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 March 31, 2007
Commission File
No. 1-31753
CapitalSource Inc.
(Exact name of registrant as
specified in its charter)
|
|
|
|
|
|
Delaware
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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 May 1, 2007, the number of shares of the
registrants Common Stock, par value $0.01 per share,
outstanding was 189,299,596.
CapitalSource
Inc.
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
($ in thousands)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
308,770
|
|
|
$
|
396,151
|
|
Restricted cash
|
|
|
135,550
|
|
|
|
240,904
|
|
Mortgage-related receivables, net
|
|
|
2,239,257
|
|
|
|
2,295,922
|
|
Mortgage-backed securities
pledged, trading
|
|
|
3,372,329
|
|
|
|
3,502,753
|
|
Receivables under
reverse-repurchase agreements
|
|
|
26,315
|
|
|
|
51,892
|
|
Loans held for sale
|
|
|
156,650
|
|
|
|
26,521
|
|
Loans:
|
|
|
|
|
|
|
|
|
Loans
|
|
|
8,455,570
|
|
|
|
7,771,785
|
|
Less deferred loan fees and
discounts
|
|
|
(124,380
|
)
|
|
|
(130,392
|
)
|
Less allowance for loan losses
|
|
|
(125,236
|
)
|
|
|
(120,575
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
8,205,954
|
|
|
|
7,520,818
|
|
Direct real estate investments, net
|
|
|
805,650
|
|
|
|
722,303
|
|
Investments
|
|
|
185,710
|
|
|
|
184,333
|
|
Other assets
|
|
|
228,148
|
|
|
|
268,977
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,664,333
|
|
|
$
|
15,210,574
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, NONCONTROLLING
INTERESTS AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
$
|
3,309,559
|
|
|
$
|
3,510,768
|
|
Unsecured credit facilities
|
|
|
492,758
|
|
|
|
355,685
|
|
Secured credit facilities
|
|
|
2,932,262
|
|
|
|
2,183,155
|
|
Term debt
|
|
|
5,423,317
|
|
|
|
5,809,685
|
|
Convertible debt
|
|
|
555,000
|
|
|
|
555,000
|
|
Subordinated debt
|
|
|
485,453
|
|
|
|
446,393
|
|
Other liabilities
|
|
|
202,852
|
|
|
|
200,498
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
13,401,201
|
|
|
|
13,061,184
|
|
Noncontrolling
interests
|
|
|
44,797
|
|
|
|
56,350
|
|
Shareholders
equity:
|
|
|
|
|
|
|
|
|
Preferred stock
(50,000,000 shares authorized; no shares outstanding)
|
|
|
|
|
|
|
|
|
Common stock ($0.01 par
value, 500,000,000 shares authorized; 189,538,383 and
182,752,290 shares issued, respectively; 188,238,383 and
181,452,290 shares outstanding, respectively)
|
|
|
1,882
|
|
|
|
1,815
|
|
Additional paid-in capital
|
|
|
2,302,393
|
|
|
|
2,139,421
|
|
Accumulated deficit
|
|
|
(56,067
|
)
|
|
|
(20,735
|
)
|
Accumulated other comprehensive
income, net
|
|
|
53
|
|
|
|
2,465
|
|
Treasury stock, at cost
|
|
|
(29,926
|
)
|
|
|
(29,926
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,218,335
|
|
|
|
2,093,040
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, noncontrolling
interests and shareholders equity
|
|
$
|
15,664,333
|
|
|
$
|
15,210,574
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
3
CapitalSource
Inc.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands, except per
|
|
|
|
share data)
|
|
|
Net investment
income:
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
289,554
|
|
|
$
|
195,498
|
|
Fee income
|
|
|
50,027
|
|
|
|
41,542
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
339,581
|
|
|
|
237,040
|
|
Operating lease income
|
|
|
20,288
|
|
|
|
4,625
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
359,869
|
|
|
|
241,665
|
|
Interest expense
|
|
|
186,649
|
|
|
|
97,782
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
173,220
|
|
|
|
143,883
|
|
Provision for loan losses
|
|
|
14,926
|
|
|
|
14,713
|
|
|
|
|
|
|
|
|
|
|
Net investment income after
provision for loan losses
|
|
|
158,294
|
|
|
|
129,170
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
40,014
|
|
|
|
33,320
|
|
Other administrative expenses
|
|
|
25,308
|
|
|
|
17,299
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
65,322
|
|
|
|
50,619
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
Diligence deposits forfeited
|
|
|
862
|
|
|
|
2,267
|
|
Gain (loss) on investments, net
|
|
|
6,163
|
|
|
|
(251
|
)
|
(Loss) gain on derivatives
|
|
|
(2,255
|
)
|
|
|
526
|
|
Loss on residential mortgage
investment portfolio
|
|
|
(5,698
|
)
|
|
|
(6,106
|
)
|
Other income, net of expenses
|
|
|
6,977
|
|
|
|
3,908
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
6,049
|
|
|
|
344
|
|
Noncontrolling interests
expense
|
|
|
1,330
|
|
|
|
861
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
and cumulative effect of accounting change
|
|
|
97,691
|
|
|
|
78,034
|
|
Income taxes
|
|
|
19,001
|
|
|
|
13,110
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative
effect of accounting change
|
|
|
78,690
|
|
|
|
64,924
|
|
Cumulative effect of accounting
change, net of taxes
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
78,690
|
|
|
$
|
65,294
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.44
|
|
|
$
|
0.44
|
|
Diluted
|
|
$
|
0.43
|
|
|
$
|
0.42
|
|
Average shares
outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
179,324,672
|
|
|
|
149,722,991
|
|
Diluted
|
|
|
181,743,884
|
|
|
|
154,450,572
|
|
Dividends declared per
share
|
|
$
|
0.58
|
|
|
$
|
0.49
|
|
See accompanying notes.
4
CapitalSource
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Treasury
|
|
|
Total
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stock,
|
|
|
Shareholders
|
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income, Net
|
|
|
at Cost
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
Total shareholders equity as
of December 31, 2006
|
|
$
|
1,815
|
|
|
$
|
2,139,421
|
|
|
$
|
(20,735
|
)
|
|
$
|
2,465
|
|
|
$
|
(29,926
|
)
|
|
$
|
2,093,040
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
78,690
|
|
|
|
|
|
|
|
|
|
|
|
78,690
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,412
|
)
|
|
|
|
|
|
|
(2,412
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,278
|
|
Cumulative effect of adoption of
FIN 48
|
|
|
|
|
|
|
|
|
|
|
(5,702
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,702
|
)
|
Dividends paid
|
|
|
|
|
|
|
2,256
|
|
|
|
(108,320
|
)
|
|
|
|
|
|
|
|
|
|
|
(106,064
|
)
|
Issuance of common stock, net
|
|
|
59
|
|
|
|
145,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,684
|
|
Stock option expense
|
|
|
|
|
|
|
2,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,392
|
|
Exercise of options
|
|
|
2
|
|
|
|
2,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,644
|
|
Restricted stock activity
|
|
|
6
|
|
|
|
2,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,467
|
|
Tax benefit on exercise of options
|
|
|
|
|
|
|
849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
849
|
|
Tax benefit on vesting of
restricted stock grants
|
|
|
|
|
|
|
6,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity as
of March 31, 2007
|
|
$
|
1,882
|
|
|
$
|
2,302,393
|
|
|
$
|
(56,067
|
)
|
|
$
|
53
|
|
|
$
|
(29,926
|
)
|
|
$
|
2,218,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
CapitalSource
Inc.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
78,690
|
|
|
$
|
65,294
|
|
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
2,392
|
|
|
|
785
|
|
Restricted stock expense
|
|
|
8,320
|
|
|
|
5,752
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
2,582
|
|
Non-cash prepayment fee
|
|
|
|
|
|
|
(8,353
|
)
|
Cumulative effect of accounting
change, net of taxes
|
|
|
|
|
|
|
(370
|
)
|
Amortization of deferred loan fees
and discounts
|
|
|
(24,814
|
)
|
|
|
(20,158
|
)
|
Paid-in-kind
interest on loans
|
|
|
(6,103
|
)
|
|
|
(1,274
|
)
|
Provision for loan losses
|
|
|
14,926
|
|
|
|
14,713
|
|
Amortization of deferred financing
fees and discounts
|
|
|
8,078
|
|
|
|
7,767
|
|
Depreciation and amortization
|
|
|
8,031
|
|
|
|
2,349
|
|
Benefit for deferred income taxes
|
|
|
(1,606
|
)
|
|
|
(1,651
|
)
|
Non-cash loss on investments, net
|
|
|
47
|
|
|
|
1,236
|
|
Non-cash loss on property and
equipment disposals
|
|
|
127
|
|
|
|
|
|
Unrealized loss (gain) on
derivatives and foreign currencies, net
|
|
|
329
|
|
|
|
(526
|
)
|
Unrealized loss on residential
mortgage investment portfolio, net
|
|
|
5,207
|
|
|
|
17,366
|
|
Net decrease (increase) in
mortgage-backed securities pledged, trading
|
|
|
155,540
|
|
|
|
(103,214
|
)
|
Amortization of discount on
residential mortgage investments
|
|
|
(8,631
|
)
|
|
|
(1,468
|
)
|
Increase in loans held for sale, net
|
|
|
(101,575
|
)
|
|
|
(77,981
|
)
|
Decrease (increase) in other assets
|
|
|
11,468
|
|
|
|
(36,238
|
)
|
Increase in other liabilities
|
|
|
1,976
|
|
|
|
6,423
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
operating activities
|
|
|
152,402
|
|
|
|
(126,966
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
|
105,354
|
|
|
|
33,341
|
|
Decrease (increase) in
mortgage-related receivables, net
|
|
|
60,003
|
|
|
|
(2,493,503
|
)
|
Decrease (increase) in receivables
under reverse-repurchase agreements, net
|
|
|
25,577
|
|
|
|
(36,889
|
)
|
Increase in loans, net
|
|
|
(699,761
|
)
|
|
|
(368,525
|
)
|
Acquisition of real estate, net of
cash acquired
|
|
|
(87,020
|
)
|
|
|
(7,180
|
)
|
(Disposal) acquisition of
investments, net
|
|
|
(8,506
|
)
|
|
|
26,564
|
|
Acquisition of property and
equipment, net
|
|
|
(2,800
|
)
|
|
|
(775
|
)
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(607,153
|
)
|
|
|
(2,846,967
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(2,097
|
)
|
|
|
(10,553
|
)
|
(Repayments of) borrowings under
repurchase agreements, net
|
|
|
(201,209
|
)
|
|
|
96,438
|
|
Borrowings on unsecured credit
facilities, net
|
|
|
137,073
|
|
|
|
250,000
|
|
Borrowings on secured credit
facilities, net
|
|
|
749,107
|
|
|
|
163,021
|
|
Borrowings of term debt
|
|
|
40,000
|
|
|
|
2,449,382
|
|
Repayments of term debt
|
|
|
(429,075
|
)
|
|
|
(398,215
|
)
|
Borrowings of subordinated debt
|
|
|
36,593
|
|
|
|
50,000
|
|
Proceeds from issuance of common
stock, net of offering costs
|
|
|
134,151
|
|
|
|
395,837
|
|
Proceeds from exercise of options
|
|
|
2,644
|
|
|
|
1,711
|
|
Tax benefits on share-based payments
|
|
|
7,596
|
|
|
|
1,677
|
|
Payment of dividends
|
|
|
(107,413
|
)
|
|
|
(143,777
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by financing
activities
|
|
|
367,370
|
|
|
|
2,855,521
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash
equivalents
|
|
|
(87,381
|
)
|
|
|
(118,412
|
)
|
Cash and cash equivalents as of
beginning of period
|
|
|
396,151
|
|
|
|
323,896
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end
of period
|
|
$
|
308,770
|
|
|
$
|
205,484
|
|
|
|
|
|
|
|
|
|
|
Noncash transactions from
investing and financing activities:
|
|
|
|
|
|
|
|
|
Issuance of common stock in
connection with dividends and real estate acquisition
|
|
$
|
|
|
|
$
|
309,736
|
|
Conversion of noncontrolling
interests into common stock
|
|
|
11,533
|
|
|
|
|
|
See accompanying notes.
6
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 middle market businesses.
We primarily provide and invest in the following products:
|
|
|
|
|
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;
|
|
|
|
First Mortgage Loans Commercial loans that are
secured by first mortgages on the property of the client;
|
|
|
|
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;
|
|
|
|
Direct Real Estate Investments Commercial
investments primarily in land and buildings, including those
that are purchased from and leased back to the current operators
through the execution of a long-term,
triple-net
operating lease;
|
|
|
|
Term B, Second Lien and Mezzanine Loans Commercial
loans, including subordinated mortgage loans, that come after a
clients senior term loans in right of payment or upon
liquidation;
|
|
|
|
Residential Mortgage Investments Investments in
residential mortgage loans and residential mortgage-backed
securities that constitute qualifying REIT assets; and
|
|
|
|
Equity Investments Opportunistic equity investments,
typically in conjunction with commercial lending relationships
and on the same terms as other equity investors.
|
Our wholly owned significant subsidiaries and their purposes as
of March 31, 2007 were as follows:
|
|
|
Entity
|
|
Purpose
|
|
CapitalSource TRS Inc.
|
|
Subsidiary that owns 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 the commercial lending,
servicing 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
transactions.
|
CSE Mortgage LLC
|
|
Subsidiary that holds the
qualifying REIT assets of CapitalSource.
|
We operate as two reportable segments: 1) Commercial
Lending & Investment, which includes our commercial
lending and investment business and 2) Residential Mortgage
Investment, which includes all of our activities related to our
residential mortgage investments.
|
|
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
7
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, 2006 as filed with the
Securities and Exchange Commission on March 1, 2007 (the
Form 10-K).
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.
Our accounting policies are described in Note 2, Summary
of Significant Accounting Policies, of our audited
consolidated financial statements as of December 31, 2006
included in our
Form 10-K.
|
|
Note 3.
|
New
Accounting Pronouncements
|
In February 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (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 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 adopted SFAS No. 155 on January 1, 2007
and it did not have a material effect on our consolidated
financial statements.
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), which 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 adopted
SFAS No. 156 on January 1, 2007 and it did not
have a material effect on our consolidated financial statements.
We subsequently measure recognized servicing assets and
servicing liabilities by amortizing such amounts in proportion
to and over the period of estimated net servicing income or
loss, while periodically assessing servicing assets for
impairment and servicing liabilities for increased obligation.
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 SFAS 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 to be
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
8
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
in accounting principle recorded as an adjustment to opening
retained earnings. As a result of our adoption of FIN 48 on
January 1, 2007, we recognized approximately a
$5.7 million increase in the liability for unrecognized tax
benefits. This increase was accounted for as an increase to the
January 1, 2007 balance of accumulated deficit. See
note 12, Income Taxes, for further discussion of our
income taxes and our adoption of FIN 48.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157), which 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 January 1, 2008. We have not
completed our assessment of the impact of the adoption of
SFAS No. 157 on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS No. 159), which
permits all entities to choose to measure eligible financial
assets and liabilities at fair value. For those financial assets
and liabilities for which the fair value option has been
elected, any unrealized gains and losses are to be reported in
earnings. The fair value option may be applied on an instrument
by instrument basis, and once elected, the option is
irrevocable. The effective date for SFAS No. 159 is
the beginning of the first fiscal year beginning after
November 15, 2007, however, early adoption is permitted as
of the beginning of a fiscal year prior to November 15,
2007, provided the entity also elects to apply the provisions of
SFAS No. 157. We plan to adopt SFAS No. 159
on January 1, 2008. We have not completed our assessment of
the impact of the adoption of SFAS No. 159 on our
consolidated financial statements.
|
|
Note 4.
|
Mortgage-Related
Receivables and Related Owners
Trust Securitizations
|
We own 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, we determined that we were the primary
beneficiary of the SPEs and, therefore, consolidated the assets
and liabilities of such entities for financial statement
purposes. In so doing, we also 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 these receivables, on our accompanying
consolidated balance sheets as of March 31, 2007 and
December 31, 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. Recourse is limited to our purchased beneficial
interests in the respective securitization trusts.
As of March 31, 2007 and December 31, 2006, the
carrying amount of our residential mortgage-related receivables,
including accrued interest and the unamortized balance of
purchase discounts, was $2.2 billion and $2.3 billion,
respectively. As of March 31, 2007 and December 31,
2006, the weighted average interest rate on such receivables was
5.37% and 5.38%, respectively, and the weighted average
contractual maturity was approximately 28.5 years and
28.7 years, respectively.
The allowance for loan losses related to our mortgage-related
receivables was $0.4 million as of March 31, 2007 and
December 31, 2006 and is recorded in the accompanying
consolidated balance sheets as a reduction to the carrying value
of mortgage-related receivables.
|
|
Note 5.
|
Residential
Mortgage-Backed Securities and Certain Derivative
Instruments
|
We invest in residential mortgage-backed securities
(RMBS), which are securities collateralized by
residential mortgage loans. These securities include
mortgage-backed securities whose payments of principal and
interest are guaranteed by Fannie Mae or Freddie Mac
(hereinafter Agency MBS). We also invest in RMBS
9
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
issued by non-government-sponsored entities that are
credit-enhanced through the use of subordination or in other
ways that are inherent in a corresponding securitization
transaction (hereinafter, Non-Agency MBS).
