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, 2008
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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4445
Willard Avenue, 12th Floor
Chevy Chase, MD 20815
(Address of Principal Executive Offices, Including Zip Code)
(800) 370-9431
(Registrants
Telephone Number, Including Area Code)
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. Yes þ 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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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 Exchange
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, 2008 was $2,103,115,809.
As of February 17, 2009, the number of shares of the
Registrants Common Stock, par value $0.01 per share,
outstanding was 302,595,100.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of CapitalSource Inc.s Proxy Statement for the
2009 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 growing
our deposit base and operations, our liquidity forecasts, credit
facilities and covenant compliance, our intention to sell
assets, the commercial real estate participation interest
(the A Participation Interest), economic
and market conditions for our business, securitization markets,
the performance of our loans, loan yields, our dividend policy,
approval of our application to become a bank holding company,
and regarding potential acquisitions. 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, expect,
estimate, plan, will,
look forward and similar expressions are generally
intended to identify forward-looking statements. All
forward-looking statements (including statements regarding
future financial and operating results and future transactions
and their results) involve risks, uncertainties and
contingencies, many of which are beyond our control, which may
cause actual results, performance, or achievements to differ
materially from anticipated results, performance or
achievements. Actual results could differ materially from those
contained or implied by such statements for a variety of
factors, including without limitation: changes in economic or
market conditions may result in increased credit losses and
delinquencies in our portfolio; continued or worsening
disruptions in economic and credit markets may continue to make
it very difficult for us to obtain financing on attractive terms
or at all, could prevent us from optimizing the amount of
leverage we employ and could adversely affect our liquidity
position; movements in interest rates and lending spreads may
adversely affect our borrowing strategy; operating CapitalSource
Bank under the California and FDIC regulatory regime could be
more costly than expected; we may not be successful in operating
CapitalSource Bank or maintaining or growing CapitalSource
Banks deposits or deploying its capital in favorable
lending transactions or originating or acquiring assets in
accordance with our strategic plan; we may not receive all
approvals needed to become a bank holding company and convert to
a commercial bank; competitive and other market pressures could
adversely affect loan pricing; the nature, extent, and timing of
any governmental actions and reforms; the success and timing of
other business strategies and asset sales; hedging activities
may result in reported losses not offset by gains reported in
our consolidated financial statements; and other risk factors
described in this
Form 10-K
and documents filed by us with 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.
Overview
We are a commercial lender that provides financial products to
middle market businesses, and, through our wholly owned
subsidiary, CapitalSource Bank, provides depository products and
services in southern and central California.
We currently operate as three reportable segments:
1) Commercial Banking, 2) Healthcare Net Lease, and
3) Residential Mortgage Investment. Our Commercial Banking
segment comprises our commercial lending and banking business
activities; our Healthcare Net Lease segment comprises our
direct real estate investment business activities; and our
Residential Mortgage Investment segment comprises our remaining
residential mortgage investment and other investment activities
in which we formerly engaged to optimize our qualification as a
real estate investment trust (REIT). For financial
information about our segments, see Note 26, Segment
Data, in our accompanying audited consolidated financial
statements for the year ended December 31, 2008.
2
Through our Commercial Banking segment activities, we provide a
wide range of financial products to middle market businesses and
participate in broadly syndicated debt financings for larger
businesses. As of December 31, 2008, we had 1,072 loans
outstanding under which we had funded an aggregate of
$9.5 billion and held a $1.4 billion participation in
a pool of commercial real estate loans (the A
Participation Interest). Within this segment,
CapitalSource Bank also offers depository products and services
in southern and central California that are insured by the
Federal Deposit Insurance Corporation (FDIC) to the
maximum amounts permitted by regulation.
Through our Healthcare Net Lease segment activities, we invest
in income-producing healthcare facilities, principally long-term
care facilities in the United States. We provide lease financing
to skilled nursing facilities and, to a lesser extent, assisted
living facilities, and long term acute care facilities. As of
December 31, 2008, we had $1.0 billion in direct real
estate investments comprising 186 healthcare facilities leased
to 40 tenants through long-term,
triple-net
operating leases. We currently intend to evaluate all potential
transactions to monetize the value of this business, including
debt financings, asset sales and corporate transactions.
Through our Residential Mortgage Investment segment activities,
we invested in certain residential mortgage assets and other
REIT qualifying investments to optimize our REIT structure
through 2008. As of December 31, 2008, our residential
mortgage investment portfolio totaled $3.3 billion, which
included investments in residential mortgage loans and
residential mortgage-backed securities (RMBS). Over
99% of our investments in RMBS were represented by
mortgage-backed securities that were issued and guaranteed by
Fannie Mae or Freddie Mac (hereinafter, Agency
RMBS). In addition, we hold mortgage-related receivables
secured by prime residential mortgage loans. During the first
quarter of 2009, we sold all of our Agency RMBS, and we intend
to merge the remaining assets currently in this segment into our
Commercial Banking segment in 2009.
In our Commercial Banking and Healthcare Net Lease segments, we
have three primary commercial lending businesses:
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Healthcare and Specialty Finance, which generally
provides first mortgage loans, asset-based revolving lines of
credit, and cash flow loans to healthcare businesses and, to a
lesser extent, a broad range of other companies. We also make
investments in income-producing healthcare facilities,
particularly long-term care facilities;
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Corporate Finance, which generally provides senior and
subordinate loans through direct origination and participation
in syndicated loan transactions; and
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Structured Finance, which generally engages in commercial
and residential real estate finance and also provides
asset-based lending to finance companies.
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Developments
During Fiscal Year 2008
2008 was a transformational year for us in which we
commenced operations of CapitalSource Bank and announced our
intention to revoke our REIT status in 2009. Given these changes
and the current challenging economic environment, our business
plan has evolved to encompass two distinct strategies.
CapitalSource Bank, our liquid and well-capitalized bank, will
be the vehicle through which we fund all our new loans, while
CapitalSource Banks ultimate parent company, CapitalSource
Inc., and its non-bank subsidiaries (collectively, the
Parent Company) will manage liquidity and credit
outcomes as its portfolio runs off.
CapitalSource
Bank
In July 2008, we acquired approximately $5.2 billion of
deposits, the A Participation Interest and 22 retail
banking branches from Fremont Investment & Loan
(FIL) and commenced operations of CapitalSource
Bank. We did not acquire FIL or any contingent liabilities.
During 2008, CapitalSource Bank purchased from our other
subsidiaries approximately $2.2 billion in commercial loans.
CapitalSource Bank operates pursuant to approvals received from
the FDIC and the California Department of Financial Institutions
(DFI), which require CapitalSource Bank to maintain
a total risk-based capital ratio of not less than 15%, a
tangible equity to tangible asset ratio of not less than 10%, an
adequate allowance for loan and lease losses and other customary
requirements applicable to de novo banks. The Parent
Company and CapitalSource
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Bank are parties to a Capital Maintenance and Liquidity
Agreement (CMLA) with the FDIC requiring the Parent
Company to maintain CapitalSource Banks total risk-based
capital ratio at not less than 15%, to 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, and
for the Parent Company to provide a $150 million unsecured
revolving credit facility that CapitalSource Bank may draw on at
any time it or the FDIC deems necessary. The Parent Company and
CapitalSource Bank also are parties to a Parent Company
Agreement (Parent Agreement) with the FDIC requiring
the Parent Company to maintain the capital levels of
CapitalSource Bank at the levels required in the CMLA, and
providing the Parent Companys consent to examination by
the FDIC for the FDIC to monitor compliance with the laws and
regulations applicable to the Parent Company.
CapitalSource Bank has access to a significant base of deposits,
which has diversified and strengthened our funding platform by
providing a lower and more stable cost of funds with less
reliance on the capital markets, positioning us to take
advantage of attractive lending opportunities we believe are now
available in the market.
Bank
Holding Company Application
Consistent with the business plan approved by our regulators, we
are pursuing our strategy of converting CapitalSource Bank to a
commercial bank and becoming a Bank Holding Company. To date we
have obtained approvals from the DFI and FDIC to convert
CapitalSource Bank from an industrial bank to a California
commercial bank. For the conversion to become effective, we must
be approved by the Federal Reserve as a Bank Holding Company
under the Bank Holding Company Act of 1956. We filed our Bank
Holding Company application with the Board of Governors of the
Federal Reserve in October 2008. That application is being
processed by the Federal Reserve Bank of Richmond and has not
been approved at this time. We are cooperating with the Federal
Reserve in providing access to such information as is needed to
make its decision on the pending application. We believe that
becoming a commercial bank will allow CapitalSource Bank to
offer a wider variety of deposit products and services to
customers; however, we cannot assure you that the Federal
Reserve will approve our application in which case CapitalSource
Bank would not convert to a commercial bank. Current guidance
from the U.S. Treasury Department provides that, since
CapitalSource Inc. did not obtain approval as a Bank Holding
Company prior to December 31, 2008, CapitalSource Inc. is
not eligible to obtain funding under the Capital Assistance
Program (CAP) or the Capital Purchase Program.
Although CapitalSource Bank has applied for CAP funding, there
is no assurance that CapitalSource Bank will be able to obtain
CAP funding or that it would accept the funding if offered.
Revocation
of REIT Status
We operated as a REIT, from 2006 through 2008. Historically, we
complied with REIT requirements in part through the acquisition,
funding and ongoing management of a portfolio of residential
mortgage-related investments including Agency securities. Our
Board of Directors determined it would be imprudent and perhaps
impossible to maintain a large compliance portfolio of
residential investment assets in 2009 based on current and
anticipated market conditions. Consequently, we revoked our REIT
election effective January 1, 2009.
Change
in Reportable Segments
From January 1, 2006 to the third quarter of 2007, we
presented financial results through two reportable segments:
1) Commercial Lending & Investment and
2) Residential Mortgage Investment. Our Commercial
Lending & Investment segment comprised our commercial
lending and direct real estate investment business activities
and our Residential Mortgage Investment segment comprised all of
our activities related to our investments in residential
mortgage loans and RMBS. In the fourth quarter of 2007, we began
presenting financial results through three reportable segments:
1) Commercial Finance, 2) Healthcare Net Lease, and
3) Residential Mortgage Investment. Changes were made in
the way management organizes financial information to make
operating decisions, resulting in the activities previously
reported in the Commercial Lending & Investment
segment being disaggregated into the Commercial Finance segment
and the Healthcare Net Lease segment as described above.
Beginning in the third quarter of 2008, we changed the name of
our Commercial Finance segment to Commercial Banking to
incorporate depository products, services and investments of
CapitalSource Bank. We have reclassified all comparative prior
period segment information to reflect our three reportable
segments. For
4
financial information about our segments, see Note 26,
Segment Data, in our accompanying audited consolidated
financial statements for the year ended December 31, 2008.
Loan
Products, Service Offerings and Investments
Commercial
Banking Segment
Our primary commercial lending products, services and
investments include:
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Depository Products and Services. Through
CapitalSource Banks 22 branches in southern and central
California, we provide savings and money market accounts, IRA
products and certificates of deposit. These products are insured
up to the maximum amounts permitted by the FDIC.
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Senior Secured Loans. A loan is a
senior loan when we 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
and/or
inventory. Cash flow loans are made 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 senior cash flow term loans generally
are secured by a security interest in all or substantially all
of a clients assets. In some cases, the equity owners of a
client pledge their stock in the client to us as further
collateral for the loan.
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First Mortgage Loans. A first mortgage loan is
a loan secured by a senior mortgage on real property. We make
mortgage loans to clients including owners and operators of
senior housing and skilled nursing facilities; owners and
operators of office, industrial, hospitality, multi-family and
residential properties; resort and residential developers;
hospitals and companies backed by private equity firms that
frequently obtain mortgage-related financing in connection with
buyout transactions.
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Term B, Second Lien and Mezzanine Loans. A
Term B loan is a loan that shares a first priority lien in a
clients collateral with the clients other senior
debt but that comes after other senior secured debt in order of
payment preference, and accordingly, generally involves greater
risk of loss than other senior secured loans. Term B loans are
senior loans and, therefore, are included with senior secured
loans in our portfolio statistics. A second lien loan is a loan
that has a lien on the clients collateral that is junior
in order of priority and also comes after the senior debt in
order of payment. A mezzanine loan is a loan that may not share
in the same collateral package as the clients senior
loans, may have no security interest in any of the clients
assets and is junior to any lien holder both as to collateral
(if any) and payment. A mezzanine loan generally involves
greater risk of loss than a senior loan, Term B loan or second
lien loan.
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Equity Investments. We acquired equity in some
borrowers at the same time and on substantially the same terms
as the private equity sponsor that invested in the borrower with
our loan proceeds. These equity investments generally
represented less than 5% of a borrowers equity. Since the
formation of CapitalSource Bank, we have ceased making these
equity investments.
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Healthcare
Net Lease Segment
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Direct Real Estate Investments. We invest in
income-producing healthcare facilities, principally long-term
care facilities in the United States. These facilities are
generally leased through long-term,
triple-net
operating leases. Under a typical
triple-net
lease, the client agrees to pay a base monthly operating lease
payment, subject to annual escalations, and all facility
operating expenses, including real estate taxes, as well as make
capital improvements.
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Residential
Mortgage Investment Segment
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Residential Mortgage-Backed Securities. While
we were a REIT, we invested in RMBS, which are securities
collateralized by residential mortgage loans. These securities
include Agency RMBS and RMBS issued by non-government-sponsored
entities that are credit-enhanced through the use of
subordination or in other ways that are inherent in a
corresponding securitization transaction (Non-Agency
RMBS). Substantially all of our Agency and Non-Agency RMBS
are collateralized by adjustable rate mortgage loans,
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including hybrid adjustable rate mortgage loans. We account for
our Agency RMBS as debt securities that are classified as
trading investments and included in mortgage-backed securities
pledged, trading on our accompanying audited consolidated
balance sheets. We account for our Non-Agency RMBS as debt
securities that are classified as
available-for-sale
and included in investments on our accompanying audited
consolidated balance sheets. During the first quarter of 2009,
we revoked our REIT status and sold all of our Agency RMBS in
this segment and we intend to merge the remaining assets
currently in this segment into our Commercial Banking segment in
2009.
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Mortgage-Related Receivables. We own
beneficial interests in special purpose entities
(SPEs) that acquired and securitized pools of
residential mortgage loans. We are the primary beneficiary of
these SPEs and, therefore, consolidate the assets and
liabilities of such entities for financial statement purposes.
The SPEs interest in the underlying mortgage loans
constitutes, for accounting purposes, receivables secured by the
underlying mortgage loans. As a result, through consolidation,
we recognized on our accompanying audited consolidated balance
sheets mortgage-related receivables, as well as the principal
amount of related debt obligations incurred by SPEs to fund the
origination of such receivables. Such mortgage-related
receivables maintain all of the economic attributes of the
underlying mortgage loans legally held in trust by such SPEs
and, as a result of our interest in such SPEs, we maintain all
of the economic benefits and related risks of ownership of the
underlying mortgage loans. The SPEs also issued beneficial
interests to third parties, which are senior to our interests in
the SPE. These senior interests are reported as liabilities on
our consolidated balance sheets. Cash flows from the underlying
mortgage loans held by the SPEs are designated to pay off the
related liabilities. Accordingly, our loss exposure is limited
to our purchased investment in the SPEs.
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As of December 31, 2008, our portfolio of assets by type
was as follows (percentages by gross carrying values):
Loan
Products and Investments by Type
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(1) |
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Includes Term B loans. |
6
Commercial
Banking Segment Overview
Portfolio
Composition
As of December 31, 2008 and 2007, the composition of our
Commercial Banking segment portfolio was as follows:
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December 31,
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2008
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2007
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($ in thousands)
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Marketable securities,
available-for-sale
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$
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642,714
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$
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Commercial real estate A Participation Interest,
net(1)
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1,400,333
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Commercial loans(1)(2)
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9,494,873
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9,867,737
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Investments
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178,595
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227,128
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Total
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$
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11,716,515
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$
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10,094,865
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(1) |
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Includes related interest receivable. |
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(2) |
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Includes loans held for sale. |
Marketable
Securities,
available-for-sale
As of December 31, 2008, we owned $642.7 million in
marketable securities,
available-for-sale.
Included in these marketable securities,
available-for-sale,
were discount notes issued by Fannie Mae, Freddie Mac and
Federal Home Loan Bank (FHLB) (Agency Discount
Notes), callable notes issued by Fannie Mae, Freddie Mac,
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) and a corporate debt
security issued by Wells Fargo & Company and
guaranteed by the FDIC (Corporate Debt). With the
exception of the Corporate Debt, CapitalSource Bank pledged all
of the marketable securities,
available-for-sale,
to the FHLB of San Francisco as a source of contingent
borrowing capacity as of December 31, 2008. For further
information on our marketable securities,
available-for-sale,
see Note 8, Marketable Securities and Investments,
in the accompanying audited consolidated financial
statements for the year ended December 31, 2008.
Commercial
Real Estate A Participation Interest
As of December 31, 2008, the A Participation
Interest had an outstanding balance of $1.4 billion, which
includes $3.7 million of related accrued interest
receivable. For further information on the A
Participation Interest, see Note 7, Commercial Lending
Assets and Credit Quality, in our accompanying audited
consolidated financial statements for the year ended
December 31, 2008.
Commercial
Portfolio
As of December 31, 2008 and 2007, our total commercial
portfolio had outstanding balances of $10.9 billion and
$9.9 billion, respectively. Included in these amounts were
loans, the A Participation Interest, loans held for
sale, and $93.3 million and $56.3 million of related
interest receivables (collectively, Commercial Lending
Assets) as of December 31, 2008 and 2007,
respectively.
7
Commercial
Loan Composition
Our total commercial loan portfolio reflected in the portfolio
statistics below includes loans, loans held for sale, and
$89.6 million and $56.3 million of related interest
receivables, as of December 31, 2008 and 2007,
respectively, and excludes the A Participation
Interest. The composition of our commercial loan portfolio by
loan type and by commercial lending business as of
December 31, 2008 and 2007, was as follows:
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December 31,
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2008
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2007
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($ in thousands)
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Composition of commercial loan portfolio by loan type:
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Senior secured loans(1)
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$
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5,640,559
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59
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%
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$
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5,695,167
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58
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%
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First mortgage loans(1)
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2,723,862
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29
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2,995,048
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30
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Subordinate loans
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1,130,452
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12
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1,177,522
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12
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Total
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$
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9,494,873
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100
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%
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$
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9,867,737
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100
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%
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Composition of commercial loan portfolio by business:
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Corporate Finance
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$
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2,659,038
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28
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%
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$
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2,979,241
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30
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%
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Healthcare and Specialty Finance
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2,998,747
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32
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2,934,666
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30
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Structured Finance
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3,837,088
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40
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3,953,830
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40
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Total
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$
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9,494,873
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100
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%
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$
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9,867,737
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100
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%
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(1) |
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Includes Term B loans. |
As of December 31, 2008, our commercial loan portfolio was
well diversified, with 1,072 loans to 679 clients operating in
multiple industries. We use the term client with
respect to loans to mean the legal entity that is the party to
whom we lend pursuant to a loan agreement. Throughout this
section, unless specifically stated otherwise, all figures
relate to our commercial loans outstanding as of
December 31, 2008.
As of December 31, 2008, our commercial loan portfolio by
industry was as follows (percentages by gross carrying values as
of December 31, 2008):
Commercial
Loan Portfolio by Industry (1)
|
|
|
(1) |
|
Industry classification is based on the North American Industry
Classification System (NAICS). |
|
(2) |
|
Include all industry groups that have an aggregate loan balance
less than 1% of the aggregate outstanding balance of our
commercial loan portfolio. |
8
As of December 31, 2008, our largest commercial loan was a
$325.0 million mezzanine loan to a borrower which owns,
operates, leases or manages 205 skilled nursing facilities, 25
assisted living facilities and five transition care units in 13
states. As of December 31, 2008, our commercial loan
portfolio by loan balance was as follows:
Commercial
Loan Portfolio by Loan Balance
As of December 31, 2008, our commercial loan portfolio by
client balance was as follows:
Commercial
Loan Portfolio by Client Balance
We may have more than one loan to a client and its related
entities. For purposes of determining the portfolio statistics
in this
Form 10-K,
we count each loan or client separately and do not aggregate
loans to related entities.
9
No client accounted for more than 10% of our total revenues in
2008. The principal executive offices of our clients were
located in 47 states, the District of Columbia, Puerto Rico
and selected international locations, primarily in Canada and
Europe. As of December 31, 2008, the largest geographical
concentration was New York, which made up approximately 13% of
the outstanding aggregate balance of our commercial loan
portfolio. In addition, 5% of the outstanding aggregate balance
of our commercial loan portfolio as of December 31, 2008,
comprised international borrowers, primarily located in Canada
and Europe. For the year ended December 31, 2008, less than
10% of our revenues were generated through our foreign
operations. As of December 31, 2008, our largest loan was
$325.0 million, and the combined total of the outstanding
aggregate balances of our ten largest loans represented 19% of
our commercial loan portfolio.
As of December 31, 2008, our commercial loan portfolio by
geographic region was as follows:
Commercial
Loan Portfolio by Geographic Region
|
|
|
(1) |
|
Includes each jurisdiction that has an aggregate loan balance
less than 1% of the aggregate outstanding balance of our
commercial loan portfolio. |
Our commercial loans have stated maturities at origination that
generally range from one to five years. As of December 31,
2008, the weighted average maturity and weighted average
remaining life of our entire commercial loan portfolio were
approximately 5.2 years and 2.5 years, respectively.
Our clients typically pay us an origination fee based on a
percentage of the commitment amount and may also be required to
pay other ongoing fees.
As of December 31, 2008, the number of loans, average loan
size, number of clients and average loan size per client by
commercial lending business were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Loan
|
|
|
|
Number
|
|
|
Average
|
|
|
Number of
|
|
|
Size per
|
|
|
|
of Loans
|
|
|
Loan Size
|
|
|
Clients
|
|
|
Client
|
|
|
|
($ in thousands)
|
|
|
Composition of commercial loan portfolio by business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Finance
|
|
|
491
|
|
|
$
|
5,416
|
|
|
|
246
|
|
|
$
|
10,809
|
|
Healthcare and Specialty Finance
|
|
|
370
|
|
|
|
8,105
|
|
|
|
257
|
|
|
|
11,668
|
|
Structured Finance
|
|
|
211
|
|
|
|
18,185
|
|
|
|
176
|
|
|
|
21,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall commercial loan portfolio
|
|
|
1,072
|
|
|
|
8,857
|
|
|
|
679
|
|
|
|
13,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
Healthcare
Net Lease Segment Overview
Portfolio
Composition
We own real estate for long-term investment purposes. These real
estate investments are generally long-term care facilities
leased through long-term,
triple-net
operating leases. We had $1.0 billion in direct real estate
investments as of December 31, 2008, which consisted
primarily of land and buildings.
As of December 31, 2008, our direct real estate investment
portfolio by geographic region was as follows:
Healthcare
Net Lease Portfolio by Geographic Region
|
|
|
(1) |
|
Includes each state that has an aggregate direct real estate
investment balance less than 1% of the aggregate direct real
estate investment balance. |
No healthcare net lease client accounted for more than 10% of
our total revenues in 2008. We use the term client
with respect to our leased real estate investments to mean the
legal entity that is the party to whom we leased properties
pursuant to the lease agreement. As of December 31, 2008,
the largest geographical concentration was Florida, which made
up approximately 33% of our direct real estate investment
portfolio. As of December 31, 2008, the single largest
industry concentration in our direct real estate investment
portfolio was skilled nursing, which made up approximately 98%
of the investments.
11
As of December 31, 2008, our direct real estate investment
portfolio by asset balance was as follows:
Healthcare
Net Lease Portfolio by Asset Balance
See Item 2, Properties, for information about our
direct real estate investment properties.
Residential
Mortgage Investment Segment Overview
Portfolio
Composition
As of December 31, 2008 and 2007, our portfolio of
residential mortgage investments was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
Mortgage-related receivables(1)
|
|
$
|
1,801,535
|
|
|
$
|
2,033,296
|
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
Agency(2)
|
|
|
1,489,291
|
|
|
|
4,030,180
|
|
Non-Agency(2)
|
|
|
377
|
|
|
|
4,517
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,291,203
|
|
|
$
|
6,067,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1). |
|
Represents secured receivables that are backed by
adjustable-rate residential prime mortgage loans. |
|
(2). |
|
See following paragraph for a description of these securities. |
While we were a REIT, we invested in Agency RMBS which are
mortgage-backed securities issued and guaranteed by Fannie Mae
or Freddie Mac. Non-Agency RMBS are RMBS issued by
non-government sponsored entities that are credit-enhanced
through the use of subordination or in other ways that are
inherent in a corresponding securitization transaction.
Substantially all of our RMBS are collateralized by adjustable
rate residential mortgage loans, including hybrid adjustable
rate mortgage loans. We account for our Agency RMBS as debt
securities that are classified as trading investments and
included in mortgage-backed securities pledged, trading on our
accompanying audited consolidated balance sheets. We account for
our Non-Agency RMBS as debt securities that are classified as
available-for-sale
and included in investments on our accompanying audited
consolidated balance sheets. The coupons on the loans underlying
RMBS are fixed for stipulated periods of time and then reset
annually thereafter. The weighted average net coupon of Agency
RMBS in our portfolio was 5.01% as of December 31, 2008,
and the weighted average reset date for the portfolio was
approximately 25 months. The weighted average net coupon of
Non-Agency RMBS in our portfolio was 3.73% as of
December 31, 2008. The fair
12
values of our Agency RMBS and Non-Agency RMBS, including accrued
interest, were $1.5 billion and $0.4 million,
respectively, as of December 31, 2008. During the first
quarter of 2009, we sold all of our Agency RMBS in this segment
and we intend to merge the remaining assets currently in this
segment into our Commercial Banking segment in 2009.
As further discussed in Note 5, Mortgage-Related
Receivables and Related Owner Trust Securitizations, of
our accompanying audited consolidated financial statements for
the year ended December 31, 2008, we had $1.8 billion
in mortgage-related receivables that were secured by prime
residential mortgage loans as of December 31, 2008. As of
December 31, 2008, the weighted average interest rate on
such receivables was 5.36%, and the weighted average contractual
maturity was approximately 27 years.
Financing
We depend on depository and external financing sources to fund
our operations. We employ a variety of financing arrangements,
including retail savings and money market accounts, certificates
of deposit, secured credit facilities, term debt, convertible
debt, subordinated debt, equity and repurchase agreements.
CapitalSource Bank has financing availability with the FHLB
equal to 15% of CapitalSource Banks total assets. The
financing is subject to various terms and conditions including,
but not limited to, the pledging of acceptable collateral,
satisfaction of the FHLB stock ownership requirement and certain
limits regarding the maximum term of debt. We expect that we
will continue to seek external financing sources in the future.
We cannot assure you, however, that we will have access to any
of these funding sources. Our existing financing arrangements
are described in further detail in Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources.
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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|
|
specialty and commercial finance companies;
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|
|
commercial banks and thrifts;
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|
|
REITS and other real estate investors;
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|
private investment funds;
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|
investment banks;
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|
insurance companies; and
|
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|
asset management companies.
|
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 lower cost of capital. We
believe we compete based on:
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|
in-depth knowledge of our clients industries or sectors
and their business needs from information, analysis, and
effective interaction between the 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 extensive 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.
13
CapitalSource Bank is a California state-chartered industrial
bank and is subject to supervision and regular examination by
the FDIC and the DFI. In addition, CapitalSource Banks
deposits are insured by the FDIC.
Although the Parent Company is not directly regulated or
supervised by the DFI, the FDIC or any other federal or state
bank regulatory authority, it is subject to regulatory oversight
with respect to guidelines and agreements concerning its
relationship with CapitalSource Bank, transactions between it
and CapitalSource Bank and other areas required by the FDIC. 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 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 is subject to supervision and regulation by
the DFI and FDIC and is a member of the FHLB System and its
deposits are insured up to applicable limits by the FDIC.
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 undertaking changes to
its approved business plan for the first three years, or
entering into certain transactions such as mergers with, or
acquisitions of, other financial institutions. There are
periodic examinations by the DFI and 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
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 extensive 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.
All FDIC member banks are required to pay assessments to the
FDIC to fund their operations. The general assessments, paid on
a semi-annual basis, are determined based on a banks total
assets, including consolidated subsidiaries.
California law provides that industrial banks are generally
subject to a limit on loans to one borrower. A bank 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. At December 31, 2008, CapitalSource
Banks limit on loans to one borrower was $145 million
if unsecured and $242 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.
14
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 times to meet 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 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 to avoid
mandatory or additional discretionary actions initiated by these
regulatory agencies. These potential actions could have a direct
material effect on our 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.
Federal
Home Loan Bank System
CapitalSource Bank is a member of the FHLB
San Francisco, which is one of 12 regional FHLBs that
provide its members with a source of funding for mortgages and
asset-liability management, liquidity for a members
short-term needs and additional funds for housing finance and
community development. Each FHLB serves as a reserve or central
bank for its members within its assigned region. Each FHLB is
funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB System. Each FHLB makes
advances to members in accordance with policies and procedures
established by the Board of Directors of that FHLB, which are
subject to the oversight of the Federal Housing Finance Agency.
All advances from the FHLB are required to be fully secured by
sufficient collateral as determined by the FHLB. At
December 31, 2008, CapitalSource Bank had no outstanding
advances from the FHLB San Francisco under its
available credit facility of $915.4 million, based on 15%
of total assets, which is limited to available collateral. A
letter of credit in the amount of $0.8 million is
outstanding under the facility which reduces our availability.
The financing is subject to various terms and conditions
including a pledge of acceptable collateral, satisfaction of the
FHLB stock ownership requirement and certain limits regarding
the maximum term of debt.
As a member, CapitalSource Bank is required to purchase and
maintain stock in the FHLB San Francisco. At
December 31, 2008, CapitalSource Bank had
$20.0 million in FHLB-San Francisco stock, which was
in compliance with this requirement. The
FHLB-San Francisco, in past years, has paid substantial
dividends on its FHLB-San Francisco stock. There is no
guarantee that the FHLB-San Francisco will maintain its
dividend at these levels. For the fourth quarter of 2008, the
FHLB-San Francisco did not pay a dividend.
Under federal law, the FHLB is required to pay 20% of net
earnings to fund a portion of the interest on the Resolution
Funding Corporation debt and to contribute to low and moderately
priced housing programs through direct loans or interest
subsidies on advances targeted for community investment and low
and moderate income housing projects. These contributions have
adversely affected the level of FHLB dividends paid and could
continue to do so in the future. These contributions also could
have an adverse effect on the value of FHLB stock in the future.
A reduction in value of CapitalSource Banks FHLB stock may
result in a corresponding reduction in CapitalSource Banks
capital.
Insurance
of Accounts and Regulation by the FDIC
CapitalSource Banks deposits are insured up to applicable
limits by the Deposit Insurance Fund (DIF) of the
FDIC. 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
15
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.
The Federal Deposit Insurance Reform Act of 2005 (Reform
Act), requires the FDIC to establish and implement a
Restoration Plan if the DIF ratio falls below 1.15%. In 2008,
the DIF ratio fell below 1.15% and the FDIC established the
Restoration Plan, effective for the first quarter of 2009. Under
the Restoration Plan system, insured institutions are assigned
to one of four risk categories based on supervisory evaluations,
regulatory capital levels and other factors. An
institutions assessment rate depends upon the category to
which it is assigned. Assessment rates are determined by the
FDIC and, on 2008, ranged from five to seven basis points for
the healthiest institutions to 43 basis points of
assessable deposits for those that pose the highest risk. The
FDIC may adjust rates uniformly from one quarter to the next,
except that no single adjustment can exceed three basis points.
No institution may pay a dividend if in default of the FDIC
assessment. For 2009, and potentially subsequent periods, the
FDIC has increased the assessment rate.
For the first quarter of 2009, the FDIC uniformly increased the
assessment rate by seven basis points for all risk categories.
Effective April 1, 2009, the FDIC will alter the assessment
rate to incorporate various depository risk elements to include,
among other items, the level of unsecured debt, secured
liabilities or brokered deposits held by a depository. For the
second quarter of 2009, and potentially subsequent quarters, the
assessment could be increased or decreased for CapitalSource
Bank depending on our level of these risk elements. In addition
to increased DIF assessment rates, the FDIC board recently
adopted a 20 basis point assessment applicable to all
insured depository institutions to be effective on June 30,
2009, and paid on September 30, 2009. The FDIC could
institute further assessments in an effort to return the DIF to
the statutory minimum ratio, and such assessments could be as
much as 10 basis points each quarter. The special
assessment charge to CapitalSource Bank is expected to be
$10 million.
A significant increase in insurance premiums would likely have
an adverse effect on the operating expenses and results of
operations of CapitalSource Bank. There can be no prediction as
to what insurance 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.
In addition to the assessment for deposit insurance,
institutions are required to make payments on bonds issued in
the late 1980s by the Financing Corporation to recapitalize a
predecessor deposit insurance fund. For the quarter ended
March 31, 2008, which is the most recent information
available, this payment was established at 1.12 basis
points (annualized) of assessable deposits.
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 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
16
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 multiplied by a risk-weight
factor of 0% to 100%, and assigned by 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,
for the first three years of operation, Capital Source 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 a total risk-based capital ratio of 10%, a Tier 1
risk-based capital ratio of 6% and a Tier 1 leverage ratio
of at least 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%. At December 31, 2008,
CapitalSource Bank had Tier-1 and total risk-based capital
ratios of 13.4% and 17.4%, respectively, each in excess of the
minimum percentage requirements for well-capitalized
institutions. At December 31, 2008, CapitalSource Bank
satisfied the DFI capital ratio requirement with a ratio of
12.0%. See Note 20, Bank Regulatory Capital, of the
Notes to the Consolidated Financial Statements under
Part II, Item 8 in this report.
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. In
accordance with the approval order, as a de novo bank,
CapitalSource Bank is prohibited from paying dividends during
its first three years of operations 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 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
17
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 customers 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.
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.
18
Other
Consumer Protection Laws and Regulations
CapitalSource Bank is subject to many other federal consumer
protection statutes and regulations, such as the Equal Credit
Opportunity Act, the Truth in Savings Act, the Truth in Lending
Act, the Real Estate Settlement Procedures Act, the Home
Ownership and Equity Protection Act, the Fair Credit Reporting
Act, the Fair Debt Collection Practices Act, the Home Mortgage
Disclosure 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
consumers, 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 CapitalSource
Bank to lawsuits and could also result in administrative
penalties, including, fines and reimbursements. CapitalSource
Bank and the Parent Company 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 consumer
protection laws and their implementing regulations have become
more intense. Due to these heightened regulatory concerns,
CapitalSource Bank may incur additional compliance costs or be
required to expend additional funds for investments in its local
community.
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:
|
|
|
|
|
regulate credit activities, including establishing licensing
requirements in some jurisdictions;
|
|
|
|
regulate lending activities, including establishing licensing
requirements in some jurisdictions;
|
|
|
|
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;
|
|
|
|
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.
|
In addition, many of our healthcare clients are subject to
licensure, certification and other regulation and oversight
under the applicable Medicare and Medicaid programs. These
regulations and governmental oversight indirectly affect our
business in several ways as discussed below and in Item 1A,
Risk Factors, on page 31.
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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 Medicare and
Medicaid reimbursement adequate to cover the actual costs of
operating the facilities. 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
|
19
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|
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|
|
or census declines 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.
|
Employees
As of December 31, 2008, we employed 716 people, 357
of whom were employed by CapitalSource Bank. We believe that our
relations with our employees are good.
Executive
Officers
Our executive officers and their ages and positions are as
follows:
|
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Name
|
|
Age
|
|
Position
|
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John K. Delaney
|
|
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45
|
|
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Chairman of the Board of Directors and Chief Executive Officer
|
Dean C. Graham
|
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|
43
|
|
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President and Chief Operating Officer
|
Douglas H. (Tad) Lowrey
|
|
|
56
|
|
|
Chief Executive Officer and President CapitalSource
Bank
|
Steven A. Museles
|
|
|
45
|
|
|
Executive Vice President, Chief Legal Officer and Secretary
|
Thomas A. Fink
|
|
|
45
|
|
|
Senior Vice President and Chief Financial Officer
|
Bryan D. Smith
|
|
|
38
|
|
|
Chief Accounting Officer (1)
|
|
|
|
(1) |
|
Bryan D. Smith was appointed as our principal accounting officer
effective September 8, 2008, and replaced our interim
principal accounting officer, Donald F. Cole, who remains with
us in other capacities. |
Biographies for our executive officers are as follows:
John K. Delaney, a co-founder of the company, is Chairman
of our Board and Chief Executive Officer, in which capacities he
has served since our inception in 2000. Mr. Delaney
received his undergraduate degree from Columbia University and
his juris doctor degree from Georgetown University Law Center.
Dean C. Graham has served as the President and Chief
Operating officer since January 2006. Mr. Graham served as
the President Healthcare and Specialty Finance from
February 2005 until assuming his current responsibilities and as
the Managing Director Group Head of our Healthcare
Finance group from September 2001 through January 2005.
Mr. Graham received an undergraduate degree from Harvard
College, a juris doctor degree from the University of Virginia
School of Law and a masters degree from the University of
Cambridge.
Douglas H. (Tad) Lowrey 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 when it was sold to Union Bank of California.
Previously, he was Chief Executive Officer of CenFed Bank and
its publicly owned holding company, CENFED Financial Corporation
from 1990 until its sale in 1998 to Glendale Federal Bank.
Additionally, Mr. Lowrey is an elected director of the
Federal Home Loan Bank of San Francisco.
20
Steven A. Museles has served as our Executive Vice
President, Chief Legal Officer and Secretary since our inception
in 2000 and in similar capacities for CapitalSource Bank since
July 2008. Mr. Museles received his undergraduate degree
from the University of Virginia and his juris doctor degree from
Georgetown University Law Center.
Thomas A. Fink has served as our Senior Vice
President Finance and Chief Financial Officer since
May 2003. Mr. Fink received his undergraduate degree from
the University of Notre Dame and his masters of business
administration from the University of Chicago Graduate School of
Business.
Bryan D. Smith has served as our Chief Accounting Officer
since September 2008. Prior to his appointment, Mr. Smith
worked as a consultant to us from June 2008 until his
appointment as our Chief Accounting Officer in September 2008.
Previously, he served as our Controller Strategy
Execution from January 2007 until May 2008, Controller from
October 2003 until January 2007 and Assistant Controller from
March 2002 until October 2003. Mr. Smith earned his
undergraduate degree from Virginia Tech in 1993 and was licensed
in 1994 in the State of Maryland as a certified public
accountant.
Statistical
Disclosures
The following supplemental statistical disclosures are presented
as a result of our acquisition of 22 retail banking branches
from Fremont Investment & Loan and the commencement of
CapitalSource Banks operations on July 25, 2008
(commencement date). This information is prepared in
accordance with Industry Guide 3 and Staff Accounting
Bulletin Topic
11-K.
The financial data for the year ended December 31, 2008
comprised information from CapitalSource Inc. for the entire
year and CapitalSource Bank for the period from the commencement
date through December 31, 2008. Financial data as of and
for the years ended December 31, 2007, 2006, 2005 and 2004
do not include any information from CapitalSource Bank.
For purposes of the following statistical disclosures, we
determined separate disclosure of foreign data was unnecessary
because they are not material in relation to the domestic
activities of our operations for all years presented in the
consolidated financial statements. In addition, certain amounts
as of and for the years ended December 31, 2007, 2006, 2005
and 2004 have been reclassified from previous years
presentations to conform to the current year presentation.
Table
1. Distribution of Assets, Liabilities, and Shareholders
Equity
The following table summarizes our consolidated average
balances, including the related interest earned from
interest-earning assets, interest expensed on interest-bearing
liabilities and the resulting average interest yields and rates
for the years ended December 31, 2008, 2007 and 2006.
For the year ended December 31, 2008, the average balances
were calculated using daily amounts throughout the entire year,
even though CapitalSource Bank commenced operations on
July 25, 2008. This allows for the average yields (rates)
to be presented on an annual basis.
21
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Interest
|
|
|
Avg
|
|
|
|
|
|
Interest
|
|
|
Avg
|
|
|
|
|
|
Interest
|
|
|
Avg
|
|
|
|
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
|
|
$
|
1,346,552
|
|
|
$
|
23,738
|
|
|
|
1.76
|
%
|
|
$
|
560,440
|
|
|
$
|
21,181
|
|
|
|
3.78
|
%
|
|
$
|
492,768
|
|
|
$
|
18,073
|
|
|
|
3.67
|
%
|
Marketable securities,
available-for-sale(3)
|
|
|
199,813
|
|
|
|
7,395
|
|
|
|
3.71
|
%
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
Mortgage related receivables, net
|
|
|
1,921,538
|
|
|
|
94,485
|
|
|
|
4.92
|
%
|
|
|
2,166,728
|
|
|
|
127,330
|
|
|
|
5.88
|
%
|
|
|
2,022,035
|
|
|
|
115,546
|
|
|
|
5.71
|
%
|
Mortgage-backed securities pledged, trading
|
|
|
2,190,775
|
|
|
|
122,181
|
|
|
|
5.58
|
%
|
|
|
3,815,471
|
|
|
|
212,869
|
|
|
|
5.58
|
%
|
|
|
2,678,471
|
|
|
|
147,308
|
|
|
|
5.50
|
%
|
Commercial real estate A Participation Interest, net
|
|
|
700,973
|
|
|
|
54,226
|
|
|
|
7.74
|
%
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
Loans(1)(2)
|
|
|
9,604,619
|
|
|
|
931,028
|
|
|
|
9.69
|
%
|
|
|
8,959,621
|
|
|
|
1,074,598
|
|
|
|
11.99
|
%
|
|
|
6,932,389
|
|
|
|
902,669
|
|
|
|
13.02
|
%
|
Investments(3)
|
|
|
43,090
|
|
|
|
8,526
|
|
|
|
16.04
|
%
|
|
|
44,038
|
|
|
|
4,293
|
|
|
|
9.75
|
%
|
|
|
44,217
|
|
|
|
3,360
|
|
|
|
7.59
|
%
|
Other assets
|
|
|
8,651
|
|
|
|
128
|
|
|
|
1.48
|
%
|
|
|
644
|
|
|
|
27
|
|
|
|
4.19
|
%
|
|
|
641
|
|
|
|
62
|
|
|
|
9.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
16,016,011
|
|
|
$
|
1,241,707
|
|
|
|
7.75
|
%
|
|
|
15,546,942
|
|
|
$
|
1,440,298
|
|
|
|
9.26
|
%
|
|
|
12,170,521
|
|
|
$
|
1,187,018
|
|
|
|
9.75
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest-earning assets
|
|
|
1,589,583
|
|
|
|
|
|
|
|
|
|
|
|
1,266,872
|
|
|
|
|
|
|
|
|
|
|
|
424,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,605,594
|
|
|
|
|
|
|
|
|
|
|
$
|
16,813,814
|
|
|
|
|
|
|
|
|
|
|
$
|
12,594,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
2,207,210
|
|
|
$
|
76,245
|
|
|
|
3.45
|
%
|
|
$
|
|
|
|
$
|
|
|
|
|
N/A
|
|
|
$
|
|
|
|
$
|
|
|
|
|
N/A
|
|
Repurchase agreements
|
|
|
2,374,890
|
|
|
|
85,458
|
|
|
|
3.60
|
%
|
|
|
3,771,977
|
|
|
|
198,610
|
|
|
|
5.27
|
%
|
|
|
2,737,289
|
|
|
|
138,460
|
|
|
|
5.06
|
%
|
Credit facilities
|
|
|
1,781,486
|
|
|
|
125,197
|
|
|
|
7.03
|
%
|
|
|
2,808,230
|
|
|
|
188,543
|
|
|
|
6.71
|
%
|
|
|
2,901,227
|
|
|
|
183,203
|
|
|
|
6.31
|
%
|
Term debt
|
|
|
6,240,744
|
|
|
|
300,723
|
|
|
|
4.82
|
%
|
|
|
6,003,040
|
|
|
|
369,476
|
|
|
|
6.15
|
%
|
|
|
3,947,727
|
|
|
|
240,242
|
|
|
|
6.09
|
%
|
Other borrowings
|
|
|
1,639,229
|
|
|
|
124,489
|
|
|
|
7.59
|
%
|
|
|
1,522,108
|
|
|
|
90,612
|
|
|
|
5.95
|
%
|
|
|
893,204
|
|
|
|
44,820
|
|
|
|
5.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
14,243,559
|
|
|
$
|
712,112
|
|
|
|
5.00
|
%
|
|
|
14,105,355
|
|
|
$
|
847,241
|
|
|
|
6.01
|
%
|
|
|
10,479,447
|
|
|
$
|
606,725
|
|
|
|
5.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non interest-bearing liabilities
|
|
|
409,518
|
|
|
|
|
|
|
|
|
|
|
|
280,292
|
|
|
|
|
|
|
|
|
|
|
|
153,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
14,653,077
|
|
|
|
|
|
|
|
|
|
|
|
14,385,647
|
|
|
|
|
|
|
|
|
|
|
|
10,632,922
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests
|
|
|
19,818
|
|
|
|
|
|
|
|
|
|
|
|
47,544
|
|
|
|
|
|
|
|
|
|
|
|
52,437
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
2,932,699
|
|
|
|
|
|
|
|
|
|
|
|
2,380,623
|
|
|
|
|
|
|
|
|
|
|
|
1,909,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, noncontrolling interests and
shareholders equity
|
|
$
|
17,605,594
|
|
|
|
|
|
|
|
|
|
|
$
|
16,813,814
|
|
|
|
|
|
|
|
|
|
|
$
|
12,594,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the years ended December 31, 2008, 2007 and 2006,
interest income from outstanding loans included loan fees of
$133.1 million, $162.4 million and
$170.5 million, respectively. |
|
(2) |
|
The average principal amounts of non-accrual loans have been
included in the average loan balances to determine the average
yield earned on loans. For the years ended December 31,
2008, 2007 and 2006, the average principal balances of
non-accrual loans were $231.7 million, $162.1 million
and $156.4 million, respectively. |
|
(3) |
|
The average yields for investment securities
available-for-sale
were calculated based on the amortized costs of the individual
securities and do not reflect any changes in fair value, which
were recorded in accumulated other comprehensive income (loss)
in our audited consolidated balance sheets. The average yields
for investment securities
held-to-maturity
have also been calculated using amortized cost balances. |
22
The following table presents the average total interest-earning
assets, net interest-earnings and net yield on interest-earning
assets for the years ended December 31, 2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Average total interest-earning assets
|
|
$
|
16,016,011
|
|
|
$
|
15,546,942
|
|
|
$
|
12,170,521
|
|
Net interest-earnings(1)
|
|
$
|
529,595
|
|
|
$
|
593,057
|
|
|
$
|
580,293
|
|
Net yield on interest-earning assets(2)
|
|
|
3.31
|
%
|
|
|
3.81
|
%
|
|
|
4.77
|
%
|
|
|
|
(1) |
|
Net interest-earnings is defined as the difference between total
interest income and total interest expense. |
|
(2) |
|
Net yield on interest-earning assets is defined as net interest
earnings divided by average total interest-earning assets. |
Table
2. Interest Income/Expense Variance Analysis
The following table presents the changes in interest income,
interest expense and net interest income for the years ended
December 31, 2008 and 2007, as a result of changes in
volume, changes in interest rates or both. Volume and interest
rate variances have been calculated based on movements in
average balances over the period and changes in interest rates
on average interest-earning assets and average interest-bearing
liabilities. Changes due to a combination of volume and interest
rates were allocated proportionally to the absolute change in
volume and interest rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Compared to 2007
|
|
|
2007 Compared to 2006
|
|
|
|
(Decrease) Increase
|
|
|
|
|
|
(Decrease) Increase
|
|
|
|
|
|
|
Due to Changes in:
|
|
|
Net
|
|
|
Due to Changes in:
|
|
|
Net
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Change
|
|
|
Rate
|
|
|
Volume
|
|
|
Change
|
|
|
|
($ in thousands)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
(15,671
|
)
|
|
$
|
18,228
|
|
|
$
|
2,557
|
|
|
$
|
565
|
|
|
$
|
2,543
|
|
|
$
|
3,108
|
|
Marketable securities,
available-for-sale
|
|
|
N/A
|
|
|
|
7,395
|
|
|
|
7,395
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Mortgage related receivables, net
|
|
|
(19,399
|
)
|
|
|
(13,446
|
)
|
|
|
(32,845
|
)
|
|
|
3,348
|
|
|
|
8,436
|
|
|
|
11,784
|
|
Mortgage-backed securities pledged, trading
|
|
|
(77
|
)
|
|
|
(90,611
|
)
|
|
|
(90,688
|
)
|
|
|
2,157
|
|
|
|
63,404
|
|
|
|
65,561
|
|
Commercial real estate A Participation Interest, net
|
|
|
N/A
|
|
|
|
54,226
|
|
|
|
54,226
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
(216,880
|
)
|
|
|
73,310
|
|
|
|
(143,570
|
)
|
|
|
(75,638
|
)
|
|
|
247,567
|
|
|
|
171,929
|
|
Investments
|
|
|
4,327
|
|
|
|
(94
|
)
|
|
|
4,233
|
|
|
|
946
|
|
|
|
(13
|
)
|
|
|
933
|
|
Other assets
|
|
|
(27
|
)
|
|
|
128
|
|
|
|
101
|
|
|
|
(37
|
)
|
|
|
2
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (decrease) increase in interest income
|
|
|
(247,727
|
)
|
|
|
49,136
|
|
|
|
(198,591
|
)
|
|
|
(68,659
|
)
|
|
|
321,939
|
|
|
|
253,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
N/A
|
|
|
|
76,245
|
|
|
|
76,245
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
|
(52,145
|
)
|
|
|
(61,007
|
)
|
|
|
(113,152
|
)
|
|
|
5,879
|
|
|
|
54,271
|
|
|
|
60,150
|
|
Credit facilities
|
|
|
8,445
|
|
|
|
(71,791
|
)
|
|
|
(63,346
|
)
|
|
|
11,337
|
|
|
|
(5,997
|
)
|
|
|
5,340
|
|
Term debt
|
|
|
(82,893
|
)
|
|
|
14,140
|
|
|
|
(68,753
|
)
|
|
|
2,764
|
|
|
|
126,470
|
|
|
|
129,234
|
|
Other borrowings
|
|
|
26,483
|
|
|
|
7,394
|
|
|
|
33,877
|
|
|
|
9,585
|
|
|
|
36,207
|
|
|
|
45,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (decrease) increase in interest expense
|
|
|
(100,110
|
)
|
|
|
(35,019
|
)
|
|
|
(135,129
|
)
|
|
|
29,565
|
|
|
|
210,951
|
|
|
|
240,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in net interest income
|
|
$
|
(147,617
|
)
|
|
$
|
84,155
|
|
|
$
|
(63,462
|
)
|
|
$
|
(98,224
|
)
|
|
$
|
110,988
|
|
|
$
|
12,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Certain selected ratios associated with our financial
information are included in Item 6, Selected Financial
Data.
Table
3. Investment Portfolio
The following table presents the outstanding book values of our
trading and investment securities held as of December 31,
2008, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency mortgage-backed securities
|
|
$
|
1,489,291
|
|
|
$
|
4,030,180
|
|
|
$
|
3,476,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency debt obligations(1)
|
|
$
|
495,337
|
|
|
$
|
|
|
|
$
|
|
|
Agency mortgage-backed securities
|
|
|
142,236
|
|
|
|
|
|
|
|
|
|
Non-Agency mortgage-backed securities
|
|
|
377
|
|
|
|
4,518
|
|
|
|
34,155
|
|
Other debt securities
|
|
|
2,416
|
|
|
|
5,318
|
|
|
|
5,952
|
|
Corporate debt securities
|
|
|
38,972
|
|
|
|
3,000
|
|
|
|
15,000
|
|
Equity securities
|
|
|
213
|
|
|
|
473
|
|
|
|
6,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available-for-sale (2)
|
|
$
|
679,551
|
|
|
$
|
13,309
|
|
|
$
|
61,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities held-to-maturity:(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities
|
|
$
|
14,389
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Agency debt obligations include discount notes, callable notes,
and debt notes issued by various Government-Sponsored
Enterprises (GSEs). |
|
(2) |
|
As of December 31, 2008, 2007, and 2006,
$36.8 million, $13.3 million, and $61.8 million
of available-for-sale securities, respectively, are included in
investments in our audited consolidated balance sheets and
further discussed in Note 8, Marketable Securities and
Investments, within our audited consolidated financial
statements. The remaining amounts are presented in marketable
securities, available-for-sale in our audited consolidated
balance sheets. |
|
(3) |
|
Such amounts are included in investments in our audited
consolidated balance sheets and further discussed in
Note 8, Marketable Securities and Investments,
within our audited consolidated financial statements. We did not
hold any securities held-to-maturity as of December 31,
2007 and 2006. |
As of December 31, 2008, we held $597.6 million and
$1.1 billion of securities issued by Fannie Mae and Freddie
Mac, respectively.
24
Table
4. Investments by Maturity Dates
The following table presents the carrying amounts, contractual
maturities and weighted average yields of our debt securities
available-for-sale as of December 31, 2008. Actual
maturities of these securities may differ from contractual
maturity dates because issuers may have the right to call or
prepay obligations. The weighted average yields were calculated
based on the amortized costs of the individual securities and do
not reflect any changes in fair value, which were recorded in
accumulated other comprehensive income (loss) in our audited
consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due Between
|
|
|
Due Between
|
|
|
|
|
|
|
|
|
|
Due in One
|
|
|
One and Five
|
|
|
Five and Ten
|
|
|
Due after Ten
|
|
|
|
|
|
|
Year or Less
|
|
|
Years
|
|
|
Years
|
|
|
Years
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Debt securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency debt obligations
|
|
$
|
149,945
|
|
|
$
|
345,392
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
495,337
|
|
Agency mortgage-backed securities
|
|
|
|
|
|
|
142,236
|
|
|
|
|
|
|
|
|
|
|
|
142,236
|
|
Non-Agency mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
377
|
|
|
|
377
|
|
Other debt securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,416
|
|
|
|
2,416
|
|
Corporate debt securities
|
|
|
|
|
|
|
7,922
|
|
|
|
31,050
|
|
|
|
|
|
|
|
38,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities available-for-sale
|
|
$
|
149,945
|
|
|
$
|
495,550
|
|
|
$
|
31,050
|
|
|
$
|
2,793
|
|
|
$
|
679,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average yield
|
|
|
2.77
|
%
|
|
|
4.01
|
%
|
|
|
16.56
|
%
|
|
|
116.21
|
%
|
|
|
4.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, all debt securities
held-to-maturity had contractual maturity lives between one and
five years and a weighted average yield of 24.49%. The weighted
average yield was calculated based on the amortized costs of the
individual securities.
The debt trading securities were not included in this table
because these securities are expected to be traded within one
year.
Table
5. Loan Balances by Product Type
The following table presents an analysis of our commercial loan
portfolio reflecting the sectors in which our borrowers
operated. The loan amounts, which exclude allowances for loan
losses and are net of unearned income, were as of December 31
2008, 2007, 2006, 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
($ in thousands)
|
|
|
Commercial(1)
|
|
$
|
6,153,773
|
|
|
$
|
6,237,073
|
|
|
$
|
4,912,664
|
|
|
$
|
3,796,912
|
|
|
$
|
2,903,467
|
|
Real estate
|
|
|
2,109,233
|
|
|
|
2,212,406
|
|
|
|
2,384,210
|
|
|
|
1,936,402
|
|
|
|
1,137,112
|
|
Real estate construction
|
|
|
959,428
|
|
|
|
1,120,578
|
|
|
|
360,898
|
|
|
|
91,486
|
|
|
|
98,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
9,222,434
|
|
|
$
|
9,570,057
|
|
|
$
|
7,657,772
|
|
|
$
|
5,824,800
|
|
|
$
|
4,139,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For purpose of this table, commercial loans are either
asset-based loans or cash flow loans and exclude loans secured
by real estate. Asset-based loans are collateralized by
specified assets of the client, generally the clients
accounts receivable and/or inventory. Cash flow loans are made
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. |
25
Although our loan portfolio included borrowers from more than 11
industries as of December 31, 2008, we had a high
concentration of our loan balances in four industries in
particular. The following are the highly-concentrated industries
and the respective percentage of loan balances of total loans:
|
|
|
|
|
|
|
Percentage of
|
|
Industries
|
|
Total Loans
|
|
|
Health care and social assistance
|
|
|
18
|
%
|
Accommodation and food services
|
|
|
14
|
%
|
Finance and insurance
|
|
|
12
|
%
|
Construction
|
|
|
11
|
%
|
The 1,072 loans within these industries are to 679 borrowers
located throughout most of the United States (47 states,
District of Columbia, and Puerto Rico). The largest loan was
$325.0 million, which was 3.5% of total loans. A discussion
of our commercial loan portfolio, including further statistical
analysis of the commercial loan portfolio, is in the Overview
section of Item 1, Business.
Table
6. Loan Balances by Maturities
The following table presents an analysis of the contractual
maturity of our commercial loan portfolio as of
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due After One
|
|
|
|
|
|
|
|
|
|
Due One Year or
|
|
|
Year Through
|
|
|
Due After Five
|
|
|
|
|
|
|
Less
|
|
|
Five Years
|
|
|
Years
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
$
|
667,735
|
|
|
$
|
4,734,792
|
|
|
$
|
751,246
|
|
|
$
|
6,153,773
|
|
Real estate
|
|
|
530,147
|
|
|
|
1,478,672
|
|
|
|
100,414
|
|
|
|
2,109,233
|
|
Real estate construction
|
|
|
684,211
|
|
|
|
275,217
|
|
|
|
|
|
|
|
959,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
1,882,093
|
|
|
$
|
6,488,681
|
|
|
$
|
851,660
|
|
|
$
|
9,222,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
7. Sensitivity of Loans to Changes in Interest
Rates
The following table presents the total amount of loans due after
one year with predetermined interest rates and floating or
adjustable interest rates as of December 31, 2008. Loans
with predetermined interest rates are loans for which the
interest rate is fixed for the entire term of the loan. All
other loans are considered loans with floating or adjustable
rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans with
|
|
|
Loans with Floating
|
|
|
|
|
|
|
Predetermined
|
|
|
or
|
|
|
|
|
|
|
Rates
|
|
|
Adjustable Rates
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Commercial
|
|
$
|
113,243
|
|
|
$
|
5,372,795
|
|
|
$
|
5,486,038
|
|
Real estate
|
|
|
206,249
|
|
|
|
1,372,837
|
|
|
|
1,579,086
|
|
Real estate construction
|
|
|
|
|
|
|
275,217
|
|
|
|
275,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
319,492
|
|
|
$
|
7,020,849
|
|
|
$
|
7,340,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
8. Non-performing and Potential Problem Loans
The following table presents the outstanding balances of our
non-performing loans as of December 31, 2008, 2007, 2006,
2005 and 2004. 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 under troubled debt restructurings (as defined
in Statement of Financial Accounting Standards No. 15,
Accounting by Debtors and Creditors for Troubled Debt
Restructurings).
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.
26
We place loans on non-accrual status when we expect, based on
judgment, that the borrower will not be able to service its debt
and other obligations.
Troubled debt restructurings are loans that have been
restructured as a result of the deterioration in the
borrowers financial position and which we have granted a
concession to the borrower that we would not have otherwise
granted if those conditions did not exist. Certain conditions to
the borrowers financial position that could result in the
restructuring of the loan are economic or legal conditions.
Troubled debt restructurings exclude loans that also meet the
criteria of loans on a non-accrual basis and loans contractually
past-due 90 days or more.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
($ in thousands)
|
|
|
Loans on non-accrual basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
278,190
|
|
|
$
|
129,505
|
|
|
$
|
140,571
|
|
|
$
|
97,764
|
|
|
$
|
15,615
|
|
Real estate
|
|
|
60,621
|
|
|
|
45,391
|
|
|
|
50,326
|
|
|
|
40,288
|
|
|
|
|
|
Real estate construction
|
|
|
52,299
|
|
|
|
7,896
|
|
|
|
3,859
|
|
|
|
|
|
|
|
1,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans on non-accrual basis
|
|
$
|
391,110
|
|
|
$
|
182,792
|
|
|
$
|
194,756
|
|
|
$
|
138,052
|
|
|
$
|
17,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accruing loans contractually past-due 90 days or more
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
6,804
|
|
|
$
|
464
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Real estate
|
|
|
23,182
|
|
|
|
1,703
|
|
|
|
12,602
|
|
|
|
77
|
|
|
|
4,253
|
|
Real estate construction
|
|
|
|
|
|
|
|
|
|
|
1,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accruing loans contractually past-due 90 days or more
|
|
$
|
29,986
|
|
|
$
|
2,167
|
|
|
$
|
14,330
|
|
|
$
|
77
|
|
|
$
|
4,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troubled debt restructurings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
137,813
|
|
|
$
|
135,820
|
|
|
$
|
63,888
|
|
|
$
|
46,620
|
|
|
$
|
33,470
|
|
Real estate
|
|
|
1,371
|
|
|
|
1,431
|
|
|
|
13,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total troubled debt restructurings
|
|
$
|
139,184
|
|
|
$
|
137,251
|
|
|
$
|
77,754
|
|
|
$
|
46,620
|
|
|
$
|
33,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
422,807
|
|
|
$
|
265,789
|
|
|
$
|
204,459
|
|
|
$
|
144,384
|
|
|
$
|
49,085
|
|
Real estate
|
|
|
85,174
|
|
|
|
48,525
|
|
|
|
76,794
|
|
|
|
40,365
|
|
|
|
4,253
|
|
Real estate construction
|
|
|
52,299
|
|
|
|
7,896
|
|
|
|
5,587
|
|
|
|
|
|
|
|
1,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
$
|
560,280
|
|
|
$
|
322,210
|
|
|
$
|
286,840
|
|
|
$
|
184,749
|
|
|
$
|
55,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The gross interest income amounts that would have been recorded
for the year ended December 31, 2008 from the non-accrual
loans and troubled debt restructurings presented in the table
above if such loans had been current in accordance with their
original terms and had been outstanding throughout the period or
since origination, if held for part of the period, were
$50.3 million. For the period ended December 31, 2008,
interest income amounts earned on such loans that were recorded
and included in net income were $32.4 million.
27
The following table presents the outstanding balance of our
potential problem loans as of December 31, 2008. Potential
problem loans are loans that are not considered non-performing
loans, as previously discussed, but loans where management is
aware of information regarding potential credit problems of our
borrowers that leads to serious doubts as to the ability of
compliance with loan covenants or defaults by the borrowers.
Such non-compliance or defaults could eventually result in the
loans being reclassified as non-performing loans ($ in
thousands).
|
|
|
|
|
With specific allowance on principal
|
|
|
|
|
Commercial
|
|
$
|
51,201
|
|
Real estate
|
|
|
19,964
|
|
Real estate construction
|
|
|
23,538
|
|
|
|
|
|
|
Total with specific allowance on principal
|
|
|
94,703
|
|
|
|
|
|
|
Without specific allowance on principal
|
|
|
|
|
Commercial
|
|
|
188,714
|
|
Real estate
|
|
|
36,618
|
|
|
|
|
|
|
Total without specific allowance on principal
|
|
|
225,332
|
|
|
|
|
|
|
Total potential problem loans
|
|
$
|
320,035
|
|
|
|
|
|
|
Table
9. Summary of Loan Loss Experience
The following table presents the movements in the loan loss
allowance according to the industry sectors of our loan
portfolio for the years ended December 31, 2008, 2007,
2006, 2005 and 2004. We establish allowances for loan losses in
our loan portfolio that represent managements estimate of
probable losses as of the balance sheet date. See additional
discussion surrounding the factors, which influence such
judgments within Allowance for Loan Losses under the Critical
Accounting Estimates section of Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
($ in thousands)
|
|
|
Balance at the beginning of year
|
|
$
|
138,930
|
|
|
$
|
120,575
|
|
|
$
|
87,370
|
|
|
$
|
35,208
|
|
|
$
|
18,025
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
(191,911
|
)
|
|
|
(46,314
|
)
|
|
|
(43,399
|
)
|
|
|
(8,680
|
)
|
|
|
(5,650
|
)
|
Real estate
|
|
|
(64,363
|
)
|
|
|
(8,586
|
)
|
|
|
(4,592
|
)
|
|
|
(3,079
|
)
|
|
|
(2,876
|
)
|
Real estate construction
|
|
|
(15,909
|
)
|
|
|
(3,494
|
)
|
|
|
(115
|
)
|
|
|
(1,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
(272,183
|
)
|
|
|
(58,394
|
)
|
|
|
(48,106
|
)
|
|
|
(13,672
|
)
|
|
|
(8,526
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
1,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
|
|
|
|
905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate construction
|
|
|
161
|
|
|
|
|
|
|
|
100
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
1,283
|
|
|
|
905
|
|
|
|
100
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(270,900
|
)
|
|
|
(57,489
|
)
|
|
|
(48,006
|
)
|
|
|
(13,549
|
)
|
|
|
(8,526
|
)
|
Transfers to held for sale
|
|
|
(20,991
|
)
|
|
|
(1,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase to allowance charged to operations
|
|
|
576,805
|
|
|
|
77,576
|
|
|
|
81,211
|
|
|
|
65,711
|
|
|
|
25,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
423,844
|
|
|
$
|
138,930
|
|
|
$
|
120,575
|
|
|
$
|
87,370
|
|
|
$
|
35,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs as a percentage of average loans outstanding
|
|
|
2.8%
|
|
|
|
0.7%
|
|
|
|
0.7%
|
|
|
|
0.3%
|
|
|
|
0.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Table
10. Allocation of the Allowance for Loan Losses
The following tables present the amount of loan loss allowances
allocated to each category of loans and the percentage of our
total loan portfolio, as of December 31, 2008, 2007, 2006,
2005, and 2004.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
($ in thousands)
|
|
|
Allocation by Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
319,842
|
|
|
$
|
109,101
|
|
|
$
|
97,336
|
|
|
$
|
68,273
|
|
|
$
|
27,543
|
|
Real estate
|
|
|
72,139
|
|
|
|
20,821
|
|
|
|
18,170
|
|
|
|
19,097
|
|
|
|
6,193
|
|
Real estate construction
|
|
|
31,863
|
|
|
|
9,008
|
|
|
|
5,069
|
|
|
|
|
|
|
|
1,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan loss allowance
|
|
$
|
423,844
|
|
|
$
|
138,930
|
|
|
$
|
120,575
|
|
|
$
|
87,370
|
|
|
$
|
35,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total Loan Portfolio by Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
66.7
|
%
|
|
|
65.2
|
%
|
|
|
64.2
|
%
|
|
|
65.2
|
%
|
|
|
70.1
|
%
|
Real estate
|
|
|
22.9
|
%
|
|
|
23.1
|
%
|
|
|
31.1
|
%
|
|
|
33.2
|
%
|
|
|
27.5
|
%
|
Real estate construction
|
|
|
10.4
|
%
|
|
|
11.7
|
%
|
|
|
4.7
|
%
|
|
|
1.6
|
%
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
11. Average Deposits
The following table presents the average balances and the
average interest rates on deposit categories in excess of 10% of
average total deposits as of December 31, 2008. There were
no deposits held as of December 31, 2007 or 2006.
