Net Loss for the Quarter of $156.9 Million - Including Non-cash Impairment Charges for the Write-off of Goodwill and Other Intangible Assets of $110.3 Million Core Earnings for the Quarter of $7.9 Million
CHICAGO, Nov. 10 /PRNewswire-FirstCall/ -- Deerfield Capital Corp.
(NYSE: DFR) today announced the results of operations for its third quarter
ended September 30, 2008. The company also announced today the implementation
of a cost savings initiative expected to save the company approximately $11.0
million in annual expenses related to compensation, benefits and other general
operating expenses.
All common share and per common share amounts throughout this press
release have been retroactively restated to reflect the 1-for-10 reverse stock
split effected after the close of business on October 16, 2008.
THIRD QUARTER 2008 SUMMARY
-- The net loss for the quarter totaled $156.9 million, or $22.81 per
diluted common share, which includes goodwill and intangible asset
non-cash impairment charges totaling $110.3 million.
-- Core earnings for the quarter totaled $7.9 million, or $1.14 per
diluted common share. Core earnings is a non-GAAP financial measure
which primarily reflects GAAP earnings excluding non-cash charges (see
reconciliation of non-GAAP measures attached).
-- Unrestricted cash, cash equivalents, unencumbered liquid securities and
net equity in financed liquid securities totaled approximately $78.1
million at quarter end.
-- Conversion to a C corporation and termination of REIT status produced
potential future tax savings of approximately $85 - $95 million.
-- Assets under management (AUM) totaled $11.9 billion at October 1, 2008.
-- Book value per share was $9.50 at September 30, 2008.
-- Economic book value per share was $12.23 at September 30, 2008.
Economic book value per share is a non-GAAP financial measure (see
Economic Book Value section that follows and reconciliation of non-GAAP
measures attached).
-- Cost savings initiative expected to save approximately $11 million in
annual expenses related to compensation, benefits and other general
operating expenses.
-- The Strategic Relations Committee of the board of directors continues
to work with UBS Investment Bank to seek strategies to enhance
shareholder value.
Commenting on third quarter results, Jonathan Trutter, chief executive
officer, said, "Our results for the quarter reflect unprecedented financial
market conditions.Although we continue to generate positive cash flow from
operations, mark-to-market and impairment charges overwhelmed the positive
aspects of underlying fundamentals in the business."
Trutter added, "We have implemented a cost savings initiative to scale our
cost structure to the current business environment without sacrificing the
quality of our ongoing asset management capabilities. We look forward to 2009
and believe our core asset management business is well positioned for the
future."
Cost Savings Initiative
In November 2008, in response to market conditions, the Board approved a
cost saving initiative (the "2008 Plan"). The 2008 Plan is intended to more
properly align the company's cost structure with projected revenue streams and
is expected to increase the company's positive cash flows from core earnings
to better position it for both the current market environment and longer-term
growth. The 2008 Plan involves reducing headcount by 25 people, or
approximately 27% of the current workforce, and decreasing compensation
expenses in other areas. The compensation payable to those 25 employees
accounts for approximately 37% of the company's annual compensation expense.
The headcount reductions are largely related to the fixed income arbitrage
trading business and the associated back-office infrastructure. On an annual
basis, once fully implemented, the 2008 Plan is expected to save approximately
$10.0 million of compensation and benefit expense and in excess of $1.0
million of other general operating expenses. The company expects to incur
severance expenses related to the 2008 Plan of approximately $1.0 million to
$1.3 million in the aggregate during the fourth quarter of 2008, which the
company expects to pay primarily during the fourth quarter of 2008 and the
first quarter of 2009. These costs are not included in the September 30, 2008
condensed consolidated financial statements.
Following the headcount reductions contemplated by the 2008 Plan, the
Company will have approximately 65 employees, which the Company believes is
adequate for managing the existing businesses. The Company believes that it
has retained management capacity that will allow the Company to expand its
business within its targeted growth strategies.
Results of Operations
In December 2007, the company acquired Deerfield Capital Management LLC
(DCM), its external manager (the Merger). In the following discussion, the
owned investment portfolio consisting principally of agency residential
mortgage backed securities (RMBS) and corporate loans and debt securities is
referred to as the Principal Investing segment and the asset management
business acquired in the Merger is referred to as the Investment Management
segment. As a result of the Merger, the current period results are not
directly comparable to the financial results for the prior year.
