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 June 30, 2007
Commission File
No. 1-31753
CapitalSource Inc.
(Exact name of registrant as
specified in its charter)
|
|
|
Delaware
(State of
Incorporation)
|
|
35-2206895
(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. Yes þ No o
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. Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of August 1, 2007, the number of shares of the
registrants Common Stock, par value $0.01 per share,
outstanding was 192,759,295.
CapitalSource
Inc.
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
($ in thousands)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
271,492
|
|
|
$
|
396,151
|
|
Restricted cash
|
|
|
221,650
|
|
|
|
240,904
|
|
Mortgage-related receivables, net
|
|
|
2,162,715
|
|
|
|
2,295,922
|
|
Mortgage-backed securities
pledged, trading
|
|
|
4,290,965
|
|
|
|
3,502,753
|
|
Receivables under
reverse-repurchase agreements
|
|
|
26,237
|
|
|
|
51,892
|
|
Loans held for sale
|
|
|
154,229
|
|
|
|
26,521
|
|
Loans:
|
|
|
|
|
|
|
|
|
Loans
|
|
|
8,761,127
|
|
|
|
7,771,785
|
|
Less deferred loan fees and
discounts
|
|
|
(128,785
|
)
|
|
|
(130,392
|
)
|
Less allowance for loan losses
|
|
|
(127,547
|
)
|
|
|
(120,575
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
8,504,795
|
|
|
|
7,520,818
|
|
Direct real estate investments, net
|
|
|
1,032,838
|
|
|
|
722,303
|
|
Investments
|
|
|
197,543
|
|
|
|
184,333
|
|
Other assets
|
|
|
299,226
|
|
|
|
268,977
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,161,690
|
|
|
$
|
15,210,574
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, NONCONTROLLING
INTERESTS AND SHAREHOLDERS EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
$
|
4,217,086
|
|
|
$
|
3,510,768
|
|
Credit facilities
|
|
|
3,671,041
|
|
|
|
2,538,840
|
|
Term debt
|
|
|
5,652,228
|
|
|
|
5,809,685
|
|
Other borrowings
|
|
|
1,082,176
|
|
|
|
1,001,393
|
|
Other liabilities
|
|
|
214,806
|
|
|
|
200,498
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
14,837,337
|
|
|
|
13,061,184
|
|
Noncontrolling
interests
|
|
|
44,871
|
|
|
|
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; 191,877,813 and
182,752,290 shares issued, respectively; 191,877,813 and
181,452,290 shares outstanding, respectively)
|
|
|
1,918
|
|
|
|
1,815
|
|
Additional paid-in capital
|
|
|
2,361,158
|
|
|
|
2,139,421
|
|
Accumulated deficit
|
|
|
(85,978
|
)
|
|
|
(20,735
|
)
|
Accumulated other comprehensive
income, net
|
|
|
2,384
|
|
|
|
2,465
|
|
Treasury stock, at cost
|
|
|
|
|
|
|
(29,926
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,279,482
|
|
|
|
2,093,040
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, noncontrolling
interests and shareholders equity
|
|
$
|
17,161,690
|
|
|
$
|
15,210,574
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
3
CapitalSource
Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands, except per share data)
|
|
|
Net investment
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
311,184
|
|
|
$
|
256,037
|
|
|
$
|
600,738
|
|
|
$
|
451,535
|
|
Fee income
|
|
|
45,056
|
|
|
|
36,603
|
|
|
|
95,083
|
|
|
|
78,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
356,240
|
|
|
|
292,640
|
|
|
|
695,821
|
|
|
|
529,680
|
|
Operating lease income
|
|
|
22,118
|
|
|
|
6,694
|
|
|
|
42,406
|
|
|
|
11,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
378,358
|
|
|
|
299,334
|
|
|
|
738,227
|
|
|
|
540,999
|
|
Interest expense
|
|
|
200,291
|
|
|
|
153,918
|
|
|
|
386,940
|
|
|
|
251,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
178,067
|
|
|
|
145,416
|
|
|
|
351,287
|
|
|
|
289,299
|
|
Provision for loan losses
|
|
|
17,410
|
|
|
|
11,471
|
|
|
|
32,336
|
|
|
|
26,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income after
provision for loan losses
|
|
|
160,657
|
|
|
|
133,945
|
|
|
|
318,951
|
|
|
|
263,115
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
38,615
|
|
|
|
34,130
|
|
|
|
78,629
|
|
|
|
67,450
|
|
Other administrative expenses
|
|
|
27,828
|
|
|
|
19,561
|
|
|
|
53,136
|
|
|
|
36,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
66,443
|
|
|
|
53,691
|
|
|
|
131,765
|
|
|
|
104,310
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diligence deposits forfeited
|
|
|
1,813
|
|
|
|
1,103
|
|
|
|
2,675
|
|
|
|
3,370
|
|
Gain (loss) on investments, net
|
|
|
17,002
|
|
|
|
(1,489
|
)
|
|
|
23,165
|
|
|
|
(1,740
|
)
|
Gain on derivatives
|
|
|
3,153
|
|
|
|
6,124
|
|
|
|
898
|
|
|
|
6,650
|
|
(Loss) gain on residential
mortgage investment portfolio
|
|
|
(13,846
|
)
|
|
|
4,035
|
|
|
|
(19,544
|
)
|
|
|
(2,071
|
)
|
Other income, net of expenses
|
|
|
12,957
|
|
|
|
1,523
|
|
|
|
19,934
|
|
|
|
5,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
21,079
|
|
|
|
11,296
|
|
|
|
27,128
|
|
|
|
11,640
|
|
Noncontrolling interests
expense
|
|
|
1,272
|
|
|
|
1,230
|
|
|
|
2,602
|
|
|
|
2,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
and cumulative effect of accounting change
|
|
|
114,021
|
|
|
|
90,320
|
|
|
|
211,712
|
|
|
|
168,354
|
|
Income taxes
|
|
|
29,693
|
|
|
|
17,531
|
|
|
|
48,694
|
|
|
|
30,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative
effect of accounting change
|
|
|
84,328
|
|
|
|
72,789
|
|
|
|
163,018
|
|
|
|
137,713
|
|
Cumulative effect of accounting
change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
84,328
|
|
|
$
|
72,789
|
|
|
$
|
163,018
|
|
|
$
|
138,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.45
|
|
|
$
|
0.43
|
|
|
$
|
0.89
|
|
|
$
|
0.87
|
|
Diluted
|
|
$
|
0.45
|
|
|
$
|
0.43
|
|
|
$
|
0.88
|
|
|
$
|
0.85
|
|
Average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
185,371,033
|
|
|
|
168,866,621
|
|
|
|
182,274,147
|
|
|
|
159,309,225
|
|
Diluted
|
|
|
187,428,430
|
|
|
|
170,569,836
|
|
|
|
184,512,451
|
|
|
|
162,515,548
|
|
Dividends declared per share
|
|
$
|
0.60
|
|
|
$
|
0.49
|
|
|
$
|
1.18
|
|
|
$
|
0.98
|
|
See accompanying notes.
4
CapitalSource
Inc.
Consolidated Statement of Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
163,018
|
|
|
|
|
|
|
|
|
|
|
|
163,018
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81
|
)
|
|
|
|
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162,937
|
|
Cumulative effect of accounting
change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adoption of
FIN 48
|
|
|
|
|
|
|
|
|
|
|
(5,702
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,702
|
)
|
Dividends paid
|
|
|
|
|
|
|
4,745
|
|
|
|
(222,559
|
)
|
|
|
|
|
|
|
|
|
|
|
(217,814
|
)
|
Issuance of common stock, net
|
|
|
94
|
|
|
|
197,721
|
|
|
|
|
|
|
|
|
|
|
|
29,926
|
|
|
|
227,741
|
|
Stock option expense
|
|
|
|
|
|
|
3,909
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,909
|
|
Exercise of options
|
|
|
2
|
|
|
|
4,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,451
|
|
Restricted stock activity
|
|
|
7
|
|
|
|
7,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,270
|
|
Tax benefit on exercise of options
|
|
|
|
|
|
|
1,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,005
|
|
Tax benefit on vesting of
restricted stock grants
|
|
|
|
|
|
|
2,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity as
of June 30, 2007
|
|
$
|
1,918
|
|
|
$
|
2,361,158
|
|
|
$
|
(85,978
|
)
|
|
$
|
2,384
|
|
|
$
|
|
|
|
$
|
2,279,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
CapitalSource
Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
163,018
|
|
|
$
|
138,083
|
|
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
3,909
|
|
|
|
4,409
|
|
Restricted stock expense
|
|
|
16,662
|
|
|
|
11,944
|
|
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
|
|
|
(49,772
|
)
|
|
|
(43,143
|
)
|
Paid-in-kind
interest on loans
|
|
|
(12,031
|
)
|
|
|
(3,202
|
)
|
Provision for loan losses
|
|
|
32,336
|
|
|
|
26,184
|
|
Amortization of deferred financing
fees and discounts
|
|
|
17,418
|
|
|
|
17,763
|
|
Depreciation and amortization
|
|
|
16,831
|
|
|
|
5,719
|
|
Benefit for deferred income taxes
|
|
|
(3,918
|
)
|
|
|
(5,684
|
)
|
Non-cash loss on investments, net
|
|
|
1,216
|
|
|
|
5,106
|
|
Non-cash gain on property and
equipment disposals
|
|
|
(1,408
|
)
|
|
|
|
|
Unrealized gain on derivatives and
foreign currencies, net
|
|
|
(958
|
)
|
|
|
(6,650
|
)
|
Unrealized loss on residential
mortgage investment portfolio, net
|
|
|
29,950
|
|
|
|
16,513
|
|
Net increase in mortgage-backed
securities pledged, trading
|
|
|
(812,546
|
)
|
|
|
(7,112
|
)
|
Amortization of discount on
residential mortgage investments
|
|
|
(17,318
|
)
|
|
|
(7,798
|
)
|
Increase in loans held for sale, net
|
|
|
(162,524
|
)
|
|
|
(24,843
|
)
|
Increase in other assets
|
|
|
(13,384
|
)
|
|
|
(30,458
|
)
|
(Decrease) increase in other
liabilities
|
|
|
(16,688
|
)
|
|
|
3,547
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by
operating activities
|
|
|
(809,207
|
)
|
|
|
94,237
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
|
19,254
|
|
|
|
60,397
|
|
Decrease (increase) in
mortgage-related receivables, net
|
|
|
139,241
|
|
|
|
(2,442,119
|
)
|
Decrease (increase) in receivables
under reverse-repurchase agreements, net
|
|
|
25,655
|
|
|
|
(62,389
|
)
|
Increase in loans, net
|
|
|
(926,074
|
)
|
|
|
(1,168,978
|
)
|
Acquisition of real estate, net of
cash acquired
|
|
|
(246,060
|
)
|
|
|
(37,199
|
)
|
Acquisition of investments, net
|
|
|
(23,550
|
)
|
|
|
(14,612
|
)
|
Acquisition of property and
equipment, net
|
|
|
(3,559
|
)
|
|
|
(1,487
|
)
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(1,015,093
|
)
|
|
|
(3,666,387
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(11,387
|
)
|
|
|
(25,562
|
)
|
Borrowings under repurchase
agreements, net
|
|
|
706,318
|
|
|
|
31,323
|
|
Borrowings on credit facilities, net
|
|
|
1,132,201
|
|
|
|
955,705
|
|
Borrowings of term debt
|
|
|
778,000
|
|
|
|
3,165,124
|
|
Repayments of term debt
|
|
|
(985,312
|
)
|
|
|
(845,333
|
)
|
Borrowings of subordinated debt
|
|
|
75,630
|
|
|
|
50,000
|
|
Proceeds from issuance of common
stock, net of offering costs
|
|
|
216,208
|
|
|
|
440,097
|
|
Proceeds from exercise of options
|
|
|
4,453
|
|
|
|
3,327
|
|
Tax benefits on share-based payments
|
|
|
3,650
|
|
|
|
2,256
|
|
Payment of dividends
|
|
|
(220,120
|
)
|
|
|
(226,628
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by financing
activities
|
|
|
1,699,641
|
|
|
|
3,550,309
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash
equivalents
|
|
|
(124,659
|
)
|
|
|
(21,841
|
)
|
Cash and cash equivalents as of
beginning of period
|
|
|
396,151
|
|
|
|
323,896
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end
of period
|
|
$
|
271,492
|
|
|
$
|
302,055
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
Acquisition of real estate
|
|
|
(78,627
|
)
|
|
|
|
|
Assumption of term debt
|
|
|
44,627
|
|
|
|
|
|
Assumption of intangible lease
liability
|
|
|
(28,554
|
)
|
|
|
|
|
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.
|
In addition to providing and investing in the products described
above, we also provide asset management and loan servicing
services to third parties. These services include servicing our
originated assets that are held in whole or in part by third
parties and managing a collateralized loan obligation vehicle
established in 2006. We receive various types of fees in
exchange for providing these services.
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
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.
7
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. 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. 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. As a result of our adoption of FIN 48 on
January 1, 2007, we recognized an approximate
$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.
8
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In February 2007, 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.
We have not completed our assessment of the impact of the
adoption of SFAS No. 159 on our consolidated financial
statements.
In June 2007, the American Institute of Certified Public
Accountants (AICPA) issued Statement of
Position 07 1, Clarification of the Scope of
the Audit and Accounting Guide Investment Companies and
Accounting by Parent Companies and Equity Method Investors for
Investments in Investment Companies
(SOP 07-1).
SOP 07-1
provides guidance for determining whether an entity is within
the scope of the AICPA Audit and Accounting Guide Investment
Companies (the Guide).
SOP 07-1
addresses whether the specialized industry accounting principles
of the Guide should be retained by a parent company in
consolidation. In addition,
SOP 07-1
includes certain disclosure requirements for parent companies
and equity method investors in investment companies that retain
investment company accounting in the parent companys
consolidated financial statements or the financial statements of
an equity method investor. The effective date for
SOP 07-1
is the beginning of the first fiscal year beginning on or after
December 15, 2007, with early application encouraged. We
plan to adopt
SOP 07-1
on January 1, 2008. We have not completed our assessment of
the impact of the adoption of
SOP 07-1
on our consolidated financial statements.
In June 2007, the FASB ratified Emerging Issues Task Force Issue
No. 06-11,
Accounting for Income Tax Benefits of Dividends on
Share-Based Payment Awards
(EITF 06-11),
which requires income tax benefits from dividends or dividend
equivalents that are charged to retained earnings and are paid
to employees for equity classified nonvested equity shares,
nonvested equity share units and outstanding equity share
options to be recognized as an increase in additional paid-in
capital and to be included in the pool of excess tax benefits
available to absorb potential future tax deficiencies on
share-based payment awards. The effective date for
EITF 06-11
is the beginning of the first fiscal year beginning after
September 15, 2007. We plan to adopt
EITF 06-11
on January 1, 2008. We have not completed our assessment of
the impact of the adoption of
EITF 06-11
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
adjustable rate, prime 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 June 30, 2007 and
December 31, 2006. Recourse is limited to our purchased
beneficial interests in the respective securitization trusts.
Recognized mortgage-related receivables are, in economic
substance, mortgage loans. Such mortgage loans are all prime,
hybrid adjustable rate loans. At acquisition by us, mortgage
loans that back mortgage-related receivables had a weighted
average loan-to-value ratio of 73% and a weighted average Fair
Isaac & Co. (FICO) score of 737.
As of June 30, 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 June 30, 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 28.3 years and
9
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
28.7 years, respectively. As of June 30, 2007,
approximately 95% of recognized mortgage-related receivables
were financed with permanent term debt that was recognized by us
through the consolidation of the referenced SPEs.
The allowance for loan losses related to our mortgage-related
receivables was $0.4 million as of June 30, 2007, and
December 31, 2006, and was 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
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 of June 30, 2007 and December 31, 2006, we owned
$4.3 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
June 30, 2007 and December 31, 2006, our portfolio of
Agency MBS comprised one-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
5.06% and 4.89% as of June 30, 2007 and December 31,
2006, respectively.
As of June 30, 2007 and December 31, 2006, the fair
value of Agency MBS in our portfolio was $4.3 billion and
$3.5 billion, respectively. For the three and six months
ended June 30, 2007, we recognized $34.1 million and
$24.3 million of unrealized losses, respectively, related
to these investments as a component of gain (loss) on
residential mortgage investment portfolio in the accompanying
consolidated statements of income. For the three and six months
ended June 30, 2006, we recognized $18.0 million and
$38.6 million of unrealized losses, respectively. During
the six months ended June 30, 2006, 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 hedge the market risk
associated with the mortgage investments in our portfolio with
the risk management objective to maintain a zero duration
position. 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 gains of $26.7 million and
$18.1 million during the three and six months ended
June 30, 2007, respectively, and of $22.0 million and
$47.3 million during the three and six months ended
June 30, 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.
|
|
Note 6.
|
Commercial
Loans and Credit Quality
|
As of June 30, 2007 and December 31, 2006, our total
commercial loan portfolio had an outstanding balance of
$8.9 billion and $7.9 billion, respectively. Included
in these amounts were loans held for sale with outstanding
balances of $154.2 million and $26.5 million as of
June 30, 2007 and December 31, 2006, respectively, and
receivables under reverse-repurchase agreements with outstanding
balances of $26.2 million and $51.9 million as of
10
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
June 30, 2007 and December 31, 2006, respectively. Our
loans held for sale were recorded at the lower of cost or fair
value on the accompanying consolidated balance sheets.
Credit
Quality
As of June 30, 2007 and December 31, 2006, the
principal balances of loans 60 or more days contractually
delinquent, non-accrual loans and impaired loans in our
commercial lending portfolio were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
Commercial Loan Asset Classification
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Loans 60 or more days
contractually delinquent
|
|
$
|
97,040
|
|
|
$
|
88,067
|
|
Non-accrual loans(1)
|
|
|
176,088
|
|
|
|
183,483
|
|
Impaired loans(2)
|
|
|
349,486
|
|
|
|
281,377
|
|
Less: loans in multiple categories
|
|
|
(251,753
|
)
|
|
|
(230,469
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
370,861
|
|
|
$
|
322,458
|
|
|
|
|
|
|
|
|
|
|
Total as a percentage of total
loans
|
|
|
4.15%
|
|
|
|
4.11%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes commercial loans with an aggregate principal balance of
$31.0 million and $47.0 million as of June 30,
2007 and December 31, 2006, respectively, which were also
classified as loans 60 or more days contractually delinquent.
