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EX-32.1 - EX-32.1 - LendingTree, Inc. | a2204116zex-32_1.htm |
EX-31.2 - EX-31.2 - LendingTree, Inc. | a2204116zex-31_2.htm |
EX-31.1 - EX-31.1 - LendingTree, Inc. | a2204116zex-31_1.htm |
EX-32.2 - EX-32.2 - LendingTree, Inc. | a2204116zex-32_2.htm |
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TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
For the Quarterly Period Ended March 31, 2011 |
||
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 No. 001-34063
TREE.COM, INC.
(Exact name of Registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
26-2414818 (I.R.S. Employer Identification No.) |
11115 Rushmore Drive, Charlotte, North Carolina 28277
(Address of principal executive offices)
(704) 541-5351
(Registrant's 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 ý 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 than 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, a non-accelerated filer or a smaller reporting company. See definition of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer ý (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 ý
As of May 12, 2011 there were 11,024,271 shares of the Registrant's common stock, par value $.01 per share, outstanding.
2
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
Three Months Ended March 31, |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2011 | 2010 | |||||||
|
(In thousands, except per share amounts) |
||||||||
Revenue |
|||||||||
LendingTree Loans |
$ | 19,250 | $ | 25,738 | |||||
Exchanges |
14,124 | 18,986 | |||||||
Total revenue |
33,374 | 44,724 | |||||||
Cost of revenue |
|||||||||
LendingTree Loans |
10,764 | 10,274 | |||||||
Exchanges |
1,348 | 1,474 | |||||||
Total cost of revenue (exclusive of depreciation shown separately below) |
12,112 | 11,748 | |||||||
Gross margin |
21,262 | 32,976 | |||||||
Operating expenses |
|||||||||
Selling and marketing expense |
23,333 | 19,559 | |||||||
General and administrative expense |
13,103 | 11,398 | |||||||
Product development |
1,535 | 1,241 | |||||||
Litigation settlements and contingencies |
4,502 | 16 | |||||||
Restructuring expense |
389 | 2,610 | |||||||
Amortization of intangibles |
307 | 943 | |||||||
Depreciation |
1,576 | 1,374 | |||||||
Asset impairments |
5,007 | | |||||||
Total operating expenses |
49,752 | 37,141 | |||||||
Operating loss |
(28,490 | ) | (4,165 | ) | |||||
Other income (expense) |
|||||||||
Interest income |
| 7 | |||||||
Interest expense |
(80 | ) | (166 | ) | |||||
Total other expense, net |
(80 | ) | (159 | ) | |||||
Loss before income taxes |
(28,570 | ) | (4,324 | ) | |||||
Income tax provision |
(265 | ) | (543 | ) | |||||
Net loss from continuing operations |
(28,835 | ) | (4,867 | ) | |||||
Loss from discontinued operations, net of tax |
(10,660 |
) |
(1,279 |
) |
|||||
Net loss available to common shareholders |
$ | (39,495 | ) | $ | (6,146 | ) | |||
Weighted average common shares outstanding |
10,882 | 10,960 | |||||||
Weighted average diluted shares outstanding |
10,882 | 10,960 | |||||||
Net loss per share from continuing operations |
|||||||||
Basic |
$ | (2.65 | ) | $ | (0.44 | ) | |||
Diluted |
$ | (2.65 | ) | $ | (0.44 | ) | |||
Net loss per share available to common shareholders |
|||||||||
Basic |
$ | (3.63 | ) | $ | (0.56 | ) | |||
Diluted |
$ | (3.63 | ) | $ | (0.56 | ) | |||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
3
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
March 31, 2011 |
December 31, 2010 |
||||||
---|---|---|---|---|---|---|---|---|
|
(unaudited) |
|
||||||
|
(In thousands, except par value and share amounts) |
|||||||
ASSETS: |
||||||||
Cash and cash equivalents |
$ | 53,520 | $ | 68,819 | ||||
Restricted cash and cash equivalents |
9,933 | 10,549 | ||||||
Accounts receivable, net of allowance of $160 and $213, respectively |
6,893 | 4,264 | ||||||
Loans held for sale ($72,697 and $115,908 measured at fair value, respectively) |
73,296 | 116,681 | ||||||
Prepaid and other current assets |
11,313 | 11,750 | ||||||
Current assets of discontinued operations |
232 | 219 | ||||||
Total current assets |
155,187 | 212,282 | ||||||
Property and equipment, net |
12,594 | 11,580 | ||||||
Goodwill |
10,741 | 3,632 | ||||||
Intangible assets, net |
41,013 | 45,419 | ||||||
Other non-current assets |
650 | 521 | ||||||
Non-current assets of discontinued operations |
171 | 9,368 | ||||||
Total assets |
$ | 220,356 | $ | 282,802 | ||||
LIABILITIES: |
||||||||
Warehouse lines of credit |
$ | 66,472 | $ | 100,623 | ||||
Accounts payable, trade |
14,451 | 7,042 | ||||||
Deferred revenue |
257 | 1,540 | ||||||
Deferred income taxes |
2,358 | 2,358 | ||||||
Accrued expenses and other current liabilities |
38,871 | 38,739 | ||||||
Current liabilities of discontinued operations |
2,381 | 1,031 | ||||||
Total current liabilities |
124,790 | 151,333 | ||||||
Income taxes payable |
99 | 96 | ||||||
Other long-term liabilities |
17,322 | 15,302 | ||||||
Deferred income taxes |
14,211 | 13,962 | ||||||
Non-current liabilities of discontinued operations |
282 | 288 | ||||||
Total liabilities |
156,704 | 180,981 | ||||||
Commitments and contingencies (Note 13) |
||||||||
SHAREHOLDERS' EQUITY: |
||||||||
Preferred stock $.01 par value; authorized 5,000,000 shares; none issued or outstanding |
| | ||||||
Common stock $.01 par value; authorized 50,000,000 shares; issued 12,111,999 and 11,893,468 shares, respectively, and outstanding 10,988,738 and 10,770,207 shares, respectively |
121 | 118 | ||||||
Additional paid-in capital |
910,160 | 908,837 | ||||||
Accumulated deficit |
(838,097 | ) | (798,602 | ) | ||||
Treasury stock 1,123,261 shares |
(8,532 | ) | (8,532 | ) | ||||
Total shareholders' equity |
63,652 | 101,821 | ||||||
Total liabilities and shareholders' equity |
$ | 220,356 | $ | 282,802 | ||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
4
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
|
|
Common Stock | |
|
Treasury Stock | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Total | Number of Shares |
Amount | Additional Paid-in Capital |
Accumulated Deficit |
Number of Shares |
Amount | ||||||||||||||||
|
(In thousands) |
||||||||||||||||||||||
Balance as of December 31, 2010 |
$ | 101,821 | 11,893 | $ | 118 | $ | 908,837 | $ | (798,602 | ) | 1,123 | $ | (8,532 | ) | |||||||||
Comprehensive loss: |
|||||||||||||||||||||||
Net loss for the three months ended March 31, 2011 |
(39,495 | ) | | | | (39,495 | ) | | | ||||||||||||||
Comprehensive loss |
(39,495 | ) | | | | | | | |||||||||||||||
Non-cash compensation |
1,301 | | | 1,301 | | | | ||||||||||||||||
Issuance of common stock upon exercise of stock options and vesting of restricted stock units, net of withholding taxes |
25 | 219 | 3 | 22 | | | | ||||||||||||||||
Balance as of March 31, 2011 |
$ | 63,652 | 12,112 | $ | 121 | $ | 910,160 | $ | (838,097 | ) | 1,123 | $ | (8,532 | ) | |||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
5
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
Three Months Ended March 31, |
|||||||
---|---|---|---|---|---|---|---|---|
|
2011 | 2010 | ||||||
|
(In thousands) |
|||||||
Cash flows from operating activities attributable to continuing operations: |
||||||||
Net loss |
$ | (39,495 | ) | $ | (6,146 | ) | ||
Less loss from discontinued operations, net of tax |
10,660 | 1,279 | ||||||
Loss from continuing operations |
(28,835 | ) | (4,867 | ) | ||||
Adjustments to reconcile net loss from continuing operations to net cash provided by (used in) operating activities attributable to continuing operations: |
||||||||
Loss on disposal of fixed assets |
| 4 | ||||||
Amortization of intangibles |
307 | 943 | ||||||
Depreciation |
1,576 | 1,374 | ||||||
Intangible impairment |
4,100 | | ||||||
Property and equipment impairment |
907 | | ||||||
Non-cash compensation expense |
1,301 | 1,094 | ||||||
Non-cash restructuring expense |
| 93 | ||||||
Deferred income taxes |
249 | 530 | ||||||
Gain on origination and sale of loans |
(17,309 | ) | (23,400 | ) | ||||
Loss on impaired loans not sold |
84 | | ||||||
(Gain) loss on sale of real estate acquired in satisfaction of loans |
(19 | ) | 368 | |||||
Bad debt expense |
(15 | ) | 75 | |||||
Changes in current assets and liabilities: |
||||||||
Accounts receivable |
(2,565 | ) | (386 | ) | ||||
Origination of loans |
(497,233 | ) | (608,365 | ) | ||||
Proceeds from sales of loans |
562,952 | 626,226 | ||||||
Principal payments received on loans |
274 | 180 | ||||||
Payments to investors for loan repurchases and early payoff obligations |
(164 | ) | (2,236 | ) | ||||
Prepaid and other current assets |
(1,533 | ) | (175 | ) | ||||
Accounts payable and other current liabilities |
5,920 | (8,274 | ) | |||||
Income taxes payable |
(3 | ) | 59 | |||||
Deferred revenue |
(1,293 | ) | (36 | ) | ||||
Other, net |
944 | 2,679 | ||||||
Net cash provided by (used in) operating activities attributable to continuing operations |
29,645 | (14,114 | ) | |||||
Cash flows from investing activities attributable to continuing operations: |
||||||||
Acquisitions, net of cash acquired |
(7,804 | ) | | |||||
Capital expenditures |
(3,498 | ) | (1,428 | ) | ||||
Other, net |
616 | 259 | ||||||
Net cash used in investing activities attributable to continuing operations |
(10,686 | ) | (1,169 | ) | ||||
Cash flows from financing activities attributable to continuing operations: |
||||||||
Borrowing under warehouse lines of credit |
138,500 | 551,088 | ||||||
Repayments of warehouse lines of credit |
(172,651 | ) | (546,070 | ) | ||||
Issuance of common stock, net of withholding taxes |
25 | (539 | ) | |||||
Purchase of treasury stock |
| (667 | ) | |||||
Increase in restricted cash |
| (600 | ) | |||||
Net cash provided by (used in) financing activities attributable to continuing operations |
(34,126 | ) | 3,212 | |||||
Total cash used in continuing operations |
(15,167 | ) | (12,071 | ) | ||||
Net cash used in operating activities attributable to discontinued operations |
(132 | ) | (790 | ) | ||||
Net cash used in investing activities attributable to discontinued operations |
| (181 | ) | |||||
Total cash used in discontinued operations |
(132 | ) | (971 | ) | ||||
Net decrease in cash and cash equivalents |
(15,299 | ) | (13,042 | ) | ||||
Cash and cash equivalents at beginning of period |
68,819 | 86,093 | ||||||
Cash and cash equivalents at end of period |
$ | 53,520 | $ | 73,051 | ||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
6
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1ORGANIZATION
Company Overview
Tree.com, Inc. ("Tree.com" or the "Company") is the parent of LendingTree, LLC, which owns several brands and businesses that provide information, tools, advice, products and services for critical transactions in our customers' lives. Our family of brands includes: LendingTree.com®, GetSmart.com®, RealEstate.com®, DegreeTree.comSM, HealthTree.comSM, LendingTreeAutos.com, DoneRight.com®, and InsuranceTree.comSM. Together, these brands serve as an ally for consumers who are looking to comparison shop for loans, real estate and other services from multiple businesses and professionals who will compete for their business.
