Attached files
file | filename |
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EX-32 - EX-32 - DITECH HOLDING Corp | b80588exv32.htm |
EX-31.1 - EX-31.1 - DITECH HOLDING Corp | b80588exv31w1.htm |
EX-10.9 - EX-10.9 - DITECH HOLDING Corp | b80588exv10w9.htm |
EX-31.2 - EX-31.2 - DITECH HOLDING Corp | b80588exv31w2.htm |
EX-10.4 - EX-10.4 - DITECH HOLDING Corp | b80588exv10w4.htm |
EX-10.6 - EX-10.6 - DITECH HOLDING Corp | b80588exv10w6.htm |
EX-10.5 - EX-10.5 - DITECH HOLDING Corp | b80588exv10w5.htm |
EX-10.11 - EX-10.11 - DITECH HOLDING Corp | b80588exv10w11.htm |
EX-10.10 - EX-10.10 - DITECH HOLDING Corp | b80588exv10w10.htm |
EX-10.12 - EX-10.12 - DITECH HOLDING Corp | b80588exv10w12.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
or
o | 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: 001-13417
Walter Investment Management Corp.
(Exact name of registrant as specified in its charter)
Maryland (State or other Jurisdiction of Incorporation or Organization) |
13-3950486 (I.R.S. Employer Identification No.) |
3000 Bayport Drive, Suite 1100
Tampa, FL 33607
(Address of principal executive offices) (Zip Code)
Tampa, FL 33607
(Address of principal executive offices) (Zip Code)
(813) 421-7600
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ
No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o
No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The registrant had 25,703,880 shares of common stock outstanding as of May 3, 2010.
WALTER INVESTMENT MANAGEMENT CORP.
FORM 10-Q
INDEX
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36 | ||||||||
EX-10.4 | ||||||||
EX-10.5 | ||||||||
EX-10.6 | ||||||||
EX-10.9 | ||||||||
EX-10.10 | ||||||||
EX-10.11 | ||||||||
EX-10.12 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32 |
Table of Contents
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(in thousands, except share and per share data)
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 96,302 | $ | 99,286 | ||||
Restricted cash |
8,901 | 8,963 | ||||||
Restricted cash of securitization trusts |
41,324 | 42,691 | ||||||
Receivables, net |
3,542 | 3,052 | ||||||
Residential loans, net of allowance for loan losses of $3,384 and $3,460, respectively |
327,775 | 333,636 | ||||||
Residential loans of securitization trusts, net of allowance for loan losses of
$13,940 and $14,201, respectively |
1,292,561 | 1,310,710 | ||||||
Subordinate security |
1,837 | 1,801 | ||||||
Real estate owned |
25,284 | 21,981 | ||||||
Real estate owned of securitization trusts |
36,667 | 41,143 | ||||||
Deferred debt issuance costs of securitization trusts |
18,137 | 18,450 | ||||||
Other assets |
5,073 | 5,961 | ||||||
Total assets |
$ | 1,857,403 | $ | 1,887,674 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Accounts payable |
$ | 477 | $ | 13,489 | ||||
Accounts payable of securitization trusts |
555 | 556 | ||||||
Accrued expenses |
25,438 | 28,296 | ||||||
Deferred income taxes, net |
161 | 173 | ||||||
Mortgage-backed debt of securitization trusts |
1,244,379 | 1,267,454 | ||||||
Accrued interest of securitization trusts |
8,555 | 8,755 | ||||||
Other liabilities |
776 | 767 | ||||||
Total liabilities |
1,280,341 | 1,319,490 | ||||||
Commitments and contingencies (Note 17) |
||||||||
Stockholders equity: |
||||||||
Preferred stock, $0.01 par value per share: |
||||||||
Authorized 10,000,000 shares |
||||||||
Issued and outstanding 0 shares at March 31, 2010 and December 31,
2009 |
| | ||||||
Common stock, $0.01 par value per share: |
||||||||
Authorized 90,000,000 shares |
||||||||
Issued and outstanding 25,694,073 and 25,642,889 shares at March 31,
2010 and December 31, 2009, respectively |
257 | 256 | ||||||
Additional paid-in capital |
123,471 | 122,552 | ||||||
Retained earnings |
451,545 | 443,433 | ||||||
Accumulated other comprehensive income |
1,789 | 1,943 | ||||||
Total stockholders equity |
577,062 | 568,184 | ||||||
Total liabilities and stockholders equity |
$ | 1,857,403 | $ | 1,887,674 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
3
Table of Contents
WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except share and per share data)
(Unaudited)
(in thousands, except share and per share data)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2010 | 2009 | |||||||
Net interest income: |
||||||||
Interest income |
$ | 41,628 | $ | 45,829 | ||||
Less: Interest expense |
21,274 | 23,089 | ||||||
Total net interest income |
20,354 | 22,740 | ||||||
Less: Provision for loan losses |
3,190 | 4,376 | ||||||
Total net interest income after
provision for loan losses |
17,164 | 18,364 | ||||||
Non-interest income: |
||||||||
Premium revenue |
2,691 | 3,065 | ||||||
Other income, net |
760 | 160 | ||||||
Total non-interest income |
3,451 | 3,225 | ||||||
Non-interest expenses: |
||||||||
Claims expense |
912 | 1,289 | ||||||
Salaries and benefits |
6,981 | 4,285 | ||||||
Legal and professional |
899 | 704 | ||||||
Occupancy |
345 | 335 | ||||||
Technology and communication |
728 | 818 | ||||||
Depreciation and amortization |
91 | 78 | ||||||
General and administrative |
2,365 | 1,533 | ||||||
Other expense |
51 | 337 | ||||||
Related party allocated corporate charges |
| 853 | ||||||
Total non-interest expenses |
12,372 | 10,232 | ||||||
Income before income taxes |
8,243 | 11,357 | ||||||
Income tax expense |
131 | 4,155 | ||||||
Net income |
$ | 8,112 | $ | 7,202 | ||||
Basic earnings per common and common equivalent
share |
$ | 0.30 | $ | 0.36 | ||||
Diluted earnings per common and common
equivalent share |
$ | 0.30 | $ | 0.36 | ||||
Weighted average common and common equivalent
shares outstanding basic |
26,343,279 | 19,871,205 | ||||||
Weighted average common and common equivalent
shares outstanding diluted |
26,403,281 | 19,871,205 |
The accompanying notes are an integral part of the consolidated financial statements.
4
Table of Contents
WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME
(Unaudited)
(in thousands, except share data)
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||
Common Stock | Paid-In | Comprehensive | Retained | Comprehensive | ||||||||||||||||||||||||
Total | Shares | Amount | Capital | Income | Earnings | Income | ||||||||||||||||||||||
Balance at December 31, 2009 |
$ | 568,184 | 25,642,889 | $ | 256 | $ | 122,552 | $ | 443,433 | $ | 1,943 | |||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income |
8,112 | $ | 8,112 | 8,112 | ||||||||||||||||||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||||||||||||||
Change in postretirement benefit plans,
net of $7 tax effect |
(126 | ) | (126 | ) | (126 | ) | ||||||||||||||||||||||
Net unrealized gain on subordinate
security, net of $0 tax effect |
36 | 36 | 36 | |||||||||||||||||||||||||
Net amortization of realized gain on
closed hedges, net of $0 tax effect |
(64 | ) | (64 | ) | (64 | ) | ||||||||||||||||||||||
Comprehensive income |
$ | 7,958 | ||||||||||||||||||||||||||
Share-based compensation |
1,172 | 1,172 | ||||||||||||||||||||||||||
Shares issued upon exercise of stock options and
vesting of RSUs |
12 | 70,180 | 1 | 11 | ||||||||||||||||||||||||
Repurchase and cancellation of common stock |
(264 | ) | (18,996 | ) | (264 | ) | ||||||||||||||||||||||
Balance at March 31, 2010 |
$ | 577,062 | 25,694,073 | $ | 257 | $ | 123,471 | $ | 451,545 | $ | 1,789 | |||||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
5
Table of Contents
WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2010 | 2009 | |||||||
Operating activities: |
||||||||
Net income |
$ | 8,112 | $ | 7,202 | ||||
Adjustments to reconcile net income to net cash (used in) provided by
operating activities: |
||||||||
Provision for loan losses |
3,190 | 4,376 | ||||||
Amortization of residential loan discount to interest income |
(3,235 | ) | (4,143 | ) | ||||
Depreciation and amortization |
91 | 78 | ||||||
Benefit from deferred income taxes |
(5 | ) | (183 | ) | ||||
Amortization of deferred debt issuance costs to interest expense |
259 | 260 | ||||||
Share-based compensation |
1,172 | 67 | ||||||
Other |
(124 | ) | (121 | ) | ||||
(Increase) decrease in assets: |
||||||||
Receivables |
1,108 | 281 | ||||||
Other |
805 | (88 | ) | |||||
Increase (decrease) in liabilities: |
||||||||
Accounts payable |
235 | (188 | ) | |||||
Accrued expenses |
(2,858 | ) | 3,906 | |||||
Accrued interest |
(200 | ) | (253 | ) | ||||
Cash flows provided by operating activities |
8,550 | 11,194 | ||||||
Investing activities: |
||||||||
Principal payments received on residential loans |
24,736 | 30,813 | ||||||
Additions to real estate owned |
(3,327 | ) | (2,071 | ) | ||||
Cash proceeds from sales of real estate owned |
2,221 | 2,452 | ||||||
Additions to property and equipment, net |
(8 | ) | (1,881 | ) | ||||
Decrease in restricted cash |
1,429 | 7 | ||||||
Cash flows provided by investing activities |
25,051 | 29,320 | ||||||
Financing activities: |
||||||||
Payments on mortgage-backed debt |
(23,085 | ) | (27,673 | ) | ||||
Net activity with Walter Energy |
| (8,680 | ) | |||||
Dividends and dividend equivalents declared |
(13,248 | ) | | |||||
Shares issued upon exercise of stock options and vesting of RSUs |
12 | | ||||||
Repurchase and cancellation of common stock |
(264 | ) | | |||||
Cash flows used in financing activities |
(36,585 | ) | (36,353 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
(2,984 | ) | 4,161 | |||||
Cash and cash equivalents at the beginning of the period |
99,286 | 1,319 | ||||||
Cash and cash equivalents at the end of the period |
$ | 96,302 | $ | 5,480 | ||||
Supplemental Disclosure of Non-Cash Investing and Financing Activities: |
||||||||
Real estate owned acquired through foreclosure |
$ | 21,104 | $ | 20,863 | ||||
Residential loans originated to finance the sale of real estate owned |
$ | 20,476 | $ | 13,473 | ||||
Residential loans acquired with warehouse proceeds and/or advances
from Walter Energy |
$ | | $ | 1,390 | ||||
Dividends to Walter Energy |
$ | | $ | 3,356 |
The accompanying notes are an integral part of the consolidated financial statements.
6
Table of Contents
WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business
The Company is a mortgage servicer and mortgage portfolio owner specializing in subprime,
non-conforming and other credit-challenged residential loans primarily in the southeastern United
States, or U.S. The Company also operates mortgage advisory and insurance ancillary businesses. At
March 31, 2010, the Company had four wholly owned, primary subsidiaries: Hanover Capital Partners
2, Ltd., doing business as Hanover Capital, Walter Mortgage Company, LLC, or WMC, Best Insurors,
Inc., or Best, and Walter Investment Reinsurance Company, Ltd., or WIRC.
The Companys business, headquartered in Tampa, Florida, was established in 1958 as the
financing segment of Walter Energy, Inc., formerly known as Walter Industries, Inc., or Walter
Energy. Throughout the Companys history, it purchased residential loans originated by Walter
Energys homebuilding affiliate, Jim Walter Homes, Inc., or JWH, originated and purchased
residential loans on its own behalf, and serviced these residential loans to maturity. Over the
past 50 years, the Company has developed significant expertise in servicing credit-challenged
accounts through its differentiated high-touch approach which involves significant face-to-face
borrower contact by trained servicing personnel strategically located in the markets where its
borrowers reside. As of March 31, 2010, the Company serviced approximately 34,000 individual
residential loans.
The Spin-off
On September 30, 2008, Walter Energy outlined its plans to separate its Financing
business from its core Natural Resources business through a spin-off to stockholders. Immediately
prior to the spin-off, substantially all of the assets and liabilities related to the Financing
business were contributed, through a series of transactions, to Walter Investment Management LLC,
or WIM, in return for all of WIMs membership units. See Note 3 for further information.
The combined financial statements of WMC, Best and WIRC (collectively representing
substantially all of Walter Energys Financing business prior to the spin-off) are considered the
predecessor to WIM for accounting purposes. Under Walter Energys ownership, the Financing business
operated through separate subsidiaries. A direct ownership relationship did not exist among the
legal entities prior to the contribution to WIM.
The Merger
On September 30, 2008, Walter Energy and WIM entered into a definitive agreement to merge
with Hanover Capital Mortgage Holdings, Inc., or Hanover, which agreement was amended and restated
on February 17, 2009. On April 17, 2009, Hanover completed the transactions, or the Merger,
contemplated by the Second Amended and Restated Agreement and Plan of Merger (as amended on
April 17, 2009, or the Merger Agreement) by and among Hanover, Walter Energy, WIM, and JWH Holding
Company, LLC, or JWHHC. The merged business, together with its consolidated subsidiaries, was
renamed Walter Investment Management Corp. on April 17, 2009 and is referred to herein as Walter
Investment or the Company. See Note 3 for further information.
2. Basis of Presentation
Interim Financial Reporting
The accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States, or GAAP, for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 2010 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2010. These unaudited interim
financial statements should be read in conjunction with our audited consolidated financial
statements and related notes included in the Companys Annual Report on Form 10-K for the year
ended December 31, 2009.
Although Hanover was the surviving legal and tax entity in the Merger, for accounting purposes
the Merger was treated as a reverse acquisition of the operations of Hanover and has been accounted
for pursuant to the guidance concerning business combinations, with WIM as the accounting acquirer.
