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John Delaney, the founder and chairman of CapitalSource in Bethesda, Md., has won the Democratic nomination for a redistricted Congressional seat and will square off against Republican incumbent Roscoe Bartlett in November's general election.
April 4 -
CapitalSource Inc. may not be drowning, but that isn't stopping the Chevy Chase, Md., finance company from looking for help.
January 6 -
CapitalSource Inc. of Chevy Chase, Md., said Tuesday that it has raised $119 million by mortgaging some of the long-term-care properties it previously agreed to sell to Omega Healthcare Investors Inc.
December 29 -
CapitalSource Inc. in Chevy Chase, Md., said it plans to give up its status as a real estate investment trust and reorganize as a bank holding company.
November 7
It is a curious case when a business wants to become a bank holding company so it can hold less capital, but that's exactly what CapitalSource (CSE) wants to do.
The commercial lender, which operates as an industrial loan company, plans to submit its bank holding company application to the Federal Reserve Board early next year. While CapitalSource's venture into the banking industry began as a liquidity strategy, the motivation to complete the transformation has shifted to capital. "The popular wisdom is that we need to change the charter so we can become like every other community bank and have checking," says Tad Lowrey, the chief executive of CapitalSource Bank, which is based in Los Angeles. "But, really, our immediate reason is the ability to lower our capital requirements."
As an industrial loan company, CapitalSource Bank is required to maintain a total risk-based capital ratio of 15%. If the Fed approves the bank holding company application, the ILC would convert to a state-chartered bank. The bank would then be able to drop its capital ratios to at least 12%.
In 2007, CapitalSource, then a Chevy Chase, Md., real estate investment trust that focused on health care lending and structured finance,
In April 2008, CapitalSource finally got its big break: regulators agreed to approve its ILC application so it could buy $5.6 billion in deposits from the undercapitalized Fremont General, avoiding what would have then been the largest bank failure in roughly 15 years.
Within months, the economy crashed, CapitalSource's own credit issues ticked up, and its application to become a bank holding company stalled. In the second quarter of 2009, the company announced that it had withdrawn the application. Early last year, there were even rumblings that the company
In ensuing years, the company shifted its focus to winding down certain assets and developing the ILC. CapitalSource's assets shrank to $8.3 billion at March 31 compared to $15.8 billion at the end of the first quarter of 2009. It also retired $3.3 billion of debt.
"We are a smaller, simpler and cleaner company," Lowrey says. Before submitting its BHC application, CapitalSource wants to further reduce its nonperforming assets and reclaim at least part of a roughly $500 million deferred tax asset.
The company's balance sheet might be smaller than it was several years earlier, but CapitalSource Bank is growing at a fast clip. It closed $522 million in loans during the first quarter and is projecting about $2.2 billion of new loans this year.
The company has retained its national lending platform. It has roughly a dozen lines of business in sectors such as health care, security, technology and equipment finance.
On Monday, CapitalSource announced that it had hired a team of lenders who will focus on premium finance, a business that helps companies pay life insurance costs up front.
In that regard, the company will always be a bit of an anomaly, even if it emerges as a full-fledged bank.
"It is a commercial finance company in a bank wrapper," says Jeff K. Davis, a longtime bank analyst familiar with the company. "In two or three years, it will be 50% larger and it will still have these attributes."
An artificially low interest rate environment has helped compensate for the company's lack of a bank holding company.
Industrial loan companies can only offer savings products, but in a low-rate environment, that is more than fine, Lowrey says. CapitalSource has a higher cost of funds than most banks, but the low interest rate environment masks the competitive disadvantage tied to the company's inability to offer noninterest-bearing products.
CapitalSource can also avoid having to build the infrastructure to offer such products.
"This way, we can stay efficient and, through our lending, produce outsized margins over 5%," Lowrey says. "This model works as long as interest rates stay low. We do not have to make a lot of financial sacrifices."
Davis says that, should the Fed approve CapitalSource's BHC application this next year, he expects the company to make a bank acquisition fairly quickly to avoid the costs and efforts of establishing a robust line up of deposit products.
"It would make sense for them to do a modest-sized acquisition rather than try to build the necessary infrastructure," Davis says.
Acquisitions are a bit of a sore subject for Lowrey. As the chief executive of a bank with a total risk-based capital ratio of 16.22%, it has been frustrating to watch the flurry of failed bank deals struck in a few years ago, along with all of the open-bank deals that have taken place in Southern California in the last year, he says.
"Not having the BHC is still a net negative," Lowrey says. "We missed out on a lot of good M&A opportunities."
