UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2009
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number:
001-13417
Walter Investment Management
Corp.
(Exact name of registrant as
specified in its charter)
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Maryland
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13-3950486
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(State or other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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3000 Bayport Drive, Suite 1100Tampa, FL
(Address of principal
executive offices)
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33607
(Zip Code)
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(813) 421-7600
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Class
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Name of Exchange on Which Registered
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Common Stock, $0.01 Par Value per Share
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NYSE Amex
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Securities registered pursuant to Section 12(g) of the
Act:
None
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 (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
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 or this
Form 10-K
or any amendment to this
Form 10-K o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company þ
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates, based on the price at which the stock was last
sold as of June 30, 2009, was $263.9 million.
The registrant had 25,682,616 shares of common stock
outstanding as of February 26, 2010.
Documents
Incorporated by Reference
Portions of the registrants definitive Proxy Statement to
be filed with the Securities and Exchange Commission under
Regulation 14A within 120 days after the end of
registrants fiscal year covered by this Annual Report are
incorporated by reference into Part III.
WALTER
INVESTMENT MANAGEMENT CORP.
FORM 10-K
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
INDEX
Safe
Harbor Statement Under the Private Securities Litigation Reform
Act of 1995
Certain statements in this report, including, without
limitation, matters discussed under Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, should be read in
conjunction with the financial statements, related notes, and
other detailed information included elsewhere in this Annual
Report on
Form 10-K.
We are including this cautionary statement to make applicable
and take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Statements that are
not historical fact are forward-looking statements. Certain of
these forward-looking statements can be identified by the use of
words such as believes, anticipates,
expects, intends, plans,
projects, estimates,
assumes, may, should,
will, or other similar expressions. Such
forward-looking statements involve known and unknown risks,
uncertainties and other important factors, which could cause
actual results, performance or achievements to differ materially
from future results, performance or achievements. These
forward-looking statements are based on our current beliefs,
intentions and expectations. These statements are not guarantees
or indicative of future performance. Important assumptions and
other important factors that could cause actual results to
differ materially from those forward-looking statements include,
but are not limited to, those factors, risks and uncertainties
described in this Annual Report on
Form 10-K
under the caption Risk Factors and in our other
securities filings with the Securities and Exchange Commission.
In particular (but not by way of limitation), the following
important factors and assumptions could affect our future
results and could cause actual results to differ materially from
those expressed in the forward-looking statements: local,
regional, national and global economic trends and developments
in general, and local, regional and national real estate and
residential mortgage market trends and developments in
particular; the availability of suitable qualifying investments
for the proceeds of our October 2009 secondary offering and
risks associated with any such investments we may pursue; the
availability of additional investment capital and suitable
qualifying investments, and risks associated with the expansion
of our business activities, including risks associated with
expanding our business outside of our current geographic
footprint
and/or
expanding the scope of our business to include activities not
currently undertaken by our business; limitations imposed on our
business due to our real estate investment trust, or REIT,
status and our continued qualification as a REIT for federal
income tax purposes; financing sources and availability, and
future interest expense; fluctuations in interest rates and
levels of mortgage prepayments; increases in costs and other
general competitive factors; natural disasters and adverse
weather conditions, especially to the extent they result in
material payouts under insurance policies placed with our
captive insurance subsidiary; changes in federal, state and
local policies, laws and regulations affecting our business,
including, without limitation, mortgage financing or servicing,
changes to licensing requirements,
and/or the
rights and obligations of property owners, mortgagees and
tenants; the effectiveness of risk management strategies;
unexpected losses resulting from pending, threatened or
unforeseen litigation or other third party claims against us;
the ability or willingness of Walter Energy, Inc. and other
counterparties to satisfy material obligations under agreements
with us; our continued listing on the NYSE Amex; uninsured
losses or losses in excess of insurance limits and the
availability of adequate insurance coverage at reasonable costs;
the integration of the former Hanover Capital Mortgage Holdings,
Inc. business into that of Walter Investment Management, LLC and
its affiliates as a result of the merger of the two companies,
and the realization of anticipated synergies, cost savings and
growth opportunities from the Merger; future performance
generally; and other presently unidentified factors.
All forward looking statements set forth herein are qualified by
these cautionary statements and are made only as of the date
hereof. We undertake no obligation to update or revise the
information contained herein, including without limitation any
forward-looking statements whether as a result of new
information, subsequent events or circumstances, or otherwise,
unless otherwise required by law.
1
PART I
Our
Company
Walter Investment Management Corp., together with its
consolidated subsidiaries (Walter Investment, the
Company, we, our and
us), is a mortgage servicer and mortgage portfolio
owner specializing in subprime, non-conforming and other
credit-challenged residential loans primarily in the
southeastern United States, or U.S. At December 31,
2009, we had four wholly owned, primary subsidiaries: Hanover
Capital Partners 2, Ltd., doing business as Hanover Capital,
Walter Mortgage Company, or WMC, Walter Investment Reinsurance
Co., Ltd., or WIRC, and Best Insurors, Inc., or Best. We operate
as an internally managed, publicly traded real estate investment
trust, or REIT.
Our business, headquartered in Tampa, Florida, was established
in 1958 as the Financing business of Walter Energy, Inc., or
Walter Energy, formerly known as Walter Industries, Inc., a
diversified company historically operating in the natural
resources, financing and homebuilding businesses. The Financing
business purchased residential loans originated by Walter
Energys Homebuilding business, Jim Walter Homes, Inc., or
JWH, originated and purchased residential loans on its own
behalf, and serviced these residential loans to maturity. We
have continued our servicing activities since spinning off from
our former parent in April 2009. Throughout this Annual Report
on
Form 10-K,
references to residential loans refer to residential
mortgage loans and residential retail instalment agreements and
references to borrowers refer to borrowers under our
residential mortgage loans and instalment obligors under our
residential retail instalment agreements. Over the past
50 years, we have developed significant expertise in
servicing credit-challenged residential loans through our
differentiated high-touch approach which involves significant
face-to-face
borrower contact by trained servicing personnel strategically
located in the markets where our borrowers reside. As of
December 31, 2009, we employed 219 employees and
serviced over 34,000 individual residential loans with a total
outstanding principal balance of $1.8 billion and a net
book value as of such date of $1.6 billion.
From 1946 to 2008, JWH built and sold approximately 350,000
homes throughout the southeastern U.S. From 1958 to 2008, WMC, a
JWH sister company, purchased residential loans originated by
JWH, as well as originated and purchased residential loans on
its own behalf. WMCs business was to service the
residential loans until such time as a sufficiently large
portfolio had been accumulated, at which point the portfolio
would be securitized and placed into a trust, with WMC
continuing to service the residential loans in the trust.
As part of a larger strategy to divest various businesses in
order to maximize stockholder value by focusing on growth in
each of its individual businesses, Walter Energy decided in 2008
to spin off its Financing business via a newly created
subsidiary, Walter Investment Management, LLC, or WIM, which
included WMC and our two insurance subsidiaries, Best and WIRC.
Further, as a result of the economic decline beginning in 2008
in general, and the dramatic decline in the real estate market
in particular, Walter Energy ceased its Homebuilding business
completely in December 2008.
Following the decision to separate from Walter Energy via the
spin-off, and given the nature of our business, it was believed
that the best way to optimize our results was for the Company to
operate as a REIT. In light of timing and other hurdles to
establishing a new REIT, it was determined that the most
expedient way to become a REIT was to merge with an existing
REIT; in October of 2008, Walter Energy entered into a
definitive agreement to merge its Financing business into
Hanover Capital Mortgage Holdings, Inc., or Hanover. The merger
with Hanover, or Merger, occurred immediately following the
spin-off and a taxable dividend distribution on April 17,
2009.
Although Hanover was the surviving legal and tax entity in the
Merger, for accounting purposes the Merger was treated as a
reverse acquisition of the operations of Hanover and has been
accounted for pursuant to the Business Combinations guidance,
with WIM as the accounting acquirer. As such, the
pre-acquisition financial statements of WIM are treated as the
historical financial statements of Walter Investment. The
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combined financial statements of WMC, Best and WIRC
(collectively representing substantially all of Walter
Energys Financing business prior to the Merger) are
considered the predecessor to WIM for accounting purposes. Thus,
the combined financial statements of WMC, Best and WIRC have
become WIMs historical financial statements for the
periods prior to the Merger. The Hanover assets acquired and the
liabilities assumed were recorded at the date of acquisition,
April 17, 2009, at their respective fair values. The
results of operations of Hanover were included in the
consolidated statements of income for periods subsequent to the
Merger.
We have elected and believe that we have qualified to be taxed
as a REIT under Sections 856 through 859 of the Internal
Revenue Code of 1986, as amended, or Code, commencing with our
taxable year ended December 31, 1997. Our qualification as
a REIT depends upon our ability to meet on a continuing basis,
through actual investment and operating results, various complex
requirements under the Code relating to, among other things, the
sources of our gross income, the composition and values of our
assets, our distribution levels and the diversity of ownership
of our shares. We believe that we have been organized and have
operated in conformity with the requirements for qualification
and taxation as a REIT under the Code, and that our manner of
operation enables us to continue to meet the requirements for
qualification and taxation as a REIT.
As a REIT, we generally will not be subject to U.S. federal
income tax on our net taxable income that we distribute to our
stockholders. If we fail to qualify as a REIT in any taxable
year and do not qualify for certain statutory relief provisions,
we will be subject to U.S. federal income tax at regular
corporate rates and may be precluded from qualifying as a REIT
for the subsequent four taxable years following the year during
which we failed to qualify as a REIT. Even if we qualify for
taxation as a REIT, we may be subject to some U.S. federal,
state and local taxes on our income or property.
Our primary operating entity is WMC from which we operate our
residential loan servicing business. Our securitization trusts
are held either directly by WMC or Hanover SPC-A or indirectly
by Mid-State Capital, LLC. All of our taxable REIT subsidiaries,
or TRSs, are held by Walter Investment Holding Company, which is
itself a TRS.
Our
Strategy
Our objective is to provide attractive risk-adjusted returns to
our stockholders, primarily through dividends and secondarily
through capital appreciation. We seek to achieve this objective
through maximizing income resulting from the spread between the
interest income we earn from our existing residential loan
portfolio and future investments in performing,
sub-performing
and non-performing residential loans and the interest expense we
pay on the borrowings that we use to finance these assets, which
we refer to as our net interest income.
We believe that our in-depth understanding of residential real
estate and real estate-related investments, coupled with our
underwriting and loan servicing capabilities, will enable us to
acquire assets with attractive in-place cash flows and the
potential for meaningful capital appreciation over time. Our
target assets are residential loans that are generally similar
to those that we currently own, including loans that are secured
by mortgages on owner-occupied, single-family residences located
within our geographic footprint in the southeastern
U.S. with initial loan amounts below $300,000. We continue
to believe that attractive investment opportunities in our
target assets exist due to the economic downturn and
corresponding credit crisis. However, the pace of deals coming
to market has not yet reached levels anticipated by market
participants. Recent reports indicate that the FDIC has in
excess of $36 billion of assets from failed banks to be
liquidated with another 702 troubled banks on its problem list,
which have over $403 billion in assets. We anticipate that
the FDIC will continue to deal with the problem banks and
dispose of these assets within reasonable timeframes. However,
there are currently numerous buyers in the market for the
relatively few assets that are available for sale. We will
evaluate these bid opportunities as they become available, but
we also remain committed to remaining disciplined and investing
prudently to provide attractive returns to our stockholders.
Shifts in the mortgage market have caused us to expand our scope
beyond the acquisition of whole-loans in outright purchase
transactions, be it from the FDIC or private sellers, to
evaluating co-investment, structured transactions, new
origination and servicing opportunities, especially servicing
opportunities with fee
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arrangements offering performance-based structures or more
attractive terms than traditional servicing arrangements. We are
primarily interested in pursuing opportunities that recognize
the value that our high-touch servicing can add to distressed
assets and that provide us with the ability to earn attractive
returns.
Our senior management team has a long track record and extensive
experience managing and investing in residential loans and real
estate-related investments through a variety of credit cycles
and market conditions. Our senior management team has an average
of over 30 years of experience in real estate investing and
financing, with significant experience in distressed,
sub-performing
and non-performing residential loans and REO properties, with an
average tenure of approximately 19 years at our Company or
our predecessor entities.
Historically, we have funded our residential loans through the
securitization market. As of December 31, 2009, we had ten
separate non-recourse securitizations outstanding, with an
aggregate of $1.3 billion of outstanding debt, which fund
residential loans and real estate owned, or REO, with a
principal balance of $1.5 billion. Approximately
$0.4 billion of our residential loans were unencumbered as
of December 31, 2009, while our stockholders equity
as of such date as determined based on generally accepted
accounting principles, or GAAP, was $568.2 million.
While we believe that, in the current environment, we can
achieve attractive yields on newly acquired assets on an
unleveraged basis, we may use prudent amounts of leverage to
increase potential returns to our stockholders. We are not
currently required to maintain any specific
debt-to-equity
ratio and we believe the appropriate leverage for the particular
assets that we are financing would depend on the credit quality
and risk of those assets. Our leverage ratio has fluctuated and
we expect it to continue to fluctuate from time to time based
upon, among other things, our assets, market conditions and the
availability of and conditions of financings.
Potential sources of leverage may include repurchase agreements,
warehouse facilities, credit facilities (including term loans
and revolving facilities), structured financing arrangements,
securitizations, term collateralized mortgage obligations, or
CMOs, and other forms of term debt, in addition to transaction-
or asset-specific financing arrangements. Current market
conditions have adversely affected the cost and availability of
financing from each of these sources, and their individual
providers, to varying degrees. We believe that, in the future,
other sources of financing may become available at affordable
terms. For example, the Federal Deposit Insurance Corporation,
or FDIC, has indicated that, in conjunction with its liquidation
of failed depository institution assets, it may provide or
guarantee debt financing to facilitate purchases.
We may also, from time to time, subject to maintaining our
qualification as a REIT, utilize derivative financial
instruments, including, among others, interest rate swaps,
interest rate caps, and interest rate floors, to hedge all or a
portion of the interest rate risk associated with the financing
of our portfolio. In utilizing leverage and interest rate
hedges, our objectives are to improve risk-adjusted returns and,
where possible, to lock in, on a long-term basis, a spread
between the yield on our assets and the cost of our financing.
Regulation
Hanover Capital Securities, Inc., one of our TRSs, is a
broker/dealer registered with the Securities and Exchange
Commission, or SEC, and is a member of the Financial Industry
Regulatory Authority.
Property
Our principal office is located at 3000 Bayport Drive, Tampa,
Florida 33607. We are a Maryland corporation organized in 1997.
Trade
Names, Trademarks and Copyrights
The names of each of our subsidiaries are well established in
the respective markets they serve. Management believes that
customer recognition of such trade names is of significant
importance. Our subsidiaries have several trademarks and
numerous copyrights, including four trademarks that have been
registered with the United States Patent and Trademark Office
which expire in September 2013, May 2014,
4
June 2014 and September 2014, respectively. Management does not
believe, however, that any one such trademark or copyright is
material to us as a whole.
Competition
We compete with a variety of third-party providers for servicing
opportunities, as well as institutional investors for the
acquisition of residential loans. These investors include other
REITs, investment banking firms, savings banks, savings and loan
associations, insurance companies, mutual funds, pension funds,
banks and other financial institutions that invest in
residential loans and other investment assets. Many of these
third-party providers and investors are substantially larger,
may have greater financial resources, access to lower costs of
capital and lower overhead than we do and may focus exclusively
on either servicing or acquisitions. While there has
historically been a broad supply of liquid mortgage assets for
companies like ours to purchase, we cannot provide assurances
that we will be successful in acquiring residential loans that
we deem suitable for us, because of such other investors
competing for the purchase of these assets. Our plan to expand
our servicing operations, as well as reestablish our acquisition
program will be subject to such competition.
Employees
As of December 31, 2009, we employed 219 full-time
employees. We believe we have been successful in our efforts to
recruit and retain qualified employees, but there is no
assurance that we will continue to be successful. None of our
employees are a party to any collective bargaining agreements.
Available
Information
Our website can be found at www.walterinvestment.com. We
make available, free of charge through the investor relations
section of our website, access to our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
current reports on
Form 8-K,
other documents and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended, as well as proxy
statements, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
SEC. We also make available, free of charge, access to our
Corporate Governance Standards, charters for our Audit
Committee, Compensation and Human Resources Committee, and
Nominating and Corporate Governance Committee, and our Code of
Conduct governing our directors, officers, and employees. Within
the time period required by the SEC and the New York Stock
Exchange, we will post on our website any amendment to the Code
of Conduct and any waiver applicable to any executive officer,
director, or senior officer (as defined in the Code of Conduct).
In addition, our website includes information concerning
purchases and sales of our equity securities by our executive
officers and directors, as well as disclosure relating to
certain non-GAAP and financial measures (as defined by SEC
Regulation G) that we may make public orally,
telephonically, by webcast, by broadcast, or by similar means
from time to time. The information on our website is not part of
this Annual Report on
Form 10-K.
Our Investor Relations Department can be contacted at 3000
Bayport Drive, Suite 1100, Tampa, FL 33607, Attn: Investor
Relations, telephone
(813) 421-7694.
You should carefully review and consider the risks described
below. If any of the risks described below should occur, our
business, prospects, financial condition, cash flows, liquidity,
results of operations, and our ability to make cash
distributions to our stockholders could be materially and
adversely affected. In that case, the trading price of our
common stock could decline and you may lose some or all of your
investment in our common stock. The risks and uncertainties
described below are not the only risks that may have a material
adverse effect on us. Additional risks and uncertainties that we
currently are unaware of, or that we currently deem to be
immaterial, also may become important factors that adversely
impact us. Further, to the extent any of the information
contained in this Annual Report on
Form 10-K
constitutes forward-looking information, the risk factors set
forth below are cautionary statements identifying important
factors that could cause our actual
5
results for various financial reporting periods to differ
materially from those expressed in any forward-looking
statements made by or on behalf of us.
Risks
Associated With Recent Adverse Developments in the Mortgage
Finance and Credit Markets
Difficult
conditions in the mortgage and real estate markets, financial
markets and the economy generally may cause us to incur losses
on our portfolio or otherwise be unsuccessful in our business
strategies. A prolonged economic slowdown, recession or period
of declining real estate values could materially and adversely
affect us.
The implementation of our business strategies may be materially
affected by current conditions in the mortgage and housing
markets, the financial markets and the economy generally.
Continuing concerns over unemployment, inflation, energy and
health care costs, geopolitical issues, the availability and
cost of credit, the mortgage market and the real estate market
have contributed to increased volatility and diminished
expectations for the economy and markets going forward.
The risks associated with our current investment portfolio and
any investments we may make will be more acute during periods of
economic slowdown or recession, especially if these periods are
accompanied by declining real estate values. A weakening economy
and declining real estate values significantly increase the
likelihood that borrowers will default on their debt service
obligations to us and that we will incur losses on our
investment portfolio in the event of a default because the value
of any collateral we foreclose upon may be insufficient to cover
the full amount of our investment or may take a significant
amount of time to realize. In addition, under such conditions,
our access to capital will generally be more limited, if
available at all, and more expensive. Any period of increased
payment delinquencies, foreclosures or losses could adversely
affect the net interest income generated from our portfolio and
our ability to make and finance future investments, which would
materially and adversely affect our revenues, results of
operations, financial condition, business prospects and our
ability to make distributions to stockholders.
Continued
weakness in the mortgage and residential real estate markets may
hinder our ability to acquire assets and implement our growth
plans and could negatively affect our results of operations and
financial condition, including causing credit and market value
losses related to our holdings which could cause us to take
charges and/or add to our allowance for loan losses in amounts
which may be material.
The residential mortgage market in the United States has
experienced significant levels of defaults, credit losses, and
liquidity concerns. These factors have impacted investor
perception of the risk associated with the residential loans
that we own and in which we intend to make further investments.
Continued or increased deterioration in the residential loan
market may adversely affect the performance and market value of
our investments. Deterioration in home prices or the value of
our portfolio could require us to take charges, or add to our
allowance for loan losses, either or both of which may be
material.
The residential loan market also has been severely affected by
changes in the lending landscape and there is no assurance that
these conditions have fully stabilized or will not worsen. The
severity of the liquidity limitation was largely unanticipated
by the markets and access to mortgages has been substantially
limited.
While the limitation on financing was initially in the subprime
mortgage market, it appears that liquidity issues now also
affect prime and Alt-A lending, with mortgage rates remaining
much higher than previously available in recent periods and the
curtailment of many product types. This has an adverse impact on
new demand for homes, which will compress the home ownership
rates and have a negative impact on future home price
performance. There is a strong correlation between home price
growth rates and residential loan delinquencies. The market
deterioration has caused us to expect increased credit losses
related to our holdings and to sell some foreclosed real estate
assets at a loss.
6
Risks
Related to Our Business
We
have limited experience operating as a stand-alone publicly
traded REIT and therefore may have difficulty in successfully
and profitably operating our business and complying with
regulatory requirements applicable to public companies. In
addition, we are dependent on key members of our senior
management team that have limited experience operating as a
REIT.
We were spun off from our former parent, Walter Energy, on
April 17, 2009. The operation of our business separate from
Walter Energy has placed significant demands on our management,
operational and technical resources. Our future performance will
depend on our ability to function as an independent company, to
finance and manage expanding operations, and to adapt our
information systems to changes in our business.
Prior to our Merger with Hanover, we did not operate as a REIT
or a public company. Our senior management team has limited
experience operating a REIT and operating a business in
compliance with the numerous technical restrictions and
limitations set forth in the Code applicable to REITs. We cannot
assure you that we will be able to successfully meet the
standards, including ownership restrictions, income distribution
requirements, qualifying asset and income tests and other such
standards, necessary to continue to qualify and operate as a
REIT. In addition, managing a portfolio of assets under the REIT
requirements of the Code may limit the types of investments we
are able to make and thus hinder our ability to achieve our
investment objectives.
Following the Merger, we have operated as a stand-alone
publicly-traded company and are subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended,
or the Exchange Act, and the NYSE Amex. As a result, we have and
will continue to incur additional expenses including increased
legal and accounting fees, governance and compliance costs,
Board of Director fees and expenses, transfer agent fees,
increased insurance costs, printing costs and filing fees, and
increased expenditures for our accounting, finance, treasury,
tax, and investor and public relations functions. In addition,
we have qualified as a small reporting company under
the rules and regulations of the SEC and therefore have been
subject to scaled reporting under the Exchange Act and the
Securities Act. However, commencing with the filing of our first
quarterly report in 2010, we will be subject to larger company
disclosure standards which may require more difficult and costly
compliance. We cannot assure you that we will be able to
successfully operate as a REIT, execute our business strategies
as a public company or comply with regulatory requirements
applicable to public companies.
We
cannot assure you that we will be successful in identifying and
consummating investments in residential loans on attractive
terms, or at all.
We expect to acquire residential loans with the net proceeds of
our secondary offering, including in liquidations by the FDIC of
portfolios of mortgage loans of failed depository institutions
and from other owners of those assets, such as mortgage banks,
commercial banks, savings and loan associations, credit unions,
insurance companies and GSEs. We also may participate in
programs established by the U.S. government, such as the Legacy
Loans Program. There can be no assurance that we will be able to
acquire residential loans from these sources on attractive
terms, or at all. In particular, there can be no assurance that
the FDIC will continue to liquidate the assets of failed
depository institutions on terms that may be attractive, or at
all, or that we will be able to acquire any residential loans in
liquidations by the FDIC. Furthermore, we may not be eligible to
participate in programs established by the U.S. government,
such as the Legacy Loans Program, or, if we are eligible, that
we will be able to utilize such programs successfully or at all.
To the extent that we are unable to successfully identify and
consummate investments in residential loans from these and other
sources, our business, financial condition and results of
operations would be materially and adversely affected.
7
We may
not be successful in achieving our growth
objectives.
Our success in achieving our growth objectives will depend on
many factors, including, but not limited to, the availability of
attractive risk-adjusted investment opportunities in our target
assets, identifying and consummating these investments on
favorable terms, our ability to access financing and capital on
favorable terms and conditions in the financial markets, our
ability to successfully service the loans we acquire, and the
real estate markets and the economy. In addition, we may face
substantial competition for attractive investment opportunities,
significant demands on our operational, financial, accounting,
information technology and telecommunications systems and legal
resources, and increased costs and expenses. We cannot assure
you that we will be able to make investments with attractive
risk-adjusted returns or effectively manage and service any such
portfolio of residential loan investments.
There
may be risks associated with the growth of our business,
including risks that third parties with which we contract may
not perform as expected.
We may purchase residential loans outside of our southeastern
U.S. footprint, either as a targeted acquisition or as part
of a more widely dispersed portfolio that includes residential
loans both inside and outside of our footprint. In the event
that we seek to expand our field servicing into these areas, we
risk being unable to retain or employ qualified personnel to
expand our servicing, or that our servicing methodologies may
not be as successful in other geographic regions as they have
been in the southeastern U.S. We also may contract with
third party servicers to service residential loans located
outside of our southeastern footprint; there can be no guarantee
that these third parties will be as successful as our personnel
in servicing these residential loans. In addition, we may seek
to grow our business through partnerships and other joint
venture arrangements with third parties, as well as through the
merger with, or acquisition of, third parties that supplement or
are otherwise complementary to our existing business. We also
may seek to expand our business beyond its current scope,
including loan origination and performance based servicing.
There can be no guarantee that we will be successful in
identifying or reaching agreement with third parties or that
such efforts to grow or expand the business will be successful.
We may
not realize the growth opportunities expected from our Merger
and the integration of Hanovers business with our business
could prove difficult.
The success of our strategies will depend, in part, on our
ability to realize the growth opportunities that we believe will
result from combining the core competencies of Hanovers
business with our servicing operations. A component of our
growth strategy is to take advantage of the experience of
Hanover and its senior personnel in identifying suitable
residential loan acquisition opportunities. Accordingly, our
ability to realize these growth opportunities, and the timing of
this realization, initially will depend on our ability to
integrate our operations, technologies, services, accounting and
personnel with those of Hanover. Even if the integration of
Hanovers business with our business is successful, there
can be no assurance that this integration will result in the
realization of the full benefits of the growth opportunities
currently expected from this integration or that these benefits
will be achieved within the anticipated time frame. In addition,
although we performed due diligence on Hanover prior to the
Merger, an unavoidable level of risk remains regarding the
actual condition of Hanovers business. For example, we may
have acquired unknown or unasserted liabilities or claims or
liabilities not susceptible of discovery during our due
diligence investigation that manifest only at a later date. If
we are unsuccessful in overcoming these risks, our business,
financial condition and results of operations could be
materially and adversely affected.
Failure
to procure adequate capital and funding on favorable terms, or
at all, would adversely affect our results and may, in turn,
negatively affect the market price of shares of our common stock
and our ability to distribute dividends to
stockholders.
We depend upon the availability of adequate funding and capital
for our operations and to grow our business. We generally are
required to distribute to our stockholders at least 90% of our
net taxable income (excluding net capital gains) for each tax
year in order to qualify as a REIT, which we intend to do. As a
result, a limited amount of retained earnings are available to
execute our growth strategies. It is possible
8
that if we achieve anticipated growth levels
and/or if
significant additional opportunities to expand our business
operations are presented, we may require additional funds in
order to finance such growth. Additional financing to finance
growth may not be available on favorable terms, or at all. In
the future we may fund our investments through a variety of
means, including additional equity issuances, as well as various
forms of financing such as repurchase agreements, warehouse
facilities, credit facilities (including term loans and
revolving facilities), structured financing arrangements,
securitizations, term collateralized mortgage obligations, or
CMOs, and other forms of term debt, in addition to transaction
or asset-specific financing arrangements. Our access to
financing and capital will depend upon a number of factors over
which we may have little or no control, including:
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general market conditions;
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the markets perception of our business and growth
potential;
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our current and potential future earnings and cash distributions;
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the market price of the shares of our common stock; and
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the markets view of the quality of our assets.
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The current weakness in the mortgage sector, and the current
situation in the broader capital and credit markets, have
adversely affected many potential lenders. Current market
conditions have adversely affected the cost and availability of
financing from many of these sources, and from individual
providers, to different degrees. Some sources generally are
unavailable, while others are available only at a high cost. As
a result, potential lenders may be unwilling or unable to
provide us with financing or may tighten their lending
standards, which could make it more difficult for us to obtain
financing on favorable terms or at all. These lenders could
require additional collateral and other terms and costs that
could increase our financing costs and reduce our profitability.
As a result of these factors, the execution of our investment
strategy may be dictated by the cost and availability of funding
from these different sources. We may have to rely more heavily
on additional equity issuances, which may be dilutive to our
stockholders, or on less efficient forms of debt financing that
require a larger portion of our cash flow from operations,
thereby reducing funds available for our operations, future
business opportunities, cash distributions to our stockholders
and other purposes. We cannot provide assurance that we will
have access to such equity or debt capital on favorable terms at
desired times, or at all, which may cause us to curtail our
investment activities and which could negatively affect our
financial condition and results of operations.
We
operate in a highly competitive market for investment
opportunities and more established competitors may be able to
compete more effectively for investment opportunities than we
can.
A number of entities compete with us for investment
opportunities in our target assets. We compete with other REITs,
specialty finance companies, public and private funds,
commercial and investment banks and other institutional
investors.
