UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-Q
 (Mark
One)
 x           QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
  For the
quarterly period ended June 30, 2008
  OR
   ̈           TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
  For the
transition period from _________ to __________
  Commission
file number: 1-32733
  
 RESOURCE
CAPITAL CORP.
 (Exact
name of registrant as specified in its charter)
 
 Maryland
              
              20-2297134(State
      or other jurisdiction of
              
              (I.R.S.
      Employerincorporation
      or organization)
              
              Identification
      No.)712
      5th
      Avenue, 10th
      FloorNew
      York, New York
              
              10019(Address
      of principal executive offices)
              
              (Zip
      code)
 
 (Registrant’s
      telephone number, including area code):  212-506-3870
 
 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.  x Yes  ̈ No
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
  Large
      accelerated
      filer                         ̈
              
              Accelerated
      filer                                   xNon-accelerated
      filer                           ̈
              (Do
      not check if a smaller reporting Company)
              Smaller
      reporting
      company                
       ̈
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   ̈ Yes x No
 
 The
number of outstanding shares of the registrant’s common stock on August 6, 2008
was 25,282,632 shares.
  
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 INDEXTO QUARTERLY REPORT
 ON
FORM 10-Q
 
 
 PAGEPART
      I
              FINANCIAL
      INFORMATIONItem 1.
              Financial
      StatementsConsolidated Balance Sheets – June 30, 2008 (unaudited) and
      December 31, 2007
              3Consolidated Statements of Operations
                Three and
      Six Months Ended June 30, 2008 and 2007 (unaudited)
              4Consolidated Statement of Changes in Stockholders’
      Equity
                Six
      Months Ended June 30, 2008 (unaudited)
              5Consolidated Statements of Cash Flows
                Six Months
      Ended June 30, 2008 and 2007 (unaudited)
              6 − 7Notes to Consolidated Financial Statements – June 30, 2008
      (unaudited)
              8 – 30Item
      2.
              Management’s Discussion and Analysis of Financial
      Condition
                and Results of
      Operations
              31 − 53Item
      3.
              Quantitative and Qualitative Disclosures about Market
      Risk
              54 − 55Item
      4.
              Controls and Procedures
              55PART
      II
              OTHER
      INFORMATIONItem
      4.
              Submission of Matters to a Vote of Security
      Holders
              56Item
      6.
              Exhibits
              56SIGNATURES
              57
 
 
 PART
I.                      FINANCIAL
INFORMATION
  Item
1.                 Financial
Statements
 
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 (in
thousands, except share data)
 
 June
      30,
              
              
              December
      312008
              
              
              2007(Unaudited)ASSETSCash and cash
      equivalents
              
              $
              14,255
              
              
              $
              6,029Restricted cash
              
              
              36,292
              
              
              
              119,482Investment securities
      available-for-sale, pledged as collateral, at fair value
              
              
              47,074
              
              
              
              65,464Loans, pledged as collateral and
      net of allowances of $20.3 million and $5.9 million
              
              
              1,798,504
              
              
              
              1,766,639Direct financing leases and
      notes, pledged as collateral and net of allowances of
                $0.1 million and $0.3 million
      and net of unearned income
              
              
              92,104
              
              
              
              95,030Investments in unconsolidated
      entities
              
              
              1,548
              
              
              
              1,805Interest
    receivable
              
              
              9,112
              
              
              
              11,965Principal paydown
      receivables
              
              
              60
              
              
              
              836Other assets
              
              
              5,072
              
              
              
              4,898Total assets
              
              $
              2,004,021
              
              
              $
              2,072,148LIABILITIESBorrowings
              
              $
              1,722,244
              
              
              $
              1,760,969Distribution
    payable
              
              
              10,440
              
              
              
              10,366Accrued interest
      expense
              
              
              4,599
              
              
              
              7,209Derivatives, at fair
      value
              
              
              12,833
              
              
              
              18,040Accounts payable and other
      liabilities
              
              
              3,557
              
              
              
              3,958Total
    liabilities
              
              
              1,753,673
              
              
              
              1,800,542STOCKHOLDERS’
      EQUITYPreferred stock, par value
      $0.001:  100,000,000 shares authorized;
                no shares issued and
      outstanding
              
              
              −
              
              
              
              −Common stock, par value
      $0.001:  500,000,000 shares authorized;
                25,282,632 and 25,103,532
      shares issued and outstanding
                (including 491,195 and 581,493
      unvested restricted shares)
              
              
              25
              
              
              
              25Additional paid-in
      capital
              
              
              355,969
              
              
              
              355,205Accumulated other comprehensive
      loss
              
              
              (43,579
              )
              
              
              (38,323
              )Distributions in excess of
      earnings
              
              
              (62,067
              )
              
              
              (45,301
              )Total stockholders’
      equity
              
              
              250,348
              
              
              
              271,606TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              2,004,021
              
              
              $
              2,072,148
  The
accompanying notes are an integral part of these statements
   3
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in
thousands, except share and per share data)
 (Unaudited)
 
 Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007REVENUESLoans
              
              $
              28,686
              
              
              $
              33,107
              
              
              $
              61,125
              
              
              $
              63,388Securities
              
              
              1,158
              
              
              
              7,908
              
              
              
              2,339
              
              
              
              15,304Leases
              
              
              1,961
              
              
              
              1,901
              
              
              
              3,951
              
              
              
              3,811Interest income −
      other
              
              
              453
              
              
              
              910
              
              
              
              1,826
              
              
              
              1,311Interest income
              
              
              32,258
              
              
              
              43,826
              
              
              
              69,241
              
              
              
              83,814Interest expense
              
              
              18,924
              
              
              
              30,222
              
              
              
              42,072
              
              
              
              56,989Net interest
    income
              
              
              13,334
              
              
              
              13,604
              
              
              
              27,169
              
              
              
              26,825OPERATING
      EXPENSESManagement fees − related
      party
              
              
              1,171
              
              
              
              2,027
              
              
              
              2,909
              
              
              
              4,059Equity compensation − related
      party
              
              
              541
              
              
              
              137
              
              
              
              622
              
              
              
              623Professional
      services
              
              
              664
              
              
              
              541
              
              
              
              1,456
              
              
              
              1,233Insurance
    expenses
              
              
              170
              
              
              
              114
              
              
              
              298
              
              
              
              235General and
      administrative
              
              
              343
              
              
              
              324
              
              
              
              698
              
              
              
              736Income tax
    expense
              
              
              138
              
              
              
              26
              
              
              
              167
              
              
              
              171Total expenses
              
              
              3,027
              
              
              
              3,169
              
              
              
              6,150
              
              
              
              7,057NET
      OPERATING INCOME
              
              
              10,307
              
              
              
              10,435
              
              
              
              21,019
              
              
              
              19,768OTHER
      (EXPENSE) REVENUENet realized gains (losses) on
      investments
              
              
              102
              
              
              
              152
              
              
              
              (1,893
              )
              
              
              222Asset
impairments
              
              
              −
              
              
              
              (788
              )
              
              
              −
              
              
              
              (788
              )Other income
              
              
              26
              
              
              
              37
              
              
              
              59
              
              
              
              73Provision for loan and lease
      loss
              
              
              (15,692
              )
              
              
              −
              
              
              
              (16,829
              )
              
              
              −Gain on the extinguishment of
      debt
              
              
              −
              
              
              
              −
              
              
              
              1,750
              
              
              
              −Total other (expenses)
      revenues
              
              
              (15,564
              )
              
              
              (599
              )
              
              
              (16,913
              )
              
              
              (493
              )NET
      (LOSS) INCOME
              
              $
              (5,257
              )
              
              $
              9,836
              
              
              $
              4,106
              
              
              $
              19,275NET
      (LOSS) INCOME PER SHARE –BASIC
              
              $
              (0.21
              )
              
              $
              0.40
              
              
              $
              0.17
              
              
              $
              0.78NET
      (LOSS) INCOME PER SHARE –DILUTED
              
              $
              (0.21
              )
              
              $
              0.39
              
              
              $
              0.16
              
              
              $
              0.77WEIGHTED
      AVERAGE NUMBER OFSHARES
      OUTSTANDING – BASIC
              
              
              24,721,063
              
              
              
              24,704,471
              
              
              
              24,665,840
              
              
              
              24,569,694WEIGHTED
      AVERAGE NUMBER OFSHARES
      OUTSTANDING – DILUTED
              
              
              24,721,063
              
              
              
              24,944,162
              
              
              
              24,922,340
              
              
              
              24,891,686DIVIDENDS
      DECLARED PER SHARE
              
              $
              0.41
              
              
              $
              0.41
              
              
              $
              0.82
              
              
              $
              0.80
  The
accompanying notes are an integral part of these statements
  4
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’
EQUITY
 SIX
MONTHS ENDED JUNE 30, 2008
 (in
thousands, except share data)
 (Unaudited)
 
 Common
      StockShares
              
              
              Amount
              
              
              Additional
      Paid-In Capital
              
              
              Accumulated
      Other Comprehensive Loss
              
              
              Retained
      Earnings
              
              
              Distributions
      in Excess of Earnings
              
              
              Treasury
      Shares
              
              
              Total
      Stockholders’ Equity
              
              
              Comprehensive
      LossBalance,
      January 1, 2008
              
              
              25,103,532
              
              
              $
              25
              
              
              $
              357,976
              
              
              $
              (38,323
              )
              
              $
              −
              
              
              $
              (45,301
              )
              
              $
              (2,771
              )
              
              $
              271,606Retirement
      of treasury
                shares
              
              
              −
              
              
              
              −
              
              
              
              (2,771
              )
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              2,771
              
              
              
              −Stock
      based compensation
              
              
              179,100
              
              
              
              −
              
              
              
              142
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              142Amortization
      of stock
                based
    compensation
              
              
              −
              
              
              
              −
              
              
              
              622
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              622Net
      income
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              4,106
              
              
              
              −
              
              
              
              −
              
              
              
              4,106
              
              
              
              4,106Available-for-sale,
                fair value
    adjustment
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              (6,342
              )
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              (6,342
              )
              
              
              (6,342
              )Designated
      derivatives, fair
                value adjustment
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              1,086
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              1,086
              
              
              
              1,086Distributions
      on common
                stock
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              (4,106
              )
              
              
              (16,766
              )
              
              
              −
              
              
              
              (20,872
              )Comprehensive
      loss
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              $
              (1,150
              )Balance,
      June 30, 2008
              
              
              25,282,632
              
              
              $
              25
              
              
              $
              355,969
              
              
              $
              (43,579
              )
              
              $
              −
              
              
              $
              (62,067
              )
              
              $
              −
              
              
              $
              250,348
  The
accompanying notes are an integral part of these statements
  5
 
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (in
thousands)
 (Unaudited)
 
 Six
      Months EndedJune
      30,2008
              
              
              2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net income
              
              $
              4,106
              
              
              $
              19,275Adjustments to reconcile net
      income to net cash provided by
                operating
      activities:Depreciation and
      amortization
              
              
              396
              
              
              
              364Amortization of net premium
      (discount) on investments
              
              
              (483
              )
              
              
              (341
              )Amortization of discount on
      notes
              
              
              84
              
              
              
              7Amortization of debt issuance
      costs
              
              
              1,576
              
              
              
              1,091Amortization of stock based
      compensation
              
              
              622
              
              
              
              623Non-cash incentive compensation
      to the Manager
              
              
              141
              
              
              
              551Net realized losses (gains) on
      derivative instruments
              
              
              56
              
              
              
              (13
              )Net realized losses on
      investments
              
              
              1,893
              
              
              
              566Gain on the extinguishment of
      debt
              
              
              (1,750
              )
              
              
              −Provision for loan and lease
      losses
              
              
              16,828
              
              
              
              −Changes in operating assets and
      liabilities:Decrease (increase) in
      restricted cash
              
              
              9,935
              
              
              
              (8,579
              )Decrease (increase) in
      interest receivable, net of purchased interest
              
              
              2,843
              
              
              
              (2,350
              )Decrease in accounts
      receivables
              
              
              188
              
              
              
              −Decrease (increase) in
      principal paydowns receivable
              
              
              776
              
              
              
              (4,092
              )Decrease (increase) in
      management and incentive fee payable
              
              
              (17
              )
              
              
              8Increase (decrease) in security
      deposits
              
              
              120
              
              
              
              (14
              )Decrease in accounts payable
      and accrued liabilities
              
              
              (493
              )
              
              
              (789
              )(Decrease) increase in accrued
      interest expense
              
              
              (2,769
              )
              
              
              1,372Increase in other
      assets
              
              
              (764
              )
              
              
              (1,110
              )Net cash provided by operating
      activities
              
              
              33,288
              
              
              
              6,569CASH
      FLOWS FROM INVESTING ACTIVITIES:Restricted cash
              
              
              73,255
              
              
              
              (61,199
              )Purchase of securities
      available-for-sale
              
              
              −
              
              
              
              (69,488
              )Principal payments on securities
      available-for-sale
              
              
              2,269
              
              
              
              6,970Proceeds from sale of securities
      available-for-sale
              
              
              8,000
              
              
              
              29,867Distribution from unconsolidated
      entities
              
              
              257
              
              
              
              −Purchase of loans
              
              
              (131,498
              )
              
              
              (1,069,897
              )Principal payments received on
      loans
              
              
              63,473
              
              
              
              390,500Proceeds from sales of
      loans
              
              
              19,836
              
              
              
              149,346Purchase of direct financing
      leases and notes
              
              
              (14,291
              )
              
              
              (9,715
              )Proceeds payments received on
      direct financing leases and notes
              
              
              15,907
              
              
              
              12,351Proceeds from sale of direct
      financing leases and notes
              
              
              1,174
              
              
              
              3,320Net cash provided by (used in)
      investing activities
              
              
              38,382
              
              
              
              (617,945
              )
 
 (Continued)
  6
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (in
thousands)
 (Unaudited)
 
 
 Six
      Months EndedJune
      30,2008
              
              
              2007CASH
      FLOWS FROM FINANCING ACTIVITIES:Net proceeds from issuance of
      common stock (net of offering costsof
      $0 and $287)
              
              
              −
              
              
              
              15,466Proceeds from
      borrowings:Repurchase
    agreements
              
              
              239
              
              
              
              388,827Collateralized debt
      obligations
              
              
              18,040
              
              
              
              660,565Unsecured revolving credit
      facility
              
              
              −
              
              
              
              5,000Secured term
    facility
              
              
              4,083
              
              
              
              9,158Payments on
      borrowings:Repurchase
    agreements
              
              
              (47,586
              )
              
              
              (425,933
              )Secured term
    facility
              
              
              (9,993
              )
              
              
              (12,896
              )Unsecured revolving credit
      facility
              
              
              −
              
              
              
              (5,000
              )Use of unrestricted cash for
      early extinguishment of debt
              
              
              (3,250
              )
              
              
              −Settlement of derivative
      instruments
              
              
              (4,178
              )
              
              
              2,581Payment of debt issuance
      costs
              
              
              −
              
              
              
              (11,606
              )Distributions paid on common
      stock
              
              
              (20,799
              )
              
              
              (17,411
              )Net cash (used in) provided by
      financing activities
              
              
              (63,444
              )
              
              
              608,751NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
              
              
              8,226
              
              
              
              (2,625
              )CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
              
              
              6,029
              
              
              
              5,354CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
              
              $
              14,255
              
              
              $
              2,729NON-CASH
      INVESTING AND FINANCING ACTIVITIES:Distributions on common stock
      declared but not paid
              
              $
              10,440
              
              
              $
              10,298Issuance of restricted
      stock
              
              $
              1,335
              
              
              $
              4,051Purchase of loans on warehouse
      line
              
              $
              −
              
              
              $
              (311,069
              )Proceeds from warehouse
      line
              
              $
              −
              
              
              $
              311,069SUPPLEMENTAL
      DISCLOSURE:Interest expense paid in
      cash
              
              $
              44,984
              
              
              $
              58,672Income taxes paid in
      cash
              
              $
              489
              
              
              $
              −
  The
accompanying notes are an integral part of these statements
   7
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2008
 (Unaudited)
 
 NOTE
1 – ORGANIZATION AND BASIS OF QUARTERLY PRESENTATION
 
 Resource Capital Corp. and
subsidiaries’ (the ‘‘Company’’) principal business activity is to purchase and
manage a diversified portfolio of commercial real estate-related assets and
commercial finance assets.  The Company’s investment activities are
managed by Resource Capital Manager, Inc. (‘‘Manager’’) pursuant to a management
agreement (‘‘Management Agreement’’).  The Manager is a wholly-owned
indirect subsidiary of Resource America, Inc. (“RAI”) (Nasdaq:
REXI).
 
 The Company has three direct
wholly-owned subsidiaries:
 
 ·
              RCC
      Real Estate, Inc. (“RCC Real Estate”) holds real estate investments,
      including commercial real estate loans.  RCC Real Estate owns
      100% of the equity of the following
entities:
  -
              Resource
      Real Estate Funding CDO 2006-1 (“RREF 2006-1”), a Cayman Islands limited
      liability company and qualified real estate investment trust (“REIT”)
      subsidiary (“QRS”).  RREF 2006-1 was established to complete a
      collateralized debt obligation (“CDO”) issuance secured by a portfolio of
      commercial real estate loans and commercial mortgage-backed
      securities.
  -
              Resource
      Real Estate Funding CDO 2007-1 (“RREF 2007-1”), a Cayman Islands limited
      liability company and QRS.  RREF 2007-1 was established to
      complete a CDO issuance secured by a portfolio of commercial real estate
      loans and
      commercial mortgage-backed securities.
  ·
              RCC
      Commercial, Inc. (“RCC Commercial”) holds bank loan investments and real
      estate investments, including commercial real estate-related
      securities.  RCC Commercial owns 100% of the equity of the
      following entities:
  -
              Apidos
      CDO I, Ltd. (“Apidos CDO I”), a Cayman Islands limited liability company
      and taxable REIT subsidiary (“TRS”).  Apidos CDO I was
      established to complete a CDO secured by a portfolio of bank
      loans.
  -
              Apidos
      CDO III, Ltd. (“Apidos CDO III”), a Cayman Islands limited liability
      company and TRS.  Apidos CDO III was established to complete a
      CDO secured by a portfolio of bank
loans.
  -
              Apidos
      Cinco CDO, Ltd. (“Apidos Cinco CDO”), a Cayman Islands limited liability
      company and TRS.  Apidos Cinco CDO was established to complete a
      CDO secured by a portfolio of bank
loans.
  ·
              Resource
      TRS, Inc. (“Resource TRS”), the Company’s directly-owned TRS, holds all
      the Company’s direct financing leases and
notes.
 
 The consolidated financial statements
and the information and tables contained in the notes to the consolidated
financial statements are unaudited.  However, in the opinion of
management, these interim financial statements include all adjustments necessary
to fairly present the results of the interim periods presented.  The
unaudited interim consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in the
Company’s Annual Report on Form 10-K for the period ended December 31,
2007.  The results of operations for the three and six months ended
June 30, 2008 may not necessarily be indicative of the results of operations for
the full fiscal year ending December 31, 2008.
 
 Certain reclassifications with respect
to the exit fees and income taxes have been made to the 2007 consolidated
financial statements to conform to the 2008 presentation.
  NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Principles
of Consolidation
 
 The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America (“GAAP”).  The consolidated
financial statements include the accounts of the Company and its subsidiaries,
all of which are wholly-owned.
 8
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2008
 (Unaudited)
 
 NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (Continued)
 
 Principles
of Consolidation − (Continued)
 
 When
the Company obtains an explicit or implicit interest in an entity, the Company
evaluates the entity to determine if the entity is a variable interest entity
(“VIE”), and, if so, whether or not the Company is deemed to be the primary
beneficiary of the VIE, in accordance with Financial Accounting Standards Board
(“FASB”) Interpretation 46, “Consolidation of Variable Interest Entities,” as
revised (“FIN 46-R”).  Generally, the Company consolidates VIEs for which
the Company is deemed to be the primary beneficiary or for non-VIEs which the
Company controls. The primary beneficiary of a VIE is the variable interest
holder that absorbs the majority of the variability in the expected losses or
the residual returns of the VIE.  When determining the primary beneficiary
of a VIE, the Company considers its aggregate explicit and implicit variable
interests as a single variable interest.  If the Company’s single variable
interest absorbs the majority of the variability in the expected losses or the
residual returns of the VIE, the Company is considered the primary beneficiary
of the VIE.  The Company reconsiders its determination of whether an entity
is a VIE and whether the Company is the primary beneficiary of such VIE if
certain events occur.
  The Company has a 100% interest valued at $1.5 million in the common shares
(three percent of the total equity) in two trusts, Resource Capital Trust I
(“RCT I”) and RCC Trust II (“RCT II”).  Accordingly, the Company does not
have the right to the majority of RCTs’ expected residual
returns.  Therefore, the Company is not deemed to be the primary
beneficiary of either trust and they are not consolidated in the Company’s
consolidated financial statements.  The Company records its investments in
RCT I and RCT II’s common securities of $774,000 each as investments in
unconsolidated trusts and records dividend income upon declaration by RCT I and
RCT II.  For the three months ended June 30, 2008, the Company
recognized $26,000 and $59,000, respectively, of income on its investment in RCT
I and RCT II and $916,000 and $2.0 million, respectively, of interest expense
which included $34,000 and $65,000, respectively, of amortization of deferred
debt issuance costs.  For the three months ended June 30, 2007, the Company
recognized $36,000 and $73,000, respectively, of income on its investment in RCT
I and RCT II and $1.2 million and $2.5 million, respectively, of interest
expense which included $27,000 and $55,000, respectively, of amortization of
deferred debt issuance costs (see Note 7 for further discussion on RCT I and RCT
II under Trust Preferred Securities) .
  All
inter-company transactions and balances have been
eliminated.
 Use
of Estimates
 
 The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those estimates.
Estimates affecting the accompanying consolidated financial statements include
the net realizable and fair values of the Company’s investments and derivatives,
the estimated life used to calculate amortization and accretion of premiums and
discounts, respectively, on investments and provisions for loan and lease
losses.
 
 Income
Taxes
 
 The Company operates in such a manner
as to qualify as a REIT under the provisions of the Internal Revenue Code of
1986, as amended (the "Code"); therefore, applicable REIT taxable income is
included in the taxable income of its shareholders, to the extent distributed by
the Company.  To maintain REIT status for federal income tax purposes, the
Company is generally required to distribute at least 90% of its REIT taxable
income to its shareholders as well as comply with certain other qualification
requirements as defined under the Code.  As a REIT, the Company is not
subject to federal corporate income tax to extent that it distributes 100% of
its REIT taxable income each year.
 
 Taxable income from non-REIT activities
managed through Resource TRS are subject to federal, state and local income
taxes.  Resource TRS' income taxes are accounted for under the asset
and liability method as required under Statement of Financial Account Standards
(‘SFAS”) 109 "Accounting for Income Taxes."  Under the asset and
liability method, deferred income taxes are recognized for the temporary
differences between the financial reporting basis and tax basis of Resource TRS'
assets and liabilities.  As of June 30, 2008 and December 31, 2007,
Resource TRS recognized a provision for income taxes of $167,000 and $338,000,
respectively.
 
  9
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2008
 (Unaudited)
 
 NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (Continued)
 
 Income
Taxes − (Continued)
 
 Apidos CDO I, Apidos CDO III, Apidos Cinco CDO and
Ischus CDO II, the Company’s foreign TRSs, are organized as exempted companies
incorporated with limited liability under the laws of the Cayman Islands, and
are generally exempt from federal and
state income tax at the corporate level because their activities in the United
States are limited to trading in stock and securities for their own
account.  Therefore, despite their status as TRSs, they generally will
not be subject to corporate tax on their earnings and no provision for income
taxes is required; however, because they are “controlled foreign corporations,”
the Company will generally be required to include Apidos CDO I’s, Apidos CDO
III’s, Apidos Cinco CDO’s and Ischus CDO II’s current taxable income in its
calculation of REIT taxable income.
 Allowance
for Loan and Lease Losses
 
 The Company maintains an allowance for
loan and lease losses.  Loans and leases held for investment are first
individually evaluated for impairment, and then evaluated for impairment as a
homogeneous pool of loans with substantially similar
characteristics.  The reviews are performed at least
quarterly.
 
 The Company considers a loan to be
impaired when, based on current information and events, management believes it
is probable that the Company will be unable to collect all amounts due according
to the contractual terms of the loan agreement.  When a loan is
impaired, the allowance for loan losses is increased by the amount of the excess
of the amortized cost basis of the loan over its fair value.  Fair
value may be determined based on the present value of estimated cash flows; on
market price, if available; or on the fair value of the collateral less
estimated disposition costs.  When a loan, or a portion thereof, is
considered uncollectible and pursuit of the collection is not warranted, then
the Company will record a charge-off or write-down of the loan against the
allowance for credit losses.
 