Includes non-performing loans classified as held for sale that
have an aggregate principal balance of $3.0 million as of
June 30, 2007. There were no non-performing loans
classified as held for sale as of December 31, 2006. |
|
(2) |
|
Includes commercial loans with an aggregate principal balance of
$78.7 million and $47.0 million as of June 30,
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
$173.1 million and $183.5 million as of June 30,
2007 and December 31, 2006, respectively, which were also
placed on non-accrual status. The carrying values of impaired
commercial loans were $343.4 million and
$275.3 million as of June 30, 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 June 30, 2007 and
December 31, 2006, we had $80.4 million and
$95.7 million of impaired commercial loans, respectively,
with allocated reserves of $33.3 million and
$37.8 million, respectively. As of June 30, 2007 and
December 31, 2006, we
11
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
had $269.1 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 and six months ended June 30, 2007 was
$303.4 million and $292.2 million, respectively, and
was $212.8 million and $212.6 million, respectively,
during the three and six months ended June 30, 2006. The
total amount of interest income that was recognized on impaired
commercial loans during the three and six months ended
June 30, 2007 was $4.0 million and $7.1 million,
respectively, and was $2.5 million and $4.8 million,
respectively, during the three and six months ended
June 30, 2006. The amount of cash basis interest income
that was recognized on impaired commercial loans during the
three and six months ended June 30, 2007 was
$3.6 million and $6.2 million, respectively, and was
$2.6 million and $3.9 million, respectively, during
the three and six months ended June 30, 2006. If the
non-accrual commercial loans had performed in accordance with
their original terms, interest income would have been higher
than reported by $6.6 million and $14.1 million for
the three and six months ended June 30, 2007, respectively,
and $5.3 million and $10.3 million, respectively, for
the three and six months ended June 30, 2006.
During the three and six months ended June 30, 2007, we
classified commercial loans with an aggregate carrying value of
$47.5 million and $69.9 million, respectively, as of
June 30, 2007 as troubled debt restructurings as defined by
SFAS No. 15, Accounting for Debtors and Creditors
for Troubled Debt Restructurings. As of June 30, 2007,
commercial loans with an aggregate carrying value of
$160.7 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
$12.3 million as of June 30, 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 $31.5 million as of
December 31, 2006.
Activity in the allowance for loan losses related to our
Commercial Lending & Investment segment for the six
months ended June 30, 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Balance as of beginning of period
|
|
$
|
120,575
|
|
|
$
|
87,370
|
|
Provision for loan losses
|
|
|
32,336
|
|
|
|
25,883
|
|
Charge offs, net
|
|
|
(23,692
|
)
|
|
|
(12,478
|
)
|
Transfers to held for sale
|
|
|
(1,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of period
|
|
$
|
127,547
|
|
|
$
|
100,775
|
|
|
|
|
|
|
|
|
|
|
12
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Investments as of June 30, 2007 and December 31, 2006
were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Investments carried at cost
|
|
$
|
82,855
|
|
|
$
|
71,386
|
|
Investments carried at fair value:
|
|
|
|
|
|
|
|
|
Investments available-for-sale
|
|
|
42,705
|
|
|
|
61,904
|
|
Warrants
|
|
|
8,015
|
|
|
|
6,908
|
|
Investments accounted for under
the equity method
|
|
|
63,968
|
|
|
|
44,135
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
197,543
|
|
|
$
|
184,333
|
|
|
|
|
|
|
|
|
|
|
During the three and six months ended June 30, 2007, we
sold investments for $19.0 million and $26.6 million,
respectively, recognizing net pretax gains of $17.2 million
and $22.8 million, respectively. During the three and six
months ended June 30, 2006, we sold investments for
$4.5 million and $41.9 million respectively,
recognizing net pretax gains of $1.7 million and
$2.0 million, respectively. During the three and six months
ended June 30, 2007, we also recorded other-than-temporary
impairments of $6.4 million and $13.4 million as a
charge to earnings relating to our Non-Agency MBS in accordance
with FASB Emerging Issues Task Force Issue
No. 99-20,
Recognition of Interest Income on Purchased Beneficial
Interests and Beneficial Interests that Continue to Be Held by a
Transferor in Securitized Financial Assets. There were no
other-than-temporary impairments recorded during the three and
six months ended June 30, 2006.
|
|
Note 8.
|
Guarantor
Information
|
The following represents the unaudited supplemental
consolidating condensed financial information of CapitalSource
Inc., which, as discussed in Note 10, Borrowings, is
the issuer of both Senior Debentures and Subordinated Debentures
(together, the Debentures), and CapitalSource
Finance LLC (CapitalSource Finance), which is a
guarantor of the Debentures, and our subsidiaries that are not
guarantors of the Debentures as of June 30, 2007 and
December 31, 2006 and for the three and six months ended
June 30, 2007 and 2006. CapitalSource Finance, a 100% owned
indirect subsidiary of CapitalSource Inc., has guaranteed the
Senior Debentures, fully and unconditionally, on a senior basis
and has guaranteed the Subordinated Debentures, fully and
unconditionally, on a senior subordinate basis. Separate
consolidated financial statements of the guarantor are not
presented, as we have determined that they would not be material
to investors.
13
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Balance Sheet
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
181,879
|
|
|
$
|
34,000
|
|
|
$
|
55,613
|
|
|
$
|
|
|
|
$
|
271,492
|
|
Restricted cash
|
|
|
|
|
|
|
30,924
|
|
|
|
93,875
|
|
|
|
96,851
|
|
|
|
|
|
|
|
221,650
|
|
Mortgage-related receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,162,715
|
|
|
|
|
|
|
|
2,162,715
|
|
Mortgage-backed securities pledged,
trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,290,965
|
|
|
|
|
|
|
|
4,290,965
|
|
Receivables under
reverse-repurchase agreements
|
|
|
|
|
|
|
26,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,237
|
|
Loans held for sale
|
|
|
|
|
|
|
67,911
|
|
|
|
86,318
|
|
|
|
|
|
|
|
|
|
|
|
154,229
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
4,176,650
|
|
|
|
842,756
|
|
|
|
3,743,693
|
|
|
|
(1,972
|
)
|
|
|
8,761,127
|
|
Less deferred loan fees and
discounts
|
|
|
|
|
|
|
(27,860
|
)
|
|
|
(57,660
|
)
|
|
|
(43,265
|
)
|
|
|
|
|
|
|
(128,785
|
)
|
Less allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
(104,619
|
)
|
|
|
(22,928
|
)
|
|
|
|
|
|
|
(127,547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
|
|
|
|
4,148,790
|
|
|
|
680,477
|
|
|
|
3,677,500
|
|
|
|
(1,972
|
)
|
|
|
8,504,795
|
|
Direct real estate investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,032,838
|
|
|
|
|
|
|
|
1,032,838
|
|
Investment in subsidiaries
|
|
|
3,248,525
|
|
|
|
|
|
|
|
837,613
|
|
|
|
1,215,793
|
|
|
|
(5,301,931
|
)
|
|
|
|
|
Intercompany due from (due to)
|
|
|
7,314
|
|
|
|
|
|
|
|
(8,639
|
)
|
|
|
1,325
|
|
|
|
|
|
|
|
|
|
Intercompany note receivable
|
|
|
75,000
|
|
|
|
|
|
|
|
50,842
|
|
|
|
|
|
|
|
(125,842
|
)
|
|
|
|
|
Investments
|
|
|
|
|
|
|
130,954
|
|
|
|
33,810
|
|
|
|
32,779
|
|
|
|
|
|
|
|
197,543
|
|
Other assets
|
|
|
28,398
|
|
|
|
31,711
|
|
|
|
103,446
|
|
|
|
196,651
|
|
|
|
(60,980
|
)
|
|
|
299,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,359,237
|
|
|
$
|
4,618,406
|
|
|
$
|
1,911,742
|
|
|
$
|
12,763,030
|
|
|
$
|
(5,490,725
|
)
|
|
$
|
17,161,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities, noncontrolling
interests and shareholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
$
|
|
|
|
$
|
38,240
|
|
|
$
|
|
|
|
$
|
4,178,846
|
|
|
$
|
|
|
|
$
|
4,217,086
|
|
Credit facilities
|
|
|
476,649
|
|
|
|
1,326,481
|
|
|
|
89,935
|
|
|
|
1,777,976
|
|
|
|
|
|
|
|
3,671,041
|
|
Term debt
|
|
|
|
|
|
|
2,398,532
|
|
|
|
10,510
|
|
|
|
3,245,152
|
|
|
|
(1,966
|
)
|
|
|
5,652,228
|
|
Other borrowings
|
|
|
555,000
|
|
|
|
|
|
|
|
527,176
|
|
|
|
|
|
|
|
|
|
|
|
1,082,176
|
|
Other liabilities
|
|
|
48,106
|
|
|
|
17,490
|
|
|
|
68,328
|
|
|
|
141,868
|
|
|
|
(60,986
|
)
|
|
|
214,806
|
|
Intercompany note payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,842
|
|
|
|
(125,842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,079,755
|
|
|
|
3,780,743
|
|
|
|
695,949
|
|
|
|
9,469,684
|
|
|
|
(188,794
|
)
|
|
|
14,837,337
|
|
Noncontrolling
interests
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
44,821
|
|
|
|
(13
|
)
|
|
|
44,871
|
|
Shareholders
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
1,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,918
|
|
Additional paid-in capital
|
|
|
2,361,158
|
|
|
|
312,145
|
|
|
|
271,603
|
|
|
|
2,798,341
|
|
|
|
(3,382,089
|
)
|
|
|
2,361,158
|
|
(Accumulated deficit) retained
earnings
|
|
|
(85,978
|
)
|
|
|
523,847
|
|
|
|
941,486
|
|
|
|
447,499
|
|
|
|
(1,912,832
|
)
|
|
|
(85,978
|
)
|
Accumulated other comprehensive
income, net
|
|
|
2,384
|
|
|
|
1,608
|
|
|
|
2,704
|
|
|
|
2,685
|
|
|
|
(6,997
|
)
|
|
|
2,384
|
|
Treasury stock, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,279,482
|
|
|
|
837,600
|
|
|
|
1,215,793
|
|
|
|
3,248,525
|
|
|
|
(5,301,918
|
)
|
|
|
2,279,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, noncontrolling
interests and shareholders equity
|
|
$
|
3,359,237
|
|
|
$
|
4,618,406
|
|
|
$
|
1,911,742
|
|
|
$
|
12,763,030
|
|
|
$
|
(5,490,725
|
)
|
|
$
|
17,161,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Balance Sheet
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource 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
|
|
Credit facilities
|
|
|
355,685
|
|
|
|
998,972
|
|
|
|
|
|
|
|
1,184,183
|
|
|
|
|
|
|
|
2,538,840
|
|
Term debt
|
|
|
|
|
|
|
2,504,472
|
|
|
|
10,729
|
|
|
|
3,295,558
|
|
|
|
(1,074
|
)
|
|
|
5,809,685
|
|
Other borrowings
|
|
|
555,000
|
|
|
|
|
|
|
|
446,393
|
|
|
|
|
|
|
|
|
|
|
|
1,001,393
|
|
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 June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
1,622
|
|
|
$
|
119,149
|
|
|
$
|
25,505
|
|
|
$
|
167,652
|
|
|
$
|
(2,744
|
)
|
|
$
|
311,184
|
|
Fee income
|
|
|
|
|
|
|
19,683
|
|
|
|
14,793
|
|
|
|
10,580
|
|
|
|
|
|
|
|
45,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
1,622
|
|
|
|
138,832
|
|
|
|
40,298
|
|
|
|
178,232
|
|
|
|
(2,744
|
)
|
|
|
356,240
|
|
Operating lease income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,118
|
|
|
|
|
|
|
|
22,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
1,622
|
|
|
|
138,832
|
|
|
|
40,298
|
|
|
|
200,350
|
|
|
|
(2,744
|
)
|
|
|
378,358
|
|
Interest expense
|
|
|
10,140
|
|
|
|
60,718
|
|
|
|
8,388
|
|
|
|
123,789
|
|
|
|
(2,744
|
)
|
|
|
200,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(8,518
|
)
|
|
|
78,114
|
|
|
|
31,910
|
|
|
|
76,561
|
|
|
|
|
|
|
|
178,067
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
15,744
|
|
|
|
1,666
|
|
|
|
|
|
|
|
17,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after
provision for loan losses
|
|
|
(8,518
|
)
|
|
|
78,114
|
|
|
|
16,166
|
|
|
|
74,895
|
|
|
|
|
|
|
|
160,657
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
221
|
|
|
|
5,434
|
|
|
|
32,960
|
|
|
|
|
|
|
|
|
|
|
|
38,615
|
|
Other administrative expenses
|
|
|
15,448
|
|
|
|
2,153
|
|
|
|
15,077
|
|
|
|
9,077
|
|
|
|
(13,927
|
)
|
|
|
27,828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
15,669
|
|
|
|
7,587
|
|
|
|
48,037
|
|
|
|
9,077
|
|
|
|
(13,927
|
)
|
|
|
66,443
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diligence deposits forfeited
|
|
|
|
|
|
|
|
|
|
|
1,813
|
|
|
|
|
|
|
|
|
|
|
|
1,813
|
|
Gain on investments, net
|
|
|
|
|
|
|
13,534
|
|
|
|
3,468
|
|
|
|
|
|
|
|
|
|
|
|
17,002
|
|
Gain (loss) on derivatives
|
|
|
|
|
|
|
243
|
|
|
|
(1,902
|
)
|
|
|
4,812
|
|
|
|
|
|
|
|
3,153
|
|
Loss on residential mortgage
investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,846
|
)
|
|
|
|
|
|
|
(13,846
|
)
|
Other income, net of expenses
|
|
|
|
|
|
|
6,274
|
|
|
|
20,808
|
|
|
|
(198
|
)
|
|
|
(13,927
|
)
|
|
|
12,957
|
|
Earnings in subsidiaries
|
|
|
108,515
|
|
|
|
|
|
|
|
88,756
|
|
|
|
82,822
|
|
|
|
(280,093
|
)
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
(1,750
|
)
|
|
|
1,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
108,515
|
|
|
|
18,301
|
|
|
|
114,693
|
|
|
|
73,590
|
|
|
|
(294,020
|
)
|
|
|
21,079
|
|
Noncontrolling interests
expense
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
|
1,200
|
|
|
|
(2
|
)
|
|
|
1,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income
taxes
|
|
|
84,328
|
|
|
|
88,754
|
|
|
|
82,822
|
|
|
|
138,208
|
|
|
|
(280,091
|
)
|
|
|
114,021
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,693
|
|
|
|
|
|
|
|
29,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
84,328
|
|
|
$
|
88,754
|
|
|
$
|
82,822
|
|
|
$
|
108,515
|
|
|
$
|
(280,091
|
)
|
|
$
|
84,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Income
Three Months Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
|
|
|
$
|
116,621
|
|
|
$
|
15,604
|
|
|
$
|
124,299
|
|
|
$
|
(487
|
)
|
|
$
|
256,037
|
|
Fee income
|
|
|
|
|
|
|
47,791
|
|
|
|
(22,505
|
)
|
|
|
11,317
|
|
|
|
|
|
|
|
36,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
|
|
|
|
164,412
|
|
|
|
(6,901
|
)
|
|
|
135,616
|
|
|
|
(487
|
)
|
|
|
292,640
|
|
Operating lease income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,694
|
|
|
|
|
|
|
|
6,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
|
|
|
|
164,412
|
|
|
|
(6,901
|
)
|
|
|
142,310
|
|
|
|
(487
|
)
|
|
|
299,334
|
|
Interest expense
|
|
|
7,647
|
|
|
|
52,041
|
|
|
|
7,006
|
|
|
|
87,711
|
|
|
|
(487
|
)
|
|
|
153,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(7,647
|
)
|
|
|
112,371
|
|
|
|
(13,907
|
)
|
|
|
54,599
|
|
|
|
|
|
|
|
145,416
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
7,432
|
|
|
|
4,039
|
|
|
|
|
|
|
|
11,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after
provision for loan losses
|
|
|
(7,647
|
)
|
|
|
112,371
|
|
|
|
(21,339
|
)
|
|
|
50,560
|
|
|
|
|
|
|
|
133,945
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
|
|
|
|
1,375
|
|
|
|
32,755
|
|
|
|
|
|
|
|
|
|
|
|
34,130
|
|
Other administrative expenses
|
|
|
3,745
|
|
|
|
689
|
|
|
|
14,736
|
|
|
|
3,978
|
|
|
|
(3,587
|
)
|
|
|
19,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,745
|
|
|
|
2,064
|
|
|
|
47,491
|
|
|
|
3,978
|
|
|
|
(3,587
|
)
|
|
|
53,691
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diligence deposits forfeited
|
|
|
|
|
|
|
|
|
|
|
1,103
|
|
|
|
|
|
|
|
|
|
|
|
1,103
|
|
Loss on investments, net
|
|
|
|
|
|
|
|
|
|
|
(1,489
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,489
|
)
|
Gain on derivatives
|
|
|
|
|
|
|
624
|
|
|
|
1,123
|
|
|
|
4,377
|
|
|
|
|
|
|
|
6,124
|
|
Gain on residential mortgage
investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,035
|
|
|
|
|
|
|
|
4,035
|
|
Other income, net of expenses
|
|
|
76
|
|
|
|
89
|
|
|
|
4,945
|
|
|
|
|
|
|
|
(3,587
|
)
|
|
|
1,523
|
|
Earnings in subsidiaries
|
|
|
84,105
|
|
|
|
|
|
|
|
105,319
|
|
|
|
47,872
|
|
|
|
(237,296
|
)
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
(5,701
|
)
|
|
|
5,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
84,181
|
|
|
|
(4,988
|
)
|
|
|
116,702
|
|
|
|
56,284
|
|
|
|
(240,883
|
)
|
|
|
11,296
|
|
Noncontrolling interests
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,230
|
|
|
|
|
|
|
|
1,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income
taxes
|
|
|
72,789
|
|
|
|
105,319
|
|
|
|
47,872
|
|
|
|
101,636
|
|
|
|
(237,296
|
)
|
|
|
90,320
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,531
|
|
|
|
|
|
|
|
17,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
72,789
|
|
|
$
|
105,319
|
|
|
$
|
47,872
|
|
|
$
|
84,105
|
|
|
$
|
(237,296
|
)
|
|
$
|
72,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Income
Six Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
9,072
|
|
|
$
|
232,187
|
|
|
$
|
49,394
|
|
|
$
|
320,567
|
|
|
$
|
(10,482
|
)
|
|
$
|
600,738
|
|
Fee income
|
|
|
|
|
|
|
42,432
|
|
|
|
33,632
|
|
|
|
19,019
|
|
|
|
|
|
|
|
95,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
9,072
|
|
|
|
274,619
|
|
|
|
83,026
|
|
|
|
339,586
|
|
|
|
(10,482
|
)
|
|
|
695,821
|
|
Operating lease income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,406
|
|
|
|
|
|
|
|
42,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
9,072
|
|
|
|
274,619
|
|
|
|
83,026
|
|
|
|
