UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2012
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)
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Delaware |
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26-2414818 |
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(State or other jurisdiction of |
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(I.R.S. Employer |
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incorporation or organization) |
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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 x 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company x |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of November 7, 2012 there were 11,366,504 shares of the registrant’s common stock, par value $.01 per share, outstanding, excluding treasury shares.
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Page |
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3 | ||
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
26 | |
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36 | ||
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37 | ||
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38 | ||
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39 | ||
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39 | ||
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39 | ||
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41 |
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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2012 |
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2011 |
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2012 |
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2011 |
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(In thousands, except per share amounts) |
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Revenue |
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$ |
23,296 |
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$ |
13,101 |
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$ |
53,501 |
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$ |
43,951 |
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Costs and expenses |
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Cost of revenue |
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1,231 |
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1,001 |
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2,830 |
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3,529 |
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Selling and marketing expense |
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13,376 |
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8,475 |
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34,997 |
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39,246 |
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General and administrative expense |
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5,532 |
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4,388 |
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16,166 |
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15,059 |
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Product development |
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853 |
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681 |
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2,383 |
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2,677 |
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Litigation settlements and contingencies |
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510 |
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212 |
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948 |
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5,206 |
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Restructuring expense (gain) |
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(48 |
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498 |
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(109 |
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990 |
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Amortization of intangibles |
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101 |
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213 |
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314 |
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787 |
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Depreciation |
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934 |
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1,393 |
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3,204 |
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3,677 |
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Asset impairments |
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— |
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— |
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— |
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29,250 |
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Total costs and expenses |
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22,489 |
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16,861 |
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60,733 |
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100,421 |
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Operating income (loss) |
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807 |
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(3,760 |
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(7,232 |
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(56,470 |
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Other expense |
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Interest expense |
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(349 |
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(110 |
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(606 |
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(266 |
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Total other expense, net |
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(349 |
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(110 |
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(606 |
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(266 |
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Income (loss) before income taxes |
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458 |
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(3,870 |
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(7,838 |
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(56,736 |
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Income tax benefit (provision) |
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(188 |
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464 |
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3,086 |
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12,128 |
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Net income (loss) from continuing operations |
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270 |
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(3,406 |
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(4,752 |
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(44,608 |
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Gain from sale of discontinued operations, net of tax |
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— |
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7,752 |
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24,313 |
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7,752 |
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Income (loss) from operations of discontinued operations, net of tax |
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4,112 |
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8,969 |
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24,745 |
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(23,829 |
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Income (loss) from discontinued operations |
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4,112 |
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16,721 |
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49,058 |
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(16,077 |
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Net income (loss) attributable to common shareholders |
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$ |
4,382 |
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$ |
13,315 |
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$ |
44,306 |
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$ |
(60,685 |
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Weighted average common shares outstanding |
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11,389 |
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11,037 |
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11,293 |
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10,978 |
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Weighted average diluted shares outstanding |
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12,003 |
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11,037 |
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11,293 |
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10,978 |
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Net income (loss) per share from continuing operations |
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Basic |
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$ |
0.02 |
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$ |
(0.31 |
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$ |
(0.42 |
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$ |
(4.06 |
) |
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Diluted |
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$ |
0.02 |
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$ |
(0.31 |
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$ |
(0.42 |
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$ |
(4.06 |
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Net income (loss) per share from discontinued operations |
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Basic |
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$ |
0.36 |
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$ |
1.52 |
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$ |
4.34 |
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$ |
(1.47 |
) |
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Diluted |
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$ |
0.35 |
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$ |
1.52 |
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$ |
4.34 |
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$ |
(1.47 |
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Net income (loss) per share attributable to common shareholders |
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Basic |
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$ |
0.38 |
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$ |
1.21 |
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$ |
3.92 |
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$ |
(5.53 |
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Diluted |
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$ |
0.37 |
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$ |
1.21 |
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$ |
3.92 |
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$ |
(5.53 |
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The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
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September 30, |
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December 31, |
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(unaudited) |
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ASSETS: |
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Cash and cash equivalents |
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$ |
89,780 |
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$ |
45,541 |
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Restricted cash and cash equivalents |
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29,425 |
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12,451 |
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Accounts receivable, net of allowance of $94 and $86, respectively |
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10,415 |
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5,474 |
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Prepaid and other current assets |
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1,524 |
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1,060 |
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Current assets of discontinued operations |
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479 |
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232,425 |
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Total current assets |
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131,623 |
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296,951 |
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Property and equipment, net |
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6,924 |
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8,375 |
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Goodwill |
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3,632 |
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3,632 |
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Intangible assets, net |
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10,874 |
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11,189 |
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Other non-current assets |
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166 |
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246 |
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Non-current assets of discontinued operations |
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236 |
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10,947 |
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Total assets |
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$ |
153,455 |
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$ |
331,340 |
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LIABILITIES: |
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Accounts payable, trade |
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$ |
3,963 |
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$ |
9,072 |
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Deferred revenue |
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1,162 |
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176 |
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Deferred income taxes |
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4,335 |
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4,335 |
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Accrued expenses and other current liabilities |
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17,367 |
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16,712 |
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Current liabilities of discontinued operations |
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31,784 |
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250,030 |
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Total current liabilities |
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58,611 |
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280,325 |
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Income taxes payable |
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— |
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7 |
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Other long-term liabilities |
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1,094 |
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4,070 |
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Deferred income taxes |
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568 |
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435 |
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Non-current liabilities of discontinued operations |
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331 |
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1,032 |
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Total liabilities |
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60,604 |
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285,869 |
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Commitments and contingencies (Note 9) |
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SHAREHOLDERS’ EQUITY: |
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Preferred stock $.01 par value; authorized 5,000,000 shares; none issued or outstanding |
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— |
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— |
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Common stock $.01 par value; authorized 50,000,000 shares; issued 12,546,501 and 12,169,226 shares, respectively, and outstanding 11,393,804 and 11,045,965 shares, respectively |
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125 |
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121 |
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Additional paid-in capital |
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915,417 |
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911,987 |
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Accumulated deficit |
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(813,799 |
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(858,105 |
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Treasury stock of 1,152,697 and 1,123,261 shares, respectively |
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(8,892 |
) |
(8,532 |
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Total shareholders’ equity |
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92,851 |
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45,471 |
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Total liabilities and shareholders’ equity |
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$ |
153,455 |
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$ |
331,340 |
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The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)
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Common Stock |
