e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 1, 2007, the number of shares of the
registrants Common Stock, par value $0.01 per share,
outstanding was 212,252,083.
CapitalSource
Inc.
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
($ in thousands)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
245,862
|
|
|
$
|
396,151
|
|
Restricted cash
|
|
|
296,789
|
|
|
|
240,904
|
|
Mortgage-related receivables, net
|
|
|
2,092,553
|
|
|
|
2,295,922
|
|
Mortgage-backed securities pledged, trading
|
|
|
4,159,037
|
|
|
|
3,502,753
|
|
Receivables under reverse-repurchase agreements
|
|
|
26,157
|
|
|
|
51,892
|
|
Loans held for sale
|
|
|
352,030
|
|
|
|
26,521
|
|
Loans:
|
|
|
|
|
|
|
|
|
Loans
|
|
|
9,251,283
|
|
|
|
7,771,785
|
|
Less deferred loan fees and discounts
|
|
|
(132,673
|
)
|
|
|
(130,392
|
)
|
Less allowance for loan losses
|
|
|
(111,692
|
)
|
|
|
(120,575
|
)
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
9,006,918
|
|
|
|
7,520,818
|
|
Direct real estate investments, net
|
|
|
1,031,905
|
|
|
|
722,303
|
|
Investments
|
|
|
190,104
|
|
|
|
184,333
|
|
Other assets
|
|
|
351,329
|
|
|
|
268,977
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,752,684
|
|
|
$
|
15,210,574
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS
EQUITY
|
Liabilities:
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
$
|
4,030,477
|
|
|
$
|
3,510,768
|
|
Credit facilities
|
|
|
2,701,685
|
|
|
|
2,251,658
|
|
Term debt
|
|
|
6,550,232
|
|
|
|
5,809,685
|
|
Other borrowings
|
|
|
1,612,258
|
|
|
|
1,288,575
|
|
Other liabilities
|
|
|
322,477
|
|
|
|
200,498
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
15,217,129
|
|
|
|
13,061,184
|
|
Noncontrolling interests
|
|
|
45,490
|
|
|
|
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; 208,540,632 and 182,752,290 shares issued,
respectively; 208,540,632 and 181,452,290 shares
outstanding, respectively)
|
|
|
2,085
|
|
|
|
1,815
|
|
Additional paid-in capital
|
|
|
2,664,842
|
|
|
|
2,139,421
|
|
Accumulated deficit
|
|
|
(181,336
|
)
|
|
|
(20,735
|
)
|
Accumulated other comprehensive income, net
|
|
|
4,474
|
|
|
|
2,465
|
|
Treasury stock, at cost
|
|
|
|
|
|
|
(29,926
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,490,065
|
|
|
|
2,093,040
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, noncontrolling interests and
shareholders equity
|
|
$
|
17,752,684
|
|
|
$
|
15,210,574
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
3
CapitalSource
Inc.
Consolidated
Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands, except per share data)
|
|
|
Net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
344,043
|
|
|
$
|
280,066
|
|
|
$
|
944,781
|
|
|
$
|
731,601
|
|
Fee income
|
|
|
29,338
|
|
|
|
53,955
|
|
|
|
124,421
|
|
|
|
132,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
373,381
|
|
|
|
334,021
|
|
|
|
1,069,202
|
|
|
|
863,701
|
|
Operating lease income
|
|
|
27,490
|
|
|
|
7,855
|
|
|
|
69,934
|
|
|
|
19,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
400,871
|
|
|
|
341,876
|
|
|
|
1,139,136
|
|
|
|
882,875
|
|
Interest expense
|
|
|
232,754
|
|
|
|
170,118
|
|
|
|
619,694
|
|
|
|
421,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
168,117
|
|
|
|
171,758
|
|
|
|
519,442
|
|
|
|
461,057
|
|
Provision for loan losses
|
|
|
12,353
|
|
|
|
24,849
|
|
|
|
44,690
|
|
|
|
51,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income after provision for loan losses
|
|
|
155,764
|
|
|
|
146,909
|
|
|
|
474,752
|
|
|
|
410,024
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
38,309
|
|
|
|
33,924
|
|
|
|
116,937
|
|
|
|
101,374
|
|
Other administrative expenses
|
|
|
26,824
|
|
|
|
19,307
|
|
|
|
79,961
|
|
|
|
56,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
65,133
|
|
|
|
53,231
|
|
|
|
196,898
|
|
|
|
157,541
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diligence deposits forfeited
|
|
|
1,465
|
|
|
|
598
|
|
|
|
4,141
|
|
|
|
3,968
|
|
(Loss) gain on investments, net
|
|
|
(1,984
|
)
|
|
|
7,223
|
|
|
|
21,181
|
|
|
|
5,483
|
|
(Loss) gain on derivatives
|
|
|
(15,494
|
)
|
|
|
(5,074
|
)
|
|
|
(14,596
|
)
|
|
|
1,576
|
|
(Loss) gain on residential mortgage investment portfolio
|
|
|
(30,225
|
)
|
|
|
2,291
|
|
|
|
(49,769
|
)
|
|
|
220
|
|
Other income, net of expenses
|
|
|
(3,389
|
)
|
|
|
5,700
|
|
|
|
16,545
|
|
|
|
11,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
(49,627
|
)
|
|
|
10,738
|
|
|
|
(22,498
|
)
|
|
|
22,378
|
|
Noncontrolling interests expense
|
|
|
1,182
|
|
|
|
1,259
|
|
|
|
3,784
|
|
|
|
3,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes and cumulative effect of
accounting change
|
|
|
39,822
|
|
|
|
103,157
|
|
|
|
251,572
|
|
|
|
271,511
|
|
Income taxes
|
|
|
11,557
|
|
|
|
22,304
|
|
|
|
60,251
|
|
|
|
52,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative effect of accounting change
|
|
|
28,265
|
|
|
|
80,853
|
|
|
|
191,321
|
|
|
|
218,566
|
|
Cumulative effect of accounting change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
28,265
|
|
|
$
|
80,853
|
|
|
$
|
191,321
|
|
|
$
|
218,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.15
|
|
|
$
|
0.47
|
|
|
$
|
1.03
|
|
|
$
|
1.34
|
|
Diluted
|
|
$
|
0.15
|
|
|
$
|
0.47
|
|
|
$
|
1.02
|
|
|
$
|
1.32
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
191,976,931
|
|
|
|
171,777,989
|
|
|
|
185,522,634
|
|
|
|
163,373,576
|
|
Diluted
|
|
|
193,607,986
|
|
|
|
173,354,891
|
|
|
|
187,636,502
|
|
|
|
166,028,844
|
|
Dividends declared per share
|
|
$
|
0.60
|
|
|
$
|
0.49
|
|
|
$
|
1.78
|
|
|
$
|
1.47
|
|
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
|
|
|
|
|
|
|
|
|
|
|
191,321
|
|
|
|
|
|
|
|
|
|
|
|
191,321
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,009
|
|
|
|
|
|
|
|
2,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193,330
|
|
Cumulative effect of adoption of FIN 48
|
|
|
|
|
|
|
|
|
|
|
(5,702
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,702
|
)
|
Dividends paid
|
|
|
|
|
|
|
7,412
|
|
|
|
(346,220
|
)
|
|
|
|
|
|
|
|
|
|
|
(338,808
|
)
|
Issuance of common stock, net
|
|
|
258
|
|
|
|
488,828
|
|
|
|
|
|
|
|
|
|
|
|
29,926
|
|
|
|
519,012
|
|
Stock option expense
|
|
|
|
|
|
|
5,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,694
|
|
Exercise of options
|
|
|
3
|
|
|
|
4,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,693
|
|
Restricted stock activity
|
|
|
9
|
|
|
|
14,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,079
|
|
Beneficial conversion option on convertible debt
|
|
|
|
|
|
|
2,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,373
|
|
Tax benefit on exercise of options
|
|
|
|
|
|
|
1,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,098
|
|
Tax benefit on vesting of restricted stock grants
|
|
|
|
|
|
|
1,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity as of September 30, 2007
|
|
$
|
2,085
|
|
|
$
|
2,664,842
|
|
|
$
|
(181,336
|
)
|
|
$
|
4,474
|
|
|
|
|
|
|
$
|
2,490,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
5
CapitalSource
Inc.
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
191,321
|
|
|
$
|
218,936
|
|
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
5,694
|
|
|
|
6,462
|
|
Restricted stock expense
|
|
|
26,214
|
|
|
|
18,530
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
2,497
|
|
Non-cash prepayment fee
|
|
|
|
|
|
|
(8,353
|
)
|
Cumulative effect of accounting change, net of taxes
|
|
|
|
|
|
|
(370
|
)
|
Amortization of deferred loan fees and discounts
|
|
|
(66,844
|
)
|
|
|
(65,808
|
)
|
Paid-in-kind
interest on loans
|
|
|
(19,697
|
)
|
|
|
(7,021
|
)
|
Provision for loan losses
|
|
|
44,689
|
|
|
|
51,033
|
|
Amortization of deferred financing fees and discounts
|
|
|
31,262
|
|
|
|
28,551
|
|
Depreciation and amortization
|
|
|
26,367
|
|
|
|
9,604
|
|
Benefit for deferred income taxes
|
|
|
(3,741
|
)
|
|
|
(9,453
|
)
|
Non-cash loss on investments, net
|
|
|
6,980
|
|
|
|
5,510
|
|
Non-cash loss (gain) on property and equipment disposals
|
|
|
559
|
|
|
|
(472
|
)
|
Unrealized loss (gain) on derivatives and foreign currencies, net
|
|
|
10,302
|
|
|
|
(195
|
)
|
Unrealized loss on residential mortgage investment portfolio, net
|
|
|
60,310
|
|
|
|
8,702
|
|
Net increase in mortgage-backed securities pledged, trading
|
|
|
(633,729
|
)
|
|
|
(331,767
|
)
|
Amortization of discount on residential mortgage investments
|
|
|
(29,862
|
)
|
|
|
(22,786
|
)
|
Increase in loans held for sale, net
|
|
|
(524,127
|
)
|
|
|
(60,154
|
)
|
(Increase) decrease in other assets
|
|
|
(68,493
|
)
|
|
|
65,211
|
|
Increase in other liabilities
|
|
|
73,904
|
|
|
|
35,423
|
|
|
|
|
|
|
|
|
|
|
Cash used in operating activities
|
|
|
(868,891
|
)
|
|
|
(55,920
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
Increase in restricted cash
|
|
|
(55,885
|
)
|
|
|
(78,164
|
)
|
Decrease (increase) in mortgage-related receivables, net
|
|
|
216,333
|
|
|
|
(2,391,783
|
)
|
Decrease (increase) in receivables under reverse-repurchase
agreements, net
|
|
|
25,735
|
|
|
|
(19,663
|
)
|
Increase in loans, net
|
|
|
(1,256,925
|
)
|
|
|
(1,365,905
|
)
|
Acquisition of real estate, net of cash acquired
|
|
|
(253,182
|
)
|
|
|
(66,375
|
)
|
Acquisition of investments, net
|
|
|
(36,642
|
)
|
|
|
(22,978
|
)
|
Acquisition of property and equipment, net
|
|
|
(4,337
|
)
|
|
|
(2,780
|
)
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
(1,364,903
|
)
|
|
|
(3,947,648
|
)
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(35,421
|
)
|
|
|
(37,874
|
)
|
Borrowings under repurchase agreements, net
|
|
|
519,709
|
|
|
|
269,867
|
|
Borrowings on credit facilities, net
|
|
|
448,281
|
|
|
|
507,538
|
|
Borrowings of convertible debt
|
|
|
245,151
|
|
|
|
|
|
Borrowings of term debt
|
|
|
1,859,927
|
|
|
|
4,495,533
|
|
Repayments of term debt
|
|
|
(1,201,986
|
)
|
|
|
(1,229,379
|
)
|
Borrowings of subordinated debt
|
|
|
75,629
|
|
|
|
131,685
|
|
Proceeds from issuance of common stock, net of offering costs
|
|
|
507,479
|
|
|
|
498,931
|
|
Proceeds from exercise of options
|
|
|
4,693
|
|
|
|
5,283
|
|
Tax benefits on share-based payments
|
|
|
2,354
|
|
|
|
3,311
|
|
Payment of dividends
|
|
|
(342,311
|
)
|
|
|
(314,080
|
)
|
|
|
|
|
|
|
|
|
|
Cash provided by financing activities
|
|
|
2,083,505
|
|
|
|
4,330,815
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(150,289
|
)
|
|
|
327,247
|
|
Cash and cash equivalents as of beginning of period
|
|
|
396,151
|
|
|
|
323,896
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end of period
|
|
$
|
245,862
|
|
|
$
|
651,143
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
110,675
|
|
|
|
|
|
Assumption of term debt
|
|
|
71,027
|
|
|
|
|
|
Assumption of intangible lease liability
|
|
|
28,554
|
|
|
|
|
|
Real estate acquired through foreclosure
|
|
|
12,791
|
|
|
|
|
|
See accompanying notes.
6
CapitalSource
Inc.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
Note 1. Organization
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:
|
|
|
|
|
First Mortgage Loans Commercial loans that are
secured by first mortgages on the property of the client;
|
|
|
|
Senior Secured Asset-Based Loans Commercial loans
that are underwritten based on our assessment of the
clients eligible collateral, including accounts
receivable, real estate related receivables
and/or
inventory;
|
|
|
|
Senior Secured Cash Flow Loans Commercial loans that
are underwritten based on our assessment of a clients
ability to generate cash flows sufficient to repay the loan and
maintain or increase its enterprise value during the term of the
loan, thereby facilitating repayment of the principal at
maturity;
|
|
|
|
Term B, Second Lien and Mezzanine Loans Commercial
loans, including subordinated mortgage loans, that come after a
clients senior term loans in right of payment or upon
liquidation;
|
|
|
|
Direct Real Estate Investments Commercial
investments primarily in land and buildings, that are leased to
clients through the execution of long-term,
triple-net
operating leases;
|
|
|
|
Equity Investments Opportunistic equity investments,
typically in conjunction with commercial lending relationships
and on the same terms as other equity investors; and
|
|
|
|
Residential Mortgage Investments Investments in
residential mortgage loans and residential mortgage-backed
securities that constitute qualifying REIT assets.
|
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
loans syndicated to 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 consolidated 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 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
September 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 September 30, 2007 and December 31, 2006, the
carrying amounts of our residential mortgage-related
receivables, including accrued interest and the unamortized
balance of purchase discounts, were $2.1 billion and
$2.3 billion, respectively. As of September 30, 2007
and December 31, 2006, the weighted average interest rates
on such receivables were 5.37% and 5.38%, respectively, and the
weighted average contractual maturities were approximately
28.0 years and 28.7 years, respectively. As of
September 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 allowances for loan losses related to our mortgage-related
receivables were $0.8 million and $0.4 million as of
September 30, 2007 and December 31, 2006,
respectively, and were recorded in the accompanying consolidated
balance sheets as reductions 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
9
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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). 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 September 30, 2007 and December 31, 2006, we
owned $4.1 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 September 30, 2007 and December 31, 2006, our
portfolio of Agency MBS comprised 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
September 30, 2007 and December 31, 2006, respectively.
As of September 30, 2007 and December 31, 2006, the
fair value of Agency MBS in our portfolio was $4.2 billion
and $3.5 billion, respectively. For the three and nine
months ended September 30, 2007, we recognized
$33.7 million and $9.4 million of unrealized gains,
respectively, related to these investments as a component of
(loss) gain on residential mortgage investment portfolio in the
accompanying consolidated statements of income. For the three
and nine months ended September 30, 2006, we recognized
$36.0 million of unrealized gains and $2.6 million of
unrealized losses, respectively. During the nine months ended
September 30, 2006, we recognized a net unrealized loss of
$10.8 million in (loss) gain 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 interest rate
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
(loss) gain on residential mortgage investment portfolio in the
accompanying consolidated statements of income. We recognized
net realized and unrealized losses of $54.2 million and
$36.0 million during the three and nine months ended
September 30, 2007, respectively. For the three and nine
months ended September 30, 2006, we recognized net realized
and unrealized losses of $32.8 million and gains of
$14.6 million, 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 September 30, 2007 and December 31, 2006, our
total commercial loan portfolio had an outstanding balance of
$9.6 billion and $7.9 billion, respectively. Included
in these amounts were loans held for sale with outstanding
balances of $352.0 million and $26.5 million as of
September 30, 2007 and December 31, 2006,
respectively, and receivables under reverse-repurchase
agreements with outstanding balances of $26.2 million and
$51.9 million as of September 30, 2007 and
December 31, 2006, respectively. Our loans held for sale
were recorded at the lower of cost or fair value on the
accompanying consolidated balance sheets.
10
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Credit
Quality
As of September 30, 2007 and December 31, 2006, the
principal balances of loans 60 or more days contractually
delinquent, non-accrual loans and impaired loans in our
commercial lending portfolio were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Loans 60 or more days contractually delinquent
|
|
$
|
71,664
|
|
|
$
|
88,067
|
|
Non-accrual loans(1)
|
|
|
169,390
|
|
|
|
183,483
|
|
Impaired loans(2)
|
|
|
332,716
|
|
|
|
281,377
|
|
Less: loans in multiple categories
|
|
|
(221,553)
|
|
|
|
(230,469)
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
352,217
|
|
|
$
|
322,458
|
|
|
|
|
|
|
|
|
|
|
Total as a percentage of total loans
|
|
|
3.66%
|
|
|
|
4.11%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes commercial loans with an aggregate principal balance of
$21.0 million and $47.0 million as of
September 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 September 30, 2007. As
of December 31, 2006, there were no loans classified as
held for sale that were placed on non-accrual status. |
|
(2) |
|
Includes commercial loans with an aggregate principal balance of
$55.1 million and $47.0 million as of
September 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 $166.4 million and
$183.5 million as of September 30, 2007 and
December 31, 2006, respectively, which were also placed on
non-accrual status. The carrying values of impaired commercial
loans were $326.1 million and $275.3 million as of
September 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 September 30, 2007 and
December 31, 2006, we had $54.4 million and
$95.7 million of impaired commercial loans, respectively,
with allocated reserves of $11.4 million and
$37.8 million, respectively. As of September 30, 2007
and December 31, 2006, we had $278.3 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 balances of impaired commercial loans during the
three and nine months ended September 30, 2007 were
$346.7 million and $310.4 million, respectively, and
were $256.8 million and $227.3 million, respectively,
during the three and nine months ended September 30, 2006.