The average deposit balances were calculated using daily amounts
throughout the entire year, even though CapitalSource Bank
commenced operations on July 25, 2008. This allows for the
average interest rates to be presented on an annual basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance
|
|
|
Average Rate
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits
|
|
$
|
282,194
|
|
|
|
2.79
|
%
|
|
|
|
|
Time deposits
|
|
|
1,925,016
|
|
|
|
3.55
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
2,207,210
|
|
|
|
3.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
12. Significant Time Deposits
The following table presents the amount of time certificates of
deposit in the amount of $100,000 or more and categorized by
time remaining to maturity as of December 31, 2008 ($ in
thousands):
|
|
|
|
|
Remaining Maturity
|
|
|
|
|
Three months or less
|
|
$
|
534,179
|
|
Three through six months
|
|
|
629,163
|
|
Six through twelve months
|
|
|
446,193
|
|
Greater than twelve months
|
|
|
14,940
|
|
|
|
|
|
|
Total
|
|
$
|
1,624,475
|
|
|
|
|
|
|
29
Table
13. Analysis of Short-term Borrowings
The following table presents certain our short-term borrowings
outstanding and weighted average interest rates for the years
ended December 31 2008, 2007 and 2006. Short-term borrowings are
borrowings with an original maturity of one year or less.
Securities sold under repurchase agreements were our only
significant category of short-term borrowings. See additional
discussion surrounding the general terms of these securities
sold under repurchase agreements in Note 13,
Borrowings, within our audited consolidated financial
statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Securities sold under repurchase agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at year end
|
|
$
|
1,499,250
|
|
|
$
|
3,796,396
|
|
|
$
|
3,510,768
|
|
Average daily balance during the year
|
|
$
|
2,268,868
|
|
|
$
|
3,727,665
|
|
|
$
|
2,737,289
|
|
Maximum outstanding month-end balance
|
|
$
|
3,780,942
|
|
|
$
|
4,217,086
|
|
|
$
|
3,547,881
|
|
Weighted average interest rate during the year
|
|
|
3.5
|
%
|
|
|
5.3
|
%
|
|
|
5.2
|
%
|
Weighted average interest rate at year end
|
|
|
2.6
|
%
|
|
|
5.1
|
%
|
|
|
5.3
|
%
|
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) 370-9431
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, 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 executive officers from, our Code of Business
Conduct and Ethics.
30
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 even further than it has over the past
several months. The U.S. economy is currently in an
economic recession and we expect this to have a significant
adverse 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
Impacting Funding our Operations
Our
ability to operate our business depends on our ability to
maintain our external financing, which is extremely challenging
in the existing economic environment.
We require a substantial amount of money to make new loans,
repay indebtedness, fund obligations to existing clients and
otherwise operate our business. To date, we have obtained this
money through issuing equity, convertible debentures and
subordinated debt, by borrowing money under our credit
facilities, securitization transactions (hereinafter term
debt) and repurchase agreements, and through deposits at
CapitalSource Bank. Our access to these and other types of
external funding depends on a number of factors, including
general market and deposit raising conditions, the markets
and our lenders perceptions of our business, our current
and potential future earnings and the market price of our common
stock. The capital and credit markets have been experiencing
extreme volatility and disruption for more than 12 months
and recently the volatility and disruption have reached
unprecedented levels. These market forces have, in turn, put
significant constraints on our ability to access and maintain
prudent levels of liquidity through the sources described above.
Our available cash and cash equivalents are 7.3% of our total
assets, down from the levels we have historically maintained.
The markets have produced downward pressure on stock prices and
credit availability for certain issuers without regard to those
issuers underlying financial strength. In addition, the
economy is experiencing an economic recession with wide ranging
impacts. We anticipate generating some of this liquidity by
utilizing means we have not regularly used in the past,
including sales of loans, loan participations, real estate
investments and real estate owned. These sale activities are
dependent on and subject to market and economic conditions and
willing and able buyers entering into transactions with us and,
therefore, are highly speculative. Furthermore, due to current
market conditions, if we are able to consummate any asset sales
we expect them to be at prices discounted to our current
carrying value. If the current recession and levels of capital
markets disruption and volatility continue or worsen, it is not
certain that sufficient funding and capital will be available to
us on acceptable terms or at all. Without sufficient funding, we
would not be able to continue to operate our business.
We are
unable to access funds held by CapitalSource Bank to supplement
our constrained liquidity position.
We have made a significant investment in establishing
CapitalSource Bank as a well-capitalized depository institution.
Despite this investment, for regulatory reasons, CapitalSource
Bank and the Parent Company are required to be operated
independently of each other, and transactions between
CapitalSource Bank and the Parent Company are restricted. For
example, the Parent Company may not sell any loans to
CapitalSource Bank. Furthermore, as a de novo bank,
CapitalSource Bank is prohibited from paying dividends to the
Parent Company for its first three years of operation.
Consequently, while CapitalSource Bank may have more than
adequate liquidity, the Parent Company is unable to directly
benefit from that liquidity to fund its significant obligations
and operations and must rely to a large extent on external
sources of financing which, as described above, are extremely
limited.
31
If our
lenders terminate or fail to renew any of our credit facilities,
we may not be able to continue to fund our
business.
As of February 25, 2009, we had six credit facilities
totaling $1.8 billion in commitments. Two of these credit
facilities aggregating $259.0 million in commitments, are
scheduled to mature during 2009. We may not be able to renew or
extend the term of these financings or to repay amounts
outstanding under them when due. Additionally, if we breach a
covenant or other provision of these facilities, the lenders
could terminate them prior to their maturity dates. If any of
these financings were terminated, not renewed upon its maturity
or renewed on materially worse terms, our liquidity position
could be materially adversely affected, and we may not be able
to satisfy our outstanding obligations or continue to fund our
operations. We have recently received waivers to potential
covenant defaults under several of our credit facilities and
have amended our largest credit facility to address our
inability to satisfy certain financial covenants in the future.
Nevertheless, we cannot assure you that we will be able to
continue to satisfy our obligations under our credit facilities
or receive additional waivers or amendments should they be
needed to avoid future defaults. We are currently in discussions
with our credit facility lenders to restructure our credit
facilities to extend maturities and gain funding efficiencies.
If successful, we expect to see higher borrowing costs,
potentially reduced committed capacity levels
and/or lower
advance rates on our secured credit facilities. We cannot assure
you that we will successfully restructure these facilities on
favorable terms or at all. If we are unsuccessful in this
restructuring, we may be unable to meet our obligations under
these credit facilities which could lead to an event of default,
termination and other consequences which would have a material
adverse effect on our business.
Required
commitment reductions in our syndicated credit facility as well
as mandatory redemptions of our outstanding convertible
debentures may limit our ability to maintain sufficient
liquidity.
We are required under our syndicated bank credit facility to
make mandatory prepayments (which are accompanied by commitment
reductions) in $25.0 million increments with a portion of
the proceeds of specified events, including
|
|
|
|
|
75% of the cash proceeds of any unsecured debt issuance by the
Parent Company,
|
|
|
|
25% of the cash proceeds of specified equity issuances, and
|
|
|
|
75% of any principal repayments on, or the cash proceeds
received on the disposition of or the incurrence of secured debt
with respect to, assets constituting collateral under the
facility.
|
Regardless of any such mandatory prepayments, the facility
commitment reduces to
|
|
|
|
|
$1.0 billion on March 31, 2009,
|
|
|
|
$900.0 million on June 30, 2009, and
|
|
|
|
$700.0 million on December 31, 2009.
|
If we are unable to sell sufficient assets, raise new capital or
restructure this credit facility, we may not have sufficient
liquidity to make these required prepayments by these dates.
Consequently, we could default under this facility which would
trigger cross-defaults under our other debt and could result in
accelerated maturity of all of our debt. In such circumstances,
our business, liquidity and operations would be materially
adversely affected, and we would 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 required to comply with financial and
non-financial covenants and obligations under our indebtedness,
including, without limitation, with respect to interest
coverage, minimum tangible net worth, leverage, maximum
delinquent and charged-off loans and servicing standards. 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, accelerate payment of all amounts payable
under such
32
indebtedness
and/or
terminate their commitments under such indebtedness. A default
under our recourse indebtedness could trigger cross-default
provisions in our other debt facilities, and a default under
some of our non-recourse indebtedness would trigger
cross-default provisions in other of our non-recourse debt. We
have received waivers to potential breaches of some of these
provisions and may have difficulty complying with some of these
provisions if the economic recession continues or worsens. We
recently amended our largest credit facility to adjust some of
these covenants to levels we believe we can meet. Nevertheless,
we may need to obtain additional waivers or amendments again in
the future if we cannot satisfy all of the covenants and
obligations under our debt. There can be no assurance that we
will be able to obtain such waivers or amendments in the future.
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 facilities 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 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. Our syndicated bank credit facility also
contains customary operating and financial restrictions that may
impair our ability to operate our business, including, among
other things, covenants limiting our ability to:
|
|
|
|
|
incur various types of additional indebtedness and grant
additional liens;
|
|
|
|
make specified investments;
|
|
|
|
merge with or into another person or consummate other
transactions that could result in a change of control;
|
|
|
|
make capital expenditures;
|
|
|
|
pay dividends if we are in default; and/or
|
|
|
|
enter into transactions with affiliates.
|
These restrictions may, among other things, reduce our
flexibility in planning for, or reacting to, changes in our
business, the economy
and/or
markets and thereby may negatively impact our financial
condition and results of operations.
Our
commitments to lend additional amounts to existing clients
exceed our resources available to fund these
commitments.
As of December 31, 2008, the amount of the Parent
Companys unfunded commitments to extend credit with
respect to existing loans exceeded unused funding sources and
unrestricted cash by $1.4 billion. Due to their nature, we
can not 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 all provisions of the loan agreements,
and/or our
discretion pursuant to the terms of the loan agreements. In many
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. In the past, the amount of unfunded
commitments and potential for them to be drawn upon by our
clients have not adversely affected our business. In light of
current economic conditions and general lack of liquidity in the
credit markets, however, clients have drawn and are more likely
to continue to draw on our unfunded commitments to improve their
weakening cash positions. Due to this fact and because our
liquidity is more constrained than in the past, we expect that
these unfunded commitments will continue to indefinitely exceed
the Parent Companys available funds. Our failure to
satisfy our full contractual funding commitment to one or more
33
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 in business.
Our
liquidity position has been and will continue to be adversely
affected as a result of our inability to complete additional
term debt transactions on favorable terms or at
all.
Prior to 2008, we had completed several term debt transactions
involving loans in our commercial lending portfolio through
which we raised a significant amount of debt capital to pay down
our borrowings under our credit facilities and to create
additional liquidity under our credit facilities for use in
funding our loans. Our credit facilities were not designed to be
long term financings, and their continued use depends on
regularly paying them down with term debt proceeds. We have been
unable to complete any term debt transactions since 2007, and
the market for securitized loans has effectively been closed
since that time. Consequently, we have been unable to pay down
our credit facilities as anticipated using the proceeds from
term debt transactions, which has constrained our liquidity
position.
Our
cash flows from the interests we retain in our term debt have
been, and we expect will continue to be, delayed or reduced due
to the requirements of the term debt, which has impaired and
could continue to impair our ability to fund our commitments
under existing loans.
We generally have retained the most junior classes of securities
issued in our term debt transactions. Our receipt of cash flows
on those junior securities is governed by provisions that
control the distribution of cash flows from the loans included
in our term debt transactions, which cash flows are tied to the
performance of the underlying loans. As more delinquencies among
loans included in the collateral pools of $4.6 billion of
our outstanding term debt securitizations have occurred, the
timing and amount of the cash flows we receive from loans
included in our term debt transactions have been adversely
affected and we expect these cash flows will continue to be
adversely affected if delinquencies increase. In addition, under
our term debt securitizations, the priority of payments are
altered if the notes remain outstanding beyond the stated
maturity dates and upon other termination events, in which case
we would receive no cash flow from these transactions until the
notes senior to our retained interests are retired.
Fluctuating
interest rates could adversely affect our profit margins and
ability to operate our business.
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 well 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 Market
Risk Management, in Managements Discussion and
Analysis of Financial Condition and Results of Operations.
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 debt facilities.
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 materially
adversely affect our earnings.
We have entered into interest rate swap agreements and other
contracts for interest rate risk management purposes. Our
hedging activity varies in scope based on a number of factors,
including the level of interest rates, the
34
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:
|
|
|
|
|
interest rate hedging can be expensive, particularly during
periods of volatile interest rates;
|
|
|
|
available interest rate hedging may not correspond directly with
the interest rate risk for which protection is sought;
|
|
|
|
the duration of the hedge may not match the duration of the
related liability or asset;
|
|
|
|
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
|
|
|
|
the party owing money in the hedging transaction may default on
its obligation to pay.
|
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 about our hedging instruments, see Note 23,
Derivative Instruments, in our accompanying audited
consolidated financial statements for the year ended
December 31, 2008.
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 about our
derivatives, see Note 23, Derivative Instruments, of
our accompanying audited consolidated financial statements for
the year ended December 31, 2008.
Risks
Related to Our Operations
We may
fail to benefit from the operation of CapitalSource
Bank.
We believe that our July 2008 formation of CapitalSource Bank
will result in significant liquidity, operational and
competitive benefits for us. Achieving these benefits will
depend in part on overcoming our lack of experience operating in
closely regulated markets and continuing to integrate
CapitalSource Banks products, services, personnel and
operations with the rest of our products, services, personnel
and operations. Bank regulatory authorities have imposed
requirements and limitations that could negatively affect the
way we conduct CapitalSource Banks and the rest of our
business and, therefore, could cause us to fail to realize the
expected benefits of operating CapitalSource Bank. Further, the
attention and effort devoted to the operation of CapitalSource
Bank may divert managements attention from other important
issues. There are no assurances that we can successfully operate
CapitalSource Bank or realize any anticipated benefits from
operating CapitalSource Bank.
35
We may
fail to maintain or raise sufficient deposits or other sources
of funding at CapitalSource Bank to operate our
business.
CapitalSource Banks ability to maintain or raise
sufficient deposits may be limited by several factors, including:
|
|
|
|
|
competition from a variety of competitors, many of which offer a
greater selection of products and services and have greater
financial resources, including, without limitation, other banks,
credit unions and brokerage firms;
|
|
|
|
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;
|
|
|
|
the California deposit gathering markets where CapitalSource
Banks branches are located have exhibited volatile and
highly competitive deposit pricing strategies, and regulatory
actions with respect to troubled institutions in those markets
have spurred defensive pricing that we believe have caused, and
may continue to cause, the impacted institutions to offer higher
interest rates to their customers as they attempt to stave off
significant outflows due to a lack of consumer confidence, all
of which could require CapitalSource Bank to offer higher
interest rates than desired to retain or grow our deposit
base; and
|
|
|
|
perceptions of CapitalSource Banks quality could be
adversely affected by depositors negative views of the
Parent Company, which could cause depositors to withdraw their
deposits or seek higher rates.
|
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 relatively short average maturity of
CapitalSource Banks deposits compared 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 the solvency of
CapitalSource Bank and the rest of CapitalSource.
Aside from deposit funding, CapitalSource Bank may obtain
back-up
liquidity from the Federal Home Loan Bank-San Francisco and
from the Parent Company. The current financial crisis threatens
the availability of both of these sources of funds. Through its
FHLB membership, CapitalSource Bank has access to a potential
secondary source of liquidity. The Federal Home Loan Bank system
is currently indicating that it may fail one or more capital
requirements imposed upon it. If the Federal Home Loan Bank
system is dissolved by Congress, CapitalSource Banks
ability to access the Federal Home Loan Bank as a potential
secondary course of liquidity and manage liquidity risk could be
materially impacted. In addition, given the Parent
Companys general liquidity constraints, CapitalSource Bank
may not be able to draw on the $150 million revolving
credit facility it has established with the Parent Company. As a
result, if the ability of CapitalSource Bank to attract and
retain suitable levels of deposits weakens, our business,
financial condition, results of operations and the market price
of our common stock could be negatively affected.
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 the
activities in which we may engage, our ability to use our
capital for certain business purposes and our ability to expand
our business. Banking regulations are primarily intended to
protect depositors funds, federal deposit insurance funds
and the banking system as a whole, not our shareholders. These
regulations affect our lending practices, capital structure,
investment practices, dividend policy and growth, among other
things. Congress and federal 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
36
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.
Failure to comply with laws, regulations or policies or the
regulatory orders pursuant to which CapitalSource Bank operates,
even if unintentionally or inadvertently, could result, among
other things, in sanctions by regulatory agencies, increased
deposit insurance costs, civil monetary penalties or fines,
issuing cease and desist or other supervisory orders or
reputation damage. Supervisory actions also could result in
higher capital requirements, higher insurance premiums and
additional limitations on our activities, which could have a
material adverse effect on our business, financial condition,
results of operations and reputation. See the Supervision and
Regulation section of Item 1, Business, above,
and Note 20, Bank Regulatory Capital, in the notes
to consolidated financial statements included in Item 8,
Financial Statements and Supplementary Data, which are
located elsewhere in this report.
The
A Participation Interest may not pay down to the
extent necessary to avoid losses.
As the holder of the A Participation Interest, we
are entitled to receive 70% of principal payments received with
respect to the assets underlying the A Participation
Interest, which include both loans and real estate owned.
Certain of the loans underlying the A Participation
Interest are in default from time to time. The loan portfolio
underlying the A Participation Interest includes
commercial real estate construction loans which may be more
susceptible to default than other commercial loans. Given
current economic conditions affecting the commercial and
residential real estate markets, we expect the level of
defaults, and the level of losses associated with such defaults,
to increase. To the extent losses on the underlying assets
exceed expectations, the amount of principal available for
distribution to us as the holder of the A
Participation Interest could be reduced to a level which would
cause us to experience credit losses. If losses reach levels in
excess of the credit-enhancement features of the A
Participation Interest, we could experience losses which would
adversely impact our financial results. Although as the holder
of the A Participation Interest we have no
obligation to make any further advances with respect to the
assets underlying the A Participation Interest, the
failure of iStar Financial, Inc. and its subsidiaries
(iStar) as the lender with respect to the underlying
assets to meet its funding obligations could also contribute to
losses on the assets underlying the A Participation
Interest.
We also could experience losses in the event of the bankruptcy
of iStar. iStar is the guarantor of the payment obligations to
us as the holder of the A Participation Interest and
such guaranty may be impaired if iStar files for bankruptcy. In
the event of its bankruptcy, it is possible that iStar could
commingle collections on the A Participation
Interest with its other funds making it difficult to indentify
the funds as our property and for us to receive our money.
Moreover, the characterization of the A
Participation Interest as a true participation could be
challenged in the bankruptcy of iStar. If the challenge were
successful, the A Participation Interest would
likely be viewed as a secured loan to iStar, entitling iStar in
certain circumstances to use the collections on the
A Participation Interest and to restructure the
obligations owed to us as the holder of the A
Participation Interest as part of a bankruptcy reorganization
plan.
We
have revoked our REIT election which could have adverse tax and
legal implications.
We operated as a REIT through 2008, but revoked our REIT
election as of January 1, 2009. Commencing in 2009, we will
be subject to corporate tax on all of our net income and we will
no longer be required to pay any dividends to our shareholders.
Further, 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.
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If it
were determined that we violated REIT requirements or failed to
qualify as a REIT in any given year during which we operated as
a REIT, it could adversely impact our historical, current and
future 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 successfully 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 and 2007 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,
we could be required to pay corporate federal income tax and
certain state and local income taxes on our net income for the
relevant years or we could be required to pay taxes that would
be due if we were to avail ourselves of certain savings
provisions to preserve our REIT status for the relevant years,
either of which could have adverse affects on our historical,
current and future financial results and the value of our common
stock.
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 real estate investment, 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
convertible debentures that were offered to the public in
registered offerings. This guarantee 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, generally they could rely either on an
exemption from registration under the Investment Company Act for
banks or entities that do not offer securities to the public and
do not have more than 100 security holders or on their operation
as a REIT owning real property. Because it is possible such
reliance could be deemed unavailable to Finance, we also conduct
Finances business in a manner that we believe would permit
it 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 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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would have to significantly reduce the amount of leverage in our
business;
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would 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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Any of these results likely would have a material adverse effect
on our business, operations, financial results and the price of
our common stock.
Changes
in the values of our assets and subsidiaries and the income
produced by them have made, and may make, it more difficult for
us to maintain our exemptions from the Investment Company
Act.
If the market value of or net income from our non-qualifying
assets at the Parent Company increase or the market value of or
net income from CapitalSource Bank or our qualifying assets at
the Parent Company decrease, we may need to increase our real
estate investments and income
and/or
liquidate our non-qualifying assets to maintain our exemptions
from the Investment Company Act. If the declines or increases
occur quickly, this may be especially difficult to accomplish.
This difficulty may be exacerbated by the illiquid nature of
many of our assets. We may have to make investment decisions
that we otherwise would not make absent the Investment Company
Act consideration, which would likely 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 systems and network infrastructure 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 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 computer
break-ins and other disruptions would jeopardize the security of
information stored in and transmitted through our computer
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
have an adverse effect on our business, financial condition and
results of operations, including our stock price, and could
potentially subject us to litigation.
39
Risks
Related to Our Lending Activities
We may
not recover all amounts that are contractually owed to us by our
borrowers.
We charged off $292.6 million in loans for the year ended
December 31, 2008, and, in light of current economic and
market conditions, we expect to experience additional
charge-offs and delinquencies in the future. If we experience
material losses on our portfolio, such losses would have a
material adverse effect on our ability to fund our business and
on our revenues, net income and assets, to the extent the losses
exceed our allowance for loan losses.
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. Any of these events may be an indication
that our risk of credit loss with respect to a particular loan
has materially increased.
We
make loans to other lenders and commercial real estate
developers which have been disproportionately negatively
impacted by the economic recession. These clients face a variety
of risks relating to their underlying loans and development,
construction and renovation projects, any of which may
negatively impact their results of operations and impair their
ability to pay principal and interest on our
loans.
We make loans to other lenders to finance their lending
operations and to other clients for development, construction
and renovation projects. The ability of these clients to make
required payments to us on these loans is subject to the risks
associated with their loans and these projects. An unsuccessful
loan by, or development, construction or renovation project of,
any such client could limit that clients ability to repay
its obligations to us.
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 continued or worsening
economic difficulties or changes in the regulatory
environment.
Defaults by our clients may be correlated with economic
conditions affecting particular industries or geographic
regions. As a result, if any particular industry or geographic
region were to experience continuing or worsening 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 result in material
harm to our revenues, net income and assets. For example, as of
December 31, 2008, loans representing 20.1% of the
aggregate outstanding balance of our commercial loan portfolio
were secured by commercial real estate other than healthcare
facilities and three or $355.8 million of our 10 largest
loans fall into this category. The commercial real estate sector
is currently experiencing severe economic difficulties, and we
expect this sector to deteriorate further in which case we are
likely to suffer additional losses on these types of loans with
increases in
loan-to-value,
delinquencies and foreclosures. In addition, as of
December 31, 2008, loans representing 21.5% of the
aggregate outstanding balance of our commercial loan portfolio
were to clients in the healthcare industry. Reimbursements under
the Medicare and Medicaid programs comprise the bulk of the
revenues of many of these clients. Our clients dependence
on reimbursement revenues could cause us to suffer losses in
several instances.
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If clients fail to comply with operational covenants and other
regulations imposed by these programs, they may lose their
eligibility to continue to receive reimbursements under the
program or incur monetary penalties, either of which could
result in the clients inability to make scheduled payments
to us.
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If reimbursement rates do not keep pace with increasing costs of
services to eligible recipients, or funding levels decrease as a
result of increasing pressures from Medicare and Medicaid to
control healthcare costs, our clients may not be able to
generate adequate revenues to satisfy their obligations to us.
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If a healthcare client were to default on its loan, we would be
unable to invoke our rights to the pledged receivables directly
as the law prohibits payment of amounts owed to healthcare
providers under the Medicare and Medicaid programs to be
directed to any entity other than the actual providers.
Consequently, we would need a court order to force collection
directly against these governmental payors. There is no
assurance that we would be successful in obtaining this type of
court order.
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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
more 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 who are able to access traditional credit sources.
We may
not have all of the material information relating to a potential
client at the time that we make a credit decision with respect
to that potential client or at the time we advance funds to the
client. As a result, we may suffer losses on loans or make
advances that we would not have made if we had all of the
material information.
There is generally no publicly available information about the
privately owned companies to which we lend. Therefore, we must
rely on our clients and the due diligence efforts of our
employees to obtain the information that we consider when making
our credit decisions. To some extent, our employees depend and
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.
Increases
in interest rates could negatively affect our clients
ability to repay their loans.
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.
A
clients fraud could cause us to suffer
losses.
The failure of a client to accurately report its financial
position, compliance with loan covenants or eligibility for
initial or additional borrowings could result in the loss of
some or all of the principal of a particular loan or loans
including, in the case of revolving loans, amounts we may not
have advanced had we possessed complete and accurate information.
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, whether by termination, modification
or failure to renew, could impair the clients ability to
continue to operate its business in the manner in which it was
operated when we made our loan to it, 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 Regulation and Supervision section of
Item 1, Business, above for additional discussion of
specific regulatory and governmental oversight applicable to
many of our healthcare clients.
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Our
loans to foreign clients may involve significant risks in
addition to the risks inherent in loans to U.S.
clients.
Loans to foreign clients may expose us to risks not typically
associated with loans to U.S. clients. These risks include
changes in exchange control regulations, political and social
instability, expropriation, imposition of foreign taxes, less
liquid markets and less available information than is generally
the case in the United States, higher transaction costs, less
developed bankruptcy laws, difficulty in enforcing contractual
obligations, lack of uniform accounting and auditing standards
and greater price volatility.
To the extent that any of our loans are denominated in foreign
currency, these loans will be subject to the risk that the value
of a particular currency will change in relation to one or more
other currencies. Among the factors that may affect currency
values are trade balances, the level of short-term interest
rates, differences in relative values of similar assets in
different currencies, long-term opportunities for investment and
capital appreciation, and political developments. We may employ
hedging techniques to minimize these risks, but we can offer no
assurance that these strategies will be effective.
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 use the term client to mean the legal entity that
is the borrower party to a loan agreement with us or the tenant
of one of our healthcare owned properties. We have several
clients that are related to each other through common ownership
or management. Because we underwrite each transaction
separately, we report each transaction with one of these clients
as a separate transaction and each client as a separate client.
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 healthcare
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.
We may
be unable to recognize or act upon an operational or financial
problem with a client in a timely fashion so as to prevent a
loss of our loan to that client.
Our clients may experience operational or financial problems
that, if not timely addressed by us, 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 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. As a result, we could suffer loan losses which could
have a material adverse effect on our revenues, net income and
results of operations.
We may
make errors in evaluating information reported by our clients
and, as a result, we may suffer losses on loans or advances that
we would not have made if we had properly evaluated the
information.
We underwrite our loans based on detailed financial information
and projections provided to us by our clients. Even if clients
provide us with full and accurate disclosure of all material
information concerning their businesses, our investment
officers, underwriting officers and credit committee members may
misinterpret or incorrectly analyze this information. Mistakes
by our staff and credit committees may cause us to make loans
that we otherwise would not have made, to fund advances that we
otherwise would not have funded or result in losses on one or
more of our existing loans.
Our
balloon loans and bullet loans may involve a greater degree of
risk than other types of loans.
As of December 31, 2008, approximately 93% 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
42
payments of principal before the maturity date of the loan. All
of our revolving loans and some of our term loans are bullet
loans.
Balloon loans and bullet loans involve a greater degree of risk
than other types of loans because they require the borrower to,
in many cases, 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
either 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 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 a clients collateral and are junior to any
lienholder both as to collateral (if any) and payment.
Collectively, Term B, second lien and mezzanine loans comprised
12% of the aggregate outstanding balance of our commercial loan
portfolio as of December 31, 2008. 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 a Term B, second lien
or mezzanine loan if the client is not in default under its
senior loan. In many instances, we are also prohibited from
foreclosing on a Term B, second lien or mezzanine loan 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 a Term B,
second lien or mezzanine loan 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.
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.
Our
cash flow 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.
Cash flow 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. These loans tend to be among the largest and to pose the
highest risk of loss upon default in our portfolio. As of
December 31, 2008, approximately 56% of the commercial
loans in our portfolio were cash flow loans under which we had
advanced 37% of the aggregate outstanding commercial loan
balance of our portfolio. While in the case of our senior cash
flow loans we generally take a lien on substantially all of the
clients assets, the value of those assets is typically
substantially less than the amount of money we advance to a
client under a cash flow loan. When a cash flow 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. We could also choose to 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
43
generate enough proceeds to repay the loan. Additionally, in an
economic recession such as the current one, many businesses
suffer decreases in revenues and net income, and we expect that
many of our cash flow clients will suffer these decreases 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 cash flow
loan, our ability to take remedial action is constrained by our
agreement with the senior lender.
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 the loan nor the agent of the lending group that
controls the collateral for purposes of administering the loan
on loans comprising approximately 20% of the aggregate
outstanding balance of our commercial loan portfolio as of
December 31, 2008. When we are not the agent for a loan, we
may not receive the same financial or operational information as
we receive for loans for which we are the agent and, in many
instances, the information on which we must rely is provided to
us by the agent rather than directly by the client. 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 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.
We are often the agent representing a syndicate of multiple
lenders that has made a loan. In that capacity, we may act on
behalf of our co-lenders in administering the loan, receiving
all payments under the loan
and/or
controlling the collateral for purposes of administering the
loan. As of December 31, 2008, 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
$2.7 billion. When we are the agent for a 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
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.
We may
purchase distressed loans at amounts that may exceed what we are
able to recover on these loans.
We may purchase loans of companies that are experiencing
significant financial or business difficulties, including
companies involved in bankruptcy or other reorganization and
liquidation proceedings. Although these investments may result
in significant returns to us, they involve a substantial degree
of risk. Any one or all of the loans which we purchase may be
unsuccessful or not show any return for a considerable period of
time. The level of analytical sophistication, both financial and
legal, necessary for making a profit on the purchase of loans to
companies experiencing significant business and financial
difficulties is particularly high. We may not correctly evaluate
the value of the assets collateralizing the loans or the
prospects for a successful reorganization or similar action. In
any reorganization or liquidation proceeding relating to a
distressed company, we may lose the entire amount of our loan,
may be required to accept cash or securities with a value less
than our purchase price
and/or may
be required to accept payment over an extended period of time.
44
Our
loans could be subject to equitable subordination by a court
which would increase our risk of loss with respect to such
loans.
Courts may apply the doctrine of equitable subordination to
subordinate the claim or lien of a lender against a borrower to
claims or liens of other creditors of the borrower, when the
lender or its affiliates is found to have engaged in unfair,
inequitable or fraudulent conduct. The courts have also applied
the doctrine of equitable subordination when a lender or its
affiliates is found to have exerted inappropriate control over a
client, including control resulting from the ownership of equity
interests in a client. We have made direct equity investments or
received warrants in connection with loans representing
approximately 21.3% of the aggregate outstanding balance of our
commercial loan portfolio as of December 31, 2008. Payments
on one or more of our loans, particularly a loan to a client in
which we also hold an equity interest, may be subject to claims
of equitable subordination. If we were deemed to have the
ability to control or otherwise exercise influence over the
business and affairs of one or more of our clients resulting in
economic hardship to other creditors of our client, this control
or influence may constitute grounds for equitable subordination
and a court may treat one or more of our loans as if it were
unsecured or common equity in the client. In that case, if the
client were to liquidate, we would be entitled to repayment of
our loan on a pro-rata basis with other unsecured debt or, if
the effect of subordination was to place us at the level of
common equity, then on an equal basis with other holders of the
clients common equity only after all of the clients
obligations relating to its debt and preferred securities had
been satisfied.
We may
incur lender liability as a result of our lending
activities.
A number of judicial decisions have upheld the right of
borrowers to sue lending institutions on the basis of various
evolving legal theories, collectively termed lender
liability. Generally, lender liability is founded on the
premise that a lender has either violated a duty, whether
implied or contractual, of good faith and fair dealing owed to
the borrower or has assumed a degree of control over the
borrower resulting in the creation of a fiduciary duty owed to
the borrower or its other creditors or shareholders. We may be
subject to allegations of lender liability. We cannot assure you
that these claims will not arise or that we will not be subject
to significant liability if a claim of this type does arise.
We
have engaged in the past, and may engage in the future, in
lending transactions with affiliates of our directors. Because
of the conflicts of interest inherent in these transactions,
their terms may not be in our shareholders best
interests.
As of December 31, 2008, we had 9 loans representing
$111.5 million in committed funds to companies affiliated
with our directors. We may make additional loans to affiliates
of our directors in the future. Although we generally require
these transactions to be approved by the disinterested members
of our board (or a committee thereof), such policy may not be
successful in eliminating the influence of conflicts of
interest. These transactions may divert our resources and
benefit our directors and their affiliates to the detriment of
our shareholders.
If we
do not obtain or maintain the necessary state licenses and
approvals, we will not be allowed to acquire, fund or originate
residential mortgage loans and other loans in some states, which
would adversely affect our operations.
We engage in consumer mortgage 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 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 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.
45
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 financial
services companies, including:
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specialty and commercial finance companies;
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commercial banks and thrifts;
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REITS and other real estate investors;
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private investment funds;
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investment banks;
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insurance companies; and
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asset management companies.
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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 if finance companies 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 new 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.
The
mortgage loans underlying our residential mortgage investments
are subject to delinquency, foreclosure and loss, which could
result in losses to us.
We invest in residential mortgage related receivables that are
secured by pools of residential mortgage loans. Accordingly,
these investments are subject to all of the risks of the
underlying mortgage loans. Residential mortgage loans are
secured by single-family residential property. They are subject
to risks of delinquency, foreclosure and loss, which increased
significantly in 2008 as the economy contracted, real estate
values declined and credit markets froze. The ability of a
borrower to repay a loan secured by a residential property
depends on the income or assets of the borrower and many factors
may impair borrowers abilities to repay their loans,
including the current economic recession. Foreclosure of a
mortgage loan can be expensive and lengthy. Our investments in
mortgage related receivables would be adversely affected by
defaults under the loans underlying such securities. To the
extent losses are realized on the loans underlying the mortgage
related receivables in which we invest, we may not recover a
portion or all of the amount invested in such mortgage related
receivables.
Debtor-in-possession
loans may have a higher risk of default.
Debtor-in-possession
loans to clients that have filed for bankruptcy under
Chapter 11 of the United States Bankruptcy Code are used by
these clients to fund on-going operations as part of the
reorganization process. While our security position for these
loans is generally better than that of the other asset-based
loans we make, there may be a higher risk of default on these
loans due to the uncertain business prospects of these clients
and the inherent risks with the bankruptcy process. Furthermore,
if our calculations as to the outcome or timing of a
reorganization are inaccurate, the client may not be able to
make payments on the loan on time or at all.
We may
not retain control over our joint venture investments, which may
increase the risk of loss with respect to such
investments.
We are party to joint ventures and may enter into additional
joint ventures. We may not have control of the operations of the
joint ventures in which we invest. Therefore, these investments
may, under certain circumstances, involve risks such as the
possibility that our partner in an investment might become
bankrupt or have economic or business interests or goals that
are inconsistent with ours, or be in a position to take action
contrary to our
46
instructions or requests or our policies or objectives. As a
result, these investments may be subject to more risk than
investments for which we have full operational or management
responsibility.
Risks
Related to our Direct Real Estate Investments
We are
exposed to liabilities, including environmental liabilities,
with respect to properties to which we take title.
Owning real estate can subject us to liabilities for injury to
persons on the property or property damage. To the extent that
any such liabilities are not adequately covered by insurance,
our business, financial condition, liquidity and results of
operations could be materially and adversely affected.
We could be subject to environmental liabilities with respect to
properties we own. We may be liable to a governmental entity or
to third parties for property damage, personal injury,
investigation and
clean-up
costs incurred by these parties in connection with environmental
contamination or may be required to investigate or clean up
hazardous or toxic substances, or chemical releases, at a
property. The costs associated with investigation or remediation
activities could be substantial. If we ever become subject to
significant environmental liabilities, our business, financial
condition, liquidity and results of operations could be
materially and adversely affected.
We
have experienced and may continue to experience losses if the
creditworthiness of our tenants leasing our healthcare
properties deteriorates and they are unable to meet their
obligations under our leases.
We own healthcare properties leased to tenants from whom we
receive rents during the terms of our leases. A tenants
ability to pay rent is determined by the creditworthiness of the
tenant. If a tenants credit deteriorates, the tenant could
default on its obligations under our lease and the tenant may
also become bankrupt. The bankruptcy or insolvency or other
failure to pay of our tenants is likely to adversely affect the
income produced by many of our direct real estate investments.
The
operators of our healthcare properties are faced with increased
litigation, rising insurance costs and enhanced government
scrutiny that may affect their ability to make payments to
us.
Advocacy groups that monitor the quality of care at healthcare
facilities have sued healthcare operators and called upon state
and federal legislatives to enhance their oversight of trends in
healthcare facility ownership and quality of care. Patients have
also sued healthcare facility operators and have, in certain
cases, succeeded in winning very large damage awards for alleged
abuses. The effect of this litigation and potential litigation
in the future has been to materially increase the costs incurred
by our operators for monitoring and reporting quality of care
compliance. In addition, the cost of medical malpractice and
liability insurance has increased and may continue to increase
so long as the present litigation environment affecting the
operations of healthcare facilities continues. Increased costs
could limit our operators ability to make payments to us,
potentially decreasing our revenue and increasing our collection
and litigation costs. To the extent we are required to remove or
replace the operators of our healthcare properties, our revenue
from those properties could be reduced or eliminated for an
extended period of time.
Since
real estate investments are illiquid and the real estate markets
are experiencing significant disruption, we may not be able to
sell properties when we desire.
Real estate investments generally cannot be sold quickly and
sales have become extremely difficult in the current real estate
market disruption and economic recession. We may not be able to
vary our portfolio promptly in response to continued changes in
the real estate market. This inability to respond to changes in
the performance of our investments could adversely affect our
ability to service our debt. The real estate market is affected
by many factors that are beyond our control, including:
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changes in interest rates and in the availability, costs and
terms of financing;
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adverse changes in national and local economic and market
conditions;
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the ongoing need for capital improvements, particularly in older
structures;
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changes in governmental laws and regulations, fiscal policies
and zoning and other ordinances and costs of compliance with
laws and regulations;
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47
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changes in operating expenses; and
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civil unrest, acts of war and natural disasters, including
earthquakes and floods, which may result in uninsured and
underinsured losses.
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We cannot predict how long it may take us to find a willing
purchaser and to close the sale of a property. We also cannot
predict whether we will be able to sell any property for the
price or on the terms set by us, or whether any price or other
terms offered by a prospective purchaser would be acceptable to
us. State laws mandate certain procedures for property
foreclosures, and in certain states, we would face a time
consuming foreclosure process with respect to mortgage loans
that default, during which time the property could be subject to
waste. These factors and any others that would impede our
ability to respond to adverse changes in the performance of our
properties could have a material adverse effect on our operating
results and financial condition.
Risks
Related to our Common Stock
We may
issue additional shares of common stock at prices that are
dilutive to our existing shareholders.
Given our desire to maintain and improve our liquidity position
and our declining stock price, we may issue equity or equity
linked securities at prices that are dilutive to our
shareholders, which may result in a significant decrease in the
market price of our common stock. These issuances could be for
cash or in exchange for outstanding debt securities in cases
where we either do not have sufficient cash to pay off those
debt securities or believe it would be more prudent to conserve
our cash.
We may
or 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.
Consequently, we can not assure you that we will pay any
dividend on our common stock or that dividend levels will not
fluctuate or be more or less than expected. If we change our
dividend policy our stock price could be adversely affected.
Acquisitions
may adversely impact our business.
As part of our business strategy, we have made acquisitions in
the past and we may continue to do so in the future. Future
acquisitions may result in potentially dilutive issuances of
equity securities and the incurrence of additional debt. In
addition, we may face additional risks from future acquisitions,
including:
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difficulties in integrating the operations, services, products
and personnel of the acquired company or asset portfolio;
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heightened risks of credit losses as a result of acquired assets
not having been originated by us in accordance with our rigorous
underwriting standards;
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the diversion of managements attention from other business
concerns;
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the potentially adverse effects that acquisitions may have in
terms of the composition and performance of our assets;
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the potential loss of key employees of the acquired
company; and
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inability to meet applicable regulatory requirements.
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If a
substantial number of shares available for sale are sold in a
short period of time, the market price of our common stock could
decline.
If our existing shareholders sell substantial amounts of our
common stock in the public market, the market price of our
common stock could decrease significantly. As of
February 17, 2009, we had 302,595,100 shares of
48
common stock outstanding and options then exercisable for
5,203,209 shares were held by our employees and directors.
Subject, in some cases, to Rule 144 compliance, all of
these shares are eligible for sale in the public market. The
perception in the public market that our existing shareholders
might sell shares of common stock could also depress our market
price. A decline in the price of shares of our common stock
might impede our ability to raise capital through the issuance
of additional shares of our common stock or other equity
securities.
As of January 1, 2009, 6,655,053 shares of our common
stock were beneficially owned by certain trusts that are
affiliates of Farallon Capital Management and its affiliates
(the Farallon Trusts), the principal business of
each of which is to liquidate its assets over time. Dispositions
of some or all of the shares of our common stock beneficially
owned by the Farallon Trusts or other Farallon entities could
adversely impact the price of our common stock. The perception
in the public market that Farallon entities might sell shares of
common stock also could depress our market price.
Similarly, if we were to issue a substantial amount of common
stock in exchange for outstanding indebtedness, as we did in
October 2008 and February 2009, and the recipients were to sell
such common stock in the public market, the market price of our
common stock could decrease significantly.
Some
provisions of Delaware law and our certificate of incorporation
and bylaws may deter third parties from acquiring
us.
Our certificate of incorporation and bylaws provide for, among
other things:
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a classified board of directors;
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restrictions on the ability of our shareholders to fill a
vacancy on the board of directors;
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the authorization of undesignated preferred stock, the terms of
which may be established and shares of which may be issued
without shareholder approval; and
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advance notice requirements for shareholder proposals.
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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. Our board of directors has provided a
waiver to Farallon Capital Management and its affiliates to
acquire common stock in excess of 15% for purposes of
Section 203 of the Delaware General Corporation Law.
These 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.
Insiders
continue to have substantial control over us and could limit
your ability to influence the outcome of key transactions,
including a change of control.
Our directors, executive officers and entities affiliated with
them owned shares of common stock equaling approximately 26% of
the outstanding shares of our common stock as of
February 17, 2009. As a result, these shareholders, if
acting together, would be able to influence or control matters
requiring approval by our shareholders, including the election
of directors and the approval of mergers or other extraordinary
transactions. They may also have interests that differ from
yours and may vote in a way with which you disagree and which
may be adverse to your interests. The concentration of ownership
may have the effect of delaying, preventing or deterring a
change of control of our company, could deprive our shareholders
of an opportunity to receive a premium for their common stock as
part of a sale of our company and might ultimately affect the
market price of our common stock.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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None.
49
Our headquarters are located in Chevy Chase, Maryland, a suburb
of Washington, D.C., where we lease office space under
long-term operating leases. This office space houses the bulk of
our technology and administrative functions and serves as the
primary base for our operations. We also maintain offices in
California, Connecticut, Florida, Georgia, Illinois,
Massachusetts, Missouri, New York, North Carolina, Pennsylvania,
Tennessee, Texas, Utah and in the United Kingdom. We believe our
leased facilities are adequate for us to conduct our business.
Our Healthcare Net Lease segment owns real estate for long-term
investment purposes. These real estate investments primarily
consist of long-term care facilities generally leased through
long-term,
triple-net
operating leases. We had $1.0 billion in direct real estate
investments as of December 31, 2008, which consisted
primarily of land and buildings. As of December 31, 2008,
all of our direct real estate investments were pledged either
directly or indirectly as collateral for certain of our
borrowings. For additional information about our borrowings, see
Note 13, Borrowings, in our accompanying audited
consolidated financial statements for the year ended
December 31, 2008.
50
Our direct real estate investment properties as of and for the
year ended December 31, 2008, were as follows:
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Number of
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Total
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Facility Location
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Facilities
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Capacity(1)
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Investment(2)
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Revenues(3)
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($ in thousands)
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Assisted Living Facilities:
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Florida
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5
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222
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$
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8,401
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$
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918
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Indiana
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1
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39
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2,038
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91
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Wisconsin
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1
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20
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738
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97
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|
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7
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281
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11,177
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1,106
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Long-Term Acute Care Facilities:
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Kansas
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1
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26
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1,421
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169
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Nevada
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1
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|
|
|
61
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|
|
2,670
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|
|
|
325
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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2
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|
|
|
87
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|
|
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4,091
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|
|
|
494
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Skilled Nursing Facilities:
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|
|
|
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Alabama
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1
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174
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8,185
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990
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Alaska
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1
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|
|
|
90
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|
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10,336
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|
|
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1,102
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Arizona
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2
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|
|
|
192
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|
|
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9,600
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971
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Arkansas
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2
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|
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185
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1,686
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|
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381
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California
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1
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99
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4,749
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398
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Colorado
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3
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|
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283
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8,923
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888
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Florida
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57
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7,080
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321,237
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38,082
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Indiana
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13
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1,353
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|
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52,440
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5,295
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Iowa
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1
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|
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201
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11,157
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1,158
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Kansas
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2
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|
|
82
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|
|
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2,753
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371
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Kentucky
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5
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344
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22,549
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|
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2,397
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Maryland
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3
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413
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26,279
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2,581
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Massachusetts
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2
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|
|
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231
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|
|
|
15,204
|
|
|
|
1,375
|
|
Mississippi
|
|
|
6
|
|
|
|
634
|
|
|
|
43,037
|
|
|
|
4,620
|
|
Nevada
|
|
|
3
|
|
|
|
407
|
|
|
|
18,706
|
|
|
|
2,317
|
|
New Mexico
|
|
|
1
|
|
|
|
102
|
|
|
|
3,157
|
|
|
|
268
|
|
North Carolina
|
|
|
6
|
|
|
|
682
|
|
|
|
40,377
|
|
|
|
2,966
|
|
Ohio
|
|
|
3
|
|
|
|
349
|
|
|
|
20,232
|
|
|
|
1,849
|
|
Oklahoma
|
|
|
5
|
|
|
|
657
|
|
|
|
18,766
|
|
|
|
1,344
|
|
Pennsylvania
|
|
|
4
|
|
|
|
585
|
|
|
|
23,175
|
|
|
|
2,774
|
|
Tennessee
|
|
|
10
|
|
|
|
1,589
|
|
|
|
93,867
|
|
|
|
10,442
|
|
Texas
|
|
|
46
|
|
|
|
5,517
|
|
|
|
198,910
|
|
|
|
21,323
|
|
Washington
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(305
|
)
|
Wisconsin
|
|
|
5
|
|
|
|
562
|
|
|
|
19,123
|
|
|
|
2,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182
|
|
|
|
21,811
|
|
|
|
974,448
|
|
|
|
106,148
|
|
Less multi-function facilities(4)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total owned properties
|
|
|
186
|
|
|
|
22,179
|
|
|
$
|
989,716
|
|
|
$
|
107,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Capacity of assisted living and long-term acute care facilities,
which are apartment-like facilities, is stated in units (studio,
one or two bedroom apartments). Capacity of skilled nursing
facilities is measured by licensed bed count. |
|
(2) |
|
Represents the acquisition costs of the assets less any related
accumulated depreciation as of December 31, 2008. |
|
(3) |
|
Represents the amount of operating lease income recognized in
our audited consolidated statement of income for the year ended
December 31, 2008. |
|
(4) |
|
Three of our properties in Florida and one property in Wisconsin
serve as both assisted living facilities and skilled nursing
facilities. In addition, we have one property in Kansas that
serves as both long-term acute care facility and a skilled
nursing facility. |
51
|
|
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.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matter was submitted to a vote of our security holders during
the fourth quarter of 2008.
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 2008 and 2007 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2008:
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
12.99
|
|
|
$
|
2.75
|
|
Third Quarter
|
|
$
|
14.75
|
|
|
$
|
9.11
|
|
Second Quarter
|
|
$
|
16.95
|
|
|
$
|
9.75
|
|
First Quarter
|
|
$
|
18.14
|
|
|
$
|
7.56
|
|
2007:
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
22.42
|
|
|
$
|
14.05
|
|
Third Quarter
|
|
$
|
25.10
|
|
|
$
|
14.76
|
|
Second Quarter
|
|
$
|
27.40
|
|
|
$
|
23.65
|
|
First Quarter
|
|
$
|
28.28
|
|
|
$
|
22.39
|
|
On February 27, 2009, the last reported sale price of our
common stock on the NYSE was $1.87 per share.
Holders
As of December 31, 2008, there were 1,828 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, but
does include each such broker or clearing agency as one
recordholder. American Stock Transfer &
Trust Company serves as transfer agent for our shares of
common stock.
Dividend
Policy
During 2008 and 2007, we declared dividends as follows:
|
|
|
|
|
|
|
|
|
|
|
Dividends Declared
|
|
|
|
and Paid per Share
|
|
|
|
2008
|
|
|
2007
|
|
|
Fourth Quarter(1)
|
|
$
|
0.05
|
|
|
$
|
0.60
|
|
Third Quarter
|
|
|
0.05
|
|
|
|
0.60
|
|
Second Quarter
|
|
|
0.60
|
|
|
|
0.60
|
|
First Quarter
|
|
|
0.60
|
|
|
|
0.58
|
|
|
|
|
|
|
|
|
|
|
Total dividends declared and paid
|
|
$
|
1.30
|
|
|
$
|
2.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Dividend declared for the fourth quarter of 2008 was paid in
January 2009. |
52
For shareholders who held our shares for the entire year, the
$1.25 per share dividend paid in 2008 was classified for tax
reporting purposes as follows: 33.59% ordinary dividends, of
which 27.16% was considered excess inclusion income;
31.92 % long-term capital gain, of which 12.82% was
considered unrecaptured Sec. 1250 gain; and 34.49 %
return on capital.
We declared a $0.05 quarterly dividend per share in the third
and fourth quarters of 2008. 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 considerations, borrowing
capacity and other factors, including debt covenant restrictions
prohibiting the payment of dividends after defaults.
Consequently, we cannot assure you that we will pay any dividend
on our common stock or that dividend levels will not fluctuate
or be more or less than expected. In addition, based on existing
and expected market conditions, we currently do not anticipate
paying dividends on our common stock at historical levels.
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, 2008, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Maximum Number
|
|
|
|
Total Number
|
|
|
Average
|
|
|
as Part of Publicly
|
|
|
of Shares that May
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Announced Plans
|
|
|
Yet be Purchased
|
|
|
|
Purchased(1)
|
|
|
per Share
|
|
|
or Programs
|
|
|
Under the Plans
|
|
|
October 1 October 31, 2008
|
|
|
7,127
|
|
|
$
|
7.04
|
|
|
|
|
|
|
|
|
|
November 1 November 30, 2008
|
|
|
16,248
|
|
|
|
3.45
|
|
|
|
|
|
|
|
|
|
December 1 December 31, 2008
|
|
|
207,431
|
|
|
|
4.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
230,806
|
|
|
|
4.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the number of shares acquired as payment by employees
of applicable statutory minimum withholding taxes owed upon
vesting of restricted stock granted under the CapitalSource Inc.
Third Amended and Restated Equity Incentive Plan. |
53
Performance
Graph
The following graph compares the performance of our common stock
during the period beginning on December 31, 2003 to
December 31, 2008, 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, 2003, 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
|
|
12/31/03
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
CapitalSource Inc.
|
|
$
|
100
|
|
|
$
|
118.4
|
|
|
$
|
114.1
|
|
|
$
|
150.6
|
|
|
$
|
108.2
|
|
|
$
|
32.3
|
|
S&P 500 Index
|
|
|
100
|
|
|
|
110.9
|
|
|
|
116.3
|
|
|
|
134.7
|
|
|
|
142.1
|
|
|
|
89.5
|
|
S&P 500 Financials Index
|
|
|
100
|
|
|
|
110.9
|
|
|
|
118.1
|
|
|
|
140.7
|
|
|
|
114.5
|
|
|
|
51.2
|
|
54
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
You should read the data set forth below in conjunction with our
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, 2008. We derived our selected consolidated
financial data as of and for the five years ended
December 31, 2008, from our audited consolidated financial
statements, which have been audited by Ernst & Young
LLP, independent registered public accounting firm.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
($ in thousands, except per share data)
|
|
|
Results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
1,108,561
|
|
|
$
|
1,277,903
|
|
|
$
|
1,016,533
|
|
|
$
|
514,652
|
|
|
$
|
313,827
|
|
Fee income
|
|
|
133,146
|
|
|
|
162,395
|
|
|
|
170,485
|
|
|
|
130,638
|
|
|
|
86,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
1,241,707
|
|
|
|
1,440,298
|
|
|
|
1,187,018
|
|
|
|
645,290
|
|
|
|
400,151
|
|
Operating lease income
|
|
|
107,748
|
|
|
|
97,013
|
|
|
|
30,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
1,349,455
|
|
|
|
1,537,311
|
|
|
|
1,217,760
|
|
|
|
645,290
|
|
|
|
400,151
|
|
Interest expense
|
|
|
712,110
|
|
|
|
847,241
|
|
|
|
606,725
|
|
|
|
185,935
|
|
|
|
79,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
637,345
|
|
|
|
690,070
|
|
|
|
611,035
|
|
|
|
459,355
|
|
|
|
321,098
|
|
Provision for loan losses
|
|
|
593,046
|
|
|
|
78,641
|
|
|
|
81,562
|
|
|
|
65,680
|
|
|
|
25,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income after provision for loan losses
|
|
|
44,299
|
|
|
|
611,429
|
|
|
|
529,473
|
|
|
|
393,675
|
|
|
|
295,388
|
|
Depreciation of direct real estate investments
|
|
|
35,889
|
|
|
|
32,004
|
|
|
|
11,468
|
|
|
|
|
|
|
|
|
|
Other operating expenses
|
|
|
255,306
|
|
|
|
235,987
|
|
|
|
204,584
|
|
|
|
143,836
|
|
|
|
107,748
|
|
Total other (expense) income
|
|
|
(174,083
|
)
|
|
|
(74,650
|
)
|
|
|
37,328
|
|
|
|
19,233
|
|
|
|
17,781
|
|
Noncontrolling interests expense
|
|
|
1,426
|
|
|
|
4,938
|
|
|
|
4,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before income taxes and cumulative effect of
accounting change
|
|
|
(422,405
|
)
|
|
|
263,850
|
|
|
|
346,038
|
|
|
|
269,072
|
|
|
|
205,421
|
|
Income tax (benefit) expense(1)
|
|
|
(199,781
|
)
|
|
|
87,563
|
|
|
|
67,132
|
|
|
|
104,400
|
|
|
|
80,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before cumulative effect of accounting change
|
|
|
(222,624
|
)
|
|
|
176,287
|
|
|
|
278,906
|
|
|
|
164,672
|
|
|
|
124,851
|
|
Cumulative effect of accounting change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(222,624
|
)
|
|
$
|
176,287
|
|
|
$
|
279,276
|
|
|
$
|
164,672
|
|
|
$
|
124,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.89
|
)
|
|
$
|
0.92
|
|
|
$
|
1.68
|
|
|
$
|
1.36
|
|
|
$
|
1.07
|
|
Diluted
|
|
$
|
(0.89
|
)
|
|
$
|
0.91
|
|
|
$
|
1.65
|
|
|
$
|
1.33
|
|
|
$
|
1.06
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
251,213,699
|
|
|
|
191,697,254
|
|
|
|
166,273,730
|
|
|
|
120,976,558
|
|
|
|
116,217,650
|
|
Diluted
|
|
|
251,213,699
|
|
|
|
193,282,656
|
|
|
|
169,220,007
|
|
|
|
123,433,645
|
|
|
|
117,600,676
|
|
Cash dividends declared per share
|
|
$
|
1.30
|
|
|
$
|
2.38
|
|
|
$
|
2.02
|
|
|
$
|
0.50
|
|
|
$
|
|
|
Dividend payout ratio
|
|
|
(1.47
|
)
|
|
|
2.59
|
|
|
|
1.20
|
|
|
|
0.37
|
|
|
|
|
|
|
|
|
(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 ended December 31, 2008, 2007
and 2006. We provided for income (benefit) expense on the
consolidated (loss) incurred or income earned based on effective
tax rates of 47.3%, 33.2%, 19.4%, 38.8% and 39.2% in 2008, 2007,
2006, 2005 and 2004, respectively. |
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
($ in thousands)
|
|
|
Balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities, available-for-sale
|
|
$
|
642,714
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Mortgage-related receivables, net
|
|
|
1,801,535
|
|
|
|
2,033,296
|
|
|
|
2,286,083
|
|
|
|
39,438
|
|
|
|
|
|
Mortgage-backed securities pledged, trading
|
|
|
1,489,291
|
|
|
|
4,030,180
|
|
|
|
3,476,424
|
|
|
|
322,027
|
|
|
|
|
|
Commercial real estate A Participation Interest, net
|
|
|
1,396,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net(1)
|
|
|
8,807,133
|
|
|
|
9,525,454
|
|
|
|
7,563,718
|
|
|
|
5,737,430
|
|
|
|
4,104,214
|
|
Direct real estate investments, net
|
|
|
989,716
|
|
|
|
1,017,604
|
|
|
|
722,303
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
18,414,901
|
|
|
|
18,040,349
|
|
|
|
15,210,574
|
|
|
|
6,987,068
|
|
|
|
4,736,829
|
|
Deposits
|
|
|
5,043,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
|
1,595,750
|
|
|
|
3,910,027
|
|
|
|
3,510,768
|
|
|
|
358,423
|
|
|
|
|
|
Credit facilities
|
|
|
1,445,062
|
|
|
|
2,207,063
|
|
|
|
2,251,658
|
|
|
|
2,450,452
|
|
|
|
964,843
|
|
Term debt
|
|
|
5,338,456
|
|
|
|
7,146,437
|
|
|
|
5,766,370
|
|
|
|
1,774,475
|
|
|
|
2,162,321
|
|
Other borrowings
|
|
|
1,560,224
|
|
|
|
1,704,108
|
|
|
|
1,331,890
|
|
|
|
792,232
|
|
|
|
578,990
|
|
Total borrowings
|
|
|
9,939,492
|
|
|
|
14,967,635
|
|
|
|
12,860,686
|
|
|
|
5,375,582
|
|
|
|
3,706,154
|
|
Total shareholders equity
|
|
|
2,839,121
|
|
|
|
2,582,271
|
|
|
|
2,093,040
|
|
|
|
1,199,938
|
|
|
|
946,391
|
|
Portfolio statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans closed to date
|
|
|
2,596
|
|
|
|
2,457
|
|
|
|
1,986
|
|
|
|
1,409
|
|
|
|
923
|
|
Number of loans paid off to date
|
|
|
(1,524
|
)
|
|
|
(1,243
|
)
|
|
|
(914
|
)
|
|
|
(486
|
)
|
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of loans
|
|
|
1,072
|
|
|
|
1,214
|
|
|
|
1,072
|
|
|
|
923
|
|
|
|
648
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loan commitments
|
|
$
|
13,296,755
|
|
|
$
|
14,602,398
|
|
|
$
|
11,929,568
|
|
|
$
|
9,174,567
|
|
|
$
|
6,379,012
|
|
Average outstanding loan size
|
|
$
|
8,857
|
|
|
$
|
8,128
|
|
|
$
|
7,323
|
|
|
$
|
6,487
|
|
|
$
|
6,596
|
|
Average balance of loans outstanding during year
|
|
$
|
9,604,619
|
|
|
$
|
8,959,621
|
|
|
$
|
6,932,389
|
|
|
$
|
5,008,933
|
|
|
$
|
3,265,390
|
|
Employees as of year end
|
|
|
716
|
|
|
|
562
|
|
|
|
548
|
|
|
|
520
|
|
|
|
398
|
|
|
|
|
(1) |
|
Total loans, net includes loans held for sale and
loans, net of deferred loan fees and discounts and allowance for
loan losses. |
56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Performance ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
|
|
|
(1.26
|
)%
|
|
|
1.05
|
%
|
|
|
2.22
|
%
|
|
|
3.04
|
%
|
|
|
3.59
|
%
|
Return on average equity
|
|
|
(7.59
|
)%
|
|
|
7.41
|
%
|
|
|
14.63
|
%
|
|
|
15.05
|
%
|
|
|
14.17
|
%
|
Yield on average interest earning assets
|
|
|
7.83
|
%
|
|
|
9.31
|
%
|
|
|
9.80
|
%
|
|
|
12.15
|
%
|
|
|
11.59
|
%
|
Cost of funds
|
|
|
5.00
|
%
|
|
|
6.01
|
%
|
|
|
5.79
|
%
|
|
|
4.43
|
%
|
|
|
3.08
|
%
|
Net finance margin
|
|
|
3.77
|
%
|
|
|
4.20
|
%
|
|
|
4.94
|
%
|
|
|
8.65
|
%
|
|
|
9.30
|
%
|
Operating expenses as a percentage of average total assets
|
|
|
1.65
|
%
|
|
|
1.59
|
%
|
|
|
1.72
|
%
|
|
|
2.65
|
%
|
|
|
3.09
|
%
|
Operating expenses (excluding direct real estate investment
depreciation) as a percentage of average total assets
|
|
|
1.45
|
%
|
|
|
1.40
|
%
|
|
|
1.62
|
%
|
|
|
2.65
|
%
|
|
|
3.09
|
%
|
Efficiency ratio (operating expenses/net interest and fee income
and other income)
|
|
|
62.86
|
%
|
|
|
43.55
|
%
|
|
|
33.32
|
%
|
|
|
30.05
|
%
|
|
|
31.80
|
%
|
Efficiency ratio (operating expenses excluding direct real
estate depreciation/net interest and fee income and other income)
|
|
|
55.11
|
%
|
|
|
38.35
|
%
|
|
|
31.55
|
%
|
|
|
30.05
|
%
|
|
|
31.80
|
%
|
Core lending spread
|
|
|
6.99
|
%
|
|
|
6.25
|
%
|
|
|
7.18
|
%
|
|
|
8.77
|
%
|
|
|
9.92
|
%
|
Credit quality ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
30-89 days
contractually delinquent as a percentage of commercial lending
assets (as of year end)
|
|
|
2.75
|
%
|
|
|
0.85
|
%
|
|
|
2.15
|
%
|
|
|
0.30
|
%
|
|
|
2.11
|
%
|
Loans 90 or more days contractually delinquent as a percentage
of commercial lending assets (as of year end)
|
|
|
1.30
|
%
|
|
|
0.59
|
%
|
|
|
0.79
|
%
|
|
|
0.70
|
%
|
|
|
0.12
|
%
|
Loans on non-accrual status as a percentage of commercial
lending assets (as of year end)
|
|
|
4.03
|
%
|
|
|
1.73
|
%
|
|
|
2.34
|
%
|
|
|
2.30
|
%
|
|
|
0.53
|
%
|
Impaired loans as a percentage of commercial lending assets (as
of year end)
|
|
|
6.35
|
%
|
|
|
3.23
|
%
|
|
|
3.58
|
%
|
|
|
3.33
|
%
|
|
|
0.77
|
%
|
Net charge offs (as a percentage of average commercial lending
assets)
|
|
|
2.89
|
%
|
|
|
0.64
|
%
|
|
|
0.69
|
%
|
|
|
0.27
|
%
|
|
|
0.26
|
%
|
Allowance for loan losses as a percentage of commercial lending
assets (as of year end)
|
|
|
3.89
|
%
|
|
|
1.41
|
%
|
|
|
1.54
|
%
|
|
|
1.46
|
%
|
|
|
0.82
|
%
|
Capital and leverage ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt and deposits to equity (as of year end)
|
|
|
5.28
|
x
|
|
|
5.80
|
x
|
|
|
6.14
|
x
|
|
|
4.48
|
x
|
|
|
3.93
|
x
|
Average equity to average assets
|
|
|
16.87
|
%
|
|
|
14.16
|
%
|
|
|
15.15
|
%
|
|
|
20.18
|
%
|
|
|
25.30
|
%
|
Equity to total assets (as of year end)
|
|
|
15.42
|
%
|
|
|
14.31
|
%
|
|
|
13.76
|
%
|
|
|
17.17
|
%
|
|
|
19.98
|
%
|
57
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Overview
and Highlights
We are a commercial lender that provides financial products to
middle market businesses, and, through our wholly owned
subsidiary, CapitalSource Bank, provides depository products and
services in southern and central California.
We currently operate as three reportable segments:
1) Commercial Banking, 2) Healthcare Net Lease, and
3) Residential Mortgage Investment. Our Commercial Banking
segment comprises our commercial lending and banking business
activities; our Healthcare Net Lease segment comprises our
direct real estate investment business activities; and our
Residential Mortgage Investment segment comprises our remaining
residential mortgage investment and other investment activities
in which we formerly engaged to optimize our qualification as
real estate investment trust (REIT). For financial
information about our segments, see Note 26, Segment
Data, in our accompanying audited consolidated financial
statements for the year ended December 31, 2008.
Through our Commercial Banking segment activities, we provide a
wide range of financial products to middle market businesses and
participate in broadly syndicated debt financings for larger
businesses. As of December 31, 2008, we had 1,072 loans
outstanding under which we had funded an aggregate of
$9.5 billion and held a $1.4 billion participation in
a pool of commercial real estate loans (the A
Participation Interest). Within this segment,
CapitalSource Bank also offers depository products and services
in southern and central California that are insured by the
Federal Deposit Insurance Corporation (FDIC) to the
maximum amounts permitted by regulation.
