Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|
|
|
þ |
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-17771
FRANKLIN CREDIT HOLDING CORPORATION
(Exact name of Registrant as specified in its charter)
|
|
|
Delaware
|
|
26-3104776 |
(State or other jurisdiction of
|
|
(IRS Employer |
incorporation or organization)
|
|
Identification No.) |
|
|
|
101 Hudson Street |
|
|
Jersey City, New Jersey
|
|
07302 |
(Address of Principal
|
|
(Zip code) |
Executive Offices) |
|
|
(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)
|
|
|
|
|
|
|
Large accelerated filer o
|
|
Accelerated filer o
|
|
Non-accelerated filer o
|
|
Smaller reporting company þ |
|
|
|
|
(Do not check if a smaller reporting company) |
|
|
|
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 ($0.40 on June 30, 2009), the aggregate market value of common
stock held by non-affiliates of the registrant as of such date was
approximately $1,204,352. 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, 2010:
8,029,795
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive proxy statement, which will be filed within 120 days of
December 31, 2009, are incorporated by reference into Part III.
FRANKLIN CREDIT HOLDING CORPORATION
FORM 10-K
December 31, 2009
INDEX
2
PART I
As used herein, references to the Company, Franklin, we, our and us refer to
Franklin Credit Holding Corporation, collectively with its subsidiaries.
Overview
Recent Developments
Franklin Forbearance Agreement. The Company entered into a fourth amendment to the Franklin
Forbearance Agreement (as defined below) and the Franklin 2004 master credit agreement (the Fourth
Amendment) with The Huntington National Bank (the Bank, Lead Lending Bank or Huntington),
effective as of March 26, 2010, relating to approximately $39.5 million of the Companys
indebtedness to the Bank (the Unrestructured Debt), which had been the remaining legacy
indebtedness to the Bank not restructured on March 31, 2009. Under the Fourth Amendment, the
forbearance period with respect to the Unrestructured Debt has been extended from March 31, 2010
until June 30, 2010, under the same terms as the expiring forbearance amendment. Franklin Credit
Management Corporation (FCMC) is not obligated to the Bank with respect to the Unrestructured
Debt. See March Restructuring and Other Information Extension to Forbearance Agreement. See
Risk Factors Risks Related to Our Business.
Amendment and Extension of Licensing Credit Agreement. On March 26, 2010, the Company 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 March 31,
2009 restructuring. The amendment includes a reduction of the draw credit facility (Draw
Facility) from $5.0 million to $4.0 million and an extension of the termination date to May 31
2010 for the Draw Facility and to March 31, 2011 for the $2.0 million revolving line of credit and
$6.5 million letter of credit facilities. The amendment further provides 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 accordance with the Legacy Credit Agreement, the Bank is currently entitled to 70% of all
amounts distributed by FCMC. The payment of any dividend, distribution or payment to FCMCs
shareholders and the Bank would result in a reduction of FCMCs stockholders equity and cash
available for its operations. All other material terms and conditions of the Licensing Credit
Agreement remain the same, and there were no changes to the collateral, warranties,
representations, covenants and events of defaults. See Risk Factors Risks Related to Our
Business.
Collection Services Agreement. 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 twenty five
percent 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 agreement.
3
March 2009 Restructuring
Effective March 31, 2009, Franklin Credit Holding Corporation (Franklin Holding), and
certain of its consolidated subsidiaries, including FCMC and Tribeca Lending Corp. (Tribeca),
entered into a series of agreements (collectively, the Restructuring Agreements) with The
Huntington National Bank, successor by merger to Sky Bank, pursuant to which, taken as a whole, (i)
the Companys loans, pledges and guarantees with the Bank and its participating banks were
substantially restructured pursuant to a legacy credit agreement (the Legacy Credit Agreement),
(ii) substantially all of the Companys portfolio of subprime mortgage loans and owned real estate,
acquired through foreclosure, was transferred to a trust (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, with certain trust certificates, representing an undivided
interest in approximately 83% of the Portfolio, transferred in turn by the Company to Huntington
Capital Financing, LLC (the REIT), a real estate investment trust wholly-owned by the Bank, (iii)
FCMC and Franklin Holding entered into an amended $13.5 million credit facility with the Bank (the
Licensing Credit Agreement), and (iv) FCMC entered into a market-rate servicing agreement (the
Servicing Agreement) with the Bank (the Restructuring). In connection with the Restructuring,
the Company in April 2009 engaged in a number of cost-saving measures intended to improve the
financial performance of FCMC, its servicing subsidiary company.
The loans transferred by the Company to the Trust continue to be included on the Companys
balance sheet, and the revenues from such loans are reflected in the Companys consolidated
results, in accordance with accounting principles generally accepted in the United States of
America (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, 100% of the loans continue to be shown on the Companys balance sheet and the
revenues, and related expenses, continue to be included in these consolidated results. As a
result, the fees received from Huntington subsequent to March 31, 2009 for servicing their loans,
and the third-party costs incurred by us and reimbursed by Huntington, in the servicing and
collection of their loans for purposes of these consolidated financial statements are not
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.
The Restructuring did not include a portion of the Companys debt (the Unrestructured Debt),
which as of December 31, 2009 totaled approximately $39.5 million. The Unrestructured Debt remains
subject to the original terms of the Franklin forbearance agreement entered into with the Bank in
December 2007 and subsequent amendments thereto (the Franklin Forbearance Agreement) and the
Franklin 2004 master credit agreement. On April 20 and August 10, 2009, Franklin Holding, and
certain of its direct and indirect subsidiaries, including Franklin Credit Management Corporation
(FCMC) and Franklin Credit Asset Corporation (Franklin Asset) entered into amendments of the
Franklin Forbearance Agreement and Franklin 2004 master credit agreement (the Amendments) with
the Bank relating to the Unrestructured Debt. The Bank agreed to forbear, during the forbearance
period, which on November 13, 2009, was extended until March 31, 2010; and, on March 26, 2010 was
extended until June 30, 2010, 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. During the forbearance period, the Bank, absent the
occurrence and continuance of a forbearance default other than an Identified Forbearance Default,
will not 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. In addition,
FCMC is not obligated to the Bank with respect to the
Unrestructured Debt and any references to FCMC in the Franklin 2004 master credit agreement
governing the Unrestructured Debt have been amended to refer to Franklin Asset.
4
Upon expiration of the forbearance period, in the event that the Unrestructured Debt with the
Bank remains outstanding, the Bank, with notice, could call an event of default under the Legacy
Credit Agreement, but not the Licensing Credit Agreement or 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 of FCMC (except
for a first lien of the Bank on an office condominium unit and a second priority lien of the Bank
on cash collateral held as security under the Licensing Credit Agreement) and the unpledged portion
of FCMCs stock.
The Franklin forbearance agreement and the Tribeca forbearance agreement (together, the
Forbearance Agreements) that had been entered into with the Bank were, except for the Companys
Unrestructured Debt, replaced effective March 31, 2009 by the Restructuring Agreements.
From the perspective of the Company and its stockholders, the Restructuring provided for the
release of thirty percent of the equity in FCMC, ten percent of which has been transferred to the
Companys principal stockholder, Thomas J. Axon, from the Companys pledges to the Bank in respect
of its Legacy Credit Agreement. The Legacy Credit Agreement also provides for the possibility of
release of up to an additional fifty percent (of which a maximum of an additional ten percent would
go to Thomas J. Axon), based upon the Banks receipt of the agreed amounts of net remittances from
the Portfolio, summarized below (the Net Remittances), from March 31, 2009, the effective date of
the Legacy Credit Agreement (the Legacy Effective Date), through the term of the Legacy Credit
Agreement pursuant to and in accordance with the schedule of collection levels identified in the
Legacy Credit Agreement.
During the twelve-month period ending March 31, 2010, the minimum amount of Net Remittances,
referred to as Level 1, to achieve the release of an additional 10% of pledged equity interests,
from 70% to 60%, is $225 million. During the nine months ended December 31, 2009, the Company
collected in aggregate approximately $176.9 million from loans and real estate owned serviced for
the Bank, of which $30.6 million was received from contractual loan purchase rights. Net
Remittances, as defined in the Legacy Credit Agreement essentially as collections less expenses
incurred by the Bank related to the Companys servicing of the Banks loans and real estate owned,
amounted to approximately $132.0 million. Therefore, the Company would need to collect $93.0
million in Net Remittances over the three-month period ending March 31, 2010 to reach the minimum
Level 1 amount under the Restructuring Agreements. Based on collections as of February 28, 2010,
the Company will not achieve the minimum Level 1 amount.
However, (i) if Net Remittances do not reach the minimum Level 1 amount prior to the first
anniversary date, but reach the minimum Level 2 amount of $475 million prior to the third
anniversary date, the Bank shall retain, as collateral, 55% of the FCMC equity instead of 50%, as
currently scheduled, and any subsequent reductions in the amount of FCMC equity pledged to the Bank
shall be 10%; and provided further that (ii) if Net Remittances do not reach the minimum Level 1
amount prior to the first anniversary date and do not reach the minimum Level 2 amount prior to the
third anniversary date, then the schedule for release of the equity interests in FCMC currently
pledged to the Bank shall be as follows: (x) upon attaining the minimum Level 3 amount of $575
million, the pledged equity interests in FCMC shall reduce 25% (from 70% to 45%); (y) upon
attaining the minimum Level 4 amount of $650 million,
the pledged equity interests in FCMC shall reduce an additional 10% (from 45% to 35%), and (z)
upon attaining the minimum Level 5 amount of $750 million, the pledged equity interests in FCMC
shall reduce an additional 10% (from 35% to 25%). See Managements Discussion and Analysis -
Borrowings Forbearance Agreements with Lead Lending Bank.
5
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 corporate 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.
Franklin Credit Management Corporation
As a result of the March 2009 Restructuring and the Reorganization that took effect December
19, 2008, FCMC, the Companys operating business is conducted principally 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 recovery
servicing, and in the due diligence, analysis, pricing and acquisition of residential mortgage
portfolios, for third parties. The portfolios serviced for other entities, as of December 31,
2009, principally for Huntington (loans previously acquired and originated by Franklin and
transferred to the Trust), primarily consist of first and second-lien loans secured by 1-4 family
residential real estate that generally fell outside the underwriting standards of Fannie Mae and
Freddie Mac.
As a result of the Restructuring and the corporate reorganization that took effect December
19, 2008, FCMC, the servicing company within the Franklin consolidated group of companies, however,
has positive net worth and since January 1, 2009 has been profitable. See Managements Discussion
and Analysis Results of Operations Franklin Credit Management Corporation (FCMC).
Amendment to Bosco Servicing Agreement
On May 28, 2008, Franklin entered into various agreements (the Bosco Servicing Agreements)
to service on a fee-paying basis approximately $245 million in residential home equity line of
credit mortgage loans for Bosco Credit LLC (Bosco).
On February 27, 2009 and October 28, 2009, the Bosco Servicing Agreements, dated as of May 28,
2008, by and between Franklin Credit and Bosco were revised and amended (the Amendment). The
Amendment effectively reduced the monthly servicing fees payable to FCMC, revised the fee structure
relating to deferred servicing fees and provided for a minimum monthly servicing fee of $50,000.
See Loan Servicing Bosco Servicing Agreement.
Going Concern Uncertainty Franklin Holding
The Company has been and continues to be operating in an extraordinary and difficult
environment, and has been significantly and negatively impacted by the unprecedented credit and
economic market turmoil of the past two plus years, including the more recent recessionary economy
of 2009. Particularly impacting Franklin as of the March 2009 Restructuring was the severe
deterioration in the U.S. housing market and the nearly complete shutdown of the mortgage credit
market for borrowers
without excellent credit histories, and the slowing economy with increasing unemployment.
These unprecedented market conditions adversely affected the Companys portfolio of residential
mortgage loans, particularly its second-lien mortgage loans, delinquencies, provisions for loan
losses, operating losses and cash flows, which resulted in significant stockholders deficit of
$464.5 million at December 31, 2008 and $822.9 million at March 31, 2009. At December 31, 2009,
the Companys stockholders deficit was $806.8 million. The Company has been, since the latter
part of 2007, expressly prohibited by the Bank from acquiring or originating loans. In addition,
the Companys restructuring agreements with the Bank contain affirmative covenants that the
Companys servicing subsidiary, FCMC, be licensed, qualified and in good standing, where
6
required,
and that it maintain its licenses to service mortgage loans and real estate owned properties serviced under the servicing agreement entered into in connection with the Restructuring. Any
event of default under the March 31, 2009 Restructuring Agreements, 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 and result in the transfer of the remaining loans pledged to Huntington
to a third party. Moreover, certain events of default under the Restructuring Agreements,
including defaults under provisions relating to enforceability, bankruptcy, maintenance of
collateral and lien positions, and certain negative covenants typical for agreements of this
nature, or defaults under its Servicing Agreement with the Bank or the Licensing Credit Agreement
could result in the transfer of the Companys sub-servicing contract as servicer of what had been
substantially all of its loans and owned real estate prior to the Restructuring. 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 Borrowings.
Operating Losses and Stockholders Deficit
The Company had a net loss of $358.1 million attributed to common shareholders for the year
ended December 31, 2009, compared with a net loss of $476.3 million for the year ended December 31,
2008.
The net loss for the year ended December 31, 2009 was principally due to the March 31, 2009
Restructuring that resulted in a write-down to fair market value of all of the Companys portfolios
of mortgage loans and real estate owned, 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
Portfolio and the loans securing the Unrestructured Debt. As part of the Restructuring, Franklin
Credit Holding Corporation transferred approximately 83% of the Portfolio (in the form of trust
certificates) to Huntington in exchange for $477.3 million in common and preferred shares in
Huntingtons REIT Securities. The REIT Securities had an aggregate value 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, approximately 17% of the Portfolio transferred to a trust in exchange for trust
certificates and the remaining loans not subject to the Restructuring. The Company had
stockholders deficit of $806.8 million at December 31, 2009, or a deficit book value per common
share of approximately $100.69.
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, is being treated as a financing under GAAP (specifically under the Financial
Accounting Standards Boards
new Accounting Standards Codification Topic 860, Transfers and Servicing). Therefore, the
mortgage loans and real estate have remain 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 does not affect the Companys cash flows or its reported net income. See
Managements Discussion and Analysis Executive Summary.
The net loss for the year ended December 31, 2008 was principally the result of a $458.1
million provision for loan losses and interest reversals for non-accrual loans. Due principally to
the substantial deterioration in the housing and subprime mortgage markets and the slowing economy
with increasing unemployment, and the concomitant deterioration in the performance of the Companys
loan portfolios, the Company reassessed its allowance for loan losses throughout the year 2008,
which resulted in significantly increased estimates of inherent losses in its portfolios and
increased allowances for loan losses. See Managements Discussion and Analysis Year Ended
December 31, 2009 Compared to Year Ended December 31, 2008.
7
Upon the request of the Bank, FCMC, a majority owned subsidiary of FCHC, made a distribution
of $2,245,000 to the Bank on September 30, 2009. The distribution, which represented approximately
70% of the estimated net income of FCMC for the six months ended September 30, 2009 after a
holdback of $500,000, was made pursuant to the provisions of the Legacy Credit Agreement currently
entitling the Bank to 70% of all amounts distributed by FCMC. The distribution was principally
applied by the Bank to pay down the debt obligations of certain of FCMCs sister companies as
provided for by the terms of the Legacy Credit Agreement with the Bank. The remaining 30%, or
$962,000, was distributed in November 2009 as a dividend of $9,623.38 per share to the stockholders
of FCMC, including $866,000 to FCHC in respect of its ownership of 90% of the outstanding stock of
FCMC, and $96,000 to Thomas J. Axon, the Chairman and President of the Company, in respect of his
ownership of 10% of the outstanding stock of FCMC.
Although the distribution to the Bank had been required under the terms of the Legacy Credit
Agreement since the distribution to the Bank was accompanied by a voluntary election by FCMC to
declare dividends to its two stockholders, FCMC is not a borrower under the Legacy Credit Agreement
and except for a pledge of certain collateral under a limited recourse guarantee is not otherwise
liable for the indebtedness under the Legacy Credit Agreement. Indeed, the Banks recourse in
respect of the Legacy Credit Agreement is limited to the assets and stock of Franklin Holdings
subsidiaries, excluding the assets of FCMC (except for a first lien of the Bank on an office
condominium unit and a second priority lien of the Bank on cash collateral held as security under
the Licensing Credit Agreement) and the unpledged portion of FCMCs stock.
Licenses to Service Loans
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 (the 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. In addition, as a result of and following the March 31, 2009 Restructuring, FCMC
has maintained net worth in excess of that which is required in those limited states in which the
net worth calculation may not include recourse on any contingent liabilities.
The business operations and financial condition of the Company taken as a whole, including
FCMC, which holds the servicing platform, on a consolidated basis, including the Companys
consolidated substantial negative net worth, did not change as a result of the Reorganization.
However, the resulting financial condition of FCMC changed, inasmuch as it had positive net worth
both at December 31, 2008 and 2009.
8
Franklins Business
During the past two years, through FCMC, we have been seeking to begin providing services for
third parties, on a fee-paying basis, which are directly related to our servicing operations and
our portfolio acquisition experience with residential mortgage loans. We are actively seeking to
(a) expand our servicing operations to provide servicing and collection services to third parties,
particularly specialized collection services that we refer to as loan recovery servicing, and (b)
capitalize on our experience to provide customized, comprehensive loan analysis and in-depth
end-to-end transaction services to the residential mortgage markets. These services include, in
addition to servicing loans for others, 1-4 family residential loan due diligence, portfolio
stratification and analysis, and portfolio pricing. These new business activities are subject to
the consent of the Bank, and we may not be successful in entering into or implementing any of these
businesses in a meaningful way.
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. We refer to the Companys investments in residential mortgage loans and real estate
assets prior to the Restructuring as the Legacy portfolio and the Legacy loans.
All disclosures and explanations included in this Form 10-K must be read in light of the March
2009 Restructuring and the changed nature of the Companys business.
Loan Servicing
The Companys servicing business is conducted principally 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 recovery
servicing, for third parties. The portfolios serviced for other entities, as of December 31, 2009,
principally for Huntington (loans previously acquired and originated by Franklin and transferred to
the Trust), primarily consist of first and second-lien loans secured by 1-4 family residential real
estate.
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 customers. Because the loans we service generally experience above average
delinquencies, erratic payment patterns and defaults, our servicing operation is focused on
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 loss mitigation and recovery strategies. Our
servicing staff employs a variety of collection strategies that we have developed to successfully
manage serious delinquencies, bankruptcy and foreclosure. Additionally, we maintain a real estate
department with experience in property management and the sale of residential properties.
As of December 31, 2009, through our servicing subsidiary, FCMC, we had two significant
servicing contracts with third parties to service 1-4 family mortgage loans and owned real estate,
Huntington and Bosco. At December 31, 2009, we serviced and provided recovery collection services
on a total population of approximately 37,000 loans for Huntington and Bosco, and relatively small
pools of loans under recovery collection contracts, whereby we receive fees based solely on a
percentage of amounts collected, for a few other entities. The loans serviced for Huntington
represented approximately 93% of the total loans serviced at December 31, 2009. In January 2010,
FCMC returned to Huntington approximately 6,600 recovery loans serviced for the Bank (loans held by
the Bank and unrelated to the Company) that we believed were not profitable for us to service.
9
Servicing and Collection Operations
At December 31, 2009, our servicing department consisted of 113 employees who managed
approximately 37,000 loans, including approximately 2,600 home equity loans for Bosco. Our
servicing operations are conducted in the following departments:
Loan Boarding and Administration. The primary objective of the loan boarding department is to
ensure that newly acquired loans under contracts to service for others are properly transitioned
from the prior servicer and are accurately boarded onto our servicing systems. Our loan boarding
department 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 provides 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 department performs typical duties related to the administration of
loans, including incorporating modifications to terms of loans. The loan administration department
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.
Customer Service. The primary objective of our customer service department 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 Franklin Credit Management Corporation
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 the loan. The customer service group 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.
Client Relations. The principal objective of the client relations group is to interface with
our servicing 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.
Collections. The main objective of our collections department is to ensure loan performance
through maintaining customer contact. Our collections group continuously reviews and monitors 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 group
begins 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 61 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 department.
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.
10
Loss Mitigation. Our loss mitigation department, 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 department utilizes various strategies in an
effort to reinstate an account or revive cash flow on an account. The loss mitigation department
analyzes 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 (pay
and interest accrue and repayment plans), Homeowner Relief programs (pre-foreclosure home sale) and
Permanent Relief programs (long-term modifications, including those sponsored by the U.S.
Treasurys Home Affordable Modification Program (HAMP)), as well as for settlements, short sales,
and deeds-in-lieu.
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 department manages loans by borrowers who have declared
bankruptcy. The primary objective of the bankruptcy group within our loss mitigation department,
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.
Real Estate. The real estate-owned (REO) 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.
Deficiency Recovery & Judgment Processing Department (Recovery). The Recovery department
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.
11
Face to Face Home Solutions (Face to Face). The Face to Face department 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.
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 tenents of the Fair Debt Collection Act 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 the companys
policies and procedures are followed. Collection calls are monitored to ensure quality and
compliance with the requirements of the federal Fair Debt Collection Practices Act and state
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.
Competition for Servicing Business
The mortgage servicing and related services businesses are highly competitive. Competition
for distressed asset and loss mitigation servicing has intensified in the past year due to the
unprecedented difficult mortgage environment and severe credit tightening, coupled with the
continuing recessionary economy, which has been evidenced by increasing delinquencies and defaults,
eroding real estate values and government mandated modification programs. Our competitors in the
subservicing space include mega mortgage servicers, established subprime loan servicers, and newer
entrants to the specialty servicing and recovery collections business. Franklins efforts to
market its ability to adequately service mortgage loans for others is more difficult than many of
its competitors because (a) we have not historically provided such services to unrelated third
parties, (b) we are not a rated primary or special
servicer of residential mortgage loans as designated by a rating agency, such as Standard and
Poors, and (c) our consolidated financial condition reflects operating losses and deficit net
worth.
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, 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. The Bank, as certificate trustee of the Trust, has consented
to FCMC modifying eligible mortgage loans in accordance with HAMP. Under HAMP, subject to a
program participation cap for potential mortgage loan owners, borrower and servicer compensation,
FCMC, as a servicer, will receive a one time incentive payment of $1,000 for each loan modified in
accordance with HAMP
12
(provided the borrower successfully completes a trial modification period of three months or longer if necessary to comply with applicable contractual obligations of the
servicing client) and an additional one time bonus payment of $500 for such loan if the borrower
had been current at the start of the modification trial period, but was facing imminent default.
In addition, provided that a HAMP modification remains in good standing, under certain
circumstances FCMC could be paid an additional annual fee of up to $1,000 per year for such loan
for up to three years. On November 30, 2009, HAMP was expanded to include eligibility criteria for
foreclosure alternatives such as deeds-in-lieu and short sales. FCMC, as of December 31, 2009, has
solicited approximately 816 borrowers that are potentially eligible under HAMP. Under the terms of
the Restructuring with the Bank, the Bank will have a security interest in certain amounts due or
received under HAMP. In particular, (i) the Licensing Credit Agreement provides that the Bank will
have a security interest in any monies or sums due to FCMC under HAMP and (ii) the Legacy Credit
Agreement provides that the Bank will have a security interest in any monies, funds or sums due or
received under HAMP by any of the entity Borrowers under the Legacy Credit Agreement, which
entities do not include Franklin Holding and FCMC. As of December 31, 2009, FCMC had not received
any fees under HAMP.
Bosco Servicing Agreement
On May 28, 2008, FCMC entered into various agreements, including a servicing agreement, to
service on a fee-paying basis approximately $245 million in residential home equity line of credit
mortgage loans for Bosco Credit LLC (Bosco). Bosco was organized by FCMC, and the membership
interests in Bosco 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. The loans that are subject to the servicing agreement were
acquired by Bosco, from an unrelated third party, on May 28, 2008, and the Bank is the
administrative agent for the lenders to Bosco. FCMC also provided the loan analysis, due diligence
and other services for Bosco on a fee-paying basis for the loans acquired by Bosco. FCMCs
servicing agreement was approved by the Companys Audit Committee.
FCMC began servicing the Bosco portfolio in June 2008. Included in the Companys consolidated
revenues were servicing fees recognized from servicing the Bosco portfolio of $2,014,000 and
$1,813,000 for the twelve months ended December 31, 2009 and 2008, respectively. In addition,
included in the Companys consolidated revenues were fees recognized for various
administrative services provided to Bosco by FCMC in the amount of $180,000 for the twelve months
ended December 31, 2008. The Company did not recognize any administrative fees in 2009 and wrote
off as uncollectible the administrative fees recognized in 2008.
On February 27, 2009, at the request of the Bosco Lenders, FCMC adopted a revised fee
structure, which was approved by the Companys 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 $29,000 was paid to Boscos 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 to repay its
third-party indebtedness.
On October 28, 2009, at the additional request of the Bosco Lenders in an effort to maximize
cash flow to the Bosco Lenders and to avoid payment defaults by Bosco, the revised fee structure
relating to deferred fees, which was adopted as of February 27, 2009, was adjusted through an
amendment to the loan servicing agreement with Bosco (the Bosco Amendment), which was approved by
the Companys Audit Committee.
13
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
(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 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 there
under 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.
Further, the Bosco Amendment provides that FCMC will not perform or be required to perform any
field contact services for Bosco or make any servicing advances on behalf of Bosco that
individually or in the aggregate would result in a cost or expense to Bosco of more than $10,000
per month, without the prior written consent and approval of the Lenders. The Bosco Amendment did
not alter FCMCs right to receive a certain percentage of collections after Boscos indebtedness to
the Lenders has been repaid in full, the Bosco equity holders have been repaid in full the equity
investment in Bosco made prior to Bosco entering into the loan agreement with the Lenders, and the
Lenders and Boscos equity holders have received a specified rate of return on their debt and
equity investments.
The amount and timing of ancillary fees owed to the Company is the subject of a good faith
dispute between the Company and the Managing Member of Bosco, Thomas Axon (the Companys Chairman
and President). However, even if the parties can resolve their differences amicably, there are no
funds available to Bosco for payment for such services, since all funds from collections are
required by Boscos 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. On December
31, 2009, the Company wrote-off $372,000 in additional aged receivables, due to non-payment,
consisting of (i) legal costs incurred by FCMC in 2008 related to the acquisition by Bosco of its
loan portfolio and entry into a servicing agreement with Bosco; (ii) expenses for loan analysis,
due diligence and other services performed for Bosco by FCMC in 2008 related to the acquisition by
Bosco of the loan portfolio; and (iii) additional internal accounting costs for services provided
to Bosco by FCMC through June 30, 2009. In addition, FCMC has not accrued fees for accounting
costs estimated to be approximately $61,000 for the period of June 1, 2009 to December 31, 2009.
FCMC determined to accept the deferrals and other amendments described above with respect to
its Bosco relationship in recognition of the performance of the Bosco 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, 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 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.
Exclusive of the amounts written off related to the Bosco serviced loans, for the twelve
months ended December 31, 2009, the Company recognized a total of $2,014,000 in servicing fees for
servicing the Bosco portfolio, of which $299,000 was not paid to FCMC and therefore deferred per
the Bosco Amendment. As of December 31, 2009, FCMC had $409,000 of accrued and unpaid servicing
fees due from Bosco (effective August 1, 2009, Franklins servicing fee income is recognized when
cash is received), and $190,000 of reimbursable third party expenses incurred by FCMC in the
servicing and collection of the Bosco loans.
14
Due Diligence Services
The Companys due diligence business is conducted principally through FCMC. During the first
quarter of 2008, capitalizing on our portfolio acquisition experience with residential mortgage
loans, the Company began providing due diligence services for third parties not related to us or
the Bank, on a fee-paying basis. During 2008, we completed 13 due diligence or loan analysis and
pricing assignments for third parties interested in acquiring mortgage loan pools. For the year
ended December 31, 2009, revenue earned from our due diligence work for third parties was not
meaningful.
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. In October 2004, we consolidated all of our arrangements with the Bank
relating to the term funding of loan acquisitions by Franklin under a Master Credit and Security
Agreement (Franklin Master Credit Facility). Under this Master Credit Facility, we requested
loans to finance the purchase of pools of residential mortgage loans or refinance existing
outstanding loans. On December 28, 2007, we entered into forbearance agreements with the Bank with
respect to the Master Credit Facility (the Franklin Forbearance Agreement) and the credit
facilities of the Companys loan origination company, Tribeca (the Tribeca Forbearance Agreement
and together with the Franklin Forbearance Agreement, the Forbearance Agreements).
Effective March 31, 2009, Franklin entered into a series of 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, and approximately 83% of the Portfolio (in the
form of trust certificates), while not removed from the Companys balance sheet, was transferred to
a real estate investment trust wholly-owned by a subsidiary of the Bank. Except for approximately
$39.5 million of the Companys debt that remains subject to the original terms of the Franklin
Master Credit Facility and the Franklin Forbearance Agreement, all previous Forbearance Agreements
and credit agreements have been replaced effective March 31, 2009 by the Restructuring Agreements.
See Managements Discussion and Analysis Borrowings.
In December 2008, the Company engaged in 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
Tribeca, to other entities in the reorganized corporate structure of the Company, and (iv) amended
its loan agreements with Huntington. As a result, Franklin Credit Holding Corporation is the
successor issuer to FCMC.
In the Reorganization, FCMC became a subsidiary of Franklin Holding and ceased to have any
subsidiaries and, therefore, ceased to have portfolios of loans and real estate properties and the
related indebtedness to the Bank.
Corporate History
We were formed in 1990 by, among others, Thomas J. Axon, our Chairman and President, and Frank
B. Evans, Jr., one of our directors, for the purpose of acquiring consumer loan portfolios from the
Resolution Trust Company, or RTC, and the Federal Deposit Insurance Corporation, or FDIC. We
became a public company in December 1994, when we merged with Miramar Resources, Inc., a publicly
traded oil and gas company that had emerged from bankruptcy proceedings in December 1993. The
newly formed entity was renamed Franklin Credit Management Corporation. At the time of the merger,
we divested substantially all of the remaining oil and gas assets directly owned by Miramar in
order to focus primarily on the non-conforming sector of the residential mortgage industry. At
that time, we decided to capitalize on our experience and expertise in acquiring and servicing
loans from the RTC and the FDIC and began purchasing performing, reperforming and nonperforming
residential mortgage loans from additional financial institutions. In 1997, we formed Tribeca to
originate subprime residential mortgage loans.
15
December 2008 Corporate Reorganization
Franklin Credit Holding Corporation (Franklin Holding, and together with its direct and
indirect subsidiaries, the Company) is the successor issuer to Franklin Credit Management
Corporation, a Delaware corporation (the Predecessor or FCMC).
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 Tribeca Lending Corporation, a direct, wholly-owned subsidiary of
FCMC (Tribeca), to other entities in the reorganized corporate structure of the
Company; and, |
|
|
(iv) |
|
amended its loan agreements with The Huntington National Bank (Huntington),
its lead lending bank. |
In the Reorganization, FCMC became a subsidiary of Franklin Holding and ceased to have any
subsidiaries.
The Reorganization:
|
|
|
resulted in various licensing authorities evaluating FCMCs servicing platforms
compliance with applicable license requirements (including net worth requirements)
without reference to the loan portfolios and related indebtedness of the other entities
in the reorganized corporate structure of the Company, and accordingly, with positive
net worth; and, |
|
|
|
|
enhanced the Companys flexibility to potentially grow its servicing business and
take advantage of other corporate restructuring opportunities should they become
available. |
The business operations and financial condition of the Company, including the Companys
substantial negative net worth, did not change as a result of the Reorganization. However, by
divesting itself of its subsidiaries, including those which are borrowers under the Companys
lending agreements with Huntington, FCMCs financial condition changed from substantial negative
net worth to positive net worth.
The Companys common stock is quoted on the OTC Bulletin Board under the trading symbol
FCMC.OB.
16
Holding Company Structure
The Predecessor adopted a holding company form of organizational structure pursuant to the
Agreement and Plan of Merger, by and among the Predecessor, Franklin Merger Sub, Inc., a Delaware
corporation (Merger Sub), and Franklin Holding, dated as of December 19, 2008 (the Merger
Agreement). To implement the Merger Agreement, the Predecessor filed a Certificate of Merger (the
Certificate of Merger) with the Secretary of State of the State of Delaware on December 19, 2008.
The holding company organizational structure was adopted by means of a merger implemented in
accordance with Section 251(g) of the Delaware General Corporation Law (the DGCL), which provides
for the formation of a holding company structure without a vote of the stockholders of the
constituent corporations. Pursuant to the terms of the Merger Agreement, Merger Sub merged with
and into the Predecessor (the Merger), with the Predecessor being the surviving corporation. As
a result of the Merger, which was consummated on December 19, 2008 (the Effective Time), the
Predecessor became a direct, wholly-owned subsidiary of Franklin Holding.
In accordance with terms of the Merger Agreement:
|
(i) |
|
each share of common stock of the Predecessor (the Predecessor Common Stock)
issued and outstanding immediately prior to the Merger was converted into a share of
common stock of Franklin Holding (Franklin Holding Common Stock) having the same
designations, rights, powers and preferences, and qualifications, limitations and
restrictions thereof, as the share of Predecessor Common Stock so converted; and, |
|
|
(ii) |
|
each share of capital stock of Merger Sub issued and outstanding immediately
prior to the Merger was converted into a share of common stock of the Predecessor. |
Except for certain amendments to the certificate of incorporation of the Predecessor effected
in accordance with Section 251(g) of the DGCL in conjunction with the Merger, which has since been
deleted with the approval of a super majority of the shareholders of Franklin Holding, the
provisions of the certificate of incorporation of Franklin Holding, including its authorized
capital stock and the designations, rights, powers and preferences of such capital stock, and the
qualifications, limitations and restrictions thereof, are identical to those of the Predecessor
immediately prior to the Merger. As a result, no post-Merger exchange of stock certificates was
made and outstanding shares of Predecessor Common Stock were automatically converted into shares of
Franklin Holding Common Stock.
The provisions of the bylaws of Franklin Holding following the Merger are identical to the
provisions of the bylaws of the Predecessor in effect immediately prior to the Merger. The
directors of Franklin Holding immediately after the Merger were the same individuals as were
directors of the Predecessor immediately prior thereto. The management of Franklin Holding
immediately after the Merger was the same as the management of the Predecessor immediately prior to
the Merger. The Company believes that the Merger qualifies as a tax-free reorganization under
Section 351 of the Internal Revenue Code of 1986, as amended, and, as a result, the stockholders of
the Predecessor will not recognize gain or loss for United States federal income tax purposes.
17
Legacy Portfolio Characteristics
Overall Legacy Portfolio
Due to the 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, is treated as a financing under GAAP, and,
therefore, the assets remain on the Companys balance sheet. As part of the Restructuring, the
Company, through FCMC, changed its business model to a specialty consumer finance 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,
pricing and acquisition of residential mortgage portfolios, for third parties. As a result, FCMCs
revenues are derived principally from the fees earned from servicing and providing recovery
servicing for third parties. Therefore, the tables that follow regarding the Companys legacy loan
portfolios are only for December 31, 2008.
At December 31, 2008, the legacy portfolio (excluding OREO) consisted of $1.14 billion of
notes receivable (inclusive of purchase discount not reflected on the face of the balance sheet)
and $395.2 million of loans held for investment. Throughout the Portfolio Characteristics section,
unless otherwise indicated or required by the context of the description, all loan amounts refer to
the unpaid principal balance (UPB). The following table sets forth information regarding the
types of properties securing the legacy loans at December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
Unpaid |
|
|
Percentage of Total |
|
Property Types |
|
Principal Balance |
|
|
Principal Balance |
|
Residential 1-4 family |
|
$ |
1,268,478,890 |
|
|
|
82.41 |
% |
Condos, co-ops, PUD dwellings |
|
|
193,149,884 |
|
|
|
12.55 |
% |
Manufactured and mobile homes |
|
|
15,135,861 |
|
|
|
0.98 |
% |
Multi-family |
|
|
443,023 |
|
|
|
0.03 |
% |
Secured, property type unknown(1) |
|
|
18,464,780 |
|
|
|
1.20 |
% |
Commercial |
|
|
1,920,922 |
|
|
|
0.12 |
% |
Unsecured loans(2) |
|
|
41,678,994 |
|
|
|
2.71 |
% |
|
|
|
|
|
|
|
Total |
|
$ |
1,539,272,354 |
|
|
|
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. |
18
Asset Quality
Delinquency. Because we specialized in acquiring and servicing loans with erratic payment
patterns and an elevated level of credit risk, a portion of the loans we acquired were, upon
acquisition, in various stages of delinquency, foreclosure and bankruptcy. We monitored the
payment status of our borrowers based on both contractual delinquency and recency delinquency, and
as servicer for third parties we continue to do so. By contractual delinquency, we mean the
delinquency of payments relative to the contractual obligations of the borrower. By recency
delinquency, we mean the recency of the most recent full monthly payment received from the
borrower. By way of illustration, on a recency delinquency basis, if the borrower had made the
most recent full monthly payment within the past 30 days, the loan is shown as current regardless
of the number of contractually delinquent payments. In contrast, on a contractual delinquency
basis, if the borrower had made the most recent full monthly payment, but had missed an earlier
payment or payments, the loan is shown as contractually delinquent. We classified a loan as in
foreclosure when we determined that the best course of action to maximize recovery of unpaid
principal balance would be to begin the foreclosure process. We classified a loan as in bankruptcy
generally when we received notice of a bankruptcy filing from the bankruptcy court. We classified
a previously delinquent or performing loan as modified when we had restructured the loan due
principally to the borrowers deteriorated financial situation, and, as a condition to the closing
of the modification, had received at least one full monthly payment at the time of the closing of
the modification. Modified loans were classified as current on both a contractual and recency
basis at the time of the modification. As of December 31, 2008, principally all of our loan
modifications included a deferral of the past due and uncollected interest or a reduction in the
interest rate. Interest rate reduction modifications were generally for a period of one year, and
for rate reduction modifications of delinquent loans, also incorporate a deferral of the past due
and uncollected interest. Approximately 20% of our modified loans as of December 31, 2008 were
modified a second time due to the borrowers difficulty in making payments in accordance with the
initial modification.