 The balance of impaired loans and
leases was $17.7 million at June 30, 2008.  The total balance of
impaired loans and leases with a valuation allowance at June 30, 2008 was $16.9
million.  All of the loans deemed impaired at June 30, 2008 have an
associated valuation allowance.  The total balance of impaired leases
without a specific valuation allowance was $771,000 at June 30,
2008.  The specific valuation allowance related to these impaired
loans and leases was $15.5 million at June 30, 2008.  The average
balance of impaired loans and leases was $17.2 million during the quarter ended
June 30, 2008.  The Company did not recognize any income on impaired
loans and leases during 2008.
 The balance of impaired loans and
leases was $17.4 million at December 31, 2007.  The total balance of
impaired loans and leases with a valuation allowance at December 31, 2007 was
$17.0 million.  All of the loans deemed impaired at December 31, 2007
have an associated valuation allowance.  The total balance of impaired
leases without a specific valuation allowance was $359,000 at December 31,
2007.  The specific valuation allowance related to these impaired
loans and leases was $2.3 million at December 31, 2007.  The average
balance of impaired loans and leases was $4.3 million during
2007.  The Company did not recognize any income on impaired loans and
leases during 2007 once each individual loan or lease became
impaired.
 
 An impaired loan or lease may remain on
accrual status during the period in which the Company is pursuing repayment of
the loan or lease; however, the loan or lease would be placed on non-accrual
status at such time as either (i) management believes that scheduled debt
service payments will not be met within the coming 12 months; (ii) the loan or
lease becomes 90 days delinquent; (iii) management determines the borrower is
incapable of, or has ceased efforts toward, curing the cause of the impairment;
or (iv) the net realizable value of the loan’s underlying collateral
approximates the Company’s carrying value of such loan.  While on
non-accrual status, the Company recognizes interest income only when an actual
payment is received.
 
 10
 
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2008
 (Unaudited)
 
 NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (Continued)
 The following tables show the changes
in the allowance for loan and lease losses (in thousands):
 
 Allowance
      for loan loss at January 1, 2008
              
              $
              5,918Provision for loan
      loss
              
              
              16,631Loans
    charged-off
              
              
              (2,269
              )Recoveries
              
              
              −Allowance
      for loan loss at June 30, 2008
              
              $
              20,280
 
 Allowance
      for lease loss at January 1, 2008
              
              $
              293Provision for lease
      loss
              
              
              198Leases
    charged-off
              
              
              (391
              )Recoveries
              
              
              −Allowance
      for lease loss at June 30, 2008
              
              $
              100
 
 Stock
Based Compensation
 
 The
Company follows SFAS 123(R), “Share Based Payment,” (“SFAS
123(R)”).  Issuances of restricted stock and options are accounted for
using the fair value based methodology prescribed by SFAS 123(R) whereby the
fair value of the award is measured on the grant date and expensed monthly to
equity compensation expense-related party on the consolidated statements of
operations with a corresponding entry to additional paid-in
capital.  For issuances to the Company’s Manager and to non-employees,
the unvested stock and options are adjusted quarterly to reflect changes in fair
value as performance under the agreement is completed.  For issuances
to the Company’s five non-employee directors, the amount is not remeasured under
the fair value-based method.  The compensation for each of these
issuances is amortized over the service period and included in equity
compensation expense.
  Recent
Accounting Pronouncements
 
 In June 2008, the Financial Accounting
Standards Board (“FASB”) issued Staff Position (“FSP”) EITF
03-6-1, “Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1
addresses whether instruments granted in share-based payment transactions are
participating securities prior to vesting and, therefore, need to be included in
the earnings allocation in computing earnings per share under the two-class
method as described in SFAS No. 128, “Earnings per Share.”  Under the
guidance in FSP EITF 03-6-1, unvested share-based payment awards that contain
non-forfeitable rights to dividends or dividend equivalents (whether paid or
unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method.  FSP EITF 03-6-1 is
effective for the Company in fiscal 2009.  After the effective
date of FSP EITF 03-6-1, all prior-period earnings per share data presented
must be adjusted retrospectively.  The Company is currently evaluating the
potential impact of adopting FSP EITF 03-6-1.
 
 In May 2008, the FASB issued SFAS 162,
“The Hierarchy of Generally Accepted Accounting Principles” (“SFAS
162”).  SFAS 162 is intended to improve financial reporting by
identifying a consistent framework or hierarchy for selecting accounting
principles to be used in preparing financial statements in conformity with U.S.
GAAP.  The Company does not expect that SFAS 162 will have an impact
on its consolidated financial statements.
 
 In March 2008, the FASB issued SFAS
161, “Disclosures about Derivative Instruments and Hedging Activities, an
amendment of SFAS 133” (“SFAS 161”).  This new standard requires
enhanced disclosures for derivative instruments, including those used in hedging
activities.  It is effective for fiscal years and interim periods
beginning after November 15, 2008 and will be applicable to the Company in the
first quarter of fiscal 2009.  The Company is assessing the potential
impact that the adoption of SFAS 161 may have on its financial
statements.
 11
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2008
 (Unaudited)
 
 NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES − (Continued)
 
 Recent
Accounting Pronouncements − (Continued)
 In
February 2008, the FASB issued FASB Staff Position 140-3, “Accounting for
Transfers of Financial Assets and Repurchase Financing Transactions” (“FSP FAS
140-3”) which provides guidance on accounting for a transfer of a financial
asset and repurchase financing.  FSP FAS 140-3 is effective for fiscal
years beginning after November 15, 2008 and interim periods within those fiscal
years.  The Company does not expect that FSP FAS 140-3 will have a
material effect on its consolidated financial statements.
 
 In December 2007, the FASB issued SFAS
160, “Noncontrolling Interests in Consolidated Financial Statements,” (“SFAS
160”).  SFAS 160 amends Accounting Research Bulletin 51 to establish
accounting and reporting standards for the noncontrolling (minority) interest in
a subsidiary and for the deconsolidation of a subsidiary.  It
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements.  The Company is currently
determining the effect, if any, that SFAS 160 will have on its consolidated
financial statements.  SFAS 160 is effective for fiscal years
beginning on or after December 15, 2008.
 
 In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations,”
which replaces SFAS No. 141 (“SFAS 141R”). SFAS 141R, among other things,
establishes principles and requirements for how an acquirer entity recognizes
and measures in its financial statements the identifiable assets acquired
(including intangibles), the liabilities assumed and any noncontrolling interest
in the acquired entity. Additionally, SFAS 141R requires that all transaction
costs be expensed as incurred. The Company is currently evaluating the effect,
if any, that SFAS 141R will have on its financial statements.  SFAS
141R is effective for fiscal years beginning after December 15,
2008.
 
 In December 2007, the Securities and
Exchange Commission (“SEC”) issued Staff Accounting Bulletin 110 (“SAB
110”).  SAB 110 amends and replaces Question 6 of Section D.2 of Topic
14, “Share-Based Payment,” of the Staff Accounting Bulletin
series.  Question 6 of Section D.2 of Topic 14 expresses the views of
the Staff regarding the use of the “simplified” method in developing an estimate
of the expected term of “plain vanilla” share options and allows usage of the
“simplified” method for share option grants prior to December 31,
2007.  SAB 110 allows public companies which do not have historically
sufficient experience to provide a reasonable estimate of the expected term of
outstanding options to continue use of the “simplified” method for estimating
the expected term of “plain vanilla” share option grants after December 31,
2007.  The Company will continue to use the “simplified” method until
it has enough historical experience to provide a reasonable estimate of expected
term in accordance with SAB 110.
  
 In February 2007, the FASB issued SFAS
159, “The Fair Value Option for Financial Assets and Financial Liabilities −
Including an amendment of FASB Statement 115,” (“SFAS 159”).  SFAS 159
permits entities to choose to measure many financial instruments and certain
other items at fair value.  This statement is effective for fiscal
years beginning after November 15, 2007.  The Company did not elect to
apply the provisions of SFAS 159 for existing eligible instruments at December
31, 2007.
 
 In September 2006, the FASB issued SFAS
157 “Fair Value Measurements,” (“SFAS 157”).  SFAS 157 clarifies the
definition of fair value, establishes a framework for measuring fair value in
GAAP and expands the disclosure of fair value measurements.  This
statement is effective for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years.  The Company adopted
SFAS 157 in the first quarter of 2008, which did not result in recognition of a
transition adjustment to retained earnings.
 
 NOTE
3 − RESTRICTED CASH
 
 Restricted cash consists of $27.8
million held in five consolidated CDO trusts, $3.5 million in cash
collateralizing outstanding margin calls and a $2.2 million credit facility
reserve used to fund future investments that will be acquired by the Company’s
three closed bank loan CDO trusts.  The remaining $2.8 million
consists of interest reserves and security deposits held in connection with the
Company’s equipment lease and note portfolio.
 12
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2008
 (Unaudited)
 NOTE
4 – INVESTMENT SECURITIES AVAILABLE-FOR-SALE
 
 The following tables summarize the
Company's mortgage-backed securities (“MBS”) and other asset-backed securities
(“ABS”), including those pledged as collateral and classified as
available-for-sale, which are carried at fair value (in thousands):
 
 Amortized
      Cost (1)
                
                
                Unrealized
      Gains
                
                
                Unrealized
      Losses
                
                
                Fair Value(1)June
      30, 2008:Commercial
      MBS private placement
                
                $
                70,326
                
                
                $
                −
                
                
                $
                (23,552
                )
                
                $
                46,774Other
      ABS
                
                
                5,665
                
                
                
                −
                
                
                
                (5,365
                )
                
                
                300Total
                
                $
                75,991
                
                
                $
                −
                
                
                $
                (28,917
                )
                
                $
                47,074December
      31, 2007:Commercial
      MBS private placement
                
                $
                82,373
                
                
                $
                −
                
                
                $
                (17,809
                )
                
                $
                64,564Other
      ABS
                
                
                5,665
                
                
                
                −
                
                
                
                (4,765
                )
                
                
                900Total
                
                $
                88,038
                
                
                $
                −
                
                
                $
                (22,574
                )
                
                $
                65,464
 (1)
              As
      of June 30, 2008 and December 31, 2007, all securities were pledged as
      collateral security under related
financings.
  The following tables summarize the
estimated maturities of the Company’s MBS and other ABS according to their
estimated weighted average life classifications (in thousands, except
percentages):
 
 Weighted
      Average Life
              
              Fair
      Value
              
              
              Amortized
      Cost
              
              
              Weighted
      Average CouponJune
      30,
      2008:Less than one
      year
              
              $
              16,154
              
              
              $
              23,150
              
              
              
              4.17%Greater than one year and less
      than five years
              
              
              6,656
              
              
              
              8,998
              
              
              
              4.49%Greater than five years and less
      than ten years
              
              
              24,264
              
              
              
              43,843
              
              
              
              5.55%Total
              
              $
              47,074
              
              
              $
              75,991
              
              
              
              5.03%December
      31, 2007:Less than one
      year
              
              $
              11,908
              
              
              $
              12,824
              
              
              
              6.15%Greater than one year and less
      than five years
              
              
              19,042
              
              
              
              21,589
              
              
              
              6.16%Greater than five years and less
      than ten years
              
              
              34,514
              
              
              
              53,625
              
              
              
              5.85%Total
              
              $
              65,464
              
              
              $
              88,038
              
              
              
              5.96%
 
 The contractual maturities of the
securities available-for-sale range from July 2017 to March 2051.
 
 13
 
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2008
 (Unaudited)
  NOTE
4 – INVESTMENT SECURITIES AVAILABLE-FOR-SALE - (Continued)
 The following tables show the fair
value and gross unrealized losses, aggregated by investment category and length
of time, that individual securities that have been in a continuous unrealized
loss position (in thousands):
 
 Less
      than 12 Months
              
              
              More
      than 12 Months
              
              
              TotalFair
      Value
              
              
              Gross
      Unrealized Losses
              
              
              Fair
      Value
              
              
              Gross
      Unrealized Losses
              
              
              Fair
      Value
              
              
              Gross
      Unrealized LossesJune
      30,
      2008:Commercial MBS privateplacement
              
              $
              3,108
              
              
              $
              (1,195
              )
              
              $
              43,666
              
              
              $
              (22,357
              )
              
              $
              46,774
              
              
              $
              (23,552
              )Other
      ABS
              
              
              −
              
              
              
              −
              
              
              
              300
              
              
              
              (5,365
              )
              
              
              300
              
              
              
              (5,365
              )Total temporarilyimpaired
      securities
              
              $
              3,108
              
              
              $
              (1,195
              )
              
              $
              43,966
              
              
              $
              (27,722
              )
              
              $
              47,074
              
              
              $
              (28,917
              )December
      31, 2007:Commercial MBS privateplacement
              
              $
              64,564
              
              
              $
              (17,809
              )
              
              $
              −
              
              
              $
              −
              
              
              $
              64,564
              
              
              $
              (17,809
              )Other
      ABS
              
              
              900
              
              
              
              (4,765
              )
              
              
              −
              
              
              
              −
              
              
              
              900
              
              
              
              (4,765
              )Total temporarilyimpaired
      securities
              
              $
              65,464
              
              
              $
              (22,574
              )
              
              $
              −
              
              
              $
              −
              
              
              $
              65,464
              
              
              $
              (22,574
              )
 
 The
determination of other-than-temporary impairment is a subjective process, and
different judgments and assumptions could affect the timing of loss
realization.  The Company reviews its portfolios monthly and the
determination of other-than-temporary impairment is made at least
quarterly.  The Company considers the following factors when
determining if there is an other-than-temporary impairment on a
security:
  ·
              the
      length of time the market value has been less than amortized
      cost;
  ·
              the
      Company’s intent and ability to hold the security for a period of time
      sufficient to allow for any anticipated recovery in market
      value;
  ·
              the
      severity of the impairment;
  ·
              the
      expected loss of the security as generated by third party
      software;
  ·
              credit
      ratings from the rating agencies;
and
  ·
              underlying
      credit fundamentals of the collateral backing the
    securities.
 
 While the available-for-sale
investments have continued to decline in fair value, their change continues to
be temporary.  In particular, with respect to CMBS, all assets are
current with respect to interest and principal payments.  In addition,
the Company performs an on-going review of third-party reports and updated
financial data on the underlying property to analyze current and projected loan
performance.  The Company’s review concluded that there exist no
credit characteristics that would indicate other-than-temporary impairments as
of June 30, 2008.
 
 In November 2007, the Company sold a
portion of its preferred shares in Ischus CDO II, Ltd., a Cayman Islands TRS to
an independent third party.  The sale was deemed to be a
reconsideration event under FASB Interpretation No. 46, “Consolidation of
Variable Interests,” as revised (“FIN 46-R”) and as a result, the Company was no
longer considered to be its primary beneficiary based on a discounted cash flow
analysis of expected losses and expected residual returns and Ischus CDO II was
deconsolidated.  The Company currently recognizes income on its
remaining investment using the cost recovery method.  At the date of
deconsolidation, the value of the Company’s investments in Ischus CDO II was
$722,000.  From the date of deconsolidation through December 31, 2007,
the Company received $465,000 of distributions leaving a balance of $257,000 at
December 31, 2007.  For the three months ended March 31, 2008, $1.3
million of cash receipts were collected of which $997,000 was recognized as
interest income – other on the consolidated statements of
operations.  No additional cash has been collected since March 31,
2008.
 14
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2008
 (Unaudited)
 NOTE
5 – LOANS HELD FOR INVESTMENT
 
 The following is a summary of loans (in
thousands):
 Loan
      Description
                
                Principal
                
                
                Unamortized
                  (Discount)
                    Premium
                
                
                Amortized
                  Cost(1)June 30,
      2008:Bank
      loans
                
                $
                950,826
                
                
                $
                (3,909
                )
                
                $
                946,917Commercial
      real estate loans:Whole
      loans
                
                
                573,858
                
                
                
                (2,696
                )
                
                
                571,162B
      notes
                
                
                89,246
                
                
                
                91
                
                
                
                89,337Mezzanine
      loans
                
                
                215,889
                
                
                
                (4,521
                )
                
                
                211,368Subtotal commercial real
      estate loans
                
                
                878,993
                
                
                
                (7,126
                )
                
                
                871,867Loans
      before
      allowances
                
                
                1,829,819
                
                
                
                (11,035
                )
                
                
                1,818,784Allowance
      for loan
      loss
                
                
                (20,280
                )
                
                
                −
                
                
                
                (20,280
                )Total loans, net of
      allowances
                
                $
                1,809,539
                
                
                $
                (11,035
                )
                
                $
                1,798,504December 31,
      2007:Bank
      loans
                
                $
                931,107
                
                
                $
                (6
                )
                
                $
                931,101Commercial
      real estate loans:Whole
      loans
                
                
                532,277
                
                
                
                (3,559
                )
                
                
                528,718B
      notes
                
                
                89,448
                
                
                
                129
                
                
                
                89,577Mezzanine
      loans
                
                
                227,597
                
                
                
                (4,435
                )
                
                
                223,162Subtotal commercial real
      estate loans
                
                
                849,322
                
                
                
                (7,865
                )
                
                
                841,457Loans
      before
      allowances
                
                
                1,780,429
                
                
                
                (7,871
                )
                
                
                1,772,558Allowance
      for loan
      loss
                
                
                (5,919
                )
                
                
                −
                
                
                
                (5,919
                )Total loans, net of
      allowances
                
                $
                1,774,510
                
                
                $
                (7,871
                )
                
                $
                1,766,639
 
 (1)
              Substantially
      all loans are pledged as collateral under various borrowings at June 30,
      2008 and December 31, 2007.
 
 As of June 30, 2008, approximately
40.7% and 10.5% of the Company’s commercial real estate loan portfolio was
concentrated in commercial real estate loans located in California and New York,
respectively.  As of June 30, 2008, approximately 10.8% of the
Company’s bank loan portfolio was concentrated in the collective industry
grouping of healthcare, education and childcare.
 
 At June 30, 2008, the Company’s bank
loan portfolio consisted of $941.5 million (net of allowance of $5.4 million) of
floating rate loans, which bear interest ranging between the London Interbank
Offered Rate (“LIBOR”) plus 1.38% and LIBOR plus 9.50% with maturity dates
ranging from March 2009 to August 2022.
  At December 31, 2007, the Company’s
bank loan portfolio consisted of $928.3 million (net of allowance of $2.8
million) of floating rate loans, which bore interest ranging between LIBOR plus
1.38% and LIBOR plus 7.50% with maturity dates ranging from July 2008 to August
2022.
  15
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2008
 (Unaudited)
 
 NOTE
5 – LOANS HELD FOR INVESTMENT− (Continued)
 
 The following is a summary of the
Company’s commercial real estate loans (in thousands):
 
 Description
              
              Quantity
              
              
              Amortized
      Cost
              
              Contracted
                Interest
      Rates
              Range
      of
                  Maturity
      DatesJune 30,
      2008:Whole
      loans, floating rate
              
              
              30
              
              
              $
              473,493
              
              LIBOR
      plus 1.50% to
                LIBOR
      plus 4.40%
              August
      2008 to
                July
      2010Whole
      loans, fixed rate
              
              
              7
              
              
              
              97,669
              
              6.98%
      to 8.57%
              May
      2009 to
                August
      2012B
      notes, floating rate
              
              
              3
              
              
              
              33,545
              
              LIBOR
      plus 2.50% to
                LIBOR
      plus 3.01%
              October
      2008 to
                July
      2009B
      notes, fixed rate
              
              
              3
              
              
              
              55,792
              
              7.00%
      to 8.68%
              July
      2011 to
                July
      2016Mezzanine
      loans, floating rate
              
              
              10
              
              
              
              130,132
              
              LIBOR
      plus 2.15% to
                LIBOR
      plus 3.45%
              August
      2008 to
                May
      2009Mezzanine
      loans, fixed rate
              
              
              7
              
              
              
              81,236
              
              5.78%
      to 11.00%
              November
      2009 to
                September
      2016Total
              
              
              60
              
              
              $
              871,867December 31,
      2007:Whole
      loans, floating rate
              
              
              28
              
              
              $
              430,776
              
              LIBOR
      plus 1.50% to
                LIBOR
      plus 4.25%
              May
      2008 to
                July
      2010Whole
      loans, fixed rates
              
              
              7
              
              
              
              97,942
              
              6.98%
      to 8.57%
              May
      2009 to
                August
      2012B
      notes, floating rate
              
              
              3
              
              
              
              33,570
              
              LIBOR
      plus 2.50% to
                LIBOR
      plus 3.01%
              March
      2008 to
                October
      2008B
      notes, fixed rate
              
              
              3
              
              
              
              56,007
              
              7.00%
      to 8.68%
              July
      2011 to
                July
      2016Mezzanine
      loans, floating rate
              
              
              11
              
              
              
              141,894
              
              LIBOR
      plus 2.15% to
                LIBOR
      plus 3.45%
              February
      2008 to
                May
      2009Mezzanine
      loans, fixed rate
              
              
              7
              
              
              
              81,268
              
              5.78%
      to 11.00%
              November
      2009 to
                September
      2016Total
              
              
              59
              
              
              $
              841,457
 
  16
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2008
 (Unaudited)
 
 NOTE
5 – LOANS HELD FOR INVESTMENT− (Continued)
 
 As of June 30, 2008, the Company had
recorded a provision for loan loss of $20.3 million consisting of a $5.4 million
provision on the Company’s bank loan portfolio and a $14.9 million provision on
the Company’s commercial real estate portfolio as a result of the Company having
two bank loan issuers and one commercial real estate loan that were deemed
impaired as well as the establishment of a general reserve for these
portfolios.
 
 As of December 31, 2007, the Company
had recorded a provision for loan loss of $5.9 million consisting of a $2.7
million provision on the Company’s bank loan portfolio and a $3.2 million
provision on the Company’s commercial real estate portfolio as a result of the
Company having two bank loans and one commercial real estate loan that were
deemed impaired.
 
 The Company has one mezzanine loan,
with a book value of $11.6 million secured by 100% of the equity interests in
two enclosed regional malls.  RCC had been working with the borrower
and special servicer toward a resolution as the mezzanine loan was in default
since February 2008.  However, during the quarter ended June 30, 2008,
the borrower on the mezzanine loan defaulted on the more senior first mortgage
position.  This event triggered the reevaluation of our provision for
loan loss and the Company determined that a full reserve of the remaining book
value balance of $11.6 million was necessary.  If in the future, the
Company is able to recover any value from this loan, the amount would be
credited directly to income in that period.
 