Through our Healthcare Net Lease segment activities, we invest
in income-producing healthcare facilities, principally long-term
care facilities in the United States. We provide lease financing
to skilled nursing facilities and, to a lesser extent, assisted
living facilities, and long term acute care facilities. As of
December 31, 2008, we had $1.0 billion in direct real
estate investments comprising 186 healthcare facilities leased
to 40 tenants through long-term,
triple-net
operating leases. We currently intend to evaluate all potential
transactions to monetize the value of this business including
debt financings, asset sales and corporate transactions.
Through our Residential Mortgage Investment segment activities,
we invested in certain residential mortgage assets and other
REIT qualifying investments to optimize our REIT structure
through 2008. As of December 31, 2008, our residential
mortgage investment portfolio totaled $3.3 billion, which
included investments in residential mortgage loans and
residential mortgage-backed securities (RMBS),
including related interest receivables. Over 99% of our
investments in RMBS were represented by mortgage-backed
securities that were issued and guaranteed by Fannie Mae or
Freddie Mac (hereinafter, Agency RMBS). In addition,
we hold mortgage-related receivables secured by prime
residential mortgage loans. During the first quarter of 2009, we
sold all of our Agency RMBS and we intend to merge the remaining
assets currently in this segment into our Commercial Banking
segment in 2009.
In our Commercial Banking, and Healthcare Net Lease segments, we
have three primary commercial lending businesses:
|
|
|
|
|
Healthcare and Specialty Finance, which generally
provides first mortgage loans, asset-based revolving lines of
credit, and cash flow loans to healthcare businesses and, to a
lesser extent, a broad range of other companies. We also make
investments in income-producing healthcare facilities,
particularly long-term care facilities;
|
|
|
|
Corporate Finance, which generally provides senior and
subordinate loans through direct origination and participation
in syndicated loan transactions; and
|
|
|
|
Structured Finance, which generally engages in commercial
and residential real estate finance and also provides
asset-based lending to finance companies.
|
Although we have made loans as large as $325.0 million, as
of December 31, 2008, our average commercial loan size was
$8.9 million and our average loan exposure by client was
$14.0 million. Our commercial loans generally have a
maturity of one to five years with a weighted average maturity
of 2.5 years as of December 31, 2008. Substantially
all of our commercial loans require monthly interest payments at
variable rates and, in many
58
cases, our commercial 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, 2008, our geographically
diverse client base consisted of 679 clients with headquarters
in 47 states, the District of Columbia, Puerto Rico and
select international locations, primarily in Canada and Europe.
Bank
Holding Company Application
Consistent with the business plan approved by our regulators, we
are pursuing our strategy of converting CapitalSource Bank to a
commercial bank and becoming a Bank Holding Company. To date we
have obtained approvals from the DFI and FDIC to convert
CapitalSource Bank from an industrial bank to a California
commercial bank. For the conversion to become effective, we must
be approved by the Federal Reserve as a Bank Holding Company
under the Bank Holding Company Act of 1956. We filed our Bank
Holding Company application with the Board of Governors of the
Federal Reserve in October 2008. That application is being
processed by the Federal Reserve Bank of Richmond and has not
been approved at this time. We are cooperating with the Federal
Reserve in providing access to such information as is needed to
make its decision on the pending application. We believe that
becoming a commercial bank will allow CapitalSource Bank to
offer a wider variety of deposit products and services to
customers; however, we cannot assure you that the Federal
Reserve will approve our application in which case CapitalSource
Bank would not convert to a commercial bank. Current guidance
from the U.S. Treasury Department provides that, since
CapitalSource Inc. did not obtain approval as a Bank Holding
Company prior to December 31, 2008, CapitalSource Inc. is
not eligible to obtain funding under the Capital Assistance
Program (CAP) or the Capital Purchase Program.
Although CapitalSource Bank has applied for CAP funding, there
is no assurance that CapitalSource Bank will be able to obtain
CAP funding or that it would accept the funding if offered.
Impact
of Economic Recession
The U.S. economy is currently in a recession. Consequently,
we expect that the credit performance of our portfolio will
continue to decline in light of the current difficult economic
conditions that are likely to adversely affect our clients
ability to fulfill their obligations to us.
In addition, the recession has generally had a
disproportionately adverse impact on financial institutions,
including a substantial reduction in liquidity, greater pricing
for risk and de-leveraging. In our Commercial Banking segment,
macroeconomic conditions have also adversely impacted our
business through reduced funding alternatives and a higher cost
of funds on our credit facilities, term debt and other
borrowings as measured by a spread to one-month LIBOR. We expect
to continue to experience higher costs and less advantageous
terms for financing the Parent Companys portfolio which
will continue to negatively impact our liquidity.
Financing the Parent Companys portfolio has recently
become more challenging as our lenders have sought to reduce
their exposure to us. To maintain our financings, we have agreed
to less favorable terms, including collateralizing our
previously unsecured credit facility and agreeing to repay it
more rapidly. As a result of these less favorable terms, as well
as other factors, our liquidity has been materially adversely
affected and may continue to worsen. You should carefully read
the Liquidity and Capital Resources portion of this
Management Discussion and Analysis of Financial Condition and
Results of Operations for more details on the factors
adversely affecting our current and expected liquidity and our
plans to address them.
CapitalSource Bank, however, has significantly diversified and
strengthened our funding and, with the addition of a significant
amount of deposits, reduced our cost of funds overall. We
believe current economic conditions present significant
near-term market opportunities for CapitalSource Bank to
originate assets with increased spreads and tighter structures
and to selectively purchase high quality assets or businesses at
attractive prices. With the liquidity and lower cost of funds at
CapitalSource Bank, we believe we have positioned ourselves to
take advantage of the attractive opportunities we perceive in
the current environment.
Consolidated
Results of Operations
We currently operate as three reportable segments:
1) Commercial Banking, 2) Healthcare Net Lease, and
3) Residential Mortgage Investment. Our Commercial Banking
segment comprises our commercial lending and
59
banking business activities; our Healthcare Net Lease segment
comprises our direct real estate investment business activities;
and our Residential Mortgage Investment segment comprises our
residential mortgage investment and other investment activities
in which we formerly engaged to optimize our qualification as a
REIT.
From January 1, 2006 to the third quarter of 2007, we
presented financial results through two reportable segments:
1) Commercial Lending & Investment and
2) Residential Mortgage Investment. Our Commercial
Lending & Investment segment comprised our commercial
lending and direct real estate investment business activities
and our Residential Mortgage Investment segment comprised all of
our activities related to our investments in residential
mortgage loans and RMBS. In the fourth quarter of 2007, we began
presenting financial results through three reportable segments:
1) Commercial Finance, 2) Healthcare Net Lease, and
3) Residential Mortgage Investment. Changes were made in
the way management organizes financial information to make
operating decisions, resulting in the activities previously
reported in the Commercial Lending & Investment
segment being disaggregated into the Commercial Finance segment
and the Healthcare Net Lease segment as described above.
Beginning in the third quarter of 2008, we changed the name of
our Commercial Finance segment to Commercial Banking to
incorporate depository products, services and investments of
CapitalSource Bank. We have reclassified all comparative prior
period segment information to reflect our three reportable
segments. For financial information about our segments, see
Note 26, Segment Data, in our accompanying audited
consolidated financial statements for the year ended
December 31, 2008.
The discussion that follows differentiates our results of
operations between our segments.
Explanation
of Reporting Metrics
Interest Income. In our Commercial Banking
segment, interest income represents interest earned on our
commercial loans, the A Participation Interest,
marketable securities, other investments and cash and cash
equivalents. Although the majority of these loans charge
interest at variable rates that generally adjust daily, we also
have a number of loans charging interest at fixed rates.
Interest on CapitalSource Bank investments is primarily derived
from agency discount notes and agency callable debt obligations.
In our Healthcare Net Lease segment, interest income represents
interest earned on cash and restricted cash. In our Residential
Mortgage Investment segment, interest income consists of coupon
interest and the amortization of purchase discounts and premiums
on our investments in RMBS and mortgage-related receivables,
which are amortized into income using the interest method.
Fee Income. In our Commercial Banking segment,
fee income represents net fee income earned from our commercial
loan operations. Fee income primarily includes the amortization
of loan origination fees, net of the direct costs of
origination, prepayment-related fees as well as other fees
charged to borrowers.
Operating Lease Income. In our Healthcare Net
Lease segment, operating lease income represents lease income
earned in connection with our direct real estate investments.
Our operating leases typically include fixed rental payments,
subject to escalation over the life of the lease. We generally
project a minimum escalation rate for the leases and recognize
operating lease income on a straight-line basis over the life of
the lease. We currently do not generate any operating lease
income in our Commercial Banking segment or our Residential
Mortgage Investment segment.
Interest Expense. Interest expense is the
amount paid on deposits and borrowings, including the
amortization of deferred financing fees and debt discounts. In
our Commercial Banking segment, interest expense includes
interest paid to depositors and the borrowing costs associated
with repurchase agreements, secured and unsecured credit
facilities, term debt, convertible debt and subordinated debt.
In our Healthcare Net Lease segment, our borrowings consist of
mortgage debt and allocated intercompany debt. In our
Residential Mortgage Investment segment, our borrowings consist
of repurchase agreements and term debt. The majority of our
borrowings charge interest at variable rates based primarily on
one-month LIBOR or Commercial Paper (CP) rates plus
a margin. Currently, our convertible debt, three series of our
subordinated debt, our term debt recorded in connection with our
investments in mortgage-related receivables and the intercompany
debt within our Healthcare Net Lease segment bear a fixed rate
of interest. Deferred financing fees, debt discounts and the
costs of issuing debt, such as commitment fees and legal fees,
are amortized over the estimated life of the borrowing. Loan
prepayments may
60
materially affect interest expense on our term debt since in the
period of prepayment the amortization of deferred financing fees
and debt acquisition costs is accelerated.
Provision for Loan Losses. We record a
provision for loan losses in both our Commercial Banking segment
and our Residential Mortgage Investment segment. The provision
for loan losses is the periodic cost of maintaining an
appropriate allowance for loan losses inherent in our commercial
lending portfolio and in our portfolio of residential
mortgage-related receivables. 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. We do not have any loan
receivables in our Healthcare Net Lease segment.
Other Income. In our Commercial Banking
segment, other (expense) income consists of gains (losses) on
the sale of loans, gains (losses) on the sale of debt and equity
investments, unrealized appreciation (depreciation) on certain
investments, gains (losses) on derivatives, due diligence
deposits forfeited, unrealized appreciation (depreciation) of
our equity interests in certain non-consolidated entities,
third-party servicing income, income from our management of
various loans held by third parties and other miscellaneous fees
and expenses not attributable to our commercial lending and
banking operations. In our Healthcare Net Lease segment, other
expense consists of gain (loss) on the sale of assets. In our
Residential Mortgage Investment segment, other expense consists
of realized and unrealized appreciation (depreciation) on
certain of our residential mortgage investments and gains
(losses) on derivatives that are used to hedge the residential
mortgage investment portfolio.
Operating Expenses. In our Commercial Banking
segment, operating expenses include compensation and benefits,
professional fees, travel, rent, insurance, depreciation and
amortization, marketing and other general and administrative
expenses. In our Healthcare Net Lease segment, operating
expenses include depreciation of direct real estate investments,
professional fees, an allocation of overhead expenses (including
compensation and benefits) and other direct expenses. In our
Residential Mortgage Investment segment, operating expenses
include an allocation of overhead expenses, compensation and
benefits, professional fees paid to our investment manager and
other direct expenses.
Income Taxes. We elected REIT status under the
Internal Revenue Code (the Code) when we filed our
tax return for the year ended December 31, 2006. We
operated as a REIT through 2008, but revoked our REIT election
effective January 1, 2009. While a REIT, we generally were
not subject to corporate-level income tax on the earnings
distributed to our shareholders that we derived from our REIT
qualifying activities, but were subject to corporate-level tax
on the earnings we derived from our taxable REIT subsidiaries
(TRSs). While a REIT, a significant portion of our
income from our Commercial Banking segment remained subject to
corporate-level income tax as many of the segments assets
were originated and held in our TRSs.
Operating
Results for the Years Ended December 31, 2008, 2007 and
2006
Our results of operations in 2008 were driven primarily by the
global recession, a challenging credit market environment and
the impact of operating as a REIT. As further described below,
the most significant factors influencing our consolidated
results of operations for the year ended December 31, 2008,
compared to 2007 were:
|
|
|
|
|
Commencement of CapitalSource Bank operations;
|
|
|
|
Increased provision for loan losses;
|
|
|
|
Gains and losses on the extinguishment of debt;
|
|
|
|
Increased balance of our commercial lending portfolio;
|
|
|
|
Mark to market losses on our Residential Mortgage Investment
Portfolio;
|
|
|
|
Gains and losses on derivatives and other investments in our
Commercial Banking segment;
|
|
|
|
Increased operating expenses;
|
|
|
|
Changes in lending and borrowing spreads; and
|
|
|
|
Reduced prepayment-related fee income and reduced gains on
equity sales.
|
61
Our consolidated operating results for the year ended
December 31, 2008, compared to the year ended
December 31, 2007, and for the year ended December 31,
2007, compared to the year ended December 31, 2006, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Interest income
|
|
$
|
1,108,561
|
|
|
$
|
1,277,903
|
|
|
$
|
(169,342
|
)
|
|
|
(13
|
)%
|
|
$
|
1,277,903
|
|
|
$
|
1,016,533
|
|
|
$
|
261,370
|
|
|
|
26
|
%
|
Fee income
|
|
|
133,146
|
|
|
|
162,395
|
|
|
|
(29,249
|
)
|
|
|
(18
|
)
|
|
|
162,395
|
|
|
|
170,485
|
|
|
|
(8,090
|
)
|
|
|
(5
|
)
|
Operating lease income
|
|
|
107,748
|
|
|
|
97,013
|
|
|
|
10,735
|
|
|
|
11
|
|
|
|
97,013
|
|
|
|
30,742
|
|
|
|
66,271
|
|
|
|
216
|
|
Interest expense
|
|
|
712,110
|
|
|
|
847,241
|
|
|
|
(135,131
|
)
|
|
|
(16
|
)
|
|
|
847,241
|
|
|
|
606,725
|
|
|
|
240,516
|
|
|
|
40
|
|
Provision for loan losses
|
|
|
593,046
|
|
|
|
78,641
|
|
|
|
514,405
|
|
|
|
654
|
|
|
|
78,641
|
|
|
|
81,562
|
|
|
|
(2,921
|
)
|
|
|
(4
|
)
|
Depreciation of direct real estate investments
|
|
|
35,889
|
|
|
|
32,004
|
|
|
|
3,885
|
|
|
|
12
|
|
|
|
32,004
|
|
|
|
11,468
|
|
|
|
20,536
|
|
|
|
179
|
|
Other operating expenses
|
|
|
255,306
|
|
|
|
235,987
|
|
|
|
19,319
|
|
|
|
8
|
|
|
|
235,987
|
|
|
|
204,584
|
|
|
|
31,403
|
|
|
|
15
|
|
Other (expense) income
|
|
|
(174,083
|
)
|
|
|
(74,650
|
)
|
|
|
(99,433
|
)
|
|
|
(133
|
)
|
|
|
(74,650
|
)
|
|
|
37,328
|
|
|
|
(111,978
|
)
|
|
|
(300
|
)
|
Noncontrolling interests expense
|
|
|
1,426
|
|
|
|
4,938
|
|
|
|
(3,512
|
)
|
|
|
(71
|
)
|
|
|
4,938
|
|
|
|
4,711
|
|
|
|
227
|
|
|
|
5
|
|
Income tax (benefit) expense
|
|
|
(199,781
|
)
|
|
|
87,563
|
|
|
|
(287,344
|
)
|
|
|
(328
|
)
|
|
|
87,563
|
|
|
|
67,132
|
|
|
|
20,431
|
|
|
|
30
|
|
Cumulative effect of accounting change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
370
|
|
|
|
(370
|
)
|
|
|
N/A
|
|
Net (loss) income
|
|
|
(222,624
|
)
|
|
|
176,287
|
|
|
|
(398,911
|
)
|
|
|
(226
|
)
|
|
|
176,287
|
|
|
|
279,276
|
|
|
|
(102,989
|
)
|
|
|
(37
|
)
|
Our consolidated yields on income earning assets and the costs
of interest bearing liabilities for the years ended
December 31, 2008 and 2007, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
|
($ in thousands)
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
$
|
1,108,561
|
|
|
|
6.99
|
%
|
|
|
|
|
|
$
|
1,277,903
|
|
|
|
8.26
|
%
|
Fee income
|
|
|
|
|
|
|
133,146
|
|
|
|
0.84
|
|
|
|
|
|
|
|
162,395
|
|
|
|
1.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets(1)
|
|
$
|
15,854,057
|
|
|
|
1,241,707
|
|
|
|
7.83
|
|
|
$
|
15,472,459
|
|
|
|
1,440,298
|
|
|
|
9.31
|
|
Total direct real estate investments
|
|
|
1,068,654
|
|
|
|
107,748
|
|
|
|
10.08
|
|
|
|
947,929
|
|
|
|
97,013
|
|
|
|
10.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income earning assets
|
|
|
16,922,711
|
|
|
|
1,349,455
|
|
|
|
7.97
|
|
|
|
16,420,388
|
|
|
|
1,537,311
|
|
|
|
9.36
|
|
Total interest bearing liabilities(2)
|
|
|
14,243,559
|
|
|
|
712,110
|
|
|
|
5.00
|
|
|
|
14,105,355
|
|
|
|
847,241
|
|
|
|
6.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
637,345
|
|
|
|
2.97
|
%
|
|
|
|
|
|
$
|
690,070
|
|
|
|
3.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
3.77
|
%
|
|
|
|
|
|
|
|
|
|
|
4.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest earning assets include cash and cash equivalents,
restricted cash, marketable securities, mortgage-related
receivables, RMBS, loans, the A Participation
Interest and investments in debt securities. |
|
(2) |
|
Interest bearing liabilities include deposits, repurchase
agreements, secured and unsecured credit facilities, term debt,
convertible debt and subordinated debt. |
Operating
Expenses
The increase in consolidated operating expenses in 2008 from
2007 was primarily due to a $23.2 million increase in
professional fees, including a write-off of previously
capitalized costs related to a terminated merger
62
transaction, fees related to the previously planned initial
public offering of CapitalSource Healthcare REIT, consulting
fees and legal and other professional fees related to the
formation and commencement of operations of CapitalSource Bank,
a $7.1 million increase in depreciation and amortization
expense primarily resulting from increases in depreciation on
our direct real estate investments and depreciation on
CapitalSource Banks fixed assets, a $3.5 million
increase in rent and marketing expense related to CapitalSource
Bank and a $5.9 million increase in other administrative
expenses. These increases were primarily offset by a
$14.4 million decrease in total employee compensation and a
$2.3 million decrease in travel and entertainment expenses.
The decrease in employee compensation was primarily due to a
$21.7 million decrease in incentive compensation partially
offset by a $4.1 million increase in salaries. For the
years ended December 31, 2008 and 2007, incentive
compensation totaled $60.0 million and $81.7 million,
respectively. Incentive compensation comprises annual bonuses,
as well as expense attributed to stock options, restricted stock
awards and restricted stock units, which generally have vesting
periods ranging from 18 months to five years.
The increase in consolidated operating expenses in 2007 from
2006 was primarily due to a $21.8 million increase in total
employee compensation and an increase of $21.2 million in
depreciation and amortization expense primarily resulting from
increases in our direct real estate investments over the
previous year. The higher employee compensation was attributable
to a $12.5 million increase in incentive compensation,
including an increase in restricted stock awards, and a
$6.1 million increase in employee salaries. For the years
ended December 31, 2007 and 2006, incentive compensation
totaled $81.7 million and $69.2 million, respectively.
Incentive compensation comprises annual bonuses, as well as
stock options and restricted stock awards, which generally have
vesting periods ranging from eighteen months to five years. The
remaining increase in operating expenses for the year ended
December 31, 2007 was primarily attributable to a
$2.6 million increase in administrative expenses and a
$2.1 million increase in rent expense.
Income
Taxes
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 and
2007, based on effective tax rates of 36.5% and 39.4%,
respectively, for the income earned by our TRSs. We did not
provide for any income taxes for the income earned by our
qualified REIT subsidiaries for the years ended
December 31, 2008 and 2007. We provided for income taxes on
the consolidated income earned based on a 47.3%, 33.2% and 19.4%
effective tax rates in 2008, 2007 and 2006, respectively. Our
overall effective tax for the year ended December 31, 2006
included the reversal of $4.7 million in net deferred tax
liabilities relating to REIT qualifying activities, into income,
in connection with our REIT election. We revoked our REIT
election effective January 1, 2009. As a result of our REIT
revocation, we have recorded a $97.7 million in deferred
tax benefit and a $97.7 million in net deferred tax asset
on our audited consolidated financial statements as of and for
the year ended December 31, 2008.
Comparison
of the Years Ended December 31, 2008 and 2007
We have reclassified all comparative prior period segment
information to reflect our three reportable segments. The
discussion that follows differentiates our results of operations
between our segments. All references to commercial loans below
include loans, loans held for sale and receivables under
reverse-repurchase agreements.
63
Commercial
Banking Segment
Our Commercial Banking segment operating results for the year
ended December 31, 2008, compared to the year ended
December 31, 2007, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
Interest income
|
|
$
|
881,224
|
|
|
$
|
928,190
|
|
|
$
|
(46,966
|
)
|
|
|
(5
|
)%
|
Fee income
|
|
|
132,799
|
|
|
|
162,395
|
|
|
|
(29,596
|
)
|
|
|
(18
|
)
|
Interest expense
|
|
|
488,307
|
|
|
|
481,605
|
|
|
|
6,702
|
|
|
|
1
|
|
Provision for loan losses
|
|
|
576,804
|
|
|
|
77,576
|
|
|
|
499,228
|
|
|
|
644
|
|
Operating expenses
|
|
|
233,617
|
|
|
|
220,550
|
|
|
|
13,067
|
|
|
|
6
|
|
Other (expense) income, net(1)
|
|
|
(66,116
|
)
|
|
|
1,920
|
|
|
|
(68,036
|
)
|
|
|
(3,544
|
)
|
Income tax (benefit) expense
|
|
|
(199,781
|
)
|
|
|
87,563
|
|
|
|
(287,344
|
)
|
|
|
(328
|
)
|
Net (loss) income
|
|
|
(151,040
|
)
|
|
|
225,211
|
|
|
|
(376,251
|
)
|
|
|
(167
|
)
|
|
|
|
(1) |
|
Includes noncontrolling interest expense. |
Interest
Income
The decrease in interest income was primarily due to an increase
in non-accrual loans and a decrease in yield on average interest
earning assets. During the year ended December 31, 2008,
yield on average interest earning assets decreased to 8.96%
compared to 11.70% for the year ended December 31, 2007.
This decrease was primarily the result of a decrease in the
interest component of yield to 7.78% for the year ended
December 31, 2008, from 9.96% for the year ended
December 31, 2007. The decrease in the interest component
of yield was due to a decrease in short-term interest rates and
lower yield on the A Participation Interest,
partially offset by an increase in our core lending spread.
During the year ended December 31, 2008, our core lending
spread to average one-month LIBOR was 6.99% compared to 6.25%
for the year ended December 31, 2007. Fluctuations in
yields are driven by a number of factors, including changes in
short-term interest rates (such as changes in the prime rate or
one-month LIBOR), the coupon on new loan originations, the
coupon on loans that pay down or pay off and modifications of
interest rates on existing loans.
Fee
Income
The decrease in fee income was primarily the result of a
decrease in prepayment-related fee income, which totaled
$21.6 million for the year ended December 31, 2008,
compared to $56.1 million for the year ended
December 31, 2007. Prepayment-related fee income
contributed 0.19% and 0.60% to yield for the years ended
December 31, 2008 and 2007, respectively. Yield from fee
income, including prepayment related fees, decreased to 1.18%
for the year ended December 31, 2008, from 1.74% for the
year ended December 31, 2007.
Interest
Expense
We fund our growth largely through debt and deposits. The
increase in interest expense was primarily due to the addition
of interest expense on deposits from our banking operations. The
increase was partially offset by a decrease in our cost of
funds. Our cost of funds decreased to 5.18% for the year ended
December 31, 2008, from 6.31% for the year ended
December 31, 2007. The decrease in our cost of funds was
the result of lower LIBOR rates on which interest on our term
securitizations and credit facilities are based and lower cost
of deposits. The increase in interest expense was also the
result of higher borrowing spreads and higher restructuring fees
on certain of our term securitizations and credit facilities,
and increases in the cost of our convertible debt following the
exchange offer completed in April 2007 and our issuance in July
2007 of our 7.25% Senior Subordinated Convertible Notes due
2037.
64
Net
Finance Margin
Net finance margin, defined as net investment income (which
includes interest and fee income less interest expense) divided
by average income earning assets, was 4.64% for the year ended
December 31, 2008, a decrease of 190 basis points from
6.54% the year ended December 31, 2007. The decrease in net
finance margin was primarily due to the decrease in yield on
total income earning assets, a decrease in short-term market
rates of interest such as LIBOR upon which the yield of many of
our loans are based, partially offset by a decrease in our costs
of funds as measured by a spread to short-term market rates of
interest such as LIBOR. Net finance spread, which represents the
difference between our gross yield on income earning assets and
the cost of our interest bearing liabilities, was 3.78% for the
year ended December 31, 2008, a decrease of 161 basis
points from 5.39% for the year ended December 31, 2007.
Gross yield is the sum of interest and fee income divided by our
average income earning assets. The decrease in net finance
spread is attributable to the changes in its components as
described above.
The yields of income earning assets and the costs of interest
bearing liabilities in our Commercial Banking segment for the
years ended December 31, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
|
($ in thousands)
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
$
|
881,224
|
|
|
|
7.78
|
%
|
|
|
|
|
|
$
|
928,190
|
|
|
|
9.96
|
%
|
Fee income
|
|
|
|
|
|
|
132,799
|
|
|
|
1.18
|
|
|
|
|
|
|
|
162,395
|
|
|
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets(1)
|
|
$
|
11,322,138
|
|
|
|
1,014,023
|
|
|
|
8.96
|
|
|
$
|
9,316,088
|
|
|
|
1,090,585
|
|
|
|
11.70
|
|
Total interest bearing liabilities(2)
|
|
|
9,421,853
|
|
|
|
488,307
|
|
|
|
5.18
|
|
|
|
7,633,687
|
|
|
|
481,605
|
|
|
|
6.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
525,716
|
|
|
|
3.78
|
%
|
|
|
|
|
|
$
|
608,980
|
|
|
|
5.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
4.64
|
%
|
|
|
|
|
|
|
|
|
|
|
6.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest earning assets include cash and cash equivalents,
restricted cash, marketable securities, the A
Participation Interest, loans, and investments in debt
securities. |
|
(2) |
|
Interest bearing liabilities include deposits, repurchase
agreements, secured and unsecured credit facilities, term debt,
convertible debt and subordinated debt. |
Provision
for Loan Losses
The increase in the provision for loan losses was primarily due
to an increase in the overall policy reserve levels due to a
change in reserve factors to reflect higher estimated inherent
losses due to the current economic environment, increase in
specific reserves and charge-offs due to increase in loan
delinquencies as well as some modest change in the portfolio
balance and mix during the year ended December 31, 2008.
Operating
Expenses
The increase in operating expenses is due to the same factors
which contributed to the increase in the consolidated operating
expenses as described above. Operating expenses as a percentage
of average total assets decreased to 1.97% for the year ended
December 31, 2008, from 2.31% for the year ended
December 31, 2007.
Other
(Expense) Income
The decrease in other (expense) income was primarily
attributable to a $93.8 million decrease in net realized
and unrealized gains in our equity investments, a
$17.6 million increase in losses related to our REO, a
$5.3 million impairment loss recorded for goodwill at the
Parent Company, a $7.4 million decrease in gains on the
sale of loans, a
65
$5.2 million decrease in income relating to our equity
interest in various investees that are not consolidated for
financial statement purposes and a $4.9 million increase in
losses relating to mark-to-market adjustments on our loans
held-for-sale. These decreases were partially offset by a
$58.2 million gain on the extinguishment of debt, a
$2.7 million increase in foreign currency gains and a
$5.1 million decrease in losses on derivative instruments.
Our unrealized losses on derivative instruments were primarily
due to the unrealized net change in the fair value of swaps used
in hedging certain of our assets and liabilities to minimize our
exposure to interest rate movements. We do not apply hedge
accounting to these swaps and, as a result, changes in the fair
value of such swaps are recognized in GAAP net income, while
changes in the fair value of the underlying hedged exposures are
not.
Healthcare
Net Lease Segment
Our Healthcare Net Lease segment operating results for the year
ended December 31, 2008, compared to the year ended
December 31, 2007, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
1,055
|
|
|
$
|
1,362
|
|
|
$
|
(307
|
)
|
|
|
(23
|
)%
|
Fee income
|
|
|
347
|
|
|
|
|
|
|
|
347
|
|
|
|
N/A
|
|
Operating lease income
|
|
|
107,748
|
|
|
|
97,013
|
|
|
|
10,735
|
|
|
|
11
|
|
Interest expense
|
|
|
43,232
|
|
|
|
41,047
|
|
|
|
2,185
|
|
|
|
5
|
|
Depreciation of direct real estate investments
|
|
|
35,889
|
|
|
|
32,004
|
|
|
|
3,885
|
|
|
|
12
|
|
Other operating expenses
|
|
|
11,580
|
|
|
|
9,437
|
|
|
|
2,143
|
|
|
|
23
|
|
Other expense
|
|
|
(1,204
|
)
|
|
|
(369
|
)
|
|
|
(835
|
)
|
|
|
(226
|
)
|
Noncontrolling interests expense
|
|
|
2,132
|
|
|
|
5,975
|
|
|
|
(3,843
|
)
|
|
|
(64
|
)
|
Net income
|
|
|
15,113
|
|
|
|
9,543
|
|
|
|
5,570
|
|
|
|
58
|
|
Operating
Lease Income
The increase in operating lease income was due to an increase in
the average balance of our direct real estate investments, which
are leased to healthcare industry clients through long-term,
triple-net
operating leases. During the years ended December 31, 2008
and 2007, our average balance of direct real estate investments
was $1.1 billion and $0.9 billion, respectively.
Interest
Expense
The increase in interest expense was primarily due to an
increase in average borrowings of $8.1 million, or 1.4%,
and an increase in the cost of funds. Our cost of borrowings
increased to 7.14% for the year ended December 31, 2008,
from 6.87% for the year ended December 31, 2007. Our
overall borrowing spread to average one-month LIBOR for the year
ended December 31, 2008, was 4.47% compared to 1.62% for
the year ended December 31, 2007.
Net
Finance Margin
Net finance margin, defined as net investment income which
includes interest and operating lease income less interest
expense, divided by average income earning assets, was 6.03% for
the year ended December 31, 2008, an increase of
19 basis points from 5.84% for the year ended
December 31, 2007. Net finance spreads were 2.94% and
3.36%, respectively, for the years ended December 31, 2008
and 2007. Net finance spread is the difference between yield on
interest earning assets and the cost of our interest bearing
liabilities. The decrease in net finance spread is attributable
to the changes in its components as described above.
66
Depreciation
of Direct Real Estate Investments
The increase in depreciation was primarily due to a full year of
depreciation expense during the year ended December 31,
2008, on properties acquired in mid 2007. Depreciation expense
on these properties was recorded from the date of acquisition
during the year ended December 31, 2007.
Operating
Expenses
The increase in operating expenses was consistent with the
increase in operating expenses in the Commercial Banking
Segment. Operating expenses as a percentage of average total
assets increased to 1.07% for the year ended December 31,
2008, from 0.95% for the year ended December 31, 2007.
Noncontrolling
Interest Expense
The decrease in noncontrolling interest expense was primarily
due to a decrease in our quarterly dividends during the year
ended December 31, 2008 and the redemption of certain
noncontrolling interests.
Residential
Mortgage Investment Segment
Our Residential Mortgage Investment segment operating results
for the year ended December 31, 2008, compared to the year
ended December 31, 2007, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
226,282
|
|
|
$
|
348,351
|
|
|
$
|
(122,069
|
)
|
|
|
(35
|
)%
|
Interest expense
|
|
|
180,571
|
|
|
|
324,589
|
|
|
|
(144,018
|
)
|
|
|
(44
|
)
|
Provision for loan losses
|
|
|
16,242
|
|
|
|
1,065
|
|
|
|
15,177
|
|
|
|
1,425
|
|
Operating expenses
|
|
|
10,109
|
|
|
|
6,000
|
|
|
|
4,109
|
|
|
|
68
|
|
Other expense
|
|
|
(106,057
|
)
|
|
|
(75,164
|
)
|
|
|
(30,893
|
)
|
|
|
(41
|
)
|
Net loss
|
|
|
(86,697
|
)
|
|
|
(58,467
|
)
|
|
|
(28,230
|
)
|
|
|
(48
|
)
|
Interest
Income
The decrease in interest income was primarily due to the
decrease in average interest earning assets of
$1.6 billion, or 26.4%.
Interest
Expense
The decrease in interest expense was primarily due to a decrease
in average borrowings of $1.7 billion, or 28.2%,
corresponding to a decrease in the size of the portfolio. Our
cost of borrowings decreased to 4.22% for the year ended
December 31, 2008, from 5.53% for the year ended
December 31, 2007. This decrease was primarily due to a
decrease in the short term interest rate market index on which
our cost of borrowings is based.
Provision
for Loan Losses
The increase in the provision for loan losses was primarily due
to an increase in the overall policy reserve levels due to a
change in reserve factors to reflect higher estimated inherent
losses due to the increase in delinquencies and foreclosures
experienced during the year ended December 31, 2008.
Operating
Expenses
The increase in operating expenses was primarily due to an
increase in professional fees. Operating expenses as a
percentage of average total assets increased to 0.22% for the
year ended December 31, 2008, from 0.11% for the year ended
December 31, 2007.
67
Other
Expense
The net increase in other expense was attributable to a
$21.9 million increase in net realized and unrealized
losses on derivative instruments related to our residential
mortgage investments, and a $32.0 million increase in net
unrealized losses on our Agency RMBS. The value of Agency RMBS
relative to risk-free investments was impacted during the year
ended December 31, 2008 by the broad credit market
disruption. These losses were partially offset by a decrease in
other-than-temporary declines in the fair value of our
Non-Agency RMBS of $26.4 million.
Comparison
of the Years Ended December 31, 2007 and 2006
We have reclassified all comparative prior period segment
information to reflect our three reportable segments. The
discussion that follows differentiates our results of operations
between our segments. All references to commercial loans below
include loans, loans held for sale and receivables under
reverse-repurchase agreements.
Commercial
Banking Segment
Our Commercial Banking segment operating results for the year
ended December 31, 2007, compared to the year ended
December 31, 2006, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
Interest income
|
|
$
|
928,190
|
|
|
$
|
749,011
|
|
|
$
|
179,179
|
|
|
|
24
|
%
|
Fee income
|
|
|
162,395
|
|
|
|
170,485
|
|
|
|
(8,090
|
)
|
|
|
(5
|
)
|
Interest expense
|
|
|
481,605
|
|
|
|
344,988
|
|
|
|
136,617
|
|
|
|
40
|
|
Provision for loan losses
|
|
|
77,576
|
|
|
|
81,211
|
|
|
|
(3,635
|
)
|
|
|
(4
|
)
|
Operating expenses
|
|
|
220,550
|
|
|
|
193,053
|
|
|
|
27,497
|
|
|
|
14
|
|
Other income
|
|
|
883
|
|
|
|
37,297
|
|
|
|
(36,414
|
)
|
|
|
(98
|
)
|
Noncontrolling interests expense
|
|
|
(1,037
|
)
|
|
|
(806
|
)
|
|
|
(231
|
)
|
|
|
(29
|
)
|
Income taxes
|
|
|
87,563
|
|
|
|
67,132
|
|
|
|
20,431
|
|
|
|
30
|
|
Cumulative effect of accounting change, net of taxes
|
|
|
|
|
|
|
370
|
|
|
|
(370
|
)
|
|
|
N/A
|
|
Net income
|
|
|
225,211
|
|
|
|
271,585
|
|
|
|
(46,374
|
)
|
|
|
(17
|
)
|
Interest
Income
The increase in interest income was due to the growth in average
interest earning assets, primarily loans, of $2.0 billion,
or 28%. This increase was partially offset by a decrease in the
interest component of yield to 9.96% for the year ended
December 31, 2007, from 10.28% for the year ended
December 31, 2006. The decrease in the interest component
of yield was primarily due to a decrease in our lending spread,
partially offset by an increase in short-term interest rates.
During the year ended December 31, 2007, our commercial
finance spread to average one-month LIBOR was 4.71% compared to
5.19% for the year ended December 31, 2006. This decrease
in lending spread reflects overall trends in financial markets,
the increase in competition in our markets, as well as the
changing mix of our commercial finance portfolio as we continue
to pursue the expanded opportunities afforded to us by our REIT
election. As a REIT, we were able to make the same, or better,
after tax return on loans with a lower interest rate than on
loans with a higher interest rate held prior to becoming a REIT.
Fluctuations in yields are driven by a number of factors,
including changes in short-term interest rates (such as changes
in the prime rate or one-month LIBOR), the coupon on new loan
originations, the coupon on loans that pay down or pay off and
modifications of interest rates on existing loans.
Fee
Income
The decrease in fee income was primarily the result of a
decrease in prepayment-related fee income, which totaled
$56.1 million for the year ended December 31, 2007,
compared to $66.7 million for the year ended
December 31, 2006. Prepayment-related fee income
contributed 0.60% and 0.92% to yield for the years ended
68
December 31, 2007 and 2006, respectively. Yield from fee
income, including prepayment related fees, decreased to 1.74%
for the year ended December 31, 2007, from 2.34% for the
year ended December 31, 2006.
Interest
Expense
We fund our growth largely through debt. The increase in
interest expense was primarily due to an increase in average
borrowings of $2.0 billion, or 35%. Our cost of borrowings
increased to 6.31% for the year ended December 31, 2007,
from 6.12% for the year ended December 31, 2006. This
increase was the result of higher LIBOR and CP rates on which
interest on our term securitizations and credit facilities are
based. The increase was also the result of higher borrowing
spreads and higher deferred financing fees on some of our term
securitizations and on some of our credit facilities, and
increases in the cost of our convertible debt following the
exchange in April 2007.
Net
Finance Margin
Net finance margin, defined as net investment income, which
includes interest and fee income less interest expense, divided
by average income earning assets, was 6.54% for the year ended
December 31, 2007, a decrease of 135 basis points from
7.89% the year ended December 31, 2006. The decrease in net
finance margin was primarily due to the increase in interest
expense resulting from higher leverage, a higher cost of funds,
and a decrease in yield on total income earning assets. Net
finance spread, which represents the difference between our
gross yield on income earning assets and the cost of our
interest bearing liabilities, was 5.40% for the year ended
December 31, 2007, a decrease of 110 basis points from
6.50% for the year ended December 31, 2006. Gross yield is
the sum of interest and fee income divided by our average income
earning assets. The decrease in net finance spread is
attributable to the changes in its components as described above.
The yields of income earning assets and the costs of interest
bearing liabilities in our Commercial Banking segment for the
years ended December 31, 2007 and 2006, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
|
($ in thousands)
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
$
|
928,190
|
|
|
|
9.96
|
%
|
|
|
|
|
|
$
|
749,011
|
|
|
|
10.28
|
%
|
Fee income
|
|
|
|
|
|
|
162,395
|
|
|
|
1.74
|
|
|
|
|
|
|
|
170,485
|
|
|
|
2.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets(1)
|
|
$
|
9,316,088
|
|
|
|
1,090,585
|
|
|
|
11.70
|
|
|
$
|
7,284,243
|
|
|
|
919,496
|
|
|
|
12.62
|
|
Total interest bearing liabilities(2)
|
|
|
7,633,687
|
|
|
|
481,605
|
|
|
|
6.31
|
|
|
|
5,639,481
|
|
|
|
344,988
|
|
|
|
6.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
608,980
|
|
|
|
5.39
|
%
|
|
|
|
|
|
$
|
574,508
|
|
|
|
6.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
6.54
|
%
|
|
|
|
|
|
|
|
|
|
|
7.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest earning assets include cash, restricted cash, loans and
investments in debt securities. |
|
(2) |
|
Interest bearing liabilities include repurchase agreements,
secured and unsecured credit facilities, term debt, convertible
debt and subordinated debt. |
Provision
for Loan Losses
The decrease in the provision for loan losses was the result of
recognizing fewer allocated reserves during the year ended
December 31, 2007.
69
Operating
Expenses
The increase in operating expenses is due to the same factors
which contributed to the increase in the consolidated operating
expenses as described above. Operating expenses as a percentage
of average total assets decreased to 2.31% for the year ended
December 31, 2007, from 2.60% for the year ended
December 31, 2006.
Other
Income (Expense)
The decrease in other income was primarily attributable to a
$48.6 million increase in net unrealized losses on
derivative instruments, a $10.4 million increase in losses
on foreign currency exchange and a $4.5 million decrease in
the receipt of
break-up
fees. These decreases were partially offset by a
$9.2 million increase in income relating to our equity
interests in various investees that are not consolidated for
financial statement purposes, an $8.9 million increase in
net realized and unrealized gains in our equity investments and
a $5.8 million increase in gains related to the sale of
loans.
Our unrealized losses on derivative instruments were primarily
due to the unrealized net change in the fair value of swaps used
in hedging certain of our assets and liabilities to minimize our
exposure to interest rate movements. We do not apply hedge
accounting to these swaps and, as a result, changes in the fair
value of such swaps are recognized in GAAP net income, while
changes in the fair value of the underlying hedged exposures
are not.
Healthcare
Net Lease Segment
Our Healthcare Net Lease segment operating results for the year
ended December 31, 2007, compared to the year ended
December 31, 2006, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Operating lease income
|
|
$
|
97,013
|
|
|
$
|
30,742
|
|
|
$
|
66,271
|
|
|
|
216
|
%
|
Interest expense
|
|
|
41,047
|
|
|
|
11,176
|
|
|
|
29,871
|
|
|
|
267
|
|
Depreciation of direct real estate investments
|
|
|
32,004
|
|
|
|
11,468
|
|
|
|
20,536
|
|
|
|
179
|
|
Operating expenses
|
|
|
9,437
|
|
|
|
2,891
|
|
|
|
6,546
|
|
|
|
226
|
|
Other income (expense)(1)
|
|
|
993
|
|
|
|
(2,497
|
)
|
|
|
3,490
|
|
|
|
140
|
|
Noncontrolling interests expense
|
|
|
5,975
|
|
|
|
5,517
|
|
|
|
458
|
|
|
|
8
|
|
Net income (loss)
|
|
|
9,543
|
|
|
|
(2,807
|
)
|
|
|
12,350
|
|
|
|
440
|
|
|
|
|
(1) |
|
Includes interest income. |
Operating
Lease Income
The increase in operating lease income is due to an increase in
our direct real estate investments, which are leased to
healthcare industry clients through long-term,
triple-net
operating leases. During the years ended December 31, 2007
and 2006, our average balance of direct real estate investments
was $947.9 million and $260.3 million, respectively.
Interest
Expense
The increase in interest expense was primarily due to an
increase in average borrowings of $413.3 million, or 225%,
corresponding to an increase in the size of the portfolio. Our
cost of borrowings increased to 6.87% for the year ended
December 31, 2007, from 6.08% for the year ended
December 31, 2006. Our overall borrowing spread to average
one-month LIBOR for the year ended December 31, 2007, was
1.62% compared to 0.99% for the year ended December 31,
2006.
70
Net
Finance Margin
Net finance margin, defined as net investment income, which
includes interest and operating lease income less interest
expense, divided by average income earning assets, was 5.84% for
the year ended December 31, 2007, a decrease of
142 basis points from 7.26% for the year ended
December 31, 2006. Net finance spreads were 3.36% and
5.73%, respectively, for the years ended December 31, 2007
and 2006. Net finance spread is the difference between yield on
interest earning assets and the cost of our interest bearing
liabilities. The decrease in net finance spread is attributable
to the changes in its components as described above.
Depreciation
of Direct Real Estate Investments
The increase in depreciation was due to increases in our direct
real estate investments over the previous year. As of
December 31, 2007, we had $1.0 billion in direct real
estate investments, an increase of $295.3 million, or
40.9%, from December 31, 2006.
Operating
Expenses
The increase in operating expenses was consistent with the
increase in operating expenses in the Commercial Finance
Segment. Operating expenses as a percentage of average total
assets decreased to 0.95% for the year ended December 31,
2007, from 1.04% for the year ended December 31, 2006.
Residential
Mortgage Investment Segment
Our Residential Mortgage Investment segment operating results
for the year ended December 31, 2007, compared to the year
ended December 31, 2006, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
348,351
|
|
|
$
|
267,522
|
|
|
$
|
80,829
|
|
|
|
30
|
%
|
Interest expense
|
|
|
324,589
|
|
|
|
250,561
|
|
|
|
74,028
|
|
|
|
30
|
|
Provision for loan losses
|
|
|
1,065
|
|
|
|
351
|
|
|
|
714
|
|
|
|
203
|
|
Operating expenses
|
|
|
6,000
|
|
|
|
8,640
|
|
|
|
(2,640
|
)
|
|
|
(31
|
)
|
Other (expense) income
|
|
|
(75,164
|
)
|
|
|
2,528
|
|
|
|
(77,692
|
)
|
|
|
(3,073
|
)
|
Net (loss) income
|
|
|
(58,467
|
)
|
|
|
10,498
|
|
|
|
(68,965
|
)
|
|
|
(657
|
)
|
Interest
Income
The increase in interest income was primarily due to the growth
in average interest earning assets of $1.3 billion, or 27%.
Interest
Expense
The increase in interest expense was primarily due to an
increase in average borrowings of $1.2 billion, or 26%,
corresponding to an increase in the size of the portfolio. Our
cost of borrowings increased to 5.53% for the year ended
December 31, 2007, from 5.38% for the year ended
December 31, 2006. This increase was primarily due to an
increase in the short term interest rate market index on which
our cost of borrowings is based.
Operating
Expenses
The decrease in operating expenses was primarily due to a
decrease in compensation and benefits and professional fees.
Operating expenses as a percentage of average total assets
decreased to 0.11% for the year ended December 31, 2007,
from 0.18% for the year ended December 31, 2006.
71
Other
(Expense) Income
The net loss was attributable to net realized and unrealized
losses on derivative instruments related to our residential
mortgage investments of $79.6 million and
other-than-temporary declines in the fair value of our
Non-Agency RMBS of $30.4 million. These losses were
partially offset by net unrealized gains on our Agency RMBS of
$34.9 million. The value of Agency RMBS relative to
risk-free investments was impacted during the year ended
December 31, 2007 by the broad credit market disruption.
Financial
Condition
Commercial
Banking Segment
Commercial
Banking Portfolio Composition
The composition of our Commercial Banking segment portfolio as
of December 31, 2008 and 2007, was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
Marketable securities, available-for-sale
|
|
$
|
642,714
|
|
|
$
|
|
|
Commercial real estate A Participation Interest,
net(1)
|
|
|
1,400,333
|
|
|
|
|
|
Commercial loans(1)(2)
|
|
|
9,494,873
|
|
|
|
9,867,737
|
|
Investments
|
|
|
178,595
|
|
|
|
227,128
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,716,515
|
|
|
$
|
10,094,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes related interest receivable. |
|
(2) |
|
Includes loans held for sale. |
Marketable
Securities, available-for-sale
As of December 31, 2008, we owned $642.7 million in
marketable securities, available-for-sale. Included in these
marketable securities, available-for-sale, were discount notes
issued by Fannie Mae, Freddie Mac and Federal Home Loan Bank
(FHLB) (Agency Discount Notes),
callable notes issued by Fannie Mae, Freddie Mac, 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) and a corporate debt security issued by Wells
Fargo & Company and guaranteed by the FDIC
(Corporate Debt). With the exception of the
Corporate Debt, CapitalSource Bank pledged all of the marketable
securities, available-for-sale, to the FHLB of
San Francisco as a source of contingent borrowing capacity
as of December 31, 2008. For further information on our
marketable securities, available-for-sale, see Note 8,
Marketable Securities and Investments, in the
accompanying audited consolidated financial statements for the
year ended December 31, 2008.
Commercial
Real Estate A Participation Interest
On July 25, 2008, we acquired the A
Participation Interest, which at the date of acquisition was a
$1.9 billion interest in a $4.8 billion pool of
commercial real estate loans. On the date of acquisition, we
recorded the A Participation Interest at its
estimated fair value of $1.8 billion, a $63.1 million
discount to the underlying principal balance of the instrument.
As of December 31, 2008, the A Participation
Interest had an outstanding balance of $1.4 billion, net of
discount. For further information on the A
Participation Interest, see Note 7, Commercial Lending
Assets and Credit Quality, in our accompanying audited
consolidated financial statements for the year ended
December 31, 2008.
72
Commercial
Portfolio
As of December 31, 2008 and 2007, our total commercial
portfolio had outstanding balances of $10.9 billion and
$9.9 billion, respectively. Included in these amounts were
the A Participation Interest, loans held for sale,
and $93.3 million and $56.3 million of related
interest receivable (collectively, Commercial Lending
Assets) as of December 31, 2008 and 2007,
respectively.
Commercial
Loan Composition
Our total commercial loan portfolio reflected in the portfolio
statistics below includes loans held for sale, and
$89.6 million and $56.3 million of related interest
receivable, as of December 31, 2008 and 2007, respectively,
and excludes the A Participation Interest. The
composition of our commercial loan portfolio by loan type and by
commercial lending business as of December 31, 2008 and
2007, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
Composition of commercial loan portfolio by loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured loans(1)
|
|
$
|
5,640,559
|
|
|
|
59
|
%
|
|
$
|
5,695,167
|
|
|
|
58
|
%
|
First mortgage loans(1)
|
|
|
2,723,862
|
|
|
|
29
|
|
|
|
2,995,048
|
|
|
|
30
|
|
Subordinate loans
|
|
|
1,130,452
|
|
|
|
12
|
|
|
|
1,177,522
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,494,873
|
|
|
|
100
|
%
|
|
$
|
9,867,737
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of commercial loan portfolio by business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Finance
|
|
$
|
2,659,038
|
|
|
|
28
|
%
|
|
$
|
2,979,241
|
|
|
|
30
|
%
|
Healthcare and Specialty Finance
|
|
|
2,998,747
|
|
|
|
32
|
|
|
|
2,934,666
|
|
|
|
30
|
|
Structured Finance
|
|
|
3,837,088
|
|
|
|
40
|
|
|
|
3,953,830
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,494,873
|
|
|
|
100
|
%
|
|
$
|
9,867,737
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Term B loans. |
We may have more than one loan to a client and its related
entities. For purposes of determining the portfolio statistics
in this section, we count each loan or client separately and do
not aggregate loans to related entities. The number of loans,
average loan size, number of clients and average loan size per
client by commercial lending business as of December 31,
2008, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Loan
|
|
|
|
Number
|
|
|
Average
|
|
|
Number of
|
|
|
Size per
|
|
|
|
of Loans
|
|
|
Loan Size
|
|
|
Clients
|
|
|
Client
|
|
|
|
($ in thousands)
|
|
|
Composition of commercial loan portfolio by business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Finance
|
|
|
491
|
|
|
$
|
5,416
|
|
|
|
246
|
|
|
$
|
10,809
|
|
Healthcare and Specialty Finance
|
|
|
370
|
|
|
|
8,105
|
|
|
|
257
|
|
|
|
11,668
|
|
Structured Finance
|
|
|
211
|
|
|
|
18,185
|
|
|
|
176
|
|
|
|
21,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall commercial loan portfolio
|
|
|
1,072
|
|
|
|
8,857
|
|
|
|
679
|
|
|
|
13,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
The scheduled maturities of our commercial loan portfolio by
loan type as of December 31, 2008, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in
|
|
|
Due in
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
One to
|
|
|
Due After
|
|
|
|
|
|
|
or Less
|
|
|
Five Years
|
|
|
Five Years
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Scheduled maturities by loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured loans(1)
|
|
$
|
676,264
|
|
|
$
|
4,618,278
|
|
|
$
|
346,017
|
|
|
$
|
5,640,559
|
|
First mortgage loans(1)
|
|
|
1,214,760
|
|
|
|
1,409,338
|
|
|
|
99,764
|
|
|
|
2,723,862
|
|
Subordinate loans
|
|
|
27,054
|
|
|
|
647,612
|
|
|
|
455,786
|
|
|
|
1,130,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,918,078
|
|
|
$
|
6,675,228
|
|
|
$
|
901,567
|
|
|
$
|
9,494,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Term B loans. |
The dollar amounts of all fixed-rate and adjustable-rate
commercial loans by loan type as of December 31, 2008, were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable
|
|
|
Fixed
|
|
|
|
|
|
|
Rates
|
|
|
Rates
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Composition of loan portfolio by loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured loans(1)
|
|
$
|
5,607,838
|
|
|
$
|
32,721
|
|
|
$
|
5,640,559
|
|
First mortgage loans(1)
|
|
|
2,461,201
|
|
|
|
262,662
|
|
|
|
2,723,862
|
|
Subordinate loans
|
|
|
1,012,716
|
|
|
|
117,736
|
|
|
|
1,130,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,081,755
|
|
|
$
|
413,119
|
|
|
$
|
9,494,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total loan portfolio
|
|
|
96
|
%
|
|
|
4
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Term B loans. |
Credit
Quality and Allowance for Loan Losses
As of December 31, 2008 and 2007, the principal balances of
loans contractually delinquent, non-accrual loans and impaired
loans in our commercial banking portfolio were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Commercial Loan Asset Classification
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
Loans
30-89 days
contractually delinquent
|
|
$
|
299,322
|
|
|
$
|
83,511
|
|
Loans 90 or more days contractually delinquent
|
|
|
141,104
|
|
|
|
58,411
|
|
Non-accrual loans(1)
|
|
|
439,547
|
|
|
|
170,522
|
|
Impaired loans(2)
|
|
|
692,278
|
|
|
|
318,945
|
|
|
|
|
(1) |
|
Includes commercial loans with aggregate principal balances of
$145.2 million and $55.5 million as of
December 31, 2008 and December 31, 2007, respectively,
which were also classified as loans 30 or more days
contractually delinquent. Includes non-performing loans
classified as held for sale that have an aggregate principal
balance of $14.5 million as of December 31, 2008. As
of December 31, 2007, there were no non performing loans
classified as held for sale that were place on non-accrual
status. |
|
(2) |
|
Includes commercial loans with aggregate principal balances of
$247.6 million and $55.5 million as of
December 31, 2008 and December 31, 2007, respectively,
which were also classified as loans 30 or more days
contractually delinquent, and commercial loans with aggregate
principal balances of $423.4 million and
$170.5 million as of December 31, 2008 and
December 31, 2007, respectively, which were also classified
as loans on non-accrual status. The carrying values of impaired
commercial loans were $683.1 million and
$311.6 million as of December 31, 2008 and 2007,
respectively, prior to the application of allocated reserves. |
74
Consistent with Statement of Financial Accounting Standards
(SFAS) No. 114, Accounting by Creditors for
Impairment of a Loan (SFAS No. 114),
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.
As of December 31, 2008, no allowance for loan losses was
deemed necessary with respect to the A Participation
Interest.
During the year ended December 31, 2008, commercial loans
with an aggregate carrying value of $589.1 million, as of
their respective restructuring dates, were involved in troubled
debt restructurings, as defined by SFAS No. 15,
Accounting for Debtors and Creditors for Troubled Debt
Restructurings. As of December 31, 2008, commercial
loans with an aggregate carrying value of $381.4 million
were involved in troubled debt restructurings. Additionally,
under SFAS No. 114, loans involved in troubled debt
restructurings are also assessed as impaired, generally for a
period of at least one year following the restructuring assuming
the loan performs under the restructured terms. The allocated
reserve for commercial loans that were involved in troubled debt
restructurings was $48.0 million as of December 31,
2008. For the year ended December 31, 2007, commercial
loans with an aggregate carrying value of $235.5 million as
of their respective restructuring dates, were involved in
troubled debt restructurings. As of December 31, 2007,
commercial loans with an aggregate carrying value of
$263.9 million were involved in troubled debt
restructurings. The allocated reserve for commercial loans that
were involved in troubled debt restructurings was
$23.1 million as of December 31, 2007.
We have provided an allowance for loan losses to cover estimated
losses inherent in our commercial loan portfolio. Our allowance
for loan losses was $423.8 million and $138.9 million
as of December 31, 2008 and December 31, 2007,
respectively. These amounts equate to 4.51% and 1.41% of gross
loans as of December 31, 2008 and 2007, respectively. Of
our total allowance for loan losses as of December 31, 2008
and 2007, $87.4 million and $27.4 million,
respectively, were allocated to impaired loans. As of
December 31, 2008 and 2007, we had $333.0 million and
$199.2 million, respectively, of commercial loans that we
assessed as impaired and for which we did not record any
allocated reserves based upon our belief that it is probable
that we ultimately will collect all principal and interest
amounts due. During the years ended December 31, 2008 and
2007, we charged off loans totaling $292.6 million and
$57.5 million, respectively. Net charge offs as a
percentage of average loans were 3.11% and 0.64% for the year
ended December 31, 2008 and 2007, respectively.
Investments
We have made investments in some of our borrowers in connection
with the loans provided to them. These investments usually
comprised equity interests such as common stock, preferred
stock, limited liability company interests, limited partnership
interests, and warrants, but sometimes were in the form of
subordinated debt if that is the form in which the equity
sponsor made its investment.
As of December 31, 2008 and 2007, the carrying values of
our investments in our Commercial Banking segment were
$178.6 million and $227.1 million, respectively.
Included in these balances were investments carried at fair
value totaling $41.1 million and $27.9 million,
respectively.
Healthcare
Net Lease Segment
Direct
Real Estate Investments
We own real estate for long-term investment purposes. These real
estate investments are generally long-term care facilities
leased through long-term,
triple-net
operating leases. Under a typical
triple-net
lease, the client agrees to pay a base monthly operating lease
payment and all facility operating expenses as well as make
capital improvements. As of each of December 31, 2008 and
2007, we had $1.0 billion in direct real estate
investments, which consisted primarily of land and buildings.
75
Residential
Mortgage Investment Segment
Portfolio
Composition
We directly own residential mortgage investments and as of
December 31, 2008 and 2007, our portfolio of residential
mortgage investments was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
Mortgage-related receivables(1)
|
|
$
|
1,801,535
|
|
|
$
|
2,033,296
|
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
Agency(2)
|
|
|
1,489,291
|
|
|
|
4,030,180
|
|
Non-Agency(2)
|
|
|
377
|
|
|
|
4,517
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,291,203
|
|
|
$
|
6,067,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents secured receivables that are backed by
adjustable-rate residential prime mortgage loans. |
|
(2) |
|
See following paragraph for a description of these securities. |
While we were a REIT, we invested in RMBS, which are securities
collateralized by residential mortgage loans. Agency RMBS are
mortgage-backed securities issued and guaranteed by Fannie Mae
or Freddie Mac. Non-Agency RMBS are RMBS issued by
non-government sponsored entities that are credit-enhanced
through the use of subordination or in other ways that are
inherent in a corresponding securitization transaction.
Substantially all of our RMBS are collateralized by adjustable
rate residential mortgage loans, including hybrid adjustable
rate mortgage loans. We account for our Agency RMBS as debt
securities that are classified as trading investments and
included in mortgage-backed securities pledged, trading on our
accompanying audited consolidated balance sheets. We account for
our Non-Agency RMBS as debt securities that are classified as
available-for-sale and included in investments on our
accompanying audited consolidated balance sheets. The coupons on
the loans underlying RMBS are fixed for stipulated periods of
time and then reset annually thereafter. The weighted average
net coupon of Agency RMBS in our portfolio was 5.01% as of
December 31, 2008, and the weighted average reset date for
the portfolio was approximately 25 months. The weighted
average net coupon of Non-Agency RMBS in our portfolio was 3.73%
as of December 31, 2008. The fair values of our Agency RMBS
and Non-Agency RMBS, including accrued interest, were
$1.5 billion and $0.4 million, respectively, as of
December 31, 2008. During the first quarter of 2009, we
sold all of our Agency RMBS and we intend to merge the remaining
assets currently in this segment into our Commercial Banking
segment in 2009.
As of December 31, 2008, we had $1.8 billion in
mortgage-related receivables secured by prime residential
mortgage loans. As of December 31, 2008, the weighted
average interest rate on these receivables was 5.36%, and the
weighted average contractual maturity was approximately
27 years. See further discussion on our accounting
treatment of mortgage-related receivables in Note 5,
Mortgage-Related Receivables and Related Owner
Trust Securitizations, in our accompanying audited
consolidated financial statements for the year ended
December 31, 2008.
During the year ended December 31, 2008, the carrying value
of certain of our residential mortgage investments decreased by
3.1% as the market dislocation impacted the pricing relationship
between mortgage assets (including Agency RMBS that we own) and
lower risk fixed income securities. Our investment strategy
explicitly contemplated the potential for upward and downward
shifts in the carrying value of the portfolio, including shifts
of the magnitude that we saw during 2008. During 2008,
volatility in the residential mortgage market increased. To
reduce our exposure to this market volatility, during the year
ended December 31, 2008, we sold Agency RMBS with a face
value of $2.1 billion, realizing a gain of
$21.4 million as a component of (loss) gain on residential
mortgage investment portfolio in the accompanying audited
consolidated statements of income.
76
Credit
Quality and Allowance for Loan Losses
As of December 31, 2008 and 2007, mortgage-related
receivables, whose underlying mortgage loans are 90 or more days
past due or were in the process of foreclosure and foreclosed
were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2008
|
|
2007
|
|
|
($ in thousands)
|
|
Mortgage-related receivables whose underlying mortgage loans are
90 or more days past due or in the process of foreclosure(1)
|
|
$
|
51,348
|
|
|
$
|
14,751
|
|
Percentage of mortgage-related receivables
|
|
|
2.82
|
%(2)
|
|
|
0.72
|
%
|
|
|
|
(1) |
|
Mortgage loans 90 or more days past due are also placed on
non-accrual status. |
|
(2) |
|
By comparison, in its December 2008 Monthly Summary Reports,
which reflected up to November 2008 performance, Fannie Mae
reported single-family delinquency (SDQ) rate of
2.13%. The SDQ rates are based on loans 90 days or more
delinquent or in foreclosure as of period end. Freddie Mac
reported a SDQ rate of 1.78% in its December 2008 Monthly
Summary Report, which reflected up to December 2008 performance,
The SDQ rate from Freddie Mac includes loans underlying their
structured transactions. The comparable December 2008 statistic
for mortgage-related receivables was 3.02%. |
During the year ended December 31, 2008, the carrying value
of foreclosed assets increased by $4.5 million from the
year ended December 31, 2007. As of December 31, 2008
and 2007, the carrying values of the foreclosed assets were $7.3
and $2.8 million, respectively.
In connection with recognized mortgage-related receivables, we
recorded provisions for loan losses of $16.2 million and
$1.1 million for the years ended December 31, 2008 and
2007, respectively. During the year ended December 31,
2008, we charged off $7.6 million, net of recoveries, of
these mortgage-related receivables. No such amounts were charged
off during the year ended December 31, 2007. The allowance
for loan losses was $9.3 million and $0.8 million as
of December 31, 2008 and 2007, respectively, and was
recorded in the accompanying audited consolidated balance sheets
as a reduction to the carrying value of mortgage-related
receivables.
Financing
We have financed our investments in Agency RMBS and FHLB
discount notes primarily through repurchase agreements. As of
December 31, 2008 and 2007, the aggregate amounts
outstanding under such repurchase agreements were
$1.6 billion and $3.9 billion, respectively. As of
December 31, 2008 and 2007, these repurchase agreements had
weighted average borrowing rates of 2.55% and 5.12%,
respectively, and weighted average remaining maturities of
0.4 month and 2.5 months, respectively.
Our investments in residential mortgage-related receivables were
financed primarily through debt issued in connection with
securitization transactions. As of December 31, 2008 and
2007, the total outstanding balance of these debt obligations
was $1.7 billion and $2.0 billion, respectively. The
interest rates on all classes of the notes within each
securitization are fixed for various periods of time and then
reset annually thereafter, with a weighted average interest rate
of 4.93% and 4.94% as of December 31, 2008 and 2007,
respectively. The notes within each securitization are expected
to mature at various dates through 2036.
The interest rates on our repurchase agreements,
securitization-based debt and other financings may change at
different times and in different magnitudes than the interest
rates earned on our residential mortgage investments. See
Market Risk Management below for a discussion of our
interest rate risk management program related to our residential
mortgage investment portfolio.
Liquidity
and Capital Resources
Liquidity is a measure of our sources of funds available to meet
our obligations as they arise. We require cash to fund new and
existing commercial loan commitments, repay indebtedness, make
new investments, fund net deposit outflows and pay expenses
related to general business operations. Our sources of liquidity
are cash and cash
77
equivalents, new borrowings and deposits, proceeds from asset
sales (including sales of loans and loan participations),
principal, interest and lease payments and additional equity and
debt financing. As a de novo bank, CapitalSource Bank is
prohibited from paying dividends during its first three years of
operations without consent from our regulators. Prior to July
2011, we do not anticipate that dividends from CapitalSource
Bank will provide any liquidity to fund the operations of the
Parent Company. Consequently, we separately manage the liquidity
of CapitalSource Bank and the Parent Company.
Our liquidity forecasts indicate that we have adequate liquidity
to conduct our business. These forecasts are based on our
business plans for the Parent Company and CapitalSource Bank and
assumptions related to expected cash inflows and outflows that
we believe are reasonable; however, we cannot assure you that
our forecasts or assumptions will prove to be accurate,
particularly in the current volatile environment. Some of our
liquidity sources such as cash, deposits, borrowings on existing
facilities and net cash from operations are generally available
on an immediate basis. Other sources of liquidity, such as
proceeds from asset sales and the ability to generate additional
liquidity through new equity or debt financings, are less
certain and less immediate, and are dependent on and subject to
market and economic conditions and the willingness of
counterparties to enter into new lending, sale or investment
transactions with us. Accordingly, these sources of additional
liquidity may not be sufficient or accessible quickly enough to
meet our needs. We cannot assure you that we will have access to
any of these additional liquidity sources.
