LendingTree, Inc.
Tree.com, Inc. (Form: 10-Q, Received: 08/06/2010 15:40:29)

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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 June 30, 2010

or

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                             to                            

Commission File 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 August 3, 2010 there were 10,731,482 shares of the Registrant's common stock, par value $.01 per share, outstanding.


Table of Contents


TABLE OF CONTENTS

 
   
  Page
Number

PART I—FINANCIAL INFORMATION

Item 1.

 

Financial Statements

  1

Item 2.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

  34

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  50

Item 4T.

 

Controls and Procedures

  51


PART II—OTHER INFORMATION

Item 1.

 

Legal Proceedings

  51

Item 1A.

 

Risk Factors

  51

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

  53

Item 6.

 

Exhibits

  54

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PART 1—FINANCIAL INFORMATION

Item 1.     Financial Statements


TREE.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 
  Three Months
Ended June 30,
  Six Months
Ended June 30,
 
 
  2010   2009   2010   2009  
 
  (In thousands, except per share amounts)
 

Revenue

                         
   

LendingTree Loans

  $ 26,649   $ 36,257   $ 52,387   $ 70,629  
   

Exchanges and other

    14,435     16,923     32,809     34,052  
   

Real Estate

    4,713     7,793     8,612     13,552  
                   
 

Total revenue

    45,797     60,973     93,808     118,233  

Cost of revenue

                         
   

LendingTree Loans

    9,348     14,003     19,502     25,859  
   

Exchanges and other

    1,057     2,531     2,509     4,998  
   

Real Estate

    2,783     4,792     5,238     8,656  
                   
 

Total cost of revenue (exclusive of depreciation shown separately below)

    13,188     21,326     27,249     39,513  
                   
 

Gross margin

    32,609     39,647     66,559     78,720  

Operating expenses

                         
 

Selling and marketing expense

    17,059     13,892     37,205     27,714  
 

General and administrative expense

    12,526     17,115     25,228     33,414  
 

Product development

    585     1,561     1,951     3,169  
 

Litigation settlements and contingencies

    26     (3 )   42     392  
 

Restructuring expense

    432     (1,078 )   3,042     (236 )
 

Amortization of intangibles

    943     1,318     1,886     2,581  
 

Depreciation

    1,507     1,687     3,016     3,351  
 

Asset impairments

        3,903         3,903  
                   
   

Total operating expenses

    33,078     38,395     72,370     74,288  
                   
   

Operating (loss) income

    (469 )   1,252     (5,811 )   4,432  

Other income (expense)

                         
 

Interest income

        27     7     75  
 

Interest expense

    (167 )   (151 )   (333 )   (302 )
                   

Total other (expense), net

    (167 )   (124 )   (326 )   (227 )
                   

(Loss) income before income taxes

    (636 )   1,128     (6,137 )   4,205  

Income tax provision

    (163 )   (386 )   (808 )   (303 )
                   

Net (loss) income

  $ (799 ) $ 742   $ (6,945 ) $ 3,902  
                   

Weighted average common shares outstanding

    11,240     10,706     11,039     10,194  
                   

Weighted average diluted shares outstanding

    11,240     11,034     11,039     10,354  
                   

Net (loss) income per share available to common shareholders

                         
 

Basic

  $ (0.07 ) $ 0.07   $ (0.63 ) $ 0.38  
                   
 

Diluted

  $ (0.07 ) $ 0.07   $ (0.63 ) $ 0.38  
                   

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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TREE.COM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 
  June 30, 2010   December 31, 2009  
 
  (unaudited)
   
 
 
  (In thousands, except par value and
share amounts)

 

ASSETS:

             

Cash and cash equivalents

  $ 62,877   $ 86,093  

Restricted cash and cash equivalents

    10,202     12,019  

Accounts receivable, net of allowance of $528 and $518, respectively

    7,073     6,835  

Loans held for sale ($110,427 and $92,236 measured at fair value, respectively)

    111,910     93,596  

Prepaid and other current assets

    14,117     10,758  
           
 

Total current assets

    206,179     209,301  

Property and equipment, net

    12,721     12,257  

Goodwill

    12,152     12,152  

Intangible assets, net

    55,740     57,626  

Other non-current assets

    654     496  
           
 

Total assets

    287,446   $ 291,832  
           

LIABILITIES:

             

Warehouse lines of credit

  $ 91,067   $ 78,481  

Accounts payable, trade

    8,534     5,905  

Deferred revenue

    1,714     1,731  

Deferred income taxes

    2,033     2,211  

Accrued expenses and other current liabilities

    38,852     54,694  
           
 

Total current liabilities

    142,200     143,022  

Income taxes payable

    561     510  

Other long-term liabilities

    16,254     12,010  

Deferred income taxes

    16,216     15,380  
           
 

Total liabilities

    175,231     170,922  

Commitments and contingencies (Note 12)

             

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 11,321,775 and 10,904,330 shares, respectively, and outstanding 10,834,417 and 10,904,330 shares, respectively

    113     109  

Additional paid-in capital

    903,495     901,818  

Accumulated deficit

    (787,962 )   (781,017 )

Treasury stock 487,358 and -0- shares, respectively

    (3,431 )    
           
 

Total shareholders' equity

    112,215     120,910  
           
 

Total liabilities and shareholders' equity

  $ 287,446   $ 291,832  
           

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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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, 2009

  $ 120,910     10,904   $ 109   $ 901,818   $ (781,017 )     $  

Comprehensive loss:

                                           
 

Net loss for the six months ended June 30, 2010

    (6,945 )               (6,945 )        
                                           

Comprehensive loss

    (6,945 )                        

Non-cash compensation

    2,062             2,062              

Issuance of common stock upon exercise of stock options and vesting of restricted stock units, net of withholding taxes

    (381 )   268     3     (384 )            

Issuance of restricted stock

        150     1     (1 )            

Purchase of treasury stock

    (3,431 )                   (487 )   (3,431 )
                               

Balance as of June 30, 2010

  $ 112,215     11,322   $ 113   $ 903,495   $ (787,962 )   (487 ) $ (3,431 )
                               

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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TREE.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
  Six Months Ended
June 30,
 
 
  2010   2009  
 
  (In thousands)
 

Cash flows from operating activities:

             

Net (loss) income

  $ (6,945 ) $ 3,902  

Adjustments to reconcile net (loss) income to net cash used in operating activities:

             
 

Loss on disposal of fixed assets

    9     949  
 

Amortization of intangibles

    1,886     2,581  
 

Depreciation

    3,016     3,351  
 

Intangible impairment

        3,903  
 

Non-cash compensation expense

    2,062     1,993  
 

Non-cash restructuring expense

    181     161  
 

Deferred income taxes

    658      
 

Gain on origination and sale of loans

    (47,441 )   (67,206 )
 

Loss on impaired loans not sold

        290  
 

Loss on sale of real estate acquired in satisfaction of loans

    377     77  
 

Bad debt expense

    92     243  

Changes in current assets and liabilities:

             
 

Accounts receivable

    (331 )   864  
 

Origination of loans

    (1,218,901 )   (1,612,556 )
 

Proceeds from sales of loans

    1,252,103     1,658,128  
 

Principal payments received on loans

    530     627  
 

Payments to investors for loan repurchases and early payoff obligations

    (4,685 )   (4,141 )
 

Prepaid and other current assets

    82     (623 )
 