Substantially all of our Agency MBS are collateralized by
adjustable rate residential mortgage loans, including hybrid
adjustable rate mortgage loans. We account for our Agency MBS as
debt securities that are classified as trading investments and
included in mortgage-backed securities pledged, trading on our
accompanying consolidated balance sheets. We account for our
Non-Agency MBS as debt securities that are classified as
available-for-sale
and included in investments on our accompanying consolidated
balance sheets. For additional information about our
available-for-sale
investments, see Note 7, Investments.
As further discussed in Note 5, Residential
Mortgage-Backed Securities and Certain Derivative
Instruments, of our audited consolidated financial
statements as of December 31, 2006 included in our
Form 10-K,
during the three months ended March 31, 2006, we owned
Agency MBS that were simultaneously financed with repurchase
agreements with the same counterparty from whom the investments
were purchased. These transactions were recorded net on our
consolidated balance sheet, as of December 31, 2005, such
that a forward commitment to purchase Agency MBS was recognized
for financial statement purposes, as well as a margin-related
cash deposit that was made in connection with the related
repurchase agreements. These commitments, which were accounted
for as derivatives, were considered forward commitments to
purchase mortgage-backed securities and were recorded at their
estimated fair value with changes in fair value included in
income for the three months ended March 31, 2006. In March
2006, we exercised our right to substitute collateral assigned
to repurchase agreements that were executed to finance the
purchase of Agency MBS. In so doing, we concluded that we
obtained effective control over the Agency MBS and, therefore,
recognized acquired Agency MBS and the principal balance of
amounts used pursuant to the corresponding repurchase agreements
on our balance sheet at fair value at the date the substitution
was completed. As of March 31, 2007 and December 31,
2006, these Agency MBS were classified as trading securities on
our accompanying consolidated balance sheets pursuant to the
provisions of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities.
As of March 31, 2007 and December 31, 2006, we owned
$3.4 billion and $3.5 billion, respectively, in Agency
MBS that were pledged as collateral for repurchase agreements
used to finance the purchase of these investments. As of
March 31, 2007 and December 31, 2006, our portfolio of
Agency MBS comprised
1-year
adjustable-rate securities and hybrid adjustable-rate securities
with varying fixed period terms issued and guaranteed by Fannie
Mae or Freddie Mac. The weighted average net coupon of Agency
MBS in our portfolio was 4.90% and 4.89% as of March 31,
2007 and December 31, 2006, respectively.
As of March 31, 2007 and December 31, 2006, the fair
value of Agency MBS in our portfolio was $3.4 billion and
$3.5 billion, respectively. For the three months ended
March 31, 2007 and 2006, we recognized $9.8 million of
unrealized gains and $20.6 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 three months ended March 31, 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 Agency MBS.
We use various derivative instruments to economically hedge the
market risk associated with the mortgage investments in our
portfolio. We account for these derivative instruments pursuant
to the provisions of SFAS No. 133 and, as such, adjust
these 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 $8.5 million and
gains of $25.3 million during the three months ended
March 31, 2007 and 2006, respectively, related to these
derivative instruments. These amounts include interest-related
accruals that we recognize in connection with the periodic
settlement of these instruments.
10
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 6.
|
Commercial
Loans and Credit Quality
|
As of March 31, 2007 and December 31, 2006, our total
commercial loan portfolio had an outstanding balance of
$8.6 billion and $7.9 billion, respectively. Included
in these amounts are loans held for sale with outstanding
balances of $156.7 million and $26.5 million as of
March 31, 2007 and December 31, 2006, respectively,
and receivables under reverse-repurchase agreements with
outstanding balances of $26.3 million and
$51.9 million as of March 31, 2007 and
December 31, 2006, respectively. Our loans held for sale
were recorded at the lower of cost or market value on the
accompanying consolidated balance sheets. None of these
commercial loans had a market value below cost as of
March 31, 2007 and December 31, 2006.
Credit
Quality
As of March 31, 2007 and December 31, 2006, the
principal balances of loans 60 or more days contractually
delinquent, non-accrual loans and impaired loans in our
commercial lending portfolio were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
Commercial Loan Asset Classification
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Loans 60 or more days
contractually delinquent
|
|
$
|
73,011
|
|
|
$
|
88,067
|
|
Non-accrual loans(1)
|
|
|
153,794
|
|
|
|
183,483
|
|
Impaired loans(2)
|
|
|
280,202
|
|
|
|
281,377
|
|
Less: loans in multiple categories
|
|
|
(208,241
|
)
|
|
|
(230,469
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
298,766
|
|
|
$
|
322,458
|
|
|
|
|
|
|
|
|
|
|
Total as a percentage of total
loans
|
|
|
3.46%
|
|
|
|
4.11%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes commercial loans with an aggregate principal balance of
$41.5 million and $47.0 million as of March 31,
2007 and December 31, 2006, respectively, which were also
classified as loans 60 or more days contractually delinquent. |
|
(2) |
|
Includes commercial loans with an aggregate principal balance of
$54.4 million and $47.0 million as of March 31,
2007 and December 31, 2006, respectively, which were also
classified as loans 60 or more days contractually delinquent,
and commercial loans with an aggregate principal balance of
$153.8 million and $183.5 million as of March 31,
2007 and December 31, 2006, respectively, which were also
classified as loans on non-accrual status. The carrying values
of impaired commercial loans were $274.2 million and
$275.3 million as of March 31, 2007 and
December 31, 2006, 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. Impaired loans include loans for which
we expect to have a credit loss, as well as loans that we have
assessed as impaired, but for which we ultimately expect to
collect all payments. As of March 31, 2007 and
December 31, 2006, we had $97.3 million and
$95.7 million of impaired commercial loans, respectively,
with allocated reserves of $33.3 million and
$37.8 million, respectively. As of March 31, 2007 and
December 31, 2006, we had $182.9 million and
$185.7 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 months ended March 31, 2007 and 2006 was
$281.0 million and $212.4 million, respectively. The
total amount of interest income that was recognized on impaired
commercial loans during the three months ended March 31,
2007 and 2006 was $3.0 million and $2.3 million,
respectively. The amount of cash basis interest income that was
recognized on impaired commercial loans during the
11
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
three months ended March 31, 2007 and 2006 was
$2.7 million and $1.7 million, respectively. If the
non-accrual commercial loans had performed in accordance with
their original terms, interest income would have been higher
than reported by $7.5 million and $5.0 million for the
three months ended March 31, 2007 and 2006, respectively.
During the three months ended March 31, 2007, we classified
commercial loans with an aggregate carrying value of
$20.2 million as of March 31, 2007 as troubled debt
restructurings as defined by SFAS No. 15,
Accounting for Debtors and Creditors for Troubled Debt
Restructurings. As of March 31, 2007, commercial loans
with an aggregate carrying value of $163.6 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 at least one year following the restructuring. The
allocated reserve for commercial loans classified as troubled
debt restructurings was $11.4 million as of March 31,
2007. For the year ended December 31, 2006, commercial
loans with an aggregate carrying value of $194.7 million as
of December 31, 2006 were classified as troubled debt
restructurings. The allocated reserve for commercial loans
classified as troubled debt restructurings was
$31.5 million as of December 31, 2006.
Activity in the allowance for loan losses related to our
Commercial Lending & Investment segment for the three
months ended March 31, 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Balance as of beginning of period
|
|
$
|
120,575
|
|
|
$
|
87,370
|
|
Provision for loan losses
|
|
|
14,926
|
|
|
|
14,412
|
|
Charge offs, net
|
|
|
(10,265
|
)
|
|
|
(276
|
)
|
|
|
|
|
|
|
|
|
|
Balance as of end of period
|
|
$
|
125,236
|
|
|
$
|
101,506
|
|
|
|
|
|
|
|
|
|
|
Investments as of March 31, 2007 and December 31, 2006
were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Investments carried at cost
|
|
$
|
78,845
|
|
|
$
|
71,386
|
|
Investments carried at fair value:
|
|
|
|
|
|
|
|
|
Investments
available-for-sale
|
|
|
48,702
|
|
|
|
61,904
|
|
Warrants
|
|
|
7,705
|
|
|
|
6,908
|
|
Investments accounted for under
the equity method
|
|
|
50,458
|
|
|
|
44,135
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
185,710
|
|
|
$
|
184,333
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2007 and 2006, we
sold investments for $7.6 million and $37.2 million
respectively, recognizing net pretax gains of $5.6 million
and $0.4 million, respectively. During the three months
ended March 31, 2007, we also recorded
other-than-temporary
impairments of $7.0 million as a charge to earnings
relating to our Non-Agency MBS in accordance with FASB Emerging
Issues Task Force Issue
No. 99-20,
Recognition of Interest Income on Purchased Beneficial
Interests and Beneficial Interests that Continue to Be Held by a
Transferor in Securitized Financial Assets.
12
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 8.
|
Guarantor
Information
|
The following represents the unaudited supplemental
consolidating condensed financial statements of CapitalSource
Inc., which was the issuer of senior convertible debentures due
2034, bearing interest at a rate of 1.25% per year until
March 15, 2009 (the 1.25% Debentures) and
3.5% senior convertible debentures due July 2034 (the
3.5% Debentures, together with the 1.25%
Debentures, the Senior Debentures), and
CapitalSource Finance LLC (CapitalSource Finance),
which was a guarantor of the Senior Debentures, and our
subsidiaries that are not guarantors of the Senior Debentures as
of March 31, 2007 and December 31, 2006 and for the
three months ended March 31, 2007 and 2006. CapitalSource
Finance, a wholly owned indirect subsidiary of CapitalSource
Inc., has guaranteed the Senior Debentures, fully and
unconditionally, on a senior unsecured basis. Separate
consolidated financial statements of each guarantor are not
presented, as we have determined that they would not be material
to investors.
13
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Balance Sheet
March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Non-
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
CapitalSource
|
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
192,414
|
|
|
$
|
56,048
|
|
|
$
|
60,308
|
|
|
$
|
|
|
|
$
|
308,770
|
|
Restricted cash
|
|
|
|
|
|
|
14,347
|
|
|
|
62,727
|
|
|
|
58,476
|
|
|
|
|
|
|
|
135,550
|
|
Mortgage-related receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,239,257
|
|
|
|
|
|
|
|
2,239,257
|
|
Mortgage-backed securities pledged,
trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,372,329
|
|
|
|
|
|
|
|
3,372,329
|
|
Receivables under
reverse-repurchase agreements
|
|
|
|
|
|
|
26,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,315
|
|
Loans held for sale
|
|
|
|
|
|
|
120,776
|
|
|
|
35,874
|
|
|
|
|
|
|
|
|
|
|
|
156,650
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
1,612
|
|
|
|
4,083,080
|
|
|
|
1,022,892
|
|
|
|
3,355,838
|
|
|
|
(7,852
|
)
|
|
|
8,455,570
|
|
Less deferred loan fees and
discounts
|
|
|
|
|
|
|
(36,926
|
)
|
|
|
(45,927
|
)
|
|
|
(41,527
|
)
|
|
|
|
|
|
|
(124,380
|
)
|
Less allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
(103,974
|
)
|
|
|
(21,262
|
)
|
|
|
|
|
|
|
(125,236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
1,612
|
|
|
|
4,046,154
|
|
|
|
872,991
|
|
|
|
3,293,049
|
|
|
|
(7,852
|
)
|
|
|
8,205,954
|
|
Direct real estate investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
805,650
|
|
|
|
|
|
|
|
805,650
|
|
Investment in subsidiaries
|
|
|
3,113,355
|
|
|
|
|
|
|
|
928,795
|
|
|
|
1,186,563
|
|
|
|
(5,228,713
|
)
|
|
|
|
|
Intercompany (due to) due from
|
|
|
(10,361
|
)
|
|
|
|
|
|
|
(280,422
|
)
|
|
|
290,783
|
|
|
|
|
|
|
|
|
|
Intercompany note receivable
|
|
|
75,000
|
|
|
|
|
|
|
|
9,960
|
|
|
|
|
|
|
|
(84,960
|
)
|
|
|
|
|
Investments
|
|
|
|
|
|
|
122,473
|
|
|
|
33,927
|
|
|
|
29,310
|
|
|
|
|
|
|
|
185,710
|
|
Other assets
|
|
|
25,859
|
|
|
|
24,246
|
|
|
|
75,752
|
|
|
|
145,138
|
|
|
|
(42,847
|
)
|
|
|
228,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,205,465
|
|
|
$
|
4,546,725
|
|
|
$
|
1,795,652
|
|
|
$
|
11,480,863
|
|
|
$
|
(5,364,372
|
)
|
|
$
|
15,664,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, NONCONTROLLING
INTERESTS AND SHAREHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
$
|
|
|
|
$
|
38,378
|
|
|
$
|
|
|
|
$
|
3,271,181
|
|
|
$
|
|
|
|
$
|
3,309,559
|
|
Unsecured credit facilities
|
|
|
400,000
|
|
|
|
50,660
|
|
|
|
42,098
|
|
|
|
|
|
|
|
|
|
|
|
492,758
|
|
Secured credit facilities
|
|
|
|
|
|
|
1,366,895
|
|
|
|
|
|
|
|
1,565,367
|
|
|
|
|
|
|
|
2,932,262
|
|
Term debt
|
|
|
|
|
|
|
2,136,374
|
|
|
|
10,540
|
|
|
|
3,277,969
|
|
|
|
(1,566
|
)
|
|
|
5,423,317
|
|
Convertible debt
|
|
|
555,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
555,000
|
|
Subordinated debt
|
|
|
|
|
|
|
|
|
|
|
485,453
|
|
|
|
|
|
|
|
|
|
|
|
485,453
|
|
Other liabilities
|
|
|
32,130
|
|
|
|
15,684
|
|
|
|
70,999
|
|
|
|
133,172
|
|
|
|
(49,133
|
)
|
|
|
202,852
|
|
Intercompany note payable
|
|
|
|
|
|
|
9,961
|
|
|
|
(1
|
)
|
|
|
75,000
|
|
|
|
(84,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
987,130
|
|
|
|
3,617,952
|
|
|
|
609,089
|
|
|
|
8,322,689
|
|
|
|
(135,659
|
)
|
|
|
13,401,201
|
|
Noncontrolling
interests
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
44,819
|
|
|
|
(11
|
)
|
|
|
44,797
|
|
Shareholders
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
1,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,882
|
|
Additional paid-in capital
|
|
|
2,302,393
|
|
|
|
557,279
|
|
|
|
263,836
|
|
|
|
2,774,016
|
|
|
|
(3,595,131
|
)
|
|
|
2,302,393
|
|
(Accumulated deficit) retained
earnings
|
|
|
(56,067
|
)
|
|
|
371,382
|
|
|
|
922,372
|
|
|
|
338,984
|
|
|
|
(1,632,738
|
)
|
|
|
(56,067
|
)
|
Accumulated other comprehensive
income, net
|
|
|
53
|
|
|
|
123
|
|
|
|
355
|
|
|
|
355
|
|
|
|
(833
|
)
|
|
|
53
|
|
Treasury stock, at cost
|
|
|
(29,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,218,335
|
|
|
|
928,784
|
|
|
|
1,186,563
|
|
|
|
3,113,355
|
|
|
|
(5,228,702
|