 NOTE
6 –DIRECT FINANCING LEASES AND NOTES
 
 The Company’s direct financing leases
and notes had weighted average initial lease and note terms of 79 months and 72
months as of June 30, 2008 and December 31, 2007, respectively.  The
interest rates on notes receivable range from 6.5% to 14.7% and from 6.8% to
13.4% as of June 30, 2008 and December 31, 2007,
respectively.  Investments in direct financing leases and notes, net
of unearned income, were as follows (in thousands):
 
 June
      30,
              
              
              December
      31,2008
              
              
              2007Direct
      financing leases,
      net
              
              $
              25,542
              
              
              $
              28,880Notes
      receivable
              
              
              66,662
              
              
              
              66,150Subtotal
              
              
              92,204
              
              
              
              95,030Allowance
      for
      lease  losses
              
              
              (100
              )
              
              
              −Total
              
              $
              92,104
              
              
              $
              95,030
 
 The components of net investment in
direct financing leases are as follows (in thousands):
 
 June
      30,
              
              
              December
      31,2008
              
              
              2007Total
      future minimum lease
      payments
              
              $
              29,753
              
              
              $
              34,009Unguaranteed
      residual
              
              
              21
              
              
              
              21Unearned
      income
              
              
              (4,232
              )
              
              
              (5,150
              )Total
              
              $
              25,542
              
              
              $
              28,880
 
 At June 30, 2008, the Company had five
leases that were sufficiently delinquent with respect to scheduled payments of
interest to require a provision for lease losses.  As a result, the
Company had recorded an allowance for lease losses of $393,000 and written the
leases off.  The Company also recorded an additional allowance of
$100,000 during the three months ended June 30, 2008  At December 31,
2007, the Company had three leases that were sufficiently delinquent with
respect to scheduled payments of interest to require a provision for lease
losses.  As a result, the Company had recorded an allowance for lease
losses of $293,000.
  17
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2008
 (Unaudited)
 
 NOTE
7 – BORROWINGS
 
 The Company has historically
financed the acquisition of its investments, including securities
available-for-sale, loans and equipment leases and notes, primarily through the
use of secured and unsecured borrowings in the form of CDOs, repurchase
agreements, a secured term facility, warehouse facilities, trust preferred
securities issuances and other secured and unsecured
borrowings.  Certain information with respect to the Company’s
borrowings at June 30, 2008 and December 31, 2007 is summarized in the following
table (dollars in thousands):
 Outstanding
      Borrowings
              
              
              Weighted
      Average Borrowing Rate
              
              Weighted
      Average
                  Remaining
      Maturity
              
              Value
      of CollateralJune 30,
      2008:Repurchase
      Agreements (1)
              
              $
              68,907
              
              
              
              3.87%
              
              18.7
      days
              
              $
              133,977RREF
      CDO 2006-1 Senior Notes (2)
              
              
              260,846
              
              
              
              3.36%
              
              38.1
      years
              
              
              319,591RREF
      CDO 2007-1 Senior Notes (3)
              
              
              359,575
              
              
              
              3.24%
              
              38.3
      years
              
              
              462,677Apidos
      CDO I Senior Notes (4)
              
              
              318,173
              
              
              
              3.42%
              
              9.1
      years
              
              
              301,404Apidos
      CDO III Senior Notes (5)
              
              
              259,408
              
              
              
              3.24%
              
              12.0
      years
              
              
              248,864Apidos
      Cinco CDO Senior Notes (6)
              
              
              317,958
              
              
              
              3.18%
              
              11.9
      years
              
              
              307,006Secured
      Term
      Facility
              
              
              85,829
              
              
              
              3.84%
              
              1.8
      years
              
              
              92,104Unsecured
      Junior Subordinated Debentures (7)
              
              
              51,548
              
              
              
              6.75%
              
              28.2 years
              
              
              −Total
              
              $
              1,722,244
              
              
              
              3.44%
              
              20.4 years
              
              $
              1,865,623December 31,
      2007:Repurchase
      Agreements (1)
              
              $
              116,423
              
              
              
              6.33%
              
              18.5
      days
              
              $
              190,914RREF
      CDO 2006-1 Senior Notes (2)
              
              
              260,510
              
              
              
              5.69%
              
              38.6
      years
              
              
              282,849RREF
      CDO 2007-1 Senior Notes (3)
              
              
              345,986
              
              
              
              5.49%
              
              38.8
      years
              
              
              444,715Apidos
      CDO I Senior Notes (4)
              
              
              317,882
              
              
              
              5.47%
              
              9.6
      years
              
              
              309,495Apidos
      CDO III Senior Notes (5)
              
              
              259,178
              
              
              
              5.59%
              
              12.5
      years
              
              
              253,427Apidos
      Cinco CDO Senior Notes (6)
              
              
              317,703
              
              
              
              5.38%
              
              12.4
      years
              
              
              311,813Secured
      Term
      Facility
              
              
              91,739
              
              
              
              6.55%
              
              2.3
      years
              
              
              95,030Unsecured
      Junior Subordinated Debentures (7)
              
              
              51,548
              
              
              
              8.86%
              
              28.7 years
              
              
              −Total
              
              $
              1,760,969
              
              
              
              5.72%
              
              20.1 years
              
              $
              1,888,243
 (1)
              At
      June 30, 2008, collateral consisted of available-for-sale securities with
      a fair value of $21.3 million and loans of $112.7 million.  At
      December 31, 2007, collateral consisted of available-for-sale securities
      with a fair value of $34.2 million and loans of $156.7
      million.
  (2)
              Amount
      represents principal outstanding of $265.5 million less unamortized
      issuance costs of $4.7 million and $5.0 million as of June 30, 2008 and
      December 31, 2007, respectively.  This CDO transaction closed in
      August 2006.
  (3)
              Amount
      represents principal outstanding of $365.8 million less unamortized
      issuance costs of $6.3 million as of June 30, 2008 and principal
      outstanding of $352.7 million less unamortized issuance costs of $6.7
      million as of December 31, 2007.  This CDO transaction closed in
      June 2007.
  (4)
              Amount
      represents principal outstanding of $321.5 million less unamortized
      issuance costs of $3.3 million as of June 30, 2008 and $3.6 million as of
      December 31, 2007.  This CDO transaction closed in August
      2005.
  (5)
              Amount
      represents principal outstanding of $262.5 million less unamortized
      issuance costs of $3.1 million as of June 30, 2008 and $3.3 million as of
      December 31, 2007.  This CDO transaction closed in May
      2006.
  (6)
              Amount
      represents principal outstanding of $322.0 million less unamortized
      issuance costs of $4.0 million as of June 30, 2008 and $4.3 million as of
      December 31, 2007.  This CDO transaction closed in May
      2007.
  (7)
              Amount
      represents junior subordinated debentures issued to Resource Capital Trust
      I and RCC Trust II in May 2006 and September 2006,
      respectively.
  18
  RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2008
 (Unaudited)
 
 NOTE
7 – BORROWINGS − (Continued)
  
 The Company had repurchase agreements
with the following counterparties at the dates indicated (dollars in
thousands):
 
 Amount
      at
                  Risk
      (1)
              
              
              Weighted
      Average Maturity in Days
              
              
              Weighted
      Average Interest RateJune 30,
      2008:Natixis
      Real Estate Capital,
      Inc.
              
              $
              49,015
              
              
              
              18
              
              
              
              3.86%Credit
      Suisse Securities (USA)
      LLC
              
              $
              16,633
              
              
              
              28
              
              
              
              4.00%December 31,
      2007:Natixis
      Real Estate Capital,
      Inc.
              
              $
              58,155
              
              
              
              18
              
              
              
              6.42%Credit
      Suisse Securities (USA)
      LLC
              
              $
              15,626
              
              
              
              25
              
              
              
              5.91%J.P.
      Morgan Securities,
      Inc.
              
              $
              886
              
              
              
              9
              
              
              
              5.63%Bear,
      Stearns International
      Limited
              
              $
              1,170
              
              
              
              15
              
              
              
              6.22%
 (1)
              Equal
      to the estimated fair value of securities or loans sold, plus accrued
      interest income, minus the sum of repurchase agreement liabilities plus
      accrued interest expense.
 
 Repurchase
and Credit Facilities
 
 In April
2007, the Company’s indirect wholly-owned subsidiary, RCC Real Estate SPE 3,
LLC, (“RCC Real Estate SPE 3”) entered into a master repurchase agreement with
Natixis Real Estate Capital, Inc. to be used as a warehouse facility to finance
the purchase of commercial real estate loans and commercial mortgage-backed
securities.  The maximum amount of the Company’s borrowing under the
repurchase agreement is $150.0 million.  The financing provided by the
agreement matures April 18, 2010 subject to a one-year extension at the option
of RCC Real Estate SPE 3 and subject further to the right of RCC Real Estate SPE
3 to repurchase the assets held in the facility earlier.  The Company
paid a facility fee of 0.75% of the maximum facility amount, or $1.2 million, at
closing.  In addition, once the borrowings exceed a weighted average
undrawn balance of $75.0 million for the prior 90 day period, the Company will
be required to pay a Non-Usage Fee on the unused portion equal to the product of
(i) 0.15% per annum multiplied by (ii) the weighted average undrawn balance
during the prior 90 day period.  Each repurchase transaction specifies
its own terms, such as identification of the assets subject to the transaction,
sale price, repurchase price, rate and term.  These are one-month
contracts.  The repurchase agreement is with recourse only to the
assets financed, subject to standardized exceptions relating to breaches of
representations, fraud and similar matters.  The Company has
guaranteed RCC Real Estate SPE 3’s performance of its obligations under the
repurchase agreement.  At June 30, 2008, RCC Real Estate SPE 3 had
borrowed $64.3 million.  At June 30, 2008, borrowings under the
repurchase agreement were secured by commercial real estate loans with an
estimated fair value of $112.7 million and had a weighted average interest rate
of one-month LIBOR plus 1.39%, which was 3.86% at June 30, 2008.  At
December 31, 2007, RCC Real Estate SPE 3 had borrowed $96.7
million.  At December 31, 2007, borrowings under the repurchase
agreement were secured by commercial real estate loans with an estimated fair
value of $154.2 million and had a weighted average interest rate of one-month
LIBOR plus 1.39%, which was 6.42% at December 31, 2007.
 
 In March
2006, the Company entered into a secured term credit facility with Bayerische
Hypo – und Vereinsbank AG to finance the purchase of equipment leases and
notes.  The maximum amount of the Company’s borrowing under this
facility is $100.0 million.  Borrowings under this facility bear
interest at one of two rates, determined by asset class.
  19
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2008
 (Unaudited)
 
 NOTE
7 – BORROWINGS − (Continued)
 
 Repurchase
and Credit Facilities − (continued)
 
 The Company received a waiver for the
period ended December 31, 2007, which was effective through June 23, 2008, from
Bayerische Hypo- und Vereinsbank AG with respect to Resource America’s
non-compliance with the tangible net worth covenant.  Under the
covenant, Resource America was required to maintain a consolidated net worth
(stockholder’s equity) of at least $175.0 million plus 90% of the net proceeds
of any capital transactions, minus all amounts (not to exceed $50,000,000) paid
by Resource America to repurchase any outstanding shares of common or preferred
stock of Resource America, measured by each quarter end, as further described in
the agreement.  On June 23, 2008, the facility was amended to base the
net worth test on LEAF Financial Corporation (“LEAF”) and to change the measure
of net worth to not less than the sum of (i) $17,000,000, plus (ii) 50% of the
aggregate net income of LEAF for each fiscal quarter beginning with the fiscal
quarter ended June 30, 2008.  See Note 11 regarding the Company’s
relationship with LEAF.
 
 The Company paid $300,000 in commitment
fees during the year ended December 31, 2006.  Commitment fees are
being amortized into interest expense using the effective yield method over the
life of the facility in the consolidated statements of
operations.  The Company paid $11,000 and $18,000 for the three and
six months ended June 30, 2008, respectively, in unused line
fees.  Unused line fees are expensed immediately into interest expense
in the consolidated statements of operations.  As of June 30, 2008,
the Company had borrowed $85.8 million at a weighted average interest rate of
3.84%.  As of December 31, 2007, the Company had borrowed $91.7
million at a weighted average interest rate of 6.55%.  The facility
expires March 2010.
 
 In
December 2005, the Company entered into a $15.0 million unsecured revolving
credit facility with TD Bank, N.A. (successor by merger to Commerce Bank,
N.A.).  This facility was increased to $25.0 million in April
2006.  This facility was decreased to $10.0 million in April 2008 to
reflect more closely the actual borrowing base available to the Company under
the facility and to reduce fees payable on the amount available for borrowing
under the facility.  Outstanding borrowings bear interest at one of
two rates elected at the Company’s option; (i) the lender’s prime rate plus a
margin ranging from 0.50% to 1.50% based upon the Company’s leverage ratio; or
(ii) LIBOR plus a margin ranging from 1.50% to 2.50% based upon the Company’s
leverage ratio.  The facility expires in December 2008.  The
Company paid $13,000 and $37,000 in unused line fees as of June 30, 2008 and
December 31, 2007, respectively.  Commitment fees are being amortized
into interest expense using the effective yield method over the life of the
facility in the consolidated statements of operations.  Unused line
fees are expensed immediately into interest expense in the consolidated
statements of operations.  As of June 30, 2008 and December 31, 2007,
no borrowings were outstanding under this facility.
 
 In August 2005, the Company’s
subsidiary, RCC Real Estate, entered into a master repurchase agreement with
Bear, Stearns International Limited (“Bear Stearns”) to finance the purchase of
commercial real estate loans.  The maximum amount of the Company’s
borrowing under the repurchase agreement is $150.0 million.  Each
repurchase transaction specifies its own terms, such as identification of the
assets subject to the transaction, sales price, repurchase price, rate and
term.  These are one-month contracts.  The Company has
guaranteed RCC Real Estate’s obligations under the repurchase agreement to a
maximum of $150.0 million.  At June 30, 2008, the Company had repaid
all obligations under this facility.  At December 31, 2007, the
Company had borrowed $1.9 million, all of which was guaranteed, with a weighted
average interest rate of LIBOR plus 1.25%, which was 6.22% at December 31,
2007.
 
 In March 2005, the Company entered into
a master repurchase agreement with Credit Suisse Securities (USA) LLC to finance
the purchase of agency ABS-residential MBS (“RMBS”) securities.  In
December 2006, the Company began using this facility to finance the purchase of
commercial MBS (“CMBS”)-private placement and other securities.  Each
repurchase transaction specifies its own terms, such as identification of the
assets subject to the transaction, sales price, repurchase price, rate and
term.  These are one-month contracts.  At June 30, 2008, the
Company had borrowed $4.6 million with a weighted average interest rate of
4.00%.  At December 31, 2007, the Company had borrowed $14.6 million
with a weighted average interest rate of 5.91%.
 
 In March 2005, the Company entered into
a master repurchase agreement with J.P. Morgan Securities, Inc. to finance the
purchase of agency ABS-RMBS.  In August 2007, the Company began using
this facility to finance the purchase of CMBS-private placement.  Each
repurchase transaction specifies its own terms, such as identification of the
assets subject to the transaction, sales price, repurchase price, rate and
term.  These are one-month contracts.  At June 30, 2008, the
Company had repaid all obligations under this facility.  At December
31, 2007, the Company had borrowed $3.2 million with a weighted average interest
rate of 5.63%.
  20
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2008
 (Unaudited)
 
 NOTE
7 – BORROWINGS − (Continued)
 
 Collateralized
Debt Obligations
 
 Resource
Real Estate Funding CDO 2007-1
 
 In June 2007, the Company closed RREF
2007-1, a $500.0 million CDO transaction that provides financing for commercial
real estate loans and CMBS.  The investments held by RREF 2007-1
collateralize the debt it issued and, as a result, the investments are not
available to the Company, its creditors or stockholders.  RREF 2007-1
issued a total of $390.0 million of senior notes at par to unrelated
investors.  RCC Real Estate purchased 100% of the class H senior notes
(rated  BBB+:Fitch), class K senior notes (rated BBB-:Fitch), class L
senior notes (rated BB:Fitch) and class M senior notes (rated B: Fitch) for
$68.0 million.  In addition, Resource Real Estate Funding 2007-1 CDO
Investor, LLC, a subsidiary of RCC Real Estate, purchased a $41.3 million equity
interest representing 100% of the outstanding preference shares.  The
senior notes purchased by RCC Real Estate are subordinated in right of payment
to all other senior notes issued by RREF 2007-1 but are senior in right of
payment to the preference shares.  The equity interest is subordinated
in right of payment to all other securities issued by RREF 2007-1.
 
 The senior notes issued to investors by
RREF 2007-1 consist of the following classes: (i) $180.0 million of class A-1
notes bearing interest at one-month LIBOR plus 0.28%; (ii) $50.0 million of
available class A-1R notes ($32.1 million was funded as of June 30, 2008), which
allow the CDO to fund future funding obligations under the existing whole loan
participations held by RREF 2007-1 that have future funding commitments; the
undrawn balance of the class A-1R notes will accrue a commitment fee at a rate
per annum equal to 0.18%, the drawn balance will bear interest at one-month
LIBOR plus 0.32%; (iii) $57.5 million of class A-2 notes bearing interest at
one-month LIBOR plus 0.46%; (iv) $22.5 million of class B notes bearing interest
at one-month LIBOR plus 0.80%; (v) $7.0 million of class C notes bearing
interest at a fixed rate of 6.423%; (vi) $26.8 million of class D notes bearing
interest at one-month LIBOR plus 0.95%; (vii) $11.9 million of class E notes
bearing interest at one-month LIBOR plus 1.15%; (viii) $11.9 million of class F
notes bearing interest at one-month LIBOR plus 1.30%; (ix) $11.3 million of
class G notes bearing interest at one-month LIBOR plus 1.55%; (x) $11.3 million
of class H notes bearing interest at one-month LIBOR plus 2.30%; (xi) $11.3
million of class J notes bearing interest at one-month LIBOR plus 2.95%; (xii)
$10.0 million of class K notes bearing interest at one-month LIBOR plus 3.25%;
(xiii) $18.8 million of class L notes bearing interest at a fixed rate of 7.50%
and (xiv) $28.8 million of class M notes bearing interest at a fixed rate of
8.50%.  As a result of the Company’s ownership of 100% of the Class H,
K, L and M senior notes and $5.0 million of the Class J senior note, the notes
retained eliminate in consolidation.  All of the notes issued mature
in September 2046, although the Company has the right to call the notes anytime
after July 2017 until maturity.  The weighted average interest rate on
all notes issued to outside investors was 3.24% at June 30, 2008.
 
 During the six months ended June 30,
2008, the Company repurchased $5.0 million of the Class J notes in RREF 2007-1
at a price of 65.0% which resulted in a $1.75 million gain.  The
Company reported the gain as gain on the extinguishment of debt in its
consolidated statements of operations.
 
 Apidos
Cinco CDO
 
 In May 2007, the Company closed Apidos
Cinco CDO, a $350.0 million CDO transaction that provides financing for bank
loans.  The investments held by Apidos Cinco CDO collateralize the
debt it issued and, as a result, the investments are not available to the
Company, its creditors or stockholders.  Apidos Cinco CDO issued a
total of $322.0 million of senior notes at par to investors and RCC commercial
purchased a $28.0 million equity interest representing 100% of the outstanding
preference shares.  The equity interest is subordinated in right of
payment to all other securities issued by Apidos Cinco CDO.
 
 The senior notes issued to investors by
Apidos Cinco CDO consist of the following classes: (i) $37.5 million of class
A-1 notes bearing interest at LIBOR plus 0.24%; (ii) $200.0 million of class
A-2a notes bearing interest at LIBOR plus 0.23%; (iii) $22.5 million of class
A-2b notes bearing interest at LIBOR plus 0.32%; (iv) $19.0 million of class A-3
notes bearing interest at LIBOR plus 0.42%; (v) $18.0 million of class B notes
bearing interest at LIBOR plus 0.80%; (vi) $14.0 million of class C notes
bearing interest at LIBOR plus 2.25% and (vii) $11.0 million of class D notes
bearing interest at LIBOR plus 4.25%. All of the notes issued mature on May 14,
2020, although the Company has the right to call the notes anytime after May 14,
2011 until maturity.  The weighted average interest rate on all notes
was 3.18% at June 30, 2008.
  21
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2008
 (Unaudited)
 
 NOTE
7 – BORROWINGS − (Continued)
 
 Collateralized
Debt Obligations − (Continued)
 
 Resource
Real Estate Funding CDO 2006-1
 
 In August 2006, the Company closed RREF
2006-1, a $345.0 million CDO transaction that provides financing for commercial
real estate loans.  The investments held by RREF 2006-1 collateralize
the debt it issued and, as a result, the investments are not available to the
Company, its creditors or stockholders.  RREF 2006-1 issued a total of
$308.7 million of senior notes at par to investors of which RCC Real Estate
purchased 100% of the class J senior notes (rated BB: Fitch) and class K senior
notes (rated B:Fitch) for $43.1 million.  In addition, Resource Real
Estate Funding 2006-1 CDO Investor, LLC, a subsidiary of RCC Real Estate,
purchased a $36.3 million equity interest representing 100% of the outstanding
preference shares.  The senior notes purchased by RCC Real Estate are
subordinated in right of payment to all other senior notes issued by RREF 2006-1
but are senior in right of payment to the preference shares.  The
equity interest is subordinated in right of payment to all other securities
issued by RREF 2006-1.
 
 The senior notes issued to investors by
RREF 2006-1 consist of the following classes:  (i) $129.4 million of
class A-1 notes bearing interest at one-month LIBOR plus 0.32%; (ii) $17.4
million of class A-2 notes bearing interest at one-month LIBOR plus 0.35%; (iii)
$5.0 million of class A-2 notes bearing interest at a fixed rate of 5.842%; (iv)
$6.9 million of class B notes bearing interest at one-month LIBOR plus 0.40%;
(v) $20.7 million of class C notes bearing interest at one-month LIBOR plus
0.62%; (vi) $15.5 million of class D notes bearing interest at one-month LIBOR
plus 0.80%; (vii) $20.7 million of class E notes bearing interest at one-month
LIBOR plus 1.30%; (viii) $19.8 million of class F notes bearing interest at
one-month LIBOR plus 1.60%; (ix) $17.3 million of class G notes bearing interest
at one-month LIBOR plus 1.90%; (x) $12.9 million of class H notes bearing
interest at one-month LIBOR plus 3.75%, (xi) $14.7 million of Class J notes
bearing interest at a fixed rate of 6.00% and (xii) $28.4 million of Class K
notes bearing interest at a fixed rate of 6.00%.  As a result of the
Company’s ownership of the Class J and K senior notes, these notes eliminate in
consolidation.  All of the notes issued mature in August 2046,
although the Company has the right to call the notes anytime after August 2016
until maturity.  The weighted average interest rate on all notes
issued to outside investors was 3.36% at June 30, 2008.
 
 Apidos
CDO III
 
 In May
2006, the Company closed Apidos CDO III, a $285.5 million CDO transaction that
provides financing for bank loans.  The investments held by Apidos CDO
III collateralize the debt it issued and, as a result, the investments are not
available to the Company, its creditors or stockholders.  Apidos CDO
III issued a total of $262.5 million of senior notes at par to investors and RCC
Commercial purchased a $23.0 million equity interest representing 100% of the
outstanding preference shares.  The equity interest is subordinated in
right of payment to all other securities issued by Apidos CDO III.
 
 The
senior notes issued to investors by Apidos CDO III consist of the following
classes:  (i) $212.0 million of class A-1 notes bearing interest at
3-month LIBOR plus 0.26%; (ii) $19.0 million of class A-2 notes bearing interest
at 3-month LIBOR plus 0.45%; (iii) $15.0 million of class B notes bearing
interest at 3-month LIBOR plus 0.75%; (iv) $10.5 million of class C notes
bearing interest at 3-month LIBOR plus 1.75%; and (v) $6.0 million of class D
notes bearing interest at 3-month LIBOR plus 4.25%.  All of the notes
issued mature on June 12, 2020, although the Company has the right to call the
notes anytime after June 12, 2011 until maturity.  The weighted
average interest rate on all notes was 3.24% at June 30, 2008.
 
 Apidos
CDO I
 
 In August 2005, the Company closed
Apidos CDO I, a $350.0 million CDO transaction that provides financing for bank
loans.  The investments held by Apidos CDO I collateralize the debt it
issued and, as a result, the investments are not available to the Company, its
creditors or stockholders.  Apidos CDO I issued a total of $321.5
million of senior notes at par to investors and RCC Commercial purchased a $28.5
million equity interest representing 100% of the outstanding preference
shares.  The equity interest is subordinated in right of payment to
all other securities issued by Apidos CDO I.
 
 22
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2008
 (Unaudited)
 
 NOTE
7 – BORROWINGS − (Continued)
 
 Collateralized
Debt Obligations − (Continued)
 
 Apidos
CDO I − (Continued)
 
 The senior notes issued to investors by
Apidos CDO I consist of the following classes:  (i) $265.0 million of
class A-1 notes bearing interest at 3-month LIBOR plus 0.26%; (ii) $15.0 million
of class A-2 notes bearing interest at 3-month LIBOR plus 0.42%; (iii) $20.5
million of class B notes bearing interest at 3-month LIBOR plus 0.75%; (iv)
$13.0 million of class C notes bearing interest at 3-month LIBOR plus 1.85%; and
(v) $8.0 million of class D notes bearing interest at a fixed rate of
9.251%.  All of the notes issued mature on July 27, 2017, although the
Company has the right to call the notes anytime after July 27, 2010 until
maturity.  The weighted average interest rate on all notes was 3.42%
at June 30, 2008.
 
 Trust
Preferred Securities
 
 In May 2006 and September 2006, the
Company formed RCT I and RCT II, respectively, for the sole purpose of
issuing and selling capital securities representing preferred beneficial
interests in the trusts.  Although the Company owns 100% of the common
securities’ of RCT I and RCT II, RCT I and RCT II are not consolidated into the
Company’s consolidated financial statements because the Company is not deemed to
be the primary beneficiary of these entities in accordance with FIN
46-R.  In connection with the issuance and sale of the capital
securities, the Company issued junior subordinated debentures to RCT I and RCT
II of $25.8 million each, representing the Company’s maximum exposure to
loss.  The debt issuance costs associated with the junior subordinated
debentures for RCT I and RCT II at June 30, 2008 were $726,000 and $735,000,
respectively.  These costs, which are included in other assets, are
being amortized into interest expense using the effective yield method over a
ten year period and are recorded in the consolidated statements of
operations.
 
 The rights of holders of common
securities of RCT I and RCT II are subordinate to the rights of the holders of
capital securities only in the event of a default; otherwise, the common
securities’ economic and voting rights are pari passu with the capital
securities.  The capital and common securities of RCT I and RCT II are
subject to mandatory redemption upon the maturity or call of the junior
subordinated debentures held by each.  Unless earlier dissolved, RCT I
will dissolve on May 25, 2041 and RCT II will dissolve on September 29,
2041.  The junior subordinated debentures are the sole assets of RCT I
and RCT II, mature on June 30, 2036 and October 30, 2036, respectively, and may
be called at par by the Company any time after June 30, 2011 and October 30,
2011, respectively.  Interest is payable on the junior subordinated
debentures held by RCT I and RCT II quarterly at a floating rate equal to
three-month LIBOR plus 3.95% per annum.  The rates for RCT I and RCT
II, at June 30, 2008, were 6.65% and 6.85%, respectively.  The Company
records its investments in RCT I and RCT II’s common securities of $774,000 each
as investments in unconsolidated trusts and records dividend income upon
declaration by RCT I and RCT II.
 
 NOTE
8 – CAPITAL STOCK
 
 Under a share repurchase plan
authorized by the board of directors on July 26, 2007, the Company was
authorized to buy back up to 2.5 million outstanding shares.  As of
December 31, 2007, the Company had repurchased 263,000 shares at a weighted
average price, including commissions, of $10.54 per share.  No
additional shares were repurchased during the six months ended June 30,
2008.
 
