending arrangements. These
investments are initially recorded at their estimated fair
value. The carrying value of the related loan is adjusted to
reflect an original issue discount equal to the estimated fair
value ascribed to the equity interest. Such original issue
discount is accreted to fee income over the contractual life of
the loan in accordance with our income recognition policy.
Warrants and options that are assessed as derivatives are
subsequently measured at fair value through earnings as a
component of gain (loss) on investments, net on our audited
consolidated statements of operations.
Deferred
Financing Fees
Deferred financing fees represent fees and other direct
incremental costs incurred in connection with our borrowings.
These amounts are amortized into income as interest expense over
the estimated life of the borrowing using the interest method.
Property
and Equipment
Property and equipment are stated at cost and depreciated or
amortized using the straight-line method over the following
estimated useful lives:
|
|
|
Buildings and improvements
|
|
10 to 40 years
|
Leasehold improvements
|
|
remaining lease term
|
Computer software
|
|
3 years
|
Equipment
|
|
5 years
|
Furniture
|
|
7 years
|
Income
Recognition on Loans
Interest income, including income on impaired loans, fees due at
maturity and
paid-in-kind
(PIK) interest, is recorded on an accrual basis to
the extent that such amounts are expected to be collected.
Carrying value adjustments of revolving lines of credit are
amortized into interest and fee income over the contractual life
of a loan on a straight line basis, while carrying value
adjustments of all other loans are amortized into earnings over
the contractual life of a loan using the interest method. In
applying the interest method, the effective yield on a loan is
determined based on its contractual payment terms, adjusted for
actual prepayments.
Loan origination fees are deferred and amortized as adjustments
to the related loans yield over the contractual life of
the loan. We do not take loan fees into income when a loan
closes. In connection with the prepayment of a loan, any
remaining unamortized deferred fees for that loan are
accelerated and, depending upon the terms of the
110
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
loan, there may be an additional fee that is charged based upon
the prepayment and recognized in the period of the prepayment.
We accrete any discount from purchased loans into interest
income in accordance with our policies up to the amount of
contractual interest and principal payments expected to be
collected. If management assesses that, upon purchase, a portion
of contractual interest and principal payments are not expected
to be collected, a portion of the discount will not be accreted
(non-accretable difference).
We will place a loan on non-accrual status if there is
substantial doubt about the borrowers ability to service
its debt and other obligations or if the loan is 90 or more days
past due and is not well-secured and in the process of
collection. When a loan is placed on non-accrual status, accrued
and unpaid interest is reversed and the recognition of interest
and fee income on that loan will stop until factors indicating
doubtful collection no longer exist and the loan has been
brought current. Payments received on non-accrual loans are
generally first applied to principal. A loan may be returned to
accrual status when its interest or principal is current,
repayment of the remaining contractual principal and interest is
expected or when the loan otherwise becomes well-secured and is
in the process of collection. Cash payments received from the
borrower and applied to the principal balance of the loan while
the loan was on non-accrual status are not reversed if a loan is
returned to accrual status.
We continue to recognize interest income on loans that have been
identified as impaired, but that have not been placed on
non-accrual status. If the loan is placed on non-accrual status,
accrued and unpaid interest is reversed and the recognition of
interest and fee income on that loan will stop until factors
indicating doubtful collection no longer exist and the loan has
been brought current.
Income
Recognition and Impairment Recognition on
Securities
For our investments in debt securities, we use the interest
method to amortize deferred items, including premiums, discounts
and other basis adjustments, into interest income. For debt
securities representing non-investment grade beneficial
interests in securitizations, the effective yield is determined
based on the estimated cash flows of the security. Changes in
the effective yield of these securities due to changes in
estimated cash flows are recognized on a prospective basis as
adjustments to interest income in future periods. The effective
yield on all other debt securities that have not experienced an
other-than-temporary
impairment is based on the contractual cash flows of the
security.
Declines in the fair value of debt securities classified as
available-for-sale
or
held-to-maturity
are reviewed to determine whether the impairment is
other-than-temporary.
This review considers a number of factors, including the
severity of the decline in fair value, current market
conditions, historical performance of the security, credit
ratings and the length of time the investment has been in an
unrealized loss position. If we do not expect to recover the
entire amortized cost basis of the security, an
other-than-temporary
impairment is considered to have occurred. In assessing whether
the entire amortized cost basis of the security will be
recovered, we compare the present value of cash flows expected
to be collected from the security with its amortized cost. The
present value of cash flows is determined using a discount rate
equal to the effective yield on the security. If the present
value of cash flows expected to be collected is less than the
amortized cost basis of the security, then the impairment is
considered to be
other-than-temporary.
Determination of whether an impairment is
other-than-temporary
requires significant judgment surrounding the collectability of
the investment including such factors as the financial condition
of the issuer, expected prepayments and expected defaults.
When we have determined that an
other-than-temporary
impairment has occurred, we separate the impairment amount into
a component representing the credit loss and a component
representing all other factors. The credit loss component is
recognized in earnings and is determined by discounting the
expected future cash flows of the security by the effective
yield of the security. The previous amortized cost basis less
the credit component of the impairment becomes the new amortized
cost basis of the security. Any remaining impairment,
representing the difference between the new amortized cost of
the security and its fair value is recognized through other
comprehensive income. We also consider impairment of a security
to be
other-than-temporary
if we have the intent to sell the security or it is more likely
than not that we will be required to sell the security before
recovery of its amortized cost
111
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
basis. In these situations, the entire amount of the impairment
represents the credit component and is recognized through
earnings.
In periods following the recognition of an
other-than-temporary
impairment, the difference between the new amortized cost basis
and the cash flows expected to be collected on the security are
accreted as interest income. Any subsequent changes to estimated
cash flows are recognized as prospective adjustments to the
effective yield of the security.
Derivative
Instruments
We enter into derivative contracts primarily to manage the
interest rate risk associated with certain assets, liabilities,
or probable forecasted transactions. As of December 31,
2010 and 2009, all of our derivatives were held for risk
management purposes, and none were designated as accounting
hedges.
Our derivatives are recorded in other assets or other
liabilities, as appropriate, on our audited consolidated balance
sheets. The changes in fair value of our derivatives and the
related interest accrued are recognized in other income, net of
expenses on our audited consolidated statements of operations.
Income
Taxes
We provide for income taxes as a C corporation on
income earned from operations. For the tax years ended
December 31, 2010 and 2009, our subsidiaries were not able
to participate in the filing of a consolidated federal tax
return. As a result, certain subsidiaries had taxable income
that was not offset by taxable losses or loss carryforwards of
other entities. We plan to reconsolidate our subsidiaries for
federal tax purposes starting in 2011. 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.
From 2006 through 2008, we operated as a real estate investment
trust (REIT). Effective January 1, 2009, we
revoked our REIT election and recognized the deferred tax
effects in our audited consolidated financial statements as of
December 31, 2008. During the period we operated as a REIT,
we were generally not subject to federal income tax at the REIT
level on our net taxable income distributed to shareholders, but
we were subject to federal corporate-level tax on the net
taxable income of our taxable REIT subsidiaries, and we were
subject to taxation in various foreign, state and local
jurisdictions. In addition, we were required to distribute at
least 90% of our REIT taxable income to our shareholders and
meet various other requirements imposed by the Internal Revenue
Code (the Code), through actual operating results,
asset holdings, distribution levels, and diversity of stock
ownership.
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.
Net
Income (Loss) per Share
Basic net income (loss) per share is based on the weighted
average number of common shares outstanding during each period.
Diluted net income (loss) per share is based on the weighted
average number of common shares outstanding during each period,
plus common share equivalents computed for stock options, stock
units, stock
112
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
dividends declared, restricted stock and convertible debt.
Diluted net loss per share is adjusted for the effects of other
potentially dilutive financial instruments only in the periods
in which such effect is dilutive.
Bonuses
Bonuses are accrued ratably, pursuant to a variable methodology
partially based on our performance, over the annual performance
period.
On a quarterly basis, management recommends a bonus accrual to
the Compensation Committee of our Board of Directors pursuant to
our variable bonus methodology. This recommendation is in the
form of a percentage of regular salary paid and is based upon
the cumulative regular salary paid from the start of the annual
performance period through the end of the particular quarterly
reporting period. In developing its recommendation to the
Compensation Committee, management analyzes certain key
performance metrics. The actual bonus accrual recorded is that
amount approved each quarter by the Compensation Committee.
Segment
Reporting
Public business enterprises are required to report financial and
descriptive information about its reportable operating segments
including a measure of segment profit or loss, certain specific
revenue and expense items and segment assets. We currently
operate as two reportable segments: 1) CapitalSource Bank
and 2) Other Commercial Finance. 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.
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 financial assets. This
guidance was 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 audited 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 was 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
audited 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
113
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 was 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 audited 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 was 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
audited 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 was 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 audited consolidated financial statements.
In July 2010, the FASB amended its guidance on financing
receivables to improve the disclosures that an entity provides
about the credit quality of its financing receivables and the
related allowance for credit losses. As a result of these
amendments, an entity is required to disaggregate by portfolio
segment and class certain existing disclosures and provide
certain new disclosures about its financing receivables and
related allowance for credit losses. This guidance was effective
for interim and annual periods beginning after December 15,
2010 for disclosures as of the end of a period and for
disclosures related to activity during a period. We adopted this
guidance on October 1, 2010. For further information, see
Note 5 Commercial Lending Assets and Credit
Quality.
Reclassifications
Certain amounts in the prior years audited consolidated
financial statements have been reclassified to conform to the
current year presentation, including the reclassification of fee
income to interest income or other income, net and the
reclassification of letter of credit fee expense from interest
expense to other income, net in our audited consolidated
statements of operations. Accordingly, the reclassifications
have been appropriately reflected throughout our audited
consolidated financial statements.
|
|
Note 3.
|
Discontinued
Operations
|
In June 2010, we completed the sale of our remaining long-term
healthcare facilities to Omega Healthcare Investors, Inc.
(Omega), and as a result, 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.
114
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The condensed balance sheets as of December 31, 2010 and
2009 for our discontinued operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
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 years ended
December 31, 2010, 2009 and 2008 for our discontinued
operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease income
|
|
$
|
28,750
|
|
|
$
|
107,296
|
|
|
$
|
107,748
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
15,183
|
|
|
|
12,415
|
|
|
|
19,607
|
|
Depreciation
|
|
|
2,540
|
|
|
|
31,520
|
|
|
|
35,889
|
|
General and administrative
|
|
|
1,481
|
|
|
|
3,832
|
|
|
|
706
|
|
Other expense
|
|
|
57
|
|
|
|
5,558
|
|
|
|
848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
19,261
|
|
|
|
53,325
|
|
|
|
57,050
|
|
Gain (loss) from sale of discontinued operations
|
|
|
21,696
|
|
|
|
(7,716
|
)
|
|
|
104
|
|
Income tax expense
|
|
|
|
|
|
|
4,458
|
|
|
|
1,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to discontinued operations
|
|
$
|
31,185
|
|
|
$
|
41,797
|
|
|
$
|
49,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 4.
|
Cash and
Cash Equivalents and Restricted Cash
|
As of December 31, 2010 and 2009, our cash and cash
equivalents and restricted cash balances were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Unrestricted
|
|
|
Restricted
|
|
|
Unrestricted
|
|
|
Restricted
|
|
|
|
($ in thousands)
|
|
|
Cash and cash equivalents and restricted cash from continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks(1)
|
|
$
|
576,276
|
|
|
$
|
58,814
|
|
|
$
|
447,632
|
|
|
$
|
24,575
|
|
Interest-bearing deposits in other banks(2)
|
|
|
70,383
|
|
|
|
10,213
|
|
|
|
135,410
|
|
|
|
7,012
|
|
Other short-term investments(3)
|
|
|
173,791
|
|
|
|
59,559
|
|
|
|
418,176
|
|
|
|
136,881
|
|
Investment securities(4)
|
|
|
|
|
|
|
|
|
|
|
169,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents and restricted cash from
continuing operations
|
|
|
820,450
|
|
|
|
128,586
|
|
|
|
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
|
|
$
|
820,450
|
|
|
$
|
128,586
|
|
|
$
|
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. |
|
(2) |
|
Represents principal and interest collections on loan assets
pledged to credit facilities. Included in these balances for
CapitalSource Bank were $63.6 million and
$119.1 million in deposits at the Federal Reserve Bank
(FRB) as of December 31, 2010 and 2009,
respectively. |
|
(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. 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 December 31, 2010. |
|
|
Note 5.
|
Commercial
Lending Assets and Credit Quality
|
As of December 31, 2010 and 2009, our commercial lending
assets had an outstanding balance of $6.4 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 December 31, 2010 and
2009, interest and fee receivables totaled $52.7 million
and $83.3 million, respectively.
116
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The outstanding unpaid principal balance of loans in our
portfolio, including loans held for sale, by type of loan, as of
December 31, 2010 and 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
$
|
4,238,471
|
|
|
|
67
|
%
|
|
$
|
5,036,455
|
|
|
|
61
|
%
|
Real estate
|
|
|
1,826,158
|
|
|
|
29
|
|
|
|
2,026,559
|
|
|
|
24
|
|
Real estate construction
|
|
|
293,581
|
|
|
|
4
|
|
|
|
1,219,226
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(1)
|
|
$
|
6,358,210
|
|
|
|
100
|
%
|
|
$
|
8,282,240
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes deferred loan fees and discounts and the allowance for
loan losses. Includes lower of cost or fair value adjustments on
loans held for sale. |
Commercial
Real Estate A Participation Interest
The A Participation Interest was fully paid off in
October 2010. Activity with respect to the A
Participation Interest for the years ended December 31,
2010 and 2009 was as follows ($ in thousands):
|
|
|
|
|
A Participation Interest as of December 31, 2008
|
|
$
|
1,396,611
|
|
Principal payments
|
|
|
(895,832
|
)
|
Discount accretion
|
|
|
29,781
|
|
|
|
|
|
|
A Participation Interest as of December 31, 2009
|
|
|
530,560
|
|
Principal payments
|
|
|
(540,108
|
)
|
Discount accretion
|
|
|
9,548
|
|
|
|
|
|
|
A Participation Interest as of December 31, 2010
|
|
$
|
|
|
|
|
|
|
|
Loans
Held for Sale
Loans held for sale are recorded at the lower of cost or fair
value in our audited consolidated balance sheets.
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 years ended December 31, 2010 and 2009, we
transferred to held for sale loans held for investment with a
carrying value of $387.2 million and $130.7 million,
respectively, including impaired loans with a carrying value of
$117.2 million and $55.4 million, respectively, based
on our decision to sell these loans as part of an overall
workout strategy. During the year ended December 31, 2010,
loans with a carrying value of $31.8 million 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). In addition, we transferred to held for sale loans
held for investment with a carrying value of $155.0 million
based on our decision to sell these loans as part of a strategy
to divest the assets of our subsidiaries based in the United
Kingdom. Transfers to loans held for sale resulted in
$24.5 million and $11.7 million in losses due to
valuation adjustments at time of transfer for the years ended
December 31, 2010 and 2009, respectively. We also
reclassified $49.5 million and $6.9 million of loans
from held for sale to held for investment during the years ended
December 31, 2010 and 2009, respectively, based upon our
intent to retain these loans for investment. No loans were
transferred between loans held for sale and loans held for
investment during the year ended December 31, 2008.
117
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the years ended December 31, 2010, 2009 and 2008, we
recognized net pre-tax losses on the sale of loans of
$7.8 million, $7.9 million and $2.8 million,
respectively.
As of December 31, 2010 and 2009, loans held for sale with
an outstanding balance of $14.7 million and
$0.7 million, respectively, were classified as non-accrual
loans.
We recorded $4.9 million and $21,000 of fair value
write-downs on non-accrual loans held for sale during the years
ended December 31, 2010 and 2009, respectively.
Loans
Held for Investment
Loans held for investment are recorded at the principal amount
outstanding, net of deferred loan costs or fees and any
discounts received or premiums paid on purchased loans. We
maintain an allowance for loan and lease losses for loans held
for investment, which is calculated based on managements
estimate of incurred loan losses inherent in our loan portfolio
as of the balance sheet date. This methodology is used
consistently to develop our allowance for loan losses for all
loans in our loan portfolio, and, as such, we maintain a single
portfolio segment. The loans in our portfolio are grouped into
seven loan classes, based on the level that we use to assess and
monitor the risk and performance of the portfolio.
Non-performing loans are loans accounted for on a non-accrual
basis, accruing loans which are contractually past due
90 days or more as to principal or interest payments and
other loans identified as troubled debt restructurings
(TDRs) as defined by GAAP.
As of December 31, 2010, the carrying value of each class
of loans held for investment, separated by performing and
non-performing categories, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Class
|
|
Performing
|
|
|
Non-Performing
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Healthcare Asset-Based
|
|
$
|
269,339
|
|
|
$
|
2,925
|
|
|
$
|
272,264
|
|
Asset-Based
|
|
|
1,352,039
|
|
|
|
194,625
|
|
|
|
1,546,664
|
|
Cash Flow
|
|
|
1,558,783
|
|
|
|
264,786
|
|
|
|
1,823,569
|
|
Healthcare Real Estate
|
|
|
841,774
|
|
|
|
28,866
|
|
|
|
870,640
|
|
Real Estate
|
|
|
725,972
|
|
|
|
356,087
|
|
|
|
1,082,059
|
|
Multi-Family
|
|
|
328,300
|
|
|
|
11,010
|
|
|
|
339,310
|
|
Small Business
|
|
|
101,761
|
|
|
|
10,171
|
|
|
|
111,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(1)
|
|
$
|
5,177,968
|
|
|
$
|
868,470
|
|
|
$
|
6,046,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes loans held for sale. Balances are net of deferred loan
fees and discounts. |
As of December 31, 2010, the carrying value of each class
of loans held for investment, by internal risk rating, was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Internal Risk Rating
|
|
|
|
|
|
|
|
|
|
Special
|
|
|
|
|
|
|
|
|
|
|
Class
|
|
Pass
|
|
|
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Healthcare Asset-Based
|
|
$
|
245,486
|
|
|
$
|
9,243
|
|
|
$
|
15,509
|
|
|
$
|
2,026
|
|
|
$
|
272,264
|
|
Asset-Based
|
|
|
1,207,990
|
|
|
|
39,612
|
|
|
|
169,986
|
|
|
|
129,076
|
|
|
|
1,546,664
|
|
Cash Flow
|
|
|
1,110,779
|
|
|
|
216,399
|
|
|
|
350,287
|
|
|
|
146,104
|
|
|
|
1,823,569
|
|
Healthcare Real Estate
|
|
|
773,955
|
|
|
|
37,730
|
|
|
|
47,090
|
|
|
|
11,865
|
|
|
|
870,640
|
|
Real Estate
|
|
|
396,044
|
|
|
|
98,401
|
|
|
|
470,034
|
|
|
|
117,580
|
|
|
|
1,082,059
|
|
Multi-Family
|
|
|
330,017
|
|
|
|
|
|
|
|
8,919
|
|
|
|
374
|
|
|
|
339,310
|
|
Small Business
|
|
|
97,444
|
|
|
|
6,278
|
|
|
|
5,514
|
|
|
|
2,696
|
|
|
|
111,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(1)
|
|
$
|
4,161,715
|
|
|
$
|
407,663
|
|
|
$
|
1,067,339
|
|
|
$
|
409,721
|
|
|
$
|
6,046,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes loans held for sale. Balances are net of deferred loan
fees and discounts. |
118
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Non-Accrual
and Past Due Loans
As of December 31, 2010, the carrying value of non-accrual
loans was as follows ($ in thousands):
|
|
|
|
|
Healthcare Asset-Based
|
|
$
|
2,925
|
|
Asset-Based
|
|
|
142,847
|
|
Cash Flow
|
|
|
183,606
|
|
Healthcare Real Estate
|
|
|
28,866
|
|
Real Estate
|
|
|
265,615
|
|
Multi-Family
|
|
|
11,010
|
|
Small Business
|
|
|
4,980
|
|
|
|
|
|
|
Total(1)
|
|
$
|
639,849
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes loans held for sale and purchased credit impaired
loans. Balances are net of deferred loan fees and discounts. |
As of December 31, 2010, delinquent loans in our loan
portfolio were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Greater than 90
|
|
|
|
30-89 Days Past
|
|
|
Greater than 90
|
|
|
|
|
|
|
|
|
|
|
|
Days Past Due and
|
|
|
|
Due
|
|
|
Days Past Due
|
|
|
Total Past Due
|
|
|
Current
|
|
|
Total Loans
|
|
|
Accruing
|
|
|
|
($ in thousands)
|
|
|
Healthcare Asset-Based
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
272,264
|
|
|
$
|
272,264
|
|
|
$
|
|
|
Asset-Based
|
|
|
8,074
|
|
|
|
27,130
|
|
|
|
35,204
|
|
|
|
1,500,537
|
|
|
|
1,535,741
|
|
|
|
3,244
|
|
Cash Flow
|
|
|
10,573
|
|
|
|
60,644
|
|
|
|
71,217
|
|
|
|
1,752,352
|
|
|
|
1,823,569
|
|
|
|
|
|
Healthcare Real Estate
|
|
|
|
|
|
|
25,887
|
|
|
|
25,887
|
|
|
|
840,527
|
|
|
|
866,414
|
|
|
|
|
|
Real Estate
|
|
|
54
|
|
|
|
148,197
|
|
|
|
148,251
|
|
|
|
924,590
|
|
|
|
1,072,841
|
|
|
|
45,783
|
|
Multi-Family
|
|
|
2,324
|
|
|
|
9,293
|
|
|
|
11,617
|
|
|
|
327,692
|
|
|
|
339,309
|
|
|
|
|
|
Small Business
|
|
|
4,317
|
|
|
|
4,981
|
|
|
|
9,298
|
|
|
|
97,444
|
|
|
|
106,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(1)
|
|
$
|
25,342
|
|
|
$
|
276,132
|
|
|
$
|
301,474
|
|
|
$
|
5,715,406
|
|
|
$
|
6,016,880
|
|
|
$
|
49,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes loans held for sale and purchased credit impaired
loans. Balances are net of deferred loan fees and discounts. |
As of December 31, 2009, non-accrual loans and accruing
loans greater than 90 days past due were $1.1 billion
and $67.0 million, respectively.
Impaired
Loans
We consider a loan to be impaired when, based on current
information, we determine that it is probable that we will be
unable to collect all amounts due in accordance with the
contractual terms of the original loan agreement. In this
regard, impaired loans include loans where we expect to
encounter a significant delay in the collection of,
and/or a
shortfall in the amount of contractual payments due to us.
Assessing the likelihood that a loan will not be paid according
to its contractual terms involves the consideration of all
relevant facts and circumstances and requires a significant
amount of judgment. In general, and for such purposes, factors
that are considered include:
|
|
|
|
|
The current performance of the borrower;
|
|
|
|
The current economic environment and financial capacity of the
borrower to preclude a default;
|
|
|
|
The willingness of the borrower to provide the support necessary
to preclude a default (including the potential for successful
resolution of a potential problem through modification of
terms); and
|
119
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
The borrowers equity position in the underlying
collateral, if applicable, based on our best estimate of the
fair value of the collateral.
|
In assessing the adequacy of available evidence, we consider
whether the receipt of payments is dependent on the fiscal
health of the borrower or the sale, refinancing or foreclosure
of the loan.
As of December 31, 2010, information pertaining to our
impaired loans was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Legal Principal
|
|
|
Related
|
|
|
Average
|
|
|
Interest Income
|
|
|
|
Value(1)
|
|
|
Balance(2)
|
|
|
Allowance
|
|
|
Balance
|
|
|
Recognized
|
|
|
|
($ in thousands)
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare Asset-Based
|
|
$
|
463
|
|
|
$
|
825
|
|
|
$
|
|
|
|
$
|
1,575
|
|
|
$
|
132
|
|
Asset-Based
|
|
|
96,514
|
|
|
|
180,659
|
|
|
|
|
|
|
|
147,560
|
|
|
|
5,158
|
|
Cash Flow
|
|
|
128,658
|
|
|
|
205,454
|
|
|
|
|
|
|
|
181,308
|
|
|
|
6,487
|
|
Healthcare Real Estate
|
|
|
18,881
|
|
|
|
19,892
|
|
|
|
|
|
|
|
20,119
|
|
|
|
11
|
|
Real Estate
|
|
|
323,292
|
|
|
|
407,423
|
|
|
|
|
|
|
|
190,510
|
|
|
|
5,770
|
|
Multi-Family
|
|
|
11,010
|
|
|
|
15,402
|
|
|
|
|
|
|
|
2,655
|
|
|
|
35
|
|
Small Business
|
|
|
9,861
|
|
|
|
17,708
|
|
|
|
|
|
|
|
4,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
588,679
|
|
|
|
847,363
|
|
|
|
|
|
|
|
548,044
|
|
|
|
17,593
|
|
With allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare Asset-Based
|
|
|
2,462
|
|
|
|
11,614
|
|
|
|
(675
|
)
|
|
|
4,908
|
|
|
|
|
|
Asset-Based
|
|
|
98,762
|
|
|
|
112,732
|
|
|
|
(21,684
|
)
|
|
|
60,580
|
|
|
|
23
|
|
Cash Flow
|
|
|
142,171
|
|
|
|
191,172
|
|
|
|
(33,069
|
)
|
|
|
109,825
|
|
|
|
1,901
|
|
Healthcare Real Estate
|
|
|
9,984
|
|
|
|
11,278
|
|
|
|
(2,323
|
)
|
|
|
9,101
|
|
|
|
179
|
|
Real Estate
|
|
|
69,128
|
|
|
|
92,833
|
|
|
|
(21,076
|
)
|
|
|
407,720
|
|
|
|
1,624
|
|
Multi-Family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,425
|
|
|
|
|
|
Small Business
|
|
|
310
|
|
|
|
359
|
|
|
|
(141
|
)
|
|
|
1,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
322,817
|
|
|
|
419,988
|
|
|
|
(78,968
|
)
|
|
|
606,655
|
|
|
|
3,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
911,496
|
|
|
$
|
1,267,351
|
|
|
$
|
(78,968
|
)
|
|
$
|
1,154,699
|
|
|
$
|
21,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Carrying value of impaired loans before applying specific
reserves. Excludes loans held for sale. Balances are net of
deferred loan fees and discounts. |
|
(2) |
|
Represents the contractual amounts owed to us by borrowers. |
As of December 31, 2010, the carrying value of impaired
loans with no related allowance recorded was
$588.7 million. Of this amount, $222.4 million related
to loans that were charged off to their carrying value. This was
primarily the result of collateral dependent loans for which
ultimate collection depends solely on the sale of the
collateral. The remaining $366.3 million relates to loans
that have no recorded charge-offs or specific reserves as of
December 31, 2010, based on our estimates that we
ultimately will collect all interest and principal amounts due.
As of December 31, 2009, the carrying value of impaired
loans was $597.4 million, net of specific reserves of
$116.5 million. Included in these loans were loans with a
carrying value of $223.0 million related to the
2006-A
Trust. As of December 31, 2009, we had loans with a
carrying value of $517.1 million that we assessed as
impaired and for which we did not record any specific reserves.
The average balances of impaired loans during the years ended
December 31, 2010, 2009 and 2008 were $1.2 billion,
$927.4 million and $455.7 million, respectively. The
total amounts of interest income that were recognized on
impaired loans during the years ended December 31, 2010,
2009 and 2008 were $21.3 million, $29.0 million and
$29.0 million, respectively. The amounts of cash basis
interest income that were recognized on impaired loans during
the years ended December 31, 2010 and 2009 were
$0.6 million and $50,000, respectively. There was no cash
basis interest income recognized during the year ended
December 31, 2008. If our non-accrual
120
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
loans had performed in accordance with their original terms,
interest income would have been increased by
$142.5 million, $127.0 million and $50.3 million
for the years ended December 31, 2010, 2009 and 2008,
respectively.
Allowance
for Loan Losses
Activity in the allowance for loan losses related to our loans
held for investment for the years ended December 31, 2010,
2009 and 2008, respectively, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands)
|
|
|
Balance as of beginning of year
|
|
$
|
586,696
|
|
|
$
|
423,844
|
|
|
$
|
138,930
|
|
Charge offs
|
|
|
(385,097
|
)
|
|
|
(589,854
|
)
|
|
|
(272,183
|
)
|
Recoveries
|
|
|
930
|
|
|
|
11,361
|
|
|
|
1,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge offs(1)
|
|
|
(384,167
|
)
|
|
|
(578,493
|
)
|
|
|
(270,900
|
)
|
Charge offs upon transfer to held for sale
|
|
|
(42,353
|
)
|
|
|
(33,907
|
)
|
|
|
(20,991
|
)
|
Deconsolidation of
2006-A Trust
|
|
|
(138,134
|
)
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
307,080
|
|
|
|
775,252
|
|
|
|
576,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of year
|
|
$
|
329,122
|
|
|
$
|
586,696
|
|
|
$
|
423,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $71.6 million and $51.4 million in charge
offs related to loans in the
2006-A Trust
for the years ended December 31, 2010 and 2009,
respectively. There were no charge offs related to loans in the
2006-A Trust
for the year ended December 31, 2008. |
As of December 31, 2010, the balances of the allowance for
loan losses and the carrying value of loans held for investment
disaggregated by impairment methodology were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for
|
|
|
|
Loans
|
|
|
Loan Losses
|
|
|
|
($ in thousands)
|
|
|
Individually evaluated for impairment
|
|
$
|
904,466
|
|
|
$
|
(78,019
|
)
|
Collectively evaluated for impairment
|
|
|
5,217,393
|
|
|
|
(249,912
|
)
|
Acquired loans with deteriorated credit quality
|
|
|
31,017
|
|
|
|
(1,191
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,152,876
|
|
|
$
|
(329,122
|
)
|
|
|
|
|
|
|
|
|
|
Troubled
Debt Restructurings
During the years ended December 31, 2010 and 2009, loans
with an aggregate carrying value, which includes principal,
deferred fees and accrued interest, of $1.0 billion and
$921.3 million, respectively, as of their respective
restructuring dates, were involved in TDRs. Loans involved in
these TDRs are assessed as impaired, generally for a period of
at least one year following the restructuring. A loan that has
been involved in a TDR might no longer be assessed as impaired
one year subsequent to the restructuring, assuming the loan
performs under the restructured terms and the restructured terms
were at market. As of December 31, 2010 and 2009, all of
our TDRs were classified as impaired loans.