As such, the pre-acquisition financial statements of WIM are treated as the historical financial
statements of Walter Investment. The Hanover assets acquired and the liabilities assumed were
recorded at the date of acquisition, April 17, 2009, at their respective fair values. The results
of operations of Hanover were included in the consolidated statements of income for periods
subsequent to the Merger.
The consolidated financial statements have been prepared in accordance with GAAP, which
requires management to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements. Actual results could differ from
those estimates. All significant intercompany balances have been eliminated in the consolidated
financial statements.
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Table of Contents
Although the Company did not operate as an independent, stand-alone entity prior to
April 17, 2009, management believes the assumptions underlying the consolidated financial
statements for the period through April 17, 2009 are reasonable. However, the consolidated
financial statements included herein do not include all of the expenses that would have been
incurred had the Company been a separate, stand-alone entity, although, the consolidated financial
statements do include certain costs and expenses that have been allocated to the Company from
Walter Energy for the three months ended March 31, 2009. As such, the financial information does
not necessarily reflect what would have been reflected had the Company been a separate, stand-alone
entity during the period through April 17, 2009.
Recent Accounting Guidance
Transfers and Servicing
In June 2009, the FASB issued new accounting guidance concerning the accounting for
transfers of financial assets which amends the existing derecognition accounting and disclosure
guidance. The guidance eliminates the exemption from consolidation for QSPEs, it also requires a
transferor to evaluate all existing QSPEs to determine whether it must be consolidated in
accordance with the accounting guidance concerning variable interest entities. The guidance was
effective for financial asset transfers occurring after the beginning of an entitys first fiscal
year that begins after November 15, 2009. The adoption of this guidance on January 1, 2010 did not
have a significant impact on the Companys consolidated financial statements.
Fair Value Measurements and Disclosures
In January 2010, the FASB updated the accounting standards to require new disclosures for
fair value measurements and to provide clarification for existing disclosure requirements. More
specifically, this update will require (a) an entity to disclose separately the amounts of
significant transfers in and out of levels 1 and 2 fair value measurements and to describe the
reasons for the transfers and (b) information about purchases, sales, issuances, and settlements to
be presented separately (i.e., present the activity on a gross basis rather than net) in the roll
forward of fair value measurements using significant unobservable inputs (Level 3 inputs). This
update clarifies existing disclosure requirements for the level of disaggregation used for classes
of assets and liabilities measured at fair value and requires disclosures about the valuation
techniques and inputs used to measure for fair value for both recurring and nonrecurring fair value
measurements using Level 2 and Level 3 inputs. The standard was effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after December 12, 2010,
and for interim periods within those fiscal years. The adoption of this guidance on January 1, 2010
did not have a significant impact on the Companys consolidated financial statements or
disclosures. See Note 5 for the additional required disclosures.
Subsequent Events
In May 2009, the FASB issued guidelines on subsequent event accounting to establish
general standards of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued. This guidance was subsequently amended in
February 2010 to no longer require disclosure of the date through which an entity has evaluated
subsequent events. The adoption of this guidance did not have a significant impact on the Companys
consolidated financial statements.
Receivables
In April 2010, the FASB updated the accounting standards to clarify that modifications of
acquired loans that are accounted for within a pool would not result in the removal of those loans
from the pool even if the modification would otherwise be considered a troubled debt
restructuring. The guidance will be effective for modifications of acquired loans accounted for
within pools occurring in the first interim or annual period ending on or after July 15, 2010. The
Company is continuing to evaluate the impact that the guidance will have on the Companys
consolidated financial statements.
Reclassifications
In order to provide comparability between periods presented, certain amounts have been
reclassified from the previously reported consolidated financial statements to conform to the
consolidated financial statement presentation of the current period.
3. Business Separation and Merger
On September 30, 2008, Walter Energy outlined its plans to separate its Financing business
from its core Natural Resources businesses through a spin-off to stockholders and subsequent Merger
with Hanover. In furtherance of these plans, on September 30, 2008, Walter Energy and WIM entered
into a definitive agreement to merge with Hanover, which agreement was amended and restated on
February 17, 2009. To effect the separation, WIM was formed on February 3, 2009, as a wholly-owned
subsidiary of Walter Energy, having no independent assets or operations. Immediately prior to the
spin-off, substantially all of the assets and
8
Table of Contents
liabilities related to the Financing business were contributed, through a series of
transactions, to WIM in return for WIMs membership unit.
On April 17, 2009, the Company completed its separation from Walter Energy. In connection
with the separation, WIM and Walter Energy executed the following transactions or agreements which
involved no cash:
| Walter Energy distributed 100% of its interest in WIM to holders of Walter Energys common stock; | ||
| All intercompany balances between WIM and Walter Energy were settled with the net balance recorded as a dividend to Walter Energy; | ||
| In accordance with the Tax Separation Agreement, Walter Energy will, in general, be responsible for any and all taxes reported on any joint return through the date of the separation, which may also include WIM for periods prior to the separation. WIM will be responsible for any and all taxes reported on any WIM separate tax return and on any consolidated returns for Walter Investment subsequent to the separation; | ||
| Walter Energys share-based awards held by WIM employees were converted to equivalent share-based awards of Walter Investment, with the number of shares and the exercise price being equitably adjusted to preserve the intrinsic value. The conversion was accounted for as a modification pursuant to the guidance concerning stock compensation. |
The assets and liabilities transferred to WIM from Walter Energy also included
$26.6 million in cash, which was contributed to WIM by Walter Energy on April 17, 2009. Following
the spin-off, WIM paid a taxable dividend consisting of cash of $16.0 million and additional equity
interests to its members.
The Merger occurred immediately following the spin-off and taxable dividend on April 17,
2009. The surviving company, Walter Investment, continues to operate as a publicly traded REIT
subsequent to the Merger. After the spin-off and Merger, Walter Energys stockholders that became
members of WIM as a result of the spin-off, and certain holders of options to acquire limited
liability company interests of WIM, collectively owned 98.5% and stockholders of Hanover owned 1.5%
of the shares of common stock of Walter Investment outstanding or reserved for issuance in
settlement of restricted stock units of Walter Investment. As a result, the business combination
has been accounted for as a reverse acquisition, with WIM considered the accounting acquirer.
Walter Investment applied for, and was granted approval, to list its shares on the NYSE Amex. On
April 20, 2009, the Companys common stock began trading on the NYSE Amex under the symbol WAC.
The purchase price for the acquisition was $2.2 million based on the fair value of
Hanover (308,302 Hanover shares, which represented 1.5% of the shares of common stock at the time
of the transaction, at $7.09, the closing stock price of Walter Investment) on April 17, 2009.
The above purchase price has been allocated to the tangible assets acquired and
liabilities assumed based on managements estimates of their current fair values.
Acquisition-related transaction costs, including legal and accounting fees and other external costs
directly related to the Merger, were expensed as incurred.
Prior to the acquisition, the Company loaned Hanover funds under a revolving line of
credit, as well as a loan and security agreement which were automatically terminated by operation
of law upon consummation of the Merger.
4. Restricted Cash
Restricted Cash
Restricted cash totaled $8.9 million and $9.0 million at March 31, 2010 and December 31, 2009,
respectively. Restricted cash includes approximately $5.9 million at March 31, 2010 and
December 31, 2009 held in an insurance trust account which secures payments under the Companys
reinsurance agreements. The funds in the insurance trust account include investments in money
market funds. The remaining restricted cash at March 31, 2010 and December 31, 2009 consists
primarily of compensating balance requirements.
Restricted Cash of Securitization Trusts
Restricted cash of securitization trusts relate primarily to funds collected on residential
loans owned by the Companys various securitization trusts (see Note 9), which are available only
to pay expenses of the securitization trusts and principal and interest on indebtedness of the
securitization trusts ($41.3 million and $42.7 million, at March 31, 2010 and December 31, 2009,
respectively). Restricted cash also includes amounts to provide overcollateralization within the
Companys mortgage-backed debt arrangements. Restricted cash at March 31, 2010 and December 31,
2009 include short-term deposits in FDIC-insured accounts.
9
Table of Contents
5. Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants. A three-tier fair value
hierarchy is used to prioritize the inputs used in measuring fair value. The hierarchy gives the
highest priority to unadjusted quoted market prices in active markets for identical assets or
liabilities and the lowest priority to unobservable inputs. A financial instruments level within
the fair value hierarchy is based on the lowest level of any input that is significant to the fair
value measurement. The three levels of the fair value hierarchy are as follows:
Basis or Measurement
Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or liabilities.
Level 2 Inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly.
Level 3 Prices or valuations that require inputs that are both significant to the fair
value measurement and unobservable.
The accounting guidance concerning fair value allows the Company to elect to measure
certain items at fair value and report the changes in fair value through the statements of income.
This election can only be made at certain specified dates and is irrevocable once made. The Company
does not have a policy regarding specific assets or liabilities to elect to measure at fair value,
but rather makes the election on an instrument by instrument basis as they are acquired or
incurred. The Company has not made the fair value election for any financial assets or liabilities
as of March 31, 2010.
The Company determines fair value based upon quoted broker prices when available or through
the use of alternative approaches, such as discounting the expected cash flows using market rates
commensurate with the credit quality and duration of the investment.
Items Measured at Fair Value on a Recurring Basis
The subordinate security is measured in the consolidated financial statements at fair
value on a recurring basis in accordance with the accounting guidance concerning debt and equity
securities and is categorized in the table below based upon the lowest level of significant input
to the valuation (in thousands):
March 31, 2010 | ||||||||||||||||
Quoted Prices in | ||||||||||||||||
Active Markets | Significant | |||||||||||||||
for Identical | Significant Other | Unobservable | ||||||||||||||
Assets | Observable Inputs | Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
Subordinate security |
$ | | $ | | $ | 1,837 | $ | 1,837 | ||||||||
Total |
$ | | $ | | $ | 1,837 | $ | 1,837 | ||||||||
The subordinate security, acquired as part of the Merger, consists of a single,
fixed-rate security backed by notes that are collateralized by manufactured housing. Approximately
one-third of the notes include attached real estate on which the manufactured housing is located as
additional collateral. The subordinate security has a coupon of 8.0% and a contractual maturity of
2038. The underlying notes were originated primarily in 2004 and 2005, have a weighted-average
coupon rate of 9.6% and a weighted-average maturity of 19.3 years. The subordinate security has an
overcollateralization level of 8.6% with a 1.1% annual loss rate.
To estimate the fair value, the Company used a discounted cash flow approach. The significant
inputs for the valuation model include the following:
| Yield: 18.5% | ||
| Probability of default: 2.3% | ||
| Loss severity: 55.0% | ||
| Prepayment: 3.5% |
The following table provides a reconciliation of the beginning and ending balances of the
Companys subordinate security which is measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the three months ended March 31, 2010 (in thousands):
10
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As of and for the | ||||
Three Months Ended | ||||
March 31, 2010 | ||||
Beginning balance |
$ | 1,801 | ||
Principal reductions |
| |||
Total gains (losses): |
||||
Included in net income |
| |||
Included in other comprehensive income |
36 | |||
Purchases, sales, issuances and settlements, net |
| |||
Transfer into or out of Level 3 category |
| |||
$ | 1,837 | |||
Total gains (losses) for the period
included in earnings attributable to the change
in unrealized gains or losses relating to
assets still held at the reporting date |
$ | | ||
Items Measured at Fair Value on a Non-Recurring Basis
At the time a residential loan becomes real estate owned, or REO, the Company records the
property at the lower of its carrying amount or estimated fair value less estimated costs to sell.
Upon foreclosure and through liquidation, the Company evaluates the propertys fair value as
compared to its carrying amount and records a valuation adjustment when the carrying amount exceeds
fair value. Any valuation adjustment at the time the loan becomes real estate owned is charged to
the allowance for loan losses.
Carrying values, and the corresponding fair value adjustments, for Level 3 assets and
liabilities measured in the consolidated financial statements at fair value on a non-recurring
basis are as follows (in thousands):
Fair Value Measurements at Reporting Date Using | ||||||||||||||||||||
Quoted Prices in | ||||||||||||||||||||
Real | Active Markets for | Significant Other | Significant | |||||||||||||||||
Estate | Identical Assets | Observable Inputs | Unobservable Inputs | Fair Value | ||||||||||||||||
Fair Value at | Owned | (Level 1) | (Level 2) | (Level 3) | Adjustment | |||||||||||||||
Real estate owned: |
||||||||||||||||||||
March 31, 2010 |
$ | 25,284 | $ | | $ | | $ | 25,284 | $ | (5,167 | ) | |||||||||
December 31, 2009 |
$ | 21,981 | $ | | $ | | $ | 21,981 | $ | (4,430 | ) | |||||||||
Real estate owned of
securitization
trusts: |
||||||||||||||||||||
March 31, 2010 |
$ | 36,667 | $ | | $ | | $ | 36,667 | $ | (9,617 | ) | |||||||||
December 31, 2009 |
$ | 41,143 | $ | | $ | | $ | 41,143 | $ | (10,615 | ) |
As of March 31, 2010, the fair value of the Companys Level 3 REO was $62.0 million.
These REO properties are generally located in rural areas and are primarily concentrated in Texas,
Mississippi, Alabama, Florida, South Carolina and Georgia. The REO properties have a
weighted-average holding period of 10 months. To estimate the fair value, the Company utilized
historical loss severity rates experienced on similar REO properties previously sold by the
Company. The blended loss severity utilized at March 31, 2010 was 19.2%.
