Investments

6 Months Ended

Jun. 30, 2011


Note 6.	Investments

Investment Securities, Available-for-Sale

As of June 30, 2011 and December 31, 2010, our investment securities, available-for-sale were as follows:


	June 30, 2011									December 31, 2010
			Gross		Gross							Gross		Gross
	Amortized		Unrealized		Unrealized			Fair		Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value
	($ in thousands)

Agency callable notes	$	124,984	$	575	$	(569	)	$	124,990	$	164,219	$	418	$	(1,749	)	$	162,888
Agency debt		55,918		1,046		—			56,964		102,263		1,167		—			103,430
Agency discount notes		—		—		—			—		164,917		57		—			164,974
Agency MBS		1,110,767		23,456		(696	)		1,133,527		860,441		15,035		(5,321	)		870,155
Asset-backed securities		18,874		1,016		—			19,890		—		—		—			—
Collateralized loan obligation		10,285		10,161		—			20,446		12,249		—		—			12,249
Corporate debt		5,730		63		(15	)		5,778		5,013		122		—			5,135
Equity security		202		318		—			520		202		61		—			263
Municipal bond		3,235		—		—			3,235		—		—		—			—
Non-agency MBS		87,558		1,258		(1,203	)		87,613		112,917		1,640		(873	)		113,684
U.S. Treasury and agency securities		19,796		—		(16	)		19,780		90,587		24		(478	)		90,133

Total	$	1,437,349	$	37,893	$	(2,499	)	$	1,472,743	$	1,512,808	$	18,524	$	(8,421	)	$	1,522,911

Included in investment securities, available-for-sale, were callable notes issued by Fannie Mae, Freddie Mac, the FHLB and Federal Farm Credit Bank (“Agency callable notes”), bonds issued by the Federal Home Loan Bank (“FHLB”) (“Agency debt”), discount notes issued by Fannie Mae, Freddie Mac and the FHLB (“Agency discount notes”), commercial and residential mortgage-backed securities issued and guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae (“Agency MBS”), asset-backed securities, investments in a collateralized loan obligation, corporate debt, an equity security, a municipal bond, commercial and residential mortgage-backed securities issued by non-government agencies (“Non-agency MBS”), and U.S. Treasury and agency securities.

The amortized cost and fair value of investment securities, available-for-sale that CapitalSource Bank pledged as collateral as of June 30, 2011 and December 31, 2010 were as follows:


	June 30, 2011				December 31, 2010
Source	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	($ in thousands)

FHLB	$	764,161	$	781,921	$	877,766	$	889,888
FRB		19,942		18,843		35,056		34,256
Non-government Correspondent Bank(1)		39,992		39,992		37,979		37,989
Government Agency(2)		27,651		28,512		29,069		29,305

Total	$	851,746	$	869,268	$	979,870	$	991,438


(1)		Represents the amounts CapitalSource Bank pledged as collateral for letters of credit and foreign exchange contracts.

(2)		Represents the amounts CapitalSource Bank pledged as collateral to secure funds deposited by a local government agency.

Realized gains or losses resulting from the sale of investments are calculated using the specific identification method and are included in gain on investments, net in our consolidated statements of operations. Proceeds and gross pre-tax gains from sales of investment securities, available-for-sale 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
	($ in thousands)

Proceeds from sales	$	—	$	19,500	$	70,206	$	39,500
Gross pre-tax gains from sales		—		877		14,507		1,616

During the three and six months ended June 30, 2011, we recognized $10.4 million and $15.3 million, respectively, of net unrealized after-tax gains, related to our investment securities, available-for-sale, as a component of accumulated other comprehensive income, net in our consolidated balance sheets.

During the six months ended June 30, 2011, we recorded $1.5 million of other-than-temporary impairments (“OTTI”) on our investment securities, available-for-sale, included as a component of gain on investments, net, in our consolidated statements of operations, related to a decline in the fair value of one municipal bond. We did not record any OTTI during the three months ended June 30, 2011. We recorded no OTTI during the three months ended June 30, 2010, and $0.3 million of OTTI during the six months ended June 30, 2010, as a component of gain on investments, net in our consolidated statements of operations, related to a decline in the fair value of our equity security.