121
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The aggregate carrying values of loans that had been
restructured in TDRs as of December 31, 2010 and 2009 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Non-accrual
|
|
$
|
400,851
|
|
|
$
|
314,526
|
|
Accruing
|
|
|
154,262
|
|
|
|
111,880
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
555,113
|
|
|
$
|
426,406
|
|
|
|
|
|
|
|
|
|
|
We recorded charge offs related to these restructured loans of
$134.5 million, $184.3 million and
$143.1 million, for the years ended December 31, 2010,
2009 and 2008, respectively. The specific reserves related to
these loans were $35.5 million and $25.1 million as of
December 31, 2010 and 2009, respectively.
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 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
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.
Loans
Pledged to the FHLB
As of December 31, 2010, CapitalSource Bank had loans held
for investment with an unpaid principal balance of
$166.1 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 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 audited 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.
122
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2010 and 2009, we had $92.3 million
and $101.4 million, respectively, of REO classified as held
for sale, which was recorded in other assets in our audited
consolidated balance sheets. Activity in REO held for sale for
the years ended December 31, 2010, 2009 and 2008 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands)
|
|
|
Balance as of beginning of year
|
|
$
|
101,401
|
|
|
$
|
84,437
|
|
|
$
|
19,741
|
|
Acquired in business combination
|
|
|
2,014
|
|
|
|
|
|
|
|
|
|
Transfers from loans held for investment
|
|
|
138,103
|
|
|
|
102,974
|
|
|
|
88,657
|
|
Fair value adjustments
|
|
|
(40,536
|
)
|
|
|
(32,033
|
)
|
|
|
(16,677
|
)
|
Transfers from (to) REO held for use
|
|
|
2,850
|
|
|
|
(11,259
|
)
|
|
|
|
|
Real estate sold
|
|
|
(111,567
|
)
|
|
|
(42,718
|
)
|
|
|
(7,284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of year
|
|
$
|
92,265
|
|
|
$
|
101,401
|
|
|
$
|
84,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2010, 2009 and 2008, we
recognized a loss of $2.1 million, a loss of
$15.0 million and a gain of $0.5 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 audited consolidated statements of operations.
As of December 31, 2010 and 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 audited
consolidated balance sheets. During the years ended
December 31, 2010 and 2009, we recognized impairment losses
of $12.9 million and $2.4 million, respectively, on
REO held for use as a component of net expense of real estate
owned and other foreclosed assets in our audited consolidated
statements of operations. There were no such impairments in 2008.
Other
Foreclosed Assets
When we foreclose on a loan to a borrower whose underlying
collateral consists of 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
estimated fair value of the acquired loans. As of
December 31, 2010 and 2009, we had $55.8 million and
$127.2 million, respectively, of loans acquired through
foreclosure, net of valuation allowances of $3.2 million
and $2.8 million, respectively, which were recorded in
other assets in our audited consolidated balance sheets. We
recorded a provision for losses of $42.1 million and
$3.6 million related to loans acquired through foreclosure
as a component of net expense of real estate owned and other
foreclosed assets in our audited consolidated statements of
operations for the years ended December 31, 2010 and 2009,
respectively. We did not record a provision for losses related
to loans acquired through foreclosure for the year ended
December 31, 2008.
123
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investment
Securities,
Available-for-Sale
As of December 31, 2010 and 2009, our investment
securities,
available-for-sale
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
($ in thousands)
|
|
|
Agency discount notes
|
|
$
|
164,917
|
|
|
$
|
57
|
|
|
$
|
|
|
|
$
|
164,974
|
|
|
$
|
49,988
|
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
49,996
|
|
Agency callable notes
|
|
|
164,219
|
|
|
|
418
|
|
|
|
(1,749
|
)
|
|
|
162,888
|
|
|
|
252,175
|
|
|
|
143
|
|
|
|
(1,788
|
)
|
|
|
250,530
|
|
Agency debt
|
|
|
102,263
|
|
|
|
1,167
|
|
|
|
|
|
|
|
103,430
|
|
|
|
24,430
|
|
|
|
315
|
|
|
|
(273
|
)
|
|
|
24,472
|
|
Agency MBS
|
|
|
860,441
|
|
|
|
15,035
|
|
|
|
(5,321
|
)
|
|
|
870,155
|
|
|
|
412,853
|
|
|
|
5,999
|
|
|
|
(462
|
)
|
|
|
418,390
|
|
Non-agency MBS
|
|
|
112,917
|
|
|
|
1,640
|
|
|
|
(873
|
)
|
|
|
113,684
|
|
|
|
152,913
|
|
|
|
1,031
|
|
|
|
(669
|
)
|
|
|
153,275
|
|
Equity securities
|
|
|
202
|
|
|
|
61
|
|
|
|
|
|
|
|
263
|
|
|
|
51,074
|
|
|
|
2,246
|
|
|
|
(336
|
)
|
|
|
52,984
|
|
Corporate debt
|
|
|
5,013
|
|
|
|
122
|
|
|
|
|
|
|
|
5,135
|
|
|
|
12,349
|
|
|
|
877
|
|
|
|
(3,608
|
)
|
|
|
9,618
|
|
Collateralized loan obligations
|
|
|
12,249
|
|
|
|
|
|
|
|
|
|
|
|
12,249
|
|
|
|
1,018
|
|
|
|
308
|
|
|
|
|
|
|
|
1,326
|
|
U.S. Treasury and agency securities
|
|
|
90,587
|
|
|
|
24
|
|
|
|
(478
|
)
|
|
|
90,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,512,808
|
|
|
$
|
18,524
|
|
|
$
|
(8,421
|
)
|
|
$
|
1,522,911
|
|
|
$
|
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, investments in collateralized loan
obligations, and U.S. Treasury and agency securities.
The amortized cost and fair value of investment securities,
available-for-sale
that CapitalSource Bank pledged as collateral as of
December 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Source
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
($ in thousands)
|
|
|
FHLB
|
|
$
|
877,766
|
|
|
$
|
889,888
|
|
|
$
|
781,747
|
|
|
$
|
786,425
|
|
FRB
|
|
|
35,056
|
|
|
|
34,256
|
|
|
|
17,979
|
|
|
|
18,076
|
|
Non-government Correspondent Bank(1)
|
|
|
37,979
|
|
|
|
37,989
|
|
|
|
|
|
|
|
|
|
Government Agency(2)
|
|
|
29,069
|
|
|
|
29,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
979,870
|
|
|
$
|
991,438
|
|
|
$
|
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. |
124
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the years ended December 31, 2010, 2009, and 2008,
we sold investment securities,
available-for-sale
for $79.5 million, $45.6 million and
$82.3 million, respectively, recognizing net pre-tax gains
of $5.9 million, $0.5 million and $0.2 million,
respectively.
During the years ended December 31, 2010, 2009, and 2008,
we recognized $1.1 million, $5.0 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 audited consolidated balance
sheets.
During the years ended December 31, 2010, 2009, and 2008,
we recorded other than temporary impairments (OTTI)
of $3.6 million, $11.8 million, and
$17.9 million, respectively, included as a component of
gain (loss) on investments, net, in our audited consolidated
statements of operations, related to declines in the fair value
of certain corporate debt securities. Additionally, during the
year ended December 31, 2010, we recorded OTTI of
$0.3 million on equity securities, included as a component
of gain (loss) on investments, net in our audited consolidated
statements of operations. We recorded no OTTI on equity
securities during the years ended December 31, 2009 and
2008. During the year ended December 31, 2010, we recorded
no OTTI on collateralized loan obligations. We recorded
$1.8 million and $3.0 million of OTTI on
collateralized loan obligations during the years ended
December 31, 2009 and 2008, respectively, included as a
component of gain (loss) on investments, net in our audited
consolidated statements of operations.
Investment
Securities,
Held-to-Maturity
As of December 31, 2010 and 2009, the amortized cost of
investment securities,
held-to-maturity,
was $184.5 million and $242.1 million, respectively
and consisted of commercial mortgage-backed securities rated AAA
held by CapitalSource Bank. The amortized costs and estimated
fair values of the investment securities,
held-to-maturity,
that CapitalSource Bank pledged as collateral as of
December 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Source:
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
($ in thousands)
|
|
|
FHLB
|
|
$
|
21,260
|
|
|
$
|
22,431
|
|
|
$
|
68,351
|
|
|
$
|
70,330
|
|
FRB
|
|
|
143,927
|
|
|
|
153,756
|
|
|
|
173,702
|
|
|
|
191,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
165,187
|
|
|
$
|
176,187
|
|
|
$
|
242,053
|
|
|
$
|
262,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Unrealized
Losses on Investment Securities
As of December 31, 2010 and 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
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
($ in thousands)
|
|
|
As of December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Securities,
Available-for-Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency callable notes
|
|
|
(1,749
|
)
|
|
|
92,471
|
|
|
|
|
|
|
|
|
|
|
|
(1,749
|
)
|
|
|
92,471
|
|
Agency MBS
|
|
|
(5,321
|
)
|
|
|
252,844
|
|
|
|
|
|
|
|
|
|
|
|
(5,321
|
)
|
|
|
252,844
|
|
Non-agency MBS
|
|
|
(835
|
)
|
|
|
20,905
|
|
|
|
(38
|
)
|
|
|
8,384
|
|
|
|
(873
|
)
|
|
|
29,289
|
|
U.S. Treasury and agency securities
|
|
|
(478
|
)
|
|
|
20,151
|
|
|
|
|
|
|
|
|
|
|
|
(478
|
)
|
|
|
20,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities,
Available-for-Sale
|
|
$
|
(8,383
|
)
|
|
$
|
386,371
|
|
|
$
|
(38
|
)
|
|
$
|
8,384
|
|
|
$
|
(8,421
|
)
|
|
$
|
394,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Securities,
Held-to-Maturity(1)
|
|
$
|
(97
|
)
|
|
$
|
13,524
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(97
|
)
|
|
$
|
13,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 commercial mortgage-backed securities rated AAA 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
December 31, 2010 and 2009 represent an OTTI. The losses
are primarily related to four agency callable notes and nine
Agency MBS. The unrealized losses are attributable to
fluctuations in their market prices due to current market
conditions and interest rate levels. Agency securities have the
highest debt rating and are backed by government-sponsored
entities. As such, we expect to recover the entire amortized
cost basis of the impaired securities. We have the ability and
the intention to hold these securities until their fair values
recover to cost or maturity.
126
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Contractual
Maturities
As of December 31, 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
|
|
$
|
283,728
|
|
|
$
|
283,958
|
|
|
$
|
|
|
|
$
|
|
|
Due after one year through five years
|
|
|
202,649
|
|
|
|
202,963
|
|
|
|
26,035
|
|
|
|
30,682
|
|
Due after five years through ten years(1)
|
|
|
80,797
|
|
|
|
83,113
|
|
|
|
|
|
|
|
|
|
Due after ten years(2)(3)
|
|
|
945,634
|
|
|
|
952,877
|
|
|
|
158,438
|
|
|
|
164,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,512,808
|
|
|
$
|
1,522,911
|
|
|
$
|
184,473
|
|
|
$
|
195,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Agency and Non-agency MBS, with fair values of
$30.8 million and $47.2 million, respectively, and
weighted average expected maturities of approximately
2.44 years and 3.22 years, respectively, based on
interest rates and expected prepayment speeds as of
December 31, 2010. |
|
(2) |
|
Includes Agency and Non-agency MBS, including CMBS, with fair
values of $839.4 million and $231.2 million,
respectively, and weighted average expected maturities of
approximately 4.47 years and 1.58 years, respectively,
based on interest rates and expected prepayment speeds as of
December 31, 2010. |
|
(3) |
|
Includes securities with no stated maturity. |
Other
Investments
As of December 31, 2010 and 2009, our other investments
were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Investments carried at cost
|
|
$
|
33,062
|
|
|
$
|
53,205
|
|
Investments carried at fair value
|
|
|
222
|
|
|
|
1,392
|
|
Investments accounted for under the equity method
|
|
|
38,605
|
|
|
|
41,920
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
71,889
|
|
|
$
|
96,517
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2010, 2009 and 2008, we
sold other investments for $57.3 million,
$23.3 million and $14.3 million, respectively,
recognizing net pre-tax gains of $35.3 million, a net
pre-tax loss of $2.3 million, and a net pre-tax gain of
$5.9 million, respectively, included as a component of loss
on investments, net in the audited consolidated statements of
operations. During the years ended December 31, 2010, 2009
and 2008, we recorded OTTI of $2.5 million,
$13.2 million and $60.0 million, respectively,
relating to our investments carried at cost, included as a
component of gain (loss) on investments, net in the audited
consolidated statements of operations.
We recorded no OTTI on our MBS securities during the years ended
December 31, 2010 and 2009, respectively. During the year
ended December 31, 2008, we recorded $4.1 million of
OTTI as a component of gain (loss) on residential mortgage
investment portfolio in our audited consolidated statements of
operations.
127
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 7.
|
Guarantor
Information
|
The following represents the supplemental consolidating
condensed financial information as of December 31, 2010 and
December 31, 2009 and for the years ended December 31,
2010, 2009, and 2008 of (i) CapitalSource Inc., which as
discussed in Note 11, Borrowings, is the issuer of
our 2014 Senior Secured Notes, as well as our Senior Debentures
and Subordinated Debentures (together, the
Debentures), (ii) CapitalSource Finance LLC
(CapitalSource Finance), which is a guarantor of our
2014 Senior Secured Notes and the Debentures, and (iii) our
subsidiaries that are not guarantors of the 2014 Senior Secured
Notes or the Debentures. CapitalSource Finance, a wholly owned
indirect subsidiary of CapitalSource Inc., has guaranteed our
2014 Senior Secured Notes and the Senior Debentures, fully and
unconditionally, on a senior basis and has guaranteed the
Subordinated Debentures, fully and unconditionally, on a senior
subordinate basis. Separate audited consolidated financial
statements of the guarantor are not presented, as we have
determined that they would not be material to investors.
128
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Balance Sheet
December 31,
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
($ in thousands)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
94,614
|
|
|
$
|
353,666
|
|
|
$
|
252,012
|
|
|
$
|
120,158
|
|
|
|
|
|
|
$
|
820,450
|
|
Restricted cash
|
|
|
|
|
|
|
39,335
|
|
|
|
85,142
|
|
|
|
4,109
|
|
|
|
|
|
|
|
128,586
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale,
at fair value
|
|
|
|
|
|
|
1,510,384
|
|
|
|
|
|
|
|
12,527
|
|
|
|
|
|
|
|
1,522,911
|
|
Held-to-maturity,
at amortized cost
|
|
|
|
|
|
|
184,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
|
|
|
|
1,694,857
|
|
|
|
|
|
|
|
12,527
|
|
|
|
|
|
|
|
1,707,384
|
|
Commercial real estate A participation interest, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
|
|
|
|
|
171,887
|
|
|
|
16,202
|
|
|
|
17,245
|
|
|
|
|
|
|
|
205,334
|
|
Loans held for investment
|
|
|
|
|
|
|
5,008,287
|
|
|
|
284,445
|
|
|
|
860,144
|
|
|
|
|
|
|
|
6,152,876
|
|
Less deferred loan fees and discounts
|
|
|
|
|
|
|
(79,877
|
)
|
|
|
(10,362
|
)
|
|
|
(18,429
|
)
|
|
|
2,230
|
|
|
|
(106,438
|
)
|
Less allowance for loan losses
|
|
|
|
|
|
|
(223,553
|
)
|
|
|
(29,626
|
)
|
|
|
(75,943
|
)
|
|
|
|
|
|
|
(329,122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for investment, net
|
|
|
|
|
|
|
4,704,857
|
|
|
|
244,457
|
|
|
|
765,772
|
|
|
|
2,230
|
|
|
|
5,717,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
|
|
|
|
4,876,744
|
|
|
|
260,659
|
|
|
|
783,017
|
|
|
|
2,230
|
|
|
|
5,922,650
|
|
Interest receivable
|
|
|
|
|
|
|
25,780
|
|
|
|
18,174
|
|
|
|
13,439
|
|
|
|
|
|
|
|
57,393
|
|
Investment in subsidiaries
|
|
|
2,339,200
|
|
|
|
3,594
|
|
|
|
1,561,468
|
|
|
|
1,623,244
|
|
|
|
(5,527,506
|
)
|
|
|
|
|
Intercompany receivable
|
|
|
375,000
|
|
|
|
9
|
|
|
|
134,079
|
|
|
|
301,241
|
|
|
|
(810,329
|
)
|
|
|
|
|
Other investments
|
|
|
|
|
|
|
52,066
|
|
|
|
13,887
|
|
|
|
5,936
|
|
|
|
|
|
|
|
71,889
|
|
Goodwill
|
|
|
|
|
|
|
173,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173,135
|
|
Other assets
|
|
|
89,198
|
|
|
|
249,119
|
|
|
|
156,557
|
|
|
|
234,034
|
|
|
|
(164,988
|
)
|
|
|
563,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,898,012
|
|
|
$
|
7,468,305
|
|
|
$
|
2,481,978
|
|
|
$
|
3,097,705
|
|
|
$
|
(6,500,593
|
)
|
|
$
|
9,445,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
|
|
|
$
|
4,621,273
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,621,273
|
|
Credit facilities
|
|
|
|
|
|
|
65,606
|
|
|
|
|
|
|
|
1,902
|
|
|
|
|
|
|
|
67,508
|
|
Term debt
|
|
|
285,731
|
|
|
|
693,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
979,254
|
|
Other borrowings
|
|
|
523,650
|
|
|
|
412,000
|
|
|
|
440,234
|
|
|
|
|
|
|
|
|
|
|
|
1,375,884
|
|
Other liabilities
|
|
|
34,658
|
|
|
|
170,408
|
|
|
|
121,227
|
|
|
|
208,816
|
|
|
|
(187,563
|
)
|
|
|
347,546
|
|
Intercompany payable
|
|
|
|
|
|
|
46,850
|
|
|
|
301,241
|
|
|
|
441,372
|
|
|
|
(789,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
844,039
|
|
|
|
6,009,660
|
|
|
|
862,702
|
|
|
|
652,090
|
|
|
|
(977,026
|
)
|
|
|
7,391,465
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
3,232
|
|
|
|
921,000
|
|
|
|
|
|
|
|
|
|
|
|
(921,000
|
)
|
|
|
3,232
|
|
Additional paid-in capital
|
|
|
3,911,344
|
|
|
|
74,588
|
|
|
|
679,241
|
|
|
|
2,556,428
|
|
|
|
(3,310,260
|
)
|
|
|
3,911,341
|
|
(Accumulated deficit) retained earnings
|
|
|
(1,870,544
|
)
|
|
|
457,302
|
|
|
|
930,076
|
|
|
|
(114,898
|
)
|
|
|
(1,272,508
|
)
|
|
|
(1,870,572
|
)
|
Accumulated other comprehensive income, net
|
|
|
9,941
|
|
|
|
5,755
|
|
|
|
9,959
|
|
|
|
4,087
|
|
|
|
(19,801
|
)
|
|
|
9,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total CapitalSource Inc. shareholders equity
|
|
|
2,053,973
|
|
|
|
1,458,645
|
|
|
|
1,619,276
|
|
|
|
2,445,617
|
|
|
|
(5,523,569
|
)
|
|
|
2,053,942
|
|
Noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,053,973
|
|
|
|
1,458,645
|
|
|
|
1,619,276
|
|
|
|
2,445,615
|
|
|
|
(5,523,567
|
)
|
|
|
2,053,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
2,898,012
|
|
|
$
|
7,468,305
|
|
|
$
|
2,481,978
|
|
|
$
|
3,097,705
|
|
|
$
|
(6,500,593
|
)
|
|
$
|
9,445,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Balance Sheet
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Operations
For the Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
($ in thousands)
|
|
|
Net interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
40,421
|
|
|
$
|
420,794
|
|
|
$
|
25,515
|
|
|
$
|
119,376
|
|
|
$
|
(29,580
|
)
|
|
$
|
576,526
|
|
Investment securities
|
|
|
|
|
|
|
58,837
|
|
|
|
118
|
|
|
|
2,693
|
|
|
|
|
|
|
|
61,648
|
|
Other
|
|
|
|
|
|
|
1,455
|
|
|
|
7
|
|
|
|
5
|
|
|
|
|
|
|
|
1,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
40,421
|
|
|
|
481,086
|
|
|
|
25,640
|
|
|
|
122,074
|
|
|
|
(29,580
|
)
|
|
|
639,641
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
60,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,052
|
|
Borrowings
|
|
|
101,481
|
|
|
|
30,579
|
|
|
|
28,294
|
|
|
|
63,779
|
|
|
|
(52,089
|
)
|
|
|
172,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
101,481
|
|
|
|
90,631
|
|
|
|
28,294
|
|
|
|
63,779
|
|
|
|
(52,089
|
)
|
|
|
232,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (loss) income
|
|
|
(61,060
|
)
|
|
|
390,455
|
|
|
|
(2,654
|
)
|
|
|
58,295
|
|
|
|
22,509
|
|
|
|
407,545
|
|
Provision for loan losses
|
|
|
|
|
|
|
123,412
|
|
|
|
(17,517
|
)
|
|
|
201,185
|
|
|
|
|
|
|
|
307,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (loss) income after provision for loan losses
|
|
|
(61,060
|
)
|
|
|
267,043
|
|
|
|
14,863
|
|
|
|
(142,890
|
)
|
|
|
22,509
|
|
|
|
100,465
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
1,302
|
|
|
|
50,088
|
|
|
|
70,687
|
|
|
|
|
|
|
|
|
|
|
|
122,077
|
|
Professional fees
|
|
|
2,451
|
|
|
|
2,627
|
|
|
|
25,372
|
|
|
|
6,016
|
|
|
|
|
|
|
|
36,466
|
|
Other administrative expenses
|
|
|
4,560
|
|
|
|
69,713
|
|
|
|
47,677
|
|
|
|
25,709
|
|
|
|
(77,648
|
)
|
|
|
70,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
8,313
|
|
|
|
122,428
|
|
|
|
143,736
|
|
|
|
31,725
|
|
|
|
(77,648
|
)
|
|
|
228,554
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on investments, net
|
|
|
|
|
|
|
30,855
|
|
|
|
1,012
|
|
|
|
22,192
|
|
|
|
|
|
|
|
54,059
|
|
(Loss) gain on derivatives
|
|
|
|
|
|
|
(2,487
|
)
|
|
|
18,727
|
|
|
|
(24,884
|
)
|
|
|
|
|
|
|
(8,644
|
)
|
Gain on debt extinguishment
|
|
|
925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
925
|
|
Net expense of real estate owned and other foreclosed assets
|
|
|
|
|
|
|
(22,222
|
)
|
|
|
(4,219
|
)
|
|
|
(84,373
|
)
|
|
|
|
|
|
|
(110,814
|
)
|
Other (expense) income, net
|
|
|
(2,613
|
)
|
|
|
34,150
|
|
|
|
50,809
|
|
|
|
25,963
|
|
|
|
(77,070
|
)
|
|
|
31,239
|
|
(Loss) earnings in subsidiaries
|
|
|
(84,787
|
)
|
|
|
(3,934
|
)
|
|
|
145,434
|
|
|
|
105,977
|
|
|
|
(162,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(86,475
|
)
|
|
|
36,362
|
|
|
|
211,763
|
|
|
|
44,875
|
|
|
|
(239,760
|
)
|
|
|
(33,235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations before income
taxes
|
|
|
(155,848
|
)
|
|
|
180,977
|
|
|
|
82,890
|
|
|
|
(129,740
|
)
|
|
|
(139,603
|
)
|
|
|
(161,324
|
)
|
Income tax (benefit) expense
|
|
|
(46,594
|
)
|
|
|
18,033
|
|
|
|
|
|
|
|
7,759
|
|
|
|
|
|
|
|
(20,802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations
|
|
|
(109,254
|
)
|
|
|
162,944
|
|
|
|
82,890
|
|
|
|
(137,499
|
)
|
|
|
(139,603
|
)
|
|
|
(140,522
|
)
|
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
|
|
|
(109,254
|
)
|
|
|
162,944
|
|
|
|
82,890
|
|
|
|
(106,314
|
)
|
|
|
(139,603
|
)
|
|
|
(109,337
|
)
|
Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(83
|
)
|
|
|
|
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to CapitalSource Inc.
|
|
$
|
(109,254
|
)
|
|
$
|
162,944
|
|
|
$
|
82,890
|
|
|
$
|
(106,231
|
)
|
|
$
|
(139,603
|
)
|
|
$
|
(109,254
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Operations
For the
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
($ in thousands)
|
|
|
Net interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
19,326
|
|
|
$
|
484,889
|
|
|
$
|
59,784
|
|
|
$
|
275,151
|
|
|
$
|
(32,814
|
)
|
|
$
|
806,336
|
|
Investment securities
|
|
|
|
|
|
|
46,868
|
|
|
|
368
|
|
|
|
13,723
|
|
|
|
|
|
|
|
60,959
|
|
Other
|
|
|
|
|
|
|
4,390
|
|
|
|
110
|
|
|
|
151
|
|
|
|
|
|
|
|
4,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
19,326
|
|
|
|
536,147
|
|
|
|
60,262
|
|
|
|
289,025
|
|
|
|
(32,814
|
)
|
|
|
871,946
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
109,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,430
|
|
Borrowings
|
|
|
118,366
|
|
|
|
49,679
|
|
|
|
32,145
|
|
|
|
144,090
|
|
|
|
(26,398
|
)
|
|
|
317,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
118,366
|
|
|
|
159,109
|
|
|
|
32,145
|
|
|
|
144,090
|
|
|
|
(26,398
|
)
|
|
|
427,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (loss) income
|
|
|
(99,040
|
)
|
|
|
377,038
|
|
|
|
28,117
|
|
|
|
144,935
|
|
|
|
(6,416
|
)
|
|
|
444,634
|
|
Provision for loan losses
|
|
|
|
|
|
|
277,570
|
|
|
|
140,640
|
|
|
|
427,776
|
|
|
|
|
|
|
|
845,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (loss) income after provision for loan losses
|
|
|
(99,040
|
)
|
|
|
99,468
|
|
|
|
(112,523
|
)
|
|
|
(282,841
|
)
|
|
|
(6,416
|
)
|
|
|
(401,352
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
1,321
|
|
|
|
51,917
|
|
|
|
86,369
|
|
|
|
|
|
|
|
|
|
|
|
139,607
|
|
Professional fees
|
|
|
7,762
|
|
|
|
3,450
|
|
|
|
38,016
|
|
|
|
7,704
|
|
|
|
|
|
|
|
56,932
|
|
Other administrative expenses
|
|
|
4,163
|
|
|
|
54,503
|
|
|
|
57,479
|
|
|
|
49,427
|
|
|
|
(84,608
|
)
|
|
|
80,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
13,246
|
|
|
|
109,870
|
|
|
|
181,864
|
|
|
|
57,131
|
|
|
|
(84,608
|
)
|
|
|
277,503
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on investments, net
|
|
|
|
|
|
|
(10,452
|
)
|
|
|
(2,778
|
)
|
|
|
(17,494
|
)
|
|
|
|
|
|
|
(30,724
|
)
|
Loss on derivatives
|
|
|
|
|
|
|
(9,669
|
)
|
|
|
(1,302
|
)
|
|
|
(732
|
)
|
|
|
(1,352
|
)
|
|
|
(13,055
|
)
|
Gain on residential mortgage investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,308
|
|
|
|
|
|
|
|
15,308
|
|
(Loss) gain on debt extinguishment
|
|
|
(57,128
|
)
|
|
|
1,617
|
|
|
|
|
|
|
|
14,997
|
|
|
|
|
|
|
|
(40,514
|
)
|
Net expense of real estate owned and other foreclosed assets
|
|
|
|
|
|
|
(8,990
|
)
|
|
|
(4,807
|
)
|
|
|
(33,972
|
)
|
|
|
|
|
|
|
(47,769
|
)
|
Other (expense) income, net
|
|
|
(3,138
|
)
|
|
|
40,886
|
|
|
|
61,096
|
|
|
|
8,305
|
|
|
|
(86,070
|
)
|
|
|
21,079
|
|
Loss in subsidiaries
|
|
|
(706,908
|
)
|
|
|
(794
|
)
|
|
|
(15,909
|
)
|
|
|
(263,983
|
)
|
|
|
987,594
|
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
|
|
|
|
3,558
|
|
|
|
(3,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(767,174
|
)
|
|
|
12,598
|
|
|
|
39,858
|
|
|
|
(281,129
|
)
|
|
|
900,172
|
|
|
|
(95,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations before income
taxes
|
|
|
(879,460
|
)
|
|
|
2,196
|
|
|
|
(254,529
|
)
|
|
|
(621,101
|
)
|
|
|
978,364
|
|
|
|
(774,530
|
)
|
Income tax (benefit) expense
|
|
|
(10,441
|
)
|
|
|
(8,483
|
)
|
|
|
224
|
|
|
|
155,014
|
|
|
|
|
|
|
|
136,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations
|
|
|
(869,019
|
)
|
|
|
10,679
|
|
|
|
(254,753
|
)
|
|
|
(776,115
|
)
|
|
|
978,364
|
|
|
|
(910,844
|
)
|
Net income from discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,868
|
|
|
|
|
|
|
|
49,868
|
|
Loss from sale of discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,071
|
)
|
|
|
|
|
|
|
(8,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(869,019
|
)
|
|
|
10,679
|
|
|
|
(254,753
|
)
|
|
|
(734,318
|
)
|
|
|
978,364
|
|
|
|
(869,047
|
)
|
Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to CapitalSource Inc.
