Loans and Credit Quality

6 Months Ended

Jun. 30, 2011


Note 5.	Loans and Credit Quality

As of June 30, 2011 and December 31, 2010, our outstanding loan balance was $5.6 billion and $6.4 billion, respectively. Included in these amounts were loans held for sale and loans held for investment. As of June 30, 2011 and December 31, 2010, interest and fee receivables totaled $33.6 million and $52.7 million, respectively.

Loans Held for Sale

We determine when to sell a loan on a loan-by-loan basis and consider several factors, including the credit quality of the loan, any financing secured by the loan and any requirements related to the release of liens and use of sales proceeds, the potential sale price relative to our loan valuation, our liquidity needs, and the resources necessary to ensure an adequate recovery if we continued to hold the loan. When our analysis indicates that the proper strategy is to sell a loan, we initiate the sale process and designate the loan as held for sale.

During the three months ended June 30, 2011 and 2010, we transferred to held for sale, from held for investment, loans with a carrying value of $135.4 million, all of which were impaired, and $55.2 million, of which $41.7 million were impaired, respectively. These transfers were based on our decision to sell these loans as part of overall portfolio management and workout strategies. We incurred $1.4 million and $7.5 million of losses due to valuation adjustments at the time of transfer during the three months ended June 30, 2011 and 2010, respectively. We did not reclassify any loans from held for sale to held for investment during the three months ended June 30, 2011 and 2010, respectively.

During the six months ended June 30, 2011 and 2010, we transferred to held for sale, from held for investment, loans with a carrying value of $165.7 million, all of which were impaired, and $92.8 million, of which $70.7 million were impaired, respectively. We incurred $1.4 million and $7.5 million of losses due to valuation adjustments at the time of transfer for the six months ended June 30, 2011 and 2010, respectively. We reclassified $28.6 million and $10.5 million of loans from held for sale to held for investment during the six months ended June 30, 2011 and 2010, respectively, based upon our intent to retain these loans for investment.

During the three and six months ended June 30, 2011, we recognized net pre-tax gains of $3.1 million and $4.4 million, respectively, related to sales of loans. During the three and six months ended June 30, 2010, we recognized net pre-tax losses of $7.6 million and $7.5 million, respectively, related to sales of loans.

As of June 30, 2011 and December 31, 2010, loans held for sale with an outstanding balance of $118.7 million and $14.7 million, respectively, were classified as non-accrual loans. We did not record any fair value write-downs on non-accrual loans held for sale during the three and six months ended June 30, 2011. We recorded $5.6 million in fair value write-downs on non-accrual loans held for sale during the three and six months ended June 30, 2010.

Loans Held for Investment

Loans held for investment are recorded at the principal amount outstanding, net of deferred loan costs or fees and any discounts received or premiums paid on purchased loans. We maintain an allowance for loan and lease losses for loans held for investment, which is calculated based on management’s estimate of incurred loan losses inherent in our loan portfolio as of the balance sheet date. This methodology is used consistently to develop our allowance for loan losses for all loans in our loan portfolio, and, as such, we maintain a single portfolio segment. The loans in our portfolio are grouped into seven loan classes, based on the level that we use to assess and monitor the risk and performance of the portfolio, including the nature of the borrower, collateral and lending arrangement.

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 identified as troubled debt restructurings (“TDRs”) as defined by GAAP.

During the three and six months ended June 30, 2011, we purchased loans held for investment with an unpaid principal balance of $32.0 million and $347.3 million, respectively. As of June 30, 2011 and December 31, 2010, the carrying value of each class of loans held for investment, separated by performing and non-performing categories, was as follows:


	June 30, 2011						December 31, 2010
Class	Performing		Non-Performing		Total		Performing		Non-Performing		Total
	($ in thousands)

Asset-based	$	1,057,201	$	112,346	$	1,169,547	$	1,352,039	$	194,625	$	1,546,664
Cash flow		1,619,384		204,656		1,824,040		1,558,783		264,786		1,823,569
Healthcare asset-based		252,910		2,101		255,011		269,339		2,925		272,264
Healthcare real estate		480,176		27,328		507,504		841,774		28,866		870,640
Multi-family		722,564		1,811		724,375		328,300		11,010		339,310
Real estate		594,696		192,290		786,986		725,972		356,087		1,082,059
Small business		126,657		11,025		137,682		101,761		10,171		111,932

Total(1)	$	4,853,588	$	551,557	$	5,405,145	$	5,177,968	$	868,470	$	6,046,438


(1)		Excludes loans held for sale. Balances are net of deferred loan fees and discounts.

