Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-17771
FRANKLIN CREDIT HOLDING CORPORATION
(Exact name of Registrant as specified in its charter)
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Delaware
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26-3104776 |
(State or other jurisdiction of
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(IRS Employer |
incorporation or organization)
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Identification No.) |
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101 Hudson Street |
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Jersey City, New Jersey
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07302 |
(Address of Principal
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(Zip code) |
Executive Offices) |
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(201) 604-1800
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
Title of Class
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§
229.405) is not contained herein, and will not be contained, to the best of registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. 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 þ |
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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 Act).
Yes o No þ
Based upon the closing sale price on the last business day of the registrants most recently
completed second fiscal quarter ($0.15 on June 30, 2010), the aggregate market value of common
stock held by non-affiliates of the registrant as of such date was approximately $475,542. There
is no non-voting stock outstanding.
Number of shares of the registrants common stock, par value $0.01 per share, outstanding as of
March 24, 2011:
8,028,795.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement, which will be filed within 120 days of
December 31, 2010, are incorporated by reference into Part III.
FRANKLIN CREDIT HOLDING CORPORATION
FORM 10-K
December 31, 2010
INDEX
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PART I
As used herein, references to the Company, Franklin Holding, we, our and us refer to
Franklin Credit Holding Corporation (FCHC), collectively with its subsidiaries; and, references
to FCMC refers to Franklin Credit Management Corporation, the Companys servicing business
subsidiary.
Overview
Recent Developments
Investment in REIT Securities Dividend. The board of directors of the real estate
investment trust (the REIT) owned by The Huntington National Bank (the Bank or Huntington)
did not declare any dividends on the preferred stock owned by the Company (the REIT Securities)
for the third and fourth calendar quarters of 2010. As a result of the non-payment of dividends by
the REIT, the Companys revenue loss for the third and fourth quarters of 2010 was approximately
$21 million (pre-tax). The nonpayment of dividends for the six months ended December 31, 2010
resulted in an increase in stockholders deficit for the six months ended December 31, 2010.
In February 2011, the Company was advised that the REIT board in February 2011 declared
dividends on the REIT securities for the two quarterly periods ended December 31 and September 30,
2010, and also declared a dividend for the full year of 2011. The Company was advised that these
declared dividends would be paid one business day after the dividends are approved by the Banks
regulator. See Note 20 to the Consolidated Financial Statements.
Derivatives Termination of Interest Rate Swap Agreements. On January 25, 2011, the Bank
declared an early termination of all remaining interest rate swaps due to a failure by the Company
to make payments due under the swap agreements. The Companys failure to make these payments was
occasioned by insufficient funds available under the credit agreement with the Bank and its
participating banks (the Legacy Credit Agreement) as a direct result of the loss of cash flows
attributable to the July, September and December 2010 loan sales by a trust of the Bank (the
Banks Trust or the Trust) and the suspension of dividends by its REIT. The swap termination
fee payable by the Company (but not FCMC) to the Bank is $6.5 million. It is anticipated that the
swap termination fee will be payable only to the extent cash is available under the waterfall
provisions of the Legacy Credit Agreement and only after the outstanding balance designated as
tranche A debt owed to the Bank has been paid in full, which at December 31, 2010 was $709 million.
The swap termination fee is not an obligation of FCMC.
The Bank has also verbally indicated that it is their position that the early termination of
the interest rate swaps in January 2011 and a prior early termination of interest rate swaps
effective March 31, 2009, which was exercised at the request of the Bank, are defaults under the
Legacy Credit Agreement, entitling the Bank to take possession of and dispose of the REIT
securities collateralizing the debt of certain subsidiaries of Franklin Holding (other than FCMC)
(the Legacy Debt). Although we dispute this interpretation based on the nature of the swap
terminations in January 2011 and certain equitable defenses with respect to the swap terminations
in March 2009, we have entered into negotiations with the Bank to surrender the REIT securities as
an alternative to litigation, which might be time-consuming and expensive with an uncertain
outcome. The Banks position, which FCMC is inclined to cooperate with,
will enable the REIT securities effectively to be redeemed at estimated fair value (as
determined by the Bank), the proceeds of which will be applied to reduce the outstanding balance of
the Legacy Debt. See Note 20 to the Consolidated Financial Statements.
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The Companys Business
Franklin Credit Holding Corporation (FCHC). The Company had a net loss attributed to common
stockholders of $55.3 million for the twelve months ended December 31, 2010, compared with a net
loss of $358.1 million for the twelve months ended December 31, 2009. At December 31, 2010 and
2009, the Companys stockholders deficit was $852.9 million and $806.8 million, respectively. See
Managements Discussion and Analysis of Financial Condition and Results of Operations.
Except for the mortgage servicing business conducted through FCMC, the business activities of
Franklin Credit Holding Corporation and its subsidiary companies following the December 2008
corporate reorganization (the Reorganization) and 2009 debt restructuring (the Restructuring or
March 2009 Restructuring) whereby the Companys debt under its legacy credit agreement (the
Legacy Credit Agreement) with the Bank and its participating banks were substantially
restructured, have principally consisted of making payments in accordance with the Legacy Debt.
Payments made on the Legacy Debt are generally limited to the cash flows received from the Banks
Trust in accordance with the March 2009 Restructuring, described below, and from the dividends
received form the investment in preferred stock of the Banks REIT. As a result of the loan sales
by the Banks Trust in the third quarter of 2010, the remaining principal source of payments on the
Legacy Debt is the dividend on the preferred stock in the Banks REIT, which was not declared or
paid in the third and fourth quarters of 2010. See Note 20 to the Consolidated Financial
Statements.
Prior to December 28, 2007, the Company was primarily engaged in the acquisition and
origination for portfolio, and servicing and resolution, of performing, reperforming and
nonperforming residential mortgage loans and real estate owned (REO) properties, including the
origination of subprime mortgage loans. We specialized in acquiring and originating loans secured
by 1-4 family residential real estate that generally fell outside the underwriting standards of
Fannie Mae and Freddie Mac and involved elevated credit risk as a result of the nature or absence
of income documentation, limited credit histories, higher levels of consumer debt or past credit
difficulties.
On December 28, 2007, the Company entered into a series of agreements (the Forbearance
Agreements) with the Bank whereby the Bank agreed to restructure approximately $1.93 billion of
the Companys indebtedness to it and its participant banks, and in November 2007, the Company
ceased to acquire or originate loans.
Franklin Credit Management Corporation (FCMC). Since the Reorganization that took effect in
December 2008 and the March 2009 Restructuring, the Companys operating business has been conducted
solely through FCMC, a specialty consumer finance company primarily engaged in the servicing and
resolution of performing, reperforming and nonperforming residential mortgage loans, including
specialized loan collection and recovery servicing, and in the due diligence, analysis, pricing and
acquisition of residential mortgage portfolios, for third parties. FCMC, the servicing company
within Franklin Holdings consolidated group of companies, has positive net worth, and as a result
of the September 2010 Transaction (discussed below), all of its equity is free from the pledges to
the Bank. Except for cash collateral of $7.5 million held by FCMC, the Legacy Debt is not an
obligation of FCMC.
At December 31, 2010, FCMC had total assets of $24.8 million and had stockholders equity of
$15.9 million. Under Amendment No. 2 to the Licensing Credit Agreement with the Bank (the
Licensing Credit Agreement), FCMC has available credit under a revolving loan facility of $1
million and a $6.5 million letter of credit facility with the Bank, and cash collateral securing
the revolving loan and letter of credit facilities of $7.5 million. The Licensing Credit Agreement
expires September 30, 2011. At December 31, 2010, FCMC had no debt outstanding under the revolving
line and approximately $6.2 million of letters of credit under the Licensing Credit Agreement.
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As a result of the transactions entered into with the Bank in September and December 2010
(described below) and the sales of loans in September and December 2010 (for the remaining loans
held by the Banks Trust and a 50% participation interest in each of the Banks commercial loans to
the Company covering the Unrestructured Debt, as described below) to entities controlled by Thomas
J. Axon (Mr. Axon), Chairman and President of the Company, the Company, through FCMC, provides
servicing, collection and recovery services for third parties that to date have been primarily
entities related to Mr. Axon (described below). As of September 30, 2010, FCMC operates its
servicing, collections and recovery business free of pledges of its stock and free of significant
restrictive covenants under the Legacy Credit Agreement with the Bank, which governs the
substantial debt owed to the Bank by subsidiaries of FCHC, other than FCMC.
In conjunction with the September 2010 transaction agreements, FCHC transferred to Mr. Axon an
additional 10% of FCMCs outstanding shares of common stock. When combined with FCMC shares
already directly owned by him, Mr. Axon now directly owns 20% of FCMC, while the remaining 80% of
FCMC is owned by FCHC and indirectly by its public shareholders (including Mr. Axon as a principal
shareholder of FCHC).
FCMC was not in compliance at December 31, 2010 with the covenant in the Licensing Credit
Agreement that requires Franklin Holding and FCMC to maintain net income before taxes of not less
than $800,000 as of the end of each calendar month for the most recently ended twelve consecutive
month period or, with notice, an event of default will be deemed to have occurred. On March 28,
2011, as a temporary measure, Franklin Holding and FCMC entered into an agreement with the Bank
that provides for a limited waiver of the financial covenant of Franklin Holding and FCMC under the
Licensing Credit Agreement, for the period through and including September 30, 2011, related to the
failure to maintain the minimum level of net income before taxes.
See Managements Discussion and Analysis of Financial Condition and Results of Operations
Franklin Credit Management Corporation (FCMC) and Note 20 to the Consolidated Financial
Statements.
Potential FCMC Spin Off
The Company anticipates that it will break out its mortgage servicing subsidiary, FCMC, from
Franklin Holdings consolidated group as a separate company through a spin off type of
transaction preferably in the late second to early third quarter of 2011, subject to numerous
conditions, including approval by its board of directors and the Bank, the effectiveness of a
registration statement on Form 10 to be filed with the Securities and Exchange Commission, adequate
capital and solvency requirements, regulatory approvals to the extent required, and accounting and
tax treatment considerations. It is the Companys plan to spin-off its 80% ownership of FCMC to
the stockholders of FCHC through a pro-rata dividend distribution, and that FCMC then would be a
separate publicly-owned company.
The September 2010 transaction with the Bank, which occurred simultaneously with the sale of
substantially all of the subordinate lien consumer loans owned by the Banks Trust (referred to as
the September Loan Sale, and described below), resulted in, subject to the final approval of the
Bank, the Banks consent to proceed with a restructuring or spin-off of the ownership of FCMC. In
the July 2010 transaction, which was amended and modified in part by the September 2010
transaction, the parties agreed that in connection with a potential restructuring (referred to as
the Potential Restructuring, and described below), if acceptable to the Bank and the required
lenders, in each partys sole discretion, and the potential restructuring does not result in
material tax, legal, regulatory, or accounting impediments or issues for Franklin Holding or FCMC,
the Bank would use its reasonable efforts to assist Franklin Holding and FCMC in connection with
such a potential restructuring in obtaining the approval of the required lenders and consenting to
any change of control in connection with a potential restructuring to the extent required under its
Legacy Credit Agreement, and FCMC or Franklin Holding would reimburse and hold the Bank and the
required lenders harmless from any reasonable expense incurred by them in connection with any such
potential restructuring.
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There can be no assurance, however, that our board of directors will approve or FCMC will be
successful in completing a spin-off as tax, shareholder, legal, regulatory, accounting or other
matters could present significant impediments to accomplishing a spin off.
Following a spin off of FCMC, if successful, the remaining direct and indirect subsidiaries of
Franklin Holding that are obligors under the Legacy Debt will be insolvent and unable to pay off
the balance of Legacy Debt owed to the Bank.
Third Quarter 2010 Restructuring
During the quarter ended September 30, 2010, the Company and FCMC entered into a series of
transactions with the Bank facilitating sales by the Banks trust (the Banks Trust or the
Trust) to third parties of substantially all of the loans underlying the trust certificates
issued by the Trust. These transactions, which are described below, were effective in July and
September 2010, and are referred to as the July 2010 Transaction and the September 2010
Transaction, respectively. The loan sales in July and September 2010 in connection with these
third quarter transactions are collectively referred to as the Loan Sales.
As a result of the third quarter loan sales by the Trust, the transfer by the Company in March
2009 (the March 2009 Restructuring) of 83% of trust certificates in the Trust, representing an 83%
interest in the Trust, the Banks REIT that had been accounted for as a secured financing in
accordance with generally accepted accounting principles (GAAP) is now accounted for as a sale of
loans in accordance with GAAP, to the extent of the loans sold by the Trust. The sales of the
loans by the Banks Trust also has resulted in treating substantially all of the loans represented
by the remaining 17% in trust certificates held by the Company as sold, to the extent of the loans
sold by the Trust, in accordance with GAAP.
The treatment of the Loan Sales as a sale of financial assets to the extent of the 83%
represented by the trust certificates held by the Banks REIT in the quarter ended September 30,
2010 did not affect the cash flows of the Company or its reported net income. However, the
treatment of the Loan Sales to the extent of the 17% represented by the trust certificates held by
the Company in the quarter ended September 30, 2010, which also were treated as sales of financial
assets, did affect the Companys cash flows and reported net income. The net proceeds from the
Loan Sales were distributed to the Trust
certificate holders on a pro rata basis by percentage interest. Accordingly, approximately
17% of the net proceeds were applied to pay down the Legacy Debt owed to the Bank, as 83% of the
trust certificates are held by the Banks REIT, and the Companys Investment in REIT securities
(which are not marketable) is realized only through declared and paid dividends (which were
suspended effective July 1, 2010, the effective date of the July 2010 sale of loans by the Banks
Trust) or a redemption of the securities by the REIT. The REIT board in February 2011 declared
dividends for the third and fourth quarters of 2010 and for the full year of 2011, with payment
pending approval of the Banks regulator. See Note 20 to the Consolidated Financial Statements.
July 2010 Transaction. On July 16, 2010, the Company and FCMC entered into a letter agreement
(the Letter Agreement) with the Bank, the Trust, and, for certain limited purposes, Thomas J.
Axon, Chairman and President of the Company. The Letter Agreement was entered into in connection
with and in anticipation of the Trusts then-proposed sale (the July Loan Sale) to a third party
of substantially all of the first-lien residential mortgage loans held by the Banks Trust and
serviced by FCMC under its servicing agreement with the Trust (the Legacy Servicing Agreement).
In the July Loan Sale, approximately $626 million (unpaid principal balance) of first-lien
residential mortgage loans, carried at an estimated fair value of approximately $270 million, were
sold by the Banks Trust.
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The July Loan Sale, effective July 1, 2010, to an unrelated third party closed on July 20,
2010 (the July Loan Sale Closing Date) and, on July 20, 2010, the July Loan Sale third-party
purchaser (the Purchaser) entered into a loan servicing agreement with FCMC (the Loan Sale
Servicing Agreement), pursuant to which FCMC continues to service approximately 75% of the
first-lien residential mortgage loans sold in the July Loan Sale.
The Letter Agreement included terms amending, or committing the Bank, FCMC and the Company to
amend certain of the restructuring agreements entered into in connection with the Companys
Restructuring with the Bank on March 31, 2009, including the existing relationships under the
Legacy Servicing Agreement, the Legacy Credit Agreement, and the Licensing Credit Agreement, and
commitments by FCMC to make certain payments to the Bank. Additionally, the Letter Agreement set
forth certain mutual commitments of the parties with respect to the Companys consideration of a
restructuring or spin-off of its ownership of FCMC (a Potential Restructuring), as well as
certain guaranties of Mr. Axon.
Under the terms of the Letter Agreement with the Bank: (i) FCMC made a $1 million payment to
the Bank as reimbursement for certain expenses incurred by the Bank in connection with the July
Loan Sale; (ii) FCMC released all claims under the Legacy Servicing Agreement with respect to the
loans sold in the July Loan Sale; (iii) the Legacy Servicing Agreement was terminated as to the
loans sold; and, (iv) FCMC and the Trust entered into an amended and restated servicing agreement
(the New Trust Servicing Agreement or Servicing Agreement) effective August 1, 2010, relating
to the servicing of the loans not sold in the July Loan Sale.
On the July Loan Sale Closing Date, the Company and FCMC entered into Amendment No. 2 to the
Licensing Credit Agreement with the Bank. In accordance with the terms of Amendment No. 2 to the
Licensing Credit Agreement with the Bank: (i) FCMC used $1 million in unpledged cash to repay the
amount outstanding under its revolving line of credit with the Bank, (ii) available credit under
the revolving loan facility was reduced from $2 million to $1 million, and (iii) cash collateral,
which is required to secure the revolving loan and letter of credit facilities, was reduced from
$8.5 million to $7.5
million, with the released cash collateral applied as a voluntary payment against the debt
outstanding of certain subsidiaries of the Company under the Legacy Credit Agreement.
Due to the retention of the servicing for approximately 75% of the loans sold to the Purchaser
and the servicing fee rates agreed to under the Loan Sale Servicing Agreement, the servicing fees
paid by the Purchaser to FCMC are substantially less than the servicing fees that had been paid by
the Trust for such loan servicing, resulting in significantly reduced revenues for FCMC and the
Company.
On July 30, 2010, FCMC entered into the New Trust Servicing Agreement, effective August 1,
2010, with the Banks Trust to replace the servicing agreement (the Legacy Servicing Agreement)
that had been entered into with the Banks Trust as part of the Companys March 31, 2009
Restructuring with the Bank. The servicing revenues from the New Trust Servicing Agreement are
significantly lower than those that had been earned under the Legacy Servicing Agreement for those
assets that were not sold in the July Loan Sale.
See Restructuring Agreements with Lead Lending Bank Third Quarter 2010 Restructuring.
September 2010 Transaction. The Company and FCMC entered into a series of transactions with
the Bank on September 22, 2010. The September 2010 Transaction enables FCMC to operate its
servicing, collections and recovery business free of past pledges of its stock and free of
significant restrictive covenants under the Legacy Credit Agreement, which governs the substantial
debt owed to the Bank by subsidiaries of FCHC, other than FCMC.
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The September 2010 Transaction, which occurred simultaneously with the sale of substantially
all of the subordinate lien consumer loans owned by the Banks Trust (the September Loan Sale),
resulted in a release of the pledge of FCMC stock to the Bank, a significant revision to the Legacy
Credit Agreement and, subject to the final approval of the Bank, the consent to proceed with a
restructuring or spin-off of the ownership of FCMC. In the September Loan Sale, approximately $761
million (unpaid principal balance) of subordinate lien consumer loans, carried at an estimated fair
value of approximately $43 million, were sold by the Banks Trust.
In connection with the terms of the September 2010 Transaction, effective September 1, 2010,
the Bank sold substantially all of the subordinate lien consumer loans owned by the Banks Trust to
Bosco Credit II, LLC (Bosco II), an entity formed and owned solely by Mr. Axon. Under the terms
and conditions of the September 2010 Transaction:
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the Bank agreed to release FCHCs pledge of 70% of the outstanding shares of
FCMC as security for the Legacy Credit Agreement, in consideration of $4 million paid
by FCMC to the Bank; |
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the Bank agreed to release its liens on real properties owned by FCMC that were
previously pledged to the Bank, in consideration of $1 million to be paid by FCMC on or
before November 22, 2010, which was paid by FCMC prior to November 22, 2010; |
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the limited recourse guarantee of FCMC under the Legacy Credit Agreement was
released, cancelled and discharged by the Bank; |
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the Bank eliminated all cross-default provisions under the credit facility of
FCMC and FCHC (the Licensing Credit Agreement) and servicing agreement of FCMC with the
Trust (for the
remaining loans and real estate owned properties that continue to be held by the Trust
and serviced by FCMC) that could have triggered a default resulting from a default under
the Legacy Credit Agreement; |
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the Bank extended the $6.5 million letter of credit and $1.0 million revolving
credit facilities available under the Licensing Credit Agreement, which are
collateralized by $7.5 million in cash held by FCMC, to September 30, 2011; |
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the Bank and the participating lenders consented to the future transfer, sale,
restructuring or spin-off of the ownership of FCMC, subject to a review and final
approval of the Bank; and, |
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FCMC entered into a deferred payment agreement to pay the Bank 10% of the
cumulative proceeds, minus $4 million, from any qualifying transactions (including
dividends or distributions) that monetize FCMCs value or significant assets prior to
March 20, 2019. |
In conjunction with the September 2010 Transaction agreements, FCHC transferred to Mr. Axon an
additional 10% of FCMCs outstanding shares of common stock, as described above. See Note 14 to
the Consolidated Financial Statements.
On September 22, 2010, FCMC also entered into a servicing agreement with Bosco II for the
servicing and collection of the loans purchased by Bosco II from the Trust. The servicing revenues
from the Bosco II servicing agreement with FCMC will be significantly lower than those that had
been earned historically under the prior servicing agreement with the Bank.
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See Restructuring Agreements with Lead Lending Bank Third Quarter 2010 Restructuring.
December Sale of Remaining Loans and Participation Interest in Unrestructured Debt with the Bank
In December 2010 (the December Transaction or the December Loan Sale), Bosco Credit III,
LLC (Bosco III), which is owned 50% by the Companys Chairman and President, Thomas J. Axon,
purchased $174 million of principally charge-off first and subordinate lien loans sold by the
Trust, which were the remaining loans (other than real estate properties) held by the Trust, and
also purchased from the Bank a 50% participation interest in each of the commercial loans to the
Company covering that portion of the Companys debt (the Unrestructured Debt) with the Bank. In
the December Loan Sale, principally charge-off first and subordinate lien loans were sold by the
Trust, which were carried at an estimated fair value of zero.
In the December Transaction, FCMC entered into a servicing agreement with Bosco III for the
servicing and collection of principally charge-off first and subordinate lien loans purchased by
Bosco III from the Banks Trust. See Note 19 to the Consolidated Financial Statements.
The Company also has one servicing contract between FCMC and certain Company subsidiaries for
the loans collateralizing the Unrestructured Debt (as defined below).
On December 22, 2010, the Bank notified FCMC that the remaining servicing, under the New Trust
Servicing Agreement, of real estate properties not sold by the Bank or the Banks Trust would be
terminated by the Bank effective March 24, 2011. On March 24, 2011, the Bank notified FCMC that
its servicing of the remaining real estate owned assets was extended through April 30, 2011.
See Restructuring Agreements with Lead Lending Bank December Sale of Remaining Loans and
Participation Interest in Unrestructured Debt with the Bank.
December 2008 Reorganization and March 2009 Restructuring
December 2008 Reorganization. On December 19, 2008, the Company engaged in a series of
transactions (the Reorganization) in which the Company (i) adopted a holding company form of
organizational structure, with Franklin Holding serving as the new public-company parent, (ii)
transferred all of the equity and membership interests in FCMCs direct subsidiaries to other
entities in the reorganized corporate structure of the Company, (iii) assigned legal record
ownership of any loans in the Companys portfolios held directly by FCMC and other subsidiary
companies to other entities in the reorganized corporate structure of the Company, and (iv) amended
its loan agreements with the Bank.
Franklin Credit Holding Corporation is the successor issuer to Franklin Credit Management
Corporation (FCMC), and FCMC ceased to have portfolios of loans and real estate properties and the
related indebtedness to the Bank and became the Companys servicing business subsidiary.
March 2009 Restructuring. Effective March 31, 2009, Franklin Holding, and its consolidated
subsidiaries, including FCMC, entered into a series of agreements (collectively, the Restructuring
Agreements) with the Bank pursuant to which (i) the Companys loans, pledges and guarantees under
the Legacy Credit Agreement with the Bank and its participating banks were substantially
restructured, (ii) substantially all of the Companys portfolio of subprime mortgage loans and
owned real estate was transferred to the Banks Trust (with the loans and owned real estate
transferred to the Banks Trust collectively referred to herein as the Portfolio) in exchange for
trust certificates, with certain trust certificates, representing an undivided interest in
approximately 83% of the Portfolio, transferred in turn by the Company to a real estate investment
trust wholly-owned by the Bank (the Banks Trust or the Trust), (iii) FCMC and Franklin Holding
entered into a new credit facility with the Bank (the Licensing Credit Agreement), and (iv) FCMC
entered into a servicing agreement (the Legacy Servicing Agreement) with the Banks Trust (the
preceding collectively referred to herein as the Restructuring).
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The Restructuring did not include a portion of the Companys debt that as of December 31, 2010
totaled approximately $39 million (the Unrestructured Debt). The Unrestructured Debt, which was
extended on January 7, 2011 until September 30, 2011, is subject to the Forbearance Agreement, as
amended, and the Companys 2004 master credit agreement with the Bank. See Restructuring
Agreements with Lead Lending Bank Forbearance Agreements with Lead Lending Bank and Risk
Factors Risks Related to Our Business. See Note 12 to the Consolidated Financial Statements.
Going Concern Uncertainty Franklin Holding
The Company since September 30, 2007 has been and continues to be operating with significant
operating losses and stockholders deficit. In addition, the Companys Legacy Debt is
significantly greater than its remaining earning assets, and, therefore, the Company will not be
able to pay off the outstanding balance of debt due to the Bank, which at December 31, 2010 was
$1.341 billion. Any event of default under the March 2009 Restructuring Agreements, as amended, or
failure to successfully renew these Restructuring Agreements or enter into new credit facilities
with Huntington prior to their scheduled maturity, could entitle Huntington to declare the
Companys indebtedness immediately due and payable. Without the continued cooperation and
assistance from Huntington, the consolidated Franklin Holdings ability to continue as a viable
business is in substantial doubt, and it may not be able to continue as a
going concern. See Managements Discussion and Analysis of Financial Condition and Results
of Operations Borrowings.
The Company had a net loss attributed to common stockholders of $55.3 million for the twelve
months ended December 31, 2010, compared with a net loss of $358.1 million for the twelve months
ended December 31, 2009. The Company had a loss per common share for the twelve months ended
December 31, 2010 of $6.89 both on a diluted and basic basis, compared to a loss per common share
of $44.74 on both a diluted and basic basis for the twelve months ended December 31, 2009. At
December 31, 2010 and 2009, the Companys stockholders deficit was $852.9 million and $806.8
million, respectively.
Franklins Business Loan Servicing, Collections and Recovery Servicing
The Companys servicing business is conducted through FCMC, a specialty consumer finance
company primarily engaged in the servicing and resolution of performing, reperforming and
nonperforming residential mortgage loans, including specialized loan collections and recovery
servicing, for third parties.
We have invested to create a loan servicing capability that is focused on collections, loss
mitigation and default management. In general, we seek to ensure that the loans we service for
others are repaid in accordance with the original terms or according to amended repayment terms
negotiated with the borrowers and in accordance with the terms of our servicing contracts with our
servicing clients. Because the loans we service generally experience above average delinquencies,
erratic payment patterns and defaults, our servicing operation is focused on collections and
recovery, and, therefore, maintaining close contact with borrowers and as a result, is more
labor-intensive than traditional mortgage servicing operations. Through frequent communication we
are able to encourage positive payment performance, quickly identify those borrowers who are likely
to move into seriously delinquent status and promptly apply appropriate collection, loss mitigation
and recovery strategies. Our servicing staff employs a variety of collection and recovery
strategies that we have developed to successfully manage serious delinquencies and defaults,
bankruptcy and foreclosure. Additionally, we maintain a real estate department with experience in
property management and the sale of residential properties.
10
As of December 31, 2010, FCMC had four significant servicing contracts to service 1-4 family
mortgage loans and owned real estate, principally consisting of first and second-lien loans and
owned properties secured by 1-4 family residential real estate that were previously acquired and
originated by Franklin and transferred to the Trust in the March 2009 Restructuring, and sold by
the Trust and the Bank to third parties in the quarter ended September 30, 2010 (the Loan Sales)
and in December 2010 (the December Loan Sale).
Loan Servicing and Collection Operations
At December 31, 2010, our servicing and collection business, conducted through FCMC, consisted
of 81 employees who serviced and provided recovery collection services and managed approximately
32,650 loans and real estate properties (with an unpaid principal balance of $1.645 billion),
including approximately 26,500 first and second-lien loans for the Bosco entities: approximately
2,300 home equity loans for Bosco I; approximately 19,800 subordinate-lien loans for Bosco II; and,
approximately 4,800 of principally charge-off first and subordinate-lien loans for Bosco III.
Our servicing and collection operations are conducted utilizing principally a one-call
resolution structure to facilitate borrower management functions. We maintain a call center
staffed by professionals with skills based in customer service, collections, loss mitigation, and
recovery. Our call center handles borrower inquiries on a one-call resolution basis, wherein the
first agent with whom a borrower speaks is qualified to satisfy almost any request for information,
such as payoff declarations, escrow account balance, payment information, collections, repayment
arrangements, settlements and short sales. Our one-call resolution structure includes the
following principal functions/groups:
Customer Service. The primary objective of customer service is to obtain timely payments from
borrowers, respond to borrower requests and resolve disputes with borrowers. Within 10 days of
boarding newly acquired loans onto our servicing system, our customer service representatives
contact each new borrower to welcome them to FCMC and to gather and/or verify any missing
information, such as loan balance, interest rate, contact phone numbers, place of employment,
insurance coverage and all other pertinent information required to properly service a loan.
Customer service representatives responds to all inbound customer calls for information requests
regarding payments, statement balances, escrow balances and taxes, payoff requests, returned check
and late payment fees. In addition, our customer service representatives process payoff requests
and reconveyances.
Collections. The main objective of our collections function is to ensure loan performance
through maintaining contact with our servicing and recovery collection clients borrowers. Our
collections agents continuously review and monitor the status of collections and individual loan
payments in order to proactively identify and solve potential collection problems. When a loan
becomes seven days past due, our collections agents begin making collection calls and generating
past-due letters. Our collections group attempts to determine whether a past due payment is an
aberration or indicative of a more serious delinquency. If the past due payment appears to be an
aberration, we emphasize a cooperative approach and attempt to assist the borrower in becoming
current or arriving at an alternative repayment arrangement. Upon a serious delinquency, by which
we mean a delinquency of sixty-one days by a borrower, or the earlier determination by our
collections group based on the evidence available that a serious delinquency is likely, the loan is
typically transferred to our loss mitigation group. We employ a range of strategies to modify
repayment terms in order to enable the borrower to make payments and ultimately cure the
delinquency, or focus on expediting the foreclosure process so that loss mitigation can begin as
promptly as practicable.
Loss Mitigation. Our loss mitigation group, which consists of staff experienced in collection
work, manages and monitors the progress of seriously delinquent loans and loans which we believe
will develop into serious delinquencies. In addition to maintaining contact with borrowers through
telephone calls and collection letters, this group utilizes various strategies in an effort to
reinstate an account or revive cash flow on an account. Loss mitigation agents analyze each loan
to determine a collection strategy to maximize the amount and speed of recovery and minimize costs.
The particular strategy is based upon each individual borrowers past payment history, current
credit profile, current ability to pay, collateral lien position and current collateral value.
Loss mitigation agents qualify borrowers for relief programs appropriate to the borrowers hardship
and finances. Loss mitigation agents process borrower applications for Temporary Relief programs
(deferments and rate reductions), Expanded Temporary Relief programs (repayment plans), Homeowner
Relief programs (pre-foreclosure home sale) and Permanent Relief programs (long-term modifications,
including, when applicable, those sponsored by the U.S. Treasurys Home Affordable Modification
Program (HAMP)), as well as for settlements, short sales, and deeds-in-lieu.
11
Seriously delinquent accounts not resolved through the loss mitigation activities described
above are foreclosed or a judgment is obtained, if potential collection warrants the cost, against
the related borrower in accordance with state and local laws, with the objective of maximizing
asset recovery in the most expeditious manner possible. This is commonly referred to as loss
management. Foreclosure timelines are managed through a timeline report built into the loan
servicing system. The report schedules milestones applicable for each state throughout the
foreclosure process, which enhances our ability to monitor and manage the process. Properties
acquired through foreclosure are transferred to our real estate department to manage eviction and
marketing or renting of the properties. However, until foreclosure is completed, efforts at loss
mitigation generally are continued.
In addition, our loss mitigation group manages loans by borrowers who have declared
bankruptcy. The primary objective of the bankruptcy function within our loss mitigation group,
which utilizes outside legal counsel, is to proactively monitor bankruptcy assets and outside legal
counsel to ensure compliance with individual plans and to ensure recovery in the event of
non-compliance.
Loan Boarding and Administration. The primary objective of the loan boarding function is to
ensure that newly acquired loans under contracts to service and provide collection and recovery
services for others are properly transitioned from the prior servicer and are accurately boarded
onto our servicing systems. Our loan boarding group audits loan information for accuracy to ensure
that the loans conform to the terms provided in the original note and mortgage. The information
boarded onto our systems provide us with a file that we use to automatically generate introductory
letters to borrowers summarizing the terms of the servicing transfer of their loan, among other
standard industry procedures.
The loan administration group performs typical duties related to the administration of loans,
including incorporating modifications to terms of loans. The loan administration group also
ensures the proper maintenance and disbursement of funds from escrow accounts and monitors
non-escrow accounts for delinquent taxes and insurance lapses. For loans serviced with adjustable
interest rates, the loan administration group ensures that adjustments are properly made and
identified to the affected borrowers in a timely manner.
Our servicing and collection operations also include the following principal
functions/groups:
Real Estate. The real estate-owned department is responsible for managing and or disposing of
properties, located throughout the country, acquired through foreclosure in an orderly, timely, and
cost-efficient manner in order to maximize our clients return on assets. These properties include
1-4 family residences, cooperative apartment and condominium units. We foreclose on property
primarily with the intent to sell it at fair market value to recover a portion of the outstanding
balance owed by the borrower. From time to time, foreclosed properties may be in need of repair or
improvement in order to either increase the value of the property or reduce the time that the
property is on the market. In those cases, the property is evaluated independently and we make a
determination of whether the additional investment might increase the return upon sale or rental of
the property.
12
Deficiency Recovery & Judgment Processing Department (Recovery). The Recovery group pursues
principally hard-to-collect consumer debt on a first, second, or third-placement basis. Our
recovery departments primary objective is to maximize the recovery of unpaid principal on each
seriously delinquent account by offering borrowers multiple workout solutions and/or negotiated
settlements. The recovery unit performs a complete analysis of the borrowers financial situation,
taking into consideration lien status, in order to determine the best course of action. Based on
the results of our
analysis, we determine to either continue collection efforts and a negotiated workout of
settlement or seek judgment. Agents may qualify borrowers for Temporary Relief and Expanded
Temporary Relief programs where appropriate. Agents will seek to perfect a judgment against a
borrower and may seek wage garnishment, if economically justified by the borrowers finances and if
provided by the clients servicing agreement.
Face to Face Home Solutions (Face to Face). The Face to Face group seeks to reestablish
connection with incommunicative borrowers and advise borrowers of available loss mitigation
opportunities. Whether successful in meeting with a borrower or not, Face to Face agents confirm
occupancy and report property conditions as well as any evidence of code violation or additional
liens on the property.
Client Relations. The principal objective of the client relations group is to interface with
our servicing and recovery collection clients regarding the servicing performance of their loans,
and for invoicing servicing clients. In addition, our client relations group oversees the boarding
of new loans for servicing and/or recovery collections.
Training. Our training department works with all departments of our servicing operations to
ensure that the employees of all departments are fully informed of the procedures necessary to
complete their required tasks. The department ensures all loan servicing employees are trained in
the tenets of the Fair Debt Collection Practices Act, and in state and local debt collection laws,
as well as in effective communication skills.
Quality Control. Our quality control department monitors all aspects of loan servicing from
boarding through foreclosure. It is the departments responsibility to ensure that FCMCs policies
and procedures are implemented and followed. Collection calls are monitored to ensure quality and
compliance with the requirements of the federal Fair Debt Collection Practices Act and state and
local collection laws. Monthly meetings with staff to discuss individual quality control scores
are held and, in certain cases, further training is recommended. Reviews of the controls for
privacy and information safeguarding and document removal are conducted monthly.
Home Affordable Modification Program
On September 11, 2009, FCMC voluntarily entered into an agreement to actively participate as a
mortgage servicer in the Federal governments HAMP for first-lien mortgage loans that are not owned
or guaranteed by Fannie Mae or Freddie Mac. HAMP is a program for consenting servicing clients,
with borrower, mortgage servicer, and mortgage loan owner incentives, designed to enable eligible
borrowers to avoid foreclosure through a more affordable and sustainable loan modification made in
accordance with HAMP guidelines, procedures, directives, and requirements. If a borrower is not
eligible for HAMP, FCMC considers other available loss mitigations options, as appropriate for the
owner of the loans serviced.
13
Bosco Servicing Agreements
On May 28, 2008, the Company entered into various agreements to service on a fee-paying basis
for Bosco I approximately $245 million in residential home equity line of credit mortgage loans.
In September 2010, FCMC entered into a servicing agreement with Bosco II for the servicing and
collection of approximately $761 million of loans purchased by Bosco II in the September 2010 sale
of subordinate lien loans by the Trust. In December 2010, FCMC entered into a servicing agreement
with Bosco III for the servicing and collection of approximately $174 million of loans purchased by
Bosco III of principally charge-off first and subordinate lien loans sold by the Trust and the
Bank. The membership interests in Bosco I include the Companys Chairman and President, Thomas J.
Axon, and a related company of which Mr. Axon is the chairman of the board and three of the
Companys directors serve as board members of that entity. Bosco II is owned solely by Thomas J.
Axon. Bosco III is 50% owned by Thomas J. Axon. FCMC began servicing the Bosco I portfolio in
June 2008, the Bosco II portfolio (which portfolio had previously been serviced for the Trust) in
September 2010 and the Bosco III portfolio (which portfolio had previously been serviced for the
Trust and the Bank) in December 2010. Included in the Companys consolidated revenues were
servicing fees recognized from servicing the portfolios for the Bosco entities of $2.5 million and
$2.0 million for the twelve months ended December 31, 2010 and 2009, respectively. Included in the
Companys consolidated revenues were servicing fees recognized from servicing the portfolios for
the Bosco entities of $1.4 million and $230,000 for the three months ended December 31, 2010 and
2009, respectively. See Note 19 to the Consolidated Financial Statements.
Due Diligence Services
During 2008, capitalizing on our acquisition experience with residential mortgage loans, FCMC
began providing services for third parties not related to us or the Bank, on a fee-paying basis.
During 2010, we were engaged in due diligence assignments principally for two third parties.
Financing
Prior to 2008, we historically financed both our acquisitions of mortgage loan portfolios and
our loan originations through various long and short-term borrowing arrangements with Sky Bank, the
predecessor to the Bank. On December 28, 2007, we entered into forbearance agreements with the
Bank with respect to these credit facilities.
Effective March 31, 2009 and through December 31, 2010, Franklin entered into a series of
restructuring agreements and amendments to restructuring agreements with the Bank, pursuant to
which the Companys debt, loans, pledges and guarantees with the Bank and its participating banks
were substantially restructured, except for approximately $39 million of the Companys debt as of
December 31, 2010, with the Bank (the Unrestructured Debt) that is subject to a forbearance
agreement effective until September 30, 2011.
Under Amendment No. 2 to the Licensing Credit Agreement with the Bank, entered into on the
July Loan Sale Closing Date, FCMC has available credit under a revolving loan facility of $1
million and a $6.5 million letter of credit facility with the Bank, and cash collateral securing
the revolving loan and letter of credit facilities of $7.5 million. The Licensing Credit Agreement
expires September 30, 2011.
At December 31, 2010, FCMC had no debt outstanding under the revolving line and approximately
$6.2 million of letters of credit under the Licensing Credit Agreement with the Bank.
See Managements Discussion and Analysis of Financial Condition and Results of Operations
Borrowings and Note 12 to the Consolidated Financial Statements.
14
Servicing Portfolio
The Companys servicing business is conducted through FCMC, a specialty consumer finance
company primarily engaged in the servicing and resolution of performing, reperforming and
nonperforming residential mortgage loans, including specialized collections and loan recovery
servicing for third parties.
As of December 31, 2010, FCMC had four significant servicing and recovery collection services
contracts with third parties to service 1-4 family mortgage loans and owned real estate: three with
related parties (Bosco I, Bosco II and Bosco III); and, one with an unrelated third party. We also
had one servicing contract remaining with Huntington and the Trust, for the owned real estate not
sold in the Loan Sales in July and September 2010 and the December Loan Sale in December 2010, and
another servicing contract between FCMC and certain Company entities for the loans collateralizing
the Unrestructured Debt. At December 31, 2010, we also serviced and provided recovery collection
services for relatively small pools of loans under recovery collection contracts for a few other
third parties, whereby we receive fees based solely on a percentage of amounts collected.
The unpaid principal balance of loans serviced for the Bosco related party entities
represented approximately 60% of the unpaid principal balance (82% of the number of loans) of the
total loans serviced at December 31, 2010, while the loans serviced for Huntington represented
approximately 1% of the unpaid principal balance (less than half of 1% of the number of loans) of
total loans serviced at December 31, 2010.
Bosco II is the Companys largest servicing client and the Purchaser for the remaining 75% of
the loans acquired in the July Loan Sale is now the Companys second largest servicing client.
On December 22, 2010, the Bank notified FCMC that the remaining servicing under the New Trust
Servicing Agreement with FCMC and the servicing of all assets by FCMC for the Trust (which as of
December 31, 2010 consisted of only REO assets) would be terminated by the Bank effective March 24,
2011. On March 24, 2011, the Bank notified FCMC that its servicing of the remaining real estate
owned assets was extended through April 30, 2011.
At December 31, 2010, the portfolio of residential mortgage loans serviced for other entities
consisted of 32,400 loans representing $1.60 billion of unpaid principal balance (UPB). The
following table sets forth information regarding the types of properties securing the serviced for
others portfolio at December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
Number |
|
|
Unpaid |
|
|
Percentage of Total |
|
Property Types |
|
of Loans |
|
|
Principal Balance |
|
|
Principal Balance |
|
Residential 1-4 family |
|
|
17,827 |
|
|
$ |
1,047,657,971 |
|
|
|
65.17 |
% |
Condos, co-ops, PUD dwellings |
|
|
2.889 |
|
|
|
168,737,824 |
|
|
|
10.50 |
% |
Manufactured and mobile homes |
|
|
438 |
|
|
|
11,248,155 |
|
|
|
0.70 |
% |
Secured, property type unknown(1) |
|
|
1,220 |
|
|
|
17,510,222 |
|
|
|
1.09 |
% |
Commercial |
|
|
40 |
|
|
|
2,767,412 |
|
|
|
0.17 |
% |
Unsecured loans(2) |
|
|
10,019 |
|
|
|
359,733,710 |
|
|
|
22.37 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
32,433 |
|
|
$ |
1,607,655,294 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The loans included in this category are principally small balance (less than $10,000)
second-lien loans acquired, and are collateralized by residential real estate. |
|
(2) |
|
The loans included in this category are principally second-lien loans where the Company
is aware that residential real estate collateral has been foreclosed by the first-lien
holder. |
15
The following table provides a breakdown of the delinquency status of our portfolio of
residential mortgage loans serviced for other entities at December 31, 2010, by unpaid principal
balance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
|
|
Contractual Delinquency |
|
|
|
Days Past Due |
|
Amount |
|
|
% |
|
Performing Current |
|
0 30 days |
|
$ |
190,038,151 |
|
|
|
11.82 |
% |
Delinquent |
|
31 60 days |
|
|
16,743,849 |
|
|
|
1.04 |
% |
|
|
61 90 days |
|
|
2,401,038 |
|
|
|
0.15 |
% |
|
|
90+ days |
|
|
785,233,734 |
|
|
|
48.84 |
% |
|
|
|
|
|
|
|
|
|
|
|
Modified Loans |
|
0 30 days |
|
|
149,608,958 |
|
|
|
9.31 |
% |
Delinquent |
|
31 60 days |
|
|
23,306,774 |
|
|
|
1.45 |
% |
|
|
61 90 days |
|
|
3,469,705 |
|
|
|
0.22 |
% |
|
|
90+ days |
|
|
49,663,139 |
|
|
|
3.09 |
% |
|
|
|
|
|
|
|
|
|
|
|
Bankruptcy |
|
0 30 days |
|
|
23,332,646 |
|
|
|
1.45 |
% |
Delinquent |
|
31 60 days |
|
|
5,145,147 |
|
|
|
0.32 |
% |
|
|
61 90 days |
|
|
927,773 |
|
|
|
0.06 |
% |
|
|
90+ days |
|
|
181,153,352 |
|
|
|
11.27 |
% |
|
|
|
|
|
|
|
|
|
|
|
Foreclosure |
|
0 30 days |
|
|
3,198,142 |
|
|
|
0.20 |
% |
Delinquent |
|
31 60 days |
|
|
|
|
|
|
|
|
|
|
61 90 days |
|
|
76,978 |
|
|
|
0.00 |
% |
|
|
90+ days |
|
|
173,355,908 |
|
|
|
10.78 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,607,655,294 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
All current loans |
|
0 30 days |
|
$ |
366,177,897 |
|
|
|
22.78 |
% |
|
|
|
|
|
|
|
|
|
Included in the above table were second-lien mortgage loans in the amount of $1.10
billion, of which $190.0 million were current on a contractual basis. The legal status composition
of the second-lien mortgage loans at December 31, 2010 was: $866.7 million (including $720.9
million at least 90 days contractually delinquent), or 78%, were performing; $87.1 million, or 8%,
were modified due to delinquency or the borrowers financial difficulty; $150.7 million, or 14%,
were in bankruptcy; and less than $1.4 million, or less than 0.13%, were in foreclosure.
The following table sets forth information regarding the lien position of the properties
securing the portfolio of residential mortgage loans (exclusive of real estate assets) serviced for
other entities at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
Number |
|
|
Unpaid |
|
|
Percentage of Total |
|
Lien Position |
|
of Loans |
|
|
Principal Balance |
|
|
Principal Balance |
|
1st Liens |
|
|
5,267 |
|
|
$ |
501,708,182 |
|
|
|
31.21 |
% |
2nd Liens |
|
|
27,166 |
|
|
|
1,105,947,112 |
|
|
|
68.79 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
32,433 |
|
|
$ |
1,607,655,294 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
16
The following table sets forth information regarding the geographic location of
properties securing the residential mortgage loans serviced for other entities at December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
|
Number |
|
|
Unpaid |
|
|
Percentage of Total |
|
Location |
|
of Loans |
|
|
Principal Balance |
|
|
Principal Balance |
|
California |
|
|
5,278 |
|
|
$ |
436,286,590 |
|
|
|
27.14 |
% |
Florida |
|
|
2,621 |
|
|
|
128,525,259 |
|
|
|
7.99 |
% |
New Jersey |
|
|
833 |
|
|
|
108,792,758 |
|
|
|
6.77 |
% |
New York |
|
|
1,216 |
|
|
|
101,532,645 |
|
|
|
6.32 |
% |
Texas |
|
|
3,263 |
|
|
|
86,478,663 |
|
|
|
5.38 |
% |
Pennsylvania |
|
|
1,032 |
|
|
|
53,392,301 |
|
|
|
3.32 |
% |
Ohio |
|
|
1,657 |
|
|
|
49,895,626 |
|
|
|
3.10 |
% |
Illinois |
|
|
1,235 |
|
|
|
48,919,997 |
|
|
|
3.04 |
% |
Georgia |
|
|
1,216 |
|
|
|
46,808,833 |
|
|
|
2.91 |
% |
Michigan |
|
|
1,617 |
|
|
|
44,567,163 |
|
|
|
2.77 |
% |
All Others |
|
|
12,465 |
|
|
|
502,455,459 |
|
|
|
31.25 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
32,433 |
|
|
$ |
1,607,655,294 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
Real Estate Assets Serviced for Other Entities
The following table sets forth the UPB of real estate properties serviced for other entities
at December 31, 2010 and December 31, 2009, and sales of real estate properties during the twelve
months ended December 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
Number of Assets |
|
|
Amount |
|
|
Number of Assets |
|
|
Amount |
|
Real estate properties |
|
|
214 |
|
|
$ |
37,703,695 |
|
|
|
198 |
|
|
$ |
38,011,340 |
|
Real estate properties sold |
|
|
309 |
|
|
|
53,196,739 |
|
|
|
738 |
|
|
$ |
138,666,762 |
|
The real estate asset activity for 2009 includes the activity in the quarter ended March
31, 2009 prior to the Restructuring when the Company owned the real estate properties.
Government Regulation
The mortgage lending, servicing and collection industry is highly regulated. Our business is
regulated by federal, state and local government authorities and is subject to federal, state and
local laws, rules and regulations, as well as judicial and administrative decisions that impose
requirements and restrictions on our business. At the federal level, these laws, rules and
regulations include:
|
|
|
Dodd-Frank Wall Street Reform and Consumer Protection Act; |
|
|
|
the Equal Credit Opportunity Act and Regulation B; |
|
|
|
the Truth in Lending Act and Regulation Z; |
|
|
|
|
the Home Ownership and Equity Protection Act; |
|
|
|
the Real Estate Settlement Procedures Act, and Regulation X; |
|
|
|
the Fair Credit Reporting Act;
|
17
|
|
|
the Fair Debt Collection Practices Act; |
|
|
|
the Home Mortgage Disclosure Act, and Regulation C; |
|
|
|
the Telemarketing and Consumer Fraud and Abuse Prevention Act; |
|
|
|
the Telephone Consumer Protection Act; |
|
|
|
the Gramm-Leach-Bliley Act; |
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the Servicemembers Civil Relief Act; |
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the Fair and Accurate Credit Transactions Act; |
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the Secure and Fair Enforcement for Mortgage Licensing Act of 2008; and, |
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the Helping Families Save Their Homes Act of 2009. |
States have also in some instances enacted their own variants of the foregoing laws, rules and
regulations, especially with respect to those laws, rules and regulations that address
anti-predatory lending and abusive servicing or privacy issues.
These laws, rules and regulations, among other things:
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impose licensing obligations and financial requirements on us; |
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limit the interest rates, finance charges, and other fees that we may charge; |
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prohibit discrimination both in the extension of credit and in the terms and
conditions on which credit is extended; |
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prohibit the payment of kickbacks for the referral of business incident to a real
estate settlement service; |
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impose underwriting requirements; |
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mandate various disclosures and notices to consumers, as well as disclosures to
governmental entities; |
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mandate the collection and reporting of statistical data regarding our customers and
the loans we service; |
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require us to safeguard non-public information about our customers; |
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impose servicing standards and regulate our collection, loss mitigation, foreclosure
and loan modification practices; |
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require us to combat money-laundering and avoid doing business with suspected
terrorists; |
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restrict the marketing practices utilized to find customers, including restrictions
on outbound telemarketing; and, |
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impose, in some cases, assignee liability on us as purchaser or seller of mortgage
loans as well as the entities that purchase or purchased our mortgage loans. |
Our failure to comply with these laws can lead to:
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civil and criminal liability, including potential monetary penalties; |
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loss of servicing licenses or approved status required for continued business
operations; |
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demands for indemnification or loan repurchases from purchasers of our loans; |
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legal defenses causing delay and expense; |
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adverse effects on our ability, as servicer, to enforce loans; |
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the imposition of supervisory agreements and cease-and-desist orders; |
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the borrower having the right to rescind or cancel the loan transaction; |
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individual and class action lawsuits; |
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administrative enforcement actions; |
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damage to our reputation in the industry; or, |
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inability to obtain credit to fund our operations. |
In response to an unusually large number of foreclosures in recent years, a growing number of
states have enacted laws that subject the holder to certain notice and/or waiting periods prior to
commencing a foreclosure. In Massachusetts, the Attorney Generals office may review and possibly
terminate the foreclosure of any 1-4 family residential mortgage that is secured by the borrowers
principal dwelling. In some instances, these laws require the servicer of the mortgage to consider
modification of the mortgage or an alternative option prior to proceeding with foreclosure.
The effect of these laws has been to delay foreclosure in particular jurisdictions.
The mortgages or assignments of mortgage for some of the mortgage loans have been recorded in
the name of Mortgage Electronic Registration Systems, Inc., or MERS, solely as nominee for the
originator and its successors and assigns, including the issuing entity. Subsequent assignments of
those mortgages are registered electronically through the MERS system. The recording of mortgages
in the name of MERS has been challenged in a number of states. Although many decisions have
accepted MERS as mortgagee, some courts have held that MERS is not a proper party to conduct a
foreclosure and have required that the mortgage be reassigned to the entity that is the economic
owner of the mortgage loan before a foreclosure can be conducted. In states where such a rule is
in effect, there may be delays and additional costs in commencing, prosecuting and completing
foreclosure proceedings and conducting foreclosure sales of mortgaged properties. In addition,
borrowers are raising new challenges to the recording of mortgages in the name of MERS, including
challenges questioning the ownership and enforceability of mortgage loans registered in MERS. An
adverse decision in any jurisdiction may delay the foreclosure process.
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Although we have systems and procedures directed to compliance with these legal requirements
and believe that we are in material compliance with all applicable federal, state and local
statutes, rules and regulations, we cannot provide assurance that more restrictive laws and
regulations will not be adopted in the future, or that governmental bodies will not interpret
existing laws or regulations in a more restrictive matter, which could render our current business
practices non-compliant or which could make compliance more difficult or expensive. These
applicable laws and regulations are subject to administrative or judicial interpretation, but some
of these laws and regulations have been enacted only recently or may be interpreted infrequently or
only recently and inconsistently. As a result of infrequent, sparse or conflicting
interpretations, ambiguities in these laws and regulations may leave uncertainty with respect to
permitted or restricted conduct under them. Any ambiguity under a law to which we are subject may
lead to non-compliance with applicable regulatory laws and regulations. We actively analyze and
monitor the laws, rules and regulations that apply to our business, as well as the changes to such
laws, rules and regulations.
Licenses to Service Loans
By letter dated April 12, 2010, the Banking Department had notified FCMC that in connection
with its review of FCMCs financial statements and mortgage servicing volume, its application for
registration as a mortgage servicer in that state, which FCMC had filed during the transitional
period allowed by the state for registration of mortgage servicers doing business in New York State
on June 30, 2009, could not be accepted for processing until FCMC addressed its Adjusted Net Worth
(defined below), which the Banking Department had determined to be below the minimum Adjusted Net
Worth requirement for mortgage servicers established under applicable regulations adopted through
emergency rule making.
On September 9, 2010, the New York State Banking Department (the Banking Department) found
the capital plan submitted by FCMC on May 12, 2010 (to address how FCMC would achieve compliance
with regulatory net worth requirements that were adopted in New York State in 2009 for mortgage
servicers) to be satisfactory and accepted for processing the application of FCMC to continue to
service residential mortgage loans in that state and granted a twelve-month waiver of otherwise
applicable net worth requirements. FCMCs capital plan includes in relevant part a commitment,
until FCMC is in
full compliance with the net worth requirements for mortgage servicers in New York State, to
(i) meet regulatory net worth requirements as soon as practicable but in no event later than
December 31, 2012 through the retention of net earnings and dividend restrictions, (ii) maintain an
interim adjusted net worth (as adjusted and calculated by the Banking Department (see below), the
Adjusted Net Worth) until FCMC complies with regulatory net worth requirements of not less than
approximately $7.9 million (Minimum Level), and not less than 5% of the principal balance of New
York mortgage loans serviced by FCMC and 0.25% of the aggregate mortgage loans serviced in the
United States (with each such percentage a Minimum Percentage), (iii) not, without the prior
written consent of the Banking Department, service additional mortgage loans secured by 1-4 family
residential homes located in New York State, (iv) not declare or pay any dividends upon the shares
of its capital stock, and (v) submit quarterly reports on the total number of and principal balance
of loans serviced and its Adjusted Net Worth. Under the terms of the capital plan, in the event
that FCMCs Adjusted Net Worth falls below the Minimum Level or is less in percentage terms than
either of the Minimum Percentages, FCMC shall promptly notify the Banking Department and (i) within
90 days cure the deficiency or (ii) within 90 days submit a written plan acceptable to the
superintendent of the Banking Department describing the primary means and timing by which the
Minimum Level or Minimum Percentages, as applicable, will be achieved.
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The emergency regulations, which were adopted by the New York State Superintendent of Banks
and which implement the statutory registration requirement for mortgage servicers in New York State
that went into effect on July 1, 2009, require (i) an Adjusted Net Worth of at least 1% of the
outstanding principal balance of aggregate mortgage loans serviced (whether or not in New York),
but in any event not less than $250,000; and, (ii) a ratio of Adjusted Net Worth to the outstanding
principal balance of New York mortgage loans serviced of at least 5%. Adjusted Net Worth, as
defined under the Superintendents emergency regulations, consists of total equity capital at the
end of the reporting period as determined by GAAP less: goodwill, intangible assets (excluding
mortgage servicing rights), any assets pledged to secure obligations of a person other than the
applicant, any assets due from officers or stockholders of the applicant or related companies; that
portion of any marketable securities (listed or unlisted) not shown at lower of cost or market; any
amount in excess of the lower of cost or market value of mortgages in foreclosure, construction
loans or property acquired through foreclosure, and any amount shown on the balance sheet as
investments in unconsolidated joint ventures, subsidiaries, affiliates, and/or other related
companies that is greater than the value of such investments accounted for using the equity method
of accounting.
At December 31, 2010, FCMCs Adjusted Net Worth was approximately $7.5 million, or
approximately 0.59% of the aggregate principal balance of loans serviced nationwide and 8.25% for
loans serviced in New York. FCMCs requirement under the capital plan with the Banking Department
is to maintain not less than $7.9 million in Adjusted Net Worth and not less than 0.25% of the
aggregate principal balance of loans serviced nationwide and 5% for loans serviced in New York.