 NOTE
9 – SHARE-BASED COMPENSATION
 
 The following table summarizes
restricted common stock transactions:
 
 Manager
              
              
              Non-Employee
      Directors
              
              
              Non-Employees
              
              
              TotalUnvested
      shares as of January 1, 2008
              
              
              113,332
              
              
              
              4,404
              
              
              
              463,757
              
              
              
              581,493Issued
              
              
              −
              
              
              
              17,261
              
              
              
              144,000
              
              
              
              161,261Vested
              
              
              (113,332
              )
              
              
              (4,404
              )
              
              
              (133,823
              )
              
              
              (251,559
              )Forfeited
              
              
              −
              
              
              
              −
              
              
              
              −
              
              
              
              −Unvested
      shares as of June 30, 2008
              
              
              −
              
              
              
              17,261
              
              
              
              473,934
              
              
              
              491,195
  23
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 June
30, 2008
 (Unaudited)
 
 NOTE
9 – SHARE-BASED COMPENSATION − (Continued)
 
 Pursuant to SFAS 123(R) and EITF 96-18,
the Company is required to value any unvested shares of restricted common stock
granted to the Manager and non-employees at the current market
price.  The estimated fair value of the unvested shares of restricted
stock granted during the six months ended June 30, 2008 and 2007, including
shares issued to the four non-employee directors, was $1.4 million and $4.1
million, respectively.
 
 On
January 14, 2008, the Company issued 144,000 shares of restricted common stock
under its 2007 Omnibus Equity Compensation Plan.  These restricted
shares will vest 33.3% on January 14, 2009.  The balance will vest
annually thereafter through January 14, 2011.
 
 On February 1, 2008 and March 8, 2008,
the Company granted 2,261 and 15,000 shares of restricted stock, respectively,
to the Company’s non-employee directors as part of their annual
compensation.  These shares will vest in full on the first anniversary
of the date of grant.
 
 The following table summarizes common
stock option transactions:
 
 Number
      of Options
              
              
              Weighted
      Average Exercise Price
              
              
              Weighted
      Average Remaining Contractual Term (in years)
              
              
              Aggregate
      Intrinsic Value (in thousands)Outstanding
      as of January 1, 2008
              
              
              640,166
              
              
              $
              14.99Granted
              
              
              −
              
              
              
              −Exercised
              
              
              −
              
              
              
              −Forfeited
              
              
              −
              
              
              
              −Outstanding
      as of June 30, 2008
              
              
              640,166
              
              
              $
              14.99
              
              
              
              7
              
              
              $
              91Exercisable
      at June 30, 2008
              
              
              339,166
              
              
              $
              14.99
              
              
              
              7
              
              
              $
              48
 
 The common stock options have a
remaining contractual term of seven years.  Upon exercise of options,
new shares are issued.
 
 The following table summarizes the
status of the Company’s unvested stock options as of June 30, 2008:
 
 Unvested
      Options
              
              Options
              
              
              Weighted
      Average Grant-Date Fair ValueUnvested
      at January 1, 2008
              
              
              205,722
              
              
              $
              14.97Granted
              
              
              −
              
              
              $
              −Vested
              
              
              (162,389
              )
              
              $
              14.98Forfeited
              
              
              −
              
              
              $
              −Unvested
      at June 30, 2008
              
              
              43,333
              
              
              $
              14.88
 
 The weighted average period over which
the Company expects to recognize the remaining expense on the unvested options
is less than one year.
 
 24
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 June
30, 2008
 (Unaudited)
 
 NOTE
9 – SHARED-BASED COMPENSATION − (Continued)
 
 The
following table summarizes the status of the Company’s vested stock options as
of June 30, 2008:
 
 Vested
      Options
              
              Number
      of Options
              
              
              Weighted
      Average Exercise Price
              
              Weighted
      Average Remaining Contractual Term (in years)
              Aggregate
      Intrinsic Value (in thousands)Vested
      as of January 1, 2008
              
              
              357,944
              
              
              $
              15.00Vested
              
              
              162,389
              
              
              
              14.98Exercised
              
              
              −
              
              
              
              −Forfeited
              
              
              −
              
              
              
              −Vested
      as of June 30, 2008
              
              
              520,333
              
              
              $
              15.00
              
              7
              $                  
      312
 
 The common stock option transactions
are valued using the Black-Scholes model using the following
assumptions:
 
 As
      of
                  June
      30, 2008
              
              
              As
      of
                  December
      31, 2007Expected
      life
              
              9
      years
              
              
              7
      yearsDiscount
      rate
              
              
              4.29%
              
              
              
              3.97%Volatility
              
              
              55.96%
              
              
              
              42.84%Dividend
      yield
              
              
              22.75%
              
              
              
              17.62%
 
 The fair value of each common stock
transaction for the period ended June 30, 2008 and for the year ended December
31, 2007, respectively, was $0.142 and $0.251.  For the three and six
months ended June 30, 2008 and 2007, the components of equity compensation
expense are as follows (in thousands):
 
 Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Options
      granted to Manager and non-employees
              
              $
              4
              
              
              $
              151
              
              
              $
              (54
              )
              
              $
              631Restricted
      shares granted to Manager andnon-employees
              
              
              509
              
              
              
              (33
              )
              
              
              626
              
              
              
              (44
              )Restricted
      shares granted to non-employeedirectors
              
              
              28
              
              
              
              19
              
              
              
              50
              
              
              
              36Total
      equity compensation expense
              
              $
              541
              
              
              $
              137
              
              
              $
              622
              
              
              $
              623
 
 During the three and six months ended
June 30, 2008, the Manager received 17,839 shares as compensation, valued at
$141,000, pursuant to the management agreement.  During the three and
six months ended June 30, 2007, the Manager received 11,349 and 21,309 shares,
respectively, as incentive compensation, valued at $186,000 and $358,000,
respectively, pursuant to the management agreement.  The incentive
management fee is paid one quarter in arrears.
 
 Apart from incentive compensation
payable under the management agreement, the Company had established no formal
criteria for equity awards as of June 30, 2008.  All awards are
discretionary in nature and subject to approval by the compensation committee of
the Company’s board of directors.
  25
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2008
 (Unaudited)
 
 NOTE
10 – EARNINGS PER SHARE
 
 The following table presents a
reconciliation of basic and diluted earnings per share for the periods presented
as follows (in thousands, except share and per share amounts):
 
 Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Basic:Net (loss) income
              
              $
              (5,257
              )
              
              $
              9,836
              
              
              $
              4,106
              
              
              $
              19,275Weighted average number of shares
      outstanding
              
              
              24,721,063
              
              
              
              24,704,471
              
              
              
              24,665,840
              
              
              
              24,569,694Basic net income per
      share
              
              $
              (0.21
              )
              
              $
              0.40
              
              
              $
              0.17
              
              
              $
              0.78Diluted:Net
    (loss) income
              
              $
              (5,257
              )
              
              $
              9,836
              
              
              $
              4,106
              
              
              $
              19,275Weighted average number of shares
      outstanding
              
              
              24,721,063
              
              
              
              24,704,471
              
              
              
              24,665,840
              
              
              
              24,569,694Additional shares due to assumed
      conversion ofdilutive
      instruments
              
              
              −
              
              
              
              239,691
              
              
              
              256,500
              
              
              
              321,992Adjusted weighted-average number
      of commonshares
      outstanding
              
              
              24,721,063
              
              
              
              24,944,162
              
              
              
              24,922,340
              
              
              
              24,891,686Diluted net (loss) income per
      share
              
              $
              (0.21
              )
              
              $
              0.39
              
              
              $
              0.16
              
              
              $
              0.77
 
 Potentially dilutive shares relating to
stock options to purchase 640,166 shares of common stock warrants to
purchase 1,192,697 shares of common stock and 485,245 shares of unvested
restricted stock are not included in the calculation of diluted net
(loss) income per share for the three and six months ended June 30, 2008
because the effect was anti-dilutive.
 
 NOTE
11 – RELATED PARTY TRANSACTIONS
 
 Relationship
with Resource Real Estate
 
 Resource Real Estate originates,
finances and manages the Company’s commercial real estate loan portfolio,
including A notes, B notes and mezzanine loans.  The Company
reimburses Resource Real Estate for loan origination costs associated with all
loans originated.  At December 31, 2007, the Company was indebted to
Resource Real Estate for $197,000 of loan origination costs.  The
Company was not indebted to Resource Real Estate for any such costs at June 30,
2008.  At December 31, 2007, Resource Real Estate was indebted to the
Company for deposits held in trust in connection with the Company’s commercial
real estate portfolio of approximately $90,000.  The Company was not
indebted to Resource Real Estate for any such deposits at June 30,
2008.
 
 Relationship
with LEAF
 
 LEAF, a majority-owned subsidiary of
RAI, originates and manages equipment leases and notes on the Company’s
behalf.  The Company purchases these leases and notes from LEAF at a
price equal to their book value plus a reimbursable origination cost not to
exceed 1% to compensate LEAF for its origination costs.  At June 30,
2008 and December 31, 2007, the Company acquired $14.3 million and $38.7
million, respectively, of equipment lease and note investments from LEAF,
including $141,000 and $387,000 million of origination cost reimbursements,
respectively.  In addition, the Company pays LEAF an annual servicing
fee, equal to 1% of the book value of managed assets, for servicing the
Company’s equipment leases and notes.  At June 30, 2008 and December
31, 2007, the Company was indebted to LEAF for servicing fees in connection with
the Company’s equipment finance portfolio of approximately $148,000 and
$133,000, respectively.  LEAF’s servicing fees for the three and six
months ended June 30, 2008 were $224,000 and $460,000, respectively, compared to
$204,000 and $413,000 for the three and six months ended June 30, 2007,
respectively.
 
 During the three and six months ended
June 30, 2008, the Company sold two leases back to LEAF at a price equal to
their book value.  The total proceeds received were $2.6
million.  During the three and six months ended June 30, 2007, the
Company sold one and three leases back to LEAF at a price equal to their book
value.  The total proceeds received were $600,000 and $1.8 million,
respectively.
  26
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2008
 (Unaudited)
 
 NOTE
11 – RELATED-PARTY TRANSACTIONS − (Continued)
 
 Relationship
with Resource America
 
 At June 30, 2008, RAI owned
1,980,339 shares, or 7.8%, of the Company’s outstanding common
stock.  In addition, RAI has 100,088 unexercised warrants and 2,166
options to purchase restricted stock.
 
 The
Company is managed by the Manager pursuant to a management agreement that
provides for both base and incentive management fees.  On June 30,
2008, the Company and the Manager entered into an amended and restated
management agreement that shall be in effect until March 31, 2009 and shall be
automatically renewed for a one-year term annually unless at least two-thirds of
the independent directors or a majority of the outstanding common shares agree
to not automatically renew.  Incentive compensation calculation was
revised as follows:  (i) twenty-five percent (25%) of the
dollar amount by which (A) the Company’s Adjusted Operating Earnings
(before Incentive Compensation but after the Base Management Fee) for such
quarter per Common Share (based on the weighted average number of Common Shares
outstanding for such quarter) exceeds (B) an amount equal to
(1) the weighted average of the price per share of the Common Shares in the
initial offering by the Company and the prices per share of the Common Shares in
any subsequent offerings by the Company, in each case at the time of issuance
thereof, multiplied by (2) the greater of (a) 2.00% and (b) 0.50%
plus one-fourth of the Ten Year Treasury Rate for such quarter, multiplied by
(ii) the weighted average number of Common Shares outstanding during such
quarter; provided, that the foregoing calculation of Incentive Compensation
shall be adjusted to exclude events pursuant to changes in GAAP or the
application of GAAP, as well as non-recurring or unusual transactions or events,
after discussion between the Manager and the Independent Directors and approval
by a majority of the Independent Directors in the case of non-recurring or
unusual transactions or events.  For the three and six months ended
June 30, 2008, the Manager earned base management fees of approximately $1.2
million and $2.3 million, respectively, and incentive management fees of
$564,000.  For the three and six months ended June 30, 2007, the
Manager earned base management fees of approximately $1.3 million and $2.6
million, respectively, and incentive management fees of $730,000 and $1.5
million, respectively.  The Company also reimbursed the Manager and
Resource America for various expenses incurred on behalf of the
Company.  For the three and six months ended June 30, 2008, the
Company reimbursed the Manager $82,000 and $183,000, respectively, for such
expenses.  For the three and six months ended June 30, 2007, the
Company reimbursed the Manager $63,000 and $293,000, respectively, for such
expenses.
 
 At June 30, 2008, the Company was
indebted to the Manager for base management fees of $785,000 and for the
reimbursement of expenses of $59,000.  At December 31, 2007, the
Company was indebted to the Manager for base management fees of $802,000 and for
reimbursement of expenses of $65,000.  These amounts are included in
accounts payable and other liabilities.
 
 As of
June 30, 2008 and December 31, 2007, the Company had executed six CDO
transactions.  These CDO transactions were structured for the Company
by the Manager but, under the management agreement, the Manager was not
separately compensated by the Company for these transactions.  In
addition, the Company may reimburse the Manager and Resource America for
expenses for employees of Resource America who perform legal, accounting, due
diligence and other services that outside professionals or consultants would
otherwise perform.
 
 Relationship
with Law Firm
 
 Until 1996, the Company’s Chairman,
Edward Cohen, was of counsel to Ledgewood, P.C., a law firm.  For the
three and six months ended June 30, 2008, the Company paid Ledgewood $36,000 and
$104,000, respectively, compared to $152,000 and $252,000 during the three and
six months ended June 30, 2007, respectively.  Mr. Cohen receives
certain debt service payments from Ledgewood related to the termination of his
affiliation with Ledgewood and its redemption of his interest.
 
 NOTE
12 – DISTRIBUTIONS
 
 In order to qualify as a REIT, the
Company must currently distribute at least 90% of its taxable
income.  In addition, the Company must distribute 100% of its taxable
income in order not to be subject to corporate federal income taxes on retained
income.  The Company anticipates it will distribute substantially all
of its taxable income to its stockholders.  Because taxable income
differs from cash flow from operations due to non-cash revenues or expenses
(such as depreciation), in certain circumstances, the Company may generate
operating cash flow in excess of its distributions or, alternatively, may be
required to borrow to make sufficient distribution payments.
  27
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2008
 (Unaudited)
 
 NOTE
12 – DISTRIBUTIONS − (Continued)
 
 On June 20, 2008, the Company declared
a quarterly distribution of $0.41 per share of common stock, $10.4 million in
the aggregate, which was paid on July 28, 2008 to stockholders of record as of
June 30, 2008.
 
 On March 11, 2008, the Company declared
quarterly distribution of $0.41 per share of common stock which was paid on
April 28, 2008 to stockholders of record as of March 31, 2008.
 
 NOTE
13 – FAIR VALUE OF FINANCIAL INSTRUMENTS
 
 Effective January 1, 2008, the Company
adopted the provisions of SFAS 157 which did not have a material effect on the
Company’s consolidated financial statements as the Company historically has
valued its investment securities available-for-sale and derivatives at fair
value.  SFAS 157 establishes a fair value hierarchy which requires an
entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The Company determines fair value
based on quoted prices when available or through the use of alternative
approaches, such as discounting the expected cash flows using market interest
rates commensurate with the credit quality and duration of the
investment.  SFAS 157’s hierarchy defines three levels of inputs that
may be used to measure fair value:
 
 Level 1 - Quoted prices in
active markets for identical assets and liabilities that the reporting entity
has the ability to access at the measurement date.
  Level 2 - Inputs other than
quoted prices included within Level 1 that are observable for the asset and
liability or can be corroborated with observable market data for substantially
the entire contractual term of the asset or liability.
 
 Level 3 - Unobservable inputs
that reflect the entity’s own assumptions about the assumptions that market
participants would use in the pricing of the asset or liability and are
consequently not based on market activity, but rather through particular
valuation techniques.
 
 The
determination of where an asset or liability falls in the hierarchy requires
significant judgment.  The Company evaluates its hierarchy disclosures
each quarter; and depending on various factors, it is possible that an asset or
liability may be classified differently from quarter to
quarter.  However, the Company expects that changes in classifications
between levels will be rare.
 
 Certain
assets and liabilities are measured at fair value on a recurring
basis.  The following is a discussion of these assets and liabilities
as well as the valuation techniques applied to each for fair value
measurement.  Investment securities available-for-sale are measured
with income valuation approaches and dealer quotes using the following types of
 inputs:
  ·
              CMBS
      with no secondary trading except for distressed sellers and markets
      reflecting forced liquidations are valued using an income approach and
      utilizing an appropriate current market yield, time value and estimated
      losses from default assumptions based on historical
    analysis.
  ·
              Other
      ABS are priced using consensus pricing and a dealer
  quote.
 
 Derivatives (Interest rate swap
contracts), both assets and liabilities, are valued by a third-party pricing
agent using an income approach and utilizing models that use as their primary
basis readily observable market parameters. This valuation process considers
factors including interest rate yield curves, time value, credit factors and
volatility factors.  Although we have determined that the majority of the
inputs used to value our derivatives fall within Level 2 of the fair value
hierarchy, the credit valuation adjustments associated with our derivatives
utilize Level 3 inputs, such as estimates of current credit spreads to
evaluate the likelihood of default by us and our
counterparties.  However, as of June 30, 2008, we have assessed the
significance of the impact of the credit valuation adjustments on the overall
valuation of its derivative positions and has determined that the credit
valuation adjustments are not significant to the overall valuation of our
derivatives.  As a result, we have determined that our derivative
valuations in otheir entirety are classified in Level 2 of the fair value
hierarchy.
 
 28
 RESOURCE CAPITAL CORP. AND
SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2008
 (Unaudited)
 
 NOTE
13 – FAIR VALUE OF FINANCIAL INSTRUMENTS − (Continued)
 
 The following table presents
information about the Company’s assets (including derivatives that are presented
net) measured at fair value on a recurring basis as of June 30, 2008 and
indicates the fair value hierarchy of the valuation techniques utilized by the
Company to determine such fair value.
 
 Quoted
      Prices in Active Markets
                  Level
      1
              
              
              Significant
      Other Observable Inputs
                  Level
      2
              
              
              Significant
      Unobservable Inputs
                  Level
      3
              
              
              Balance
      as of
                  June
      30, 2008Securities
      available-for-sale
              
              $
              −
              
              
              $
              −
              
              
              $
              47,074
              
              
              $
              47,074Derivatives,
      net
              
              
              −
              
              
              
              (12,833
              )
              
              
              −
              
              
              
              (12,833
              )Total
              
              $
              −
              
              
              $
              (12,833
              )
              
              $
              47,074
              
              
              $
              34,241
 
 The
following table presents additional information about assets which are measured
at fair value on a recurring basis for which the Company has utilized Level 3
inputs to determine fair value.
 
 Fair
      Value Measurements Using Significant Unobservable Inputs
                (Level
      3)
                Securities
                Available-for-SaleBeginning
      balance
              
              $
              65,464Total
      gains or losses (realized/unrealized):Included
      in earnings
              
              
              (2,000
              )Purchases,
      sales, issuances, and settlements (net)
              
              
              (10,048
              )Included
      in other comprehensive income
              
              
              (6,342
              )Ending
      balance
              
              $
              47,074
 
 The
Company had $2.0 million of losses included in earnings due to the sale of one
asset during the six months ended June 30, 2008.  The loss is included
on consolidated statements of operations as net realized gains
(losses) on sales of investments.
 
 NOTE
14 – INTEREST RATE RISK AND DERIVATIVE INSTRUMENTS
 
 The primary market risk to the Company
is interest rate risk.  Interest rates are highly sensitive to many
factors, including governmental monetary and tax policies, domestic and
international economic and political considerations and other factors beyond the
Company’s control.  Changes in the general level of interest rates can
affect net interest income, which is the difference between the interest income
earned on interest-earning assets and the interest expense incurred in
connection with the interest-bearing liabilities, by affecting the spread
between the interest-earning assets and interest-bearing
liabilities.  Changes in the level of interest rates also can affect
the value of the Company’s interest-earning assets and the Company’s ability to
realize gains from the sale of these assets.  A decline in the value
of the Company’s interest-earning assets pledged as collateral for borrowings
under repurchase agreements could result in the counterparties demanding
additional collateral pledges or liquidation of some of the existing collateral
to reduce borrowing levels.
  29
 RESOURCE
CAPITAL CORP. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)
 JUNE
30, 2008
 (Unaudited)
 
 NOTE
14 – INTEREST RISK AND DERIVATIVE INSTRUMENTS − (Continued)
 
 The Company seeks to manage the extent
to which net income changes as a function of changes in interest rates by
matching adjustable-rate assets with variable-rate borrowings.  During
periods of changing interest rates, interest rate mismatches could negatively
impact the Company’s consolidated financial condition, consolidated results of
operations and consolidated cash flows.  In addition, the Company
mitigates the potential impact on net income of periodic and lifetime coupon
adjustment restrictions in its investment portfolio by entering into interest
rate hedging agreements such as interest rate caps and interest rate
swaps.
 
 At June 30, 2008, the Company had 31
interest rate swap contracts outstanding whereby the Company will pay an average
fixed rate of 5.14% and receive a variable rate equal to one-month
LIBOR.  The aggregate notional amount of these contracts was $334.8
million at June 30, 2008.
 
 At December 31, 2007, the Company had
30 interest rate swap contracts outstanding whereby the Company will pay an
average fixed rate of 5.36% and receive a variable rate equal to one-month
LIBOR.  The aggregate notional amount of these contracts was $347.9
million at December 31, 2007.
 
 The
estimated fair value of the Company’s interest rate swaps was ($12.8) million
and ($18.0) million as of June 30, 2008 and December 31, 2007,
respectively.  The Company had aggregate unrealized losses of $14.7
million and $15.7 million on the interest rate swap agreements as of June 30,
2008 and December 31, 2007, respectively, which is recorded in accumulated other
comprehensive loss.  In connection, with the August 2006 close of
Resource Real Estate Funding CDO 2006-1, the Company realized a swap termination
loss of $119,000, which is being amortized over the maturity of RREF CDO
2006-1.  The amortization is reflected in interest expense in the
Company’s consolidated statements of operations.  In connection with
the June 2007 close of RREF 2007-1, the Company realized a swap termination gain
of $2.6 million, which is being amortized over the maturity of RREF
2007-1.  The accretion is reflected in interest expense in the
Company’s consolidated statements of operations.  In connection with
the termination of a $53.6 million swap related to RREF 2006-1 during the six
months ended June 30, 2008, the Company realized a swap termination loss of $4.2
million, which is being amortized over the maturity of a new $45.0 million
swap.  The amortization is reflected in interest expense in the
Company’s consolidated statements of operations.
 
 Changes in interest rates may also have
an effect on the rate of mortgage principal prepayments and, as a result,
prepayments on MBS in the Company’s investment portfolio.  The Company
seeks to mitigate the effect of changes in the mortgage principal repayment rate
by balancing assets purchased at a premium with assets purchased at a
discount.  At June 30, 2008, the aggregate discount exceeded the
aggregate premium on the Company’s MBS by approximately $3.9
million.  At December 31, 2007, the aggregate discount exceeded the
aggregate premium on the Company’s MBS by approximately $4.1
million.
 
 NOTE
15 – SUBSEQUENT EVENTS
 
 On June 20, 2008, the Company declared
a quarterly distribution of $0.41 per share of common stock, $10.4 million in
the aggregate, which was paid on July 28, 2008 to stockholders of record as of
June 30, 2008.
  30
  ITEM
2.                   MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS  (Unaudited)
 
 This
report contains certain forward-looking statements. Forward-looking statements
relate to expectations, beliefs, projections, future plans and strategies,
anticipated events or trends and similar expressions concerning matters that are
not historical facts.  In some cases, you can identify forward-looking
statements by terms such as “anticipate,” “believe,” “could,” “estimate,”
“expects,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will” and
“would” or the negative of these terms or other comparable
terminology.  Such statements are subject to the risks and
uncertainties more particularly described in Item 1A, under the caption “Risk
Factors,” in our Annual Report on Form 10-K for period ended December 31,
2007.  These risks and uncertainties could cause actual results to
differ materially.  Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date
hereof.  We undertake no obligation to publicly release the results of
any revisions to forward-looking statements which we may make to reflect events
or circumstances after the date of this Form 10-Q or to reflect the occurrence
of unanticipated events, except as may be required under applicable
law.
 
 Overview
 
 We are a specialty finance company that
focuses primarily on commercial real estate and commercial
finance.  We are organized and conduct our operations to qualify as a
REIT under Subchapter M of the Internal Revenue Code of 1986, as
amended.  Our objective is to provide our stockholders with total
returns over time, including quarterly distributions and capital appreciation,
while seeking to manage the risks associated with our investment
strategy.  We invest in a combination of real estate-related assets
and, to a lesser extent, higher-yielding commercial finance
assets.  Future distributions and capital appreciation are not
guaranteed, however, and we have only a relatively short operating history and
REIT experience upon which you can base an assessment of our ability to achieve
our objectives.
 