Fair Value of Financial Instruments
The following table presents the carrying values and estimated fair values of financial assets
and liabilities that are required to be recorded or disclosed at fair value as of March 31, 2010
and December 31, 2009, respectively (in thousands):
March 31, 2010 | December 31, 2009 | |||||||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
Financial assets: |
||||||||||||||||
Cash and cash
equivalents |
$ | 96,302 | $ | 96,302 | $ | 99,286 | $ | 99,286 | ||||||||
Cash and short-term
investments |
8,901 | 8,901 | 8,963 | 8,963 | ||||||||||||
Restricted cash of
securitization trusts |
41,324 | 41,324 | 42,691 | 42,691 | ||||||||||||
Receivables, net |
3,542 | 3,542 | 3,052 | 3,052 | ||||||||||||
Residential loans, net |
327,775 | 295,600 | 333,636 | 295,000 |
11
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March 31, 2010 | December 31, 2009 | |||||||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | |||||||||||||
Residential loans of
securitization
trusts, net |
1,292,561 | 1,243,047 | 1,310,710 | 1,238,267 | ||||||||||||
Subordinate security |
1,837 | 1,837 | 1,801 | 1,801 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Accounts payable |
477 | 477 | 13,489 | 13,489 | ||||||||||||
Accounts payable of
securitization trusts |
555 | 555 | 556 | 556 | ||||||||||||
Accrued expenses |
25,438 | 25,438 | 28,296 | 28,296 | ||||||||||||
Mortgage-backed debt,
net of deferred debt
issuance costs, of
securitization trusts |
1,226,242 | 1,147,056 | 1,249,004 | 1,147,142 | ||||||||||||
Accrued interest of
securitization trusts |
8,555 | 8,555 | 8,755 | 8,755 |
For assets and liabilities measured in the consolidated financial statements on a
historical cost basis, the estimated fair value shown in the above table is for disclosure purposes
only. The following methods and assumptions were used to estimate fair value:
Cash, restricted cash and short-term investments, receivables, accounts payable, accrued
expenses, and accrued interest The estimated fair value of these financial instruments
approximates their carrying value due to their high liquidity or short-term nature.
Residential loans The fair value of residential loans is estimated by discounting the
net cash flows estimated to be generated from the asset. The discounted cash flows were determined
using assumptions such as, but not limited to, interest rates, prepayment speeds, default rates,
loss severities, and a risk-adjusted market discount rate. The value of these assets is very
sensitive to changes in interest rates.
Subordinate security The fair value of the subordinate security is measured in the
consolidated financial statements at fair value on a recurring basis by discounting the net cash
flows estimated to be generated from the asset. Unrealized gains and losses are reported in
accumulated other comprehensive income. To the extent that the cost basis exceeds the fair value
and the unrealized loss is considered to be other-than-temporary, an impairment charge is
recognized and the amount recorded in accumulated other comprehensive income or loss is
reclassified to earnings as a realized loss.
Mortgage-backed debt, net of deferred debt issuance costs, of securitization trusts
The fair value of mortgage-backed debt of securitization trusts is determined by discounting the
net cash outflows estimated to be used to repay the debt. These obligations are to be satisfied
using the proceeds from the residential loans that secure these obligations and are non-recourse to
the Company. The value of mortgage-backed debt is very sensitive to changes in interest rates.
6. Residential Loans
Residential loans, net are held for investment and consist of unencumbered residential
mortgage loans and residential retail instalment agreements, summarized in the table below (in
thousands):
March 31, 2010 | December 31, 2009 | |||||||
Residential loans, principal balance |
$ | 360,543 | $ | 365,797 | ||||
Less: Yield adjustment, net (1) |
(29,384 | ) | (28,701 | ) | ||||
Less: Allowance for loan losses |
(3,384 | ) | (3,460 | ) | ||||
Residential loans, net (2) |
$ | 327,775 | $ | 333,636 | ||||
(1) | Deferred origination costs, premiums and discounts are amortized over the life of the note portfolio. Deferred origination costs included in the yield adjustment, net for residential loans, net at March 31, 2010 and December 31, 2009 were $2.7 million and $2.8 million, respectively. Premiums and discounts, net included in the yield adjustment, net for residential loans, net at March 31, 2010 and December 31, 2009 were $35.0 million and $35.9 million, respectively. | |
(2) | The weighted average life of the portfolio approximates 10 years based on assumptions for prepayment speeds, default rates and losses. |
The following table summarizes the activity in the allowance for loan losses on residential
loans, net (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Balance, December 31 |
$ | 3,460 | $ | 3,418 | ||||
Provision charged to income |
1,399 | 1,269 | ||||||
Less: Charge-offs, net of recoveries |
(1,475 | ) | (1,314 | ) | ||||
Balance, March 31 |
$ | 3,384 | $ | 3,373 | ||||
12
Table of Contents
The amount of residential loans, net that had been put on nonaccrual status due to
delinquent payments of 90 days past due or greater was $18.8 million and $21.4 million at March 31,
2010 and December 31, 2009, respectively. Residential loans are placed on non-accrual status when
any portion of the principal or interest is 90 days past due. When placed on non-accrual status,
the related interest receivable is reversed against interest income of the current period.
Residential loans are removed from non-accrual status when the amount financed and the associated
interest are no longer over 90 days past due.
The following table presents delinquencies as a percent of amounts outstanding on the
principal balance of residential loans, net:
March 31, 2010 | December 31, 2009 | |||||||
31-60 days |
1.62 | % | 1.98 | % | ||||
61-90 days |
0.83 | % | 1.53 | % | ||||
91 days or more |
5.21 | % | 5.84 | % | ||||
7.66 | % | 9.35 | % | |||||
7. Residential Loans of Securitization Trusts
Residential loans of securitization trusts, net consist of residential mortgage loans and
residential retail instalment agreements that the Company has securitized in structures that are
accounted for as financings. These securitizations are structured legally as sales, but for
accounting purposes are treated as financings under the accounting guidance concerning transfers of
financial assets, as amended. Accordingly, the loans in these securitizations remain on the balance
sheet as residential loans. Given this treatment, retained interests are not created, and
securitization mortgage-backed debt is reflected on the balance sheet as a liability. The assets of
the securitization trusts are not available to satisfy claims of general creditors of the Company
and the mortgage-backed debt issued by the securitization trusts is to be satisfied solely from the
proceeds of the residential loans of securitization trusts and are non-recourse to the Company. The
Company records interest income on residential loans of securitization trusts and interest expense
on mortgage-backed debt issued in the securitizations over the life of the securitizations.
Deferred debt issuance costs and discounts related to the mortgage-backed debt are amortized on a
level yield basis over the estimated life of the mortgage-backed debt.
Residential loans of securitization trusts, net are summarized as follows (in thousands):
March 31, 2010 | December 31, 2009 | |||||||
Residential loans of securitization trusts, principal balance |
$ | 1,432,403 | $ | 1,454,062 | ||||
Less: Yield adjustment, net (1) |
(125,902 | ) | (129,151 | ) | ||||
Less: Allowance for loan losses |
(13,940 | ) | (14,201 | ) | ||||
Residential loans of securitization trusts, net (2) |
$ | 1,292,561 | $ | 1,310,710 | ||||
(1) | Deferred origination costs, premiums and discounts are amortized over the life of the note portfolio. Deferred origination costs included in the yield adjustment, net for residential loans of securitization trusts, net at March 31, 2010 and December 31, 2009 were $8.6 million and $8.8 million, respectively. Premiums and discounts, net included in the yield adjustment, net for residential loans of securitization trusts, net at March 31, 2010 and December 31, 2009 were $142.3 million and $145.8 million, respectively. | |
(2) | The weighted average life of the portfolio approximates 8 years based on assumptions for prepayment speeds, default rates and losses. |
The following table summarizes the activity in the allowance for loan losses on residential
loans of securitization trusts, net (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Balance, December 31 |
$ | 14,201 | $ | 15,551 | ||||
Provision charged to income |
1,791 | 3,107 | ||||||
Less: Charge-offs, net of recoveries |
(2,052 | ) | (3,549 | ) | ||||
Balance, March 31 |
$ | 13,940 | $ | 15,109 | ||||
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The amount of residential loans of securitization trusts, net that had been put on nonaccrual
status due to delinquent payments of 90 days past due or greater was $32.9 million and $39.8
million at March 31, 2010 and December 31, 2009, respectively. Residential loans are placed on
non-accrual status when any portion of the principal or interest is 90 days past due. When placed
on non-accrual status, the related interest receivable is reversed against interest income of the
current period. Residential loans are removed from non-accrual status when the amount financed and
the associated interest are no longer over 90 days past due.
All of the Companys residential loans of securitization trusts, net are pledged as
collateral for the mortgage-backed debt (see Note 9). The Companys only continued involvement with
the residential loans of securitization trusts, net is retaining all of the beneficial interests in
the securitization trusts and servicing the residential loans collateralizing the mortgage-backed
debt.
The following table presents delinquencies as a percent of amounts outstanding on the
principal balance of residential loans of securitization trusts:
March 31, 2010 | December 31, 2009 | |||||||
31-60 days |
0.73 | % | 1.17 | % | ||||
61-90 days |
0.31 | % | 0.54 | % | ||||
91 days or more |
2.30 | % | 2.74 | % | ||||
3.34 | % | 4.45 | % | |||||
8. Subordinate Security
The Companys subordinate security totaled $1.8 million at March 31, 2010 and December 31,
2009. The subordinate security was acquired as part of the Merger with Hanover. Subordinate
security is summarized as follows (in thousands):
March 31, 2010 | December 31, 2009 | |||||||
Principal balance |
$ | 3,812 | $ | 3,812 | ||||
Purchase price and other adjustments |
(2,200 | ) | (2,200 | ) | ||||
Amortized cost |
$ | 1,612 | $ | 1,612 | ||||
Unrealized gain |
225 | 189 | ||||||
Carrying value (fair value) |
$ | 1,837 | $ | 1,801 | ||||
Actual maturities on mortgage-backed securities are generally shorter than the stated
contractual maturities because the actual maturities are affected by the contractual lives of the
underlying notes, periodic payments of principal, and prepayments of principal. The contractual
maturity of the subordinate security is 2038.
9. Mortgage-Backed Debt and Related Collateral of Securitization Trusts
Mortgage-Backed Debt
Mortgage-backed debt consists of mortgage-backed/asset-backed notes and collateralized
mortgage obligations issued by the Company to fund its residential loans via the securitization
market. The securitization trusts beneficially owned by WIMC and its wholly owned subsidiary,
Mid-State Capital, LLC, or Mid-State Capital, are the depositors under the Companys outstanding
mortgage-backed and asset-backed notes (the Trust Notes), which consist of eight separate series
of public debt offerings and one private offering. Hanover Capital Grantor Trust, acquired from
Hanover as part of the Merger, is a public debt offering. These ten trusts have an aggregate of
$1.2 billion of outstanding debt, collateralized by $1.5 billion of assets, including residential
loans, REO and restricted cash. All of the Companys mortgage-backed debt is non-recourse and not
cross-collateralized and, therefore, must be satisfied exclusively from the proceeds of the
residential loans and REO held in each securitization trust. The Company services the collateral
underlying the nine securitization trusts owned by WIMC and Mid-State Capital.
The securitization trusts contain provisions that require the cash payments received from
the underlying residential loans be applied to reduce the principal balance of the Trust Notes
unless certain overcollateralization or other similar targets are satisfied. The securitization
trusts also contain delinquency and loss triggers, that, if exceeded, require that any excess
overcollateralization be paid to reduce the outstanding principal balance of the Trust Notes for
that particular securitization at an accelerated pace. Assuming no servicer trigger events have
occurred and the overcollateralization targets have been met, any excess cash is released to the
Company either monthly or quarterly, in accordance with the terms of the respective underlying
trust agreements. As of March 31, 2010, two of the Companys securitization trusts exceeded certain
triggers and did not provide any significant levels of excess cash flow to the Company during the
three months ended March 31, 2010.
Borrower remittances received on the residential loan collateral are used to make
payments on the mortgage-backed debt. The maturity of the mortgage-backed debt is directly affected
by principal prepayments on the related residential loan collateral. As a result, the actual
maturity of the mortgage-backed debt is likely to occur earlier than the stated maturity. Certain
of the Companys
14
Table of Contents
mortgage-backed debt is also subject to redemption at the option of the Company
according to specific terms of the respective indenture agreements.
Collateral for Mortgage-Backed Debt
The following table summarizes the carrying value of the collateral for the
mortgage-backed debt as of March 31, 2010 and December 31, 2009, respectively (in thousands):
March 31, 2010 | December 31, 2009 | |||||||
Residential loans of securitization
trusts, principal balance |
$ | 1,432,403 | $ | 1,454,062 | ||||
Restricted cash of securitization trusts |
41,324 | 42,691 | ||||||
Real estate owned of securitization trusts |
36,667 | 41,143 | ||||||
Total mortgage-backed debt
collateral of securitization trusts |
$ | 1,510,394 | $ | 1,537,896 | ||||
10. Share-Based Compensation Plans
The Companys share-based expense has been reflected in the consolidated statements of income
in salaries and benefits expense.
Option Activity
On January 4, 2010, certain executive officers of the Company were awarded a total of
118,651 nonqualified options, or the Executive Options, to acquire common stock of the Company
pursuant to the 2009 LTIP. The Executive Options granted to each executive officer of the Company
will vest and become exercisable in equal installments on the first, second and third anniversary
of the date of grant. The exercise price of $14.39 for each of the Executive Options was determined
based on the mean of the high and low sales prices for a share of common stock of the Company as
reported by the NYSE Amex on the date of grant.
On January 22, 2010, an executive, in connection with his employment with the Company,
was awarded a total of 90,000 nonqualified options to acquire common stock of the Company pursuant
to the 2009 LTIP. The options granted will vest and become exercisable on the fourth anniversary of
the award. The exercise price of $14.29 for each option was determined based on the mean of the
high and low sales prices for a share of common stock of the Company as reported by the NYSE Amex
on the date of grant.
On March 3, 2010, the Company granted stock options to its new non-employee director who was
awarded a total of 5,195 nonqualified options to acquire common stock of the Company pursuant to
the 2009 LTIP. The options granted will vest and become exercisable in equal installments on the
first, second and third anniversary of the date of grant. The exercise price of $14.79 for each
option was determined based on the mean of the high and low sales prices for a share of common
stock of the Company as reported by the NYSE Amex on the date of grant.