Following the receipt of payments in January 2011 from FCMCs related companies for servicing
receivables outstanding at December 31, 2010, FCMC was back in compliance with the Minimum Level
under its capital plan.
New Areas of Regulation
We are subject to numerous laws and regulations as a result of our historical business as an
originator and acquirer of residential mortgage loans, as well as our historical and current
business of servicing such loans and providing due diligence services for third parties.
Furthermore, many new laws
and regulations applicable to the mortgage industry have recently been enacted and promulgated
in response to what some have alleged to be unfair and deceptive trade practices even prior to the
enactment of such new laws and regulations. Our summary below includes such laws and regulations
which may, in that context, need to be considered in context of our historical activities. In
addition, our clients expect us to be generally aware of new laws and regulations affecting the
mortgage industry that may apply to them.
Regulatory and legal requirements are subject to change, making our compliance more difficult
or expensive, or otherwise restricting our ability to conduct our business as it is now conducted.
In particular, federal, state and local governments have become more active in the consumer
protection area in recent years.
Local, state and federal legislatures, state and federal banking regulatory agencies, state
attorneys general offices, the Federal Trade Commission, the Department of Justice, the Department
of Housing and Urban Development and state and local governmental authorities have continued to
focus on lending and servicing practices by some companies, primarily in the non-prime lending
industry, sometimes referred to as predatory lending and abusive servicing practices.
Sanctions have been imposed by various agencies for practices such as charging excessive fees,
imposing higher interest rates than the credit risk of some borrowers warrant, failing to disclose
adequately the material terms of loans to borrowers and abrasive servicing and collections
practices.
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On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Reform
Act) was signed into law. The Reform Act, which is designed to improve accountability and
transparency in the financial system and to protect consumers from abusive financial services
practices, creates various new requirements affecting mortgage servicers, such as FCMC, including
mandatory escrow accounts for certain mortgage loans; notice requirements for consumers who waive
escrow services; certain prohibitions related to mortgage servicing with respect to force-placed
hazard insurance, qualified written requests, requests to correct certain servicing errors, and
requests concerning the identity and contact information for an owner or assignee of a loan;
requirements for prompt crediting of payments, processing of payoff statements, and monthly
statements with certain disclosures for adjustable rate mortgage loans; and late fee restrictions
on high cost loans. In addition, a new executive agency and consumer financial regulator, the
Bureau of Consumer Financial Protection (CFPB), was established in the Federal Reserve System
under the Reform Act. On July 21, 2011, the regulation of the offering and provision of consumer
financial products or services, including mortgage servicing, under federal consumer financial
laws, will be generally transferred and consolidated into the CFPB (with a few exceptions that will
among other provisions affecting FCMC result in the Federal Trade Commission exercising concurrent
enforcement authority with CFPB and retaining certain rulemaking authority under certain acts and
the Department of Housing and Development administering and enforcing the Fair Housing Act).
The Reform Act sets forth certain objectives for and the functions of the CFPB. The
objectives of the CFPB, as identified under the Reform Act, are to ensure that: (1) consumers are
provided with timely and understandable information to make responsible decisions about financial
transactions; (2) consumers are protected from unfair, deceptive, or abusive acts and practices and
from discrimination; (3) outdated, unnecessary, or unduly burdensome regulations are regularly
identified and addressed in order to reduce unwarranted regulatory burdens; (4) federal consumer
financial law is enforced consistently, without regard to the status of a person as a depository
institution, in order to promote fair competition; and (5) markets for consumer financial products
and services operate transparently and efficiently to facilitate
access and innovation. The primary functions of the CFPB under the Reform Act are: (1)
conducting financial education programs; (2) collecting, investigating, and responding to consumer
complaints; (3) collecting, researching, monitoring, and publishing information relevant to the
functioning of markets for consumer financial products and services to identify risks to consumers
and the proper functioning of such markets; (4) subject to certain sections of the Reform Act,
supervising covered persons for compliance with federal consumer financial law, and taking
appropriate enforcement action to address violations of federal consumer financial law; (5) issuing
rules, orders, and guidance implementing federal consumer financial law; and (6) performing such
support activities as may be necessary or useful to facilitate the other functions of the CFPB.
Several federal, state and local laws, rules and regulations have been adopted, or are under
consideration, that are intended to protect consumers from predatory lending and abusive servicing
practices, and in some instances establish or propose a servicing standard and duty of care for
mortgage servicers. On January 4, 2011, the CFPB implementation team entered into an information
sharing memorandum of understanding with the Conference of State Bank Supervisors (an organization
that historically has cooperated with the American Association of Residential Mortgage Regulators,
which is another association comprised of the state regulators of FCMC) to promote state and
federal cooperation and consistent examination procedures among regulators of providers of consumer
financial products and services, including mortgage servicers.
The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the SAFE Act) was
enacted as part of the federal Housing and Economic Recovery Act of 2008. The SAFE Act is a model
act that required states to implement licensing requirements for all individual mortgage loan
originators (i.e., mortgage brokers, loan officers, etc.) and set minimum requirements for such
individual employees, including testing and initial and continuing education requirements. The
SAFE Act directed each state to enact legislation requiring licensing; otherwise, the SAFE Act
directed the Department of Housing & Urban Development (HUD, with HUD responsibilities and
functions under the SAFE Act to be transferred to the CFPB under the Reform Act) to provide a
default licensing system.
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The Office of the Comptroller of the Currency, the regulator of national banks, issued a final
regulation in 2004 that prescribed an explicit anti-predatory lending standard without regard to a
trigger test based on the cost of the loan. This regulation prohibits a national bank from, among
other restrictions, making or purchasing a loan based predominately on the foreclosure value of the
borrowers home, rather than the borrowers repayment ability, including current and expected
income, current obligations, employment status and relevant financial resources.
On May 16, 2005, the Office of the Comptroller of the Currency, the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift
Supervision, and the National Credit Union Administration (the Agencies) jointly issued Credit
Risk Management Guidance for Home Equity Lending. The guidance promotes sound credit risk
management practices for institutions engaged in home equity lending (both home equity lines of
credit and closed-end home equity loans). Among other risk factors, the guidance cautions lenders
to consider all relevant risk factors when establishing product offerings and underwriting
guidelines, including a borrowers income and debt levels, credit score (if obtained), and credit
history, as well as the loan size, collateral value, lien position, and property type and location.
It stresses that prudently underwritten home equity loans should include an evaluation of a
borrowers capacity to adequately service the debt, and that reliance on a credit score is
insufficient because it relies on historical financial performance rather than present capacity to
pay. While not specifically applicable to loans that had been originated by our subsidiary Tribeca
Lending
Corp. (Tribeca), the guidance is instructive of the regulatory climate covering low and no
documentation loans, such as certain of Tribecas loans originated in the past.
On June 29, 2007, the Agencies released their final statement on subprime mortgage lending to
address certain concerns of the Agencies that subprime borrowers may not fully understand the risk
and consequences of certain adjustable-rate mortgage products. The Agencies expressed particular
concern with (1) marketing products to subprime borrowers offering low initial payments based on an
introductory (teaser) rate that is considerably lower than the fully indexed rate; (2) approving
borrowers without considering appropriate documentation of their income; (3) setting very high or
no limits on payment or interest rate increases at reset periods; (4) loan product features likely
to result in frequent refinancing to maintain an affordable monthly payment; (5) including
substantial prepayment penalties and/or prepayment penalties that extend beyond the initial rate
adjustment period; and (6) providing borrowers with inadequate information relative to product
features, material loan terms and products risks.
The final statement identified underwriting standards, consumer protection principles and
control systems applicable to subprime mortgage loans that focus on the importance of evaluating
the borrowers ability to repay the debt by its final maturity at the fully indexed rate and
providing information that enable consumers to understand material terms, costs, and risks. The
Agencies caution their regulated institutions against making mortgage loans based predominately on
the foreclosure or liquidation value of a borrowers collateral rather than on the borrowers
ability to repay the mortgage according to its terms, inducing a borrower to repeatedly refinance a
loan in order to charge high points and fees each time a loan is refinanced and engaging in fraud
or deception to conceal the true nature of the mortgage loan obligation. The Agencies also advised
their regulated institutions that when underwriting higher risk loans, stated income and reduced
documentation should be accepted only if there are mitigating factors that clearly minimize the
need for direct verification of repayment capacity. A higher interest rate is not considered a
mitigating factor. While the final statement, in part, discusses subprime products that were not
offered by Tribeca such as loans with teaser rates, the final statement appears to apply strict
standards for all types of subprime loans and is instructive of the regulatory climate concerning
subprime mortgage loans, such as Tribecas Liberty Loan, where the lending decision was or may have
been based entirely or primarily on the borrowers equity in his or her home and not, or to a
lesser extent, on a determination of the borrowers ability to repay the loan. In addition, as
with the 2006 Interagency Guidance on Nontraditional Mortgage Product Risks for mortgages where the
borrower is able to defer repayment of principal for a period of time (interest only-loans and Pay
Option ARMs), state regulators have adopted similar standards applicable to the institutions they
regulate, which included Tribeca. On July 17, 2007, the American Association of Residential
Mortgage Regulators (AARMR), which is comprised of state officials with responsibility for
regulating state licensed mortgage lenders and brokers, in conjunction with the Conference of State
Bank Supervisors (CSBS) and the National Association of Consumer Credit Regulators (NACCA), issued
a statement on subprime lending that is substantially similar to the Agencies final statement and
which, as of July 7, 2008, was adopted in 40 states in addition to the District of Columbia.
Moreover, under the Reform Act and implementing regulations to be prescribed, a creditor may not
make a residential mortgage loan unless the creditor makes a reasonable and good faith
determination based on verified and documented information that, at the time the loan is
consummated, the consumer has a reasonable ability to repay the loan, according to its terms, and
all applicable taxes, insurance (including mortgage guarantee insurance), and assessments.
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A key mortgage industry tool for finding new borrowers is under recent attack in class action
litigation across the country. Those class actions have been filed by attorneys seeking to
capitalize on a
2004 decision of the Seventh Circuit Court of Appeals, Cole v. U.S. Capital, Inc. (Cole)
interpreting the meaning of firm offers of credit under the Fair Credit Reporting Act (FCRA).
A prescreened or firm offer is any offer of credit to a consumer that will be honored if the
consumer is determined, based on information in a consumer report on the consumer, to meet the
specific criteria used to select the consumer for the offer. Cole was the first case in the nation
to hold that an offer of nominal value to the consumer, which could arise from a combination of
factors such as a low dollar amount of the offered credit, ambiguous or contradictory terms, or
complex approval procedures, may not actually qualify as a firm offer under FCRA, even if the
stated amount is guaranteed. Recent courts to address the issue have split on the issue. Some of
the courts in these recent cases have concluded that the defendants violation of FCRA was
willful. FCRA distinguishes negligent or inadvertent non-compliance from willful violations by
the damages that are available. Specifically, FCRA provides for statutory damages of $100-$1,000
per violation for willful violations and permits punitive damages as well. By contrast, FCRA
provides that a defendant whose non-compliance was merely negligent will be liable only for actual
damages sustained by the consumer as a result of the failure. This distinction is significant
because FCRA does not have a cap for statutory damages in a class action, unlike other federal
statutes regulating consumer lending which cap statutory damages in a class action at a maximum of
$500,000 or one percent of the creditors net worth, whichever is less. If we are named as a
defendant in a firm offer class action, and the court were to find that the violation was willful,
we could face substantial liability that could have a material adverse affect on our financial
condition and operations.
HOEPA identifies a category of mortgage loans and subjects such loans to restrictions not
applicable to other mortgage loans. Loans subject to HOEPA consist of loans on which certain
points and fees or the annual percentage rate, known as the APR, exceed specified levels.
Liability for violations of applicable law with regard to loans subject to HOEPA would extend not
only to us, but to the institutional purchasers of our loans as well. It was our policy to seek
not to originate loans that were subject to HOEPA or state and local laws discussed in the
following paragraph or purchase high cost loans that violated such laws. Non-compliance with HOEPA
and other applicable laws may lead to demands for indemnification or loan repurchases from our
institutional loan purchasers, class action lawsuits and administrative enforcement actions.
Laws, rules and regulations have been adopted at the state and local levels that are similar
to HOEPA in that they impose certain restrictions on loans on which certain points and fees or the
APR exceeds specified thresholds, which generally are lower than under federal law. These
restrictions include prohibitions on steering borrowers into loans with high interest rates and
away from more affordable products, selling unnecessary insurance to borrowers, flipping or
repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers
will be able to repay the loans. If the numerical thresholds were miscalculated, certain
variations of Tribecas Liberty Loan product, where the lending decision was or may have been based
entirely or primarily on the borrowers equity in his or her home and not, or to a lesser extent,
on a determination of the borrowers ability to repay the loan, would violate HOEPA and many of
these state and local anti-predatory lending laws. In the past, we have sold a portion of
Tribecas Liberty Loan production to third parties on a whole-loan, servicing-released basis.
Compliance with some of these restrictions requires lenders to make subjective judgments, such as
whether a loan will provide a net tangible benefit to the borrower. These restrictions expose a
lender to risks of litigation and regulatory sanction no matter how carefully a loan is
underwritten. The remedies for violations of these laws are not based on actual harm to the
consumer and can result in damages that exceed the loan balance. In addition, an increasing number
of these laws, rules and regulations seek to impose liability for violations on assignees, which
may include our prior warehouse lenders and whole-loan buyers, regardless of whether the assignee
knew of or participated in the violation.
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RESPA prohibits the payment of fees for the mere referral of real estate settlement service
business. This law does permit the payment of reasonable value for services actually performed and
facilities actually provided unrelated to the referral. In the past, several lawsuits have been
filed against mortgage lenders alleging that such lenders have made certain payments to independent
mortgage brokers in violation of RESPA. These lawsuits generally have been filed on behalf of a
purported nationwide class of borrowers alleging that payments made by a lender to a broker in
addition to payments made by the borrower to a broker are prohibited by RESPA and are therefore
illegal. On September 18, 2002, the Eleventh Circuit Court of Appeals issued a decision in
Heimmermann v. First Union Mortgage Corp., which reversed the courts earlier decision in Culpepper
v. Irwin Mortgage Corp. in which the court found the yield-spread premium payments received by a
mortgage broker to be unlawful per se under RESPA. The Department of Housing and Urban Development
responded to the Culpepper decision by issuing a policy statement (2001-1) taking the position that
lender payments to mortgage brokers, including yield spread premiums, are not per se illegal. The
Heimmermann decision eliminated a conflict that had arisen between the Eleventh Circuit and the
Eighth and Ninth Circuit Courts of Appeals, with the result that all federal circuit courts that
have considered the issue have aligned with the Department of Housing and Urban Development policy
statement and found that yield spread premiums are not prohibited per se. If other circuit courts
that have not yet reviewed this issue disagree with the Heimmermann decision, there could be a
substantial increase in litigation regarding lender payments to brokers and in the potential costs
of defending these types of claims and in paying any judgments that might result.
A new RESPA rule effective on January 1, 2010 includes the yield spread premium in the
calculation of the mortgage brokers total compensation and require more detailed closing costs
disclosures to be provided to consumers at the time of loan origination. The new RESPA rule might
usher in a new wave of litigation when mortgage lenders and brokers are subject to new compliance
parameters.
Further, in a rule taking effect on April 1, 2011 under Regulation Z and future rule-making
under the Reform Act, sweeping changes with respect to permissible and prohibited loan originator
compensation are underway that will prohibit loan originator compensation based on loan terms or
conditions (other than the amount of the principal), dual compensation of loan originators and
various loan steering activities are underway.
In 2008, Congress enacted the Mortgage Disclosure Improvement Act of 2008 (MDIA), which was
initially part of the Housing and Economic Recovery Act of 2008 and then subsequently amended as
part of the Emergency Economic Stabilization Act of 2008. As of July 30, 2009, the MDIA requires
creditors to furnish early Truth in Lending (TIL) disclosures for all closed-end mortgage
transactions that are secured by a consumers dwelling, including loans secured by primary,
secondary or vacation homes, and regardless of whether the loans are for purchase money or
non-purchase money transactions. While the early TIL disclosure must still be given within three
business days of application, the MDIA and MDIA rule now require that the early TIL disclosure be
provided at least seven business days prior to consummation of the transaction. Further, if the
disclosed annual percentage rate (APR) exceeds certain tolerances as set forth in the Truth in
Lending Act and Regulation Z, the creditor must provide corrected disclosures disclosing an
accurate APR and all changed terms no later than 3 business days before consummation.
Significantly, this means that multiple early TIL disclosures may be required.
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In addition, the Federal Reserve Board adopted a final rule to amend Regulation Z on July 14,
2008 (the July Rule). Notably, the July Rule, which took effect on October 1, 2009: (i) created
a new category of loans called higher-priced mortgage loans; (ii) instituted new protections for
both this new
category of higher-priced mortgage loans as well as for the existing category of high cost
mortgages under the Home Ownership and Equity Protection Act; (iii) enacted certain prohibited
acts and practices for all closed-end credit transactions secured by a consumers principal
dwelling; (iv) revised the disclosures required in advertisements for credit secured by a
consumers dwelling and prohibited certain practices in connection with closed-end mortgage
advertising; and (v) required disclosures for closed-end mortgages secured by a consumers
principal dwelling to be provided earlier in the transaction and before consumers pay any fee
except for a fee for obtaining a consumers credit history.
Home Affordable Modification Program
On September 11, 2009, FCMC voluntarily entered into an agreement to actively participate as a
mortgage servicer in the Federal governments Home Affordable Modification Program (HAMP) for first
lien mortgage loans that are not owned or guaranteed by Fannie Mae or Freddie Mac. HAMP is a
program for consenting servicing clients, with borrower, mortgage servicer, and mortgage loan owner
incentives, designed to enable eligible borrowers to avoid foreclosure through a more affordable
and sustainable loan modification made in accordance with HAMP guidelines, procedures, directives,
and requirements. Effective April 5, 2010, HAMP was expanded to include eligibility criteria and
financial incentives for foreclosure alternatives such as deeds-in-lieu and short sales. Pursuant
to the Reform Act, supplemental directives and guidelines were revised to require each
participating mortgage servicer to provide each borrower whose request for a mortgage modification
is denied with all borrower-related and mortgage-related input data used in any net present value
analyses performed in connection with the subject mortgage. If a borrower is not eligible for
HAMP, FCMC considers other available loss mitigation options, as appropriate, for owners of the
loans serviced.
Privacy
Title V of the federal Gramm-Leach-Bliley Act (GLBA) obligates us to safeguard the
information we maintain on our clients borrowers and to inform our borrowers of our use of their
non-public personal information. In addition to the requirements of GLBA, we are subject to
compliance with state privacy laws. Whereas under GLBA, a borrower is required to affirmatively
opt-out of certain of our information sharing practices, under the privacy laws of California (to
a certain extent) and Vermont, the borrower must affirmatively opt-in to the same. California
passed legislation known as the California Financial Information Privacy Act and the California
On-Line Privacy Protection Act. Both pieces of legislation became effective on July 1, 2004, and
impose additional notification obligations on us. Regulations have been proposed by several
agencies and states that may affect our obligations to safeguard information. If other states or
federal agencies adopt additional privacy legislation, our compliance costs could substantially
increase.
26
Fair Credit Reporting Act
The FCRA allows lenders to share information with affiliates and certain third parties and to
provide pre-approved offers of credit to consumers in certain instances. However, the FCRA places
certain restrictions on the use of information shared between affiliates and with third parties,
and Congress recently amended the Statute to, among other things, to provide new disclosures to
consumers when risk based pricing is used in the credit decision, and to help protect consumers
from identity theft. All of these provisions impose additional regulatory and compliance costs on
us.
As discussed above under the heading New Areas of Regulation, there has been significant
class action activity relating to prescreened offers of credit, which is a tool we used for finding
potential borrowers, when we were originating loans. Many other mortgage lenders used prescreened
credit offers to obtain new borrowers. We have not been named as a defendant in such a class
action. However, if we were to be named in a class action alleging a violation of the Fair Credit
Reporting Acts prescreened offer provisions, and the court were to find that the violation was
willful, we could face substantial liability that could have a material adverse affect on our
financial condition and operations.
Home Mortgage Disclosure Act
In 2002, the Federal Reserve Board adopted changes to Regulation C promulgated under the Home
Mortgage Disclosure Act (HMDA). Among other things, the new regulation requires lenders to
report pricing data on loans that they originate with annual percentage rates that exceed the yield
on treasury bills with comparable maturities by three percent. The expanded reporting took effect
in 2004 for reports filed in 2005. A majority of our loans we originated in 2004 and thereafter
were subject to the expanded reporting requirements.
The expanded reporting does not include additional loan information such as credit risk,
debt-to-income ratio, LTV ratio, documentation level or other salient loan features that might
impact pricing on individual loans. As a result, the reported information may lead to increased
litigation and government scrutiny to determine if any reported disparities between prices paid by
minorities and majorities may have resulted from unlawful discrimination. For example, the Civil
Rights Division of the New York State Attorney Generals office requested that certain large
lenders provide it with supplementary information to explain the disparities in their reported HMDA
data.
SAFE Act
The implications of the SAFE Act on individual loan officers and brokers employed by lenders
are clear: these individuals must now be licensed in states in connection with their origination
and brokering activity. However, there has been confusion in the industry about the potential
application of the state SAFE Acts to individuals, who are either employed by a servicer or working
as their agent or on their behalf, in connection with executing loan modifications. The SAFE Act,
as implemented on the state level, impacts a wide range of individuals, including those engaged in
certain loss mitigation activities, because of the manner in which it defines a mortgage loan
originator. The majority of states define mortgage loan originator as someone who, for
compensation or gain, or in the expectation of compensation or gain, either: (1) takes a
residential mortgage loan application; or, (2) offers or negotiates terms of a residential mortgage
loan.
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The Department of Housing and Urban Development, issued proposed rules under the SAFE Act on
December 15, 2009, subject to a public comment period which ended on March 5, 2010. In those
rules, the Department of Housing and Urban Development takes the informal position that individuals
who perform loan modifications for servicers meet the definition of mortgage loan originator for
purposes of the state versions of the SAFE Act. At this time, several states also have adopted
this informal position, pending the publication of final rules from the Department of Housing and
Urban Development or CFPB. Other states have moved to specifically exempt those individuals working
for servicers from the definition of mortgage loan originator. As a result, individuals who
engage in loan modification activities for servicers may potentially fall within this definition
and be required to hold individual licenses within a particular state. Furthermore, state SAFE
Acts impose civil and criminal penalties on both individuals and companies for failure to comply
with their requirements. This individual licensing issue is currently in-flux, and subject to
change pending a final determination from HUD (it has been reported that HUD sent its final rule to
the Office of Management and Budget for approval in or about February 2011) or CFPB, and a more
thorough review of the licensing policy from state regulators over the coming months.
Telephone Consumer Protection Act and Telemarketing Consumer Fraud and Abuse Prevention Act
The Federal Communications Commission and the Federal Trade Commission adopted do-not-call
registry requirements, which, in part, mandate that companies such as us maintain and regularly
update lists of consumers who have chosen not to be called for marketing purposes. These
requirements also mandate that we do not call consumers who have chosen to be on the list. Those
prohibitions do not apply to calls made to a servicers existing customers. Several states also
have adopted similar laws, with which we also seek to comply. The Telephone Consumer Protection
Act, which in part regulates the use or auto-dialers, prohibits making any call, absent an
emergency purpose or prior express consent of the called party, using any automatic telephone
dialing system or an artificial or prerecorded voice to call any telephone number assigned to a
cellular telephone service. The Federal Communications Commission, which has adopted rules
implementing the Telephone Consumer Protection Act, clarified in 2008 that autodialed and
prerecorded message calls to wireless numbers that are provided by the called party to a creditor
in connection with an existing debt are permissible as calls made with the prior express consent of
the called party. On January 20, 2010, the Federal Communications Commission proposed a rule that
would require debt collectors and others not engaged in sales or telemarketing to obtain a written
agreement from a consumer with detailed conditions to be satisfied, including that the written
agreement not be obtained as a condition of purchasing any goods, before a person or entity shall
be deemed to have obtained the prior express written consent of the called party. If adopted, this
rule will impose additional burdens on us with respect to the use of an auto-dialer to contact
borrowers.
Compliance, Quality Control and Quality Assurance
We maintain a variety of quality control procedures designed to detect compliance errors. We
have a stated anti-predatory loan servicing policy that is communicated to all employees at regular
training sessions. We track the results of internal quality assurance reviews and provide reports
to the appropriate managers of the Company. Our servicing practices are reviewed regularly in
connection with the due diligence performed by third parties that consider outsourcing their loan
servicing to us. State regulators also review our practices and loan files and report the results
back to us.
Environmental Matters
In the ordinary course of our business, prior to November 2007, we had from time to time
acquired properties securing loans that were in default. In addition, loans that we purchased in
the past that were initially not in default subsequently may become in default on by the borrower.
In either case, it is possible that hazardous substances or waste, contamination, pollutants or
sources thereof could be discovered on those properties after we acquire them. To date, we have
not incurred any environmental liabilities in connection with our OREO, although there can be no
guarantee that we will not incur any such liabilities in the future.
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Employees
We recruit, hire, and retain individuals with the specific skills that complement our
corporate growth and business strategies. As of December 31, 2010, we had 112 full-time employees.
None of our employees are represented by a union or covered by a collective bargaining
agreement. We believe our relations with our employees, under the Companys current circumstances,
are good. However, under the Companys current circumstances, retaining key employees and hiring
for certain critical positions is more challenging.
Risks Related to Our Business
The Company may not be able to continue as a going concern.
The consolidated Franklin Holding since September 30, 2007 has been and continues to be
operating with significant operating losses and stockholders deficit, and the Company will not be
able to pay off the outstanding balance of debt due to the Bank. The consolidated Franklin Holding
financial condition raises substantial doubt about its ability to continue as a going concern.
Our Restructuring Agreements and Forbearance Agreements with the Bank require us to observe
certain covenants, and our failure to satisfy such covenants could render us insolvent.
Our Restructuring Agreements and Forbearance Agreements with the Bank require
us to comply with affirmative and negative covenants customary for restricted indebtedness. Any
defaults with respect to these agreements could result in acceleration of the amounts owed to the
Bank (with FCMC not obligated on the amounts owed under the Legacy Credit Agreement and Franklin
Holding only obligated if there has been an exception to non-recourse) and a foreclosure on the
assets of the Company pledged to the Bank (which no longer include equity interests in or other
assets of FCMC, except for $7.5 million in cash held by FCMC). Such acceleration or foreclosure
would render us insolvent. As of December 31, 2010, the Company was not in default of its
Restructuring Agreements and Forbearance Agreements with the Bank.
If our lenders fail to renew our available credit under the Licensing Credit Agreement for
additional terms, our revolving line of credit and letter of credit facilities will expire on
September 30, 2011.
The revolving line of credit and letter of credit facilities under the Licensing Credit
Agreement, as amended, expires (if not earlier terminated under the provisions of the Licensing
Credit Agreement) on September 30, 2011. The Licensing Credit Agreement, which is the sole source
of credit for Franklin Holding and FCMC, does not include a commitment to renew the $1 million
revolving loan commitment, or the letter of credit commitment of up to $6.5 million, which supports
various servicer and debt collector licenses of FCMC, and there is no assurance that Huntington
will renew the credit line or letters of credit at that time.
If our lenders fail to renew our loans under the Legacy Credit Agreement for additional terms
or provide us with refinancing opportunities, our legacy indebtedness will become due and payable
in 2012.
The principal sum of Legacy Debt owed to Huntington under the Legacy Credit Agreement,
which totals approximately $1.30 billion as of December 31, 2010, is due on March 31, 2012 (if not
earlier under the provisions of the Legacy Credit Agreement). The Legacy Credit Agreement does not
include a commitment to refinance this outstanding balance. Although the Banks recourse in
respect of the Legacy Credit Agreement is limited with respect to Franklin Holding, without an
extension, renewal,
modification, or amendment by the Bank of the Legacy Credit Agreement, if the subsidiaries of
Franklin Holding (other than FCMC), which are obligated under the Legacy Credit Agreement, are
unable to repay to the Bank the remaining principal and interest due by March 31, 2012, which is
expected, the Bank would have all available rights and remedies, including a foreclosure on the
assets pledged to the Bank (which no longer includes equity interests in FCMC), which could have a
material impact on our business and operations and render us insolvent.
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If our lenders fail to extend the Forbearance Agreement covering the Unrestructured Debt, the
Unrestructured Debt will become due and payable September 2011.
The March 2009 Restructuring did not include a portion of the Companys debt (the
Unrestructured Debt), which as of December 31, 2010 totaled approximately $39 million. The
Unrestructured Debt remains subject to the original terms of the Forbearance Agreement entered into
with the Bank in December 2007 and subsequent amendments thereto and the Companys 2004 master
credit agreement. On April 20, August 10, and November 13, 2009, March 26, June 28, and November
19, 2010, and January 7, 2011, the Bank extended the term of forbearance period, which is now
until September 30, 2011. A refusal by the Bank to continue to or further extend the
Forbearance Agreement would cause the Unrestructured Debt to become immediately due and payable,
which could result in our insolvency if we are unable to repay the debt.
The clients for whom we service loans may transfer our rights as servicer and we may be unable
to add business or take appropriate cost saving measures to replace reduced revenues.
Under the terms of FCMCs servicing agreements with third parties, our clients have, in
general, reserved the right to terminate our servicing of their loans without cause upon minimal
notice and the payment of minimal or no termination penalties. In addition, with respect to one of
FCMCs significant servicing clients, Bosco I, the maturity date of Bosco Is loan agreement with
its lenders is May 28, 2011, unless the loan agreement is earlier terminated in accordance with its
terms or by operation of law. In the event that Bosco Is lending agreement is not extended or
renewed, it is uncertain whether the lenders would permit FCMC to remain the servicer of Bosco Is
mortgage loans. Should FCMC be unable to attract new business or should clients exercise their
rights to terminate a significant portion of the loans currently serviced by FCMC, FCMC may be
unable to add business or take appropriate cost saving measures to replace the reduced revenues or
avoid insolvency. If any of our four largest servicing clients terminate us as servicer that would
represent a loss of a significant portion of our servicing revenue and our operations and financial
condition would be adversely affected, which could result in our insolvency, including the
insolvency of FCMC.
Our ability to fund operating expenses depends on the cash flow received from servicing loans
for third parties.
We are required to submit all payments we receive from our preferred stock investment,
the remaining trust certificates that we own (representing a relatively small amount of real estate
inventory) and the notes receivable and mortgage loans and real estate held for sale to a lockbox,
which is controlled by the Bank. Substantially all amounts submitted to the lockbox are used to
pay down amounts outstanding under our Legacy Credit Agreement with the Bank and are not available
to fund operating expenses. Moreover, the line of credit available for FCMC under the Licensing
Credit Agreement is limited to $1 million, which expires September 30, 2011. If the cash flow
received by FCMC from servicing loans and performing due diligence services for third parties is
insufficient to sustain the cost of operating FCMCs business, and we have fully utilized our
licensing credit facility, there is no guarantee that we can continue in business.
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A prolonged economic slowdown or a lengthy or severe recession could harm our servicing
operations, particularly if it results in a decline in the real estate market.
The risks associated with our servicing business are more acute during periods of
economic slowdown or recession because these periods may be accompanied by decreased real estate
values. Any material decline in real estate values would increase the loan-to-value ratios on
loans that we service for third parties and, therefore, weaken any collateral coverage, increase
the likelihood of a borrower with little or no equity in his or her home defaulting and increase
the possibility of a loss or reduced servicing and collection revenues if a borrower defaults.
Our business is sensitive to, and can be materially affected by, changes in interest rates.
Our business may be adversely affected by changes in interest rates, particularly changes
that are unexpected in timing or size. For instance, the majority of our borrowings bear interest
at variable rates, while our investment in REIT securities bears a fixed rate and is subject to
dividends being declared by the Banks REIT. In addition, the Companys interest-bearing
liabilities greatly exceed the remaining interest-earning assets. As a result, an increase in
interest rates is likely to result in an increase in our interest expense without an offsetting
increase in income, which would adversely affect our results and likely would increase the balance
of indebtedness to the Bank. Moreover, due to the termination by the Bank of the Companys
remaining interest rate swaps in January 2011, all of the our interest rate sensitive borrowings
are unhedged and an increase in interest rates will result in an increase in our interest expense
without an offsetting increase in income.
We are also subject to risks from decreasing interest rates. A significant decrease in
interest rates could increase the rate at which the loans that we service for third parties are
prepaid and reduce FCMCs servicing and collection income in subsequent periods.
We may not be successful in expanding or implementing our planned business of providing
servicing and other mortgage related services for other entities on a fee-paying basis.
The servicing and mortgage-related services industries are highly competitive. Prior to
2010, FCMC did not historically provide such services to unrelated third parties. Additionally,
the absence of a rating by a statistical rating agency as a primary or special servicer of
residential mortgage loans may make it difficult to compete or effectively market FCMCs services
to entities that rely on such ratings as a factor in the selection of a servicer for their loans.
If we do not succeed in expanding our business of providing such services to third parties, or
prove unable to provide such services on a profitable basis, such a failure could adversely affect
our operations and financial condition.
If we do not obtain and maintain the appropriate state licenses, we will not be allowed to
service mortgage loans in affected states, which would adversely affect our operations.
The requirements imposed by state mortgage finance licensing laws vary considerably. In
addition to the requirement for a license to engage in mortgage origination activities, many
mortgage licensing laws impose a licensing obligation to service residential mortgage loans.
Further, certain state collection agency licensing laws require entities collecting on current,
delinquent or defaulted loans for others or to acquire such loans to be licensed as well. Under
the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the SAFE Act), which
establishes minimum standards for the licensing and registration of individuals meeting the
definition of a mortgage loan originator, the U.S. Department of Housing and Urban Development
(HUD), which has been delegated the authority to ensure that every state meets the requirements of
the SAFE Act (until the transfer of such function to the newly created Consumer Financial
Protection Bureau (CFPB) pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection
Act), has issued a proposed rule that the SAFE Acts definition of a mortgage loan originator
include individuals who for a loan servicer perform a
31
residential
mortgage loan modification, which involves offering or negotiating of loan terms that are materially different from the
original loan. Although a final rule has not yet been issued (it has been reported that HUD sent
its final rule to the Office of Management and Budget for approval in or about February 2011),
certain states are requiring such individuals who perform loan modifications, including as part of
loss mitigation, be licensed as a mortgage loan originator. As the examinations for licensing
under the SAFE Act (which is required for those not employed by a federally regulated institution)
generally cover the origination and not servicing of loans, there can be no assurance that our
staff or those we hire will be able to pass the required state and national exams and satisfy
individual licensing requirements in sufficient numbers to continue loan modifications
efforts in those states where SAFE Act licensing is required, which could result in FCMC
losing a license in any such state that requires a servicer to consider a modification prior to
foreclosure and a loss of servicing business. In the alternative, if hiring individuals who are
already licensed under the SAFE Act is necessary, such individuals may not have adequate experience
servicing or modifying loans and we could be at a competitive disadvantage from an internal cost
perspective to federally regulated institutions, which are not subject to individual licensing
requirements.
Once licenses are obtained by a company, state regulators impose additional ongoing
obligations on licensees, such as maintaining certain minimum net worth or line of credit
requirements. In limited instances, the net worth calculation may not include recourse on any
contingent liabilities. If the Companys servicing subsidiary, FCMC, does not, among other things,
meet these minimum net worth or line of credit requirements, state regulators may revoke or suspend
FCMCs licenses and prevent FCMC from continuing to service loans in such states, which would
adversely affect FCMCs operations and financial condition and ability to attract new servicing
customers.
FCMCs deficit net worth during 2008, prior to the Companys reorganization in December 2008,
resulted in FCMCs noncompliance with the requirements to maintain certain licenses in a number of
states. The regulators in these states could have taken a number of possible corrective actions in
response to FCMCs noncompliance, including license revocation or suspension, requirement for the
filing of a corrective action plan, denial of an application for a license renewal or a combination
of the same, in which case FCMCs business would have been adversely affected. In order to address
these and other issues, in December 2008, FCMC completed a reorganization of its company structure
for the principal purpose of restoring the required minimum net worth under FCMCs licenses to
ensure that FCMC would be able to continue to service mortgage loans. Effective December 19, 2008,
Franklin Holding became the parent company of FCMC in the adoption of a holding company form of
organizational structure. This reorganization resulted in FCMC, which holds the Companys
servicing platform, having positive net worth as a result of having assigned and transferred to a
newly formed sister company ownership of the entities that held beneficial ownership of the
Companys loan portfolios and the related indebtedness and accordingly, being able to comply with
applicable net worth requirements to maintain licenses to service and collect loans in various
jurisdictions. However, there is no assurance that regulators will not take corrective action
against the Company with respect to the actions it took to remedy deficit net worth through the
December 2008 reorganization or actions taken in connection with the and March 2009 Restructuring,
in which case FCMCs business would be adversely affected.
On April 12, 2010, the New York State Banking Department (the Banking Department) notified
FCMC that in connection with its review of its financial statements and mortgage servicing volume,
its application for registration as a mortgage servicer in that state, which FCMC had filed during
the transitional period allowed by the state for registration of mortgage servicers doing business
in New York State on June 30, 2009, could not be accepted for processing until FCMC addressed its
Adjusted Net Worth, which the Banking Department had determined to be below the minimum Adjusted
Net Worth requirement for mortgage servicers established under applicable regulations adopted
through emergency rule making. Although FCMC ultimately submitted a capital plan to the Banking
Department to address how FCMC would achieve compliance with regulatory net worth requirements,
which was deemed satisfactory and acceptable by the Banking Department for processing the
application of FCMC to be a
mortgage servicer in that state and FCMC was granted a twelve month waiver of otherwise
applicable net worth requirements, there is no assurance that FCMCs application to be a registered
mortgage servicer in New York State will be approved or that FCMC will be able to comply with its
capital plan on an ongoing basis (which it was temporarily unable to do at September 30, 2010, due
to outstanding receivables of related parties, until it regained compliance by the end of October
2010, when such receivables were paid) and obtain any necessary extensions of the waiver of or
regain compliance with regulatory net worth requirements in New York State.
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FCMCs capital plan includes in relevant part a commitment, until FCMC is in full compliance
with the net worth requirements for mortgage servicers in New York State, to (i) meet regulatory
net worth requirements as soon as practicable but in no event later than December 31, 2012 through
the retention of net earnings and dividend restrictions, (ii) maintain an interim adjusted net
worth (as adjusted and calculated by the Banking Department, the Adjusted Net Worth) until FCMC
complies with regulatory net worth requirements of not less than approximately $7.9 million
(Minimum Level), and not less than 5% of the principal balance of New York mortgage loans
serviced by FCMC and 0.25% of the aggregate mortgage loans serviced in the United States, (iii)
not, without the prior written consent of the Banking Department, service additional mortgage loans
secured by 1-4 family residential homes located in New York State, (iv) not declare or pay any
dividends upon the shares of its capital stock, and (v) submit quarterly reports on the total
number of and principal balance of loans serviced and its Adjusted Net Worth. Under the terms of
the capital plan, in the event that FCMCs Adjusted Net Worth falls below the Minimum Level or is
less in percentage terms than either of the Minimum Percentages, FCMC shall promptly notify the
Banking Department and (i) within 90 days cure the deficiency or (ii) within 90 days submit a
written plan acceptable to the Superintendent of the Banking Department describing the primary
means and timing by which the Minimum Level or Minimum Percentages, as applicable, will be
achieved.
A significant amount of the mortgage loans that we originated and acquired prior to the March
2009 Restructuring and continue to service on behalf of third parties are secured by property in
New York, New Jersey Florida, Texas and California, and our operations could be harmed by economic
downturns or other adverse events in these states.
A significant portion of our mortgage loan origination activity was concentrated in the
northeastern United States, particularly in New York and New Jersey, and we acquired a significant
number of loans secured by properties in Florida, Texas, and California. An overall decline in the
economy or the residential real estate market, a continuing decline in home prices, or the
occurrence of events such as a natural disaster or an act of terrorism could decrease the value of
residential properties in those areas. This could result in an increase in the risk of
delinquency, default or foreclosure, which could reduce our servicing and collection revenues, and
reduce our profitability.
We may not be adequately protected against the risks inherent in servicing subprime
residential mortgage loans.
The vast majority of the loans we originated and acquired prior to the March 2009
Restructuring, which we continue to service, through FCMC, for third parties, were underwritten
generally in accordance with standards designed for subprime residential mortgages. Mortgage loans
underwritten under these underwriting standards are likely to experience rates of delinquency,
foreclosure and loss that are higher, and may be substantially higher, than prime residential
mortgage loans. A majority of the loans previously originated by Tribeca were made under a
limited documentation program, which generally placed the most significant emphasis on the
loan-to-value ratio based on the appraised value of the property, and not, or to a lesser extent,
on a determination of the borrowers ability to repay the loan. Our past underwriting and loan
servicing practices may not afford adequate protection against the higher risks associated with
loans made to such borrowers particularly in a poor housing and credit market or an economic
recession. If we are unable to mitigate these risks, our ability to service and collect on these
loans may be adversely affected resulting in a decrease in our servicing and collection
revenues and cash flows, and our results of operations, financial condition and liquidity could be
materially harmed.
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A number of the second-lien mortgage loans that we service are subordinated to ARM or
interest-only mortgages that may be subject to monthly payment increases, which may result in
delinquencies and a decrease in servicing and collection revenues.
A number of the second-lien mortgage loans that we acquired prior to the March 2009
Restructuring, which we continue to service through FCMC for third parties, are subordinated to an
adjustable rate mortgage (ARM) held by a third party that was originated in a period of unusually
low interest rates or originated with a below market interest rate, or to an interest-only
mortgage. A substantial majority of these ARMs bore a fixed rate for the first two or three years
of the loan, followed by annual interest and payment rate resets. As a result, holders of ARM
loans faced monthly payment increases following interest rate adjustments. Similarly,
interest-only loans typically required principal payments to be made after the first one or two
years from the date of the loan. The decreased availability of refinancing alternatives has
impacted the run-off that typically occurs as an ARM rests or the interest-only loans begin to
require the payment of principal. Interest rate adjustments or principal becoming payable on first
lien mortgages may also have a direct impact on a borrowers ability to repay any underlying
second-lien mortgage loan on a property. As a result, delinquencies on these loans may increase
and our ability to service and collect on these loans may be adversely affected resulting in a
decrease in our servicing and collection revenues and cash flows.
We are subject to losses from the mortgage loans we acquired and originated prior to the
Restructuring due to fraudulent and negligent acts on the part of loan applicants, mortgage
brokers, sellers of loans we acquired, vendors and our employees.
When we acquired and originated mortgage loans, including those mortgage loans
transferred to the Trust as part of the March 2009 Restructuring, which we currently service for
third parties, we typically relied heavily upon information supplied by third parties, including
the information contained in the loan application, property appraisal, title information and,
employment and income stated on the loan application. If any of this information was intentionally
or negligently misrepresented and such misrepresentation was not detected prior to the acquisition
or funding of the loan, the value of the loan may end up being significantly lower than expected.
Whether a misrepresentation was made by the loan applicant, the mortgage broker, another third
party or one of our employees, we generally bear the risk of loss associated with the
misrepresentation except when we purchased loans pursuant to contracts that include a right of
return and the seller remains sufficiently creditworthy to render such right meaningful.
Legal proceedings and regulatory investigations could be brought or initiated which could
adversely affect our financial results.
Various companies throughout the mortgage industry have been named as defendants in
individual and class action law suits and have been the subject of regulatory investigations
challenging residential loan servicing and origination practices (even as an acquirer of a loan),
including, most recently, foreclosure processes and procedures and the verification of information
included in and notarization of affidavits filed in foreclosure, eviction and bankruptcy matters
(FCMC, in particular, has begun to receive requests from certain state attorneys general and
regulators that it review its foreclosure process and file a response with such public official or
regulator, which FCMC has completed or in the process of completing and FCMC to date has not
discovered any faulty affidavits filed in or unwarranted foreclosure actions). At least some of
those participants have paid significant sums to settle lawsuits or regulatory proceedings brought
against it in respect of servicing and origination practices. There can be no assurance that
similar suits or proceedings will not be brought against us in the future, and that we will not be
subject to resulting fines, sanctions, costs, damages, penalties or claims by counterparties or
third parties (or, additionally with respect to foreclosures, the overturning of foreclosure sales
or delays in the
foreclosure process) that could adversely affect our financial results, or substantial damages
that could render the Company insolvent.
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Given the nature of the industry in which we operate, our businesses is, and in the future may
become, involved in various legal proceedings the ultimate resolution of which is inherently
unpredictable and could have a material adverse effect on our business, financial position, results
of operations or cash flows.
Due, in part, to the heavily regulated nature of the industries in which we operate, we
are, and in the future may become, involved in various legal proceedings. We may therefore incur
legal costs and expenses in connection with the defense of such proceedings. In addition, the
actual cost of resolving our pending and any future legal proceedings might be substantially higher
than any amounts reserved for such matters. Depending on the remedy sought and the outcome of such
proceedings, the ultimate resolution of our pending and any future legal proceedings, could have a
material adverse effect on our business, financial position, results of operations or cash flows.
We are exposed to counter-party risk and there can be no assurances that we will manage or
mitigate this risk effectively.
We are exposed to counterparty risk in the event of nonperformance by counterparties to
various agreements and transactions. The insolvency, unwillingness or inability of a significant
counterparty to perform its obligations under an agreement or transaction, including, without
limitation, as a result of the rejection of an agreement or transaction by counterparty in
bankruptcy proceedings, could have a material adverse effect on our business, financial position,
results of operations or cash flows. There can be no assurances that we will be effective in
managing or mitigating our counterparty risk, which could have a material adverse effect on our
business, financial position, results of operations or cash flows.
The success and growth of our servicing business will depend on our ability to adapt to and
implement technological changes, and any failure to do so could result in a material adverse effect
on our business.
Our mortgage loan servicing business is dependent upon our ability to effectively adapt
to technological advances, such as the ability to automate loan servicing, process borrower
payments and provide customer information over the Internet, accept electronic signatures and
provide instant status updates. The intense competition in our industry has led to rapid
technological developments, evolving industry standards and frequent releases of new products and
enhancements. The failure to acquire new technologies or technological solutions when necessary
could limit our ability to remain competitive in our industry and our ability to increase the
cost-efficiencies of our servicing operation, which would harm our business, results of operations
and financial condition. Alternatively, adapting to technological changes in the industry to
remain competitive may require us to make significant and costly changes to our loan servicing and
information systems, which could in turn increase operating costs.
If we do not manage the changes in our businesses effectively, our financial performance could
be harmed.
As we seek to engage in new businesses, our future growth could require capital resources
beyond what we currently possess, which would place certain pressures on our infrastructure. Our
future profitability will similarly depend on the proper management of our wind-down of the
businesses we no longer operate. We will need to continue to upgrade and expand our financial,
operational and managerial systems and controls, particularly our servicing systems and resources.
If we do not manage the changes in our servicing business effectively, our expenses could increase,
and FCMCs business, liquidity and financial condition could be significantly harmed.
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The inability to attract and retain qualified employees could significantly harm our business.
We continually need to retain, attract, hire and successfully integrate qualified
personnel, including certain servicing personnel that are able to satisfy licensing requirements
under the SAFE Act to perform loan modifications (in those states where SAFE Act licensing is
required for such activities), in an intensely competitive hiring environment in order to manage
and operate our business. The market for skilled management, professional and loan servicing
personnel is highly competitive. Competition for qualified personnel may lead to increased hiring
and retention costs. If we are unable to attract, successfully integrate and retain a sufficient
number of skilled personnel at manageable costs, we will be unable to effectively continue to
service mortgage loans, which would harm our business, results of operations and financial
condition. Due to our operating losses and financial condition, on a consolidated basis, we may be
unable to hire additional qualified personnel and retaining key employees could become more
challenging.
An interruption in or breach of our information systems may result in lost business and
increased expenses.
We rely heavily upon communications and information systems to conduct our business. Any
failure, interruption or breach in security of or damage to our information systems or the
third-party information systems on which we rely could cause us to be noncompliant with our
servicing and collection contracts and significant federal and state regulations relating to the
handling of customer information, particularly with respect to maintaining the confidentiality of
such information. A failure, interruption or breach of information systems could result in the
loss of our servicing and collection contracts, regulatory action and litigation against us. We
cannot assure that such failures or interruptions will not occur or if they do occur that they will
be adequately addressed by us or the third parties on which we rely.
We are exposed to the risk of environmental liabilities with respect to properties to which we
took title.
We have historically foreclosed on defaulted mortgage loans in our portfolio, taking
title to the properties underlying those mortgages. By taking title, we could be subject to
environmental liabilities with respect to such properties and any remaining properties that we have
to reacquire from the Trust pursuant to the Transfer and Assignment Agreement of the Restructuring.
Hazardous substances or wastes, contaminants, pollutants or sources thereof may be discovered on
these properties during our ownership or after a sale to a third party. Environmental defects can
reduce the value of and make it more difficult to sell such properties, and we may be held liable
to a governmental entity or to third parties for property damage, personal injury, investigation,
and cleanup costs incurred by these parties in connection with environmental contamination, or may
be required to investigate or clean up hazardous or toxic substances or chemical releases at a
property. These costs could be substantial. If we ever become subject to significant
environmental liabilities, our business, financial condition, liquidity and results of operation
could be materially and adversely affected. Although we have not to date incurred any
environmental liabilities in connection with real estate, there can be no assurance that we will
not incur any such liabilities in the future.
A loss of our Chairman and President may adversely affect our operations.
Thomas J. Axon, our Chairman and President, is responsible for making substantially all
of the most significant policy and managerial decisions in our business operations. These
decisions are paramount to the success and future growth of our servicing business. Mr. Axon is
also the managing member of three of our principal servicing clients, Bosco I, Bosco II and Bosco
III, and was instrumental in maintaining our relationship with Huntington and our operations under
the terms of the Restructuring Agreements and retaining the servicing of loans sold by the
Huntington Trust in the third and fourth quarters of 2010. A loss of the services of Mr. Axon
could disrupt and adversely affect our operations.
36
Risks Related to Our Financial Statements
We may become subject to liability and incur increased expenditures as a result of our having
reassessed our allowance for loan losses and our transfer of substantially all our mortgage
portfolio related assets to the Bank.
Our reassessments of our allowance for loan losses during 2007 and 2008, and the transfer
of substantially all of our loans and properties acquired through foreclosure to the Bank in March
2009, could expose us to legal action or government investigation. The defense of any such actions
could cause the diversion of managements attention and resources, and we could be required to pay
damages to settle such actions or if any such actions are not resolved in our favor. Even if
resolved in our favor, such actions could cause us to incur significant legal and other expenses.
Moreover, we may be the subject of negative publicity and negative reactions from stockholders,
creditors, existing and potential servicing clients or others with which we do business. The
occurrence of any of the foregoing could harm our business.
Failures in our internal controls and disclosure controls and procedures could lead to
material errors in our financial statements and cause us to fail to meet our reporting obligations.
Effective internal controls are necessary for us to provide reliable financial reports.
Such controls are designed to provide reasonable, not absolute assurance that we are providing
reliable financial reports. In addition, the design of any control system is based in part upon
certain assumptions about the likelihood of future events. Because of these and other inherent
limitations of control systems, there is only reasonable assurance that our controls will succeed
in achieving their goals under all potential future conditions. If such controls fail to operate
effectively, this may result in material errors in our financial statements. Deficiencies in our
system of internal controls over financial reporting may require remediation, which could be
costly. Failure to remediate such deficiencies or to implement required new or improved controls
could lead to material errors in our financial statements, cause us to fail to meet our reporting
obligations, and expose us to government investigation or legal action.
Risks Related to the Regulation of Our Industry
New legislation and regulations directed at curbing predatory lending and abusive servicing
practices could restrict our ability to service non-prime residential mortgage loans, which could
adversely impact our earnings.
The Federal Home Ownership and Equity Protection Act, or HOEPA, identifies a category of
residential mortgage loans and subjects such loans to restrictions not applicable to other
residential mortgage loans. Loans subject to HOEPA consist of loans on which certain points and
fees or the annual percentage rate, which is based on the interest rate and certain finance
charges, exceed specified levels. Laws, rules and regulations have been adopted at the state and
local levels that are similar to HOEPA in that they impose certain restrictions on loans that
exceed certain cost parameters. These state and local laws generally have lower thresholds and
broader prohibitions than under the federal law. The restrictions include prohibitions on steering
borrowers into loans with high interest rates and away from more affordable products, selling
unnecessary insurance to borrowers, flipping or repeatedly refinancing loans and originating loans
without a reasonable expectation that the borrowers will be able to repay the loans without regard
to the value of the mortgaged property.
Compliance with some of these restrictions requires lenders to make subjective judgments, such
as whether a loan will provide a net tangible benefit to the borrower. These restrictions expose
a lender to risks of litigation and regulatory sanction no matter how carefully a loan is
underwritten and impact the way in which a loan is underwritten. The remedies for violations of
these laws are not based on actual harm to the consumer and can result in damages that exceed the
loan balance. Liability for violations of HOEPA, as well as violations of many of the state and
local equivalents, would extend not only to us, but
to assignees, which may include our warehouse lenders and whole-loan buyers, regardless of
whether such assignee knew of or participated in the violation.
37
It was our policy not to originate loans that would be subject to HOEPA or similar state and
local laws and not to purchase high cost loans that would have violated those laws. If we
miscalculated the numerical thresholds described above, however, we may have mistakenly originated
or purchased such loans and bear the related marketplace and legal risks and consequences. These
thresholds below which we tried to originate loans created artificial barriers to production and
limited the price at which we offered loans to borrowers and our ability to underwrite, originate,
sell and finance mortgage loans. In a number of states, for example, proposed and recently enacted
state and local anti-predatory lending laws and regulations broaden the trigger test for loans
subject to restrictions. If the numerical thresholds were miscalculated, certain variations of
Tribecas Liberty Loan product, where the lending decision may have been based entirely or
primarily on the borrowers equity in his or her home and not, or to a lesser extent, on a
determination of the borrowers ability to repay the loan, would violate HOEPA and many of these
state and local anti-predatory lending laws. In the past, we sold a portion of Tribecas Liberty
Loan production to third parties on a whole-loan, servicing-released basis.
We purchased loans that are covered by one of these laws, rules or regulations only if, in our
judgment, a loan was made in accordance with our strict legal compliance standards and without
undue risk relative to litigation or to the enforcement of the loan according to its terms.
Several states and municipalities have adopted legislation and ordinances establishing new
consumer protections governing loan servicing practices and foreclosure procedures. Some of the
provisions will impede or materially delay a holders ability to foreclose on certain mortgaged
properties. There are proposed laws providing greater protections to consumers, pertaining to such
activities as maintenance of escrow funds, timely crediting of payments received, limitation on
ancillary income, responding to customer inquiries and requirements to conduct loss mitigation. On
July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Reform Act) was
signed into law. The Reform Act, which is designed to improve accountability and transparency in
the financial system and to protect consumers from abusive financial services practices, creates
various new requirements affecting mortgage servicers, such as FCMC, including mandatory escrow
accounts for certain mortgage loans; notice requirements for consumers who waive escrow services;
certain prohibitions related to mortgage servicing with respect to force-placed hazard insurance,
qualified written requests, requests to correct certain servicing errors, and requests concerning
the identity and contact information for an owner or assignee of a loan; requirements for prompt
crediting of payments, processing of payoff statements, and monthly statements with certain
disclosures for adjustable rate mortgage loans; and late fee restrictions on high cost loans. In
addition, a new executive agency and consumer financial regulator, the Bureau of Consumer Financial
Protection (CFPB), was established in the Federal Reserve System under the Reform Act. On July 21,
2011, the regulation of the offering and provision of consumer financial products or services,
including mortgage servicing, under certain federal consumer financial laws, will be transferred
and consolidated into the CFPB.
The Federal Reserve Board approved changes to HOEPA in Regulation Z, which implements the
Truth in Lending Act, to protect consumers from unfair or deceptive home mortgage lending and
advertising practices. Effective October 1, 2009, the amendments create protections for a new
category of loans called higher-priced mortgage loans. Under these amendments, companies that
service mortgage loans will be required to credit consumers loan payments as of the date of
receipt. Further, the HOEPA amendments expand the types of loans subject to early disclosures.
Previously, transaction-specific early disclosures were only required for purchase money mortgage
loans. The early disclosures now are required with all closed-end non-purchase money mortgage
loans, such as refinancings, closed-end home equity loans and reverse mortgage loans. Under the
Reform Act, HOEPA was revised to lower APR and point and fee triggers and expand coverage to
purchase money mortgages.
38
We cannot predict whether or in what form Congress or the various state and local legislatures
may enact legislation affecting our business. We are evaluating the potential impact of these
initiatives, if enacted, on our servicing practices and results of operations. As a result of
these and other initiatives, we are unable to predict whether federal, state, or local authorities
will require changes in our servicing practices in the future, including reimbursement of fees
charged to borrowers, or will impose fines. These changes, if required, could adversely affect our
profitability, particularly if we make such changes in response to new or amended laws, regulations
or ordinances in states where we service a significant amount of mortgage loans.
The broad scope of our operations exposes us to risks of noncompliance with an increasing and
inconsistent body of complex laws and regulations at the federal, state and local levels.