)
|
|
|
2,218,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, noncontrolling
interests and shareholders equity
|
|
$
|
3,205,465
|
|
|
$
|
4,546,725
|
|
|
$
|
1,795,652
|
|
|
$
|
11,480,863
|
|
|
$
|
(5,364,372
|
)
|
|
$
|
15,664,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Balance Sheet
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
157
|
|
|
$
|
238,224
|
|
|
$
|
46,723
|
|
|
$
|
111,047
|
|
|
$
|
|
|
|
$
|
396,151
|
|
Restricted cash
|
|
|
|
|
|
|
55,631
|
|
|
|
122,655
|
|
|
|
62,618
|
|
|
|
|
|
|
|
240,904
|
|
Mortgage-related receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,295,922
|
|
|
|
|
|
|
|
2,295,922
|
|
Mortgage-backed securities pledged,
trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,502,753
|
|
|
|
|
|
|
|
3,502,753
|
|
Receivables under
reverse-repurchase agreements
|
|
|
|
|
|
|
51,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,892
|
|
Loans held for sale
|
|
|
|
|
|
|
26,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,521
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
52
|
|
|
|
4,050,786
|
|
|
|
762,653
|
|
|
|
2,968,938
|
|
|
|
(10,644
|
)
|
|
|
7,771,785
|
|
Less deferred loan fees and
discounts
|
|
|
|
|
|
|
(33,348
|
)
|
|
|
(58,203
|
)
|
|
|
(38,841
|
)
|
|
|
|
|
|
|
(130,392
|
)
|
Less allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
(101,938
|
)
|
|
|
(18,637
|
)
|
|
|
|
|
|
|
(120,575
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
52
|
|
|
|
4,017,438
|
|
|
|
602,512
|
|
|
|
2,911,460
|
|
|
|
(10,644
|
)
|
|
|
7,520,818
|
|
Direct real estate investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
722,303
|
|
|
|
|
|
|
|
722,303
|
|
Investment in subsidiaries
|
|
|
3,030,807
|
|
|
|
|
|
|
|
926,709
|
|
|
|
1,133,651
|
|
|
|
(5,091,167
|
)
|
|
|
|
|
Intercompany (due to) due from
|
|
|
(98,737
|
)
|
|
|
|
|
|
|
(138,447
|
)
|
|
|
237,184
|
|
|
|
|
|
|
|
|
|
Intercompany note receivable
|
|
|
75,000
|
|
|
|
2,137
|
|
|
|
11,194
|
|
|
|
|
|
|
|
(88,331
|
)
|
|
|
|
|
Investments
|
|
|
|
|
|
|
118,380
|
|
|
|
31,710
|
|
|
|
34,243
|
|
|
|
|
|
|
|
184,333
|
|
Other assets
|
|
|
20,770
|
|
|
|
25,741
|
|
|
|
61,024
|
|
|
|
187,088
|
|
|
|
(25,646
|
)
|
|
|
268,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,028,049
|
|
|
$
|
4,535,964
|
|
|
$
|
1,664,080
|
|
|
$
|
11,198,269
|
|
|
$
|
(5,215,788
|
)
|
|
$
|
15,210,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, NONCONTROLLING
INTERESTS AND SHAREHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
$
|
|
|
|
$
|
63,260
|
|
|
$
|
|
|
|
$
|
3,447,508
|
|
|
$
|
|
|
|
$
|
3,510,768
|
|
Unsecured credit facilities
|
|
|
355,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
355,685
|
|
Secured credit facilities
|
|
|
|
|
|
|
998,972
|
|
|
|
|
|
|
|
1,184,183
|
|
|
|
|
|
|
|
2,183,155
|
|
Term debt
|
|
|
|
|
|
|
2,504,472
|
|
|
|
10,729
|
|
|
|
3,295,558
|
|
|
|
(1,074
|
)
|
|
|
5,809,685
|
|
Convertible debt
|
|
|
555,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
555,000
|
|
Subordinated debt
|
|
|
|
|
|
|
|
|
|
|
446,393
|
|
|
|
|
|
|
|
|
|
|
|
446,393
|
|
Other liabilities
|
|
|
24,324
|
|
|
|
29,220
|
|
|
|
73,307
|
|
|
|
108,863
|
|
|
|
(35,216
|
)
|
|
|
200,498
|
|
Intercompany note payable
|
|
|
|
|
|
|
13,331
|
|
|
|
|
|
|
|
75,000
|
|
|
|
(88,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
935,009
|
|
|
|
3,609,255
|
|
|
|
530,429
|
|
|
|
8,111,112
|
|
|
|
(124,621
|
)
|
|
|
13,061,184
|
|
Noncontrolling
interests
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
56,350
|
|
|
|
(8
|
)
|
|
|
56,350
|
|
Shareholders
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
1,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,815
|
|
Additional paid-in capital
|
|
|
2,139,421
|
|
|
|
564,687
|
|
|
|
272,828
|
|
|
|
2,777,426
|
|
|
|
(3,614,941
|
)
|
|
|
2,139,421
|
|
(Accumulated deficit) retained
earnings
|
|
|
(20,735
|
)
|
|
|
359,678
|
|
|
|
857,927
|
|
|
|
250,613
|
|
|
|
(1,468,218
|
)
|
|
|
(20,735
|
)
|
Accumulated other comprehensive
income, net
|
|
|
2,465
|
|
|
|
2,336
|
|
|
|
2,896
|
|
|
|
2,768
|
|
|
|
(8,000
|
)
|
|
|
2,465
|
|
Treasury stock, at cost
|
|
|
(29,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,926
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,093,040
|
|
|
|
926,701
|
|
|
|
1,133,651
|
|
|
|
3,030,807
|
|
|
|
(5,091,159
|
)
|
|
|
2,093,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, noncontrolling
interests and shareholders equity
|
|
$
|
3,028,049
|
|
|
$
|
4,535,964
|
|
|
$
|
1,664,080
|
|
|
$
|
11,198,269
|
|
|
$
|
(5,215,788
|
)
|
|
$
|
15,210,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Income
Three Months Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
7,450
|
|
|
$
|
113,038
|
|
|
$
|
23,889
|
|
|
$
|
152,915
|
|
|
$
|
(7,738
|
)
|
|
$
|
289,554
|
|
Fee income
|
|
|
|
|
|
|
22,749
|
|
|
|
18,839
|
|
|
|
8,439
|
|
|
|
|
|
|
|
50,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
7,450
|
|
|
|
135,787
|
|
|
|
42,728
|
|
|
|
161,354
|
|
|
|
(7,738
|
)
|
|
|
339,581
|
|
Operating lease income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,288
|
|
|
|
|
|
|
|
20,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
7,450
|
|
|
|
135,787
|
|
|
|
42,728
|
|
|
|
181,642
|
|
|
|
(7,738
|
)
|
|
|
359,869
|
|
Interest expense
|
|
|
10,266
|
|
|
|
54,688
|
|
|
|
14,662
|
|
|
|
114,771
|
|
|
|
(7,738
|
)
|
|
|
186,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(2,816
|
)
|
|
|
81,099
|
|
|
|
28,066
|
|
|
|
66,871
|
|
|
|
|
|
|
|
173,220
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
12,301
|
|
|
|
2,625
|
|
|
|
|
|
|
|
14,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after
provision for loan losses
|
|
|
(2,816
|
)
|
|
|
81,099
|
|
|
|
15,765
|
|
|
|
64,246
|
|
|
|
|
|
|
|
158,294
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
637
|
|
|
|
5,333
|
|
|
|
34,044
|
|
|
|
|
|
|
|
|
|
|
|
40,014
|
|
Other administrative expenses
|
|
|
11,931
|
|
|
|
957
|
|
|
|
15,229
|
|
|
|
8,504
|
|
|
|
(11,313
|
)
|
|
|
25,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
12,568
|
|
|
|
6,290
|
|
|
|
49,273
|
|
|
|
8,504
|
|
|
|
(11,313
|
)
|
|
|
65,322
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diligence deposits forfeited
|
|
|
|
|
|
|
|
|
|
|
862
|
|
|
|
|
|
|
|
|
|
|
|
862
|
|
Gain on investments, net
|
|
|
|
|
|
|
6,095
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
6,163
|
|
Loss on derivatives
|
|
|
|
|
|
|
(278
|
)
|
|
|
(1,915
|
)
|
|
|
(62
|
)
|
|
|
|
|
|
|
(2,255
|
)
|
Loss on residential mortgage
investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,698
|
)
|
|
|
|
|
|
|
(5,698
|
)
|
Other income, net of expenses
|
|
|
|
|
|
|
2,298
|
|
|
|
15,992
|
|
|
|
|
|
|
|
(11,313
|
)
|
|
|
6,977
|
|
Earnings in subsidiaries
|
|
|
94,074
|
|
|
|
|
|
|
|
81,518
|
|
|
|
64,446
|
|
|
|
(240,038
|
)
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
(1,429
|
)
|
|
|
1,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
94,074
|
|
|
|
6,686
|
|
|
|
97,954
|
|
|
|
58,686
|
|
|
|
(251,351
|
)
|
|
|
6,049
|
|
Noncontrolling interests
expense
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
1,353
|
|
|
|
(3
|
)
|
|
|
1,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income
taxes
|
|
|
78,690
|
|
|
|
81,515
|
|
|
|
64,446
|
|
|
|
113,075
|
|
|
|
(240,035
|
)
|
|
|
97,691
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,001
|
|
|
|
|
|
|
|
19,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
78,690
|
|
|
$
|
81,515
|
|
|
$
|
64,446
|
|
|
$
|
94,074
|
|
|
$
|
(240,035
|
)
|
|
$
|
78,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Income
Three Months Ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Net investment
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
556
|
|
|
$
|
115,188
|
|
|
$
|
16,319
|
|
|
$
|
64,816
|
|
|
$
|
(1,381
|
)
|
|
$
|
195,498
|
|
Fee income
|
|
|
|
|
|
|
28,940
|
|
|
|
(1,511
|
)
|
|
|
14,113
|
|
|
|
|
|
|
|
41,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
556
|
|
|
|
144,128
|
|
|
|
14,808
|
|
|
|
78,929
|
|
|
|
(1,381
|
)
|
|
|
237,040
|
|
Operating lease income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,625
|
|
|
|
|
|
|
|
4,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
556
|
|
|
|
144,128
|
|
|
|
14,808
|
|
|
|
83,554
|
|
|
|
(1,381
|
)
|
|
|
241,665
|
|
Interest expense
|
|
|
5,313
|
|
|
|
53,415
|
|
|
|
5,527
|
|
|
|
34,908
|
|
|
|
(1,381
|
)
|
|
|
97,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(4,757
|
)
|
|
|
90,713
|
|
|
|
9,281
|
|
|
|
48,646
|
|
|
|
|
|
|
|
143,883
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
10,321
|
|
|
|
4,392
|
|
|
|
|
|
|
|
14,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after
provision for loan losses
|
|
|
(4,757
|
)
|
|
|
90,713
|
|
|
|
(1,040
|
)
|
|
|
44,254
|
|
|
|
|
|
|
|
129,170
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
|
|
|
|
931
|
|
|
|
32,389
|
|
|
|
|
|
|
|
|
|
|
|
33,320
|
|
Other administrative expenses
|
|
|
3,597
|
|
|
|
548
|
|
|
|
13,614
|
|
|
|
3,072
|
|
|
|
(3,532
|
)
|
|
|
17,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,597
|
|
|
|
1,479
|
|
|
|
46,003
|
|
|
|
3,072
|
|
|
|
(3,532
|
)
|
|
|
50,619
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diligence deposits forfeited
|
|
|
|
|
|
|
|
|
|
|
2,267
|
|
|
|
|
|
|
|
|
|
|
|
2,267
|
|
Loss on investments, net
|
|
|
|
|
|
|
|
|
|
|
(251
|
)
|
|
|
|
|
|
|
|
|
|
|
(251
|
)
|
Gain on derivatives
|
|
|
|
|
|
|
411
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
526
|
|
Loss on residential mortgage
investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,106
|
)
|
|
|
|
|
|
|
(6,106
|
)
|
Other income, net of expenses
|
|
|
|
|
|
|
229
|
|
|
|
9,793
|
|
|
|
(2,582
|
)
|
|
|
(3,532
|
)
|
|
|
3,908
|
|
Earnings in subsidiaries
|
|
|
73,648
|
|
|
|
|
|
|
|
82,246
|
|
|
|
55,125
|
|
|
|
(211,019
|
)
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
(7,628
|
)
|
|
|
7,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
73,648
|
|
|
|
(6,988
|
)
|
|
|
101,798
|
|
|
|
46,437
|
|
|
|
(214,551
|
)
|
|
|
344
|
|
Noncontrolling interests
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
861
|
|
|
|
|
|
|
|
861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
and cumulative effect of accounting change
|
|
|
65,294
|
|
|
|
82,246
|
|
|
|
54,755
|
|
|
|
86,758
|
|
|
|
(211,019
|
)
|
|
|
78,034
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,110
|
|
|
|
|
|
|
|
13,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative
effect of accounting change
|
|
|
65,294
|
|
|
|
82,246
|
|
|
|
54,755
|
|
|
|
73,648
|
|
|
|
(211,019
|
)
|
|
|
64,924
|
|
Cumulative effect of accounting
change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
65,294
|
|
|
$
|
82,246
|
|
|
$
|
55,125
|
|
|
$
|
73,648
|
|
|
$
|
(211,019
|
)
|
|
$
|
65,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Cash Flows
Three Months Ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
78,690
|
|
|
$
|
81,515
|
|
|
$
|
64,446
|
|
|
$
|
94,074
|
|
|
$
|
(240,035
|
)
|
|
$
|
78,690
|
|
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
176
|
|
|
|
2,216
|
|
|
|
|
|
|
|
|
|
|
|
2,392
|
|
Restricted stock expense
|
|
|
|
|
|
|
1,340
|
|
|
|
6,980
|
|
|
|
|
|
|
|
|
|
|
|
8,320
|
|
Amortization of deferred loan fees
and discounts
|
|
|
|
|
|
|
(7,411
|
)
|
|
|
(11,171
|
)
|
|
|
(6,232
|
)
|
|
|
|
|
|
|
(24,814
|
)
|
Paid-in-kind
interest on loans
|
|
|
|
|
|
|
1,920
|
|
|
|
(6,126
|
)
|
|
|
(1,897
|
)
|
|
|
|
|
|
|
(6,103
|
)
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
12,301
|
|
|
|
2,625
|
|
|
|
|
|
|
|
14,926
|
|
Amortization of deferred financing
fees and discounts
|
|
|
880
|
|
|
|
3,049
|
|
|
|
109
|
|
|
|
4,040
|
|
|
|
|
|
|
|
8,078
|
|
Depreciation and amortization
|
|
|
|
|
|
|
40
|
|
|
|
782
|
|
|
|
7,209
|
|
|
|
|
|
|
|
8,031
|
|
Benefit for deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,606
|
)
|
|
|
|
|
|
|
(1,606
|
)
|
Non-cash (gain) loss on
investments, net
|
|
|
|
|
|
|
(188
|
)
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
Non-cash loss on property and
equipment disposals
|
|
|
|
|
|
|
95
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
|
|
127
|
|
Unrealized loss (gain) on
derivatives and foreign currencies, net
|
|
|
|
|
|
|
336
|
|
|
|
(270
|
)
|
|
|
263
|
|
|
|
|
|
|
|
329
|
|
Unrealized loss on residential
mortgage investment portfolio, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,207
|
|
|
|
|
|
|
|
5,207
|
|
Net decrease in mortgage-backed
securities pledged, trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155,540
|
|
|
|
|
|
|
|
155,540
|
|
Amortization of discount on
residential mortgage investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,631
|
)
|
|
|
|
|
|
|
(8,631
|
)
|
Increase in loans held for sale, net
|
|
|
|
|
|
|
(65,701
|
)
|
|
|
(35,874
|
)
|
|
|
|
|
|
|
|
|
|
|
(101,575
|
)
|
Decrease in intercompany note
receivable
|
|
|
|
|
|
|
2,137
|
|
|
|
1,234
|
|
|
|
|
|
|
|
(3,371
|
)
|
|
|
|
|
(Increase) decrease in other assets
|
|
|
(5,910
|
)
|
|
|
(696
|
)
|
|
|
(14,260
|
)
|
|
|
15,133
|
|
|
|
17,201
|
|
|
|
11,468
|
|
Increase (decrease) in other
liabilities
|
|
|
7,489
|
|
|
|
(13,219
|
)
|
|
|
(2,670
|
)
|
|
|
24,293
|
|
|
|
(13,917
|
)
|
|
|
1,976
|
|
Net transfers with subsidiaries
|
|
|
(154,733
|
)
|
|
|
(79,790
|
)
|
|
|
125,225
|
|
|
|
(130,737
|
)
|
|
|
240,035
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by
operating activities
|
|
|
(73,584
|
)
|
|
|
(76,397
|
)
|
|
|
143,189
|
|
|
|
159,281
|
|
|
|
(87
|
)
|
|
|
152,402
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
|
|
|
|
|
41,284
|
|
|
|
59,928
|
|
|
|
4,142
|
|
|
|
|
|
|
|
105,354
|
|
Decrease in mortgage-related
receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,003
|
|
|
|
|
|
|
|
60,003
|
|
Decrease in receivables under
reverse-repurchase agreements, net
|
|
|
|
|
|
|
25,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,577
|
|
Increase in loans, net
|
|
|
(1,560
|
)
|
|
|
(51,819
|
)
|
|
|
(267,506
|
)
|
|
|
(376,084
|
)
|
|
|
(2,792
|
)
|
|
|
(699,761
|
)
|
Acquisition of real estate, net of
cash acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87,020
|
)
|
|
|
|
|
|
|
(87,020
|
)
|
Acquisition of investments, net
|
|
|
|
|
|
|
(5,403
|
)
|
|
|
(1,403
|
)
|
|
|
(1,700
|
)
|
|
|
|
|
|
|
(8,506
|
)
|
Acquisition of property and
equipment, net
|
|
|
|
|
|
|
(483
|
)
|
|
|
(2,317
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by
investing activities
|
|
|
(1,560
|
)
|
|
|
9,156
|
|
|
|
(211,298
|
)
|
|
|
(400,659
|
)
|
|
|
(2,792
|
)
|
|
|
(607,153
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(59
|
)
|
|
|
(772
|
)
|
|
|
(1,079
|
)
|
|
|
(187
|
)
|
|
|
|
|
|
|
(2,097
|
)
|
Decrease in intercompany note
payable
|
|
|
|
|
|
|
(3,370
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
3,371
|
|
|
|
|
|
Repayments of repurchase
agreements, net
|
|
|
|
|
|
|
(24,881
|
)
|
|
|
|
|
|
|
(176,328
|
)
|
|
|
|
|
|
|
(201,209
|
)
|
Borrowings on unsecured credit
facilities, net
|
|
|
44,315
|
|
|
|
50,660
|
|
|
|
42,098
|
|
|
|
|
|
|
|
|
|
|
|
137,073
|
|
Borrowings on secured credit
facilities, net
|
|
|
|
|
|
|
367,923
|
|
|
|
|
|
|
|
381,184
|
|
|
|
|
|
|
|
749,107
|
|
Borrowings of term debt
|
|
|
|
|
|
|
492
|
|
|
|
|
|
|
|
40,000
|
|
|
|
(492
|
)
|
|
|
40,000
|
|
Repayments of term debt
|
|
|
|
|
|
|
(368,621
|
)
|
|
|
(177
|
)
|
|
|
(60,277
|
)
|
|
|
|
|
|
|
(429,075
|
)
|
Borrowings of subordinated debt