381,992
|
|
|
|
(10,482
|
)
|
|
|
738,227
|
|
Interest expense
|
|
|
20,406
|
|
|
|
115,406
|
|
|
|
23,050
|
|
|
|
238,560
|
|
|
|
(10,482
|
)
|
|
|
386,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(11,334
|
)
|
|
|
159,213
|
|
|
|
59,976
|
|
|
|
143,432
|
|
|
|
|
|
|
|
351,287
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
28,045
|
|
|
|
4,291
|
|
|
|
|
|
|
|
32,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after
provision for loan losses
|
|
|
(11,334
|
)
|
|
|
159,213
|
|
|
|
31,931
|
|
|
|
139,141
|
|
|
|
|
|
|
|
318,951
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
858
|
|
|
|
10,767
|
|
|
|
67,004
|
|
|
|
|
|
|
|
|
|
|
|
78,629
|
|
Other administrative expenses
|
|
|
27,379
|
|
|
|
3,110
|
|
|
|
30,306
|
|
|
|
17,581
|
|
|
|
(25,240
|
)
|
|
|
53,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
28,237
|
|
|
|
13,877
|
|
|
|
97,310
|
|
|
|
17,581
|
|
|
|
(25,240
|
)
|
|
|
131,765
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diligence deposits forfeited
|
|
|
|
|
|
|
|
|
|
|
2,675
|
|
|
|
|
|
|
|
|
|
|
|
2,675
|
|
Gain on investments, net
|
|
|
|
|
|
|
19,629
|
|
|
|
3,536
|
|
|
|
|
|
|
|
|
|
|
|
23,165
|
|
(Loss) gain on derivatives
|
|
|
|
|
|
|
(35
|
)
|
|
|
(3,817
|
)
|
|
|
4,750
|
|
|
|
|
|
|
|
898
|
|
Loss on residential mortgage
investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,544
|
)
|
|
|
|
|
|
|
(19,544
|
)
|
Other income, net of expenses
|
|
|
|
|
|
|
8,572
|
|
|
|
36,800
|
|
|
|
(198
|
)
|
|
|
(25,240
|
)
|
|
|
19,934
|
|
Earnings in subsidiaries
|
|
|
202,589
|
|
|
|
|
|
|
|
170,274
|
|
|
|
147,268
|
|
|
|
(520,131
|
)
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
(3,179
|
)
|
|
|
3,179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
202,589
|
|
|
|
24,987
|
|
|
|
212,647
|
|
|
|
132,276
|
|
|
|
(545,371
|
)
|
|
|
27,128
|
|
Noncontrolling interests
expense
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
2,553
|
|
|
|
(5
|
)
|
|
|
2,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
163,018
|
|
|
|
170,269
|
|
|
|
147,268
|
|
|
|
251,283
|
|
|
|
(520,126
|
)
|
|
|
211,712
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,694
|
|
|
|
|
|
|
|
48,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
163,018
|
|
|
$
|
170,269
|
|
|
$
|
147,268
|
|
|
$
|
202,589
|
|
|
$
|
(520,126
|
)
|
|
$
|
163,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Income
Six Months Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
549
|
|
|
$
|
231,809
|
|
|
$
|
31,923
|
|
|
$
|
189,115
|
|
|
$
|
(1,861
|
)
|
|
$
|
451,535
|
|
Fee income
|
|
|
|
|
|
|
76,731
|
|
|
|
(24,016
|
)
|
|
|
25,430
|
|
|
|
|
|
|
|
78,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
549
|
|
|
|
308,540
|
|
|
|
7,907
|
|
|
|
214,545
|
|
|
|
(1,861
|
)
|
|
|
529,680
|
|
Operating lease income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,319
|
|
|
|
|
|
|
|
11,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
549
|
|
|
|
308,540
|
|
|
|
7,907
|
|
|
|
225,864
|
|
|
|
(1,861
|
)
|
|
|
540,999
|
|
Interest expense
|
|
|
12,953
|
|
|
|
105,456
|
|
|
|
12,533
|
|
|
|
122,619
|
|
|
|
(1,861
|
)
|
|
|
251,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(12,404
|
)
|
|
|
203,084
|
|
|
|
(4,626
|
)
|
|
|
103,245
|
|
|
|
|
|
|
|
289,299
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
17,753
|
|
|
|
8,431
|
|
|
|
|
|
|
|
26,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after
provision for loan losses
|
|
|
(12,404
|
)
|
|
|
203,084
|
|
|
|
(22,379
|
)
|
|
|
94,814
|
|
|
|
|
|
|
|
263,115
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
|
|
|
|
2,306
|
|
|
|
65,144
|
|
|
|
|
|
|
|
|
|
|
|
67,450
|
|
Other administrative expenses
|
|
|
7,339
|
|
|
|
1,237
|
|
|
|
28,350
|
|
|
|
7,053
|
|
|
|
(7,119
|
)
|
|
|
36,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
7,339
|
|
|
|
3,543
|
|
|
|
93,494
|
|
|
|
7,053
|
|
|
|
(7,119
|
)
|
|
|
104,310
|
|
Other income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diligence deposits forfeited
|
|
|
|
|
|
|
|
|
|
|
3,370
|
|
|
|
|
|
|
|
|
|
|
|
3,370
|
|
Loss on investments, net
|
|
|
|
|
|
|
|
|
|
|
(1,740
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,740
|
)
|
Gain on derivatives
|
|
|
|
|
|
|
1,035
|
|
|
|
1,238
|
|
|
|
4,377
|
|
|
|
|
|
|
|
6,650
|
|
Loss on residential mortgage
investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,071
|
)
|
|
|
|
|
|
|
(2,071
|
)
|
Other income, net of expenses
|
|
|
76
|
|
|
|
318
|
|
|
|
14,738
|
|
|
|
(2,582
|
)
|
|
|
(7,119
|
)
|
|
|
5,431
|
|
Earnings in subsidiaries
|
|
|
157,750
|
|
|
|
|
|
|
|
187,564
|
|
|
|
102,997
|
|
|
|
(448,311
|
)
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
(13,330
|
)
|
|
|
13,330
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
157,826
|
|
|
|
(11,977
|
)
|
|
|
218,500
|
|
|
|
102,721
|
|
|
|
(455,430
|
)
|
|
|
11,640
|
|
Noncontrolling interests
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,091
|
|
|
|
|
|
|
|
2,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
and cumulative effect of accounting change
|
|
|
138,083
|
|
|
|
187,564
|
|
|
|
102,627
|
|
|
|
188,391
|
|
|
|
(448,311
|
)
|
|
|
168,354
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,641
|
|
|
|
|
|
|
|
30,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative
effect of accounting change
|
|
|
138,083
|
|
|
|
187,564
|
|
|
|
102,627
|
|
|
|
157,750
|
|
|
|
(448,311
|
)
|
|
|
137,713
|
|
Cumulative effect of accounting
change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
138,083
|
|
|
$
|
187,564
|
|
|
$
|
102,997
|
|
|
$
|
157,750
|
|
|
$
|
(448,311
|
)
|
|
$
|
138,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Cash Flows
Six Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
163,018
|
|
|
$
|
170,269
|
|
|
$
|
147,268
|
|
|
$
|
202,589
|
|
|
$
|
(520,126
|
)
|
|
$
|
163,018
|
|
Adjustments to reconcile net income
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
234
|
|
|
|
3,675
|
|
|
|
|
|
|
|
|
|
|
|
3,909
|
|
Restricted stock expense
|
|
|
|
|
|
|
2,245
|
|
|
|
14,417
|
|
|
|
|
|
|
|
|
|
|
|
16,662
|
|
Amortization of deferred loan fees
and discounts
|
|
|
|
|
|
|
(13,326
|
)
|
|
|
(22,381
|
)
|
|
|
(14,065
|
)
|
|
|
|
|
|
|
(49,772
|
)
|
Paid-in-kind
interest on loans
|
|
|
|
|
|
|
(1,467
|
)
|
|
|
(8,401
|
)
|
|
|
(2,163
|
)
|
|
|
|
|
|
|
(12,031
|
)
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
28,046
|
|
|
|
4,290
|
|
|
|
|
|
|
|
32,336
|
|
Amortization of deferred financing
fees and discounts
|
|
|
1,724
|
|
|
|
7,421
|
|
|
|
224
|
|
|
|
8,049
|
|
|
|
|
|
|
|
17,418
|
|
Depreciation and amortization
|
|
|
|
|
|
|
148
|
|
|
|
1,577
|
|
|
|
15,106
|
|
|
|
|
|
|
|
16,831
|
|
Benefit for deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,918
|
)
|
|
|
|
|
|
|
(3,918
|
)
|
Non-cash loss on investments, net
|
|
|
|
|
|
|
1,182
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
1,216
|
|
Non-cash (gain) loss on property
and equipment disposals
|
|
|
|
|
|
|
(1,442
|
)
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
(1,408
|
)
|
Unrealized loss (gain) on
derivatives and foreign currencies, net
|
|
|
|
|
|
|
(230
|
)
|
|
|
3,600
|
|
|
|
(4,328
|
)
|
|
|
|
|
|
|
(958
|
)
|
Unrealized loss on residential
mortgage investment portfolio, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,950
|
|
|
|
|
|
|
|
29,950
|
|
Net increase in mortgage-backed
securities pledged, trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(812,546
|
)
|
|
|
|
|
|
|
(812,546
|
)
|
Amortization of discount on
residential mortgage investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,318
|
)
|
|
|
|
|
|
|
(17,318
|
)
|
Increase in loans held for sale, net
|
|
|
|
|
|
|
(75,253
|
)
|
|
|
(87,271
|
)
|
|
|
|
|
|
|
|
|
|
|
(162,524
|
)
|
Decrease (increase) in intercompany
note receivable
|
|
|
|
|
|
|
2,137
|
|
|
|
(39,648
|
)
|
|
|
|
|
|
|
37,511
|
|
|
|
|
|
(Increase) decrease in other assets
|
|
|
(9,294
|
)
|
|
|
(2,587
|
)
|
|
|
(42,131
|
)
|
|
|
5,294
|
|
|
|
35,334
|
|
|
|
(13,384
|
)
|
Increase (decrease) in other
liabilities
|
|
|
24,149
|
|
|
|
(12,097
|
)
|
|
|
(5,008
|
)
|
|
|
2,038
|
|
|
|
(25,770
|
)
|
|
|
(16,688
|
)
|
Net transfers with subsidiaries
|
|
|
(303,559
|
)
|
|
|
(262,239
|
)
|
|
|
(115,430
|
)
|
|
|
161,102
|
|
|
|
520,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in operating activities
|
|
|
(123,962
|
)
|
|
|
(185,005
|
)
|
|
|
(121,395
|
)
|
|
|
(425,920
|
)
|
|
|
47,075
|
|
|
|
(809,207
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted
cash
|
|
|
|
|
|
|
24,707
|
|
|
|
28,780
|
|
|
|
(34,233
|
)
|
|
|
|
|
|
|
19,254
|
|
Decrease in mortgage-related
receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139,241
|
|
|
|
|
|
|
|
139,241
|
|
Decrease in receivables under
reverse-repurchase agreements, net
|
|
|
|
|
|
|
25,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,655
|
|
Increase in loans, net
|
|
|
52
|
|
|
|
(83,280
|
)
|
|
|
(80,072
|
)
|
|
|
(754,102
|
)
|
|
|
(8,672
|
)
|
|
|
(926,074
|
)
|
Acquisition of real estate, net of
cash acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(246,060
|
)
|
|
|
|
|
|
|
(246,060
|
)
|
(Acquisition) disposal of
investments, net
|
|
|
|
|
|
|
(12,703
|
)
|
|
|
357
|
|
|
|
(11,204
|
)
|
|
|
|
|
|
|
(23,550
|
)
|
Disposal (acquisition) of property
and equipment, net
|
|
|
|
|
|
|
126
|
|
|
|
(3,685
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,559
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
52
|
|
|
|
(45,495
|
)
|
|
|
(54,620
|
)
|
|
|
(906,358
|
)
|
|
|
(8,672
|
)
|
|
|
(1,015,093
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(58
|
)
|
|
|
(8,992
|
)
|
|
|
(2,066
|
)
|
|
|
(271
|
)
|
|
|
|
|
|
|
(11,387
|
)
|
(Decrease) increase in intercompany
note payable
|
|
|
|
|
|
|
(13,331
|
)
|
|
|
|
|
|
|
50,842
|
|
|
|
(37,511
|
)
|
|
|
|
|
(Repayments of) borrowings under
repurchase agreements, net
|
|
|
|
|
|
|
(25,020
|
)
|
|
|
|
|
|
|
731,338
|
|
|
|
|
|
|
|
706,318
|
|
Borrowings on credit facilities, net
|
|
|
120,964
|
|
|
|
327,509
|
|
|
|
89,935
|
|
|
|
593,793
|
|
|
|
|
|
|
|
1,132,201
|
|
Borrowings of term debt
|
|
|
|
|
|
|
738,892
|
|
|
|
|
|
|
|
40,000
|
|
|
|
(892
|
)
|
|
|
778,000
|
|
Repayments of term debt
|
|
|
|
|
|
|
(844,903
|
)
|
|
|
(207
|
)
|
|
|
(140,202
|
)
|
|
|
|
|
|
|
(985,312
|
)
|
Borrowings of subordinated debt
|
|
|
|
|
|
|
|
|
|
|
75,630
|
|
|
|
|
|
|
|
|
|
|
|
75,630
|
|
Proceeds from issuance of common
stock, net of offering costs
|
|
|
216,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,208
|
|
Proceeds from exercise of options
|
|
|
4,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,453
|
|
Tax benefits on share based payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,650
|
|
|
|
|
|
|
|
3,650
|
|
Payment of dividends
|
|
|
(217,814
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,306
|
)
|
|
|
|
|
|
|
(220,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by financing
activities
|
|
|
123,753
|
|
|
|
174,155
|
|
|
|
163,292
|
|
|
|
1,276,844
|
|
|
|
(38,403
|
)
|
|
|
1,699,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash
equivalents
|
|
|
(157
|
)
|
|
|
(56,345
|
)
|
|
|
(12,723
|
)
|
|
|
(55,434
|
)
|
|
|
|
|
|
|
(124,659
|
)
|
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
|
|
$
|
|
|
|
$
|
181,879
|
|
|
$
|
34,000
|
|
|
$
|
55,613
|
|
|
$
|
|
|
|
$
|
271,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Cash Flows
Six Months Ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
138,083
|
|
|
$
|
187,564
|
|
|
$
|
102,997
|
|
|
$
|
157,750
|
|
|
$
|
(448,311
|
)
|
|
$
|
138,083
|
|
Adjustments to reconcile net income
to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
4,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,409
|
|
Restricted stock expense
|
|
|
|
|
|
|
|
|
|
|
11,944
|
|
|
|
|
|
|
|
|
|
|
|
11,944
|
|
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
|
|
|
|
|
|
|
(24,462
|
)
|
|
|
15,202
|
|
|
|
(33,883
|
)
|
|
|
|
|
|
|
(43,143
|
)
|
Paid-in-kind
interest on loans
|
|
|
|
|
|
|
5,158
|
|
|
|
(4,804
|
)
|
|
|
(3,556
|
)
|
|
|
|
|
|
|
(3,202
|
)
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
17,753
|
|
|
|
8,431
|
|
|
|
|
|
|
|
26,184
|
|
Amortization of deferred financing
fees and discounts
|
|
|
1,431
|
|
|
|
12,079
|
|
|
|
262
|
|
|
|
3,991
|
|
|
|
|
|
|
|
17,763
|
|
Depreciation and amortization
|
|
|
|
|
|
|
4
|
|
|
|
1,452
|
|
|
|
4,263
|
|
|
|
|
|
|
|
5,719
|
|
Benefit for deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,684
|
)
|
|
|
|
|
|
|
(5,684
|
)
|
Non-cash loss on investments, net
|
|
|
|
|
|
|
|
|
|
|
5,106
|
|
|
|
|
|
|
|
|
|
|
|
5,106
|
|
Gain on derivatives, net
|
|
|
|
|
|
|
(1,035
|
)
|
|
|
(1,238
|
)
|
|
|
(4,377
|
)
|
|
|
|
|
|
|
(6,650
|
)
|
Unrealized loss on residential
mortgage investment portfolio, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,513
|
|
|
|
|
|
|
|
16,513
|
|
Net increase in mortgage-backed
securities pledged, trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,112
|
)
|
|
|
|
|
|
|
(7,112
|
)
|
Amortization of discount on
residential mortgage investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,798
|
)
|
|
|
|
|
|
|
(7,798
|
)
|
(Increase) decrease in loans
held-for-sale, net
|
|
|
|
|
|
|
(51,056
|
)
|
|
|
26,213
|
|
|
|
|
|
|
|
|
|
|
|
(24,843
|
)
|
Decrease in intercompany note
receivable
|
|
|
|
|
|
|
4,894
|
|
|
|
22,885
|
|
|
|
|
|
|
|
(27,779
|
)
|
|
|
|
|
Decrease (increase) in other assets
|
|
|
20,104
|
|
|
|
242
|
|
|
|
(2,630
|
)
|
|
|
(56,192
|
)
|
|
|
8,018
|
|
|
|
(30,458
|
)
|
Increase (decrease) in other
liabilities
|
|
|
11,835
|
|
|
|
(3,042
|
)
|
|
|
(1,821
|
)
|
|
|
5,559
|
|
|
|
(8,984
|
)
|
|
|
3,547
|
|
Net transfers with subsidiaries
|
|
|
(863,138
|
)
|
|
|
(33,035
|
)
|
|
|
(68,876
|
)
|
|
|
516,738
|
|
|
|
448,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by
operating activities
|
|
|
(687,276
|
)
|
|
|
97,311
|
|
|
|
115,722
|
|
|
|
597,225
|
|
|
|
(28,745
|
)
|
|
|
94,237
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in restricted
cash
|
|
|
|
|
|
|
(5,358
|
)
|
|
|
78,499
|
|
|
|
(12,744
|
)
|
|
|
|
|
|
|
60,397
|
|
Increase in mortgage-related
receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,442,119
|
)
|
|
|
|
|
|
|
(2,442,119
|
)
|
Increase in receivables under
reverse-repurchase agreements, net
|
|
|
|
|
|
|
(62,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62,389
|
)
|
Decrease (increase) in loans, net
|
|
|
|
|
|
|
362,559
|
|
|
|
(315,343
|
)
|
|
|
(1,217,160
|
)
|
|
|
966
|
|
|
|
(1,168,978
|
)
|
Acquisition of real estate, net of
cash acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,199
|
)
|
|
|
|
|
|
|
(37,199
|
)
|
Disposal (acquisition) of
investments, net
|
|
|
33,484
|
|
|
|
(19,400
|
)
|
|
|
(10,751
|
)
|
|
|
(17,945
|
)
|
|
|
|
|
|
|
(14,612
|
)
|
Acquisition of property and
equipment, net
|
|
|
|
|
|
|
(29
|
)
|
|
|
(1,458
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
investing activities
|
|
|
33,484
|
|
|
|
275,383
|
|
|
|
(249,053
|
)
|
|
|
(3,727,167
|
)
|
|
|
966
|
|
|
|
(3,666,387
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(2,909
|
)
|
|
|
(8,360
|
)
|
|
|
(910
|
)
|
|
|
(13,383
|
)
|
|
|
|
|
|
|
(25,562
|
)
|
Decrease in intercompany note
payable
|
|
|
(20,327
|
)
|
|
|
(7,452
|
)
|
|
|
|
|
|
|
|
|
|
|
27,779
|
|
|
|
|
|
Borrowings under (repayment of)
repurchase agreements, net
|
|
|
|
|
|
|
65,495
|
|
|
|
|
|
|
|
(34,172
|
)
|
|
|
|
|
|
|
31,323
|
|
Borrowings on (repayments of)
credit facilities, net
|
|
|
460,000
|
|
|
|
(352,295
|
)
|
|
|
|
|
|
|
848,000
|
|
|
|
|
|
|
|
955,705
|
|
Borrowings of term debt
|
|
|
|
|
|
|
715,763
|
|
|
|
1,491
|
|
|
|
2,447,870
|
|
|
|
|
|
|
|
3,165,124
|
|
Repayments of term debt
|
|
|
|
|
|
|
(782,158
|
)
|
|
|
(49
|
)
|
|
|
(63,126
|
)
|
|
|
|
|
|
|
(845,333
|
)
|
Borrowings of subordinated debt
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
Proceeds from issuance of common
stock, net of offering costs
|
|
|
440,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
440,097
|
|
Proceeds from exercise of options
|
|
|
3,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,327
|
|
Tax benefits on share-based payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,256
|
|
|
|
|
|
|
|
2,256
|
|
Payment of dividends
|
|
|
(226,628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(226,628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in)
financing activities
|
|
|
653,560
|
|
|
|
(369,007
|
)
|
|
|
50,532
|
|
|
|
3,187,445
|
|
|
|
27,779
|
|
|
|
3,550,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and
cash equivalents
|
|
|
(232
|
)
|
|
|
3,687
|
|
|
|
(82,799
|
)
|
|
|
57,503
|
|
|
|
|
|
|
|
(21,841
|
)
|
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
|
|
$
|
1,806
|
|
|
$
|
148,752
|
|
|
$
|
73,772
|
|
|
$
|
77,725
|
|
|
$
|
|
|
|
$
|
302,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 9.