|
|
$
|
(869,019
|
)
|
|
$
|
10,679
|
|
|
$
|
(254,753
|
)
|
|
$
|
(734,290
|
)
|
|
$
|
978,364
|
|
|
$
|
(869,019
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Operations
For the
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
($ in thousands)
|
|
|
Net interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
4,335
|
|
|
$
|
510,592
|
|
|
$
|
72,729
|
|
|
$
|
468,799
|
|
|
$
|
(8,954
|
)
|
|
$
|
1,047,501
|
|
Investment securities
|
|
|
|
|
|
|
8,406
|
|
|
|
828
|
|
|
|
128,868
|
|
|
|
|
|
|
|
138,102
|
|
Other
|
|
|
|
|
|
|
12,029
|
|
|
|
2,879
|
|
|
|
8,958
|
|
|
|
|
|
|
|
23,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
4,335
|
|
|
|
531,027
|
|
|
|
76,436
|
|
|
|
606,625
|
|
|
|
(8,954
|
)
|
|
|
1,209,469
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
76,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,245
|
|
Borrowings
|
|
|
93,827
|
|
|
|
142,046
|
|
|
|
47,241
|
|
|
|
331,723
|
|
|
|
(13,375
|
)
|
|
|
601,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
93,827
|
|
|
|
218,291
|
|
|
|
47,241
|
|
|
|
331,723
|
|
|
|
(13,375
|
)
|
|
|
677,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (loss) income
|
|
|
(89,492
|
)
|
|
|
312,736
|
|
|
|
29,195
|
|
|
|
274,902
|
|
|
|
4,421
|
|
|
|
531,762
|
|
Provision for loan losses
|
|
|
|
|
|
|
55,600
|
|
|
|
479,281
|
|
|
|
58,165
|
|
|
|
|
|
|
|
593,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest (loss) income after provision for loan losses
|
|
|
(89,492
|
)
|
|
|
257,136
|
|
|
|
(450,086
|
)
|
|
|
216,737
|
|
|
|
4,421
|
|
|
|
(61,284
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
1,061
|
|
|
|
29,446
|
|
|
|
112,890
|
|
|
|
4
|
|
|
|
|
|
|
|
143,401
|
|
Professional fees
|
|
|
3,577
|
|
|
|
5,596
|
|
|
|
34,668
|
|
|
|
10,728
|
|
|
|
(1,991
|
)
|
|
|
52,578
|
|
Other administrative expenses
|
|
|
38,175
|
|
|
|
24,765
|
|
|
|
48,480
|
|
|
|
4,414
|
|
|
|
(57,213
|
)
|
|
|
58,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
42,813
|
|
|
|
59,807
|
|
|
|
196,038
|
|
|
|
15,146
|
|
|
|
(59,204
|
)
|
|
|
254,600
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on investments, net
|
|
|
|
|
|
|
(10,492
|
)
|
|
|
(9,147
|
)
|
|
|
(53,716
|
)
|
|
|
(214
|
)
|
|
|
(73,569
|
)
|
(Loss) gain on derivatives
|
|
|
|
|
|
|
(7,449
|
)
|
|
|
36,829
|
|
|
|
(66,179
|
)
|
|
|
(4,283
|
)
|
|
|
(41,082
|
)
|
Loss on residential mortgage investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(102,779
|
)
|
|
|
|
|
|
|
(102,779
|
)
|
(Loss) gain on debt extinguishment
|
|
|
(28,296
|
)
|
|
|
4,160
|
|
|
|
29,854
|
|
|
|
53,138
|
|
|
|
|
|
|
|
58,856
|
|
Net expense of real estate owned and other foreclosed assets
|
|
|
|
|
|
|
|
|
|
|
(14,970
|
)
|
|
|
(4,780
|
)
|
|
|
|
|
|
|
(19,750
|
)
|
Other (expense) income, net
|
|
|
(1,372
|
)
|
|
|
12,856
|
|
|
|
92,020
|
|
|
|
1,837
|
|
|
|
(69,847
|
)
|
|
|
35,494
|
|
(Loss) earnings in subsidiaries
|
|
|
(47,939
|
)
|
|
|
|
|
|
|
96,776
|
|
|
|
(288,141
|
)
|
|
|
239,304
|
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
(83,213
|
)
|
|
|
137,126
|
|
|
|
(53,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(77,607
|
)
|
|
|
(84,138
|
)
|
|
|
368,488
|
|
|
|
(514,533
|
)
|
|
|
164,960
|
|
|
|
(142,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations before income
taxes
|
|
|
(209,912
|
)
|
|
|
113,191
|
|
|
|
(277,636
|
)
|
|
|
(312,942
|
)
|
|
|
228,585
|
|
|
|
(458,714
|
)
|
Income tax expense (benefit)
|
|
|
9,977
|
|
|
|
16,417
|
|
|
|
|
|
|
|
(216,977
|
)
|
|
|
|
|
|
|
(190,583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income from continuing operations
|
|
|
(219,889
|
)
|
|
|
96,774
|
|
|
|
(277,636
|
)
|
|
|
(95,965
|
)
|
|
|
228,585
|
|
|
|
(268,131
|
)
|
Net income from discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,350
|
|
|
|
|
|
|
|
49,350
|
|
Gain from sale of discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
|
|
|
|
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(219,889
|
)
|
|
|
96,774
|
|
|
|
(277,636
|
)
|
|
|
(46,511
|
)
|
|
|
228,585
|
|
|
|
(218,677
|
)
|
Net income attributable to noncontrolling interests
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
1,428
|
|
|
|
(6
|
)
|
|
|
1,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to CapitalSource Inc.
|
|
$
|
(219,889
|
)
|
|
$
|
96,770
|
|
|
$
|
(277,636
|
)
|
|
$
|
(47,939
|
)
|
|
$
|
228,591
|
|
|
$
|
(220,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Cash Flows
For the
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(109,254
|
)
|
|
$
|
162,944
|
|
|
$
|
82,890
|
|
|
$
|
(106,314
|
)
|
|
$
|
(139,603
|
)
|
|
$
|
(109,337
|
)
|
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
1,559
|
|
|
|
3,193
|
|
|
|
|
|
|
|
|
|
|
|
4,752
|
|
Restricted stock expense
|
|
|
|
|
|
|
1,458
|
|
|
|
8,125
|
|
|
|
|
|
|
|
|
|
|
|
9,583
|
|
Gain on extinguishment of debt
|
|
|
(925
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(925
|
)
|
Amortization of deferred loan fees and discounts
|
|
|
|
|
|
|
(67,865
|
)
|
|
|
2,582
|
|
|
|
(11,527
|
)
|
|
|
|
|
|
|
(76,810
|
)
|
Paid-in-kind
interest on loans
|
|
|
|
|
|
|
(5,150
|
)
|
|
|
1,540
|
|
|
|
4,097
|
|
|
|
|
|
|
|
487
|
|
Provision for loan losses
|
|
|
|
|
|
|
123,411
|
|
|
|
(17,517
|
)
|
|
|
201,186
|
|
|
|
|
|
|
|
307,080
|
|
Provision for unfunded commitments
|
|
|
|
|
|
|
(442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(442
|
)
|
Amortization of deferred financing fees and discounts
|
|
|
28,010
|
|
|
|
8,492
|
|
|
|
(982
|
)
|
|
|
15,406
|
|
|
|
|
|
|
|
50,926
|
|
Depreciation and amortization
|
|
|
|
|
|
|
(9,760
|
)
|
|
|
3,847
|
|
|
|
3,738
|
|
|
|
|
|
|
|
(2,175
|
)
|
(Benefit) provision for deferred income taxes
|
|
|
|
|
|
|
(31,023
|
)
|
|
|
(220
|
)
|
|
|
35,586
|
|
|
|
|
|
|
|
4,343
|
|
Non-cash gain on investments, net
|
|
|
|
|
|
|
(27,799
|
)
|
|
|
(1,337
|
)
|
|
|
(12,534
|
)
|
|
|
|
|
|
|
(41,670
|
)
|
Non-cash loss on foreclosed assets and other property and
equipment disposals
|
|
|
|
|
|
|
17,843
|
|
|
|
5,751
|
|
|
|
46,486
|
|
|
|
|
|
|
|
70,080
|
|
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
|
|
|
|
|
|
|
(2,753
|
)
|
|
|
(27,118
|
)
|
|
|
24,315
|
|
|
|
|
|
|
|
(5,556
|
)
|
Accretion of discount on commercial real estate A
participation interest
|
|
|
|
|
|
|
(9,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,548
|
)
|
(Increase) decrease in interest receivable
|
|
|
|
|
|
|
(10,837
|
)
|
|
|
51,391
|
|
|
|
(9,358
|
)
|
|
|
|
|
|
|
31,196
|
|
(Increase) decrease in loans held for sale, net
|
|
|
|
|
|
|
(1,771
|
)
|
|
|
1,754
|
|
|
|
9,395
|
|
|
|
|
|
|
|
9,378
|
|
Increase in intercompany receivable
|
|
|
|
|
|
|
|
|
|
|
(405
|
)
|
|
|
18,008
|
|
|
|
(17,603
|
)
|
|
|
|
|
(Increase) decrease in other assets
|
|
|
(22,664
|
)
|
|
|
(19,525
|
)
|
|
|
(29,181
|
)
|
|
|
137,020
|
|
|
|
33,660
|
|
|
|
99,310
|
|
(Decrease) increase in other liabilities
|
|
|
(113
|
)
|
|
|
36,248
|
|
|
|
(28,208
|
)
|
|
|
13,829
|
|
|
|
(41,405
|
)
|
|
|
(19,649
|
)
|
Net transfers with subsidiaries
|
|
|
378,909
|
|
|
|
(77,770
|
)
|
|
|
121,944
|
|
|
|
(585,775
|
)
|
|
|
162,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities
|
|
|
273,963
|
|
|
|
83,988
|
|
|
|
178,049
|
|
|
|
(233,165
|
)
|
|
|
(2,259
|
)
|
|
|
300,576
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted cash
|
|
|
|
|
|
|
33,419
|
|
|
|
(26,892
|
)
|
|
|
47,129
|
|
|
|
|
|
|
|
53,656
|
|
Decrease in commercial real estate A participation
interest
|
|
|
|
|
|
|
540,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
540,108
|
|
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
|
|
|
|
|
|
|
114,091
|
|
|
|
(89,397
|
)
|
|
|
1,343,308
|
|
|
|
(22,107
|
)
|
|
|
1,345,895
|
|
Cash received for real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
339,643
|
|
|
|
|
|
|
|
339,643
|
|
Acquisition of marketable securities, available for sale, net
|
|
|
|
|
|
|
(558,399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(558,399
|
)
|
Reduction of marketable securities, held to maturity, net
|
|
|
|
|
|
|
75,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,643
|
|
(Acquisition) reduction of other investments, net
|
|
|
|
|
|
|
(5,489
|
)
|
|
|
2,391
|
|
|
|
88,586
|
|
|
|
|
|
|
|
85,488
|
|
(Acquisition) disposal of property and equipment, net
|
|
|
|
|
|
|
(1,626
|
)
|
|
|
(5,833
|
)
|
|
|
859
|
|
|
|
|
|
|
|
(6,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities
|
|
|
|
|
|
|
98,947
|
|
|
|
(119,731
|
)
|
|
|
1,826,525
|
|
|
|
(22,107
|
)
|
|
|
1,783,634
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(18,082
|
)
|
|
|
(1,099
|
)
|
|
|
2
|
|
|
|
(2,789
|
)
|
|
|
|
|
|
|
(21,968
|
)
|
Deposits accepted, net of repayments
|
|
|
|
|
|
|
137,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137,699
|
|
Increase (decrease) in intercompany payable
|
|
|
|
|
|
|
|
|
|
|
(18,008
|
)
|
|
|
(6,358
|
)
|
|
|
24,366
|
|
|
|
|
|
Repayments on credit facilities, net
|
|
|
(193,637
|
)
|
|
|
(91,656
|
)
|
|
|
(54,199
|
)
|
|
|
(124,428
|
)
|
|
|
|
|
|
|
(463,920
|
)
|
Borrowings of term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,784
|
|
|
|
|
|
|
|
14,784
|
|
Repayments and extinguishment of term debt
|
|
|
|
|
|
|
(846,556
|
)
|
|
|
|
|
|
|
(1,142,036
|
)
|
|
|
|
|
|
|
(1,988,592
|
)
|
(Repayments of) borrowings under other borrowings
|
|
|
(47,227
|
)
|
|
|
212,000
|
|
|
|
(78
|
)
|
|
|
(263,972
|
)
|
|
|
|
|
|
|
(99,277
|
)
|
Proceeds from exercise of options
|
|
|
1,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,080
|
|
Repurchase of common stock
|
|
|
(7,635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,635
|
)
|
Payment of dividends
|
|
|
(12,951
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,951
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by financing activities
|
|
|
(278,452
|
)
|
|
|
(589,612
|
)
|
|
|
(72,283
|
)
|
|
|
(1,524,799
|
)
|
|
|
24,366
|
|
|
|
(2,440,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(4,489
|
)
|
|
|
(406,677
|
)
|
|
|
(13,965
|
)
|
|
|
68,561
|
|
|
|
|
|
|
|
(356,570
|
)
|
Cash and cash equivalents as of beginning of year
|
|
|
99,103
|
|
|
|
760,343
|
|
|
|
265,977
|
|
|
|
51,597
|
|
|
|
|
|
|
|
1,177,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end of year
|
|
$
|
94,614
|
|
|
$
|
353,666
|
|
|
$
|
252,012
|
|
|
$
|
120,158
|
|
|
$
|
|
|
|
$
|
820,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Cash Flows
For the Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(869,019
|
)
|
|
$
|
10,679
|
|
|
$
|
(254,753
|
)
|
|
$
|
(734,318
|
)
|
|
$
|
978,364
|
|
|
$
|
(869,047
|
)
|
Adjustments to reconcile net (loss) income to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
1,103
|
|
|
|
4,795
|
|
|
|
|
|
|
|
|
|
|
|
5,898
|
|
Restricted stock expense
|
|
|
|
|
|
|
3,491
|
|
|
|
21,506
|
|
|
|
|
|
|
|
|
|
|
|
24,997
|
|
Loss (gain) on extinguishment of debt
|
|
|
57,128
|
|
|
|
(1,617
|
)
|
|
|
|
|
|
|
(14,901
|
)
|
|
|
|
|
|
|
40,610
|
|
Amortization of deferred loan fees and discounts
|
|
|
|
|
|
|
(17,244
|
)
|
|
|
(34,478
|
)
|
|
|
(25,812
|
)
|
|
|
|
|
|
|
(77,534
|
)
|
Paid-in-kind
interest on loans
|
|
|
|
|
|
|
(13,838
|
)
|
|
|
358
|
|
|
|
804
|
|
|
|
|
|
|
|
(12,676
|
)
|
Provision for loan losses
|
|
|
|
|
|
|
278,042
|
|
|
|
140,640
|
|
|
|
427,304
|
|
|
|
|
|
|
|
845,986
|
|
Provision for unfunded commitments
|
|
|
|
|
|
|
3,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,704
|
|
Amortization of deferred financing fees and discounts
|
|
|
32,214
|
|
|
|
14,926
|
|
|
|
418
|
|
|
|
15,980
|
|
|
|
|
|
|
|
63,538
|
|
Depreciation and amortization
|
|
|
|
|
|
|
(9,107
|
)
|
|
|
3,691
|
|
|
|
37,117
|
|
|
|
|
|
|
|
31,701
|
|
Provision (benefit) for deferred income taxes
|
|
|
6,879
|
|
|
|
(21,924
|
)
|
|
|
7
|
|
|
|
82,435
|
|
|
|
|
|
|
|
67,397
|
|
Non-cash loss on investments, net
|
|
|
|
|
|
|
18,825
|
|
|
|
2,847
|
|
|
|
10,093
|
|
|
|
|
|
|
|
31,765
|
|
Non-cash loss on foreclosed assets and other property and
equipment disposals
|
|
|
|
|
|
|
4,391
|
|
|
|
4,637
|
|
|
|
37,790
|
|
|
|
|
|
|
|
46,818
|
|
Unrealized loss on derivatives and foreign currencies, net
|
|
|
|
|
|
|
7,459
|
|
|
|
17
|
|
|
|
9,245
|
|
|
|
|
|
|
|
16,721
|
|
Unrealized gain on residential mortgage investment portfolio, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66,676
|
)
|
|
|
|
|
|
|
(66,676
|
)
|
Net decrease in mortgage-backed securities pledged, trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,485,144
|
|
|
|
|
|
|
|
1,485,144
|
|
Accretion of discount on commercial real estate A
participation interest
|
|
|
|
|
|
|
(29,781
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,781
|
)
|
Decrease (increase) in interest receivable
|
|
|
|
|
|
|
10,068
|
|
|
|
(59,199
|
)
|
|
|
30,818
|
|
|
|
|
|
|
|
(18,313
|
)
|
Decrease in loans held for sale, net
|
|
|
|
|
|
|
3,606
|
|
|
|
17,330
|
|
|
|
|
|
|
|
|
|
|
|
20,936
|
|
(Increase) decrease in intercompany receivable
|
|
|
(300,000
|
)
|
|
|
|
|
|
|
52,091
|
|
|
|
(55,249
|
)
|
|
|
303,158
|
|
|
|
|
|
(Increase) decrease in other assets
|
|
|
(18,072
|
)
|
|
|
(118,624
|
)
|
|
|
141,378
|
|
|
|
505,731
|
|
|
|
(51,830
|
)
|
|
|
458,583
|
|
(Decrease) increase in other liabilities
|
|
|
(30,886
|
)
|
|
|
(93,649
|
)
|
|
|
95,957
|
|
|
|
(208,864
|
)
|
|
|
38,367
|
|
|
|
(199,075
|
)
|
Net transfers with subsidiaries
|
|
|
1,722,522
|
|
|
|
(304,190
|
)
|
|
|
127,067
|
|
|
|
(557,570
|
)
|
|
|
(987,829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities
|
|
|
600,766
|
|
|
|
(253,680
|
)
|
|
|
264,309
|
|
|
|
979,071
|
|
|
|
280,230
|
|
|
|
1,870,696
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in restricted cash
|
|
|
|
|
|
|
(37,059
|
)
|
|
|
23,087
|
|
|
|
251,113
|
|
|
|
|
|
|
|
237,141
|
|
Decrease in mortgage-related receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,754,555
|
|
|
|
|
|
|
|
1,754,555
|
|
Decrease in commercial real estate A participation
interest
|
|
|
|
|
|
|
895,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
895,832
|
|
Decrease (increase) in loans, net
|
|
|
|
|
|
|
741,435
|
|
|
|
(221,987
|
)
|
|
|
(66,237
|
)
|
|
|
8,825
|
|
|
|
462,036
|
|
Cash received for real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
292,837
|
|
|
|
|
|
|
|
292,837
|
|
Acquisition of marketable securities,
available-for-sale,
net
|
|
|
|
|
|
|
(241,018
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(241,018
|
)
|
Acquisition of marketable securities,
held-to-maturity,
net
|
|
|
|
|
|
|
(213,048
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(213,048
|
)
|
Reduction of other investments, net
|
|
|
|
|
|
|
5,055
|
|
|
|
2,835
|
|
|
|
11,722
|
|
|
|
|
|
|
|
19,612
|
|
(Acquisition) disposal of property and equipment, net
|
|
|
|
|
|
|
(12,656
|
)
|
|
|
(7,867
|
)
|
|
|
1,986
|
|
|
|
|
|
|
|
(18,537
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities
|
|
|
|
|
|
|
1,138,541
|
|
|
|
(203,932
|
)
|
|
|
2,245,976
|
|
|
|
8,825
|
|
|
|
3,189,410
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(32,556
|
)
|
|
|
(641
|
)
|
|
|
177
|
|
|
|
(12,553
|
)
|
|
|
|
|
|
|
(45,573
|
)
|
Deposits accepted, net of repayments
|
|
|
|
|
|
|
(560,497
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(560,497
|
)
|
Increase in intercompany payable
|
|
|
|
|
|
|
|
|
|
|
196,332
|
|
|
|
92,723
|
|
|
|
(289,055
|
)
|
|
|
|
|
Repayments under repurchase agreements, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,595,750
|
)
|
|
|
|
|
|
|
(1,595,750
|
)
|
(Repayments of) borrowings on credit facilities, net
|
|
|
(696,363
|
)
|
|
|
(294,946
|
)
|
|
|
(29,701
|
)
|
|
|
110,729
|
|
|
|
|
|
|
|
(910,281
|
)
|
Borrowings of term debt
|
|
|
281,898
|
|
|
|
6,000
|
|
|
|
|
|
|
|
38,551
|
|
|
|
|
|
|
|
326,449
|
|
Repayments and extinguishment of term debt
|
|
|
|
|
|
|
(704,688
|
)
|
|
|
|
|
|
|
(1,994,230
|
)
|
|
|
|
|
|
|
(2,698,918
|
)
|
(Repayments of) borrowings under other borrowings
|
|
|
(118,503
|
)
|
|
|
200,000
|
|
|
|
(74
|
)
|
|
|
117,648
|
|
|
|
|
|
|
|
199,071
|
|
Proceeds from issuance of common stock, net of offering costs
|
|
|
77,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,105
|
|
Repurchase of common stock
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(800
|
)
|
Payment of dividends
|
|
|
(12,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,455
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by financing activities
|
|
|
(501,674
|
)
|
|
|
(1,354,772
|
)
|
|
|
166,734
|
|
|
|
(3,242,882
|
)
|
|
|
(289,055
|
)
|
|
|
(5,221,649
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
99,092
|
|
|
|
(469,911
|
)
|
|
|
227,111
|
|
|
|
(17,835
|
)
|
|
|
|
|
|
|
(161,543
|
)
|
Cash and cash equivalents as of beginning of year
|
|
|
11
|
|
|
|
1,230,254
|
|
|
|
38,866
|
|
|
|
69,432
|
|
|
|
|
|
|
|
1,338,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end of year
|
|
$
|
99,103
|
|
|
$
|
760,343
|
|
|
$
|
265,977
|
|
|
$
|
51,597
|
|
|
$
|
|
|
|
$
|
1,177,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Cash Flows
For the Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(219,889
|
)
|
|
$
|
96,774
|
|
|
$
|
(277,636
|
)
|
|
$
|
(46,511
|
)
|
|
$
|
228,585
|
|
|
$
|
(218,677
|
)
|
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
53
|
|
|
|
966
|
|
|
|
|
|
|
|
|
|
|
|
1,019
|
|
Restricted stock expense
|
|
|
|
|
|
|
3,385
|
|
|
|
39,190
|
|
|
|
|
|
|
|
|
|
|
|
42,575
|
|
Loss (gain) on extinguishment of debt
|
|
|
28,296
|
|
|
|
(4,160
|
)
|
|
|
(29,854
|
)
|
|
|
(53,138
|
)
|
|
|
|
|
|
|
(58,856
|
)
|
Amortization of deferred loan fees and discounts
|
|
|
|
|
|
|
(38,544
|
)
|
|
|
(33,738
|
)
|
|
|
(18,685
|
)
|
|
|
|
|
|
|
(90,967
|
)
|
Paid-in-kind
interest on loans
|
|
|
|
|
|
|
7,887
|
|
|
|
5,276
|
|
|
|
2,689
|
|
|
|
|
|
|
|
15,852
|
|
Provision for loan losses
|
|
|
|
|
|
|
55,600
|
|
|
|
479,281
|
|
|
|
58,165
|
|
|
|
|
|
|
|
593,046
|
|
Amortization of deferred financing fees and discounts
|
|
|
55,216
|
|
|
|
28,059
|
|
|
|
2,600
|
|
|
|
32,265
|
|
|
|
|
|
|
|
118,140
|
|
Depreciation and amortization
|
|
|
|
|
|
|
2,717
|
|
|
|
3,639
|
|
|
|
33,101
|
|
|
|
|
|
|
|
39,457
|
|
Provision (benefit) for deferred income taxes
|
|
|
3,689
|
|
|
|
(34,096
|
)
|
|
|
(3,071
|
)
|
|
|
(118,973
|
)
|
|
|
|
|
|
|
(152,451
|
)
|
Non-cash loss (gain) on investments, net
|
|
|
|
|
|
|
55,542
|
|
|
|
26,789
|
|
|
|
(81
|
)
|
|
|
|
|
|
|
82,250
|
|
Impairment of Parent Company goodwill
|
|
|
|
|
|
|
|
|
|
|
5,344
|
|
|
|
|
|
|
|
|
|
|
|
5,344
|
|
Non-cash loss on foreclosed assets and other property and
equipment disposals
|
|
|
|
|
|
|
|
|
|
|
17,202
|
|
|
|
|
|
|
|
|
|
|
|
17,202
|
|
Unrealized loss on derivatives and foreign currencies, net
|
|
|
|
|
|
|
26,202
|
|
|
|
3,632
|
|
|
|
11,259
|
|
|
|
|
|
|
|
41,093
|
|
Unrealized loss on residential mortgage investment portfolio, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,085
|
|
|
|
|
|
|
|
50,085
|
|
Net decrease in mortgage-backed securities pledged, trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,559,389
|
|
|
|
|
|
|
|
2,559,389
|
|
Amortization of discount on residential mortgage investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,619
|
)
|
|
|
|
|
|
|
(8,619
|
)
|
Accretion of discount on commercial real estate A
participation interest
|
|
|
|
|
|
|
(23,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,777
|
)
|
(Increase) decrease in interest receivable
|
|
|
|
|
|
|
(18,849
|
)
|
|
|
20,600
|
|
|
|
32,232
|
|
|
|
|
|
|
|
33,983
|
|
Decrease in loans held for sale, net
|
|
|
|
|
|
|
52,788
|
|
|
|
10,470
|
|
|
|
206,725
|
|
|
|
|
|
|
|
269,983
|
|
Decrease (increase) in intercompany receivable
|
|
|
|
|
|
|
|
|
|
|
100,336
|
|
|
|
(56,194
|
)
|
|
|
(44,142
|
)
|
|
|
|
|
Increase in other assets
|
|
|
(4,627
|
)
|
|
|
(40,242
|
)
|
|
|
(90,391
|
)
|
|
|
(509,843
|
)
|
|
|
161,979
|
|
|
|
(483,124
|
)
|
Increase (decrease) in other liabilities
|
|
|
19,864
|
|
|
|
168,221
|
|
|
|
(28,783
|
)
|
|
|
128,004
|
|
|
|
(163,363
|
)
|
|
|
123,943
|
|
Net transfers with subsidiaries
|
|
|
(564,742
|
)
|
|
|
462,131
|
|
|
|
48,010
|
|
|
|
293,380
|
|
|
|
(238,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by operating activities
|
|
|
(682,193
|
)
|
|
|
799,691
|
|
|
|
299,862
|
|
|
|
2,595,250
|
|
|
|
(55,720
|
)
|
|
|
2,956,890
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted cash
|
|
|
|
|
|
|
45,087
|
|
|
|
87,591
|
|
|
|
(38,258
|
)
|
|
|
|
|
|
|
94,420
|
|
Decrease in mortgage-related receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
214,298
|
|
|
|
|
|
|
|
214,298
|
|
Decrease in commercial real estate A participation
interest
|
|
|
|
|
|
|
447,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
447,804
|
|
Acquisition of CS Advisors CLO II
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,619
|
)
|
|
|
|
|
|
|
(18,619
|
)
|
(Increase) decrease in loans, net
|
|
|
|
|
|
|
(1,768,175
|
)
|
|
|
(316,348
|
)
|
|
|
2,010,447
|
|
|
|
11,027
|
|
|
|
(63,049
|
)
|
Cash paid for real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,121
|
)
|
|
|
|
|
|
|
(10,121
|
)
|
Acquisition of marketable securities,
available-for-sale,
net
|
|
|
|
|
|
|
(639,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(639,116
|
)
|
Acquisition of other investments, net
|
|
|
|
|
|
|
(43,269
|
)
|
|
|
(514
|
)
|
|
|
(5,173
|
)
|
|
|
|
|
|
|
(48,956
|
)
|
Net cash acquired in FIL transaction
|
|
|
|
|
|
|
3,187,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,187,037
|
|
Acquisition of property and equipment, net
|
|
|
|
|
|
|
(1,644
|
)
|
|
|
(3,373
|
)
|
|
|
(577
|
)
|
|
|
|
|
|
|
(5,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities
|
|
|
|
|
|
|
1,227,724
|
|
|
|
(232,644
|
)
|
|
|
2,151,997
|
|
|
|
11,027
|
|
|
|
3,158,104
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(42,110
|
)
|
|
|
(20,754
|
)
|
|
|
273
|
|
|
|
(13,340
|
)
|
|
|
|
|
|
|
(75,931
|
)
|
Deposits accepted, net of repayments
|
|
|
|
|
|
|
(126,773
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(126,773
|
)
|
(Decrease) increase in intercompany payable
|
|
|
|
|
|
|
|
|
|
|
(84,889
|
)
|
|
|
40,747
|
|
|
|
44,142
|
|
|
|
|
|
Repayments under repurchase agreements, net
|
|
|
|
|
|
|
(12,673
|
)
|
|
|
|
|
|
|
(2,301,604
|
)
|
|
|
|
|
|
|
(2,314,277
|
)
|
Borrowings on (repayments of) credit facilities, net
|
|
|
409,763
|
|
|
|
(456,591
|
)
|
|
|
100,712
|
|
|
|
(966,160
|
)
|
|
|
|
|
|
|
(912,276
|
)
|
Borrowings of term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,108
|
|
|
|
|
|
|
|
56,108
|
|
Repayments and extinguishment of term debt
|
|
|
|
|
|
|
(331,881
|
)
|
|
|
|
|
|
|
(1,477,390
|
)
|
|
|
551
|
|
|
|
(1,808,720
|
)
|
Repayments of other borrowings
|
|
|
|
|
|
|
|
|
|
|
(63,453
|
)
|
|
|
(10,724
|
)
|
|
|
|
|
|
|
(74,177
|
)
|
Proceeds from issuance of common stock, net of offering costs
|
|
|
601,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
601,755
|
|
Proceeds from exercise of options
|
|
|
362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
362
|
|
Tax expense on share based payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,641
|
)
|
|
|
|
|
|
|
(10,641
|
)
|
Payment of dividends
|
|
|
(287,566
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,994
|
)
|
|
|
|
|
|
|
(290,560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities
|
|
|
682,204
|
|
|
|
(948,672
|
)
|
|
|
(47,357
|
)
|
|
|
(4,685,998
|
)
|
|
|
44,693
|
|
|
|
(4,955,130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
11
|
|
|
|
1,078,743
|
|
|
|
19,861
|
|
|
|
61,249
|
|
|
|
|
|
|
|
1,159,864
|
|
Cash and cash equivalents as of beginning of year
|
|
|
|
|
|
|
151,511
|
|
|
|
19,005
|
|
|
|
8,183
|
|
|
|
|
|
|
|
178,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end of year
|
|
$
|
11
|
|
|
$
|
1,230,254
|
|
|
$
|
38,866
|
|
|
$
|
69,432
|
|
|
$
|
|
|
|
$
|
1,338,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
136
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 8.
|
Property
and Equipment
|
We own property and equipment for use in our operations. As of
December 31, 2010 and 2009, property and equipment included
in other assets on our audited consolidated balance sheets
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Land
|
|
$
|
125
|
|
|
$
|
125
|
|
Buildings
|
|
|
465
|
|
|
|
465
|
|
Equipment
|
|
|
19,060
|
|
|
|
19,410
|
|
Computer software
|
|
|
5,178
|
|
|
|
4,977
|
|
Furniture
|
|
|
6,294
|
|
|
|
7,066
|
|
Leasehold improvements
|
|
|
25,076
|
|
|
|
25,702
|
|
Accumulated depreciation and amortization
|
|
|
(26,476
|
)
|
|
|
(25,898
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,722
|
|
|
$
|
31,847
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property and equipment totaled
$11.0 million, $10.7 million and $6.9 million for
the years ended December 31, 2010, 2009 and 2008,
respectively.