We extended modifications based on our evaluation of the borrowers deteriorated financial
situation. Approximately 85% of all loan modifications as of December 31, 2008 were performing
loans that were delinquent on a contractual basis less than 90 days at the time of modification,
including approximately 67% that were in a current status on a contractual basis.
19
The following table provides a breakdown of the delinquency status of our notes receivable and
loans held for investment as of December 31, 2008, by unpaid principal balance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
Contractual Delinquency |
|
|
Recency Delinquency |
|
|
|
Days Past Due |
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
Performing Current |
|
0 - 30 days |
|
$ |
373,712,487 |
|
|
|
24.28 |
% |
|
$ |
419,653,369 |
|
|
|
27.26 |
% |
Delinquent |
|
31 - 60 days |
|
|
30,511,251 |
|
|
|
1.98 |
% |
|
|
25,910,879 |
|
|
|
1.69 |
% |
|
|
61 - 90 days |
|
|
4,302,736 |
|
|
|
0.28 |
% |
|
|
21,390,383 |
|
|
|
1.39 |
% |
|
|
90+ days |
|
|
128,904,056 |
|
|
|
8.38 |
% |
|
|
70,475,899 |
|
|
|
4.58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modified Loans |
|
0 - 30 days |
|
|
262,156,611 |
|
|
|
17.03 |
% |
|
|
299,215,550 |
|
|
|
19.44 |
% |
Delinquent |
|
31 - 60 days |
|
|
46,097,510 |
|
|
|
2.99 |
% |
|
|
32,572,746 |
|
|
|
2.12 |
% |
|
|
61 - 90 days |
|
|
1,195,906 |
|
|
|
0.08 |
% |
|
|
15,542,772 |
|
|
|
1.01 |
% |
|
|
90+ days |
|
|
78,911,624 |
|
|
|
5.13 |
% |
|
|
41,030,583 |
|
|
|
2.66 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankruptcy |
|
0 - 30 days |
|
|
26,527,458 |
|
|
|
1.72 |
% |
|
|
62,020,559 |
|
|
|
4.03 |
% |
Delinquent |
|
31 - 60 days |
|
|
5,929,387 |
|
|
|
0.38 |
% |
|
|
10,264,968 |
|
|
|
0.67 |
% |
|
|
61 - 90 days |
|
|
1,644,545 |
|
|
|
0.11 |
% |
|
|
4,623,655 |
|
|
|
0.30 |
% |
|
|
90+ days |
|
|
90,762,522 |
|
|
|
5.90 |
% |
|
|
47,954,730 |
|
|
|
3.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosure |
|
0 - 30 days |
|
|
2,575,557 |
|
|
|
0.16 |
% |
|
|
19,594,271 |
|
|
|
1.27 |
% |
Delinquent |
|
31 - 60 days |
|
|
743,187 |
|
|
|
0.05 |
% |
|
|
7,639,599 |
|
|
|
0.50 |
% |
|
|
61 - 90 days |
|
|
123,808 |
|
|
|
0.01 |
% |
|
|
7,248,534 |
|
|
|
0.47 |
% |
|
|
90+ days |
|
|
485,173,709 |
|
|
|
31.52 |
% |
|
|
454,133,857 |
|
|
|
29.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,539,272,354 |
|
|
|
100.00 |
% |
|
$ |
1,539,272,354 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All current loans |
|
0 - 30 days |
|
$ |
664,972,113 |
|
|
|
43.20 |
% |
|
$ |
800,483,749 |
|
|
|
52.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the foreclosure category were approximately $189.4 million of loans for which the
Company had proceeded to file a judgment action against the borrower on the note personally instead
of seeking to foreclose on the related collateral. Approximately $184.2 million of these loans
were second-lien loans. Judgments were obtained on approximately $6.0 million of loans, of which
approximately $5.2 million were second-lien loans.
Included in the above table were second-lien mortgage loans in our notes receivable portfolio
in the amount of $754.1 million, of which $334.3 million and $371.9 million were current on a
contractual and recency basis, respectively. The legal status composition of the second-lien
mortgage loans at December 31, 2008 was: $344.5 million, or 46%, were performing; $110.9 million,
or 15%, were modified due to delinquency or the borrowers financial difficulty; $55.3 million, or
7%, were in bankruptcy; and, $243.4 million, or 32%, were in foreclosure (including $189.3 million
where a judgment action had been filed against the borrower on the note personally or where
judgments had been obtained). At December 31, 2008, $29.3 million of the modified second-lien
loans were delinquent on a contractual basis, while $24.1 million of the modified second-lien loans
were delinquent on a recency basis.
20
Legacy Notes Receivable Portfolio
Due to the Restructuring and the exchange of loans and other real estate owned for trust
certificates effective March 31, 2009, the Company does not have any significant portfolios of
loans that it manages as the investor and no longer has a notes receivable portfolio classified as
held to maturity. Therefore, the tables that follow are only as of December 31, 2008.
At December 31, 2008, the legacy notes receivable portfolio included approximately 22,817
loans with an aggregate UPB of $1.14 billion. Impaired loans comprised a significant portion of
our portfolio. Many of the loans we acquired were impaired loans at the time of purchase. We
generally purchased such loans at discounts and considered the payment status, underlying
collateral value and expected cash flows when determining our purchase price. While interest
income generally was not accrued on impaired loans, interest and fees were received on a portion of
loans classified as impaired. The following table provides a breakdown of the legacy notes
receivable portfolio by performing and impaired loans at December 31, 2008:
|
|
|
|
|
|
|
December 31, 2008 |
|
Performing loans |
|
$ |
528,953,209 |
|
Allowance for loan losses |
|
|
130,724,698 |
|
Nonaccretable discount* |
|
|
25,277,808 |
|
|
|
|
|
Total performing loans, net
allowance for loan losses and nonaccretable discount |
|
|
372,950,703 |
|
|
|
|
|
|
|
|
|
|
Impaired loans |
|
|
615,159,200 |
|
Allowance for loan losses |
|
|
340,368,461 |
|
Nonaccretable discount* |
|
|
72,325,558 |
|
|
|
|
|
Total impaired loans, net
allowance for loan losses and nonaccretable discount |
|
|
202,465,181 |
|
|
|
|
|
|
|
|
|
|
Total notes receivable, net
allowance for loan losses and nonaccretable discount |
|
|
575,415,884 |
|
|
|
|
|
|
|
|
|
|
Accretable discount* |
|
|
24,860,752 |
|
|
|
|
|
|
|
|
|
|
Total notes receivable, net
allowance for loan losses and accretable/nonaccretable discount |
|
$ |
550,555,132 |
|
|
|
|
|
|
|
|
* |
|
Represents purchase discount not reflected on the face of the balance sheet in
accordance with Topic 310, Loans and Debt Securities Acquired with Deteriorated Credit
Quality, for loans acquired after December 31, 2004. Accretable Discount is the excess of
the loans estimated cash flows over the purchase prices, which is accreted into income
over the life of the loan. Nonaccretable Discount is the excess of the undiscounted
contractual cash flows over the undiscounted cash flows estimated at the time of
acquisition. |
Changes in the allowance for loan losses and nonaccretable discount were principally the
result of movement of loans between performing and impaired classifications.
21
The following table provides a breakdown of the balance of our legacy portfolio of notes
receivable between fixed-rate and adjustable-rate loans, net of allowance for loan losses as of
December 31, 2008.
|
|
|
|
|
|
|
December 31, 2008 |
|
Performing Loans: |
|
|
|
|
Fixed rate |
|
$ |
325,799,144 |
|
|
|
|
|
Adjustable rate |
|
|
72,429,367 |
|
|
|
|
|
Total Performing Loans |
|
$ |
398,228,511 |
|
|
|
|
|
|
|
|
|
|
Impaired Loans: |
|
|
|
|
Fixed rate |
|
$ |
162,504,488 |
|
|
|
|
|
Adjustable rate |
|
|
112,286,251 |
|
|
|
|
|
Total Impaired Loans |
|
$ |
274,790,739 |
|
|
|
|
|
Total Notes |
|
$ |
673,019,250 |
|
|
|
|
|
|
|
|
|
|
Accretable discount |
|
$ |
24,860,752 |
|
|
|
|
|
Nonaccretable discount |
|
$ |
97,603,366 |
|
|
|
|
|
Total Notes Receivable,
net of allowance for loan losses |
|
$ |
550,555,132 |
|
|
|
|
|
Impaired loans comprised a significant portion of the legacy notes receivable portfolio. Many
of the loans we acquired were impaired loans at the time of purchase. We generally purchased such
loans at discounts and considered the payment status, underlying collateral value and expected cash
flows when determining our purchase price. While interest income generally was not accrued on
impaired loans, interest and fees were received on a portion of loans classified as impaired.
Lien Position. The following table sets forth information regarding the lien position of the
properties securing the legacy portfolio of notes receivable at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
Percentage of Total |
|
Lien Position |
|
Principal Balance |
|
|
Principal Balance |
|
1st Liens |
|
$ |
390,020,158 |
|
|
|
34.09 |
% |
2nd Liens |
|
|
754,092,251 |
|
|
|
65.91 |
% |
|
|
|
|
|
|
|
Total |
|
$ |
1,144,112,409 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
22
Other Real Estate Owned
The following table sets forth the legacy real estate owned, or OREO portfolio, and OREO sales
during the twelve months ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Other real estate owned |
|
$ |
|
|
|
$ |
60,748,390 |
|
OREO as a percentage of total assets |
|
|
|
|
|
|
5.94 |
% |
OREO sold (prior to the Restructuring) |
|
$ |
18,852,671 |
|
|
$ |
41,609,095 |
|
Gain on sale |
|
$ |
374,344 |
|
|
$ |
2,213,998 |
|
Due to the Restructuring effective March 31, 2009, any gains and losses on sales of OREO
properties supporting the investment in trust certificates and mortgage loans and real estate
properties held for sale are included in fair valuation adjustments.
Property Types of Originated Loans Held for Investment. Due to the Restructuring and the
exchange of loans and other real estate owned for trust certificates effective March 31, 2009, the
Company no longer had loans it originated that it manages as the investor and no longer had a
portfolio of originated loans held for investment. Therefore, the table that follows is only as of
December 31, 2008.
At December 31, 2008, the legacy portfolio of originated loans held for investment consisted
of 1,728 loans with an aggregate unpaid principal balance of $395.2 million of previously
originated loans that are held for investment. The following table sets forth information
regarding the types of properties securing the legacy portfolio of loans held for investment at
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Unpaid |
|
|
Percentage of Total |
|
Property Types |
|
Principal Balance |
|
|
Principal Balance |
|
Residential 1-4 family |
|
$ |
366,986,696 |
|
|
|
92.87 |
% |
Condos, co-ops, PUD dwellings |
|
|
26,235,944 |
|
|
|
6.64 |
% |
Commercial |
|
|
1,213,370 |
|
|
|
0.31 |
% |
Other |
|
|
723,935 |
|
|
|
0.18 |
% |
|
|
|
|
|
|
|
Total |
|
$ |
395,159,945 |
* |
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
* |
|
UPB before net deferred fees and allowance for loan losses. |
At December 31, 2008, the Company did not have any loans held for sale.
23
Geographic Dispersion of Originated Loans Held for Investment. The following table sets forth
information regarding the geographic location of properties securing all legacy loans held for
investment at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
Principal |
|
|
Percentage of Total |
|
Location |
|
Balance |
|
|
Principal Balance |
|
New York |
|
$ |
123,880,052 |
|
|
|
31.35 |
% |
New Jersey |
|
|
110,711,384 |
|
|
|
28.02 |
% |
Pennsylvania |
|
|
36,953,589 |
|
|
|
9.35 |
% |
Florida |
|
|
21,861,359 |
|
|
|
5.53 |
% |
Maryland |
|
|
19,009,954 |
|
|
|
4.81 |
% |
Massachusetts |
|
|
16,962,889 |
|
|
|
4.29 |
% |
Connecticut |
|
|
14,686,403 |
|
|
|
3.72 |
% |
Virginia |
|
|
13,589,808 |
|
|
|
3.44 |
% |
California |
|
|
9,479,743 |
|
|
|
2.40 |
% |
North Carolina |
|
|
4,316,450 |
|
|
|
1.09 |
% |
All Others |
|
|
23,708,314 |
|
|
|
6.00 |
% |
|
|
|
|
|
|
|
Total |
|
$ |
395,159,945 |
* |
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
* |
|
UPB before net deferred fees and allowance for loan losses. |
24
Delinquency. Because we specialized in originating residential mortgage loans for individuals
with credit histories, income and/or factors that caused them to be classified as subprime
borrowers, a substantially greater portion of the loans we originated experience varying degrees of
delinquency, foreclosure and bankruptcy than those of prime lenders. We monitored the payment
status of our borrowers based on both contractual delinquency and recency delinquency. By
contractual delinquency, we mean the delinquency of payments relative to the contractual
obligations of the borrower. By recency delinquency, we mean the recency of the most recent full
monthly payment received from the borrower. By way of illustration, on a recency delinquency
basis, if the borrower has made the most recent full monthly payment within the past 30 days, the
loan is shown as current regardless of the number of contractually delinquent payments. In
contrast, on a contractual delinquency basis, if the borrower made the most recent full monthly
payment, but missed an earlier payment or payments, the loan was shown as contractually delinquent.
We classified a loan as in foreclosure when we determined that the best course of action to
maximize recovery of unpaid principal balance was to begin the foreclosure process. We classified
a loan as in bankruptcy generally when we received notice of a bankruptcy filing from the
bankruptcy court. We classified a previously delinquent or performing loan as modified when we
restructured the loan due principally to the borrowers deteriorated financial situation, and, as a
condition to the closing of the modification, received at least one full monthly payment at the
time of the closing of the modification. Modified loans were classified as current on both a
contractual and recency basis at the time of the modification. As of December 31, 2008,
principally all of our loan modifications included a deferral of the past due and uncollected
interest or a reduction in the interest rate. Interest rate reduction modifications generally were
for a period of one year, and for the rate reduction modifications of delinquent loans, also
incorporated a deferral of the past due and uncollected interest. Approximately 29% of our
modified loans as of December 31, 2008 were modified a second time due to the borrowers difficulty
in making payments in accordance with the initial modification.
During the year 2008, due to the continued decline in housing prices nationally, the
deterioration in mortgage markets, and the slowing economy in the latter part of the year with
increasing unemployment and the increased delinquency performance of the originated loans in the
Companys portfolios, we moved more quickly to identify those borrowers who were likely to move
into seriously delinquent status and attempted to promptly apply appropriate loss mitigation
strategies to encourage positive payment performance. Accordingly, beginning in 2008, we
strengthened our servicing staff and intensified our efforts to work with borrowers to modify their
loans. During 2008, we completed approximately $182.6 million of loan modifications (unpaid
principal balance), including interest rate reduction modifications on approximately $86.6 million
of loans. As of December 31, 2008, total loan modifications amounted to $155.3 million, which
included approximately $83.5 million of interest rate reductions. The average interest rate
reduction on the $86.6 million of rate modified loans was approximately 4.41% at December 31, 2008,
from an average of approximately 11.45% to an average of approximately 7.05%. Approximately 82% of
the modifications as of December 31, 2008 were performing loans that were delinquent on a
contractual basis less than 90 days at the time of modification, including approximately 61% that
were in a current status on a contractual basis and granted modifications based on our evaluation
of the borrowers deteriorated financial situation. During 2008, approximately $44.5 million of
modified loans were modified a second time due to the inability of borrowers to meet the terms of
the original modification agreements. At December 31, 2008, $60.6 million, or approximately 39%,
of modified loans were delinquent on a contractual basis, and $40.8 million, or approximately 26%,
were delinquent on a recency basis.
25
The following tables provide a breakdown of the delinquency status of the legacy loans held
for investment portfolio, loans that we originated prior to November 2007, as of December 31, 2008,
by principal balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
Contractual Delinquency |
|
|
Recency Delinquency |
|
|
|
Days Past Due |
|
Amount |
|
|
% |
|
|
Amount |
|
|
% |
|
Performing Current |
|
0 - 30 days |
|
$ |
36,507,373 |
|
|
|
9.24 |
% |
|
$ |
44,588,755 |
|
|
|
11.28 |
% |
Delinquent |
|
31 - 60 days |
|
|
3,581,801 |
|
|
|
0.91 |
% |
|
|
3,481,770 |
|
|
|
0.88 |
% |
|
|
61 - 90 days |
|
|
|
|
|
|
|
|
|
|
3,502,244 |
|
|
|
0.89 |
% |
|
|
90+ days |
|
|
15,384,265 |
|
|
|
3.89 |
% |
|
|
3,900,670 |
|
|
|
0.99 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Modified Loans |
|
0 - 30 days |
|
|
94,745,106 |
|
|
|
23.98 |
% |
|
|
114,563,000 |
|
|
|
28.99 |
% |
Delinquent |
|
31 - 60 days |
|
|
22,270,155 |
|
|
|
5.64 |
% |
|
|
13,869,945 |
|
|
|
3.51 |
% |
|
|
61 - 90 days |
|
|
|
|
|
|
|
|
|
|
6,542,880 |
|
|
|
1.66 |
% |
|
|
90+ days |
|
|
38,332,095 |
|
|
|
9.70 |
% |
|
|
20,371,531 |
|
|
|
5.16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankruptcy |
|
0 - 30 days |
|
|
1,059,398 |
|
|
|
0.27 |
% |
|
|
6,454,645 |
|
|
|
1.63 |
% |
Delinquent |
|
31 - 60 days |
|
|
35,838 |
|
|
|
0.01 |
% |
|
|
3,258,305 |
|
|
|
0.83 |
% |
|
|
61 - 90 days |
|
|
|
|
|
|
|
|
|
|
1,620,981 |
|
|
|
0.41 |
% |
|
|
90+ days |
|
|
25,146,648 |
|
|
|
6.36 |
% |
|
|
14,907,953 |
|
|
|
3.77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosure |
|
0 - 30 days |
|
|
558,299 |
|
|
|
0.14 |
% |
|
|
7,335,438 |
|
|
|
1.85 |
% |
Delinquent |
|
31 - 60 days |
|
|
128,777 |
|
|
|
0.03 |
% |
|
|
3,750,505 |
|
|
|
0.95 |
% |
|
|
61 - 90 days |
|
|
|
|
|
|
|
|
|
|
3,741,529 |
|
|
|
0.95 |
% |
|
|
90+ days |
|
|
157,410,190 |
|
|
|
39.83 |
% |
|
|
143,269,794 |
|
|
|
36.25 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
395,159,945 |
|
|
|
100.00 |
% |
|
$ |
395,159,945 |
|
|
|
100.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All current loans |
|
0 - 30 days |
|
$ |
132,870,176 |
|
|
|
33.62 |
% |
|
$ |
172,941,838 |
|
|
|
43.77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the foreclosure category was approximately $446,000 of loans for which the Company
had proceeded to file a judgment action against the borrower on the note personally instead of
seeking to foreclose on the related collateral. Approximately $401,000 of these loans was
second-lien loans. Judgments were obtained on approximately $150,000 of loans, all of which are
second-lien loans.
26
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:
|
|
|
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; |
|
|
|
|
the Fair Debt Collection Practices Act; |
|
|
|
|
the Home Mortgage Disclosure Act, and Regulation C; |
|
|
|
|
the Fair Housing Act; |
|
|
|
|
the Telemarketing and Consumer Fraud and Abuse Prevention Act; |
|
|
|
|
the Telephone Consumer Protection Act; |
|
|
|
|
the Gramm-Leach-Bliley Act; |
|
|
|
|
the Servicemembers Civil Relief Act; |
|
|
|
|
the Fair and Accurate Credit Transactions Act; |
|
|
|
|
the CAN-SPAM Act; |
|
|
|
|
the Secure and Fair Enforcement for Mortgage Licensing Act of 2008; and, |
|
|
|
|
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 servicing or privacy issues.
These laws, rules and regulations, among other things:
|
|
|
impose licensing obligations and financial requirements on us; |
|
|
|
|
limit the interest rates, finance charges, and other fees that we may charge; |
|
|
|
|
prohibit discrimination both in the extension of credit and in the terms and
conditions on which credit is extended; |
27
|
|
|
prohibit the payment of kickbacks for the referral of business incident to a real
estate settlement service; |
|
|
|
|
impose underwriting requirements; |
|
|
|
|
mandate various disclosures and notices to consumers, as well as disclosures to
governmental entities; |
|
|
|
|
mandate the collection and reporting of statistical data regarding our customers; |
|
|
|
|
require us to safeguard non-public information about our customers; |
|
|
|
|
regulate our collection, loss mitigation and loan modification practices; |
|
|
|
|
require us to combat money-laundering and avoid doing business with suspected
terrorists; |
|
|
|
|
restrict the marketing practices utilized to find customers, including restrictions
on outbound telemarketing; and, |
|
|
|
|
impose, in some cases, assignee liability on us as purchaser or seller of mortgage
loans as well as the entities that purchase our mortgage loans. |
Our failure to comply with these laws can lead to:
|
|
|
civil and criminal liability, including potential monetary penalties; |
|
|
|
|
loss of servicing licenses or approved status required for continued business
operations; |
|
|
|
|
demands for indemnification or loan repurchases from purchasers of our loans; |
|
|
|
|
legal defenses causing delay and expense; |
|
|
|
|
adverse effects on our ability, as servicer, to enforce loans; |
|
|
|
|
the imposition of supervisory agreements and cease-and-desist orders; |
|
|
|
|
the borrower having the right to rescind or cancel the loan transaction; |
|
|
|
|
adverse publicity; |
|
|
|
|
individual and class action lawsuits; |
|
|
|
|
administrative enforcement actions; |
|
|
|
|
damage to our reputation in the industry; or, |
|
|
|
|
inability to obtain credit to fund our operations. |
28
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.
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. For example, the federal Gramm-Leach-Bliley financial reform
legislation imposed additional privacy obligations with respect to applicants and borrowers.
Several states have enacted privacy laws. For example, Vermont privacy laws require the
affirmative consent of the consumer to certain information sharing. California has two privacy
laws that relate to our operations, the California Financial Information Privacy Act and the
California On-Line Privacy Protection Act, both of which impose additional notification obligations
on us that are not preempted by existing federal law. Other states are also considering adopting
privacy legislation. If states adopt a variety of inconsistent state privacy legislation, our
compliance costs could substantially increase. The Fair and Accurate Credit Transactions Act of
2003, enacted in December 2003, required us to provide additional disclosures when a loan
application was not approved. Additional requirements apply to our use of consumer reports and our
furnishing of information to the consumer reporting agencies. Additionally, the Department of
Housing and Urban Development, the federal agency that administers Regulation X, promulgated
regulations that became effective on January 1, 2010 and substantially augmented the disclosure
requirements and prohibitions association with the issuance of the Good Faith Estimate of
Settlement charges and the HUD-1 Settlement Statement. Moreover, 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 servicing practices.
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 increased their
focus on lending and servicing practices by some companies, primarily in the non-prime lending
industry, sometimes referred to as predatory lending practices. Further, some states have
enacted laws that require that refinancings of residential loans that are secured by the principal
residence of the borrower be in the borrowers interest or confer a net tangible benefit to the
borrower. 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. 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 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. This restriction
would prevent national banks and their operating subsidiaries from purchasing the variation of the
Liberty Loan where no assessment was made of the borrowers ability to repay the loan.
29
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 originated by Tribeca, the guidance is instructive
of the regulatory climate covering low and no documentation loans, such as certain of Tribecas
Liberty Loan products.
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, has been adopted in 40 states in addition to the District of Columbia.
30
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, or are under consideration, 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 our 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 our 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.
31
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.
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.
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.
32
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, 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 will be expanded to include eligibility criteria and financial incentives for
foreclosure alternatives such as deeds-in-lieu and short sales.
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.
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.
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.
33
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 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 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 to provide a default licensing system. As of the date of
this memorandum, every state except Minnesota has passed its own version of the 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.
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 have also adopted
this informal position, pending the publication of final rules from the Department of Housing and
Urban Development. 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, and a more thorough review of the licensing policy from
state regulators over the coming months.
34
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 have
also 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 such written consent to be in writing, with detailed
conditions to be satisfied, including that the written consent 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.
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 may subsequently be defaulted 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.
Employees
We recruit, hire, and retain individuals with the specific skills that complement our
corporate growth and business strategies. As of December 31, 2009, we had 154 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.
35
Risks Related to Our Business
A prolonged economic slowdown or a lengthy or severe recession could harm our operations,
particularly if it results in a decline in the real estate market.
The risks associated with our business are more acute during periods of economic slowdown or
recession because these periods may be accompanied by decreased real estate values, loss of jobs as
well as an increased rate of delinquencies, defaults and foreclosures. In particular, any material
decline in real estate values would increase the loan-to-value ratios on loans that we hold or
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. If the current
economic recession continues to worsen, our business could experience even greater losses and
reduced servicing and collection revenues.
The Company may not be able to continue as a going concern.
The consolidated Franklin Holdings has been and continues to be operating in an extraordinary
and difficult economic environment, and has been significantly and negatively impacted by the
unprecedented credit and economic market turmoil of the past two plus years and the more recent
recessionary economy of 2009. The consolidated Franklin Holdings financial condition raises
substantial doubt about its ability to continue as a going concern.
Our credit facilities and servicing agreement with the Bank require us to observe certain
covenants, and our failure to satisfy such covenants could render us insolvent.
Our credit facilities with the Bank require us to comply with affirmative and negative
covenants customary for restricted indebtedness, including covenants requiring that: we will not
enter into mergers, consolidations or sales of any substantial portion of our assets; FCMC will
maintain net income before taxes of at least $800,000 as of the end of each calendar month for the
most recently ended twelve (12) consecutive month period ending on such date; and that FCMC, as of
the end of each month, will maintain a net worth of at least $7.6 million. See Managements
Discussion and Analysis Borrowings.
Subject to notice and cure period requirements of our credit facilities and Servicing
Agreement, any unwaived and uncured default under the Licensing Credit Agreement would result in a
cross-default under the Servicing Agreement; and any unwaived and uncured default under the
Servicing Agreement would result in a cross-default under the Licensing Credit Agreement and Legacy
Credit Agreement. Any such defaults could result in acceleration of the amounts owed to the Bank
(with Franklin Holding and FCMC not obligated on the amounts owed under the Legacy Credit Agreement
unless there has been an exception to non-recourse), a foreclosure on the assets of the Company
pledged to the Bank, including on Franklin Holdings pledge of 70% of the common stock of FCMC and
the termination of the Servicing Agreement with the Bank. Such acceleration or foreclosure would
render us insolvent. As of December 31, 2009, the Company was not in default of its credit
facilities or Servicing Agreement with the Bank. See Managements Discussion and Analysis
Borrowings.
36
Based on our current rate of collections on the assets we transferred to the Trust under the
Restructuring Agreement, without a significant special transaction, we may not be able to achieve
the minimum amount of net remittances necessary to reduce the pledge of FCMC stock to the Bank from
70% to a minimum of 20% or at all.
The Restructuring provided for the release of thirty percent of the equity in FCMC, ten
percent of which has been transferred to the Companys principal stockholder, Thomas J. Axon, from
the Companys pledges to the Bank under the Legacy Credit Agreement. If the Bank receives certain
minimum amounts of net remittances on the portfolio of assets transferred to the Trust, the Legacy
Credit Agreement provides for the possibility of a release of up to an additional fifty percent (of
which a maximum of an additional ten percent would go to Thomas J. Axon). However, it is not
anticipated that we will meet the first minimum target of $225 million by March 31, 2010, and there
is no assurance that the Company will meet any of the remaining minimum targets. If we do not
achieve any of the minimum targets, the pledge of FCMC stock to the Bank will not be reduced. In
addition, without an extension, renewal, modification, or amendment by the Bank of the Legacy
Credit Agreement, if we are unable to repay to the Bank the remaining principal and interest due on
the Legacy Credit Agreement by March 31, 2012, which is expected based on the current rate of
collections, the Bank would have all available rights and remedies under the Legacy Credit
Agreement, including a foreclosure on the stock of FCMC pledged to the Bank, which could have a
material impact on our business and operations and render us insolvent. See Managements
Discussion and Analysis March 2009 Restructuring.
If our lenders fail to renew our loans under the Licensing Credit Agreement for additional terms or
provide us with refinancing opportunities, our indebtedness under the $2 million revolving line
will become due and payable in 2011; and, the draw line for working capital needs of FCMC will
expire on May 31, 2010.
The principal sum owed to Huntington under the revolving line of the Licensing Credit
Agreement, as amended, which totaled approximately $1 million as of December 31, 2009, is due on
March 31, 2011. The Licensing Credit Agreement does not include a commitment to refinance this
outstanding balance or renew the $2 million revolving loan commitment, or the letter of credit
commitment of up to $6,500,000, which supports various servicer licenses, and there is no assurance
that Huntington will renew the loan, credit lines or letters of credit at that time. Under the
Licensing Credit Agreement, the termination date is May 31, 2010 for the draw line commitment (for
working capital needs of FCMC) and March 31, 2011 for the revolving loan and letter of credit
commitments (for meeting licensing requirements and, with respect to the revolving loan only, to
pay approved expenses of Franklin Holding). Refusal to provide us with renewals or a refinancing
opportunity would cause our indebtedness under the Licensing Credit Agreement to become immediately
due and payable upon the contractual maturity of such indebtedness and may result in the loss of
certain servicing licenses, which could result in defaults under the Servicing and Legacy Credit
Agreements and our insolvency (and a foreclosure by the Bank on all of the assets pledged under the
Restructuring Agreements, including on Franklin Holdings pledge of 70% of the stock of FCMC) if we
are unable to repay the debt or obtain credit lines or letters of credit with another lending
institution. Without the continued cooperation and assistance from the Bank, the consolidated
Franklin Holdings ability to continue as a viable business is in doubt, and it may not be able to
continue as a going concern.
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 owed to Huntington under the Legacy Credit Agreement, which totals
approximately $1.37 billion as of December 31, 2009, is due on March 31, 2012. 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 FCMC and
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 stock of FCMC pledged to the Bank, which could
have a material impact on our business and operations and render us insolvent.
37
If our lenders fail to extend the Forbearance Agreement covering the Unrestructured Debt, the
Unrestructured Debt will become due and payable and the Bank would be able to foreclose on the
portion of the stock of FCMC pledged to it.
The Restructuring did not include a portion of the Companys debt (the Unrestructured Debt),
which as of December 31, 2009 totaled approximately $39.5 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 Franklin 2004 master credit agreement. On April 20,
August 10, November 13, 2009, and March 26, 2010 the Bank extended the term of forbearance period
until June 30, 2010. 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. Moreover, the Bank could provide a
notice of an event of default under the Legacy Credit Agreement, which would entitle the Bank to
exercise its rights with respect to the collateral pledged under the Legacy Credit Agreement,
including the stock of FCMC pledged to the Bank, which if exercised could have a material impact on
our business and operations.
The Bank may transfer our rights as servicer to the assets we transferred to the Trust under the
Restructuring Agreement to a third party.
Under the terms of the Restructuring Agreements with the Bank, the Bank has the right to
replace us as servicer for any reason and to sell, on a servicing released basis without an
assignment of the Servicing Agreement, the assets we transferred to the Trust (subject to a
termination fee if servicing is terminated by the Bank prior to March 31, 2010, for any reason
other than a default under the Servicing Agreement). If the Bank terminated us as servicer of the
assets transferred to the Trust under the Restructuring Agreements, which would represent a loss of
substantially all of our servicing revenue, 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
trust certificates that we own and the notes receivable 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 working capital needs under
the Licensing Credit Agreement is limited to $4.0 million, which expires May 31, 2010. If the cash
flow received 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 facilities, there is no guarantee that we can continue in business.
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. The following are some of the risks we face related to an
increase in interest rates:
|
|
|
The majority of our borrowings bear interest at variable rates and we are only
partially hedged through interest rate swaps and caps, while a significant majority of
our investments bear fixed rates. As a result, an increase in interest rates is likely
to result in an increase in our interest expense without an offsetting increase in
interest income, which would adversely affect our profitability. |
|
|
|
An increase in interest rates may lead to an increase in borrower defaults, if
borrowers have difficulties making their adjustable-rate mortgage payments, and a
corresponding increase in nonperforming assets, which could decrease our servicing and
collection revenues and our cash flows, increase our loan servicing costs, and
adversely affect our profitability. |
38
We are also subject to risks from decreasing interest rates. For example, a significant
decrease in interest rates could increase the rate at which the loans that we service are prepaid
and reduce our servicing and collection income in subsequent periods.
The Bank may prevent our pursuing future business opportunities.
The Company has been, since the latter part of 2007, expressly prohibited by the Bank from
acquiring or originating loans. In addition, the Servicing Agreement with the Bank provides that
FCMC shall not (i) enter into any other servicing agreements, (ii) otherwise agree to service any
assets other than the mortgage loans and real estate owned properties serviced under the Servicing
Agreement; or (iii) provide any other business services, which could be deemed reasonably likely to
impair the ability of FCMC to perform its obligations under the Servicing Agreement, without the
prior written consent of the Bank, which shall not be unreasonably withheld. The Licensing Credit
Agreement requires the Company to limit its activities to designated activities dealing with the
collateral pledged under the Licensing Credit Agreement and, with the prior written consent of the
Bank, property or assets similar to the collateral, which are to be pledged to the secured parties
under the Licensing Credit Agreement; and includes restrictive covenants on liens, indebtedness,
transactions with affiliates, and investments. Any of these restrictions could effectively
preclude our pursuing future business opportunities.
We may not be successful in entering into 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. The Company
has not historically provided 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 the Companys ability to adequately
service mortgage loans 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 entering the 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 some 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 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, has issued a proposed rule that the SAFE Acts definition of a loan
originator include individuals who for a loan servicer perform a residential mortgage loan
modification, which involves offering or negotiating of loan terms that are materially different
from the original loan. Although HUD has not yet issued a final rule, certain states are requiring
such individuals who perform loan modifications, including those related to loss mitigation, be
licensed as a loan originator.
39
Once these licenses are obtained, 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 (the 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. In addition, as of and since March 31, 2009, FCMC has maintained net
worth in excess of that which is required in those limited states with a more restrictive
definition of net worth. 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 and March 2009 Restructuring, in which case FCMCs business would
be adversely affected.
Under the Servicing Agreement entered into on March 31, 2009 as part of the Restructuring with
Huntington, it would be an event of default if FCMC failed to maintain its license to do business
in any jurisdiction where any mortgaged property or other real estate owned (OREO) property
serviced under the servicing agreement is located and such failure continues unremedied for ten
(10) days, which, if the same were to occur, would entitle the Bank to terminate the Servicing
Agreement. In addition, with
notice in connection with such a default, the Bank could also call an event of default under
the Licensing Credit Agreement and the Legacy Credit Agreement entered into in connection with the
Restructuring, which, among other remedies, would entitle the Bank to foreclose on the assets of
the Company pledged to the Bank, including on Franklin Holdings pledge of 70% of the common stock
of FCMC.
A significant amount of the mortgage loans that we originated prior to the Restructuring and
transferred to the Trust as part of the Restructuring are secured by property in New York and New
Jersey, and our operations could be harmed by economic downturns or other adverse events in these
states.
A significant portion of Tribecas mortgage loan origination activity was concentrated in the
northeastern United States, particularly in New York and New Jersey. Of the loans originated by
Tribeca prior to the Restructuring and transferred to the Trust as part of the Restructuring, a
majority of the aggregate principal was secured by property in these two states. 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 in the northeastern
United States could decrease the value of residential properties in this region. 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.
40
We may not be adequately protected against the risks inherent in servicing subprime residential
mortgage loans.