The grant date fair value of the stock options granted during the three months ended
March 31, 2010 approximated $0.6 million.
Non-Vested Share Activity
The Companys non-vested share-based awards consist of restricted stock and restricted
stock units.
On January 4, 2010, certain executive officers of the Company were awarded a total of
100,548 restricted stock units, or the Executive RSUs, of the Company pursuant to the 2009 LTIP.
The Executive RSUs granted to each executive officer of the Company will vest in equal installments on the first, second and third anniversary of the date of grant,
and each such Executive RSU vested on such date will be paid out with a single share of common
stock of the Company. Each executive receiving Executive RSUs will be entitled to receive cash
payments equivalent to any dividend paid to the holders of common stock of the Company, but they
will not be entitled to any voting rights otherwise associated with the common stock.
On January 22, 2010, an executive, in connection with his employment with the Company, was
awarded a total of 135,556 restricted stock units, or RSUs, of the Company under the 2009 LTIP. Of
the RSUs granted, 110,000 will vest in equal installments on the first, second and third
anniversary of the date of grant. The settlement date for these RSUs is January 22, 2013, and each
such RSU vested on such date will be paid out with a single share of common stock of the Company.
The remaining 25,556 RSUs granted will vest on the first anniversary of the date of grant. The
settlement date for these RSUs is March 14, 2011, and each such RSU vested on such date will be
paid out with a single share of common stock of the Company. The executive receiving the RSUs will
be entitled to receive cash payments equivalent to any dividend paid to the holders of common stock
of the Company, but they will not be entitled to any voting rights otherwise associated with the
common stock.
15
Table of Contents
The grant date fair value of RSUs granted during the three months ended March 31, 2010
approximated $3.4 million.
11. Credit Agreements
On April 20, 2009, the Company entered into a syndicated credit agreement, a revolving credit
agreement and security agreement, and a support letter of credit agreement. All three of these
agreements mature on April 20, 2011. As of March 31, 2010, no funds have been drawn under any of
the credit agreements and the Company is in compliance with all covenants.
12. Transactions with Walter Energy
Following the spin-off, Walter Investment and Walter Energy have operated independently, and
neither has any ownership interest in the other. In order to govern certain of the ongoing
relationships between the Company and Walter Energy after the spin-off and to provide mechanisms
for an orderly transition, the Company and Walter Energy entered into certain agreements, pursuant
to which (a) the Company and Walter Energy provide certain services to each other, (b) the Company
and Walter Energy will abide by certain non-compete and non-solicitation arrangements, and (c) the
Company and Walter Energy will indemnify each other against certain liabilities arising from their
respective businesses. The specified services that the Company and Walter Energy may provide each
other, as requested, include tax and accounting services, certain human resources services,
communications systems and support, and insurance/risk management. Each party will be compensated
for services rendered, as set forth in the Transition Services Agreement. The Transition Services
Agreement provides for terms not to exceed 24 months for the various services, with some of the
terms capable of extension. See Note 3 for further information regarding the spin-off transaction.
13. Comprehensive Income and Accumulated Other Comprehensive Income
The components of comprehensive income are as follows (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Net income |
$ | 8,112 | $ | 7,202 | ||||
Other comprehensive income (loss): |
||||||||
Change in postretirement benefit plans, net of $7 tax effect |
(126 | ) | | |||||
Net unrealized gain on subordinate security, net of $0 tax effect |
36 | | ||||||
Net amortization of realized gain on closed hedges, net of $0
and $30 tax effect, respectively |
(64 | ) | (51 | ) | ||||
Comprehensive income |
$ | 7,958 | $ | 7,151 | ||||
The components of accumulated other comprehensive income are as follows (in thousands):
Excess of | ||||||||||||||||
Additional | ||||||||||||||||
Postretirement | Net Unrealized Gain | Net Amortization of | ||||||||||||||
Employee Benefits | on Subordinate | Realized Gain on | ||||||||||||||
Liability | Security | Closed Hedges | Total | |||||||||||||
Balance at December 31, 2009 |
$ | 1,117 | $ | 189 | $ | 637 | $ | 1,943 | ||||||||
Pre-tax amount |
(133 | ) | 36 | (64 | ) | (161 | ) | |||||||||
Tax benefit |
7 | | | 7 | ||||||||||||
Balance at March 31, 2010 |
$ | 991 | $ | 225 | $ | 573 | $ | 1,789 | ||||||||
14. Common Stock and Earnings Per Share
In accordance with the accounting guidance concerning earnings per share, or EPS, unvested
share-based payment awards that include non-forfeitable rights to dividends or dividend
equivalents, whether paid or unpaid, are considered participating securities. As a result, the
awards are required to be included in the calculation of basic earnings per common share pursuant
to the two-class method. For the Company, participating securities are comprised of certain
unvested restricted stock and restricted stock units.
Under the two-class method, net income is reduced by the amount of dividends declared in the
period for common stock and participating securities. The remaining undistributed earnings are
then allocated to common stock and participating securities as if all of the net income for the
period had been distributed. Basic earnings per share excludes dilution and is calculated by
dividing net income allocable to common shares by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share is calculated by dividing net income
allocable to common shares by the weighted-average number of common shares for the period, as
adjusted for the potential dilutive effect of non-participating share-based awards.
16
Table of Contents
The following is a reconciliation of the numerators and denominators of the basic and
diluted EPS computations shown on the face of the accompanying consolidated statements of income
(in thousands, except per share data):
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Basic earnings per share: |
||||||||
Net income |
$ | 8,112 | $ | 7,202 | ||||
Less: net income allocated to unvested
restricted stock units |
(113 | ) | | |||||
Net income available to common
stockholders (numerator) |
$ | 7,999 | $ | 7,202 | ||||
Weighted-average common shares outstanding |
25,657 | 19,871 | ||||||
Add: vested restricted stock units |
686 | | ||||||
Total weighted-average common shares
outstanding (denominator) |
26,343 | 19,871 | ||||||
Basic earnings per share |
$ | 0.30 | $ | 0.36 | ||||
Diluted earnings per share: |
||||||||
Net income |
$ | 8,112 | $ | 7,202 | ||||
Less: net income allocated to unvested
restricted stock units |
(113 | ) | | |||||
Net income available to common
stockholders (numerator) |
$ | 7,999 | $ | 7,202 | ||||
Weighted-average common shares outstanding |
25,657 | 19,871 | ||||||
Add: Potentially dilutive stock options and
restricted stock units |
746 | | ||||||
Diluted weighted-average common shares
outstanding (denominator) |
26,403 | 19,871 | ||||||
Diluted earnings per share |
$ | 0.30 | $ | 0.36 | ||||
The calculation of diluted earnings per share for the three months ended March 31, 2010
does not include 0.2 million shares because their effect would have been anti-dilutive. There were
no anti-dilutive shares for the three months ended March 31, 2009.
15. REIT Qualification
The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended. The Companys continuing qualification as a REIT depends on its ability to meet the
various requirements imposed by the Code, which relate to organizational structure, distribution
levels, diversity of stock ownership and certain restrictions with regard to owned assets and
categories of income. As a REIT, the Company will generally not be subject to United States, or
U.S., federal corporate income tax on its taxable income that is currently distributed to
stockholders.
Even as a REIT, the Company may be subject to U.S. federal income and excise taxes in
various situations, such as on the Companys undistributed income.
Certain of the Companys operations or portions thereof, including mortgage advisory and
insurance ancillary businesses, are conducted through taxable REIT subsidiaries, or TRSs. A TRS is
a C-corporation that has not elected REIT status and, as such, is subject to U.S. federal corporate
income tax. The Companys TRSs facilitate its ability to offer certain services and conduct
activities that generally cannot be offered directly by the REIT. The Company also will be required
to pay a 100% tax on any net income on non-arms length transactions between the REIT and any of
its TRSs.
16. Income Taxes
The Company recorded income tax expense of $0.1 million for the three months ended March 31,
2010. During the three months ended March 31, 2010 and 2009, an estimated tax rate of 1.6% and
36.6%, respectively, was used to derive income tax expense of $0.1 million and $4.2 million,
respectively, calculated on our income from operations, before taxes, of $8.2 million and $11.4
million, respectively. The decrease in income tax expense was due to the Companys REIT
qualification in conjunction with the spin-off from Walter Energy and Merger with Hanover which resulted in only the Companys TRSs being taxable
entities.
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The Company recognizes tax benefits in accordance with the FASB guidance concerning
uncertainty in income taxes. This guidance establishes a more-likely-than-not recognition
threshold that must be met before a tax benefit can be recognized in the financial statements. As
of March 31, 2010 and December 31, 2009, the total gross amount of unrecognized tax benefits was
$7.7 million.
17. Commitments and Contingencies
Securities Sold with Recourse
In October 1998, Hanover sold 15 adjustable-rate FNMA certificates and 19 fixed-rate FNMA
certificates that the Company received in a swap for certain adjustable-rate and fixed-rate
mortgage loans. These securities were sold with recourse. Accordingly, the Company retains credit
risk with respect to the principal amount of these mortgage securities. As of March 31, 2010, the
unpaid principal balance of the 15 remaining mortgage securities was approximately $1.7 million.
Employment Agreements
At March 31, 2010, the Company had employment agreements with its senior officers, with
varying terms that provide for, among other things, base salary, bonus, and change-in-control
provisions that are subject to the occurrence of certain triggering events.
Bayport Plaza Lease
On May 1, 2009, the Company entered into a sublease with Municipal Mortgage & Equity, LLC to
secure the Companys corporate headquarters located at 3000 Bayport Drive, Suite 1100, Tampa,
Florida 33607. The lease commenced on May 15, 2009 and expires on April 29, 2016. The base rent
over the lease term is $4.0 million.
Income Tax Exposure
A dispute exists with regard to federal income taxes owed by the Walter Energy consolidated
group. The Company was part of the Walter Energy consolidated group prior to the spin-off and
Merger. As such, the Company is jointly and severally liable with Walter Energy for any final
taxes, interest and/or penalties owed by the Walter Energy consolidated group during the time that
the Company was a part of the Walter Energy consolidated group. According to Walter Energys most
recent public filing, they state that a controversy exists with regard to federal income taxes
allegedly owed by Walter Energy for fiscal years ended August 31, 1983 through May 31, 1994, and
the amount of tax claimed by the IRS in an adversary proceeding in bankruptcy court, including
interest and penalties, is substantial. The public filing goes on to disclose that Walter Energy
believes, should the IRS prevail on any such issues, Walter Energys financial exposure is limited
to interest and possible penalties. Walter Energy discloses further that it believes that all of
its current and prior tax filing positions have substantial merit and it intends to defend
vigorously any tax claims asserted. Under the terms of the Tax Separation Agreement between the
Company and Walter Energy dated April 17, 2009, Walter Energy is responsible for the payment of all
federal income taxes (including any interest or penalties applicable thereto) of the consolidated
group, which includes the aforementioned claims of the IRS. However, to the extent that Walter
Energy is unable to pay any amounts owed, the Company could be responsible for any unpaid amounts.
The Tax Separation Agreement also provides that Walter Energy is responsible for the
preparation and filing of any tax returns for the consolidated group for the periods when the
Company was part of the Walter Energy consolidated group. This arrangement may result in conflicts
between Walter Energy and the Company. In addition, the spin-off of WIM from Walter Energy was
intended to qualify as a tax-free spin-off under Section 355 of the Code. The Tax Separation
Agreement provides generally that if the spin-off is determined not to be tax-free pursuant to
Section 355 of the Code, any taxes imposed on Walter Energy or a Walter Energy shareholder as a
result of such determination (Distribution Taxes) which are the result of the acts or omissions
of Walter Energy or its affiliates, will be the responsibility of Walter Energy. However, should
Distribution Taxes result from the acts or omissions of the Company or its affiliates, such
Distribution Taxes will be the responsibility of the Company. The Tax Separation Agreement goes on
to provide that Walter Energy and the Company shall be jointly liable, pursuant to a designated
allocation formula, for any Distribution Taxes that are not specifically allocated to Walter Energy
or the Company. To the extent that Walter Energy is unable or unwilling to pay any Distribution
Taxes for which it is responsible under the Tax Separation Agreement, the Company could be liable
for those taxes as a result of being a member of the Walter Energy consolidated group for the year
in which the spin-off occurred. The Tax Separation Agreement also provides for payments from Walter
Energy in the event that an additional taxable dividend is required to cure a REIT disqualification
from the determination of a shortfall in the distribution of non-REIT earnings and profits made
immediately following the spin-off. As with Distribution Taxes, the Company will be responsible for
this dividend if Walter Energy is unable or unwilling to pay.
Miscellaneous Litigation
The Company is a party to a number of lawsuits arising in the ordinary course of its business.
While the results of such litigation cannot be predicted with certainty, the Company believes that
the final outcome of such litigation will not have a materially adverse effect on the Companys financial condition, results of operations or cash flows.
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18. Subsequent Events
Purchase of a Pool of Loans
On April 14, 2010, the Company entered into a definitive agreement to purchase a pool of 100%
performing, fixed-rate residential loans on single-family, owner occupied residences located within
the Companys existing southeastern United States geographic footprint. The purchase closed on
April 19, 2010, utilizing $11.1 million of the proceeds from the Companys secondary offering that
closed on October 21, 2009. The Company is in the process of evaluating the loans acquired for
evidence of credit quality deterioration since origination and for which it is probable at the
purchase date that the Company will be unable to collect all contractually required payments.
Dividend Declaration
On April 30, 2010, the Company declared a dividend of $0.50 per share on its common stock to
stockholders of record on May 14, 2010 which will be paid on May 28, 2010.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the consolidated financial
statements and notes thereto appearing elsewhere in this Form 10-Q and in our results for the year
ended December 31, 2009, filed in our Annual Report on Form 10-K on March 2, 2010. Historical
results and trends which might appear should not be taken as indicative of future operations. Our
results of operations and financial condition, as reflected in the accompanying statements and
related footnotes, are subject to managements evaluation and interpretation of business
conditions, changing capital market conditions, and other factors.