As of December 31, 2010 and 2009, CapitalSource Bank had
$4.6 billion and $4.5 billion, respectively, in
deposits insured up to the maximum limit by the FDIC. In 2010,
the United States Congress permanently increased the deposit
insurance level from $100,000 to $250,000. As of
December 31, 2010 and 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
December 31, 2010 and 2009, CapitalSource Bank had
$266.7 million and $199.7 million, respectively, of
certificates of deposit in the amount of $250,000 or more.
As of December 31, 2010 and 2009, the weighted average
interest rates for savings and money market deposit accounts
were 0.83% and 1.06%, respectively, and for certificates of
deposit were 1.27% and 1.68%, respectively. The weighted average
interest rates for all deposits as of December 31, 2010 and
2009 were 1.18% and 1.56%, respectively.
As of December 31, 2010 and 2009, deposits at CapitalSource
Bank were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Interest-bearing deposits:
|
|
|
|
|
|
|
|
|
Money market
|
|
$
|
236,811
|
|
|
$
|
258,283
|
|
Savings
|
|
|
694,157
|
|
|
|
599,084
|
|
Certificates of deposit
|
|
|
3,690,305
|
|
|
|
3,626,512
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
$
|
4,621,273
|
|
|
$
|
4,483,879
|
|
|
|
|
|
|
|
|
|
|
137
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2010, certificates of deposit at
CapitalSource Bank detailed by maturity were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Amount
|
|
|
Average Rate
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Maturing by:
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
$
|
2,903,824
|
|
|
|
1.16
|
%
|
December 31, 2012
|
|
|
689,031
|
|
|
|
1.54
|
|
December 31, 2013
|
|
|
34,941
|
|
|
|
2.13
|
|
December 31, 2014
|
|
|
31,386
|
|
|
|
2.87
|
|
December 31, 2015
|
|
|
31,123
|
|
|
|
2.66
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,690,305
|
|
|
|
1.27
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2010, 2009 and 2008,
interest expense on deposits was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands)
|
|
|
Savings and money market
|
|
$
|
8,291
|
|
|
$
|
11,014
|
|
|
$
|
7,887
|
|
Certificates of deposit
|
|
|
51,994
|
|
|
|
98,309
|
|
|
|
67,498
|
|
Brokered certificates of deposit
|
|
|
|
|
|
|
456
|
|
|
|
1,137
|
|
Fees for early withdrawal
|
|
|
(233
|
)
|
|
|
(349
|
)
|
|
|
(277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense on deposits
|
|
$
|
60,052
|
|
|
$
|
109,430
|
|
|
$
|
76,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10.
|
Variable
Interest Entities
|
Troubled
Debt Restructurings
On January 1, 2010, we adopted new accounting guidance
surrounding the consolidation of variable interest entities. The
new guidance removes the exemption for 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 $493.7 million as of December 31, 2010
and are included in loans held for investment in our audited
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
$610.6 million as of December 31, 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,
138
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 December 31, 2010 and 2009,
the total outstanding balances of these commercial term debt
securitizations were $1.0 billion and $3.7 billion,
respectively. These amounts include $328.2 million and
$1.0 billion of notes and certificates that we held as of
December 31, 2010 and 2009, respectively.
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 audited consolidated financial statements,
including the underlying loans and the issued notes and
certificates held by third parties. As of December 31, 2010
and 2009, the carrying amounts of the consolidated liabilities
related to the Issuers were $697.5 million and
$2.7 billion, respectively. These amounts include term debt
recorded in our audited consolidated balance sheets and
represent obligations for which there is no recourse to us. As
of December 31, 2010 and 2009, the carrying amounts of the
consolidated assets related to the Issuers were
$901.9 million and $3.1 billion, respectively. These
amounts include loans held for investment, net recorded in our
audited consolidated balance sheets and relate to assets that
can only be used to settle obligations of the Issuers.
During the third quarter of 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 that most significantly impact the economic
performance of the
2006-A
Trust. In making this determination, we assessed the character
and 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 for the three months ended
September 30, 2010. As of December 31, 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 $12.2 million and were classified as
investment securities, available for sale in our consolidated
balance sheets. During the six months ended December 31,
2010, there were no realized or unrealized gains or losses
recorded to this interest from the date of deconsolidation. We
have no additional funding commitments or other obligations
related to these 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 year ended December 31, 2010. This swap
had a fair value of $15.1 million as of December 31,
2010. The interests in the Trust and the swap guarantee comprise
our maximum exposure to loss related to the
2006-A Trust.
139
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2010 and 2009, the composition of our
outstanding borrowings from continuing and discontinued
operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Outstanding borrowings from continuing operations:
|
|
|
|
|
|
|
|
|
Credit facilities
|
|
$
|
67,508
|
|
|
$
|
542,781
|
|
Term debt(1)
|
|
|
979,254
|
|
|
|
2,956,536
|
|
Other borrowings:
|
|
|
|
|
|
|
|
|
Convertible debt, net(2)
|
|
|
523,650
|
|
|
|
561,347
|
|
Subordinated debt
|
|
|
437,286
|
|
|
|
439,701
|
|
FHLB SF borrowings
|
|
|
412,000
|
|
|
|
200,000
|
|
Notes payable
|
|
|
2,948
|
|
|
|
3,026
|
|
|
|
|
|
|
|
|
|
|
Total other borrowings
|
|
|
1,375,884
|
|
|
|
1,204,074
|
|
|
|
|
|
|
|
|
|
|
Total outstanding borrowings from continuing operations
|
|
|
2,422,646
|
|
|
|
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
|
|
$
|
2,422,646
|
|
|
$
|
5,171,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts presented are net of debt discounts of
$14.4 million and $17.4 million as of
December 31, 2010 and 2009, respectively. |
|
(2) |
|
Amounts presented are net of debt discounts of $6.9 million
and $18.7 million as of December 31, 2010 and 2009,
respectively. |
|
(3) |
|
In June 2010, all mortgage debt was assumed or repaid upon the
sale of the related properties to Omega. |
Credit
Facilities
We have utilized secured credit facilities to finance our
commercial loans and for general corporate purposes. Our
committed credit facility capacities were $167.5 million
and $691.3 million as of December 31, 2010 and 2009,
respectively. As of December 31, 2010, 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
December 31, 2010 and 2009, total undrawn capacities under
our credit facilities were $100.0 million and
$148.5 million, respectively, which were limited by issued
and outstanding letters of credit totaling $21.0 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
140
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
proceeds. In May 2010, we modified the maturity date on our CS
Europe credit facility from May 28, 2010 to May 6,
2011. During the first quarter of 2011, we terminated all of the
credit facilities with the exception of our syndicated bank
facility, which had an aggregate commitment of
$100.0 million and no outstanding balance as of
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
|
|
|
Committed
|
|
|
Principal
|
|
|
Collateral
|
|
|
Committed
|
|
|
Principal
|
|
|
Collateral
|
|
|
Interest
|
|
|
Stated
|
|
|
|
Capacity
|
|
|
Outstanding
|
|
|
Balance(1)
|
|
|
Capacity
|
|
|
Outstanding
|
|
|
Balance(1)
|
|
|
Rate(2)
|
|
|
Maturity Date
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CS Funding III
|
|
$
|
1,626
|
|
|
$
|
1,626
|
|
|
$
|
81,236
|
|
|
$
|
41,287
|
|
|
$
|
41,287
|
|
|
$
|
119,354
|
|
|
|
LIBOR + 4.00
|
%
|
|
|
May 29, 2012
|
|
CS Funding VII
|
|
|
1,902
|
|
|
|
1,902
|
|
|
|
145,739
|
|
|
|
200,162
|
|
|
|
126,330
|
|
|
|
237,742
|
|
|
|
CP + 4.00
|
%
|
|
|
April 17, 2012
|
|
CS Europe(3)
|
|
|
63,980
|
|
|
|
63,980
|
|
|
|
261,813
|
|
|
|
124,820
|
|
|
|
124,820
|
|
|
|
314,870
|
|
|
|
EURIBOR + 4.00
|
%(4)
|
|
|
May 6, 2011
|
|
CS Inc.(5)
|
|
|
100,000
|
|
|
|
|
|
|
|
1,784,565
|
|
|
|
325,000
|
|
|
|
250,344
|
|
|
|
1,872,627
|
|
|
|
LIBOR + 6.50
|
%(6)
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit facilities
|
|
$
|
167,508
|
|
|
$
|
67,508
|
|
|
$
|
2,273,353
|
|
|
$
|
691,269
|
|
|
$
|
542,781
|
|
|
$
|
2,544,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the outstanding balances of assets that were pledged
as collateral to these credit facilities, including
$1.0 billion and $1.4 billion, as of December 31,
2010 and 2009, respectively, of loans. |
|
(2) |
|
As of December 31, 2010, the one-month LIBOR was 0.26%; the
one-month EURIBOR was 0.78%; and the CP rate for CS Funding VII
was 0.26%. |
|
(3) |
|
As of December 31, 2010, CS Europe was a
47.8 million multi-currency facility with principal
outstanding in Euro and British Pound Sterling
(GBP). The amounts presented were translated into
USD using the applicable spot rates as of December 31, 2010. |
|
(4) |
|
Borrowings in Euro or GBP are at EURIBOR or GBP LIBOR + 4.00%,
respectively, and borrowings in USD are at LIBOR + 4.00%. |
|
(5) |
|
Our syndicated bank credit facility requires that we reduce the
aggregate commitments to zero by December 31, 2011 unless
otherwise reduced by the receipt of collateral proceeds prior to
this date. Our 12.75% First Priority Senior Secured Notes due in
July 2014 (the 2014 Senior Secured Notes) share in
the collateral securing this facility. The Aggregate Collateral
Balance comprises loan assets and other assets that qualify as
Available Assets as defined under the credit agreement. |
|
(6) |
|
LIBOR + 6.50% or at an alternative base rate, which is the
greater of the prime rate for USD borrowings or the Federal
Funds Rate + 0.50%, or for foreign currency borrowings, at the
prevailing EURIBOR rate + 6.50% or GBP LIBOR + 6.50%. |
Term
Debt
In conjunction with each of our commercial term debt
securitizations, we established and contributed commercial loans
to separate 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 continue to service the underlying commercial loans
contributed to the Issuers and earn periodic servicing fees paid
from the cash flows of the underlying commercial loans. We have
no legal obligation to repay the outstanding notes or
certificates or contribute additional assets to the entity.
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. During the first quarter
of 2011, this term debt securitization was terminated.
141
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In July 2010, we deconsolidated the
2006-A
Trust, which resulted in the removal of all of its assets and
liabilities, including $891.3 million of term debt, from
our audited consolidated balance sheet as of December 31,
2010. For additional information on the deconsolidation of the
2006-A
Trust, see Note 10, Variable Interest Entities.
Our outstanding term debt transactions in the form of asset
securitizations held by third parties as of December 31,
2010 and 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Third Party Held
|
|
|
|
|
|
|
|
|
|
|
|
Debt Balance as of
|
|
|
|
|
|
|
|
|
Amounts
|
|
|
December 31,
|
|
|
Interest Rate
|
|
|
Original Expected
|
|
|
Issued
|
|
|
2010
|
|
|
2009
|
|
|
Spread(1)
|
|
|
Maturity Date
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
2006-1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
$
|
567,134
|
|
|
$
|
|
|
|
$
|
46,701
|
|
|
|
0.12
|
%
|
|
April 20, 2010
|
Class B
|
|
|
27,379
|
|
|
|
|
|
|
|
12,637
|
|
|
|
0.25
|
%
|
|
June 21, 2010
|
Class C
|
|
|
68,447
|
|
|
|
26,132
|
|
|
|
31,592
|
|
|
|
0.55
|
%
|
|
September 20, 2010
|
Class D
|
|
|
52,803
|
|
|
|
24,371
|
|
|
|
24,372
|
|
|
|
1.30
|
%
|
|
December 20, 2010
|
Class E(2)
|
|
|
31,290
|
|
|
|
|
|
|
|
|
|
|
|
2.50
|
%
|
|
June 20, 2011
|
Class F(2)
|
|
|
35,202
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
782,255
|
|
|
|
50,503
|
|
|
|
115,302
|
|
|
|
|
|
|
|
2006-2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1
|
|
|
300,000
|
|
|
|
27,036
|
|
|
|
175,556
|
|
|
|
0.24
|
%
|
|
May 20, 2013
|
Class A-2
|
|
|
550,000
|
|
|
|
|
|
|
|
260,667
|
|
|
|
0.21
|
%
|
|
September 20, 2012
|
Class A-3
|
|
|
147,500
|
|
|
|
62,859
|
|
|
|
147,500
|
|
|
|
0.33
|
%
|
|
May 20, 2013
|
Class B
|
|
|
71,250
|
|
|
|
71,250
|
|
|
|
71,250
|
|
|
|
0.38
|
%
|
|
June 20, 2013
|
Class C(3)
|
|
|
157,500
|
|
|
|
151,500
|
|
|
|
151,500
|
|
|
|
0.68
|
%
|
|
June 20, 2013
|
Class D(3)
|
|
|
101,250
|
|
|
|
98,000
|
|
|
|
98,000
|
|
|
|
1.52
|
%
|
|
June 20, 2013
|
Class E(4)
|
|
|
56,250
|
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
2.50
|
%
|
|
June 20, 2013
|
Class F(2)
|
|
|
116,250
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500,000
|
|
|
|
430,645
|
|
|
|
924,473
|
|
|
|
|
|
|
|
2006-A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1
A
|
|
|
70,375
|
|
|
|
|
|
|
|
62,865
|
|
|
|
0.26
|
%
|
|
January 20, 2037
|
Class A-R(5)
|
|
|
200,000
|
|
|
|
|
|
|
|
130,160
|
|
|
|
0.27
|
%
|
|
January 20, 2037
|
Class A-2A
|
|
|
500,000
|
|
|
|
|
|
|
|
424,640
|
|
|
|
0.25
|
%
|
|
January 20, 2037
|
Class A-2B
|
|
|
125,000
|
|
|
|
|
|
|
|
125,000
|
|
|
|
0.31
|
%
|
|
January 20, 2037
|
Class B
|
|
|
82,875
|
|
|
|
|
|
|
|
57,875
|
|
|
|
0.39
|
%
|
|
January 20, 2037
|
Class C
|
|
|
62,400
|
|
|
|
|
|
|
|
32,400
|
|
|
|
0.65
|
%
|
|
January 20, 2037
|
Class D
|
|
|
30,225
|
|
|
|
|
|
|
|
30,225
|
|
|
|
0.75
|
%
|
|
January 20, 2037
|
Class E
|
|
|
30,225
|
|
|
|
|
|
|
|
15,225
|
|
|
|
0.85
|
%
|
|
January 20, 2037
|
Class F
|
|
|
26,650
|
|
|
|
|
|
|
|
5,078
|
|
|
|
1.05
|
%
|
|
January 20, 2037
|
Class G
|
|
|
33,150
|
|
|
|
|
|
|
|
10,172
|
|
|
|
1.25
|
%
|
|
January 20, 2037
|
Class H
|
|
|
31,200
|
|
|
|
|
|
|
|
31,796
|
|
|
|
1.50
|
%
|
|
January 20, 2037
|
Class J(2)
|
|
|
47,450
|
|
|
|
|
|
|
|
|
|
|
|
2.50
|
%
|
|
January 20, 2037
|
Class K(2)
|
|
|
60,450
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,300,000
|
|
|
|
|
|
|
|
925,436
|
|
|
|
|
|
|
|
142
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Third Party Held
|
|
|
|
|
|
|
|
|
|
|
|
Debt Balance as of
|
|
|
|
|
|
|
|
|
Amounts
|
|
|
December 31,
|
|
|
Interest Rate
|
|
|
Original Expected
|
|
|
Issued
|
|
|
2010
|
|
|
2009
|
|
|
Spread(1)
|
|
|
Maturity Date
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
2007-1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
$
|
586,000
|
|
|
$
|
62,841
|
|
|
$
|
224,434
|
|
|
|
0.13
|
%
|
|
May 21, 2012
|
Class B
|
|
|
20,000
|
|
|
|
11,531
|
|
|
|
11,531
|
|
|
|
0.31
|
%
|
|
July 20, 2012
|
Class C
|
|
|
84,000
|
|
|
|
48,429
|
|
|
|
48,429
|
|
|
|
0.65
|
%
|
|
February 20, 2013
|
Class D
|
|
|
48,000
|
|
|
|
27,673
|
|
|
|
27,673
|
|
|
|
1.50
|
%
|
|
September 20, 2013
|
Class E(2)
|
|
|
34,000
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
January 21, 2014
|
Class F(2)
|
|
|
28,000
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
800,000
|
|
|
|
150,474
|
|
|
|
312,067
|
|
|
|
|
|
|
|
2007-A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
1,250,000
|
|
|
|
|
|
|
|
208,246
|
|
|
|
1.50
|
%
|
|
May 31, 2011
|
Class B
|
|
|
83,333
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
May 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,333,333
|
|
|
|
|
|
|
|
208,246
|
|
|
|
|
|
|
|
2007-2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
400,000
|
|
|
|
62,031
|
|
|
|
188,368
|
|
|
|
1.10
|
%
|
|
October 21, 2019
|
Class B(2)
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
October 21, 2019
|
Class C(2)
|
|
|
90,000
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
October 21, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
|
|
62,031
|
|
|
|
188,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,215,588
|
|
|
$
|
693,653
|
|
|
$
|
2,673,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The interest rate of
2007-2 is
based on the CP rate, which was 0.28% and 0.18% as of
December 31, 2010 and 2009, respectively. All of our other
term debt transactions are based on one-month LIBOR, which was
0.26% and 0.23% as of December 31, 2010 and 2009,
respectively. |
|
(2) |
|
Securities initially retained by us. During the third quarter of
2010, we sold our retained interests in the Class J and K
notes issued by the
2006-A Trust. |
|
(3) |
|
We repurchased certain bonds from third party investors at fair
market value. The total of $9.3 million of repurchased debt
reflects two classes of the
2006-2
securitization as of December 31, 2010. The tables reflect
outstanding debt to third party investors, and therefore,
eliminate the portions of debt owned by us. |
|
(4) |
|
$20.0 million of these securities were originally offered
for sale. The remaining $36.3 million of the securities are
retained by us. |
|
(5) |
|
Variable funding note. |
The expected aforementioned maturity dates are based on the
contractual maturities of the underlying loans held by the
securitization trusts. If the underlying loans experience
delinquencies or have their maturity dates extended, the
interest payments collected on them to repay the notes may be
delayed. The note holders may get cash flows from the
transactions faster if the notes remain outstanding beyond the
stated maturity dates and upon other termination events, in
which case our cash flow from these transactions would be
delayed until the notes senior to our retained interests are
retired.
In July 2009, we issued $300.0 million principal amount of
the 2014 Senior Secured Notes at an issue price of 93.966% in a
private offering to qualified institutional buyers
as defined in Rule 144A under the Securities Act and
outside the United States in reliance on Regulation S under
the Securities Act pursuant to an indenture (the
Indenture) by and among CapitalSource Inc., the
subsidiary guarantors and U.S. Bank National Association,
as
143
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
trustee. We received net proceeds of $273.8 million from
the issuance of the 2014 Senior Secured Notes, which were used
to reduce the commitments of the extending lenders under our
syndicated bank credit facility. The 2014 Senior Secured Notes
accrue interest at a rate of 12.75% per annum from July 27,
2009. Interest is payable semi-annually in arrears on January 15
and July 15 of each year, commencing on January 15, 2010.
The 2014 Senior Secured Notes will mature on July 15, 2014.
Repayment of the 2014 Senior Secured Notes may be accelerated
upon the occurrence of events of defaults specified in the
Indenture.
The Indenture contains a covenant that generally limits cash
dividends and dividends in other property paid on our common
stock and other capital stock to amounts that do not exceed the
cumulative amount of our consolidated net income (as defined for
purposes of the Indenture) plus (i) the net cash proceeds
of certain equity offerings, and (ii) the net reduction of
specified investments. The Indenture does not restrict payment
of a regular quarterly dividend not to exceed $0.01 per share,
as adjusted for certain transactions.
The 2014 Senior Secured Notes contain certain covenants that,
among other things, limit our ability and the ability of our
restricted subsidiaries, to incur or guarantee additional
indebtedness, pay dividends or make other distributions on, or
redeem or repurchase, our capital stock, make certain
investments or other restricted payments, refinance our existing
indebtedness, repay subordinated indebtedness, enter into
transactions with affiliates, sell assets, create liens, pay
dividends and other payments to CapitalSource Inc., designate
unrestricted subsidiaries, issue or sell stock of subsidiaries,
and engage in a merger, sale or consolidation. All of the
covenants are subject to a number of important qualifications
and exceptions.
In December 2010, we completed a consent solicitation regarding
our 12.75% Notes and entered into a supplemental indenture
which (1) permits us to use available cash to purchase our
convertible debentures redeemable in July 2011 and July 2012;
(2) modified the formula for calculating our restricted
payment capacity; (3) permits us to contribute the equity
in our remaining four term debt securitizations to CapitalSource
Bank, and (4) allows us to obtain secured debt with a
minimum advance rate of 40%, rather than the previous 75%
requirement, in each case, subject to our satisfying certain
collateral coverage tests.
We may redeem some or all of the 2014 Senior Secured Notes at a
redemption price equal to 100% of their principal amount plus a
make-whole premium. In addition, before
July 15, 2012, we may redeem up to 35% of the aggregate
principal amount of the 2014 Senior Secured Notes at a
redemption price of 112.75% of their principal amount with the
net cash proceeds of certain equity offerings. If we undergo a
change of control, sell certain of our assets, or, under certain
circumstances, receive certain cash proceeds from loan
collateral, we may be required to offer to purchase 2014 Senior
Secured Notes from holders at 101% of their principal amount, in
the case of a change of control, or 100% of their principal
amount, in the case of asset sales or receipt of loan collateral
proceeds. Accrued and unpaid interest on the 2014 Senior Secured
Notes would also be payable in each of the foregoing events of
redemption or purchase.
The 2014 Senior Secured Notes are secured on a senior basis,
equally and ratably with our existing syndicated bank credit
facility and any future senior obligations by all of the assets
that are pledged by us to secure our syndicated bank credit
facility and by secured intercompany notes issued to us by our
subsidiaries which are guarantors of the obligations under our
existing syndicated bank credit facility but not guarantors of
the 2014 Senior Secured Notes. These intercompany notes are
pledged as part of the security for the 2014 Senior Secured
Notes.
As of December 31, 2010 and 2009, our 2014 Senior Secured
Notes had balances of $285.7 million and
$282.9 million, respectively, net of discounts of
$14.3 million and $17.1 million, respectively.
Convertible
Debt
We have issued five series of convertible debentures as part of
our financing activities. Two of the series, our
1.25% Senior Convertible Debentures due 2034 (originally
issued in March 2004) and our 1.625% Senior
Subordinated Convertible Debentures due 2034 (originally issued
in April 2007), were repurchased in full during 2009. As a
result, our outstanding convertible debt as of December 31,
2010 and 2009 comprises only our 3.5% Senior Convertible
Debentures due 2034 (originally issued in July 2004; the
Senior Debentures), our 4% Senior Subordinated
Convertible Debentures due 2034 (originally issued in April
2007), and our 7.25% Senior
144
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Subordinated Convertible Debentures due 2037 (originally issued
in July 2007; the 4% debentures and the
7.25% debentures, together, the Subordinated
Debentures and, together with the Senior Debentures, the
Debentures).
Our outstanding convertible debentures as of December 31,
2010 and 2009, and their applicable conversion rates, effective
conversion prices per share, and number of shares used to
determine aggregate consideration as of December 31, 2010
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
|
|
|
|
|
|
|
Outstanding Balance
|
|
|
|
|
|
Conversion
|
|
|
|
|
|
|
as of December 31,
|
|
|
Conversion
|
|
|
Price per
|
|
|
Number of
|
|
Debentures
|
|
2010
|
|
|
2009
|
|
|
Rate(1)
|
|
|
Share(1)
|
|
|
Shares
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
3.5% Senior Convertible Debentures due 2034
|
|
$
|
8,446
|
|
|
$
|
8,446
|
|
|
|
48.0727
|
|
|
$
|
20.80
|
|
|
|
406,022
|
|
4.0% Senior Subordinated Convertible Debentures due 2034
|
|
|
272,077
|
|
|
|
321,554
|
|
|
|
48.0727
|
|
|
|
20.80
|
|
|
|
13,079,476
|
|
7.25% Senior Subordinated Convertible Debentures due 2037
|
|
|
250,000
|
|
|
|
250,000
|
|
|
|
36.9079
|
|
|
|
27.09
|
|
|
|
9,226,975
|
|
Debt discount, net of amortization(2)
|
|
|
(6,873
|
)
|
|
|
(18,653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
523,650
|
|
|
$
|
561,347
|
|
|
|
|
|
|
|
|
|
|
|
22,712,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity components recorded in additional paid-in capital
|
|
$
|
101,220
|
|
|
$
|
101,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2010, the Debentures may convert into
the stated number of shares of common stock per $1,000 principal
amount of Debentures, subject to certain conditions. The
conversion rates and prices of our convertible debt are subject
to adjustment based on the average price of our common stock ten
business days prior to the ex-dividend date and on the dividends
we pay on our common stock. See below for further information
regarding the adjustments of the conversion rates and prices. |
|
(2) |
|
As of December 31, 2010, the unamortized discounts on our
3.5%, 4.0% and 7.25% Senior Convertible Debentures will be
amortized through July 15, 2011, July 15, 2011 and
July 15, 2012, respectively. |
The conversion rate and price adjusts each time we pay a
dividend on our common stock, with the fair value of each
adjustment taxable to the holders. The 3.5% Debentures and
4% Debentures are redeemable for cash at our option at any
time on or after July 15, 2011 at a redemption price of
100% of their principal amount plus accrued interest. Holders of
the 3.5% Debentures or 4% Debentures have the right to
require us to repurchase some or all of their respective
debentures for cash on July 15, 2011, and each five-year
anniversary thereafter at a price of 100% of their principal
amount plus accrued interest. Holders of the 3.5% or
4% Debentures also have the right to require us to
repurchase some or all of their respective debentures upon
certain events constituting a fundamental change.