These businesses and brands are operated under the segments known as LendingTree Loans and the Exchanges.
LendingTree Loans
The LendingTree Loans segment originates, processes, approves and funds various residential real estate loans through Home Loan Center, Inc. dba LendingTree Loans ("HLC"). The HLC and LendingTree Loans brand names are collectively referred to in these consolidated financial statements as "LendingTree Loans."
Exchanges
The Exchanges segment consists of online lead generation networks and call centers that connect consumers and service providers principally in the lending, real estate, higher education, home services, insurance and automobile marketplaces.
Discontinued Operations
On March 10, 2011, management of the Company made the decision and finalized a plan to close all of the field offices of the proprietary full service real estate brokerage business known as RealEstate.com, REALTORS®, which was previously reported within the Real Estate reporting segment (see Note 8). The Company exited all markets by March 31, 2011. Accordingly, RealEstate.com, REALTORS® is presented as discontinued operations in the accompanying consolidated balance sheet and consolidated statements of operations and cash flows for all periods presented. The notes accompanying these consolidated financial statements reflect our continuing operations and, unless otherwise noted, exclude information related to the discontinued operations.
Tree.com maintains operations solely in the United States.
Business Combinations
On March 15, 2011, Tree.com, through its wholly-owned subsidiary, HLC, completed its acquisition of certain assets of First Residential Mortgage Network, Inc. dba SurePoint Lending ("SurePoint") and certain shareholders of SurePoint. The Asset Purchase Agreement (the "Agreement") was previously announced on November 16, 2010. SurePoint, a LendingTree network lender for eleven years, was a full service residential mortgage provider licensed in 45 states and employing over 500 people, including more than 300 licensed loan officers. The Agreement provides for the purchase by HLC of certain specified assets and liabilities of SurePoint related to its business of originating, refinancing, processing, underwriting, funding and closing residential mortgage loans; providing title and escrow services; and
7
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1ORGANIZATION (Continued)
providing other mortgage related services, as further described in the Agreement. The acquired assets also include all of the equity interests of Real Estate Title Services, LLC. Under the terms of the Agreement, HLC paid $8.0 million in cash upon the closing of the transaction, subject to certain adjustments as described in the Agreement. The Company used available cash to fund the acquisition.
This asset purchase is being accounted for under the acquisition method of accounting. Accordingly, the purchase price is allocated to the acquired assets and liabilities based on their estimated fair values at the acquisition date. The allocation of the purchase price, including goodwill, if any, is not yet complete and will be finalized upon completion of the analysis of the fair values of the acquired assets and liabilities. The pro forma effect of this purchase was not material to our results of operations.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements as of March 31, 2011 and 2010 and for the three months then ended have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of the Company's management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company's financial position for the periods presented. The results for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for the year ending December 31, 2011, or any other period. These financial statements and notes should be read in conjunction with the audited financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2010.
NOTE 2SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
Tree.com's management is required to make certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles ("GAAP"). These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates.
Significant estimates underlying the accompanying consolidated financial statements include: valuation allowance for impaired loans held for sale; loan loss obligations; the fair value of loans held for sale and related derivatives; the recoverability of long-lived assets, goodwill and intangible assets; the determination of income taxes payable and deferred income taxes, including related valuation allowances; restructuring reserves; contingent consideration related to business combinations; various other allowances, reserves and accruals; and assumptions related to the determination of stock-based compensation.
8
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2SIGNIFICANT ACCOUNTING POLICIES (Continued)
Cash and Cash Equivalents
Cash and cash equivalents include cash and short-term, highly liquid money market investments.
Restricted Cash
Restricted cash and cash equivalents consists of the following (in thousands):
|
March 31, 2011 |
December 31, 2010 |
||||||
---|---|---|---|---|---|---|---|---|
Cash in escrow for surety bonds |
$ | 5,031 | $ | 5,030 | ||||
Cash in escrow for corporate purchasing card program |
800 | 800 | ||||||
Minimum required balances for warehouse lines of credit |
1,925 | 1,925 | ||||||
Mortgage lending escrow funds |
1,770 | 2,394 | ||||||
Other |
407 | 400 | ||||||
Total restricted cash and cash equivalents |
$ | 9,933 | $ | 10,549 | ||||
Recent Accounting Pronouncements
On January 21, 2010, the FASB amended and Tree.com adopted the accounting standard for fair value measurements and disclosures, which added new requirements for disclosures about transfers into and out of Level 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. The amendment also clarifies existing fair value disclosures about the level of disaggregation and the inputs and valuation techniques used to measure fair value. This amendment is effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. See Note 10 for further information.
NOTE 3GOODWILL AND INTANGIBLE ASSETS
The balance of goodwill and intangible assets, net is as follows (in thousands):
|
March 31, 2011 |
December 31, 2010 |
||||||
---|---|---|---|---|---|---|---|---|
Goodwill |
$ | 10,741 | $ | 3,632 | ||||
Intangible assets with indefinite lives |
$ | 39,142 | $ | 43,242 | ||||
Intangible assets with definite lives, net |
1,871 | 2,177 | ||||||
Total intangible assets, net |
$ | 41,013 | $ | 45,419 | ||||
Intangible assets with indefinite lives relate principally to trade names and trademarks acquired in various acquisitions.
9
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3GOODWILL AND INTANGIBLE ASSETS (Continued)
At March 31, 2011, intangible assets with definite lives relate to the following (in thousands):
|
Cost | Accumulated Amortization |
Net | Weighted Average Amortization Life (Years) |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Purchase agreements |
$ | 75,453 | $ | (75,300 | ) | $ | 153 | 5.8 | ||||||
Technology |
30,491 | (29,949 | ) | 542 | 3.0 | |||||||||
Customer lists |
7,388 | (6,707 | ) | 681 | 3.9 | |||||||||
Other |
9,009 | (8,514 | ) | 495 | 4.4 | |||||||||
Total |
$ | 122,341 | $ | (120,470 | ) | $ | 1,871 | |||||||
At December 31, 2010, intangible assets with definite lives relate to the following (in thousands):
|
Cost | Accumulated Amortization |
Net | Weighted Average Amortization Life (Years) |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Purchase agreements |
$ | 75,453 | $ | (75,288 | ) | $ | 165 | 5.8 | ||||||
Technology |
30,491 | (29,838 | ) | 653 | 3.0 | |||||||||
Customer lists |
7,388 | (6,692 | ) | 696 | 3.9 | |||||||||
Other |
9,009 | (8,346 | ) | 663 | 4.1 | |||||||||
Total |
$ | 122,341 | $ | (120,164 | ) | $ | 2,177 | |||||||
Amortization of intangible assets with definite lives is computed on a straight-line basis and, based on March 31, 2011 balances, such amortization for the next five years is estimated to be as follows (in thousands):
|
Amount | ||||
---|---|---|---|---|---|
Nine months ending December 31, 2011 |
$ | 777 | |||
Year ending December 31, 2012 |
410 | ||||
Year ending December 31, 2013 |
144 | ||||
Year ending December 31, 2014 |
84 | ||||
Year ending December 31, 2015 |
60 | ||||
Thereafter |
396 | ||||
Total |
$ | 1,871 | |||
10
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3GOODWILL AND INTANGIBLE ASSETS (Continued)
The following table presents the balance of goodwill by segment (in thousands):
|
LendingTree Loans |
Exchanges | Total | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Balance as of December 31, 2010 |
|||||||||||
Goodwill |
$ | 46,526 | $ | 486,720 | $ | 533,246 | |||||
Accumulated impairment losses |
(46,526 | ) | (483,088 | ) | (529,614 | ) | |||||
|
| 3,632 | 3,632 | ||||||||
Goodwill resulting from business combinations |
7,109 | | 7,109 | ||||||||
Balance as of March 31, 2011 |
|||||||||||
Goodwill |
53,635 | 486,720 | 540,355 | ||||||||
Accumulated impairment losses |
(46,526 | ) | (483,088 | ) | (529,614 | ) | |||||
|
$ | 7,109 | $ | 3,632 | $ | 10,741 | |||||
Goodwill acquired in 2011 relates to the acquisition of SurePoint that is discussed in Note 1.
In connection with closing all of the field offices of RealEstate.com, REALTORS® as described in Note 1, the Company incurred impairment charges totaling $5.0 million in the first quarter of 2011. Trademark impairment totaled $4.1 million and property and equipment impairment totaled $0.9 million. As described in Note 7, in connection with exiting this business, the Company changed its reporting segments. See Note 7 for information regarding the allocation of segment results.
NOTE 4PROPERTY AND EQUIPMENT
The balance of property and equipment, net is as follows (in thousands):
|
March 31, 2011 |
December 31, 2010 |
||||||
---|---|---|---|---|---|---|---|---|
Computer equipment and capitalized software |
$ | 35,258 | $ | 36,101 | ||||
Leasehold improvements |
2,352 | 2,915 | ||||||
Furniture and other equipment |
2,994 | 2,311 | ||||||
Projects in progress |
4,085 | 2,896 | ||||||
|
44,689 | 44,223 | ||||||
Less: accumulated depreciation and amortization |
(32,095 | ) | (32,643 | ) | ||||
Total property and equipment, net |
$ | 12,594 | $ | 11,580 | ||||
11
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following (in thousands):
|
March 31, 2011 |
December 31, 2010 |
||||||
---|---|---|---|---|---|---|---|---|
Accrued loan loss liability related to loans previously sold |
$ | 6,928 | $ | 5,459 | ||||
Loan loss settlement liability related to loans previously sold |
300 | 300 | ||||||
Litigation accruals |
4,795 | 520 | ||||||
Accrued advertising expense |
5,823 | 8,979 | ||||||
Accrued compensation and benefits |
5,606 | 7,247 | ||||||
Accrued professional fees |
1,067 | 1,340 | ||||||
Accrued restructuring costs |
1,109 | 1,199 | ||||||
Derivative liabilities |
892 | 1,634 | ||||||
Customer deposits and escrows |
3,870 | 3,166 | ||||||
Deferred rent |
396 | 482 | ||||||
Other |
8,085 | 8,413 | ||||||
Total accrued expenses and other current liabilities |
$ | 38,871 | $ | 38,739 | ||||
The other category above reflects an earnout payable related to an acquisition, franchise taxes, self-insured health claims and other miscellaneous accrued expenses.