The total amounts of interest income that were recognized on
impaired commercial loans during the three and nine months ended
September 30, 2007 were $8.1 million and
$15.2 million, respectively, and were $2.7 million and
$7.5 million, respectively, during the three and nine
months ended September 30, 2006. The amounts of cash basis
interest income that were recognized on impaired commercial
loans during the three and nine months ended September 30,
2007 were $6.7 million and $12.9 million,
respectively, and were $2.2 million and $6.1 million,
respectively, during the three and nine months ended
September 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 $7.5 million
and $21.6 million for the three and nine
11
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
months ended September 30, 2007, respectively, and
$6.4 million and $16.7 million, respectively, for the
three and nine months ended September 30, 2006.
During the three months ended September 30, 2007, no new
troubled debt restructurings as defined by
SFAS No. 15, Accounting for Debtors and Creditors
for Troubled Debt Restructuring occurred. During the nine
months ended September 30, 2007, commercial loans with an
aggregate carrying value of $69.7 million, as of
September 30, 2007, were involved in a troubled debt
restructuring. As of September 30, 2007, commercial loans
with an aggregate carrying value of $167.6 million were
involved in a troubled debt restructuring. Additionally, under
SFAS No. 114, loans involved in a 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 that were involved in
troubled debt restructurings was $6.3 million as of
September 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 involved
in a troubled debt restructuring. The allocated reserve for
commercial loans that were involved in a troubled debt
restructuring was $31.5 million as of December 31,
2006.
Activity in the allowance for loan losses related to our
Commercial Lending & Investment segment for the nine
months ended September 30, 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Balance as of beginning of period
|
|
$
|
120,575
|
|
|
$
|
87,370
|
|
Provision for loan losses
|
|
|
44,460
|
|
|
|
50,732
|
|
Charge offs, net
|
|
|
(51,671
|
)
|
|
|
(35,443
|
)
|
Transfers to held for sale
|
|
|
(1,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of period
|
|
$
|
111,692
|
|
|
$
|
102,659
|
|
|
|
|
|
|
|
|
|
|
Investments as of September 30, 2007 and December 31,
2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Investments carried at cost
|
|
$
|
81,270
|
|
|
$
|
71,386
|
|
Investments carried at fair value:
|
|
|
|
|
|
|
|
|
Investments available-for-sale
|
|
|
32,490
|
|
|
|
61,904
|
|
Warrants
|
|
|
8,093
|
|
|
|
6,908
|
|
Investments accounted for under the equity method
|
|
|
68,251
|
|
|
|
44,135
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
190,104
|
|
|
$
|
184,333
|
|
|
|
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2007,
we sold investments for $3.2 million and
$29.8 million, respectively, recognizing net pretax gains
of $3.1 million and $25.9 million, respectively.
During the three and nine months ended September 30, 2006,
we sold investments for $20.6 million and
$62.5 million, respectively, recognizing net pretax gains
of $5.4 million and $7.4 million, respectively. During the
three and nine months ended September 30, 2007, we also
recorded other-than-temporary declines in the fair value of our
Non-Agency MBS of $9.7 million and $23.2 million,
respectively, as a component of (loss) gain on residential
mortgage investment portfolio in the accompanying consolidated
statements of income 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. We did not
record any other-than-
12
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
temporary declines in the fair value of our Non-Agency MBS
during the three and nine months ended September 30, 2006.
During the three and nine months ended September 30, 2007,
we recorded other-than-temporary impairments of
$5.4 million and $6.8 million, respectively, related
to our investments carried at cost. During the three and nine
months ended September 30, 2006, we recorded
other-than-temporary impairments of $1.0 million and
$4.1 million, respectively, related to our investments
carried at cost.
|
|
Note 8.
|
Guarantor
Information
|
The following represents the unaudited supplemental
consolidating condensed financial information of CapitalSource
Inc., which, as discussed in Note 10, Borrowings, is
the issuer of both Senior Debentures and Subordinated Debentures
(together, the Debentures), and CapitalSource
Finance LLC (CapitalSource Finance), which is a
guarantor of the Debentures, and our subsidiaries that are not
guarantors of the Debentures as of September 30, 2007 and
December 31, 2006 and for the three and nine months ended
September 30, 2007 and 2006. CapitalSource Finance, a 100%
owned indirect subsidiary of CapitalSource Inc., has guaranteed
the Senior Debentures, fully and unconditionally, on a senior
basis and has guaranteed the Subordinated Debentures, fully and
unconditionally, on a senior subordinate basis. Separate
consolidated financial statements of the guarantor are not
presented, as we have determined that they would not be material
to investors.
13
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Balance Sheet
September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
Combined
|
|
|
Other Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Guarantor
|
|
|
Guarantor
|
|
|
Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Assets
|
Cash and cash equivalents
|
|
$
|
|
|
|
$
|
124,507
|
|
|
$
|
44,321
|
|
|
$
|
77,034
|
|
|
$
|
|
|
|
$
|
245,862
|
|
Restricted cash
|
|
|
|
|
|
|
34,942
|
|
|
|
89,981
|
|
|
|
171,866
|
|
|
|
|
|
|
|
296,789
|
|
Mortgage-related receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,092,553
|
|
|
|
|
|
|
|
2,092,553
|
|
Mortgage-backed securities pledged, trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,159,037
|
|
|
|
|
|
|
|
4,159,037
|
|
Receivables under reverse-repurchase agreements
|
|
|
|
|
|
|
26,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,157
|
|
Loans held for sale
|
|
|
|
|
|
|
16,356
|
|
|
|
2,800
|
|
|
|
332,874
|
|
|
|
|
|
|
|
352,030
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
4,586,465
|
|
|
|
624,320
|
|
|
|
4,040,925
|
|
|
|
(427
|
)
|
|
|
9,251,283
|
|
Less deferred loan fees and discounts
|
|
|
|
|
|
|
(35,652
|
)
|
|
|
(56,529
|
)
|
|
|
(40,492
|
)
|
|
|
|
|
|
|
(132,673
|
)
|
Less allowance for loan losses
|
|
|
|
|
|
|
|
|
|
|
(88,090
|
)
|
|
|
(23,602
|
)
|
|
|
|
|
|
|
(111,692
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
|
|
|
|
|
4,550,813
|
|
|
|
479,701
|
|
|
|
3,976,831
|
|
|
|
(427
|
)
|
|
|
9,006,918
|
|
Direct real estate investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,031,905
|
|
|
|
|
|
|
|
1,031,905
|
|
Investment in subsidiaries
|
|
|
3,600,457
|
|
|
|
|
|
|
|
1,095,877
|
|
|
|
1,234,996
|
|
|
|
(5,931,330
|
)
|
|
|
|
|
Intercompany due from (due to)
|
|
|
7,314
|
|
|
|
|
|
|
|
(8,899
|
)
|
|
|
1,585
|
|
|
|
|
|
|
|
|
|
Intercompany note receivable
|
|
|
75,000
|
|
|
|
|
|
|
|
128,318
|
|
|
|
|
|
|
|
(203,318
|
)
|
|
|
|
|
Investments
|
|
|
|
|
|
|
132,972
|
|
|
|
31,930
|
|
|
|
25,202
|
|
|
|
|
|
|
|
190,104
|
|
Other assets
|
|
|
32,851
|
|
|
|
37,806
|
|
|
|
95,711
|
|
|
|
218,737
|
|
|
|
(33,776
|
)
|
|
|
351,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,715,622
|
|
|
$
|
4,923,553
|
|
|
$
|
1,959,740
|
|
|
$
|
13,322,620
|
|
|
$
|
(6,168,851
|
)
|
|
$
|
17,752,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities, noncontrolling interests and shareholders
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements
|
|
$
|
|
|
|
$
|
38,100
|
|
|
$
|
|
|
|
$
|
3,992,377
|
|
|
$
|
|
|
|
$
|
4,030,477
|
|
Credit facilities
|
|
|
410,238
|
|
|
|
1,487,993
|
|
|
|
110,033
|
|
|
|
693,421
|
|
|
|
|
|
|
|
2,701,685
|
|
Term debt
|
|
|
|
|
|
|
2,282,875
|
|
|
|
6,131
|
|
|
|
4,261,647
|
|
|
|
(421
|
)
|
|
|
6,550,232
|
|
Other borrowings
|
|
|
797,777
|
|
|
|
|
|
|
|
529,044
|
|
|
|
285,437
|
|
|
|
|
|
|
|
1,612,258
|
|
Other liabilities
|
|
|
17,542
|
|
|
|
18,677
|
|
|
|
79,536
|
|
|
|
240,504
|
|
|
|
(33,782
|
)
|
|
|
322,477
|
|
Intercompany note payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203,318
|
|
|
|
(203,318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,225,557
|
|
|
|
3,827,645
|
|
|
|
724,744
|
|
|
|
9,676,704
|
|
|
|
(237,521
|
)
|
|
|
15,217,129
|
|
Noncontrolling interests
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
45,459
|
|
|
|
(16
|
)
|
|
|
45,490
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
2,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,085
|
|
Additional paid-in capital
|
|
|
2,664,842
|
|
|
|
538,927
|
|
|
|
203,099
|
|
|
|
3,093,276
|
|
|
|
(3,835,302
|
)
|
|
|
2,664,842
|
|
(Accumulated deficit) retained earnings
|
|
|
(181,336
|
)
|
|
|
551,977
|
|
|
|
1,026,677
|
|
|
|
502,406
|
|
|
|
(2,081,060
|
)
|
|
|
(181,336
|
)
|
Accumulated other comprehensive income, net
|
|
|
4,474
|
|
|
|
4,957
|
|
|
|
5,220
|
|
|
|
4,775
|
|
|
|
(14,952
|
)
|
|
|
4,474
|
|
Treasury stock, at cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
2,490,065
|
|
|
|
1,095,861
|
|
|
|
1,234,996
|
|
|
|
3,600,457
|
|
|
|
(5,931,314
|
)
|
|
|
2,490,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, noncontrolling interests and
shareholders equity
|
|
$
|
3,715,622
|
|
|
$
|
4,923,553
|
|
|
$
|
1,959,740
|
|
|
$
|
13,322,620
|
|
|
$
|
(6,168,851
|
)
|
|
$
|
17,752,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
897,000
|
|
|
|
|
|
|
|
2,251,657
|
|
Term debt
|
|
|
|
|
|
|
2,504,472
|
|
|
|
10,729
|
|
|
|
3,295,558
|
|
|
|
(1,074
|
)
|
|
|
5,809,685
|
|
Other borrowings
|
|
|
555,000
|
|
|
|
|
|
|
|
446,393
|
|
|
|
287,183
|
|
|
|
|
|
|
|
1,288,576
|
|
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 September 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
|
|
$
|
1,616
|
|
|
$
|
125,781
|
|
|
$
|
21,674
|
|
|
$
|
198,732
|
|
|
$
|
(3,760
|
)
|
|
$
|
344,043
|
|
Fee income
|
|
|
|
|
|
|
11,901
|
|
|
|
9,554
|
|
|
|
7,883
|
|
|
|
|
|
|
|
29,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
1,616
|
|
|
|
137,682
|
|
|
|
31,228
|
|
|
|
206,615
|
|
|
|
(3,760
|
)
|
|
|
373,381
|
|
Operating lease income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,490
|
|
|
|
|
|
|
|
27,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
1,616
|
|
|
|
137,682
|
|
|
|
31,228
|
|
|
|
234,105
|
|
|
|
(3,760
|
)
|
|
|
400,871
|
|
Interest expense
|
|
|
17,464
|
|
|
|
63,354
|
|
|
|
11,594
|
|
|
|
144,102
|
|
|
|
(3,760
|
)
|
|
|
232,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(15,848
|
)
|
|
|
74,328
|
|
|
|
19,634
|
|
|
|
90,003
|
|
|
|
|
|
|
|
168,117
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
11,264
|
|
|
|
1,089
|
|
|
|
|
|
|
|
12,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after provision for loan losses
|
|
|
(15,848
|
)
|
|
|
74,328
|
|
|
|
8,370
|
|
|
|
88,914
|
|
|
|
|
|
|
|
155,764
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
93
|
|
|
|
6,260
|
|
|
|
31,935
|
|
|
|
21
|
|
|
|
|
|
|
|
38,309
|
|
Other administrative expenses
|
|
|
10,665
|
|
|
|
1,482
|
|
|
|
12,550
|
|
|
|
11,454
|
|
|
|
(9,327
|
)
|
|
|
26,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
10,758
|
|
|
|
7,742
|
|
|
|
44,485
|
|
|
|
11,475
|
|
|
|
(9,327
|
)
|
|
|
65,133
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diligence deposits forfeited
|
|
|
|
|
|
|
|
|
|
|
1,465
|
|
|
|
|
|
|
|
|
|
|
|
1,465
|
|
Gain (loss) on investments, net
|
|
|
|
|
|
|
1,553
|
|
|
|
(3,537
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,984
|
)
|
Gain (loss) on derivatives
|
|
|
|
|
|
|
2,232
|
|
|
|
3,234
|
|
|
|
(20,960
|
)
|
|
|
|
|
|
|
(15,494
|
)
|
Loss on residential mortgage investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,225
|
)
|
|
|
|
|
|
|
(30,225
|
)
|
Other income, net of expenses
|
|
|
|
|
|
|
4,799
|
|
|
|
1,755
|
|
|
|
(616
|
)
|
|
|
(9,327
|
)
|
|
|
(3,389
|
)
|
Earnings in subsidiaries
|
|
|
54,871
|
|
|
|
|
|
|
|
71,335
|
|
|
|
41,991
|
|
|
|
(168,197
|
)
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
(3,854
|
)
|
|
|
3,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
54,871
|
|
|
|
4,730
|
|
|
|
78,106
|
|
|
|
(9,810
|
)
|
|
|
(177,524
|
)
|
|
|
(49,627
|
)
|
Noncontrolling interests expense
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
1,201
|
|
|
|
(3
|
)
|
|
|
1,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
28,265
|
|
|
|
71,332
|
|
|
|
41,991
|
|
|
|
66,428
|
|
|
|
(168,194
|
)
|
|
|
39,822
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,557
|
|
|
|
|
|
|
|
11,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
28,265
|
|
|
$
|
71,332
|
|
|
$
|
41,991
|
|
|
$
|
54,871
|
|
|
$
|
(168,194
|
)
|
|
$
|
28,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Income
Three Months Ended September 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
|
|
$
|
3
|
|
|
$
|
98,673
|
|
|
$
|
33,637
|
|
|
$
|
148,195
|
|
|
$
|
(442
|
)
|
|
$
|
280,066
|
|
Fee income
|
|
|
|
|
|
|
28,171
|
|
|
|
4,528
|
|
|
|
21,256
|
|
|
|
|
|
|
|
53,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
3
|
|
|
|
126,844
|
|
|
|
38,165
|
|
|
|
169,451
|
|
|
|
(442
|
)
|
|
|
334,021
|
|
Operating lease income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,855
|
|
|
|
|
|
|
|
7,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
3
|
|
|
|
126,844
|
|
|
|
38,165
|
|
|
|
177,306
|
|
|
|
(442
|
)
|
|
|
341,876
|
|
Interest expense
|
|
|
11,382
|
|
|
|
55,564
|
|
|
|
5,527
|
|
|
|
98,087
|
|
|
|
(442
|
)
|
|
|
170,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(11,379
|
)
|
|
|
71,280
|
|
|
|
32,638
|
|
|
|
79,219
|
|
|
|
|
|
|
|
171,758
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
25,551
|
|
|
|
(702
|
)
|
|
|
|
|
|
|
24,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after provision for loan losses
|
|
|
(11,379
|
)
|
|
|
71,280
|
|
|
|
7,087
|
|
|
|
79,921
|
|
|
|
|
|
|
|
146,909
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
|
|
|
|
1,218
|
|
|
|
32,706
|
|
|
|
|
|
|
|
|
|
|
|
33,924
|
|
Other administrative expenses
|
|
|
3,998
|
|
|
|
802
|
|
|
|
14,138
|
|
|
|
4,150
|
|
|
|
(3,781
|
)
|
|
|
19,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
3,998
|
|
|
|
2,020
|
|
|