Results for the quarter ended September 30, 2008 reflect the impact of
severe financial market turmoil and the resultant negative effect on asset
values. The net loss for the quarter totaled $156.9 million, or $22.81 per
diluted common share, compared with a net loss of $23.2 million, or $4.50 per
share, for the third quarter of 2007. The net loss is primarily the result of
non-cash impairment charges related to the write-off goodwill and other
intangible assets recorded in connection with the Merger, and to a lesser
extent, impairment charges on loans held for investment, lower asset values in
the securities and loans held for sale portfolios, and a decline in net
interest income.
Net interest income totaled $8.8 million in the quarter ended September
30, 2008, compared with $26.8 million in the third quarter of 2007. The
decrease was largely driven by significantly lower balances in the RMBS
portfolio due to sales in the first quarter of 2008 and interest expense on
the company's Series A and Series B notes issued in connection with the
Merger.
Investment advisory fees totaled $9.0 million in the quarter reflecting
the impact of the asset management business acquired in the Merger. Results
include the impact of a decrease in investment fund AUM during the quarter due
to poor performance and investor withdrawals.
The provision for loan losses was $15.5 million for the quarter, compared
with zero in the prior year quarter, primarily due to credit loss provisions
on a second lien loan in the medical education field and two commercial real
estate development loans, and a provision recorded as a result of the transfer
of loans held for investment with a par value of $24.3 million to loans held
for sale.
Expenses totaled $122.8 million for the quarter, up by $117.7 million over
the prior year quarter. The increase was largely due to goodwill and
intangible asset impairment of $78.2 million and $32.1 million, respectively.
Goodwill, which arose in connection with the Merger, is generally tested for
impairment on an annual basis. However, the recent overall decline in the
company's market capitalization was a triggering event for impairment testing
as of the current quarter end. The company's analysis indicated lower
estimated cash flows from the Investment Management segment due to lower AUM,
as well as lower market multiples for comparable investment management
companies, leading to an impairment charge in the amount of the remaining
goodwill balance related to the Merger. The intangible asset impairment
charge primarily relates to the asset associated with the management contract
for the company's remaining government arbitrage investment fund, which became
fully impaired during the period as the fund exhibited poor performance during
the quarter resulting in notice of significant investor redemptions and is
expected to be liquidated by November 30, 2008.
Other income and gain (loss) was a net loss of $31.8 million in the
quarter, compared with a net loss of $45.3 million in the prior year quarter.
The current quarter net loss was primarily due to unrealized losses in the
syndicated bank loan held for sale portfolio and unrealized losses in the RMBS
portfolio without the benefit of offsetting gains in the associated interest
rate swap portfolio due to wider spreads in the government agency mortgage-
backed security market.
Investment Management Segment
The investment management group specializes in credit products, with teams
dedicated to bank loans, corporate debt securities and asset-backed
securities.
As of October 1, 2008, AUM totaled approximately $11.9 billion held in
twenty-eight CDOs and one structured loan fund, one private investment fund
and six separately managed accounts. The following table summarizes AUM and
investment advisory fees for each product category:
Three months ended
October 1, 2008(1) September 30, 2008July 1, 2008(1)
Investment
# of Average Advisory# of
Accounts AUM(3) AUM(1)(2) Fees Accounts AUM
(in
(in thousands) thousands)
CDOs
CLOs(4)14 $4,738,850 $4,529,916 $5,403 15$5,151,278
Asset
backed
securities125,780,8086,152,695 1,395 13 6,336,532
Corporate
bonds 3 797,139 743,599 279 2 620,883
Total
CDOs29 11,316,797 11,426,210 7,077 3012,108,693
Investment
Fund(5)
Government
arbitrage 1 330,959 435,676 1,702 1 436,156
Separately
Managed
Accounts(6) 6 267,295 404,321 236 6 431,480
Total
AUM (7) $11,915,051 $12,266,207 $9,015 $12,976,329
(1) AUM numbers are reported as of July 1, 2008 and October 1, 2008,
rather than as of the last day of the prior month.
(2) Average AUM is calculated as the average of the July 1, August 1 and
September 1, 2008 AUM.
(3) CDO AUM numbers generally reflect the aggregate principal or notional
balance of the collateral and, in some cases, the cash balance held by
the CDOs and are as of the date of the last trustee report received
for each CDO prior to the AUM date. Our CDOs/CLOs AUM includes
AUM related to our structured loan fund.
(4) The AUM for our Euro-denominated CLOs have been converted
into U.S. dollars using the spot rate of exchange as of the respective
AUM dates.
(5) The Number of Accounts for the Investment Fund does not include feeder
funds, which are funds that invest all or substantially all of their
assets into a trading fund which we manage, although some of our
management fees are paid pursuant to contracts with those feeder
funds. This fund is expected to be liquidated by November 30, 2008.
