Deerfield Capital Corp. Announces Third Quarter 2010 Results

CHICAGO, Nov. 15, 2010 /PRNewswire-FirstCall/ -- Deerfield Capital Corp. (Nasdaq: DFR) ("DFR" or the "Company") today announced its results of operations for the third quarter ended September 30, 2010.

Third Quarter 2010 Highlights

• Net loss attributable to DFR for the quarter totaled $8.0 million, or $0.70 loss per diluted common share, compared to net income attributable to DFR of $1.8 million, or $0.27 per diluted common share, for the third quarter of 2009. The majority of the 2010 net loss was attributable to non-cash items, including, a $3.7 million unrealized loss on the conversion feature of the Company's senior subordinated convertible notes (the "Convertible Notes") primarily resulting from share price appreciation during the quarter and a $2.4 million impairment charge on intangible assets associated with the sale of a non-core portfolio management product. Additionally, the Company recorded $1.7 million of income tax expense in the third quarter of 2010.
• DFR Operations (defined below) investment advisory fees were $6.8 million for the quarter, an increase of $2.8 million, or 70 percent, compared with the comparable 2009 quarter primarily related to increases in CLO management fees.
• Core earnings for the quarter totaled $4.3 million, or $0.33 per diluted common share, compared to $5.2 million, or $0.77 per diluted common share, for the third quarter of 2009. Core earnings is a non-GAAP financial measure (see reconciliation between net loss, the most comparable GAAP financial measure, and core earnings in "Reconciliation of Non-GAAP Measure - Core Earnings" below).
• Assets under management ("AUM") totaled $9.6 billion as of October 1, 2010.

Third Quarter 2010 Financial Overview

Discussing the quarter, Jonathan Trutter, the Company's Chief Executive Officer said, "We saw year over year improvements in investment advisory fees, including increases in CLO subordinated fees and fees from the June acquisition of CNCIM. Our liquidity remains strong, and we are well positioned to capitalize on investment management opportunities in the credit markets."

The discussion below focuses on "DFR Operations," which represents the combined results of the Investment Management and Principal Investing segments (see "Segment Condensed Statement of Operations" table below). This is the metric that the Company uses to evaluate its financial results. DFR Operations excludes the results of the Consolidated Investment Products ("CIP") segment, which consists of 11 collateralized debt obligations ("CDOs") that the Company is required to consolidate into its financial results pursuant to a new accounting standard.  The Company earns investment advisory fees from, and recognizes gains (losses) on its minimal direct investments in, the CDOs of the CIP segment which are included in the results of DFR Operations and eliminated upon consolidation. Otherwise, the results of the CIP segment have no economic impact on the Company's operations. The DFR Operations results are comparable to the Company's consolidated GAAP results for periods prior to January 1, 2010 during which the Company was not required to consolidate these CDOs.

DFR Operations

During the three months ended September 30, 2010, net revenues were $8.4 million, a net increase of $1.7 million, or 25.4 percent, as compared to the same period in 2009. This significant improvement is the result of a $2.8 million increase in investment advisory fees and a $1.1 million decrease in the provision for loan losses, partially offset by a $2.2 million decrease in net interest income.

Investment advisory fees were $6.8 million for the three months ended September 30, 2010, an increase of $2.8 million, or 70.0 percent, as compared to the same period in 2009. The increase in investment advisory fees is primarily attributable to an increase in subordinated management fees, as most of the collateralized loan obligations ("CLOs") that the Company manages have resumed current payment of subordinated management fees and begun to pay previously deferred subordinated management fees.  Furthermore, Columbus Nova Credit Investment Management, LLC ("CNCIM") contributed investment advisory fees of $1.6 million during the period.

Net interest income was $4.8 million for the three months ended September 30, 2010, a decline of $2.2 million, or 31.4 percent, as compared to the same period in 2009.  This decline is primarily the result of declines in net interest income on the Company's residential mortgage-backed securities ("RMBS") portfolio and DFR Middle Market CLO Ltd. ("DFR MM CLO"), partially offset by interest expense savings on the Company's long-term debt.

Expenses were $12.4 million for the three months ended September 30, 2010, an increase of $4.7 million, or 61.0 percent, as compared to the same period in 2009.  The increase was primarily driven by $2.4 million of impairment charges on intangible assets associated with the sale of a non-core portfolio management product during the period and a $1.9 million increase in compensation and benefits.

Net other income (expense) and gain (loss) was a net loss of $1.5 million for the three months ended September 30, 2010, a decrease of $4.5 million, or 150.0 percent, as compared to the same period in 2009.  This decrease is primarily related to $3.7 million of unrealized losses on the quarterly valuation of the conversion feature of the Convertible Notes, which is deemed to be an embedded derivative instrument.  These unrealized losses primarily resulted from share price appreciation during the quarter.

Income tax expense was $1.7 million for the three months ended September 30, 2010, as compared with $0.1 million for the same period in 2009.  As a result of the acquisition of CNCIM the Company's ability to utilize its net operating losses to offset federal taxable income has been significantly reduced.

Assets Under Management

As of October 1, 2010, the Company's AUM totaled approximately $9.6 billion, primarily held in 31 CDOs.

Principal Investing Portfolio

The Principal Investing segment's total invested assets decreased by $57.4 million, or 9.7 percent, to $535.0 million as of September 30, 2010, as compared to $592.4 million as of June 30, 2010. The decrease was primarily attributable to a reduction in the RMBS portfolio of $51.2 million as a result of paydowns and opportunistic sales.