The vast majority of the loans we originated prior to the Restructuring, and transferred to
the Trust as part of the Restructuring, 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.
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 Restructuring, and
transferred to the Trust as part of the Restructuring, are subordinated to an adjustable rate
mortgage 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 may face monthly
payment increases following their first interest rate adjustment date and when short-term interest
rates rise. Similarly, interest-only loans typically require 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 nears its first rate reset 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 Restructuring, 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.
41
Legal proceedings could be brought which could adversely affect our financial results.
Various companies in the servicing industry have been named as defendants in individual and
class action law suits challenging their residential loan servicing practices. At least some of
those participants have paid significant sums to settle lawsuits brought against it in respect of
such practices. There can be no assurance that similar suits will not be brought against us in the
future, and that we will not be subject to resulting costs, damages or penalties that could
adversely affect our financial results.
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 nevertheless incur
legal costs and expenses in connection with the defense of such proceeding. In addition, the
actual cost of resolving our pending and any future legal proceedings may 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 non-performance by counterparties to
various agreements and sales 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 a 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 business effectively, our expenses could increase, our loan
delinquencies and defaults could continue to accelerate and our business, liquidity and financial
condition could be further significantly harmed.
42
The inability to attract and retain qualified employees could significantly harm our business.
We continually need to attract, hire and successfully integrate additional qualified personnel
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 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, retaining key employees and hiring for certain critical
positions for our servicing and collection business can 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 our 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 take
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 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 our real
estate owned, 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 business. Mr. Axon is also instrumental in
maintaining our relationship with Huntington and our operations under the terms of the
Restructuring Agreements. A loss of the services of Mr. Axon could disrupt and adversely affect
our operations.
43
Risks Related to Our Financial Statements
Our financial condition and financial results can be materially affected by Federal Reserves Board
policies and the capital markets.
The Restructuring included the transfer of substantially all of the Companys portfolios of
subprime mortgage loans and owned real estate to a trust. As of December 31, 2009, the Company
carried all of its subprime mortgage loans and owned real estate either at fair value or lower of
cost or market value on its financial statements, with changes in fair values recorded in earnings
as fair valuation adjustments.
Increases in market interest rates, continued deteriorating capital market values for subprime
mortgage loans (both performing and nonperforming mortgage loans) and real estate, significant
increases in market volatility and the continued lack of liquidity in the secondary market for
these assets may result in estimated fair values significantly below the fair values carried on our
financial statements, which would result in a reduction in reported earnings.
We may become subject to liability and incur increased expenditures as a result of the restatement
of our financial statements.
The restatement of our previously issued financial statements in 2006 could expose us to
government investigation or legal action. 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 focusing on any financial statement inaccuracies and resulting
restatement and negative reactions from shareholders, creditors, or others with which we do
business. The occurrence of any of the foregoing could harm our business and reputation and cause
the price of our securities to decline.
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, 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 shareholders, 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. Any of these results could cause
investors to lose confidence in our reported financial information and could have a negative effect
on the trading price of our common stock.
44
Risks Related to the Regulation of Our Industry
New legislation and regulations directed at curbing predatory lending 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, or are under
consideration, 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.
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 our 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 our 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 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. 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.
45
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. As our operations grow, 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. 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:
|
|
|
civil and criminal liability, including potential monetary penalties; |
|
|
|
loss of servicing and debt collection licenses or approved status required for
continued business operations; |
|
|
|
demands for indemnification or loan repurchases from purchasers of our loans; |
|
|
|
legal defenses causing delay and expense; |
|
|
|
adverse effects on our ability, as servicer or debt collector, to enforce loans; |
46
|
|
|
the imposition of supervisory agreements and cease-and-desist orders; |
|
|
|
the borrower having the right to rescind or cancel the loan transaction; |
|
|
|
individual and class action lawsuits; |
|
|
|
administrative enforcement actions; |
|
|
|
damage to our reputation in the industry; or; |
|
|
|
the inability to obtain credit to fund our operations. |
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 of 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 earnings.
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, thereby subjecting our industry
to the possibility of periodic negative publicity.
47
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 profitability by impeding our ability
to attract and retain customers and employees.
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 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 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 to temporarily enhance
protections for servicemembers relating to mortgages and mortgage foreclosures until December 31,
2010, 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. 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 is likely to negatively impact our
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.
48
In 2008 and 2009, several states and municipalities 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, which could materially increase the cost of foreclosure.
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. If
such proposals are enacted, the cost to service could materially increase. Regardless of whether a
specific law is proposed or enacted, there are several federal and state government initiatives,
including HAMP under the Homeowner Affordability and Stability Plan, that 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. As a result, Mr. Axon will be able to influence significantly the actions that
require stockholder approval, including:
|
|
|
the election of our directors; and, |
|
|
|
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.
49
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.
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.
Section 203 of the Delaware General Corporation Law, subject to certain exceptions, prohibits
a Delaware corporation from engaging in any business combination with any interested stockholder
(such as the owner of 15% or more of our outstanding common stock) for a period of three years
following the date that the stockholder became an interested stockholder. 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, 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:
|
|
|
the timing and amount of collections on loans that we service; |
|
|
|
the rate of delinquency, default, foreclosure and prepayment on the loans we
service; |
|
|
|
changes in interest rates; |
|
|
|
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; |
50
|
|
|
our inability to purchase and originate new mortgage loans for portfolio or for sale
in the secondary mortgage market; |
|
|
|
our inability to successfully enter the new business of servicing loans for third
parties; |
|
|
|
further declines in the estimated value of real property securing mortgage loans; |
|
|
|
increases in operating expenses associated with the changes in our business; |
|
|
|
general economic and market conditions; and, |
|
|
|
the effects of state and federal tax, monetary and fiscal policies. |
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 in the future.
Compliance with the rules of the market in which our common stock trades, 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.
|
|
|
ITEM 1B. |
|
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. 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. Pursuant to the lease, in 2009 we paid 101 Hudson Leasing
Associates rent of approximately $16,000 per month. The terms of both the sublease for the
25th floor and the lease for the 37th floor were through December 30, 2010.
However, effective as of June 26, 2009, pursuant to applicable bankruptcy law, Lehman Brothers
Holdings Inc. rejected its lease with 101 Hudson Leasing Associates. As a result of the Lehman
Brothers Holdings Inc.s rejection, our lease is now with 101 Hudson Leasing Associates for the
space on the 25th floor and we now lease both the 25th floor space and the
37th floor space directly from 101 Hudson Leasing Associates. The term of this combined
lease will be through December 30, 2013 for approximately $98,000 per month. Through June 2009,
pursuant to the sublease, we paid Lehman Brothers Holdings Inc. rent of approximately $72,000 per
month, and from July through December 2009, we paid 101 Hudson Leasing Associates rent of
approximately $82,000 per month.
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. Pursuant to the lease,
we paid 101 Hudson Leasing Associates rent of approximately $17,000 per month in 2009. The term of
the lease is through December 31, 2013.
51
In addition, we leased approximately 228 square feet of office space in Trevose, Pennsylvania
under a lease agreement that was extended in March 2008 on a month-to-month basis through November
30, 2008. The monthly lease payment for the Trevose office was not significant, and as of December
31, 2008, the lease was terminated. On August 1, 2008, Franklin entered into a lease agreement
with Patelco Credit Union to lease 1,500 square feet of space in Concord, California for rent of
approximately $4,750 per month, which was terminated on June 29, 2009.
Our Tribeca subsidiary had leased office space in Trevose, Pennsylvania (approximately 1,000
square feet) under a lease agreement that was extended in December 2007 on a month-to-month basis
through October 31, 2008, and in Marlton, New Jersey (approximately 2,426 square feet) under a
lease agreement with a term that was extended to July 31, 2009. The monthly lease payment for the
Trevose office was not significant, and as of December 31, 2008, the lease was terminated. The
monthly lease payment for the Marlton office was approximately $6,000 in 2009. At December 31,
2008, the Marlton office space was not being utilized by Tribeca, and the remaining lease payments
of $64,000 were accrued and other non-usable fixed assets of $246,000 were written off. The
Marlton lease expired unrenewed on July 31, 2009.
On February 13, 2006, Tribeca entered into a lease agreement with 18 Harrison Development
Associates, an entity controlled by Thomas J. Axon, to lease approximately 950 square feet on the
5th floor at 18 Harrison Street, New York, New York, for approximately $4,880 per month,
for use as additional office space. The lease was extended for an additional period of one year at
a rate of approximately $5,124 per month, which expired unrenewed in February 2008.
As part of its acquisition of the wholesale mortgage origination unit in February 2007,
Tribeca assumed the lease obligation for office space located in Bridgewater, New Jersey, for
approximately 14,070 square feet. The term of the lease is 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 other non-usable fixed assets of $209,000 were written off in 2008.
|
|
|
ITEM 3. |
|
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 originated, acquired, service and collect on mortgage loans
throughout the country, 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.
|
|
|
ITEM 4. |
|
(REMOVED AND RESERVED) |
52
PART II
|
|
|
ITEM 5. |
|
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. In May 2009, the Companys trading symbol was changed to FCMCE.OB to reflect its
delinquency in not filing its Quarterly Report on Form 10-Q for the quarterly period ended March
31, 2009 in a timely manner. However, we met the OTC Bulletin Board filing requirements on June
19, 2009, and on June 23, 2009, the OTC Bulletin Board removed from our trading symbol the fifth
character E. 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. Prior to November 3, 2008, the
Companys common stock traded on The Nasdaq Capital Market.
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, Nasdaq and 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, while prices prior to such date are as reported by Nasdaq.
|
|
|
|
|
|
|
|
|
|
|
High |
|
|
Low |
|
Year Ended December 31, 2008: |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
1.10 |
|
|
$ |
0.60 |
|
Second Quarter |
|
|
1.19 |
|
|
|
0.63 |
|
Third Quarter |
|
|
0.86 |
|
|
|
0.27 |
|
Fourth Quarter |
|
|
1.25 |
|
|
|
0.35 |
|
Year Ended December 31, 2009: |
|
|
|
|
|
|
|
|
First Quarter |
|
|
0.75 |
|
|
|
0.13 |
|
Second Quarter |
|
|
1.00 |
|
|
|
0.25 |
|
Third Quarter |
|
|
1.10 |
|
|
|
0.40 |
|
Fourth Quarter |
|
|
1.25 |
|
|
|
0.30 |
|
Holders. As of March 24, 2010, there were approximately 392 record holders of the Companys
common stock.
Dividend Policy. Franklin Holding historically has not paid cash dividends on our common
stock, and due to operating losses and deficit stockholders equity does not expect to pay a cash
dividend in the near 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.
53
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.
|
|
|
ITEM 6. |
|
SELECTED FINANCIAL DATA |
Not applicable because the Company is a Smaller Reporting Company.
54
|
|
|
ITEM 7. |
|
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 financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America. 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 Restructuring, the loans transferred by the Company to the Trust continue
to be included on the Companys balance sheet in accordance with GAAP, and, therefore, the revenues
from such loans are 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. As a result, 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 are not 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.
Going Concern Uncertainty
The Company has been and continues to be operating in an extraordinary and difficult
environment, and has been significantly and negatively impacted by the unprecedented credit and
economic market turmoil of the past two plus years, including the recent recessionary economy of
2009. Particularly impacting the Company as of the March 2009 Restructuring was the severe
deterioration in the U.S. housing market and the nearly complete shutdown of the mortgage credit
market for borrowers without excellent credit histories, and the slowing economy with increasing
unemployment. These unprecedented market conditions adversely affected the Companys portfolio of
residential mortgage loans, particularly its second-lien mortgage loans, delinquencies, provisions
for loan losses, operating losses and cash flows, which resulted in significant stockholders
deficit of $464.5 million at December 31, 2008 and $822.9 million at March 31, 2009. At December
31, 2009, the
55
Companys stockholders deficit was $806.8 million. The Company has been, since the latter part of 2007, expressly
prohibited by its agreements with the Bank from acquiring or originating loans. In addition, the
Companys restructuring agreements with the Bank contain affirmative covenants that the Companys
servicing subsidiary, FCMC, be licensed, qualified and in good standing, where required, and that
it maintain its licenses to service mortgage loans and real estate owned properties serviced under
the servicing agreement entered into in connection with the Restructuring. Any event of default
under the March 31, 2009 Restructuring Agreements, 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 and result in the transfer of the remaining loans pledged to Huntington to a third
party. Moreover, certain events of default under the Restructuring Agreements, including defaults
under provisions relating to enforceability, bankruptcy, maintenance of collateral and lien
positions, and certain negative covenants typical for agreements of this nature, or defaults under
its Servicing Agreement with the Bank or the Licensing Credit Agreement could result in the
transfer of the Companys sub-servicing contract as servicer of what had been substantially all of
its loans and owned real estate prior to the Restructuring. 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 Borrowings.
Executive Summary
The Company had a consolidated net loss of $358.1 million attributed to common shareholders
for the twelve months ended December 31, 2009, compared with a net loss of $476.3 million for the
year ended December 31, 2008.
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 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 a 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
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 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 Huntington REIT. The Company had stockholders deficit of $806.8 million at December 31, 2009,
or a deficit book value per common share of $100.69.
56
Although the transfer of the trust certificates, representing approximately 83% of the
Portfolio, to the REIT is structured in substance as a sale of financial assets, the transfer, for
accounting purposes, is being treated as a financing under GAAP (specifically under the Financial
Accounting Standards Boards new Accounting Standards Codification Topic 860, Transfers and
Servicing). 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 does not meet one of the technical
requirements of applicable Topic 860 insofar as, for accounting purposes, it can not be assured
that the transferred assets are legally isolated from the Company and put presumptively beyond the
reach of the Company and its creditors, even in bankruptcy. The treatment as a financing on the
Companys balance sheet, however, did not affect the cash flows of the transfer, and does not
affect the Companys cash flows or its reported net income nor would it, necessarily, dictate the
treatment of the assets in a bankruptcy.
The net loss for the year ended December 31, 2008 was principally the result of a $458.1
million provision for loan losses and interest reversals for non-accrual loans. Due principally to
the substantial deterioration in the housing and subprime mortgage markets and the slowing economy
with increasing unemployment, and the concomitant deterioration in the performance of the Companys
loan portfolios, the Company reassessed its allowance for loan losses throughout the year 2008,
which resulted in significantly increased estimates of inherent losses in its portfolios and
increased allowances for loan losses. The Company had stockholders deficit of $464.5 million at
December 31, 2008.
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.
In June 2009, the Financial Accounting Standards Board (FASB) issued FASB Accounting
Standards Codification (ASC) 105, which establishes 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 its financial statements for the period ended September 30, 2009. The adoption of FASB
ASC 105 did not impact the Companys financial position or results of operations.
Noncontrolling interest The Company accounts for a 10% 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 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.
57
Mortgage Loans and Real Estate Held for Sale As part of the Restructuring, approximately 83%
of the Portfolio, acquired through foreclosure, was transferred to the REIT and such loans and
owned real estate 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 has been accounted for as a secured financing in accordance with GAAP, Topic 860,
Transfers and Servicing, because for accounting purposes the requisite level of certainty that the
transferred assets have been 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, the mortgage loans and real estate remain 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 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.
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 investment in trust certificates 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, 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 At March 31, 2009, as part of the Restructuring, notes
receivable, 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 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 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 investment in mortgage loans and real estate held for sale is estimated
based on the available information on these loans and real estate provided by our Bank and from the
loans serviced for the Trust. The estimated income 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).
58
Notes Receivable and Income Recognition The notes receivable portfolio consisted primarily
of secured real estate mortgage loans purchased from financial institutions and mortgage and
finance companies. Such notes receivable were performing, nonperforming or subperforming at the
time of purchase and were generally purchased at a discount from the principal balance remaining.
Notes receivable were carried at the amount of unpaid principal, reduced by purchase discount and
allowance for loan losses. The Company reviewed its loan portfolios upon purchase of loan pools,
at loan boarding, and on a frequent basis thereafter to determine an estimate of the allowance
necessary to absorb probable loan losses in its portfolios. Managements judgment in determining
the adequacy of the allowance for loan losses was based on an evaluation of loans within its
portfolios, the known and inherent risk characteristics and size of the portfolio, the assessment
of current economic and real estate market conditions, estimates of the current value of underlying
collateral, past loan loss experience and other relevant factors. In connection with the
determination of the allowance for loan losses, management obtained independent appraisals for the
underlying collateral on an ongoing basis in accordance with company policy.
In general, interest on the notes receivable was calculated based on contractual interest
rates applied to daily balances of the principal amount outstanding using the accrual method.
Accrual of interest on notes receivable, including impaired notes receivable, was discontinued when
management believed, after considering economic and business conditions and collection efforts,
that the borrowers financial condition was such that collection of interest was doubtful. When
interest accrual was discontinued, all unpaid accrued interest was reversed against interest
income. Subsequent recognition of income occurred only to the extent payment was received, subject
to managements assessment of the collectibility of the remaining interest and principal. A
non-accrual note was restored to an accrual status when collectibility of interest and principal
was no longer in doubt and past due interest was recognized at that time.
Discounts on Acquired Loans The Company followed Topic 310 for acquired loans which had
evidence of deterioration of credit quality since origination and for which it was probable, at the
time of our acquisition, that the Company would be unable to collect all contractually required
payments. For these loans, the excess of the undiscounted contractual cash flows over the
undiscounted cash flows estimated by us at the time of acquisition was not accreted into income
(nonaccretable discount). The amount representing the excess of cash flows estimated by us at
acquisition over the purchase price was accreted into purchase discount earned over the life of the
applicable loans (accretable discount). The nonaccretable discount was not accreted into income.
If cash flows could not be reasonably estimated for any loan, and collection was not probable, the
cost recovery method of accounting was used. Under the cost recovery method, any amounts received
were applied against the recorded amount of such loans.
Subsequent to acquisition, if cash flow projections improved, and it was determined that the
amount and timing of the cash flows related to the nonaccretable discount was reasonably estimable
and collection was probable, the corresponding decrease in the nonaccretable discount was
transferred to the accretable discount and was accreted into interest income over the remaining
life of any such loan on the interest method. If cash flow projections deteriorated subsequent to
acquisition, the decline was accounted for through the allowance for loan losses. Depending on the
timing of an acquisition, the initial allocation of discount generally was made primarily to
nonaccretable discount until the Company boarded all loans onto its servicing system; at that time,
any cash flows expected to be collected over the purchase price were transferred to accretable
discount. Generally, the allocation was finalized no later than ninety days from the date of
purchase.
59
Originated Loans Held for Investment In general, interest on originated loans held for
investment was calculated based on contractual interest rates applied to daily balances of the
principal amount outstanding using the accrual method. The Company accrued interest on secured
real estate first mortgage loans originated by the Company up to a maximum of 209 days
contractually delinquent with a recency payment in the last 179 days, and that were judged to be
fully recoverable for both principal and accrued interest, based principally on a foreclosure
analysis that included an updated estimate of the realizable value of the property securing the
loan.
The accrual of interest was discontinued when management believed, after considering economic
and business conditions and collection efforts, that the borrowers financial condition was such
that collection of interest was doubtful, which can be less than 209 days contractually delinquent
with a recency payment in the last 179 days. When interest accrual was discontinued, the unpaid
accrued interest on certain loans in the foreclosure process was not reversed against interest
income where the current estimate of the value of the underlying collateral exceeded 110% of the
outstanding loan balance. For all other loans held for investment, all unpaid accrued interest was
reversed against interest income when interest accrual was discontinued. Except for certain loan
modifications, subsequent recognition of income occurred only to the extent payment was received,
subject to managements assessment of the collectibility of the remaining interest and principal.
Allowance for Loan Losses 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, and was therefore $0 at December 31, 2009.
Prior to the March 31, 2009 Restructuring, the Company reviewed its loan portfolios upon purchase
of loan pools, at loan boarding, and on a frequent basis thereafter to determine an estimate of the
allowance necessary to absorb probable loan losses in its portfolios. Managements judgment in
determining the adequacy of the allowance for
loan losses was based on an evaluation of loans within its portfolios, the known and inherent
risk characteristics and size of the portfolio, the assessment of current economic and real estate
market conditions, estimates of the current value of underlying collateral, past loan loss
experience and other relevant factors. In connection with the determination of the allowance for
loan losses, management obtained independent appraisals for the underlying collateral on an ongoing
basis in accordance with company policy.
Other Real Estate Owned Other real estate owned (OREO) consisted of properties acquired
through, or in lieu of, foreclosure or other proceedings and were held for sale and carried at the
lower of cost or fair value less estimated costs to sell. Any write-down to fair value, less cost
to sell, was charged to provision for loan losses based upon managements continuing assessment of
the fair value of the underlying collateral. OREO was evaluated periodically to ensure that the
recorded amount was supported by current fair values and valuation allowances were recorded as
necessary to reduce the carrying amount to fair value less estimated cost to sell. Revenue and
expenses from the operation of OREO and changes in the valuation allowance were included in
operations. Direct costs relating to the development and improvement of the property were
capitalized, subject to the limit of fair value of the property, while costs related to holding the
property were expensed in the current period. Gains or losses were included in operations upon
disposal of the property.
Derivatives As part of the Companys interest-rate risk management process, we entered into
interest rate cap agreements in 2006 and 2007, and 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.
60
Interest rate caps are recorded at fair value. The interest rate caps are not designated as
hedging instruments for accounting purpose, and unrealized changes in fair value are recognized in
the period in which the changes occur and realized gains and losses are recognized in the period
when such instruments are settled.
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, 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 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, 2009 and 2008, which is related to the
terminated hedges, is amortized to earnings over time.
As of December 31, 2009, the notional amount of the Companys fixed-rate interest rate swaps
totaled $390 million, representing approximately 32% of the Companys outstanding variable rate
debt. The fixed-rate interest rate swaps are 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.
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.
As of December 31, 2008, the Company removed the hedge designations for its cash flow hedges.
As a result, the Company will continue 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 as of December 31, 2009 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.
61
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, 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 Recent Accounting Pronouncements.
Results of Operations Franklin Credit Management Corporation (FCMC)
The Companys operating business since January 1, 2009 has been conducted principally through
FCMC, our 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, pricing and acquisition of
residential mortgage portfolios, for third parties. The portfolios serviced for other entities, as
of December 31, 2009, principally included Huntington (first and second-lien loans secured by 1-4
family residential real estate previously acquired and originated by Franklin and transferred to
the Trust) and Bosco. The Companys consolidated financial statements, while including the results
of FCMC, include the results of all consolidated entities of Franklin Holding, which includes all
the assets and debt obligations that have resulted from Franklins legacy business prior to March
31, 2009.
As a result of the March 2009 Restructuring and the corporate reorganization that took effect
December 19, 2008, FCMC, the Companys servicing entity within the Franklin group of companies,
notwithstanding the substantial stockholders deficit of Franklin, has positive net worth and 30%
of its equity free from the pledges to the Bank. The Restructuring provided for the release of
thirty percent of the equity in FCMC, ten percent of which has been transferred to the Companys
principal stockholder, Thomas J. Axon, from the Companys pledges to the Bank in respect of its
Legacy Credit Agreement.
62
At December 31, 2009, FCMC had total assets of $26.3 million and had stockholders equity of
$18.9 million. At December 31, 2008, FCMCs total assets amounted to $40.4 million and its
stockholders equity was $15.7 million. Inter-company payables and receivables were eliminated in
deriving the Consolidated Financial Statements of Franklin. FCMC recognized net income of
approximately $4.2 million for the year ended December 31, 2009, principally from servicing the
portfolio of loans and assets for the Bank and Bosco. Inter-company servicing revenues allocated
to FCMC during the first quarter of 2009 were based principally on the servicing contract entered
into 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, the Federal provision for income taxes,
and cash servicing revenues received from the Bank for servicing its loans during 2009 have been
eliminated in deriving the Consolidated Financial Statements of Franklin. Servicing revenues were
eliminated in the Consolidated Financial Statements of Franklin due to the accounting treatment for
the transfer of the trust certificates as a financing under GAAP Topic 860, Transfers and
Servicing.
Upon the request of the Bank, FCMC made a distribution of $2,245,000 to the Bank on September
30, 2009. The distribution, which represented approximately 70% of the estimated net income of
FCMC for the six months ended September 30, 2009 after a holdback of $500,000, was made pursuant to
the provisions of the Legacy Credit Agreement currently entitling the Bank to 70% of all amounts
distributed by FCMC. The distribution was principally applied by the Bank to pay down the debt
obligations of certain of FCMCs sister companies as provided for by the terms of the Legacy Credit
Agreement with the Bank. The remaining 30%, or $962,000, was distributed in November 2009 as a
dividend of $9,623.38 per share to the stockholders of FCMC, including $866,000 to FCHC in respect
of its ownership of 90% of the outstanding stock of FCMC, and $96,000 to Thomas J. Axon, the
Chairman and President of the Company, in respect of his ownership of 10% of the outstanding stock
of FCMC.
The Legacy Credit Agreement requires that each dividend by FCMC to its stockholders be
accompanied by payment of a distribution to the Bank of an amount such that the Bank receives 70%
of the combined amounts paid by FCMC. While FCMC is not a borrower under the Legacy Credit
Agreement or otherwise liable for the indebtedness thereunder it has pledged certain collateral in
support of the Legacy Credit Agreement, and a default under the Legacy Credit Agreement could
result in the Banks foreclosure on the assets and stock of Franklin Holdings subsidiaries,
excluding the assets of FCMC (other than an office condominium unit held by FCMC and certain cash
collateral which also serves as security under the Licensing Credit Agreement) and the unpledged
portion of FCMCs stock.
On March 26, 2010, the Company entered into an amendment to the Licensing Credit Agreement
with the Bank, which renewed and extended the Licensing Credit Agreement. The amendment includes a
reduction of the draw credit facility (Draw Facility) from $5.0 million to $4.0 million and an
extension of the termination date to May 31 2010 for the Draw Facility and to March 31, 2011 for
the $2.0 million revolving line of credit and $6.5 million letter of credit facilities. The
amendment further provides 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 accordance with the Legacy Credit Agreement, the Bank is currently entitled to 70%
of all amounts distributed by FCMC. The payment of any dividend, distribution or payment to FCMCs
shareholders and the Bank s would result in a reduction of FCMCs stockholders equity and cash
available for its operations.
63
A summary of FCMCs stand-alone financial results for the year ended December 31, 2009 and at
December 31, 2009 are as follows:
|
|
|
|
|
|
|
Twelve Months Ended |
|
STATEMENT OF INCOME |
|
December 31, 2009 |
|
REVENUES: |
|
|
|
|
Interest income |
|
$ |
104,836 |
|
Servicing fees and other income |
|
|
27,870,675 |
|
|
|
|
|
Total revenues |
|
|
27,975,511 |
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
Interest expense |
|
|
78,119 |
|
Collection, general and administrative |
|
|
20,188,497 |
|
Depreciation |
|
|
642,941 |
|
|
|
|
|
Total operating expenses |
|
|
20,909,557 |
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE PROVISION FOR INCOME TAXES |
|
$ |
7,065,954 |
|
Provision for income taxes |
|
|
2,824,007 |
|
|
|
|
|
NET INCOME |
|
$ |
4,241,947 |
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET |
|
At December 31, 2009 |
|
ASSETS: |
|
|
|
|
Cash and cash equivalents |
|
$ |
15,116,880 |
|
Restricted cash |
|
|
4,770,867 |
|
Receivables, fixed and other assets |
|
|
6,436,434 |
|
|
|
|
|
Total assets |
|
$ |
26,324,181 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES: |
|
|
|
|
Debt |
|
$ |
1,000,000 |
|
Servicing liabilities |
|
|
4,770,867 |
|
Other liabilities |
|
|
1,675,372 |
|
|
|
|
|
Total liabilities |
|
$ |
7,446,239 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY |
|
$ |
18,877,942 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
26,324,181 |
|
|
|
|
|
|
|
|
|
|
SERVICING PORTFOLIO: |
|
|
|
|
Number of loans serviced |
|
|
36,700 |
|
Unpaid principal balance serviced |
|
$ |
1.80 billion |
|
Prior to the Restructuring in March 2009, the Company had two reportable operating segments:
(i) portfolio asset acquisition and resolution; and (ii) mortgage banking. As a result of the
Restructuring, the Companys only principal business has been the servicing and resolution of
performing, reperforming and nonperforming residential mortgage loans, including specialized loan
recovery servicing, for third parties; and, therefore, the Company no longer had separate
reportable operating segments.
64
Results of Operations Franklin Credit Holding Corporation
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, is treated as a financing in accordance with GAAP. 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 does not affect the Companys cash flows or its reported net income nor would it, necessarily,
dictate the treatment of the assets in a bankruptcy.
As a result, 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 are not
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 owned and
self serviced the loans.
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
Overview. 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 a 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
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) that
collateralizes the Unrestructured Debt, which, on March 31, 2009, was recorded at fair value
approximating $4.3 million.
The Company had a net loss attributed to common shareholders of $358.1 million for the year
ended December 31, 2009, compared with a net loss of $476.3 million for the year ended December 31,
2008. The net loss for the year ended December 31, 2009 was principally due to the March 31, 2009
Restructuring. As part of the Restructuring, Franklin Credit Holding Corporation transferred
approximately 83% of the Portfolio (in the form of trust certificates) from the Companys balance
sheet in exchange for $477.3 million in common and preferred shares in REIT Securities. The REIT
Securities had an aggregate value 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, approximately 17% of the
Portfolio transferred to a trust in exchange for trust certificates and the remaining loans not
subject to the Restructuring. During the nine months 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 real estate owned acquired through
foreclosure and (ii) expenses equal to the interest income and fees on the approximately 83%
of the Portfolio transferred to the Huntington REIT.
65
The net loss for the year ended December 31, 2008 was driven principally by $458.1 million in
provisions for loan losses as the Companys portfolios of residential 1-4 family loans continued to
deteriorate throughout the year, and by a significant excess of interest-bearing liabilities over
interest-paying loans, both of which were the result of the Companys significant amount of
delinquent residential 1-4 family loans. As a result, the Companys aggregate net interest income
(interest income less interest expense) and non-interest income was not sufficient to support its
general and administrative expenses. The significant provisions for loan losses during the year
ended December 31, 2008 was due principally to the substantial deterioration in the housing and
subprime mortgage markets and the slowing economy with increasing unemployment and the significant
further deterioration in the performance of the Companys portfolios of acquired and originated
loans, which resulted in significantly increased estimates of inherent losses in its portfolios and
the need for substantial increases in reserves throughout the year.
The Company had stockholders deficit of $806.8 million at December 31, 2009, compared to
stockholders deficit of $464.5 million at December 31, 2008.
The Company had a loss per common share for the twelve months ended December 31, 2009 of
$44.74 both on a diluted and basic basis, compared to a loss per common share of $59.67 on both a
diluted and basic basis for the twelve months ended December 31, 2008. Revenues decreased by
$354.7 million to a loss of $244.8 million for the twelve months ended December 31, 2009, from
$109.9 million for the twelve months ended December 31, 2008. Our total debt outstanding decreased
to $1.37 billion at December 31, 2009 from $1.44 billion at December 31, 2008. As a result of the
restructuring of our debt, including $300 million of debt forgiveness in December 2007, a zero rate
of interest on $125 million of our debt up to the effective date of the Restructuring and the
benefit of a decline in one-month LIBOR on our interest-sensitive borrowings, interest expense
(inclusive of amortization of deferred financing costs and success fees) decreased by $4.6 million,
or 6%, during the twelve months ended December 31, 2009 compared with the same period in 2008.
Collection, general and administrative expenses decreased by $8.2 million, or 17%, to $40.3 million
during the twelve months ended December 31, 2009, from $48.5 million for the same period in 2008.
The provision for loan losses decreased by $458.1 million to just $169,000 in the twelve months
ended December 31, 2009.
Revenues. Revenues decreased by $354.7 million for the twelve months ended December 31, 2009,
from $109.9 million for the twelve months ended December 31, 2008 to a loss of $244.8 million.
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 OREO and servicing fees and other income.
Interest income decreased by $35.0 million, or 38%, to $58.1 million during the twelve months
ended December 31, 2009 from $93.1 million during the twelve months ended December 31, 2008. The
decrease in interest income reflected an approximate 45% increase in loans on nonaccrual due to
increased serious delinquencies in the Companys loan portfolios and a change in the interest
accrual policy, effective with the Restructuring, to accrue only one month of interest on
performing loans (loans that are contractually current). Approximately $1.23 billion of loans were
on nonaccrual status at December 31, 2009 compared with $851.2 million at December 31, 2008.
Dividend income from the Investment in REIT securities, received in exchange for Trust
Certificated transferred to the Banks REIT on March 31, 2009, was $32.0 million during the twelve
months ended December 31, 2009. There was no dividend income during the same period last year.
66
Purchase discount earned decreased by $2.2 million, or 85%, to $392,000 during the twelve
months of 2009 from $2.6 million during the twelve months of 2008. This decrease was the result of
the elimination of the remaining balance of purchase discount on March 31, 2009 effective with the
Restructuring, and, therefore there was no purchase discount remaining to be earned during the last
three quarters of 2009.
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, 2008.
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 approximately 83% of the trust certificates representing
the Portfolio previously transferred to the Trust, in exchange for preferred and common stock in
Huntingtons REIT (REIT Securities) with a fair market value approximating $477.3 million. The
transfer of the trust certificates has been accounted for as a secured financing in accordance with
GAAP Topic 860, Transfers and Servicing because for accounting purposes the requisite level of
certainty that the transferred assets have been 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, the mortgage loans and real
estate remain on the Companys balance sheet classified as mortgage loans and real estate held for
sale securing the nonrecourse liability in an equal amount. The loss, therefore, represented the
application of fair market value accounting that 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 accrued interest
on the loans exchanged in the amount of $8.6 million that was not collected as part of the
Restructuring.
Loss on valuation of investment in trust certificates, mortgage loans and real estate 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, were classified as available for sale and fair market value accounting was applied that
resulted in a write-down to fair market value approximating $95.8 million. 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.
Fair valuation adjustments (fair value adjustments of the investment in trust certificates and
the nonrecourse liability) amounted to a net loss of $27.2 million for the twelve months ended
December 31, 2009. Included in the fair valuation adjustments in the twelve months ended December
31, 2009 were (i) net losses realized from sales of owned real estate acquired through foreclosure
in the amount of $14.9 million, which were somewhat offset by adjustments to reduce the nonrecourse
liability in the amount of $4.3 million, (ii) expenses recognized on the nonrecourse liability
equal to the interest income and fees [received] in the amount of $17.7 million on the
approximately 83% of the Portfolio transferred to the Huntington REIT, and (iii) various other net
adjustments to the fair value in the amount of approximately $1.2 million, net. In addition, during
the nine months ended December 31, 2009, the Company incurred a net loss of approximately $34.4
million due to further declines and other adjustments in the estimated fair value of the 83% of the
Portfolio transferred to the REIT, which was offset by a reduction in the related nonrecourse
liability for a like amount; and, therefore, had no impact on the Companys net operating results
or cash flows.
67
Gain on sale of OREO decreased by $1.8 million, or 83%, to $374,000 during the twelve months
ended December 31, 2009, from $2.2 million during the twelve months ended December 31, 2008. We
sold 198 OREO properties with an aggregate carrying value of $18.9 million during the twelve months
of 2009, as compared to 490 OREO properties with an aggregate carrying value of $41.6 million
during the twelve months of 2008. For periods subsequent to the March 31 Restructuring, during the
nine months ended December 31, 2009, gains and losses on sales of OREO were reflected in fair
valuation adjustments.
Servicing fees and other income (principally third-party subservicing fees, third-party
acquisition services fees and late charges, prepayment penalties and other miscellaneous servicing
revenues) decreased by $5.7 million, or 48%, to $6.3 million during the twelve months ended
December 31, 2009 from $12.0 million during the corresponding period last year. This decrease was
principally the result of decreased recoveries of outside foreclosure attorney costs from
delinquent borrowers, an insignificant amount of due diligence fees earned from third parties,
reduced late charges collected from delinquent borrowers, decreased prepayment penalties due to a
continuing slower rate of loan payoffs, a write off of $462,000 in administrative fees associated
with services provided on the Bosco portfolio by FCMC, and a reduction of $702,000 in the servicing
fees recognized on the portfolio of loans serviced for BOSCO as a result of amendments to the
servicing contract with Bosco effective in February and October 2009.