Accounts payable and other current liabilities

    (17,276 )   (1,888 )
 

Income taxes payable

    84     123  
 

Deferred revenue

    (134 )   236  
 

Other, net

    4,360     1,003  
           

Net cash used in operating activities

    (30,273 )   (7,983 )
           

Cash flows from investing activities:

             
 

Acquisitions

        (1,000 )
 

Capital expenditures

    (3,534 )   (1,404 )
 

Other, net

    1,667     581  
           

Net cash used in investing activities

    (1,867 )   (1,823 )
           

Cash flows from financing activities:

             
 

Borrowing under warehouse lines of credit

    950,007     1,402,823  
 

Repayments of warehouse lines of credit

    (937,421 )   (1,385,887 )
 

Issuance of common stock, net of withholding taxes

    (381 )   3,807  
 

Purchase of treasury stock

    (3,431 )    
 

Increase in restricted cash

    150     (875 )
           

Net cash provided by financing activities

    8,924     19,868  
           

Net (decrease) increase in cash and cash equivalents

    (23,216 )   10,062  

Cash and cash equivalents at beginning of period

    86,093     73,643  
           

Cash and cash equivalents at end of period

  $ 62,877   $ 83,705  
           

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—ORGANIZATION

Spin-Off

        On August 20, 2008, Tree.com, Inc. ("Tree.com" or the "Company") was spun off from its parent company, IAC/InterActiveCorp ("IAC") into a separate publicly traded company. In these consolidated financial statements, we refer to the separation transaction as the "spin-off." In connection with the spin-off, Tree.com was incorporated as a Delaware corporation in April 2008.

Company Overview

        Tree.com is the parent of LendingTree, LLC and the owner of 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.com SM , HealthTree.com SM , LendingTreeAutos.com, DoneRight.com®, and InsuranceTree.com SM . 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, the Exchanges and Real Estate.

    LendingTree Loans

        The LendingTree Loans segment originates, processes, approves and funds various residential real estate loans through Home Loan Center, Inc. ("HLC"), (d/b/a LendingTree Loans). 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 (principally LendingTree.com, Tree.com, DegreeTree.com, LendingTreeAutos and GetSmart.com) that connect consumers and service providers principally in the lending, higher education and automobile marketplaces.

    Real Estate

        The Real Estate segment consists of a proprietary full service real estate brokerage (RealEstate.com, REALTORS®) that operates in 20 U.S. markets, as well as an online lead generation network accessed at www.RealEstate.com , that connects consumers with third party real estate brokerages around the country.

        The Corporate segment consists of unallocated expenses and consolidation transactions.

        Tree.com maintains operations solely in the United States.

Basis of Presentation

        The accompanying unaudited interim consolidated financial statements as of June 30, 2010 and 2009 and for the three and six 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

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1—ORGANIZATION (Continued)


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 and six months ended June 30, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010, 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, 2009, as amended by Amendment No. 1 to the Company's annual report on Form 10-K/A.

NOTE 2—SIGNIFICANT 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.

Restricted Cash and Cash Equivalents

        Restricted cash and cash equivalents consists of the following (in thousands):

 
  June 30, 2010   December 31, 2009  

Cash in escrow for future operating lease commitments

  $   $ 788  

Cash in escrow for surety bonds

    5,030     5,030  

Cash in escrow for corporate purchasing card program

    800     2,203  

Minimum required balances for warehouse lines of credit

    1,725     1,875  

Other

    2,647     2,123  
           
 

Total restricted cash and cash equivalents

  $ 10,202   $ 12,019  
           

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements

        On June 12, 2009, the Financial Accounting Standards Board ("FASB") issued the accounting standard for transfers and servicing of financial assets. The objective is to improve relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor's continuing involvement, if any, in transferred financial assets. This standard is effective for annual reporting periods beginning after November 15, 2009. Tree.com adopted this standard on January 1, 2010 and determined there was no material impact to the financial statements.

        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. Early adoption is permitted. See Note 9 for further information.

NOTE 3—GOODWILL AND INTANGIBLE ASSETS

        The balance of goodwill and intangible assets, net is as follows (in thousands):

 
  June 30, 2010   December 31, 2009  

Goodwill

  $ 12,152   $ 12,152  

Intangible assets with indefinite lives

    52,733     52,733  

Intangible assets with definite lives, net

    3,007     4,893  
           
 

Total goodwill and intangible assets, net

  $ 67,892   $ 69,778  
           

        Intangible assets with indefinite lives relate principally to trade names and trademarks acquired in various acquisitions.

        At June 30, 2010, intangible assets with definite lives relate to the following (in thousands):

 
  Cost   Accumulated
Amortization
  Net   Weighted Average
Amortization Life
(Years)
 

Purchase agreements

  $ 76,352   $ (75,952 ) $ 400     5.7  

Technology

    30,491     (29,617 )   874     3.0  

Customer lists

    7,388     (6,661 )   727     3.9  

Other

    9,813     (8,807 )   1,006     4.1  
                     
 

Total

  $ 124,044   $ (121,037 ) $ 3,007        
                     

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3—GOODWILL AND INTANGIBLE ASSETS (Continued)

        At December 31, 2009, intangible assets with definite lives relate to the following (in thousands):

 
  Cost   Accumulated
Amortization
  Net   Weighted Average
Amortization Life
(Years)
 

Purchase agreements

  $ 76,352   $ (74,657 ) $ 1,695     5.7  

Technology

    30,491     (29,396 )   1,095     3.0  

Customer lists

    7,388     (6,631 )   757     3.9  

Other

    9,813     (8,467 )   1,346     4.1  
                     
 

Total

  $ 124,044   $ (119,151 ) $ 4,893        
                     

        Amortization of intangible assets with definite lives is computed on a straight-line basis and, based on June 30, 2010 balances, such amortization for the next five years is estimated to be as follows (in thousands):

 
  Amount  

Six months ending December 31, 2010

  $ 826  

Year ending December 31, 2011

    1,086  

Year ending December 31, 2012

    411  

Year ending December 31, 2013

    144  

Year ending December 31, 2014

    84  

Thereafter

    456  
       
 

Total

  $ 3,007  
       

        In the second quarter of 2009, Tree.com recorded impairment charges of $3.9 million related to definite-lived intangible assets within Real Estate. In the second quarter of 2009, the new Real Estate operating segment leadership undertook significant changes in management, operational focus and marketing efforts related to the new homes referral service business. These changes combined with the continued deterioration of new housing starts and new homes sales in 2009, caused the Company to reassess the remaining useful lives and the likely future recoverability of the remaining value of these intangible assets. In testing the recoverability of these assets, indications of impairment were determined to exist, and subsequent impairment testing resulted in the charge noted above.

        The following table presents the balance of goodwill by segment at June 30, 2010 and December 31, 2009 (in thousands):

 
  LendingTree
Loans
  Exchanges   Real
Estate
  Total  
 

Goodwill

  $ 46,526   $ 485,955   $ 70,091   $ 602,572  
 

Accumulated impairment losses

    (46,526 )   (483,088 )   (60,806 )   (590,420 )
                   

Goodwill, net

  $   $ 2,867   $ 9,285   $ 12,152  
                   

        There was no activity in goodwill during the six months ended June 30, 2010.

