e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2006
Commission File
No. 1-31753
CapitalSource Inc.
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
|
|
35-2206895
|
(State of
Incorporation)
|
|
(I.R.S. Employer Identification
No.)
|
4445 Willard Avenue, 12th Floor
Chevy Chase, MD 20815
(Address of Principal Executive
Offices, Including Zip Code)
(800) 370-9431
(Registrants Telephone
Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. þ Yes o No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
|
|
þ |
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer
|
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). o Yes þ No
As of November 1, 2006, the number of shares of the
registrants Common Stock, par value $0.01 per share,
outstanding was 178,685,743.
CapitalSource
Inc.
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
($ in thousands)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
651,143
|
|
|
$
|
323,896
|
|
Restricted cash
|
|
|
362,949
|
|
|
|
284,785
|
|
Mortgage-related receivables, net
|
|
|
2,340,433
|
|
|
|
39,438
|
|
Mortgage-backed securities
pledged, trading
|
|
|
3,424,516
|
|
|
|
323,370
|
|
Receivables under
reverse-repurchase agreements
|
|
|
52,906
|
|
|
|
33,243
|
|
Loans held for sale
|
|
|
77,532
|
|
|
|
59,589
|
|
Loans:
|
|
|
|
|
|
|
|
|
Loans
|
|
|
7,219,331
|
|
|
|
5,894,911
|
|
Less deferred loan fees and
discounts
|
|
|
(122,255
|
)
|
|
|
(120,407
|
)
|
Less allowance for loan losses
|
|
|
(102,659
|
)
|
|
|
(87,370
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
6,994,417
|
|
|
|
5,687,134
|
|
Property and equipment, net
|
|
|
278,053
|
|
|
|
11,502
|
|
Investments
|
|
|
170,766
|
|
|
|
126,393
|
|
Deferred financing fees, net
|
|
|
58,041
|
|
|
|
42,006
|
|
Other assets
|
|
|
81,118
|
|
|
|
55,712
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
14,491,874
|
|
|
$
|
6,987,068
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, NONCONTROLLING
INTERESTS AND SHAREHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
$
|
3,387,521
|
|
|
$
|
358,423
|
|
Unsecured credit facilities
|
|
|
465,000
|
|
|
|
|
|
Secured credit facilities
|
|
|
2,450,811
|
|
|
|
2,450,452
|
|
Term debt
|
|
|
5,080,284
|
|
|
|
1,779,748
|
|
Convertible debt
|
|
|
555,000
|
|
|
|
555,000
|
|
Subordinated debt
|
|
|
367,721
|
|
|
|
231,959
|
|
Stock dividend payable
|
|
|
|
|
|
|
280,720
|
|
Cash dividend payable
|
|
|
|
|
|
|
70,202
|
|
Other liabilities
|
|
|
111,990
|
|
|
|
60,626
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
12,418,327
|
|
|
|
5,787,130
|
|
Noncontrolling
interests
|
|
|
56,371
|
|
|
|
|
|
Shareholders
equity:
|
|
|
|
|
|
|
|
|
Preferred stock
(50,000,000 shares authorized; no shares outstanding)
|
|
|
|
|
|
|
|
|
Common stock ($0.01 par
value, 500,000,000 shares authorized; 178,677,872 and
141,705,766 shares issued, respectively; 177,377,872 and
140,405,766 shares outstanding, respectively)
|
|
|
1,774
|
|
|
|
1,404
|
|
Additional paid-in capital
|
|
|
2,024,761
|
|
|
|
1,248,745
|
|
Retained earnings
|
|
|
18,460
|
|
|
|
46,783
|
|
Deferred compensation
|
|
|
|
|
|
|
(65,729
|
)
|
Accumulated other comprehensive
income (loss), net
|
|
|
2,107
|
|
|
|
(1,339
|
)
|
Treasury stock, at cost
|
|
|
(29,926
|
)
|
|
|
(29,926
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,017,176
|
|
|
|
1,199,938
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, noncontrolling
interests and shareholders equity
|
|
$
|
14,491,874
|
|
|
$
|
6,987,068
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
2
CapitalSource
Inc.
Consolidated Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands, except per share data)
|
|
|
Net investment
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
280,066
|
|
|
$
|
133,480
|
|
|
$
|
731,601
|
|
|
$
|
361,321
|
|
Fee income
|
|
|
53,955
|
|
|
|
35,771
|
|
|
|
132,100
|
|
|
|
100,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
334,021
|
|
|
|
169,251
|
|
|
|
863,701
|
|
|
|
462,044
|
|
Operating lease income
|
|
|
7,855
|
|
|
|
|
|
|
|
19,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
341,876
|
|
|
|
169,251
|
|
|
|
882,875
|
|
|
|
462,044
|
|
Interest expense
|
|
|
170,118
|
|
|
|
50,981
|
|
|
|
421,818
|
|
|
|
128,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
171,758
|
|
|
|
118,270
|
|
|
|
461,057
|
|
|
|
333,680
|
|
Provision for loan losses
|
|
|
24,849
|
|
|
|
42,884
|
|
|
|
51,033
|
|
|
|
57,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income after
provision for loan losses
|
|
|
146,909
|
|
|
|
75,386
|
|
|
|
410,024
|
|
|
|
275,847
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
33,924
|
|
|
|
20,253
|
|
|
|
101,374
|
|
|
|
72,207
|
|
Other administrative expenses
|
|
|
19,307
|
|
|
|
13,042
|
|
|
|
56,167
|
|
|
|
32,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
53,231
|
|
|
|
33,295
|
|
|
|
157,541
|
|
|
|
105,024
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diligence deposits forfeited
|
|
|
598
|
|
|
|
1,628
|
|
|
|
3,968
|
|
|
|
3,105
|
|
Gain on investments, net
|
|
|
7,223
|
|
|
|
36
|
|
|
|
5,483
|
|
|
|
5,328
|
|
(Loss) gain on derivatives
|
|
|
(5,074
|
)
|
|
|
(107
|
)
|
|
|
1,576
|
|
|
|
(114
|
)
|
Gain on residential mortgage
investment portfolio
|
|
|
2,291
|
|
|
|
|
|
|
|
220
|
|
|
|
|
|
Other income, net of expenses
|
|
|
5,700
|
|
|
|
1,186
|
|
|
|
11,131
|
|
|
|
4,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
10,738
|
|
|
|
2,743
|
|
|
|
22,378
|
|
|
|
12,787
|
|
Noncontrolling interests
expense
|
|
|
1,259
|
|
|
|
|
|
|
|
3,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
and cumulative effect of accounting change
|
|
|
103,157
|
|
|
|
44,834
|
|
|
|
271,511
|
|
|
|
183,610
|
|
Income taxes
|
|
|
22,304
|
|
|
|
16,751
|
|
|
|
52,945
|
|
|
|
70,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative
effect of accounting change
|
|
|
80,853
|
|
|
|
28,083
|
|
|
|
218,566
|
|
|
|
112,737
|
|
Cumulative effect of accounting
change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
80,853
|
|
|
$
|
28,083
|
|
|
$
|
218,936
|
|
|
$
|
112,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.47
|
|
|
$
|
0.24
|
|
|
$
|
1.34
|
|
|
$
|
0.97
|
|
Diluted
|
|
$
|
0.47
|
|
|
$
|
0.24
|
|
|
$
|
1.32
|
|
|
$
|
0.96
|
|
Average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
171,777,989
|
|
|
|
116,742,755
|
|
|
|
163,373,576
|
|
|
|
116,630,570
|
|
Diluted
|
|
|
173,354,891
|
|
|
|
117,697,783
|
|
|
|
166,028,844
|
|
|
|
117,731,254
|
|
Dividends declared per share
|
|
$
|
0.49
|
|
|
$
|
|
|
|
$
|
1.47
|
|
|
$
|
|
|
See accompanying notes.
3
CapitalSource
Inc.
Consolidated Statement of Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Total
|
|
|
|
Common
|
|
|
Additional
|
|
|
Retained
|
|
|
Deferred
|
|
|
Income
|
|
|
Stock,
|
|
|
Shareholders
|
|
|
|
Stock
|
|
|
Paid-in Capital
|
|
|
Earnings
|
|
|
Compensation
|
|
|
(Loss), net
|
|
|
at cost
|
|
|
Equity
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Total shareholders equity as
of December 31, 2005
|
|
$
|
1,404
|
|
|
$
|
1,248,745
|
|
|
$
|
46,783
|
|
|
$
|
(65,729
|
)
|
|
$
|
(1,339
|
)
|
|
$
|
(29,926
|
)
|
|
$
|
1,199,938
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
218,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218,936
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,446
|
|
|
|
|
|
|
|
3,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
222,382
|
|
Cumulative effect of accounting
change, net of taxes
|
|
|
|
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(370
|
)
|
Dividends paid
|
|
|
|
|
|
|
6,343
|
|
|
|
(247,211
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(240,868
|
)
|
Issuance of common stock, net
|
|
|
352
|
|
|
|
808,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
808,667
|
|
Stock option expense
|
|
|
|
|
|
|
6,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,462
|
|
Exercise of options
|
|
|
6
|
|
|
|
5,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,283
|
|
Restricted stock activity
|
|
|
12
|
|
|
|
(53,322
|
)
|
|
|
(48
|
)
|
|
|
65,729
|
|
|
|
|
|
|
|
|
|
|
|
12,371
|
|
Tax benefit on exercise of options
|
|
|
|
|
|
|
2,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,902
|
|
Tax benefit on vesting of
restricted stock grants
|
|
|
|
|
|
|
409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity as
of September 30, 2006
|
|
$
|
1,774
|
|
|
$
|
2,024,761
|
|
|
$
|
18,460
|
|
|
$
|
|
|
|
$
|
2,107
|
|
|
$
|
(29,926
|
)
|
|
$
|
2,017,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
CapitalSource
Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
218,936
|
|
|
$
|
112,737
|
|
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
6,462
|
|
|
|
281
|
|
Restricted stock expense
|
|
|
18,530
|
|
|
|
13,075
|
|
Loss on extinguishment of debt
|
|
|
2,497
|
|
|
|
|
|
Non-cash prepayment fee
|
|
|
(8,353
|
)
|
|
|
|
|
Cumulative effect of accounting
change, net of taxes
|
|
|
(370
|
)
|
|
|
|
|
Amortization of deferred loan fees
and discounts
|
|
|
(65,808
|
)
|
|
|
(58,420
|
)
|
Interest on
paid-in-kind
loans
|
|
|
(7,021
|
)
|
|
|
(8,694
|
)
|
Provision for loan losses
|
|
|
51,033
|
|
|
|
57,833
|
|
Amortization of deferred financing
fees and discounts
|
|
|
28,551
|
|
|
|
17,940
|
|
Depreciation and amortization
|
|
|
9,604
|
|
|
|
2,015
|
|
Benefit for deferred income taxes
|
|
|
(9,453
|
)
|
|
|
(8,965
|
)
|
Non-cash loss (gain) on
investments, net
|
|
|
5,510
|
|
|
|
(2,795
|
)
|
Non-cash gain on property and
equipment disposals
|
|
|
(472
|
)
|
|
|
|
|
(Gain) loss on derivatives
|
|
|
(195
|
)
|
|
|
114
|
|
Unrealized loss on residential
mortgage investment portfolio
|
|
|
8,702
|
|
|
|
|
|
Net increase in mortgage-backed
securities pledged, trading
|
|
|
(331,767
|
)
|
|
|
|
|
Amortization of discount on
residential mortgage investments
|
|
|
(22,786
|
)
|
|
|
|
|
Increase in loans held for sale, net
|
|
|
(60,154
|
)
|
|
|
(33,606
|
)
|
Decrease in other assets
|
|
|
65,211
|
|
|
|
2,992
|
|
Increase (decrease) in other
liabilities
|
|
|
35,423
|
|
|
|
(21,964
|
)
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by
operating activities
|
|
|
(55,920
|
)
|
|
|
72,543
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in restricted
cash
|
|
|
(78,164
|
)
|
|
|
67,394
|
|
Increase in mortgage-related
receivables, net
|
|
|
(2,391,783
|
)
|
|
|
|
|
Increase in receivables under
reverse-repurchase agreements, net
|
|
|
(19,663
|
)
|
|
|
(16,928
|
)
|
Increase in loans, net
|
|
|
(1,365,905
|
)
|
|
|
(1,083,002
|
)
|
Acquisition of real estate, net of
cash acquired
|
|
|
(66,375
|
)
|
|
|
|
|
Acquisition of investments, net
|
|
|
(22,978
|
)
|
|
|
(45,329
|
)
|
Acquisition of property and
equipment, net
|
|
|
(2,780
|
)
|
|
|
(3,727
|
)
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(3,947,648
|
)
|
|
|
(1,081,592
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(37,874
|
)
|
|
|
(14,875
|
)
|
Borrowings under repurchase
agreements, net
|
|
|
269,867
|
|
|
|
|
|
Borrowings on unsecured credit
facilities, net
|
|
|
465,000
|
|
|
|
|
|
Borrowings on secured credit
facilities, net
|
|
|
42,538
|
|
|
|
1,033,739
|
|
Borrowings of term debt
|
|
|
4,495,533
|
|
|
|
1,158,485
|
|
Repayments of term debt
|
|
|
(1,229,379
|
)
|
|
|
(1,250,315
|
)
|
Borrowings of subordinated debt
|
|
|
131,685
|
|
|
|
|
|
Proceeds from issuance of common
stock, net of offering costs
|
|
|
498,931
|
|
|
|
582
|
|
Proceeds from exercise of options
|
|
|
5,283
|
|
|
|
761
|
|
Tax benefits on share-based payments
|
|
|
3,311
|
|
|
|
|
|
Payment of dividends
|
|
|
(314,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by financing
activities
|
|
|
4,330,815
|
|
|
|
928,377
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
327,247
|
|
|
|
(80,672
|
)
|
Cash and cash equivalents as of
beginning of period
|
|
|
323,896
|
|
|
|
206,077
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end
of period
|
|
$
|
651,143
|
|
|
$
|
125,405
|
|
|
|
|
|
|
|
|
|
|
Noncash transactions from
investing and financing activities:
|
|
|
|
|
|
|
|
|
Issuance of common stock in
dividend and acquisition
|
|
$
|
309,736
|
|
|
$
|
|
|
See accompanying notes.
5
CapitalSource
Inc.
CapitalSource Inc. (CapitalSource), a Delaware
corporation, is a specialized finance company operating as a
real estate investment trust (REIT) and providing a
broad array of financial products to small and medium-sized
businesses. We primarily provide and invest in the following
products:
|
|
|
|
|
First Mortgage Loans Commercial loans that are
secured by first mortgages on the property of the client;
|
|
|
|
Senior Secured Asset-Based Loans Commercial loans
that are underwritten based on our assessment of the
clients eligible collateral, including accounts
receivable, real estate related receivables
and/or
inventory;
|
|
|
|
Senior Secured Cash Flow Loans Commercial loans that
are underwritten based on our assessment of a clients
ability to generate cash flows sufficient to repay the loan and
maintain or increase its enterprise value during the term of the
loan, thereby facilitating repayment of the principal at
maturity;
|
|
|
|
Term B, Second Lien and Mezzanine Loans Commercial
loans, including subordinated mortgage loans, that come after a
clients senior loans in right of payment or upon
liquidation;
|
|
|
|
Direct Real Estate Investments Commercial
investments in land, buildings and other assets, including those
that are purchased from and triple-net leased back to the
current operators through sale-leaseback transactions;
|
|
|
|
Private Equity Co-Investments Opportunistic equity
investments, typically in conjunction with commercial lending
relationships and on the same terms as other equity
investors; and
|
|
|
|
Residential Mortgage Investments Investments in
residential mortgage loans, residential mortgage-backed
securities and residential asset-backed securities that
constitute qualifying REIT assets.
|
Our wholly owned significant subsidiaries and their purposes as
of September 30, 2006 were as follows:
|
|
|
Entity
|
|
Purpose
|
|
CapitalSource TRS Inc.
|
|
Subsidiary that owns interest in
CapitalSource Finance LLC that made a taxable REIT subsidiary
election effective January 1, 2006.
|
CapitalSource Finance LLC
|
|
Primary operating subsidiary of
CapitalSource TRS Inc. that conducts commercial lending and
investment business of CapitalSource and manages our REIT
operations.
|
CapitalSource Finance II Inc.
|
|
Subsidiary of CapitalSource
Finance LLC that holds certain limited liability companies
established in accordance with credit facilities and term debt
securitizations.
|
CSE Mortgage LLC
|
|
Subsidiary that holds qualifying
REIT assets of CapitalSource.
|
CSE QRS Funding I LLC
|
|
Single-purpose, bankruptcy-remote
subsidiary of CSE Mortgage LLC established in accordance with a
secured credit facility to finance purchases of qualifying REIT
assets.
|
In connection with our REIT election and our related purchases
of residential mortgage investments, we began operating as two
reportable segments on January 1, 2006: 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.
6
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 2.
|
Summary
of Significant Accounting Policies
|
Unaudited
Interim Consolidated Financial Statements Basis of
Presentation
Our interim consolidated financial statements are prepared in
accordance with U.S. generally accepted accounting
principles (GAAP) for interim financial information
and pursuant to the requirements for reporting on
Form 10-Q
and Article 10 of
Regulation S-X.
Accordingly, certain disclosures accompanying annual
consolidated financial statements prepared in accordance with
GAAP are omitted. In the opinion of management, all adjustments
and eliminations, consisting solely of normal recurring
accruals, considered necessary for the fair presentation of
financial statements for the interim periods, have been
included. The current periods results of operations are
not necessarily indicative of the results that ultimately may be
achieved for the year. The interim unaudited consolidated
financial statements and notes thereto should be read in
conjunction with the financial statements and notes thereto
included in our Annual Report on
Form 10-K
for the year ended December 31, 2005 as filed with the
Securities and Exchange Commission on March 8, 2006.
The accompanying financial statements reflect our consolidated
accounts, including all of our subsidiaries and the related
consolidated results of operations with all intercompany
balances and transactions eliminated in consolidation.
Certain amounts in prior periods consolidated financial
statements have been reclassified to conform to the current
period presentation.
Except as discussed below, our accounting policies are described
in Note 2, Summary of Significant Accounting
Policies, of our audited consolidated financial statements
as of December 31, 2005 included in our Annual Report on
Form 10-K.
The following accounting policies have become significant
accounting policies during the nine months ended
September 30, 2006.
Mortgage-Related
Receivables and Related Owner
Trust Securitizations
We purchased beneficial interests in special purpose entities
(SPEs) that acquired and securitized pools of
residential mortgage loans. In accordance with the provisions of
FASB Interpretation No. 46 (Revised 2003), Consolidation
of Variable Interest Entities An Interpretation of
ARB No. 51 (FIN 46(R)), we determined
that we were the primary beneficiary of these SPEs and,
therefore, consolidated the assets and liabilities of such
entities for financial statement purposes. We determined that
the SPEs interest in the underlying mortgage loans
constituted, for accounting purposes, receivables secured by
underlying mortgage loans. As a result, through consolidation,
we recorded mortgage-related receivables, as well as the
principal amount of related debt obligations incurred by SPEs to
fund the origination of such receivables, on our accompanying
consolidated balance sheet as of September 30, 2006. Such
mortgage-related receivables maintain all of the economic
attributes of the underlying mortgage loans legally held in
trust by such SPEs and, as a result of our interest in such
SPEs, we maintain all of the economic benefits and related risks
of ownership of underlying mortgage loans.
Our investments in mortgage-related receivables are recorded at
amortized cost. Purchase premiums and discounts that relate to
such receivables are amortized into interest income over the
estimated lives of such assets in accordance with the interest
method of Statement of Financial Accounting Standards
(SFAS) No. 91, Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases. We also amortize into
interest expense recognized discounts and other deferred items
relating to the debt obligations of the SPEs over their
estimated lives using the interest method.
|
|
Note 3.
|
Recently
Issued Accounting Guidance
|
In February 2006, the Financial Accounting Standards Board
(FASB) issued SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments
(SFAS No. 155), which amends
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133)
and SFAS No. 140, Accounting for Transfers and
Servicing
7
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of Financial Assets and Extinguishments of Liabilities
(SFAS No. 140). SFAS No. 155
clarifies that derivative instruments embedded within beneficial
interests in securitized financial assets are subject to
SFAS No. 133 and, in instances where an embedded
derivative must otherwise be bifurcated, permits an entity the
option of adjusting the host instrument to fair value through
earnings. In addition, SFAS No. 155 introduces new
guidance concerning derivative instruments that a qualifying
special-purpose entity may hold under SFAS No. 140.
The effective date for SFAS No. 155 is the beginning
of the first fiscal year beginning after September 15,
2006. We plan to adopt SFAS No. 155 on January 1,
2007. We have not completed our assessment of the impact of
adoption on our consolidated financial statements, but do not
expect it to be significant based on our current business plan.
In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets An
Amendment of FASB Statement No. 140
(SFAS No. 156). SFAS No. 156
amends SFAS No. 140 with respect to the accounting for
separately recognized servicing assets and servicing
liabilities. SFAS No. 156 requires that all separately
recognized servicing assets and servicing liabilities be
initially measured at fair value, if practicable.
SFAS No. 156 permits, but does not require, the
subsequent measurement of separately recognized servicing assets
and servicing liabilities using either an amortization- or fair
value-based method. SFAS No. 156 also requires
separate presentation of servicing assets and liabilities
subsequently measured at fair value in the balance sheet and
additional disclosures for all separately recognized servicing
assets and liabilities. The effective date for
SFAS No. 156 is the beginning of the first fiscal year
beginning after September 15, 2006. We plan to adopt
SFAS No. 156 on January 1, 2007. We do not expect
the adoption of SFAS No. 156 to have a material impact
on our consolidated financial statements based on our current
business plan.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109
(FIN 48), which clarifies the accounting for
uncertainty in income taxes recognized in an entitys
financial statements in accordance with FASB Statement
No. 109, Accounting for Income Taxes. FIN 48
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This
interpretation requires recognition of the impact of a tax
position if that position is more likely than not of being
sustained upon examination, including resolution of any related
appeals or litigation processes, based on the technical merits
of the position. In addition, FIN 48 provides measurement
guidance whereby a tax position that meets the
more-likely-than-not recognition threshold is calculated to
determine the amount of benefit to recognize in the financial
statements. FIN 48 is effective beginning the first fiscal
year beginning after December 15, 2006, with the cumulative
effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. We plan to adopt
FIN 48 on January 1, 2007 and do not expect its
adoption to have a material impact on our consolidated financial
statements based on our current business plan.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157). SFAS No. 157
defines fair value, establishes a framework for measuring fair
value and provides for expanded disclosures. The effective date
for SFAS No. 157 is the beginning of the first fiscal
year beginning after November 15, 2007. Earlier application
is encouraged, provided that financial statements have not been
issued for any period of that fiscal year. We plan to adopt
SFAS No. 157 on or prior to January 1, 2008. We
have not completed our assessment of the impact of adoption on
our consolidated financial statements, but do not expect it to
be significant based on our current business plan.
|
|
Note 4.
|
Mortgage-Related
Receivables
|
As of September 30, 2006, we had $2.3 billion in
mortgage-related receivables that, as further discussed above in
Note 2, Summary of Significant Accounting Policies,
are secured by prime residential mortgage loans. As of
September 30, 2006, the weighted average interest rate on
such receivables was 5.38%, and the weighted average contractual
maturity was approximately 29 years. As of
September 30, 2006, the carrying amount of our residential
mortgage-related receivables, including accrued interest and the
unamortized balance of purchase discounts, was $2.3 billion.
8
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The allowance for loan losses related to our mortgage-related
receivables was $0.3 million as of September 30, 2006
and is recorded in the accompanying consolidated balance sheet
as a reduction to the carrying value of mortgage-related
receivables.
|
|
Note 5.
|
Residential
Mortgage-Backed Securities and Certain Derivative
Instruments
|
As of September 30, 2006 and December 31, 2005, we
owned $3.4 billion and $2.3 billion, respectively, in
residential mortgage-backed securities (RMBS). As of
September 30, 2006 and December 31, 2005, all of our
RMBS were pledged as collateral for repurchase agreements that
were used to finance the purchase of such investments. We define
RMBS to include mortgage-backed securities that are rated AAA by
Standard & Poors or Moodys Investors
Service, as well as mortgage-backed securities whose payments of
principal and interest are guaranteed by the Federal National
Mortgage Association (Fannie Mae) or Freddie Mac. As
of September 30, 2006 and December 31, 2005, our
portfolio of RMBS comprised
1-year
adjustable-rate RMBS and hybrid adjustable-rate RMBS with
varying fixed period terms issued and guaranteed by Fannie Mae
or Freddie Mac. The weighted average net coupon of RMBS in our
portfolio was 4.77% and 4.59% as of September 30, 2006 and
December 31, 2005, respectively.
