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CapitalSource Bank

FEDERAL DEPOSIT INSURANCE CORPORATION

In Re: CapitalSource Bank (Proposed)
Salt Lake City, Salt Lake County, Utah
Application for Federal Deposit Insurance
(Deposit Insurance Fund)

ORDER

The Federal Deposit Insurance Corporation (FDIC) has satisfactorily resolved the factors enumerated in section 6 of the Federal Deposit Insurance Act, as they relate to the application for Federal deposit insurance submitted by CapitalSource Bank (Bank), a proposed new Utah industrial bank to be located in Salt Lake City, Utah, and owned by CapitalSource TRS, Inc., a direct subsidiary of CapitalSource, Inc., Chevy Chase, Maryland. Accordingly, it is hereby ORDERED, for the reasons set forth in the attached Statement, that the application submitted by the Bank for Federal deposit insurance be approved, subject to the following conditions:

1. The Bank's beginning paid-in capital funds shall not be less than $127,500,000.

2. Prior to the effective date of deposit insurance, the Bank, CapitalSource TRS, Inc. (TRS), CapitalSource Finance LLC, and Capital Source, Inc. shall enter into a Capital Maintenance and Liquidity Agreement with the FDIC.

3. CapitalSource, Inc. shall submit to the FDIC an initial listing of all of its subsidiaries and update the list annually.

4. CapitalSource, Inc. consents to examination by the FDIC of it and each of its subsidiaries to monitor compliance with the provisions of the Federal Deposit Insurance Act or any other Federal law that the FDIC has specific jurisdiction to enforce against such company or subsidiary and those governing transactions and relationships between any depository institution subsidiary and its affiliates.

5. That deposit insurance shall not become effective until CapitalSource, Inc. ceases to engage in activities that are not financial activities, and that commencing on the effective date of deposit insurance, CapitalSource, Inc. shall engage, directly or indirectly, only in financial activities. (For purposes of this Order, the term "financial activity" means (1) banking, managing or controlling banks or savings associations; (2) any activity permissible for financial holding companies under 12 U.S.C. § 1843(k), any specific activity that is listed as permissible for bank holding companies under 12 U.S.C. § 1843(c) and activities that the Federal Reserve Board has permitted for bank holding companies under 12 C.F.R. § 225.28 and 225.86, and (3) any activity permissible for a all savings and loan association holding companies under 12 U.S.C. § 1467a(c)).

6. CapitalSource, Inc. shall submit to the FDIC an annual report regarding its operations and activities, in the form and manner prescribed by the FDIC, and such other reports as may be requested by the FDIC to keep the FDIC informed as to financial condition, systems for monitoring and controlling financial and operating risks, and transactions with the Bank; and compliance by CapitalSource, Inc. or its subsidiaries with applicable provisions of the Federal Deposit Insurance Act or any other Federal laws that the FDIC has specific jurisdiction to enforce against such company or subsidiary.

7. CapitalSource, Inc. shall maintain such records as the FDIC may deem necessary to assess the risks to the Bank or to the Deposit Insurance Fund.

8. CapitalSource, Inc. shall cause an independent annual audit of the Bank to be performed during the first three years after the Bank becomes a subsidiary of the company, and the Bank shall submit to the FDIC, (i) a copy of the audited annual financial statements and the independent public auditor's report thereon within 90 days after the end of the depository institution's fiscal year, (ii) a copy of any other reports by the independent auditor (including any management letters) within 15 days after their receipt by the institution, and (iii) written notification within 15 days when a change in the institution's independent auditor occurs.

9. CapitalSource, Inc. shall limit its representation, direct and indirect, on the Board of Directors of the Bank to no more than 25 percent of the members of such Board of Directors, in the aggregate.

10. Prior to the effective date of deposit insurance, the Bank and CapitalSource, Inc. shall enter into a written agreement with the FDIC whereby CapitalSource, Inc. agrees to adhere to the conditions imposed in paragraphs 3 through 9 above. (The written agreement is attached to this Order.)

11. This approval is conditioned on the facts as currently known by the FDIC. If there are any material events prior to the opening of the Bank for business, including, for example, any person or group obtaining ownership, control, or the ability to vote 10 percent or more of any class of voting shares of the Bank or any company that controls the Bank, the Bank shall notify the FDIC as soon as the Bank becomes aware of the event, and this approval may be withdrawn or modified.