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 4—PROPERTY AND EQUIPMENT

        The balance of property and equipment, net is as follows (in thousands):

 
  June 30, 2010   December 31, 2009  

Computer equipment and capitalized software

  $ 38,473   $ 35,881  

Leasehold improvements

    2,544     2,888  

Furniture and other equipment

    4,009     4,096  

Projects in progress

    2,093     1,532  
           

    47,119     44,397  

Less: accumulated depreciation and amortization

    (34,398 )   (32,140 )
           
 

Total property and equipment, net

  $ 12,721   $ 12,257  
           

NOTE 5—ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

        Accrued expenses and other current liabilities consist of the following (in thousands):

 
  June 30, 2010   December 31, 2009  

Accrued loan loss liability related to loans previously sold

  $ 6,918   $ 6,115  

Loan loss settlement liability related to loans previously sold

    2,400     4,500  

Litigation accruals

        12,750  

Accrued advertising expense

    6,581     8,095  

Accrued compensation and benefits

    3,851     7,525  

Accrued professional fees

    871     1,528  

Accrued restructuring costs

    1,034     1,848  

Derivative liabilities

    4,141     356  

Customer deposits and escrows

    3,953     3,387  

Deferred rent

    532     793  

Other

    8,571     7,797  
           
 

Total accrued expenses and other current liabilities

  $ 38,852   $ 54,694  
           

        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 $7.8 million and $6.4 million of accrued loan loss liability related to loans previously sold are classified in other long term liabilities at June 30, 2010 and December 31, 2009, respectively.

NOTE 6—WAREHOUSE LINES OF CREDIT

        Borrowings on warehouse lines of credit were $91.1 million and $78.5 million at June 30, 2010 and December 31, 2009, respectively.

        As of June 30, 2010, LendingTree Loans had two committed lines of credit totaling $125.0 million of borrowing capacity. Borrowings under these lines of credit are used to fund, and are secured by,

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 6—WAREHOUSE LINES OF CREDIT (Continued)


consumer residential loans that are held for sale. Loans under these lines of credit are repaid using proceeds from the sales of loans held for sale by LendingTree Loans.

        The $50.0 million first line was scheduled to expire on June 29, 2010, but the Company has renewed this line with a new expiration date of 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., Lending Tree, LLC and Lending Tree Holdings Corp. The interest rate under the first line is 2.25% plus the greater of (a) the 30-day LIBOR or (b) 2.00%. The interest rate under the $25.0 million uncommitted line is 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.

        The $75.0 million second line is scheduled to expire on October 29, 2010. This second line is also guaranteed by Tree.com, Inc., LendingTree, LLC and LendingTree Holdings Corp. The interest rate under this line is 30-day LIBOR or 2.0% (whichever is greater) plus 2.50% to 3.0% for loans being sold to the lender and 30-day LIBOR or 2.0% (whichever is greater) plus 2.75% for loans not being sold to the lender.

        The Company also had a $40.0 million line with a lender that exited the warehouse lending business. This line expired on June 30, 2010 and was not renewed. The Company had anticipated that decision and had factored it into its future liquidity needs.

        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 $44.0 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 June 30, 2010, LendingTree Loans was in compliance with the covenants under the lines. Effective July 22, 2010, both warehouse lines have been amended reducing the tangible net worth covenant to $25.0 million.

        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 expect to renew the line that is expiring on October 29, 2010.

NOTE 7—SEGMENT 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.

        The expenses presented below for each of the business segments include an allocation of certain corporate expenses that are identifiable and directly benefit those segments. The unallocated expenses

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7—SEGMENT INFORMATION (Continued)


are those corporate overhead expenses that are not directly attributable to a segment and include: corporate expenses such as finance, legal, executive, technology support, and human resources, as well as elimination of inter-segment revenue and costs.

        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 loss contingencies and settlements, (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, including depreciation, non-cash compensation and acquisition related accounting. 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.

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7—SEGMENT INFORMATION (Continued)

        Summarized information by segment and reconciliation to EBITDA is as follows (in thousands):

 
  For the Three Months Ended June 30, 2010:  
 
  LendingTree
Loans
  Exchanges   Real
Estate
  Unallocated—
Corporate
  Total  

Revenue

  $ 26,649   $ 21,906   $ 4,713   $ (7,471 ) $ 45,797  

Cost of revenue (exclusive of depreciation shown separately below)

    9,348     941     2,783     116     13,188  
                       
 

Gross margin

    17,301     20,965     1,930     (7,587 )   32,609  

Operating expenses:

                               
 

Selling and marketing expense

    7,974     16,116     394     (7,425 )   17,059  
 

General and administrative expense

    4,916     1,471     1,557     4,582     12,526  
 

Product development

    (132 )   674     34     9     585  
 

Litigation loss contingencies and settlements

    25             1     26  
 

Restructuring expense

        (58 )   364     126     432  
 

Amortization of intangibles

        295     635     13     943  
 

Depreciation

    425     495     293     294     1,507  
                       
 

Total operating expenses

    13,208     18,993     3,277     (2,400 )   33,078  
                       

Operating income (loss)

    4,093     1,972     (1,347 )   (5,187 )   (469 )

Adjustments to reconcile to EBITDA and Adjusted EBITDA:

                               
 

Amortization of intangibles

        295     635     13     943  
 

Depreciation

    425     495     293     294     1,507  
                       

EBITDA

    4,518     2,762     (419 )   (4,880 )   1,981  
 

Restructuring expense

        (58 )   364     126     432  
 

Loss on disposal of assets

            5         5  
 

Non-cash compensation

    74     297     35     562     968  
 

Litigation loss contingencies and settlements

    25             1     26  
                       

Adjusted EBITDA

  $ 4,617   $ 3,001   $ (15 ) $ (4,191 ) $ 3,412  
                       

Reconciliation to net loss in total:

                               

Operating loss per above

                          $ (469 )

Other expense, net

                            (167 )
                               

Loss before income taxes

                            (636 )

Income tax provision

                            (163 )
                               

Net loss

                          $ (799 )
                               

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7—SEGMENT INFORMATION (Continued)

 

 
  For the Three Months Ended June 30, 2009:  
 
  LendingTree
Loans
  Exchanges   Real
Estate
  Unallocated—
Corporate
  Total  

Revenue

  $ 36,257   $ 20,630   $ 7,793   $ (3,707 ) $ 60,973  

Cost of revenue (exclusive of depreciation shown separately below)

    14,003     2,020     4,792     511     21,326  
                       
 

Gross margin

    22,254     18,610     3,001     (4,218 )   39,647  

Operating expenses:

                               
 

Selling and marketing expense

    4,098     12,474     1,020     (3,700 )   13,892  
 

General and administrative expense

    5,914     2,665     2,331     6,205     17,115  
 

Product development

    97     807     347     310     1,561  
 

Litigation loss contingencies and settlements

    (3 )               (3 )
 

Restructuring expense

    (1,084 )       6         (1,078 )
 

Amortization of intangibles

    70     106     1,142         1,318  
 

Depreciation

    759     198     287     443     1,687  
 

Asset impairments

            3,903         3,903  
                       
 

Total operating expenses

    9,851     16,250     9,036     3,258     38,395  
                       

Operating income (loss)

    12,403     2,360     (6,035 )   (7,476 )   1,252  

Adjustments to reconcile to EBITDA and Adjusted EBITDA:

                               
 

Amortization of intangibles

    70     106     1,142         1,318  
 

Depreciation

    759     198     287     443     1,687  
                       

EBITDA

    13,232     2,664     (4,606 )   (7,033 )   4,257  
 

Restructuring expense

    (1,084 )       6         (1,078 )
 