Unless otherwise specified, the figures presented in the
following paragraphs are based on current forecasts and take
into account activity since December 31, 2008. 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
Forecast Our liquidity forecast is based on
our business plan to make all new commercial loans through
CapitalSource Bank for the foreseeable future, and our
expectations regarding the net growth in the commercial loan
portfolio at CapitalSource Bank and the repayment of the
A Participation Interest. We intend to maintain
sufficient liquidity at CapitalSource Bank through cash,
investments in marketable securities, deposits and access to
other funding sources to fund commercial loan commitments and
operations as well as to maintain minimum ratios required by our
regulators. CapitalSource Bank is well-capitalized, and we do
not expect CapitalSource Bank will need either additional
capital investments from us or to access external sources of
financing (including the Capital Assistance Program, the Capital
Purchase Program or other similar government programs) to meet
its business plan. CapitalSource Bank, however, may access
external sources of financing if available on favorable terms or
desirable for other corporate purposes, such as managing
interest rate risk.
CapitalSource Bank uses its liquidity to fund new commercial
loans and investments, to fund commitments on existing
commercial loans fund net deposit outflows and to pay operating
expenses, including, without limitation, intercompany payments
to the Parent Company for origination and other services
performed on its behalf. CapitalSource Bank operates in
accordance with the conditions imposed by its regulators in
connection with regulatory approvals obtained upon its
formation. These approvals include, among others, requirements
that CapitalSource Bank maintain a total risk-based capital
ratio of not less than 15%, capital levels required for a bank
to be considered well-capitalized under relevant
banking regulations, and a ratio of tangible equity to tangible
assets of not less than 10% for its first three years of
operations. In addition, we have a policy to maintain 10% of
CapitalSource Banks assets in cash, cash equivalents and
marketable securities.
CapitalSource Banks primary source of liquidity is
deposits, substantially all of which are in the form of
certificates of deposit (CDs). We expect
CapitalSource Bank to continue to generate sufficient deposits
to meet its liquidity needs, including, as necessary, replacing
maturing deposits and outflows on demand deposits. At
December 31, 2008, deposits at CapitalSource Bank were
$5.0 billion, which is approximately 60.0% of the
historical peak deposit levels of the branches before we
acquired them. We believe we will be able to maintain a
sufficient level of deposits to fund CapitalSource Bank.
Additional sources of liquidity for CapitalSource Bank include
cash flows from operations, payments of principal and interest
from loans and the A Participation Interest, cash
equivalents and marketable securities, borrowings from the
FHLBSan Francisco and reverse repurchase
transactions. We expect regular payments with
78
respect to the A Participation Interest during 2009,
and that the A Participation Interest will be paid
in full in 2010. Cash receipts from these sources may reduce our
need to maintain or increase deposits at CapitalSource Bank.
As of December 31, 2008, CapitalSource Bank had
approximately $1.2 billion of cash and cash equivalents and
owned $642.7 million in readily marketable securities. As
of December 31, 2008, the amount of CapitalSource
Banks unfunded commitments to extend credit with respect
to existing loans was $777.8 million. Due to their nature,
we cannot know with certainty the aggregate amounts we will be
required to fund under these unfunded commitments. Our failure
to satisfy our full contractual funding commitment to one or
more of our clients could create breach of contract and lender
liability for us and irreparably damage our reputation in the
marketplace. We anticipate that CapitalSource Bank will have
sufficient liquidity to satisfy these unfunded commitments.
Parent Company Liquidity Forecast Given the
current dislocation in the capital markets, managing the Parent
Companys liquidity has become increasingly challenging. In
prior periods, we maintained a higher level of cash and
available liquidity under our credit facilities and were able to
access the capital markets as an additional source of funds for
the Parent Company. In the current economic environment, the
lack of liquidity in the capital markets means that we have very
limited access to formerly available funding sources, and,
consequently, our liquidity is lower than in prior periods. The
Parent Companys need for liquidity, however, is less than
in prior periods because our business plan is to make all new
commercial loans through CapitalSource Bank for the foreseeable
future, and it is our expectation that the balances of our
existing loan portfolio and other assets held in the Parent
Company will be stable and run off over time. In addition, based
on existing and expected market conditions, we currently do not
anticipate paying dividends on our common stock at historical
levels.
The Parent Company has an existing portfolio of commercial loans
and other assets such as our mortgage-related receivables and
our direct real estate investments. We intend to generate
adequate liquidity at the Parent Company to cover our estimated
funding obligations for commitments under existing commercial
loans, to repay recourse indebtedness due in 2009, and to pay
operating expenses.
We anticipate generating some of this liquidity by utilizing
means we have not regularly used in the past, including sales of
loans, loan participations, real estate investments and real
estate owned. These sale activities are dependent on and subject
to market and economic conditions and willing and able buyers
entering into transactions with us and, therefore, are highly
speculative. Furthermore, due to current market conditions, if
we are able to consummate any asset sales we expect them to be
at prices discounted to our current carrying value. In some
instances, proceeds from some of these activities are required
to be used to make mandatory repayments on some of our
indebtedness.
Sources of liquidity for the Parent Company that we expect to be
available include cash flows from operations, including, without
limitation, principal, interest and lease payments; new
borrowings under our credit facilities; loan sales to our
2006-A term
debt securitization; long-term financing of direct real estate
investments through the U.S. Department of Housing and
Urban Development (HUD) and other mortgage debt;
asset sales; and tax refunds. In the past we relied on
consummating term debt transactions and our secured credit
facilities to generate liquidity, but we do not expect these
sources to be available to us for the foreseeable future.
Our current forecast of significant cash outflows for the Parent
Company includes an aggregate of $295.0 million scheduled
stepdown payments during the remainder of 2009 under our
$995.0 million syndicated bank credit facility,
$118.5 million in March 2009 to repurchase, as required,
our outstanding convertible debentures due 2034, funding of
unfunded commitments on existing commercial loans, and mandatory
repayments on our indebtedness resulting from some asset sales.
As of December 31, 2008, the amount of the Parent
Companys unfunded commitments to extend credit with
respect to existing loans exceeded unused funding sources and
unrestricted cash by $1.4 billion, an increase of
$589.1 million, or 72 % from December 31, 2007.
Due to their nature, we cannot know with certainty the aggregate
amounts we will be required to fund under these unfunded
commitments. We expect that these unfunded commitments will
continue to indefinitely 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.
79
In many cases, our obligation to fund unfunded commitments is
subject to our clients ability to provide collateral to
secure the requested additional fundings, the collaterals
satisfaction of eligibility requirements, our clients
ability to meet specified preconditions to borrowing, including
compliance with all provisions of the loan agreements,
and/or our
discretion pursuant to the terms of the loan agreements. In many
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. To the extent there are unfunded
commitments with respect to a loan that is owned partially by
CapitalSource Bank and the Parent Company, unless our client is
in default, CapitalSource Bank is obligated in some cases
pursuant to intercompany agreements to fund its portion of the
unfunded commitment before the Parent Company is required to
fund its portion. In addition, in some cases we may be able to
borrow additional amounts under our secured credit facilities as
we fund these unfunded commitments.
Pursuant to agreements with our regulators, to the extent
CapitalSource Bank independently is unable to do so, the Parent
Company must maintain CapitalSource Banks total risk-based
capital ratio at not less than 15% and must maintain the capital
levels of CapitalSource Bank at all times to meet the levels
required for a bank to be considered
well-capitalized under the relevant banking
regulations. We do not expect that our Parent Company will be
required to fund amounts to CapitalSource Bank. 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, 2008, this facility was undrawn, and we do not
expect that it will be drawn in 2009, but there cannot be any
assurance that the FDIC will not require funding under this
facility in the future.
We have continued to experience negative effects from the global
economic recession and credit market disruption in the form of
reduced commitments on our credit facilities, lower leverage and
higher cost of funds on borrowings as measured by the spread to
one-month LIBOR. Some of these negative effects were partially
offset in 2008 through the sale by the Parent Company to
CapitalSource Bank of $2.2 billion of loans, and the Parent
Companys use of the proceeds from such sales to
significantly reduce indebtedness and commitments on our credit
facilities. We currently do not expect to obtain additional term
securitization debt to finance our loans.
We are currently in discussions with our credit facility lenders
to restructure our credit facilities to extend maturities and
gain funding efficiencies. If successful, we expect to see
higher borrowing costs, potentially reduced committed capacity
levels
and/or lower
advance rates on our secured credit facilities. We seek to
complete a restructuring with our lenders during the second
quarter of 2009, but we cannot assure you that we will
successfully restructure these facilities on favorable terms or
at all.
Cash
and Cash Equivalents
As of December 31, 2008 and 2007, we had $1.3 billion
and $0.2 billion, respectively, in cash and cash
equivalents. We invest cash on hand in short-term liquid
investments.
We had $419.4 million and $513.8 million of restricted
cash as of December 31, 2008 and 2007, respectively. The
restricted cash consists primarily of principal and interest
collections on loans collateralizing our term debt and on loans
pledged to our credit facilities other than our syndicated bank
credit facility and securities pledged as collateral to secure
our repurchase agreements and related derivatives. Restricted
cash also includes client holdbacks and escrows. Principal
repayments, interest rate swap payments, interest payable and
servicing fees are deducted from the monthly principal and
interest collections funded by loans collateralizing our credit
facilities and term debt, and the remaining restricted cash is
returned to us and becomes unrestricted at that time.
Deposits
We completed the formation of CapitalSource Bank on
July 25, 2008, which included the assumption of
approximately $5.2 billion in deposits from FIL. Deposits
gathered through 22 retail bank branches are the primary source
of funding for CapitalSource Bank, although CapitalSource Bank
may have other sources of liquidity as outlined above. As of
December 31, 2008, we had deposits totaling
$5.0 billion. For additional information about our
deposits, see Note 12, Deposits, in our accompanying
consolidated financial statements for the year ended
December 31, 2008.
80
Borrowings
As of December 31, 2008 and 2007, we had outstanding
borrowings totaling $9.9 billion and $15.0 billion,
respectively, under our repurchase agreements, credit
facilities, term debt, convertible debt and subordinated debt.
For a detailed discussion of our borrowings, see Note 13,
Borrowings, in our accompanying audited consolidated
financial statements for the year ended December 31, 2008.
Our maximum facility amounts, amounts outstanding and unused
capacity, subject to certain minimum equity requirements and
other covenants and conditions, as of December 31, 2008,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
Facility
|
|
|
Amount
|
|
|
Unused
|
|
Funding Source
|
|
Amount
|
|
|
Outstanding
|
|
|
Capacity(1)
|
|
|
|
($ in thousands)
|
|
|
Repurchase agreements
|
|
$
|
1,595,750
|
|
|
$
|
1,595,750
|
|
|
$
|
|
|
Credit facilities(2)
|
|
|
2,639,870
|
|
|
|
1,445,062
|
|
|
|
1,194,808
|
|
Term debt
|
|
|
5,432,348
|
|
|
|
5,338,456
|
|
|
|
93,892
|
|
Other borrowings
|
|
|
1,560,224
|
|
|
|
1,560,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,228,192
|
|
|
$
|
9,939,492
|
|
|
$
|
1,288,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes issued and outstanding letters of credit totaling
$52.5 million as of December 31, 2008. |
|
(2) |
|
As of February 25, 2009, we had an aggregate maximum
facility amount of $1.8 billion and an aggregate of
$434.0 million of unused capacity. We cannot borrow this
unused capacity under these facilities without pledging
additional eligible collateral. We have limited available
collateral to pledge to use this unused capacity. However, such
unused capacity may become available to us to the extent we have
additional eligible collateral in the future. |
As of December 31, 2008, approximately 88% of our debt was
secured by our assets and approximately 12% was unsecured. We
intend to maintain prudent levels of leverage and currently
expect our debt-to-equity ratio on the combined portfolios of
our Commercial Banking segment and Healthcare Net Lease segment
to remain below 4x.
Repurchase
Agreements
As of December 31, 2008, we had borrowings outstanding
under five master repurchase agreements with various financial
institutions financing our purchases of RMBS and FHLB discount
notes. As of December 31, 2008 and 2007, the aggregate
amounts outstanding under such repurchase agreements were
$1.6 billion and $3.9 billion, respectively. As of
December 31, 2008 and 2007, these repurchase agreements had
weighted average borrowing rates of 2.55% and 5.12%,
respectively, and weighted average remaining maturities of
0.4 month and 2.5 months, respectively. The terms of
most of our borrowings pursuant to these repurchase agreements
typically reset every 30 days. As of December 31, 2008
and 2007, these repurchase agreements were collateralized by
Agency RMBS and FHLB discount notes with a fair value of
$1.7 billion and $4.1 billion, respectively, including
accrued interest, and cash deposits of $10.6 million and
$29.2 million, respectively, made to cover margin calls. As
of February 25, 2009, we had repaid all outstanding amounts
under our repurchase agreements.
Credit
Facilities
Our committed credit facility amounts were $2.6 billion and
$5.6 billion as of December 31, 2008 and 2007,
respectively. As of December 31, 2008, we had six secured
credit facilities with a total of 23 financial institutions.
Interest on our credit facility borrowings is charged at
variable rates that may be based on one or more of one-month
LIBOR, one-month EURIBOR or the applicable CP rate. We use these
facilities to fund assets and for general corporate purposes.
Until 2007, we financed many of our assets in our secured credit
facilities until we completed term debt transactions in which we
securitized pools of our assets from these facilities. We
primarily have used the proceeds from our term debt transactions
to pay down our credit facilities, which resulted in increased
capacity to redraw on them as needed. Through 2008, the term
debt markets in which we securitized our loan assets were
81
inaccessible and we retained loan assets in our credit
facilities or sold them to CapitalSource Bank. We expect the
term debt securitization markets to remain inaccessible
throughout 2009 and possibly beyond.
As of December 31, 2008, our credit facilities
commitments, principal amounts outstanding and maturity dates
were as follows:
|
|
|
|
|
|
|
|
|
|
|
Committed
|
|
|
Principal
|
|
|
|
Capacity
|
|
|
Outstanding
|
|
|
|
($ in thousands)
|
|
|
CS III secured credit facility scheduled to mature
April 29, 2009
|
|
$
|
150,000
|
(1)
|
|
$
|
74,000
|
|
CS Europe secured credit facility scheduled to mature
September 23, 2009
|
|
|
279,420
|
(2)
|
|
|
165,949
|
|
CS VII secured credit facility scheduled to mature
March 31, 2010
|
|
|
285,000
|
(3)
|
|
|
176,600
|
|
Syndicated bank secured credit facility scheduled to mature
March 13, 2010
|
|
|
1,070,000
|
(4)
|
|
|
972,463
|
|
CSE QRS Funding I secured credit facility scheduled to mature
April 24, 2010
|
|
|
815,000
|
(3)(5)
|
|
|
15,600
|
|
CS VIII secured credit facility scheduled to mature
July 19, 2010
|
|
|
40,450
|
|
|
|
40,450
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,639,870
|
|
|
$
|
1,445,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In February 2009, we reduced the committed capacity to
$100.0 million. |
|
(2) |
|
In February 2009, we reduced the committed capacity to
125.0 million. For the table above, the committed
capacity of 200.0 million is converted into US
dollars at the prevailing spot rate as of December 31, 2008. |
|
(3) |
|
On termination or maturity, amounts due under the credit
facility may, in the absence of a default, be repaid from
proceeds from amortization of the collateral pool. The maturity
date stated in the table above assumes utilization of a one-year
amortization period from the termination date. |
|
(4) |
|
As of February 25, 2009, we reduced the committed capacity
to $995.0 million. |
|
(5) |
|
In February 2009, we reduced the committed capacity to
$250.0 million |
In December 2008, we modified the terms of our
$1.07 billion unsecured credit facility to collateralize it
with substantially all of the Parent Companys previously
unencumbered assets, including loan assets, healthcare net lease
properties, owned and purchased tranches of our term
securitizations and our equity interest in CapitalSource Bank.
The amendment increased the margin above the applicable
reference rate that we must pay on borrowings under the facility
by an additional 1.50% to 4.50%. We are required to make
mandatory prepayments (which are accompanied by commitment
reductions) in $25.0 million increments with a portion of
the proceeds of certain specified events, including (A) 75%
of the cash proceeds of any unsecured debt issuance by the
Parent Company, (B) 25% of the cash proceeds of specified
equity issuances, and (C) 75% of any principal repayments
on, or the cash proceeds received on the disposition of or the
incurrence of secured debt with respect to, assets constituting
collateral under the facility. Regardless of any mandatory
prepayments, the facility commitments reduce to
(1) $1.0 billion on March 31, 2009,
(2) $900.0 million on June 30, 2009, and
(3) $700.0 million on December 31, 2009. The
revised facility also contains customary operating and financial
covenants. In January 2009 we made a mandatory reduction in the
facility commitment of $25.0 million, and in February 2009
we made a further $50.0 million reduction in the facility
commitment, which fulfills the March 31, 2009 amortization
requirement one month ahead of schedule. The committed capacity
and principal amount outstanding on this facility as of
February 25, 2009 were $995.0 million and
$937.2 million, respectively.
As of February 25, 2009, our credit facilities
aggregate committed capacity was $1.8 billion and our
aggregate unused capacity totaled $434.0 million. We cannot
borrow the unused capacity under these facilities without
pledging additional eligible collateral. We have limited
available collateral to pledge to use this unused capacity.
However, such unused capacity may become available to us to the
extent we have additional eligible collateral in the future.
As a member of the FHLB-San Francisco, CapitalSource Bank
has financing availability with the FHLB equal to 15% of
CapitalSource Banks total assets. As of December 31,
2008, the maximum financing under this
82
formula was $915.4 million. Although no advances were
outstanding as of December 31, 2008, a letter of credit in
the amount of $0.8 million is outstanding under the
facility which reduces our availability. The financing is
subject to various terms and conditions including pledging
acceptable collateral, satisfaction of the FHLB stock ownership
requirement and certain limits regarding the maximum term of
debt.
During 2008, we did not enter into any new credit facilities
other than the FHLB facility, but we amended various terms of
our existing credit facilities. For further information on our
credit facilities, see Note 13, Borrowings, in our
accompanying audited consolidated financial statements for the
year ended December 31, 2008.
Term
Debt
For our Commercial Banking segment, we have raised capital by
securitizing pools of assets in permanent, on-balance-sheet term
debt securitizations. We did not consummate any term debt
securitization transactions in 2008, but did replenish some of
our term securitizations with an aggregate of $1.0 billion
of loans during 2008. As of December 31, 2008, the
outstanding balance of our term debt securitizations was
$4.6 billion. For further information on these term debt
securitizations, see Note 13, Borrowings, in our
accompanying audited consolidated financial statements for the
year ended December 31, 2008.
Owner
Trust Term Debt
Within our Residential Mortgage Investment segment, we own
beneficial interests in securitization trusts (the Owner
Trust), which, in 2006, issued $2.4 billion in senior
notes and $105.6 million in subordinated notes backed by
$2.5 billion of a diversified pool of adjustable rate
commercial loans. As of December 31, 2008, the outstanding
balance of our Owner Trust term debt was $1.7 billion. For
further information on this debt, see Note 5,
Mortgage-Related Receivables and Related Owner
Trust Securitizations, and Note 13,
Borrowings, in our accompanying audited consolidated
financial statements for the year ended December 31, 2008.
Convertible
Debt
We have raised capital through the issuance of convertible debt.
We did not issue any convertible debt in 2008. Since October
2008, we have retired approximately $106.6 million of our
convertible debt in exchange for issuances of our common stock.
Pursuant to the terms of these debentures, we have commenced a
tender offer for up to $118.5 million of our outstanding
convertible debentures which is scheduled to close in March
2009. As of December 31, 2008 and February 25, 2009,
the outstanding balance of our convertible debt was
$715.9 million and $666.1 million, respectively. For
further information on our convertible debt, see Note 13,
Borrowings, in our accompanying audited consolidated
financial statements for the year ended December 31, 2008.
Subordinated
Debt
We have raised junior subordinated capital through the issuance
of trust preferred securities. We did not consummate any such
transactions in 2008. As of December 31, 2008, the
outstanding balance of our subordinated debt was
$438.8 million. For further information on our subordinated
debt, see Note 13, Borrowings, in our accompanying
audited consolidated financial statements for the year ended
December 31, 2008.
Mortgage
Debt
For our Healthcare Net Lease segment, we use mortgage loans to
finance some of our direct real estate investments. As of
December 31, 2008, the outstanding balance of our mortgage
debt was $330.3 million. For further information on such
mortgage loans, see Note 13, Borrowings, in our
accompanying audited consolidated financial statements for the
year ended December 31, 2008.
Other
Borrowings
We have incurred other indebtedness in the ordinary course of
our lending and investing activities, including a
$24.4 million senior loan secured by a property to which we
took ownership following the exercise of our remedies, a
$27.7 million senior loan that we assumed on the
acquisition of a majority equity interest in a property, and
four
83
junior subordinated notes totaling $20.0 million that we
entered into in connection with our acquisition of a healthcare
real estate property portfolio. For further information on such
mortgage loans, see Note 13, Borrowings, in our
accompanying audited consolidated financial statements for the
year ended December 31, 2008.
Debt
Covenants
The Parent Company is required to comply with financial and
non-financial covenants under our indebtedness, including,
without limitation, with respect to, interest coverage, minimum
tangible net worth, leverage, maximum delinquent and charged-off
loans and servicing standards. 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, accelerate
payment of all amounts payable under such indebtedness
and/or
terminate their commitments under such indebtedness. In
addition, under our term debt securitizations, the priority of
payments are altered if the notes remain outstanding beyond the
stated maturity dates and upon other termination events, in
which case we would receive no cash flow from these transactions
until the notes senior to our retained interests are retired. A
default under our recourse indebtedness could trigger
cross-default provisions in our other debt facilities, and a
default under some of our non-recourse indebtedness would
trigger cross-default provisions in other of our non-recourse
debt.
In February 2009, we obtained a waiver of the Consolidated
EBITDA to Interest Expense financial covenant for our syndicated
bank credit facility for the reporting period ending
December 31, 2008. The waiver was obtained to provide
certainty that the net loss reported for the quarter ended and
the year ended December 31, 2008, after making certain
adjustments as provided for in the covenant definition, would
not cause an event of default under the facility agreement.
Because this covenant was tested on a rolling
12-month
basis, we would likely have breached it for the quarter ending
March 31, 2009 and other periods in 2009. However, on
February 25, 2009, we amended this facility to:
|
|
|
|
|
modify the Consolidated EBITDA to Interest Expense financial
covenant to exclude the period ending December 31, 2008,
and to define and measure the covenant differently for future
periods, including to:
|
|
|
|
|
|
replace the trailing 12-month measurement period with a
quarterly measurement;
|
|
|
|
change the way we measure Consolidated EBITDA by including up to
$90.0 million of provision for loan losses for the
reporting period ending March 31, 2009, and up to
$50.0 million for each reporting period thereafter; and
|
|
|
|
set the minimum ratio of Consolidated EBITDA to Interest Expense
to 1.50:1.00 for the periods ending March 31, June 30,
and September 30, 2009, and 1.75:1.00 for each period
thereafter;
|
|
|
|
|
|
provide that we only count loans that are delinquent by at least
180 days, subject to an insolvency event or are charged off
pursuant to our credit and collection policy when calculating
our maximum average portfolio charged-off ratio; and
|
|
|
|
increase the maximum average portfolio charged-off ratios, as
follows:
|
|
|
|
|
|
for the fiscal quarter ended March 31, 2009, (i) from
8.0% to 8.5%, calculated excluding CapitalSource Bank, and
(ii) from 5.0% to 6.5%, calculated including CapitalSource
Bank; and
|
|
|
|
for every fiscal quarter thereafter, (i) from 8.0% to
10.0%, when calculated by excluding CapitalSource Bank, and
(ii) from 5.0% to 6.5%, calculated including CapitalSource
Bank.
|
During the first quarter of 2009, we obtained waivers of
financial covenants to cure or avoid potential events of default
and executed amendments with respect to some of our other credit
facilities. For further information on these waivers and
amendments, see Note 13, Borrowings, in our
accompanying audited consolidated financial statements for the
year ended December 31, 2008. We may need to obtain other
waivers and amendments in the future, and there can be no
assurance that we will be able to obtain them on favorable terms
or at all.
In addition, upon the occurrence of specified servicer defaults,
our lenders under our credit facilities and the holders of our
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
84
facilities and term debt. 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.
Equity
We offer a Dividend Reinvestment and Stock Purchase Plan (the
DRIP) to current and prospective shareholders.
Participation in the DRIP allows 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, 2008, we received
$198.1 million related to the direct purchase of
15.4 million shares of our common stock pursuant to the
DRIP. We have not sold any shares under the direct purchase
features of the DRIP after May 2008. During the year ended
December 31, 2007, we received $607.8 million related
to the direct purchase of 31.7 million shares of our common
stock pursuant to the DRIP. In addition, we received proceeds of
$38.7 million related to cash dividends reinvested in
3.6 million shares of our common stock during the year
ended December 31, 2008. We received proceeds of
$106.7 million related to the cash dividends reinvested for
5.4 million shares of our common stock during the year
ended December 31, 2007.
In June 2008, we sold 34.5 million shares of our common
stock in an underwritten public offering at a price of $11.00
per share, including the 4.5 million shares purchased by
the underwriters pursuant to their over-allotment option. In
connection with this offering, we received net proceeds of
$365.8 million, which were used to repay borrowings under
our secured credit facilities.
In October 2008 and February 2009, we issued 6,224,392 and
19,815,752 shares of our common stock, respectively, in
exchange for approximately $45.0 million in aggregate
principal amount of our outstanding 1.25% and 1.625% senior
and senior subordinated convertible debentures due 2034 and
approximately $61.6 million in aggregate principal amount
of our outstanding senior subordinated convertible notes due
March 2034, respectively. We retired the debentures acquired in
these exchanges.
Special
Purpose Entities
We use SPEs as an integral part of our funding activities. We
commonly service loans that we have transferred to these
vehicles. The use of these special purpose entities is generally
required in connection with our non-recourse secured debt
financings in order to legally isolate from us loans that we
transfer to these vehicles if we were to be in bankruptcy.
We also used special purpose entities to facilitate the issuance
of collateralized loan obligation transactions that are further
described below in Commitments, Guarantees &
Contingencies. Additionally, we have purchased beneficial
ownership interests in residential mortgage assets that are held
by special purpose entities established by third parties.
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 as defined by FASB Interpretation
No. 46 (Revised 2003), Consolidation of Variable
Interest Entities An Interpretation of ARB
No. 51, (FIN 46(R)), 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. As further
discussed in Note 5, Mortgage-Related Receivables and
Related Owner Trust Securitizations, in February 2006,
we acquired beneficial interests in two special purpose entities
that acquired and securitized pools of residential mortgage
loans. In accordance with the provisions of FIN 46(R), we
determined that we were the primary beneficiary of these SPEs
and, therefore, consolidated the assets and liabilities of such
entities for financial statement purposes. Additionally, and as
further discussed in Note 13, Borrowings, the assets
and related liabilities of all special purpose entities that we
use to issue our term debt are recognized on our accompanying
audited consolidated balance sheets as of December 31, 2008
and 2007.
85
Commitments,
Guarantees & Contingencies
As of December 31, 2008 and 2007, we had unfunded
commitments to extend credit to our clients of $3.6 billion
and $4.7 billion, respectively. Due to their nature, we
cannot know with certainty the aggregate amounts we will be
required to fund under these unfunded commitments. We expect
that these unfunded commitments will continue to indefinitely
exceed our 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. In many cases, our obligation to fund unfunded
commitments is subject to our clients ability to provide
collateral to secure the requested additional fundings, the
collaterals satisfaction of eligibility requirements, our
clients ability to meet specified preconditions to
borrowing, including compliance with all provisions of the loan
agreements, and/or our discretion pursuant to the terms of the
loan agreements. In many 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. To the extent there
are unfunded commitments with respect to a loan that is owned
partially by CapitalSource Bank and the Parent Company, unless
our client is in default, CapitalSource Bank is obligated in
some cases pursuant to intercompany agreements to fund its
portion of the unfunded commitment before the Parent Company is
required to fund its portion. In addition, in some cases we may
be able to borrow additional amounts under our secured credit
facilities as we fund these unfunded commitments.
We have non-cancelable operating leases for office space and
office equipment. The leases expire over the next 15 years
and contain provisions for certain annual rental escalations. A
discussion of these contingencies is included in Note 21,
Commitments and Contingencies, in our accompanying
audited consolidated financial statements for the year ended
December 31, 2008.
We are obligated to provide standby letters of credit in
conjunction with several of our lending arrangements. As of
December 31, 2008 and 2007, we had issued
$183.5 million and $226.4 million, respectively, in
letters of credit which expire at various dates over the next
six years. If a borrower defaults on its commitment(s) subject
to any letter of credit issued under these arrangements, we
would be responsible to meet the borrowers financial
obligation and would seek repayment of that financial obligation
from the borrower. A discussion of these contingencies is
included in Note 21, Commitments and Contingencies,
in our accompanying audited consolidated financial statements
for the year ended December 31, 2008.
As of December 31, 2008, we had identified conditional
asset retirement obligations primarily related to the future
removal and disposal of asbestos that is contained within
certain of our direct real estate investment properties. For
reasons further discussed in Note 21, Commitments and
Contingencies, in our accompanying audited consolidated
financial statements for the year ended December 31, 2008,
no liability for conditional asset retirement obligations was
recorded on our accompanying audited consolidated balance sheet
as of December 31, 2008.
We had provided a financial guarantee to a third-party warehouse
lender that financed the purchase of approximately
$344 million of commercial loans by a special purpose
entity to which one of our other wholly owned indirect
subsidiaries provided advisory services in connection with such
purchases of commercial loans. We had provided the warehouse
lender with a limited guarantee under which we agreed to assume
a portion of net losses realized in connection with those loans
held by the special purpose entity up to a specific loss limit.
In May 2008, we paid the third-party warehouse lender
$13.3 million in full settlement of this guarantee in
connection with our consolidation of the special purpose entity.
In connection with certain securitization transactions and
secured financings, we typically make customary representations
and warranties regarding the characteristics of the underlying
transferred assets and collateral. Prior to any securitization
transaction and secured financing, we generally perform due
diligence with respect to the assets to be included in the
securitization transaction and the collateral to ensure that
they satisfy the representations and warranties. In our capacity
as originator and servicer in certain securitization
transactions and secured financings, we may be required to
repurchase or substitute loans which breach a representation and
warranty as of their date of transfer to the securitization or
financing vehicle.
86
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 $17.0 million to 18 private equity funds, and
$0.8 million to an equity investment. The contractual
obligations under our debt are included in the accompanying
audited consolidated balance sheet as of December 31, 2008.
The expected contractual obligations under our certificates of
deposit, debt, operating leases and commitments under
non-cancelable contracts as of December 31, 2008, were as
follows:
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of
|
|
|
Repurchase
|
|
|
Credit
|
|
|
Term
|
|
|
Convertible
|
|
|
Subordinated
|
|
|
Mortgage
|
|
|
Notes
|
|
|
|
|
|
|
|
|
|
Deposit
|
|
|
Agreements
|
|
|
Facilities(1)
|
|
|
Debt(2)
|
|
|
Debt(3)
|
|
|
Debt(4)
|
|
|
Debt
|
|
|
Payable
|
|
|
Other(5)
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
2009
|
|
$
|
4,256,580
|
|
|
$
|
1,595,750
|
|
|
$
|
239,949
|
|
|
$
|
1,321,460
|
|
|
$
|
174,583
|
|
|
$
|
|
|
|
$
|
5,554
|
|
|
$
|
74
|
|
|
$
|
14,425
|
|
|
$
|
7,608,375
|
|
2010
|
|
|
16,357
|
|
|
|
|
|
|
|
1,205,113
|
|
|
|
1,170,235
|
|
|
|
|
|
|
|
|
|
|
|
5,960
|
|
|
|
52,206
|
|
|
|
14,027
|
|
|
|
2,463,898
|
|
2011
|
|
|
13,985
|
|
|
|
|
|
|
|
|
|
|
|
796,678
|
|
|
|
295,056
|
|
|
|
|
|
|
|
6,393
|
|
|
|
84
|
|
|
|
13,196
|
|
|
|
1,125,392
|
|
2012
|
|
|
5,978
|
|
|
|
|
|
|
|
|
|
|
|
784,546
|
|
|
|
246,246
|
|
|
|
|
|
|
|
259,622
|
|
|
|
89
|
|
|
|
12,356
|
|
|
|
1,308,837
|
|
2013
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
272,759
|
|
|
|
|
|
|
|
|
|
|
|
943
|
|
|
|
2,776
|
|
|
|
9,415
|
|
|
|
286,097
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
993,292
|
|
|
|
|
|
|
|
438,799
|
|
|
|
51,839
|
|
|
|
20,000
|
|
|
|
65,870
|
|
|
|
1,569,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,293,104
|
|
|
$
|
1,595,750
|
|
|
$
|
1,445,062
|
|
|
$
|
5,338,970
|
|
|
$
|
715,885
|
|
|
$
|
438,799
|
|
|
$
|
330,311
|
|
|
$
|
75,229
|
|
|
$
|
129,289
|
|
|
$
|
14,362,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
|
(2) |
|
Excludes net unamortized discounts of $0.5 million and is
based on contractual amortization schedule of our loans. The
underlying loans are subject to prepayment, which could shorten
the life of the term debt transactions; conversely, the
underlying loans may be amended to extend their term, which may
lengthen the life of the term debt transactions. At our option,
we may substitute loans for prepaid loans up to specified
limitations, which may also impact the life of the term debt
transactions. In addition, the contractual obligations for our
term debt transactions are computed based on the estimated life
of the instrument. The contractual obligations for the Owner
Trust term debt are computed based on the estimated lives of the
underlying adjustable rate prime residential mortgage whole
loans. |
|
(3) |
|
The contractual obligations for convertible debt are computed
based on the initial put/call date. The legal maturities of the
convertible debt are 2034 and 2037. For further discussion of
terms of our convertible debt and factors impacting their
maturity see Note 2, Summary of Significant Accounting
Policies, and Note 13, Borrowings, in our
accompanying audited consolidated financial statements for the
year ended December 31, 2008. |
|
(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 the accompanying audited consolidated balance
sheet as of December 31, 2008, 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 value of the contracts changes
daily as market interest rates change. Further discussion of
derivative instruments is included in Note 2, Summary of
Significant Accounting Policies, and Note 23,
Derivative Instruments, in our accompanying audited
consolidated financial statements for the year ended
December 31, 2008.
87
Credit
Risk Management
Credit risk is the risk of loss arising from adverse changes in
a clients or counterpartys ability to meet its
financial obligations under
agreed-upon
terms. Credit risk exists primarily in our lending, leasing and
derivative portfolios. The degree of credit risk will vary based
on many factors including the size of the asset or transaction,
the credit characteristics of the client, the contractual terms
of the agreement and the availability and quality of collateral.
We manage credit risk of our derivatives and credit-related
arrangements by limiting the total amount of arrangements
outstanding with an individual counterparty, by obtaining
collateral based on managements assessment of the client,
by applying uniform credit standards maintained for all
activities with credit risk.
As appropriate, the CapitalSource Inc. and CapitalSource Bank
Credit Committees evaluate and approve credit standards and
oversee the credit risk management function related to our
commercial loans, direct real estate investments and other
investments. Their primary responsibilities include ensuring the
adequacy of our credit risk management infrastructure,
overseeing credit risk management strategies and methodologies,
monitoring conditions in real estate and other markets having an
impact on lending activities, and evaluating and monitoring
overall credit risk and by monitoring our clients
financial condition and performance.
Commercial
Banking Segment
Credit risk management for the commercial loan portfolio 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 three factors: credit,
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.
Residential
Mortgage Investment Segment
A significant asset class in our residential mortgage investment
portfolio was Agency RMBS. For all Agency RMBS we benefited from
a full guarantee from Fannie Mae or Freddie Mac, and looked to
this guarantee to mitigate the risk of changes in the credit
performance of the mortgage loans underlying the Agency RMBS.
However, variation in the level of credit losses could impact
the duration of our investments since a credit loss results in
the prepayment of the relevant loan by the guarantor. Another
significant asset class in our residential mortgage investment
portfolio is mortgage-related receivables. With respect to
mortgage-related receivables, we are directly exposed to the
level of credit losses on the underlying mortgage loans. With
respect to Non-Agency RMBS we are exposed to changes in the
credit performance of the mortgage loan underlying these assets
and the value or performance of our investment was impacted by
higher levels of credit losses.
Concentrations
of Credit Risk
In our normal course of business, we engage in commercial
lending and leasing activities with clients primarily throughout
the United States. As of December 31, 2008, the single
largest industry concentration was healthcare and social
assistance, which made up approximately 18% of our commercial
loan portfolio. As of December 31, 2008, the largest
geographical concentration was New York, which made up
approximately 13% of our commercial loan portfolio. As of
December 31, 2008, the single largest industry
concentration in our direct real estate investment portfolio was
skilled nursing, which made up approximately 98% of the
investments. As of December 31, 2008, the largest
geographical concentration in our direct real estate investment
portfolio was Florida, which made up approximately 33% of the
investments.
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, 2008 and 2007, the gross positive fair
value of our derivative financial instruments were
$200.7 million and $82.9 million, respectively. Our
master netting agreements reduced the exposure to this gross
positive fair value by $166.4 million and
$58.0 million as of December 31, 2008 and 2007,
respectively. We held $24.2 million of collateral against
derivative financial instruments as of December 31, 2008.
We held no such amount as of December 31, 2007.
Accordingly, our net exposure to derivative counterparty credit
risks as of December 31, 2008 and 2007, was
$10.1 million and $24.9 million, 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 market movements. This risk is inherent in
the financial instruments associated with our operations
and/or
activities including loans, securities, short-term borrowings,
long-term debt, trading account assets and liabilities and
derivatives. Market-sensitive assets and liabilities are
generated through loans associated with our traditional lending
activities and market risk mitigation activities.
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, residential
mortgage investments 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 is the
effect of changes in the economic value of our loans, and our
other interest rate sensitive instruments and is reflected in
the levels of future income and expense produced by these
positions versus levels that would be generated by current
levels of interest rates. We seek to mitigate interest rate risk
through the use of various types of derivative instruments. For
a detailed discussion of our derivatives, see Note 23,
Derivative Instruments, of our accompanying audited
consolidated financial statements for the year ended
December 31, 2008.
Interest
Rate Risk Management Commercial Banking
Segment & Healthcare Net Lease Segment
Interest rate risk in our Commercial Banking and Healthcare Net
Lease segments refers to the change in earnings that may result
from changes in interest rates, primarily various short-term
interest rates, including LIBOR-based rates and the prime rate.
We attempt to mitigate exposure to the earnings impact of
interest rate changes by conducting the majority of our lending
and borrowing on a variable rate basis. The majority of our
commercial loan portfolio bears interest at a spread to the
LIBOR rate or a prime-based rate with almost all of our other
loans bearing interest at a fixed rate. The majority of our
borrowings bear interest at a spread to LIBOR or CP, with the
remainder bearing interest at a fixed rate. 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.
89
The estimated (decreases) increases in net interest income for a
12-month
segment based on changes in the interest rates applied to the
combined portfolios of our Commercial Banking segment and
Healthcare Net Lease segment as of December 31, 2008, were
as follows ($ in thousands):
|
|
|
|
|
Rate Change
|
|
|
|
(Basis Points)
|
|
|
|
|
−100
|
|
$
|
20,280
|
|
−50
|
|
|
17,160
|
|
+ 50
|
|
|
(16,080
|
)
|
+ 100
|
|
|
(30,000
|
)
|
For the purposes of the above analysis, we included related
derivatives, excluded principal payments and assumed a 70%
advance rate on our variable rate borrowings.
Approximately 48.7% of the aggregate outstanding principal
amount of our commercial loans had interest rate floors as of
December 31, 2008. Of the loans with interest rate floors,
approximately 99% had contractual rates below the interest rate
floor and the floor was providing a benefit to us. The loans
with interest rate floors as of December 31, 2008, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Percentage of
|
|
|
|
Outstanding(1)
|
|
|
Total Portfolio
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Loans with contractual interest rates:
|
|
|
|
|
|
|
|
|
Exceeding the interest rate floor
|
|
$
|
38,546
|
|
|
|
0.4
|
%
|
At the interest rate floor
|
|
|
9,164
|
|
|
|
0.1
|
|
Below the interest rate floor
|
|
|
4,573,750
|
|
|
|
48.2
|
|
Loans with no interest rate floor
|
|
|
4,873,413
|
|
|
|
51.3
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,494,873
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes related interest receivable. |
We use interest rate swaps to hedge the interest rate risk of
certain fixed rate assets. 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 interest rate swaps modify our exposure to interest
rate risk by synthetically converting fixed rate and prime rate
loans to one-month LIBOR. Additionally, we use offsetting
interest rate caps to hedge loans with embedded interest rate
caps. Our interest rate hedging activities partially protect us
from the risk that interest collected under fixed-rate and prime
rate loans will not be sufficient to service the interest due
under the one-month LIBOR-based term debt.
We also use interest rate swaps to hedge the interest rate risk
of certain fixed rate debt. These interest rate swaps modify our
exposure to interest rate risk by synthetically converting fixed
rate debt to one-month LIBOR.
We have also entered into relatively short-dated forward
exchange agreements to minimize exposure to foreign currency
risk arising from foreign currency denominated loans.
Fair
Value Measurements
A portion of our financial instruments are accounted for at fair
value both on a recurring and nonrecurring basis. Specifically,
investments in debt securities that are classified as trading
and derivative instruments are periodically adjusted to fair
value on a recurring basis through earnings. Investments in debt
and equity securities that are classified as available-for-sale
are adjusted to fair value on a recurring basis through
accumulated other comprehensive income, to the extent the losses
are not considered other-than-temporary. In addition, we may be
required from time to time to measure certain of our assets at
fair value on a nonrecurring basis Loans held for sale are
recorded at the lower of carrying value or fair value. We use
the fair value of collateral method to assess fair value for
certain of our commercial loans held for investment for purposes
of establishing a specific reserve against
90
those assets. The fair value of equity investments is estimated
for purposes of assessing and measuring such assets for
impairment purposes.
As discussed in Critical Accounting Estimates below, we
follow the guidance in SFAS No. 157, Fair Value
Measurements (SFAS No. 157) in
determining the fair value of our financial instruments
accounted for at fair value on a recurring and nonrecurring
basis. Accordingly, we classify each of these financial
instruments within Level 1, Level 2 or Level 3 of
the fair value hierarchy of SFAS No. 157. As of
December 31, 2008, 12.92% of total assets and 2.20% of
total liabilities consisted of financial instruments recorded at
fair value on a recurring basis. Of these financial assets
carried at fair value, $2.3 billion (12.70% of total
assets) were classified as Level 2 while $41.3 million
(0.22% of total assets) were classified as Level 3 as of
December 31, 2008. From a liability perspective,
$342.8 million (2.20% of total liabilities) were classified
as Level 2 while no liabilities were classified as
Level 3 as of December 31, 2008. As of
December 31, 2008, we had no financial assets or
liabilities classified as Level 1 within the fair value
hierarchy.
Fair
Values of Level 1 or Level 2 Financial
Instruments
Financial instruments 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 instruments fair value. These
investments are classified as either Level 1 or
Level 2 within the SFAS No. 157 hierarchy.
Whether a financial instrument is classified as Level 1 or
Level 2 depends largely on its similarity with other
financial instruments in the marketplace and our ability to
obtain corroborative data regarding whether the market in which
the financial instrument trades is active.
Our largest portfolio of financial instruments carried at
Level 2 is our Agency RMBS portfolio. Other Level 2
financial instruments recorded at fair value on a recurring
basis include our marketable securities, equity securities in
public companies and our over-the-counter traded derivatives. In
addition, our loans held for sale are recorded at fair value on
a nonrecurring basis and are classified as Level 2 when
fair values are determined through actual market transactions.
Below is a discussion of the valuation methods and assumptions
we use to estimate the fair value of our significant financial
assets and liabilities classified as Level 2 within the
fair value hierarchy.
Marketable
Securities
Marketable securities consist of Agency Discount Notes, Agency
Callable Notes, Agency Debt, Agency MBS and Corporate Debt that
are carried at fair value on a recurring basis and classified as
available-for-sale securities. 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 the quoted market prices of securities
with similar characteristics or independent pricing models,
which utilize observable market data such as benchmark yields,
reported trades and issuer spreads. The prices we receive from
external market participants are not adjusted as we believe that
these prices represent the best estimate of fair value. Fair
values obtained from pricing services are validated on a monthly
basis by comparing them to fair values obtained from the
independent asset custodian.
Residential
Mortgage-Backed Securities
Our Agency RMBS include mortgage-backed securities issued and
guaranteed by Fannie Mae or Freddie Mac. These securities are
carried at fair value on a recurring basis and classified as
trading securities. The securities are valued using quoted
prices from external market participants, including pricing
services. The prices we receive from external market
participants are not adjusted as we believe that these prices
represent the best estimate of fair value. We validate pricing
information received from external market participants by
obtaining independent, non-binding broker quotes from third
parties, comparing the implied option adjusted spread
(OAS) to the OAS for closely comparable securities
with an available market price and reviewing actual sale
activity occurring subsequent to the pricing date. During the
first quarter of 2009, we sold our remaining Agency RMBS with a
fair value of $1.5 billion for a gain of $28.0 million.
91
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. As discussed in more detail in Credit Risk
Management above, we manage counterparty credit risk by
obtaining collateral from counterparties and monitoring exposure
and collateral requirements on a daily basis. We do not believe
counterparty credit risk is a significant risk with our
derivatives as a result of the collateral requirements in place
in these contracts.
Fair
Values of Level 3 Financial Instruments
When observable market prices and data do not exist, significant
management judgment is necessary to estimate fair value. In
those cases, small changes in assumptions could result in
significant changes in valuation. 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.
Our financial assets carried at fair value on a recurring basis
that are classified as Level 3 within the
SFAS No. 157 hierarchy include our Non-Agency RMBS,
debt securities classified as available for sale and warrants.
Other Level 3 assets with fair value adjustments recorded
on a nonrecurring basis include loans held for investment,
equity investments accounted for under the cost or equity
methods of accounting and loans held for sale when the fair
values are determined through internally developed valuation
models. Below is a discussion of the valuation methods and
assumptions we use to estimate the fair value of our significant
financial assets and liabilities classified as Level 3
within the fair value hierarchy.
Loans
Held for Investment
Fair value adjustments are recorded on our loans held for
investment on a nonrecurring basis when we have determined that
it is necessary to record a specific reserve against the loans.
We may utilize the fair value of collateral, less costs to sell,
to measure the specific reserve for those loans that are
collateral dependent. To determine the fair value of the
collateral, we may employ different approaches depending on the
type of collateral. Typically, we determine the fair value of
the collateral using internally developed models, which require
significant management judgment. The primary inputs of the
valuation models vary based on the nature of the collateral and
may include expected cash flows, recovery rates, performance
multiples and risk premiums based on changing market conditions.
Our models utilize industry valuation benchmarks, such as
multiples of earnings before interest, taxes, depreciation, and
amortization (EBITDA), depending on the industry, to
determine a value for the underlying enterprise. Valuations
consider comparable market transactions where available. In
certain cases where our collateral is a fixed or other tangible
asset, we will periodically obtain a third party appraisal to
corroborate managements estimates of fair value. When
deemed necessary, we apply an additional liquidity discount to
the valuation model to reflect current market conditions.
During the year ended December 31, 2008, we recognized
losses of $353.2 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.
Available-for-Sale
Investments
Investments carried at fair value on a recurring basis include
debt securities classified as available-for-sale under
SFAS No. 115. Debt securities are primarily corporate
bonds whose values are determined using discounted cash flow
techniques for which key inputs include the timing and amount of
future cash flows and market yields.
92
Market yields are based on comparisons to other instruments for
which market data is available. Significant unobservable inputs
include estimates of credit default, recovery and prepayment
rates as well as assumptions surrounding the comparability to
other investments for which observable price and spread data is
available. Valuations may also be adjusted to reflect the
illiquidity of the investment. Such adjustments are based on
market available evidence and managements best estimates.
Prior to the fourth quarter of 2008, we utilized pricing
services to value our debt security investments. We considered
the inputs provided by pricing services in arriving at our fair
value estimates as of December 31, 2008. However, given the
declining volume of trading activity surrounding our
investments, we concluded that such inputs were no longer
representative of the investments fair value. The prices
provided by the pricing services lacked transparency as to the
volume and nature of actual transactions, if any, from which
these prices were developed. We believe our methods provide the
most reasonable estimates of fair value as they maximize the use
of market observable inputs and are most consistent with the
approach that would likely be used by market participants in
executing actual transactions. Had we based our fair value
estimates solely on the inputs provided by pricing services, the
fair value of our available-for-sale securities would have been
reduced by $20.9 million as compared to the fair value
estimates reflected in our accompanying consolidated balance
sheet as of December 31, 2008.
During the year ended December 31, 2008, we recognized
losses of $25.0 million related to other-than-temporary
declines in the fair value of our debt securities classified as
available-for-sale. We evaluate these investments for impairment
by considering, among other factors, the length of time and
extent to which the market value has been below its cost basis.
During 2008, as a result of the current economic environment,
the large majority of our unrealized losses on these debt
securities were recognized in earnings as other-than-temporary
impairment. For investments that were determined to be
other-than-temporarily impaired as of December 31, 2008, at
least a portion of the impairment recognized was attributable to
deterioration in the credit quality of the issuer. However, at
this time, we do not anticipate liquidating these investments in
the short term and believe that amounts realized upon settlement
or maturity of the investments may be greater than the fair
values recorded as of December 31, 2008.
Equity
Investments
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 impaired during the period. We impair
these investments to fair value when we have determined that
other-than-temporary impairment exists. 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,
depending on the industry, 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. Because of the
inherent uncertainty of determining the fair value of
investments that do not have a readily ascertainable market
value, the fair value of our investments may differ
significantly from the values that would have been used had a
ready market existed for the investments, and the differences
could be material.
The primary inputs utilized in our valuation models include
borrower financial information, transaction multiples and
liquidity discounts. Transaction multiples are based on
observable market transactions, when available, or similar
transactions for comparable companies. In determining the
appropriate multiple to use, we typically review a range of
comparable multiples and consider the amount of time elapsed
since the transaction occurred, the similarity of the investment
transacted to our investment and the similarity of comparable
public companies to our investment. In cases where no comparable
transactions are available, we use a comparable multiple within
the respective companys industry classification determined
by Standard & Poors. When deemed necessary, we
apply an additional liquidity discount to the valuation model.
In certain cases, liquidity discounts are already embedded into
the transaction multiple so no additional discount is applied.
During the year ended December 31, 2008, we recognized
losses of $60.0 million and $7.6 million related to
other-than-temporary declines in the fair value of our equity
investments accounted for under the cost and equity method of
accounting, respectively. We evaluate these investments for
impairment by considering, among other factors, the length of
time and extent to which the market value has been below its
cost basis. During 2008, as a
93
result of the current economic environment, the majority of our
unrealized losses on these investments were recognized in
earnings as other-than-temporary impairment.
Critical
Accounting Estimates
Accounting policies are integral to understanding our
Managements Discussion and Analysis of Financial
Condition and Results of Operations. The preparation of
financial statements in accordance 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 accompanying audited consolidated financial statements
for the year ended December 31, 2008, and our critical
accounting estimates are described in this section. Accounting
estimates are considered critical if the estimate requires
management to make assumptions 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. 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 portfolio. Management
performs detailed reviews of this 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 commercial loan portfolio comprises large balance,
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. When necessary, management establishes
specific allowances for commercial loans determined to be
individually impaired. An allowance for loan losses is estimated
by management based upon the borrowers overall financial
condition, financial resources and, when applicable, the
estimated realizable value of any collateral. Loans subject to
individual reviews are analyzed and segregated by risk according
to our internal risk rating scale. These risk classifications,
in conjunction with an analysis of historical loss experience,
current economic conditions, industry performance trends, and
any other pertinent information, (including individual
valuations on nonperforming loans) are considered 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.
In addition to the specific allowances for impaired loans, we
maintain allowances that are based on an evaluation for
impairment of certain commercial and residential portfolios.
These allowances are based on historical experience, current
economic conditions and performance trends within specific
portfolio segments. Certain considerations are made in relation
to the length and severity of outstanding balances. We generally
do not factor in guarantees from our capital call agreements
with our borrowers private equity sponsors in determining
the overall allowance for loan losses. Furthermore, when
performing the analysis on an individual troubled loan, we do
not consider any applicable borrower guarantees when calculating
our potential for a specific loss.
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. In this
case, management is required to make judgments related, but not
limited, to: (i) risk ratings for pools of commercial
loans; (ii) market and collateral values and discount rates
for individually evaluated loans; (iii) loss rates used for
commercial loans; (iv) adjustments made to assess current
events and conditions; (v) considerations regarding
economic uncertainty; and (vi) overall credit and economic
conditions.
94
Our allowance for loan losses is sensitive to the risk rating
assigned to commercial loans and to corresponding reserve
factors that we use to estimate the allowance and that are
reflective of historical losses. We have assigned 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
were determined by analyzing the following elements:
|
|
|
|
|
the types of loans, for example, whether the loan is
underwritten based on the borrowers assets, real estate or
cash flow;
|
|
|
|
our historical losses with regard to the loan types;
|
|
|
|
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, such as
latest credit agency rating information, actual and expected
trends in underlying economic or market conditions and changes
in our loss mitigation strategies. We estimate the allowance by
applying historical loss factors derived from loss tracking
mechanisms associated with actual portfolio movements over a
specified period of time, using a standard loan grading
procedure. 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 estimate inaccuracy and
uncertainty.
The sensitivity of our allowance for loan losses to potential
changes in our reserve factors (in terms of basis points)
applied to our overall loan portfolio as of December 31,
2008, was as follows:
|
|
|
|
|
|
|
Estimated Increase
|
|
Change in Reserve Factors
|
|
(Decrease) in the
|
|
(Basis Points)
|
|
Allowance for Loan Losses
|
|
|
|
($ in thousands)
|
|
|
+ 50
|
|
$
|
43,624
|
|
+ 25
|
|
|
21,812
|
|
−25
|
|
|
(21,812
|
)
|
−50
|
|
|
(43,624
|
)
|
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 may have been 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, on page 28 of this
Form 10-K.
Fair
Value of Financial Instruments
We adopted SFAS No. 157 effective January 1,
2008. SFAS No. 157 defines fair value 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.
SFAS No. 157 establishes a fair value hierarchy which
prioritizes the inputs into valuation techniques used to measure
fair value. The 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
95
these as Level 3 measurements. The three levels of the fair
value hierarchy under SFAS No. 157 are described below:
Level 1 Valuations based on unadjusted quoted
prices in active markets for identical assets or liabilities
that the reporting entity has 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;
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 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.
It is our policy to maximize the use of observable market based
inputs, when appropriate, to value our financial instruments
carried at fair value on a recurring basis or to determine
whether an adjustment to fair value is needed for assets carried
at fair value on a non-recurring basis. Given the nature of some
of our financial instruments carried at fair value, whether on a
recurring or nonrecurring basis, clearly determinable market
based valuation inputs are often not available. Therefore, these
instruments are valued using internal assumptions and classified
as Level 3 within the SFAS No. 157 hierarchy.
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
selection of a method to estimate fair value for each type of
financial instrument depends on the reliability and availability
of relevant market data. The amount of judgment involved in
estimating the fair value of a financial instrument 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. 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.
|
See Fair Value Measurements above for additional
discussion surrounding the specific methods and assumptions we
use to estimate the fair value of our financial instruments
carried at fair value on a recurring and nonrecurring basis.
Income
Taxes
We elected REIT status under the Code when we filed our federal
tax return for the year ended December 31, 2006. We
operated as a REIT through 2008, but revoked our REIT election
effective January 1, 2009. While we were a REIT, we
generally were not subject to corporate-level income tax on the
earnings distributed to our shareholders that were derived from
our REIT qualifying activities, but were subject to
corporate-level income tax on the earnings we derived from our
TRSs. While we were a REIT, we were still subject to foreign,
state and local taxation in various foreign, state and local
jurisdictions, including those in which we transacted business
or resided.
In order to estimate our corporate-level income taxes while we
were a REIT, we were required to determine the amount of our net
income derived from our TRSs during the entire taxable year, and
if any, expected undistributed REIT taxable income. If our
estimates of the source of the net income were not appropriate,
income taxes could be materially different from amounts reported
in our quarterly and annual consolidated statements of income.
While we were a REIT, we continued to be subject to
corporate-level income tax on the earnings we derived from our
TRSs. As more fully described in Note 2, Summary of
Significant Accounting Policies, and Note 16,
96
Income Taxes, of the accompanying audited consolidated
financial statements for the year ended December 31, 2008,
we account for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes
(SFAS 109). Income tax receivable, reported
as a component of other assets on our consolidated balance
sheet, represent the net amount of current income taxes we
expect to receive from various taxing jurisdictions attributable
to our operations to date. We consider many factors in filing
income tax returns, including statutory, judicial and regulatory
guidance, in estimating the appropriate accrued income taxes for
each jurisdiction.
In applying the principles of SFAS 109, we monitor relevant
tax authorities and change our estimate of accrued income taxes
due to changes in income tax laws and their interpretation by
the courts and regulatory authorities. These revisions of our
estimate of accrued income taxes, which also may result from our
own income tax planning and from the resolution of income tax
controversies, can materially affect our operating results for
any given reporting period.
Effective January 1, 2009, we provide for income taxes as a
C corporation on income earned from our operations.
97
|
|
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 23,
Derivative Instruments and Note 24, Credit
Risk, in our accompanying audited consolidated financial
statements for the year ended December 31, 2008.
Equity
Price Risk
As further described in Note 13, Borrowings, in our
accompanying audited consolidated financial statements for the
year ended December 31, 2008, we have outstanding
1.25% senior convertible debentures (the
1.25% Debentures) and 3.5% senior
convertible debentures (the 3.5% Debentures).
In 2007, we completed exchange offers related to our
1.25% Debentures and 3.5% Debentures in which we
issued 1.625% senior subordinated convertible debentures
(the 1.625% Debentures) and 4% senior
subordinated convertible debentures (the
4% Debentures). In addition, in 2007, we issued
7.25% senior subordinated convertible debentures (the
7.25% Debentures and together with the 1.25%,
1.625%, 3.5%, and 4% Debentures, the
Debentures).
Our 1.25% Debentures and 1.625% Debentures would be
convertible into our common stock at a conversion price of
$20.37 per share, subject to adjustment upon the occurrence of
specified events. As of December 31, 2008, each $1,000 of
the aggregate outstanding principal of the 1.25% Debentures
and 1.625% Debentures would be convertible into
49.1002 shares of our common stock, subject to adjustment
upon the occurrence of specified events.
Our 3.5% Debentures and 4% Debentures would be
convertible into our common stock at a conversion price of
$21.29 per share, subject to adjustment upon the occurrence of
specified events. As of December 31, 2008, each $1,000 of
the aggregate outstanding principal of the 3.5% Debentures
and 4% Debentures would be convertible into
46.9599 shares of our common stock, subject to adjustment
upon the occurrence of specified events.
Our 7.25% Debentures would be convertible into our common
stock at a conversion price of $27.09 per share, subject to
adjustment upon the occurrence of specified events. As of
December 31, 2008, each $1,000 of the aggregate outstanding
principal of the 7.25% Debentures would be convertible into
36.9079 shares of our common stock, subject to adjustment
upon the occurrence of specified events.
Holders of the Debentures may convert their debentures prior to
maturity only if: (1) the sale price of our common stock
reaches specified thresholds, (2) the trading price of the
Debentures falls below a specified threshold, (3) the
Debentures have been called for redemption, or
(4) specified corporate transactions occur.
In addition, in the event of a significant change in our
corporate ownership or structure, the holders may require us to
repurchase all or any portion of their Debentures for 100% of
the principal amount.
98
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 the companys 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.
In July 2008, we acquired approximately $5.2 billion of
deposits, participation in a pool of commercial real estate
loans (the A Participation Interest) and 22
retail banking branches from Fremont Investment & Loan
and commenced operations of CapitalSource Bank. Total assets of
CapitalSource Bank represent approximately 33% of our
consolidated total assets as of December 31, 2008. Net
investment income from CapitalSource Bank represents
approximately 11% of our consolidated net investment income for
the year ended December 31, 2008. We have excluded
CapitalSource Bank from our assessment of internal control over
financial reporting as of December 31, 2008, and
managements conclusion about the effectiveness of our
internal control over financial reporting does not extend to the
internal controls of CapitalSource Bank. For further details on
this acquisition see Note 3, Acquisition, in the
accompanying audited financial statements for the year ended
December 31, 2008.
CapitalSources management assessed the effectiveness of
the companys internal control over financial reporting as
of December 31, 2008. 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 our
assessment we believe that, as of December 31, 2008, 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 100.
99
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, 2008, 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.
As indicated in the accompanying Management Report on Internal
Control Over Financial Reporting, managements assessment
of and conclusion on the effectiveness of internal control over
financial reporting did not include the internal controls of
CapitalSource Bank, which is included in the December 31,
2008 consolidated financial statements of CapitalSource Inc. and
constituted 33% of consolidated total assets as of
December 31, 2008 and 11% of consolidated net investment
income for the year then ended. Our audit of internal control
over financial reporting of CapitalSource Inc. also did not
include an evaluation of internal control over financial
reporting of CapitalSource Bank.
In our opinion, CapitalSource Inc. maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2008, 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, 2008 and 2007, and the related consolidated
statements of income, shareholders equity and cash flows
for each of the three years in the period ended
December 31, 2008 and our report dated March 2, 2009
expressed an unqualified opinion thereon.
McLean, Virginia
March 2, 2009
100
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Index to
Consolidated Financial Statements
For the Years Ended December 31, 2008, 2007 and
2006
101
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of CapitalSource Inc.
We have audited the accompanying consolidated balance sheets of
CapitalSource Inc. (CapitalSource) as of
December 31, 2008 and 2007, and the related consolidated
statements of income, shareholders equity and cash flows
for each of the three years in the period ended
December 31, 2008. 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,
2008 and 2007, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended December 31, 2008, in conformity with
U.S. generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial
statements, CapitalSource adopted the provisions of Financial
Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109, as of
January 1, 2007.
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, 2008, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 2, 2009 expressed an unqualified
opinion thereon.
McLean, Virginia
March 2, 2009
102
CapitalSource
Inc.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
1,338,563
|
|
|
$
|
178,699
|
|
Restricted cash
|
|
|
419,383
|
|
|
|
513,803
|
|
Marketable securities, available-for-sale
|
|
|
642,714
|
|
|
|
|
|
Mortgage-related receivables, net
|
|
|
1,801,535
|
|
|
|
2,033,296
|
|
Mortgage-backed securities pledged, trading
|
|
|
1,489,291
|
|
|
|
4,030,180
|
|
Commercial real estate A Participation Interest, net
|
|
|
1,396,611
|
|
|
|
|
|
Loans held for sale
|
|
|
8,543
|
|
|
|
94,327
|
|
Loans:
|
|
|
|
|
|
|
|
|
Loans
|
|
|
9,396,751
|
|
|
|
9,717,146
|
|
Less deferred loan fees and discounts
|
|
|
(174,317
|
)
|
|
|
(147,089
|
)
|
Less allowance for loan losses
|
|
|
(423,844
|
)
|
|
|
(138,930
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
8,798,590
|
|
|
|
9,431,127
|
|
Interest receivable
|
|
|
117,516
|
|
|
|
95,441
|
|
Direct real estate investments, net
|
|
|
989,716
|
|
|
|
1,017,604
|
|
Investments
|
|
|
178,972
|
|
|
|
231,645
|
|
Goodwill
|
|
|
173,135
|
|
|
|
5,344
|
|
Other assets
|
|
|
1,060,332
|
|
|
|
408,883
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
18,414,901
|
|
|
$
|
18,040,349
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS
EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
5,043,695
|
|
|
$
|
|
|
Repurchase agreements
|
|
|
1,595,750
|
|
|
|
3,910,027
|
|
Credit facilities
|
|
|
1,445,062
|
|
|
|
2,207,063
|
|
Term debt
|
|
|
5,338,456
|
|
|
|
7,146,437
|
|
Other borrowings
|
|
|
1,560,224
|
|
|
|
1,704,108
|
|
Other liabilities
|
|
|
592,136
|
|
|
|
444,997
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
15,575,323
|
|
|
|
15,412,632
|
|
Noncontrolling interests
|
|
|
457
|
|
|
|
45,446
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock (50,000,000 shares authorized; no shares
outstanding)
|
|
|
|
|
|
|
|
|
Common stock ($0.01 par value, 1,200,000,000 and
500,000,000 shares authorized, respectively; 282,804,211
and 220,704,800 shares issued and outstanding, respectively)
|
|
|
2,828
|
|
|
|
2,207
|
|
Additional paid-in capital
|
|
|
3,683,065
|
|
|
|
2,902,501
|
|
Accumulated deficit
|
|
|
(855,867
|
)
|
|
|
(327,387
|
)
|
Accumulated other comprehensive income, net
|
|
|
9,095
|
|
|
|
4,950
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,839,121
|
|
|
|
2,582,271
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, noncontrolling interests and
shareholders equity
|
|
$
|
18,414,901
|
|
|
$
|
18,040,349
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
103
CapitalSource
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands, except per share data)
|
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
946,593
|
|
|
$
|
1,039,533
|
|
|
$
|
847,730
|
|
Mortgage-backed securities pledged, trading
|
|
|
122,181
|
|
|
|
212,869
|
|
|
|
147,308
|
|
Other
|
|
|
39,787
|
|
|
|
25,501
|
|
|
|
21,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
1,108,561
|
|
|
|
1,277,903
|
|
|
|
1,016,533
|
|
Fee income
|
|
|
133,146
|
|
|
|
162,395
|
|
|
|
170,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
1,241,707
|
|
|
|
1,440,298
|
|
|
|
1,187,018
|
|
Operating lease income
|
|
|
107,748
|
|
|
|
97,013
|
|
|
|
30,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
1,349,455
|
|
|
|
1,537,311
|
|
|
|
1,217,760
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
76,245
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
635,865
|
|
|
|
847,241
|
|
|
|
606,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
712,110
|
|
|
|
847,241
|
|
|
|
606,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
637,345
|
|
|
|
690,070
|
|
|
|
611,035
|
|
Provision for loan losses
|
|
|
593,046
|
|
|
|
78,641
|
|
|
|
81,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income after provision for loan losses
|
|
|
44,299
|
|
|
|
611,429
|
|
|
|
529,473
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
143,401
|
|
|
|
157,755
|
|
|
|
135,912
|
|
Depreciation of direct real estate investments
|
|
|
35,889
|
|
|
|
32,004
|
|
|
|
11,468
|
|
Professional fees
|
|
|
52,578
|
|
|
|
29,375
|
|
|
|
28,340
|
|
Other administrative expenses
|
|
|
59,327
|
|
|
|
48,857
|
|
|
|
40,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
291,195
|
|
|
|
267,991
|
|
|
|
216,052
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain on investments, net
|
|
|
(73,569
|
)
|
|
|
20,270
|
|
|
|
12,101
|
|
(Loss) gain on derivatives
|
|
|
(41,082
|
)
|
|
|
(46,150
|
)
|
|
|
2,485
|
|
(Loss) gain on residential mortgage investment portfolio
|
|
|
(102,779
|
)
|
|
|
(75,164
|
)
|
|
|
2,528
|
|
Gain (loss) on debt extinguishment, net
|
|
|
58,856
|
|
|
|
678
|
|
|
|
(2,497
|
)
|
Other income, net of expenses
|
|
|
(15,509
|
)
|
|
|
25,716
|
|
|
|
22,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(174,083
|
)
|
|
|
(74,650
|
)
|
|
|
37,328
|
|
Noncontrolling interests expense
|
|
|
1,426
|
|
|
|
4,938
|
|
|
|
4,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before income taxes and cumulative effect
of accounting change
|
|
|
(422,405
|
)
|
|
|
263,850
|
|
|
|
346,038
|
|
Income tax (benefit) expense
|
|
|
(199,781
|
)
|
|
|
87,563
|
|
|
|
67,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before cumulative effect of accounting
change
|
|
|
(222,624
|
)
|
|
|
176,287
|
|
|
|
278,906
|
|
Cumulative effect of accounting change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(222,624
|
)
|
|
$
|
176,287
|
|
|
$
|
279,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.89
|
)
|
|
$
|
0.92
|
|
|
$
|
1.68
|
|
Diluted
|
|
$
|
(0.89
|
)
|
|
$
|
0.91
|
|
|
$
|
1.65
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
251,213,699
|
|
|
|
191,697,254
|
|
|
|
166,273,730
|
|
Diluted
|
|
|
251,213,699
|
|
|
|
193,282,656
|
|
|
|
169,220,007
|
|
See accompanying notes.