Because we service and collect on loans and have purchased and originated mortgage loans
in all 50 states, we must comply with the laws and regulations pertaining to licensing, disclosure
and substantive practices, as well as judicial and administrative decisions, of all of these
jurisdictions, as well as an extensive body of federal laws and regulations. The volume of new or
modified laws and regulations has increased in recent years, and government agencies enforcing
these laws, as well as the courts, sometimes interpret the same law in different ways. The laws
and regulations of each of these jurisdictions are different, complex and, in some cases, in direct
conflict with each other. Accordingly, it may be more difficult to identify comprehensively and to
interpret accurately applicable laws and regulations and to employ properly our policies,
procedures and systems and train our personnel effectively with respect to all of these laws and
regulations, thereby potentially increasing our exposure to the risks of noncompliance with these
laws and regulations.
Federal, state and local governmental authorities have focused on the lending and servicing
practices of companies in the non-prime mortgage lending industry, sometimes seeking to impose
sanctions for practices such as charging excessive fees, imposing interest rates higher than
warranted by the credit risk of the borrower, imposing prepayment fees, failing to adequately
disclose the material terms of loans and abusive servicing and collection practices.
Our failure to comply with this regulatory regimen can lead to:
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civil and criminal liability, including potential monetary penalties; |
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loss of servicing and debt collection licenses or approved status required for
continued business operations; |
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demands for indemnification or loan repurchases from purchasers of our loans; |
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legal defenses causing delay and expense; |
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adverse effects on our ability, as servicer or debt collector, to enforce loans; |
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the imposition of supervisory agreements and cease-and-desist orders; |
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the borrower having the right to rescind or cancel the loan transaction; |
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individual and class action lawsuits; |
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administrative enforcement actions; |
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damage to our reputation in the industry; or; |
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the inability to obtain credit to fund our operations. |
39
Although we have systems and procedures directed to compliance with these legal requirements
and believe that we are in material compliance with all applicable federal, state and local
statutes, rules and regulations, we cannot assure you that more restrictive laws and regulations
will not be adopted in the future, or that governmental bodies or courts will not interpret
existing laws or regulations in a more restrictive manner, which could render our current business
practices non-compliant or which could make compliance more difficult or expensive. These
applicable laws and regulations are subject to administrative or judicial interpretation, but some
of these laws and regulations have been enacted only recently, or may be interpreted infrequently
or only recently and inconsistently. As a result of infrequent, sparse or conflicting
interpretations, ambiguities in these laws and regulations may leave uncertainty with respect to
permitted or restricted conduct under them. Any ambiguity under a law to which we are subject may
lead to regulatory investigations, governmental enforcement actions or private causes of action,
such as class action lawsuits, with respect to our compliance with applicable laws and regulations.
We may be subject to fines or other penalties based upon the conduct of our independent
brokers.
Mortgage brokers that we utilized prior to November 2007 to source our legacy mortgage
originations, have parallel and separate legal obligations to which they are subject. While these
laws may not explicitly hold the originating lenders responsible for the legal violations of
mortgage brokers, increasingly federal and state agencies have sought to impose such assignee
liability. For example, the FTC entered into a settlement agreement with a mortgage lender where
the FTC characterized a broker that had placed all of its loan production with a single lender as
the agent of the lender. The FTC imposed a fine on the lender in part because, as principal,
the lender was legally responsible for the mortgage brokers unfair and deceptive acts and
practices. In the past, the United States Department of Justice sought to hold a non-prime
mortgage lender responsible for the pricing practices of its mortgage brokers, alleging that the
mortgage lender was directly responsible for the total fees and charges paid by the borrower under
the Fair Housing Act even if the lender neither dictated what the mortgage broker could charge nor
kept the money for its own account. Accordingly, we may be subject to fines or other penalties
based upon the conduct of independent mortgage brokers utilized by us in the past.
We are subject to reputation risks from negative publicity concerning the subprime mortgage
industry.
The subprime mortgage industry in which we operate may be subject to periodic negative
publicity, which could damage our reputation and adversely impact our servicing business.
Reputation risk, or the risk to our business, earnings and capital from negative publicity, is
inherent in our industry. There is a perception that the borrowers of subprime loans may be
unsophisticated and in need of consumer protection. Accordingly, from time to time, consumer
advocate groups or the media may focus attention on our services (both past and present), thereby
subjecting our industry to the possibility of periodic negative publicity.
We may also be negatively impacted if another company in the subprime mortgage industry or in
a related industry engages in practices resulting in increased public attention to our industry.
Negative publicity may also occur as a result of judicial inquiries and regulatory or governmental
action with respect to the subprime mortgage industry. Negative publicity may result in increased
regulation and legislative scrutiny of industry practices as well as increased litigation or
enforcement actions by civil and criminal authorities. Additionally, negative publicity may
increase our costs of doing business and adversely affect our servicing operations by impeding our
ability to attract and retain customers and employees.
40
During the past several years, the press has widely reported certain industry related
concerns, including rising delinquencies, the tightening of credit and more recently, increasing
litigation. Some of the litigation instituted against subprime lenders is being brought in the
form of purported class actions by individuals or by state or federal regulators or state attorneys
general. The judicial climate in many states is such that the outcome of these cases is
unpredictable. If we are subject to increased litigation due to such negative publicity, it could
have a material adverse impact on our results of operations.
We are subject to significant legal and reputation risks and expenses under federal and state
laws concerning privacy, use and security of customer information.
The federal Gramm-Leach-Bliley financial reform legislation imposes significant privacy
obligations on us in connection with the collection, use, disposal and security of financial and
other nonpublic information provided of borrowers. In addition, California and Vermont have
enacted, and several other states are considering enacting, privacy or
customer-information-security legislation with even more stringent requirements than those set
forth in the federal law. Because laws and rules concerning the use and protection of customer
information are continuing to develop at the federal and state levels, we expect to incur increased
costs in our effort to be and remain in full compliance with these requirements. Nevertheless,
despite our efforts we will be subject to legal and reputational risks in connection with our
collection, safeguarding, disposal and use of customer information, and we cannot assure you that
we will not be subject to lawsuits or compliance actions under such state or federal privacy
requirements. To the extent that a variety of inconsistent state privacy rules or requirements are
enacted, our compliance costs could substantially increase.
If many of the borrowers of the loans we service become subject to the Servicemembers Civil
Relief Act of 2003, our cash flows and service fee income may be adversely affected.
Under the Servicemembers Civil Relief Act of 2003, or the Civil Relief Act, a borrower
who enters active military service after the origination of his or her mortgage loan generally may
not be required to pay interest above an annual rate of 6%, and the lender is restricted from
exercising certain enforcement remedies, including foreclosure, during the period of the borrowers
active duty status. The Civil Relief Act also applies to a borrower who was on reserve status and
is called to active duty after origination of the mortgage loan. The Civil Relief Act was amended
on July 30, 2008 by the Housing and Economic Recovery Act of 2008 and Helping Heroes Keep Their
Homes Act of 2010 to temporarily enhance protections for servicemembers relating to mortgages and
mortgage foreclosures until December 31, 2012, by extending the protection period and stay of
proceedings from 90 days to nine months and extending the interest rate limitation on mortgages
from the period of military service to the period of military service and one year thereafter. On
October 13, 2010, the Veterans Benefits Act of 2010 became law, which allows for enforcement of
the Civil Relief Act by the U.S. Attorney General and provides for a private right cause of action.
Considering the large number of U.S. Armed Forces personnel on active duty and likely to be on
active duty in the future, our cash flows and revenues may be adversely affected by compliance with
this law.
Legislative action to provide mortgage relief may negatively impact our business.
As delinquencies, defaults and foreclosures in and of residential mortgages have
increased dramatically, there are several federal, state and local initiatives to restrict our
ability to foreclose and resell the property of a customer in default. Any restriction on our
ability to foreclose on a loan, any requirement that we forego a portion of the amount otherwise
due on a loan or any requirement that we modify any original loan terms could negatively impact
FCMCs servicing business, financial condition, liquidity and results of operations. These
initiatives have come in the form of proposed legislation and regulations, including those
pertaining to federal bankruptcy laws, government investigations and calls for voluntary
modifications of mortgages.
41
Several states and municipalities have adopted legislation and ordinances establishing new
consumer protections governing loan servicing practices and foreclosure procedures. There are
proposed and enacted laws providing greater protections to consumers, pertaining to such activities
as maintenance of escrow funds, timely crediting of payments received, limitation on ancillary
income, responding to customer inquiries and requirements to conduct loss mitigation. In addition,
there are several federal and state government initiatives, including HAMP under the Homeowner
Affordability and Stability Plan, which seek to obtain the voluntary agreement of servicers to
subscribe to a code of conduct or statement of principles or methodologies when working with
borrowers facing foreclosure on their homes. Generally speaking, the principles call for servicers
to reach out to borrowers before their loans reset with higher monthly payments that might result
in a default by a borrower and seek to modify loans prior to the reset. Applicable servicing
agreements, federal tax law and accounting standards limit the ability of a servicer to modify a
loan before the borrower has defaulted on the loan or the servicer has determined that a default by
the borrower is reasonably likely to occur. Servicing agreements generally require the servicer to
act in the best interests of the note holders or at least not to take actions that are materially
adverse to the interests of the note holders. Compliance with the code or principles must conform
to these other contractual, tax and accounting standards. As a result, servicers have to confront
competing demands from consumers and those advocating on their behalf to make home retention the
overarching priority when dealing with borrowers in default, on the one hand, and the requirements
of note holders to maximize returns on the loans, on the other.
Risks Related to Our Securities
Thomas J. Axon effectively controls our company, substantially reducing the influence of our
other stockholders.
Thomas J. Axon, our Chairman and President, beneficially owns more than 45% of our
outstanding common stock, and 20% of the stock of FCMC. As a result, Mr. Axon will be able to
influence significantly the actions that require stockholder approval, including:
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the election of our directors; and, |
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the approval of mergers, sales of assets or other corporate transactions or matters
submitted for stockholder approval. |
Furthermore, the members of the board of directors as a group (including Mr. Axon)
beneficially own a substantial majority of our outstanding common stock. As a result, our other
stockholders may have little or no influence over matters submitted for stockholder approval. In
addition, Mr. Axons influence and/or that of our current board members could preclude any
unsolicited acquisition of us and consequently materially adversely affect the price of our common
stock.
Our common stock is quoted only on the OTC Bulletin Board, which may adversely impact the
price and liquidity of the common stock, and our ability to raise capital.
Our common stock is quoted under the stock symbol FCMC.OB on the OTC Bulletin Board,
a centralized quotation service for over-the-counter securities and is subject to the rules
promulgated under the Securities Exchange Act of 1934 relating to penny stocks. These rules
require brokers who sell securities that are subject to the rules, and who sell to persons other
than established customers and institutional accredited investors, to complete required
documentation, make suitability inquiries of investors and provide investors with information
concerning the risks of trading in the security. These requirements could make it more difficult
to buy or sell our common stock in the open market. In addition, this could materially adversely
affect our ability to raise capital, and could also have other negative results, including the
potential loss of confidence by employees, the loss of institutional investor interest and fewer
business development opportunities.
42
Our organizational documents, Delaware law and our Restructuring Agreements may make it harder
for us to be acquired without the consent and cooperation of our board of directors, management and
our Bank.
Several provisions of our organizational documents, Delaware law, and our Restructuring
Agreements may deter or prevent a takeover attempt, including a takeover attempt in which the
potential purchaser offers to pay a per share price greater than the current market price of our
common stock.
Our classified board of directors will make it more difficult for a person seeking to obtain
control of us to do so. Also, our supermajority voting requirements may discourage or deter a
person from attempting to obtain control of us by making it more difficult to amend the provisions
of our certificate of incorporation to eliminate an anti-takeover effect or the protections they
afford minority stockholders, and will make it more difficult for a stockholder or stockholder
group to put pressure on our board of directors to amend our certificate of incorporation to
facilitate a takeover attempt. In addition, under the terms of our certificate of incorporation,
our board of directors has the authority, without further action by the stockholders, to issue
shares of preferred stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof. The ability to issue shares of preferred stock could tend to discourage
takeover or acquisition proposals not supported by our current board of directors.
The preceding provisions of our organizational documents, as well as Section 203 of the
Delaware General Corporation Law, could discourage potential acquisition proposals, delay or
prevent a change of control and prevent changes in our management, even if such events would be in
the best interests of our stockholders.
Under the terms of the Restructuring Agreements, we cannot enter into mergers, consolidations,
sales of any substantial portion of our assets (other than in connection with a restructuring or
spin-off of FCMC), or certain material changes to our capital structure.
Our quarterly operating results may fluctuate and cause our stock price to decline.
Because of the nature of our business and our Restructuring Agreements, our quarterly
operating results may fluctuate, or we may incur additional operating losses. Our results may
fluctuate as a result of any of the following:
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the non-payment by the Banks REIT of the dividend on our investment in the REITs
preferred stock; |
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the timing and amount of collections on loans that we service; |
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the rate of delinquency, default, foreclosure and prepayment on the loans we
service; |
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changes in interest rates; |
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fair valuation adjustments related to changes in the fair value of investments in
mortgage loans and real estate held for sale and investments in trust certificates; |
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our inability to successfully enter the new business of servicing loans for third
parties; |
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further declines in the estimated value of real property securing mortgage loans; |
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increases in operating expenses associated with the changes in our business; |
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general economic and market conditions; and, |
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the effects of state and federal tax, monetary and fiscal policies. |
43
Many of these factors are beyond our control, and we cannot predict their potential effects on
the price of our common stock. We cannot assure you that the market price of our common stock will
not fluctuate or further significantly decline or become worthless in the future.
Compliance with the rules of the market in which our common stock is quoted and proposed and
recently enacted changes in securities laws and regulations are likely to increase our costs.
The Sarbanes-Oxley Act of 2002 and the related rules and regulations promulgated by the
Securities and Exchange Commission (the SEC) and the national securities exchanges have increased
the scope, complexity and cost of corporate governance, reporting and disclosure practices for
public companies, including ourselves. These rules and regulations could also make it more
difficult for us to attract and retain qualified executive officers and members of our board of
directors, particularly to serve on our audit committee.
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ITEM 1B. |
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UNRESOLVED STAFF COMMENTS |
Not applicable.
On March 4, 2005, we entered into a sublease agreement with Lehman Brothers Holdings Inc. to
sublease approximately 33,866 square feet of space on the 25th floor at 101 Hudson
Street, Jersey City, New Jersey for use as executive and administrative offices (the
25th Floor Premises). Effective as of June 26, 2009, as a result of Lehman Brothers
Holdings Inc.s rejection of its lease under bankruptcy law, the 25th Floor Premises is
now leased directly with 101 Hudson Leasing Associates. On July 27, 2005, we entered into a lease
agreement with 101 Hudson Leasing Associates to lease approximately 6,856 square feet of space on
the 37th floor at 101 Hudson Street, Jersey City, New Jersey for use as administrative
offices (the 37th Floor Premises). On March 30, 2007, we entered into a lease agreement
with 101 Hudson Leasing Associates to lease approximately an additional 6,269 square feet of space
on the 37th floor at 101 Hudson Street, Jersey City, New Jersey for use as
administrative offices (the Expansion Premises). The term of the combined lease with 101 Hudson
Leasing Associates for the 25th Floor Premises, 37th Floor Premises and
Expansion Premises is through December 30, 2013, with a base rent of $1,181,000 annually, payable
in monthly installments of $98,000, until December 31, 2010, and thereafter a base rent of
$1,597,000 annually, payable in monthly installments of $133,000.
At December 31, 2010, the 37th Floor Premises was not being utilized and is currently being
marketed for sublet. At December 31, 2010, the remaining lease payments, net of estimated sublet
payments (based on the Companys estimate for subleasing the space), in the amount of $258,000 were
accrued and non-usable leasehold improvements in the amount of $110,000 were written off.
As part of its acquisition of a wholesale mortgage origination unit in February 2007 from a
third party, Tribeca assumed a lease obligation for office space located in Bridgewater, New
Jersey, for approximately 14,070 square feet. The term of the lease was through January 31, 2011
at approximately $21,000 per month. The space was not being utilized by Tribeca, and due to
adverse market conditions for rental commercial space of this type the remaining lease payments of
$597,000 were accrued and non-usable fixed assets of $209,000 were written off in 2008. The
Bridgewater lease expired unrenewed on January 31, 2011.
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ITEM 3. |
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LEGAL PROCEEDINGS |
We are involved in routine litigation matters generally incidental to our business, which
primarily consist of legal actions related to the enforcement of our rights under mortgage loans we
hold, held, service or collect for others, none of which is individually or in the aggregate
material. In addition, because we service and collect on mortgage loans throughout the country,
and prior to November 2007 originated and acquired mortgage loans on a nationwide basis, we must
comply and were required to comply with various state and federal lending, servicing and debt
collection laws, rules and regulations and we are routinely subject to investigation and inquiry by
regulatory agencies, some of which arise from complaints filed by borrowers, none of which is
individually or in the aggregate material.
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ITEM 4. |
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(REMOVED AND RESERVED) |
45
PART II
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ITEM 5. |
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MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information. Effective with the opening of stock market trading on April 22, 2009, the
Companys common stock has been quoted on the OTC Bulletin Board under the trading symbol
FCMC.OB. Our common stock was delisted from The Nasdaq Capital Market as of November 3, 2008,
and was quoted under the stock symbol FCMC.PK on the Pink Sheets, a centralized quotation
service for over-the-counter securities, until April 22, 2009.
The following table sets forth the bid prices for the common stock and the sales prices for
the common stock on the OTC Bulletin Board and the Pink Sheets, as applicable, for the periods
indicated. Trading during these periods was limited and sporadic; therefore, the following quotes
may not accurately reflect the true market value of the securities. Prices since November 3, 2008
reflect inter-dealer prices without retail markup or markdown or commissions and may not represent
actual transactions.
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High |
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Low |
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Year Ended December 31, 2009: |
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First Quarter |
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$ |
0.75 |
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$ |
0.13 |
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Second Quarter |
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1.00 |
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0.25 |
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Third Quarter |
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1.10 |
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0.40 |
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Fourth Quarter |
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1.25 |
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0.30 |
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Year Ended December 31, 2010: |
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First Quarter |
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1.00 |
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0.41 |
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Second Quarter |
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0.48 |
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0.13 |
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Third Quarter |
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0.40 |
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0.05 |
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Fourth Quarter |
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0.23 |
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0.11 |
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Holders. As of March 24, 2011, there were approximately 369 record holders of the
Companys common stock.
Dividend Policy. Franklin Holding historically has not paid cash dividends on its common
stock and due to operating losses and deficit stockholders equity does not expect to pay a cash
dividend in the future. Any future determination to pay cash dividends will be at the discretion
of the board of directors and will depend upon a complete review and analysis of all relevant
factors, including our financial condition, operating results, capital requirements and any other
factors the board of directors deems relevant. In addition, the Restructure Agreements expressly
restrict payments to stockholders, without the prior written consent of the Bank, which includes
our ability to pay dividends.
Securities Authorized for Issuance Under Compensation Plans. The information required by this
item concerning securities authorized for issuance under equity compensation plans is set forth in
Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
Recent Sales of Unregistered Securities
None.
46
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ITEM 6. |
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SELECTED FINANCIAL DATA |
Not applicable because the Company is a Smaller Reporting Company.
47
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ITEM 7. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Managements Discussion and Analysis of Financial Condition and Results of Operations
includes forward-looking statements. We have based these forward-looking statements on our current
plans, expectations and beliefs about future events. In light of the risks, uncertainties and
assumptions discussed under Item 1A. Risk Factors of this Annual Report on Form 10-K and other
factors discussed in this section, there are risks that our actual experience will differ
materially from the expectations and beliefs reflected in the forward-looking statements in this
section and throughout this report. For more information regarding what constitutes a
forward-looking statement, please refer to Item 1A. Risk Factors.
General
The following discussion of our operations and financial condition should be read in
conjunction with our financial statements and notes thereto included elsewhere in this Form 10-K.
In these discussions, most percentages and dollar amounts have been rounded to aid presentation.
As a result, all such figures are approximations. The following managements discussion and
analysis of financial condition and results of operations is based on the amounts reported in the
Companys Consolidated Financial Statements. These Consolidated Financial Statements are prepared
in accordance with accounting principles generally accepted in the United States of America (GAAP).
In preparing the financial statements, management is required to make various judgments, estimates
and assumptions that affect the reported amounts. Changes in these estimates and assumptions could
have a material effect on the Companys Consolidated Financial Statements.
Effective with the March 2009 Restructuring, the loans transferred by the Company to the Trust
continued to be included on the Companys balance sheet in accordance with GAAP, and, therefore,
the revenues from such loans have been reflected in the Companys consolidated results,
notwithstanding the fact that trust certificates representing an undivided interest in
approximately 83% of the Trust assets were transferred to Huntington in the Restructuring.
Although the transfer of the trust certificates, representing approximately 83% of the Portfolio,
to the REIT was structured in substance as a sale of financial assets, the transfer, for accounting
purposes, was treated, through September 30, 2010, as a financing under GAAP under Accounting
Standards Codification Topic 860, Transfers and Servicing (ASC Topic 860). While Franklin
transferred legal ownership and the economic interests and risks relating to the underlying assets
of the related trust certificates to the Bank in exchange for preferred and common stocks of the
REIT, the transfer did not meet one of the technical requirements of Topic 860 insofar as, for
accounting purposes, it could not be assured that the transferred assets were legally isolated from
the Company and put presumptively beyond the reach of the Company and its creditors, even in
bankruptcy.
Except for and effective with the sale of loans sold by Huntington in the third and fourth
quarters of 2010, the fees received from Huntington subsequent to March 31, 2009 for servicing
their loans, and the third party costs incurred by us in the servicing and collection of their
loans and reimbursed by Huntington, for purposes of these Consolidated Financial Statements have
not been recognized as servicing fees and reimbursement of third party servicing costs, but as
additional interest and other income earned and additional, offsetting expenses as if the Company
continued to own the loans.
During the quarters ended September 30, 2010 and December 31, 2010, the Company and FCMC, its
servicing business subsidiary, entered into a series of transactions with Huntington facilitating
sales by the Banks Trust to third parties of substantially all of the loans underlying the trust
certificates issued by the Trust. These transactions, described below, were effective in July,
September and December 2010, and are individually referred to as the July 2010 Transaction or July
Loan Sale, the
September 2010 Transaction or September Loan Sale, and the December Transaction or December
Loan Sale, respectively.
48
As a result of the third and fourth quarter loan sales by the Banks Trust, the transfer by
the Company in March 2009 of 83% of trust certificates in the Trust, representing an 83% interest
in the Trust, to the Banks REIT that has been accounted for as a secured financing in accordance
with GAAP, as of the effective dates of the Loan Sales are accounted for as sales of loans in
accordance with GAAP, to the extent of the loans sold by the Trust. The sales of the loans by the
Banks Trust also has resulted in treating substantially all of the loans represented by the
remaining 17% in trust certificates held by the Company as sold, to the extent of the loans sold by
the Trust, in accordance with GAAP. Accordingly, the fees received from Huntington subsequent to
March 31, 2009 and through June 30, 2010 and during the quarter ended September 30, 2010 for
servicing their loans up to the respective effective dates of the July Loan Sale and the September
Loan Sale, and during the quarter ended December 31, 2010 up to the respective effective date of
the December Loan Sale, and the third-party costs incurred by us in the servicing and collection of
their loans and reimbursed by Huntington, for purposes of these Consolidated Financial Statements
were not recognized as servicing fees and reimbursement of third-party servicing costs, but instead
as additional interest and other income earned, with offsetting expenses in an equal amount, as if
the Company owned and self serviced the loans.
The treatment as a financing on the Companys balance sheet did not affect the cash flows of
the March 2009 transfer, and has not affected the Companys cash flows or its reported net income.
The treatment of the Loan Sales and the December Loan Sale to the extent of the 83% represented by
the trust certificates held by the Banks REIT in the quarters ended September 30 and December 31,
2010 as a sale of financial assets also did not affect the cash flows of the Company or its
reported net income. However, the treatment of the Loan Sales and the December Loan Sale to the
extent of the 17% represented by the trust certificates held by the Company in the quarters ended
September 30 and December 31, 2010, which also were treated as sales of financial assets, did
affect the Companys cash flows and reported net income.
The net proceeds from the Loan Sales and the December Loan Sale were distributed to the Trust
certificate holders on a pro rata basis by percentage interest. Accordingly, approximately 17% of
the net proceeds were received by the Company and were applied to pay down the Legacy Debt owed to
the Bank, as 83% of the trust certificates are held by the Banks REIT, and the Companys
investment in REIT securities (which are not marketable) is realized only through declared and paid
dividends (which were suspended a few days after the July Loan Sale and throughout the remainder of
2010) or a redemption of the securities by the REIT. The REIT board in February 2011 declared
dividends for the third and fourth quarters of 2010 and for the full year of 2011, with payment
pending approval of the Banks regulator. See Note 20 to the Consolidated Financial Statements.
Executive Summary
The Company had a net loss of $55.3 million attributed to common shareholders for the twelve
months ended December 31, 2010, compared with a net loss of $358.1 million for the year ended
December 31, 2009. The net loss for the twelve months of 2010 was attributed principally to the
Banks REIT not declaring and not paying a dividend in the aggregate amount of approximately $21
million during the six months ended December 31, 2010 relating to the Companys investment in REIT
securities, net negative fair value adjustments (Fair valuation adjustments) recognized during the
year 2010 in the amount of $16.0 million on the Investment in trust certificates at fair value
(including a net loss in the amount of $9.8 million on the sales of loans by the Banks Trust and
the Bank in the third and fourth quarters of 2010 and other net negative fair value adjustments of
$6.2 million during 2010), and the absence of interest income on the Companys 17% interest in
trust certificates (Investment in trust certificates at fair value) from the loans sold by the Bank
and the Banks Trust in July and September
2010. The Company had stockholders deficit of $852.9 million at December 31, 2010, or a
deficit book value per common share of $106.23.
49
The net loss for the twelve months of 2009 was driven principally by the restructuring
agreement entered into with the Bank effective March 31, 2009 (the Restructuring) that resulted in
a write-down to fair market value of the Companys mortgage loans and owned real estate, and
subsequent write downs during the nine months ended December 31, 2009 due to further declines in
estimated fair values and other adjustments to the mortgage loans and owned real estate, including
the loans securing the Unrestructured Debt.
Application of Critical Accounting Policies and Estimates
The following discussion and analysis of financial condition and results of operations is
based on the amounts reported in our Consolidated Financial Statements, which are prepared in
accordance with accounting principles generally accepted in the United States of America, or GAAP.
In preparing the Consolidated Financial Statements, management is required to make various
judgments, estimates and assumptions that affect the financial statements and disclosures. Changes
in these estimates and assumptions could have a material effect on our Consolidated Financial
Statements. The following is a summary of the critical accounting policies believed by management
to be those that require subjective and complex judgment that could potentially affect reported
results of operations. Management believes that the estimates and judgments used in preparing
these Consolidated Financial Statements were the most appropriate at that time.
Noncontrolling Interest The Company accounts for a 20% equity interest in FCMC to a related
party in accordance with Topic 810, Consolidations, applying consolidation accounting under
Accounting Research Bulletin No. 51, Consolidated Financial Statements (ARB 51).
Investment in REIT Securities Investment in REIT securities, common and preferred stocks,
is carried at cost. The preferred and common stock of the REIT cannot be sold or redeemed by the
Company, and is, therefore, classified as of the date of purchase as non-marketable. The
investment in REIT securities is evaluated periodically for other than temporary impairment. The
investment in common stock is approximately $4.9 million.
Investment in Trust Certificates Investment in trust certificates, representing
approximately 17% of the Portfolio not transferred to the Banks REIT in the March 2009
Restructuring, is classified at the date of purchase as available for sale, and a fair value
adjustment at March 31, 2009 was recorded as Loss on valuation of trust certificates and notes
receivable held for sale. Investment in trust certificates is carried at fair market value, and
the certificates are valued as of the end of each reporting period. Subsequent to March 31, 2009,
changes in fair value are recorded in earnings as Fair valuation adjustments. The fair value of
the trust certificates is based on an assessment of the underlying investment, expected cash flows
and other market-based information, and where observable market prices and other data are not
available for similar investments, pricing models or discounted cash flow analyses, using
observable market data where available, are utilized to estimate fair market value. At December
31, 2010, the Investment in trust certificates consisted solely of real estate properties acquired
through foreclosure.
50
Mortgage Loans and Real Estate Held for Sale As part of the Restructuring, approximately
83% of the Portfolio was transferred to the REIT and such loans and owned real estate (acquired
through foreclosure) are classified as held for sale. As a result, a loss on the transfer was
recorded as Loss on mortgage loans and real estate held for sale. Subsequent to March 31, 2009,
Mortgage loans and real estate held for sale are carried at the lower of cost or market value. The
transfer was accounted for as a secured financing in accordance with GAAP, ASC Topic 860, because
for accounting purposes the requisite level of certainty that the transferred assets were legally
isolated from the Company and put
presumptively beyond the reach of the Company and its creditors, including in a bankruptcy
proceeding, was not achieved. Accordingly, in accordance with GAAP, except to the extent of and
prior to the sale of loans by the Bank, as applicable, in July, September and December 2010, the
mortgage loans and real estate remained on the Companys balance sheet classified as Mortgage loans
and real estate held for sale securing the Nonrecourse liability in an equal amount. The fair
value of the Mortgage loans and real estate held for sale is based on an assessment of the
underlying residential 1-4 family mortgage loans and real estate, expected cash flows and other
market-based information, and where observable market prices and other data are not available for
similar loans, pricing models or discounted cash flow analyses, using observable market data where
available, are utilized to estimate market value. Mortgage loans and real estate held for sale are
valued as of the end of each reporting period, and changes in fair value are recorded in earnings
as Fair valuation adjustments. At December 31, 2010, the Mortgage loans and real estate held for
sale consisted solely of real estate properties acquired through foreclosure.
Nonrecourse Liability The Nonrecourse liability is the offset to, and is secured by, the
Mortgage loans and real estate held for sale. The Company elected the fair value option for the
Nonrecourse liability, and adjustments to fair value are recorded as Fair valuation adjustments.
No interest expense is recorded on the Nonrecourse liability as any payments received from the
Trust on the trust certificates, comprising the Mortgage loans and real estate held for sale, are
recorded as a reduction to the balance of the Nonrecourse liability, which is adjusted to fair
value each quarter through the fair valuation adjustments line item.
Fair Valuation Adjustments Fair valuation adjustments include amounts subsequent to March
31, 2009 related to adjustments in the fair value of the Investment in trust certificates at fair
value and the Nonrecourse liability, adjustments to the lower of cost or market related to Mortgage
loans and real estate held for sale, and for losses on sales of real estate owned.
Notes Receivable Held for Sale, Net At March 31, 2009, as part of the Restructuring, Notes
receivable held for sale, net, which represent the loans and assets that collateralize the
Unrestructured Debt, are classified as held for sale as this portfolio, from time-to-time, is
marketed for sale, and a lower of cost or market value was recorded as Loss on valuation of
investments in trust certificates and notes receivable held for sale. Subsequent to March 31,
2009, the fair value of the Notes receivable held for sale, net is based on an assessment of the
underlying residential 1-4 family mortgage loans, expected cash flows and other market-based
information, and where observable market prices and other data are not available for similar loans,
pricing models or discounted cash flow analyses, using observable market data where available, are
utilized to estimate market value. Notes receivable held for sale, net are valued as of the end of
each reporting period, and changes in fair value are recorded as Fair valuation adjustments.
Income Recognition on Investment in Trust Certificates and Mortgage Loans and Real Estate Held
for Sale Income on the mortgage loans and real estate collateralizing the Investment in trust
certificates and the Mortgage loans and real estate held for sale is estimated based on the
available information on these loans and real estate provided by the Bank and from the loans
serviced for the Trust. The estimated income on the Mortgage loans and real estate held for sale
does not represent cash received and retained by the Company and is essentially offset through a
valuation adjustment of the Nonrecourse liability. During the second quarter of 2009, the Company
revised its interest accrual policy to accrue only one month of interest on performing loans (loans
that are contractually current).
Derivatives As part of the Companys interest-rate risk management process, we entered into
interest rate swap agreements in 2008. In accordance with Topic 815, Derivatives and Hedging
(Topic 815), as amended and interpreted, derivative financial instruments are reported on the
consolidated balance sheets at their fair value. All of our interest rate swaps were executed with
the Bank.
51
Franklins management of interest-rate risk predominantly included the use of plain-vanilla
interest rate swaps to synthetically convert a portion of its London Interbank Offered Rate
(LIBOR)-based variable-rate debt to fixed-rate debt. In accordance with Topic 815, derivative
contracts hedging the risks associated with expected future cash flows are designated as cash flow
hedges. The Company formally documents at the inception of its hedges all relationships between
hedging instruments and the related hedged items, as well as its interest risk management
objectives and strategies for undertaking various accounting hedges. Additionally, we use
regression analysis at the inception of the hedge and for each reporting period thereafter to
assess the derivatives hedge effectiveness in offsetting changes in the cash flows of the hedged
items. The Company discontinues hedge accounting if it is determined that a derivative is not
expected to be or has ceased to be highly effective as a hedge, and then reflects changes in the
fair value of the derivative in earnings. All of the Companys interest rate swaps qualify for
cash flow hedge accounting, and are so designated.
In conjunction with the Restructuring, and at the request of the Bank, effective March 31,
2009, the Company exercised its right to terminate two non-amortizing fixed-rate interest rate
swaps with the Bank, with an aggregate notional amount of $390 million. The total termination fee
for cancellation of the swaps was $8.2 million, which is payable only to the extent cash is
available under the waterfall provisions of the Legacy Credit Agreement, and only after the first
$837.9 million of debt (the amount designated as tranche A debt as of March 31, 2009) owed to the
Bank has been paid in full. The carrying value included in accumulated other comprehensive loss
(AOCL) within stockholders equity at December 31, 2010 and 2009, which is related to the
terminated hedges, is amortized to earnings over time.
As of December 31, 2010, the notional amount of the Companys fixed-rate interest rate swaps
totaled $390 million, representing approximately 33% of the Companys outstanding variable rate
debt. The fixed-rate interest rate swaps were expected to reduce the Companys exposure to future
increases in interest costs on a portion of its borrowings due to increases in one-month LIBOR
during the remaining terms of the swap agreements.
Through December 31, 2008, changes in the fair value of derivatives designated as cash flow
hedges, in our case the swaps, was recorded in AOCL within stockholders equity to the extent that
the hedges were effective. Any hedge ineffectiveness is recorded in current period earnings as a
part of interest expense. If a derivative instrument in a cash flow hedge is terminated, the hedge
designation is removed, or the hedge accounting criteria are no longer met, the Company will
discontinue the hedge relationship.
The Company removed the hedge designations for its cash flow hedges effective as of December
31, 2008. As a result, the Company carries the December 31, 2008 balance related to these hedges
in AOCL unless it becomes probable that the forecasted cash flows will not occur. The balance in
AOCL is amortized to earnings as part of interest expense in the same period or periods during
which the hedged forecasted transaction affects earnings. Changes in the fair value of the
remaining interest rate swaps are accounted for directly in earnings.
On January 25, 2011, the Bank declared an early termination of all remaining swaps due to a
failure to make payments due under the swap agreements, which payment defaults were occasioned by
insufficient funds available under the Legacy Credit Agreement as a direct result of the loss of
cash flows attributable to the July, September and December 2010 loan sales by the Banks Trust and
the suspension of dividends by its REIT. The early termination fee payable by the Company (but not
FCMC) to the Bank is $6.5 million. The swap termination fee is expected to be charged to earnings
in the quarter ended March 31, 2011. See Interest Rate Swaps and Note 20 to the Consolidated
Financial Statements.
52
Fair Value Measurements Topic 820, Fair Value Measurements and Disclosures, establishes a
three-tier hierarchy for fair value measurements based upon the transparency of the inputs to the
valuation of an asset or liability and expands the disclosures about instruments measured at fair
value. A financial instrument is categorized in its entirety and its categorization within the
hierarchy is based upon the lowest level of input that is significant to the fair value
measurement. The three levels are described below.
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Level 1 Inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets. |
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Level 2 Inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets and inputs that are observable for the asset
of liability, either directly or indirectly, for substantially the full term of the
financial instrument. Fair values for these instruments are estimated using pricing
models, quoted prices of securities with similar characteristics, or discounted cash
flows. |
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Level 3 Inputs to the valuation methodology are unobservable and significant to
the fair value measurement. Fair values are initially valued based upon transaction
price and are adjusted to reflect exit values as evidenced by financing and sale
transactions with third parties. |
Fair values for over-the-counter interest rate contracts, which are determined from market
observable inputs, including the LIBOR curve and measures of volatility used to determine fair
values, are considered Level 2 observable market inputs.
Fair values for certain investments (Level 3 assets) are determined using pricing models,
discounted cash flow methodologies or similar techniques and at least one significant model
assumption or input is unobservable.
New Accounting Pronouncements
A discussion of new accounting pronouncements that are applicable to Franklin, and have been
or will be adopted by Franklin, is included in Note 2 in Consolidated Notes to Financial
Statements Summary of Significant Accounting Policies Recent Accounting Pronouncements.
Results of Operations Franklin Credit Management Corporation (FCMC)
Through FCMC, we continue to actively seek to (a) expand our servicing business to provide
servicing and recovery services to third parties, particularly specialized collection services, and
(b) capitalize on our experience to provide due diligence and various other portfolio management
services to the residential mortgage markets. Since January 1, 2009, the Companys operating
business has been conducted solely through FCMC, a specialty consumer finance subsidiary company
primarily engaged in the servicing and resolution of performing, reperforming and nonperforming
residential mortgage loans, including specialized loan recovery servicing, and in the due
diligence, analysis and pricing of residential mortgage portfolios, for third parties.
As a result of the March 2009 Restructuring and the December 2008 Reorganization, FCMC, the
Companys servicing entity within the Franklin group of companies, notwithstanding the substantial
stockholders deficit of Franklin Holding, has positive net worth, and as of September 22, 2010,
all of FCMCs equity is free from the pledges to the Bank. In addition, FCMC, as of September 22,
2010, is free of significant restrictive covenants under the Legacy Credit Agreement with the Bank
that governs the substantial debt owed to the Bank by subsidiaries of FCHC, but not FCMC.
53
At December 31, 2010, FCMC had total assets of $24.8 million and had stockholders equity of
$15.9 million. At December 31, 2009, FCMCs total assets amounted to $26.3 million and its
stockholders equity was $18.9 million. The reduction in stockholders equity during the twelve
months ended December 31, 2010 was the result principally of payments made by FCMC to the Bank in
connection with the July 2010 Transaction and the September 2010 Transaction (referred to as
non-dividend distributions), which payments were applied by the Bank as payments against the debt
outstanding of certain subsidiaries of the Company under the Legacy Credit Agreement, net of an
additional contribution of capital by FCHC. Inter-company payables and receivables, and
non-dividend distributions made by FCMC, were eliminated in deriving the Consolidated Financial
Statements of Franklin Holding.
FCMC had income before tax of approximately $461,000 and $7.1 million, respectively, for the
twelve months ended December 31, 2010 and 2009, principally from servicing the portfolio of loans
and assets for the Banks Trust in 2009; and, in 2010 from servicing the portfolio of loans and
assets for the third party that purchased the loans in the July Loan Sale, the three Bosco entities
and for the Banks Trust. The decline in before tax income for 2010 compared with 2009 was due to
new servicing contracts entered into in connection with the Loan Sales and the December Loan Sale,
significantly reduced servicing fees earned from servicing the Bosco I portfolio, and the $1.0
million bank fee paid in the third quarter of 2010 to Huntington in connection with the July Loan
Sale pursuant to the terms of the July 2010 Transaction, and to a lesser extent reduced servicing
fees as a result of a reduction in the number of loans serviced. Inter-company servicing revenues
allocated to FCMC during the first quarter of 2009 were based principally on the servicing contract
entered into with the Banks Trust as part of the Restructuring, which became effective on March
31, 2009. FCMC charges its sister companies a management fee that is estimated based on internal
services rendered by its employees to those companies.
Inter-company allocations and the Federal provision for income taxes during the twelve months
ended December 31, 2010 and 2009 have been eliminated in deriving the Consolidated Financial
Statements of the Company. Servicing revenues received from the Bank for servicing its loans
during the twelve months ended December 31, 2009 have been eliminated in deriving the Consolidated
Financial Statements of the Company. The servicing fees received from the Bank during 2010 for
servicing their loans up to the effective dates of the July, September and December 2010 loan sales
were eliminated in deriving the Consolidated Financial Statements of the Company. Servicing
revenues were eliminated in the Consolidated Financial Statements of the Company due to the
accounting treatment for the transfer of the trust certificates as a financing under ASC Topic 860.
The Companys Consolidated Financial Statements, while including the results of FCMC, include
the results of all its subsidiary companies, which comprise all the remaining assets and debt
obligations (the Legacy Debt) that have resulted from the Companys legacy business prior to 2008.
FCMC was not in compliance at December 31, 2010 with the covenant in the Licensing Credit
Agreement that requires Franklin Holding and FCMC to maintain net income before taxes of not less
than $800,000 as of the end of each calendar month for the most recently ended twelve consecutive
month period or, with notice, an event of default will be deemed to have occurred. FCMC, however,
would have been in compliance with the net income covenant had it not paid the Bank a $1.0 million
fee in connection with the July Loan Sale by the Banks Trust pursuant to the terms of the Letter
Agreement entered into with Huntington in July 2010. On March 28, 2011, as a temporary measure,
Franklin Holding and FCMC entered into an agreement with the Bank that provides for a limited
waiver of the financial covenant of Franklin Holding and FCMC under the Licensing Credit Agreement,
for the period through and including September 30, 2011, related to the failure to maintain the
minimum level of net income before taxes.
54
As of December 31, 2010, FCMC had four significant servicing contracts with third parties to
service 1-4 family mortgage loans and owned real estate; three with related parties (Bosco I, Bosco
II and Bosco III) and one with an unrelated third party. In addition, FCMC had a servicing
contract remaining with Huntington, through the Trust, for the remaining real estate owned
properties not sold in the Loan Sales and the December Loan Sale. FCMC also had one servicing
contract with certain Company entities for the loans collateralizing the Unrestructured Debt. At
December 31, 2010, FCMC serviced and provided recovery collection services on a total population of
approximately 32,400 loans. While the loans serviced for Huntington represented less than 1% of
the total number of loans serviced for third parties as of December 31, 2010 (due to the July,
September and December 2010 loan sales by the Banks Trust), the servicing revenues earned from
servicing the Huntington portfolio represented approximately 70% of the total servicing revenues
earned during the twelve months ended December 31, 2010. The servicing revenues earned from
servicing the Bosco entities represented approximately 15% of the total servicing revenues earned
during the twelve months ended December 31, 2010. The servicing revenues earned from servicing the
Huntington portfolio represented approximately 13% of the total servicing revenues earned during
the three months ended December 31, 2010, while the servicing revenues earned from servicing the
Bosco entities represented approximately 46% of the total servicing revenues earned during the
three months ended December 31, 2010. See Note 19 to the Consolidated Financial Statements.
Effective July 1, 2010, in the July Loan Sale, the Trust as directed by the Bank sold
approximately 3,300 residential mortgage loans to a third-party purchaser (the Purchaser).
Effective July 1, 2010, FCMC entered into the Loan Sale Servicing Agreement with the Purchaser,
pursuant to which FCMC would continue to provide servicing for the loans acquired by the Purchaser
in the July Loan Sale. However, effective October 1, 2010, the servicing of approximately 25% of
the loans were transferred by the Purchaser to an affiliate of the Purchaser and FCMC currently
services approximately 75% of the loans acquired (based on unpaid principal balance) as in
accordance with the Loan Sale Servicing Agreement.
Under the terms of the July 2010 Transaction, FCMC paid the Bank (i) $1 million towards the
Banks expenses of the July Loan Sale, (ii) $1 million to pay off the outstanding debt under the
Licensing Credit Agreement, and (iii) $1 million to reduce the revolving line of credit from $2
million, which resulted in a release of $1 million in cash collateral that was used to pay down
debt of the Company under the Legacy Credit Agreement.
Effective September 1, 2010, the Trust as directed by the Bank sold to a third party (Bosco
II) substantially all (approximately 20,000 residential mortgage loans) of the subordinate-lien
residential mortgage loans (the September Loan Sale) serviced by FCMC under the servicing agreement
with the Trust (the New Trust Servicing Agreement). FCMC entered into a servicing agreement with
Bosco II for the servicing and collection of the loans purchased by Bosco II from the Trust.
The Company and its mortgage servicing subsidiary, FCMC, entered into a series of transactions
(the September 2010 Transaction) with the Bank and other parties on September 22, 2010. The
September 2010 Transaction enables FCMC to operate its servicing, collections and recovery business
free of pledges of its stock (FCHCs pledge of 70% of the outstanding shares of FCMC as security
for the Legacy Credit Agreement was released by the Bank, in consideration of $4 million paid by
FCMC to the Bank) and significant restrictive covenants under the Legacy Credit Agreement with the
Bank, which governs the substantial debt owed to the Bank by subsidiaries of FCHC, but not FCMC.
For a description of the key terms and conditions of the September 2010 Transaction that
relate to FCMC see Borrowings September 2010 Transaction and Note 12 to the Consolidated
Financial Statements.
55
In conjunction with the September 2010 Transaction, FCHC transferred to Mr. Axon an additional
10% of FCMCs outstanding shares of common stock. When combined with FCMC shares already directly
owned by him, Mr. Axon (the Chairman and President of the Company) now directly owns 20% of FCMC,
while the remaining 80% of FCMC is owned by FCHC and indirectly by its public shareholders
(including Mr. Axon as a principal shareholder of FCHC). See Borrowings September 2010
Transaction and Note 19 to the Consolidated Financial Statements.
In December 2010, effective November 15, 2010, the Trust as directed by the Bank sold to a
third party (Bosco III) substantially all (approximately 4,800 residential mortgage loans) of the
remaining charge-off mortgage loans not sold in the July Loan Sale and the September Loan Sale and
serviced by FCMC under the New Trust Servicing Agreement. FCMC entered into a servicing agreement
with Bosco III for the servicing and collection of the loans purchased by Bosco III from the Trust.
See Note 19 to the Consolidated Financial Statements.
Following the loan sale to Bosco III, on December 22, 2010, the Bank terminated the New Trust
Servicing Agreement (entered into on July 30, 2010 and effective as of August 1, 2010, to replace
the Legacy Servicing Agreement, which had been entered into with the Trust as part of the March
2009 Restructuring with the Bank, and the servicing of all remaining assets by FCMC for the Trust
(which as of December 31, 2010 consisted of 88 REO assets with an unpaid principal balance of
approximately $18.8 million) effective March 24, 2011. On March 24, 2011, the Bank notified FCMC
that its servicing of the remaining real estate owned assets was extended through April 30, 2011.
56
A summary of FCMCs stand-alone financial results for the years ended December 31, 2010 and
2009 and at December 31, 2010 and 2009 follows:
|
|
|
|
|
|
|
|
|
STATEMENT OF INCOME |
|
2010 |
|
|
2009 |
|
REVENUES: |
|
|
|
|
|
|
|
|
Interest income |
|
$ |
30,689 |
|
|
$ |
104,836 |
|
Servicing fees and other income |
|
|
19,657,002 |
|
|
|
27,870,675 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
19,687,691 |
|
|
|
27,975,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
Interest expense |
|
|
49,653 |
|
|
|
78,119 |
|
Bank fee |
|
|
1,000,000 |
|
|
|
|
|
Collection, general and administrative |
|
|
17,578,185 |
|
|
|
20,188,497 |
|
Depreciation |
|
|
598,735 |
|
|
|
642,941 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
19,226,573 |
|
|
|
20,909,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE PROVISION FOR INCOME TAXES |
|
$ |
461,118 |
|
|
$ |
7,065,954 |
|
Provision for income taxes |
|
|
185,000 |
|
|
|
2,824,007 |
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
276,118 |
|
|
$ |
4,241,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET |
|
At December 31, 2010 |
|
|
At December 31, 2009 |
|
ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
12,071,212 |
|
|
$ |
15,116,880 |
|
Restricted cash |
|
|
7,304,521 |
|
|
|
4,770,867 |
|
Receivables, fixed and other assets |
|
|
5,413,821 |
|
|
|
6,436,434 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
24,789,554 |
|
|
$ |
26,324,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
|
|
|
|
Debt |
|
$ |
|
|
|
$ |
1,000,000 |
|
Servicing liabilities |
|
|
7,304,521 |
|
|
|
4,770,867 |
|
Other liabilities |
|
|
1,611,871 |
|
|
|
1,675,372 |
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
8,916,392 |
|
|
$ |
7,446,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY |
|
$ |
15,873,162 |
|
|
$ |
18,877,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
24,789,554 |
|
|
$ |
26,324,181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SERVICING PORTFOLIO: |
|
|
|
|
|
|
|
|
Number of loans serviced |
|
|
32,400 |
|
|
|
36,700 |
|
Unpaid principal balance serviced |
|
$ |
1.60 billion |
|
|
$ |
1.80 billion |
|
The fee of $1.0 million paid to Huntington in 2010 (the Bank fee) was in connection with
the July Loan Sale from the Banks Trust pursuant to the terms of the Letter Agreement entered into
with Huntington in July 2010, whereby FCMC agreed to reimburse the Bank up to $1 million for
certain costs incurred in connection with the sale of loans by the Banks Trust.
Included in Cash and cash equivalents at December 31, 2010 and 2009 was pledged cash to the
Bank of $8.5 million and $7.5 million, respectively, under the Licensing Credit Agreement (secured
by a first-priority lien) and Legacy Credit Agreement (secured by a second-priority lien). The
reduction in pledged cash was the result of the release of $1 million of pledged cash to the Bank
in connection with the reduction in the line of credit with the Bank from $2 million to $1 million in accordance with the
terms of the July 2010 Transaction.
57
Results of Operations Franklin Credit Holding Corporation (FCHC)
On March 31, 2009, Franklin Holding, and certain of its subsidiaries, including FCMC, entered
into the Restructuring Agreements with the Bank, pursuant to which the Companys loans, pledges and
guarantees with the Bank and its participating banks were substantially restructured, and
approximately 83% of the Portfolio was transferred to the Banks REIT.
The net loss for the twelve months of 2009 was driven principally by the Restructuring
Agreements entered into with the Bank effective March 31, 2009 in connection with the Restructuring
that resulted in a write-down to fair market value of the Companys Mortgage loans and owned real
estate, and subsequent write downs during the nine months ended December 31, 2009 due to further
declines in estimated fair values and other adjustments to the Mortgage loans and owned real
estate, including the loans securing the Unrestructured Debt. As part of the Restructuring with
the Bank, substantially all of the Companys portfolio of subprime mortgage loans and owned real
estate, was transferred to the Trust (with the loans and owned real estate transferred to the Trust
collectively referred to herein as the Portfolio) in exchange for trust certificates. In addition,
at March 31, 2009, the Company transferred approximately 83%, or approximately $760 million, of the
Portfolio (in the form of trust certificates) to Huntington and received preferred and common stock
in the amount of $477.3 million in Huntingtons REIT. Because the transfer of the trust
certificates is treated as a financing and not a sale for accounting purposes, the mortgage loans
and real estate have remained on the Companys balance sheet classified as Mortgage loans and real
estate held for sale securing a Nonrecourse liability in an equal amount. Effective March 31,
2009, the carrying value of the remaining approximately 17%, or $151.2 million, of the Portfolio,
which was also transferred to the Trust as part of the Restructuring in exchange for trust
certificates (Investments in trust certificates at fair value) that are held by the Company, was
reclassified as an investment available for sale and, therefore, recorded at fair value
approximating $95.8 million on March 31, 2009. In addition, the Company classified as an
investment held for sale loans with a fair value approximating $4.3 million and a carrying value
of approximately $11.4 million, representing the Companys remaining subprime mortgage loans not
subject to the Restructuring (Notes receivable held for sale, net), which collateralizes the
Unrestructured Debt and, as a result, recognized a loss of $7.3 million, which, on March 31, 2009,
was recorded as Loss on valuation of investment in trust certificates and notes receivable held for
sale. During the nine months of 2009 since the Restructuring, the Company incurred losses from
various fair value adjustments on the Portfolio and the loans that collateralize the Unrestructured
Debt, which amounted to $27.2 million, principally as a result of (i) losses recognized from sales
of owned real estate acquired through foreclosure and (ii) offsetting expenses equal to interest
income and fees on the approximately 83% of the Portfolio transferred to the REIT.
Although the transfer of the trust certificates in the March 2009 Restructuring, representing
approximately 83% of the Portfolio, to the REIT was structured in substance as a sale of financial
assets, the transfer, for accounting purposes, was treated as a secured financing in accordance
with ASC Topic 860. Therefore, the mortgage loans and real estate remained on the Companys
balance sheet classified as Mortgage loans and real estate held for sale securing a Nonrecourse
liability in an equal amount.
Because the loans transferred by the Company to the Trust had continued to be included on the
Companys consolidated balance sheet, the revenues from such loans were reflected in the Companys
consolidated results, in accordance with GAAP, notwithstanding the fact that trust certificates
representing an undivided interest in approximately 83% of the Portfolio were transferred to
Huntington in the Restructuring. Accordingly, except for and effective with the sale of Huntington
loans sold in the third and fourth quarters of 2010, the fees received from Huntington subsequent
to March 31, 2009 for
servicing their loans, and the third party costs incurred by us in the servicing and
collection of their loans and reimbursed by Huntington, for purposes of these Consolidated
Financial Statements were not recognized as servicing fees and reimbursement of third party
servicing costs, but instead as additional interest and other income earned with additional
offsetting expenses in an equal amount as if the Company continued to own the loans.
58
During the quarters ended September 30, 2010 and December 31, 2010, the Company and FCMC, its
servicing business subsidiary, entered into a series of transactions with Huntington facilitating
sales by the Banks Trust to third parties of substantially all of the loans underlying the trust
certificates issued by the Trust. These transactions, described below, were effective in July,
September and December 2010, and are individually referred to as the July Loan Sale, the September
Loan Sale, and the December Loan Sale.
As a result of the third and fourth quarter loan sales by the Trust, the transfer of
approximately 83% of the trust certificates (representing an undivided 83% interest in the loans
and real estate held by the Banks Trust) to the Banks REIT in March 2009, which was accounted for
as a secured financing in accordance with GAAP, with an equal percentage of mortgage loans and
owned real estate sold to the Banks Trust remaining on the Companys balance sheet classified as
Mortgage loans and real estate held for sale and securing a Nonrecourse liability in an equal
amount, is as of the effective dates of the Loan Sales and December Loan Sale substantially
accounted for as a sale of loans in accordance with GAAP, to the extent of the loans sold by the
Trust. Similarly, the Loan Sales and December Loan Sale by the Banks Trust also resulted in
treating substantially all of the loans represented by the remaining 17% in trust certificates held
by the Company as sold in accordance with GAAP effective with the dates of the Loan Sales and
December Loan Sale. However, the Trust did not sell the real estate owned inventory, which
remained on the Companys balance sheet classified as Mortgage loans and real estate held for sale
and securing a Nonrecourse liability in an equal amount.
The treatment as a financing on the Companys balance sheet did not affect the cash flows of
the March 2009 transfer, and has not affected the Companys cash flows or its reported net income.
The treatment of the Loan Sales and the December Loan Sale to the extent of the 83% represented by
the trust certificates held by the Banks REIT in the quarters ended September 30 and December 31,
2010 as a sale of financial assets also did not affect the cash flows of the Company or its
reported net income. However, the treatment of the Loan Sales and the December Loan Sale to the
extent of the 17% represented by the trust certificates held by the Company in the quarters ended
September 30 and December 31, 2010, which also were treated as sales of financial assets, did
affect the Companys cash flows and reported net income.
As a result of the Loan Sales by the Banks Trust, $263.0 million of the mortgage loans that
had remained on the Companys balance sheet as of June 30, 2010 included in Mortgage loans and real
estate held for sale in the amount of $288.7 million, and securing a Nonrecourse liability in an
equal amount, were removed from the Companys balance sheet as of September 30, 2010. In addition,
in December 2010, the Banks Trust sold the remaining mortgage loans (carried at an estimated fair
value of zero at September 30, 2010) included in Mortgage loans and real estate held for sale
(securing the Nonrecourse liability in an equal amount). At December 31, 2010, the remaining $7.5
million (estimated fair value) of Mortgage loans and real estate held for sale, and the
corresponding Nonrecourse liability of an equal amount, consisted only of real estate owned
properties.
As a result of the Loan Sales by the Banks Trust, $50.1 million of the mortgage loans that
had remained on the Companys balance sheet as of June 30, 2010 included in the Investment in trust
certificates at fair value in the amount of $58.0 were removed from the Companys balance sheet as
of September 30, 2010. In addition, in December 2010 the Banks Trust sold the remaining mortgage
loans (carried at an estimated fair value of zero at September 30, 2010) included in the Investment
in trust
certificates at fair value. At December 31, 2010, the remaining balance of the Investment in
trust certificates at fair value was $1.5 million and consisted only of real estate owned
properties.