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Treasury Stock |
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Number |
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Additional |
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Number |
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of |
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Paid-in |
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Accumulated |
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of |
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Total |
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Shares |
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Amount |
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Capital |
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Deficit |
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Shares |
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Amount |
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(In thousands) |
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Balance as of December 31, 2011 |
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$ |
45,471 |
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12,169 |
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$ |
121 |
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$ |
911,987 |
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$ |
(858,105 |
) |
1,123 |
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$ |
(8,532 |
) |
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Comprehensive income: |
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Net income for the nine months ended September 30, 2012 |
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44,306 |
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— |
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— |
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— |
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44,306 |
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— |
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— |
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Non-cash compensation |
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3,735 |
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— |
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— |
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3,735 |
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— |
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— |
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— |
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Issuance of common stock upon exercise of stock options and vesting of restricted stock units, net of withholding taxes |
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(301 |
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377 |
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4 |
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(305 |
) |
— |
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— |
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— |
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Purchase of treasury stock |
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(360 |
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— |
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— |
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— |
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— |
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30 |
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(360 |
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Balance as of September 30, 2012 |
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$ |
92,851 |
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12,546 |
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$ |
125 |
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$ |
915,417 |
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$ |
(813,799 |
) |
1,153 |
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$ |
(8,892 |
) |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
TREE.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine Months |
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2012 |
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2011 |
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(In thousands) |
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Cash flows from operating activities attributable to continuing operations: |
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Net income (loss) |
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$ |
44,306 |
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$ |
(60,685 |
) |
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Less (income) loss from discontinued operations, net of tax |
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(49,058 |
) |
16,077 |
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Net loss from continuing operations |
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(4,752 |
) |
(44,608 |
) | ||
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Adjustments to reconcile net loss from continuing operations to net cash used in operating activities attributable to continuing operations: |
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Loss on disposal of fixed assets |
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344 |
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210 |
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Amortization of intangibles |
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314 |
|
787 |
| ||
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Depreciation |
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3,204 |
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3,677 |
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Intangible impairment |
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— |
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29,250 |
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Non-cash compensation expense |
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3,565 |
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2,731 |
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Deferred income taxes |
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134 |
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(12,144 |
) | ||
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Bad debt expense (recovery) |
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(4 |
) |
32 |
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Changes in current assets and liabilities: |
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Accounts receivable |
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(4,938 |
) |
(1,911 |
) | ||
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Prepaid and other current assets |
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401 |
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(122 |
) | ||
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Accounts payable and other current liabilities |
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(2,492 |
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385 |
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Income taxes payable |
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(658 |
) |
(58 |
) | ||
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Deferred revenue |
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986 |
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(96 |
) | ||
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Other, net |
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(410 |
) |
988 |
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Net cash used in operating activities attributable to continuing operations |
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(4,306 |
) |
(20,879 |
) | ||
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Cash flows from investing activities attributable to continuing operations: |
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Capital expenditures |
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(2,046 |
) |
(5,480 |
) | ||
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Increase in restricted cash |
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(4,047 |
) |
(1,488 |
) | ||
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Net cash used in investing activities attributable to continuing operations |
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(6,093 |
) |
(6,968 |
) | ||
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Cash flows from financing activities attributable to continuing operations: |
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Vesting and issuance of common stock, net of withholding taxes |
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(301 |
) |
(950 |
) | ||
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Purchase of treasury stock |
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(360 |
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— |
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(Increase) decrease in restricted cash |
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4,150 |
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(3,325 |
) | ||
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Net cash provided by (used in) financing activities attributable to continuing operations |
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3,489 |
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(4,275 |
) | ||
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Total cash used in continuing operations |
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(6,910 |
) |
(32,122 |
) | ||
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Net cash provided by (used in) operating activities attributable to discontinued operations |
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222,885 |
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(58,317 |
) | ||
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Net cash provided by (used in) investing activities attributable to discontinued operations |
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25,923 |
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(9,310 |
) | ||
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Net cash provided by (used in) financing activities attributable to discontinued operations |
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(197,659 |
) |
41,261 |
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Total cash provided by (used in) discontinued operations |
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51,149 |
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(26,366 |
) | ||
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Net increase (decrease) in cash and cash equivalents |
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44,239 |
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(58,488 |
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Cash and cash equivalents at beginning of period |
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45,541 |
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68,819 |
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Cash and cash equivalents at end of period |
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$ |
89,780 |
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$ |
10,331 |
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The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
TREE.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1—ORGANIZATION
Company Overview
Tree.com, Inc. (“we”, “Tree.com” or the “Company”) is the parent of LendingTree, LLC, which owns several brands and businesses that provide information, tools, advice, products and services for critical transactions in consumers’ lives. Our family of brands includes: LendingTree.com®, GetSmart®, DegreeTree®, LendingTreeAutos, DoneRight®, ServiceTreeSM, InsuranceTree® and HealthTree. Together, these brands serve as an ally for consumers who are looking to comparison shop for loans and other services from multiple businesses and professionals who will compete for their business. We refer to the collection of these brands and businesses as our Exchanges business, which comprises our continuing operations, as detailed herein.
Segment Reporting
Through the quarter ended March 31, 2011, we operated in two reportable business segments: LendingTree Loans and Exchanges. Until the completion on June 6, 2012 of the sale of substantially all of the operating assets of our LendingTree Loans business to a wholly-owned subsidiary of Discover Financial Services, discussed below and in Note 6, the LendingTree Loans segment originated, processed, approved and funded various residential real estate loans through Home Loan Center, Inc. dba LendingTree Loans (“HLC”). The business operated by HLC under the HLC and LendingTree Loans brand names is referred to in this report as “LendingTree Loans.” Discover Financial Services and/or any of its affiliates are collectively referred to in this report as “Discover.”
The Exchanges segment consists of online lead generation networks and call centers that connect consumers and service providers principally in the lending, higher education, automobile, home services and insurance marketplaces.
In connection with entering into the agreement in the second quarter of 2011 that provided for the sale of substantially all of the operating assets of our LendingTree Loans business, management re-evaluated its reporting segments based on our continuing operations and determined that our continuing operations were one reportable segment, which represents the previous “Exchanges” segment. Prior period results have been reclassified to conform with discontinued operations presentation and the change in reportable segments.
We maintain operations solely in the United States.
Discontinued Operations
The businesses of RealEstate.com and RealEstate.com, REALTORS® (which together represent the former Real Estate segment) and LendingTree Loans are presented as discontinued operations in the accompanying consolidated balance sheets and consolidated statements of operations and cash flows for all periods presented. The notes accompanying these consolidated financial statements reflect our continuing operations and, unless otherwise noted, exclude information related to the discontinued operations.
Real Estate
On March 10, 2011, management made the decision and finalized a plan to close all of the field offices of the proprietary full-service real estate brokerage business known as RealEstate.com, REALTORS®. We exited all markets in which we previously operated by March 31, 2011. In September 2011, we sold the remaining assets of RealEstate.com, which consisted primarily of internet domain names and trademarks, for $8.3 million and recognized a gain on sale of $7.8 million.
LendingTree Loans
On May 12, 2011, we entered into an asset purchase agreement, as amended by an amendment to the asset purchase agreement dated as of February 7, 2012, for the sale of substantially all of the operating assets of our LendingTree Loans business. We completed the sale on June 6, 2012.
The asset purchase agreement as amended provided for a purchase price of approximately $55.9 million in cash for the assets, subject to certain conditions. Of this total purchase price, $8.0 million was paid prior to the closing, $37.9 million was paid upon the closing and $10.0 million is due on the first anniversary of the closing, subject to us meeting certain conditions.
Discover generally did not assume liabilities of the LendingTree Loans business that arose before the closing date, except for certain liabilities directly related to assets Discover acquired. Approximately $17.1 million of the initial purchase price payment is being held in escrow pending resolution of certain actual and/or contingent liabilities that remain with us following the sale. The escrowed amount is recorded as restricted cash at September 30, 2012.
Separate from the asset purchase agreement, we agreed to provide certain marketing-related services to Discover in connection with its mortgage origination business for approximately seventeen months following the closing, or such earlier point as the agreed-upon services are satisfactorily completed. Discover is also now a participating lender on our lending network.
The unaudited pro forma financial information in the table below summarizes our results as if the sale of substantially all of the operating assets of LendingTree Loans had occurred as of January 1, 2011. The unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of what the results would have been had the sale occurred as of January 1, 2011.
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Nine Months |
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Nine Months |
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Revenue |
|
$ |
53,501 |
|
$ |
43,951 |
|
|
Net loss from continuing operations |
|
(4,752 |
) |
(44,608 |
) | ||
|
Net loss attributable to common shareholders |
|
(4,752 |
) |
(44,608 |
) | ||
|
Basic earnings per share attributable to common shareholders |
|
(0.42 |
) |
(4.06 |
) | ||
|
Diluted earnings per share attributable to common shareholders |
|
(0.42 |
) |
(4.06 |
) | ||
Business Combinations
On March 15, 2011, our wholly-owned subsidiary, HLC, completed its acquisition of certain assets of First Residential Mortgage Network, Inc. dba SurePoint Lending, pursuant to an asset purchase agreement dated November 15, 2010. SurePoint, a LendingTree network lender for eleven years, was a full-service residential mortgage provider licensed in 45 states and employed over 500 people, including more than 300 licensed loan officers. HLC purchased certain specified assets and assumed certain liabilities of SurePoint related to its business of originating, refinancing, processing, underwriting, funding and closing residential mortgage loans; providing title and escrow services; and providing other mortgage-related services. The acquired assets also included the equity interests of Real Estate Title Services, LLC. HLC paid $8.0 million in cash upon the closing of the transaction, subject to certain adjustments as described in the asset purchase agreement, and $0.2 million in cash for contingent consideration subsequent to the close. HLC used available cash to fund the acquisition.
This asset purchase was accounted for under the acquisition method of accounting. Accordingly, the purchase price was allocated to the acquired assets and liabilities based on their estimated fair values at the acquisition date. The purchase price was allocated as $5.6 million to goodwill, $0.7 million to intangible assets with useful lives of three months to five years, and $1.7 million to equipment and other assets. The pro forma effect of this purchase was not material to our results of operations.