Operating Expenses. Operating expenses decreased by $471.7 million, or 80%, to $115.9 million
during the twelve months of 2009 from $587.6 million during the same period in 2008. 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 $4.2 million, or 5%, to $74.3 million during the twelve months
ended December 31, 2009 from $78.5 million during the twelve months ended December 31, 2008. This
decrease was the result of a lower average cost of funds, exclusive of the effect of interest rate
swaps, during the twelve months ended December 31, 2009 of 3.58%, compared to 4.99% during the
twelve months ended December 31, 2008, reflecting the restructuring of the interest rate terms on
our debt and a decline of about 21 basis points in one-month LIBOR since December 31, 2008, which
was nearly offset by the cost of interest rate swaps. On February 27, 2008, the Company entered
into $725 million (notional amount) of fixed-rate interest rate swaps, and on April 30, 2008, the
Company entered into an additional $275 million (notional amount) of 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. As of April 1,
2009, due to swap maturities and early terminations, the Company had in place $390 million
(notional amount) of fixed-rate interest rate swaps. Because short-term interest rates actually
declined in the months following the purchase of these swaps and due to the amortization of the
AOCL balance relating to terminated interest rate swaps, offset somewhat by an increase in the fair
value of the swaps during 2009, the interest rate swaps increased the Companys interest cost in
the twelve months ended December 31, 2009 by $23.4 million. At December 31, 2009, the weighted
average interest rate of our borrowed funds, exclusive of the effect of the interest rate swaps,
was 3.94%, compared with 3.95% at December 31, 2008.
68
Collection, general and administrative expenses decreased by $8.2 million, or 17%, to $40.3
million during the twelve months ended December 31, 2009, from $48.5 million during the
corresponding period in 2008. The decrease in collection, general and administrative expenses was
principally the result of a reduction in operating costs throughout the Company including decreased
servicing costs due to a reduction of third-party expenses incurred on servicing the Banks
portfolio of loans since, effective April 1, 2009 with the Restructuring, the Bank has directed the
Company as servicer to limit certain third-party costs and expenses that are reimbursed by the
Bank. These decreased costs were somewhat offset by the costs of the Restructuring. Total
restructuring costs with the Bank were $4.7 million during the twelve months ended December 31,
2009 as compared to $1.5 million during the twelve months ended
December 31, 2008, and represented principally outside legal and consulting expenses,
including reimbursement of costs incurred by Huntington in accordance with the Restructuring
Agreements in 2009 and the Forbearance Agreements in 2008. Salaries and employee benefits expenses
decreased by $3.0 million, or 17%, to $15.0 million during the twelve months ended December 31,
2009, from $18.0 million during the twelve months ended December 31, 2008, due to reductions in
staff throughout the Company during the past 21 months, including salary reductions for certain
senior executives and various other cost-saving measures implemented in the beginning of April
2009. The number of servicing employees decreased to 113 at December 31, 2009, from 159 employees
at December 31, 2008. The Company ended the twelve months ended December 31, 2009 with 154
employees, compared with 220 employees at December 31, 2008. Legal fees relating to collection and
loss mitigation activities decreased by $2.3 million, or 25%, to $6.9 million from $9.2 million
during the same period last year. This decrease principally reflected reduced outside legal
services for foreclosure, bankruptcy and judgment activities for the delinquent loans in the
portfolios serviced for the Bank during the last three quarters of 2009, which are now subject to
approval and reimbursement by the Bank. The Company also experienced an increase in corporate
legal expenditures not directly related to the Restructuring of $83,000, or 6%, to $1.5 million
from $1.4 million, principally related to a nonrecurring matter, as compared to the same
twelve-month period last year. Servicing expenses related to the maintenance and management of
OREO decreased by approximately $1.2 million to $2.9 million during the twelve months ended
December 31, 2009, from $4.2 million during the same twelve-month period last year, primarily due
to a delay in moving loans through the foreclosure process as a result of first seeking to qualify
borrowers under HAMP; and, due to approval and reimbursement by the Bank for OREO serviced on
behalf of the Trust, during the last three quarters of 2009, which was somewhat offset by payments
of all outstanding property taxes in the first quarter of 2009 in accordance with the terms of the
Restructuring. In addition, other third-party servicing expenses related to our collection, loss
mitigation and deficiency operations decreased by $426,000 to $2.8 million from $3.3 million for
the twelve months ended December 31, 2008, primarily due to a decrease in the volume of properties
and a reduction in fees for our force-placed insurance on borrower properties and other decreased
third-party vendor activities as directed by the Bank effective April 1, 2009. Professional fees
decreased by $1.2 million, or 46%, to $1.4 million from $2.7 million, principally due to a decrease
in outside audit fees and the non-accrual of the 2009 audit/tax fees, which will now be expensed in
the same period as the services are provided, compared to the same period last year. Rent expenses
decreased by $770,000 to $1.2 for the twelve months ended December 31, 2009, due principally to the
cost of a lease write-down of vacant office space during the second quarter of 2008. Various other
general and administrative expenses decreased by approximately $2.6 million during the twelve
months ended December 31, 2009, principally due to reduced costs throughout the Companys
operations and the related reductions in the workforce because the Company ceased to acquire and
originate loans in November 2007 and re-directed its business to a fee for services model.
There was a provision for loan losses of $169,000 during the twelve months ended December 31,
2009, compared with a provision of $458.1 million during the twelve months ended December 31, 2008.
The virtual absence of a provision for loan losses during the twelve months ended December 31,
2009 reflected the transfer of a significant portion of our portfolio of notes receivable, loans
held for sale and OREO properties to the Trust on March 31, 2009 and the exchange and retention,
principally in the form of trust certificates, of the remaining portion of our portfolio of notes
receivable, loans held for sale and OREO properties as part of the Restructuring. As a result of
the Restructuring and the exchange of the Companys loans and OREO 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 and the provision for loan losses effective March 31, 2009 was substantially
eliminated. The provision for loan losses for the year 2008 of $458.1 million was due principally
to the substantial deterioration in the housing and subprime mortgage markets, and the slowing
economy with increasing unemployment, and the concomitant deterioration in the performance of the
Companys loan portfolios, which resulted in significantly increased estimates of inherent losses
in its portfolios and substantially increased allowances for loan losses.
69
Amortization of deferred financing costs decreased by $432,000, or 44%, to $537,000 during the
twelve months of 2009 from $984,000 during the twelve months of 2008. This decrease resulted
primarily from a reduction in portfolio collections and in accordance with the terms of the
Restructuring Agreements, which resulted in a decrease in the pay down of our borrowed funds.
Depreciation expenses decreased by $892,000, or 58%, to $646,000 in the twelve months of 2009.
This decrease during the twelve months ended December 31, 2009 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 2008.
Our pre-tax loss decreased by $117.0 million to a loss of $360.7 million during the twelve
months ended December 31, 2009, from a loss of $477.7 million during the twelve months ended
December 31, 2008 for the reasons set forth above.
The Company recorded net income tax benefits of $2.8 million and $1.3 million, respectively,
during the twelve months ended December 31, 2009 and December 31, 2008.
Liquidity and Capital Resources
General
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.
As of December 31, 2009, we had one limited source of external funding 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 a REIT owned by a
Huntington subsidiary, and borrower payments of interest and principal from the notes receivable
held for sale and the mortgage loans collateralizing the owned trust certificates. See
Borrowings.
We are required to submit all payments we receive from our preferred stock investment, the
trust certificates that we own and the notes receivable 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. If the cash flow received
from servicing loans and performing due diligence services for third parties is insufficient to
sustain the cost of operating our business, and we have fully utilized our licensing credit
facilities, there is no assurance that we 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, 2009, all of the Companys unrestricted cash was invested in money market accounts
and certificates of deposits held at The Huntington National Bank.
70
Cost of Funds. At of December 31, 2009, we had total borrowings of $1.37 billion, of which
$1.33 billion was subject to the Legacy Credit Agreement and $39.5 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, 2009 is secured by the REIT Securities, trust
certificates, cash and certain other assets, including 70% of the equity interests in FCMC and 100%
of the equity interests in all other direct and indirect subsidiaries of Franklin Holding.
However, the assets of our servicing subsidiary, FCMC (other than an office condominium unit, on
which the Bank has a first lien, and 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 such debt. At December 31, 2009, the
interest rates on our term debt (Notes payable) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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% |
|
$ |
|
|
|
$ |
15,998,860 |
|
FHLB 30-day LIBOR advance rate plus 2.75% |
|
|
|
|
|
|
23,535,477 |
|
LIBOR plus 2.25% (Tranche A) |
|
|
770,617,430 |
|
|
|
|
|
LIBOR plus 2.75% (Tranche B) |
|
|
417,164,681 |
|
|
|
|
|
15.00% (Tranche C) |
|
|
140,074,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,327,856,497 |
|
|
$ |
39,534,337 |
|
|
|
|
|
|
|
|
At December 31, 2009, the weighted average interest rate on term debt was 3.93%.
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, 2009 and since March 31, 2009, our liquidity position is, and has been,
affected principally by the collections from servicing the trust certificates and the dividends
received from the preferred stock investment in the Huntington subsidiary REIT.
At December 31, 2009, we had cash and cash equivalents of $16.0 million compared with $21.4
million at December 31, 2008. Restricted cash of $2.6 million and $27.9 million at December 31,
2009 and 2008, respectively, was restricted under our credit agreements and lockbox facility with
the Bank.
Until March 31, 2009, substantially all of our assets were invested in our portfolios of notes
receivable, loans held for investment, OREO and loans held for sale. Primary sources of our cash
flow for operating and investing activities had been borrowings under our various credit
facilities, collections of interest and principal on notes receivable and loans held for investment
and proceeds from sales of notes and OREO properties, and from time to time, sales of our newly
originated loans that generally were held for investment. Primary uses of cash included purchases
of notes receivable, originations of loans and for operating expenses. We had relied significantly
upon the Bank and the other banks that participated in the loans made to us by the Bank to provide
the funds necessary for the purchase of notes receivable portfolios and the origination of loans.
We ceased to acquire and originate loans in November 2007, and under the terms of the Restructuring
Agreements, we are expressly prohibited from acquiring or originating mortgage loans or other
assets without the prior consent of the Bank.
Net cash provided by operating activities was $130.4 million during the twelve months ended
December 31, 2009, compared with cash used of $16.7 million during the twelve months ended December
31, 2008. The increase in cash provided by operating activities during the twelve months ended
December 31, 2009 was primarily due to non-cash fair valuation losses and adjustments included in
the net loss attributed to common shareholders and principal collections on mortgage loans held for
sale and proceeds from the sale of real estate held for sale during the period. These increases
were only partially offset by decreases in accounts payable and accrued expenses during the period.
Net cash provided by investing activities was $61.8 million in the twelve months ended
December 31, 2009, compared to $205.4 million of cash provided in the twelve months ended December
31, 2008. The decrease in cash provided by investing activities during the twelve months ended
December 31, 2009 was due primarily to reductions in principal collections on both notes receivable
and loans held for investment, which was partially offset by an increase in the use of restricted
cash, which was used to settle the cash related to the Restructuring.
71
Net cash used in financing activities was $197.6 million during the twelve months ended
December 31, 2009, compared to $185.5 million used during the twelve months ended December 31,
2008. The increase in cash used in financing activities during the twelve months ended December
31, 2009 was due to the pay-down of the nonrecourse liability, which was the result of the
principal collections on mortgage loans held for sale and proceeds from the sale of real estate
held for sale, which was partially offset by reductions in principal payments of notes payable.
Borrowings
As of December 31, 2009, the Company had total borrowings of $1.37 billion under the
Restructuring Agreements, of which $1.33 billion was subject to the Legacy Credit Agreement and
$39.5 million remained under a credit facility excluded from the Restructuring Agreements (the
Unrestructured Debt). Substantially all of the debt under these facilities was incurred in
connection with the Companys legacy purchase and origination of residential one-four family
mortgage loans. These borrowings are shown in the Companys financial statements as Notes
payable (referred to as term loans or term debt herein). At December 31, 2009, FCMC owed $1
million under the revolving line of its Licensing Credit Agreement with the Bank, which is shown in
the Companys financial statements as Financing agreement.
During the nine months ended December 31, 2009 following the Restructuring, while the Company
made principal payments on the senior portion (tranche A) of the notes payable in the amount of
$68.4 million, total notes payable outstanding was reduced by only $43.7 million. The balance of
the subordinate portions (tranches B and C) of notes payable actually increased during this
nine-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 tranches B
and C. For the full year of 2009, the Company paid down notes payable by a total of $99.7 million.
Restructuring 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 and warehousing agreements
with Huntington. As of December 31, 2009, all of our borrowings, with the exception of the
Unrestructured Debt in the amount of $39.5 million, are governed by credit agreements entered into
as part of the Restructuring Agreements. Information regarding the credit and forbearance
agreements is presented below.
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.
72
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 remains
subject to the original terms of the Franklin forbearance agreement entered into with the Bank in
December 2007 and subsequent amendments thereto (the Franklin Forbearance Agreement) and the
Franklin 2004 master credit agreement. On April 20, August 10, and November 13, 2009, Franklin
Holding, and certain of its direct and indirect subsidiaries, including FCMC and Franklin Credit
Asset Corporation (Franklin Asset) entered into amendments to the Franklin Forbearance Agreement
and
Franklin 2004 master credit agreement (the Amendments) with the Bank relating to the
Unrestructured Debt whereby the term of forbearance period, which had been previously extended by
the Bank, was extended on March 26, 2010 until June 30, 2010. The Bank again agreed to forebear
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. During the forbearance period, the Bank, absent the occurrence and
continuance of a forbearance default other than an Identified Forbearance Default, will not
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. In addition, FCMC is
not obligated to the Bank with respect to the Unrestructured Debt and any references to FCMC in the
Franklin 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, the Bank, with notice, could 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 of FCMC (except
for a first lien of the Bank on an office condominium unit and a second priority lien of the Bank
on cash collateral held as security under the Licensing Credit Agreement) and the unpledged portion
of FCMCs stock.
The Franklin forbearance agreement and the Tribeca forbearance agreement (together, the
Forbearance Agreements) that had been entered into with the Bank were, except for approximately
$39.5 million of the Companys debt outstanding at December 31, 2009, replaced effective March 31,
2009 by the Restructuring Agreements.
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, 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, 2009, $770.6 million of
this tranche of debt remained to be paid off before payment of the swap termination fee is
triggered. The Company has other non-amortizing fixed-rate interest rate swaps with the Bank,
which have not been terminated.
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 corporate 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.
73
Background to the Restructuring. The severe deterioration in the U.S. housing market and the
nearly complete shutdown of the mortgage credit market for most borrowers in the latter part of
2007 and throughout 2008, coupled with the severe economic slowdown and rapidly rising unemployment
during 2008, resulted in increased delinquencies, provisions for loan losses, operating losses, and
decreased cash flows for the Company. The impact on the Companys operations was severe, and
included (i) a substantial and growing shortfall in cash collections from the portfolio of mortgage
loans and real estate owned relative to the Companys debt service obligations owed to the Bank,
(ii) a substantial and growing shortfall in the value of the Companys assets, relative to the
amounts owed to the Bank, (iii) concern by
potential servicing customers and other constituencies over the continued viability of the
Company, including the viability of FCMC, the Companys servicing platform, and (iv) concern that
the Bank was increasingly likely to: (a) cease granting necessary waivers and forbearances with
respect to defaults under the Companys various credit facilities; and, (b) declare a default with
respect to the credit facilities and foreclose on the assets of the Company, substantially all of
which were pledged to the Bank, especially in light of communications from the Bank indicating that
it was seeking greater and more direct control over the collection guidelines related to the assets
in the Portfolio and may have needed to foreclose on the Portfolio if it were not able to
consummate a transaction like the Restructuring in which it was able to gain control over the
Portfolio while keeping the credit facilities outstanding. Such a foreclosure would have left no
value for the Companys stockholders.
In order to address these issues, accommodate the concerns of the Bank to take advantage of
what the Company believes is the best option to preserve value for its stockholders, the Company
negotiated and entered into the Restructuring, which was approved by the Companys Board of
Directors.
Summary of the Restructuring. Key attributes of the Restructuring, as they relate to the
Companys legacy indebtedness to the Bank include:
|
(1) |
|
in exchange for the transfer of that part of the Portfolio underlying the Bank
Trust Certificates (as defined below), the Company received common membership interests
and Class C preferred membership interests in the REIT having in the aggregate a value
intended to approximate the fair market value of that portion of the Portfolio
transferred to the Bank, which as of March 31, 2009 was approximately $477.3 million
(the REIT Securities). The preferred membership interests have a liquidation value
of $100,000 per unit and an annual cumulative dividend rate of 9% of such liquidation
value. Any dividends on the preferred shares shall be payable only out of funds
legally available for the payment thereof; |
|
(2) |
|
principal and interest payments in respect of the Legacy Credit Agreement are
only due and payable to the extent of cash flow of the Company, which cash flow would
include dividends declared and paid in respect of the REIT Securities or any other
assets of the Company, other than the retained interest in FCMC (as discussed below);
and, |
|
(3) |
|
the Banks recourse in respect of the Legacy Credit Agreement is limited to the
assets and stock of Franklin Holdings subsidiaries, excluding the assets of FCMC
(except for a first lien of the Bank on an office condominium unit and a second
priority lien of the Bank on cash collateral held as security under the Licensing
Credit Agreement) and a portion of FCMCs stock, representing not less than twenty
percent and not more than seventy percent of FCMCs common equity, based on the amounts
received by the Bank from the cash collections from FCMCs servicing of the Portfolio
as discussed in more detail below. Under the terms and conditions of the Restructuring
Agreements, FCMC may pay dividends or other distributions in respect of its capital
stock if FCMC delivers to the Bank a payment to be applied to outstanding obligations
under the Legacy Credit Agreement equal to seventy percent of any such distribution or
dividend that FCMC elects to make or declare, which percentage share may be reduced to
twenty percent based upon the Banks receipt of the agreed amounts of net remittances
from the Portfolio summarized below. |
74
From the perspective of the Company and its stockholders, the Restructuring accomplished a
number of overarching objectives, including:
|
(1) |
|
release of thirty percent of the equity in FCMC, ten percent of which has been
transferred to the Companys principal stockholder, Thomas J. Axon, from the Companys
pledges to the Bank in respect of its Legacy Credit Agreement, with the possibility of
release of up to an additional fifty percent (of which a maximum of ten percent would
go to Thomas J. Axon), based upon the Banks receipt of the agreed amounts of net
remittances from the Portfolio, summarized below (the Net Remittances), from March
31, 2009, the effective date of the Legacy Credit Agreement (the Legacy Effective
Date), through the term of the Legacy Credit Agreement; the Bank shall reduce its
interest in the equity in FCMC, as collateral, in accordance with the following
collection levels; |
|
|
|
|
|
|
|
|
|
Minimum Amount |
|
|
|
|
|
|
of Net Remittances |
|
|
|
|
Level |
|
(Minimum Level Amount) |
|
Time Period |
|
Release of Equity Interests |
Level 1 |
|
$225 million |
|
1 year from the Legacy Effective Date |
|
10% (70% reduces to 60%) |
Level 2 |
|
$475 million |
|
3 years from the Legacy Effective Date |
|
10% (60% reduces to 50%) |
Level 3 |
|
$575 million |
|
No time period specified |
|
10% (50% reduces to 40%) |
Level 4 |
|
$650 million |
|
No time period specified |
|
10% (40% reduces to 30%) |
Level 5 |
|
$750 million |
|
No time period specified |
|
10% (30% reduces to 20%) |
|
(2) |
|
entry into a servicing agreement enabling the Company to receive fee income in
respect of its continued servicing of the transferred Portfolio; and, |
|
(3) |
|
entry into amended credit facilities in the aggregate principal amount of $13.5
million, including a $5 million facility for working capital and to support various
servicer licenses, a $2 million revolving facility and a $6.5 million letter of credit
facility to support various servicer licenses. |
|
|
|
* |
|
Provided, however, (i) if Net Remittances do not reach the minimum Level 1 amount prior to
the first anniversary of the Legacy Effective Date, but reach the minimum Level 2 amount prior
to the third anniversary of the Legacy Effective Date, the Bank shall retain, as collateral,
55% of the FCMC equity instead of 50%, as currently scheduled, and any subsequent reductions
in the amount of FCMC equity pledged to the Bank shall be 10%; and provided further that (ii)
if Net Remittances do not reach the minimum Level 1 amount prior to the first anniversary of
the Legacy Effective Date and do not reach the minimum Level 2 amount prior to the third
anniversary of the Legacy Effective Date, then the schedule for release of the equity
interests in FCMC currently pledged to the Bank shall be as follows: (x) upon attaining the
minimum Level 3 amount, the pledged equity interests in FCMC shall reduce 25% (from 70% to
45%); (y) upon attaining the minimum Level 4 amount, the pledged equity interests in FCMC
shall reduce an additional 10% (from 45% to 35%), and (z) upon attaining the minimum Level 5
amount, the pledged equity interests in FCMC shall reduce an additional 10% (from 35% to 25%). |
Among the most significant costs of accomplishing these objectives were:
|
(1) |
|
the possible transfer of ownership of a portion of FCMC, including a minimum of
twenty percent and a maximum of seventy percent, to the Bank at maturity of the
Companys Legacy Credit Agreement with the Bank, unless further extended if the Company
is not otherwise able to satisfy or refinance the Legacy Credit Agreement prior to
maturity; |
|
(2) |
|
the transfer of ten percent of ownership of FCMC to Franklin Holdings
principal stockholder, Thomas J. Axon, as the cost of obtaining certain guarantees and
pledges required by the Bank as a condition of the restructuring, subject to increase
to an additional ten percent should the pledge of common shares of FCMC by Franklin
Holding to the Bank be reduced upon the attainment by FCMC of certain net collection
targets set by the Bank with respect to the Portfolio; |
75
|
(3) |
|
entry into a service agreement with respect to FCMCs continued servicing of
the Portfolio that allows the Bank to terminate such servicing and, concomitantly,
FCMCs fee income from servicing the Portfolio; and, |
|
(4) |
|
the Company may incur significant income tax liabilities as a result in part of
a tax basis transfer, at termination of the Legacy Credit Agreement, liquidation of the
Company or any of its direct or indirect subsidiary companies, or certain other Company
events such as a de facto liquidation. The amount of any tax liability that the
Company may incur is not certain since any such calculations need to be performed on a
company by company basis and are influenced by a number of factors including, but not
limited to, the ability to use prior year losses and future results of operations. |
Restructuring Agreements. In connection with the 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 approximately 83% of the Portfolio to a
newly formed Delaware statutory trust (New 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); |
|
(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 represent approximately 83.27961% of the assets transferred to New
Trust considered in the aggregate (such portion, the Bank Contributed Assets) and the
Participants Trust Certificates represent approximately 16.72039% of the assets transferred to New
Trust considered in the aggregate.
76
Pursuant to the Transfer and Assignment Agreement, the Franklin Transferring Entities made
certain representations, warranties and covenants to New Trust related to the Portfolio. To the
extent any Franklin Selling Entity breaches any such representations, warranties and covenants and
the Franklin Transferring Entities are unable to cure such breach, New 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 New 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 New 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 Huntington Capital Financing Stock that is equal in value to the Reacquisition
Price (as defined in the Transfer and Assignment Agreement).
2. |
|
Amended and restated substantially all of its outstanding debt. |
Pursuant to the terms of the Amended and Restated Credit Agreement (Legacy) (the Legacy
Credit Agreement), the Company amended and restated substantially all of its indebtedness
currently subject to a certain First Amended and Restated Forbearance Agreement and Amendment to
Credit Agreements, dated December 19, 2008, and a certain First Amended and Restated Tribeca
Forbearance Agreement and Amendment to Credit 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 New Trust in connection with the portion of the Portfolio
represented by the Bank Trust Certificates will 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; 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).
77
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 will increase to 5% over
the rate otherwise applicable to the respective tranche.
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 immediately following the Restructuring.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
Outstanding |
|
|
|
|
|
|
|
|
|
Principal Amount |
|
|
Principal Amount |
|
|
Applicable Interest |
|
|
Required Monthly |
|
|
|
at March 31, 2009 |
|
|
at December 31, 2009 |
|
|
Margin Over LIBOR |
|
|
Principal |
|
|
|
Franklin Asset/Tribeca |
|
|
Franklin Asset/Tribeca |
|
|
(basis points) |
|
|
Amortization |
|
Tranche A |
|
$ |
838,000,000 |
|
|
$ |
771,000,000 |
|
|
|
225 |
|
|
None |
Tranche B |
|
$ |
407,000,000 |
|
|
$ |
417,000,000 |
|
|
|
275 |
|
|
None |
Tranche C |
|
$ |
125,000,000 |
|
|
$ |
140,000,000 |
|
|
|
N/A |
(1) |
|
None |
|
Unrestructured Debt |
|
$ |
41,000,000 |
|
|
$ |
40,000,000 |
|
|
|
|
(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 the one-month LIBOR
plus applicable margins. In accordance with the terms of the Restructuring Agreements, interest
due and unpaid on 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 Credit Asset
Corporation), (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 New 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.
78
In accordance with the terms of the Legacy Credit Agreement, during the nine months ended
December 31 2009, the outstanding balance of Tranche B increased from $407.5 million to $417.2
million and the outstanding balance of Tranche C increased from $125.0 million to $140.1 million,
due to the addition of accrued interest for which cash was not available to pay the interest due.
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. Some, but not all, of the Legacy Credit Agreement defaults (including defaults
under provisions relating to enforceability, bankruptcy, maintenance of collateral and lien
positions, and certain negative covenants typical for agreements of this nature) will create an
event of default under the Licensing Credit Agreement and the Servicing Agreement (as defined
below). Under such circumstances, the Bank would be entitled to foreclose on all of the assets of
the Company pledged to the Bank, including on Franklin Holdings pledge of 70% of the stock of
FCMC.
The Legacy Credit Agreement is secured by a first priority security interest in (i) the REIT
Shares; (ii) the Participant Trust Certificates; (iii) an undivided 16.72039% interest in the
consumer mortgage loans and REO properties transferred to New Trust; (iv) 70% of all equity
interests in FCMC, and 100% equity interests in all other direct and indirect subsidiaries of
Franklin Holding, pledged by Franklin Holding (subject to partial releases of such equity interests
under Cumulative Collective Targets under the terms relating to the Servicing Agreement); (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) a first mortgage in real
property interests at 6 Harrison Street, Unit 6, New York, New York; (vii) all monies owing to any
borrower from any taxing authority; (viii) any commercial tort or other claim of FCMC, Holding, or
any borrower, including FCMCs right, title and interest in claims and actions with respect to
certain loan purchase agreements and other interactions of FCMC with various entities engaged in
the secondary mortgage market; (ix) certain real property interests of FCMC in respect to the
proprietary leases under the existing Forbearance Agreements if not transferred to New Trust; (x) a
second priority lien on cash collateral held as security for the Licensing Credit Agreement to
FCMC; and (xi) 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. Any security agreement, acknowledgement or
other agreement in respect of a lien or encumbrance on any asset of New Trust shall be non-recourse
in nature and shall permit New Trust to distribute, without qualification, 83.27961% of all net
collections received by New 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 New Trust, provided that an event of default has not occurred and
is continuing, shall go first to the payment of monthly servicing fees, which shall be paid one
month in advance, under 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.
79
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
an Amended and Restated Credit Agreement (Licensing) (the Licensing Credit Agreement) which
included a credit limit of $13,500,000, composed of a secured (i) revolving line of credit
(Revolving Facility) up to the principal amount outstanding at any time of $2,000,000, (ii) up to
the aggregate stated
amount outstanding at any time for letters of credit of $6,500,000, and (iii) a draw credit
facility (Draw Facility) up to the principal amount outstanding at any time of $5,000,000. As of
December 31, 2009, $1,000,000 was outstanding under the revolving facility and approximately $6.3
million of letters of credit for various state licensing purposes were outstanding.
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 reduces the draw
credit facility (Draw Facility) from $5.0 million to $4.0 million and extends the termination
date to May 31, 2010, and extends the termination date for the $2.0 million revolving line of
credit and $6.5 million letter of credit facilities to March 31, 2011. The amendment further
provides 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 accordance with the Legacy Credit Agreement, the Bank is currently
entitled to 70% of all amounts distributed by FCMC. The payment of any dividends, distributions
and payments to FCMCs shareholders and the Bank would result in a reduction of FCMCs
stockholders equity and cash available for its operations. All other material terms and
conditions of the Licensing Credit Agreement remain the same, including the collateral, warranties,
representations, covenants and events of defaults.
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 is
used to provide working capital of FCMC, if needed, and amounts drawn and repaid under this
facility cannot be re-borrowed. At the time the credit facility was renewed, $1,000,000 was
outstanding under the revolving facility and approximately $6.3 million of letters of credit for
various state licensing purposes were outstanding. There were no amounts due under the Draw
Facility.
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%. Advances under the Draw Facility shall bear interest at the one-month reserve adjusted LIBOR
plus a margin of 6%. There is a requirement to make monthly payments of interest accrued on the
Advances under the Revolving Facility and the Draw 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 restructuring.
The Licensing Credit Agreement, as amended, 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 $8,500,000, (ii) blanket existing lien on all personal
property of FCMC, (iii) a second mortgage in real property interests at 6 Harrison Street, Unit 6,
New York, New York, (iv) a first Mortgage in certain real property interests at 350 Albany Street,
New York, New York; and (v) 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.
80
The Draw Facility is guaranteed by Thomas J. Axon, Chairman of the Board of Directors and a
principal stockholder of the Company. Mr. Axons Guaranty is secured by a first priority and
exclusive lien on commercial real estate. 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.
4. |
|
Entered into a servicing agreement with the New Trust. |
The servicing agreement (the Servicing Agreement) governs the servicing by FCMC, as the
servicer (the Servicer) of the Portfolio transferred to New Trust. New Trust and/or the Bank as
the administrator of New Trust (the Administrator) have significant control over all aspects of
the servicing of the Portfolio based on (i) a majority of the Servicers actions or Servicers
utilization of any subservicer or subcontractor is contingent on the Servicer receiving explicit
instructions or consent from New Trust or Administrator, (ii) compliance with work rules and an
approval matrix provided by the Bank and (iii) monthly meetings between New Trust and the Servicer.
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 Servicers servicing fees and servicing advance reimbursements
are paid in advance provided an event of default has not occurred. If an event of default has
occurred, the Servicers servicing fees and servicing advances are the third remittance in the
Waterfall, following remittances for payment of Administrator, custodian and trustee fees.
New Trusts indemnification obligation to the Servicer is limited to the collections from the
Portfolio. In addition, the Servicer will be indemnified by New 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.
The Servicer is required to maintain net worth of approximately $7.6 million and net income
before taxes of $800,000 for the most recent twelve-month period or an event of default will be
deemed to have occurred. In addition to typical servicer events of default and the defaults listed
above, the Servicing Agreement contains the following events of default: (i) certain defaults under
the Legacy Loan Agreement would trigger an event of default under the Servicing Agreement, (ii)
failure to adopt a servicing action plan as directed by the Administrator would trigger an event of
default, (iii) any event of default under the Licensing Loan Agreement would trigger an event of
default under the Servicing Agreement, and (iv) failure of Servicer to satisfy certain gross
collection targets if determined to be the result of a failed servicing practice as determined by
the Bank per a servicing audit would trigger an event of default.
The Servicing Agreement shall have an initial term of three years which may be extended for
one or two additional one year periods at the sole discretion of New Trust. During the first year
of the agreement, Servicer shall receive a termination fee for each loan to the extent the
servicing is terminated by the Bank for any reason other than a default under the terms of the
servicing agreement. During the term of the servicing agreement, FCMC may not enter into any other
third-party servicing agreements to service any other assets that could reasonably likely impair
its ability to service the Portfolio without the consent of the Bank, which cannot be unreasonably
withheld.
81
Forbearance Agreements with Lead Lending Bank
The summary that follows describes the principal terms of the Companys Forbearance Agreements
(the Forbearance) in effect prior to entering into the Restructure Agreements on March 31, 2009
described above, which replaced such Forbearance Agreements, except for the Unrestructured Debt (as
referred to in this Forbearance Agreement).
On December 28, 2007, the Company entered into a series of agreements with the bank, pursuant
to which the bank agreed to forbear with respect to certain defaults of the Company relating to the
Companys indebtedness to the bank and restructure approximately $1.93 billion of such indebtedness
to the bank and its participant banks.
The Forbearance did not relate to:
|
|
|
$44.5 million of the Companys indebtedness under the Master Credit and Security
Agreement, dated as of October 13, 2004, as amended, by and among Franklin Credit,
certain subsidiaries of Franklin Credit and the bank; and, |
|
|
|
$44.8 million of Tribecas indebtedness to BOS (USA) Inc., an affiliate of Bank of
Scotland, under the Master Credit and Security Agreement, dated March 24, 2006, by and
among Tribeca, certain subsidiaries and BOS. |
These amounts remained subject to the original terms specified in the applicable agreements
(the Unrestructured Debt).
Debt Restructuring. Pursuant to the Forbearance:
|
|
|
the Company acknowledged, and the bank waived, certain existing defaults under the
Companys existing credit facilities with the bank; |
|
|
|
Franklin Credits indebtedness to the bank was reduced by $300 million and Franklin
Credit paid a restructuring fee of $12 million to the bank; |
|
|
|
the remaining approximately $1.54 billion of outstanding indebtedness to the bank,
including approximately $1.05 billion of outstanding indebtedness of Franklin Credit
and approximately $491.1 million of outstanding indebtedness of Tribeca, was
restructured into six term loans with modified terms and a maturity date of May 15,
2009; and, |
|
|
|
the Company paid all of the accrued interest on its debt outstanding to the bank
through December 27, 2007 and guaranteed payment and performance of the restructured
indebtedness. |
82
Terms of the Restructured Indebtedness. The following table summarizes the principal economic
terms of the Companys indebtedness immediately following the Forbearance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applicable |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
Interest |
|
|
Required Monthly |
|
|
Required Monthly |
|
|
|
Outstanding |
|
|
Principal |
|
|
Margin Over |
|
|
Principal |
|
|
Principal |
|
|
|
Principal Amount |
|
|
Amount |
|
|
LIBOR |
|
|
Amortization |
|
|
Amortization |
|
|
|
Franklin Credit |
|
|
Tribeca |
|
|
(basis points) |
|
|
Franklin Credit |
|
|
Tribeca |
|
Tranche A |
|
$ |
600,000,000 |
|
|
$ |
400,000,000 |
|
|
|
225 |
|
|
$ |
5,400,000 |
|
|
$ |
3,600,000 |
|
Tranche B |
|
$ |
323,255,000 |
|
|
$ |
91,142,000 |
|
|
|
275 |
|
|
$ |
750,000 |
|
|
$ |
250,000 |
|
Tranche C |
|
$ |
125,000,000 |
|
|
|
N/A |
|
|
|
N/A |
(1) |
|
|
N/A |
(2) |
|
|
N/A |
|
Tranche D |
|
$ |
1,033,000 |
(3) |
|
|
N/A |
|
|
|
250 |
(4) |
|
|
N/A |
|
|
|
N/A |
|
|
|
Unrestructured Debt |
|
$ |
44,537,000 |
|
|
$ |
44,835,000 |
|
|
|
235-250 |
|
|
$ |
148,000 |
|
|
$ |
498,000 |
|
|
|
|
(1) |
|
The applicable interest rate is fixed at 10% per annum. Interest will be paid in kind
during the term of the forbearance. |
|
(2) |
|
Tranche C requires no principal amortization. All principal is due at maturity. |
|
(3) |
|
Tranche D serves as a revolving credit line with a maximum availability of $5 million,
and an additional $5 million which may be used for issuance of letters of credit. |
|
(4) |
|
Does not include a letter of credit facing fee of 0.125% per annum on the average daily
undrawn amount of each issued and outstanding letter of credit. |
The interest rate under the terms of the Forbearance Agreements that is the basis, or index,
for the Companys interest cost is the one-month LIBOR plus applicable margins.
The following table compares the approximate weighted average interest rate of the Companys
indebtedness immediately prior to and following the Forbearance.
|
|
|
|
|
|
|
|
|
|
|
Total Outstanding |
|
|
|
|
|
|
Principal Amount |
|
|
Weighted Average |
|
|
|
(Franklin Credit and Tribeca)* |
|
|
Applicable Interest Rate |
|
Immediately after restructuring |
|
$1.63 billion |
|
|
7.49 |
% |
Immediately prior to restructuring |
|
$1.93 billion |
|
|
7.71 |
% |
|
|
|
* |
|
Includes the Unrestructured Debt. |
Pursuant to the Forbearance Agreements, the bank is not required to provide any additional
advances, except for those under the revolving credit or letter of credit portions of Tranche D.