An additional $13.1 million and $11.5 million of accrued loan loss liability related to loans previously sold is classified in other long term liabilities at March 31, 2011 and December 31, 2010, respectively.
An additional $1.1 million and $1.2 million of accrued restructuring liability is classified in other long term liabilities at March 31, 2011 and December 31, 2010, respectively.
NOTE 6WAREHOUSE LINES OF CREDIT
Borrowings on warehouse lines of credit were $66.5 million and $100.6 million at March 31, 2011 and December 31, 2010, respectively.
As of March 31, 2011, LendingTree Loans had two committed lines of credit totaling $150.0 million of borrowing capacity. LendingTree Loans also has a $25.0 million uncommitted line with one of these lenders. Borrowings under these lines of credit are used to fund, and are secured by, consumer residential loans that are held for sale. Loans under these lines of credit are repaid using proceeds from the sales of loans by LendingTree Loans.
The $50.0 million first line is scheduled to expire on June 29, 2011. This line can be cancelled at the option of the lender without default upon sixty days notice. This first line includes an additional uncommitted credit facility of $25.0 million. This first line is also guaranteed by Tree.com, Inc., LendingTree, LLC and LendingTree Holdings Corp. The interest rate under the first line is the 30-day London InterBank Offered Rate ("LIBOR") or 2.00% (whichever is greater) plus 2.25%. The interest rate under the $25.0 million uncommitted line is the 30-day LIBOR plus 1.50%. LendingTree Loans is also required to sell at least 25% of the loans it originates to the lender under this line or pay a "pair-off fee" of 0.25% on the difference between the required and actual volume of loans sold.
12
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6WAREHOUSE LINES OF CREDIT (Continued)
The $100.0 million second line is scheduled to expire on October 28, 2011. This line is also guaranteed by Tree.com, Inc., LendingTree, LLC and LendingTree Holdings Corp. The interest rate under this line is the 30-day Adjusted LIBOR or 2.0% (whichever is greater) plus 2.25% to 2.5% for loans being sold to the lender and 30-day Adjusted LIBOR or 2.0% (whichever is greater) plus 2.25% for loans not being sold to the lender.
Under the terms of these warehouse lines, LendingTree Loans is required to maintain various financial and other covenants. These financial covenants include, but are not limited to, maintaining (i) minimum tangible net worth of $25.0 million, (ii) minimum liquidity, (iii) a minimum current ratio, (iv) a maximum ratio of total liabilities to net worth, (v) a maximum leverage ratio, (vi) pre-tax net income requirements and (vii) a maximum warehouse capacity ratio. During the quarter ended March 31, 2011, LendingTree Loans was in compliance with the covenants under these lines.
The LendingTree Loans business is highly dependent on the availability of these warehouse lines. Although we believe that our existing lines of credit are adequate for our current operations, reductions in our available credit, or the inability to renew or replace these lines, would have a material adverse effect on our business, financial condition and results of operations. Management has determined that it could continue to operate the LendingTree Loans business at a reduced capacity if one, but not both, of the warehouse lines were lost. We intend to renew both of these lines upon expiration.
NOTE 7SEGMENT INFORMATION
The overall concept that Tree.com employs in determining its reportable segments and related financial information is to present them in a manner consistent with how the chief operating decision maker and executive management view the Tree.com businesses, how the businesses are organized as to segment management, and the focus of the Tree.com businesses with regards to the types of products or services offered or the target market.
In connection with exiting the RealEstate.com, REALTORS® business that is discussed in Notes 1, 3 and 8, the Company re-evaluated its reporting segments based on the continuing operations of the Company. In prior periods, the segments "LendingTree Loans", "Exchanges", "Real Estate" and "Unallocated-Corporate" were presented, which have been changed to "LendingTree Loans" and "Exchanges". The "Exchanges" segment now includes the continuing operations of the previous "Real Estate" segment and the previous "UnallocatedCorporate" segment. Segment results for prior periods have been restated to conform to the new presentation.
During the third quarter of 2010, the Company changed its accounting policy for inter-segment revenue and inter-segment marketing expense between the LendingTree Loans and Exchanges segments. This change only impacts the individual segment results, and does not impact the consolidated financial results of Tree.com.
Marketing expense for the Exchanges is primarily related to the building and maintaining of the Company's core brands, using both online and offline spending, and generates leads not only for the Exchanges but for other segments as well. Previously, marketing expense for LendingTree Loans was primarily comprised of inter-segment purchases of leads from the Exchanges, leveraging the LendingTree and GetSmart brands. The Exchanges received inter-segment revenue for the sale of these
13
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7SEGMENT INFORMATION (Continued)
leads, and that revenue and the related marketing expense at LendingTree Loans would then be eliminated in consolidation of the total Company results.
The Company now uses a cost sharing approach for these marketing expenses, whereby LendingTree Loans and the Exchanges now share the marketing expense on a pro rata basis, based on the quantity of leads received by each segment. There is no longer inter-segment revenue or inter-segment marketing expense between these two segments related to these leads. Management believes that this cost sharing approach is preferable because it more closely aligns the overall goals of the Company with the goals of segment management, and may ultimately drive the Company to better performance. Segment reporting results for prior periods have been restated to conform to the new presentation.
Tree.com's primary performance metrics are EBITDA and Adjusted EBITDA. EBITDA is defined as earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA excluding (1) non-cash compensation expense, (2) non-cash intangible asset impairment charges, (3) gain/loss on disposal of assets, (4) restructuring expenses, (5) litigation settlements and contingencies, (6) pro forma adjustments for significant acquisitions, and (7) one-time items, which are truly one-time in nature and non-recurring, infrequent or unusual, and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. For the periods presented in this report, there are no one-time items. These measures are two of the primary metrics by which Tree.com evaluates the performance of its businesses, on which its internal budgets are based and by which management is compensated. Tree.com believes that investors should have access to the same set of tools that it uses in analyzing its results. EBITDA and Adjusted EBITDA have certain limitations in that they do not take into account the impact to Tree.com's statement of operations of certain expenses, as described above. Tree.com endeavors to compensate for the limitations of the non-GAAP measure presented by also providing the comparable GAAP measure with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the non-GAAP measure.
14
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7SEGMENT INFORMATION (Continued)
Summarized information by segment and reconciliation to EBITDA and Adjusted EBITDA is as follows (in thousands):
|
For the Three Months Ended March 31, 2011 |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
LendingTree Loans |
Exchanges | Total | ||||||||
Revenue |
$ | 19,250 | $ | 14,124 | $ | 33,374 | |||||
Cost of revenue (exclusive of depreciation shown separately below) |
10,764 | 1,348 | 12,112 | ||||||||
Gross margin |
8,486 | 12,776 | 21,262 | ||||||||
Operating expenses: |
|||||||||||
Selling and marketing expense |
7,703 | 15,630 | 23,333 | ||||||||
General and administrative expense |
7,145 | 5,958 | 13,103 | ||||||||
Product development |
246 | 1,289 | 1,535 | ||||||||
Litigation settlements and contingencies |
2 | 4,500 | 4,502 | ||||||||
Restructuring expense |
295 | 94 | 389 | ||||||||
Amortization of intangibles |
| 307 | 307 | ||||||||
Depreciation |
397 | 1,179 | 1,576 | ||||||||
Asset impairments |
| 5,007 | 5,007 | ||||||||
Total operating expenses |
15,788 | 33,964 | 49,752 | ||||||||
Operating loss |
(7,302 | ) | (21,188 | ) | (28,490 | ) | |||||
Adjustments to reconcile to EBITDA and Adjusted EBITDA: |
|||||||||||
Amortization of intangibles |
| 307 | 307 | ||||||||
Depreciation |
397 | 1,179 | 1,576 | ||||||||
EBITDA from continuing operations |
(6,905 | ) | (19,702 | ) | (26,607 | ) | |||||
Restructuring expense |
295 | 94 | 389 | ||||||||
Non-cash compensation |
153 | 1,148 | 1,301 | ||||||||
Litigation settlements and contingencies |
2 | 4,500 | 4,502 | ||||||||
Asset impairments |
| 5,007 | 5,007 | ||||||||
Adjusted EBITDA from continuing operations |
$ | (6,455 | ) | $ | (8,953 | ) | $ | (15,408 | ) | ||
Reconciliation to net loss in total: |
|||||||||||
Operating loss per above |
$ | (28,490 | ) | ||||||||
Other expense, net |
(80 | ) | |||||||||
Loss before income taxes |
(28,570 | ) | |||||||||
Income tax provision |
(265 | ) | |||||||||
Net loss from continuing operations |
(28,835 | ) | |||||||||
Loss from discontinued operations, net of tax |
(10,660 | ) | |||||||||
Net loss |
$ | (39,495 | ) | ||||||||
15
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7SEGMENT INFORMATION (Continued)
|
For the Three Months Ended March 31, 2010 |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
LendingTree Loans |
Exchanges | Total | ||||||||
Revenue |
$ | 25,738 | $ | 18,986 | $ | 44,724 | |||||
Cost of revenue (exclusive of depreciation shown separately below) |
10,274 | 1,474 | 11,748 | ||||||||
Gross margin |
15,464 | 17,512 | 32,976 | ||||||||
Operating expenses: |
|||||||||||
Selling and marketing expense |
4,895 | 14,664 | 19,559 | ||||||||
General and administrative expense |
4,816 | 6,582 | 11,398 | ||||||||
Product development |
131 | 1,110 | 1,241 | ||||||||
Litigation settlements and contingencies |
16 | | 16 | ||||||||
Restructuring expense |
7 | 2,603 | 2,610 | ||||||||
Amortization of intangibles |
| 943 | 943 | ||||||||
Depreciation |
490 | 884 | 1,374 | ||||||||
Total operating expenses |
10,355 | 26,786 | 37,141 | ||||||||
Operating income (loss) |
5,109 | (9,274 | ) | (4,165 | ) | ||||||
Adjustments to reconcile to EBITDA and Adjusted EBITDA: |
|||||||||||
Amortization of intangibles |
| 943 | 943 | ||||||||
Depreciation |
490 | 884 | 1,374 | ||||||||
EBITDA from continuing operations |
5,599 | (7,447 | ) | (1,848 | ) | ||||||
Restructuring expense |
7 | 2,603 | 2,610 | ||||||||
Non-cash compensation |
131 | 963 | 1,094 | ||||||||
Loss on disposal of assets |
| 4 | 4 | ||||||||
Litigation settlements and contingencies |
16 | | 16 | ||||||||
Adjusted EBITDA from continuing operations |
$ | 5,753 | $ | (3,877 | ) | $ | 1,876 | ||||
Reconciliation to net loss in total: |
|||||||||||
Operating loss per above |
$ | (4,165 | ) | ||||||||
Other expense, net |
(159 | ) | |||||||||
Loss before income taxes |
(4,324 | ) | |||||||||
Income tax provision |
(543 | ) | |||||||||
Net loss from continuing operations |
(4,867 | ) | |||||||||
Loss from discontinued operations, net of tax |
(1,279 | ) | |||||||||
Net loss |
$ | (6,146 | ) | ||||||||
16
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7SEGMENT INFORMATION (Continued)
Significant components of revenue for the three months ended March 31, 2011 and 2010 are as follows (in thousands):
|
Three Months Ended March 31, |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2011 | 2010 | |||||||
LendingTree Loans: |
|||||||||
Origination and sale of loans |
$ | 17,309 | $ | 23,400 | |||||
Other |
1,941 | 2,338 | |||||||
Total LendingTree Loans |
19,250 | 25,738 | |||||||
Exchanges: |
|||||||||
Match fees |
12,627 | 14,248 | |||||||
Closed loan fees |
1,006 | 3,758 | |||||||
Other |
491 | 980 | |||||||
Total Exchanges |
14,124 | 18,986 | |||||||
Total revenue |
$ | 33,374 | $ | 44,724 | |||||
Total assets by segment at March 31, 2011 and December 31, 2010 are as follows (in thousands):
|
March 31, 2011 |
December 31, 2010 |
|||||
---|---|---|---|---|---|---|---|
LendingTree Loans |
$ | 138,457 | $ | 194,244 | |||
Exchanges |
81,496 | 78,971 | |||||
Discontinued Operations |
403 | 9,587 | |||||
Total |
$ | 220,356 | $ | 282,802 | |||
NOTE 8DISCONTINUED OPERATIONS
On March 10, 2011, management of the Company made the decision and finalized a plan to close all of the field offices of the proprietary full service real estate brokerage business known as RealEstate.com, REALTORS®, which was previously reported within the Real Estate reporting segment (see Note 7). The Company exited all markets by March 31, 2011. Accordingly, RealEstate.com, REALTORS® is presented as discontinued operations in the accompanying consolidated balance sheet and consolidated statements of operations and cash flows for all periods presented.