Correction of an Error
As disclosed in our Form 10-K for the year ended December 31, 2011, during the process of preparing our financial statements for the year ended December 31, 2011, we determined that a $29.0 million impairment charge related to trade names and trademarks that we determined to exist as of October 1, 2011, as determined in our annual impairment testing, should have been recorded in the second quarter of 2011 pursuant to the impairment test we performed as a result of our entry into the asset purchase agreement for the sale of substantially all of the assets of our LendingTree Loans business. As a result of this error, certain previously reported amounts in the condensed consolidated financial statements for the quarter ended September 30, 2011 were materially misstated; accordingly we have restated the prior period financial statements.
The restated condensed consolidated statement of operations for the three months ended September 30, 2011 is as follows:
|
|
|
As Previously |
|
Impairment |
|
As Restated |
| |||
|
Income tax benefit |
|
$ |
185 |
|
$ |
279 |
|
$ |
464 |
|
|
Net loss from continuing operations |
|
(3,685 |
) |
279 |
|
(3,406 |
) | |||
|
Income from operations of discontinued operations, net of tax |
|
8,531 |
|
438 |
|
8,969 |
| |||
|
Income from discontinued operations |
|
16,283 |
|
438 |
|
16,721 |
| |||
|
Net income attributable to common shareholders |
|
12,598 |
|
717 |
|
13,315 |
| |||
|
Basic and diluted net loss per share from continuing operations |
|
(0.33 |
) |
0.02 |
|
(0.31 |
) | |||
|
Basic and diluted net income per share from discontinued operations |
|
1.47 |
|
0.05 |
|
1.52 |
| |||
|
Basic and diluted net income per share attributable to common shareholders |
|
1.14 |
|
0.07 |
|
1.21 |
| |||
The restated condensed consolidated statement of operations for the nine months ended September 30, 2011 is as follows:
|
|
|
As Previously |
|
Impairment |
|
As Restated |
| |||
|
Asset impairments |
|
$ |
250 |
|
$ |
29,000 |
|
$ |
29,250 |
|
|
Total costs and expenses |
|
71,421 |
|
29,000 |
|
100,421 |
| |||
|
Operating loss |
|
(27,470 |
) |
(29,000 |
) |
(56,470 |
) | |||
|
Loss before income taxes |
|
(27,736 |
) |
(29,000 |
) |
(56,736 |
) | |||
|
Income tax benefit (provision) |
|
(117 |
) |
12,245 |
|
12,128 |
| |||
|
Net loss from continuing operations |
|
(27,853 |
) |
(16,755 |
) |
(44,608 |
) | |||
|
Loss from operations of discontinued operations, net of tax |
|
(24,615 |
) |
786 |
|
(23,829 |
) | |||
|
Loss from discontinued operations |
|
(16,863 |
) |
786 |
|
(16,077 |
) | |||
|
Net loss attributable to common shareholders |
|
(44,716 |
) |
(15,969 |
) |
(60,685 |
) | |||
|
Basic and diluted net loss per share from continuing operations |
|
(2.54 |
) |
(1.52 |
) |
(4.06 |
) | |||
|
Basic and diluted net loss per share from discontinued operations |
|
(1.53 |
) |
0.06 |
|
(1.47 |
) | |||
|
Basic and diluted net loss per share from attributable to common shareholders |
|
(4.07 |
) |
(1.46 |
) |
(5.53 |
) | |||
The restated cash flows from operating activities section of the condensed consolidated statement of cash flows for the nine months ended September 30, 2011 is as follows:
|
|
|
As Previously |
|
Impairment |
|
As Restated |
| |||
|
Cash Flows from Operating Activities: |
|
|
|
|
|
|
| |||
|
Net loss |
|
$ |
(44,716 |
) |
$ |
(15,969 |
) |
$ |
(60,685 |
) |
|
Less loss from discontinued operations, net of tax |
|
16,863 |
|
(786 |
) |
16,077 |
| |||
|
Net loss from continuing operations |
|
(27,853 |
) |
(16,755 |
) |
(44,608 |
) | |||
|
Intangible impairment |
|
250 |
|
29,000 |
|
29,250 |
| |||
|
Deferred income taxes |
|
101 |
|
(12,245 |
) |
(12,144 |
) | |||
Out of Period Adjustment
Our results of operations for the three and nine months ended September 30, 2012 include a reduction to net income of approximately $0.3 million resulting from additional interest expense related to our shares of Series A Redeemable Preferred Stock of a wholly-owned subsidiary of Tree.com that should have been recorded as a reduction to net income or increase to net loss from the third quarter of 2008 through the third quarter of 2012. Because the amounts are not material to our consolidated financial statements in any prior period, and the cumulative amount is not expected to be material to the results of operations for the full year 2012, we recorded the cumulative effect of correcting these items during the three months ended September 30, 2012.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements as of September 30, 2012 and 2011 and for the three and nine months then ended have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of 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 our financial position for the periods presented. The results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the year ending December 31, 2012, or any other period. These financial statements and notes should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2011.
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
Accounting Estimates
Management is required to make certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with 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, including discontinued operations, 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.
Concentrations
One customer on our networks accounted for revenue representing 22% and 11% for the three and nine months ended September 30, 2012, respectively. No customer accounted for more than 10% of revenue for the three or nine months ended September 30, 2011.
Cash and Cash Equivalents
Cash and cash equivalents include cash and short-term, highly liquid money market investments with original maturities of three months or less.
Restricted Cash
Restricted cash and cash equivalents consists of the following (in thousands):
|
|
|
September 30, |
|
December 31, |
| ||
|
Cash in escrow for loan loss obligations |
|
$ |
20,127 |
|
$ |
— |
|
|
Cash in escrow for surety bonds |
|
6,501 |
|
6,500 |
| ||
|
Cash in escrow for corporate purchasing card program |
|
800 |
|
800 |
| ||
|
Minimum required balances for warehouse lines of credit |
|
— |
|
4,250 |
| ||
|
Other |
|
1,997 |
|
901 |
| ||
|
Total restricted cash and cash equivalents |
|
$ |
29,425 |
|
$ |
12,451 |
|
Cash in escrow for loan loss obligations includes $17.1 million held in escrow pursuant to the asset purchase agreement for the sale of substantially all of the operating assets of our LendingTree Loans business, pending the resolution of certain actual and/or contingent liabilities that remain with us following the closing of such sale, and $3.0 million is held by an investor that purchased loans from LendingTree Loans to secure potential loan loss obligations.
Revenue Recognition
Revenue principally represents match fees and closed-loan fees paid by lenders that received a transmitted loan request and/or closed a loan for a consumer that originated through one of our websites or affiliates. Revenue also includes match fees paid by institutions of higher education and businesses and professionals in the automobile, home services and insurance industries for a transmitted lead or service request. Match fees are recognized at the time qualification forms are transmitted. Closed-loan fees are recognized at the time the lender reports the closed loan to us, which may be several months after the loan request is transmitted. Revenue also includes fees paid by advertisers on our websites. In addition, during the nine months ended September 30, 2012, we recognized approximately $1.3 million of revenue from marketing-related services provided to Discover discussed above, which is recognized in the period the services are provided.
Recent Accounting Pronouncements
In May 2011, the FASB issued amendments to the fair value accounting guidance. The amendments clarify the application of the highest and best use, and valuation premise concepts, preclude the application of blockage factors in the valuation of all financial instruments and include criteria for applying the fair value measurement principles to portfolios of financial instruments. The amendments additionally prescribe enhanced financial statement disclosures for Level 3 fair value measurements. The new amendments were effective on January 1, 2012. The adoption of this guidance did not have a material impact on our consolidated financial statements. See Note 6 for further information.