Cash Flow. The Forbearance Agreements with respect to Franklin Credit, on the one hand, and
Tribeca, on the other, provided a waterfall with respect to cash flow received in respect of
collateral pledged in support of the related restructured indebtedness, net of approved,
reimbursable operating expenses. Such cash flow was applied in the following order:
|
|
|
to pay interest in respect of Tranche A advances, Tranche B advances and, in the
case of Franklin Credit, Tranche D advances, in that order; |
|
|
|
|
to pay fees related to the Companys letters of credit from the bank; |
|
|
|
|
to pay the minimum required principal payments in respect of Tranche A advances and
Tranche B advances, in that order; |
|
|
|
|
to prepay outstanding Tranche A advances; |
|
|
|
|
to prepay outstanding Tranche B advances; |
|
|
|
|
to prepay Unrestructured Debt (excluding that owed to BOS); |
|
|
|
|
in the case of Franklin Credit, to repay Tranche D advances, any letter of credit
exposure, and any obligations in respect of any interest rate hedge agreements with the
bank; |
83
|
|
|
in the case of Franklin Credit, 90% of the available cash flow to repay interest and
then principal of the Tranche C advances if Franklin Credit is acting as servicer of
the underlying collateral, or 100% otherwise; and, |
|
|
|
|
in the case of Franklin Credit and Tribeca, to pay any advances then outstanding in
respect of the others indebtedness to the bank, other than for Unrestructured Debt. |
Covenants; Events of Default. The Forbearance Agreements contain affirmative and negative
covenants customary for restructurings of this type, including covenants relating to reporting
obligations. The affirmative and negative covenants under all of the credit agreements between the
Company and the bank, other than those under the Franklin Master Credit Agreement and under the
Tribeca Master Credit and Security Agreement, dated as of February 28, 2006, as amended, were
superseded by the covenants in the Forbearance Agreements. Additionally, any provisions of any of
the credit agreements between the Company and the bank that conflict with or are subject of a
discrepancy with the provisions of the Forbearance Agreements would be superseded by the
conflicting provision in the Forbearance Agreements. The Forbearance Agreements include covenants
requiring that:
|
|
|
the Companys reimbursable expenses in the ordinary course of business during each
of the first two months after the date of the agreement would not exceed $2.5 million,
excluding reimbursement of certain bank expenses after the date of the Restructuring,
and thereafter, an amount provided for in an approved budget; |
|
|
|
|
the Company would not originate or acquire mortgage loans or other assets, perform
due diligence or servicing, broker loans, or participate in off-balance sheet joint
ventures and special purpose vehicles, without the prior consent of the bank; |
|
|
|
|
the Company would use its best efforts to obtain interest rate hedges acceptable to
the bank in respect of the $1 billion of Tranche A indebtedness; |
|
|
|
|
the Company would not make certain restricted payments to its stockholders or
certain other related parties; |
|
|
|
|
the Company would not engage in certain transactions with affiliates; |
|
|
|
|
the Company would not incur additional indebtedness other than trade payables and
subordinated indebtedness; |
|
|
|
|
the Company together would maintain a minimum consolidated net worth of at least $5
million, plus a certain percentage, to be mutually agreed upon, of any equity
investment in the Company after the date of the Restructuring; |
|
|
|
|
the Company would together maintain a minimum liquidity of $5 million; |
|
|
|
|
the Company would maintain prescribed interest coverage ratios based on EBITDA (as
defined) to Interest Expense (as defined); |
|
|
|
|
the Company would not enter into mergers, consolidations or sales of assets (subject
to certain exceptions); and, |
|
|
|
|
the Company would not, without the banks consent, enter into any material change in
its capital structure that the bank or a nationally recognized independent public
accounting firm determine could cause a consolidation of its assets with other persons
under relevant accounting regulations. |
The Forbearance Agreements contain events of default customary for facilities of this type,
although they generally provide for no or minimal grace and cure periods.
Servicing. Franklin Credit would continue to service the collateral pledged by the Company
under the Forbearance Agreements, subject to the banks right to replace Franklin Credit as
servicer in the event of a default under the Forbearance Agreements or if the bank determined that
Franklin Credit was not servicing the collateral in accordance with accepted servicing practices,
as defined in the Forbearance Agreements. Franklin Credit, with the banks consent, was permitted
to, provide to third parties servicing of their portfolios, and other related services, on a
fee-paying basis.
84
Security. The Companys obligations with respect to the restructured Franklin Credit
indebtedness are secured by a first priority lien on all of the assets of Franklin Credit and its
subsidiaries, other than those of Tribeca and Tribecas subsidiaries, and those securing the
Unrestructured Debt. The Companys obligations with respect to the restructured Tribeca
indebtedness were secured by a first
priority lien on all of the assets of Tribeca and Tribecas subsidiaries, except for those
assets securing the Unrestructured Debt. In addition, pursuant to a lockbox arrangement, the bank
controlled substantially all sums payable to the bank in respect of any of the collateral.
March 2008 Modifications to Forbearance Agreements and Refinancing of BOS Loan
On March 31, 2008, the Company entered into a series of agreements with the bank, which
amended the Forbearance Agreements, referred to as the Forbearance Agreement Amendments.
Pursuant to the Forbearance Agreement Amendments, the bank extended an additional $43.3
million under Tribecas Tranche A and Tranche B facilities, (the Additional Payoff Indebtedness),
to fund the complete payoff of the BOS Loan (a portion of the Unrestructured Debt).
Simultaneously, BOS acquired from the bank a participation interest in Tribecas Tranche A facility
equal in amount to the Additional Payoff Indebtedness. The effect of these transactions was to
roll Tribecas indebtedness to BOS into the Forbearance Agreements, to terminate any obligations of
Tribeca under the BOS Loan and to BOS directly, and to transfer the benefit of the collateral
interests previously securing the BOS Loan to secure the obligations under the Forbearance
Agreements. As a result of the Forbearance Agreement Amendments, Tribecas indebtedness as of
March 31, 2008, was $410,860,000 and $98,774,000 for Tranche A and Tranche B, respectively. In
connection with the increased debt outstanding under the Amended Forbearance Agreements, Tribecas
required monthly principal amortization amount under the Tranche A Facility was increased from
$3,600,000 to $3,900,000 and that under the Tranche B Facility was increased from $250,000 to
$275,000.
In addition, the Forbearance Amendment Agreements modified the Forbearance Agreements with
respect to the Franklin Master Credit Facility (the Franklin Forbearance Agreement):
|
|
|
to provide that Tranche C interest would not accrue until the first business day
after all outstanding amounts under the Tranche A facility have been paid in full; |
|
|
|
|
to increase the Tranche C interest rate to 20% from and after such time it would
begin to accrue; |
|
|
|
|
to extend an additional period of forbearance through July 31, 2008, from May 15,
2008, in respect of the remaining Unrestructured Debt; and, |
|
|
|
|
to increase the maximum availability under the Tranche D line of credit to
$10,000,000 for working capital and general corporate purposes to enable the Company to
purchase real property in which it had a lien, and for purposes of meeting licensing
requirements. |
Additionally, the Forbearance Agreement Amendments modified the Forbearance Agreements to (a)
join additional subsidiaries of the Company as borrowers and parties to the forbearance agreements
and other loan documents; and (b) extend the time periods or modify the requirements for the
Company and the Companys other subsidiaries to satisfy certain requirements of the Forbearance
Agreements.
After giving effect to the Forbearance Agreement Amendments, the waterfall of payments was
adjusted to provide that periodic amounts constituting additional periodic payments of interest
required under any interest hedging agreement would be paid after interest on the Tranche A and
Tranche B advances, payments of interest and principal with respect to Tranche C advance would be
deferred until after payment of the Tranche D advance, and to provide for cash payment reserves for
certain contractual obligations, taxes and $10,000,000 of cash payment reserves in the aggregate
for fees, expenses, required monthly principal amortization and interest owed to the Bank.
85
The bank also waived any defaults under the Forbearance Agreements for the period through and
including March 31, 2008, and consented to the origination by the Company of certain mortgage loans
to refinance existing mortgage loans which the bank had approved for purchase and subsequent sale
in the
secondary market or which the bank determines are qualified for purchase by Fannie Mae or
Freddie Mac.
August 2008 Modification to Forbearance Agreements
The Company entered into additional amendments to the Forbearance Agreements, effective August
15, 2008, whereby, among other things, (a) eliminated the minimum net worth covenant, (b) changed
the prescribed interest coverage ratios based on EBITDA to ratios based on actual cash flows, (c)
cash flows available for debt service would include all of the Companys cash receipts, including
its cash revenues from providing subservicing and other services for third parties, and (d) the
existing extension of an additional period of forbearance through July 31, 2008 in respect of the
remaining Unrestructured Debt was extended to December 31, 2008, and absent the occurrence of an
event of default, the bank agreed not to initiate collection proceedings against the Company in
respect of any of the Unrestructured Debt. In addition, all identified forbearance defaults,
including the minimum net worth covenant, that existed at the time of the August 2008 Modification
were waived.
Unrestructured Debt
The Company failed to make the minimum monthly debt service payments due on July 5, 2008
through September 5, 2008 in the aggregate amount of $1.3 million from the cash flows received from
the collateral supporting the remaining Unrestructured Debt, as required by the Master Credit
Agreement in respect of the Unrestructured Debt (remaining debt due to a participant bank that is
not a party to the Forbearance Agreements). The Company, however, made up the aggregate shortfall
of approximately $409,000 in the required minimum payments from its own cash account during 2008.
December 2008 Modification to Forbearance Agreements
Concurrent with the merger and the Companys reorganization into a holding company structure,
and the reallocation of owned assets, the Company entered into a series of agreements with
Huntington (the Amendments to the Forbearance Agreements), pursuant to which the Company amended
its loan agreements with Huntington as follows:
|
|
|
Franklin Asset became a borrower under the Companys lending agreements with
Huntington; |
|
|
|
Newly formed trusts became guarantors for the Borrowers indebtedness to Huntington; |
|
|
|
FCMC, Franklin Asset and the newly formed trusts each pledged its assets, including
any equity interests in any of the Borrowers, as security for the Borrowers
indebtedness to Huntington; |
|
|
|
Franklin Servicing LLC agreed to service, if necessary, the Companys mortgage loans
in selected states; |
86
|
|
|
the Company agreed to maintain in effect one or more interest rate hedge agreements
in an aggregate notional principal amount of not less than $1 billion, or such lesser
amount as Huntington in its sole discretion might approve; |
|
|
|
the Companys Tranche D facility was amended to provide for (i) a revolving credit
facility and letter of credit facility in the aggregate outstanding amount of $10
million, with a sublimit of $5 million, and, in addition, (ii) a separate letter of
credit facility pursuant to
which Huntington could issue letters of credit in its discretion, with a sublimit of
$5.5 million; |
|
|
|
Huntington agreed to waive the Companys breach of covenant to comply with all laws,
rules and regulations to the extent such breach results from the Companys failure to
satisfy a minimum net worth requirement; and, |
|
|
|
the covenant requiring FCMC and each of the Borrowers to maintain liquidity of at
least $5 million was deleted. |
In addition, effective immediately after the filing of the certificate of merger:
|
|
|
Franklin Holding became a guarantor for the Borrowers indebtedness to Huntington;
and, |
|
|
|
Franklin Holding pledged its assets, including any equity interests in any of the
Borrowers, as security for the Borrowers indebtedness to Huntington. |
The Forbearance Agreements and the March 2009 Restructuring and Modifications to the Franklin
Forbearance Agreement in April, August and November 2009, and on March 26, 2010
The Tribeca forbearance agreement entered into with the Bank was replaced effective March 31,
2009 by the Restructuring Agreements. The Franklin forbearance agreement, however, remains in
effect until June 30, 2010, but only with respect to the Companys remaining Unrestructured Debt
that was not restructured effective March 31, 2009 under the Restructuring Agreements, which was
approximately $39.5 million at December 31, 2009.
The Unrestructured Debt remains subject to the original terms of the Franklin forbearance
agreement entered into with the Bank in December 2007 and subsequent amendments thereto (the
Franklin Forbearance Agreement) and the Franklin 2004 master credit agreement. On April 20,
August 10, November 13, 2009 and March 26, 2010, Franklin Holding, and certain of its direct and
indirect subsidiaries, including FCMC and Franklin Credit Asset Corporation (Franklin Asset)
entered into amendments to the Franklin Forbearance Agreement and Franklin 2004 master credit
agreement (the Amendments) with the Bank relating to the Unrestructured Debt whereby the term of
forbearance period, which had been previously extended by the Bank, was extended until June 30,
2010. The Bank again agreed to forebear 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. During the forbearance period, the
Bank, absent the occurrence and continuance of a forbearance default other than an Identified
Forbearance Default, will not 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. In addition, FCMC is not obligated to the Bank with respect to the Unrestructured Debt
and any references to FCMC in the Franklin 2004 master credit agreement governing the
Unrestructured Debt have been amended to refer to Franklin Asset.
87
Upon expiration of the forbearance period, in the event that the Unrestructured Debt with the
Bank remains outstanding, the Bank, with notice, could 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 of FCMC (except
for a first lien of the Bank on an office condominium unit and a second priority lien of the Bank
on cash collateral held as security under the Licensing Credit Agreement) and the unpledged portion
of FCMCs stock.
The Franklin Forbearance Agreement is subject to a scheduled maturity date of June 30, 2010.
Franklin Master Credit Facility Term Loans
The summary that follows describes the terms of the Companys credit facilities with respect
to FCMC in effect prior to entering into the Forbearance Agreements on December 28, 2007 described
above, and the Restructuring Agreements entered into effective March 31, 2009, which substantially
modified such facility, except for the Unrestructured Debt.
General. In October 2004, the Company, and its finance subsidiaries, excluding Tribeca,
entered into a master credit and security agreement (the Franklin Master Credit Facility) with
Huntington National Bank, which we refer to as the bank, our lender or Huntington. Under this
master credit facility, we requested term loans to finance the purchase of residential mortgage
loans or refinance existing outstanding loans under this facility. The facility did not include a
commitment to additional lendings or a commitment to refinance existing outstanding term loans when
they matured, which were therefore subject to our lenders discretion as well as any regulatory
limitations to which our lender was subject. At December 31, 2007, $44.5 million remained
outstanding under this facility (a portion of the Unrestructured Debt), and the interest rate
continues to be based on the Federal Home Loan Bank of Cincinnati 30-day advance rate plus margins
of 2.60% and 2.75%.
Covenants; Events of Default. The Franklin Master Credit Facility, as modified by the
Franklin Forbearance Agreement, contains affirmative, negative and financial covenants customary
for financings of this type, including, among other things, a covenant that Franklin Asset and its
subsidiaries together maintain a minimum net worth of at least $10 million. These master credit
facilities contain events of default customary for facilities of this type (with customary grace
and cure periods, as applicable).
Security. Our obligations under the Franklin Master Credit Facility are secured by a first
priority lien on the loans making up the Unrestructured Debt that was financed by proceeds of loans
made to us under the facility. The collateral securing each loan cross-collateralizes all other
loans made under this facility. In addition, pursuant to a lockbox arrangement, our lender is
entitled to receive substantially all sums payable to us in respect of any of the collateral.
Interest Rate Caps
On September 5, 2007, the Company purchased a $200 million (notional amount) one-month LIBOR
cap with a strike price of 5.75% at a price of $102,000, and on September 6, 2007, the Company
purchased a $400 million (notional amount) one-month LIBOR cap with a strike price of 6.0% at a
price of $90,000. Both interest rate cap agreements expired on September 30, 2008. At December
31, 2009, the Company did not have any interest rate cap agreements.
88
Interest Rate Swaps
Effective February 27, 2008, the Company entered into $725 million (notional amount) of
fixed-rate interest rate swaps in order to effectively stabilize the future interest payments on a
portion of its interest-sensitive borrowings. The fixed-rate swaps are for periods ranging from
one to four years, are non-amortizing, and are in effect for the respective full terms of each swap
agreement. These swaps effectively fixed the Companys interest costs on a portion of its
borrowings regardless of increases or decreases in the one-month LIBOR. The interest rate swaps
were executed with the Bank and are for the following terms: $220 million notional amount for one
year at a fixed rate of 2.62%; $390 million notional amount for two-years at a fixed rate of 2.79%;
$70 million notional amount for three years at a fixed rate of 3.11%; and, $45 million notional
amount for four years at a fixed rate of 3.43%.
Effective April 30, 2008, the Company entered into an additional $275 million (notional
amount) of fixed-rate interest rate swaps in order to effectively stabilize the future interest
payments on a portion of its interest-sensitive borrowings. The fixed-rate swaps are for a period
of three years, are non-amortizing, and at a fixed rate of 3.47%. These swaps reduced further 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. The interest rate
swaps were executed with the Bank.
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. Accordingly, Franklin
established a fixed rate, plus applicable margins, on $1.0 billion of its borrowings, which at the
time of entering into the swap agreements ranged from one year to four years. On March 5, 2009,
$220 million of one-year interest rate swaps matured, which have not been replaced.
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, 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 $770.6 million remaining at December 31, 2009 of Tranche A debt
owed to the Bank has been paid in full.
The unamortized balance of derivative losses in the amount of $16.2 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, 2009 was $15.4
million, which increased our interest expense.
The following table presents the notional and fair value amounts of the interest rate swaps
outstanding at December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Fair |
|
Notional Amount |
|
Term |
|
|
Maturity Date |
|
|
Fixed Rate |
|
|
Value* |
|
$ |
275,000,000 |
|
3 years |
|
March 5, 2011 |
|
|
3.47 |
% |
|
$ |
(9,380,699 |
) |
|
70,000,000 |
|
3 years |
|
March 5, 2011 |
|
|
3.11 |
% |
|
|
(1,917,039 |
) |
|
45,000,000 |
|
4 years |
|
March 5, 2012 |
|
|
3.43 |
% |
|
|
(1,846,853 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
390,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(13,144,591 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Determined in accordance with Topic 820, Fair Value Measurements and Disclosures, based
upon a Level 2 valuation methodology. |
89
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; (ii) the Companys relations
with the Companys lenders and such lenders willingness to waive any defaults under the Companys
agreements with such lenders; (iii) increases in the delinquency rates of the Companys borrowers,
(iv) the availability of third parties holding subprime mortgage debt for servicing by the Company
on a fee-paying basis; (v) changes in the statutes or regulations applicable to the Companys
business or in the interpretation and enforcement thereof by the relevant authorities; (vi) the
status of the Companys regulatory compliance; (vii) our ability to meet collection targets under
the Legacy Credit Agreement in order to reduce the pledge of equity interest in FCMC from 70% to a
minimum of 20%; and (viii) 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.
|
|
|
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 in our portfolio (although transferred to the Bank, for
accounting purposes the portfolio is treated as a financing under GAAP and remains on the 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 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.
90
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 affect our revenues from servicing mortgage loans for third parties.
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 operating results depend in large part on differences between the interest
earned on its assets and the interest paid on its borrowings. Most of the Companys assets,
consisting primarily of REIT Securities (principally preferred REIT stock) and Trust Certificates
(collateralized by mortgage loans and real estate owned properties), generate fixed returns and
have remaining contractual maturities in excess of five years. Our borrowings are based on
one-month LIBOR. In most cases, the interest income from our assets will respond more slowly to
interest rate fluctuations than the cost of our borrowings, creating a mismatch between interest
earned on our interest-yielding assets and the interest paid on our borrowings. Consequently,
changes in interest rates, particularly short-term interest rates, will significantly impact our
net interest income and, therefore, net income. Our borrowings bear interest at rates that
fluctuate with the one-month LIBOR rate. We use 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 $838.3 million of unhedged interest-rate sensitive borrowings outstanding at December
31, 2009, a 1% instantaneous and sustained increase in the one-month LIBOR rate could increase
quarterly interest expense by as much as approximately $2.1 million, pre-tax, during the remaining
terms of the swap agreements, which would negatively impact 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. If the Companys
existing swap contracts expire, and are not renewed, a 1% instantaneous and sustained increase in
the one-month LIBOR rate would have the effect of increasing quarterly interest expense by
approximately $3.1 million, pre-tax. See Managements Discussion and Analysis Borrowings.
The value of our assets may be affected by prepayment rates on investments not carried at
cost. Prepayment rates are influenced by changes in current interest rates and a variety of
economic, geographic, market and other factors beyond our control. Consequently, such prepayment
rates cannot be predicted with certainty. For example, in periods of declining mortgage interest
rates, prepayments on mortgages generally increase and can actually adversely affect the market
value of mortgage investments, and the market value of mortgage investments may, because of the
risk of prepayment, benefit less from declining interest rates than other fixed-income securities.
In addition, rising prepayment rates on mortgage loans that we service for others generally
will increase the prepayments of the loans we service and generally will result in reduced
servicing revenues. Conversely, in periods of rising interest rates, prepayments on mortgages
generally will decrease and generally will result in more stable servicing revenues.
91
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; 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 investments not carried
at cost to decrease.
|
|
|
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 (T). |
|
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 Securities Exchange Act of 1934, as amended (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, 2009, 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, 2009, the Companys disclosure controls and procedures were
effective as of the end of the period covered by this report.
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.
92
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, 2009 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, 2009.
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
temporary rules of the SEC that permit us to provide only managements report in this Annual Report
on Form 10-K.
|
|
|
ITEM 9B. |
|
OTHER INFORMATION |
None.
93
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, 2009, the Companys most recent
fiscal year, and is incorporated herein by reference. If such proxy statement is not filed on or
before April 30, 2010, 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, 2009, the Companys most recent fiscal year,
and is incorporated herein by reference. If such proxy statement is not filed on or before April
30, 2010, 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, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
301,000 |
|
|
$ |
3.81 |
|
|
|
449,000 |
|
Equity compensation
plans not approved
by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
301,000 |
|
|
$ |
3.81 |
|
|
|
449,000 |
|
|
|
|
|
|
|
|
|
|
|
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, 2009, the Companys most recent
fiscal year, and is incorporated herein by reference. If such proxy statement is not filed on or
before April 30, 2010, 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).
94
|
|
|
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, 2009, the Companys most recent fiscal year,
and is
incorporated herein by reference. If such proxy statement is not filed on or before April 30,
2010, 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, 2009, the Companys most recent fiscal year,
and is incorporated herein by reference. If such proxy statement is not filed on or before April
30, 2010, 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).
95
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. |
96
|
|
|
|
|
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 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. |
97
|
|
|
|
|
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 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. |
98
|
|
|
|
|
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. |
99
|
|
|
|
|
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. |
100
|
|
|
|
|
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 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. |
101
|
|
|
|
|
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. |
102
|
|
|
|
|
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. |
|
|
|
|
|
|
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. |
|
|
|
|
|
|
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. |
|
|
|
|
|
|
23.2 |
* |
|
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. |
103
|
|
|
|
|
Exhibit |
Number |
|
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. |
104
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 31, 2010 |
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 31, 2010 |
|
|
|
|
|
/s/ PAUL D. COLASONO
Paul D. Colasono
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
|
|
March 31, 2010 |
|
|
|
|
|
/s/ KIMBERLEY SHAW
Kimberley Shaw
|
|
Senior Vice President and Treasurer
(Controller)
|
|
March 31, 2010 |
|
|
|
|
|
/s/ MICHAEL BERTASH
Michael Bertash
|
|
Director
|
|
March 31, 2010 |
|
|
|
|
|
/s/ FRANK EVANS
Frank Evans
|
|
Director
|
|
March 31, 2010 |
|
|
|
|
|
/s/ STEVEN LEFKOWITZ
Steven Lefkowitz
|
|
Director
|
|
March 31, 2010 |
|
|
|
|
|
/s/ ALLAN R. LYONS
Allan R. Lyons
|
|
Director
|
|
March 31, 2010 |
105
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 Board of Directors and Stockholders of
Franklin Credit Holding Corporation
Jersey City, New Jersey
We have audited the accompanying consolidated balance sheet of Franklin Credit Holding Corporation
and subsidiaries (the Company) as of December 31, 2009, and the related consolidated statements
of operations, comprehensive income, change in stockholders deficit, and cash flows for the year
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 audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit 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 audit
provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Franklin Credit Holding Corporation and subsidiaries
as of December 31, 2009, and the results of their operations and their cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements for the year ended December 31, 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
New York, New York
March 31, 2010
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Franklin Credit Holding Corporation
Jersey City, New Jersey
We have audited the accompanying consolidated balance sheet of Franklin Credit Holding Corporation
and subsidiaries (the Company) as of December 31, 2008, and the related consolidated statements
of operations, stockholders equity/(deficit), and cash flows for the year 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 audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit 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 audit
provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Franklin Credit Holding Corporation and subsidiaries as of December 31,
2008, and the results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements for the year ended December 31, 2008 have been prepared
assuming that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Companys recurring losses from operations, stockholders deficit, and
potential defaults under its lending agreements 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 financial statements. The financial statements do not include any adjustments that
might result from this uncertainty.
/s/ Deloitte & Touche LLP
New York, New York
April 9, 2009
FRANKLIN CREDIT HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
15,963,115 |
|
|
$ |
21,426,777 |
|
Restricted cash |
|
|
2,611,640 |
|
|
|
27,890,706 |
|
Investment in REIT securities |
|
|
477,316,409 |
|
|
|
|
|
Investment in trust certificates at fair value |
|
|
69,355,735 |
|
|
|
|
|
Mortgage loans and real estate held for sale |
|
|
345,441,865 |
|
|
|
|
|
Notes Receivable: |
|
|
|
|
|
|
|
|
Principal |
|
|
|
|
|
|
1,021,648,291 |
|
Purchase discount |
|
|
|
|
|
|
(9,777,475 |
) |
Allowance for loan losses |
|
|
|
|
|
|
(471,093,159 |
) |
|
|
|
|
|
|
|
Net notes receivable |
|
|
|
|
|
|
540,777,657 |
|
|
|
|
|
|
|
|
|
|
Notes receivable held for sale, net |
|
|
3,575,323 |
|
|
|
|
|
Originated loans held for investment: |
|
|
|
|
|
|
|
|
Principal, net of deferred fees and costs |
|
|
|
|
|
|
391,704,319 |
|
Allowance for loan losses |
|
|
|
|
|
|
(49,876,092 |
) |
|
|
|
|
|
|
|
Originated loans held for investment, net |
|
|
|
|
|
|
341,828,227 |
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable |
|
|
41,337 |
|
|
|
10,055,241 |
|
Other real estate owned |
|
|
|
|
|
|
60,748,390 |
|
Deferred financing costs, net |
|
|
7,287,536 |
|
|
|
7,824,432 |
|
Other receivables |
|
|
3,233,676 |
|
|
|
7,028,334 |
|
Building, furniture and equipment, net |
|
|
1,529,418 |
|
|
|
2,042,436 |
|
Income tax receivable |
|
|
5,592,370 |
|
|
|
2,126,590 |
|
Other assets |
|
|
692,730 |
|
|
|
634,652 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
932,641,154 |
|
|
$ |
1,022,383,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS (DEFICIT) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Notes payable, net of debt discount of $191,511 in 2009 and
$205,976 in 2008 |
|
$ |
1,367,199,323 |
|
|
$ |
1,442,126,964 |
|
Financing agreement |
|
|
1,000,000 |
|
|
|
1,958,011 |
|
Nonrecourse liability |
|
|
345,441,865 |
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
4,466,779 |
|
|
|
15,056,870 |
|
Derivative liabilities, at fair value |
|
|
13,144,591 |
|
|
|
27,753,436 |
|
Terminated derivative liability |
|
|
8,200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,739,452,558 |
|
|
|
1,486,895,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 and outstanding: 8,012,795 at
December 31, 2009 and 8,025,295 at December 31, 2008 |
|
|
22,067,763 |
|
|
|
23,383,120 |
|
Noncontrolling interest in subsidiary |
|
|
1,657,275 |
|
|
|
|
|
Accumulated other comprehensive (loss) |
|
|
(12,310,764 |
) |
|
|
(27,753,436 |
) |
Retained (deficit) |
|
|
(818,225,678 |
) |
|
|
(460,141,523 |
) |
|
|
|
|
|
|
|
Total stockholders (deficit) |
|
|
(806,811,404 |
) |
|
|
(464,511,839 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders (deficit) |
|
$ |
932,641,154 |
|
|
$ |
1,022,383,442 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-2
FRANKLIN CREDIT HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
REVENUES: |
|
|
|
|
|
|
|
|
Interest income |
|
$ |
58,098,774 |
|
|
$ |
93,100,602 |
|
Dividend income |
|
|
32,020,353 |
|
|
|
|
|
Purchase discount earned |
|
|
392,127 |
|
|
|
2,590,174 |
|
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 |
|
|
(27,221,418 |
) |
|
|
|
|
Gain on sale of other real estate owned |
|
|
374,344 |
|
|
|
2,213,998 |
|
Servicing fees and other income |
|
|
6,276,769 |
|
|
|
12,024,492 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
(244,754,644 |
) |
|
|
109,929,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
|
Interest expense |
|
|
74,279,677 |
|
|
|
78,463,161 |
|
Collection, general and administrative |
|
|
40,269,046 |
|
|
|
48,487,940 |
|
Provision for loan losses |
|
|
169,479 |
|
|
|
458,121,989 |
|
Amortization of deferred financing costs |
|
|
536,896 |
|
|
|
983,657 |
|
Depreciation |
|
|
646,410 |
|
|
|
1,538,465 |
|
|
|
|
|
|
|
|
Total expenses |
|
|
115,901,508 |
|
|
|
587,595,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) before provision for income taxes |
|
|
(360,656,152 |
) |
|
|
(477,665,946 |
) |
Income tax (benefit) |
|
|
(2,839,516 |
) |
|
|
(1,325,258 |
) |
|
|
|
|
|
|
|
Net (loss) |
|
|
(357,816,636 |
) |
|
|
(476,340,688 |
) |
Net income attributed to noncontrolling interest |
|
|
267,519 |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) attributed to common stockholders |
|
$ |
(358,084,155 |
) |
|
$ |
(476,340,688 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) PER COMMON SHARE: |
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(44.74 |
) |
|
$ |
(59.67 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF SHARES |
|
|
|
|
|
|
|
|
Outstanding, basic and diluted |
|
|
8,003,420 |
|
|
|
7,982,483 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-3
FRANKLIN CREDIT HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS (DEFICIT)
YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Common Stock and |
|
|
Noncontrolling |
|
|
Other |
|
|
Retained |
|
|
|
|
|
|
Additional Paid-in Capital |
|
|
Interest |
|
|
Comprehensive |
|
|
(Deficit)/ |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
in Subsidiary |
|
|
Loss |
|
|
Earnings |
|
|
Total |
|
BALANCE, JANUARY 1, 2008 |
|
|
8,025,295 |
|
|
$ |
23,091,510 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
16,199,165 |
|
|
$ |
39,290,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
291,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
291,610 |
|
Net unrealized (losses) on derivatives |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,753,436 |
) |
|
|
|
|
|
|
(27,753,436 |
) |
Net (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(476,340,688 |
) |
|
|
(476,340,688 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, DECEMBER 31, 2008 |
|
|
8,025,295 |
|
|
$ |
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 minority 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 |
|
|
8,012,795 |
|
|
$ |
22,067,763 |
|
|
$ |
1,657,275 |
|
|
$ |
(12,310,764 |
) |
|
$ |
(818,225,678 |
) |
|
$ |
(806,811,404 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009, the total comprehensive loss amounted to $342.6
million, which was comprised of the net loss of $358.1 million and amortization of the unrealized
loss on derivatives of $15.4 million. For the year ended December 31, 2008, the total
comprehensive loss amounted to $504.1 million, which was comprised of the net loss of $476.3
million and the net unrealized loss on derivatives of $27.8 million.
See Notes to Consolidated Financial Statements.
F-4
FRANKLIN CREDIT HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
Net (loss) attributed to common shareholders |
|
$ |
(358,084,155 |
) |
|
$ |
(476,340,688 |
) |
Adjustments to reconcile income to net cash provided by/(used in) operating activities: |
|
|
|
|
|
|
|
|
Gain on sale of notes receivable |
|
|
|
|
|
|
|
|
Gain on sale of other real estate owned |
|
|
(374,344 |
) |
|
|
(2,213,998 |
) |
Depreciation |
|
|
646,410 |
|
|
|
1,538,465 |
|
Amortization of deferred costs and fees on originated loans, net |
|
|
48,215 |
|
|
|
(512,511 |
) |
Loss on mortgage loans and real estate held for sale |
|
|
282,593,653 |
|
|
|
|
|
Fair valuation adjustments |
|
|
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 |
|
|
40,494,363 |
|
|
|
|
|
Paid in kind interest |
|
|
24,750,648 |
|
|
|
|
|
Proceeds from the sale of real estate held for sale |
|
|
49,645,962 |
|
|
|
|
|
Amortization of deferred financing costs |
|
|
536,896 |
|
|
|
983,657 |
|
Amortization of debt discount |
|
|
14,465 |
|
|
|
26,389 |
|
Stock-based compensation |
|
|
170,633 |
|
|
|
291,610 |
|
Deferred tax provision |
|
|
|
|
|
|
(543,507 |
) |
Purchase discount earned |
|
|
(392,127 |
) |
|
|
(2,590,174 |
) |
Provision for loan losses |
|
|
169,479 |
|
|
|
458,121,989 |
|
Noncontrolling interest in subsidiary |
|
|
267,519 |
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accrued interest receivable |
|
|
1,435,434 |
|
|
|
12,934,660 |
|
Other receivables |
|
|
3,794,658 |
|
|
|
(2,110,736 |
) |
Income tax receivable |
|
|
(3,465,780 |
) |
|
|
1,556,271 |
|
Other assets |
|
|
(185,269 |
) |
|
|
173,227 |
|
Accounts payable and accrued expenses |
|
|
(9,756,264 |
) |
|
|
(8,051,279 |
) |
Terminated derivate liability |
|
|
8,200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) operating activities |
|
|
130,383,754 |
|
|
|
(16,736,625 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
Decrease in restricted cash |
|
|
25,279,066 |
|
|
|
12,435,815 |
|
Principal collections on notes receivable |
|
|
11,424,215 |
|
|
|
82,758,686 |
|
Principal collections on loans held for investment |
|
|
5,857,079 |
|
|
|
60,070,709 |
|
Put back of acquired notes receivable |
|
|
|
|
|
|
1,803,604 |
|
Proceeds from short-term investments |
|
|
|
|
|
|
4,735,308 |
|
Proceeds from sale of other real estate owned |
|
|
19,227,015 |
|
|
|
43,823,094 |
|
Purchase of building, furniture and fixtures |
|
|
(6,201 |
) |
|
|
(217,594 |
) |
|
|
|
|
|
|
|
Net cash provided by investing activities |
|
|
61,781,174 |
|
|
|
205,409,622 |
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-5
FRANKLIN CREDIT HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 2009 AND 2008
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Principal payments of notes payable |
|
|
(99,692,754 |
) |
|
|
(186,437,224 |
) |
Proceeds from financing agreements |
|
|
2,017,052 |
|
|
|
2,005,606 |
|
Principal payments of financing agreements |
|
|
(2,975,063 |
) |
|
|
(1,080,668 |
) |
Dividend distribution |
|
|
(96,234 |
) |
|
|
|
|
Payments on nonrecourse liability |
|
|
(96,881,591 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in)/provided by financing activities |
|
|
(197,628,590 |
) |
|
|
(185,512,286 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS |
|
|
(5,463,662 |
) |
|
|
3,160,711 |
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR |
|
|
21,426,777 |
|
|
|
18,266,066 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR |
|
$ |
15,963,115 |
|
|
$ |
21,426,777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
Cash payments for interest |
|
$ |
45,118,607 |
|
|
$ |
84,113,492 |
|
|
|
|
|
|
|
|
Cash payments for taxes |
|
$ |
889,192 |
|
|
$ |
1,687,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH INVESTING AND FINANCING ACTIVITY: |
|
|
|
|
|
|
|
|
Transfers to other real estate owned |
|
$ |
20,566,414 |
|
|
$ |
90,096,019 |
|
|
|
|
|
|
|
|
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, 2009 AND 2008
1. |
|
BASIS OF PRESENTATION AND BUSINESS |
As used herein, references to the Company, Franklin, we, our and us refer to
Franklin Credit Holding Corporation, collectively with its subsidiaries.
Overview
March 2009 Restructuring. Effective March 31, 2009, Franklin Credit Holding Corporation
(Franklin Holding), and certain of its consolidated subsidiaries, including Franklin Credit
Management Corporation (FCMC) and Tribeca Lending Corp. (Tribeca), entered into a series of
agreements (collectively, the Restructuring Agreements) with The Huntington National Bank (the
Bank, Lead Lending Bank or Huntington), successor by merger to Sky Bank, pursuant to which,
taken as a whole, (i) the Companys loans, pledges and guarantees with the Bank and its
participating banks were substantially restructured pursuant to a legacy credit agreement (the
Legacy Credit Agreement), (ii) substantially all of the Companys portfolio of subprime mortgage
loans and owned real estate acquired through foreclosure was transferred to a trust (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, with certain trust certificates, representing
an undivided interest in approximately 83% of the Portfolio, transferred in turn by the Company to
Huntington Capital Financing, LLC (the REIT), a real estate investment trust wholly-owned by the
Bank, (iii) FCMC and Franklin Holding entered into an amended $13.5 million credit facility with
the Bank (the Licensing Credit Agreement), and (iv) FCMC entered into a market-rate servicing
agreement (the Servicing Agreement) with the Bank (the Restructuring). In connection with the
Restructuring, the Company in April 2009 engaged in a number of cost-saving measures intended to
improve the financial performance of FCMC, its servicing subsidiary company.