Many of our competitors are substantially larger and have
considerably greater financial, technical and marketing
resources than we have. Several other REITs have recently raised
significant amounts of capital, and may have investment
objectives that overlap with ours, which may create significant
competition for investment opportunities. Some competitors may
have a lower cost of funds and access to funding sources that
are not available to us. In addition, some of our competitors
may have higher risk tolerances or different risk assessments,
which could allow them to consider a wider variety of
investments and establish more favorable relationships than we
can. We cannot assure you that the competitive pressures we face
will not have a material adverse effect on our business,
financial condition and results of operations. Also, as a result
of this competition, we may not be able to take advantage of
attractive investment opportunities from time to time, and we
can offer no assurance that we will be able to identify and make
investments that are consistent with our investment objectives.
9
We may
leverage our investments, which may adversely affect our return
on our investments and may reduce cash available for
distribution to stockholders.
As of December 31, 2009, we had outstanding indebtedness of
approximately $1.3 billion, which consisted entirely of
non-recourse leverage from our securitizations entered into
prior to 2007. We are not required to maintain any specific
debt-to-equity
ratio and our governing documents contain no limitation in the
amount of debt that we may incur.
Subject to market conditions and availability, we may incur
significant debt in the future through a variety of forms, such
as repurchase agreements, warehouse facilities, credit
facilities (including term loans and revolving facilities),
structured financing arrangements, securitizations, term CMOs
and other forms of term debt, in addition to transaction or
asset-specific financing arrangements. The amount of leverage we
may use to make future investments will vary depending on our
ability to obtain financing, lenders and rating
agencies estimates of the stability of the cash flow from
our investments, and our assessment of the appropriate amount of
leverage for the particular assets we are funding.
Any return on our investments and cash available for
distribution to stockholders may be reduced to the extent that
changes in market conditions prevent us from leveraging our
investments, require us to decrease our rate of leverage or
increase the amount of collateral we are required to provide, or
increase the cost of our financing relative to the income that
can be derived from the assets acquired.
Our debt service payments will reduce cash flow available for
distributions to stockholders, which could adversely affect the
market price of our common stock. We may not be able to meet our
debt service obligations and, to the extent that we cannot, we
could be subject to risks such as: (i) the acceleration of
such debt and any other debt subject to cross-default
provisions, (ii) the loss of our ability to borrow unused
amounts under any of our financing arrangements could be reduced
or eliminated, and (iii) the loss of some or all of our
assets to foreclosure or sale.
At the present time, we do not have available to us repurchase
agreements, warehouse facilities, securitizations and term CMO
financings or other committed forms of leverage. In the event
that they become available in either the near term or over the
long-term, we may leverage certain of our assets through these
types of financings. In the event that we use these financings,
we will be subject to certain risks, such as: (i) decreases
in the value of assets funded or collateralized by these
financings, which may lead to margin calls that we will have to
satisfy; if we do not have the funds or collateral available to
satisfy such margin calls, we may be forced to sell assets at
significantly depressed prices due to market conditions or
otherwise, (ii) since the financing costs of such
facilities typically are determined by reference to floating
rates and the assets funded by the facility may be at fixed
rates, net interest income will decline in periods of rising
interest rates as financing costs increase while interest income
remains fixed, and (iii) these facilities may have maturity
dates that are shorter than the maturities of the assets funded
by the facility and if the facilities cannot be replaced or
extended at their maturity we may be forced to sell assets at
significantly depressed prices due to market conditions or
otherwise. The need to satisfy such margin calls or maturities
and any compression of net interest income in a period of rising
interest rates may reduce cash flow available for distribution
to you. Any reduction in distributions to you or sales of assets
at inopportune times or at a loss may cause the value of our
common stock to decline, in some cases, precipitously.
Certain
of our existing financing facilities contain covenants that
restrict our operations and may inhibit our ability to grow our
business and increase revenues.
Certain of our existing financing facilities contain
restrictions, covenants, and representations and warranties
that, among other things, require us to satisfy specified
financial and asset quality tests. If we fail to meet or satisfy
any of these covenants or representations and warranties, we
would be in default under these agreements and our lenders could
elect to declare any and all amounts outstanding under the
agreements to be immediately due and payable, enforce their
respective interests against collateral pledged under such
agreements and restrict our ability to make additional
borrowings. Certain of our financing agreements contain
cross-default provisions, so that if a default occurs under any
one agreement, the lenders under our other agreements could also
declare a default. The covenants and restrictions in our
financing facilities may restrict
10
our ability to, among other things: incur or guarantee
additional debt; make certain investments or acquisitions; make
distributions on or repurchase or redeem capital stock; engage
in mergers or consolidations; grant liens; sell, lease, assign,
transfer or dispose of any of our assets, business or property;
and enter into transactions with affiliates.
These restrictions may interfere with our ability to obtain
financing, including the financing needed for us to qualify as a
REIT, or to engage in other business activities, which may
significantly harm our business, financial condition, liquidity
and results of operations. A default and resulting repayment
acceleration could significantly reduce our liquidity. This
could also significantly harm our business, financial condition,
results of operations, and our ability to make distributions,
which could cause the value of our common stock to decline. A
default will also significantly limit our financing alternatives
such that we will be unable to pursue a leverage strategy, which
could curtail our investment returns.
The
repurchase agreements, warehouse facilities, credit facilities
(including term loans and revolving facilities), structured
financing arrangements, securitizations, term CMOs and other
forms of term debt, in addition to transaction or asset-specific
financing arrangements that we may use to finance our
investments, may contain restrictions, covenants, and
representations and warranties that restrict our operations or
may require us to provide additional collateral and may restrict
us from leveraging our assets as fully as desired.
We may use repurchase agreements, warehouse facilities, credit
facilities (including term loans and revolving facilities),
structured financing arrangements, securitizations, term CMOs
and other forms of term debt, in addition to transaction or
asset-specific financing arrangements, to finance our investment
purchases. Such financing facilities may contain restrictions,
covenants, and representations and warranties that, among other
things, require us to satisfy specified financial and asset
quality tests and may restrict our ability to, among other
things, incur or guarantee additional debt, make certain
investments or acquisitions, make distributions on or repurchase
or redeem capital stock, engage in mergers or consolidations,
grant liens or such other conditions as the lenders may require.
If we fail to meet or satisfy any of these covenants or
representations and warranties, we would be in default under
these agreements and our lenders could elect to declare any and
all amounts outstanding under the agreements to be immediately
due and payable, enforce their respective interests against
collateral pledged under such agreements and restrict our
ability to make additional borrowings. These financing
agreements may also contain cross-default provisions, so that if
a default occurs under any one agreement, the lenders under our
other agreements could also declare a default.
If the market value of the loans pledged by us to a funding
source declines in value, we may be required by the lending
institution to provide additional collateral or pay down a
portion of the funds advanced, but we may not have the
collateral or funds available to do so. Posting additional
collateral will reduce our liquidity and limit our ability to
leverage our assets, which could adversely affect our business.
In the event we do not have sufficient liquidity to meet such
requirements, lending institutions may accelerate repayment of
our indebtedness, increase our borrowing rates, liquidate our
collateral or terminate our ability to borrow. Such a situation
would likely result in a rapid deterioration of our financial
condition and possibly necessitate a filing for protection under
the U.S. Bankruptcy Code. Further, financial institutions
may require us to maintain a certain amount of cash that is not
invested or to set aside non-levered assets sufficient to
maintain a specified liquidity position which would allow us to
satisfy our collateral obligations. As a result, we may not be
able to leverage our assets as fully as we would otherwise
choose which could reduce our return on equity. If we are unable
to meet these collateral obligations, then, as described above,
our financial condition could deteriorate rapidly.
Our
current and possible future use of term CMO and securitization
financings with over-collateralization requirements may have a
negative impact on our cash flow.
The terms of our current CMOs and securitizations generally
provide, and those that we may sponsor in the future typically
will provide, that the principal amount of assets must exceed
the principal balance of the related bonds by a certain amount,
commonly referred to as over-collateralization. Our CMO and
securitization terms do, and we anticipate that future CMO and
securitization terms will, provide that, if certain
11
delinquencies or losses exceed specified levels based on the
analysis by the lenders or the rating agencies (or any financial
guaranty insurer) of the characteristics of the assets
collateralizing the bonds, the required level of
over-collateralization may be increased or may be prevented from
decreasing as would otherwise be permitted if losses or
delinquencies did not exceed those levels. Other tests (based on
delinquency levels or other criteria) may restrict our ability
to receive net income from assets collateralizing the
obligations. We cannot assure you that the performance tests
will be satisfied. Given recent volatility in the CMO and
securitization market, rating agencies may depart from historic
practices for CMO and securitization financings, making them
more costly for us. Failure to obtain favorable terms with
regard to these matters may materially and adversely affect the
availability of net income to us. If our assets fail to perform
as anticipated, our over-collateralization or other credit
enhancement expense associated with our CMO and securitization
financings will increase.
Our
existing securitization trusts contain servicer triggers that,
if exceeded, could result in a significant reduction in cash
flows to us.
Our existing securitization trusts contain delinquency and loss
triggers that, if exceeded, result in any excess
over-collateralization going to pay down the bonds for that
particular securitization at an accelerated pace instead of
releasing the excess cash to us. Three of our existing
securitizations: Mid-State Trust X, or Trust X,
Mid-State Capital Corporation
2005-1, or
Trust 2005-1,
and Mid-State Capital Corporation
2006-1, or
Trust 2006-1,
exceeded certain triggers and did not provide any significant
levels of excess cash flow to us during 2009. As of
December 31, 2009, Trust X held mortgage loans with an
outstanding principal balance of $193.1 million and a book
value of $164.7 million, which collateralized bonds issued
by Trust X having an outstanding principal balance of
$169.5 million. In February 2010, we purchased Trust X
REO at its par value of approximately $3.0 million. As a
result of this transaction, the Trust X loss trigger has
been cured. Consequently, on February 16, 2010 we received
a $4.2 million cash release from this securitization. As of
December 31, 2009,
Trust 2005-1
held mortgage loans with an outstanding principal balance of
$177.0 million and a book value of $170.4 million,
which collateralized bonds issued by
Trust 2005-1
having an outstanding principal balance of $160.8 million.
As of December 31, 2009,
Trust 2006-1
held mortgage loans with an outstanding principal balance of
$183.4 million and a book value of $174.4 million,
which collateralized bonds issued by
Trust 2006-1
having an outstanding principal balance of $179.0 million.
All of our other securitization trusts have experienced some
level of delinquencies and losses, and if any of these
additional trusts were to exceed their triggers or if we are
unable to cure the triggers already exceeded, any excess cash
flow from such trusts would not be available to us and we may
not have sufficient sources of cash to meet our operating needs
or to make required REIT distributions.
Our
failure to effectively service our portfolio of residential
loans would materially and adversely affect us.
Most residential loans and securitizations of residential loans
require a servicer to manage collections on each of the
underlying loans. Our servicing responsibilities include
providing delinquency notices when necessary, loan workouts and
modifications, foreclosure proceedings, short sales,
liquidations of our REO acquired as a result of foreclosures of
residential loans, and, to the extent loans are securitized and
sold, reporting on the performance of the loans to the trustee
of such pooled loans. Servicer quality is of prime importance in
the default performance of residential loans. Both default
frequency and default severity of loans may depend upon the
quality of our servicing. If we are not vigilant in encouraging
borrowers to make their monthly payments, the borrowers may be
far less likely to make these payments, which could result in a
higher frequency of default. If we take longer to liquidate
non-performing assets, loss severities may tend to be higher
than originally anticipated. Higher loss severity may also be
caused by less successful dispositions of REO properties. Our
ability to effectively service our portfolio of residential
loans is critical to our success, particularly given our
strategy of maximizing the value of the residential loans that
we acquire through loan modification programs, differentiated
servicing and other initiatives focused on keeping borrowers in
their homes and, when that is not possible and foreclosure is
necessary, maximizing recovery rates. Our effectiveness is tied
to our high-touch servicing approach. In the event we purchase
residential loans outside of our
12
southeastern U.S. footprint, either as a targeted
acquisition or as part of a widely dispersed portfolio that
includes residential loans both inside and outside of our
footprint, we may, among other options, expand our servicing
network into such areas, contract with third party servicers to
service these residential loans
and/or
subsequently divest such residential loans. There can be no
guarantee that we will be as effective servicing loans outside
of our footprint as we have been inside our footprint, nor that
third party servicers will be as effective as we have been.
Residential
loans are subject to risks, including borrower defaults or
bankruptcies, special hazard losses, declines in real estate
values, delinquencies and fraud.
During the time we hold residential loans we are subject to
risks on the underlying residential loans from borrower defaults
and bankruptcies and from special hazard losses, such as those
occurring from earthquakes, hurricanes or floods that are not
covered by standard hazard insurance. If a default occurs on any
residential loan we hold, we may bear the risk of loss of
principal to the extent of any deficiency between the value of
the mortgaged property plus any payments from any insurer or
guarantor, and the amount owing on the residential loan.
Defaults on residential loans historically coincide with
declines in real estate values, which are difficult to
anticipate and may be dependent on local economic conditions.
Increased exposure to losses on residential loans can reduce the
value of our portfolio.
The
lack of liquidity in our portfolio may adversely affect our
business.
We have invested and may continue to invest in residential loans
that are not liquid. It may be difficult or impossible to obtain
third party pricing on the residential loans we purchase.
Illiquid investments typically experience greater price
volatility as a ready market does not exist. In addition,
validating third party pricing for illiquid investments may be
more subjective than more liquid investments. The illiquidity of
our residential loans may make it difficult for us to sell such
residential loans if the need or desire arises. In addition, if
we are required to liquidate all or a portion of our portfolio
quickly, we may realize significantly less than the value at
which we have previously recorded our portfolio. As a result,
our ability to vary our portfolio in response to changes in
economic and other conditions may be relatively limited, which
could adversely affect our results of operations and financial
condition.
We are
highly dependent on information systems and third parties, and
systems failures could significantly disrupt our business, which
may, in turn, negatively affect the market price of our common
stock and our ability to pay dividends to
stockholders.
Our business is highly dependent on communications and
information systems. Any failure or interruption of our systems,
or unsuccessful implementation of new systems, could cause
delays or other problems in our servicing activities, which
could have a material adverse effect on our operating results
and negatively affect the market price of our common stock and
our ability to pay dividends to stockholders.
Economic
conditions in Texas, Louisiana, Mississippi, Alabama and Florida
may have a material impact on our profitability because we
conduct a significant portion of our business in these
markets.
Our residential loans currently are, and likely will be,
concentrated in the Texas, Louisiana, Mississippi, Alabama and
Florida markets. As a result of the geographic concentration of
residential loans in these markets, we are particularly exposed
to downturns in these local economies or other changes in local
real estate conditions. In the past, rates of loss and
delinquency on residential loans have increased from time to
time, driven primarily by weaker economic conditions in these
markets. Furthermore, precarious economic conditions may hinder
the ability of borrowers to repay their obligations in areas in
which we conduct the majority of our business. In the event of
negative economic changes in these markets, our business,
financial condition and results of operations, our ability to
make distributions to our stockholders and the trading price of
our common stock may be materially and adversely affected.
13
Natural
disasters and adverse weather conditions could disrupt our
business and adversely affect our results of operations,
including those of our insurance business.
The climates of many of the states in which we do and will
operate, including Texas, Louisiana, Mississippi, Alabama and
Florida, where we have the largest concentrations of residential
loans, present increased risks of natural disaster and adverse
weather. Natural disasters or adverse weather in the areas in
which we do and will conduct our business, or in nearby areas,
have in the past, and may in the future, lead to significant
insurance claims, cause increases in delinquencies and defaults
in our mortgage portfolio and weaken the demand for homes that
we may have to repossess in affected areas, which could
adversely affect our results. In addition, the rate of
delinquencies may be higher after natural disasters or adverse
weather conditions. The occurrence of large loss events due to
natural disasters or adverse weather could reduce the insurance
coverage available to us, increase the cost of our insurance
premiums and weaken the financial condition of our insurers,
thereby limiting our ability to mitigate any future losses that
may occur from such events. Moreover, severe flooding, wind and
water damage, forced evacuations, contamination, gas leaks, fire
and environmental and other damage caused by natural disasters
or adverse weather could lead to a general economic downturn,
including increased prices for oil, gas and energy, loss of
jobs, regional disruptions in travel, transportation and tourism
and a decline in real-estate related investments, especially in
the areas most directly damaged by the disaster or storm.
Our insurance business is also susceptible to risks of natural
disasters and adverse weather conditions. Best places coverage
through American Modern Insurance Group, or AMIG, which, in
turn, reinsures some or all of the coverage through WIRC. WIRC
has a reinsurance policy with Munich Re. This policy has a
$2.5 million deductible per occurrence with an aggregate
limit of $10 million per year. Multiple occurrences of
natural disasters
and/or
adverse weather conditions will subject us to the payment of a
corresponding number of deductibles of up to $2.5 million
per occurrence. In addition, to the extent that insured losses
exceed $10 million in the aggregate in any policy year, we
will be responsible for the payment of such excess losses.
Because we are dependent upon Munich Res ability to pay
any claims on our reinsurance policy, should they fail to make
any such payments, the payments would be our responsibility. In
the future, reinsurance of WIRCs exposure to AMIG may not
be available, or available at affordable rates leaving us
without coverage for insured claims. While we currently have a
$10 million facility provided by Walter Energy to cover
catastrophic hurricane losses, the facility expires in April
2011 and is not likely to be replaced, and we therefore will
have increased exposure to our insurance business at such time.
We may
be subject to liability for potential violations of predatory
lending and/or servicing laws, which could adversely impact our
results of operations, financial condition and
business.
Various federal, state and local laws have been enacted that are
designed to discourage predatory lending and servicing
practices. The federal Home Ownership and Equity Protection Act
of 1994, or HOEPA, prohibits inclusion of certain provisions in
residential loans that have mortgage rates or origination costs
in excess of prescribed levels and requires that borrowers be
given certain disclosures prior to origination. Some states have
enacted, or may enact, similar laws or regulations, which in
some cases impose restrictions and requirements greater than
those in HOEPA. In addition, under the anti-predatory lending
laws of some states, the origination of certain residential
loans, including loans that are not classified as high
cost loans under applicable law, must satisfy a net
tangible benefits test with respect to the related borrower.
This test may be highly subjective and open to interpretation.
As a result, a court may determine that a residential loan, for
example, does not meet the test even if the related originator
reasonably believed that the test was satisfied. Failure of
residential loan originators or servicers to comply with these
laws, to the extent any of their residential loans are or become
part of our mortgaged-related assets, could subject us, as an
originator or servicer, in the case of originated or owned
loans, or as an assignee or purchaser, in the case of acquired
loans, to monetary penalties and could result in the borrowers
rescinding the affected residential loans. Lawsuits have been
brought in various states making claims against originators,
servicers, assignees and purchasers of high cost loans for
violations of state law. Named defendants in these cases have
included numerous participants within the secondary mortgage
market. If our loans are found to have been originated in
violation of predatory or abusive lending laws, we could incur
losses, which could materially and adversely impact our results
of operations, financial condition and business.
14
The
expanding body of federal, state and local regulations and/or
the licensing of loan servicing, collections or other aspects of
our business may increase the cost of compliance and the risks
of noncompliance.
Our business is subject to extensive regulation by federal,
state and local governmental authorities and is subject to
various laws and judicial and administrative decisions imposing
requirements and restrictions on a substantial portion of our
operations. The volume of new or modified laws and regulations
has increased in recent years. Some individual municipalities
have begun to enact laws that restrict loan servicing
activities, including delaying or preventing foreclosures or
forcing the modification of certain mortgages. Further, federal
legislation recently has been proposed which, among other
things, also could hinder the ability of a servicer to foreclose
promptly on defaulted residential loans or would permit limited
assignee liability for certain violations in the residential
loan origination process, and which could result in us being
held responsible for violations in the residential loan
origination process.
In addition, the U.S. government through the Federal
Housing Administration, or FHA, the FDIC and the
U.S. Department of Treasury, or the Treasury, has commenced
or proposed implementation of programs designed to provide
homeowners with assistance in avoiding residential mortgage
foreclosures, such as the Hope for Homeowners program
(permitting certain distressed borrowers to refinance their
mortgages into FHA insured loans), Home Affordability
Modification Program, or HAMP, and the Secured Lien Program
(involving, among other things, the modification of first-lien
and second-lien mortgages to reduce the principal amount or the
interest rate of loans or to extend the payment terms).
Moreover, certain mortgage lenders and servicers have
voluntarily, or as part of settlements with law enforcement
authorities, established loan-modification programs relating to
loans they hold or service. Although our current loan portfolio
is not materially impacted by these programs, loans that we
acquire or service in the future may be subject to such
programs. These loan-modification programs, future federal,
state and local legislative or regulatory actions that result in
modification of outstanding loans acquired by us, as well as
changes in the requirements to qualify for refinancing with or
selling to Fannie Mae, Freddie Mac, or the Government National
Mortgage Association, or Ginnie Mae, may adversely affect the
value of, and the returns on, such residential mortgage loans.
Furthermore, if regulators impose new or more restrictive
requirements, we may incur additional significant costs to
comply with such requirements, which could further adversely
affect our results of operations or financial condition. Our
failure to comply with these laws and regulations could possibly
lead to civil and criminal liability; loss of licensure; damage
to our reputation in the industry; fines and penalties and
litigation, including class action lawsuits; or administrative
enforcement actions. Any of these outcomes could harm our
results of operations or financial condition. We are unable to
predict whether U.S. federal, state or local authorities
will enact laws, rules or regulations that will require changes
in our practices in the future and any such changes could
adversely affect our cost of doing business and profitability.
The
Financial Reform Plan could have an adverse effect on our
operations.
On June 17, 2009, the U.S. Treasury released the Obama
administrations framework for financial regulatory reform,
or the Reform Plan. The Reform Plan proposes a comprehensive set
of legislative and regulatory reforms aimed at promoting robust
supervision and regulation of financial firms, establishing
comprehensive supervision of financial markets, protecting
consumers and investors from financial abuse, providing the
government with the tools it needs to manage financial crises,
and raising international regulatory standards and improving
international cooperation. Implementation of the Reform Plan,
including changes to the manner in which financial institutions
(including GSEs, such as Fannie Mae and Freddie Mac), financial
products, and financial markets operate and are regulated and in
the accounting standards that govern them, could adversely
affect our business and results of operations.
As of March 1, 2010, no legislation has been
enacted, no regulations have been promulgated, and no accounting
standards have been altered in response to the Reform Plan that
would materially effect our operations. However, we expect that
the Reform Plan may result in new legislation, regulation, and
accounting standards in the future, possibly including
legislation, regulation, or standards that go beyond the scope
of, or
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differ materially from, the proposals set forth in the Reform
Plan. Any new legislation, regulation, or standards affecting
financial institutions, financial products, or financial markets
could subject us to greater regulatory scrutiny, make it more
expensive to conduct our business, increase competition, limit
our ability to expand our business, or have an adverse effect on
our results of operations, possibly materially.
There
can be no assurance that the actions of the U.S. government,
Federal Reserve, U.S. Treasury and other governmental and
regulatory bodies for the purpose of stabilizing the financial
markets, including the establishment of the TALF and the PPIP,
or market response to those actions, will achieve the intended
effect, and our business may not benefit from these actions;
further government actions or the cessation or curtailment of
current U.S. government programs and/or participation in the
mortgage and securities markets could adversely impact
us.
In response to the financial issues affecting the banking system
and the financial markets and going concern threats to
investment banks and other financial institutions, the
U.S. government, Federal Reserve and U.S. Treasury and
other governmental and regulatory bodies have taken action to
stabilize the financial markets. Significant measures include:
the enactment of the Emergency Economic Stabilization Act of
2008, or the EESA, to, among other things, establish TARP; the
enactment of the Housing and Economic Recovery Act of 2008, or
the HERA, which established a new regulator for Fannie Mae and
Freddie Mac; and the establishment of the TALF and the PPIP.
There can be no assurance that the EESA, HERA, TALF, PPIP or
other recent U.S. government actions will have a beneficial
impact on the financial markets, including on current extreme
levels of volatility. To the extent the market does not respond
favorably to these initiatives or these initiatives do not
function as intended, our business may not receive the
anticipated positive impact from the legislation. There can also
be no assurance that we will continue to be eligible to
participate in programs established by the U.S. government
such as the TALF or the PPIP or, if we remain eligible, that we
will be able to utilize them successfully or at all. In
addition, because the programs are designed, in part, to restart
the market for certain of our target assets, the establishment
of these programs may result in increased competition for
attractive opportunities in our target assets. It is also
possible that our competitors may utilize the programs which
would provide them with attractive debt and equity capital
funding from the U.S. government. In addition, the
U.S. government, the Federal Reserve, the
U.S. Treasury and other governmental and regulatory bodies
have taken or are considering taking other actions to address
the financial crisis. However, there can be no assurance that
the U.S. government, the Federal Reserve, the
U.S. Treasury and other governmental and regulatory bodies
will not eliminate or curtail current U.S. government
programs
and/or
participation in the mortgage and securities markets. We cannot
predict whether or when such actions may occur, and such actions
could have a dramatic impact on our business, results of
operations and financial condition.
If we
fail to maintain an effective system of internal controls, we
may not be able to accurately determine our financial results or
prevent fraud. As a result, our stockholders could lose
confidence in our financial results, which could harm our
business and the market value of our common
shares.
Effective internal controls are necessary for us to provide
reliable financial reports and effectively prevent fraud. We may
in the future discover areas of our internal controls that need
improvement. Section 404 of the Sarbanes-Oxley Act of 2002,
or the Sarbanes-Oxley Act, requires us to evaluate and report on
our internal controls over financial reporting and have our
independent auditors issue their own opinion on our internal
control over financial reporting. While we intend to undertake
substantial work to maintain compliance with Section 404 of
the Sarbanes-Oxley Act, we cannot be certain that we will be
successful in maintaining adequate control over our financial
reporting and financial processes. Furthermore, as we grow our
business, our internal controls will become more complex, and we
will require significantly more resources to ensure our internal
controls remain effective. If we or our independent auditors
discover a material weakness, the disclosure of that fact, even
if quickly remedied, could reduce the market value of our shares
of common stock. Additionally, the existence of any material
weakness or significant deficiency would require management to
devote significant time and incur significant expense to
remediate any such material weaknesses or significant
deficiencies and management may not be able to remediate any
such material weaknesses or significant deficiencies in a timely
manner.
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We
will utilize analytical models and data in connection with the
valuation of our future investments, and any incorrect,
misleading or incomplete information used in connection
therewith would subject us to potential risks.
Given the complexity of our proposed future investments and
strategies, we will rely on analytical models and information
and data, some of which is supplied by third parties. When our
models or such data prove to be incorrect or misleading, any
decision made in reliance thereon exposes us to potential risks.
Some of the analytical models that will be used by us are
predictive in nature. The use of predictive models has inherent
risks and may incorrectly forecast future behavior, leading to
potential losses. We also will use valuation models that will
rely on market data inputs. If incorrect market data is input
into a valuation model, even a well-respected valuation model
may provide incorrect valuations and, as a result, could provide
adverse actual results as compared to the predictive results.
Our
success will depend, in part, on our ability to attract and
retain qualified personnel.
Our success will depend, in part, on our ability to attract,
retain and motivate qualified personnel, including executive
officers and other key management personnel. We cannot assure
you that we will be able to attract and retain qualified
management and other personnel necessary for our business. The
loss of key management personnel or other key employees or our
inability to attract such personnel may adversely affect our
ability to manage our overall operations and successfully
implement our business strategy.
While
we expand our business, we may not be successful in conveying
the knowledge of our long-serving personnel to newly hired
personnel and retaining our internal culture.
Much of our success can be attributed to the knowledge,
experience, and loyalty of our key management and other
personnel who have served us for many years. As we grow and
expand our operations, we will need to hire new employees to
implement our business strategies. It is important that the
knowledge and experience of our senior management and our
overall philosophies, business model, and operational standards,
including our differentiated high-touch approach to servicing,
are adequately conveyed to, and shared by, these new members of
our team. At the same time, we must ensure that our hiring and
retention practices serve to maintain our internal culture. If
we are unable to achieve these integration objectives, our
growth could come at a risk to our business model, which has
been a major underlying component of our success.
We may
change our investment and operational policies without
stockholder consent, which may adversely affect the market value
of our common stock and our ability to make distributions to our
stockholders.
Our Board of Directors determines our operational policies and
may amend or revise such policies, including our policies with
respect to our REIT qualification, acquisitions, dispositions,
growth, operations, indebtedness and distributions, or approve
transactions that deviate from these policies, without a vote
of, or notice to, our stockholders. Operational policy changes
could adversely affect the market value of our common stock and
our ability to make distributions to our stockholders.
Risks
Related To Our Investments
We
invest in subprime, non-conforming and other credit-challenged
residential loans, which are subject to increased risks relative
to performing loans.
Our portfolio includes, and we anticipate that we will use the
net proceeds from our secondary offering to acquire, subprime
residential loans and
sub-performing
and non-performing residential loans, which are subject to
increased risks of loss. Loans may be, or may become,
sub-performing
or non-performing for a variety of reasons, including, without
limitation, because the underlying property is too highly
leveraged or the borrower falls upon financial distress, in
either case, resulting in the borrower being unable to meet its
debt service obligations to us. Such
sub-performing
or non-performing loans may require a substantial amount of
workout negotiations
and/or
restructuring, which may divert the attention of our senior
management team from other activities and entail, among other
things, a substantial reduction in the interest rate,
capitalization of interest
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payments and a substantial write-down of the principal of the
loans. However, even if such restructuring were successfully
accomplished, a risk exists that the borrowers will not be able
or willing to maintain the restructured payments or refinance
the restructured loan upon maturity.