|
Direct
Real Estate Investments
|
Our direct real estate investments primarily consist of skilled
nursing facilities currently leased to clients through the
execution of long-term,
triple-net
operating leases. During the six months ended June 30 2007, our
gross direct real estate investments increased by $324.7 through
the acquisition of 58 health care properties. Our direct real
estate investments as of June 30, 2007 and
December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Land
|
|
$
|
111,240
|
|
|
$
|
91,543
|
|
Buildings
|
|
|
895,932
|
|
|
|
607,833
|
|
Furniture
|
|
|
51,285
|
|
|
|
34,395
|
|
Accumulated depreciation
|
|
|
(25,619
|
)
|
|
|
(11,468
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,032,838
|
|
|
$
|
722,303
|
|
|
|
|
|
|
|
|
|
|
Depreciation of direct real estate investments totaled
$7.4 million and $14.2 million for the three and six
months ended June 30, 2007, respectively, and
$2.6 million and $4.3 million, respectively, for the
three and six months ended June 30, 2006.
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 six
months ended June 30, 2007:
Repurchase
Agreements
We entered into one new master repurchase agreement during the
six months ended June 30, 2007. We also borrowed under our
existing repurchase agreements with various financial
institutions to finance the purchases of RMBS during the six
months ended June 30, 2007. As of June 30, 2007 and
December 31, 2006, the aggregate amount outstanding under
our repurchase agreements used to finance purchases of
residential mortgage investments was $4.2 billion and
$3.4 billion, respectively. As of June 30, 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
June 30, 2007, such repurchase agreements were
collateralized by Agency MBS with a fair value of
$4.3 billion, including accrued interest, Non-Agency MBS
with a fair value of $21.6 million, including accrued
interest, and cash deposits of $4.9 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
$5.3 billion and $5.0 billion as of June 30, 2007
and December 31, 2006, respectively. As of June 30,
2007, total undrawn capacity under our credit facilities was
$2.0 billion.
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
22
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Acceptance rate plus a margin based on the credit ratings we
receive on our public debt. As of June 30, 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, lower
the interest rate that we are charged on Eurocurrency borrowings
by 10 basis points to Adjusted LIBOR, as defined, plus
0.65%, and 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 on this
facility 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, modify the
interest rate to one-month LIBOR plus 1.85% and change the
maturity date from January 11, 2017 to April 9, 2009,
with three one-year extensions at our option.
In April 2007, we entered into a $1.25 billion secured,
revolving credit facility with Citigroup Global Markets Realty
Corp. (Citigroup) that replaced our borrowings under
our $400 million secured credit facility led by an
affiliate of Citigroup Global Markets Inc. We expect to use the
funds available under this facility to finance the origination
of commercial loans. The credit facility is secured by certain
commercial loans from our portfolio. On August 2, 2007, we
increased the commitment amount to $1.50 billion, as
permitted under the terms of the facility and we extended the
facility maturity date to August 1, 2008 from
October 16, 2007. In consideration for such extension, we
amended the facility to (i) decrease the maximum advance
rate to 85% from 90% of the outstanding principal balance of
commercial loans transferred to this facility, and
(ii) increase the interest rate that we are charged on
borrowings by 30 basis points to one-month LIBOR plus
0.90%, subject to adjustment under certain circumstances, in
each case effective September 1, 2007. There were no other
material changes in the terms and conditions of the facility.
In April 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.
In June 2007, we amended our $640.0 million unsecured
syndicated revolving credit facility with Wachovia Bank N.A as
Administrative Agent to increase the total commitment amount
under the facility to $1.05 billion. At our option, under
certain circumstances, the amendment allows the total commitment
amount under the facility to be increased to $1.25 billion.
Six new institutions joined the lending syndicate, bringing the
total number of lenders to 23 and eleven institutions increased
their commitment. There were no other material changes in the
terms and conditions of the facility.
Term
Debt
In January 2007, we repaid all amounts outstanding under our
series 2004-2
Term Debt notes.
In April 2007, we completed an $800.0 million term debt
securitization that was recorded as an on-balance sheet
financing. We sold $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 and the trust certificate. The blended pricing for the
notes sold to investors (excluding fees) was one-month LIBOR
plus 28.3 basis points. We used the proceeds to repay
borrowings under certain of our credit facilities and to pay
certain transaction fees and expenses.
In June 2007, we repaid all amounts outstanding under our
series 2003-2
and 2005-1
Term Debt notes.
23
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Borrowings
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, which is not consolidated for financial statement
purposes, 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 coupon that is 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.
In June 2007, we issued $41.2 million in junior
subordinated debt to a newly formed statutory trust,
CapitalSource Trust Preferred Securities
2007-2
(2007-2
TP Trust). We formed the
2007-2 TP
Trust in June 2007, with an initial capitalization in common
securities of $1.2 million for the sole purpose of issuing
$40.0 million of preferred securities (the
2007-2
TP Securities) to outside investors. The
2007-2 TP
Trust used the initial capitalization and the proceeds from the
sale of the
2007-2 TP
Securities to acquire the junior subordinated debt that we
issued.
The 2007-2
TP Securities bear interest at a floating interest rate based on
three-month LIBOR plus 1.95%, resetting quarterly. The
2007-2 TP
Securities, which mature on July 30, 2037, are callable at
par in whole or in part at any time after July 30, 2012 and
are unsecured and junior in right of payment to all of our
indebtedness.
Convertible
Debt
In April 2007, we completed exchange offers relating to our
senior convertible debentures due 2034, bearing interest at a
rate of 1.25% per year until March 15, 2009 (the
1.25% Debentures), and our 3.5% senior
convertible debentures due July 2034 (the
3.5% Debentures, together with the
1.25% Debentures, the Senior Debentures). At
closing, 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 $321.6 million in aggregate principal amount of a
new series of 4% senior subordinated convertible debentures
due 2034 (the 4% Debentures, together with the
1.625% Debentures, the Subordinated Debentures)
in exchange for a like principal amount of our
3.5% Debentures. The results of the exchange offers were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
Outstanding
|
|
|
Amount
|
|
|
|
Prior
|
|
|
Outstanding
|
|
|
|
to Exchange
|
|
|
at Completion of
|
|
Securities
|
|
Offers
|
|
|
Exchange Offers
|
|
|
|
($ in thousands)
|
|
|
3.50% Senior Convertible
Notes due 2034
|
|
$
|
330,000
|
|
|
$
|
8,446
|
|
1.25% Senior Convertible
Notes due 2034
|
|
|
225,000
|
|
|
|
47,620
|
|
4.00% Senior Subordinated
Convertible Notes due 2034
|
|
|
|
|
|
|
321,554
|
|
1.625% Senior Subordinated
Convertible Notes due 2034
|
|
|
|
|
|
|
177,380
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
555,000
|
|
|
$
|
555,000
|
|
|
|
|
|
|
|
|
|
|
In addition, we amended the documents governing our convertible
bond hedge transaction to provide, among other things, for those
documents to relate to shares issuable upon conversion of both
the 1.25% Debentures and the 1.625% Debentures.
24
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Subordinated Debentures are guaranteed on a senior
subordinated basis by CapitalSource Finance (see Note 8,
Guarantor Information). The Subordinated Debentures rank
junior to all of our other existing and future secured and
unsecured and unsubordinated 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 and July 15,
2011 for the 1.625% Debentures and the 4% Debentures,
respectively, which, under certain circumstances, will increase
the conversion rate by a number of additional shares. The
Subordinated Debentures do not provide for the payment of
contingent interest.
Like the 1.25% Debentures, and as of June 30, 2007,
the 1.625% Debentures are convertible, subject to certain
conditions, into 7.4 million shares of our common stock at
a conversion rate of 41.5818 shares of common stock per
$1,000 principal amount of debentures, representing an effective
conversion price of approximately $24.05 per share. The
conversion rate and price will adjust each time we pay a
dividend on our common stock, with the fair value of each
adjustment taxable to the holders. The 1.625% Debentures
are redeemable for cash at our option at any time on or after
March 15, 2009 at a redemption price of 100% of their
principal amount plus accrued interest. Holders of the
1.625% Debentures have the right to require us to
repurchase some or all of their debentures for cash on
March 15, 2009, March 15, 2014, March 15, 2019,
March 15, 2024 and March 15, 2029 at a price of 100%
of their principal amount plus accrued interest. Holders of the
1.625% Debentures also have the right to require us to
repurchase some or all of their 1.625% Debentures upon
certain events constituting a fundamental change.
Like the 3.5% Debentures, and as of June 30, 2007, the
4% Debentures are convertible, subject to certain
conditions, into 12.8 million shares of our common stock at
a conversion rate of 39.7693 shares of common stock per
$1,000 principal amount of debentures, representing an effective
conversion price of approximately $25.15 per share. The
conversion rate and price will adjust each time we pay a
dividend on our common stock, with the fair value of each
adjustment taxable to the holders. The 4% Debentures are
redeemable for cash at our option at any time on or after
July 15, 2011 at a redemption price of 100% of their
principal amount plus accrued interest. Holders of the
4% Debentures have the right to require us to repurchase
some or all of their 4% Debentures for cash on
July 15, 2011, July 15, 2014, July 15, 2019,
July 15, 2024 and July 15, 2029 at a price of 100% of
their principal amount plus accrued interest. Holders of the
4% Debentures also have the right to require us to
repurchase some or all of their 4% Debentures upon certain
events constituting a fundamental change.
Holders of the Subordinated Debentures may convert their
debentures prior to maturity only if the following conditions
occur:
1) The sale price of our common stock for at least 20
trading days during the period of 30 consecutive trading days
ending on the last trading day of the previous calendar quarter
is greater than or equal to 120% of the applicable conversion
price per share of our common stock on such last trading day;
2) During the five consecutive business day period after
any five consecutive trading day period in which the trading
price per debenture for each day of that period was less than
98% of the product of the conversion rate and the last reported
sale price of our common stock for each day during such period
(the 98% Trading Exception); provided, however, that
if, on the date of any conversion pursuant to the 98% Trading
Exception that is on or after March 15, 2029 for the
1.625% Debentures and on or after July 15, 2019 for
the 4% Debentures, the last reported sale price of our
common stock on the trading day before the conversion date is
greater than 100% of the applicable conversion price, then
holders surrendering debentures for conversion will receive, in
lieu of shares of our common stock based on the then applicable
conversion rate, shares of common stock with a value equal to
the principal amount of the debentures being converted;
3) Specified corporate transactions occur such as if we
elect to distribute to all holders of our common stock rights or
warrants entitling them to subscribe for or purchase, for a
period expiring within 45 days after the date of the
distribution, shares of our common stock at less than the last
reported sale price of a share of our common stock on the
trading day immediately preceding the declaration date of the
distribution; or distribute
25
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to all holders of our common stock, assets, debt securities or
rights to purchase our securities, which distribution has a per
share value as determined by our board of directors exceeding 5%
of the last reported sale price of our common stock on the
trading day immediately preceding the declaration date for such
distribution;
4) With respect to the 1.625% Debentures, we call any
or all of the 1.625% Debentures for redemption and with
respect to the 4% Debentures, we call any or all of the
4% Debentures for redemption; or
5) We are a party to a consolidation, merger or binding
share exchange, in each case pursuant to which our common stock
would be converted into cash or property other than securities.
We are unable to assess the likelihood of meeting conditions
(1) or (2) above for the Subordinated Debentures as
both conditions depend on future market prices for our common
stock and the Subordinated Debentures. We believe that the
likelihood of meeting conditions (3), (4) or
(5) related to the specified corporate transactions
occurring for the Subordinated Debentures is remote since we
have no current plans to distribute rights or warrants to all
holders of our common stock, call any of our Subordinated
Debentures for redemption or enter a consolidation, merger or
binding share exchange pursuant to which our common stock would
be converted into cash or property other than securities.
Because the Subordinated Debentures are not substantially
different from the Senior Debentures, as defined by
EITF 96-19,
Debtors Accounting for a Modification or Exchange of
Debt Instruments, we did not consider the exchange offer to
be a debt extinguishment and therefore continued to amortize the
remaining unamortized deferred financing fees over the remaining
life of the Debentures. Additionally, all costs associated with
the exchange offer were expensed as incurred.
Should we be required to repurchase the Subordinated Debentures
at any of the redemption dates, or if the Subordinated
Debentures are converted, our intent is to satisfy all principal
and accrued interest requirements with respect thereto in cash.
To the extent that the respective conversion prices are adjusted
below the price of our common stock at the time the Subordinated
Debentures were issued, we would be required to record a
beneficial conversion option, which would impact both our net
income and net income per share. This has not occurred as of
June 30, 2007.
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.
|
|
Note 11.
|
Shareholders
Equity
|
Common
Stock Shares Outstanding
Common stock share activity for the six months ended
June 30, 2007 was as follows:
|
|
|
|
|
Outstanding as of
December 31, 2006
|
|
|
181,452,290
|
|
Issuance of common stock
|
|
|
7,920,776
|
|
Sale of treasury stock
|
|
|
1,300,000
|
|
Exercise of options
|
|
|
306,423
|
|
Restricted stock and other stock
grants, net
|
|
|
898,324
|
|
|
|
|
|
|
Outstanding as of June 30,
2007
|
|
|
191,877,813
|
|
|
|
|
|
|
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 and six
26
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
months ended June 30, 2007, we received proceeds of
$60.4 million and $186.7 million, respectively,
related to the direct purchase of 2.4 million and
7.5 million shares of our common stock pursuant to the
DRIP, respectively. During the three and six months ended
June 30, 2006, we received proceeds of $39.7 million
related to the direct purchase of 1.7 million shares of our
common stock pursuant to the DRIP. In addition, we received
proceeds of $21.7 million and $29.5 million related to
cash dividends reinvested for 0.9 million and
1.2 million shares of our common stock during the three and
six months ended June 30, 2007, respectively. We received
proceeds of $3.4 million and $5.1 million related to
cash dividends reinvested for 0.1 million and
0.2 million shares of our common stock, respectively,
during the three and six months ended June 30, 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, 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 and six months ended June 30, 2007, we
recorded $29.7 million and $48.7 million of income tax
expense, respectively. Our effective income tax rate on our
consolidated net income was 23.0% for the six months ended
June 30, 2007.
The reconciliations of the consolidated effective income tax
rate and the federal statutory corporate income tax rate for the
six months ended June 30, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Benefit of REIT election
|
|
|
(14.2
|
)
|
|
|
(16.1
|
)
|
State income taxes, net of federal
tax benefit
|
|
|
1.9
|
|
|
|
1.5
|
|
Other
|
|
|
0.3
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate before
discrete items
|
|
|
23.0
|
|
|
|
21.0
|
|
Discrete item Benefit
for reversal of net deferred tax liabilities(1)
|
|
|
|
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
23.0
|
%
|
|
|
18.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In connection with our REIT election, we reversed net deferred
tax liabilities of $4.7 million, relating to REIT
qualifying activities, into income during the six months ended
June 30, 2006. |
27
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the six months ended June 30, 2007, we recorded a
valuation allowance of $1.1 million against our deferred
tax asset related to net operating loss carryforwards, 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. During the
three months ended June 30, 2007, we made no changes to our
liability for unrecognized tax benefits and made no adjustments
to accumulated deficit related to the adoption of FIN 48.
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 and penalties accrued related to
unrecognized tax benefits as a component of income taxes. As of
January 1, 2007, accrued interest expense and penalties
totaled $1.5 million. During the three and six months ended
June 30, 2007, we recognized $0.2 million and
$0.3 million in interest expense and penalties,
respectively.