59
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009
Overview. The Company had a net loss attributed to common stockholders of $55.3 million for
the twelve months ended December 31, 2010, compared with a net loss of $358.1 million for the
twelve months of 2009. The Company had a loss per common share for the twelve months ended
December 31, 2010 of $6.89 both on a diluted and basic basis, compared to a loss per common share
of $44.74 on both a diluted and basic basis for the twelve months ended December 31, 2009. The net
loss of $55.3 million in 2010 was principally the result of the absence of dividend income on the
Companys Investment in REIT securities in the third and fourth quarters of 2010, a net loss of
$9.8 million on the sales of loans by the Banks Trust and the Bank, other negative fair valuation
adjustments in the amount of $6.2 million incurred during the year 2010 due to estimated lower fair
values of the Companys Investment in trust certificates at fair value, and lower interest income
on the Investment in trust certificates at fair value (the 17% held by the Company) principally due
to the July Loan Sale and the September Loan Sale.
During the twelve months ended December 31, 2010, in the July Loan Sale and the September Loan
Sale (the Loan Sales) the Banks Trust sold substantially all of the loans represented by the trust
certificates (the 83% held by the Banks REIT and the 17% held by the Company), and in the December
Loan Sale the Bank sold its 50% participation interest in the loans securing the Unrestructured
Debt, to third parties. The Company recorded the Loan Sales as a sale of financial assets in
accordance with ASC Topic 860, effective July 1, 2010 and September 1, 2010, and recognized a net
loss of $9.8 million on the Investment in trust certificates at fair value from the Loan Sales
representing its 17% pro rata portion of the aggregate loans sold during the three months ended
September 30, 2010, which is reported in the consolidated statement of operations as Fair valuation
adjustments. The sale of loans and real estate assets representing the 83% pro rata portion did
not affect the Companys reported net loss for the year ended December 31, 2010 since the Companys
loss on the Mortgage loans and real estate held for sale was offset by adjustments to the
Nonrecourse liability of an equal amount in accordance with ASC Topic 860.
In the December Loan Sale, the Banks Trust sold the remaining loans not sold in the Loan
Sales, and the Company recorded the December Loan Sale as a sale of financial assets in accordance
with ASC Topic 860, and recognized a net gain of less than $50,000 on the Investment in trust
certificates at fair value representing its remaining 17% pro rata portion of the aggregate loans
sold during the three months ended December 31, 2010, which is reported in the consolidated
statement of operations as Fair valuation adjustments.
In the December Loan Sale, the Bank also sold its 50% participation interest in the commercial
loans securing the Unrestructured Debt, which did not affect the Companys reported net loss for
the three months ended December 31, 2010 since the Bank sold a participation interest in its
commercial loans representing the Unrestructured Debt. Therefore, the Companys investments in the
loans securing the Unrestructured Debt, (shown on the Companys balance sheets as Notes receivable
held for sale, net) were not treated as a sale of financial assets in accordance with GAAP.
As a result of the Loan Sales by the Banks Trust, the aggregate balance of Mortgage loans and
real estate held for sale and the Investment in trust certificates at fair value were substantially
reduced. Approximately $9.0 million (estimated fair value) of real estate owned properties were
not sold by the Trust, and, in accordance with GAAP, continue to be carried on the Companys
balance sheet at estimated fair values. At December 31, 2010, the remaining balance of Mortgage
loans and real estate held for sale, and the corresponding Nonrecourse liability of an equal
amount, was $7.5 million and the remaining balance of the Companys Investment in trust
certificates at fair value was $1.5 million. At December 31,
2010, the remaining balances of Mortgage loans and real estate held for sale and the
Investment in trust certificates at fair value included only estimated fair values of the real
estate properties not sold by the Banks Trust.
60
Total revenues increased by $286.5 million to $41.7 million for the twelve months ended
December 31, 2010, from a loss of $244.8 million for the twelve months ended December 31, 2009.
The net loss in the twelve months of 2009 resulted principally from the loss recognized by the
Company on 83% of the Portfolio contributed to the Trust as a result of the transfer of trust
certificates, representing that percentage of ownership of the Trust, to the Banks REIT in
exchange for the preferred and common stock of the REIT. The REIT Securities, common and preferred
shares, had an aggregate value of $477.3 million, intended to approximate the fair market value of
the trust certificates transferred to the Bank as of March 31, 2009. The Company incurred a loss
of $282.6 million on the transfer of assets. In addition, the Company recognized a loss of $62.7
million on the valuation of the remaining investments on the Companys balance sheet, reflecting
estimated losses attributable to the 17% ownership interest in the trust certificates retained by
the Company and the remaining loans not subject to the March 2009 Restructuring.
Our total debt outstanding decreased to $1.341 billion at December 31, 2010 from $1.367
billion at December 31, 2009. Interest expense decreased by $4.9 million, or 7%, including the
cost of the interest-rate swaps, during the twelve months of 2010 compared with the same period in
2009. Interest expense on borrowed funds, excluding the cost of the interest-rate swaps, however,
increased by $5.2 million during the twelve months ended December 31, 2010. At December 31, 2010,
the weighted average interest rate of borrowed funds, excluding the cost of interest-rate swaps,
was 4.13%. Collection, general and administrative expenses decreased by $13.4 million, or
approximately 33%, to $26.9 million during the twelve months ended December 31, 2010, from $40.3
million for the same period in 2009, due principally to costs incurred in the first quarter of 2009
for the March 2009 Restructuring, reduced third-party servicing costs incurred for servicing the
Portfolio and generally reduced operating costs throughout the Company. Stockholders deficit
increased to $852.9 million (a deficit book value per common share of $106.23) at December 31,
2010, from stockholders deficit of $806.8 million at December 31, 2009 (a deficit book value per
common share of $100.63).
Revenues. Revenues increased by $286.5 million for the twelve months ended December 31, 2010
to $41.7 million from a loss of $244.8 million for the twelve months ended December 31, 2009.
Revenues include interest income, dividend income, purchase discount earned, gain on recovery of
contractual loan purchase rights, loss on mortgage loans and real estate held for sale, loss on
valuation of trust certificates and notes receivable held for sale, fair valuation adjustments,
gain on sale of real estate properties and servicing fees and other income.
Interest income decreased by $30.9 million, or approximately 53%, to $27.2 million during the
twelve months ended December 31, 2010 from $58.1 million during the twelve months ended December
31, 2009, principally due to the Loan Sales by the Banks Trust, and due to increased serious
delinquencies experienced throughout 2010, up to the effective dates of the July Loan Sale and the
September Loan Sale, in the Companys loan portfolio (which reflected an approximate 55% decrease
in the amount of interest collected during the nine months ended September 30, 2010, as compared to
the full year 2009.
Dividend income from the Investment in REIT securities, received in exchange for trust
certificates in the Banks Trust transferred to the Banks REIT on March 31, 2009, decreased by
$10.8 million, or approximately 34%, to $21.3 million during the twelve months ended December 31,
2010 from $32.0 million during the twelve months ended December 31, 2009, principally due to the
suspension of the payment of dividends by the Banks REIT for the third and fourth quarters of
2010. The Company received the REIT securities on March 31, 2009 in exchange for the transfer of
the loans to the Banks
Trust as part of the Restructuring, and therefore, received dividends on the Investment in
REIT securities for each quarter in 2009 subsequent to March 31, 2009.
61
There was no purchase discount earned during the twelve months ended December 31, 2010 as
purchase discount on loans acquired in past years was eliminated effective March 31, 2009 with the
Restructuring. During the twelve months ended December 31, 2009, purchase discount earned amounted
to $392,000.
Gain on recovery of contractual loan purchase rights amounted to $30.6 million during the
twelve months ended December 31, 2009. The gain was principally the result of proceeds received
from contractual loan purchase rights during the three months ended June 30, 2009. There was no
gain on recovery of contractual loan purchase rights in the twelve months ended December 31, 2010.
Loss on Mortgage loans and real estate held for sale was $282.6 million during the twelve
months ended December 31, 2009, which occurred during the three months ended March 31, 2009. On
March 31, 2009, the Company transferred trust certificates in the Trust having a carrying value
approximating $759.9 million, representing 83% ownership of the trust certificates, in exchange for
preferred and common stock in Huntingtons REIT with a fair market value approximating $477.3
million. The loss, therefore, represented the application of fair market value accounting, which
resulted in a write-down to fair market value. Included in the realized loss from the March 31,
2009 exchange was a charge-off of $8.6 million in accrued interest on the loans exchanged, which
had not been collected as part of the Restructuring. There was no such loss during the twelve
months ended December 31, 2010 as subsequent changes in fair value are reflected as Fair valuation
adjustments.
Loss on valuation of Investment in trust certificates at fair value and Notes receivable held
for sale was $62.7 million during the twelve months ended December 31, 2009. At March 31, 2009,
effective with the Restructuring, the retained trust certificates in the Trust had a book value of
approximately $151.2 million, representing approximately the remaining 17% of the Companys
economic interest in the Portfolio, exclusive of the assets collateralizing the Unrestructured
Debt, which were classified as available for sale and written-down to approximately $95.8 million
based on fair market value accounting. The loans collateralizing the Unrestructured Debt with a
carrying value of $11.4 million were classified as held for sale and adjusted to approximate the
fair market value of $4.1 million, which resulted in a realized a loss of $7.3 million. There were
no such losses during the twelve months ended December 31, 2010 as changes in fair value subsequent
to March 31, 2009 have been reflected as Fair valuation adjustments.
Fair valuation adjustments amounted to a net loss of $16.0 million for the twelve months ended
December 31, 2010, compared to a net loss of $27.2 million for the twelve months ended December 31,
2009. Included in the net loss (Fair valuation adjustments) for 2010 were approximately $9.8
million of net losses from the sales by the Banks Trust of the loans underlying the Investment in
trust certificates (the Loan Sales). Included in the $9.8 million of net losses from the Loan
Sales were a negative fair value adjustment of approximately $7.6 million recognized in the quarter
ended June 30, 2010 based on the estimated pricing of the loans expected to be sold by the Trust in
the July Loan Sale and net negative fair value adjustments of approximately $2.2 million attributed
to the Loan Sales. Also included in the Fair valuation adjustments in the twelve months ended
December 31, 2010 were net gains on REO sold in the amount of $5.5 million, a valuation net gain on
the Investment in trust certificates of $4.6 million, and other net negative valuation adjustments
of approximately $16.3 million, including net expenses recognized on the Nonrecourse liability
equal to the interest income and fees received of approximately $9.2 million, fair value
adjustments to the Nonrecourse liability for offsets to REO gains of approximately a negative $8.9
million and various other positive adjustments approximating $1.8 million. Included in the Fair
valuation adjustments in the twelve months ended December 31, 2009 were (i) net losses on REO sold
in the amount of $14.9 million, (ii) a valuation gain on trust certificates of $2.0 million and
(iii)
various other net negative adjustments to the fair value in the amount of approximately $14.3
million, including expenses recognized on the Nonrecourse liability equal to the interest income
and fees received of approximately $18.8 million and fair value adjustments to the Nonrecourse
liability for offsets to REO losses of approximately $4.1 million. Because the trust certificates
transferred by the Company to the Banks REIT had continued to be included on the Companys
consolidated balance sheet until the effective dates of the Loan Sales and the December Loan Sale
(classified as Mortgage loans and real estate held for sale) and the revenues from such loans were
reflected in the Companys consolidated results in accordance with GAAP, expenses equal to the
revenues recognized on the Mortgage loans and real estate held for sale were reflected as Fair
valuation adjustments. During 2010, gains and losses on sales of REO were reflected as Fair
valuation adjustments.
62
Servicing fees and other income (principally third-party subservicing fees, due diligence
fees, fees for door knock services, third-party acquisition services fees, late charges and other
miscellaneous servicing and other revenues) increased by $3.1 million, or approximately 49%, to
$9.4 million during the twelve months ended December 31, 2010, from $6.3 million during the
corresponding period last year. This increase was principally the result of servicing fees
received under two new servicing agreements with third parties entered into by the Company in the
third quarter of 2010 in the amount of $4.3 million, increased servicing fees of $341,000 earned
from various other third party servicing and collection agreements, increased due diligence fees of
$767,000, door knock services fees earned from third parties in the amount of $606,000 in 2010,
income received on the recovery of a settled litigation matter in the amount of $303,000. These
revenue increases were somewhat offset by reduced late charges collected from delinquent borrowers
in the amount of $1.1 million, decreased recoveries of outside foreclosure attorney costs collected
from delinquent borrowers in the amount of $1.3 million, and a reduction of $1.0 million in the
servicing fees recognized on the portfolio of loans serviced for Bosco I as a result of amendments
to the servicing contract with Bosco I effective in February and October 2009 (including a charge
off of $299,000 for an aged unpaid receivable due from Bosco I, the collectibility of which was
deemed to be in doubt), and various other net revenues of $156,000. The increase in servicing fees
reflects the recognition of $4.3 million in servicing and collection revenues earned under new
third-party servicing agreements entered into in the quarter ended September 30, 2010 as a result
of the Loan Sales, compared with the non recognition of servicing and collection fees earned from
servicing the loans for the Banks Trust prior to the effective dates of the July Loan Sale and the
September Loan Sale (due to the required accounting treatment as a secured financing in accordance
with GAAP, ASC Topic 860).
Operating Expenses. Operating expenses decreased by $18.6 million, or approximately 16%, to
$97.3 million during the twelve months of 2010 from $115.9 million during the same period in 2009.
Total operating expenses include interest expense, collection, general and administrative expenses,
provisions for loan losses, amortization of deferred financing costs and depreciation expense.
Interest expense decreased by $4.9 million, or approximately 7%, to $69.4 million during the
twelve months ended December 31, 2010 from $74.3 million during the twelve months ended December
31, 2009. This decrease was the result of lower costs of interest rate swaps during the twelve
months ended December 31, 2010 compared with the twelve months ended December 31, 2009, offset
somewhat by an increase in the cost of borrowed funds. Interest expense on borrowed funds,
excluding the cost of interest rate swaps, increased by $5.2 million during the twelve months ended
December 31, 2010 due principally to the 15% interest rate on an increased balance of tranche C
debt (since the March 2009 Restructuring). Tranche C debt increased to $162.9 million at December
31, 2010 from $140.1 million at December 31, 2009, due to the addition of accrued and unpaid
interest at a fixed interest rate of 15%. This increase in the cost of borrowed funds was offset
somewhat by a reduced average balance of borrowed funds during the twelve months ended December 31,
2010. The average cost of borrowed funds, excluding the cost of interest rate swaps, during the
twelve months ended December 31, 2010 was 4.13%, compared to 3.58% during the twelve months ended
December 31, 2009. At December 31, 2010, the weighted average interest rate of our borrowed funds,
exclusive of the effect of the interest-rate swaps,
was 4.20%, compared with 3.94% at December 31, 2009. The average cost of borrowed funds,
including the cost of interest rate swaps, during the twelve months ended December 31, 2010 was
5.11%, compared to 5.23% during the twelve months ended December 31, 2009.
63
The Company has in place fixed-rate interest rate swaps in order to limit the negative effect
of a rise in short-term interest rates by effectively stabilizing the future interest payments on a
portion of its variable-rate debt. Because short-term interest rates have actually declined in the
months following the purchases of these swaps and due to the amortization of the AOCL balance,
which was offset somewhat by an increase in the fair value of the swaps, the interest rate swaps
actually increased the Companys interest cost in the twelve months ended December 31, 2010 by
$13.3 million. Compared with the same twelve month period in 2009; however, in the twelve months
ended December 31, 2010, the cost of the interest-rate swaps decreased by $10.1 million.
Collection, general and administrative expenses decreased by $13.4 million, or approximately
33%, to $26.9 million during the twelve months ended December 31, 2010, from $40.3 million during
the corresponding period in 2009. For the purpose of the discussion below of comparing collection,
general and administrative expenses incurred by the Company on a recurring basis, the following
costs are excluded from the twelve month-to-twelve month change analysis: (i) a restructuring cost
incurred in connection with the July 2010 Transaction of $1.0 million and not incurred in 2009,
(ii) $4.7 million of restructuring costs incurred in the first quarter of 2009 due to the
Restructuring and not incurred in 2010, and (iii) third-party servicing expenses for the loans and
real estate serviced for the Banks Trust, which since the March 2009 Restructuring, and through
the effective dates of the July Loan Sale and the September Loan Sale, were reimbursed by the Bank,
in the aggregate amount of $6.4 million and $12.3 million, respectively, during the twelve months
ended December 31, 2010 and 2009. These third-party servicing expenses are, however, included in
the consolidated statements of operations due to the treatment for accounting purposes of the
transfer of the trust certificates, representing ownership in approximately 83% of the Portfolio
transferred to the REIT, as a financing in accordance with GAAP, which resulted in the mortgage
loans and real estate remaining on the Companys balance sheet (classified as Mortgage loans and
real estate held for sale). As a result of this accounting treatment, for purposes of these
Consolidated Financial Statements, the third-party costs incurred by us in the servicing and
collection of the Banks loans, which are reimbursed by the Bank, are not treated as reimbursed
third-party servicing costs but as additional collection, general and administrative expenses as if
the Company owned and self serviced the loans, with an offsetting amount included in Fair valuation
adjustments, with no impact on the Companys consolidated net loss. However, for the twelve months
ended December 31, 2010, the third-party costs incurred by us in the servicing and collection of
the Banks loans and reimbursed by the Bank up to the effective dates of the Loan Sales, for
purposes of these Consolidated Financial Statements, are not treated as reimbursed third-party
servicing costs but as additional collection, general and administrative expenses as if the Company
owned and self serviced the loans, with an offsetting amount included in Fair valuation
adjustments, which had no impact on the Companys consolidated net loss. The third-party servicing
costs were substantially decreased in the twelve months ended December 31, 2010 from the same
period ended December 31, 2009 due to (i) the sales of substantially all the loans held by the
Banks Trust during three month periods ended September 30 and December 31, 2010 (the Loan Sales
were effective July 1 and September 1 and the December Loan Sale was effective November 15, 2010),
(ii) modified work rules by the Bank applicable under our servicing agreement for the Company as
servicer of the Portfolio, particularly for collection, loss mitigation, deficiency foreclosure,
bankruptcy and judgment activities for delinquent loans and REO, and (iii) substantially fewer REO
additions and dispositions during the full year 2010 as compared with the full year 2009.
64
Exclusive of these items described above, Collection, general and administrative expenses
decreased by $3.7 million, or approximately 16%, to $19.5 million in the twelve months ended
December 31, 2010, from $23.3 million during the corresponding period in 2009. Salaries and
employee benefit
expenses decreased by $4.0 million, or approximately 26%, to $11.0 million during the twelve
months ended December 31, 2010, from $15.0 million during the twelve months ended December 31,
2009, principally due to reductions in staff throughout the Company. The reduction in salaries and
employee benefit expenses was the result of several reductions in the Companys workforce, although
the full annual reduction in salaries and employee benefits expense due to the Companys reductions
in workforce that took place in June 2010 and in October 2010 were not fully realized in 2010, and
salary reductions effective April 1, 2009 for all employees. The April 1, 2009 salary reductions
were somewhat offset by increases in salaries, effective September 1, 2009 for most of the
employees (effective at various times between January 1, 2010 and December 31, 2010), to the levels
that had been applicable before the reductions. The number of servicing employees decreased to 81
at December 31, 2010, from 113 employees at December 31, 2009 and 159 employees at December 31,
2008. The Company ended the twelve months ended December 31, 2010 with 112 employees, compared
with 154 employees at December 31, 2009 and 220 employees at December 31, 2008. The Company also
experienced a decrease in corporate legal expenditures of $682,000, or approximately 46%, to
$795,000 from $1.5 million as compared to the same twelve-month period last year, with the decrease
principally related to legal costs that were incurred for a nonrecurring matter in the twelve
months ended December 31, 2009. Professional fees increased by $360,000 to $1.8 million from $1.4
million during the same period last year principally due to the timing of audit expense payments as
compared to the same period in 2009 when the audit fee for 2009 was paid and expensed in 2010.
Various other general and administrative expenses increased by $557,000 to $5.8 million, or
approximately 11%, from $5.3 million, during the twelve months ended December 31, 2010 due
primarily to the purchase of a new analytics software license to better target loan collection
activities and a lease write down of vacant office space (net of estimated sublease rent payments)
in the amount of $258,000, which were partially offset by decreases in other various operating
expenses incurred throughout the Company associated with the reductions in workforce and changes to
the Companys operations.
There was no provision for loan losses during the twelve months ended December 31, 2010,
compared with a provision of $169,000 during the twelve months ended December 31, 2009. The
absence of a provision for loan losses during the twelve months ended December 31, 2010 and the
absence of provisions for loan losses in 2009 effective with the March 2009 Restructuring since the
first quarter of 2009 are reflective of the transfer of the Portfolio to the Bank on March 31, 2009
and the exchange and retention of trust certificates. As a result of the March 2009 Restructuring
and the exchange of the Companys loans and REO assets for investments carried at either fair
market value or lower of cost or market value, an allowance for loan losses is no longer necessary.
Amortization of deferred financing costs decreased by $173,000, or approximately 32%, to
$364,000 during the twelve months of 2010 from $537,000 during the twelve months of 2009. This
decrease resulted primarily from a reduction in portfolio collections that culminated in a decrease
in the pay down of our borrowed funds made in accordance with the terms of the Restructuring
Agreements.
Depreciation expenses decreased by $48,000, or approximately 7%, to $599,000 in the twelve
months of 2010. This decrease during the twelve months ended December 31, 2010 was principally due
to fully depreciated assets during the past twelve months and a reduction in assets purchased
compared with the same twelve-month period in 2009, which was partially offset by a write off of
non-usable leasehold improvements in the amount of $110,000.
Our pre-tax loss decreased by $305.1 million to a loss of $55.5 million during the twelve
months ended December 31, 2010, from a loss of $360.7 million during the twelve months ended
December 31, 2009 for the reasons set forth above.
The Company recorded net income tax benefits of $262,000 and $2.8 million, respectively,
during the twelve months ended December 31, 2010 and December 31, 2009.
65
Liquidity and Capital Resources
General
As of December 31, 2010, we had one limited source of external funding, a $1 million credit
line, to meet our liquidity requirements, in addition to the cash flow provided from servicing
loans and performing due diligence services for third parties, dividends from preferred stock in
the Banks REIT (the payments of which were suspended during the second and third quarters of
2010), and borrower payments of interest and principal from 50% of the Notes receivable held for
sale, the remaining real estate properties owned, and not sold in the Loan Sales and the December
Loan Sale, collateralizing the Investment in trust certificates at fair value. At December 31,
2010, the aggregate carrying value of 50% of the Notes receivable held for sale, net, and the
Investment in trust certificates at fair value was approximately $3.0 million. As a direct result
of the Banks REIT not declaring dividends, which the Company was verbally advised of on July 23,
2010, during the third and fourth quarters of 2010 the Company was unable to pay all of the monthly
interest due on tranche A debt under the Legacy Credit Agreement. Accordingly, as permitted under
the terms of the Legacy Credit Agreement, approximately $4.5 million of accrued interest on tranche
A debt was added to the outstanding principal balance of the tranche A debt during the six months
ended December 31, 2010. See Borrowings.
We are required to submit all payments we receive from our preferred stock investments, the
remaining cash flow from the Investment in trust certificates at fair value (which as of December
31, 2010, was supported by a relatively small pool of real estate owned properties held by the
Trust) and 50% of the Notes receivable held for sale, net, to a lockbox, which is controlled by the
Bank. Substantially all amounts submitted to the lockbox are used to pay interest and principal
outstanding under the Legacy Credit Agreement with the Bank. If the cash flow received from
servicing loans and performing due diligence services for third parties is insufficient to sustain
the cost of operating FCMC, and we have fully utilized our $1 million revolving line of credit
under the Licensing Credit Facility, there is no guarantee that FCMC can continue in business.
Short-term Investments. The Companys investment policy is structured to provide an adequate
level of liquidity in order to meet normal working capital needs, while taking minimal credit risk.
At December 31, 2010, all of the Companys unrestricted cash (including FCMCs $7.5 million of
pledged cash) was held in operating accounts or invested in money market accounts at the Bank.
66
Cost of Funds. At of December 31, 2010, we had total borrowings of $1.341 billion, of which
$1.302 billion was subject to the Legacy Credit Agreement and $39.0 million remained under the
original credit facility with the Bank (the Unrestructured Debt). Substantially all of the debt
under these facilities was incurred in connection with the purchase and origination of loans prior
to November 2007, and as of December 31, 2010 is secured by the REIT Securities, the trust
certificates, pledged cash in the amount of $7.5 million and certain other assets, including 100%
of the equity interests in all direct and indirect subsidiaries of Franklin Holding, but not FCMC.
The assets of our servicing subsidiary, FCMC (other than $7.5 million of cash collateral held as
security under the Licensing Credit Agreement on which the Bank has a second priority lien under
the Legacy Credit Agreement), are not pledged as collateral for the Legacy Debt. At December 31,
2010, the interest rates on our term debt (Notes payable) were as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
Under the terms of the |
|
|
|
|
|
|
|
Forbearance Agreements |
|
|
|
|
|
|
|
and Credit Agreement |
|
|
|
In accordance with the |
|
|
excluded |
|
|
|
terms of the Restructuring |
|
|
from the Restructuring |
|
|
|
Agreements |
|
|
Agreements |
|
|
FHLB 30-day LIBOR advance rate plus 2.60% |
|
$ |
|
|
|
$ |
15,768,896 |
|
FHLB 30-day LIBOR advance rate plus 2.75% |
|
|
|
|
|
|
23,185,277 |
|
LIBOR plus 2.25% (Tranche A) |
|
|
709,049,268 |
|
|
|
|
|
LIBOR plus 2.75% (Tranche B) |
|
|
430,089,964 |
|
|
|
|
|
15.00% (Tranche C) |
|
|
162,926,720 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,302,065,952 |
|
|
$ |
38,954,173 |
|
|
|
|
|
|
|
|
At December 31, 2010, the weighted average interest rate on term debt (the Legacy Debt)
was 4.20%.
Terms of the Restructured Indebtedness under the Legacy Credit Agreement. The following table
summarizes the principal economic terms of the Companys indebtedness under the Legacy Credit
Agreement.
|
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|
|
|
|
|
|
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|
|
Outstanding |
|
|
Outstanding |
|
|
|
|
|
|
|
|
|
Principal Amount |
|
|
Principal Amount |
|
|
|
|
|
|
|
|
|
at March 31, 2009 |
|
|
at December 31, 2010 |
|
|
Applicable Interest |
|
|
Required Monthly |
|
|
|
Franklin |
|
|
Franklin |
|
|
Margin Over LIBOR |
|
|
Principal |
|
|
|
Asset/Tribeca |
|
|
Asset/Tribeca |
|
|
(basis points) |
|
|
Amortization |
|
Tranche A |
|
$ |
838,000,000 |
|
|
$ |
709,000,000 |
|
|
|
225 |
|
|
None |
Tranche B |
|
$ |
407,000,000 |
|
|
$ |
430,000,000 |
|
|
|
275 |
|
|
None |
Tranche C |
|
$ |
125,000,000 |
|
|
$ |
163,000,000 |
|
|
|
N/A |
(1) |
|
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestructured Debt |
|
$ |
41,000,000 |
|
|
$ |
39,000,000 |
|
|
|
|
(2) |
|
None |
|
|
|
(1) |
|
The applicable interest rate is fixed at 15% per annum. Interest will be paid in kind
during the term of the Restructuring. |
|
(2) |
|
Interest margin over FHLB 30-day LIBOR advance rate plus 2.60%-2.75%. |
The interest rate under the terms of the Restructuring Agreements for tranche A and
tranche B indebtedness that is the basis, or index, for the Companys interest cost is one-month
LIBOR plus applicable margins. In accordance with the terms of the Restructuring Agreements,
interest due and unpaid on tranche A (upon election), tranche B and tranche C debt is accrued and
added to the debt balance.
67
Cash Flow from Operating, Investing and Financing Activities
Liquidity represents our ability to obtain adequate funding to meet our financial obligations.
As of December 31, 2010 and since March 31, 2009, our liquidity position is, and has been,
affected principally by the collections from servicing the Portfolio and distributions from the
Trust certificates and the dividends received from the preferred stock investment in Huntingtons
REIT.
At December 31, 2010, we had cash and cash equivalents of $12.6 million compared with $16.0
million at December 31, 2009. However, Cash and cash equivalents at December 31, 2010 and 2009
included pledged cash to the Bank of $7.5 million and $8.5 million, respectively, under the
Licensing Credit Agreement (secured by a first-priority lien) and Legacy Credit Agreement (secured
by a second-priority lien).
Restricted cash of $2.4 million and $2.6 million at December 31, 2010 and 2009, respectively,
was restricted under our credit agreements and lockbox facility with the Bank. See Note 12 to the
Consolidated Financial Statements.
Changes in several of the cash flows noted in the explanations that follow were the result of
the March 31, 2009 Restructuring and the resultant changed asset classifications from Notes
receivable and Originated loans held for investment to Investment in trust certificates at fair
value and Mortgage loans and real estate held for sale.
Net cash provided by operating activities as reported was $65.0 million during the twelve
months ended December 31, 2010, compared with net cash provided of $33.5 million during the twelve
months ended December 31, 2009. Although the transfer of the trust certificates, representing
approximately 83% of the Portfolio, to the Banks REIT was structured in substance as a sale of
financial assets, the transfer, for accounting purposes, has been treated as a secured financing in
accordance with ASC Topic 860. Therefore, the mortgage loans and real estate have remained on the
Companys balance sheet classified as Mortgage loans and real estate held for sale securing a
Nonrecourse liability in an equal amount. The treatment as a financing on the Companys balance
sheet, however, did not affect the cash flows of the transfer and has not affected the Companys
cash flows or its reported net income. Excluding the reported activities related to Mortgage loans
and real estate held for sale and the offsetting Nonrecourse liability, the increase in cash
provided by operating activities was primarily due to the net proceeds of approximately $44.7
million from the July and September loan sales during the three months ended September 30, 2010 of
the Companys Investment in trust certificates and the receipt of income tax refunds in the net
amount of $5.6 million.
Net cash provided by investing activities was $1.0 in the twelve months ended December 31,
2010, compared to $61.8 million of cash provided in the twelve months ended December 31, 2009. The
decrease in cash provided by investing activities during the twelve months ended December 31, 2010
was due primarily to reductions in principal collections on Notes receivable held for sale. As of
March 31, 2009 (effective with the Restructuring), the Company no longer had real estate owned
properties or loans held for investment.
Net cash used in financing activities decreased to approximately $69.3 million during the
twelve months ended December 31, 2010, compared to $100.7 million used during the twelve months
ended December 31, 2009. The decrease in cash used in financing activities during the twelve
months ended December 31, 2010 was principally due to the decrease in the principal payments on the
Companys debt (Notes payable) due to reduced collections received from principally delinquent
loans underlying the Companys Investment in trust certificates and the absence of dividends in the
third and fourth quarters of 2010 by the Banks REIT on the Companys Investment in REIT
securities.
68
Borrowings
Substantially all of the Companys debt was incurred in connection with the purchase and
origination of residential 1-4 family mortgage loans prior to December 2007. These borrowings are
shown in the Companys Consolidated Financial Statements as Notes payable (also referred to as
term loans or term debt herein). We ceased to acquire and originate loans in November 2007,
and under the terms of the Restructuring Agreements, the Company cannot originate or acquire
mortgage loans or other assets without the prior consent of the Bank. In 2008, the Company changed
its business model to become a provider to third parties of loan servicing and recovery collection
services, due diligence and certain other services to the residential mortgage loan industry, and
has operated these activities through FCMC. See Note 12 to the Consolidated Financial Statements.
At December 31, 2010, the Company had total borrowings, Notes payable and Financing
agreements, of $1.341 billion under the Restructuring Agreements, of which $1.302 billion was
subject to the Companys debt restructured in the March 2009 Restructuring (referred to as the
Legacy Debt) and $39.0 million remained outstanding under a credit facility excluded from the
Restructuring Agreements (referred to as the Unrestructured Debt). See Note 12 to the Consolidated
Financial Statements.
During the twelve months ended December 31, 2010, while the Company made payments in the
amount of $67.7 million on the senior portion (Tranche A) of the Notes payable, total Notes
payable outstanding decreased by $26.4 million. The balance of the Tranche A debt was reduced by a
net $62.0 million during the twelve months ended December 31, 2010, although interest due and
unpaid on Tranche A debt during the six months ended December 31, 2010 was accrued and added to the
outstanding debt balance due to the suspension of the payment of dividends by the Banks REIT and
significantly reduced cash flow due to the sales of loans by the Banks Trust in the third and
fourth quarters of 2010. However, during the quarter ended December 31, 2010, the balance of the
Tranche A debt decreased by $5.3 million, and the aggregate balance of the subordinate portions
(Tranche B and Tranche C) of Notes payable increased by $9.3 million during this three-month
period as interest due and unpaid was accrued and added to the outstanding debt balance as per the
terms of Restructuring Agreements, which require all available cash to be applied to interest and
principal on Tranche A until paid in full before payments can be applied to Tranche B and Tranche
C.
The net proceeds of the loan sales by the Banks Trust in July, September and December 2010
were distributed to the certificate holders of the Trust on a pro rata basis by percentage
interest. Accordingly, only 17% of the net proceeds form the sale of the loans underlying the
trust certificates of the Companys Investment in trust certificates at fair value were applied to
pay down the Legacy Debt owed to the Bank, as 83% of the trust certificates are held by the Banks
REIT, and the Companys investment in REIT Securities (which are not marketable) are realized only
through declared and paid dividends (which were suspended a few days after the July Loan Sale and
throughout the remainder of 2010) or a redemption of the securities by the REIT. As a result of
the loan sales by the Banks Trust in July and September 2010, the sale proceeds received by the
Banks Trust, net of the Banks expenses attributed to such sales and the hold back of a portion of
the sale proceeds, in the amount of approximately $44.7 million were received by the Company and,
as per the Legacy Credit Agreement with the Bank, were remitted to the Bank to pay down the Legacy
Debt (applied to Tranche A debt). See Note 20 to the Consolidated Financial Statements.
As a result principally of the loan sales by the Banks Trust in the quarters ended September
30 and December 31, 2010, the remaining available sources of cash flow to be applied to pay
interest and principal on the Legacy Debt are from (i) any dividends declared on the preferred
stock of the REIT (which were suspended during the third and fourth quarters of 2010), which are
required under the Legacy Credit Agreement to be used by the Company to make payments on the Legacy
Debt, when and if declared in the future, or a redemption of the securities by the REIT, (ii) the
approximately $18.9 million
(unpaid principal balance) of real estate owned properties collateralizing the Companys
Investment in trust certificates at fair value not sold and still held by the Banks Trust, and
(iii) 50% of the approximately $31.0 million (unpaid principal balance) of the loans that
collateralize the Unrestructured Debt. Effective with the third and fourth quarter loan sales,
cash collections from substantially all of the loans that were underlying the Investment in trust
certificates at fair value and 50% of the Notes receivable held for sale (representing 50% of the
loans collateralizing the Unrestructured Debt) are no longer available to be applied to pay
interest and principal on the Legacy Debt.
69
The REIT board in February 2011 declared dividends for the third and fourth quarters of 2010
and for the full year of 2011, with payment pending approval of the Banks regulator. If the
declared dividends are paid by the Banks REIT, the cash payments approximating $60 million will be
applied to pay down the Legacy Debt. See Note 20 to the Consolidated Financial Statements.
Under Amendment No. 2 to the Licensing Credit Agreement with the Bank, FCMC used $1 million in
cash to repay the amount outstanding under the revolving line of credit with the Bank, and
available credit under the revolving line of credit was reduced from $2 million to $1 million and
cash collateral securing the revolving loan and letter of credit facilities was reduced from $8.5
million to $7.5 million, with the released collateral applied as a voluntary payment against the
debt outstanding of certain subsidiaries of the Company under the Legacy Credit Agreement.
At December 31, 2010, FCMC had no debt outstanding under the revolving line under its
Licensing Credit Agreement with the Bank, which is shown in the Companys financial statements as
Financing agreement.
December Sale of Remaining Loans and Participation Interest in Unrestructured Debt with the Bank
In December 2010 (the December Transaction or the December Loan Sale), Bosco III, which is
owned 50% by the Companys Chairman and President, Thomas J. Axon, purchased principally charge-off
first and subordinate lien loans sold by the Trust, which were the remaining loans (other than real
estate owned properties) held by the Banks Trust, and also purchased from the Bank a 50%
participation interest in each of the commercial loans to the Company covering that portion of the
Companys debt (the Unrestructured Debt) with the Bank. As of December 31, 2010, the
Unrestructured Debt totaled approximately $39 million and is secured by approximately 740 loans,
for which FCMC is the loan servicer, and certain Company entities are the beneficial owners. The
Unrestructured Debt is subject to the original terms of the Companys forbearance agreement with
the Bank, as amended, which has an expiration date of September 30, 2011, and the Companys 2004
master credit agreement with the Bank.
In conjunction with the December Transaction, FCMC entered into a servicing agreement with
Bosco III for the servicing and collection of approximately $174 million of loans purchased by
Bosco III of principally charge-off first and subordinate lien loans sold by the Trust and the
Bank, which were the remaining loans (other than REO properties, the servicing of which has been
terminated by the Bank effective March 24, 2011) held by the Banks Trust. The servicing fees for
second lien mortgage loans are predominately based on the percentage of principal and interest
collected, with a contingency rate dependent on the delinquency of the loan and a per unit monthly
service fee for only those loans less than 30 days delinquent or in a bankruptcy status during the
90 day period following a bankruptcy filing. Otherwise, FCMC receives a monthly servicing fee per
loan per month for first lien mortgage loans less than 120 days delinquent or in foreclosure or
bankruptcy with the amount dependent upon loan status at the end of each month, a monthly fee for
REO properties, a contingency fee for first lien mortgage loans equal to or more than 120 days
delinquent and not in foreclosure or bankruptcy, resolution and disposition fees based on the
unpaid principal balance of first lien mortgage loans collected from borrowers or gross proceeds
from the sales of a properties, as applicable, in addition to various ancillary fees and
reimbursement of certain third-party expenses. However, discussions are underway between the
Bosco III investors and FCMC regarding a possible revision to the servicing agreement to have the
fees consist principally of a percentage of principal and interest collected, in addition to
various ancillary fees and reimbursement of certain third-party expenses. FCMCs services may be
terminated with respect to some or all of the assets without cause and without penalty on 30 days
prior written notice.
70
FCMC also has one servicing contract between FCMC and certain Company entities for the loans
collateralizing the Unrestructured Debt.
September 2010 Transaction
September 16, 2010 Agreement
On September 16, 2010, FCHC and its subsidiary, FCMC, entered into an agreement with the Bank,
the Banks Trust, Thomas J. Axon, the Chairman and President of FCHC and FCMC, and Bosco II, an
entity of which Mr. Axon is the sole member.
The agreement was entered into in connection with discussions regarding the then proposed sale
to Bosco II (with approximately 95% of the funds provided by a third party lender) of all of the
subordinate lien consumer loans (the Subordinate Consumer Loans) owned by the Trust and serviced
by FCMC under an amended and restated servicing agreement dated as of August 1, 2010 (the
Servicing Agreement). The conditions and transactions contemplated by the agreement, including
the sale of the Subordinate Consumer Loans (the September Loan Sale) were consummated on September
22, 2010.
It was agreed that contemporaneously with the consummation of the September Loan Sale, and
after obtaining the requisite agreement of syndicate members under the Legacy Credit Agreement,
FCHCs pledge of 70% of the outstanding shares of FCMC as security for the Legacy Credit Agreement
would be released, in consideration of and subject to:
|
|
|
receipt of $4 million in cash at closing from FCMC to be applied to the amounts
outstanding under the Legacy Credit Agreement; |
|
|
|
payment by Bosco II to the Trust of approximately $650,000 as additional payment for
the September Loan Sale, an amount equal to the servicing fees paid by the Trust to
FCMC for FCMCs servicing of the Trusts portfolio during August 2010; |
|
|
|
FCMC and Mr. Axon entering into an agreement (the Deferred Payment Agreement)
providing that upon each monetizing transaction, dividend or distribution (other than
the sale, restructuring or spin off of FCMC (each a Proposed Restructuring)) prior to
March 20, 2019, they will be obligated to pay the lenders under the Legacy Credit
Agreement 10% of the aggregate value (to be defined in the agreement) of the
transaction, in excess of a threshold of $4 million of consideration in respect of such
transaction; and, |
|
|
|
the cash payment of $1 million by FCMC to release the mortgages on certain office
and residential condominium units owned by FCMC (the Real Estate) pledged to the Bank
under the Legacy Credit Agreement and the Licensing Credit Agreement (the Real Estate
Release Payment); provided, however, that if by the closing of the September Loan Sale
and the Proposed Restructuring, FCMC is unable to make such payment, FCMC will deliver
in lieu of such cash payment a $1 million note payable on November 22, 2010, guaranteed
by Mr. Axons Note. FCMC made the $1 million payment to the Bank prior to November 22,
2010, and the Bank released the Real Estate. |
71
The Bank also agreed that, in consideration of its receipt of the above items and either the
Real Estate Release payment or delivery of Mr. Axons Note upon closing, the EBITDA Payment
described in the July 2010 Transaction among FCHC, FCMC, Mr. Axon, the Bank and the Trust would be
waived.
Additionally, the agreement provided that:
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the Trust will consent under the Servicing Agreement with FCMC to the change of
control of FCMC resulting from the Proposed Restructuring and agree to eliminate any
cross default provisions in the Servicing Agreement relating to defaults under the
Legacy Credit Agreement; |
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the Bank and the requisite lenders will consent under the Legacy Credit Agreement to
the change of control of FCMC resulting from the Proposed Restructuring and agree to
waive any related defaults and amend the definition of Collateral and certain
FCMC-related restrictive covenants; and, |
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FCMC and the Bank will amend the Licensing Credit Agreement to permit a change of
control of FCMC resulting from the Proposed Restructuring and agree to eliminate any
cross default provisions relating to defaults under the Legacy Credit Agreement and
extend the letter of credit facility and the revolving facility under the Licensing
Credit Agreement to September 30, 2011. |
In the agreement, FCMC also waived any additional notice of the termination of the Servicing
Agreement with respect to the Subordinate Consumer Loans, and any fees or other amounts in respect
thereof with respect to any period from and after the closing of the September Loan Sale.
In consideration of Mr. Axons undertaking the obligations required of him under the
agreement, and various guarantees and concessions previously provided by Mr. Axon for the Companys
benefit, the Companys Audit Committee agreed, subject to specific terms to be negotiated with the
Company and Mr. Axon, to the transfer to Mr. Axon of a number of shares of FCMC common stock
currently held by FCHC representing 10% of FCMCs outstanding shares, effective upon the closing of
the September Loan Sale and the release of FCHCs pledge of 70% of the outstanding shares of FCMC
as security for the Legacy Credit Agreement.
September 22, 2010 Implementing Agreements
On September 22, 2010, FCHC and FCMC entered into various agreements implementing the
transactions contemplated by the September 16, 2010 agreement (the Implementing Agreements or the
September 2010 Transaction). On September 22, 2010, the letter agreement was superseded by the
execution and delivery of an agreement, in a form and under terms substantially similar to the
letter agreement, to implement the terms and conditions agreed to under the letter agreement.
Deferred Payment Agreement. On September 22, 2010, FCMC entered into the Deferred Payment
Agreement with the Bank, in its capacity as Administrative Agent under the Legacy Credit Agreement,
and Mr. Axon.
The Deferred Payment Agreement has a term expiring March 20, 2019, and provides that FCMC will
pay to the Bank in respect of a qualifying transaction consummated during the term of the agreement
an amount equal to ten percent of the aggregate value of the qualifying transaction minus $4
million.
72
Qualifying transactions, which do not include the Proposed Restructuring, would include
transactions or series or combinations of related transactions involving any of:
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sale of all or a portion of the assets (an Asset Sale) or the capital stock (a
Stock Sale) of FCMC, whether any such sale is effected by FCMC, Mr. Axon, its
then-current owners if such owners sell 30% or more of the fully diluted outstanding
equity securities of FCMC, a third party or any combination of any of the foregoing; |
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any exchange or tender offer, merger, consolidation or other business combination
involving FCMC; |
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any recapitalization, reorganization, restructuring or any other similar transaction
including, without limitation, negotiated repurchases of FCMCs securities, an issuer
tender offer, a dividend or distribution, or a spin-off or split-off involving FCMC;
and, |
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any liquidation or winding-down of FCMC, whether by FCMC, its then-current owners, a
third party or any combination of any of the foregoing. |
Qualifying transactions specifically exclude:
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the issuance of shares under FCMCs equity compensation plans to the extent that
those issuances do not exceed 7% of the fully diluted outstanding securities of FCMC
during the term of the Deferred Payment Agreement; and, |
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the sale, restructuring or spin off, which is subject to the Banks prior approval,
by the Company of its ownership interests in FCMC. |
In the event of a qualifying transaction, the aggregate value of the transaction will be:
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in the case of a Stock Sale, the total consideration paid or payable to equity
holders, or FCMC in the case of a new issuance. If a Stock Sale involves the
acquisition of a majority of the fully diluted outstanding equity shares of FCMC, the
total consideration will also include additional amounts reflecting FCMCs indebtedness
for borrowed money, net pension liabilities, to the extent they are under funded and
deferred compensation liabilities, and be grossed up to the amount that would have been
paid if all of the outstanding equity securities were acquired for the same per share
consideration as that ascribed to the shares actually acquired; and, |
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in the case of an Asset Sale, the total consideration paid or payable for the
assets. If an Asset Sale involves the sale of a material portion of the assets or
business of FCMC, the total consideration will also include any assumed debt (including
capitalized leases and repayment obligations under letters of credit), pension
liabilities assumed, to the extent they are under funded, and deferred compensation
liabilities assumed, the net book value of net current assets retained by FCMC and the
fair market value of any other retained assets. |
In any qualifying transaction, the aggregate value of the transaction will also include:
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consideration paid or payable to FCMC and its equity holders in connection with the
qualifying transaction for covenants not to compete and management or consulting
arrangements (excluding reasonable salaries or wages payable under bona fide
arrangements for actual services); |
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dividends or distributions declared, and payments by FCMC to repurchase outstanding
equity securities, in either event, after the date of the Deferred Payment Agreement;
and, |
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in any qualifying transaction, amounts payable pursuant to any earn out, royalty or
similar arrangement will be included in the aggregate value of the transaction. If
such amounts are contingent, the deferred payment in respect of the contingent amounts
will be paid at the time the contingency is realized, provided that amounts payable
pursuant to notes or an escrow arrangement will not be treated as contingent. |
73
Additionally, pursuant to the Deferred Payment Agreement, Mr. Axon guaranteed prompt and full
payment to the Bank of each required deferred payment when due.
Amendment to Legacy Credit Agreement. On September 22, 2010, subsidiaries of FCHC (other than
FCMC) entered into an amendment to the Legacy Credit Agreement with the Bank. Various definitions,
terms and FCMC-related covenants were amended to permit a change of control of FCMC as part of the
Proposed Restructuring, to effectuate the release of the equity interests of FCHC in FCMC and
release of the Real Estate (subject to payment in full of Mr. Axons Note since FCMC had elected to
deliver Mr. Axons Note, which payment was made to the Bank and the Bank released the Real Estate),
and to add the Deferred Payment Agreement as collateral under the Legacy Credit Agreement.
On September 22, 2010, the limited recourse guarantee of FCMC under the Legacy Credit
Agreement was released, cancelled and discharged by the Bank. On September 22, 2010, FCHC and the
Bank entered into a first amendment to the limited recourse guaranty and first amendment to amended
and restated pledge agreements of FCHC under the Legacy Credit Agreement, which eliminated any
reference to the equity interests in FCMC of FCHC.
Amendment to Licensing Credit Agreement. On September 22, 2010, FCHC and FCMC entered into an
amendment to the Licensing Credit Agreement with the Bank. Various definitions, terms and
FCMC-related covenants were amended to permit a change of control of FCMC as part of the Proposed
Restructuring, to effectuate the release of the Real Estate (subject to the agreement of the
applicable administrative agents and the lenders to release the same pursuant to the terms of the
Restructuring Agreements), eliminate any cross defaults resulting from any default under the Legacy
Credit Agreement; permit incurrence of liabilities for indebtedness subject to the prior written
consent of the Bank, which consent shall not be unreasonably withheld or delayed; and, eliminate
the provision that FCMC shall, to the extent permitted by applicable law, no less frequently than
semi-annually, within forty-five days after each June 30th and December 31st of each calendar year,
make pro rata dividends, distributions and payments to FCMCs stockholders and the Bank under the
Legacy Credit Agreement. In addition the Licensing Credit Agreement and the revolving loan and
credit facilities thereunder were extended to September 30, 2011.
Amendment to Servicing Agreement with the Bank. On September 22, 2010, the Servicing
Agreement was amended to eliminate any cross-default provisions resulting from any default under
the Legacy Credit Agreement.
EBIDTA Payment. On September 22, 2010, the Bank cancelled and terminated the obligations to
make any EBITDA payments under the July 2010 Transaction.
Servicing Agreement with Bosco II. On September 22, 2010, FCMC entered into a servicing
agreement with Bosco II for the servicing and collection of the loans purchased by Bosco II from
the Trust (the Bosco II Servicing Agreement). Pursuant to the Bosco II Servicing Agreement, FCMC
shall service the loans subject to customary terms, conditions and servicing practices for the
mortgage servicing industry. Under the terms of the Bosco II Servicing Agreement, FCMC is entitled
to a servicing
fee equal to a percentage of net amounts collected and a per unit monthly service fee for
loans less than thirty days contractually delinquent, a straight contingency fee for loans equal to
or more than thirty days contractually delinquent, and reimbursement of certain third-party fees
and expenses incurred by FCMC. The Bosco II Servicing Agreement may be terminated without cause
and penalty upon thirty days prior written notice.
74
July 2010 Transaction
On July 16, 2010, FCHC and its servicing business subsidiary, FCMC, entered into a letter
agreement (the Letter Agreement) with the Bank, the Trust and, for certain limited purposes, Mr.
Axon. The Letter Agreement was entered into in connection with and in anticipation of the July
Loan Sale, of substantially all of the first-lien residential mortgage loans serviced by FCMC under
the Legacy Servicing Agreement.
The July Loan Sale, effective July 1, 2010, closed on July 20, 2010 (the July Loan Sale
Closing Date) and, on July 20, 2010, the July Loan Sale purchaser (the Purchaser) entered into a
loan servicing agreement with FCMC (the Loan Sale Servicing Agreement), pursuant to which FCMC
continues to service approximately 75% of the first-lien residential mortgage loans acquired by
Purchaser in the July Loan Sale (effective October 1, 2010, 25% of the loans acquired were
transferred by the Purchaser to its affiliate, which was an event that had been planned by the
Purchaser at acquisition). Approximately 3,300 residential mortgage loans, consisting principally
of first-lien mortgage loans, were included in the July Loan Sale.
The Letter Agreement included terms amending, or committing the Bank, FCMC, the Company, and
related parties to amend certain of the Restructuring Agreements entered into in connection with
the Companys Restructuring with the Bank on March 31, 2009, including the existing relationships
under the Legacy Servicing Agreement, the Legacy Credit Agreement, and the Licensing Credit
Agreement, and FCMC to commit to make certain payments to the Bank. Additionally, the Letter
Agreement set forth certain mutual commitments of the parties with respect to the Companys
consideration of a restructuring or spin-off of its ownership of FCMC, as well as certain
guaranties of Mr. Axon, the Chairman and President of the Company and FCMC.
Letter Agreement with the Bank. Under the Letter Agreement with the Bank:
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FCMC made a $1 million payment to the Bank as reimbursement for certain expenses of
the Bank in connection with the July Loan Sale; |
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FCMC released all claims under the Legacy Servicing Agreement as of the loan sale
date (other than those for unpaid servicing advances for services incurred prior to
June 30, 2010) with respect to the loans sold in the July Loan Sale; |
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FCMC refunded to the Trust an estimated $400,000 for servicing fees paid in advance
to FCMC under the Legacy Servicing Agreement in respect of July 2010 to the extent
attributable to the loans sold in the July Loan Sale; |
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the Legacy Servicing Agreement was terminated as to the loans sold, except with
respect to FCMCs obligations to assist in curing documentary issues or deficiencies
relating to the loans sold; and, |
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FCMC and the Trust entered into an amended and restated servicing agreement (the
New Trust Servicing Agreement or Servicing Agreement) on July 30, 2010 and effective
August 1, 2010, relating to the servicing of the loans and real estate properties
previously serviced
under the Legacy Servicing Agreement, other than those sold in the July Loan Sale (see
below). (On December 22, 2010, the Bank terminated the New Trust Servicing Agreement
and the servicing of all assets by FCMC for the Trust (which as of December 31, 2010
consisted of only REO assets) effective March 24, 2011.) |
75
On the July Loan Sale Closing Date, the Company and FCMC entered into Amendment No. 2 to the
Licensing Credit Agreement with the Bank and an affiliate of the Bank, Huntington Finance, LLC
(Amendment No. 2).
Amendment No. 2 to the Licensing Credit Agreement with the Bank. Under Amendment No. 2 to the
Licensing Credit Agreement with the Bank:
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FCMC used $1 million in unpledged cash to repay the amount outstanding under its
revolving line of credit with the Bank; and, |
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available credit under the revolving loan facility was reduced from $2 million to $1
million and the cash collateral, which was required to secure the revolving loan and
letter of credit facilities, was reduced from $8.5 million to $7.5 million, with the
released collateral applied as a voluntary payment against the debt outstanding of
certain subsidiaries of the Company under the Legacy Credit Agreement. |
Loan Sale Servicing Agreement with Purchaser. On July 20, 2010, but effective as of July 1,
2010, FCMC entered into a loan servicing agreement with the third-party Purchaser, pursuant to
which FCMC provides servicing for the loans acquired by the Purchaser in the July Loan Sale. The
Purchaser, which is now the second largest servicing client of FCMC, has the right to terminate the
servicing of any of such loans without cause upon ninety (90) calendar days prior written notice,
subject to the payment of a termination fee for each such loan terminated. Pursuant to the Loan
Sale Servicing Agreement, FCMC services the loans subject to customary terms, conditions and
servicing practices for the mortgage servicing industry.
Effective October 1, 2010, the Purchaser exercised its right to terminate the servicing of
approximately 25% of the loans acquired by the Purchaser in the July Loan Sale (based on unpaid
principal balance).
FCMC as servicer receives a monthly servicing fee per loan per month with the per loan amount
dependent upon loan status at the end of each month, resolution and disposition fees based on the
unpaid principal balance of loans collected from borrowers or gross proceeds from the sales of
properties, as applicable, and a contingency fee the for unpaid principal balance collected on
loans designated by the Purchaser, in addition to various ancillary fees and reimbursement of
certain third-party expenses.
Potential Restructuring. In the July 2010 Transaction, which was amended and modified in part
by the September 2010 Transaction described above, the parties agreed that in connection with a
potential restructuring (the Potential Restructuring), if the Potential Restructuring is acceptable
to the Bank and the required lenders, in each partys sole discretion, and the Potential
Restructuring does not result in material tax, legal, regulatory, or accounting impediments or
issues for Franklin Holding or FCMC, then:
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the Bank would use its reasonable efforts to assist Franklin Holding and FCMC in
connection with such Potential Restructuring in obtaining the approval of the required
lenders for the Potential Restructuring and consenting to any change of control in
connection with the Potential Restructuring to the extent required under the Legacy
Credit Agreement, and FCMC or Franklin Holding would reimburse and hold the Bank and
the required lenders harmless
from any reasonable expense incurred by them in connection with any such Potential
Restructuring; |
76
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FCMC would make semi-annual payments to the Bank under the Legacy Credit Agreement
(the EBITDA Payment) equal to (i) 50% of FCMCs EBITDA, in accordance with GAAP, for
each period for the first 18 months from the July Loan Sale Closing Date, and (ii) 70%
of FCMCs GAAP EBITDA for each period thereafter, up to a maximum aggregate of $3
million. The EBITDA Payment obligation, which was never triggered, was terminated and
cancelled pursuant to the September 2010 Transaction; |
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Thomas J. Axons existing personal guaranty to the Bank would be extended to the
EBITDA Payment pursuant to an amendment to the guarantee, which will also provide that
to the extent that the EBITDA Payment in respect of any period is less than $500,000,
Mr. Axon will pay such shortfall. Mr. Axons obligations pursuant to the guaranty
would be secured and continue to be secured by the collateral he had pledged to the
Bank on March 31, 2009; and, |
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any payments by FCMC or Mr. Axon in respect of the EBITDA Payment would go to reduce
the obligation of the other in respect of the obligations to make such payment, or the
guaranty in respect of such payment, as the case may be; and, any payments in respect
of the EBITDA Payments, and application of payments to the Bank in respect of
distributions by FCMC to its stockholders, would each serve as a credit against the
other, which could have the effect of reducing the impact of the $3 million maximum
amount of the EBITDA Payments otherwise payable as described above. (These
obligations, which were never triggered, were terminated and cancelled, and Mr. Axons
collateral has been released by the Bank, pursuant to the September 2010 Transaction.) |
New Trust Servicing Agreement. On July 30, 2010, FCMC entered into the New Trust Servicing
Agreement for the loans and real estate properties not sold by the Trust, effective August 1, 2010,
with the Trust to replace the servicing agreement (the Legacy Servicing Agreement) that had been
entered into with the Trust as part of the Companys March 31, 2009 Restructuring with the Bank.