In September 2011, the FASB issued the updated accounting standard on testing goodwill for impairment. The update simplifies how an entity tests goodwill for impairment. The amendments allow both public and nonpublic entities an option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under that option, an entity no longer would be required to calculate the fair value of a reporting unit unless the entity determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments were effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In December 2011, the FASB issued new accounting guidance that requires additional disclosures on financial instruments and derivative instruments that are either offset in accordance with existing accounting guidance or are subject to an enforceable master netting arrangement or similar agreement. The new requirements do not change the accounting guidance on netting, but rather enhance the disclosures to more clearly show the impact of netting arrangements on a company’s financial position. This new accounting guidance will be effective, on a retrospective basis for all comparative periods presented, beginning on January 1, 2013. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
In July 2012, the FASB issued new guidance which allows an entity to first assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. This assessment should be used as a basis for determining whether it is necessary to perform the quantitative impairment test. An entity would not be required to calculate the fair value of the intangible asset and perform the quantitative test unless the entity determines, based upon its qualitative assessment, that it is more likely than not that its fair value is less than its carrying value. The update expands previous guidance by providing more examples of events and circumstances that an entity should consider in determining whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. The update also allows an entity the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent
period. This update is effective for annual and interim periods beginning after September 15, 2012, with early adoption permitted. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
NOTE 3—GOODWILL AND INTANGIBLE ASSETS
The balance of goodwill and intangible assets, net is as follows (in thousands):
|
|
|
September 30, |
|
December 31, |
| ||
|
Goodwill |
|
$ |
3,632 |
|
$ |
3,632 |
|
|
Intangible assets with indefinite lives |
|
$ |
10,142 |
|
$ |
10,142 |
|
|
Intangible assets with definite lives, net |
|
732 |
|
1,047 |
| ||
|
Total intangible assets, net |
|
$ |
10,874 |
|
$ |
11,189 |
|
Intangible assets with indefinite lives relate principally to the LendingTree trademark.
At September 30, 2012, intangible assets with definite lives relate to the following (in thousands):
|
|
|
Cost |
|
Accumulated |
|
Net |
|
Weighted |
| |||
|
Purchase agreements |
|
$ |
50,411 |
|
$ |
(50,329 |
) |
$ |
82 |
|
5.0 |
|
|
Technology |
|
25,194 |
|
(25,142 |
) |
52 |
|
3.0 |
| |||
|
Customer lists |
|
6,682 |
|
(6,090 |
) |
592 |
|
4.2 |
| |||
|
Other |
|
1,516 |
|
(1,510 |
) |
6 |
|
2.5 |
| |||
|
Total |
|
$ |
83,803 |
|
$ |
(83,071 |
) |
$ |
732 |
|
|
|
At December 31, 2011, intangible assets with definite lives relate to the following (in thousands):
|
|
|
Cost |
|
Accumulated |
|
Net |
|
Weighted |
| |||
|
Purchase agreements |
|
$ |
50,411 |
|
$ |
(50,293 |
) |
$ |
118 |
|
5.0 |
|
|
Technology |
|
25,194 |
|
(25,034 |
) |
160 |
|
3.0 |
| |||
|
Customer lists |
|
6,682 |
|
(6,045 |
) |
637 |
|
4.2 |
| |||
|
Other |
|
1,516 |
|
(1,384 |
) |
132 |
|
2.5 |
| |||
|
Total |
|
$ |
83,803 |
|
$ |
(82,756 |
) |
$ |
1,047 |
|
|
|
Amortization of intangible assets with definite lives is computed on a straight-line basis and, based on September 30, 2012 balances, such amortization for the next five years is estimated to be as follows (in thousands):
|
|
|
Amount |
| |
|
Three months ending December 31, 2012 |
|
$ |
43 |
|
|
Year ending December 31, 2013 |
|
147 |
| |
|
Year ending December 31, 2014 |
|
86 |
| |
|
Year ending December 31, 2015 |
|
60 |
| |
|
Year ending December 31, 2016 |
|
60 |
| |
|
Thereafter |
|
336 |
| |
|
Total |
|
$ |
732 |
|
NOTE 4—PROPERTY AND EQUIPMENT
The balance of property and equipment, net is as follows (in thousands):
|
|
|
September 30, |
|
December 31, |
| ||
|
Computer equipment and capitalized software |
|
$ |
26,571 |
|
$ |
24,940 |
|
|
Leasehold improvements |
|
2,055 |
|
2,042 |
| ||
|
Furniture and other equipment |
|
1,488 |
|
1,450 |
| ||
|
Projects in progress |
|
612 |
|
826 |
| ||
|
|
|
30,726 |
|
29,258 |
| ||
|
Less: accumulated depreciation and amortization |
|
(23,802 |
) |
(20,883 |
) | ||
|
Total property and equipment, net |
|
$ |
6,924 |
|
$ |
8,375 |
|
NOTE 5—ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following (in thousands):
|
|
|
September 30, |
|
December 31, |
| ||
|
Litigation accruals |
|
$ |
500 |
|
$ |
3,077 |
|
|
Accrued advertising expense |
|
5,044 |
|
2,659 |
| ||
|
Accrued compensation and benefits |
|
4,776 |
|
624 |
| ||
|
Accrued professional fees |
|
1,019 |
|
635 |
| ||
|
Accrued restructuring costs |
|
341 |
|
439 |
| ||
|
Customer deposits and escrows |
|
1,941 |
|
2,211 |
| ||
|
Deferred rent |
|
212 |
|
186 |
| ||
|
Other |
|
3,534 |
|
6,881 |
| ||
|
Total accrued expenses and other current liabilities |
|
$ |
17,367 |
|
$ |
16,712 |
|
Accrued compensation and benefits at September 30, 2012 includes $3.1 million of compensation that was previously classified as a long-term liability, but became a current liability in the third quarter of 2012 as the amount is payable within twelve months of September 30, 2012. See Note 10—Subsequent Event for further information. The other category above reflects franchise taxes, self-insured health claims and other miscellaneous accrued expenses.
An additional $0.6 million and $0.9 million of accrued restructuring liabilities are classified in other long term liabilities at September 30, 2012 and December 31, 2011, respectively.
NOTE 6—DISCONTINUED OPERATIONS
On March 10, 2011, management made the decision and finalized a plan to close all of the field offices of the proprietary full-service real estate brokerage business known as RealEstate.com, REALTORS®. We exited all markets by March 31, 2011. In September 2011, we sold the remaining assets of RealEstate.com, which consisted primarily of internet domain names and trademarks. Accordingly, these Real Estate businesses are presented as discontinued operations in the accompanying consolidated balance sheets and consolidated statements of operations and cash flows for all periods presented. No significant future cash flows are anticipated from the disposition of this business.
On May 12, 2011, we entered into an asset purchase agreement that provided for the sale of substantially all of the operating assets of our LendingTree Loans business to Discover. On February 7, 2012, we entered into an amendment to the asset purchase agreement. We completed the sale on June 6, 2012. Discover is now a participating lender on our lending network. We have evaluated the facts and circumstances of the transaction and the applicable accounting guidance for discontinued operations, and have concluded that the LendingTree Loans business should be reflected as discontinued operations in the accompanying consolidated balance sheets and consolidated statements of operations and cash flows for all periods presented. The continuing cash flows related to this transaction are not significant, and accordingly, are not deemed to be direct cash flows of the divested business.
We have agreed to indemnify Discover for a breach or inaccuracy of any representation, warranty or covenant made by us in the asset purchase agreement, for any liability of ours that was not assumed, for any claims by our stockholders against Discover and for our failure to comply with any applicable bulk sales law, subject to certain limitations. Discover has submitted a claim for indemnification relating to our sale prior to the closing of certain loans that were listed in the asset purchase agreement as to be conveyed to Discover at closing. We have evaluated this matter as a potential loss contingency, and have determined that it is probable that a loss could be incurred. We also evaluated a range of potential losses, and a reserve of $1.6 million has been established for this matter, which is reflected as a reduction in gain from sale of discontinued operations and in current liabilities of discontinued operations.
The revenue and net loss for the Real Estate businesses that are reported as discontinued operations for the applicable periods were as follows (in thousands):
|
|
|
Three Months |
| ||||
|
|
|
2012 |
|
2011 |
| ||
|
Revenue |
|
$ |
2 |
|
$ |
515 |
|
|
Loss before income taxes |
|
$ |
(282 |
) |
$ |
(637 |
) |
|
Income tax provision |
|
— |
|
— |
| ||
|
Gain from sale of discontinued operations |
|
— |
|
7,752 |
| ||
|
Net income (loss) |
|
$ |
(282 |
) |
$ |
7,115 |
|
|
|
|
Nine Months Ended |
| ||||
|
|
|
2012 |
|
2011 |
| ||
|
Revenue |
|
$ |
77 |
|
$ |
3,633 |
|
|
Loss before income taxes |
|
$ |
(442 |
) |
$ |
(16,936 |
) |
|
Income tax provision |
|
— |
|
— |
| ||
|
Gain from sale of discontinued operations |
|
— |
|
7,752 |
| ||
|
Net loss |
|
$ |
(442 |
) |
$ |
(9,184 |
) |
Net loss for the nine months ended September 30, 2011 includes goodwill disposal charges of $8.0 million, intangible asset impairment charges of $4.1 million and restructuring charges of $2.5 million.