We file income tax returns in the United States federal and
various state, local and foreign jurisdictions and remain
subject to examinations by these tax jurisdictions for tax years
2003 through 2006.
|
|
Note 13.
|
Comprehensive
Income
|
Comprehensive income for the three and six months ended
June 30, 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Net income
|
|
$
|
84,328
|
|
|
$
|
72,789
|
|
|
$
|
163,018
|
|
|
$
|
138,083
|
|
Unrealized (loss) gain on
available-for-sale securities, net of tax
|
|
|
(94
|
)
|
|
|
1,937
|
|
|
|
(2,798
|
)
|
|
|
2,549
|
|
Unrealized gain on foreign
currency translation, net of tax
|
|
|
1,561
|
|
|
|
|
|
|
|
2,181
|
|
|
|
|
|
Unrealized gain on cash flow
hedge, net of tax
|
|
|
864
|
|
|
|
1,186
|
|
|
|
536
|
|
|
|
2,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
86,659
|
|
|
$
|
75,912
|
|
|
$
|
162,937
|
|
|
$
|
143,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, net as of June 30,
2007 and December 31, 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Unrealized (loss) gain on
available-for-sale securities, net of tax
|
|
$
|
(84
|
)
|
|
$
|
2,714
|
|
Unrealized gain (loss) on foreign
currency translation, net of tax
|
|
|
1,355
|
|
|
|
(826
|
)
|
Unrealized gain on cash flow
hedge, net of tax
|
|
|
1,113
|
|
|
|
577
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive
income, net
|
|
$
|
2,384
|
|
|
$
|
2,465
|
|
|
|
|
|
|
|
|
|
|
28
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 and six months ended June 30, 2007 and 2006,
respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands, except per share data)
|
|
|
Basic net income per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
84,328
|
|
|
$
|
72,789
|
|
|
$
|
163,018
|
|
|
$
|
138,083
|
|
Average shares basic
|
|
|
185,371,033
|
|
|
|
168,866,621
|
|
|
|
182,274,147
|
|
|
|
159,309,225
|
|
Basic net income per share
|
|
$
|
0.45
|
|
|
$
|
0.43
|
|
|
$
|
0.89
|
|
|
$
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
84,328
|
|
|
$
|
72,789
|
|
|
$
|
163,018
|
|
|
$
|
138,083
|
|
Average shares basic
|
|
|
185,371,033
|
|
|
|
168,866,621
|
|
|
|
182,274,147
|
|
|
|
159,309,225
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock dividend declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,629,138
|
|
Option shares
|
|
|
558,360
|
|
|
|
384,842
|
|
|
|
599,957
|
|
|
|
434,331
|
|
Unvested restricted stock
|
|
|
1,259,472
|
|
|
|
1,299,293
|
|
|
|
1,415,191
|
|
|
|
1,129,508
|
|
Stock units
|
|
|
41,207
|
|
|
|
19,080
|
|
|
|
33,769
|
|
|
|
13,346
|
|
Non-managing member units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debt(1)
|
|
|
198,358
|
|
|
|
|
|
|
|
189,387
|
|
|
|
|
|
Written call option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares diluted
|
|
|
187,428,430
|
|
|
|
170,569,836
|
|
|
|
184,512,451
|
|
|
|
162,515,548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.45
|
|
|
$
|
0.43
|
|
|
$
|
0.88
|
|
|
$
|
0.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the three and six months ended June 30, 2007, the
conversion premium on the 1.25% Debentures and
1.625% Debentures represented the dilutive shares based on
a conversion price of $24.05. |
Shares that have an antidilutive effect in the calculation of
diluted net income per share and certain shares related to the
Debentures have been excluded from the computations above as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Average shares)
|
|
|
Stock options
|
|
|
123,771
|
|
|
|
2,835,252
|
|
|
|
72,950
|
|
|
|
1,781,862
|
|
Non-managing member units
|
|
|
1,996,855
|
|
|
|
2,510,818
|
|
|
|
2,225,248
|
|
|
|
2,150,148
|
|
Shares subject to a written call
option
|
|
|
7,401,420
|
|
|
|
7,401,420
|
|
|
|
7,401,420
|
|
|
|
7,401,420
|
|
For the three and six months ended June 30, 2007, the
conversion premiums on the 3.5% Debentures and
4% Debentures were considered to be antidilutive based on a
conversion price of $25.15. For the three and six months ended
June 30, 2006, the conversion premiums on the
1.25% Debentures and 3.5% Debentures were considered
to be antidilutive based on conversion prices of $26.24 and
$27.44, 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.
29
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
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 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 June 30, 2007, there were 12.3 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 six months ended June 30, 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 $9.9 million and $20.6 million for the three
and six months ended June 30, 2007, respectively, and
$9.8 million and $16.3 million, respectively, for the
three and six months ended June 30, 2006, respectively.
The weighted average grant date fair value of options granted
during the six months ended June 30, 2007 was $1.51. The
total intrinsic value of stock options exercised during the six
months ended June 30, 2007 was $3.5 million. As of
June 30, 2007, the total unrecognized compensation cost
related to nonvested stock options granted pursuant to the Plan
was $7.4 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 six months ended June 30, 2007 was
$25.09. The total fair value of restricted stock that vested
during the six months ended June 30, 2007 was
$26.6 million. As of June 30, 2007, the total
unrecognized compensation cost related to nonvested restricted
stock granted pursuant to the Plan was $71.5 million. This
cost is expected to be recognized over a weighted average period
of 2.3 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 June 30, 2007, we had issued $263.0 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 these obligations, totaling
$6.5 million, in other liabilities in the accompanying
consolidated balance sheet as of June 30, 2007.
As of June 30, 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 June 30, 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
30
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
conditional asset retirement obligations was recorded on our
accompanying consolidated balance sheet as of June 30, 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.
SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, requires that a public
business enterprise report financial and descriptive information
about its reportable 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 reportable segments as of and for the three and six
months ended June 30, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
|
|
|
|
Lending
|
|
|
Mortgage
|
|
|
Consolidated
|
|
|
Lending
|
|
|
Mortgage
|
|
|
Consolidated
|
|
|
|
& Investment
|
|
|
Investment
|
|
|
Total
|
|
|
& Investment
|
|
|
Investment
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Total interest and fee income
|
|
$
|
272,851
|
|
|
$
|
83,389
|
|
|
$
|
356,240
|
|
|
$
|
216,686
|
|
|
$
|
75,954
|
|
|
$
|
292,640
|
|
Operating lease income
|
|
|
22,118
|
|
|
|
|
|
|
|
22,118
|
|
|
|
6,694
|
|
|
|
|
|
|
|
6,694
|
|
Interest expense
|
|
|
122,513
|
|
|
|
77,778
|
|
|
|
200,291
|
|
|
|
81,262
|
|
|
|
72,656
|
|
|
|
153,918
|
|
Provision for loan losses
|
|
|
17,410
|
|
|
|
|
|
|
|
17,410
|
|
|
|
11,471
|
|
|
|
|
|
|
|
11,471
|
|
Operating expenses(1)
|
|
|
64,564
|
|
|
|
1,879
|
|
|
|
66,443
|
|
|
|
51,737
|
|
|
|
1,954
|
|
|
|
53,691
|
|
Other income (expense)(2)
|
|
|
34,925
|
|
|
|
(13,846
|
)
|
|
|
21,079
|
|
|
|
7,261
|
|
|
|
4,035
|
|
|
|
11,296
|
|
Noncontrolling interests expense
|
|
|
1,272
|
|
|
|
|
|
|
|
1,272
|
|
|
|
1,230
|
|
|
|
|
|
|
|
1,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income
taxes
|
|
|
124,135
|
|
|
|
(10,114
|
)
|
|
|
114,021
|
|
|
|
84,941
|
|
|
|
5,379
|
|
|
|
90,320
|
|
Income taxes
|
|
|
29,693
|
|
|
|
|
|
|
|
29,693
|
|
|
|
17,531
|
|
|
|
|
|
|
|
17,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
94,442
|
|
|
$
|
(10,114
|
)
|
|
$
|
84,328
|
|
|
$
|
67,410
|
|
|
$
|
5,379
|
|
|
$
|
72,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,589,381
|
|
|
$
|
6,572,309
|
|
|
$
|
17,161,690
|
|
|
$
|
7,931,088
|
|
|
$
|
5,638,767
|
|
|
$
|
13,569,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
|
|
|
Commercial
|
|
|
Residential
|
|
|
|
|
|
|
Lending
|
|
|
Mortgage
|
|
|
Consolidated
|
|
|
Lending
|
|
|
Mortgage
|
|
|
Consolidated
|
|
|
|
& Investment
|
|
|
Investment
|
|
|
Total
|
|
|
& Investment
|
|
|
Investment
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Total interest and fee income
|
|
$
|
531,532
|
|
|
$
|
164,289
|
|
|
$
|
695,821
|
|
|
$
|
426,356
|
|
|
$
|
103,324
|
|
|
$
|
529,680
|
|
Operating lease income
|
|
|
42,406
|
|
|
|
|
|
|
|
42,406
|
|
|
|
11,319
|
|
|
|
|
|
|
|
11,319
|
|
Interest expense
|
|
|
233,764
|
|
|
|
153,176
|
|
|
|
386,940
|
|
|
|
154,095
|
|
|
|
97,605
|
|
|
|
251,700
|
|
Provision for loan losses
|
|
|
32,336
|
|
|
|
|
|
|
|
32,336
|
|
|
|
25,883
|
|
|
|
301
|
|
|
|
26,184
|
|
Operating expenses(1)
|
|
|
128,785
|
|
|
|
2,980
|
|
|
|
131,765
|
|
|
|
100,102
|
|
|
|
4,208
|
|
|
|
104,310
|
|
Other income (expense)(2)
|
|
|
46,672
|
|
|
|
(19,544
|
)
|
|
|
27,128
|
|
|
|
13,711
|
|
|
|
(2,071
|
)
|
|
|
11,640
|
|
Noncontrolling interests expense
|
|
|
2,602
|
|
|
|
|
|
|
|
2,602
|
|
|
|
2,091
|
|
|
|
|
|
|
|
2,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income
taxes and cumulative effect of accounting change
|
|
|
223,123
|
|
|
|
(11,411
|
)
|
|
|
211,712
|
|
|
|
169,215
|
|
|
|
(861
|
)
|
|
|
168,354
|
|
Income taxes
|
|
|
48,694
|
|
|
|
|
|
|
|
48,694
|
|
|
|
30,641
|
|
|
|
|
|
|
|
30,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before
cumulative effect of accounting change
|
|
|
174,429
|
|
|
|
(11,411
|
)
|
|
|
163,018
|
|
|
|
138,574
|
|
|
|
(861
|
)
|
|
|
137,713
|
|
Cumulative effect of accounting
change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
174,429
|
|
|
$
|
(11,411
|
)
|
|
$
|
163,018
|
|
|
$
|
138,944
|
|
|
$
|
(861
|
)
|
|
$
|
138,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
10,589,381
|
|
|
$
|
6,572,309
|
|
|
$
|
17,161,690
|
|
|
$
|
7,931,088
|
|
|
$
|
5,638,767
|
|
|
$
|
13,569,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
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 July 20, 2007, we entered into a $135.6 million
secured credit facility with an affiliate of Deutsche Bank AG.
We used the proceeds from this facility to repay borrowings
under certain of our other credit facilities. The credit
facility provides incremental liquidity and is secured by
certain commercial loans from our portfolio that may not be
eligible for financing under other secured credit facilities.
The facility is scheduled to mature on July 20, 2010. The
current outstanding principal balance of commercial loans in
this facility was financed at advance rates ranging from
approximately 50% to 85%. Interest on borrowings under the
credit facility will be charged at a rate equal to the
lenders commercial paper rate plus 0.75%.
32
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On July 30, 2007, we issued $250.0 million principal
amount of 7.25% senior subordinated convertible notes due
2037 (the 7.25% Debentures). The
7.25% Debentures have an initial conversion rate of
36.9079 shares of our common stock per $1,000 principal
amount of notes, representing a conversion price of
approximately $27.09 per share. The conversion rate will
adjust each time we pay a dividend on our common stock that is
greater than $0.60 per share, with the fair value of each
adjustment taxable to the holders. To the extent that the
conversion price is adjusted below the price of our common stock
at the time the 7.25% Debentures were issued, we would be
required to record a beneficial conversion option, which would
impact both our net income and net income per share. Should we
be required to repurchase the 7.25% Debentures at any of
the redemption dates, or if the 7.25% Debentures are
converted, we will satisfy all principal and accrued interest
requirements with respect thereto in cash. The 7.25% Debentures
are unsecured and are fully and unconditionally guaranteed by
CapitalSource Finance LLC. We used the funds available from this
offering to repay indebtedness under our $1.05 billion
unsecured revolving credit facility.
On August 2, 2007, as discussed in Note 10,
Borrowings, we increased the commitment amount of our
$1.25 billion secured, revolving credit facility with
Citigroup to $1.50 billion, as permitted under the terms of
the facility and we extended the facility maturity date to
August 1, 2008. In consideration for such extension, we
amended the facility to (i) decrease the maximum advance
rate to 85% from 90% of the outstanding principal balance of
commercial loans transferred to the facility, and
(ii) increase the interest rate that we are charged on
borrowings by 30 basis points to one-month LIBOR plus
0.90%, subject to adjustment under certain circumstances in each
case effective September 1, 2007. There were no other
material changes in the terms and conditions of the facility.
On July 31, 2007 we modified our $287.1 million loan
agreement with Column Financial Inc. to divide the loan into a
senior $250 million loan and a $36.1 million mezzanine
loan. Both loans mature on April 9, 2009. The interest rate
under the senior loan is one-month LIBOR plus 1.54% and the
interest rate under the mezzanine loan is one-month LIBOR plus
4% (with the effect that the weighted average interest rate
under the two loans taken together is unchanged after the
modification). There were no other material changes in the terms
and conditions of the loan.
33
|
|
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 the Private Securities
Litigation Reform Act of 1995, including certain plans,
expectations, goals, and projections, and including statements
about the proposed merger between CapitalSource and TierOne,
which are subject to numerous assumptions, risks, and
uncertainties. All statements contained in this Form 10-Q
that are not clearly historical in nature are forward-looking,
and the words anticipate, believe,
expect, estimate, plan, and
similar expressions are generally intended to identify
forward-looking statements. All forward-looking statements
(including statements regarding future financial and operating
results) involve risks, uncertainties and contingencies, many of
which are beyond our control which may cause actual results,
performance, or achievements to differ materially from
anticipated results, performance or achievements. Actual results
could differ materially from those contained or implied by such
statements for a variety of factors, including without
limitation: the merger with TierOne may not be completed on the
proposed terms and schedule or at all; changes in economic
conditions; movements in interest rates; competitive pressures
on product pricing and services; success and timing of other
business strategies; the nature, extent, and timing of
governmental actions and reforms; extended disruption of vital
infrastructure; and other factors described in our Annual Report
on
Form 10-K
for the year ended December 31, 2006 as filed with the
Securities and Exchange Commission (SEC) on
March 1, 2007 (the
Form 10-K),
and documents subsequently filed by us with the SEC, including
our Current Report on
Form 8-K
as filed with the SEC on July 23, 2007. All forward-looking
statements included in this section are based on information
available at the time the statement is made.
We are under no obligation to (and expressly disclaim any such
obligation to) update or alter our forward-looking statements,
whether as a result of new information, future events or
otherwise.
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:
|
|
|
|
|
Structured Finance, which generally engages in commercial
and residential real estate finance and also provides
asset-based lending to finance companies;
|
|
|
|
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; 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 June 30, 2007, the
balance of our residential mortgage investment portfolio was
$6.5 billion, which included investments in residential
mortgage loans and residential mortgage-backed securities
(RMBS).
Recent
Developments Pending Acquisition of TierOne
Corporation
In May 2007, we announced an agreement to acquire TierOne
Corporation, the holding company for TierOne Bank, a Lincoln,
Nebraska-based thrift with more than $3.4 billion in assets
and $2.2 billion of deposits as of
34
March 31, 2007. TierOne Bank offers customers a wide
variety of full-service consumer, commercial and agricultural
banking products and services through a network of 69 banking
offices located in Nebraska, Iowa and Kansas and nine loan
production offices located in Arizona, Colorado, Florida,
Minnesota, Nevada and North Carolina. At the time of the
announcement, the stock and cash transaction was valued at
approximately $34.46 per share of TierOne common stock. We
believe the acquisition will allow us to achieve our strategic
goal of enhancing the profitability and stability of our lending
business through a depository charter. Through this acquisition,
we seek to join our profitable, growing and diverse direct
lending platform with the stability, efficiency and diversity of
a sound community banking franchise. We believe the resulting
entity will be a well diversified lending and funding platform
that will continue to serve the needs of TierOne Banks
banking community as well as our customers. We expect the
transaction to close in the fourth quarter of 2007. However, the
transaction is subject to customary closing conditions,
including the approval of (1) TierOne shareholders by the
affirmative vote of at least a majority of the outstanding
shares of TierOne common stock and (2) the Office of Thrift
Supervision, and we cannot guarantee that we will close the
transaction within the expected timeframe or at all.
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 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.
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 recorded 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
35
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, net of expenses. 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.
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, realized and
unrealized gains and losses on investments in RMBS 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 net income 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.
36
Operating
Results for the Three and Six Months Ended June 30,
2007
Our results of operations for the three and six months ended
June 30, 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:
|
|
|
|
|
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; and
|
|
|
|
Decreased lending and borrowing spreads.
|
Our consolidated operating results for the three and six months
ended June 30, 2007 compared to the three and six months
ended June 30, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
Interest income
|
|
$
|
311,184
|
|
|
$
|
256,037
|
|
|
$
|
55,147
|
|
|
|
22
|
%
|
|
$
|
600,738
|
|
|
$
|
451,535
|
|
|
$
|
149,203
|
|
|
|
33
|
%
|
Fee income
|
|
|
45,056
|
|
|
|
36,603
|
|
|
|
8,453
|
|
|
|
23
|
%
|
|
|
95,083
|
|
|
|
78,145
|
|
|
|
16,938
|
|
|
|
22
|
%
|
Operating lease income
|
|
|
22,118
|
|
|
|
6,694
|
|
|
|
15,424
|
|
|
|
230
|
%
|
|
|
42,406
|
|
|
|
11,319
|
|
|
|
31,087
|
|
|
|
275
|
%
|
Interest expense
|
|
|
200,291
|
|
|
|
153,918
|
|
|
|
46,373
|
|
|
|
30
|
%
|
|
|
386,940
|
|
|
|
251,700
|
|
|
|
135,240
|
|
|
|
54
|
%
|
Provision for loan losses
|
|
|
17,410
|
|
|
|
11,471
|
|
|
|
5,939
|
|
|
|
52
|
%
|
|
|
32,336
|
|
|
|
26,184
|
|
|
|
6,152
|
|
|
|
23
|
%
|
Operating expenses
|
|
|
66,443
|
|
|
|
53,691
|
|
|
|
12,752
|
|
|
|
24
|
%
|
|
|
131,765
|
|
|
|
104,310
|
|
|
|
27,455
|
|
|
|
26
|
%
|
Other income, net of expenses
|
|
|
21,079
|
|
|
|
11,296
|
|
|
|
9,783
|
|
|
|
87
|
%
|
|
|
27,128
|
|
|
|
11,640
|
|
|
|
15,488
|
|
|
|
133
|
%
|
Noncontrolling interests expense
|
|
|
1,272
|
|
|
|
1,230
|
|
|
|
42
|
|
|
|
3
|
%
|
|
|
2,602
|
|
|
|
2,091
|
|
|
|
511
|
|
|
|
24
|
%
|
Income taxes
|
|
|
29,693
|
|
|
|
17,531
|
|
|
|
12,162
|
|
|
|
69
|
%
|
|
|
48,694
|
|
|
|
30,641
|
|
|
|
18,053
|
|
|
|
59
|
%
|
Cumulative effect of accounting
change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
370
|
|
|
|
370
|
|
|
|
100
|
%
|
Net income
|
|
|
84,328
|
|
|
|
72,789
|
|
|
|
11,539
|
|
|
|
16
|
%
|
|
|
163,018
|
|
|
|
138,083
|
|
|
|
24,935
|
|
|
|
18
|
%
|
Our consolidated yields on income earning assets and the costs
of interest bearing liabilities for the six months ended
June 30, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
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
|
|
|
|
|
|
$
|
600,737
|
|
|
|
8.29
|
%
|
|
|
|
|
|
$
|
451,535
|
|
|
|
8.54
|
%
|
Fee income
|
|
|
|
|
|
|
95,083
|
|
|
|
1.31
|
|
|
|
|
|
|
|
78,145
|
|
|
|
1.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets(1)
|
|
$
|
14,620,118
|
|
|
|
695,820
|
|
|
|
9.60
|
|
|
$
|
10,658,010
|
|
|
|
529,680
|
|
|
|
10.02
|
|
Total direct real estate investments
|
|
|
830,035
|
|
|
|
42,406
|
|
|
|
10.30
|
|
|
|
173,496
|
|
|
|
11,319
|
|
|
|
13.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income earning assets
|
|
|
15,450,153
|
|
|
|
738,226
|
|
|
|
9.64
|
|
|
|
10,831,506
|
|
|
|
540,999
|
|
|
|
10.07
|
|
Total interest bearing
liabilities(2)
|
|
|
13,278,448
|
|
|
|
386,941
|
|
|
|
5.88
|
|
|
|
9,087,398
|
|
|
|
251,700
|
|
|
|
5.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
351,285
|
|
|
|
3.76
|
%
|
|
|
|
|
|
$
|
289,299
|
|
|
|
4.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
4.59
|
%
|
|
|
|
|
|
|
|
|
|
|
5.39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
37
Comparison
of the Three Months Ended June 30, 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 $227.8 million for the three months
ended June 30, 2007, an increase of $47.7 million, or
26%, from interest income for the three months ended
June 30, 2006. This increase was due to the growth in
average interest earning assets, primarily loans, of
$2.2 billion, or 31%. This increase was partially offset by
a slight decrease in the interest component of yield to 10.06%
for the three months ended June 30, 2007 from 10.45% for
the three months ended June 30, 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
June 30, 2007, our commercial lending spread to average
one-month LIBOR was 4.74% compared to 5.37% for the three months
ended June 30, 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
was $83.4 million for the three months ended June 30,
2007, an increase of $7.4 million, or 10%, from interest
income for the three months ended June 30, 2006. This
increase was due to the growth in average interest earning
assets of $313 million, or 6%.