The New Trust Servicing Agreement, which contains terms that are generally similar to those
included in FCMCs Legacy Servicing Agreement does, however, include the following material
changes: (i) the servicing fees for the second lien mortgage loans (which on September 22, 2010
were terminated from the New Trust Servicing Agreement and sold to Bosco II in the September Loan
Sale) are based predominately on the percentage of principal and interest collected and a per unit
monthly service fee only for contractually performing loans and loans in the early stages of
bankruptcy, (ii) the servicing fees for the first lien mortgages and REO properties not sold to the
Purchaser are based on a fee schedule from the Loan Sale Servicing Agreement FCMC had entered into
with Purchaser (as described above), (iii) the New Trust Servicing Agreement is terminable without
penalty and without cause on 90 days prior written notice, or 30 days prior written notice in
connection with a sale of some or all of the assets by the Trust, (iv) the consent process for
hiring vendors was replaced with a general restriction that vendors may not be engaged to perform a
substantial portion of the primary day-to-day servicing obligations of FCMC, (v) minimum gross
collection targets that could have triggered a termination of the agreement were removed, and (vi)
the restrictions on entering into new servicing agreements that could reasonably likely impair the
ability of FCMC to perform its obligations were eliminated. On December 22, 2010, the Bank
terminated the New Trust Servicing Agreement and the servicing of all assets by FCMC for the Trust
(which as of December 31, 2010 consisted of only REO assets) effective March 24, 2011. On March
24, 2011, the Bank notified FCMC that its servicing of the remaining real estate owned assets was
extended through April 30, 2011.
77
Restructuring Agreements with Lead Lending Bank
Forbearance Agreements with Lead Lending Bank
Prior to the March 31, 2009 Restructuring Agreements that we entered into with Huntington, our
indebtedness was governed by forbearance agreements and prior credit agreements with Huntington.
Effective as of March 31, 2009, all of our borrowings, with the exception of the Unrestructured
Debt in the current amount of $39.0 million, are governed by credit agreements entered into as part
of the Restructuring Agreements. The Unrestructured Debt remains subject to the original terms of
the Forbearance Agreement entered into with the Bank in December 2007 and subsequent amendments
thereto and the Companys 2004 master credit agreement with Huntington. On April 20, August 10,
and November 13, 2009, March 26 June 28, and November 19, 2010, and January 7, 2011, the Bank
extended the term of forbearance period, which is now until September 30, 2011.
The Bank has agreed to forbear with respect to any defaults past or present with respect to
any failure to make scheduled principal and interest payments to the Bank (Identified Forbearance
Default) relating to the Unrestructured Debt. The Bank, absent the occurrence and continuance of
a forbearance default other than an Identified Forbearance Default, has agreed not to initiate
collection proceedings or exercise its remedies in respect of the Unrestructured Debt or elect to
have interest accrue at the stated rate applicable after default. FCMC is not obligated to the
Bank with respect to the Unrestructured Debt and any references to FCMC in the Companys 2004
master credit agreement governing the Unrestructured Debt have been amended to refer to Franklin
Asset.
Upon expiration of the forbearance period, in the event that the Unrestructured Debt with the
Bank remains outstanding (currently $39.0 million), the Bank, with notice, has the right to call an
event of default under the Legacy Credit Agreement, but not the Licensing Credit Agreement and the
Servicing Agreement, which do not include cross-default provisions that would be triggered by such
an event of default under the Legacy Credit Agreement. The Banks recourse in respect of the
Legacy Credit Agreement is limited to the assets and stock of Franklin Holdings subsidiaries,
excluding the assets and stock of FCMC (except for a second-priority lien of the Bank on $7.5
million of cash collateral held as security under the Licensing Credit Agreement).
March 2009 Restructuring
On March 31, 2009, Franklin Holding, and certain of its direct and indirect subsidiaries,
including Franklin Credit Management Corporation and Tribeca Lending Corp., entered into a series
of agreements (collectively, the Restructuring Agreements) with the Bank, successor by merger to
Sky Bank, pursuant to which the Companys loans, pledges and guarantees with the Bank and its
participating banks were substantially restructured, and approximately 83% of the Portfolio was
transferred to Huntington Capital Financing, LLC (the REIT), a real estate investment trust
wholly-owned by the Bank.
The Restructuring did not include a portion of the Companys debt (the Unrestructured Debt),
which as of March 31, 2009 totaled approximately $40.7 million. The Unrestructured Debt is subject
to the original terms of the Companys Forbearance Agreement entered into with the Bank in December
2007 and subsequent amendments thereto and the Companys 2004 master credit agreement, as described
above.
The Companys forbearance agreements that had been entered into with the Bank were, except for
approximately $39.0 million of the Companys debt outstanding (the Unrestructured Debt) at December
31, 2010, replaced effective March 31, 2009 by the Restructuring Agreements.
78
On June 25, 2009, in connection with the Restructuring and with the approval of the holders of
more than two-thirds of the shares of Franklin Holding entitled to vote at an election of
directors, the
Certificate of Incorporation of FCMC was amended to delete the provision, adopted pursuant to
Section 251(g) of the General Corporation Law of the State of Delaware in connection with the
Companys December 2008 Reorganization, that had required the approval of the stockholders of
Franklin Holding in addition to the stockholders of FCMC for any action or transaction, other than
the election or removal of directors, that would require the approval of the stockholders of FCMC.
For a description of the March 2009 Restructuring Agreements, see Note 12 to the Consolidated
Financial Statements.
Interest Rate Swaps
At December 31, 2010, the Company had $390 million, notional amount, of interest rate swaps
outstanding.
During 2008, the Company entered into a series of fixed-rate interest rate swaps with the Bank
in order to effectively stabilize the future interest payments on a portion of its
interest-sensitive borrowings. The fixed-rate swaps were for periods ranging from one to four
years, and are non-amortizing. These swaps effectively fixed the Companys interest costs on a
portion of its borrowings regardless of increases or decreases in the one-month London Interbank
Offered Rate (LIBOR). On March 5, 2009, $220 million of one-year interest rate swaps matured and
have not been replaced.
Under these swap agreements, the Company makes interest payments to the Bank at fixed rates
and receives interest payments from the Bank on the same notional amounts at variable rates based
on LIBOR. Effective December 28, 2007, the Company pays interest on its interest-sensitive
borrowings, principally based on one-month LIBOR plus applicable margins.
In conjunction with the Restructuring, and at the request of the Bank, effective March 31,
2009, the Company exercised its right to terminate two non-amortizing fixed-rate interest rate
swaps with the Bank, with an aggregate notional amount of $390 million. The total termination fee
for cancellation of the swaps was $8.2 million, which is payable only to the extent cash is
available under the waterfall provisions of the Legacy Credit Agreement, and only after the Tranche
A debt owed to the Bank, which at December 31, 2010 amounted to $709.0 million, has been paid in
full.
The unamortized balance of derivative losses in the amount of $24.0 million, as a result of
the Company electing to cease hedge accounting as of December 31, 2008, is amortized to interest
expense over time. The amount amortized during the twelve months ended December 31, 2010 was $9.2
million, which increased our interest expense. The balance of unamortized derivative losses at
December 31, 2010 was $3.2 million.
The following table presents the notional and fair value amounts of the interest rate swaps
outstanding at December 31, 2010.
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Estimated Fair |
|
Notional Amount |
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Term |
|
Maturity Date |
|
Fixed Rate |
|
|
Value* |
|
$ |
275,000,000 |
|
|
3 years |
|
March 5, 2011 |
|
|
3.47 |
% |
|
$ |
(3,000,994 |
) |
|
70,000,000 |
|
|
3 years |
|
March 5, 2011 |
|
|
3.11 |
% |
|
|
(361,594 |
) |
|
45,000,000 |
|
|
4 years |
|
March 5, 2012 |
|
|
3.43 |
% |
|
|
(1,559,787 |
) |
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|
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|
$ |
390,000,000 |
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|
|
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|
|
$ |
(4,922,375 |
) |
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* |
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Determined in accordance with Topic 820, Fair Value Measurements and Disclosures,
based upon a Level 2 valuation methodology. |
79
In addition, on January 25, 2011, the Bank declared an early termination of all remaining
swaps due to a failure of the Company to make payments due under the swap agreements, which payment
defaults were occasioned by insufficient funds available under the Legacy Credit Agreement as a
direct result of the loss of cash flow attributable to the July, September and December loan sales
by the Banks Trust and suspension of dividends by its REIT. The early termination fee payable by
the Company (but not FCMC) to the Bank is $6.5 million, which the Company will be unable to pay.
It is anticipated that the Companys liability (which is not a liability of FCMC) for the swap
termination fee will be payable only to the extent cash is available under the waterfall provisions
of the Legacy Credit Agreement, and only after the amount of debt designated as Tranche A debt owed
to the Bank has been paid in full, which at December 31, 2010 amounted to $709.0 million. See Note
20 to the Consolidated Financial Statements.
Safe Harbor Statement
Statements contained herein and elsewhere in this Annual Report on Form 10-K that are not
historical fact may be forward-looking statements regarding the business, operations and financial
condition of Franklin Credit Holding Corporation (Franklin Holding, and together with its
consolidated subsidiaries, the Company, we, us or our unless otherwise specified or the
context otherwise requires) within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act).
This information may involve known and unknown risks, uncertainties and other factors which may
cause our actual results, performance or achievements to be materially different from our future
results, performance or achievements expressed or implied by any forward-looking statements.
Forward-looking statements, which involve assumptions and describe our future plans, strategies and
expectations, and other statements that are not historical facts, are generally identifiable by use
of the words may, will, should, expect, anticipate, estimate, believe, intend,
plan, potential or project or the negative of these words or other variations on these words
or comparable terminology. These forward-looking statements are based on assumptions that may be
incorrect, and there can be no assurance that these projections included in these forward-looking
statements will come to pass. Our actual results could differ materially from those expressed or
implied by the forward-looking statements as a result of various factors. These factors include,
but are not limited to: (i) unanticipated changes in the U.S. economy, including changes in
business conditions such as interest rates, changes in the level of growth in the finance and
housing markets, such as slower or negative home price appreciation and economic downturns or other
adverse events in certain states; (ii) the Companys ability to continue as a going concern; (iii)
the Companys relations with the Companys lenders and such lenders willingness to waive any
defaults under the Companys agreements with such lenders; (iv) the Companys ability to obtain
renewals of its loans or alternative refinancing opportunities; (v) the availability of or ability
to retain as clients third parties holding distressed mortgage debt for servicing by the Company on
a fee-paying basis; (vi) changes in the statutes or regulations applicable to the Companys
business or in the interpretation and enforcement thereof by the relevant authorities; (vii) the
status of the Companys regulatory compliance; (viii) the risk that legal proceedings could be
brought against the Company which could adversely affect its financial results; (ix) the Companys
ability to adapt to and implement technological change; (x) the Companys ability to attract and
retain qualified employees; (xi) our failure to reduce quickly overhead and infrastructure costs in
response to a reduction in revenue and (xii) other risks detailed from time to time in the
Companys SEC reports and filings. Additional factors that would cause actual results to differ
materially from those projected or suggested in any forward-looking statements are contained in the
Companys filings with the SEC, including, but not limited to, those factors discussed under the
captions Risk Factors, Interest Rate Risk and Real Estate Risk in this Annual Report on Form
10-K and Quarterly Reports on Form 10-Q, which the Company urges investors to consider. The
Company undertakes no obligation to publicly release the revisions to such forward-looking
statements that may be made to reflect events or circumstances after the date hereof or to reflect
the occurrences of unanticipated events, except as otherwise required by securities, and other
applicable laws. Readers are
cautioned not to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to release publicly the results on any
events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
80
|
|
|
ITEM 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to various types of market risk in the normal course of business, including the
impact of interest rate changes, real estate, delinquency and default risks of the loans that we
service for third parties, the loans and real properties in the Portfolio (although approximately
83% of the Portfolio transferred to the Banks REIT, for accounting purposes up to the effective
dates of the Loan Sales and December Loan Sale, has been treated as a financing under GAAP and
remained on the Companys balance sheet), and changes in corporate tax rates. A material change in
these rates or risks could adversely affect our operating results and cash flows.
Impact of Inflation
The Company measures its financial condition and operating results in historical dollars
without considering changes in the purchasing power of money over time due to inflation, although
the impact of inflation is reflected in increases in the costs of our operations. Substantially
all of the Companys assets and liabilities are monetary in nature, and therefore, interest rates
have a greater impact on our performance than the general effects of inflation. Because a
substantial portion of the Companys borrowings are sensitive to changes in short-term interest
rates, any increase in inflation, which often gives rise to increases in interest rates, could
materially impact the Companys financial performance.
Interest Rate Risk
Interest rate fluctuations can adversely affect our operating results and present a variety of
risks, including the risk of a mismatch between the repricing of interest-earning assets and
borrowings, and variances in the yield curve.
Interest rates are highly sensitive to many factors, including governmental monetary policies
and domestic and international economic and political conditions. Conditions such as inflation,
recession, unemployment, money supply and other factors beyond our control may also affect interest
rates. Fluctuations in market interest rates are neither predictable nor controllable and may have
a material adverse effect on our business, financial condition and results of operations.
The Companys consolidated operating results depend in large part on differences between the
interest and dividends earned on its assets and the interest paid on its borrowings. Most of the
Companys earning assets, consisting as of September 30, 2010 primarily of REIT Securities
(principally preferred stock) generate fixed returns and have remaining contractual maturities in
excess of five years. Our borrowings are based on one-month LIBOR. As of December 31, 2010, due
to the Loan Sales and December Loan Sale, the interest and dividend income from our remaining
assets, principally the REIT securities, is based on a fixed rate, while the interest cost of our
borrowings is principally based on a variable rate, creating a mismatch between interest earned on
our interest-yielding assets and the interest paid on our borrowings. In addition, the Companys
interest-bearing liabilities as of December 31, 2010 greatly exceed the remaining interest-earning
assets. Consequently, changes in interest rates, particularly short-term interest rates, will
continue to significantly impact our net interest and dividend income and, therefore, net income.
Until the termination of our swaps by the Bank on January 25, 2011, we used from time to time
interest-rate derivatives, essentially interest-rate swaps, to hedge our interest rate exposure by
converting a portion of our highly interest-sensitive borrowings from variable-rate payments to
fixed-rate payments. Based on approximately $749.1 million of unhedged interest-rate sensitive
borrowings outstanding at December 31 2010, a 1% instantaneous and sustained increase in one-month
LIBOR could
have increased quarterly interest expense by as much as approximately $1.9 million, pre-tax,
during the remaining terms of the Companys swap agreements, which would have negatively impacted
our quarterly after-tax net income or loss. Due to our liability-sensitive balance sheet,
increases in these rates will decrease both net income, or increase net loss, and the market value
of our net assets.
81
Due to the termination by the Bank of the Companys remaining interest rate swaps in January
2011, all of the our interest rate sensitive borrowings are unhedged and an increase in interest
rates will result in an increase in our interest expense without any offset for payments on the
terminated interest rate swaps. Therefore, a 1% instantaneous and sustained increase in one-month
LIBOR would have the effect of increasing quarterly interest expense in the future by approximately
$2.8 million, pre-tax. See Borrowings and Note 20 to the Consolidated Financial Statements.
Real Estate Risk
Residential property values are subject to volatility and may be affected adversely by a
number of factors, including, but not limited to, national, regional and local economic conditions,
which may be adversely affected by industry slowdowns and other factors, and local real estate
conditions (such as the supply of housing or the rapid increase in home values). Decreases in
property values reduce the value of the collateral and the potential proceeds available to
borrowers to repay their mortgage loans, which could cause the value of our remaining investments
in Mortgage loans and real estate held for sale and the Investment in trust certificates not
carried at cost to decrease and our servicing revenues to decline.
|
|
|
ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The financial statements required by this Item are included herein, beginning on page F-2 of
this report.
|
|
|
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
|
|
|
ITEM 9A. |
|
CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to provide reasonable
assurance that information required to be disclosed by the Company in reports filed or submitted
under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods
specified in the SECs rules and forms and (ii) accumulated and communicated to the Companys
management, including the Chairman and Principal Executive Officer, Chief Financial Officer and
Controller, as appropriate, to allow timely decisions regarding disclosure.
As of December 31, 2010, the end of the period covered by this Annual Report on Form 10-K, the
Companys management, including the Companys Chairman and Principal Executive Officer, Chief
Financial Officer and Controller, evaluated the effectiveness of the Companys disclosure controls
and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Exchange Act.
Based on that evaluation, the Companys Principal Executive Officer and Chief Financial Officer
concluded that, as of December 31, 2010, the Companys disclosure controls and procedures were
effective as of the end of the period covered by this report.
82
Managements Annual Report on Internal Control over Financial Reporting
The Companys management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Internal
control over financial reporting is a process designed by, or under the supervision of, our
Principal Executive Officer, Chief Financial Officer and Controller and affected by our board of
directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to risk that controls may become inadequate due to changes in conditions, or that the
degree of compliance with policies and procedures may deteriorate.
With the participation of the Principal Executive Officer, the Chief Financial Officer and the
Controller, our management conducted an evaluation of the effectiveness of our system of internal
control over financial reporting as of December 31, 2010 based on the framework set forth in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this evaluation, our management has concluded that our internal
control over financial reporting was effective as of December 31, 2010.
During the quarter ended December 31, 2010, there have been no changes in the Companys
internal control over financial reporting that have materially affected, or are reasonably likely
to affect, the Companys internal control over financial reporting.
This Annual Report on Form 10-K does not include an attestation report of our registered
public accounting firm regarding internal control over financial reporting. Managements report
was not subject to the attestation by our registered public accounting firm pursuant to the rules
of the SEC that permit us to provide only managements report in this Annual Report on Form 10-K.
83
|
|
|
ITEM 9B. |
|
OTHER INFORMATION |
On March 10, 2011, Franklin Holding and FCMC, following discussions with the Bank, requested
amendments to and consents under certain agreements with the Bank including, among other items:
|
(1) |
|
that the financial covenant that Franklin Holding and FCMC maintain a net
income before taxes (Net Income Before Taxes) of not less than $800,000 as of the end
of each calendar month for the most recently ended twelve consecutive month period
under the Licensing Credit Agreement be deleted; |
|
(2) |
|
that the maturity date under the Licensing Credit Agreement be extended from
September 30, 2011 to September 30, 2012; |
|
(3) |
|
that the Bank eliminate Franklin Holding as a guarantor and release, cancel and
discharge the limited recourse guarantee of Franklin Holding under the Legacy Credit
Agreement; and, |
|
(4) |
|
that the Bank release, cancel and discharge FCMC and Franklin Holding from any
liability under any interest rate hedge agreements (including interest rate swap
transactions and ISDA master agreements) entered into with the Bank. |
Although officers at the Bank have indicated that the amendments and consents should be able
to be accomplished in the next few months, subject to the approval of its loan committee and
participating lenders (to the extent applicable), there can be no assurance that the Bank will
amend the agreements or provide consents, as was requested.
On March 28, 2011, as a temporary measure, Franklin Holding and FCMC entered into an agreement
with the Bank that provides for a limited waiver of the financial covenant of Franklin Holding and
FCMC under the Licensing Credit Agreement, for the period through and including September 30, 2011,
related to the failure to maintain the minimum level of Net income before taxes.
84
PART III
|
|
|
ITEM 10. |
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The Company has adopted a Code of Ethics and Business Conduct (the Code) that applies to all
of its officers, directors and employees (including the Companys Principal Executive Officer,
Chief Financial Officer and Controller). The Code is available on the Companys website at
www.franklincredit.com through the Franklin Credit Holding Corporation Investor Relations link. In
the event that there are any amendments to or waivers from any provision of the Code that require
disclosure under Item 5.05 of Form 8-K, the Company intends to satisfy these disclosure
requirements by posting such information on its website, as permitted by Item 5.05(c) of Form 8-K.
The other information required under this Item is contained in the Companys definitive proxy
statement, which will be filed within 120 days of December 31, 2010, the Companys most recent
fiscal year, and is incorporated herein by reference. If such proxy statement is not filed on or
before April 30, 2011, the information called for by this Item will be filed as part of an
amendment to this Annual Report on Form 10-K on or before such date, in accordance with General
Instruction G(3).
|
|
|
ITEM 11. |
|
EXECUTIVE COMPENSATION |
Information required under this Item is contained in the Companys definitive proxy statement,
which will be filed within 120 days of December 31, 2010, the Companys most recent fiscal year,
and is incorporated herein by reference. If such proxy statement is not filed on or before April
30, 2011, the information called for by this Item will be filed as part of an amendment to this
Annual Report on Form 10-K on or before such date, in accordance with General Instruction G(3).
|
|
|
ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS |
The following table shows compensation plans (including individual compensation arrangements)
under which equity securities are authorized for issuance, as of December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities |
|
|
|
|
|
|
|
|
|
|
|
remaining available for |
|
|
|
Number of securities to |
|
|
Weighted average |
|
|
future issuance under equity |
|
|
|
be issued upon exercise of |
|
|
exercise price of |
|
|
compensation plans |
|
|
|
outstanding options, |
|
|
outstanding options, |
|
|
(excluding securities |
|
Plan Category |
|
warrants and rights |
|
|
warrants and rights |
|
|
reflected in column (a)) |
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation
plans approved by
security holders |
|
|
229,000 |
|
|
$ |
3.64 |
|
|
|
521,000 |
|
Equity compensation
plans not approved
by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
229,000 |
|
|
$ |
3.64 |
|
|
|
521,000 |
|
|
|
|
|
|
|
|
|
|
|
|
The other information required under this Item is contained in the Companys definitive
proxy statement, which will be filed within 120 days of December 31, 2010, the Companys most
recent fiscal year, and is incorporated herein by reference. If such proxy statement is not filed
on or before April 30, 2011, the information called for by this Item will be filed as part of an
amendment to this Annual Report on Form 10-K on or before such date, in accordance with General
Instruction G(3).
85
|
|
|
ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Information required under this Item is contained in the Companys definitive proxy statement,
which will be filed within 120 days of December 31, 2010, the Companys most recent fiscal year,
and is incorporated herein by reference. If such proxy statement is not filed on or before April
30, 2011, the information called for by this Item will be filed as part of an amendment to this
Annual Report on Form 10-K on or before such date, in accordance with General Instruction G(3).
|
|
|
ITEM 14. |
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Information required under this Item is contained in the Companys definitive proxy statement,
which will be filed within 120 days of December 31, 2010, the Companys most recent fiscal year,
and is incorporated herein by reference. If such proxy statement is not filed on or before April
30, 2011, the information called for by this Item will be filed as part of an amendment to this
Annual Report on Form 10-K on or before such date, in accordance with General Instruction G(3).
86
PART IV
|
|
|
ITEM 15. |
|
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
The following documents are filed as part of Form 10-K:
|
(1) |
|
Financial Statements. |
The financial statements required by Item 8 are included herein, beginning on page F-2
of this report.
|
(2) |
|
Financial Statement Schedules. |
The financial statement schedules required by Item 8 are included in the financial
statements (or are either not applicable or not significant).
|
|
|
|
|
Exhibit |
Number |
|
3.1 |
|
|
First Amended and Restated Certificate of Incorporation.
Incorporated by reference to Exhibit 3.1 to the
Registrants Current Report on Form 8-K, filed with the
Securities and Exchange Commission (the Commission) on
December 24, 2008. |
|
|
|
|
|
|
3.2 |
|
|
Amended and Restated By-laws. Incorporated by reference
to Exhibit 3.2 to the Registrants Current Report on
Form 8-K, filed with the Commission on December 24,
2008. |
|
|
|
|
|
|
10.1 |
|
|
Master Credit and Security Agreement, dated as of
October 13, 2004, between the Registrant and Sky Bank
(the Master Credit Agreement). Incorporated by
reference to Exhibit 10.1 to the Registrants
Registration Statement on Form S-1 (File No.
333-125681), filed with the Commission on June 9, 2005
(the Registration Statement). |
|
|
|
|
|
|
10.2 |
|
|
Amendment to the Master Credit Agreement, dated as of
December 30, 2004 between the Registrant and Sky Bank.
Incorporated by reference to Exhibit 10.2 to the
Registrants Annual Report on Form 10-K for the fiscal
year ended December 31, 2004, filed with the Commission
on April 8, 2005 (the 2004 10-K). |
|
|
|
|
|
|
10.3 |
|
|
1996 Stock Incentive Plan, as amended. Incorporated by
reference to Exhibit 4.1 to the Registrants
Registration Statement on Form S-8 (File No.
333-122677), filed with the Commission on February 10,
2005. |
|
|
|
|
|
|
10.4 |
|
|
Employment Agreement, effective as of March 28, 2005,
between the Registrant and Paul D. Colasono.
Incorporated by reference to Exhibit 10.1 to the
Registrants Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2005, filed with the
Commission on May 16, 2005 (the First Quarter
10-Q). () |
|
|
|
|
|
|
10.5 |
|
|
Restricted Stock Grant Agreement, dated as of April 13,
2005, between the Registrant and Paul D. Colasono.
Incorporated by reference to Exhibit 10.2 to the First
Quarter 10-Q. () |
|
|
|
|
|
|
10.6 |
|
|
Lease, dated July 27, 2005, between the Registrant and
101 Hudson Leasing Associates. Incorporated by
reference to Exhibit 10.1 to the Registrants Current
Report on Form 8-K, filed with the Commission on July
29, 2005. |
|
|
|
|
|
|
10.7 |
|
|
Franklin Credit Management Corporation 2006 Stock
Incentive Plan. Incorporated by reference to Exhibit
99.1 of the Registrants Revised Definitive Proxy
Statement on Schedule 14A, filed with the Commission on
May 3, 2006. |
87
|
|
|
|
|
Exhibit |
Number |
|
10.8 |
|
|
Assignment and Assumption of Lease Landlord Consent and
Lease Modification Agreement, dated as of February 22,
2007, among The New York Mortgage Company, LLC, Tribeca
Lending Corp., and First States Investors 5200 LLC.
Incorporated by reference to Exhibit 10.37 to the
Registrants Annual Report on Form 10-K for the fiscal
year ended December 31, 2006, filed with the Commission
on April 2, 2007. |
|
|
|
|
|
|
10.9 |
|
|
Limited Waiver, dated as of November 15, 2007, between
The Huntington National Bank, successor by merger to Sky
Bank (Huntington), the Company and each subsidiary of
the Company listed on the signature pages thereof.
Incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K, filed with the
Commission on November 15, 2007. |
|
|
|
|
|
|
10.10 |
|
|
Limited Waiver, dated as of November 15, 2007, between
Huntington, Tribeca and each subsidiary of the Company
listed on the signature pages thereof. Incorporated by
reference to Exhibit 10.2 to the Registrants Current
Report on Form 8-K, filed with the Commission on
November 15, 2007. |
|
|
|
|
|
|
10.11 |
|
|
Security Agreement, dated as of November 15, 2007, by
the Company and each of the entities listed on the
signature pages thereof in favor of Huntington.
Incorporated by reference to Exhibit 10.3 to the
Registrants Current Report on Form 8-K, filed with the
Commission on November 15, 2007. |
|
|
|
|
|
|
10.12 |
|
|
Forbearance Agreement and Amendment to Credit
Agreements, dated December 28, 2007, by and among the
borrowers listed on Schedule 1 thereof, Franklin Credit
Management Corporation and The Huntington National Bank.
Incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K, filed with the
Commission on January 4, 2008. |
|
|
|
|
|
|
10.13 |
|
|
Tranche A Note, dated December 28, 2007, by the
borrowers listed on Schedule 1 to the Forbearance
Agreement, in favor of The Huntington National Bank.
Incorporated by reference to Exhibit 10.2 to the
Registrants Current Report on Form 8-K, filed with the
Commission on January 4, 2008. |
|
|
|
|
|
|
10.14 |
|
|
Form of Tranche B Note, dated December 28, 2007, by the
borrowers listed on Schedule 1 to the Forbearance
Agreement, in favor of The Huntington National Bank.
Incorporated by reference to Exhibit 10.3 to the
Registrants Current Report on Form 8-K, filed with the
Commission on January 4, 2008. |
|
|
|
|
|
|
10.15 |
|
|
Tranche C Note, dated December 28, 2007, by the
borrowers listed on Schedule 1 to the Forbearance
Agreement, in favor of The Huntington National Bank.
Incorporated by reference to Exhibit 10.4 to the
Registrants Current Report on Form 8-K, filed with the
Commission on January 4, 2008. |
|
|
|
|
|
|
10.16 |
|
|
Tranche D Note, dated December 28, 2007, by the
borrowers listed on Schedule 1 to the Forbearance
Agreement, in favor of The Huntington National Bank.
Incorporated by reference to Exhibit 10.5 to the
Registrants Current Report on Form 8-K, filed with the
Commission on January 4, 2008. |
|
|
|
|
|
|
10.17 |
|
|
Letter Agreement, dated January 3, 2008, by and among
the borrowers listed on Schedule 1 to the Forbearance
Agreement, Franklin Credit Management Corporation and
The Huntington National Bank. Incorporated by reference
to Exhibit 10.6 to the Registrants Current Report on
Form 8-K, filed with the Commission on January 4, 2008. |
|
|
|
|
|
|
10.18 |
|
|
Tribeca Forbearance Agreement and Amendment to Credit
Agreements, dated December 28, 2007, by and among the
borrowers listed on Schedule 1 thereof, including
without limitation Tribeca Lending Corp. and Franklin
Credit Management Corporation, and The Huntington
National Bank. Incorporated by reference to Exhibit
10.7 to the Registrants Current Report on Form 8-K,
filed with the Commission on January 4, 2008. |
88
|
|
|
|
|
Exhibit |
Number |
|
10.19 |
|
|
Tranche A Note, dated December 28, 2007, by the
borrowers listed on Schedule 1 to the Tribeca
Forbearance Agreement, in favor of The Huntington
National Bank. Incorporated by reference to Exhibit
10.8 to the Registrants Current Report on Form 8-K,
filed with the Commission on January 4, 2008. |
|
|
|
|
|
|
10.20 |
|
|
Form of Tranche B Note, dated December 28, 2007, by the
borrowers listed on Schedule 1 to the Tribeca
Forbearance Agreement, in favor of The Huntington
National Bank. Incorporated by reference to Exhibit
10.9 to the Registrants Current Report on Form 8-K,
filed with the Commission on January 4, 2008. |
|
|
|
|
|
|
10.21 |
|
|
Guaranty, dated as of December 28, 2007, by Franklin
Credit Management Corporation in favor of The Huntington
National Bank. Incorporated by reference to Exhibit
10.10 to the Registrants Current Report on Form 8-K,
filed with the Commission on January 4, 2008. |
|
|
|
|
|
|
10.22 |
|
|
Guaranty, dated as of December 28, 2007, by Franklin
Credit Management Corporation in favor of The Huntington
National Bank. Incorporated by reference to Exhibit
10.11 to the Registrants Current Report on Form 8-K,
filed with the Commission on January 4, 2008. |
|
|
|
|
|
|
10.23 |
|
|
Security Agreement, dated as of December 28, 2007, by
Tribeca Lending Corp. and each of the entities listed on
the signature pages thereof, in favor of The Huntington
National Bank. Incorporated by reference to Exhibit
10.12 to the Registrants Current Report on Form 8-K,
filed with the Commission on January 4, 2008. |
|
|
|
|
|
|
10.24 |
|
|
ISDA Master (Swap) Agreement between the Registrant and
the Huntington National Bank, dated as of February 27,
2008 and the Schedule thereto. Incorporated by
reference to Exhibit 10.37 to the Registrants Annual
Report on Form 10-K for the fiscal year ended December
31, 2006, filed with the Commission on April 2, 2007. |
|
|
|
|
|
|
10.25 |
|
|
Joinder and Amendment No.1 to Forbearance Agreement,
dated as of March 31, 2008, by and among the borrowers
listed on Schedule 1 thereto, Franklin Credit Management
Corporation and The Huntington National Bank.
Incorporated by reference to Exhibit 10.55 to the
Registrants Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2008, filed with the
Commission on May 15, 2008. |
|
|
|
|
|
|
10.26 |
|
|
Second Amended and Restated Tranche D Note, dated March
31, 2008, by the borrowers listed on Schedule 1 to the
Forbearance Agreement, in favor of The Huntington
National Bank. Incorporated by reference to Exhibit
10.56 to the Registrants Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2008, filed
with the Commission on May 15, 2008. |
|
|
|
|
|
|
10.27 |
|
|
Joinder and Amendment No. 1 to Tribeca Forbearance
Agreement, dated March 31, 2008, by and among the
borrowers listed on Schedule 1 thereof, including
without limitation Tribeca Lending Corp. and Franklin
Credit Management Corporation, and The Huntington
National Bank. Incorporated by reference to Exhibit
10.57 to the Registrants Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2008, filed
with the Commission on May 15, 2008. |
|
|
|
|
|
|
10.28 |
|
|
Participation Agreement, dated March 31, 2008, by and
between The Huntington National Bank, BOS (USA) Inc.,
and Tribeca Lending Corp. and its subsidiaries.
Incorporated by reference to Exhibit 10.58 to the
Registrants Current Report on Form 10-Q, dated as of
March 31, 2008. |
|
|
|
|
|
|
10.29 |
|
|
Second Amended and Restated Tranche A Note, dated March
31, 2008, by the borrowers listed on Schedule 1 to the
Forbearance Agreement, in favor of The Huntington
National Bank. Incorporated by reference to Exhibit
10.59 to the Registrants Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2008, filed
with the Commission on May 15, 2008. |
89
|
|
|
|
|
Exhibit |
Number |
|
10.30 |
|
|
Confirmation Letters, dated February 27, 2008, to the
ISDA Master (Swap) Agreement between Franklin Credit
Management Corporation and The Huntington National Bank,
dated as of February 27, 2008. Incorporated by
reference to Exhibit 10.64 to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended June
30, 2008, filed with the Commission on August 19, 2008. |
|
|
|
|
|
|
10.31 |
|
|
Confirmation Letters, dated April 30, 2008, to the ISDA
Master (Swap) Agreement between Franklin Credit
Management Corporation and The Huntington National Bank,
dated as of February 27, 2008. Incorporated by
reference to Exhibit 10.65 to the Registrants Quarterly
Report, on Form 10-Q for the quarterly period ended June
30, 2008, filed with the Commission on August 19, 2008. |
|
|
|
|
|
|
10.32 |
|
|
Loan Servicing Agreement, dated May 28, 2008, by and
between Franklin Credit Management Corporation and Bosco
Credit LLC (portions of this exhibit have been omitted
and separately filed with the Commission with a request
for confidential treatment). Incorporated by reference
to Exhibit 10.66 to the Registrants Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2008,
filed with the Commission on August 19, 2008. |
|
|
|
|
|
|
10.33 |
|
|
Amendment No. 2 to Forbearance Agreement, dated August
15, 2008, between the borrowers listed on Schedule 1
thereof, Franklin Credit Management Corporation and The
Huntington National Bank. Incorporated by reference to
Exhibit 10.67 to the Registrants Quarterly Report on
Form 10-Q for the quarterly period ended June 30, 2008,
filed with the Commission on August 19, 2008. |
|
|
|
|
|
|
10.34 |
|
|
Amendment No. 2 to Tribeca Forbearance Agreement, dated
August 15, 2008, between the borrowers listed on
Schedule 1 thereof, including without limitation Tribeca
Lending Corp., Franklin Credit Management Corporation
and The Huntington National Bank. Incorporated by
reference to Exhibit 10.68 to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended June
30, 2008, filed with the Commission on August 19, 2008. |
|
|
|
|
|
|
10.35 |
|
|
Pledge, Assignment and Security Agreement, dated August
15, 2008, by Franklin Credit Management Corporation in
favor of The Huntington National Bank. Incorporated by
reference to Exhibit 10.69 to the Registrants Quarterly
Report Form 10-Q for the quarterly period ended June 30,
2008, filed with the Commission on August 19, 2008. |
|
|
|
|
|
|
10.36 |
|
|
Form of Acknowledgement. Incorporated by reference to
Exhibit 10.1 to the Registrants Current Report on Form
8-K, filed with the Commission on December 24, 2008. |
|
|
|
|
|
|
10.37 |
|
|
Master Trust Agreement, dated as of December 15, 2008,
by and among Franklin Credit Management Corporation,
Tribeca Lending Corp., Deutsche Bank National Trust
Company, and Deutsche Bank National Trust Company
Delaware. Incorporated by reference to Exhibit 10.2 to
the Registrants Current Report on Form 8-K, filed with
the Commission on December 24, 2008. |
|
|
|
|
|
|
10.38 |
|
|
First Amended and Restated Forbearance Agreement and
Amendment to Credit Agreements, dated as of December 19,
2008, by and among the borrowers listed on Schedule 1
thereto, Franklin Credit Management Corporation,
Franklin Credit Asset Corporation, Franklin Credit
Holding Corporation and The Huntington National Bank.
Incorporated by reference to Exhibit 10.3 to the
Registrants Current Report on Form 8-K, filed with the
Commission on December 24, 2008. |
90
|
|
|
|
|
Exhibit |
Number |
|
10.39 |
|
|
First Amended and Restated Tribeca Forbearance Agreement
and Amendment to Credit Agreements, dated as of December
19, 2008, by and among the borrowers listed on Schedule
1 thereto, Tribeca Lending Corp., Franklin Credit
Management Corporation, Franklin Credit Holding
Corporation and The Huntington National Bank.
Incorporated by reference to Exhibit 10.4 to the
Registrants Current Report on Form 8-K, filed with the
Commission on December 24, 2008. |
|
|
|
|
|
|
10.40 |
|
|
Guaranty, dated as of December 19, 2008, by and between
Franklin Credit Holding Corporation and The Huntington
National Bank. Incorporated by reference to Exhibit
10.5 to the Registrants Current Report on Form 8-K,
filed with the Commission on December 24, 2008. |
|
|
|
|
|
|
10.41 |
|
|
Guaranty, dated as of December 19, 2008, by and between
Franklin Credit Holding Corporation and The Huntington
National Bank. Incorporated by reference to Exhibit
10.6 to the Registrants Current Report on Form 8-K,
filed with the Commission on December 24, 2008. |
|
|
|
|
|
|
10.42 |
|
|
Guaranty, dated as of December 19, 2008, by and between
Franklin Credit Trust Series I and The Huntington
National Bank. Incorporated by reference to Exhibit
10.7 to the Registrants Current Report on Form 8-K,
filed with the Commission on December 24, 2008. |
|
|
|
|
|
|
10.43 |
|
|
Guaranty, dated as of December 19, 2008, by and between
Franklin Credit Trust Series I and The Huntington
National Bank Incorporated by reference to Exhibit 10.8
to the Registrants Current Report on Form 8-K, filed
with the Commission on December 24, 2008. |
|
|
|
|
|
|
10.44 |
|
|
Guaranty, dated as of December 19, 2008, by and between
Tribeca Lending Trust Series I and The Huntington
National Bank. Incorporated by reference to Exhibit
10.9 to the Registrants Current Report on Form 8-K,
filed with the Commission on December 24, 2008. |
|
|
|
|
|
|
10.45 |
|
|
Guaranty, dated as of December 19, 2008, by and between
Tribeca Lending Trust Series I and The Huntington
National Bank. Incorporated by reference to Exhibit
10.10 to the Registrants Current Report on Form 8-K,
filed with the Commission on December 24, 2008. |
|
|
|
|
|
|
10.46 |
|
|
Joinder Agreement No. 3 (Franklin), dated as of December
19, 2008, by Franklin Credit Asset Corporation, Franklin
Credit Holding Corporation and The Huntington National
Bank. Incorporated by reference to Exhibit 10.11 to the
Registrants Current Report on Form 8-K, filed with the
Commission on December 24, 2008. |
|
|
|
|
|
|
10.47 |
|
|
Joinder Agreement No. 3 (Tribeca), dated as of December
19, 2008, by Tribeca Lending Corp., Franklin Credit
Asset Corporation, Franklin Credit Holding Corporation
and The Huntington National Bank. Incorporated by
reference to Exhibit 10.12 to the Registrants Current
Report on Form 8-K, filed with the Commission on
December 24, 2008. |
|
|
|
|
|
|
10.48 |
|
|
Pledge Amendment (Franklin), dated as of December 19,
2008, by and among Franklin Credit Management
Corporation, the parties listed on Schedule A thereto,
Franklin Credit Asset Corporation, Franklin Credit
Holding Corporation and The Huntington National Bank.
Incorporated by reference to Exhibit 10.13 to the
Registrants Current Report on Form 8-K, filed with the
Commission on December 24, 2008. |
|
|
|
|
|
|
10.49 |
|
|
Pledge Amendment (Tribeca), dated as of December 19,
2008, by and among Tribeca Lending Corp., the parties
listed on Schedule A thereto, Franklin Credit Asset
Corporation, Franklin Credit Holding Corporation and The
Huntington National Bank. Incorporated by reference to
Exhibit 10.14 to the Registrants Current Report on Form
8-K, filed with the Commission on December 24, 2008. |
91
|
|
|
|
|
Exhibit |
Number |
|
10.50 |
|
|
Pledge Amendment (Franklin Trust Certificate), dated as
of December 19, 2008, by and among Franklin Credit
Management Corporation, the parties listed on Schedule A
thereto, Franklin Credit Asset Corporation, Franklin
Credit Holding Corporation and The Huntington National
Bank. Incorporated by reference to Exhibit 10.15 to the
Registrants Current Report on Form 8-K, filed with the
Commission on December 24, 2008. |
|
|
|
|
|
|
10.51 |
|
|
Security Agreement, dated as of December 19, 2008, by
and between Franklin Credit Trust Series I and The
Huntington National Bank. Incorporated by reference to
Exhibit 10.16 to the Registrants Current Report on Form
8-K, filed with the Commission on December 24, 2008. |
|
|
|
|
|
|
10.52 |
|
|
Security Agreement, dated as of December 19, 2008, by
and between Tribeca Lending Trust Series I and The
Huntington National Bank. Incorporated by reference to
Exhibit 10.17 to the Registrants Current Report on Form
8-K, filed with the Commission on December 24, 2008. |
|
|
|
|
|
|
10.53 |
|
|
Assignment Agreement, dated as of December 19, 2008, by
and among Franklin Credit Management Corporation,
Franklin Credit Holding Corporation and The Huntington
National Bank Incorporated by reference to Exhibit 10.18
to the Registrants Current Report on Form 8-K, filed
with the Commission on December 24, 2008. |
|
|
|
|
|
|
10.54 |
|
|
Guaranty, dated as of December 19, 2008, by and between
Tribeca Lending Corporation and The Huntington National
Bank. Incorporated by reference to Exhibit 10.19 to the
Registrants Current Report on Form 8-K, filed with the
Commission on December 24, 2008. |
|
|
|
|
|
|
10.55 |
|
|
Amendment to Employment Agreement, dated as of December
30, 2008, by and between Franklin Credit Management
Corporation and Paul Colasono. Incorporated by
reference to Exhibit 10.90 to the Registrants Current
Report on Form 8-K, filed with the Commission on January
5, 2009. |
|
|
|
|
|
|
10.56 |
|
|
First Amendment to Loan Servicing Agreement, dated as of
February 27, 2009, by and between Franklin Credit
Management Corporation and Bosco Credit, LLC.
Incorporated by reference to Exhibit 10.89 to the
Registrants Annual Report on Form 10-K for the annual
period ended December 31, 2008, filed with the
Commission on April 10, 2009. |
|
|
|
|
|
|
10.57 |
|
|
Trust Agreement by and among Franklin Credit Asset
Corporation, Franklin Credit Management Corporation,
Tribeca Lending Corp. and each of their respective
subsidiaries, as Depositors, and The Huntington National
Bank, as Certificate Trustee, and Wilmington Trust
Company, as Owner Trustee, dated March 31, 2009.
Incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K, filed with the
Commission on April 6, 2009. |
|
|
|
|
|
|
10.58 |
|
|
Transfer and Assignment Agreement by and among Franklin
Mortgage Asset Trust 2009-A, Franklin Credit Asset
Corporation, Franklin Credit Management Corporation,
Tribeca Lending Corp. and each of their respective
subsidiaries dated March 31, 2009. Incorporated by
reference to Exhibit 10.2 to the Registrants Current
Report on Form 8-K, filed with the Commission on April
6, 2009. |
|
|
|
|
|
|
10.59 |
|
|
Contribution Agreement by and among Franklin Asset, LLC
and Franklin Asset Merger Sub, LLC dated March 31, 2009.
Incorporated by reference to Exhibit 10.3 to the
Registrants Current Report on Form 8-K, filed with the
Commission on April 6, 2009. |
|
|
|
|
|
|
10.60 |
|
|
Agreement and Plan of Merger by and among Huntington
Capital Financing, LLC, HCFFL, LLC, Franklin Asset, LLC,
Franklin Credit Holding Corporation, Franklin Credit
Asset Corporation, Tribeca Lending Corp. and each of
their respective subsidiaries dated March 31, 2009.
Incorporated by reference to Exhibit 10.4 to the
Registrants Current Report on Form 8-K, filed with the
Commission on April 6, 2009. |
92
|
|
|
|
|
Exhibit |
Number |
|
10.61 |
|
|
Amended and Restated Credit Agreement (Legacy) by and
among Franklin Credit Asset Corporation, Tribeca Lending
Corp. and the Other Borrowers Party hereto as Borrowers,
the Financial Institutions Party hereto as Lenders, and
the Huntington National Bank, as Administrative Agent,
dated March 31, 2009. Incorporated by reference to
Exhibit 10.5 to the Registrants Current Report on Form
8-K, filed with the Commission on April 6, 2009. |
|
|
|
|
|
|
10.62 |
|
|
The Limited Recourse Guarantee, dated as of March 3,
2009, made by Franklin Credit Holding Corporation in
favor of The Huntington National Bank. Incorporated by
reference to Exhibit 10.6 to the Registrants Current
Report on Form 8-K, filed with the Commission on April
6, 2009. |
|
|
|
|
|
|
10.63 |
|
|
The Limited Recourse Guarantee, dated as of March 31,
2009, made by Franklin Credit Management Corporation in
favor The Huntington National Bank. Incorporated by
reference to Exhibit 10.7 to the Registrants Current
Report on Form 8-K, filed with the Commission on April
6, 2009. |
|
|
|
|
|
|
10.64 |
|
|
The Amended and Restated Security Agreement, dated as of
March 31, 2009, by and among the Borrowers and The
Huntington National Bank. Incorporated by reference to
Exhibit 10.8 to the Registrants Current Report on Form
8-K, dated as of April 6, 2009. |
|
|
|
|
|
|
10.65 |
|
|
The Amended and Restated Pledge Agreement, dated as of
March 31, 2009, by and between Franklin Credit Holding
Corporation and The Huntington National Bank.
Incorporated by reference to Exhibit 10.9 to the
Registrants Current Report on Form 8-K, filed with the
Commission on April 6, 2009. |
|
|
|
|
|
|
10.66 |
|
|
The Amended and Restated Pledge, Assignment and Security
Agreement, dated as of March 31, 2009, by and between
Franklin Credit Management Corporation and The
Huntington National Bank. Incorporated by reference to
Exhibit 10.10 to the Registrants Current Report on Form
8-K, filed with the Commission on April 6, 2009. |
|
|
|
|
|
|
10.67 |
|
|
The Investment Property Security Agreement, dated as of
March 31, 2009, by and between Franklin Credit
Management Corporation and The Huntington National Bank.
Incorporated by reference to Exhibit 10.11 to the
Registrants Current Report on Form 8-K, filed with the
Commission on April 6, 2009. |
|
|
|
|
|
|
10.68 |
|
|
Amended and Restated Credit Agreement (Licensing) by and
among Franklin Credit Management Corporation and
Franklin Credit Holding Corporation as Borrowers, the
Financial Institutions Party hereto as Lenders, and the
Huntington National Bank, as Administrative Agent, dated
March 31, 2009. Incorporated by reference to Exhibit
10.12 to the Registrants Current Report on Form 8-K,
filed with the Commission on April 6, 2009. |
|
|
|
|
|
|
10.69 |
|
|
The Amended and Restated Security Agreement (Licensing),
dated as of March 31, 2009, by and between Franklin
Credit Management Corporation and The Huntington
National Bank. Incorporated by reference to Exhibit
10.13 to the Registrants Current Report on Form 8-K,
filed with the Commission on April 6, 2009. |
|
|
|
|
|
|
10.70 |
|
|
Servicing Agreement by and among Franklin Mortgage Asset
Trust 2009-A and Franklin Credit Management Corporation
dated March 31, 2009 (portions of this exhibit have been
omitted and separately filed with the Commission with a
request for confidential treatment). Incorporated by
reference to Exhibit 10.14 to the Registrants Current
Report on Form 8-K, filed with the Commission on April
6, 2009. |
93
|
|
|
|
|
Exhibit |
Number |
|
10.71 |
|
|
Amendment No. 1 to First Amended and Restated
Forbearance Agreement and Amendment to Credit
Agreements, dated as of April 20, 2009, by and among
Franklin Credit Holding Corporation, Franklin Credit
Management Corporation, Franklin Credit Asset
Corporation, Flow 2006 F Corp., FCMC 2006 M Corp., FCMC
2006 K Corp. and The Huntington National Bank.
Incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K, filed with the
Commission on April 22, 2009. |
|
|
|
|
|
|
10.72 |
|
|
Amendment No. 2 to First Amended and Restated
Forbearance Agreement and Amendment to Credit
Agreements, dated as of August 10, 2009, by and among
the Registrant, Franklin Credit Asset Corporation, Flow
2006 F Corp., FCMC 2006 M Corp., FCMC 2006 K Corp. and
The Huntington National Bank. Incorporated by reference
to Exhibit 10.100 to the Registrants Quarterly Report
on Form 10-Q for the quarterly period ended June 30,
2009, filed with the Commission on August 14, 2009. |
|
|
|
|
|
|
10.73 |
|
|
Separation Agreement and General Release, effective
October 15, 2009, by and among the Registrant, Franklin
Credit Management Corporation, Tribeca Lending Corp. and
William F. Sullivan. Incorporated by reference to
Exhibit 10.101 to the Registrants Quarterly Report on
Form 10-Q for the quarterly period ended September 30,
2009, filed with the Commission on November 16, 2009. |
|
|
|
|
|
|
10.74 |
|
|
Second Amendment to Loan Servicing Agreement, dated
October 29, 2009, by and between Franklin Credit
Management Corporation and Bosco Credit LLC (portions of
this exhibit have been omitted and separately filed with
the Commission with a request for confidential
treatment). Incorporated by reference to Exhibit 10.102
to the Registrants Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2009, filed
with the Commission on November 16, 2009. |
|
|
|
|
|
|
10.75 |
|
|
Amendment No.3 to First Amended and Restated Forbearance
Agreement and Amendment to Credit Agreements, effective
as of September 30, 2009, by and among the Registrant,
Franklin Credit Asset Corporation, Flow 2006 F Corp.,
FCMC 2006 M Corp., FCMC 2006 K Corp. and The Huntington
National Bank. Incorporated by reference to Exhibit
10.103 to the Registrants Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2009, filed
with the Commission on November 16, 2009. |
|
|
|
|
|
|
10.76 |
|
|
Amendment No.4 to First Amended and Restated Forbearance
Agreement and Amendment to Credit Agreements, effective
as of March 26, 2010, by and among the Registrant,
Franklin Credit Asset Corporation, Flow 2006 F Corp.,
FCMC 2006 M Corp., FCMC 2006 K Corp. and The Huntington
National Bank. Incorporated by reference to Exhibit
10.76 to the Registrants Annual Report on Form 10-K for
the annual period ended December 31, 2009, filed with
the Commission on March 31, 2010. |
|
|
|
|
|
|
10.77 |
|
|
Amendment No.1 to Amended and Restated Credit Agreement
(Licensing) by and among Franklin Credit Management
Corporation and Franklin Credit Holding Corporation as
Borrowers, the Financial Institutions Party hereto as
Lenders, and the Huntington National Bank, as
Administrative Agent, dated March 26, 2010.
Incorporated by reference to Exhibit 10.77 to the
Registrants Annual Report on Form 10-K for the annual
period ended December 31, 2009, filed with the
Commission on March 31, 2010. |
|
|
|
|
|
|
10.78 |
|
|
Employment Agreement, effective as of January 11, 2010,
between Franklin Credit Management Corporation and Jimmy
Yan. Incorporated by reference to Exhibit 10.1 to the
Registrants Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2010, filed with the
Commission on May 17, 2010. () |
94
|
|
|
|
|
Exhibit |
Number |
|
10.79 |
|
|
Employee Restricted Stock Grant Agreement, dated as of
January 11, 2010, between the Registrant and Jimmy Yan.
Incorporated by reference to Exhibit 10.2 to the
Registrants Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2010, filed with the
Commission on May 17, 2010. () |
|
|
|
|
|
|
10.80 |
|
|
Amendment No.1 to Amended and Restated Credit Agreement
and Replacement of Schedule to Amended and Restated
Security Agreement by and among Franklin Credit Asset
Corporation, Tribeca Lending Corp., Franklin Asset, LLC
and the Other Borrowers Party thereto as Borrowers, the
Financial Institutions Party thereto as Lenders, and the
Huntington National Bank, as Administrative Agent, dated
June 11, 2010. Incorporated by reference to Exhibit
10.3 to the Registrants Quarterly Report on Form 10-Q
for the quarterly period ended June 30, 2010, filed with
the Commission on August 16, 2010. |
|
|
|
|
|
|
10.81 |
|
|
Amendment No. 5 to First Amended and Restated
Forbearance Agreement and Amendment to Credit
Agreements, effective as of June 28, 2010, by and among
the Registrant, Franklin Credit Asset Corporation, Flow
2006 F Corp., FCMC 2006 M Corp., FCMC 2006 K Corp. and
The Huntington National Bank. Incorporated by reference
to Exhibit 10.1 to the Registrants Current Report on
Form 8-K, filed with the Commission on June 28, 2010. |
|
|
|
|
|
|
10.82 |
|
|
Letter Agreement, dated July 16, 2010, by and among The
Huntington National Bank, Franklin Mortgage Asset Trust
2009-A, the Registrant, Franklin Credit Management
Corporation and, solely for the purposes of paragraph 5
thereof, Thomas J. Axon. Incorporated by reference to
Exhibit 10.1 to the Registrants Current Report on Form
8-K, filed with the Commission on July 22, 2010. |
|
|
|
|
|
|
10.83 |
|
|
Amendment No. 2 to the Amended and Restated Credit
Agreement (Licensing), dated as of July 20, 2010, by and
among Franklin Credit Management Corporation, the
Registrant, the Financial Institutions Party thereto as
Lenders, and The Huntington National Bank (as
Administrative Agent and Issuing Bank) and an affiliate
of the Bank, Huntington Finance, LLC as Lender and Risk
Participant. Incorporated by reference to Exhibit 10.2
to the Registrants Current Report on Form 8-K, filed
with the Commission on July 22, 2010. |
|
|
|
|
|
|
10.84 |
|
|
Loan Servicing Agreement, entered into on July 20, 2010
but dated and effective July 1, 2010, by and among
Vantium Capital Markets, L.P., Vantium REO Capital
Markets, L.P. and FCMC (portions of this exhibit have
been omitted and separately filed with the Commission
with a request for confidential treatment).
Incorporated by reference to Exhibit 10.3 to the
Registrants Amended Current Report on Form 8-K/A, filed
with the Commission on September 20, 2010. |
|
|
|
|
|
|
10.85 |
|
|
Amended and Restated Servicing Agreement, entered into
on August 1, 2010, by and between Franklin Mortgage
Asset Trust 2009-A, as Owner, and Franklin Credit
Management Corporation, as Servicer (portions of this
exhibit have been omitted and separately filed with the
Commission with a request for confidential treatment).
Incorporated by reference to Exhibit 10.1 to the
Registrants Amended Current Report on Form 8-K/A, filed
with the Commission on September 20, 2010. |
|
|
|
|
|
|
10.86 |
|
|
Letter Agreement, dated September 16, 2010, by and among
The Huntington National Bank, Franklin Mortgage Asset
Trust 2009-A, the Registrant, Franklin Credit Management
Corporation, Bosco Credit II, LLC and Thomas J. Axon.
Incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K, filed with the
Commission on September 23, 2010. |
95
|
|
|
|
|
Exhibit |
Number |
|
10.87 |
|
|
Restructure Agreement, dated September 22, 2010, by and
among The Huntington National Bank, Franklin Mortgage
Asset Trust 2009-A, the Registrant, Franklin Credit
Management Corporation, Bosco Credit II, LLC and Thomas
J. Axon. Incorporated by reference to Exhibit 10.2 to
the Registrants Current Report on Form 8-K, filed with
the Commission on September 23, 2010. |
|
|
|
|
|
|
10.88 |
|
|
First Amendment to Limited Recourse Guaranty, dated
September 22, 2010, by and between the Registrant and
The Huntington National Bank, as Administrative Agent.