|
|
|
|
|
|
|
|
|
|
|
36,593
|
|
|
|
|
|
|
|
|
|
|
|
36,593
|
|
Proceeds from issuance of common
stock, net of offering costs
|
|
|
134,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134,151
|
|
Proceeds from exercise of options
|
|
|
2,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,644
|
|
Tax benefits on share based payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,596
|
|
|
|
|
|
|
|
7,596
|
|
Payment of dividends
|
|
|
(106,064
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,349
|
)
|
|
|
|
|
|
|
(107,413
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by financing
activities
|
|
|
74,987
|
|
|
|
21,431
|
|
|
|
77,434
|
|
|
|
190,639
|
|
|
|
2,879
|
|
|
|
367,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and
cash equivalents
|
|
|
(157
|
)
|
|
|
(45,810
|
)
|
|
|
9,325
|
|
|
|
(50,739
|
)
|
|
|
|
|
|
|
(87,381
|
)
|
Cash and cash equivalents as of
beginning of period
|
|
|
157
|
|
|
|
238,224
|
|
|
|
46,723
|
|
|
|
111,047
|
|
|
|
|
|
|
|
396,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end
of period
|
|
$
|
|
|
|
$
|
192,414
|
|
|
$
|
56,048
|
|
|
$
|
60,308
|
|
|
$
|
|
|
|
$
|
308,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Cash Flows
Three
Months Ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Source Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
CapitalSource
|
|
|
|
Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
65,294
|
|
|
$
|
82,246
|
|
|
$
|
55,125
|
|
|
$
|
73,648
|
|
|
$
|
(211,019
|
)
|
|
$
|
65,294
|
|
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
785
|
|
Restricted stock expense
|
|
|
|
|
|
|
|
|
|
|
5,752
|
|
|
|
|
|
|
|
|
|
|
|
5,752
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,582
|
|
|
|
|
|
|
|
2,582
|
|
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
|
|
|
|
|
|
|
(9,583
|
)
|
|
|
6,692
|
|
|
|
(17,267
|
)
|
|
|
|
|
|
|
(20,158
|
)
|
Paid-in-kind
interest on loans
|
|
|
|
|
|
|
2,207
|
|
|
|
(2,164
|
)
|
|
|
(1,317
|
)
|
|
|
|
|
|
|
(1,274
|
)
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
10,321
|
|
|
|
4,392
|
|
|
|
|
|
|
|
14,713
|
|
Amortization of deferred financing
fees and discounts
|
|
|
632
|
|
|
|
5,928
|
|
|
|
153
|
|
|
|
1,054
|
|
|
|
|
|
|
|
7,767
|
|
Depreciation and amortization
|
|
|
|
|
|
|
2
|
|
|
|
712
|
|
|
|
1,635
|
|
|
|
|
|
|
|
2,349
|
|
Benefit for deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,651
|
)
|
|
|
|
|
|
|
(1,651
|
)
|
Non-cash loss on investments, net
|
|
|
|
|
|
|
|
|
|
|
1,236
|
|
|
|
|
|
|
|
|
|
|
|
1,236
|
|
Unrealized gain on derivatives and
foreign currencies, net
|
|
|
|
|
|
|
(411
|
)
|
|
|
(115
|
)
|
|
|
|
|
|
|
|
|
|
|
(526
|
)
|
Unrealized loss on residential
mortgage investment portfolio, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,366
|
|
|
|
|
|
|
|
17,366
|
|
Net increase in mortgage-backed
securities pledged, trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103,214
|
)
|
|
|
|
|
|
|
(103,214
|
)
|
Amortization of discount on
residential mortgage investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,468
|
)
|
|
|
|
|
|
|
(1,468
|
)
|
Decrease (increase) in loans
held-for-sale,
net
|
|
|
|
|
|
|
1,982
|
|
|
|
(79,963
|
)
|
|
|
|
|
|
|
|
|
|
|
(77,981
|
)
|
Decrease (increase) in intercompany
note receivable
|
|
|
|
|
|
|
1,061
|
|
|
|
(23,125
|
)
|
|
|
|
|
|
|
22,064
|
|
|
|
|
|
Decrease (increase) in other assets
|
|
|
20,036
|
|
|
|
420
|
|
|
|
(1,561
|
)
|
|
|
(59,511
|
)
|
|
|
4,378
|
|
|
|
(36,238
|
)
|
Increase (decrease) in other
liabilities
|
|
|
3,613
|
|
|
|
184
|
|
|
|
(10,265
|
)
|
|
|
17,807
|
|
|
|
(4,916
|
)
|
|
|
6,423
|
|
Net transfers with subsidiaries
|
|
|
(651,702
|
)
|
|
|
(177,213
|
)
|
|
|
89,164
|
|
|
|
528,732
|
|
|
|
211,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by
operating activities
|
|
|
(561,342
|
)
|
|
|
(93,177
|
)
|
|
|
43,239
|
|
|
|
462,788
|
|
|
|
21,526
|
|
|
|
(126,966
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted
cash
|
|
|
|
|
|
|
48,039
|
|
|
|
22,212
|
|
|
|
(36,910
|
)
|
|
|
|
|
|
|
33,341
|
|
Increase in mortgage-related
receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,493,503
|
)
|
|
|
|
|
|
|
(2,493,503
|
)
|
Increase in receivables under
reverse-repurchase agreements, net
|
|
|
|
|
|
|
(36,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,889
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in loans, net
|
|
|
|
|
|
|
505,621
|
|
|
|
(329,903
|
)
|
|
|
(544,781
|
)
|
|
|
538
|
|
|
|
(368,525
|
)
|
Acquisition of real estate, net of
cash acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,180
|
)
|
|
|
|
|
|
|
(7,180
|
)
|
Disposal (acquisition) of
investments, net
|
|
|
33,405
|
|
|
|
|
|
|
|
(6,841
|
)
|
|
|
|
|
|
|
|
|
|
|
26,564
|
|
(Acquisition) disposal of property
and equipment, net
|
|
|
|
|
|
|
(32
|
)
|
|
|
(923
|
)
|
|
|
180
|
|
|
|
|
|
|
|
(775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
investing activities
|
|
|
33,405
|
|
|
|
516,739
|
|
|
|
(315,455
|
)
|
|
|
(3,082,194
|
)
|
|
|
538
|
|
|
|
(2,846,967
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(2,450
|
)
|
|
|
(89
|
)
|
|
|
(1,525
|
)
|
|
|
(6,489
|
)
|
|
|
|
|
|
|
(10,553
|
)
|
Increase (decrease) in intercompany
note payable
|
|
|
24,640
|
|
|
|
(2,576
|
)
|
|
|
|
|
|
|
|
|
|
|
(22,064
|
)
|
|
|
|
|
Borrowings under repurchase
agreements, net
|
|
|
|
|
|
|
31,613
|
|
|
|
|
|
|
|
64,825
|
|
|
|
|
|
|
|
96,438
|
|
Borrowings on unsecured credit
facilities, net
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,000
|
|
(Repayments of) borrowings on
secured credit facilities, net
|
|
|
|
|
|
|
(51,223
|
)
|
|
|
65,244
|
|
|
|
149,000
|
|
|
|
|
|
|
|
163,021
|
|
Borrowings of term debt
|
|
|
|
|
|
|
|
|
|
|
1,512
|
|
|
|
2,447,870
|
|
|
|
|
|
|
|
2,449,382
|
|
Repayments of term debt
|
|
|
|
|
|
|
(398,194
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
(398,215
|
)
|
Borrowings of subordinated debt
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
Proceeds from issuance of common
stock, net of offering costs
|
|
|
395,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
395,837
|
|
Proceeds from exercise of options
|
|
|
1,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,711
|
|
Tax benefits on share based payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,677
|
|
|
|
|
|
|
|
1,677
|
|
Payment of dividends
|
|
|
(143,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(143,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
financing activities
|
|
|
525,961
|
|
|
|
(420,469
|
)
|
|
|
115,210
|
|
|
|
2,656,883
|
|
|
|
(22,064
|
)
|
|
|
2,855,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and
cash equivalents
|
|
|
(1,976
|
)
|
|
|
3,093
|
|
|
|
(157,006
|
)
|
|
|
37,477
|
|
|
|
|
|
|
|
(118,412
|
)
|
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
|
|
$
|
62
|
|
|
$
|
148,158
|
|
|
$
|
(435
|
)
|
|
$
|
57,699
|
|
|
$
|
|
|
|
$
|
205,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 9.
|
Direct
Real Estate Investments
|
Our direct real estate investments as of March 31, 2007 and
December 31, 2006 were as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Land
|
|
$
|
93,800
|
|
|
$
|
91,543
|
|
Buildings
|
|
|
691,825
|
|
|
|
607,833
|
|
Furniture
|
|
|
38,255
|
|
|
|
34,395
|
|
Accumulated depreciation
|
|
|
(18,230
|
)
|
|
|
(11,468
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
805,650
|
|
|
$
|
722,303
|
|
|
|
|
|
|
|
|
|
|
Depreciation of direct real estate investments totaled
$6.8 million and $1.6 million for the three months
ended March 31, 2007 and 2006, respectively.
For a detailed discussion of our borrowings, see Note 11,
Borrowings, in our audited consolidated financial
statements for the year ended December 31, 2006 included in
our
Form 10-K.
The following changes to our borrowings occurred during the
three months ended March 31, 2007:
Repurchase
Agreements
We entered into one new master repurchase agreement during the
three months ended March 31, 2007. We borrowed under our
existing repurchase agreements with various financial
institutions to finance the purchases of RMBS during the
quarter. As of March 31, 2007 and December 31, 2006,
the aggregate amount outstanding under our repurchase agreements
used to finance purchases of residential mortgage investments
was $3.3 billion and $3.4 billion, respectively. As of
March 31, 2007 and December 31, 2006, repurchase
agreements that we executed had a weighted average borrowing
rate of 5.29% and 5.32%, respectively, and a weighted average
remaining maturity of 0.5 months and 0.6 months,
respectively. As of March 31, 2007, such repurchase
agreements were collateralized by Agency MBS with a fair value
of $3.4 billion, including accrued interest, Non-Agency MBS
with a fair value of $27.6 million, including accrued
interest, and cash deposits of $11.5 million made to cover
margin calls. As of December 31, 2006, such repurchase
agreements were collateralized by Agency MBS with a fair value
of $3.5 billion, including accrued interest, Non-Agency MBS
with a fair value of $34.2 million including accrued
interest and cash deposits of $32.5 million made to cover
margin calls.
Credit
Facilities
We utilize both secured and unsecured credit facilities,
primarily to fund our commercial loans and for general corporate
purposes. Our committed credit facility capacity was
$5.0 billion as of March 31, 2007 and
December 31, 2006.
In February 2007, we entered into a CAD$75.0 million
unsecured one-year revolving credit facility with the Royal Bank
of Canada. We expect to use the funds available under this
facility primarily to finance the origination of commercial loan
assets. Interest on borrowings under the credit facility is
charged at the Canadian Bankers Acceptance rate plus a margin
based on the credit ratings we receive on our public debt. As of
March 31, 2007, the interest rate charged under this
facility was 5.47%. This facility is scheduled to mature on
February 19, 2008.
In March 2007, we amended our $300.0 million secured,
revolving credit facility with JPMorgan Chase Bank, N.A. to,
among other things, increase certain concentration limits, to
lower the interest rate that we are charged on Eurocurrency
borrowings by 10 basis points to Adjusted LIBOR, as
defined, plus 0.65%, and to establish the
20
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
interest rate that we are charged on United States Dollar
borrowings at the commercial paper rate plus 0.65%. Also, the
commitment termination date was changed from June 30, 2008
to March 25, 2008.
In March 2007, we amended our $287.1 million loan agreement
with Column Financial Inc. to, among other things, reduce the
interest rate to one-month LIBOR plus 1.85% and change the
maturity date from January 11, 2017 to April 9, 2009.
Term
Debt
In January 2007, we repaid all amounts outstanding under our
series 2004-2
Term Debt notes.
Subordinated
Debt
In March 2007, we issued $38.7 million in junior
subordinated debt to a newly formed statutory trust,
CapitalSource Trust Preferred Securities
2007-1
(2007-1
TP Trust). We formed the
2007-1 TP
Trust in March 2007, with an initial capitalization in common
securities of $1.2 million for the sole purpose of issuing
$37.5 million of preferred securities (the
2007-1
TP Securities) to outside investors. The
2007-1 TP
Trust used the initial capitalization and the proceeds from the
sale of the
2007-1 TP
Securities to acquire the junior subordinated debt that we
issued.
The 2007-1
TP Securities bear interest at a floating interest rate based on
three-month LIBOR plus 1.95%, resetting quarterly. The
2007-1 TP
Securities, which mature on April 30, 2037, are callable at
par in whole or in part at any time after April 30, 2012.
The 2007-1
TP Securities are unsecured and junior in right of payment to
all of our indebtedness.
|
|
Note 11.
|
Shareholders
Equity
|
Common
Stock Shares Outstanding
Common stock share activity for the three months ended
March 31, 2007 was as follows:
|
|
|
|
|
Outstanding as of
December 31, 2006
|
|
|
181,452,290
|
|
Issuance of common stock
|
|
|
5,892,651
|
|
Exercise of options
|
|
|
185,725
|
|
Restricted stock and other stock
grants, net
|
|
|
707,717
|
|
|
|
|
|
|
Outstanding as of March 31,
2007
|
|
|
188,238,383
|
|
|
|
|
|
|
Dividend
Reinvestment and Stock Purchase Plan
We offer 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 three months ended March 31, 2007, we received proceeds
of $126.3 million related to the direct purchase of
5.1 million shares of our common stock pursuant to the
DRIP. We had no such purchases during the three months ended
March 31, 2006. In addition, we received proceeds of
$7.8 million and $1.7 million related to cash
dividends reinvested for 0.3 million and 0.1 million
shares of our common stock during the three months ended
March 31, 2007 and 2006, respectively.
We expect to formally make an election to REIT status under the
Internal Revenue Code (the Code) when we file our
tax return for the year ended 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,
21
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 consolidated 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 months ended March 31, 2007, we recorded
$19.0 million of income tax expense. Our effective income
tax rate for the three months ended March 31, 2007
attributable to our TRSs was 38.9% and the effective income tax
rate on our consolidated net income was 19.5%.
The reconciliations of the consolidated effective income tax
rate and the federal statutory corporate income tax rate for the
three months ended March 31, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Benefit of REIT election
|
|
|
(17.8
|
)
|
|
|
(14.6
|
)
|
State income taxes, net of federal
tax benefit
|
|
|
1.6
|
|
|
|
2.7
|
|
Other
|
|
|
0.7
|
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
Estimated annual effective income
tax rate
|
|
|
19.5
|
|
|
|
22.9
|
|
Discrete item Benefit
for reversal of net deferred tax liabilities(1)
|
|
|
|
|
|
|
(6.1
|
)
|
|
|
|
|
|
|
|
|
|
Current quarter effective income
tax rate
|
|
|
19.5
|
%
|
|
|
16.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 three months ended
March 31, 2006. |
During the three months ended March 31, 2007, we recorded a
valuation allowance of $0.4 million against our deferred
tax asset related to net operating loss carryforwards, 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.
As discussed in Note 3, New Accounting
Pronouncements, we adopted the provisions of FIN 48 on
January 1, 2007. As a result of adopting FIN 48, we
recognized an increase of approximately $5.7 million in the
liability for unrecognized tax benefits, which was accounted for
as an increase to accumulated deficit as of January 1,
2007. Our unrecognized tax benefits totaled $14.0 million,
as of January 1, 2007, including $6.5 million that, if
recognized, would affect the effective tax rate. We do not
currently anticipate such unrecognized tax benefits to
significantly increase or decrease over the next 12 months;
however, actual results could differ from those currently
anticipated.
We recognize interest accrued related to unrecognized tax
benefits in interest expense and penalties as a component of
income taxes. As of January 1, 2007, accrued interest and
penalties totaled $1.5 million. During the three months
ended March 31, 2007, we recognized $0.1 million in
interest and penalties.