(6) The AUM for certain of the separately managed accounts is a multiple
of the capital actually invested in such account. Management fees for
these accounts are paid on this levered AUM number.
(7) Included in the Total AUM are $294.1 million and $300.9 million as of
October 1, 2008 and $295.3 million and $300.8 million as of July 1,
2008 related to Market Square CLO and DFR MM CLO, respectively, which
amounts are also included in the Principal Investing segment
discussion. DCM manages these vehicles but is not contractually
entitled to receive any management fees for so long as 100% of the
equity in these vehicles is held by Deerfield Capital LLC or an
affiliate thereof. All other amounts included in the Principal
Investing segment are excluded from Total AUM.
AUM decreased by approximately $1.1 billion, or 8.2%, from July 1, 2008.
The decline was primarily due to the liquidation of Castle Harbor CLO Ltd.
(Castle Harbor) and Western Springs CDO Ltd. (Western Springs), partially
offset by the addition of Robeco CDO II Limited.
Castle Harbor ($351.3 million of AUM at July 1, 2008) triggered a market
value-based event of default and was liquidated during the third quarter of
2008. Western Springs ($300.4 million of AUM at July 1, 2008) triggered an
event of default resulting primarily from downgrades of underlying collateral
and was also liquidated during the third quarter of 2008. The Robeco CDO
acquisition closed in July 2008, adding approximately $201 million of AUM.
Principal Investing Segment
Investment Portfolio
The following table summarizes the carrying value of the company's
invested assets and the respective balance sheet classifications as of
September 30, 2008 (in thousands):
Carrying Value
Available-
for-Loans
SaleTrading Other HeldTotal Total
Descrip- Secur- Secur-Secur-for Sep 30, Jun 30,
tion ities ities ities SaleLoans 2008 2008
Agency
RMBS$- $394,335 $- $- $- $394,335 $415,336
Non-agency
RMBS - 20,167 ---20,16728,849
Total
RMBS -414,502 --- 414,502 444,185
U.S.
Treasury
bills- - --- - 999,954
Corporate
leveraged
loans: (1)
Loans held
in DFR
MM CLO - - -- 256,818 256,818 259,577
Loans
held
in
Wachovia
facility - - - 22,374 55,30277,67689,627
Other
corporate
leveraged
loans - - -- 32,25932,25924,879
Commercial
mortgage-
backed
assets 41 - -- 12,33012,37117,212
Equity
securities - - 4,764-- 4,764 5,472
Total
structured
&
syndicated
assets
(2) 41 - 4,764 22,374 356,709 383,888 396,767
Assets
held in
Market
Square
CLO (3) 5,037 - - 245,045- 250,082 263,037
Other
inves-
tments
and
loans (4)-960 --- 960 2,956
Total
alter-
native
assets 5,078960 4,764 267,419 356,709 634,930662,760
Total
invested
assets -
Sep 30,
2008 $5,078 $415,462 $4,764 $267,419 $356,709 $1,049,432 $2,106,899
Total
invested
assets -
June
30,
2008$7,403 $1,445,802 $5,472 $264,559 $383,663 $2,106,899
(1) Corporate leveraged loans excludes a credit default swap with an
estimated negative fair value of $0.1 million and a $5.0 million
notional value. Also excluded is a total return swap with an
estimated positive fair value of $0.5 million and a $5.7 million
notional value.
(2) This amount is reported gross of the $21.6 million allowance for loan
losses.
(3) Assets held in Market Square CLO include syndicated bank loans of
$245.0 million, high yield corporate bonds of $2.9 million and
asset-backed securities of $2.2 million as of September 30, 2008.
(4) Other investments and loans includes $1.0 million of preferred shares
of CDOs owned by DCM and considered assets of our Investment
Management segment.
Total invested assets were down $1.1 billion, or 50.2%, to $1.0 billion as
of September 30, 2008 compared to the end of the prior quarter. The decrease
was primarily attributable to the maturity of $1.0 billion of U.S. Treasury
bills in July 2008 which were purchased to assist the company in complying
with the applicable REIT asset tests as of June 30, 2008. The company elected
to convert to a C corporation in the third quarter of 2008 to maximize use of
significant potential tax benefits and provide more flexibility with respect
to future decisions involving investments of capital. Please refer to the
REIT Status section that follows for additional information.
Mortgage Securities Portfolio
During the third quarter of 2008, the RMBS portfolio decreased by 6.7% to
$414.5 million from $444.2 million as of June 30, 2008. The notional amount
of interest rate swaps totaled $263.0 million at quarter end. The net
portfolio duration, which is the difference between the duration of the RMBS
and that of the repurchase agreements funding these investments, adjusted for
the effects of the company's swap portfolio, was approximately 1.27 years at
September 30, 2008, based on model-driven results, compared to 1.33 years at
June 30, 2008. This means the company could expect approximately a 1.27%
change in value of the combined RMBS and interest rate swap portfolios given a
1% change in interest rates. Empirical net duration, which is based on actual
price movements observed in the market, is estimated to be significantly less
than the model-driven results.