Asset impairments

            3,903         3,903  
 

Loss on disposal of assets

        311             311  
 

Non-cash compensation

    67     306     33     410     816  
 

Litigation loss contingencies and settlements

    (3 )               (3 )
                       

Adjusted EBITDA

  $ 12,212   $ 3,281   $ (664 ) $ (6,623 ) $ 8,206  
                       

Reconciliation to net income in total:

                               

Operating income per above

                          $ 1,252  

Other expense, net

                            (124 )
                               

Income before income taxes

                            1,128  

Income tax provision

                            (386 )
                               

Net income

                          $ 742  
                               

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7—SEGMENT INFORMATION (Continued)

 

 
  For the Six Months Ended June 30, 2010:  
 
  LendingTree
Loans
  Exchanges   Real
Estate
  Unallocated—
Corporate
  Total  

Revenue

  $ 52,387   $ 47,957   $ 8,612   $ (15,148 ) $ 93,808  

Cost of revenue (exclusive of depreciation shown separately below)

    19,502     2,069     5,238     440     27,249  
                       
 

Gross margin

    32,885     45,888     3,374     (15,588 )   66,559  

Operating expenses:

                               
 

Selling and marketing expense

    15,972     35,201     1,083     (15,051 )   37,205  
 

General and administrative expense

    9,732     3,064     3,098     9,334     25,228  
 

Product development

    (1 )   1,556     202     194     1,951  
 

Litigation loss contingencies and settlements

    41             1     42  
 

Restructuring expense

    7     82     364     2,589     3,042  
 

Amortization of intangibles

        590     1,271     25     1,886  
 

Depreciation

    915     814     627     660     3,016  
                       
 

Total operating expenses

    26,666     41,307     6,645     (2,248 )   72,370  
                       

Operating income (loss)

    6,219     4,581     (3,271 )   (13,340 )   (5,811 )

Adjustments to reconcile to EBITDA and Adjusted EBITDA:

                               
 

Amortization of intangibles

        590     1,271     25     1,886  
 

Depreciation

    915     814     627     660     3,016  
                       

EBITDA

    7,134     5,985     (1,373 )   (12,655 )   (909 )
 

Restructuring expense

    7     82     364     2,589     3,042  
 

Loss on disposal of assets

            6     3     9  
 

Non-cash compensation

    205     630     90     1,137     2,062  
 

Litigation loss contingencies and settlements

    41             1     42  
                       

Adjusted EBITDA

  $ 7,387   $ 6,697   $ (913 ) $ (8,925 ) $ 4,246  
                       

Reconciliation to net loss in total:

                               

Operating loss per above

                          $ (5,811 )

Other expense, net

                            (326 )
                               

Loss before income taxes

                            (6,137 )

Income tax provision

                            (808 )
                               

Net loss

                          $ (6,945 )
                               

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7—SEGMENT INFORMATION (Continued)

 

 
  For the Six Months Ended June 30, 2009:  
 
  LendingTree
Loans
  Exchanges   Real
Estate
  Unallocated—
Corporate
  Total  

Revenue

  $ 70,629   $ 39,697   $ 13,552   $ (5,645 ) $ 118,233  

Cost of revenue (exclusive of depreciation shown separately below)

    25,859     3,911     8,656     1,087     39,513  
                       
 

Gross margin

    44,770     35,786     4,896     (6,732 )   78,720  

Operating expenses:

                               
 

Selling and marketing expense

    6,212     24,442     2,698     (5,638 )   27,714  
 

General and administrative expense

    10,888     5,449     5,030     12,047     33,414  
 

Product development

    247     1,439     881     602     3,169  
 

Litigation loss contingencies and settlements

    360     7     25         392  
 

Restructuring expense

    (1,192 )   58     739     159     (236 )
 

Amortization of intangibles

    140     156     2,285         2,581  
 

Depreciation

    1,546     397     547     861     3,351  
 

Asset impairments

            3,903         3,903  
                       
 

Total operating expenses

    18,201     31,948     16,108     8,031     74,288  
                       

Operating income (loss)

    26,569     3,838     (11,212 )   (14,763 )   4,432  

Adjustments to reconcile to EBITDA and Adjusted EBITDA:

                               
 

Amortization of intangibles

    140     156     2,285         2,581  
 

Depreciation

    1,546     397     547     861     3,351  
                       

EBITDA

    28,255     4,391     (8,380 )   (13,902 )   10,364  
 

Restructuring expense

    (1,192 )   58     739     159     (236 )
 

Asset impairments

            3,903         3,903  
 

Loss on disposal of assets

        949             949  
 

Non-cash compensation

    136     419     131     1,307     1,993  
 

Litigation loss contingencies and settlements

    360     7     25         392  
                       

Adjusted EBITDA

  $ 27,559   $ 5,824   $ (3,582 ) $ (12,436 ) $ 17,365  
                       

Reconciliation to net loss in total:

                               

Operating income per above

                          $ 4,432  

Other expense, net

                            (227 )
                               

Income before income taxes

                            4,205  

Income tax provision

                            (303 )
                               

Net income

                          $ 3,902  
                               

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 7—SEGMENT INFORMATION (Continued)

        Significant components of revenue for the three and six months ended June 30, 2010 and 2009 are as follows (in thousands):

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2010   2009   2010   2009  

LendingTree Loans:

                         
 

Origination and sale of loans

  $ 24,041   $ 34,442   $ 47,441   $ 67,206  
 

Other

    2,608     1,815     4,946     3,423  
                   
   

Total LendingTree Loans revenue

    26,649     36,257     52,387     70,629  

Exchanges:

                         
 

Match fees

    11,659     9,903     25,825     19,869  
 

Closed loan fees

    2,025     6,432     5,352     12,862  
 

Other

    751     588     1,632     1,321  
 

Inter-segment

    7,471     3,707     15,148     5,645  
                   
   

Total Exchanges

    21,906     20,630     47,957     39,697  

Real Estate revenue

    4,713     7,793     8,612     13,552  

Inter-segment elimination

    (7,471 )   (3,707 )   (15,148 )   (5,645 )
                   

Total revenue

  $ 45,797   $ 60,973   $ 93,808   $ 118,233  
                   

        Total assets by segment at June 30, 2010 and December 31, 2009 are as follows (in thousands):

 
  June 30,
2010
  December 31,
2009
 

LendingTree Loans

  $ 182,828   $ 167,976  

Real Estate

    26,375     28,031  

Exchanges and Unallocated—Corporate(a)

    78,243     95,825  
           

Total

  $ 287,446   $ 291,832  
           

(a)
Assets are jointly used by the Exchanges and Unallocated—Corporate segments, and it is not practicable to allocate assets between these segments.