22
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We file income tax returns in the United States federal and
various state, local and foreign jurisdictions and remain
subject to examinations by these tax jurisdictions for tax years
2003 through 2006.
|
|
Note 13.
|
Comprehensive
Income
|
Comprehensive income for three months ended March 31, 2007
and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Net income
|
|
$
|
78,690
|
|
|
$
|
65,294
|
|
Unrealized (loss) gain on
available-for-sale
securities, net of tax
|
|
|
(2,704
|
)
|
|
|
612
|
|
Unrealized gain on foreign
currency translation, net of tax
|
|
|
620
|
|
|
|
|
|
Unrealized (loss) gain on cash
flow hedges, net of tax
|
|
|
(328
|
)
|
|
|
1,270
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
76,278
|
|
|
$
|
67,176
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, net as of March 31,
2007 and December 31, 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Unrealized gain on
available-for-sale
securities, net of tax
|
|
$
|
10
|
|
|
$
|
2,714
|
|
Unrealized loss on foreign
currency translation, net of tax
|
|
|
(206
|
)
|
|
|
(826
|
)
|
Unrealized gain on cash flow
hedges, net of tax
|
|
|
249
|
|
|
|
577
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income, net
|
|
$
|
53
|
|
|
$
|
2,465
|
|
|
|
|
|
|
|
|
|
|
23
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 14.
|
Net
Income per Share
|
The computations of basic and diluted net income per share for
the three months ended March 31, 2007 and 2006 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands, except share data)
|
|
|
Basic net income per
share:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
78,690
|
|
|
$
|
65,294
|
|
Average shares basic
|
|
|
179,324,672
|
|
|
|
149,722,991
|
|
Basic net income per share
|
|
$
|
0.44
|
|
|
$
|
0.44
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per
share:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
78,690
|
|
|
$
|
65,294
|
|
Average shares basic
|
|
|
179,324,672
|
|
|
|
149,722,991
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock dividend declared
|
|
|
|
|
|
|
3,276,377
|
|
Option shares
|
|
|
641,556
|
|
|
|
483,869
|
|
Unvested restricted stock
|
|
|
1,570,909
|
|
|
|
959,723
|
|
Stock units
|
|
|
26,331
|
|
|
|
7,612
|
|
Non-managing member units
|
|
|
|
|
|
|
|
|
Conversion premium on the
1.25% Debentures(1)
|
|
|
180,416
|
|
|
|
|
|
Written call option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares diluted
|
|
|
181,743,884
|
|
|
|
154,450,572
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.43
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the three months ended March 31, 2007, the conversion
premium on the 1.25% Debentures represented the dilutive
shares based on a conversion price of $24.61. |
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 months ended March 31, 2007 and 2006, we
excluded 0.1 million and 0.8 million average shares,
respectively, from average dilutive shares related to stock
options that are either antidilutive or have not satisfied a
required market condition. For the three months ended
March 31, 2007 and 2006, we excluded 2.5 million and
1.8 million average shares, respectively, from average
dilutive shares related to non-managing member units that are
considered antidilutive. For the three months ended
March 31, 2007 and 2006, 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 months ended March 31, 2007,
the conversion premium on the 3.5% Debentures was considered to
be antidilutive based on conversion price of $25.74. For the
three months ended March 31, 2006, the conversion premiums
on the 1.25% Debentures and 3.5% Debentures were
considered to be antidilutive based on conversion prices of
$32.17 and $33.64, respectively. As dividends are paid, the
conversion prices related to our written call option and the
Senior Debentures are adjusted. Also, we have excluded the
shares underlying the principal balance of the Senior Debentures
for all periods presented.
|
|
Note 15.
|
Stock-Based
Compensation
|
The CapitalSource Inc. Third Amended and Restated Equity
Incentive Plan (the Plan) is intended to give
eligible employees, members of the Board of Directors, and our
consultants and advisors awards that are linked to
24
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the performance of our common stock. A total of
33.0 million shares of common stock are reserved for
issuance under the Plan and as of March 31, 2007, there
were 12.8 million shares remaining available for issuance
under the Plan.
We adopted SFAS No. 123 (revised 2004), Share-Based
Payment, (SFAS No. 123(R)) on
January 1, 2006 using the modified- prospective-transition
method, as it relates to the Plan described above. 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 three months ended March 31,
2006 resulting from the requirement to estimate forfeitures for
unvested awards at the date of grant instead of recognizing them
as incurred. Total compensation cost recognized in income
pursuant to the Plan was $10.7 million and
$6.5 million for the three months ended March 31, 2007
and 2006, respectively.
The weighted average grant date fair value of options granted
during the three months ended March 31, 2007 was $1.49. The
total intrinsic value of stock options exercised during the
three months ended March 31, 2007 was $2.2 million. As
of March 31, 2007, the total unrecognized compensation cost
related to nonvested stock options granted pursuant to the Plan
was $9.4 million. This cost is expected to be recognized
over a weighted average period of 2.0 years.
The weighted average grant date fair value of restricted stock
granted during the three months ended March 31, 2007 was
$24.87. The total fair value of restricted stock that vested
during the three months ended March 31, 2007 was
$17.4 million. As of March 31, 2007, the total
unrecognized compensation cost related to nonvested restricted
stock granted pursuant to the Plan was $76.8 million. This
cost is expected to be recognized over a weighted average period
of 2.5 years.
For further discussion of our accounting for stock-based
compensation, see Note 17, Stock-Based Compensation,
in our audited consolidated financial statements for the year
ended December 31, 2006 included in our
Form 10-K.
|
|
Note 16.
|
Commitments
and Contingencies
|
As of March 31, 2007, we had issued $257.3 million in
letters of credit which expire at various dates over the next
six 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 $6.9 million, in other liabilities in
the accompanying consolidated balance sheet as of March 31,
2007.
As of March 31, 2007, 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 that 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 March 31, 2007, 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 settlement dates. As
such, no liability for conditional asset retirement obligations
was recorded on our accompanying consolidated balance sheet as
of March 31, 2007.
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.
25
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS No. 131 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, we operate as two reportable segments:
1) Commercial Lending & Investment and
2) Residential Mortgage Investment. The financial results
of our operating segments as of and for the three months
March 31, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
|
|
|
|
Lending &
|
|
|
Mortgage
|
|
|
Consolidated
|
|
|
|
Investment
|
|
|
Investment
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Total interest and fee income
|
|
$
|
258,681
|
|
|
$
|
80,900
|
|
|
$
|
339,581
|
|
Operating lease income
|
|
|
20,288
|
|
|
|
|
|
|
|
20,288
|
|
Interest expense
|
|
|
111,251
|
|
|
|
75,398
|
|
|
|
186,649
|
|
Provision for loan losses
|
|
|
14,926
|
|
|
|
|
|
|
|
14,926
|
|
Operating expenses(1)
|
|
|
64,221
|
|
|
|
1,101
|
|
|
|
65,322
|
|
Other income (expense)(2)
|
|
|
11,747
|
|
|
|
(5,698
|
)
|
|
|
6,049
|
|
Noncontrolling interests expense
|
|
|
1,330
|
|
|
|
|
|
|
|
1,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income
taxes
|
|
|
98,988
|
|
|
|
(1,297
|
)
|
|
|
97,691
|
|
Income taxes
|
|
|
19,001
|
|
|
|
|
|
|
|
19,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
79,987
|
|
|
$
|
(1,297
|
)
|
|
$
|
78,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of March 31, 2007
|
|
$
|
9,939,143
|
|
|
$
|
5,725,190
|
|
|
$
|
15,664,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of December 31, 2006
|
|
$
|
9,235,449
|
|
|
$
|
5,975,125
|
|
|
$
|
15,210,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2006
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
|
|
|
|
Lending &
|
|
|
Mortgage
|
|
|
Consolidated
|
|
|
|
Investment
|
|
|
Investment
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Total interest and fee income
|
|
$
|
209,670
|
|
|
$
|
27,370
|
|
|
$
|
237,040
|
|
Operating lease income
|
|
|
4,625
|
|
|
|
|
|
|
|
4,625
|
|
Interest expense
|
|
|
72,833
|
|
|
|
24,949
|
|
|
|
97,782
|
|
Provision for loan losses
|
|
|
14,412
|
|
|
|
301
|
|
|
|
14,713
|
|
Operating expenses(1)
|
|
|
48,365
|
|
|
|
2,254
|
|
|
|
50,619
|
|
Other income (expense)(2)
|
|
|
6,450
|
|
|
|
(6,106
|
)
|
|
|
344
|
|
Noncontrolling interests expense
|
|
|
861
|
|
|
|
|
|
|
|
861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income
taxes and cumulative effect of accounting change
|
|
|
84,274
|
|
|
|
(6,240
|
)
|
|
|
78,034
|
|
Income taxes
|
|
|
13,110
|
|
|
|
|
|
|
|
13,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before cumulative
effect of accounting change
|
|
|
71,164
|
|
|
|
(6,240
|
)
|
|
|
64,924
|
|
Cumulative effect of accounting
change, net of taxes
|
|
|
370
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
71,534
|
|
|
$
|
(6,240
|
)
|
|
$
|
65,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 (expense) 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. |
26
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The accounting policies of each of the individual operating
segments are the same as those described in Note 2,
Summary of Significant Accounting Policies. Currently,
substantially all of our business activities occur within the
United States of America and therefore, no additional geographic
disclosures are necessary.
|
|
Note 18.
|
Subsequent
Events
|
On April 4, 2007, we completed exchange offers for our
outstanding $225.0 million in aggregate principal amount of
1.25% Debentures and our $330.0 million in aggregate
principal amount of 3.5% Debentures. As a result of the
exchange offers, we issued $177.4 million in aggregate
principal amount of a new series of senior subordinated
convertible debentures due 2034, bearing interest at a rate of
1.625% per year until March 15, 2009 (the 1.625%
Debentures), in exchange for a like principal amount of
our 1.25% Debentures. In addition, we issued
$321.6 million in aggregate principal amount of a new
series of 4% senior subordinated convertible debentures due
2034 (the 4% Debentures, together with the
1.625% Debentures, the Subordinated Debentures)
in exchange for a like principal amount of our
3.5% Debentures. The results of the exchange offers were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
Amount
|
|
|
Outstanding
|
|
|
|
Outstanding
|
|
|
at Completion of
|
|
Securities
|
|
at March 31, 2007
|
|
|
Exchange Offers
|
|
|
3.50% Senior Convertible
Notes due 2034
|
|
$
|
330,000,000
|
|
|
$
|
8,446,000
|
|
1.25% Senior Convertible
Notes due 2034
|
|
|
225,000,000
|
|
|
|
47,620,000
|
|
4.00% Senior Subordinated
Convertible Notes due 2034
|
|
|
|
|
|
|
321,554,000
|
|
1.625% Senior Subordinated
Convertible Notes due 2034
|
|
|
|
|
|
|
177,380,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
555,000,000
|
|
|
$
|
555,000,000
|
|
|
|
|
|
|
|
|
|
|
The Subordinated Debentures are guaranteed on a senior
subordinated basis by CapitalSource Finance. The Subordinated
Debentures rank junior to all of our other existing and future
senior indebtedness, including the Senior Debentures that were
not exchanged, and senior to our existing and future subordinate
indebtedness.
The Subordinated Debentures provide for a make-whole amount upon
conversion in connection with certain transactions or events
that may occur prior to March 15, 2009, which, under
certain circumstances, will increase the conversion rate by a
number of additional shares. The 4% Debentures do not provide
for the payment of contingent interest as the 3.5% Debentures
do, subject to certain limitations.
Other than the increased interest rates, subordination and
ranking provisions, make-whole provisions and contingent
interest features discussed above, the terms of the Subordinated
Debentures are materially similar to the terms of the Senior
Debentures. For a detailed discussion of the terms of the Senior
Debentures, see Note 11, Borrowings, in our audited
consolidated financial statements for the year ended
December 31, 2006 included in our
Form 10-K.
On April 12, 2007, we completed an $800.0 million term
debt securitization that was recorded as an on-balance sheet
financing. The transaction covers the sale to investors of
approximately $738.0 million of floating-rate asset-backed
notes, which are backed by an $800.0 million diversified
pool of senior and subordinated commercial loans from our
portfolio. The value of the notes sold to investors represented
92.25% of the value of the collateral pool and we retained notes
representing 7.75% of the value of the collateral pool. The
blended pricing for the notes sold to investors (excluding fees)
was one-month LIBOR plus 28.32 basis points. We used the
proceeds to repay borrowings under certain of our credit
facilities, to purchase certain of the commercial loans that
were securitized in this transaction from our affiliated
companies and to pay certain transaction fees and expenses.
On April 19, 2007, we entered into a $1.25 billion
secured, revolving credit facility with Citigroup Global Markets
Realty Corp. (Citigroup). We expect to use the funds
available under this facility to finance the
27
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
origination from time to time of commercial loans. The
commitment amount of this facility may be increased to
$1.50 billion at our election, subject to certain
limitations. The credit facility is secured by certain
commercial loans from our portfolio and is scheduled to mature
on October 16, 2007. The facility permits us to obtain
financing of up to 90% of the outstanding principal balance of
commercial loans that we originate and transfer to this
facility. Interest on borrowings under the credit facility will
be charged at a rate equal to one-month LIBOR plus 0.50% through
July 18, 2007 and then at a rate equal to one-month LIBOR
plus 0.60%.
On April 20, 2007, in connection with consummation of the
secured, revolving credit facility with Citigroup described
above, we fully repaid all amounts outstanding under our
$906.0 million multi-bank secured credit facility led by
BMO Capital Markets Corp. (as successor to Harris Nesbitt
Corp.), and terminated the credit facility, which was scheduled
to mature in May 2007.
28
|
|
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
mutual 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.
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, 2006 as filed with the
Securities and Exchange Commission on March 1, 2007 (the
Form 10-K).
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 commercial lending, investment and asset management
company focused on the middle market. We operate as a real
estate investment trust (REIT) and provide senior
and subordinate commercial loans, invest in real estate, engage
in asset management and servicing activities and invest in
residential mortgage assets.
Through our commercial lending and investment activities, our
primary goal is to be the provider of financing of choice for
middle market businesses that require customized and
sophisticated financing. We operate through three principal
commercial finance businesses:
|
|
|
|
|
Healthcare and Specialty Finance, which generally
provides first mortgage loans, asset-based revolving lines of
credit, real estate lease financing and cash flow loans to
healthcare businesses and a broad range of other companies;
|
|
|
|
Structured Finance, which generally engages in commercial
and residential real estate finance and also provides
asset-based lending to finance companies; and
|
|
|
|
Corporate Finance, which generally provides senior and
subordinate loans through direct origination and participation
in widely syndicated loan transactions.
|
To optimize our REIT structure, we also invest in certain
residential mortgage assets. As of March 31, 2007, the
balance of our residential mortgage investment portfolio was
$5.6 billion, which included investments in residential
mortgage loans and residential mortgage-backed securities
(RMBS).
29
Consolidated
Results of Operations
We operate as two reportable segments: 1) Commercial
Lending & Investment, which includes our commercial
lending and investment business and 2) Residential Mortgage
Investment, which 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 Reporting Metrics
Interest Income. In our Commercial
Lending & Investment segment, interest income
represents interest earned on our commercial loans. Although the
majority of these loans charge interest at variable rates that
generally adjust daily, we also have a number of loans charging
interest at fixed rates. In our Residential Mortgage Investment
segment, interest income represents interest earned on our
residential mortgage-related receivables and RMBS.
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, prepayment-related
fees as well as other fees charged to borrowers. 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,
convertible debt and subordinated debt. In our Residential
Mortgage Investment segment, our borrowings consist of
repurchase agreements and term debt. The majority of our
borrowings charge interest at variable rates based primarily on
one-month 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 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 loans, 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, income
from our management of various loans held by third parties 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
realized and unrealized appreciation (depreciation) on certain
of our residential mortgage investments and gains (losses) on
derivatives used to economically hedge the residential mortgage
investment portfolio.
30
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 expect to formally make an
election to REIT status under the Internal Revenue Code (the
Code) when we file our tax return for our taxable
year ended 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 taxable REIT subsidiaries
(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. A significant
portion of our Commercial Lending & Investment segment
will remain subject to corporate-level income tax as many of the
segments assets are originated and held in our TRSs.
Adjusted Earnings. Adjusted earnings
represents net income as determined in accordance with
U.S. 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.