 We generate our income primarily from
the spread between the revenues we receive from our assets and the cost to
finance the purchase of those assets and hedge interest rate
risks.  We generate revenues from the interest we earn on our whole
loans, A notes, B notes, mezzanine debt, commercial mortgage-backed securities,
or CMBS, bank loans, payments on equipment leases and notes and other
asset-backed securities, or ABS.  Historically, we have used a
substantial amount of leverage to enhance our returns and we have financed each
of our different asset classes with different degrees of
leverage.  The cost of borrowings to finance our investments comprises
a significant part of our expenses.  Our net income depends on our
ability to control these expenses relative to our revenue.  In our
bank loans, CMBS, equipment leases and notes and other ABS, we have used
warehouse facilities as a short-term financing source and collateralized debt
obligations, or CDOs, and, to a lesser extent, other term financing as a
long-term financing source.  In our commercial real estate loan
portfolio, we have used repurchase agreements as a short-term financing source,
and CDOs and have used, to a lesser extent, other term financing as a long-term
financing source.  Our other term financing has consisted of long-term
match-funded financing provided through long-term bank financing and
asset-backed financing programs, depending upon market conditions and credit
availability.
 
 Ongoing problems in real estate and credit markets continue to impact our
operations, particularly our ability to generate capital and financing to
execute our investment strategies.  These ongoing problems have affected
our earnings on a GAAP basis as we have increased our provision for loan and
lease losses to reflect this trend. We have also determined that the market
valuation for CMBS and Other ABS in our investment portfolio has been
temporarily impaired.  While we believe we have appropriately valued the
assets in our investment portfolio at June 30, 2008, we cannot assure you that
further impairment will not occur or that our assets will otherwise not be
adversely effected by market conditions.
  The events occurring in the credit
markets have impacted our financing and investing strategies.  The
market for securities issued by securitizations collateralized by assets similar
to those in our investment portfolio has contracted severely.  Since
our sponsorship in June 2007 of Resource Real Estate Funding CDO 2007-1, or RREF
2007-1, we have not sponsored any new securitizations and we expect our ability
to sponsor new securitizations will be limited for the foreseeable
future.  Short-term financing through warehouse lines of credit and
repurchase agreements has become less available and reliable as increasing
volatility in the valuation of assets similar to those we originate has
increased the risk of margin calls. To reduce our exposure to margin calls or
facility terminations, we have been paying down various repurchase agreement
borrowings that finance CMBS and other securities that we hold.  In
addition, we have received returns of funded margin calls related to our
interest rate derivatives and repurchase agreements of $3.3 million and
$295,000, respectively, during the six months ended June 30, 2008.  As
a result, our ability to originate and finance new investments has been
significantly diminished.
  31
  Beginning in the second half of 2007,
we have focused on managing our exposure to liquidity risks primarily by
reducing our exposure to possible margin calls under repurchase agreements,
seeking to conserve our liquidity.  We have continued to manage our
liquidity and originate new assets primarily through capital recycling as
payoffs occur and through existing capacities within our completed
securitizations.  To illustrate these efforts, within our commercial
real estate loan portfolio we had uninvested cash of $54.0 million at December
31, 2007 coupled with proceeds of $11.4 million from a commercial real estate
loan that paid off during the six months ended June 30, 2008 to originate a new
loan of $20.8 million and transfer $42.8 million of commercial real estate loans
into RREF CDO 2006-1.  In addition, during the six months ended June
30, 2008 we sold a CMBS security that provided proceeds of $8.0
million.  The proceeds from the transfer of commercial real estate
loans from our commercial real estate non-recourse term facility and the sale of
a CMBS security were used to repay related repurchase agreement debt of $47.3
million and the remaining $3.5 million became unrestricted cash during the
period.  As of June 30, 2008, our repurchase agreement exposure was
$49.0 million on commercial real estate loans and $16.6 million on commercial
real estate CDO notes, which was reduced from $75.8 million in the aggregate as
of December 31, 2007.
 We expect to continue to generate net
investment income from our current investment portfolio and generate dividends
for our shareholders. We continue to seek additional sources of financing,
including expanded bank financing, and use of co-investment, participations and
joint venture strategies that will enable us to originate investments and
generate fee income while preserving capital.
 
 We consolidate variable interest
entities, or VIEs, if we determine we are the primary beneficiary, in accordance
with Financial Accounting Standards Board, or FASB, Interpretation 46,
“Consolidation of Variable Interest Entities,” as revised, or FIN
46-R.  During the year ended December 31, 2007, we sold ten percent of
our equity investment in Ischus CDO II to an independent third party at market
value.  The sale was deemed to be a reconsideration event under FIN
46-R and we determined we were no longer the primary beneficiary based on a
discounted cash flow analysis of expected losses and expected residual
returns.  Therefore, we deconsolidated Ischus CDO II and recognized
income in our investment in Ischus CDO II using the cost recovery
method.  Our investment in Ischus CDO II was fully recovered during
the three months ended March 31, 2008.  For the six months ended June
30, 2008, we recognized $997,000 of interest income on this investment which we
record on our income statement as interest income – other.
 
 As of June 30, 2008, we had invested
73% of our portfolio in commercial real estate-related assets 25% in commercial
bank loans and 2% in direct financing leases and notes.  As of
December 31, 2007, we had invested 75% of our portfolio in commercial real
estate-related assets, 24% in commercial bank loans and 1% in direct financing
leases and notes.
 
 Critical
Accounting Policies and Estimates
 
 The following represents our most
critical accounting policies and estimates.  For a complete discussion
of our critical accounting policies and estimates, see the discussion our annual
report on Form 10-K for fiscal 2007 under “Management’s Discussion and Analysis
of Financial Condition and Results of Operations − Critical Accounting Policies
and Estimates.”
 
 Allowance
for Loan and Lease Losses
 
 We maintain an allowance for loan and
lease losses.  Loans and leases held for investment are first
individually evaluated for impairment, and then evaluated as a homogeneous pool
as loans with substantially similar characteristics for
impairment.  The reviews are performed at least
quarterly.
 
 We consolidate variable interest
entities, or VIEs, if we determine we are the primary beneficiary, in accordance
with Financial Accounting Standards Board, or FASB, Interpretation 46,
“Consolidation of Variable Interest Entities,” as revised, or FIN
46-R.  During the year ended December 31, 2007, we sold ten percent of
our equity investment in Ischus CDO II to an independent third party at market
value.  The sale was deemed to be a reconsideration event under FIN
46-R and we determined we were no longer the primary beneficiary based on a
discounted cash flow analysis of expected losses and expected residual
returns.  Therefore, we deconsolidated Ischus CDO II and recognized
income in our investment in Ischus CDO II using the cost recovery
method.  At the date of deconsolidation, the value of our investment
in Ischus CDO II was $722,000.  From the date of deconsolidation
through December 31, 2007, we received $465,000 of distributions leaving a
balance of $257,000 at December 31, 2007.  For the three months ended
March 31, 2008, $1.3 million of cash receipts were collected and we recognized
$997,000 of interest income on this investment which we record on our income
statement as interest income – other.  No additional cash has been
collected since March 31, 2008.
  The balance of impaired loans and
leases was $17.1 million at June 30, 2008.  The balance of impaired
loans and leases with a valuation allowance at June 30, 2008 was $16.9
million.  All of the loans deemed impaired at June 30, 2008 have an
associated valuation allowance.  The balance of impaired leases
without a specific valuation allowance was $771,000 at June 30,
2008.  The valuation allowance related to these specifically impaired
loans and leases was $15.5 million at June 30, 2008.  The average
balance of impaired loans and leases was $17.2 million during the six months
ended June 30, 2008.  We did not recognize any income on impaired
loans and leases during 2008.
 
 32
 The balance of impaired loans and
leases was $17.4 million at December 31, 2007.  The balance of
impaired loans and leases with a valuation allowance at December 31, 2007 was
$17.0 million.  All of the loans deemed impaired at December 31, 2007
have an associated valuation allowance.  The balance of impaired
leases without a specific valuation allowance was $359,000 at December 31,
2007.  The valuation allowance related to these specifically impaired
loans and leases was $2.3 million at December 31, 2007.  The average
balance of impaired loans and leases was $4.3 million during 2007.  We
did not recognize any income on impaired loans and leases during 2007 once each
individual loan or lease became impaired.
 
 An impaired loan or lease may remain on
accrual status during the period in which we are pursuing repayment of the loan
or lease; however, the loan or lease would be placed on non-accrual status at
such time as either (i) management believes that scheduled debt service payments
will not be met within the coming 12 months; (ii) the loan or lease becomes 90
days delinquent; (iii) management determines the borrower is incapable of, or
has ceased efforts toward, curing the cause of the impairment; or (iv) the net
realizable value of the loan’s underlying collateral approximates our carrying
value of such loan.  While on non-accrual status, we recognize
interest income only when an actual payment is received.
 
 The following tables show the changes
in the allowance for loan and lease losses (in thousands):
 
 Allowance
      for loan loss at January 1, 2008
              
              $
              5,918Provision for loan
      loss
              
              
              16,631Loans
    charged-off
              
              
              (2,269
              )Recoveries
              
              
              −Allowance
      for loan loss at June 30, 2008
              
              $
              20,280
 
 Allowance
      for lease loss at January 1, 2008
              
              $
              293Provision for lease
      loss
              
              
              198Leases
    charged-off
              
              
              (391
              )Recoveries
              
              
              −Allowance
      for lease loss at June 30, 2008
              
              $
              100
 
 Classifications
and Valuation of Investment Securities
 
 Effective January 1, 2008, we adopted
the provisions of Statement of Financial Accounting Standards No. 157, or SFAS,
“Fair Value Measurements.”  SFAS 157 did not have a material effect on
our consolidated financial statements with respect to investment securities
available-for-sale and derivatives as we historically have valued them at fair
value.  SFAS 157 establishes a fair value hierarchy which requires an
entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. We determined fair value based on
quoted prices when available or through the use of alternative approaches, such
as discounting the expected cash flows using market interest rates commensurate
with the credit quality and duration of the investment.  SFAS 157’s
hierarchy defines three levels of inputs that may be used to measure fair
value:
 
 Level 1 - Quoted prices in
active markets for identical assets and liabilities that the reporting entity
has the ability to access at the measurement date.
  Level 2 - Inputs other than
quoted prices included within Level 1 that are observable for the asset and
liability or can be corroborated with observable market data for substantially
the entire contractual term of the asset or liability.
 
 Level 3 - Unobservable inputs
that reflect the entity’s own assumptions about the assumptions that market
participants would use in the pricing of the asset or liability and are
consequently not based on market activity, but rather through particular
valuation techniques.
 
 The
determination of where an asset or liability falls in the hierarchy requires
significant judgment.  The Company evaluates its hierarchy disclosures
each quarter; and depending on various factors, it is possible that an asset or
liability may be classified differently from quarter to
quarter.  However, we expect that changes in classifications between
levels will be rare.
 
 Certain
assets and liabilities are measured at fair value on a recurring
basis.  The following is a discussion of these assets and liabilities
as well as the valuation techniques applied to each for fair value
measurement.  Investment securities available-for-sale are measured
with income valuation approaches and dealer quotes using the following types of
inputs:
 ·
              Commercial
      Mortgage Backed Securities with no secondary trading except for distressed
      sellers and markets reflecting forced liquidations are valued using an
      income approach and utilizing an appropriate current market yield, time
      value and estimated losses from default assumptions based on historical
      analysis.
  33
 ·
              Other ABS is priced using
      consensus pricing and a dealer
quote.
   The
following is a discussion of the valuation techniques applied to derivatives for
fair value measurement.
  ·
                Derivatives
      (Interest rate swap contracts), both assets and liabilities, are valued by
      a third-party pricing agent using an income approach and utilizing models
      that use as their primary basis readily observable market
      parameters.  This valuation process considers factors including
      interest rate yield curves, time value, credit factors and volatility
      factors.Although
      we have determined that the majority of the inputs used to value our
      derivatives fall within Level 2 of the fair value hierarchy, the
      credit valuation adjustments associated with our derivatives utilize
      Level 3 inputs, such as estimates of current credit spreads to
      evaluate the likelihood of default by us and our
      counterparties.  However, as of June 30, 2008, we have assessed
      the significance of the impact of the credit valuation adjustments on the
      overall valuation of its derivative positions and has determined that the
      credit valuation adjustments are not significant to the overall valuation
      of our derivatives.  As a result, we have determined that our
      derivative valuations in otheir entirety are classified in Level 2 of
      the fair value hierarchy.
 
 The following table presents
information about our assets (including derivatives that are presented net)
measured at fair value on a recurring basis as of June 30, 2008 and indicates
the fair value hierarchy of the valuation techniques utilized by us to determine
such fair value.
 
 Quoted
      Prices in Active Markets
                  Level
      1
              
              
              Significant
      Other Observable Inputs
                  Level
      2
              
              
              Significant
      Unobservable Inputs
                  Level
      3
              
              
              Balance
      as of
                  June
      30, 2008Securities
      available-for-sale
              
              $
              −
              
              
              $
              −
              
              
              $
              47,074
              
              
              $
              47,047Derivatives,
      net
              
              
              −
              
              
              
              (12,833
              )
              
              
              −
              
              
              
              (12,833
              )Total
              
              $
              −
              
              
              $
              (12,833
              )
              
              $
              47,074
              
              
              $
              34,241
 
 The
following table presents additional information about assets which we measure at
fair value on a recurring basis for which we used Level 3 inputs to determine
fair value.
 
 Fair
      Value Measurements Using Significant Unobservable Inputs
                (Level
      3)
                Securities
                Available-for-SaleBeginning
      balance
              
              $
              65,464Total
      gains or losses (realized/unrealized):Included
      in earnings
              
              
              (2,000
              )Purchases,
      sales, issuances, and settlements (net)
              
              
              (10,048
              )Included
      in other comprehensive income
              
              
              (6,342
              )Ending
      balance
              
              $
              47,074
 
 We had
$2.0 million of losses included in earnings due to the sale of one asset during
the six months ended June 30, 2008.  The loss is included on
consolidated statements of operations as net realized gains (losses) on sales of
investments.
 
 SFAS No. 115, “Accounting for Certain
Investments in Debt and Equity Securities,” requires us to classify our
investment portfolio as either trading investments, available-for-sale
investments or held-to-maturity investments.  Although we generally
plan to hold most of our investments to maturity, we may from time to time sell
any of our investments due to changes in market conditions or in accordance with
our investment strategy.  Accordingly, SFAS 115 requires us to
classify all of our investment securities as available-for-sale.  We
report all investments classified as available-for-sale at fair value, based on
market prices provided by dealers, with unrealized gains and losses reported as
a component of accumulated other comprehensive income (loss) in stockholders’
equity.
 
 We evaluate our available-for-sale
investments for other-than-temporary impairment charges in accordance with
Emerging Issues Task Force, or EITF, 03-1, “The Meaning of Other-Than-Temporary
Impairment and its Application to Certain Investments.”  SFAS 115 and
EITF 03-1 require an investor to determine when an investment is considered
impaired (i.e., decline in fair value below its amortized cost), evaluate
whether the impairment is other than temporary (i.e., the investment value will
not be recovered over its remaining life), and, if the impairment is other than
temporary, recognize an impairment loss equal to the difference between the
investment’s cost and its fair value.  The guidance also includes
accounting considerations subsequent to the recognition of other-than-temporary
impairment and requires certain disclosures about unrealized losses that have
not been recognized as other-than-temporary impairments.  EITF 03-1
also includes disclosure requirements for investments in an unrealized loss
position for which other-than-temporary impairments have not been
recognized.
 
 34
 While our available-for-sale
investments have continued to decline in fair value, we believe that these
declines continue to be temporary. In particular, with respect to CMBS, all
assets are current with respect to interest and principal payments. In addition,
we perform an on-going review of third-party reports and updated financial data
on the underlying property financial information to analyze current and
projected loan performance.  Our review concluded, that there exist no
credit characteristics that would indicate other-than-temporary impairments as
of June 30, 2008.
 
 We record investment securities
transactions on the trade date.  We record purchases of newly issued
securities when all significant uncertainties regarding the characteristics of
the securities are removed, generally shortly before settlement
date.  We determine realized gains and losses on investment securities
on the specific identification method.
 
 Repurchase
Agreements
 
 We have used repurchase agreements as a
financing source in acquiring our commercial real estate loans and CMBS-private
placement portfolios, and have used repurchase agreements as a short-term
financing source for our commercial real estate loan portfolio prior to the
execution of a CDO. Although structured as a sale and purchase obligation, a
repurchase agreement operates as a financing arrangement under which we pledge
our securities as collateral to secure a loan which is equal in value to a
specified percentage of the estimated fair value of the pledged collateral,
while we retain beneficial ownership of the pledged collateral.  We
carry these repurchase agreements at their contractual amounts, as specified in
the respective agreements.  We recognize interest expense on all
borrowings on an accrual basis.
 
 We have from time to time purchased
debt investments from a counterparty and subsequently financed the acquisition
of those debt investments through repurchase agreements with the same
counterparty.  We currently record the acquisition of the debt
investments as assets and the related repurchase agreements as financing
liabilities gross on the consolidated balance sheets.  Interest income
earned on the debt investments and interest expense incurred on the repurchase
obligations are reported gross on our consolidated income
statements.  However, under an interpretation of SFAS 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities” such transactions may not qualify as a purchase by
us.  We believe, and it is industry practice, that we account for
these transactions in an appropriate manner.  However, the result of
this technical interpretation would prevent us from presenting the debt
investments and repurchase agreements and the related interest income and
interest expense on a gross basis on our financial
statements.  Instead, we would present the net investment in these
transactions with the counterparty and a derivative with the corresponding
change in fair value of the derivative being recorded through
earnings.  The value of the derivative would reflect changes in the
value of the underlying debt investments and changes in the value of the
underlying credit provided by the counterparty.  There were no such
transactions as of June 30, 2008 and December 31, 2007.  In February
2008, FASB issued FASB Staff Position 140-3, or FSP FAS 140-3, “Accounting for
Transfers of Financial Assets and Repurchase Financing Transactions,” which
provides guidance on accounting for a transfer of a financial asset and
repurchase financing, which is effective for fiscal years beginning after
November 15, 2008.  We do not expect FSP FAS 140-3 will have a
material effect on our consolidated financial statements.
 
 Derivative
Instruments
 
 Our policies permit us to enter into
derivative contracts, including interest rate swaps and interest rate caps to
add stability to our interest expense and to manage our exposure to interest
rate movements or other identified risks.  We designated these
transactions as cash flow hedges.  We evaluate contracts or hedge
instruments at inception and at subsequent balance sheet dates to determine if
they qualify for hedge accounting under SFAS No. 133, “Accounting for Derivative
Instruments and Hedging Activities.”  SFAS 133 requires that we
recognize all derivatives on the balance sheet at fair value.  We
record changes in the fair value of the derivative in other comprehensive income
to the extent that it is effective.  Any ineffective portion of a
derivative’s change in fair value will be immediately recognized in
earnings.
 
 Results
of Operations − Three and Six
Months Ended June 30, 2008 as compared to Three
and Six Months Ended June 30, 2007
 
 Our net loss for the three months ended
June 30, 2008 was $5.3 million, or ($0.21) per weighted average common share
(basic and diluted) while our net income for the six months ended June 30, 2008
was $4.1 million or $0.17 per weighted average common share-basic ($0.16 per
weighted average common share-diluted) as compared to $9.8 million, or $0.40 per
weighted average common share-basic ($0.39 per weighted average common
share-diluted) and $19.3 million, or $0.78 per weighted average common
share-basic ($0.77 per weighted average common share-diluted) for the three and
six months ended June 30, 2007, respectively.
 
 The decrease in net income of $15.1
million for the three months ended June 30, 2008 from the comparative 2007
period is primarily attributable to provisions for loan and lease losses of
$15.7 million during the three months ended June 30, 2008.  The decrease in
net income for the six months ended June 30, 2008 from the comparative 2007
period is primarily attributable to provisions for loan and lease losses of
$16.8 million offset by a gain on the extinguishment of debt of $1.8 million
during the six months ended June 30, 2008.
 
 35
 Interest
Income
 
 The following table sets forth
information relating to our interest income recognized for the periods presented
(in thousands, except percentages):
  Three
      Months Ended
                June
      30, 2008
              
              
              Three
      Months Ended
                June
      30, 2007Weighted
      Average
              
              
              
              
              
              Weighted
      AverageInterest
      Income
              
              
              Yield
              
              
              Balance
              
              
              Interest
      Income
              
              
              Yield
              
              
              BalanceInterest income from
      loans:Bank loans
              
              $
              12,637
              
              
              
              5.27%
              
              
              $
              945,219
              
              
              $
              17,506
              
              
              
              7.38%
              
              
              $
              916,289Commercial real estate
      loans
              
              
              16,049
              
              
              
              7.43%
              
              
              $
              858,603
              
              
              
              15,601
              
              
              
              8.63%
              
              
              $
              723,679Total interest income fromloans
              
              
              28,686
              
              
              
              
              
              
              
              
              
              
              
              33,107Interest income from securities
      available-for-sale:ABS-RMBS
              
              
              −
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              6,272
              
              
              
              7.19%
              
              
              $
              347,671CMBS
              
              
              −
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              400
              
              
              
              5.67%
              
              
              $
              28,269Other ABS
              
              
              70
              
              
              
              4.67%
              
              
              $
              6,000
              
              
              
              404
              
              
              
              6.76%
              
              
              $
              23,191CMBS-private
      placement
              
              
              1,088
              
              
              
              5.58%
              
              
              $
              74,565
              
              
              
              832
              
              
              
              6.58%
              
              
              $
              50,353Total interest income from
      securities
      available-for-sale
              
              
              1,158
              
              
              
              
              
              
              
              
              
              
              
              7,908Leasing
              
              
              1,961
              
              
              
              8.68%
              
              
              $
              90,487
              
              
              
              1,901
              
              
              
              8.68%
              
              
              $
              86,772Interest income –
      other:Interest rate swap
      agreements
              
              
              −
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              55
              
              
              
              0.14%
              
              
              $
              158,802Temporary investmentin
      over-night repurchaseagreements
              
              
              453
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              855
              
              
              
              N/A
              
              
              
              N/ATotal interest income −
      other
              
              
              453
              
              
              
              
              
              
              
              
              
              
              
              910Total
      interest income
              
              $
              32,258
              
              
              
              
              
              
              
              
              
              
              $
              43,826
   36
 
 Six
      Months Ended
                  June
      30, 2008
                
                
                Six
      Months Ended
                  June
      30, 2007Weighted
      Average
                
                
                
                
                
                Weighted
      AverageInterest
      Income
                
                
                Yield
                
                
                Balance
                
                
                Interest
      Income
                
                
                Yield
                
                
                BalanceInterest income from
      loans:Bank loans
                
                $
                28,800
                
                
                
                6.02%
                
                
                $
                943,026
                
                
                $
                33,065
                
                
                
                7.42%
                
                
                $
                868,986Commercial real estate
      loans
                
                
                32,325
                
                
                
                7.54%
                
                
                $
                851,589
                
                
                
                30,323
                
                
                
                8.82%
                
                
                $
                692,939Total interest income fromloans
                
                
                61,125
                
                
                
                
                
                
                
                
                
                
                
                63,388Interest income from securities
      available-for-sale:ABS-RMBS
                
                
                −
                
                
                
                N/A
                
                
                
                N/A
                
                
                
                12,558
                
                
                
                7.21%
                
                
                $
                349,373CMBS
                
                
                −
                
                
                
                N/A
                
                
                
                N/A
                
                
                
                801
                
                
                
                5.67%
                
                
                $
                28,276Other ABS
                
                
                19
                
                
                
                0.66%
                
                
                $
                6,000
                
                
                
                758
                
                
                
                6.67%
                
                
                $
                21,858CMBS-private
      placement
                
                
                2,320
                
                
                
                5.79%
                
                
                $
                78,269
                
                
                
                1,187
                
                
                
                6.11%
                
                
                $
                38,178Total interest income from
      securities
      available-for-sale
                
                
                2,339
                
                
                
                
                
                
                
                
                
                
                
                15,304Leasing
                
                
                3,951
                
                
                
                8.68%
                
                
                $
                93,490
                
                
                
                3,811
                
                
                
                8.71%
                
                
                $
                87,039Interest income –
      other:Interest rate swap
      agreements
                
                
                −
                
                
                
                N/A
                
                
                
                N/A
                
                
                
                33
                
                
                
                0.05%
                
                
                $
                135,226Interest income – other (1)
                
                
                997
                
                
                
                N/A
                
                
                
                N/A
                
                
                
                −
                
                
                
                N/A
                
                
                
                N/ATemporary investmentin
      over-night repurchaseagreements
                
                
                829
                
                
                
                N/A
                
                
                
                N/A
                
                
                
                1,278
                
                
                
                N/A
                
                
                
                N/ATotal interest income −
      other
                
                
                1,826
                
                
                
                
                
                
                
                
                
                
                
                1,311Total
      interest income
                
                $
                69,241
                
                
                
                
                
                
                
                
                
                
                $
                83,814
 (1)
              Represents
      cash received on our 90% equity investment in Ischus CDO II in excess of
      our investment.  Income on this investment is recognized using
      the cost recovery method.
 