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8—EARNINGS PER SHARE AND STOCK-BASED COMPENSATION

        The following table sets forth the computation of Basic and Diluted earnings per share:

 
  Three Months Ended June 30,  
 
  2010   2009  
 
  Basic   Diluted   Basic   Diluted  
 
  (In thousands, except per share data)
 

Numerator:

                         

Net (loss) income available to common shareholders

  $ (799 ) $ (799 ) $ 742   $ 742  

Denominator:

                         

Weighted average common shares

    11,240     11,240     10,706     11,034  
                   

Net (loss) income per common share

  $ (0.07 ) $ (0.07 ) $ 0.07   $ 0.07  
                   

 

 
  Six Months Ended June 30,  
 
  2010   2009  
 
  Basic   Diluted   Basic   Diluted  
 
  (In thousands, except per share data)
 

Numerator:

                         

Net (loss) income available to common shareholders

  $ (6,945 ) $ (6,945 ) $ 3,902   $ 3,902  

Denominator:

                         

Weighted average common shares

    11,039     11,039     10,194     10,354  
                   

Net (loss) income per common share

  $ (0.63 ) $ (0.63 ) $ 0.38   $ 0.38  
                   

        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 and six months ended June 30, 2010 and 2009 (in thousands):

 
  Three Months
Ended
June 30,
  Six Months
Ended
June 30,
 
 
  2010   2009   2010   2009  

Cost of revenue

  $ 1   $ 31   $ 16   $ 69  

Selling and marketing expense

    41     50     109     86  

General and administrative expense

    888     690     1,845     1,765  

Product development

    38     45     92     73  
                   

Non-cash compensation expense

  $ 968   $ 816   $ 2,062   $ 1,993  
                   

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8—EARNINGS PER SHARE AND STOCK-BASED COMPENSATION (Continued)

        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 six months ended June 30, 2010 is as follows:

 
  Shares   Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Contractual
Term
  Aggregate
Intrinsic
Value
 
 
   
   
  (In years)
  (In thousands)
 

Outstanding at January 1, 2010

    1,177,319   $ 9.34              

Granted

                     

Exercised

    (42,037 )   6.88              

Forfeited

    (59,826 )   7.46              

Expired

    (59,780 )   10.75              
                       

Outstanding at June 30, 2010

    1,015,676   $ 9.48     6.7   $ 52  
                   

Options exercisable at June 30, 2010

    340,125   $ 11.72     4.9   $ 52  
                   

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8—EARNINGS PER SHARE AND STOCK-BASED COMPENSATION (Continued)

        The following table summarizes the information about stock options outstanding and exercisable as of June 30, 2010:

 
  Options Outstanding   Options Exercisable  
Range of Exercise Prices
  Outstanding at
June 30, 2010
  Weighted
Average
Remaining
Contractual
Life in Years
  Weighted
Average
Exercise Price
  Exercisable at
June 30, 2010
  Weighted
Average
Exercise Price
 

$.01 to $4.99

    15,078     1.88   $ 3.00     15,078   $ 3.00  

$5.00 to $7.45

    13,847     2.45     6.67     13,847     6.67  

$7.46 to $9.99

    797,360     7.42     8.25     121,809     7.67  

$10.00 to $14.99

    61,160     2.62     12.19     61,160     12.19  

$15.00 to $19.99

    81,568     4.90     15.03     81,568     15.03  

$20.00 to $24.99

    46,663     4.94     20.19     46,663     20.19  
                             

    1,015,676     6.67   $ 9.48     340,125   $ 11.72  
                             

        Nonvested RSUs and restricted stock outstanding as of June 30, 2010 and changes during the six months ended June 30, 2010 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, 2010

    704,938   $ 8.03     350,000   $ 5.42  

Granted

    434,436     8.25     150,000     9.15  

Vested

    (253,696 )   10.63     (87,500 )   5.42  

Forfeited

    (220,542 )   7.27          
                   

Nonvested at June 30, 2010

    665,136   $ 7.60     412,500   $ 6.78  
                   

NOTE 9—FAIR 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.

    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.

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

        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. At June 30, 2010 and December 31, 2009, there were $394.2 million and $258.4 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. 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. 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 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 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".

20


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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

        The following presents Tree.com's assets and liabilities that are measured at fair value on a recurring basis at June 30, 2010 and December 31, 2009 (in thousands):

 
  As of June 30, 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

  $   $ 109,470   $ 957   $ 110,427  

Interest rate lock commitments ("IRLCs")

            10,848     10,848  

Forward delivery contracts

        (3,819 )   (20 )   (3,839 )
                   

Total

  $   $ 105,651   $ 11,785   $ 117,436  
                   

 

 
  As of December 31, 2009  
 
  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

  $   $ 91,459   $ 777   $ 92,236  

Interest rate lock commitments ("IRLCs")

            3,680     3,680  

Forward delivery contracts

        2,737     487     3,224  
                   

Total

  $   $ 94,196   $ 4,944   $ 99,140  
                   

21


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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—FAIR 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 and six months ended June 30, 2010 and 2009 (in thousands):

 
  Three Months
Ended June 30, 2010
 
 
  Interest Rate
Lock
Commitments
  Forward
Delivery
Contracts
  Loans
Held
for Sale
 

Balance at April 1, 2010

  $ 5,508   $ 153   $ 776  
 

Transfers into Level 3

            262  
 

Transfers out of Level 3

        100      
 

Transfers of IRLCs to closed loans

    (19,393 )        
 

Total net gains (losses) included in earnings (realized and unrealized)

    28,735     (273 )   (78 )
 

Purchases, sales, and settlements

                   
   

Purchases

             
   

Sales

             
   

Settlements

    (4,002 )       (3 )
               

Balance at June 30, 2010

  $ 10,848   $ (20 ) $ 957  
               

 

 
  Six Months
Ended June 30, 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

            262  
 

Transfers out of Level 3

        126      
 

Transfers of IRLCs to closed loans

    (34,184 )        
 

Total net gains (losses) included in earnings (realized and unrealized)

    50,068     (633 )   (77 )
 

Purchases, sales, and settlements

                   
   

Purchases

             
   

Sales

             
   

Settlements

    (8,716 )       (5 )
               

Balance at June 30, 2010

  $ 10,848   $ (20 ) $ 957  
               

22


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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

 

 
  Three Months
Ended June 30, 2009
 
 
  Interest Rate
Lock
Commitments
  Forward
Delivery
Contracts
  Loans
Held
for Sale
 

Balance at April 1, 2009

  $ 8,780   $ (25 ) $ 271  
 

Transfers into Level 3

             
 

Transfers out of Level 3

        (639 )    
 

Transfers of IRLCs to closed loans

    (12,308 )        
 

Total net gains (losses) included in earnings (realized and unrealized)

    23,665     582     1  
 

Purchases, sales, and settlements

                   
   

Purchases

             
   

Sales

             
   

Settlements

    (13,439 )       (1 )
               

Balance at June 30, 2009

  $ 6,698   $ (82 ) $ 271  
               

 

 
  Six Months
Ended June 30, 2009
 
 
  Interest Rate
Lock
Commitments
  Forward
Delivery
Contracts
  Loans
Held
for Sale
 

Balance at January 1, 2009

  $ 5,904   $ (20 ) $ 814  
 

Transfers into Level 3

             
 

Transfers out of Level 3

        (485 )    
 

Transfers of IRLCs to closed loans

    (27,480 )        
 

Total net gains (losses) included in earnings (realized and unrealized)

    52,951     423     66  
 

Purchases, sales, and settlements

                   
   

Purchases

             
   

Sales

            (357 )
   

Settlements

    (24,677 )       (252 )
               

Balance at June 30, 2009

  $ 6,698   $ (82 ) $ 271  
               

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

        The following presents the gains (losses) included in earnings for the three and six months ended June 30, 2010 and 2009 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 June 30, 2010
  Six Months
Ended June 30, 2010
 