|
46,844
|
|
|
|
4,150
|
|
|
|
(3,781
|
)
|
|
|
53,231
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diligence deposits forfeited
|
|
|
|
|
|
|
(128
|
)
|
|
|
726
|
|
|
|
|
|
|
|
|
|
|
|
598
|
|
Gain on investments, net
|
|
|
|
|
|
|
|
|
|
|
7,223
|
|
|
|
|
|
|
|
|
|
|
|
7,223
|
|
(Loss) gain on derivatives
|
|
|
|
|
|
|
(1,656
|
)
|
|
|
874
|
|
|
|
(4,292
|
)
|
|
|
|
|
|
|
(5,074
|
)
|
Gain on residential mortgage investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,291
|
|
|
|
|
|
|
|
2,291
|
|
Other income, net of expenses
|
|
|
|
|
|
|
4,411
|
|
|
|
4,985
|
|
|
|
85
|
|
|
|
(3,781
|
)
|
|
|
5,700
|
|
Earnings in subsidiaries
|
|
|
96,230
|
|
|
|
|
|
|
|
51,781
|
|
|
|
45,911
|
|
|
|
(193,922
|
)
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
(20,079
|
)
|
|
|
20,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
96,230
|
|
|
|
(17,452
|
)
|
|
|
85,668
|
|
|
|
43,995
|
|
|
|
(197,703
|
)
|
|
|
10,738
|
|
Noncontrolling interests expense
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
1,232
|
|
|
|
(2
|
)
|
|
|
1,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes and cumulative effect of
accounting change
|
|
|
80,853
|
|
|
|
51,779
|
|
|
|
45,911
|
|
|
|
118,534
|
|
|
|
(193,920
|
)
|
|
|
103,157
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,304
|
|
|
|
|
|
|
|
22,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative effect of accounting change
|
|
|
80,853
|
|
|
|
51,779
|
|
|
|
45,911
|
|
|
|
96,230
|
|
|
|
(193,920
|
)
|
|
|
80,853
|
|
Cumulative effect of accounting change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
80,853
|
|
|
$
|
51,779
|
|
|
$
|
45,911
|
|
|
$
|
96,230
|
|
|
$
|
(193,920
|
)
|
|
$
|
80,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Income
Nine Months Ended September 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
|
|
$
|
10,688
|
|
|
$
|
357,968
|
|
|
$
|
71,068
|
|
|
$
|
519,299
|
|
|
$
|
(14,242
|
)
|
|
$
|
944,781
|
|
Fee income
|
|
|
|
|
|
|
54,659
|
|
|
|
42,860
|
|
|
|
26,902
|
|
|
|
|
|
|
|
124,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
10,688
|
|
|
|
412,627
|
|
|
|
113,928
|
|
|
|
546,201
|
|
|
|
(14,242
|
)
|
|
|
1,069,202
|
|
Operating lease income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,934
|
|
|
|
|
|
|
|
69,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
10,688
|
|
|
|
412,627
|
|
|
|
113,928
|
|
|
|
616,135
|
|
|
|
(14,242
|
)
|
|
|
1,139,136
|
|
Interest expense
|
|
|
37,870
|
|
|
|
178,760
|
|
|
|
34,644
|
|
|
|
382,662
|
|
|
|
(14,242
|
)
|
|
|
619,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(27,182
|
)
|
|
|
233,867
|
|
|
|
79,284
|
|
|
|
233,473
|
|
|
|
|
|
|
|
519,442
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
39,310
|
|
|
|
5,380
|
|
|
|
|
|
|
|
44,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after provision for loan losses
|
|
|
(27,182
|
)
|
|
|
233,867
|
|
|
|
39,974
|
|
|
|
228,093
|
|
|
|
|
|
|
|
474,752
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
951
|
|
|
|
17,027
|
|
|
|
98,938
|
|
|
|
21
|
|
|
|
|
|
|
|
116,937
|
|
Other administrative expenses
|
|
|
38,044
|
|
|
|
4,592
|
|
|
|
42,856
|
|
|
|
29,036
|
|
|
|
(34,567
|
)
|
|
|
79,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
38,995
|
|
|
|
21,619
|
|
|
|
141,794
|
|
|
|
29,057
|
|
|
|
(34,567
|
)
|
|
|
196,898
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diligence deposits forfeited
|
|
|
|
|
|
|
|
|
|
|
4,141
|
|
|
|
|
|
|
|
|
|
|
|
4,141
|
|
Gain (loss) on investments, net
|
|
|
|
|
|
|
21,182
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
21,181
|
|
(Loss) gain on derivatives
|
|
|
|
|
|
|
2,197
|
|
|
|
(583
|
)
|
|
|
(16,210
|
)
|
|
|
|
|
|
|
(14,596
|
)
|
Loss on residential mortgage investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49,769
|
)
|
|
|
|
|
|
|
(49,769
|
)
|
Other income, net of expenses
|
|
|
|
|
|
|
13,371
|
|
|
|
38,555
|
|
|
|
(814
|
)
|
|
|
(34,567
|
)
|
|
|
16,545
|
|
Earnings in subsidiaries
|
|
|
257,498
|
|
|
|
|
|
|
|
241,935
|
|
|
|
189,260
|
|
|
|
(688,693
|
)
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
(7,033
|
)
|
|
|
7,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
257,498
|
|
|
|
29,717
|
|
|
|
291,080
|
|
|
|
122,467
|
|
|
|
(723,260
|
)
|
|
|
(22,498
|
)
|
Noncontrolling interests expense
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
3,754
|
|
|
|
(8
|
)
|
|
|
3,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes
|
|
|
191,321
|
|
|
|
241,927
|
|
|
|
189,260
|
|
|
|
317,749
|
|
|
|
(688,685
|
)
|
|
|
251,572
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,251
|
|
|
|
|
|
|
|
60,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
191,321
|
|
|
$
|
241,927
|
|
|
$
|
189,260
|
|
|
$
|
257,498
|
|
|
$
|
(688,685
|
)
|
|
$
|
191,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Income
Nine Months Ended September 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
|
|
$
|
552
|
|
|
$
|
330,482
|
|
|
$
|
65,560
|
|
|
$
|
337,310
|
|
|
$
|
(2,303
|
)
|
|
$
|
731,601
|
|
Fee income
|
|
|
|
|
|
|
104,902
|
|
|
|
(19,488
|
)
|
|
|
46,686
|
|
|
|
|
|
|
|
132,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and fee income
|
|
|
552
|
|
|
|
435,384
|
|
|
|
46,072
|
|
|
|
383,996
|
|
|
|
(2,303
|
)
|
|
|
863,701
|
|
Operating lease income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,174
|
|
|
|
|
|
|
|
19,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
552
|
|
|
|
435,384
|
|
|
|
46,072
|
|
|
|
403,170
|
|
|
|
(2,303
|
)
|
|
|
882,875
|
|
Interest expense
|
|
|
24,335
|
|
|
|
161,020
|
|
|
|
18,060
|
|
|
|
220,706
|
|
|
|
(2,303
|
)
|
|
|
421,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income
|
|
|
(23,783
|
)
|
|
|
274,364
|
|
|
|
28,012
|
|
|
|
182,464
|
|
|
|
|
|
|
|
461,057
|
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
43,304
|
|
|
|
7,729
|
|
|
|
|
|
|
|
51,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment (loss) income after provision for loan losses
|
|
|
(23,783
|
)
|
|
|
274,364
|
|
|
|
(15,292
|
)
|
|
|
174,735
|
|
|
|
|
|
|
|
410,024
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
|
|
|
|
3,524
|
|
|
|
97,850
|
|
|
|
|
|
|
|
|
|
|
|
101,374
|
|
Other administrative expenses
|
|
|
11,340
|
|
|
|
2,039
|
|
|
|
42,488
|
|
|
|
11,200
|
|
|
|
(10,900
|
)
|
|
|
56,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
11,340
|
|
|
|
5,563
|
|
|
|
140,338
|
|
|
|
11,200
|
|
|
|
(10,900
|
)
|
|
|
157,541
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diligence deposits forfeited
|
|
|
|
|
|
|
(128
|
)
|
|
|
4,096
|
|
|
|
|
|
|
|
|
|
|
|
3,968
|
|
Gain on investments, net
|
|
|
|
|
|
|
|
|
|
|
5,483
|
|
|
|
|
|
|
|
|
|
|
|
5,483
|
|
(Loss) gain on derivatives
|
|
|
|
|
|
|
(621
|
)
|
|
|
2,112
|
|
|
|
85
|
|
|
|
|
|
|
|
1,576
|
|
Gain on residential mortgage investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220
|
|
|
|
|
|
|
|
220
|
|
Other income, net of expenses
|
|
|
76
|
|
|
|
4,729
|
|
|
|
19,723
|
|
|
|
(2,497
|
)
|
|
|
(10,900
|
)
|
|
|
11,131
|
|
Earnings in subsidiaries
|
|
|
253,983
|
|
|
|
|
|
|
|
239,349
|
|
|
|
148,912
|
|
|
|
(642,244
|
)
|
|
|
|
|
Intercompany
|
|
|
|
|
|
|
(33,409
|
)
|
|
|
33,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
254,059
|
|
|
|
(29,429
|
)
|
|
|
304,172
|
|
|
|
146,720
|
|
|
|
(653,144
|
)
|
|
|
22,378
|
|
Noncontrolling interests expense
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
3,327
|
|
|
|
(6
|
)
|
|
|
3,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before income taxes and cumulative effect of
accounting change
|
|
|
218,936
|
|
|
|
239,343
|
|
|
|
148,542
|
|
|
|
306,928
|
|
|
|
(642,238
|
)
|
|
|
271,511
|
|
Income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,945
|
|
|
|
|
|
|
|
52,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before cumulative effect of accounting change
|
|
|
218,936
|
|
|
|
239,343
|
|
|
|
148,542
|
|
|
|
253,983
|
|
|
|
(642,238
|
)
|
|
|
218,566
|
|
Cumulative effect of accounting change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
218,936
|
|
|
$
|
239,343
|
|
|
$
|
148,912
|
|
|
$
|
253,983
|
|
|
$
|
(642,238
|
)
|
|
$
|
218,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Cash Flows
Nine Months Ended September 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
|
|
$
|
191,321
|
|
|
$
|
241,927
|
|
|
$
|
189,260
|
|
|
$
|
257,498
|
|
|
$
|
(688,685
|
)
|
|
$
|
191,321
|
|
Adjustments to reconcile net income to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
344
|
|
|
|
5,350
|
|
|
|
|
|
|
|
|
|
|
|
5,694
|
|
Restricted stock expense
|
|
|
|
|
|
|
3,136
|
|
|
|
23,078
|
|
|
|
|
|
|
|
|
|
|
|
26,214
|
|
Amortization of deferred loan fees and discounts
|
|
|
|
|
|
|
(18,526
|
)
|
|
|
(27,597
|
)
|
|
|
(20,721
|
)
|
|
|
|
|
|
|
(66,844
|
)
|
Paid-in-kind
interest on loans
|
|
|
|
|
|
|
(4,747
|
)
|
|
|
(11,163
|
)
|
|
|
(3,787
|
)
|
|
|
|
|
|
|
(19,697
|
)
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
39,310
|
|
|
|
5,379
|
|
|
|
|
|
|
|
44,689
|
|
Amortization of deferred financing fees and discounts
|
|
|
2,885
|
|
|
|
11,173
|
|
|
|
349
|
|
|
|
16,855
|
|
|
|
|
|
|
|
31,262
|
|
Depreciation and amortization
|
|
|
|
|
|
|
236
|
|
|
|
2,456
|
|
|
|
23,675
|
|
|
|
|
|
|
|
26,367
|
|
Benefit for deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,741
|
)
|
|
|
|
|
|
|
(3,741
|
)
|
Non-cash loss on investments, net
|
|
|
|
|
|
|
3,232
|
|
|
|
3,748
|
|
|
|
|
|
|
|
|
|
|
|
6,980
|
|
Non-cash (gain) loss on property and equipment disposals
|
|
|
|
|
|
|
(1,347
|
)
|
|
|
766
|
|
|
|
1,140
|
|
|
|
|
|
|
|
559
|
|
Unrealized loss (gain) on derivatives and foreign currencies, net
|
|
|
|
|
|
|
(6,569
|
)
|
|
|
15,392
|
|
|
|
1,479
|
|
|
|
|
|
|
|
10,302
|
|
Unrealized loss on residential mortgage investment portfolio, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,310
|
|
|
|
|
|
|
|
60,310
|
|
Net increase in mortgage-backed securities pledged, trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(633,729
|
)
|
|
|
|
|
|
|
(633,729
|
)
|
Amortization of discount on residential mortgage investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(29,862
|
)
|
|
|
|
|
|
|
(29,862
|
)
|
Increase in loans held for sale, net
|
|
|
|
|
|
|
(114,487
|
)
|
|
|
(38,435
|
)
|
|
|
(371,205
|
)
|
|
|
|
|
|
|
(524,127
|
)
|
Decrease (increase) in intercompany note receivable
|
|
|
|
|
|
|
2,137
|
|
|
|
(117,124
|
)
|
|
|
|
|
|
|
114,987
|
|
|
|
|
|
(Increase) decrease in other assets
|
|
|
(13,683
|
)
|
|
|
249
|
|
|
|
(20,387
|
)
|
|
|
(42,802
|
)
|
|
|
8,130
|
|
|
|
(68,493
|
)
|
(Decrease) increase in other liabilities
|
|
|
(7,072
|
)
|
|
|
(10,253
|
)
|
|
|
(8,685
|
)
|
|
|
98,480
|
|
|
|
1,434
|
|
|
|
73,904
|
|
Net transfers with subsidiaries
|
|
|
(645,444
|
)
|
|
|
(77,536
|
)
|
|
|
(407,115
|
)
|
|
|
441,410
|
|
|
|
688,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in operating activities
|
|
|
(471,993
|
)
|
|
|
28,969
|
|
|
|
(350,797
|
)
|
|
|
(199,621
|
)
|
|
|
124,551
|
|
|
|
(868,891
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted cash
|
|
|
|
|
|
|
20,689
|
|
|
|
32,674
|
|
|
|
(109,248
|
)
|
|
|
|
|
|
|
(55,885
|
)
|
Decrease in mortgage-related receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,333
|
|
|
|
|
|
|
|
216,333
|
|
Decrease in receivables under reverse-repurchase agreements, net
|
|
|
|
|
|
|
25,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,735
|
|
Increase in loans, net
|
|
|
52
|
|
|
|
(381,974
|
)
|
|
|
142,708
|
|
|
|
(1,007,494
|
)
|
|
|
(10,217
|
)
|
|
|
(1,256,925
|
)
|
Acquisition of real estate, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(253,182
|
)
|
|
|
|
|
|
|
(253,182
|
)
|
Acquisition of investments, net
|
|
|
|
|
|
|
(16,787
|
)
|
|
|
(1,394
|
)
|
|
|
(18,461
|
)
|
|
|
|
|
|
|
(36,642
|
)
|
Disposal (acquisition) of property and equipment, net
|
|
|
|
|
|
|
33
|
|
|
|
(4,370
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
|
52
|
|
|
|
(352,304
|
)
|
|
|
169,618
|
|
|
|
(1,172,052
|
)
|
|
|
(10,217
|
)
|
|
|
(1,364,903
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(1,283
|
)
|
|
|
(19,211
|
)
|
|
|
(2,287
|
)
|
|
|
(12,640
|
)
|
|
|
|
|
|
|
(35,421
|
)
|
(Decrease) increase in intercompany note payable
|
|
|
|
|
|
|
(13,331
|
)
|
|
|
|
|
|
|
128,318
|
|
|
|
(114,987
|
)
|
|
|
|
|
(Repayments of) borrowings under repurchase agreements, net
|
|
|
|
|
|
|
(25,160
|
)
|
|
|
|
|
|
|
544,869
|
|
|
|
|
|
|
|
519,709
|
|
Borrowings on (repayments of) credit facilities, net
|
|
|
54,552
|
|
|
|
489,021
|
|
|
|
110,033
|
|
|
|
(205,325
|
)
|
|
|
|
|
|
|
448,281
|
|
Borrowings of convertible debt
|
|
|
245,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
245,151
|
|
Borrowings of term debt
|
|
|
|
|
|
|
737,347
|
|
|
|
232
|
|
|
|
1,121,695
|
|
|
|
653
|
|
|
|
1,859,927
|
|
Repayments of term debt
|
|
|
|
|
|
|
(959,048
|
)
|
|
|
(4,830
|
)
|
|
|
(238,108
|
)
|
|
|
|
|
|
|
(1,201,986
|
)
|
Borrowings of subordinated debt
|
|
|
|
|
|
|
|
|
|
|
75,629
|
|
|
|
|
|
|
|
|
|
|
|
75,629
|
|
Proceeds from issuance of common stock, net of offering costs
|
|
|
507,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
507,479
|
|
Proceeds from exercise of options
|
|
|
4,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,693
|
|
Tax benefits on share based payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,354
|
|
|
|
|
|
|
|
2,354
|
|
Payment of dividends
|
|
|
(338,808
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,503
|
)
|
|
|
|
|
|
|
(342,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by financing activities
|
|
|
471,784
|
|
|
|
209,618
|
|
|
|
178,777
|
|
|
|
1,337,660
|
|
|
|
(114,334
|
)
|
|
|
2,083,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(157
|
)
|
|
|
(113,717
|
)
|
|
|
(2,402
|
)
|
|
|
(34,013
|
)
|
|
|
|
|
|
|
(150,289
|
)
|
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
|
|
$
|
|
|
|
$
|
124,507
|
|
|
$
|
44,321
|
|
|
$
|
77,034
|
|
|
$
|
|
|
|
$
|
245,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidating
Statement of Cash Flows
Nine Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CapitalSource Finance LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
|
|
|
|
Other Non
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Guarantor
|
|
|
Combined Guarantor
|
|
|
-Guarantor
|
|
|
|
|
|
Consolidated
|
|
|
|
CapitalSource Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
Eliminations
|
|
|
CapitalSource Inc.