In addition, certain
sub-performing
or non-performing loans that we acquire may have been originated
by financial institutions that are or may become insolvent,
suffer from serious financial stress or are no longer in
existence. As a result, the standards by which such loans were
originated, the recourse to the selling institution,
and/or the
standards by which such loans are being serviced or operated may
be adversely affected. Further, loans on properties operating
under the close supervision of a mortgage lender are, in certain
circumstances, subject to certain additional potential
liabilities that may exceed the value of our investment.
In the future, it is possible that we may find it necessary or
desirable to foreclose on some of the residential loans that we
acquire, and the foreclosure process may be lengthy and
expensive. Borrowers may resist mortgage foreclosure actions by
asserting numerous claims, counterclaims and defenses against us
including, without limitation, numerous lender liability claims
and defenses, even when such assertions may have no basis in
fact, in an effort to prolong the foreclosure action and force
the lender into a modification of the loan or a favorable
buy-out of the borrowers position. In some states,
foreclosure actions can sometimes take several years or more to
litigate. At any time prior to or during the foreclosure
proceedings, the borrower may file for bankruptcy, which would
have the effect of staying the foreclosure actions and further
delaying the foreclosure process. Foreclosure may create a
negative public perception of the related mortgaged property,
resulting in a diminution of its value. Even if we are
successful in foreclosing on a loan, the liquidation proceeds
upon sale of the underlying real estate may not be sufficient to
recover our cost basis in the loan, resulting in a loss to us.
Furthermore, any costs or delays involved in the effectuation of
a foreclosure of the loan or a liquidation of the underlying
property will further reduce the proceeds and thus increase the
loss. Any such reductions could materially and adversely affect
the value of the residential loans in which we intend to invest.
Whether or not we have participated in the negotiation of the
terms of any such mortgages, there can be no assurance as to the
adequacy of the protection of the terms of the loan, including
the validity or enforceability of the loan and the maintenance
of the anticipated priority and perfection of the applicable
security interests. Furthermore, claims may be asserted that
might interfere with enforcement of our rights. In the event of
a foreclosure, we may assume direct ownership of the underlying
real estate. The liquidation proceeds upon sale of such real
estate may not be sufficient to recover our cost basis in the
loan, resulting in a loss to us. Any costs or delays involved in
the effectuation of a foreclosure of the loan or a liquidation
of the underlying property will further reduce the proceeds and
thus increase the loss.
Whole loan mortgages are also subject to special
hazard risk (property damage caused by hazards, such as
earthquakes or environmental hazards, not covered by standard
property insurance policies), and to bankruptcy risk (reduction
in a borrowers mortgage debt by a bankruptcy court). In
addition, claims may be assessed against us on account of our
position as mortgage holder or property owner, including
responsibility for tax payments, environmental hazards and other
liabilities, which could have a material adverse effect on our
results of operations, financial condition and our ability to
make distributions to our stockholders.
We may
not realize expected income from our portfolio.
We invest to generate current income. To the extent the
borrowers on the residential loans we invest in default on
interest or principal payments, we may not be able to realize
income from our portfolio. Any income that we realize may not be
sufficient to offset our expenses. Our inability to realize
income from our portfolio would have a material adverse effect
on our financial condition and results of operations, our
ability to make distributions to stockholders and the trading
price of our common stock.
Increases
in interest rates could negatively affect the value of our
portfolio, which could result in reduced earnings or losses and
negatively affect the cash available for distribution to
stockholders.
We have and will likely continue to invest directly in
residential loans. Under a normal yield curve, an investment in
these loans will decline in value if long-term interest rates
increase. Declines in market value may ultimately reduce
earnings or result in losses to us, which may negatively affect
cash available for
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distribution to you. A significant risk associated with our
portfolio is the risk that long-term interest rates will
increase significantly. If long-term rates were to increase
significantly, the market value of our portfolio would decline,
and the duration and weighted average life of our portfolio
would increase. While we plan to hold our portfolio to maturity,
we could realize a loss if our portfolio were to be sold. Market
values of our portfolio may decline without any general increase
in interest rates for a number of reasons, such as increases in
defaults, increases in voluntary prepayments for those
residential loans that are subject to prepayment risk and
widening of credit spreads.
Accounting
rules for certain of our transactions continue to evolve, are
highly complex, and involve significant judgments and
assumptions. Changes in accounting interpretations or
assumptions could impact our financial statements.
Accounting rules for determining the fair value measurement and
disclosure of financial instruments are highly complex and
involve significant judgment and assumptions. These complexities
could lead to a delay in preparation of financial information
and the delivery of this information to our stockholders.
Changes in accounting interpretations or assumptions related to
fair value could impact our financial statements and our ability
to timely prepare our financial statements.
A
prolonged economic slowdown, a recession or declining real
estate values could impair our portfolio and harm our operating
results.
Our portfolio is susceptible to economic slowdowns or
recessions, which could lead to financial losses in our
portfolio and a decrease in revenues, net income and assets.
Unfavorable economic conditions also could increase our funding
costs, limit our access to the capital markets, result in a
decision by lenders not to extend credit to us, or force us to
sell assets at an inopportune time and for a loss. These events
could prevent us from increasing investments and have an adverse
effect on our operating results.
Failure
to hedge effectively against interest rate changes may adversely
affect results of operations.
We currently are not involved in any material hedging activities
or transactions. However, subject to maintaining our
qualification as a REIT, we may in the future seek to manage our
exposure to interest rate volatility by using interest rate
hedging arrangements, such as interest cap agreements and
interest rate swap agreements. These agreements may fail to
protect or could adversely affect us because, among other things:
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interest rate hedging can be expensive, particularly during
periods of rising and volatile interest rates;
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available interest rate hedges may not correspond directly with
the interest rate risk for which protection is sought;
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the duration of the hedge may not match the duration of the
related liability;
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the amount of income that a REIT may earn from non-qualified
hedging transactions (other than through TRSs) to offset
interest rate losses is limited by U.S. federal tax
provisions governing REITs;
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the credit quality of the party owing money on the hedge may be
downgraded to such an extent that it impairs our ability to sell
or assign our side of the hedging transaction;
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the party owing money in the hedging transaction may default on
its obligation to pay; and
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a court could rule that such an agreement is not legally
enforceable.
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We intend only to enter into contracts with major financial
institutions based on their credit rating and other factors, but
our Board of Directors may choose to change this policy in the
future. Hedging may reduce any overall returns on our
investments, which could reduce our cash available for
distribution to our stockholders. Failure to hedge effectively
against interest rate changes may materially adversely affect
our results of operations.
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Changes
in prepayment rates could negatively affect the value of our
residential loan portfolio, which could result in reduced
earnings or losses and negatively affect the cash available for
distribution to stockholders.
There are seldom any restrictions on borrowers abilities
to prepay their residential loans. Homeowners tend to prepay
residential loans faster when interest rates decline.
Consequently, owners of the loans have to reinvest the money
received from the prepayments at the lower prevailing interest
rates. Conversely, homeowners tend not to prepay residential
loans when interest rates increase. Consequently, owners of the
loans are unable to reinvest money that would have otherwise
been received from prepayments at the higher prevailing interest
rates. This volatility in prepayment may result in reduced
earnings or losses for us and negatively affect the cash
available for distribution to you.
To the extent our residential loans are purchased at a premium,
faster-than-expected
prepayments result in a
faster-than-expected
amortization of the premium paid, which would adversely affect
our earnings. Conversely, if these residential loans were
purchased at a discount,
faster-than-expected
prepayments accelerate our recognition of income.
A
decrease in prepayment rates may adversely affect our
profitability.
Borrower prepayment of residential loans may adversely affect
our profitability. We may purchase residential loans that have a
lower interest rate than the then-prevailing market interest
rate. In exchange for this lower interest rate, we may pay a
discount to par value to acquire the investment. In accordance
with accounting rules, we will accrete this discount over the
expected term of the investment based on our prepayment
assumptions. If the investment is prepaid at a slower than
expected rate, however, we must accrete the remaining portion of
the discount at a slower than expected rate. This will extend
the expected life of the portfolio and result in a
lower-than-expected
yield on investment purchased at a discount to par.
The
residential loans we invest in are subject to delinquency,
foreclosure and loss, which could result in losses to
us.
Residential loans are typically secured by single-family
residential property and are subject to risks of delinquency,
foreclosure, and risks of loss. The ability of a borrower to
repay a loan secured by a residential property is dependent upon
the income or assets of the borrower. A number of factors,
including a general economic downturn, acts of God, terrorism,
social unrest and civil disturbances, may impair borrowers
abilities to repay their loans. In the event of the bankruptcy
of a residential loan borrower, the residential loan to such
borrower will be deemed to be secured only to the extent of the
value of the underlying collateral at the time of bankruptcy (as
determined by the bankruptcy court), and the lien securing the
residential loan will be subject to the avoidance powers of the
bankruptcy trustee or
debtor-in-possession
to the extent the lien is unenforceable under state law.
Foreclosure of a residential loan can be an expensive and
lengthy process which could have a substantial negative effect
on our anticipated return on the foreclosed residential loan.
Our
real estate investments are subject to risks particular to real
property.
We own assets secured by real estate and may own real estate
directly in the future upon a default of residential loans. Real
estate investments are subject to various risks, including:
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acts of God, including earthquakes, floods and other natural
disasters, which may result in uninsured losses;
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acts of war or terrorism, including the consequences of
terrorist attacks, such as those that occurred on September 11,
2001;
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adverse changes in national and local economic and market
conditions;
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changes in governmental laws and regulations, fiscal policies
and zoning ordinances and the related costs of compliance with
laws and regulations, fiscal policies and ordinances;
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costs of remediation and liabilities associated with
environmental conditions such as indoor mold;
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condemnation; and
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the potential for uninsured or under-insured property losses.
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If any of these or similar events occurs, it may reduce our
return from an affected property or investment and reduce or
eliminate our ability to make distributions to you.
Insurance
on residential loans and their collateral may not cover all
losses.
There are certain types of losses, generally of a catastrophic
nature, such as earthquakes, floods, hurricanes, terrorism or
acts of war, that may be uninsurable or not economically
insurable. Inflation, changes in building codes and ordinances,
environmental considerations and other factors, including
terrorism or acts of war, also might make the insurance proceeds
insufficient to repair or replace a property if it is damaged or
destroyed. Under these circumstances, the insurance proceeds
received might not be adequate to restore our economic position
with respect to the affected real property. Any uninsured loss
could result in the loss of cash flow from, and the asset value
of, the affected property.
We may
be exposed to environmental liabilities with respect to
properties to which we take title, which may in turn decrease
the value of the underlying properties.
In the course of our business, we may take title to real estate,
and, if we do take title, we could be subject to environmental
liabilities with respect to these properties. In such a
circumstance, we may be held liable to a governmental entity or
to third parties for property damage, personal injury,
investigation, and
clean-up
costs incurred by these parties in connection with environmental
contamination, or we may be required to investigate or clean up
hazardous or toxic substances, or chemical releases at a
property. The costs associated with investigation or remediation
activities could be substantial. If we ever become subject to
significant environmental liabilities, our business, financial
condition, liquidity, and results of operations could be
materially and adversely affected. In addition, an owner or
operator of real property may become liable under various
federal, state and local laws, for the costs of removal of
certain hazardous substances released on its property. Such laws
often impose liability without regard to whether the owner or
operator knew of, or was responsible for, the release of such
hazardous substances. The presence of hazardous substances may
adversely affect an owners ability to sell real estate or
borrow using real estate as collateral. To the extent that an
owner of an underlying property becomes liable for removal
costs, the ability of the owner to make debt payments may be
reduced, which in turn may adversely affect the value of the
relevant mortgage-related assets held by us.
Risks
Related To The Funds Obtained in Our 2009 Secondary Offering and
Our Common Stock
We may
allocate the net proceeds from the offering to investments with
which you may not agree.
In October 2009, we raised approximately $76.8 million in
capital through a secondary offering of company stock. As of
December 31, 2009 we had not yet identified suitable
investments for any of those funds. We will have significant
flexibility in investing the net proceeds of this offering and
we may use the net proceeds from this offering to make
investments with which you may not agree. The failure of our
management to apply these proceeds effectively or find
investments that meet our investment criteria in sufficient time
or on acceptable terms could result in unfavorable returns,
could cause a material adverse effect on our financial
conditions and results of operations, and could cause the value
of our common stock to decline.
There
is a risk that you may not receive distributions or that
distributions may not grow over time.
We anticipate making distributions on a quarterly basis out of
assets legally available therefor to our stockholders in amounts
such that all or substantially all of our REIT taxable income in
each year is distributed. We have not established a minimum
distribution payment level and our ability to pay distributions
may be adversely affected by a number of factors, including the
risk factors described in this Annual Report on
Form 10-K.
All distributions will be made at the discretion of our Board of
Directors and will depend on our earnings, our financial
condition, maintenance of our REIT status and other factors as
our Board of
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Directors may deem relevant from time to time. Among the factors
that could adversely affect our results of operations and impair
our ability to pay distributions, or the amount we have to pay
to our stockholders are:
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the profitability of the investment of the net proceeds of our
secondary offering;
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our ability to make profitable investments;
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defaults in our asset portfolio or decreases in the value of our
portfolio; and
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the fact that anticipated operating expense levels may not prove
accurate, as actual results may vary from estimates.
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A change in any one of these factors could affect our ability to
make distributions. We cannot assure you that we will achieve
results that will allow us to make a specified level of cash
distributions or
year-to-year
increases in cash distributions.
Market
interest rates may have an effect on the trading value of our
shares.
One of the factors that investors may consider in deciding
whether to buy or sell our common stock is our dividend rate as
a percentage of our share price relative to market interest
rates. If market interest rates increase, prospective investors
may demand a higher dividend rate or seek alternative
investments paying higher dividends or interest. As a result,
interest rate fluctuations and capital market conditions can
affect the market value of our shares. For instance, if interest
rates rise, it is likely that the market price of our shares
will decrease as market rates on interest-bearing securities,
such as bonds, increase.
Investing
in our shares may involve a high degree of risk.
The investments we make in accordance with our investment
objectives may result in a high amount of risk when compared to
alternative investment options and volatility or loss of
principal. Our investments may be highly speculative and
aggressive, are subject to credit risk, interest rate, and
market value risks, among others and therefore an investment in
our shares may not be suitable for someone with lower risk
tolerance.
Broad
market fluctuations could negatively impact the market price of
our common stock.
The stock market has recently experienced extreme price and
volume fluctuations that have affected the market price of the
shares of many companies in industries similar or related to
ours and that have been unrelated to these companies
operating performances. These broad market fluctuations could
reduce the market price of our common stock. Furthermore, our
operating results and prospects may be below the expectations of
public market analysts and investors or may be lower than those
of companies with comparable market capitalizations, which could
lead to a material decline in the market price of our common
stock.
Our
existing portfolio of residential loans was primarily purchased
from and originated by Walter Energys homebuilding
affiliate, JWH, and we may not be successful in identifying and
consummating suitable investment opportunities independent of
this origination platform, which may impede our growth and
negatively affect our results of operations.
Our ability to expand through acquisitions of portfolios of
residential loans or otherwise is integral to our business
strategy and requires us to identify suitable investment
opportunities that meet our criteria. Our existing portfolio of
residential loans was primarily purchased from and originated by
Walter Energys homebuilding affiliate, JWH, and these
loans were underwritten according to our specifications.
Following the spin-off of our business from Walter Energy, we
now operate our business on an independent basis and there can
be no assurance that we will be successful in identifying and
consummating suitable investment opportunities independent of
Walter Energy and JWH. Failure to identify or consummate
acquisitions of portfolios of residential loans on attractive
terms or at all will slow our growth, which could in turn
adversely affect our results of operations.
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Risks
Related to Our Organization and Structure
Certain
provisions of Maryland law could inhibit a change in our
control.
Certain provisions of the Maryland General Corporation Law, or
the MGCL, may have the effect of inhibiting a third party from
making a proposal to acquire us or of impeding a change in our
control under circumstances that otherwise could provide the
holders of shares of our common stock with the opportunity to
realize a premium over the then prevailing market price of such
shares. We are subject to the business combination
provisions of the MGCL that, subject to limitations, prohibit
certain business combinations between us and an interested
stockholder (defined generally as any person who
beneficially owns 10% or more of our then outstanding voting
shares or an affiliate or associate of ours who, at any time
within the two-year period prior to the date in question, was
the beneficial owner of 10% or more of our then outstanding
voting shares) or an affiliate thereof for five years after the
most recent date on which the stockholder becomes an interested
stockholder and, thereafter, imposes special appraisal rights
and special stockholder voting requirements on these
combinations. These provisions of the MGCL do not apply,
however, to business combinations that are approved or exempted
by the Board of Directors of a corporation prior to the time
that the interested stockholder becomes an interested
stockholder. Pursuant to the statute, our Board of Directors has
by resolution exempted business combinations between us and any
other person, provided that the business combination is first
approved by our Board of Directors. This resolution, however,
may be altered or repealed in whole or in part at any time. If
this resolution is repealed, or our Board of Directors does not
otherwise approve a business combination, this statute may
discourage others from trying to acquire control of us and
increase the difficulty of consummating any offer.
The control share provisions of the MGCL provide
that control shares of a Maryland corporation
(defined as shares which, when aggregated with all other shares
controlled by the stockholder, entitle the stockholder to
exercise one of three increasing ranges of voting power in the
election of directors) acquired in a control share
acquisition (defined as the acquisition of control
shares, subject to certain exceptions) have no voting
rights except to the extent approved by our stockholders by the
affirmative vote of at least two-thirds of all the votes
entitled to be cast on the matter, excluding votes entitled to
be cast by the acquirer of control shares, our officers and our
employees who are also our directors. Our bylaws contain a
provision exempting from the control share acquisition statute
any and all acquisitions by any person of our shares of stock.
There can be no assurance that this provision will not be
amended or eliminated at any time in the future.
The unsolicited takeover provisions of the MGCL
permit our Board of Directors, without stockholder approval and
regardless of what is currently provided in our charter or
bylaws, to implement certain provisions if we have a class of
equity securities registered under the Exchange Act (which we
have upon the completion of our secondary offering), and at
least three independent directors. These provisions may have the
effect of inhibiting a third party from making an acquisition
proposal for us or of delaying, deferring or preventing a change
in our control under circumstances that otherwise could provide
the holders of shares of our common stock with the opportunity
to realize a premium over the then current market price.
Our Board of Directors is divided into three classes of
directors. The terms of the directors expire in 2010, 2011 and
2012, respectively. Directors of each class will be elected for
three-year terms upon the expiration of their current terms, and
each year one class of directors will be elected by our
stockholders. The staggered terms of our directors may reduce
the possibility of a tender offer or an attempt at a change in
control, even though a tender offer or change in control might
be in the best interests of our stockholders.
Our
authorized but unissued shares of common and preferred stock may
prevent a change in our control.
Our charter authorizes us to issue additional authorized but
unissued shares of common or preferred stock. In addition, our
Board of Directors may, without stockholder approval, classify
or reclassify any unissued shares of common or preferred stock
and set the preferences, rights and other terms of the
classified or reclassified shares. As a result, our Board of
Directors may establish a series of shares of common or
preferred stock that could delay or prevent a transaction or a
change in control that might involve a premium price for our
shares of common stock or otherwise be in the best interest of
our stockholders.
23
Your
investment return may be reduced if we are required to register
as an investment company under the Investment Company Act of
1940. In seeking to qualify for an exemption from registration
under the Investment Company Act, our ability to make certain
investments will be limited, which also may reduce our
returns.
We do not intend to register as an investment company under the
Investment Company Act. If we were obligated to register as an
investment company, we would have to comply with a variety of
substantive requirements under the Investment Company Act that
impose, among other things:
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limitations on capital structure;
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restrictions on specified investments;
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prohibitions on transactions with affiliates; and
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compliance with reporting, record keeping, voting, proxy
disclosure and other rules and regulations that would
significantly increase our operating expenses
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In general, we expect to operate our company so that we will not
be required to register as an investment company under the
Investment Company Act because we are primarily engaged in
the business of purchasing or otherwise acquiring mortgages and
other liens on and interests in real estate. This
exemption generally requires that at least 55% of our portfolio
be comprised of real property and mortgages and other liens on
an interest in real estate (collectively, qualifying
assets) and at least 80% of our portfolio be comprised of
real estate-related assets. Qualifying assets include mortgage
loans, mortgage-backed securities that represent the entire
ownership in a pool of mortgage loans and other interests in
real estate. Specifically, our investment strategy is to invest
at least 55% of our assets in mortgage loans and other
qualifying interests in real estate. As a result, we are limited
in our ability to make certain investments. If we fail to
qualify for this exemption in the future, we could be required
to restructure our activities in a manner that or at a time when
we would not otherwise choose to do so, which could negatively
affect the value of shares of our common stock, the
sustainability of our business model, and our ability to make
distributions. In addition, we may have to acquire additional
income or loss generating assets that we might not otherwise
have acquired or may have to forego opportunities to acquire
interests in companies that we would otherwise want to acquire
and would be important to our investment strategy. Criminal and
civil actions could also be brought against us if we failed to
comply with the Investment Company Act.
In addition, there can be no assurance that the laws and
regulations governing REITs, including regulations issued by the
Division of Investment Management of the SEC, providing more
specific or different guidance regarding the treatment of assets
as qualifying real estate assets or real estate-related assets,
will not change in a manner that adversely affects our
operations.
Rapid
changes in the values of our residential loans and other real
estate-related assets may make it more difficult for us to
maintain our qualification as a REIT or exclusion from the
Investment Company Act.
If the market value or income potential of our residential loans
and other real estate-related assets declines as a result of
increased interest rates, prepayment rates or other factors, we
may need to increase certain real estate investments and income
and/or
liquidate our non-qualifying assets in order to maintain our
REIT qualification or our exclusion from the Investment Company
Act. Doing so may be especially difficult if the decline in real
estate asset values
and/or
income occurs quickly. This difficulty may be exacerbated by the
illiquid nature of our investments. We may have to make
investment decisions that we otherwise would not make absent our
REIT and Investment Company Act considerations.
Risks
Relating to Our Relationship with Walter Energy
We may
have substantial additional liability for U.S. federal income
tax allegedly owed by Walter Energy.
Each member of a consolidated group for U.S. federal income
tax purposes is jointly and severally liable for the federal
income tax liability of each other member of the consolidated
group for any year in which it is a member of the group at any
time during such year. Accordingly, we could be liable under
such provisions in
24
the event any such liability is incurred, and not discharged, by
any other member of the Walter Energy-controlled group for any
period during which we were included in the Walter
Energy-controlled group.
A controversy exists with regard to the U.S. federal income
taxes allegedly owed by Walter Energy for fiscal years ended
August 31, 1983 through May 31, 1994. WIM predecessor
companies were included within Walter Energy during these years.
According to Walter Energys most recent public filing, the
amount of tax claimed by the IRS in an adversary proceeding in
bankruptcy court, including interest and penalties, is
substantial. Walters public filing further provides that
Walter Energy believes that, should the IRS prevail on any
issues in dispute, Walter Energys exposure is limited to
interest and possible penalties and the amount of tax claimed
will be offset by deductions in other years. While Walter Energy
is obligated to indemnify us against any such claims, as a
matter of law, we are jointly and severally liable for any final
tax determination, which means that in the event Walter Energy
is unable to pay any amounts owed, we would be liable. Walter
Energy disclosed in its public filing that it believes its
filing positions have substantial merit and that they intend to
defend vigorously any claims asserted, but there can be no
assurance that Walter Energy is correct or that, if not, they
will be able to pay the amount of the claims.
The
tax separation agreement between us and Walter Energy allocates
to us certain tax risks associated with the spin-off of the
financing division and the Merger and imposes other obligations
that may affect our business.
Walter Energy effectively controlled all of our tax decisions
for periods during which we were a member of the Walter Energy
consolidated U.S. federal income tax group and certain
combined, consolidated, or unitary state and local income tax
groups. Under the terms of the tax separation agreement between
Walter Energy and WIM dated April 17, 2009, WIM generally
computes WIMs tax liability for purposes of its taxable
years ended December 31, 2008 and April 16, 2009, on a
stand-alone basis, but Walter Energy has sole authority to
respond to and conduct all tax proceedings (including tax
audits) relating to WIMs U.S. federal income and
combined state returns, to file all such returns on WIMs
behalf and to determine the amount of WIMs liability to
(or entitlement to payment from) Walter Energy for such periods.
This arrangement may result in conflicts of interests between us
and Walter Energy. In addition, the tax separation agreement
provides that if the spin-off is determined not to be tax-free
pursuant to Section 355 of the Code, WIM (and therefore we)
generally will be responsible for any taxes incurred by Walter
Energy or its stockholders if such taxes result from certain of
our actions or omissions or for a percentage of any such taxes
that are not a direct result of either our or Walter
Energys actions or omissions based upon a designated
allocation formula. Additionally, to the extent that Walter
Energy was unable to pay taxes, if any, attributable to the
spin-off and for which it is responsible under the tax
separation agreement, we could be liable for those taxes as a
result of WIM being a member of the Walter Energy consolidated
group for the year in which the spin-off occurred. Moreover, the
tax separation agreement obligates WIM to take certain tax
positions that are consistent with those taken historically by
Walter Energy. In the event we do not take such positions, we
could be liable to Walter Energy to the extent our failure to do
so results in an increased tax liability or the reduction of any
tax asset of Walter Energy.
Tax
Risks
Summary
of U.S. federal income tax risks.
This summary of certain tax risks is limited to the
U.S. federal income tax risks addressed below. Additional
risks or issues may exist that are not addressed in this Annual
Report on
Form 10-K
and that could affect the U.S. federal tax treatment of us
or our stockholders. Investors are advised to consult with tax
experts to fully assess their tax risks.
Complying
with REIT requirements may cause us to forego otherwise
attractive opportunities.
To qualify as a REIT for U.S. federal income tax purposes,
we must continually satisfy various tests regarding the sources
of our income, the nature and diversification of our assets, the
amounts we distribute to stockholders and the ownership of our
stock. To meet these tests, we may be required to forego
investments
25
we might otherwise make. We may be required to make
distributions to you at disadvantageous times or when we do not
have funds readily available for distribution. Thus, compliance
with the REIT requirements may hinder our investment performance.
Complying
with REIT requirements may force us to liquidate otherwise
attractive investments.
To qualify as a REIT, we must ensure that we meet the REIT gross
income tests annually and that at the end of each calendar
quarter at least 75% of the value of our total assets consists
of cash, cash items, government securities and qualified REIT
real estate assets, including certain residential loans and
mortgage-backed securities. The remainder of our investment in
securities (other than government securities and qualifying real
estate assets) generally cannot include more than 10% of the
outstanding voting securities of any one issuer or more than 10%
of the total value of the outstanding securities of any one
issuer other than a TRS. In addition, in general, no more than
5% of the value of our assets (other than government securities,
qualifying real estate assets, and securities issued by a TRS)
can consist of the securities of any one issuer, and no more
than 25% of the value of our total securities can be represented
by securities of one or more TRSs. If we fail to comply with
these requirements at the end of any quarter, we must correct
the failure within 30 days after the end of such calendar
quarter or qualify for certain statutory relief provisions to
avoid losing our REIT qualification and suffering adverse tax
consequences. As a result, we may be required to liquidate from
our portfolio or contribute otherwise attractive investments to
a TRS. These actions could have the effect of reducing our
income and amounts available for distribution to our
stockholders.
Failure
to qualify as a REIT would subject us to U.S. federal income tax
and applicable state and local taxes, which would reduce the
cash available for distribution to our
stockholders.
Qualifying as a REIT requires us to meet various tests regarding
the nature of our assets and our income, the ownership of our
outstanding stock, and the amount of our distributions on an
ongoing basis. Our ability to satisfy the gross income and asset
tests depends upon our analysis of the characterization and fair
market values of our assets, some of which are not susceptible
to a precise determination, and for which we will not obtain
independent appraisals. Our compliance with the REIT annual
income and quarterly asset requirements also depends upon our
ability to successfully manage the composition of our income and
assets on an ongoing basis. Certain rules applicable to REITs
are particularly difficult to interpret or to apply in the case
of REITs investing in real estate mortgage loans that are
acquired at a discount, subject to work-outs or modifications,
or reasonably expected to be in default at the time of
acquisition. Moreover, new legislation, court decisions or
administrative guidance, in each case possibly with retroactive
effect, may make it more difficult or impossible for us to
qualify as a REIT. Thus, while we believe that we have operated
and intend to continue to operate so that we will qualify as a
REIT, given the highly complex nature of the rules governing
REITs, the ongoing importance of factual determinations,
including the tax treatment of certain investments we may make,
and the possibility of future changes in our circumstances, no
assurance can be given that we have qualified or will continue
to so qualify for any particular year.
If we fail to qualify as a REIT in any calendar year and we do
not qualify for certain statutory relief provisions, we would be
required to pay U.S. federal income tax on our taxable
income. We might need to borrow money or sell assets to pay that
tax. Our payment of income tax would decrease the amount of our
income available for distribution to our stockholders.
Furthermore, if we fail to maintain our qualification as a REIT
and we do not qualify for certain statutory relief provisions,
we no longer would be required to distribute substantially all
of our net taxable income to our stockholders. Unless our
failure to qualify as a REIT were excused under
U.S. federal tax laws, we would be disqualified from
taxation as a REIT for the four taxable years following the year
during which we failed to qualify.
Classification
of a securitization or financing arrangement we enter into as a
taxable mortgage pool could subject us or certain of our
stockholders to increased taxation.