As of December 31, 2005, $2.0 billion of our purchases
of RMBS were financed through repurchase agreements that were
executed with the seller of such investments. We accounted for
the various contractual elements of these transactions on a net
basis such that forward commitments to purchase RMBS were
recorded on our consolidated balance sheet as derivative
instruments, as well as a margin-related cash deposit that was
made in connection with the related repurchase agreements. These
derivative instruments were adjusted to fair value through
income in accordance with SFAS No. 133. In March 2006,
we exercised our contractual right to substitute RMBS that were
assigned as collateral to such repurchase agreements. As a
result, as of September 30, 2006, these RMBS were
classified as trading securities on our accompanying
consolidated balance sheet pursuant to the provisions of
SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. Additionally, in recording such
investments, we also recorded liabilities to counterparties of
corresponding repurchase agreements that were executed to
finance the purchase of such investments. For further discussion
of our accounting for such transactions, see Note 2,
Summary of Significant Accounting Policies, in our
audited consolidated financial statements for the year ended
December 31, 2005 included in our Annual Report on
Form 10-K.
As of September 30, 2006, the fair value of RMBS in our
portfolio was $3.4 billion. For the three and nine months
ended September 30, 2006, we recognized $36.0 million
of unrealized gains and $2.6 million of unrealized losses,
respectively, related to these investments in income as a
component of gain (loss) on residential mortgage investment
portfolio in the accompanying consolidated statements of income.
During the nine months ended September 30, 2006, and prior
to executing the aforementioned right of collateral
substitution, we recognized a net unrealized loss of
$10.8 million in gain (loss) on residential mortgage
investment portfolio related to period changes in the fair value
of our forward commitments to purchase RMBS. As of
December 31, 2005, RMBS with a fair value of
$323.4 million were classified as trading securities on our
accompanying consolidated balance sheet.
We use various derivative instruments to economically hedge the
market risk associated with the RMBS in our portfolio. We
account for such derivative instruments pursuant to the
provisions of SFAS No. 133 and, as such, adjust such
instruments to fair value through income as a component of gain
(loss) on residential mortgage investment portfolio in the
accompanying consolidated statements of income. We recognized
net realized and unrealized losses of $32.8 million and
gains of $14.6 million during the three and nine months
ended September 30, 2006, respectively, related to such
derivative instruments. These amounts include interest-related
accruals that we recognize in connection with the periodic
settlement of such instruments.
|
|
Note 6.
|
Commercial
Loans and Credit Quality
|
As of September 30, 2006 and December 31, 2005, our
total commercial loan portfolio had an outstanding balance of
$7.3 billion and $6.0 billion, respectively. Included
in these amounts are loans held for sale with
9
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
outstanding balances of $77.5 million and
$59.6 million as of September 30, 2006 and
December 31, 2005, respectively, and receivables under
reverse-repurchase agreements with outstanding balances of
$52.9 million and $33.2 million as of
September 30, 2006 and December 31, 2005,
respectively. Our loans held for sale were recorded at the lower
of cost or market value on the accompanying consolidated balance
sheets. None of these commercial loans had a market value below
cost as of September 30, 2006 or December 31, 2005.
Credit
Quality
As of September 30, 2006 and December 31, 2005, the
principal balances of loans 60 or more days contractually
delinquent, non-accrual loans and impaired loans in our
commercial lending portfolio were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Commercial Loan Asset Classification
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Loans 60 or more days
contractually delinquent
|
|
$
|
61,965
|
|
|
$
|
41,785
|
|
Non-accrual loans(1)
|
|
|
175,846
|
|
|
|
137,446
|
|
Impaired loans(2)
|
|
|
266,816
|
|
|
|
199,257
|
|
Less: loans in multiple categories
|
|
|
(222,764
|
)
|
|
|
(175,070
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
281,863
|
|
|
$
|
203,418
|
|
|
|
|
|
|
|
|
|
|
Total as a percentage of total
loans
|
|
|
3.83%
|
|
|
|
3.40%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes commercial loans with an aggregate principal balance of
$46.9 million and $37.6 million as of
September 30, 2006 and December 31, 2005,
respectively, which were also classified as loans 60 or more
days contractually delinquent. |
|
(2) |
|
Includes commercial loans with an aggregate principal balance of
$46.9 million and $37.6 million as of
September 30, 2006 and December 31, 2005,
respectively, which were also classified as loans 60 or more
days contractually delinquent, and commercial loans with an
aggregate principal balance of $175.8 million and
$137.4 million as of September 30, 2006 and
December 31, 2005, respectively, which were also classified
as loans on non-accrual status. The carrying value of impaired
commercial loans was $263.7 million and $194.6 million
as of September 30, 2006 and December 31, 2005,
respectively. |
Reflective of principles established in SFAS No. 114,
Accounting by Creditors for Impairment of a Loan
(SFAS No. 114), 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, including scheduled principal and
interest payments. Impaired loans include loans for which we
expect to have a credit loss and other loans that we have
assessed as impaired, but for which we ultimately expect to
collect all payments. As of September 30, 2006 and
December 31, 2005, we had $82.4 million and
$98.2 million of impaired commercial loans, respectively,
with allocated reserves of $34.9 million and
$33.1 million, respectively. As of September 30, 2006
and December 31, 2005, we had $184.4 million and
$101.0 million, respectively, of commercial loans that we
assessed as impaired and for which we did not record any
allocated reserves based upon our belief that it is probable
that we will ultimately collect all principal and interest
amounts due.
The average balance of impaired commercial loans during the
three and nine months ended September 30, 2006 was
$256.8 million and $227.3 million, respectively, and
was $193.5 million and $145.7 million, respectively,
during the three and nine months ended September 30, 2005.
The total amount of interest income that was recognized on
impaired commercial loans during the three and nine months ended
September 30, 2006 was $2.7 million and
$7.5 million, respectively, and was $2.4 million and
$8.5 million, respectively, during the three and nine
months ended September 30, 2005. The amount of cash basis
interest income that was recognized on impaired commercial loans
during the three and nine months ended September 30, 2006
was $2.2 million and $6.1 million,
10
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
respectively, and was $1.6 million and $6.9 million,
respectively, during the three and nine months ended
September 30, 2005. If the non-accrual commercial loans had
performed in accordance with their original terms, interest
income would have been higher than reported by $6.4 million
and $16.7 million for the three and nine months ended
September 30, 2006, respectively, and $3.7 million and
$7.7 million, respectively, for the three and nine months
ended September 30, 2005.
During the three and nine months ended September 30, 2006,
we classified commercial loans with an aggregate carrying value
of $83.3 million and $177.4 million, respectively, as
of September 30, 2006 as troubled debt restructurings as
defined by SFAS No. 15, Accounting for Debtors and
Creditors for Troubled Debt Restructurings. As of
September 30, 2006, commercial loans with an aggregate
carrying value of $196.8 million were classified as
troubled debt restructurings. Additionally, under
SFAS No. 114, loans classified as troubled debt
restructurings are also assessed as impaired, generally for a
period of one year following the restructuring. The allocated
reserve for commercial loans classified as troubled debt
restructurings was $25.6 million as of September 30,
2006. For the year ended December 31, 2005, commercial
loans with an aggregate carrying value of $73.7 million as
of December 31, 2005 were classified as troubled debt
restructurings. The allocated reserve for commercial loans
classified as troubled debt restructurings was
$13.6 million as of December 31, 2005.
Activity in the allowance for loan losses related to our
Commercial Lending & Investment segment for the nine
months ended September 30, 2006 and 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Balance as of beginning of period
|
|
$
|
87,370
|
|
|
$
|
35,208
|
|
Provision for loan losses
|
|
|
50,732
|
|
|
|
57,833
|
|
Charge offs, net
|
|
|
(35,443
|
)
|
|
|
(11,543
|
)
|
|
|
|
|
|
|
|
|
|
Balance as of end of period
|
|
$
|
102,659
|
|
|
$
|
81,498
|
|
|
|
|
|
|
|
|
|
|
Investments as of September 30, 2006 and December 31,
2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Investments carried at cost
|
|
$
|
69,949
|
|
|
$
|
51,907
|
|
Investments carried at fair value:
|
|
|
|
|
|
|
|
|
Investments
available-for-sale
|
|
|
61,720
|
|
|
|
50,461
|
|
Warrants
|
|
|
8,210
|
|
|
|
10,259
|
|
Investments accounted for under
the equity method
|
|
|
30,887
|
|
|
|
13,766
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
170,766
|
|
|
$
|
126,393
|
|
|
|
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2006,
we sold investments for $20.6 million and
$62.5 million, respectively, recognizing net pretax gains
of $5.4 million and $7.4 million, respectively. During
the three and nine months ended September 30, 2005, we sold
investments for $0.4 million and $5.4 million,
respectively, recognizing gross pretax gains of
$0.3 million and $3.7 million, respectively.
11
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For a detailed discussion of our borrowings, see Note 9,
Borrowings, in our audited consolidated financial
statements for the year ended December 31, 2005 included in
our Annual Report on
Form 10-K,
as filed with the Securities and Exchange Commission on
March 8, 2006. The following changes to our borrowings
occurred during the three months ended September 30, 2006:
Repurchase
Agreements
We did not enter into any new master repurchase agreements
during the three months ended September 30, 2006. However,
we did borrow under our existing repurchase agreements with
various financial institutions to finance the purchases of RMBS
and asset-backed securities during the quarter. As of
September 30, 2006 and December 31, 2005, the
aggregate amount outstanding under our repurchase agreements
used to finance purchases of residential mortgage investments
was $3.3 billion and $2.2 billion, respectively. As of
September 30, 2006 and December 31, 2005, repurchase
agreements that we executed had a weighted average borrowing
rate of 5.30% and 4.36%, respectively, and a weighted average
remaining maturity of 0.8 months and 2.9 months,
respectively. RMBS with a fair value of $3.4 billion,
including accrued interest, asset-backed securities with a fair
value of $33.7 million, including accrued interest, and
cash deposits of $23.6 million made to cover margin calls
collateralized these repurchase agreements as of
September 30, 2006. RMBS with a fair value of
$2.3 billion, including accrued interest, and cash deposits
of $1.8 million made to cover margin calls collateralized
these repurchase agreements as of December 31, 2005.
Credit
Facilities
As of September 30, 2006, we had seven credit facilities,
six of which were secured and one of which was unsecured, with
20 financial institutions which we primarily use to fund our
commercial loans and for general corporate purposes. During the
three months ended September 30, 2006, we increased our
committed credit facility capacity to $5.2 billion from
$4.8 billion.
On July 28, 2006, we amended our $500.0 million
secured, revolving credit facility with Citigroup Global Markets
Realty Corp. to increase the maximum facility amount to
$900.0 million through the addition of a new lender.
On September 5, 2006, we amended our $1.2 billion
credit facility with Wachovia Capital Markets LLC to increase
the maximum amount of the facility to $1.4 billion and to
increase the number of lenders participating in the facility.
On September 21, 2006, we amended our $280.0 million
secured, revolving credit facility with Wachovia Bank, National
Association to increase the maximum facility amount to
$470.0 million and to extend the maturity date to
April 10, 2009 from April 10, 2008.
Term
Debt
On September 28, 2006, we completed a $1.5 billion
term debt securitization that includes a three-year
replenishment period allowing us, subject to certain
restrictions, to reinvest principal payments into new loan
collateral. Consistent with our prior term debt securitizations,
we recorded this transaction as an on-balance sheet financing in
accordance with SFAS No. 140. In conjunction with this
transaction, we established a single-purpose, bankruptcy-remote
subsidiary, CapitalSource Commercial Loan
Trust 2006-2.
The transaction covers the sale of $1.3 billion of
floating-rate asset-backed notes which are backed by a
$1.5 billion diversified pool of senior and subordinated
commercial loans from our commercial lending portfolio. The
value of the offered notes represents 88.5% of the value of the
collateral pool, and we retained an 11.5% interest in the
collateral pool. The
Class A-PT,
A-1A,
A-1B, B, C,
D and E notes carry an interest rate of
30-day LIBOR
plus 0.24%, 0.21%, 0.33%, 0.38%, 0.68%, 1.52% and 2.50%,
respectively, and are expected to mature at various dates
through June 2013. We used the proceeds from this offering
primarily to repay outstanding indebtedness under certain of our
credit facilities.
12
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In October 2006, we sold $20.0 million of the Class E
notes initially retained in conjunction with the term debt
securitization discussed above. The sale of these Class E
notes increased the value of the total notes sold to 89.8% of
the value of the collateral pool.
Subordinated
Debt
In September 2006, we issued $51.6 million in junior
subordinated debt to a newly formed statutory trust,
CapitalSource Trust Preferred Securities 2006-2
(2006-2 TP Trust). We formed the 2006-2 TP Trust in
September 2006, with an initial capitalization in common
securities of $1.6 million for the sole purpose of issuing
$50.0 million of preferred securities (the 2006-2 TP
Securities). The 2006-2 TP Trust used the initial
capitalization and the proceeds from the sale of the 2006-2 TP
Securities to acquire the junior subordinated debt that we
issued.
The 2006-2 TP Securities bear interest at a fixed rate equal to
6.97% per annum through October 30, 2011 and,
thereafter, at a floating interest rate based on
90-day LIBOR
plus 1.95%, resetting quarterly. The 2006-2 TP Securities, which
mature on October 30, 2036, are callable at par in whole or
in part at any time after October 30, 2011.
In September 2006, we also issued 25.8 million in
junior subordinated debt to another newly-formed statutory
trust, CapitalSource Trust Preferred Securities 2006-3
(2006-3 TP Trust). We formed the 2006-3 TP Trust in
September 2006, with initial capitalization in common securities
of 0.8 million for the sole purpose of issuing
25.0 million of preferred securities (the
2006-3 TP Securities). The 2006-3 TP Trust used the
initial capitalization and the proceeds from the sale of the
2006-3 TP Securities to acquire the junior subordinated debt
that we issued. In accordance with SFAS No. 52, Foreign
Currency Translation, this junior subordinated debt is
translated in the accompanying consolidated financial statements
into United States dollars at an approximate market
exchange rate prevailing as of the date of the financial
statements. As of September 30, 2006, $32.7 million of
this junior subordinated debt was outstanding.
The 2006-3 TP Securities bear interest at a floating interest
rate equal to
90-day
European Inter-Bank Offered Rate (EURIBOR) plus
2.05%, resetting quarterly. The 2006-3 TP Securities, which
mature on October 30, 2036, are callable at par in whole or
in part at any time after October 30, 2011.
The junior subordinated debt described above is unsecured and
ranks subordinate and junior in right of payment to all of our
indebtedness, other than the pari passu junior subordinated debt
issued in our previous subordinated debt transactions.
Both the 2006-2 TP Trust and the 2006-3 TP Trust are wholly
owned indirect subsidiaries of CapitalSource. However, in
accordance with the provisions of FIN 46(R), we have not
consolidated the 2006-2 TP Trust or the 2006-3 TP Trust for
financial statement purposes. We account for our investments in
the 2006-2 TP Trust and the 2006-3 TP Trust under the equity
method of accounting pursuant to Accounting Principles Board
No. 18, The Equity Method of Accounting for Investments
in Common Stock.
|
|
Note 9.
|
Guarantor
Information
|
The following represents the unaudited supplemental
consolidating condensed financial statements of CapitalSource
Inc., which was the issuer of the convertible debentures issued
in March 2004 (the March Debentures) and July 2004
(the July Debentures, together with the March
Debentures, the Debentures), and CapitalSource
Finance LLC (CapitalSource Finance), which was a
guarantor of the Debentures, and our subsidiaries that are not
guarantors of the Debentures as of September 30, 2006 and
December 31, 2005 and for the three and nine months ended
September 30, 2006 and 2005. CapitalSource Finance, a
wholly owned indirect subsidiary of CapitalSource Inc., has
guaranteed the Debentures, fully and unconditionally, on a
senior basis. Through October 12, 2005, CSE Holdings LLC,
formerly CapitalSource Holdings Inc. (CSE Holdings),
was also a guarantor of the Debentures. On October 12,
2005, CSE Holdings merged with and into CapitalSource Inc., with
CapitalSource Inc. as the surviving entity. The following
condensed consolidating financial statements include the
activity of CSE Holdings for the three and nine months ended
September 30, 2005. Separate consolidated financial
statements of each guarantor are not presented, as we have
determined that they would not be material to investors.
13
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Balance Sheet
September 30,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
CapitalSource
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
169,149
|
|
|
$
|
34,552
|
|
|
$
|
447,442
|
|
|
$
|
|
|
|
$
|
651,143
|
|
Restricted cash
|
|
|
|
|
|
|
108,330
|
|
|
|
203,254
|
|
|
|
51,365
|
|
|
|
|
|
|
|
362,949
|
|
Mortgage-related receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,340,433
|
|
|
|
|
|
|
|
2,340,433
|
|
Mortgage-backed securities pledged,
trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,424,516
|
|
|
|
|
|
|
|
3,424,516
|
|
Receivables under
reverse-repurchase agreements
|
|
|
|
|
|
|
52,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,906
|
|
Loans held for sale
|
|
|
|
|
|
|
15,032
|
|
|
|
62,500
|
|
|
|
|
|
|
|
|
|
|
|
77,532
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
4,063,117
|
|
|
|
520,154
|
|
|
|
2,646,039
|
|
|
|
(9,979
|
)
|
|
|
7,219,331
|
|
Less deferred loan fees and
discounts
|
|
|
|
|
|
|
(31,764
|
)
|
|
|
(49,618
|
)
|
|
|
(40,873
|
)
|
|
|
|
|
|
|
(122,255
|
)
|
Less allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
(85,865
|
)
|
|
|
(16,794
|
)
|
|
|
|
|
|
|
(102,659
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
|
|
|
|
4,031,353
|
|
|
|
384,671
|
|
|
|
2,588,372
|
|
|
|
(9,979
|
)
|
|
|
6,994,417
|
|
Property and equipment, net
|
|
|
|
|
|
|
1,311
|
|
|
|
11,634
|
|
|
|
265,108
|
|
|
|
|
|
|
|
278,053
|
|
Investment in subsidiaries
|
|
|
3,139,466
|
|
|
|
|
|
|
|
791,305
|
|
|
|
1,111,283
|
|
|
|
(5,042,054
|
)
|
|
|
|
|
Intercompany (due to) due from
|
|
|
(99,898
|
)
|
|
|
|
|
|
|
(65,829
|
)
|
|
|
165,727
|
|
|
|
|
|
|
|
|
|
Intercompany note receivable
|
|
|
|
|
|
|
2,519
|
|
|
|
11,908
|
|
|
|
|
|
|
|
(14,427
|
)
|
|
|
|
|
Investments
|
|
|
|
|
|
|
48,804
|
|
|
|
88,294
|
|
|
|
33,668
|
|
|
|
|
|
|
|
170,766
|
|
Deferred financing fees, net
|
|
|
11,856
|
|
|
|
25,061
|
|
|
|
11,139
|
|
|
|
9,985
|
|
|
|
|
|
|
|
58,041
|
|
Other assets
|
|
|
|
|
|
|
1,157
|
|
|
|
27,080
|
|
|
|
64,680
|
|
|
|
(11,799
|
)
|
|
|
81,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,051,424
|
|
|
$
|
4,455,622
|
|
|
$
|
1,560,508
|
|
|
$
|
10,502,579
|
|
|
$
|
(5,078,259
|
)
|
|
$
|
14,491,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, NONCONTROLLING
INTERESTS AND SHAREHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
$
|
|
|
|
$
|
60,429
|
|
|
$
|
|
|
|
$
|
3,327,092
|
|
|
$
|
|
|
|
$
|
3,387,521
|
|
Unsecured credit facilities
|
|
|
465,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
465,000
|
|
Secured credit facilities
|
|
|
|
|
|
|
809,811
|
|
|
|
|
|
|
|
1,641,000
|
|
|
|
|
|
|
|
2,450,811
|
|
Term debt
|
|
|
|
|
|
|
2,755,165
|
|
|
|
9,624
|
|
|
|
2,316,298
|
|
|
|
(803
|
)
|
|
|
5,080,284
|
|
Convertible debt
|
|
|
555,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
555,000
|
|
Subordinated debt
|
|
|
|
|
|
|
|
|
|
|
367,721
|
|
|
|
|
|
|
|
|
|
|
|
367,721
|
|
Other liabilities
|
|
|
14,248
|
|
|
|
24,461
|
|
|
|
71,880
|
|
|
|
22,376
|
|
|
|
(20,975
|
)
|
|
|
111,990
|
|
Intercompany note payable
|
|
|
|
|
|
|
14,427
|
|
|
|
|
|
|
|
|
|
|
|
(14,427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,034,248
|
|
|
|
3,664,293
|
|
|
|
449,225
|
|
|
|
7,306,766
|
|
|
|
(36,205
|
)
|
|
|
12,418,327
|
|
Noncontrolling
interests
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
56,347
|
|
|
|
(5
|
)
|
|
|
56,371
|
|
Shareholders
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
1,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,774
|
|
Additional paid-in capital
|
|
|
2,024,761
|
|
|
|
198,220
|
|
|
|
282,270
|
|
|
|
2,884,995
|
|
|
|
(3,365,485
|
)
|
|
|
2,024,761
|
|
Retained earnings
|
|
|
18,460
|
|
|
|
593,070
|
|
|
|
826,121
|
|
|
|
252,062
|
|
|
|
(1,671,253
|
)
|
|
|
18,460
|
|
Accumulated other comprehensive
income, net
|
|
|
2,107
|
|
|
|
10
|
|
|
|
2,892
|
|
|
|
2,409
|
|
|
|
(5,311
|
)
|
|
|
2,107
|
|
Treasury stock, at cost
|
|
|
(29,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,017,176
|
|
|
|
791,300
|
|
|
|
1,111,283
|
|
|
|
3,139,466
|
|
|
|
(5,042,049
|
)
|
|
|
2,017,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, noncontrolling
interests and shareholders equity
|
|
$
|
3,051,424
|
|
|
$
|
4,455,622
|
|
|
$
|
1,560,508
|
|
|
$
|
10,502,579
|
|
|
$
|
(5,078,259
|
)
|
|
$
|
14,491,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Balance Sheet
December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
CapitalSource
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
($ in thousands)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
2,038
|
|
|
$
|
145,065
|
|
|
$
|
156,571
|
|
|
$
|
20,222
|
|
|
$
|
|
|
|
$
|
323,896
|
|
Restricted cash
|
|
|
|
|
|
|
125,832
|
|
|
|
153,299
|
|
|
|
5,654
|
|
|
|
|
|
|
|
284,785
|
|
Mortgage-related receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,438
|
|
|
|
|
|
|
|
39,438
|
|
Mortgage-backed securities pledged,
trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
323,370
|
|
|
|
|
|
|
|
323,370
|
|
Receivables under
reverse-repurchase agreements
|
|
|
|
|
|
|
33,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,243
|
|
Loans held for sale
|
|
|
|
|
|
|
17,378
|
|
|
|
42,211
|
|
|
|
|
|
|
|
|
|
|
|
59,589
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
4,087,078
|
|
|
|
374,833
|
|
|
|
1,440,828
|
|
|
|
(7,828
|
)
|
|
|
5,894,911
|
|
Less deferred loan fees and
discounts
|
|
|
|
|