Liquidity

As of September 30, 2010, unrestricted cash and cash equivalents and unencumbered RMBS totaled $38.1 million and net equity in the financed RMBS portfolio, excluding the unencumbered RMBS included above, totaled $22.1 million. In total, the Company had unrestricted cash and cash equivalents, unencumbered RMBS and net equity in its financed RMBS portfolio of $60.2 million as of September 30, 2010.

About the Company

DFR, through its subsidiaries Deerfield Capital Management LLC and CNCIM, manages client assets, including bank loans and other corporate debt, RMBS, government securities and asset-backed securities. In addition, DFR has a principal investing portfolio comprised of fixed income investments, including bank loans and other corporate debt and RMBS.

For more information, please go to the Company's website, at www.deerfieldcapital.com.

* * Notes and Tables to Follow * *

NOTES TO PRESS RELEASE

Certain statements in this press release are forward-looking as permitted 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 the Company.  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.  Forward-looking statements contained in this press release are made as of the date hereof, and the Company does not undertake any obligation to update any forward-looking statement to reflect subsequent events, new information or circumstances arising after the date of this press release.  All future written and oral forward-looking statements attributable to us or any person acting on behalf of the Company are expressly qualified in their entirety by the cautionary statements contained or referenced above.  In addition, it is the Company's policy generally not to make any specific projections as to future earnings, and the Company does not endorse any projections regarding future performance that may be made by third parties.

The following factors, among others, could cause actual results to differ materially from those described in the forward-looking statements: general economic and market conditions, particularly as they relate to the markets for debt securities, such as RMBS and CDOs; continued availability of financing and the Company's ability to access capital markets on commercially reasonable terms; the Company's ability to maintain adequate liquidity; the Company's ability to maintain compliance with its existing debt instruments and other contractual obligations; the Company's future operating results; the Company's business prospects and the business prospects of companies in which the Company invests; changes in the Company's investment, hedging or credit strategies or the performance and values of the Company's investment portfolios; reductions in the Company's assets under management and related management and advisory fee revenue; the Company's ability to make investments in new investment products and realize growth of fee-based income; the Company's receipt of previously deferred CLO subordinated management fees and its receipt of future CLO subordinated management fees on a current basis; the Company's ability to assume or otherwise acquire additional CDO management contracts on favorable terms, or at all; the Company's ability to maintain its exemption from registration as an investment company pursuant to the Investment Company Act of 1940; impact of restrictions contained in the Company's existing debt instruments; the costs and effects of the current Securities and Exchange Commission ("SEC") investigation into certain of the Company's securities trading procedures, and the accounting related thereto, in connection with which DFR has received a "Wells notice" from the staff of the SEC; changes in, and the ability of the Company to remain in compliance with, laws, regulations or government policies affecting the Company's business, including investment management regulations and accounting standards; and the Company's failure to realize the expected benefits of the acquisition of CNCIM.

These and other factors that could cause the Company's actual results to differ materially from those described in the forward-looking statements set forth in the Company's annual report on Form 10-K for the year ended December 31, 2009, quarterly reports on Form 10-Q and 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

RECONCILIATION OF NON-GAAP MEASURE - CORE EARNINGS

The Company believes that core earnings, a non-GAAP financial measure, is a useful metric for evaluating and analyzing its performance.  The calculation of core earnings, which the Company uses to compare financial results from period to period, eliminates the impact of certain non-cash items, non-recurring items, special charges, essentially all components of net other income (expense) and gain (loss) and the provision for income tax from net income (loss), the most comparable GAAP financial measure. Core earnings provided herein may not be comparable to similar measures presented by other companies, as it is a non-GAAP financial measure and may therefore be defined differently by other companies. Core earnings include the earnings from the Company's subsidiary, DFR MM CLO, but is not necessarily indicative of cash flows received from DFR MM CLO.

DEERFIELD CAPITAL CORP. AND ITS SUBSIDIARIES

SEGMENT CONDENSED STATEMENT OF OPERATIONS

On January 1, 2010, pursuant to a new accounting standard, the Company was required to consolidate the results of seven CDOs managed by the Company. Upon completion of the acquisition of CNCIM the Company was also required to consolidate the four CLOs managed by CNCIM (together with the seven CDOs previously consolidated, the "CIP CDOs"). Although the Company now consolidates the CIP CDOs into its financial results in the Consolidated Investment Products segment, there have been no changes to the terms of the Company's management contracts with the CIP CDOs, the revenues the Company is contractually entitled to receive from the CIP CDOs or the Company's exposure to liability with respect to the CIP CDOs.  The assets of the CIP CDOs are held solely as collateral to satisfy the obligations of the CIP CDOs. The Company has no right to the benefits from, nor does the Company bear the risks associated with, the assets held by the CIP CDOs, beyond the Company's minimal direct investments and beneficial interests in, and management fees generated from, the CIP CDOs. If DFR were to liquidate, the assets of the CIP CDOs would not be available to the general creditors of DFR, and as a result, the Company does not consider them to be DFR assets. Additionally, the investors in the CIP CDOs have no recourse to the general credit of DFR for the debt issued by the CIP CDOs. Therefore the Company does not consider this debt to be an obligation of DFR. DFR MM CLO is not included in the Consolidated Investment Products segment, but instead is included in the Principal Investing segment because the Company owns all of its preference shares.

When reviewing and analyzing the financial results, management excludes the impact of the Consolidated Investment Products segment as this segment does not have any economic impact on the Company's operations. The following table presents the consolidation of the Investment Management and Principal Investing segments into DFR Operations and the Consolidated Investment Products segment into the condensed consolidated statement of operations. DFR Operations for the three months ended September 30, 2010 is comparable to the Company's consolidated results for periods prior to January 1, 2010.

SOURCE Deerfield Capital Corp.

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