104
CapitalSource
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Deferred
|
|
|
(Loss)
|
|
|
Stock,
|
|
|
Shareholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Compensation
|
|
|
Income, net
|
|
|
at cost
|
|
|
Equity
|
|
|
|
($ in thousands)
|
|
|
Total shareholders equity as of December 31, 2005
|
|
$
|
1,404
|
|
|
$
|
1,248,745
|
|
|
$
|
46,783
|
|
|
$
|
(65,729
|
)
|
|
$
|
(1,339
|
)
|
|
$
|
(29,926
|
)
|
|
$
|
1,199,938
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
279,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
279,276
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,804
|
|
|
|
|
|
|
|
3,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
283,080
|
|
Cumulative effect of accounting change, net of taxes
|
|
|
|
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(370
|
)
|
Dividends paid
|
|
|
|
|
|
|
8,503
|
|
|
|
(346,746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(338,243
|
)
|
Issuance of common stock, net
|
|
|
391
|
|
|
|
912,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
913,158
|
|
Stock option expense
|
|
|
|
|
|
|
8,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,598
|
|
Exercise of options
|
|
|
7
|
|
|
|
7,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,050
|
|
Restricted stock activity
|
|
|
13
|
|
|
|
(50,146
|
)
|
|
|
(48
|
)
|
|
|
65,729
|
|
|
|
|
|
|
|
|
|
|
|
15,548
|
|
Tax benefit on exercise of options
|
|
|
|
|
|
|
3,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,018
|
|
Tax benefit on vesting of restricted stock grants
|
|
|
|
|
|
|
1,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity as of December 31, 2006
|
|
|
1,815
|
|
|
|
2,139,421
|
|
|
|
(20,735
|
)
|
|
|
|
|
|
|
2,465
|
|
|
|
(29,926
|
)
|
|
|
2,093,040
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
176,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176,287
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,485
|
|
|
|
|
|
|
|
2,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
178,772
|
|
Cumulative effect of adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
(5,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,702
|
)
|
Dividends paid
|
|
|
|
|
|
|
10,064
|
|
|
|
(477,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(467,173
|
)
|
Issuance of common stock, net
|
|
|
379
|
|
|
|
695,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,926
|
|
|
|
726,023
|
|
Stock option expense
|
|
|
|
|
|
|
7,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,569
|
|
Exercise of options
|
|
|
4
|
|
|
|
4,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,750
|
|
Restricted stock activity
|
|
|
9
|
|
|
|
22,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,761
|
|
Beneficial conversion option on convertible debt
|
|
|
|
|
|
|
20,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,177
|
|
Tax benefit on exercise of options
|
|
|
|
|
|
|
1,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,077
|
|
Tax benefit on vesting of restricted stock grants
|
|
|
|
|
|
|
977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity as of December 31, 2007
|
|
|
2,207
|
|
|
|
2,902,501
|
|
|
|
(327,387
|
)
|
|
|
|
|
|
|
4,950
|
|
|
|
|
|
|
|
2,582,271
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
(222,624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(222,624
|
)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,145
|
|
|
|
|
|
|
|
4,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(218,479
|
)
|
Dividends paid
|
|
|
|
|
|
|
4,463
|
|
|
|
(305,856
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(301,393
|
)
|
Proceeds from issuance of common stock, net
|
|
|
559
|
|
|
|
646,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
646,575
|
|
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
|
|
Beneficial conversion option on convertible debt
|
|
|
|
|
|
|
35,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,128
|
|
Tax benefit on exercise of options
|
|
|
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
|
|
Tax expense on vesting of restricted stock grants
|
|
|
|
|
|
|
(10,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity as of December 31, 2008
|
|
$
|
2,828
|
|
|
$
|
3,683,065
|
|
|
$
|
(855,867
|
)
|
|
$
|
|
|
|
$
|
9,095
|
|
|
$
|
|
|
|
$
|
2,839,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
105
CapitalSource
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Unaudited
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(222,624
|
)
|
|
$
|
176,287
|
|
|
$
|
279,276
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities, net of impact of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
1,019
|
|
|
|
7,569
|
|
|
|
8,598
|
|
Restricted stock expense
|
|
|
42,575
|
|
|
|
36,921
|
|
|
|
24,695
|
|
(Gain) loss on extinguishment of debt
|
|
|
(58,856
|
)
|
|
|
(678
|
)
|
|
|
2,497
|
|
Non-cash prepayment fee
|
|
|
|
|
|
|
|
|
|
|
(8,353
|
)
|
Cumulative effect of accounting change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
(370
|
)
|
Amortization of deferred loan fees and discounts
|
|
|
(90,967
|
)
|
|
|
(88,558
|
)
|
|
|
(86,248
|
)
|
Paid-in-kind
interest on loans
|
|
|
15,852
|
|
|
|
(30,053
|
)
|
|
|
331
|
|
Provision for loan losses
|
|
|
593,046
|
|
|
|
78,641
|
|
|
|
81,562
|
|
Amortization of deferred financing fees and discounts
|
|
|
131,207
|
|
|
|
47,672
|
|
|
|
41,232
|
|
Depreciation and amortization
|
|
|
39,457
|
|
|
|
35,891
|
|
|
|
14,755
|
|
(Benefit) provision for deferred income taxes
|
|
|
(162,997
|
)
|
|
|
41,793
|
|
|
|
(20,699
|
)
|
Non-cash loss (gain) on investments, net
|
|
|
82,250
|
|
|
|
(865
|
)
|
|
|
8,024
|
|
Impairment of Parent Company goodwill
|
|
|
5,344
|
|
|
|
|
|
|
|
|
|
Non-cash loss (gain) on property and equipment disposals
|
|
|
17,202
|
|
|
|
1,037
|
|
|
|
(404
|
)
|
Unrealized loss (gain) on derivatives and foreign currencies, net
|
|
|
41,093
|
|
|
|
42,599
|
|
|
|
(1,470
|
)
|
Unrealized loss on residential mortgage investment portfolio, net
|
|
|
50,085
|
|
|
|
75,507
|
|
|
|
4,758
|
|
Net decrease (increase) in mortgage-backed securities pledged,
trading
|
|
|
2,559,389
|
|
|
|
(494,153
|
)
|
|
|
(375,244
|
)
|
Amortization of discount on residential mortgage investments
|
|
|
(8,619
|
)
|
|
|
(39,380
|
)
|
|
|
(32,090
|
)
|
Accretion of discount on commercial real estate A
participation interest
|
|
|
(23,777
|
)
|
|
|
|
|
|
|
|
|
Increase in interest receivable
|
|
|
(16,515
|
)
|
|
|
(23,673
|
)
|
|
|
(27,889
|
)
|
Decrease (increase) in loans held for sale, net
|
|
|
269,983
|
|
|
|
(598,897
|
)
|
|
|
(9,143
|
)
|
(Increase) decrease in other assets
|
|
|
(483,124
|
)
|
|
|
(234,964
|
)
|
|
|
10,285
|
|
Increase in other liabilities
|
|
|
123,943
|
|
|
|
194,974
|
|
|
|
82,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating activities, net of impact
of acquisitions
|
|
|
2,904,966
|
|
|
|
(772,330
|
)
|
|
|
(3,321
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted cash
|
|
|
94,420
|
|
|
|
(272,899
|
)
|
|
|
47,538
|
|
Decrease (increase) in mortgage-related receivables, net
|
|
|
214,298
|
|
|
|
265,839
|
|
|
|
(2,333,434
|
)
|
Decrease in commercial real estate A participation
interest, net
|
|
|
447,804
|
|
|
|
|
|
|
|
|
|
Acquisition of CS Advisors CLO II
|
|
|
(18,619
|
)
|
|
|
|
|
|
|
|
|
Decrease (increase) in receivables under reverse-repurchase
agreements, net
|
|
|
|
|
|
|
51,892
|
|
|
|
(18,649
|
)
|
Increase in loans, net
|
|
|
(12,551
|
)
|
|
|
(1,434,109
|
)
|
|
|
(1,919,862
|
)
|
Acquisition of real estate, net of cash acquired
|
|
|
(10,121
|
)
|
|
|
(248,120
|
)
|
|
|
(498,005
|
)
|
Acquisition of investments, net
|
|
|
(48,956
|
)
|
|
|
(28,724
|
)
|
|
|
(32,583
|
)
|
Acquisition of marketable securities, available for sale, net
|
|
|
(639,116
|
)
|
|
|
|
|
|
|
|
|
Net cash acquired in FIL transaction
|
|
|
3,187,037
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment, net
|
|
|
(5,594
|
)
|
|
|
(5,379
|
)
|
|
|
(4,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities
|
|
|
3,208,602
|
|
|
|
(1,671,500
|
)
|
|
|
(4,759,600
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(75,931
|
)
|
|
|
(53,107
|
)
|
|
|
(56,623
|
)
|
Deposits accepted, net of repayments
|
|
|
(126,773
|
)
|
|
|
|
|
|
|
|
|
(Repayments) borrowings under repurchase agreements, net
|
|
|
(2,314,277
|
)
|
|
|
399,259
|
|
|
|
393,114
|
|
(Repayments) borrowings on credit facilities, net
|
|
|
(912,276
|
)
|
|
|
(47,414
|
)
|
|
|
130,567
|
|
Borrowings of term debt
|
|
|
56,108
|
|
|
|
2,860,607
|
|
|
|
5,508,204
|
|
Repayments of term debt
|
|
|
(1,808,720
|
)
|
|
|
(1,503,018
|
)
|
|
|
(1,548,875
|
)
|
(Repayments) borrowings under other borrowings
|
|
|
(74,177
|
)
|
|
|
320,630
|
|
|
|
206,685
|
|
Proceeds from issuance of common stock, net of offering costs
|
|
|
601,755
|
|
|
|
714,490
|
|
|
|
603,422
|
|
Proceeds from exercise of options
|
|
|
362
|
|
|
|
4,750
|
|
|
|
7,050
|
|
Tax (expense) benefits on share-based payments
|
|
|
(10,641
|
)
|
|
|
2,054
|
|
|
|
4,281
|
|
Payment of dividends
|
|
|
(289,134
|
)
|
|
|
(471,873
|
)
|
|
|
(412,649
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by financing activities
|
|
|
(4,953,704
|
)
|
|
|
2,226,378
|
|
|
|
4,835,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
1,159,864
|
|
|
|
(217,452
|
)
|
|
|
72,255
|
|
Cash and cash equivalents as of beginning of year
|
|
|
178,699
|
|
|
|
396,151
|
|
|
|
323,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end of year
|
|
$
|
1,338,563
|
|
|
$
|
178,699
|
|
|
$
|
396,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
641,312
|
|
|
$
|
768,259
|
|
|
$
|
524,759
|
|
Income taxes, net of refunds
|
|
|
65,992
|
|
|
|
93,221
|
|
|
|
89,835
|
|
Noncash transactions from investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with dividends and real
estate acquisition
|
|
$
|
|
|
|
$
|
|
|
|
$
|
309,736
|
|
Assumption of FIL assets and liabilities
|
|
|
3,292,185
|
|
|
|
|
|
|
$
|
|
|
Beneficial conversion option on convertible debt
|
|
|
35,128
|
|
|
|
20,177
|
|
|
|
|
|
Exchange of common stock for convertible debentures
|
|
|
44,880
|
|
|
|
|
|
|
|
|
|
Assets acquired through foreclosure
|
|
|
127,315
|
|
|
|
20,225
|
|
|
|
|
|
Assumption of note payable
|
|
|
25,729
|
|
|
|
|
|
|
|
|
|
Acquisition of real estate
|
|
|
2,120
|
|
|
|
110,675
|
|
|
|
235,766
|
|
Conversion of noncontrolling interests into common stock
|
|
|
44,989
|
|
|
|
11,533
|
|
|
|
|
|
Assumption of intangible lease liability
|
|
|
|
|
|
|
30,476
|
|
|
|
|
|
Assumption of term debt
|
|
|
|
|
|
|
71,027
|
|
|
|
|
|
Change in fair value of standby letters of credit
|
|
|
|
|
|
|
104
|
|
|
|
1,565
|
|
Acquisition of investments in unconsolidated trusts
|
|
|
|
|
|
|
2,544
|
|
|
|
6,522
|
|
Dividends declared but not paid
|
|
|
13,827
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
106
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS
CapitalSource Inc. (CapitalSource), a Delaware
corporation, is a commercial lender that provides financial
products to middle market businesses, and, through our wholly
owned subsidiary, CapitalSource Bank, provides depository
products and services in southern and central California. Our
primary products include:
|
|
|
|
|
Depository Products and Services Savings and
money market accounts, Individual Retirement Accounts and
certificates of deposit insured up to the maximum amounts
permitted by the Federal Deposit Insurance Corporation
(FDIC);
|
|
|
|
First Mortgage Loans Commercial loans that
are secured by senior first mortgage on real property of the
client;
|
|
|
|
Senior Secured Asset-Based Loans Commercial
loans that are underwritten based on our assessment of the
clients eligible collateral, including accounts
receivable, real estate related receivables
and/or
inventory;
|
|
|
|
Senior Secured Cash Flow Loans Commercial
loans that are underwritten based on our assessment of a
clients ability to generate cash flows sufficient to repay
the loan and maintain or increase its enterprise value during
the term of the loan, thereby facilitating repayment of the
principal at maturity;
|
|
|
|
Direct Real Estate Investments Investments in
income-producing healthcare facilities that are generally leased
through long-term,
triple-net
operating leases;
|
|
|
|
Term B, Second Lien and Mezzanine Loans
Commercial loans, including subordinated mortgage loans, that
come after a clients senior term loans in right of payment
or upon liquidation;
|
|
|
|
Equity Investments Opportunistically
invested, typically in conjunction with commercial financing
relationships and on the same terms as other equity
investors; and
|
|
|
|
Residential Mortgage Investments Invested in
residential mortgage loans and residential mortgage-backed
securities that constituted qualifying REIT assets.
|
We currently operate as three reportable segments:
1) Commercial Banking, 2) Healthcare Net Lease, and
3) Residential Mortgage Investment. Our Commercial Banking
segment comprises our commercial lending business activities;
our Healthcare Net Lease segment comprises our direct real
estate investment business activities; and our Residential
Mortgage Investment segment comprises our residential mortgage
investment and other investment activities in which we formerly
engaged to optimize our qualification as a real estate
investment trust (REIT).
From January 1, 2006 to the third quarter of 2007, we
presented financial results through two reportable segments:
1) Commercial Lending & Investment and
2) Residential Mortgage Investment. Our Commercial
Lending & Investment segment comprised our commercial
lending and direct real estate investment business activities
and our Residential Mortgage Investment segment comprised all of
our activities related to our investments in residential
mortgage loans and residential mortgage-backed securities
(RMBS). Changes were made in the way management
organizes financial information to make operating decisions,
resulting in the activities previously reported in the
Commercial Lending & Investment segment being
disaggregated into the Commercial Finance segment and the
Healthcare Net Lease segment as described above. Beginning in
the third quarter of 2008, we changed the name of our Commercial
Finance segment to Commercial Banking to incorporate depository
products and services of CapitalSource Bank. We have
reclassified all comparative prior period segment information to
reflect our three reportable segments. For financial information
about our segments, see Note 26, Segment Data, in
our accompanying audited consolidated financial statements for
the years ended December 31, 2008.
|
|
Note 2.
|
Summary
of Significant Accounting Policies
|
Our financial reporting and accounting policies conform to
U.S. generally accepted accounting principles
(GAAP).
107
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Use of
Estimates
The preparation of the 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 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, including those of 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.
Fair
Value Measurements
Effective January 1, 2008, we adopted Statement of
Financial Accounting Standards (SFAS) No. 157,
Fair Value Measurements
(SFAS No. 157), which establishes a
framework for measuring fair value in generally accepted
accounting principles, clarifies the definition of fair value
within that framework, and expands disclosures about the use of
fair value measurements. This statement applies whenever other
accounting standards require or permit fair value measurement.
Under this standard, fair value is defined as the price that
would be received to sell an asset or paid to transfer a
liability (the exit price) in an orderly transaction
between market participants.
SFAS No. 157 establishes a fair value hierarchy which
prioritizes the inputs into valuation techniques used to measure
fair value. The 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 under SFAS No. 157 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 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 more information on our
application of SFAS No. 157, see Note 25, 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 collections from our borrowers, amounts due from banks,
U.S. Treasury securities, short-term investments and
commercial paper with an initial maturity of three months or
less.
108
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Loans
Loans held 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, adjusted for actual prepayments,
using the interest method. We use contractual payment terms to
determine the constant yield needed to apply the interest method.
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
all or part of that loan 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 in portfolio to held
for sale. Upon transfer, the 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 of expenses
in the accompanying audited consolidated statements of income.
Gains or losses on the sale of these loans are also recorded in
other income, net of expenses in the accompanying audited
consolidated statements of income. In certain circumstances,
loans designated as held for sale may later be transferred back
to the loan portfolio based upon our intent to retain the loan.
We transfer these loans to our portfolio at the lower of cost or
fair value.
Allowance
for Loan Losses
Our allowance for loan losses represents managements
estimate of incurred loan losses inherent in the our loan
portfolio as of the balance sheet date. The estimation of the
allowance 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. Losses
are recognized when available information indicates that it is
probable that a loss has been incurred and the amount of the
loss can be reasonably estimated.
We perform periodic and systematic detailed reviews of our loan
portfolios to identify credit risks and to assess the overall
collectibility of those portfolios. The allowance on certain
pools of loans with similar characteristics is based on
aggregated portfolio segment evaluations generally by loan type
and is estimated using reserve factors that are reflective of
estimated historical and industry loss rates. The commercial
portfolios are reviewed on an individual loan basis. Loans
subject to individual reviews are analyzed and segregated by
risk according to our internal risk rating scale. These risk
classifications, in conjunction with an analysis of historical
loss experience, current economic conditions, industry
performance trends, and any other pertinent information,
including individual valuations on nonperforming 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.
If necessary, a specific allowance for loan losses is
established for individual impaired commercial loans. 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. Once a loan has been
identified as individually impaired, management measures
impairment in accordance with SFAS No. 114,
Accounting by Creditors for Impairment of a Loan,
(SFAS No. 114). Individually impaired
loans are measured based on the present value of payments
expected to be received, observable market prices, or the
estimated fair value of the collateral. We generally do not
factor in guarantees from or capital call agreements with our
borrowers private equity sponsors in determining the
overall allowance for loan losses. If the recorded investment in
impaired loans exceeds the present value of payments expected to
be received, a specific allowance is established as a component
of the allowance for loan losses.
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THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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 client or other terms and conditions.
Real
Estate Owned
Real Estate Owned (REO), includes foreclosed
property received in full satisfaction of a loan. We recognize
REO upon the earlier of the loan foreclosure event or when we
take physical possession of the property (i.e., through a deed
in lieu of foreclosure transaction). REO is initially measured
at its fair value less its estimated costs to sell. We treat any
excess of our recorded investment in the loan over the fair
value less estimated costs to sell the property as a charge-off
to the allowance for loan losses.
REO that we do not intend to sell are classified separately as
held for use, are depreciated and are recorded in other assets
in the accompanying 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 other (expense) income in
the accompanying audited consolidated statements of income. 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 cost of operating and gains or losses on sales of REO
through other (expense) income in the accompanying audited
consolidated statements of income.
Goodwill
Impairment
Under SFAS No. 142, Goodwill and Other Intangible
Assets, 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, 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 year ended December 31, 2008, we recorded
goodwill impairment of $5.3 million included in other
(expense) income on the accompanying audited consolidated
statement of income. The remaining balance of goodwill of
$173.1 million as of December 31, 2008 was entirely
attributable to the acquisition of CapitalSource Bank and was
not considered to be impaired as of December 31, 2008.
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 on
our 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
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THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reported at amortized cost. All RMBS that we purchase and
classify as trading investments are stated at fair value with
unrealized gains and losses included in gain (loss) on
residential mortgage investment portfolio on the accompanying
audited consolidated statements of income. All other debt
securities, 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
accompanying 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 our ownership
position is large enough 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 limited liability company. Our share of earnings
and losses in equity method investees is included in other
income, net of expenses in the accompanying audited consolidated
statements of income. If our ownership position is too small to
provide such influence, 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 each quarter. 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 income and a new
carrying value for the investment is established.
Realized gains or losses resulting from the sale of investments
are included in (loss) gain on investments, net in the
accompanying audited consolidated statements of income.
Mortgage-Related
Receivables
Investments in mortgage-related receivables are recorded at
amortized cost. Premiums and discounts that relate to such
receivables are amortized into interest income over the
estimated lives of such assets using the interest method.
Transfers
of Financial Assets
We account for transfers of commercial 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 assets. In
such transactions, we allocate the recorded carrying amount of
transferred assets between retained and sold interests based
upon their fair values. We record gains and losses based upon
the difference of proceeds received and the carrying amount of
transferred assets that are allocated to sold interests.
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
received 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 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
111
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THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 (loss) gain on investments, net on the accompanying
audited consolidated statements of income.
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
|
Direct
Real Estate Investments
We lease our direct real estate investments through long-term,
triple-net
operating leases. Under these
triple-net
leases, the client agrees to pay all facility operating
expenses, as well as make capital improvements.
We allocate the purchase price of our direct real estate
investments to net tangible and identified intangible assets
acquired, primarily lease intangibles, based on their estimated
fair values at the time of acquisition. In making estimates of
fair values for purposes of allocating the purchase price, we
utilize a number of sources, including independent appraisals
that may be obtained in connection with the acquisition or
financing of the respective property and other market data. When
valuing the acquired properties, we do not include the value of
any in-place leases. We also consider information obtained about
each property as a result of our pre-acquisition due diligence,
marketing and leasing activities in estimating the fair value of
the tangible and intangible assets acquired and liabilities
assumed.
Depreciation is computed on a straight-line basis over the
estimated useful lives ranging from 10 to 40 years for
buildings. Equipment related to our direct real estate
investments is depreciated in accordance with our property and
equipment policy, as outlined above.
In assessing lease intangibles, we recognize above-market and
below-market in-place lease values for acquired operating leases
based on the present value of the difference between:
(1) the contractual amounts to be received pursuant to the
leases negotiated and in-place at the time of acquisition of the
facilities; and (2) managements estimate of fair
market lease rates for the facility or equivalent facility,
measured over a period equal to the remaining non-cancelable
term of the lease. Factors to be considered for lease
intangibles also include estimates of carrying costs during
hypothetical
lease-up
periods, market conditions, and costs to execute similar leases.
The capitalized above-market or below-market lease values are
classified as intangible assets, net and lease obligations, net,
respectively, and are amortized to operating lease income over
the remaining non-cancelable term of each lease. We also
acquired select direct real estate investments through
transactions in which we typically execute long-term
triple-net
leases, at market rates, simultaneously with such acquisitions.
We assess our real estate investments and the related intangible
assets for impairment indicators whenever events or changes in
circumstances indicate the carrying amount may not be
recoverable; such assessment is performed not less than
annually. Our assessment of the existence of impairment
indicators is based on factors such
112
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THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
as, but not limited to, market conditions, operator performance
and the lessees compliance with lease terms. If we
determine that indicators of impairment are present, we evaluate
the carrying value of the related real estate investments in
relation to the future undiscounted cash flows of the underlying
facilities. Provisions for impairment losses related to
long-lived assets may be recognized when expected future
undiscounted cash flows are determined to be less than the
carrying values of the assets. An adjustment is made to the net
carrying value of the leased properties and other long-lived
assets for the excess over their estimated fair value. The fair
value of the real estate investment is determined by market
research, which includes valuing the property as a healthcare
facility as well as other alternative uses. All impairments are
taken as a period cost at that time, and depreciation is
adjusted going forward to reflect the new value assigned to the
asset.
If we decide to sell a real estate investment, we evaluate the
recoverability of the carrying amounts of the assets. If the
evaluation indicates that the carrying value is not recoverable
from estimated net sales proceeds, the property is written down
to estimated fair value less costs to sell. Our estimates of
cash flows and fair values of the properties are based on
current market conditions and consider matters such as rental
rates and occupancies for comparable properties, recent sales
data for comparable properties, and, where applicable, contracts
or the results of negotiations with purchasers or prospective
purchasers.
Interest
and Fee Income Recognition on Loans
Interest and fee 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.
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 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 fee 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 generally place a loan on non-accrual status if a loan
is 90 days or more past due, or we expect that the borrower
will not be able to service its debt and other obligations. When
a loan is placed on non-accrual status, 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
applied to principal. On the date the borrower pays all overdue
amounts in full, the borrowers loan will emerge from
non-accrual status and all overdue charges (including those from
prior years) are recognized as interest income in the current
period.
Operating
Lease Income Recognition
Substantially all of our direct real estate investments are
leased through long-term,
triple-net
operating leases and typically include fixed rental payments,
subject to escalation over the life of the lease. We recognize
operating lease income on a straight-line basis over the life of
the lease when collectibility is reasonably assured. We do not
recognize any income on contingent rents until payments are
received and all contingencies have been eliminated.
Income
Recognition and Impairment Recognition on
Securities
For most of our investments in debt securities, we use the
interest method to amortize deferred items, including premiums,
discounts and other basis adjustments, into interest income over
the estimated lives of the securities.
113
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Declines in the fair value of debt securities classified as
available-for-sale securities are recognized in earnings when we
have concluded that a decrease in the fair value of a security
is other-than-temporary. This review considers a number of
factors, including the severity of the decline in fair value,
credit ratings and the length of time the investment has been in
an unrealized loss position. We recognize impairment when
quantitative and qualitative factors indicate that we may not
recover the unrealized loss. One of the factors we consider is
our intent and ability to hold the investment until a point in
time at which recovery can be reasonably expected to occur. We
apply significant judgment in determining whether impairment
loss recognition is appropriate. Debt securities that are
classified as trading are not assessed for impairment.
For investments in non-investment grade securitized assets that
are classified as available-for-sale, changes in the effective
yield due to changes in estimated cash flows are recognized on a
prospective basis as adjustments to interest income in future
periods. Additionally, we assess and measure impairment in such
investments and recognize an impairment loss when the fair value
of a security declines below its recognized carrying amount and
an adverse change in expected cash flows has occurred.
Determination of whether an adverse change has occurred involves
judgment about expected prepayments and credit events.
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,
2008 and 2007, 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 accompanying 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 the accompanying audited
consolidated statements of income.
Securities
Purchased under Agreements to Resell and Securities Sold under
Agreements to Repurchase
Securities purchased under agreements to resell and securities
sold under agreements to repurchase are treated as
collateralized financing transactions and are recorded at the
amounts at which the securities were acquired or sold plus
accrued interest. Our policy is to obtain the use of securities
purchased under agreements to resell. The market value of the
underlying securities that collateralize the related receivable
on agreements to resell is monitored, including accrued
interest. We may require counterparties to deposit additional
collateral or return collateral pledged, when appropriate.
In instances where we acquire mortgage-backed securities through
repurchase agreements with the same counterparty from whom the
investments were purchased, we account for the purchase
commitment and repurchase agreement on a net basis and record a
forward commitment to purchase mortgage-backed securities as a
derivative instrument. Such forward commitments are recorded at
fair value with subsequent changes in fair value recognized in
income.
Income
Taxes
When we filed our federal income tax return for the year ended
December 31, 2006, we elected REIT status under the
Internal Revenue Code (the Code). We operated as a
REIT through 2008, but revoked our REIT election effective
January 1, 2009. While we were a REIT, we were required to
distribute at least 90% of our REIT taxable income to our
shareholders and meet the various other requirements imposed by
the Code, through actual operating results, asset holdings,
distribution levels and diversity of stock ownership. While we
were a REIT, we generally were not subject to corporate-level
income tax on the earnings distributed to our shareholders that
we derived from our REIT qualifying activities. We were subject
to corporate-level tax on the earnings we derived from our
taxable REIT subsidiaries (TRSs). We were still
subject to foreign, state and local taxation in various foreign,
state and local jurisdictions, including those in which we
transact business or reside.
114
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As certain of our subsidiaries were TRSs, we continued to report
a provision for income taxes within our consolidated financial
statements. We use the asset and liability method of accounting
for income taxes. Under the asset and liability method, deferred
tax assets and liabilities are recognized for the 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
to the extent that they relate to tax positions that are more
likely than not to be sustained upon examination based on the
technical merits of the position. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the changes. A valuation
allowance is recognized for a deferred tax asset if, based on
the weight of available evidence, it is more likely than not
that some portion or all of the deferred tax asset will not be
realized. The evaluation pertaining to the tax expense and
related tax asset and liability balances involves a high degree
of judgment and subjectivity around the ultimate measurement and
resolution of these matters.
Effective January 1, 2009, we provide for income taxes as a
C corporation on income earned from our operations.
We adopted FIN No. 48, Accounting for Uncertainty in Income
Taxes An Interpretation of FASB Statement No.
109 (FIN 48) on January 1, 2007 and
recognized an approximate $5.7 million increase in the liability
for unrecognized tax benefits. This increase was accounted for
as an increase to the January 1, 2007 balance of
accumulated deficit. See Note 16, Income Taxes, for
further discussion of our income taxes and our adoption of
FIN 48.
Net
Income per Share
Basic net income per share is based on the weighted-average
number of common shares outstanding during each period. Diluted
net income 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
dividends declared, restricted stock and convertible debt.
Diluted net income per share is adjusted for the effects of
other potentially dilutive financial instruments only in the
periods in which such effect is dilutive.
Stock-Based
Compensation
We adopted SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123(R)), which is a
revision of SFAS No. 123, Accounting for
Stock-Based Payment (SFAS No. 123),
using the modified prospective method on January 1, 2006.
SFAS No. 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values.
Bonuses
Bonuses are accrued ratably, pursuant to a variable methodology
partially based on the performance of CapitalSource, 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 for CapitalSource. The actual bonus accrual
recorded is that amount approved each quarter by the
compensation committee.
Marketing
Marketing costs, including advertising, are expensed as incurred.
Segment
Reporting
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, requires that a public
business enterprise report financial and descriptive information
about its reportable operating segments including a
115
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THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
measure of segment profit or loss, certain specific revenue and
expense items and segment assets. We currently operate as three
reportable segments: 1) Commercial Banking,
2) Healthcare Net Lease, and 3) Residential Mortgage
Investment. Our Commercial Banking segment comprises our
commercial lending and investing business activities; our
Healthcare Net Lease segment comprises our direct real estate
investment business activities; and our Residential Mortgage
Investment segment comprises our residential mortgage investment
and other investment activities in which we formerly engaged to
optimize our REIT qualification. During the first quarter of
2009, we sold all of our Agency RMBS in our Residential Mortgage
Investment segment, and we intend to merge the remaining assets
currently in this segment into our Commercial Banking segment
and to discontinue this segment in 2009.
New
Accounting Pronouncements
In February 2007, the Financial Accounting Standard Board
(FASB) issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities
(SFAS No. 159), which permits all
entities to choose to measure eligible financial assets and
liabilities at fair value (the fair value option).
The fair value option may be applied on an instrument by
instrument basis, and once elected, the option is irrevocable.
Effective January 1, 2008, we adopted the provisions of
SFAS No. 159, but decided not to elect the fair value
option for any eligible financial assets and liabilities.
Accordingly, the initial application of SFAS No. 159
did not have any effect on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS No. 141(R)), which establishes
principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in the acquiree.
SFAS No. 141(R) also provides guidance for recognizing
and measuring the goodwill acquired in the business combination
and determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial
effects of the business combination. The effective date for
SFAS No. 141(R) is for business combinations for which
the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15,
2008. We adopted SFAS No. 141(R) on January 1,
2009 and it did not have material impact on our consolidated
financial statements.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements An Amendment of ARB No. 51
(SFAS No. 160), which establishes
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 clarifies that a
noncontrolling interest in a subsidiary is an ownership interest
in the consolidated entity that should be reported as equity in
the consolidated financial statements. SFAS No. 160
also amends certain consolidation procedures for consistency
with the requirements of SFAS No. 141(R). The
effective date for SFAS No. 160 is the beginning of
the first fiscal year beginning after December 15, 2008. We
adopted SFAS No. 160 on January 1, 2009 and it
did not have material impact on our consolidated financial
statements.
Effective January 1, 2008, we adopted
SFAS No. 157, and it did not have a significant effect
on fair value measurements in our consolidated financial
statements. In February 2008, the FASB issued FASB Staff
Position (FSP)
SFAS 157-2,
Effective Date of FASB Statement No. 157 (FSP
SFAS 157-2),
which delayed the effective date of SFAS No. 157 for
all non financial assets and liabilities, except those items
recognized or disclosed at fair value on an annual or more
frequently recurring basis, until years beginning after
November 15, 2008. We adopted FSP
SFAS 157-2
on January 1, 2009 and it did not have material impact on
our consolidated financial statements. In October 2008, the FASB
issued FSP
SFAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active (FSP
SFAS 157-3).
FSP
SFAS 157-3
clarifies the application of SFAS No. 157, in a market
that is not active and provides an example to illustrate key
considerations in determining the fair value of a financial
asset when the market for that financial asset is not active.
FSP
SFAS 157-3
is effective upon issuance, including prior periods for which
financial statements have not been issued. We have concluded
that our application of SFAS No. 157 in all periods
has been consistent with FSP
SFAS 157-3,
and there was no impact on our consolidated financial statements
as a result of adopting this standard.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities An Amendment of FASB Statement
No. 133 (SFAS No. 161), which
intends to improve transparency
116
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THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in financial reporting by requiring enhanced disclosures of an
entitys derivative instruments and hedging activities and
their effects on the entitys financial position, financial
performance, and cash flows. SFAS No. 161 applies to
all derivative instruments within the scope of
SFAS No. 133, Accounting for Derivative instruments
and Hedging Activities (SFAS No. 133).
It also applies to non-derivative hedging instruments and all
hedged items designated and qualifying as hedges under
SFAS No. 133. The effective date of
SFAS No. 161 is the beginning of the first fiscal year
beginning after November 15, 2008. We adopted
SFAS No. 161 on January 1, 2009 and it did not
have material impact on our consolidated financial statements.
In May 2008, the FASB issued FSP APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement) (FSP APB
14-1),
which clarifies that convertible debt instruments that may be
settled in cash upon conversion (including partial cash
settlement) are not addressed by paragraph 12 of APB
Opinion No. 14, Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants. Additionally, FSP APB
14-1
specifies that issuers of such instruments should separately
account for the liability and equity components in a manner that
will reflect the entitys nonconvertible debt borrowing
rate when interest cost is recognized in subsequent periods. FSP
APB 14-1
applies to convertible debt instruments that, by their stated
terms, may be settled in cash (or other assets) upon conversion,
including partial cash settlement, unless the embedded
conversion option is required to be separately accounted for as
a derivative under SFAS No. 133. FSP APB
14-1 is
effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years and requires retroactive application
for all periods presented in the consolidated financial
statements. We adopted FSP APB
14-1 on
January 1, 2009. The adoption of FSP APB
14-1
required a $22.4 million reduction to our January 1,
2006 accumulated deficit, a reduction to interest expense of
$13.0 million for the year ended December 31, 2008;
and an increase in interest expense of $17.0 million and
$15.0 million for the years ended December 31, 2007
and 2006, respectively.
In December 2008, the FASB issued FSP
SFAS 140-4
and FASB Interpretation No. (FIN) 46(Revised
2003)-8, Disclosures by Public Entities (Enterprises) about
Transfers of Financial Assets and Interests in Variable Interest
Entities (FSP
FAS 140-4
and FIN 46(R)-8), which amends
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities, to require public entities to provide
additional disclosures about transfers of financial assets. It
also amends FIN 46(R), Consolidation of Variable
Interest Entities, to require public entities, including
sponsors that have a variable interest in a VIE, to provide
additional disclosures about their involvement with variable
interest entities. Additionally, FSP
FAS 140-4
and FIN 46(R)-8 requires certain disclosures to be provided
by a public enterprise that is (a) a sponsor of a
qualifying SPE that holds a variable interest in the qualifying
SPE but was not the transferor of financial assets to the
qualifying SPE and (b) a servicer of a qualifying SPE that
holds a significant variable interest in the qualifying SPE but
was not the transferor of financial assets to the qualifying
SPE. The disclosures required by FSP
FAS 140-4
and FIN 46(R)-8 are intended to provide greater
transparency to financial statement users about a
transferors continuing involvement with transferred
financial assets and an enterprises involvement with VIEs
and qualifying SPEs. The effective date for FSP
FAS 140-4
and FIN 46(R)-8 is the first interim or annual period
ending after December 15, 2008. We adopted FSP
FAS 140-4
and FIN 46(R)-8 on December 31, 2008 and it did not
have material impact on our consolidated financial statements.
Reclassifications
Certain amounts in prior years consolidated financial
statements have been reclassified to conform to the current year
presentation, including the reclassification of accrued
interest, which was previously included in the mortgage-related
receivables, net, mortgage-backed securities pledged, trading,
loans, investments and other assets line items, to a separate
line item in the accompanying audited consolidated balance
sheets. Accordingly, the reclassification in accrued interest
has been appropriately reflected throughout the accompanying
audited consolidated financial statements.
117
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In July 2008, we acquired approximately $5.2 billion of
deposits, a pool of commercial real estate loans (the
A Participation Interest) and 22 retail
banking branches from Fremont Investment & Loan
(FIL) and commenced operations of CapitalSource
Bank. The results of CapitalSource Banks operations have
been included in the consolidated financial statements since
that date. The A Participation Interest had an
outstanding principal balance of $1.9 billion as of
July 25, 2008 and was acquired at a 3% discount to its net
book value. The cash purchase price of this acquisition was
$105.2 million, excluding estimated transaction costs. We
did not acquire FIL, any contingent liabilities or any business
operations except FILs retail branch network.
For purposes of calculating the purchase price of the acquired
retail banking assets and liabilities, we considered the cash
purchase price and $10.6 million of total transaction
costs, resulting in a total purchase price of
$115.7 million. Based upon the estimated fair values as of
July 25, 2008, the purchase price has been allocated to the
net tangible and intangible assets acquired and liabilities
assumed by us in connection with the acquisition as follows ($
in thousands):
|
|
|
|
|
Cash
|
|
$
|
3,292,185
|
|
A Participation Interest
|
|
|
1,820,638
|
|
Interest receivable
|
|
|
5,244
|
|
Goodwill
|
|
|
173,135
|
|
Other assets
|
|
|
7,597
|
|
Other liabilities
|
|
|
(12,231
|
)
|
Deposits
|
|
|
(5,170,833
|
)
|
|
|
|
|
|
Total purchase price
|
|
$
|
115,735
|
|
|
|
|
|
|
The amount of goodwill recognized represents the difference
between the purchase price paid and the fair value of the net
assets acquired. The entire amount of the goodwill is allocated
to our Commercial Banking segment and is deductible for tax
purposes.
The following pro forma financial information gives effect to
the acquisition and includes certain purchase accounting
adjustments, such as increased depreciation and amortization
expense on acquired assets. Additionally, such information does
not include the impacts of any revenue, cost or other operating
synergies that have resulted or may result from the acquisition.
This pro forma financial information is presented as though the
acquisition had been completed as of the beginning of the
periods presented.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands, except per share amounts)
|
|
|
Pro forma investment income
|
|
$
|
740,156
|
|
|
$
|
845,581
|
|
Pro forma net (loss) income
|
|
|
(176,367
|
)
|
|
|
226,182
|
|
Pro forma net (loss) income per share basic
|
|
|
(0.70
|
)
|
|
|
1.18
|
|
Pro forma net (loss) income per share diluted
|
|
|
(0.70
|
)
|
|
|
1.17
|
|
|
|
Note 4.
|
Cash and
Cash Equivalents and Restricted Cash
|
As of December 31, 2008 and 2007, our current cash and cash
equivalents and restricted cash balances were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
Cash and due from banks(1)
|
|
$
|
249,610
|
|
|
$
|
82,588
|
|
Interest-bearing deposits in other banks(2)
|
|
|
19,963
|
|
|
|
30,778
|
|
Other short-term investments(3)
|
|
|
984,237
|
|
|
|
411,267
|
|
Investment securities(4)
|
|
|
504,136
|
|
|
|
167,869
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents and restricted cash
|
|
$
|
1,757,946
|
|
|
$
|
692,502
|
|
|
|
|
|
|
|
|
|
|
118
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
(1) |
|
Represents principal and interest collections on loan assets
held by securitization trusts or pledged to credit facilities
and escrows for future expenses related to our direct real
estate investments. The restricted portion of the balance was
$60.9 million and $82.1 million as of
December 31, 2008 and 2007, respectively. |
|
(2) |
|
Represents principal and interest collections on loan assets
pledged to credit facilities. The restricted portion was
$8.4 million and $6.2 million as of December 31,
2008 and 2007, respectively. |
|
(3) |
|
Represents cash invested in money market funds that invest
primarily in U.S. Treasury securities and repurchase agreements
secured by U.S. Treasury securities and principal and interest
collections on loan assets held by securitization trusts or
pledged to credit facilities. The restricted portion was
$150.0 million and $268.2 million as of
December 31, 2008 and 2007, respectively. |
|
(4) |
|
Represents Discount Notes with AAA ratings totaling
$303.0 million issued by the Federal Home Loan Bank
(FHLB) Fannie Mae and Freddie Mac (Agency
Discount Notes) with a remaining weighted average maturity
of 61 days. Approximately $2.2 million of the
investment securities are U.S. Treasury securities with a
remaining weighted average maturity of 29 days and
approximately $200.0 million are FHLB discount notes with a
remaining weighted average maturity of nine days, that
collateralize various financings under our repurchase agreements
and derivatives, which are held under the custody of our prime
broker. The restricted portion was $200.0 million and
$157.3 million as of December 31, 2008 and 2007,
respectively. |
As of December 31, 2008, approximately $1.2 billion of
our cash and cash equivalents was held by CapitalSource Bank and
can only be used by CapitalSource Bank.
|
|
Note 5.
|
Mortgage-Related
Receivables and Related Owner
Trust Securitizations
|
In February 2006, we purchased beneficial interests in SPEs that
acquired and securitized pools of adjustable rate, prime
residential mortgage loans. These beneficial interests are
subordinate to other interests issued by the SPEs that are held
by third parties. In accordance with the provisions of
FIN 46(R), we determined that the SPEs were variable
interest entities designed to create and pass along risks
related to the credit performance of the underlying residential
mortgage loan portfolio. We concluded that we were the primary
beneficiary of the SPEs as we expected that our subordinated
interests will absorb a majority of the expected losses related
to these risks. As a result, we consolidated the assets and
liabilities of such entities for financial statement purposes.
In so doing, we also determined that the SPEs interest in
the underlying mortgage loans constituted, for accounting
purposes, receivables secured by underlying mortgage loans. As a
result, through consolidation, we recorded mortgage-related
receivables, as well as the principal amount of related debt
obligations incurred by the SPEs to fund these receivables, on
our accompanying audited consolidated balance sheets as of
December 31, 2008 and 2007. The carrying amount of the
assets and liabilities of the SPEs reported on our consolidated
balance sheet as of December 31, 2008, were
$1.8 billion and $1.7 billion, respectively. We are
restricted from pledging or exchanging the assets held by the
SPEs. Cash flows from the underlying residential mortgage loans
are designated to pay off the related liabilities. Recourse is
limited to the assets held in the SPE and does not extend to the
general credit of CapitalSource. Our economic exposure at
December 31, 2008 is limited to $84.3 million in
beneficial interests we purchased in the respective
securitization trusts.
Recognized mortgage-related receivables are, in economic
substance, mortgage loans. Such mortgage loans are all prime,
hybrid adjustable-rate loans. At acquisition by us, mortgage
loans that back mortgage-related receivables had a weighted
average loan-to-value ratio of 73% and a weighted average Fair
Isaac & Co. (FICO) score of 737.
As of December 31, 2008 and 2007, the carrying amount of
our residential mortgage-related receivables, including accrued
interest and the unamortized balance of purchase discounts, was
$1.8 billion and $2.0 billion, respectively. As of
December 31, 2008 and 2007, the weighted average interest
rate on such receivables was 5.36% and 5.38%, respectively, and
the weighted average contractual maturity was approximately
27 years and 28 years, respectively. As of
December 31, 2008, approximately 95% of recognized
mortgage-related receivables were financed with permanent term
debt that was recognized by us through the consolidation of the
referenced SPEs.
119
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2008 and 2007, mortgage-related
receivables, whose underlying mortgage loans are 90 or more days
past due or were in the process of foreclosure and foreclosed
were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
Mortgage-related receivables whose underlying mortgage loans are
90 or more days past due or were in the process of foreclosure(1)
|
|
$
|
51,348
|
|
|
$
|
14,751
|
|
Percentage of mortgage-related receivables
|
|
|
2.82
|
%(2)
|
|
|
0.72
|
%
|
|
|
|
(1) |
|
Mortgage loans 90 or more days past due are also placed on
non-accrual status. |
|
(2) |
|
By comparison, in its December 2008 Monthly Summary Reports,
which reflected up to November 2008 performance, Fannie Mae
reported single-family delinquency (SDQ) rate of
2.13%. The SDQ rates are based on loans 90 days or more
delinquent or in foreclosure as of period end. Freddie Mac
reported a SDQ rate of 1.78% in its December 2008 Monthly
Summary Report, which reflected up to December 2008 performance,
The SDQ rate from Freddie Mac includes loans underlying their
structured transactions. The comparable December 2008 statistic
for mortgage-related receivables was 3.02%. |
During the year ended December 31, 2008, the carrying value
of foreclosed assets increased by $4.5 million from
December 31, 2007. As of December 31, 2008 and 2007,
the carrying values of the foreclosed assets were
$7.3 million and $2.8 million, respectively.
In connection with recognized mortgage-related receivables, we
recorded provisions for loan losses of $16.2 million and
$1.1 million for the years ended December 31, 2008 and
2007, respectively. During the years ended December 31,
2008 and 2007, we charged off $7.6 million and
$0.7 million, respectively, net of recoveries, of these
mortgage-related receivables. The allowance for loan losses was
$9.3 million and $0.8 million as of December 31,
2008 and 2007, respectively, and were recorded on a net basis in
the accompanying audited consolidated balance sheets as a
reduction to the carrying value of mortgage-related receivables.
During the years ended December 31, 2008, 2007 and 2006, we
recognized interest income on our mortgage-related receivables
and related owner trust securitizations of $94.5 million,
$127.3 million and $115.5 million, respectively, as a
component of interest income on loans in the accompanying
audited consolidated statements of income.
|
|
Note 6.
|
Residential
Mortgage-Backed Securities and Certain Derivative
Instruments
|
We invested in RMBS, which are securities collateralized by
residential mortgage loans. These securities include
mortgage-backed securities that were issued and guaranteed by
Fannie Mae or Freddie Mac (hereinafter, Agency
RMBS). We also invested in RMBS issued by
non-government-sponsored entities that are credit-enhanced
through the use of subordination or in other ways (hereinafter,
Non-Agency RMBS). All of our Agency RMBS are
collateralized by adjustable rate residential mortgage loans,
including hybrid adjustable rate mortgage loans. We account for
our Agency RMBS as debt securities that are classified as
trading investments and included in mortgage-backed securities
pledged, trading on our accompanying audited consolidated
balance sheets. We account for our Non-Agency RMBS as debt
securities that are classified as available-for-sale and
included in investments on our accompanying audited consolidated
balance sheets. For additional information about our Non-Agency
RMBS and other mortgage-backed securities held at CapitalSource
Bank, see Note 8, Marketable Securities and
Investments.
As of December 31, 2008 and 2007, we owned
$1.5 billion and $4.0 billion, respectively, in Agency
RMBS, including accrued interest, that were pledged as
collateral for repurchase agreements used to finance the
acquisition of these investments. As of December 31, 2008
and 2007, our portfolio of Agency RMBS comprised hybrid
adjustable-rate securities with varying fixed period terms
issued and guaranteed by Fannie Mae or Freddie Mac. The weighted
average net coupon of Agency RMBS in our portfolio was 5.01% and
5.07% as of December 31, 2008 and 2007, respectively.
120
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2008 and 2007, the fair values of Agency
RMBS, including accrued interest, in our portfolio was
$1.5 billion and $4.1 billion, respectively. During
the years ended December 31, 2008, 2007 and 2006, we
recognized unrealized losses of $18.5 million, unrealized
gains of $34.9 million and unrealized losses of
$3.8 million, respectively, related to these investments as
a component of (loss) gain on residential mortgage investment
portfolio in the accompanying audited consolidated statements of
income. During the year ended December 31, 2008, we sold
Agency RMBS with a face value of $2.1 billion, realizing a
gain of $21.4 million as a component of (loss) gain on
residential mortgage investment portfolio in the accompanying
audited consolidated statements of income. During the year ended
December 31, 2008, we also unwound derivatives related to
the sold Agency RMBS. During the year ended December 31,
2007, we did not sell any Agency RMBS. During the year ended
December 31, 2006, we recognized a net unrealized loss of
$10.8 million in (loss) gain on residential mortgage
investment portfolio related to period changes in the fair value
of our forward commitments to purchase Agency RMBS that were
being accounted for on a net basis.
We use various derivative instruments to hedge the interest rate
risk associated with the mortgage investments in our portfolio
with the risk management objective to maintain approximately a
zero, net duration position. We accounted for these as
derivative instruments and, as such, adjust these instruments to
fair value through income as a component of (loss) gain on
residential mortgage investment portfolio in the accompanying
audited consolidated statements of income. During the years
ended December 31, 2008, 2007 and 2006, we recognized a net
realized and unrealized losses of $101.6 million,
$79.6 million and net realized and unrealized gains of
$18.1 million, respectively, related to these derivative
instruments. These amounts include interest-related accruals
that we recognize in connection with the periodic settlement of
these instruments.
During the first quarter of 2009, we sold all of our Agency RMBS
remaining in our residential mortgage investment portfolio,
realizing a gain of $28.0 million. We also unwound all
derivatives related to the sold Agency RMBS and recognized a
realized loss of $79.0 million related to the unwound
derivatives.
|
|
Note 7.
|
Commercial
Lending Assets and Credit Quality
|
As of December 31, 2008 and 2007, our total commercial loan
portfolio had an outstanding balance of $10.9 billion and
$9.9 billion, respectively. Included in these amounts were
loans, the A Participation Interest, loans held for
sale and related interest and fee receivables (collectively,
Commercial Lending Assets). As of December 31,
2008 and 2007, interest and fee receivables totaled
$93.3 million and $56.3 million, respectively. Our
loans held for sale were recorded at the lower of cost or fair
market value on the accompanying audited consolidated balance
sheets. During the year ended December 31, 2008, we
transferred $85.7 million of loans designated as held for
sale back to the loan held for investment portfolio based upon
our intent to retain the loans for investment. During the year
ended December 31, 2008, 2007 and 2006, we recognized net
gains on the sale of loans of $2.8 million,
$9.1 million and $2.0 million, respectively.
Also included in loans on the accompanying audited consolidated
balance sheets are purchased loans, which totaled
$841.2 million and $638.4 million as of
December 31, 2008 and 2007, respectively. The accretable
discount on purchased loans as of December 31, 2008 and
2007 totaled $77.5 million and $22.5 million,
respectively, which is reflected in deferred loan fees and
discounts in our accompanying audited consolidated balance
sheets. During the years ended December 31, 2008 and 2007,
we accreted $19.3 million and $5.9 million,
respectively, into fee income from purchased loan discounts. For
the year ended December 31, 2008, we had $74.3 million
of additions to accretable discounts.
121
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents our commercial loan balances,
including related interest receivable, by type of loans as of
December 31, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
Composition of commercial loans by loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans
|
|
$
|
6,387,000
|
|
|
|
67.3
|
%
|
|
$
|
6,486,601
|
|
|
|
65.8
|
%
|
Real estate
|
|
|
2,121,666
|
|
|
|
22.3
|
|
|
|
2,232,916
|
|
|
|
22.6
|
|
Real estate construction
|
|
|
986,207
|
|
|
|
10.4
|
|
|
|
1,148,220
|
|
|
|
11.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,494,873
|
|
|
|
100.0
|
%
|
|
$
|
9,867,737
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
Real Estate A Participation Interest
As discussed in Note 3, Acquisition, on
July 25, 2008, we acquired the A Participation
Interest, which, at the date of acquisition was a
$1.9 billion interest in a $4.8 billion pool of
commercial real estate loans. On the date of acquisition, we
recorded the A Participation Interest at its
estimated fair value of $1.8 billion, a $63.1 million
discount to the underlying principal balance of the instrument.
The activity with respect to the A Participation
Interest for the period from July 25, 2008 to
December 31, 2008 was as follows ($ in thousands):
|
|
|
|
|
A Participation Interest as of July 25, 2008
|
|
$
|
1,820,638
|
|
Principal payments
|
|
|
(447,804
|
)
|
Discount accretion
|
|
|
23,777
|
|
|
|
|
|
|
A Participation Interest as of December 31, 2008
|
|
$
|
1,396,611
|
|
|
|
|
|
|
During the period from July 25, 2008 to December 31,
2008, we recognized $54.2 million in interest income on the
A Participation Interest.
The A Participation Interest is reported at the
outstanding principal balance less the associated discount and
the interest is accrued as earned. The discount is accreted into
interest income over the estimated life of the instrument using
the interest method.
The A Participation Interest is governed by a
participation agreement that is structured to minimize our
exposure to credit risk. We have pari passu rights in the
underlying loans pursuant to which we receive 70% of all
borrower principal repayments from the underlying loans and
properties. In addition, under the participation agreement,
iStar FM Loans, LLC, the holder of the B
Participation Interest, assumed all future funding obligations
with respect to the loans underlying the participation
agreement. Accordingly, although the holder of the B
Participation Interest continues to increase its percentage of
the overall funding of the underlying loans, we continue to
receive 70% of all borrower repayments. Thus, the structure of
the A Participation Interest accelerates the paydown
of the A Participation Interest, relative to the
paydown of the overall underlying portfolio. This accelerated
paydown serves to reduce our exposure to credit risk.
Additionally, the A Participation Interest is
structured so that we do not have loan and property-level risk.
We receive payments based on the cash flows of the entire
underlying pool of assets and not any one asset in particular.
Therefore, we will incur a loss only if the portfolio, as a
whole, fails to perform at least to the extent of the
A Participation Interest balance.
122
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Credit
Quality
As of December 31, 2008 and 2007, the principal balances of
loans contractually delinquent, non-accrual loans and impaired
loans in our commercial lending assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Commercial Loan Asset Classification
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
Loans
30-89 days
contractually delinquent
|
|
$
|
299,322
|
|
|
$
|
83,511
|
|
Loans 90 or more days contractually delinquent(1)
|
|
|
141,104
|
|
|
|
58,411
|
|
Non-accrual loans(2)
|
|
|
439,547
|
|
|
|
170,522
|
|
Impaired loans(3)
|
|
|
692,278
|
|
|
|
318,945
|
|
|
|
|
(1) |
|
The aggregate principal balance of loans 90 or more days
contractually delinquent that are on accrual status was
$30.5 million and $2.2 million as of December 31,
2008 and 2007, respectively. |
|
(2) |
|
Includes commercial loans with aggregate principal balances of
$145.2 million and $55.5 million as of
December 31, 2008 and 2007, respectively, which were also
classified as loans 30 or more days contractually delinquent.
Includes non-performing loans classified as held for sale that
had an aggregate principal balance of $14.5 million as of
December 31, 2008. As of December 31, 2007, there were
no non-performing loans classified as held for sale. |
|
(3) |
|
Includes commercial loans with aggregate principal balances of
$247.6 million and $55.5 million as of
December 31, 2008 and 2007, respectively, which were also
classified as loans 30 or more days contractually delinquent,
and commercial loans with aggregate principal balances of
$423.4 million and $170.5 million as of
December 31, 2008 and 2007, respectively, which were also
classified as loans on non-accrual status. The carrying values
of impaired commercial loans were $683.1 million and
$311.6 million as of December 31, 2008 and 2007,
respectively, prior to the application of allocated reserves. |
Consistent with the provisions of SFAS No. 114, 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 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. As of
December 31, 2008 and 2007, we had $359.3 million and
$119.7 million of impaired commercial loans, respectively,
with allocated reserves of $87.4 million and
$27.4 million, respectively. As of December 31, 2008
and 2007, we had $333.0 million and $199.2 million,
respectively, of commercial loans that we assessed as impaired
and for which we did not record any allocated reserves based
upon our belief that it is probable that we ultimately will
collect all principal and interest amounts due.
As of December 31, 2008, no allowance for loan loss was
deemed necessary with respect to the A Participation
Interest.
The average balances of impaired commercial loans during the
years ended December 31, 2008, 2007 and 2006 were
$535.2 million, $308.4 million and
$238.6 million, respectively. The total amounts of interest
income that were recognized on impaired commercial loans during
the years ended December 31, 2008, 2007 and 2006, were
$29.0 million, $19.7 million and $10.0 million,
respectively. The amounts of cash basis interest income that
were recognized on impaired commercial loans during the years
ended December 31, 2008, 2007 and 2006, were
$20.9 million, $18.5 million and $8.8 million,
respectively. If the non-accrual commercial loans had performed
in accordance with their original terms, interest income would
have been increased by $50.3 million, $35.2 million
and $23.9 million for the years ended December 31,
2008, 2007 and 2006, respectively.
During the year ended December 31, 2008, commercial loans
with an aggregate carrying value of $589.1 million, as of
their respective restructuring dates, were involved in troubled
debt restructurings as defined by SFAS No. 15,
Accounting by Debtors and Creditors for Troubled Debt
Restructurings. As of December 31, 2008, commercial
loans
123
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
with an aggregate carrying value of $381.4 million were
involved in troubled debt restructurings. Additionally, under
SFAS No. 114, loans involved in troubled debt
restructurings are also 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 allocated reserve for
commercial loans that were involved in troubled debt
restructurings was $48.0 million as of December 31,
2008. For the year ended December 31, 2007, commercial
loans with an aggregate carrying value of $235.5 million as
of their respective restructuring dates, were involved in
troubled debt restructurings. As of December 31, 2007,
commercial loans with an aggregate carrying value of
$263.9 million were involved in troubled debt
restructurings. The allocated reserve for commercial loans that
were involved in troubled debt restructurings was
$23.1 million as of December 31, 2007.
Activity in the allowance for loan losses related to our
Commercial Banking segment for the years ended December 31,
2008, 2007 and 2006, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Balance as of beginning of year
|
|
$
|
138,930
|
|
|
$
|
120,575
|
|
|
$
|
87,370
|
|
Provision for loan losses
|
|
|
576,805
|
|
|
|
77,576
|
|
|
|
81,211
|
|
Charge offs, net of recoveries
|
|
|
(270,900
|
)
|
|
|
(57,489
|
)
|
|
|
(48,006
|
)
|
Transfers to held for sale
|
|
|
(20,991
|
)
|
|
|
(1,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of year
|
|
$
|
423,844
|
|
|
$
|
138,930
|
|
|
$
|
120,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed
Assets
When we foreclose on assets that collateralized a loan, we
record the assets at their estimated fair value at the time of
foreclosure. Upon foreclosure and through liquidation, we
evaluate the assets fair value as compared to its carrying
amount and record a valuation adjustment when the carrying
amount exceeds fair value. We estimate fair value at the
assets liquidation value, based on market conditions, less
estimated costs to sell such asset.
As of December 31, 2008 and 2007, we had $84.4 million
and $19.7 million, respectively, of REO, which was recorded
in other assets on our audited consolidated balance sheet.
During the year ended December 31, 2008, we sold
$7.3 million of our REO and recognized gain of
$0.5 million as a component of other (expense) income, net
in the accompanying audited consolidated statements of income.
We did not sell any of our REO during the year ended
December 31, 2007. During the years ended December 31,
2008 and 2007, we recorded writedowns of $16.7 million and
$1.2 million, respectively, related to our REO as a
component of other (expense) income, net, in the accompanying
audited consolidated statements of income. We did not have any
REO during the year ended December 31, 2006.
Additionally, during the year ended December 31, 2008, we
foreclosed on assets that collateralized loans that had a book
value of $61.3 million. Based on our intent to hold and use
these assets, we recorded them at their estimated fair value of
$42.3 million as a component of other assets on our
accompanying audited consolidated balance sheets and charged off
$19.0 million against our allowance for loan losses.
124
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 8.
|
Marketable
Securities and Investments
|
Marketable
Securities, available-for-sale
As of December 31, 2008, our marketable securities,
available-for-sale, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Book
|
|
|
Term
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Yield
|
|
|
(Months)
|
|
|
|
($ in thousands)
|
|
|
Agency Discount Notes
|
|
$
|
149,383
|
|
|
$
|
562
|
|
|
$
|
|
|
|
$
|
149,945
|
|
|
|
2.77
|
%
|
|
|
2
|
|
Agency Callable Notes
|
|
|
312,829
|
|
|
|
2,249
|
|
|
|
|
|
|
|
315,078
|
|
|
|
3.66
|
|
|
|
22
|
|
Agency Debt
|
|
|
30,697
|
|
|
|
|
|
|
|
(383
|
)
|
|
|
30,314
|
|
|
|
4.45
|
|
|
|
24
|
|
Agency MBS
|
|
|
141,213
|
|
|
|
1,023
|
|
|
|
|
|
|
|
142,236
|
|
|
|
4.62
|
|
|
|
29
|
|
Corporate Debt
|
|
|
4,994
|
|
|
|
147
|
|
|
|
|
|
|
|
5,141
|
|
|
|
3.04
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
639,116
|
|
|
$
|
3,981
|
|
|
$
|
(383
|
)
|
|
$
|
642,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, we owned $642.7 million, in
marketable securities, available-for-sale. Included in these
marketable securities, available-for-sale, were Agency Discount
Notes, callable notes issued by Fannie Mae, Freddie Mac, 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) and a corporate debt
security issued by Wells Fargo & Company and
guaranteed by the FDIC (Corporate Debt). With the
exception of the Corporate Debt, CapitalSource Bank pledged all
of the marketable securities, available-for-sale, to the FHLB of
San Francisco as a source of contingent borrowing capacity
as of December 31, 2008.
During the year ended December 31, 2008, we recognized
$2.1 million (after-tax), in net unrealized gains related
to these marketable securities as a component of accumulated
other comprehensive income in our accompanying audited
consolidated balance sheet. During the year ended
December 31, 2008, we sold marketable securities,
available-for-sale for $82.3 million, recognizing gross
pre-tax gains of $0.2 million. During the year ended
December 31, 2008, we reviewed these securities for
impairment and do not consider them to be other-than-temporarily
impaired. As of December 31, 2008, all of these securities
were held at CapitalSource Bank.
Investments
As of December 31, 2008 and 2007, our investments were as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
Investments carried at cost
|
|
$
|
61,279
|
|
|
$
|
127,183
|
|
Investments carried at fair value:
|
|
|
|
|
|
|
|
|
Investments available-for-sale(1)
|
|
|
36,837
|
|
|
|
13,309
|
|
Warrants
|
|
|
4,661
|
|
|
|
8,994
|
|
Investments accounted for under the equity method
|
|
|
61,806
|
|
|
|
82,159
|
|
Investments held-to-maturity(2)
|
|
|
14,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
178,972
|
|
|
$
|
231,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount includes $0.4 million and $4.5 million of
Non-Agency RMBS, as of December 31, 2008 and 2007,
respectively, with maturity dates greater than ten years, and an
investment in a subordinated note of a collateralized loan
obligation of $2.4 million and $5.3 million as of
December 31, 2008 and 2007, respectively, that matures in
2020 and a $33.8 million corporate debt securities that
mature in 2013, 2016 and 2018. |
|
(2) |
|
As of December 31, 2008, the carrying value of these
investments approximates fair value, thus there are no
unrealized holding gains or losses associated with these
securities. |
125
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the years ended December 31, 2008, 2007 and 2006, we
recognized net pre-tax gains of $6.2 million,
$17.0 million and $9.3 million, respectively, on
investments sold that were carried at cost. We did not sell any
available-for-sale investments during the year ended
December 31, 2008. For the years ended December 31,
2007 and 2006, we sold available-for-sale investments for
$7.1 million and $48.0 million, respectively,
recognizing gross pre-tax gains of $5.2 million and
$0.3 million, respectively.