The Restructuring did not include a portion of the Companys debt (the Unrestructured Debt),
which as of December 31, 2009 totaled approximately $39.5 million. The Unrestructured Debt remains
subject to the original terms of the Franklin forbearance agreement entered into with the Bank in
December 2007 and subsequent amendments thereto (the Franklin Forbearance Agreement) and the
Franklin 2004 master credit agreement. On April 20 and August 10, 2009, Franklin Holding, and
certain of its direct and indirect subsidiaries, including FCMC and Franklin Credit Asset
Corporation (Franklin Asset), entered into amendments of the Franklin forbearance agreement and
Franklin 2004 master credit agreement (the Amendments) with the Bank relating to the
Unrestructured Debt, and the Bank agreed to forbear, during the forbearance period, which on
November 13, 2009, was extended until March 31, 2010, and, on March 26, 2010 was extended until
June 30, 2010, 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. During the forbearance period, the Bank, absent the occurrence and
continuance of a forbearance default other than an Identified Forbearance Default, will not
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. In addition, FCMC is
not obligated to the Bank with respect to the Unrestructured Debt and any references to FCMC in the
Franklin 2004 master credit agreement governing the Unrestructured Debt have been amended to refer
to Franklin Asset.
F-7
Upon expiration of the forbearance period, in the event that the Unrestructured Debt with the
Bank remains outstanding, the Bank, with notice, could 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 of FCMC (except
for a first lien of the Bank on an office condominium unit and a second priority lien of the Bank
on cash collateral held as security under the Licensing Credit Agreement) and the unpledged portion
of FCMCs stock. See Note 9.
The loans transferred by the Company to the Trust continue to be included on the Companys
balance sheet, and the revenues from such loans are reflected in the Companys consolidated
results, in accordance with accounting principles generally accepted in the United States of
America (GAAP), notwithstanding the fact that trust certificates representing an undivided
interest in approximately 83% of the Trust assets were transferred to the Banks REIT in the
Restructuring. The transfer has been accounted for as a secured financing in accordance with GAAP,
Topic 860, Transfers and Servicing, because for accounting purposes the requisite level of
certainty that the transferred assets have been 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, the mortgage loans and real
estate remain on the Companys balance sheet classified as mortgage loans and real estate held for
sale securing the nonrecourse liability in an equal amount.
Going Concern
The Company has been and continues to be operating in an extraordinary and difficult
environment, and has been significantly and negatively impacted by the unprecedented credit and
economic market turmoil of the past two plus years, including the more recent recessionary economy
of 2009. Particularly impacting Franklin as of the March 2009 Restructuring was the severe
deterioration in the U.S. housing market and the nearly complete shutdown of the mortgage credit
market for borrowers without excellent credit histories, and the slowing economy with increasing
unemployment. These unprecedented market conditions adversely affected the Companys portfolio of
residential mortgage loans, particularly its second-lien mortgage loans, delinquencies, provisions
for loan losses, operating losses and cash flows, which resulted in significant stockholders
deficit of $464.5 million at December 31, 2008 and $822.9 million at March 31, 2009. At December
31, 2009, the Companys stockholders deficit was $806.8 million. The Company has been, since the
latter part of 2007, expressly prohibited by the Bank from acquiring or originating loans. In
addition, the Companys restructuring agreements with the Bank contain affirmative covenants that
the Companys servicing subsidiary, FCMC, be licensed, qualified and in good standing, where
required, and that it maintain its licenses to service mortgage loans and real estate owned
properties serviced under the servicing agreement entered into in connection with the
Restructuring. Any event of default under the March 31, 2009 Restructuring Agreements, 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 and result in the transfer of the remaining loans pledged
to Huntington to a third party. Moreover, certain events of default under the Restructuring
Agreements, including defaults under provisions relating to enforceability, bankruptcy, maintenance
of collateral and lien positions, and certain negative covenants typical for agreements of this
nature, or defaults under its Servicing Agreement with the Bank or the Licensing Credit Agreement
could result in the transfer of the Companys sub-servicing contract as servicer of what had been
substantially all of its loans and owned real estate prior to the Restructuring. 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.
F-8
Operating Losses and Stockholders Deficit
The Company had a consolidated net loss of $358.1 million attributed to common shareholders
for the twelve months ended December 31, 2009. 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 that resulted in a write-down to fair market value of the Companys mortgage loans and 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 Portfolio. As part of the
Restructuring, at March 31, 2009, the Company transferred approximately 83%, or approximately $760
million, of the Portfolio (in the form of trust certificates that had been issued by the trust
formed by the Bank as part of the Restructuring (the Trust)) 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 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.
The Company had a net loss of $476.3 million for the twelve months ended December 31, 2008.
The net loss for the year ended December 31, 2008 was driven principally by $458.1 million in
provisions for loan losses as the Companys portfolios of residential 1-4 family loans continued to
deteriorate throughout the year, and by a significant excess of interest-bearing liabilities over
interest-paying loans, both of which were the result of the Companys significant amount of
delinquent residential 1-4 family loans. As a result, the Companys aggregate net interest income
(interest income less interest expense) and non-interest income was not sufficient to support its
general and administrative expenses. The significant provisions for loan losses during the year
ended December 31, 2008 was due principally to the substantial deterioration in the housing and
subprime mortgage markets and the slowing economy with increasing unemployment and the significant
further deterioration in the performance of the Companys portfolios of acquired and originated
loans, which resulted in significantly increased estimates of inherent losses in its portfolios and
the need for substantial increases in reserves throughout the year. The Company had a
stockholders deficit of $464.5 million at December 31, 2008.
F-9
Licenses to Service Loans
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 (the 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.
In addition, as a result of and following the March 2009 Restructuring, FCMC has maintained net
worth in excess of that which is required in those limited states in which the net worth
calculation may not include recourse on any contingent liabilities.
The business operations and financial condition of the Company taken as a whole, including
FCMC, which holds the servicing platform, on a consolidated basis, including the Companys
consolidated substantial negative net worth, did not change as a result of the Reorganization.
However, the resulting financial condition of FCMC changed, inasmuch as it had positive net worth
both at December 31, 2008 and 2009.
Franklins Business
As a result of the March 2009 Restructuring and the Reorganization that took effect December
19, 2008, FCMC, the Companys operating business is conducted principally 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 recovery
servicing, and in the due diligence, analysis, pricing and acquisition of residential mortgage
portfolios, for third parties. The portfolios serviced for other entities, as of December 31,
2009, principally for Huntington (loans previously acquired and originated by Franklin and
transferred to the Trust), primarily consist of first and second-lien loans secured by 1-4 family
residential real estate that generally fell outside the underwriting standards of Fannie Mae and
Freddie Mac.
On May 28, 2008, FCMC entered into various agreements, including a servicing agreement, to
service on a fee-paying basis approximately $245 million in residential home equity line of credit
mortgage loans for Bosco Credit LLC (Bosco). Bosco was organized by FCMC, and the membership
interests in Bosco 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. The loans that are subject to the servicing agreement, as amended
on October 28, 2009, were acquired by Bosco, from an unrelated third party, on May 28, 2008.
FCMCs servicing agreement was approved by the Companys Audit Committee. See Note 17.
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.
F-10
Amendments to Lending Agreements Prior to Restructuring
On December 28, 2007, Franklin entered into a series of agreements (the Forbearance
Agreements) with The Huntington National Bank, successor by merger in July 2007 to Sky Bank (Sky
Bank, prior to the merger, and Huntington, thereafter, are referred to as the Bank), whereby the
Bank agreed to restructure approximately $1.93 billion of the Companys indebtedness to it and its
participant banks, forgave $300 million of such indebtedness for a restructuring fee of $12 million
paid to the Bank, and waived certain existing defaults. In November 2007, Franklin ceased to
acquire or originate loans and, under the terms of the Forbearance Agreements, the Company has been
expressly prohibited from acquiring or originating loans. See Note 9.
On March 31, 2008, the Company entered into amendments to the Forbearance Agreements whereby,
among other things, (a) the indebtedness of Franklins direct, wholly-owned subsidiary (Tribeca)
to BOS (USA) Inc. ($44.8 million as of December 31, 2007) was effectively rolled into the
Forbearance Agreements, resulting in the payoff and retirement of Tribecas debt facilities with
BOS (USA) Inc. and BOS acquiring a participation interest under the Forbearance Agreements; and (b)
the interest rate and date of commencement of the accrual of PIK (payment in kind) interest on
approximately $125 million of the Companys indebtedness was modified as of March 31, 2008. See
Note 9.
The Company entered into additional amendments to the Forbearance Agreements, effective August
15, 2008, whereby, among other things, (a) the minimum net worth covenant was eliminated, (b) the
prescribed interest coverage ratios based on EBITDA were changed to ratios based on actual cash
flows, and (c) the existing extension of an additional period of forbearance through July 31, 2008
in respect of the remaining Unrestructured Debt was extended to December 31, 2008, and absent the
occurrence of an event of default, the Bank agreed not to initiate collection proceedings against
the Company in respect of any of the Unrestructured Debt. See Note 9.
On December 19, 2008, the Company engaged in a series of transactions (the Reorganization)
in which the Company: (a) adopted a holding company form of organizational structure, with Franklin
Holding serving as the new public-company parent; (b) transferred all of the equity and membership
interests in Franklin Credit Management Corporations (FCMC) direct subsidiaries to other
entities in the reorganized corporate structure of the Company; (c) assigned legal record ownership
of any loans in the Companys portfolio held directly by FCMC and Tribeca Lending Corporation, to
other entities in the reorganized corporate structure of the Company; and (d) amended its loan
agreements with Huntington, its lead lending bank.
In the Reorganization, FCMC became a subsidiary of Franklin Holding and ceased to have any
subsidiaries. Franklin Credit Holding Corporation (Franklin Holding, and together with its
direct and indirect subsidiaries, the Company) is the successor issuer to Franklin Credit
Management Corporation, a Delaware corporation (the Predecessor or FCMC). The Reorganization
was accounted for as a transaction between entities under common control at carrying value.
The Companys common stock is quoted under the stock symbol FCMC.OB on the OTC Bulletin
Board.
Concurrent with the Reorganization, the Company entered into a series of agreements with
Huntington, its lead lending bank, which included, among other amendments, guaranties of the
indebtedness to Huntington by various new entities in the Companys structure and Huntington
waiving the Companys
breach of its covenant to comply with all laws, rules and regulations to the extent such
breach resulted from the Companys failure to satisfy a minimum net worth requirement prior to the
Reorganization. See Note 9.
F-11
2. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
In June 2009, the Financial Accounting Standards Board (FASB) issued FASB Accounting
Standards Codification (ASC) 105, which establishes 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 its financial statements for the period ended December 31, 2009. The adoption of FASB
ASC 105 did not impact the Companys financial position or results of operations.
Basis of Presentation The consolidated financial statements include the accounts of the
Company and its wholly-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 and 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 which could cause actual results to differ
materially.
Operating Segments Disclosures about Segments of an Enterprise and Related Information
(Topic 280) requires companies to report financial and descriptive information about their
reportable operating segments, including segment profit or loss, certain specific revenue and
expense items, and segment assets. Prior to the Restructuring in March 2009, the Company had two
reportable operating segments: (i) portfolio asset acquisition and resolution; and (ii) mortgage
banking. The portfolio asset acquisition and resolution segment, prior to 2008, acquired
performing, reperforming or nonperforming notes receivable and promissory notes from financial
institutions and mortgage and finance companies, and serviced and collected on such notes
receivable. The mortgage-banking segment, prior to 2008, originated, or purchased, subprime
residential mortgage loans for individuals whose credit histories, income and other factors caused
them to be classified as subprime borrowers. As of March 31, 2009, due to the Restructuring, the
Company no longer had separate reportable operating segments. During 2008 and through the date of
the Restructuring, the Company serviced its portfolios of owned mortgage loans and owned real
estate. 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 is not reflected in the consolidated financial statements.
Noncontrolling Interest The Company accounts for a 10% 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 shareholders 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, 2009 and 2008, 301,000 and 582,000 stock options, respectively, were not included in
the computation of net loss per share because they were antidilutive.
F-12
Cash and Cash Equivalents Cash and cash equivalents includes cash certificates of deposit
with original maturities of three months or less, 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 or expects 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, substantially all of which
is required to pay down current debt obligations with its 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 seven shares of common stock of the REIT.
Investment in Trust Certificates Investment in trust certificates 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.
Mortgage Loans and Real Estate Held for Sale As part of the Restructuring, trust
certificates representing approximately 83% of the Portfolio, acquired through foreclosure, was
transferred to the REIT and such loans and owned real estate 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, Transfers and Servicing, (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.
F-13
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 investment in trust certificates 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 At March 31, 2009, as part of the Restructuring, notes
receivable, 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. Subsequent to March 31, 2009, the fair value of
the notes receivable 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 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 investment in 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 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).
Notes Receivable and Income Recognition The notes receivable portfolio consisted primarily
of secured real estate mortgage loans purchased from financial institutions and mortgage and
finance companies. Such notes receivable were performing, nonperforming or subperforming at the
time of purchase and were generally purchased at a discount from the principal balance remaining.
Notes receivable were carried at the amount of unpaid principal, reduced by purchase discount and
allowance for loan losses. The Company reviewed its loan portfolios upon purchase of loan pools,
at loan boarding, and on a frequent basis thereafter to determine an estimate of the allowance
necessary to absorb probable loan losses in its portfolios. Managements judgment in determining
the adequacy of the allowance for loan losses was based on an evaluation of loans within its
portfolios, the known and inherent risk characteristics and size of the portfolio, the assessment
of current economic and real estate market conditions, estimates of the current value of underlying
collateral, past loan loss experience and other relevant factors. In connection with the
determination of the allowance for loan losses, management obtained independent appraisals for the
underlying collateral on an ongoing basis in accordance with company policy.
F-14
In general, interest on the notes receivable was calculated based on contractual interest
rates applied to daily balances of the principal amount outstanding using the accrual method.
Accrual of interest on notes receivable, including impaired notes receivable, was discontinued when
management believed, after
considering economic and business conditions and collection efforts, that the borrowers
financial condition was such that collection of interest was doubtful. When interest accrual was
discontinued, all unpaid accrued interest was reversed against interest income. Subsequent
recognition of income occurred only to the extent payment was received, subject to managements
assessment of the collectibility of the remaining interest and principal. A non-accrual note was
restored to an accrual status when collectibility of interest and principal was no longer in doubt
and past due interest was recognized at that time.
Discounts on Acquired Loans The Company followed Topic 310, Loans and Debt Securities
Acquired with Deteriorated Credit Quality, for acquired loans which have evidence of deterioration
of credit quality since origination and for which it is probable, at the time of our acquisition,
that the Company will be unable to collect all contractually required payments. For these loans,
the excess of the undiscounted contractual cash flows over the undiscounted cash flows estimated by
us at the time of acquisition was not accreted into income (nonaccretable discount). The amount
representing the excess of cash flows estimated by us at acquisition over the purchase price was
accreted into purchase discount earned over the life of the loan (accretable discount). The
nonaccretable discount was not accreted into income. If cash flows could not be reasonably
estimated for any loan, and collection was not probable, the cost recovery method of accounting was
used. Under the cost recovery method, any amounts received were applied against the recorded
amount of the loan.
Subsequent to acquisition, if cash flow projections improved, and it was determined that the
amount and timing of the cash flows related to the nonaccretable discount were reasonably estimable
and collection was probable, the corresponding decrease in the nonaccretable discount was
transferred to the accretable discount and was accreted into interest income over the remaining
life of the loan on the effective interest method. If cash flow projections deteriorated
subsequent to acquisition, the decline was accounted for through the allowance for loan losses.
There was significant judgment involved in estimating the amount of the loans future cash
flows. Depending on the timing of an acquisition, the initial allocation of discount generally was
made primarily to nonaccretable discount until the Company had boarded all loans onto its servicing
system; at that time, any cash flows expected to be collected over the purchase price were
transferred to accretable discount. Generally, the allocation was finalized no later than ninety
days from the date of purchase.
For loans not addressed by Topic 310 that were acquired subsequent to December 31, 2004, the
discount, which represented the excess of the amount of reasonably estimable and probable
discounted future cash collections over the purchase price, was accreted into purchase discount
earned using the interest method over the term of the loans. This was consistent with the method
the Company utilized for its accounting for loans purchased prior to January 1, 2005, except that
for these loans an allowance allocation was also made at the time of acquisition.
Allowance for Loan Losses The Company reviewed its loan portfolios upon purchase of loan
pools, at loan boarding, and on a frequent basis thereafter to determine an estimate of the
allowance necessary to absorb probable loan losses in its portfolios. Managements judgment in
determining the adequacy of the allowance for loan losses was based on an evaluation of loans
within its portfolios, the known and inherent risk characteristics and size of the portfolio, the
assessment of current economic and real estate market conditions, estimates of the current value of
underlying collateral, past loan loss experience and other relevant factors. In connection with
the determination of the allowance for loan losses, management obtained independent appraisals for
the underlying collateral on an ongoing basis in accordance with company policy.
F-15
Originated Loans Held for Investment In general, interest on originated loans held for
investment was calculated based on contractual interest rates applied to daily balances of the
principal amount outstanding using the accrual method. The Company accrued interest on secured
real estate first mortgage loans originated by the Company up to a maximum of 209 days
contractually delinquent with a recency payment in the last 179 days, and that were judged to be
fully recoverable for both principal and accrued interest, based principally on a foreclosure
analysis that included an updated estimate of the realizable value of the property securing the
loan.
The accrual of interest was discontinued when management believed, after considering economic
and business conditions and collection efforts, that the borrowers financial condition was such
that collection of interest was doubtful, which generally was less than 209 days contractually
delinquent with a recency payment in the last 179 days. When interest accrual was discontinued,
the unpaid accrued interest on certain loans in the foreclosure process was not reversed against
interest income where the current estimate of the value of the underlying collateral exceeded 110%
of the outstanding loan balance. For all other loans held for investment, all unpaid accrued
interest was reversed against interest income when interest accrual was discontinued. Except for
certain loan modifications, subsequent recognition of income occurred only to the extent payment
was received, subject to managements assessment of the collectibility of the remaining interest
and principal. Except for certain performing loans that were modified by a reduction in the
interest rate, while all accrued and unpaid interest was reversed and in these cases, interest at
the new modified interest rate was accrued, a nonaccrual note was restored to an accrual status
when collectibility of interest and principal was expected to be fully recovered.
Other Real Estate Owned Other real estate owned (OREO) consists of properties acquired
through, or in lieu of, foreclosure or other proceedings and are held for sale and carried at the
lower of cost or fair value less estimated costs to sell. Any write-down to fair value, less cost
to sell, is charged to provision for loan losses based upon managements continuing assessment of
the fair value of the underlying collateral. OREO is evaluated quarterly to ensure that the
recorded amount is supported by current fair values and valuation allowances are recorded as
necessary to reduce the carrying amount to fair value less estimated cost to sell. Revenue and
expenses from the operation of OREO and changes in the valuation allowance are included in
operations. Direct costs relating to the development and improvement of the property are
capitalized, subject to the limit of fair value of the property, while costs related to holding the
property are expensed in the current period. Gains or losses are included in operations upon
disposal of the property.
Derivatives As part of the Companys interest-rate risk management process, we entered into
interest rate cap agreements in 2006 and 2007, and 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.
Interest rate caps are recorded at fair value. The interest rate caps are not designated as
hedging instruments for accounting purpose, and unrealized changes in fair value are recognized in
the period in which the changes occur and realized gains and losses are recognized in the period
when such instruments are settled.
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.
F-16
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, 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 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.
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.
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.
F-17
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, are
deferred and are amortized over the term of the related loan.
Income Taxes Income taxes are accounted for under 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 prepayment
penalties, fees for servicing loans for third parties, due diligence fees for services provided to
third parties, late charges, and other miscellaneous income. With the exception of servicing and
due diligence fees for services provided to third parties, such income is recognized on a cash
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.
Fair Value of Financial Instruments Topic 825, Financial Instruments, 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.
The methods and assumptions used by the Company, prior to the Restructuring, in estimating the
fair value of its financial instruments at December 31, 2008 were as follows:
|
a. |
|
Cash, Restricted Cash, Accrued Interest Receivables, Other Receivable and Accrued
Interest Payable The carrying values reported in the consolidated balance sheets are a
reasonable estimate of fair value. |
|
b. |
|
Notes Receivable Fair value of the net note receivable portfolio is estimated by
discounting the estimated future cash flows using the interest method. The fair value of
notes receivable at December 31, 2008 approximated $304 million, which was based on an
independent valuation as of February 28, 2009. |
|
c. |
|
Loans Held for Investment The fair value of loans held for investment at December
31, 2008 approximated $274 million, which was based on an independent valuation as of
February 28, 2009. |
F-18
|
d. |
|
Short-term Borrowings The interest rates on financing agreements and other
short-term borrowings reset on a monthly basis; therefore, the carrying amounts of these
liabilities approximate their fair value. |
|
e. |
|
Long-term Debt The fair value of the Companys long-term debt (notes payable) at
December 31, 2008 approximated $578 million. |
At December 31, 2009, the Companys investment in trust certificates, mortgage loans and real
estate held for sale, and notes receivable held for sale are carried at estimated fair values. The
book value of the investment in REIT securities approximates the fair value for these
non-marketable securities. The fair value of the Companys long-term debt (notes payable) is
estimated to be equal to the fair value of the investment in trust certificates, mortgage loans and
real estate held for sale and notes receivable held for sale (in aggregate, the collateral for the
long-term debt), which approximated $418 million at December 31, 2009.
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.
The compensation cost recognized in income was $170,633 and $291,610 for the years ended
December 31, 2009 and 2008, respectively.
Recent Accounting Pronouncements
Topic 820, Fair Value Measurements and Disclosures, is effective for fiscal years beginning
after November 15, 2007 and for interim periods within those years. This statement defines fair
value, establishes a framework for measuring fair value and expands the related disclosure
requirements. This statement applies under other accounting pronouncements that require or permit
fair value measurements. The statement indicates, among other matters, that a fair value
measurement assumes that a transaction to sell an asset or transfer a liability occurs in the
principal market for the asset or liability or, in the absence of a principal market, the most
advantageous market for the asset or liability. Topic 820 defines fair value based upon an exit
price model. The Company adopted Topic 820 as of January 1, 2008. Adoption of this standard
affected disclosures only and did not have a material impact on the Companys consolidated
financial position and results of operations.
F-19
In December 2007, the FASB issued Topic 810, Consolidations. Topic 810 establishes accounting
and reporting standards for the noncontrolling interest in a subsidiary (previously referred to as
minority interests). Topic 810 also requires that a retained noncontrolling interest upon the
deconsolidation of a subsidiary be initially measured at its fair value. Under Topic 810,
noncontrolling interests are reported as a separate component of consolidated stockholders equity.
In addition, net income allocable to noncontrolling interests and net income attributed to
stockholders are reported separately in the consolidated statements of operations. Topic 810
became effective beginning January 1, 2009. Topic 810 has an impact on the presentation and
disclosure of the noncontrolling interests of any non wholly-owned subsidiary. The Company adopted
Topic 810 as of January 1, 2009.
In March 2008, the FASB issued Topic 815, Derivatives and Hedging. The new standard enhances
disclosures about how and why a company uses derivatives; how derivative instruments are accounted
for under Topic 815 (and the interpretations of that standard); and, how derivatives affect a
companys financial position, financial performance and cash flows. Topic 815 is effective for
financial statements issued for fiscal years and interim periods beginning after November 15, 2008.
The Company adopted this standard as of January 1, 2009. Adoption of this standard did not have a
material impact on the Companys consolidated financial position and results of operations.
In April 2009, the FASB issued Topic 825, Financial Instruments. Topic 825 requires
disclosures about fair value of financial instruments in interim as well as in annual financial
statements. This standard is effective for periods ending after September 15, 2009. Adoption of
this standard will affect disclosures only and will not have a material impact on the Companys
consolidated financial position and results of operations.
In May 2009, the FASB issued Topic 855, Subsequent Events. Topic 855 establishes general
standards of accounting for and disclosure of subsequent events. In addition, Topic 855 requires
entities to disclose the date through which subsequent events have been evaluated, as well as
whether that date is the date the financial statements were issued or the date the financial
statements were made available to be issued. Topic 855 is effective for periods ending after
September 15, 2009, and accordingly, the Company adopted this standard in the third quarter of
2009. The Company had evaluated subsequent events through the time of filing its consolidated
financial statements with the Securities and Exchange Commission and does expect the adoption of
this standard to have any impact on the Companys consolidated financial position and results of
operations.
In August 2009, the FASB issued Accounting Standard Update (ASU) 2009-05, Fair Value
Measurements and Disclosures, which provides clarification on measuring liabilities at fair value
when a quoted price in an active market is not available. This standard became effective for us on
October 1, 2009 and did not have a significant impact on our consolidated financial position or
results of operations.
The FASB has published ASU 2009-13, Revenue Recognition Multiple Deliverable Revenue
Arrangements, which addresses the accounting for multiple-deliverable arrangements to enable
vendors to account for products or services (deliverables) separately rather than as a combined
unit. Specifically, this guidance amends the criteria in Subtopic 605-25, Revenue Recognition
Multiple-Element Arrangements, for separating consideration in multiple-deliverable arrangements.
This guidance establishes a selling price hierarchy for determining the selling price of a
deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence;
or (c) estimates. This guidance also eliminates the residual method of allocation and requires
that arrangement consideration be allocated at the inception of the arrangement to all deliverables
using the relative selling price method and also requires expanded disclosures. FASB ASU
2009-13 is effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The
adoption of this standard is not expected to have a material impact on the Companys consolidated
financial position and results of operations.
F-20
3. |
|
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, 2009
consist principally of the trust certificates not transferred to the Banks REIT as of the
Restructuring (representing approximately 17% of the Companys loans and real estate assets as of
March 31, 2009):
|
|
|
|
|
|
|
December 31, 2009 |
|
Balance, January 1, 2009 |
|
$ |
|
|
|
|
|
|
|
Fair value designation at March 31, 2009 |
|
|
95,832,753 |
|
Trust distributions |
|
|
(17,647,303 |
) |
Transfers (out) |
|
|
(10,794,569 |
) |
Fair value adjustment, net |
|
|
1,964,854 |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
$ |
69,355,735 |
|
|
|
|
|
Mortgage loans and real estate held for sale, carried at lower of cost or estimated fair
value, as of December 31, 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):
|
|
|
|
|
|
|
December 31, 2009 |
|
Balance, January 1, 2009 |
|
$ |
|
|
|
|
|
|
|
Fair value designation at March 31, 2009 |
|
|
477,316,409 |
|
REO sales |
|
|
(53,764,783 |
) |
Principal payments |
|
|
(43,116,808 |
) |
Loans written off |
|
|
(594,853 |
) |
Fair value adjustments, net |
|
|
(34,398,100 |
) |
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
$ |
345,441,865 |
|
|
|
|
|
Notes receivable held for sale, carried at lower of cost or estimated fair value, as of
December 31, 2009 consist principally of the Companys loans securing the Unrestructured Debt:
|
|
|
|
|
|
|
December 31, 2009 |
|
Balance, January 1, 2009 |
|
$ |
|
|
|
|
|
|
|
Fair value designation at March 31, 2009 |
|
|
4,141,487 |
|
Principal payments |
|
|
(794,986 |
) |
Loans written off |
|
|
(602,628 |
) |
Fair value adjustments, net |
|
|
831,450 |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
$ |
3,575,323 |
|
|
|
|
|
F-21
4. |
|
NOTES RECEIVABLE, ORIGINATED LOANS HELD FOR INVESTMENT, PURCHASE DISCOUNT AND ALLOWANCE FOR
LOAN LOSSES |
Due to the 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, is treated as a financing under GAAP, and,
therefore, the assets transferred to the trust remain 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. Accordingly, the tables that follow are only for December 31, 2008 and
represent the Companys legacy loan portfolios prior to the Restructuring.
Notes receivable, net of accretable and nonaccretable discounts, consisted principally of
residential one-to-four family mortgage loans as of December 31, 2008:
|
|
|
|
|
|
|
2008 |
|
Real estate secured |
|
$ |
974,530,982 |
|
Manufactured and mobile homes |
|
|
14,704,899 |
|
Unsecured |
|
|
32,412,410 |
|
|
|
|
|
|
|
|
1,021,648,291 |
|
|
|
|
|
|
Less: |
|
|
|
|
Purchase discount |
|
|
(9,777,475 |
) |
Allowance for loan losses |
|
|
(471,093,159 |
) |
|
|
|
|
Balance |
|
$ |
540,777,657 |
|
|
|
|
|
Originated loans held for investment, represented residential one-to-four family real
estate mortgage loans as of December 31, 2008:
|
|
|
|
|
|
|
2008 |
|
Real estate secured |
|
$ |
394,016,324 |
|
Consumer unsecured |
|
|
723,935 |
|
Manufactured homes |
|
|
|
|
|
|
|
|
|
|
|
394,740,259 |
|
|
|
|
|
|
Less: |
|
|
|
|
Net deferred costs and fees |
|
|
(3,035,940 |
) |
Allowance for loan losses |
|
|
(49,876,092 |
) |
|
|
|
|
Balance |
|
$ |
341,828,227 |
|
|
|
|
|
F-22
Changes in the allowance for loan losses on notes receivable and loans held for
investment for the years ended December 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Allowance for loan losses, beginning of year |
|
$ |
520,969,251 |
|
|
$ |
254,661,653 |
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
169,479 |
|
|
|
412,802,253 |
|
Loans transferred to OREO |
|
|
(6,517,919 |
) |
|
|
(25,150,881 |
) |
Loans charged off |
|
|
(14,029,345 |
) |
|
|
(122,260,110 |
) |
Loans exchanged for trust certificates |
|
|
(481,453,374 |
) |
|
|
|
|
Loans reclassified as loans held for sale |
|
|
(17,435,075 |
) |
|
|
|
|
Other, net |
|
|
(1,703,017 |
) |
|
|
916,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses, end of year |
|
$ |
|
|
|
$ |
520,969,251 |
|
|
|
|
|
|
|
|
Write-downs for declines in the estimated net realizable value of OREO resulted in a
provision for loan losses of $45,319,736 during the twelve months ended December 31, 2008, which
was not included in the above tables. 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.
At December 31, 2008, principal amounts of notes receivable included approximately $615
million of notes for which there was no accrual of interest income. The following information
related to impaired notes receivable, which include all such notes receivable as of and for the
year ended December 31, 2008:
|
|
|
|
|
|
|
2008 |
|
Total impaired notes receivable |
|
$ |
615,159,200 |
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses related to impaired
notes receivable |
|
$ |
340,368,461 |
|
|
|
|
|
|
|
|
|
|
Interest income recognized |
|
$ |
23,137,469 |
|
|
|
|
|
|
|
|
|
|
Average balance of impaired notes receivable
during the year |
|
$ |
472,685,854 |
|
|
|
|
|
At December 31, 2008, the principal amount of loans held for investment included loans on
non-accrual status of approximately $236 million.
|
|
|
|
|
|
|
2008 |
|
Total impaired loans held for investment |
|
$ |
236,010,911 |
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses related to loans held for investment |
|
$ |
40,328,866 |
|
|
|
|
|
|
|
|
|
|
Interest income recognized |
|
$ |
6,086,370 |
|
|
|
|
|
|
|
|
|
|
Average balance of impaired loans held for investment during
the year |
|
$ |
209,008,158 |
|
|
|
|
|
F-23
In the normal course of its business, the Company restructured or modified terms of
certain loans to enhance the collectibility of such loans. We classified a previously delinquent
or performing loan as modified when we restructured the loan due to the borrowers deteriorated
financial situation, and, as a condition to the closing of the modification, received at least one
full monthly payment at the time of the closing of the modification. As of December 31, 2008,
principally all of the modified loans consisted of the deferral of the past due and uncollected
interest or a reduction in the interest rate. Interest rate reduction modifications generally were
for a period of one year, and for rate reduction modifications of delinquent loans, also
incorporated a deferral of the past due and uncollected interest.
As of December 31, 2009 and December 31, 2008, the unpaid principal balance of mortgage loans
being serviced by the Company for others was $1.99 billion and $243.4 million, respectively.
Mortgage loans serviced for others, except for mortgage loans serviced for the Bank, are not
included on the Companys consolidated balance sheets.
The following table sets forth certain information relating to the activity in the accretable
and nonaccretable discounts, which is shown as a component of notes receivable principal on the
balance sheet at December 31, 2008, in accordance with Topic 310 for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Accretable Discount |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
24,860,752 |
|
|
$ |
26,507,403 |
|
Accretion |
|
|
(198,841 |
) |
|
|
(1,646,651 |
) |
Loans transferred to Huntington |
|
|
(24,131,696 |
) |
|
|
|
|
Loans transferred to notes receivable held for sale |
|
|
(530,215 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
|
|
|
$ |
24,860,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccretable Discount |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
97,603,366 |
|
|
$ |
102,141,880 |
|
Net reductions relating to loans repurchased |
|
|
|
|
|
|
(123,760 |
) |
Net reductions relating to loans charged off |
|
|
|
|
|
|
(1,379,028 |
) |
Loans transferred to Huntington |
|
|
(93,655,391 |
) |
|
|
|
|
Loans transferred to notes receivable held for sale |
|
|
(2,847,136 |
) |
|
|
|
|
Loans transferred to OREO, other |
|
|
(1,100,839 |
) |
|
|
(3,035,726 |
) |
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
|
|
|
$ |
97,603,366 |
|
|
|
|
|
|
|
|
The outstanding balance of notes receivable subject to Topic 310 at December 31, 2008 was
$938.9 million. The allowance for loan losses related to loans subject to Topic 310 was $405.1
million at December 31, 2008. The allowance was increased during 2008 by a charge to provision for
loan losses in the amount of $237.6 million. 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.
F-24
5. |
|
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.
The following table sets forth the activity since the Restructuring affecting the fair
valuation adjustments during the nine months ended December 31, 2009:
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
December 31, 2009 |
|
Valuation (loss) on OREO sold |
|
$ |
(14,891,467 |
) |
Valuation (loss) on mortgage loans and OREO |
|
|
(34,398,100 |
) |
Valuation gain on nonrecourse liability |
|
|
34,398,100 |
|
Other adjustments |
|
|
(12,329,951 |
) |
|
|
|
|
|
|
|
|
|
(Loss) on valuation |
|
$ |
(27,221,418 |
) |
|
|
|
|
Other adjustments include estimated fair market value adjustments and the offset to the
interest and other income recorded on the investment in trust certificates.
As part of the Companys interest-rate risk management process, we entered into interest rate
cap agreements in 2006 and 2007, and 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 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 of debt (tranche A debt) 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, 2009, the notional amount of the Companys fixed-rate interest-rate swaps
totaled $390 million, representing approximately 32% 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.
F-25
The following table presents the notional and fair value amounts of the interest rate swaps at
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
|
|
Term |
|
Maturity Date |
|
|
Fixed Rate |
|
|
Estimated Fair Value |
|
$ |
275,000,000 |
|
|
3 years |
|
March 5, 2011 |
|
|
3.47 |
% |
|
$ |
(9,380,699 |
) |
|
70,000,000 |
|
|
3 years |
|
March 5, 2011 |
|
|
3.11 |
% |
|
|
(1,917,039 |
) |
|
45,000,000 |
|
|
4 years |
|
March 5, 2012 |
|
|
3.43 |
% |
|
|
(1,846,853 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
390,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(13,144,591 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps increased our interest expense for the twelve months ended December
31, 2009 by $23.4 million. The estimated fair value of the swaps at December 31, 2009 was a
negative $13.1 million.
The net changes in the fair value of the Companys derivatives, which is reflected in
derivative liabilities, at fair value, for the twelve months ended December 31, 2009 and 2008 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Balance, January 1 |
|
$ |
(27,753,436 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
(5,048,748 |
) |
Cash settlements |
|
|
14,317,132 |
|
|
|
|
|
Fair value adjustments |
|
|
(7,908,287 |
) |
|
|
(22,704,688 |
) |
Terminated contracts |
|
|
8,200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31 |
|
$ |
(13,144,591 |
) |
|
$ |
(27,753,436 |
) |
|
|
|
|
|
|
|
7. |
|
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, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Level 3 |
|
Interest-rate swaps |
|
$ |
|
|
|
$ |
(13,144,591 |
) |
|
$ |
|
|
|
$ |
|
|
Investment in trust certificates |
|
|
|
|
|
|
|
|
|
|
69,355,735 |
|
|
|
|
|
Nonrecourse liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(345,441,865 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
(13,144,591 |
) |
|
$ |
69,355,735 |
|
|
$ |
(345,441,865 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in items classified as Level 3 during the twelve months ended December 31,
2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
Liabilities |
|
Balance, January 1, 2009 |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
151,189,198 |
|
|
|
(477,316,409 |
) |
Total recognized unrealized (losses)/gains |
|
|
(53,391,591 |
) |
|
|
34,398,100 |
|
Transfers in/(out) |
|
|
(10,794,569 |
) |
|
|
594,853 |
|
Distributions/payments |
|
|
(17,647,303 |
) |
|
|
96,881,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
|
69,355,735 |
|
|
$ |
(345,441,865 |
) |
|
|
|
|
|
|
|
Unrealized losses included in earnings during the twelve months ended December 31, 2009
related to investments held at December 31, 2009 were $53.4 million.