The revenue and net income (loss) for LendingTree Loans that are reported as discontinued operations for the applicable periods were as follows (in thousands):
|
|
|
Three Months Ended |
| ||||
|
|
|
2012 |
|
2011 |
| ||
|
Revenue |
|
$ |
5,943 |
|
$ |
37,094 |
|
|
Income before income taxes |
|
$ |
4,470 |
|
$ |
9,606 |
|
|
Income tax provision |
|
(76 |
) |
— |
| ||
|
Net income |
|
$ |
4,394 |
|
$ |
9,606 |
|
|
|
|
Nine Months Ended |
| ||||
|
|
|
2012 |
|
2011 |
| ||
|
Revenue |
|
$ |
87,338 |
|
$ |
81,726 |
|
|
Income (loss) before income taxes |
|
$ |
27,660 |
|
$ |
(6,893 |
) |
|
Income tax provision |
|
(2,473 |
) |
— |
| ||
|
Gain from sale of discontinued operations, net of tax of $1,267 and $-0- |
|
24,313 |
|
— |
| ||
|
Net income (loss) |
|
$ |
49,500 |
|
$ |
(6,893 |
) |
Net income for the nine months ended September 30, 2012 includes intangible asset impairment charges of $1.4 million. Net loss for the nine months ended September 30, 2011 includes restructuring charges of $4.0 million.
The assets and liabilities of Real Estate that are reported as discontinued operations as of September 30, 2012 and December 31, 2011 were as follows (in thousands):
|
|
|
September 30, |
|
December 31, |
| ||
|
Current assets |
|
$ |
— |
|
$ |
33 |
|
|
Current liabilities |
|
390 |
|
702 |
| ||
|
Non-current liabilities |
|
— |
|
54 |
| ||
|
Net liabilities |
|
$ |
(390 |
) |
$ |
(723 |
) |
The assets and liabilities of LendingTree Loans that are reported as discontinued operations as of September 30, 2012 and December 31, 2011 were as follows (in thousands):
|
|
|
September 30, |
|
December 31, |
| ||
|
Loans held for sale |
|
$ |
— |
|
$ |
217,467 |
|
|
Other current assets |
|
479 |
|
14,925 |
| ||
|
Current assets |
|
479 |
|
232,392 |
| ||
|
Property and equipment |
|
— |
|
4,181 |
| ||
|
Goodwill |
|
— |
|
5,579 |
| ||
|
Other non-current assets |
|
236 |
|
1,187 |
| ||
|
Non-current assets |
|
236 |
|
10,947 |
| ||
|
Warehouse lines of credit |
|
— |
|
197,659 |
| ||
|
Other current liabilities |
|
31,394 |
|
56,383 |
| ||
|
Current liabilities |
|
31,394 |
|
254,042 |
| ||
|
Non-current liabilities |
|
331 |
|
978 |
| ||
|
Net liabilities |
|
$ |
(31,010 |
) |
$ |
(11,681 |
) |
Significant Assets and Liabilities of LendingTree Loans
Upon closing of the sale of substantially all of the operating assets of our LendingTree Loans business on June 6, 2012, LendingTree Loans ceased to originate consumer loans and no longer has additional borrowings available under warehouse lines of credit. The remaining operations are being wound down. These wind-down activities have included, among other things, selling the balance of loans held for sale to investors, which is substantially complete, and paying off and then terminating the warehouse lines of credit, which occurred on July 21, 2012. Additionally, liability for losses on previously sold loans will remain with LendingTree Loans. Below is a discussion of these significant items.
Loans Held for Sale
LendingTree Loans originated all of its residential real estate loans with the intent to sell them in the secondary market. Loans held for sale consisted primarily of residential first mortgage loans that were secured by residential real estate throughout the United States.
The following table represents the loans held for sale by type of loan as of September 30, 2012 and December 31, 2011 ($ amounts in thousands):
|
|
|
September 30, 2012 |
|
December 31, 2011 |
| ||||||
|
|
|
Amount |
|
% |
|
Amount |
|
% |
| ||
|
Conforming |
|
$ |
— |
|
— |
% |
$ |
171,375 |
|
79 |
% |
|
FHA |
|
— |
|
— |
% |
40,433 |
|
18 |
% | ||
|
Jumbo |
|
— |
|
— |
% |
5,659 |
|
3 |
% | ||
|
Total |
|
$ |
— |
|
— |
% |
$ |
217,467 |
|
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 September 30, 2012 and December 31, 2011 (in thousands):
|
|
|
As of September 30, 2012 |
| |||||||
|
|
|
Loans on |
|
Loans on |
|
Total Loans |
| |||
|
Aggregate unpaid principal balance |
|
$ |
412 |
|
$ |
— |
|
$ |
412 |
|
|
Difference between fair value and aggregate unpaid principal balance |
|
(412 |
) |
— |
|
(412 |
) | |||
|
Loans on nonaccrual |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
|
|
As of December 31, 2011 |
| |||||||
|
|
|
Loans on |
|
Loans on |
|
Total Loans |
| |||
|
Aggregate unpaid principal balance |
|
$ |
539 |
|
$ |
— |
|
$ |
539 |
|
|
Difference between fair value and aggregate unpaid principal balance |
|
(244 |
) |
— |
|
(244 |
) | |||
|
Loans on nonaccrual |
|
$ |
295 |
|
$ |
— |
|
$ |
295 |
|
There is one repurchased loan included within the loans on nonaccrual status at September 30, 2012 and no repurchased loans included within the loans on nonaccrual status at December 31, 2011. During the nine months ended September 30, 2012, LendingTree Loans repurchased two loans with a total unpaid principal balance of $0.7 million. During the nine months ended September 30, 2011, LendingTree Loans did not repurchase any loans.
Fair Value Measurements
We categorize our 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 which require us to develop our own assumptions, based on the best information available in the circumstances, about the assumptions market participants would use in pricing the asset or liability.
A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Transfers in and out of Level 1, 2 or 3 are recorded at fair value at the beginning of the reporting period.
Following is a description of valuation methodologies used for instruments measured at fair value as well as the general classification of such instruments pursuant to the fair value hierarchy.
LendingTree Loans entered into commitments with consumers to originate loans at specified interest rates (interest rate lock commitments—“IRLCs”). We reported IRLCs as derivative instruments at fair value with changes in fair value being recorded in discontinued operations. IRLCs for loans to be sold to investors using a mandatory or assignment of trade (“AOT”) method were hedged using “to be announced mortgage-backed securities” (“TBA MBS”) and were 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 included, but were 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 were hedged using best-efforts forward delivery commitments and were valued on an individual loan basis using a proprietary database program prior to January 1, 2012. These valuations were based on investor pricing tables stratified by product, note rate and term. The valuations were adjusted at the loan level to consider the servicing release premium and loan pricing adjustments specific to each loan. Effective January 1, 2012, LendingTree Loans began valuing IRLCs for loans sold to investors on a best-efforts
basis using quantitative risk models on a loan level basis. The decision to modify the valuation calculation for IRLCs for loans sold on a best-efforts basis evolved from a desire to achieve principally two goals: 1) to include this portion of the IRLCs into the main operating system we used for fair value (known as QRM), allowing us to improve our estimate of loan funding probability and 2) to include elements of the all-in fair value that we could not previously calculate in the previous models. The most significant data inputs used in the valuation of these IRLCs included, but were not limited to, investor pricing tables stratified by product, note rate and term, adjusted for current market conditions. These valuations were adjusted at the loan level to consider the servicing release premium and loan pricing adjustments specific to each loan. LendingTree Loans applied an anticipated loan funding probability based on its own experience to value IRLCs, which resulted in the classification of these derivatives as Level 3. The value of the underlying loans and the anticipated loan funding probability were the most significant assumptions affecting the valuation of IRLCs. A significant change in the unobservable inputs could have resulted in a significant change in the ending fair value measurement.