As of December 31, 2008 and 2007, unrealized gains (losses)
on investments carried at fair value were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
($ in thousands)
|
|
|
Investments available-for-sale(1)
|
|
$
|
37,305
|
|
|
$
|
52
|
|
|
$
|
(520
|
)
|
|
$
|
36,837
|
|
Warrants(2)
|
|
|
8,043
|
|
|
|
3,116
|
|
|
|
(6,498
|
)
|
|
|
4,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
45,348
|
|
|
$
|
3,168
|
|
|
$
|
(7,018
|
)
|
|
$
|
41,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
($ in thousands)
|
|
|
Investments available-for-sale(1)
|
|
$
|
13,509
|
|
|
$
|
13
|
|
|
$
|
(213
|
)
|
|
$
|
13,309
|
|
Warrants(2)
|
|
|
10,520
|
|
|
|
3,444
|
|
|
|
(4,970
|
)
|
|
|
8,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,029
|
|
|
$
|
3,457
|
|
|
$
|
(5,183
|
)
|
|
$
|
22,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unrealized gains and losses on available-for-sale securities are
included in accumulated other comprehensive income (loss), net,
on the accompanying audited consolidated balance sheets, to the
extent that the losses are not considered other-than-temporary
impairments. |
|
(2) |
|
Unrealized gains and losses on warrants are included in (loss)
gain on investments, net in the accompanying audited
consolidated statements of income. |
As of December 31, 2008 and 2007, our investments that were
in an unrealized loss position for which other-than-temporary
impairments have not been recognized were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
|
($ in thousands)
|
|
|
Investments carried at cost
|
|
$
|
2,774
|
|
|
$
|
10,208
|
|
|
$
|
5,314
|
|
|
$
|
13,844
|
|
Investments available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
|
219
|
|
|
|
2,781
|
|
|
|
171
|
|
|
|
289
|
|
Equity investments
|
|
|
301
|
|
|
|
213
|
|
|
|
42
|
|
|
|
473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,294
|
|
|
$
|
13,202
|
|
|
$
|
5,527
|
|
|
$
|
14,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We evaluate each of these investments for impairment by
considering the length of time and extent to which the market
value has been less than the cost basis. During the years ended
December 31, 2008 and 2007, we recorded
other-than-temporary declines in the fair value of our
Non-Agency RMBS of $4.1 million and $30.4 million,
respectively, as a component of (loss) gain on residential
mortgage investment portfolio in the accompanying audited
consolidated statements of income in accordance with FASB
Emerging Issues Task Force Issue
No. 99-20,
Recognition of Interest Income on Purchased Beneficial
Interests and Beneficial Interests that Continue to Be Held by a
Transferor in Securitized Financial Assets. During the years
ended December 31, 2008 and 2007, we also
126
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
recorded other-than-temporary declines in the fair value of an
investment in a subordinated note of a collateralized loan
obligation of $3.0 million and $0.7 million,
respectively, as a component of other income, net of expense in
the accompanying audited consolidated statements of income.
Additionally, we also recorded a $17.9 million
other-than-temporary impairment related to corporate debt
securities during the year ended December 31, 2008. We did
not record any other-than-temporary declines in the fair value
of these investments during the years ended December 31,
2007 and 2006.
During the years ended December 31, 2008, 2007 and 2006, we
recorded other-than-temporary impairments of $60.0 million,
$8.5 million, and $5.3 million, respectively, relating
to our investments carried at cost.
As of December 31, 2008, we had commitments to contribute
up to an additional $17.0 million to 18 private equity
funds and $0.8 million to an equity investment.
Certain investments are subject to clawback or put/call right
provisions. The investment and carrying value information is net
of any restrictions related to the warrant or underlying
shares/units.
|
|
Note 9.
|
Guarantor
Information
|
The following represents the supplemental consolidating
condensed financial information of CapitalSource Inc., which, as
discussed in Note 13, Borrowings, is the issuer of
both Senior Debentures and Subordinated Debentures (together,
the Debentures,), and CapitalSource Finance LLC
(CapitalSource Finance), which is a guarantor of the
Debentures, and our subsidiaries that are not guarantors of the
Debentures, as of December 31, 2008 and 2007 and for the
years ended December 31, 2008, 2007 and 2006. CapitalSource
Finance, a 100% owned indirect subsidiary of CapitalSource Inc.,
has guaranteed the Senior Debentures, fully and unconditionally,
on a senior basis and has guaranteed the Subordinated
Debentures, fully and unconditionally, on a senior subordinate
basis. Separate consolidated financial statements of the
guarantor are not presented, as we have determined that they
would not be material to investors.
127
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Balance Sheet
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Guarantor
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
11
|
|
|
$
|
1,230,254
|
|
|
$
|
38,866
|
|
|
$
|
69,432
|
|
|
$
|
|
|
|
$
|
1,338,563
|
|
Restricted cash
|
|
|
|
|
|
|
35,695
|
|
|
|
81,337
|
|
|
|
302,351
|
|
|
|
|
|
|
|
419,383
|
|
Marketable securities, available for sale
|
|
|
|
|
|
|
642,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
642,714
|
|
Mortgage-related receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,801,535
|
|
|
|
|
|
|
|
1,801,535
|
|
Mortgage-backed securities pledged, trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,489,291
|
|
|
|
|
|
|
|
1,489,291
|
|
Commercial real estate A participation interest, net
|
|
|
|
|
|
|
1,396,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,396,611
|
|
Loans held for sale
|
|
|
|
|
|
|
1,561
|
|
|
|
|
|
|
|
6,982
|
|
|
|
|
|
|
|
8,543
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
6,040,079
|
|
|
|
398,509
|
|
|
|
2,958,169
|
|
|
|
(6
|
)
|
|
|
9,396,751
|
|
Less deferred loan fees and discounts
|
|
|
|
|
|
|
(85,245
|
)
|
|
|
(32,950
|
)
|
|
|
(45,052
|
)
|
|
|
(11,070
|
)
|
|
|
(174,317
|
)
|
Less allowance for loan losses
|
|
|
|
|
|
|
(55,600
|
)
|
|
|
(295,002
|
)
|
|
|
(73,242
|
)
|
|
|
|
|
|
|
(423,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
|
|
|
|
5,899,234
|
|
|
|
70,557
|
|
|
|
2,839,875
|
|
|
|
(11,076
|
)
|
|
|
8,798,590
|
|
Interest receivable
|
|
|
|
|
|
|
55,689
|
|
|
|
2,178
|
|
|
|
59,649
|
|
|
|
|
|
|
|
117,516
|
|
Direct real estate investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
989,716
|
|
|
|
|
|
|
|
989,716
|
|
Investment in subsidiaries
|
|
|
4,397,772
|
|
|
|
|
|
|
|
1,657,532
|
|
|
|
1,602,354
|
|
|
|
(7,657,658
|
)
|
|
|
|
|
Intercompany note receivable
|
|
|
75,000
|
|
|
|
9
|
|
|
|
185,765
|
|
|
|
264,000
|
|
|
|
(524,774
|
)
|
|
|
|
|
Investments
|
|
|
|
|
|
|
104,589
|
|
|
|
22,334
|
|
|
|
52,049
|
|
|
|
|
|
|
|
178,972
|
|
Goodwill
|
|
|
|
|
|
|
173,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173,135
|
|
Other assets
|
|
|
34,438
|
|
|
|
102,213
|
|
|
|
253,270
|
|
|
|
853,546
|
|
|
|
(183,135
|
)
|
|
|
1,060,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,507,221
|
|
|
$
|
9,641,704
|
|
|
$
|
2,311,839
|
|
|
$
|
10,330,780
|
|
|
$
|
(8,376,643
|
)
|
|
$
|
18,414,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS
EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
|
|
|
$
|
5,043,695
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,043,695
|
|
Repurchase agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,595,750
|
|
|
|
|
|
|
|
1,595,750
|
|
Credit facilities
|
|
|
890,000
|
|
|
|
456,999
|
|
|
|
82,462
|
|
|
|
15,601
|
|
|
|
|
|
|
|
1,445,062
|
|
Term debt
|
|
|
|
|
|
|
2,238,382
|
|
|
|
|
|
|
|
3,100,074
|
|
|
|
|
|
|
|
5,338,456
|
|
Other borrowings
|
|
|
715,885
|
|
|
|
|
|
|
|
441,899
|
|
|
|
402,440
|
|
|
|
|
|
|
|
1,560,224
|
|
Other liabilities
|
|
|
62,181
|
|
|
|
198,272
|
|
|
|
52,552
|
|
|
|
463,656
|
|
|
|
(184,525
|
)
|
|
|
592,136
|
|
Intercompany note payable
|
|
|
|
|
|
|
46,850
|
|
|
|
122,917
|
|
|
|
355,007
|
|
|
|
(524,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,668,066
|
|
|
|
7,984,198
|
|
|
|
699,830
|
|
|
|
5,932,528
|
|
|
|
(709,299
|
)
|
|
|
15,575,323
|
|
Noncontrolling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
480
|
|
|
|
(23
|
)
|
|
|
457
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
2,828
|
|
|
|
921,000
|
|
|
|
|
|
|
|
|
|
|
|
(921,000
|
)
|
|
|
2,828
|
|
Additional paid-in capital
|
|
|
3,683,265
|
|
|
|
146,019
|
|
|
|
699,806
|
|
|
|
3,926,123
|
|
|
|
(4,772,148
|
)
|
|
|
3,683,065
|
|
(Accumulated deficit) retained earnings
|
|
|
(855,836
|
)
|
|
|
587,837
|
|
|
|
908,731
|
|
|
|
468,063
|
|
|
|
(1,964,662
|
)
|
|
|
(855,867
|
)
|
Accumulated other comprehensive income, net
|
|
|
8,898
|
|
|
|
2,650
|
|
|
|
3,472
|
|
|
|
3,586
|
|
|
|
(9,511
|
)
|
|
|
9,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,839,155
|
|
|
|
1,657,506
|
|
|
|
1,612,009
|
|
|
|
4,397,772
|
|
|
|
(7,667,321
|
)
|
|
|
2,839,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, noncontrolling interests and
shareholders equity
|
|
$
|
4,507,221
|
|
|
$
|
9,641,704
|
|
|
$
|
2,311,839
|
|
|
$
|
10,330,780
|
|
|
$
|
(8,376,643
|
)
|
|
$
|
18,414,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Balance Sheet
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
CapitalSource
|
|
|
Non-Guarantor
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
($ in thousands)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
151,511
|
|
|
$
|
19,005
|
|
|
$
|
8,183
|
|
|
$
|
|
|
|
$
|
178,699
|
|
Restricted cash
|
|
|
|
|
|
|
80,782
|
|
|
|
168,928
|
|
|
|
264,093
|
|
|
|
|
|
|
|
513,803
|
|
Mortgage-related receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,033,296
|
|
|
|
|
|
|
|
2,033,296
|
|
Mortgage-backed securities pledged, trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,030,180
|
|
|
|
|
|
|
|
4,030,180
|
|
Loans held for sale
|
|
|
|
|
|
|
78,675
|
|
|
|
15,652
|
|
|
|
|
|
|
|
|
|
|
|
94,327
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
4,221,190
|
|
|
|
459,561
|
|
|
|
5,036,952
|
|
|
|
(557
|
)
|
|
|
9,717,146
|
|
Less deferred loan fees and discounts
|
|
|
|
|
|
|
(37,052
|
)
|
|
|
(61,492
|
)
|
|
|
(49,053
|
)
|
|
|
508
|
|
|
|
(147,089
|
)
|
Less allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
(107,611
|
)
|
|
|
(31,319
|
)
|
|
|
|
|
|
|
(138,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
|
|
|
|
4,184,138
|
|
|
|
290,458
|
|
|
|
4,956,580
|
|
|
|
(49
|
)
|
|
|
9,431,127
|
|
Interest receivable
|
|
|
|
|
|
|
16
|
|
|
|
22,446
|
|
|
|
72,979
|
|
|
|
|
|
|
|
95,441
|
|
Direct real estate investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,017,604
|
|
|
|
|
|
|
|
1,017,604
|
|
Investment in subsidiaries
|
|
|
3,777,732
|
|
|
|
|
|
|
|
1,079,432
|
|
|
|
1,217,739
|
|
|
|
(6,074,903
|
)
|
|
|
|
|
Intercompany note receivable
|
|
|
75,000
|
|
|
|
9
|
|
|
|
286,101
|
|
|
|
207,806
|
|
|
|
(568,916
|
)
|
|
|
|
|
Investments
|
|
|
|
|
|
|
122,224
|
|
|
|
39,536
|
|
|
|
69,885
|
|
|
|
|
|
|
|
231,645
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
5,344
|
|
|
|
|
|
|
|
|
|
|
|
5,344
|
|
Other assets
|
|
|
18,046
|
|
|
|
42,570
|
|
|
|
113,919
|
|
|
|
255,504
|
|
|
|
(21,156
|
)
|
|
|
408,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,870,778
|
|
|
$
|
4,659,925
|
|
|
$
|
2,040,821
|
|
|
$
|
14,133,849
|
|
|
$
|
(6,665,024
|
)
|
|
$
|
18,040,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS
EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
$
|
|
|
|
$
|
12,673
|
|
|
$
|
|
|
|
$
|
3,897,354
|
|
|
$
|
|
|
|
$
|
3,910,027
|
|
Credit facilities
|
|
|
480,237
|
|
|
|
932,195
|
|
|
|
|
|
|
|
794,631
|
|
|
|
|
|
|
|
2,207,063
|
|
Term debt
|
|
|
|
|
|
|
2,570,125
|
|
|
|
|
|
|
|
4,576,863
|
|
|
|
(551
|
)
|
|
|
7,146,437
|
|
Other borrowings
|
|
|
780,630
|
|
|
|
|
|
|
|
535,991
|
|
|
|
387,487
|
|
|
|
|
|
|
|
1,704,108
|
|
Other liabilities
|
|
|
27,640
|
|
|
|
18,634
|
|
|
|
79,793
|
|
|
|
340,092
|
|
|
|
(21,162
|
)
|
|
|
444,997
|
|
Intercompany note payable
|
|
|
|
|
|
|
46,850
|
|
|
|
207,806
|
|
|
|
314,260
|
|
|
|
(568,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,288,507
|
|
|
|
3,580,477
|
|
|
|
823,590
|
|
|
|
10,310,687
|
|
|
|
(590,629
|
)
|
|
|
15,412,632
|
|
Noncontrolling interests
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
45,430
|
|
|
|
(18
|
)
|
|
|
45,446
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
2,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,207
|
|
Additional paid-in capital
|
|
|
2,902,501
|
|
|
|
524,914
|
|
|
|
90,979
|
|
|
|
3,256,263
|
|
|
|
(3,872,156
|
)
|
|
|
2,902,501
|
|
(Accumulated deficit) retained earnings
|
|
|
(327,387
|
)
|
|
|
549,305
|
|
|
|
1,120,817
|
|
|
|
516,216
|
|
|
|
(2,186,338
|
)
|
|
|
(327,387
|
)
|
Accumulated other comprehensive income, net
|
|
|
4,950
|
|
|
|
5,195
|
|
|
|
5,435
|
|
|
|
5,253
|
|
|
|
(15,883
|
)
|
|
|
4,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,582,271
|
|
|
|
1,079,414
|
|
|
|
1,217,231
|
|
|
|
3,777,732
|
|
|
|
(6,074,377
|
)
|
|
|
2,582,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, noncontrolling interests and
shareholders equity
|
|
$
|
3,870,778
|
|
|
$
|
4,659,925
|
|
|
$
|
2,040,821
|
|
|
$
|
14,133,849
|
|
|
$
|
(6,665,024
|
)
|
|
$
|
18,040,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Income
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
4,335
|
|
|
$
|
490,010
|
|
|
$
|
34,160
|
|
|
$
|
431,463
|
|
|
$
|
(13,375
|
)
|
|
$
|
946,593
|
|
Mortgage-backed securities pledged, trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
122,181
|
|
|
|
|
|
|
|
122,181
|
|
Other
|
|
|
|
|
|
|
20,440
|
|
|
|
3,705
|
|
|
|
15,642
|
|
|
|
|
|
|
|
39,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
4,335
|
|
|
|
510,450
|
|
|
|
37,865
|
|
|
|
569,286
|
|
|
|
(13,375
|
)
|
|
|
1,108,561
|
|
Fee income
|
|
|
|
|
|
|
27,631
|
|
|
|
59,751
|
|
|
|
41,343
|
|
|
|
4,421
|
|
|
|
133,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
4,335
|
|
|
|
538,081
|
|
|
|
97,616
|
|
|
|
610,629
|
|
|
|
(8,954
|
)
|
|
|
1,241,707
|
|
Operating lease income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,748
|
|
|
|
|
|
|
|
107,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
4,335
|
|
|
|
538,081
|
|
|
|
97,616
|
|
|
|
718,377
|
|
|
|
(8,954
|
)
|
|
|
1,349,455
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
76,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,245
|
|
Borrowings
|
|
|
108,320
|
|
|
|
142,132
|
|
|
|
47,456
|
|
|
|
351,332
|
|
|
|
(13,375
|
)
|
|
|
635,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
108,320
|
|
|
|
218,377
|
|
|
|
47,456
|
|
|
|
351,332
|
|
|
|
(13,375
|
)
|
|
|
712,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(103,985
|
)
|
|
|
319,704
|
|
|
|
50,160
|
|
|
|
367,045
|
|
|
|
4,421
|
|
|
|
637,345
|
|
Provision for loan losses
|
|
|
|
|
|
|
55,600
|
|
|
|
479,281
|
|
|
|
58,165
|
|
|
|
|
|
|
|
593,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after provision for loan losses
|
|
|
(103,985
|
)
|
|
|
264,104
|
|
|
|
(429,121
|
)
|
|
|
308,880
|
|
|
|
4,421
|
|
|
|
44,299
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
1,061
|
|
|
|
29,446
|
|
|
|
112,890
|
|
|
|
4
|
|
|
|
|
|
|
|
143,401
|
|
Depreciation on direct real estate investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,889
|
|
|
|
|
|
|
|
35,889
|
|
Professional fees
|
|
|
3,577
|
|
|
|
5,596
|
|
|
|
34,668
|
|
|
|
10,728
|
|
|
|
(1,991
|
)
|
|
|
52,578
|
|
Other administrative expenses
|
|
|
38,175
|
|
|
|
24,765
|
|
|
|
48,480
|
|
|
|
5,120
|
|
|
|
(57,213
|
)
|
|
|
59,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
42,813
|
|
|
|
59,807
|
|
|
|
196,038
|
|
|
|
51,741
|
|
|
|
(59,204
|
)
|
|
|
291,195
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Other income (expense)
|
|
|
54
|
|
|
|
5,830
|
|
|
|
56,143
|
|
|
|
(7,689
|
)
|
|
|
(69,847
|
)
|
|
|
(15,509
|
)
|
Earnings in subsidiaries
|
|
|
(47,939
|
)
|
|
|
|
|
|
|
96,776
|
|
|
|
(288,141
|
)
|
|
|
239,304
|
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
(83,155
|
)
|
|
|
137,068
|
|
|
|
(53,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
(76,181
|
)
|
|
|
(91,106
|
)
|
|
|
347,523
|
|
|
|
(519,279
|
)
|
|
|
164,960
|
|
|
|
(174,083
|
)
|
Noncontrolling interests expense
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
1,428
|
|
|
|
(6
|
)
|
|
|
1,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income taxes
|
|
|
(222,979
|
)
|
|
|
113,187
|
|
|
|
(277,636
|
)
|
|
|
(263,568
|
)
|
|
|
228,591
|
|
|
|
(422,405
|
)
|
Income taxes
|
|
|
(569
|
)
|
|
|
16,417
|
|
|
|
|
|
|
|
(215,629
|
)
|
|
|
|
|
|
|
(199,781
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(222,410
|
)
|
|
$
|
96,770
|
|
|
$
|
(277,636
|
)
|
|
$
|
(47,939
|
)
|
|
$
|
228,591
|
|
|
$
|
(222,624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Income
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
($ in thousands)
|
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
12,203
|
|
|
$
|
471,003
|
|
|
$
|
76,333
|
|
|
$
|
495,765
|
|
|
$
|
(15,771
|
)
|
|
$
|
1,039,533
|
|
Mortgage-backed securities pledged, trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212,869
|
|
|
|
|
|
|
|
212,869
|
|
Other
|
|
|
2
|
|
|
|
5,795
|
|
|
|
8,566
|
|
|
|
11,138
|
|
|
|
|
|
|
|
25,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
12,205
|
|
|
|
476,798
|
|
|
|
84,899
|
|
|
|
719,772
|
|
|
|
(15,771
|
)
|
|
|
1,277,903
|
|
Fee income
|
|
|
|
|
|
|
72,814
|
|
|
|
55,483
|
|
|
|
34,134
|
|
|
|
(36
|
)
|
|
|
162,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
12,205
|
|
|
|
549,612
|
|
|
|
140,382
|
|
|
|
753,906
|
|
|
|
(15,807
|
)
|
|
|
1,440,298
|
|
Operating lease income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,013
|
|
|
|
|
|
|
|
97,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
12,205
|
|
|
|
549,612
|
|
|
|
140,382
|
|
|
|
850,919
|
|
|
|
(15,807
|
)
|
|
|
1,537,311
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
55,052
|
|
|
|
236,533
|
|
|
|
46,171
|
|
|
|
525,256
|
|
|
|
(15,771
|
)
|
|
|
847,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
55,052
|
|
|
|
236,533
|
|
|
|
46,171
|
|
|
|
525,256
|
|
|
|
(15,771
|
)
|
|
|
847,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(42,847
|
)
|
|
|
313,079
|
|
|
|
94,211
|
|
|
|
325,663
|
|
|
|
(36
|
)
|
|
|
690,070
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
64,657
|
|
|
|
13,984
|
|
|
|
|
|
|
|
78,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after provision for loan losses
|
|
|
(42,847
|
)
|
|
|
313,079
|
|
|
|
29,554
|
|
|
|
311,679
|
|
|
|
(36
|
)
|
|
|
611,429
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
1,194
|
|
|
|
20,781
|
|
|
|
135,676
|
|
|
|
104
|
|
|
|
|
|
|
|
157,755
|
|
Depreciation on direct real estate investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,004
|
|
|
|
|
|
|
|
32,004
|
|
Professional fees
|
|
|
2,905
|
|
|
|
2,890
|
|
|
|
17,546
|
|
|
|
6,034
|
|
|
|
|
|
|
|
29,375
|
|
Other administrative expenses
|
|
|
48,074
|
|
|
|
3,429
|
|
|
|
39,725
|
|
|
|
3,917
|
|
|
|
(46,288
|
)
|
|
|
48,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
52,173
|
|
|
|
27,100
|
|
|
|
192,947
|
|
|
|
42,059
|
|
|
|
(46,288
|
)
|
|
|
267,991
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on investments, net
|
|
|
|
|
|
|
22,028
|
|
|
|
(2,192
|
)
|
|
|
434
|
|
|
|
|
|
|
|
20,270
|
|
Gain (loss) on derivatives
|
|
|
|
|
|
|
544
|
|
|
|
8,534
|
|
|
|
(55,228
|
)
|
|
|
|
|
|
|
(46,150
|
)
|
Loss on residential mortgage investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75,164
|
)
|
|
|
|
|
|
|
(75,164
|
)
|
Gain on debt extinguishment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
678
|
|
|
|
|
|
|
|
678
|
|
Other income (expense)
|
|
|
|
|
|
|
18,133
|
|
|
|
52,761
|
|
|
|
566
|
|
|
|
(45,744
|
)
|
|
|
25,716
|
|
Earnings in subsidiaries
|
|
|
271,307
|
|
|
|
|
|
|
|
297,473
|
|
|
|
225,698
|
|
|
|
(794,478
|
)
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
(29,195
|
)
|
|
|
32,007
|
|
|
|
(2,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
271,307
|
|
|
|
11,510
|
|
|
|
388,583
|
|
|
|
94,172
|
|
|
|
(840,222
|
)
|
|
|
(74,650
|
)
|
Noncontrolling interests expense
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
4,922
|
|
|
|
(10
|
)
|
|
|
4,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
176,287
|
|
|
|
297,463
|
|
|
|
225,190
|
|
|
|
358,870
|
|
|
|
(793,960
|
)
|
|
|
263,850
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87,563
|
|
|
|
|
|
|
|
87,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
176,287
|
|
|
$
|
297,463
|
|
|
$
|
225,190
|
|
|
$
|
271,307
|
|
|
$
|
(793,960
|
)
|
|
$
|
176,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Income
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
($ in thousands)
|
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
9,744
|
|
|
$
|
449,005
|
|
|
$
|
69,150
|
|
|
$
|
332,256
|
|
|
$
|
(12,425
|
)
|
|
$
|
847,730
|
|
Mortgage-backed securities pledged, trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
147,308
|
|
|
|
|
|
|
|
147,308
|
|
Other
|
|
|
553
|
|
|
|
5,781
|
|
|
|
9,470
|
|
|
|
5,691
|
|
|
|
|
|
|
|
21,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
10,297
|
|
|
|
454,786
|
|
|
|
78,620
|
|
|
|
485,255
|
|
|
|
(12,425
|
)
|
|
|
1,016,533
|
|
Fee income
|
|
|
|
|
|
|
96,535
|
|
|
|
17,318
|
|
|
|
56,632
|
|
|
|
|
|
|
|
170,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
10,297
|
|
|
|
551,321
|
|
|
|
95,938
|
|
|
|
541,887
|
|
|
|
(12,425
|
)
|
|
|
1,187,018
|
|
Operating lease income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,742
|
|
|
|
|
|
|
|
30,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
10,297
|
|
|
|
551,321
|
|
|
|
95,938
|
|
|
|
572,629
|
|
|
|
(12,425
|
)
|
|
|
1,217,760
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
34,878
|
|
|
|
221,180
|
|
|
|
35,156
|
|
|
|
327,936
|
|
|
|
(12,425
|
)
|
|
|
606,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
34,878
|
|
|
|
221,180
|
|
|
|
35,156
|
|
|
|
327,936
|
|
|
|
(12,425
|
)
|
|
|
606,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(24,581
|
)
|
|
|
330,141
|
|
|
|
60,782
|
|
|
|
244,693
|
|
|
|
|
|
|
|
611,035
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
71,714
|
|
|
|
9,848
|
|
|
|
|
|
|
|
81,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after provision for loan losses
|
|
|
(24,581
|
)
|
|
|
330,141
|
|
|
|
(10,932
|
)
|
|
|
234,845
|
|
|
|
|
|
|
|
529,473
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
|
|
|
|
21,514
|
|
|
|
114,398
|
|
|
|
|
|
|
|
|
|
|
|
135,912
|
|
$Depreciation on direct real estate investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,468
|
|
|
|
|
|
|
|
11,468
|
|
Professional fees
|
|
|
6,051
|
|
|
|
2,239
|
|
|
|
15,607
|
|
|
|
4,443
|
|
|
|
|
|
|
|
28,340
|
|
Other administrative expenses
|
|
|
17,643
|
|
|
|
2,311
|
|
|
|
34,557
|
|
|
|
868
|
|
|
|
(15,047
|
)
|
|
|
40,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
23,694
|
|
|
|
26,064
|
|
|
|
164,562
|
|
|
|
16,779
|
|
|
|
(15,047
|
)
|
|
|
216,052
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on investments, net
|
|
|
|
|
|
|
11,864
|
|
|
|
237
|
|
|
|
|
|
|
|
|
|
|
|
12,101
|
|
(Loss) gain on derivatives
|
|
|
|
|
|
|
(721
|
)
|
|
|
2,644
|
|
|
|
562
|
|
|
|
|
|
|
|
2,485
|
|
Gain on residential mortgage investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,528
|
|
|
|
|
|
|
|
2,528
|
|
Loss on debt extinguishment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,497
|
)
|
|
|
|
|
|
|
(2,497
|
)
|
Other income (expense)
|
|
|
75,017
|
|
|
|
8,562
|
|
|
|
29,179
|
|
|
|
|
|
|
|
(90,047
|
)
|
|
|
22,711
|
|
Earnings in subsidiaries
|
|
|
327,534
|
|
|
|
|
|
|
|
292,851
|
|
|
|
180,717
|
|
|
|
(801,102
|
)
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
(30,930
|
)
|
|
|
30,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
402,551
|
|
|
|
(11,225
|
)
|
|
|
355,841
|
|
|
|
181,310
|
|
|
|
(891,149
|
)
|
|
|
37,328
|
|
Noncontrolling interests expense
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
4,710
|
|
|
|
(8
|
)
|
|
|
4,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes and cumulative effect of
accounting change
|
|
|
354,276
|
|
|
|
292,843
|
|
|
|
180,347
|
|
|
|
394,666
|
|
|
|
(876,094
|
)
|
|
|
346,038
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,132
|
|
|
|
|
|
|
|
67,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative effect of accounting change
|
|
|
354,276
|
|
|
|
292,843
|
|
|
|
180,347
|
|
|
|
327,534
|
|
|
|
(876,094
|
)
|
|
|
278,906
|
|
Cumulative effect of accounting change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
354,276
|
|
|
$
|
292,843
|
|
|
$
|
180,717
|
|
|
$
|
327,534
|
|
|
$
|
(876,094
|
)
|
|
$
|
279,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Cash Flows
Year
Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(222,410
|
)
|
|
$
|
96,770
|
|
|
$
|
(277,636
|
)
|
|
$
|
(47,939
|
)
|
|
$
|
228,591
|
|
|
$
|
(222,624
|
)
|
Adjustments to reconcile net income to net cash (used in)
provided by operating activities, net of impact of acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
53
|
|
|
|
966
|
|
|
|
|
|
|
|
|
|
|
|
1,019
|
|
Restricted stock expense
|
|
|
|
|
|
|
3,385
|
|
|
|
39,190
|
|
|
|
|
|
|
|
|
|
|
|
42,575
|
|
Loss (gain) on extinguishment of debt
|
|
|
28,296
|
|
|
|
(4,200
|
)
|
|
|
(29,854
|
)
|
|
|
(53,098
|
)
|
|
|
|
|
|
|
(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
|
|
|
68,283
|
|
|
|
28,059
|
|
|
|
2,600
|
|
|
|
32,265
|
|
|
|
|
|
|
|
131,207
|
|
Depreciation and amortization
|
|
|
|
|
|
|
2,717
|
|
|
|
3,639
|
|
|
|
33,101
|
|
|
|
|
|
|
|
39,457
|
|
Benefit for deferred income taxes
|
|
|
(6,857
|
)
|
|
|
(34,096
|
)
|
|
|
(3,071
|
)
|
|
|
(118,973
|
)
|
|
|
|
|
|
|
(162,997
|
)
|
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 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
|
|
|
|
|
|
|
(50,445
|
)
|
|
|
20,600
|
|
|
|
13,330
|
|
|
|
|
|
|
|
(16,515
|
)
|
Decrease in loans held for sale, net
|
|
|
|
|
|
|
52,788
|
|
|
|
10,470
|
|
|
|
206,725
|
|
|
|
|
|
|
|
269,983
|
|
Decrease (increase) in intercompany note receivable
|
|
|
|
|
|
|
|
|
|
|
100,336
|
|
|
|
(56,194
|
)
|
|
|
(44,142
|
)
|
|
|
|
|
(Increase) decrease 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
|
)
|
|
|
462,171
|
|
|
|
48,010
|
|
|
|
293,346
|
|
|
|
(238,785
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by operating activities, net of impact
of acquisitions
|
|
|
(682,193
|
)
|
|
|
768,091
|
|
|
|
299,862
|
|
|
|
2,574,926
|
|
|
|
(55,720
|
)
|
|
|
2,904,966
|
|
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
|
|
|
|
|
|
|
(1,736,575
|
)
|
|
|
(316,348
|
)
|
|
|
2,029,345
|
|
|
|
11,027
|
|
|
|
(12,551
|
)
|
Acquisition of real estate, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,121
|
)
|
|
|
|
|
|
|
(10,121
|
)
|
Acquisition of investments, net
|
|
|
|
|
|
|
(43,269
|
)
|
|
|
(514
|
)
|
|
|
(5,173
|
)
|
|
|
|
|
|
|
(48,956
|
)
|
Acquisition of marketable securities, available-for-sale
|
|
|
|
|
|
|
(639,116
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(639,116
|
)
|
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
|
|
|
|
|
|
|
1,259,324
|
|
|
|
(232,644
|
)
|
|
|
2,170,895
|
|
|
|
11,027
|
|
|
|
3,208,602
|
|
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 note payable
|
|
|
|
|
|
|
|
|
|
|
(84,889
|
)
|
|
|
40,747
|
|
|
|
44,142
|
|
|
|
|
|
Repayments of 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 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
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,568
|
)
|
|
|
|
|
|
|
(289,134
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities
|
|
|
682,204
|
|
|
|
(948,672
|
)
|
|
|
(47,357
|
)
|
|
|
(4,684,572
|
)
|
|
|
44,693
|
|
|
|
(4,953,704
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Cash Flows
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
176,287
|
|
|
$
|
297,463
|
|
|
$
|
225,698
|
|
|
$
|
271,307
|
|
|
$
|
(794,468
|
)
|
|
$
|
176,287
|
|
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
475
|
|
|
|
7,094
|
|
|
|
|
|
|
|
|
|
|
|
7,569
|
|
Restricted stock expense
|
|
|
|
|
|
|
4,082
|
|
|
|
32,839
|
|
|
|
|
|
|
|
|
|
|
|
36,921
|
|
Gain on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(678
|
)
|
|
|
|
|
|
|
(678
|
)
|
Amortization of deferred loan fees and discounts
|
|
|
|
|
|
|
(26,287
|
)
|
|
|
(34,368
|
)
|
|
|
(27,903
|
)
|
|
|
|
|
|
|
(88,558
|
)
|
Paid-in-kind
interest on loans
|
|
|
|
|
|
|
(7,839
|
)
|
|
|
(14,390
|
)
|
|
|
(7,824
|
)
|
|
|
|
|
|
|
(30,053
|
)
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
64,658
|
|
|
|
13,983
|
|
|
|
|
|
|
|
78,641
|
|
Amortization of deferred financing fees and discounts
|
|
|
5,174
|
|
|
|
15,926
|
|
|
|
474
|
|
|
|
26,098
|
|
|
|
|
|
|
|
47,672
|
|
Depreciation and amortization
|
|
|
|
|
|
|
325
|
|
|
|
3,388
|
|
|
|
32,178
|
|
|
|
|
|
|
|
35,891
|
|
Benefit for deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,793
|
|
|
|
|
|
|
|
41,793
|
|
Non-cash (gain) loss on investments, net
|
|
|
|
|
|
|
(4,018
|
)
|
|
|
3,125
|
|
|
|
28
|
|
|
|
|
|
|
|
(865
|
)
|
Non-cash (gain) loss on property and equipment disposals
|
|
|
|
|
|
|
(1,372
|
)
|
|
|
1,254
|
|
|
|
1,155
|
|
|
|
|
|
|
|
1,037
|
|
Unrealized (gain) loss on derivatives and foreign currencies, net
|
|
|
|
|
|
|
(7,476
|
)
|
|
|
(7,084
|
)
|
|
|
57,159
|
|
|
|
|
|
|
|
42,599
|
|
Unrealized loss on residential mortgage investment portfolio, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,507
|
|
|
|
|
|
|
|
75,507
|
|
Net increase in mortgage-backed securities pledged, trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(494,153
|
)
|
|
|
|
|
|
|
(494,153
|
)
|
Amortization of discount on residential mortgage investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,380
|
)
|
|
|
|
|
|
|
(39,380
|
)
|
Decrease (increase) in interest receivable
|
|
|
52
|
|
|
|
4,412
|
|
|
|
(2,321
|
)
|
|
|
(25,816
|
)
|
|
|
|
|
|
|
(23,673
|
)
|
Increase in loans held for sale, net
|
|
|
|
|
|
|
(174,006
|
)
|
|
|
(53,781
|
)
|
|
|
(371,110
|
)
|
|
|
|
|
|
|
(598,897
|
)
|
Decrease (increase) in intercompany note receivable
|
|
|
|
|
|
|
2,128
|
|
|
|
(67,101
|
)
|
|
|
239,261
|
|
|
|
(174,288
|
)
|
|
|
|
|
Decrease (increase) in other assets
|
|
|
1,219
|
|
|
|
(2,419
|
)
|
|
|
(11,186
|
)
|
|
|
(218,088
|
)
|
|
|
(4,490
|
)
|
|
|
(234,964
|
)
|
Increase (decrease) in other liabilities
|
|
|
3,004
|
|
|
|
(9,541
|
)
|
|
|
(17,033
|
)
|
|
|
204,490
|
|
|
|
14,054
|
|
|
|
194,974
|
|
Net transfers with subsidiaries
|
|
|
(804,649
|
)
|
|
|
(191,085
|
)
|
|
|
(418,611
|
)
|
|
|
619,877
|
|
|
|
794,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by operating activities
|
|
|
(618,913
|
)
|
|
|
(99,232
|
)
|
|
|
(287,345
|
)
|
|
|
397,884
|
|
|
|
(164,724
|
)
|
|
|
(772,330
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in restricted cash
|
|
|
|
|
|
|
(25,151
|
)
|
|
|
(46,273
|
)
|
|
|
(201,475
|
)
|
|
|
|
|
|
|
(272,899
|
)
|
Decrease in mortgage-related receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
265,839
|
|
|
|
|
|
|
|
265,839
|
|
Decrease in receivables under reverse-repurchase agreements, net
|
|
|
|
|
|
|
51,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,892
|
|
(Increase) decrease in loans, net
|
|
|
|
|
|
|
(7,359
|
)
|
|
|
245,446
|
|
|
|
(1,662,109
|
)
|
|
|
(10,087
|
)
|
|
|
(1,434,109
|
)
|
Acquisition of real estate, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(248,120
|
)
|
|
|
|
|
|
|
(248,120
|
)
|
Disposal (acquisition) of investments, net
|
|
|
|
|
|
|
38,771
|
|
|
|
(3,012
|
)
|
|
|
(64,483
|
)
|
|
|
|
|
|
|
(28,724
|
)
|
Acquisition of property and equipment, net
|
|
|
|
|
|
|
(45
|
)
|
|
|
(5,334
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities
|
|
|
|
|
|
|
58,108
|
|
|
|
190,827
|
|
|
|
(1,910,348
|
)
|
|
|
(10,087
|
)
|
|
|
(1,671,500
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(2,862
|
)
|
|
|
(27,259
|
)
|
|
|
(2,215
|
)
|
|
|
(20,771
|
)
|
|
|
|
|
|
|
(53,107
|
)
|
Increase (decrease) in intercompany note payable
|
|
|
|
|
|
|
33,518
|
|
|
|
|
|
|
|
(207,806
|
)
|
|
|
174,288
|
|
|
|
|
|
(Repayments of) borrowings under repurchase agreements, net
|
|
|
|
|
|
|
(50,586
|
)
|
|
|
|
|
|
|
449,845
|
|
|
|
|
|
|
|
399,259
|
|
Borrowings on (repayments of) credit facilities, net
|
|
|
124,551
|
|
|
|
(66,776
|
)
|
|
|
|
|
|
|
(105,189
|
)
|
|
|
|
|
|
|
(47,414
|
)
|
Borrowings of term debt
|
|
|
|
|
|
|
1,137,477
|
|
|
|
232
|
|
|
|
1,722,375
|
|
|
|
523
|
|
|
|
2,860,607
|
|
Repayments of term debt
|
|
|
|
|
|
|
(1,071,963
|
)
|
|
|
(4,847
|
)
|
|
|
(426,208
|
)
|
|
|
|
|
|
|
(1,503,018
|
)
|
Borrowings under other borrowings
|
|
|
245,000
|
|
|
|
|
|
|
|
75,630
|
|
|
|
|
|
|
|
|
|
|
|
320,630
|
|
Proceeds from issuance of common stock, net of offering costs
|
|
|
714,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
714,490
|
|
Proceeds from exercise of options
|
|
|
4,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,750
|
|
Tax expense on share based payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,054
|
|
|
|
|
|
|
|
2,054
|
|
Payment of dividends
|
|
|
(467,173
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,700
|
)
|
|
|
|
|
|
|
(471,873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities
|
|
|
618,756
|
|
|
|
(45,589
|
)
|
|
|
68,800
|
|
|
|
1,409,600
|
|
|
|
174,811
|
|
|
|
2,226,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
(157
|
)
|
|
|
(86,713
|
)
|
|
|
(27,718
|
)
|
|
|
(102,864
|
)
|
|
|
|
|
|
|
(217,452
|
)
|
Cash and cash equivalents as of beginning of period
|
|
|
157
|
|
|
|
238,224
|
|
|
|
46,723
|
|
|
|
111,047
|
|
|
|
|
|
|
|
396,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end of period
|
|
$
|
|
|
|
$
|
151,511
|
|
|
$
|
19,005
|
|
|
$
|
8,183
|
|
|
$
|
|
|
|
$
|
178,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Cash Flows
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
CapitalSource
|
|
|
Non-Guarantor
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
354,276
|
|
|
$
|
292,843
|
|
|
$
|
180,717
|
|
|
$
|
327,534
|
|
|
$
|
(876,094
|
)
|
|
$
|
279,276
|
|
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
580
|
|
|
|
8,018
|
|
|
|
|
|
|
|
|
|
|
|
8,598
|
|
Restricted stock expense
|
|
|
|
|
|
|
2,611
|
|
|
|
22,084
|
|
|
|
|
|
|
|
|
|
|
|
24,695
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,497
|
|
|
|
|
|
|
|
2,497
|
|
Non-cash prepayment fee
|
|
|
|
|
|
|
|
|
|
|
(8,353
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,353
|
)
|
Cumulative effect of accounting change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
|
(370
|
)
|
Amortization of deferred loan fees and discounts
|
|
|
|
|
|
|
(45,732
|
)
|
|
|
5,045
|
|
|
|
(45,561
|
)
|
|
|
|
|
|
|
(86,248
|
)
|
Paid-in-kind
interest on loans
|
|
|
|
|
|
|
6,941
|
|
|
|
(3,733
|
)
|
|
|
(2,877
|
)
|
|
|
|
|
|
|
331
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
71,714
|
|
|
|
9,848
|
|
|
|
|
|
|
|
81,562
|
|
Amortization of deferred financing fees and discounts
|
|
|
3,146
|
|
|
|
23,305
|
|
|
|
487
|
|
|
|
14,294
|
|
|
|
|
|
|
|
41,232
|
|
Depreciation and amortization
|
|
|
|
|
|
|
172
|
|
|
|
2,887
|
|
|
|
11,696
|
|
|
|
|
|
|
|
14,755
|
|
Benefit for deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,699
|
)
|
|
|
|
|
|
|
(20,699
|
)
|
Non-cash loss on investments, net
|
|
|
|
|
|
|
7,993
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
8,024
|
|
Non-cash (gain) loss on property and equipment disposals
|
|
|
|
|
|
|
(676
|
)
|
|
|
272
|
|
|
|
|
|
|
|
|
|
|
|
(404
|
)
|
Unrealized loss (gain) on derivatives and foreign currencies, net
|
|
|
60
|
|
|
|
1,734
|
|
|
|
(1,835
|
)
|
|
|
(1,429
|
)
|
|
|
|
|
|
|
(1,470
|
)
|
Unrealized loss on residential mortgage investment portfolio, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,758
|
|
|
|
|
|
|
|
4,758
|
|
Net increase in mortgage-backed securities pledged, trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(375,244
|
)
|
|
|
|
|
|
|
(375,244
|
)
|
Amortization of discount on residential mortgage investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,090
|
)
|
|
|
|
|
|
|
(32,090
|
)
|
(Increase) decrease in interest receivable
|
|
|
(52
|
)
|
|
|
38,561
|
|
|
|
(20,497
|
)
|
|
|
(45,901
|
)
|
|
|
|
|
|
|
(27,889
|
)
|
Increase in loans held for sale, net
|
|
|
|
|
|
|
(9,143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,143
|
)
|
(Increase) decrease in intercompany note receivable
|
|
|
(75,000
|
)
|
|
|
5,666
|
|
|
|
24,094
|
|
|
|
|
|
|
|
45,240
|
|
|
|
|
|
Decrease (increase) in other assets
|
|
|
10,448
|
|
|
|
(3,312
|
)
|
|
|
(12,994
|
)
|
|
|
(9,503
|
)
|
|
|
25,646
|
|
|
|
10,285
|
|
Increase in other liabilities
|
|
|
21,324
|
|
|
|
6,309
|
|
|
|
31,751
|
|
|
|
50,580
|
|
|
|
(27,388
|
)
|
|
|
82,576
|
|
Net transfers with subsidiaries
|
|
|
(883,951
|
)
|
|
|
(36,257
|
)
|
|
|
(147,904
|
)
|
|
|
192,018
|
|
|
|
876,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by operating activities
|
|
|
(569,749
|
)
|
|
|
291,595
|
|
|
|
151,414
|
|
|
|
79,921
|
|
|
|
43,498
|
|
|
|
(3,321
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted cash
|
|
|
|
|
|
|
70,201
|
|
|
|
30,644
|
|
|
|
(53,307
|
)
|
|
|
|
|
|
|
47,538
|
|
Increase in mortgage-related receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,333,434
|
)
|
|
|
|
|
|
|
(2,333,434
|
)
|
Increase in receivables under reverse-repurchase agreements, net
|
|
|
|
|
|
|
(18,649
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,649
|
)
|
(Increase) decrease in loans, net
|
|
|
(60
|
)
|
|
|
70,035
|
|
|
|
(543,272
|
)
|
|
|
(1,449,381
|
)
|
|
|
2,816
|
|
|
|
(1,919,862
|
)
|
Acquisition of real estate, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(498,005
|
)
|
|
|
|
|
|
|
(498,005
|
)
|
Disposal (acquisition) of investments, net
|
|
|
33,683
|
|
|
|
(94,145
|
)
|
|
|
47,521
|
|
|
|
(19,642
|
)
|
|
|
|
|
|
|
(32,583
|
)
|
Acquisition of property and equipment, net
|
|
|
|
|
|
|
(1,630
|
)
|
|
|
(2,975
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,605
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities
|
|
|
33,623
|
|
|
|
25,812
|
|
|
|
(468,082
|
)
|
|
|
(4,353,769
|
)
|
|
|
2,816
|
|
|
|
(4,759,600
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(3,140
|
)
|
|
|
(21,554
|
)
|
|
|
(5,322
|
)
|
|
|
(26,607
|
)
|
|
|
|
|
|
|
(56,623
|
)
|
(Decrease) increase in intercompany note payable
|
|
|
(20,327
|
)
|
|
|
(9,433
|
)
|
|
|
|
|
|
|
75,000
|
|
|
|
(45,240
|
)
|
|
|
|
|
Borrowings repurchase agreements, net
|
|
|
|
|
|
|
16,104
|
|
|
|
|
|
|
|
377,010
|
|
|
|
|
|
|
|
393,114
|
|
Borrowings on (repayments of) credit facilities, net
|
|
|
355,685
|
|
|
|
(939,301
|
)
|
|
|
|
|
|
|
714,183
|
|
|
|
|
|
|
|
130,567
|
|
Borrowings of term debt
|
|
|
|
|
|
|
2,063,522
|
|
|
|
5,786
|
|
|
|
3,439,970
|
|
|
|
(1,074
|
)
|
|
|
5,508,204
|
|
Repayments of term debt
|
|
|
|
|
|
|
(1,333,586
|
)
|
|
|
(329
|
)
|
|
|
(214,960
|
)
|
|
|
|
|
|
|
(1,548,875
|
)
|
Borrowings under other borrowings
|
|
|
|
|
|
|
|
|
|
|
206,685
|
|
|
|
|
|
|
|
|
|
|
|
206,685
|
|
Proceeds from issuance of common stock, net of offering costs
|
|
|
603,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
603,422
|
|
Proceeds from exercise of options
|
|
|
7,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,050
|
|
Tax benefits on share based payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,281
|
|
|
|
|
|
|
|
4,281
|
|
Payment of dividends
|
|
|
(408,445
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,204
|
)
|
|
|
|
|
|
|
(412,649
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities
|
|
|
534,245
|
|
|
|
(224,248
|
)
|
|
|
206,820
|
|
|
|
4,364,673
|
|
|
|
(46,314
|
)
|
|
|
4,835,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(1,881
|
)
|
|
|
93,159
|
|
|
|
(109,848
|
)
|
|
|
90,825
|
|
|
|
|
|
|
|
72,255
|
|
Cash and cash equivalents as of beginning of period
|
|
|
2,038
|
|
|
|
145,065
|
|
|
|
156,571
|
|
|
|
20,222
|
|
|
|
|
|
|
|
323,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end of period
|
|
$
|
157
|
|
|
$
|
238,224
|
|
|
$
|
46,723
|
|
|
$
|
111,047
|
|
|
$
|
|
|
|
$
|
396,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 10.
|
Direct
Real Estate Investments
|
Our direct real estate investments primarily consist of
long-term care facilities generally leased through long-term,
triple-net
operating leases. As of December 31, 2008 and 2007, our
direct real estate investments were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
Land
|
|
$
|
106,797
|
|
|
$
|
106,620
|
|
Buildings
|
|
|
910,413
|
|
|
|
902,863
|
|
Furniture and equipment
|
|
|
51,814
|
|
|
|
51,545
|
|
Accumulated depreciation
|
|
|
(79,308
|
)
|
|
|
(43,424
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
989,716
|
|
|
$
|
1,017,604
|
|
|
|
|
|
|
|
|
|
|
Depreciation of direct real estate investments totaled
$35.9 million, $32.0 million and $11.5 million
for the years ended December 31, 2008, 2007 and 2006,
respectively. During the year ended December 31, 2007, we
recognized $1.2 million in impairments, which was recorded
as a component of other income (expense) in our accompanying
audited consolidated income statement for the year ended
December 31, 2007. We did not incur impairments on our
direct real estate investments during the years ended
December 31, 2008 and 2006.
As of December 31, 2008, all of our direct real estate
investments were pledged either directly or indirectly as
collateral for certain of our borrowings. For additional
information about our borrowings, see Note 13,
Borrowings, in our accompanying audited consolidated
financial statements for the year ended December 31, 2008.
The leases on our direct real estate investments expire at
various dates through 2026 and typically include fixed rental
payments, subject to escalation over the life of the lease. As
of December 31, 2008, we expect to receive future minimum
rental payments from our non-cancelable operating leases as
follows ($ in thousands):
|
|
|
|
|
2009
|
|
$
|
100,860
|
|
2010
|
|
|
102,237
|
|
2011
|
|
|
99,630
|
|
2012
|
|
|
97,715
|
|
2013
|
|
|
95,693
|
|
Thereafter
|
|
|
414,517
|
|
|
|
|
|
|
|
|
$
|
910,652
|
|
|
|
|
|
|
|
|
Note 11.
|
Property
and Equipment
|
We own property and equipment for use in our operations or that
was acquired through foreclosure that we intend to hold and use.
As of December 31, 2008 and 2007, property and equipment
included in other assets on our accompanying audited
consolidated balance sheets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
Land
|
|
$
|
9,558
|
|
|
$
|
3,214
|
|
Buildings
|
|
|
55,833
|
|
|
|
28,861
|
|
Equipment
|
|
|
15,268
|
|
|
|
9,377
|
|
Computer software
|
|
|
4,691
|
|
|
|
4,090
|
|
Furniture
|
|
|
7,279
|
|
|
|
5,837
|
|
Leasehold improvements
|
|
|
15,245
|
|
|
|
10,413
|
|
Accumulated depreciation and amortization
|
|
|
(19,601
|
)
|
|
|
(13,030
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
88,273
|
|
|
$
|
48,762
|
|
|
|
|
|
|
|
|
|
|
136
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Depreciation of property and equipment totaled
$6.9 million, $3.7 million and $3.0 million for
the years ended December 31, 2008, 2007 and 2006,
respectively.
As of December 31, 2008, CapitalSource Bank had
$5.0 billion in deposits insured up to the maximum legal
limit by the FDIC. As of December 31, 2008, CapitalSource
Bank had $1.6 billion of time certificates of deposit in
the amount of $100,000 or more.
As of December 31, 2008, the weighted-average interest rate
for savings and money market deposit accounts, and for
certificates of deposit (including brokered), was 2.76% and
3.56%, respectively. The weighted-average interest rate for all
deposits on December 31, 2008 was 3.44%.
As of December 31, 2008, interest-bearing deposits at
CapitalSource Bank were as follows ($ in thousands):
|
|
|
|
|
Interest-bearing deposits:
|
|
|
|
|
Money market
|
|
$
|
279,577
|
|
Savings
|
|
|
471,014
|
|
Certificates of deposit
|
|
|
4,259,153
|
|
Brokered certificates of deposit
|
|
|
33,951
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
$
|
5,043,695
|
|
|
|
|
|
|
As of December 31, 2008, certificates of deposit at
CapitalSource Bank detailed by maturity were as follows:
|
|
|
|
|
|
|
|
|
Maturing by December 31,
|
|
Amount
|
|
|
Weighted Average Rate
|
|
|
|
($ in thousands)
|
|
|
|
|
|
2009
|
|
$
|
4,256,580
|
|
|
|
3.55
|
%
|
2010
|
|
|
16,357
|
|
|
|
4.02
|
|
2011
|
|
|
13,985
|
|
|
|
5.06
|
|
2012
|
|
|
5,978
|
|
|
|
4.94
|
|
2013
|
|
|
204
|
|
|
|
3.95
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,293,104
|
|
|
|
3.56
|
%
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008, interest expense on
deposits was as follows ($ in thousands):
|
|
|
|
|
Savings and money market deposit accounts
|
|
$
|
7,887
|
|
Certificates of deposit
|
|
|
67,498
|
|
Brokered certificates of deposit
|
|
|
1,137
|
|
Fees for early withdrawal
|
|
|
(277
|
)
|
|
|
|
|
|
Total interest expense
|
|
$
|
76,245
|
|
|
|
|
|
|
Repurchase
Agreements
As of December 31, 2008, we had borrowings outstanding
under five master repurchase agreements with various financial
institutions to finance the purchases of RMBS and FHLB discount
notes. As of December 31, 2008 and 2007, the aggregate
amounts outstanding under such repurchase agreements were
$1.6 billion and $3.9 billion, respectively. As of
December 31, 2008 and 2007, these repurchase agreements had
weighted average borrowing rates of 2.55% and 5.12%,
respectively, and weighted average remaining maturities of
0.4 months and 2.5 months, respectively. The terms of
most of our borrowings pursuant to these repurchase agreements
typically reset every 30 days. As of December 31, 2008
and 2007, these repurchase agreements were collateralized by
Agency RMBS
137
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and FHLB discount notes with a fair value of $1.7 billion
and $4.1 billion, respectively, including accrued interest,
and cash deposits of $10.6 million and $29.2 million,
respectively, in order to cover margin calls.
Credit
Facilities
We utilize secured credit facilities, to finance our commercial
loans and for general corporate purposes. Our committed credit
facility capacities were $2.6 billion and $5.6 billion
as of December 31, 2008 and 2007, respectively. Interest on
our credit facility borrowings is charged at variable rates that
may be based on one or more of one-month LIBOR, one-month
EURIBOR,
and/or the
applicable Commercial Paper (CP) rate. As of
December 31, 2008 and 2007, total undrawn capacities under
our credit facilities were $1.2 billion and
$3.4 billion, respectively, which is limited to the extent
we have existing available eligible collateral to pledge in
order to utilize such unused capacity.
As of December 31, 2008, our credit facilities
committed capacity, principal outstanding, aggregate outstanding
collateral balances, interest rates, maturity dates and maximum
advance rates were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
|
|
|
Maximum
|
|
|
|
Committed
|
|
|
Principal
|
|
|
Collateral
|
|
|
Interest
|
|
Maturity
|
|
Advance
|
|
|
|
Capacity
|
|
|
Outstanding
|
|
|
Balance(1)
|
|
|
Rate(2)
|
|
Date
|
|
Rate(3)
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
|
Credit Facilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CS Funding III
|
|
$
|
150,000
|
|
|
$
|
74,000
|
|
|
$
|
113,572
|
|
|
LIBOR + 2.00%
|
|
April 29, 2009
|
|
|
77.5
|
%
|
CS Funding VII(4)
|
|
|
285,000
|
|
|
|
176,600
|
|
|
|
261,175
|
|
|
CP + 2.25%
|
|
March 31, 2010
|
|
|
70.0
|
%
|
CS Funding VIII
|
|
|
40,450
|
|
|
|
40,450
|
|
|
|
115,397
|
|
|
CP + 0.75%
|
|
July 19, 2010
|
|
|
64.0
|
%
|
CSE QRS Funding I(4)
|
|
|
815,000
|
|
|
|
15,600
|
|
|
|
144,549
|
|
|
LIBOR/CP + 2.0%
|
|
April 24, 2010
|
|
|
77.5
|
%
|
CS Europe(5)
|
|
|
279,420
|
|
|
|
165,949
|
|
|
|
315,796
|
|
|
EURIBOR + 2.50%(6)
|
|
September 23, 2009
|
|
|
70.0
|
%
|
CS Inc.(7)
|
|
|
1,070,000
|
|
|
|
972,463
|
|
|
|
1,780,200
|
|
|
LIBOR + 4.50%(8)
|
|
March 13, 2010
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit facilities
|
|
$
|
2,639,870
|
|
|
$
|
1,445,062
|
|
|
$
|
2,730,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the outstanding balances of the loans and other
assets which are pledged as collateral to the credit facility. |
|
(2) |
|
As of December 31, 2008, the one-month LIBOR was 0.44%; the
one-month EURIBOR was 2.60%; the CP rate for CS Funding VII was
3.38%; the CP rate for CS Funding VIII was 2.17%; and the
blended CP rate for CSE QRS Funding I was 1.32%. |
|
(3) |
|
We may obtain financing up to the specified percentage of the
outstanding principal balance of real estate loans, real
estate-related loans and commercial loans, that we transfer to
the credit facilities, depending upon and subject to, among
other factors, the type of loan and lien position, its current
loan rating and priority of payment within the particular
borrowers capital structure and certain concentration
limits. Advance rates on individual eligible collateral range
from 25% to the specified percentage. |
|
(4) |
|
On termination or maturity of the credit facility, amounts due
under the credit facility may, in the absence of a default, be
repaid from proceeds from amortization of the collateral pool.
The maturity date reflected in the table above assumes
utilization of a one-year amortization period from the
termination date of each facility. |
|
(5) |
|
CS Europe was a 200 million multi-currency facility
allowing for principal to be drawn in US Dollars
(USD), Euro or British Pound Sterling
(GBP), and the amounts presented were translated to
USD using the applicable spot rates as of December 31, 2008. |
|
(6) |
|
Borrowings in Euro or GBP are at EURIBOR or GBP LIBOR + 2.50%,
respectively, and borrowings in USD are at LIBOR + 2.50%. |
|
(7) |
|
The Aggregate Collateral Balance is comprised of the loan assets
and other assets that qualify as Available Assets as defined
under the credit agreement. See below for additional details
regarding this credit facility. |
|
(8) |
|
LIBOR + 4.50% 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 + 4.50% or GBP LIBOR + 4.50%. |
138
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In December 2008, we modified the terms of our
$1.07 billion unsecured credit facility to collateralize it
with substantially all of the Parent Companys previously
unencumbered assets, including loan assets, healthcare net lease
properties, owned and purchased tranches of our term
securitizations and our equity interest in CapitalSource Bank.
The amendment increased the margin above the applicable
reference rate that we must pay on borrowings under the facility
by an additional 1.50% to 4.50%. We are required to make
mandatory prepayments (which are accompanied by commitment
reductions) in $25.0 million increments with a portion of
the proceeds of certain specified events, including (A) 75%
of the cash proceeds of any unsecured debt issuance by the
Parent Company, (B) 25% of the cash proceeds of specified
equity issuances, and (C) 75% of any principal repayments
on, or the cash proceeds received on the disposition of or the
incurrence of secured debt with respect to, assets constituting
collateral under the facility. Regardless of any mandatory
prepayments, the facility commitments reduce to
(1) $1.0 billion on March 31, 2009;
(2) $900.0 million on June 30, 2009; and
(3) $700.0 million on December 31, 2009. The
revised facility also contains customary operating and financial
covenants, certain of which were revised to avoid a potential
event of default. In January 2009, we made a mandatory reduction
in the facility commitment of $25.0 million, and in
February 2009 we made a further $50.0 million reduction in
the facility commitment which fulfilled the March 31, 2009
amortization requirement one month ahead of schedule. The
committed capacity and principal amount outstanding on this
facility as of February 25, 2009 were $995.0 million
and $937.2 million, respectively.
In February 2009, to avoid a potential event of default, we
amended this facility to modify the Consolidated EBITDA to
Interest Expense financial covenant to exclude the period ending
December 31, 2008, and to define and measure the covenant
differently for future periods, including: replacing the
trailing twelve month measurement period with a quarterly
measurement; changing the way we measure Consolidated EBITDA by
including up to $90.0 million of provision for loan losses
for the reporting period ending March 31, 2009, and up to
$50.0 million for each reporting period thereafter; and
setting the minimum ratio of Consolidated EBITDA to Interest
Expense to 1.50:1.00 for the periods ending March 31,
June 30, and September 30, 2009, and 1.75:1.00 for
each period thereafter. This amendment also provides that we
only count loans that are delinquent by at least 180 days,
subject to an insolvency event or are charged off pursuant to
our credit and collection policy when calculating our maximum
average portfolio charged-off ratio; and increases the maximum
average portfolio charged-off ratios (i) for the fiscal
quarter ended March 31, 2009, from 8.0% to 8.5%, calculated
excluding CapitalSource Bank, and from 5.0% to 6.5%, calculated
including CapitalSource Bank; and (ii) for every fiscal
quarter thereafter, from 8.0% to 10.0%, when calculated by
excluding CapitalSource Bank, and from 5.0% to 6.5%, calculated
including CapitalSource Bank.
In December 2008, we modified the terms of our CS Funding VIII
facility to provide that amounts previously payable to us from
interest collections on the collateral are payable to the
lenders.
In February 2009, we reduced the commitment on our CS
Funding III facility from $150.0 million to
$100.0 million and we obtained a waiver of the aggregate
portfolio charge-off ratio financial covenant for the December
2008 through March 2009 reporting periods to avoid a potential
event of default. We also agreed to an increase in the facility
margin of 1.5% to 3.5%.
In February 2009, we obtained a waiver for our CS Funding VII
facility, revocable at the discretion of the administrative
agent, of the aggregate portfolio charge-off ratio financial
covenant for the December 2008 through February 2009 reporting
periods to avoid a potential event of default.
In February 2009, we reduced the facility commitment amount on
our CSE QRS Funding I facility from $815.0 million to
$250.0 million and we obtained a waiver of the average
portfolio charged-off ratio financial covenant for the January
2009 through March 2009 reporting periods to avoid a potential
event of default. We also agreed to an increase in the facility
margin of 1.50% to 3.50%.
In February 2009, we reduced the facility commitment amount on
our CS Europe credit facility from 200.0 million to
125.0 million.
As of February 25, 2009, our credit facilities
aggregate committed capacity was $1.8 billion.
139
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Federal
Home Loan Bank Financing
As a member of the FHLB of San Francisco, CapitalSource
Bank has current financing availability with the FHLB equal to
15% of CapitalSource Banks total assets. As of
December 31, 2008, the maximum financing under this formula
was $915.4 million. Although no advances were outstanding
as of December 31, 2008, a letter of credit in the amount
of $0.8 million had been issued under the facility. The
financing is subject to various terms and conditions including,
but not limited to, the pledging of acceptable collateral,
satisfaction of the FHLB stock ownership requirement and certain
limits regarding the maximum term of debt.
Term
Debt
In conjunction with each of our term debt transactions, we
established and contributed commercial loans to separate single
purpose entities (collectively referred to as the
Issuers). The Issuers issued certificates that are
collateralized by and are designed to be paid off from the cash
flows of the underlying pool of commercial loans held by the
Issuer. The Issuers are structured to be legally isolated,
bankruptcy remote entities. Simultaneously with the initial
contributions, the Issuers issued notes to institutional
investors and we retained subordinated notes or 100% of the
Issuers trust certificates or equity. The notes are
collateralized by all or portions of specific commercial loans,
totaling $4.6 billion as of December 31, 2008. During
2008, we did not consummate any term debt transactions.
We continue to service the underlying commercial loans
contributed to the Issuer and earn periodic servicing fees paid
from the cash flows of the underlying commercial loans. We have
no legal obligation to repay the outstanding certificates or
contribute additional assets to the entity. During the year
ended December 31, 2008, we repurchased $162.4 million
of loans that had experienced a credit event such as borrower
delinquency or bankruptcy from certain Issuers as permitted by
the transaction documents. The loans were repurchased at their
outstanding loan balance plus accrued interest. These
repurchases were executed in order to maintain strong
performance of the transactions and to avoid the funding of
delinquency reserves. We expect that these repurchases will
occur less frequently in the future.
We have determined that the Issuers are variable interest
entities, subject to the consolidation guidance of
FIN 46(R). Through our assessment of the Issuers, we
concluded that the entities were designed to create and pass
along risks related to the credit performance of the underlying
commercial loan portfolio. As we expect that our interests will
absorb a majority of the expected losses related to such risks,
we have concluded that we are the primary beneficiary of the
Issuers. As a result, we report all of the assets and
liabilities of the Issuers in our consolidated financial
statements including the underlying commercial loans and the
issued certificates held by third parties. The certificates are
designed to be paid off by the cash flows of the underlying
commercial loans. As a result, we do not have the ability to
pledge or exchange the assets held by the Issuers. The carrying
amount of the commercial loans and issued certificates were
$4.4 billion and $3.6 billion, respectively, as of
December 31, 2008.