As of June 30, 2011 and December 31, 2010, CapitalSource Bank pledged loans held for investment with an unpaid principal balance of $367.2 million and $166.1 million, respectively, to the Federal Home Loan Bank of San Francisco (“FHLB SF”) as collateral for its financing facility.

Credit risk within our loan portfolio is the risk of loss arising from adverse changes in a client’s or counterparty’s ability to meet its financial obligations under agreed-upon terms. 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 use a variety of tools to continuously monitor a client’s 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.

Credit risk management for the loan portfolio begins with an assessment of the credit risk profile of a client generally based on an analysis of the client’s payment performance, cash flow and financial position. As part of the overall credit risk assessment of a client, each credit exposure is assigned an internal 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 two factors: financial performance and collateral. Subsequent to loan origination, risk ratings are monitored on an ongoing basis. If necessary, risk ratings are adjusted to reflect changes in the client’s financial condition, cash flow or financial position. We use risk rating aggregations to measure and evaluate concentrations within the loan portfolio. In making decisions regarding credit, we consider risk rating, collateral and industry concentration limits.

We believe that the likelihood of not being paid according to the contractual terms of a loan is, in large part, dependent upon the assessed level of risk associated with the loan. The internal rating that is assigned to a loan provides a view as to the relative risk of each loan. We employ an internal risk rating scale to establish a view of the credit quality of each loan. This scale is based on the credit classifications of assets as prescribed by government regulations and industry standards and is separated into the following groups:


	•	Pass — Loans with standard, acceptable levels of credit risk;

	•	Special mention — Loans that have potential weaknesses that deserve close attention, and which, if left uncorrected, may result in a loss or deterioration of our credit position;


	•	Substandard — Loans that are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected; and

	•	Doubtful — Loans that have all the weaknesses inherent in those classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full improbable based on currently existing facts, conditions, and values.

As of June 30, 2011 and December 31, 2010, the carrying value of each class of loans held for investment, by internal risk rating, was as follows:


	Internal Risk Rating
Class	Pass		Special Mention		Substandard		Doubtful		Total
	($ in thousands)

As of June 30, 2011:
Asset-based	$	856,917	$	140,533	$	99,366	$	72,731	$	1,169,547
Cash flow		1,313,942		84,324		382,544		43,230		1,824,040
Healthcare asset-based		216,726		28,879		8,391		1,015		255,011
Healthcare real estate		417,998		40,362		44,978		4,166		507,504
Multi-family		714,939		4,463		3,162		1,811		724,375
Real estate		397,966		38,395		248,843		101,782		786,986
Small business		121,607		3,918		7,497		4,660		137,682

Total(1)	$	4,040,095	$	340,874	$	794,781	$	229,395	$	5,405,145

As of December 31, 2010:
Asset-based	$	1,207,990	$	39,612	$	169,986	$	129,076	$	1,546,664
Cash flow		1,110,779		216,399		350,287		146,104		1,823,569
Healthcare asset-based		245,486		9,243		15,509		2,026		272,264
Healthcare real estate		773,955		37,730		47,090		11,865		870,640
Multi-family		330,017		—		8,919		374		339,310
Real estate		396,044		98,401		470,034		117,580		1,082,059
Small business		97,444		6,278		5,514		2,696		111,932

Total(1)	$	4,161,715	$	407,663	$	1,067,339	$	409,721	$	6,046,438


(1)		Excludes loans held for sale. Balances are net of deferred loan fees and discounts.

Non-Accrual and Past Due Loans

We will place a loan on non-accrual status if there is substantial doubt about the borrower’s ability to service its debt and other obligations or if the loan is 90 or more days past due and is not well-secured and in the process of collection. When a loan is placed on non-accrual status, accrued and unpaid interest is reversed and the recognition of interest and fee income on that loan will stop until factors no longer indicate collection is doubtful and the loan has been brought current. Payments received on non-accrual loans are generally first applied to principal. A loan may be returned to accrual status when its interest or principal is current, repayment of the remaining contractual principal and interest is expected or when the loan otherwise becomes well-secured and is in the process of collection. Cash payments received from the borrower and applied to the principal balance of the loan while the loan was on non-accrual status are not reversed if a loan is returned to accrual status.