12. Subsequent to the opening of the Bank for business, CapitalSource, Inc. shall provide written notification to the FDIC within 30 days of CapitalSource, Inc. becoming aware of any investor who acquires control, directly or indirectly, of 10 percent or more of the voting shares of CapitalSource, Inc. or CapitalSource TRS, Inc.

13. Prior to the effective date of deposit insurance, the Bank shall have appointed and shall thereafter maintain a Board of Directors who possess the knowledge, experience, and capability to carry out the responsibilities of the position in a safe and sound manner and independently of the activities of CapitalSource, Inc. and its affiliated entities.

14. Prior to the effective date of deposit insurance, the Bank shall have appointed and shall thereafter retain senior executive officers who possess the knowledge, experience, and capability to carry out the responsibilities of the position in a safe and sound manner and independently of the activities of CapitalSource, Inc. and its affiliated entities. Further, absent the prior written non-objection of the FDIC, each such officer's permanent place of work shall be physically located at the Bank's main office located in Salt Lake City, Utah, such that the individuals shall be capable of providing ongoing and direct oversight of the Bank's activities. At a minimum, such senior executive officers shall include (or be similarly qualified and titled) the President/Chief Executive Officer, Chief Credit Officer, and Chief Financial Officer.

15. The Bank shall obtain written approval from the FDIC prior to adding or replacing a member of the Bank's Board of Directors or any senior executive officer during the first three years of operation.

16. The Bank shall obtain written approval from the FDIC prior to employing a senior executive officer who is associated in any manner (e.g., as a director, officer, employee, agent, owner, partner, or consultant) with an affiliate of the Bank.

17. The Bank shall obtain written approval from the FDIC prior to entering into any contract for essential services with CapitalSource, Inc. or any of its affiliated entities.

18. The Bank shall notify the FDIC of any material nonperformance under any contract for essential services with CapitalSource, Inc. or any of its affiliated entities within 15 days.

19. During the first three years of operation, the Bank shall obtain written approval from the FDIC prior to consummating any proposed major deviation or material change from its business plan.

20. The Bank shall conduct business pursuant to operating policies that are commensurate with the proposed business plan, independent from those of affiliated entities, and adopted by the Board of Directors of the Bank. Also, the Board of Directors shall adopt controls reasonably designed to ensure compliance with and enforcement of such policies. Further, the Board of Directors shall ensure that executive officers are delegated reasonable authority to implement and enforce the policies independently of CapitalSource, Inc. and its affiliated entities. At a minimum, such operating policies and procedures shall encompass the Bank's lending, investment, liquidity, and asset-liability management activities.

21. The Bank shall adhere to U.S. Generally Accepted Accounting Principles, adopt an accrual accounting system for maintaining the books of the depository institution, and maintain separate accounting and other business records, including customer account records. The Bank's books and records shall be maintained under the control and direction of authorized Bank officials and available for review by the FDIC at the Bank's main office located in Salt Lake City, Utah. Further, the Bank's books and records shall be sufficiently detailed and maintained in a manner that provides Bank officials with the objective and transparent information necessary to administer the Bank's affairs.

22. Prior to the opening of the Bank for business, any changes in proposed management shall be approved by the FDIC.

23. Federal deposit insurance shall not become effective until the Bank is authorized to operate as a State bank by the State of Utah.

24. The Bank shall pay no dividends during the first three years of operations without the prior written approval of the FDIC and the State of Utah.

25. Prior to the effective date of Federal deposit insurance, the Bank shall obtain surety bond coverage in a sufficient amount to conform to generally accepted banking practices.

26. Federal deposit insurance shall not become effective unless Farallon Capital Management, LLC executes a passivity agreement with the FDIC substantially in the form of Exhibit A within 90 days of the date of this Order.

27. Federal deposit insurance shall not become effective unless Madison Dearborn Partners, LLC executes a passivity agreement with the FDIC substantially in the form of Exhibit B within 90 days of the date of this Order.

28. The Bank shall complete the de novo asset purchase of up to $782 million of loans from Capital Source, Inc. within four months after the effective date of deposit insurance.

29. The Bank shall not purchase any loan or extension of credit where CapitalSource, Inc. or any of its affiliated entities has an equity interest in the borrower.