The revenue and net loss for the aforementioned discontinued operations for the applicable periods were as follows (in thousands):
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2011 | 2010 | |||||
Revenue |
$ | 1,792 | $ | 3,287 | |||
Loss before income taxes |
$ | (10,660 | ) | $ | (1,177 | ) | |
Income tax provision |
| (102 | ) | ||||
Net loss |
$ | (10,660 | ) | $ | (1,279 | ) | |
17
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8DISCONTINUED OPERATIONS (Continued)
Net loss for the three months ended March 31, 2011 includes goodwill disposal charges totaling $8.0 million and restructuring charges totaling $1.9 million. The amount of goodwill allocated to discontinued operations and subsequently disposed of was based on the relative fair values prior to disposition of the business disposed of and the business retained.
The assets and liabilities of RealEstate.com, REALTORS® reported as discontinued operations as of March 31, 2011 and December 31, 2010 were as follows (in thousands):
|
March 31, 2011 |
December 31, 2010 |
||||||
---|---|---|---|---|---|---|---|---|
Current assets |
$ | 232 | $ | 219 | ||||
Property and equipment |
| 1,215 | ||||||
Goodwill |
| 7,967 | ||||||
Other non-current assets |
171 | 186 | ||||||
Non-current assets |
171 | 9,368 | ||||||
Current liabilities |
2,381 | 1,031 | ||||||
Non-current liabilities |
282 | 288 | ||||||
Net assets (liabilities) |
$ | (2,260 | ) | $ | 8,268 | |||
NOTE 9EARNINGS PER SHARE AND STOCK-BASED COMPENSATION
The following table sets forth the computation of Basic and Diluted earnings per share:
|
Three Months Ended March 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2010 | |||||||||||
|
Basic | Diluted | Basic | Diluted | |||||||||
|
(In thousands, except per share data) |
||||||||||||
Numerator: |
|||||||||||||
Loss from continuing operations |
$ | (28,835 | ) | $ | (28,835 | ) | $ | (4,867 | ) | $ | (4,867 | ) | |
Loss from discontinued operations, net of tax |
(10,660 | ) | (10,660 | ) | (1,279 | ) | (1,279 | ) | |||||
Net loss available to common shareholders |
$ | (39,495 | ) | $ | (39,495 | ) | $ | (6,146 | ) | $ | (6,146 | ) | |
Denominator: |
|||||||||||||
Weighted average common shares |
10,882 | 10,882 | 10,960 | 10,960 | |||||||||
Loss per Share: |
|||||||||||||
Loss from continuing operations |
$ | (2.65 | ) | $ | (2.65 | ) | $ | (0.44 | ) | $ | (0.44 | ) | |
Loss from discontinued operations, net of tax |
(0.98 | ) | (0.98 | ) | (0.12 | ) | (0.12 | ) | |||||
Net loss per common share |
$ | (3.63 | ) | $ | (3.63 | ) | $ | (0.56 | ) | $ | (0.56 | ) | |
18
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9EARNINGS PER SHARE AND STOCK-BASED COMPENSATION (Continued)
Non-cash compensation expense related to equity awards is included in the following line items in the accompanying consolidated statements of operations for the three months ended March 31, 2011 and 2010 (in thousands):
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2011 | 2010 | |||||
Cost of revenue |
$ | 3 | $ | 15 | |||
Selling and marketing expense |
160 | 68 | |||||
General and administrative expense |
1,042 | 957 | |||||
Product development |
96 | 54 | |||||
Non-cash compensation expense |
$ | 1,301 | $ | 1,094 | |||
The forms of stock-based awards granted to Tree.com employees are principally restricted stock units ("RSUs"), restricted stock and stock options. RSUs are awards in the form of units, denominated in a hypothetical equivalent number of shares of Tree.com common stock and with the value of each award equal to the fair value of Tree.com common stock at the date of grant. RSUs may be settled in cash, stock or both, as determined by the Compensation Committee at the time of grant. Each stock-based award is subject to service-based vesting, where a specific period of continued employment must pass before an award vests. Certain restricted stock awards also include performance-based vesting, where certain performance targets set at the time of grant must be achieved before an award vests. Tree.com recognizes expense for all stock-based awards for which vesting is considered probable. For stock-based awards, the accounting charge is measured at the grant date as the fair value of Tree.com common stock and expensed ratably as non-cash compensation over the vesting term. For performance-based awards, the expense is measured at the grant date as the fair value of Tree.com common stock and expensed as non-cash compensation over the vesting period if the performance targets are considered probable of being achieved.
The amount of stock-based compensation expense recognized in the consolidated statement of operations is reduced by estimated forfeitures, as the amount recorded is based on awards ultimately expected to vest. The forfeiture rate is estimated at the grant date based on historical experience and revised, if necessary, in subsequent periods if the actual forfeiture rate differs from the estimated rate.
A summary of changes in outstanding stock options for the three months ended March 31, 2011 is as follows:
|
Shares | Weighted Average Exercise Price |
Weighted Average Remaining Contractual Term |
Aggregate Intrinsic Value |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
(In years) |
(In thousands) |
|||||||||
Outstanding at January 1, 2011 |
952,669 | $ | 9.58 | ||||||||||
Granted |
| | |||||||||||
Exercised |
(5,101 | ) | 4.19 | ||||||||||
Forfeited |
(875 | ) | 7.46 | ||||||||||
Expired |
(4,173 | ) | 7.97 | ||||||||||
Outstanding at March 31, 2011 |
942,520 | $ | 9.62 | 6.0 | $ | 21 | |||||||
Options exercisable at March 31, 2011 |
315,756 | $ | 12.01 | 4.6 | $ | 21 | |||||||
19
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9EARNINGS PER SHARE AND STOCK-BASED COMPENSATION (Continued)
The following table summarizes the information about stock options outstanding and exercisable as of March 31, 2011:
|
Options Outstanding | Options Exercisable | ||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Range of Exercise Prices
|
Outstanding at March 31, 2011 |
Weighted Average Remaining Contractual Life in Years |
Weighted Average Exercise Price |
Exercisable at March 31, 2011 |
Weighted Average Exercise Price |
|||||||||||
$.01 to $4.99 |
7,012 | 2.24 | $ | 2.89 | 7,012 | $ | 2.89 | |||||||||
$5.00 to $7.45 |
11,290 | 1.77 | 6.65 | 11,290 | 6.65 | |||||||||||
$7.46 to $9.99 |
742,780 | 6.74 | 8.29 | 116,016 | 7.56 | |||||||||||
$10.00 to $14.99 |
53,369 | 2.07 | 12.24 | 53,369 | 12.24 | |||||||||||
$15.00 to $19.99 |
81,406 | 4.15 | 15.03 | 81,406 | 15.03 | |||||||||||
$20.00 to $24.99 |
46,663 | 4.19 | 20.19 | 46,663 | 20.19 | |||||||||||
|
942,520 | 6.03 | $ | 9.62 | 315,756 | $ | 12.01 | |||||||||
Additionally, on April 8, 2011 the Chairman and CEO was granted 153,868 stock options that vest in three equal installments beginning on April 8, 2012. The weighted average exercise price and the weighted average fair value related to these stock options were $5.89 and $2.60, respectively.
Nonvested RSUs and restricted stock outstanding as of March 31, 2011 and changes during the three months ended March 31, 2011 were as follows:
|
RSUs | Restricted Stock | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Number of Shares |
Weighted Average Grant Date Fair Value |
Number of Shares |
Weighted Average Grant Date Fair Value |
|||||||||
Nonvested at January 1, 2011 |
634,771 | $ | 7.53 | 412,500 | $ | 6.80 | |||||||
Granted |
297,916 | 7.47 | | | |||||||||
Vested |
(190,871 | ) | 7.17 | (137,500 | ) | 6.80 | |||||||
Forfeited |
(2,672 | ) | 7.26 | | | ||||||||
Nonvested at March 31, 2011 |
739,144 | $ | 7.63 | 275,000 | $ | 6.80 | |||||||
NOTE 10FAIR VALUE MEASUREMENTS
Tree.com categorizes its assets and liabilities measured at fair value into a fair value hierarchy that prioritizes the assumptions used in pricing the asset or liability into the following three levels:
-
- Level 1: Observable inputs such as quoted prices for identical assets and liabilities in active
markets obtained from independent sources.
-
- Level 2: Other inputs that are observable directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs that are derived principally from or corroborated by observable market data.
20
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10FAIR VALUE MEASUREMENTS (Continued)
-
- Level 3: Unobservable inputs for which there is little or no market data and require Tree.com to develop its own assumptions, based on the best information available in the circumstances, about the assumptions market participants would use in pricing the asset or liability.