 
  Interest Rate
Lock
Commitments
  Forward
Delivery
Contracts
  Loans
Held
for Sale
  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

  $ 28,735   $ (273 ) $ (78 ) $ 50,068   $ (633 ) $ (77 )
                           

Change in unrealized gains (losses) relating to assets and liabilities still held at June 30, 2010, which are included in revenue from LendingTree Loans

  $ 10,848   $ (20 ) $ (78 ) $ 10,848   $ (20 ) $ (77 )
                           

 

 
  Three Months
Ended June 30, 2009
  Six Months
Ended June 30, 2009
 
 
  Interest Rate
Lock
Commitments
  Forward
Delivery
Contracts
  Loans
Held
for Sale
  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

  $ 23,664   $ 583   $ 1   $ 52,951   $ 423   $ 66  
                           

Change in unrealized gains (losses) relating to assets and liabilities still held at June 30, 2009 which are included in revenue from LendingTree Loans

  $ 6,698   $ (82 ) $ 1   $ 6,698   $ (82 ) $ 1  
                           

        The following table summarizes the Company's derivative instruments not designated as hedging instruments as of June 30, 2010 and December 31, 2009 (in thousands):

 
  June 30, 2010   December 31, 2009  
 
  Balance Sheet Location   Fair Value   Balance Sheet Location   Fair Value  

Interest Rate Lock Commitments

  Prepaid and other current assets   $ 10,848   Prepaid and other current assets   $ 3,919  

Forward Delivery Contracts

  Prepaid and other current assets     303   Prepaid and other current assets     3,341  

Interest Rate Lock Commitments

  Accrued expenses and other current liabilities       Accrued expenses and other current liabilities     (239 )

Forward Delivery Contracts

  Accrued expenses and other current liabilities     (4,141 ) Accrued expenses and other current liabilities     (117 )
                   

Total Derivatives

      $ 7,010       $ 6,904  
                   

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

        The gain/(loss) recognized in the consolidated statements of operations for derivatives for the three months ended June 30, 2010 and 2009 was as follows (in thousands):

 
   
  Three Months Ended   Six Months Ended  
 
  Location of Gain/(Loss) Recognized
in Income on Derivative
  June 30,
2010
  June 30,
2009
  June 30,
2010
  June 30,
2009
 

Interest Rate Lock Commitments

  LendingTree Loans revenue   $ 28,735   $ 23,664   $ 50,068   $ 52,951  

Forward Delivery Contracts

  LendingTree Loans revenue     (5,083 )   3,400     (7,157 )   2,419  
                       
 

Total

      $ 23,652   $ 27,064   $ 42,911   $ 55,370  
                       

        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 June 30, 2010 and December 31, 2009, 28 and 29 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 June 30, 2010 and December 31, 2009, measured on a non-recurring basis using significant unobservable inputs (Level 3), was $1.5 million and $1.4 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 June 30, 2010 and December 31, 2009 (in thousands):

 
  As of June 30, 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

  $ 106,292   $ 3,351   $ 109,643  

Difference between fair value and aggregate unpaid principal balance

    4,135         4,135  

Lower of cost or market valuation allowance

        (1,859 )   (1,859 )

Deferred loan fees, net of costs

        (9 )   (9 )
               

Loans held for sale

  $ 110,427   $ 1,483   $ 111,910  
               

25


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—FAIR VALUE MEASUREMENTS (Continued)

 

 
  As of December 31, 2009  
 
  Loans Held
for Sale—
Measured at
Fair Value
  Loans Held
for Sale—
Measured at
LOCOM
  Total Loans
Held For
Sale
 

Aggregate unpaid principal balance

  $ 91,824   $ 3,217   $ 95,041  

Difference between fair value and aggregate unpaid principal balance

    412         412  

Lower of cost or market valuation allowance

        (1,848 )   (1,848 )

Deferred loan fees, net of costs

        (9 )   (9 )
               

Loans held for sale

  $ 92,236   $ 1,360   $ 93,596  
               

        During the three months ended June 30, 2010 and 2009, the change in fair value of loans held for sale for which the fair value option was elected was a gain of $2.7 million and a loss of $1.6 million, respectively, and is included as a component of LendingTree Loans revenue in the accompanying consolidated statements of operations.

        During the six months ended June 30, 2010 and 2009, the change in fair value of loans held for sale for which the fair value option was elected was a gain of $4.7 million and a loss of $2.0 million, respectively, and is included as a component of LendingTree Loans revenue in the accompanying consolidated statements of operations.

NOTE 10—ORIGINATION 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.

        A summary of the initial unpaid principal balance of loans sold by type of loan for the three and six months ended June 30, 2010 and 2009 is presented below ($ amounts in millions):

 
  Three Months Ended June 30,   Six Months Ended June 30,  
 
  2010   2009   2010   2009  
 
  Amount   %   Amount   %   Amount   %   Amount   %  

Conforming

  $ 448     74 % $ 751     86 % $ 908     75 % $ 1,387     87 %

FHA

    129     22 %   111     13 %   239     20 %   188     12 %

Jumbo

    25     4 %   9     1 %   57     5 %   12     1 %
                                   

Total

    602     100 % $ 871     100 % $ 1,204     100 % $ 1,587     100 %
                                   

26


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10—ORIGINATION AND SALE OF LOANS, LOANS HELD FOR SALE AND LOAN LOSS OBLIGATIONS (Continued)

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 June 30, 2010 and December 31, 2009 (in thousands):

 
  June 30,
2010
  December 31,
2009
 
 
  Amount   %   Amount   %  

Conforming

  $ 85,506     76 % $ 72,670     77 %

FHA

    20,141     18 %   16,596     18 %

Jumbo

    5,514     5 %   3,486     4 %

Subprime

    658     1 %   720     1 %

Home equity

    91     %   124     %
                   

Total

  $ 111,910     100 % $ 93,596     100 %
                   

        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 June 30, 2010 and December 31, 2009 (in thousands):

 
  As of June 30, 2010  
 
  Loans on
Nonaccrual—
Measured at
Fair Value
  Loans on
Nonaccrual—
Measured at
LOCOM
  Total Loans on
Nonaccrual
 

Aggregate unpaid principal balance

  $ 1,560   $ 3,351   $ 4,911  

Difference between fair value and aggregate unpaid principal balance

    (603 )       (603 )

Lower of cost or market valuation allowance

        (1,859 )   (1,859 )

Deferred loan fees, net of costs

        (9 )   (9 )
               

Loans on nonaccrual

  $ 957   $ 1,483   $ 2,440  
               

 

 
  As of December 31, 2009  
 
  Loans on
Nonaccrual—
Measured at
Fair Value
  Loans on
Nonaccrual—
Measured at
LOCOM
  Total Loans on
Nonaccrual
 

Aggregate unpaid principal balance

  $ 1,303   $ 3,217   $ 4,520  

Difference between fair value and aggregate unpaid principal balance

    (526 )       (526 )

Lower of cost or market valuation allowance

        (1,848 )   (1,848 )

Deferred loan fees, net of costs

        (9 )   (9 )
               

Loans on nonaccrual

  $ 777   $ 1,360   $ 2,137  
               

27


Table of Contents


TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10—ORIGINATION AND SALE OF LOANS, LOANS HELD FOR SALE AND LOAN LOSS OBLIGATIONS (Continued)

        Included within the loans on nonaccrual status are repurchased loans with a net book value of $0.9 million and $0.7 million at June 30, 2010 and December 31, 2009, respectively. During the three and six months ended June 30, 2010, LendingTree repurchased one loan with a balance of $0.3 million. During the three and six months ended June 30, 2009, LendingTree Loans did not repurchase any loans.