|
|
|
|
(Unaudited)
|
|
|
|
($ in thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
218,936
|
|
|
$
|
239,343
|
|
|
$
|
148,912
|
|
|
$
|
253,983
|
|
|
$
|
(642,238
|
)
|
|
$
|
218,936
|
|
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option expense
|
|
|
|
|
|
|
55
|
|
|
|
6,407
|
|
|
|
|
|
|
|
|
|
|
|
6,462
|
|
Restricted stock expense
|
|
|
|
|
|
|
450
|
|
|
|
18,080
|
|
|
|
|
|
|
|
|
|
|
|
18,530
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,497
|
|
|
|
|
|
|
|
2,497
|
|
Non-cash prepayment fee
|
|
|
|
|
|
|
|
|
|
|
(8,353
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,353
|
)
|
Cumulative effect of accounting change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
|
|
(370
|
)
|
Amortization of deferred loan fees
|
|
|
|
|
|
|
(33,534
|
)
|
|
|
6,936
|
|
|
|
(39,210
|
)
|
|
|
|
|
|
|
(65,808
|
)
|
Interest on
paid-in-kind
loans
|
|
|
|
|
|
|
6,365
|
|
|
|
(11,373
|
)
|
|
|
(2,013
|
)
|
|
|
|
|
|
|
(7,021
|
)
|
Provision for loan losses
|
|
|
|
|
|
|
|
|
|
|
43,304
|
|
|
|
7,729
|
|
|
|
|
|
|
|
51,033
|
|
Amortization of deferred financing fees and discounts
|
|
|
2,284
|
|
|
|
16,750
|
|
|
|
331
|
|
|
|
9,186
|
|
|
|
|
|
|
|
28,551
|
|
Depreciation and amortization
|
|
|
|
|
|
|
34
|
|
|
|
2,220
|
|
|
|
7,350
|
|
|
|
|
|
|
|
9,604
|
|
Benefit for deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,453
|
)
|
|
|
|
|
|
|
(9,453
|
)
|
Non-cash loss on investments, net
|
|
|
|
|
|
|
|
|
|
|
5,510
|
|
|
|
|
|
|
|
|
|
|
|
5,510
|
|
Non-cash (gain) loss on property and equipmnt disposals
|
|
|
|
|
|
|
(740
|
)
|
|
|
268
|
|
|
|
|
|
|
|
|
|
|
|
(472
|
)
|
Loss (gain) on derivatives
|
|
|
|
|
|
|
678
|
|
|
|
(844
|
)
|
|
|
(29
|
)
|
|
|
|
|
|
|
(195
|
)
|
Unrealized loss on residential mortgage investment portfolio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,702
|
|
|
|
|
|
|
|
8,702
|
|
Net increase in mortgage-backed securities pledged, trading
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(331,767
|
)
|
|
|
|
|
|
|
(331,767
|
)
|
Amortization of discount on residential mortgage investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,786
|
)
|
|
|
|
|
|
|
(22,786
|
)
|
Decrease (increase) in loans held for sale, net
|
|
|
|
|
|
|
2,346
|
|
|
|
(62,500
|
)
|
|
|
|
|
|
|
|
|
|
|
(60,154
|
)
|
Decrease in intercompany note receivable
|
|
|
|
|
|
|
5,284
|
|
|
|
23,380
|
|
|
|
|
|
|
|
(28,664
|
)
|
|
|
|
|
Decrease (increase) in other assets
|
|
|
20,110
|
|
|
|
(817
|
)
|
|
|
(4,586
|
)
|
|
|
38,705
|
|
|
|
11,799
|
|
|
|
65,211
|
|
Increase in other liabilities
|
|
|
11,977
|
|
|
|
821
|
|
|
|
29,876
|
|
|
|
5,896
|
|
|
|
(13,147
|
)
|
|
|
35,423
|
|
Net transfers with subsidiaries
|
|
|
(923,633
|
)
|
|
|
(96,974
|
)
|
|
|
(88,451
|
)
|
|
|
466,820
|
|
|
|
642,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by operating activities
|
|
|
(670,326
|
)
|
|
|
140,061
|
|
|
|
108,747
|
|
|
|
395,610
|
|
|
|
(30,012
|
)
|
|
|
(55,920
|
)
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in restricted cash
|
|
|
|
|
|
|
17,502
|
|
|
|
(49,955
|
)
|
|
|
(45,711
|
)
|
|
|
|
|
|
|
(78,164
|
)
|
Increase in mortgage-related receivables, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,391,783
|
)
|
|
|
|
|
|
|
(2,391,783
|
)
|
Increase in receivables under reverse-repurchase agreements, net
|
|
|
|
|
|
|
(19,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,663
|
)
|
Decrease (increase) in loans, net
|
|
|
|
|
|
|
75,404
|
|
|
|
(301,032
|
)
|
|
|
(1,142,428
|
)
|
|
|
2,151
|
|
|
|
(1,365,905
|
)
|
Acquisition of real estate, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66,375
|
)
|
|
|
|
|
|
|
(66,375
|
)
|
Disposal (acquisition) of investments, net
|
|
|
33,683
|
|
|
|
(26,835
|
)
|
|
|
(10,114
|
)
|
|
|
(19,712
|
)
|
|
|
|
|
|
|
(22,978
|
)
|
Acquisition of property and equipment, net
|
|
|
|
|
|
|
(605
|
)
|
|
|
(2,175
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) investing activities
|
|
|
33,683
|
|
|
|
45,803
|
|
|
|
(363,276
|
)
|
|
|
(3,666,009
|
)
|
|
|
2,151
|
|
|
|
(3,947,648
|
)
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of deferred financing fees
|
|
|
(3,026
|
)
|
|
|
(18,922
|
)
|
|
|
(3,526
|
)
|
|
|
(12,400
|
)
|
|
|
|
|
|
|
(37,874
|
)
|
Decrease in intercompany note payable
|
|
|
(20,327
|
)
|
|
|
(8,337
|
)
|
|
|
|
|
|
|
|
|
|
|
28,664
|
|
|
|
|
|
Borrowings under repurchase agreements, net
|
|
|
|
|
|
|
13,273
|
|
|
|
|
|
|
|
256,594
|
|
|
|
|
|
|
|
269,867
|
|
Borrowings on unsecured credit facilities, net
|
|
|
465,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
465,000
|
|
(Repayments of) borrowings on secured credit facilities, net
|
|
|
|
|
|
|
(1,128,462
|
)
|
|
|
|
|
|
|
1,171,000
|
|
|
|
|
|
|
|
42,538
|
|
Borrowings of term debt
|
|
|
|
|
|
|
2,044,066
|
|
|
|
4,400
|
|
|
|
2,447,870
|
|
|
|
(803
|
)
|
|
|
4,495,533
|
|
Repayments of term debt
|
|
|
|
|
|
|
(1,063,398
|
)
|
|
|
(49
|
)
|
|
|
(165,932
|
)
|
|
|
|
|
|
|
(1,229,379
|
)
|
Borrowings of subordinated debt
|
|
|
|
|
|
|
|
|
|
|
131,685
|
|
|
|
|
|
|
|
|
|
|
|
131,685
|
|
Proceeds from issuance of common stock, net of offering costs
|
|
|
498,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
498,931
|
|
Proceeds from exercise of options
|
|
|
5,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,283
|
|
Tax benefits on share-based payments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,311
|
|
|
|
|
|
|
|
3,311
|
|
Payment of dividends
|
|
|
(311,256
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,824
|
)
|
|
|
|
|
|
|
(314,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) financing activities
|
|
|
634,605
|
|
|
|
(161,780
|
)
|
|
|
132,510
|
|
|
|
3,697,619
|
|
|
|
27,861
|
|
|
|
4,330,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(2,038
|
)
|
|
|
24,084
|
|
|
|
(122,019
|
)
|
|
|
427,220
|
|
|
|
|
|
|
|
327,247
|
|
Cash and cash equivalents as of beginning of period
|
|
|
2,038
|
|
|
|
145,065
|
|
|
|
156,571
|
|
|
|
20,222
|
|
|
|
|
|
|
|
323,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents as of end of period
|
|
$
|
|
|
|
$
|
169,149
|
|
|
$
|
34,552
|
|
|
$
|
447,442
|
|
|
$
|
|
|
|
$
|
651,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine months ended September 30
2007, our gross direct real estate investments increased by
$332.7 million through the acquisition of 62 healthcare
properties. Our direct real estate investments as of
September 30, 2007 and December 31, 2006 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Land
|
|
$
|
110,519
|
|
|
$
|
91,543
|
|
Buildings
|
|
|
904,182
|
|
|
|
607,833
|
|
Furniture
|
|
|
51,747
|
|
|
|
34,395
|
|
Accumulated depreciation
|
|
|
(34,543
|
)
|
|
|
(11,468
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,031,905
|
|
|
$
|
722,303
|
|
|
|
|
|
|
|
|
|
|
Depreciation of direct real estate investments totaled
$8.9 million and $23.1 million for the three and nine
months ended September 30, 2007, respectively, and
$3.1 million and $7.3 million, respectively, for the
three and nine months ended September 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 nine
months ended September 30, 2007:
Repurchase
Agreements
We entered into two new master repurchase agreements and
borrowed under our existing repurchase agreements with various
financial institutions to finance the purchases of RMBS during
the nine months ended September 30, 2007. As of
September 30, 2007 and December 31, 2006, the
aggregate amounts outstanding under our repurchase agreements
used to finance purchases of RMBS were $4.0 billion and
$3.4 billion, respectively. As of September 30, 2007
and December 31, 2006, repurchase agreements that we
executed had a weighted average borrowing rates of 5.43% and
5.32%, respectively, and weighted average remaining maturities
of 3.25 months and 0.6 months, respectively. The terms
of our borrowings pursuant to repurchase agreements typically
reset every 30 days. During the three months ended
September 30, 2007, we negotiated longer terms for some of
these repurchase agreements with several counterparties. As a
result, as of September 30, 2007, approximately 34% of the
borrowings outstanding under repurchase agreements had terms
longer than 30 days. As of September 30, 2007, such
repurchase agreements were collateralized by Agency MBS with a
fair value of $4.2 billion, including accrued interest and
cash deposits of $105.0 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 capacities were
$5.6 billion and $5.0 billion as of September 30,
2007 and December 31, 2006, respectively. As of
September 30, 2007, total undrawn capacity under our credit
facilities was $2.9 billion.
22
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In February 2007, we entered into a CAD$75.0 million
unsecured one-year revolving credit facility with the Royal Bank
of Canada. We expect to use the funds available under this
facility primarily to finance the origination of commercial loan
assets. Interest on borrowings under the credit facility is
charged at the Canadian Bankers Acceptance rate plus a margin
based on the credit ratings we receive on our public debt. As of
September 30, 2007, the interest rate under this facility
was 6.08%. 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 on Eurocurrency borrowings by 10 basis
points to Adjusted LIBOR, as defined, plus 0.65%, and establish
the interest rate 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 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 continue 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
$1.5 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 financed in this facility,
and (ii) increase the interest rate by 30 basis points
to one-month LIBOR plus 0.90%, subject to adjustment under
certain circumstances, in each case effective September 1,
2007.
In April 2007, in connection with consummation of the
$1.5 billion 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 September 2007, in connection with consummation of the
$1.5 billion secured, revolving credit facility with
Citigroup described above, we terminated our $400.0 million
multi-bank secured credit facility led by Citigroup, which was
scheduled to mature in October 2008. There were no amounts
outstanding under the facility at termination.
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 as of September 30, 2007,
twelve institutions increased their commitment. In August 2007,
as permitted under the amended terms of the facility, we
increased the commitment amount to $1.07 billion.
In July 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, some of which are not,
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 is equal to the lenders commercial paper
rate plus 0.75%.
In September 2007, in connection with the consummation of our
$1.07 billion term debt securitization, we amended our
$700.0 million secured facility with Citigroup to reduce
the overall advance rate from 85% to 80%.
23
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
In September 2007, we completed a $1.07 billion term debt
securitization with an affiliate of Citigroup recorded as an
on-balance sheet financing. We sold a $1.07 billion
floating-rate asset-backed note, which is backed by a
diversified pool of senior and subordinated commercial real
estate loans from our portfolio, and we retained the trust
certificate. The value of the sold note represented 75% of the
value of the collateral pool, and the note bears interest at a
floating commercial paper rate plus 1.50%. We may at our option,
subject to certain limitations, increase the commitment amount
to $1.50 billion. We may prepay the note, at par, at any
time without penalty. We used the proceeds to repay borrowings
under certain of our credit facilities and to pay certain
transaction fees and expenses.
Other
Borrowings
Other borrowings as of September 30, 2007 and
December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Subordinated debt
|
|
$
|
529,044
|
|
|
$
|
446,393
|
|
Convertible debt
|
|
|
797,778
|
|
|
|
555,000
|
|
Mortgage debt
|
|
|
285,436
|
|
|
|
287,182
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,612,258
|
|
|
$
|
1,288,575
|
|
|
|
|
|
|
|
|
|
|
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
24
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 $321.6 million in aggregate principal amount of a
new series of 4% senior subordinated convertible debentures
due 2034 (the 4% Debentures) in exchange for a
like principal amount of our 3.5% Debentures. The results
of the exchange offers were as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
Outstanding
|
|
|
Amount
|
|
|
|
Prior
|
|
|
Outstanding
|
|
|
|
to Exchange
|
|
|
at Completion of
|
|
Securities
|
|
Offers
|
|
|
Exchange Offers
|
|
|
|
($ 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.
As with the 1.25% Debentures, and as of September 30,
2007, our 1.625% Debentures are convertible, subject to
certain conditions, into 7.6 million shares of our common
stock at a conversion rate of 43.0713 shares of common
stock per $1,000 principal amount of debentures, representing an
effective conversion price of approximately $23.22 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.
As with the 3.5% Debentures, and as of September 30,
2007, our 4% Debentures are convertible, subject to certain
conditions, into 13.2 million shares of our common stock at
a conversion rate of 41.1939 shares of common stock per
$1,000 principal amount of debentures, representing an effective
conversion price of approximately $24.28 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.
25
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Because the 1.625% Debentures and the 4% 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 consummation of
the exchange offers to prompt an extinguishment of issued debt
and, therefore, continued to amortize the remaining unamortized
deferred financing fees over the remaining estimated lives of
the 1.625% Debentures and the 4% Debentures. Additionally, all
costs associated with the exchange offers were expensed as
incurred.
In July 2007, we issued $250.0 million principal amount of
7.25% senior subordinated convertible notes due 2037
bearing interest at a rate of 7.25% per year until July 20,
2012 (the 7.25% Debentures and together with
the 1.625% Debentures and the 4.00% Debentures, the
Subordinated Debentures). The 7.25% Debentures
were sold at a price of 98% of the aggregate principal amount of
the notes. 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 an initial conversion
price of approximately $27.09 per share. The conversion rate and
price will adjust if we pay dividends on our common stock
greater than $0.60 per share, per quarter, with the fair value
of each adjustment taxable to the holders.
The 7.25% Debentures are redeemable for cash at our option
at any time on or after July 20, 2012 at a redemption price
of 100% of their principal amount plus accrued interest. Holders
of the 7.25% Debentures have the right to require us to
repurchase some or all of their debentures for cash on
July 15, 2012, July 15, 2017, July 15, 2022,
July 15, 2027 and July 15, 2032 at a price of 100% of
their principal amount plus accrued interest. Holders of the
7.25% Debentures also have the right to require us to
repurchase some or all of their 7.25% Debentures upon
certain events constituting a fundamental change.
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
outstanding Senior Debentures, and senior to our existing and
future subordinated 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, July 15, 2011
and July 15, 2012 for the 1.625% Debentures, the
4% Debentures and the 7.25% 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.
Holders of each series of 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, on or after July 15, 2019 for the
4% Debentures and on or after July 15, 2022 for the
7.25% 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
26
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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) We call any or all of the Subordinated Debentures of
such series 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.
Should we be required to repurchase the 7.25% Debentures at
any of the redemption dates, we are required to satisfy all
principal and accrued interest requirements with respect thereto
in cash. Should we be required to repurchase any other series of
our Subordinated Debentures at any of the redemption dates, or
if any series of our 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. For the three and nine months
ended September 30, 2007, we recorded a $2.4 million
beneficial conversion option related to the 3.5% Debentures
and 4% Debentures, which will be amortized through
July 15, 2011 in accordance with Emerging Issues Task Force
Issue
No. 98-05,
Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion
Ratios.
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.
Mortgage
Debt
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.
27
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 11.
|
Shareholders
Equity
|
Common
Stock Shares Outstanding
Common stock share activity for the nine months ended
September 30, 2007 was as follows:
|
|
|
|
|
Outstanding as of December 31, 2006
|
|
|
181,452,290
|
|
Issuance of common stock
|
|
|
24,246,651
|
|
Sale of treasury stock
|
|
|
1,300,000
|
|
Exercise of options
|
|
|
332,821
|
|
Restricted stock and other stock grants, net
|
|
|
1,208,870
|
|
|
|
|
|
|
Outstanding as of September 30, 2007
|
|
|
208,540,632
|
|
|
|
|
|
|
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 nine months ended September 30, 2007, we
received proceeds of $251.0 million and
$437.7 million, respectively, related to the direct
purchase of 14.2 million and 21.7 million shares of
our common stock pursuant to the DRIP, respectively. During the
three and nine months ended September 30, 2006, we received
proceeds of $55.0 million and $94.7 million,
respectively, related to the direct purchase of 2.4 million
and 4.1 million shares of our common stock pursuant to the
DRIP, respectively. In addition, we received proceeds of
$40.3 million and $69.8 million related to cash
dividends reinvested for 2.1 million and 3.3 million
shares of our common stock during the three and nine months
ended September 30, 2007, respectively. We received
proceeds of $3.9 million and $9.0 million related to
cash dividends reinvested for 0.2 million and
0.4 million shares of our common stock, respectively,
during the three and nine months ended September 30, 2006,
respectively.
When we filed our federal income tax return for the year ended
December 31, 2006, we elected REIT status under the
Internal Revenue Code (the Code). 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. As a REIT, we generally are not subject to
corporate-level income tax on the earnings distributed to our
shareholders that we derive from our REIT qualifying activities.
We 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 are still 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.