We intend to structure our securitization and financing
arrangements so as to not create a taxable mortgage pool, or
TMP. However, if we have borrowings with two or more maturities
and (1) those borrowings are secured by mortgages or
mortgage-backed securities and (2) the payments made on
the
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borrowings are related to the payments received on the
underlying assets, then the borrowings and the pool of mortgages
or mortgage-backed securities to which such borrowings relate
may be classified as a TMP under the Code. If any part of our
investments were to be treated as a TMP, then our REIT
qualification would not be impaired, but a portion of the
taxable income we recognize may be characterized as excess
inclusion income and allocated among our stockholders to
the extent of and generally in proportion to the distributions
we make to each stockholder. Any excess inclusion income would:
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not be allowed to be offset by a stockholders net
operating losses;
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be subject to a tax as unrelated business income if a
stockholder were a tax-exempt stockholder and not a disqualified
organization as discussed below;
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be subject to the application of U.S. federal income tax
withholding at the maximum rate (without reduction for any
otherwise applicable income tax treaty) with respect to amounts
allocable to foreign stockholders; and
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be taxable (at the highest corporate tax rate) to us rather than
to you, to the extent the excess inclusion income relates to
stock held by disqualified organizations (generally, tax-exempt
organizations not subject to tax on unrelated business income,
including governmental organizations).
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REIT
distribution requirements could adversely affect our ability to
execute our business plan and may require us to incur debt or
sell assets to make such distributions.
In order to qualify as a REIT, we must distribute to our
stockholders, each calendar year, at least 90% of our REIT
taxable income (including certain items of non-cash income),
determined without regard to the deduction for dividends paid
and excluding net capital gain. To the extent that we satisfy
the 90% distribution requirement, but distribute less than 100%
of our taxable income, we are subject to U.S. federal
corporate income tax on our undistributed income. In addition,
we will incur a 4% nondeductible excise tax on the amount, if
any, by which our distributions in any calendar year are less
than a minimum amount specified under U.S. federal income
tax laws. We intend to distribute our net income to our
stockholders in a manner that will satisfy the REIT 90%
distribution requirement and to avoid the 4% nondeductible
excise tax.
Our taxable income may substantially exceed our net income as
determined by GAAP or differences in timing between the
recognition of taxable income and the actual receipt of cash may
occur. For example, we may be required to accrue interest and
discount income on mortgage loans and other types of debt
securities or interests in debt securities before we receive any
payments of interest or principal on such assets. We may also
acquire distressed debt instruments that are subsequently
modified by agreement with the borrower either directly or
pursuant to our involvement in programs recently announced by
the U.S. federal government. If the amendments to the
outstanding debt are significant modifications under
applicable regulations promulgated by the Treasury, or Treasury
Regulations, the modified debt may be considered to have been
reissued to us at a gain in a
debt-for-debt
exchange with the borrower, with gain recognized by us to the
extent that the principal amount of the modified debt exceeds
our cost of purchasing it prior to modification. We may also be
required under the terms of the indebtedness that we incur,
whether to private lenders or pursuant to government programs,
to use cash received from interest payments to make principal
payment on that indebtedness, with the effect that we will
recognize income but will not have a corresponding amount of
cash available for distribution to our stockholders.
As a result of the foregoing, we may generate less cash flow
than taxable income in a particular year and find it difficult
or impossible to meet the REIT distribution requirements in
certain circumstances. In such circumstances, we may be required
to: (i) sell assets in adverse market conditions,
(ii) borrow on unfavorable terms, (iii) distribute
amounts that would otherwise be invested in future acquisitions,
capital expenditures or repayment of debt, (iv) make a
taxable distribution of our shares as part of a distribution in
which stockholders may elect to receive shares or (subject to a
limit measured as a percentage of the total distribution) cash
or (v) use cash reserves, in order to comply with the REIT
distribution requirements and to avoid corporate income tax and
the 4% nondeductible excise tax. Thus, compliance with the REIT
distribution requirements may hinder our ability to grow, which
could adversely affect the value of our common stock.
27
The
tax on prohibited transactions will limit our ability to engage
in transactions, including certain methods of securitizing
residential loans, that would be treated as sales for U.S.
federal income tax purposes.
A REITs net income from prohibited transactions is subject
to a 100% tax. In general, prohibited transactions are sales or
other dispositions of property, other than foreclosure property,
but including residential loans, held primarily for sale to
customers in the ordinary course of business. We might be
subject to this tax if we sold or securitized our assets in a
manner that was treated as a sale for U.S. federal income
tax purposes. Therefore, to avoid the prohibited transactions
tax, we may choose not to engage in certain sales of assets at
the REIT level, and may securitize assets only in transactions
that are treated as financing transactions and not as sales for
tax purposes even though such transactions may not be the
optimal execution on a pre-tax basis. We may be able to avoid
any prohibited transactions tax concerns by engaging in
securitization transactions through a TRS, subject to certain
limitations described above. To the extent that we engage in
such activities through TRSs, the income associated with such
activities will be subject to U.S. federal (and applicable
state and local) corporate income tax.
We may
be required to report taxable income for certain investments in
excess of the economic income we ultimately realize from
them.
We expect that we will acquire debt instruments in the secondary
market for less than their face amount. The amount of such
discount is generally treated as market discount for
U.S. federal income tax purposes. We have made an election,
which cannot be revoked without the consent of the IRS, to
include market discount in income on our loan assets on a basis
of a constant yield to maturity. Consequently, we will be
required to include market discount with respect to a loan in
income each period as if such loan were assured of ultimately
being collected in full. If we collect less on the debt
instrument than our purchase price plus the market discount we
had previously reported as income, we may not be able to benefit
from any offsetting loss deductions in a later taxable year.
In the event that any debt instruments acquired by us are
delinquent as to mandatory principal and interest payments, or
in the event payments with respect to a particular debt
instrument are not made when due, we may nonetheless be required
to continue to recognize the unpaid interest as taxable income
as it accrues, despite doubt as to its ultimate collectability.
In this case, while we would in general ultimately have an
offsetting loss deduction available to us when such interest was
determined to be uncollectible, the utility of that deduction
could depend on our having taxable income in that later year or
thereafter.
Finally, we or one of our TRSs may recognize taxable
phantom income as a result of modifications,
pursuant to agreements with borrowers, of debt instruments that
we acquire if the amendments to the outstanding debt are
significant modifications under applicable Treasury
Regulations.
Even
if we qualify as a REIT, we may face tax liabilities that reduce
our cash flow.
Even if we qualify for taxation as a REIT, we may be subject to
certain U.S. federal, state and local taxes on our income
and assets, including taxes on any undistributed income, tax on
income from some activities conducted as a result of a
foreclosure, and state or local income, franchise, property and
transfer taxes, including mortgage recording taxes. In addition,
we could in certain circumstances be required to pay an excise
or penalty tax (which could be significant in amount) in order
to utilize one or more relief provisions under the Code in order
to maintain or qualification as a REIT. In addition, any TRSs we
own, such as Walter Investment Holding Company, Hanover Capital
Partners 2, Ltd., Best Insurors, Inc. and Walter Investment
Reinsurance Company, Ltd., may be subject to U.S. federal,
state and local corporate taxes. In order to meet the REIT
qualification requirements, or to avoid the imposition of a 100%
tax that applies to certain gains derived by a REIT from sales
of inventory or property held primarily for sale to customers in
the ordinary course of business, we may hold some of our assets
through taxable subsidiary corporations, including TRSs. Any
taxes paid by such subsidiary corporations would decrease the
cash available for distribution to our stockholders.
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The
failure of mortgage loans subject to a repurchase agreement to
qualify as a real estate asset would adversely affect our
ability to qualify as a REIT.
We may enter into repurchase agreements under which we will
nominally sell certain of our assets to a counterparty and
simultaneously enter into an agreement to repurchase the sold
assets. We believe that we will be treated for U.S. federal
income tax purposes as the owner of the assets that are the
subject of repurchase agreements and that the repurchase
agreements will be treated as secured lending transactions
notwithstanding that such agreements may transfer record
ownership of the assets to the counterparty during the term of
the agreement. It is possible, however, that the IRS could
assert that we did not own the assets during the term of the
repurchase agreement, in which case we could fail to qualify as
a REIT.
We may
choose to make distributions in our own stock, in which case you
may be required to pay income taxes in excess of the cash
dividends you receive.
We may distribute taxable dividends that are payable in cash and
shares of our common stock at the election of each stockholder.
Under IRS Revenue Procedure
2009-15, up
to 90% of any such taxable dividend for 2009 could be payable in
our stock. Taxable stockholders receiving such dividends will be
required to include the full amount of the dividend as ordinary
income to the extent of our current or accumulated earnings and
profits for U.S. federal income tax purposes. As a result,
U.S. holders, may be required to pay income taxes with
respect to such dividends in excess of the cash dividends
received. Accordingly, U.S. holders receiving a
distribution of our shares may be required to sell shares
received in such distribution or may be required to sell other
stock or assets owned by them, at a time that may be
disadvantageous, in order to satisfy any tax imposed on such
distribution. If a U.S. holder sells the stock that it
receives as a dividend in order to pay this tax, the sales
proceeds may be less than the amount included in income with
respect to the dividend, depending on the market price of our
stock at the time of the sale. Furthermore, with respect to
certain
non-U.S. holders,
we may be required to withhold tax with respect to such
dividends, including in respect of all or a portion of such
dividend that is payable in stock, by withholding or disposing
of part of the shares in such distribution and using the
proceeds of such disposition to satisfy the withholding tax
imposed. In addition, if a significant number of our
stockholders determine to sell shares of our common stock in
order to pay taxes owed on dividends, such sale may put downward
pressure on the trading price of our common stock.
Further, while Revenue Procedure
2009-15
applies only to taxable dividends payable by us in cash or stock
in 2009, it is unclear whether and to what extent we will be
able to pay taxable dividends in cash and stock in later years.
Moreover, various tax aspects of such a taxable cash/stock
dividend are uncertain and have not yet been addressed by the
IRS. No assurance can be given that the IRS will not impose
additional requirements in the future with respect to taxable
cash/stock dividends, including on a retroactive basis, or
assert that the requirements for such taxable cash/stock
dividends have not been met.
The
percentage of our assets represented by TRSs and the amount of
our income that we can receive in the form of TRS dividends are
subject to statutory limitations that could jeopardize our REIT
qualification.
A REIT may own up to 100% of the stock of one or more TRSs. A
TRS may earn income that would not be qualifying income if
earned directly by the parent REIT. Both the subsidiary and the
REIT must jointly elect to treat the subsidiary as a TRS. A
significant portion of our activities will likely be conducted
through one or more TRSs, and we expect that such TRSs may from
time to time hold significant assets. Overall, no more than 25%
of the value of a REITs assets may consist of stock or
securities of one or more TRSs (at the end of each quarter).
While we intend to manage our affairs so as to satisfy this
requirement, there can be no assurance that we will be able to
do so in all market circumstances.
TRSs, such as Walter Investment Holding Company, Hanover Capital
Partners 2, Ltd., Best Insurors, Inc. and Walter Investment
Reinsurance Company, Ltd., that we form may pay
U.S. federal, state and local income tax on their taxable
income, and their after-tax net income will be available for
distribution to us but is not required to be distributed to us,
unless necessary to maintain our REIT qualification. We will
receive distributions from TRSs which will be classified as
dividend income to the extent of the earnings and profits
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of the distributing corporation. We may from time to time need
to make such distributions in order to keep the value of our
TRSs below 25% of our total assets. However, TRS dividends will
generally not constitute good income for purposes of
one of the tests we must satisfy to qualify as a REIT, namely,
that at least 75% of our gross income must in each taxable year
generally be from real estate assets. While we will be
monitoring our compliance with both this income test and the
limitation on the percentage of our assets represented by TRS
securities, and intend to conduct our affairs so as to comply
with both, the two may at times be in conflict with one another.
That is, it is possible that we may wish to distribute a
dividend from a TRS in order to reduce the value of our TRSs
below 25% of our assets, but be unable to do so without
violating the requirement that 75% of our gross income in the
taxable year be derived from real estate assets. Although there
are other measures we can take in such circumstances in order to
remain in compliance, there can be no assurance that we will be
able to comply with both of these tests in all market conditions.
Despite
our qualification as a REIT, a significant portion of our income
may be earned through TRSs that are subject to U.S. federal
income taxation.
Despite our qualification as a REIT, we may be subject to a
significant amount of U.S. federal income taxes. We may
hold a significant amount of our assets from time to time in one
or more TRSs, subject to the limitation that securities in TRSs
may not represent more than 25% of our assets in order for us to
remain qualified as a REIT. In general, we intend that loans
that we originate or buy with an intention of selling in a
manner that might expose us to the 100% tax on prohibited
transactions will be originated or sold by a TRS. In
addition, loans that are to be modified will in general be held
by a TRS on the date of their modification and for a period of
time thereafter. Finally, some or all of the real estate
properties that we may from time to time acquire by foreclosure
or other procedure may be held in one or more TRSs. All taxable
income and gains derived from the assets held from time to time
in our TRSs will be subject to regular corporate income taxation.
Complying
with REIT requirements may limit our ability to hedge
effectively.
The REIT provisions of the Code may limit our ability to hedge
our assets and operations. Under these provisions, any income
that we generate from transactions intended to hedge our
interest rate risk will be excluded from gross income for
purposes of the REIT 75% and 95% gross income tests if the
instrument hedges interest rate risk on liabilities used to
carry or acquire real estate assets, and such instrument is
properly identified under applicable Treasury Regulations.
Income from hedging transactions that do not meet these
requirements will generally constitute non-qualifying income for
purposes of both the REIT 75% and 95% gross income tests. As a
result of these rules, we may have to limit our use of hedging
techniques that might otherwise be advantageous or implement
those hedges through a TRS. This could increase the cost of our
hedging activities because our TRS would be subject to tax on
gains or expose us to greater risks associated with changes in
interest rates than we would otherwise want to bear. In
addition, losses in our TRS will generally not provide any tax
benefit, except for being carried forward against future taxable
income in the TRS.
We may
be subject to adverse legislative or regulatory tax changes that
could reduce the market price of our common stock.
At any time, the U.S. federal income tax laws or
regulations governing REITs or the administrative
interpretations of those laws or regulations may be amended. We
cannot predict when or if any new U.S. federal income tax
law, regulation or administrative interpretation, or any
amendment to any existing U.S. federal income tax law,
regulation or administrative interpretation, will be adopted,
promulgated or become effective and any such law, regulation or
interpretation may take effect retroactively. We and you could
be adversely affected by any such change in, or any new,
U.S. federal income tax law, regulation or administrative
interpretation.
30
Dividends
payable by REITs do not qualify for reduced tax rates available
for some dividends.
Legislation enacted in 2003 generally reduces the maximum tax
rate for qualified dividends payable to domestic
stockholders that are individuals, trusts and estates to 15%
(for taxable years beginning on or before December 31,
2010). Dividends payable by REITs, however, are generally not
eligible for the reduced rates. Although this legislation does
not adversely affect the taxation of REITs or dividends paid by
REITs, and the more favorable rates applicable to regular
corporate dividends could cause investors who are individuals,
trusts, and estates to perceive investments in REITs to be
relatively less attractive than investments in stock of non-REIT
corporations that pay dividends, which could adversely affect
the value of the stock of REITs, including our common stock.
There
are uncertainties relating to the estimate of our special
E&P distribution, which could result in our
disqualification as a REIT.
In order to remain qualified as a REIT, we are required to
distribute to our stockholders all of our accumulated non-REIT
tax earnings and profits, or E&P prior to the close of the
taxable year. Immediately following the spin-off transaction but
prior to the Merger, a special E&P distribution consisting
of cash of approximately $16 million of cash and additional
WIM equity interests was made to WIMs interest holders. We
believe that the amount of WIMs special E&P
distribution equaled or exceeded the amount of WIMs
subchapter C earnings and profits, and therefore we did not
succeed to any such C corporation E&P as a result of the
Merger. There are, however, substantial uncertainties relating
to the determination of the amount of WIMs E&P,
including the possibility that the IRS could, in any audits for
tax years through 2008, successfully assert that WIM or Walter
Energys taxable income should be increased, which would
increase WIMs pre-Merger E&P. Thus, we might fail to
satisfy the requirement that we distributed all of our
subchapter C E&P. Moreover, although there are procedures
available to cure a failure to distribute all of our subchapter
C E&P, we cannot now determine whether we would be able to
take advantage of them or the economic impact on us of doing so.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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None.
Our executive offices and principal administrative offices are
located at 3000 Bayport Drive, Suite 1100, Tampa, Florida,
33607. This sublease expires on April 29, 2016 and has a
2010 rental obligation of $0.6 million.
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ITEM 3.
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LEGAL
PROCEEDINGS
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We are not currently a party to any lawsuit or proceeding which,
in the opinion of management, is likely to have a material
adverse effect on our business, financial condition, or results
of operation.
Notwithstanding the above, we are involved in litigation,
investigations and claims arising out of the normal conduct of
our business. We estimate and accrue liabilities resulting from
such matters based on a variety of factors, including
outstanding legal claims and proposed settlements and
assessments by internal counsel of pending or threatened
litigation. These accruals are recorded when the costs are
determined to be probable and are reasonably estimable. We
believe we have adequately accrued for these potential
liabilities; however, facts and circumstances may change that
could cause the actual liabilities to exceed the estimates, or
that may require adjustments to the recorded liability balances
in the future.
Notwithstanding the foregoing, WMC is a party to a lawsuit
entitled Casa Linda Homes, et al. v. Walter Mortgage
Company, et al., Cause
No. C-2918-08-H,
389th
Judicial District Court of Hidalgo County, Texas, claiming
breach of contract, fraud, negligent misrepresentation, breach
of fiduciary duty and bad faith, promissory estoppel and unjust
enrichment. The plaintiffs are seeking actual and exemplary
damages, the amount of which have not been specified, but if
proven could be material. The allegations arise from a claim
31
that we breached a contract with the plaintiffs by failing to
purchase a certain amount of loan pool packages from the
corporate plaintiff, a Texas real estate developer. We believe
the case to be without merit and are vigorously pursuing the
defense of the claim.
As discussed in Note 15 of Notes to Consolidated
Financial Statements, Walter Energy is in dispute with the
IRS on a number of federal income tax issues. Walter Energy has
stated in its public filings that it believes that all of its
current and prior tax filing positions have substantial merit
and that Walter Energy intends to defend vigorously any tax
claims asserted. Under the terms of the tax separation agreement
between us and Walter Energy dated April 17, 2009, Walter
Energy is responsible for the payment of all federal income
taxes (including any interest or penalties applicable thereto)
of the consolidated group, which includes the aforementioned
claims of the IRS. However, to the extent that Walter Energy is
unable to pay any amounts owed, we could be responsible for any
unpaid amounts.
PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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On April 20, 2009, following the effective date of the
Merger between WIM and Hanover, our common stock commenced
trading on the NYSE Amex under the symbol WAC. Prior
to April 20, 2009, our common stock was traded on the NYSE
Amex under the symbol HCM. As of February 26,
2010, there were 25,682,616 shares of common stock
outstanding. This amount includes 5,750,000 shares issued
upon completion of a secondary offering on October 21,
2009. As of February 26, 2010, there were 176 record
holders of our common stock.
The following table sets forth the high and low closing sales
prices for our common stock for the periods indicated. For
periods prior to April 20, 2009, the information below
relates to legacy Hanover. The prices indicated below account
for a 50-to-1 reverse stock split effective on April 20,
2009.
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2009
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2008
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High
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Low
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High
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Low
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First Quarter
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$
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11.50
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$
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5.50
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$
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43.50
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$
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18.50
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Second Quarter
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14.15
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5.90
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25.00
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8.00
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Third Quarter
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18.13
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13.01
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13.50
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4.00
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Fourth Quarter
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16.23
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11.83
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27.50
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4.00
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The following table lists the per share cash dividends declared
on each share of our common stock for the periods indicated. For
periods prior to April 20, 2009, the information below
relates to legacy Hanover.
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Cash Dividends
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Declared per Share
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2009
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First Quarter ended March 31, 2009
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$
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0.00
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Second Quarter ended June 30, 2009
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0.00
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Third Quarter ended September 30, 2009
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0.50
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Fourth Quarter ended December 31, 2009
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1.00
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2008
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First Quarter ended March 31, 2008
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$
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0.00
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Second Quarter ended June 30, 2008
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0.00
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Third Quarter ended September 30, 2008
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0.00
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Fourth Quarter ended December 31, 2008
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0.00
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32
For the year ended December 31, 2009, we paid quarterly
dividends of $0.50 per share on August 31, 2009,
November 30, 2009 and January 20, 2010 to stockholders
of record on August 19, 2009, November 18, 2009 and
December 31, 2009, respectively.
We expect to pay dividends to our stockholders of all or
substantially all of our net income in each year to qualify for
the tax benefits accorded to a REIT under the Code. All
distributions will be made at the discretion of our Board of
Directors and will depend on our earnings, both tax and GAAP,
financial condition, maintenance of REIT qualification and such
other factors as the Board of Directors deems relevant.
Common
Stock Offering
On September 22, 2009, we filed a registration statement on
Form S-11
with the SEC (Registration Number
333-162067),
as amended on October 8, 2009 and October 16, 2009, to
offer 5.0 million shares of common stock. In addition, the
underwriters of the offering, Credit Suisse and SunTrust
Robinson Humphrey, exercised their over-allotment option to
purchase an additional 0.8 million shares of common stock.
The offering closed on October 21, 2009 with all
5.0 million shares plus the over-allotment of
0.8 million shares sold. This offering of our common stock,
including the exercise of the over-allotment option, generated
net proceeds to us of approximately $76.8 million, after
deducting underwriting discounts and commissions and offering
expenses.
We intend to use the net proceeds of our secondary offering to
acquire residential loans, to otherwise grow our business and
for general corporate purposes. At the current time, we do not
have specific agreements or understandings to deploy this
capital but we are continually evaluating opportunities to do
so. The precise amounts and timing of our use of the net
proceeds from our secondary offering will depend upon market
conditions, our ability to identify and purchase residential
loans and governmental asset portfolios and otherwise to
identify and implement appropriate opportunities to grow our
business.
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ITEM 6.
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SELECTED
FINANCIAL DATA
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Not applicable.
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ITEM 7.
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MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing
elsewhere in this Annual Report on
Form 10-K.
Historical results and trends which might appear should not be
taken as indicative of future operations. Our results of
operations and financial condition, as reflected in the
accompanying statements and related footnotes, are subject to
managements evaluation and interpretation of business
conditions, changing capital market conditions, and other
factors.
Our
Company
We are a mortgage servicer and mortgage portfolio owner
specializing in subprime, non-conforming and other
credit-challenged residential loans primarily in the
southeastern United States, or U.S. We also operate
mortgage advisory and insurance ancillary businesses. At
December 31, 2009, we had four wholly owned, primary
subsidiaries: Hanover Capital Partners 2, Ltd., doing business
as Hanover Capital, Walter Mortgage Company, or WMC, Walter
Investment Reinsurance Co., Ltd., or WIRC, and Best Insurors,
Inc., or Best. We operate as an internally managed, publicly
traded real estate investment trust, or REIT.
Our business, headquartered in Tampa, Florida, was established
in 1958 as the Financing business of Walter Energy, Inc.,
formerly known as Walter Industries, Inc., or Walter Energy.
Throughout our history, we have purchased residential loans
originated by Walter Energys Homebuilding business, Jim
Walter Homes, Inc., or JWH, originated and purchased residential
loans on our own behalf, and serviced these residential loans to
maturity. Throughout this Annual Report on
Form 10-K,
references to residential loans refer to residential
mortgage loans and residential retail instalment agreements and
references to borrowers refer to borrowers under our
residential mortgage loans and instalment obligors under our
residential retail instalment
33
agreements. Over the past 50 years, we have developed
significant expertise in servicing credit-challenged accounts
through our differentiated high-touch approach which involves
significant
face-to-face
borrower contact by trained servicing personnel strategically
located in the markets where our borrowers reside. Currently, we
employ 219 professionals and service over 34,000 individual
residential loans.
We have historically funded our residential loans through the
securitization market. In particular, we organized Mid-State
Trust II, or Trust II (whose assets are pledged to
Trust IV), Mid-State Trust IV, or Trust IV,
Mid-State Trust VI, or Trust VI, Mid-State
Trust VII, or Trust VII, Mid-State Trust VIII, or
Trust VIII, Mid-State Trust X, or Trust X,
Mid-State Trust XI, or Trust XI, Mid-State Capital
Corporation
2004-1
Trust, or
Trust 2004-1,
Mid-State Capital Corporation
2005-1
Trust, or
Trust 2005-1,
and Mid-State Capital Corporation
2006-1
Trust, or
Trust 2006-1
(collectively, the Trusts) for the purpose of purchasing
residential loans from WMC with the net proceeds from the
issuance of mortgage-backed or asset-backed notes, or a
securitization. The beneficial interests in the Trusts are owned
either directly by WMC or indirectly by Mid-State Capital, LLC,
or Mid-State, a wholly-owned subsidiary of WMC, respectively. We
acquired the Hanover Capital Grantor Trust from Hanover Capital
Mortgage Holdings, Inc., or Hanover, as part of the merger
transaction, or Merger. The mortgage-backed debt is non-recourse
and not cross-collateralized and therefore must be satisfied
exclusively from the proceeds of the residential loans and real
estate owned, or REO, held in each securitization trust. As of
December 31, 2009, our ten separate non-recourse
securitization trusts had an aggregate of $1.3 billion of
outstanding debt, which fund residential loans and REO with a
principal balance of $1.5 billion. Approximately
$0.4 billion of our residential loans were unencumbered at
December 31, 2009. We perform the servicing function for
the residential loans held within the nine securitization trusts
owned by either WMC or Mid-State, as well as the unencumbered
residential loans.
The securitization trusts contain provisions that require that
the cash payments received from the underlying mortgages be
applied to reduce the principal balance of the notes issued by
these Trusts unless certain over-collateralization or other
similar targets are satisfied. Additionally, the securitization
trusts contain delinquency and loss triggers, that, if exceeded,
result in any excess over-collateralization going to pay down
bonds for that particular securitization at an accelerated pace.
Assuming no servicer trigger events have occurred and the
over-collateralization targets have been met, any excess cash is
released to us.
Three of our existing securitizations: Trust X,
Trust 2005-1,
and
Trust 2006-1
exceeded certain triggers and did not provide any significant
levels of excess cash flow to us during 2009. As of
December 31, 2009, Trust X held mortgage loans with an
outstanding principal balance of $193.1 million and a book
value of $164.7 million, which collateralized bonds issued
by Trust X having an outstanding principal balance of
$169.5 million. In February 2010, we purchased Trust X
REO at its par value of approximately $3.0 million. As a result
of this transaction, the Trust X loss trigger has been
cured. Consequently, on February 16, 2010 we received a
$4.2 million cash release from this securitization. As of
December 31, 2009,
Trust 2005-1
held mortgage loans with an outstanding principal balance of
$177.0 million and a book value of $170.4 million,
which collateralized bonds issued by
Trust 2005-1
having an outstanding principal balance of $160.8 million.
As of December 31, 2009,
Trust 2006-1
held mortgage loans with an outstanding principal balance of
$183.4 million and a book value of $174.4 million,
which collateralized bonds issued by
Trust 2006-1
having an outstanding principal balance of $179.0 million.
All of our other securitizations have experienced some level of
delinquencies and losses, and if any additional trusts were to
exceed their triggers, any cash flow from such trusts would not
be available to us.
Our objective is to provide attractive risk-adjusted returns to
our stockholders, primarily through dividends and secondarily
through capital appreciation. We seek to achieve this objective
through maximizing income from our existing residential loan
portfolio and future investments in performing,
sub-performing
and non-performing residential loans.
Although we have been in operation since 1958, we substantially
revised our business structure on April 17, 2009, when we
completed the spin-off and our Merger with Hanover.
34
Business
Separation and Merger
On September 30, 2008, Walter Energy outlined its plans to
separate its Financing business from its core Natural Resources
business through a spin-off to stockholders and subsequent
Merger with Hanover. In furtherance of these plans, on
September 30, 2008, Walter Energy and Walter Investment
Management LLC, or WIM, entered into a definitive agreement to
merge with Hanover which agreement was amended and restated on
February 17, 2009. Immediately prior to the spin-off,
substantially all of the assets and liabilities related to the
Financing business were contributed, through a series of
transactions, to WIM in return for all of WIMs membership
units. On April 17, 2009, immediately following the
spin-off from Walter Energy, WIM was merged with and into
Hanover with Hanover continuing as the surviving corporation in
the Merger. Following the Merger, Hanover was renamed Walter
Investment Management Corp. After the spin-off and Merger,
Walter Energys stockholders that became members of WIM as
a result of the spin-off, and certain holders of options to
acquire limited liability company interests of WIM, collectively
owned 98.5% of the shares of common stock of the surviving
corporation in the Merger, while stockholders of Hanover owned
1.5% of the shares of common stock of such corporation. As a
result, the business combination has been accounted for as a
reverse acquisition, with WIM considered the accounting
acquirer. On April 20, 2009, our common stock began trading
on the NYSE Amex under the symbol WAC.
Although Hanover was the legal surviving entity in the Merger,
for accounting purposes the Merger was treated as a reverse
acquisition of the operations of Hanover and has been accounted
for pursuant to the Business Combinations guidance, with WIM as
the accounting acquirer. As such, the pre-acquisition financial
statements of WIM are treated as the historical financial
statements of Walter Investment. The Hanover assets acquired and
the liabilities assumed were recorded at the date of
acquisition, April 17, 2009, at their respective fair
values. The results of operations of Hanover were included in
the consolidated statements of income for periods subsequent to
the Merger.