The carrying value of assets measured at the lower of cost or market value at December 31,
2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Mortgage loans and real estate held for sale |
|
$ |
|
|
|
$ |
|
|
|
$ |
345,441,865 |
|
8. |
|
BUILDING, FURNITURE AND EQUIPMENT, NET |
At December 31, 2009 and 2008, building, furniture and equipment, net consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Building and improvements |
|
$ |
3,327,537 |
|
|
$ |
2,280,626 |
|
Furniture and equipment |
|
|
657,883 |
|
|
|
1,571,404 |
|
|
|
|
|
|
|
|
|
|
|
3,985,420 |
|
|
|
3,852,030 |
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation |
|
|
(2,456,002 |
) |
|
|
(1,809,594 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,529,418 |
|
|
$ |
2,042,436 |
|
|
|
|
|
|
|
|
F-27
As of December 31, 2009, the Company had total borrowings of $1.37 billion under the
Restructuring Agreements, of which $1.33 billion was subject to the Legacy Credit Agreement and
$39.5 million remained under a credit facility excluded from the Restructuring Agreements (the
Unrestructured Debt). Substantially all of the debt under these facilities was incurred in
connection with the Companys legacy purchases and origination of residential one-four family
mortgage loans. These borrowings are shown in the Companys financial statements as Notes
payable (referred to as term loans or term debt herein). At December 31, 2009, FCMC owed $1
million 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 interest rates on our notes payable were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the terms of credit |
|
|
|
In accordance with the |
|
|
agreement excluded |
|
|
|
terms of the Legacy Credit |
|
|
from the |
|
|
|
Agreement |
|
|
Legacy Credit Agreement |
|
FHLB 30-day LIBOR advance rate plus 2.60% |
|
$ |
|
|
|
$ |
15,998,860 |
|
FHLB 30-day LIBOR advance rate plus 2.75% |
|
|
|
|
|
|
23,535,477 |
|
LIBOR plus 2.25% (Tranche A) |
|
|
770,617,430 |
|
|
|
|
|
LIBOR plus 2.75% (Tranche B) |
|
|
417,164,681 |
|
|
|
|
|
15.00% fixed (Tranche C) |
|
|
140,074,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,327,856,497 |
|
|
$ |
39,534,337 |
|
|
|
|
|
|
|
|
During the nine months ended December 31, 2009 following the Restructuring, while the
Company made principal payments on the senior portion (tranche A) of the notes payable in the
amount of $68.4 million, total notes payable outstanding was reduced by only $43.7 million. The
balance of certain subordinate portions (tranches B and C) of notes payable actually increased
during this nine month period as interest due and unpaid was accrued and added to the outstanding
term 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 tranches B and C. For the full year of 2009, the Company paid down notes payable by a total of
$99.7 million.
At December 31, 2009 and 2008, the weighted average interest rate on our term debt was 3.93%
and 3.95%, respectively.
Aggregate contractual maturities of all notes payable at December 31, 2009 are as follows:
|
|
|
$39.5 million in Unrestructured Debt will mature on June 30, 2010 (extended for 90
days on March 26, 2010); and, |
|
|
|
$1.33 billion will mature on March 31, 2012 in accordance with the terms of the
Legacy Credit Agreement. |
Prior to the March 31, 2009 Restructuring, our indebtedness was governed by forbearance
agreements and prior credit and warehousing agreements with Huntington. As of December 31, 2009,
all of our borrowings, with the exception of the Unrestructured Debt in the amount of $39.5
million, are governed by credit agreements entered into as part of the Restructuring Agreements.
Information regarding the Restructuring Agreements and credit and forbearance agreements is
presented below.
F-28
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 remains
subject to the original terms of the Franklin forbearance agreement entered into with the Bank in
December 2007 and subsequent amendments thereto (the Franklin Forbearance Agreement) and the
Franklin 2004 master credit agreement. On April 20, August 10, and November 13, 2009, Franklin
Holding, and certain of its direct and indirect subsidiaries, including FCMC and Franklin Credit
Asset Corporation (Franklin Asset) entered into amendments to the Franklin Forbearance Agreement
and Franklin 2004 master credit agreement (the Amendments) with the Bank relating to the
Unrestructured Debt whereby the term of forbearance period, which had been previously extended by
the Bank, was extended through and including March 31, 2010; and, on March 26, 2010 was
extended until June 30, 2010. The Bank again agreed to forebear 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. During the
forbearance period, the Bank, absent the occurrence and continuance of a forbearance default other
than an Identified Forbearance Default, will not 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. In addition, FCMC is not obligated to the Bank with respect to the
Unrestructured Debt and any references to FCMC in the Franklin 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, the Bank, with notice, could 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 of FCMC (except
for a first lien of the Bank on an office condominium unit and a second priority lien of the Bank
on cash collateral held as security under the Licensing Credit Agreement) and the unpledged portion
of FCMCs stock.
The Franklin forbearance agreement and the Tribeca forbearance agreement (together, the
Forbearance Agreements) that had been entered into with the Bank were, except for approximately
$39.5 million of the Companys debt outstanding at December 31, 2009, replaced effective March 31,
2009 by the Restructuring Agreements.
F-29
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, 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 of term debt (tranche A term debt) has
been paid in full. At December 31, 2009, $770.6 million of this tranche of term debt remained to
be paid off before payment of the swap termination fee is triggered. The Company has other
non-amortizing fixed-rate interest rate swaps with the Bank, which have not been terminated.
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 corporate 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.
Background to the Restructuring. The severe deterioration in the U.S. housing market and the
nearly complete shutdown of the mortgage credit market for most borrowers in the latter part of
2007 and throughout 2008, coupled with the severe economic slowdown and rapidly rising unemployment
during 2008, resulted in increased delinquencies, provisions for loan losses, operating losses, and
decreased cash flows for the Company. The impact on the Companys operations was severe, and
included (i) a substantial and growing shortfall in cash collections from the portfolio of mortgage
loans and real estate owned relative to the Companys debt service obligations owed to the Bank,
(ii) a substantial and growing shortfall in the value of the Companys assets, relative to the
amounts owed to the Bank, (iii) concern by potential servicing customers and other constituencies
over the continued viability of the Company, including the viability of FCMC, the Companys
servicing platform, and (iv) concern that the Bank was increasingly likely to: (a) cease granting
necessary waivers and forbearances with respect to defaults under the Companys various credit
facilities; and, (b) declare a default with respect to the credit facilities and foreclose on the
assets of the Company, substantially all of which were pledged to the Bank, especially in light of
communications from the Bank indicating that it was seeking greater and more direct control over
the collection guidelines related to the assets in the Portfolio and may have needed to foreclose
on the Portfolio if it were not able to consummate a transaction like the Restructuring in which it
was able to gain control over the Portfolio while keeping the credit facilities outstanding. Such
a foreclosure would have left no value for the Companys stockholders.
In order to address these issues, accommodate the concerns of the Bank to take advantage of
what the Company believes is the best option to preserve value for its stockholders, the Company
negotiated and entered into the Restructuring, which was approved by the Companys Board of
Directors.
F-30
Summary of the Restructuring. Key attributes of the Restructuring, as they relate to the
Companys legacy indebtedness to the Bank include:
|
(1) |
|
in exchange for the transfer of that part of the Portfolio underlying the Bank
Trust Certificates (as defined below), the Company received common membership interests
and Class C preferred membership interests in the REIT having in the aggregate a value
intended to approximate the fair market value of that portion of the Portfolio
transferred to the Bank, which as of March 31, 2009 was approximately $477.3 million
(the REIT Securities). The preferred membership interests have a liquidation value
of $100,000 per unit and an annual cumulative dividend rate of 9% of such liquidation
value. Any dividends on the preferred shares shall be payable only out of funds
legally available for the payment thereof; |
|
(2) |
|
principal and interest payments in respect of the Legacy Credit Agreement are
only due and payable to the extent of cash flow of the Company, which cash flow would
include dividends declared and paid in respect of the REIT Securities or any other
assets of the Company, other than the retained interest in FCMC (as discussed below);
and, |
|
(3) |
|
the Banks recourse in respect of the Legacy Credit Agreement is limited to the
assets and stock of Franklin Holdings subsidiaries, excluding the assets of FCMC
(except for a first lien of the Bank on an office condominium unit and a second
priority lien of the Bank on cash collateral held as security under the Licensing
Credit Agreement) and a portion of FCMCs stock, representing not less than twenty
percent and not more than seventy percent of FCMCs common equity, based on the amounts
received by the Bank from the cash collections from FCMCs servicing of the Portfolio
as discussed in more detail below. Under the terms and conditions of the Restructuring
Agreements, FCMC may pay dividends or other distributions in respect of its capital
stock if FCMC delivers to the Bank a payment to be applied to outstanding obligations
under the Legacy Credit Agreement equal to seventy percent of any such distribution or
dividend that FCMC elects to make or declare, which percentage share may be reduced to
twenty percent based upon the Banks receipt of the agreed amounts of net remittances
from the Portfolio summarized below. |
F-31
From the perspective of the Company and its stockholders, the Restructuring accomplished a
number of overarching objectives, including:
|
(1) |
|
release of thirty percent of the equity in FCMC, ten percent of which has been
transferred to the Companys principal stockholder, Thomas J. Axon, from the Companys
pledges to the Bank in respect of its Legacy Credit Agreement, with the possibility of
release of up to an additional fifty percent (of which a maximum of ten percent would
go to Thomas J. Axon), based upon the Banks receipt of the agreed amounts of net
remittances from the Portfolio, summarized below (the Net Remittances), from March
31, 2009, the effective date of the Legacy Credit Agreement (the Legacy Effective
Date), through the term of the Legacy Credit Agreement; the Bank shall reduce its
interest in the equity in FCMC, as collateral, in accordance with the following
collection levels; |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Amount |
|
|
|
|
|
|
|
|
|
of Net Remittances |
|
|
|
|
|
|
|
Level |
|
(Minimum Level Amount) |
|
|
Time Period |
|
|
Release of Equity Interests |
|
Level 1 |
|
$225 million |
|
1 year from the Legacy Effective Date |
|
10% (70% reduces to 60%) |
Level 2 |
|
$475 million |
|
3 years from the Legacy Effective Date |
|
10% (60% reduces to 50%) |
Level 3 |
|
$575 million |
|
No time period specified |
|
10% (50% reduces to 40%) |
Level 4 |
|
$650 million |
|
No time period specified |
|
10% (40% reduces to 30%) |
Level 5 |
|
$750 million |
|
No time period specified |
|
10% (30% reduces to 20%) |
|
(2) |
|
entry into a servicing agreement enabling the Company to receive fee
income in respect of its continued servicing of the transferred Portfolio; and, |
|
(3) |
|
entry into amended credit facilities in the aggregate principal amount of $13.5
million, including a $5 million facility for working capital and to support various
servicer licenses, a $2 million revolving facility and a $6.5 million letter of credit
facility to support various servicer licenses. |
|
|
|
* |
|
Provided, however, (i) if Net Remittances do not reach the minimum Level 1 amount prior to
the first anniversary of the Legacy Effective Date, but reach the minimum Level 2 amount prior
to the third anniversary of the Legacy Effective Date, the Bank shall retain, as collateral,
55% of the FCMC equity instead of 50%, as currently scheduled, and any subsequent reductions
in the amount of FCMC equity pledged to the Bank shall be 10%; and provided further that (ii)
if Net Remittances do not reach the minimum Level 1 amount prior to the first anniversary of
the Legacy Effective Date and do not reach the minimum Level 2 amount prior to the third
anniversary of the Legacy Effective Date, then the schedule for release of the equity
interests in FCMC currently pledged to the Bank shall be as follows: (x) upon attaining the
minimum Level 3 amount, the pledged equity interests in FCMC shall reduce 25% (from 70% to
45%); (y) upon attaining the minimum Level 4 amount, the pledged equity interests in FCMC
shall reduce an additional 10% (from 45% to 35%), and (z) upon attaining the minimum Level 5
amount, the pledged equity interests in FCMC shall reduce an additional 10% (from 35% to 25%). |
Among the most significant costs of accomplishing these objectives were:
|
(1) |
|
the possible transfer of ownership of a portion of FCMC, including a minimum of
twenty percent and a maximum of seventy percent, to the Bank at maturity of the
Companys Legacy Credit Agreement with the Bank, unless further extended if the Company
is not otherwise able to satisfy or refinance the Legacy Credit Agreement prior to
maturity; |
|
(2) |
|
the transfer of ten percent of ownership of FCMC to Franklin Holdings principal
stockholder, Thomas J. Axon, as the cost of obtaining certain guarantees and pledges
required by the Bank as a condition of the restructuring, subject to increase to an
additional ten percent should the pledge of common shares of FCMC by Franklin Holding
to the Bank be reduced upon the attainment by FCMC of certain net collection targets
set by the Bank with respect to the Portfolio; |
F-32
|
(3) |
|
entry into a service agreement with respect to FCMCs continued servicing of the
Portfolio that allows the Bank to terminate such servicing and, concomitantly, FCMCs
fee income from servicing the Portfolio; and, |
|
(4) |
|
the Company may incur significant income tax liabilities as a result in part of
a tax basis transfer, at termination of the Legacy Credit Agreement, liquidation of the
Company or any of its direct or indirect subsidiary companies, or certain other Company
events such as a de facto liquidation. The amount of any tax liability that the
Company may incur is not certain since any such calculations need to be performed on a
company by company basis and are influenced by a number of factors including, but not
limited to, the ability to use prior year losses and future results of operations. |
Restructuring Agreements. In connection with the 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 approximately 83% of the Portfolio to a
newly formed Delaware statutory trust (New 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); |
|
(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 represent 83.27961% of the assets transferred to New Trust
considered in the aggregate (such portion, the Bank Contributed Assets) and the Participants
Trust Certificates represent 16.72039% of the assets transferred to New Trust considered in the
aggregate.
F-33
Pursuant to the Transfer and Assignment Agreement, the Franklin Transferring Entities made
certain representations, warranties and covenants to New Trust related to the Portfolio. To the
extent any Franklin Selling Entity breaches any such representations, warranties and covenants and
the Franklin Transferring Entities are unable to cure such breach, New 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 New 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 New 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 Huntington Capital Financing Stock that is equal in value to the Reacquisition
Price (as defined in the Transfer and Assignment Agreement).
2. |
|
Amended and restated substantially all of its outstanding debt. |
Pursuant to the terms of the Amended and Restated Credit Agreement (Legacy) (the Legacy
Credit Agreement), the Company amended and restated substantially all of its indebtedness
currently subject to a certain First Amended and Restated Forbearance Agreement and Amendment to
Credit Agreements, dated December 19, 2008, and a certain First Amended and Restated Tribeca
Forbearance Agreement and Amendment to Credit 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 New Trust in connection with the portion of the Portfolio represented by the Bank Trust Certificates will
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; and (5) Franklin
Holding and FCMC were released from existing guarantees of the Restructured Loans, including
Franklin Holdings pledge of 100% of the outstanding
F-34
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).
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 will increase to 5% over
the rate otherwise applicable to the respective tranche.
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 immediately following the Restructuring.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
Outstanding |
|
|
|
|
|
|
|
|
Principal Amount |
|
|
Principal Amount |
|
|
Applicable Interest |
|
|
Required Monthly |
|
|
at March 31, 2009 |
|
|
at December 31, 2009 |
|
|
Margin Over LIBOR |
|
|
Principal |
|
|
Franklin Asset/Tribeca |
|
|
Franklin Asset/Tribeca |
|
|
(basis points) |
|
|
Amortization |
Tranche A |
|
$ |
838,000,000 |
|
|
$ |
771,000,000 |
|
|
|
225 |
|
|
None |
Tranche B |
|
$ |
407,000,000 |
|
|
$ |
417,000,000 |
|
|
|
275 |
|
|
None |
Tranche C |
|
$ |
125,000,000 |
|
|
$ |
140,000,000 |
|
|
|
N/A |
(1) |
|
None |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrestructured Debt |
|
$ |
41,000,000 |
|
|
$ |
40,000,000 |
|
|
|
|
(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 the
one-month LIBOR plus applicable margins. In accordance with the terms of the Restructuring
Agreements, interest due and unpaid on Tranche B and Tranche C debt is accrued and added to the
debt balance.
F-35
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 Credit Asset
Corporation), (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 New 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 nine months ended
December 31 2009, the outstanding balance of Tranche B increased from $407.5 million to $417.2
million and the outstanding balance of Tranche C increased from $125.0 million to $140.1 million,
due to the addition of accrued interest for which cash was not available to pay the interest due.
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. Some, but not all, of the Legacy Credit Agreement defaults (including defaults
under provisions relating to enforceability, bankruptcy, maintenance of collateral and lien
positions, and certain negative covenants typical for agreements of this nature) will create an
event of default under the Licensing Credit Agreement and the Servicing Agreement (as defined
below). Under such circumstances, the Bank would be entitled to foreclose on all of the assets of
the Company pledged to the Bank, including on Franklin Holdings pledge of 70% of the stock of
FCMC.
The Legacy Credit Agreement is secured by a first priority security interest in (i) the REIT
Shares; (ii) the Participant Trust Certificates; (iii) an undivided 16.72039% interest in the
consumer mortgage loans and REO properties transferred to New Trust; (iv) 70% of all equity
interests in FCMC, and 100% equity interests in all other direct and indirect subsidiaries of
Franklin Holding, pledged by Franklin Holding (subject to partial releases of such equity interests
under Cumulative Collective Targets under the terms relating to the Servicing Agreement); (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) a first mortgage in real
property interests at 6 Harrison Street, Unit 6, New York, New York; (vii) all monies owing to any
borrower from any taxing authority; (viii) any commercial tort or other claim of FCMC, Holding, or
any borrower, including FCMCs right, title and interest in claims and actions with respect to
certain loan purchase agreements and other interactions of FCMC with various entities engaged in
the secondary mortgage market; (ix) certain real property interests of FCMC in respect to the
proprietary leases under the existing Forbearance Agreements if not transferred to New Trust; (x) a
second priority lien on cash collateral held as security for the Licensing Credit Agreement to
FCMC; and (xi) 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. Any security
agreement, acknowledgement or other agreement in respect of a lien or encumbrance on any asset of
New Trust shall be non-recourse in nature and shall permit New Trust to distribute, without
qualification, 83.27961% of all net collections received by New Trust to the REIT Sub and its
subsidiaries irrespective of any event or condition in respect of the Legacy Credit Agreement.
F-36
All collections received by New Trust, provided that an event of default has not occurred and
is continuing, shall go first to the payment of monthly servicing fees, which shall be paid one
month in advance, under 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.
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 have entered
into an Amended and Restated Credit Agreement (Licensing) (the Licensing Credit Agreement) which
includes a credit limit of $13,500,000, composed of a secured (i) revolving line of credit
(Revolving Facility) up to the principal amount outstanding at any time of $2,000,000, (ii) up to
the aggregate stated amount outstanding at any time for letters of credit of $6,500,000, and (iii)
a draw credit facility (Draw Facility) up to the principal amount outstanding at any time of
$5,000,000. As of December 31, 2009, $1,000,000 was outstanding under the revolving facility and
approximately $6.3 million of letters of credit for various state licensing purposes were
outstanding.
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 reduces the draw
credit facility (Draw Facility) from $5.0 million to $4.0 million and extends the termination
date to May 31, 2010, and extends the termination date for the $2.0 million revolving line of
credit and $6.5 million letter of credit facilities to March 31, 2011. The amendment further
provides 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 accordance with the Legacy Credit Agreement, the Bank is currently
entitled to 70% of all amounts distributed by FCMC. The payment of any dividend, distribution or
payment to FCMCs shareholders and the Bank would result in a reduction of FCMCs stockholders
equity and cash available for its operations. All other material terms and conditions of
the Licensing Credit Agreement remain the same, including the collateral, warranties,
representations, covenants and events of defaults.
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 is
used to provide working capital of FCMC, if needed, and amounts drawn and repaid under this
facility cannot be re-borrowed. At the time the credit facility was renewed, $1.0 million was
outstanding under the revolving facility and approximately $6.3 million of letters of credit for
various state licensing purposes were outstanding. There were no amounts due under the Draw
Facility.
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%. Advances under the Draw
Facility shall bear interest at the one-month reserve adjusted LIBOR plus a margin of 6%.
There is a requirement to make monthly payments of interest accrued on the Advances under the
Revolving Facility and the Draw 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.
F-37
The Licensing Credit Agreement, as amended, contains warranties, representations, covenants
and events of default that are customary in transactions similar to the restructuring.
The Licensing Credit Agreement, as amended, 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, (ii) blanket existing lien on all
personal property of FCMC, (iii) a second mortgage in real property interests at 6 Harrison Street,
Unit 6, New York, New York, (iv) a first Mortgage in certain real property interests at 350 Albany
Street, New York, New York; and (v) 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 is guaranteed by Thomas J. Axon, Chairman of the Board of Directors and a
principal stockholder of the Company. Mr. Axons Guaranty is secured by a first priority and
exclusive lien on commercial real estate. 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.
4. |
|
Entered into a servicing agreement with the New Trust. |
The servicing agreement (the Servicing Agreement) governs the servicing by FCMC, as the
servicer (the Servicer) of the Portfolio transferred to New Trust. New Trust and/or the Bank as
the administrator of New Trust (the Administrator) have significant control over all aspects of
the servicing of the Portfolio based on (i) a majority of the Servicers actions or Servicers
utilization of any subservicer or subcontractor is contingent on the Servicer receiving explicit
instructions or consent from New Trust or Administrator, (ii) compliance with work rules and an
approval matrix provided by the Bank and (iii) monthly meetings between New Trust and the Servicer.
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 Servicers servicing fees and servicing advance reimbursements
are paid in advance provided an event of default has not occurred. If an event of default has
occurred, the Servicers servicing fees and servicing advances are the third remittance in the
Waterfall, following remittances for payment of Administrator, custodian and trustee fees.
New Trusts indemnification obligation to the Servicer is limited to the collections from the
Portfolio. In addition, the Servicer will be indemnified by New 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.
The Servicer is required to maintain net worth of approximately $7.6 million and net income
before taxes of $800,000 for the most recent twelve-month period or an event of default will be
deemed to have occurred. In addition to typical servicer events of default and the defaults listed
above, the Servicing Agreement contains the following events of default: (i) certain defaults under
the Legacy Loan Agreement would trigger an event of default under the Servicing Agreement, (ii)
failure to adopt a servicing action plan
as directed by the Administrator would trigger an event of default, (iii) any event of default
under the Licensing Loan Agreement would trigger an event of default under the Servicing Agreement,
and (iv) failure of Servicer to satisfy certain gross collection targets if determined to be the
result of a failed servicing practice as determined by the Bank per a servicing audit would trigger
an event of default.
F-38
The Servicing Agreement shall have an initial term of three years which may be extended for
one or two additional one year periods at the sole discretion of New Trust. During the first year
of the agreement, Servicer shall receive a termination fee for each loan to the extent the
servicing is terminated by the Bank for any reason other than a default under the terms of the
servicing agreement. During the term of the servicing agreement, FCMC may not enter into any other
third-party servicing agreements to service any other assets that could reasonably likely impair
its ability to service the Portfolio without the consent of the Bank, which cannot be unreasonably
withheld.
Forbearance Agreements with Lead Lending Bank
The summary that follows describes the principal terms of the Companys Forbearance Agreements
(the Forbearance) in effect prior to entering into the Restructure Agreements on March 31, 2009
described above, which replaced such Forbearance Agreements, except for the Unrestructured Debt.
On December 28, 2007, the Company entered into a series of agreements with the bank, pursuant
to which the bank agreed to forbear with respect to certain defaults of the Company relating to the
Companys indebtedness to the bank and restructure approximately $1.93 billion of such indebtedness
to the bank and its participant banks, forgave $300 million of such indebtedness for a
restructuring fee of $12 million paid to the bank, and waived certain existing defaults.
The Forbearance did not relate to:
|
|
|
$44.5 million of the Companys indebtedness under the Master Credit and Security
Agreement, dated as of October 13, 2004, as amended, by and among Franklin Credit,
certain subsidiaries of Franklin Credit and the bank; and, |
|
|
|
$44.8 million of Tribecas indebtedness to BOS (USA) Inc., an affiliate of Bank of
Scotland, under the Master Credit and Security Agreement, dated March 24, 2006, by and
among Tribeca, certain subsidiaries and BOS. |
These amounts remained subject to the original terms specified in the applicable agreements
(the Unrestructured Debt).
Debt Restructuring. Pursuant to the Forbearance:
|
|
|
the Company acknowledged, and the bank waived, certain existing defaults under the
Companys existing credit facilities with the bank; |
|
|
|
Franklin Credits indebtedness to the bank was reduced by $300 million and Franklin
Credit paid a restructuring fee of $12 million to the bank; |
|
|
|
the remaining approximately $1.54 billion of outstanding indebtedness to the bank,
including approximately $1.05 billion of outstanding indebtedness of Franklin Credit
and approximately $491.1 million of outstanding indebtedness of Tribeca, was
restructured into six term loans with modified terms and a maturity date of May 15,
2009; and, |
|
|
|
the Company paid all of the accrued interest on its debt outstanding to the bank
through December 27, 2007 and guaranteed payment and performance of the restructured
indebtedness. |
F-39
Terms of the Restructured Indebtedness. The following table summarizes the principal economic
terms of the Companys indebtedness immediately following the Forbearance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applicable |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
Interest |
|
|
Required Monthly |
|
|
Required Monthly |
|
|
|
Outstanding |
|
|
Principal |
|
|
Margin Over |
|
|
Principal |
|
|
Principal |
|
|
|
Principal Amount |
|
|
Amount |
|
|
LIBOR |
|
|
Amortization |
|
|
Amortization |
|
|
|
Franklin Credit |
|
|
Tribeca |
|
|
(basis points) |
|
|
Franklin Credit |
|
|
Tribeca |
|
Tranche A |
|
$ |
600,000,000 |
|
|
$ |
400,000,000 |
|
|
|
225 |
|
|
$ |
5,400,000 |
|
|
$ |
3,600,000 |
|
Tranche B |
|
$ |
323,255,000 |
|
|
$ |
91,142,000 |
|
|
|
275 |
|
|
$ |
750,000 |
|
|
$ |
250,000 |
|
Tranche C |
|
$ |
125,000,000 |
|
|
|
N/A |
|
|
|
N/A |
(1) |
|
|
N/A |
(2) |
|
|
N/A |
|
Tranche D |
|
$ |
1,033,000 |
(3) |
|
|
N/A |
|
|
|
250 |
(4) |
|
|
N/A |
|
|
|
N/A |
|
|
|
Unrestructured Debt |
|
$ |
44,537,000 |
|
|
$ |
44,835,000 |
|
|
|
235-250 |
|
|
$ |
148,000 |
|
|
$ |
498,000 |
|
|
|
|
(1) |
|
The applicable interest rate is fixed at 10% per annum. Interest will be paid in kind
during the term of the forbearance. |
|
(2) |
|
Tranche C requires no principal amortization. All principal is due at maturity. |
|
(3) |
|
Tranche D serves as a revolving credit line with a maximum availability of $5 million,
and an additional $5 million which may be used for issuance of letters of credit. |
|
(4) |
|
Does not include a letter of credit facing fee of 0.125% per annum on the average daily
undrawn amount of each issued and outstanding letter of credit. |
The interest rate under the terms of the Forbearance Agreements that is the basis, or
index, for the Companys interest cost is the one-month LIBOR plus applicable margins.
The following table compares the approximate weighted average interest rate of the Companys
indebtedness immediately prior to and following the Forbearance.
|
|
|
|
|
|
|
|
|
|
|
Total Outstanding |
|
|
|
|
|
|
Principal Amount |
|
|
Weighted Average |
|
|
|
(Franklin Credit and Tribeca)* |
|
|
Applicable Interest Rate |
|
Immediately after restructuring |
|
$1.63 billion |
|
|
7.49 |
% |
Immediately prior to restructuring |
|
$1.93 billion |
|
|
7.71 |
% |
|
|
|
* |
|
Includes the Unrestructured Debt. |
Pursuant to the Forbearance Agreements, the Bank is not required to provide any
additional advances, except for those under the revolving credit or letter of credit portions of
Tranche D.
F-40
Cash Flow. The Forbearance Agreements with respect to Franklin Credit, on the one hand, and
Tribeca, on the other, provide a waterfall with respect to cash flow received in respect of
collateral pledged in support of the related restructured indebtedness, net of approved,
reimbursable operating expenses. Such cash flow is applied in the following order:
|
|
|
to pay interest in respect of Tranche A advances, Tranche B advances and, in the
case of Franklin Credit, Tranche D advances, in that order; |
|
|
|
|
to pay fees related to the Companys letters of credit from the bank; |
|
|
|
|
to pay the minimum required principal payments in respect of Tranche A advances and
Tranche B advances, in that order; |
|
|
|
|
to prepay outstanding Tranche A advances; |
|
|
|
|
to prepay outstanding Tranche B advances; |
|
|
|
|
to prepay Unrestructured Debt (excluding that owed to BOS); |
|
|
|
|
in the case of Franklin Credit, to repay Tranche D advances, any letter of credit
exposure, and any obligations in respect of any interest rate hedge agreements with the
bank; |
|
|
|
|
in the case of Franklin Credit, 90% of the available cash flow to repay interest and
then principal of the Tranche C advances if Franklin Credit is acting as servicer of
the underlying collateral, or 100% otherwise; and, |
|
|
|
|
in the case of Franklin Credit and Tribeca, to pay any advances then outstanding in
respect of the others indebtedness to the bank, other than for Unrestructured Debt. |
Covenants; Events of Default. The Forbearance Agreements contain affirmative and negative
covenants customary for restructurings of this type, including covenants relating to reporting
obligations. The affirmative and negative covenants under all of the credit agreements between the
Company and the bank, other than those under the Franklin Master Credit Agreement and under the
Tribeca Master Credit and Security Agreement, dated as of February 28, 2006, as amended, were
superseded by the covenants in the Forbearance Agreements. Additionally, any provisions of any of
the credit agreements between the Company and the bank that conflict with or are subject of a
discrepancy with the provisions of the Forbearance Agreements will be superseded by the conflicting
provision in the Forbearance Agreements. The Forbearance Agreements include covenants requiring
that:
|
|
|
the Companys reimbursable expenses in the ordinary course of business during each
of the first two months after the date of the agreement will not exceed $2.5 million,
excluding reimbursement of certain bank expenses after the date of the Restructuring,
and thereafter, an amount provided for in an approved budget; |
|
|
|
|
the Company will not originate or acquire mortgage loans or other assets, perform
due diligence or servicing, broker loans, or participate in off-balance sheet joint
ventures and special purpose vehicles, without the prior consent of the bank; |
|
|
|
|
the Company will use its best efforts to obtain interest rate hedges acceptable to
the bank in respect of the $1 billion of Tranche A indebtedness; |
|
|
|
|
the Company will not make certain restricted payments to its stockholders or certain
other related parties; |
|
|
|
|
the Company will not engage in certain transactions with affiliates; |
|
|
|
|
the Company will not incur additional indebtedness other than trade payables and
subordinated indebtedness; |
F-41
|
|
|
the Company together will maintain a minimum consolidated net worth of at least $5
million, plus a certain percentage, to be mutually agreed upon, of any equity
investment in the Company after the date of the Restructuring; |
|
|
|
the Company will together maintain a minimum liquidity of $5 million; |
|
|
|
the Company will maintain prescribed interest coverage ratios based on EBITDA (as
defined) to Interest Expense (as defined); |
|
|
|
the Company will not enter into mergers, consolidations or sales of assets (subject
to certain exceptions); and, |
|
|
|
the Company will not, without the banks consent, enter into any material change in
its capital structure that the bank or a nationally recognized independent public
accounting firm determine could cause a consolidation of its assets with other persons
under relevant accounting regulations. |
The Forbearance Agreements contain events of default customary for facilities of this type,
although they generally provide for no or minimal grace and cure periods.
Servicing. Franklin Credit will continue to service the collateral pledged by the Company
under the Forbearance Agreements, subject to the banks right to replace Franklin Credit as
servicer in the event of a default under the Forbearance Agreements or if the bank determines that
Franklin Credit is not servicing the collateral in accordance with accepted servicing practices, as
defined in the Forbearance Agreements. Franklin Credit may also, with the banks consent, and
plans to, provide to third parties servicing of their portfolios, and other related services, on a
fee paying basis.
Security. The Companys obligations with respect to the restructured Franklin Credit
indebtedness are secured by a first priority lien on all of the assets of Franklin Credit and its
subsidiaries, other than those of Tribeca and Tribecas subsidiaries, and those securing the
Unrestructured Debt. The Companys obligations with respect to the restructured Tribeca
indebtedness are secured by a first priority lien on all of the assets of Tribeca and Tribecas
subsidiaries, except for those assets securing the Unrestructured Debt. In addition, pursuant to a
lockbox arrangement, the bank controls substantially all sums payable to the bank in respect of any
of the collateral.
March 2008 Modifications to Forbearance Agreements and Refinancing of BOS Loan
On March 31, 2008, the Company entered into a series of agreements with the bank, which
amended the Forbearance Agreements, which are referred to as the Forbearance Agreement Amendments.
Pursuant to the Forbearance Agreement Amendments, the bank extended an additional $43.3
million under Tribecas Tranche A and Tranche B facilities, (the Additional Payoff Indebtedness),
to fund the complete payoff of the BOS Loan. Simultaneously, BOS acquired from the bank a
participation interest in Tribecas Tranche A facility equal in amount to the Additional Payoff
Indebtedness. The effect of these transactions was to roll Tribecas indebtedness to BOS into the
Forbearance Agreements, to terminate any obligations of Tribeca under the BOS Loan and to BOS
directly, and to transfer the benefit of the collateral interests previously securing the BOS Loan
to secure the obligations under the Forbearance Agreements. As a result of the Forbearance
Agreement Amendments, Tribecas indebtedness as of March 31, 2008, was $410,860,000 and $98,774,000
for Tranche A and Tranche B, respectively. In connection with the increased debt outstanding under
the Amended Forbearance Agreements, Tribecas required monthly principal
amortization amount under the Tranche A Facility was increased from $3,600,000 to $3,900,000
and that under the Tranche B Facility was increased from $250,000 to $275,000.
F-42
In addition, the Forbearance Amendment Agreements modified the Forbearance Agreements with
respect to the Franklin Master Credit Facility (the Franklin Forbearance Agreement):
|
|
|
to provide that Tranche C interest shall not accrue until the first business day
after all outstanding amounts under the Tranche A facility have been paid in full; |
|
|
|
to increase the Tranche C interest rate to 20% from and after such time it begins to
accrue; |
|
|
|
to extend an additional period of forbearance through July 31, 2008, from May 15,
2008, in respect of the remaining Unrestructured Loans; and, |
|
|
|
to increase the maximum availability under the Tranche D line of credit to
$10,000,000 for working capital and general corporate purposes to enable the Company to
purchase real property in which it may have a lien, and for purposes of meeting
licensing requirements. |
Additionally, the Forbearance Agreement Amendments modified the Forbearance Agreements to (a)
join additional subsidiaries of the Company as borrowers and parties to the forbearance agreements
and other loan documents; and (b) extend the time periods or modify the requirements for the
Company and the Companys other subsidiaries to satisfy certain requirements of the Forbearance
Agreements.
After giving effect to the Forbearance Agreement Amendments, the waterfall of payments has
been adjusted to provide that periodic amounts constituting additional periodic payments of
interest required under any interest hedging agreement may be paid after interest on the Tranche A
and Tranche B advances, payments of interest and principal with respect to Tranche C advance shall
be deferred until after payment of the Tranche D advance, and to provide for cash payment reserves
for certain contractual obligations, taxes and $10,000,000 of cash payment reserves in the
aggregate for fees, expenses, required monthly principal amortization and interest owing to the
Bank.
The bank also waived any defaults under the Forbearance Agreements for the period through and
including March 31, 2008, and consented to the origination by the Company of certain mortgage loans
to refinance existing mortgage loans which the bank has approved for purchase and subsequent sale
in the secondary market or which the bank determines are qualified for purchase by Fannie Mae or
Freddie Mac.
August 2008 Modification to Forbearance Agreements
The Company entered into additional amendments to the Forbearance Agreements, effective August
15, 2008, whereby, among other things, (a) the minimum net worth covenant was eliminated, (b) the
prescribed interest coverage ratios based on EBITDA were changed to ratios based on actual cash
flows, (c) cash flows available for debt service shall include all of the Companys cash receipts,
including its cash revenues from providing subservicing and other services for third parties, and
(d) the existing extension of an additional period of forbearance through July 31, 2008 in respect
of the remaining Unrestructured Debt was extended to December 31, 2008, and absent the occurrence
of an event of default, the bank agreed not to initiate collection proceedings against the Company
in respect of any of the Unrestructured Debt. In addition, all identified forbearance defaults,
including the minimum net worth covenant, that existed at the time of the August 2008 Modification
were waived.