As of June 30, 2011 and December 31, 2010, the carrying value of non-accrual loans was as follows:


	June 30, 2011		December 31, 2010
	($ in thousands)

Asset-based	$	73,820	$	142,847
Cash flow		113,996		183,606
Healthcare asset-based		2,101		2,925
Healthcare real estate		27,328		28,866
Multi-family		1,811		11,010
Real estate		110,274		265,615
Small business		5,997		4,980

Total(1)	$	335,327	$	639,849


(1)		Excludes loans held for sale and purchased credit impaired loans. Balances are net of deferred loan fees and discounts.

As of June 30, 2011 and December 31, 2010, the delinquency status of loans in our loan portfolio was as follows:


											Greater than 90
	30-89 Days		Greater than 90								Days Past Due and
	Past Due		Days Past Due		Total Past Due		Current		Total Loans		Accruing
	($ in thousands)

As of June 30, 2011:
Asset-based	$	—	$	20,424	$	20,424	$	1,142,382	$	1,162,806	$	1,982
Cash flow		751		36,304		37,055		1,786,985		1,824,040		—
Healthcare asset-based		—		—		—		255,011		255,011		—
Healthcare real estate		—		21,167		21,167		483,430		504,597		—
Multi-family		205		349		554		723,821		724,375		—
Real estate		—		91,579		91,579		692,950		784,529		37,870
Small business		2,297		4,606		6,903		125,751		132,654		—

Total(1)	$	3,253	$	174,429	$	177,682	$	5,210,330	$	5,388,012	$	39,852

As of December 31, 2010:
Asset-based	$	8,074	$	27,130	$	35,204	$	1,500,537	$	1,535,741	$	3,244
Cash flow		10,573		60,644		71,217		1,752,352		1,823,569		—
Healthcare asset-based		—		—		—		272,264		272,264		—
Healthcare real estate		—		25,887		25,887		840,527		866,414		—
Multi-family		2,324		9,293		11,617		327,692		339,309		—
Real estate		54		148,197		148,251		924,590		1,072,841		45,783
Small business		4,317		4,981		9,298		97,444		106,742		—

Total(1)	$	25,342	$	276,132	$	301,474	$	5,715,406	$	6,016,880	$	49,027


(1)		Excludes loans held for sale and purchased credit impaired loans. Balances are net of deferred loan fees and discounts.

Impaired Loans

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 loans where we expect to encounter a significant delay in the collection of and/or a shortfall in the amount of contractual payments due to us.

Assessing the likelihood that a loan will not be paid according to its contractual terms involves the consideration of all relevant facts and circumstances and requires a significant amount of judgment. For such purposes, factors that are considered include:


	•	The current performance of the borrower;

	•	The current economic environment and financial capacity of the borrower to preclude a default;

	•	The willingness of the borrower to provide the support necessary to preclude a default (including the potential for successful resolution of a potential problem through modification of terms); and

	•	The borrower’s equity position in, and the value of, the underlying collateral, if applicable, based on our best estimate of the fair value of the collateral.

In assessing the adequacy of available evidence, we consider whether the receipt of payments is dependent on the fiscal health of the borrower or the sale, refinancing or foreclosure of the loan.

We continue to recognize interest income on loans that have been identified as impaired but that have not been placed on non-accrual status.

As of June 30, 2011 and December 31, 2010, information pertaining to our impaired loans was as follows:


	June 30, 2011							December 31, 2010
	Carrying		Legal Principal		Related			Carrying		Legal Principal		Related
	Value(1)		Balance(2)		Allowance			Value(1)		Balance(2)		Allowance
	($ in thousands)

With no related allowance recorded:
Asset-based	$	68,304	$	88,150	$	—		$	96,514	$	180,659	$	—
Cash flow		125,586		207,183		—			128,658		205,454		—
Healthcare asset-based		876		1,127		—			463		825		—
Healthcare real estate		27,328		33,826		—			18,881		19,892		—
Multi-family		1,606		2,616		—			11,010		15,402		—
Real estate		96,143		162,732		—			323,292		407,423		—
Small business		9,354		17,182		—			9,861		17,708		—

