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CSE > SEC Filings for CSE > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for CAPITALSOURCE INC


3-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q, including the footnotes to our unaudited consolidated financial statements included herein, contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including certain plans, strategies, goals, and projections and including statements about our interest spread, asset yield and interest rate risk management, Parent Company asset run off, CapitalSource Bank net interest margin, CapitalSource Bank loan and lease portfolio growth and production, Parent Company and CapitalSource Bank liquidity, our expectations regarding the timing of our BHC filing and approval and converting CapitalSource Bank's charter to a commercial charter, unfunded loan commitments, capital management strategies, including share repurchases, loan repayments, and expectation about the deferred tax asset valuation allowance reversal. All statements contained in this Form 10-Q that are not clearly historical in nature are forward-looking, and the words "anticipate," "assume," "intend," "believe," "forecast," "expect," "estimate," "plan," "continue," "will," "should," "look forward" and similar expressions are generally intended to identify forward-looking statements. All forward-looking statements (including statements regarding future financial and operating results and future transactions and their results) involve risks, uncertainties and contingencies, many of which are beyond our control, which may cause actual results, performance, or achievements to differ materially from anticipated results, performance or achievements. Actual results could differ materially from those contained or implied by such statements for a variety of factors, including without limitation: changes in economic or market conditions or investment or lending opportunities; changes in interest rates and lending spreads; competitive and other market pressures on product pricing and services; unfavorable changes in asset mix; changes in the forward yield curve; increases or decreases in market interest rates; changes in the relationship between yields on investments and loans repaid and yields on assets reinvested; deteriorations or disruptions in credit and other markets; borrowers' lack of financial strength or other inability to repay loans; the Parent Company's decision to make new loans or extend existing loans may affect the timing of loan portfolio run off; compression of spreads on newly originated loans; higher than anticipated payoff levels on higher yielding loans; changes in our loan products could further compress NIM; changes in economic or competitive market conditions could negatively impact investment or lending opportunities or product pricing and services; reduced demand for our services; our inability to grow deposits and access wholesale funding sources; regulatory safety and soundness considerations could increase capital requirements; the success and timing of other business strategies and asset sales; drawdown of Parent Company unfunded commitments substantially in excess of historical drawings; lower than expected Parent Company's recurring tax basis income; lower than expected taxable income at CapitalSource Bank for which CapitalSource Bank has to reimburse the Parent Company for income tax expenses in accordance with the tax sharing agreement; higher than anticipated capital needs due to strategic or regulatory reasons; continued or worsening credit losses, charge offs, reserves and delinquencies; we may experience regulatory delay; unanticipated regulatory restrictions on our ability to return capital could cause us to reassess the timing of our BHC application; we may not receive the regulatory approvals needed to become a bank holding company within our expected timeframe or at all and alternative approaches to charter conversion may be unavailable or may not succeed; declines in asset values; the need to retain capital for strategic or regulatory reasons including the implementation of Basel III standards; stock price fluctuations; inadequate stress testing results; inability of CapitalSource Bank to pay dividends; extension of loans; changes in tax laws or regulations affecting our business; tax planning or disallowance of tax benefits by tax authorities; and other risk factors described in our audited consolidated financial statements, and other risk factors described in this Form 10-Q and documents filed by us with the Securities and Exchange Commission (the "SEC"). All forward-looking statements included in this Form 10-Q are based on information available at the time the statement is made.
We are under no obligation to (and expressly disclaim any such obligation to) update or alter our forward-looking statements, whether as a result of new information, future events or otherwise except as required by law.
The information contained in this section should be read in conjunction with our consolidated financial statements and related notes and the information contained elsewhere in this Form 10-Q and in our Form 10-K. Overview
CapitalSource Inc., a Delaware corporation, is a commercial lender that provides financial products to small and middle market businesses nationwide and provides depository products and services to consumers in southern and central California, primarily through our wholly owned subsidiary, CapitalSource Bank (the "Bank"). References to we, us, the Company or CapitalSource refer to CapitalSource Inc. together with its subsidiaries. References to CapitalSource Bank include its subsidiaries, and references to the Parent Company refer to CapitalSource Inc. and its subsidiaries other than the Bank.
As of March 31, 2013, we had total assets of $8.5 billion, total loans of $6.2 billion, total deposits of $5.7 billion and stockholders' equity of $1.5 billion.
Our corporate headquarters is located in Los Angeles, California, and we have 21 retail bank branches located in southern and central California. Our loan origination efforts are conducted nationwide with key offices located in Chevy Chase, Maryland,


Los Angeles, Denver, Chicago, Boston, New York and Atlanta. We also maintain a number of smaller lending offices throughout the country.
For the three months ended March 31, 2013 and 2012, we operated as two reportable segments: the Bank and Other Commercial Finance. The Bank segment comprises our commercial lending and banking business activities, and our Other Commercial Finance segment comprises our loan portfolio and other business activities in the Parent Company. For additional information, see Note 15, Segment Data.