Investment Securities, Held-to-Maturity

Investment securities, held-to-maturity consists of commercial mortgage-backed securities rated AAA held by CapitalSource Bank. The amortized costs and estimated fair values of the investment securities, held-to-maturity, that CapitalSource Bank pledged as collateral as of June 30, 2011 and December 31, 2010 were as follows:


	June 30, 2011				December 31, 2010
Source	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	($ in thousands)

FHLB	$	12,178	$	13,175	$	21,260	$	22,431
FRB		113,018		118,109		143,927		153,756

Total	$	125,196	$	131,284	$	165,187	$	176,187

Unrealized Losses on Investment Securities

As of June 30, 2011 and December 31, 2010, the gross unrealized losses and fair values of investment securities that were in unrealized loss positions were as follows:


	Less Than 12 Months					12 Months or More					Total
	Gross					Gross					Gross
	Unrealized			Fair		Unrealized			Fair		Unrealized			Fair
	Losses			Value		Losses			Value		Losses			Value
	($ in thousands)

As of June 30, 2011
Investment securities, available-for-sale:
Agency callable notes	$	(569	)	$	29,415	$	—		$	—	$	(569	)	$	29,415
Agency MBS		(696	)		127,134		—			—		(696	)		127,134
Corporate debt		(15	)		—		—			—		(15	)		—
Non-agency MBS		(5	)		1,841		(1,198	)		22,175		(1,203	)		24,016
U.S. Treasury and agency securities		(16	)		19,780		—			—		(16	)		19,780

Total investment securities, available-for-sale	$	(1,301	)	$	178,170	$	(1,198	)	$	22,175	$	(2,499	)	$	200,345

Total investment securities, held-to-maturity(1)	$	(261	)	$	43,323	$	—		$	—	$	(261	)	$	43,323

As of December 31, 2010
Investment securities, available-for-sale:
Agency callable notes	$	(1,749	)	$	92,471	$	—		$	—	$	(1,749	)	$	92,471
Agency MBS		(5,321	)		252,844		—			—		(5,321	)		252,844
Non-agency MBS		(835	)		20,905		(38	)		8,384		(873	)		29,289
U.S. Treasury and agency securities		(478	)		20,151		—			—		(478	)		20,151

Total investment securities, available-for-sale	$	(8,383	)	$	386,371	$	(38	)	$	8,384	$	(8,421	)	$	394,755

Total investment securities, held-to-maturity(1)	$	(97	)	$	13,524	$	—		$	—	$	(97	)	$	13,524


(1)		Consists of commercial mortgage-backed securities rated AAA held by CapitalSource Bank.

Securities in unrealized loss positions are analyzed individually as part of our ongoing assessment of OTTI, and we do not believe that any unrealized losses in our portfolio as of June 30, 2011 and December 31, 2010 represent an OTTI. The losses are primarily related to two Agency callable notes, two Agency MBS, and three non-Agency MBS. The unrealized losses are attributable to fluctuations in their market prices due to current market conditions and interest rate levels. Agency securities have the highest debt rating and are backed by government-sponsored entities. The non-Agency MBS securities also have strong debt ratings and debt metrics. As such, we expect to recover the entire amortized cost basis of the impaired securities. We have the ability and the intention to hold these securities until their fair values recover to cost or maturity.

Contractual Maturities

As of June 30, 2011, the contractual maturities of our available-for-sale and held-to-maturity investment securities were as follows:


	Investment Securities,				Investment Securities,
	Available-for-Sale				Held-to-Maturity
			Estimated				Estimated
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	($ in thousands)

Due in one year or less	$	25,024	$	25,177	$	—	$	—
Due after one year through five years		149,846		151,150		26,348		30,535
Due after five years through ten years(1)		86,010		89,458		—		—
Due after ten years(2)(3)		1,176,469		1,206,958		109,902		111,767

Total	$	1,437,349	$	1,472,743	$	136,250	$	142,302


(1)		Includes Agency and Non-agency MBS, with fair values of $31.5 million and $38.1 million, respectively, and weighted-average expected maturities of 2.62 years and 1.31 years, respectively, based on interest rates and expected prepayment speeds as of June 30, 2011.

(2)		Includes Agency and Non-agency MBS, including CMBS, with fair values of $1.1 billion and $161.3 million, respectively, and weighted-average expected maturities of 3.70 years and 2.66 years, respectively, based on interest rates and expected prepayment speeds as of June 30, 2011.

(3)		Includes securities with no stated maturity.

Other Investments

As of June 30, 2011 and December 31, 2010, our other investments were as follows:


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

Investments carried at cost	$	32,826	$	33,062
Investments carried at fair value		210		222
Investments accounted for under the equity method		28,629		38,605

Total	$	61,665	$	71,889

Proceeds and net pre-tax gains from the sales of other investments during 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
	($ in thousands)

Proceeds from sales	$	9,923	$	16,048	$	20,020	$	25,472
Net pre-tax gains from sales		7,416		7,043		17,251		13,453

During the three and six months ended June 30, 2011, we recorded OTTI of $0.2 million and $0.4 million, respectively, relating to our investments carried at cost. During the three and six months ended June 30, 2010, we recorded OTTI of $0.2 million and $2.2 million, respectively, relating to our investments carried at cost.