LendingTree Loans enters into commitments with consumers to originate loans at a specified interest rate (interest rate lock commitments"IRLCs"). Tree.com reports IRLCs as derivative instruments at fair value with changes in fair value being recorded in current earnings as a component of revenue from the origination and sale of loans. IRLCs for loans to be sold to investors using a mandatory or assignment of trade ("AOT") method are hedged using "to be announced mortgage-backed securities" ("TBA MBS") and are valued using quantitative risk models. The IRLCs derive their base value from an underlying loan type with similar characteristics using the TBA MBS market which is actively quoted and easily validated through external sources. The most significant data inputs used in this valuation include, but are not limited to, loan type, underlying loan amount, note rate, loan program, and expected sale date of the loan. IRLCs for loans sold to investors on a best efforts basis are hedged using best efforts forward delivery commitments and are valued on an individual loan basis using a proprietary database program. These valuations are based on investor pricing tables stratified by product, note rate and term. The valuation is adjusted at the loan level to consider the servicing release premium and loan pricing adjustments specific to each loan. The Company applies an anticipated loan funding probability based on its own experience to value IRLCs, which results in the classification of these derivatives as Level 3. The value of the underlying loan and the anticipated loan funding probability are the most significant assumptions affecting the valuation of IRLCs. There were no significant changes to the methods and assumptions for valuing IRLCs in the period ended March 31, 2011. At March 31, 2011 and December 31, 2010, there were $301.7 million and $216.6 million, respectively, of IRLCs notional value outstanding.
Loans held for sale measured at fair value and sold to investors using a mandatory or AOT method are also hedged using TBA MBS and valued using quantitative risk models. The valuation is based on the loan amount, note rate, loan program, and expected sale date of the loan. Loans held for sale measured at fair value and sold to investors on a best efforts basis are hedged using best efforts forward delivery commitments and are valued using a proprietary database program. The best efforts valuations are based on daily investor pricing tables stratified by product, note rate and term. These valuations are adjusted at the loan level to consider the servicing release premium and loan pricing adjustments specific to each loan. Loans held for sale, excluding impaired loans, are classified as Level 2. Loans held for sale measured at fair value that become impaired are transferred from Level 2 to Level 3, as the estimate of fair value is based on the Company's experience considering lien position and current status of the loan. There were no significant changes to the method and assumptions used to estimate the fair value of impaired loans in the period ended March 31, 2011. LendingTree Loans recognizes interest income separately from other changes in fair value.
Under LendingTree Loans' risk management policy, LendingTree Loans economically hedges the changes in fair value of IRLCs and loans held for sale caused by changes in interest rates by using TBA MBS and entering into best efforts forward delivery commitments. These hedging instruments are recorded at fair value with changes in fair value recorded in current earnings as a component of revenue from the origination and sale of loans. There were no significant changes to the methods and assumptions for valuing hedging instruments in the period ended March 31, 2011. TBA MBS used to hedge both IRLCs and loans are valued using quantitative risk models based primarily on inputs related to characteristics of the MBS stratified by product, coupon, and settlement date. These
21
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10FAIR VALUE MEASUREMENTS (Continued)
derivatives are classified as Level 2. Best efforts forward delivery commitments are valued using a proprietary database program using investor pricing tables considering the current base loan price. An anticipated loan funding probability is applied to value best efforts commitments hedging IRLCs, which results in the classification of these contracts as Level 3. The current base loan price and the anticipated loan funding probability are the most significant assumptions affecting the value of the best efforts commitments. The best efforts forward delivery commitments hedging loans held for sale are classified as Level 2, so such contracts are transferred from Level 3 to Level 2 at the time the underlying loan is originated. For the purposes of the tables below, we refer to TBA MBS and best efforts forward delivery commitments collectively as "Forward Delivery Contracts".
The following presents Tree.com's assets and liabilities that are measured at fair value on a recurring basis at March 31, 2011 and December 31, 2010 (in thousands):
|
As of March 31, 2011 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Recurring Fair Value Measurements Using | ||||||||||||
|
Quoted Market Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Fair Value Measurements |
|||||||||
Loans held for sale |
$ | | $ | 71,735 | $ | 962 | $ | 72,697 | |||||
Interest rate lock commitments ("IRLCs") |
| | 5,628 | 5,628 | |||||||||
Forward delivery contracts |
| (181 | ) | 112 | (69 | ) | |||||||
Total |
$ | | $ | 71,554 | $ | 6,702 | $ | 78,256 | |||||
|
As of December 31, 2010 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Recurring Fair Value Measurements Using | ||||||||||||
|
Quoted Market Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total Fair Value Measurements |
|||||||||
Loans held for sale |
$ | | $ | 115,024 | $ | 884 | $ | 115,908 | |||||
Interest rate lock commitments ("IRLCs") |
| | 5,986 | 5,986 | |||||||||
Forward delivery contracts |
| 1,001 | 3 | 1,004 | |||||||||
Total |
$ | | $ | 116,025 | $ | 6,873 | $ | 122,898 | |||||
22
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10FAIR VALUE MEASUREMENTS (Continued)
The following presents the changes in Tree.com's assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2011 and 2010 (in thousands):
|
Three Months Ended March 31, 2011 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Interest Rate Lock Commitments |
Forward Delivery Contracts |
Loans Held for Sale |
|||||||||
Balance at January 1, 2011 |
$ | 5,986 | $ | 3 | $ | 884 | ||||||
Transfers into Level 3 |
| | 335 | |||||||||
Transfers out of Level 3 |
| (28 | ) | | ||||||||
Total net gains (losses) included in earnings (realized and unrealized) |
15,940 | 195 | (32 | ) | ||||||||
Purchases, sales, and settlements |
||||||||||||
Purchases(a) |
970 | (58 | ) | | ||||||||
Sales |
| | (220 | ) | ||||||||
Settlements |
(3,441 | ) | | (5 | ) | |||||||
Transfers of IRLCs to closed loans |
(13,827 | ) | | | ||||||||
Balance at March 31, 2011 |
$ | 5,628 | $ | 112 | $ | 962 | ||||||
- (a)
- Purchased in conjunction with the acquisition of certain assets of SurePoint.
|
Three Months Ended March 31, 2010 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Interest Rate Lock Commitments |
Forward Delivery Contracts |
Loans Held for Sale |
|||||||||
Balance at January 1, 2010 |
$ | 3,680 | $ | 487 | $ | 777 | ||||||
Transfers into Level 3 |
| | | |||||||||
Transfers out of Level 3 |
| 25 | | |||||||||
Total net gains (losses) included in earnings (realized and unrealized) |
21,333 | (359 | ) | 1 | ||||||||
Purchases, sales, and settlements |
||||||||||||
Purchases |
| | | |||||||||
Sales |
| | | |||||||||
Settlements |
(4,714 | ) | | (2 | ) | |||||||
Transfers of IRLCs to closed loans |
(14,791 | ) | | | ||||||||
Balance at March 31, 2010 |
$ | 5,508 | $ | 153 | $ | 776 | ||||||
23
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10FAIR VALUE MEASUREMENTS (Continued)
The following presents the gains (losses) included in earnings for the three months ended March 31, 2011 and 2010 relating to Tree.com's assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
|
Three Months Ended March 31, 2011 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Interest Rate Lock Commitments |
Forward Delivery Contracts |
Loans Held for Sale |
|||||||
Total net gains (losses) included in earnings, which are included in revenue from LendingTree Loans |
$ | 15,940 | $ | 195 | $ | (32 | ) | |||
Change in unrealized gains (losses) relating to assets and liabilities still held at March 31, 2011, which are included in revenue from LendingTree Loans |
$ | 4,832 | $ | 129 | $ | (99 | ) | |||
|
Three Months Ended March 31, 2010 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Interest Rate Lock Commitments |
Forward Delivery Contracts |
Loans Held for Sale |
|||||||
Total net gains included in earnings, which are included in revenue from LendingTree Loans |
$ | 21,333 | $ | (359 | ) | $ | 1 | |||
Change in unrealized gains (losses) relating to assets and liabilities still held at March 31, 2010 which are included in revenue from LendingTree Loans |
$ | 5,508 | $ | 153 | $ | 1 | ||||
The following table summarizes the Company's derivative instruments not designated as hedging instruments as of March 31, 2011 and December 31, 2010 (in thousands):
|
March 31, 2011 | December 31, 2010 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||
Interest Rate Lock Commitments |
Prepaid and other current assets | $ | 5,707 | Prepaid and other current assets | $ | 5,991 | ||||||
Forward Delivery Contracts |
Prepaid and other current assets | 744 | Prepaid and other current assets | 2,633 | ||||||||
Interest Rate Lock Commitments |
Accrued expenses and other current liabilities | (79 | ) | Accrued expenses and other current liabilities | (5 | ) | ||||||
Forward Delivery Contracts |
Accrued expenses and other current liabilities | (813 | ) | Accrued expenses and other current liabilities | (1,629 | ) | ||||||
Total Derivatives |
$ | 5,559 | $ | 6,990 | ||||||||
24
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10FAIR VALUE MEASUREMENTS (Continued)
The gain/(loss) recognized in the consolidated statements of operations for derivatives for the periods ended March 31, 2011 and 2010 was as follows (in thousands):
|
|
Three Months Ended | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
|
Location of Gain/(Loss) Recognized in Income on Derivative |
March 31, 2011 |
March 31, 2010 |
||||||||
Interest Rate Lock Commitments |
LendingTree Loans revenue | $ | 15,940 | $ | 21,333 | ||||||
Forward Delivery Contracts |
LendingTree Loans revenue | (904 | ) | (2,073 | ) | ||||||
Total |
$ | 15,036 | $ | 19,260 | |||||||
Tree.com has elected to account for loans held for sale originated on or after January 1, 2008 at fair value. Electing the fair value option allows a better offset of the changes in fair values of the loans and the forward delivery contracts used to economically hedge them without the burden of complying with the requirements for hedge accounting.
Tree.com did not elect the fair value option on loans held for sale originated prior to January 1, 2008 and on loans that were repurchased from investors on or subsequent to that date. As of March 31, 2011 and December 31, 2010, 20 and 23 such loans, respectively, all of which were impaired, were included in loans held for sale and were carried at the lower of cost or market ("LOCOM") value assessed on an individual loan basis. The market value (or fair value) of these impaired loans at March 31, 2011 and December 31, 2010, measured on a non-recurring basis using significant unobservable inputs (Level 3), was $0.6 million and $0.8 million, respectively. This fair value measurement is management's best estimate of the market value of such loans and considers the lien position and loan status.