The RMBS holdings consisted of hybrid adjustable rate and fixed rate bonds
as of September 30, 2008, as follows:
Weighted Average
Par Cons-
and Esti- Yield Contra- tantModi-
Noti- matedMonths to ctual Prepay- fied
Security onal Fair to Matu- Matu- mentDura-
Description AmountValue Coupon Reset(1) rity rity Rate(2) tion(3)
(In thousands)
Hybrid
Adjustable
Rate
RMBS:
Rate
reset
in
1 year
or less$56,281 $55,541 5.39% 65.12% 5/36 15.5 1.3
Rate
reset
in 1
to 3
years 256,468 255,113 4.84% 215.16% 2/35 15.6 1.7
Rate
reset
in 3
to 5
years 30,917 31,225 5.68% 405.26% 9/36 14.1 2.5
Rate
reset
in 5
to 7
years 10,0849,971 4.94% 824.79% 9/357.9 3.5
Rate
reset
in 7
to 10
years 27,373 16,493 5.85% 89 16.97% 3/36 10.6 10.1
Fixed Rate
RMBS
30 year 56,548 46,159 6.11% n/a 11.33% 5/35 14.4 6.8
Total RMBS -
September
30, 2008 $437,671 $414,502
RMBS - June
30, 2008$454,044 $444,185 n/a - not applicable
(1) Represents number of months before conversion to floating rate.
(2) Constant prepayment rate refers to the expected average annualized
percentage rate of principal prepayments over the remaining life of
the security. The values represented in this table are estimates only
and the results of a third party financial model.
(3) Modified duration represents the approximate percentage change in
market value per 100 basis point change in interest rates.
Alternative Assets Portfolio
During the third quarter of 2008, the structured and syndicated assets
portion of the alternative assets portfolio, primarily the corporate leveraged
loan book, decreased by 3.2% to $383.9 million from $396.8 million at June 30,
2008. The decrease was largely due to select asset sales and paydowns.
A provision for loan losses of $15.5 million was recognized in the
quarter, compared with zero in the prior year quarter. The increase was
primarily due to an $11.3 million loan loss provision on a $15.0 million
second lien loan to a borrower in the medical education field, a $2.5 million
provision on two commercial real estate development loans with a net carrying
amount, after deducting the allowance for loan loss, of $2.2 million and a
$1.7 million provision due to a transfer of loans held for investment with a
par value of $24.3 million to loans held for sale.
Liquidity
The company manages short-term liquidity by maintaining a portfolio of
unrestricted cash, overnight investments and unencumbered RMBS. These assets
are available to meet margin calls on existing repurchase (repo) financing
agreements and interest rate swap contracts, and to pledge against new repo
borrowings and swap agreements. The repo borrowings are primarily overnight
to thirty-day contracts that generally roll over and reprice at maturity.
Unencumbered RMBS and unrestricted cash and cash equivalents as of
September 30, 2008 totaled $49.6 million, compared to $57.4 million as of the
end of the second quarter. In addition, the net equity in the financed RMBS
portfolio, including associated interest rate swaps, totaled approximately
$28.5 million at quarter end. The total cash, cash equivalents, unencumbered
liquid securities and net equity in financed liquid securities was
approximately $78.1 million at September 30, 2008. The company believes these
amounts, together with expected cash flows from operations, are adequate to
meet its anticipated long-term (greater than one year) liquidity requirements.
Longer term funding totaled $736.4 million at September 30, 2008 and is
summarized as follows:
Weighted
Carrying Average
Value Rate
(In thousands)
Revolving warehouse facility $34,0605.10%
Market Square CLO276,0003.28%
DFR MM CLO 231,0003.48%
Trust preferred securities 123,7175.57%
Series A and Series B Notes 71,6317.79%
Total $736,4084.25%
The revolving warehouse facility and CLO borrowings are in bankruptcy
remote subsidiaries, and debt holders have recourse only to the collateral
within these entities. Recourse obligations include three separate issuances
of 30-year trust preferred securities and 5-year, non-amortizing Series A and
Series B notes, which were issued in connection with the Merger.
Book Value
Book value per common share at September 30, 2008 was $9.50 compared to
$33.71 at June 30, 2008. The decrease in reported book value per share
primarily reflects the impact of the current quarter net loss on stockholders'
equity, as well as the $0.85 per share dividend declared on August 11, 2008.