Our website can be found at www.walterinvestment.com. We make available, free of charge
through the investor relations section of our website, access to our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, current reports on Form 8-K, other documents and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended, as well as proxy statements, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the SEC. We also make available, free of
charge, access to our Corporate Governance Standards, charters for our Audit Committee,
Compensation and Human Resources Committee, and Nominating and Corporate Governance Committee, and
our Code of Conduct governing our directors, officers, and employees. Within the time period
required by the SEC and the New York Stock Exchange, we will post on our website any amendment to
the Code of Conduct and any waiver applicable to any executive officer, director, or senior officer
(as defined in the Code of Conduct). In addition, our website includes information concerning
purchases and sales of our equity securities by our executive officers and directors, as well as
disclosure relating to certain non-GAAP and financial measures (as defined by SEC Regulation G)
that we may make public orally, telephonically, by webcast, by broadcast, or by similar means from
time to time. The information on our website is not part of this Quarterly Report on Form 10-Q.
Our Investor Relations Department can be contacted at 3000 Bayport Drive, Suite 1100,
Tampa, FL 33607, Attn: Investor Relations, telephone (813) 421-7694.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995
Certain statements in this report, including, without limitation, matters discussed under Item
2, Managements Discussion and Analysis of Financial Condition and Results of Operations, should
be read in conjunction with the financial statements, related notes, and other detailed information
included elsewhere in this Quarterly Report on Form 10-Q. We are including this cautionary
statement to make applicable and take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Statements that are not historical fact are
forward-looking statements. Certain of these forward-looking statements can be identified by the
use of words such as believes, anticipates, expects, intends, plans, projects,
estimates, assumes, may, should, will, or other similar expressions. Such forward-looking
statements involve known and unknown risks, uncertainties and other important factors, which could
cause actual results, performance or achievements to differ materially from future results,
performance or achievements. These forward-looking statements are based on our current beliefs,
intentions and expectations. These statements are not guarantees or indicative of future
performance. Important assumptions and other important factors that could cause actual results to
differ materially from those forward-looking statements include, but are not limited to, those
factors, risks and uncertainties described in our Annual Report on Form 10-K filed on March 2, 2010
under the caption Risk Factors and in our other securities filings with the SEC.
In particular (but not by way of limitation), the following important factors and
assumptions could affect our future results and could cause actual results to differ materially
from those expressed in the forward-looking statements: local, regional, national and global
economic trends and developments in general, and local, regional and national real estate and
residential mortgage market trends and developments in particular; the availability of suitable
qualifying investments for the proceeds of our October 2009 secondary offering and risks associated
with any such investments we may pursue; the availability of additional investment capital and
suitable qualifying investments, and risks associated with the expansion of our business
activities, including risks associated with expanding our business outside of our current
geographic footprint and/or expanding the scope of our business to include activities not currently
undertaken by our business; limitations imposed on our business due to our real estate investment
trust, or REIT, status and our continued qualification as a REIT for federal income tax purposes;
financing sources and availability, and future interest expense; fluctuations in interest rates and
levels of mortgage prepayments; increases in costs and other general competitive factors; natural
disasters and adverse weather conditions, especially to the extent they result in material payouts
under insurance policies placed with our captive insurance subsidiary; changes in federal, state
and local policies, laws and regulations affecting our business, including, without limitation,
mortgage financing or servicing, changes to licensing requirements, and/or the rights and
obligations of property owners, mortgagees and tenants; the effectiveness of risk management
strategies; unexpected losses resulting from pending, threatened or unforeseen litigation or other
third party claims against us; the ability or willingness of Walter Energy, Inc. and other
counterparties to satisfy material obligations under agreements with us; our continued listing on
the NYSE Amex; uninsured losses or losses in excess of insurance limits and the availability of
adequate insurance coverage at reasonable costs; the integration of the former Hanover Capital
Mortgage Holdings, Inc., or Hanover, business into that of Walter Investment Management, LLC and
its affiliates as a result of the merger of the two companies, and the realization of anticipated
synergies, cost savings and growth opportunities from the Merger; future performance generally; and
other presently unidentified factors.
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All forward looking statements set forth herein are qualified by these cautionary
statements and are made only as of the date hereof. We undertake no obligation to update or revise
the information contained herein, including without limitation any forward-looking statements
whether as a result of new information, subsequent events or circumstances, or otherwise, unless
otherwise required by law.
The Company
We are a mortgage servicer and mortgage portfolio owner specializing in subprime,
non-conforming and other credit-challenged residential loans primarily in the southeastern United
States, or U.S. We also operate mortgage advisory and insurance ancillary businesses. At March 31,
2010, we had four wholly owned, primary subsidiaries: Hanover Capital Partners 2, Ltd., doing
business as Hanover Capital, Walter Mortgage Company, or WMC, Best Insurors, Inc., or Best, Walter
Investment Reinsurance Co., Ltd., or WIRC. We operate as an internally managed, publicly traded
real estate investment trust, or REIT.
Basis of Presentation
The consolidated financial statements reflect the historical operations of the Financing
business which was operated as part of Walter Energy prior to the spin-off. Under Walter Energys
ownership, the Financing business operated through separate subsidiaries. A direct ownership
relationship did not exist among the legal entities prior to the contribution to Walter Investment
Management LLC, or WIM. The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States, or GAAP, which requires management
to make estimates and assumptions that affect the amounts reported in the consolidated financial
statements. Actual results could differ from those estimates. All significant intercompany balances
have been eliminated in the consolidated financial statements.
Although we have operated as an independent, stand-alone entity only since April 17,
2009, management believes the assumptions underlying the consolidated financial statements as of
March 31, 2009 are reasonable. However, the consolidated financial statements included herein do
not include all of the expenses that would have been incurred had we been a separate, stand-alone
entity, although, the consolidated financial statements do include certain costs and expenses that
have been allocated to us from Walter Energy. As such, the financial information does not
necessarily reflect or is not necessarily indicative of our consolidated financial position,
results of operations and cash flows in the future, or what would have been reflected had we been a
separate, stand-alone entity during the period presented prior to the Merger.
Results of operations for the three months ended March 31, 2010 and 2009 include the
results of operations of legacy WIM. The results of operations of legacy Hanover are included for
the three months ended March 31, 2010. Since the Merger constitutes a reverse acquisition for
accounting purposes, the pre-acquisition consolidated financial statements of WIM are treated as
the historical financial statements of Walter Investment. The combined financial statements of
WMC, Best and WIRC (collectively representing substantially all of Walter Energys Financing
business prior to the Merger) are considered the predecessor to WIM for accounting purposes. The
combined financial statements of WMC, Best and WIRC have become WIMs historical financial
statements for periods prior to the Merger.
Business Separation and Merger
On September 30, 2008, Walter Energy outlined its plans to separate its Financing business
from its core Natural Resources business through a spin-off to stockholders and subsequent Merger
with Hanover. In furtherance of these plans, on September 30, 2008, Walter Energy and WIM entered
into a definitive agreement to merge with Hanover which agreement was amended and restated on
February 17, 2009. Immediately prior to the spin-off, substantially all of the assets and
liabilities related to the Financing business were contributed, through a series of transactions,
to WIM in return for all of WIMs membership units. On April 17, 2009, immediately following the
spin-off from Walter Energy, WIM was merged with and into Hanover with Hanover continuing as the
surviving corporation in the Merger. Following the Merger, Hanover was renamed Walter Investment
Management Corp. After the spin-off and Merger, Walter Energys stockholders that became members of
WIM as a result of the spin-off, and certain holders of options to acquire limited liability
company interests of WIM, collectively owned 98.5% of the shares of common stock of the surviving
corporation in the Merger, while stockholders of Hanover owned 1.5% of the shares of common stock
of such corporation. As a result, the business combination has been accounted for as a reverse
acquisition, with WIM considered the accounting acquirer. On April 20, 2009, our common stock began
trading on the NYSE Amex under the symbol WAC.
Although Hanover was the legal and tax surviving entity in the Merger, for accounting
purposes the Merger was treated as a reverse acquisition of the operations of Hanover and has been
accounted for pursuant to the guidance concerning business combinations, with WIM as the accounting
acquirer. As such, the pre-acquisition financial statements of WIM are treated as the historical
financial statements of Walter Investment. The Hanover assets acquired and the liabilities assumed
were recorded at the date of acquisition, April 17, 2009, at their respective fair values. The
results of operations of Hanover were included in the consolidated statements of income for periods
subsequent to the Merger.
On April 17, 2009, we completed our separation from Walter Energy. In connection with the
separation, WIM and Walter Energy executed the following transactions or agreements which involved
no cash:
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| Walter Energy distributed 100% of its interest in WIM to holders of Walter Energys common stock; | ||
| All intercompany balances between WIM and Walter Energy were settled with the net balance recorded as a dividend to Walter Energy; | ||
| In accordance with the Tax Separation Agreement, Walter Energy will, in general, be responsible for any and all taxes reported on any joint return through the date of the separation, which may also include WIM for periods prior to the separation. WIM will be responsible for any and all taxes reported on any WIM separate tax return and on any consolidated returns for Walter Investment subsequent to the separation; | ||
| Walter Energys share-based awards held by WIM employees were converted to equivalent share-based awards of Walter Investment, with the number of shares and the exercise price being equitably adjusted to preserve the intrinsic value. The conversion was accounted for as a modification under the provisions of the guidance concerning stock compensation. |
The assets and liabilities transferred to WIM from Walter Energy also included $26.6
million in cash, which was contributed to WIM by Walter Energy on April 17, 2009. Following the
spin-off, WIM paid a taxable dividend consisting of cash of $16.0 million and additional equity
interests to its members. The Merger occurred immediately following the spin-off and taxable
dividend on April 17, 2009. The surviving company continues to operate as a publicly traded REIT
subsequent to the Merger.
Critical Accounting Policies
The significant accounting policies used in preparation of our consolidated financial
statements are described in Note 2 of Notes to Consolidated Financial Statements for the year
ended December 31, 2009 included in our Annual Report on Form 10-K filed with the SEC on March 2,
2010. There have been no material changes to our critical accounting policies or the methodologies
or assumptions we apply under them.
Results of Operations
Revenue by Portfolio Type
For the three months ended March 31, 2010 and 2009, we reported net income of $8.1
million and $7.2 million, respectively. The main components of the change in net income for the
three months ended March 31, 2010 and 2009 are detailed in the following table (in thousands):
Three Months Ended | ||||||||||||
March 31, | Increase/ | |||||||||||
2010 | 2009 | (Decrease) | ||||||||||
Residential loans |
||||||||||||
Interest income |
$ | 7,714 | $ | 8,928 | $ | (1,214 | ) | |||||
Less: Interest expense |
| | | |||||||||
Net interest income |
7,714 | 8,928 | (1,214 | ) | ||||||||
Less: Provision for
loan losses (1) |
1,399 | 1,269 | 130 | |||||||||
Net interest
income after provision
for loan losses |
6,315 | 7,659 | (1,344 | ) | ||||||||
Residential loans of
securitization trusts |
||||||||||||
Interest income |
33,914 | 36,901 | (2,987 | ) | ||||||||
Interest expense |
21,274 | 23,089 | (1,815 | ) | ||||||||
Net interest income |
12,640 | 13,812 | (1,172 | ) | ||||||||
Less: Provision for
loan losses (1) |
1,791 | 3,107 | (1,316 | ) |
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Three Months Ended | ||||||||||||
March 31, | Increase/ | |||||||||||
2010 | 2009 | (Decrease) | ||||||||||
Net interest
income after provision
for loan losses |
10,849 | 10,705 | 144 | |||||||||
Non-interest income |
||||||||||||
Premium revenue |
2,691 | 3,065 | (374 | ) | ||||||||
Other income, net |
760 | 160 | 600 | |||||||||
Total |
3,451 | 3,225 | 226 | |||||||||
Total revenues, net |
20,615 | 21,589 | (974 | ) | ||||||||
Total non-interest expenses |
12,372 | 10,232 | 2,140 | |||||||||
Income before income
taxes |
8,243 | 11,357 | (3,114 | ) | ||||||||
Income tax expense |
131 | 4,155 | (4,024 | ) | ||||||||
Net income |
$ | 8,112 | $ | 7,202 | $ | 910 |
(1) | Excludes the impact of the REO sale from the securitized residential loan portfolio to the unencumbered residential loan portfolio. |
Net Interest Income
The decrease in unencumbered residential loan net interest income for the three months
ended March 31, 2010, as compared to the same period in 2009 was due primarily to the declining
portfolio balance as a result of principal repayments and foreclosures and a decrease in the volume
of voluntary prepayments. The average prepayment rate for the unencumbered portfolio was 3.0% for
the three months ended March 31, 2010, as compared to 4.5% in the same period of 2009.
The decrease in the securitized residential loan net interest income for the three months
ended March 31, 2010, as compared to the same period in 2009 was due primarily to the declining
balance as a result of principal repayments and foreclosures, a decrease in voluntary prepayments
and a decrease in interest expense due to lower average outstanding borrowings. The average
prepayment rate for the securitized portfolio was 2.6% for the three months ended March 31, 2010,
as compared to 3.3% in the same period of 2009. The reduction in average borrowings was due to
principal payments on the mortgage-backed debt issued with no new issuances over the past year.
Provision for Loan Losses
The unencumbered residential loan provision for loan losses was relatively unchanged for
the three months ended March 31, 2010, as compared to the same period in 2009 due to an improvement
in the performance experienced by this portfolio.
The decrease in the securitized residential loan provision for loan losses for the three
months ended March 31, 2010, as compared to the same period in
2009 was primarily due to a decline in seriously delinquent accounts
and foreclosures in process as well as an improvement in the net
charge-off ratio experienced by this portfolio.