28
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the three and nine months ended September 30, 2007,
we recorded $11.6 million and $60.3 million of income
tax expense, respectively. Our effective income tax rate on our
consolidated net income was 24.0% for the nine months ended
September 30, 2007.
The reconciliations of the consolidated effective income tax
rate and the federal statutory corporate income tax rate for the
nine months ended September 30, 2007 and 2006 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Benefit of REIT election
|
|
|
(13.0
|
)
|
|
|
(16.1
|
)
|
State income taxes, net of federal tax benefit
|
|
|
1.8
|
|
|
|
1.4
|
|
Other
|
|
|
0.2
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate before discrete items
|
|
|
24.0
|
|
|
|
21.2
|
|
Discrete item Benefit for reversal of net deferred
tax liabilities(1)
|
|
|
|
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
24.0
|
%
|
|
|
19.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In connection with our REIT election, we reversed net deferred
tax liabilities of $4.7 million, relating to REIT
qualifying activities, into income during the nine months ended
September 30, 2006. |
During the nine months ended September 30, 2007, we
recorded a valuation allowance of $0.5 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 September 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 nine months
ended September 30, 2007, respectively, we recognized
$0.2 million and $0.5 million in interest expense and
penalties.
We file income tax returns with the United States and various
state, local and foreign jurisdictions and generally remain
subject to examinations by these tax jurisdictions for tax years
2004 through 2006.
29
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
Note 13.
|
Comprehensive
Income
|
Comprehensive income for the three and nine months ended
September 30, 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Net income
|
|
$
|
28,265
|
|
|
$
|
80,853
|
|
|
$
|
191,321
|
|
|
$
|
218,936
|
|
Unrealized (loss) gain on available-for-sale securities, net of
tax
|
|
|
(606
|
)
|
|
|
(177
|
)
|
|
|
(3,404
|
)
|
|
|
2,371
|
|
Unrealized gain on foreign currency translation, net of tax
|
|
|
3,528
|
|
|
|
|
|
|
|
5,709
|
|
|
|
|
|
Unrealized (loss) gain on cash flow hedge, net of tax
|
|
|
(833
|
)
|
|
|
(1,381
|
)
|
|
|
(296
|
)
|
|
|
1,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
30,354
|
|
|
$
|
79,295
|
|
|
$
|
193,330
|
|
|
$
|
222,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, net as of
September 30, 2007 and December 31, 2006 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Unrealized (loss) gain on available-for-sale securities, net of
tax
|
|
$
|
(690
|
)
|
|
$
|
2,714
|
|
Unrealized gain (loss) on foreign currency translation, net of
tax
|
|
|
4,883
|
|
|
|
(826
|
)
|
Unrealized gain on cash flow hedge, net of tax
|
|
|
281
|
|
|
|
577
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, net
|
|
$
|
4,474
|
|
|
$
|
2,465
|
|
|
|
|
|
|
|
|
|
|
30
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 nine months ended September 30, 2007 and
2006, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands, except per share data)
|
|
|
Basic net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
28,265
|
|
|
$
|
80,853
|
|
|
$
|
191,321
|
|
|
$
|
218,936
|
|
Average shares basic
|
|
|
191,976,931
|
|
|
|
171,777,989
|
|
|
|
185,552,634
|
|
|
|
163,373,576
|
|
Basic net income per share
|
|
$
|
0.15
|
|
|
$
|
0.47
|
|
|
$
|
1.03
|
|
|
$
|
1.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
28,265
|
|
|
$
|
80,853
|
|
|
$
|
191,321
|
|
|
$
|
218,936
|
|
Average shares basic
|
|
|
191,976,931
|
|
|
|
171,777,989
|
|
|
|
185,522,634
|
|
|
|
163,373,576
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock dividend declared
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,080,124
|
|
Option shares
|
|
|
161,394
|
|
|
|
330,551
|
|
|
|
453,770
|
|
|
|
397,791
|
|
Unvested restricted stock
|
|
|
1,415,679
|
|
|
|
1,180,952
|
|
|
|
1,493,333
|
|
|
|
1,146,656
|
|
Stock units
|
|
|
53,982
|
|
|
|
24,442
|
|
|
|
40,507
|
|
|
|
17,045
|
|
Non-managing member units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debt(1)
|
|
|
|
|
|
|
40,957
|
|
|
|
126,258
|
|
|
|
13,652
|
|
Written call option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares diluted
|
|
|
193,607,986
|
|
|
|
173,354,891
|
|
|
|
187,636,502
|
|
|
|
166,028,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.15
|
|
|
$
|
0.47
|
|
|
$
|
1.02
|
|
|
$
|
1.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For the nine months ended September 30, 2007, the
conversion premiums on the 1.25% Debentures and
1.625% Debentures represented dilutive shares based on a
conversion price of $23.22. |
The weighted average shares that have an antidilutive effect in
the calculation of diluted net income per share and have been
excluded from the computations above as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Stock options
|
|
|
8,543,433
|
|
|
|
8,309,478
|
|
|
|
3,792,836
|
|
|
|
3,926,149
|
|
Non-managing member units
|
|
|
1,996,855
|
|
|
|
2,510,818
|
|
|
|
2,148,280
|
|
|
|
2,271,692
|
|
Shares subject to a written call option
|
|
|
7,401,420
|
|
|
|
7,401,420
|
|
|
|
7,401,420
|
|
|
|
7,401,420
|
|
For the three months ended September 30, 2007, the
conversion premiums on the 1.25% Debentures and the
1.625% Debentures were considered antidilutive based on a
conversion premium of $23.22. For the three and nine months
ended September 30, 2007, the conversion premiums on the
3.5% Debentures and 4% Debentures were considered to
be antidilutive based on a conversion price of $24.28. For the
three and nine months ended September 30, 2006, the
conversion premiums on the 3.5% Debentures were considered
to be antidilutive based on conversion prices of $26.88. As
dividends are paid, the conversion prices related to our written
call option, Senior Debentures, 1.625% Debentures, and
4% Debentures are adjusted. The conversion price related to
the 7.25% Debentures will be adjusted only if we pay
dividends on our common stock greater than $0.60 per share, per
quarter. Also, we have excluded the shares underlying the
principal balance of the Debentures for all periods presented.
31
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 September 30, 2007, there were 11.6 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 nine months ended September 30, 2006
resulting from the requirement to estimate forfeitures for
unvested awards at the date of grant instead of recognizing them
as incurred. Total compensation costs recognized in income
pursuant to the Plan were $11.3 million and
$31.9 million for the three and nine months ended
September 30, 2007, respectively, and $8.6 million and
$25.0 million, respectively, for the three and nine months
ended September 30, 2006, respectively.
The weighted average grant date fair value of options granted
during the nine months ended September 30, 2007 was $1.60.
The total intrinsic value of stock options exercised during the
nine months ended September 30, 2007 was
$3.79 million. As of September 30, 2007, the total
unrecognized compensation cost related to nonvested stock
options granted pursuant to the Plan was $5.9 million. This
cost is expected to be recognized over a weighted average period
of 1.7 years.
The weighted average grant date fair value of restricted stock
granted during the nine months ended September 30, 2007 was
$24.20. The total fair value of restricted stock that vested
during the nine months ended September 30, 2007 was
$33.7 million. As of September 30, 2007, the total
unrecognized compensation cost related to nonvested restricted
stock granted pursuant to the Plan was $68.1 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 September 30, 2007, we had issued $249.8 million
in letters of credit which expire at various dates over the next
ten 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 September 30, 2007.
As of September 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. We
believe 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 September 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 conditional asset retirement
obligations was recorded on our accompanying consolidated
balance sheet as of September 30, 2007.
32
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 nine
months ended September 30, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 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
|
|
$
|
279,310
|
|
|
$
|
94,071
|
|
|
$
|
373,381
|
|
|
$
|
252,873
|
|
|
$
|
81,148
|
|
|
$
|
334,021
|
|
Operating lease income
|
|
|
27,490
|
|
|
|
|
|
|
|
27,490
|
|
|
|
7,855
|
|
|
|
|
|
|
|
7,855
|
|
Interest expense
|
|
|
143,602
|
|
|
|
89,152
|
|
|
|
232,754
|
|
|
|
96,872
|
|
|
|
73,246
|
|
|
|
170,118
|
|
Provision for loan losses
|
|
|
11,938
|
|
|
|
415
|
|
|
|
12,353
|
|
|
|
24,849
|
|
|
|
|
|
|
|
24,849
|
|
Operating expenses(1)
|
|
|
63,783
|
|
|
|
1,350
|
|
|
|
65,133
|
|
|
|
51,081
|
|
|
|
2,150
|
|
|
|
53,231
|
|
Other income (expense)(2)
|
|
|
(19,402
|
)
|
|
|
(30,225
|
)
|
|
|
(49,627
|
)
|
|
|
8,447
|
|
|
|
2,291
|
|
|
|
10,738
|
|
Noncontrolling interests expense
|
|
|
1,182
|
|
|
|
|
|
|
|
1,182
|
|
|
|
1,259
|
|
|
|
|
|
|
|
1,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income taxes
|
|
|
66,893
|
|
|
|
(27,071
|
)
|
|
|
39,822
|
|
|
|
95,114
|
|
|
|
8,043
|
|
|
|
103,157
|
|
Income taxes
|
|
|
11,557
|
|
|
|
|
|
|
|
11,557
|
|
|
|
22,304
|
|
|
|
|
|
|
|
22,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
55,336
|
|
|
$
|
(27,071
|
)
|
|
$
|
28,265
|
|
|
$
|
72,810
|
|
|
$
|
8,043
|
|
|
$
|
80,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
CapitalSource
Inc.
NOTES TO
THE UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 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
|
|
$
|
810,841
|
|
|
$
|
258,361
|
|
|
$
|
1,069,202
|
|
|
$
|
679,228
|
|
|
$
|
184,473
|
|
|
$
|
863,701
|
|
Operating lease income
|
|
|
69,934
|
|
|
|
|
|
|
|
69,934
|
|
|
|
19,174
|
|
|
|
|
|
|
|
19,174
|
|
Interest expense
|
|
|
377,366
|
|
|
|
242,328
|
|
|
|
619,694
|
|
|
|
250,967
|
|
|
|
170,851
|
|
|
|
421,818
|
|
Provision for loan losses
|
|
|
44,275
|
|
|
|
415
|
|
|
|
44,690
|
|
|
|
50,732
|
|
|
|
301
|
|
|
|
51,033
|
|
Operating expenses(1)
|
|
|
191,529
|
|
|
|
5,369
|
|
|
|
196,898
|
|
|
|
151,183
|
|
|
|
6,358
|
|
|
|
157,541
|
|
Other income (expense)(2)
|
|
|
27,271
|
|
|
|
(49,769
|
)
|
|
|
(22,498
|
)
|
|
|
22,158
|
|
|
|
220
|
|
|
|
22,378
|
|
Noncontrolling interests expense
|
|
|
3,784
|
|
|
|
|
|
|
|
3,784
|
|
|
|
3,350
|
|
|
|
|
|
|
|
3,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income taxes and cumulative effect of
accounting change
|
|
|
291,092
|
|
|
|
(39,520
|
)
|
|
|
251,572
|
|
|
|
264,328
|
|
|
|
7,183
|
|
|
|
271,511
|
|
Income taxes
|
|
|
60,251
|
|
|
|
|
|
|
|
60,251
|
|
|
|
52,945
|
|
|
|
|
|
|
|
52,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before cumulative effect of accounting change
|
|
|
230,841
|
|
|
|
(39,520
|
)
|
|
|
191,321
|
|
|
|
211,383
|
|
|
|
7,183
|
|
|
|
218,566
|
|
Cumulative effect of accounting change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
230,841
|
|
|
$
|
(39,520
|
)
|
|
$
|
191,321
|
|
|
$
|
211,753
|
|
|
$
|
7,183
|
|
|
$
|
218,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of September 30, 2007
|
|
$
|
11,298,736
|
|
|
$
|
6,453,948
|
|
|
$
|
17,752,684
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets as of December 31, 2006
|
|
$
|
9,235,449
|
|
|
$
|
5,975,125
|
|
|
$
|
15,210,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
34
|
|
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
Corporation (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 approved or
completed on the proposed terms and schedule or at all; changes
in economic conditions; movements in interest rates; competitive
and other market pressures on loan 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
Form 10-Q
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 originate, underwrite and manage our
commercial loans and investments through three principal
commercial finance businesses:
|
|
|
|
|
Structured Finance, which generally engages in commercial
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 September 30, 2007, the
balance of our residential mortgage investment portfolio was
$6.3 billion, which included investments in residential
mortgage loans and residential mortgage-backed securities
(RMBS). Over 99% of our investments in RMBS are
represented by mortgage-backed securities that were issued and
guaranteed by Fannie Mae or Freddie
35
Mac (hereinafter, Agency MBS). In addition, we had
mortgage-related receivables secured by prime residential
mortgage loans.
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 $3.5 billion in assets
and $2.4 billion of deposits as of September 30, 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. As of September 30, 2007, the stock and
cash merger was valued at approximately $28.66 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. The transaction remains subject to approval by
TierOne shareholders and the Office of Thrift Supervision.
TierOnes shareholder meeting to vote on the proposed
transaction is scheduled for November 29, 2007. Assuming
all approvals are obtained and conditions are satisfied, we
expect to close the transaction in early 2008.
Impact of
Recent Market Conditions
During the third quarter 2007 we witnessed a significant
disruption in the capital markets that affected many financial
institutions. What began with concerns about rising
delinquencies and potential defaults in sub-prime mortgages and
related securities broadened to affect the mortgage markets more
generally and, ultimately, all credit markets. The effects of
this disruption resulted in a substantial reduction in liquidity
for certain assets, greater pricing for risk and de-leveraging.
These extreme market conditions did not have a material impact
upon our business in the third quarter. We did see, and expect
to continue to see, negative effects in terms of a higher cost
of funds on incremental borrowings than before the market
disruption. For example, in September and October 2007 we
completed two term debt securitizations, backed by commercial
loans from our portfolio. Due to the market disruption, these
financings were more expensive and provided lower leverage than
similar financings we have completed in the past. However, we
believe that the same market conditions that adversely affect us
as a borrower have and will continue to allow us as a lender to
price new loans at higher yields. It is possible this market
disruption could adversely affect the U.S. economy as a whole.
Further declines in economic conditions could adversely affect
our clients ability to fulfill their obligations to us
and/or our ability to fund our business activities.
During the quarter, we also saw a small decrease in the carrying
value of our residential mortgage investments (approximately
0.5% of the residential mortgage investment portfolio). We
actively manage the interest rate risk associated with this
portfolio pursuant to a risk management strategy that is further
described below in the discussion on market risk management.
Our investment strategy explicitly contemplated the potential
for upward and downward shifts in the carrying value of the
portfolio, including shifts of the magnitude that we saw during
the third quarter. Such volatility in carrying value has no
material impact on our investment strategy. While the portfolio
may further decrease in value, we believe that the reduction in
value is short-term. As the market disruption subsides, we
expect that the carrying value of our residential mortgage
investments should return to more historical levels.
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.
36
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 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 that are 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 elected REIT status under the
Internal Revenue Code (the Code) when we filed our
tax return for our taxable year ended December 31, 2006. As
a REIT, we generally are not subject to corporate-level income
tax on the earnings distributed to our shareholders that we
derive from our REIT qualifying activities, but
37
are 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 is 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 net income and cash flows from operating,
investing and financing activities in our consolidated financial
statements, to help analyze how our business is performing.
Adjusted earnings and other supplemental performance measures
are defined in various ways throughout the REIT industry.
Investors should consider these differences when comparing our
adjusted earnings to other REITs.