Incorporated by reference to Exhibit 10.3 to the
Registrants Current Report on Form 8-K, filed with the
Commission on September 23, 2010. |
|
|
|
|
|
|
10.89 |
|
|
Letter from The Huntington National Bank to the
Registrant and Franklin Credit Management Corporation
regarding the EBITDA Payment. Incorporated by reference
to Exhibit 10.4 to the Registrants Current Report on
Form 8-K, filed with the Commission on September 23,
2010. |
|
|
|
|
|
|
10.90 |
|
|
Promissory Note of Franklin Credit Management
Corporation, dated September 22, 2010. Incorporated by
reference to Exhibit 10.5 to the Registrants Current
Report on Form 8-K, filed with the Commission on
September 23, 2010. |
|
|
|
|
|
|
10.91 |
|
|
Amendment No.2 to Amended and Restated Credit Agreement
by and among Franklin Credit Asset Corporation, Tribeca
Lending Corp., Franklin Asset, LLC and the Other
Borrowers Party thereto as Borrowers, the Financial
Institutions Party thereto as Lenders, and The
Huntington National Bank, as Administrative Agent, dated
September 22, 2010. Incorporated by reference to
Exhibit 10.6 to the Registrants Current Report on Form
8-K, filed with the Commission on September 23, 2010. |
|
|
|
|
|
|
10.92 |
|
|
Amendment No. 3 to the Amended and Restated Credit
Agreement (Licensing), dated September 22, 2010, by and
among Franklin Credit Management Corporation, the
Registrant, the Financial Institutions Party thereto as
Lenders, and The Huntington National Bank, as
Administrative Agent. Incorporated by reference to
Exhibit 10.7 to the Registrants Current Report on Form
8-K, filed with the Commission on September 23, 2010. |
|
|
|
|
|
|
10.93 |
|
|
Release, Cancellation and Discharge of Limited Recourse
Guaranty of Franklin Credit Management Corporation dated
September 22, 2010. Incorporated by reference to
Exhibit 10.8 to the Registrants Current Report on Form
8-K, filed with the Commission on September 23, 2010. |
|
|
|
|
|
|
10.94 |
|
|
First Amendment to Amended and Restated Pledge
Agreement, dated September 22, 2010, by and between the
Registrant and The Huntington National Bank, as
Administrative Agent. Incorporated by reference to
Exhibit 10.9 to the Registrants Current Report on Form
8-K, filed with the Commission on September 23, 2010. |
|
|
|
|
|
|
10.95 |
|
|
Amendment Number One to Servicing Agreement, entered
into on September 22, 2010, by and between Franklin
Mortgage Asset Trust 2009-A and Franklin Credit
Management Corporation. Incorporated by reference to
Exhibit 10.10 to the Registrants Current Report on Form
8-K, filed with the Commission on September 23, 2010. |
|
|
|
|
|
|
10.96 |
|
|
Loan Servicing Agreement, entered into on September 22,
2010, effective September 1, 2010 by and between
Franklin Credit Management Corporation and Bosco Credit
II, LLC (portions of this exhibit have been omitted and
separately filed with the Commission with a request for
confidential treatment). Incorporated by reference to
Exhibit 10.11 to the Registrants Amended Current Report
on Form 8-K/A, filed with the Commission on September
23, 2010. |
96
|
|
|
|
|
Exhibit |
Number |
|
10.97 |
|
|
Deferred Payment Agreement, dated September 22, 2010, by
and among The Huntington National Bank, as
Administrative Agent under the Legacy Credit Agreement,
Franklin Credit Management Corporation and Thomas J.
Axon. Incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K, filed with the
Commission on October 1, 2010. |
|
|
|
|
|
|
10.98 |
|
|
Amendment No. 6 to First Amended and Restated
Forbearance Agreement and Amendment to Credit
Agreements, effective as of September 30, 2010, by and
among the Registrant, Franklin Credit Asset Corporation,
Flow 2006 F Corp., FCMC 2006 M Corp., FCMC 2006 K Corp.
and The Huntington National Bank. Incorporated by
reference to Exhibit 10.1 to the Registrants Current
Report on Form 8-K, filed with the Commission on
November 23, 2010. |
|
|
|
|
|
|
10.99 |
|
|
Amendment No. 7 to First Amended and Restated
Forbearance Agreement and Amendment to Credit
Agreements, dated January 7, 2011 and effective as of
December 31, 2010, by and among the Registrant, Franklin
Credit Asset Corporation, Flow 2006 F Corp., FCMC 2006 M
Corp., FCMC 2006 K Corp. and The Huntington National
Bank. Incorporated by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K, filed with the
Commission on January 11, 2011. |
|
|
|
|
|
|
10.100 |
* |
|
Limited Waiver, dated as of March 28, 2011, by and among
The Huntington National Bank, as Administrative Agent,
the Registrant and Franklin Credit Management
Corporation, under the Amended and Restated Credit
Agreement (Licensing) dated as of March 31, 2009, as
amended. |
|
|
|
|
|
|
16.1 |
|
|
Letter of Deloitte & Touche LLP dated September 2, 2009
regarding change in certifying accountant. Incorporated
by reference to Exhibit 16.1 to the Registrants Current
Report on Form 8-K, filed with the Commission on
September 4, 2009. |
|
|
|
|
|
|
21.1 |
* |
|
Subsidiaries of the Registrant. |
|
|
|
|
|
|
23.1 |
* |
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
|
|
|
31.1 |
* |
|
Rule 13a-14(a) Certification of Chief Executive Officer
of the Registrant in accordance with Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
31.2 |
* |
|
Rule 13a-14(a) Certification of Chief Financial Officer
of the Registrant in accordance with Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.1 |
* |
|
Section 1350 Certification of Chief Executive Officer of
the Registrant in accordance with Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
|
32.2 |
* |
|
Section 1350 Certification of Chief Financial Officer of
the Registrant in accordance with Section 906 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
* |
|
Filed herewith. |
|
() |
|
Management contracts and compensation plans and arrangements. |
97
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
|
March 30, 2011 |
FRANKLIN CREDIT HOLDING CORPORATION
|
|
|
By: |
/s/ THOMAS J. AXON
|
|
|
|
Principal Executive Officer |
|
|
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacity and on the
dates indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ THOMAS J. AXON
Thomas J. Axon
|
|
President
and Chairman of the Board
(Principal Executive Officer)
|
|
March 30, 2011 |
|
|
|
|
|
/s/ PAUL D. COLASONO
Paul D. Colasono
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
|
|
March 30, 2011 |
|
|
|
|
|
/s/ KIMBERLEY SHAW
Kimberley Shaw
|
|
Senior
Vice President and Treasurer
(Controller)
|
|
March 30, 2011 |
|
|
|
|
|
/s/ MICHAEL BERTASH
Michael Bertash
|
|
Director
|
|
March 30, 2011 |
|
|
|
|
|
/s/ FRANK EVANS
Frank Evans
|
|
Director
|
|
March 30, 2011 |
|
|
|
|
|
/s/ STEVEN LEFKOWITZ
Steven Lefkowitz
|
|
Director
|
|
March 30, 2011 |
|
|
|
|
|
/s/ ALLAN R. LYONS
Allan R. Lyons
|
|
Director |
|
March 30, 2011 |
98
FRANKLIN CREDIT HOLDING CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
|
|
|
|
|
Page |
|
|
|
|
|
|
Consolidated Financial Statements: |
|
|
|
|
|
|
|
F-2 |
|
|
|
|
|
F-3 |
|
|
|
|
|
F-4 |
|
|
|
|
|
F-5 |
|
|
|
|
|
F-7 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the Board of Directors and Stockholders of
Franklin Credit Holding Corporation
We have audited the accompanying consolidated balance sheets of Franklin Credit Holding Corporation
and Subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated
statements of operations, changes in stockholders deficit, comprehensive loss, and cash flows for
the years then ended. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Franklin Credit Holding Corporation and
Subsidiaries, as of December 31, 2010 and 2009, and the consolidated results of its operations and
its cash flows for the years then ended in conformity with accounting principles generally accepted
in the United States of America.
The accompanying consolidated financial statements for the years ended December 31, 2010 and 2009
have been prepared assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Companys recurring losses from operations and
stockholders deficit raise substantial doubt about its ability to continue as a going concern.
Managements plans concerning these matters are also discussed in Note 1 to the consolidated
financial statements. The consolidated financial statements do not include any adjustments that
might result from this uncertainty.
/s/ Marcum LLP
Marcum llp
New York, New York
March 30, 2011
FRANKLIN CREDIT HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
12,640,619 |
|
|
$ |
15,963,115 |
|
Restricted cash |
|
|
2,407,194 |
|
|
|
2,611,640 |
|
Investment in REIT securities |
|
|
477,316,409 |
|
|
|
477,316,409 |
|
Investment in trust certificates at fair value |
|
|
1,505,978 |
|
|
|
69,355,735 |
|
Mortgage loans and real estate held for sale |
|
|
7,500,863 |
|
|
|
345,441,865 |
|
Notes receivable held for sale, net |
|
|
2,857,312 |
|
|
|
3,575,323 |
|
Accrued interest receivable |
|
|
28,245 |
|
|
|
41,337 |
|
Deferred financing costs, net |
|
|
6,923,169 |
|
|
|
7,287,536 |
|
Other receivables |
|
|
3,463,029 |
|
|
|
3,233,676 |
|
Building, furniture and equipment, net |
|
|
1,038,152 |
|
|
|
1,529,418 |
|
Income tax receivable |
|
|
|
|
|
|
5,592,370 |
|
Other assets |
|
|
2,633,072 |
|
|
|
692,730 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
518,314,042 |
|
|
$ |
932,641,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS (DEFICIT) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Notes payable, net of debt discount of $181,616 in 2010 and
$191,511 in 2009 |
|
$ |
1,340,838,509 |
|
|
$ |
1,367,199,323 |
|
Financing agreement |
|
|
|
|
|
|
1,000,000 |
|
Nonrecourse liability |
|
|
7,500,863 |
|
|
|
345,441,865 |
|
Accounts payable and accrued expenses |
|
|
9,454,136 |
|
|
|
4,466,779 |
|
Derivative liabilities, at fair value |
|
|
4,922,375 |
|
|
|
13,144,591 |
|
Income tax payable |
|
|
274,266 |
|
|
|
|
|
Terminated derivative liability |
|
|
8,200,000 |
|
|
|
8,200,000 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,371,190,149 |
|
|
|
1,739,452,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders (Deficit): |
|
|
|
|
|
|
|
|
Preferred stock, $.001 par value; authorized 3,000,000; issued none |
|
|
|
|
|
|
|
|
Common stock and additional paid-in capital, $.01 par value,
22,000,000 authorized shares; issued 8,034,795 and outstanding
8,028,795 at December 31, 2010, and issued 8,017,795 and outstanding
8,011,795 at December 31, 2009 |
|
|
20,588,782 |
|
|
|
22,067,763 |
|
Noncontrolling interest in subsidiary |
|
|
3,174,632 |
|
|
|
1,657,275 |
|
Accumulated other comprehensive (loss) |
|
|
(3,140,312 |
) |
|
|
(12,310,764 |
) |
Retained (deficit) |
|
|
(873,499,209 |
) |
|
|
(818,225,678 |
) |
|
|
|
|
|
|
|
Total stockholders (deficit) |
|
|
(852,876,107 |
) |
|
|
(806,811,404 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders (deficit) |
|
$ |
518,314,042 |
|
|
$ |
932,641,154 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-2
FRANKLIN CREDIT HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2010 AND 2009
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
REVENUES: |
|
|
|
|
|
|
|
|
Interest income |
|
$ |
27,167,218 |
|
|
$ |
58,098,774 |
|
Dividend income |
|
|
21,258,599 |
|
|
|
32,020,353 |
|
Purchase discount earned |
|
|
|
|
|
|
392,127 |
|
Gain on recovery from contractual loan purchase rights |
|
|
|
|
|
|
30,550,000 |
|
(Loss) on mortgage loans and real estate held for sale |
|
|
|
|
|
|
(282,593,653 |
) |
(Loss) on valuation of investments in trust certificates
and notes receivable held for sale |
|
|
|
|
|
|
(62,651,940 |
) |
Fair valuation adjustments |
|
|
(16,039,196 |
) |
|
|
(27,221,418 |
) |
Gain on sale of other real estate owned |
|
|
|
|
|
|
374,344 |
|
Servicing fees and other income |
|
|
9,360,021 |
|
|
|
6,276,769 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
41,746,642 |
|
|
|
(244,754,644 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
Interest expense |
|
|
69,426,256 |
|
|
|
74,279,677 |
|
Collection, general and administrative |
|
|
26,892,286 |
|
|
|
40,269,046 |
|
Provision for loan losses |
|
|
|
|
|
|
169,479 |
|
Amortization of deferred financing costs |
|
|
364,367 |
|
|
|
536,896 |
|
Depreciation |
|
|
598,735 |
|
|
|
646,410 |
|
|
|
|
|
|
|
|
Total expenses |
|
|
97,281,644 |
|
|
|
115,901,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) before provision for income taxes |
|
|
(55,535,002 |
) |
|
|
(360,656,152 |
) |
Income tax (benefit) |
|
|
(262,447 |
) |
|
|
(2,839,516 |
) |
|
|
|
|
|
|
|
Net (loss) |
|
|
(55,272,555 |
) |
|
|
(357,816,636 |
) |
Net income attributed to noncontrolling interest |
|
|
976 |
|
|
|
267,519 |
|
|
|
|
|
|
|
|
Net (loss) attributed to common stockholders |
|
$ |
(55,273,531 |
) |
|
$ |
(358,084,155 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) PER COMMON SHARE: |
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(6.89 |
) |
|
$ |
(44.74 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES |
|
|
|
|
|
|
|
|
Outstanding, basic and diluted |
|
|
8,020,016 |
|
|
|
8,003,420 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-3
FRANKLIN CREDIT HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS (DEFICIT)
YEARS ENDED DECEMBER 31, 2010 AND 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Common Stock and |
|
|
Noncontrolling |
|
|
Other |
|
|
Retained |
|
|
|
|
|
|
Additional Paid-in Capital |
|
|
Interest |
|
|
Comprehensive |
|
|
(Deficit)/ |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
in Subsidiary |
|
|
Loss |
|
|
Earnings |
|
|
Total |
|
BALANCE, JANUARY 1, 2009 |
|
|
8,024,295 |
|
|
$ |
23,383,120 |
|
|
$ |
|
|
|
$ |
(27,753,436 |
) |
|
$ |
(460,141,523 |
) |
|
$ |
(464,511,839 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
(12,500 |
) |
|
|
170,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170,633 |
|
Initial transfer of noncontrolling interest
in subsidiary |
|
|
|
|
|
|
(1,710,490 |
) |
|
|
1,710,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributed
to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
267,519 |
|
|
|
|
|
|
|
|
|
|
|
267,519 |
|
Non-dividend distribution |
|
|
|
|
|
|
224,500 |
|
|
|
(224,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interest distribution |
|
|
|
|
|
|
|
|
|
|
(96,234 |
) |
|
|
|
|
|
|
|
|
|
|
(96,234 |
) |
Amortization unrealized loss on derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,442,672 |
|
|
|
|
|
|
|
15,442,672 |
|
Net (loss) attributed to common shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(358,084,155 |
) |
|
|
(358,084,155 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2009 |
|
|
8,011,795 |
|
|
$ |
22,067,763 |
|
|
$ |
1,657,275 |
|
|
$ |
(12,310,764 |
) |
|
$ |
(818,225,678 |
) |
|
$ |
(806,811,404 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
17,000 |
|
|
|
37,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,400 |
|
Additional 10% transfer
of noncontrolling interest in subsidiary |
|
|
|
|
|
|
(1,516,381 |
) |
|
|
1,516,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributed
to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
976 |
|
|
|
|
|
|
|
|
|
|
|
976 |
|
Amortization unrealized loss on derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,170,452 |
|
|
|
|
|
|
|
9,170,452 |
|
Net (loss) attributed to common shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,273,531 |
) |
|
|
(55,273,531 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2010 |
|
|
8,028,795 |
|
|
$ |
20,588,782 |
|
|
$ |
3,174,632 |
|
|
$ |
(3,140,312 |
) |
|
$ |
(873,499,209 |
) |
|
$ |
(852,876,107 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2010, the total comprehensive loss amounted to $46.1 million,
which was comprised of the net loss of $55.3 million and amortization of the unrealized loss on
derivatives of $9.2 million. For the year ended December 31, 2009, the total comprehensive loss
amounted to $342.7 million, which was comprised of the net loss of $358.1 million and amortization
of the unrealized loss on derivatives of $15.4 million.
See Notes to Consolidated Financial Statements.
F-4
FRANKLIN CREDIT HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2010 AND 2009
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net (loss) attributed to common shareholders |
|
$ |
(55,273,531 |
) |
|
$ |
(358,084,155 |
) |
Adjustments to reconcile net (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Gain on sale of other real estate owned |
|
|
|
|
|
|
(374,344 |
) |
Depreciation |
|
|
598,735 |
|
|
|
646,410 |
|
Amortization of deferred costs and fees on originated loans, net |
|
|
|
|
|
|
48,215 |
|
Loss on mortgage loans and real estate held for sale |
|
|
|
|
|
|
282,593,653 |
|
Fair valuation adjustments |
|
|
16,039,196 |
|
|
|
27,221,418 |
|
Loss on valuation of investment in trust certificates and notes receivable held
for sale |
|
|
|
|
|
|
62,651,940 |
|
Principal collections on mortgage loans and real estate held for sale, net |
|
|
16,915,671 |
|
|
|
40,494,363 |
|
Paid in kind interest |
|
|
41,940,128 |
|
|
|
24,750,648 |
|
Proceeds from the sale of investment in trust certificates |
|
|
44,740,727 |
|
|
|
|
|
Proceeds from the sale of mortgage loans and real estate held for sale |
|
|
240,035,930 |
|
|
|
49,645,962 |
|
Reductions of nonrecourse liability, net |
|
|
(250,073,999 |
) |
|
|
(96,881,591 |
) |
Amortization of deferred financing costs |
|
|
364,367 |
|
|
|
536,896 |
|
Amortization of debt discount |
|
|
9,895 |
|
|
|
14,465 |
|
Stock-based compensation |
|
|
37,400 |
|
|
|
170,633 |
|
Purchase discount earned |
|
|
|
|
|
|
(392,127 |
) |
Provision for loan losses |
|
|
|
|
|
|
169,479 |
|
Noncontrolling interest in subsidiary |
|
|
976 |
|
|
|
267,519 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accrued interest receivable |
|
|
13,092 |
|
|
|
1,435,434 |
|
Other receivables |
|
|
(229,353 |
) |
|
|
3,794,658 |
|
Income tax receivable |
|
|
5,592,370 |
|
|
|
(3,465,780 |
) |
Other assets |
|
|
(1,940,342 |
) |
|
|
(185,269 |
) |
Taxes payable |
|
|
274,266 |
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
4,987,357 |
|
|
|
(10,590,092 |
) |
Derivative liabilities and accumulated other comprehensive (loss) |
|
|
948,236 |
|
|
|
833,828 |
|
Terminated derivate liability |
|
|
|
|
|
|
8,200,000 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
64,981,121 |
|
|
|
33,502,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Decrease in restricted cash |
|
|
204,446 |
|
|
|
25,279,066 |
|
Principal collections on notes receivable |
|
|
910,243 |
|
|
|
11,424,215 |
|
Principal collections on loans held for investment |
|
|
|
|
|
|
5,857,079 |
|
Proceeds from sale of other real estate owned |
|
|
|
|
|
|
19,227,015 |
|
Purchase of building, furniture and fixtures |
|
|
(107,469 |
) |
|
|
(6,201 |
) |
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
1,007,220 |
|
|
|
61,781,174 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-5
FRANKLIN CREDIT HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2010 AND 2009
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Principal payments of notes payable |
|
|
(62,310,837 |
) |
|
|
(97,447,754 |
) |
Repayment of notes payable |
|
|
(6,000,000 |
) |
|
|
(2,245,000 |
) |
Proceeds from financing agreements |
|
|
|
|
|
|
2,017,052 |
|
Principal payments of financing agreements |
|
|
(1,000,000 |
) |
|
|
(2,975,063 |
) |
Dividend distribution |
|
|
|
|
|
|
(96,234 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(69,310,837 |
) |
|
|
(100,746,999 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS |
|
|
(3,322,496 |
) |
|
|
(5,463,662 |
) |
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
|
|
15,963,115 |
|
|
|
21,426,777 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR |
|
$ |
12,640,619 |
|
|
$ |
15,963,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
|
Cash payments for interest |
|
$ |
19,512,721 |
|
|
$ |
45,118,607 |
|
|
|
|
|
|
|
|
Cash payments for taxes |
|
$ |
371,611 |
|
|
$ |
889,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITY: |
|
|
|
|
|
|
|
|
|
Transfers to other real estate owned |
|
$ |
|
|
|
$ |
20,566,414 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-6
FRANKLIN CREDIT HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
1. BASIS OF PRESENTATION AND BUSINESS
As used herein, references to the Company, Franklin Holding, we, our and us refer to
Franklin Credit Holding Corporation (FCHC), collectively with its subsidiaries; and, references
to FCMC refers to Franklin Credit Management Corporation, the Companys servicing business
subsidiary. References to Bosco I, Bosco II and Bosco III refer to Bosco Credit I, Bosco
Credit II and Bosco Credit III, respectively, each of which is a related-party entity.
Description of the Companys Business
Except for the mortgage servicing business conducted through FCMC, the business activities of
Franklin Credit Holding Corporation and its subsidiary companies following Franklins December 2008
corporate reorganization (the Reorganization) and the March 2009 debt restructuring (the
Restructuring) have principally consisted of making payments on the legacy indebtedness due to
The Huntington National Bank (the Bank or Huntington). Payments made on the Companys legacy
indebtedness (referred to as the Legacy Debt) are generally limited to the cash flows received from
the Banks trust in accordance with the March 2009 Restructuring, described below, and from the
dividends received form the preferred stock investment in the Banks real estate investment trust
(the Banks REIT or the REIT). As a result of the loan sales by the Banks trust in the third
quarter of 2010, the remaining principal source of payments on the legacy indebtedness is the
dividend on the investment in preferred stock in the Banks REIT, which was not declared or paid in
the third and fourth quarters of 2010.
As a result of the non-payment of dividends on the Companys investment in preferred stock of
the Banks REIT (the REIT Securities), the Companys revenue loss for the third and fourth
quarters of 2010 was approximately $21 million (pre-tax). The nonpayment of dividends for the six
months ended December 31, 2010 resulted in an increase in the Companys stockholders deficit for
the six months ended December 31, 2010. In February 2011, the Company was advised that the REIT
board in February 2011 declared dividends on the REIT Securities for the two quarterly periods
ended December 31 and September 30, 2010, and also declared a dividend for the full year of 2011.
The Company was advised that these declared dividends would be paid one business day after the
dividends are approved by the Banks regulator. See Note 20.
Prior to December 28, 2007, the Company was primarily engaged in the acquisition and
origination for portfolio, and servicing and resolution, of performing, reperforming and
nonperforming residential mortgage loans and real estate assets, including the origination of
subprime mortgage loans. We specialized in acquiring and originating loans secured by 1-4 family
residential real estate that generally fell outside the underwriting standards of Fannie Mae and
Freddie Mac and involved elevated credit risk as a result of the nature or absence of income
documentation, limited credit histories, higher levels of consumer debt or past credit
difficulties.
On December 28, 2007, the Company entered into a series of agreements (the Forbearance
Agreements) with the Bank whereby the Bank agreed to restructure approximately $1.93 billion of
the Companys indebtedness to it and its participant banks (the Legacy Debt), and in November
2007, the Company ceased to acquire or originate loans.
F-7
Since the Reorganization that took effect in December 2008 and the March 2009 Restructuring,
which did not include a portion of the Companys debt (the Unrestructured Debt), the Companys
operating business has been conducted solely through FCMC, a specialty consumer finance company
primarily engaged in the servicing and resolution of performing, reperforming and nonperforming
residential mortgage loans, including specialized loan collection and recovery servicing, and in
the due diligence, analysis, pricing and acquisition of residential mortgage portfolios, for third
parties.
As a result of the July and September 2010 transactions entered into with the Bank, described
below, and the sale to entities controlled by Thomas J. Axon, Chairman and President of the
Company, in July and in December 2010 (for the remaining loans held by the Banks Trust and a 50%
participation interest in each of the Banks commercial loans covering the Unrestructured Debt) to
the Company, the Company, through FCMC, provides servicing, collection and recovery services for
third parties, which to date have been primarily entities related to Mr. Axon (described below).
As of September 30, 2010, FCMC operates its servicing, collections and recovery business free of
pledges of its stock and free of significant restrictive covenants under the legacy credit
agreement (the Legacy Credit Agreement) with the Bank, which governs the substantial debt owed to
the Bank by subsidiaries of FCHC (the Legacy Debt), other than FCMC. See Note 12.
In conjunction with the September 2010 transaction agreements, FCHC transferred to Mr. Axon an
additional 10% of FCMCs outstanding shares of common stock. When combined with FCMC shares
already directly owned by Mr. Axon, the Chairman and President of the Company now directly owns 20%
of FCMC, while the remaining 80% of FCMC is owned by FCHC and indirectly by its public shareholders
(including Mr. Axon as a principal shareholder of FCHC). See Note 19.
December 2008 Reorganization
On December 19, 2008, the Company engaged in a series of transactions (the Reorganization) in
which the Company (i) adopted a holding company form of organizational structure, with Franklin
Holding serving as the new public-company parent, (ii) transferred all of the equity and membership
interests in FCMCs direct subsidiaries to other entities in the reorganized corporate structure of
the Company, (iii) assigned legal record ownership of any loans in the Companys portfolios held
directly by FCMC and other subsidiary companies to other entities in the reorganized corporate
structure of the Company, and (iv) amended its loan agreements with the Bank.
Franklin Credit Holding Corporation is the successor issuer to Franklin Credit Management
Corporation (FCMC), and FCMC ceased to have portfolios of loans and real estate properties and the
related indebtedness to the Bank and became the Companys servicing business subsidiary.
March 2009 Restructuring
Effective March 31, 2009, Franklin Holding, and its consolidated subsidiaries, including FCMC,
entered into a series of agreements (collectively, the Restructuring Agreements) with the Bank
pursuant to which (i) the Companys loans, pledges and guarantees under the Legacy Credit Agreement
with the Bank and its participating banks were substantially restructured, (ii) substantially all
of the Companys portfolio of subprime mortgage loans and owned real estate was transferred to the
Banks trust (with the loans and owned real estate transferred to the Banks trust collectively
referred to herein as the Portfolio) in exchange for trust certificates, with certain trust
certificates, representing an undivided interest in approximately 83% of the Portfolio, transferred
in turn by the Company to a real estate investment trust wholly-owned by the Bank (the
Banks Trust or the Trust), (iii) FCMC and Franklin Holding entered into a new credit
facility with the Bank (the Licensing Credit Agreement), and (iv) FCMC entered into a servicing
agreement (the Legacy Servicing Agreement) with the Banks Trust (the preceding collectively
referred to herein as the Restructuring).
F-8
The March 2009 Restructuring did not include a portion of the Companys debt, which as of
December 31, 2010 totaled approximately $39 million (the Unrestructured Debt). The
Unrestructured Debt remains subject to the original terms of the Forbearance Agreement entered into
with the Bank in December 2007 and subsequent amendments thereto and the Companys 2004 master
credit agreement with Huntington. At subsequent times during 2009 and on January 7, 2011, the Bank
extended the term of forbearance period, which is now until September 30, 2011.
The Bank has agreed to forbear with respect to any defaults past or present with respect to
any failure to make scheduled principal and interest payments to the Bank (Identified Forbearance
Default) relating to the Unrestructured Debt. The Bank, absent the occurrence and continuance of
a forbearance default other than an Identified Forbearance Default, has agreed not to initiate
collection proceedings or exercise its remedies in respect of the Unrestructured Debt or elect to
have interest accrue at the stated rate applicable after default. FCMC is not obligated to the
Bank with respect to the Unrestructured Debt and any references to FCMC in the Companys 2004
master credit agreement governing the Unrestructured Debt have been amended to refer to Franklin
Asset.
Upon expiration of the forbearance period, in the event that the Unrestructured Debt with the
Bank remains outstanding (currently $39.0 million), the Bank, with notice, has the right to call an
event of default under the Legacy Credit Agreement, but not the Licensing Credit Agreement and the
Servicing Agreement, which do not include cross-default provisions that would be triggered by such
an event of default under the Legacy Credit Agreement. The Banks recourse in respect of the
Legacy Credit Agreement is limited to the assets and stock of Franklin Holdings subsidiaries,
excluding the assets and stock of FCMC (except for a second-priority lien of the Bank on $7.5
million of cash collateral held as security under the Licensing Credit Agreement).
Although the transfer of the trust certificates, representing approximately 83% of the
Portfolio, to the REIT was structured in substance as a sale of financial assets, the transfer was
treated as a secured financing in accordance with accounting principles generally accepted in the
United States of America (GAAP), pursuant to the provisions of applicable Accounting Standards
Codification Topic 860, Transfers and Servicing (ASC Topic 860), because for accounting purposes
the requisite level of certainty that the transferred assets were legally isolated from the Company
and put presumptively beyond the reach of the Company and its creditors, including in a bankruptcy
proceeding, was not achieved. Therefore, the mortgage loans and real estate assets remained on the
Companys balance sheet classified as Mortgage loans and real estate held for sale securing a
Nonrecourse liability in an equal amount.
Because the loans transferred by the Company to the Trust had continued to be included on the
Companys consolidated balance sheet, the revenues from such loans were reflected in the Companys
consolidated results, in accordance with GAAP, notwithstanding the fact that trust certificates
representing an undivided interest in approximately 83% of the Portfolio were transferred to
Huntington in the March 2009 Restructuring. Accordingly, except for and effective with the sale of
Huntington loans sold in the third and fourth quarters of 2010, the fees received from Huntington
subsequent to March 31, 2009 for servicing their loans, and the third party costs incurred by us in
the servicing and collection of their loans and reimbursed by Huntington, for purposes of these
Consolidated Financial Statements were not recognized as servicing fees
and reimbursement of third party servicing costs, but instead as additional interest and other
income earned with additional offsetting expenses in an equal amount as if the Company continued to
own the loans.
F-9
See Note 12 for a description of the March 2009 Restructuring.
Third and Fourth Quarter 2010 Loan Sales
During the quarters ended September 30 and December 31, 2010, the Company and FCMC, its
servicing business subsidiary, entered into a series of transactions with Huntington facilitating
sales by the Banks Trust to third parties of substantially all of the loans underlying the trust
certificates issued by the Trust in the March 2009 Restructuring. These loan sales, described
below, were effective in July and September (referred to as the July Loan Sale and the September
Loan Sale and collectively, the Loan Sales) and December 2010 (referred to as the December Loan
Sale).
As a result of the third and fourth quarter loan sales by the Banks Trust, the transfer by
the Company in March 2009 of 83% of trust certificates in the Trust, representing an 83% interest
in the Trust, to the Banks REIT that has been accounted for as a secured financing in accordance
with generally accepted accounting principles (GAAP), as of the effective dates of the loan sales
are accounted for as sales of loans in accordance with GAAP, to the extent of the loans sold by the
Banks Trust. The sales of the loans by the Banks Trust also have resulted in treating
substantially all of the loans represented by the remaining 17% in trust certificates held by the
Company as sold, to the extent of the loans sold by the Banks Trust, in accordance with GAAP.
Accordingly, the fees received from Huntington subsequent to March 31, 2009 and through June 30,
2010 and during the quarter ended September 30, 2010 for servicing their loans up to the respective
effective dates of the July Loan Sale and the September Loan Sale, and during the quarter ended
December 31, 2010 up to the respective effective date of the December Loan Sale, and the
third-party costs incurred by us in the servicing and collection of their loans and reimbursed by
Huntington, for purposes of these Consolidated Financial Statements were not recognized as
servicing fees and reimbursement of third-party servicing costs, but instead as additional interest
and other income earned, with offsetting expenses in an equal amount, as if the Company owned and
self serviced the loans.
The treatment of the Loan Sales and the December Loan Sale to the extent of the 83%
represented by the trust certificates held by the Banks REIT in the quarters ended September 30
and December 31, 2010 as a sale of financial assets did not affect the cash flows of the Company or
its reported net income. However, the treatment of the Loan Sales and the December Loan Sale to
the extent of the 17% represented by the trust certificates held by the Company in the quarters
ended September 30 and December 31, 2010, which also were treated as sales of financial assets, did
affect the Companys cash flows and reported net income.
The net proceeds from the Loan Sales and the December Loan Sale were distributed to the
certificate holders of the Trust on a pro rata basis by percentage interest. Accordingly,
approximately 17% of the net proceeds were applied to pay down the Legacy Debt owed to the Bank, as
83% of the trust certificates were held by the Banks REIT, and the Companys investment in REIT
securities (which are not marketable) is realized only through declared and paid dividends (which
were suspended a few days after the July Loan Sale and throughout the remainder of 2010) or a
redemption of the securities by the REIT. See Note 20.
See Note 12 for a description of the Loan Sales and the December Loan Sale.
F-10
Going Concern
The Company since September 30, 2007 has been and continues to be operating with significant
operating losses and stockholders deficit. In addition, the Companys Legacy Debt is
significantly greater than its remaining earning assets, and, therefore, the Company will not be
able to pay off the outstanding balance of debt due to the Bank, which at December 31, 2010 was
$1.341 billion. Any event of default under the March 2009 Restructuring Agreements, as amended, or
failure to successfully renew these Restructuring Agreements or enter into new credit facilities
with Huntington prior to their scheduled maturity, could entitle Huntington to declare the
Companys indebtedness immediately due and payable. Without the continued cooperation and
assistance from Huntington, the consolidated Franklin Holdings ability to continue as a viable
business is in substantial doubt, and it may not be able to continue as a going concern.
The Company had a net loss attributed to common stockholders of $55.3 million for the twelve
months ended December 31, 2010, compared with a net loss of $358.1 million for the twelve months
ended December 31, 2009. The Company had a loss per common share for the twelve months ended
December 31, 2010 of $6.89 both on a diluted and basic basis, compared to a loss per common share
of $44.74 on both a diluted and basic basis for the twelve months ended December 31, 2009. At
December 31, 2010 and 2009, the Companys stockholders deficit was $852.9 million and $806.8
million, respectively.
Licenses to Service Loans
On September 9, 2010, the New York State Banking Department (the Banking Department) found
the capital plan submitted by FCMC on May 12, 2010 (to address how FCMC would achieve compliance
with regulatory net worth requirements that were adopted in New York State in 2009 for mortgage
servicers) to be satisfactory and acceptable for processing the application of FCMC to continue to
service residential mortgage loans in that state and granted a twelve-month waiver of otherwise
applicable net worth requirements. FCMCs capital plan includes in relevant part a commitment,
until FCMC is in full compliance with the net worth requirements for mortgage servicers in New York
State, to (i) meet regulatory net worth requirements as soon as practicable but in no event later
than December 31, 2012 through the retention of net earnings and dividend restrictions, (ii)
maintain an interim adjusted net worth (as adjusted and calculated by the Banking Department (see
below), the Adjusted Net Worth) until FCMC complies with regulatory net worth requirements of not
less than approximately $7.9 million (Minimum Level), and not less than 5% of the principal
balance of New York mortgage loans serviced by FCMC and 0.25% of the aggregate mortgage loans
serviced in the United States (with each such percentage a Minimum Percentage), (iii) not,
without the prior written consent of the Banking Department, service additional mortgage loans
secured by 1-4 family residential homes located in New York State, (iv) not declare or pay any
dividends upon the shares of its capital stock, and (v) submit quarterly reports on the total
number of and principal balance of loans serviced and its Adjusted Net Worth. Under the terms of
the capital plan, in the event that FCMCs Adjusted Net Worth falls below the Minimum Level or is
less in percentage terms than either of the Minimum Percentages, FCMC shall promptly notify the
Banking Department and (i) within 90 days cure the deficiency or (ii) within 90 days submit a
written plan acceptable to the superintendent of the Banking Department describing the primary
means and timing by which the Minimum Level or Minimum Percentages, as applicable, will be
achieved.
F-11
The emergency regulations, which were adopted by the New York State Superintendent of Banks
and which implement the statutory registration requirement for mortgage servicers in New York State
that went into effect on July 1, 2009, require (i) an Adjusted Net Worth of at least 1% of the
outstanding principal balance of aggregate mortgage loans serviced (whether or not in New York),
but in any event not less than
$250,000; and, (ii) a ratio of Adjusted Net Worth to the outstanding principal balance of New
York mortgage loans serviced of at least 5%. Adjusted Net Worth, as defined under the
Superintendents emergency regulations, consists of total equity capital at the end of the
reporting period as determined by GAAP less: goodwill, intangible assets (excluding mortgage
servicing rights), any assets pledged to secure obligations of a person other than the applicant,
any assets due from officers or stockholders of the applicant or related companies; that portion of
any marketable securities (listed or unlisted) not shown at lower of cost or market; any amount in
excess of the lower of cost or market value of mortgages in foreclosure, construction loans or
property acquired through foreclosure, and any amount shown on the balance sheet as investments in
unconsolidated joint ventures, subsidiaries, affiliates, and/or other related companies that is
greater than the value of such investments accounted for using the equity method of accounting.
At December 31, 2010, FCMCs Adjusted Net Worth was approximately $7.5 million, or
approximately 0.59% of the aggregate principal balance of loans serviced nationwide and 8.25% for
loans serviced in New York. FCMCs requirement under its capital plan with the Banking Department
is to maintain not less than $7.9 million in Adjusted Net Worth and not less than 0.25% of the
aggregate principal balance of loans serviced nationwide and 5% for loans serviced in New York.
Following the receipt of payments in January 2011 from related companies for servicing receivables
outstanding at December 31, 2010, FCMC was back in compliance with the Minimum Level under its
capital plan.
The Companys common stock is quoted under the stock symbol FCMC.OB on the OTC Bulletin
Board.
Basis of Presentation
The Consolidated Financial Statements include the accounts of the Company and its wholly-owned
and majority-owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. These Consolidated Financial Statements include all normal and
recurring adjustments that management believes necessary for a fair presentation. The preparation
of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. The
Companys estimates and assumptions primarily arise, as of the March 31, 2009 Restructuring, from
uncertainties and changes associated with interest rates, credit exposure and fair market values of
its Investment in trust certificates at fair value and its Mortgage loans and real estate held for
sale. Although management is not currently aware of any factors that would significantly change
its estimates and assumptions in the near term, future changes in market trends, market values and
interest rates and other conditions may occur that could cause actual results to differ materially.
As of March 31, 2009, due to the Restructuring, the Company no longer had separate reportable
operating segments. Subsequent to the date of the Restructuring, the Companys only principal
business activity is servicing portfolios of loans for third parties, which because of the
accounting treatment of the Restructuring have not been reflected in the Consolidated Financial
Statements until the effective dates of the Loan Sales and the December Loan Sale.
F-12
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In June 2009, the Financial Accounting Standards Board (FASB) issued FASB Accounting
Standards Codification (ASC) 105, which established the FASB ASC as the sole source of
authoritative GAAP. Pursuant to the provisions of FASB ASC 105, the Company has updated references
to GAAP in these financial statements. The adoption in 2009 of FASB ASC 105 in 2009 did not impact
the Companys financial position or results of operations.
Noncontrolling Interest The Company accounts for a 20% equity interest in FCMC to a related
party in accordance with Topic 810, Consolidations, applying consolidation accounting under
Accounting Research Bulletin No. 51, Consolidated Financial Statements (ARB 51).
Loss Per Share Basic and diluted net loss per share is calculated by dividing net loss
attributed to common stockholders by the weighted average number of common shares outstanding
during the period. The effects of warrants, restricted stock units and stock options are excluded
from the computation of diluted earnings per common share in periods in which the effect would be
antidilutive. Dilutive potential common shares are calculated using the treasury stock method.
For the years ended December 31, 2010 and 2009, 229,000 and 301,000 stock options, respectively,
were not included in the computation of net loss per share because they were antidilutive.
Cash and Cash Equivalents Cash and cash equivalents includes cash held at banks and
certificates of deposit with original maturities of three months or less (when purchased), with the
exception of restricted cash, which is reported separately on the Companys balance sheets. The
Company maintains accounts at banks, which at times may exceed federally insured limits. The
Company has not experienced and does not expect to incur any losses from such concentrations.
Restricted Cash Restricted cash includes interest and principal collections received on the
Companys portfolio of notes receivable and loans held for investment prior to the 2009
Restructuring that is being held in reserve by the Bank, substantially all of which is required to
pay down the Legacy Debt obligations with the Bank.
Investment in REIT Securities Investment in REIT securities includes preferred and common
stocks of the Huntington REIT. Investment in preferred and common stock of the REIT, which cannot
be sold or redeemed by the Company, is classified at the date of purchase as non-marketable and
carried at cost, and periodically assessed for other than temporary impairment. The investment in
common stock of the REIT of approximately $4.9 million is carried at cost. The Company owns 4,724
shares of REIT preferred stock and 154 shares of common stock of the REIT.
Investment in Trust Certificates Investment in trust certificate, representing
approximately 17% of the Portfolio not transferred to the Banks REIT in the March 2009
Restructuring, is classified at the date of purchase as available for sale, and the fair value
adjustment at March 31, 2009 was recorded as Loss on valuation of trust certificates and notes
receivable held for sale. Investment in trust certificates is carried at fair market value, and
the certificates are valued as of the end of each reporting period. Subsequent to March 31, 2009,
changes in fair value are recorded in earnings as Fair valuation adjustments. The fair value of
the trust certificates is based on an assessment of the underlying investment, expected cash flows
and other market-based information, and where observable market prices and other data are not
available for similar investments, pricing models or discounted cash flow analyses, using
observable market data where available,
are utilized to estimate fair market value. At December 31, 2010, the Investment in trust
certificates consisted solely of real estate properties acquired through foreclosure.
F-13
Mortgage Loans and Real Estate Held for Sale As part of the March 2009 Restructuring, trust
certificates representing approximately 83% of the Portfolio was transferred to the REIT and such
loans and owned real estate (acquired through foreclosure) are classified as held for sale. As a
result, a loss on the transfer was recorded as (Loss) on mortgage loans and real estate held for
sale. Subsequent to March 31, 2009, Mortgage loans and real estate held for sale are carried at
the lower of cost or market value. Because the transfer has been accounted for as a secured
financing in accordance with GAAP, Topic 860, (based solely on the assertion that the transferred
assets have not been legally isolated from the Company and put presumptively beyond the reach of
the Company and its creditors, even in bankruptcy), the mortgage loans and real estate remain on
the Companys balance sheet classified as Mortgage loans and real estate held for sale and with a
Nonrecourse liability also recorded on the balance sheet in an equal amount. The fair value of the
Mortgage loans and owned real estate held for sale is based on an assessment of the underlying
residential 1-4 family mortgage loans and real estate, expected cash flows and other market-based
information, and where observable market prices and other data are not available for similar loans,
pricing models or discounted cash flow analyses, using observable market data where available, are
utilized to estimate market value. Mortgage loans and real estate held for sale are valued as of
the end of each reporting period, and changes in fair value are recorded in earnings as Fair
valuation adjustments. At December 31, 2010, the Mortgage loans and real estate held for sale
consisted solely of real estate properties acquired through foreclosure.
Nonrecourse Liability The nonrecourse liability is the offset to, and is secured by, the
Mortgage loans and real estate held for sale. The Company elected the fair value option for the
nonrecourse liability, and adjustments to fair value are recorded as Fair valuation adjustments.
No interest expense is recorded on the Nonrecourse liability as any payments received from the
Trust on the trust certificates, comprising the Mortgage loans and real estate held for sale, are
recorded as a reduction to the balance of the Nonrecourse liability, which is adjusted to fair
value each quarter through the Fair valuation adjustments line item.
Fair Valuation Adjustments Fair valuation adjustments include amounts subsequent to March
31, 2009 related to adjustments in the fair value of the Investment in trust certificates and the
Nonrecourse liability, and adjustments to the lower of cost or market related to Mortgage loans and
real estate held for sale, and for losses on sales of real estate owned.
Notes Receivable Held for Sale, Net At March 31, 2009, as part of the March 2009
Restructuring, Notes receivable held for sale, net, which represent the loans and assets that
collateralize the Unrestructured Debt, are classified as held for sale as this portfolio is from
time to time actively marketed for sale, and a lower of cost or market value was recorded as Loss
on valuation of investments in trust certificates and Notes receivable held for sale, net.
Subsequent to March 31, 2009, the fair value of the Notes receivable held for sale, net is based on
an assessment of the underlying residential 1-4 family mortgage loans, expected cash flows and
other market-based information, and where observable market prices and other data are not available
for similar loans, pricing models or discounted cash flow analyses, using observable market data
where available, are utilized to estimate market value. Notes receivable held for sale, net are
valued as of the end of each reporting period, and changes in fair value are recorded as Fair
valuation adjustments.
F-14
Income Recognition on Investment in Trust Certificates and Mortgage Loans and Real Estate Held
for Sale Income on the mortgage loans and real estate collateralizing the Investment in trust
certificates and the Mortgage loans and real estate held for sale is estimated based on the
available information on these loans
and real estate provided by the Bank and from the loans serviced for the Trust. The estimated
income on the Mortgage loans and real estate held for sale does not represent cash received and
retained by the Company and is essentially offset through a valuation adjustment of the Nonrecourse
liability. During the second quarter of 2009, the Company revised its interest accrual policy to
accrue only one month of interest on performing loans (loans that are contractually current).
Derivatives As part of the Companys interest-rate risk management process, we entered into
and interest rate swap agreements in 2008. In accordance with Topic 815, Derivatives and Hedging
(Topic 815), as amended and interpreted, derivative financial instruments are reported on the
consolidated balance sheets at their fair value.
The Companys management of interest-rate risk predominantly included the use of plain-vanilla
interest-rate swaps to synthetically convert a portion of its London Interbank Offered Rate
(LIBOR)-based variable-rate debt to fixed-rate debt. In accordance with Topic 815, derivative
contracts hedging the risks associated with expected future cash flows are designated as cash flow
hedges. The Company formally documents at the inception of its hedges all relationships between
hedging instruments and the related hedged items, as well as its interest risk management
objectives and strategies for undertaking various accounting hedges. Additionally, we use
regression analysis at the inception of the hedge and for each reporting period thereafter to
assess the derivatives hedge effectiveness in offsetting changes in the cash flows of the hedged
items. The Company discontinues hedge accounting if it is determined that a derivative is not
expected to be or has ceased to be highly effective as a hedge, and then reflects changes in the
fair value of the derivative in earnings. All of the Companys interest-rate swaps qualify for
cash flow hedge accounting, and are so designated.
In conjunction with the Restructuring, and at the request of the Bank, effective March 31,
2009, the Company exercised its right to terminate two non-amortizing fixed-rate interest-rate
swaps with the Bank, with an aggregate notional amount of $390 million. The total termination fee
for cancellation of the swaps was $8.2 million, which is payable only to the extent cash is
available under the waterfall provisions of the Legacy Credit Agreement, and only after the first
$837.9 million of debt (the amount designated as tranche A debt as of March 31, 2009) owed to the
Bank has been paid in full. The carrying value included in Accumulated other comprehensive loss
(AOCL) within stockholders deficit related to the terminated hedges is amortized to earnings
over time. See Note 20.
Changes in the fair value of derivatives designated as cash flow hedges, in our case the
swaps, are recorded in AOCL within stockholders equity to the extent that the hedges are
effective. Any hedge ineffectiveness is recorded in current period earnings as a part of interest
expense. If a derivative instrument in a cash flow hedge is terminated, the hedge designation is
removed, or the hedge accounting criteria are no longer met, the Company will discontinue the hedge
relationship.
As of December 31, 2008, the Company removed the hedge designations for its cash flow hedges.
As a result, the Company continues to carry the December 31, 2008 balance related to these hedges
in AOCL unless it becomes probable that the forecasted cash flows will not occur. The balance in
AOCL is being amortized to earnings as part of interest expense in the same period or periods
during which the hedged forecasted transaction affects earnings.
Fair Value Measurements Topic 820, Fair Value Measurements and Disclosures, establishes a
three-tier hierarchy for fair value measurements based upon the transparency of the inputs to the
valuation of an asset or liability and expands the disclosures about instruments measured at fair
value. A financial
instrument is categorized in its entirety and its categorization within the hierarchy is based
upon the lowest level of input that is significant to the fair value measurement.
F-15
Fair values for over-the-counter interest rate contracts are determined from market observable
inputs, including the LIBOR curve and measures of volatility, used to determine fair values are
considered Level 2, observable market inputs. Fair values for certain investments (Level 3 assets)
are determined using pricing models, discounted cash flow methodologies or similar techniques and
at least one significant model assumption or input is unobservable.
Building, Furniture and Equipment Building, furniture and equipment, including leasehold
improvements, is recorded at cost net of accumulated depreciation and amortization. Depreciation
is computed using the straight-line method over the estimated useful lives of the assets, which
range from 3 to 40 years. Amortization of leasehold improvements is computed using the
straight-line method over the lives of the related leases or useful lives of the related assets,
whichever is shorter. Maintenance and repairs are expensed as incurred.
Deferred Financing Costs Deferred financing costs, which include origination fees incurred
in connection with obtaining term loan financing from our banks prior to November 2007 (the Legacy
Debt), are deferred and are amortized over the term of the related loans (the Legacy Debt).
Income Taxes Income taxes are accounted for under Topic 740, Accounting for Income Taxes
(Topic 740), which requires an asset and liability approach in accounting for income taxes. This
method provides for deferred income tax assets or liabilities based on the temporary difference
between the income tax basis of assets and liabilities and their carrying amount in the
Consolidated Financial Statements. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when
management determines that it is more likely than not that some portion or all of the benefit of
the deferred tax assets will not be realized in future years. Deferred tax assets and liabilities
are adjusted for the effects of changes in tax laws and rates on the date of the enactment of the
changes.
Servicing Fees and Other Income Servicing fees and other income consists of fees for
servicing loans and providing collection and recovery services for third parties, due diligence and
other servicing-related fees for services provided to third parties, late charges, prepayment
penalties and other miscellaneous income. Servicing fees and other income are recognized
principally on an accrual basis.
Dividend Income Dividend income consists of payments received from the Investment in REIT
securities, which the Company received in exchange for the trust certificates that were transferred
to the Banks REIT on March 31, 2009. Dividend income is recognized on an accrual basis. See Note
20.
Fair Value of Financial Instruments Topic 825, Financial Instruments (Topic 825) requires
disclosure of fair value information of financial instruments, whether or not recognized in the
balance sheets, for which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that regard, the derived fair value estimates
cannot be substantiated by comparison to independent markets and, in many cases, could not be
realized in immediate settlement of the instruments. Topic 825 excludes
certain financial instruments and all non-financial assets and liabilities from its disclosure
requirements. Accordingly, the aggregate fair value amounts do not represent the underlying value
of the Company.
F-16
The methods and assumptions used by the Company in estimating the fair value of its financial
instruments at December 31, 2010 and 2009 were as follows:
|
a. |
|
Cash, Restricted Cash, Accrued Interest Receivable, Other Receivables and
Accounts Payable and Accrued Expenses The carrying values reported in the
consolidated balance sheets are a reasonable estimate of fair value. |
|
b. |
|
Investment in Trust Certificates, Mortgage Loans and Real Estate Held for Sale,
and Notes Receivable Held for Sale These investments are carried at estimated fair
values. |
|
c. |
|
Investment in REIT Securities The book value of the Investment in REIT
securities approximates the fair value for these non-marketable securities (based on
the approximate value of the underlying assets of the REIT). |
|
d. |
|
Short-term Borrowings (Financing Agreement) The interest rates on short-term
borrowings reset on a monthly basis; therefore, the carrying amounts of these
liabilities approximate their fair value. |
|
e. |
|
Long-term Debt (Notes Payable) the fair value of long-term debt is estimated
to be equal to the fair value of the REIT securities, Investment in trust certificates,
Notes receivable held for sale and pledged cash of $7.5 million (in aggregate, the
collateral for the long-term debt), which approximated $497 million at December 31,
2010. |
Stock-Based Compensation Plans The Company maintains share-based payment arrangements under
which employees are awarded grants of restricted stock, non-qualified stock options, incentive
stock options and other forms of stock-based payment arrangements. Effective January 1, 2006, the
Company adopted the fair value recognition provisions of Topic 718 (revised 2004), Share-Based
Payment, (Topic 718) using the modified-prospective transition method. Under this transition
method, compensation cost recognized beginning January 1, 2006 includes compensation cost for all
share-based payment arrangements issued, but not yet vested as of December 31, 2005, based on the
grant date fair value and expense attribution methodology determined in accordance with the
original provisions of Topic 718. Compensation cost for all share-based payment arrangements
granted subsequent to December 31, 2005, is based on the grant-date fair value estimated in
accordance with the provisions of Topic 718. In addition, the effect of forfeitures on restricted
stock (if any), is estimated when recognizing compensation cost. Prior to adoption of Topic 718,
the Company presented all tax benefits of deductions resulting from the exercise of stock options
as operating cash flows in the Statement of Cash Flows. Topic 718 requires the cash flows
resulting from the tax benefits of tax deductions in excess of the compensation cost recognized for
those options (excess tax benefits) to be classified as financing cash flows.
Recent Accounting Pronouncements The Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) 2009-16, Transfers and Servicing (Topic 860) Accounting for
Transfers of Financial Assets (ASU 2009-16). ASU 2009-16 requires more information about
transfers of financial assets, including securitization transactions, eliminates the concept of a
qualifying special-purpose entity and changes the requirements for derecognizing financial assets.
ASU 2009-16 is effective at the start
of a reporting entitys first fiscal year beginning after November 15, 2009. The adoption of
this standard did not have any impact on the Companys consolidated financial position and results
of operations.
F-17
In January 2011, the FASB issued ASU No. 2011-01, Receivables (Topic 310): Deferral of the
Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20 (ASU
2011-01). The amendments in ASU 2011-01 temporarily delay the effective date of the disclosures
about troubled debt restructurings in ASU No. 2010-20, Receivables (Topic 310): Disclosures about
the Credit Quality of Financing Receivables and the Allowance for Credit Losses, for public
entities. The delay is intended to allow the FASB time to complete its deliberations on what
constitutes a troubled debt restructuring. The effective date of the new disclosures about
troubled debt restructurings for public entities and the guidance for determining what constitutes
a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to
be effective for interim and annual periods ending after June 15, 2011. The adoption of this
standard is not expected to have any material impact on the Companys consolidated financial
position and results of operations.
On July 21, 2010, the FASB issued ASU No. 2010-20, Disclosures About the Credit Quality of
Financing Receivables and the Allowance for Credit Losses, which amends ASC 310, Receivables, by
requiring more robust and disaggregated disclosures about the credit quality of an entitys
financing receivables and its allowance for credit losses. The objective of enhancing these
disclosures is to improve financial statement users understanding of (1) the nature of an entitys
credit risk associated with its financing receivables and (2) the entitys assessment of that risk
in estimating its allowance for credit losses as well as changes in the allowance and the reasons
for those changes.
The new and amended disclosures that relate to information as of the end of a reporting period
will be effective for the first interim or annual reporting periods ending on or after December 15,
2010. That is, for calendar-year-end public entities, like the Company, most of the new and
amended disclosures in the ASU would be effective for this year-end reporting season. However, the
disclosures that include information for activity that occurs during a reporting period will be
effective for the first interim or annual periods beginning after December 15, 2010. Those
disclosures include (1) the activity in the allowance for credit losses for each period and (2)
disclosures about modifications of financing receivables. For calendar-year-end public entities,
like the Company, those disclosures would be effective for the first quarter of 2011. The adoption
of this standard is not expected to have a material impact on the Companys consolidated financial
position and results of operations.
In April 2010, the FASB issued ASU 2010-12, Income Taxes, (Topic 740) Accounting for Certain
Tax Effects of the Health Care Reform Acts (ASU 2010-12). On March 30, 2010, the President of
the United States signed the Health Care and Education Reconciliation Act of 2010, which is a
reconciliation bill that amends the Patient Protection and Affordable Act that was signed on March
23, 2010 (collectively, the Acts). ASU 2010-12 allows entities to consider the two Acts together
for accounting purposes. The Company does not expect the adoption of this standard to have any
impact on the Companys consolidated financial position and results of operations.
In March 2010, the FASB issued ASU No. 2010-11, which is included in the Codification under
ASC 815, Derivatives and Hedging. This update clarifies the type of embedded credit derivative
that is exempt from embedded derivative bifurcation requirements. Only an embedded credit
derivative that is related to the subordination of one financial instrument to another qualifies
for the exemption. This guidance is effective for interim and annual reporting periods beginning
January 1, 2010. The adoption of this standard did not have any impact on the Companys
consolidated financial position and results of operations.
F-18
In February 2010, the FASB issued ASU 2010-10, Consolidation (Topic 810) (Topic 810). The
amendments to the consolidation requirements of Topic 810 resulting from the issuance of Statement
167 are deferred for a reporting entitys interest in an entity (1) that has all the attributes of
an investment company or (2) for which it is industry practice to apply measurement principles for
financial reporting purposes that are consistent with those followed by investment companies. An
entity that qualifies for the deferral will continue to be assessed under the overall guidance on
the consolidation of variable interest entities in Subtopic 810-10 (before the Statement 167
amendments) or other applicable consolidation guidance, such as the guidance for the consolidation
of partnerships in Subtopic 810-20. The deferral is effective as of the beginning of a reporting
entitys first annual period that begins after November 15, 2009, and for interim periods within
that first annual reporting period, which coincides with the effective date of Statement 167.
Early application is not permitted. The adoption of this standard did not have any impact on the
Companys consolidated financial position and results of operations.