On April 17, 2009, we completed our separation from Walter
Energy. In connection with the separation, WIM and Walter Energy
executed the following transactions or agreements which involved
no cash:
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Walter Energy distributed 100% of its interest in WIM to holders
of Walter Energys common stock;
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All intercompany balances between WIM and Walter Energy were
settled with the net balance recorded as a dividend to Walter
Energy;
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In accordance with the Tax Separation Agreement, Walter Energy
will, in general, be responsible for any and all taxes reported
on any joint return through the date of the separation, which
may also include WIM for periods prior to the separation. WIM
will be responsible for any and all taxes reported on any WIM
separate tax return and on any consolidated returns for Walter
Investment subsequent to the separation;
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Walter Energys share-based awards held by WIM employees
were converted to equivalent share-based awards of Walter
Investment, with the number of shares and the exercise price
being equitably adjusted to preserve the intrinsic value. The
conversion was accounted for as a modification under the
provisions of the guidance concerning stock compensation.
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The assets and liabilities transferred to WIM from Walter Energy
also included $26.6 million in cash, which was contributed
to WIM by Walter Energy on April 17, 2009. Following the
spin-off, WIM paid a taxable dividend consisting of cash of
$16.0 million and additional equity interests to its
members. The Merger occurred immediately following the spin-off
and taxable dividend on April 17, 2009. The surviving
company continues to operate as a publicly traded REIT
subsequent to the Merger.
Basis of
Presentation
The consolidated financial statements reflect the historical
operations of the Financing business which was operated as part
of Walter Energy prior to the spin-off. Under Walter
Energys ownership, the Financing business operated through
separate subsidiaries. A direct ownership relationship did not
exist among the legal entities prior to the contribution to WIM.
The consolidated financial statements have been prepared in
35
accordance with GAAP, which requires management to make
estimates and assumptions that affect the amounts reported in
the consolidated financial statements. Actual results could
differ from those estimates. All significant intercompany
balances have been eliminated in the consolidated financial
statements.
Although we have operated as an independent, stand-alone entity
only since April 17, 2009, management believes the
assumptions underlying the consolidated financial statements as
of December 31, 2009 and 2008 are reasonable. However, the
consolidated financial statements included herein do not include
all of the expenses that would have been incurred had we been a
separate, stand-alone entity, although, the consolidated
financial statements do include certain costs and expenses that
have been allocated to us from Walter Energy. As such, the
financial information does not necessarily reflect or is not
necessarily indicative of our consolidated financial position,
results of operations and cash flows in the future, or what
would have been reflected had we been a separate, stand-alone
entity during the periods presented.
Results of operations for the year ended December 31, 2009
include the results of operations of legacy WIM. The results of
operations of legacy Hanover are included from the completion of
the Merger with Hanover on April 17, 2009 through
December 31, 2009. Since the Merger constitutes a reverse
acquisition for accounting purposes, the pre-acquisition
consolidated financial statements of WIM are treated as the
historical financial statements of Walter Investment.
The combined financial statements of WMC, Best and WIRC
(collectively representing substantially all of Walter
Energys Financing business prior to the Merger) are
considered the predecessor to WIM for accounting purposes. The
combined financial statements of WMC, Best and WIRC have become
WIMs historical financial statements for periods prior to
the Merger. Results of operations for year ended
December 31, 2008 are the results of WIM only.
Critical
Accounting Policies
While all significant accounting policies are important to our
consolidated financial statements, some of these policies may be
viewed as critical. Critical policies are those that are most
important to the portrayal of our financial condition and
require our most difficult, subjective and complex estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues, expenses and related disclosures. These
estimates are based upon our historical experience and on
various assumptions that we believe to be reasonable under the
circumstances. Our actual results may differ from these
estimates under different assumptions or conditions. We believe
our most critical accounting policies are as follows:
Residential
Loans and Revenue Recognition
Residential loans consist of residential mortgage loans and
residential retail instalment agreements originated by us and
acquired from other originators, principally JWH. Residential
loans are initially recorded at the discounted value of the
future payments using an imputed interest rate, net of yield
adjustments such as deferred loan origination fees, associated
direct costs, premiums and discounts and are stated at amortized
cost. The imputed interest rate used represents the estimated
prevailing market rate of interest for credit of similar terms
issued to borrowers with similar credit. References to
borrowers refer to borrowers under our residential
mortgage loans and instalment obligors in our residential retail
instalment agreements. We have had minimal purchase and
origination activity subsequent to May 1, 2008, when we
ceased purchasing new originations from JWH or providing
financing to new customers of JWH. New originations, subsequent
to May 1, 2008, primarily relate to the financing of sales
of REO properties. The imputed interest rate on these financings
is based on observable market mortgage rates, adjusted for
variations in expected credit losses where market data is
unavailable. Variations in the estimated market rate of interest
used to initially record residential loans could affect the
timing of interest income recognition.
Interest income on our residential loans is a combination of the
interest earned based on the outstanding principal balance of
the underlying loan, the contractual terms of the mortgage loan
and retail instalment agreement and the amortization of yield
adjustments, principally premiums and discounts. The retail
instalment agreement states the maximum amount to be charged to
borrowers, and ultimately recognized as revenue, based on the
contractual number of payments and dollar amount of monthly
payments. Yield adjustments are
36
deferred and recognized over the estimated life of the loan as
an adjustment to yield using the level yield method. We use
actual and estimated cash flows to derive an effective level
yield. Residential loan pay-offs received in advance of
scheduled maturity (voluntary prepayments) affect the amount of
interest income due to the recognition at that time of any
remaining unamortized premiums or discounts arising from the
loans inception.
We have the ability to levy costs to protect our collateral
position upon default, such as attorney fees and late charges,
as allowed by state law. The various legal instruments used
allow for different fee structures to be charged to the
borrower, for example, late fees and prepayment fees. These fees
are ultimately recognized as revenue when collected. In our
capacity as the loan servicer, we advance funds on behalf of
borrowers for taxes and insurance. These advances are routinely
assessed for collectability and any uncollectible advances are
appropriately charged to earnings. Recoveries of charged-off
advances, if any, are recognized as income when collected.
Residential loans are placed on non-accrual status when any
portion of the principal or interest is 90 days past due.
When placed on non-accrual status, the related interest
receivable is reversed against interest income of the current
period. Interest income on non-accrual loans, if received, is
recorded using the cash method of accounting. Residential loans
are removed from non-accrual status when the amount financed and
the associated interest are no longer over 90 days past
due. If a non-accrual loan is returned to accruing status the
accrued interest, at the date the residential loan is placed on
non-accrual status, and forgone interest during the non-accrual
period, are recorded as interest income as of the date the loan
no longer meets the non-accrual criteria. The past due or
delinquency status of residential loans is generally determined
based on the contractual payment terms. The calculation of
delinquencies excludes from delinquent amounts those accounts
that are in bankruptcy proceedings that are paying their
mortgage payments in contractual compliance with the bankruptcy
court approved mortgage payment obligations. Loan balances are
charged off when it becomes evident that balances are not fully
collectible.
We sell REO which was repossessed or foreclosed from borrowers
in default of their loans or notes. Sales of REO involve the
sale and, in most circumstances, the financing of both a home
and related real estate. Revenues from the sales of REO are
recognized by the full accrual method where appropriate.
However, the requirement for a minimum 5% initial cash
investment (for primary residences), frequently is not met. When
this is the case, losses are immediately recognized, and gains
are deferred and recognized by the installment method until the
borrowers investment reaches the minimum 5%. At that time,
revenue is recognized by the full accrual method.
Allowance
for Loan Losses on Residential Loans
The residential loan portfolio is collectively evaluated for
impairment as the individual loans have smaller balances and are
homogenous in nature. The allowance for loan losses is
established based on managements judgment and estimate of
credit losses inherent in our residential loan portfolio.
Managements periodic evaluation of the adequacy of the
allowance for loan losses on residential loans is based on, but
not limited to, our past loss experience, known and inherent
risks in the portfolio, delinquencies, the estimated value of
the underlying real estate collateral and current economic and
market conditions within the applicable geographic areas
surrounding the underlying real estate. The allowance for losses
on residential loans is increased by provisions for losses
charged to income and is reduced by charge-offs, net of
recoveries. As the amount of residential loans decreases and as
they age, the credit exposure is reduced, resulting in
decreasing provisions.
Real
Estate Owned
REO, which consists of real estate acquired in satisfaction of
residential loans, is recorded at the lower of cost or estimated
fair value less estimated costs to sell, which is based on
historical resale recovery rates and current market conditions.
37
Accounting
for the Impairment of Long-Lived Assets Including
Goodwill
Long-lived assets, including goodwill, are reviewed for
impairment whenever events or changes in circumstances indicate
that the book value of the asset may not be recoverable and, in
the case of goodwill, at least annually. We periodically
evaluate whether events and circumstances have occurred that
indicate possible impairment.
We use estimates of future cash flows of the related asset,
asset grouping or reporting unit in measuring whether the assets
are recoverable. Changes in market conditions and actual or
estimated future cash flows could have an impact on the
recoverability of such assets, resulting in future impairment
charges.
In 2008, we recorded a charge of $12.3 million for the
impairment of goodwill. As a result of further deterioration in
the subprime mortgage markets, we analyzed our goodwill for
potential impairment. The fair value was determined using a
discounted cash flow approach which indicated that the carrying
value exceeded the fair value and that there was no implied
value of goodwill. The discount rate of interest used to
determine both the fair value of the reporting unit and the
implied value of goodwill was a contributing factor in this
impairment charge. The continued increase in perceived risk in
the financial services markets resulted in a significant
increase in the discount rate applied to the projected future
cash flows, as compared to the discount rate applied to similar
analyses performed in previous periods. As a result of this
write-off, we no longer have any goodwill on our balance sheet.
Hedging
Activities
We have, in the past, entered into interest rate hedge
agreements designed to reduce the risk of rising interest rates
on the forecasted amount of securitization debt to be issued to
finance residential loans. Changes in the fair value of interest
rate hedge agreements that were designated and effective as
hedges were recorded in accumulated other comprehensive income
(loss), or AOCI. Deferred gains or losses from settled hedges
determined to be effective have been reclassified from AOCI to
interest expense in the statement of operations in the same
period as the underlying transactions were recorded and are
recognized in the caption interest expense. Cash
flows from hedging activities are reported in the statement of
cash flows in the same classification as the hedged item.
Changes in the fair value of interest rate hedge agreements that
are not effective are immediately recorded in the statement of
operations. There were no hedges outstanding as of
December 31, 2009.
Insurance
Claims (Hurricane Losses)
Accruals for property liability claims and claims expense are
recognized when probable and reasonably estimable at amounts
necessary to settle both reported and unreported claims of
insured property liability losses, based upon the facts in each
case and our experience with similar matters. The establishment
of appropriate accruals, including accruals for catastrophes
such as hurricanes, is an inherently uncertain process. Accrual
estimates are regularly reviewed and updated, using the most
current information available.
We recorded a provision of $3.9 million in 2008 for
hurricane insurance losses, net of reinsurance proceeds received
from unrelated insurance carriers. These estimates were recorded
for claims losses as a result of damage from Hurricanes Ike and
Gustav in our geographic footprint. There were no significant
hurricane losses in the other years presented.
Share-Based
Compensation Plans
We have in effect stock incentive plans under which restricted
stock, restricted stock units and non-qualified stock options
have been granted to employees and non-employee members of the
Board of Directors. We are required to estimate the fair value
of share-based awards on the date of grant. The value of the
award is principally recognized as expense using the graded
method over the requisite service periods. The fair value of our
restricted stock and restricted stock units is generally based
on the average of the high and low market price of our common
stock on the date of grant. We have estimated the fair value of
non-qualified stock options as of the date of grant using the
Black-Scholes option pricing model. The Black-Scholes model
considers, among other factors, the expected life of the award,
the volatility of our stock price and dividend rate.
38
Income
Taxes
We have elected to be taxed as a REIT under the Internal Revenue
Code of 1986, as amended, or Code, and the corresponding
provisions of state law. To qualify as a REIT, we must
distribute at least 90% of our annual REIT taxable income to
stockholders (not including taxable income retained in our
taxable subsidiaries) within the timeframe set forth in the Code
and also meet certain other requirements.
We assess our tax positions for all open tax years and determine
whether we have any material unrecognized liabilities in
accordance with the guidance on accounting for uncertain tax
positions. We classify interest and penalties on uncertain tax
positions as other expense and general and administrative
expenses, respectively, in our consolidated statement of income.
Litigation
and Investigations
We are involved in litigation, investigations and claims arising
out of the normal conduct of our business. We estimate and
accrue liabilities resulting from such matters based on a
variety of factors, including outstanding legal claims and
proposed settlements and assessments by internal counsel of
pending or threatened litigation. These accruals are recorded
when the costs are determined to be probable and are reasonably
estimable. We believe we have adequately accrued for these
potential liabilities; however, facts and circumstances may
change that could cause the actual liabilities to exceed the
estimates, or that may require adjustments to the recorded
liability balances in the future.
Notwithstanding the foregoing, WMC is a party to a lawsuit
entitled Casa Linda Homes, et al. v. Walter Mortgage
Company, et al., Cause
No. C-2918-08-H,
389th
Judicial District Court of Hidalgo County, Texas, claiming
breach of contract, fraud, negligent misrepresentation, breach
of fiduciary duty and bad faith, promissory estoppel and unjust
enrichment. The plaintiffs are seeking actual and exemplary
damages, the amount of which have not been specified, but if
proven could be material. The allegations arise from a claim
that WMC breached a contract with the plaintiffs by failing to
purchase a certain amount of loan pool packages from the
corporate plaintiff, a Texas real estate developer. We believe
the case to be without merit and are vigorously pursuing the
defense of the claim.
As discussed in Note 15 of Notes to Consolidated
Financial Statements, Walter Energy is in dispute with the
IRS on a number of federal income tax issues. Walter Energy has
stated in its public filings that it believes that all of its
current and prior tax filing positions have substantial merit
and that Walter Energy intends to defend vigorously any tax
claims asserted. Under the terms of the tax separation agreement
between us and Walter Energy dated April 17, 2009, Walter
Energy is responsible for the payment of all federal income
taxes (including any interest or penalties applicable thereto)
of the consolidated group, which includes the aforementioned
claims of the IRS. However, to the extent that Walter Energy is
unable to pay any amounts owed, we could be responsible for any
unpaid amounts.
39
Results
of Operations
2009
Summary Results of Operations
Revenue
by Portfolio Type
For the years ended December 31, 2009 and 2008, we reported
net income of $113.8 million and $2.4 million,
respectively. The main components of the change in net income
for the years ended December 31, 2009 and 2008 are detailed
in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Increase/
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
Residential loans, unencumbered
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
32,767
|
|
|
$
|
34,833
|
|
|
$
|
(2,066
|
)
|
Less: Interest expense
|
|
|
|
|
|
|
3,509
|
|
|
|
(3,509
|
)
|
Less: Interest rate hedge ineffectiveness
|
|
|
|
|
|
|
16,981
|
|
|
|
(16,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
32,767
|
|
|
|
14,343
|
|
|
|
18,424
|
|
Less: Provision for loan losses
|
|
|
4,359
|
|
|
|
5,894
|
|
|
|
(1,535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
28,408
|
|
|
|
8,449
|
|
|
|
19,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential loans held in securitization trusts
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
142,605
|
|
|
|
156,230
|
|
|
|
(13,625
|
)
|
Less: Interest expense
|
|
|
89,726
|
|
|
|
98,606
|
|
|
|
(8,880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
52,879
|
|
|
|
57,624
|
|
|
|
(4,745
|
)
|
Less: Provision for loan losses
|
|
|
10,823
|
|
|
|
15,074
|
|
|
|
(4,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
42,056
|
|
|
|
42,550
|
|
|
|
(494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium revenue
|
|
|
11,465
|
|
|
|
11,773
|
|
|
|
(308
|
)
|
Other income, net
|
|
|
569
|
|
|
|
(3,139
|
)
|
|
|
3,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,034
|
|
|
|
8,634
|
|
|
|
3,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues, net
|
|
|
82,498
|
|
|
|
59,633
|
|
|
|
22,865
|
|
Total non-interest expenses
|
|
|
44,880
|
|
|
|
54,097
|
|
|
|
(9,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
37,618
|
|
|
|
5,536
|
|
|
|
32,082
|
|
Income tax expense (benefit)
|
|
|
(76,161
|
)
|
|
|
3,099
|
|
|
|
(79,260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
113,779
|
|
|
$
|
2,437
|
|
|
$
|
111,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Interest Income
The increase in unencumbered net interest income for the year
ended December 31, 2009, as compared to the same period in
the previous year was due primarily to the decrease in interest
expense as a result of the repayment of the Warehouse Facilities
in April 2008, as well as the $17.0 million interest rate
hedge ineffectiveness charge recorded in 2008, offset by a
slight decrease in interest income due to the declining
portfolio balance as a result of principal repayments, a
decrease in the volume of voluntary prepayments and increased
non-performing loans. The average prepayment rate for the
unencumbered portfolio was 4.16% for the year ended
December 31, 2009, as compared to 6.37% in the same period
of 2008.
The decrease in the securitized residential loan net interest
income for the year ended December 31, 2009, as compared to
the same period in the previous year was due to a decrease in
the volume of voluntary prepayments, offset by a decrease in
interest expense due to lower average outstanding borrowings.
The average prepayment rate for the securitized portfolio was
3.30% for the year ended December 31, 2009, as compared to
4.37% in the same period of 2008. The reduction in average
borrowings was due to principal payments on the mortgage-backed
debt issued with no new issuances over the past year.
40
Provision
for Loan Losses
The decrease in the unencumbered and the securitized residential
loan provision for loan losses for the year ended
December 31, 2009, as compared to the same period in the
previous year was primarily due to an increase in the loss
severity assumption for adjustable rate loans in the 2008 period
and a stabilizing of loss severities for our portfolio in 2009.
Additionally, as the amount of residential loans decreases and
as the loans season, the credit exposure is reduced, resulting
in decreasing provisions.
Non-Interest
Income
The increase in non-interest income for the year ended
December 31, 2009, as compared to the same period in the
previous year was primarily due to the sale of the third-party
insurance agency portfolio, an increase in mortgage advisory
revenue, as well as an improvement in taxes, insurance and other
advances, or TIO, as a result of lower insurance advances and a
slight increase in collections.
Non-Interest
Expenses
The decrease in non-interest expenses for the year ended
December 31, 2009, as compared to the same period in the
previous year was primarily due to $16.1 million in
non-recurring charges recorded in 2008 related to a goodwill
impairment charge and a provision for estimated hurricane losses
partially offset by additional expenses incurred during 2009 to
support corporate functions required as a result of the spin-off
from Walter Energy and Merger with Hanover.
Income
Taxes
The change in income tax benefit for the year ended
December 31, 2009, as compared to income tax expense for
the same period in the previous year was due to the reversal of
mortgage-related deferred tax liabilities and the reversal of
tax benefits previously reflected in accumulated other
comprehensive income that were no longer applicable upon our
REIT qualification.
Residential
Loan Portfolio and Related Liabilities
Our results of operations for our portfolio during a given
period typically reflect the net interest spread earned on our
residential loan portfolio. The net interest spread is impacted
by factors such as the interest rate our residential loans are
earning and our cost of funds. Furthermore, the amount of
discount on the residential loans will impact the net interest
spread as such amounts will be amortized over the expected term
of the residential loans and the amortization will be
accelerated due to voluntary prepayments. Loan losses due to
defaults will also negatively impact our earnings.
41
The following table reflects the average balances of our
residential loan portfolio, net, as well as associated
liabilities, with corresponding rates of interest and effective
yields (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Average residential loan balance(1)
|
|
$
|
1,726,326
|
|
|
$
|
1,817,122
|
|
Average mortgage-backed debt balance
|
|
|
1,320,138
|
|
|
|
1,539,520
|
|
|
|
|
|
|
|
|
|
|
Average net investment
|
|
$
|
406,188
|
|
|
$
|
277,602
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
175,372
|
|
|
$
|
191,063
|
|
Less: Interest expense
|
|
|
89,726
|
|
|
|
102,115
|
|
Less: Interest rate hedge ineffectiveness
|
|
|
|
|
|
|
16,981
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
85,646
|
|
|
$
|
71,967
|
|
|
|
|
|
|
|
|
|
|
Effective interest income yield on the residential loan portfolio
|
|
|
10.16
|
%
|
|
|
10.51
|
%
|
Effective interest expense rate on the mortgage-backed debt
|
|
|
6.80
|
%
|
|
|
6.63
|
%
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
3.36
|
%
|
|
|
3.88
|
%
|
|
|
|
|
|
|
|
|
|
Average equity balance
|
|
$
|
489,831
|
|
|
$
|
273,939
|
|
Average leverage ratio(2)
|
|
|
2.70
|
|
|
|
5.62
|
|
Net interest margin(3)
|
|
|
4.96
|
%
|
|
|
4.89
|
%
|
Net yield on net investment(4)
|
|
|
21.09
|
%
|
|
|
32.04
|
%
|
|
|
|
(1) |
|
Average residential loan balance is net of yield adjustments and
gross of allowance for losses for the period. |
|
(2) |
|
Average leverage ratio is calculated as average mortgage-backed
debt balance divided by average equity. |
|
(3) |
|
Net interest margin for the year ended December 31, 2008
does not include the interest rate hedge ineffectiveness charge
of $17.0 million. There were no hedging costs for the year
ended December 31, 2009. Net interest margin is calculated
by dividing net interest income by the average residential loan
balance. |
|
(4) |
|
Net yield on net investment for the year ended December 31,
2008 does not include the interest rate hedge ineffectiveness
charge of $17.0 million. There were no hedging costs for
the year ended December 31, 2009. Net yield on net
investment is calculated by dividing net interest income by the
net investment. |
Average
Net Investment
Average net investment increased for the year ended
December 31, 2009, as compared to the same period in 2008,
primarily due to the repayment and termination of the Warehouse
Facilities in April 2008 with funds provided by Walter Energy,
partially offset by residential loan principal and
mortgage-backed debt repayments.
Net
Interest Spread
Net interest spread decreased for the year ended
December 31, 2009, compared to the same period in 2008.
This decrease is primarily due to a reduction in the effective
yield on the residential loans due to a decrease in voluntary
prepayment speeds which resulted in a decrease in the
recognition of purchase discounts into interest income, as well
as an increase in borrower delinquencies, partially offset by an
increased effective rate on debt as the lower cost Warehouse
Facilities were repaid and terminated.
Average
Leverage Ratio
The average leverage ratio decreased for the year ended
December 31, 2009, compared to the same period in 2008. The
decrease is primarily related to a decrease in the average
mortgage-backed debt balance
42
due to the repayment and termination of the Warehouse Facilities
with funds provided by Walter Energy resulting in an increase in
the average equity.
Net
Interest Margin
Net interest margin increased for the year ended
December 31, 2009, as compared to the same period in 2008.
The increase is primarily the result of a decrease in interest
income due to lower voluntary prepayments and higher
delinquencies, as well as a decrease in the average residential
loan balance.
Net Yield
on Net Investment
Net yield on net investment decreased for the year ended
December 31, 2009, as compared to the same period in 2008.
The decrease is primarily the result of the increase in our
average net investment due to the termination of the Warehouse
Facilities in 2008, offset by a slight decrease in net interest
income due to the run-off of the portfolio, lower voluntary
prepayments and higher delinquencies.
2008
Summary Results of Operations
Revenue
by Portfolio Type
For the years ended December 31, 2008 and 2007, we reported
net income of $2.4 million and $24.3 million,
respectively. The main components of the change in net income by
portfolio type for the years ended December 31, 2008 and
2007 are detailed in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
Increase/
|
|
|
|
2008
|
|
|
2007
|
|
|
(Decrease)
|
|
|
Residential loans, unencumbered
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
34,833
|
|
|
$
|
19,940
|
|
|
$
|
14,893
|
|
Less: Interest expense
|
|
|
3,509
|
|
|
|
6,953
|
|
|
|
(3,444
|
)
|
Less: Interest rate hedge ineffectiveness
|
|
|
16,981
|
|
|
|
|
|
|
|
16,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
14,343
|
|
|
|
12,987
|
|
|
|
1,356
|
|
Less: Provision for loan losses
|
|
|
5,894
|
|
|
|
2,737
|
|
|
|
3,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
8,449
|
|
|
|
10,250
|
|
|
|
(1,801
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential loans held in securitization trusts
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
156,230
|
|
|
|
180,051
|
|
|
|
(23,821
|
)
|
Less: Interest expense
|
|
|
98,606
|
|
|
|
112,149
|
|
|
|
(13,543
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
57,624
|
|
|
|
67,902
|
|
|
|
(10,278
|
)
|
Less: Provision for loan losses
|
|
|
15,074
|
|
|
|
10,739
|
|
|
|
4,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
42,550
|
|
|
|
57,163
|
|
|
|
(14,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium revenue
|
|
|
11,773
|
|
|
|
9,771
|
|
|
|
2,002
|
|
Other income, net
|
|
|
(3,139
|
)
|
|
|
1,028
|
|
|
|
(4,167
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8,634
|
|
|
|
10,799
|
|
|
|
(2,165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues, net
|
|
|
59,633
|
|
|
|
78,212
|
|
|
|
(18,579
|
)
|
Total non-interest expenses
|
|
|
54,097
|
|
|
|
39,419
|
|
|
|
14,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
5,536
|
|
|
|
38,793
|
|
|
|
(33,257
|
)
|
Income tax expense
|
|
|
3,099
|
|
|
|
14,530
|
|
|
|
(11,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,437
|
|
|
$
|
24,263
|
|
|
$
|
(21,826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
Net
Interest Income
Net interest income on the unencumbered residential loans
increased for the year ended December 31, 2008, as compared
to the same period of 2007. This was due predominantly to the
increase of the average outstanding portfolio balance due to the
growth of this pool of residential loans as our last
securitization occurred in November 2006, partially offset by an
increase in interest expense due to a $17.0 million
interest rate hedge ineffectiveness charge related to the
termination of the Warehouse Facilities.
Net interest income on the residential loans held in
securitization trusts decreased for the year ended
December 31, 2008, as compared to the same period of 2007,
due predominantly to a decrease of the average outstanding
portfolio balance due to scheduled repayments, voluntary
prepayments and defaults. Voluntary prepayment speeds have
decreased from 8.02% to 4.74% for the years ended
December 31, 2007 and 2008, respectively, resulting in a
decrease in the recognition of purchase discounts. Voluntary
prepayment speeds impact interest income due to the accelerated
recognition into interest income at the time of prepayment of
purchase discounts that would otherwise by amortized into income
over the life of the note. Interest expense on the
mortgage-backed debt decreased for the year ended
December 31, 2008, as compared to the same period of 2007,
due predominantly to a decrease of the average outstanding debt
balance from repayments.
Provision
for Loan Losses
The increase in the unencumbered and securitized residential
loan provision for loan losses for the year ended
December 31, 2008, as compared to the same period in 2007
was primarily due to an increase in the loss severity assumption
for adjustable rate loans in 2008 which reflects the effects of
the housing crisis and related economic downturn.
Non-Interest
Income
Non-interest income decreased for the year ended
December 31, 2008, as compared to the same period in 2007
primarily due to lower interest income on short-term investments
due to lower balances from a lower volume of prepayments within
the securitization trusts and increased TIO advances, partially
offset by higher premium rates charged to borrowers.
Non-Interest
Expenses
The increase in non-interest expenses was primarily attributable
to goodwill impairment charges and provision for estimated
hurricane insurance losses. Goodwill impairment charges of
$12.3 million were recorded in 2008 as a result of the
total impairment of our goodwill. A provision for estimated
hurricane insurance losses of $3.9 million was recorded in
2008 as a result of damages from Hurricanes Gustav and Ike that
impacted our market area. No such charges were recorded in 2007.
Income
Taxes
The decrease in income taxes was primarily due to the impact of
the non-deductible goodwill impairment charge on the effective
rate.
44
Residential
Loan Portfolio and Related Liabilities
The following table reflects the average balances of our
residential loan portfolio, net, as well as associated
liabilities, with corresponding rates of interest and effective
yields (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Average residential loan balance(1)
|
|
$
|
1,817,122
|
|
|
$
|
1,816,233
|
|
Average mortgage-backed debt balance
|
|
|
1,539,520
|
|
|
|
1,721,462
|
|
|
|
|
|
|
|
|
|
|
Average net investment
|
|
$
|
277,602
|
|
|
$
|
94,771
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
191,063
|
|
|
$
|
199,991
|
|
Less: Interest expense
|
|
|
102,115
|
|
|
|
119,102
|
|
Less: Interest rate hedge ineffectiveness
|
|
|
16,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
71,967
|
|
|
$
|
80,889
|
|
|
|
|
|
|
|
|
|
|
Effective interest income yield on the residential loan portfolio
|
|
|
10.51
|
%
|
|
|
11.01
|
%
|
Effective interest expense rate on the mortgage-backed debt
|
|
|
6.63
|
%
|
|
|
6.92
|
%
|
|
|
|
|
|
|
|
|
|
Net interest spread
|
|
|
3.88
|
%
|
|
|
4.09
|
%
|
|
|
|
|
|
|
|
|
|
Average equity balance
|
|
$
|
273,939
|
|
|
$
|
103,227
|
|
Average leverage ratio(2)
|
|
|
5.62
|
|
|
|
16.68
|
|
Net interest margin(3)
|
|
|
4.89
|
%
|
|
|
4.45
|
%
|
Net yield on net investment(4)
|
|
|
32.04
|
%
|
|
|
85.35
|
%
|
|
|
|
(1) |
|
Average residential loan balance is net of yield adjustments and
gross of allowance for losses for the period. |
|
(2) |
|
Average leverage ratio is calculated as average mortgage-backed
debt balance divided by average equity. |
|
(3) |
|
Net interest margin for the year ended December 31, 2008
does not include the interest rate hedge ineffectiveness charge
of $17.0 million. There were no hedging costs for the year
ended December 31, 2007. Net interest margin is calculated
by dividing net interest income by the average residential loan
balance. |
|
(4) |
|
Net yield on net investment for the year ended December 31,
2008 does not include the interest rate hedge ineffectiveness
charge of $17.0 million. There were no hedging costs for
the year ended December 31, 2007. Net yield on net
investment is calculated by dividing net interest income by the
net investment. |
Average
Net Investment
Average net investment increased for the year ended
December 31, 2008, compared to the same period in 2007. The
increase is primarily due to the repayment and termination of
the Warehouse Facilities in April 2008.