|
|
(971
|
)
|
|
|
(100,123
|
)
|
|
|
(19,313
|
)
|
|
|
|
|
|
|
(120,407
|
)
|
Less allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
(78,003
|
)
|
|
|
(9,367
|
)
|
|
|
|
|
|
|
(87,370
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
|
|
|
|
4,086,107
|
|
|
|
196,707
|
|
|
|
1,412,148
|
|
|
|
(7,828
|
)
|
|
|
5,687,134
|
|
Property and equipment, net
|
|
|
|
|
|
|
|
|
|
|
11,502
|
|
|
|
|
|
|
|
|
|
|
|
11,502
|
|
Investment in subsidiaries
|
|
|
2,063,092
|
|
|
|
|
|
|
|
655,627
|
|
|
|
|
|
|
|
(2,718,719
|
)
|
|
|
|
|
Intercompany note receivable
|
|
|
|
|
|
|
7,803
|
|
|
|
35,288
|
|
|
|
|
|
|
|
(43,091
|
)
|
|
|
|
|
Investments
|
|
|
33,494
|
|
|
|
21,210
|
|
|
|
71,689
|
|
|
|
|
|
|
|
|
|
|
|
126,393
|
|
Deferred financing fees, net
|
|
|
11,114
|
|
|
|
22,868
|
|
|
|
7,944
|
|
|
|
80
|
|
|
|
|
|
|
|
42,006
|
|
Other assets
|
|
|
20,110
|
|
|
|
1,018
|
|
|
|
19,839
|
|
|
|
14,745
|
|
|
|
|
|
|
|
55,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,129,848
|
|
|
$
|
4,460,524
|
|
|
$
|
1,350,677
|
|
|
$
|
1,815,657
|
|
|
$
|
(2,769,638
|
)
|
|
$
|
6,987,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
$
|
|
|
|
$
|
47,157
|
|
|
$
|
|
|
|
$
|
311,266
|
|
|
$
|
|
|
|
$
|
358,423
|
|
Secured credit facilities
|
|
|
|
|
|
|
1,938,273
|
|
|
|
42,179
|
|
|
|
470,000
|
|
|
|
|
|
|
|
2,450,452
|
|
Term debt
|
|
|
|
|
|
|
1,774,475
|
|
|
|
5,273
|
|
|
|
|
|
|
|
|
|
|
|
1,779,748
|
|
Convertible debt
|
|
|
555,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
555,000
|
|
Subordinated debt
|
|
|
|
|
|
|
|
|
|
|
231,959
|
|
|
|
|
|
|
|
|
|
|
|
231,959
|
|
Stock dividend payable
|
|
|
280,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
280,720
|
|
Cash dividend payable
|
|
|
70,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,202
|
|
Other liabilities
|
|
|
3,661
|
|
|
|
22,228
|
|
|
|
41,112
|
|
|
|
1,453
|
|
|
|
(7,828
|
)
|
|
|
60,626
|
|
Intercompany note payable
|
|
|
20,327
|
|
|
|
22,764
|
|
|
|
|
|
|
|
|
|
|
|
(43,091
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
929,910
|
|
|
|
3,804,897
|
|
|
|
320,523
|
|
|
|
782,719
|
|
|
|
(50,919
|
)
|
|
|
5,787,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
1,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,404
|
|
Additional paid-in capital
|
|
|
1,248,745
|
|
|
|
278,656
|
|
|
|
362,137
|
|
|
|
1,025,690
|
|
|
|
(1,666,483
|
)
|
|
|
1,248,745
|
|
Retained earnings
|
|
|
46,783
|
|
|
|
377,492
|
|
|
|
668,762
|
|
|
|
7,248
|
|
|
|
(1,053,502
|
)
|
|
|
46,783
|
|
Deferred compensation
|
|
|
(65,729
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(65,729
|
)
|
Accumulated other comprehensive
loss, net
|
|
|
(1,339
|
)
|
|
|
(521
|
)
|
|
|
(745
|
)
|
|
|
|
|
|
|
1,266
|
|
|
|
(1,339
|
)
|
Treasury stock, at cost
|
|
|
(29,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
1,199,938
|
|
|
|
655,627
|
|
|
|
1,030,154
|
|
|
|
1,032,938
|
|
|
|
(2,718,719
|
)
|
|
|
1,199,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
2,129,848
|
|
|
$
|
4,460,524
|
|
|
$
|
1,350,677
|
|
|
$
|
1,815,657
|
|
|
$
|
(2,769,638
|
)
|
|
$
|
6,987,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Income
Three Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
CapitalSource
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
3
|
|
|
$
|
98,673
|
|
|
$
|
33,637
|
|
|
$
|
148,195
|
|
|
$
|
(442
|
)
|
|
$
|
280,066
|
|
Fee income
|
|
|
|
|
|
|
28,171
|
|
|
|
4,528
|
|
|
|
21,256
|
|
|
|
|
|
|
|
53,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
3
|
|
|
|
126,844
|
|
|
|
38,165
|
|
|
|
169,451
|
|
|
|
(442
|
)
|
|
|
334,021
|
|
Operating lease income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,855
|
|
|
|
|
|
|
|
7,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
3
|
|
|
|
126,844
|
|
|
|
38,165
|
|
|
|
177,306
|
|
|
|
(442
|
)
|
|
|
341,876
|
|
Interest expense
|
|
|
11,382
|
|
|
|
55,564
|
|
|
|
5,527
|
|
|
|
98,087
|
|
|
|
(442
|
)
|
|
|
170,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(11,379
|
)
|
|
|
71,280
|
|
|
|
32,638
|
|
|
|
79,219
|
|
|
|
|
|
|
|
171,758
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
25,551
|
|
|
|
(702
|
)
|
|
|
|
|
|
|
24,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after
provision for loan losses
|
|
|
(11,379
|
)
|
|
|
71,280
|
|
|
|
7,087
|
|
|
|
79,921
|
|
|
|
|
|
|
|
146,909
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
|
|
|
|
1,218
|
|
|
|
32,706
|
|
|
|
|
|
|
|
|
|
|
|
33,924
|
|
Other administrative expenses
|
|
|
3,998
|
|
|
|
802
|
|
|
|
14,138
|
|
|
|
4,150
|
|
|
|
(3,781
|
)
|
|
|
19,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,998
|
|
|
|
2,020
|
|
|
|
46,844
|
|
|
|
4,150
|
|
|
|
(3,781
|
)
|
|
|
53,231
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diligence deposits forfeited
|
|
|
|
|
|
|
(128
|
)
|
|
|
726
|
|
|
|
|
|
|
|
|
|
|
|
598
|
|
Gain on investments, net
|
|
|
|
|
|
|
|
|
|
|
7,223
|
|
|
|
|
|
|
|
|
|
|
|
7,223
|
|
(Loss) gain on derivatives
|
|
|
|
|
|
|
(1,656
|
)
|
|
|
874
|
|
|
|
(4,292
|
)
|
|
|
|
|
|
|
(5,074
|
)
|
Gain on residential mortgage
investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,291
|
|
|
|
|
|
|
|
2,291
|
|
Other income, net of expenses
|
|
|
|
|
|
|
4,411
|
|
|
|
4,985
|
|
|
|
85
|
|
|
|
(3,781
|
)
|
|
|
5,700
|
|
Earnings in subsidiaries
|
|
|
96,230
|
|
|
|
|
|
|
|
51,781
|
|
|
|
45,911
|
|
|
|
(193,922
|
)
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
(20,079
|
)
|
|
|
20,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
96,230
|
|
|
|
(17,452
|
)
|
|
|
85,668
|
|
|
|
43,995
|
|
|
|
(197,703
|
)
|
|
|
10,738
|
|
Noncontrolling interests
expense
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
1,232
|
|
|
|
(2
|
)
|
|
|
1,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
and cumulative effect of accounting change
|
|
|
80,853
|
|
|
|
51,779
|
|
|
|
45,911
|
|
|
|
118,534
|
|
|
|
(193,920
|
)
|
|
|
103,157
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,304
|
|
|
|
|
|
|
|
22,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative
effect of accounting change
|
|
|
80,853
|
|
|
|
51,779
|
|
|
|
45,911
|
|
|
|
96,230
|
|
|
|
(193,920
|
)
|
|
|
80,853
|
|
Cumulative effect of accounting
change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
80,853
|
|
|
$
|
51,779
|
|
|
$
|
45,911
|
|
|
$
|
96,230
|
|
|
$
|
(193,920
|
)
|
|
$
|
80,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Income
Nine
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
CapitalSource
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
552
|
|
|
$
|
330,482
|
|
|
$
|
65,560
|
|
|
$
|
337,310
|
|
|
$
|
(2,303
|
)
|
|
$
|
731,601
|
|
Fee income
|
|
|
|
|
|
|
104,902
|
|
|
|
(19,488
|
)
|
|
|
46,686
|
|
|
|
|
|
|
|
132,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
552
|
|
|
|
435,384
|
|
|
|
46,072
|
|
|
|
383,996
|
|
|
|
(2,303
|
)
|
|
|
863,701
|
|
Operating lease income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,174
|
|
|
|
|
|
|
|
19,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
552
|
|
|
|
435,384
|
|
|
|
46,072
|
|
|
|
403,170
|
|
|
|
(2,303
|
)
|
|
|
882,875
|
|
Interest expense
|
|
|
24,335
|
|
|
|
161,020
|
|
|
|
18,060
|
|
|
|
220,706
|
|
|
|
(2,303
|
)
|
|
|
421,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(23,783
|
)
|
|
|
274,364
|
|
|
|
28,012
|
|
|
|
182,464
|
|
|
|
|
|
|
|
461,057
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
43,304
|
|
|
|
7,729
|
|
|
|
|
|
|
|
51,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after
provision for loan losses
|
|
|
(23,783
|
)
|
|
|
274,364
|
|
|
|
(15,292
|
)
|
|
|
174,735
|
|
|
|
|
|
|
|
410,024
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
|
|
|
|
3,524
|
|
|
|
97,850
|
|
|
|
|
|
|
|
|
|
|
|
101,374
|
|
Other administrative expenses
|
|
|
11,340
|
|
|
|
2,039
|
|
|
|
42,488
|
|
|
|
11,200
|
|
|
|
(10,900
|
)
|
|
|
56,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
11,340
|
|
|
|
5,563
|
|
|
|
140,338
|
|
|
|
11,200
|
|
|
|
(10,900
|
)
|
|
|
157,541
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diligence deposits forfeited
|
|
|
|
|
|
|
(128
|
)
|
|
|
4,096
|
|
|
|
|
|
|
|
|
|
|
|
3,968
|
|
Gain on investments, net
|
|
|
|
|
|
|
|
|
|
|
5,483
|
|
|
|
|
|
|
|
|
|
|
|
5,483
|
|
(Loss) gain on derivatives
|
|
|
|
|
|
|
(621
|
)
|
|
|
2,112
|
|
|
|
85
|
|
|
|
|
|
|
|
1,576
|
|
Gain on residential mortgage
investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220
|
|
|
|
|
|
|
|
220
|
|
Other income, net of expenses
|
|
|
76
|
|
|
|
4,729
|
|
|
|
19,723
|
|
|
|
(2,497
|
)
|
|
|
(10,900
|
)
|
|
|
11,131
|
|
Earnings in subsidiaries
|
|
|
253,983
|
|
|
|
|
|
|
|
239,349
|
|
|
|
148,912
|
|
|
|
(642,244
|
)
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
(33,409
|
)
|
|
|
33,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
254,059
|
|
|
|
(29,429
|
)
|
|
|
304,172
|
|
|
|
146,720
|
|
|
|
(653,144
|
)
|
|
|
22,378
|
|
Noncontrolling interests
expense
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
3,327
|
|
|
|
(6
|
)
|
|
|
3,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
and cumulative effect of accounting change
|
|
|
218,936
|
|
|
|
239,343
|
|
|
|
148,542
|
|
|
|
306,928
|
|
|
|
(642,238
|
)
|
|
|
271,511
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,945
|
|
|
|
|
|
|
|
52,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative
effect of accounting change
|
|
|
218,936
|
|
|
|
239,343
|
|
|
|
148,542
|
|
|
|
253,983
|
|
|
|
(642,238
|
)
|
|
|
218,566
|
|
Cumulative effect of accounting
change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
218,936
|
|
|
$
|
239,343
|
|
|
$
|
148,912
|
|
|
$
|
253,983
|
|
|
$
|
(642,238
|
)
|
|
$
|
218,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Income
Three
Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
CapitalSource
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Net investment
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
199
|
|
|
$
|
110,689
|
|
|
$
|
23,215
|
|
|
$
|
(623
|
)
|
|
$
|
133,480
|
|
Fee income
|
|
|
|
|
|
|
11,497
|
|
|
|
24,274
|
|
|
|
|
|
|
|
35,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
199
|
|
|
|
122,186
|
|
|
|
47,489
|
|
|
|
(623
|
)
|
|
|
169,251
|
|
Interest expense
|
|
|
4,177
|
|
|
|
47,124
|
|
|
|
303
|
|
|
|
(623
|
)
|
|
|
50,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(3,978
|
)
|
|
|
75,062
|
|
|
|
47,186
|
|
|
|
|
|
|
|
118,270
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
42,884
|
|
|
|
|
|
|
|
42,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after
provision for loan losses
|
|
|
(3,978
|
)
|
|
|
75,062
|
|
|
|
4,302
|
|
|
|
|
|
|
|
75,386
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
|
|
|
|
443
|
|
|
|
19,810
|
|
|
|
|
|
|
|
20,253
|
|
Other administrative expenses
|
|
|
(18
|
)
|
|
|
286
|
|
|
|
12,774
|
|
|
|
|
|
|
|
13,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
(18
|
)
|
|
|
729
|
|
|
|
32,584
|
|
|
|
|
|
|
|
33,295
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diligence deposits forfeited
|
|
|
|
|
|
|
|
|
|
|
1,628
|
|
|
|
|
|
|
|
1,628
|
|
Gain on investments, net
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
36
|
|
Gain (loss) on derivatives
|
|
|
|
|
|
|
588
|
|
|
|
(695
|
)
|
|
|
|
|
|
|
(107
|
)
|
Other income, net of expenses
|
|
|
|
|
|
|
979
|
|
|
|
207
|
|
|
|
|
|
|
|
1,186
|
|
Earnings in subsidiaries
|
|
|
48,794
|
|
|
|
|
|
|
|
52,213
|
|
|
|
(101,007
|
)
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
(23,687
|
)
|
|
|
23,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
48,794
|
|
|
|
(22,120
|
)
|
|
|
77,076
|
|
|
|
(101,007
|
)
|
|
|
2,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income
taxes
|
|
|
44,834
|
|
|
|
52,213
|
|
|
|
48,794
|
|
|
|
(101,007
|
)
|
|
|
44,834
|
|
Income taxes
|
|
|
16,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
28,083
|
|
|
$
|
52,213
|
|
|
$
|
48,794
|
|
|
$
|
(101,007
|
)
|
|
$
|
28,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Income
Nine
Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
CapitalSource
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Net investment
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
199
|
|
|
$
|
305,670
|
|
|
$
|
57,371
|
|
|
$
|
(1,919
|
)
|
|
$
|
361,321
|
|
Fee income
|
|
|
|
|
|
|
36,005
|
|
|
|
64,718
|
|
|
|
|
|
|
|
100,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
199
|
|
|
|
341,675
|
|
|
|
122,089
|
|
|
|
(1,919
|
)
|
|
|
462,044
|
|
Interest expense
|
|
|
12,554
|
|
|
|
115,729
|
|
|
|
2,000
|
|
|
|
(1,919
|
)
|
|
|
128,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(12,355
|
)
|
|
|
225,946
|
|
|
|
120,089
|
|
|
|
|
|
|
|
333,680
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
57,833
|
|
|
|
|
|
|
|
57,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after
provision for loan losses
|
|
|
(12,355
|
)
|
|
|
225,946
|
|
|
|
62,256
|
|
|
|
|
|
|
|
275,847
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
|
|
|
|
1,690
|
|
|
|
70,517
|
|
|
|
|
|
|
|
72,207
|
|
Other administrative expenses
|
|
|
276
|
|
|
|
716
|
|
|
|
31,825
|
|
|
|
|
|
|
|
32,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
276
|
|
|
|
2,406
|
|
|
|
102,342
|
|
|
|
|
|
|
|
105,024
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diligence deposits forfeited
|
|
|
|
|
|
|
|
|
|
|
3,105
|
|
|
|
|
|
|
|
3,105
|
|
Gain on investments, net
|
|
|
|
|
|
|
|
|
|
|
5,328
|
|
|
|
|
|
|
|
5,328
|
|
Gain (loss) on derivatives
|
|
|
|
|
|
|
1,377
|
|
|
|
(1,491
|
)
|
|
|
|
|
|
|
(114
|
)
|
Other income, net of expenses
|
|
|
|
|
|
|
3,442
|
|
|
|
1,026
|
|
|
|
|
|
|
|
4,468
|
|
Earnings in subsidiaries
|
|
|
196,241
|
|
|
|
|
|
|
|
209,650
|
|
|
|
(405,891
|
)
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
(18,709
|
)
|
|
|
18,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
196,241
|
|
|
|
(13,890
|
)
|
|
|
236,327
|
|
|
|
(405,891
|
)
|
|
|
12,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income
taxes
|
|
|
183,610
|
|
|
|
209,650
|
|
|
|
196,241
|
|
|
|
(405,891
|
)
|
|
|
183,610
|
|
Income taxes
|
|
|
70,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
112,737
|
|
|
$
|
209,650
|
|
|
$
|
196,241
|
|
|
$
|
(405,891
|
)
|
|
$
|
112,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Cash Flows
Nine
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
CapitalSource
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
218,936
|
|
|
$
|
239,343
|
|
|
$
|
148,912
|
|
|
$
|
253,983
|
|
|
$
|
(642,238
|
)
|
|
$
|
218,936
|
|
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
55
|
|
|
|
6,407
|
|
|
|
|
|
|
|
|
|
|
|
6,462
|
|
Restricted stock expense
|
|
|
|
|
|
|
450
|
|
|
|
18,080
|
|
|
|
|
|
|
|
|
|
|
|
18,530
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,497
|
|
|
|
|
|
|
|
2,497
|
|
Non-cash prepayment fee
|
|
|
|
|
|
|
|
|
|
|
(8,353
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,353
|
)
|
Cumulative effect of accounting
change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
|
(370
|
)
|
Amortization of deferred loan fees
and discounts
|
|
|
|
|
|
|
(33,534
|
)
|
|
|
6,936
|
|
|
|
(39,210
|
)
|
|
|
|
|
|
|
(65,808
|
)
|
Interest on
paid-in-kind
loans
|
|
|
|
|
|
|
6,365
|
|
|
|
(11,373
|
)
|
|
|
(2,013
|
)
|
|
|
|
|
|
|
(7,021
|
)
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
43,304
|
|
|
|
7,729
|
|
|
|
|
|
|
|
51,033
|
|
Amortization of deferred financing
fees and discounts
|
|
|
2,284
|
|
|
|
16,750
|
|
|
|
331
|
|
|
|
9,186
|
|
|
|
|
|
|
|
28,551
|
|
Depreciation and amortization
|
|
|
|
|
|
|
34
|
|
|
|
2,220
|
|
|
|
7,350
|
|
|
|
|
|
|
|
9,604
|
|
Benefit for deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,453
|
)
|
|
|
|
|
|
|
(9,453
|
)
|
Non-cash loss on investments, net
|
|
|
|
|
|
|
|
|
|
|
5,510
|
|
|
|
|
|
|
|
|
|
|
|
5,510
|
|
Non-cash (gain) loss on property
and equipment disposals
|
|
|
|
|
|
|
(740
|
)
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
|
(472
|
)
|
Loss (gain) on derivatives
|
|
|
|
|
|
|
678
|
|
|
|
(844
|
)
|
|
|
(29
|
)
|
|
|
|
|
|
|
(195
|
)
|
Unrealized loss on residential
mortgage investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,702
|
|
|
|
|
|
|
|
8,702
|
|
Net increase in mortgage-backed
securities pledged, trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(331,767
|
)
|
|
|
|
|
|
|
(331,767
|
)
|
Amortization of discount on
residential mortgage investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,786
|
)
|
|
|
|
|
|
|
(22,786
|
)
|
Decrease (increase) in loans held
for sale, net
|
|
|
|
|
|
|
2,346
|
|
|
|
(62,500
|
)
|
|
|
|
|
|
|
|
|
|
|
(60,154
|
)
|
Decrease in intercompany note
receivable
|
|
|
|
|
|
|
5,284
|
|
|
|
23,380
|
|
|
|
|
|
|
|
(28,664
|
)
|
|
|
|
|
Decrease (increase) in other assets
|
|
|
20,110
|
|
|
|
(817
|
)
|
|
|
(4,586
|
)
|
|
|
38,705
|
|
|
|
11,799
|
|
|
|
65,211
|
|
Increase in other liabilities
|
|
|
11,977
|
|
|
|
821
|
|
|
|
29,876
|
|
|
|
5,896
|
|
|
|
(13,147
|
)
|
|
|
35,423
|
|
Net transfers with subsidiaries
|
|
|
(923,633
|
)
|
|
|
(96,974
|
)
|
|
|
(88,451
|
)
|
|
|
466,820
|
|
|
|
642,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by
operating activities
|
|
|
(670,326
|
)
|
|
|
140,061
|
|
|
|
108,747
|
|
|
|
395,610
|
|
|
|
(30,012
|
)
|
|
|
(55,920
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted
cash
|
|
|
|
|
|
|
17,502
|
|
|
|
(49,955
|
)
|
|
|
(45,711
|
)
|
|
|
|
|
|
|
(78,164
|
)
|
Increase in mortgage-related
receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,391,783
|
)
|
|
|
|
|
|
|
(2,391,783
|
)
|
Increase in receivables under
reverse-repurchase agreements, net
|
|
|
|
|
|
|
(19,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,663
|
)
|
Decrease (increase) in loans, net
|
|
|
|
|
|
|
75,404
|
|
|
|
(301,032
|
)
|
|
|
(1,142,428
|
)
|
|
|
2,151
|
|
|
|
(1,365,905
|
)
|
Acquisition of real estate, net of
cash acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66,375
|
)
|
|
|
|
|
|
|
(66,375
|
)
|
Disposal (acquisition) of
investments, net
|
|
|
33,683
|
|
|
|
(26,835
|
)
|
|
|
(10,114
|
)
|
|
|
(19,712
|
)
|
|
|
|
|
|
|
(22,978
|
)
|
Acquisition of property and
equipment, net
|
|
|
|
|
|
|
(605
|
)
|
|
|
(2,175
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
investing activities
|
|
|
33,683
|
|
|
|
45,803
|
|
|
|
(363,276
|
)
|
|
|
(3,666,009
|
)
|
|
|
2,151
|
|
|
|
(3,947,648
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(3,026
|
)
|
|
|
(18,922
|
)
|
|
|
(3,526
|
)
|
|
|
(12,400
|
)
|
|
|
|
|
|
|
(37,874
|
)
|
Decrease in intercompany note
payable
|
|
|
(20,327
|
)
|
|
|
(8,337
|
)
|
|
|
|
|
|
|
|
|
|
|
28,664
|
|
|
|
|
|
Borrowings under repurchase
agreements, net
|
|
|
|
|
|
|
13,273
|
|
|
|
|
|
|
|
256,594
|
|
|
|
|
|
|
|
269,867
|
|
Borrowings on unsecured credit
facilities, net
|
|
|
465,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
465,000
|
|
(Repayments of) borrowings on
secured credit facilities, net
|
|
|
|
|
|
|
(1,128,462
|
)
|
|
|
|
|
|
|
1,171,000
|
|
|
|
|
|
|
|
42,538
|
|
Borrowings of term debt
|
|
|
|
|
|
|
2,044,066
|
|
|
|
4,400
|
|
|
|
2,447,870
|
|
|
|
(803
|
)
|
|
|
4,495,533
|
|
Repayments of term debt
|
|
|
|
|
|
|
(1,063,398
|
)
|
|
|
(49
|
)
|
|
|
(165,932
|
)
|
|
|
|
|
|
|
(1,229,379
|
)
|
Borrowings of subordinated debt
|
|
|
|
|
|
|
|
|
|
|
131,685
|
|
|
|
|
|
|
|
|
|
|
|
131,685
|
|
Proceeds from issuance of common
stock, net of offering costs
|
|
|
498,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
498,931
|
|
Proceeds from exercise of options
|
|
|
5,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,283
|
|
Tax benefits on share-based payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,311
|
|
|
|
|
|
|
|
3,311
|
|
Payment of dividends
|
|
|
(311,256
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,824
|
)
|
|
|
|
|
|
|
(314,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
financing activities
|
|
|
634,605
|
|
|
|
(161,780
|
)
|
|
|
132,510
|
|
|
|
3,697,619
|
|
|
|
27,861
|
|
|
|
4,330,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and
cash equivalents
|
|
|
(2,038
|
)
|
|
|
24,084
|
|
|
|
(122,019
|
)
|
|
|
427,220
|
|
|
|
|
|
|
|
327,247
|
|
Cash and cash equivalents as of
beginning of period
|
|
|
2,038
|
|
|
|
145,065
|
|
|
|
156,571
|
|
|
|
20,222
|
|
|
|
|
|
|
|
323,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end
of period
|
|
$
|
|
|
|
$
|
169,149
|
|
|
$
|
34,552
|
|
|
$
|
447,442
|
|
|
$
|
|
|
|
$
|
651,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Cash Flows
Nine
Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
CapitalSource
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
112,737
|
|
|
$
|
209,650
|
|
|
$
|
196,241
|
|
|
$
|
(405,891
|
)
|
|
$
|
112,737
|
|
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
281
|
|
Restricted stock expense
|
|
|
13,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,075
|
|
Amortization of deferred loan fees
and discounts
|
|
|
|
|
|
|
|
|
|
|
(58,420
|
)
|
|
|
|
|
|
|
(58,420
|
)
|
Interest on
paid-in-kind
loans
|
|
|
|
|
|
|
(1,408
|
)
|
|
|
(7,286
|
)
|
|
|
|
|
|
|
(8,694
|
)
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
57,833
|
|
|
|
|
|
|
|
57,833
|
|
Amortization of deferred financing
fees and discounts
|
|
|
1,747
|
|
|
|
15,563
|
|
|
|
630
|
|
|
|
|
|
|
|
17,940
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
2,015
|
|
|
|
|
|
|
|
2,015
|
|
Benefit for deferred income taxes
|
|
|
(8,965
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,965
|
)
|
Non-cash loss (gain) on
investments, net
|
|
|
|
|
|
|
222
|
|
|
|
(3,017
|
)
|
|
|
|
|
|
|
(2,795
|
)
|
(Gain) loss on derivatives
|
|
|
|
|
|
|
(1,376
|
)
|
|
|
1,490
|
|
|
|
|
|
|
|
114
|
|
Increase in loans held for sale, net
|
|
|
|
|
|
|
(33,606
|
)
|
|
|
|
|
|
|
|
|
|
|
(33,606
|
)
|
Decrease in intercompany note
receivable
|
|
|
|
|
|
|
|
|
|
|
7,692
|
|
|
|
(7,692
|
)
|
|
|
|
|
Decrease in other assets
|
|
|
187
|
|
|
|
1,955
|
|
|
|
850
|
|
|
|
|
|
|
|
2,992
|
|
(Decrease) increase in other
liabilities
|
|
|
(14,927
|
)
|
|
|
6,600
|
|
|
|
(11,717
|
)
|
|
|
(1,920
|
)
|
|
|
(21,964
|
)
|
Net transfers with subsidiaries
|
|
|
(75,492
|
)
|
|
|
(199,892
|
)
|
|
|
(130,507
|
)
|
|
|
405,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
operating activities
|
|
|
28,643
|
|
|
|
(2,292
|
)
|
|
|
55,804
|
|
|
|
(9,612
|
)
|
|
|
72,543
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in restricted
cash
|
|
|
|
|
|
|
(64,867
|
)
|
|
|
132,261
|
|
|
|
|
|
|
|
67,394
|
|
Increase in receivables under
reverse-repurchase agreements, net
|
|
|
|
|
|
|
(16,928
|
)
|
|
|
|
|
|
|
|
|
|
|
(16,928
|
)
|
Increase in loans, net
|
|
|
|
|
|
|
(983,411
|
)
|
|
|
(101,511
|
)
|
|
|
1,920
|
|
|
|
(1,083,002
|
)
|
Acquisition of investments, net
|
|
|
(28,629
|
)
|
|
|
(6,175
|
)
|
|
|
(10,525
|
)
|
|
|
|
|
|
|
(45,329
|
)
|
Acquisition of property and
equipment, net
|
|
|
|
|
|
|
5
|
|
|
|
(3,732
|
)
|
|
|
|
|
|
|
(3,727
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by
investing activities
|
|
|
(28,629
|
)
|
|
|
(1,071,376
|
)
|
|
|
16,493
|
|
|
|
1,920
|
|
|
|
(1,081,592
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(170
|
)
|
|
|
(14,277
|
)
|
|
|
(428
|
)
|
|
|
|
|
|
|
(14,875
|
)
|
Decrease in intercompany note
payable
|
|
|
|
|
|
|
(7,692
|
)
|
|
|
|
|
|
|
7,692
|
|
|
|
|
|
Borrowings on secured credit
facilities, net
|
|
|
|
|
|
|
1,019,426
|
|
|
|
14,313
|
|
|
|
|
|
|
|
1,033,739
|
|
Borrowings of term debt
|
|
|
|
|
|
|
1,141,825
|
|
|
|
16,660
|
|
|
|
|
|
|
|
1,158,485
|
|
Repayments of term debt
|
|
|
|
|
|
|
(1,128,034
|
)
|
|
|
(122,281
|
)
|
|
|
|
|
|
|
(1,250,315
|
)
|
Proceeds from issuance of common
stock, net of offering costs
|
|
|
582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
582
|
|
Proceeds from exercise of options
|
|
|
761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
financing activities
|
|
|
1,173
|
|
|
|
1,011,248
|
|
|
|
(91,736
|
)
|
|
|
7,692
|
|
|
|
928,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and
cash equivalents
|
|
|
1,187
|
|
|
|
(62,420
|
)
|
|
|
(19,439
|
)
|
|
|
|
|
|
|
(80,672
|
)
|
Cash and cash equivalents as of
beginning of period
|
|
|
|
|
|
|
170,532
|
|
|
|
35,545
|
|
|
|
|
|
|
|
206,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end
of period
|
|
$
|
1,187
|
|
|
$
|
108,112
|
|
|
$
|
16,106
|
|
|
$
|
|
|
|
$
|
125,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 10.