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 $17.3 million
for the three months ended June 30, 2007 compared to
$10.9 million for the three months ended June 30,
2006. Prepayment-related fee income contributed 0.77% and 0.63%,
to yield for the three months ended June 30, 2007 and 2006,
respectively. Yield from fee income, including prepayment
related fees, decreased to 1.99% for the three months ended
June 30, 2007 from 2.12% for the three months ended
June 30, 2006.
Operating
Lease Income
In our Commercial Lending & Investment segment,
operating lease income was $22.1 million, an increase of
$15.4 million, or 230%, from the three months ended
June 30, 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 June 30,
2007 and 2006, our average balance of direct real estate
investments was $873.0 million and $219.6 million,
respectively.
Interest
Expense
We fund our growth largely through borrowings. In our Commercial
Lending & Investment segment, interest expense was
$122.5 million for the three months ended June 30,
2007, an increase of $41.3 million, or 51%, from interest
expense for the three months ended June 30, 2006. This
increase in interest expense was primarily due to an increase in
average borrowings of $2.6 billion, or 48% . Our cost of
borrowings increased to 6.20% for the three months ended
June 30, 2007 from 6.08% for the three months ended
June 30, 2006. This increase was the result of 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
38
borrowing spread to average one-month LIBOR for the three months
ended June 30, 2007 was 0.88% compared to 1.00% for the
three months ended June 30, 2006.
In our Residential Mortgage Investment segment, interest expense
was $77.8 million for the three months ended June 30,
2007, an increase of $5.1 million, or 7%, from interest
expense for the three months ended June 30, 2006. This
increase in interest expense was primarily due to an increase in
average borrowings of $271.1 million. Our cost of
borrowings increased to 5.34% for the three months ended
June 30, 2007 from 5.23% for the three months ended
June 30, 2006. This increase was primarily the result of
rising interest rates.
Net
Finance Margin
In our Commercial Lending & Investment segment, net
finance margin, defined as net investment income (which includes
interest, fee and operating lease income less interest expense)
divided by average income earning assets, was 6.95% for the
three months ended June 30, 2007, a decrease of
104 basis points from 7.99% for the three months ended
June 30, 2006. The decrease in net finance margin was
primarily due to the increase in interest expense resulting from
higher leverage and a higher cost of funds and by a decrease in
yield on total income earning assets. Net finance spread, which
represents the difference between our gross yield on income
earning assets and the cost of our interest bearing liabilities,
was 5.68% for the three months ended June 30, 2007, a
decrease of 81 basis points from 6.49% for the three months
ended June 30, 2006. Gross yield is the sum of interest,
fee and operating lease income divided by our average income
earning assets. The decrease in net finance spread is
attributable to the changes in its components as described above.
The yields of income earning assets and the costs of interest
bearing liabilities in our Commercial Lending &
Investment segment for the three months ended June 30, 2007
and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
|
($ in thousands)
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
$
|
227,794
|
|
|
|
10.06
|
%
|
|
|
|
|
|
$
|
180,083
|
|
|
|
10.45
|
%
|
Fee income
|
|
|
|
|
|
|
45,056
|
|
|
|
1.99
|
|
|
|
|
|
|
|
36,603
|
|
|
|
2.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets(1)
|
|
$
|
9,083,019
|
|
|
|
272,850
|
|
|
|
12.05
|
|
|
$
|
6,910,554
|
|
|
|
216,686
|
|
|
|
12.57
|
|
Total direct real estate
investments
|
|
|
872,969
|
|
|
|
22,118
|
|
|
|
10.16
|
|
|
|
219,632
|
|
|
|
6,694
|
|
|
|
12.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income earning assets
|
|
|
9,955,988
|
|
|
|
294,968
|
|
|
|
11.88
|
|
|
|
7,130,186
|
|
|
|
223,380
|
|
|
|
12.57
|
|
Total interest bearing
liabilities(2)
|
|
|
7,929,113
|
|
|
|
122,513
|
|
|
|
6.20
|
|
|
|
5,356,722
|
|
|
|
81,262
|
|
|
|
6.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
172,455
|
|
|
|
5.68
|
%
|
|
|
|
|
|
$
|
142,118
|
|
|
|
6.49
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
6.95
|
%
|
|
|
|
|
|
|
|
|
|
|
7.99
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 0.27% and 0.16%, respectively, for the three months
ended June 30, 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.
39
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 June 30, 2007.
Other
Income
In our Commercial Lending & Investment segment, other
income was $34.9 million for the three months ended
June 30, 2007, an increase of $27.7 million, or 381%,
from total other income for the three months ended June 30,
2006. The increase in other income was primarily attributable to
a $18.5 million increase in net realized and unrealized
gains in our equity investments, a $5.5 million increase in
gains related to the sale of loans, a $2.1 million increase
in fees arising from our HUD mortgage origination services, a
$2.1 million increase in income from our management of
various loans held by third parties and a $2.0 million
increase in income relating to our equity interests in certain
non-consolidated entities. These increases were partially offset
by a $3.0 million decrease in net unrealized gains on
derivative instruments and a $2.7 million increase in
losses on foreign currency exchange.
In our Residential Mortgage Investment segment, other expense
consisted of a net loss on the residential mortgage investment
portfolio of $13.8 million for the three months ended
June 30, 2007, a decrease of $17.9 million, or 443%,
from total other income for the three months ended June 30,
2006. This net loss was attributable to net unrealized losses on
our residential mortgage investments of $34.1 million and
impairments on our Non-Agency MBS of $6.4 million. These
losses were partially offset by net realized and unrealized
gains on derivative instruments related to our residential
mortgage investments of $26.7 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.
Operating
Expenses
The increase in consolidated operating expenses was primarily
due to an increase of $4.9 million in depreciation and
amortization primarily resulting from our direct real estate
investments, a $4.5 million increase in total employee
compensation and a $1.0 million increase in professional
fees. The higher employee compensation was attributable to a
$1.7 million increase in employee salaries and higher
incentive compensation, including an increase in restricted
stock awards and stock options granted. For the three months
ended June 30, 2007 and 2006, incentive compensation
totaled $19.9 million and $18.4 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. Operating expenses in our
Residential Mortgage Investment segment, which consist primarily
of compensation and benefits, professional fees and other direct
expenses, were $1.9 million and $2.0 million for the
three months ended June 30, 2007 and 2006, respectively.
In our Commercial Lending & Investment segment,
operating expenses as a percentage of average total assets
decreased to 2.54% for the three months ended June 30,
2007, from 2.87% for the three months ended June 30, 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 2.25% for the three months ended June 30,
2007, from 2.72% for the three months ended June 30, 2006.
40
Adjusted
Earnings
Adjusted earnings, as previously defined, were
$128.4 million, or $0.68 per diluted share, for the three
months ended June 30, 2007. Adjusted earnings were
$97.1 million, or $0.57 per diluted share, for the three
months ended June 30, 2006. A reconciliation of our
reported net income to adjusted earnings for the three months
ended June 30, 2007 and 2006 was as follows ($ in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
June 30
|
|
|
|
2007
|
|
|
2006
|
|
|
Net income
|
|
$
|
84,328
|
|
|
$
|
72,789
|
|
Add:
|
|
|
|
|
|
|
|
|
Real estate depreciation and
amortization(1)
|
|
|
7,896
|
|
|
|
2,220
|
|
Amortization of deferred financing
fees(2)
|
|
|
6,823
|
|
|
|
7,525
|
|
Non-cash equity compensation
|
|
|
9,859
|
|
|
|
9,817
|
|
Net realized and unrealized losses
(gain) on residential mortgage investment portfolio, including
related derivatives(3)
|
|
|
15,846
|
|
|
|
(3,770
|
)
|
Unrealized gains on derivatives and
foreign currencies, net
|
|
|
(1,287
|
)
|
|
|
(6,882
|
)
|
Unrealized losses on investments,
net
|
|
|
1,170
|
|
|
|
3,870
|
|
Provision for loan losses
|
|
|
17,410
|
|
|
|
11,571
|
|
Recoveries(4)
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Charge offs(5)
|
|
|
13,625
|
|
|
|
|
|
Nonrecurring items
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting
change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted earnings
|
|
$
|
128,420
|
|
|
$
|
97,140
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
0.45
|
|
|
$
|
0.43
|
|
Diluted as reported
|
|
$
|
0.45
|
|
|
$
|
0.43
|
|
Average shares
outstanding:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
|
185,371,033
|
|
|
|
168,866,621
|
|
Diluted as reported
|
|
|
187,428,430
|
|
|
|
170,569,836
|
|
Adjusted earnings per
share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.69
|
|
|
$
|
0.58
|
|
Diluted(6)
|
|
$
|
0.68
|
|
|
$
|
0.57
|
|
Average shares
outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
185,371,033
|
|
|
|
168,866,621
|
|
Diluted(7)
|
|
|
189,425,285
|
|
|
|
173,080,654
|
|
|
|
|
(1)
|
|
Depreciation and amortization 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
realized gains and losses and 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)
|
|
Adjusted to reflect the impact of
adding back noncontrolling interests expense of
$1.3 million and $1.2 million for the three months
ended June 30, 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.
|
|
(7)
|
|
Adjusted to include average
non-managing member units of 1,996,855 and 2,510,818 for the
three months ended June 30, 2007 and 2006, respectively,
which are considered dilutive to adjusted earnings per share,
but are antidilutive to GAAP net income per share.
|
41
Comparison
of the Six Months Ended June 30, 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 $436.4 million for the six months ended
June 30, 2007, an increase of $88.2 million, or 25%,
from interest income for the six months ended June 30,
2006. This increase was due to the growth in average interest
earning assets, primarily loans, of $2.0 billion, or 29%.
This increase was partially offset by a decrease in the interest
component of yield to 10.05% for the six months ended
June 30, 2007 from 10.35% for the six months ended
June 30, 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 six months ended June 30, 2007, our commercial
lending spread to average one-month LIBOR was 4.73% compared to
5.50% for the six months ended June 30, 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
was $164.3 million for the six months ended June 30,
2007, an increase of $61.0 million, or 59%, from interest
income for the six months ended June 30, 2006. This
increase was primarily due to the growth in average interest
earning assets of $2.0 billion, or 51%.
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 $40.1 million
for the six months ended June 30, 2007 compared to
$28.3 million for the six months ended June 30, 2006.
Prepayment-related fee income contributed 0.92% and 0.84%, to
yield for the six months ended June 30, 2007 and 2006,
respectively. Yield from fee income, including prepayment
related fees, decreased to 2.19% for the six months ended
June 30, 2007 from 2.32% for the six months ended
June 30, 2006.
Operating
Lease Income
In our Commercial Lending & Investment segment,
operating lease income was $42.4 million, an increase of
$31.1 million, or 275%, from the six months ended
June 30, 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 six months ended June 30, 2007
and 2006, our average balance of direct real estate investments
was $830.0 million and $173.5 million, respectively.
Interest
Expense
We fund our growth largely through borrowings. In our Commercial
Lending & Investment segment, interest expense was
$233.8 million for the six months ended June 30, 2007,
an increase of $79.7 million, or 52%, from interest expense
for the six months ended June 30, 2006. This increase in
interest expense was primarily due to an increase in average
borrowings of $2.3 billion, or 42%. Our cost of borrowings
increased to 6.21% for the six months ended June 30, 2007
from 5.82% for the six months ended June 30, 2006. This
increase was the result of 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, which 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
42
one-month LIBOR for the six months ended June 30, 2007 was
0.89% compared to 0.97% for the six months ended June 30,
2006.
In our Residential Mortgage Investment segment, interest expense
was $153.2 million for the six months ended June 30,
2007, an increase of $55.6 million, or 57%, from interest
expense for the six months ended June 30, 2006. This
increase in interest expense was primarily due to an increase in
average borrowings of $1.9 billion, or 52%. Our cost of
borrowings increased to 5.36% for the six months ended
June 30, 2007 from 5.18% for the six months ended
June 30, 2006. This increase was primarily the result of
rising interest rates.
Net
Finance Margin
In our Commercial Lending & Investment segment, net
finance margin, defined as net investment income (which includes
interest, fee and operating lease income less interest expense)
divided by average income earning assets, was 7.15% for the six
months ended June 30, 2007, a decrease of 107 basis
points from 8.22% for the six months ended June 30, 2006.
The decrease in net finance margin was primarily due to the
increase in interest expense resulting from higher leverage, a
higher cost of funds, and a decrease in yield on total income
earning assets. Net finance spread, which represents the
difference between our gross yield on income earning assets and
the cost of our interest bearing liabilities, was 5.86% for the
six months ended June 30, 2007, a decrease of
100 basis points from 6.86% for the six months ended
June 30, 2006. Gross yield is the sum of interest, fee and
operating lease income divided by our average income earning
assets. The decrease in net finance spread is attributable to
the changes in its components as described above.
The yields of income earning assets and the costs of interest
bearing liabilities in our Commercial Lending &
Investment segment for the six months ended June 30, 2007
and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
Weighted
|
|
|
Net
|
|
|
Average
|
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
Average
|
|
|
Investment
|
|
|
Yield/
|
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
Balance
|
|
|
Income
|
|
|
Cost
|
|
|
|
($ in thousands)
|
|
|
Interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
$
|
436,448
|
|
|
|
10.05
|
%
|
|
|
|
|
|
$
|
348,211
|
|
|
|
10.35
|
%
|
Fee income
|
|
|
|
|
|
|
95,083
|
|
|
|
2.19
|
|
|
|
|
|
|
|
78,145
|
|
|
|
2.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets(1)
|
|
$
|
8,758,732
|
|
|
|
531,531
|
|
|
|
12.24
|
|
|
$
|
6,785,120
|
|
|
|
426,356
|
|
|
|
12.67
|
|
Total direct real estate
investments
|
|
|
830,035
|
|
|
|
42,406
|
|
|
|
10.30
|
|
|
|
173,496
|
|
|
|
11,319
|
|
|
|
13.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income earning assets
|
|
|
9,588,767
|
|
|
|
573,937
|
|
|
|
12.07
|
|
|
|
6,958,616
|
|
|
|
437,675
|
|
|
|
12.68
|
|
Total interest bearing
liabilities(2)
|
|
|
7,595,630
|
|
|
|
233,765
|
|
|
|
6.21
|
|
|
|
5,339,899
|
|
|
|
154,095
|
|
|
|
5.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
340,173
|
|
|
|
5.86
|
%
|
|
|
|
|
|
$
|
283,580
|
|
|
|
6.86
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
7.15
|
%
|
|
|
|
|
|
|
|
|
|
|
8.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 0.25% and 0.16%, respectively, for the six months
ended June 30, 2007 and 2006. Net finance spread is the
difference between yield on interest earning assets and the cost
of our interest bearing liabilities. The increase in net finance
spread is attributable to the changes in its components as
described above.
43
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 six months ended June 30, 2007.
Other
Income
In our Commercial Lending & Investment segment, other
income was $46.7 million for the six months ended
June 30, 2007, an increase of $33.0 million, or 240%,
from total other income for the six months ended June 30,
2006. The increase in other income was primarily attributable to
a $24.9 million increase in net realized and unrealized
gains in our equity investments, a $5.7 million increase in
gains related to the sale of loans, a $3.4 million increase
in income from our management of various loans held by third
parties, a $2.9 million increase in fees arising from our
HUD mortgage origination services, a $2.6 million decrease
in losses incurred on the extinguishment of debt and a
$1.8 million increase in income relating to our equity
interests in certain non-consolidated entities. These increases
were partially offset by a $5.8 million decrease in net
unrealized gains on derivative instruments and a
$4.5 million decrease in the receipt of
break-up
fees.
In our Residential Mortgage Investment segment, other expense
consisted of a net loss on the residential mortgage investment
portfolio of $19.5 million for the six months ended
June 30, 2007, an increase of $17.5 million, or 844%,
from total other expense for the six months ended June 30,
2006. This net loss was attributable to net unrealized losses on
our residential mortgage investments of $24.3 million and
impairments on our Non-Agency MBS of $13.4 million. These
losses were partially offset by net realized and unrealized
gains on derivative instruments related to our residential
mortgage investments of $18.1 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.
Operating
Expenses
The increase in consolidated operating expenses was primarily
due to higher total employee compensation, which increased
$11.2 million, or 17%. The higher employee compensation was
attributable to $3.1 million increase in employee salaries
and higher incentive compensation, including an increase in
restricted stock awards and stock options granted. For the six
months ended June 30, 2007 and 2006, incentive compensation
totaled $40.7 million and $34.0 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 six months ended June 30, 2007
was primarily attributable to an increase of $10.2 million
in depreciation and amortization primarily resulting from our
direct real estate investments, an increase of $2.0 million
in professional fees, an increase of $1.3 million in travel
and entertainment expenses, an increase of $1.2 million in
administrative expenses and an increase of $1.1 million in
rent expense. Operating expenses in our Residential Mortgage
Investment segment, which consist primarily of compensation and
benefits, professional fees and other direct expenses, were
$3.0 million and $4.2 million for the six months ended
June 30, 2007 and 2006, respectively.