145
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For the years ended December 31, 2010, 2009 and 2008, the
interest expense recognized on our Debentures and the effective
interest rates on the liability components were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Interest expense recognized on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual interest coupon
|
|
$
|
30,128
|
|
|
$
|
31,785
|
|
|
$
|
34,645
|
|
Amortization of deferred financing fees
|
|
|
1,358
|
|
|
|
1,414
|
|
|
|
2,235
|
|
Amortization of debt discount
|
|
|
10,455
|
|
|
|
12,085
|
|
|
|
18,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense recognized
|
|
$
|
41,941
|
|
|
$
|
45,284
|
|
|
$
|
55,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective interest rate on the liability component:
|
|
|
|
|
|
|
|
|
|
|
|
|
1.25% Senior Debentures due 2034(1)
|
|
|
|
|
|
|
8.30
|
%
|
|
|
8.29
|
%
|
1.625% Senior Subordinated Debentures due 2034(1)
|
|
|
|
|
|
|
7.33
|
%
|
|
|
6.81
|
%
|
3.5% Senior Debentures due 2034
|
|
|
7.25
|
%
|
|
|
7.25
|
%
|
|
|
7.25
|
%
|
4.0% Senior Subordinated Debentures due 2034
|
|
|
7.68
|
%
|
|
|
7.68
|
%
|
|
|
7.68
|
%
|
7.25% Senior Subordinated Debentures due 2037
|
|
|
7.79
|
%
|
|
|
7.79
|
%
|
|
|
7.79
|
%
|
|
|
|
(1) |
|
Repurchased or exchanged for equity during 2009. |
If not earlier redeemed or repurchased, the 3.5% Debentures
will pay contingent interest, subject to certain limitations,
beginning on July 15, 2011. This contingent interest
feature is indexed to the value of our common stock, which is
not clearly and closely related to the economic characteristics
and risks of the 3.5% Debentures. The contingent interest
feature represents an embedded derivative that must be
bifurcated from its host instrument and accounted for separately
as a derivative instrument. However, we determined that the fair
value of the contingent interest feature at inception was zero
based on our option to redeem the 3.5% Debentures prior to
incurring any contingent interest payments. If we were to
exercise this redemption option, we would not be required to
make any contingent interest payments and, therefore, the
holders of the 3.5% Debentures cannot assume they will
receive those payments. We continue to conclude that the fair
value of the contingent interest feature is zero. The
3.5% Debentures are unsecured and unsubordinated
obligations, and are guaranteed by one of our wholly owned
subsidiaries. For additional information, see Note 7,
Guarantor Information.
In April 2007, we completed exchange offers relating to our
1.25% Debentures and 3.5% Debentures. At closing, we
issued $177.4 million in aggregate principal amount of
1.625% Debentures, in exchange for a like principal amount
of our 1.25% Debentures, and we issued $321.6 million
in aggregate principal amount of 4% Debentures in exchange
for a like principal amount of our 3.5% Debentures. The
results of the exchange offers were as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Amount
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
|
Prior to
|
|
|
at Completion of
|
|
|
|
Exchange
|
|
|
Exchange
|
|
Securities
|
|
Offers
|
|
|
Offers
|
|
|
|
($ in thousands)
|
|
|
1.25% Senior Debentures due 2034
|
|
$
|
225,000
|
|
|
$
|
47,620
|
|
1.625% Senior Subordinated Debentures due 2034
|
|
|
|
|
|
|
177,380
|
|
3.5% Senior Debentures due 2034
|
|
|
330,000
|
|
|
|
8,446
|
|
4.0% Senior Subordinated Debentures due 2034
|
|
|
|
|
|
|
321,554
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
555,000
|
|
|
$
|
555,000
|
|
|
|
|
|
|
|
|
|
|
Subsequent to the exchange offers, the 1.25% Debentures and
the 1.625% Debentures were exchanged for equity or
repurchased in 2008 and in 2009.
146
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In July 2007, we issued $250.0 million principal amount of
7.25% senior subordinated convertible notes due 2037
bearing interest at a rate of 7.25% per year. The
7.25% Debentures were sold at a price of 98% of the
aggregate principal amount of the notes. The
7.25% Debentures had an initial conversion rate of
36.9079 shares of our common stock per $1,000 principal
amount of notes, representing an initial conversion price of
approximately $27.09 per share. The conversion rate and price
will adjust if we pay dividends on our common stock greater than
$0.60 per share, per quarter, with the fair value of each
adjustment taxable to the holders.
The 7.25% Debentures are redeemable for cash at our option
at any time on or after July 20, 2012 at a redemption price
of 100% of their principal amount plus accrued interest. Holders
of the 7.25% Debentures have the right to require us to
repurchase some or all of their debentures for cash on
July 15, 2012 and each five-year anniversary thereafter at
a price of 100% of their principal amount plus accrued interest.
Holders of the 7.25% Debentures also have the right to
require us to repurchase some or all of their
7.25% Debentures upon certain events constituting a
fundamental change.
The Subordinated Debentures are guaranteed on a senior
subordinated basis by CapitalSource Finance. For additional
information, see Note 7, Guarantor Information. The
Subordinated Debentures rank junior to all of our other existing
and future secured and unsecured indebtedness, including the
outstanding Senior Debentures, and senior to our existing and
future subordinated indebtedness.
The Subordinated Debentures provide for a make-whole amount upon
conversion in connection with certain transactions or events
that may occur prior to July 15, 2011 and July 15,
2012 for the 4% Debentures and the 7.25% Debentures,
respectively, which, under certain circumstances, will increase
the conversion rate by a number of additional shares. The
Subordinated Debentures do not provide for the payment of
contingent interest.
Holders of each series of the Debentures may convert their
debentures prior to maturity only if the following conditions
occur:
1) The sale price of our common stock for at least 20
trading days during the period of 30 consecutive trading days
ending on the last trading day of the previous calendar quarter
is greater than or equal to 120% of the applicable conversion
price per share of our common stock on such last trading day;
2) During the five consecutive business day period after
any five consecutive trading day period in which the trading
price per debenture for each day of that period was less than
98% of the product of the conversion rate and the last reported
sale price of our common stock for each day during such period
(the 98% Trading Exception); provided, however, that
if, on the date of any conversion pursuant to the 98% Trading
Exception that is on or after July 15, 2019 for the
3.5% Debenture or 4% Debentures and on or after
July 15, 2022 for the 7.25% Debentures, the last
reported sale price of our common stock on the trading day
before the conversion date is greater than 100% of the
applicable conversion price, then holders surrendering
debentures for conversion will receive, in lieu of shares of our
common stock based on the then applicable conversion rate,
shares of common stock with a value equal to the principal
amount of the debentures being converted;
3) Specified corporate transactions occur such as if we
elect to distribute to all holders of our common stock rights or
warrants entitling them to subscribe for or purchase, for a
period expiring within 45 days after the date of the
distribution, shares of our common stock at less than the last
reported sale price of a share of our common stock on the
trading day immediately preceding the declaration date of the
distribution; or distribute to all holders of our common stock,
assets, debt securities or rights to purchase our securities,
which distribution has a per share value as determined by our
board of directors exceeding 5% of the last reported sale price
of our common stock on the trading day immediately preceding the
declaration date for such distribution;
4) We call any or all of the Debentures of such series for
redemption; or
5) We are a party to a consolidation, merger or binding
share exchange, in each case pursuant to which our common stock
would be converted into cash or property other than securities.
We are unable to assess the likelihood of meeting conditions
(1) or (2) above for the Debentures as both conditions
depend on future market prices for our common stock and the
Debentures. We believe that the likelihood
147
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of meeting conditions (3), (4) or (5) related to the
specified corporate transactions occurring for the Debentures is
remote since we have no current plans to distribute rights or
warrants to all holders of our common stock, call any of our
Debentures for redemption or enter a consolidation, merger or
binding share exchange pursuant to which our common stock would
be converted into cash or property other than securities.
Under the terms of the Indenture governing 3.5% Debentures
and 4% Debentures, we have the ability to make irrevocable
elections to pay the principal balance in cash upon any
conversion prior to or at maturity. The principal balance of our
7.25% Debentures is required to be settled in cash upon
redemption or conversion. During the third quarter of 2008, we
began applying the if-converted method to determine the effect
on diluted net income per share of shares issuable pursuant to
our Senior Debentures, 1.625% Debentures and
4% Debentures as we are no longer assuming cash settlement
of the underlying principal. The only impact on diluted net
income per share from our 7.25% Debentures results from the
application of the treasury stock method to any conversion
spread on this instrument. For additional information, see
Note 16, Net Loss per Share.
In February 2009, we entered into an agreement with an existing
security holder and issued 19,815,752 shares of our common
stock in exchange for approximately $61.6 million in
aggregate principal amount of our outstanding
1.625% Debentures held by the security holder, and our
wholly owned subsidiary, CapitalSource Finance, paid
approximately $0.6 million in cash to the security holder
in exchange for the guaranty on such notes by such subsidiary.
We retired all of the debentures acquired in the exchange. In
connection with this exchange, we incurred a loss of
approximately $57.5 million in the first quarter of 2009,
which included a write-off of $0.4 million in deferred
financing fees and debt discount.
In accordance with the terms of the 1.25% and
1.625% Debentures, we offered to repurchase
$118.5 million of our outstanding convertible debentures,
all of which were tendered, repurchased and retired in March
2009.
Subordinated
Debt
We have issued subordinated debt to statutory trusts (TP
Trusts) that are formed for the purpose of issuing
preferred securities to outside investors, which we refer to as
Trust Preferred Securities (TPS). We generally
retained 100% of the common securities issued by the TP Trusts,
representing 3% of their total capitalization. The terms of the
subordinated debt issued to the TP Trusts and the TPS issued by
the TP Trusts are substantially identical.
The TP Trusts are wholly owned indirect subsidiaries of
CapitalSource. However, we have not consolidated the TP Trusts
for financial statement purposes. We account for our investments
in the TP Trusts under the equity method of accounting pursuant
to relevant GAAP requirements.
We had subordinated debt outstanding totaling
$437.3 million and $439.7 million as of
December 31, 2010 and 2009, respectively.
As of December 31, 2010, our outstanding subordinated debt
transactions were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust Formation
|
|
|
|
|
|
|
|
|
Interest Rate as of
|
|
TPS Series
|
|
|
Date
|
|
Debt Issued
|
|
|
Maturity Date
|
|
Date Callable(1)
|
|
December 31, 2010
|
|
|
|
2005-1
|
|
|
November 2005
|
|
$
|
103,093
|
|
|
December 15, 2035
|
|
December 15, 2010
|
|
|
2.25
|
%(2)
|
|
2005-2
|
|
|
December 2005
|
|
$
|
128,866
|
|
|
January 30, 2036
|
|
January 30, 2011
|
|
|
6.82
|
%(3)
|
|
2006-1
|
|
|
February 2006
|
|
$
|
51,545
|
|
|
April 30, 2036
|
|
April 30, 2011
|
|
|
6.96
|
%(4)
|
|
2006-2
|
|
|
September 2006
|
|
$
|
51,550
|
|
|
October 30, 2036
|
|
October 30, 2011
|
|
|
6.97
|
%(5)
|
|
2006-3
|
|
|
September 2006
|
|
|
25,775
|
|
|
October 30, 2036
|
|
October 30, 2011
|
|
|
3.04
|
%(6)
|
|
2006-4
|
|
|
December 2006
|
|
$
|
21,908
|
|
|
January 30, 2037
|
|
January 30, 2012
|
|
|
2.24
|
%(2)
|
|
2006-5
|
|
|
December 2006
|
|
$
|
6,650
|
|
|
January 30, 2037
|
|
January 30, 2012
|
|
|
2.24
|
%(2)
|
|
2007-2
|
|
|
June 2007
|
|
$
|
39,177
|
|
|
July 30, 2037
|
|
July 30, 2012
|
|
|
2.24
|
%(2)
|
|
|
|
(1) |
|
The subordinated debt is callable by us in whole or in part at
par at any time after the stated date. |
148
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(2) |
|
Bears interest at a floating interest rate equal to three-month
LIBOR plus 1.95%, resetting quarterly at various dates. |
|
(3) |
|
Bears a fixed rate of interest of 6.82% through January 30,
2011 and then bears interest at a floating interest rate equal
to three-month LIBOR plus 1.95%, resetting quarterly. |
|
(4) |
|
Bears a fixed rate of interest of 6.96% through April 1,
2011 and then bears interest at a floating interest rate equal
to three-month LIBOR plus 1.95%, resetting quarterly. |
|
(5) |
|
Bears a fixed rate of interest of 6.97% through October 30,
2011 and then bears interest at a floating interest rate equal
to three-month LIBOR plus 1.95%, resetting quarterly. |
|
(6) |
|
Bears interest at a floating interest rate equal to three-month
EURIBOR plus 2.05%, resetting quarterly. |
The subordinated debt described above is unsecured and ranks
subordinate and junior in right of payment to all of the Parent
Companys indebtedness.
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 December 31, 2010 equal
to 20% of CapitalSource Banks total assets. The maximum
financing available under this formula was $1.2 billion and
$1.1 billion as of December 31, 2010 and 2009,
respectively. The financing is subject to various terms and
conditions including pledging acceptable collateral,
satisfaction of the FHLB SF stock ownership requirement and
certain limits regarding the maximum term of debt. As of
December 31, 2010, collateral with an estimated fair value
of $912.3 million was pledged to the FHLB SF.
As of December 31, 2010 and 2009, CapitalSource Bank had
borrowing capacity with the FHLB SF based on pledged collateral
as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Borrowing capacity
|
|
$
|
885,842
|
|
|
$
|
965,195
|
|
Less: outstanding principal
|
|
|
(412,000
|
)
|
|
|
(200,000
|
)
|
Less: outstanding letters of credit
|
|
|
(600
|
)
|
|
|
(750
|
)
|
|
|
|
|
|
|
|
|
|
Unused borrowing capacity
|
|
$
|
473,242
|
|
|
$
|
764,445
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 and 2009, collateral with amortized
costs of $179.0 million and $191.8 million,
respectively, and fair values of $188.0 million and
$209.9 million, respectively, had been pledged under the
primary credit program of the FRB of San Franciscos
discount window under which approved depository institutions are
eligible to borrow from the FRB for periods of up to
90 days, but there were no borrowings outstanding.
149
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Debt
Maturities
The on-balance sheet contractual obligations under our credit
facilities, term debt, convertible debt, subordinated debt and
notes payable as of December 31, 2010, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Borrowings
|
|
|
|
|
|
|
Credit
|
|
|
|
|
|
Convertible
|
|
|
Subordinated
|
|
|
|
|
|
|
|
|
|
Facilities(1)
|
|
|
Term Debt(2)
|
|
|
Debt(3)
|
|
|
Debt(4)
|
|
|
Notes Payable
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
2011
|
|
$
|
63,980
|
|
|
$
|
50,503
|
|
|
$
|
280,523
|
|
|
$
|
|
|
|
$
|
151,000
|
|
|
$
|
546,006
|
|
2012
|
|
|
3,528
|
|
|
|
74,372
|
|
|
|
250,000
|
|
|
|
|
|
|
|
53,000
|
|
|
|
380,900
|
|
2013
|
|
|
|
|
|
|
506,747
|
|
|
|
|
|
|
|
|
|
|
|
45,948
|
|
|
|
552,695
|
|
2014
|
|
|
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
55,000
|
|
|
|
355,000
|
|
2015
|
|
|
|
|
|
|
62,031
|
|
|
|
|
|
|
|
|
|
|
|
95,000
|
|
|
|
157,031
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437,286
|
|
|
|
15,000
|
|
|
|
452,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
67,508
|
|
|
$
|
993,653
|
|
|
$
|
530,523
|
|
|
$
|
437,286
|
|
|
$
|
414,948
|
|
|
$
|
2,443,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The contractual obligations for credit facilities are computed
based on the stated final maturities of the facilities not
considering amortization, optional annual renewals, and assumes
utilization of available term-out features. During the first
quarter of 2011, we terminated all of the credit facilities with
the exception of our syndicated bank facility, which had an
aggregate commitment of $100.0 million and no outstanding
balance as of December 31, 2010. |
|
(2) |
|
The amounts are presented gross of net unamortized discounts of
$0.1 million on our term debt securitizations and
$14.3 million on the 2014 Senior Secured Notes. Contractual
obligations on our term debt securitizations are computed based
on their estimated lives. The estimated lives are based upon the
contractual amortization schedule of the underlying loans. These
underlying loans are subject to prepayment, which could shorten
the life of the term debt securitizations; conversely, the
underlying loans may be amended to extend their term, which may
lengthen the life of the term debt securitizations. |
|
(3) |
|
The contractual obligations for our convertible debt are
computed based on the initial put/call date. The legal maturity
of our 7.25% Debentures is 2037, and the legal maturities
of our other series of Debentures are 2034. The amounts are
presented gross of net unamortized discounts of
$6.9 million. |
|
(4) |
|
The contractual obligations for subordinated debt are computed
based on the legal maturities, which are between 2035 and 2037. |
Interest
Expense
The weighted average interest rates on all of our borrowings,
including amortization of deferred financing costs, for the
years ended December 31, 2010, 2009 and 2008 were 2.9%,
3.6% and 4.9%, respectively.
Deferred
Financing Fees
As of December 31, 2010 and 2009, deferred financing fees
of $46.9 million and $62.6 million, respectively, net
of accumulated amortization of $110.8 million and
$107.0 million, respectively, were included in other assets
in our audited consolidated balance sheets.
Debt
Covenants
The Parent Company is subject to financial and non-financial
covenants under our indebtedness, including, with respect to
restricted payments, leverage, servicing standards, and
limitations on incurring or guaranteeing indebtedness,
refinancing existing indebtedness, repaying subordinated
indebtedness, making investments, dividends, distributions,
redemptions or repurchases of our capital stock, selling assets,
entering into transactions with our affiliates creating liens
and engaging in a merger, sale or consolidation. If we were to
default under our
150
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
indebtedness by violating these covenants or otherwise, our
investors remedies would include the ability to, among
other things, transfer servicing to another servicer, foreclose
on collateral,
and/or
accelerate payment of all amounts payable under such
indebtedness.
In addition, upon the occurrence of specified servicer defaults,
our lenders under our credit facility and the holders of the
asset-backed notes issued in our term debt may elect to
terminate us as servicer of the loans under the applicable
facility or term debt and appoint a successor servicer or
replace us as cash manager for our secured facilities and term
debt. If we were terminated as servicer, we would no longer
receive our servicing fee.
In February 2010, we amended the tangible net worth covenant for
our syndicated bank credit facility and other indebtedness for
the reporting period ended December 31, 2009 and future
periods. The amendments were obtained to provide certainty that
the net loss reported for the quarter and the year ended
December 31, 2009, after making certain adjustments as
provided for in the covenant definition, would not cause an
event of default under these facilities.
|
|
Note 12.
|
Shareholders
Equity
|
Common
Stock Shares Outstanding
Common stock share activity for the years ended
December 31, 2010, 2009 and 2008 was as follows:
|
|
|
|
|
Outstanding as of December 31, 2007
|
|
|
220,704,800
|
|
Issuance of common stock
|
|
|
61,644,758
|
|
Exercise of options
|
|
|
57,327
|
|
Restricted stock and other stock activities
|
|
|
397,326
|
|
|
|
|
|
|
Outstanding as of December 31, 2008
|
|
|
282,804,211
|
|
Issuance of common stock
|
|
|
40,044,073
|
|
Repurchase of common stock
|
|
|
(639,400
|
)
|
Exercise of options
|
|
|
2,718
|
|
Restricted stock and other stock activities
|
|
|
831,011
|
|
|
|
|
|
|
Outstanding as of December 31, 2009
|
|
|
323,042,613
|
|
Repurchase of common stock
|
|
|
(1,415,000
|
)
|
Exercise of options
|
|
|
309,801
|
|
Restricted stock and other stock activities
|
|
|
1,287,941
|
|
|
|
|
|
|
Outstanding as of December 31, 2010
|
|
|
323,225,355
|
|
|
|
|
|
|
Share
Repurchase Plans
In December 2010, our Board of Directors authorized the
repurchase of up to $150.0 million of our common stock over
a period of up to two years. Any share repurchases made under
the stock repurchase plan will be made through open market
purchases or privately negotiated transactions. The amount and
timing of any repurchases will depend on market conditions and
other factors and repurchases may be suspended or discontinued
at any time. In December 2010, we repurchased
1,415,000 shares of our common stock under the share
repurchase plan, at an average price of $7.01 per share for a
total purchase price of $9.9 million. All shares purchased
under the share purchase plan were retired upon settlement. 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 additional shares.
In March 2009, our Board of Directors previously 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.
During the year ended December 31, 2009, we purchased
639,400 shares of our common stock under this share
repurchase plan, at a weighted average price of $1.22 per share
for a total purchase price of
151
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$0.8 million. All shares purchased under the share purchase
plan were retired upon settlement. This plan was terminated upon
the approval of the share repurchase plan that was authorized
during 2010.
Dividend
Reinvestment and Stock Purchase Plan
We had a Dividend Reinvestment and Stock Purchase Plan (the
DRIP) for shareholders during 2009. Participation in
the DRIP allowed common shareholders to reinvest cash dividends
and to purchase additional shares of our common stock, in some
cases at a discount from the market price. During the year ended
December 31, 2009, there were no direct purchases made
under the DRIP. During the year ended December 31, 2008, we
received $198.1 million related to the direct purchase of
15.4 million shares of our common stock pursuant to the
DRIP. In addition, we received proceeds of $0.1 million and
$38.7 million, respectively, related to cash dividends
reinvested in 36,000 and 3.6 million shares of our common
stock during the years ended December 31, 2009 and 2008,
respectively. We terminated the DRIP effective March 1,
2010.
Equity
Offerings
In February 2009, we entered into an agreement with an existing
security holder and issued 19,815,752 shares of our common
stock in exchange for approximately $61.6 million in
aggregate principal amount of our outstanding
1.625% Debentures held by the security holder, and our
wholly owned subsidiary, CapitalSource Finance, paid
approximately $0.6 million in cash to the security holder
in exchange for the CapitalSource Finance guaranty on such notes
by such subsidiary. We retired all of the Debentures acquired in
the exchange. In connection with this exchange, we incurred a
loss of approximately $57.5 million in the first quarter of
2009, which included a write-off of $0.4 million in
deferred financing fees and debt discount.
In July 2009, we sold approximately 20.1 million shares of
our common stock in an underwritten public offering at a price
of $4.10 per share, including the approximately 2.6 million
shares purchased by the underwriters pursuant to their
over-allotment option. In connection with this offering, we
received net proceeds of approximately $77.0 million.
|
|
Note 13.
|
Employee
Benefit Plan
|
Our employees are eligible to participate in the CapitalSource
Finance LLC 401(k) Savings Plan (401(k) Plan), a
defined contribution plan in accordance with Section 401(k)
of the Internal Revenue Code of 1986, as amended. For the years
ended December 31, 2010, 2009 and 2008, we contributed
$1.8 million, $1.8 million and $2.0 million,
respectively, in matching contributions to the 401(k) Plan.
We provide for income taxes as a C corporation on
income earned from operations. For the tax years ended
December 31, 2010 and 2009, our subsidiaries were not able
to participate in the filing of a consolidated federal tax
return. As a result, certain subsidiaries had taxable income
that was not offset by taxable losses or loss carryforwards of
other entities. We plan to reconsolidate our subsidiaries for
federal tax purposes starting in 2011. 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.
From 2006 through 2008, we operated as a REIT. Effective
January 1, 2009, we revoked our REIT election and
recognized the deferred tax effects in our audited consolidated
financial statements as of December 31, 2008. During the
period we operated as a REIT, we were generally not subject to
federal income tax at the REIT level on our net taxable income
distributed to shareholders, but we were subject to federal
corporate-level tax on the net
152
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
taxable income of our taxable REIT subsidiaries, and we were
subject to taxation in various foreign, state and local
jurisdictions. In addition, we were required to distribute at
least 90% of our REIT taxable income to our shareholders and
meet various other requirements imposed by the Internal Revenue
Code, through actual operating results, asset holdings,
distribution levels, and diversity of stock ownership.
The components of income tax (benefit) expense from continuing
operations for the years ended December 31, 2010, 2009 and
2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(27,898
|
)
|
|
$
|
69,020
|
|
|
$
|
(70,274
|
)
|
State
|
|
|
(2,637
|
)
|
|
|
17,220
|
|
|
|
7,858
|
|
Foreign
|
|
|
4,881
|
|
|
|
2,953
|
|
|
|
22,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
(25,654
|
)
|
|
|
89,193
|
|
|
|
(39,901
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
7,979
|
|
|
|
17,175
|
|
|
|
(112,756
|
)
|
State
|
|
|
(2,649
|
)
|
|
|
34,890
|
|
|
|
(37,828
|
)
|
Foreign
|
|
|
(478
|
)
|
|
|
(4,944
|
)
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
4,852
|
|
|
|
47,121
|
|
|
|
(150,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense
|
|
$
|
(20,802
|
)
|
|
$
|
136,314
|
|
|
$
|
(190,583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We had no income tax expense from discontinued operations during
the year ended December 31, 2010. Income tax expense from
discontinued operations was $4.5 million and
$1.3 million for the years ended December 31, 2009 and
2008, respectively.
For the year ended December 31, 2010, we had
$20.9 million of pre-tax income and $182.2 million of
pre-tax loss that was attributable to foreign and domestic
operations, respectively. For the year ended December 31,
2009, we had $3.0 million of pre-tax income and
$777.5 million of pre-tax loss that was attributable to
foreign and domestic operations, respectively. For the year
ended December 31, 2008, we had $15.8 million of
pre-tax income and $474.5 million of pre-tax loss that was
attributable to foreign and domestic operations, respectively.
The reconciliations of the effective income tax rate and the
federal statutory corporate income tax rate for the years ended
December 31, 2010, 2009 and 2008, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Sale of healthcare net lease business
|
|
|
10.8
|
|
|
|
|
|
|
|
|
|
Sale of 2006-A Trust
|
|
|
(15.1
|
)
|
|
|
|
|
|
|
|
|
Benefit of REIT election
|
|
|
|
|
|
|
|
|
|
|
(12.3
|
)
|
State income taxes, net of federal tax benefit
|
|
|
4.3
|
|
|
|
4.3
|
|
|
|
1.9
|
|
Induced conversion of convertible debentures
|
|
|
|
|
|
|
(2.6
|
)
|
|
|
|
|
Valuation allowance
|
|
|
(17.3
|
)
|
|
|
(49.8
|
)
|
|
|
|
|
Impact of revoking REIT election(1)
|
|
|
|
|
|
|
|
|
|
|
23.8
|
|
Other
|
|
|
(4.8
|
)
|
|
|
(4.5
|
)
|
|
|
(6.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
12.9
|
%
|
|
|
(17.6
|
)%
|
|
|
41.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In connection with revoking our REIT election, we recognized
$97.7 million of net deferred tax assets relating to our
REIT qualifying activities into income during the year ended
December 31, 2008. |
153
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred income taxes are recorded when revenues and expenses
are recognized in different periods for financial statement and
income tax purposes. Net deferred tax assets are included in
other assets in our audited consolidated balance sheets. The
components of deferred tax assets and liabilities as of
December 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
144,019
|
|
|
$
|
221,027
|
|
Net unrealized losses on investments
|
|
|
108,102
|
|
|
|
103,124
|
|
Net unrealized losses on other real estate owned
|
|
|
14,411
|
|
|
|
6,558
|
|
Net operating losses federal
|
|
|
188,850
|
|
|
|
136,879
|
|
Net operating losses state, net of federal tax
benefit
|
|
|
25,911
|
|
|
|
27,835
|
|
Capital losses federal and state
|
|
|
31,742
|
|
|
|
8,402
|
|
Share-based compensation awards
|
|
|
11,118
|
|
|
|
16,045
|
|
Non-accrual interest
|
|
|
9,507
|
|
|
|
26,950
|
|
Other
|
|
|
86,846
|
|
|
|
79,663
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
620,506
|
|
|
|
626,483
|
|
Valuation allowance
|
|
|
(413,761
|
)
|
|
|
(385,858
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net of valuation allowance
|
|
|
206,745
|
|
|
|
240,625
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Mark-to-market
on loans
|
|
|
59,885
|
|
|
|
113,090
|
|
Unamortized bond premium
|
|
|
24,459
|
|
|
|
|
|
Other
|
|
|
24,864
|
|
|
|
20,478
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
109,208
|
|
|
|
133,568
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
97,537
|
|
|
$
|
107,057
|
|
|
|
|
|
|
|
|
|
|
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 earnings 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 December 31, 2010 and 2009, the total
valuation allowance was $413.8 million and
$385.9 million, respectively. Although realization is not
assured, we believe it is more likely than not that the
December 31, 2010 net deferred tax assets of
$97.5 million 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
154
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
term tax exempt rate and (b) the value of the relevant
taxable entitys capital stock immediately before the
ownership change. These change of ownership rules generally
focus on ownership changes involving stockholders owning
directly or indirectly 5% or more of a companys
outstanding stock, including certain public groups of
stockholders as set forth under Section 382 of the Code,
and those arising from new stock issuances and other equity
transactions. The determination of whether an ownership change
occurs is complex and not entirely within our control. No
assurance can be given as to whether we have undergone, or in
the future will undergo, an ownership change under
Section 382 of the Code.