|
Shareholders
Equity
|
Common
Stock Shares Outstanding
Common stock share activity for the nine months ended
September 30, 2006 was as follows:
|
|
|
|
|
Outstanding as of
December 31, 2005
|
|
|
140,405,766
|
|
Issuance of common stock
|
|
|
35,845,342
|
|
Exercise of options
|
|
|
587,716
|
|
Restricted stock and other stock
grants, net
|
|
|
539,048
|
|
|
|
|
|
|
Outstanding as of
September 30, 2006
|
|
|
177,377,872
|
|
|
|
|
|
|
Dividend
Reinvestment and Stock Purchase Plan
In March 2006, we began offering a Dividend Reinvestment and
Stock Purchase Plan (the DRIP) to current and
prospective shareholders. Participation in the DRIP allows
common shareholders to reinvest cash dividends and to purchase
additional shares of our common stock, in some cases at a
discount from the market price. During the nine months ended
September 30, 2006, we received proceeds of
$94.7 million related to the purchase of 4.1 million
shares of our common stock pursuant to the DRIP. In addition, we
received proceeds of $9.0 million related to cash dividends
reinvested for 0.4 million shares of our common stock
during the nine months ended September 30, 2006.
We intend to elect to be taxed as a REIT under the Internal
Revenue Code (the Code) commencing with our taxable
year ending December 31, 2006. To qualify as a REIT, we are
required to distribute at least 90% of our REIT taxable income
to our shareholders and meet the various other requirements
imposed by the Code, through actual operating results, asset
holdings, distribution levels and diversity of stock ownership.
Provided we qualify for taxation as a REIT, we generally will
not be subject to corporate-level income tax on the earnings
distributed to our shareholders that we derive from our REIT
qualifying activities. We will continue to be subject to
corporate-level tax on the earnings we derive from our taxable
REIT subsidiaries (TRSs). If we fail to qualify as a
REIT in any taxable year, all of our taxable income would be
subject to federal income tax at regular corporate rates,
including any applicable alternative minimum tax. We will still
be subject to foreign, state and local taxation in various
foreign, state and local jurisdictions, including those in which
we transact business or reside.
As certain of our subsidiaries are TRSs, we continue to report a
provision for income taxes within our financial statements. We
use the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates for the periods
in which the differences are expected to reverse. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the change.
During the three and nine months ended September 30, 2006,
we recorded $22.3 million and $52.9 million of income
tax expense, respectively. Our effective income tax rate for the
three and nine months ended September 30, 2006 attributable
to our TRSs was 39.2% and the effective tax rate on our
consolidated net income was 21.6% and
22
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
19.5%, respectively. The reconciliations of the consolidated
effective income tax rate and the federal statutory corporate
income tax rate for the three and nine months ended
September 30, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Benefit of REIT election
|
|
|
(15.9
|
)
|
|
|
|
|
|
|
(16.1
|
)
|
|
|
|
|
State income taxes, net of federal
tax benefit
|
|
|
1.2
|
|
|
|
2.2
|
|
|
|
1.4
|
|
|
|
3.2
|
|
Other
|
|
|
1.3
|
|
|
|
0.2
|
|
|
|
0.9
|
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated annual effective income
tax rate
|
|
|
21.6
|
|
|
|
37.4
|
|
|
|
21.2
|
|
|
|
38.6
|
|
Discrete item Benefit
for reversal of net deferred tax liabilities(1)
|
|
|
|
|
|
|
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current quarter effective income
tax rate
|
|
|
21.6
|
%
|
|
|
37.4
|
%(2)
|
|
|
19.5
|
%
|
|
|
38.6
|
%(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In connection with our REIT election, we reversed net deferred
tax liabilities of $4.7 million, relating to REIT
qualifying activities, into income during the nine months ended
September 30, 2006. |
|
(2) |
|
We provided for income taxes on the income earned for the three
months ended September 30, 2005 based on a 37.4% effective
tax rate, compared to 39.0% for the previous quarters in 2005.
This decrease in the effective tax rate was the result of both a
reconciliation of our previous provision for income taxes with
actual tax expense for 2004 plus a change in the estimated tax
rate for 2005 which was accounted for in the third quarter 2005.
Our effective tax rate was 38.6% for the nine months ended
September 30, 2005 and 38.8% for the year ended
December 31, 2005. |
During the nine months ended September 30, 2006, we
recorded a valuation allowance of $0.4 million against our
deferred tax asset related to a state net operating loss
carryforward, the majority of which expires beginning in 2025,
as we determined that it was more likely than not that this
deferred tax asset would not be realized.
|
|
Note 12.
|
Comprehensive
Income
|
Comprehensive income for the three and nine months ended
September 30, 2006 and 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Net income
|
|
$
|
80,853
|
|
|
$
|
28,083
|
|
|
$
|
218,936
|
|
|
$
|
112,737
|
|
Unrealized (loss) gain on
available-for-sale
securities, net of tax
|
|
|
(177
|
)
|
|
|
12
|
|
|
|
2,371
|
|
|
|
(278
|
)
|
Unrealized (loss) gain on cash
flow hedge, net of tax
|
|
|
(1,381
|
)
|
|
|
(63
|
)
|
|
|
1,075
|
|
|
|
(331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
79,295
|
|
|
$
|
28,032
|
|
|
$
|
222,382
|
|
|
$
|
112,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accumulated other comprehensive income (loss), net as of
September 30, 2006 and December 31, 2005 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Unrealized gain (loss) on
available-for-sale
securities, net of tax
|
|
$
|
1,553
|
|
|
$
|
(818
|
)
|
Unrealized gain (loss) on cash
flow hedge, net of tax
|
|
|
554
|
|
|
|
(521
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income (loss), net
|
|
$
|
2,107
|
|
|
$
|
(1,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Note 13.
|
Net
Income per Share
|
The computations of basic and diluted net income per share for
the three and nine months ended September 30, 2006 and 2005
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands, except per share data)
|
|
|
Basic net income per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
80,853
|
|
|
$
|
28,083
|
|
|
$
|
218,936
|
|
|
$
|
112,737
|
|
Average shares basic
|
|
|
171,777,989
|
|
|
|
116,742,755
|
|
|
|
163,373,576
|
|
|
|
116,630,570
|
|
Basic net income per share
|
|
$
|
0.47
|
|
|
$
|
0.24
|
|
|
$
|
1.34
|
|
|
$
|
0.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
80,853
|
|
|
$
|
28,083
|
|
|
$
|
218,936
|
|
|
$
|
112,737
|
|
Average shares basic
|
|
|
171,777,989
|
|
|
|
116,742,755
|
|
|
|
163,373,576
|
|
|
|
116,630,570
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock dividend declared (1)
|
|
|
|
|
|
|
|
|
|
|
1,080,124
|
|
|
|
|
|
Option shares
|
|
|
330,551
|
|
|
|
678,979
|
|
|
|
397,791
|
|
|
|
756,282
|
|
Unvested restricted stock
|
|
|
1,180,952
|
|
|
|
270,025
|
|
|
|
1,146,656
|
|
|
|
339,874
|
|
Stock units
|
|
|
24,442
|
|
|
|
6,024
|
|
|
|
17,045
|
|
|
|
4,528
|
|
Non-managing member units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion premium on the March
Debentures (2)
|
|
|
40,957
|
|
|
|
|
|
|
|
13,652
|
|
|
|
|
|
Written call option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares diluted
|
|
|
173,354,891
|
|
|
|
117,697,783
|
|
|
|
166,028,844
|
|
|
|
117,731,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.47
|
|
|
$
|
0.24
|
|
|
$
|
1.32
|
|
|
$
|
0.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All conditions were not met for inclusion in the basic net
income per share calculation until such shares were issued on
January 25, 2006. |
|
(2) |
|
For the three and nine months ended September 30, 2006, the
conversion premium on the March Debentures represents the
dilutive shares associated with 8.8 million shares based on
a conversion price of $25.71. |
Shares that have an antidilutive effect in the calculation of
diluted net income per share and certain shares related to our
convertible debt have been excluded from the computations above.
For the three and nine months ended September 30, 2006, we
excluded 8.3 million and 3.9 million average shares,
respectively, from average dilutive shares related to stock
options that are antidilutive. For the three and nine months
ended September 30, 2005, we excluded 0.6 million and
0.2 million average shares, respectively, from average
dilutive shares related to
24
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
stock options that are antidilutive. For the three and nine
months ended September 30, 2006, we excluded
2.5 million and 2.3 million average shares,
respectively, from average dilutive shares related to
non-managing member units that are considered antidilutive. For
the three and nine months ended September 30, 2006 and
2005, we excluded 7.4 million average shares from average
dilutive shares related to shares subject to a written call
option that are considered antidilutive. For the three and nine
months ended September 30, 2006, the conversion premium on
the July Debentures associated with 12.3 million shares was
considered to be antidilutive based on a conversion price of
$26.88. For the three and nine months ended September 30,
2005, the conversion premium on the Debentures associated with
17.8 million shares was considered to be antidilutive based
on conversion prices of $36.48 and $31.78, respectively. As
dividends are paid, the conversion prices related to our written
call option and the Debentures are adjusted.
|
|
Note 14.
|
Stock-Based
Compensation
|
Equity
Incentive Plan
In April 2006, our shareholders adopted the CapitalSource Inc.
Third Amended and Restated Equity Incentive Plan (the
Plan), which amended the CapitalSource Inc. Second
Amended and Restated Equity Incentive Plan adopted on
August 6, 2003 in connection with our initial public
offering. A total of 33.0 million shares of common stock
are reserved for issuance under the Plan. The Plan will expire
on the earliest of (1) the date as of which the Board of
Directors, in its sole discretion, determines that the Plan
shall terminate, (2) following certain corporate
transactions such as a merger or sale of our assets if the Plan
is not assumed by the surviving entity, (3) at such time as
all shares of common stock that may be available for purchase
under the Plan have been issued or (4) August 6, 2016.
The Plan is intended to give eligible employees, members of the
Board of Directors, and our consultants and advisors awards that
are linked to the performance of our common stock. As of
September 30, 2006, there were 14.6 million shares
remaining available for issuance under the Plan.
Adoption
of SFAS No. 123(R)
On January 1, 2006, we adopted SFAS No. 123
(revised 2004), Share-Based Payment,
(SFAS No. 123(R)) which is a revision of
SFAS No. 123, Accounting for Stock-Based
Compensation, (SFAS No. 123), as it
relates to the Plan described above. SFAS No. 123(R)
supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25) and amends SFAS No. 95,
Statement of Cash Flows. SFAS No. 123(R)
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income
statement based on their fair values. SFAS No. 123(R)
also requires the cash flows resulting from the tax benefits of
tax deductions in excess of the compensation cost recognized
from the exercise of stock options to be classified as financing
cash flows, rather than as operating cash flows.
Prior to the adoption of SFAS No. 123(R), we accounted
for share-based payments to employees using the intrinsic value
method in accordance with APB 25 and related
interpretations, as permitted under SFAS No. 123, and
as such, generally recognized no compensation cost for employee
stock options. In accordance with APB 25, compensation cost
was only recognized for our options and restricted stock granted
to employees where the exercise price was less than the market
price of the underlying common stock on the date of grant. We
adopted the fair value recognition provisions of
SFAS No. 123(R) using the modified-
prospective-transition method. Under this method, compensation
cost recognized beginning on January 1, 2006, includes:
(a) compensation cost for all share-based payments granted
prior to, but not yet vested as of January 1, 2006, based
on the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123, and
(b) compensation cost for all share-based payments granted
subsequent to January 1, 2006, based on the grant date fair
value estimated in accordance with the provisions of
SFAS No. 123(R). In accordance with the
modified-prospective-transition method, our consolidated
financial statements from prior periods have not been restated
to reflect, and do not include, the impact of
SFAS No. 123(R). In addition, under
SFAS No. 123(R), an entity may elect to recognize
compensation cost for an award with only service conditions that
has a graded vesting schedule using either a straight-line
recognition
25
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
method or a graded vesting recognition method. We elected the
straight-line recognition method for all awards with only
service based vesting conditions. For awards having graded
vesting schedules and performance or market based vesting
conditions, we amortize compensation cost using the graded
vesting recognition method.
Upon adoption of SFAS No. 123(R), we recorded a
cumulative effect of accounting change of $0.4 million (or
$0.00 per diluted share), net of taxes, in our accompanying
consolidated statement of income for the nine months ended
September 30, 2006 resulting from the requirement to
estimate forfeitures for unvested awards at the date of grant
instead of recognizing them as incurred. We did not record any
additional cumulative effect of accounting change during the
three months ended September 30, 2006. Our net income for
the three and nine months ended September 30, 2006 is
$1.1 million and $3.2 million, respectively, or $0.01
and $0.02 per basic and diluted share, respectively, lower
than if we had continued to account for stock-based compensation
under APB 25. The adoption of SFAS No. 123(R)
also had the impact of reducing net operating cash flows and
increasing net financing cash flows by the $3.3 million
excess tax benefit recognized for the nine months ended
September 30, 2006. The following table illustrates the
effect on reported net income and net income per share as if we
had applied the fair value recognition provisions of
SFAS No. 123 to stock-based compensation for the three
and nine months ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2005
|
|
|
September 30, 2005
|
|
|
|
($ in thousands, except per share data)
|
|
|
Net income as reported
|
|
$
|
28,083
|
|
|
$
|
112,737
|
|
Add back: Stock-based compensation
expense from options included in reported net income, net of tax
|
|
|
62
|
|
|
|
171
|
|
Deduct: Total stock-based
compensation expense determined under fair value-based method
for all option awards, net of tax
|
|
|
(566
|
)
|
|
|
(1,631
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
27,579
|
|
|
$
|
111,277
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
0.24
|
|
|
$
|
0.97
|
|
Basic pro forma
|
|
$
|
0.24
|
|
|
$
|
0.95
|
|
Diluted as reported
|
|
$
|
0.24
|
|
|
$
|
0.96
|
|
Diluted pro forma
|
|
$
|
0.23
|
|
|
$
|
0.95
|
|
Total compensation cost recognized in income pursuant to the
Plan was $8.6 million and $25.0 million for the three
and nine months ended September 30, 2006, respectively, and
$5.2 million and $13.3 million for the three and nine
months ended September 30, 2005.
26
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following disclosures are being provided pursuant to the
requirements of SFAS No. 123(R).
Stock
Options
Option activity for the nine months ended September 30,
2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual Life
|
|
|
Aggregate
|
|
|
|
Options
|
|
|
Price
|
|
|
(in years)
|
|
|
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Outstanding as of
December 31, 2005
|
|
|
2,587,312
|
|
|
$
|
15.34
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
7,967,493
|
|
|
|
23.71
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(587,716
|
)
|
|
|
9.36
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(196,414
|
)
|
|
|
19.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of
September 30, 2006
|
|
|
9,770,675
|
|
|
$
|
22.44
|
|
|
|
9.28
|
|
|
$
|
16,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest as of
September 30, 2006
|
|
|
9,611,458
|
|
|
$
|
22.52
|
|
|
|
1.66
|
|
|
$
|
16,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of
September 30, 2006
|
|
|
2,556,971
|
|
|
$
|
20.89
|
|
|
|
8.88
|
|
|
$
|
5,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2006, the weighted
average grant date fair value of options granted was $1.44. The
total intrinsic value of options exercised during the nine
months ended September 30, 2006 was $8.6 million. As
of September 30, 2006, the total unrecognized compensation
cost related to nonvested options granted pursuant to the Plan
was $11.0 million. This cost is expected to be recognized
over a weighted average period of 2.22 years.
For awards containing only service
and/or
performance based vesting conditions, we use the Black-Scholes
weighted average option-pricing model to estimate the fair value
of each option grant on its grant date. During the three and
nine months ended September 30, 2005, we used this model
solely to determine the pro forma net income disclosures
required by SFAS No. 123. The weighted average
assumptions used in this model for the three and nine months
ended September 30, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Dividend yield
|
|
|
7.75%
|
|
|
|
|
|
|
|
8.33%
|
|
|
|
|
|
Expected volatility
|
|
|
20%
|
|
|
|
35%
|
|
|
|
20%
|
|
|
|
32%
|
|
Risk-free interest rate
|
|
|
4.86%
|
|
|
|
4.08%
|
|
|
|
4.98%
|
|
|
|
4.00%
|
|
Expected life
|
|
|
4.0 years
|
|
|
|
6.0 years
|
|
|
|
9.7 years
|
|
|
|
6.0 years
|
|
The dividend yield is computed based on annualized dividends and
the average share price for the period. Prior to our decision to
elect to be taxed as a REIT for the year commencing
January 1, 2006, we did not pay dividends and this
assumption was not applicable. Prior to 2006, expected
volatility was based on the historical volatility of our common
stock. In connection with our REIT election, we changed our
method of computing the expected volatility to be based on the
average volatility of the common stock of selected competitor
REITs as our historical volatility is no longer an indicator of
our future volatility. The risk-free interest rate is the
U.S. Treasury yield curve in effect at the time of grant
based on the expected life of options. The expected life of our
options granted represents the period of time that options are
expected to be outstanding. The expected life of our options
increased during the nine months ended September 30, 2006
as a result of options granted to certain executives during the
period which have a longer expected life.
27
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For certain awards granted during the nine months ended
September 30, 2006 containing market based vesting
conditions, we used a lattice option-pricing model to estimate
the fair value of each option grant on its grant date. The
assumptions used in this model for the nine months ended
September 30, 2006 were as follows:
|
|
|
|
|
Dividend yield
|
|
|
8.25
|
%
|
Expected volatility
|
|
|
20
|
%
|
Risk-free interest rate
|
|
|
5.00
|
%
|
Expected life
|
|
|
10.0 years
|
|
The dividend yield is computed based on anticipated annual
dividends and the share price on the last day of the period. Our
expected volatility is computed based on the average volatility
of the common stock of selected competitor REITs as our
historical volatility is not an indicator of our future
volatility, as discussed above. The risk-free interest rate is
the U.S. Treasury yield curve in effect at the time of
grant based on the expected life of options. The expected life
of our options granted represents the period of time that
options are expected to be outstanding.
Restricted
Stock
Restricted stock activity for the nine months ended
September 30, 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested as of December 31,
2005
|
|
|
3,873,124
|
|
|
$
|
22.08
|
|
Granted
|
|
|
1,618,921
|
|
|
|
23.58
|
|
Vested
|
|
|
(768,390
|
)
|
|
|
22.55
|
|
Forfeited
|
|
|
(116,547
|
)
|
|
|
22.43
|
|
|
|
|
|
|
|
|
|
|
Nonvested as of September 30,
2006
|
|
|
4,607,108
|
|
|
$
|
22.52
|
|
|
|
|
|
|
|
|
|
|
The fair value of nonvested restricted stock is determined based
on the closing trading price of our common stock on the grant
date. The weighted average grant date fair value of restricted
stock granted during the nine months ended September 30,
2006 was $23.58. The total fair value of restricted stock that
vested during the nine months ended September 30, 2006 was
$18.5 million. As of September 30, 2006, the total
unrecognized compensation cost related to nonvested restricted
stock granted pursuant to the Plan was $76.9 million. This
cost is expected to be recognized over a weighed average period
of 1.76 years.
|
|
Note 15.
|
Commitments
and Contingencies
|
As of September 30, 2006, we had issued $235.3 million
in letters of credit that expire at various dates over the next
seven years. If a borrower defaults on its commitment(s) subject
to any letter of credit issued under these arrangements, we
would be responsible to meet the borrowers financial
obligation and would seek repayment of that financial obligation
from the borrower. These arrangements qualify as a financial
guarantee in accordance with FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others. As a result, we included the fair value of these
obligations, totaling $6.4 million, in other assets in the
accompanying consolidated balance sheet as of September 30,
2006.
