CAPITALSOURCE (CSE)

 

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.

 

On July 25, 2008, we completed the acquisition of approximately $5.2 billion of retail deposits and 22 retail banking branches from Fremont Investment & Loan (“FIL”) and commenced operations of CapitalSource Bank, a new wholly owned subsidiary of CapitalSource (“CapitalSource Bank”). We also acquired certain systems and other infrastructure necessary for the operation of the retail branch network, $3.3 billion in cash and short-term investments and the “A” Participation Interest in a pool of commercial real estate loans (the “Participation Interest”), (which Participation Interest had an outstanding principal balance of approximately $1.9 billion as of July 25, 2008). The Participation Interest was acquired at a 3% discount to its net book value. The cash purchase price of this acquisition was approximately $162 million. We did not acquire FIL, any contingent liabilities or any business operations except FIL’s retail branch network. We intend to fund a majority of our commercial loans through CapitalSource Bank in the future.

 

On July 25, 2008, CapitalSource Bank also purchased approximately $2.1 billion in commercial loans from five of our wholly owned subsidiaries. We used the loan sale proceeds to reduce our credit facility borrowings and certain securitizations by approximately $1.6 billion. We used the remaining approximately $500 million as a portion of the initial CapitalSource Bank capitalization of $921 million.

 

We received approval from the Federal Deposit Insurance Corporation and the California Department of Financial Institutions to consummate these transactions, in each case subject to the conditions set forth in their respective regulatory approvals. These conditions include, among others, requirements that CapitalSource Bank maintain a total risk-based capital ratio of not less than 15% and an adequate allowance for loan and lease losses and, like many other de novo banks, not pay any dividends for its first three years of operations without prior approval of its regulators.

 

We and our wholly owned subsidiaries, CapitalSource TRS Inc. (“TRS”) and CapitalSource Finance LLC (“CSF” and together with CapitalSource and TRS, the “Parent Companies”), and CapitalSource Bank entered into a Capital Maintenance and Liquidity Agreement (“CMLA”) with the Federal Deposit Insurance Corporation (“FDIC”) requiring the Parent Companies to maintain CapitalSource Bank’s 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 CapitalSource and CSF 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 Companies and CapitalSource Bank also entered into a Parent Company Agreement (“Parent Agreement”) with the FDIC requiring the Parent Companies to maintain the capital levels of CapitalSource Bank at the levels required in the CMLA, and providing the Parent Companies’ consent to examination by the FDIC in order for the FDIC to monitor compliance with the laws and regulations applicable to CapitalSource and its affiliates.

 

 

On April 13, 2008, we entered into a definitive asset purchase agreement with Fremont Investment & Loan (“FIL”), a California industrial bank (the “Agreement”), pursuant to which we agreed, through a new subsidiary we will form, to assume all of FIL’s deposits (approximately $5.6 billion as of March 31, 2008) and deposit-related liabilities and to acquire 22 retail banking branches and operate them through our new bank subsidiary. Under the Agreement, we will also acquire certain systems and other infrastructure necessary for the operation of the retail branch network, approximately $3.0 billion of cash and short-term investments and the “A” participation interest in a pool of commercial real estate loans (the “Participation Interest”), which Participation Interest had an outstanding principal balance of approximately $2.7 billion as of March 31, 2008. The transaction is subject to regulatory

 

We are a commercial lending, investment and asset management company focused on the middle market. We operate as a real estate investment trust (“REIT”) and provide senior and subordinated commercial loans, invest in real estate, engage in asset management and servicing activities, and invest in residential mortgage assets. We expect to formally make an election to REIT status for 2006 when we file our tax return for the year ended December 31, 2006.

 

On January 1, 2006, we began operating as two reportable segments: 1) Commercial Lending & Investment and 2) Residential Mortgage Investment. Our Commercial Lending & Investment segment includes our commercial lending and investment business, and our Residential Mortgage Investment segment includes all of our activities related to our residential mortgage investments. For financial information about our segments, see Note 24, Segment Data, in our audited consolidated financial statements for the year ended December 31, 2006.

 

Through our commercial lending and investment activities, our primary goal is to be the leading provider of financing to middle market businesses that require customized and sophisticated financing. We provide a wide range of financial products that we negotiate and structure on a client-specific basis through direct interaction with the owners and senior managers of our clients. We also originate and participate in broadly syndicated debt financings for larger businesses. We seek to add value to our clients’ businesses by providing tailored financing that meets their specific business needs and objectives.

 

The financing needs of our clients are often specific to their particular business or situation. We believe we can most successfully meet these needs and manage risk through industry or sector expertise and flexibility in structuring financings. We offer a range of senior and subordinate mortgage loans, real estate lease financing, asset-based loans, cash flow loans, and equity investments to our clients. Because we believe specialized industry and/or sector knowledge is important to successfully serve our client base, we originate, underwrite and manage our financings through three focused commercial financing businesses organized around our areas of expertise. Focusing our efforts in these specific sectors, industries and markets allows us to rapidly design and implement