140
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Our outstanding term debt transactions in the form of asset
securitizations as of December 31, 2008 and 2007, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
|
|
|
Outstanding Debt Balance as of December 31,
|
|
|
Interest Rate
|
|
|
Original Expected
|
|
|
Issued
|
|
|
2008
|
|
|
2007
|
|
|
Spread(1)
|
|
|
Maturity Date
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
2004-1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1
|
|
$
|
218,000
|
|
|
$
|
|
|
|
$
|
|
|
|
|
0.13
|
%
|
|
N/A
|
Class A-2
|
|
|
370,437
|
|
|
|
|
|
|
|
1,295
|
|
|
|
0.33
|
%
|
|
September 22, 2008
|
Class B
|
|
|
67,813
|
|
|
|
|
|
|
|
149
|
|
|
|
0.65
|
%
|
|
September 22, 2008
|
Class C
|
|
|
70,000
|
|
|
|
|
|
|
|
154
|
|
|
|
1.00
|
%
|
|
September 22, 2008
|
Class D
|
|
|
39,375
|
|
|
|
|
|
|
|
87
|
|
|
|
1.75
|
%
|
|
September 22, 2008
|
Class E(2)
|
|
|
109,375
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
875,000
|
|
|
|
|
|
|
|
1,685
|
|
|
|
|
|
|
|
2006-1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
567,134
|
|
|
|
118,453
|
|
|
|
213,115
|
|
|
|
0.12
|
%
|
|
April 20, 2010
|
Class B
|
|
|
27,379
|
|
|
|
12,637
|
|
|
|
12,637
|
|
|
|
0.25
|
%
|
|
June 21, 2010
|
Class C
|
|
|
68,447
|
|
|
|
31,592
|
|
|
|
31,592
|
|
|
|
0.55
|
%
|
|
September 20, 2010
|
Class D
|
|
|
52,803
|
|
|
|
24,371
|
|
|
|
24,371
|
|
|
|
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
|
|
|
|
187,053
|
|
|
|
281,715
|
|
|
|
|
|
|
|
2006-2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
0.24
|
%
|
|
May 20, 2013
|
Class A-2
|
|
|
550,000
|
|
|
|
550,000
|
|
|
|
550,000
|
|
|
|
0.21
|
%
|
|
September 20, 2012
|
Class A-3
|
|
|
147,500
|
|
|
|
147,500
|
|
|
|
147,500
|
|
|
|
0.33
|
%
|
|
May 20, 2013
|
Class B
|
|
|
71,250
|
|
|
|
71,250
|
|
|
|
71,250
|
|
|
|
0.38
|
%
|
|
June 20, 2013
|
Class C(6)
|
|
|
157,500
|
|
|
|
151,637
|
|
|
|
157,500
|
|
|
|
0.68
|
%
|
|
June 20, 2013
|
Class D
|
|
|
101,250
|
|
|
|
101,250
|
|
|
|
101,250
|
|
|
|
1.52
|
%
|
|
June 20, 2013
|
Class E(3)
|
|
|
56,250
|
|
|
|
19,349
|
|
|
|
19,349
|
|
|
|
2.50
|
%
|
|
June 20, 2013
|
Class F(2)
|
|
|
116,250
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500,000
|
|
|
|
1,340,986
|
|
|
|
1,346,849
|
|
|
|
|
|
|
|
141
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
|
|
|
Outstanding Debt Balance as of December 31,
|
|
|
Interest Rate
|
|
|
Original Expected
|
|
|
Issued
|
|
|
2008
|
|
|
2007
|
|
|
Spread(1)
|
|
|
Maturity Date
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
2006-A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1A
|
|
$
|
70,375
|
|
|
$
|
70,375
|
|
|
$
|
70,375
|
|
|
|
0.26
|
%
|
|
January 20, 2037
|
Class A-R(4)
|
|
|
200,000
|
|
|
|
106,108
|
|
|
|
50,000
|
|
|
|
0.27
|
%
|
|
January 20, 2037
|
Class A-2A
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
0.25
|
%
|
|
January 20, 2037
|
Class A-2B
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
125,000
|
|
|
|
0.31
|
%
|
|
January 20, 2037
|
Class B(6)
|
|
|
82,875
|
|
|
|
57,875
|
|
|
|
82,875
|
|
|
|
0.39
|
%
|
|
January 20, 2037
|
Class C(6)
|
|
|
62,400
|
|
|
|
32,400
|
|
|
|
62,400
|
|
|
|
0.65
|
%
|
|
January 20, 2037
|
Class D
|
|
|
30,225
|
|
|
|
30,225
|
|
|
|
30,225
|
|
|
|
0.75
|
%
|
|
January 20, 2037
|
Class E(6)
|
|
|
30,225
|
|
|
|
20,225
|
|
|
|
30,225
|
|
|
|
0.85
|
%
|
|
January 20, 2037
|
Class F(6)
|
|
|
26,650
|
|
|
|
5,000
|
|
|
|
26,650
|
|
|
|
1.05
|
%
|
|
January 20, 2037
|
Class G(6)
|
|
|
33,150
|
|
|
|
10,000
|
|
|
|
33,150
|
|
|
|
1.25
|
%
|
|
January 20, 2037
|
Class H
|
|
|
31,200
|
|
|
|
31,200
|
|
|
|
31,200
|
|
|
|
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
|
|
|
|
988,408
|
|
|
|
1,042,100
|
|
|
|
|
|
|
|
2007-1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
586,000
|
|
|
|
337,847
|
|
|
|
428,245
|
|
|
|
0.13
|
%
|
|
May 21, 2012
|
Class B
|
|
|
20,000
|
|
|
|
11,531
|
|
|
|
14,616
|
|
|
|
0.31
|
%
|
|
July 20, 2012
|
Class C
|
|
|
84,000
|
|
|
|
48,429
|
|
|
|
61,387
|
|
|
|
0.65
|
%
|
|
February 20, 2013
|
Class D
|
|
|
48,000
|
|
|
|
27,673
|
|
|
|
35,078
|
|
|
|
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
|
|
|
|
425,480
|
|
|
|
539,326
|
|
|
|
|
|
|
|
2007-A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A(5)
|
|
|
1,250,000
|
|
|
|
386,752
|
|
|
|
1,137,850
|
|
|
|
1.50
|
%
|
|
May 31, 2011
|
Class B(2)
|
|
|
83,333
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
May 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,333,333
|
|
|
|
386,752
|
|
|
|
1,137,850
|
|
|
|
|
|
|
|
2007-2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
|
400,000
|
|
|
|
284,863
|
|
|
|
400,000
|
|
|
|
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
|
|
|
|
284,863
|
|
|
|
400,000
|
|
|
|
|
|
|
|
142
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
|
|
|
Outstanding Debt Balance as of December 31,
|
|
|
Interest Rate
|
|
|
Original Expected
|
|
|
Issued
|
|
|
2008
|
|
|
2007
|
|
|
Spread(1)
|
|
|
Maturity Date
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
2007-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
$
|
380,000
|
|
|
$
|
|
|
|
$
|
354,139
|
|
|
|
0.85
|
%
|
|
January 20, 2016
|
Class B
|
|
|
10,000
|
|
|
|
|
|
|
|
10,000
|
|
|
|
1.50
|
%
|
|
January 20, 2016
|
Class C
|
|
|
45,000
|
|
|
|
|
|
|
|
45,000
|
|
|
|
2.70
|
%
|
|
January 20, 2016
|
Class D(2)
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
January 20, 2016
|
Class E(2)
|
|
|
41,350
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
January 20, 2016
|
Class F(2)
|
|
|
49,428
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
January 20, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
529,778
|
|
|
|
|
|
|
|
409,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,620,366
|
|
|
$
|
3,613,542
|
|
|
$
|
5,158,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The interest rate of
2006-A is
based on three-month LIBOR, which was 4.52% and 4.70% as of
December 31, 2008 and 2007, respectively. The interest
rates of
2007-A and
2007-2 are
based on CP rates, which were 2.79% and 2.07%, respectively, as
of December 31, 2008. All of our other term debt
transactions are based on one-month LIBOR, which was 0.44% and
4.60% as of December 31, 2008 and 2007, respectively. |
|
(2) |
|
Securities retained by CapitalSource. |
|
(3) |
|
Only $20.0 million of these securities were offered for
sale. The remaining $36.3 million of the securities are
retained by CapitalSource. |
|
(4) |
|
Variable funding note. |
|
(5) |
|
These notes closed with an initial commitment amount of
$1.3 billion and an initial funding amount of
$1.1 billion.
2007-A
allowed for replenishment through a revolving period that
extended to November 30, 2007. During the revolving period,
we had the option to increase the commitment amount of the
Class A notes up to $1.5 billion, subject to certain
limitations. The maximum amount drawn under
2007-A was
$1.2 billion. As of December 31, 2008, we had drawn
all the capacity amount under these notes. |
|
(6) |
|
We repurchased certain bonds from third party investors at fair
market value. The total of $115.8 million of repurchased
debt reflects various classes of the
2006-A
securitization and one class of the
2006-2
securitization. The tables reflect outstanding debt to third
party investors, and therefore, eliminate the portions of debt
owned by CapitalSource. |
Except for our
series 2007-2
Term Debt
(2007-2),
series 2006-2
Term Debt
(2006-2)
and
series 2006-A
Term Debt
(2006-A),
the expected aforementioned maturity dates are based on the
contractual maturities of the underlying loans held by the
securitization trusts and an assumed constant prepayment rate of
10%. 2006-2
and 2006-A
have replenishment periods that allow us, subject to certain
restrictions, to reinvest principal payments into eligible new
loan collateral and we assumed no prepayments would be made
during these replenishment periods, but use a constant
prepayment rate of 10% once the replenishment period ends. 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 noteholders 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.
Owner
Trust Term Debt
In February 2006, we purchased beneficial interests in
securitization trusts (the Owner Trusts), which
issued $2.4 billion in asset-backed notes through two
on-balance sheet securitizations for the purpose of purchasing
adjustable rate prime residential mortgage whole loans. These
notes are backed by the $2.5 billion of residential
mortgage loans purchased with the proceeds and simultaneously
sold and deposited with the Owner Trusts. A third
143
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
party remains servicer of the mortgage loans. Legal title to the
loans is held by the Owner Trusts as discussed in Note 5,
Mortgage-Related Receivables and Related Owner
Trust Securitizations. Senior notes rated
AAA by Standard & Poors and Fitch
Ratings and Aaa by Moodys Investors Service,
Inc. (the Senior Notes) were issued by the Owner
Trusts in the public capital markets. The Owner Trusts also
issued subordinate notes and ownership certificates, all of
which we acquired and continue to hold. In accordance with
SFAS No. 140, we were not the transferor in these
securitizations. However, as the holder of the subordinate notes
issued by the Owner Trusts, we determined that we were the
primary beneficiary of the Owner Trusts in accordance with
FIN 46(R). As the primary beneficiary, we consolidated the
assets and liabilities of the Owner Trusts and recorded our
investments in the mortgage loans as assets and the Senior Notes
and subordinate notes as liabilities on our accompanying audited
consolidated balance sheets. The holders of the Senior Notes
have no recourse to the general credit of us. The two
securitizations had aggregate outstanding balances of
$1.7 billion and $2.0 billion as of December 31,
2008 and 2007, respectively.
In the first securitization, the Owner Trusts issued
$1.5 billion in Senior Notes and $65.4 million in
subordinate notes. The interest rates on the
Class I-A1
and I-A2 Senior Notes have an initial fixed interest rate of
4.90% until the initial reset date of February 1, 2010. The
interest rates on the
Class II-A1
and II-A2 Senior Notes have an initial fixed interest rate of
4.70% until the initial reset date of October 1, 2010. The
interest rates on the
Class III-A1
and III-A2 Senior Notes have an initial fixed interest rate of
5.50% until the initial reset date of January 1, 2011.
After the initial reset date, the interest rates on all classes
of the Senior Notes will reset annually based on a blended rate
of one-year constant maturity treasury index (CMT)
plus 240 basis points, up to specified caps. These Senior
Notes are expected to mature at various dates through
March 25, 2036. One of our subsidiaries purchased the
subordinate notes. The aggregate outstanding balances of these
Senior Notes and subordinate notes were $1.0 billion and
$1.2 billion as of December 31, 2008 and 2007,
respectively.
In the second securitization, the Owner Trusts issued
$940.9 million in Senior Notes and $40.2 million in
subordinate notes. The interest rates on all classes of the
Senior Notes have an initial fixed interest rate of 4.625% until
the initial reset date of November 1, 2010. After the
initial reset date, the interest rates of the Senior Notes will
reset annually based on a blended rate of one-year CMT plus
225 basis points, up to specified caps. These Senior Notes
are expected to mature on February 26, 2036. One of our
subsidiaries purchased the subordinate notes. The aggregate
outstanding balances of these Senior Notes and subordinate notes
were $695.5 million and $800.8 million as of
December 31, 2008 and 2007, respectively.
Other
Borrowings
As of December 31, 2008 and 2007, our other borrowings were
as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
Convertible debt, net(1)
|
|
$
|
715,885
|
|
|
$
|
780,630
|
|
Subordinated debt
|
|
|
438,799
|
|
|
|
529,877
|
|
Mortgage debt
|
|
|
330,311
|
|
|
|
341,086
|
|
Notes payable
|
|
|
75,229
|
|
|
|
52,515
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,560,224
|
|
|
$
|
1,704,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts presented are net of $40.5 million and
$19.7 million of discounts, net of amortization related to
the recognition of beneficial conversion options, as of
December 31, 2008 and 2007, respectively. |
144
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Convertible
Debt
Our outstanding convertible debt transactions as of
December 31, 2008 and 2007, and their applicable conversion
rates and effective conversion prices per share were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
|
|
|
|
Outstanding Balance
|
|
|
|
|
|
Conversion
|
|
|
|
as of December 31,
|
|
|
Conversion
|
|
|
Price per
|
|
Debentures
|
|
2008
|
|
|
2007
|
|
|
Rate(1)
|
|
|
Share(1)
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
|
|
1.25% Senior Convertible Debentures due 2034
|
|
$
|
26,620
|
|
|
$
|
47,620
|
|
|
|
49.1002
|
|
|
$
|
20.37
|
|
1.625% Senior Subordinated Convertible Debentures due 2034
|
|
|
153,500
|
|
|
|
177,380
|
|
|
|
49.1002
|
|
|
|
20.37
|
|
3.5% Senior Convertible Debentures due 2034
|
|
|
8,446
|
|
|
|
8,446
|
|
|
|
46.9599
|
|
|
|
21.29
|
|
4% Senior Subordinated Convertible Debentures due 2034
|
|
|
321,554
|
|
|
|
321,554
|
|
|
|
46.9599
|
|
|
|
21.29
|
|
7.25% Senior Subordinated Convertible Debentures due 2037,
net of discount
|
|
|
246,245
|
|
|
|
245,362
|
|
|
|
36.9079
|
|
|
|
27.09
|
|
Beneficial conversion option, net of amortization
|
|
|
(40,480
|
)
|
|
|
(19,732
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
715,885
|
|
|
$
|
780,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2008, 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. |
In March 2004, we completed an offering of $225.0 million
in aggregate principal amount of senior convertible debentures
due 2034 (the 1.25% Debentures) in a private
offering pursuant to Rule 144A under the Securities Act of
1933, as amended. Until March 2009, the 1.25% Debentures
will bear interest at a rate of 1.25%, after which time the
debentures will not bear interest.
In July 2004, we completed an offering of $330.0 million
principal amount of 3.5% senior convertible debentures due
2034 (the 3.5% Debentures, together with the
1.25% Debentures, the Senior Debentures) in a
private offering pursuant to Rule 144A under the Securities
Act of 1933, as amended.
The 3.5% Debentures will pay contingent interest, subject
to certain limitations as described in the offering memorandum,
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. In accordance with
SFAS No. 133, 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 Senior Debentures are unsecured and unsubordinated
obligations, and are guaranteed by one of our wholly owned
subsidiaries (see Note 9, 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 a
new series of senior subordinated convertible debentures due
2034, bearing interest at a rate of 1.625% per year until
March 15, 2009 (the 1.625% Debentures),
145
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in exchange for a like principal amount of our
1.25% Debentures. In addition, we issued
$321.6 million in aggregate principal amount of a new
series of 4% senior subordinated convertible debentures due
2034 (the 4% Debentures) in exchange for a like
principal amount of our 3.5% Debentures. The results of the
exchange offers were as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
Outstanding
|
|
|
Amount
|
|
|
|
Prior
|
|
|
Outstanding
|
|
|
|
to Exchange
|
|
|
at Completion of
|
|
Securities
|
|
Offers
|
|
|
Exchange Offers
|
|
|
|
($ in thousands)
|
|
|
3.5% Senior Convertible Debentures due 2034
|
|
$
|
330,000
|
|
|
$
|
8,446
|
|
1.25% Senior Convertible Debentures due 2034
|
|
|
225,000
|
|
|
|
47,620
|
|
4% Senior Subordinated Convertible Debentures due 2034
|
|
|
|
|
|
|
321,554
|
|
1.625% Senior Subordinated Convertible Debentures due 2034
|
|
|
|
|
|
|
177,380
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
555,000
|
|
|
$
|
555,000
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, both our 1.25% Debentures and
our 1.625% Debentures would be convertible, subject to
certain conditions, into 1.3 million and 7.5 million
shares of our common stock, respectively, at a conversion rate
of 49.1002 shares of common stock per $1,000 principal
amount of debentures, representing an effective conversion price
of approximately $20.37 per share. The conversion rate and price
will adjust each time we pay a dividend on our common stock,
with the fair value of each adjustment taxable to the holders.
The 1.25% Debentures and 1.625% Debentures are
redeemable for cash at our option at any time on or after
March 15, 2009 at a redemption price of 100% of their
principal amount plus accrued interest. Holders of the
1.25% Debentures or 1.625% Debentures have the right
to require us to repurchase some or all of their respective
debentures for cash on March 15, 2009, March 15, 2014,
March 15, 2019, March 15, 2024 and March 15, 2029
at a price of 100% of their principal amount plus accrued
interest. Holders of the 1.25% Debentures or
1.625% Debentures also have the right to require us to
repurchase some or all of their respective debentures upon
certain events constituting a fundamental change. We expect the
holders of these notes to exercise their right to cause us to
repurchase the notes in March 2009.
As of December 31, 2008, both our 3.5% Debentures and
our 4% Debentures would be convertible, subject to certain
conditions, into 0.4 million and 15.1 million shares
of our common stock, respectively, at a conversion rate of
46.9599 shares of common stock per $1,000 principal amount
of debentures, representing an effective conversion price of
approximately $21.29 per share. The conversion rate and price
will adjust 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, July 15, 2014, July 15, 2019,
July 15, 2024 and July 15, 2029 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.
Because the terms of the 1.625% Debentures and the
4% Debentures are not substantially different from the
Senior Debentures, as defined by
EITF 96-19,
Debtors Accounting for a Modification or Exchange of
Debt Instruments, we did not consider the consummation of
the exchange offers to prompt an extinguishment of issued debt
and, therefore, continued to amortize the remaining unamortized
deferred financing fees over the remaining estimated lives of
the 1.625% Debentures and the 4% Debentures.
Additionally, all costs associated with the exchange offers were
expensed as incurred.
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 until July 20,
2012 (the 7.25% Debentures and together with
the 1.625% Debentures and the 4% Debentures, the
Subordinated Debentures). 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
146
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, July 15, 2017, July 15, 2022,
July 15, 2027 and July 15, 2032 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 (see Note 9,
Guarantor Information). The Subordinated Debentures rank
junior to all of our other existing and future secured and
unsecured and unsubordinated 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 March 15, 2009, July 15, 2011
and July 15, 2012 for the 1.625% Debentures, 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 March 15, 2029 for the
1.25% Debentures or 1.625% Debentures, 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 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
147
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Because the respective conversion prices fell below the price of
our common stock at the time the Senior Debentures, 1.625%
Debentures and 4% Debentures were issued, we were required
to record a beneficial conversion option, which impacted both
our net (loss) income and net (loss) income per share. For the
years ended December 31, 2008 and 2007, we recorded a
$50.9 million and $20.2 million, respectively,
beneficial conversion option related to the Senior Debentures,
1.625% Debentures and 4% Debentures. We did not recognize
any such beneficial conversion option prior to 2007.
Under the terms of the indentures governing our Senior
Debentures, 1.625% 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 (see Note 18, Net (Loss) Income per Share
for further information).
In October 2008, we entered into an agreement with an existing
securityholder and issued 6,224,392 shares of our common
stock in exchange for approximately $45.0 million in
aggregate principal amount of our outstanding
1.25% Debentures and 1.625% Debentures held by the
securityholder. We retired all of the debentures acquired in the
exchange. In connection with this exchange, and pursuant to the
provisions of SFAS No. 84, Induced Conversions of
Convertible Debt an amendment of APB Opinion
No. 26, we incurred a loss of approximately
$29.7 million, which includes a write-off of
$1.4 million in deferred financing fees and beneficial
conversion premium. This exchange resulted in an increase to our
book equity of approximately $43.5 million.
In February 2009, we entered into an agreement with an existing
securityholder 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 securityholder. 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 includes
a write-off of $0.4 million in deferred financing fees and
debt discount. This exchange resulted in an increase to our book
equity of approximately $61.1 million.
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. We did not consummate
any of these financings in 2008.
The TP Trusts are wholly owned indirect subsidiaries of
CapitalSource. However, in accordance with the provisions of
FIN 46(R), 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
APB No. 18, The Equity Method of Accounting for
Investments in Common Stock.
We had subordinated debt outstanding totaling
$438.8 million and $529.9 million as of
December 31, 2008 and 2007, respectively. During the year
ended December 31, 2008, we purchased all of the preferred
securities issued under our TPS
series 2007-1
at a discount from liquidation value and terminated the trust.
In 2008, we also purchased an aggregate of $50.8 million of
preferred securities from our TPS
2006-4,
2006-5 and
2007-2 at a
discount from liquidation value and exchanged and cancelled the
related subordinated debt. Based upon these transactions, we
realized an aggregate gain of $29.9 million which has been
recorded as a component of other (expense) income, net, in the
accompanying audited consolidated statements of income.
148
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2008, our outstanding subordinated debt
transactions were as follows:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust Formation
|
|
|
|
|
|
|
|
|
Interest Rate as of
|
|
TPS Series
|
|
|
Date
|
|
Debt Issued
|
|
|
Maturity Date
|
|
Date Callable(1)
|
|
December 31, 2008
|
|
|
|
|
|
|
(Amounts in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
thousands)
|
|
|
|
|
|
|
|
|
|
|
2005-1
|
|
|
November 2005
|
|
$
|
103,093
|
|
|
December 15, 2035
|
|
December 15, 2010
|
|
|
3.95
|
%(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
|
|
|
6.91
|
%(6)
|
|
2006-4
|
|
|
December 2006
|
|
$
|
21,908
|
|
|
January 30, 2037
|
|
January 30, 2012
|
|
|
5.42
|
%(2)
|
|
2006-5
|
|
|
December 2006
|
|
$
|
6,650
|
|
|
January 30, 2037
|
|
January 30, 2012
|
|
|
5.42
|
%(2)
|
|
2007-2
|
|
|
June 2007
|
|
$
|
39,177
|
|
|
July 30, 2037
|
|
July 30, 2012
|
|
|
5.42
|
%(2)
|
|
|
|
(1) |
|
The subordinated debt is callable by us in whole or in part at
par at any time after the stated date. |
|
(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 20,
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 our
indebtedness.
Mortgage
Debt
We use mortgage loans to finance certain of our direct real
estate investments. We had mortgage debt totaling
$330.3 million and $341.1 million as of
December 31, 2008 and 2007, respectively. As of
December 31, 2008, our mortgage debt comprised a senior
$239.0 million loan, $35.3 million mezzanine loan and
11 mortgage loans totaling $56.0 million guaranteed by HUD
and collateralized by 11 of our healthcare investment
properties. The interest rate under the senior loan is one-month
LIBOR plus 1.54%, and the interest rate under the mezzanine loan
is one-month LIBOR plus 4% and the weighted average interest
rate on our mortgage loans is 6.61%.
We exercised the first of three one-year extensions to the
senior and mezzanine loans in September 2008 extending the
maturity of both loans from April 9, 2009 to April 9,
2010. The master servicer acknowledged and agreed to the
extension in February 2009, subject to our compliance with the
terms of the loan documents as of April 9, 2009.
Notes
Payable
We have incurred other indebtedness in the ordinary course of
our lending and investing activities. We had notes payable
totaling $75.2 million and $52.5 million as of
December 31, 2008 and 2007, respectively. Notes payable
includes a $24.4 million senior loan secured by a property
that we assumed following the exercise of our collection
remedies, a $27.7 million senior loan that we assumed on
the acquisition of a majority equity interest in a property, and
four junior subordinated notes totaling $20.0 million that
we entered into as consideration for the acquisition of a
healthcare real estate property portfolio.
149
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Debt
Maturities
The on-balance sheet contractual obligations under our
repurchase agreements, credit facilities, term debt, convertible
debt, subordinated debt, mortgage debt and notes payable as of
December 31, 2008, were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Borrowings
|
|
|
|
|
|
|
Repurchase
|
|
|
Credit
|
|
|
|
|
|
Convertible
|
|
|
Subordinated
|
|
|
Mortgage
|
|
|
|
|
|
|
|
|
|
Agreements
|
|
|
Facilities(1)
|
|
|
Term Debt(2)
|
|
|
Debt(3)
|
|
|
Debt(4)
|
|
|
Debt
|
|
|
Notes Payable
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
2009
|
|
$
|
1,595,750
|
|
|
$
|
239,949
|
|
|
$
|
1,321,460
|
|
|
$
|
174,583
|
|
|
$
|
|
|
|
$
|
5,554
|
|
|
$
|
74
|
|
|
$
|
3,337,370
|
|
2010
|
|
|
|
|
|
|
1,205,113
|
|
|
|
1,170,235
|
|
|
|
|
|
|
|
|
|
|
|
5,960
|
|
|
|
52,206
|
|
|
|
2,433,514
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
796,678
|
|
|
|
295,056
|
|
|
|
|
|
|
|
6,393
|
|
|
|
84
|
|
|
|
1,098,211
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
784,546
|
|
|
|
246,246
|
|
|
|
|
|
|
|
259,622
|
|
|
|
89
|
|
|
|
1,290,503
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
272,759
|
|
|
|
|
|
|
|
|
|
|
|
943
|
|
|
|
2,776
|
|
|
|
276,478
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
993,292
|
|
|
|
|
|
|
|
438,799
|
|
|
|
51,839
|
|
|
|
20,000
|
|
|
|
1,503,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,595,750
|
|
|
$
|
1,445,062
|
|
|
$
|
5,338,970
|
|
|
$
|
715,885
|
|
|
$
|
438,799
|
|
|
$
|
330,311
|
|
|
$
|
75,229
|
|
|
$
|
9,940,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The contractual obligations for credit facilities are computed
based on the stated maturities of the facilities not considering
optional annual renewals, and assumes utilization of available
term-out features. |
|
(2) |
|
Excludes net unamortized discounts of $0.5 million and is
based on the contractual amortization schedule of our loans. The
underlying loans are subject to prepayment, which would shorten
the life of the term debt transactions; conversely, the
underlying loans may be amended to extend their term, which will
lengthen the life of the term debt transactions. At our option,
we may substitute for prepaid loans up to specified limitations,
which may also impact the life of the term debt. Also, the
contractual obligations for our term debt are computed based on
the estimated life of the instrument. The contractual
obligations for the Owner Trust term debt are computed based on
the estimated lives of the underlying adjustable rate prime
residential mortgage whole loans. |
|
(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. |
|
(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, 2008, 2007 and 2006 were 5.0%,
6.0% and 5.8%, respectively.
Deferred
Financing Costs
As of December 31, 2008 and 2007, deferred financing costs
of $74.0 million and $95.1 million, respectively, net
of accumulated amortization of $172.3 million and
$105.8 million, respectively, were included in other assets
in the accompanying audited consolidated balance sheets.
Debt
Covenants
The Parent Company is required to comply with financial and
non-financial covenants under our indebtedness, including,
without limitation, with respect to interest coverage, minimum
tangible net worth, leverage, maximum delinquent and charged-off
loans and servicing standards. 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, accelerate
payment of all amounts payable under such indebtedness
and/or
terminate their commitments under such indebtedness. In
addition, under our term debt securitizations, the priority of
payments are altered if the notes remain outstanding beyond the
stated maturity dates and upon other termination
150
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
events, in which case we would receive no cash flow from these
transactions until the notes senior to our retained interests
are retired. A default under our recourse indebtedness could
trigger cross-default provisions in our other debt facilities
and a default under some of our non-recourse indebtedness would
trigger cross-default provisions in other of our non-recourse
debt.
In February 2009, we obtained a waiver of the Consolidated
EBITDA to Interest Expense financial covenant for our syndicated
bank credit facility for the reporting period ending
December 31, 2008. The waiver was obtained to provide
certainty that the net loss reported for the quarter ended and
the year ended December 31, 2008, after making certain
adjustments as provided for in the covenant definition, would
not cause an event of default under the facility agreement.
Because this covenant was tested on a rolling
12-month
basis, we would likely have breached it for the quarter ending
March 31, 2009 and other periods in 2009. However, on
February 25, 2009, we amended this facility as described
above under Credit Facilities.
During the first quarter of 2009, we obtained waivers of
financial covenants and executed amendments with respect to some
of our other credit facilities as described above under
Credit Facilities. We may need to obtain other waivers
and amendments in the future, and there can be no assurance that
we will be able to obtain them on favorable terms or at all.
In addition, upon the occurrence of specified servicer defaults,
our lenders under our credit facilities and the holders of our
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 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.
We believe we are in compliance with our financial covenants as
of December 31, 2008, after consideration of the waivers
received. Based on our review of the covenants we will be
required to meet during 2009 and the information currently
available to us, we believe that we will meet our financial
covenants through December 31, 2009.
Single
Purpose Loan Financing
In May 2008, we purchased subordinated notes of a SPE to which
one of our other wholly owned indirect subsidiaries provided
advisory services. In accordance with FIN 46(R), we
determined that we were the primary beneficiary of the SPE. As a
result, we consolidated the assets and liabilities of the SPE
for financial reporting purposes, including commercial loans
with a principal balance of $236.2 million and a fair value
of $205.8 million and a related debt facility of
$187.1 million. In connection with this transaction, we
paid $13.3 million to a third-party warehouse lender to
settle a limited guarantee we had provided under which we agreed
to assume a portion of net losses realized by the loans held by
the SPE up to a specific loss limit. During the year ended
December 31, 2008, we sold $162.9 million of these
loans to third parties using the proceeds to repay the principal
balance on the facility. The balance of the facility was fully
repaid and terminated in July 2008.
151
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 14. Shareholders
Equity
Common
Stock Shares Outstanding
Common stock share activity for the years ended
December 31, 2008, 2007 and 2006 was as follows:
|
|
|
|
|
Outstanding as of December 31, 2005
|
|
|
140,405,766
|
|
Issuance of common stock
|
|
|
39,758,116
|
|
Exercise of options
|
|
|
692,375
|
|
Restricted stock and other stock grants, net
|
|
|
596,033
|
|
|
|
|
|
|
Outstanding as of December 31, 2006
|
|
|
181,452,290
|
|
Issuance of common stock
|
|
|
36,327,557
|
|
Sale of treasury stock
|
|
|
1,300,000
|
|
Exercise of options
|
|
|
339,201
|
|
Restricted stock and other stock grants, net
|
|
|
1,285,752
|
|
|
|
|
|
|
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 grants, net
|
|
|
397,326
|
|
|
|
|
|
|
Outstanding as of December 31, 2008
|
|
|
282,804,211
|
|
|
|
|
|
|
In order to comply with the rules applicable to REITs, in
January 2006, we paid a special dividend of $2.50 per share, or
$350.9 million in the aggregate, representing our
cumulative undistributed earnings and profits, including
earnings and profits of some of our predecessor entities, from
our inception through December 31, 2005. We paid this
special dividend $70.2 million in cash and
$280.7 million in 12.3 million shares of common stock,
based on an imputed per share stock price of $22.85.
Dividend
Reinvestment and Stock Purchase Plan
We have a Dividend Reinvestment and Stock Purchase Plan (the
DRIP) for current and prospective shareholders.
Participation in the DRIP allows 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 years ended December 31, 2008 and 2007, we received
$198.1 million and $607.8 million, respectively,
related to the direct purchase of 15.4 million and
31.7 million shares of our common stock pursuant to the
DRIP, respectively. In addition, we received proceeds of
$38.7 million and $106.7 million related to cash
dividends reinvested in 3.6 million and 5.4 million
shares of our common stock during the years ended
December 31, 2008 and 2007, respectively.
Equity
Offerings
In June 2008, we sold 34.5 million shares of our common
stock in an underwritten public offering at a price of $11.00
per share, including the 4.5 million shares purchased by
the underwriters pursuant to their over-allotment option. In
connection with this offering, we received net proceeds of
$365.8 million, which were used to repay borrowings under
our secured credit facilities. Affiliated purchasers, including
John K. Delaney, CapitalSource Chairman and Chief Executive
Officer, Michael C. Szwajkowski, President of our Structured
Finance Business, and affiliates of Farallon Capital Management,
L.L.C., purchased an aggregate of 6.4 million shares.
In October 2008, we entered into an agreement with one of our
existing securityholders, pursuant to which we issued
6,224,392 shares of our common stock in exchange for
approximately $45.0 million in aggregate principal amount
of our outstanding 1.25% and 1.625% senior and senior
subordinated convertible debentures due 2034 held by the
securityholder. We retired all of the debentures we acquired in
the exchange. In connection with this conversion, we incurred a
loss of approximately $29.7 million, which includes a
write-off of $1.4 million in deferred financing fees and
beneficial conversion premium.
152
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 15.
|
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, 2008, 2007 and 2006, we contributed
$2.0 million, $1.9 million and $1.7 million,
respectively, in matching contributions to the 401(k) Plan.
We elected REIT status under the Code when we filed our federal
income tax return for the year ended December 31, 2006. We
operated as a REIT through 2008, but revoked our REIT election
effective January 1, 2009 and recognized the resulting
deferred tax effects in the consolidated financial statements as
of December 31, 2008. While we were a REIT, we were
required to distribute at least 90% of our REIT taxable income
to our shareholders and meet the various other requirements
imposed by the Code, through actual operating results, asset
holdings, distribution levels and diversity of stock ownership.
While we were a REIT, we generally were not subject to
corporate-level income tax on the earnings distributed to our
shareholders that we derived from our REIT qualifying
activities. We were subject to corporate-level tax on the
earnings we derived from our TRSs. While we were a REIT, we were
still subject to foreign, state and local taxation in various
foreign, state and local jurisdictions, including those in which
we transacted business or resided. Effective January 1,
2009, we will provide for income taxes as a C
corporation on income earned from our operations.
As certain of our subsidiaries were TRSs, we continued to report
a provision for income taxes within our consolidated financial
statements. We used the asset and liability method of accounting
for income taxes. Under the asset and liability method, deferred
tax assets and liabilities are recognized for the 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.
The components of income tax (benefit) expense for the years
ended December 31, 2008, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(70,274
|
)
|
|
$
|
37,135
|
|
|
$
|
74,095
|
|
State
|
|
|
7,858
|
|
|
|
6,229
|
|
|
|
13,736
|
|
Foreign
|
|
|
22,515
|
|
|
|
2,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
(39,901
|
)
|
|
|
45,979
|
|
|
|
87,831
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(120,478
|
)
|
|
|
36,354
|
|
|
|
(18,382
|
)
|
State
|
|
|
(39,304
|
)
|
|
|
5,230
|
|
|
|
(2,317
|
)
|
Foreign
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(159,880
|
)
|
|
|
41,584
|
|
|
|
(20,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense
|
|
$
|
(199,781
|
)
|
|
$
|
87,563
|
|
|
$
|
67,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2008, we had approximately
$15.8 million of pre-tax income and $438.2 million of
pre-tax loss that was attributable to foreign and domestic
operations, respectively.
Deferred income taxes are recorded when revenues and expenses
are recognized in different periods for financial statement and
income tax purposes. Net deferred tax assets are included in
other assets in the
153
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
accompanying audited consolidated balance sheets. The components
of deferred tax assets and liabilities as of December 31,
2008 and 2007, were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
171,348
|
|
|
$
|
33,098
|
|
Net unrealized losses on investments
|
|
|
135,263
|
|
|
|
|
|
Net operating losses federal
|
|
|
85,141
|
|
|
|
|
|
Net operating losses state and foreign net of
federal tax benefit
|
|
|
20,102
|
|
|
|
1,767
|
|
Stock based compensation awards
|
|
|
9,761
|
|
|
|
12,678
|
|
Other
|
|
|
87,979
|
|
|
|
3,973
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
509,594
|
|
|
|
51,516
|
|
Valuation allowance
|
|
|
|
|
|
|
(1,767
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net of valuation allowance
|
|
|
509,594
|
|
|
|
49,749
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Mark-to-market on loans
|
|
|
304,489
|
|
|
|
49,949
|
|
Net unrealized gain on investments
|
|
|
|
|
|
|
36
|
|
Property and equipment
|
|
|
|
|
|
|
325
|
|
Other, net
|
|
|
52,638
|
|
|
|
1,610
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
357,127
|
|
|
|
51,920
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
152,467
|
|
|
$
|
(2,171
|
)
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, we recorded no valuation allowance
against our deferred tax assets. In assessing the need to record
a valuation allowance, we considered future reversals of
existing taxable temporary differences, future taxable income
and tax planning strategies, as being adequate to allow for the
full realization of the deferred tax assets. As of
December 31, 2007, we recorded valuation allowances
of $1.8 million, against our deferred tax assets
related to foreign and state net operating loss carryforwards.
As of December 31, 2008, we have net operating loss
carryforwards of $243.3 million for federal tax purposes,
which will be available to offset future taxable income. If not
used, these carryforwards will expire in 2028. 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. We also have state net operating loss carryforwards of
$536.3 million. These state net operating loss
carryforwards will expire in varying amounts beginning in 2013
through 2028.
The reconciliations of the effective income tax rate and the
federal statutory corporate income tax rate for the years ended
December 31, 2008, 2007 and 2006, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Benefit of REIT election
|
|
|
(10.0
|
)
|
|
|
(5.5
|
)
|
|
|
(16.8
|
)
|
State income taxes, net of federal tax benefit
|
|
|
2.0
|
|
|
|
3.1
|
|
|
|
2.1
|
|
Other
|
|
|
(5.3
|
)
|
|
|
0.6
|
|
|
|
0.5
|
|
Impact of making and revoking REIT election(1)
|
|
|
25.6
|
|
|
|
|
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
47.3
|
%
|
|
|
33.2
|
%
|
|
|
19.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In connection with our REIT election, we reversed net deferred
tax liabilities of $4.7 million, relating to REIT
qualifying activities, into income during the year ended
December 31, 2006. 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. |
154
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We adopted the provisions of FIN 48 on January 1,
2007. As a result of adopting FIN 48, we recognized an
increase of approximately $5.7 million in the liability for
unrecognized tax benefits, which was accounted for as an
increase to accumulated deficit as of January 1, 2007. Our
recognized tax benefits totaled $14.0 million, as of
January 1, 2007, including $6.5 million that, if
recognized, would affect the effective tax rate. A
reconciliation of the beginning and ending amount of
unrecognized tax benefits for the years ended December 31,
2008 and 2007 are as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance at January 1
|
|
$
|
16,720
|
|
|
$
|
13,998
|
|
Additions based on tax positions related to the current year
|
|
|
|
|
|
|
2,004
|
|
Additions for tax positions of prior years
|
|
|
26,246
|
|
|
|
718
|
|
Reductions for tax positions of prior years
|
|
|
(6,510
|
)
|
|
|
|
|
Settlements
|
|
|
(16,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
19,747
|
|
|
$
|
16,720
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008 and 2007, approximately
$5.0 million and $7.2 million, respectively, of our
unrecognized tax benefits would affect the effective tax rate.
We do not currently anticipate such unrecognized tax benefits to
significantly increase or decrease over the next 12 months;
however, actual results could differ from those currently
anticipated.
We recognize interest and penalties accrued related to
unrecognized tax benefits as a component of income taxes. As of
December 31, 2008 and 2007, accrued interest expense and
penalties totaled $1.9 million and $1.5 million,
respectively. For the year ended December 31, 2008 and
2007, we recognized $0.4 million and $0.7 million,
respectively, in interest expense.
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
2003 forward. In June 2008, we settled an Internal Revenue
Service examination for the tax years 2004 and 2005 and
concluded certain state examinations of tax years 2003 to 2005.
During the year ended December 31, 2008, we incurred
interest expense of $3.3 million and $16.7 million of
additional tax in connection with the settlement and conclusion
of these examinations. We are currently under examination by
certain states for the tax years 2004 and 2005, and we have been
notified by the Internal Revenue Service that we will be audited
for tax years 2006 and 2007.
|
|
Note 17.
|
Comprehensive
(Loss) Income
|
Comprehensive (loss) income for the years ended
December 31, 2008, 2007 and 2006, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Net (loss) income
|
|
$
|
(222,624
|
)
|
|
$
|
176,287
|
|
|
$
|
279,276
|
|
Unrealized gain (loss) on available-for-sale securities, net of
tax
|
|
|
7,857
|
|
|
|
(3,103
|
)
|
|
|
3,532
|
|
Unrealized (loss) gain on foreign currency translation, net of
tax
|
|
|
(2,892
|
)
|
|
|
5,175
|
|
|
|
(826
|
)
|
Unrealized (loss) gain on cash flow hedges, net of tax
|
|
|
(820
|
)
|
|
|
413
|
|
|
|
1,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(218,479
|
)
|
|
$
|
178,772
|
|
|
$
|
283,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accumulated other comprehensive income, net as of
December 31, 2008 and 2007, was as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
Unrealized gain (loss) on available-for-sale securities, net of
tax
|
|
$
|
7,468
|
|
|
$
|
(389
|
)
|
Unrealized gain on foreign currency translation, net of tax
|
|
|
1,457
|
|
|
|
4,349
|
|
Unrealized gain on cash flow hedges, net of tax
|
|
|
170
|
|
|
|
990
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, net
|
|
$
|
9,095
|
|
|
$
|
4,950
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 18.
|
Net
(Loss) Income per Share
|
The computations of basic and diluted net (loss) income per
share for the years ended December 31, 2008, 2007 and 2006,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands, except per share data)
|
|
|
Basic net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(222,624
|
)
|
|
$
|
176,287
|
|
|
$
|
279,276
|
|
Average shares basic
|
|
|
251,213,699
|
|
|
|
191,697,254
|
|
|
|
166,273,730
|
|
Basic net income per share
|
|
$
|
(0.89
|
)
|
|
$
|
0.92
|
|
|
$
|
1.68
|
|
Diluted net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(222,624
|
)
|
|
$
|
176,287
|
|
|
$
|
279,276
|
|
Average shares basic
|
|
|
251,213,699
|
|
|
|
191,697,254
|
|
|
|
166,273,730
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock dividend declared
|
|
|
|
|
|
|
|
|
|
|
807,874
|
|
Option shares
|
|
|
|
|
|
|
340,328
|
|
|
|
483,301
|
|
Unvested restricted stock
|
|
|
|
|
|
|
1,120,000
|
|
|
|
1,341,067
|
|
Stock units
|
|
|
|
|
|
|
30,380
|
|
|
|
19,201
|
|
Non-managing member units
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion premium on the Debentures(1)
|
|
|
|
|
|
|
94,694
|
|
|
|
294,834
|
|
Written call option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares diluted
|
|
|
251,213,699
|
|
|
|
193,282,656
|
|
|
|
169,220,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share
|
|
$
|
(0.89
|
)
|
|
$
|
0.91
|
|
|
$
|
1.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the year ended December 31, 2007, the conversion
premiums on the 1.25% and 1.625% Debentures represent the
dilutive shares based on a conversion price of $22.41. For the
year ended December 31, 2006, the conversion premiums on
the 1.25% and 3.5% Debentures, represent the dilutive
shares based on conversion prices of $25.20 and $26.35,
respectively. |
156
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted average shares that have an antidilutive effect in
the calculation of diluted net income per share and have been
excluded from the computations above are shown in the following
table. No shares are presented for the year ended
December 31, 2008 as we reported a net loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Stock options
|
|
|
N/A
|
|
|
|
8,102,769
|
|
|
|
4,513,699
|
|
Non-managing member units
|
|
|
N/A
|
|
|
|
1,113,259
|
|
|
|
2,331,965
|
|
Shares subject to a written call option
|
|
|
N/A
|
|
|
|
7,401,420
|
|
|
|
7,401,420
|
|
From the third quarter of 2008, we are no longer assuming cash
settlement of the underlying principal on our Senior Debentures,
1.625% Debentures, and 4% Debentures, therefore, we
began applying the if-converted method to determine the effect
on diluted net income per share of shares issuable pursuant to
convertible debt. For prior periods, we used the treasury stock
method to determine the effect on diluted income per share of
shares issuable pursuant to the conversion premium of
convertible debt and the shares underlying the principal
balances were excluded. See Note 13, Borrowings, of
our accompanying audited consolidated financial statements as of
December 31, 2008, for further information on convertible
debt.
For the year ended December 31, 2007, the conversion
premiums on the 3.5% Debentures and 4% Debentures were
considered to be antidilutive based on a conversion price of
$23.43. As dividends are paid, the conversion prices related to
our written call option, Senior Debentures,
1.625% Debentures, and 4% Debentures are adjusted. The
conversion price related to the 7.25% Debentures will be
adjusted only if we pay dividends on our common stock greater
than $0.60 per share, per quarter. Also, we have excluded the
shares underlying the principal balance of the
7.25% Debentures for all periods presented.
|
|
Note 19.
|
Stock-Based
Compensation
|
Equity
Incentive Plan
In April 2006, our shareholders adopted the CapitalSource Inc.
Third Amended and Restated Equity Incentive Plan (the
Plan), which amended the CapitalSource Inc. Second
Amended and Restated Equity Incentive Plan adopted on
August 6, 2003 in connection with our initial public
offering. A total of 33.0 million shares of common stock
are reserved for issuance under the Plan. Any shares that may be
issued under the Plan to any person pursuant to an option or
stock appreciation right (an SAR) are counted
against this limit as 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, 2008, there were 14.4 million shares
subject to outstanding grants and 9.5 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) August 6, 2016.
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.
Adoption
of SFAS No. 123(R)
As discussed in Note 2, Summary of Significant
Accounting Policies, we adopted SFAS No. 123(R) on
January 1, 2006, as it relates to the Plan described above.
SFAS No. 123(R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees (APB
25) and amends SFAS No. 95, Statement of Cash
Flows. SFAS No. 123(R) requires all share-based
payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their
fair values. SFAS No. 123(R) also requires the cash
flows resulting from the tax benefits of tax deductions in
excess of the compensation cost recognized from the exercise of
stock options to be classified as financing cash flows, rather
than as operating cash flows.
157
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We adopted the fair value recognition provisions of
SFAS No. 123(R) using the modified-
prospective-transition method. Under this method, compensation
cost recognized beginning on January 1, 2006, includes:
(a) compensation cost for all share-based payments granted
prior to, but not yet vested as of January 1, 2006, based
on the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123, and
(b) compensation cost for all share-based payments granted
subsequent to January 1, 2006, based on the grant date fair
value estimated in accordance with the provisions of
SFAS No. 123(R). In accordance with the
modified-prospective-transition method, our consolidated
financial statements from prior periods have not been restated
to reflect, and do not include, the impact of
SFAS No. 123(R). In addition, under
SFAS No. 123(R), an entity may elect to recognize
compensation cost for an award with only service conditions that
has a graded vesting schedule using either a straight-line
recognition method or a graded vesting recognition method. We
elected the straight-line recognition method for all awards with
only service based vesting conditions. For awards having graded
vesting schedules and performance or market based vesting
conditions, we amortize compensation cost using the graded
vesting recognition method.
Upon adoption of SFAS No. 123(R), we recorded a
cumulative effect of accounting change of $0.4 million (or
$0.00 per diluted share), net of taxes, in our accompanying
audited consolidated statement of income for the year ended
December 31, 2006, resulting from the requirement to
estimate forfeitures for unvested awards at the date of grant
instead of recognizing them as incurred.
Total compensation cost recognized in income pursuant to the
Plan was $43.6 million, $44.5 million and
$33.3 million for the years ended December 31, 2008,
2007 and 2006, respectively.
Stock
Options
Stock option activity for the year ended December 31, 2008
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual Life
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Price
|
|
|
(in years)
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Outstanding as of December 31, 2007
|
|
|
9,058,317
|
|
|
$
|
22.91
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
81,005
|
|
|
|
12.68
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(57,327
|
)
|
|
|
6.31
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(188,055
|
)
|
|
|
20.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2008
|
|
|
8,893,940
|
|
|
$
|
22.98
|
|
|
|
7.18
|
|
|
$
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested as of December 31, 2008
|
|
|
8,865,072
|
|
|
$
|
22.99
|
|
|
|
7.18
|
|
|
$
|
45
|
|
Exercisable as of December 31, 2008
|
|
|
5,185,059
|
|
|
$
|
22.59
|
|
|
|
6.99
|
|
|
$
|
45
|
|
For the years ended December 31, 2008, 2007 and 2006, the
weighted average grant date fair value of options granted was
$2.65, $1.60 and $1.44, respectively. The total intrinsic value
of options exercised during the years ended December 31,
2008, 2007 and 2006, was $0.5 million, $3.8 million
and $9.8 million, respectively. As of December 31,
2008, the total unrecognized compensation cost related to
nonvested options granted pursuant to the Plan was
$2.1 million. This cost is expected to be recognized over a
weighted average period of 1.5 years.
For awards containing only service
and/or
performance based vesting conditions, we use the Black-Scholes
weighted average option-pricing model to estimate the fair value
of each option grant on its grant date. The
158
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
weighted average assumptions used in this model for the years
ended December 31, 2008, 2007 and 2006, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Dividend yield
|
|
|
12.0
|
%
|
|
|
10.4
|
%
|
|
|
8.3
|
%
|
Expected volatility
|
|
|
49.6
|
%
|
|
|
23.3
|
%
|
|
|
20.0
|
%
|
Risk-free interest rate
|
|
|
2.8
|
%
|
|
|
4.6
|
%
|
|
|
5.0
|
%
|
Expected life
|
|
|
4.0 years
|
|
|
|
4.0 years
|
|
|
|
9.6 years
|
|
The dividend yield is computed based on annualized dividends and
the average share price for the period. In connection with our
REIT election, we changed our method of computing the expected
volatility to be based on the average volatility of the common
stock of selected competitor REITs as our historical volatility
was then no longer an indicator of our future volatility. 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
options. The expected life of our options granted represents the
period of time that options are expected to be outstanding. The
expected life of our options increased during the year ended
December 31, 2006, as a result of options granted to
certain executives during the period which have a longer
expected life.
We granted 3.5 million awards to our Chairman and Chief
Executive Officer during the year ended December 31, 2006,
that contained market based vesting conditions. For the awards
containing market based vesting conditions, we used a lattice
option-pricing model to estimate the fair value of each option
grant on its grant date. No awards containing market based
vesting conditions were issued during the years ended
December 31, 2008 and 2007.
The assumptions used in this model for the year ended
December 31, 2006, were as follows:
|
|
|
|
|
Dividend yield
|
|
|
8.35
|
%
|
Expected volatility
|
|
|
19
|
%
|
Risk-free interest rate
|
|
|
4.99
|
%
|
Expected life
|
|
|
10 years
|
|
The dividend yield is computed based on anticipated annual
dividends and the share price on the last day of the period. Our
expected volatility is computed based on the average volatility
of the common stock of selected competitor REITs as our
historical volatility is not an indicator of our future
volatility, as discussed above. 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 options. The expected life
of our options granted represents the period of time that
options are expected to be outstanding.
Restricted
Stock
Restricted stock activity for the year ended December 31,
2008, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
|
Grant-Date
|
|
|
Shares
|
|
Fair Value
|
|
Nonvested as of December 31, 2007
|
|
|
4,742,356
|
|
|
$
|
23.07
|
|
Granted
|
|
|
3,883,758
|
|
|
|
13.24
|
|
Vested
|
|
|
(2,731,268
|
)
|
|
|
21.38
|
|
Forfeited
|
|
|
(430,745
|
)
|
|
|
21.56
|
|
|
|
|
|
|
|
|
|
|
Nonvested as of December 31, 2008
|
|
|
5,464,101
|
|
|
$
|
19.40
|
|
|
|
|
|
|
|
|
|
|
The fair value of nonvested restricted stock 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
159
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
granted during the years ended December 31, 2008, 2007 and
2006 was $13.24, $23.55 and $23.97, respectively. The total fair
value of restricted stock that vested during the years ended
December 31, 2008, 2007 and 2006 was $31.7 million,
$39.8 million and $26.8 million, respectively. As of
December 31, 2008, the total unrecognized compensation cost
related to nonvested restricted stock granted pursuant to the
Plan was $36 million, which is expected to be recognized
over a weighed average period of 1.22 years.
Restricted
Stock Units
On December 31, 2008, our Board of Directors made a grant
under our Equity Incentive Plan to our Chief Executive Officer,
John K. Delaney, of 2.0 million restricted stock units,
which carry full cash dividend rights and require delivery to
Mr. Delaney of 2.0 million shares of our common stock
six months following termination of his service to the company.
In connection with this grant, we recorded $9.2 million in
compensation expense in our audited consolidated statements of
income for the year ended December 31, 2008, based on a
grant date fair value of $4.62 per share. We granted a total of
2.1 million and 52,060 restricted stock units during the
years ended December 31, 2008 and 2007, respectively.
|
|
Note 20.
|
Bank
Regulatory Capital
|
CapitalSource Bank is subject to various regulatory capital
requirements established by federal and state regulatory
agencies. Failure to meet minimum capital requirements can
result in regulatory agencies initiating certain mandatory and
possibly additional discretionary actions that, if undertaken,
could have a direct material effect on our audited consolidated
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, CapitalSource
Banks must meet specific capital guidelines that involve
quantitative measures of its assets and liabilities as
calculated under regulatory accounting practices. CapitalSource
Banks capital amounts and other requirements are also
subject to qualitative judgments by its regulators about, risk
weightings and other factors. See Item 1,
Business Supervision and Regulation, for a
further description of CapitalSource Banks regulatory
requirements.
The calculations of the respective capital amounts at
CapitalSource Bank as of December 31, 2008, were as follows
($ in thousands):
|
|
|
|
|
Common stockholders equity at CapitalSource Bank
|
|
$
|
915,691
|
|
Less:
|
|
|
|
|
Disallowed goodwill and other disallowed intangible assets
|
|
|
(102,547
|
)
|
Unrealized loss on available-for-sale securities
|
|
|
(2,125
|
)
|
Disallowance of deferred tax assets
|
|
|
(16,397
|
)
|
|
|
|
|
|
Total Tier-1 Capital
|
|
|
794,622
|
|
Add: Allowable portion of the allowance for loan losses and other
|
|
|
55,696
|
|
|
|
|
|
|
Total Risk-Based Capital
|
|
$
|
850,318
|
|
|
|
|
|
|
To remain in compliance with the conditions imposed by the FDIC,
CapitalSource Bank must at all times be both
well-capitalized, which requires CapitalSource Bank
to 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%, and must maintain a total risk-based capital ratio of
160
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
than 15%. CapitalSource Banks capital ratios and the
minimum requirement as of December 31, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
|
Minimum Required
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
($ in thousands)
|
|
|
Tier-1 Leverage Capital
|
|
$
|
794,622
|
|
|
|
13.38
|
%
|
|
$
|
296,876
|
|
|
|
5.00
|
%
|
Risk-Based Capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier-1
|
|
|
794,622
|
|
|
|
16.30
|
|
|
|
292,489
|
|
|
|
6.00
|
|
Total
|
|
|
850,318
|
|
|
|
17.44
|
|
|
|
731,222
|
|
|
|
15.00
|
|
The California Department of Financial Institutions (the
DFI) approval order requires that CapitalSource
Bank, during the first three years of operations, maintain a
minimum ratio of tangible shareholders equity to total
tangible assets of at least 10.0%. At December 31, 2008,
CapitalSource Bank satisfied the DFI capital ratio requirement
with a ratio of 12.0%.
|
|
Note 21.
|
Commitments
and Contingencies
|
We have non-cancelable operating leases for office space and
office equipment. The leases expire over the next fifteen years
and contain provisions for certain annual rental escalations.
As of December 31, 2008, future minimum lease payments
under non-cancelable operating leases, including leases held at
CapitalSource Bank, were as follows ($ in thousands):
|
|
|
|
|
2009
|
|
$
|
14,425
|
|
2010
|
|
|
14,027
|
|
2011
|
|
|
13,196
|
|
2012
|
|
|
12,356
|
|
2013
|
|
|
9,415
|
|
Thereafter
|
|
|
65,870
|
|
|
|
|
|
|
Total
|
|
$
|
129,289
|
|
|
|
|
|
|
In addition, in April 2007, we entered into a new lease for our
corporate headquarters which requires estimated minimum payments
of $7.9 million per year (subject to certain escalations)
scheduled to commence in 2009 for a period of 15 years. We
are currently in negotiations to materially reduce our
commitment under this lease.
Rent expense was $11.4 million, $9.7 million and
$7.6 million for the years ended December 31, 2008,
2007 and 2006, respectively.
We are obligated to provide standby letters of credit in
conjunction with several of our lending arrangements. As of
December 31, 2008 and 2007, we had issued
$183.5 million and $226.4 million, respectively, in
letters of credit which expire at various dates over the next
six years. If a borrower defaults on its commitment(s) subject
to any letter of credit issued under these arrangements, we
would be responsible to meet the borrowers financial
obligation and would seek repayment of that financial obligation
from the borrower. These arrangements qualify as a financial
guarantee in accordance with FIN 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. As a result,
we included the fair value of these obligations, totaling
$5.9 million, in other liabilities in the accompanying
audited consolidated balance sheet as of December 31, 2008.
As of December 31, 2008 and 2007, we had unfunded
commitments to extend credit to our clients of $3.6 billion
and $4.7 billion, respectively. Due to their nature, we
cannot know with certainty the aggregate amounts we will be
required to fund under these unfunded commitments. We expect
that these unfunded commitments will
161
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
continue to indefinitely exceed our 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. In many cases, our
obligation to fund unfunded commitments is subject to our
clients ability to provide collateral to secure the
requested additional fundings, the collaterals
satisfaction of eligibility requirements, our clients
ability to meet specified preconditions to borrowing, including
compliance with all provisions of the loan agreements, and/or
our discretion pursuant to the terms of the loan agreements. In
many 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. To the extent there are unfunded
commitments with respect to a loan that is owned partially by
CapitalSource Bank and the Parent Company, unless our client is
in default, CapitalSource Bank is obligated in some cases
pursuant to intercompany agreements to fund its portion of the
unfunded commitment before the Parent Company is required to
fund its portion. In addition, in some cases we may be able to
borrow additional amounts under our secured credit facilities as
we fund these unfunded commitments.
As of December 31, 2008, we had identified conditional
asset retirement obligations primarily related to the future
removal and disposal of asbestos that is contained within
certain of our direct real estate investment properties. The
asbestos is appropriately contained and we believe we are
compliant with current environmental regulations. If these
properties undergo major renovations or are demolished, certain
environmental regulations are in place, which specify the manner
in which asbestos must be handled and disposed. Under FASB
Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations An Interpretation of FASB
No. 143, we are required to record the fair value of
these conditional liabilities if they can be reasonably
estimated. As of December 31, 2008, sufficient information
was not available to estimate our liability for conditional
asset retirement obligations as the obligations to remove the
asbestos from these properties have indeterminable settlement
dates. As such, no liability for conditional asset retirement
obligations was recorded on our accompanying audited
consolidated balance sheet as of December 31, 2008.
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 22.
|
Related
Party Transactions
|
We have from time to time in the past, and expect that we may
from time to time in the future, make loans to or invest in the
equity securities of 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 or 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, 2008 and 2007, we had committed to lend
$135.3 million and $223.4 million, respectively, to
such entities of which $111.7 million and
$110.1 million, respectively, was outstanding. These loans
bear interest ranging from 3.66% to 8.75% as of
December 31, 2008 and 7.60% to 12.25% as of
December 31, 2007. For the years ended December 31,
2008, 2007 and 2006, we recognized $9.2 million,
$13.0 million and $37.5 million, respectively, in
interest and fees from these loans.
Activity in related party loans for the year ended
December 31, 2008, was as follows ($ in thousands):
|
|
|
|
|
Balance at beginning of year
|
|
$
|
110,131
|
|
Advances
|
|
|
150,348
|
|
Repayments
|
|
|
(123,835
|
)
|
Reclassified to non-related party
|
|
|
(24,995
|
)
|
|
|
|
|
|
Balance at end of year
|
|
$
|
111,649
|
|
|
|
|
|
|
162
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 23.
|
Derivative
Instruments
|
In addition to the derivatives related to our residential
mortgage investments discussed in Note 6, Residential
Mortgage-Backed Securities and Certain Derivative
Instruments, we have also entered into various derivative
instruments to manage interest rate and foreign exchange risk in
our Commercial Banking segment. We account for these derivative
instruments pursuant to the provisions of SFAS No. 133
and, as such, adjust these instruments to fair value through
income as a component of (loss) gain on derivatives in the
accompanying audited consolidated statements of income. During
the years ended December 31, 2008, 2007 and 2006, we
recognized net realized and unrealized losses of
$41.1 million, $46.2 million and net realized and
unrealized gains of $2.5 million, respectively, related to
these derivative instruments. As of December 31, 2008 and
2007, our commercial derivative activities resulted in an asset
position of $66.4 million and $51.1 million,
respectively, which is recorded on our consolidated balance
sheet in other assets; and a liability position of
$131.3 million and $78.6 million, respectively, which
is recorded on our consolidated balance sheet in other
liabilities.
Interest
Rate Risk
We enter into various derivative instruments to manage interest
rate risk. The objective is to manage interest rate sensitivity
by modifying the characteristics of certain assets and
liabilities to reduce the adverse effect of changes in interest
rates.
Interest rate swaps are contracts in which a series of interest
rate cash flows, based on a specific notional amount and a fixed
and variable interest rate, are exchanged over a prescribed
period. Options are contracts that provide the right, but not
the obligation, to buy (call) or sell (put) a security at an
agreed-upon
price during a certain period of time or on a specific date in
exchange for the payment of a premium when the contract is
issued. Swaptions are contracts that provide the right, but not
the obligation, to enter into an interest rate swap agreement on
a specified future date in exchange for the payment of a premium
when the contract is issued. Caps and floors are contracts that
transfer, modify, or reduce interest rate risk in exchange for
the payment of a premium when the contract is issued. Eurodollar
and Treasury futures are contracts that cash settle on a future
date based on a specific notional amount and a variable interest
rate.
Foreign
Exchange Risk
We enter into forward exchange contracts to manage foreign
exchange risk. The objective is to manage the uncertainty of
future foreign exchange rate fluctuations by contractually
locking in current foreign exchange rates for the settlement of
anticipated future cash flows.
Derivatives
Designated as Hedging Instruments
In connection with the issuance of one series of our TPS, we
entered into an interest rate swap. The objective of this
instrument was to offset the changes in interest rate payments
attributable to fluctuations in three-month LIBOR. This interest
rate swap was designated as a cash flow hedge for accounting
purposes until its termination in the third quarter of 2007. As
of December 31, 2008 and 2007, we had no derivatives
designated as an accounting hedge.
Derivatives
Not Designated as Hedging Instruments
Interest
Rate Swaps
We enter into interest rate swap agreements to minimize the
economic effect of interest rate fluctuations specific to our
fixed rate debt, certain fixed rate loans and certain
sale-leaseback transactions. Interest rate fluctuations result
in hedged assets and liabilities appreciating or depreciating in
market value. Gain or loss on the derivative instruments will
generally offset the effect of unrealized appreciation or
depreciation of hedged assets and liabilities for the period the
item is being hedged. As of December 31, 2008 and 2007 the
fair value of the
163
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
interest rate swap derivative asset was $53.0 million and
$45.4 million, respectively. As of December 31, 2008
and 2007 the fair value of the interest rate swap derivative
liability was $127.6 million and $71.6 million,
respectively.
Basis
Swaps
We enter into basis swap agreements to eliminate 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 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. These
basis swaps are not designated as hedges for accounting
purposes. During the years ended December 31, 2008, 2007
and 2006, we recognized a net gain of $2.1 million, net
loss of $1.8 million and $2.3 million, respectively,
related to the fair value of these basis swaps and cash payments
made or received, which was recorded in (loss) gain on
derivatives in the accompanying audited consolidated statements
of income. As of December 31, 2008 and 2007 the fair value
of the basis swap derivative asset was $6.5 million and
$5.2 million, respectively. As of December 31, 2008
and 2007 the fair value of the basis swap derivative liability
was $2.6 million and $6.0 million, respectively.
Interest
Rate Caps
The Issuers entered into interest rate cap agreements to hedge
loans with embedded interest rate caps that are pledged as
collateral for our term debt. Simultaneously, we entered into
offsetting interest rate cap agreements. The interest rate caps
are not designated as hedges for accounting purposes. Since the
interest rate cap agreements are offsetting, changes in the fair
value of the interest rate cap agreements have no impact on
current period earnings.
Call
Options
Concurrently with our sale of the 1.25% and
1.65% Debentures we entered into and amended two separate
call option transactions. The objective of these transactions is
to minimize potential dilution as a result of the conversion of
the 1.25% and the 1.625% Debentures. These call options are
not designated as hedges for accounting purposes and were
initially recorded in shareholders equity. Subsequent
changes in the fair value of these transactions will not be
recognized as long as the instruments remain classified in
shareholders equity. We reassess this classification on a
quarterly basis to determine whether the call option
transactions should be reclassified. We continue to believe that
equity classification for these transactions is appropriate as
of December 31, 2008. For further discussion of the terms
of these transactions, see Note 13, Borrowings.
Forward
Exchange Contracts
We have entered into forward exchange contracts to hedge
anticipated loan syndications and foreign currency-denominated
loans we originate against foreign currency fluctuations. These
forward exchange contracts provide for a fixed exchange rate
which has the effect of locking in the anticipated cash flows to
be received from the loan syndication and the foreign
currency-denominated loans. As of December 31, 2008 and
2007 the fair value of the forward exchange contracts derivative
asset was $6.9 million and $0.5 million, respectively.