As of September 30, 2006, we had identified conditional
asset retirement obligations primarily related to the future
removal and disposal of asbestos that is contained within
certain of our direct real estate investment properties. The
asbestos is appropriately contained and we believe we are
compliant with current environmental regulations. If these
properties undergo major renovations or are demolished, certain
environmental regulations are in place, which specify the manner
in which asbestos must be handled and disposed. Under FASB
Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations An Interpretation of FASB
No. 143, we are required to record the fair value of
these conditional liabilities if they can be reasonably
estimated. As of September 30, 2006, sufficient information
was not available to estimate our liability for conditional
asset retirement obligations as the obligations to remove the
asbestos from these properties have indeterminable
28
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
settlement dates. As such, no liability for conditional asset
retirement obligations was recorded on our consolidated balance
sheet as of September 30, 2006.
From time to time we are party to legal proceedings. We do not
believe that any currently pending or threatened proceeding, if
determined adversely to us, would have a material adverse effect
on our business, financial condition or results of operations,
including our cash flows.
29
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 16.
|
Operating
Segments
|
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, requires that a public
business enterprise report financial and descriptive information
about its reportable operating segments including a measure of
segment profit or loss, certain specific revenue and expense
items and segment assets. As discussed in Note 1,
Organization, on January 1, 2006 we began operating
as two reportable segments: 1) Commercial
Lending & Investment and 2) Residential Mortgage
Investment. Prior to 2006, we operated as a single business
segment as substantially all of our activity was related to our
commercial lending and investment business. The financial
results of our operating segments as of and for the three and
nine months ended September 30, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2006
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
|
|
|
|
Lending &
|
|
|
Mortgage
|
|
|
Consolidated
|
|
|
|
Investment
|
|
|
Investment
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Total interest and fee income
|
|
$
|
252,873
|
|
|
$
|
81,148
|
|
|
$
|
334,021
|
|
Operating lease income
|
|
|
7,855
|
|
|
|
|
|
|
|
7,855
|
|
Interest expense
|
|
|
96,872
|
|
|
|
73,246
|
|
|
|
170,118
|
|
Provision for loan losses
|
|
|
24,849
|
|
|
|
|
|
|
|
24,849
|
|
Operating expenses (1)
|
|
|
51,081
|
|
|
|
2,150
|
|
|
|
53,231
|
|
Other income (2)
|
|
|
8,447
|
|
|
|
2,291
|
|
|
|
10,738
|
|
Noncontrolling interests expense
|
|
|
1,259
|
|
|
|
|
|
|
|
1,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
95,114
|
|
|
|
8,043
|
|
|
|
103,157
|
|
Income taxes
|
|
|
22,304
|
|
|
|
|
|
|
|
22,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
72,810
|
|
|
$
|
8,043
|
|
|
$
|
80,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of
September 30, 2006
|
|
$
|
8,635,672
|
|
|
$
|
5,856,202
|
|
|
$
|
14,491,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
|
|
|
|
Lending &
|
|
|
Mortgage
|
|
|
Consolidated
|
|
|
|
Investment
|
|
|
Investment
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Total interest and fee income
|
|
$
|
679,228
|
|
|
$
|
184,473
|
|
|
$
|
863,701
|
|
Operating lease income
|
|
|
19,174
|
|
|
|
|
|
|
|
19,174
|
|
Interest expense
|
|
|
250,967
|
|
|
|
170,851
|
|
|
|
421,818
|
|
Provision for loan losses
|
|
|
50,732
|
|
|
|
301
|
|
|
|
51,033
|
|
Operating expenses (1)
|
|
|
151,183
|
|
|
|
6,358
|
|
|
|
157,541
|
|
Other income (2)
|
|
|
22,158
|
|
|
|
220
|
|
|
|
22,378
|
|
Noncontrolling interests expense
|
|
|
3,350
|
|
|
|
|
|
|
|
3,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes and
cumulative effect of accounting change
|
|
|
264,328
|
|
|
|
7,183
|
|
|
|
271,511
|
|
Income taxes
|
|
|
52,945
|
|
|
|
|
|
|
|
52,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative effect
of accounting change
|
|
|
211,383
|
|
|
|
7,183
|
|
|
|
218,566
|
|
Cumulative effect of accounting
change, net of taxes
|
|
|
370
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
211,753
|
|
|
$
|
7,183
|
|
|
$
|
218,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of
September 30, 2006
|
|
$
|
8,635,672
|
|
|
$
|
5,856,202
|
|
|
$
|
14,491,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Operating expenses of our
Residential Mortgage Investment segment consist primarily of
direct expenses related to compensation and benefits,
professional fees paid to our investment manager and other
direct expenses.
|
|
(2)
|
|
Other income for our Residential
Mortgage Investment segment includes the net of interest income
and expense accruals related to certain of our derivatives along
with the changes in fair value of our investments and related
derivatives.
|
The accounting policies of each of the individual operating
segments are the same as those described in Note 2,
Summary of Significant Accounting Policies.
30
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 17.
|
Subsequent
Events
|
On October 6, 2006, we amended our $600.0 million
credit facility with Citigroup Global Markets Inc. to decrease
the maximum amount of the facility to $400.0 million.
On October 10, 2006, we entered into a definitive agreement
to purchase 78 skilled nursing facilities for
$443.5 million. The closing of this transaction is expected
to occur prior to December 31, 2006 and is subject to
certain customary conditions.
On November 7, 2006, we entered into a definitive agreement
to purchase 11 skilled nursing facilities for
$78.0 million. The closing of this transaction is expected
to occur within the next 90 days and is subject to certain
customary conditions.
31
|
|
ITEM 2.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Form 10-Q,
including the footnotes to our unaudited consolidated financial
statements included herein, contains forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Exchange Act of
1934, as amended, and as such may involve known and unknown
risks, uncertainties and other factors that may cause our actual
results, performance or achievements to be materially different
from future results, performance or achievements expressed or
implied by these forward-looking statements. Forward-looking
statements, which are based on certain assumptions and describe
our future plans, strategies and expectations, are generally
identified by our use of words such as intend,
plan, may, should,
will, project, estimate,
anticipate, believe, expect,
continue, potential,
opportunity, and similar expressions, whether in the
negative or affirmative. Our ability to predict results or the
effect of future plans or strategies is inherently uncertain.
Although we believe that the expectations reflected in such
forward-looking statements are based on reasonable assumptions,
actual results and performance could differ materially from
those set forth in the forward-looking statements. All
statements regarding our expected financial position, business
and financing plans are forward-looking statements. All
forward-looking statements speak only to events as of the date
on which the statements are made. All subsequent written and
oral forward-looking statements attributable to us or any person
acting on our behalf are qualified by the cautionary statements
in this section. We undertake no obligation to update or
publicly release any revisions to forward-looking statements to
reflect events, circumstances or changes in expectations after
the date on which the statement is made, except as required by
law.
More detailed information about the factors that could have a
material adverse effect on our operations and future prospects
or which could cause events or circumstances to differ from the
forward-looking statements are contained herein in
Managements Discussion and Analysis of Financial
Condition and Results of Operations and in Risk
Factors, and in those same captioned sections of our Annual
Report on
Form 10-K
for the year ended December 31, 2005, as filed with the
Securities and Exchange Commission on March 8, 2006.
The information contained in this section should be read in
conjunction with our unaudited consolidated financial statements
and related notes in this
Form 10-Q.
Overview
and Highlights
We are a specialized finance company providing financing to
small and medium-sized businesses. We also selectively make
equity investments, engage in asset management and servicing
activities and invest in real estate and residential mortgage
assets. We intend to qualify as a real estate investment trust
(REIT) for our taxable year ending December 31,
2006.
Through our commercial lending and investment activities, our
primary goal is to be the lender of choice for small and
medium-sized businesses with annual revenues generally ranging
from $5 million to $500 million that require
customized and sophisticated debt financing. Since our inception
in September 2000, we have operated through three principal
commercial lending businesses:
|
|
|
|
|
Structured Finance, which generally engages in commercial
and residential real estate lending and also provides
asset-based lending to finance companies;
|
|
|
|
Healthcare and Specialty Finance, which generally
provides asset-based revolving lines of credit, first mortgage
loans, sale-leaseback financing, equipment financing and other
senior and mezzanine loans to healthcare businesses and a broad
range of other companies; and
|
|
|
|
Corporate Finance, which generally provides senior and
mezzanine loans principally to businesses backed by private
equity sponsors.
|
Our loans generally range from $1 million to
$50 million, although we sometimes make commercial loans
greater than $50 million, with an average commercial loan
size as of September 30, 2006 of $7.0 million. Our
commercial loans generally have a maturity of two to five years,
and substantially all of our commercial loans require monthly
interest payments at variable rates. In many cases, our
commercial loans provide for interest rate
32
floors that help us maintain our yields when interest rates are
low or declining. During the nine months ended
September 30, 2006, we closed on commercial loans
representing aggregate commitments of $3.9 billion.
To optimize the value of the REIT structure, we invest in
certain residential mortgage assets. As of September 30,
2006, the balance of our residential mortgage investment
portfolio was $5.8 billion, which included investments in
residential mortgage loans, residential mortgage-backed
securities (RMBS) and residential asset-backed
securities. While these residential mortgage assets are lower
yielding than the assets we originate in our commercial lending
and investment activities, our strategy is to purchase these
residential mortgage assets to further diversify our asset
portfolio and, by using appropriate leverage, to generate what
we believe to be appropriate risk adjusted returns in a
tax-efficient REIT structure.
Consolidated
Results of Operations
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. The discussion that follows
differentiates our results of operations between our segments.
Explanation
of Key Reporting Metrics
Interest Income. In our Commercial
Lending & Investment segment, interest income
represents interest earned on our commercial loans. The majority
of these loans charge interest at variable rates that generally
adjust daily, with an increasing number of loans charging
interest at fixed rates. As of September 30, 2006 and
December 31, 2005, 6% of our loans had fixed rates of
interest. In our Residential Mortgage Investment segment,
interest income represents interest earned on our residential
mortgage-related receivables, RMBS and asset-backed securities.
Fee Income. In our Commercial
Lending & Investment segment, fee income represents net
fee income earned from our commercial loan operations. Fee
income primarily includes the amortization of loan origination
fees, net of the direct costs of origination, and the
amortization of fees related to syndicated loans that we
originate and other fees charged to borrowers. We amortize these
loan fees into income over the life of our loans and do not take
loan fees into income when a loan closes. Loan prepayments may
materially affect fee income since, in the period of prepayment,
the amortization of remaining net loan origination fees and
discounts is accelerated and prepayment penalties may be
assessed on the prepaid loans and recognized in the period of
the prepayment. We consider both the acceleration of any
unamortized fees and fees related to prepayment penalties to be
prepayment-related fee income. We currently do not generate fee
income in our Residential Mortgage Investment segment.
Operating Lease Income. In our Commercial
Lending & Investment segment, operating lease income
represents lease income earned in connection with our direct
real estate investments. Our operating leases typically include
fixed rental payments, subject to escalation over the life of
the lease. We project a minimum escalation rate for the leases
and recognize operating lease income on a straight-line basis
over the life of the lease. We currently do not generate any
operating lease income in our Residential Mortgage Investment
segment.
Interest Expense. Interest expense is the
amount paid on borrowings, including the amortization of
deferred financing fees. In our Commercial Lending &
Investment segment, our borrowings consist of repurchase
agreements, secured and unsecured credit facilities, term debt
securitizations, convertible debt and subordinated debt. In our
Residential Mortgage Investment segment, our borrowings consist
of repurchase agreements and term debt securitizations. The
majority of our borrowings charge interest at variable rates
based primarily on
30-day LIBOR
or commercial paper rates plus a margin. Currently, our
convertible debt, three series of our subordinated debt and our
term debt issued in connection with our investments in
mortgage-related receivables bear a fixed rate of interest. As
our borrowings increase and as short term interest rates rise,
our interest expense will increase. Deferred financing fees and
the costs of issuing debt, such as commitment fees and legal
fees, are amortized over the estimated life of the borrowing.
Loan prepayments may materially affect interest expense on our
term debt since in the period of prepayment the amortization of
deferred financing fees and debt acquisition costs is
accelerated.
Provision for Loan Losses. We record a
provision for loan losses in both our Commercial
Lending & Investment segment and our Residential
Mortgage Investment segment. The provision for loan losses is
the periodic cost of maintaining an appropriate allowance for
loan losses inherent in our commercial lending portfolio and in
our
33
portfolio of residential mortgage-related receivables. As the
size and mix of loans within these portfolios change, or if the
credit quality of the portfolios change, we record a provision
to appropriately adjust the allowance for loan losses.
Other Income. In our Commercial
Lending & Investment segment, other income (expense)
consists of gains (losses) on the sale of debt and equity
investments, unrealized appreciation (depreciation) on certain
investments, gains (losses) on derivatives, due diligence
deposits forfeited, fees associated with the United States
Department of Housing and Urban Development, or HUD, origination
activities, unrealized appreciation (depreciation) of our equity
interests in certain non-consolidated entities, third-party
servicing income and other miscellaneous fees and expenses not
attributable to our commercial lending and investment
operations. In our Residential Mortgage Investment segment,
other income (expense) consists of unrealized appreciation
(depreciation) on our residential mortgage investments and gains
(losses) on related derivatives.
Operating Expenses. Operating expenses for
both our Commercial Lending & Investment segment and
our Residential Mortgage Investment segment include compensation
and benefits, professional fees, travel, rent, insurance,
depreciation and amortization, marketing and other general and
administrative expenses.
Income Taxes. We intend to elect to be taxed
as a REIT under the Internal Revenue Code (the Code)
commencing with our taxable year ending December 31, 2006.
Provided we qualify for taxation as a REIT, we generally will
not be subject to corporate-level income tax on the earnings
distributed to our shareholders that we derive from our REIT
qualifying activities, but we will continue to be subject to
corporate-level tax on the earnings we derive from our TRSs. We
do not expect our Residential Mortgage Investment segment to be
subject to corporate-level tax as all assets are considered REIT
qualifying assets. Our Commercial Lending & Investment
segment will remain subject to corporate-level income tax. We
were responsible for paying federal, state and local income
taxes on all of our income through December 31, 2005.
Adjusted Earnings. Adjusted earnings
represents net income as determined in accordance with United
States generally accepted accounting principles
(GAAP), adjusted for certain non-cash items,
including real estate depreciation, amortization of deferred
financing fees, non-cash equity compensation, unrealized gains
and losses on our residential mortgage investment portfolio and
related derivatives, unrealized gains and losses on other
derivatives and foreign currencies, net unrealized gains and
losses on investments, provision for loan losses, charge offs,
recoveries, nonrecurring items and the cumulative effect of
changes in accounting principles. We view adjusted earnings and
the related per share measures as useful and appropriate
supplements to net income and earnings per share. These measures
serve as an additional measure of our operating performance
because they facilitate evaluation of the company without the
effects of certain adjustments determined in accordance with
GAAP that may not necessarily be indicative of current operating
performance. Adjusted earnings should not be considered as an
alternative to net income or cash flows (each computed in
accordance with GAAP). Instead, adjusted earnings should be
reviewed in connection with income and cash flows from
operating, investing and financing activities in our
consolidated financial statements, to help analyze how our
business is performing. Adjusted earnings and other supplemental
performance measures are defined in various ways throughout the
REIT industry. Investors should consider these differences when
comparing our adjusted earnings to other REITs.
34
Operating
Results for the Three and Nine Months Ended September 30,
2006
Our results of operations continue to be driven primarily by our
rapid growth. The most significant factors influencing our
consolidated results of operations for the time periods
described in this section were:
|
|
|
|
|
Significant growth in our commercial loan portfolio;
|
|
|
|
Purchases of investments in residential mortgage loans and RMBS;
|
|
|
|
Increased borrowings to fund our growth;
|
|
|
|
Increased operating expenses, consisting primarily of higher
employee compensation directly related to increases in the
number of our employees;
|
|
|
|
Addition of operating lease income related to our direct real
estate investments;
|
|
|
|
Increase in short-term interest rates;
|
|
|
|
Decreased lending and borrowing spreads; and
|
|
|
|
A decrease in our effective tax rate.
|
Our consolidated operating results for the three and nine months
ended September 30, 2006 compared to the three and nine
months ended September 30, 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Interest income
|
|
$
|
280,066
|
|
|
$
|
133,480
|
|
|
$
|
146,586
|
|
|
|
110
|
%
|
|
$
|
731,601
|
|
|
$
|
361,321
|
|
|
$
|
370,280
|
|
|
|
102
|
%
|
Fee income
|
|
|
53,955
|
|
|
|
35,771
|
|
|
|
18,184
|
|
|
|
51
|
%
|
|
|
132,100
|
|
|
|
100,723
|
|
|
|
31,377
|
|
|
|
31
|
%
|
Operating lease income
|
|
|
7,855
|
|
|
|
|
|
|
|
7,855
|
|
|
|
N/A
|
|
|
|
19,174
|
|
|
|
|
|
|
|
19,174
|
|
|
|
N/A
|
|
Interest expense
|
|
|
170,118
|
|
|
|
50,981
|
|
|
|
119,137
|
|
|
|
234
|
%
|
|
|
421,818
|
|
|
|
128,364
|
|
|
|
293,454
|
|
|
|
229
|
%
|
Provision for loan losses
|
|
|
24,849
|
|
|
|
42,884
|
|
|
|
(18,035
|
)
|
|
|
(42
|
)%
|
|
|
51,033
|
|
|
|
57,833
|
|
|
|
(6,800
|
)
|
|
|
(12
|
)%
|
Operating expenses
|
|
|
53,231
|
|
|
|
33,295
|
|
|
|
19,936
|
|
|
|
60
|
%
|
|
|
157,541
|
|
|
|
105,024
|
|
|
|
52,517
|
|
|
|
50
|
%
|
Other income
|
|
|
10,738
|
|
|
|
2,743
|
|
|
|
7,995
|
|
|
|
291
|
%
|
|
|
22,378
|
|
|
|
12,787
|
|
|
|
9,591
|
|
|
|
75
|
%
|
Noncontrolling interests expense
|
|
|
1,259
|
|
|
|
|
|
|
|
1,259
|
|
|
|
N/A
|
|
|
|
3,350
|
|
|
|
|
|
|
|
3,350
|
|
|
|
N/A
|
|
Income taxes
|
|
|
22,304
|
|
|
|
16,751
|
|
|
|
5,553
|
|
|
|
33
|
%
|
|
|
52,945
|
|
|
|
70,873
|
|
|
|
(17,928
|
)
|
|
|
(25
|
)%
|
Cumulative effect of accounting
change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
|
370
|
|
|
|
|
|
|
|
370
|
|
|
|
N/A
|
|
Net income
|
|
|
80,853
|
|
|
|
28,083
|
|
|
|
52,770
|
|
|
|
188
|
%
|
|
|
218,936
|
|
|
|
112,737
|
|
|
|
106,199
|
|
|
|
94
|
%
|
35
Our consolidated yields of income earning assets and the costs
of interest bearing liabilities for the nine months ended
September 30, 2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
|
($ in thousands)
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
$
|
731,601
|
|
|
|
8.49
|
%
|
|
|
|
|
|
$
|
361,321
|
|
|
|
9.50
|
%
|
Fee income
|
|
|
|
|
|
|
132,100
|
|
|
|
1.53
|
|
|
|
|
|
|
|
100,723
|
|
|
|
2.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning
assets (1)
|
|
$
|
11,527,276
|
|
|
|
863,701
|
|
|
|
10.02
|
|
|
$
|
5,082,760
|
|
|
|
462,044
|
|
|
|
12.15
|
|
Total direct real estate
investments
|
|
|
203,011
|
|
|
|
19,174
|
|
|
|
12.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income earning assets
|
|
|
11,730,287
|
|
|
|
882,875
|
|
|
|
10.06
|
|
|
|
5,082,760
|
|
|
|
462,044
|
|
|
|
12.15
|
|
Total interest bearing
liabilities (2)
|
|
|
9,901,508
|
|
|
|
421,818
|
|
|
|
5.70
|
|
|
|
4,071,288
|
|
|
|
128,364
|
|
|
|
4.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
461,507
|
|
|
|
4.36
|
%
|
|
|
|
|
|
$
|
333,680
|
|
|
|
7.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
5.26
|
%
|
|
|
|
|
|
|
|
|
|
|
8.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest earning assets include cash, restricted cash,
mortgage-related receivables, RMBS, loans, asset-backed
securities and investments in debt securities. |
|
(2) |
|
Interest bearing liabilities include repurchase agreements,
secured and unsecured credit facilities, term debt, convertible
debt and subordinated debt. |
Comparison
of the Three Months Ended September 30, 2006 and
2005
All amounts below relating to our Commercial Lending &
Investment segment for the three months ended September 30,
2006 are compared to our consolidated results for the three
months ended September 30, 2005 as we did not report our
operations in segments in 2005, and all activity for the three
months ended September 30, 2005 was related to commercial
lending and investment activity. All references to commercial
loans below include loans, loans held for sale and receivables
under reverse-repurchase agreements.
Interest
Income
In our Commercial Lending & Investment segment,
interest income was $198.9 million for the three months
ended September 30, 2006, an increase of
$65.4 million, or 49%, from total interest income for the
three months ended September 30, 2005. This increase was
due to the growth in average interest earning assets, primarily
loans, of $2.2 billion, or 41%, as well as an increase in
the interest component of yield to 10.28% for the three months
ended September 30, 2006 from 9.74% for three months ended
September 30, 2005. The increase in the interest component
of yield was largely due to the increase in short-term interest
rates, offset by a decrease in our lending spread. During the
three months ended September 30, 2006, our commercial
lending spread to the
average 30-day
LIBOR was 4.93% compared to 6.14% for the three months ended
September 30, 2005. This decrease in lending spread
reflects overall trends in financial markets, the increase in
competition in our markets, as well as the changing mix of our
commercial lending portfolio as we pursue the expanded
opportunities afforded to us by our decision to elect to be
taxed as a REIT. By operating as a REIT, we can make the same,
or better, after tax return on a loan with a lower interest rate
than on a loan with a higher interest rate originated prior to
our decision to elect to be taxed as a REIT. Fluctuations in
yields are driven by a number of factors, including changes in
short-term interest rates (such as changes in the prime rate or
30-day
LIBOR), the coupon on new loan originations, the coupon on loans
that pay down or pay off and modifications of interest rates on
existing loans.
In our Residential Mortgage Investment segment, interest income
was $81.1 million for the three months ended
September 30, 2006. Included in this amount is the
amortization of purchase discounts on our investments in RMBS
and mortgage-related receivables, which are amortized into
income using the interest method. Average interest earning
36
assets, which consist primarily of residential mortgage-related
receivables and RMBS, were $5.6 billion as of
September 30, 2006. Yield on average interest earning
assets was 5.84% for the three months ended September 30,
2006.
Fee
Income
In our Commercial Lending & Investment segment, the
increase in fee income was primarily the result of an increase
in prepayment-related fee income, which totaled
$26.4 million for the three months ended September 30,
2006 compared to $11.0 million for the three months ended
September 30, 2005. Prepayment-related fee income increased
during the three months ended September 30, 2006 primarily
due to the receipt of $14.5 million in prepayment fees from
the prepayment of certain first mortgage loans in our Healthcare
and Specialty Finance lending business. Prepayment-related fee
income contributed 1.37% and 0.81%, respectively, to yield for
the three months ended September 30, 2006 and 2005. Yield
from fee income increased to 2.79% for the three months ended
September 30, 2006 from 2.61% for the three months ended
September 30, 2005.
Operating
Lease Income
In our Commercial Lending & Investment segment,
$7.9 million of operating lease income was earned in
connection with direct real estate investments that we acquired
during 2006 primarily through sale-leaseback transactions.
Interest
Expense
We fund our growth largely through borrowings. In our Commercial
Lending & Investment segment, interest expense was
$96.9 million for the three months ended September 30,
2006, an increase of $45.9 million, or 90%, from total
interest expense for the three months ended September 30,
2005. This increase in interest expense was primarily due to an
increase in average borrowings of $1.8 billion, or 40%, as
well as rising interest rates during the period. Our cost of
borrowings increased to 6.26% for the three months ended
September 30, 2006 from 4.61% for the three months ended
September 30, 2005. This increase was the result of rising
interest rates, the use of our unsecured credit facility, which
has a higher borrowing spread relative to our secured credit
facilities, and an increase in amortization of deferred
financing fees. The increase in amortization of deferred
financing fees was primarily due to additional financings and
higher loan prepayments on loans that secure our term debt
securitization transactions. These increases were partially
offset by lower borrowing margins and our use of more cost
effective sources of financing. Our overall borrowing spread to
average 30-day
LIBOR for the three months ended September 30, 2006 was
0.91% compared to 1.01% for the three months ended
September 30, 2005.