Total(1)		329,197		512,816		—			588,679		847,363		—
With allowance recorded:
Asset-based		44,041		59,899		(6,246	)		98,762		112,732		(21,684	)
Cash flow		79,070		104,847		(8,136	)		142,171		191,172		(33,069	)
Healthcare asset-based		1,226		11,913		(467	)		2,462		11,614		(675	)
Healthcare real estate		—		—		—			9,984		11,278		(2,323	)
Multi-family		205		279		(19	)		—		—		—
Real estate		22,819		45,308		(2,502	)		69,128		92,833		(21,076	)
Small business		1,670		1,826		(490	)		310		359		(141	)

Total(1)		149,031		224,072		(17,860	)		322,817		419,988		(78,968	)

Total impaired loans	$	478,228	$	736,888	$	(17,860	)	$	911,496	$	1,267,351	$	(78,968	)


(1)		Carrying value of impaired loans before applying specific reserves. Excludes loans held for sale. Balances are net of deferred loan fees and discounts.

(2)		Represents the contractual amounts owed to us by borrowers.

Average balances and interest income recognized on impaired loans by loan class for the three and six months ended June 30, 2011 and 2010 were as follows:


	Three Months Ended June 30,								Six Months Ended June 30,
	2011				2010				2011				2010
	Average		Interest Income		Average		Interest Income		Average		Interest Income		Average		Interest Income
	Balance		Recognized(1)		Balance		Recognized(1)		Balance		Recognized(1)		Balance		Recognized(1)
	($ in thousands)

No allowance recorded:
Asset-based	$	69,557	$	622	$	180,428	$	1,774	$	75,611	$	1,392	$	153,946	$	3,396
Cash flow		115,414		2,501		176,717		1,325		122,127		3,721		221,047		4,012
Healthcare asset-based		1,421		101		3,930		—		1,002		101		2,327		131
Healthcare real estate		21,852		165		22,128		—		20,579		165		20,902		—
Multi-family		7,198		—		140		—		8,813		—		315		—
Real estate		188,509		1,245		202,883		2,283		246,797		2,921		141,697		2,352
Small business		10,129		—		—		—		10,014		—		—		—

Total		414,080		4,634		586,226		5,382		484,943		8,300		540,234		9,891
With allowance recorded:
Asset-based		41,694		—		54,632		—		61,933		—		52,334		—
Cash flow		126,335		831		123,235		210		137,642		1,663		98,987		545
Healthcare asset-based		811		—		5,233		—		1,429		—		5,428		—
Healthcare real estate		8,802		—		13,583		90		9,296		—		9,698		180
Multi-family		1,242		—		15,716		—		710		—		18,078		—
Real estate		31,509		—		528,715		—		45,901		—		539,390		201
Small business		511		—		—		—		425		—		—		—

Total		210,904		831		741,114		300		257,336		1,663		723,915		926

Total impaired loans	$	624,984	$	5,465	$	1,327,340	$	5,682	$	742,279	$	9,963	$	1,264,149	$	10,817


(1)		We recognized no cash basis interest income on impaired loans during the three months ended June 30, 2011, and we recognized $0.2 million of cash basis interest on impaired loans during the three months ended June 30, 2010. The amounts of cash basis interest income that were recognized on impaired loans were $0.1 million and $0.3 million during the six months ended June 30, 2011 and 2010, respectively.

As of June 30, 2011 and December 31, 2010, the carrying value of impaired loans with no related allowance recorded was $329.2 million and $588.7 million, respectively. Of these amounts, $143.2 million and $222.4 million, respectively, related to loans that were charged off to their carrying values. These charge offs were primarily the result of collateral dependent loans for which ultimate collection depends solely on the sale of the collateral. The remaining $186.0 million and $366.3 million related to loans that had no recorded charge offs or specific reserves as of June 30, 2011 and December 31, 2010, respectively, based on our estimates that we ultimately will collect all principal amounts due.

If our non-accrual loans had performed in accordance with their original terms, interest income would have been increased by $28.7 million and $61.7 million for the three and six months ended June 30, 2011, respectively, and $39.9 million and $79.4 million for the three and six months ended June 30, 2010, respectively.

Allowance for Loan Losses

Our allowance for loan losses represents management’s estimate of incurred loan losses inherent in our loan and lease portfolio as of the balance sheet date. The estimation of the allowance for loan losses is based on a variety of factors, including past loan loss experience, the current credit profile and financial position 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. Provisions for loan 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 quarterly and systematic detailed reviews of our loan portfolio to identify credit risks and to assess the overall collectability of the portfolio. The allowance on certain pools of loans with similar characteristics is estimated using reserve factors that are reflective of historical loss rates.