In our Commercial Lending & Investment segment,
operating expenses as a percentage of average total assets
decreased to 2.65% for the six months ended June 30, 2007,
from 2.85% for the six months ended June 30, 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 2.36% for the six months ended June 30, 2007,
from 2.72% for the six months ended June 30, 2006.
Income
Taxes
Our effective tax rate on our consolidated net income was 23.0%
for the six months ended June 30, 2007. Our effective
income tax rate for the six months ended June 30, 2007
attributable to our TRSs was 38.8%. Our overall effective tax
rate was 18.2% for the six months ended June 30, 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.
44
Adjusted
Earnings
Adjusted earnings, as previously defined, were
$242.7 million, or $1.31 per diluted share, for the six
months ended June 30, 2007. Adjusted earnings were
$192.0 million, or $1.18 per diluted share, for the six
months ended June 30, 2006. A reconciliation of our
reported net income to adjusted earnings for the six months
ended June 30, 2007 and 2006 was as follows ($ in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
June 30
|
|
|
|
2007
|
|
|
2006
|
|
|
Net income
|
|
$
|
163,018
|
|
|
$
|
138,083
|
|
Add:
|
|
|
|
|
|
|
|
|
Real estate depreciation and
amortization(1)
|
|
|
14,658
|
|
|
|
3,610
|
|
Amortization of deferred financing
fees(2)
|
|
|
12,332
|
|
|
|
14,427
|
|
Non-cash equity compensation
|
|
|
20,571
|
|
|
|
16,353
|
|
Net realized and unrealized losses
on residential mortgage investment portfolio, including related
derivatives(3)
|
|
|
23,381
|
|
|
|
677
|
|
Unrealized gains on derivatives
and foreign currencies, net
|
|
|
(959
|
)
|
|
|
(7,133
|
)
|
Unrealized losses on investments,
net
|
|
|
1,217
|
|
|
|
5,106
|
|
Provision for loan losses
|
|
|
32,336
|
|
|
|
26,284
|
|
Recoveries(4)
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Charge offs(5)
|
|
|
23,876
|
|
|
|
276
|
|
Nonrecurring items(6)
|
|
|
|
|
|
|
4,725
|
|
Cumulative effect of accounting
change, net of taxes
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
Adjusted earnings
|
|
$
|
242,678
|
|
|
$
|
192,036
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
0.89
|
|
|
$
|
0.87
|
|
Diluted as reported
|
|
$
|
0.88
|
|
|
$
|
0.85
|
|
Average shares
outstanding:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
|
182,274,147
|
|
|
|
159,309,225
|
|
Diluted as reported
|
|
|
184,512,451
|
|
|
|
162,515,548
|
|
Adjusted earnings per
share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.33
|
|
|
$
|
1.21
|
|
Diluted(7)
|
|
$
|
1.31
|
|
|
$
|
1.18
|
|
Average shares
outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
182,274,147
|
|
|
|
159,309,225
|
|
Diluted(8)
|
|
|
186,737,699
|
|
|
|
164,665,696
|
|
|
|
|
(1) |
|
Depreciation and amortization 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 realized gains and losses
and 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 six
months ended June 30, 2006. |
|
(7) |
|
Adjusted to reflect the impact of adding back noncontrolling
interests expense of $2.6 million and $2.1 million for
the six months ended June 30, 2007 and 2006, respectively,
to adjusted earnings due to the application of the if-converted
method on non-managing member units, which are considered
dilutive to adjusted earnings per share, but are antidilutive to
GAAP net income per share for all periods presented. |
|
(8) |
|
Adjusted to include average non-managing member units of
2,225,248 and 2,150,148 for the six months ended June 30,
2007 and 2006, respectively, which are considered dilutive to
adjusted earnings per share, but are antidilutive to GAAP net
income per share. |
45
Financial
Condition
Commercial
Lending & Investment Segment
Portfolio
Composition
We provide commercial loans to businesses that require
customized and sophisticated financing. We also invest in real
estate and selectively make equity investments. As of
June 30, 2007 and December 31, 2006, our commercial
lending and investment portfolio comprised the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Commercial loans
|
|
$
|
8,941,593
|
|
|
$
|
7,850,198
|
|
Direct real estate investments
|
|
|
1,032,838
|
|
|
|
722,303
|
|
Equity investments
|
|
|
175,968
|
|
|
|
150,090
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,150,399
|
|
|
$
|
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 June 30, 2007 and December 31,
2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007
|
|
|
December 31, 2006
|
|
|
|
($ in thousands)
|
|
|
Composition of loan portfolio by
loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured loans(1)
|
|
$
|
5,365,138
|
|
|
|
60
|
%
|
|
$
|
4,704,166
|
|
|
|
60
|
%
|
First mortgage loans(1)
|
|
|
2,864,816
|
|
|
|
32
|
|
|
|
2,542,222
|
|
|
|
32
|
|
Subordinate loans
|
|
|
711,639
|
|
|
|
8
|
|
|
|
603,810
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,941,593
|
|
|
|
100
|
%
|
|
$
|
7,850,198
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of loan portfolio by
business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured Finance
|
|
$
|
3,534,140
|
|
|
|
40
|
%
|
|
$
|
2,839,716
|
|
|
|
36
|
%
|
Healthcare and Specialty Finance
|
|
|
2,798,002
|
|
|
|
31
|
|
|
|
2,775,748
|
|
|
|
35
|
|
Corporate Finance
|
|
|
2,609,451
|
|
|
|
29
|
|
|
|
2,234,734
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,941,593
|
|
|
|
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 June 30, 2007
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Number of
|
|
|
Average Loan
|
|
|
|
of Loans
|
|
|
Loan Size
|
|
|
Clients
|
|
|
Size per Client
|
|
|
|
($ in thousands)
|
|
|
Composition of loan portfolio by
business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare and Specialty Finance
|
|
|
426
|
|
|
$
|
6,568
|
|
|
|
300
|
|
|
$
|
9,327
|
|
Structured Finance
|
|
|
266
|
|
|
|
13,286
|
|
|
|
219
|
|
|
|
16,138
|
|
Corporate Finance
|
|
|
448
|
|
|
|
5,825
|
|
|
|
210
|
|
|
|
12,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall loan portfolio
|
|
|
1,140
|
|
|
|
7,844
|
|
|
|
729
|
|
|
|
12,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
The scheduled maturities of our commercial loan portfolio by
loan type as of June 30, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured loans(1)
|
|
$
|
714,116
|
|
|
$
|
4,297,112
|
|
|
$
|
353,911
|
|
|
$
|
5,365,139
|
|
First mortgage loans(1)
|
|
|
1,082,917
|
|
|
|
1,639,532
|
|
|
|
142,366
|
|
|
|
2,864,815
|
|
Subordinate loans
|
|
|
68,540
|
|
|
|
106,303
|
|
|
|
536,796
|
|
|
|
711,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,865,573
|
|
|
$
|
6,042,947
|
|
|
$
|
1,033,073
|
|
|
$
|
8,941,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Term B loans. |
The dollar amounts of all fixed-rate and adjustable-rate
commercial loans by loan type as of June 30, 2007 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable
|
|
|
Fixed
|
|
|
|
|
|
|
Rates
|
|
|
Rates
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Composition of loan portfolio by
loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured loans(1)
|
|
$
|
5,306,738
|
|
|
$
|
58,401
|
|
|
$
|
5,365,139
|
|
First mortgage loans(1)
|
|
|
2,562,182
|
|
|
|
302,633
|
|
|
|
2,864,815
|
|
Subordinate loans
|
|
|
577,299
|
|
|
|
134,340
|
|
|
|
711,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,446,219
|
|
|
$
|
495,374
|
|
|
$
|
8,941,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total loan portfolio
|
|
|
94%
|
|
|
|
6%
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Term B loans. |
As of June 30, 2007, our Healthcare and Specialty Finance,
Structured Finance and Corporate Finance businesses had
commitments to lend up to an additional $1.9 billion,
$2.5 billion and $0.6 billion, respectively, to 300,
219 and 210 existing clients, respectively. Commitments do not
include transactions for which we have signed commitment letters
but not yet signed loan agreements
Credit
Quality and Allowance for Loan Losses
As of June 30, 2007 and December 31, 2006, the
principal balances of loans 60 or more days contractually
delinquent, non-accrual loans and impaired loans in our
commercial lending portfolio were as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
Commercial Loan Asset Classification
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Loans 60 or more days
contractually delinquent
|
|
$
|
97,040
|
|
|
$
|
88,067
|
|
Non-accrual loans(1)
|
|
|
176,088
|
|
|
|
183,483
|
|
Impaired loans(2)
|
|
|
349,486
|
|
|
|
281,377
|
|
Less: loans in multiple categories
|
|
|
(251,753
|
)
|
|
|
(230,469
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
370,861
|
|
|
$
|
322,458
|
|
|
|
|
|
|
|
|
|
|
Total as a percentage of total
loans
|
|
|
4.15%
|
|
|
|
4.11%
|
|
|
|
|
|
|
|
|
|
|
Total as a percentage of all
commercial assets(3)
|
|
|
3.72%
|
|
|
|
3.76%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes commercial loans with an aggregate principal balance of
$31.0 million and $47.0 million as of June 30,
2007 and December 31, 2006, respectively, which were also
classified as loans 60 or more days contractually delinquent.
Includes non-performing loans classified as held for sale that
have an aggregate principal balance of |
47
|
|
|
|
|
$3.0 million as of June 30, 2007. There were no
non-performing loans classified as held for sale as of
December 31, 2006. |
|
|
|
(2) |
|
Includes commercial loans with an aggregate principal balance of
$78.7 million and $47.0 million as of June 30,
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
$173.1 million and $183.5 million as of June 30,
2007 and December 31, 2006, respectively, which were also
placed 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 six months ended June 30, 2007, we classified
commercial loans with an aggregate carrying value of
$69.9 million as of June 30, 2007 as troubled debt
restructurings as defined by SFAS No. 15,
Accounting for Debtors and Creditors for Troubled Debt
Restructurings. As of June 30, 2007, commercial loans
with an aggregate carrying value of $160.7 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 $12.3 million as of June 30,
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 $127.5 million and $120.6 million as
of June 30, 2007 and December 31, 2006, respectively.
These amounts equate to 1.43% and 1.54% of gross loans as of
June 30, 2007 and December 31, 2006, respectively. Of
our total allowance for loan losses as of June 30, 2007 and
December 31, 2006, $33.3 million and
$37.8 million, respectively, were allocated to impaired
loans. During the six months ended June 30, 2007 and 2006,
we charged off loans totaling $23.7 million and
$12.5 million, respectively. Net charge offs as a
percentage of average loans was 0.57% and 0.39% for the six
months ended June 30, 2007 and 2006, respectively.
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 June 30, 2007 and
December 31, 2006, we had $1.0 billion 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 June 30, 2007 and December 31, 2006, the
carrying values of our investments in our Commercial
Lending & Investment segment were $176.0 million
and $150.1 million, respectively. Included in these
balances were investments carried at fair value totaling
$29.1 million and $34.6 million, respectively.
48
Residential
Mortgage Investment Segment
Portfolio
Composition
We invest directly in residential mortgage investments and, as
of June 30, 2007 and December 31, 2006, our portfolio
of residential mortgage investments was as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Mortgage-related receivables(1)
|
|
$
|
2,162,716
|
|
|
$
|
2,295,922
|
|
Residential mortgage-backed
securities:
|
|
|
|
|
|
|
|
|
Agency(2)
|
|
|
4,290,965
|
|
|
|
3,502,753
|
|
Non-Agency(3)
|
|
|
21,575
|
|
|
|
34,243
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,475,256
|
|
|
$
|
5,832,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents secured receivables that are backed by adjustable
rate, prime residential mortgage loans that are further
described in Note 4, Mortgage-Related Receivables and
Related Owners Trust Transactions, in our accompanying
unaudited consolidated financial statements for the three and
six months ended June 30, 2007. |
|
(2) |
|
Represent mortgage-backed securities (MBS) whose
payments of principal and interest are guaranteed by Fannie Mae
or Freddie Mac. See the following paragraph for a description of
these securities. |
|
(3) |
|
See following paragraph for a description of these securities. |
We invest in RMBS, which are securities collateralized by
residential mortgage loans. Over 99% of our investments in RMBS
are represented by mortgage-backed securities that were issued
and guaranteed by Fannie Mae or Freddie Mac (hereinafter,
Agency MBS). Substantially all of our Agency MBS are
collateralized by adjustable rate residential mortgage loans,
including hybrid adjustable rate mortgage loans. We also invest
in RMBS 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). 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 5.06% as of
June 30, 2007 and the weighted average reset date for the
portfolio was approximately 46.7 months. The weighted
average net coupon of Non-Agency MBS in our portfolio was 8.38%
as of June 30, 2007. The fair values of our Agency MBS and
Non-Agency MBS were $4.3 billion and $21.6 million,
respectively, as of June 30, 2007.
As of June 30, 2007, we had $2.2 billion in
mortgage-related receivables secured by prime residential
mortgage loans. As of June 30, 2007, the weighted average
interest rate on these receivables was 5.37%, and the weighted
average contractual maturity was approximately 28.3 years.
See further discussion on our accounting treatment of
mortgage-related receivables in Note 4, Mortgage-Related
Receivables and Related Owners Trust Securitizations,
in our accompanying consolidated financial statements.
49
Credit
Quality and Allowance for Loan Losses
Mortgage-related receivables, including real estate owned that
was obtained through the foreclosure of certain of such
receivables, are comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-Related Receivable (MRR) Asset
Classification
|
|
June 30,2007
|
|
|
|
December 31,2006
|
|
|
|
($ in thousands)
|
|
|
|
|
|
|
% of MRR
|
|
|
|
|
|
|
% of MRR
|
|
|
Total mortgage-related receivables
|
|
$
|
2,162,715
|
|
|
|
100
|
|
%
|
|
$
|
2,295,922
|
|
|
|
100
|
%
|
Mortgage-related receivables whose
underlying mortgage loans are 90 or more days past due or are in
the process of foreclosure
|
|
|
7,531
|
|
|
|
0.35%(1
|
)
|
|
|
|
2,364
|
|
|
|
0.10
|
%
|
Foreclosed assets
|
|
|
2,058
|
|
|
|
0.10
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
By comparison, in its June 2007 Monthly Summary Report, Fannie
Mae reported a serious delinquency rate (SDQ) of 0.62% for
conventional single family loans that are three months or more
past due or in foreclosure process while, in its June 2007
Monthly Volume Summary, Freddie Mac reported an SDQ of 0.49% for
comparable types of single family loans. |
In connection with such assets, we recorded no provision for
loan losses for the six months ended June 30, 2007 and the
allowance for loan losses was $0.4 million as of
June 30, 2007. We recorded a provision for loan losses of
$0.3 million related to our mortgage-related receivables
during the six months ended June 30, 2006, and the
allowance for loan losses was $0.4 million as of
December 31, 2006. Through June 30, 2007, we have
recognized less than $1,000 in total realized losses on such
mortgage-related receivables.
Financing
We have financed our investments in RMBS primarily through
repurchase agreements. As of June 30, 2007 and
December 31, 2006, our outstanding repurchase agreements
totaled $4.2 billion and $3.4 billion, respectively.
As of June 30, 2007, repurchase agreements that we executed
had maturities of between 2 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 June 30, 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 June 30, 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 (ILC) with the Federal
Deposit Insurance Corporation
50
(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. If and when operational, both the ILC and
TierOne Bank will provide additional sources of liquidity: the
ILC will provide access to wholesale deposits and TierOne Bank
will provide access to retail deposits, wholesale deposits, and
Federal Home Loan Bank borrowings.
As of June 30, 2007, the amount of our unfunded commitments
to extend credit to our clients exceeded our unused funding
sources and unrestricted cash by $2.6 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.
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 June 30, 2007 and December 31, 2006, we had
$271.5 million and $396.2 million, respectively, in
cash and cash equivalents. We invest cash on hand in short-term
liquid investments.
We had $221.7 million and $240.9 million of restricted
cash as of June 30, 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.
51
Sources
and Uses of Cash
For the six months ended June 30, 2007 and 2006, we (used)
generated cash from operations of $(809.2) million and
$94.2 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 six months ended June 30, 2007 and 2006, we generated
cash flow from financing activities of $1.7 billion and
$3.6 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 six months ended June 30, 2007
and 2006, we used cash in investing activities of
$1.0 billion and $3.7 billion, respectively.
Borrowings
As of June 30, 2007 and December 31, 2006, we had
outstanding borrowings totaling $14.6 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,
Borrowings, in our audited consolidated financial
statements for the year ended December 31, 2006 included in
our
Form 10-K
and Note 10, Borrowings, in our accompanying
unaudited consolidated financial statements for the three and
six months ended June 30, 2007.
Our overall debt strategy emphasizes diverse sources of
financing including both secured and unsecured financings. As of
June 30, 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
six months ended June 30, 2007. We also borrowed under our
existing repurchase agreements with various financial
institutions to finance purchases of RMBS during the six months
ended June 30, 2007. Agency MBS, Non-Agency MBS and short
term liquid investments collateralize our repurchase agreements
as of June 30, 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 $5.3 billion and
$5.0 billion, respectively, as of June 30, 2007 and
December 31, 2006, respectively. As of June 30, 2007,
we had seven credit facilities, five of which are secured and
two of which are unsecured, with a total of 25 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 June 30, 2007, three of our credit
facilities, with a total capacity of $1.6 billion, were
scheduled to mature within one year. The amount outstanding
under these facilities was $1.1 billion as of June 30,
2007. Our other four credit facilities, with a total capacity of
$3.7 billion, have scheduled maturity dates between one and
two years, of which $2.7 billion is subject to annual
renewal.
52
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
June 30, 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 on
this facility 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, modify the
interest rate to one-month LIBOR plus 1.85% and change the
maturity date from January 11, 2017 to April 9, 2009,
with three one-year extensions at our option.
In April 2007, we entered into a $1.25 billion secured,
revolving credit facility with Citigroup Global Markets Realty
Corp. (Citigroup) that replaced our borrowings under
our $400 million secured credit facility led by an
affiliate of Citigroup Global Markets Inc. We expect to use the
funds available under this facility to finance the origination
of commercial loans. The credit facility is secured by certain
commercial loans from our portfolio. On August 2, 2007, we
increased the commitment amount to $1.50 billion, as
permitted under the terms of the facility and we extended the
facility maturity date to August 1, 2008 from
October 16, 2007. In consideration for such extension, we
amended the facility to (i) decrease the maximum advance
rate to 85% from 90% of the outstanding principal balance of
commercial loans transferred to this facility, and
(ii) increase the interest rate that we are charged on
borrowings by 30 basis points to one-month LIBOR plus
0.90%, subject to adjustment under certain circumstances, in
each case effective September 1, 2007. There were no other
material changes in the terms and conditions of the facility.
In April 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.
In June 2007, we amended our $640.0 million unsecured
syndicated revolving credit facility with Wachovia Bank N.A as
Administrative Agent to increase the total commitment amount
under the facility to $1.05 billion. At our option, under
certain circumstances, the amendment allows the total commitment
amount under the facility to be increased to $1.25 billion.