In our Residential Mortgage Investment segment, interest expense
was $73.2 million for the three months ended
September 30, 2006, resulting from average borrowings of
$5.4 billion. Our cost of borrowings was 5.34% for the
three months ended September 30, 2006.
Net
Finance Margin
In our Commercial Lending & Investment segment, net
finance margin, defined as net investment income, which includes
interest, fee and operating lease income less interest expense,
divided by average income earning assets, was 8.19% for the
three months ended September 30, 2006, a decline of 44
basis points from 8.63% for the three months ended
September 30, 2005. The decrease in net finance margin was
primarily due to the increase in interest expense resulting from
a higher cost of funds, offset partially by an increase in yield
on total income earning assets resulting from higher loan
prepayments. Net finance spread, the difference between our
gross yield on income earning assets and the cost of our
interest bearing liabilities, was 6.77% for the three months
ended September 30, 2006, a decrease of 97 basis
points from 7.74% for the three months ended September 30,
2005. Gross yield is the sum of interest, fee and operating
lease income divided by our average income earning assets. The
decrease in net finance spread is attributable to the changes in
its components as described above.
37
The yields of income earning assets and the costs of interest
bearing liabilities in our Commercial Lending &
Investment segment for the three months ended September 30,
2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
|
($ in thousands)
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
$
|
198,918
|
|
|
|
10.28
|
%
|
|
|
|
|
|
$
|
133,480
|
|
|
|
9.74
|
%
|
Fee income
|
|
|
|
|
|
|
53,955
|
|
|
|
2.79
|
|
|
|
|
|
|
|
35,771
|
|
|
|
2.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets(1)
|
|
$
|
7,678,450
|
|
|
|
252,873
|
|
|
|
13.07
|
|
|
$
|
5,436,081
|
|
|
|
169,251
|
|
|
|
12.35
|
|
Total direct real estate
investments
|
|
|
261,376
|
|
|
|
7,855
|
|
|
|
11.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income earning assets
|
|
|
7,939,826
|
|
|
|
260,728
|
|
|
|
13.03
|
|
|
|
5,436,081
|
|
|
|
169,251
|
|
|
|
12.35
|
|
Total interest bearing
liabilities(2)
|
|
|
6,139,327
|
|
|
|
96,872
|
|
|
|
6.26
|
|
|
|
4,383,977
|
|
|
|
50,981
|
|
|
|
4.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
163,856
|
|
|
|
6.77
|
%
|
|
|
|
|
|
$
|
118,270
|
|
|
|
7.74
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
8.19
|
%
|
|
|
|
|
|
|
|
|
|
|
8.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest earning assets include cash, restricted cash, loans and
investments in debt securities. |
|
(2) |
|
Interest bearing liabilities include repurchase agreements,
secured and unsecured credit facilities, term debt, convertible
debt and subordinated debt. |
In our Residential Mortgage Investment segment, net finance
spread was 0.50% for the three months ended September 30,
2006. Net finance spread is the difference between yield on
interest earning assets of 5.84% and the cost of our interest
bearing liabilities of 5.34% for the three months ended
September 30, 2006. Interest earning assets include cash,
restricted cash, mortgage-related receivables, RMBS and
asset-backed securities. Interest bearing liabilities include
repurchase agreements and term debt.
Provision
for Loan Losses
The decrease in the provision for loan losses in our Commercial
Lending & Investment segment is primarily the result of
a change made to our loan loss reserve policy during the three
months ended September 30, 2005, the seasoning of our
portfolio, overall economic conditions and other factors. This
decrease is offset partially by increases in the provision for
loan losses as a result of the growth in our commercial loan
portfolio, an increase in the balance of impaired loans in the
portfolio and additional allocated reserves recorded during the
three months ended September 30, 2006.
Other
Income
In our Commercial Lending & Investment segment, other
income was $8.4 million for the three months ended
September 30, 2006, an increase of $5.7 million, or
208%, from total other income for the three months ended
September 30, 2005. The increase in other income was
primarily attributable to a $7.2 million increase in net
realized and unrealized gains on our equity investments, a
$1.9 million increase in fees arising from our HUD mortgage
origination services, an increase of $1.5 million in gains
related to the sale of loans and a $1.3 million increase in
income relating to our equity interests in certain
non-consolidated entities. These increases were partially offset
by a $5.0 million increase in net unrealized losses on
derivative instruments and a $1.0 million decrease in
diligence deposits forfeited.
In our Residential Mortgage Investment segment, other income
consisted of a gain on the residential mortgage investment
portfolio of $2.3 million for the three months ended
September 30, 2006. This gain was attributable to net
realized and unrealized gains on residential mortgage
investments of $35.1 million, partially offset by net
realized and unrealized losses on related derivative instruments
of $32.8 million.
38
Operating
Expenses
The increase in consolidated operating expenses was primarily
due to higher total employee compensation, which increased
$13.7 million, or 68%. The higher employee compensation was
attributable to an increase in employees to 552 as of
September 30, 2006, from 473 as of September 30, 2005,
as well as higher incentive compensation, including an increase
in restricted stock awards and stock options granted. For the
three months ended September 30, 2006 and 2005, incentive
compensation totaled $17.8 million and $9.1 million,
respectively. Incentive compensation comprises annual bonuses,
stock options and restricted stock awards, which generally have
a three- to five-year vesting period. The remaining increase in
operating expenses for the three months ended September 30,
2006 was primarily attributable to an increase of
$3.2 million in depreciation and amortization resulting
from our direct real estate investments, an increase of
$1.5 million in professional fees and an increase of
$1.5 million in other general business expenses. Operating
expenses in our Residential Mortgage Investment segment, which
consist primarily of compensation and benefits, professional
fees and other direct expenses, were $2.2 million for the
three months ended September 30, 2006.
In our Commercial Lending & Investment segment,
operating expenses as a percentage of average total assets
increased to 2.51% for the three months ended September 30,
2006 from 2.40% for the three months ended September 30,
2005. Our Commercial Lending & Investment
segments efficiency ratio, which represents operating
expenses as a percentage of net investment income and other
income, increased to 29.65% for the three months ended
September 30, 2006 from 27.51% for the three months ended
September 30, 2005. The increases in operating expenses as
a percentage of average total assets and the efficiency ratio
were primarily attributable to the increase in incentive
compensation described above.
Income
Taxes
Our effective tax rate on our consolidated net income was 21.6%
for the three months ended September 30, 2006, reflecting
our expected annual effective tax rate of 20.8%, which is
impacted by a reduction in net deferred tax liabilities as a
result of our planned REIT election. Our effective income tax
rate for the three months ended September 30, 2006
attributable to our TRSs was 39.2%. Our effective tax rate was
37.4% for the three months ended September 30, 2005 and
38.8% for the year ended December 31, 2005.
39
Adjusted
Earnings
Adjusted earnings, as previously defined, were
$122.9 million, or $0.71 per diluted share, for the three
months ended September 30, 2006. A reconciliation of our
reported net income to adjusted earnings for the three months
ended September 30, 2006 was as follows ($ in thousands,
except per share data):
|
|
|
|
|
Net income
|
|
$
|
80,853
|
|
Add:
|
|
|
|
|
Real estate depreciation (1)
|
|
|
2,595
|
|
Amortization of deferred financing
fees
|
|
|
6,225
|
|
Non-cash equity compensation
|
|
|
8,640
|
|
Net unrealized loss on residential
mortgage investment portfolio, including related derivatives (2)
|
|
|
3,436
|
|
Unrealized loss on derivatives and
foreign currencies, net
|
|
|
6,937
|
|
Unrealized loss on investments, net
|
|
|
404
|
|
Provision for loan losses
|
|
|
24,849
|
|
Recoveries (3)
|
|
|
|
|
Less:
|
|
|
|
|
Charge offs (4)
|
|
|
11,000
|
|
Nonrecurring items
|
|
|
|
|
Cumulative effect of accounting
change, net of taxes
|
|
|
|
|
|
|
|
|
|
Adjusted earnings
|
|
$
|
122,939
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
Basic as reported
|
|
$
|
0.47
|
|
Diluted as reported
|
|
$
|
0.47
|
|
Average shares
outstanding:
|
|
|
|
|
Basic as reported
|
|
|
171,777,989
|
|
Diluted as reported
|
|
|
173,354,891
|
|
Adjusted earnings per
share:
|
|
|
|
|
Basic
|
|
$
|
0.72
|
|
Diluted (5)
|
|
$
|
0.71
|
|
Average shares
outstanding:
|
|
|
|
|
Basic
|
|
|
171,777,989
|
|
Diluted (6)
|
|
|
175,865,709
|
|
|
|
|
(1) |
|
Depreciation for direct real estate investments only. Excludes
depreciation for corporate leasehold improvements, fixed assets
and other non-real estate items. |
|
(2) |
|
Includes adjustments to reflect the period change in fair value
of RMBS and related derivative instruments. |
|
(3) |
|
Includes all recoveries on loans during the period. |
|
(4) |
|
To the extent we experience losses on loans for which we
specifically provided a reserve prior to January 1, 2006,
there will be no adjustment to earnings. All charge offs
incremental to previously established allocated reserves will be
deducted from net income. |
|
(5) |
|
Adjusted to reflect the impact of adding back noncontrolling
interests expense of $1.3 million to adjusted earnings due
to the application of the if-converted method on non-managing
member units, which are considered dilutive to adjusted earnings
per share, but are antidilutive to GAAP net income per share. |
|
(6) |
|
Adjusted to include average non-managing member units of
2,510,818, which are considered dilutive to adjusted earnings
per share, but are antidilutive to GAAP net income per share. |
40
Comparison
of the Nine Months Ended September 30, 2006 and
2005
All amounts below relating to our Commercial Lending &
Investment segment for the nine months ended September 30,
2006 are compared to our consolidated results for the nine
months ended September 30, 2005 as we did not report our
operations in segments in 2005, and all activity for the nine
months ended September 30, 2005 was related to commercial
lending and investment activity. All references to commercial
loans below include loans, loans held for sale and receivables
under reverse-repurchase agreements.
Interest
Income
In our Commercial Lending & Investment segment,
interest income was $547.1 million for the nine months
ended September 30, 2006, an increase of
$185.8 million, or 51%, from total interest income for the
nine months ended September 30, 2005. This increase was due
to the growth in average interest earning assets, primarily
loans, of $2.0 billion, or 39%, as well as an increase in
the interest component of yield to 10.32% for the nine months
ended September 30, 2006 from 9.50% for the nine months
ended September 30, 2005. The increase in the interest
component of yield was largely due to the increase in short-term
interest rates, partially offset by a decrease in our lending
spread. During the nine months ended September 30, 2006,
our commercial lending spread to
average 30-day
LIBOR was 5.31% compared to 6.38% for the nine months ended
September 30, 2005. This decrease in lending spread
reflects overall trends in financial markets, the increase in
competition in our markets, as well as the changing mix of our
commercial lending portfolio as we pursue the expanded
opportunities afforded to us by our decision to elect to be
taxed as a REIT. By operating as a REIT, we can make the same,
or better, after tax return on a loan with a lower interest rate
than on a loan with a higher interest rate originated prior to
our decision to elect to be taxed as a REIT. Fluctuations in
yields are driven by a number of factors, including changes in
short-term interest rates (such as changes in the prime rate or
30-day
LIBOR), the coupon on new loan originations, the coupon on loans
that pay down or pay off and modifications of interest rates on
existing loans.
In our Residential Mortgage Investment segment, interest income
was $184.5 million for the nine months ended
September 30, 2006. Included in this amount is the
amortization of purchase discounts on our investments in RMBS
and mortgage-related receivables, which are amortized into
income using the interest method. Average interest earning
assets, which consist primarily of residential mortgage-related
receivables and RMBS, were $4.4 billion as of
September 30, 2006. Yield on average interest earning
assets was 5.54% for the nine months ended September 30,
2006.
Fee
Income
In our Commercial Lending & Investment segment, the
increase in fee income was primarily the result of the growth in
interest earning assets as well as an increase in
prepayment-related fee income, which totaled $54.7 million
for the nine months ended September 30, 2006 compared to
$29.2 million for the nine months ended September 30,
2005. Prepayment-related fee income increased during the nine
months ended September 30, 2006 due primarily to the
receipt of $14.5 million in prepayment fees from the
prepayment of certain first mortgage loans in our Healthcare and
Specialty Finance lending business and $8.4 million of
prepayment fees received in connection with the acquisition of a
direct real estate investment. Prepayment-related fee income
contributed 1.03% and 0.77%, respectively, to yield for the nine
months ended September 30, 2006 and 2005. Yield from fee
income decreased to 2.49% for the nine months ended
September 30, 2006 from 2.65% for the nine months ended
September 30, 2005.
Operating
Lease Income
In our Commercial Lending & Investment segment,
$19.2 million of operating lease income was earned in
connection with our direct real estate investments acquired
primarily through sale-leaseback transactions during the nine
months ended September 30, 2006.
Interest
Expense
We fund our growth largely through borrowings. In our Commercial
Lending & Investment segment, interest expense was
$251.0 million for the nine months ended September 30,
2006, an increase of $122.6 million, or 96%, from total
interest expense for the nine months ended September 30,
2005. This increase in interest expense was primarily due to an
increase in average borrowings of $1.5 billion, or 38%, as
well as rising interest rates during the period. Our cost of
borrowings increased to 5.98% for the nine months ended
September 30, 2006 from 4.22% for the nine months ended
September 30, 2005. This increase was the result of rising
interest rates, the use of our
41
unsecured credit facility, which has a higher borrowing spread
relative to our secured credit facilities, and an increase in
amortization of deferred financing fees. The increase in
deferred financing fees was primarily due to additional
financings and higher loan prepayments on loans that secure our
term debt securitization transactions. These increases were
partially offset by lower borrowing margins and our use of more
cost effective sources of financing. Our overall borrowing
spread to
average 30-day
LIBOR for the nine months ended September 30, 2006 was
0.97% compared to 1.10% for the nine months ended
September 30, 2005.
In our Residential Mortgage Investment segment, interest expense
was $170.8 million for the nine months ended
September 30, 2006, resulting from average borrowings of
$4.3 billion. Our cost of borrowings was 5.25% for the nine
months ended September 30, 2006.
Net
Finance Margin
In our Commercial Lending & Investment segment, net
finance margin, defined as net investment income, which includes
interest, fee and operating lease income less interest expense,
divided by average income earning assets, was 8.21% for the nine
months ended September 30, 2006, a decline of 57 basis
points from 8.78% for the nine months ended September 30,
2005. The decrease in net finance margin was primarily due to
the increase in interest expense resulting from a higher cost of
funds, offset partially by an increase in yield on total income
earning assets resulting from higher loan prepayments. Net
finance spread, the difference between our gross yield on income
earning assets and the cost of our interest bearing liabilities,
was 6.83% for the nine months ended September 30, 2006, a
decrease of 110 basis points from 7.93% for the nine months
ended September 30, 2005. Gross yield is the sum of
interest, fee and operating lease income divided by our average
income earning assets. The decrease in net finance spread is
attributable to the changes in its components as described above.
The yields of income earning assets and the costs of interest
bearing liabilities in our Commercial Lending &
Investment segment for the nine months ended September 30,
2006 and 2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
|
($ in thousands)
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
$
|
547,128
|
|
|
|
10.32
|
%
|
|
|
|
|
|
$
|
361,321
|
|
|
|
9.50
|
%
|
Fee income
|
|
|
|
|
|
|
132,100
|
|
|
|
2.49
|
|
|
|
|
|
|
|
100,723
|
|
|
|
2.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets (1)
|
|
$
|
7,086,281
|
|
|
|
679,228
|
|
|
|
12.81
|
|
|
$
|
5,082,760
|
|
|
|
462,044
|
|
|
|
12.15
|
|
Total direct real estate investments
|
|
|
203,011
|
|
|
|
19,174
|
|
|
|
12.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income earning assets
|
|
|
7,289,292
|
|
|
|
698,402
|
|
|
|
12.81
|
|
|
|
5,082,760
|
|
|
|
462,044
|
|
|
|
12.15
|
|
Total interest bearing liabilities
(2)
|
|
|
5,609,304
|
|
|
|
250,967
|
|
|
|
5.98
|
|
|
|
4,071,288
|
|
|
|
128,364
|
|
|
|
4.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
447,435
|
|
|
|
6.83
|
%
|
|
|
|
|
|
$
|
333,680
|
|
|
|
7.93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
8.21
|
%
|
|
|
|
|
|
|
|
|
|
|
8.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest earning assets include cash, restricted cash, loans and
investments in debt securities. |
|
(2) |
|
Interest bearing liabilities include repurchase agreements,
secured and unsecured credit facilities, term debt, convertible
debt and subordinated debt. |
In our Residential Mortgage Investment segment, net finance
spread was 0.29% for the nine months ended September 30,
2006. Net finance spread is the difference between yield on
interest earning assets of 5.54% and the cost of our interest
bearing liabilities of 5.25% for the nine months ended
September 30, 2006. Interest earning assets include cash,
restricted cash, mortgage-related receivables, RMBS and
asset-backed securities. Interest bearing liabilities include
repurchase agreements and term debt.
Provision
for Loan Losses
The decrease in the provision for loan losses in our Commercial
Lending & Investment segment is the result of a change
made to our loan loss reserve policy during the nine months
ended September 30, 2005, the seasoning of
42
our portfolio, overall economic conditions and other factors.
This decrease is offset partially by increases in the provision
for loan losses as a result of the growth in our commercial loan
portfolio, an increase in the balance of impaired loans in the
portfolio and additional allocated reserves recorded during the
nine months ended September 30, 2006.
Other
Income
In our Commercial Lending & Investment segment, other
income was $22.2 million for the nine months ended
September 30, 2006, an increase of $9.4 million, or
73%, from total other income for the nine months ended
September 30, 2005. The increase in other income was
primarily attributable to the receipt of a
break-up fee
of $4.5 million related to a prospective loan, a
$2.4 million increase in income relating to our equity
interests in certain non-consolidated entities, an increase of
$2.0 million in gains related to the sale of loans, a
$1.7 million increase on net gains on derivatives, a
$1.5 million increase in fees arising from our HUD mortgage
origination services, a $0.9 million increase in diligence
deposits forfeited, a $0.7 million gain on the sale of
property and $0.6 million in asset management fees
received. These increases were partially offset by a
$3.1 million decrease in third-party servicing fees and a
$2.5 million loss incurred on the extinguishment of debt in
connection with one of our direct real estate investments
entered into during the nine months ended September 30,
2006.
In our Residential Mortgage Investment segment, other income
consisted of a gain on the residential mortgage investment
portfolio of $0.2 million for the nine months ended
September 30, 2006. This gain was attributable to net
realized and unrealized gains on related derivative instruments
of $3.7 million, almost completely offset by net realized
and unrealized losses on residential mortgage investments of
$3.5 million. Included in unrealized gains on derivative
instruments is the net of interest income and expense accruals
related to certain of our derivatives.
Operating
Expenses
The increase in consolidated operating expenses was primarily
due to higher total employee compensation, which increased
$29.2 million, or 40%. The higher employee compensation was
attributable to an increase in employees to 552 as of
September 30, 2006 from 473 as of September 30, 2005,
as well as higher incentive compensation, including an increase
in restricted stock awards and stock options granted. For the
nine months ended September 30, 2006 and 2005, incentive
compensation totaled $51.8 million and $36.8 million,
respectively. Incentive compensation comprises annual bonuses,
stock options and restricted stock awards, which generally have
a three- to five-year vesting period. The remaining increase in
operating expenses for the nine months ended September 30,
2006 was primarily attributable to an increase of
$10.8 million in professional fees, an increase of
$7.6 million in depreciation and amortization resulting
from our direct real estate investments, an increase of
$1.7 million in travel and entertainment expenses and an
increase of $3.3 million in other general business
expenses. Operating expenses in our Residential Mortgage
Investment segment, which consist primarily of compensation and
benefits, professional fees and other direct expenses, were
$6.4 million for the nine months ended September 30,
2006.
In our Commercial Lending & Investment segment,
operating expenses as a percentage of average total assets
decreased slightly to 2.72% for the nine months ended
September 30, 2006 from 2.73% for the nine months ended
September 30, 2005. Our Commercial Lending &
Investment segments efficiency ratio, which represents
operating expenses as a percentage of net investment income and
other income, increased to 32.19% for the nine months ended
September 30, 2006 from 30.31% for the nine months ended
September 30, 2005 primarily attributable to the increase
in operating expenses described above.
Income
Taxes
Our effective tax rate on our consolidated net income was 19.5%
for the nine months ended September 30, 2006, reflecting
our expected annual effective tax rate of 20.8%, which is
impacted by a reduction in net deferred tax liabilities as a
result of our planned REIT election. Our effective income tax
rate for the nine months ended September 30, 2006
attributable to our TRSs was 39.2%. Our effective tax rate was
38.6% for the nine months ended September 30, 2005 and
38.8% for the year ended December 31, 2005.