Non-Interest Income
The increase in non-interest income for the three months ended March 31, 2010, as
compared to the same period in 2009 was primarily due to the addition of mortgage advisory services
revenue as a result of our Merger with Hanover in April 2009 as well as an improvement in taxes,
insurance and other advances as a result of lower insurance advances and a slight increase in
collections, partially offset by lower earned premiums from our insurance business.
Non-Interest Expenses
The increase in non-interest expenses for the three months ended March 31, 2010, as
compared to the same period in 2009 was primarily due to the additional expenses incurred in order
to support the stand-alone corporate functions required subsequent to the spin-off from Walter
Energy and Merger with Hanover, as well as the timing of compensation expense associated with
share-based awards. Share-based awards were granted during the first quarter in 2010 versus the
second quarter in 2009. Share-based award compensation expense is recognized over the vesting
term, which is generally three years, using the graded method.
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Income Taxes
The decrease in income tax expense for the three months ended March 31, 2010, as compared
to the same period in 2009 was due to our REIT qualification in conjunction with the spin-off from
Walter Energy and Merger with Hanover which generally limits our income tax expense to our TRSs.
Residential Loan Portfolio and Related Liabilities
Our results of operations for our portfolio during a given period typically reflect the net
interest spread earned on our residential loan portfolio. The net interest spread is impacted by
factors such as the interest rate our residential loans are earning and our cost of funds.
Furthermore, the amount of discount on the residential loans will impact the net interest spread as
such amounts will be amortized over the expected term of the residential loans and the amortization
will be accelerated due to voluntary prepayments. Loan losses due to defaults will also negatively
impact our earnings.
Residential Loan Portfolio
The following table reflects the average balances of our unencumbered residential loan
portfolio, net with corresponding rates of interest and effective yields (in thousands):
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Average residential loan balance (1) |
$ | 334,128 | $ | 363,211 | ||||
Interest income |
$ | 7,714 | $ | 8,928 | ||||
Effective interest income yield on the
residential loan portfolio (2) |
9.23 | % | 9.83 | % |
(1) | Average residential loan balance is net of yield adjustments and gross of allowance for losses for the period. | |
(2) | Results have been annualized. |
Interest Income |
Net interest income decreased for the three months ended March 31, 2010, as compared to
the same period in 2009, primarily due to the declining portfolio balance as a result of principal
repayments and foreclosures and a decrease in the volume of voluntary prepayments.
Effective Interest Income Yield
Effective interest income yield decreased for the three months ended March 31, 2010,
compared to the same period in 2009. This decrease is primarily due to a decrease in voluntary
prepayment speeds which resulted in a decrease in the recognition of purchase discounts into
interest income.
Securitized Residential Loan Portfolio
The following table reflects the average balances of our securitized residential loan
portfolio, net, as well as associated liabilities, with corresponding rates of interest and
effective yields (in thousands):
Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Average securitized
residential loan balance (1) |
$ | 1,315,706 | $ | 1,409,975 | ||||
Average mortgage-backed debt
balance |
1,255,917 | 1,358,991 | ||||||
Net investment |
$ | 59,789 | $ | 50,984 | ||||
Interest income |
$ | 33,914 | $ | 36,901 | ||||
Less: Interest expense |
21,274 | 23,089 | ||||||
Net interest income |
$ | 12,640 | $ | 13,812 |
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Three Months Ended March 31, | ||||||||
2010 | 2009 | |||||||
Effective interest income yield
on the securitized residential
loan portfolio (2) |
10.31 | % | 10.47 | % | ||||
Effective interest expense rate
on the mortgage-backed debt (2) |
6.78 | % | 6.80 | % | ||||
Net interest spread (2) |
3.53 | % | 3.67 | % | ||||
Average equity balance |
572,623 | 411,441 | ||||||
Average leverage ratio (3) |
2.19 | 3.30 | ||||||
Net interest margin (2)(4) |
3.84 | % | 3.92 | % | ||||
Net yield on net investment (2)(5) |
84.56 | % | 108.37 | % |
(1) | Average securitized residential loan balance is net of yield adjustments and gross of allowance for losses for the period. | |
(2) | Results have been annualized. | |
(3) | Average leverage ratio is calculated as average mortgage-backed debt balance divided by average equity. | |
(4) | Net interest margin is calculated by dividing net interest income by the average securitized residential loan balance. | |
(5) | Net yield on net investment is calculated by dividing net interest income by the net investment. |
Average Net Investment
Average net investment increased for the three months ended March 31, 2010, as compared
to the same period in 2009, primarily due to the acceleration of debt repayments due to exceeding
loss triggers on certain securitization trusts.
Net Interest Income
Net interest income decreased for the three months ended March 31, 2010, as compared to
the same period in 2009, primarily due to the declining portfolio balance as a result of principal
repayments and foreclosures coupled with a decrease in the volume of voluntary prepayments.
Net Interest Spread
Net interest spread decreased for the three months ended March 31, 2010, compared to the
same period in 2009. This decrease is primarily due to a reduction in the effective interest yield
on the securitized residential loan portfolio due to a decrease in voluntary prepayment speeds
which resulted in a decrease in the recognition of purchase discounts into interest income, as well
as an increase in borrower delinquencies.
Average Leverage Ratio
The average leverage ratio decreased for the three months ended March 31, 2010, compared
to the same period in 2009. The decrease is primarily related to a decrease in the average
mortgage-backed debt balance due to repayments as well as an increase in average equity primarily
resulting from the settlement of the net activity with Walter Energy in conjunction with the
spin-off and Merger, net income generated, as well as our secondary offering in October 2009,
partially offset by dividends paid.
Net Yield on Net Investment
Net yield on net investment decreased for the three months ended March 31, 2010, as
compared to the same period in 2009. The decrease is primarily the result of the increase in our
average net investment resulting from accelerated mortgage-backed debt repayments coupled with a
slight decrease in net interest income due to the run-off of the portfolio and lower voluntary
prepayments.
Additional Analysis of Residential Loan Portfolio
Allowance for Loan Losses
The allowance for loan losses represents managements estimate of probable incurred credit
losses inherent in our residential loan portfolio as of the balance sheet date. The determination
of the level of the allowance for loan losses and, correspondingly, the provision for loan losses,
is based on delinquency levels and trends, prior loan loss severity experience, and managements
judgment and assumptions regarding various matters, including the composition of the residential
loan portfolio, the estimated value of the underlying real estate collateral, the level of the
allowance in relation to total loans and to historical loss levels, national and local economic
conditions, changes in unemployment levels and the impact that changes in interest rates have on a
borrowers ability to
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refinance their loan and to meet their repayment obligations. Management
continuously evaluates these assumptions and various other relevant factors impacting credit
quality and inherent losses when quantifying our exposure to credit losses and assessing the
adequacy of our allowance for such losses as of each reporting date. The level of the allowance is
adjusted based on the results of managements analysis.
Given continuing pressure on residential property values, especially in our southeastern
U.S. market, continued high unemployment and a generally uncertain economic backdrop, we expect the
allowance for loan losses to continue to remain elevated until such time as we experience a
sustained improvement in the credit quality of the residential loan portfolio. The future growth of
the allowance is highly correlated to unemployment levels and changes in home prices within our
markets.
While we consider the allowance for loan losses to be adequate based on information
currently available, future adjustments to the allowance may be necessary due to changes in
economic conditions, delinquency levels, foreclosure rates, loss severity rates, and further
declines in real estate values.
The following table shows information about the allowance for losses by portfolio for the
periods presented.
Net Losses and | Net Losses and | |||||||||||||||
Charge-offs | Charge-offs as a % | |||||||||||||||
Allowance | Allowance as a % of | Deducted from the | of Average | |||||||||||||
for Loan Losses | Residential Loans (1) | Allowance | Residential Loans (2) | |||||||||||||
(in thousands) | ||||||||||||||||
Residential loans: |
||||||||||||||||
March 31, 2010 |
$ | 3,384 | 1.02 | % | $ | 5,900 | (3) | 1.77% | (3)(4) | |||||||
December 31, 2009 |
$ | 3,460 | 1.03 | % | $ | 4,317 | 1.23 | % | ||||||||
Residential loans of securitization trusts: |
||||||||||||||||
March 31, 2010 |
$ | 13,940 | 1.07 | % | $ | 8,208 | (3) | 0.62% | (3)(4) | |||||||
December 31, 2009 |
$ | 14,201 | 1.07 | % | $ | 12,173 | 0.89 | % |
(1) | The allowance for loan loss ratio is calculated as period end allowance for loan losses divided by period end residential loans, by portfolio type, before the allowance for loan losses. | |
(2) | The charge off ratio is calculated as charge-offs, net of recoveries divided by average residential loans, by portfolio type, before the allowance for loan losses. | |
(3) | Annualized. | |
(4) | Excludes the impact of the REO sale from the securitized residential loan portfolio to the unencumbered residential loan portfolio. |
The following table summarizes activity in the allowance for loan losses in our residential
loan portfolios, net for the three months ended March 31, 2010 and 2009 (in thousands):
Residential Loans | Residential Loans of Securitization Trusts | |||||||||||||||
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Balance, December 31 |
$ | 3,460 | $ | 3,418 | $ | 14,201 | $ | 15,551 | ||||||||
Provision charged to income |
1,399 | 1,269 | 1,791 | 3,107 | ||||||||||||
Less: Charge-offs, net of recoveries |
(1,475 | ) | (1,314 | ) | (2,052 | ) | (3,549 | ) | ||||||||
Balance, March 31 |
$ | 3,384 | $ | 3,373 | $ | 13,940 | $ | 15,109 | ||||||||
Delinquency Information
The following table presents information about delinquencies as a percent of amounts
outstanding in our residential loan portfolios:
Residential Loans | ||||||||||||||||
Residential Loans | of Securitization Trusts | |||||||||||||||
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Principal balance outstanding (in thousands) |
$ | 360,543 | $ | 365,797 | $ | 1,432,403 | $ | 1,454,062 | ||||||||
31-60 days |
1.62 | % | 1.98 | % | 0.73 | % | 1.17 | % | ||||||||
61-90 days |
0.83 | % | 1.53 | % | 0.31 | % | 0.54 | % | ||||||||
91 days or more |
5.21 | % | 5.84 | % | 2.30 | % | 2.74 | % | ||||||||
7.66 | % | 9.35 | % | 3.34 | % | 4.45 | % | |||||||||
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The following table presents information about delinquencies as a percent of the total number
of loans outstanding in our residential loan portfolios:
Residential Loans | ||||||||||||||||
Residential Loans | of Securitization Trusts | |||||||||||||||
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Total number of residential loans |
3,676 | 3,703 | 30,054 | 30,502 | ||||||||||||
31-60 days |
1.61 | % | 1.84 | % | 0.63 | % | 1.07 | % | ||||||||
61-90 days |
0.82 | % | 1.51 | % | 0.26 | % | 0.47 | % | ||||||||
91 days or more |
4.79 | % | 5.51 | % | 1.83 | % | 2.15 | % | ||||||||
7.22 | % | 8.86 | % | 2.72 | % | 3.69 | % | |||||||||
The past due or delinquency status is generally determined based on the contractual payment
terms. The calculation of delinquencies excludes from delinquent amounts those accounts that are in
bankruptcy proceedings that are paying their mortgage payments in contractual compliance with the
bankruptcy court approved mortgage payment obligations.
The following table summarizes our residential loans placed in non-accrual status due to
delinquent payments of 90 days past due or greater:
March 31, | December 31, | |||||||
2010 | 2009 | |||||||
Residential loans |
||||||||
Number of loans |
176 | 204 | ||||||
Balance (in millions) |
$ | 18.8 | $ | 21.4 | ||||
Residential loans of securitization trusts |
||||||||
Number of loans |
551 | 656 | ||||||
Balance (in millions) |
$ | 32.9 | $ | 39.8 | ||||
Total |
||||||||
Number of loans |
727 | 860 | ||||||
Balance (in millions) |
$ | 51.7 | $ | 61.2 |
Portfolio Characteristics
The weighted average original loan-to-value, or LTV, dispersion of our portfolios is as
follows:
Residential Loans | ||||||||||||||||
Residential Loans | of Securitization Trusts | |||||||||||||||
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Weighted Average LTV |
88.00 | % | 88.00 | % | 89.00 | % | 89.00 | % | ||||||||
0.00 - 70.00 |
3.84 | % | 3.91 | % | 0.96 | % | 0.95 | % | ||||||||
70.01 - 80.00 |
6.63 | % | 6.88 | % | 1.91 | % | 1.93 | % | ||||||||
80.01 - 90.00(1) |
44.84 | % | 43.56 | % | 77.35 | % | 76.90 | % | ||||||||
90.01 - 100.00 |
44.69 | % | 45.65 | % | 19.78 | % | 20.22 | % | ||||||||
Total |
100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % | ||||||||
(1) | For those residential loans in the portfolio prior to electronic tracking of original LTVs, the maximum LTV was 90%, or 10% equity. Thus, these residential loans have been included in the 80.01 to 90.00 LTV category. |
Original LTVs do not include additional value contributed by the borrower to complete the
home. This additional value typically
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was created by the installation and completion of wall and
floor coverings, landscaping, driveways and utility connections in more recent periods.
Current LTVs are not readily determinable given the rural geographic distribution of our
portfolio which precludes us from obtaining reliable comparable sales information to utilize in
valuing the collateral.