The following presents the difference between the aggregate principal balance of loans held for sale for which the fair value option has been elected and for loans measured at LOCOM as of March 31, 2011 and December 31, 2010 (in thousands):
|
As of March 31, 2011 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Loans Held for Sale Measured at Fair Value |
Loans Held for Sale Measured at LOCOM |
Total Loans Held For Sale |
|||||||
Aggregate unpaid principal balance |
$ | 71,159 | $ | 1,895 | $ | 73,054 | ||||
Difference between fair value and aggregate unpaid principal balance |
1,538 | | 1,538 | |||||||
Lower of cost or market valuation allowance |
| (1,288 | ) | (1,288 | ) | |||||
Deferred loan fees, net of costs |
| (8 | ) | (8 | ) | |||||
Loans held for sale |
$ | 72,697 | $ | 599 | $ | 73,296 | ||||
25
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 10FAIR VALUE MEASUREMENTS (Continued)
|
As of December 31, 2010 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Loans Held for Sale Measured at Fair Value |
Loans Held for Sale Measured at LOCOM |
Total Loans Held For Sale |
|||||||
Aggregate unpaid principal balance |
$ | 113,116 | $ | 2,290 | $ | 115,406 | ||||
Difference between fair value and aggregate unpaid principal balance |
2,792 | | 2,792 | |||||||
Lower of cost or market valuation allowance |
| (1,508 | ) | (1,508 | ) | |||||
Deferred loan fees, net of costs |
| (9 | ) | (9 | ) | |||||
Loans held for sale |
$ | 115,908 | $ | 773 | $ | 116,681 | ||||
During the three months ended March 31, 2011 and 2010, the change in fair value of loans held for sale for which the fair value option was elected was a loss of $1.6 million and a gain of $2.0 million, respectively, and is included as a component of LendingTree Loans revenue in the accompanying consolidated statements of operations.
Non-financial assets measured at fair value on a nonrecurring basis
The Company's non-financial assets, such as goodwill, intangible assets and property and equipment are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment charge is recognized. Such impairment charges incorporate fair value measurements based on Level 3 inputs. See Notes 3 and 8 for discussion of goodwill and intangible asset impairment charges.
NOTE 11ORIGINATION AND SALE OF LOANS, LOANS HELD FOR SALE AND LOAN LOSS OBLIGATIONS
Origination and Sale of Loans
LendingTree Loans' revenues are primarily derived from the origination and sale of loans. Mortgage loans are funded through warehouse lines of credit and are recorded at fair value. Changes in the fair value of mortgage loans are recorded through revenue prior to the sale of the loans to investors, which typically occurs within thirty days. The gain or loss on the sale of loans is recognized on the date the loans are sold and is based on the difference between the sale proceeds received and the fair value of the loans. The Company sells its loans on a servicing released basis in which the Company gives up the right to service the loans.
26
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11ORIGINATION AND SALE OF LOANS, LOANS HELD FOR SALE AND LOAN LOSS OBLIGATIONS (Continued)
A summary of the initial unpaid principal balance of loans sold by type of loan for the three months ended March 31, 2011 and 2010 is presented below ($ amounts in millions):
|
Three Months Ended March 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | 2010 | |||||||||||
|
Amount | % | Amount | % | |||||||||
Conforming |
$ | 397 | 74 | % | $ | 460 | 77 | % | |||||
FHA |
116 | 21 | % | 110 | 18 | % | |||||||
Jumbo |
26 | 5 | % | 32 | 5 | % | |||||||
Total |
$ | 539 | 100 | % | $ | 602 | 100 | % | |||||
Loans Held for Sale
LendingTree Loans originates all of its residential real estate loans with the intent to sell them in the secondary market. Loans held for sale consist primarily of residential first mortgage loans that are secured by residential real estate throughout the United States.
The following table represents the loans held for sale by type of loan as of March 31, 2011 and December 31, 2010 ($ amounts in thousands):
|
March 31, 2011 | December 31, 2010 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amount | % | Amount | % | |||||||||
Conforming |
$ | 54,229 | 74 | % | $ | 86,451 | 74 | % | |||||
FHA and Alt-A |
15,898 | 22 | % | 20,431 | 18 | % | |||||||
Jumbo |
2,672 | 4 | % | 9,129 | 8 | % | |||||||
Subprime |
407 | | % | 580 | | % | |||||||
Home equity |
90 | | % | 90 | | % | |||||||
Total |
$ | 73,296 | 100 | % | $ | 116,681 | 100 | % | |||||
27
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11ORIGINATION AND SALE OF LOANS, LOANS HELD FOR SALE AND LOAN LOSS OBLIGATIONS (Continued)
The following presents the difference between the aggregate principal balance of loans on nonaccrual status for which the fair value option has been elected and for loans measured at lower of cost or market valuation as of March 31, 2011 and December 31, 2010 (in thousands):
|
As of March 31, 2011 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Loans on Nonaccrual Measured at Fair Value |
Loans on Nonaccrual Measured at LOCOM |
Total Loans on Nonaccrual |
|||||||
Aggregate unpaid principal balance |
$ | 1,492 | $ | 1,895 | $ | 3,387 | ||||
Difference between fair value and aggregate unpaid principal balance |
(530 | ) | | (530 | ) | |||||
Lower of cost or market valuation allowance |
| (1,288 | ) | (1,288 | ) | |||||
Deferred loan fees, net of costs |
| (8 | ) | (8 | ) | |||||
Loans on nonaccrual |
$ | 962 | $ | 599 | $ | 1,561 | ||||
|
As of December 31, 2010 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Loans on Nonaccrual Measured at Fair Value |
Loans on Nonaccrual Measured at LOCOM |
Total Loans on Nonaccrual |
|||||||
Aggregate unpaid principal balance |
$ | 1,380 | $ | 2,290 | $ | 3,670 | ||||
Difference between fair value and aggregate unpaid principal balance |
(496 | ) | | (496 | ) | |||||
Lower of cost or market valuation allowance |
| (1,508 | ) | (1,508 | ) | |||||
Deferred loan fees, net of costs |
| (9 | ) | (9 | ) | |||||
Loans on nonaccrual |
$ | 884 | $ | 773 | $ | 1,657 | ||||
Included within the loans on nonaccrual status are repurchased loans with a net book value of $0.2 million at March 31, 2011 and December 31, 2010. During the three months ended March 31, 2011 and March 31, 2010, LendingTree Loans did not repurchase any loans.
Real estate properties acquired in satisfaction of loans totaled $0.2 million and $0.1 million, net of estimated selling expenses, at March 31, 2011 and December 31, 2010, respectively, and are included in prepaid and other current assets in the accompanying consolidated balance sheets. The estimated fair values are determined using current real estate market conditions and estimated selling expenses, which are unobservable inputs (Level 3).
Loan Loss Obligations
LendingTree Loans sells loans it originates to investors on a servicing released basis so the risk of loss or default by the borrower is generally transferred to the investor. However, LendingTree Loans is required by these investors to make certain representations relating to credit information, loan documentation and collateral. These representations and warranties may extend through the contractual
28
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11ORIGINATION AND SALE OF LOANS, LOANS HELD FOR SALE AND LOAN LOSS OBLIGATIONS (Continued)
life of the mortgage loan. Subsequent to the sale, if underwriting deficiencies, borrower fraud or documentation defects are discovered in individual mortgage loans, LendingTree Loans may be obligated to repurchase the respective mortgage loan or indemnify the investors for any losses from borrower defaults if such deficiency or defect cannot be cured within the specified period following discovery.
In the case of early loan payoffs and early defaults on certain loans, LendingTree Loans may be required to repay all or a portion of the premium initially paid by the investor. The estimated obligation associated with early loan payoffs and early defaults is calculated based on historical loss experience by type of loan.
The obligation for losses related to the representations and warranties and other provisions discussed above is initially recorded at its estimated fair value, which includes a projection of expected future losses as well as a market based premium. Because LendingTree Loans does not service the loans it sells, it does not maintain nor have access to the current balances and loan performance data with respect to the individual loans previously sold to investors. Accordingly, the Company is unable to determine, with precision, its maximum exposure under its representations and warranties. However, LendingTree Loans utilizes the original loan balance (before it was sold to an investor), historical and projected loss frequency and loss severity ratios by loan type as well as analyses of losses in process to estimate its exposure to losses on loans previously sold. The Company maintains a liability related to this exposure based, in part, on historical and projected loss frequency and loss severity using its loan loss history (adjusted for recent trends in loan loss experience), the original principal amount of the loans previously sold, the year the loans were sold, and loan type. Accordingly, subsequent adjustments to the obligation, if any, are not made based on changes in the fair value of the obligation, which might include an estimated change in losses that may be expected in the future, but are made once further losses are estimated to be both probable and estimable. As such, given current general industry trends in mortgage loans as well as housing prices, market expectations around losses related to the Company's obligations could vary significantly from the obligation recorded as of the balance sheet date or the range estimated below. In estimating its exposure to loan losses, LendingTree Loans segments its loan sales into four segments based on the extent of the documentation provided by the borrower to substantiate income and/or assets (full or limited documentation) and the lien position of the mortgage in the underlying property (first or second position). Each of these segments has a different loss experience with full documentation, first lien position loans generally having the lowest loss ratios and limited documentation, second lien position loans generally having the highest loss ratios.
29
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11ORIGINATION AND SALE OF LOANS, LOANS HELD FOR SALE AND LOAN LOSS OBLIGATIONS (Continued)
The following table represents the loans sold for the period shown and the aggregate loan losses through March 31, 2011:
|
As of March 31, 2011 | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Period of Loan Sales
|
Number of loans sold |
Original principal balance |
Number of loans with losses |
Original principal balance of loans with losses |
Amount of aggregate losses |
|||||||||||
|
|
(in billions) |
|
(in millions) |
(in millions) |
|||||||||||
Three months ended March 31, 2011 |
2,500 | $ | 0.5 | 0 | $ | 0 | $ | 0 | ||||||||
2010 |
12,400 | 2.8 | 2 | 0.6 | 0.1 | |||||||||||
2009 |
12,800 | 2.8 | 3 | 0.8 | 0.1 | |||||||||||
2008 |
11,000 | 2.2 | 21 | 4.3 | 1.1 | |||||||||||
2007 |
36,300 | 6.1 | 149 | 20.2 | 7.0 | |||||||||||
2006 |
55,000 | 7.9 | 202 | 23.4 | 12.7 | |||||||||||
2005 and prior years |
86,700 | 13.0 | 87 | 11.7 | 4.7 | |||||||||||
Total |
216,700 | $ | 35.3 | 464 | $ | 61.0 | $ | 25.7 | ||||||||
The pipeline of 97 loan repurchase requests and indemnifications as of March 31, 2011 was considered in determining the appropriate reserve amount. The status of these 97 loans varied from an initial review stage, which may result in a rescission of the request, to in process, where the probability of incurring a loss is high, to indemnification, whereby the Company has agreed to reimburse the purchaser of that loan if and when losses are incurred. The indemnification may have a specific term, thereby limiting the Company's exposure. The original principal amount of these loans is approximately $18.2 million, comprised of approximately 76% full documentation first liens, 3% full documentation second liens, 15% limited documentation first liens, and 6% limited documentation second liens.