Operating
Results for the Three and Nine Months Ended September 30,
2007
As further described below, the most significant factors
influencing our consolidated results of operations for the three
and nine months ended September 30, 2007, compared to the
consolidated results of operations for the equivalent time
periods in 2006, were:
|
|
|
|
|
Mark to market losses on our Residential Mortgage Investment
Portfolio;
|
|
|
|
Losses on derivatives and other investments in our Commercial
Lending and Investment Segment;
|
|
|
|
Reduced prepayment-related fee income and reduced gains on
equity sales;
|
|
|
|
Growth in our commercial loan portfolio;
|
|
|
|
Increased operating lease income related to our direct real
estate investments;
|
|
|
|
Decreased operating expenses as a percentage of average assets;
and
|
|
|
|
Decreased lending and borrowing spreads.
|
Our consolidated operating results for the three and nine months
ended September 30, 2007 compared to the three and nine
months ended September 30, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
2007
|
|
|
2006
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
($ in thousands)
|
|
|
Interest income
|
|
$
|
344,043
|
|
|
$
|
280,066
|
|
|
$
|
63,977
|
|
|
|
23
|
%
|
|
$
|
944,781
|
|
|
$
|
731,601
|
|
|
$
|
213,180
|
|
|
|
29
|
%
|
Fee income
|
|
|
29,338
|
|
|
|
53,955
|
|
|
|
(24,617
|
)
|
|
|
(46
|
)%
|
|
|
124,421
|
|
|
|
132,100
|
|
|
|
(7,679
|
)
|
|
|
(6
|
)%
|
Operating lease income
|
|
|
27,490
|
|
|
|
7,855
|
|
|
|
19,635
|
|
|
|
250
|
%
|
|
|
69,934
|
|
|
|
19,174
|
|
|
|
50,760
|
|
|
|
265
|
%
|
Interest expense
|
|
|
232,754
|
|
|
|
170,118
|
|
|
|
62,636
|
|
|
|
37
|
%
|
|
|
619,694
|
|
|
|
421,818
|
|
|
|
197,876
|
|
|
|
47
|
%
|
Provision for loan losses
|
|
|
12,353
|
|
|
|
24,849
|
|
|
|
(12,496
|
)
|
|
|
(50
|
)%
|
|
|
44,690
|
|
|
|
51,033
|
|
|
|
(6,343
|
)
|
|
|
(12
|
)%
|
Operating expenses
|
|
|
65,133
|
|
|
|
53,231
|
|
|
|
11,902
|
|
|
|
22
|
%
|
|
|
196,898
|
|
|
|
157,541
|
|
|
|
39,357
|
|
|
|
25
|
%
|
Other income, net of expenses
|
|
|
(49,627
|
)
|
|
|
10,738
|
|
|
|
(60,365
|
)
|
|
|
(562
|
)%
|
|
|
(22,498
|
)
|
|
|
22,378
|
|
|
|
(44,876
|
)
|
|
|
(201
|
)%
|
Noncontrolling interests expense
|
|
|
1,182
|
|
|
|
1,259
|
|
|
|
(77
|
)
|
|
|
(6
|
)%
|
|
|
3,784
|
|
|
|
3,350
|
|
|
|
434
|
|
|
|
13
|
%
|
Income taxes
|
|
|
11,557
|
|
|
|
22,304
|
|
|
|
(10,747
|
)
|
|
|
(48
|
)%
|
|
|
60,251
|
|
|
|
52,945
|
|
|
|
7,306
|
|
|
|
14
|
%
|
Cumulative effect of accounting change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
370
|
|
|
|
(370
|
)
|
|
|
(100
|
)%
|
Net income
|
|
|
28,265
|
|
|
|
80,853
|
|
|
|
(52,588
|
)
|
|
|
(65
|
)%
|
|
|
191,321
|
|
|
|
218,936
|
|
|
|
(27,615
|
)
|
|
|
(13
|
)%
|
38
Our consolidated yields on income earning assets and the costs
of interest bearing liabilities for the nine months ended
September 30, 2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 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
|
|
|
|
|
|
$
|
944,780
|
|
|
|
8.33
|
%
|
|
|
|
|
|
$
|
731,601
|
|
|
|
8.49
|
%
|
Fee income
|
|
|
|
|
|
|
124,421
|
|
|
|
1.10
|
|
|
|
|
|
|
|
132,100
|
|
|
|
1.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets(1)
|
|
$
|
15,612,542
|
|
|
|
1,069,201
|
|
|
|
9.43
|
|
|
$
|
11,527,276
|
|
|
|
863,701
|
|
|
|
10.02
|
|
Total direct real estate investments
|
|
|
909,240
|
|
|
|
69,934
|
|
|
|
10.28
|
|
|
|
203,011
|
|
|
|
19,174
|
|
|
|
12.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income earning assets
|
|
|
16,071,782
|
|
|
|
1,139,135
|
|
|
|
9.48
|
|
|
|
11,730,287
|
|
|
|
882,875
|
|
|
|
10.06
|
|
Total interest bearing liabilities(2)
|
|
|
13,852,181
|
|
|
|
619,694
|
|
|
|
5.98
|
|
|
|
9,901,508
|
|
|
|
421,818
|
|
|
|
5.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
519,441
|
|
|
|
3.50
|
%
|
|
|
|
|
|
$
|
461,057
|
|
|
|
4.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
4.32
|
%
|
|
|
|
|
|
|
|
|
|
|
5.26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
Comparison
of the Three Months Ended September 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 $250.0 million for the three months
ended September 30, 2007, an increase of
$51.1 million, or 26%, from interest income for the three
months ended September 30, 2006. This increase was due to
the growth in average interest earning assets, primarily loans,
of $2.1 billion, or 28%. This increase was partially offset
by a slight decrease in the interest component of yield to
10.11% for the three months ended September 30, 2007 from
10.28% for the three months ended September 30, 2006.
During the three months ended September 30, 2007, our
commercial lending spread to average one-month LIBOR was 4.68%
compared to 4.93% for the three months ended September 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 REIT election. 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
becoming 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 $94.1 million for the three months ended
September 30, 2007, an increase of $12.9 million, or
16%, from interest income recognized for the three months ended
September 30, 2006. This increase was primarily due to the
growth in average interest earning assets of
$857.7 million, or 15%.
Fee
Income
In our Commercial Lending & Investment segment, the
decrease in fee income was primarily the result of a decrease in
prepayment-related fee income, which totaled $3.2 million
for the three months ended September 30,
39
2007 compared to $26.4 million for the three months ended
September 30, 2006. Prepayment-related fee income
contributed 0.13% and 0.81%, to yield for the three months ended
September 30, 2007 and 2006, respectively. Yield from fee
income, including prepayment-related fees, decreased to 1.19%
for the three months ended September 30, 2007 from 2.79%
for the three months ended September 30, 2006.
Operating
Lease Income
In our Commercial Lending & Investment segment,
operating lease income was $27.5 million, an increase of
$19.6 million, or 250%, from the three months ended
September 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
September 30, 2007 and 2006, our average balance of direct
real estate investments was $1.1 billion and
$261.4 million, respectively.
Interest
Expense
We fund our growth largely through borrowings. In our Commercial
Lending & Investment segment, interest expense was
$143.6 million for the three months ended
September 30, 2007, an increase of $46.7 million, or
48%, from interest expense for the three months ended
September 30, 2006. This increase in interest expense was
primarily due to an increase in average borrowings of
$2.7 billion, or 44%. Our cost of borrowings increased to
6.46% for the three months ended September 30, 2007 from
6.26% for the three months ended September 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, an increase in the amortization of
deferred financing fees and higher borrowing margins. The
increase in deferred financing fees was primarily due to
increases in our borrowings. Our overall borrowing spread to
average one-month LIBOR for the three months ended
September 30, 2007 was 1.03% compared to 0.91% for the
three months ended September 30, 2006.
In our Residential Mortgage Investment segment, interest expense
was $89.2 million for the three months ended
September 30, 2007, an increase of $15.9 million, or
22%, from interest expense for the three months ended
September 30, 2006. This increase in interest expense was
primarily due to an increase in average borrowings of
$795.2 million, corresponding to an increase in the size of
the portfolio. Our cost of borrowings increased to 5.66% for the
three months ended September 30, 2007 from 5.34% for the
three months ended September 30, 2006. This increase was
primarily the result of increased discount amortization
associated with the owner trust term debt used to finance our
mortgage-related receivables.
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 5.95% for the
three months ended September 30, 2007, a decrease of
224 basis points from 8.19% for the three months ended
September 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 4.73% for the three months ended September 30, 2007, a
decrease of 204 basis points from 6.77% for the three
months ended September 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.
40
The yields of income earning assets and the costs of interest
bearing liabilities in our Commercial Lending &
Investment segment for the three months ended September 30,
2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 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
|
|
|
|
|
|
$
|
249,972
|
|
|
|
10.11
|
%
|
|
|
|
|
|
$
|
198,918
|
|
|
|
10.28
|
%
|
Fee income
|
|
|
|
|
|
|
29,338
|
|
|
|
1.19
|
|
|
|
|
|
|
|
53,955
|
|
|
|
2.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets(1)
|
|
$
|
9,813,180
|
|
|
|
279,310
|
|
|
|
11.30
|
|
|
$
|
7,678,450
|
|
|
|
252,873
|
|
|
|
13.07
|
|
Total direct real estate investments
|
|
|
1,065,068
|
|
|
|
27,490
|
|
|
|
10.24
|
|
|
|
261,376
|
|
|
|
7,855
|
|
|
|
11.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income earning assets
|
|
|
10,878,248
|
|
|
|
306,800
|
|
|
|
11.19
|
|
|
|
7,939,826
|
|
|
|
260,728
|
|
|
|
13.03
|
|
Total interest bearing liabilities(2)
|
|
|
8,821,916
|
|
|
|
143,601
|
|
|
|
6.46
|
|
|
|
6,139,327
|
|
|
|
96,872
|
|
|
|
6.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
163,199
|
|
|
|
4.73
|
%
|
|
|
|
|
|
$
|
163,856
|
|
|
|
6.77
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
5.95
|
%
|
|
|
|
|
|
|
|
|
|
|
8.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 0.20% and 0.50%, respectively, for the three months
ended September 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.
Provision
for Loan Losses
The decrease in the provision for loan losses in our Commercial
Lending & Investment segment is the result of
recognizing fewer allocated reserves during the quarter and
during the three months ended September 30, 2007. This
decrease was partially offset by significant growth in our loan
portfolio.
Other
Income
In our Commercial Lending & Investment segment, other
income (expense) was $(19.4) million for the three months
ended September 30, 2007, a decrease of $27.8 million,
or 330%, from other income for the three months ended
September 30, 2006. The decrease in other income was
primarily attributable to a $10.4 million increase in net
unrealized losses on derivative instruments, a $9.2 million
decrease in net realized and unrealized losses in our equity
investments, a $2.3 million increase in losses on foreign
currency exchange and a $2.1 million decrease in fees
arising from our HUD mortgage origination services.
In our Residential Mortgage Investment segment, other expense
consisted of a net loss on the residential mortgage investment
portfolio of $30.2 million for the three months ended
September 30, 2007, an increase of $32.5 million from
total other income for the three months ended September 30,
2006. This net loss was attributable to net realized and
unrealized losses on derivative instruments related to our
residential mortgage investments of $54.2 million and
other-than-temporary declines in the fair value of our
Non-Agency MBS of $9.7 million. These losses were partially
offset by net unrealized gains on our Agency MBS of
$33.7 million. The value of Agency MBS relative to
risk-free investments was impacted during the three months ended
September 30, 2007 by the broad market dislocation.
Operating
Expenses
The increase in consolidated operating expenses was primarily
due to an increase of $6.0 million in depreciation and
amortization expense primarily resulting from increases in our
direct real estate investments
41
over the previous year, and a $4.4 million increase in
total employee compensation. The higher employee compensation
was primarily attributable to a $2.9 million increase in
employee benefits, including an increase in incentive
compensation. For the three months ended September 30, 2007
and 2006, incentive compensation totaled $19.2 million and
$17.8 million, respectively. Incentive compensation
comprises annual bonuses, as well as stock options and
restricted stock awards, which generally have a three- to
five-year vesting period. Operating expenses in our Residential
Mortgage Investment segment, which consist primarily of
compensation and benefits, professional fees and other direct
expenses, were $1.4 million and $2.2 million for the
three months ended September 30, 2007 and 2006,
respectively.
In our Commercial Lending & Investment segment,
operating expenses as a percentage of average total assets
decreased to 2.27% for the three months ended September 30,
2007, from 2.51% for the three months ended September 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 1.95% for the three months ended
September 30, 2007, from 2.36% for the three months ended
September 30, 2006.
42
Adjusted
Earnings
Adjusted earnings, as previously defined, were
$97.6 million, or $0.50 per diluted share, for the three
months ended September 30, 2007. Adjusted earnings were
$121.9 million, or $0.70 per diluted share, for the three
months ended September 30, 2006. A reconciliation of our
reported net income to adjusted earnings for the three months
ended September 30, 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands, except
|
|
|
|
per share data)
|
|
|
Net income
|
|
$
|
28,265
|
|
|
$
|
80,853
|
|
Add:
|
|
|
|
|
|
|
|
|
Real estate depreciation and amortization(1)
|
|
|
8,570
|
|
|
|
3,087
|
|
Amortization of deferred financing fees(2)
|
|
|
7,491
|
|
|
|
7,031
|
|
Non-cash equity compensation
|
|
|
11,336
|
|
|
|
8,640
|
|
Net realized and unrealized losses on residential mortgage
investment portfolio, including related derivatives(3)
|
|
|
32,425
|
|
|
|
1,123
|
|
Unrealized losses on derivatives and foreign currencies, net
|
|
|
16,464
|
|
|
|
6,937
|
|
Unrealized losses on investments, net
|
|
|
8,452
|
|
|
|
404
|
|
Provision for loan losses
|
|
|
12,353
|
|
|
|
24,849
|
|
Recoveries(4)
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Charge offs(5)
|
|
|
27,796
|
|
|
|
11,000
|
|
Nonrecurring items
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting change, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted earnings
|
|
$
|
97,560
|
|
|
$
|
121,924
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
0.15
|
|
|
$
|
0.47
|
|
Diluted as reported
|
|
$
|
0.15
|
|
|
$
|
0.47
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
|
191,976,931
|
|
|
|
171,777,989
|
|
Diluted as reported
|
|
|
193,607,986
|
|
|
|
173,354,891
|
|
Adjusted earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.51
|
|
|
$
|
0.71
|
|
Diluted(6)
|
|
$
|
0.50
|
|
|
$
|
0.70
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
191,976,931
|
|
|
|
171,777,989
|
|
Diluted(7)
|
|
|
195,604,841
|
|
|
|
175,865,709
|
|
|
|
|
(1) |
|
Depreciation and amortization for direct real estate investments
only. Excludes depreciation for corporate leasehold
improvements, fixed assets and (1) 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 for the three months
ended September 30, 2006, 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 the
three months ended September 30, 2006. |
|
(7) |
|
Adjusted to include average non-managing member units of
2,510,818 for the three months ended September 30, 2006,
which are considered dilutive to adjusted earnings per share,
but are antidilutive to GAAP net income per share. |
43
Comparison
of the Nine Months Ended September 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 $686.4 million for the nine months
ended September 30, 2007, an increase of
$139.3 million, or 25%, from interest income for the nine
months ended September 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 10.07% for
the nine months ended September 30, 2007 from 10.32% for
the nine months ended September 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 nine months ended
September 30, 2007, our commercial lending spread to
average one-month LIBOR was 4.71% compared to 5.31% for the nine
months ended September 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 REIT election.
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 becoming 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 $258.4 million for the nine months ended
September 30, 2007, an increase of $73.9 million, or
40%, from interest income recognized for the nine months ended
September 30, 2006. This increase was primarily due to the
growth in average interest earning assets of $1.6 billion,
or 36%.
Fee
Income
In our Commercial Lending & Investment segment, the
decrease in fee income was primarily the result of a decrease in
prepayment-related fee income, which totaled $43.4 million
for the nine months ended September 30, 2007 compared to
$54.7 million for the nine months ended September 30,
2006. Prepayment-related fee income contributed 0.63% and 1.03%
to yield for the nine months ended September 30, 2007 and
2006, respectively. Yield from fee income, including prepayment
related fees, decreased to 1.83% for the nine months ended
September 30, 2007 from 2.49% for the nine months ended
September 30, 2006.
Operating
Lease Income
In our Commercial Lending & Investment segment,
operating lease income was $69.9 million, an increase of
$50.8 million, or 265%, from the nine months ended
September 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 nine months ended
September 30, 2007 and 2006, our average balance of direct
real estate investments was $909.2 million and
$203.0 million, respectively.
Interest
Expense
We fund our growth largely through borrowings. In our Commercial
Lending & Investment segment, interest expense was
$377.4 million for the nine months ended September 30,
2007, an increase of $126.4 million, or 50%, from interest
expense for the nine months ended September 30, 2006. This
increase in interest expense was primarily due to an increase in
average borrowings of $2.4 billion, or 43%. Our cost of
borrowings increased to 6.30% for the nine months ended
September 30, 2007 from 5.98% for the nine months ended
September 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 increases in our borrowings. These
increases were partially offset by lower borrowing margins and
our use of
44
more cost effective sources of financing. Our overall borrowing
spread to average one-month LIBOR for the nine months ended
September 30, 2007 was 0.94% compared to 0.97% for the nine
months ended September 30, 2006.
In our Residential Mortgage Investment segment, interest expense
was $242.3 million for the nine months ended
September 30, 2007, an increase of $71.5 million, or
42%, from interest expense for the nine months ended
September 30, 2006. This increase in interest expense was
primarily due to an increase in average borrowings of
$1.6 billion, or 36%, corresponding to an increase in the
size of the portfolio. Our cost of borrowings increased to 5.47%
for the nine months ended September 30, 2007 from 5.25% for
the nine months ended September 30, 2006. This increase was
primarily the result of increased discount amortization
associated with the owner trust term debt used to finance our
mortgage-related receivables.
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 6.71% for the nine
months ended September 30, 2007, a decrease of
150 basis points from 8.21% for the nine months ended
September 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 5.45% for the nine months ended September 30, 2007, a
decrease of 138 basis points from 6.83% for the nine months
ended September 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 nine months ended September 30,
2007 and 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 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
|
|
|
|
|
|
$
|
686,420
|
|
|
|
10.07
|
%
|
|
|
|
|
|
$
|
547,128
|
|
|
|
10.32
|
%
|
Fee income
|
|
|
|
|
|
|
124,421
|
|
|
|
1.83
|
|
|
|
|
|
|
|
132,100
|
|
|
|
2.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest earning assets(1)
|
|
$
|
9,114,113
|
|
|
|
810,841
|
|
|
|
11.90
|
|
|
$
|
7,086,281
|
|
|
|
679,228
|
|
|
|
12.81
|
|
Total direct real estate investments
|
|
|
909,240
|
|
|
|
69,934
|
|
|
|
10.28
|
|
|
|
203,011
|
|
|
|
19,174
|
|
|
|
12.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income earning assets
|
|
|
10,023,353
|
|
|
|
880,775
|
|
|
|
11.75
|
|
|
|
7,289,292
|
|
|
|
698,402
|
|
|
|
12.81
|
|
Total interest bearing liabilities(2)
|
|
|
8,008,884
|
|
|
|
377,366
|
|
|
|
6.30
|
|
|
|
5,609,304
|
|
|
|
250,967
|
|
|
|
5.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance spread
|
|
|
|
|
|
$
|
503,409
|
|
|
|
5.45
|
%
|
|
|
|
|
|
$
|
447,435
|
|
|
|
6.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net finance margin
|
|
|
|
|
|
|
|
|
|
|
6.71
|
%
|
|
|
|
|
|
|
|
|
|
|
8.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
spreads were 0.23% and 0.29%, respectively, for the nine months
ended September 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.