Economic Book Value
At September 30, 2008, Market Square CLO Ltd. (Market Square CLO) total
equity was negative $18.2 million primarily due to a $39.4 million valuation
allowance on the loans held therein, which are all classified as loans held
for sale and carried at the lower of cost or market value. Generally accepted
accounting principles currently require the negative equity of this
consolidated subsidiary to flow into the company's financial statements even
though the Market Square CLO is a bankruptcy remote entity, and the company's
economic exposure is limited to its equity investment.
Economic book value at September 30, 2008 of $81.6 million, or $12.23 per
share, includes an add-back to reported book value of $18.2 million, or $2.73
per share, to back out the negative equity in Market Square CLO. To date, the
company has received approximately $21.2 million in distributions from the
Market Square CLO on its original investment of $24.0 million. A
reconciliation of GAAP book value to economic book value is attached.
Share Repurchase
In August 2008, the company announced that its board of directors had
authorized the repurchase of up to $1.0 million of the company's outstanding
common stock. The amount of the authorized repurchase was capped by the
terms of our Series A and Series B Notes, which limit common stock repurchases
to $1.0 million during the term of the note agreements. Since September 30,
2008, the company has repurchased and subsequently retired 220,000 shares of
our common stock in private transactions at an average price of $4.40 per
share.
Trust Preferred Waiver
On November 7, 2008, the company entered into a letter agreement (the
"November Letter Agreement") with the representative of the holders of its
trust preferred securities. The November Letter Agreement provided a waiver
of any prior noncompliance by the company with the net worth covenant
contained in the agreements governing the trust preferred securities and
waived any future noncompliance with such covenant through April 1, 2010. The
November Letter Agreement required no adjustment to the underlying interest
rate or maturity of the company's trust preferred securities.
REIT Status
Historically, the company had elected to be taxed as a real estate
investment trust (REIT) under the Internal Revenue Code of 1986, as amended
(the Code). The company's REIT status terminated (retroactive to January 1,
2008) during the third quarter of 2008 when, in an effort to increase
stockholder value, the company converted to a C corporation to maximize use of
significant potential tax benefits and provide more flexibility with respect
to future capital investment. The conversion to a C corporation results in
the creation of potential future tax savings of approximately $85 - $95
million, including projected cash savings of approximately $8 - $12 million
for 2008. Such potential tax savings may be materially limited by certain
provisions of the Code if the company undergoes an ownership change as defined
under the Code.
Conference Call
The company will host a live conference call to discuss its financial
results on Tuesday, November 11, 2008, at 11:00 a.m. Eastern Time. The
conference call will be accessible by telephone and through the Internet.
Interested individuals are invited to access the call by dialing 877-704-5381.
To participate on the webcast, log on to the company's website at
http://www.deerfieldcapital.com 15 minutes before the call to download the
necessary software.
For those unable to listen to the call live, a replay will be available
beginning one hour following the completion of the call on November 11, and
will continue through November 18. To access the rebroadcast, dial 888-203-
1112 and request reservation number 6189492. A replay of the call will also be
available on the Internet at http://www.deerfieldcapital.com for 30 days.
About the Company
Deerfield Capital Corp. is a Maryland corporation with a principal
investing portfolio comprised of fixed income investments, including RMBS,
government securities and corporate debt. In addition, through its
subsidiary, Deerfield Capital Management LLC, the company manages client
assets, including government securities, corporate debt, RMBS and asset backed
securities.
For more information, please go to the company website, at
http://www.deerfieldcapital.com
* * Notes and Tables to Follow * *
NOTES TO PRESS RELEASE
Certain statements in this press release are forward-looking as defined by
the Private Securities Litigation Reform Act of 1995. These include
statements regarding future results or expectations. Forward-looking
statements can be identified by forward looking language, including words such
as "believes," "anticipates," "expects," "estimates," "intends," "may,"
"plans," "projects," "will" and similar expressions, or the negative of these
words. Such forward-looking statements are based on facts and conditions as
they exist at the time such statements are made. Forward-looking statements
are also based on predictions as to future facts and conditions, the accurate
prediction of which may be difficult and involve the assessment of events
beyond the control of Deerfield Capital Corp. and its subsidiaries (DFR).
Forward-looking statements are further based on various operating assumptions.
Caution must be exercised in relying on forward-looking statements. Due to
known and unknown risks, actual results may differ materially from
expectations or projections. DFR does not undertake any obligation to update
any forward-looking statement, whether written or oral, relating to matters
discussed in this press release, except as may be required by applicable
securities laws.