As of December 31, 2010 and 2009, we had net operating loss
carryforwards of $539.6 million and $391.1 million,
respectively, for federal tax purposes, which will be available
to offset future taxable income. If not used, these
carryforwards will begin to expire in 2028 and would fully
expire in 2030. To the extent net operating loss carryforwards,
when realized, relate to non-qualified stock option and
restricted stock deductions, the resulting benefits will be
credited to stockholders equity. As of December 31,
2010 and 2009, we had state net operating loss carryforwards of
$664.4 million and $583.9 million, respectively, which
will expire in varying amounts beginning in 2012 through 2030.
As of December 31, 2010 and 2009, we had capital loss
carryforwards of $81.6 million and $21.6 million,
respectively, for federal tax purposes which will be available
to offset future capital gains. If not used, these carryforwards
will begin to expire in 2014 and will fully expire in 2015.
As of December 31, 2010, we have foreign tax credit
carryforwards of $2.7 million for federal tax purposes,
which will be available to offset future federal income tax. If
not used, these carryforwards will begin to expire in 2016 and
would fully expire in 2017.
We adopted the provisions for accounting for uncertain tax
positions in accordance with the current accounting standards on
January 1, 2007. A reconciliation of the beginning and
ending amount of unrecognized tax benefits for the years ended
December 31, 2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Balance as of the beginning of year
|
|
$
|
62,210
|
|
|
$
|
19,747
|
|
Additions for tax positions of prior years
|
|
|
4,136
|
|
|
|
48,375
|
|
Reductions for tax positions of prior years
|
|
|
(13,892
|
)
|
|
|
(1,615
|
)
|
Settlements
|
|
|
|
|
|
|
(4,297
|
)
|
|
|
|
|
|
|
|
|
|
Balance as of the end of year
|
|
$
|
52,454
|
|
|
$
|
62,210
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010 and 2009, our unrecognized tax
benefit that may affect the effective tax rate is approximately
$4.7 million and $3.5 million, respectively. Due to
potential for resolution of federal and state examinations and
the expiration of various statutes of limitations, it is
reasonably possible that our gross unrecognized tax benefits may
decrease within the next twelve months by a range of zero to
$48.0 million; however, we have sufficient net operating
losses and other adjustments to offset these potential tax
liabilities.
We recognize interest and penalties accrued related to
unrecognized tax benefits as a component of income taxes. For
the years ended December 31, 2010, 2009, and 2008, we
recognized ($9.4) million, $6.2 million and
$2.7 million in interest (benefit) expense and penalties,
respectively. We had $1.3 million and $11.0 million
for the payment of interest and penalties accrued as of
December 31, 2010 and 2009, respectively.
We file income tax returns with the United States and various
state, local and foreign jurisdictions and generally remain
subject to examinations by these tax jurisdictions for tax years
2006 through 2009. In 2008, we settled an Internal Revenue
Service examination for the tax years 2005 and 2004 and in 2009
and 2008, we settled certain state examinations for the tax
years 2005, 2004 and 2003. In connection with the settlement and
conclusion
155
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of these examinations, we incurred penalty and interest expense
of $1.0 million in 2009 and paid taxes in the amount of
$4.3 million and $16.7 million in 2009 and 2008,
respectively. We are currently under examination by the Internal
Revenue Service and certain states for the tax years 2006 to
2008.
|
|
Note 15.
|
Comprehensive
Loss
|
Comprehensive loss for the years ended December 31, 2010,
2009 and 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands)
|
|
|
Net loss from continuing operations
|
|
$
|
(140,522
|
)
|
|
$
|
(910,844
|
)
|
|
$
|
(268,131
|
)
|
Net income from discontinued operations, net of taxes
|
|
|
9,489
|
|
|
|
49,868
|
|
|
|
49,350
|
|
Gain (loss) from sale of discontinued operations, net of taxes
|
|
|
21,696
|
|
|
|
(8,071
|
)
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(109,337
|
)
|
|
|
(869,047
|
)
|
|
|
(218,677
|
)
|
Unrealized gain (loss) on
available-for-sale
securities, net of taxes
|
|
|
1,133
|
|
|
|
(608
|
)
|
|
|
7,857
|
|
Unrealized (loss) gain on foreign currency translation, net of
taxes
|
|
|
(10,469
|
)
|
|
|
11,357
|
|
|
|
(2,892
|
)
|
Unrealized loss on cash flow hedges, net of taxes
|
|
|
(84
|
)
|
|
|
(86
|
)
|
|
|
(820
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
(118,757
|
)
|
|
|
(858,384
|
)
|
|
|
(214,532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income attributable to noncontrolling
interests
|
|
|
(83
|
)
|
|
|
(28
|
)
|
|
|
1,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss attributable to CapitalSource Inc.
|
|
$
|
(118,674
|
)
|
|
$
|
(858,356
|
)
|
|
$
|
(215,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, net, as of
December 31, 2010 and 2009 was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Unrealized gain on
available-for-sale
securities, net of tax
|
|
$
|
5,763
|
|
|
$
|
5,027
|
|
Unrealized gain on foreign currency translation, net of tax
|
|
|
4,178
|
|
|
|
14,647
|
|
Unrealized gain on cash flow hedge, net of tax
|
|
|
|
|
|
|
84
|
|
Effect of adoption of amended investment guidance
|
|
|
|
|
|
|
(397
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, net
|
|
$
|
9,941
|
|
|
$
|
19,361
|
|
|
|
|
|
|
|
|
|
|
156
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 16.
|
Net Loss
Per Share
|
The computations of basic and diluted net loss per share
attributable to CapitalSource Inc. for the years ended
December 31, 2010, 2009 and 2008, respectively, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands, except per share data)
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(140,522
|
)
|
|
$
|
(910,844
|
)
|
|
$
|
(268,131
|
)
|
From discontinued operations, net of taxes
|
|
|
9,489
|
|
|
|
49,868
|
|
|
|
49,350
|
|
From sale of discontinued operations, net of taxes
|
|
|
21,696
|
|
|
|
(8,071
|
)
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from discontinued operations
|
|
|
31,185
|
|
|
|
41,797
|
|
|
|
49,454
|
|
Attributable to CapitalSource Inc.
|
|
|
(109,254
|
)
|
|
|
(869,019
|
)
|
|
|
(220,103
|
)
|
Average shares basic
|
|
|
320,836,867
|
|
|
|
306,417,394
|
|
|
|
251,213,699
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Option shares
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock units
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion premium on the Debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares diluted
|
|
|
320,836,867
|
|
|
|
306,417,394
|
|
|
|
251,213,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.44
|
)
|
|
$
|
(2.97
|
)
|
|
$
|
(1.07
|
)
|
From discontinued operations, net of taxes
|
|
|
0.10
|
|
|
|
0.14
|
|
|
|
0.20
|
|
Attributable to CapitalSource Inc.
|
|
|
(0.34
|
)
|
|
|
(2.84
|
)
|
|
|
(0.88
|
)
|
Diluted net income (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.44
|
)
|
|
$
|
(2.97
|
)
|
|
$
|
(1.07
|
)
|
From discontinued operations, net of taxes
|
|
|
0.10
|
|
|
|
0.14
|
|
|
|
0.20
|
|
Attributable to CapitalSource Inc.
|
|
|
(0.34
|
)
|
|
|
(2.84
|
)
|
|
|
(0.88
|
)
|
The weighted average shares that have an antidilutive effect in
the calculation of diluted net loss per share attributable to
CapitalSource Inc. and have been excluded from the computations
above were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Stock units
|
|
|
3,679,234
|
|
|
|
2,509,297
|
|
|
|
144,952
|
|
Stock options
|
|
|
2,845,512
|
|
|
|
5,689,616
|
|
|
|
8,812,062
|
|
Non-managing member units
|
|
|
|
|
|
|
|
|
|
|
826,476
|
|
Shares subject to a written call option
|
|
|
|
|
|
|
2,346,825
|
|
|
|
7,401,420
|
|
Shares issuable upon conversion of convertible debt
|
|
|
14,510,369
|
|
|
|
15,633,859
|
|
|
|
12,710,307
|
|
Unvested restricted stock
|
|
|
813,145
|
|
|
|
1,971,253
|
|
|
|
2,488,571
|
|
|
|
Note 17.
|
Stock-Based
Compensation
|
Equity
Incentive Plan
A total of 66.0 million shares of common stock have been
reserved for issuance under the CapitalSource Inc. Third Amended
and Restated Equity Incentive Plan, as amended (the
Plan). Any shares that may be issued under the Plan
to any person pursuant to an option or stock appreciation right
(a SAR) are counted against this limit as
157
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
one share for every one share granted. Any shares that may be
issued under the Plan to any person, other than pursuant to an
option or SAR, are counted against this limit as one and
one-half shares for every one share granted.
As of December 31, 2010, there were 14.7 million
shares subject to outstanding grants and 33.0 million
shares remaining available for future grants under the Plan. The
Plan will expire on the earliest of (1) the date as of
which the Board of Directors, in its sole discretion, determines
that the Plan shall terminate, (2) following certain
corporate transactions such as a merger or sale of our assets if
the Plan is not assumed by the surviving entity, (3) at
such time as all shares of common stock that may be available
for purchase under the Plan have been issued or
(4) April 29, 2020. The Plan is intended to give
eligible employees, members of the Board of Directors, and our
consultants and advisors awards that are linked to the
performance of our common stock.
Total compensation cost recognized in income pursuant to the
Plan was $14.3 million, $30.9 million and
$43.6 million for the years ended December 31, 2010,
2009 and 2008, respectively.
Stock
Options
Stock option activity for the year ended December 31, 2010
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual Life
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
(in years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Outstanding as of December 31, 2009
|
|
|
7,671,792
|
|
|
$
|
5.66
|
|
|
|
8.65
|
|
|
$
|
2,922
|
|
Granted
|
|
|
1,586,374
|
|
|
|
5.32
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(309,801
|
)
|
|
|
3.49
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(192,303
|
)
|
|
|
19.27
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(510,884
|
)
|
|
|
4.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2010
|
|
|
8,245,178
|
|
|
|
5.45
|
|
|
|
8.20
|
|
|
|
23,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested as of December 31, 2010
|
|
|
3,795,247
|
|
|
|
6.97
|
|
|
|
7.46
|
|
|
|
10,258
|
|
Exercisable as of December 31, 2010
|
|
|
3,795,247
|
|
|
|
6.97
|
|
|
|
7.46
|
|
|
|
10,258
|
|
For the years ended December 31, 2010, 2009 and 2008, the
weighted average grant date fair values of options granted were
$3.21, $1.91 and $2.65, respectively. The total intrinsic values
of options exercised during the years ended December 31,
2010, 2009 and 2008, were $0.7 million, $10,845 and
$0.5 million, respectively. As of December 31, 2010,
the total unrecognized compensation cost related to unvested
options granted pursuant to the Plan was $6.7 million. This
cost is expected to be recognized over a weighted average period
of 1.98 years.
For awards containing only service
and/or
performance based vesting conditions, we use the Black-Scholes
option-pricing model to estimate the fair value of each option
grant on its grant date. The assumptions used in this model for
the years ended December 31, 2010, 2009 and 2008, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Dividend yield
|
|
|
0.75
|
%
|
|
|
1.2
|
%
|
|
|
12.0
|
%
|
Expected volatility
|
|
|
87.0
|
%
|
|
|
84.2
|
%
|
|
|
49.6
|
%
|
Risk-free interest rate
|
|
|
1.6
|
%
|
|
|
1.7
|
%
|
|
|
2.8
|
%
|
Expected life
|
|
|
4.0 years
|
|
|
|
4.0 years
|
|
|
|
4.0 years
|
|
The dividend yield is computed based on annualized dividends and
the average share price for the period. The expected volatility
is based on the historical volatility of CapitalSource
Inc.s stock price in the most recent period that is equal
to the expected term of the options being valued. The risk-free
interest rate is the U.S. Treasury yield curve in effect at
the time of grant based on the expected life of the options. The
expected life of our options granted represents the period of
time that the options are expected to be outstanding.
158
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restricted
Stock Awards and Restricted Stock Units
Restricted stock activities, including restricted stock awards
and restricted stock units, for the year ended December 31,
2010, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Outstanding as of December 31, 2009
|
|
|
6,521,876
|
|
|
$
|
7.52
|
|
Granted
|
|
|
2,045,220
|
|
|
|
6.11
|
|
Vested
|
|
|
(1,612,906
|
)
|
|
|
5.40
|
|
Forfeited
|
|
|
(484,142
|
)
|
|
|
9.38
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2010(1)
|
|
|
6,470,048
|
|
|
|
5.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 2.6 million and 0.7 million vested and
unvested restricted stock units, respectively. |
The fair value of unvested restricted stock awards and
restricted stock units is determined based on the closing
trading price of our common stock on the grant date, in
accordance with the Plan. The weighted average grant date fair
value of restricted stock awards and restricted stock units
granted during the years ended December 31, 2010, 2009 and
2008 was $6.11, $3.45 and $8.78, respectively.
The total fair value of restricted stock awards and restricted
stock units that vested during the years ended December 31,
2010, 2009 and 2008 was $8.6 million, $5.9 million and
$31.7 million, respectively. As of December 31, 2010,
the total unrecognized compensation cost related to unvested
restricted stock awards and restricted stock units granted
pursuant to the Plan was $16.1 million, which is expected
to be recognized over a weighted average period of
2.69 years.
|
|
Note 18.
|
Bank
Regulatory Capital
|
CapitalSource Bank is subject to various regulatory capital
requirements established by federal and state regulatory
agencies. Failure to meet minimum capital requirements can
result in regulatory agencies initiating certain mandatory and
possibly additional discretionary actions that, if undertaken,
could have a direct material effect on our audited consolidated
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, CapitalSource
Bank must meet specific capital guidelines that involve
quantitative measures of its assets and liabilities as
calculated under regulatory accounting practices. CapitalSource
Banks capital amounts and other requirements are also
subject to qualitative judgments by its regulators about risk
weightings and other factors. See Item 1,
Business Supervision and Regulation, for a
further description of CapitalSource Banks regulatory
requirements.
The calculations of the respective capital amounts at
CapitalSource Bank as of December 31, 2010, were as follows
($ in thousands):
|
|
|
|
|
Common stockholders equity at CapitalSource Bank
|
|
$
|
924,644
|
|
Less:
|
|
|
|
|
Disallowed goodwill and other disallowed intangible assets
|
|
|
(161,799
|
)
|
Unrealized gain on
available-for-sale
securities
|
|
|
(6,024
|
)
|
|
|
|
|
|
Total Tier-1 Capital
|
|
|
756,821
|
|
Add: Allowable portion of the allowance for loan losses and other
|
|
|
57,001
|
|
|
|
|
|
|
Total Risk-Based Capital
|
|
$
|
813,822
|
|
|
|
|
|
|
Under prompt corrective action regulations, a
well-capitalized bank must have a total risk-based
capital ratio of 10%, a Tier 1 risk-based capital ratio of
6%, and a Tier 1 leverage ratio of 5%. Under its approval
order from the FDIC, CapitalSource Bank must be well
capitalized and at all times have a minimum total
risk-based capital ratio
159
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of 15%, a minimum Tier-1 risk-based capital ratio of 6% and a
minimum Tier 1 leverage ratio of 5%. CapitalSource
Banks capital ratios and the minimum requirement as of
December 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Actual
|
|
|
Minimum Required
|
|
|
Actual
|
|
|
Minimum Required
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
($ in thousands)
|
|
|
Tier-1 Leverage
|
|
$
|
756,821
|
|
|
|
13.15
|
%
|
|
$
|
287,830
|
|
|
|
5.00
|
%
|
|
$
|
699,323
|
|
|
|
12.80
|
%
|
|
$
|
273,153
|
|
|
|
5.00
|
%
|
Tier-1 Risk-Based Capital
|
|
|
756,821
|
|
|
|
16.86
|
|
|
|
269,335
|
|
|
|
6.00
|
|
|
|
699,323
|
|
|
|
16.19
|
|
|
|
259,175
|
|
|
|
6.00
|
|
Total Risk-Based Capital
|
|
|
813,822
|
|
|
|
18.13
|
|
|
|
673,336
|
|
|
|
15.00
|
|
|
|
754,580
|
|
|
|
17.47
|
|
|
|
647,938
|
|
|
|
15.00
|
|
The California Department of Financial Institutions (the
DFI) approval order requires that CapitalSource
Bank, until July 2011, maintain a minimum ratio of tangible
shareholders equity to total tangible assets of at least
10.00%. As of December 31, 2010 and 2009, CapitalSource
Bank satisfied the DFI capital ratio requirement with ratios of
12.61% and 12.32%, respectively.
|
|
Note 19.
|
Commitments
and Contingencies
|
We have non-cancelable operating leases for office space and
office equipment. The leases expire over the next fourteen years
and contain provisions for certain annual rental escalations.
As of December 31, 2010, future minimum lease payments
under non-cancelable operating leases, including leases held at
CapitalSource Bank, were as follows ($ in thousands):
|
|
|
|
|
2011
|
|
$
|
14,934
|
|
2012
|
|
|
13,921
|
|
2013
|
|
|
11,625
|
|
2014
|
|
|
9,639
|
|
2015
|
|
|
7,736
|
|
Thereafter
|
|
|
51,441
|
|
|
|
|
|
|
Total(1)
|
|
$
|
109,296
|
|
|
|
|
|
|
|
|
|
(1) |
|
Minimum payments have not been reduced by minimum sublease
rentals of $11.9 million due in the future under
noncancelable subleases. |
Rent expense was $18.1 million, $18.6 million and
$11.4 million for the years ended December 31, 2010,
2009 and 2008, respectively.
We provide standby letters of credit in conjunction with several
of our lending arrangements and property lease obligations. As
of December 31, 2010 and 2009, we had issued
$143.4 million and $182.5 million, respectively, in
these stand-by letters of credit which expire at various dates
over the next five 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 $3.8 million and $6.1 million, as
reported in other liabilities in our audited consolidated
balance sheets as of December 31, 2010 and 2009,
respectively.
As of December 31, 2010 and 2009, we had unfunded
commitments to extend credit to our clients of $1.9 billion
and $2.8 billion, respectively including unfunded
commitments to extend credit by CapitalSource Bank of
$958.7 million and $914.9 million, respectively, and
by the parent company of $977.7 million and
$1.9 billion, respectively. Due to their nature, we cannot
know with certainty the aggregate amounts we will be required to
fund under these unfunded commitments. 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 the loan agreements,
and/or our
discretion pursuant to the terms of the loan agreements. In
other cases, however, there are no such prerequisites to future
fundings by us and our clients may draw on these unfunded
160
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
commitments at any time. Although we expect that these unfunded
commitments will continue to exceed the Parent Companys
available funds, we forecast adequate liquidity to fund the
expected borrower draws under these commitments. To the extent
there are unfunded commitments with respect to a loan that is
owned partially by CapitalSource Bank and the Parent Company,
unless our client is in default, CapitalSource Bank is obligated
in some cases pursuant to intercompany agreements to fund its
portion of the unfunded commitment before the Parent Company is
required to fund its portion.
During the year ended December 31, 2010, we sold all of our
remaining 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 December 31, 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 20.
|
Related
Party Transactions
|
We have from time to time in the past, and expect that we may
from time to time in the future, enter into transactions with
companies in which our directors, executive officers, nominees
for directors, 5% or more beneficial owners or certain of their
affiliates have material interests. Our Board of Directors, or a
committee of disinterested directors, is charged with
considering and approving these types of transactions.
Management believes that each of our related party loans has
been, and will continue to be, subject to the same due
diligence, underwriting and rating standards as the loans that
we make to unrelated third parties.
As of December 31, 2010 and 2009, we had committed to lend
$53.7 million and $86.5 million, respectively, to such
entities of which $24.0 million and $64.0 million,
respectively, was outstanding. These loans bear interest ranging
from 3.30% to 7.75% as of December 31, 2010 and 3.26% to
8.75% as of December 31, 2009. For the years ended
December 31, 2010, 2009 and 2008, we recognized
$6.7 million, $4.7 million and $9.2 million,
respectively, in interest and fees from these loans.
Activity in related party loans for the year ended
December 31, 2010, was as follows ($ in thousands):
|
|
|
|
|
Balance as of January 1, 2010
|
|
$
|
63,990
|
|
Advances
|
|
|
300,067
|
|
Repayments
|
|
|
(335,846
|
)
|
Loan sales
|
|
|
(20,626
|
)
|
Reclassifications to related party
|
|
|
16,421
|
|
|
|
|
|
|
Balance as of December 31, 2010
|
|
$
|
24,006
|
|
|
|
|
|
|
|
|
Note 21.
|
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 December 31, 2010, none of our
derivatives were designated as hedging instruments pursuant to
GAAP.
We enter into various derivative instruments to manage our
exposure to interest rate risk. The objective is to manage
interest rate sensitivity by modifying the characteristics of
certain assets and liabilities to reduce the adverse
161
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
During the years ended December 31, 2010, 2009 and 2008, we
recognized net realized and unrealized losses of
$8.6 million, $13.1 million and $41.1 million,
respectively, related to these derivative instruments.
As of December 31, 2010, the notional amounts and fair
values of our various derivative instruments as well as their
locations in our audited consolidated balance sheets were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Fair Value
|
|
|
|
Amount
|
|
|
Other Assets
|
|
|
Other Liabilities
|
|
|
|
($ in thousands)
|
|
|
Interest rate contracts
|
|
$
|
1,287,399
|
|
|
$
|
41,309
|
|
|
$
|
77,410
|
|
Foreign exchange contracts
|
|
|
35,557
|
|
|
|
|
|
|
|
877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,322,956
|
|
|
$
|
41,309
|
|
|
$
|
78,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
|
Fair Value
|
|
|
|
Amount
|
|
|
Other Assets
|
|
|
Other Liabilities
|
|
|
|
($ in thousands)
|
|
|
Interest rate contracts
|
|
$
|
2,380,365
|
|
|
$
|
14,073
|
|
|
$
|
78,736
|
|
Foreign exchange contracts
|
|
|
53,683
|
|
|
|
256
|
|
|
|
3,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,434,048
|
|
|
$
|
14,329
|
|
|
$
|
82,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The gains and losses on our derivative instruments recognized
during the years ended December 31, 2010, 2009 and 2008 as
well as the locations of such gains and losses in our audited
consolidated statements of operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Income in Year Ended
December 31,
|
|
|
|
Location
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Interest rate contracts
|
|
Loss on derivatives
|
|
$
|
(6,055
|
)
|
|
$
|
(4,748
|
)
|
|
$
|
(47,455
|
)
|
Interest rate contracts
|
|
Gain (loss) on residential
mortgage investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
896
|
|
|
|
(101,468
|
)
|
Foreign exchange contracts
|
|
Loss on derivatives
|
|
|
(2,589
|
)
|
|
|
(8,307
|
)
|
|
|
14,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
(8,644
|
)
|
|
$
|
(12,159
|
)
|
|
$
|
(134,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the normal course of business, we utilize various financial
instruments to manage our exposure to interest rate and other
market risks. These financial instruments, which consist of
derivatives and credit-related arrangements, involve, to varying
degrees, elements of credit and market risk in excess of the
amounts recorded on our audited consolidated balance sheets in
accordance with applicable accounting standards.
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. Market risk is the possibility that a change in market
prices may cause the value of a financial instrument to decrease
or become more costly to settle. The contract or notional
amounts of financial instruments, which are not included in our
audited consolidated balance sheets, do not necessarily
represent credit or market risk. However, they can be used to
measure the extent of involvement in various types of financial
instruments.
We manage credit risk of our derivatives and credit-related
arrangements by limiting the total amount of arrangements
outstanding by 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.
163
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Contract or notional amounts and the credit risk amounts for
derivatives and credit-related arrangements as of
December 31, 2010 and 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Contract or
|
|
|
|
|
|
Contract or
|
|
|
|
|
|
|
Notional
|
|
|
Credit Risk
|
|
|
Notional
|
|
|
Credit Risk
|
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
|
($ in thousands)
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
726,889
|
|
|
$
|
41,309
|
|
|
$
|
1,267,049
|
|
|
$
|
14,073
|
|
Interest rate caps
|
|
|
|
|
|
|
|
|
|
|
269,478
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
35,557
|
|
|
|
|
|
|
|
53,683
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
$
|
762,446
|
|
|
$
|
41,309
|
|
|
$
|
1,590,210
|
|
|
$
|
14,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit-related arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
$
|
1,936,356
|
|
|
$
|
18,036
|
|
|
$
|
2,838,915
|
|
|
$
|
25,838
|
|
Commitments to extend letters of credit
|
|
|
267,268
|
|
|
|
17,425
|
|
|
|
371,528
|
|
|
|
24,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit-related arrangements
|
|
$
|
2,203,624
|
|
|
$
|
35,461
|
|
|
$
|
3,210,443
|
|
|
$
|
50,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
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. As of December 31, 2010, we also posted
collateral of $10.0 million related to counterparty
requirements for foreign exchange contracts at CapitalSource
Bank. Our agreements generally include master netting agreements
whereby we are entitled to settle our individual derivative
positions with the same counterparty on a net basis upon the
occurrence of certain events. As of December 31, 2010, our
derivative counterparty exposure was as follows ($ in thousands):
|
|
|
|
|
Gross derivative counterparty exposure
|
|
$
|
41,309
|
|
Master netting agreements
|
|
|
(26,297
|
)
|
|
|
|
|
|
Net derivative counterparty exposure
|
|
$
|
15,012
|
|
|
|
|
|
|
We report our derivatives in our audited consolidated balance
sheets at fair value on a gross basis irrespective of our master
netting arrangements. We held $15.3 million and
$0.5 million of collateral against our derivative
instruments that were in an asset position as of
December 31, 2010 and 2009, respectively. For derivatives
that were in a liability position, we had posted collateral of
$53.1 million and $59.8 million as of
December 31, 2010 and 2009, respectively. For additional
information, see Note 21, Derivative Instruments.
Credit-Related
Arrangements
As of December 31, 2010 and 2009, we had committed credit
facilities to our borrowers of approximately $8.6 billion
and $11.6 billion, respectively, of which approximately
$1.9 billion and $2.8 billion, respectively, were
unfunded. Our failure to satisfy our full contractual funding
commitment to one or more of our borrowers could
164
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
create a breach of contract and lender liability for us and
damage our reputation in the marketplace, which could have a
material adverse effect on our business.
We provide standby letters of credit in conjunction with several
of our lending arrangements. As of December 31, 2010 and
2009, we had issued $143.4 million and $182.5 million,
respectively, in letters of credit which expire at various dates
over the next five 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.
In our normal course of business, we engage in transactions with
clients throughout the United States. As of December 31,
2010, the single largest industry concentration was healthcare
and social assistance, which made up approximately 21.5% of our
commercial loan portfolio. As of December 31, 2010, the two
largest geographical concentrations were Florida and California,
which made up 10.5% and 9.7% of our commercial loan portfolio,
respectively.
|
|
Note 23.
|
Fair
Value Measurements
|
We use fair value measurements to record fair value adjustments
to certain of our assets and liabilities and to determine fair
value disclosures. Investment securities,
available-for-sale,
warrants and derivatives are recorded at fair value on a
recurring basis. In addition, we may be required, in specific
circumstances, to measure certain of our assets at fair value on
a nonrecurring basis, including investment securities,
held-to-maturity,
loans held for sale, loans held for investment, REO and certain
other investments.
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.
165
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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
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.
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.
166
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 an 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 collateral dependent commercial real estate 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 a timely updated
appraisal, we perform internal valuations which utilize
assumptions and calculations similar to those customarily
utilized by third party appraisers and consider relevant
property specific facts and circumstances. In certain instances,
our internal assessment of value may be based on adjustments to
outdated appraisals by analyzing the changes in local market
conditions and asset performance since the appraisals were
performed. The outdated appraisal values may be discounted by
percentages that are determined by analyzing changes in local
market conditions since the dates of the appraisals as well as
by consulting databases, comparable market sale prices,
brokers opinions of value and other relevant data. We do
not make adjustments that increase the values indicated by
outdated appraisals by using higher recent sale comparisons.