Current Developments
We offer a broad range of specialized senior secured, commercial loan products to small and middle-market businesses, and we offer our loan products on a nationwide basis. With a deposit gathering platform based in southern and central California, we believe our business model is well positioned to deliver a broad range of customized financial solutions to borrowers. Since the formation of the Bank in 2008, we have launched or acquired five lending platforms - equipment finance, small business, professional practice, multifamily lending and insurance premium finance lending. It is our intent to continue to seek lending platforms and experienced individuals who will further augment our specialized businesses.
We are pursuing our strategy of converting the Bank to a commercial bank. Our current strategy for achieving this goal involves the Parent Company becoming a bank holding company under the Bank Holding Company Act of 1956. Subject to ongoing discussions with regulatory authorities, we expect to file an application to convert the existing industrial bank charter of the Bank to a commercial charter and to file an application for the Parent Company to become a bank holding company. This process is moving forward and we continue to expect it can be concluded during 2013. There is no assurance that any of the regulatory authorities will approve our applications.
Our broader business focus includes operating the Bank. As of March 31, 2013 and 2012, the Bank had $7.6 billion and $7.0 billion of assets, respectively. In the first quarter of 2013, the Bank's loan portfolio grew by approximately $205.7 million or 3.6%, while the loan portfolio of the Parent Company decreased by $171.2 million or 32.9%; resulting in net loan growth of $34.5 million. The credit profile improved as non-performing assets as of March 31, 2013 were $36.0 million, or 0.5% of total assets, a decrease of $12.3 million from December 31, 2012. The allowance for loan losses as of March 31, 2013 was $99.8 million or 1.7% of loans compared to $98.9 million or 1.8% of loans as of December 31, 2012.
Beyond the Bank operations, our ongoing strategy is to liquidate our remaining Parent Company assets and continue to return a substantial portion of our excess capital to shareholders through a combination of share repurchases and/or dividends. The Company began repurchasing shares in December 2010 and through March 2013, we have repurchased approximately 135.9 million shares, or 42% of the shares outstanding since December 2010. Consistent with the objective of returning excess capital to shareholders, during the fourth quarter of 2012, the Company's Board of Directors approved a new share repurchase program with authority to purchase up to $250.0 million of outstanding shares through the end of 2013.
We also continue to repay debt at the Parent Company. As of December 31, 2012, the carrying amount of our term debt securitizations was $177.2 million. In January 2013, we called the 2007-1 term debt securitization and repaid the outstanding third-party debt of $47.1 million and recognized no gain or loss on the extinguishment of debt. As of March 31, 2013, the carrying amount of our term debt securitizations was $74.2 million. Subsequently, in April 2013, amounts collected in late March and reported in restricted cash, were used to reduce the carrying value of the term debt securitizations by $39.9 million. The Bank net interest margin for the three months ended March 31, 2013 rose to 5.08% due to several factors including: the full quarter benefit of strong loan portfolio growth in late December, which was funded primarily by our excess liquidity; higher amortization of net deferred loan fees and discounts; and a series of non-recurring items, offset by the negative impact of declining yields in the loan portfolio. The net interest margin will be lower in subsequent periods due to the absence of certain non-recurring items which positively benefited the first quarter margin. In addition, we anticipate that the net interest margin will decline from the first quarter level during the balance of 2013 for two principal reasons. First, the Bank is experiencing strong competition across each of its loan products, which is depressing loan yields. Secondly, the prolonged low interest rate environment and abundant liquidity is causing a greater than normal volume of loan repayments on our higher rate loans and has caused us to lower coupon rates on some existing loans. As a counterbalance to these pressures on our net interest margin, we expect asset mix improvement as loan growth continues to be funded in part with excess liquidity. Net interest margin was 4.84%, 4.97%, 4.95%, and 5.12% for the three-months ended December 31, 2012, September 30, 2012, June 30, 2012 and March 31, 2012, respectively.


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