Net
Interest Spread
Net interest spread decreased for the year ended
December 31, 2008, compared to the same period in 2007.
This decrease is primarily due to a decrease in the average
mortgage-backed debt balance as a result of the repayment of the
Warehouse Facilities, which reduced the effective interest
expense rate due to higher interest rates in 2007 than 2008,
partially offset by a decrease in interest income resulting from
lower payment and voluntary prepayment-related income, which
reduced the effective interest income yield.
45
Average
Leverage Ratio
The average leverage ratio decreased for the year ended
December 31, 2008, compared to the same period in 2007. The
decrease is primarily related to a decrease in the average
mortgage-backed debt balance due to the repayment and
termination of the Warehouse Facilities.
Net
Interest Margin
Net interest margin increased for the year ended
December 31, 2008, as compared to the same period in 2007.
This increase in yield is the result of the significant decrease
in interest expense primarily as a result of the repayment of
the Warehouse Facilities, offset by a slight decrease to
interest income resulting from lower voluntary
prepayment-related income.
Net Yield
on Net Investment
Net yield on net investment decreased for the year ended
December 31, 2008, as compared to the same period in 2007.
The decrease is primarily the result of the increase in our
average net investment due to the termination of the Warehouse
Facilities in 2008, offset by a slight decrease in net interest
income due to the run-off of the portfolio, lower voluntary
prepayments and higher delinquencies.
Additional
Analysis of Residential Loan Portfolio
Allowance
for Loan Losses
The allowance for loan losses represents managements
estimate of probable incurred credit losses inherent in our
residential loan portfolio as of the balance sheet date. The
determination of the level of the allowance for loan losses and,
correspondingly, the provision for loan losses, is based on
delinquency levels and trends, prior loan loss severity
experience, and managements judgment and assumptions
regarding various matters, including the composition of the
residential loan portfolio, the estimated value of the
underlying real estate collateral, the level of the allowance in
relation to total loans and to historical loss levels, national
and local economic conditions, changes in unemployment levels
and the impact that changes in interest rates have on a
borrowers ability to refinance their loan and to meet
their repayment obligations. Management continuously evaluates
these assumptions and various other relevant factors impacting
credit quality and inherent losses when quantifying our exposure
to credit losses and assessing the adequacy of our allowance for
such losses as of each reporting date. The level of the
allowance is adjusted based on the results of managements
analysis.
Given continuing pressure on residential property values,
especially in our southeastern U.S. market, continued high
unemployment and a generally uncertain economic backdrop, we
expect the allowance for loan losses to continue to remain
elevated until such time as we experience a sustained
improvement in the credit quality of the residential loan
portfolio. The future growth of the allowance is highly
correlated to unemployment levels and changes in home prices
within our markets.
In response to continued deterioration of the housing and
mortgage markets and consistent with our practice of routinely
and regularly evaluating the accuracy of our estimation models,
we have made adjustments to assumptions used to estimate
incurred losses in our residential loan portfolio. For the year
ended December 31, 2008, we adjusted our assumptions to
reflect expected increases in the frequency of residential loans
moving to default and the expected severities of losses from
sales of underlying REO properties. These adjustments to the
assumptions accounted for approximately 24% of the provision
recorded for the year ended December 31, 2008. We
continually evaluate our allowance methodology seeking to refine
and enhance the process as appropriate, and it is likely that
the methodology will continue to evolve over time.
While we consider the allowance for loan losses to be adequate
based on information currently available, future adjustments to
the allowance may be necessary due to changes in economic
conditions, delinquency levels, foreclosure rates, loss rates,
and further declines in real estate values.
46
The allowance for loan losses on residential loans was
$17.7 million, $19.0 million, and $14.0 million
at December 31, 2009, 2008 and 2007, respectively. The
following table shows information about the allowance for loan
losses for the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Losses and
|
|
Net Losses and
|
|
|
|
|
|
|
Charge-offs
|
|
Charge-offs as a %
|
|
|
Allowance
|
|
Allowance as a % of
|
|
Deducted from the
|
|
of Average
|
|
|
for Loan Losses
|
|
Residential Loans(1)
|
|
Allowance
|
|
Residential Loans
|
|
|
(In thousands)
|
|
December 31, 2009
|
|
$
|
17,661
|
|
|
|
1.06
|
%
|
|
$
|
16,490
|
|
|
|
0.96
|
%
|
December 31, 2008
|
|
$
|
18,969
|
|
|
|
1.06
|
%
|
|
$
|
15,991
|
|
|
|
0.88
|
%
|
December 31, 2007
|
|
$
|
13,992
|
|
|
|
0.76
|
%
|
|
$
|
12,495
|
|
|
|
0.69
|
%
|
|
|
|
(1) |
|
The allowance for loan loss ratio is calculated as period end
allowance for loan losses divided by period end residential
loans before the allowance for loan losses. |
The following table summarizes activity in the allowance for
loan losses in our residential portfolio, net for the year ended
December 31, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unencumbered Residential Loans
|
|
|
Residential Loans Held in Securitization Trusts
|
|
|
|
for the Year Ended December 31,
|
|
|
for the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Balance, December 31
|
|
$
|
3,418
|
|
|
$
|
1,737
|
|
|
$
|
15,551
|
|
|
$
|
12,255
|
|
Provision charged to income
|
|
|
4,359
|
|
|
|
5,894
|
|
|
|
10,823
|
|
|
|
15,074
|
|
Less: Charge-offs, net of recoveries
|
|
|
(4,317
|
)
|
|
|
(4,213
|
)
|
|
|
(12,173
|
)
|
|
|
(11,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
$
|
3,460
|
|
|
$
|
3,418
|
|
|
$
|
14,201
|
|
|
$
|
15,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency
Information
The following table presents information about delinquencies in
our residential loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Total number of residential loans outstanding
|
|
|
34,205
|
|
|
|
36,767
|
|
Delinquencies as a percent of number of residential loans
outstanding:
|
|
|
|
|
|
|
|
|
31-60 days
|
|
|
1.15
|
%
|
|
|
1.32
|
%
|
61-90 days
|
|
|
0.58
|
%
|
|
|
0.60
|
%
|
91 days or more
|
|
|
2.51
|
%
|
|
|
2.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
4.24
|
%
|
|
|
4.15
|
%
|
|
|
|
|
|
|
|
|
|
Principal balance of residential loans outstanding (in thousands)
|
|
$
|
1,819,859
|
|
|
$
|
1,964,978
|
|
Delinquencies as a percent of amounts outstanding
|
|
|
|
|
|
|
|
|
31-60 days
|
|
|
1.33
|
%
|
|
|
1.58
|
%
|
61-90 days
|
|
|
0.74
|
%
|
|
|
0.72
|
%
|
91 days or more
|
|
|
3.37
|
%
|
|
|
3.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
5.44
|
%
|
|
|
5.35
|
%
|
47
The following table presents further information about
delinquencies as a percent of amounts outstanding in our
residential loan portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unencumbered Residential Loans
|
|
|
Residential Loans Held in Securitization Trusts
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
31-60 days
|
|
|
1.98
|
%
|
|
|
2.29
|
%
|
|
|
1.17
|
%
|
|
|
1.39
|
%
|
61-90 days
|
|
|
1.53
|
%
|
|
|
0.92
|
%
|
|
|
0.54
|
%
|
|
|
0.67
|
%
|
91 days or more
|
|
|
5.84
|
%
|
|
|
4.03
|
%
|
|
|
2.74
|
%
|
|
|
2.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.35
|
%
|
|
|
7.24
|
%
|
|
|
4.45
|
%
|
|
|
4.84
|
%
|
The past due or delinquency status is generally determined based
on the contractual payment terms. The calculation of
delinquencies excludes from delinquent amounts those accounts
that are in bankruptcy proceedings that are paying their
mortgage payments in contractual compliance with the bankruptcy
court approved mortgage payment obligations.
The following table summarizes our residential loans placed in
non-accrual status due to delinquent payments of 90 days
past due or greater:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
Unencumbered residential loans
|
|
|
|
|
|
|
|
|
Number of loans
|
|
|
204
|
|
|
|
153
|
|
Balance (in millions)
|
|
$
|
21.4
|
|
|
$
|
16.0
|
|
Residential loans held in securitization trusts
|
|
|
|
|
|
|
|
|
Number of loans
|
|
|
656
|
|
|
|
666
|
|
Balance (in millions)
|
|
$
|
39.8
|
|
|
$
|
42.3
|
|
Total
|
|
|
|
|
|
|
|
|
Number of loans
|
|
|
860
|
|
|
|
819
|
|
Balance (in millions)
|
|
$
|
61.2
|
|
|
$
|
58.3
|
|
Portfolio
Characteristics
The weighted average original
loan-to-value,
or LTV, on the loans in our residential loan portfolio is 89.00%
and 89.18% as of December 31, 2009 and 2008, respectively.
The LTV dispersion of our portfolio is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
0.00 - 70.00
|
|
|
1.55
|
%
|
|
|
1.66
|
%
|
70.01 - 80.00
|
|
|
2.92
|
%
|
|
|
3.04
|
%
|
80.01 - 90.00(1)
|
|
|
70.19
|
%
|
|
|
69.49
|
%
|
90.01 - 100.00
|
|
|
25.34
|
%
|
|
|
25.81
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
|
|
|
(1) |
|
For those residential loans in the portfolio prior to electronic
tracking of original LTVs, the maximum LTV was 90%, or 10%
equity. Thus, these residential loans have been included in the
80.01 to 90.00 LTV category. |
Original LTVs do not include additional value contributed by the
borrower to complete the home. This additional value typically
was created by the installation and completion of wall and floor
coverings, landscaping, driveways and utility connections in
more recent periods.
48
Current LTVs are not readily determinable given the rural
geographic distribution of our portfolio which precludes us from
obtaining reliable comparable sales information to utilize in
valuing the collateral.
The refreshed weighted average FICO score of the loans in our
residential loan portfolio was 580 and 579 as of
December 31, 2009 and 2008, respectively. The refreshed
FICO dispersion of our portfolio is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
<=600
|
|
|
56.49
|
%
|
|
|
51.07
|
%
|
601 - 640
|
|
|
13.39
|
%
|
|
|
11.30
|
%
|
641 - 680
|
|
|
8.44
|
%
|
|
|
7.68
|
%
|
681 - 720
|
|
|
4.91
|
%
|
|
|
4.60
|
%
|
721 - 760
|
|
|
2.83
|
%
|
|
|
2.45
|
%
|
761 - 800
|
|
|
2.37
|
%
|
|
|
2.39
|
%
|
>800
|
|
|
0.96
|
%
|
|
|
1.00
|
%
|
Unknown or unavailable
|
|
|
10.61
|
%
|
|
|
19.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Our residential loans are concentrated in the following states:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Texas
|
|
|
33.90
|
%
|
|
|
33.41
|
%
|
Mississippi
|
|
|
15.45
|
%
|
|
|
15.36
|
%
|
Alabama
|
|
|
8.70
|
%
|
|
|
8.86
|
%
|
Louisiana
|
|
|
6.52
|
%
|
|
|
6.49
|
%
|
Florida
|
|
|
6.08
|
%
|
|
|
6.24
|
%
|
Others
|
|
|
29.35
|
%
|
|
|
29.64
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Our residential loans were originated in the following periods:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Year 2009 Origination
|
|
|
3.28
|
%
|
|
|
|
|
Year 2008 Origination
|
|
|
7.48
|
%
|
|
|
9.87
|
%
|
Year 2007 Origination
|
|
|
12.99
|
%
|
|
|
13.85
|
%
|
Year 2006 Origination
|
|
|
11.86
|
%
|
|
|
11.66
|
%
|
Year 2005 Origination
|
|
|
8.56
|
%
|
|
|
8.79
|
%
|
Year 2004 Origination and earlier
|
|
|
55.83
|
%
|
|
|
55.83
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Real
Estate Owned
The following table presents information about repossessed
property related to the unencumbered residential loans (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
|
Balance
|
|
|
Balance at December 31, 2008
|
|
|
151
|
|
|
$
|
12,435
|
|
Repossessions
|
|
|
289
|
|
|
|
25,049
|
|
Sales
|
|
|
(169
|
)
|
|
|
(15,503
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
271
|
|
|
$
|
21,981
|
|
|
|
|
|
|
|
|
|
|
49
The following table presents information about repossessed
property related to the residential loans held in securitization
trusts (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
|
Balance
|
|
|
Balance at December 31, 2008
|
|
|
673
|
|
|
$
|
35,763
|
|
Repossessions
|
|
|
1,092
|
|
|
|
58,833
|
|
Sales
|
|
|
(1,005
|
)
|
|
|
(53,453
|
)
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
760
|
|
|
$
|
41,143
|
|
|
|
|
|
|
|
|
|
|
Liquidity
and Capital Resources
Overview
Our principal sources of funds are our existing cash balances,
monthly principal and interest payments we receive from our
unencumbered residential loan portfolio, cash releases from our
securitized residential loan portfolio, proceeds from our
secondary offering and other financing activities. We generally
use our liquidity for our operating costs, to make additional
investments, and to make dividend payments.
Our securitization trusts are consolidated for financial
reporting under GAAP. Our results of operations and cash flows
include the activity of these Trusts. The cash proceeds from the
repayment of the collateral held in securitization trusts are
owned by the Trusts and serve to only repay the obligations of
the Trusts unless certain over-collateralization or other
similar targets are satisfied. Principal and interest on the
mortgage-backed debt of the Trusts can only be paid if there are
sufficient cash flows from the underlying collateral. As of
December 31, 2009, total debt decreased $105.4 million
as compared to December 31, 2008.
The securitization trusts contain delinquency and loss triggers,
that, if exceeded, result in any excess over-collateralization
going to pay down our outstanding mortgage-backed and
asset-backed notes for that particular securitization at an
accelerated pace. Assuming no servicer trigger events have
occurred and the over-collateralization targets have been met,
any excess cash is released to us. As of December 31, 2009,
three of our securitization trusts exceeded certain triggers and
did not provide any significant levels of excess cash flow to us
during 2009. In February 2010, we purchased Trust X REO at
its par value of approximately $3.0 million. As a result of
this transaction, the Trust X loss trigger has been cured.
Consequently, on February 16, 2010 we received a
$4.2 million cash release from this securitization.
We believe that, based on current forecasts and anticipated
market conditions, funding generated from the residential loans
and the proceeds from our recent secondary offering will be
sufficient to meet operating needs, to invest in residential
loans, to make planned capital expenditures, to make all
required principal and interest payments on mortgage-backed debt
of the Trusts, for general corporate purposes and to pay cash
dividends as required for our qualification as a REIT. However,
our operating cash flows and liquidity are significantly
influenced by numerous factors, including the general economy,
interest rates and, in particular, conditions in the mortgage
markets.
Mortgage-Backed
Debt and Warehouse Facilities
We have historically funded our residential loans through the
securitization market. As of December 31, 2009, we had nine
separate non-recourse securitization trusts where we service the
underlying collateral and one non-recourse securitization for
which we do not service the underlying collateral. These ten
trusts have an aggregate of $1.3 billion of outstanding
debt, collateralized by residential loans and REO with a
principal balance of $1.5 billion. All of our
mortgage-backed debt is non-recourse and not
cross-collateralized and, therefore, must be satisfied
exclusively from the proceeds of the residential loans and REO
held in each securitization trust. As we retained the beneficial
interests in the securitizations and will absorb a majority of
any losses on the underlying collateral, we have consolidated
the securitization entities and treat the residential loans as
our assets and the related mortgage-backed debt as our debt.
Borrower remittances received on the residential loan collateral
are used to make payments on the mortgage-backed debt. The
maturity of the mortgage-backed debt is directly affected by
principal prepayments
50
on the related residential loan collateral. As a result, the
actual maturity of the mortgage-backed debt is likely to occur
earlier than the stated maturity. Certain of our mortgage-backed
debt is also subject to redemption according to specific terms
of the respective indenture agreements.
At the beginning of the second quarter of 2008, we were a
borrower under a $200.0 million warehouse facility and a
$150.0 million warehouse facility, together the Warehouse
Facilities, providing temporary financing to us for our
purchases
and/or
originations of residential loans. On April 30, 2008, we
repaid all outstanding borrowings and terminated the Warehouse
Facilities using funds provided by Walter Energy. Since the
termination of the Warehouse Facilities, we have neither used
nor accessed the mortgage-backed securitization market.
Credit
Agreements
In April 2009, we entered into a syndicated credit agreement
that provides for a $15.0 million secured revolving credit
facility provided by a bank group, or the Syndicated Credit
Agreement. A portion of the Syndicated Credit Agreement, up to
$10.0 million, may be used to issue letters of credit. We
intend to use the proceeds of the Syndicated Credit Agreement,
as necessary, for general corporate purposes. The Syndicated
Credit Agreement matures on April 20, 2011. No borrowings
have been made under the Syndicated Credit Agreement since
inception and we are in compliance with all covenants
In April 2009, we entered into a revolving credit agreement and
security agreement, or the Revolving Credit Agreement, among us,
certain of our subsidiaries and Walter Energy, as lender. The
Revolving Credit Agreement establishes a guaranteed
$10.0 million revolving facility, secured by a pledge of
unencumbered assets with an unpaid principal balance of at least
$10.0 million. This facility would be available only after
a major hurricane has occurred with projected losses greater
than a $2.5 million self-insured retention. The Revolving
Credit Agreement matures on April 20, 2011. As of
December 31, 2009, no funds have been drawn under the
Revolving Credit Agreement and we are in compliance with all
covenants.
In April 2009, we entered into a support letter of credit
agreement, or the Support LC Agreement, with Walter Energy. The
Support LC Agreement was entered into in connection with a
letter of credit of $15.7 million and the bonds similarly
posted by Walter Energy in support of our obligations. The
Support LC Agreement provides that we will reimburse Walter
Energy for all costs incurred by it in posting the Support
Letter of Credit as well as for any draws under bonds posted in
support of us. The Support LC Agreement matures on
April 20, 2011. As of December 31, 2009, a
$15.7 million letter of credit remains outstanding and we
are in compliance with all covenants.
See Note 10 of Notes to Consolidated Financial
Statements for further information regarding the
Agreements.
Statements
of Cash Flows
The following table sets forth, for the periods indicated,
selected consolidated cash flow information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows provided by operating activities
|
|
$
|
28,434
|
|
|
$
|
1,956
|
|
Cash flows provided by investing activities
|
|
|
113,897
|
|
|
|
171,376
|
|
Cash flows used in financing activities
|
|
|
(44,364
|
)
|
|
|
(175,135
|
)
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
97,967
|
|
|
$
|
(1,803
|
)
|
|
|
|
|
|
|
|
|
|
Cash balances outstanding were $99.3 million and
$1.3 million at December 31, 2009 and 2008,
respectively.
Net cash provided by operating activities increased
$26.5 million for the year ended December 31, 2009, as
compared to the same period in 2008 and is primarily due to
higher earnings from operations.
51
Net cash provided by investing activities decreased
$57.5 million for the year ended December 31, 2009, as
compared to the same period in 2008. The decrease was primarily
due to a $31.0 million decrease in principal payments
received on residential loans due to a decline in the overall
portfolio balance, lower levels of voluntary prepayments and
increased delinquencies, $2.0 million of capital
expenditures, as well as $5.9 million of cash transferred
to, and held as, restricted cash in an insurance trust account.
The remaining decrease in investing cash flows, year over year,
primarily relates to a decrease in the restricted cash balances
during 2008 due to the termination in the Warehouse Facilities.
Net cash used in financing activities decreased
$130.8 million for the year ended December 31, 2009,
as compared to the same period in 2008. The decrease was
primarily due to $76.8 million of net proceeds raised
through our secondary offering, as well as a decrease in
payments of mortgage-backed debt as the prior year included a
non-recurring $214.0 million payment to terminate our
Warehouse Facilities and a $25.0 million decrease in
mortgage-backed debt issued. These amounts were offset by a net
$131.7 million decrease in the receivable from, and
dividends paid to, Walter Energy due to the spin-off
transaction. Additionally, we paid $16.0 million of
dividends to WIM interest holders immediately following the
spin-off and $23.6 million of dividends to WIMC
stockholders during 2009.
Off-Balance
Sheet Arrangements
As of December 31, 2009, we retained credit risk on 15
remaining mortgage securities totaling $1.7 million that
were sold with recourse by Hanover in a prior year. Accordingly,
we are responsible for credit losses, if any, with respect to
these securities.
We do not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as
structured finance, special purpose or variable interest
entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. In addition, we do not
have any undisclosed borrowings or debt, and have not entered
into any derivative contracts or synthetic leases. We are,
therefore, not materially exposed to any financing, liquidity,
market or credit risk that could arise if we had engaged in such
relationships.
Dividends
As a REIT, we are required to have declared dividends amounting
to at least 90% of our net taxable income (excluding net capital
gain) for each year by the time our U.S. federal tax return
is filed. Therefore, a REIT generally passes through
substantially all of its earnings to stockholders without paying
U.S. federal income tax at the corporate level.
As of December 31, 2009, we expect to pay dividends to our
stockholders of all or substantially all of our net income in
each year to qualify for the tax benefits accorded to a REIT
under the Code. All distributions will be made at the discretion
of our Board of Directors and will depend on our earnings, both
tax and GAAP, financial condition, maintenance of REIT
qualification and such other factors as the Board of Directors
deems relevant.
On December 15, 2009, we declared a dividend of $0.50 per
share on our common stock which was paid on January 20,
2010 to stockholders of record on December 31, 2009.
52
Lease
Obligations
Our lease obligations are for office space and office equipment.
We have no capital leases. Future minimum payments under
operating leases as of December 31, 2009 are as follows (in
thousands):
|
|
|
|
|
2010
|
|
$
|
1,658
|
|
2011
|
|
|
817
|
|
2012
|
|
|
647
|
|
2013
|
|
|
627
|
|
2014
|
|
|
645
|
|
Thereafter
|
|
|
889
|
|
|
|
|
|
|
Total
|
|
$
|
5,283
|
|
|
|
|
|
|
Market
Risk
We seek to manage the risks inherent in our business
including but not limited to credit risk, interest rate risk,
prepayment risk, liquidity risk, and inflation risk
in a prudent manner designed to enhance our earnings and
dividends and preserve our capital. In general, we seek to
assume risks that can be quantified from historical experience,
to actively manage such risks, and to maintain capital levels
consistent with these risks.
Credit
Risk
Credit risk is the risk that we will not fully collect the
principal we have invested in residential loans due to borrower
defaults. Our portfolio as of December 31, 2009 consisted
of securitized residential loans with a principal balance of
$1.4 billion and approximately $0.4 billion of
unencumbered residential loans.
The securitized residential loans were principally originated by
or for JWH prior to our spin-off from Walter Energy. These are
predominantly subprime loans with an average LTV ratio at
origination of approximately 89% and average borrower credit
core of 589. While we feel that our origination and underwriting
of these loans will help to mitigate the risk of significant
borrower default on these loans, we cannot assure you that all
borrowers will continue to satisfy their payment obligations
under these loans, thereby avoiding default.
The $1.4 billion of residential loans held in
securitization trusts are permanently financed with
$1.3 billion of mortgage-backed debt leaving us with a net
exposure of $186.6 million of credit exposure, which
represents our equity interest in the securitization trusts.
When we purchase residential loans, the credit underwriting
process will vary depending on the pool characteristics,
including loan seasoning or age, LTV ratios, payment histories
and counterparty representations and warranties. We will perform
a due diligence review of potential acquisitions which may
include a review of the residential loan documentation,
appraisal reports and credit underwriting. Generally, an updated
property valuation is obtained.
Interest
Rate Risk
Our primary interest rate risk exposures relate to the interest
rates on mortgage-backed debt of the Trusts and the yields on
our residential loan portfolio and prepayments thereof.
Our fixed-rate residential loan portfolio had $1.8 billion
and $1.9 billion of unpaid principal as of
December 31, 2009 and 2008, respectively and fixed-rate
mortgage-backed debt was $1.3 billion and $1.4 billion
as of December 31, 2009 and 2008, respectively. The fixed
rate nature of these instruments and their offsetting positions
effectively mitigate significant interest rate risk exposure
from these instruments. If interest rates decrease, we may be
exposed to higher prepayment speeds. This could result in a
modest increase in short-term profitability. However, it could
adversely impact long-term profitability as a result of a
shrinking portfolio. Changes in interest rates may impact the
fair value of these financial instruments.
53
At December 31, 2007, we had two warehouse facilities that
provided temporary financing. The warehouse facilities were
repaid and subsequently terminated in April 2008. As of
December 31, 2007, we held multiple interest rate hedge
agreements with various counterparties. The objective of these
hedges was to protect against changes in the benchmark interest
rate on the forecasted issuance of mortgage-backed debt in a
securitization anticipated to be priced on or around
April 1, 2008. The hedges were to be settled on or before
maturity and were being accounted for as cash flow hedges. As
such, changes in the fair value of the hedges that took place
through the date of maturity were recorded in accumulated other
comprehensive income (loss). At March 31, 2008, these
hedges no longer qualified for hedge accounting treatment
because we no longer planned to access the securitization market
due to existing market conditions. As a result, we recognized a
loss on our interest rate hedge ineffectiveness of
$17.0 million in the three months ended March 31,
2008. On April 1, 2008, we settled the interest rate hedge
agreements that were originally designated to hedge our next
securitization. There are no hedge agreements outstanding at
December 31, 2009.
Prepayment
Risk
When borrowers repay the principal on their residential loans
before maturity, or faster than their scheduled amortization,
the effect is to shorten the period over which interest is
earned, and therefore, increases the yield for residential loans
purchased at a discount to their then current balance, as with
the majority of our portfolio. Conversely, residential loans
purchased at a premium to their then current balance exhibit
lower yields due to faster prepayments. Historically, when
market interest rates declined, borrowers had a tendency to
refinance their residential loans, thereby increasing
prepayments. Increases in residential loan prepayment rates
could result in GAAP earnings volatility including substantial
variation from quarter to quarter.
We monitor prepayment risk through periodic reviews of the
impact of a variety of prepayment scenarios on revenues, net
earnings, dividends, and cash flow.
Liquidity
Risks
Liquidity is a measure of our ability to meet potential cash
requirements, including ongoing commitments to repay
mortgage-backed debt of the Trusts, fund and maintain the
portfolio, pay dividends to our stockholders and other general
business needs. We recognize the need to have funds available to
operate our business. It is our policy to have adequate
liquidity at all times. We plan to meet liquidity needs through
normal operations.
Our principal sources of liquidity are the mortgage-backed debt
of the Trusts we have issued to finance our residential loans
held in securitization trusts, the principal and interest
payments received from unencumbered residential loans, cash
releases from the securitized portfolio and cash proceeds from
the issuance of equity securities. We believe our existing cash
balances and cash flows from operations will be sufficient for
our liquidity requirements
Inflation
Risk
Virtually all of our assets and liabilities are interest rate
sensitive in nature. As a result, interest rates and other
factors influence our performance far more so than inflation.
Changes in interest rates do not necessarily correlate with
inflation rates or changes in inflation rates. Our consolidated
financial statements are prepared in accordance with GAAP and
our distributions will be determined by our Board of Directors
consistent with our obligation to distribute to our stockholders
at least 90% of our REIT taxable income on an annual basis in
order to maintain our REIT qualification; in each case, our
activities and balance sheet are measured with reference to
historical cost
and/or fair
market value without considering inflation.
Effect
of Governmental Initiatives on Market Risks
Recent market and economic conditions have been unprecedented
and challenging. There are continuing concerns about the overall
economy, the systemic impact of inflation or deflation, energy
costs, geopolitical issues, the availability and cost of credit,
the U.S. mortgage market, unemployment, and the declining
real estate market in the U.S.
54
These market and economic conditions have spurred government
initiatives and interventions designed to address them. Given
the size and scope of the government actions, they will affect
many of the market risks described above, although the total
impact is not yet fully known. As these initiatives are further
developed and their effects become more apparent, we will
continue to take them into account in managing the risks
inherent in our business.
Recent
Accounting Guidance
In June 2009, the Financial Accounting Standards Board, or FASB,
issued new guidance concerning the organization of authoritative
guidance under U.S. GAAP. The new guidance created the FASB
Accounting Standards Codification, or the Codification or ASC.
The Codification is now the single source of authoritative
nongovernmental GAAP, superseding existing FASB, American
Institute of Certified Public Accountants, or AICPA, Emerging
Issues Task Force, or EITF), and related accounting literature.
The ASC reorganizes the thousands of GAAP pronouncements into
roughly 90 accounting topics and displays them using a
consistent structure. Also included is relevant Securities and
Exchange Commission, or SEC, guidance organized using the same
topical structure in separate sections. The ASC is effective for
financial statements issued for reporting periods that end after
September 15, 2009. The adoption of this guidance on
September 30, 2009 did not have a significant impact on our
consolidated financial statements.