45
Provision
for Loan Losses
The decrease in the provision for loan losses in our Commercial
Lending & Investment segment is the result of
recognizing fewer allocated reserves during the quarter and]
during the nine months ended September 30, 2007.
Other
Income
In our Commercial Lending & Investment segment, other
income was $27.3 million for the nine months ended
September 30, 2007, an increase of $5.1 million, or
23%, from total other income for the nine months ended
September 30, 2006. The increase in other income was
primarily attributable to a $15.7 million increase in net
realized and unrealized gains in our equity investments, a
$4.6 million increase in gains related to the sale of
loans, a $2.5 million decrease in losses incurred on the
extinguishment of debt and a $2.0 million increase in
income relating to our equity interests in various investees
that are not consolidated for financial statement purposes.
These increases were partially offset by a $16.2 million
decrease in net unrealized gains on derivative instruments, a
$4.5 million decrease in the receipt of
break-up
fees and a $2.9 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 $49.8 million for the nine months ended
September 30, 2007, a decrease of $50.0 million, from
total other income for the nine months ended September 30,
2006. This net loss was attributable to net realized and
unrealized losses on derivative instruments related to our
residential mortgage investments of $36.0 million and
other-than-temporary declines in the fair value of our
Non-Agency MBS of $23.2 million. These losses were
partially offset by net unrealized gains on our Agency MBS of
$9.4 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 $16.2 million in depreciation and
amortization expense primarily resulting from increases in our
direct real estate investments over the previous year, and a
$15.6 million increase in total employee compensation. The
higher employee compensation was attributable to a
$8.3 million increase in employee salaries and a
$8.1 million increase in incentive compensation, including
an increase in restricted stock awards. For the nine months
ended September 30, 2007 and 2006, incentive compensation
totaled $59.9 million and $51.8 million, respectively.
Incentive compensation comprises annual bonuses, as well as
stock options and restricted stock awards, which generally have
a three- to five-year vesting period. The remaining increase in
operating expenses for the nine months ended September 30,
2007 was primarily attributable to a $2.3 million increase
in professional fees, a $1.8 million increase in
administrative expenses and a $1.7 million increase 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
$5.4 million and $6.4 million for the nine months
ended September 30, 2007 and 2006, respectively.
In our Commercial Lending & Investment segment,
operating expenses as a percentage of average total assets
decreased to 2.50% for the nine months ended September 30,
2007, from 2.72% for the nine months ended September 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 2.19% for the nine months ended
September 30, 2007, from 2.60% for the nine months ended
September 30, 2006.
Income
Taxes
Our effective tax rate on our consolidated net income was 24.0%
for the nine months ended September 30, 2007. Our effective
income tax rate for the nine months ended September 30,
2007 attributable to our TRSs was 38.0%. Our overall effective
tax rates were 19.5% for the nine months ended
September 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. The increase in our effective tax rate on
consolidated net income is due to our expectation that our TRSs
will account for a greater percentage of our annual consolidated
net income in the current year than in the previous year.
46
Adjusted
Earnings
Adjusted earnings, as previously defined, were
$340.7 million, or $1.82 per diluted share, for the nine
months ended September 30, 2007. Adjusted earnings were
$315.0 million, or $1.89 per diluted share, for the nine
months ended September 30, 2006. A reconciliation of our
reported net income to adjusted earnings for the nine months
ended September 30, 2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands, except
|
|
|
|
per share data)
|
|
|
Net income
|
|
$
|
191,321
|
|
|
$
|
218,936
|
|
Add:
|
|
|
|
|
|
|
|
|
Real estate depreciation and amortization(1)
|
|
|
23,675
|
|
|
|
7,350
|
|
Amortization of deferred financing fees(2)
|
|
|
19,823
|
|
|
|
21,976
|
|
Non-cash equity compensation
|
|
|
31,908
|
|
|
|
24,993
|
|
Net realized and unrealized losses on residential mortgage
investment portfolio, including related derivatives(3)
|
|
|
55,805
|
|
|
|
1,782
|
|
Unrealized losses (gains) on derivatives and foreign currencies,
net
|
|
|
15,504
|
|
|
|
(196
|
)
|
Unrealized losses on investments, net
|
|
|
9,669
|
|
|
|
5,510
|
|
Provision for loan losses
|
|
|
44,690
|
|
|
|
51,034
|
|
Recoveries(4)
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Charge offs(5)
|
|
|
51,671
|
|
|
|
11,276
|
|
Nonrecurring items(6)
|
|
|
|
|
|
|
4,725
|
|
Cumulative effect of accounting change, net of taxes
|
|
|
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
Adjusted earnings
|
|
$
|
340,724
|
|
|
$
|
315,014
|
|
|
|
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
1.03
|
|
|
$
|
1.34
|
|
Diluted as reported
|
|
$
|
1.02
|
|
|
$
|
1.32
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
|
185,552,634
|
|
|
|
163,373,576
|
|
Diluted as reported
|
|
|
187,636,502
|
|
|
|
166,028,844
|
|
Adjusted earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.84
|
|
|
$
|
1.93
|
|
Diluted(7)
|
|
$
|
1.82
|
|
|
$
|
1.89
|
|
Average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
185,522,634
|
|
|
|
163,373,576
|
|
Diluted(8)
|
|
|
189,784,782
|
|
|
|
168,300,536
|
|
|
|
|
(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
nine months ended September 30, 2006. |
|
|
(7) |
|
Adjusted to reflect the impact of adding back noncontrolling
interests expense $3.4 million for the nine months ended
September 30, 2006, to adjusted earnings due to the
application of the if-converted method on non-managing member
units, which are considered dilutive to adjusted earnings per
share, but are antidilutive to GAAP net income per share for the
nine months ended September 30, 2006. |
|
|
(8) |
|
Adjusted to include average non-managing member units of
2,271,692 for the nine months ended September 30, 2006,
respectively, which are considered dilutive to adjusted earnings
per share, but are antidilutive to GAAP net income per share. |
47
Financial
Condition
Commercial
Lending & Investment Segment
Portfolio
Composition
We provide commercial loans to businesses that require
customized and sophisticated financing. We also invest in real
estate and selectively make equity investments. As of
September 30, 2007 and December 31, 2006, the
composition of our commercial lending and investment portfolio
was as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Commercial loans, net
|
|
$
|
9,629,470
|
|
|
$
|
7,850,198
|
|
Direct real estate investments, net
|
|
|
1,031,905
|
|
|
|
722,303
|
|
Equity investments
|
|
|
178,574
|
|
|
|
150,090
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,839,949
|
|
|
$
|
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 September 30, 2007 and
December 31, 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
($ in thousands)
|
|
|
Composition of loan portfolio by loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured loans(1)
|
|
$
|
5,456,046
|
|
|
|
57
|
%
|
|
$
|
4,704,166
|
|
|
|
60
|
%
|
First mortgage loans(1)
|
|
|
3,057,652
|
|
|
|
32
|
|
|
|
2,542,222
|
|
|
|
32
|
|
Subordinate loans
|
|
|
1,115,772
|
|
|
|
11
|
|
|
|
603,810
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,629,470
|
|
|
|
100
|
%
|
|
$
|
7,850,198
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of loan portfolio by business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured Finance
|
|
$
|
3,841,265
|
|
|
|
40
|
%
|
|
$
|
2,839,716
|
|
|
|
36
|
%
|
Healthcare and Specialty Finance
|
|
|
3,083,636
|
|
|
|
32
|
|
|
|
2,775,748
|
|
|
|
35
|
|
Corporate Finance
|
|
|
2,704,569
|
|
|
|
28
|
|
|
|
2,234,734
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,629,470
|
|
|
|
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 September 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured Finance
|
|
|
265
|
|
|
$
|
14,495
|
|
|
|
218
|
|
|
$
|
17,620
|
|
Healthcare and Specialty Finance
|
|
|
415
|
|
|
|
7,430
|
|
|
|
299
|
|
|
|
10,313
|
|
Corporate Finance
|
|
|
457
|
|
|
|
5,918
|
|
|
|
216
|
|
|
|
12,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall loan portfolio
|
|
|
1,137
|
|
|
|
8,469
|
|
|
|
733
|
|
|
|
13,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
The scheduled maturities of our commercial loan portfolio by
loan type as of September 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)
|
|
$
|
743,875
|
|
|
$
|
4,371,032
|
|
|
$
|
341,139
|
|
|
$
|
5,456,046
|
|
First mortgage loans(1)
|
|
|
1,194,903
|
|
|
|
1,714,295
|
|
|
|
148,454
|
|
|
|
3,057,652
|
|
Subordinate loans
|
|
|
127,855
|
|
|
|
453,251
|
|
|
|
534,666
|
|
|
|
1,115,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,066,633
|
|
|
$
|
6,538,578
|
|
|
$
|
1,024,259
|
|
|
$
|
9,629,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Term B loans. |
The dollar amounts of all fixed-rate and adjustable-rate
commercial loans by loan type as of September 30, 2007 were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable
|
|
|
Fixed
|
|
|
|
|
|
|
Rates
|
|
|
Rates
|
|
|
Total
|
|
|
|
($ in thousands)
|
|
|
Composition of loan portfolio by loan type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior secured loans(1)
|
|
$
|
5,392,334
|
|
|
$
|
63,712
|
|
|
$
|
5,456,046
|
|
First mortgage loans(1)
|
|
|
2,706,738
|
|
|
|
350,914
|
|
|
|
3,057,652
|
|
Subordinate loans
|
|
|
982,388
|
|
|
|
133,384
|
|
|
|
1,115,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,081,460
|
|
|
$
|
548,010
|
|
|
$
|
9,629,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total loan portfolio
|
|
|
94%
|
|
|
|
6%
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes Term B loans. |
As of September 30, 2007, our Structured Finance,
Healthcare and Specialty Finance, and Corporate Finance
businesses had commitments to lend up to an additional
$2.3 billion, $2.0 billion and $0.6 billion,
respectively, to 218, 299 and 216 existing clients,
respectively. Commitments do not include transactions for which
we have signed commitment letters but not yet signed loan
agreements.
49
Credit
Quality and Allowance for Loan Losses
As of September 30, 2007 and December 31, 2006, the
principal balances of loans 60 or more days contractually
delinquent, non-accrual loans and impaired loans in our
commercial lending portfolio were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Loans 60 or more days contractually delinquent
|
|
$
|
71,664
|
|
|
$
|
88,067
|
|
Non-accrual loans(1)
|
|
|
169,390
|
|
|
|
183,483
|
|
Impaired loans(2)
|
|
|
332,716
|
|
|
|
281,377
|
|
Less: loans in multiple categories
|
|
|
(221,553
|
)
|
|
|
(230,469
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
352,217
|
|
|
$
|
322,458
|
|
|
|
|
|
|
|
|
|
|
Total as a percentage of total loans
|
|
|
3.66%
|
|
|
|
4.11%
|
|
|
|
|
|
|
|
|
|
|
Total as a percentage of all commercial assets(3)
|
|
|
3.30%
|
|
|
|
3.76%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes commercial loans with an aggregate principal balance of
$21.0 million and $47.0 million as of
September 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 September 30, 2007. As
of December 31, 2006, there were no loans classified as
held for sale that were placed on non-accrual status. |
|
(2) |
|
Includes commercial loans with an aggregate principal balance of
$55.1 million and $47.0 million as of
September 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 $166.4 million and
$183.5 million as of September 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 three months ended September 30, 2007, no new
troubled debt restructurings, as defined by
SFAS No. 15, Accounting for Debtors and Creditors
for Troubled Debt Restructurings, occurred. During the nine
months ended September 30, 2007, commercial loans with an
aggregate carrying value of $69.7 million as of
September 30, 2007 were involved in a troubled debt
restructuring. As of September 30, 2007, commercial loans
with an aggregate carrying value of $167.6 million were
involved in a troubled debt restructuring. Additionally, under
SFAS No. 114, loans involved in a 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 that were involved in
troubled debt restructurings was $6.3 million as of
September 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 involved
in troubled debt restructurings. The allocated reserve for
commercial loans that were involved in a troubled debt
restructuring 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 allowances for
loan losses were $111.7 million and $120.6 million as
of September 30, 2007 and December 31, 2006,
respectively. These amounts equate to 1.16% and 1.54% of gross
loans as of September 30, 2007 and
50
December 31, 2006, respectively. Of our total allowance for
loan losses as of September 30, 2007 and December 31,
2006, $11.4 million and $37.8 million, respectively,
were allocated to impaired loans. During the nine months ended
September 30, 2007 and 2006, we charged off loans totaling
$51.7 million and $35.4 million, respectively. Net
charge offs as a percentage of average loans were 0.79% and
0.69% for the nine months ended September 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 September 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 September 30, 2007 and December 31, 2006, the
carrying values of our investments in our Commercial
Lending & Investment segment were $184.3 million
and $150.1 million, respectively. Included in these
balances were investments carried at fair value totaling
$29.1 million and $34.6 million, respectively.
Residential
Mortgage Investment Segment
Portfolio
Composition
We invest directly in residential mortgage investments and, as
of September 30, 2007 and December 31, 2006, our
portfolio of residential mortgage investments was as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
($ in thousands)
|
|
|
Mortgage-related receivables(1)
|
|
$
|
2,092,553
|
|
|
$
|
2,295,922
|
|
Residential mortgage-backed securities:
|
|
|
|
|
|
|
|
|
Agency(2)
|
|
|
4,159,037
|
|
|
|
3,502,753
|
|
Non-Agency(3)
|
|
|
11,530
|
|
|
|
34,243
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,263,120
|
|
|
$
|
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
nine months ended September 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 Agency MBS and 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
include such investments in mortgage-backed securities pledged,
trading on our accompanying consolidated balance sheets. We
account for our Non-Agency MBS as debt securities that are
51
classified as available-for-sale and include such investments 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 September 30, 2007 and the weighted average reset date
for the portfolio was approximately 43.9 months. The
weighted average net coupon of Non-Agency MBS in our portfolio
was 8.18% as of September 30, 2007. The fair values of our
Agency MBS and Non-Agency MBS were $4.2 billion and
$11.5 million, respectively, as of September 30, 2007.
As of September 30, 2007, we had $2.1 billion in
mortgage-related receivables secured by prime residential
mortgage loans. As of September 30, 2007, the weighted
average interest rate on these receivables was 5.37%, and the
weighted average contractual maturity was approximately
28.0 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.
Credit
Quality and Allowance for Loan Losses
As of September 30, 2007 and December 31, 2006,
mortgage-related receivables, whose underlying mortgage loans
are 90 days or more days past due or were in the process of
foreclosure and foreclosed were amounts as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Mortgage-related receivables whose underlying mortgage loans are
90 or more days past due or are in the process of foreclosure
|
|
$
|
9,192
|
|
|
$
|
2,364
|
|
Percentage of mortgage-related receivables
|
|
|
0.44
|
%(1)
|
|
|
0.10
|
%
|
|
|
|
|
|
|
|
|
|
Foreclosed assets
|
|
$
|
1,335
|
|
|
|
|
|
Percentage of mortgage-related receivables
|
|
|
0.06
|
%
|
|
|
|
|
|
|
|
(1) |
|
By comparison, in its September 2007 Monthly Summary Report,
Fannie Mae reported a serious delinquency rate (SDQ) of 0.71%
for August 2007, for conventional single family loans that are
three months or more past due or in foreclosure process while,
in its September 2007 Monthly Volume Summary, Freddie Mac
reported an SDQ of 0.46% for August 2007, for comparable types
of single family loans. The comparable August 2007 statistic for
the mortgage-related receivables was 0.43%. |
In connection with recognized mortgage-related receivables, we
recorded provision for loan losses of $0.4 million for the
three and nine months ended September 30, 2007 and the
allowance for loan losses was $0.8 million as of
September 30, 2007. We recorded a provision for loan losses
of $0.3 million related to our mortgage-related receivables
during the nine months ended September 30, 2006, and the
allowance for loan losses was $0.4 million as of
December 31, 2006. Through September 30, 2007, we have
recognized $0.2 million in total, realized losses on such
mortgage-related receivables.
Financing
We have financed our investments in RMBS primarily through
repurchase agreements. As of September 30, 2007 and
December 31, 2006, our outstanding repurchase agreements
totaled $4.0 billion and $3.4 billion, respectively.
As of September 30, 2007, repurchase agreements that we
executed had maturities of between four days and 1.4 years
and a weighted average borrowing rate 5.43%.
Our investments in residential mortgage-related receivables were
financed primarily through debt issued in connection with two
securitization transactions. As of September 30, 2007, the
total outstanding balance of these debt obligations was
$2.1 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 September 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.
52
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 (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. We intend to
analyze the conditions of the approval and determine their
impact on our overall operations with respect to the ILC once
the merger with TierOne is completed as expected. If and when
operational, we anticipate that both the ILC and TierOne Bank
will provide additional sources of liquidity; the ILC is
expected to provide access to wholesale deposits, and TierOne
Bank is expected to provide access to retail deposits, wholesale
deposits and Federal Home Loan Bank borrowings.
As of September 30, 2007, the amount of our unfunded
commitments to extend credit to our clients exceeded our unused
funding sources and unrestricted cash by $1.6 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 certain
unfunded commitments 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. Other unfunded
commitments do not require additional collateral to be provided
by a debtor as a prerequiste to future fundings by us. 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 our 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.
To maintain our REIT status and 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.
53
Cash
and Cash Equivalents
As of September 30, 2007 and December 31, 2006, we had
$245.9 million and $396.2 million, respectively, in
cash and cash equivalents. We invest cash on hand in short-term
liquid investments.
We had $296.8 million and $240.9 million of restricted
cash as of September 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 repurchase agreements and various financial derivative
contracts. Principal repayments, interest rate swap payments,
interest payable and servicing fees are deducted from the
monthly principal and interest collections funded by loans
collateralizing our credit facilities and term debt, and the
remaining restricted cash is returned to us and becomes
unrestricted at that time.