        Real estate properties acquired in satisfaction of loans totaled $-0- and $0.9 million, net of estimated selling expenses, at June 30, 2010 and December 31, 2009, respectively. This amount is included in prepaid and other current assets in the accompanying consolidated balance sheet.

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 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, which occurs when a borrower prepays a loan prior to the end of a specified period, 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 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 categorizes its loan sales into four types based on the extent of the documentation provided by the borrower to

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10—ORIGINATION AND SALE OF LOANS, LOANS HELD FOR SALE AND LOAN LOSS OBLIGATIONS (Continued)


substantiate income and/or assets (full or limited documentation) and the lien position of the mortgage in the underling property (first or second position). Each of these loan types 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.

        The following table represents the loans sold for the period shown and the aggregate loan losses through June 30, 2010:

 
  As of June 30, 2010  
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)
 

Six months ended June 30, 2010

    5,500   $ 1.2       $   $  

2009

    12,800     2.8     3     0.8     0.1  

2008

    11,000     2.2     14     2.7     0.4  

2007

    36,300     6.1     125     15.5     4.7  

2006

    55,000     7.9     179     20.1     10.6  

2005 and prior years

    86,700     13.0     83     11.3     4.3  
                       

Total

    207,300   $ 33.2     404   $ 50.4   $ 20.1  
                       

        The pipeline of 112 loan repurchase requests and indemnifications as of June 30, 2010 was considered in determining the appropriate reserve amount. The status of these 112 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 $20.2 million, comprised of approximately 61% full documentation first liens, 6% full documentation second liens, 22% limited documentation first liens, and 11% 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, to be paid in four equal quarterly installments in 2010, relates to all future losses on limited documentation second lien loans on loans sold to this buyer. LendingTree Loans must also pay an additional amount of up to $0.3 million in conjunction with this settlement if it does not sell a certain volume of loans to this buyer in 2010. This amount is being accrued throughout 2010 and is included in the total estimated settlement amount. This settlement amount is included as a charge off to the reserve in 2010 and is not included in the table above.

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 10—ORIGINATION AND SALE OF LOANS, LOANS HELD FOR SALE AND LOAN LOSS OBLIGATIONS (Continued)

        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 June 30, 2010 LendingTree Loans estimated the range of remaining possible losses due to representations and warranty issues based on the methodology described above, excluding the $2.4 million settlement remaining to be paid in 2010, as $12 million to $20 million. The Company believes that it has adequately reserved for these losses.

        The activity related to loss reserves on previously sold loans for the six months ended June 30, 2010 and 2009, is as follows (in thousands):

 
  Six Months Ended
June 30,
 
 
  2010   2009  

Balance, beginning of period

  $ 16,985   $ 10,451  

Provisions

    4,462     5,943  

Charge offs to reserves(a)

    (6,752 )   (4,309 )
           

Balance, end of period

  $ 14,695   $ 12,085  
           

(a)
The six months ended June 30, 2010 includes a charge off for the amount of the $4.5 million loan loss settlement discussed above plus an estimated portion of the $0.3 million additional amount based on loans sold to this buyer in 2010. The remaining settlement payments due of $2.4 million are 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, including the remaining portion of the settlement discussed above, is presented in the accompanying consolidated balance sheet as of June 30, 2010 and December 31, 2009 as follows (in thousands):

 
  As of June 30,
2010
  As of December 31,
2009
 

Current portion related to settlement above, included in accrued expenses and other current liabilities

  $ 2,400   $ 4,500  

Other current portion, included in accrued expenses and other current liabilities

    6,918     6,115  

Long term portion, included in other long-term liabilities

    7,777     6,370  
           

Total

  $ 17,095   $ 16,985  
           

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 11—INCOME TAXES

        For the three months ended June 30, 2010 and 2009, Tree.com recorded a tax provision of $0.2 million and $0.4 million, respectively, which represents effective tax rates of (25.6)% and 34.2%, respectively. For the three months ended June 30, 2010, the tax rate is lower than the federal statutory rate of 35% mainly due to an increase in the valuation allowance on deferred tax assets. For the three months ended June 30, 2009, there was an increase in the valuation allowance and non-deductible impairment charges that caused the tax rate to be lower than the federal statutory rate.

        For the six months ended June 30, 2010 and 2009, Tree.com recorded a tax provision of $0.8 million and $0.3 million, respectively, which represents effective tax rates of (13.2)% and 7.2%, respectively. For the six months ended June 30, 2010, the tax rate is lower than the federal statutory rate of 35% mainly due to an increase in the valuation allowance on deferred tax assets. For the six months ended June 30, 2009, there was an increase in the valuation allowance and non-deductible impairment charges that caused the tax rate to be lower than the federal statutory rate.

        Tree.com's unrecognized tax benefits remained constant in the second quarter. Tree.com believes that it is reasonably possible that its remaining unrecognized tax benefits could decrease by approximately $0.6 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 six months ended June 30, 2010, Tree.com determined that its valuation allowance 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 six months ended June 30, 2009.

NOTE 12—CONTINGENCIES

        During the six months ended June 30, 2010 and 2009, provisions for litigation settlements of $0.1 million, $0.3 million, respectively, were recorded in litigation settlements and contingencies in the accompanying consolidated statements of operations. The balance of the related liability was $-0- and $12.8 million at June 30, 2010 and December 31, 2009, respectively. The $12.8 million liability was paid in 2010.

        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.

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 13—RESTRUCTURING 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. The restructuring charges in 2009 primarily relate to Tree.com's segment reorganizations and aligning the cost structure with future revenue opportunities. 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 June 30, 2010  
 
  Employee
Termination
Costs
  Continuing
Lease
Obligations
  Asset
Write-offs
  Total  

LendingTree Loans

  $   $   $   $  

Exchanges

    (58 )           (58 )

Real Estate

    6     271     87     364  

Unallocated—corporate

    126             126  
                   

Total

  $ 74   $ 271   $ 87   $ 432  
                   

 

 
  For The Three Months Ended June 30, 2009  
 
  Employee
Termination
Costs
  Continuing
Lease
Obligations
  Asset
Write-offs
  Total  

LendingTree Loans

  $   $ (1,084 ) $   $ (1,084 )

Exchanges

                 

Real Estate

    6             6  

Unallocated—corporate

                 
                   

Total

  $ 6   $ (1,084 ) $   $ (1,078 )
                   

 

 
  For The Six Months Ended June 30, 2010  
 
  Employee
Termination
Costs
  Continuing
Lease
Obligations
  Asset
Write-offs
  Total  

LendingTree Loans

  $   $ 9   $ (2 ) $ 7  

Exchanges

    (10 )       92     82  

Real Estate

    6     271     87     364  

Unallocated—corporate

    126     2,463         2,589  
                   

Total

  $ 122   $ 2,743   $ 177   $ 3,042  
                   

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 13—RESTRUCTURING CHARGES (Continued)

 

 
  For The Six Months Ended June 30, 2009  
 
  Employee
Termination
Costs
  Continuing
Lease
Obligations
  Asset
Write-offs
  Total  

LendingTree Loans

  $   $ (1,192 ) $   $ (1,192 )