43
Adjusted
Earnings
Adjusted earnings, as previously defined, were
$315.0 million, or $1.89 per diluted share, for the nine
months ended September 30, 2006. A reconciliation of our
reported net income to adjusted earnings for the nine months
ended September 30, 2006 was as follows ($ in thousands,
except per share data):
|
|
|
|
|
Net income
|
|
$
|
218,936
|
|
Add:
|
|
|
|
|
Real estate depreciation (1)
|
|
|
6,205
|
|
Amortization of deferred financing
fees
|
|
|
20,652
|
|
Non-cash equity compensation
|
|
|
24,993
|
|
Net unrealized loss on residential
mortgage investment portfolio, including related derivatives (2)
|
|
|
4,113
|
|
Unrealized gain on derivatives and
foreign currencies, net
|
|
|
(196
|
)
|
Unrealized loss on investments, net
|
|
|
5,510
|
|
Provision for loan losses
|
|
|
51,133
|
|
Recoveries (3)
|
|
|
|
|
Less:
|
|
|
|
|
Charge offs (4)
|
|
|
11,276
|
|
Nonrecurring items (5)
|
|
|
4,725
|
|
Cumulative effect of accounting
change, net of taxes
|
|
|
370
|
|
|
|
|
|
|
Adjusted earnings
|
|
$
|
314,975
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
Basic as reported
|
|
$
|
1.34
|
|
Diluted as reported
|
|
$
|
1.32
|
|
Average shares
outstanding:
|
|
|
|
|
Basic as reported
|
|
|
163,373,576
|
|
Diluted as reported
|
|
|
166,028,844
|
|
Adjusted earnings per
share:
|
|
|
|
|
Basic
|
|
$
|
1.93
|
|
Diluted (6)
|
|
$
|
1.89
|
|
Average shares
outstanding:
|
|
|
|
|
Basic
|
|
|
163,373,576
|
|
Diluted (7)
|
|
|
168,300,536
|
|
|
|
|
(1) |
|
Depreciation for direct real estate investments only. Excludes
depreciation for corporate leasehold improvements, fixed assets
and other non-real estate items. |
(2) |
|
Includes adjustments to reflect the period change in fair value
of RMBS and related derivative instruments. |
|
(3) |
|
Includes all recoveries on loans during the period. |
|
(4) |
|
To the extent we experience losses on loans for which we
specifically provided a reserve prior to January 1, 2006,
there will be no adjustment to earnings. All charge offs
incremental to previously established allocated reserves will be
deducted from net income. |
|
(5) |
|
Represents the write-off of a net deferred tax liability
recorded in connection with our conversion to a REIT for the
nine months ended September 30, 2006. |
|
(6) |
|
Adjusted to reflect the impact of adding back noncontrolling
interests expense of $3.4 million to adjusted earnings due
to the application of the if-converted method on non-managing
member units, which are considered dilutive to adjusted earnings
per share, but are antidilutive to GAAP net income per share for
all periods presented. |
|
(7) |
|
Adjusted to include average non-managing member units of
2,271,692, which are considered dilutive to adjusted earnings
per share, but are antidilutive to GAAP net income per share. |
44
Financial
Condition
Commercial
Lending & Investment Segment
Commercial
Lending Portfolio Composition
Our total commercial loan portfolio reflected in the portfolio
statistics below includes loans, loans held for sale and
receivables under reverse-repurchase agreements. The composition
of our commercial loan portfolio by loan type and by commercial
lending business as of September 30, 2006 and
December 31, 2005 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
December 31, 2005
|
|
|
|
($ in thousands)
|
|
|
Composition of loan portfolio by
loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans (1)
|
|
$
|
2,556,621
|
|
|
|
35
|
%
|
|
$
|
1,970,709
|
|
|
|
33
|
%
|
Senior secured asset-based loans
(1)
|
|
|
2,438,577
|
|
|
|
33
|
|
|
|
2,022,123
|
|
|
|
34
|
|
Senior secured cash flow loans (1)
|
|
|
1,837,957
|
|
|
|
25
|
|
|
|
1,740,184
|
|
|
|
29
|
|
Mezzanine loans
|
|
|
516,614
|
|
|
|
7
|
|
|
|
254,727
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,349,769
|
|
|
|
100
|
%
|
|
$
|
5,987,743
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of loan portfolio by
lending business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured Finance
|
|
$
|
2,482,933
|
|
|
|
34
|
%
|
|
$
|
1,909,149
|
|
|
|
32
|
%
|
Healthcare and Specialty Finance
|
|
|
2,902,425
|
|
|
|
39
|
|
|
|
2,281,419
|
|
|
|
38
|
|
Corporate Finance
|
|
|
1,964,411
|
|
|
|
27
|
|
|
|
1,797,175
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,349,769
|
|
|
|
100
|
%
|
|
$
|
5,987,743
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Term B loans, which are loans that share a first
priority lien on the clients collateral with the lenders
on the clients senior loan, but that come after a senior
secured loan in order of payment priority preference upon a
borrowers liquidation. |
We may have more than one loan to a client and its related
entities. For purposes of determining the portfolio statistics
in this section, we count each loan or client separately and do
not aggregate loans to related entities. The number of loans,
average loan size, number of clients and average loan size per
client by commercial lending business as of September 30,
2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Loan
|
|
|
|
Number
|
|
|
Average
|
|
|
Number of
|
|
|
Size per
|
|
|
|
of Loans
|
|
|
Loan Size
|
|
|
Clients
|
|
|
Client
|
|
|
|
($ in thousands)
|
|
|
Composition of loan portfolio by
lending business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured Finance
|
|
|
246
|
|
|
$
|
10,093
|
|
|
|
211
|
|
|
$
|
11,767
|
|
Healthcare and Specialty Finance
|
|
|
469
|
|
|
|
6,189
|
|
|
|
319
|
|
|
|
9,099
|
|
Corporate Finance
|
|
|
332
|
|
|
|
5,917
|
|
|
|
149
|
|
|
|
13,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall loan portfolio
|
|
|
1,047
|
|
|
|
7,020
|
|
|
|
679
|
|
|
|
10,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The scheduled maturities of our commercial loan portfolio by
loan type as of September 30, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due in
|
|
|
Due in
|
|
|
|
|
|
|
|
|
|
One Year
|
|
|
One to
|
|
|
Due After
|
|
|
|
|
|
|
or Less
|
|
|
Five Years
|
|
|
Five Years
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Scheduled maturities by loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans
|
|
$
|
711,716
|
|
|
$
|
1,657,190
|
|
|
$
|
187,715
|
|
|
$
|
2,556,621
|
|
Senior secured asset-based loans
|
|
|
302,555
|
|
|
|
2,133,204
|
|
|
|
2,818
|
|
|
|
2,438,577
|
|
Senior secured cash flow loans
|
|
|
235,088
|
|
|
|
1,528,282
|
|
|
|
74,587
|
|
|
|
1,837,957
|
|
Mezzanine loans
|
|
|
132,871
|
|
|
|
141,383
|
|
|
|
242,360
|
|
|
|
516,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,382,230
|
|
|
$
|
5,460,059
|
|
|
$
|
507,480
|
|
|
$
|
7,349,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
The dollar amounts of all fixed-rate and adjustable-rate
commercial loans by loan type as of September 30, 2006 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable
|
|
|
Fixed
|
|
|
|
|
|
|
Rates
|
|
|
Rates
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Composition of loan portfolio by
loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans
|
|
$
|
2,240,448
|
|
|
$
|
316,173
|
|
|
$
|
2,556,621
|
|
Senior secured asset-based loans
|
|
|
2,404,625
|
|
|
|
33,952
|
|
|
|
2,438,577
|
|
Senior secured cash flow loans
|
|
|
1,820,612
|
|
|
|
17,345
|
|
|
|
1,837,957
|
|
Mezzanine loans
|
|
|
473,974
|
|
|
|
42,640
|
|
|
|
516,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,939,659
|
|
|
$
|
410,110
|
|
|
$
|
7,349,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total loan portfolio
|
|
|
94%
|
|
|
|
6%
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2006, our Structured Finance,
Healthcare and Specialty Finance and Corporate Finance
businesses had commitments to lend up to an additional
$1.2 billion, $2.0 billion and $0.5 billion,
respectively, to 211, 319 and 149 existing clients,
respectively. Throughout 2006, the mix of outstanding loans in
our commercial loan portfolio has shifted to a greater
percentage of first mortgage and asset-based loans, including
complementary fixed rate and low leverage real estate products,
which have become more attractive as a result of the REIT
structure.
46
Credit
Quality and Allowance for Loan Losses
As of September 30, 2006 and December 31, 2005, the
principal balances of loans 60 or more days contractually
delinquent, non-accrual loans and impaired loans in our
commercial lending portfolio were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Commercial Loan Asset Classification
|
|
2006
|
|
|
2005
|
|
|
|
($ in thousands)
|
|
|
Loans 60 or more days
contractually delinquent
|
|
$
|
61,965
|
|
|
$
|
41,785
|
|
Non-accrual loans (1)
|
|
|
175,846
|
|
|
|
137,446
|
|
Impaired loans (2)
|
|
|
266,816
|
|
|
|
199,257
|
|
Less: loans in multiple categories
|
|
|
(222,764
|
)
|
|
|
(175,070
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
281,863
|
|
|
$
|
203,418
|
|
|
|
|
|
|
|
|
|
|
Total as a percentage of total
loans
|
|
|
3.83%
|
|
|
|
3.40%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes commercial loans with an aggregate principal balance of
$46.9 million and $37.6 million as of
September 30, 2006 and December 31, 2005,
respectively, which were also classified as loans 60 or more
days contractually delinquent. |
|
(2) |
|
Includes commercial loans with an aggregate principal balance of
$46.9 million and $37.6 million as of
September 30, 2006 and December 31, 2005,
respectively, which were also classified as loans 60 or more
days contractually delinquent, and commercial loans with an
aggregate principal balance of $175.8 million and
$137.4 million as of September 30, 2006 and
December 31, 2005, respectively, which were also classified
as loans on non-accrual status. |
Reflective of principles established in Statement of Financial
Accounting Standards (SFAS) No. 114,
Accounting by Creditors for Impairment of a Loan
(SFAS No. 114), 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 according to the contractual terms of the original
loan agreement, including scheduled principal and interest
payments. Impaired loans include loans for which we expect to
have a credit loss and other loans that we have assessed as
impaired, but for which we ultimately expect to collect all
payments.
For the nine months ended September 30, 2006, we classified
commercial loans with an aggregate carrying value of
$177.4 million as of September 30, 2006 as troubled
debt restructurings as defined by SFAS No. 15,
Accounting for Debtors and Creditors for Troubled Debt
Restructurings. As of September 30, 2006,
commercial loans with an aggregate carrying value of
$196.8 million were classified as troubled debt
restructurings. These loans were also classified as impaired
loans since, under SFAS No. 114, loans classified as
troubled debt restructurings are also classified as impaired
loans. Generally these loans are assessed as impaired for a
period of at least one year following the restructuring. The
allocated reserve for loans classified as troubled debt
restructurings was $25.6 million as of September 30,
2006. For the year ended December 31, 2005, loans with an
aggregate carrying value of $73.7 million as of
December 31, 2005 were classified as troubled debt
restructurings. The allocated reserve for loans classified as
troubled debt restructurings was $13.6 million as of
December 31, 2005.
Middle market lending involves credit risks which we believe
will result in further credit losses in our portfolio. We have
provided an allowance for loan losses to cover estimated losses
inherent in our commercial loan portfolio. Our allowance for
loan losses was $102.7 million and $87.4 million as of
September 30, 2006 and December 31, 2005,
respectively. These amounts equate to 1.40% and 1.46% of gross
loans as of September 30, 2006 and December 31, 2005,
respectively. This decrease is primarily due to additional
charge offs recorded during the nine months ended
September 30, 2006 as compared to the nine months ended
September 30, 2005. Of our total allowance for loan losses
as of September 30, 2006 and December 31, 2005,
$34.9 million and $33.1 million, respectively, were
allocated to impaired loans. During the nine months ended
September 30, 2006 and 2005, we charged off loans totaling
$35.4 million and $11.5 million, respectively. Net
charge offs as a percentage of average loans were 0.69% and
0.32%, on an annualized basis, for the nine months ended
September 30, 2006 and 2005, respectively.
47
Direct
Real Estate Investments
During 2006, we began acquiring real estate for investment
purposes. These real estate investments are generally structured
as sale-leaseback transactions, in which we purchase a
clients real property and simultaneously triple-net lease
it back to the client through the execution of a long term
lease. We had $265.1 million in direct real estate assets
as of September 30, 2006, which consisted of land,
buildings and furniture.
On August 22, 2006, we entered into a definitive agreement
to purchase 17 long-term care facilities for
$145.0 million. The closing of this transaction is expected
to occur in the next 120 days and is subject to certain
customary conditions.
Investments
We acquire equity interests, typically in connection with a loan
to a client. These investments include common stock, preferred
stock, limited liability company interests, limited partnership
interests and warrants to purchase equity instruments. In the
past, we have also invested in debt securities, the majority of
which were sold during the nine months ended September 30,
2006.
As of September 30, 2006 and December 31, 2005, the
carrying value of our investments in our Commercial
Lending & Investment segment was $137.1 million
and $126.4 million, respectively. As of September 30,
2006 and December 31, 2005, our investments carried at fair
value totaled $36.3 million and $60.7 million,
respectively, including investments of $8.2 million and
$10.3 million, respectively, with increases and decreases in
fair value recorded in other income (expense) in our
accompanying consolidated statements of income.
Residential
Mortgage Investment Segment
Portfolio
Composition
We invest directly in residential mortgage investments that
qualify as REIT eligible assets. As of September 30, 2006,
our portfolio of residential mortgage investments consisted of
$3.4 billion in RMBS, $2.3 billion in adjustable rate
residential prime mortgage loans recorded as mortgage-related
receivables on our consolidated balance sheet and
$33.7 million in residential asset-backed securities
recorded as investments on our consolidated balance sheet. As of
December 31, 2005, our portfolio consisted of
$2.3 billion in residential mortgage-backed securities, the
majority of which was recorded net as derivatives.
We define RMBS to include mortgage-backed securities that are
rated AAA by Standard & Poors or Moodys
Investors Service, as well as mortgage-backed securities whose
payments of principal and interest are guaranteed by the Federal
National Mortgage Association (Fannie Mae) or
Freddie Mac. As of September 30, 2006, our portfolio of
RMBS comprised
1-year
adjustable-rate and hybrid adjustable-rate RMBS with varying
fixed period terms issued and guaranteed by Fannie Mae or
Freddie Mac. The coupons on the loans underlying these
securities are fixed until the initial reset date and then reset
annually thereafter. The weighted average net coupon of RMBS in
our portfolio was 4.77% as of September 30, 2006 and the
weighted average reset date for the portfolio was approximately
46 months. As of September 30, 2006, all of our RMBS
were classified as trading securities on our consolidated
balance sheet and recorded at their estimated fair value of
$3.4 billion. See Note 5, Residential
Mortgage-Backed Securities and Certain Derivative
Instruments, for a discussion of the accounting treatment of
our RMBS and related repurchase agreements as of
December 31, 2005.
As of September 30, 2006, we had $2.3 billion in
mortgage-related receivables that, as further discussed in
Note 2, Summary of Significant Accounting Policies,
were secured by prime residential mortgage loans. As of
September 30, 2006, the weighted average interest rate on
such receivables was 5.38%, and the weighted average contractual
maturity was approximately 29 years.
Credit
Quality and Allowance for Loan Losses
We recorded a provision for loan losses of $0.3 million
related to our mortgage-related receivables during the nine
months ended September 30, 2006 and the allowance for loan
losses was $0.3 million as of September 30, 2006.
48
Financing
We have financed our investments in RMBS and asset-backed
securities primarily through repurchase agreements. As of
September 30, 2006 and December 31, 2005, our
outstanding repurchase agreements totaled $3.3 billion and
$2.2 billion, respectively. As of September 30, 2006,
repurchase agreements that we executed had maturities of between
2 and 38 days and a weighted average borrowing rate of
5.30%. Our investments in residential mortgage-related
receivables were financed primarily through term debt issued in
two owner trust securitizations. As of September 30, 2006,
the total outstanding balance of this term debt was
$2.3 billion. The interest rates on all classes of the
notes within each securitization are fixed until the initial
reset date and then reset annually thereafter, with a weighted
average interest rate of 4.96% as of September 30, 2006.
The notes within each securitization are expected to mature at
various dates through 2036.
The interest rates on our repurchase agreements, term debt
securitizations and other financings may change at different
times and in different magnitudes than the interest rates earned
on our residential mortgage investments. See Market Risk
Management below for a discussion of our interest rate risk
management program related to our residential mortgage
investment portfolio.
Liquidity
and Capital Resources
Liquidity is a measurement of our ability to meet potential cash
requirements, which include funding our existing commercial loan
and investment commitments, acquiring residential mortgage
investments, and ongoing commitments to repaying borrowings,
paying dividends and for other general business purposes. Our
primary sources of funds for liquidity consist of cash flows
from operations, borrowings under our existing and future
repurchase agreements, credit facilities and term debt
securitizations, proceeds from issuances of common equity and
other sources. We believe these sources of financing will be
sufficient to meet our short-term liquidity needs.
As of September 30, 2006, the amount of our unfunded
commitments to extend credit to our clients exceeded our unused
funding sources and unrestricted cash by $617.6 million. We
expect that our commercial loan commitments will continue to
exceed our available funds indefinitely. Our obligation to fund
unfunded commitments generally is based on our clients
ability to provide additional collateral to secure the requested
additional fundings, the additional collaterals
satisfaction of eligibility requirements and our clients
ability to meet certain other preconditions to borrowing.
Provided our clients additional collateral meets all of
the eligibility requirements of our funding sources, we believe
that we have sufficient funding capacity to meet short-term
needs related to unfunded commitments. If we do not have
sufficient funding capacity to satisfy these commitments, our
failure to satisfy our full contractual funding commitment to
one or more of our clients could create breach of contract
liability for us and damage our reputation in the marketplace,
which could have a material adverse effect on our business.
As a result of our decision to elect to be taxed as a REIT, we
may continue to acquire additional residential mortgage
investments. As discussed below, we have funded and expect to
continue to fund these purchases primarily through repurchase
agreements and term debt transactions using leverage consistent
with industry standards for these assets.
We will determine our long-term liquidity and capital resource
requirements based on the growth rate of our portfolio and other
assets. Additionally, as a REIT, our growth must be funded
largely by external sources of capital due to the requirement to
distribute at least 90% of our REIT taxable income to our
shareholders to qualify as a REIT. We are not required to
distribute the taxable income related to our TRSs and,
therefore, have the flexibility to retain these earnings. We
intend to pay dividends at least equal to 100% of our REIT
taxable income. We intend to cause our TRSs to pay dividends to
us to supplement our REIT taxable income, subject to the REIT
gross income limitations. If we are limited in the amount of
dividends we can receive from our TRSs, we intend to use other
sources of cash to fund dividend payments.
We anticipate that we will need to raise additional capital from
time to time to support our growth. In addition to raising
equity, we plan to continue to access the secured debt market
for capital and to continue to explore additional sources of
financing. We expect these financings will include additional
unsecured credit facilities, unsecured term debt, equity-related
securities such as convertible debt
and/or other
financing sources. We cannot assure you, however, that we will
have access to any of these funding sources in the future.
49
Cash
and Cash Equivalents
As of September 30, 2006 and December 31, 2005, we had
$651.1 million and $323.9 million, respectively, in
cash and cash equivalents. The increase in cash as of
September 30, 2006 was primarily due to cash received just
prior to quarter-end including net proceeds from the
$1.5 billion term debt securitization and loan collections
and prepayments. We invest cash on hand in short-term liquid
investments, where permitted, that qualify as cash equivalents.
We generally fund new loan originations and growth in revolving
loan balances using advances under our credit facilities.
For the nine months ended September 30, 2006, we used cash
from operations of $55.9 million. For the nine months ended
September 30, 2005, we generated cash flow from operations
of $72.5 million. During the nine months ended
September 30, 2006, we purchased RMBS which are required to
be included in cash used in operations in the accompanying
consolidated statements of cash flows as these securities are
classified as trading securities in accordance with
SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. We financed these
purchases of RMBS primarily through repurchase agreements which
are included in cash from financing activities in the
accompanying consolidated statements of cash flows and as
described below. In addition, we purchased loans held for sale
during the nine months ended September 30, 2006 that also
are required to be included in cash used in operations.
Proceeds from our equity offerings, borrowings on our repurchase
agreements and credit facilities, the issuance of asset-backed
notes in our term debt transactions and the issuance of
convertible debt and subordinated debt provide cash from
financing activities. For the nine months ended
September 30, 2006 and 2005, we generated cash flow from
financing activities of $4.3 billion and $0.9 billion,
respectively.
Investing activities primarily relate to purchases of
residential mortgage investments and loan origination. For the
nine months ended September 30, 2006 and 2005, we used cash
in investing activities of $3.9 billion and
$1.1 billion, respectively.
We had $362.9 million and $284.8 million of restricted
cash as of September 30, 2006 and December 31, 2005,
respectively. The restricted cash represents principal and
interest collections on loans collateralizing our term debt,
interest collections on loans pledged to our credit facilities
and other items such as client holdbacks and escrows. Principal
repayments, interest rate swap payments, interest payable and
servicing fees are deducted from the monthly principal and
interest collections funded by loans collateralizing our credit
facilities and term debt, and the remaining restricted cash is
returned to us and becomes unrestricted at that time.
Borrowings
As of September 30, 2006 and December 31, 2005, we had
outstanding borrowings totaling $12.3 billion and
$5.4 billion, respectively. Borrowings under our repurchase
agreements, credit facilities, term debt, convertible debt and
subordinated debt have supported our growth. For a detailed
discussion of our borrowings, see Note 9,
Borrowings, in our audited consolidated financial
statements for the year ended December 31, 2005 included in
our Annual Report on
Form 10-K,
as filed with the Securities and Exchange Commission on
March 8, 2006.
Our overall debt strategy emphasizes diverse sources of
financing including both secured and unsecured financings. As of
September 30, 2006, approximately 89% of our debt was
collateralized by our loans and residential mortgage investments
and 11% was unsecured. We intend to increase our percentage of
unsecured debt over time through both unsecured credit
facilities and unsecured term debt. Fitch Ratings issued an
investment grade rating to our senior unsecured debt during
2005. As we continue to grow, we expect to obtain investment
grade ratings from other rating agencies and to improve these
ratings over time. As our ratings improve, we should be able to
issue more unsecured debt relative to the amount of our secured
debt. In any case, we intend to maintain prudent levels of
leverage and currently expect our debt to equity ratio on our
commercial lending portfolio to remain below 5x.
Repurchase
Agreements
We did not enter into any new master repurchase agreements
during the three months ended September 30, 2006. However,
we did borrow under our existing repurchase agreements with
various financial institutions to finance purchases of RMBS and
asset-backed securities during the quarter. RMBS, asset-backed
securities and cash collateralize our repurchase agreements as
of September 30, 2006.
50
Substantially all of our repurchase agreements and related
derivative instruments require us to deposit additional
collateral if interest rates change or the market value of
existing collateral declines, which may require us to sell
assets to reduce our borrowings. We believe we have designed a
policy to maintain a cushion of equity sufficient to provide
required liquidity to respond to the effects under our
repurchase agreements of interest rate movements and changes in
the market value of our RMBS collateralizing the repurchase
agreements. However, a major disruption of the repurchase or
other market that we rely on for short-term borrowings would
have a material adverse effect on us unless we were able to
arrange alternative sources of financing on comparable terms.
Credit
Facilities
During the three months ended September 30, 2006, we
increased our committed credit facility capacity by
$393.8 million to $5.2 billion. This net increase in
capacity primarily resulted from an increase in the maximum
facility amount of three of our existing secured credit
facilities, partially offset by the termination of one of our
secured credit facilities. We currently have seven credit
facilities, six of which were secured and one of which was
unsecured, with a total of 20 financial institutions that we
primarily use to fund our loans on a daily basis. To date, many
loans have been held, or warehoused, in our secured credit
facilities until we complete a term debt securitization
transaction in which we securitize a pool of loans from these
facilities. We primarily use the proceeds from our term debt
transactions to pay down our credit facilities, which results in
increased capacity to redraw on them as needed. As of
September 30, 2006, one of our credit facilities, with a
total capacity of $0.9 billion, is scheduled to mature
within one year and is not subject to renewal. The amount
outstanding under this facility was $286.2 million as of
September 30, 2006. Our other six credit facilities, with a
total capacity of $4.3 billion, have scheduled maturity
dates between one and three years, of which $3.4 billion is
subject to annual renewal.
Term
Debt
In 2006, we completed a $1.5 billion term debt
securitization that includes a three-year replenishment period
allowing us, subject to certain restrictions, to reinvest
principal payments into new loan collateral. The transaction
covers the sale of $1.3 billion of floating-rate
asset-backed notes which are backed by a $1.5 billion
diversified pool of senior and subordinated commercial loans
from our portfolio. The value of the offered notes represents
88.5% of the value of the collateral pool, and we retained an
11.5% interest in the collateral pool. The blended pricing for
the offered notes (excluding fees) was one month LIBOR plus
39.4 basis points. We primarily used the proceeds from this
offering to repay outstanding indebtedness under certain of our
credit facilities.
In October 2006, we sold $20.0 million of the floating-rate
asset-backed notes initially retained, increasing the total
value of the notes sold to 89.8% of the value of the collateral
pool.
Subordinated
Debt
In September 2006, we issued $51.6 million in subordinated
debt to a newly formed statutory trust, which issued an
aggregate of $50.0 million of preferred securities to
outside investors. We retained $1.6 million of the
trusts common securities. The subordinated debt has terms
substantially identical to those of the preferred securities
issued by the trust. The subordinated debt is callable in whole
or in part at par at any time after October 30, 2011 and
matures on October 30, 2036. The subordinated debt is
unsecured and subordinate and junior in right of payment to all
of our other indebtedness, other than the pari passu junior
subordinated debt issued in our previous subordinated debt
transactions.
In September 2006, we also issued 25.8 million in
subordinated debt to a newly formed statutory trust, which
issued an aggregate of 25.0 million of preferred
securities to outside investors. We retained
0.8 million of the trusts common securities.
The subordinated debt is callable in whole or in part at par at
any time after October 30, 2011 and matures on
October 30, 2036. In accordance with SFAS No. 52,
Foreign Currency Translation, this junior subordinated
debt is translated in the accompanying consolidated financial
statements into United States dollars at an approximate
market exchange rate prevailing as of the date of the financial
statements. As of September 30, 2006, $32.7 million of
this junior subordinated debt was outstanding. The subordinated
debt is unsecured and subordinate and junior in right of payment
to our other indebtedness, other than the pari passu junior
subordinated debt issued in our previous subordinated debt
transactions.
51
Debt
Covenant Compliance
CapitalSource Finance LLC, one of our wholly owned indirect
subsidiaries, services loans collateralizing our secured credit
facilities and term debt and is required to meet various
financial and non-financial covenants. Failure to meet the
covenants could result in the servicing being transferred to
another servicer. The notes under the trusts established in
connection with our term debt include accelerated amortization
provisions that require cash flows to be applied to pay the
noteholders if the notes remain outstanding beyond the stated
maturity dates. We, and certain of our other wholly owned
subsidiaries, also have certain financial and non-financial
covenants related to our unsecured credit facility, subordinated
debt and our other debt financings. As of September 30,
2006, we believe we were in compliance with all of our covenants.
Equity
In March 2006, we began offering a Dividend Reinvestment and
Stock Purchase Plan (the DRIP) to current and
prospective shareholders. Participation in the DRIP allows
common shareholders to reinvest cash dividends and to purchase
additional shares of our common stock, in some cases at a
discount from the market price. During the nine months ended
September 30, 2006, we received proceeds of
$94.7 million related to the purchase of 4.1 million
shares of our common stock pursuant to the DRIP. In addition, we
received proceeds of $9.0 million related to cash dividends
reinvested for 0.4 million shares of our common stock
during the nine months ended September 30, 2006.