The weighted average FICO score dispersion of the loans in our residential loan portfolios,
refreshed as of December 31, 2009, is as follows:
Residential Loans | ||||||||||||||||
Residential Loans | of Securitization Trusts | |||||||||||||||
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Weighted Average FICO |
566 | 566 | 584 | 583 | ||||||||||||
<=600 |
62.97 | % | 62.77 | % | 55.06 | % | 54.90 | % | ||||||||
601 - 640 |
11.19 | % | 11.07 | % | 14.01 | % | 13.97 | % | ||||||||
641 - 680 |
6.85 | % | 6.84 | % | 8.82 | % | 8.85 | % | ||||||||
681 - 720 |
4.58 | % | 4.55 | % | 4.93 | % | 4.99 | % | ||||||||
721 - 760 |
2.36 | % | 2.42 | % | 2.95 | % | 2.94 | % | ||||||||
761-800 |
1.99 | % | 2.01 | % | 2.44 | % | 2.46 | % | ||||||||
>=801 |
0.82 | % | 0.84 | % | 0.98 | % | 0.99 | % | ||||||||
Unknown or unavailable |
9.24 | % | 9.50 | % | 10.81 | % | 10.90 | % | ||||||||
Total |
100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % | ||||||||
Our residential loans are concentrated in the following states:
Residential Loans | ||||||||||||||||
Residential Loans | of Securitization Trusts | |||||||||||||||
March 31, | December 31, | March 31, | December 31, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Texas |
34.01 | % | 33.85 | % | 34.06 | % | 33.92 | % | ||||||||
Mississippi |
12.81 | % | 12.86 | % | 16.09 | % | 16.11 | % | ||||||||
Alabama |
10.31 | % | 10.25 | % | 8.30 | % | 8.31 | % | ||||||||
Louisiana |
7.96 | % | 8.00 | % | 6.14 | % | 6.15 | % | ||||||||
Florida |
9.16 | % | 9.38 | % | 5.27 | % | 5.25 | % | ||||||||
Others |
25.75 | % | 25.66 | % | 30.14 | % | 30.26 | % | ||||||||
Total |
100.00 | % | 100.00 | % | 100.00 | % | 100.00 | % | ||||||||
Our residential loans outstanding as of March 31, 2010 were originated in the following
periods:
Residential Loans | ||||||||
Residential Loans | of Securitization Trusts | |||||||
Year 2010 Origination |
1.56 | % | 1.09 | % | ||||
Year 2009 Origination |
3.76 | % | 3.13 | % | ||||
Year 2008 Origination |
27.96 | % | 2.10 | % | ||||
Year 2007 Origination |
57.24 | % | 1.62 | % | ||||
Year 2006 Origination |
6.92 | % | 12.89 | % | ||||
Year 2005 Origination |
0.35 | % | 10.51 | % | ||||
Year 2004 Origination and earlier |
2.21 | % | 68.66 | % | ||||
Total |
100.00 | % | 100.00 | % | ||||
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Real Estate Owned
The following table presents information about foreclosed property (dollars in thousands):
Real Estate Owned Related to the | Real Estate Owned Related to the | |||||||||||||||
Residential Loan Portfolio | Residential Loans of Securitization Trusts | |||||||||||||||
Units | Balance | Units | Balance | |||||||||||||
Balance, December 31, 2009 |
271 | $ | 21,981 | 760 | $ | 41,143 | ||||||||||
Foreclosures, net of fair value adjustments |
78 | 6,835 | 269 | 17,750 | ||||||||||||
Purchases from the securitized residential
loan portfolio |
72 | 3,882 | | | ||||||||||||
Sales to the residential loan portfolio |
| | (72 | ) | (3,882 | ) | ||||||||||
Sales to third parties |
(86 | ) | (7,414 | ) | (298 | ) | (18,344 | ) | ||||||||
Balance, March 31, 2010 |
335 | $ | 25,284 | 659 | $ | 36,667 | ||||||||||
During the three months ended March 31, 2010, we purchased 72 Mid-State Trust X REO
accounts for approximately $3.9 million which is the economic value of the accounts as defined by
the Trust agreement. As a result of this transaction, the loss trigger on Mid-State Trust X was
cured. The purchased REO accounts are now included in the unencumbered REO balance.
Liquidity and Capital Resources
Overview
Our principal sources of funds are our existing cash balances, monthly principal and interest
payments we receive from our unencumbered residential loan portfolio, cash releases from our
securitized residential loan portfolio, proceeds from our secondary offering and other financing
activities. We generally use our liquidity for our operating costs, to make additional investments,
and to make dividend payments.
Our securitization trusts are consolidated for financial reporting purposes under GAAP.
Our results of operations and cash flows include the activity of these Trusts. The cash proceeds
from the repayment of the collateral held in securitization trusts are owned by the Trusts and
serve to only repay the obligations of the Trusts unless certain overcollateralization or other
similar targets are satisfied. Principal and interest on the mortgage-backed debt of the Trusts can
only be paid if there are sufficient cash flows from the underlying collateral. As of March 31,
2010, total debt decreased $23.1 million as compared to December 31, 2009.
The securitization trusts contain delinquency and loss triggers, that, if exceeded,
result in any excess overcollateralization going to pay down our outstanding mortgage-backed and
asset-backed notes for that particular securitization at an accelerated pace. Assuming no servicer
trigger events have occurred and the overcollateralization targets have been met, any excess cash
is released to the Company either monthly or quarterly, in accordance with the terms of the
respective underlying trust agreements. As of March 31, 2010, two of our securitization trusts
exceeded certain triggers and did not provide any excess cash flow to
us. With the exception of the two trusts which have exceeded their
triggers and the recently cured Mid-State Trust X, none of our other securitization trusts have reached or are
near the levels of underperformance that would trigger a delay in cash releases.
We believe that, based on current forecasts and anticipated market conditions, funding
generated from the residential loans and the proceeds from our recent secondary offering will be
sufficient to meet operating needs, to invest in residential loans, to make planned capital
expenditures, to make all required principal and interest payments on mortgage-backed debt of the
Trusts, for general corporate purposes and to pay cash dividends as required for our qualification
as a REIT. However, our operating cash flows and liquidity are significantly influenced by numerous
factors, including the general economy, interest rates and, in particular, conditions in the
mortgage markets.
Mortgage-Backed Debt
We have historically funded our residential loans through the securitization market. As of
March 31, 2010, we had nine separate non-recourse securitization trusts where we service the
underlying collateral and one non-recourse securitization for which we do not service the
underlying collateral. These ten trusts have an aggregate of $1.2 billion of outstanding debt,
collateralized by residential loans, REO and restricted cash with a principal balance of $1.5
billion. All of our mortgage-backed debt is non-recourse and not cross-collateralized and,
therefore, must be satisfied exclusively from the proceeds of the residential loans and REO held in
each securitization trust. As we retained the beneficial interests in the securitizations, will
absorb a majority of any losses on the underlying collateral and significantly direct the
activities of the securitization trusts, we have consolidated the securitization entities and treat
the residential loans as our assets and the related mortgage-backed debt as our debt.
Borrower remittances received on the residential loan collateral held in securitization
trusts are used to make payments on the mortgage-backed debt. The maturity of the mortgage-backed
debt is directly affected by principal prepayments on the related residential loan collateral. As a
result, the actual maturity of the mortgage-backed debt is likely to occur earlier than the stated
maturity. Certain of our mortgage-backed debt is also subject to redemption according to specific
terms of the respective indenture agreements.
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Credit Agreements
In April 2009, we entered into a syndicated credit agreement, a revolving credit
agreement and security agreement, and a support letter of credit agreement. All three of these
agreements mature on April 20, 2011. As of March 31, 2010, no funds have been drawn under any of
the credit agreements and we are in compliance with all covenants.
Sources and Uses of Cash
Our quarterly sources and uses of cash is one of the financial metrics on which we focus.
As a supplement to the Consolidated Statements of Cash Flows included in this Quarterly Report on
Form 10-Q, we provide the table below which sets forth, for the periods indicated, our quarterly
sources and uses of cash (in millions). The cash balance at the beginning and ending of the first
quarter of 2010 and 2009 are GAAP amounts and the sources and uses of cash are organized in a
manner consistent with the way management analyzes them. The presentation of our sources and uses
of cash for the table below is derived by aggregating and netting all items within our GAAP
Consolidated Statements of Cash Flows for the respective periods.
Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Beginning cash and cash equivalents balance |
$ | 99.3 | $ | 1.3 | ||||
Principal sources of cash: |
||||||||
Cash collections from the unencumbered portfolio |
11.9 | 14.8 | ||||||
Cash releases from the securitized portfolio |
13.9 | 8.9 | ||||||
Cash flow from ancillary businesses |
2.9 | 3.3 | ||||||
28.7 | 27.0 | |||||||
Other sources of cash: |
||||||||
Other |
0.1 | 4.0 | ||||||
Total sources of cash |
28.8 | 31.0 | ||||||
Principal uses of cash: |
||||||||
Acquisition of REO from the securitized portfolio |
(3.9 | ) | | |||||
Claims paid |
(0.9 | ) | (0.6 | ) | ||||
Operating expenses paid |
(12.5 | ) | (9.6 | ) | ||||
Capital expenditures |
| (0.8 | ) | |||||
(17.3 | ) | (11.0 | ) | |||||
Other uses of cash: |
||||||||
Dividends paid |
(13.2 | ) | | |||||
Other |
(1.3 | ) | (15.8 | ) | ||||
Total uses of cash |
(31.8 | ) | (26.8 | ) | ||||
Net (uses) sources of cash |
(3.0 | ) | 4.2 | |||||
Ending cash and cash equivalents balance |
$ | 96.3 | $ | 5.5 | ||||
Our principal business cash flows are those associated with managing our portfolio and totaled
$11.4 million for the three months ended March 31, 2010,
down $4.6 million from the three months
ended March 31, 2009, as cash collections from our unencumbered residential loan portfolio
decreased by $2.9 million due to the declining balance nature of our portfolio and a decline in the
level of voluntary prepayments. Additionally, cash flow from our ancillary businesses decreased by
$0.4 million, cash of $3.9 million was used to acquire REO from the securitized portfolio and cash
operating expenses increased by $2.4 million due to expenses required as part of being a
stand-alone company, partially offset by an increase of cash releases from our securitized
portfolio of $5.0 million. The cash utilized to acquire REO from the securitized portfolio
resulted in the increase in cash releases.
Cash releases from the securitized portfolio consist of servicing fees and residual cash flows
on residential loans held as securitized collateral within the securitization trusts after
distributions are made to investors on the securitized mortgage-backed debt to the extent required
credit enhancements are maintained and the delinquency and loss triggers are not exceeded. These
cash flows represent the difference between principal and interest payments received on the
underlying residential loans reduced by principal payments, including accelerated payments, if any,
on the securitized mortgage-backed debt; interest paid on the securitized mortgage-backed debt;
actual losses, net of any gains incurred upon disposition of REO; and the maintenance of
overcollateralization requirements.
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Our
net other cash use totaled $14.4 million for the three months ended March 31, 2010, up
$2.6 million from the three months ended March 31, 2009, primarily due to dividends paid to
stockholders, partially offset by the termination of transactions with Walter Energy as a result of
our spin-off.
During April 2010, we deployed $11.1 million of the proceeds from our secondary offering to
purchase a pool of residential loans. We intend to invest the remainder of the proceeds from the
secondary offering in our targeted asset classes. We expect our future sources of cash will
continue to be generated from our existing residential loan portfolios, as well as from future
acquisitions of residential loans. If conditions in the securitization market improve, we may
securitize in the future. Additionally, we expect that our future cash operating expenses will be
relatively consistent with annualized fourth quarter 2009 actual results as a stand-alone entity.
The following table sets forth, for the periods indicated, selected consolidated cash flow
information (in thousands):
For the Three Months Ended | ||||||||
March 31, | ||||||||
2010 | 2009 | |||||||
Cash flows provided by operating activities |
$ | 8,550 | $ | 11,194 | ||||
Cash flows provided by investing activities |
25,051 | 29,320 | ||||||
Cash flows used in financing activities |
(36,585 | ) | (36,353 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
$ | (2,984 | ) | $ | 4,161 |
Operating activities. Net cash provided by operating activities was $8.6 million for
the three months ended March 31, 2010 as compared to $11.2 million for the same period in 2009.
During the three months ended March 31, 2010 and 2009, the primary sources of cash in operating
activities were the income generated from our portfolio and our ancillary businesses.
Investing activities. Net cash provided by investing activities was $25.1 million for the
three months ended March 31, 2010 as compared to $29.3 million for the same period in 2009. For the
three months ended March 31, 2010 and 2009, the primary source of cash from investing activities
was provided by principal payments received on our residential loans.
Financing activities. Net cash used in financing activities was $36.6 million for the three
months ended March 31, 2010 as compared to $36.4 million for the same period in 2009. For the three
months ended March 31, 2010, net cash used in financing activities was primarily for principal
payments on our mortgage-backed debt as well as the payment of dividends to our stockholders. For
the three months ended March 31, 2009, net cash used in financing activities was primarily for
principal payments on our mortgage-backed debt as well as net activity with Walter Energy, our
former parent company.
Off-Balance Sheet Arrangements
As of March 31, 2010, we retained credit risk on 15 remaining mortgage securities totaling
$1.7 million that were sold with recourse by Hanover in a prior year. Accordingly, we are
responsible for credit losses, if any, with respect to these securities.
We do not have any relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance, special purpose or variable interest
entities, which would have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. In addition, we do not have any
undisclosed borrowings or debt, and have not entered into any derivative contracts or synthetic
leases. We are, therefore, not materially exposed to any financing, liquidity, market or credit
risk that could arise if we had engaged in such relationships.
Dividends
As a REIT, we are required to have declared dividends amounting to at least 90% of our net
taxable income (excluding net capital gain) for each year by the time our U.S. federal tax return
is filed. Therefore, a REIT generally passes through substantially all of its earnings to
stockholders without paying U.S. federal income tax at the corporate level.
As of March 31, 2010, we expect to pay dividends to our stockholders of all or
substantially all of our net income in each year to qualify for the tax benefits accorded to a REIT
under the Code. All distributions will be made at the discretion of our Board of Directors and will
depend on our earnings, both tax and GAAP, financial condition and liquidity, maintenance of REIT
qualification and such other factors as the Board of Directors deems relevant.
On April 30, 2010, we declared a dividend of $0.50 per share on our common stock which
was paid on May 14, 2010 to stockholders of record on May 28, 2010.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Qualitative Information on Market Risk
We seek to manage the risks inherent in our business including but not limited to
credit risk, interest rate risk, prepayment risk, liquidity risk, real estate risk and inflation
risk in a prudent manner designed to enhance our earnings and dividends and preserve our capital.