 Interest income decreased $11.5 million
(26%) and $14.6 million (17%) to $32.3 million and $69.2 million for the three
and six months ended June 30, 2008, respectively, from $43.8 million and $83.8
million for the three and six months ended June 30, 2007.  We
attribute this decrease to the following:
 
 Interest
Income from Loans
 
 Interest income from loans decreased
$4.4 million (13%) and $2.3 million (4%) to $28.7 million and $61.1 million for
the three and six months ended June 30, 2008, respectively, from $33.1 million
and $63.4 million for the three and six months ended June 30, 2007,
respectively.
 
 Bank loans generated interest income of
$12.6 million and $28.8 million for the three and six months ended June 30,
2008, respectively, as compared to $17.5 million and $33.1 million for the three
and six months ended June 30, 2007, respectively, a decrease of $4.9 million
(28%) and $4.3 million (13%), respectively.  These decreases resulted
primarily from a decrease in the weighted average rate earned by our bank loans
to 5.27% and 6.02% for the three and six months ended June 30, 2008,
respectively from 7.38% and 7.42% for the three and six months ended June 30,
2007, respectively, principally as a result of the decrease in LIBOR which is a
reference index for the rates payable on these loans.  The effects of
the decrease in the weighted average rate were partially offset by an increase
of $28.9 million and $74.0 million in the weighted average balance of assets to
$945.2 million and $943.0 million for the three and six months ended June 30,
2008, respectively, from $916.3 million and $869.0 million for the three and six
months ended June 30, 2007, respectively, as a result of the acquisition of
investments for Apidos Cinco CDO.
 
 37
 The decrease in bank loans was
partially offset by an increase in commercial real estate loans which produced
$16.0 million and $32.3 million of interest income for the three and six months
ended June 30, 2008, respectively, as compared to $15.6 million and $30.3
million for the three and six months ended June 30, 2007, respectively, an
increase of $448,000 (3%) and $2.0 million (7%), respectively.  This
increase resulted from an increase of $134.9 million and $158.7 million in the
weighted average balance of our commercial real estate loans to $858.6 million
and $851.6 million, respectively for the three and six months ended June 30,
2008, respectively, from $723.7 million and $692.9 million for the three and six
months ended June 30, 2007, respectively, as a result of the accumulation of
assets for our second commercial real estate, or CRE CDO, RREF 2007-1 which
closed in June 2007.  This increase was partially offset by the
following:
  ·
              a
      decrease in the weighted average rate to 7.17% and 7.31% for the three and
      six months ended June 30, 2008, respectively, from 8.09% and 8.28% for the
      three and six months ended June 30, 2007, respectively, primarily as a
      result of the decrease in LIBOR which is a reference index for the rates
      payable on a substantial portion of these loans;
  and
  ·
              the
      acceleration of loan origination fees of $495,000 for the six months ended
      June 30, 2007, respectively, as a result of the sale of loans. There was
      no such acceleration of loan origination fees for the three and six months
      ended June 30, 2008.
 
 Interest
Income from Securities Available-for-Sale
 
 Interest income from securities
available-for-sale decreased $6.8 million (85%) and $13.0 million (85%) to $1.2
million and $2.3 million for the three and six months ended June 30, 2008,
respectively, from $7.9 million and $15.3 million for the three and six months
ended June 30, 2007.
 
 Interest income from our asset-backed
securities-residential mortgage-backed securities, or ABS-RMBS, CMBS and other
ABS portfolio generated $6.3 million, $400,000 and $404,000, respectively for
the three months ended June 30, 2007 and $12.6 million, $801,000 and $758,000
for the six months ended June 30, 2008.  No interest income from
ABS-RMBS and CMBS was generated during the three and six months ended June 30,
2008.  The other ABS portfolio generated $70,000 and $19,000 for the
three and six months ended June 30, 2008.  The decrease is primarily a
result of the deconsolidation of Ischus CDO II  on November 13, 2007
following our sale of a 10% portion of our equity ownership, a reconsideration
event in accordance with FIN 46-R.
 
 This decrease was partially offset by
the contribution from CMBS-private placement of $1.1 million and $2.3 million of
interest income for the three and six months ended June 30, 2008, respectively,
as compared to $832,000 and $1.2 million for the three and six months ended June
30, 2007, respectively, an increase of $256,000 (31%) and $1.1 million (95%),
respectively.  This increase resulted primarily from the increase of
the weighted average balance of $24.2 million and $40.1 million on these
securities to $74.6 million and $78.3 million for the three and six months ended
June 30, 2008, respectively, from $50.4 million and $38.2 million for the three
and six months ended June 30, 2007, respectively.
 
 Interest
Income - Other
 
 Interest income-other decreased
$457,000 (50%) and increased $515,000 (39%) to $453,000 and $1.8 million for the
three and six months ended June 30, 2008, respectively, as compared to $910,000
and $1.3 million for the three and six months ended June 30, 2007,
respectively.  The decrease for the three months ended June 30, 2008
was due to lower rates earned on our over-night repurchase
agreements.  The increase for the six months ended June 30, 2008 was
from an increase in interest income from our equity method investment in Ischus
CDO II.  We use the cost recovery method to recognize the income on
this investment and recognized $997,000 during the three months ended March 31,
2008.  No such income was recognized for the three months ended June
30, 2008 or in the prior year.  This increase during the six months
ended June 30, 2008 was partially offset by a decrease in temporary investment
income due to lower rates earned on our over-night repurchase
agreements.
 
 38
 Interest
Expense
 
 The following tables set forth
information relating to our interest expense incurred for the periods presented
(in thousands, except percentages):
  Three
      Months Ended
                June
      30, 2008
              
              
              Three
      Months Ended
                June
      30, 2007Weighted
      Average
              
              
              
              
              
              Weighted
      AverageInterest
      Expense
              
              
              Yield
              
              
              Balance
              
              
              Interest
      Expense
              
              
              Yield
              
              
              BalanceBank
      loans
              
              $
              8,208
              
              
              
              3.58%
              
              
              $
              906,000
              
              
              $
              13,338
              
              
              
              5.90%
              
              
              $
              881,131Commercial
      real estate loans
              
              
              6,626
              
              
              
              3.78%
              
              
              $
              699,850
              
              
              
              8,050
              
              
              
              6.33%
              
              
              $
              496,132ABS-RMBS
      / CMBS / ABS
              
              
              −
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              5,665
              
              
              
              5.88%
              
              
              $
              376,000CMBS-private
      placement
              
              
              11
              
              
              
              5.52%
              
              
              $
              848
              
              
              
              494
              
              
              
              5.68%
              
              
              $
              34,554Leasing
              
              
              931
              
              
              
              4.25%
              
              
              $
              86,751
              
              
              
              1,401
              
              
              
              6.41%
              
              
              $
              83,894General
              
              
              3,148
              
              
              
              3.21%
              
              
              $
              384,385
              
              
              
              1,274
              
              
              
              9.51%
              
              
              $
              50,385Total interest expense
              
              $
              18,924
              
              
              
              
              
              
              
              
              
              
              $
              30,222
 
 Six
      Months Ended
                June
      30, 2008
              
              
              Six
      Months Ended
                June
      30, 2007Weighted
      Average
              
              
              
              
              
              Weighted
      AverageInterest
      Expense
              
              
              Yield
              
              
              Balance
              
              
              Interest
      Expense
              
              
              Yield
              
              
              BalanceBank
      loans
              
              $
              19,094
              
              
              
              4.17%
              
              
              $
              906,000
              
              
              $
              24,938
              
              
              
              5.97%
              
              
              $
              830,066Commercial
      real estate loans
              
              
              15,101
              
              
              
              4.26%
              
              
              $
              701,615
              
              
              
              14,594
              
              
              
              6.45%
              
              
              $
              451,079ABS-RMBS
      / CMBS / ABS
              
              
              −
              
              
              
              N/A
              
              
              
              N/A
              
              
              
              11,269
              
              
              
              5.96%
              
              
              $
              376,000CMBS-private
      placement
              
              
              88
              
              
              
              4.88%
              
              
              $
              3,570
              
              
              
              833
              
              
              
              5.54%
              
              
              $
              29,848Leasing
              
              
              2,215
              
              
              
              4.94%
              
              
              $
              89,649
              
              
              
              2,812
              
              
              
              6.50%
              
              
              $
              84,646General
              
              
              5,574
              
              
              
              2.79%
              
              
              $
              388,523
              
              
              
              2,543
              
              
              
              9.77%
              
              
              $
              50,244Total interest
      expense
              
              $
              42,072
              
              
              
              
              
              
              
              
              
              
              $
              56,989
 
 Interest expense decreased $11.3
million (37%) and $14.9 million (26%) to $18.9 million and $42.1 million for the
three and six months ended June 30, 2008, respectively, from $30.2 million and
$57.0 million for the three and six months ended June 30, 2007.  We
attribute this decrease to the following:
 
 Interest expense on bank loans was $8.2
million and $19.1 million for the three and six months ended June 30, 2008,
respectively, as compared to $13.3 million and $24.9 million for the three and
six months ended June 30, 2007, a decrease of $5.1 million (38%) and $5.8
million (23%), respectively.  This decrease resulted from a decrease
in the weighted average rate on the debt related to bank loans to 3.41% and
4.00% for the three and six months ended June 30, 2008, respectively, from 5.84%
and 5.85% for the three and six months ended June 30, 2007, respectively, on a
substantial portion of this debt due primarily to the decrease in
LIBOR.  This decrease was partially offset by our amortization of
$395,000 and $776,000 of deferred debt issuance costs related to the CDO
financings for the three and six months ended June 30, 2008, respectively, as
compared to $272,000 and $504,000 for the three and six months ended June 30,
2007.
 
 Interest expense on commercial real
estate loans which was $6.6 million and $15.1 million for the three and six
months ended June 30, 2008, respectively, decreased $1.4 million (18%) for the
three months ended June 30, 2008 and increased $507,000 (3%) for the six months
ended June 30, 2008 from $8.1 million and $14.6 million for the three and six
months ended June 30, 2007 due principally to the following:
  ·
              The
      increase in the weighted average balance of debt of $203.7 million and
      $250.5 million to $699.9 million and $701.6 million for the three and six
      months ended June 30, 2008, respectively, from $496.1 million and $451.1
      million for the three and six months ended June 30, 2007, respectively,
      primarily related to the accumulation of investments and the closing of
      our second CRE CDO, RREF 2007-1, which closed on June 26, 2007 and issued
      $348.9 million of debt.
  ·
              Our
      amortization of $453,000 and $800,000 of deferred debt issuance costs
      related to the CDO financings for the three and six months ended June 30,
      2008, respectively, as compared to $146,000 and $290,000 for the three and
      six months ended June 30, 2007,
respectively.
 
 39
 The
increase in the weighted average balance and the increase in issuance cost
amortization were offset by a decrease in the weighted average rate to 3.48% and
3.97% for the three and six months ended June 30, 2008, respectively, from 6.23%
and 6.24% for the three and six months ended June 30, 2007, respectively, on a
substantial portion of debt as a result of the decrease in LIBOR.
 
 ABS-RMBS, CMBS and other ABS, which we
refer to collectively as ABS, were pooled and financed by Ischus CDO
II.  Interest expense related to these obligations was $5.7 million
and $11.3 million for the three and six months ended June 30, 2007,
respectively.  There was no such interest expense for the three and
six months ended June 30, 2008 due to the deconsolidation of Ischus CDO II on
November 13, 2007 as a result of the sale of 10% of our equity ownership, a
reconsideration event in accordance with FIN 46-R.
 
 Interest expense on CMBS-private
placement was $11,000 and $88,000 for the three and six months ended June 30,
2008, respectively, as compared to $494,000 and $833,000 for the three and six
months ended June 30, 2007, respectively, a decrease of $483,000 (98%) and
$745,000 (89%) due to a majority of the assets being refinanced by CDO debt for
the three and six months ended June 30, 2008, respectively.  For the
three and six months ended June 30, 2007, most of the assets were held outside
of the CDOs.
 
 Interest expense on leasing activities
was $931,000 and $2.2 million for the three and six months ended June 30, 2008,
respectively, as compared to $1.4 million and $2.8 million for the three and six
months ended June 30, 2007, respectively, a decrease of $470,000 (34%) and
$597,000 (21%), respectively, resulting from the decrease in the commercial
paper index, which is a reference index for the rate payable on this
facility.
 
 The decrease in interest expense was
partially offset by the increase in general interest expense which incurred $3.1
million and $5.6 million of interest expense for the three and six months ended
June 30, 2008, respectively, as compared to $1.3 million and $2.5 million for
the three and six months ended June 30, 2007, respectively, an increase $1.9
million (147%) and $3.0 million (119%), respectively.  This increase
resulted primarily from an increase of $2.2 million and $3.5 million in expenses
on our interest rate derivatives that fix the rate we pay under these
agreements.  During the three and six months ended June 30, 2008, the
floating rate we paid exceeded the fixed rate we received due to the decrease in
LIBOR. The increase in derivative expense was partially offset by a decrease in
interest expense related to our unsecured junior subordinated debentures held by
unconsolidated trusts that issued trust preferred securities as a result of a
decrease in the LIBOR rate which is a reference index for the rates payable by
these debentures.
 
 Non-Investment
Expenses
 
 The following table sets forth
information relating to our expenses incurred for the periods presented (in
thousands):
 
 Three
      Months Ended
                June
      30,
              
              
              Six
      Months Ended
                June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Management
      fee – related party
              
              $
              1,171
              
              
              $
              2,027
              
              
              $
              2,909
              
              
              $
              4,059Equity
      compensation − related party
              
              
              541
              
              
              
              137
              
              
              
              622
              
              
              
              623Professional
      services
              
              
              664
              
              
              
              541
              
              
              
              1,456
              
              
              
              1,233Insurance
              
              
              170
              
              
              
              114
              
              
              
              298
              
              
              
              235General
      and administrative
              
              
              343
              
              
              
              324
              
              
              
              698
              
              
              
              736Income
      tax expense
              
              
              138
              
              
              
              26
              
              
              
              167
              
              
              
              171Total
              
              $
              3,027
              
              
              $
              3,169
              
              
              $
              6,150
              
              
              $
              7,057
 
 Management fee–related party decreased
$856,000 (42%) and $1.2 million (28%) to $1.2 million and $2.9 million for the
three and six months ended June 30, 2008, respectively, as compared to $2.0
million and $4.1 million for the three and six months ended June 30, 2007,
respectively.  These amounts represent compensation in the form of
base management fees and incentive management fees pursuant to our management
agreement.  The base management fees decreased by $125,000 (10%) and
$238,000 (9%) to $1.2 million and $2.3 million for the three and six months
ended June 30, 2008, respectively, as compared to $1.3 million and $2.6 million
for the three and six months ended June 30, 2007, respectively.  This
decrease was due to decreased equity, a component in the formula by which base
management fees are calculated, as a result of the buyback of 263,000 shares
during the third and fourth quarters of 2007 as well as asset impairment and
eventual deconsolidation of Ischus CDO II.  Incentive management fees
decreased by $730,000 (100%) and $912,000 (62%) to $0 and $564,000 for the
three and six months ended June 30, 2008 from $730,000 and $1.5 million in the
three and six months ended June 30, 2007, respectively.  The decrease
for the three and six months ended was due to the fact that no incentive was
paid as a result of the net loss for the three months ended June 30,
2008.  The decrease for the six months ended June 30, 2008 was also a
result of the decrease in our adjusted net income of $11.4 million, as defined
in the management agreement, during the three and six months ended June 30, 2008
as compared to the three and six months ended June 30, 2007 as well as an
increase in the number of weighted average common shares outstanding, a
component in the formula by which incentive management fees are calculated, for
the three months ended June 30, 2008 as compared to June 30, 2007.
 
 40
 Equity compensation–related party
increased $404,000 (295%) to $541,000 for the three months ended June 30, 2008
as compared to $137,000 for the three months ended June 30,
2007.  These expenses relate to the amortization of annual grants of
restricted common stock to our non-employee independent directors, and annual
and discretionary grants of restricted stock to several employees of Resource
America, Inc., or RAI, who provide investment management services to us through
our Manager.  The increase in expense was primarily the result of
several restricted stock grants during and subsequent to June
2007.  This was partially offset by our quarterly remeasurement of
unvested stock and options as a result of the decrease in our stock
price.
 
 Professional services increased
$123,000 (23%) and $223,000 (18%) to $664,000 and $1.5 million for the three and
six months ended June 30, 2008, respectively, as compared to $541,000 and $1.2
million for the three and six months ended June 30, 2007,
respectively.  These increases during the three and six months ended
June 30, 2008 were primarily due to a $74,000 and $125,000, respectively,
increase in legal fees related principally to compliance work
performed.
 
 Other
(Expenses) Revenues
 
 The following table sets forth
information relating to our other (expenses) revenues incurred for the periods
presented (in thousands):
 
 Three
      Months Ended
                June
      30,
              
              
              Six
      Months Ended
                June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      realized gains (losses) on salesof
      investments
              
              $
              102
              
              
              $
              152
              
              
              $
              (1,893
              )
              
              $
              222Asset
      impairments
              
              
              −
              
              
              
              (788
              )
              
              
              −
              
              
              
              (788
              )Other
      income
              
              
              26
              
              
              
              37
              
              
              
              59
              
              
              
              73Provision
      for loan and lease loss
              
              
              (15,692
              )
              
              
              −
              
              
              
              (16,829
              )
              
              
              −Gain
      on the extinguishment of debt
              
              
              −
              
              
              
              −
              
              
              
              1,750
              
              
              
              −Total
              
              $
              (15,564
              )
              
              $
              (599
              )
              
              $
              (16,913
              )
              
              $
              (493
              )
 
 Net
realized gains (losses) on investments decreased $50,000 (33%) and decreased
$2.1 million (953%) to a gain of $102,000 and a loss of $1.9 million for the
three and six months ended June 30, 2008, respectively, from gains of $152,000
and $222,000 for the three and six months ended June 30, 2007,
respectively.  The increase in realized losses during the six months
ended June 30, 2008 was primarily due to a loss of $2.0 million on the sale of
one of our CMBS – private placement positions.
 
 Asset
impairments were $788,000 for the three and six months ended June 30, 2007 and
consisted entirely of other-than-temporary impairment on assets in our ABS-RMBS
portfolio.  During the second quarter, we experienced illiquidity in
the sub-prime market and deteriorating delinquency characteristics of the
mortgages underlying our bonds.  These trends together with significant
rating agency actions supported the need to further reevaluate the level of
asset impairments in our ABS-RMBS portfolio.  The asset impairments
recorded reflect these worsening market conditions.  Due to the
deconsolidation of Ischus CDO II on November 13, 2007, as a result of the sale
of 10% of our equity ownership, a reconsideration event in accordance with FIN
46-R, there was no such impairment for the three and six months ended June 30,
2008.
 
 Our
provision for loan and lease losses was $15.7 million and $16.8 million for the
three and six months ended June 30, 2008, respectively.  It consisted
of $3.9 million and $4.6 million of provisions for loan loss on our bank loan
portfolio for the three and six months ended June 30, 2008, respectively, $11.6
million and $11.7 million of provisions for loan loss on our commercial real
estate portfolio for the three and six months ended June 30, 2008, respectively
and $198,000 of provision on our leasing portfolio for the three and six months
ended June 30, 2008.  There was no provision deemed necessary for the
three and six months ended June 30, 2007.  The principal reason for
the increase in the provision for loan and lease losses was due to reserves
recognized on three defaulted bank loans and fully reserving for one defaulted
CRE loan.  We also increased our general reserve due to deteriorating
credit market conditions.
 
 Gain on
the extinguishment of debt is due to the buyback of $5.0 million of debt issued
by RREF 2007-1 during the six months ended June 30, 2008.  The notes,
issued at par, were bought back as an investment by us at a price of 65%
resulting in a gain of $1.8 million.  The related deferred debt
issuance costs were immaterial.  There was no such transaction in the
six months ended June 30, 2007.
 
 41
 Income
Taxes
 
 We do not pay federal income tax on
income we distribute to our stockholders, subject to our compliance with REIT
qualification requirements.  However, Resource TRS, our domestic TRS,
is taxed as a regular subchapter C corporation under the provisions of the
Internal Revenue Code.  For the three and six months ended June 30,
2008, Resource TRS recognized a $138,000 and $167,000 provision for income
taxes, respectively.  For the three and six months ended June 30,
2007, Resource TRS recognized a $26,000 and $171,000 provision for income taxes,
respectively.
 
 42
 Financial
Condition
 
 Investment
Portfolio
 
 The table below summarizes the
amortized cost and net carrying amount of our investment portfolio as of June
30, 2008 and December 31, 2007, classified by interest rate type.  The
following table includes both (i) the amortized cost of our investment portfolio
and the related dollar price, which is computed by dividing amortized cost by
par amount, and (ii) the net carrying amountof our investment
portfolio and the related dollar price, which is computed by dividing the net
carrying amount by par amount (in thousands, except percentages):
 
 Amortized
      cost
              
              
              Dollar
      price
              
              
              Net
      carrying
                  amount
      (4)
              
              
              Dollar
      price
              
              
              Net
      carrying
                  amount
      less
                  amortized
      cost
              
              
              Dollar
      priceJune
      30, 2008Floating
      rateCMBS-private
      placement
              
              $
              39,212
              
              
              
              94.58%
              
              
              $
              26,773
              
              
              
              64.58%
              
              
              $
              (12,439
              )
              
              
              -30.00%Other
      ABS
              
              
              5,665
              
              
              
              94.42%
              
              
              
              300
              
              
              
              5.00%
              
              
              
              (5,365
              )
              
              
              -89.42%B
      notes (1)
              
              
              33,545
              
              
              
              100.03%
              
              
              
              33,462
              
              
              
              99.78%
              
              
              
              (83
              )
              
              
              -0.25%Mezzanine
      loans (1)
              
              
              130,132
              
              
              
              100.04%
              
              
              
              129,807
              
              
              
              99.79%
              
              
              
              (325
              )
              
              
              -0.25%Whole
      loans (1)
              
              
              473,493
              
              
              
              99.55%
              
              
              
              472,309
              
              
              
              99.31%
              
              
              
              (1,184
              )
              
              
              -0.24%Bank
      loans (2)
              
              
              946,917
              
              
              
              99.59%
              
              
              
              857,274
              
              
              
              90.16%
              
              
              
              (89,643
              )
              
              
              -9.43%Total floating
      rate
              
              $
              1,628,964
              
              
              
              99.48%
              
              
              $
              1,519,925
              
              
              
              92.82%
              
              
              $
              (109,039
              )
              
              
              -6.66%Fixed rateCMBS
      – private placement
              
              $
              31,114
              
              
              
              94.94%
              
              
              $
              20,001
              
              
              
              61.03%
              
              
              $
              (11,113
              )
              
              
              -33.91%B
      notes (1)
              
              
              55,792
              
              
              
              100.14%
              
              
              
              55,652
              
              
              
              99.89%
              
              
              
              (140
              )
              
              
              -0.25%Mezzanine
      loans (1)
              
              
              81,236
              
              
              
              94.67%
              
              
              
              68,374
              
              
              
              79.68%
              
              
              
              (12,862
              )
              
              
              -14.99%Whole
      loans (1)
              
              
              97,669
              
              
              
              99.41%
              
              
              
              97,425
              
              
              
              99.17%
              
              
              
              (244
              )
              
              
              -0.24%Equipment
      leases and notes (3)
              
              
              92,597
              
              
              
              100.00%
              
              
              
              92,104
              
              
              
              99.47%
              
              
              
              (493
              )
              
              
              -0.53%Total fixed
      rate
              
              $
              358,408
              
              
              
              98.16%
              
              
              $
              333,556
              
              
              
              91.35%
              
              
              $
              (24,852
              )
              
              
              -6.81%Grand
      total
              
              $
              1,987,372
              
              
              
              99.24%
              
              
              $
              1,853,481
              
              
              
              92.55%
              
              
              $
              (133,891
              )
              
              
              -6.69%December
      31, 2007Floating
      rateCMBS-private
      placement
              
              $
              54,132
              
              
              
              93.40%
              
              
              $
              41,524
              
              
              
              71.65%
              
              
              $
              (12,608
              )
              
              
              -21.75%Other
      ABS
              
              
              5,665
              
              
              
              94.42%
              
              
              
              900
              
              
              
              15.00%
              
              
              
              (4,765
              )
              
              
              -79.42%B
      notes (1)
              
              
              33,570
              
              
              
              100.10%
              
              
              
              33,486
              
              
              
              99.85%
              
              
              
              (84
              )
              
              
              -0.25%Mezzanine
      loans (1)
              
              
              141,894
              
              
              
              100.09%
              
              
              
              141,539
              
              
              
              99.83%
              
              
              
              (355
              )
              
              
              -0.26%Whole
      loans (1)
              
              
              430,776
              
              
              
              99.35%
              
              
              
              429,699
              
              
              
              99.10%
              
              
              
              (1,077
              )
              
              
              -0.25%Bank
      loans (2)
              
              
              931,101
              
              
              
              100.00%
              
              
              
              874,736
              
              
              
              93.95%
              
              
              
              (56,365
              )
              
              
              -6.05%Total floating
      rate
              
              $
              1,597,138
              
              
              
              99.58%
              
              
              $
              1,521,884
              
              
              
              94.88%
              
              
              $
              (75.254
              )
              
              
              -4.69%Fixed
      rateCMBS
      – private placement
              
              $
              28,241
              
              
              
              98.95%
              
              
              $
              23,040
              
              
              
              80.73%
              
              
              $
              (5,201
              )
              
              
              -18.22%B
      notes (1)
              
              
              56,007
              
              
              
              100.17%
              
              
              
              55,867
              
              
              
              99.92%
              
              
              
              (140
              )
              
              
              -0.25%Mezzanine
      loans (1)
              
              
              81,268
              
              
              
              94.69%
              
              
              
              80,016
              
              
              
              93.23%
              
              
              
              (1,252
              )
              
              
              -1.46%Whole
      loans (1)
              
              
              97,942
              
              
              
              99.24%
              
              
              
              97,697
              
              
              
              98.99%
              
              
              
              (245
              )
              
              
              -0.25%Equipment
      leases and notes (3)
              
              
              95,323
              
              
              
              100.00%
              
              
              
              95,030
              
              
              
              99.69%
              
              
              
              (293
              )
              
              
              -0.31%Total fixed
      rate
              
              $
              358,781
              
              
              
              98.49%
              
              
              $
              351,650
              
              
              
              96.53%
              
              
              $
              (7,131
              )
              
              
              -1.96%Grand
      total
              
              $
              1.955,919
              
              
              
              99.37%
              
              
              $
              1,873,534
              
              
              
              95.19%
              
              
              $
              (82,385
              )
              
              
              -4.18%
 (1)
              Net
      carrying amount includes an allowance for loan losses of $14.9 million at
      June 30, 2008, allocated as follows:  B notes ($0.2 million),
      mezzanine loans ($13.2 million) and whole loans ($1.5
      million).  Net carrying amount includes an allowance for loan
      losses of $3.2 million at December 31, 2007, allocated as
      follows:  B notes ($0.2 million), mezzanine loans ($1.6 million)
      and whole loans ($1.4 million).
  (2)
              Net
      carrying amount includes a $5.4 million and $2.7 million allowance for
      loan losses at June 30, 2008 and December 31, 2007,
      respectively.
  (3)
              Net
      carrying amount includes $100,000 and $293,000 allowance for lease losses
      at June 30, 2008 December 31, 2007,
  respectively.
  (4)
              Bank
      loan portfolio is carried at amortized cost less allowance for loan
      loss.
    43
 Commercial Mortgage-Backed Securities-Private
Placement
  At June 30, 2008 and December 31, 2007,
we held $46.8 million and $64.6 million, respectively, of CMBS-private placement
at fair value which is based on certain valuation techniques, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations −
Critical Accounting Policies and Estimates,” net of unrealized losses of $23.6
million and $17.8 million, respectively.  The portfolio was purchased
at a discount.  As of June 30, 2008 and December 31, 2007, the
remaining discount to be accreted into income over the remaining lives of the
securities was $3.9 million and $4.1 million, respectively.  These
securities are classified as available-for-sale and, as a result, are carried at
their fair value.
 