As of December 31, 2008 and 2007 the fair value of the
forward exchange contracts derivative liability was
$1.1 million and $1.0 million, respectively.
Derivatives
Related to Residential Mortgage Investments
In connection with our residential mortgage investments, we
entered into interest rate swaps, interest rate swaptions,
interest rate caps and Eurodollar and Treasury futures contracts
as part of our interest rate risk management program related to
these investments. The objective of these instruments is to
offset the changes in fair value of our residential mortgage
investments. These derivatives are not designated as hedges for
accounting purposes. During the years ended December 31,
2008, 2007 and 2006, we recognized net losses of
$101.6 million, $79.6 million, and net gains of
$18.1 million, respectively, related to the fair value of
these derivatives and related
164
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
cash payments which were recorded in (loss) gain on the
residential mortgage investment portfolio in the accompanying
audited consolidated statements of income. As of
December 31, 2008 and 2007 the fair value of the
residential mortgage investment portfolio derivative asset was
$140.6 million and $36.5 million, respectively. As of
December 31, 2008 and 2007 the fair value of the
residential mortgage investment portfolio derivative liability
was $211.5 million and $121.0 million, respectively.
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 the accompanying audited consolidated
balance sheets in accordance with GAAP.
Credit risk represents the potential loss that may occur because
a party to a transaction fails to perform according to the terms
of the contract. 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 the accompanying 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. As of December 31, 2008, we
had received cash collateral of $24.2 million and have
posted cash collateral of $155.3 million related to our
derivatives in asset and liability positions, respectively.
Contract or notional amounts and the credit risk amounts for
derivatives and credit-related arrangements as of
December 31, 2008 and 2007, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Contract or
|
|
|
|
|
|
Contract or
|
|
|
|
|
|
|
Notional
|
|
|
Credit Risk
|
|
|
Notional
|
|
|
Credit Risk
|
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
Amount
|
|
|
|
($ in thousands)
|
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
8,173,804
|
|
|
$
|
192,747
|
|
|
$
|
9,624,814
|
|
|
$
|
73,449
|
|
Interest rate caps
|
|
|
1,115,575
|
|
|
|
616
|
|
|
|
1,180,359
|
|
|
|
2,476
|
|
Futures
|
|
|
2,656,000
|
|
|
|
2,848
|
|
|
|
1,867,000
|
|
|
|
|
|
Interest rate swaptions
|
|
|
152,000
|
|
|
|
523
|
|
|
|
1,250,000
|
|
|
|
6,516
|
|
Forward exchange contracts
|
|
|
71,443
|
|
|
|
6,855
|
|
|
|
79,248
|
|
|
|
514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
|
|
$
|
12,168,822
|
|
|
$
|
203,589
|
|
|
$
|
14,001,421
|
|
|
$
|
82,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit-related arrangements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
$
|
3,576,193
|
|
|
$
|
38,910
|
|
|
$
|
4,734,661
|
|
|
$
|
66,269
|
|
Commitments to extend letters of credit
|
|
|
169,144
|
|
|
|
6,578
|
|
|
|
186,359
|
|
|
|
5,889
|
|
Interest-only loans
|
|
|
8,874,758
|
|
|
|
8,874,758
|
|
|
|
9,153,997
|
|
|
|
9,153,997
|
|
Paid-in-kind
interest on loans
|
|
|
74,516
|
|
|
|
74,516
|
|
|
|
69,274
|
|
|
|
69,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total credit-related arrangements
|
|
$
|
12,694,611
|
|
|
$
|
8,994,762
|
|
|
$
|
14,144,291
|
|
|
$
|
9,295,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Derivatives
Derivatives expose us to credit and market risk. If the
counterparty fails to perform, the credit risk is equal to the
fair market value gain of the derivative. When the fair market
value of a derivative contract is positive, this indicates the
counterparty owes us, and therefore, creates a repayment risk
for us. When the fair market value of a derivative contract is
negative, we owe the counterparty and have no repayment risk.
Market risk is the adverse effect that a change in interest
rates has on the value of a financial instrument. We manage
market risk by only using derivatives for hedging purposes
against existing assets and liabilities. For further discussion
regarding our derivative activities, see Note 23,
Derivative Instruments.
Credit-Related
Arrangements
As of December 31, 2008 and 2007, we had committed credit
facilities to our borrowers of approximately $13.3 billion
and $14.6 billion, respectively, of which approximately
$3.6 billion and $4.7 billion, respectively, was
unfunded. Our failure to satisfy our full contractual funding
commitment to one or more of our borrowers could 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 are obligated to provide standby letters of credit in
conjunction with several of our lending arrangements. As of
December 31, 2008 and 2007, we had issued
$183.5 million and $222.6 million, respectively, in
letters of credit which expire at various dates over the next
six years. If a borrower defaults on its commitment(s) subject
to any letter of credit issued under these arrangements, we
would be responsible to meet the borrowers financial
obligation and would seek repayment of that financial obligation
from the borrower.
Our interest-only loans consist of balloon and bullet loans,
which collectively represent approximately 93% of our loan
portfolio as of December 31, 2008 and 2007. 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. On the maturity date, the entire
unpaid balance of the loan is due. Balloon loans and bullet
loans involve a greater degree of credit risk than other types
of loans because they require the client to make a large final
payment upon the maturity of the loan.
Our PIK interest rate loans represent the deferral of either a
portion or all of the contractual interest payments on the loan.
At each payment date, any accrued and unpaid interest is
capitalized and included in the loans principal balance.
As of December 31, 2008 and 2007, the outstanding balance
of our PIK loans was $1.1 billion and $939.0 million,
respectively. On the maturity date, the principal balance and
the capitalized PIK interest are due. Loans with PIK interest
have a greater degree of credit risk than other types of loans
because they require the client to make a large final payment
upon the maturity of the loan.
Concentrations
of Credit Risk
In our normal course of business, we engage in commercial
lending and leasing activities with clients throughout the
United States. As of December 31, 2008, the single largest
industry concentration was healthcare and social assistance,
which made up approximately 18% of our commercial loan
portfolio. As of December 31, 2008, the largest
geographical concentration was New York, which made up
approximately 13% of our commercial loan portfolio. As of
December 31, 2008, the single largest industry
concentration in our direct real estate investment portfolio was
skilled nursing, which made up approximately 98% of the
investments. As of December 31, 2008, the largest
geographical concentration in our direct real estate investment
portfolio was Florida, which made up approximately 33% of the
investments.
|
|
Note 25.
|
Fair
Value Measurements
|
We use fair value measurements to record fair value adjustments
to certain of our financial assets and liabilities and to
determine fair value disclosures. Marketable securities,
mortgage-backed securities, available-for-sale
166
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
investments, warrants and derivatives are recorded at fair value
on a recurring basis. In addition, we may be required from time
to time to measure certain of our assets at fair value on a
nonrecurring basis, including loans held for sale, loans held
for investment and certain of our investments. As previously
discussed in Note 2, Summary of Significant Accounting
Policies, we adopted SFAS No. 157 effective
January 1, 2008. SFAS No. 157 amended
SFAS No. 107, Disclosures about Fair Value of
Financial Instruments
(SFAS No. 107), which requires the
disclosure of the estimated fair value of on- and off-balance
sheet financial instruments. We followed SFAS No. 157
in determining the SFAS No. 107 fair value disclosure
amounts. The disclosures required under SFAS No. 157
and SFAS No. 107 are included in this note.
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 and for estimating fair value of financial
instruments not recorded at fair value for disclosure purposes.
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 financial instruments could result in a different
estimate of fair value at the measurement date.
Financial
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.
Marketable
Securities
Marketable securities consist of Agency Discount Notes, Agency
Callable Notes, Agency Debt, Agency MBS and Corporate Debt that
are carried at fair value on a recurring basis and classified as
available-for-sale securities. 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. The entire portfolio of
securities is classified as Level 2.
Mortgage-Related
Receivables
Mortgage-related receivables are recorded at outstanding
principal, net of unamortized purchase discounts. For
SFAS No. 107 disclosures, the fair value is determined
by an external pricing service based on the underlying
collateral of the receivables. The value of the loans
collateralizing the mortgage-related receivables is based on
internal valuation techniques that consider interest rates, home
values and borrower attributes, as well as anticipated default
rates and prepayment rates.
Residential
Mortgage-Backed Securities
Residential mortgage-backed securities are carried at fair value
on a recurring basis. Agency RMBS are classified as trading and
Non-Agency RMBS are classified as available-for-sale. Where
possible, these securities are valued using quoted prices from
external market participants, including pricing services. If
quoted prices are not available, the values are determined using
quoted prices of securities with similar characteristics or
internal pricing
167
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
models inclusive of assumptions related to prepayment speeds and
credit losses. Level 2 securities relate principally to
Agency RMBS, and Level 3 securities relate principally to
Non-Agency RMBS for which there was no active market as of
December 31, 2008.
Commercial
Real Estate A Participation Interest
The A Participation Interest is recorded at
outstanding principal, net of the unamortized purchase discount.
For SFAS No. 107 disclosures, the fair value is
estimated based on a discounted cash flow analysis, using rates
currently being offered for securities with similar
characteristics as the underlying collateral.
Loans
Held for Sale
Loans held for sale are carried at the lower of cost or fair
value, with fair value adjustments recorded on a nonrecurring
basis. The fair value is determined using actual market
transactions when available. In situations when market
transactions are not available, we use the income approach
through internally developed valuation models to estimate the
fair value. This requires the use of significant judgment
surrounding discount rates and the timing and amounts of future
cash flows. Key inputs to these valuations also include costs of
completion and unit settlement prices for the underlying
collateral of the loans. Fair values determined through actual
market transactions are classified within Level 2 of the
valuation hierarchy while fair values determined through
internally developed valuation models are classified within
Level 3.
Loans
Held for Investment
Loans held for investment are recorded at outstanding principal,
net of any deferred fees and unamortized purchase discounts or
premiums. We record fair value adjustments on a nonrecurring
basis when we have determined that it is necessary to record a
specific reserve against the loans. We may utilize the fair
value of collateral to measure the specific reserve for those
loans that are collateral dependent. To determine the fair value
of the collateral, we may employ different approaches depending
on the type of collateral. Typically, we determine the fair
value of the collateral using internally developed models. Our
models utilize industry valuation benchmarks, such as multiples
of earnings before interest, taxes, depreciation, and
amortization (EBITDA), depending on the industry, to
determine a value for the underlying enterprise. In certain
cases where our collateral is a fixed or other tangible asset,
we will periodically obtain a third party appraisal. When fair
value adjustments are recorded on these loans, we typically
classify them in Level 3 of the fair value hierarchy.
For SFAS No. 107 disclosures, we determine the fair
value estimates of loans held for investment primarily using
external pricing services. These pricing services 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.
Investments
Investments carried at fair value on a recurring basis include
debt and equity securities classified as available-for-sale
under SFAS No. 115. Debt securities are primarily
corporate bonds whose values are determined using internally
developed valuation models. These models 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. Prior to the fourth quarter of 2008, we utilized
pricing services to value our debt security investments.
However, given the declining volume of trading activity
surrounding our investments, we concluded that such inputs were
no longer representative of the investments fair value.
Equity securities are valued using the stock price of the
underlying company in which we hold our investment. Given the
168
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
lack of active and observable trading in the market, our debt
securities are classified in Level 3. Our equity securities
are classified in Level 1 or 2 depending on the level of
activity within the market.
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 impaired during the period. We impair
these investments to fair value when we have determined that
other-than-temporary impairment exists. 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,
depending on the industry, 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. Where these
investments have been measured to fair value, we typically
classify them in Level 3 of the fair value hierarchy.
For SFAS No. 107 disclosures, we determine the fair
value estimate of equity investments accounted for under the
cost method of accounting as described above. The disclosures
required under SFAS No. 107 are not required for
investments accounted for under the equity method of accounting.
We also own mortgage-backed securities classified as
held-to-maturity under SFAS No. 115, which are
recorded at amortized cost. As of December 31, 2008, the
carrying value of these investments approximated fair value as
they were purchased in late December 2008.
Warrants
Warrants are carried at fair value on a recurring basis and
generally relate to private companies. Warrants for private
companies are valued based on the estimated value of the
underlying enterprise principally using a multiple determined
either from comparable public company data or from the
transaction where we acquired the warrant and a financial
performance indicator based on EBITDA or another revenue
measure. Given the nature of the inputs used to value private
company warrants, they are classified in Level 3 of the
fair value hierarchy.
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.
FHLB
Stock
Our investment in FHLB stock is recorded at historical cost,
which is a reasonable estimate of fair value. FHLB stock does
not have a readily determinable fair value, but can be sold back
to the FHLB at its par value with stated notice.
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.
For SFAS No. 107 disclosures, certificates of deposit
are grouped by maturity date, and the fair value is estimated
utilizing discounted cash flow techniques. The interest rates
applied to the analyses are rates currently being offered for
similar certificates of deposit within the respective maturity
groupings.
169
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Repurchase
Agreements
The carrying amount of repurchase agreements is a reasonable
estimate of fair value as these instruments have short-term
maturities and interest rates that approximate market.
Credit
Facilities
For SFAS No. 107 disclosures, the fair value of our
credit facilities is estimated based on current market interest
rates for similar debt instruments adjusted for the remaining
time to maturity.
Term
Debt
Term debt is comprised of term debt transactions in the form of
asset securitizations and Owner Trust term debt. For
SFAS No. 107 disclosures, the fair value of our term
debt securitizations is 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. The
fair value of the Owner Trust senior term debt is determined by
an external pricing service based on the fair value of the
mortgage-related receivables, as described above, and the
structure of the deal. The fair value is not adjusted for
changes in our credit quality as the holders do not have
recourse to our general credit. As of December 31, 2008,
the Owner Trust subordinated term debt was no longer
outstanding. As of December 31, 2007, the carrying amount
of the Owner Trust subordinated term debt approximated its fair
value.
Other
Borrowings
Our other borrowings are comprised of convertible debt,
subordinated debt and mortgage debt. For SFAS No. 107
disclosures, 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
occured. The fair value of our mortgage debt is estimated using
discounted cash flow techniques, which take into account current
market interest rates and the fixed spread included in the debt.
Off-Balance
Sheet Financial Instruments
Loan
Commitments and Letters of Credit
These instruments generate ongoing fees at our current pricing
levels, which are recognized over the term of the commitment
period. For SFAS No. 107 disclosures, the fair value
is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of
the agreements, 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.
170
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Financial
Assets and Liabilities Carried at Fair Value on a Recurring
Basis
Assets and liabilities have been grouped in their entirety 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, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurement as of
|
|
|
Quoted Prices in
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
December 31,
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
2008
|
|
|
Identical Assets (Level 1)
|
|
|
Inputs (Level 2)
|
|
|
Inputs (Level 3)
|
|
|
|
($ in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities, available-for-sale
|
|
$
|
642,714
|
|
|
$
|
|
|
|
$
|
642,714
|
|
|
$
|
|
|
Mortgage-backed securities pledged, trading
|
|
|
1,489,291
|
|
|
|
|
|
|
|
1,489,291
|
|
|
|
|
|
Investments carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments available-for-sale
|
|
|
36,837
|
|
|
|
|
|
|
|
213
|
|
|
|
36,624
|
|
Warrants
|
|
|
4,661
|
|
|
|
|
|
|
|
|
|
|
|
4,661
|
|
Other assets held at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
|
|
206,979
|
|
|
|
|
|
|
|
206,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,380,482
|
|
|
$
|
|
|
|
$
|
2,339,197
|
|
|
$
|
41,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities held at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
342,784
|
|
|
$
|
|
|
|
$
|
342,784
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the changes in the fair values of assets and
liabilities carried at fair value for the year ended
December 31, 2008 that have been classified in Level 3
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized and Unrealized
|
|
|
|
|
|
Purchases,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses, net
|
|
|
Total
|
|
|
Sales,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in
|
|
|
Realized
|
|
|
Issuances,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
|
|
|
|
|
Other
|
|
|
and
|
|
|
and
|
|
|
Transfers
|
|
|
Balance as of
|
|
|
Unrealized
|
|
|
|
|
|
|
January 1,
|
|
|
Included in
|
|
|
Comprehensive
|
|
|
Unrealized
|
|
|
Settlements,
|
|
|
in (out)
|
|
|
December 31,
|
|
|
Losses, net
|
|
|
|
|
|
|
2008
|
|
|
Income
|
|
|
Income, net
|
|
|
Losses, net
|
|
|
Net
|
|
|
of Level 3
|
|
|
2008
|
|
|
(1)
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments available-for-sale
|
|
$
|
12,837
|
|
|
$
|
(25,008
|
)
|
|
$
|
(10
|
)
|
|
$
|
(25,018
|
)
|
|
$
|
48,805
|
|
|
$
|
|
|
|
$
|
36,624
|
|
|
$
|
(25,008
|
)
|
|
|
|
|
Warrants
|
|
|
8,994
|
|
|
|
(2,681
|
)
|
|
|
|
|
|
|
(2,681
|
)
|
|
|
(1,652
|
)
|
|
|
|
|
|
|
4,661
|
|
|
|
(2,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
21,831
|
|
|
$
|
(27,689
|
)
|
|
$
|
(10
|
)
|
|
$
|
(27,699
|
)
|
|
$
|
47,153
|
|
|
$
|
|
|
|
$
|
41,285
|
|
|
$
|
(27,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents net unrealized losses included in income relating to
assets held as of December 31, 2008. |
Realized and unrealized gains and losses on assets and
liabilities classified in Level 3 included in income for
the year ended December 31, 2008, reported in interest
income, (loss) gain 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 losses included in earnings for the period
|
|
$
|
(83
|
)
|
|
$
|
(23,536
|
)
|
|
$
|
(4,070
|
)
|
Unrealized losses relating to assets still held at reporting date
|
|
|
(83
|
)
|
|
|
(23,136
|
)
|
|
|
(4,070
|
)
|
171
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Financial
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 in accordance with GAAP.
As described above, these adjustments to fair value usually
result from the application of lower of cost or fair value
accounting or write downs of individual assets. The table below
provides the fair values of those assets for which nonrecurring
fair value adjustments were recorded during the year ended
December 31, 2008, 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, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measurements for
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
Total Net Losses for
|
|
|
|
the Year Ended
|
|
|
Active Markets
|
|
|
Significant Other
|
|
|
Significant
|
|
|
the Year Ended
|
|
|
|
December 31,
|
|
|
for Identical
|
|
|
Observable Inputs
|
|
|
Unobservable
|
|
|
December 31,
|
|
|
|
2008
|
|
|
Assets (Level 1)
|
|
|
(Level 2)
|
|
|
Inputs (Level 3)
|
|
|
2008
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
8,543
|
|
|
$
|
|
|
|
$
|
8,543
|
|
|
$
|
|
|
|
$
|
(5,498
|
)
|
Loans held for investment(1)
|
|
|
289,363
|
|
|
|
|
|
|
|
|
|
|
|
289,363
|
|
|
|
(353,202
|
)
|
Investments carried at cost
|
|
|
3,993
|
|
|
|
|
|
|
|
|
|
|
|
3,993
|
|
|
|
(52,278
|
)
|
Investments accounted for under the equity method
|
|
|
6,207
|
|
|
|
|
|
|
|
|
|
|
|
6,207
|
|
|
|
(7,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
308,106
|
|
|
$
|
|
|
|
$
|
8,543
|
|
|
$
|
299,563
|
|
|
$
|
(418,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 year. |
SFAS No. 107
Fair Value Disclosures
SFAS No. 107 requires the disclosure of the estimated
fair value of financial instruments. A financial instrument is
defined by SFAS No. 107 as cash, evidence of an
ownership interest in an entity, or a contract that creates a
contractual obligation or right to deliver to or receive cash or
another financial instrument from a second entity on potentially
favorable terms. The methods and assumptions used in estimating
the fair values of our financial instruments are described above.
The table below provides fair value estimates for our financial
instruments as of December 31, 2008 and 2007, excluding
financial assets and liabilities for which carrying value is a
reasonable estimate of fair value and which are recorded at fair
value on a recurring basis.
172
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
|
($ in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related receivables, net
|
|
$
|
1,801,535
|
|
|
$
|
1,005,639
|
|
|
$
|
2,033,296
|
|
|
$
|
1,988,643
|
|
Commercial real estate A participation, net
|
|
|
1,396,611
|
|
|
|
1,266,921
|
|
|
|
|
|
|
|
|
|
Loans, net (including loans held for sale)
|
|
|
8,807,133
|
|
|
|
7,911,429
|
|
|
|
9,525,454
|
|
|
|
9,290,410
|
|
Investments carried at cost
|
|
|
61,279
|
|
|
|
81,237
|
|
|
|
127,183
|
|
|
|
153,355
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
5,043,695
|
|
|
$
|
5,066,874
|
|
|
$
|
|
|
|
$
|
|
|
Credit facilities
|
|
|
1,445,062
|
|
|
|
1,343,512
|
|
|
|
2,207,063
|
|
|
|
2,207,063
|
|
Owner Trust term debt
|
|
|
1,724,914
|
|
|
|
997,611
|
|
|
|
1,987,774
|
|
|
|
1,982,076
|
|
Other term debt
|
|
|
3,613,542
|
|
|
|
2,135,646
|
|
|
|
5,158,664
|
|
|
|
5,158,664
|
|
Convertible debt
|
|
|
715,885
|
|
|
|
455,368
|
|
|
|
780,630
|
|
|
|
749,107
|
|
Subordinated debt
|
|
|
438,799
|
|
|
|
219,400
|
|
|
|
529,877
|
|
|
|
452,305
|
|
Mortgage debt
|
|
|
330,311
|
|
|
|
275,995
|
|
|
|
341,086
|
|
|
|
341,086
|
|
Loan commitments and letters of credit
|
|
|
|
|
|
|
45,488
|
|
|
|
|
|
|
|
72,158
|
|
We currently operate as three reportable segments:
1) Commercial Banking, 2) Healthcare Net Lease, and
3) Residential Mortgage Investment. Our Commercial Banking
segment comprises our commercial lending and banking business
activities; our Healthcare Net Lease segment comprises our
direct real estate investment business activities; and our
Residential Mortgage Investment segment comprises our
residential mortgage investment and other investment activities
formally engaged in to optimize our REIT qualification.
From January 1, 2006 to the third quarter of 2007, we
presented financial results through two reportable segments:
1) Commercial Lending & Investment and
2) Residential Mortgage Investment. Our Commercial
Lending & Investment segment comprised our commercial
lending and direct real estate investment business activities
and our Residential Mortgage Investment segment comprised all of
our activities related to our investments in residential
mortgage loans and RMBS. Changes were made in the way management
organizes financial information to make operating decisions,
resulting in the activities previously reported in the
Commercial Lending & Investment segment being
disaggregated into the Commercial Finance segment and the
Healthcare Net Lease segment as described above. Beginning in
the third quarter of 2008, we changed the name of our Commercial
Finance segment to Commercial Banking to incorporate depository
products, services and investments of CapitalSource Bank. We
have reclassified all comparative prior period segment
information to reflect our three reportable segments.
173
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The financial results of our operating segments as of and for
the year ended December 31, 2008 and 2007, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
Commercial
|
|
|
Healthcare
|
|
|
Mortgage
|
|
|
Consolidated
|
|
|
|
Banking
|
|
|
Net Lease
|
|
|
Investment
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Total interest and fee income
|
|
$
|
1,014,023
|
|
|
$
|
1,402
|
|
|
$
|
226,282
|
|
|
$
|
1,241,707
|
|
Operating lease income
|
|
|
|
|
|
|
107,748
|
|
|
|
|
|
|
|
107,748
|
|
Interest expense
|
|
|
488,307
|
|
|
|
43,232
|
(1)
|
|
|
180,571
|
|
|
|
712,110
|
|
Provision for loan losses
|
|
|
576,804
|
|
|
|
|
|
|
|
16,242
|
|
|
|
593,046
|
|
Operating expenses(2)
|
|
|
233,617
|
|
|
|
47,469
|
|
|
|
10,109
|
|
|
|
291,195
|
|
Other expense(3)
|
|
|
66,822
|
|
|
|
1,204
|
|
|
|
106,057
|
|
|
|
174,083
|
|
Noncontrolling interests expense
|
|
|
(706
|
)
|
|
|
2,132
|
|
|
|
|
|
|
|
1,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before income taxes
|
|
|
(350,821
|
)
|
|
|
15,113
|
|
|
|
(86,697
|
)
|
|
|
(422,405
|
)
|
Income tax benefit
|
|
|
(199,781
|
)
|
|
|
|
|
|
|
|
|
|
|
(199,781
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(151,040
|
)
|
|
$
|
15,113
|
|
|
$
|
(86,697
|
)
|
|
$
|
(222,624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of December 31, 2008
|
|
$
|
13,515,890
|
|
|
$
|
1,059,031
|
|
|
$
|
3,839,980
|
|
|
$
|
18,414,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
Commercial
|
|
|
Healthcare
|
|
|
Mortgage
|
|
|
Consolidated
|
|
|
|
Banking
|
|
|
Net Lease
|
|
|
Investment
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Total interest and fee income
|
|
$
|
1,090,585
|
|
|
$
|
1,362
|
|
|
$
|
348,351
|
|
|
$
|
1,440,298
|
|
Operating lease income
|
|
|
|
|
|
|
97,013
|
|
|
|
|
|
|
|
97,013
|
|
Interest expense
|
|
|
481,605
|
|
|
|
41,047
|
(1)
|
|
|
324,589
|
|
|
|
847,241
|
|
Provision for loan losses
|
|
|
77,576
|
|
|
|
|
|
|
|
1,065
|
|
|
|
78,641
|
|
Operating expenses(2)
|
|
|
220,550
|
|
|
|
41,441
|
|
|
|
6,000
|
|
|
|
267,991
|
|
Other income (expense)(3)
|
|
|
883
|
|
|
|
(369
|
)
|
|
|
(75,164
|
)
|
|
|
(74,650
|
)
|
Noncontrolling interests expense
|
|
|
(1,037
|
)
|
|
|
5,975
|
|
|
|
|
|
|
|
4,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income taxes
|
|
|
312,774
|
|
|
|
9,543
|
|
|
|
(58,467
|
)
|
|
|
263,850
|
|
Income taxes
|
|
|
87,563
|
|
|
|
|
|
|
|
|
|
|
|
87,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
225,211
|
|
|
$
|
9,543
|
|
|
$
|
(58,467
|
)
|
|
$
|
176,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of December 31, 2007
|
|
$
|
10,609,306
|
|
|
$
|
1,098,287
|
|
|
$
|
6,332,756
|
|
|
$
|
18,040,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
Commercial
|
|
|
Healthcare
|
|
|
Mortgage
|
|
|
Consolidated
|
|
|
|
Banking
|
|
|
Net Lease
|
|
|
Investment
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Total interest and fee income
|
|
$
|
919,496
|
|
|
$
|
|
|
|
$
|
267,522
|
|
|
$
|
1,187,018
|
|
Operating lease income
|
|
|
|
|
|
|
30,742
|
|
|
|
|
|
|
|
30,742
|
|
Interest expense
|
|
|
344,988
|
|
|
|
11,176
|
(1)
|
|
|
250,561
|
|
|
|
606,725
|
|
Provision for loan losses
|
|
|
81,211
|
|
|
|
|
|
|
|
351
|
|
|
|
81,562
|
|
Operating expenses(2)
|
|
|
193,053
|
|
|
|
14,359
|
|
|
|
8,640
|
|
|
|
216,052
|
|
Other income (expense)(3)
|
|
|
37,297
|
|
|
|
(2,497
|
)
|
|
|
2,528
|
|
|
|
37,328
|
|
Noncontrolling interests expense
|
|
|
(806
|
)
|
|
|
5,517
|
|
|
|
|
|
|
|
4,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income taxes and cumulative effect of
accounting change
|
|
|
338,347
|
|
|
|
(2,807
|
)
|
|
|
10,498
|
|
|
|
346,038
|
|
Income taxes
|
|
|
67,132
|
|
|
|
|
|
|
|
|
|
|
|
67,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before cumulative effect of accounting change
|
|
|
271,215
|
|
|
|
(2,807
|
)
|
|
|
10,498
|
|
|
|
278,906
|
|
Cumulative effect of accounting change, net of taxes
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
271,585
|
|
|
$
|
(2,807
|
)
|
|
$
|
10,498
|
|
|
$
|
279,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of December 31, 2006
|
|
$
|
8,445,216
|
|
|
$
|
790,233
|
|
|
$
|
5,975,125
|
|
|
$
|
15,210,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest expense in our Healthcare Net Lease segment includes
interest on its secured credit facility and mortgage debt as
well as an allocation of interest on its allocated intercompany
debt. |
|
(2) |
|
Operating expenses of our Healthcare Net Lease segment include
depreciation of direct real estate investments, professional
fees, an allocation of overhead expenses (including compensation
and benefits) and other direct expenses. Operating expenses of
our Residential Mortgage Investment segment consist primarily of
direct expenses related to compensation and benefits and
professional fees paid to our investment manager and other
direct expenses. |
|
(3) |
|
Other (expense) income for our Residential Mortgage Investment
segment includes the net of interest income and expense accruals
related to certain of our derivatives along with the changes in
fair value of our Agency RMBS and related derivatives. |
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 and therefore, no additional geographic
disclosures are necessary.
175
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 27.
|
Parent
Company Information
|
As of December 31, 2008 and 2007, the parent company,
CapitalSource Incs, condensed financial information was as
follows:
Condensed
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
11
|
|
|
$
|
|
|
Investment in subsidiaries:
|
|
|
|
|
|
|
|
|
Bank subsidiary
|
|
|
915,690
|
|
|
|
|
|
Non-Bank subsidiaries
|
|
|
3,482,082
|
|
|
|
3,777,732
|
|
|
|
|
|
|
|
|
|
|
Total investment in subsidiaries
|
|
|
4,397,772
|
|
|
|
3,777,732
|
|
Other assets
|
|
|
109,438
|
|
|
|
93,046
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
4,507,221
|
|
|
|
3,870,778
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders Equity Liabilities:
|
|
|
|
|
|
|
|
|
Credit facilities
|
|
$
|
890,000
|
|
|
$
|
480,237
|
|
Other borrowings
|
|
|
715,885
|
|
|
|
780,630
|
|
Other liabilities
|
|
|
62,181
|
|
|
|
27,640
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,668,066
|
|
|
|
1,288,507
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
2,828
|
|
|
|
2,207
|
|
Additional paid-in capital
|
|
|
3,683,265
|
|
|
|
2,902,501
|
|
Accumulated deficit
|
|
|
(855,836
|
)
|
|
|
(327,387
|
)
|
Accumulated other comprehensive income, net
|
|
|
8,898
|
|
|
|
4,950
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,839,155
|
|
|
|
2,582,271
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
4,507,221
|
|
|
$
|
3,870,778
|
|
|
|
|
|
|
|
|
|
|
176
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Condensed
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
4,335
|
|
|
$
|
12,205
|
|
|
$
|
10,297
|
|
Interest expense
|
|
|
108,320
|
|
|
|
55,052
|
|
|
|
34,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(103,985
|
)
|
|
|
(42,847
|
)
|
|
|
(24,581
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
1,061
|
|
|
|
1,194
|
|
|
|
|
|
Professional fees
|
|
|
3,577
|
|
|
|
|
|
|
|
|
|
Other administrative expenses
|
|
|
38,175
|
|
|
|
50,979
|
|
|
|
23,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
42,813
|
|
|
|
52,173
|
|
|
|
23,694
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
(28,123
|
)
|
|
|
|
|
|
|
75,017
|
|
Earnings in Bank subsidiary
|
|
|
(8,491
|
)
|
|
|
|
|
|
|
|
|
Earnings in non-bank subsidiaries
|
|
|
(38,998
|
)
|
|
|
271,307
|
|
|
|
327,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(75,612
|
)
|
|
|
271,307
|
|
|
|
402,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(222,410
|
)
|
|
$
|
176,287
|
|
|
$
|
354,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Cash used in operating activities:
|
|
$
|
(682,193
|
)
|
|
$
|
(618,965
|
)
|
|
$
|
(569,697
|
)
|
Cash provided by investing activities:
|
|
|
|
|
|
|
52
|
|
|
|
33,571
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net of offering costs
|
|
|
601,755
|
|
|
|
714,490
|
|
|
|
603,422
|
|
Payment of dividend
|
|
|
(287,566
|
)
|
|
|
(467,173
|
)
|
|
|
(408,445
|
)
|
Borrowings on credit facilities, net
|
|
|
409,763
|
|
|
|
124,551
|
|
|
|
355,685
|
|
Borrowings of convertible debt
|
|
|
|
|
|
|
245,000
|
|
|
|
|
|
Others
|
|
|
(41,748
|
)
|
|
|
1,888
|
|
|
|
(16,417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by financing activities:
|
|
|
682,204
|
|
|
|
618,756
|
|
|
|
534,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
11
|
|
|
|
(157
|
)
|
|
|
(1,881
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
|
|
|
|
157
|
|
|
|
2,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
11
|
|
|
$
|
|
|
|
$
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 28.
|
Unaudited
Quarterly Information
|
Unaudited quarterly information for each of the three months in
the years ended December 31, 2008 and 2007, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
|
($ in thousands except per share data)
|
|
|
Interest income
|
|
$
|
272,002
|
|
|
$
|
274,012
|
|
|
$
|
254,222
|
|
|
$
|
308,325
|
|
Fee income
|
|
|
28,264
|
|
|
|
29,974
|
|
|
|
41,267
|
|
|
|
33,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
300,266
|
|
|
|
303,986
|
|
|
|
295,489
|
|
|
|
341,966
|
|
Operating lease income
|
|
|
27,708
|
|
|
|
28,140
|
|
|
|
24,210
|
|
|
|
27,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
327,974
|
|
|
|
332,126
|
|
|
|
319,699
|
|
|
|
369,656
|
|
Interest expense
|
|
|
182,586
|
|
|
|
180,496
|
|
|
|
160,083
|
|
|
|
188,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
145,388
|
|
|
|
151,630
|
|
|
|
159,616
|
|
|
|
180,711
|
|
Provision for loan losses
|
|
|
445,452
|
|
|
|
110,261
|
|
|
|
31,674
|
|
|
|
5,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after provision for loan losses
|
|
|
(300,064
|
)
|
|
|
41,369
|
|
|
|
127,942
|
|
|
|
175,052
|
|
Depreciation of direct real estate investments
|
|
|
9,085
|
|
|
|
8,898
|
|
|
|
8,990
|
|
|
|
8,916
|
|
Other operating expenses
|
|
|
82,440
|
|
|
|
52,621
|
|
|
|
61,652
|
|
|
|
58,593
|
|
Other (expense) income
|
|
|
(146,133
|
)
|
|
|
28,163
|
|
|
|
40,286
|
|
|
|
(96,399
|
)
|
Noncontrolling interests expense
|
|
|
(54
|
)
|
|
|
(100
|
)
|
|
|
283
|
|
|
|
1,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before income taxes
|
|
|
(537,668
|
)
|
|
|
8,113
|
|
|
|
97,303
|
|
|
|
9,847
|
|
Income tax (benefit) expense
|
|
|
(240,158
|
)
|
|
|
58
|
|
|
|
37,243
|
|
|
|
3,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(297,510
|
)
|
|
$
|
8,055
|
|
|
$
|
60,060
|
|
|
$
|
6,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.07
|
)
|
|
$
|
0.03
|
|
|
$
|
0.26
|
|
|
$
|
0.03
|
|
Diluted
|
|
|
(1.07
|
)
|
|
|
0.03
|
|
|
|
0.25
|
|
|
|
0.03
|
|
178
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
($ in thousands except per share data)
|
|
|
Interest income
|
|
$
|
333,122
|
|
|
$
|
344,043
|
|
|
$
|
311,184
|
|
|
$
|
289,554
|
|
Fee income
|
|
|
37,974
|
|
|
|
29,338
|
|
|
|
45,056
|
|
|
|
50,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
371,096
|
|
|
|
373,381
|
|
|
|
356,240
|
|
|
|
339,581
|
|
Operating lease income
|
|
|
27,079
|
|
|
|
27,490
|
|
|
|
22,156
|
|
|
|
20,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
398,175
|
|
|
|
400,871
|
|
|
|
378,396
|
|
|
|
359,869
|
|
Interest expense
|
|
|
227,547
|
|
|
|
232,754
|
|
|
|
200,291
|
|
|
|
186,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
170,628
|
|
|
|
168,117
|
|
|
|
178,105
|
|
|
|
173,220
|
|
Provision for loan losses
|
|
|
33,952
|
|
|
|
12,353
|
|
|
|
17,410
|
|
|
|
14,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income after provision for loan losses
|
|
|
136,676
|
|
|
|
155,764
|
|
|
|
160,695
|
|
|
|
158,294
|
|
Depreciation of direct real estate investments
|
|
|
8,928
|
|
|
|
8,924
|
|
|
|
7,390
|
|
|
|
6,762
|
|
Operating expenses
|
|
|
62,165
|
|
|
|
56,209
|
|
|
|
59,053
|
|
|
|
58,560
|
|
Other (expense) income
|
|
|
(52,151
|
)
|
|
|
(49,627
|
)
|
|
|
21,079
|
|
|
|
6,049
|
|
Noncontrolling interests expense
|
|
|
1,154
|
|
|
|
1,182
|
|
|
|
1,272
|
|
|
|
1,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
12,278
|
|
|
|
39,822
|
|
|
|
114,059
|
|
|
|
97,691
|
|
Income taxes
|
|
|
27,312
|
|
|
|
11,557
|
|
|
|
29,693
|
|
|
|
19,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(15,034
|
)
|
|
$
|
28,265
|
|
|
$
|
84,366
|
|
|
$
|
78,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.07
|
)
|
|
$
|
0.15
|
|
|
$
|
0.45
|
|
|
$
|
0.44
|
|
Diluted
|
|
|
(0.07
|
)
|
|
|
0.15
|
|
|
|
0.45
|
|
|
|
0.43
|
|
|
|
Note 29.
|
Subsequent
Event
|
On February 13, 2009, we entered into an agreement with an
existing securityholder and issued 19,815,752 shares our
common stock in exchange for approximately $61.6 million in
aggregate principal amount of our outstanding 1.625% senior
subordinated convertible debentures due March 2034 held by the
securityholder. We retired all of the debentures acquired in the
exchange. In connection with this exchange, we incurred a loss
of approximately $57.5 million, which includes a write-off
of $0.4 million in deferred financing fees and debt
discount. Additionally, this exchange resulted in an increase to
our book equity of approximately $61.1 million.
179
|
|
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 Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
pursuant to
Rule 13a-15
of the Securities Exchange act of 1934, as amended. Based upon
that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
were effective as of December 31, 2008. There have been no
changes in our internal control over financial reporting during
the quarter ended December 31, 2008, 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 99.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
On February 25, 2009, Amendment No. 7 to the Credit
Agreement dated as of March 14, 2006 was entered into by
and among CapitalSource Inc., as Initial Borrower, CapitalSource
TRS LLC (TRS), CapitalSource Finance LLC
(CSF), CSE Mortgage LLC (CSEM),
CapitalSource SF TRS LLC (SF TRS), CapitalSource
International Inc. (International), CapitalSource
Finance II LLC (CSF II), CapitalSource CF LLC
(CS CF), CSE CHR Holdco LLC (CHR Holdco)
and CSE CHR Holdings LLC (CHR Holdings and together
with TRS, CSF, CSEM, SF TRS, International, CSF II and CHR
Holdco, the Guarantors), the banks and other
financial institutions parties thereto, Wachovia Bank, National
Association, as Administrative Agent (Wachovia),
Swingline Lender, and Issuing Lender, and Bank of America, N.A.,
as Issuing Lender (as amended to date, the
Amendment).
The Amendment:
|
|
|
|
|
Modifies the Consolidated EBITDA to Interest Expense financial
covenant to exclude the period ending December 31, 2008,
and to define and measure the covenant differently for future
periods, including to:
|
|
|
|
|
|
replace the trailing twelve month measurement period with a
quarterly measurement;
|
|
|
|
change the way we measure Consolidated EBITDA to include up to
$90.0 million of provision for loan losses for the
reporting period ending March 31, 2009, and up to
$50.0 million for each reporting period thereafter; and
|
|
|
|
set the minimum ratio of Consolidated EBITDA to Interest Expense
to 1.50:1.00 for the periods ending March 31, June 30,
and September 30, 2009, and 1.75:1.00 for each period
thereafter;
|
|
|
|
|
|
Provides that we only count loans that are delinquent by at
least 180 days, subject to an insolvency event or are
charged off pursuant to our credit and collection policy when
calculating our maximum average portfolio charged-off
ratio; and
|
|
|
|
Increases the maximum average portfolio charged-off ratios, as
follows:
|
|
|
|
|
|
for the fiscal quarter ended March 31, 2009, (i) from
8.0% to 8.5%, calculated excluding CapitalSource Bank, and
(ii) from 5.0% to 6.5%, calculated including CapitalSource
Bank; and
|
|
|
|
for every fiscal quarter thereafter, (i) from 8.0% to
10.0%, when calculated by excluding CapitalSource Bank, and
(ii) from 5.0% to 6.5%, calculated including CapitalSource
Bank.
|
From time to time we have entered into other transactions and
agreements with Wachovia, certain of the other parties to the
Amendment and their respective affiliates.
180
PART III
|
|
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 20 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
Chief Executive Officer and Chairman of the Board
Frederick W.
Eubank, II(2)(4)
Managing Partner, Wachovia Capital Partners, LLC
Andrew B.
Fremder(3)(4)
Member and Consultant, Farallon Capital Management,
L.L.C and Farallon Partners, L.L.C.
Sara L.
Grootwassink(1)(3)
Retired Chief Financial Officer, Washington Real
Estate Investment Trust
C. William
Hosler(2)
Retired Chief Financial Officer, Marcus &
Millichap Holding Companies
Timothy M.
Hurd(2)
Managing Director, Madison Dearborn Partners, LLC
Lawrence C.
Nussdorf(1)
President and Chief Operating Officer, Clark
Enterprises, Inc.
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
2009 Annual Meeting of Stockholders to be held April 30,
2009, which will be filed within 120 days of the end of our
fiscal year ended December 31, 2008 (the 2009 Proxy
Statement).
Our Chairman and Chief Executive Officer 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 29, 2008, our Chairman and Chief
Executive Officer certified to the NYSE that he was not aware of
any violations by the Company of the NYSEs corporate
governance listing standards and, as required by the rules of
the NYSE, expects to provide a similar certification following
the 2009 Annual Meeting of Stockholders.
|
|
|
(1) |
|
Audit Committee |
|
(2) |
|
Compensation Committee |
|
(3) |
|
Nominating and Corporate Governance Committee |
|
(4) |
|
Credit Policy Committee |
181
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
Information pertaining to executive compensation is incorporated
herein by reference to in the 2009 Proxy Statement to be filed
with the Securities and Exchange Commission within 120 days
after the end of the year covered by this
Form 10-K
with respect to the 2009 Annual Meeting of Stockholders to be
held on April 30, 2009.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
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 2009
Proxy Statement to be filed with the Securities and Exchange
Commission within 120 days after the end of the year
covered by this
Form 10-K
with respect to the 2009 Annual Meeting of Stockholders to be
held on April 30, 2009.
|
|
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 2009 Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after
the end of the year covered by this
Form 10-K
with respect to the 2009 Annual Meeting of Stockholders to be
held on April 30, 2009.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
Information pertaining to principal accounting fees and services
is incorporated herein by reference to Report of the Audit
Committee of the 2009 Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after
the end of the year covered by this
Form 10-K
with respect to the 2009 Annual Meeting of Stockholders to be
held on April 30, 2009.
182
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
15(a)(1)
Financial Statements
The 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 101 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 the 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.
183
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 March 2, 2009
|
|
/s/ JOHN
K.
DELANEY John
K. Delaney
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
Date March 2, 2009
|
|
/s/ THOMAS
A.
FINK Thomas
A. Fink
Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
Date: March 2, 2009
|
|
/s/ BRYAN
D.
SMITH Bryan
D. Smith
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
March 2, 2009.
|
|
|
|
|
/s/ C. WILLIAM
HOSLER
|
|
|
|
William G. Byrnes, Director
|
|
C. William Hosler, Director
|
|
|
|
/s/ FREDERICK
W. EUBANK, II
|
|
/s/ TIMOTHY
M. HURD
|
|
|
|
Frederick W. Eubank, II, Director
|
|
Timothy M. Hurd, Director
|
|
|
|
|
|
/s/ LAWRENCE
C. NUSSDORF
|
|
|
|
Andrew B. Fremder, Director
|
|
Lawrence C. Nussdorf, Director
|
|
|
|
|
|
|
|
|
|
Sara L. Grootwassink, Director
|
|
|
184
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 October 30, 2007) (incorporated by
reference to exhibit 3.2 to the
Form 10-Q
filed by CapitalSource on November 9, 2007).
|
|
4.1
|
|
|
Indenture dated as of March 19, 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 1.25% Senior
Convertible Debenture Due 2034 (incorporated by reference to
exhibit 4.7 to the
Form 10-Q
filed by CapitalSource on May 13, 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. 333-118744)
filed by CapitalSource on October 19, 2004).
|
|
4.2
|
|
|
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).
|
|
4.2.1
|
|
|
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).
|
|
4.3
|
|
|
Indenture, dated as of April 4, 2007, by and among the
CapitalSource Inc., as issuer, Wells Fargo Bank, N.A., as
trustee, and CapitalSource Finance LLC, as guarantor
(incorporated by reference to exhibit d(3) to the
Schedule TO-I
filed by CapitalSource on February 17, 2009).
|
|
4.4
|
|
|
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.
|
|
4.5
|
|
|
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).
|
|
4.5.1
|
|
|
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).
|
|
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
|
|
|
Office Lease Agreement dated as of December 8, 2000, by and
between Chase Tower Associates, L.L.C. and CapitalSource Finance
LLC (incorporated by reference to exhibit 10.1 to the
Registration Statement on
Form S-1/A
(Reg.
No. 333-106076)
filed by CapitalSource on June 12, 2003).
|
|
10.3.1
|
|
|
First Amendment to Office Lease Agreement dated May 10,
2002, by and between Chase Tower Associates, L.L.C. and
CapitalSource Finance LLC.
|
|
10.3.2
|
|
|
Second Amendment to Office Lease Agreement dated
February 4, 2003, by and between Chase Tower Associates,
L.L.C. and CapitalSource Finance LLC.
|
|
10.3.3
|
|
|
Third Amendment to Office Lease Agreement dated as of
August 1, 2003, by and between Chase Tower Associates,
L.L.C. and CapitalSource Finance LLC (incorporated by reference
to exhibit 10.1.1 to the Registration Statement on
Form S-1
(Reg.
No. 333-112002)
filed by CapitalSource on February 2, 2004).
|
185
|
|
|
|
|
Exhibit
|
|
|
No
|
|
Description
|
|
|
10.3.4
|
|
|
Fourth Amendment to Office Lease Agreement dated July 2,
2007, by and between Chase Tower Associates, L.L.C. and
CapitalSource Finance LLC.
|
|
10.3.5
|
|
|
Fifth Amendment to Office Lease Agreement dated March 6,
2008, by and between Chase Tower Associates, L.L.C. and
CapitalSource Finance LLC.
|
|
10.3.5.1
|
|
|
Assignment and Assumption Agreement dated December 8, 2004
to the Office Lease Agreement dated December 7, 2001, by
and between Medical Office Properties, Inc. f/k/a Healthcare
Financial Partners REIT, Inc. and CapitalSource Finance
LLC.
|
|
10.3.5.2
|
|
|
Office Lease Agreement dated December 7, 2001, by and
between Chase Tower Associates, L.L.C. and Healthcare Financial
Partners REIT, Inc.
|
|
10.3.5.3
|
|
|
First Amendment to Office Lease Agreement dated June 30,
2003, by and between Chase Tower Associates, L.L.C. and
Healthcare Financial Partners REIT, Inc.
|
|
10.4
|
|
|
Office Lease Agreement dated April 27, 2007 by and between
Wisconsin Place Office LLC and CapitalSource Finance LLC.
|
|
10.5
|
|
|
Standard Office Lease dated April 23, 2004 between Crown
Brea Associates, LLC and Fremont Investment &
Loan.
|
|
10.5.1
|
|
|
Lease Amendment No. 1 dated August, 2004, by and between
Crown Brea Associates, LLC and Fremont Investment &
Loan.
|
|
10.5.2
|
|
|
Third Amendment to Standard Office Lease effective as of
November 15, 2005, by and between AEW LT Brea Imperial
Centre, LLC and Fremont Investment & Loan.
|
|
10.5.3
|
|
|
Fourth Amendment to Standard Office Lease dated July 31,
2007, by and between AEW LT Brea Imperial Centre, LLC and
Fremont Investment & Loan.
|
|
10.5.4
|
|
|
Sublease Agreement dated as of July 25, 2008, by and
between Fremont Investment & Loan and CapitalSource
Bank.
|
|
10.6
|
|
|
Amended and Restated Registration Rights Agreement dated
August 30, 2002, among CapitalSource Holdings LLC and the
holders party thereto (incorporated by reference to
exhibit 10.11 to the Registration Statement on
Form S-1
(Reg.
No. 333-106076)
filed by CapitalSource on June 12, 2003).
|
|
10.7
|
|
|
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).
|
|
10.8
|
|
|
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).
|
|
10.9
|
|
|
Credit Agreement dated as of March 14, 2006, among
CapitalSource Inc., as borrower, the guarantors and lenders as
listed in the Credit Agreement, Wachovia Bank, National
Association, as administrative agent, swingline lender and
issuing lender, Bank of America, N.A., as issuing lender,
Wachovia Capital Markets, LLC, as sole bookrunner and lead
arranger, and Bank of Montreal, Barclays Bank PLC and SunTrust
Bank, as co-documentation agents (composite version; reflects
all amendments through February 25, 2009).
|
|
10.9.1
|
|
|
Limited Waiver dated February 10, 2009 to the Credit
Agreement, dated as of March 14, 2006, among CapitalSource
Inc., as borrower, the guarantors and lenders as listed in the
Credit Agreement, Wachovia Bank, National Association, as
administrative agent, swingline lender and issuing lender, Bank
of America, N.A., as issuing lender, Wachovia Capital Markets,
LLC, as sole bookrunner and lead arranger, and Bank of Montreal,
Barclays Bank PLC and SunTrust Bank, as co-documentation
agents.
|
|
10.10
|
|
|
Security Agreement dated as of December 23, 2008, 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 administrative agent and
lender.
|
186
|
|
|
|
|
Exhibit
|
|
|
No
|
|
Description
|
|
|
10.11
|
|
|
Pledge Agreement dated as of December 23, 2008, 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 administrative agent and lender, Wells
Fargo Bank, National Association as collateral custodian and
CapitalSource Finance LLC, as servicer.
|
|
10.12
|
|
|
Sale and Servicing Agreement dated as of April 20, 2004, by
and among CapitalSource Funding III LLC, as seller,
CapitalSource Finance LLC, as originator and servicer, Wachovia
Capital Markets, LLC as administrative agent and Wells Fargo
Bank, National Association, as the backup servicer and as the
collateral custodian (composite version; reflects all amendments
through February 10, 2009).
|
|
10.12.1
|
|
|
Waiver, Consent and Amendment No. 15 to Sale and Servicing
Agreement dated as of February 10, 2009, among
CapitalSource Funding III LLC, as seller, CapitalSource
Finance LLC, as originator and as servicer, Wachovia Bank,
National Association, as a purchaser, Wachovia Capital Markets,
LLC, as administrative agent and Wells Fargo Bank, National
Association, as backup servicer and collateral custodian and
Wachovia Bank, National Association, as hedge counterparty.
|
|
10.13
|
|
|
Sale and Servicing Agreement, dated as of May 8, 2008, by
and among CS Funding VII Depositor LLC, as the seller,
CapitalSource Finance LLC, as the servicer and originator, the
issuers from time to time party thereto, the liquidity banks
from time to time party thereto, Citicorp North America, Inc.,
as the administrative agent and Wells Fargo Bank, National
Association, as the backup servicer and as the collateral
custodian (composite version; reflects all amendments through
August 20, 2008).
|
|
10.13.1
|
|
|
Waiver Letter dated February 12, 2009 to the Sale and
Servicing Agreement, dated as of May 8, 2008, by and among
CS Funding VII Depositor LLC, as the seller, CapitalSource
Finance LLC, as the servicer and originator, the issuers from
time to time party thereto, the liquidity banks from time to
time party thereto, Citicorp North America, Inc., as the
administrative agent and Wells Fargo Bank, National Association,
as the backup servicer and as the collateral custodian.
|
|
10.14
|
|
|
Credit Agreement dated as of July 20, 2007, among
CapitalSource Funding VIII LLC, as borrower, CapitalSource
Finance LLC, as servicer, Deutsche Bank AG, New York Branch, as
administrative agent and Wells Fargo Bank, National Association,
as collateral custodian and backup servicer.
|
|
10.14.1
|
|
|
Amendment No. 1 dated as of December 31, 2008 to
Credit Agreement, among CapitalSource Funding VIII LLC, as
borrower, CapitalSource Finance LLC, as servicer, Deutsche Bank
AG, as administrative agent and managing agent and Nantucket
Funding Corp. LLC, as lender.
|
|
10.15
|
|
|
Amended and Restated Sale and Servicing Agreement dated
April 28, 2006, by and among CSE QRS Funding I LLC, as
seller, CSE Mortgage LLC, as servicer and originator, Wachovia
Capital Markets, LLC, as administrative agent and VFCC agent,
Wells Fargo Bank, National Association, as backup servicer and
collateral custodian (composite version; reflects all amendments
through February 17, 2009).
|
|
10.15.1
|
|
|
Waiver, Consent and Amendment No. 6 dated February 17,
2009 to Amended and Restated Sale and Servicing Agreement dated
April 28, 2006, among CSE QRS Funding I LLC, as seller, CSE
Mortgage LLC, as servicer and originator, purchasers from time
to time, Wachovia Capital Markets, LLC, as administrative agent
and VFCC agent, Wells Fargo Bank, National Association, as
backup servicer and collateral custodian.
|
|
10.16
|
|
|
Facility Agreement dated as of October 3, 2007, among CS
Europe Finance Limited and CS UK Finance Limited, as borrowers
and guarantors, CapitalSource Finance LLC, as servicer, Wachovia
Bank, N.A., as administrative agent and security trustee and
Wachovia Securities International Ltd., as lead arranger and
sole bookrunner (composite version; reflects all amendments
through February 10, 2009).
|
|
10.17
|
|
|
Servicing Agreement dated October 3, 2007, between CS UK
Finance Limited and CS Europe Finance Limited, as borrowers,
CapitalSource Finance LLC, as servicer, CapitalSource Europe
Limited, as subservicer and parent, CapitalSource UK Limited, as
parent, Wachovia Bank, N.A., as administrative agent and
security trustee and Wachovia Securities International Ltd., as
lead arranger and sole bookrunner (composite version; reflects
all amendments through September 24, 2008).
|
|
10.18
|
|
|
Amended and Restated Loan Agreement dated March 29, 2007,
between Column Financial, Inc., as lender, and those
subsidiaries of CapitalSource Inc. listed as borrowers from time
to time, borrowers.
|
187
|
|
|
|
|
Exhibit
|
|
|
No
|
|
Description
|
|
|
10.18.1
|
|
|
Modification Agreement dated July 31, 2007 to that certain
Amended and Restated Loan Agreement dated as of March 29,
2007, between Column Financial, Inc., as lender, and, those
subsidiaries of CapitalSource Inc. listed as borrowers from time
to time, borrowers.
|
|
10.19
|
|
|
Guaranty Agreement dated March 29, 2007 to the Amended and
Restated Loan Agreement dated March 29, 2007, made by
CapitalSource Inc. for the benefit of Column Financial,
Inc.
|
|
10.20
|
|
|
Mezzanine Loan Agreement dated as of July 31, 2007, between
Column Financial, Inc., as lender, and CSE Casablanca
Holdings II LLC, as borrower.
|
|
10.20.1
|
|
|
Modification dated July 31, 2007 to that certain Mezzanine
Loan Agreement dated as of July 31, 2007, between Column
Financial, Inc., lender and CSE Casablanca Holdings II LLC,
borrower.
|
|
10.21
|
|
|
Guaranty Agreement dated July 31, 2007 to the Mezzanine
Loan Agreement dated July 31, 2007 made by CapitalSource
Inc. for the benefit of Column Financial, Inc.
|
|
10.21.1
|
|
|
Amendment dated July 31, 2007 to that certain Guaranty
Agreement to the Mezzanine Loan Agreement dated July 31,
2007 made by CapitalSource Inc. for the benefit of Column
Financial, Inc.
|
|
10.22
|
|
|
Second Amended and Restated Sale and Servicing Agreement, dated
as of May 8, 2008, by and among CapitalSource Real Estate
Loan LLC,
2007-A, as
the seller, CSE Mortgage LLC, as the originator and servicer,
the issuers from time to time party thereto, the liquidity banks
from time to time party thereto, Citicorp North America, Inc.,
as the administrative agent and Wells Fargo Bank, National
Association, as the backup servicer and as the collateral
custodian (composite version; reflects all amendments through
May 8, 2008) (incorporated by reference to
exhibit 10.2 to the
Form 10-Q
filed by CapitalSource on May 12, 2008).
|
|
10.22.1
|
|
|
First Amendment, dated as of July 31, 2008, to the Second
Amended and Restated Sale and Servicing Agreement, dated as of
May 8, 2008, by and among CapitalSource Real Estate Loan
LLC, 2007-A,
as the seller, CSE Mortgage LLC, as the originator and servicer,
the issuers from time to time party thereto, the liquidity banks
from time to time party thereto, Citicorp North America, Inc.,
as the administrative agent and Wells Fargo Bank, National
Association, as the backup servicer and as the collateral
custodian (incorporated by reference to exhibit 10.4.1 to
the
Form 10-Q
filed by CapitalSource on November 10, 2008).
|
|
10.22.2
|
|
|
Second Amendment, dated as of August 20, 2008, to the
Second Amended and Restated Sale and Servicing Agreement, dated
as of May 8, 2008, by and among CapitalSource Real Estate
Loan LLC,
2007-A, as
the seller, CSE Mortgage LLC, as the originator and servicer,
the issuers from time to time party thereto, the liquidity banks
from time to time party thereto, Citicorp North America, Inc.,
as the administrative agent and Wells Fargo Bank, National
Association, as the backup servicer and as the collateral
custodian (incorporated by reference to exhibit 10.4.2 to
the
Form 10-Q
filed by CapitalSource on November 10, 2008).
|
|
10.22.3
|
|
|
Third Amendment, dated as of December 31, 2008, to Second
Amended and Restated Sale and Servicing Agreement, dated as of
May 8, 2008, by and among CapitalSource Real Estate Loan
LLC, 2007-A,
as the seller, CSE Mortgage LLC, as the originator and servicer,
the issuers from time to time party thereto, the liquidity banks
from time to time party thereto, Citicorp North America, Inc.,
as the administrative agent and Wells Fargo Bank, National
Association, as the backup servicer and as the collateral
custodian.
|
|
10.23
|
|
|
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).
|
|
10.24
|
|
|
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).
|
|
10.25
|
|
|
Indenture dated as of December 20, 2006, by and among
CapitalSource Real Estate Loan
Trust 2006-A,
as the issuer, CapitalSource Finance LLC, as advancing agent and
Wells Fargo Bank, N.A., as trustee, paying agent, calculation
agent, transfer agent, custodial securities intermediary, backup
advancing agent and notes registrar (incorporated by reference
to exhibit 4.17 to the
Form 8-K
filed by CapitalSource on December 27, 2006).
|
188
|
|
|
|
|
Exhibit
|
|
|
No
|
|
Description
|
|
|
10.26
|
|
|
Servicing Agreement dated as of December 20, 2006, by and
among CapitalSource Real Estate Loan
Trust 2006-A,
as the issuer, Wells Fargo Bank, N.A, as trustee and as the
backup servicer and CapitalSource Finance LLC, as collateral
manager, servicer and special servicer (incorporated by
reference to exhibit 10.67 to the
Form 8-K
filed by CapitalSource on December 27, 2006).
|
|
10.27
|
|
|
Collateral Management Agreement dated as of December 20,
2006, by and among CapitalSource Real Estate Loan
Trust 2006-A,
as the issuer, and CapitalSource Finance LLC, as collateral
manager (incorporated by reference exhibit 10.68 to the
Form 8-K
filed by CapitalSource on December 27, 2006).
|
|
10.28
|
*
|
|
Third Amended and Restated Equity Incentive Plan (composite
version; reflects all amendments through December 31,
2008).
|
|
10.29.1
|
*
|
|
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).
|
|
10.29.2
|
*
|
|
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).
|
|
10.29.3
|
*
|
|
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).
|
|
10.30.1
|
*
|
|
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).
|
|
10.30.2
|
*
|
|
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).
|
|
10.30.3
|
*
|
|
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).
|
|
10.31.1
|
*
|
|
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).
|
|
10.31.2
|
*
|
|
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).
|
|
10.31.3
|
*
|
|
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).
|
|
10.32.1
|
*
|
|
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).
|
|
10.32.2
|
*
|
|
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).
|
|
10.33.1
|
*
|
|
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).
|
|
10.33.2
|
*
|
|
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).
|
|
10.33.3
|
*
|
|
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).
|
|
10.34.1
|
*
|
|
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).
|
|
10.34.2
|
*
|
|
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).
|
|
10.35
|
*
|
|
CapitalSource Inc. Amended and Restated Deferred Compensation
Plan effective August 8, 2008 (incorporated by reference to
exhibit 10.7 to the
Form 10-Q
filed by CapitalSource on November 10, 2008).
|
|
10.36
|
*
|
|
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).
|
|
10.37
|
*
|
|
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).
|
189
|
|
|
|
|
Exhibit
|
|
|
No
|
|
Description
|
|
|
10.38
|
*
|
|
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).
|
|
10.39
|
*
|
|
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).
|
|
10.40
|
*
|
|
Employment Agreement dated as of June 6, 2006, between
CapitalSource Inc. and John K. Delaney (incorporated by
reference to exhibit 10.1 to the
Form 8-K
filed by CapitalSource on June 8, 2006).
|
|
10.40.1
|
*
|
|
Amendment dated as of December 31, 2008 to Employment
Agreement dated June 6, 2006, by and between CapitalSource
Inc. and John K. Delaney.
|
|
10.41
|
*
|
|
Non-Qualified Option Agreement dated as of June 6, 2006,
between CapitalSource Inc. and John K. Delaney (included as
Exhibit A of the Employment Agreement incorporated by
reference to exhibit 10.3 to the
Form 8-K
filed by CapitalSource on June 8, 2006).
|
|
10.42
|
*
|
|
Non-Qualified Option Agreement dated as of June 6, 2006,
between CapitalSource Inc. and John K. Delaney (included as
Exhibit B of the Employment Agreement incorporated by
reference to exhibit 10.4 to the
Form 8-K
filed by CapitalSource on June 8, 2006).
|
|
10.43
|
*
|
|
Employment Agreement dated as of April 4, 2005, between
CapitalSource Inc. and Dean C. Graham (incorporated by reference
to exhibit 10.36 to the
Form 10-Q
filed by CapitalSource on August 5, 2005).
|
|
10.43.1
|
*
|
|
Amendment to Employment Agreement dated as of November 22,
2005, between CapitalSource Inc. and Dean C. Graham
(incorporated by reference to exhibit 10.36.1 to the
Form 10-K
filed by CapitalSource on March 9, 2006).
|
|
10.43.2
|
*
|
|
Amendment No. 2 to Employment Agreement dated as of
February 1, 2007, between CapitalSource Inc. and Dean C.
Graham (incorporated by reference exhibit 10.36.2 to the
Form 10-K
filed by CapitalSource on March 1, 2007).
|
|
10.43.3
|
*
|
|
Amendment No. 3 to Employment Agreement dated as of
December 31, 2008, by and between CapitalSource Inc. and
Dean C. Graham.
|
|
10.44
|
*
|
|
Employment Agreement dated as of April 22, 2005, between
CapitalSource Inc. and Michael C. Szwajkowski (incorporated by
reference to exhibit 10.38 to the
Form 10-Q
filed by CapitalSource on August 5, 2005).
|
|
10.44.1
|
*
|
|
Amendment to Employment Agreement dated as of November 22,
2005, between CapitalSource Inc. and Michael C. Szwajkowski
(incorporated by reference to exhibit 10.38.1 to the
Form 10-K
filed by CapitalSource on March 9, 2006).
|
|
10.44.2
|
*
|
|
Amendment to Employment Agreement dated as of December 31,
2008, by and between CapitalSource Inc. and Michael C.
Szwajkowski.
|
|
10.45
|
*
|
|
Employment Agreement, dated as of November 22, 2005,
between CapitalSource Inc. and Thomas A. Fink (incorporated by
reference to exhibit 10.44 to the
Form 10-K
filed by CapitalSource on March 9, 2006).
|
|
10.45.1
|
*
|
|
Amendment No. 1 to Employment Agreement, dated as of
October 30, 2008, between CapitalSource Inc. and Thomas A.
Fink (incorporated by reference to exhibit 10.1 to the
Form 8-K
filed by CapitalSource on November 3, 2008).
|
|
10.46
|
*
|
|
Employment Agreement, dated as of February 1, 2007, between
CapitalSource Inc. and Steven A. Museles (incorporated by
reference to exhibit 10.34 to the
Form 10-K
filed by CapitalSource on February 29, 2008).
|
|
10.46.1
|
*
|
|
Amendment to Employment Agreement, dated as of December 31,
2008, by and between CapitalSource Inc. and Steven A.
Museles.
|
|
10.47
|
*
|
|
Relocation Agreement, dated August 22, 2008, by and between
CapitalSource Inc. and Steven A. Museles (incorporated by
reference to exhibit 10.6 to the
Form 10-Q
filed by CapitalSource on November 10, 2008).
|
|
12.1
|
|
|
Ratio of Earnings to Fixed Charges.
|
|
21.1
|
|
|
List of Subsidiaries.
|
190
|
|
|
|
|
Exhibit
|
|
|
No
|
|
Description
|
|
|
23.1
|
|
|
Consent of Ernst & Young LLP.
|
|
31.1
|
|
|
Rule 13a 14(a) Certification of Chairman of the
Board and 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).
|
|
|
|
|
|
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 which does not exceed 10% of
the total consolidated assets of the registrant.
191