F-43
Unrestructured Debt
The Company failed to make the minimum monthly debt service payments due on July 5, 2008
through September 5, 2008 in the aggregate amount of $1.3 million from the cash flows received from
the collateral supporting the Unrestructured Debt, as required by the Master Credit Agreement in
respect of the Unrestructured Debt (remaining debt due to a participant bank that is not a party to
the Forbearance Agreements). The Company, however, made up the aggregate shortfall of
approximately $409,000 in the required minimum payments from its own cash account during 2008.
December 2008 Modification to Forbearance Agreements
Concurrent with the merger and the Companys reorganization into a holding company structure,
and the reallocation of owned assets, the Company entered into a series of agreements with
Huntington (the Amendments to the Forbearance Agreements), pursuant to which the Company amended
its loan agreements with Huntington as follows:
|
|
|
Franklin Asset became a borrower under the Companys lending agreements with
Huntington; |
|
|
|
the Trusts became guarantors for the Borrowers indebtedness to Huntington; |
|
|
|
FCMC, Franklin Asset and the Trusts each pledged its assets, including any equity
interests in any of the Borrowers, as security for the Borrowers indebtedness to
Huntington; |
|
|
|
Franklin Servicing LLC agreed to service, if necessary, the Companys mortgage loans
in selected states; |
|
|
|
the Company agreed to maintain in effect one or more interest rate hedge agreements
in an aggregate notional principal amount of not less than $1 billion, or such lesser
amount as Huntington in its sole discretion may approve; |
|
|
|
the Companys Tranche D facility was amended to provide for (i) a revolving credit
facility and letter of credit facility in the aggregate outstanding amount of $10
million, with a sublimit of $5 million, and, in addition, (ii) a separate letter of
credit facility pursuant to which Huntington may issue letters of credit in its
discretion, with a sublimit of $5.5 million; |
|
|
|
Huntington agreed to waive the Companys breach of covenant to comply with all laws,
rules and regulations to the extent such breach results from the Companys failure to
satisfy a minimum net worth requirement; and, |
|
|
|
the covenant requiring FCMC and each of the Borrowers to maintain liquidity of at
least $5 million was deleted. |
In addition, effective immediately after the filing of the certificate of merger:
|
|
|
Franklin Holding became a guarantor for the Borrowers indebtedness to Huntington;
and, |
|
|
|
Franklin Holding pledged its assets, including any equity interests in any of the
Borrowers, as security for the Borrowers indebtedness to Huntington. |
F-44
The Forbearance Agreements and the March 2009 Restructuring and Modifications to the Franklin
Forbearance Agreement in April, August and November 2009, and on March 26, 2010
The Tribeca forbearance agreement entered into with the Bank was replaced effective March 31,
2009 by the Restructuring Agreements. The Franklin Forbearance Agreement, however, remains in
effect until March 31, 2010, but only with respect to the Companys debt that was not restructured
(the Unrestructured Debt) effective March 31, 2009 under the Restructuring Agreements, which was
approximately $39.5 million at December 31, 2009. The Franklin Forbearance Agreement was extended
on March 26, 2010 to June 30, 2010.
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 remains
subject to the original terms of the Franklin forbearance agreement entered into with the Bank in
December 2007 and subsequent amendments thereto (the Franklin Forbearance Agreement) and the
Franklin 2004 master credit agreement. On April 20, August 10, November 13, 2009 and March 26,
2010, Franklin Holding, and certain of its direct and indirect subsidiaries, including FCMC and
Franklin Credit Asset Corporation (Franklin Asset) entered into amendments to the Franklin
Forbearance Agreement and Franklin 2004 master credit agreement (the Amendments) with the Bank
relating to the Unrestructured Debt whereby the term of forbearance period, which had been
previously extended by the Bank, was extended until June 30, 2010. The Bank again agreed to
forebear 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. During the forbearance period, the Bank, absent the occurrence and
continuance of a forbearance default other than an Identified Forbearance Default, will not
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. In addition, FCMC is
not obligated to the Bank with respect to the Unrestructured Debt and any references to FCMC in the
Franklin 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, the Bank, with notice, could 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 of FCMC (except
for a first lien of the Bank on an office condominium unit and a second priority lien of the Bank
on cash collateral held as security under the Licensing Credit Agreement) and the unpledged portion
of FCMCs stock.
The Franklin Forbearance Agreement is subject to a scheduled maturity date of June 30, 2010.
At December 31, 2009, FCMC owed $1 million under the revolving line of its Licensing Credit
Agreement with the Bank, which is shown in the Companys financial statements as Financing
agreement. See Note 9, Notes Payable March 2009 Restructuring. At December 31, 2008, the
Company had $2.0 million outstanding under a credit agreement with the Bank that was replaced by
the Licensing Credit Agreement. See Note 9.
F-45
11. |
|
NONCONTROLLING INTEREST |
For the Companys consolidated majority-owned subsidiary in which the Company owns less than
100% of the total outstanding common shares of stock (FCMC), the Company recognizes a minority
interest for the ownership interest of the minority interest holder, the Companys President and
Chairman, and principal stockholder, Thomas J. Axon. The minority interest represents the minority
stockholders proportionate share of the equity of FCMC. At December 31, 2009, the Company owned
90% of FCMCs capital stock, and Mr. Axon owned 10%. The 10% 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 minority interest for the year ended December 31,
2009 is as follows:
|
|
|
|
|
|
|
2009 |
|
Balance as of January 1, 2009 |
|
$ |
|
|
|
|
|
|
|
Transfer of 10% ownership |
|
|
1,710,490 |
|
Net income attributed to minority interest |
|
|
267,519 |
|
Non-dividend distribution |
|
|
(224,500 |
) |
Noncontrolling interest distribution |
|
|
(96,234 |
) |
|
|
|
|
|
|
|
|
|
Noncontrolling interest in Subsidiary |
|
$ |
1,675,275 |
|
|
|
|
|
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 restructuring
entered into by the Company and certain of its wholly-owned direct and indirect subsidiaries on
March 31, 2009. Mr. Axon is also entitled to a grant of up to an additional ten percent of the
common stock of FCMC from the Company should the pledge of common shares of FCMC by the Company to
the Bank, as part of the restructuring, be reduced upon the attainment by FCMC of certain net
collection targets set by the Bank. See Note 9.
F-46
Components of the (benefit) for income taxes for the years ended December 31, 2009 and 2008
are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Current (benefit)/provision: |
|
|
|
|
|
|
|
|
Federal |
|
$ |
(3,719,010 |
) |
|
$ |
(1,088,215 |
) |
State and local |
|
|
638,762 |
|
|
|
306,464 |
|
|
|
|
|
|
|
|
|
|
|
(3,080,248 |
) |
|
|
(781,751 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision/(benefit): |
|
|
|
|
|
|
|
|
Federal |
|
|
82,619,163 |
|
|
|
(162,291,345 |
) |
State and local |
|
|
7,087,080 |
|
|
|
(13,921,367 |
) |
|
|
|
|
|
|
|
|
|
|
89,706,243 |
|
|
|
(176,212,712 |
) |
|
|
|
|
|
|
|
(Decrease)/increase
in valuation allowance |
|
|
(89,465,511 |
) |
|
|
175,669,205 |
|
|
|
|
|
|
|
|
(Benefit) |
|
$ |
(2,839,516 |
) |
|
$ |
(1,325,258 |
) |
|
|
|
|
|
|
|
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, 2009 and 2008 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Tax determined by applying
U.S. statutory rate to income |
|
$ |
(122,623,091 |
) |
|
$ |
(162,653,941 |
) |
Increase in taxes resulting from: |
|
|
|
|
|
|
|
|
State and local taxes,
net of Federal benefit |
|
|
(7,156,807 |
) |
|
|
(13,615,221 |
) |
(Decrease)/increase
in valuation allowance |
|
|
(89,465,511 |
) |
|
|
175,669,205 |
|
Basis adjustment |
|
|
215,513,346 |
|
|
|
|
|
Change in federal tax estimate |
|
|
856,857 |
|
|
|
(1,124,961 |
) |
Non-deductible expenses |
|
|
35,690 |
|
|
|
399,660 |
|
|
|
|
|
|
|
|
|
|
$ |
(2,839,516 |
) |
|
$ |
(1,325,258 |
) |
|
|
|
|
|
|
|
F-47
The following table provides a reconciliation of the beginning and ending amounts of the
Companys unrecognized tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Unrecognized tax liabilities,
January 1 |
|
$ |
702,442 |
|
|
$ |
490,684 |
|
|
|
|
|
|
|
|
|
|
Increase as a result of tax position
taken in prior year |
|
|
240,732 |
|
|
|
211,758 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax liabilities,
December 31 |
|
$ |
943,174 |
|
|
$ |
702,442 |
|
|
|
|
|
|
|
|
During the year 2009, the Company recorded an increase in the unrecognized tax liability
in the amount of $241,000 in its consolidated statement of operations. The Company is not aware of
any tax positions for unrecognized tax benefits 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 2029.
The Company is currently under examination by the Internal Revenue Service for the tax years 2005,
2006 and 2007.
The tax effects of temporary differences that gave rise to deferred income tax assets and
liabilities at December 31, 2009 and 2008 are presented below:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Deferred loan costs |
|
$ |
|
|
|
$ |
647,679 |
|
Restricted stock |
|
|
35,550 |
|
|
|
102,015 |
|
Loans to subsidiary companies |
|
|
6,629,225 |
|
|
|
6,629,226 |
|
Prepaid expenses, other assets |
|
|
|
|
|
|
363,633 |
|
Other |
|
|
132,590 |
|
|
|
154,190 |
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
$ |
6,797,365 |
|
|
$ |
7,896,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Loan basis |
|
$ |
8,348,718 |
|
|
$ |
149,087,786 |
|
Derivative liabilities |
|
|
4,431,875 |
|
|
|
9,991,237 |
|
Tax hedge |
|
|
1,048,315 |
|
|
|
|
|
Other real estate owned |
|
|
|
|
|
|
8,384,705 |
|
Investment in REIT stock |
|
|
53,144,236 |
|
|
|
|
|
Acquisition costs |
|
|
264,416 |
|
|
|
360,476 |
|
State net operating loss carryforwards |
|
|
8,331,997 |
|
|
|
7,807,847 |
|
Deferred costs |
|
|
1,351,325 |
|
|
|
|
|
Federal net operating loss carryforwards |
|
|
24,965,450 |
|
|
|
21,373,745 |
|
Other |
|
|
771,464 |
|
|
|
648,766 |
|
|
|
|
|
|
|
|
Deferred tax assets |
|
$ |
102,657,796 |
|
|
$ |
197,654,562 |
|
|
|
|
|
|
|
|
Valuation allowance |
|
|
(95,860,431 |
) |
|
|
(189,757,819 |
) |
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
F-48
The Company recorded a valuation allowance of $95.9 million, inclusive of $4.4 million
that was recorded in other comprehensive income, and $189.8 million, inclusive of $9.9 million that
was recorded in other comprehensive income, as of December 31, 2009 and 2008, 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, 2009, the Company had tax net operating loss carryforwards with various
states totaling approximately $140.3 million. As of December 31, 2009, the Company had federal tax
net operating loss carryforwards of approximately $73.4 million. The net operating loss
carryforwards expire in various years beginning in 2015 through 2029.
As part of the 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 amount of the tax basis in the assets
transferred approximated $1.1 billion.
13. |
|
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, 2009 and 2008. 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 |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Risk-free interest rate |
|
|
|
|
|
|
2.94 |
% |
|
|
3.57 |
% |
|
|
3.57 |
% |
Weighted average volatility |
|
|
|
|
|
|
103.06 |
|
|
|
110.53 |
|
|
|
102.23 |
|
Expected lives (years) |
|
|
|
|
|
|
10.0 |
|
|
|
10.0 |
|
|
|
10.0 |
|
F-49
Transactions in stock options for the years ended December 31, 2009 and 2008 under the
plan are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Outstanding options, beginning |
|
|
582,000 |
|
|
$ |
2.78 |
|
|
|
370,000 |
|
|
$ |
3.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted |
|
|
12,000 |
|
|
|
0.30 |
|
|
|
262,000 |
|
|
|
1.71 |
|
Options cancelled |
|
|
(293,000 |
) |
|
|
1.63 |
|
|
|
(50,000 |
) |
|
|
2.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options, end |
|
|
301,000 |
|
|
|
3.81 |
|
|
|
582,000 |
|
|
|
2.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options unvested |
|
|
(60,000 |
) |
|
|
1.75 |
|
|
|
(250,000 |
) |
|
|
1.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, end |
|
|
241,000 |
|
|
$ |
4.32 |
|
|
|
332,000 |
|
|
$ |
3.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the weighted average remaining contractual term and aggregate
intrinsic value of options outstanding and exercisable was 4.38 years and $0.
The Company has the following options outstanding at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
Number |
|
Range of exercise price of options: |
|
Outstanding |
|
|
Exercisable |
|
$0.30 |
|
|
12,000 |
|
|
|
12,000 |
|
$0.75 |
|
|
84,000 |
|
|
|
84,000 |
|
$0.85 |
|
|
5,000 |
|
|
|
5,000 |
|
$0.89 |
|
|
12,000 |
|
|
|
12,000 |
|
$1.04 |
|
|
6,000 |
|
|
|
6,000 |
|
$1.75 |
|
|
80,000 |
|
|
|
20,000 |
|
$2.25 |
|
|
11,000 |
|
|
|
11,000 |
|
$3.55 |
|
|
12,000 |
|
|
|
12,000 |
|
$4.98 |
|
|
15,000 |
|
|
|
15,000 |
|
$7.73 |
|
|
15,000 |
|
|
|
15,000 |
|
$12.85 |
|
|
15,000 |
|
|
|
15,000 |
|
$13.75 |
|
|
34,000 |
|
|
|
34,000 |
|
|
|
|
|
|
|
|
TOTAL OPTIONS |
|
|
301,000 |
|
|
|
241,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price |
|
$ |
3.81 |
|
|
$ |
4.32 |
|
Compensation cost related to the Companys stock option awards was $22,509 for the year
ended December 31, 2009. Compensation cost related to the Companys stock option awards was
$50,964 for the year ended December 31, 2008. As of December 31, 2009, unrecognized compensation
cost related to the Companys stock option awards was $44,259, which will be recognized over a
weighted average period of 2.33 years.
F-50
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, 2009 and
2008 and changes during the periods then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
Restricted Stock |
|
Shares |
|
|
Fair Value |
|
|
Shares |
|
|
Fair Value |
|
Outstanding unvested grants, beginning of year |
|
|
31,250 |
|
|
$ |
7.90 |
|
|
|
65,000 |
|
|
$ |
8.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested |
|
|
(18,750 |
) |
|
$ |
7.90 |
|
|
|
(33,750 |
) |
|
$ |
8.54 |
|
Canceled |
|
|
(12,500 |
) |
|
$ |
7.90 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding unvested grants, end of year |
|
|
|
|
|
$ |
|
|
|
|
31,250 |
|
|
$ |
7.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2009, the total fair value of the Companys restricted stock that vested was
$148,124.
As of December 31, 2009, all compensation cost related to the Companys restricted stock
awards has been recognized.
F-51
Prior to the Restructuring in March 2009, the Company had two reportable operating segments:
(i) portfolio asset acquisition and resolution; and (ii) mortgage banking. The portfolio asset
acquisition and resolution segment, prior to 2008, acquired performing, reperforming or
nonperforming notes receivable and promissory notes from financial institutions and mortgage and
finance companies, and serviced and collected on such notes receivable. The mortgage-banking
segment, prior to 2008, originated, or purchased, subprime residential mortgage loans for
individuals whose credit histories, income and other factors caused them to be classified as
subprime borrowers. As a result of the Restructuring, the Company no longer had separate
reportable operating segments and, therefore, the Companys segment information is presented only
for the year 2008. The Companys management evaluated the performance of each segment in 2008
based on profit or loss from operations before unusual and extraordinary items and income taxes.
|
|
|
|
|
PORTFOLIO ASSET ACQUISITION |
|
|
|
AND RESOLUTION |
|
2008 |
|
REVENUES: |
|
|
|
|
Interest income |
|
$ |
72,586,631 |
|
Purchase discount earned |
|
|
2,555,543 |
|
(Loss) on sale of other real estate owned |
|
|
(25,466 |
) |
Other |
|
|
8,212,846 |
|
|
|
|
|
Total revenues |
|
|
83,329,554 |
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
Interest expense |
|
|
52,064,878 |
|
Collection, general and administrative |
|
|
36,620,553 |
|
Provision for loan losses |
|
|
393,367,806 |
|
Amortization of deferred financing costs |
|
|
606,006 |
|
Depreciation |
|
|
721,834 |
|
|
|
|
|
Total operating expenses |
|
|
483,381,077 |
|
|
|
|
|
|
|
|
|
|
(LOSS) BEFORE PROVISION
FOR INCOME TAXES |
|
$ |
(400,051,523 |
) |
|
|
|
|
F-52
|
|
|
|
|
MORTGAGE BANKING |
|
2008 |
|
REVENUES: |
|
|
|
|
Interest income |
|
$ |
20,513,971 |
|
Purchase discount earned |
|
|
34,631 |
|
Gain on sale of other real estate owned |
|
|
2,239,464 |
|
Other |
|
|
3,811,646 |
|
|
|
|
|
Total revenues |
|
|
26,599,712 |
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
Interest expense |
|
|
26,398,283 |
|
Collection, general and administrative |
|
|
11,867,387 |
|
Provision for loan losses |
|
|
64,754,183 |
|
Amortization of deferred financing costs |
|
|
377,651 |
|
Depreciation |
|
|
816,631 |
|
|
|
|
|
Total operating expenses |
|
|
104,214,135 |
|
|
|
|
|
|
|
|
|
|
(LOSS) BEFORE PROVISION
FOR INCOME TAXES |
|
$ |
(77,614,423 |
) |
|
|
|
|
|
|
|
|
|
OTHER SELECTED SEGMENT RESULTS
|
|
|
|
|
CONSOLIDATED ASSETS: |
|
|
|
|
Portfolio asset acquisition and resolution |
|
$ |
598,239,478 |
|
Mortgage banking |
|
|
424,143,964 |
|
|
|
|
|
Consolidated assets |
|
$ |
1,022,383,442 |
|
|
|
|
|
|
|
|
|
|
TOTAL ADDITIONS TO BUILDING, FURNITURE AND EQUIPMENT: |
|
|
|
|
Portfolio asset acquisition and resolution |
|
$ |
2,042,436 |
|
Mortgage banking |
|
|
|
|
|
|
|
|
Consolidated additions to building, furniture and equipment |
|
$ |
2,042,436 |
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED REVENUE: |
|
|
|
|
Portfolio asset acquisition and resolution |
|
$ |
83,329,554 |
|
Mortgage banking |
|
|
26,599,712 |
|
|
|
|
|
Consolidated revenue |
|
$ |
109,929,266 |
|
|
|
|
|
|
|
|
|
|
CONSOLIDATED NET (LOSS)/INCOME: |
|
|
|
|
Portfolio asset acquisition and resolution |
|
$ |
(398,726,265 |
) |
Mortgage banking |
|
|
(77,614,423 |
) |
|
|
|
|
Consolidated net (loss) |
|
$ |
(476,340,688 |
) |
|
|
|
|
F-53
15. |
|
CERTAIN CONCENTRATIONS |
Third Party Servicing Agreements As a result of the March 2009 Restructuring and
the Reorganization that took effect December 19, 2008, FCMC, the Companys operating business is
conducted principally 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 recovery servicing, for third parties. The portfolios serviced
for other entities, as of December 31, 2009, were heavily concentrated with Huntington (loans
previously acquired and originated by Franklin and transferred to the Trust). As of December 31,
2009, FCMC had two significant servicing contracts with third parties to service 1-4 family
mortgage loans and owned real estate, one with Huntington and the other with Bosco, a related
party. At December 31, 2009, we serviced and provided recovery collection services on a total
population of approximately 37,000 loans for Huntington and Bosco, and relatively small pools of
loans under recovery collection contracts, whereby we receive fees based solely on a percentage of
amounts collected, for several other entities. The loans serviced for Huntington represented more
than 92% of the total loans serviced for third parties at December 31, 2009.
Additionally, under the terms of the Restructuring Agreements with the Bank, the Bank has the
right to replace us as servicer for any reason and to sell, on a servicing released basis without
an assignment of the Servicing Agreement, the assets we transferred to the Trust (subject to a
termination fee if servicing is terminated by the Bank prior to March 31, 2010, for any reason
other than a default under the Servicing Agreement).
Legacy Loan Portfolios The following table summarizes percentages of total principal
balances by the geographic location of properties securing the legacy loans in our portfolios of
notes receivable and loans held for investment at December 31, 2008:
|
|
|
|
|
Location |
|
December 31, 2008 |
|
California |
|
|
14.72 |
% |
New York |
|
|
11.22 |
% |
New Jersey |
|
|
9.44 |
% |
Florida |
|
|
8.85 |
% |
Pennsylvania |
|
|
4.53 |
% |
Texas |
|
|
4.53 |
% |
Maryland |
|
|
3.31 |
% |
Ohio |
|
|
3.30 |
% |
Illinois |
|
|
3.19 |
% |
Michigan |
|
|
2.84 |
% |
All Others |
|
|
34.07 |
% |
|
|
|
|
|
|
|
100.00 |
% |
|
|
|
|
Such real estate mortgage loans held were collateralized by real estate with a
concentration in these states. Accordingly, the collateral value of a substantial portion of the
Companys real estate mortgage loans held and real estate acquired through foreclosure was
susceptible to changes in market conditions in these states.
Financing Substantially all of the Companys existing debt is with one financial
institution.
F-54
16. |
|
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 2009 and 2008 amounted to $1,204,057 and
$1,973,322, respectively.
The combined future minimum lease payments as of December 31, 2009 are as follows:
|
|
|
|
|
Year Ended |
|
Amount |
|
2010 |
|
$ |
1,633,277 |
|
2011 |
|
|
1,618,085 |
|
2012 |
|
|
1,597,107 |
|
2013 |
|
|
1,597,107 |
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
$ |
6,445,576 |
|
|
|
|
|
As part of its acquisition of the wholesale mortgage origination unit in February 2007,
Tribeca assumed the lease obligation for office space located in Bridgewater, New Jersey, for
approximately 14,070 square feet. The term of the lease is through January 31, 2011 at
approximately $20,621 per month. At December 31, 2007, the space was not being utilized by
Tribeca, and was being marketed for sublease. Due to adverse market conditions for rental
commercial space of this type, the remaining lease payments of $596,774 were accrued and other
non-usable fixed assets of $208,991 were written off in 2008.
Substantially all of the Companys office equipment is leased under multiple operating leases.
The combined future minimum lease payments as of December 31, 2009 are as follows:
|
|
|
|
|
Year Ended |
|
Amount |
|
2010 |
|
$ |
73,314 |
|
2011 |
|
|
31,476 |
|
2012 |
|
|
31,476 |
|
2013 |
|
|
31,476 |
|
2014 |
|
|
31,476 |
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
$ |
199,218 |
|
|
|
|
|
Capital Leases The Company entered into a lease for office furniture for its new
corporate office in Jersey City 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, was originally $916,890. Accumulated amortization of the leased furniture at
December 31, 2009 was $809,920. Amortization of assets under capital leases is included on the
Companys consolidated statements of operations in depreciation.
F-55
The combined future minimum lease payments required under the capital lease as of December 31,
2009 are as follows:
|
|
|
|
|
Year Ended |
|
Amount |
|
2010 |
|
$ |
96,838 |
|
|
|
|
|
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.
17. |
|
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
restructuring entered into by the Company and certain of its wholly-owned direct and indirect
subsidiaries on March 31, 2009. Mr. Axon is also entitled to a grant of up to an additional ten
percent of the common stock of FCMC from the Company should the pledge of common shares of FCMC by
the Company to the Bank, as part of the restructuring, be reduced upon the attainment by FCMC of
certain net collection targets set by the Bank. See Note 9.
Bosco Servicing Agreement On May 28, 2008, FCMC entered into various agreements, including
a servicing agreement, to service on a fee-paying basis approximately $245 million in residential
home equity line of credit mortgage loans for Bosco Credit LLC (Bosco). Bosco was organized by
FCMC, and the membership interests in Bosco 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. The loans that are subject to the
servicing agreement were acquired by Bosco on May 28, 2008, and the Bank is the administrative
agent for the lenders to Bosco. FCMC also provided the loan analysis, due diligence and other
services for Bosco on a fee-paying basis for the loans acquired by Bosco. FCMCs servicing
agreement was approved by the Companys Audit Committee.
FCMC began servicing the Bosco portfolio in June 2008. Included in the Companys consolidated
revenues were servicing fees recognized from servicing the Bosco portfolio of $2,014,000 and
$1,813,000 for the twelve months ended December 31, 2009 and 2008, respectively. In addition,
included in the Companys consolidated revenues were fees recognized for various administrative
services provided to Bosco by FCMC in the amount of $180,000 for the twelve months ended December
31, 2008. The Company did not recognize any administrative fees in 2009 and wrote off as
uncollectible the administrative fees recognized in 2008.
On February 27, 2009, at the request of the Bosco Lenders, FCMC adopted a revised fee
structure, which was approved by the Companys 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 Boscos 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 to repay its
third-party indebtedness.
On October 29, 2009, at the additional request of the Bosco Lenders in an effort to maximize
cash flow to the Bosco Lenders and to avoid payment defaults by Bosco, the revised fee structure
relating to deferred fees was adjusted through an amendment to the loan servicing agreement with
Bosco (the Bosco Amendment), which was approved by the Companys Audit Committee.
F-56
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
(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 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.
Further, the Bosco Amendment provides that FCMC will not perform or be required to perform any
field contact services for Bosco or make any servicing advances on behalf of Bosco that
individually or in the aggregate would result in a cost or expense to Bosco of more than $10,000
per month, without the prior written consent and approval of the Lenders. The Bosco Amendment did
not alter FCMCs right to receive a certain percentage of collections after Boscos indebtedness to
the Lenders has been repaid in full, the Bosco equity holders have been repaid in full the equity
investment in Bosco made prior to Bosco entering into the loan agreement with the Lenders, and the
Lenders and Boscos equity holders have received a specified rate of return on their debt and
equity investments.
The amount and timing of ancillary fees owed to the Company is the subject of a good faith
dispute between the Company and the Managing Member of Bosco, Thomas Axon (the Companys Chairman
and President). However, even if the parties can resolve their difference amicably, there are no
funds available to Bosco for payment for such services, since all funds from collections are
required by Boscos 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.
On December 31, 2009, the Company wrote-off $372,000 in additional aged receivables, due to
non-payment, consisting of (i) legal costs incurred by FCMC in 2008 related to the acquisition by
Bosco of its loan portfolio and entry into a servicing agreement with Bosco; (ii) expenses for loan
analysis, due diligence and other services performed for Bosco by FCMC in 2008 related to the
acquisition by Bosco of the loan portfolio; and (iii) additional internal accounting costs for
services provided to Bosco by FCMC through June 30, 2009. In addition, FCMC has not accrued fees
for accounting costs estimated to be approximately $61,000 for the period of June 1, 2009 to
December 31, 2009.
FCMC determined to accept the deferrals and other amendments described above with respect to
its Bosco relationship in recognition of the performance of the Bosco 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, 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 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.
F-57
Exclusive of the amounts written off related to the Bosco serviced loans, for the twelve
months ended December 31, 2009, the Company recognized a total of $2,014,000 in servicing fees for
servicing the Bosco portfolio, of which $299,000 was not paid to FCMC and therefore deferred per
the Bosco Amendment. As of December 31, 2009, FCMC, had $409,000 of accrued and unpaid servicing
fees due from Bosco (effective August 1, 2009, Franklins servicing fee income is recognized when
cash is received), and $190,000 of reimbursable third party expenses incurred by FCMC in the
servicing and collection of the Bosco loans.
On March 4, 2010, FCMC entered into an agreement with Bosco to provide ancillary services not
covered by the Servicing Agreement 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. FCMC had performed such
services for Bosco on a trial basis under a pass-through cost arrangement, with total expenses to
Bosco of approximately $111,000 as of December 31, 2009.
Other Significant Related Party Transactions with the Companys Chairman At December 31,
2009 and 2008, respectively, the Company had an outstanding receivable from an affiliate, RMTS
Associates, of $1,781 and $12,388, respectively. This receivable represents various operating
expenses that are paid by the Company and then reimbursed by RMTS.
On August 18, 2008, FCMCs audit committee authorized a 5% commission to Hudson Servicing
Solutions, LLC (Hudson), a procurer of force-placed insurance products for the mortgage industry,
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 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 as provided for in this collection
services agreement.
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 twenty five percent 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.
F-58
18. |
|
QUARTERLY FINANCIAL INFORMATION (Unaudited) |
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Quarters |
|
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
First |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
11,936,927 |
|
|
$ |
13,030,707 |
|
|
$ |
16,676,815 |
|
|
$ |
16,454,325 |
|
Dividend income |
|
|
10,712,559 |
|
|
|
10,678,495 |
|
|
|
10,629,299 |
|
|
|
|
|
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 |
|
|
(8,640,854 |
) |
|
|
(4,186,598 |
) |
|
|
(14,393,966 |
) |
|
|
|
|
Gain on sale of other real estate owned |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
374,344 |
|
Servicing fees and other income |
|
|
589,222 |
|
|
|
1,460,381 |
|
|
|
1,717,609 |
|
|
|
2,509,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
14,597,854 |
|
|
|
20,982,985 |
|
|
|
45,179,757 |
|
|
|
(325,515,240 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
18,277,248 |
|
|
|
21,202,037 |
|
|
|
17,117,236 |
|
|
|
17,683,156 |
|
Collection, general and administrative |
|
|
5,948,409 |
|
|
|
8,721,929 |
|
|
|
6,905,713 |
|
|
|
18,692,995 |
|
Provision for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169,479 |
|
Amortization of deferred financing costs |
|
|
37,741 |
|
|
|
43,810 |
|
|
|
288,577 |
|
|
|
166,768 |
|
Depreciation |
|
|
178,361 |
|
|
|
153,509 |
|
|
|
157,892 |
|
|
|
156,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
24,441,759 |
|
|
|
30,121,285 |
|
|
|
24,469,418 |
|
|
|
36,869,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income before income taxes |
|
|
(9,843,905 |
) |
|
|
(9,138,300 |
) |
|
|
20,710,339 |
|
|
|
(362,384,286 |
) |
(Tax benefit)/provision for income taxes |
|
|
(3,511,156 |
) |
|
|
238,475 |
|
|
|
433,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income |
|
|
(6,332,749 |
) |
|
|
(9,376,775 |
) |
|
|
20,277,174 |
|
|
|
(362,384,286 |
) |
Net (income)/loss attributed
to noncontrolling interest |
|
|
(131,231 |
) |
|
|
192,670 |
|
|
|
206,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income attributed
to common stockholders |
|
$ |
(6,201,518 |
) |
|
$ |
(9,569,445 |
) |
|
$ |
20,071,094 |
|
|
$ |
(362,384,286 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.77 |
) |
|
$ |
(1.20 |
) |
|
$ |
2.51 |
|
|
$ |
(45.33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
F-59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Quarters |
|
|
|
Fourth |
|
|
Third |
|
|
Second |
|
|
First |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
15,052,778 |
|
|
$ |
19,122,096 |
|
|
$ |
26,605,598 |
|
|
$ |
32,320,130 |
|
Purchase discount earned |
|
|
456,032 |
|
|
|
547,392 |
|
|
|
805,409 |
|
|
|
781,341 |
|
Gain on sale of other real estate owned |
|
|
1,087,638 |
|
|
|
743,653 |
|
|
|
291,891 |
|
|
|
90,816 |
|
Servicing fees and other income |
|
|
3,120,525 |
|
|
|
3,706,094 |
|
|
|
3,175,150 |
|
|
|
2,022,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
19,716,973 |
|
|
|
24,119,235 |
|
|
|
30,878,048 |
|
|
|
35,215,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
18,411,150 |
|
|
|
18,267,375 |
|
|
|
18,902,627 |
|
|
|
22,882,009 |
|
Collection, general and administrative |
|
|
13,856,693 |
|
|
|
12,702,951 |
|
|
|
12,305,127 |
|
|
|
9,623,169 |
|
Provision for loan losses |
|
|
158,413,814 |
|
|
|
10,560,709 |
|
|
|
280,491,641 |
|
|
|
8,655,825 |
|
Amortization of deferred financing costs |
|
|
111,775 |
|
|
|
297,917 |
|
|
|
318,126 |
|
|
|
255,839 |
|
Depreciation |
|
|
676,431 |
|
|
|
247,732 |
|
|
|
297,676 |
|
|
|
316,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
191,469,863 |
|
|
|
42,076,684 |
|
|
|
312,315,197 |
|
|
|
41,733,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) before income taxes |
|
|
(171,752,890 |
) |
|
|
(17,957,449 |
) |
|
|
(281,437,149 |
) |
|
|
(6,518,458 |
) |
Income tax (benefit) |
|
|
(1,325,258 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) |
|
$ |
(170,427,632 |
) |
|
$ |
(17,957,449 |
) |
|
$ |
(281,437,149 |
) |
|
$ |
(6,518,458 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(21.32 |
) |
|
$ |
(2.25 |
) |
|
$ |
(35.26 |
) |
|
$ |
(0.82 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Extension to Forbearance Agreement
On March 26, 2010, Franklin Holding, and certain of its direct and indirect subsidiaries,
including Franklin Asset (but not FCMC), entered into a fourth amendment to the Franklin
Forbearance Agreement and the Franklin 2004 master credit agreement with the Bank (the Fourth
Amendment), effective as of March 26, 2010, relating to approximately $39.5 million of the
Companys indebtedness to the Bank (the Unrestructured Debt), which had been the remaining legacy
indebtedness to the Bank not restructured on March 31, 2009. FCMC is not obligated to the Bank
with respect to the Unrestructured Debt.
Under the Fourth Amendment, the forbearance period with respect to the Unrestructured Debt has
been extended from March 31, 2010 until June 30, 2010, and the Bank has agreed to forbear, during
the forbearance period, 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. In particular, during the forbearance period, the Bank,
absent the occurrence and continuance of a forbearance default other than an Identified Forbearance
Default, will not 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.
F-60
Upon expiration of the forbearance period, in the event that the Unrestructured Debt with the
Bank remains outstanding, the Bank, with notice, could 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 of FCMC (except
for a first lien of the Bank on an office condominium unit and a second priority lien of the Bank
on cash collateral held as security under the Licensing Credit Agreement) and the unpledged portion
of FCMCs stock.
Amendment and Extension of Licensing Credit Agreement
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 reduces the draw
credit facility (Draw Facility) from $5.0 million to $4.0 million and extends the termination
date to May 31, 2010, and extends the termination date for the $2.0 million revolving line of
credit and $6.5 million letter of credit facilities to March 31, 2011. The amendment further
provides 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 accordance with the Legacy Credit Agreement, the Bank is currently
entitled to 70% of all amounts distributed by FCMC. The payment of any dividend, distribution or
payment to FCMCs shareholders and the Bank would result in a reduction of FCMCs stockholders
equity and cash available for its operations. All other material terms and conditions of
the Licensing Credit Agreement remain the same, including the collateral, warranties,
representations, covenants and events of defaults.
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 is
used to provide working capital of FCMC, if needed, and amounts drawn and repaid under this
facility cannot be re-borrowed. At the time the credit facility was renewed, $1.0 million was
outstanding under the revolving facility and approximately $6.3 million of letters of credit for
various state licensing purposes were outstanding. There were no amounts due under the Draw
Facility.
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%. Advances under the Draw Facility shall bear interest at the one-month reserve adjusted LIBOR
plus a margin of 6%. There is a requirement to make monthly payments of interest accrued on the
Advances under the Revolving Facility and the Draw 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 restructuring.
F-61
The Licensing Credit Agreement, as amended, 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, (ii) blanket existing lien on all
personal property of FCMC, (iii) a second mortgage in real property interests at 6 Harrison Street,
Unit 6, New York, New York, (iv) a first Mortgage in certain real property interests at 350 Albany
Street, New York, New York; and (v) 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 is guaranteed by Thomas J. Axon, Chairman of the Board of Directors and a
principal stockholder of the Company. Mr. Axons Guaranty is secured by a first priority and
exclusive lien on commercial real estate. 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.
Bosco Ancillary Services Agreement
On March 4, 2010, FCMC entered into an agreement with Bosco to provide ancillary services not
covered by the Servicing Agreement 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. FCMC had performed such
services for Bosco on a trial basis under a pass-through cost arrangement, with total expenses to
Bosco of approximately $111,000 as of December 31, 2009.
Collection Services Agreement
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 twenty five percent 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 agreement.
F-62