Our portfolio is reviewed regularly, and, on a periodic basis, individual loans are reviewed and assigned a risk rating. Loans subject to individual reviews are analyzed and segregated by risk according to our internal risk rating scale. These risk ratings, in conjunction with an analysis of historical loss experience, current economic conditions, industry performance trends, and any other pertinent information, including individual valuations on impaired 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 the recorded investment in an impaired loan exceeds the present value of payments expected to be received, the fair value of the collateral and/or the loan’s observable market price, a specific allowance is established as a component of the allowance for loan losses.

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 through 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. 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. Reserves for losses related to unfunded commitments are included within other liabilities on our audited consolidated balance sheets.

Activity in the allowance for loan losses related to our loans held for investment for the three and six months ended June 30, 2011 and 2010, respectively, was as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
	($ in thousands)

Balance as of beginning of period	$	283,274		$	686,193		$	329,122		$	586,696
Charge offs		(83,468	)		(125,369	)		(179,930	)		(236,631	)
Recoveries		2,563			296			15,976			302

Net charge offs		(80,905	)		(125,073	)		(163,954	)		(236,329	)
Charge offs upon transfer to held for sale		(4,754	)		(7,749	)		(12,362	)		(15,936	)
Provision for loan losses		1,523			25,262			46,332			244,202

Balance as of end of period	$	199,138		$	578,633		$	199,138		$	578,633

As of June 30, 2011 and December 31, 2010, the balances of the allowance for loan losses and the carrying value of loans held for investment disaggregated by impairment methodology were as follows:


	June 30, 2011					December 31, 2010
			Allowance for Loan					Allowance for Loan
	Loans		Losses			Loans		Losses
	($ in thousands)

Individually evaluated for impairment	$	472,337	$	(17,860	)	$	904,466	$	(78,019	)
Collectively evaluated for impairment		4,993,266		(181,278	)		5,217,393		(249,912	)
Acquired loans with deteriorated credit quality		17,133		—			31,017		(1,191	)

Total	$	5,482,736	$	(199,138	)	$	6,152,876	$	(329,122	)

Troubled Debt Restructurings (“TDRs”)

During the three and six months ended June 30, 2011, loans with an aggregate carrying value, which includes principal, deferred fees and accrued interest, of $68.7 million and $223.5 million, respectively, as of their respective restructuring dates, were involved in TDRs. During the three and six months ended June 30, 2010, loans with an aggregate carrying value of $361.0 million and $561.9 million, respectively, as of their respective restructuring dates, were involved in TDRs. Loans involved in TDRs are assessed as impaired, generally for a period of at least one year following the restructuring. A loan that has been involved in a TDR might no longer be assessed as impaired one year subsequent to the restructuring, assuming the loan performs under the restructured terms and the restructured terms were at market. As of June 30, 2011, two loans with an aggregate carrying value of $35.6 million that had been previously restructured in a TDR were not classified as impaired as they performed in accordance with the restructured terms for twelve consecutive months. As of December 31, 2010, all of our loans restructured in TDRs were classified as impaired loans.

The aggregate carrying values of loans that had been restructured in TDRs as of June 30, 2011 and December 31, 2010 were as follows:


	June 30,		December 31,
	2011		2010
	($ in thousands)

Non-accrual	$	291,317	$	400,851
Accruing		163,034		154,262

Total	$	454,351	$	555,113

We recorded charge offs related to these restructured loans of $63.7 million and $134.4 million, respectively, for the three and six months ended June 30, 2011, and $52.4 million and $80.6 million, respectively, for the three and six months ended June 30, 2010. The specific reserves related to these loans were $11.5 million and $35.5 million as of June 30, 2011 and December 31, 2010, respectively.

For a loan that accrues interest immediately after that loan is restructured in a TDR, we generally do not charge off a portion of the loan as part of the restructuring. If a portion of a loan has been charged off, we will not accrue interest on the remaining portion of the loan if the charged off portion is still contractually due from the borrower. However, if the charged off portion of the loan is legally forgiven through concessions to the borrower, then the restructured loan may be placed on accrual status if the remaining contractual amounts due on the loan are reasonably assured of collection. In addition, for certain TDRs, especially those involving a commercial real estate loan, we may split the loan into an A note and a B note, placing the performing A note on accrual status and charging off the B note. For an amortizing loan with monthly payments, the borrower is required to demonstrate sustained payment performance for a minimum of six months to return a non-accrual restructured loan to accrual status.