 The following table summarizes our
CMBS-private placement as of June 30, 2008 and December 31, 2007 (in thousands,
except percentages).  Dollar price is computed by dividing amortized
cost by par amount.
 
 June
      30, 2008
              
              
              December
      31, 2007Amortized
      Cost
              
              
              Dollar
      Price
              
              
              Amortized
      Cost
              
              
              Dollar
      PriceMoody’s
      Ratings Category:Aaa
              
              $
              −
              
              
              
              N/A
              
              
              $
              10,000
              
              
              
              100.00%Baa1
      through Baa3
              
              
              64,728
              
              
              
              96.28%
              
              
              
              65,377
              
              
              
              94.07%Ba1
      through Ba3
              
              
              5,598
              
              
              
              79.97%
              
              
              
              6,996
              
              
              
              99.94%Total
              
              $
              70,326
              
              
              
              94.74%
              
              
              $
              82,373
              
              
              
              95.23%S&P
      Ratings Category:AAA
              
              $
              −
              
              
              
              N/A
              
              
              $
              10,000
              
              
              
              100.00%BBB+
      through BBB-
              
              
              67,655
              
              
              
              94.55%
              
              
              
              72,373
              
              
              
              94.61%BB+
      through BB-
              
              
              2,671
              
              
              
              100.00%
              
              
              
              −
              
              
              
              N/ATotal
              
              $
              70,326
              
              
              
              94.74%
              
              
              $
              82,373
              
              
              
              95.23%Weighted
      average rating factor
              
              
              595
              
              
              
              
              
              
              
              497
 
 Other
Asset-Backed Securities
 
 At June 30, 2008 and December 31, 2007,
we held $300,000 and $900,000, respectively, of other ABS at fair value, which
is based on market prices provided by dealers, net of losses of $5.4 million and
$4.8 million, respectively.  In the aggregate, we purchased our other
ABS portfolio at a discount.  As of June 30, 2008 and December 31,
2007, the remaining discount to be accreted into income over the remaining lives
of securities was $335,000.  These securities are classified as
available-for-sale and, as a result, are carried at their fair market
value.
 
 The
following table summarizes our other ABS as of June 30, 2008 and December 31,
2007 (in thousands, except percentages).  Dollar price is computed by
dividing amortized cost by par amount.
 
 June
      30, 2008
              
              
              December
      31, 2007Amortized
      Cost
              
              
              Dollar
      Price
              
              
              Amortized
      Cost
              
              
              Dollar
      PriceMoody’s
      ratings category:B1
      through B3
              
              $
              5,665
              
              
              
              94.42%
              
              
              $
              5,665
              
              
              
              94.42%Total
              
              $
              5,665
              
              
              
              94.42%
              
              
              $
              5,665
              
              
              
              94.42%S&P
      ratings category:B+
      through B-
              
              $
              5,665
              
              
              
              94.42%
              
              
              $
              5,665
              
              
              
              94.42%Total
              
              $
              5,665
              
              
              
              94.42%
              
              
              $
              5,665
              
              
              
              94.42%Weighted
      average rating factor
              
              
              3,490
              
              
              
              
              
              
              
              610
 
  44
 Commercial
Real Estate Loans
 
 The following table is a summary of
the loans in our commercial real estate loan portfolio at the dates indicated
(in thousands):
 
 Description
                
                Quantity
                
                
                Amortized
      Cost
                
                Contracted
                  Interest
      Rates
                Maturity
      DatesJune 30,
      2008:Whole
      loans, floating rate
                
                
                30
                
                
                $
                473,493
                
                LIBOR
      plus 1.50% to
                  LIBOR
      plus 4.40%
                August
      2008 to
                  July
      2010Whole
      loans, fixed rate
                
                
                7
                
                
                
                97,669
                
                6.98%
      to 8.57%
                May
      2009 to
                  August
      2012B
      notes, floating rate
                
                
                3
                
                
                
                33,545
                
                LIBOR
      plus 2.50% to
                  LIBOR
      plus 3.01%
                October
      2008 to
                  July
      2009B
      notes, fixed rate
                
                
                3
                
                
                
                55,792
                
                7.00%
      to 8.68%
                July
      2011 to
                  July
      2016Mezzanine
      loans, floating rate
                
                
                10
                
                
                
                130,132
                
                LIBOR
      plus 2.15% to
                  LIBOR
      plus 3.45%
                August
      2008 to
                  May
      2009Mezzanine
      loans, fixed rate
                
                
                7
                
                
                
                81,236
                
                5.78%
      to 11.00%
                November
      2009 to
                  September
      2016Total (1)
                
                
                60
                
                
                $
                871,867December 31,
      2007:Whole
      loans, floating rate
                
                
                28
                
                
                $
                430,776
                
                LIBOR
      plus 1.50% to
                  LIBOR
      plus 4.25%
                May
      2008 to
                  July
      2010Whole
      loans, fixed rate
                
                
                7
                
                
                
                97,942
                
                6.98%
      to 8.57%
                May
      2009 to
                  August
      2012B
      notes, floating rate
                
                
                3
                
                
                
                33,570
                
                LIBOR
      plus 2.50% to
                  LIBOR
      plus 3.01%
                March
      2008 to
                  October
      2008B
      notes, fixed rate
                
                
                3
                
                
                
                56,007
                
                7.00%
      to 8.68%
                July
      2011 to
                  July
      2016Mezzanine
      loans, floating rate
                
                
                11
                
                
                
                141,894
                
                LIBOR
      plus 2.15% to
                  LIBOR
      plus 3.45%
                February
      2008 to
                  May
      2009Mezzanine
      loans, fixed rate
                
                
                7
                
                
                
                81,268
                
                5.78%
      to 11.00%
                November
      2009 to
                  September
      2016Total (1)
                
                
                59
                
                
                $
                841,457
 (1)
              The
      total does not include a provision for loan losses of $14.8 million
      recorded as of June 30, 2008 and $3.2 million as of December 31,
      2007.
 
 45
 We have
one mezzanine loan, with a book value of $11.6 million secured by 100% of the
equity interests in two enclosed regional malls.  We had been working
with the borrower and special servicer toward a resolution as the mezzanine loan
was in default since February 2008.  However, during the quarter ended
June 30, 2008, the borrower on the mezzanine loan defaulted on the more senior
first mortgage position.  This event triggered the reevaluation of our
provision for loan loss and we determined that a full reserve of the remaining
book value balance of $11.6 million was necessary.  If in the future,
we are able to recover any value from this loan, the amount would be credited
directly to income in that period.
 
 Bank
Loans
 
 At June 30, 2008, we held a total of
$857.3 million of bank loans at fair value, all of which are held by and secure
the debt issued by Apidos CDO I, Apidos CDO III and Apidos Cinco
CDO.  This is a decrease of $17.4 million over our holdings at
December 31, 2007 at fair value.  The decrease in the fair value of
bank loans was principally due to the reduction of market prices.  We
own 100% of the equity issued by Apidos CDO I, Apidos CDO III and Apidos Cinco
CDO.  We have determined that Apidos CDO I, Apidos CDO III and Apidos
Cinco CDO are VIEs for which we are the primary beneficiaries.  See
“-Variable Interest Entities.”  As a result, we consolidated Apidos
CDO I, Apidos CDO III and Apidos Cinco CDO as of June 30, 2008.
 
 The following table summarizes our bank
loan investments as of June 30, 2008 and December 31, 2007 (in thousands, except
percentages).  Dollar price is computed by dividing amortized cost by
par amount.
 
 June
      30, 2008
              
              
              December
      31, 2007Amortized
      Cost
              
              
              Dollar
      Price
              
              
              Amortized
      Cost
              
              
              Dollar
      PriceMoody’s
      ratings category:A1
      through A3
              
              $
              5,750
              
              
              
              100.00%
              
              
              $
              −
              
              
              
              − %
              %Baa1
      through Baa3
              
              
              11,462
              
              
              
              99.22%
              
              
              
              5,914
              
              
              
              98.65%
              %Ba1
      through Ba3
              
              
              533,369
              
              
              
              99.63%
              
              
              
              500,417
              
              
              
              100.02%
              %B1
      through B3
              
              
              367,671
              
              
              
              99.51%
              
              
              
              386,589
              
              
              
              100.01%
              %Caa1
      through Caa3
              
              
              20,444
              
              
              
              100.32%
              
              
              
              20,380
              
              
              
              100.20%
              %Ca
      through C
              
              
              −
              
              
              
              − %
              
              
              
              1,000
              
              
              
              100.00%
              %No
      rating provided
              
              
              8,221
              
              
              
              98.55%
              
              
              
              16,800
              
              
              
              99.44%
              %Total
              
              $
              946,917
              
              
              
              99.59%
              
              
              $
              931,100
              
              
              
              100.00%
              %S&P
      ratings category:BBB+
      through BBB-
              
              $
              60,375
              
              
              
              99.90%
              
              
              $
              14,819
              
              
              
              100.15%
              %BB+
      through BB-
              
              
              490,708
              
              
              
              99.47%
              
              
              
              433,624
              
              
              
              100.00%
              %B+
      through B-
              
              
              313,788
              
              
              
              99.80%
              
              
              
              405,780
              
              
              
              100.06%
              %CCC+
      through CCC-
              
              
              8,817
              
              
              
              100.23%
              
              
              
              4,207
              
              
              
              100.00%
              %No
      rating provided
              
              
              73,229
              
              
              
              99.14%
              
              
              
              72,670
              
              
              
              99.59%
              %Total
              
              $
              946,917
              
              
              
              99.59%
              
              
              $
              931,100
              
              
              
              100.00%
              %Weighted
      average rating factor
              
              
              1,834
              
              
              
              
              
              
              
              2,000
 
 Equipment
Leases and Notes
 
 Investments in direct financing leases
and notes as of June 30, 2008 and December 31, 2007 were as follows (in
thousands):
 
 June
      30,
                  2008
              
              
              December
      31,
                  2007Direct
      financing leases
              
              $
              25,542
              
              
              $
              28,880Notes
      receivable
              
              
              66,662
              
              
              
              66,150Subtotal
              
              
              92,204
              
              
              
              95,030Allowance
      for possible losses
              
              
              (100
              )
              
              
              −Total
              
              $
              92,104
              
              
              $
              95,030
   46
 Variable
Interest Entities
 
 In December 2003, FASB issued FIN 46-R
which addresses the application of Accounting Research Bulletin No. 51,
“Consolidated Financial Statements,” to a variable interest entity, or VIE, and
requires that the assets, liabilities and results of operations of a VIE be
consolidated into the financial statements of the enterprise that has a
controlling financial interest in it. The interpretation provides a framework
for determining whether an entity should be evaluated for consolidation based on
voting interests or significant financial support provided to the entity which
we refer to as variable interests. We consider all counterparties to a
transaction to determine whether a counterparty is a VIE and, if so, whether our
involvement with the entity results in a variable interest in the entity. We
perform analyses to determine whether we are the primary
beneficiary.  As of June 30, 2008, we determined that RREF CDO 2007-1,
Resource Real Estate Funding CDO 2006-1, Apidos CDO I, Apidos CDO III and Apidos
Cinco CDO were VIEs and that we were the primary beneficiary of the
VIEs.  We own 100% of the equity interests of RREF CDO 2007-1,
Resource Real Estate Funding CDO 2006-1, Apidos CDO I, Apidos CDO III and Apidos
Cinco CDO.  As a result of the application of FIN 46-R, we
consolidated $1.7 billion of assets for these entities onto our balance sheet;
however, only our equity investments in these VIEs, amounting to $273.9 million
(before adjustment to other comprehensive loss) as of June 30, 2008, is
available to our creditors.
 
 Interest
Receivable
 
 At June 30, 2008, we had accrued
interest receivable of $9.1 million, which consisted of $9.0 million of interest
on our securities, loans and equipment leases and notes, and $71,000 of interest
earned on escrow and sweep accounts.  At December 31, 2007, we had
interest receivable of $12.0 million, which consisted of $11.7 million of
interest on our securities, loans and equipment leases and notes and $228,000 of
interest earned on escrow and sweep accounts.
 
 Principal
Paydown Receivables
 
 At June 30, 2008 and December 31, 2007,
we had principal paydown receivables of $60,000 and $836,000, respectively,
which consisted of principal payments on our bank loans.  The decrease
was primarily due to the timing of when the principal was paid.
 
 Other
Assets
 
 Other assets at June 30, 2008 of $5.1
million consisted primarily of $3.1 million of loan origination costs associated
with our revolving credit facility, commercial real estate loan portfolio and
secured term facility, $1.2 million of prepaid expenses and $809,000 of lease
payment receivables.
 
 Other assets at December 31, 2007 of
$4.9 million consisted primarily of $3.4 million of loan origination costs
associated with our trust preferred securities issuances, revolving credit
facility, commercial real estate loan portfolio and secured term facility,
$85,000 of prepaid directors’ and officers’ liability insurance, $412,000 of
prepaid expenses, $998,000 of lease payment receivables and $37,000 of other
receivables.
 
 47
 Hedging
Instruments
 
 Our hedges at June 30, 2008 and
December 31, 2007, were fixed-for-floating interest rate swap agreements whereby
we swapped the floating rate of interest on the liabilities we hedged for a
fixed rate of interest.  As of December 31, 2007, we had entered into
hedges with a notional amount of $347.9 million and maturities ranging from May
2009 to November 2017.  We intend to continue to seek such hedges for
our floating rate debt in the future.  Our hedges at June 30, 2008
were as follows (in thousands):
  Benchmark
      rate
              
              Notional
      value
              
              
              Pay
      rate
              
              Effective
      date
              
              Maturity
      date
              
              Fair
      valueInterest
      rate swap
              1
      month LIBOR
              
              $
              12,750
              
              
              
              5.27
              
              07/25/07
              
              08/06/12
              
              $
              (655
              )Interest
      rate swap
              1
      month LIBOR
              
              
              12,965
              
              
              
              4.63
              
              12/04/06
              
              07/01/11
              
              
              (349
              )Interest
      rate swap
              1
      month LIBOR
              
              
              28,000
              
              
              
              5.10
              
              05/24/07
              
              06/05/10
              
              
              (953
              )Interest
      rate swap
              1
      month LIBOR
              
              
              12,675
              
              
              
              5.52
              
              06/12/07
              
              07/05/10
              
              
              (526
              )Interest
      rate swap
              1
      month LIBOR
              
              
              1,880
              
              
              
              5.68
              
              07/13/07
              
              03/12/17
              
              
              (163
              )Interest
      rate swap
              1
      month LIBOR
              
              
              15,235
              
              
              
              5.34
              
              06/08/07
              
              02/25/10
              
              
              (536
              )Interest
      rate swap
              1
      month LIBOR
              
              
              10,435
              
              
              
              5.32
              
              06/08/07
              
              05/25/09
              
              
              (230
              )Interest
      rate swap
              1
      month LIBOR
              
              
              12,150
              
              
              
              5.44
              
              06/08/07
              
              03/25/12
              
              
              (675
              )Interest
      rate swap
              1
      month LIBOR
              
              
              7,000
              
              
              
              5.34
              
              06/08/07
              
              02/25/10
              
              
              (246
              )Interest
      rate swap
              1
      month LIBOR
              
              
              44,888
              
              
              
              4.13
              
              01/10/08
              
              05/25/16
              
              
              460Interest
      rate swap
              1
      month LIBOR
              
              
              82,879
              
              
              
              5.58
              
              06/08/07
              
              04/25/17
              
              
              (5,951
              )Interest
      rate swap
              1
      month LIBOR
              
              
              1,726
              
              
              
              5.65
              
              06/28/07
              
              07/15/17
              
              
              (127
              )Interest
      rate swap
              1
      month LIBOR
              
              
              1,681
              
              
              
              5.72
              
              07/09/07
              
              10/01/16
              
              
              (129
              )Interest
      rate swap
              1
      month LIBOR
              
              
              3,850
              
              
              
              5.65
              
              07/19/07
              
              07/15/17
              
              
              (282
              )Interest
      rate swap
              1
      month LIBOR
              
              
              4,023
              
              
              
              5.41
              
              08/07/07
              
              07/25/17
              
              
              (230
              )Interest
      rate swap
              1
      month LIBOR
              
              
              19,630
              
              
              
              5.32
              
              03/30/06
              
              09/22/15
              
              
              (693
              )Interest
      rate swap
              1
      month LIBOR
              
              
              6,918
              
              
              
              5.31
              
              03/30/06
              
              11/23/09
              
              
              (112
              )Interest
      rate swap
              1
      month LIBOR
              
              
              5,747
              
              
              
              5.41
              
              05/26/06
              
              08/22/12
              
              
              (161
              )Interest
      rate swap
              1
      month LIBOR
              
              
              3,627
              
              
              
              5.43
              
              05/26/06
              
              04/22/13
              
              
              (135
              )Interest
      rate swap
              1
      month LIBOR
              
              
              3,365
              
              
              
              5.72
              
              06/28/06
              
              06/22/16
              
              
              (167
              )Interest
      rate swap
              1
      month LIBOR
              
              
              1,143
              
              
              
              5.52
              
              07/27/06
              
              07/22/11
              
              
              (29
              )Interest
      rate swap
              1
      month LIBOR
              
              
              2,988
              
              
              
              5.54
              
              07/27/06
              
              09/23/13
              
              
              (128
              )Interest
      rate swap
              1
      month LIBOR
              
              
              5,691
              
              
              
              5.25
              
              08/18/06
              
              07/22/16
              
              
              (222
              )Interest
      rate swap
              1
      month LIBOR
              
              
              3,894
              
              
              
              5.06
              
              09/28/06
              
              08/22/16
              
              
              (128
              )Interest
      rate swap
              1
      month LIBOR
              
              
              2,171
              
              
              
              4.97
              
              12/22/06
              
              12/23/13
              
              
              (67
              )Interest
      rate swap
              1
      month LIBOR
              
              
              3,538
              
              
              
              5.22
              
              01/19/07
              
              11/22/16
              
              
              (119
              )Interest
      rate swap
              1
      month LIBOR
              
              
              2,012
              
              
              
              5.05
              
              04/23/07
              
              09/22/11
              
              
              (44
              )Interest
      rate swap
              1
      month LIBOR
              
              
              3,006
              
              
              
              5.42
              
              07/25/07
              
              04/24/17
              
              
              (122
              )Interest
      rate swap
              1
      month LIBOR
              
              
              8,245
              
              
              
              4.53
              
              11/29/07
              
              10/23/17
              
              
              (118
              )Interest
      rate swap
              1
      month LIBOR
              
              
              5,591
              
              
              
              4.40
              
              12/26/07
              
              11/22/17
              
              
              (67
              )Interest
      rate swap
              1
      month LIBOR
              
              
              5,143
              
              
              
              3.35
              
              01/23/08
              
              12/22/14
              
              
              71Total
              
              
              $
              334,846
              
              
              
              5.14
              
              
              
              
              
              $
              (12,833
              )
 
 48
 Borrowings
 
 Repurchase
Agreements
  We have entered into repurchase
agreements to finance our commercial real estate loans and CMBS-private
placement portfolio.  These agreements are secured by the financed
assets and bear interest rates that have historically moved in close
relationship to LIBOR.  At June 30, 2008, we had established nine
borrowing arrangements with various financial institutions and had utilized four
of these arrangements, principally our arrangement with Credit Suisse Securities
(USA) LLC, the initial purchaser and placement agent for our March 2005 offering
and one of the underwriters in our two public offerings.  None of the
counterparties to these agreements are affiliates of the Manager or
us.
 
 We seek to renew the repurchase
agreements we use to finance asset acquisitions as they mature under the
then-applicable borrowing terms of the counterparties to our repurchase
agreements.  Through June 30, 2008, we have encountered no
difficulties in effecting renewals of our repurchase
agreements.  However, we have had to post collateral and/or pay down a
particular repurchase agreement depending upon the market value of the
securities or other collateral subject to that repurchase
agreement.
 