Operating
Results for the Three Months Ended March 31,
2007
Our results of operations for the three months ended
March 31, 2007 were driven primarily by our continued
growth as well as the impact of our REIT election. As further
described below, the most significant factors influencing our
consolidated results of operations for the time period compared
to the consolidated results of operations for equivalent time
period in 2006, were:
|
|
|
|
|
Significant growth in our commercial loan portfolio;
|
|
|
|
Increased operating lease income related to our direct real
estate investments;
|
|
|
|
Increased borrowings to fund our growth;
|
|
|
|
Increased operating expenses, including higher employee
compensation;
|
|
|
|
Improvement in our credit metrics; and
|
|
|
|
Decreased lending and borrowing spreads.
|
31
Our consolidated operating results for the three months ended
March 31, 2007 compared to the three months ended
March 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Interest income
|
|
$
|
289,554
|
|
|
$
|
195,498
|
|
|
$
|
94,056
|
|
|
|
48
|
%
|
Fee income
|
|
|
50,027
|
|
|
|
41,542
|
|
|
|
8,485
|
|
|
|
20
|
%
|
Operating lease income
|
|
|
20,288
|
|
|
|
4,625
|
|
|
|
15,663
|
|
|
|
339
|
%
|
Interest expense
|
|
|
186,649
|
|
|
|
97,782
|
|
|
|
88,867
|
|
|
|
91
|
%
|
Provision for loan losses
|
|
|
14,926
|
|
|
|
14,713
|
|
|
|
213
|
|
|
|
1
|
%
|
Operating expenses
|
|
|
65,322
|
|
|
|
50,619
|
|
|
|
14,703
|
|
|
|
29
|
%
|
Other income, net of expenses
|
|
|
6,049
|
|
|
|
344
|
|
|
|
5,705
|
|
|
|
1,658
|
%
|
Noncontrolling interests expense
|
|
|
1,330
|
|
|
|
861
|
|
|
|
469
|
|
|
|
54
|
%
|
Income taxes
|
|
|
19,001
|
|
|
|
13,110
|
|
|
|
5,891
|
|
|
|
45
|
%
|
Cumulative effect of accounting
change, net of taxes
|
|
|
|
|
|
|
370
|
|
|
|
(370
|
)
|
|
|
100
|
%
|
Net income
|
|
|
78,690
|
|
|
|
65,294
|
|
|
|
13,396
|
|
|
|
21
|
%
|
Our consolidated yields on income earning assets and the costs
of interest bearing liabilities for the three months ended
March 31, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
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
|
|
|
|
|
|
$
|
289,554
|
|
|
|
8.27
|
%
|
|
|
|
|
|
$
|
195,498
|
|
|
|
9.08
|
%
|
Fee income
|
|
|
|
|
|
|
50,027
|
|
|
|
1.43
|
|
|
|
|
|
|
|
41,542
|
|
|
|
1.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets(1)
|
|
$
|
14,207,472
|
|
|
|
339,581
|
|
|
|
9.70
|
|
|
$
|
8,731,522
|
|
|
|
237,040
|
|
|
|
11.01
|
|
Total direct real estate
investments
|
|
|
786,623
|
|
|
|
20,288
|
|
|
|
10.46
|
|
|
|
126,848
|
|
|
|
4,625
|
|
|
|
14.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income earning assets
|
|
|
14,994,095
|
|
|
|
359,869
|
|
|
|
9.73
|
|
|
|
8,858,370
|
|
|
|
241,665
|
|
|
|
11.06
|
|
Total interest bearing
liabilities(2)
|
|
|
12,860,904
|
|
|
|
186,649
|
|
|
|
5.89
|
|
|
|
7,307,304
|
|
|
|
97,782
|
|
|
|
5.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
173,220
|
|
|
|
3.84
|
%
|
|
|
|
|
|
$
|
143,883
|
|
|
|
5.63
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
4.69
|
%
|
|
|
|
|
|
|
|
|
|
|
6.59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest earning assets include cash, restricted cash,
mortgage-related receivables, RMBS, 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. |
32
Comparison
of the Three Months Ended March 31, 2007 and
2006
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 $208.7 million for the three months
ended March 31, 2007, an increase of $40.5 million, or
24%, from interest income for the three months ended
March 31, 2006. This increase was due to the growth in
average interest earning assets, primarily loans, of
$1.8 billion, or 28%. This increase was partially offset by
a slight decrease in the interest component of yield to 10.04%
for the three months ended March 31, 2007 from 10.18% for
the three months ended March 31, 2006. The decrease in the
interest component of yield was primarily due to a decrease in
our lending spread, partially offset by an increase in
short-term interest rates. During the three months ended
March 31, 2007, our commercial lending spread to average
one-month LIBOR was 4.72% compared to 5.57% for the three months
ended March 31, 2006. 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 continue to 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 one-month 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.
Interest income in our Residential Mortgage Investment segment
consists of coupon interest and the amortization of purchase
discounts and premiums on our investments in RMBS and
mortgage-related receivables, which are amortized into income
using the interest method. Interest income in our Residential
Mortgage Investment segment was $80.9 million for the three
months ended March 31, 2007, an increase of
$53.5 million, or 196%, from interest income for the three
months ended March 31, 2006. This increase is primarily due
to recognizing a full quarter of gross interest income on our
accompanying consolidated statement of income for the three
months ended March 31, 2007, compared to recognizing gross
interest income during only one month in the accompanying
consolidated statement of income for the three months ended
March 31, 2006. As further discussed in Note 5,
Residential Mortgage-Backed Securities and Certain Derivative
Instruments, in our accompanying consolidated financial
statements, we owned Agency MBS that were accounted for as
derivatives during the three months ended March 31, 2006.
Until we exercised our right to substitute collateral in March
2006, the income on these Agency MBS was recorded net of related
interest expense on the income statement. Also contributing to
the increase was the recognition of three months of income
related to our mortgage-related receivables, which we purchased
at the end of February 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 $22.8 million
for the three months ended March 31, 2007 compared to
$17.4 million for the three months ended March 31,
2006. Prepayment-related fee income contributed 1.10% and 1.05%,
to yield for the three months ended March 31, 2007 and
2006, respectively. Yield from fee income, including prepayment
related fees, decreased to 2.41% for the three months ended
March 31, 2007 from 2.51% for the three months ended
March 31, 2006.
Operating
Lease Income
In our Commercial Lending & Investment segment,
operating lease income was $20.3 million, an increase of
$15.7 million, or 339%, from the three months ended
March 31, 2006. This increase is due to an increase in our
direct real estate investments, which are leased to healthcare
industry clients through the execution of long-term,
triple-net
operating leases. During the three months ended March 31,
2007 and 2006, our average balance of direct real estate
investments was $786.6 million and $126.8 million,
respectively.
33
Interest
Expense
We fund our growth largely through borrowings. In our Commercial
Lending & Investment segment, interest expense was
$111.3 million for the three months ended March 31,
2007, an increase of $38.4 million, or 53%, from interest
expense for the three months ended March 31, 2006. This
increase in interest expense was primarily due to an increase in
average borrowings of $1.9 billion, or 36%, as well as
higher interest rates during the three months ended
March 31, 2007 compared to the three months ended
March 31, 2006. Our cost of borrowings increased to 6.22%
for the three months ended March 31, 2007 from 5.55% for
the three months ended March 31, 2006. 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 the
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. 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 one-month
LIBOR for the three months ended March 31, 2007 was 0.90%
compared to 0.94% for the three months ended March 31, 2006.
In our Residential Mortgage Investment segment, interest expense
was $75.4 million for the three months ended March 31,
2007, an increase of $50.4 million, or 202%, from interest
expense for the three months ended March 31, 2006. This
increase in interest expense was primarily due to the gross
versus net accounting of the repurchase agreements used to
finance purchases of Agency MBS described above. Also
contributing to the increase was the recognition of three months
of interest expense related to our owner trust term debt, which
closed at the end of February 2006. Our cost of borrowings
increased to 5.38% for the three months ended March 31,
2007 from 5.03% for the three months ended March 31, 2006.
This increase was primarily the result of rising interest rates.
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 7.38% for the
three months ended March 31, 2007, a decrease of 102 basis
points from 8.40% for the three months ended March 31,
2006. The decrease in net finance margin was primarily due to
the increase in interest expense resulting from higher leverage
and 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, which represents the difference
between our gross yield on income earning assets and the cost of
our interest bearing liabilities, was 6.05% for the three months
ended March 31, 2007, a decrease of 113 basis points
from 7.18% for the three months ended March 31, 2006. 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.
34
The yields of income earning assets and the costs of interest
bearing liabilities in our Commercial Lending &
Investment segment for the three months ended March 31,
2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
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
|
|
|
|
|
|
$
|
208,654
|
|
|
|
10.04
|
%
|
|
|
|
|
|
$
|
168,128
|
|
|
|
10.18
|
%
|
Fee income
|
|
|
|
|
|
|
50,027
|
|
|
|
2.41
|
|
|
|
|
|
|
|
41,542
|
|
|
|
2.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets(1)
|
|
$
|
8,430,913
|
|
|
|
258,681
|
|
|
|
12.45
|
|
|
$
|
6,699,752
|
|
|
|
209,670
|
|
|
|
12.69
|
|
Total direct real estate investments
|
|
|
786,623
|
|
|
|
20,288
|
|
|
|
10.46
|
|
|
|
126,848
|
|
|
|
4,625
|
|
|
|
14.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income earning assets
|
|
|
9,217,536
|
|
|
|
278,969
|
|
|
|
12.27
|
|
|
|
6,826,600
|
|
|
|
214,295
|
|
|
|
12.73
|
|
Total interest bearing
liabilities(2)
|
|
|
7,258,442
|
|
|
|
111,251
|
|
|
|
6.22
|
|
|
|
5,322,890
|
|
|
|
72,833
|
|
|
|
5.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
167,718
|
|
|
|
6.05
|
%
|
|
|
|
|
|
$
|
141,462
|
|
|
|
7.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
7.38
|
%
|
|
|
|
|
|
|
|
|
|
|
8.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 0.22% and 0.36%, respectively, for the three months
ended March 31, 2007 and 2006. Net finance spread is the
difference between yield on interest earning assets and the cost
of our interest bearing liabilities. The decrease in net finance
spread is attributable to the changes in its components as
described above.
Provision
for Loan Losses
The increase in the provision for loan losses in our Commercial
Lending & Investment segment is the result of growth
in our commercial loan portfolio, changes in the mix of our
portfolio and an increase in the balance of impaired loans in
the portfolio during the three months ended March 31, 2007.
Other
Income
In our Commercial Lending & Investment segment, other
income was $11.7 million for the three months ended
March 31, 2007, an increase of $5.3 million, or 82%,
from total other income for the three months ended
March 31, 2006. The increase in other income was primarily
attributable to a $6.4 million increase in net realized and
unrealized gains in our equity investments, a $2.6 million
decrease in losses incurred on the extinguishment of debt, a
$2.1 million increase in gains on foreign currency exchange
and a $1.4 million increase in income from our management
of various loans held by third parties. These increases were
partially offset by a $4.5 million decrease in the receipt
of break-up
fees, a $2.8 million increase in net losses on derivatives,
and a $1.4 million decrease in diligence deposits forfeited.
In our Residential Mortgage Investment segment, other expense
consisted of a net loss on the residential mortgage investment
portfolio of $5.7 million for the three months ended
March 31, 2007, a decrease of $0.4 million, or 7%,
from total other expense for the three months ended
March 31, 2006. This net loss was attributable to net
realized and unrealized losses on derivative instruments related
to our residential mortgage investments of $8.5 million,
and impairments on our Non-Agency MBS of $7.0 million.
These losses were partially offset by net unrealized gains on
our residential mortgage investments of $9.8 million.
Included in unrealized gains on derivative instruments is not
only the change in fair value of these instruments, but also the
net of interest income and expense accruals related to certain
of our derivatives.
35
Operating
Expenses
The increase in consolidated operating expenses was primarily
due to higher total employee compensation, which increased
$6.7 million, or 20%. The higher employee compensation was
attributable to higher incentive compensation, including an
increase in restricted stock awards and stock options granted.
For the three months ended March 31, 2007 and 2006,
incentive compensation totaled $18.5 million and
$14.8 million, respectively. Incentive compensation
comprises annual bonuses, as well as 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 March 31, 2007 was
primarily attributable to an increase of $5.2 million in
depreciation and amortization primarily resulting from our
direct real estate investments, an increase of $1.0 million
in professional fees and an increase of $0.8 million in
travel and entertainment expenses. Operating expenses in our
Residential Mortgage Investment segment, which consist primarily
of compensation and benefits, professional fees and other direct
expenses, were $1.1 million and $2.3 million for the
three months ended March 31, 2007 and 2006, respectively.
In our Commercial Lending & Investment segment,
operating expenses as a percentage of average total assets
decreased to 2.76% for the three months ended March 31,
2007, from 2.82% for the three months ended March 31, 2006.
Our Commercial Lending & Investment segments
operating expenses as a percentage of average total assets,
excluding depreciation of our direct real estate investments,
decreased to 2.47% for the three months ended March 31,
2007, from 2.73% for the three months ended March 31, 2006.
Income
Taxes
Our effective tax rate on our consolidated net income was 19.5%
for the three months ended March 31, 2007, which is
impacted by a reduction in net deferred tax liabilities as a
result of our REIT election. Our effective income tax rate for
the three months ended March 31, 2007 attributable to our
TRSs was 38.9%. Our effective tax rate was 16.8% for the three
months ended March 31, 2006 and 19.4% for the year ended
December 31, 2006, which included the reversal of
$4.7 million in net deferred tax liabilities relating to
REIT qualifying activities, into income, in connection with our
REIT election.
36
Adjusted
Earnings
Adjusted earnings, as previously defined, were
$113.9 million, or $0.63 per diluted share, for the three
months ended March 31, 2007. Adjusted earnings were
$94.9 million, or $0.61 per diluted share, for the
three months ended March 31, 2006. A reconciliation of our
reported net income to adjusted earnings for the three months
ended March 31, 2007 and 2006 was as follows ($ in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March, 31
|
|
|
|
2007
|
|
|
2006
|
|
|
Net income
|
|
$
|
78,690
|
|
|
$
|
65,294
|
|
Add:
|
|
|
|
|
|
|
|
|
Real estate depreciation(1)
|
|
|
6,762
|
|
|
|
1,390
|
|
Amortization of deferred financing
fees(2)
|
|
|
5,508
|
|
|
|
6,902
|
|
Non-cash equity compensation
|
|
|
10,712
|
|
|
|
6,536
|
|
Net unrealized loss on residential
mortgage investment portfolio, including related derivatives(3)
|
|
|
7,180
|
|
|
|
4,447
|
|
Unrealized loss (gain) on
derivatives and foreign currencies, net
|
|
|
328
|
|
|
|
(251
|
)
|
Unrealized loss on investments, net
|
|
|
47
|
|
|
|
1,236
|
|
Provision for loan losses
|
|
|
14,926
|
|
|
|
14,713
|
|
Recoveries(4)
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Charge offs(5)
|
|
|
10,250
|
|
|
|
276
|
|
Nonrecurring items(6)
|
|
|
|
|
|
|
4,725
|
|
Cumulative effect of accounting
change, net of taxes
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
Adjusted earnings
|
|
$
|
113,903
|
|
|
$
|
94,896
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
0.44
|
|
|
$
|
0.44
|
|
Diluted as reported
|
|
$
|
0.43
|
|
|
$
|
0.42
|
|
Average shares
outstanding:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
|
179,324,672
|
|
|
|
149,722,991
|
|
Diluted as reported
|
|
|
181,743,884
|
|
|
|
154,450,572
|
|
Adjusted earnings per
share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.64
|
|
|
$
|
0.63
|
|
Diluted(7)
|
|
$
|
0.63
|
|
|
$
|
0.61
|
|
Average shares
outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
179,324,672
|
|
|
|
149,722,991
|
|
Diluted(8)
|
|
|
184,200,063
|
|
|
|
156,236,043
|
|
|
|
|
(1) |
|
Depreciation for direct real estate investments only. Excludes
depreciation for corporate leasehold improvements, fixed assets
and other non-real estate items. |
|
(2) |
|
Includes amortization of deferred financing fees and other
non-cash interest expense. |
|
(3) |
|
Includes adjustments to reflect the period change in fair value
of RMBS and related derivative instruments. |
|
(4) |
|
Includes all recoveries on loans during the period. |
|
(5) |
|
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. |
|
(6) |
|
Represents the write-off of a net deferred tax liability
recorded in connection with our conversion to a REIT for the
three months ended March 31, 2006. |
|
(7) |
|
Adjusted to reflect the impact of adding back noncontrolling
interests expense of $1.3 million and $0.9 million for
the three months ended March 31, 2007 and 2006,
respectively, to adjusted earnings due to the application of the
if-converted method on non-managing member units, which are
considered dilutive to adjusted earnings per share, but are
antidilutive to GAAP net income per share for all periods
presented. |
|
(8) |
|
Adjusted to include average non-managing member units of
2,456,179 and 1,785,471 for the three months ended
March 31, 2007 and 2006, respectively, which are considered
dilutive to adjusted earnings per share, but are antidilutive to
GAAP net income per share. |
37
Financial
Condition
Commercial
Lending & Investment Segment
Portfolio
Composition
We provide commercial loans to businesses that require
customized and sophisticated financing. We also invest in real
estate and selectively make equity investments. As of
March 31, 2007 and December 31, 2006, our commercial
lending and investment portfolio comprised the following:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Commercial loans
|
|
$
|
8,638,535
|
|
|
$
|
7,850,198
|
|
Direct real estate investments
|
|
|
805,650
|
|
|
|
722,303
|
|
Equity investments
|
|
|
158,100
|
|
|
|
150,090
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,602,285
|
|
|
$
|
8,722,591
|
|
|
|
|
|
|
|
|
|
|
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
finance business as of March 31, 2007 and December 31,
2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Composition of loan portfolio by
loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans(1)
|
|
$
|
2,814,286
|
|
|
|
33
|
%
|
|
$
|
2,542,222
|
|
|
|
32
|
%
|
Senior secured asset-based loans(1)
|
|
|
2,759,381
|
|
|
|
32
|
|
|
|
2,599,014
|
|
|
|
33
|
|
Senior secured cash flow loans(1)
|
|
|
2,350,718
|
|
|
|
27
|
|
|
|
2,105,152
|
|
|
|
27
|
|
Subordinate loans
|
|
|
714,150
|
|
|
|
8
|
|
|
|
603,810
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,638,535
|
|
|
|
100
|
%
|
|
$
|
7,850,198
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of loan portfolio by
business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare and Specialty Finance
|
|
$
|
2,786,793
|
|
|
|
32
|
%
|
|
$
|
2,775,748
|
|
|
|
35
|
%
|
Structured Finance
|
|
|
3,381,091
|
|
|
|
39
|
|
|
|
2,839,716
|
|
|
|
36
|
|
Corporate Finance
|
|
|
2,470,651
|
|
|
|
29
|
|
|
|
2,234,734
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,638,535
|
|
|
|
100
|
%
|
|
$
|
7,850,198
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Term B loans. |
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 finance business as of March 31, 2007
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Loan
|
|
|
|
Number
|
|
|
Average
|
|
|
Number of
|
|
|
Size per
|
|
|
|
of Loans
|
|
|
Loan Size
|
|
|
Clients
|
|
|
Client
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Composition of loan portfolio by
business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare and Specialty Finance
|
|
|
441
|
|
|
$
|
6,319
|
|
|
|
302
|
|
|
$
|
9,228
|
|
Structured Finance
|
|
|
283
|
|
|
|
11,947
|
|
|
|
229
|
|
|
|
14,765
|
|
Corporate Finance
|
|
|
405
|
|
|
|
6,100
|
|
|
|
189
|
|
|
|
13,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall loan portfolio
|
|
|
1,129
|
|
|
|
7,651
|
|
|
|
720
|
|
|
|
11,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
The scheduled maturities of our commercial loan portfolio by
loan type as of March 31, 2007 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(1)
|
|
$
|
911,131
|
|
|
$
|
1,734,633
|
|
|
$
|
168,522
|
|
|
$
|
2,814,286
|
|
Senior secured asset-based loans(1)
|
|
|
264,219
|
|
|
|
2,384,529
|
|
|
|
110,633
|
|
|
|
2,759,381
|
|
Senior secured cash flow loans(1)
|
|
|
305,143
|
|
|
|
1,797,326
|
|
|
|
248,249
|
|
|
|
2,350,718
|
|
Subordinate loans
|
|
|
81,448
|
|
|
|
195,713
|
|
|
|
436,989
|
|
|
|
714,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,561,941
|
|
|
$
|
6,112,201
|
|
|
$
|
964,393
|
|
|
$
|
8,638,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Term B loans. |
The dollar amounts of all fixed-rate and adjustable-rate
commercial loans by loan type as of March 31, 2007 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable
|
|
|
Fixed
|
|
|
|
|
|
|
Rates
|
|
|
Rates
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Composition of loan portfolio by
loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage loans(1)
|
|
$
|
2,527,831
|
|
|
$
|
286,455
|
|
|
$
|
2,814,286
|
|
Senior secured asset-based loans(1)
|
|
|
2,728,673
|
|
|
|
30,708
|
|
|
|
2,759,381
|
|
Senior secured cash flow loans(1)
|
|
|
2,332,263
|
|
|
|
18,455
|
|
|
|
2,350,718
|
|
Subordinate loans
|
|
|
583,687
|
|
|
|
130,463
|
|
|
|
714,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,172,454
|
|
|
$
|
466,081
|
|
|
$
|
8,638,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total loan portfolio
|
|
|
95%
|
|
|
|
5%
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Term B loans. |
As of March 31, 2007, our Healthcare and Specialty Finance,
Structured Finance and Corporate Finance businesses had
commitments to lend up to an additional $2.9 billion,
$2.5 billion and $1.5 billion, respectively, to 302,
229 and 189 existing clients, respectively.