Loans held for sale measured at fair value and sold to investors using a mandatory or AOT method were also hedged using TBA MBS and valued using quantitative risk models. The valuation was 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 were hedged using best-efforts forward delivery commitments and were valued using a proprietary database program prior to January 1, 2012. The best-efforts valuations prior to that date were based on daily investor pricing tables stratified by product, note rate and term. These valuations were adjusted at the loan level to consider the servicing release premium and loan pricing adjustments specific to each loan. Effective January 1, 2012, LendingTree Loans began valuing the loans held for sale and sold to investors on a best-efforts basis using quantitative risk models. The most significant data inputs used in the valuation of these loans included investor pricing tables stratified by product, note rate and term, adjusted for current market conditions. Loans held for sale, excluding impaired loans, were classified as Level 2. Loans held for sale measured at fair value that become impaired were transferred from Level 2 to Level 3, as the estimate of fair value was based on LendingTree Loans’ experience considering lien position and current status of the loan. A significant change in the unobservable inputs could have resulted in a significant change in the ending fair value measurement. LendingTree Loans recognized interest income separately from other changes in fair value.
Under LendingTree Loans’ risk management policy, LendingTree Loans economically hedged 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 were 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 were valued using quantitative risk models based primarily on inputs related to characteristics of the MBS stratified by product, coupon and settlement date. These derivatives were classified as Level 2. Prior to January 1, 2012, best-efforts forward delivery commitments were valued using a proprietary database program using investor pricing tables considering the current base loan price. Effective January 1, 2012, best-efforts forward delivery commitments were valued using quantitative risk models based on investor pricing tables stratified by product, note rate and term, adjusted for current market conditions. An anticipated loan funding probability was applied to value best-efforts commitments hedging IRLCs, which resulted in the classification of these contracts as Level 3. The current base loan price and the anticipated loan funding probability were the most significant assumptions affecting the value of the best-efforts commitments. A significant change in the unobservable inputs could have resulted in a significant change in the ending fair value measurement. The best-efforts forward delivery commitments hedging loans held for sale were classified as Level 2, so such contracts were transferred from Level 3 to Level 2 at the time the underlying loan was originated. For the purposes of the tables below, we refer to TBA MBS and best-efforts forward delivery commitments collectively as “Forward Delivery Contracts”.
Assets and liabilities measured at fair value on a recurring basis
The following presents our assets and liabilities that are measured at fair value on a recurring basis at September 30, 2012 and December 31, 2011 (in thousands):
|
|
|
As of September 30, 2012 |
| ||||||||||
|
|
|
Recurring Fair Value Measurements Using |
| ||||||||||
|
|
|
Quoted Market |
|
Significant |
|
Significant |
|
Total |
| ||||
|
Loans held for sale |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
Forward delivery contracts |
|
— |
|
— |
|
— |
|
— |
| ||||
|
Total |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
|
|
As of December 31, 2011 |
| ||||||||||
|
|
|
Recurring Fair Value Measurements Using |
| ||||||||||
|
|
|
Quoted Market |
|
Significant |
|
Significant |
|
Total |
| ||||
|
Loans held for sale |
|
$ |
— |
|
$ |
217,172 |
|
$ |
295 |
|
$ |
217,467 |
|
|
Interest rate lock commitments (“IRLCs”) |
|
— |
|
— |
|
9,122 |
|
9,122 |
| ||||
|
Forward delivery contracts |
|
— |
|
(4,107 |
) |
19 |
|
(4,088 |
) | ||||
|
Total |
|
$ |
— |
|
$ |
213,065 |
|
$ |
9,436 |
|
$ |
222,501 |
|
The following presents the changes in our assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2012 and 2011 (in thousands):
|
|
|
Three Months Ended September 30, 2012 |
| |||||||
|
|
|
Interest Rate |
|
Forward |
|
Loans |
| |||
|
Balance at July 1, 2012 |
|
$ |
— |
|
$ |
— |
|
$ |
167 |
|
|
Transfers into Level 3 |
|
— |
|
— |
|
124 |
| |||
|
Transfers out of Level 3 |
|
— |
|
— |
|
— |
| |||
|
Total net gains (losses) included in earnings (realized and unrealized) |
|
— |
|
— |
|
(380 |
) | |||
|
Purchases, sales, and settlements |
|
|
|
|
|
|
| |||
|
Purchases |
|
— |
|
— |
|
— |
| |||
|
Sales |
|
— |
|
— |
|
90 |
| |||
|
Settlements |
|
— |
|
— |
|
(1 |
) | |||
|
Transfers of IRLCs to closed loans |
|
— |
|
— |
|
— |
| |||
|
Balance at September 30, 2012 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
|
|
Nine Months Ended September 30, 2012 |
| |||||||
|
|
|
Interest Rate |
|
Forward |
|
Loans |
| |||
|
Balance at January 1, 2012 |
|
$ |
9,122 |
|
$ |
19 |
|
$ |
295 |
|
|
Transfers into Level 3 |
|
— |
|
— |
|
564 |
| |||
|
Transfers out of Level 3 |
|
— |
|
(845 |
) |
— |
| |||
|
Total net gains (losses) included in earnings (realized and unrealized) |
|
73,378 |
|
846 |
|
(147 |
) | |||
|
Purchases, sales, and settlements |
|
|
|
|
|
|
| |||
|
Purchases |
|
— |
|
— |
|
— |
| |||
|
Sales |
|
(5,640 |
) |
(20 |
) |
(491 |
) | |||
|
Settlements |
|
(3,401 |
) |
— |
|
(221 |
) | |||
|
Transfers of IRLCs to closed loans |
|
(73,459 |
) |
— |
|
— |
| |||
|
Balance at September 30, 2012 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
|
|
Three Months Ended September 30, 2011 |
| |||||||
|
|
|
Interest Rate |
|
Forward |
|
Loans |
| |||
|
Balance at July 1, 2011 |
|
$ |
6,278 |
|
$ |
220 |
|
$ |
861 |
|
|
Transfers into Level 3 |
|
— |
|
— |
|
72 |
| |||
|
Transfers out of Level 3 |
|
— |
|
(257 |
) |
— |
| |||
|
Total net gains (losses) included in earnings (realized and unrealized) |
|
40,680 |
|
69 |
|
(83 |
) | |||
|
Purchases, sales, and settlements |
|
|
|
|
|
|
| |||
|
Purchases |
|
— |
|
— |
|
— |
| |||
|
Sales |
|
— |
|
— |
|
(538 |
) | |||
|
Settlements |
|
(2,255 |
) |
— |
|
(4 |
) | |||
|
Transfers of IRLCs to closed loans |
|
(31,956 |
) |
— |
|
— |
| |||
|
Balance at September 30, 2011 |
|
$ |
12,747 |
|
$ |
32 |
|
$ |
308 |
|
|
|
|
Nine Months Ended September 30, 2011 |
| |||||||
|
|
|
Interest Rate |
|
Forward |
|
Loans |
| |||
|
Balance at January 1, 2011 |
|
$ |
5,986 |
|
$ |
3 |
|
$ |
884 |
|
|
Transfers into Level 3 |
|
— |
|
— |
|
732 |
| |||
|
Transfers out of Level 3 |
|
— |
|
(215 |
) |
— |
| |||
|
Total net gains (losses) included in earnings (realized and unrealized) |
|
81,847 |
|
302 |
|
(86 |
) | |||
|
Purchases, sales, and settlements |
|
|
|
|
|
|
| |||
|
Purchases(a) |
|
970 |
|
(58 |
) |
— |
| |||
|
Sales |
|
— |
|
— |
|
(1,041 |
) | |||
|
Settlements |
|
(8,252 |
) |
— |
|
(181 |
) | |||
|
Transfers of IRLCs to closed loans |
|
(67,804 |
) |
— |
|
— |
| |||
|
Balance at September 30, 2011 |
|
$ |
12,747 |
|
$ |
32 |
|
$ |
308 |
|
(a) Purchased in conjunction with the acquisition of certain assets of SurePoint.