Various factors could cause DFR's actual results to differ materially from
those described in any forward-looking statements. These factors include, but
are not limited to: changes in economic and market conditions, particularly as
they relate to the market for debt securities, such as mortgage-backed
securities, and collateralized debt obligations; continued availability of
financing; changes in DFR's investment, hedging or credit strategies or the
performance of its investment portfolios; the effects of defaults or
terminations under, and DFR's ability to enter into replacement transactions
with respect to, repurchase agreements, interest rate swaps and long-term debt
obligations; reductions in DFR's assets under management and related
management and advisory fee revenue; changes to DFR's tax status; DFR's
ability to forecast its tax attributes, which are based upon various facts and
assumptions, and its ability to protect and use its net operating losses to
offset taxable income; DFR's ability to maintain compliance with its existing
debt instruments and other contractual obligations; impact of restrictions
contained in DFR's existing debt instruments; DFR's ability to maintain its
exemption from registration as an investment company pursuant to the
Investment Company Act of 1940; the expected delisting of DFR's common stock
by the New York Stock Exchange, and DFR's ability to comply with the initial
listing standards, and maintain compliance with the continued listing
standards, of another national securities exchange; the cost, uncertainties
and effect of any legal and administrative proceedings, such as the current
Securities and Exchange Commission investigation into certain mortgage-backed
securities trading procedures in connection with which the SEC has requested
certain information from DFR regarding certain of its mortgage securities
trades; DFR's ability to complete the integration of, and realize the economic
benefits of, its acquisition of Deerfield Capital Management LLC; and changes
in, and the ability of DFR to remain in compliance with, law, regulations or
government policies affecting DFR's business, including investment management
regulations and accounting standards.
These and other factors that could cause DFR's actual results to differ
materially from those described in the forward-looking statements are set
forth in DFR's annual report on Form 10-K, as amended, for the year ended
December 31, 2007, DFR's quarterly reports on Form 10-Q for the quarters ended
September 30, June 30 and March 31, 2008 and DFR's other public filings with
the SEC and public statements. Readers of this press release are cautioned to
consider these risks and uncertainties and not to place undue reliance on any
forward-looking statements.
DEERFIELD CAPITAL CORP. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share amounts)
September 30,December 31,
2008 2007
ASSETS
Cash and cash equivalents$41,908 $113,733
Due from broker 12,715 270,630
Restricted cash and cash equivalents 63,03447,125
Available-for-sale securities,
including zero and $4,884,023
pledged-at fair value 5,078 4,897,972
Trading securities, including
$408,660 and $733,782 pledged-at
fair value 415,462 1,444,505
Other investments 4,764 5,472
Derivative assets 2,004 4,537
Loans held for sale 267,419 267,335
Loans356,709 466,360
Allowance for loan losses(21,596) (5,300)
Loans, net of allowance for loan
losses 335,113 461,060
Investment advisory fee receivable 4,077 6,409
Interest receivable7,80439,216
Other receivable 3,13122,912
Prepaid and other assets 12,91114,721
Fixed assets, net 9,47010,447
Intangible assets, net36,36483,225
Goodwill - 98,670
TOTAL ASSETS $1,221,254$7,787,969
LIABILITIES
Repurchase agreements, including
$336 and $20,528 of accrued
interest $383,617$5,303,865
Due to broker 2,298 879,215
Dividends payable 7,35421,944
Derivative liabilities 7,927 156,813
Interest payable 4,90128,683
Accrued other liabilities 15,20935,652
Short term debt 172 1,693
Long term debt 736,408 775,368
TOTAL LIABILITIES 1,157,886 7,203,233
Series A cumulative convertible
preferred stock. $0.001 par value,
zero shares and 14,999,992
shares issued and outstanding
(aggregate liquidation value of zero
and $150,000) - 116,162
STOCKHOLDERS' EQUITY
Preferred stock, par value $0.001:
100,000,000 shares authorized;
zero and 1,499,999 shares issued and
outstanding as described above - -
Common stock, par value $0.001:
500,000,000 shares authorized;
6,676,106 and 5,175,272 shares issued
and 6,669,742 and 5,165,532 shares
outstanding 751
Additional paid-in capital 866,330 748,216
Accumulated other comprehensive loss (1,525) (83,783)