39
Credit
Quality and Allowance for Loan Losses
As of March 31, 2007 and December 31, 2006, the
principal balances of loans 60 or more days contractually
delinquent, non-accrual loans and impaired loans in our
commercial lending portfolio were as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
Commercial Loan Asset Classification
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Loans 60 or more days
contractually delinquent
|
|
$
|
73,011
|
|
|
$
|
88,067
|
|
Non-accrual loans(1)
|
|
|
153,794
|
|
|
|
183,483
|
|
Impaired loans(2)
|
|
|
280,202
|
|
|
|
281,377
|
|
Less: loans in multiple categories
|
|
|
(208,241
|
)
|
|
|
(230,469
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
298,766
|
|
|
$
|
322,458
|
|
|
|
|
|
|
|
|
|
|
Total as a percentage of total
loans
|
|
|
3.46%
|
|
|
|
4.11%
|
|
|
|
|
|
|
|
|
|
|
Total as a percentage of all
commercial assets(3)
|
|
|
3.16%
|
|
|
|
3.76%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes commercial loans with an aggregate principal balance of
$41.5 million and $47.0 million as of March 31,
2007 and December 31, 2006, respectively, which were also
classified as loans 60 or more days contractually delinquent. |
|
(2) |
|
Includes commercial loans with an aggregate principal balance of
$54.4 million and $47.0 million as of March 31,
2007 and December 31, 2006, respectively, which were also
classified as loans 60 or more days contractually delinquent,
and commercial loans with an aggregate principal balance of
$153.8 million and $183.5 million as of March 31,
2007 and December 31, 2006, respectively, which were also
classified as loans on non-accrual status. |
|
(3) |
|
Commercial assets include commercial loans, loans held for sale,
receivables under reverse-repurchase agreements and direct real
estate investments. |
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. In this regard, impaired loans include those loans
where we expect to encounter a significant delay in the
collection of,
and/or
shortfall in the amount of, contractual payments due to us.
During the three months ended March 31, 2007, we classified
commercial loans with an aggregate carrying value of
$20.2 million as of March 31, 2007 as troubled debt
restructurings as defined by SFAS No. 15,
Accounting for Debtors and Creditors for Troubled Debt
Restructurings. As of March 31, 2007, commercial loans
with an aggregate carrying value of $163.6 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 at least one year following the restructuring. The
allocated reserve for commercial loans classified as troubled
debt restructurings was $11.4 million as of March 31,
2007. For the year ended December 31, 2006, commercial
loans with an aggregate carrying value of $194.7 million as
of December 31, 2006 were classified as troubled debt
restructurings. The allocated reserve for commercial loans
classified as troubled debt restructurings was
$31.5 million as of December 31, 2006.
Middle market lending involves credit risks that 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 $125.2 million and $120.6 million as
of March 31, 2007 and December 31, 2006, respectively.
These amounts equate to 1.45% and 1.54% of gross loans as of
March 31, 2007 and December 31, 2006, respectively. Of
our total allowance for loan losses as of March 31, 2007
and December 31, 2006, $33.3 million and
$37.8 million, respectively, were allocated to impaired
loans. During the three months ended March 31, 2007 and
2006, we charged off loans totaling $10.3 million and
$0.3 million, respectively. Net charge offs as a percentage
of average loans were 0.51% and 0.02% for the three months ended
March 31, 2007 and 2006, respectively.
40
Direct
Real Estate Investments
We acquire real estate for long-term investment purposes. These
direct real estate investments are generally leased to clients
through the execution of long-term,
triple-net
operating leases. Under a typical
triple-net
lease, the client agrees to pay a base monthly operating lease
payment and all facility operating expenses as well as make
capital improvements. As of March 31, 2007 and
December 31, 2006, we had $805.7 million and
$722.3 million in direct real estate investments,
respectively, which consisted primarily of land and buildings.
Equity
Investments
We commonly acquire equity interests in connection with loans to
clients. These investments include common stock, preferred
stock, limited liability company interests, limited partnership
interests and warrants to purchase equity instruments.
As of March 31, 2007 and December 31, 2006, the
carrying values of our investments in our Commercial
Lending & Investment segment were $158.1 million
and $150.1 million, respectively. Included in these
balances were investments carried at fair value totaling
$28.8 million and $34.6 million, respectively.
Residential
Mortgage Investment Segment
Portfolio
Composition
We invest directly in residential mortgage investments and as of
March 31, 2007 and December 31, 2006, our portfolio of
residential mortgage investments was as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Mortgage-related receivables(1)
|
|
$
|
2,239,257
|
|
|
$
|
2,295,922
|
|
Residential mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
Agency(2)
|
|
|
3,372,329
|
|
|
|
3,502,753
|
|
Non-Agency(2)
|
|
|
27,610
|
|
|
|
34,243
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,639,196
|
|
|
$
|
5,832,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents secured receivables that are backed by adjustable
rate residential prime mortgage loans. |
|
(2) |
|
See following paragraph for a description of these securities. |
We invest in RMBS, which are securities collateralized by
residential mortgage loans. These securities include
mortgage-backed securities whose payments of principal and
interest are guaranteed by Fannie Mae or Freddie Mac
(hereinafter Agency MBS). We also invest in RMBS
issued by non-government-sponsored entities that are
credit-enhanced through the use of subordination or in other
ways that are inherent in a corresponding securitization
transaction (hereinafter, Non-Agency MBS).
Substantially all of our Agency MBS are collateralized by
adjustable rate residential mortgage loans, including hybrid
adjustable rate mortgage loans. We account for our Agency MBS as
debt securities that are classified as trading investments and
included in mortgage-backed securities pledged, trading on our
accompanying consolidated balance sheets. We account for our
Non-Agency MBS as debt securities that are classified as
available-for-sale
and included in investments on our accompanying consolidated
balance sheets. The coupons on the loans underlying RMBS are
fixed for stipulated periods of time and then reset annually
thereafter. The weighted average net coupon of Agency MBS in our
portfolio was 4.90% as of March 31, 2007 and the weighted
average reset date for the portfolio was approximately
43 months. The weighted average net coupon of Non-Agency
MBS in our portfolio was 8.38% as of March 31, 2007. The
fair values of our Agency MBS and Non-Agency MBS were
$3.4 billion and $27.6 million, respectively, as of
March 31, 2007.
As of March 31, 2007, we had $2.2 billion in
mortgage-related receivables secured by prime residential
mortgage loans. As of March 31, 2007, the weighted average
interest rate on these receivables was 5.37%, and the weighted
average contractual maturity was approximately 28.5 years.
See further discussion on our accounting treatment of
mortgage-related receivables in Note 4, Mortgage-Related
Receivables and Related Owners Trust Securitizations,
in our accompanying consolidated financial statements.
41
Credit
Quality and Allowance for Loan Losses
We recorded no provision for loan losses for the three months
ended March 31, 2007 and the allowance for loan losses was
$0.4 million as of March 31, 2007. We recorded a
provision for loan losses of $0.3 million related to our
mortgage-related receivables during the three months ended
March 31, 2006, and the allowance for loan losses was
$0.4 million as of December 31, 2006.
Financing
We have financed our investments in RMBS primarily through
repurchase agreements. As of March 31, 2007 and
December 31, 2006, our outstanding repurchase agreements
totaled $3.3 billion and $3.4 billion, respectively.
As of March 31, 2007, repurchase agreements that we
executed had maturities of between 5 and 30 days and a
weighted average borrowing rate of 5.29%.
Our investments in residential mortgage-related receivables were
financed primarily through debt issued in connection with two
securitization transactions. As of March 31, 2007, the
total outstanding balance of these debt obligations was
$2.2 billion. The interest rates on all classes of the
notes within each securitization are fixed for various periods
of time and then reset annually thereafter, with a weighted
average interest rate of 4.94% as of March 31, 2007. The
notes within each securitization are scheduled to mature at
various dates through 2036.
The interest rates on our repurchase agreements,
securitization-based debt 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, funding ongoing commitments to repay borrowings,
paying dividends and for other general business purposes. Our
primary sources of funds consist of cash flows from operations,
borrowings under our existing and future repurchase agreements,
credit facilities, term debt, subordinated debt and convertible
debt, proceeds from issuances of equity and other sources. We
believe these sources of financing are sufficient to meet our
short-term liquidity needs. We have applied for an Industrial
Loan Corporation charter with the Federal Deposit Insurance
Corporation (FDIC), which we expect would enable us
to obtain additional funds through the brokered deposit market.
In March 2007, we received correspondence from the FDIC
approving our application for FDIC deposit insurance, subject to
certain conditions, and we are currently reviewing and analyzing
the conditions of the approval to understand the impact on our
overall operations.
As of March 31, 2007, the amount of our unfunded
commitments to extend credit to our clients exceeded our unused
funding sources and unrestricted cash by $2.2 billion.
Commitments do not include transactions for which we have signed
commitment letters but not yet signed loan agreements. 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 that 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.
42
As a result of our decision to make an election to REIT status
and to maintain our exemption from registration as an investment
company under the Investment Company Act of 1940, 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 using leverage consistent with industry standards for
these assets.
We 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. 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 equal to at
least 90% of our REIT taxable income. We may cause our TRSs to
pay dividends to us to increase 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 debt market for
capital and to continue to explore additional sources of
financing. We expect these financings will include additional
secured and unsecured credit facilities, secured and unsecured
term debt, subordinated debt, repurchase agreements,
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.
Cash
and Cash Equivalents
As of March 31, 2007 and December 31, 2006, we had
$308.8 million and $396.2 million, respectively, in
cash and cash equivalents. We invest cash on hand in short-term
liquid investments.
We had $135.6 million and $240.9 million of restricted
cash as of March 31, 2007 and December 31, 2006,
respectively. The restricted cash primarily represents both
principal and interest collections on loans collateralizing our
term debt and on loans pledged to our credit facilities. We also
have restricted cash representing other items such as client
holdbacks, escrows and securities pledged as collateral to
secure our repurchase agreements and related derivatives.
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.
Sources
and Uses of Cash
For the three months ended March 31, 2007 and 2006, we
generated (used) cash from operations of $152.4 million and
$(127.0) million, respectively. Included within these
amounts are cash inflows and outflows related to our Agency MBS
that are classified as trading investments and loans held for
sale.
Cash from our financing activities is generated from proceeds
from our issuance of equity, borrowings on our repurchase
agreements, credit facilities and term debt and from our
issuance of convertible debt and subordinated debt. Our
financing activities primarily use cash to repay repurchase
agreements, term debt borrowings and to pay cash dividends. For
the three months ended March 31, 2007 and 2006, we
generated cash flow from financing activities of
$367.4 million and $2.9 billion, respectively.
Investing activities primarily relate to loan origination,
purchases of residential mortgage investments, primarily
mortgage-related receivables, and acquisitions of direct real
estate investments. For the three months ended March 31,
2007 and 2006, we used cash in investing activities of
$607.2 million and $2.8 billion, respectively.
Borrowings
As of March 31, 2007 and December 31, 2006, we had
outstanding borrowings totaling $13.2 billion and
$12.9 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 11,
43
Borrowings, in our audited consolidated financial statements for
the year ended December 31, 2006 included in our
Form 10-K.
Our overall debt strategy emphasizes diverse sources of
financing including both secured and unsecured financings. As of
March 31, 2007, approximately 88% of our debt was
collateralized by our loans and residential mortgage investments
and 12% was unsecured. We intend to increase our percentage of
unsecured debt over time through both unsecured credit
facilities and unsecured term debt. In April 2007, Standard and
Poors issued a BBB- rating of our senior unsecured debt
and Fitch Ratings affirmed our BBB- senior unsecured debt
rating. We may apply for ratings from other rating agencies, and
our goal is to improve all of 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 entered into one new master repurchase agreement during the
three months ended March 31, 2007. We borrowed under our
existing repurchase agreements with various financial
institutions to finance purchases of RMBS during the year. RMBS
and short term liquid investments collateralize our repurchase
agreements as of March 31, 2007. 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.
Credit
Facilities
Our committed credit facility capacity was $5.0 billion as
of March 31, 2007 and December 31, 2006. As of
March 31, 2007, we had eight credit facilities, six of
which are secured and two of which are unsecured, with a total
of twenty-two financial institutions. We primarily use these
facilities to fund our loans and for general corporate purposes.
To date, many loans have been held, or warehoused, in our
secured credit facilities until we complete a term debt
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
March 31, 2007, three of our credit facilities, with a
total capacity of $1.3 billion, are scheduled to mature
within one year. The amount outstanding under these facilities
was $624.3 million as of March 31, 2007. Our other
five credit facilities, with a total capacity of
$3.7 billion, have scheduled maturity dates between one and
three years, of which $3.1 billion is subject to annual
renewal.
In February 2007, we entered into a CAD$75.0 million
unsecured one-year revolving credit facility with the Royal Bank
of Canada. We expect to use the funds available under this
facility to primarily finance the origination of commercial loan
assets. Interest on borrowings under the credit facility is
charged at the Canadian Bankers Acceptance rate plus a margin
based on the credit ratings we receive on our public debt. As of
March 31, 2007, the interest rate charged under this
facility totaled 5.47%. This facility is scheduled to mature on
February 19, 2008.
In March 2007, we amended our $300.0 million secured,
revolving credit facility with JPMorgan Chase Bank, N.A. to,
among other things, increase certain concentration limits, to
lower the interest rate that we are charged on Eurocurrency
borrowings by 10 basis points to Adjusted LIBOR, as
defined, plus 0.65%, and to establish the interest rate that we
are charged on United States Dollar borrowings at the commercial
paper rate plus 0.65%. Also, the commitment termination date was
changed from June 30, 2008 to March 25, 2008.