In February 2010, the FASB issued ASU 2010-09, Subsequent Events (Topic 855) Amendments to
Certain Recognition and Disclosure Requirement (ASU 2010-09). ASU 2010-09 requires an entity
that is an SEC filer to evaluate subsequent events through the date that the financial statements
are issued and removes the requirement that an SEC filer disclose the date through which subsequent
events have been evaluated. ASC 2010-09 was effective upon issuance. The adoption of this
standard had no effect on the Companys consolidated financial position or results of operations.
In February 2010, the FASB issued ASU 2010-08, Technical Corrections to Various Topics. This
amendment eliminated inconsistencies and outdated provisions and provided the needed clarifications
to various topics within Topic 815. The amendments are effective for the first reporting period
(including interim periods) beginning after issuance (February 2, 2010), except for certain
amendments. The amendments to the guidance on accounting for income taxes in reorganization
(Subtopic 852-740) should be applied to reorganizations for which the date of the reorganization is
on or after the beginning of the first annual reporting period beginning on or after December 15,
2008. For those reorganizations reflected in interim financial statements issued before the
amendments in this Update are effective, retrospective application is required. The clarifications
of the guidance on the embedded derivates and hedging (Subtopic 815-15) are effective for fiscal
years beginning after December 15, 2009, and should be applied to existing contracts (hybrid
instruments) containing embedded derivative features at the date of adoption. The adoption of this
standard did not have any impact on the Companys consolidated financial position and results of
operations.
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic
820): Improving Disclosures about Fair Value Measurements (ASU 2010-06). This ASU requires some
new disclosures and clarifies some existing disclosure requirements about fair value measurement as
set forth in Codification Subtopic 820-10. ASU 2010-06 amends Codification Subtopic 820-10 and now
requires a reporting entity to use judgment in determining the appropriate classes of assets and
liabilities and to provide disclosures about the valuation techniques and inputs used to measure
fair value for both recurring and nonrecurring fair value measurements. ASU 2010-06 is effective
for interim and annual reporting periods beginning after December 15, 2009. As this standard
relates specifically to disclosures, the adoption did not have an impact on the Companys
consolidated financial position and results of operations.
F-19
In January 2010, the FASB issued ASU 2010-01, Equity (Topic 505): Accounting for Distributions
to Shareholders with Components of Stock and Cash (ASU 2010-01). This ASU clarifies that the
stock portion of a distribution to shareholders that allows them to elect to receive cash or stock
with a potential limitation on the total amount of cash that all shareholders can elect to receive
in the aggregate is considered a
share issuance that is reflected in earnings per share prospectively and is not a stock
dividend. ASU 2010-01 is effective for interim and annual periods ending on or after December 15,
2009, and should be applied on a retrospective basis. The adoption of this standard did not have
any impact on the Companys consolidated financial position and results of operations.
In December 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810) Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities (ASU 2009-17). ASU
2009-17 changes how a reporting entity determines when an entity that is insufficiently capitalized
or is not controlled through voting (or similar rights) should be consolidated. This determination
is based on, among other things, the other entitys purpose and design and the Companys ability to
direct the activities of the other entity that most significantly impact the other entitys
economic performance. ASU 2009-17 is effective at the start of the Companys first fiscal year
beginning after November 15, 2009. The adoption of this standard did not have any impact on the
Companys consolidated financial position and results of operations.
3. CASH AND CASH EQUIVALENTS
At December 31, 2010 and 2009, the Company had $12.6 million and $16.0 million, respectively,
in cash and cash equivalents. Included in Cash and cash equivalents at December 31, 2010 and 2009
was pledged cash to the Bank of $7.5 million and $8.5 million, respectively, under the Licensing
Credit Agreement (secured by a first-priority lien) and the Legacy Credit Agreement (secured by a
second-priority lien).
4. RESTRICTED CASH
Restricted cash in the amount of $2.4 million and $2.6 million at December 31, 2010 and 2009,
respectively, represents interest and principal collections received on the Companys portfolio of
notes receivable and loans held for investment prior to the 2009 Restructuring that is being held
in reserve by the Bank, substantially all of which is required to pay down the Legacy Debt
obligations with the Bank.
5. INVESTMENT IN PREFERRED AND COMMON STOCK (HUNTINGTON REIT SECURITIES)
The Companys investment in REIT Securities includes preferred and common stocks of the Banks
REIT. On or about June 14, 2010, the REIT, in which the Company owned 4,724 shares of Class C
preferred stock and seven shares of common stock, was merged with another REIT of the Bank, with
the Company receiving, in exchange for preferred stock and common stock held in the initial REIT,
4,724 shares of Class C preferred stock and 154 shares of common stock of the combined REIT, which
did not constitute a change in the approximate fair value or carrying value of the Companys
investment. In addition, the terms of the new Class C shares of the combined REIT mirror the terms
of the Class C shares of the initial REIT.
On July 23, 2010, the Company was verbally notified by the Bank that due to losses recognized
by the new combined REIT from a write down of the carrying value of the mortgage loans owned by the
Trust, the board of directors of the new combined REIT decided not to declare any preferred
dividends for the third and fourth calendar quarters of 2010. As a result, during the quarters
ended December 31 and September 30, 2010, the Company did not receive or accrue dividends on its
investment in preferred stock of the Banks REIT, which had amounted to approximately $10.6 million
in recent prior quarterly periods.
F-20
The Bank indicated in July 2010, and reaffirmed in November 2010, that the suspension of
preferred dividends is temporary and that the new combined REIT is expected to declare and pay
dividends commencing in January 2011, including the cumulative dividends for the third and fourth
quarters of 2010. Because the preferred stock is cumulative and unpaid dividends are therefore
accumulated, the suspended dividends may be recovered in 2011 should the REIT then declare
dividends. The nonpayment of dividends in the three months ended December 31, 2010 and in the
three months ended September 30, 2010 resulted in an increase in stockholders deficit at December
31, 2010.
In February 2011, the Company was advised that the REIT board in February declared dividends
on the REIT Securities for the two quarterly periods ended December 31 and September 30, 2010, and
also declared a dividend for the full year of 2011. The Company was advised that these declared
dividends would be paid one business day after the dividends are approved by the Banks regulator.
See Note 20.
6. INVESTMENT IN TRUST CERTIFICATES AT FAIR VALUE, MORTGAGE LOANS AND REAL ESTATE HELD FOR SALE,
AND NOTES RECEIVABLE HELD FOR SALE
Investment in Trust certificates, carried at estimated fair value, as of December 31, 2010 and
2009 consist principally of the trust certificates not transferred to the Banks REIT as of the
March 2009 Restructuring (representing approximately 17% of the Companys loans and real estate
assets as of March 31, 2009):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Balance, beginning of year |
|
$ |
69,355,735 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Fair value designation at March 31, 2009 |
|
|
|
|
|
|
95,832,753 |
|
Loan sales, at fair value |
|
|
(50,051,396 |
) |
|
|
|
|
Fair value adjustments, loan sales |
|
|
(9,816,831 |
) |
|
|
|
|
Trust distributions |
|
|
(9,093,786 |
) |
|
|
(17,647,303 |
) |
Transfers (out) |
|
|
(3,456,861 |
) |
|
|
(10,794,569 |
) |
|
Other fair value adjustments, net |
|
|
4,569,117 |
|
|
|
1,964,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
1,505,978 |
|
|
$ |
69,355,735 |
|
|
|
|
|
|
|
|
The Banks Trust sold in the third quarter ended September 30, 2010, in the Loan Sales,
approximately $50.1 million of the loans and real estate owned assets underlying the Companys
Investment in trust certificates. The Company recognized a loss (a fair value adjustment) in the
amount of $9.8 million on the loans sold by the Banks Trust in the July Loan Sale and the
September Loan Sale (the Loan Sales). The Banks Trust sold, in the December Loan Sale, the
remaining loans and real estate owned assets underlying the Companys Investment in trust
certificates that were not sold in the Loan Sales, and recognized a recovery (a fair value
adjustment) of less than $50,000 (included in Other fair value adjustments) on the loans sold by
the Banks Trust. The Other fair value adjustments also include a gain on the distributions from
the Trust of $4.6 million. The December 31, 2010 balance represents the estimated fair value of
the Companys pro rata share of the remaining real estate owned properties underlying the
Investment in trust certificates that were not sold by the Banks Trust in the third and fourth
quarter loan sales.
F-21
Mortgage loans and real estate held for sale, carried at lower of cost or estimated fair
value, as December 31, 2010 and 2009 consist principally of the trust certificates transferred to
the Banks REIT as of the Restructuring (representing approximately 83% of the Portfolio as of
March 31, 2009):
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Balance, beginning of year |
|
$ |
345,441,865 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Fair value designation at March 31, 2009 |
|
|
|
|
|
|
477,316,409 |
|
Loan sales, at fair value |
|
|
(263,049,681 |
) |
|
|
|
|
Fair value adjustments, loan sales |
|
|
(37,826,111 |
) |
|
|
|
|
REO sales |
|
|
(17,194,661 |
) |
|
|
(53,764,783 |
) |
Principal payments |
|
|
(16,915,671 |
) |
|
|
(43,116,808 |
) |
Loans written off |
|
|
(23,016 |
) |
|
|
(594,853 |
) |
|
Other fair value adjustments, net |
|
|
(2,931,862 |
) |
|
|
(34,398,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
7,500,863 |
|
|
$ |
345,441,865 |
|
|
|
|
|
|
|
|
The Banks Trust sold in the third quarter ended September 30, 2010 (the Loan Sales),
approximately $263.0 million in loans attributable to trust certificates held by the Banks REIT,
which were reflected on the Companys balance sheet as Mortgage loans and real estate held for
sale. The Banks Trust sold in the fourth quarter ended December 31, 2010 (the December Loan
Sale), the remaining loans attributable to trust certificates held by the Banks REIT that were not
sold in the Loan Sales. The Company, with respect to the Loan Sales, recognized a negative fair
value adjustment in the amount of $37.8 million, which was offset by a corresponding positive fair
value adjustment in the amount of $37.8 million on the Nonrecourse liability; and, a net gain of
less than $50,000 (a fair value adjustment) was recognized on the loans sold by the Banks Trust in
the December Loan Sale. The Other fair value adjustments include a net decline of approximately
$2.9 million in the estimated market value of the pro rata percentage of loans and REO underlying
the Mortgage loans and real estate held for sale. The December 31, 2010 balance represents the
estimated fair value of the undivided 83% interest in the real estate properties that were not sold
by the Banks Trust.
Notes receivable held for sale, carried at lower of cost or estimated fair value, as of
December 31, 2010 and 2009 consist principally of the Companys loans securing the Unrestructured
Debt:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Balance, beginning of year |
|
$ |
3,575,323 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Fair value designation at March 31, 2009 |
|
|
|
|
|
|
4,141,487 |
|
Principal payments |
|
|
(910,243 |
) |
|
|
(794,986 |
) |
Loans written off |
|
|
(17,357 |
) |
|
|
(602,628 |
) |
Fair value adjustments, net |
|
|
209,589 |
|
|
|
831,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
2,857,312 |
|
|
$ |
3,575,323 |
|
|
|
|
|
|
|
|
In the December Loan Sale, the Bank also sold its 50% participation interest in the
commercial loans securing the Unrestructured Debt, which did not affect the Companys reported net
loss for the three months ended December 31, 2010 since the Bank sold a participation interest in
its commercial loan representing the Unrestructured Debt. Therefore, the Companys investments in
the loans securing the Unrestructured Debt, (shown on the Companys balance sheets as Notes
receivable held for sale, net) were not treated as a sale of financial assets in accordance with
GAAP.
F-22
7. ALLOWANCE FOR LOAN LOSSES AND PURCHASE DISCOUNT
Due to the March 2009 Restructuring and the exchange of loans and other real estate owned for
trust certificates effectuated as of March 31, 2009, the Company does not have any significant
portfolios of loans that it manages as the investor and no longer has portfolios classified as held
to maturity. Although the transfer of the trust certificates was structured in substance as a sale
of financial assets, the transfer, for accounting purposes, was treated as a financing under GAAP
until the effective dates of the Loan Sales and the December Loan Sale, and, therefore, the assets
transferred to the trust remained on the Companys balance sheet as Investment in trust
certificates at fair value, Mortgage loans and real estate held for sale and Notes receivable held
for sale. Effective as of the effective dates of the Loan Sales and the December Loan Sale, such
sales were accounted for as sales of loans in accordance with GAAP, to the extent of the loans sold
by the Trust. Accordingly, the tables that follow are only for the twelve months ended December
31, 2009 and represent the activity for the Companys legacy loan portfolios prior to the
Restructuring.
Changes in the allowance for loan losses on notes receivable and loans held for investment for
the year ended December 31, 2009 are as follows:
|
|
|
|
|
|
|
2009 |
|
Allowance for loan losses, beginning of year |
|
$ |
520,969,251 |
|
|
|
|
|
|
Provision for loan losses |
|
|
169,479 |
|
Loans transferred to REO |
|
|
(6,517,919 |
) |
Loans charged off |
|
|
(14,029,345 |
) |
Loans exchanged for trust certificates |
|
|
(481,453,374 |
) |
Loans reclassified as loans held for sale |
|
|
(17,435,075 |
) |
Other, net |
|
|
(1,703,017 |
) |
|
|
|
|
|
|
|
|
|
Allowance for loan losses, end of year |
|
$ |
|
|
|
|
|
|
Real estate owned properties are referred to as REO.
As a result of the Restructuring and the exchange of loans and other real estate owned for
trust certificates, and because, as of March 31, 2009, the Company is carrying its investments at
fair value or lower of cost or market value, the allowance for loan losses was eliminated during
the first quarter of 2009; therefore, there was no remaining balance of the allowance for loan
losses as of December 31, 2009.
As of December 31, 2010 and 2009, the unpaid principal balance of mortgage loans serviced by
the Company for others was $1.60 billion and $1.99 billion, respectively. As of December 31, 2010,
principally all the loans serviced were for third-party entities other than the Banks Trust or the
Bank, while at December 31, 2009, with the exception of the loans serviced for Bosco I, principally
all the loans were serviced for the Banks Trust and the Bank. Mortgage loans serviced for others,
except for mortgage loans serviced for the Banks Trust and the Bank, are not included on the
Companys consolidated balance sheets.
F-23
The following table sets forth certain information relating to purchase discount and the
activity in the accretable and nonaccretable purchase discounts for the year ended December 31,
2009, in accordance with Topic 310, Effect of a Loan Modification When the Loan is Part of a Pool
That Is Accounted for as a Single Asset A Consensus of the FASB Emerging Task Force, for the
period indicated:
|
|
|
|
|
|
|
2009 |
|
Accretable Discount |
|
|
|
|
Balance, beginning of year |
|
$ |
24,860,752 |
|
Accretion |
|
|
(198,841 |
) |
Loans transferred to Huntington |
|
|
(24,131,696 |
) |
Loans transferred to notes receivable held for sale |
|
|
(530,215 |
) |
|
|
|
|
Balance, end of year |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Nonaccretable Discount |
|
|
|
|
Balance, beginning of year |
|
$ |
97,603,366 |
|
Loans transferred to Huntington |
|
|
(93,655,391 |
) |
Loans transferred to notes receivable held for sale |
|
|
(2,847,136 |
) |
Loans transferred to REO, other |
|
|
(1,100,839 |
) |
|
|
|
|
Balance, end of year |
|
$ |
|
|
|
|
|
|
Due to the Restructuring and the exchange of loans for trust certificates, carried at
either fair value or lower of cost or fair value, there was no remaining balance in accretable and
nonaccretable discount as of December 31, 2009.
8. FAIR VALUATION ADJUSTMENTS
Fair valuation adjustments include amounts subsequent to March 31, 2009 related to adjustments
in the fair value of the Investment in trust certificates, the Nonrecourse liability, and
adjustments to the lower of cost or market related to Mortgage loans and real estate held for sale,
and for losses on sales of real estate owned properties (REO).
The following table sets forth the activity since the March 2009 Restructuring affecting the
Fair valuation adjustments during the twelve months ended December 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Valuation gain/(loss) on REO sales |
|
$ |
5,451,463 |
|
|
$ |
(14,891,467 |
) |
Valuation (loss)/gain on mortgage loans and REO |
|
|
(40,757,974 |
) |
|
|
(34,398,100 |
) |
Valuation gain/(loss) on nonrecourse liability |
|
|
40,757,974 |
|
|
|
34,398,100 |
|
Valuation (loss) on sales of trust certificates |
|
|
(9,816,831 |
) |
|
|
|
|
Valuation gain on trust certificates |
|
|
4,569,117 |
|
|
|
1,964,854 |
|
Valuation (loss) on notes receivable |
|
|
209,588 |
|
|
|
831,450 |
|
Other adjustments |
|
|
(16,452,533 |
) |
|
|
(15,126,255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) on valuation |
|
$ |
(16,039,196 |
) |
|
$ |
(27,221,418 |
) |
|
|
|
|
|
|
|
Other adjustments during the twelve months ended December 31, 2010 include estimated fair
market value declines to REO of approximately $8.9 million, offsets to the interest and other
income recorded on the mortgage loans of approximately $9.3 million and various other net positive
adjustments approximating $1.7
million. Other adjustments during the twelve months ended December 31, 2009 include estimated
fair market value increases to REO of approximately $4.1 million, offsets to the interest and other
income recorded on the mortgage loans of approximately $18.8 million and various other net negative
adjustments approximating $420,000.
F-24
9. DERIVATIVES
As part of the Companys interest-rate risk management process, the Company entered into
interest rate swap agreements in 2008. In accordance with Topic 815, Derivatives and Hedging, as
amended and interpreted, derivative financial instruments are reported on the consolidated balance
sheets at their fair value. All of the Companys interest rate swaps qualify for cash flow hedge
accounting, and are so designated.
In conjunction with the March 2009 Restructuring, and at the request of the Bank, effective
March 31, 2009, the Company exercised its right to terminate two non-amortizing fixed-rate
interest-rate swaps with the Bank, with an aggregate notional amount of $390 million. The total
termination fee for cancellation of the swaps was $8.2 million, which is payable only to the extent
cash is available under the waterfall provisions of the Legacy Credit Agreement, and only after the
outstanding balance of tranche A debt, as of December 31, 2010 in the amount of $709.0 million,
owed to the Bank has been paid in full. The carrying value included in Accumulated other
comprehensive loss (AOCL) within stockholders equity at December 31, 2008 related to the
terminated hedges is amortized to earnings over time.
As of December 31, 2010, the notional amount of the Companys fixed-rate interest-rate swaps
totaled $390 million, representing approximately 33% of the Companys outstanding variable rate
debt. The fixed-rate interest-rate swaps were expected to reduce the Companys exposure to future
increases in interest costs on a portion of its borrowings due to increases in one-month LIBOR
during the remaining terms of the swap agreements. All of our interest-rate swaps were executed
with the Bank.
As of December 31, 2008, the Company removed the hedge designations for its cash flow hedges.
As a result, the Company continues to carry the December 31, 2008 balance related to these hedges
in AOCL unless it becomes probable that the forecasted cash flows will not occur. The balance in
AOCL is amortized to earnings as part of interest expense in the same period or periods during
which the hedged forecasted transaction affects earnings.
The following table presents the notional and fair value amounts of the interest rate swaps at
December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
|
|
Term |
|
Maturity Date |
|
Fixed Rate |
|
|
Estimated Fair Value |
|
$ |
275,000,000 |
|
|
3 years |
|
March 5, 2011 |
|
|
3.47 |
% |
|
$ |
(3,000,994 |
) |
|
70,000,000 |
|
|
3 years |
|
March 5, 2011 |
|
|
3.11 |
% |
|
|
(361,594 |
) |
|
45,000,000 |
|
|
4 years |
|
March 5, 2012 |
|
|
3.43 |
% |
|
|
(1,559,787 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
390,000,000 |
|
|
|
|
|
|
|
|
|
|
$ |
(4,922,375 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps increased our interest expense for the twelve months ended December
31, 2010 and December 31, 2009 by $13.3 million and $23.4 million, respectively. The estimated
fair value of the swaps at December 31, 2010 was a negative $4.9 million.
F-25
The net changes in the fair value of the Companys derivatives, which are reflected in
derivative liabilities, at fair value, for the twelve months ended December 31, 2010 and 2009 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Balance, beginning of year |
|
$ |
(13,144,591 |
) |
|
$ |
(27,753,436 |
) |
|
|
|
|
|
|
|
|
|
Cash settlements |
|
|
12,352,189 |
|
|
|
14,317,132 |
|
Fair value adjustments |
|
|
(4,129,973 |
) |
|
|
(7,908,287 |
) |
Terminated contracts |
|
|
|
|
|
|
8,200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
(4,922,375 |
) |
|
$ |
(13,144,591 |
) |
|
|
|
|
|
|
|
On January 25, 2011, the Bank declared an early termination of all remaining swaps due to
a failure to make payments due under the swap agreements, which payment failures were occasioned by
insufficient funds available under the Legacy Credit Agreement as a direct result of the absence of
cash flows attributable to the July, September and December 2010 loan sales by the Banks Trust and
the suspension of dividends by its REIT. The early termination fee payable by the Company (but not
FCMC) to the Bank is $6.5 million. It is anticipated that the Companys liability (which is not a
liability of FCMC) for the swap termination fee will be payable only to the extent cash is
available under the waterfall provisions of the Legacy Credit Agreement, and only after the amount
of debt designated as tranche A debt owed to the Bank has been paid in full, which at December 31,
2010 amounted to $709 million. See Note 20.
10. FAIR VALUE MEASUREMENTS
Topic 820, Fair Value Measurements and Disclosures, establishes a three-tier hierarchy for
fair value measurements based upon the transparency of the inputs to the valuation of an asset or
liability and expands the disclosures about instruments measured at fair value. A financial
instrument is categorized in its entirety and its categorization within the hierarchy is based upon
the lowest level of input that is significant to the fair value measurement. The three levels are
described below.
|
|
|
Level 1 Inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets. |
|
|
|
Level 2 Inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets and inputs that are observable for the asset
of liability, either directly or indirectly, for substantially the full term of the
financial instrument. Fair values for these instruments are estimated using pricing
models, quoted prices of securities with similar characteristics, or discounted cash
flows. |
|
|
|
Level 3 Inputs to the valuation methodology are unobservable and significant to
the fair value measurement. Fair values are initially valued based upon transaction
price and are adjusted to reflect exit values as evidenced by financing and sale
transactions with third parties. |
Fair values for over-the-counter interest rate contracts are determined from market observable
inputs, including the LIBOR curve and measures of volatility, used to determine fair values are
considered Level 2, observable market inputs.
F-26
Fair values for certain investments (Level 3 assets) are determined using pricing models,
discounted cash flow methodologies or similar techniques and at least one significant model
assumption or input is unobservable.
The carrying value of derivative and financial instruments on the Companys financial
statements at December 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Level 3 |
|
Interest-rate swaps |
|
$ |
|
|
|
$ |
(4,922,375 |
) |
|
$ |
|
|
|
$ |
|
|
Investment in trust certificates |
|
|
|
|
|
|
|
|
|
|
1,505,978 |
|
|
|
|
|
Nonrecourse liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,500,863 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
(4,922,375 |
) |
|
$ |
1,505,978 |
|
|
$ |
(7,500,863 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in items classified as Level 3 during the twelve months ended December 31,
2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
Liabilities |
|
Balance, beginning of year |
|
$ |
69,355,735 |
|
|
$ |
(345,441,865 |
) |
|
|
|
|
|
|
|
|
|
Total recognized unrealized (losses)/gains |
|
|
4,569,117 |
|
|
|
31,064,847 |
|
Total recognized unrealized (losses) due to loan sale |
|
|
(9,816,831 |
) |
|
|
|
|
Transfers in/(out) |
|
|
(53,508,257 |
) |
|
|
280,244,342 |
|
Trust distributions/payments |
|
|
(9,093,786 |
) |
|
|
26,631,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
1,505,978 |
|
|
$ |
(7,500,863 |
) |
|
|
|
|
|
|
|
Net unrealized losses included in earnings during the twelve months ended December 31,
2010 related to investments held at December 31, 2010 were $5.2 million.
The carrying value of assets measured at the lower of cost or market value at December 31,
2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Mortgage loans and real estate held for sale |
|
$ |
|
|
|
$ |
|
|
|
$ |
7,500,863 |
|
|
|
|
|
|
|
|
|
|
|
11. BUILDING, FURNITURE AND EQUIPMENT, NET
At December 31, 2010 and 2009, building, furniture and equipment, net consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Building and improvements |
|
$ |
2,159,567 |
|
|
$ |
2,410,647 |
|
Furniture and equipment |
|
|
1,681,855 |
|
|
|
1,574,773 |
|
|
|
|
|
|
|
|
|
|
|
3,841,422 |
|
|
|
3,985,420 |
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation |
|
|
(2,803,270 |
) |
|
|
(2,456,002 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,038,152 |
|
|
$ |
1,529,418 |
|
|
|
|
|
|
|
|
F-27
At December 31, 2010, a certain portion of the Companys office space was not being
utilized and is currently being marketed for sublet. At December 31, 2010, the remaining lease
payments, net of the estimated sublet payments (based on the Companys estimate for subleasing the
space), in the amount of $258,000 were accrued and non-usable leasehold improvements in the amount
of $110,000 were written off.
12. NOTES PAYABLE
As of December 31, 2010, the Company had total borrowings, Notes payable and Financing
agreement, of $1.34 billion under the Restructuring Agreements, of which $1.30 billion (the Legacy
Debt) was subject to the Companys debt restructured in the March 2009 Restructuring (the Legacy
Credit Agreement) and $39.0 million remained under a credit facility excluded from the
Restructuring Agreements (referred to as the Unrestructured Debt). Substantially all of the debt
under these facilities was incurred in connection with the Companys purchase and origination of
residential 1-4 family mortgage loans prior to December 2007. We ceased to acquire and originate
loans in November 2007. The borrowings incurred under the Legacy Credit Agreement are shown in the
Companys Consolidated Financial Statements as Notes payable (referred to as term loans, term debt
or Legacy Debt herein).
During the twelve months ended December 31, 2010, while the Company made payments in the
amount of $67.7 million on the senior portion (Tranche A) of the Notes payable, total Notes
payable outstanding decreased by $26.4 million. The balance of the Tranche A debt was reduced by a
net $62.0 million during the twelve months ended December 31, 2010, although interest due and
unpaid on Tranche A debt during the six months ended December 31, 2010 was accrued and added to the
outstanding debt balance due to the suspension of the payment of dividends by the Banks REIT and
significantly reduced cash flow due to the sales of loans by the Banks Trust in the third and
fourth quarters of 2010. However, during the quarter ended December 31, 2010, the balance of the
Tranche A debt decreased by $5.3 million, and the aggregate balance of the subordinate portions
(Tranches B and Tranche C) of Notes payable increased by $9.3 million during this three-month
period as interest due and unpaid was accrued and added to the outstanding debt balance as per the
terms of Restructuring Agreements, which require all available cash to be applied to interest and
principal on Tranche A until paid in full before payments can be applied to Tranche B and Tranche
C.
The net proceeds of the loan sales by the Banks Trust in July, September and December 2010
were distributed to the Trust certificate holders on a pro rata basis by percentage interest.
Accordingly, only 17% of the net proceeds were applied to pay down the Legacy Debt owed to the
Bank, as 83% of the trust certificates are held by the Banks REIT, and the Companys investment in
REIT Securities (which are not marketable) are realized only through declared and paid dividends
(which were suspended a few days after the July Loan Sale and throughout the remainder of 2010) or
a redemption of the securities by the REIT. See Note 20.
As a result principally of the loan sales by the Banks Trust in the quarters ended September
30 and December 31, 2010, the remaining available sources of cash flow to be applied to pay
interest and principal on the Legacy Debt are from (i) any dividends declared on the preferred
stock of the REIT (which were suspended during the third and fourth quarters of 2010), which are
required under the Legacy Credit Agreement to be used by the Company to make payments on the Legacy
Debt, when and if declared in the future, or a redemption of the securities by the REIT, (ii) the
approximately $18.9 million (unpaid principal balance) of real estate owned properties not sold and
still held by the Banks Trust and collateralizing the Companys Investment in trust certificates
at fair value, and (iii) 50% of the approximately $31.0 million (unpaid principal balance) of the
loans that collateralize the Unrestructured Debt. Effective with the third and
fourth quarter loan sales, cash collections from substantially all of the loans that were
underlying the Investment in trust certificates at fair value and 50% of the Notes receivable held
for sale (representing 50% of the loans collateralizing the Unrestructured Debt) are no longer
available to be applied to pay interest and principal on the Legacy Debt.
F-28
The REIT board in February 2011 declared dividends for the third and fourth quarters of 2010
and for the full year of 2011, with payment pending approval of the Banks regulator. If the
declared dividends are paid by the Banks REIT, the cash payments approximating $60 million will be
applied to pay down the Legacy Debt. See Note 20.
Under Amendment No. 2 to the Licensing Credit Agreement with the Bank, FCMC used $1 million in
cash to repay the amount outstanding under its revolving line of credit with the Bank, and
available credit under the revolving loan facility was reduced from $2 million to $1 million and
cash collateral securing the revolving loan and letter of credit facilities was reduced from $8.5
million to $7.5 million, with the released collateral applied as a voluntary payment against the
debt outstanding of certain subsidiaries of the Company under the Legacy Credit Agreement.
The Company was not in compliance at December 31, 2010 with the covenant in the Licensing
Credit Agreement that requires Franklin Holding and FCMC to maintain a net income before taxes of
not less than $800,000 as of the end of each calendar month for the most recently ended twelve
consecutive month period or, with notice, an event of default will be deemed to have occurred. On
March 28, 2011, as a temporary measure, Franklin Holding and FCMC entered into an agreement with
the Bank that provides for a limited waiver of the financial covenant of Franklin Holding and FCMC
under the Licensing Credit Agreement, for the period through and including September 30, 2011,
related to the failure to maintain the minimum level of net income before taxes.
FCMC, however, would have been in compliance with the net income covenant had it not paid the
Bank a $1.0 million fee in connection with the July Loan Sale by the Banks Trust pursuant to the
terms of the Letter Agreement entered into with Huntington in July 2010.
At December 31, 2010, FCMC had no debt outstanding under the revolving line under its
Licensing Credit Agreement with the Bank, which is shown in the Companys consolidated financial
statements as Financing agreement.
Restructuring Agreements with Lead Lending Bank
December Sale of Remaining Loans and Participation Interest in Unrestructured Debt with the Bank
In December 2010 (the December Loan Sale), Bosco III, which is owned 50% by the Companys
Chairman and President, Thomas J. Axon, purchased $174 million of principally charge-off first and
subordinate lien loans sold by the Trust, which were the remaining loans (other than real estate
owned properties) held by the Banks Trust, and also purchased from the Bank a 50% participation
interest in each of the commercial loans to the Company covering that portion of the Companys debt
(the Unrestructured Debt) with the Bank (see Forbearance Agreements with Lead Lending Bank
described below).
As of December 31, 2010, the Unrestructured Debt totaled approximately $39 million and is
secured by approximately 740 loans, for which FCMC is the loan servicer, and certain Company
entities are the beneficial owners. The Unrestructured Debt is subject to the original terms of
the Companys forbearance
agreement with the Bank, as amended, which has an expiration date of September 30, 2011, and
the Companys 2004 master credit agreement with the Bank.
F-29
In conjunction with the December Loan Sale, FCMC entered into a servicing agreement with Bosco
III for the servicing and collection of approximately $174 million of loans purchased by Bosco III
of principally charge-off first and subordinate lien loans sold by the Trust and the Bank, which
were the remaining loans (other than real estate owned properties, the servicing of which has been
terminated by the Bank effective March 24, 2011) held by the Banks Trust. FCMCs services may be
terminated with respect to some or all of the assets without cause and without penalty on 30 days
prior written notice. See Note 19.
FCMC also has one servicing contract between FCMC and certain Company entities for the loans
collateralizing the Unrestructured Debt.
September 2010 Transaction
September 16, 2010 Agreement
On September 16, 2010, FCHC and its subsidiary, FCMC, entered into an agreement with the Bank,
the Banks Trust, Thomas J. Axon, the Chairman and President of FCHC and FCMC and Bosco II, an
entity of which Mr. Axon is the sole member.
The agreement was entered into in connection with discussions regarding the then proposed sale
to Bosco II (with approximately 95% of the funds provided by a third party lender) of all of the
subordinate lien consumer loans (the Subordinate Consumer Loans) owned by the Trust and serviced
by FCMC under an amended and restated servicing agreement dated as of August 1, 2010 (the
Servicing Agreement). The conditions and transactions contemplated by the agreement, including
the sale of the Subordinate Consumer Loans (the September Loan Sale) were consummated on September
22, 2010.
It was agreed that contemporaneously with the consummation of the September Loan Sale, and
after obtaining the requisite agreement of syndicate members under the Legacy Credit Agreement,
FCHCs pledge of 70% of the outstanding shares of FCMC as security for the Legacy Credit Agreement
would be released, in consideration of and subject to:
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receipt of $4 million in cash at closing from FCMC to be applied to the amounts
outstanding under the Legacy Credit Agreement; |
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payment by Bosco II to the Trust of approximately $650,000 as additional payment for
the September Loan Sale, an amount equal to the servicing fees paid by the Trust to
FCMC for FCMCs servicing of the Trusts portfolio during August 2010; |
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FCMC and Mr. Axon entering into an agreement (the Deferred Payment Agreement)
providing that upon each monetizing transaction, dividend or distribution (other than
the sale, restructuring or spin off of FCMC (each a Proposed Restructuring)) prior to
March 20, 2019, they will be obligated to pay the lenders under the Legacy Credit
Agreement 10% of the aggregate value (to be defined in the agreement) of the
transaction, in excess of a threshold of $4 million of consideration in respect of such
transaction; and, |
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the cash payment of $1 million by FCMC to release the mortgages on certain office
and residential condominium units owned by FCMC (the Real Estate) pledged to the Bank
under the Legacy Credit Agreement and the Licensing Credit Agreement (the Real Estate
Release Payment); provided, however, that if by the closing of the September Loan Sale
and the Proposed Restructuring, FCMC is unable to make such payment, FCMC will deliver
in lieu of such cash payment a $1 million note payable on November 22, 2010, guaranteed
by Mr. Axons Note. FCMC made the $1 million payment to the Bank prior to November 22,
2010, and the Bank released the Real Estate. |
F-30
The Bank also agreed that, in consideration of its receipt of the above items and either the
Real Estate Release payment or delivery of Mr. Axons Note upon closing, the EBITDA Payment
described in the July 2010 Transaction among FCHC, FCMC, Mr. Axon, the Bank and the Trust would be
waived.
Additionally, the agreement provided that:
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the Trust will consent under the Servicing Agreement with FCMC to the change of
control of FCMC resulting from the Proposed Restructuring and agree to eliminate any
cross default provisions in the Servicing Agreement relating to defaults under the
Legacy Credit Agreement; |
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the Bank and the requisite lenders will consent under the Legacy Credit Agreement to
the change of control of FCMC resulting from the Proposed Restructuring and agree to
waive any related defaults and amend the definition of Collateral and certain
FCMC-related restrictive covenants; and, |
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FCMC and the Bank will amend the Licensing Credit Agreement to permit a change of
control of FCMC resulting from the Proposed Restructuring and agree to eliminate any
cross default provisions relating to defaults under the Legacy Credit Agreement and
extend the letter of credit facility and the revolving facility under the Licensing
Credit Agreement to September 30, 2011. |
In the agreement, FCMC also waived any additional notice of the termination of the Servicing
Agreement with respect to the Subordinate Consumer Loans, and any fees or other amounts in respect
thereof with respect to any period from and after the closing of the September Loan Sale.
In consideration of Mr. Axons undertaking the obligations required of him under the
agreement, and various guarantees and concessions previously provided by Mr. Axon for the Companys
benefit, the Companys Audit Committee agreed, subject to specific terms to be negotiated with the
Company and Mr. Axon, to the transfer to Mr. Axon of a number of shares of FCMC common stock
currently held by FCHC representing 10% of FCMCs outstanding shares, effective upon the closing of
the September Loan Sale and the release of FCHCs pledge of 70% of the outstanding shares of FCMC
as security for the Legacy Credit Agreement.
September 22, 2010 Implementing Agreements
On September 22, 2010, FCHC and FCMC entered into various agreements implementing the
transactions contemplated by the September 16, 2010 agreement (the Implementing Agreements or the
September 2010 Transaction). On September 22, 2010, the letter agreement was superseded by the
execution and delivery of an agreement, in a form and under terms substantially similar to the
letter agreement, to implement the terms and conditions agreed to under the letter agreement.
F-31
Deferred Payment Agreement. On September 22, 2010, FCMC entered into the Deferred Payment
Agreement with the Bank, in its capacity as Administrative Agent under the Legacy Credit Agreement,
and Mr. Axon.
The Deferred Payment Agreement has a term expiring March 20, 2019, and provides that FCMC will
pay to the Bank in respect of a qualifying transaction consummated during the term of the agreement
an amount equal to ten percent of the aggregate value of the qualifying transaction minus $4
million.
Qualifying transactions, which do not include the Proposed Restructuring, would include
transactions or series or combinations of related transactions involving any of:
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sale of all or a portion of the assets (an Asset Sale) or the capital stock (a
Stock Sale) of FCMC, whether any such sale is effected by FCMC, Mr. Axon, its
then-current owners if such owners sell 30% or more of the fully diluted outstanding
equity securities of FCMC, a third party or any combination of any of the foregoing; |
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any exchange or tender offer, merger, consolidation or other business combination
involving FCMC; |
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any recapitalization, reorganization, restructuring or any other similar transaction
including, without limitation, negotiated repurchases of FCMCs securities, an issuer
tender offer, a dividend or distribution, or a spin-off or split-off involving FCMC;
and, |
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any liquidation or winding-down of FCMC, whether by FCMC, its then-current owners, a
third party or any combination of any of the foregoing. |
Qualifying transactions specifically exclude:
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the issuance of shares under FCMCs equity compensation plans to the extent that
those issuances do not exceed 7% of the fully diluted outstanding securities of FCMC
during the term of the Deferred Payment Agreement; and, |
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the sale, restructuring or spin off, which is subject to the Banks prior approval,
by the Company of its ownership interests in FCMC. |
In the event of a qualifying transaction, the aggregate value of the transaction will be:
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in the case of a Stock Sale, the total consideration paid or payable to equity
holders, or FCMC in the case of a new issuance. If a Stock Sale involves the
acquisition of a majority of the fully diluted outstanding equity shares of FCMC, the
total consideration will also include additional amounts reflecting FCMCs indebtedness
for borrowed money, net pension liabilities, to the extent they are under funded and
deferred compensation liabilities, and be grossed up to the amount that would have been
paid if all of the outstanding equity securities were acquired for the same per share
consideration as that ascribed to the shares actually acquired; and, |
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in the case of an Asset Sale, the total consideration paid or payable for the
assets. If an Asset Sale involves the sale of a material portion of the assets or
business of FCMC, the total consideration will also include any assumed debt (including
capitalized leases and repayment obligations under
letters of credit), pension liabilities assumed, to the extent they are under funded,
and deferred compensation liabilities assumed, the net book value of net current assets
retained by FCMC and the fair market value of any other retained assets. |
F-32
In any qualifying transaction, the aggregate value of the transaction will also include:
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consideration paid or payable to FCMC and its equity holders in connection with the
qualifying transaction for covenants not to compete and management or consulting
arrangements (excluding reasonable salaries or wages payable under bona fide
arrangements for actual services); |
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dividends or distributions declared, and payments by FCMC to repurchase outstanding
equity securities, in either event, after the date of the Deferred Payment Agreement;
and, |
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in any qualifying transaction, amounts payable pursuant to any earn out, royalty or
similar arrangement will be included in the aggregate value of the transaction. If
such amounts are contingent, the deferred payment in respect of the contingent amounts
will be paid at the time the contingency is realized, provided that amounts payable
pursuant to notes or an escrow arrangement will not be treated as contingent. |
Additionally, pursuant to the Deferred Payment Agreement, Mr. Axon guaranteed prompt and full
payment to the Bank of each required deferred payment when due.
Amendment to Legacy Credit Agreement. On September 22, 2010, subsidiaries of FCHC (other than
FCMC) entered into an amendment to the Legacy Credit Agreement with the Bank. Various definitions,
terms and FCMC-related covenants were amended to permit a change of control of FCMC as part of the
Proposed Restructuring, to effectuate the release of the equity interests of FCHC in FCMC and
release of the Real Estate (subject to payment in full of Mr. Axons Note since FCMC had elected to
deliver Mr. Axons Note, which payment was made to the Bank and the Bank released the Real Estate),
and to add the Deferred Payment Agreement as collateral under the Legacy Credit Agreement.
On September 22, 2010, the limited recourse guarantee of FCMC under the Legacy Credit
Agreement was released, cancelled and discharged by the Bank. On September 22, 2010, FCHC and the
Bank entered into a first amendment to the limited recourse guaranty and first amendment to amended
and restated pledge agreements of FCHC under the Legacy Credit Agreement, which eliminated any
reference to the equity interests in FCMC of FCHC.
Amendment to Licensing Credit Agreement. On September 22, 2010, FCHC and FCMC entered into an
amendment to the Licensing Credit Agreement with the Bank. Various definitions, terms and
FCMC-related covenants were amended to permit a change of control of FCMC as part of the Proposed
Restructuring, to effectuate the release of the Real Estate (subject to the agreement of the
applicable administrative agents and the lenders to release the same pursuant to the terms of the
Restructure Agreement), eliminate any cross defaults resulting from any default under the Legacy
Credit Agreement; permit incurrence of liabilities for indebtedness subject to the prior written
consent of the Bank, which consent shall not be unreasonably withheld or delayed; and, eliminate
the provision that FCMC shall, to the extent permitted by applicable law, no less frequently than
semi-annually, within forty-five days after each June 30th and December 31st of each calendar year,
make pro rata dividends, distributions and payments to FCMCs shareholders and the Bank under the
Legacy Credit Agreement. In addition the Licensing Credit Agreement and the revolving loan and
credit facilities thereunder were extended to September 30, 2011.
F-33
Amendment to Servicing Agreement with the Bank. On September 22, 2010, the Servicing
Agreement was amended to eliminate any cross-default provisions resulting from any default under
the Legacy Credit Agreement.
EBIDTA Payment. On September 22, 2010, the Bank cancelled and terminated the obligations to
make any EBITDA payments under the July 2010 Transaction.
Servicing Agreement with Bosco II. On September 22, 2010, FCMC entered into a servicing
agreement with Bosco II for the servicing and collection of the loans purchased by Bosco II from
the Trust (the Bosco II Servicing Agreement). Pursuant to the Bosco II Servicing Agreement, FCMC
shall service the loans subject to customary terms, conditions and servicing practices for the
mortgage servicing industry. Under the terms of the Bosco II Servicing Agreement, FCMC is entitled
to a servicing fee equal to a percentage of net amounts collected and a per unit monthly service
fee for loans less than thirty days contractually delinquent, a straight contingency fee for loans
equal to or more than thirty days contractually delinquent, and reimbursement of certain
third-party fees and expenses incurred by FCMC. The Bosco II Servicing Agreement may be terminated
without cause and penalty upon thirty days prior written notice.
July 2010 Transaction
On July 16, 2010, FCHC and its servicing business subsidiary, FCMC, entered into a letter
agreement (the Letter Agreement) with the Bank, Franklin Mortgage Asset Trust 2009-A, an indirect
subsidiary of the Bank (the Trust) and, for certain limited purposes, Mr. Axon. The Letter
Agreement was entered into in connection with and in anticipation of the Trusts then-proposed sale
to a third party, on a servicing-released basis (the July Loan Sale), of substantially all of the
first-lien residential mortgage loans serviced by FCMC under the servicing agreement by and among
the Trust and FCMC dated March 31, 2009 (the Legacy Servicing Agreement).
The July Loan Sale, effective July 1, 2010, closed on July 20, 2010 (the July Loan Sale
Closing Date) and, on July 20, 2010, the July Loan Sale purchaser (the Purchaser) entered into a
loan servicing agreement with FCMC (the Loan Sale Servicing Agreement), pursuant to which FCMC
continues to service approximately 75% of the first-lien residential mortgage loans acquired by
Purchaser in the July Loan Sale (effective October 1, 2010, 25% of the loans acquired were
transferred by the Purchaser to its affiliate, which was an event that had been planned by the
Purchaser at acquisition). Approximately 3,300 residential mortgage loans, consisting principally
of first-lien mortgage loans, were included in the July Loan Sale.
The Letter Agreement included terms amending, or committing the Bank, FCMC, the Company, and
related parties to amend certain of the March 2009 Restructuring Agreements entered into in
connection with the Companys Restructuring with the Bank on March 31, 2009, including the existing
relationships under the Legacy Servicing Agreement, the Legacy Credit Agreement, and the Licensing
Credit Agreement, and FCMC to commit to make certain payments to the Bank. Additionally, the
Letter Agreement set forth certain mutual commitments of the parties with respect to the Companys
consideration of a restructuring or spin-off of its ownership of FCMC (a Potential Restructuring),
as well as certain guaranties of Mr. Axon, the Chairman and President of the Company and FCMC.
Letter Agreement with the Bank. Under the Letter Agreement with the Bank:
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FCMC made a $1 million payment to the Bank as reimbursement for certain expenses of
the Bank in connection with the July Loan Sale; |
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FCMC released all claims under the Legacy Servicing Agreement as of the loan sale
date (other than those for unpaid servicing advances for services incurred prior to
June 30, 2010) with respect to the loans sold in the July Loan Sale; |
F-34
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FCMC refunded to the Trust an estimated $400,000 for servicing fees paid in advance
to FCMC under the Legacy Servicing Agreement in respect of July 2010 to the extent
attributable to the loans sold in the July Loan Sale; |
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the Legacy Servicing Agreement was terminated as to the loans sold, except with
respect to FCMCs obligations to assist in curing documentary issues or deficiencies
relating to the loans sold; and, |
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FCMC and the Trust entered into an amended and restated servicing agreement (the New
Trust Servicing Agreement or Servicing Agreement) on July 30, 2010 and effective August
1, 2010, relating to the servicing of the loans and real estate properties previously
serviced under the Legacy Servicing Agreement, other than those sold in the July Loan
Sale (see below). (On December 22, 2010, the Bank terminated the New Trust Servicing
Agreement and the servicing of all assets by FCMC for the Trust (which as of December
31, 2010 consisted of only REO assets) effective March 24, 2011.) |
On the July Loan Sale Closing Date, the Company and FCMC entered into Amendment No. 2 to the
Licensing Credit Agreement with the Bank and an affiliate of the Bank, Huntington Finance, LLC
(Amendment No. 2).
Amendment No. 2 to the Licensing Credit Agreement with the Bank. Under Amendment No. 2 to the
Licensing Credit Agreement with the Bank:
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FCMC used $1 million in unpledged cash to repay the amount outstanding under its
revolving line of credit with the Bank; and, |
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available credit under the revolving loan facility was reduced from $2 million to $1
million and the cash collateral, which was required to secure the revolving loan and
letter of credit facilities, was reduced from $8.5 million to $7.5 million, with the
released collateral applied as a voluntary payment against the debt outstanding of
certain subsidiaries of the Company under the Legacy Credit Agreement. |
Loan Sale Servicing Agreement with Purchaser. On July 20, 2010, but effective as of July 1,
2010, FCMC entered into a loan servicing agreement with the third-party Purchaser, pursuant to
which FCMC provides servicing for the loans acquired by the Purchaser in the July Loan Sale. The
Purchaser, which is now the second largest servicing client of FCMC, has the right to terminate the
servicing of any of such loans without cause upon ninety (90) calendar days prior written notice,
subject to the payment of a termination fee for each such loan terminated. Pursuant to the Loan
Sale Servicing Agreement, FCMC services the loans subject to customary terms, conditions and
servicing practices for the mortgage servicing industry.
Effective October 1, 2010, the Purchaser exercised its right to terminate the servicing of
approximately 25% of the loans acquired by the Purchaser in the July Loan Sale (based on unpaid
principal balance).
F-35
FCMC as servicer receives a monthly servicing fee per loan per month with the per loan amount
dependent upon loan status at the end of each month, resolution and disposition fees based on the
unpaid principal balance of loans collected from borrowers or gross proceeds from the sales of
properties, as applicable, and a contingency fee the for unpaid principal balance collected on
loans designated by the Purchaser, in addition to various ancillary fees and reimbursement of
certain third-party expenses.
Potential Restructuring. In the July 2010 Transaction, which was amended and modified in part
by the September 2010 Transaction described above, the parties agreed that in connection with a
potential restructuring (the Potential Restructuring), if the Potential Restructuring is acceptable
to the Bank and the required lenders, in each partys sole discretion, and the Potential
Restructuring does not result in material tax, legal, regulatory, or accounting impediments or
issues for Franklin Holding or FCMC, then:
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the Bank would use its reasonable efforts to assist Franklin Holding and FCMC in
connection with such Potential Restructuring in obtaining the approval of the required
lenders for the Potential Restructuring and consenting to any change of control in
connection with the Potential Restructuring to the extent required under the Legacy
Credit Agreement, and FCMC or Franklin Holding would reimburse and hold the Bank and
the required lenders harmless from any reasonable expense incurred by them in
connection with any such Potential Restructuring; |
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FCMC would make semi-annual payments to the Bank under the Legacy Credit Agreement
(the EBITDA Payment) equal to (i) 50% of FCMCs EBITDA, in accordance with GAAP, for
each period for the first 18 months from the July Loan Sale Closing Date, and (ii) 70%
of FCMCs GAAP EBITDA for each period thereafter, up to a maximum aggregate of $3
million. The EBITDA Payment obligation, which was never triggered, was terminated and
cancelled pursuant to the September 2010 Transaction; |
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Thomas J. Axons existing personal guaranty to the Bank would be extended to the
EBITDA Payment pursuant to an amendment to the guarantee, which will also provide that
to the extent that the EBITDA Payment in respect of any period is less than $500,000,
Mr. Axon will pay such shortfall. Mr. Axons obligations pursuant to the guaranty
would be secured and continue to be secured by the collateral he had pledged to the
Bank on March 31, 2009; and, |
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any payments by FCMC or Mr. Axon in respect of the EBITDA Payment would go to reduce
the obligation of the other in respect of the obligations to make such payment, or the
guaranty in respect of such payment, as the case may be; and, any payments in respect
of the EBITDA Payments, and application of payments to the Bank in respect of
distributions by FCMC to its stockholders, would each serve as a credit against the
other, which could have the effect of reducing the impact of the $3 million maximum
amount of the EBITDA Payments otherwise payable as described above. (These
obligations, which were never triggered, were terminated and cancelled, and Mr. Axons
collateral has been released by the Bank, pursuant to the September 2010 Transaction.) |
New Trust Servicing Agreement. On July 30, 2010, FCMC entered into the New Trust Servicing
Agreement for the loans and real estate properties not sold by the Trust, effective August 1, 2010,
with the Trust to replace the servicing agreement (the Legacy Servicing Agreement) that had been
entered into with the Trust as part of the Companys March 31, 2009 Restructuring with the Bank.
F-36
The New Trust Servicing Agreement, which contains terms that are generally similar to those
included in FCMCs Legacy Servicing Agreement does, however, include the following material
changes: (i) the servicing fees for the second lien mortgage loans (which on September 22, 2010
were terminated from the New Trust Servicing Agreement and sold to Bosco II in the September Loan
Sale) are based predominately on the percentage of principal and interest collected and a per unit
monthly service fee only for contractually performing loans and loans in the early stages of
bankruptcy, (ii) the servicing fees for the first lien mortgages and real estate owned properties
not sold to the Purchaser are based on a fee schedule from the Loan Sale Servicing Agreement FCMC
had entered into with Purchaser (as described above), (iii) the New Trust Servicing Agreement is
terminable without penalty and without cause on 90 days prior written notice, or 30 days prior
written notice in connection with a sale of some or all of the assets by the Trust, (iv) the
consent process for hiring vendors was replaced with a general restriction that vendors may not be
engaged to perform a substantial portion of the primary day-to-day servicing obligations of FCMC,
(v) minimum gross collection targets that could have triggered a termination of the agreement were
removed, and (vi) the restrictions on entering into new servicing agreements that could reasonably
likely impair the ability of FCMC to perform its obligations were eliminated. On December 22,
2010, the Bank terminated the New Trust Servicing Agreement and the servicing of all assets by FCMC
for the Trust (which as of December 31, 2010 consisted of only REO assets) effective March 24,
2011. On March 24, 2011, the Bank notified FCMC that its servicing of the remaining real estate
owned assets was extended through April 30, 2011.
Forbearance Agreements with Lead Lending Bank
Prior to the March 31, 2009 Restructuring Agreements that we entered into with Huntington, our
indebtedness was governed by forbearance agreements and prior credit agreements with Huntington.
Effective as of March 31, 2009, all of our borrowings, with the exception of the Unrestructured
Debt in the current amount of $39.0 million, are governed by credit agreements entered into as part
of the Restructuring Agreements. The Unrestructured Debt remains subject to the original terms of
the Forbearance Agreement entered into with the Bank in December 2007 and subsequent amendments
thereto and the Companys 2004 master credit agreement with Huntington. On April 20, August 10,
and November 13, 2009, March 26 June 28, and November 19, 2010, and January 7, 2011, the Bank
extended the term of forbearance period, which is now until September 30, 2011.
The Bank has agreed to forbear with respect to any defaults past or present with respect to
any failure to make scheduled principal and interest payments to the Bank (Identified Forbearance
Default) relating to the Unrestructured Debt. The Bank, absent the occurrence and continuance of
a forbearance default other than an Identified Forbearance Default, has agreed not to initiate
collection proceedings or exercise its remedies in respect of the Unrestructured Debt or elect to
have interest accrue at the stated rate applicable after default. FCMC is not obligated to the
Bank with respect to the Unrestructured Debt and any references to FCMC in the Companys 2004
master credit agreement governing the Unrestructured Debt have been amended to refer to Franklin
Asset.
Upon expiration of the forbearance period, in the event that the Unrestructured Debt with the
Bank remains outstanding (currently $39.0 million), the Bank, with notice, has the right to call an
event of default under the Legacy Credit Agreement, but not the Licensing Credit Agreement and the
Servicing Agreement, which do not include cross-default provisions that would be triggered by such
an event of default under the Legacy Credit Agreement. The Banks recourse in respect of the
Legacy Credit Agreement is limited to the assets and stock of Franklin Holdings subsidiaries,
excluding the assets and stock of FCMC (except for a second-priority lien of the Bank on $7.5
million of cash collateral held as security under the Licensing Credit Agreement).
F-37
March 2009 Restructuring
On March 31, 2009, Franklin Holding, and certain of its direct and indirect subsidiaries,
including Franklin Credit Management Corporation and Tribeca Lending Corp., entered into a series
of agreements (collectively, the Restructuring Agreements) with the Bank, successor by merger to
Sky Bank, pursuant to which the Companys loans, pledges and guarantees with the Bank and its
participating banks were substantially restructured, and approximately 83% of the Portfolio was
transferred to Huntington Capital Financing, LLC (the REIT), a real estate investment trust
wholly-owned by the Bank.
The March 2009 Restructuring did not include a portion of the Companys debt (the
Unrestructured Debt), which as of March 31, 2009 totaled approximately $40.7 million. The
Unrestructured Debt is subject to the original terms of the Companys Forbearance Agreement entered
into with the Bank in December 2007 and subsequent amendments thereto and the Companys 2004 master
credit agreement. The Unrestructured Debt was extended on January 7, 2011 until September 30,
2011.
The Companys forbearance agreements that had been entered into with the Bank were, except for
approximately $39.0 million of the Companys debt outstanding (the Unrestructured Debt) at December
31, 2010, replaced effective March 31, 2009 by the Restructuring Agreements.
In conjunction with the March 2009 Restructuring, and at the request of the Bank, effective
March 31, 2009, the Company exercised its right to terminate two non-amortizing fixed-rate interest
rate swaps with the Bank, one with a notional amount of $150 million and the other with a notional
amount of $240 million. The total termination fee for cancellation of the swaps was $8.2 million,
which is payable only to the extent cash is available under the waterfall provisions of the Legacy
Credit Agreement, and only after the first $837.9 million (the amount designated as Tranche A debt
as of March 31, 2009) of term debt has been paid in full. At December 31, 2010, $709.0 million of
this tranche of debt remained to be paid off before payment of the swap termination fee would be
triggered.
On June 25, 2009, also in connection with the Restructuring and with the approval of the
holders of more than two-thirds of the shares of Franklin Holding entitled to vote at an election
of directors, the Certificate of Incorporation of FCMC was amended to delete the provision, adopted
pursuant to Section 251(g) of the General Corporation Law of the State of Delaware in connection
with the Companys December 2008 Reorganization, that had required the approval of the stockholders
of Franklin Holding in addition to the stockholders of FCMC for any action or transaction, other
than the election or removal of directors, that would require the approval of the stockholders of
FCMC.