Accumulated deficit (801,444) (195,910)
TOTAL STOCKHOLDERS' EQUITY 63,368 468,574
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $1,221,254$7,787,969
DEERFIELD CAPITAL CORP. AND ITS SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share amounts)
Three months endedNine months ended
September 30, September 30,
2008 2007 2008 2007
REVENUES
Net interest income:
Interest income $20,506 $125,765 $103,680 $378,176
Interest expense 11,671 98,948 71,692300,346
Net interest income 8,835 26,817 31,988 77,830
Provision for loan losses 15,459- 19,961 6,933
Net interest(expense)income
after provision for loan losses (6,624)26,817 12,027 70,897
Investment advisory fees 9,015- 33,493-
Total net revenues 2,391 26,817 45,520 70,897
EXPENSES
Management fee expense to
related party -2,710-9,470
Incentive fee expense to
related party - - -2,185
Compensation and benefits4,982- 22,045-
Depreciation and
amortization2,498-7,765-
Professional services2,211 1,418 5,941 2,835
Insurance expense 740207 2,207548
Other general and
administrative expenses 2,062721 6,572 1,881
Impairment of intangible
assets and goodwill 110,268- 139,302-
Total expenses 122,761 5,056183,832 16,919
OTHER INCOME AND GAIN (LOSS)
Net loss on
available-for-sale
securities (856) (23,176)(4,712) (20,870)
Net (loss) gain on trading
securities (13,655) 5,645 (216,121) 2,597
Net loss on loans and
loans held for sale (14,367)(7,451) (35,404)(6,981)
Net loss on
derivatives (2,239) (20,216) (219,384) (14,843)
Dividend income and other
net gain (loss) (678) (118) (484) (215)
Net other income
and (loss) gain(31,795) (45,316) (476,105) (40,312)
(Loss) income before income
tax expense (benefit) (152,165) (23,555) (614,417)13,666
Income tax expense (benefit) 4,718 (320) 384 (120)
Net (loss) income $(156,883) $(23,235) $(614,801) $13,786
NET (LOSS) INCOME PER
SHARE-Basic $(22.81)$(4.50) $(95.52) $2.67
NET (LOSS) INCOME PER
SHARE-Diluted $(22.81)$(4.50) $(95.52) $2.67
WEIGHTED-AVERAGE NUMBER OF
SHARES
OUTSTANDING - Basic 6,878,260 5,161,811 6,436,583 5,160,089
WEIGHTED-AVERAGE NUMBER OF
SHARES
OUTSTANDING - Diluted6,878,260 5,161,811 6,436,583 5,170,557
DEERFIELD CAPITAL CORP. AND ITS SUBSIDIARIES
RECONCILIATION OF NON-GAAP MEASURES
(In thousands, except share and per share amounts)
We believe that core earnings and economic book value per share, both non-
GAAP financial measures, are useful metrics for evaluating and analyzing our
performance. The calculation of core earnings eliminates the impact of
certain non-cash charges and income tax expense (benefit), which we believe
facilitates comparison of our financial results to those of other comparable
firms with fewer or no non-cash charges and comparison of our own financial
results from period to period. The calculation of economic book value per
share eliminates losses in excess of the equity that we have at risk in
bankruptcy-remote subsidiaries. We believe this is appropriate because, were
those subsidiaries to incur losses in excess of our equity at risk, those
losses would be borne by those subsidiaries' debt holders. We believe that
the calculation of economic book value per share facilitates comparison of our
financial results to those of other comparable firms. The core earnings and
economic book value per share provided herein may not be comparable to similar
measures presented by other companies as they are non-GAAP financial measures
and may therefore be defined differently by other companies.
Core Earnings
The table below provides reconciliation between net loss and core
earnings:
Three months ended September 30,
2008 2007
(In thousands, except share and per
share amounts)
Net loss $(156,883) $(23,235)
Add back:
Provision for loan losses 15,459 -
Depreciation and amortization 2,498 -
Impairment of intangible assets and
goodwill110,268 -
Net other income and (loss) gain 31,79545,316
Income tax expense (benefit) 4,718 (320)
Core earnings $7,855 $21,761
Core earnings per share - diluted$1.14 $4.22
Weighted-average number of shares
outstanding - diluted6,878,260 5,161,811
Economic Book Value Per Share
The table below provides reconciliation between book value per common
share and economic book value per common share:
As of
September 30, December 31,
2008 2007
(In thousands, except share and
per share amounts)
Stockholders' Equity $63,368 $468,574
Add back:
Negative Market Square CLO equity
in excess of amount at risk18,210-
Economic book value $81,578 $468,574
Economic book value per share $12.23 $90.71
Total common shares outstanding 6,669,742 5,165,532
DEERFIELD CAPITAL CORP. AND ITS SUBSIDIARIES
EFFECTIVE RATE AND NET RETURN ANALYSIS (1)
(Dollars in thousands)