In the fourth quarter of 2009, LendingTree Loans entered into settlement negotiations with two buyers of previously purchased limited documentation loans. The settlement with one buyer was completed in December 2009 and included a payment of $1.9 million related to all second lien loans sold to this buyer, including both full and limited documentation. This amount was not determined on an individual loan basis and is, therefore, not included in the loss amounts disclosed above based on the year such loans were sold. The settlement was included as a charge off to the reserve in 2009. Negotiations with the second buyer were completed in January 2010. This settlement of $4.5 million, which was paid in four equal quarterly installments in 2010, relates to all future losses on limited documentation second lien loans sold to this buyer. LendingTree Loans must also pay an additional amount of up to $0.3 million in conjunction with this settlement since it did not sell a certain volume of loans to this buyer in 2010. This amount is included in the total settlement amount and the estimated settlement payments remaining to be paid. This settlement amount is included as a charge off to the reserve in 2010 and is not included in the table above.
Based on historical experience, it is anticipated that the Company will continue to receive repurchase requests and incur losses on loans sold in prior years. However, the two settlements discussed above will eliminate future repurchase requests from those buyers for the loan types included in those settlements. As of March 31, 2011, LendingTree Loans estimated the range of remaining
30
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 11ORIGINATION AND SALE OF LOANS, LOANS HELD FOR SALE AND LOAN LOSS OBLIGATIONS (Continued)
possible losses due to representations and warranty issues based on the methodology described above, excluding the $0.3 million settlement remaining to be paid in 2011, as $16 million to $26 million. The Company believes that it has adequately reserved for these losses.
The activity related to loss reserves on previously sold loans for the three months ended March 31, 2011 and 2010, is as follows (in thousands):
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2011 | 2010 | |||||
Balance, beginning of period |
$ | 16,984 | $ | 16,985 | |||
Provisions |
3,250 | 1,464 | |||||
Charge offs to reserves(a) |
(196 | ) | (5,617 | ) | |||
Balance, end of period |
$ | 20,038 | $ | 12,832 | |||
- (a)
- The three months ended March 31, 2010 includes a charge off for the amount of the $4.5 million loan loss settlement plus a portion of the $0.3 million additional accrual discussed above. The remaining settlement payment due of $0.3 million is tracked as a liability separate from the loan loss reserve (see table below).
Based on an analysis of the Company's historical loan loss experience, it has been determined that a portion of the loan losses expected to be made by investors will be made more than twelve months following the initial sale of the underlying loan. Accordingly, the Company has estimated the portion of its loans sold reserve that it anticipates it will be liable for after twelve months and has classified that portion of the reserve as a long-term liability. The liability for losses on previously sold loans is presented in the accompanying consolidated balance sheet as of March 31, 2011 and December 31, 2010 as follows (in thousands):
|
As of March 31, 2011 |
As of December 31, 2010 |
|||||
---|---|---|---|---|---|---|---|
Current portion related to settlement above, included in accrued expenses and other current liabilities |
$ | 300 | $ | 300 | |||
Other current portion, included in accrued expenses and other current liabilities |
6,928 | 5,459 | |||||
Long term portion, included in other long-term liabilities |
13,110 | 11,525 | |||||
Total |
$ | 20,338 | $ | 17,284 | |||
NOTE 12INCOME TAXES
For the three months ended March 31, 2011 and 2010, Tree.com recorded a tax provision of $0.3 million and $0.5 million, respectively, which represents effective tax rates of (0.9)% and (12.6)%, respectively. In the first quarter of 2011, the tax rate is lower than the federal statutory rate of 35%
31
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12INCOME TAXES (Continued)
mainly due to the change in the valuation allowance on deferred tax assets. In the first quarter of 2010, the tax rate was lower than the federal statutory rate of 35% due to the change in the valuation allowance on deferred tax assets and an increase to the FIN 48 reserve.
Tree.com's unrecognized tax benefits increased by an immaterial amount in the first quarter of 2011. The increase was due to penalty and interest on uncertain tax positions in prior years. Tree.com believes that it is reasonably possible that its remaining unrecognized tax benefits could decrease by approximately $0.06 million within twelve months of the current reporting date due to the expiration of state statute of limitations. An estimate of other changes in unrecognized tax benefits cannot be made, but are not expected to be significant.
For the three months ended March 31, 2011, Tree.com determined that its activity yielded an unusual effective tax rate; therefore, Tree.com utilized the actual year to date effective tax rate for purposes of determining year to date tax expense. This approach is consistent with the three months ended March 31, 2010.
NOTE 13CONTINGENCIES
During the three months ended March 31, 2011 and 2010, provisions for litigation settlements and contingencies of $4.5 million and $-0- million, respectively, were recorded in litigation settlements and contingencies in the accompanying consolidated statements of operations. The balance of the related liability was $4.8 million and $0.5 million at March 31, 2011 and December 31, 2010, respectively.
In the ordinary course of business, Tree.com is a party to various lawsuits. Tree.com establishes reserves for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Management has also identified certain other legal matters where it believes an unfavorable outcome is not probable and, therefore, no reserve is established. Although management currently believes that an unfavorable resolution of claims against Tree.com, including claims where an unfavorable outcome is reasonably possible, will not have a material impact on the liquidity, results of operations, or financial condition of Tree.com, these matters are subject to inherent uncertainties and management's view of these matters may change in the future. It is possible that an unfavorable outcome of one or more of these lawsuits could have a material impact on the liquidity, results of operations, or financial condition of Tree.com. Tree.com also evaluates other contingent matters, including tax contingencies, to assess the probability and estimated extent of potential loss.
32
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14RESTRUCTURING CHARGES
The restructuring charges in 2010 primarily relate to continuing lease obligations on facilities previously used for call center operations, for which management had a plan to exit at December 31, 2009, but the cease-use date did not occur until January 2010. Costs that relate to ongoing operations are not part of restructuring charges. Restructuring charges by segment and type are as follows (in thousands):
|
For The Three Months Ended March 31, 2011 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Employee Termination Costs |
Continuing Lease Obligations |
Asset Write-offs |
Total | |||||||||
LendingTree Loans |
$ | 295 | $ | | $ | | $ | 295 | |||||
Exchanges |
94 | | | 94 | |||||||||
Total |
$ | 389 | $ | | $ | | $ | 389 | |||||
|
For The Three Months Ended March 31, 2010 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Employee Termination Costs |
Continuing Lease Obligations |
Asset Write-offs |
Total | |||||||||
LendingTree Loans |
$ | | $ | 9 | $ | (2 | ) | $ | 7 | ||||
Exchanges |
47 | 2,463 | 93 | 2,603 | |||||||||
Total |
$ | 47 | $ | 2,472 | $ | 91 | $ | 2,610 | |||||
Restructuring charges and spending against liabilities are as follows (in thousands):
|
For The Three Months Ended March 31, 2011 | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Employee Termination Costs |
Continuing Lease Obligations |
Asset Write-offs |
Other | Total | ||||||||||||
Balance, beginning of period |
$ | 19 | $ | 2,339 | $ | | $ | | $ | 2,358 | |||||||
Restructuring charges |
389 | | | | 389 | ||||||||||||
Payments |
(136 | ) | (411 | ) | | | (547 | ) | |||||||||
Write-offs |
| | | | | ||||||||||||
Balance, end of period |
$ | 272 | $ | 1,928 | $ | | $ | | $ | 2,200 | |||||||
At March 31, 2011, restructuring liabilities of $1.1 million are included in accrued expenses and other current liabilities and $1.1 million are included in other long-term liabilities in the accompanying consolidated balance sheet. At December 31, 2010, restructuring liabilities of $1.2 million are included in accrued expenses and other current liabilities and $1.2 million are included in other long-term liabilities in the accompanying consolidated balance sheet. Tree.com does not expect to incur significant additional costs related to the prior restructurings noted above.
33
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15SUBSEQUENT EVENTS
On May 12, 2011, we entered into an Asset Purchase Agreement with Discover Bank, a wholly-owned subsidiary of Discover Financial Services. The Asset Purchase Agreement provides for the sale of substantially all of the operating assets of our LendingTree Loans segment to Discover Bank.
Under the terms of the Asset Purchase Agreement, Discover Bank has agreed to pay approximately $55.9 million in cash for the assets, subject to certain adjustments as described in the Asset Purchase Agreement. $35.9 million is due upon the closing of the transaction and $10 million is due on each of the first and second anniversaries of the closing, subject to certain conditions as described in the Asset Purchase Agreement, including maintenance of the LendingTree Exchange and certain financial and operational metrics associated with the LendingTree Exchange business.
Discover Bank generally will not assume liabilities of the LendingTree Loans business that arose before the closing date. A portion of the initial purchase price payment will be held in escrow pending the discharge of certain liabilities that will remain with us.
The transaction is subject to various closing conditions, including the receipt of regulatory approvals and loan repurchase proposals for Discover Bank and the approval of our stockholders. Our board of directors has unanimously recommended that our stockholders approve the transaction. Douglas Lebda, our Chairman and Chief Executive Officer, who beneficially owns approximately 20% of our outstanding shares, a subsidiary of Liberty Media Corporation which owns approximately 25% of our outstanding shares, and various funds managed by Second Curve, LLC, which own less than 5% of our outstanding shares, have entered into voting and support agreements with Discover Bank which obligate them to vote in favor of the transaction. The transaction is expected to close by the end of 2011.
The Asset Purchase Agreement contains customary representations, warranties, covenants and indemnification obligations of the parties.
The Asset Purchase Agreement also includes covenants of us and Discover Bank. Subject to certain exceptions stated in the Asset Purchase Agreement, we have agreed to operate the LendingTree Loans business in the ordinary course and to maintain certain operational and financial metrics until the closing of the transaction. Our covenants include requirements to maintain personnel in our LendingTree Loans business, to maintain certain quality thresholds for our loan pipeline, to maintain warehouse line capacity and compliance with our warehouse lending agreement, and subject to certain exceptions, not to introduce new loan products without Discover Bank's consent. If the requirements of these covenants are not met, Discover Bank has the option to terminate the Asset Purchase Agreement. Subject to certain exceptions, we have also agreed not to solicit or initiate discussion with third parties regarding other proposals to acquire the assets of the LendingTree Loans business or substantial equity interests in our company, and to certain restrictions on our ability to respond to or accept any such proposals.
The Asset Purchase Agreement also includes customary termination provisions, including that each of our company and Discover Bank may terminate the Asset Purchase Agreement if the other party has materially breached any representation, warranty or covenant contained in the Asset Purchase Agreement and failed to cure such breach, if our stockholders do not approve the transaction or if the closing has not occurred within 150 days from the signing (subject to certain extensions for up to 150 additional days). Discover Bank may terminate the Asset Purchase Agreement if our board of directors determines, after considering any modified proposals from Discover Bank, to change its
34
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 15SUBSEQUENT EVENTS (Continued)
recommendation to our stockholders because a failure to do so would constitute a breach of its fiduciary duties, or if we materially breach our non-solicitation obligations or our obligation to hold a meeting of our stockholders to approve the transaction. If the Asset Purchase Agreement is terminated under certain circumstances, including due to a change of recommendation by our board of directors, we will be required to pay Discover Bank a termination fee of $2.2 million. If Discover Bank does not complete the acquisition as a result of its inability to obtain proposals for loan purchase arrangements that are customary for a bank that is similarly situated to Discover Bank, Discover Bank will be required to pay us a termination fee of $5 million.
