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CSE > SEC Filings for CSE > Form 10-Q on 2-Aug-2013All Recent SEC Filings

Show all filings for CAPITALSOURCE INC

Form 10-Q for CAPITALSOURCE INC


2-Aug-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 pending merger between the Parent Company and PacWest, interest spread, asset yield and interest rate risk management, loan repayments, unfunded loan commitments, CapitalSource Bank net interest margin, Parent Company and CapitalSource Bank liquidity, 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, including statements about the pending merger between the Company and PacWest, 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: the ability to complete the pending merger between the Parent Company and PacWest, including obtaining regulatory approvals and approval by the stockholders of PacWest and the Parent Company, successfully integrate the companies following completion of the merger or achieve expected beneficial synergies and/or operating efficiencies, in each case within expected time-frames or at all; the possibility that regulatory approvals may not be received on expected timeframes or at all; the possibility that personnel changes in connection with the merger may not proceed as planned; the possibility that the cost of additional capital may be more than expected; changes in the Parent Company's stock price before completion of the merger, including as a result of the financial performance of PacWest prior to closing; the reaction to the merger of the companies' customers, employees and counterparties; changes in interest rates and lending spreads; competitive and other market pressures on product pricing and services; unfavorable changes in asset mix; changes in loan repayment levels due to negative impact of rate changes to discounts and premiums; compression of spreads on newly originated loans; higher than anticipated payoff levels; changes in our loan product could further compress NIM; changes in economic or market conditions or investment or lending opportunities; borrowers' lack of financial strength to repay loans; continued or worsening credit losses, charge-offs, reserves and delinquencies; reduced demand for our services; loan repayments higher than expected; our inability to grow deposits and access wholesale funding sources; regulatory safety and soundness considerations; 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; CapitalSource Bank dividend payment to the Parent Company is less than expected; changes in tax laws or regulations affecting our business; tax planning or disallowance of tax benefits by tax authorities; 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; 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 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 June 30, 2013, we had total assets of $8.7 billion, total loans of $6.5 billion, total deposits of $5.9 billion and stockholders' equity of $1.6 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, California, Denver, Colorado, Chicago, Illinois, and New York, New York. We also maintain a number of smaller lending offices throughout the country.
For the six months ended June 30, 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. It is our intent to continue to seek lending platforms and experienced individuals who will further augment our specialized businesses.
On July 23, 2013, the Parent Company announced that it had entered into the Merger with PacWest pursuant to which the Parent Company will merge with and into PacWest. Under the terms of the Merger, stockholders of the Parent Company will receive $2.47 in cash and 0.2837 shares of PacWest common stock for each share of CapitalSource common stock. The total value of the per share merger consideration, based on the closing price of PacWest shares on July 19, 2013, is $11.64. The transaction, currently expected to close in the first quarter of 2014, is subject to customary conditions, including the approval of bank regulatory authorities and the stockholders of both companies.
Our business focus includes operating the Bank. As of June 30, 2013 and 2012, the Bank had $7.8 billion and $7.1 billion of assets, respectively. In the second quarter of 2013, the Bank's loan portfolio grew by approximately $404.4 million or 6.8%, while the loan portfolio of the Parent Company decreased by $92.2 million or 26.4%; resulting in net loan growth of $312.2 million. Non-performing assets as of June 30, 2013 were $62.3 million, or 0.8% of total assets, an increase of $14.0 million from December 31, 2012. The allowance for loan losses as of June 30, 2013 was $105.0 million or 1.7% of loans compared to $98.9 million or 1.8% of loans as of December 31, 2012.
The Bank net interest margin for the three months ended June 30, 2013 declined to 4.79% due to several factors including: declining yields in the loan portfolio, lower amortization of net deferred loan fees/discounts and the absence of certain non-recurring items which positively benefited the first quarter margin. For the remainder of 2013, we anticipate that the net interest margin will remain relatively flat as compared to the second quarter, despite the expectation of continued declines in the loan portfolio yield. The Bank's ending loan balance for the second quarter was $324 million greater than the average balance, with the loan growth funded with a combination of borrowings and increased deposit balances. This increase in loan portfolio is expected to mitigate the anticipated decline in the loan portfolio yield for the second half of this year. Net interest margin was 5.08%, 4.84%, 4.97% and 4.95% for the three months ended March 31, 2013, December 31, 2012, September 30, 2012 and June 30, 2012, respectively.
We also continue to repay debt at the Parent Company. During the six months ended June 30, 2013, we called the 2006-1, 2006-2 and 2007-1 term debt securitizations and repaid the outstanding third-party debt of $177.2 million; we recognized no gain or loss on the extinguishment of debt. As a result, as of June 30, 2013, we had no outstanding term debt securitizations. The only remaining debt at the Parent Company is the subordinated debt which begins to mature in December 2035.

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