Consolidation
and Business Combinations
In December 2007, the FASB issued new guidance on noncontrolling
interests in consolidated financial statements to establish
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements. The adoption of this guidance on January 1,
2009 did not have a significant impact on our consolidated
financial statements.
Also in December 2007, the FASB issued new guidance on business
combinations that changes or clarifies the acquisition method of
accounting for acquired contingencies, transaction costs, step
acquisitions, restructuring costs and other major areas
affecting how the acquirer recognizes and measures the assets
acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. In addition, this guidance amends
previous interpretations of intangible asset accounting by
requiring the capitalization of in-process research and
development and proscribing impacts to current income tax
expense (rather than a reduction to goodwill) for changes in
deferred tax benefits related to a business combination. This
guidance was applied prospectively for business combinations
occurring after December 31, 2008. The adoption of this
guidance impacted our operating results in 2009 with the
completion of the business combination with Hanover. Acquisition
costs and fees were expensed, resulting in a decrease in our
operating results.
In June 2009, the FASB issued new guidance which modifies how a
company determines when a variable interest entity, or VIE,
should be consolidated. It also requires a qualitative
assessment of an entitys determination of the primary
beneficiary of a VIE based on whether the entity (1) has
the power to direct the activities of a VIE that most
significantly impact the entitys economic performance, and
(2) has the obligation to absorb losses of the entity that
could potentially be significant to the VIE or the right to
receive benefits from the entity that could potentially be
significant to the VIE. An ongoing assessment is also required
to determine whether a company is the primary beneficiary of a
VIE as well as additional disclosures about a companys
involvement in VIEs. The guidance is effective for fiscal years
beginning after November 15, 2009. We are continuing to
evaluate the impact that the guidance will have on our
consolidated financial statements.
Investments
In April 2009, the FASB issued new guidance related to
investments in debt and equity securities which clarifies the
determination of an
other-than-temporary
impairment. The guidance (i) changes existing guidance for
determining whether an impairment is other than temporary to
debt securities and (ii) replaces the existing requirement
that the entitys management assert it has both the intent
and ability to hold an impaired security until recovery with a
requirement that management assert: (a) it does not have
the intent to sell the security;
55
and (b) it is more likely than not it will not have to sell
the security before recovery of its cost basis. Under the
existing guidance, declines in the fair value of
held-to-maturity
and
available-for-sale
securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses to the
extent the impairment is related to credit losses. The amount of
impairment related to other factors is recognized in other
comprehensive income. The guidance is effective for interim and
annual periods ending after June 15, 2009. The adoption of
the guidance on June 30, 2009 did not have a significant
impact on our consolidated financial statements or disclosures.
Transfers
and Servicing
In February 2008, the FASB issued guidance related to transfers
and servicing of financial assets which requires an assessment
as to whether assets purchased from a counterparty and financed
through a repurchase agreement with the same counterparty can be
considered and accounted for as separate transactions. If
certain criteria are met, the transaction is considered a sale
and a subsequent financing. If certain criteria are not met, the
transaction is not considered a sale with a subsequent
financing, but rather a linked transaction that is recorded
based upon the economics of the combined transaction, which is
generally a forward contract. The new guidance was effective for
fiscal years beginning after November 15, 2008, and it is
applied to all initial transfers and repurchase financings
entered into after the effective date. The adoption of this
guidance on January 1, 2009 did not have a significant
impact on our consolidated financial statements.
In December 2008, the FASB issued new accounting guidance
concerning the disclosures by public entities of transfers of
financial assets and interests in variable interest entities
which requires expanded disclosures for transfers of financial
assets and involvement with VIEs. Under this guidance, the
disclosure objectives related to transfers of financial assets
now include providing information on (i) the companys
continued involvement with financial assets transferred in a
securitization or asset backed financing arrangement,
(ii) the nature of restrictions on assets held by the
company that relate to transferred financial assets, and
(iii) the impact on financial results of continued
involvement with assets sold and assets transferred in secured
borrowing arrangements. VIE disclosure objectives now include
providing information on (i) significant judgments and
assumptions used by the company to determine the consolidation
or disclosure of a VIE, (ii) the nature of restrictions
related to the assets of a consolidated VIE, (iii) the
nature of risks related to the companys involvement with
the VIE and (iv) the impact on financial results related to
the companys involvement with the VIE. Certain disclosures
are also required where the company is a non-transferor sponsor
or servicer of a QSPE. The guidance was effective for the first
reporting period ending after December 15, 2008. See
Note 5 of Notes to Consolidated Financial
Statements for the additional disclosures required by the
guidance.
In June 2009, the FASB issued new accounting guidance concerning
the accounting for transfers of financial assets which amends
the existing derecognition accounting and disclosure guidance.
The guidance eliminates the exemption from consolidation for
QSPEs, it also requires a transferor to evaluate all existing
QSPEs to determine whether it must be consolidated in accordance
with the accounting guidance concerning variable interest
entities. The guidance is effective for financial asset
transfers occurring after the beginning of an entitys
first fiscal year that begins after November 15, 2009. We
are continuing to evaluate the impact that guidance will have on
our consolidated financial statements.
Derivatives
and Hedging
In March 2008, the FASB issued new guidance concerning
disclosures of derivative instruments and hedging activities.
The guidance amends and expands the disclosure requirements of
previous guidance to provide greater transparency about how and
why an entity uses derivative instruments, how derivative
instruments and related hedge items are accounted for, and how
derivative instruments and related hedged items affect an
entitys financial position, results of operations, and
cash flows. The guidance requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on
derivative instruments, and disclosures about
credit-risk-related contingent features in derivative
agreements. The guidance was effective January 1, 2009. The
adoption of this guidance on January 1, 2009, did not have
a significant impact on our consolidated financial statements.
56
Fair
Value Measurements and Disclosures
In October 2008, the FASB issued new accounting guidance
concerning the determination of fair value of a financial asset
when the market for that asset is not active. The new guidance
clarifies the application of the existing fair value accounting
guidance in a market that is not active. The guidance applies to
financial assets within the scope of accounting guidance that
require or permit fair value measurements in accordance with the
existing guidance and provides an example to illustrate key
considerations in determining the fair value of a financial
asset when the market for that financial asset is not active.
The guidance was effective upon issuance, including prior
periods for which financial statements have not been issued.
Revisions resulting from a change in the valuation technique or
its application are to be accounted for as a change in
accounting estimate. The adoption of this guidance did not have
a significant impact on our consolidated financial statements or
disclosures.
In April 2009, the FASB issued new accounting guidance
concerning the determination of fair value when the volume and
level of activity for the asset or liability have significantly
decreased and the identification of transactions are not
orderly. The guidance affirms the objective of fair value when a
market is not active, clarifies and includes additional factors
for determining whether there has been a significant decrease in
market activity, eliminates the presumption that all
transactions are distressed unless proven otherwise, and
requires an entity to disclose a change in valuation technique.
The guidance is effective for interim and annual periods ending
after June 15, 2009. The adoption of the guidance on
June 30, 2009 did not have a significant impact on our
consolidated financial statements or disclosures.
In August 2009, the FASB updated the accounting standards to
provide additional guidance on estimating the fair value of a
liability in a hypothetical transaction where the liability is
transferred to a market participant. The standard is effective
for the first reporting period, including interim periods,
beginning after issuance. The adoption of this guidance on
December 31, 2009 did not have a material effect on our
consolidated financial statements or disclosures.
In January 2010, the FASB updated the accounting standards to
require new disclosures for fair value measurements and to
provide clarification for existing disclosure requirements. More
specifically, this update will require (a) an entity to
disclose separately the amounts of significant transfers in and
out of levels 1 and 2 fair value measurements and to
describe the reasons for the transfers and (b) information
about purchases, sales, issuances, and settlements to be
presented separately (i.e., present the activity on a gross
basis rather than net) in the roll forward of fair value
measurements using significant unobservable inputs (Level 3
inputs). This update clarifies existing disclosure requirements
for the level of disaggregation used for classes of assets and
liabilities measured at fair value and requires disclosures
about the valuation techniques and inputs used to measure for
fair value for both recurring and nonrecurring fair value
measurements using Level 2 and Level 3 inputs. The
standard is effective for interim and annual reporting periods
beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements
in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years
beginning after December 12, 2010, and for interim periods
within those fiscal years. We do not expect the adoption of this
guidance to have a material effect on the our disclosures.
Financial
Instruments
In January 2009, the FASB issued new impairment guidance
concerning beneficial interests which amends the existing
impairment guidance to achieve a more consistent determination
of whether an
other-than-temporary
impairment has occurred for all beneficial interests. The
guidance eliminates the requirement that a holders best
estimate of cash flows be based upon those that a market
participant would use and instead requires that an
other-than-temporary
impairment be recognized as a realized loss through earnings
when it its probable there has been an adverse
change in the holders estimated cash flows from cash flows
previously projected. This change is consistent with the
impairment models contained in the accounting guidance
concerning accounting for certain investments in debt and equity
securities. The guidance emphasizes that the holder must
consider all available information relevant to the
collectability of the security, including information about past
events, current conditions and reasonable and supportable
forecasts, when developing
57
the estimate of future cash flows. Such information generally
should include the remaining payment terms of the security,
prepayments speeds, financial condition of the issuer, expected
defaults, and the value of any underlying collateral. The holder
should also consider industry analyst reports and forecasts,
sector credit ratings, and other market data that are relevant
to the collectability of the consolidated security. The adoption
of the guidance on December 31, 2008 did not have a
significant impact on our consolidated financial statements.
In April 2009, the FASB issued new guidance related to financial
instruments which amends disclosures about fair value of
financial instruments. The guidance requires a public entity to
provide disclosures about fair value of financial instruments in
interim financial information. This guidance is effective for
interim and annual financial periods ending after June 15,
2009. The adoption of the guidance as of June 30, 2009 did
not have a significant impact on our consolidated financial
statements. See Note 4 of Notes to Consolidated
Financial Statements for our fair value disclosures.
Compensation
In June 2008, the FASB issued new accounting guidance concerning
the determination of whether instruments granted in share-based
payment transactions are participating securities which provides
that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall
be included in the computation of earnings per share pursuant to
the two-class method. The guidance requires that all previously
reported earnings per share, or EPS, data is retrospectively
adjusted to conform to the provisions of the new accounting
guidance. Current period EPS amounts have been adjusted to
reflect the adoption of the guidance on January 1, 2009.
Subsequent
Events
In May 2009, FASB issued guidelines on subsequent event
accounting to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but
before financial statements are issued. This guidance was
subsequently amended in February 2010 to no longer require
disclosure of the date through which an entity has evaluated
subsequent events. The adoption of this guidance did not have a
significant impact on our consolidated financial statements.
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|
Not applicable.
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
Our financial statements and related notes, together with the
Report of Independent Registered Certified Public Accounting
Firm thereon, begin on
page F-1
of this Annual Report on
Form 10-K.
|
|
ITEM 9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|
The information required by Item 9 is incorporated herein
by reference to the definitive Proxy Statement to be filed with
the SEC pursuant to Regulation 14A within 120 days
after the end of the fiscal year covered by this Annual Report
on
Form 10-K.
|
|
ITEM 9A(T).
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
As of the end of the period covered by this report, we carried
out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive
Officer and our Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and
procedures, as such term is defined under
Rule 13a-15
and
15d-15(e) of
the Securities Exchange Act of 1934, as amended, or the
58
Exchange Act. Based on that evaluation, our management,
including our Chief Executive Officer and our Chief Financial
Officer, concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this
report.
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rule 13a-15(f)
under the Exchange Act). Our internal control system is designed
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.
Management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2009. In making
this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway
Commission, or COSO, in the Internal Control-Integrated
Framework. Based on our assessment and those criteria,
management believes that we maintained effective internal
control over financial reporting as of December 31, 2009.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risks that controls may become inadequate
because of changes in conditions or that the degree of
compliance with the policies or procedures may deteriorate.
This Annual Report on
Form 10-K
does not include an attestation report of our independent
registered public accounting firm regarding internal control
over financial reporting. Managements report was not
subject to attestation by our independent registered public
accounting firm pursuant to temporary rules of the SEC that
permit us to provide only managements report in this
Annual Report on
Form 10-K.
Changes
in Internal Control Over Financial Reporting
There have been no changes in our internal control over
financial reporting that occurred during the fourth quarter of
2009 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
There is no information required to be disclosed in a report on
Form 8-K
during the fourth quarter of the year covered by this Annual
Report on
Form 10-K
that has not been so reported.
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by Item 10 is incorporated herein
by reference to the definitive Proxy Statement to be filed with
the SEC pursuant to Regulation 14A within 120 days
after the end of the fiscal year covered by this Annual Report
on
Form 10-K.
|
|
ITEM 11.
|
EXECUTIVE
COMPENSATION
|
The information required by Item 11 is incorporated herein
by reference to the definitive Proxy Statement to be filed with
the SEC pursuant to Regulation 14A within 120 days
after the end of the fiscal year covered by this Annual Report
on
Form 10-K.
59
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required by Item 12 is incorporated herein
by reference to the definitive Proxy Statement to be filed with
the SEC pursuant to Regulation 14A within 120 days
after the end of the fiscal year covered by this Annual Report
on
Form 10-K.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information required by Item 13 is incorporated herein
by reference to the definitive Proxy Statement to be filed with
the SEC pursuant to Regulation 14A within 120 days
after the end of the fiscal year covered by this Annual Report
on
Form 10-K.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES DISCLOSURE OF FEES CHARGED BY
PRINCIPAL ACCOUNTANTS
|
The information required by Item 14 is incorporated herein
by reference to the definitive Proxy Statement to be filed with
the SEC pursuant to Regulation 14A within 120 days
after the end of the fiscal year covered by this Annual Report
on
Form 10-K.
PART IV
|
|
ITEM 15.
|
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
|
|
|
|
|
|
|
(a)
|
|
(1) Financial Statements
|
|
|
|
|
|
See Part II, Item 8 hereof.
|
|
|
|
|
|
(2) Financial Statement Schedules
|
|
|
|
|
|
The required financial statement schedules are omitted because
the information is disclosed elsewhere herein.
|
|
|
|
(b)
|
|
Exhibits
|
|
|
|
|
|
Exhibits required to be attached by Item 601 of Regulation
S-K are listed in the Exhibit Index attached hereto, which
is incorporated herein by reference.
|
60
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, on March 2, 2010.
WALTER INVESTMENT MANAGEMENT CORP.
Mark J. OBrien
Chief Executive Officer
(Principal Executive Officer)
In accordance with the requirements of the Securities Exchange
Act of 1934, this Annual Report on
Form 10-K
has been signed below by the following persons in the capacities
and on the date(s) indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Mark
J. OBrien
Mark
J. OBrien
|
|
Chairman of the Board and Chief Executive Officer (Principal
Executive Officer)
|
|
March 2, 2010
|
|
|
|
|
|
/s/ Ellyn
L. Brown
Ellyn
L. Brown
|
|
Director
|
|
March 2, 2010
|
|
|
|
|
|
/s/ Denmar
J. Dixon
Denmar
J. Dixon
|
|
Vice Chairman and
Executive Vice President
|
|
March 2, 2010
|
|
|
|
|
|
/s/ William
J. Meurer
William
J. Meurer
|
|
Director
|
|
March 2, 2010
|
|
|
|
|
|
/s/ Shannon
E. Smith
Shannon
E. Smith
|
|
Director
|
|
March 2, 2010
|
|
|
|
|
|
/s/ Michael
T. Tokarz
Michael
T. Tokarz
|
|
Director
|
|
March 2, 2010
|
|
|
|
|
|
/s/ Kimberly
A. Perez
Kimberly
A. Perez
|
|
Chief Financial Officer (Principal Financial Officer and
Principal Accounting Officer)
|
|
March 2, 2010
|
61
INDEX TO
EXHIBITS
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
No
|
|
Notes
|
|
Description
|
|
|
2
|
.1
|
|
(1)
|
|
Second Amended and Restated Agreement and Plan of Merger dated
as of February 6, 2009, among Registrant, Walter
Industries, Inc., JWH Holding Company, LLC, and Walter
Investment Management LLC.
|
|
2
|
.2
|
|
(1)
|
|
Amendment to the Second Amended and Restated Agreement and Plan
of Merger, entered into as of February 17, 2009 between
Registrant, Walter Industries, Inc., JWH Holding Company, LLC
and Walter Investment Management LLC
|
|
3
|
.1
|
|
(4)
|
|
Articles of Amendment and Restatement of Registrant effective
April 17, 2009.
|
|
3
|
.2
|
|
(3)
|
|
By-Laws of Registrant, effective April 17, 2009.
|
|
4
|
.1
|
|
(6)
|
|
Specimen Common Stock Certificate of Registrant
|
|
4
|
.2
|
|
(4)
|
|
Joint Direction and Release, by and among Registrant, Hanover
Statutory Trust I, and The Bank of New York Mellon
Trust Company, N.A. (as successor to JPMorgan Chase Bank,
N.A.) as trustee, dated April 17, 2009.
|
|
4
|
.3
|
|
(4)
|
|
Discharge Agreement, by and among Registrant, Hanover Statutory
Trust I, The Bank of New York Mellon Trust Company,
N.A. (as successor to JPMorgan Chase Bank, N.A.) as trustee,
dated April 17, 2009.
|
|
4
|
.4
|
|
(4)
|
|
Joint Direction and Release, by and among Registrant, Hanover
Statutory Trust II, and Wilmington Trust Company, as
trustee, dated April 17, 2009.
|
|
4
|
.5
|
|
(4)
|
|
Discharge Agreement, by and among Registrant., Hanover Statutory
Trust II, Wilmington Trust Company, as trustee, dated
April 17, 2009.
|
|
10
|
.1
|
|
(2)
|
|
1999 Equity Incentive Plan
|
|
10
|
.2
|
|
(8)
|
|
Amendment No. 1 to the Walter Investment Management Corp.
1999 Equity Incentive Plan
|
|
10
|
.3
|
|
(8)
|
|
Amendment No. 2 to the Walter Investment Management Corp.
1999 Equity Incentive Plan
|
|
10
|
.4
|
|
(1)
|
|
Software License Agreement, dated as of September 30, 2008,
between Registrant and JWH Holding Company, LLC.
|
|
10
|
.5
|
|
(4)
|
|
Assignment and Assumption of Software License Agreement, by and
among Registrant, JWH Holding Company, LLC, and Walter
Investment Management LLC, dated April 17, 2009.
|
|
10
|
.6
|
|
(4)
|
|
Revolving Credit Agreement between Registrant, as borrower,
Regions Bank, as syndication agent, SunTrust Bank, as
administrative agent, and the additional lenders thereto, dated
as of April 20, 2009.
|
|
10
|
.7
|
|
(11)
|
|
Amendment No. 1 dated February 16, 2010 to Revolving
Credit Agreement between Registrant, as borrower, Regions Bank,
as syndication agent, SunTrust Bank, as administrative agent,
and the additional lenders thereto, dated as of April 20,
2009.
|
|
10
|
.8
|
|
(4)
|
|
Subsidiary Guaranty Agreement by and among Registrant, each of
the subsidiaries listed on Schedule I thereto, SunTrust
Bank as administrative agent, and the additional lenders
thereto, dated April 20, 2009.
|
|
10
|
.9
|
|
(4)
|
|
Revolving Credit Agreement and Security Agreement, between
Registrant as borrower, and Walter Industries, Inc. as lender,
dated as of April 20, 2009.
|
|
10
|
.10
|
|
(4)
|
|
L/C Support Agreement among Registrant and certain of its
subsidiaries and Walter Industries, Inc., dated April 20,
2009.
|
|
10
|
.11
|
|
(4)
|
|
Trademark License Agreement, between Walter Industries, Inc. and
Walter Investment Management LLC, dated April 17, 2009.
|
|
10
|
.12
|
|
(4)
|
|
Transition Services Agreement, between Walter Industries, Inc.
and Walter Investment Management LLC, dated April 17, 2009.
|
|
10
|
.13
|
|
(4)
|
|
Tax Separation Agreement, between Walter Industries, Inc. and
Walter Investment Management LLC, dated April 17, 2009.
|
|
10
|
.14
|
|
(4)
|
|
Joint Litigation Agreement, between Walter Industries, Inc. and
Walter Investment Management LLC, dated April 17, 2009
|
62
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
No
|
|
Notes
|
|
Description
|
|
|
10
|
.15
|
|
(8)
|
|
The 2009 Long Term Incentive Award Plan of Walter Investment
Management Corp.
|
|
10
|
.16.1
|
|
(5)
|
|
Agreement dated as of December 23, 2008, between JWH
Holding Company, L.L.C. and Mark J. OBrien
|
|
10
|
.16.2
|
|
(24)
|
|
Form of Executive RSU Award Agreement of Mark J. OBrien
|
|
10
|
.17
|
|
(9)
|
|
Executive RSU Award Agreement of Mark J. OBrien
|
|
10
|
.18.1
|
|
(5)
|
|
Agreement dated as of December 23, 2008, between JWH
Holding Company, L.L.C. and Charles E. Cauthen
|
|
10
|
.18.2
|
|
(24)
|
|
Form of Executive RSU Award Agreement of Charles E. Cauthen
|
|
10
|
.19
|
|
(9)
|
|
Form of Executive RSU Award Agreement of Charles E. Cauthen
|
|
10
|
.20.1
|
|
(5)
|
|
Agreement dated as of December 23, 2008, between JWH
Holding Company, L.L.C. and Kimberley Ann Perez
|
|
10
|
.20.2
|
|
(9)
|
|
Form of Executive RSU Award Agreement of Kimberly A. Perez
|
|
10
|
.21
|
|
(24)
|
|
Form of Director Award Agreement
|
|
10
|
.22.1
|
|
(7)
|
|
Form of Indemnity Agreements dated April 17, 2009 between
the Registrant and the following officers and directors: Mark
OBrien, Ellyn Brown, John Burchett, Denmar Dixon, William
J. Meurer, Shannon Smith, Michael T. Tokarz, Charles E. Cauthen,
Irma Tavares, Del Pulido, William Atkins, William Batik, Joseph
Kelly, Jr. and Stuart Boyd.
|
|
10
|
.22.2
|
|
(16)
|
|
Indemnity Agreements dated July 1, 2004 between the
Registrant and the following: John A. Burchett, John A. Clymer,
Joseph J. Freeman, Roberta M. Graffeo, Douglas L. Jacobs,
Harold F. McElraft, Richard J. Martinelli, Joyce S.
Mizerak, Saiyid T. Naqvi, George J. Ostendorf, John N. Rees,
David K. Steel, James F. Stone, James C. Strickler, and Irma N.
Tavares
|
|
10
|
.22.3
|
|
(17)
|
|
Indemnity Agreement between Registrant and Harold F. McElraft,
dated as of April 14, 2005
|
|
10
|
.22.4
|
|
(18)
|
|
Indemnity Agreement between Registrant and Suzette Berrios,
dated as of November 28, 2005
|
|
10
|
.23
|
|
(7)
|
|
Office Sublease dated between Registrant and Municipal Mortgage
and Equity, L.L.C
|
|
10
|
.23.1
|
|
(19)
|
|
Office Lease Agreement, dated as of March 1, 1994, between
Metroplex Associates and Registrant, as amended by the First
Modification and Extension of Lease Amendment dated as of
February 28, 1997
|
|
10
|
.23.2
|
|
(20)
|
|
Second Modification and Extension of Lease Agreement dated
April 22, 2002 between Metroplex Associates and Registrant
|
|
10
|
.23.3
|
|
(20)
|
|
Third Modification of Lease Agreement dated May 8, 2002
between Metroplex Associates and Hanover Capital Mortgage
Corporation
|
|
10
|
.23.4
|
|
(20)
|
|
Fourth Modification of Lease Agreement dated November 2002
between Metroplex Associates and Hanover Capital Mortgage
Corporation
|
|
10
|
.23.5
|
|
(21)
|
|
Fifth Modification of Lease Agreement dated October 9, 2003
between Metroplex Associates and Hanover Capital Partners Ltd.
|
|
10
|
.23.6
|
|
(22)
|
|
Sixth Modification of Lease Agreement dated August 3, 2005
between Metroplex Associates and HanoverTrade Inc.
|
|
10
|
.23.7
|
|
(23)
|
|
Seventh Modification of Lease Agreement dated December 16,
2005 between Metroplex Associates and Hanover Capital Partners
2, Ltd.
|
|
10
|
.24
|
|
(10)
|
|
Employment Agreement of Denmar Dixon
|
|
10
|
.25
|
|
(25)
|
|
Separation and General Release Between the Registrant and John
A. Burchett
|
|
10
|
.26.1
|
|
(14)
|
|
Amended and Restated Employment Agreement of Irma N. Tavares,
effective as of July 1, 2007
|
|
10
|
.26.2
|
|
(15)
|
|
Second Amended and Restated Employment Agreement dated as of
September 30, 2008 between Registrant and Irma N. Tavares.
|
63
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
No
|
|
Notes
|
|
Description
|
|
|
10
|
.26.3
|
|
(1)
|
|
Amendment to the Second Amended and Restated Employment
Agreement, entered into February 12, 2009 between
Registrant and Irma N. Tavares
|
|
14
|
|
|
(24)
|
|
Code of Conduct
|
|
21
|
|
|
(13)
|
|
Subsidiaries of the Registrant
|
|
23
|
.1
|
|
(25)
|
|
Consent of Ernst & Young LLP
|
|
31
|
.1
|
|
(25)
|
|
Certification by Mark J. OBrien pursuant to Securities
Exchange Act
Rule 13a-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31
|
.2
|
|
(25)
|
|
Certification by Kimberly Perez pursuant to Securities Exchange
Act
Rule 13a-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32
|
|
|
(25)
|
|
Certification by Mark J. OBrien and Kimberly Perez
pursuant to 18 U.S.C. Section 1352, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
Note
|
|
Notes to Exhibit Index
|
|
|
(1)
|
|
|
Incorporated herein by reference to the Annexes to the proxy
statement/ prospectus forming a part of Amendment No. 4 to
the Registrants Registration Statement on
Form S-4,
Registration
No. 333-155091,
as filed with the Securities and Exchange Commission on
February 17, 2009.
|
|
(2)
|
|
|
Incorporated herein by reference to Registrants Annual
Report on
Form 10-K
for the year ended December 31, 1999, as filed with the
Securities and Exchange Commission on March 30, 2000.
|
|
(3)
|
|
|
Incorporated herein by reference to Registrants Current
Report on
Form 8-K
filed with the Securities and Exchange Commission on
April 21, 2009.
|
|
(4)
|
|
|
Incorporated herein by reference to Registrants Current
Report on
Form 8-K
filed with the Securities and Exchange Commission on
April 23, 2009.
|
|
(5)
|
|
|
Incorporated by reference to the Exhibits to Amendment
No. 2 to the Registrants Registration Statement on
Form S-4,
Registration
No. 333-155091,
as filed with the Securities and Exchange Commission on
February 6, 2009.
|
|
(6)
|
|
|
Incorporated herein by reference to Registrants Quarterly
Report on
Form 10-Q
for the quarter ended March 31, 2009, as filed with the
Securities and Exchange Commission on May 15, 2009
|
|
(7)
|
|
|
Incorporated by reference to Registrants Quarterly Report
on
Form 10-Q
for the quarter ended June 30, 2009, as filed with the
Securities and Exchange Commission on August 14, 2009
|
|
(8)
|
|
|
Incorporate by reference to the Exhibits to the
Registrants Registration Statement on
form S-8,
Registration
No. 333-160743,
as filed with the Securities and Exchange Commission on
July 22, 2009.
|
|
(9)
|
|
|
Incorporated herein by reference to Registrants Current
Report on
Form 8-K
filed with the Securities and Exchange Commission on
January 8, 2010.
|
|
(10)
|
|
|
Incorporated herein by reference to Registrants Current
Report on
Form 8-K
filed with the Securities and Exchange Commission on
January 26, 2010.
|
|
(11)
|
|
|
Incorporated herein by reference to Registrants Current
Report on
Form 8-K
filed with the Securities and Exchange Commission on
February 19, 2010.
|
|
(12)
|
|
|
Incorporated herein by reference to Registrants Current
Report on
Form 8-K/A
filed with the Securities and Exchange Commission on May 1,
2009.
|
|
(13)
|
|
|
Incorporate by reference to the Exhibits to the
Registrants Registration Statement on
form S-11,
Registration
No. 333-162067,
as filed with the Securities and Exchange Commission on
September 22, 2009.
|
|
(14)
|
|
|
Incorporated herein by reference to Registrants Current
Report on
Form 8-K
filed with the Securities and Exchange Commission on
December 3, 2007.
|
|
(15)
|
|
|
Incorporated herein by reference to Registrants Current
Report on
Form 8-K
filed with the Securities and Exchange Commission on
October 1, 2008.
|
|
(16)
|
|
|
Incorporated herein by reference to Registrants Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2004, as filed with the
Securities and Exchange Commission on November 9, 2004.
|
64
|
|
|
|
|
Note
|
|
Notes to Exhibit Index
|
|
|
(17)
|
|
|
Incorporated herein by reference to Registrants Quarterly
Report on
Form 10-Q
for the quarter ended March 31, 2005, as filed with the
Securities and Exchange Commission on May 16, 2005.
|
|
(18)
|
|
|
Incorporated herein by reference to Registrants Annual
Report on
Form 10-K
for the year ended December 31, 2005, as filed with the
Securities and Exchange Commission on March 16, 2006.
|
|
(19)
|
|
|
Incorporated herein by reference to Registrants
Registration Statement on
Form S-11,
Registration
No. 333-29261,
as amended, which became effective under the Securities Act of
1933, as amended, on September 15, 1997.
|
|
(20)
|
|
|
Incorporated herein by reference to Registrants Annual
Report on
Form 10-K
for the year ended December 31, 2002, as filed with the
Securities and Exchange Commission on March 28, 2003.
|
|
(21)
|
|
|
Incorporated herein by reference to Registrants Quarterly
Report on
Form 10-Q
for the quarter ended March 31, 2004, as filed with the
Securities and Exchange Commission on May 24, 2004.
|
|
(22)
|
|
|
Incorporated herein by reference to Registrants Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2005, as filed with the
Securities and Exchange Commission on August 9, 2005.
|
|
(23)
|
|
|
Incorporated herein by reference to Registrants Annual
Report on
Form 10-K
for the year ended December 31, 2005, as filed with the
Securities and Exchange Commission on March 16, 2006.
|
|
(24)
|
|
|
Incorporated herein by reference to Registrants Current
Report on
Form 8-K
filed with the Securities and Exchange Commission on May 5,
2009.
|
|
(25)
|
|
|
Filed herewith
|
65
TABLE OF
CONTENTS TO FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
WALTER INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
F-2
|
|
Consolidated Financial Statements as of December 31, 2009
and 2008 and for the Years Ended December 31, 2009, 2008
and 2007:
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING
FIRM
The Board of Directors and Stockholders of
Walter Investment Management Corp.