Impaired collateral dependent commercial real estate loans for
which ultimate collection depends solely on the sale of the
collateral are charged off to the estimated fair value of the
collateral less estimated costs to sell. For certain of these
loans, we charged off to an amount different than the value
indicated by the most recent appraisal. This was primarily the
result of both factors causing the appraisal to be outdated as
outlined above and other factors surrounding the loans not
considered by appraisals, such as pending loan sales and other
transaction specific factors. As of December 31, 2010 and
2009, we charged off an additional $58.2 million, net, and
$2.3 million, net, respectively, in loan balances compared
with amounts that would have been charged off based on the
appraised values of the collateral.
Our policy on updating appraisals related to these originated
impaired collateral dependent commercial real estate loans
generally is to obtain current appraisals subsequent to the
impairment date if there are significant changes to the
underlying assumptions from the most recent appraisal. Some
factors that could cause significant changes include the passage
of more than twelve months since the time of the last appraisal;
the volatility of the local market; the availability of
financing; the inventory of competing properties; new
improvements to, or lack of maintenance of, the subject property
or competing surrounding properties; a change in zoning;
environmental contamination; or failure of the project to meet
material assumptions of the original appraisal. This policy for
updating appraisals does not vary by commercial real estate loan
type.
We continue to monitor collateral values on partially
charged-off impaired collateral dependent commercial real estate
loans and may record additional charge offs upon receiving
updated appraisals. We do not return such partially charged-off
loans to performing status, except in limited circumstances when
such loans have been formally restructured and have met key
performance criteria including compliance with restructured
payment terms. We do not return such partially charged-off loans
to performing status based solely on the results of appraisals.
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.
167
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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. 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
December 31, 2010.
Derivative
Assets and Liabilities
Derivatives are carried at fair value on a recurring basis and
primarily relate to interest rate swaps, caps, floors, basis
swaps and forward exchange contracts which we enter into to
manage interest rate risk and foreign exchange risk. Our
derivatives are principally traded in
over-the-counter
markets where quoted market prices are not readily available.
Instead, derivatives are measured using market observable inputs
such as interest rate yield curves, volatilities and basis
spreads. We also consider counterparty credit risk in valuing
our derivatives. We typically classify our derivatives in
Level 2 of the fair value hierarchy.
Real
Estate Owned
REO is initially recorded at its estimated fair value at the
time of foreclosure. REO held for sale is carried at the lower
of its carrying amount or fair value subsequent to the date of
foreclosure, with fair value adjustments recorded on a
nonrecurring basis. REO held for use is recorded at its carrying
amount, net of accumulated depreciation, with fair value
adjustments recorded on a nonrecurring basis if the carrying
amount of the real estate is not recoverable
168
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and exceeds its fair value. When available, the fair value of
REO is determined using actual market transactions. When market
transactions are not available, the fair value of REO is
typically determined based upon recent appraisals by third
parties. We may or may not adjust these third party appraisal
values based on our own internally developed judgments and
estimates. To the extent that market transactions or third party
appraisals are not available, we use the income approach through
internally developed valuation models to estimate the fair
value. This requires the use of significant judgment surrounding
discount rates and the timing and amounts of future cash flows.
Fair values determined through actual market transactions are
classified within Level 2 of the fair value hierarchy while
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 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 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 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.
Off-Balance
Sheet Financial Instruments
Loan
Commitments and Letters of Credit
Loan commitments and letters of credit generate ongoing fees at
our current pricing levels, which are recognized over the term
of the commitment period. For disclosure purposes, the fair
value is estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms
of the agreements,
169
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the current creditworthiness of the counterparties and current
market conditions. In addition, for loan commitments, the market
rates of return utilized in the valuation of the loans held for
investment as described above are applied to this analysis to
reflect current market conditions.
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 December 31, 2010 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurement as of
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
December 31,
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
2010
|
|
|
Identical Assets (Level 1)
|
|
|
Inputs (Level 2)
|
|
|
Inputs (Level 3)
|
|
|
|
($ in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities,
available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency discount notes
|
|
$
|
164,974
|
|
|
$
|
|
|
|
$
|
164,974
|
|
|
$
|
|
|
Agency callable notes
|
|
|
162,888
|
|
|
|
|
|
|
|
162,888
|
|
|
|
|
|
Agency debt
|
|
|
103,430
|
|
|
|
|
|
|
|
103,430
|
|
|
|
|
|
Agency MBS
|
|
|
870,155
|
|
|
|
|
|
|
|
870,155
|
|
|
|
|
|
Non-agency MBS
|
|
|
113,684
|
|
|
|
|
|
|
|
113,684
|
|
|
|
|
|
Equity securities
|
|
|
263
|
|
|
|
263
|
|
|
|
|
|
|
|
|
|
Corporate debt
|
|
|
5,135
|
|
|
|
|
|
|
|
5,120
|
|
|
|
15
|
|
Collateralized loan obligations
|
|
|
12,249
|
|
|
|
|
|
|
|
|
|
|
|
12,249
|
|
U.S. Treasury and agency securities
|
|
|
90,133
|
|
|
|
|
|
|
|
90,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities,
available-for-sale
|
|
|
1,522,911
|
|
|
|
263
|
|
|
|
1,510,384
|
|
|
|
12,264
|
|
Investments carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
Other assets held at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
|
41,309
|
|
|
|
|
|
|
|
41,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,564,442
|
|
|
$
|
263
|
|
|
$
|
1,551,693
|
|
|
$
|
12,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities held at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
78,287
|
|
|
$
|
|
|
|
$
|
78,287
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Assets and liabilities carried at fair value on a recurring
basis on the balance sheet as of December 31, 2009 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurement as of
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
December 31,
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
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 year ended
December 31, 2010 that have been classified in Level 3
of the fair value hierarchy was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized and Unrealized
|
|
|
Total
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses)
|
|
|
Realized
|
|
|
Sales,
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
and
|
|
|
Issuances,
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
|
|
Balance as of
|
|
|
|
|
|
Other
|
|
|
Unrealized
|
|
|
and
|
|
|
Transfers in (Out)
|
|
|
Balance as of
|
|
|
(Losses) as of
|
|
|
|
January 1,
|
|
|
Included in
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
Settlements,
|
|
|
of Level 3
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
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
|
|
|
|
(2,368
|
)
|
|
|
2,896
|
|
|
|
528
|
|
|
|
(4,970
|
)
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
(3,594
|
)
|
Collateralized loan obligation
|
|
|
1,326
|
|
|
|
636
|
|
|
|
(308
|
)
|
|
|
328
|
|
|
|
10,595
|
|
|
|
|
|
|
|
|
|
|
|
12,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,844
|
|
|
|
(1,732
|
)
|
|
|
2,588
|
|
|
|
856
|
|
|
|
5,564
|
|
|
|
|
|
|
|
|
|
|
|
12,264
|
|
|
|
(3,594
|
)
|
Warrants
|
|
|
1,392
|
|
|
|
117
|
|
|
|
|
|
|
|
117
|
|
|
|
(1,287
|
)
|
|
|
|
|
|
|
|
|
|
|
222
|
|
|
|
(605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
7,236
|
|
|
$
|
(1,615
|
)
|
|
$
|
2,588
|
|
|
$
|
973
|
|
|
$
|
4,277
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,486
|
|
|
$
|
(4,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the changes in the fair values of assets and
liabilities carried at fair value for the year ended
December 31, 2009 that have been classified in Level 3
of the fair value hierarchy was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized and Unrealized
|
|
|
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (Losses)
|
|
|
Total
|
|
|
Sales,
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
Realized and
|
|
|
Issuances,
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
|
|
Balances as of
|
|
|
|
|
|
Other
|
|
|
Unrealized
|
|
|
and
|
|
|
|
|
|
|
|
|
Balance as of
|
|
|
(Losses) as of
|
|
|
|
January 1,
|
|
|
Included in
|
|
|
Comprehensive
|
|
|
Gains
|
|
|
Settlements,
|
|
|
Transfers In (Out) of Level 3
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
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
|
)
|
|
$
|
(247
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
61
|
|
|
$
|
(17
|
)
|
Corporate debt
|
|
|
33,886
|
|
|
|
(10,893
|
)
|
|
|
(2,676
|
)
|
|
|
(13,569
|
)
|
|
|
(15,860
|
)
|
|
|
|
|
|
|
|
|
|
|
4,457
|
|
|
|
151
|
|
Collateralized loan obligation
|
|
|
2,361
|
|
|
|
(1,232
|
)
|
|
|
308
|
|
|
|
(924
|
)
|
|
|
(111
|
)
|
|
|
|
|
|
|
|
|
|
|
1,326
|
|
|
|
(1,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
36,624
|
|
|
|
(12,142
|
)
|
|
|
(2,420
|
)
|
|
|
(14,562
|
)
|
|
|
(16,218
|
)
|
|
|
|
|
|
|
|
|
|
|
5,844
|
|
|
|
(1,098
|
)
|
Warrants
|
|
|
4,661
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
(21
|
)
|
|
|
(3,248
|
)
|
|
|
|
|
|
|
|
|
|
|
1,392
|
|
|
|
(185
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
41,285
|
|
|
$
|
(12,163
|
)
|
|
$
|
(2,420
|
)
|
|
$
|
(14,583
|
)
|
|
$
|
(19,466
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,236
|
|
|
$
|
(1,283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized and unrealized gains and losses on assets and
liabilities classified in Level 3 of the fair value
hierarchy included in income for the year ended
December 31, 2010, reported in interest income and gain
(loss) on investments, net were as follows:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
Gain (Loss) on
|
|
|
Income
|
|
Investments, Net
|
|
|
($ in thousands)
|
|
Total gains (losses) included in earnings for the year
|
|
$
|
159
|
|
|
$
|
(1,774
|
)
|
Unrealized gains (losses) relating to assets held at year end
|
|
|
|
|
|
|
(4,199
|
)
|
Realized and unrealized gains and losses on assets and
liabilities classified in Level 3 of the fair value
hierarchy included in income for the year ended
December 31, 2009, reported in interest income, loss on
investments, net, and loss on residential mortgage investment
portfolio were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on
|
|
|
Interest
|
|
Loss on
|
|
Residential Mortgage
|
|
|
Income
|
|
Investments, Net
|
|
Investment Portfolio
|
|
|
($ in thousands)
|
|
Total gains (losses) included in earnings for the year
|
|
$
|
895
|
|
|
$
|
(13,588
|
)
|
|
$
|
(4
|
)
|
Unrealized gains (losses) relating to assets held at year end
|
|
|
739
|
|
|
|
(2,018
|
)
|
|
|
(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 tables below provide the fair values of
those assets for which nonrecurring fair value adjustments were
recorded during the years ended December 31, 2010 and 2009,
classified by their position in the fair value hierarchy. The
tables also provide the gains (losses) related to those assets
recorded during the years ended December 31, 2010 and 2009.
172
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
Total Net Losses for
|
|
|
|
Measurement as of
|
|
|
Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
the Year Ended
|
|
|
|
December 31,
|
|
|
for Identical
|
|
|
Observable Inputs
|
|
|
Unobservable
|
|
|
December 31,
|
|
|
|
2010
|
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
Inputs (Level 3)
|
|
|
2010
|
|
|
|
($ in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
205,334
|
|
|
$
|
|
|
|
$
|
205,334
|
|
|
$
|
|
|
|
$
|
(23,237
|
)
|
Loans held for investment(1)
|
|
|
185,303
|
|
|
|
|
|
|
|
|
|
|
|
185,303
|
|
|
|
(153,275
|
)
|
Investments carried at cost
|
|
|
606
|
|
|
|
|
|
|
|
|
|
|
|
606
|
|
|
|
(2,540
|
)
|
Investments accounted for under the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
equity method
|
|
|
199
|
|
|
|
|
|
|
|
|
|
|
|
199
|
|
|
|
(837
|
)
|
REO(2)
|
|
|
47,826
|
|
|
|
|
|
|
|
|
|
|
|
47,826
|
|
|
|
(45,484
|
)
|
Loan receivables
|
|
|
53,373
|
|
|
|
|
|
|
|
|
|
|
|
53,373
|
|
|
|
(42,079
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
492,641
|
|
|
$
|
|
|
|
$
|
205,334
|
|
|
$
|
287,307
|
|
|
$
|
(267,452
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 year ended December 31, 2009, classified by their
position in the fair value hierarchy. The table also provides
the gains (losses) related to those assets recorded during the
year ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
Total Net Losses for
|
|
|
|
Measurement as of
|
|
|
Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
the Year Ended
|
|
|
|
December 31,
|
|
|
for Identical
|
|
|
Observable Inputs
|
|
|
Unobservable
|
|
|
December 31,
|
|
|
|
2009
|
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
Inputs (Level 3)
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
670
|
|
|
$
|
|
|
|
$
|
670
|
|
|
$
|
|
|
|
$
|
(3,438
|
)
|
Loans held for investment(1)
|
|
|
388,982
|
|
|
|
|
|
|
|
|
|
|
|
388,982
|
|
|
|
(276,650
|
)
|
Investments carried at cost
|
|
|
12,914
|
|
|
|
|
|
|
|
|
|
|
|
12,914
|
|
|
|
(12,542
|
)
|
Investments accounted for under the equity method
|
|
|
610
|
|
|
|
|
|
|
|
|
|
|
|
610
|
|
|
|
(2,802
|
)
|
REO(2)
|
|
|
80,674
|
|
|
|
|
|
|
|
|
|
|
|
80,674
|
|
|
|
(17,156
|
)
|
Loan receivables
|
|
|
127,173
|
|
|
|
|
|
|
|
|
|
|
|
127,173
|
|
|
|
(3,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
611,023
|
|
|
$
|
|
|
|
$
|
670
|
|
|
$
|
610,353
|
|
|
$
|
(316,182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents impaired loans held for investment measured at fair
value of the loans collateral less transaction costs.
Transaction costs were not significant during the period. |
|
(2) |
|
Represents REO measured at fair value of the collateral less
transaction costs. Transaction costs were not significant during
the period. |
Fair
Value of Financial Instruments
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.
173
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The table below provides fair value estimates for our financial
instruments as of December 31, 2010 and 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate A Participation Interest, net
|
|
$
|
|
|
|
$
|
|
|
|
$
|
530,560
|
|
|
$
|
530,390
|
|
Loans held for investment, net
|
|
|
5,717,316
|
|
|
|
5,767,160
|
|
|
|
7,548,545
|
|
|
|
7,255,318
|
|
Investments carried at cost
|
|
|
33,062
|
|
|
|
64,735
|
|
|
|
53,205
|
|
|
|
87,940
|
|
Investment securities,
held-to-maturity
|
|
|
184,473
|
|
|
|
195,438
|
|
|
|
242,078
|
|
|
|
262,181
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
4,621,273
|
|
|
|
4,628,903
|
|
|
|
4,483,879
|
|
|
|
4,486,285
|
|
Credit facilities
|
|
|
67,508
|
|
|
|
66,464
|
|
|
|
542,781
|
|
|
|
497,036
|
|
Term debt
|
|
|
979,254
|
|
|
|
921,169
|
|
|
|
2,956,536
|
|
|
|
2,162,533
|
|
Convertible debt, net
|
|
|
523,650
|
|
|
|
539,297
|
|
|
|
561,347
|
|
|
|
525,860
|
|
Subordinated debt
|
|
|
437,286
|
|
|
|
253,626
|
|
|
|
439,701
|
|
|
|
255,027
|
|
Mortgage debt
|
|
|
|
|
|
|
|
|
|
|
447,683
|
|
|
|
426,865
|
|
Loan commitments and letters of credit
|
|
|
|
|
|
|
32,972
|
|
|
|
|
|
|
|
45,455
|
|
For the year ended December 31, 2010, we operated as two
reportable segments: 1) CapitalSource Bank and
2) Other Commercial Finance. For the years ended
December 31, 2009 and 2008, 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 during 2010. We have reclassified all comparative
period results to reflect our two current reportable segments.
In addition, 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 years ended December 31, 2010, 2009 and
2008.
174
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The financial results of our operating segments as of and for
the years ended December 31, 2010, 2009 and 2008, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
CapitalSource
|
|
|
Commercial
|
|
|
Intercompany
|
|
|
Consolidated
|
|
|
|
Bank(1)
|
|
|
Finance
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Total interest income
|
|
$
|
333,625
|
|
|
$
|
315,934
|
|
|
$
|
(9,918
|
)
|
|
$
|
639,641
|
|
Interest expense
|
|
|
65,267
|
|
|
|
166,829
|
|
|
|
|
|
|
|
232,096
|
|
Provision for loan losses
|
|
|
117,105
|
|
|
|
189,975
|
|
|
|
|
|
|
|
307,080
|
|
Operating expenses
|
|
|
113,696
|
|
|
|
174,426
|
|
|
|
(59,568
|
)
|
|
|
228,554
|
|
Other income (expense), net
|
|
|
27,686
|
|
|
|
(1,932
|
)
|
|
|
(58,989
|
)
|
|
|
(33,235
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations before income taxes
|
|
|
65,243
|
|
|
|
(217,228
|
)
|
|
|
(9,339
|
)
|
|
|
(161,324
|
)
|
Income tax expense (benefit)
|
|
|
13,628
|
|
|
|
(34,430
|
)
|
|
|
|
|
|
|
(20,802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
51,615
|
|
|
$
|
(182,798
|
)
|
|
$
|
(9,339
|
)
|
|
$
|
(140,522
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of December 31, 2010
|
|
$
|
6,117,368
|
|
|
$
|
3,418,897
|
|
|
$
|
(90,858
|
)
|
|
$
|
9,445,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
CapitalSource
|
|
|
Commercial
|
|
|
Intercompany
|
|
|
Consolidated
|
|
|
|
Bank(1)
|
|
|
Finance
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Total interest income
|
|
$
|
310,741
|
|
|
$
|
567,214
|
|
|
$
|
(6,009
|
)
|
|
$
|
871,946
|
|
Interest expense
|
|
|
111,873
|
|
|
|
315,439
|
|
|
|
|
|
|
|
427,312
|
|
Provision for loan losses
|
|
|
213,381
|
|
|
|
632,605
|
|
|
|
|
|
|
|
845,986
|
|
Operating expenses
|
|
|
100,474
|
|
|
|
221,690
|
|
|
|
(44,661
|
)
|
|
|
277,503
|
|
Other income (expense), net
|
|
|
38,060
|
|
|
|
(86,261
|
)
|
|
|
(47,474
|
)
|
|
|
(95,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations before income taxes
|
|
|
(76,927
|
)
|
|
|
(688,781
|
)
|
|
|
(8,822
|
)
|
|
|
(774,530
|
)
|
Income tax (benefit) expense
|
|
|
(6,228
|
)
|
|
|
142,542
|
|
|
|
|
|
|
|
136,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(70,699
|
)
|
|
$
|
(831,323
|
)
|
|
$
|
(8,822
|
)
|
|
$
|
(910,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of December 31, 2009
|
|
$
|
5,682,949
|
|
|
$
|
6,680,576
|
|
|
$
|
(102,475
|
)
|
|
$
|
12,261,050
|
|
175
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
CapitalSource
|
|
|
Commercial
|
|
|
Intercompany
|
|
|
Consolidated
|
|
|
|
Bank(1)
|
|
|
Finance
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Total interest income
|
|
$
|
148,104
|
|
|
$
|
1,056,867
|
|
|
$
|
4,498
|
|
|
$
|
1,209,469
|
|
Interest expense
|
|
|
76,246
|
|
|
|
601,461
|
|
|
|
|
|
|
|
677,707
|
|
Provision for loan losses
|
|
|
55,600
|
|
|
|
537,446
|
|
|
|
|
|
|
|
593,046
|
|
Operating expenses
|
|
|
43,287
|
|
|
|
234,571
|
|
|
|
(23,258
|
)
|
|
|
254,600
|
|
Other income (expense), net
|
|
|
12,451
|
|
|
|
(117,204
|
)
|
|
|
(38,077
|
)
|
|
|
(142,830
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations before income taxes
|
|
|
(14,578
|
)
|
|
|
(433,815
|
)
|
|
|
(10,321
|
)
|
|
|
(458,714
|
)
|
Income tax benefit
|
|
|
(6,089
|
)
|
|
|
(184,494
|
)
|
|
|
|
|
|
|
(190,583
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(8,489
|
)
|
|
$
|
(249,321
|
)
|
|
$
|
(10,321
|
)
|
|
$
|
(268,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of December 31, 2008
|
|
$
|
6,112,572
|
|
|
$
|
12,468,828
|
|
|
$
|
(161,768
|
)
|
|
$
|
18,419,632
|
|
|
|
|
(1) |
|
CapitalSource Bank segment commenced operations on July 25,
2008. |
The accounting policies of each of the individual operating
segments are the same as those described in Note 2,
Summary of Significant Accounting Policies. Currently,
substantially all of our business activities occur within the
United States of America; therefore, no additional geographic
disclosures are necessary.
Intercompany
Eliminations
The intercompany eliminations consist of eliminations for
intercompany activity among the segments. Such activities
primarily include services provided by the Parent Company to
CapitalSource Bank and by CapitalSource Bank to the Parent
Company, loan sales between the Parent Company and CapitalSource
Bank, daily loan collections received at CapitalSource Bank for
Parent Company loans and daily loan disbursements paid at the
Parent Company for CapitalSource Bank loans.
176
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 25.
|
Parent
Company Information
|
As of December 31, 2010 and 2009, the Parent Company
condensed financial information was as follows:
Condensed
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
($ in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
94,614
|
|
|
$
|
99,103
|
|
Investment in subsidiaries:
|
|
|
|
|
|
|
|
|
Bank subsidiary
|
|
|
924,644
|
|
|
|
868,324
|
|
Non-Bank subsidiaries
|
|
|
1,414,556
|
|
|
|
1,847,775
|
|
|
|
|
|
|
|
|
|
|
Total investment in subsidiaries
|
|
|
2,339,200
|
|
|
|
2,716,099
|
|
Other assets
|
|
|
464,198
|
|
|
|
438,214
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,898,012
|
|
|
$
|
3,253,416
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity:
|
|
|
|
|
|
|
|
|
Credit facilities
|
|
$
|
|
|
|
$
|
193,637
|
|
Other borrowings
|
|
|
809,381
|
|
|
|
844,285
|
|
Other liabilities
|
|
|
34,658
|
|
|
|
32,328
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
844,039
|
|
|
|
1,070,250
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
3,232
|
|
|
|
3,230
|
|
Additional paid-in capital
|
|
|
3,911,344
|
|
|
|
3,909,366
|
|
Accumulated deficit
|
|
|
(1,870,544
|
)
|
|
|
(1,748,791
|
)
|
Accumulated other comprehensive income, net
|
|
|
9,941
|
|
|
|
19,361
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,053,973
|
|
|
|
2,183,166
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
2,898,012
|
|
|
$
|
3,253,416
|
|
|
|
|
|
|
|
|
|
|
177
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands)
|
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
40,421
|
|
|
$
|
19,326
|
|
|
$
|
4,335
|
|
Interest expense
|
|
|
101,481
|
|
|
|
118,366
|
|
|
|
93,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment loss
|
|
|
(61,060
|
)
|
|
|
(99,040
|
)
|
|
|
(89,492
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
1,302
|
|
|
|
1,321
|
|
|
|
1,061
|
|
Professional fees
|
|
|
2,451
|
|
|
|
7,762
|
|
|
|
3,577
|
|
Other administrative expenses
|
|
|
4,560
|
|
|
|
4,163
|
|
|
|
38,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
8,313
|
|
|
|
13,246
|
|
|
|
42,813
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
(1,688
|
)
|
|
|
(60,266
|
)
|
|
|
(29,668
|
)
|
Earnings (loss) in Bank subsidiary
|
|
|
51,614
|
|
|
|
(70,699
|
)
|
|
|
(8,491
|
)
|
Loss in non-Bank subsidiaries
|
|
|
(136,401
|
)
|
|
|
(636,209
|
)
|
|
|
(39,448
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expense
|
|
|
(86,475
|
)
|
|
|
(767,174
|
)
|
|
|
(77,607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(155,848
|
)
|
|
|
(879,460
|
)
|
|
|
(209,912
|
)
|
Income tax (benefit) expense
|
|
|
(46,594
|
)
|
|
|
(10,441
|
)
|
|
|
9,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(109,254
|
)
|
|
$
|
(869,019
|
)
|
|
$
|
(219,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
($ in thousands)
|
|
|
Cash provided by (used in) operating activities:
|
|
$
|
273,963
|
|
|
$
|
600,766
|
|
|
$
|
(682,193
|
)
|
Cash provided by investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Repurchase of) proceeds from issuance of common stock
|
|
|
(7,635
|
)
|
|
|
77,105
|
|
|
|
601,755
|
|
Payment of dividends
|
|
|
(12,951
|
)
|
|
|
(12,455
|
)
|
|
|
(287,566
|
)
|
(Repayments of) borrowings on credit facilities, net
|
|
|
(193,637
|
)
|
|
|
(696,363
|
)
|
|
|
409,763
|
|
Borrowings of term debt
|
|
|
|
|
|
|
281,898
|
|
|
|
|
|
Repayments of other borrowings
|
|
|
(47,227
|
)
|
|
|
(118,503
|
)
|
|
|
|
|
Other
|
|
|
(17,002
|
)
|
|
|
(33,356
|
)
|
|
|
(41,748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by financing activities:
|
|
|
(278,452
|
)
|
|
|
(501,674
|
)
|
|
|
682,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(4,489
|
)
|
|
|
99,092
|
|
|
|
11
|
|
Cash and cash equivalents as of beginning of year
|
|
|
99,103
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end of year
|
|
$
|
94,614
|
|
|
$
|
99,103
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
179
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 26.
|
Unaudited
Quarterly Information
|
Unaudited quarterly information for each of the three months in
the years ended December 31, 2010 and 2009, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
2010
|
|
|
|
($ in thousands, except per share data)
|
|
|
Interest income
|
|
$
|
150,377
|
|
|
$
|
153,130
|
|
|
$
|
164,720
|
|
|
$
|
171,414
|
|
Interest expense
|
|
|
48,430
|
|
|
|
57,908
|
|
|
|
60,757
|
|
|
|
65,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
101,947
|
|
|
|
95,222
|
|
|
|
103,963
|
|
|
|
106,413
|
|
Provision for loan losses
|
|
|
24,107
|
|
|
|
38,771
|
|
|
|
25,262
|
|
|
|
218,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (loss) after provision for loan losses
|
|
|
77,840
|
|
|
|
56,451
|
|
|
|
78,701
|
|
|
|
(112,527
|
)
|
Operating expenses
|
|
|
56,991
|
|
|
|
54,767
|
|
|
|
53,591
|
|
|
|
63,205
|
|
Other (expense) income
|
|
|
(16,904
|
)
|
|
|
40,750
|
|
|
|
(34,806
|
)
|
|
|
(22,275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations before income taxes
|
|
|
3,945
|
|
|
|
42,434
|
|
|
|
(9,696
|
)
|
|
|
(198,007
|
)
|
Income tax (benefit) expense
|
|
|
(1,966
|
)
|
|
|
(35,668
|
)
|
|
|
(4,174
|
)
|
|
|
21,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
5,911
|
|
|
|
78,102
|
|
|
|
(5,522
|
)
|
|
|
(219,013
|
)
|
Net income from discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
2,166
|
|
|
|
7,323
|
|
Gain (loss) from sale of discontinued operations, net of taxes
|
|
|
|
|
|
|
|
|
|
|
21,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
5,911
|
|
|
|
78,102
|
|
|
|
18,340
|
|
|
|
(211,690
|
)
|
Net loss attributable to noncontrolling interests
|
|
|
|
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to CapitalSource Inc.
|
|
$
|
5,911
|
|
|
$
|
78,185
|
|
|
$
|
18,340
|
|
|
$
|
(211,690
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.02
|
|
|
$
|
0.24
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.68
|
)
|
From discontinued operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.08
|
|
|
$
|
0.02
|
|
Attributable to CapitalSource Inc.
|
|
$
|
0.02
|
|
|
$
|
0.24
|
|
|
$
|
0.06
|
|
|
$
|
(0.66
|
)
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
0.02
|
|
|
$
|
0.24
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.68
|
)
|
From discontinued operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.08
|
|
|
$
|
0.02
|
|
Attributable to CapitalSource Inc.
|
|
$
|
0.02
|
|
|
$
|
0.24
|
|
|
$
|
0.06
|
|
|
$
|
(0.66
|
)
|
180
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
|
($ in thousands, except per share data)
|
|
|
Interest income
|
|
$
|
198,136
|
|
|
$
|
208,162
|
|
|
$
|
216,746
|
|
|
$
|
248,902
|
|
Interest expense
|
|
|
91,721
|
|
|
|
101,438
|
|
|
|
107,017
|
|
|
|
127,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
106,415
|
|
|
|
106,724
|
|
|
|
109,729
|
|
|
|
121,766
|
|
Provision for loan losses
|
|
|
265,487
|
|
|
|
221,385
|
|
|
|
203,847
|
|
|
|
155,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest loss after provision for loan losses
|
|
|
(159,072
|
)
|
|
|
(114,661
|
)
|
|
|
(94,118
|
)
|
|
|
(33,501
|
)
|
Operating expenses
|
|
|
75,833
|
|
|
|
64,426
|
|
|
|
68,159
|
|
|
|
69,085
|
|
Other expense
|
|
|
(6,437
|
)
|
|
|
(8,544
|
)
|
|
|
(8,833
|
)
|
|
|
(71,861
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations before income taxes
|
|
|
(241,342
|
)
|
|
|
(187,631
|
)
|
|
|
(171,110
|
)
|
|
|
(174,447
|
)
|
Income tax expense (benefit)
|
|
|
5,125
|
|
|
|
97,089
|
|
|
|
89,441
|
|
|
|
(55,341
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
|
(246,467
|
)
|
|
|
(284,720
|
)
|
|
|
(260,551
|
)
|
|
|
(119,106
|
)
|
Net income from discontinued operations, net of taxes
|
|
|
12,760
|
|
|
|
10,484
|
|
|
|
13,045
|
|
|
|
13,579
|
|
(Loss) gain from sale of discontinued operations, net of taxes
|
|
|
(10,215
|
)
|
|
|
|
|
|
|
937
|
|
|
|
1,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(243,922
|
)
|
|
|
(274,236
|
)
|
|
|
(246,569
|
)
|
|
|
(104,320
|
)
|
Net income (loss) attributable to noncontrolling interests
|
|
|
|
|
|
|
10
|
|
|
|
(22
|
)
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to CapitalSource Inc.
|
|
$
|
(243,922
|
)
|
|
$
|
(274,246
|
)
|
|
$
|
(246,547
|
)
|
|
$
|
(104,304
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.77
|
)
|
|
$
|
(0.90
|
)
|
|
$
|
(0.87
|
)
|
|
$
|
(0.41
|
)
|
From discontinued operations
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
Attributable to CapitalSource Inc.
|
|
$
|
(0.76
|
)
|
|
$
|
(0.87
|
)
|
|
$
|
(0.82
|
)
|
|
$
|
(0.36
|
)
|
Diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
$
|
(0.77
|
)
|
|
$
|
(0.90
|
)
|
|
$
|
(0.87
|
)
|
|
$
|
(0.41
|
)
|
From discontinued operations
|
|
$
|
0.01
|
|
|
$
|
0.03
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
Attributable to CapitalSource Inc.
|
|
$
|
(0.76
|
)
|
|
$
|
(0.87
|
)
|
|
$
|
(0.82
|
)
|
|
$
|
(0.36
|
)
|
181
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
None.
|
|
ITEM 9A.
|
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 December 31, 2010. There
have been no changes in our internal control over financial
reporting during the quarter ended December 31, 2010, that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Reference is made to the Management Report on Internal Controls
over Financial Reporting on page 97.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
On February 24, 2011, the Compensation Committee of the
Board of Directors adopted specific performance criteria which
the Compensation Committee expects to consider when making cash
bonus awards for 2011 to the
Co-Chief
Executive Officers of the Parent Company. The criteria, in
addition to the overall objective of achieving pre-tax net
income for CapitalSource Bank of $150.0 million, include
achieving new funded originations in 2011 of $1.8 billion,
measures of credit losses, progress toward converting
CapitalSource Banks charter from an ILC to a commercial
bank charter, reducing the Parent Companys level of
classified assets, simplification of our operating structure,
and reducing operating expenses. Achievement of any one or more
of the performance targets will not require the Compensation
Committee to award any specific bonus amount, or any bonus at
all. While the Compensation Committee believes the targets are
achievable, it also believes they present appropriate challenges
to the Co-CEOs and, if met, would be reflective of a high level
of performance by the executives and by the Company.