Restructuring Agreements. In connection with the March 2009 Restructuring, the Company and
its subsidiaries:
1. |
|
Transferred substantially the entire Portfolio in exchange for the REIT Securities. |
Pursuant to the terms of a Transfer and Assignment Agreement, certain subsidiaries of the
Company (the Franklin Transferring Entities) transferred the Portfolio to a newly formed Delaware
statutory trust (the Trust) in exchange for the following trust certificates (collectively, the
Trust Certificates):
|
(a) |
|
an undivided 100% interest of the Banks portion of consumer mortgage loans
(the Bank Consumer Loan Certificate); |
|
(b) |
|
an undivided 100% interest in the Banks portion of consumer REO assets (the
Bank Consumer REO Certificate, and together with the Bank Consumer Loan Certificate,
the Bank Trust Certificates); |
F-38
|
(c) |
|
an undivided 100% interest in the portion of consumer mortgage loan assets
allocated to the M&I Marshall & Ilsley Bank (M&I) and BOS (USA) Inc. (BOS) (M&I and
BOS collectively, the Participants) represented by two certificates (the
Participants Consumer Loan Certificates); and, |
|
(d) |
|
an undivided 100% interest in Participants portion of the consumer REO assets
represented by two certificates (the Participants Consumer REO Certificates, and
together with the Participants Consumer Loan Certificate, the Participants Trust
Certificates). |
The Bank Trust Certificates represented approximately 83.27961% of the assets transferred to
the Trust considered in the aggregate (such portion, the Bank Contributed Assets) and the
Participants Trust Certificates represented approximately 16.72039% of the assets transferred to
the Trust considered in the aggregate. Substantially all of the assets were sold by the Trust to
third parties in the July and September Loan Sales.
Pursuant to the Transfer and Assignment Agreement, the Franklin transferring entities made
certain representations, warranties and covenants to the Trust related to the Portfolio. To the
extent any Franklin transferring entity breaches any such representations, warranties and covenants
and the Franklin transferring entities are unable to cure such breach, the Trust has recourse
against the Franklin transferring entities (provided that recourse to FCMC is limited solely to
instances whereby FCMC transferred REO property FCMC did not own) (the Reacquisition Parties).
In such instances, the Reacquisition Parties are obligated to repurchase any mortgage loan or REO
property and indemnify the Trust, the Bank, the Administrator (as defined below), the holders of
the Trust Certificates and the trustees to the trust agreement. The Franklin transferring entities
provided representations and warranties, including but not limited to correct information, loans
have not been modified, loans are in force, valid lien, compliance with laws, licensing,
enforceability of the mortgage loans, hazardous substances, fraud, and insurance coverage. In
addition, the Franklin transferring entities agreed to provide certain collateral documents for
each mortgage loan and REO property transferred (except to the extent any collateral deficiency was
disclosed to the Trust). To the extent any collateral deficiency exists with respect to such
mortgage loan or REO property and the Franklin transferring entities do not cure such deficiency,
the Reacquisition Parties shall be obligated to repurchase such mortgage loan. In connection with
the reacquisition of any asset, the price to be paid by the Reacquisition Parties for such asset
(the Reacquisition Price) shall be as agreed upon by the Administrator and the applicable
Reacquisition Party; provided, however, should such parties not promptly come to agreement, the
Reacquisition Price shall be as determined by the Administrator in good faith using its sole
discretion.
The subsidiaries then transferred the Trust Certificates to a newly formed Delaware limited
liability company, Franklin Asset, LLC, in exchange for membership interests in Franklin Asset,
LLC. Franklin Asset, LLC then contributed the Bank Trust Certificates to a newly formed Delaware
limited liability company, Franklin Asset Merger Sub, LLC, in exchange for membership interests in
Franklin Asset Merger Sub, LLC (Franklin Asset, LLC retained the Participant Trust Certificates).
Franklin Merger Sub, LLC merged with and into a Huntington National Bank wholly-owned subsidiary of
the REIT (REIT Sub) and Franklin Asset, LLC received the REIT Securities having in the aggregate
a value equal to the estimated fair market value of the loans underlying the Bank Trust
Certificates, which as of March 31, 2009 was approximately $477.3 million, in exchange for its
membership interests in Franklin Asset Merger Sub, LLC.
The preferred REIT Securities have a liquidation value of $100,000 per unit and an annual
cumulative dividend rate of 9% of such liquidation value. If there is a reacquisition required to
be made by the Reacquisition Parties under the Transfer and Assignment Agreement, Franklin Asset,
LLC will return such number of Class C Preferred Shares of REIT Securities that is equal in value
to the Reacquisition Price (as defined in the Transfer and Assignment Agreement).
F-39
2. |
|
Amended and restated substantially all of its outstanding debt. |
Pursuant to the terms of the Legacy Credit Agreement, the Company amended and restated
substantially all of its indebtedness subject to forbearance agreements dated December 19, 2008
(the Forbearance Agreements). As more fully described below, pursuant to the terms of the Legacy
Credit Agreement, (1) the Participant Trust Certificates were collaterally assigned to the Bank as
collateral for the loans as modified pursuant to the terms of the Legacy Credit Agreement (the
Restructured Loans); (2) all net collections received by the Trust in connection with the portion
of the Portfolio represented by the Bank Trust Certificates are to be paid to the REIT Sub or its
subsidiaries; (3) the REIT Securities were pledged to the Bank as collateral for the Restructured
Loans; (4) Franklin Holding pledged seventy percent (70%) of the common equity in FCMC to the Bank
as collateral for the Restructured Loans (which was released pursuant to the September 2010
Transaction); and (5) Franklin Holding and FCMC were released from existing guarantees of the
Restructured Loans, including Franklin Holdings pledge of 100% of the outstanding shares of FCMC.
In exchange, Franklin Holding and FCMC provided certain limited recourse guarantees relating to the
Restructured Loans, wherein the Bank agreed to exercise only limited recourse against property
encumbered by the pledge agreement (the Pledged Collateral) made in connection with the Legacy
Credit Agreement, provided Franklin Holding and FCMC, respectively, any designee acting under the
authority thereof or any subsidiary of either Franklin Holding or FCMC did not (i) commission any
act fraud or material misrepresentation in respect of the Pledged Collateral; (ii) divert, embezzle
or misapply proceeds, funds or money and/or other property relating in any way to the Pledged
Collateral; (iii) breach any covenant under Article IV of the Pledge Agreement entered into by
Franklin Holding; or (iv) conduct any business activities to perform diligence services, to service
mortgage Loans or REO Properties or any related activities, directly or indirectly, other than by
FCMC and Franklin Credit Loan Servicing, LLC (all of which are referred to as exceptions to
nonrecourse). On September 22, 2010, the limited recourse guarantee of FCMC was released,
cancelled and discharged.
The terms of the Legacy Credit Agreement vary according to the three tranches of loans covered
by the Legacy Credit Agreement. At March 31, 2009, Tranche A included outstanding debt in the
approximate principal sum of $837.9 million bearing interest at a per annum rate equal to one-month
LIBOR plus 2.25% per annum, payable monthly in arrears on the outstanding principal balance of the
related advances; Tranche B included outstanding debt in the approximate principal sum of $407.5
million bearing interest at a per annum rate equal to one-month LIBOR plus 2.75% per annum, payable
monthly in arrears on the outstanding principal balance of the related advances; and, Tranche C
included outstanding debt in the approximate principal sum of $125 million bearing interest at a
per annum rate equal to 15%, payable monthly in arrears on the outstanding principal balance of the
related advances. In the event of a default, the applicable interest rate would increase to 5%
over the rate otherwise applicable to the respective tranche.
F-40
Terms of the Restructured Indebtedness under the Legacy Credit Agreement. The following table
summarizes the principal economic terms of the Companys indebtedness under the Legacy Credit
Agreement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
Outstanding |
|
|
|
|
|
|
|
|
|
Principal Amount |
|
|
Principal Amount |
|
|
|
|
|
|
|
|
|
at March 31, 2009 |
|
|
at December 31, 2010 |
|
|
Applicable Interest |
|
|
Required Monthly |
|
|
|
Franklin |
|
|
Franklin |
|
|
Margin Over LIBOR |
|
|
Principal |
|
|
|
Asset/Tribeca |
|
|
Asset/Tribeca |
|
|
(basis points) |
|
|
Amortization |
|
Tranche A |
|
$ |
838,000,000 |
|
|
$ |
709,000,000 |
|
|
|
225 |
|
|
None |
|
Tranche B |
|
$ |
407,000,000 |
|
|
$ |
430,000,000 |
|
|
|
275 |
|
|
None |
|
Tranche C |
|
$ |
125,000,000 |
|
|
$ |
163,000,000 |
|
|
|
N/A |
(1) |
|
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestructured Debt |
|
$ |
41,000,000 |
|
|
$ |
39,000,000 |
|
|
|
|
(2) |
|
None |
|
|
|
|
(1) |
|
The applicable interest rate is fixed at 15% per annum. Interest will be paid in kind
during the term of the Restructuring. |
|
(2) |
|
Interest margin over FHLB 30-day LIBOR advance rate plus 2.60%-2.75%. |
The interest rate under the terms of the March 2009 Restructuring Agreements for Tranche
A and Tranche B indebtedness that is the basis, or index, for the Companys interest cost is the
one-month LIBOR plus applicable margins. In accordance with the terms of the Restructuring
Agreements, interest due and unpaid on Tranche A (upon election), Tranche B and Tranche C debt is
accrued and added to the debt balance.
All cash available for each tranche shall be used to pay cash interest to the extent cash is
available, and any accrued interest for which cash is not available will be added to the principal
sum of such tranche. Cash payments on each tranche will be made from: (i) any cash or other assets
of the borrowers (Tribeca and certain subsidiaries of Tribeca and Franklin Asset), (ii) dividends
and distributions on the REIT Securities, all of which shall be applied as a non pro rata
distribution solely to the Banks pro rata share of such tranche (until paid in full), (iii) all
distributions made by the Trust on the Participant Trust Certificates, all of which shall be
applied as a non pro rata distribution to the Participants pro rata shares of such tranche (until
paid in full), and (iv) from any proceeds received from any other collateral, which will be applied
pursuant to a waterfall provision described more fully in the Legacy Credit Agreement. The
borrowers will not be required to make scheduled principal payments, provided that all amounts
received by any borrower in excess of accrued interest, whether from collateral or otherwise, shall
be applied to reduce the principal sum. All remaining principal and interest will be due and
payable at maturity of the Legacy Credit Agreement on March 31, 2012. Based on the current cash
flows described above, it is not expected that that the Company will be able to repay remaining
principal and interest due on March 31, 2012. Under such circumstances, the Bank would have all
available rights and remedies under the Legacy Credit Agreement.
In accordance with the terms of the Legacy Credit Agreement, during the twelve months ended
December 31, 2010, the outstanding balance of Tranche B debt increased from $417.2 million to
$430.1 million and the outstanding balance of Tranche C debt increased from $140.1 million to
$162.9 million, due to the addition of accrued interest for which cash was not available to pay the
interest due. Notwithstanding the increases in Tranche B and Tranche C debt, during the year ended
December 31, 2010, the total balance of debt outstanding under the Legacy Credit Agreement declined
slightly from $1.367 billion at year-end 2009 to $1.341 billion at December 31, 2010.
F-41
During the three months ended December 31, 2010, the outstanding balance of Tranche B debt
increased from $426.8 million to $430.1 million and the outstanding balance of Tranche C debt
increased from $156.8 million to $162.9 million, due to the addition of accrued interest for which
cash was not available to pay the interest due. In addition, during the three months ended
December 31, 2010, the outstanding balance of Tranche A debt decreased slightly from $714.3 million
to $709.0 million due to the addition of accrued interest for which cash was not available to pay
all the interest due. As a result, the total balance of debt outstanding under the Legacy Credit
Agreement increased from $1.337 billion at September 30, 2010 to $1.341 billion at December 31,
2010.
The Legacy Credit Agreement contains representations, warranties, covenants and events of
default (the Legacy Credit Agreement Defaults) that are customary in transactions similar to the
Restructuring. The Legacy Credit Agreement (as modified on September 22, 2010 and due to the
satisfaction of Mr. Axons Note in November 2010) is secured by a first priority security interest
in (i) the REIT Securities; (ii) the Participant Trust Certificates; (iii) an undivided 16.72039%
interest in the consumer mortgage loans and real estate owned properties transferred to and still
held by the Trust; (iv) 100% equity interests in all direct and indirect subsidiaries of Franklin
Holding (other than FCMC), pledged by Franklin Holding (v) all amounts owing pursuant to any
deposit account or securities account of any Company entities bound to the Legacy Credit Agreement
(other than Franklin Holding), (vi) all monies owing to any borrower from any taxing authority;
(vii) any commercial tort or other claim of FCMC, Franklin Holding, or any borrower; (viii) a
second-priority lien on cash collateral held as security for the Licensing Credit Agreement to
FCMC; (ix) any monies, funds or sums due or received by any borrower in respect of any program
sponsored by any Governmental Authority, any federal program, federal agency or quasi-governmental
agency, including without limitation any fees received, directly or indirectly, under the U.S.
Treasury Homeowners Affordability and Stability Plan; and, (x) the Deferred Payment Agreement. Any
security agreement, acknowledgement or other agreement in respect of a lien or encumbrance on any
asset of the Trust shall be non-recourse in nature and shall permit the Trust to distribute,
without qualification, 83.27961% of all net collections received by the Trust to the REIT Sub and
its subsidiaries irrespective of any event or condition in respect of the Legacy Credit Agreement.
All collections received by the Trust, provided that an event of default has not occurred and
is continuing, shall go first to the payment of monthly servicing fees under the servicing
agreement with the Trust, as amended (the Servicing Agreement) and then to (i) Administration
Fees, expenses and costs (if any), (ii) pro rata to the owner trustee, certificate trustee and each
custodian for any due and unpaid fees and expenses of such trustee and/or custodian, and (iii) to
the pro rata ownership of the Trust Certificates. All amounts received pursuant to the
Participants Trust Certificates shall be distributed pursuant to the applicable Waterfall
provisions.
On September 22, 2010, the Legacy Credit Agreement with the Bank was amended. Various
definitions, terms and FCMC-related covenants were amended to permit a future transfer, sale,
restructuring or spin-off of the ownership of FCMC, subject to a review and final approval of the
Bank; release the equity interests of FCHC in FCMC that had been pledged to the Bank in March 2009
and the Banks lien on a certain commercial condominium unit of FCMC; add as collateral the
Deferred Payment Agreement (which is guaranteed and collateralized by Mr. Axon) to pay the Bank 10%
of the cumulative proceeds, minus $4 million, from any qualifying transactions (including dividends
or distributions) that monetize FCMCs value or significant assets prior to March 20, 2019; and,
release, cancel and discharge the limited guarantee of FCMC. In addition, on September 22, 2010,
the Bank eliminated all cross-default provisions to the Licensing Credit Agreement and Servicing
Agreement of FCMC with the Trust (for the remaining loans and real estate
owned properties that continue to be held by the Trust) that could have triggered a default
resulting from a default under the Legacy Credit Agreement.
F-42
3. |
|
Entered into an amended and restated credit agreement to fund FCMCs licensing obligations
and working capital. |
On March 31, 2009, in connection with the Restructuring, Franklin Holding and FCMC entered
into the Licensing Credit Agreement, which included a credit limit of $13.5 million, comprised of a
secured (i) revolving line of credit (Revolving Facility) up to the principal amount outstanding
at any time of $2.0 million, (ii) up to the aggregate stated amount outstanding at any time for
letters of credit of $6.5 million, and (iii) a draw credit facility (Draw Facility) up to the
principal amount outstanding at any time of $5.0 million.
On March 26, 2010, Franklin Holding and FCMC entered into an amendment to the Licensing Credit
Agreement with the Bank, which renewed and extended the Licensing Credit Agreement entered into
with the Bank on March 31, 2009 as part of the Restructuring. The Amendment reduced the Draw
Facility from $5.0 million to $4.0 million and extended the termination date to May 31, 2010, which
expired unrenewed, and extended the termination date for the $2.0 million revolving line of credit
and $6.5 million letter of credit facilities to March 31, 2011.
On July 16, 2010, the Licensing Credit Agreement was amended to reduce the revolving line of
credit from $2 million to $1 million and to reduce the cash collateral securing the revolving loan
and letter of credit facilities from $8.5 million to $7.5 million.
On September 22, 2010, Franklin Holding and FCMC entered into a further amendment to the
Licensing Credit Agreement. Various definitions, terms and FCMC-related covenants were amended to
extend the revolving line of credit and letter of credit facilities to September 30, 2011; permit a
future transfer, sale, restructuring or spin-off of the ownership of FCMC, subject to a review and
final approval of the Bank; release Bank liens on certain corporate condominium units of FCMC
(subject to payment in full of Mr. Axons Note, which was due in full on November 22, 2010, and
which has been paid and subject liens have been released); eliminate any cross defaults resulting
from any default under the Legacy Credit Agreement; permit the incurrence of liabilities for
indebtedness subject to the prior written consent of the Bank, which consent shall not be
unreasonably withheld or delayed; and eliminate the provision that FCMC shall, to the extent
permitted by applicable law, no less frequently than semi-annually, within forty-five days after
each June 30th and December 31st of each calendar year, make pro rata dividends, distributions and
payments to FCMCs shareholders and the Bank under the Legacy Credit Agreement. In addition, the
Bank cancelled and terminated the obligation of FCMC, entered into on July 16, 2010, to make
payments aggregating $3 million to the Bank based upon FCMCs EBITDA over a three-year period.
The Revolving Facility and the letters of credit are used to assure that all state licensing
requirements of FCMC are met and to pay approved expenses of the Company. The Draw Facility was
available, although never utilized by the Company, for the purpose of providing working capital for
FCMC, if needed, and amounts drawn and repaid under this facility could not be re-borrowed. At
December 31, 2010, no amount was outstanding under the Revolving Facility and approximately $6.2
million of letters of credit for various state licensing purposes were outstanding. There were no
amounts due under the Draw Facility when it expired unrenewed.
F-43
The principal sum shall be due and payable in full on the earlier of the date that the
advances under the Licensing Credit Agreement, as amended, are due and payable in full pursuant to
the terms of the agreement, whether by acceleration or otherwise, or at maturity. Advances under
the Revolving Facility shall bear interest at the one-month reserve adjusted LIBOR plus a margin of
8%. There is a requirement to make monthly payments of interest accrued on the Advances under the
Revolving Facility. After any default, all advances and letters of credit shall bear interest at
5% in excess of the rate of interest then in effect.
The Licensing Credit Agreement, as amended, contains warranties, representations, covenants
and events of default that are customary in transactions similar to the March 2009 Restructuring.
The Licensing Credit Agreement, as amended (and following the payment of Mr. Axons Note in
November 2010), is secured by (i) a first priority security interest in FCMCs cash equivalents in
a controlled account maintained at the Bank in an amount satisfactory to the Bank, but not less
than $8.5 million (which, effective June 20, 2010, is $7.5 million), (ii) blanket existing lien on
all personal property of FCMC, and (iii) any monies or sums due FCMC in respect of any program
sponsored by any Governmental Authority, including without limitation any fees received, directly
or indirectly, under the U.S. Treasury Homeowners Affordability and Stability Plan.
The Draw Facility had been guaranteed by Thomas J. Axon, Chairman of the Board of Directors
and a principal stockholder of the Company. In consideration for his guaranty, the Bank and the
Companys Audit Committee each had consented in March 2009 to the payment to Mr. Axon equal to 10%
of FCMCs common shares, which has been paid, subject to a further payment of up to an additional
10% in FCMCs common shares should the pledge of common shares of FCMC by Franklin Holding to the
Bank be reduced upon attainment by FCMC of certain net collection targets set by the Bank with
respect to the Portfolio. The further payment of up to an additional 10% in FCMCs common shares
should the pledge of common shares of FCMC by Franklin Holding to the Bank be reduced upon
attainment by FCMC of certain net collection targets set by the Bank with respect to the Portfolio
is no longer applicable effective with the September 2010 Transaction.
4. |
|
Entered into a servicing agreement with the Trust. |
The Servicing Agreement, which was entered into on March 31, 2009 and subsequently amended on
August 1, 2010 and September 22, 2010, governs the servicing by FCMC, as the servicer (the
Servicer) for the loans and real estate owned properties owned by the Trust. The Trust and/or
the Bank as the administrator of the Trust (the Administrator) have significant control over all
aspects of the servicing by FCMC for the Trust. On September 22, 2010, the Servicing Agreement was
amended to eliminate any cross-default provisions resulting from any default under the Legacy
Credit Agreement. On December 22, 2010, the Bank terminated the Servicing Agreement and the
servicing of all assets by FCMC for the Trust (which as of December 31, 2010 consisted of only REO
assets) effective March 24, 2011.
All collections by the Servicer are remitted to a collection account and controlled through
the Banks lockbox account. The Administrator shall transfer the collection amounts from the
lockbox account to a certificate account whereby the funds shall flow through the trust agreements
Waterfall as described above. The obligation of the Trust to pay the Servicers servicing fees
and servicing advance reimbursements are limited to the collections from the loans and REO
properties of the Trust. In addition, the Servicer will be indemnified by the Trust only for a
breach of corporate representations and warranties or if the Administrator forces the Servicer to
take an action that results in a loss to the Servicer.
F-44
13. FINANCING AGREEMENTS
At December 31, 2010, FCMC had no balance outstanding under the revolving line of its
Licensing Credit Agreement with the Bank, which is shown in the Companys financial statements as
Financing agreement. At December 31, 2009, the Company had $1.0 million outstanding under the
Licensing Credit Agreement. See Note 12.
14. NONCONTROLLING INTEREST
For the Companys consolidated majority-owned subsidiary (FCMC) in which the Company owns less
than 100% of the total outstanding common shares of stock, the Company recognizes a noncontrolling
interest for the ownership interest of the noncontrolling interest holder, the Companys Chairman
and President, and principal stockholder, Thomas J. Axon. The noncontrolling interest represents
the minority stockholders proportionate share of the equity of FCMC. At December 31, 2010, the
Company owned 80% of FCMCs capital stock, and Mr. Axon owned 20%. The 20% equity interest of FCMC
that is not owned by the Company is shown as Noncontrolling interest in subsidiary in the Companys
Consolidated Financial Statements.
The change in the carrying amount of the noncontrolling interest for the years ended December
31, 2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Balance, beginning of year |
|
$ |
1,657,275 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Transfer of 10% ownership |
|
|
|
|
|
|
1,710,490 |
|
Transfer of additional 10% ownership |
|
|
1,516,381 |
|
|
|
|
|
Net income attributed to noncontrolling interest |
|
|
976 |
|
|
|
267,519 |
|
Non-dividend distribution |
|
|
|
|
|
|
(224,500 |
) |
Noncontrolling interest distribution |
|
|
|
|
|
|
(96,234 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
3,174,632 |
|
|
$ |
1,657,275 |
|
|
|
|
|
|
|
|
On March 31, 2009, the Company transferred ten percent of its ownership in common stock
of FCMC to its Chairman and President, Thomas J. Axon, as the cost of obtaining certain guarantees
and pledges from Mr. Axon, which were required by the Bank as a condition of the March 2009
Restructuring entered into by the Company and certain of its wholly-owned direct and indirect
subsidiaries on March 31, 2009. On September 22, 2010, in consideration for Mr. Axons undertaking
the obligations required of him under the September 2010 Transaction agreements, and various
guarantees and concessions previously and currently provided by Mr. Axon for the benefit of FCMC
and FCHC, FCHC transferred to Mr. Axon an additional 10% of FCMCs outstanding shares of common
stock. When combined with FCMC shares already directly owned by Mr. Axon, the Chairman and
President of FCHC and FCMC now directly owns 20% of FCMC, while the remaining 80% of FCMC is owned
by FCHC and its public shareholders (including Mr. Axon as a principal shareholder of FCHCs
publicly owned shares).
F-45
15. INCOME TAXES
Components of the (benefit) for income taxes for the years ended December 31, 2010 and 2009
are as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Current (benefit)/provision: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
(150,000 |
) |
|
$ |
(3,719,010 |
) |
State and local |
|
|
(112,447 |
) |
|
|
638,762 |
|
|
|
|
|
|
|
|
|
|
|
(262,447 |
) |
|
|
(3,080,248 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred (benefit)/provision: |
|
|
|
|
|
|
|
|
Federal |
|
|
(17,470,107 |
) |
|
|
82,619,163 |
|
State and local |
|
|
(1,519,140 |
) |
|
|
7,087,080 |
|
|
|
|
|
|
|
|
|
|
|
(18,989,247 |
) |
|
|
89,706,243 |
|
|
|
|
|
|
|
|
Increase/(decrease) in valuation allowance |
|
|
18,989,247 |
|
|
|
(89,465,511 |
) |
|
|
|
|
|
|
|
(Benefit) |
|
$ |
(262,447 |
) |
|
$ |
(2,839,516 |
) |
|
|
|
|
|
|
|
A reconciliation of the anticipated income tax (benefit), computed by applying the
Federal statutory income tax rate to income before provision for income taxes, to the provision for
income taxes in the accompanying consolidated statements of operations for the years ended December
31, 2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Tax determined by applying U.S. statutory rate to income |
|
$ |
(18,881,901 |
) |
|
$ |
(122,623,091 |
) |
Increase in taxes resulting from: |
|
|
|
|
|
|
|
|
State and local taxes, net of Federal benefit |
|
|
(3,119,250 |
) |
|
|
(7,156,807 |
) |
Increase/(decrease) in valuation allowance |
|
|
18,989,247 |
|
|
|
(89,465,511 |
) |
Basis adjustment |
|
|
3,045,497 |
|
|
|
215,513,346 |
|
Change in tax estimate |
|
|
(304,447 |
) |
|
|
856,857 |
|
Non-deductible expenses |
|
|
8,407 |
|
|
|
35,690 |
|
|
|
|
|
|
|
|
|
|
$ |
(262,447 |
) |
|
$ |
(2,839,516 |
) |
|
|
|
|
|
|
|
The following table provides a reconciliation of the beginning and ending amounts of the
Companys uncertain tax positions:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Uncertain tax positions, January 1 |
|
$ |
943,174 |
|
|
$ |
702,442 |
|
|
|
|
|
|
|
|
|
|
Decreases relating to positions taken during prior years |
|
|
(567,041 |
) |
|
|
|
|
Increases relating to positions taken during the current year |
|
|
262,594 |
|
|
|
240,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uncertain tax positions, December 31 |
|
$ |
638,727 |
|
|
$ |
943,174 |
|
|
|
|
|
|
|
|
F-46
During 2010, the Company recorded a net decrease in the uncertain tax position in the
amount of $304,000 and an increase during 2009 of $241,000 in its consolidated statements of
operations. The Company is not aware of any uncertain tax positions that will significantly
increase or decrease within the
next twelve months. The Companys major tax jurisdictions are Federal and the states of New
Jersey and New York, which remain subject to examination from and including the years 2006 to 2010
for the states of New Jersey and New York, and from and including the years 2007 to 2010 by the
Internal Revenue Service for its Federal returns. The IRS examination of tax years 2005 through
2007 concluded during 2010 with a favorable settlement, and as a result, the Company reversed a
$150,000 reserve for this audit determination. The Company also decreased the reserve
approximately $417,000 for other uncertain tax positions. The Company is not currently under
examination by the Internal Revenue Service.
The tax effects of temporary differences that give rise to deferred income tax assets and
liabilities at December 31, 2010 and 2009 are presented below:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Loans to subsidiary companies |
|
$ |
6,629,225 |
|
|
$ |
6,629,225 |
|
Restricted stock |
|
|
3,060 |
|
|
|
35,550 |
|
Loan commitment fees |
|
|
1,530,534 |
|
|
|
|
|
Other |
|
|
197,973 |
|
|
|
132,590 |
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
$ |
8,360,792 |
|
|
$ |
6,797,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Loan basis |
|
$ |
7,936,451 |
|
|
$ |
8,348,718 |
|
Derivative liabilities |
|
|
1,130,512 |
|
|
|
4,431,875 |
|
Tax hedge |
|
|
1,048,315 |
|
|
|
1,048,315 |
|
Investment in REIT stock |
|
|
46,963,223 |
|
|
|
53,144,236 |
|
Acquisition costs |
|
|
185,881 |
|
|
|
264,416 |
|
State net operating loss carryforwards |
|
|
11,829,359 |
|
|
|
8,331,997 |
|
Deferred costs |
|
|
1,351,325 |
|
|
|
1,351,325 |
|
Federal net operating loss carryforwards |
|
|
48,828,171 |
|
|
|
24,965,450 |
|
Other |
|
|
635,870 |
|
|
|
771,464 |
|
|
|
|
|
|
|
|
Deferred tax assets |
|
|
119,909,107 |
|
|
$ |
102,657,796 |
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
(111,548,315 |
) |
|
|
(95,860,431 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
The Company recorded a valuation allowance of $111.5 million, inclusive of $1.1 million
that was recorded in Other accumulated comprehensive (loss), and $95.9 million, inclusive of $4.4
million that was recorded in Other accumulated comprehensive (loss), as of December 31, 2010 and
2009, respectively, as the Company has determined that it is more likely than not that all of the
deferred tax assets will not be fully realizable.
As of December 31, 2010, the Company had tax net operating loss carryforwards with various
states totaling approximately $199.1 million. As of December 31, 2010, the Company had Federal tax
net operating loss carryforwards of approximately $143.6 million. The net operating loss
carryforwards expire in various years beginning in 2015 through 2030.
As part of the March 2009 Restructuring, the Company agreed to transfer to the Bank its tax
basis in the assets transferred to the Bank, and on March 15, 2010, the Company filed the necessary
Federal election to transfer such tax basis to the Bank. The Companys tax basis in the assets
transferred approximated $1.1 billion.
F-47
16. STOCK-BASED COMPENSATION
The Company awarded stock options to certain officers and directors under the Franklin Credit
Management Corporation 1996 Stock Incentive Plan (the Plan) as amended. The Compensation
Committee of the Board of Directors (the Compensation Committee) determines which eligible
employees or directors will receive awards, the types of awards to be received, and the terms and
conditions thereof.
Options granted under the Plan may be designated as either incentive stock options or
non-qualified stock options. The Compensation Committee determines the terms and conditions of the
option, including the time or times at which an option may be exercised, the methods by which such
exercise price may be paid, and the form of such payment. Options are generally granted with an
exercise price equal to the market value of the Companys stock at the date of grant. These option
awards generally vest over 1 to 3 years and have a contractual term of 10 years.
The Company estimated the fair value of stock options granted on the date of grant using the
Black-Scholes option-pricing model. The table below presents the assumptions used to estimate the
fair value of stock options granted on the date of grant using the Black-Scholes option-pricing
model for the years ended December 31, 2010 and 2009. The risk-free rate for periods within the
contractual life of the stock option is based on the U.S. Treasury yield curve in effect at the
time of grant. The Company uses historical data to estimate stock option exercise. The expected
term of stock options granted is derived from the output of the model and represents the period of
time that stock options granted are expected to be outstanding. The estimates of fair value from
these models are theoretical values for stock options and changes in the assumptions used in the
models could result in materially different fair value estimates. The actual value of the stock
options will depend on the market value of the Companys common stock when the stock options are
exercised.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive Stock Options |
|
|
Non-Qualified Stock Options |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
Risk-free interest rate |
|
|
|
|
|
|
|
|
|
|
3.26 |
% |
|
|
3.57 |
% |
Weighted average volatility |
|
|
|
|
|
|
|
|
|
|
123.51 |
% |
|
|
110.53 |
|
Expected lives (years) |
|
|
|
|
|
|
|
|
|
|
10.0 |
|
|
|
10.0 |
|
F-48
Transactions in stock options for the years ended December 31, 2010 and 2009 under the
plan are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding options, beginning |
|
|
301,000 |
|
|
$ |
3.81 |
|
|
|
582,000 |
|
|
$ |
2.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
12,000 |
|
|
|
.13 |
|
|
|
12,000 |
|
|
|
0.30 |
|
Options cancelled |
|
|
(84,000 |
) |
|
|
3.75 |
|
|
|
(293,000 |
) |
|
|
1.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options, end |
|
|
229,000 |
|
|
|
3.64 |
|
|
|
301,000 |
|
|
|
3.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options unvested |
|
|
(40,000 |
) |
|
|
1.75 |
|
|
|
(60,000 |
) |
|
|
1.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, end |
|
|
189,000 |
|
|
$ |
4.04 |
|
|
|
241,000 |
|
|
$ |
4.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, the weighted average remaining contractual term and aggregate
intrinsic value of options outstanding and exercisable was 5.18 years and $0.
The Company has the following options outstanding at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
Number |
|
Range of exercise price of options: |
|
Outstanding |
|
|
Exercisable |
|
$0.13 |
|
|
12,000 |
|
|
|
12,000 |
|
$0.30 |
|
|
12,000 |
|
|
|
12,000 |
|
$0.75 |
|
|
23,000 |
|
|
|
23,000 |
|
$0.85 |
|
|
5,000 |
|
|
|
5,000 |
|
$0.89 |
|
|
12,000 |
|
|
|
12,000 |
|
$1.04 |
|
|
6,000 |
|
|
|
6,000 |
|
$1.75 |
|
|
80,000 |
|
|
|
40,000 |
|
$2.25 |
|
|
11,000 |
|
|
|
11,000 |
|
$3.55 |
|
|
12,000 |
|
|
|
12,000 |
|
$4.98 |
|
|
12,000 |
|
|
|
12,000 |
|
$7.73 |
|
|
12,000 |
|
|
|
12,000 |
|
$12.85 |
|
|
12,000 |
|
|
|
12,000 |
|
$13.75 |
|
|
20,000 |
|
|
|
20,000 |
|
|
|
|
|
|
|
|
TOTAL OPTIONS |
|
|
229,000 |
|
|
|
189,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price |
|
$ |
3.64 |
|
|
$ |
4.04 |
|
Compensation cost related to the Companys stock option awards was $20,643 for the year
ended December 31, 2010. Compensation cost related to the Companys stock option awards was
$22,509 for the year ended December 31, 2009. As of December 31, 2010, unrecognized compensation
cost related to the Companys stock option awards was $25,109, which will be recognized over a
weighted average period of 1.33 years.
F-49
2006 Stock Incentive Plan
On May 24, 2006, the shareholders approved the 2006 Stock Incentive Plan. This approval
authorized and reserved 750,000 shares for grant under the 2006 stock incentive plan. Awards can
consist of non-qualified stock options, incentive stock options, stock appreciation rights, shares
of restricted stock, restricted stock units, shares of unrestricted stock, performance shares and
dividend equivalent rights are authorized. Grants of non-qualified stock options, incentive stock
options and stock appreciation rights under the 2006 Stock Incentive Plan generally qualify as
performance-based compensation under Section 162(m) of the Internal Revenue Code, and, therefore,
are not subject to the provisions of Section 162(m), which disallow a federal income tax deduction
for certain compensation in excess of $1 million per year paid to the Companys Chief Executive
Officer and each of its four other most highly compensated executive officers.
Restricted Stock Restricted shares of the Companys common stock have been awarded
to certain executives. The stock awards are subject to restrictions on transferability and other
restrictions, and step vest over a three-year period.
A summary of the status of the Companys restricted stock awards as of December 31, 2010 and
2009 and changes during the periods then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
Restricted Stock |
|
Shares |
|
|
Fair Value |
|
|
Shares |
|
|
Fair Value |
|
Outstanding unvested grants, beginning of year |
|
|
|
|
|
$ |
|
|
|
|
31,250 |
|
|
$ |
7.90 |
|
Granted |
|
|
17,000 |
|
|
$ |
1.00 |
|
|
|
|
|
|
|
|
|
Vested |
|
|
(8,500 |
) |
|
$ |
1.00 |
|
|
|
(18,750 |
) |
|
$ |
7.90 |
|
Canceled |
|
|
|
|
|
|
|
|
|
|
(12,500 |
) |
|
$ |
7.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding unvested grants, end of year |
|
|
8,500 |
|
|
$ |
1.00 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation cost related to the Companys restricted stock awards was $17,000 and
$148,000 for the year ended December 31, 2010 and 2009, respectively.
During the year ended December 31, 2010, the total fair value of the Companys restricted
stock that vested was $8,500.
17. CERTAIN CONCENTRATIONS
Third Party Servicing Agreements As a result of the March 2009 Restructuring and the
Reorganization that took effect December 19, 2008, the Companys operating business is conducted
solely through FCMC, which is a specialty consumer finance company primarily engaged in the
servicing and resolution of performing, reperforming and nonperforming residential mortgage loans,
including specialized loan collection and recovery servicing, for third parties. The portfolios
serviced for other entities, as of December 31, 2010, were heavily concentrated with loans serviced
for related parties (which consist primarily of loans previously acquired and originated by the
Company, transferred to the Trust and then subsequently sold by the Trust to third parties). As of
December 31, 2010, FCMC had four significant servicing contracts with third parties to service 1-4
family mortgage loans and owned real estate; three with related parties (Bosco I, Bosco II and
Bosco III); and one with an unrelated third party. We also had one servicing contract remaining
with Huntington for the remaining loans not sold by the Trust in the Loan Sales and the December
Loan Sale. At December 31, 2010, we serviced and provided recovery collection services on a
total population of approximately 26,500 loans, with approximately $1.1 billion of unpaid principal
balance, for the Bosco-related entities. See Note 19.
F-50
The following table summarizes percentages of total principal balances by the geographic
location of properties securing the residential mortgage loans serviced for other entities at
December 31, 2010:
|
|
|
|
|
Location |
|
December 31, 2010 |
|
California |
|
|
27.14 |
% |
Florida |
|
|
7.99 |
% |
New Jersey |
|
|
6.77 |
% |
New York |
|
|
6.32 |
% |
Texas |
|
|
5.38 |
% |
Pennsylvania |
|
|
3.32 |
% |
Ohio |
|
|
3.10 |
% |
Illinois |
|
|
3.04 |
% |
Georgia |
|
|
2.91 |
% |
Michigan |
|
|
2.77 |
% |
All Others |
|
|
31.25 |
% |
|
|
|
|
|
|
|
100.00 |
% |
|
|
|
|
Financing Substantially all of the Companys existing debt and available credit
facility is with one financial institution, Huntington.
18. COMMITMENTS AND CONTINGENCIES
Operating Leases During 2005, the Company entered into two operating lease agreements for
corporate office space, which contain provisions for future rent increases, rent-free periods, or
periods in which rent payments are reduced (abated). The total amount of rental payments due over
the lease term is being charged to rent expense on the straight-line method over the term of the
lease. The difference between rent expense recorded and the amount paid is credited or charged to
accrued expenses, which is included in Accounts payable and accrued expenses on the Companys
balance sheets. The Companys aggregate rent expenses for 2010 and 2009 amounted to $1,389,732 and
$1,204,057, respectively.
The combined future minimum lease payments as of December 31, 2010 are as follows:
|
|
|
|
|
Year Ended |
|
Amount |
|
2011 |
|
$ |
1,618,085 |
|
2012 |
|
|
1,597,107 |
|
2013 |
|
|
1,597,107 |
|
|
|
|
|
|
|
$ |
4,812,299 |
|
|
|
|
|
F-51
Substantially all of the Companys office equipment is leased under multiple operating
leases. The combined future minimum lease payments as of December 31, 2010 are as follows:
|
|
|
|
|
Year Ended |
|
Amount |
|
2011 |
|
$ |
63,682 |
|
2012 |
|
|
59,937 |
|
2013 |
|
|
59,937 |
|
2014 |
|
|
48,824 |
|
Thereafter |
|
|
3,766 |
|
|
|
|
|
|
|
$ |
236,146 |
|
|
|
|
|
Capital Leases The Company entered into a lease for office furniture for its corporate
office in Jersey City, New Jersey under an agreement that is classified as a capital lease. The
cost of the furniture under this capital lease, included on the balance sheets as Building,
furniture and equipment, net was originally $916,890. The lease has been fully depreciated as of
December 31, 2010. Amortization of assets under capital leases is included on the Companys
consolidated statements of operations in Depreciation.
Legal Actions The Company is involved in legal proceedings and litigation arising in the
ordinary course of business. In the opinion of management, the outcome of such proceedings and
litigation currently pending will not materially affect the Companys financial statements.
19. RELATED PARTY TRANSACTIONS
Restructuring On March 31, 2009, the Company transferred ten percent of its ownership in
common stock of FCMC to its Chairman and President, Thomas J. Axon, as the cost of obtaining
certain guarantees and pledges from Mr. Axon, which were required by the Bank as a condition of the
March 2009 Restructuring entered into by the Company and certain of its wholly-owned direct and
indirect subsidiaries on March 31, 2009. On September 22, 2010, in consideration for Mr. Axons
undertaking the obligations required of him under a series of transactions the Company and FCMC
entered into with the Bank on that date (which resulted in a release of the pledge of FCMC stock to
the Bank, a significant revision to the Companys legacy credit agreement and, subject to the final
approval of the Bank, the consent to proceed with a restructuring or spin-off of the ownership of
FCMC) and various guarantees and concessions provided by Mr. Axon for the benefit of both FCMC and
the Company, the Company transferred to Mr. Axon an additional 10% of FCMCs outstanding shares of
common stock. When combined with FCMC shares already directly owned by Mr. Axon, the Chairman and
President of the Company and FCMC now directly owns 20% of FCMC, while the remaining 80% of FCMC is
owned by the Company and indirectly by its public shareholders (including Mr. Axon as a principal
shareholder of the Companys publicly owned shares).
The Companys servicing revenues from the Bosco-related entities amounted to $2.5 million and
$2.0 million for the year ended December 31, 2010 and 2009, respectively.
Bosco I Servicing Agreement On May 28, 2008, FCMC entered into various agreements,
including a servicing agreement, to service on a fee-paying basis for Bosco I approximately $245
million in residential home equity line of credit mortgage loans. Bosco I was organized by FCMC,
and the membership interests in Bosco I include the Companys Chairman and President, Thomas J.
Axon, and a related company of which Mr. Axon is the chairman of the board and three of the
Companys directors serve as board members. The loans that are subject to the servicing agreement
were acquired by Bosco I on May 28, 2008. FCMCs
servicing agreement was approved by its Audit Committee. The Bosco I servicing agreement is
for a term of three years and expires, if not renewed, May 28, 2011.
F-52
FCMC began servicing the Bosco I portfolio in June 2008. Included in the Companys
consolidated revenues were servicing fees recognized from servicing the Bosco I portfolio of
$501,000 and $2,014,000 for the twelve months ended December 31, 2010 and 2009, respectively. The
Company did not recognize any administrative fees for the twelve months ended December 31, 2010 and
Bosco I did not pay for any fees for such services provided during the twelve months ended December
31, 2010. For the twelve months ended December 31, 2009, the Company did not recognize any
administrative fees and wrote off as uncollectible the administrative fees that had been recognized
in 2008.
On February 27, 2009, at the request of the Bosco I lenders, FCMC adopted a revised fee
structure, which was approved by FCMCs Audit Committee. The revised fee structure provided that,
for the next 12 months, FCMCs monthly servicing fee would be paid only after a monthly loan
modification fee of $29,167 was paid to Bosco Is lenders. Further, the revised fee structure
provided that, on each monthly payment date, if the aggregate amount of net collections was less
than $1 million, 25% of FCMCs servicing fee would be paid only after certain other monthly
distributions were made, including, among other things, payments made by Bosco I to repay its
third-party indebtedness.
On October 29, 2009, at the additional request of the Bosco I lenders in an effort to maximize
cash flow to the Bosco I lenders and to avoid payment defaults by Bosco I, the revised fee
structure relating to deferred fees was adjusted through an amendment to the loan servicing
agreement with Bosco I (the Bosco Amendment), which was approved by FCMCs Audit Committee.
Under the terms of the Bosco Amendment, FCMC is entitled to a minimum monthly servicing fee of
$50,000. However, to the extent that the servicing fee otherwise paid for any month would be in
excess of the greater of $50,000 or 10% of the total cash collected on the loans serviced for Bosco
I (such amount being the Monthly Cap), the excess will be deferred, without the accrual of
interest. The cumulative amounts deferred will be paid (i) with the payment of the monthly
servicing fee, to the maximum extent possible, for any month in which the servicing fee is less
than the applicable Monthly Cap, so long as the sum paid does not exceed the Monthly Cap or (ii) to
the extent not previously paid, on the date on which any of the promissory notes (Notes) payable
by Bosco I to the lenders, which were entered into to finance the purchase of and are secured by
the loans serviced by FCMC, is repaid, refinanced, released, accelerated, or the amounts owing
thereunder increased (other than by accrual or capitalization of interest). If the deferred
servicing fees become payable by reason of acceleration of the Notes, the lenders right to payment
under such Notes shall be prior in right to FCMCs rights to such deferred fees.
The Bosco Amendment did not alter FCMCs right to receive a certain percentage of collections
in the event Bosco Is indebtedness to the Lenders has been repaid in full, the Bosco I equity
holders have been repaid in full the equity investment in Bosco I made prior to Bosco I entering
into the loan agreement with the lenders, and the lenders and Bosco Is equity holders have
received a specified rate of return on their debt and equity investments.
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The amount and timing of ancillary administrative fees owed to the Company is the subject of a
good faith dispute between FCMC and the Managing Member of Bosco I, Thomas J. Axon (Chairman and
President of the Company and FCMC). However, even if the parties can resolve their differences
amicably, there are no funds available to Bosco I for payment for such services (short of a capital
call), since all funds from collections are required by Bosco Is agreements with its lenders to
repay such lenders, aside from
specific amounts required for servicing fees and other specifically excepted costs. On June
30, 2009, the Company wrote off $90,000 in internal accounting costs associated with services
provided by FCMC to Bosco I. On December 31, 2009, the Company wrote off $372,000 in additional
aged receivables, due to nonpayment, consisting of (i) legal costs incurred by FCMC in 2008 related
to the acquisition by Bosco I of its loan portfolio and entry into a servicing agreement with Bosco
I; (ii) expenses for loan analysis, due diligence and other services performed for Bosco I by FCMC
in 2008 related to the acquisition by Bosco I of the loan portfolio; and (iii) additional internal
accounting costs for services provided to Bosco I by FCMC through June 30, 2009. In addition, FCMC
has not accrued fees for accounting costs for these services since June 1, 2009.
FCMC determined to accept the deferrals and other amendments described above with respect to
its Bosco I relationship in recognition of the performance of the Bosco I loan portfolio, which has
been adversely impacted by general market and economic conditions, in an effort to maintain the
continued and future viability of its servicing relationship with Bosco I, and in the belief that
doing so is in its best long-term economic interests in light of the fact that the Company believes
FCMCs servicing of the Bosco I portfolio is profitable notwithstanding such deferrals and
amendments. FCMCs determination to not currently take legal action with respect to the
receivables it has written off as described above, which receivables have not been settled or
forgiven by FCMC, was made in light of these same considerations.
At December 31,2010, the Company charged off as uncollectible $299,000 of accrued and unpaid
servicing fees due from Bosco I that represented the remaining portion of outstanding servicing
fees due and unpaid prior to August 1, 2009, due to current disputes among Bosco I and its lenders
regarding the May 28, 2011 maturity of the Bosco I loan agreement. As of December 31, 2010, the
Company had no outstanding accrued and unpaid servicing fees due from Bosco I other than the
servicing fee due for the current month of December 31, 2010, which was received in January 2011,
and $8,000 in outstanding reimbursable third-party expenses incurred by FCMC in the servicing and
collection of the Bosco I loans. As of December 31, 2010, no deferred servicing fees per the Bosco
I amendments have been accrued, and all such amounts remain unpaid.
On March 4, 2010, FCMC entered into an agreement with Bosco I to provide ancillary services
not covered by the Bosco I Servicing Agreement, as amended, related to occupancy verification and
the coordination of on-sight visits with borrowers to facilitate the implementation of loss
mitigation program initiatives at fees ranging from $100-$140 per individual assignment. As of
December 31, 2010 there were no third party expenses reimbursable by Bosco I outstanding for the
services referenced above.
The maturity date of Bosco Is loan agreement with its lenders is May 28, 2011, unless the
loan agreement is earlier terminated in accordance with its terms or by operation of law. In the
event that Bosco Is lending agreement is not extended or renewed, it is uncertain whether the
lenders would permit FCMC to remain the servicer of the mortgage loans.
Bosco II Servicing Agreement On September 22, 2010, FCMC entered into a servicing agreement
with Bosco II and a trust to service and collect loans purchased by Bosco II from Franklin Mortgage
Asset Trust 2009-A, an indirect subsidiary of the Banks Trust. 100% of the membership interest in
Bosco II is held by the Companys Chairman and President, Thomas J. Axon. The Bosco II Servicing
Agreement governs the servicing of approximately 20,000 loans. Pursuant to the Bosco II Servicing
Agreement, FCMC services the loans subject to customary terms, conditions and servicing practices
for the mortgage servicing industry. Under the terms of the Bosco II Servicing Agreement, FCMC is
entitled to a servicing fee equal to a percentage of net amounts collected and per unit monthly
service fee for loans less than thirty days
contractually delinquent and a straight contingency fee for loans equal to or more than thirty
days contractually delinquent, and reimbursement of certain third-party fees and expenses incurred
by FCMC. The Bosco II Servicing Agreement may be terminated without cause and penalty upon thirty
days prior written notice.
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FCMC also provided the loan analysis and certain other services for Bosco II for the loans
acquired by Bosco II and will perform various administrative and bookkeeping services for Bosco
Credit II at the rate of $1,500 per month (the administrative services agreement is pending
approval of Bosco IIs lender). FCMCs servicing agreement and administrative services agreement
with Bosco II were approved by its Audit Committee.
Included in the Companys consolidated revenues for the twelve months ended December 31, 2010
were servicing fees recognized from servicing the Bosco II portfolio of approximately $2.0 million.
Bosco III Servicing Agreement and Participation Interest in Unrestructured Debt with the Bank
In December 2010, FCMC entered into a servicing agreement with Bosco III to service and collect
approximately charge-off loans purchased by Bosco III from the Banks Trust (the remaining loans
held by the Banks Trust) and purchased from the Bank a 50% participation interest in each of the
commercial loans to the Company covering that portion of the Companys debt with the Bank, the
Unrestructured Debt, in the amount of approximately $39 million (FMCM is the loan servicer for
certain Company entities that are the beneficial owners of the loans securing the Unrestructured
Debt). 50% of the membership interest in Bosco III is held by the Companys Chairman and President,
Thomas J. Axon.
The Bosco III servicing agreement governs the servicing of approximately 4,800 loans.
Pursuant to the Bosco III servicing agreement, the servicing fees for second lien mortgage loans
are predominately based on the percentage of principal and interest collected, with a contingency
rate dependent on the delinquency of the loan and a per unit monthly service fee for only those
loans less than 30 days delinquent or in a bankruptcy status during the 90 day period following a
bankruptcy filing. Otherwise, FCMC receives a monthly servicing fee per loan per month for first
lien mortgage loans less than 120 days delinquent or in foreclosure or bankruptcy with the amount
dependent upon loan status at the end of each month, a monthly fee for real estate owned
properties, a contingency fee for first lien mortgage loans equal to or more than 120 days
delinquent and not in foreclosure or bankruptcy, resolution and disposition fees based on the
unpaid principal balance of first lien mortgage loans collected from borrowers or gross proceeds
from the sales of a properties, as applicable, in addition to various ancillary fees and
reimbursement of certain third-party expenses. However, discussions are underway between the Bosco
III investors and FCMC regarding a possible revision to the servicing agreement to have the fees
consist principally of a percentage of principal and interest collected, in addition to various
ancillary fees and reimbursement of certain third-party expenses. FCMCs services may be
terminated with respect to some or all of the assets without cause and without penalty on 30 days
prior written notice.
FCMC also provided the loan analysis and certain other services for Bosco III for the loans
acquired by Bosco III. FCMCs servicing agreement with Bosco III was ratified by its Audit
Committee.
Other Significant Related Party Transactions with the Companys Chairman At December 31,
2010, the Company had an outstanding receivable from an affiliate, RMTS, LLC, of $4,300. This
receivable represents various operating expenses that are paid by the Company and then reimbursed
by RMTS.
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On September 13, 2010, FCMCs audit committee authorized a 22% commission (minus certain
expenses) to Hudson Servicing Solutions, LLC (Hudson), a procurer of force-placed insurance
products for FCMC, with respect to force-placed hazard insurance coverage maintained on FCMCs
remaining portfolio of mortgage loans and mortgage loans serviced for third parties. The sole
member of Hudson is RMTS, LLC, of which Mr. Axon, the Companys Chairman and President, is the
majority owner.
FCMC entered into a collection services agreement, effective December 23, 2009, pursuant to
which FCMC agreed to serve as collection agent in the customary manner in connection with
approximately 4,000 seriously delinquent and generally unsecured loans, with an unpaid principal
balance of approximately $56 million, which were acquired by two trusts set up by a fund in which
the Companys Chairman and President is a member, and contributed 50% of the purchase price and
agreed to pay certain fund expenses. Under the collection services agreement, FCMC is entitled to
collection fees consisting of 35% of the gross amount collected. The agreement also provides for
reimbursement of third-party fees and expenses incurred by FCMC. The collection fees earned by
FCMC under this collection services agreement during the twelve months ended December 31, 2010
amounted to approximately $116,000. In December 2010, FCMC entered into an agreement with the fund
to provide certain administrative and bookkeeping services for a fee of $1,500 per month.
On February 1, 2010, FCMC entered into a collection services agreement, pursuant to which FCMC
agreed to serve as collection agent in the customary manner in connection with approximately 1,500
seriously delinquent and generally unsecured loans, with an unpaid principal balance of
approximately $85 million, which were acquired through a trust set up by a fund in which the
Companys Chairman and President is a member, and contributed 25% of the purchase price. Under the
collection services agreement, FCMC is entitled to collection fees consisting of 33% of the amount
collected, net of third-party expenses. The agreement also provides for reimbursement of
third-party fees and expenses incurred by FCMC in compliance with the collection services
agreement. The collection fees earned by FCMC under this collection services agreement during the
twelve months ended December 31, 2010 were not significant.
20. SUBSEQUENT EVENTS
Investment in REIT Securities Dividend
On July 23, 2010, the Company was verbally notified by the Bank that due to losses recognized
by the new combined REIT from a write down of the carrying value of the mortgage loans owned by the
Banks Trust, the board of directors of the REIT decided not to declare any preferred dividends for
the third and fourth calendar quarters of 2010. The Bank indicated in July 2010, and reaffirmed in
November 2010, that the suspension of preferred dividends would be temporary and that the new
combined REIT is expected to declare and pay dividends commencing in January 2011, including the
cumulative dividends for the third and fourth quarters of 2010. The Companys revenue loss for the
third and fourth quarters of 2010 was approximately $21 million (pre-tax) and the nonpayment of
dividends for the six months ended December 31, 2010 resulted in an increase in stockholders
deficit for the six months ended December 31, 2010.
In February 2011, the Company was advised that the REIT board in February declared dividends
on the REIT Securities for the two quarterly periods ended December 31 and September 30, 2010, and
also declared a dividend for the full year of 2011. The Company was advised that these declared
dividends would be paid one business day after the dividends are approved by the Banks regulator.
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Derivatives Termination of Interest Rate Swap Agreements
On January 25, 2011, the Bank declared an early termination of all of the Companys remaining
interest rate swaps due to a failure to make payments due under the swap agreements, which payment
defaults were occasioned by insufficient funds available under the Legacy Credit Agreement as a
direct result of the loss of cash flows attributable to the July, September and December 2010 loan
sales by the Banks Trust and the suspension of dividends by its REIT. The early termination fee
payable by the Company (but not FCMC) to the Bank is $6.5 million. It is anticipated that the
Companys liability (which is not a liability of FCMC) for the swap termination fee will be payable
only to the extent cash is available under the waterfall provisions of the Legacy Credit Agreement,
and only after the outstanding balance of debt designated as Tranche A debt owed to the Bank has
been paid in full, which at December 31, 2010 amounted to $709 million.
The swap termination fee will be charged to earnings in the quarter ended March 31, 2011.
The Bank also has verbally indicated that it is their position that the early termination of
the interest rate swaps in January 2011 and a prior early termination of interest rate swaps
effective March 31, 2009, which was exercised at the request of the Bank, are defaults under the
Legacy Credit Agreement, entitling the Bank to take possession of and dispose of the REIT
securities collateralizing the legacy debt of certain subsidiaries of Franklin Holding (other than
FCMC). Although we dispute this interpretation based on the nature of the swap terminations in
January 2011 and certain equitable with respect to the swap terminations in March 2009, we have
entered into negotiations with the Bank to surrender the REIT securities as an alternative to
litigation, which might be time-consuming and expensive with an uncertain outcome. The Banks
position, which FCMC is inclined to cooperate with, will enable the REIT securities effectively to
be redeemed at estimated fair value (as determined by the Bank), the proceeds of which would be
applied to reduce the outstanding balance of the Companys Legacy Debt.
Licensing Credit Agreement Waiver of Covenant Noncompliance
The Company was not in compliance at December 31, 2010 with the covenant in the Licensing
Credit Agreement that provides that Franklin Holding and FCMC shall maintain a net income before
taxes of not less than $800,000 as of the end of each calendar month for the most recently ended
twelve consecutive month period or, with notice, an event of default will be deemed to have
occurred. On March 28, 2011, as a temporary measure, Franklin Holding and FCMC entered into an
agreement with the Bank that provides for a limited waiver of the financial covenant of Franklin
Holding and FCMC under the Licensing Credit Agreement, for the period through and including
September 30, 2011, related to the failure to maintain the minimum level of net income before
taxes.
The Company has evaluated subsequent events through the date of the issuance of these
Consolidated Financial Statements.
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