Sources
and Uses of Cash
For the nine months ended September 30, 2007 and 2006, we
(used) generated cash from operations of $868.9 million and
$55.9 million, respectively. Included within these amounts
are cash inflows and outflows related to our Agency MBS that are
classified as trading investments and loans that are classified
as held for sale.
Cash from our financing activities is generated from proceeds
from our issuance of equity, including issuances under our
Dividend Reinvestment and Stock Purchase Plan (the
DRIP), 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 nine months ended
September 30, 2007 and 2006, we generated cash flow from
financing activities of $2.1 billion and $4.3 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 nine months ended September 30,
2007 and 2006, we used cash in investing activities of
$1.4 billion and $3.9 billion, respectively.
Borrowings
As of September 30, 2007 and December 31, 2006, we had
outstanding borrowings totaling $14.9 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
nine months ended September 30, 2007.
Our overall debt strategy emphasizes diverse sources of
financing, including both secured and unsecured financings. As
of September 30, 2007, approximately 87% of our debt was
collateralized by our loans and residential mortgage investments
and 13% 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- senior unsecured debt rating 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 expected to 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 two new master repurchase agreements and
borrowed under our existing repurchase agreements with various
financial institutions to finance the purchases of RMBS during
the nine months ended September 30, 2007. The terms of our
borrowings pursuant to repurchase agreements typically reset
every thirty days. During the three months ended
September 30, 2007, we negotiated longer terms for some of
these repurchase agreements with several counterparties. As a
result, as of September 30, 2007, approximately 34% of the
54
borrowings outstanding under repurchase agreements had terms
longer than 30 days. Agency MBS, Non-Agency MBS and short term
liquid investments collateralize our repurchase agreements as of
September 30, 2007. Substantially all of our repurchase
agreements and related derivative instruments require us to
deposit additional collateral if the market value of existing
collateral declines below specified collateralization limits,
which may require us to sell assets to reduce our borrowings.
Credit
Facilities
Our committed credit facility capacities were $5.6 billion
and $5.0 billion, respectively, as of September 30,
2007 and December 31, 2006, respectively. As of
September 30, 2007, we had eight credit facilities, six of
which are secured and two of which are unsecured, with a total
of 27 financial institutions. We primarily use these facilities
to fund our loans and for general corporate purposes. To date,
many loans have been held, or warehoused, in our secured credit
facilities until we complete a term debt transaction in which we
securitize a pool of loans from these facilities. We primarily
use the proceeds from our term debt transactions to pay down our
credit facilities, which results in increased capacity to redraw
on them as needed.
As of September 30, 2007, our credit facilities
maturity dates, committed capacities and outstanding principal
balances were as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
|
Committed
|
|
|
Principal
|
|
|
|
Capacity
|
|
|
Outstanding
|
|
|
|
($ in thousands)
|
|
|
Unsecured credit facility scheduled to mature February 19,
2008
|
|
$
|
75,607
|
|
|
$
|
60,010
|
|
Secured credit facility scheduled to mature March 26, 2008
|
|
|
300,000
|
|
|
|
110,150
|
|
Secured credit facility scheduled to mature August 1, 2008
|
|
|
1,500,000
|
|
|
|
1,001,000
|
|
Unsecured credit facility scheduled to mature March 13, 2009
|
|
|
1,070,000
|
|
|
|
520,271
|
|
Secured credit facility scheduled to mature April 10, 2009
|
|
|
470,000
|
(1)
|
|
|
202,186
|
|
Secured credit facility scheduled to mature April 27, 2009
|
|
|
1,400,000
|
(1)
|
|
|
378,800
|
|
Secured credit facility scheduled to mature June 27, 2009
|
|
|
700,000
|
(1)
|
|
|
314,621
|
|
Secured credit facility scheduled to mature July 19, 2010
|
|
|
114,647
|
|
|
|
114,647
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,630,254
|
|
|
$
|
2,701,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Credit facility is subject to 364-day liquidity renewal. On
termination or maturity, amounts due under the credit facility
may, in the absence of a default, be repaid from proceeds from
amortization of the collateral pool. |
During the nine months ended September 30, 2007, we entered
into three new credit facilities and amended various terms in
certain of our credit facilities. For further information on our
credit facilities, see Note 10, Borrowings, in our
accompanying unaudited consolidated financial statements for the
three and nine months ended September 30, 2007.
Term
Debt
We have raised capital by securitizing pools of loans from our
portfolio in permanent, on-balance-sheet term debt
securitizations. During the nine months ended September 30,
2007 and thereafter, we completed two term debt securitizations
totaling $1.9 billion. For further information on these
term debt securitizations, see Note 10, Borrowings,
in our accompanying unaudited consolidated financial statements
for the three and nine months ended September 30, 2007.
Subordinated
Debt
We have raised junior subordinated capital through the issuance
of trust preferred securities. During the nine months ended
September 30, 2007, we issued two series of subordinated
debt, totaling $79.9 million. For further information our
subordinated debt, see Note 10, Borrowings, in our
accompanying unaudited consolidated financial statements for the
three and nine months ended September 30, 2007.
55
Convertible
Debt
We have raised capital through the issuance of convertible debt.
During the nine months ended September 30, 2007, we issued
three series of convertible debt, totaling $748.9 million.
For further information on our convertible debt, see
Note 10, Borrowings, in our accompanying unaudited
consolidated financial statements for the three and nine months
ended September 30, 2007.
Mortgage
Debt
We use mortgage loans to finance certain of our direct real
estate investments. For further information on such mortgage
loans, see Note 10, Borrowings, in our accompanying
unaudited consolidated financial statements for the three and
nine months ended September 30, 2007.
Debt
Covenants
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 secured and unsecured credit
facilities, subordinated debt and our other debt financings.
Equity
We offer a 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 nine months ended September 30, 2007, we
received proceeds of $251.0 million and
$437.7 million, respectively, related to the direct
purchase of 14.2 million and 21.7 million shares of
our common stock pursuant to the DRIP, respectively. During the
three and nine months ended September 30, 2006, we received
proceeds of $55.0 million and $94.7 million,
respectively, related to the direct purchase of 2.4 million
and 4.1 million shares of our common stock pursuant to the
DRIP, respectively. In addition, we received proceeds of
$40.3 million and $69.8 million related to cash
dividends reinvested for 2.1 million and 3.3 million
shares of our common stock during the three and nine months
ended September 30, 2007, respectively. We received
proceeds of $3.9 million and $9.0 million related to
cash dividends reinvested for 0.2 million and
0.4 million shares of our common stock, respectively,
during the three and nine months ended September 30, 2006,
respectively.
Commitments,
Guarantees & Contingencies
As of September 30, 2007 and December 31, 2006, we had
unfunded commitments to extend credit to our clients of
$4.9 billion and $4.1 billion, respectively.
Commitments do not include transactions for which we have signed
commitment letters but not yet signed loan agreements. We expect
that our commercial loan commitments will continue to exceed our
available funds indefinitely. Our obligation to fund certain
unfunded commitments generally is based on our clients
ability to provide the required collateral and to meet certain
other preconditions to borrowing. Other unfunded commitments do
not require additional collateral to be provided by a debtor as
a prerequisite to future fundings by us. 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.
We have provided financial guarantees to third-party warehouse
lenders that financed the purchase of approximately
$528 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 such
purchases 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. The
56
first guarantee, which was scheduled to expire on
September 24, 2007, has been extended and now is scheduled
to expire on September 24, 2008, while the second 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
September 30, 2007. These special purpose entities were
formed to eventually complete collateralized loan obligation
transactions for which we would serve as advisor. In light of
current conditions in the markets for third-party managed
collateralized loan obligation transactions, we do not expect to
close these transactions in 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 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
57
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 September 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 September 30, 2007, the single largest
industry concentration was skilled nursing, which made up
approximately 17% of our commercial loan portfolio. As of
September 30, 2007, the largest geographical concentration
was Florida, which made up approximately 16% of our commercial
loan portfolio. As of September 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 September 30,
2007, the largest geographical concentration in our direct real
estate investment portfolio was Florida, which made up
approximately 33.8% 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 September 30,
2007 and December 31, 2006, the gross positive fair value
of our derivative financial instruments were $30.2 million
and $23.7 million, respectively. Our master netting
agreements reduced the exposure to this gross positive fair
value by $23.4 million and $16.1 million as of
September 30, 2007 and December 31, 2006,
respectively. We did not hold collateral against derivative
financial instruments as of September 30, 2007 and
December 31, 2006. Accordingly, our net exposure to
derivative counterparty credit risks as of September 30,
2007 and December 31, 2006 were $6.8 million and
$7.6 million, respectively.
Market
Risk Management
Market risk is the risk that values of assets and liabilities or
revenues will be adversely affected by changes in market
conditions such as market movements. This risk is inherent in
the financial instruments associated with our operations
and/or
activities including loans, securities, short-term borrowings,
long-term debt, trading account assets and liabilities and
derivatives. Market-sensitive assets and liabilities are
generated through loans associated with our traditional lending
activities and market risk mitigation activities.
The primary market risk to which we are exposed is interest rate
risk, which is inherent in the financial instruments associated
with our operations, primarily including our loans, residential
mortgage investments and borrowings. Our traditional loan
products are non-trading positions and are reported at amortized
cost. Additionally, debt obligations that we incur to fund our
business operations are recorded at historical cost. While GAAP
requires a historical cost view of such assets and liabilities,
these positions are still subject to changes in economic value
based on varying market conditions. Interest rate risk is the
effect of changes in the economic value of our loans, and our
other interest rate sensitive instruments and is reflected in
the levels of future income and expense produced by these
positions versus levels that would be generated by current
levels of interest rates. We seek to mitigate interest rate risk
through the use of various types of derivative instruments. For
a detailed discussion of our derivatives, see Note 20,
Derivative Instruments, in our audited consolidated
financial statements for the year ended December 31, 2006
included in our
Form 10-K.
58
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
September 30, 2007 were as follows:
|
|
|
|
|
|
|
Estimated (Decrease)
|
|
|
|
Increase in
|
|
Rate Change
|
|
Net Interest Income
|
|
(Basis Points)
|
|
Over 12 Months
|
|
|
|
($ in thousands)
|
|
|
−100
|
|
$
|
(6,480
|
)
|
−50
|
|
|
(4,080
|
)
|
+ 50
|
|
|
5,280
|
|
+ 100
|
|
|
10,440
|
|
For the purposes of the above analysis, we included related
derivatives, excluded principal payments and assumed a 78.7%
advance rate on our variable and fixed rate borrowings.
Approximately 38% of the aggregate outstanding principal amount
of our commercial loans had interest rate floors as of
September 30, 2007. The loans with interest rate floors as
of September 30, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Percentage of
|
|
|
|
Outstanding
|
|
|
Total Portfolio
|
|
|
|
($ in thousands)
|
|
|
Loans with contractual interest rates:
|
|
|
|
|
|
|
|
|
Exceeding the interest rate floor
|
|
$
|
3,320,969
|
|
|
|
35
|
%
|
At the interest rate floor
|
|
|
40,156
|
|
|
|
|
|
Below the interest rate floor
|
|
|
288,794
|
|
|
|
3
|
|
Loans with no interest rate floor
|
|
|
5,979,551
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,629,470
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
We use interest rate swaps to hedge the interest rate risk 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 offsetting interest rate caps to economically hedge loans
with embedded interest rate caps. 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 interest rate risk
of certain fixed rate debt. These interest rate swaps modify our
exposure to interest rate risk by synthetically converting fixed
rate debt to one-month LIBOR.
We have also entered into spot and short-dated forward exchange
contracts to minimize exposure to foreign currency risk arising
from foreign denominated loans.
59
Interest
Rate Risk Management Residential Mortgage Investment
Segment
We are exposed to changes in interest rates in our residential
mortgage investment portfolio and related financings based on
changes in the level and shape of the yield curve, volatility of
interest rates and mortgage prepayments. Changes in interest
rates are a significant risk to our residential mortgage
investment portfolio. As interest rates increase, the market
value of residential mortgage investments may decline while
financing costs could rise, to the extent not mitigated by
positions intended to economically hedge these movements.
Conversely, if interest rates decrease, the market value of
residential mortgage investments may increase while financing
costs could decline, also to the extent not mitigated by
positions intended to economically hedge these movements. In
addition, changes in the interest rate environment may affect
mortgage prepayment rates. For example, in a rising interest
rate environment, mortgage prepayment rates may decrease,
thereby extending the duration of our investments.
The majority of our residential mortgage investments are
collateralized with mortgages that have a fixed interest rate
for a certain period of time followed by an adjustable rate
period in which the adjustments are subject to annual and
lifetime caps. Our liabilities include, with respect to RMBS and
mortgage-related receivables, repurchase agreements indexed to a
short-term interest rate market index such as LIBOR and, with
respect to mortgage-related receivables only, securitized term
debt financing through debt obligations secured by residential
mortgage loans that have a similar initial fixed period followed
by an adjustable period.
The estimated changes in fair value based on changes in interest
rates applied to our residential mortgage investment portfolio
as of September 30, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Estimated (Decrease)
|
|
|
|
|
Rate Change
|
|
Increase
|
|
|
Percentage of Total
|
|
(Basis Points)
|
|
in Fair Value
|
|
|
Segment Assets
|
|
|
|
($ in thousands)
|
|
|
|
|
|
−100
|
|
$
|
(3,734
|
)
|
|
|
(.06
|
)%
|
−50
|
|
|
(644
|
)
|
|
|
(.01
|
)
|
+ 50
|
|
|
(858
|
)
|
|
|
(.01
|
)
|
+ 100
|
|
|
(3,504
|
)
|
|
|
(.05
|
)
|
For the purposes of the above analysis, our residential mortgage
investment portfolio includes all of our investments in
residential mortgage-related receivables, Agency MBS, repurchase
agreements with remaining terms longer than 30 days, term debt
and related derivatives as of September 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
60
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 September 30, 2007.
61
PART II.
OTHER INFORMATION
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 September 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
|
|
|
July 1 July 31, 2007
|
|
|
95,947
|
|
|
$
|
24.59
|
|
|
|
|
|
|
|
|
|
August 1 August 31, 2007
|
|
|
11,989
|
|
|
|
18.94
|
|
|
|
|
|
|
|
|
|
September 1 September 30, 2007
|
|
|
8,862
|
|
|
|
17.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
116,798
|
|
|
|
23.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
(a) Exhibits
The Index to Exhibits attached hereto is incorporated herein by
reference.
62
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CAPITALSOURCE INC.
|
|
|
Date: November 8, 2007
|
|
/s/ JOHN
K. DELANEY
John
K. Delaney
Chairman of the Board and Chief Executive Officer (Principal
Executive Officer)
|
|
|
|
|
|
|
Date: November 8, 2007
|
|
/s/ THOMAS
A. FINK
Thomas
A. Fink
Chief Financial Officer
(Principal Financial Officer)
|
|
|
|
|
|
|
Date: November 8, 2007
|
|
/s/ DAVID
C. BJARNASON
David
C. Bjarnason
Chief Accounting Officer
(Principal Accounting Officer)
|
63
|
|
|
|
|
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 (as amended on October 30,
2007).
|
|
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 8-A/2B/A dated
May 22, 2006).
|
|
4
|
.20
|
|
Indenture dated as of July 30, 2007, by and between
CapitalSource Inc., as Obligator, and Wells Fargo Bank, N.A., as
Trustee.
|
|
4
|
.20.1
|
|
First Supplemental Indenture dated as of July 30, 2007, by
and between CapitalSource Inc., as Issuer, CapitalSource Finance
LLC, as Guarantor, and Wells Fargo Bank, N.A., as Trustee.
|
|
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 for form 8-K dated July 2,
2007).
|
|
10
|
.33*
|
|
Summary of Non-employee Director Compensation.
|
|
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 (incorporated by
reference to the same numbered exhibit to the registrants
Current Report on Form 10-Q for the quarter ended June 30,
2007).
|
|
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 (incorporated by reference to the same numbered
exhibit to the registrants Current Report on Form 10-Q for
the quarter ended June 30, 2007).
|
|
10
|
.82
|
|
Sale and Servicing Agreement, dated as of September 10,
2007, by and among CapitalSource Real Estate Loan LLC
2007-A, as
the Seller, CSE Mortgage LLC, as the Originator and as the
Servicer, Citicorp North America, Inc., as the Administrative
Agent, and Wells Fargo Bank, National Association, as the Backup
Servicer and as the Collateral Custodian. (incorporated by
reference to the exhibit 10.82 to the registrants
Current Report on
Form 8-K
dated September 10, 2007)
|
|
10
|
.83
|
|
Sale and Contribution Agreement, dated as of September 10,
2007, by and between CapitalSource Real Estate Loan LLC
2007-A, as
the Buyer and CSE Mortgage LLC, as the Seller (incorporated by
reference to the same numbered exhibit to the registrants
Current Report on
Form 8-K
dated September 10, 2007)
|
|
12
|
.1
|
|
Ratio of Earnings to Fixed Charges.
|
|
31
|
.1
|
|
Rule 13a 14(a) Certification of Chairman and
Chief Executive Officer (Principal Executive Officer).
|
|
31
|
.2
|
|
Rule 13a 14(a) Certification of Chief Financial
Officer.
|
|
32
|
|
|
Section 1350 Certifications.
|
|
|
|
|
|
Filed herewith. |
|
* |
|
Management contract or compensatory plan or arrangement. |
The registrant agrees to furnish to the Commission, upon
request, a copy of each agreement with respect to long-term debt
not filed herewith in reliance upon the exemption from filing
applicable to any series of debt which does not exceed 10% of
the total consolidated assets of the registrant.
64