Three months ended
June 30, Inc /
September 30, 2008 2008 (Dec)
Average Interest Effective Effective Effective
Balance(2) Income Rate(3) Rate(3) Rate(3)
RMBS, U.S. T-bills &
other securities (4) $487,061$6,029 4.95% 4.65% 0.30%
Assets held in CLO
(Market Square) 263,039 4,186 6.37% 6.40%(0.03)%
Assets held in CLO
(Middle Market) 316,446 6,781 8.57% 8.92%(0.35)%
Other corporate debt 116,192 3,510 12.08% 10.88% 1.20 %
Total investments $1,182,738 $20,506 6.93% 6.70% 0.23 %
Average Interest Effective Effective Effective
Balance(2) Income Rate(3) Rate(3) Rate(3)
Repurchase agreements &
ST debt (5) (6)$421,824$2,789 2.65% 2.53% 0.12%
Long-term debt:
Market Square CLO276,000 2,407 3.49% 3.71%(0.22)%
Middle Market CLO231,000 2,135 3.70% 3.92%(0.22)%
Revolving warehouse
facility 41,010 678 6.61% 5.56% 1.05%
Series A & B notes71,522 1,713 9.58% 8.67% 0.91%
Trust preferred
securities (TPS)123,717 1,949 6.30% 6.42% (0.12)%
Total short-term and
long-term debt $1,165,073 $11,671 4.01% 3.91% 0.10%
Net
Net return on average InterestNet Net Net
investmentIncome(7) Return(8) Return(8) Return(8)
RMBS and other short-
term investments (5) $3,240 2.66% 2.45% 0.21%
Assets held in CLO
(Market Square) 1,779 2.71% 2.57% 0.14%
Assets held in CLO
(Middle Market) 4,646 5.87% 6.04%(0.17)%
Other corporate debt 2,832 9.75% 8.40% 1.35%
Total net return
before TPS and Series
A & B notes 12,497 4.23% 3.97% 0.26%
Trust preferred and
Series A & B notes (3,662) -1.24% -1.08%(0.16)%
Total net return $8,835 2.99% 2.89% 0.10%
Average
Net return on averageNet NetNet Net
net investment Investment Return(9) Return(9) Return(9)
RMBS (5) $65,237 19.86% 18.76% 1.10%
Assets held in CLO
(Market Square)24,000 29.65% 28.63% 1.02%
Assets held in CLO
(Middle Market)69,000 26.94% 27.47%(0.53)%
Other corporate debt75,182 15.07% 15.17%(0.10)%
Total net return
(including TPS and
Series A & B notes)$233,419 15.14% 15.30%(0.16)%
(1) This supplemental information is subject to various significant
limitations, including that it is being provided solely for general
informational purposes; it is based on unaudited financial
information; it is subject to revision; the past results presented are
not necessarily indicative of future results; the company makes no
representation about the appropriateness of the information in making
investment decisions; the portfolio instruments that constitute each
asset category reflect subjective judgments by the company and are
subject to change; the information is qualified in its entirety by the
following documents available on our website -- the company's Annual
Report for 2007 on Form 10-K filed with the SEC, the company's
subsequent reports on Form 10-Q filed with the SEC, and the "Notes to
Press Release" included with this announcement.
(2) Average balance is calculated based on the month-end balances with the
exception of some of the Other alternative assets, which are based on
daily balances. Available-for-sale securities are included in this
analysis using historical cost while all other balances are at
carrying value. Average balances exclude any unsettled purchases and
sales.
(3) Effective rate is calculated by dividing Interest income or Interest
expense by the respective Average balance. The effective rate is
annualized.
(4) RMBS, U.S. T-bills and other securities includes interest earning cash
and short-term investments not held in a CLO.
(5) This calculation includes the amortization of de-designated and
terminated hedging activity resulting in an increase to interest
expense of $61 and $31 for the three months ended June 30, 2008 and
September 30, 2008, respectively.
(6) Repurchase agreements include an immaterial amount related to Other
corporate debt, however, these amounts are included in the RMBS Net
return calculations.
(7) Net Interest Income excludes "Provision for loan losses", "Investment
Advisory Fees", "Expenses" and "Other income and gain (loss)",
reported in the Company's Condensed Consolidated Statements of
Operations.
(8) Net return on average investment is calculated by dividing Net
interest income by the average investment balance and the return is
annualized.
(9) Net return on average net investment is calculated by dividing the Net
interest income by the respective average net investment. Average net
investment is calculated for RMBS and Other corporate debt by taking
their investment Average balance less the respective debt Average
balance. Net investment for the Assets held in CLO (Market Square),
Assets held in CLO (Middle Market) is their initial equity of $24,000
and $69,000, respectively. The Return on average net investment is
annualized.
SOURCE Deerfield Capital Corp.