182
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
A listing of our executive officers and their biographies are
included under Item 1, Business, in the section entitled
Executive Officers on page 25 of this
Form 10-K.
The members of our Board of Directors, their principal
occupations and the Board committees on which they serve are as
follows:
William G.
Byrnes(1)
Private Investor
John K.
Delaney(4)
Executive Chairman
Frederick W.
Eubank, II(2)(4)
Managing Partner, Pamlico Capital Management, LP
Andrew B.
Fremder(3)(4)
President, East Bay College Fund
Sara Grootwassink
Lewis(1)(3)
Chief Executive Officer, Lewis Corporate Advisors, LLC
C. William
Hosler(1)(2)
Private Investor and Consultant to TPG
Timothy M.
Hurd(2)
Managing Director, Madison Dearborn Partners, LLC
Steven A. Museles
Co-Chief Executive Officer
James J. Pieczynski
Co-Chief Executive Officer
|
|
|
(1) |
|
Audit Committee |
(2) |
|
Compensation Committee |
(3) |
|
Nominating and Corporate Governance Committee |
(4) |
|
Asset, Liability and Credit Policy Committee |
Biographies for our non-management directors and additional
information pertaining to directors and executive officers and
our corporate governance as well as the remaining information
called for by this item are incorporated herein by reference to
Election of Directors, Corporate Governance, Board of
Directors and Other Matters Section 16(a)
Beneficial Ownership Reporting Compliance and other sections
in our definitive proxy statement for our 2011 Annual Meeting of
Stockholders to be held April 27, 2011, which will be filed
within 120 days of the end of our fiscal year ended
December 31, 2010 (the 2011 Proxy Statement).
Our Co-Chief Executive Officers and Chief Financial Officer have
delivered, and we have filed with this
Form 10-K,
all certifications required by rules of the SEC and relating to,
among other things, the Companys financial statements,
internal controls and the public disclosures contained in this
Form 10-K.
In addition, on May 26, 2010, our Co-Chief Executive
Officers certified to the New York Stock Exchange (the
NYSE) that they were not aware of any violations by
the Company of the NYSEs corporate governance listing
standards and, as required by the rules of the NYSE. We expect
our Co-Chief Executive Officers to provide a similar
certification following the 2011 Annual Meeting of Stockholders.
183
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Information pertaining to executive compensation is incorporated
herein by reference to Executive Compensation in the 2011
Proxy Statement with respect to our 2011 Annual Meeting of
Stockholders to be held on April 27, 2011.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATERS
|
Information pertaining to security ownership of management and
certain beneficial owners of the registrants Common Stock
is incorporated herein by reference to Voting Securities and
Principal Holders Thereof and other sections of the 2011
Proxy Statement with respect to our 2011 Annual Meeting of
Stockholders to be held on April 27, 2011.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
Information pertaining to certain relationships and related
transactions and director independence is incorporated herein by
reference to Corporate Governance and Compensation
Committee Interlocks and Insider Participation and other
sections of the 2011 Proxy Statement with respect to our 2011
Annual Meeting of Stockholders to be held on April 27, 2011.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
Information pertaining to principal accounting fees and services
is incorporated herein by reference to Report of the Audit
Committee of the 2011 Proxy Statement with respect to our
2011 Annual Meeting of Stockholders to be held on April 27,
2011.
184
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
15(a)(1)
Financial Statements
The audited consolidated financial statements of the registrant
as listed in the Index to Consolidated Financial
Statements included in Item 8, Financial
Statements and Supplementary Data, on page 99 of this
report, are filed as part of this report.
15(a)(2)
Financial Statement Schedules
Consolidated financial statement schedules have been omitted
because the required information is not present, or not present
in amounts sufficient to require submission of the schedules, or
because the required information is provided in our audited
consolidated financial statements or notes thereto.
15(a)(3)
Exhibits
The exhibits listed in the accompanying Index to Exhibits are
filed as part of this report.
185
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
CAPITALSOURCE INC.
|
|
|
|
Date: February 28, 2011
|
|
/s/ STEVEN
A.
MUSELES Steven
A. Museles
Director and Co-Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
Date: February 28, 2011
|
|
/s/ JAMES
J.
PIECZYNSKI James
J. Pieczynski
Director and Co-Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
Date: February 28, 2011
|
|
/s/ DONALD
F.
COLE Donald
F. Cole
Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
Date: February 28, 2011
|
|
/s/ BRYAN
D.
SMITH Bryan
D. Smith
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated on
February 28, 2011.
|
|
|
/s/ JOHN
K. DELANEY
John
K. Delaney, Executive Chairman of the Board of Directors
|
|
/s/ WILLIAM
G.
BYRNES William
G. Byrnes, Director
|
|
|
|
/s/ FREDERICK
W. EUBANK, II
Frederick
W. Eubank, II, Director
|
|
/s/ C.
WILLIAM
HOSLER C.
William Hosler, Director
|
|
|
|
/s/ ANDREW
B. FREMDER
Andrew
B. Fremder, Director
|
|
/s/ TIMOTHY
M.
HURD Timothy
M. Hurd, Director
|
|
|
|
/s/ SARA
GROOTWASSINK LEWIS
Sara
Grootwassink Lewis, Director
|
|
|
186
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
No
|
|
Description
|
|
|
3
|
.1
|
|
Second Amended and Restated Certificate of Incorporation
(composite version; reflects all amendments through May 1,
2008)(incorporated by reference to exhibit 3.1 to the
Form 10-Q
filed by CapitalSource on May 12, 2008).
|
|
3
|
.2
|
|
Amended and Restated Bylaws (composite version; reflects all
amendments through February 16, 2011)(incorporated by
reference to exhibit 3.1 to the
Form 8-K
filed by CapitalSource on February 18, 2011).
|
|
4
|
.1
|
|
Indenture dated as of July 7, 2004, by and among
CapitalSource Inc., as issuer, U.S. Bank National Association,
as trustee, and CapitalSource Holdings LLC and CapitalSource
Finance LLC, as guarantors, including form of 3.5% Senior
Convertible Debenture due 2034 (incorporated by reference to
exhibit 4.1 to the Registration Statement on
Form S-3
(Reg.
No. 333-118738)
filed by CapitalSource on September 1, 2004).
|
|
4
|
.1.1
|
|
First Supplemental Indenture dated as of October 18, 2004,
by and among the CapitalSource Inc., as issuer, CapitalSource
Holdings Inc. and CapitalSource Finance LLC, as guarantors, and
U.S. Bank National Association, as trustee (incorporated by
reference to exhibit 4.1.1 to the Registration Statement on
Form S-3
(Reg.
No. 333-118738)
filed by CapitalSource on October 19, 2004).
|
|
4
|
.2
|
|
Indenture dated as of April 4, 2007, by and among
CapitalSource Inc., as issuer, CapitalSource Finance LLC, as
guarantor, and Wells Fargo Bank, N.A., as trustee (incorporated
by reference to exhibit 4.4 to the
Form 10-K
filed by CapitalSource on March 2, 2009).
|
|
4
|
.3
|
|
Indenture dated as of July 30, 2007, by and between
CapitalSource Inc., as issuer, and Wells Fargo Bank, N.A., as
trustee (incorporated by reference to exhibit 4.20 to the
Form 10-Q
filed by CapitalSource on November 9, 2007).
|
|
4
|
.3.1
|
|
First Supplemental Indenture dated as of July 30, 2007, by
and between CapitalSource Inc., as issuer, CapitalSource Finance
LLC, as guarantor, and Wells Fargo Bank, N.A., as trustee
(incorporated by reference to exhibit 4.20.1 to the
Form 10-Q
filed by CapitalSource on November 9, 2007).
|
|
4
|
.4
|
|
Indenture dated as of July 27, 2009 between CapitalSource
Inc., the guarantors of the notes from time to time parties
thereto and U.S. Bank National Association, as trustee
(incorporated by reference to exhibit 4.1 to the
Form 8-K
filed by CapitalSource on July 30, 2009).
|
|
4
|
.4.1
|
|
Supplemental Indenture dated as of December 9, 2010 among
CapitalSource Inc., CapitalSource Finance LLC, as guarantor and
U.S. Bank National Association, as trustee (incorporated by
reference to exhibit 4.1 to the
Form 8-K
filed by CapitalSource on December 9, 2010).
|
|
10
|
.1
|
|
Capital Maintenance and Liquidity Agreement dated as of
July 25, 2008, among CapitalSource Inc., CapitalSource TRS
LLC (formerly CapitalSource TRS Inc.), CapitalSource Finance
LLC, CapitalSource Bank and the FDIC (incorporated by reference
to exhibit 10.1 to the
Form 8-K
filed by CapitalSource on July 28, 2008).
|
|
10
|
.2
|
|
Parent Company Agreement dated as of July 25, 2008, among
CapitalSource Inc., CapitalSource TRS LLC (formerly
CapitalSource TRS Inc.), CapitalSource Finance LLC,
CapitalSource Bank and the FDIC (incorporated by reference to
exhibit 10.2 to the
Form 8-K
filed by CapitalSource on July 28, 2008).
|
|
10
|
.3.1
|
|
Office Lease Agreement dated April 27, 2007 by and between
Wisconsin Place Office LLC and CapitalSource Finance LLC
(incorporated by reference to exhibit 10.4 to the
Form 10-K
filed by CapitalSource on March 2, 2009).
|
|
10
|
.3.2
|
|
Amendment No. 1 to Lease dated August 25, 2008 by and
between Wisconsin Place Office LLC and CapitalSource Finance LLC
(incorporated by reference to exhibit 10.6 to the
Form 10-Q
filed by CapitalSource on August 10, 2009).
|
|
10
|
.3.3
|
|
Amendment No. 2 to Lease dated February 17, 2009 by
and between Wisconsin Place Office LC and CapitalSource Finance
LLC (incorporated by reference to exhibit 10.7 to the
Form 10-Q
filed by CapitalSource on August 10, 2009).
|
|
10
|
.3.4
|
|
Sublease of Office Lease Agreement dated as of September 1,
2010 by and between CapitalSource Finance LLC and Brown
Investment Advisory and Trust Company (incorporated by
reference to exhibit 10.1 to the
Form 10-Q
filed by CapitalSource on November 4, 2010).
|
|
10
|
.4
|
|
Office Lease dated November 5, 2008, by and between
Providence 130 State College Brea, LLC and CapitalSource Bank
(incorporated by reference to exhibit 10.1 to the
Form 10-Q
filed by CapitalSource on May 11, 2009).
|
187
|
|
|
|
|
Exhibit
|
|
|
No
|
|
Description
|
|
|
10
|
.5
|
|
Fourth Amended and Restated Intercreditor and Lockbox
Administration Agreement dated as of June 30, 2005, among
Bank of America, N.A., as lockbox bank, CapitalSource Finance
LLC, as originator, original servicer and lockbox servicer,
CapitalSource Funding Inc., as owner, and the financing agents
(incorporated by reference to exhibit 10.39 to the
Form 10-Q
filed by CapitalSource on August 5, 2005).
|
|
10
|
.6
|
|
Fifth Amended and Restated Three Party Agreement Relating to
Lockbox Services and Control dated as of June 30, 2005,
among Bank of America, N.A., as the bank, CapitalSource Finance
LLC, as originator, original servicer and lockbox servicer,
CapitalSource Funding Inc., as the owner, and the financing
agents (incorporated by reference to exhibit 10.40 to the
Form 10-Q
filed by CapitalSource on August 5, 2005).
|
|
10
|
.7
|
|
Amended Security Agreement dated as of July 27, 2009 by and
among CapitalSource Inc. and certain direct and indirect
subsidiaries of CapitalSource Inc. that are or become guarantors
collectively, the guarantors and the obligors, and Wachovia
Bank, National Association, as collateral agent (composite
version; reflects all amendments through November 5,
2009)(incorporated by reference to exhibit 10.11 to the
Form 10-K
filed by CapitalSource on March 1, 2010).
|
|
10
|
.8
|
|
Amended Pledge Agreement dated as of July 27, 2009 by and
among CapitalSource Inc. and certain direct and indirect
subsidiaries of CapitalSource Inc. that are or become guarantors
collectively, the guarantors and pledgors, Wachovia Bank,
National Association, as collateral agent, Wells Fargo Bank,
National Association as collateral custodian and CapitalSource
Finance LLC, as servicer (composite version; reflects all
amendments through November 5, 2009)(incorporated by
reference to exhibit 10.12 to the
Form 10-K
filed by CapitalSource on March 1, 2010).
|
|
10
|
.9
|
|
Indenture dated as of September 28, 2006, by and among
CapitalSource Commercial Loan
Trust 2006-2,
as the issuer, and Wells Fargo Bank, National Association, as
the indenture trustee (incorporated by reference to
exhibit 4.16 to the
Form 8-K
filed by CapitalSource on October 4, 2006).
|
|
10
|
.10
|
|
Sale and Servicing Agreement dated as of September 28,
2006, by and among CapitalSource Commercial Loan
Trust 2006-2,
as the issuer, CapitalSource Commercial Loan LLC,
2006-2, as
the trust depositor, CapitalSource Finance LLC, as the
originator and as the servicer, and Wells Fargo Bank, National
Association, as the indenture trustee and as the backup servicer
(incorporated by reference to exhibit 10.66 to the
Form 8-K
filed by CapitalSource on October 4, 2006).
|
|
10
|
.11*
|
|
Third Amended and Restated Equity Incentive Plan (composite
version; reflects all amendments through April 29, 2010)
(incorporated by reference to exhibit 10.1 to the
Registration Statement on
Form S-8
filed by CapitalSource on May 3, 2010).
|
|
10
|
.12.1*
|
|
Form of Non-Qualified Option Agreement (2005) (incorporated by
reference to exhibit 10.1 to the
Form 8-K
filed by CapitalSource on January 31, 2005).
|
|
10
|
.12.2*
|
|
Form of Non-Qualified Option Agreement (2007) (incorporated by
reference to exhibit 10.81 to the
Form 10-Q
filed by CapitalSource on August 8, 2007).
|
|
10
|
.12.3*
|
|
Form of Non-Qualified Option Agreement (2008) (incorporated by
reference to exhibit 10.8 to the
Form 10-Q
filed by CapitalSource on August 11, 2008).
|
|
10
|
.12.4*
|
|
Form of Non-Qualified Option Agreement (2010) (incorporated by
reference to exhibit 10.32.4 to the
Form 10-K
filed by CapitalSource on March 1, 2010).
|
|
10
|
.12.5*
|
|
Form of Non-Qualified Option Agreement (July 2010) (incorporated
by reference to exhibit 10.5 to the
Form 10-Q
filed by CapitalSource on August 3, 2010).
|
|
10
|
.13.1*
|
|
Form of Non-Qualified Option Agreement for Directors (2005)
(incorporated by reference to exhibit 10.2 to the
Form 8-K
filed by CapitalSource on January 31, 2005).
|
|
10
|
.13.2*
|
|
Form of Non-Qualified Option Agreement for Directors (2007)
(incorporated by reference to exhibit 10.78 to the
Form 10-Q
filed by CapitalSource on August 8, 2007).
|
|
10
|
.13.3*
|
|
Form of Non-Qualified Option Agreement for Directors (2008)
(incorporated by reference to exhibit 10.18.3 to the
Form 10-K
filed by CapitalSource on February 29, 2008).
|
|
10
|
.13.4*
|
|
Form of Non-Qualified Option Agreement for Directors (2010)
(incorporated by reference to exhibit 10.33.4 to the
Form 10-K
filed by CapitalSource on March 1, 2010).
|
|
10
|
.14.1*
|
|
Form of Restricted Stock Agreement (2005) (incorporated by
reference to exhibit 10.3 to the
Form 8-K
filed by CapitalSource on January 31, 2005).
|
|
10
|
.14.2*
|
|
Form of Restricted Stock Agreement (2007) (incorporated by
reference to exhibit 10.79 to the
Form 10-Q
filed by CapitalSource on August 8, 2007).
|
|
10
|
.14.3*
|
|
Form of Restricted Stock Agreement (2008) (incorporated by
reference to exhibit 10.6 to the
Form 10-Q
filed by CapitalSource on August 11, 2008).
|
188
|
|
|
|
|
Exhibit
|
|
|
No
|
|
Description
|
|
|
10
|
.14.4*
|
|
Form of Restricted Stock Agreement (2009) (incorporated by
reference to exhibit 10.7 to the
Form 10-Q
filed by CapitalSource on May 11, 2009).
|
|
10
|
.14.5*
|
|
Form of Restricted Stock Agreement (2010) (incorporated by
reference to exhibit 10.34.5 to the
Form 10-K
filed by CapitalSource on March 1, 2010).
|
|
10
|
.14.6*
|
|
Form of Restricted Stock Agreement (April 2010) (incorporated by
reference to exhibit 10.7 to the
Form 10-Q
filed on May 5, 2010).
|
|
10
|
.14.7*
|
|
Form of Restricted Stock Agreement (July 2010) (incorporated by
reference to exhibit 10.6 to the
Form 10-Q
filed on August 3, 2010).
|
|
10
|
.15.1*
|
|
Form of Restricted Stock Agreement for Directors (2007)
(incorporated by reference to exhibit 10.76 to the
Form 10-Q
filed by CapitalSource on August 8, 2007).
|
|
10
|
.15.2*
|
|
Form of Restricted Stock Agreement for Directors (2008)
(incorporated by reference to exhibit 10.20.2 to the
Form 10-K
filed by CapitalSource on February 29, 2008).
|
|
10
|
.15.3*
|
|
Form of Restricted Stock Agreement for Directors (2009)
(incorporated by reference to exhibit 10.8 to the
Form 10-Q
filed by CapitalSource on May 11, 2009).
|
|
10
|
.15.4*
|
|
Form of Restricted Stock Agreement for Directors (2010)
(incorporated by reference to exhibit 10.36.4 to the
Form 10-K
filed by CapitalSource on March 1, 2010).
|
|
10
|
.15.5*
|
|
Form of Restricted Stock Agreement for Directors (April 2010)
(incorporated by reference to exhibit 10.8 to the
Form 10-Q
filed by CapitalSource on May 5, 2010).
|
|
10
|
.16.1*
|
|
Form of Restricted Unit Agreement (2007) (incorporated by
reference to exhibit 10.70 to the
Form 8-K
filed by CapitalSource on March 13, 2007).
|
|
10
|
.16.2*
|
|
Form of Restricted Stock Unit Agreement (2007) (incorporated by
reference to exhibit 10.80 to the
Form 10-Q
filed by CapitalSource on August 8, 2007).
|
|
10
|
.16.3*
|
|
Form of Restricted Stock Unit Agreement (2008) (incorporated by
reference to exhibit 10.7 to the
Form 10-Q
filed by CapitalSource on August 11, 2008).
|
|
10
|
.16.4*
|
|
Form of Restricted Stock Unit Agreement (2010) (incorporated by
reference to exhibit 10.9 to the
Form 10-Q
filed by CapitalSource on May 5, 2010).
|
|
10
|
.16.5*
|
|
Form of Restricted Stock Unit Agreement (April 2010)
(incorporated by reference to exhibit 10.9 to the
Form 10-Q
filed by CapitalSource on May 5, 2010).
|
|
10
|
.16.6*
|
|
Form of Restricted Stock Unit Agreement (July 2010)
(incorporated by reference to exhibit 10.7 to the
Form 10-Q
filed by CapitalSource on August 3, 2010).
|
|
10
|
.17.1*
|
|
Form of Restricted Stock Unit Agreement for Directors (2007)
(incorporated by reference to exhibit 10.77 to the
Form 10-Q
filed by CapitalSource on August 8, 2007).
|
|
10
|
.17.2*
|
|
Form of Restricted Stock Unit Agreement for Directors (2008)
(incorporated by reference to exhibit 10.22.2 to the
Form 10-K
filed by CapitalSource on February 29, 2008).
|
|
10
|
.17.3*
|
|
Form of Restricted Stock Unit Agreement for Directors (2010)
(incorporated by reference to exhibit 10.37.3 to the
Form 10-K
filed by CapitalSource on March 1, 2010).
|
|
10
|
.17.4*
|
|
Form of Restricted Stock Unit Agreement for Directors (April
2010) (incorporated by reference to exhibit 10.10 to the
Form 10-Q
filed by CapitalSource on May 5, 2010).
|
|
10
|
.18*
|
|
CapitalSource Inc. Amended and Restated Deferred Compensation
Plan effective July 28, 2010 (incorporated by reference to
exhibit 10.2 to the
Form 10-Q
filed by CapitalSource on November 4, 2010).
|
|
10
|
.19*
|
|
Summary of Non-employee Director Compensation (incorporated by
reference to exhibit 10.8 to the
Form 10-Q
filed by CapitalSource on November 10, 2008).
|
|
10
|
.20*
|
|
CapitalSource 2011 CEO Compensation Program.
|
|
10
|
.21*
|
|
CapitalSource Bank Compensation for Non-Employee Directors
(incorporated by reference to exhibit 10.40 to the
Form 10-K
filed by CapitalSource on March 1, 2010).
|
|
10
|
.22*
|
|
Form of Indemnification Agreement between CapitalSource Inc. and
each of its non-employee directors (incorporated by reference to
exhibit 10.4 to the
Form 10-Q
filed by CapitalSource on November 7, 2003).
|
|
10
|
.23*
|
|
Form of Indemnification Agreement between CapitalSource Inc. and
each of its employee directors (incorporated by reference to
exhibit 10.5 to the
Form 10-Q
filed by CapitalSource on November 7, 2003).
|
|
10
|
.24*
|
|
Form of Indemnification Agreement between CapitalSource Inc. and
each of its executive officers (incorporated by reference to
exhibit 10.6 to the
Form 10-Q
filed by CapitalSource on November 7, 2003).
|
189
|
|
|
|
|
Exhibit
|
|
|
No
|
|
Description
|
|
|
10
|
.25*
|
|
Amended and Restated Employment Agreement dated
December 16, 2009 between CapitalSource Inc. and John K.
Delaney (incorporated by reference to exhibit 10.1 to the
Form 8-K
filed by CapitalSource on December 18, 2009).
|
|
10
|
.26*
|
|
Form of Restricted Stock Unit Agreement for John K. Delaney, as
amended July 16, 2010 (incorporated by reference to
exhibit 10.10 to the
Form 10-Q
filed by CapitalSource on August 3, 2010).
|
|
10
|
.27*
|
|
Amendment dated July 16, 2010 to the Amended and Restated
Employment Agreement dated December 16, 2009 between
CapitalSource Inc. and John K. Delaney (incorporated by
reference to exhibit 10.9 to the
Form 10-Q
filed by CapitalSource on August 3, 2010).
|
|
10
|
.28*
|
|
Amended and Restated Employment Agreement dated
December 16, 2009 between CapitalSource Inc. and Steven A.
Museles (incorporated by reference to exhibit 10.2 to the
Form 8-K
filed by CapitalSource on December 18, 2009).
|
|
10
|
.29*
|
|
Amended and Restated Employment Agreement dated
December 16, 2009 between CapitalSource Inc. and James J.
Pieczynski (incorporated by reference to exhibit 10.3 to
the
Form 8-K
filed by CapitalSource on December 18, 2009).
|
|
10
|
.30*
|
|
Amended and Restated Employment Agreement dated as of
July 29, 2010 between CapitalSource Bank and Douglas Hayes
Lowrey (incorporated by reference to exhibit 10.11 to the
Form 10-Q
filed by CapitalSource on August 3, 2010).
|
|
10
|
.31*
|
|
Employment Agreement dated July 29, 2010 by and between
CapitalSource Inc. and Donald F. Cole. (incorporated by
reference to exhibit 10.12 to the
Form 10-Q
filed by CapitalSource on August 3, 2010).
|
|
10
|
.32*
|
|
Letter Agreement dated February 16, 2011 by and between
CapitalSource Finance LLC and Bryan D. Smith.
|
|
10
|
.33*
|
|
CapitalSource Bank Change in Control Agreement dated
January 21, 2009 by and between CapitalSource Bank and John
A. Bogler.
|
|
12
|
.1
|
|
Ratio of Earnings to Fixed Charges.
|
|
21
|
.1
|
|
List of Subsidiaries.
|
|
23
|
.1
|
|
Consent of Ernst & Young LLP.
|
|
31
|
.1.1
|
|
Rule 13a 14(a) Certification of Co-Chief
Executive Officer.
|
|
31
|
.1.2
|
|
Rule 13a 14(a) Certification of Co-Chief
Executive Officer.
|
|
31
|
.2
|
|
Rule 13a 14(a) Certification of Chief Financial
Officer.
|
|
32
|
|
|
Section 1350 Certifications.
|
|
99
|
.1
|
|
Federal Deposit Insurance Corporation in Re: CapitalSource Bank
(In Organization) Pasadena, California, Applications for Federal
Deposit Insurance and Consent to Purchase Certain Assets and
Assume Certain Liabilities and Establish 22 Branches
Order Granting Deposit Insurance, Approving a Merger, and
Consenting to the Establishment of Branches dated June 17,
2008 (incorporated by reference to exhibit 99.1 to the
Form 8-K
filed by CapitalSource on June 18, 2008)
|
|
101
|
.INS
|
|
XBRL Instance Document
|
|
101
|
.SCH
|
|
XBRL Taxonomy Extension Schema Document
|
|
101
|
.CAL
|
|
XBRL Taxonomy Calculation Linkbase Document
|
|
101
|
.LAB
|
|
XBRL Taxonomy Label Linkbase Document
|
|
101
|
.PRE
|
|
XBRL Taxonomy Presentation Linkbase Document
|
|
101
|
.DEF
|
|
XBRL Taxonomy Definition Document
|
|
|
|
|
|
Filed herewith. |
|
* |
|
Management contract or compensatory plan or arrangement. |
The registrant agrees to furnish to the Commission, upon
request, a copy of each agreement with respect to long-term debt
not filed herewith in reliance upon the exemption from filing
applicable to any series of debt that does not exceed 10% of the
total consolidated assets of the registrant.
190