The following presents the gains (losses) included in earnings for the three and nine months ended September 30, 2012 and 2011 relating to our assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):
|
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||||||||
|
|
|
Interest Rate |
|
Forward |
|
Loans |
|
Interest Rate |
|
Forward |
|
Loans |
| ||||||
|
Total net gains (losses) included in earnings, which are included in discontinued operations |
|
$ |
— |
|
$ |
— |
|
$ |
(380 |
) |
$ |
73,378 |
|
$ |
846 |
|
$ |
(147 |
) |
|
Change in unrealized losses relating to assets and liabilities still held at September 30, 2012, which are included in discontinued operations |
|
$ |
— |
|
$ |
— |
|
$ |
(412 |
) |
$ |
— |
|
$ |
— |
|
$ |
(412 |
) |
|
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||||||||
|
|
|
Interest Rate |
|
Forward |
|
Loans |
|
Interest Rate |
|
Forward |
|
Loans |
| ||||||
|
Total net gains (losses) included in earnings, which are included in discontinued operations |
|
$ |
40,680 |
|
$ |
69 |
|
$ |
(83 |
) |
$ |
81,847 |
|
$ |
302 |
|
$ |
(86 |
) |
|
Change in unrealized gains (losses) relating to assets and liabilities still held at September 30, 2011, which are included in discontinued operations |
|
$ |
12,747 |
|
$ |
32 |
|
$ |
— |
|
$ |
12,747 |
|
$ |
32 |
|
$ |
(44 |
) |
The following table summarizes our derivative instruments not designated as hedging instruments as of September 30, 2012 and December 31, 2011 (in thousands):
|
|
|
September 30, 2012 |
|
December 31, 2011 |
| ||||||
|
|
|
Balance Sheet Location |
|
Fair Value |
|
Balance Sheet Location |
|
Fair Value |
| ||
|
Interest Rate Lock Commitments |
|
Current assets of discontinued operations |
|
$ |
— |
|
Current assets of discontinued operations |
|
$ |
9,282 |
|
|
Forward Delivery Contracts |
|
Current assets of discontinued operations |
|
— |
|
Current assets of discontinued operations |
|
480 |
| ||
|
Interest Rate Lock Commitments |
|
Current liabilities of discontinued operations |
|
— |
|
Current liabilities of discontinued operations |
|
(160 |
) | ||
|
Forward Delivery Contracts |
|
Current liabilities of discontinued operations |
|
— |
|
Current liabilities of discontinued operations |
|
(4,568 |
) | ||
|
Total Derivatives |
|
|
|
$ |
— |
|
|
|
$ |
5,034 |
|
The gain (loss) recognized in the consolidated statements of operations for derivatives for the three and nine months ended September 30, 2012 and 2011 was as follows (in thousands):
|
|
|
Location of Gain/(Loss) |
|
Three Months Ended |
|
Nine Months Ended |
| ||||||||
|
|
|
Recognized |
|
September 30, |
|
September 30, |
|
September 30, |
|
September 30, |
| ||||
|
Interest Rate Lock Commitments |
|
Discontinued operations |
|
$ |
— |
|
$ |
40,680 |
|
$ |
73,378 |
|
$ |
81,847 |
|
|
Forward Delivery Contracts |
|
Discontinued operations |
|
2,193 |
|
(3,262 |
) |
4,244 |
|
(3,818 |
) | ||||
|
Total |
|
|
|
$ |
2,193 |
|
$ |
37,418 |
|
$ |
77,622 |
|
$ |
78,029 |
|
Assets and liabilities under the fair value option
LendingTree Loans elected to account for loans held for sale originated on or after January 1, 2008 at fair value. Electing the fair value option allowed 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.
LendingTree Loans 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 September 30, 2012 and December 31, 2011, there were no loans held for sale or carried at the lower of cost or market (“LOCOM”) value assessed on an individual loan basis.
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 September 30, 2012 and December 31, 2011 (in thousands):
|
|
|
As of September 30, 2012 |
| |||||||
|
|
|
Loans Held |
|
Loans Held |
|
Total |
| |||
|
Aggregate unpaid principal balance |
|
$ |
412 |
|
$ |
— |
|
$ |
412 |
|
|
Difference between fair value and aggregate unpaid principal balance |
|
(412 |
) |
— |
|
(412 |
) | |||
|
Loans held for sale |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
|
|
As of December 31, 2011 |
| |||||||
|
|
|
Loans Held |
|
Loans Held |
|
Total |
| |||
|
Aggregate unpaid principal balance |
|
$ |
208,918 |
|
$ |
— |
|
$ |
208,918 |
|
|
Difference between fair value and aggregate unpaid principal balance |
|
8,549 |
|
— |
|
8,549 |
| |||
|
Loans held for sale |
|
$ |
217,467 |
|
$ |
— |
|
$ |
217,467 |
|
During the nine months ended September 30, 2012 and 2011, 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 $3.7 million, respectively, and is included in discontinued operations in the accompanying consolidated statements of operations.
Loan Loss Obligations
LendingTree Loans sold loans it originated to investors on a servicing-released basis, so the risk of loss or default by the borrower was generally transferred to the investor. However, LendingTree Loans was required by these investors to make certain representations and warranties relating to credit information, loan documentation and collateral. These representations and warranties may extend through the contractual life of the loan. Subsequent to the loan sale, if underwriting deficiencies, borrower fraud or documentation defects are discovered in individual loans, LendingTree Loans may be obligated to repurchase the respective loan or indemnify the investors for any losses from borrower defaults if such deficiency or defect cannot be cured within the specified period following discovery. In the case of early loan payoffs and early defaults on certain loans, LendingTree Loans may be required to repay all or a portion of the premium initially paid by the investor.
Our HLC subsidiary continues to be liable for these indemnification obligations, repurchase obligations and premium repayment obligations following the sale of substantially all of the operating assets of our LendingTree Loans business in the second quarter of 2012. Approximately $17.1 million of the purchase price paid at closing is being held in escrow pending resolution of certain of these contingent liabilities. We have been negotiating with certain secondary market purchasers to settle any existing and future contingent liabilities, but we may not be able to complete such negotiations on acceptable terms, or at all.
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 sold, it does not maintain nor generally have access to the current balances and loan performance data with respect to the individual loans previously sold to investors. Accordingly, LendingTree Loans is unable to determine, with precision, its maximum exposure for breaches of the representations and warranties it makes to the investors that purchase such loans.
During the third quarter of 2012, in order to reflect our exit from the mortgage loan origination business in the second quarter of 2012 and our current commercial objective to pursue bulk settlements with investors, management revised the estimation process for evaluating the adequacy of the reserve for loan losses. The revised methodology, which is described below, was effective as of September 30, 2012, and resulted in a $6.5 million reduction to the loss reserve on previously sold loans during the three months ended September 30, 2012.
Prior to the third quarter of 2012, in estimating our exposure to losses on loans previously sold, LendingTree Loans used a model that considered 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. 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 determined to be both probable and estimable. Further, LendingTree Loans segmented its loan sales into four segments, based on the extent of the documentation provided by the borrower to substantiate their income and/or assets (full or limited documentation) and the lien position of the mortgage in the underlying property (first or second position). Each of these segments typically 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 revised methodology uses the model described above, but also incorporates into the estimation process (a) recent bulk settlements entered into by certain of our investors with governmental agencies and other counterparties, as applied to the attributes of the loans sold by LendingTree Loans and currently held by the investors and (b) our own recent investor bulk settlement experience. The historical model described above was weighted 50% in the revised analysis, and each of the other factors were weighted 25% to estimate the range of remaining loan losses, which was determined to be $18 million to $33 million at September 30, 2012. The reserve balance recorded as of September 30, 2012 was $26.6 million. Management has considered both objective and subjective factors in the estimation process, but given current general industry trends in mortgage loans as well as housing prices, market expectations and actual losses related to LendingTree Loans’ obligations could vary significantly from the obligation recorded as of the balance sheet date or the range estimated above.
Additionally, Tree.com has guaranteed certain loans sold to two investors in the event that LendingTree Loans is unable to satisfy its repurchase and warranty obligations related to such loans. The original principal balance of the loans sold to one of these investors is approximately $1.8 billion and $1.5 billion as of September 30, 2012 and December 31, 2011,
respectively. The unpaid principal balance of the loans sold to the second investor is approximately $279.6 million and $32.4 million as of September 30, 2012 and December 31, 2011, respectively.