30. The Bank shall not purchase any loan or extension of credit where a principal shareholder (as defined by the FRB's Regulation O) of CapitalSource, Inc. has a lending relationship with, or equity interest in, the same borrower.

31. Until the conditional commitment herein granted becomes effective, the FDIC shall have the right to aIter, suspend, or withdraw the said commitment should any interim development be deemed to warrant such action.

32. The consent granted herein shall expire if Federal deposit insurance has not become effective within twelve months from the date of this ORDER, unless the FDIC approves a request for an extension of the deadline prior to the expiration.

By Order of the Board of Directors of the Federal Deposit Insurance Corporation.

Dated at Washington, D.C. this 20th day of March, 2007.

FEDERAL DEPOSIT INSURANCE CORPORATION
By: Robert E. Feldman
Executive Secretary

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FEDERAL DEPOSIT INSURANCE CORPORATION

In Re: CapitalSource Bank (Proposed)
Salt Lake City, Salt Lake County, Utah
Application for Federal Deposit Insurance
(Deposit Insurance Fund)

STATEMENT

Pursuant to the provisions of Section 5 of the Federal Deposit Insurance Act (12 U.S.C. § 1815), an application for Federal deposit insurance has been filed for CapitalSource Bank (the Bank), a proposed new state-chartered industrial bank, to be located at 2180 South, 1300 East, Suite 300, Salt Lake City, Salt Lake County, Utah.

The Bank will be a direct subsidiary of CapitalSource TRS, Inc., a direct subsidiary of CapitalSource, Inc., Chevy Chase, Maryland. CapitalSource, Inc. is a publicly traded commercial finance company with a national network of offices and employees. As of September 30, 2006, CapitalSource, Inc. had a commercial loan portfolio totaling $7.3 billion.

The activities of CapitalSource, Inc. and its subsidiaries are considered financial in nature, with the exception of a few equity investments retained by CapitalSource, Inc. Therefore, approval of the application is conditioned on CapitalSource, Inc. ceasing to engage in these non-financial activities prior to the effective date of deposit insurance.

Further, CapitalSource, Inc. is not subject to consolidated Federal bank supervision. Therefore, in order to protect the safety and soundness of the Bank and to protect the Deposit Insurance Fund, approval of the application is conditioned on CapitalSource, Inc. executing one or more written agreements that incorporate some or all of the conditions and requirements contained in the FDIC's recently proposed rules regarding certain industrial banks. See 72 Fed. Reg. 5217 (February 5, 2007). The written agreements incorporate those conditions and requirements detailed in the proposed rules that are appropriate for this application.

Two institutional investors own at least 10 percent but less than 25 percent of CapitalSource, Inc, These institutional investors are engaged in commercial activities that are not permissible for a financial holding company or savings and loan holding company. Further, these institutional investors would each indirectly control the Bank under the rebuttable presumption of control provisions of the Change in Bank Control Act, 12 C.F.R. 303.82(b)(2), because they each own over 10% of CapitalSource, Inc., which is a publicly traded company. In view of the FDIC's moratorium on deposit insurance applications for industrial banks that will be owned by commercial companies, approval of the application is conditioned on each of the investors executing a passivity agreement to eliminate the investors' ability to control the Bank.

The Bank will not offer checking accounts, accept demand deposits, or offer retail deposit or loan services. The Bank will obtain certificates of deposit from institutional deposit brokers and use the funds to purchase commercial loans from CapitalSource, Inc. The Bank will ensure that all affiliate transactions are conducted in accordance with Sections 23A and 23B of the Federal Reserve Act, 12 U.S.C. 371c, 371c-1, and the Board of Governors of the Federal Reserve System's Regulation W, 12 CFR part 223. The Bank will maintain a Board of Directors independent of its holding company and its affiliates.

For the purposes of this proposal, capital is adequate, projections for future earnings prospects are favorable, management is considered satisfactory, and the investment in fixed assets is reasonable. Corporate powers to be exercised are consistent with the purpose of the Federal Deposit Insurance Act. No formal objections to this proposal have been filed, and no undue risk to the insurance fund is apparent.

Accordingly, based upon careful evaluation of all available facts and information, the Board of Directors of the FDIC has concluded that approval of the application is warranted, subject to certain prudential conditions.

BOARD OF DIRECTORS

FEDERAL DEPOSIT INSURANCE CORPORATION



Last Updated 03/24/2011 Legal@fdic.gov