Six new institutions joined the lending syndicate, bringing the
total number of lenders to 23 and eleven institutions increased
their commitment. There were no other material changes in the
terms and conditions of the facility.
Term
Debt
In January 2007, we repaid all amounts outstanding under our
series 2004-2
Term Debt notes.
In April 2007, we completed an $800.0 million term debt
securitization that was recorded as an on-balance sheet
financing. We sold $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 and the trust certificate. The blended pricing for the
notes sold to investors (excluding fees) was one-month LIBOR
plus 28.3 basis points. We used the proceeds to repay
borrowings under certain of our credit facilities and to pay
certain transaction fees and expenses.
In June 2007, we repaid all amounts outstanding under our
series 2003-2
and 2005-1
Term Debt notes.
53
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, which is not consolidated for financial statement
purposes, 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 coupon that is 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.
In June 2007, we issued $41.2 million in junior
subordinated debt to a newly formed statutory trust,
CapitalSource Trust Preferred Securities
2007-2
(2007-2
TP Trust). We formed the
2007-2 TP
Trust in June 2007, with an initial capitalization in common
securities of $1.2 million for the sole purpose of issuing
$40.0 million of preferred securities (the
2007-2
TP Securities) to outside investors. The
2007-2 TP
Trust used the initial capitalization and the proceeds from the
sale of the
2007-2 TP
Securities to acquire the junior subordinated debt that we
issued.
The 2007-2
TP Securities bear interest at a floating interest rate based on
three-month LIBOR plus 1.95%, resetting quarterly. The
2007-2 TP
Securities, which mature on July 30, 2037, are callable at
par in whole or in part at any time after July 30, 2012 and
are unsecured and junior in right of payment to all of our
indebtedness.
Convertible
Debt
In April 2007, we completed exchange offers relating to our
1.25% Debentures and our 3.5% Debentures. At closing, 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 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
secured and unsecured and unsubordinated indebtedness, including
the Senior Debentures that were not exchanged, and senior to our
existing and future subordinate indebtedness.
In addition, we amended the documents governing our convertible
bond hedge transaction to provide, among other things, for those
documents to relate to shares issuable upon conversion of both
the 1.25% Debentures and the 1.625% Debentures.
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 and July 15,
2011 for the 1.625% Debentures and the 4% Debentures,
respectively, which, under certain circumstances, will increase
the conversion rate by a number of additional shares. The
Subordinated Debentures do not provide for the payment of
contingent interest.
Like the 1.25% Debentures, and as of June 30, 2007, the
1.625% Debentures are convertible, subject to certain
conditions described below, into shares of our common stock at a
rate of 41.5818 shares of common stock per $1,000 principal
amount of debentures. The conversion rate will adjust each time
we pay a dividend on our common stock, with the fair value of
each adjustment taxable to the holders. The
1.625% Debentures are redeemable for cash at our option at
any time on or after March 15, 2009 at a redemption price
of 100% of their principal amount plus accrued interest. Holders
of the 1.625% Debentures have the right to require us to
repurchase some or all of their debentures for cash on
March 15, 2009, March 15, 2014, March 15, 2019,
March 15, 2024 and March 15, 2029 at a price of 100%
of their principal amount plus accrued interest. Holders of the
1.625% Debentures also have the right
54
to require us to repurchase some or all of their
1.625% Debentures upon certain events constituting a
fundamental change.
Holders of the 1.625% Debentures may convert their
debentures prior to maturity only if: (1) the sale price of
our common stock reaches specified thresholds, (2) the
trading price of the 1.625% Debentures falls below a
specified threshold, (3) the 1.625% Debentures have
been called for redemption, or (4) specified corporate
transactions occur. See Note 10, Borrowings, in our
accompanying consolidated financial statements for the three and
six months ended June 30, 2007 for a detailed
discussion of these conditions.
Like the 3.5% Debentures, and as of June 30, 2007, the
4% Debentures are convertible, subject to certain
conditions, into shares of our common stock at a conversion rate
of 39.7693 shares of common stock per $1,000 principal
amount of debentures, representing an effective conversion price
of approximately $25.15 per share. The conversion rate and price
will adjust each time we pay a dividend on our common stock,
with the fair value of each adjustment taxable to the holders.
The 4% Debentures are redeemable for cash at our option at
any time on or after July 15, 2011 at a redemption price of
100% of their principal amount plus accrued interest. Holders of
the 4% Debentures have the right to require us to
repurchase some or all of their 4% Debentures for cash on
July 15, 2011, July 15, 2014, July 15, 2019,
July 15, 2024 and July 15, 2029 at a price of 100% of
their principal amount plus accrued interest. Holders of the
4% Debentures also have the right to require us to
repurchase some or all of their 4% Debentures upon certain
events constituting a fundamental change.
Holders of the 4% Debentures may convert their debentures
prior to maturity only if: (1) the sale price of our common
stock reaches specified thresholds, (2) the trading price
of the 4% Debentures falls below a specified threshold,
(3) the 4% Debentures have been called for redemption,
or (4) specified corporate transactions occur. See
Note 10, Borrowings, in our accompanying
consolidated financial statements for the three and six months
ended June 30, 2007 for a detailed discussion of these
conditions.
To the extent that the respective conversion prices are adjusted
below the price of our common stock at the time the Subordinated
Debentures were issued, we would be required to record a
beneficial conversion option, which would impact both our net
income and net income per share. This has not occurred as of
June 30, 2007.
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.
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 June 30, 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 and six months ended June 30, 2007, we received
proceeds of $60.4 million and $186.7 million,
respectively, related to the direct purchase of 2.4 million
and 7.5 million shares of our common stock pursuant to the
DRIP, respectively. During the three and six months ended
June 30, 2006, we received proceeds of $39.7 million
related to the direct purchase of 1.7 million shares of our
common stock pursuant to the DRIP. In addition, we received
proceeds of $21.7 million and $29.5 million related to
cash dividends reinvested for 0.9 million and
1.2 million shares of our common stock during the three and
six months ended June 30, 2007, respectively. We received
proceeds of
55
$3.4 million and $5.1 million related to cash
dividends reinvested for 0.1 million and 0.2 million
shares of our common stock, respectively, during the three and
six months ended June 30, 2006, respectively.
Commitments,
Guarantees & Contingencies
As of June 30, 2007 and December 31, 2006, we had
unfunded commitments to extend credit to our clients of
$5.0 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 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 June 30, 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.
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
56
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,
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 June 30, 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 June 30, 2007, the single largest industry concentration
was business products and services, which made up approximately
14% of our commercial loan portfolio. As of June 30, 2007,
the largest geographical concentration was Florida, which made
up approximately 16% of our commercial loan portfolio. As of
June 30, 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
June 30, 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 June 30, 2007
and December 31, 2006, the gross positive fair value of our
derivative financial instruments was $45.9 million and
$23.7 million, respectively. Our master netting agreements
reduced the exposure to this gross positive fair value by
$28.5 million and $16.1 million as of June 30,
2007 and December 31, 2006, respectively. We did not hold
collateral against derivative financial instruments as of
June 30, 2007 and December 31, 2006. Accordingly, our
net exposure to derivative counterparty credit risk as of
June 30, 2007 and December 31, 2006 was
$17.4 million and $7.6 million, respectively.
57
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.
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 June 30,
2007 were as follows:
|
|
|
|
|
|
|
Estimated (Decrease)
|
|
|
|
Increase in
|
|
Rate Change
|
|
Net Interest Income
|
|
(Basis Points)
|
|
Over 12 Months
|
|
|
|
($ in thousands)
|
|
|
−100
|
|
$
|
(4,810
|
)
|
−50
|
|
|
(3,990
|
)
|
+ 50
|
|
|
4,690
|
|
+ 100
|
|
|
9,760
|
|
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.
58
Approximately 40% of the aggregate outstanding principal amount
of our commercial loans had interest rate floors as of
June 30, 2007. The loans with interest rate floors as of
June 30, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Percentage of
|
|
|
|
Outstanding
|
|
|
Total Portfolio
|
|
|
|
($ in thousands)
|
|
|
Loans with contractual interest
rates:
|
|
|
|
|
|
|
|
|
Exceeding the interest rate floor
|
|
$
|
3,446,460
|
|
|
|
38
|
%
|
At the interest rate floor
|
|
|
97,341
|
|
|
|
1
|
|
Below the interest rate floor
|
|
|
59,377
|
|
|
|
1
|
|
Loans with no interest rate floor
|
|
|
5,338,415
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,941,593
|
|
|
|
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.
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.
59
The estimated changes in fair value based on changes in interest
rates applied to our residential mortgage investment portfolio
as of June 30, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Estimated (Decrease)
|
|
|
|
|
Rate Change
|
|
Increase
|
|
|
Percentage of Total
|
|
(Basis Points)
|
|
in Fair Value
|
|
|
Segment Assets
|
|
|
|
($ in thousands)
|
|
|
|
|
|
−100
|
|
$
|
(7,332
|
)
|
|
|
(0.11
|
)%
|
−50
|
|
|
(1,066
|
)
|
|
|
(0.02
|
)
|
+ 50
|
|
|
(1,114
|
)
|
|
|
(0.02
|
)
|
+ 100
|
|
|
(3,657
|
)
|
|
|
(0.06
|
)
|
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 June 30, 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 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,
in Item 7a, Quantitative and Qualitative Disclosures
about Market Risk in our
Form 10-K
for the year ended December 31, 2006 and documents
subsequently filed by us with the Securities and Exchange
Commission, including our Current Report on
Form 8-K
as filed with the SEC on July 23, 2007. 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 June 30, 2007.
60
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
and our Current Report on
Form 8-K
dated July 23, 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 June 30, 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
|
|
|
April 1 April 30,
2007
|
|
|
2,626,972
|
|
|
$
|
25.18
|
|
|
|
|
|
|
|
|
|
May 1 May 31, 2007
|
|
|
329,587
|
|
|
|
26.27
|
|
|
|
|
|
|
|
|
|
June 1 June 30,
2007
|
|
|
581,802
|
|
|
|
25.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,538,361
|
|
|
|
25.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
|
At our Annual Meeting of Stockholders held on May 3, 2007,
two proposals were submitted to a vote of our shareholders.
1. Election of Directors Two directors
were elected to serve on our Board of Directors for a term that
ends at the 2010 Annual Meeting. The number of votes cast in
favor and withheld for each nominee were as follows:
|
|
|
|
|
|
|
|
|
Nominee
|
|
In Favor
|
|
|
Withheld
|
|
|
Andrew B. Fremder
|
|
|
152,650,013
|
|
|
|
7,194,247
|
|
Lawrence C. Nussdorf
|
|
|
157,618,434
|
|
|
|
2,225,827
|
|
61
In addition, the directors serving on our Board of Directors
until the end of their terms in office are as follows:
|
|
|
|
|
Director
|
|
Term Ends
|
|
|
Frederick W. Eubank, II
|
|
|
2008 Annual Meeting
|
|
Jason M. Fish
|
|
|
2008 Annual Meeting
|
|
Timothy M. Hurd
|
|
|
2008 Annual Meeting
|
|
William G. Byrnes
|
|
|
2009 Annual Meeting
|
|
John K. Delaney
|
|
|
2009 Annual Meeting
|
|
Sara L. Grootwassink
|
|
|
2009 Annual Meeting
|
|
Thomas F. Steyer
|
|
|
2009 Annual Meeting
|
|
C. William Hosler (appointed
effective July 1, 2007)
|
|
|
2010 Annual Meeting
|
|
2. Ratification of Auditors The
stockholders ratified the appointment of Ernst & Young
LLP as our independent registered public accounting firm for
2007. The number of votes cast in favor and against the
proposal, as well as the number of abstentions were as follows:
|
|
|
|
|
|
|
|
|
|
|
In Favor
|
|
|
Against
|
|
|
Abstained
|
|
|
|
159,086,874
|
|
|
|
659,904
|
|
|
|
97,481
|
|
|
|
ITEM 5.
|
OTHER
INFORMATION
|
None
(a) Exhibits
The Index to Exhibits attached hereto is incorporated herein by
reference.
62
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: August 8, 2007
|
|
/s/ JOHN
K. DELANEY
John
K. Delaney
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
|
|
|
Date: August 8, 2007
|
|
/s/ THOMAS
A. FINK
Thomas
A. Fink
Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
|
|
|
Date: August 8, 2007
|
|
/s/ DAVID
C.
BJARNASON
David
C. Bjarnason
Chief Accounting Officer
(Principal Accounting Officer)
|
63
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)).
|
|
4
|
.18
|
|
Indenture dated as of
April 12, 2007, by and between CapitalSource Commercial
Loan
Trust 2007-1,
as the Issuer, and Wells Fargo Bank, National Association, as
the Indenture Trustee (incorporated by reference to the
same-numbered exhibit to the registrants Current Report on
Form 8-K
dated April 18, 2007).
|
|
4
|
.19
|
|
Indenture dated as of
April 19, 2007, by and between CapitalSource Funding VII
Trust, as the Issuer, and Wells Fargo Bank, National
Association, as the Indenture Trustee (incorporated by reference
to the same-numbered exhibit to the registrants Current
Report on
Form 8-K
dated April 25, 2007).
|
|
4
|
.20
|
|
Form of First Supplemental
Indenture between the Company, CapitalSource Finance LLC and
Wells Fargo Bank, N.A., as Trustee. (incorporated by reference
to the exhibit 4.1 to the registrants Current Report
on
Form 8-K
dated July 25, 2007).
|
|
4
|
.21
|
|
Form of 7.250% Senior
Subordinated Convertible Note due 2037 (incorporated by
reference to the exhibit 4.2 to the registrants
Current Report on
Form 8-K
dated July 25, 2007).
|
|
10
|
.14.4
|
|
Side Letter, dated as of
April 19, 2007, among CapitalSource Funding II Trust, as
Issuer, CS Funding II Depositor LLC, as Depositor, CapitalSource
Finance LLC, as Loan Originator and Servicer, Wells Fargo Bank,
National Association, as Indenture Trustee, Collateral
Custodian, and Backup Servicer, and Citigroup Global Markets
Realty Corp. and Transamerica Life Insurance Company, as
Noteholders/Purchasers.
|
|
10
|
.21*
|
|
CapitalSource Inc. Amended and
Restated Deferred Compensation Plan, dated as of July 31,
2007.
|
|
10
|
.23.1
|
|
Amended Call Option Transaction
Confirmation, dated as of April 4, 2007, between
CapitalSource Inc. and JPMorgan Chase Bank (incorporated by
reference to the same-numbered exhibit to the registrants
Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2007).
|
|
10
|
.23.2
|
|
Amended Warrant Transaction
Confirmation, dated as of April 4, 2007, between
CapitalSource Inc. and JPMorgan Chase Bank (incorporated by
reference to the same-numbered exhibit to the registrants
Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2007).
|
|
10
|
.23.3
|
|
Call Option Transaction
Confirmation, dated as of April 4, 2007, between
CapitalSource Inc. and JPMorgan Chase Bank (incorporated by
reference to the same-numbered exhibit to the registrants
Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2007).
|
|
10
|
.54
|
|
Amended and Restated Credit
Agreement, dated as of March 14, 2006, (Composite Version;
Reflects All Amendments through June 29, 2007) among
CapitalSource Inc., as Borrower, the Guarantors and Lenders as
listed in the Credit Agreement, Wachovia Bank, National
Association, as Administrative Agent, Swingline Lender and
Issuing Lender, Bank of America, N.A., as Issuing Lender,
Wachovia Capital Markets, LLC, as Sole Bookrunner and Lead
Arranger, and Bank of Montreal, Barclays Bank PLC and SunTrust
Bank, as Co-Documentation Agents.
|
|
10
|
.71
|
|
Sale and Servicing Agreement,
dated as of April 12, 2007, by and among CapitalSource
Commercial Loan
Trust 2007-1,
as the Issuer, CapitalSource Commercial Loan LLC,
2007-1, as
the Trust Depositor, CapitalSource Finance LLC, as the
Originator and as the Servicer, and Wells Fargo Bank, National
Association, as the Indenture Trustee and as the Backup Servicer
(incorporated by reference to the same-numbered exhibit to the
registrants Current Report on
Form 8-K
dated April 18, 2007).
|
|
10
|
.72
|
|
Note Purchase Agreement, dated as
of April 19, 2007, among CapitalSource Funding VII Trust,
as Issuer, CS Funding VII Depositor LLC, as Depositor,
CapitalSource Finance LLC, as Loan Originator, and Citigroup
Global Markets Realty Corp., as Purchaser (incorporated by
reference to the same-numbered exhibit to the registrants
Current Report on
Form 8-K
dated April 25, 2007).
|
64
|
|
|
|
|
Exhibit
|
|
|
No
|
|
Description
|
|
|
10
|
.73
|
|
Sale and Servicing Agreement,
dated as of April 19, 2007, by and among CapitalSource
Funding VII Trust, as Issuer, as the Issuer, and CS Funding VII
Depositor LLC, as Depositor, and CapitalSource Finance LLC, as
Loan Originator and Servicer, and Wells Fargo Bank, National
Association, as Indenture Trustee, Collateral Custodian and
Backup Servicer (incorporated by reference to the same-numbered
exhibit to the registrants Current Report on
Form 8-K
dated April 25, 2007).
|
|
10
|
.74
|
|
First Amendment to the Note
Purchase Agreement, dated as of August 2, 2007, among
CapitalSource Funding VII Trust, as Issuer, CS Funding VII
Depositor LLC, as Depositor, CapitalSource Finance LLC, as Loan
Originator, and Citigroup Global Markets Realty Corp., as
Purchaser.
|
|
10
|
.75
|
|
First Amendment to the Sale and
Servicing Agreement, dated as of August 2, 2007, by and
among CapitalSource Funding VII Trust, as Issuer, as the Issuer,
and CS Funding VII Depositor LLC, as Depositor, and
CapitalSource Finance LLC, as Loan Originator and Servicer, and
Wells Fargo Bank, National Association, as Indenture Trustee,
Collateral Custodian and Backup Servicer.
|
|
10
|
.76*
|
|
Form of Restricted Stock Agreement
for Directors, CapitalSource Inc. Third Amended and Restated
Equity Incentive Plan.
|
|
10
|
.77*
|
|
Form of Restricted Stock Unit
Agreement for Directors, CapitalSource Inc. Third Amended and
Restated Equity Incentive Plan.
|
|
10
|
.78*
|
|
Form of Non-Qualified Option
Agreement for Directors, CapitalSource Inc. Third Amended and
Restated Equity Incentive Plan.
|
|
10
|
.79*
|
|
Form of Restricted Stock
Agreement, CapitalSource Inc. Third Amended and Restated Equity
Incentive Plan.
|
|
10
|
.80*
|
|
Form of Restricted Stock Unit
Agreement, CapitalSource Inc. Third Amended and Restated Equity
Incentive Plan.
|
|
10
|
.81*
|
|
Form of Non-Qualified Option
Agreement, CapitalSource Inc. Third Amended and Restated Equity
Incentive Plan.
|
|
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.
|
|
|
|
* |
|
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.
65