The following table represents the loans sold for the period shown and the aggregate loan losses through September 30, 2012:
|
|
|
As of September 30, 2012 |
| |||||||||||
|
Period of Loan Sales |
|
Number of |
|
Original |
|
Number of |
|
Original |
|
Amount of |
| |||
|
|
|
|
|
(in billions) |
|
|
|
(in millions) |
|
(in millions) |
| |||
|
Nine months ended September 30, 2012 |
|
9,200 |
|
$ |
1.9 |
|
— |
|
$ |
— |
|
$ |
— |
|
|
2011 |
|
12,500 |
|
2.7 |
|
1 |
|
0.3 |
|
0.1 |
| |||
|
2010 |
|
12,400 |
|
2.8 |
|
4 |
|
1.1 |
|
0.1 |
| |||
|
2009 |
|
12,800 |
|
2.8 |
|
4 |
|
0.9 |
|
0.1 |
| |||
|
2008 |
|
11,000 |
|
2.2 |
|
33 |
|
6.9 |
|
2.2 |
| |||
|
2007 |
|
36,300 |
|
6.1 |
|
160 |
|
22.1 |
|
8.2 |
| |||
|
2006 |
|
55,000 |
|
7.9 |
|
207 |
|
24.5 |
|
13.4 |
| |||
|
2005 and prior years |
|
86,700 |
|
13.0 |
|
89 |
|
12.3 |
|
5.0 |
| |||
|
Total |
|
235,900 |
|
$ |
39.4 |
|
498 |
|
$ |
68.1 |
|
$ |
29.1 |
|
The pipeline of 365 requests for loan repurchases and indemnifications was considered in determining the appropriate reserve amount. The status of these 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 LendingTree Loans has agreed to reimburse the purchaser of that loan if and when losses are incurred. The indemnification obligation may have a specific term, thereby limiting the exposure to LendingTree Loans. The original principal amount of these loans is approximately $70.9 million, comprised of approximately 70% full documentation first liens, 2% full documentation second liens, 24% limited documentation first liens and 4% 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. The settlement was included as a charge-off to the reserve in 2009. Negotiations with the second buyer were completed in January 2010. This settlement of $4.5 million, which was paid in four equal quarterly installments in 2010, related to all then existing and future losses on limited documentation second lien loans sold to this buyer. LendingTree Loans was also required to pay an additional amount of up to $0.3 million in conjunction with this settlement, since it did not sell a certain volume of loans to this buyer in 2010. The entire $4.8 million is included in the total settlement amount and was included as a charge-off to the reserve in 2010. The $0.3 million additional liability was recorded as a separate liability from the loss reserve at December 31, 2011, and was paid in January 2012. In the second quarter of 2012, LendingTree Loans completed a settlement with a third buyer of previously purchased loans. This settlement of $3.3 million relates to all existing and substantially all future losses on loans sold to this buyer. The settlement amount was included as a charge-off to the reserve in the second quarter of 2012. The settlement amounts for all three of these settlements were not determined on an individual loan basis and are, therefore, not included in the loss amounts disclosed above for the years such loans were sold.
In December 2011, LendingTree Loans agreed to a $1.2 million settlement related to specific loans, which was included as a charge-off to the reserve in 2011 and is included in the table above. This $1.2 million settlement was recorded as a liability separate from the loss reserve at December 31, 2011, and was paid in January 2012.
Based on historical experience, it is anticipated that LendingTree Loans will continue to receive repurchase requests and incur losses on loans sold in prior years. However, the three settlements discussed above will substantially eliminate future repurchase requests from those buyers for the loan types included in those settlements.
The activity related to loss reserves on previously sold loans for the three and nine months ended September 30, 2012 and 2011, is as follows (in thousands):
|
|
|
Three Months |
|
Nine Months |
| ||||||||
|
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
| ||||
|
Balance, beginning of period |
|
$ |
33,096 |
|
$ |
24,317 |
|
$ |
31,512 |
|
$ |
16,984 |
|
|
Provisions (recoveries) |
|
(6,493 |
) |
3,488 |
|
(109 |
) |
11,050 |
| ||||
|
Charge-offs to reserves |
|
(14 |
) |
(785 |
) |
(4,814 |
) |
(1,014 |
) | ||||
|
Balance, end of period |
|
$ |
26,589 |
|
$ |
27,020 |
|
$ |
26,589 |
|
$ |
27,020 |
|
The liability for losses on previously sold loans is included in current liabilities of discontinued operations in the accompanying consolidated balance sheet.
Warehouse Lines of Credit
Borrowings on warehouse lines of credit were $-0- and $197.7 million at September 30, 2012 and December 31, 2011, respectively.
As a result of the closing of the sale of substantially all of the operating assets of our LendingTree Loans business on June 6, 2012, all three then-existing warehouse lines of credit expired and terminated on July 21, 2012. Borrowings under these lines of credit were used to fund, and were secured by, consumer residential loans that were held for sale. Loans under these lines of credit were repaid using proceeds from the sales of loans by LendingTree Loans.
NOTE 7—EARNINGS PER SHARE AND STOCK-BASED COMPENSATION
The following table sets forth the computation of Basic and Diluted earnings per share:
|
|
|
Three Months Ended September 30, |
| ||||||||||
|
|
|
2012 |
|
2011 |
| ||||||||
|
|
|
Basic |
|
Diluted |
|
Basic |
|
Diluted |
| ||||
|
|
|
(In thousands, except per share data) |
| ||||||||||
|
Numerator: |
|
|
|
|
|
|
|
|
| ||||
|
Income (loss) from continuing operations |
|
$ |
270 |
|
$ |
270 |
|
$ |
(3,406 |
) |
$ |
(3,406 |
) |
|
Income from discontinued operations, net of tax |
|
4,112 |
|
4,112 |
|
16,721 |
|
16,721 |
| ||||
|
Net income attributable to common shareholders |
|
$ |
4,382 |
|
$ |
4,382 |
|
$ |
13,315 |
|
$ |
13,315 |
|
|
Denominator: |
|
|
|
|
|
|
|
|
| ||||
|
Weighted average common shares |
|
11,389 |
|
12,003 |
|
11,037 |
|
11,037 |
| ||||
|
Income (loss) per share: |
|
|
|
|
|
|
|
|
| ||||
|
Income (loss) from continuing operations |
|
$ |
0.02 |
|
$ |
0.02 |
|
$ |
(0.31 |
) |
$ |
(0.31 |
) |
|
Income from discontinued operations, net of tax |
|
0.36 |
|
0.35 |
|
1.52 |
|
1.52 |
| ||||
|
Net income per common share |
|
$ |
0.38 |
|
$ |
0.37 |
|
$ |
1.21 |
|
$ |
1.21 |
|
|
|
|
Nine Months Ended September 30, |
| ||||||||||
|
|
|
2012 |
|
2011 |
| ||||||||
|
|
|
Basic |
|
Diluted |
|
Basic |
|
Diluted |
| ||||
|
|
|
(In thousands, except per share data) |
| ||||||||||
|
Numerator: |
|
|
|
|
|
|
|
|
| ||||
|
Loss from continuing operations |
|
$ |
(4,752 |
) |
$ |
(4,752 |
) |
(44,608 |
) |
(44,608 |
) | ||
|
Income (loss) from discontinued operations, net of tax |
|
49,058 |
|
49,058 |
|
(16,077 |
) |
(16,077 |
) | ||||
|
Net income (loss) available to common shareholders |
|
$ |
44,306 |
|
$ |
44,306 |
|
$ |
(60,685 |
) |
$ |
(60,685 |
) |
|
Denominator: |
|
|
|
|
|
|
|
|
| ||||
|
Weighted average common shares |
|
11,293 |
|
11,293 |
|
10,978 |
|
10,978 |
| ||||
|
Income (loss) per share: |
|
|
|
|
|
|
|
|
| ||||
|
Loss from continuing operations |
|
$ |
(0.42 |
) |
$ |
(0.42 |
) |
$ |
(4.06 |
) |
$ |
(4.06 |
) |
|
Income (loss) from discontinued operations, net of tax |
|
4.34 |
|
4.34 |
|
(1.47 |
) |
(1.47 |
) | ||||
|
Net income (loss) per common share |
|||||||||||||