Exchanges

    58             58  

Real Estate

    542     73     124     739  

Unallocated—corporate

    208     (49 )       159  
                   

Total

  $ 808   $ (1,168 ) $ 124   $ (236 )
                   

        Restructuring charges and spending against liabilities are as follows (in thousands):

 
  For The Six Months Ended June 30, 2010  
 
  Employee
Termination
Costs
  Continuing
Lease
Obligations
  Asset
Write-offs
  Other   Total  

Balance, beginning of period

  $ 1,505   $ 1,043   $   $ 12   $ 2,560  
 

Restructuring charges

    122     2,743     177         3,042  
 

Payments

    (1,480 )   (724 )   4     (12 )   (2,212 )
 

Write-offs

        238     (181 )       57  
                       

Balance, end of period

  $ 147   $ 3,300   $   $   $ 3,447  
                       

        At June 30, 2010, restructuring liabilities of $1.0 million are included in accrued expenses and other current liabilities and $2.4 million are included in other long-term liabilities in the accompanying consolidated balance sheet. At December 31, 2009, restructuring liabilities of $1.8 million are included in accrued expenses and other current liabilities and $0.7 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.

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Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations

Management Overview

        On August 20, 2008, Tree.com, Inc. ("Tree.com") was spun off from its parent company, IAC/InterActiveCorp ("IAC") into a separate publicly traded company. We refer to the separation transaction as the "spin-off." In connection with the spin-off, Tree.com was incorporated as a Delaware corporation in April 2008.

        Tree.com is the parent of LendingTree, LLC and the owner of 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.com SM , HealthTree.com SM , LendingTreeAutos.com, DoneRight.com, and InsuranceTree.com SM . 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, the Exchanges and Real Estate. Additionally, certain shared indirect costs that are described below are reported as "Unallocated—Corporate."

        The expenses presented below for each of the business segments include an allocation of certain corporate expenses that are identifiable and directly benefit those segments. The unallocated expenses are those corporate overhead expenses that are not directly attributable to a segment and include: corporate expenses such as finance, legal, executive, technology support, and human resources, as well as elimination of inter-segment revenue and costs.

        The LendingTree Loans segment originates, processes, approves and funds various residential real estate loans through Home Loan Center, Inc. ("HLC"), (d/b/a LendingTree Loans). The HLC and LendingTree Loans brand names are collectively referred to in these consolidated financial statements as "LendingTree Loans."

        The Exchanges segment consists of online lead generation networks and call centers (principally LendingTree.com, Tree.com, DegreeTree.com, LendingTreeAutos.com and GetSmart.com) that connect consumers and service providers principally in the lending, higher education and automobile marketplaces.

        The Real Estate segment consists of a proprietary full-service real estate brokerage (RealEstate.com, REALTORS®) that operates in 20 U.S. markets, as well as an online lead generation network accessed at www.RealEstate.com , that connects consumers with third party real estate brokerages around the country.

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         Results of operations for the three and six months ended June 30, 2010 compared to the three and six months ended June 30, 2009:

    Revenue

         For the three months ended June 30, 2010 compared to the three months ended June 30, 2009:

 
  Three Months Ended June 30,  
 
  2010   % Change   2009  
 
  (Dollars in thousands)
 

LendingTree Loans:

                   
 

Origination and sale of loans

  $ 24,041     (30 )% $ 34,442  
 

Other

    2,608     44 %   1,815  
                 

Total LendingTree Loans

    26,649     (26 )%   36,257  

Exchanges:

                   
 

Match fees

    11,659     18 %   9,903  
 

Closed loan fees

    2,025     (69 )%   6,432  
 

Other

    751     28 %   588  
 

Inter-segment revenue

    7,471     102 %   3,707  
                 

Total Exchanges

    21,906     6 %   20,630  

Real Estate

    4,713     (40 )%   7,793  

Inter-segment revenue

    (7,471 )   102 %   (3,707 )
                 

Total revenue

  $ 45,797     (25 )% $ 60,973  
                 

        LendingTree Loans revenue in 2010 decreased $9.6 million, or 26%, from the same period in 2009. Revenue generated from the origination and sale of loans decreased $10.4 million, or 30%. The total dollar value of loans closed declined by 32% during 2010, even though the number of consumer loan requests increased by 20% in the same period. The resulting decrease in loan closing rates was primarily driven by tight secondary credit markets that are unable to serve many consumers who do not have sufficient collateral value or are not eligible for conforming prime first-lien position loans.

        The dollar value of loans closed directly by LendingTree Loans is as follows:

 
  Three Months Ended
June 30,
 
 
  2010   % Change   2009  
 
  (Dollars in millions)
 

Refinance mortgages

  $ 533     (34 )% $ 812  

Purchase mortgages

    78     (10 )%   86  
                 

Total

  $ 611     (32 )% $ 898  
                 

        LendingTree Loans originates mortgage loans on property located throughout the United States. Revenue from loans originated for property in California totaled approximately 9% and 16% of Tree.com's consolidated revenue for the three months ended June 30, 2010 and 2009, respectively.

        Revenue from the Exchanges in 2010 increased $1.3 million, or 6%, from the same period in 2009 due primarily to an increase in inter-segment revenue from sales of consumer mortgage leads to LendingTree Loans, reflecting both an expansion of consumer volume LendingTree Loans takes to include direct consumer calls and a higher transfer price due to increased marketing costs to acquire leads. Overall matched requests in the second quarter of 2010 declined 19% from the same period in 2009, which reflects a decline of 47% in home loan matches and an increase of 209% in matches for the new consumer vertical areas of higher education, home services and insurance. Home loan matches

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were down because of the expansion of volume taken by LendingTree Loans and many lenders experiencing their own high levels of organic lead volume during this low interest rate environment. Matches in new consumer verticals have grown as a result of both business acquisitions completed in 2009 and increased marketing spending. The overall impact on match fees was an increase of 18%, reflecting a shift in pricing on home loan related matches to increase the average match fee (and decrease the average closed loan fee). Also impacting the revenue from closed loan fees was a 38% decline in closed units in the period as a result of the decline in matched loan requests.

        The dollar value of loans closed by Exchange network lenders is as follows:

 
  Three Months Ended June 30,  
 
  2010   % Change   2009  
 
  (Dollars in millions)
 

Refinance mortgages

  $ 704     (63 )% $ 1,882  

Purchase mortgages

    723     22 %   590  

Other

    54     (62 )%   141  
                 

Total

  $ 1,481     (43 )% $ 2,613  
                 

        No single Exchange network lender accounts for revenue representing more than 10% of Tree.com's consolidated revenue for any periods presented.

        Real Estate revenue in 2010 decreased $3.1 million, or 40%, from the same period in 2009 principally due to a decrease in closings due to the persistent negative real estate market conditions contributing to lower home sales prices and fewer real estate transactions overall. In addition, the Company consolidated three office locations in the fourth quarter of 2009, which resulted in lower agent count and transactions in 2010. The dollar value of the Company's real estate closings decreased 40% in 2010, from $332 million in 2009 to $200 million in 2010.

         For the six months ended June 30, 2010 compared to the six months ended June 30, 2009:

 
  Six Months Ended June 30,  
 
  2010   % Change   2009  
 
  (Dollars in thousands)
 

LendingTree Loans:

                   
 

Origination and sale of loans

  $ 47,441     (29 )%