In general, we seek to assume risks that can be quantified from historical experience, to actively
manage such risks, and to maintain capital levels consistent with these risks.
Credit Risk
Credit risk is the risk that we will not fully collect the principal we have invested in
residential loans due to borrower defaults. Our portfolio as of March 31, 2010 consisted of
securitized residential loans with a principal balance of $1.4 billion and approximately
$0.4 billion of unencumbered residential loans.
The residential loans were principally originated by or for JWH prior to our spin-off
from Walter Energy. These are predominantly subprime loans with an average LTV ratio at origination
of approximately 89% and average borrower credit core of 580. While we feel that our origination
and underwriting of these loans will help to mitigate the risk of significant borrower default on
these loans, we cannot assure you that all borrowers will continue to satisfy their payment
obligations under these loans, thereby avoiding default.
The $1.4 billion of residential loans held in securitization trusts are permanently
financed with $1.2 billion of mortgage-backed debt leaving us with a net credit exposure of
$188.0 million, which approximates our equity interest in the securitization trusts.
When we purchase residential loans, the credit underwriting process will vary depending
on the pool characteristics, including loan seasoning or age, LTV ratios, payment histories and
counterparty representations and warranties. We will perform a due diligence review of potential
acquisitions which may include a review of the residential loan documentation, appraisal reports
and credit underwriting. Generally, an updated property valuation is obtained.
Interest Rate Risk
Interest rate risk is the risk of changing interest rates in the market place. Our
primary interest rate risk exposures relate to the interest rates on mortgage-backed debt of the
Trusts and the yields on our residential loan portfolios and prepayments thereof.
Our fixed-rate residential loan portfolio had $1.8 billion of unpaid principal as of
March 31, 2010 and December 31, 2009, and fixed-rate mortgage-backed debt was $1.2 billion and
$1.3 billion as of March 31, 2010 and December 31, 2009, respectively. The fixed rate nature of
these instruments and their offsetting positions effectively mitigate significant interest rate
risk exposure from these instruments. If interest rates decrease, we may be exposed to higher
prepayment speeds. This could result in a modest increase in short-term profitability. However, it
could adversely impact long-term profitability as a result of a shrinking portfolio. Changes in
interest rates may impact the fair value of these financial instruments.
Prepayment Risk
Prepayment risk is the risk that borrowers will pay more than their required monthly
mortgage payment including payoffs of residential loans. When borrowers repay the principal on
their residential loans before maturity, or faster than their scheduled amortization, the effect is
to shorten the period over which interest is earned, and therefore, increases the yield for
residential loans purchased at a discount to their then current balance, as with the majority of
our portfolio. Conversely, residential loans purchased at a premium to their then current balance
exhibit lower yields due to faster prepayments. Historically, when market interest rates declined,
borrowers had a tendency to refinance their residential loans, thereby increasing prepayments.
Increases in residential loan prepayment rates could result in GAAP earnings volatility including
substantial variation from quarter to quarter.
We monitor prepayment risk through periodic reviews of the impact of a variety of
prepayment scenarios on revenues, net earnings, dividends, and cash flow.
Liquidity Risk
Liquidity is a measure of our ability to meet potential cash requirements, including
ongoing commitments to repay mortgage-backed debt of the Trusts, fund and maintain the portfolio,
pay dividends to our stockholders and other general business needs. We recognize the need to have
funds available to operate our business. It is our policy to have adequate liquidity at all times.
Our principal sources of liquidity are the mortgage-backed debt of the Trusts we have
issued to finance our residential loans held in securitization trusts, the principal and interest
payments received from unencumbered residential loans, cash releases from the securitized portfolio
and cash proceeds from the issuance of equity securities. We expect
these sources of funds will
be sufficient to meet our liquidity requirements.
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Our unencumbered and securitized mortgage loans are accounted for as held-for-investment and
reported at amortized cost. Thus, changes in the fair value of the residential loans do not have
an impact on our liquidity. However, the delinquency and loss triggers discussed previously may
impact our liquidity. Our obligations consist solely of mortgage-backed debt issued by our
securitization trusts. Changes in fair value of mortgage-backed debt generally have no impact on
our liquidity. Mortgage-backed debt issued by the securitization trusts are reported at amortized
cost as are the residential loans collateralizing the debt.
Real Estate Risk
We own assets secured by real property and own property directly as a result of
foreclosures. Residential property values are subject to volatility and may be affected adversely
by a number of factors, including, but not limited to, national, regional and local economic
conditions (which may be adversely affected by industry slowdowns and other factors); local real
estate conditions (such as an oversupply of housing); changes or continued weakness in specific
industry segments; construction quality, age and design; demographic factors; and retroactive
changes to building or similar codes. In addition, decreases in property values reduce the value
of the collateral and the potential proceeds available to a borrower to repay our loans, which
could also cause us to suffer losses.
Inflation Risk
Virtually all of our assets and liabilities are financial in nature. As a result, changes
in interest rates and other factors influence our performance far more so than inflation. Changes
in interest rates do not necessarily correlate with inflation rates or changes in inflation rates.
Our consolidated financial statements are prepared in accordance with GAAP. Our activities and
balance sheets are measured with reference to historical cost or fair value without considering
inflation.
Effect of Governmental Initiatives on Market Risk
Recent market and economic conditions have been unprecedented and challenging. There are
continuing concerns about the overall economy, the systemic impact of inflation or deflation, the
availability and cost of credit, the U.S. mortgage market, unemployment, and the declining real
estate market in the U.S.
These market and economic conditions have spurred government initiatives and interventions
designed to address them. Given the size and scope of the government actions, they will affect many
of the market risks described above, although the total impact is not yet fully known. As these
initiatives are further developed and their effects become more apparent, we will continue to take
them into account in managing the risks inherent in our business.
Quantitative Information on Market Risk
Our future earnings are sensitive to a number of market risk factors; changes in these factors
may have a variety of secondary effects that, in turn, will also impact our earnings. To
supplement this discussion on the market risk we face, the following table incorporates information
that may be useful in analyzing certain market risks.
The table presents principal cash flows by year of repayment. The timing of principal cash
flows includes assumptions on the prepayment speeds of assets based on their recent performance and
future prepayment expectations. Our future results depend greatly on the credit performance of the
underlying loans (this table assumes no credit losses).
Principal Amounts Maturing and Effective Rates During Period | At March 31, 2010 | |||||||||||||||||||||||||||||||||||
Principal | ||||||||||||||||||||||||||||||||||||
(dollars in thousands) | Q2-Q4 2010 | 2011 | 2012 | 2013 | 2014 | Thereafter | Value | Book Value | Fair Value | |||||||||||||||||||||||||||
Residential loans |
||||||||||||||||||||||||||||||||||||
Principal |
11,742 | 16,812 | 17,938 | 17,896 | 17,202 | 278,953 | 360,543 | 327,775 | 295,600 | |||||||||||||||||||||||||||
Residential loans of
securitization trusts |
||||||||||||||||||||||||||||||||||||
Principal |
68,492 | 95,031 | 91,612 | 87,885 | 84,391 | 1,004,992 | 1,432,403 | 1,292,561 | 1,243,047 | |||||||||||||||||||||||||||
Mortgage-backed debt |
||||||||||||||||||||||||||||||||||||
Principal |
59,422 | 95,710 | 92,971 | 88,690 | 86,136 | 822,041 | 1,244,970 | 1,244,379 | 1,147,056 |
Approximately 99% of residential loans have fixed interest rates. Residential loans with
adjustable interest rates comprise only $1.3 million of the unencumbered loans and $20.9 million of
the securitized loans. Similarly, all of our mortgage-backed debt of securitization trusts is
fixed rate. The weighted-average coupon is 9.2% for residential loans, 9.1% for residential loans
of securitization trusts and 6.7% for mortgage-backed debt.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered
by this report, we carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief
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Financial Officer, of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended. Based
upon that evaluation, our management, including our Chief Executive Officer and Chief Financial
Officer, concluded that our disclosure controls and procedures are effective in timely alerting
them to material information required to be included in our periodic SEC filings.
(b) Changes in Internal Controls. There have been no changes in our internal control over
financial reporting during our first quarter ended March 31, 2010, that have materially affected,
or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently a party to any lawsuit or proceeding which, in the opinion of management,
is likely to have a material adverse effect on our business, financial condition, or results of
operation.
As discussed in Note 17 of Notes to Consolidated Financial Statements, Walter Energy is
in dispute with the IRS on a number of federal income tax issues. Walter Energy has stated in its
public filings that it believes that all of its current and prior tax filing positions have
substantial merit and that Walter Energy intends to defend vigorously any tax claims asserted.
Under the terms of the tax separation agreement between us and Walter Energy dated April 17, 2009,
Walter Energy is responsible for the payment of all federal income taxes (including any interest or
penalties applicable thereto) of the consolidated group, which includes the aforementioned claims
of the IRS. However, to the extent that Walter Energy is unable to pay any amounts owed, we could
be responsible for any unpaid amounts.
Item 1A. Risk Factors
For risk factors, see Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year
ended December 31, 2009. Our risk factors have not changed materially since December 31, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) | Not applicable. | ||
(b) | Not applicable. | ||
(c) | Not applicable. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Removed and Reserved
Item 5. Other Information
None.
Item 6. Exhibits
The exhibits listed on the Exhibit Index, which appears immediately following the signature
page below, are included or incorporated by reference herein.
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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.
WALTER INVESTMENT MANAGEMENT CORP. |
||||
By: | /s/ Mark J. O'Brien | |||
Mark J. O'Brien | ||||
Chief Executive Officer (Principal Executive Officer) |
||||
Dated: May 5, 2010
By: | /s/ Kimberly A. Perez | |||
Kimberly A. Perez | ||||
Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
||||
Dated: May 5, 2010
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INDEX TO EXHIBITS
Exhibit No | Notes | Description | ||
2.1
|
(1) | Second Amended and Restated Agreement and Plan of Merger dated as of February 6, 2009, among Registrant, Walter Industries, Inc., JWH Holding Company, LLC, and Walter Investment Management LLC. | ||
2.2
|
(1) | Amendment to the Second Amended and Restated Agreement and Plan of Merger, entered into as of February 17, 2009 between Registrant, Walter Industries, Inc., JWH Holding Company, LLC and Walter Investment Management LLC | ||
3.1
|
(2) | Articles of Amendment and Restatement of Registrant effective April 17, 2009. | ||
3.2
|
(2) | By-Laws of Registrant, effective April 17, 2009. | ||
10.1
|
(3) | Form of Indemnity Agreement dated March 3, 2010 between the Registrant and Steven R. Berrard. | ||
10.2
|
(4) | Employment Agreement between the Registrant and Denmar Dixon dated January 22, 2010 | ||
10.3
|
(5) | Separation and General Release Between the Registrant and John A. Burchett | ||
10.4
|
(9) | Amended and Restated Contract of Employment between the Registrant and Mark J. OBrien dated March 15, 2010 | ||
10.5
|
(9) | Amended and Restated Contract of Employment between the Registrant and Charles E. Cauthen dated March 15, 2010 | ||
10.6
|
(9) | Amended and Restated Contract of Employment between the Registrant and Kimberly A. Perez dated March 15, 2010 | ||
10.7
|
(6) | Executive RSU Award Agreements between Registrant and Mark J. OBrien, Charles E. Cauthen and Kimberly A. Perez dated January 4, 2010 | ||
10.8
|
(6) | Non-Qualified Option Award Agreements between Registrant and Mark J. OBrien, Charles E. Cauthen and Kimberly A. Perez dated January 4, 2010 | ||
10.9
|
(9) | Executive RSU Award Agreement between Registrant and Stuart D. Boyd dated January 4, 2010 | ||
10.10
|
(9) | Executive RSU Award Agreement between Registrant and Del Pulido dated January 4, 2010 | ||
10.11
|
(9) | Non-Qualified Option Award Agreement between Registrant and Stuart D. Boyd dated January 4, 2010 | ||
10.12
|
(9) | Non-Qualified Option Award Agreements between Registrant and Del Pulido dated January 4, 2010 | ||
10.13
|
(7) | 2009 Long Term Incentive Award Agreements for Special RSU Award, Bonus RSU Award and Nonqualified Option Award Between Registrant and Denmar Dixon | ||
10.14
|
(8) | Amendment No. 1 to Revolving Credit Agreement | ||
31.1
|
(9) | Certification by Mark J. OBrien pursuant to Securities Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2
|
(9) | Certification by Kimberly A. Perez pursuant to Securities Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32
|
(9) | Certification by Mark J. OBrien and Kimberly A. Perez pursuant to 18 U.S.C. Section 1352, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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Note | Notes to Exhibit Index | |
(1)
|
Incorporated herein by reference to the Annexes to the proxy statement/ prospectus forming a part of Amendment No. 4 to the Registrants Registration Statement on Form S-4, Registration No. 333-155091, as filed with the Securities and Exchange Commission on February 17, 2009. | |
(2)
|
Incorporated herein by reference to Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on April 21, 2009. | |
(3)
|
Incorporated by reference to Registrants Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, as filed with the Securities and Exchange Commission on August 14, 2009. | |
(4)
|
Incorporated by reference to Registrants Current Report on Form 8-K, as filed with the Securities and Exchange Commission on January 26, 2010. | |
(5)
|
Incorporated by reference to Registrants Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission on March 2, 2010 | |
(6)
|
Incorporated by reference to Registrants Current Report on Form 8-K, as filed with the Securities and Exchange Commission on January 8, 2010. | |
(7)
|
Incorporated by reference to Registrants Current Report on Form 8-K, as filed with the Securities and Exchange Commission on January 28, 2010. | |
(8)
|
Incorporated by reference to Registrants Current Report on Form 8-K, as filed with the Securities and Exchange Commission on February 19, 2010. | |
(9)
|
Filed herewith |
38