Our evaluation of whether collection of interest and principal is reasonably assured is based on the facts and circumstances of each individual borrower and our assessment of the borrower’s ability and intent to repay in accordance with the revised loan terms. We generally consider such factors as historical operating performance and payment history of the borrower, indications of support by sponsors and other interest holders, the terms of the modified loan, the value of any collateral securing the loan and projections of future performance of the borrower as part of this evaluation.

Foreclosed Assets

Real Estate Owned (“REO”)

When we foreclose on a real estate asset that collateralizes a loan, we record the asset at its estimated fair value less costs to sell at the time of foreclosure if the related REO is classified as held for sale. Upon foreclosure, we evaluate the asset’s fair value as compared to the loan’s carrying amount and record a charge off when the carrying amount of the loan exceeds fair value less costs to sell. For REO determined to be held for sale, subsequent valuation adjustments are recorded as a valuation allowance, which is recorded as a component of net expense of real estate owned and other foreclosed assets in our consolidated statements of operations. REO that does not meet the criteria of held for sale is classified as held for use and initially recorded at its fair value. The real estate asset is subsequently depreciated over its estimated useful life. Fair value adjustments on REO held for use are recorded only if the carrying amount of an asset is not recoverable and exceeds its fair value.

As of June 30, 2011 and December 31, 2010, we had $47.0 million and $92.3 million, respectively, of REO classified as held for sale, which was recorded in other assets in our consolidated balance sheets. Activity related to REO held for sale for the three and six months ended June 30, 2011 and 2010 was as follows:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
	($ in thousands)

Balance as of beginning of period	$	70,050		$	136,277		$	92,265		$	101,401
Acquired in business combination		—			2,014			—			2,014
Transfers from loans held for investment and other assets		8,840			23,765			13,589			78,331
Fair value adjustments		(11,080	)		(11,186	)		(13,124	)		(27,234	)
Transfers from REO held for use		—			—			—			2,850
Real estate sold		(20,798	)		(11,920	)		(45,718	)		(18,412	)

Balance as of end of period	$	47,012		$	138,950		$	47,012		$	138,950

During the three and six months ended June 30, 2011, we recognized gains of $1.1 million and $1.4 million, respectively, on the sales of REO held for sale as a component of net expense of real estate owned and other foreclosed assets in our consolidated statements of operations. During the three and six months ended June 30, 2010, we recognized losses of $1.1 million and $1.4 million, respectively, on the sales of REO held for sale as a component of net expense of real estate owned and other foreclosed assets in our consolidated statements of operations.

As of June 30, 2011 and December 31, 2010, we had $1.4 million of REO classified as held for use, which was recorded in other assets in our consolidated balance sheets. We did not recognize any impairment losses on REO classified as held for use during the three and six months ended June 30, 2011. During the three and six months ended June 30, 2010, we recognized impairment losses of $5.6 million and $10.2 million, respectively, on REO held for use as a component of net expense of real estate owned and other foreclosed assets in our consolidated statements of operations.

Other Foreclosed Assets

When we foreclose on a borrower whose underlying collateral consists of loans, we record the acquired loans at the estimated fair value less costs to sell at the time of foreclosure. At the time of foreclosure, we record charge offs when the carrying amount of the original loan exceeds the estimated fair value of the acquired loans. We may also write down or record allowances on the acquired loans subsequent to foreclosure if such loans experience additional credit deterioration. As of June 30, 2011 and December 31, 2010, we had $24.9 million and $55.8 million, respectively, of loans acquired through foreclosure, net of allowances of $0.4 million and $3.2 million, respectively, which were recorded in other assets in our consolidated balance sheets. Provision for losses and gains and losses on sales on our other foreclosed assets, which were recorded as a component of net expense of real estate owned and other foreclosed assets in our consolidated statements of operations, for the three and six months ended June 30, 2011 and 2010 were as follows:


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2011			2010		2011		2010
	($ in thousands)

(Recovery) provision for losses on other foreclosed assets	$	(398	)	$	23,699	$	7,405	$	38,869
(Losses) gains on sales of other foreclosed assets		(32	)		—		1,647		—