Off-Balance
Sheet Transactions
For a detailed discussion of our off-balance sheet transactions,
see Note 18, Credit Risk, of our audited
consolidated financial statements for the year ended
December 31, 2005 included in our Annual Report on
Form 10-K,
as filed with the Securities and Exchange Commission on
March 8, 2006.
Funding-Related
Commitments
We are subject to off-balance sheet risk in the normal course of
business primarily from non-binding commitments to extend
credit. As of September 30, 2006 and December 31,
2005, we had unfunded commitments to extend credit to our
clients of $3.7 billion and $3.2 billion,
respectively. As of September 30, 2006 and
December 31, 2005, we had issued $235.3 million and
$166.8 million, respectively, in letters of credit which
expire at various dates over the next seven years. These letters
of credit may have the effect of creating, increasing or
accelerating our borrowings. If a borrower defaults on its
commitment(s) subject to any letter of credit issued under these
arrangements, we would be responsible to meet the
borrowers financial obligation and would seek repayment of
that financial obligation from the borrower. These arrangements
qualify as a financial guarantee in accordance with Financial
Accounting Standards Board Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others. These commitments are subject to the same
underwriting and ongoing portfolio maintenance as the on-balance
sheet financial instruments we hold.
Guarantee
to Special Purpose Entity
We have provided a limited financial guarantee to a third party
warehouse lender, which finances the purchase of commercial
loans by a special purpose entity (SPE). Under this
guaranty, we have agreed to assume a portion of net losses
realized in connection with loans held by the SPE up to a
specified loss limit. This guarantee is due to expire in
September 2007, or earlier, to the extent that any of the
following occur prior to the guarantees scheduled expiry:
the warehouse facility is refinanced; there is an event of
default under the warehouse facility; or a determination is made
that the planned issuance of securities of the SPE in a
collateralized debt obligation transaction will not be
consummated. We also perform certain advisory services in
connection with the acquisition of these loans. As of
September 30, 2006, the face amount of loans subject to the
guarantee was $11.0 million. In accordance with the
provisions of FASB Interpretation No. 46 (Revised 2003),
Consolidation of Variable Interest Entities An
Interpretation of ARB No. 51
(FIN 46(R)), we determined that we are not
required to recognize the assets and liabilities of this SPE for
financial statement purposes as of September 30, 2006.
Market
Risk Management
Market risk is the risk that the values of our assets and
liabilities or revenues will be adversely affected by changes in
market conditions such as interest rates. The primary market
risk to which we are exposed is interest rate
52
risk, which is inherent in the financial instruments associated
with our operations, primarily including our loans, residential
mortgage investments and borrowings. For a detailed discussion
of our derivatives, see Note 17, Derivatives and
Off-Balance Sheet Financial Instruments, of our audited
consolidated financial statements for the year ended
December 31, 2005 included in our Annual Report on
Form 10-K.
Commercial
Lending & Investment Segment
Interest rate risk in our commercial lending portfolio refers to
the change in earnings that may result from changes in interest
rates, primarily various short-term interest rates, including
30-day LIBOR
and the prime rate. We attempt to mitigate exposure to the
earnings impact of interest rate changes by conducting the
majority of our lending and borrowing on a variable rate basis.
The majority of our commercial loan portfolio bears interest at
a spread to the prime rate with almost all of our other loans
bearing interest at a spread to
30-day LIBOR
or at a fixed rate. The majority of our borrowings bear interest
at a spread to
30-day LIBOR
or commercial paper rates, with the remainder bearing interest
at a fixed rate. We are also exposed to changes in interest
rates in certain of our fixed rate loans and investments. We
attempt to mitigate our exposure to the earnings impact of the
interest rate changes in these assets by engaging in hedging
activities as discussed below.
The estimated changes in net interest income for a
12-month
period based on changes in the interest rates applied to our
commercial lending portfolio as of September 30, 2006 were
as follows:
|
|
|
|
|
|
|
Estimated (Decrease)
|
|
|
|
Increase in
|
|
|
|
Net Interest Income
|
|
Rate Change (Basis Points)
|
|
Over 12 Months
|
|
|
|
($ in thousands)
|
|
|
100
|
|
$
|
(14,664
|
)
|
50
|
|
|
(7,854
|
)
|
+50
|
|
|
8,658
|
|
+100
|
|
|
17,235
|
|
For the purposes of the above analysis, we included related
derivatives, excluded principal payments and assumed a 75%
advance rate on our variable rate borrowings.
Approximately 49% of the aggregate outstanding principal amount
of our commercial loans had interest rate floors as of
September 30, 2006. The loans with interest rate floors as
of September 30, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Percentage of
|
|
|
|
Outstanding
|
|
|
Total Portfolio
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Loans with contractual interest
rates:
|
|
|
|
|
|
|
|
|
Exceeding the interest rate floor
|
|
$
|
3,581,723
|
|
|
|
49
|
%
|
At the interest rate floor
|
|
|
8,664
|
|
|
|
|
|
Below the interest rate floor
|
|
|
37,537
|
|
|
|
|
|
Loans with no interest rate floor
|
|
|
3,721,845
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,349,769
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Hedging
Activities
We use interest rate swaps to economically hedge the risk of
changes in fair value of certain fixed rate loans. We also enter
into additional basis swap agreements to economically hedge
basis risk between our LIBOR-based term debt and the prime-based
loans pledged as collateral for that debt. These interest rate
swaps modify our exposure to interest rate risk by synthetically
converting fixed rate and prime rate loans to
30-day
LIBOR. Additionally, we use interest rate caps to economically
hedge loans with embedded interest rate caps that are pledged as
collateral for our term debt. Our interest rate hedging
activities partially protect us from the risk that interest
collected under fixed-rate and prime rate loans will not be
sufficient to service the interest due under the
30-day
LIBOR-based term debt. The fair value of these interest rate
swaps and basis swaps was $(0.9) million and
$(0.1) million as of September 30, 2006 and
December 31, 2005, respectively. The fair value of the
interest rate caps was $0.1 million as of
September 30, 2006 and December 31, 2005, respectively.
53
We also use interest rate swaps to hedge the variability of cash
flows in interest payments for subordinated debt underlying
certain of our securities issuances. The fair value of this
interest rate swap was $0.9 million and $0.2 million
as of September 30, 2006 and December 31, 2005,
respectively.
We also use interest rate swaps to economically hedge changes in
the fair value of certain of our fixed rate loans, which are not
pledged to our term debt, and fixed rate investments. The fair
value of these interest rate swaps was $0.4 million and
$0.7 million as of September 30, 2006 and
December 31 2005, respectively.
We have also entered into forward exchange contracts to
economically hedge anticipated loan syndications and foreign
currency-denominated loans we originate against foreign currency
fluctuations. These forward exchange contracts provide for a
fixed exchange rate which has the effect of locking in the
anticipated cash flows to be received from the loan syndication
and the foreign currency-denominated loans. The fair value of
these forward exchange contracts was $0.4 million as of
September 30, 2006.
Residential
Mortgage Investment Segment
We are exposed to changes in interest rates in our residential
mortgage investment portfolio and related financings based on
changes in the level and shape of the yield curve, volatility of
interest rates and mortgage prepayments. Changes in interest
rates are a significant risk to our residential mortgage
investment portfolio. As interest rates increase, the market
value of residential mortgage investments may decline while
financing costs could rise, to the extent not mitigated by
derivative positions intended to economically hedge such
exposures. Conversely, if interest rates decrease, the market
value of residential mortgage investments may increase while
financing costs could decline, also to the extent financing is
at variable rates and is not mitigated by derivative positions
intended to economically hedge such exposures. In addition,
changes in the interest rate environment may affect mortgage
prepayment rates. For example, in a rising interest rate
environment, mortgage prepayment rates may decrease, thereby
extending the duration of our investments. The majority of our
residential mortgage investments have a fixed interest rate for
a certain period of time followed by an adjustable rate period
in which the adjustments are subject to annual and lifetime
caps. We have term debt financing through debt obligations
secured by residential mortgage loans that have a similar
initial fixed period followed by an adjustable period. Related
repurchase agreements are indexed to a short-term interest rate
market index such as LIBOR.
The estimated changes in fair value based on changes in interest
rates applied to our residential mortgage investment portfolio
as of September 30, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Estimated Decrease
|
|
|
Percentage of Total
|
|
Rate Change (Basis Points)
|
|
in Fair Value
|
|
|
Segment Assets
|
|
|
|
($ in thousands)
|
|
|
|
|
|
100
|
|
$
|
(7,162
|
)
|
|
|
(0.12
|
)%
|
50
|
|
|
(1,032
|
)
|
|
|
(0.02
|
)
|
+50
|
|
|
(1,443
|
)
|
|
|
(0.02
|
)
|
+100
|
|
|
(5,601
|
)
|
|
|
(0.10
|
)
|
For the purposes of the above analysis, our residential mortgage
investment portfolio includes all of our investments in
residential mortgage-related receivables, RMBS, term debt and
related derivatives as of September 30, 2006.
Hedging
Activities
In connection with our residential mortgage investments and
related financings, we follow a risk management program designed
to mitigate the risk of changes in fair value of our residential
mortgage investments due to shifts in interest rates.
Specifically, we seek to eliminate the effective duration gap
associated with our assets and liabilities. To accomplish this
objective, we use a variety of derivative instruments such as
interest rate swaps, interest rate caps, swaptions and Euro
dollar futures contracts. These derivative transactions convert
the short-term financing of our repurchase agreements to term
financing matched to the expected duration of our residential
mortgage investments. The fair value of derivative instruments
used by our Residential Mortgage Investment segment was
$(23.0) million and $2.3 million as of
September 30, 2006 and December 31, 2005, respectively.
54
To the extent necessary and based on established risk criteria,
we will adjust the mix of financing and hedges as market
conditions and asset performance evolves to maintain a close
alignment between our assets and our liabilities. In addition,
we have contracted with an external investment advisor,
BlackRock Financial Management, Inc., to provide analytical,
risk management and other advisory services in connection with
interest rate risk management on this portfolio.
Critical
Accounting Policies
Our consolidated financial statements are based on the selection
and application of critical accounting policies, many of which
require management to make estimates and assumptions. Except as
discussed below, our critical accounting policies are described
in Critical Accounting Policies within
Managements Discussion and Analysis of Financial
Condition and Results of Operations included in our Annual
Report on
Form 10-K
for the year ended December 31, 2005 as filed with the
Securities and Exchange Commission on March 8, 2006. The
following are new critical accounting policies during the nine
months ended September 30, 2006.
Interest
Income on Mortgage-Related Receivables and Mortgage-Backed
Securities
Interest income from our mortgage-related receivables and RMBS
is accrued into earnings based upon the contractual terms of
such investments. Where appropriate, carrying value adjustments,
including purchase premiums and discounts of such investments
are amortized into interest income using the interest method in
accordance with SFAS No. 91, Accounting for
Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases
(SFAS No. 91). To the extent
applicable, the provisions of Emerging Issues Task Force Issue
No. 99-20,
Recognition of Interest Income and Impairment on Purchased
and Retained Beneficial Interests in Securitized Assets, as
well as the American Institute of Certified Public
Accountants Statement of Position
No. 03-3,
Accounting for Certain Loans or Debt Securities Acquired in a
Transfer, are also considered for purposes of facilitating
interest income recognition on certain of these investments.
Determination of the constant effective yield that is used to
facilitate the amortization of carrying value adjustments
requires significant judgment in estimating expected
prepayments, which is inherently uncertain. Estimates of future
prepayments contemplate a variety of assumptions about borrower
behavior in response to changes in interest rates and other
macroeconomic factors. Judgment is involved in making initial
determinations about prepayment expectations and in changing
those expectations over time in response to changes in market
conditions, which may be significant. The use of different
assumptions in our prepayment models could have resulted in
significantly different income recognition results.
Mortgage-Related
Receivables and Related Owner
Trust Securitizations
We purchased beneficial interests in SPEs that acquired and
securitized pools of residential mortgage loans. In accordance
with the provisions of FIN 46(R), we determined that we
were the primary beneficiary of these SPEs and, therefore,
consolidated the assets and liabilities of such entities for
financial statement purposes. We determined that the SPEs
interest in the underlying mortgage loans constituted, for
accounting purposes, receivables secured by underlying mortgage
loans. As a result, through consolidation, we recorded
mortgage-related receivables, as well as the principal amount of
related debt obligations incurred by SPEs to fund the
origination of such receivables, on our accompanying
consolidated balance sheet as of September 30, 2006. Such
mortgage-related receivables maintain all of the economic
attributes of the underlying mortgage loans legally held in
trust by such SPEs and, as a result of our interest in such
SPEs, we maintain all of the economic benefits and related risks
of ownership of underlying mortgage loans.
Our investments in mortgage-related receivables are recorded at
amortized cost. Purchase premiums and discounts that relate to
such receivables are amortized into interest income over the
estimated lives of such assets in accordance with the interest
method of SFAS No. 91. We also amortize into interest
expense recognized discounts and other deferred items relating
to the debt obligations of the SPEs over their estimated lives
using the interest method.
Income
Taxes
We intend to elect to be taxed as a REIT under the Code
commencing with our taxable year ending December 31, 2006.
Provided we qualify for taxation as a REIT, we generally will
not be subject to corporate-level income tax on the earnings
distributed to our shareholders that we derive from our REIT
qualifying activities. We will continue to be subject to
corporate-level tax on the earnings we derive from our TRSs. If
we fail to qualify as a
55
REIT in any taxable year, all of our taxable income would be
subject to federal income tax at regular corporate rates,
including any applicable alternative minimum tax. We will still
be subject to foreign, state and local taxation in various
foreign, state and local jurisdictions, including those in which
we transact business or reside.
In order to estimate our corporate-level income taxes as a REIT,
we must determine the amount of our income derived from REIT
qualifying activities and the amount derived from our TRSs
during the entire taxable year. If our estimates of the source
of the income are not appropriate, income taxes could be
materially different from amounts reported in the consolidated
statements of income.
56
|
|
ITEM 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
We are exposed to certain financial market risks, which are
discussed in detail in Managements Discussion and
Analysis of Financial Condition and Results of Operations in
the Market Risk Management section. There have been no
material changes to our exposures to those market risks since
December 31, 2005. In addition, for a detailed discussion
of our derivatives and off-balance sheet financial instruments,
see Note 17, Derivatives and Off-Balance Sheet Financial
Instruments, in our audited consolidated financial
statements for the year ended December 31, 2005 included in
our Annual Report on
Form 10-K,
as filed with the Securities and Exchange Commission on
March 8, 2006.
|
|
ITEM 4.
|
CONTROLS
AND PROCEDURES
|
We carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
pursuant to
Rule 13a-15
of the Securities Exchange Act of 1934, as amended. Based upon
that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures
were effective as of September 30, 2006.
57
PART II.
OTHER INFORMATION
|
|
ITEM 1.
|
LEGAL
PROCEEDINGS
|
None
See the discussion of our risk factors in the Risk Factors
section of our audited consolidated financial statements for
the year ended December 31, 2005 included in our Annual
Report on
Form 10-K,
as filed with the Securities and Exchange Commission on
March 8, 2006.
|
|
ITEM 2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
A summary of our repurchases of shares of our common stock for
the three months ended September 30, 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Maximum Number
|
|
|
|
Total Number
|
|
|
Average
|
|
|
as Part of Publicly
|
|
|
of Shares that May
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Announced Plans
|
|
|
Yet be Purchased
|
|
|
|
Purchased (1)
|
|
|
per Share
|
|
|
or Programs
|
|
|
Under the Plans
|
|
|
July 1 July 31,
2006
|
|
|
3,546
|
|
|
$
|
23.66
|
|
|
|
|
|
|
|
|
|
August 1
August 31, 2006
|
|
|
14,990
|
|
|
|
23.30
|
|
|
|
|
|
|
|
|
|
September 1
September 30, 2006
|
|
|
8,054
|
|
|
|
24.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
26,590
|
|
|
$
|
23.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the number of shares acquired as payment by employees
of applicable statutory minimum withholding taxes owed upon
vesting of restricted stock granted under the CapitalSource Inc.
Third Amended and Restated Equity Incentive Plan. |
|
|
ITEM 3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
None
|
|
ITEM 5.
|
OTHER
INFORMATION
|
None
(a) Exhibits
The Index to Exhibits attached hereto is incorporated herein by
reference.
58
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CAPITALSOURCE INC.
Date: November 8, 2006
John K. Delaney
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Date: November 8, 2006
Thomas A. Fink
Chief Financial Officer
(Principal Financial Officer)
Date: November 8, 2006
David C. Bjarnason
Chief Accounting Officer
(Principal Accounting Officer)
59
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
No
|
|
Description
|
|
|
3
|
.1
|
|
Second Amended and Restated
Certificate of Incorporation (incorporated by reference to the
same-numbered exhibit to the registrants Current Report on
Form 8-K
dated May 3, 2006).
|
|
3
|
.2
|
|
Amended and Restated Bylaws
(incorporated by reference to the same-numbered exhibit to the
registrants Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2003).
|
|
4
|
.1
|
|
Form of Certificate of Common
Stock of CapitalSource Inc. (incorporated by reference
Exhibit 3 to the registrants Registration Statement
on
Form 8-A/A
dated May 22, 2006).
|
|
4
|
.3
|
|
Indenture dated as of
October 30, 2002, by and between CapitalSource Commercial
Loan
Trust 2002-2,
as Issuer, and Wells Fargo Bank Minnesota, National Association,
as Indenture Trustee (incorporated by reference to the
same-numbered exhibit to the registrants Registration
Statement on
Form S-1
(Reg.
No. 333-106076)).
|
|
4
|
.4
|
|
Indenture dated as of
April 17, 2003, by and between CapitalSource Commercial
Loan
Trust 2003-1,
as Issuer, and Wells Fargo Bank Minnesota, National Association,
as Indenture Trustee (incorporated by reference to the
same-numbered exhibit to the registrants Registration
Statement on
Form S-1
(Reg.
No. 333-106076)).
|
|
4
|
.5
|
|
Indenture dated as of
September 17, 2003, between CapitalSource Funding II
Trust and Wells Fargo Bank Minnesota, National Association, as
Indenture Trustee (incorporated by reference to the
same-numbered exhibit to the registrants Quarterly Report
on
Form 10-Q
for the quarter ended September 30, 2003).
|
|
4
|
.6
|
|
Indenture dated as of
November 25, 2003, by and between CapitalSource Commercial
Loan
Trust 2003-2,
as Issuer, and Wells Fargo Bank Minnesota, National Association,
as Indenture Trustee (incorporated by reference to the
same-numbered exhibit to the registrants Registration
Statement on
Form S-1
(Reg.
No. 333-112002)).
|
|
4
|
.7
|
|
Indenture dated as of
March 19, 2004, by and among CapitalSource Inc., as Issuer,
U.S. Bank National Association, as Trustee, and
CapitalSource Holdings LLC and CapitalSource Finance LLC, as
Guarantors, including form of Senior Convertible Debenture Due
2034 (incorporated by reference to the same-numbered exhibit to
the registrants Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2004).
|
|
4
|
.7.1
|
|
First Supplemental Indenture dated
as of October 18, 2004, by and among the registrant,
CapitalSource Holdings Inc. and CapitalSource Finance LLC, as
Guarantors, and U.S. Bank National Association, as Trustee
(incorporated by reference to Exhibit 4.1.1 to the
registrants Registration Statement on
Form S-3
(Reg.
No. 333-118744)).
|
|
4
|
.8
|
|
Indenture dated as of
June 22, 2004, by and among CapitalSource Commercial Loan
Trust 2004-1,
as Issuer, and Wells Fargo Bank Minnesota, National Association,
as Indenture Trustee (incorporated by reference to the
same-numbered exhibit to the registrants Quarterly Report
on
Form 10-Q
for the quarter ended June 30, 2004).
|
|
4
|
.9
|
|
Indenture dated as of
October 28, 2004, by and between CapitalSource Commercial
Loan
Trust 2004-2,
as the Issuer, and Wells Fargo Bank, National Association, as
the Indenture Trustee (incorporated by reference to the
same-numbered exhibit to the registrants Current Report on
Form 8-K
dated October 28, 2004).
|
|
4
|
.10
|
|
Indenture dated as of July 7,
2004, by and among CapitalSource Inc., as Issuer, U.S. Bank
National Association, as Trustee, and CapitalSource Holdings LLC
and CapitalSource Finance LLC, as Guarantors, including form of
3.5% Senior Convertible Debenture Due 2034 (incorporated by
reference to Exhibit 4.1 to the registrants
Registration Statement on
Form S-3
(Reg.
No. 333-118738)).
|
|
4
|
.10.1
|
|
First Supplemental Indenture dated
as of October 18, 2004, by and among the registrant,
CapitalSource Holdings Inc. and CapitalSource Finance LLC, as
Guarantors, and U.S. Bank National Association, as Trustee
(incorporated by reference to Exhibit 4.1.1 to the
registrants Registration Statement on
Form S-3
(Reg.
No. 333-118738)).
|
|
4
|
.11
|
|
Indenture dated as of
April 14, 2005, by and between CapitalSource Commercial
Loan
Trust 2005-1,
as the Issuer, and Wells Fargo Bank, National Association, as
the Indenture Trustee (incorporated by reference to the
same-numbered exhibit to the registrants Current Report on
Form 8-K
dated April 20, 2005).
|
60
|
|
|
|
|
Exhibit
|
|
|
No
|
|
Description
|
|
|
4
|
.12
|
|
Junior Subordinated Indenture,
dated as of November 21, 2005, among CapitalSource Finance
LLC, as Issuer, CapitalSource Inc., as Guarantor, and Wilmington
Trust Company, as Trustee (incorporated by reference to the
same-numbered exhibit to the registrants Annual Report on
Form 10-K
for the year ended December 31, 2005).
|
|
4
|
.13
|
|
Junior Subordinated Indenture,
dated as of December 14, 2005, among CapitalSource Finance
LLC, CapitalSource Inc. and JPMorgan Chase Bank, National
Association, as Trustee (incorporated by reference to the
same-numbered exhibit to the registrants Annual Report on
Form 10-K
for the year ended December 31, 2005).
|
|
4
|
.14
|
|
Indenture dated as of
April 11, 2006, by and between CapitalSource Commercial
Loan
Trust 2006-1,
as the Issuer, and Wells Fargo Bank, National Association, as
the Indenture Trustee (incorporated by reference to the
same-numbered exhibit to the registrants Current Report on
Form 8-K
dated April 17, 2006).
|
|
4
|
.15
|
|
Junior Subordinated Indenture,
dated as of February 22, 2006, among CapitalSource Finance
LLC, as Issuer, CapitalSource Inc., as Guarantor, and JPMorgan
Chase Bank, National Association, as Trustee (incorporated by
reference to the same-numbered exhibit to the registrants
Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2006).
|
|
4
|
.16
|
|
Indenture dated as of
September 28, 2006, by and among CapitalSource Commercial
Loan
Trust 2006-2,
as the Issuer, and Wells Fargo Bank, National Association, as
the Indenture Trustee (incorporated by reference to the
same-numbered exhibit to the registrants Current Report on
Form 8-K
dated October 4, 2006).
|
|
10
|
.65
|
|
Amended and Restated Sale and
Servicing Agreement, dated as of July 28, 2006, among CSE
QRS Funding II LLC, as Seller, CSE Mortgage LLC, as
Originator and Servicer, Citigroup Global Markets Realty Corp.,
as Administrative Agent and as Citigroup Agent, Wells Fargo
Bank, National Association, as Backup Servicer and Collateral
Custodian, MICA Funding, LLC as a Purchaser and Swiss Re
Financial Products Corporation as Micas Purchaser Agent
(incorporated by reference to the same-numbered exhibit to the
registrants Current Report on
Form 8-K
dated August 3, 2006).
|
|
10
|
.66
|
|
Sale and Servicing Agreement,
dated as of September 28, 2006, by and among CapitalSource
Commercial Loan
Trust 2006-2,
as the Issuer, CapitalSource Commercial Loan LLC, 2006-2, as the
Trust Depositor, CapitalSource Finance LLC, as the
Originator and as the Servicer, and Wells Fargo Bank, National
Association, as the Indenture Trustee and as the Backup Servicer
(incorporated by reference to the same-numbered exhibit to the
registrants Current Report on
Form 8-K
dated October 4, 2006).
|
|
12
|
.1
|
|
Ratio of Earnings to Fixed
Charges.
|
|
31
|
.1
|
|
Rule 13a 14(a)
Certification of Chairman and Chief Executive Officer.
|
|
31
|
.2
|
|
Rule 13a 14(a)
Certification of Chief Financial Officer.
|
|
32
|
|
|
Section 1350
Certifications.
|
61