 Collaterized
Debt Obligations
 
 As of
June 30, 2008, we had executed six CDO transactions as follows:
  ·
              In
      June 2007, we closed Resource Real Estate Funding CDO 2007-1, a $500.0
      million CDO transaction that provided financing for commercial real estate
      loans.  The investments held by Resource Real Estate Funding CDO
      2007-1 collateralized $390.0 million of senior notes issued by the CDO
      vehicle, of which RCC Real Estate, Inc., or RCC Real Estate, purchased
      100% of the class H senior notes, class K senior notes, class L senior
      notes and class M senior notes for $68.0 million and $5.0 million of the
      class J senior notes purchased in February 2008.  In addition,
      Resource Real Estate Funding 2007-1 CDO Investor, LLC, a subsidiary of RCC
      Real Estate, purchased a $41.3 million equity interest representing 100%
      of the outstanding preference shares.  At June 30, 2008,
      Resource Real Estate Funding CDO 2007-1 had $106,000 of uninvested
      principal and $17.9 million of A1-R availability to fund future funding
      commitments on commercial real estate loans.  At June 30, 2008,
      the notes issued to outside investors had a weighted average borrowing
      rate of 3.24%.
  ·
              In
      May 2007, we closed Apidos Cinco CDO, a $350.0 million CDO transaction
      that provided financing for bank loans.  The investments held by
      Apidos Cinco CDO collateralized $322.0 million of senior notes issued by
      the CDO vehicle, of which RCC Commercial Inc., or RCC Commercial,
      purchased a $28.0 million equity interest representing 100% of the
      outstanding preference shares.  At June 30, 2008, Apidos Cinco
      CDO had $4.3 million in uninvested principal and $1.2 million in a credit
      facility reserve.  At June 30, 2008, the notes issued to outside
      investors had a weighted average borrowing rate of
  3.18%.
  ·
              In
      August 2006, we closed Resource Real Estate Funding CDO 2006-1, a $345.0
      million CDO transaction that provided financing for commercial real estate
      loans.  The investments held by Resource Real Estate Funding CDO
      2006-1 collateralized $308.7 million of senior notes issued by the CDO
      vehicle, of which RCC Real Estate, Inc., or RCC Real Estate, purchased
      100% of the class J senior notes and class K senior notes for $43.1
      million.  At June 30, 2008, Resource Real Estate Funding CDO
      2006-1 had $20,000 of uninvested principal.  At June 30, 2008,
      the notes issued to outside investors had a weighted average borrowing
      rate of 3.36%.
  ·
              In
      May 2006, we closed Apidos CDO III, a $285.5 million CDO transaction that
      provided financing for bank loans.  The investments held by
      Apidos CDO III collateralized $262.5 million of senior notes issued by the
      CDO vehicle.  At June 30, 2008, Apidos CDO III had $3.9 million
      in uninvested principal and $309,000 in a credit facility
      reserve.  At June 30, 2008, the notes issued to outside
      investors had a weighted average borrowing rate of
  3.24%.
  ·
              In
      August 2005, we closed Apidos CDO I, a $350.0 million CDO transaction that
      provided financing for bank loans.  The investments held by
      Apidos CDO I collateralize $321.5 million of senior notes issued by the
      CDO vehicle, of which RCC Commercial purchased $23.0 million equity
      interest representing 100% of the outstanding preference
      shares.  At June 30, 2008, Apidos CDO I had $11.2 million in
      uninvested principal and $642,000 in a credit facility
      reserve.  At June 30, 2008, the notes issued to outside
      investors had a weighted average borrowing rate of
  3.42%.
  ·
              In
      July 2005, we closed Ischus CDO II, a $403.0 million CDO transaction that
      provided financing for MBS and other asset-backed.  The
      investments held by Ischus CDO II collateralize $376.0 million of senior
      notes issued by the CDO vehicle, of which RCC Commercial purchased $28.5
      million equity interest representing 100% of the outstanding preference
      shares.  At November 13, 2007, we sold 10% of our equity
      interest and are no longer deemed to be the primary
      beneficiary.  As a result, we deconsolidated Ischus CDO II at
      that date.
  49
 
 Trust
Preferred Securities
 
 In May and September 2006, we formed
Resource Capital Trust I and RCC Trust II, respectively, for the sole purpose of
issuing and selling trust preferred securities.  In accordance with
FIN 46-R, we do not consolidate Resource Capital Trust I and RCC Trust II into
our consolidated financial statements because we are not deemed to be the
primary beneficiary of either trust.  We own 100% of the common shares
of each trust, each of which issued $25.0 million of preferred shares to
unaffiliated investors.  Our rights as the holder of the common shares
of each trust are subordinate to the rights of the holders of preferred shares
only in the event of a default; otherwise, our economic and voting rights are
pari passu with the preferred shareholders.  We record each of our
investments in the trusts’ common shares of $774,000 as an investment in
unconsolidated entities and record dividend income upon declaration by each
trust.
 
 In connection with the issuance and
sale of the trust preferred securities, we issued $25.8 million principal amount
of junior subordinated debentures to each of Resource Capital Trust I and RCC
Trust II.  The junior subordinated debentures debt issuance costs are
deferred in other assets in our consolidated balance sheets.  We
record interest expense on the junior subordinated debentures and amortization
of debt issuance costs in our consolidated statements of
operations.  At June 30, 2008, the junior subordinated debentures had
a weighted average borrowing rate of 6.75%.
 
 Term
Facility
 
 In March 2006, we entered into a
secured term credit facility with Bayerische Hypo – und Vereinsbank AG, New York
Branch to finance the purchase of equipment leases and notes.  The
maximum amount of our borrowing under this facility is $100.0
million.  At June 30, 2008 and December 31, 2007, $85.8 million and
$91.7 million, respectively was outstanding under the facility.  The
facility bears interest at one of two rates, determined by asset
class.  The interest rate was 3.84% and 6.55% at June 30, 2008 and
December 31, 2007, respectively.
 
 Credit
Facility
 
 In December 2005, we entered into a
$15.0 million corporate credit facility with TD Bank, N.A. (successor by merger
to Commerce Bank, N.A.)  This facility was increased to $25.0 million
in April 2006 and decreased to $10.0 million in April 2008 to reflect more
closely the actual borrowing base available to us under the facility and to
reduce fees payable on the amount available for borrowing under the
facility.  As a result, we do not believe the reduction will have a
material impact on our current liquidity.  The unsecured revolving
credit facility permits us to borrow up to the lesser of the facility amount and
the sum of 80% of the sum of our unsecured assets rated higher than Baa3 or
better by Moody’s and BBB- or better by Standard and Poor’s plus our interest
receivables plus 65% of our unsecured assets rated lower than Baa3 by Moody’s
and BBB- from Standard and Poor’s.  Up to 20% of the borrowings under
the facility may be in the form of standby letters of credit.  At June
30, 2008 and December 31, 2007, no balance was outstanding under this
facility.  The interest rate varies from, in the case of LIBOR loans,
from the adjusted LIBOR rate (as defined in the agreement) plus between 1.50% to
2.50% depending upon our leverage ratio (the ratio of consolidated total
liability to consolidated tangible net worth) or, in the case of base rate
loans, from TD Bank, N.A. base rate plus between 0.50% and 1.50% also depending
upon our leverage ratio.
 
 Stockholders’
Equity
 
 Stockholders’ equity at June 30, 2008
was $250.3 million and included $28.9 million of net unrealized losses on our
CMBS-private placement and other asset-backed portfolio, and $14.7 million of
unrealized losses on cash flow hedges, shown as a component of accumulated other
comprehensive loss.  Stockholders’ equity at December 31, 2007 was
$271.6 million and included $15.7 million of unrealized losses on cash flow
hedges and $22.6 million of unrealized losses on our available-for-sale
portfolio, shown as a component of accumulated other comprehensive
loss.  The decrease in stockholder’s equity during the six months
ended June 30, 2008 was principally due to the decrease in the market value of
our available-for-sale securities and on our cash flow hedges.
 
 Fluctuations in market values of assets
do not impact our income determined in accordance with GAAP, or our taxable
income, but rather are reflected on our consolidated balance sheets by changing
the carrying value of the asset and stockholders’ equity under ‘‘Accumulated
Other Comprehensive Income (Loss).’’  By accounting for our assets in
this manner, we hope to provide useful information to stockholders and creditors
and to preserve flexibility to sell assets in the future without having to
change accounting methods.
 
 50
 Estimated
REIT Taxable Income
 
 We calculate estimated REIT taxable
income, which is a non-GAAP financial measure, according to the requirements of
the Internal Revenue Code.  The following table reconciles net income
to estimated REIT taxable income for the periods presented (in
thousands):
 
 Three
      Months Ended
              
              
              Six
      Months EndedJune
      30,
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      (loss) income
              
              $
              (5,257
              )
              
              $
              9,836
              
              
              $
              4,106
              
              
              $
              19,275Adjustments:Share-based compensation to
      related parties
              
              
              (392
              )
              
              
              (345
              )
              
              
              (539
              )
              
              
              (340
              )Incentive management fee expense
      to related parties paid in shares
              
              
              −
              
              
              
              231
              
              
              
              −
              
              
              
              417Capital loss carryover
      (utilization)/losses from
                the sale of
      securities
              
              
              −
              
              
              
              −
              
              
              
              2,000
              
              
              
              −Provisions for loan and lease
      losses unrealized
              
              
              11,629
              
              
              
              −
              
              
              
              11,685
              
              
              
              −Net book to tax adjustments for
      the Company’s
                taxable foreign REIT
      subsidiaries
              
              
              3,462
              
              
              
              (15
              )
              
              
              4,237
              
              
              
              (34
              )Addback of GAAP loss
      reserves
              
              
              −
              
              
              
              856
              
              
              
              −
              
              
              
              856Other net book to tax
      adjustments
              
              
              1
              
              
              
              (45
              )
              
              
              9
              
              
              
              14Estimated
      REIT taxable income
              
              $
              9,443
              
              
              $
              10,518
              
              
              $
              21,498
              
              
              $
              20,188Amounts
      per share – diluted
              
              $
              0.38
              
              
              $
              0.42
              
              
              $
              0.86
              
              
              $
              0.81
 
 We believe that a presentation of
estimated REIT taxable income provides useful information to investors regarding
our financial condition and results of operations as this measurement is used to
determine the amount of dividends that we are required to declare to our
stockholders in order to maintain our status as a REIT for federal income tax
purposes.  Since we, as a REIT, expect to make distributions based on
taxable earnings, we expect that our distributions may at times be more or less
than our reported earnings.  Total taxable income is the aggregate
amount of taxable income generated by us and by our domestic and foreign taxable
REIT subsidiaries.  Estimated REIT taxable income excludes the
undistributed taxable income of our domestic taxable REIT subsidiary, if any
such income exists, which is not included in REIT taxable income until
distributed to us.  There is no requirement that our domestic taxable
REIT subsidiary distribute its earnings to us.  Estimated REIT taxable
income, however, includes the taxable income of our foreign taxable REIT
subsidiaries because we will generally be required to recognize and report their
taxable income on a current basis.  Because not all companies use
identical calculations, this presentation of estimated REIT taxable income may
not be comparable to other similarly-titled measures of other
companies.
 
 In order to maintain our qualification
as a REIT and to avoid corporate-level income tax on the income we distribute to
our stockholders, we intend to make regular quarterly distributions of all or
substantially all of our net taxable income to holders of our common
stock.  This requirement does not allow us to generate any material
amount of investment funds from operations to fund investments or to provide
operating liquidity.
 
 
 51
 Liquidity
and Capital Resources
 
 Capital
Sources
 
 For the six months ended June 30, 2008,
we had both restricted and unrestricted sources of capital funds as
follows:
 
 ·
              Restricted
      - $64.0 million of principal repayments on investments held by our CDO
      issuers and $18.0 million of CDO future funding
  advances.
 ·
              Unrestricted
      - $1.7 million from principal repayments on investments held at our term
      facility.
 
 Liquidity
 
 Our liquidity needs consist principally
of capital needed to make investments, make distributions to our stockholders,
pay our operating expenses, including management fees and our approved share
repurchase plan.  Our ability to meet our liquidity needs will be
subject to our ability to generate cash from operations, and, with respect to
our investments, our ability to obtain debt financing and equity
capital.  We may seek to increase our capital resources through
offerings of equity securities (possibly including common stock and one or more
classes of preferred stock), CDOs, trust preferred securities or other forms of
financing.  However, the availability of any such financing will
depend on market conditions which, as we discuss in “Overview”, have recently
been subject to substantial volatility and reduction in liquidity.  If
we are unable to renew, replace or expand our sources of financing on
substantially similar terms, we may be unable to implement our investment
strategies successfully and may be required to liquidate portfolio
investments.  If required, a sale of portfolio investments could be at
prices lower than the carrying value of such investments, which could result in
losses and reduced income.
 
 At July
31, 2008, RCC’s liquidity consisted of three primary sources:
  ·
              unrestricted
      cash and cash equivalents of $7.1 million and restricted cash of $7.0
      million comprised of $4.0 million in margin call accounts and $3.0 million
      related to its leasing portfolio;
  ·
              capital
      available for reinvestment in its five collateralized debt obligation
      (“CDO”) entities of $44.4 million, which is made up of $27.0 million of
      restricted cash and $17.4 million of availability to finance future
      funding commitments on commercial real estate loans;
  and
  ·
              financing
      available under existing borrowing facilities of $26.5 million, comprised
      of $16.5 million of available cash from RCC’s three year non-recourse
      secured financing facility and $10.0 million of unused capacity under its
      unsecured revolving credit facility.  RCC also has $83.4 million
      of unused capacity under a three-year non-recourse commercial real estate
      repurchase facility, which, however, requires approval of individual
      repurchase transactions by the repurchase
  counterparty.
 
 We anticipate that, depending upon
market conditions and credit availability, upon repayment of each borrowing
under a repurchase agreement, we will immediately use the collateral released by
the repayment as collateral for borrowing under a new repurchase agreement to
maximize liquidity.  Our leverage ratio may vary as a result of the
various funding strategies we use.  As of June 30, 2008 and December
31, 2007, our leverage ratio was 6.9 times and 6.5 times,
respectively.  This increase was primarily due to the decrease in fair
market value adjustments that are recorded in the statement of stockholders
equity through accumulated other comprehensive loss due to available-for-sale
securities and derivatives and offset by the repayment of repurchase
agreements.
 
 Distributions
 
 On March 11, 2008, we declared a
quarterly distribution of $0.41 per share of common stock, $10.4 million in the
aggregate, which was paid on April 28, 2008 to stockholders of record as of
March 30, 2008.
 
 On June 20, 2008, we declared a
quarterly distribution of $0.41 per share of common stock, $10.4 million in the
aggregate, which was paid on July 28, 2008 to stockholders of record as of June
30, 2008.
 
 52
 Contractual
Obligations and Commitments
 
 The table below summarizes our
contractual obligations as of June 30, 2008.  The table below excludes
contractual commitments related to our derivatives, which we discuss in our
Annual Report on Form 10-K for fiscal 2007 in Item 7A − “Quantitative and
Qualitative Disclosures about Market Risk,” and in “ − Financial
Condition  − Hedging Instruments,” above and incentive fees payable
under the management agreement that we have with our Manager, which we discuss
in our Annual Report on Form 10-K for fiscal 2007 in Item 1 − “Business” and
Item 13, “Certain Relationships and Related Transactions”because those contracts
do not have fixed and determinable payments.
 
 Contractual
      commitments
                  (dollars
      in thousands)Payments
      due by periodTotal
                
                
                Less
      than 1 year
                
                
                1 –
      3 years
                
                
                3 –
      5 years
                
                
                More
      than 5 yearsRepurchase
      agreements (1)
                
                $
                68,907
                
                
                $
                68,907
                
                
                $
                −
                
                
                $
                −
                
                
                $
                −CDOs
                
                
                1,515,960
                
                
                
                −
                
                
                
                318,173
                
                
                
                577,366
                
                
                
                620,421Secured
      term
      facility
                
                
                85,829
                
                
                
                −
                
                
                
                85,829
                
                
                
                −
                
                
                
                −Junior
      subordinated debentures heldby
      unconsolidated trusts that
                  issued trust preferred
      securities
                
                
                51,548
                
                
                
                −
                
                
                
                −
                
                
                
                −
                
                
                
                51,548Total
      borrowings
                
                
                1,722,244
                
                
                
                68,907
                
                
                
                404,002
                
                
                
                577,366
                
                
                
                671,969Base
      management fees(2)
                
                
                4,736
                
                
                
                4,736
                
                
                
                −
                
                
                
                −
                
                
                
                −Total
      contractual
      commitments
                
                $
                1,726,980
                
                
                $
                73,643
                
                
                $
                404,002
                
                
                $
                577,366
                
                
                $
                671,969
 (1)
              Includes
      accrued interest of $84,000.
  (2)
              Calculated
      only for the next 12 months based on our current equity, as defined in our
      management agreement.
 
 At June 30, 2008, we had 31 interest
rate swap contracts with a notional value of $334.8 million.  These
contracts are fixed-for-floating interest rate swap agreements under which we
contracted to pay a fixed rate of interest for the term of the hedge and will
receive a floating rate of interest.  As of June 30, 2008, the average
fixed pay rate of our interest rate hedges was 5.14% and our receive rate was
one-month LIBOR, or 2.48%.
 
 Off-Balance
Sheet Arrangements
 
 As of June 30, 2008, we did not
maintain any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance vehicles,
special purpose entities or VIEs, established for the purpose of facilitating
off-balance sheet arrangements or contractually narrow or limited
purposes.  Further, as of June 30, 2008, we had not guaranteed any
obligations of unconsolidated entities or entered into any commitment or intent
to provide additional funding to any such entities.
 
 Recent
Developments
 
 As of July 31, 2008, short-term
repurchase agreements have been reduced to $880,000 from $4.6 million as of June
30, 2008.
  53
 ITEM
3.                      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 As of June 30, 2008 and December 31,
2007, the primary component of our market risk was interest rate risk, as
described below.  While we do not seek to avoid risk completely, we do
seek to assume risk that can be quantified from historical experience, to
actively manage that risk, to earn sufficient compensation to justify assuming
that risk and to maintain capital levels consistent with the risk we undertake
or to which we are exposed.
 
 The following sensitivity analysis
tables show, at June 30, 2008 and December 31, 2007, the estimated impact on the
fair value of our interest rate-sensitive investments and liabilities of changes
in interest rates, assuming rates instantaneously fall 100 basis points and rise
100 basis points (dollars in thousands):
 
 June
      30, 2008Interest
      rates fall 100
                  basis
      points
              
              
              Unchanged
              
              
              Interest
      rates rise 100
                  basis
      pointsCMBS
      – private placement (1)Fair value
              
              $
              27,302
              
              
              $
              25,772
              
              
              $
              8,995Change in fair
    value
              
              $
              1,530
              
              
              $
              −
              
              
              $
              (16,777
              )Change as a percent of fair
      value
              
              
              5.94
              %
              
              
              
              
              
              
              65.10
              %Repurchase
      and warehouse agreements (2)Fair value
              
              $
              154,652
              
              
              $
              154,652
              
              
              $
              154.652Change in fair
    value
              
              $
              −
              
              
              $
              −
              
              
              $
              −Change as a percent of fair
      value
              
              
              −
              
              
              
              −
              
              
              
              −Hedging
      instrumentsFair value
              
              $
              (27,544
              )
              
              $
              (12,833
              )
              
              $
              (1,094
              )Change in fair
    value
              
              $
              (14,711
              )
              
              $
              −
              
              
              $
              11,739Change as a percent of fair
      value
              
              
              N/M
              
              
              
              −
              
              
              
              N/M
 
 
 December
      31, 2007Interest
      rates fall 100
                  basis
      points
              
              
              Unchanged
              
              
              Interest
      rates rise 100
                  basis
      pointsCMBS
      – private placement (1)Fair value
              
              $
              28,756
              
              
              $
              27,154
              
              
              $
              11,519Change in fair
    value
              
              $
              1,602
              
              
              $
              −
              
              
              $
              (15,635
              )Change as a percent of fair
      value
              
              
              5.90
              %
              
              
              −
              
              
              
              57.58
              %Repurchase
      and warehouse agreements (2)Fair value
              
              $
              207,908
              
              
              $
              207,908
              
              
              $
              207,908Change in fair
    value
              
              $
              −
              
              
              $
              −
              
              
              $
              −Change as a percent of fair
      value
              
              
              −
              
              
              
              −
              
              
              
              −Hedging
      instrumentsFair value
              
              $
              (33,731
              )
              
              $
              (18,040
              )
              
              $
              (3,234
              )Change in fair
    value
              
              $
              (15,691
              )
              
              $
              −
              
              
              $
              14,806Change as a percent of fair
      value
              
              
              N/M
              
              
              
              −
              
              
              
              N/M
 (1)
              Includes
      the fair value of other available-for-sale investments that are sensitive
      to interest rate changes.
  (2)
              The
      fair value of the repurchase agreements and warehouse agreements would not
      change materially due to the short-term nature of these
      instruments.
 
 For purposes of the tables, we have
excluded our investments with variable interest rates that are indexed to
LIBOR.  Because the variable rates on these instruments are short-term
in nature, we are not subject to material exposure to movements in fair value as
a result of changes in interest rates.
 
 54
 It is important to note that the impact
of changing interest rates on fair value can change significantly when interest
rates change beyond 100 basis points from current levels.  Therefore,
the volatility in the fair value of our assets could increase significantly when
interest rates change beyond 100 basis points from current levels.  In
addition, other factors impact the fair value of our interest rate-sensitive
investments and hedging instruments, such as the shape of the yield curve,
market expectations as to future interest rate changes and other market
conditions.  Accordingly, in the event of changes in actual interest
rates, the change in the fair value of our assets would likely differ from that
shown above and such difference might be material and adverse to our
stockholders.
 
 ITEM
4.                      CONTROLS AND PROCEDURES
 
 We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed
in our Securities Exchange Act of 1934 reports is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
our Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure.  In designing and evaluating the disclosure
controls and procedures, our management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and our
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
 
 Under the supervision of our Chief
Executive Officer and Chief Financial Officer, we have carried out an evaluation
of the effectiveness of our disclosure controls and procedures as of the end of
the period covered by this report.  Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective at the reasonable assurance
level.
 
 There have been no significant changes
in our internal controls over financial reporting that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting during our most recent fiscal year.
  55
 PART
II.  OTHER INFORMATION
 
 ITEM
4.                    SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 At our Annual Meeting of Stockholders
held on June 12, 2008, our stockholders re-elected seven directors - Messrs.
Walter T. Beach, Edward E. Cohen, Jonathan Z. Cohen, William B. Hart, Gary
Ickowicz, Murray S. Levin and P. Sherrill Neff - to serve one year terms
expiring at the Annual Meeting of Stockholders in 2009.  The voting
results were: 23,618,663 shares for and 244,611 shares withheld for Mr. Beach;
23,609,506 shares for and 253,768 shares withheld for Mr. E. Cohen; 23,624,492
shares for and 238,782 shares withheld for Mr. J. Cohen; 23,619,844 shares for
and 243,430 shares withheld for Mr. Hart; 23,648,036 shares for and 215,238
shares withheld for Mr. Ickowicz; 23,564,621 shares for and 298,653 shares
withheld for Mr. Levin; and 23,549,874 shares for and 313,400 shares withheld
for Mr. Neff.
 
 ITEM
6.                      EXHIBITS
 
 Exhibit
      No.
              Description3.1
              Restated
      Certificate of Incorporation of Resource Capital Corp. (1)3.2
              Amended
      and Restated Bylaws of Resource Capital Corp. (1)4.1
              Form
      of Certificate for Common Stock for Resource Capital Corp. (1)4.2
              Junior
      Subordinated indenture between Resource Capital Corp. and Wells Fargo
      Bank, N.A., as Trustee, dated May 25, 2006. (3)4.3
              Amended
      and Restated Trust Agreement among Resource Capital Corp., Wells Fargo
      Bank, N.A., Wells Fargo Delaware Trust Company and the Administrative
      Trustees named therein, dated May 25, 2006. (3)4.4
              Junior
      Subordinated Note due 2036 in the principal amount of $25,774,000, dated
      May 25, 2006. (3)4.5
              Junior
      Subordinated Indenture between Resource Capital Corp. and Wells Fargo
      Bank, N.A., as Trustee, dated September 29, 2006. (4)4.6
              Amended
      and Restated Trust Agreement among Resource Capital Corp., Wells Fargo
      Bank, N.A., Wells Fargo Delaware Trust Company and the Administrative
      Trustees named therein, dated September 29, 2006. (4)4.7
              Junior
      Subordinated Note due 2036 in the principal amount of $25,774,000, dated
      September 29, 2006. (4)4.8
              Form
      of Warrant to Purchase Common Stock (1)10.1
              Amended
      and Restated Management Agreement between Resource Capital Corp., Resource
      Capital Manager, Inc. and Resource America, Inc. dated as of June 30,
      2008.  (6)10.6a
              Third
      Amendment dated April 11, 2008 but effective as of March 31, 2008 to the
      Loan Agreement dated December 15, 2005, by and among Resource Capital
      Corp. and Commerce Bank, N.A.(5)10.6b
              Fourth
      Amendment dated July 22, 2008 but effective as of March 31, 2008 to the
      Loan Agreement dated December 15, 2005, by and among Resource Capital
      Corp. and TD Bank, N.A. (Successor by merger to Commerce Bank,
      N.A.)31.1
              Rule
      13a-14(a)/Rule 15d-14(a) Certification of Chief Executive
      Officer.31.2
              Rule
      13a-14(a)/Rule 15d-14(a) Certification of Chief Financial
      Officer.32.1
              Certification
      of Chief Executive Officer pursuant to Section 1350 of Chapter 63 of Title
      18 of the United States Code.32.2
              Certification
      of Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title
      18 of the United States Code.
 (1)
              Filed
      previously as an exhibit to the Company’s registration statement on Form
      S-11, Registration No. 333-126517.
  (2)
              Filed
      previously as an exhibit to the Company’s Current Report on Form 8-K filed
      on April 23, 2007.
  (3)
              Filed
      previously as an exhibit to the Company’s quarterly report on Form 10-Q
      for the quarter ended June 30,
2006.
  (4)
              Filed
      previously as an exhibit to the Company’s quarterly report on Form 10-Q
      for the quarter ended September 30,
2006.
  (5)
              Filed
      previously as an exhibit to the Company’s Current Report on Form 8-K filed
      on April 11, 2008.
  (6)
              Filed
      previously as an exhibit to the Company’s Current Report on Form 8-K filed
      on July 3, 2008.
  56
 SIGNATURES
 
 Pursuant to the requirements 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.
 
 RESOURCE
      CAPITAL CORP.(Registrant)Date:
      August 8, 2008
              By:           /s/ Jonathan Z.
      CohenJonathan Z.
    CohenChief Executive Officer and
      President
 
 
 Date
      August 8, 2008
              By:           /s/ David J.
      BryantDavid J.
  BryantChief Financial Officer and
      Chief Accounting Officer