In March 2007, we amended our $287.1 million loan agreement
with Column Financial Inc. to, among other things, reduce the
interest rate to one-month LIBOR plus 1.85% and change the
maturity date from January 11, 2017 to April 9, 2009.
Term
Debt
In January 2007, we repaid all amounts outstanding under our
series 2004-2
Term Debt notes.
44
Subordinated
Debt
In March 2007, we issued $38.7 million in junior
subordinated debt to a newly formed statutory trust,
CapitalSource Trust Preferred Securities
2007-1
(2007-1
TP Trust). We formed the
2007-1 TP
Trust in March 2007, with an initial capitalization in common
securities of $1.2 million for the sole purpose of issuing
$37.5 million of preferred securities (the
2007-1
TP Securities) to outside investors. The
2007-1 TP
Trust used the initial capitalization and the proceeds from the
sale of the
2007-1 TP
Securities to acquire the junior subordinated debt that we
issued.
The 2007-1
TP Securities bear interest at a floating interest rate based on
three-month LIBOR plus 1.95%, resetting quarterly. The
2007-1 TP
Securities, which mature on April 30, 2037, are callable at
par in whole or in part at any time after April 30, 2012.
The 2007-1
TP Securities are unsecured and junior in right of payment to
all of our indebtedness.
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 March 31, 2007,
we believe we were in compliance with all of our covenants.
Equity
We offer 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 three months ended March 31, 2007, we received proceeds
of $126.3 million related to the direct purchase of
5.1 million shares of our common stock pursuant to the
DRIP. We had no such purchases during the three months ended
March 31, 2006. In addition, we received proceeds of
$7.8 million and $1.7 million related to cash
dividends reinvested for 0.3 million and 0.1 million
shares of our common stock during the three months ended
March 31, 2007 and 2006, respectively.
Commitments,
Guarantees & Contingencies
As of March 31, 2007 and December 31, 2006, we had
unfunded commitments to extend credit to our clients of
$6.9 billion and $4.1 billion, respectively.
Commitments do not include transactions for which we have signed
commitment letters but not yet signed loan agreements. Our
obligation to fund unfunded commitments generally is based on
our clients ability to provide the required collateral and
to meet certain other preconditions to borrowing. Our failure to
satisfy our full contractual funding commitment to one or more
of our clients could create a breach of contract liability for
us and damage our reputation in the marketplace, which could
have a material adverse effect on our business. We currently
believe that we have sufficient funding capacity to meet
short-term needs related to unfunded commitments.
One of our wholly owned indirect subsidiaries has provided
limited financial guarantees to third-party warehouse lenders
that financed the purchase of $298.3 million of commercial
loans by two special purpose entities to which one of our other
wholly owned indirect subsidiaries provides advisory services in
connection with their purchase of commercial loans. We have
provided the warehouse lenders with limited guarantees under
which we agreed to assume a portion of net losses realized in
connection with those loans held by the special purpose entities
up to a specified loss limit. One guarantee is due to expire on
September 24, 2007 and the other guarantee is scheduled to
expire on December 31, 2007. Such guarantees may terminate
earlier to the extent that the warehouse facility is refinanced
prior to the guarantees expiry. 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)) and
45
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities, we determined that we are not required to
recognize the assets and liabilities of these special purpose
entities for financial statement purposes as of March 31,
2007.
In connection with certain securitization transactions, we
typically make customary representations and warranties
regarding the characteristics of the underlying transferred
assets. Prior to any securitization transaction, we perform due
diligence with respect to the assets to be included in the
securitization transaction to ensure that they satisfy the
representations and warranties. Due to these procedures, we
believe that the potential for loss is remote and therefore no
liability is recorded in our consolidated financial statements
related to these representations and warranties. The outstanding
loan balance related to these securitization transactions was
approximately $2.2 billion as of March 31, 2007.
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.
Credit
Risk Management
Credit risk is the risk of loss arising from adverse changes in
a borrowers or counterpartys ability to meet its
financial obligations under
agreed-upon
terms. Credit risk exists primarily in our lending and
derivative portfolios. The degree of credit risk will vary based
on many factors including the size of the asset or transaction,
the credit characteristics of the borrower, the contractual
terms of the agreement and the availability and quality of
collateral. We manage credit risk of our derivatives and
credit-related arrangements by limiting the total amount of
arrangements outstanding by an individual counterparty, by
obtaining collateral based on managements assessment of
the client and by applying uniform credit standards maintained
for all activities with credit risk.
We have established a Credit Committee to evaluate and approve
credit standards and to oversee the credit risk management
function related to our commercial loans and investments. The
Credit Committees primary responsibilities include
ensuring the adequacy of our credit risk management
infrastructure, overseeing credit risk management strategies and
methodologies, monitoring conditions in real estate and other
markets having an impact on lending activities, and evaluating
and monitoring overall credit risk.
Commercial
Lending & Investment Segment
Credit risk management for the commercial loan and investment
portfolio begins with an assessment of the credit risk profile
of a client based on an analysis of the clients financial
position. As part of the overall credit risk assessment of a
client, each commercial credit exposure or transaction is
assigned a risk rating that is subject to approval based on
defined credit approval standards. While rating criteria vary by
product, each loan rating focuses on the same three factors:
credit, collateral, and financial performance. Subsequent to
loan origination, risk ratings are monitored on an ongoing
basis. If necessary, risk ratings are adjusted to reflect
changes in the borrowers or counterpartys financial
condition, cash flow or financial situation. We use risk rating
aggregations to measure and evaluate concentrations within
portfolios. In making decisions regarding credit, we consider
risk rating, collateral, industry and single name concentration
limits.
We use a variety of tools to continuously monitor a
borrowers or counterpartys ability to perform under
its obligations. Additionally, we syndicate loan exposure to
other lenders, sell loans and use other risk mitigation
techniques to manage the size and risk profile of our loan
portfolio.
Residential
Mortgage Investment Segment
We are exposed to changes in the credit performance of the
mortgage loans underlying the Agency MBS, the Non-Agency MBS,
and the mortgage related receivables. With respect to Agency
MBS, while we benefit from a full guaranty from Fannie Mae or
Freddie Mac, variation in the level of credit losses may impact
the duration of our investments since a credit loss results in
the prepayment of the relevant loan by the guarantor. With
respect to Non- Agency MBS, the value or performance of our
investment may be impacted by higher levels of credit losses,
46
depending on the specific provisions of the relevant
securitizations. With respect to mortgage related receivables,
we are directly exposed to the level of credit losses on the
underlying mortgage loans.
Concentrations
of Credit Risk
In our normal course of business, we engage in commercial
lending activities with borrowers primarily throughout the
United States. As of March 31, 2007 and December 31,
2006, the entire commercial loan portfolio was diversified such
that no single borrower was greater than 4% of the portfolio. As
of March 31, 2007, the single largest industry
concentration was skilled nursing, which made up approximately
15% of our commercial loan portfolio. As of March 31, 2007,
the largest geographical concentration was Florida, which made
up approximately 16% of our commercial loan portfolio. As of
March 31, 2007, the single largest industry concentration
in our direct real estate investment portfolio was skilled
nursing, which made up approximately 98% of the investments. As
of March 31, 2007, the largest geographical concentration
in our direct real estate investment portfolio was Florida,
which made up approximately 34% of the investments.
Derivative
Counterparty Credit Risk
Derivative financial instruments expose us to credit risk in the
event of nonperformance by counterparties to such agreements.
This risk consists primarily of the termination value of
agreements where we are in a favorable position. Credit risk
related to derivative financial instruments is considered and
provided for separately from the allowance for loan losses. We
manage the credit risk associated with various derivative
agreements through counterparty credit review, counterparty
exposure limits and monitoring procedures. We obtain collateral
from certain counterparties for amounts in excess of exposure
limits and monitor all exposure and collateral requirements
daily. We continually monitor the fair value of collateral
received from a counterparty and may request additional
collateral from counterparties or return collateral pledged as
deemed appropriate. Our agreements generally include master
netting agreements whereby the counterparties are entitled to
settle their positions net. As of March 31,
2007 and December 31, 2006, the gross positive fair value
of our derivative financial instruments was $13.2 million
and $23.7 million, respectively. Our master netting
agreements reduced the exposure to this gross positive fair
value by $45.1 million and $16.1 million as of
March 31, 2007 and December 31, 2006, respectively. We
did not hold collateral against derivative financial instruments
as of March 31, 2007 and December 31, 2006.
Accordingly, our net exposure to derivative counterparty credit
risk as of March 31, 2007 and December 31, 2006 was
$31.9 million and $7.6 million, respectively.
Market
Risk Management
Market risk is the risk that values of assets and liabilities or
revenues will be adversely affected by changes in market
conditions such as market movements. This risk is inherent in
the financial instruments associated with our operations
and/or
activities including loans, securities, short-term borrowings,
long-term debt, trading account assets and liabilities and
derivatives. Market-sensitive assets and liabilities are
generated through loans associated with our traditional lending
activities and market risk mitigation activities.
The primary market risk to which we are exposed is interest rate
risk, which is inherent in the financial instruments associated
with our operations, primarily including our loans, residential
mortgage investments and borrowings. Our traditional loan
products are non-trading positions and are reported at amortized
cost. Additionally, debt obligations that we incur to fund our
business operations are recorded at historical cost. While GAAP
requires a historical cost view of such assets and liabilities,
these positions are still subject to changes in economic value
based on varying market conditions. Interest rate risk is the
effect of changes in the economic value of our loans, and our
other interest rate sensitive instruments and is reflected in
the levels of future income and expense produced by these
positions versus levels that would be generated by current
levels of interest rates. We seek to mitigate interest rate risk
through the use of various types of derivative instruments. For
a detailed discussion of our derivatives, see Note 20,
Derivative Instruments in our audited consolidated
financial statements for the year ended December 31, 2006
included in our
Form 10-K.
47
Interest
Rate Risk Management Commercial Lending &
Investments 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
LIBOR-based rates 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 either the Prime rate or
LIBOR, with almost all of our other loans bearing interest at a
fixed rate. The majority of our borrowings bear interest at a
spread to 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 and investment portfolio as of March 31,
2007 were as follows:
|
|
|
|
|
|
|
Estimated (Decrease)
|
|
|
|
Increase in
|
|
Rate Change
|
|
Net Interest Income
|
|
(Basis Points)
|
|
Over 12 Months
|
|
|
|
($ in thousands)
|
|
|
−100
|
|
$
|
(11,660
|
)
|
−50
|
|
|
(6,980
|
)
|
+ 50
|
|
|
8,350
|
|
+ 100
|
|
|
16,330
|
|
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 45% of the aggregate outstanding principal amount
of our commercial loans had interest rate floors as of
March 31, 2007. The loans with interest rate floors as of
March 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Percentage of
|
|
|
|
Outstanding
|
|
|
Total Portfolio
|
|
|
|
($ in thousands)
|
|
|
|
|
|
Loans with contractual interest
rates:
|
|
|
|
|
|
|
|
|
Exceeding the interest rate floor
|
|
$
|
3,734,700
|
|
|
|
43
|
%
|
At the interest rate floor
|
|
|
70,211
|
|
|
|
1
|
|
Below the interest rate floor
|
|
|
57,643
|
|
|
|
1
|
|
Loans with no interest rate floor
|
|
|
4,775,981
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,638,535
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
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 one-month 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 one-month
LIBOR-based term debt.
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. In addition, we 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.
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.
48
Interest
Rate Risk Management 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
positions intended to economically hedge these movements.
Conversely, if interest rates decrease, the market value of
residential mortgage investments may increase while financing
costs could decline, also to the extent not mitigated by
positions intended to economically hedge these movements. 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 are
collateralized with mortgages that 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. Our liabilities include, with respect to RMBS and
mortgage-related receivables, repurchase agreements indexed to a
short-term interest rate market index such as LIBOR and, with
respect to mortgage-related receivables only, securitized term
debt financing through debt obligations secured by residential
mortgage loans that have a similar initial fixed period followed
by an adjustable period.
The estimated changes in fair value based on changes in interest
rates applied to our residential mortgage investment portfolio
as of March 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Estimated (Decrease)
|
|
|
|
|
Rate Change
|
|
Increase
|
|
|
Percentage of Total
|
|
(Basis Points)
|
|
in Fair Value
|
|
|
Segment Assets
|
|
|
|
($ in thousands)
|
|
|
|
|
|
−100
|
|
$
|
(2,888
|
)
|
|
|
(0.05
|
)%
|
−50
|
|
|
8
|
|
|
|
|
|
+ 50
|
|
|
(996
|
)
|
|
|
(0.02
|
)
|
+ 100
|
|
|
(2,894
|
)
|
|
|
(0.05
|
)
|
For the purposes of the above analysis, our residential mortgage
investment portfolio includes all of our investments in
residential mortgage-related receivables, Agency MBS, term debt
and related derivatives as of March 31, 2007.
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.
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 Estimates
The preparation of financial statements in accordance with GAAP
requires management to make certain judgments and assumptions
based on information that is available at the time of the
financial statements in determining accounting estimates used in
the preparation of such statements. Accounting estimates are
considered critical if the estimate requires management to make
assumptions about matters that were highly uncertain at the time
the accounting estimate was made and if different estimates
reasonably could have been used in the reporting period, or if
changes in the accounting estimate are reasonably likely to
occur from period to period that would have a material impact on
our financial condition, results of operations or cash flows.
Our critical accounting estimates
49
are described in Critical Accounting Estimates within
Managements Discussion and Analysis of Financial
Condition and Results of Operations included in our
Form 10-K
for the year ended December 31, 2006.
|
|
ITEM 3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
We are exposed to certain financial market risks, which are
discussed in detail in the in the Market Risk Management
section of Item 2, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
of this
Form 10-Q
and in Item 7a, Quantitative and Qualitative Disclosures
about Market Risk in our
Form 10-K
for the year ended December 31, 2006, as filed with the
Securities and Exchange Commission on March 1, 2007. There
have been no material changes to our exposures to those market
risks since December 31, 2006. In addition, for a detailed
discussion of our derivatives, see Note 20, Derivative
Instruments, in our audited consolidated financial
statements for the year ended December 31, 2006 included in
our
Form 10-K.
|
|
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 March 31, 2007.
50
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, 2006 included in our
Form 10-K,
as filed with the Securities and Exchange Commission on
March 1, 2007.
|
|
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 March 31, 2007 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
|
|
|
January 1
January 31, 2007
|
|
|
17,970
|
|
|
$
|
26.81
|
|
|
|
|
|
|
|
|
|
February 1
February 28, 2007
|
|
|
166,894
|
|
|
|
26.57
|
|
|
|
|
|
|
|
|
|
March 1 March 31,
2007
|
|
|
38,818
|
|
|
|
24.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
223,682
|
|
|
$
|
26.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
51
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: May 10, 2007
|
|
/s/ JOHN K. DELANEY John K. DelaneyChairman of the Board and Chief Executive Officer(Principal Executive Officer)
|
Date: May 10, 2007
|
|
/s/ THOMAS
A.
FINK Thomas
A. FinkChief Financial Officer(Principal Financial Officer)
|
Date: May 10, 2007
|
|
/s/ DAVID
C.
BJARNASON David
C. BjarnasonChief Accounting Officer(Principal Accounting
Officer)
|
52
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 to the
same-numbered exhibit to the registrants Registration
Statement on
Form S-1
(Reg.
No. 333-106076)).
|
|
10
|
.12*
|
|
CapitalSource Inc. Third Amended
and Restated Equity Incentive Plan, as amended, dated as of
March 8, 2007 (incorporated by reference to the
same-numbered exhibit to the registrants Current Report on
Form 8-K
dated March 13, 2007).
|
|
10
|
.23.1
|
|
Amended Call Option Transaction
Confirmation, dated as of April 4, 2007, between
CapitalSource Inc. and JPMorgan Chase Bank.
|
|
10
|
.23.2
|
|
Amended Warrant Transaction
Confirmation, dated as of April 4, 2007, between
CapitalSource Inc. and JPMorgan Chase Bank.
|
|
10
|
.23.3
|
|
Call Option Transaction
Confirmation, dated as of April 4, 2007, between
CapitalSource Inc. and JPMorgan Chase Bank.
|
|
10
|
.36.2*
|
|
Amendment No. 2 to Employment
Agreement, dated as of February 1, 2007, between
CapitalSource Inc. and Dean C. Graham (incorporated by reference
to the same numbered exhibit to the registrants Annual
Report on
Form 10-K
for the year ended December 31, 2006).
|
|
10
|
.69*
|
|
Consulting Agreement, dated as of
January 2, 2007, between CapitalSource Inc. and Jason M.
Fish (incorporated by reference to the same numbered exhibit to
the registrants Annual Report on
Form 10-K
for the year ended December 31, 2006).
|
|
10
|
.70*
|
|
Form of Restricted Unit Agreement
(incorporated by reference to the same-numbered exhibit to the
registrants Current Report on
Form 8-K
dated March 13, 2007).
|
|
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.
|
|
|
|
|
|
Filed herewith. |
|
* |
|
Management contract or compensatory plan or arrangement. |
The registrant agrees to furnish to the Commission, upon
request, a copy of each agreement with respect to long-term debt
not filed herewith in reliance upon the exemption from filing
applicable to any series of debt which does not exceed 10% of
the total consolidated assets of the registrant.
53