We have also agreed to perform certain services to Discover Bank in connection with its mortgage origination business for a two-year term commencing on the date of entry into the Asset Purchase Agreement. Discover Bank has also agreed to be a participating lender in the LendingTree Network following the closing of the acquisition.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Management Overview
Tree.com is the parent of LendingTree, LLC which owns several brands and businesses that provide information, tools, advice, products and services for critical transactions in our customers' lives. Our family of brands includes: LendingTree.com®, GetSmart.com®, RealEstate.com®, DegreeTree.comSM, HealthTree.comSM, LendingTreeAutos.com, DoneRight.com®, and InsuranceTree.comSM. Together, these brands serve as an ally for consumers who are looking to comparison shop for loans, real estate and other services from multiple businesses and professionals who will compete for their business.
On March 10, 2011, management of the Company made the decision and finalized a plan to close all of the field offices of the proprietary full service real estate brokerage business known as RealEstate.com, REALTORS®, which was previously reported within the Real Estate reporting segment. The Company exited all markets by March 31, 2011. Accordingly, RealEstate.com, REALTORS® are presented as discontinued operations in the consolidated financial statements for all periods presented. The following discussion, unless otherwise noted, excludes information related to the discontinued operations.
In connection with exiting the RealEstate.com, REALTORS® business that is discussed above, the Company re-evaluated its reporting segments based on the continuing operations of the Company. In prior periods, the segments "LendingTree Loans", "Exchanges", "Real Estate" and "Unallocated-Corporate" were presented, which have been changed to "LendingTree Loans" and "Exchanges". The "Exchanges" segment now includes the continuing operations of the previous "Real Estate" segment and the previous "UnallocatedCorporate" segment. Segment results for prior periods have been restated to conform to the new presentation.
The LendingTree Loans segment originates, processes, approves and funds various residential real estate loans through Home Loan Center, Inc. dba LendingTree Loans ("HLC"). The HLC and LendingTree Loans brand names are collectively referred to in this report as "LendingTree Loans."
The Exchanges segment consists of online lead generation networks and call centers that connect consumers and service providers principally in the lending, real estate, higher education, home services, insurance and automobile marketplaces.
From time to time, we may evaluate the potential acquisition of various assets and other businesses that may complement our current services, enhance our capabilities, improve or sustain our competitive position, or otherwise offer growth opportunities. From time to time, also we may consider the potential disposition of certain of our assets, subsidiaries or lines of businesses. As a general rule, we publicly announce any material acquisitions or dispositions when a definitive agreement has been reached.
Recent Mortgage Banking Trends
Interest rate and market risk can be substantial in the mortgage business. Fluctuations in interest rates drive consumer demand for new mortgages and the level of refinancing activity, which in turn affects total revenue from the origination and sale of loans. Typically, a decline in mortgage interest rates will lead to an increase in mortgage originations and revenue, and an increase in mortgage interest rates will lead to a decrease in mortgage originations and revenue.
Mortgage rates hit a recent low of 4.2% in November 2010, but swiftly increased to 5.0% by year-end. Consequently, mortgage applications dropped off significantly at the end of 2010 and in the first quarter of 2011. Most economic forecasts also predict an increase in mortgage rates of another 0.50% throughout 2011.
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Real Estate Market
The operations, cash flows and financial position of the Company were negatively impacted by the continued deterioration in the housing market in 2010 and early 2011. In particular, revenues for the LendingTree Loans and Exchange segments have been impacted by falling home prices and increased foreclosures. While nationwide sales of existing homes have risen in recent months, most of the increase is due to a rise in foreclosure sales and distressed transactions. Overall home prices continued to decline during 2010 and most economic forecasts indicate that conditions are unlikely to improve significantly in 2011. Falling home prices also make it more difficult to make accurate home value appraisals and lenders typically require higher down payments and higher credit scores, which could further restrict the pool of prospective homebuyers.
Expenses
As revenues have declined, the Company has focused on expense savings and is taking various initiatives to reduce costs. During the first quarter of 2011, the Company commenced a voluntary severance plan for certain corporate employees and conducted a reduction in force at HLC. In addition, the Company has taken steps to minimize ineffective marketing costs. The Company is seeking to set expenses consistent with its reduced revenues.
Discover Asset Sale
On May 12, 2011, the Company entered into an Asset Purchase Agreement (the "APA") with Discover Bank, a wholly-owned subsidiary of Discover Financial Services. The APA provides for the sale of substantially all of the operating assets of HLC to Discover Bank. Under the terms of the APA, Discover Bank will pay approximately $55.9 million in cash for the assets, subject to certain adjustments as described in the APA. $35.9 million is due upon the closing of the transaction and $10 million is due on each of the first and second anniversaries of the closing, subject to certain conditions as described in the APA. Discover Bank generally will not assume liabilities of the LendingTree Loans business that arose before the closing date. A portion of the initial purchase price payment will be held in escrow for certain liabilities that will remain with the Company. The transaction is subject to various closing conditions, including regulatory approvals for Discover Bank and the approval of the Company's stockholders. The acquisition is expected to close by the end of 2011. Subject to certain exceptions stated in the APA, the Company has agreed to operate the LendingTree Loans business in the ordinary course until the closing of the acquisition.
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Results of operations for the three months ended March 31, 2011 compared to the three months ended March 31, 2010:
Revenue
|
Three Months Ended March 31, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | $ Change | % Change | 2010 | ||||||||||
|
(Dollars in thousands) |
|||||||||||||
LendingTree Loans: |
||||||||||||||
Origination and sale of loans |
$ | 17,309 | $ | (6,091 | ) | (26 | )% | $ | 23,400 | |||||
Other |
1,941 | (397 | ) | (17 | )% | 2,338 | ||||||||
Total LendingTree Loans |
19,250 | (6,488 | ) | (25 | )% | 25,738 | ||||||||
Exchanges: |
||||||||||||||
Match fees |
12,627 | (1,621 | ) | (11 | )% | 14,248 | ||||||||
Closed loan fees |
1,006 | (2,752 | ) | (73 | )% | 3,758 | ||||||||
Other |
491 | (489 | ) | (50 | )% | 980 | ||||||||
Total Exchanges |
14,124 | (4,862 | ) | (26 | )% | 18,986 | ||||||||
Total revenue |
$ | 33,374 | (11,350 | ) | (25 | )% | $ | 44,724 | ||||||
LendingTree Loans revenue in 2011 decreased from the same period in 2010 reflecting the higher mortgage interest rates experienced in the first quarter of 2011. Refinance originations decreased 20%, purchase mortgage originations decreased 5%, and total loans closed decreased 10% compared to the same period in 2010. The increase in interest rates also caused the revenue per funded loan to be lower by 13% as compared to the same period in 2010. In addition, the provision for previously sold loans, which is recorded as reduction of revenue, increased $2.3 million versus the three months ended March 31, 2010.
The dollar value of loans closed directly by LendingTree Loans is as follows:
|
Three Months Ended March 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | $ Change | % Change | 2010 | |||||||||
|
(Dollars in millions) |
||||||||||||
Refinance mortgages |
$ | 443 | $ | (109 | ) | (20 | )% | $ | 552 | ||||
Purchase mortgages |
54 | (2 | ) | (5 | )% | 56 | |||||||
Total |
$ | 497 | $ | (111 | ) | (18 | )% | $ | 608 | ||||
LendingTree Loans originates mortgage loans on property located throughout the United States. Revenue from loans originated for property in California totaled approximately 13% and 10% of Tree.com's consolidated revenue for the three months ended March 31, 2011 and 2010, respectively.
Revenue from Exchanges in 2011 decreased from the same period in 2010 primarily due to fewer loan requests from consumers, resulting in fewer matched requests and fewer loans closed through Network Lenders. Overall, matched requests in the first quarter of 2011 declined 22% from the same period in 2010, which reflects a decline of 30% in home loan matches and a decline of 7% in matches for the new consumer vertical areas of higher education, home services, insurance and automobile. Home loan matches were down because of the rising interest rates in 2011. Revenue from closed loan fees decreased due to a previously announced shift in pricing on home loan related matches to increase the average match fee while decreasing the average closed loan fee, and a 34% decline in closed units in the period as a result of the decline in matched loan requests.
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The dollar value of loans closed by Exchange network lenders is as follows:
|
Three Months Ended March 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | $ Change | % Change | 2010 | |||||||||
|
(Dollars in millions) |
||||||||||||
Refinance mortgages |
$ | 457 | $ | (577 | ) | (56 | )% | $ | 1,034 | ||||
Purchase mortgages |
233 | (330 | ) | (59 | )% | 563 | |||||||
Other |
70 | 4 | 6 | % | 66 | ||||||||
Total |
$ | 760 | $ | (903 | ) | (54 | )% | $ | 1,663 | ||||
No single Exchange network lender accounts for revenue representing more than 10% of Tree.com's consolidated revenue for any periods presented.
Cost of revenue
|
Three Months Ended March 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | $ Change | % Change | 2010 | |||||||||
|
(Dollars in thousands) |
||||||||||||
LendingTree Loans |
$ | 10,764 | $ | 490 | 5 | % | $ | 10,274 | |||||
Exchanges |
1,348 | (126 | ) | (9 | )% | 1,474 | |||||||
Cost of revenue |
$ | 12,112 | $ | 364 | 3 | % | $ | 11,748 | |||||
As a percentage of total revenue |
36 | % | 26 | % |
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
As a Percentage of Segment Revenue
|
2011 | 2010 | |||||
LendingTree Loans |
56 | % | 40 | % | |||
Exchanges |
10 | % | 8 | % |
Cost of revenue consists primarily of costs associated with loan originations, compensation and other employee related costs (including stock-based compensation) related to customer call centers, real estate network support staff and loan officers, as well as credit scoring fees, consumer incentive costs, and website network hosting and server fees.
Cost of revenue in 2011 increased from the same period in 2010 primarily due to increases of $0.8 million in compensation costs related to increased headcount for LendingTree Loans following the acquisition of SurePoint, and $0.2 million in server hosting fees and licensing agreements, offset by a decrease of $0.8 million in net origination costs at LendingTree Loans. The net origination costs at LendingTree Loans were lower due to decreased origination volume.
Selling and marketing expense
|
Three Months Ended March 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2011 | $ Change | % Change | 2010 | |||||||||
|
(Dollars in thousands) |
||||||||||||
LendingTree Loans |
$ | 7,703 | $ | 2,808 | 57 | % | $ | 4,895 | |||||
Exchanges |
15,630 | 966 | 7 | % | 14,664 | ||||||||
Selling and marketing expense |
$ | 23,333 | $ | 3,774 | 19 | % | $ | 19,559 | |||||
As a percentage of total revenue |
70 | % | 44 | % |
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