We have audited the accompanying consolidated balance sheets of
Walter Investment Management Corp. and subsidiaries as of
December 31, 2009 and 2008, and the related consolidated
statements of income, changes in stockholders equity and
comprehensive income and cash flows for each of the three years
in the period ended December 31, 2009. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits 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, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Walter Investment Management Corp. and
subsidiaries at December 31, 2009 and 2008, and the
consolidated results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2009, in conformity with U.S. generally
accepted accounting principles.
Tampa, Florida
March 2, 2010
F-2
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share and per share data)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
99,286
|
|
|
$
|
1,319
|
|
Cash and short-term investments, restricted
|
|
|
51,654
|
|
|
|
49,196
|
|
Receivables, net
|
|
|
3,052
|
|
|
|
5,447
|
|
Residential loans, net of allowance for loan losses of $17,661
and $18,969, respectively
|
|
|
1,644,346
|
|
|
|
1,771,675
|
|
Subordinate security
|
|
|
1,801
|
|
|
|
|
|
Real estate owned
|
|
|
63,124
|
|
|
|
48,198
|
|
Deferred debt issuance costs
|
|
|
18,450
|
|
|
|
19,745
|
|
Other assets
|
|
|
5,961
|
|
|
|
3,261
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,887,674
|
|
|
$
|
1,898,841
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Accounts payable
|
|
$
|
14,045
|
|
|
$
|
2,181
|
|
Accrued expenses
|
|
|
28,296
|
|
|
|
46,367
|
|
Deferred income taxes, net
|
|
|
173
|
|
|
|
55,530
|
|
Mortgage-backed debt
|
|
|
1,267,454
|
|
|
|
1,372,821
|
|
Accrued interest
|
|
|
8,755
|
|
|
|
9,717
|
|
Other liabilities
|
|
|
767
|
|
|
|
748
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,319,490
|
|
|
|
1,487,364
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 16)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Member unit
|
|
|
|
|
|
|
|
|
Issued 0 and 1 member units at December 31,
2009 and 2008, respectively
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value per share:
|
|
|
|
|
|
|
|
|
Authorized 10,000,000 shares
|
|
|
|
|
|
|
|
|
Issued and outstanding 0 shares at
December 31, 2009 and 2008, respectively
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value per share:
|
|
|
|
|
|
|
|
|
Authorized 90,000,000 shares
|
|
|
|
|
|
|
|
|
Issued and outstanding 25,642,889 and 0 shares
at December 31, 2009 and 2008, respectively
|
|
|
256
|
|
|
|
|
|
Additional paid-in capital
|
|
|
122,552
|
|
|
|
52,293
|
|
Retained earnings
|
|
|
443,433
|
|
|
|
684,127
|
|
Accumulated other comprehensive income
|
|
|
1,943
|
|
|
|
1,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
568,184
|
|
|
|
738,167
|
|
Less: Receivable from Walter Energy
|
|
|
|
|
|
|
(326,690
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
568,184
|
|
|
|
411,477
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,887,674
|
|
|
$
|
1,898,841
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Net interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
175,372
|
|
|
$
|
191,063
|
|
|
$
|
199,991
|
|
Less: Interest expense
|
|
|
89,726
|
|
|
|
102,115
|
|
|
|
119,102
|
|
Less: Interest rate hedge ineffectiveness
|
|
|
|
|
|
|
16,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest income
|
|
|
85,646
|
|
|
|
71,967
|
|
|
|
80,889
|
|
Less: Provision for loan losses
|
|
|
15,182
|
|
|
|
20,968
|
|
|
|
13,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net interest income after provision for loan losses
|
|
|
70,464
|
|
|
|
50,999
|
|
|
|
67,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium revenue
|
|
|
11,465
|
|
|
|
11,773
|
|
|
|
9,771
|
|
Other income, net
|
|
|
569
|
|
|
|
(3,139
|
)
|
|
|
1,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
|
12,034
|
|
|
|
8,634
|
|
|
|
10,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims expense
|
|
|
4,483
|
|
|
|
5,180
|
|
|
|
4,831
|
|
Salaries and benefits
|
|
|
20,568
|
|
|
|
15,934
|
|
|
|
18,570
|
|
Legal and professional
|
|
|
4,166
|
|
|
|
1,249
|
|
|
|
1,720
|
|
Occupancy
|
|
|
1,364
|
|
|
|
1,509
|
|
|
|
1,522
|
|
Technology and communication
|
|
|
2,980
|
|
|
|
1,404
|
|
|
|
1,360
|
|
Depreciation and amortization
|
|
|
436
|
|
|
|
416
|
|
|
|
1,175
|
|
General and administrative
|
|
|
9,537
|
|
|
|
7,422
|
|
|
|
5,125
|
|
Other expense
|
|
|
493
|
|
|
|
1,370
|
|
|
|
1,433
|
|
Related party allocated corporate charges
|
|
|
853
|
|
|
|
3,469
|
|
|
|
3,683
|
|
Goodwill impairment charges
|
|
|
|
|
|
|
12,291
|
|
|
|
|
|
Provision for estimated hurricane insurance losses
|
|
|
|
|
|
|
3,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
|
|
44,880
|
|
|
|
54,097
|
|
|
|
39,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
37,618
|
|
|
|
5,536
|
|
|
|
38,793
|
|
Income tax expense (benefit)
|
|
|
(76,161
|
)
|
|
|
3,099
|
|
|
|
14,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
113,779
|
|
|
$
|
2,437
|
|
|
$
|
24,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common and common equivalent share
|
|
$
|
5.26
|
|
|
$
|
0.12
|
|
|
$
|
1.22
|
|
Diluted earnings per common and common equivalent share
|
|
$
|
5.25
|
|
|
$
|
0.12
|
|
|
$
|
1.22
|
|
Weighted average common and common equivalent shares
outstanding basic
|
|
|
21,496,369
|
|
|
|
19,871,205
|
|
|
|
19,871,205
|
|
Weighted average common and common equivalent shares
outstanding diluted
|
|
|
21,564,621
|
|
|
|
19,871,205
|
|
|
|
19,871,205
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Member Unit/
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
Receivable
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
from Walter
|
|
|
|
Total
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Energy
|
|
|
|
(In thousands, except share data)
|
|
|
Balance at December 31, 2006
|
|
$
|
70,052
|
|
|
|
|
|
|
$
|
|
|
|
$
|
91,704
|
|
|
|
|
|
|
$
|
661,677
|
|
|
$
|
3,136
|
|
|
$
|
(686,465
|
)
|
Adjustment to initially apply FIN 48
|
|
|
(4,421
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,421
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted balance at January 1, 2007
|
|
|
65,631
|
|
|
|
|
|
|
|
|
|
|
|
91,704
|
|
|
|
|
|
|
|
657,256
|
|
|
|
3,136
|
|
|
|
(686,465
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
24,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,263
|
|
|
|
24,263
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in postretirement benefit plans, net of $112 tax effect
|
|
|
(299
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(299
|
)
|
|
|
|
|
|
|
(299
|
)
|
|
|
|
|
Net amortization of realized gain on hedges, net of $144 tax
effect
|
|
|
(282
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(282
|
)
|
|
|
|
|
|
|
(282
|
)
|
|
|
|
|
Net unrealized loss on hedges, net of $3,445 tax effect
|
|
|
(6,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,385
|
)
|
|
|
|
|
|
|
(6,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net activity with Walter Energy
|
|
|
50,917
|
|
|
|
|
|
|
|
|
|
|
|
(25,864
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,781
|
|
Share-based compensation
|
|
|
2,556
|
|
|
|
|
|
|
|
|
|
|
|
2,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
136,401
|
|
|
|
|
|
|
|
|
|
|
|
68,396
|
|
|
|
|
|
|
|
681,519
|
|
|
|
(3,830
|
)
|
|
|
(609,684
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
2,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,437
|
|
|
|
2,437
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in postretirement benefit plans, net of $69 tax effect
|
|
|
(106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(106
|
)
|
|
|
|
|
|
|
(106
|
)
|
|
|
|
|
Net amortization of realized gain on hedges, net of $137 tax
effect
|
|
|
(258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(258
|
)
|
|
|
|
|
|
|
(258
|
)
|
|
|
|
|
Net recognized loss on hedges, net of $3,329 tax effect
|
|
|
6,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,130
|
|
|
|
|
|
|
|
6,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of changing the plan measurement date pursuant to FASB
Statement 158:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost and interest cost for October 1,
2007 December 31, 2007, net of $92 tax effect
|
|
|
171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial gain and prior service cost for
October 1, 2007 December 31, 2007, net of
$102 tax effect
|
|
|
(189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(189
|
)
|
|
|
|
|
Net activity with Walter Energy
|
|
|
265,917
|
|
|
|
|
|
|
|
|
|
|
|
(17,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282,994
|
|
Share-based compensation
|
|
|
974
|
|
|
|
|
|
|
|
|
|
|
|
974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
411,477
|
|
|
|
|
|
|
|
|
|
|
|
52,293
|
|
|
|
|
|
|
|
684,127
|
|
|
|
1,747
|
|
|
|
(326,690
|
)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
113,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
113,779
|
|
|
|
113,779
|
|
|
|
|
|
|
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in postretirement benefit plans, net of $502 tax effect
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41
|
)
|
|
|
|
|
|
|
(41
|
)
|
|
|
|
|
Net unrealized gain on subordinate security, net of $0 tax effect
|
|
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189
|
|
|
|
|
|
|
|
189
|
|
|
|
|
|
Net amortization of realized gain on closed hedges, net of $347
tax effect
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
113,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net activity with Walter Energy
|
|
|
19,914
|
|
|
|
|
|
|
|
|
|
|
|
(5,172
|
)
|
|
|
|
|
|
|
(301,604
|
)
|
|
|
|
|
|
|
326,690
|
|
Consummation of spin-off and Merger
|
|
|
(2,508
|
)
|
|
|
19,871,205
|
|
|
|
199
|
|
|
|
(2,707
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
1,352
|
|
|
|
|
|
|
|
|
|
|
|
1,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends to WIM interest-holders
|
|
|
(16,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,000
|
)
|
|
|
|
|
|
|
|
|
Dividends and dividend equivalents declared
|
|
|
(36,869
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,869
|
)
|
|
|
|
|
|
|
|
|
Issuance of restricted stock
|
|
|
|
|
|
|
15,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued upon exercise of stock options
|
|
|
54
|
|
|
|
6,456
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of common stock
|
|
|
|
|
|
|
(162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secondary offering, net of issuance costs
|
|
|
76,789
|
|
|
|
5,750,000
|
|
|
|
57
|
|
|
|
76,732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
568,184
|
|
|
|
25,642,889
|
|
|
$
|
256
|
|
|
$
|
122,552
|
|
|
|
|
|
|
$
|
443,433
|
|
|
$
|
1,943
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
113,779
|
|
|
$
|
2,437
|
|
|
$
|
24,263
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
15,182
|
|
|
|
20,968
|
|
|
|
13,476
|
|
Amortization of residential loan discount to interest income
|
|
|
(14,965
|
)
|
|
|
(18,334
|
)
|
|
|
(25,140
|
)
|
Depreciation and amortization
|
|
|
436
|
|
|
|
416
|
|
|
|
1,175
|
|
Proceeds from sale of mortgage securities classified as trading
|
|
|
2,387
|
|
|
|
|
|
|
|
|
|
Benefit from deferred income taxes
|
|
|
(81,749
|
)
|
|
|
(7,777
|
)
|
|
|
(7,088
|
)
|
Amortization of deferred debt issuance costs to interest expense
|
|
|
1,204
|
|
|
|
1,845
|
|
|
|
2,867
|
|
Share-based compensation
|
|
|
1,352
|
|
|
|
974
|
|
|
|
2,556
|
|
Goodwill impairment charges
|
|
|
|
|
|
|
12,291
|
|
|
|
|
|
Other
|
|
|
(550
|
)
|
|
|
(258
|
)
|
|
|
(298
|
)
|
Decrease (increase) in assets, net of effect of reverse
acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(3,108
|
)
|
|
|
(3,802
|
)
|
|
|
1,227
|
|
Other
|
|
|
(770
|
)
|
|
|
(649
|
)
|
|
|
46
|
|
Increase (decrease) in liabilities, net of effect of reverse
acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(1,384
|
)
|
|
|
(161
|
)
|
|
|
372
|
|
Accrued expenses
|
|
|
(2,415
|
)
|
|
|
(3,758
|
)
|
|
|
1,478
|
|
Accrued interest
|
|
|
(965
|
)
|
|
|
(2,236
|
)
|
|
|
(893
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by operating activities
|
|
|
28,434
|
|
|
|
1,956
|
|
|
|
14,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of residential loans from unrelated third parties
|
|
|
|
|
|
|
|
|
|
|
(39,900
|
)
|
Principal payments received on residential loans
|
|
|
117,388
|
|
|
|
148,432
|
|
|
|
214,632
|
|
Additions to real estate owned
|
|
|
(10,155
|
)
|
|
|
(8,885
|
)
|
|
|
(5,228
|
)
|
Cash proceeds from sales of real estate owned
|
|
|
10,731
|
|
|
|
11,863
|
|
|
|
17,138
|
|
Additions to property and equipment, net
|
|
|
(2,176
|
)
|
|
|
(217
|
)
|
|
|
(156
|
)
|
Cash proceeds from sale of property and equipment
|
|
|
|
|
|
|
259
|
|
|
|
1
|
|
(Increase) decrease in cash and short-term investments,
restricted
|
|
|
(2,665
|
)
|
|
|
19,924
|
|
|
|
15,177
|
|
Cash acquired in reverse acquisition with Hanover
|
|
|
774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by investing activities
|
|
|
113,897
|
|
|
|
171,376
|
|
|
|
201,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of mortgage-backed debt
|
|
|
|
|
|
|
25,000
|
|
|
|
189,200
|
|
Payments on mortgage-backed debt
|
|
|
(108,169
|
)
|
|
|
(358,459
|
)
|
|
|
(219,793
|
)
|
Net activity with Walter Energy
|
|
|
26,583
|
|
|
|
158,324
|
|
|
|
(184,932
|
)
|
Dividends to WIM interest-holders
|
|
|
(16,000
|
)
|
|
|
|
|
|
|
|
|
Dividends and dividend equivalents declared
|
|
|
(23,621
|
)
|
|
|
|
|
|
|
|
|
Stock options exercised
|
|
|
54
|
|
|
|
|
|
|
|
|
|
Secondary offering, net of issuance costs
|
|
|
76,789
|
|
|
|
|
|
|
|
|
|
Debt issuance costs paid
|
|
|
|
|
|
|
|
|
|
|
(530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in financing activities
|
|
|
(44,364
|
)
|
|
|
(175,135
|
)
|
|
|
(216,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
97,967
|
|
|
|
(1,803
|
)
|
|
|
(350
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
1,319
|
|
|
|
3,122
|
|
|
|
3,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
99,286
|
|
|
$
|
1,319
|
|
|
$
|
3,122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
89,480
|
|
|
$
|
119,600
|
|
|
$
|
117,286
|
|
Cash paid for income taxes
|
|
$
|
5,551
|
|
|
$
|
12,443
|
|
|
$
|
20,633
|
|
Supplemental Disclosure of Non-Cash Investing &
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate owned acquired through foreclosure
|
|
$
|
87,869
|
|
|
$
|
73,036
|
|
|
$
|
64,885
|
|
Residential loans originated to finance the sale of real estate
owned
|
|
$
|
56,849
|
|
|
$
|
42,345
|
|
|
$
|
36,281
|
|
Residential loans acquired with warehouse proceeds and/or
advances from Walter Energy
|
|
$
|
2,504
|
|
|
$
|
107,593
|
|
|
$
|
235,849
|
|
Dividends to Walter Energy
|
|
$
|
306,458
|
|
|
$
|
17,077
|
|
|
$
|
25,864
|
|
Dividends and dividend equivalents declared, not yet paid
|
|
$
|
13,248
|
|
|
$
|
|
|
|
$
|
|
|
Consummation of reverse acquisition with Hanover
|
|
$
|
2,186
|
|
|
$
|
|
|
|
$
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
|
|
1.
|
Business
and Basis of Presentation
|
The Company is a mortgage servicer and mortgage portfolio owner
specializing in subprime, non-conforming and other
credit-challenged residential loans primarily in the
southeastern United States, or U.S. The Company also
operates mortgage advisory and insurance ancillary businesses.
At December 31, 2009, the Company had four wholly owned,
primary subsidiaries: Hanover Capital Partners 2, Ltd., doing
business as Hanover Capital, Walter Mortgage Company, LLC, or
WMC, Walter Investment Reinsurance Company, Ltd., or WIRC, and
Best Insurors, Inc., or Best.
The Companys business, headquartered in Tampa, Florida,
was established in 1958 as the financing segment of Walter
Energy, Inc., formerly known as Walter Industries, Inc., or
Walter Energy. Throughout the Companys history, it
purchased residential loans originated by Walter Energys
homebuilding affiliate, JWH, originated and purchased
residential loans on its own behalf, and serviced these
residential loans to maturity. Over the past 50 years, the
Company has developed significant expertise in servicing
credit-challenged accounts through its differentiated high-touch
approach which involves significant
face-to-face
borrower contact by trained servicing personnel strategically
located in the markets where its borrowers reside. As of
December 31, 2009, the Company employed 219 professionals
and serviced over 34,000 individual residential loans.
The
Spin-off
On September 30, 2008, Walter Energy outlined its plans to
separate its Financing business from its core Natural Resources
Business through a spin-off to stockholders. Immediately prior
to the spin-off, substantially all of the assets and liabilities
related to the Financing business were contributed, through a
series of transactions, to Walter Investment Management LLC, or
WIM, in return for all of WIMs membership units. See
Note 3 for further information.
The combined financial statements of WMC, Best and WIRC
(collectively representing substantially all of Walter
Energys Financing business prior to the spin-off) are
considered the predecessor to WIM for accounting purposes. Under
Walter Energys ownership, the Financing business operated
through separate subsidiaries. A direct ownership relationship
did not exist among the legal entities prior to the contribution
to WIM.
The
Merger
On September 30, 2008, Walter Energy and WIM entered into a
definitive agreement to merge with Hanover Capital Mortgage
Holdings, Inc., or Hanover, which agreement was amended and
restated on February 17, 2009. On April 17, 2009,
Hanover completed the transactions, or the Merger, contemplated
by the Second Amended and Restated Agreement and Plan of Merger
(as amended on April 17, 2009, the Merger Agreement) by and
among Hanover, Walter Energy, WIM, and JWH Holding Company, LLC,
or JWHHC. The merged business was renamed Walter Investment
Management Corp. on April 17, 2009 and is referred herein
as Walter Investment or the Company. See
Note 3 for further information.
Basis
of Presentation
The accompanying consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States, or GAAP, the instructions to
Form 10-K
and Article 8 of
Regulation S-X.
The consolidated financial statements include the accounts of
Walter Investment and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been
eliminated.
The Merger constitutes a reverse acquisition for accounting
purposes. As such, the pre-acquisition financial statements of
WIM are treated as the historical financial statements of Walter
Investment. Results of operations for the year ended
December 31, 2009 include the results of operations for
legacy operations of
F-7
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
WIM for the full year ended December 31, 2009 and the
results of operations of legacy Hanover from the completion of
the Merger on April 17, 2009 through December 31,
2009. Results of operations for the years ended
December 31, 2008 and 2007 are the results of operations of
WIM only.
General corporate expenses incurred prior to April 17, 2009
and reported in the prior period financial statements contain
allocations of operating costs between WIM and its former
parent, Walter Energy. The costs include risk management,
executive salaries, and other centralized business functions and
were allocated to Walter Energys subsidiaries based on
estimated annual revenues. Such costs were recorded in the
caption related party-allocated corporate charges in
the accompanying statements of income and were
$0.9 million, $3.5 million and $3.7 million for
the years ended December 31, 2009, 2008 and 2007,
respectively. Certain costs incurred by Walter Energy that were
considered directly related to WIM were charged to WIM and
recorded in the caption general and administrative
in the accompanying statements of income. These costs
approximated $0.1 million, $1.1 million and
$1.6 million for the years ended December 31, 2009,
2008 and 2007, respectively. Management believes these
allocations are made on a reasonable basis; however, the
financial statements included herein may not necessarily reflect
Walter Investments results of operations, financial
position and cash flows in the future or what its results of
operations, financial position and cash flows would have been
had WIM operated as a stand-alone entity prior to April 17,
2009.
Principles
of Consolidation
The Company has historically funded its residential loans
through the securitization market. In particular, the Company
organized Mid-State Trust II, or Trust II (whose
assets are pledged to Trust IV), Mid-State Trust IV,
or Trust IV, Mid-State Trust VI, or Trust VI,
Mid-State Trust VII, or Trust VII, Mid-State
Trust VIII, or Trust VIII, Mid-State Trust X, or
Trust X, Mid-State Trust XI, or Trust XI,
Mid-State Capital Corporation
2004-1
Trust, or
Trust 2004-1,
Mid-State Capital Corporation
2005-1
Trust, or
Trust 2005-1,
and Mid-State Capital Corporation
2006-1
Trust, or
Trust 2006-1
(collectively, the Trusts) for the purpose of purchasing
residential loans from WMC with the net proceeds from the
issuance of mortgage-backed or asset-backed notes, or a
securitization. The beneficial interests in the Trusts are owned
either directly by WMC or indirectly by Mid-State Capital, LLC,
or Mid-State, a wholly-owned subsidiary of WMC, respectively.
The Company acquired the Hanover Capital Grantor Trust from
Hanover as part of the Merger. The mortgage-backed debt is
non-recourse and not cross-collateralized and therefore must be
satisfied exclusively from the proceeds of the residential loans
and REO held in each securitization trust.
The securitizations are structured legally as sales, but for
accounting purposes are treated as financings under the
Transfers and Servicing guidance as they do not meet the
qualifying special purpose entity criteria under that guidance.
WMC, as servicer to the nine trusts owned by WMC or Mid-State,
subject to applicable contractual provisions, has discretion,
consistent with prudent mortgage servicing practices, to
determine whether to sell or work out any loans securitized
through the securitization trusts that become troubled.
Accordingly, the notes remain on balance sheet as
residential loans, retained interests are not
recorded, and securitization bond financing replaces the
warehouse debt or asset-backed commercial paper originally
associated with the notes held for investment.
Reclassifications
In order to provide comparability between periods presented,
certain amounts have been reclassified from the previously
reported consolidated financial statements to conform to the
consolidated financial statement presentation of the current
period.
F-8
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Summary
of Significant Accounting Policies
|
Use of
Estimates
The preparation of consolidated 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 liabilities at the date
of the financial statements and the reported amounts of revenue
and expenses during the reporting period. The Companys
estimates and assumptions primarily arise from risks and
uncertainties associated with interest rate volatility,
prepayment volatility and credit exposure. 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 conditions may occur which could cause actual
results to differ materially.
Concentrations
of Credit Risk
Financial instruments which potentially subject the Company to
significant concentrations of credit risk consist principally of
cash and cash equivalents, short-term investments and
residential loans.
The Company maintains cash and cash equivalents with federally
insured financial institutions and at times these balances may
exceed insurable amounts. Concentrations of credit risk with
respect to residential loans are limited due to the large number
of customers and their dispersion across many geographic areas.
However, of the gross amount of residential loans, 34%, 15%, 9%,
7% and 6% are secured by homes located in the states of Texas,
Mississippi, Alabama, Louisiana and Florida, respectively, at
December 31, 2009 and 33%, 15%, 9%, 6% and 6%,
respectively, at December 31, 2008. The Company believes
the potential for incurring material losses related to these
concentrations of credit is remote.
The Company provides insurance to homeowners primarily in the
southeastern U.S. and, due to the concentration in this area, is
subject to risk of loss due to the threat of hurricanes and
other natural disasters.
Cash
and Cash Equivalents
Cash and cash equivalents include short-term deposits and highly
liquid investments that have original maturities of three months
or less when purchased and are stated at cost which approximates
market. The Company held $7.5 million in a certificate of
deposit at December 31, 2009.
Cash
and Short-Term Investments, Restricted
Restricted cash and short-term investments relate primarily to
funds collected on residential loans owned by the Companys
various securitization trusts (see Note 7), which are
available only to pay expenses of the securitization trusts and
principal and interest on indebtedness of the securitization
trusts ($45.8 million and $49.0 million, at
December 31, 2009 and 2008, respectively). Restricted
short-term investments at December 31, 2009 include
short-term deposits in FDIC-insured accounts. Restricted
short-term investments at December 31, 2008 include
temporary investments, primarily in commercial paper or money
market accounts, with original maturities of less than
90 days. Restricted short-term investments also include
$5.9 million and $0 at December 31, 2009 and 2008,
respectively, held in an insurance trust account. The insurance
trust account, which secures payments under the Companys
reinsurance agreements, replaced a $5.9 million letter of
credit canceled by the Company in June 2009. The funds in the
insurance trust account include investments in money market
funds. Additionally, restricted marketable securities totaled $0
and $0.2 million at December 31, 2009 and 2008,
respectively.
F-9
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Residential
Loans and Revenue Recognition
Residential loans consist of residential mortgage loans and
residential retail instalment agreements originated by the
Company and acquired from other originators, principally JWH.
Residential loans are initially recorded at the discounted value
of the future payments using an imputed interest rate, net of
yield adjustments such as deferred loan origination fees,
associated direct costs, premiums and discounts and are stated
at amortized cost. The imputed interest rate used represents the
estimated prevailing market rate of interest for credit of
similar terms issued to borrowers with similar credit.
References to borrowers refer to borrowers under the
Companys residential mortgage loans and instalment
obligors in the Companys residential retail instalment
agreements. The Company has had minimal purchase and origination
activity subsequent to May 1, 2008, when the Company ceased
purchasing new originations from JWH or providing financing to
new customers of JWH. New originations relate to the financing
of sales of REO properties. The imputed interest rate on these
financings is based on observable market mortgage rates,
adjusted for variations in expected credit losses where market
data is unavailable. Variations in the estimated market rate of
interest used to initially record residential loans could affect
the timing of interest income recognition.
Interest income on the Companys residential loans is a
combination of the interest earned based on the outstanding
principal balance of the underlying loan, the contractual terms
of the mortgage loan and retail instalment agreement and the
amortization of yield adjustments, principally premiums and
discounts. The retail instalment agreement states the maximum
amount to be charged to borrowers, and ultimately recognized as
interest income, based on the contractual number of payments and
dollar amount of monthly payments. Yield adjustments are
deferred and recognized over the estimated life of the loan as
an adjustment to yield using the level yield method. The Company
uses actual and estimated cash flows to derive an effective
level yield. Residential loan pay-offs received in advance of
scheduled maturity (voluntary prepayments) affect the amount of
interest income due to the recognition at that time of any
remaining unamortized premiums or discounts arising from the
loans inception.
The Company has the ability to levy costs to protect its
collateral position upon default, such as attorney fees and late
charges, as allowed by state law. The various legal instruments
used allow for different fee structures to be charged to the
borrower, for example, late fees and prepayment fees. These fees
are recognized as revenue when collected. In its capacity as the
loan servicer, the Company advances funds on behalf of borrowers
for taxes and insurance. These advances are routinely assessed
for collectability and any uncollectible advances are
appropriately charged to earnings. Recoveries of charged-off
advances, if any, are recognized as income when collected.
Residential loans are placed on non-accrual status when any
portion of the principal or interest is 90 days past due.
When placed on non-accrual status, the related interest
receivable is reversed against interest income of the current
period. Interest income on non-accrual loans, if received, is
recorded using the cash method of accounting. Residential loans
are removed from non-accrual status when the amount financed and
the associated interest are no longer over 90 days past
due. If a non-accrual loan is returned to accruing status the
accrued interest, at the date the residential loan is placed on
non-accrual status, and forgone interest during the non-accrual
period, are recorded as interest income as of the date the loan
no longer meets the non-accrual criteria. The past due or
delinquency status of residential loans is generally determined
based on the contractual payment terms. The calculation of
delinquencies excludes from delinquent amounts those accounts
that are in bankruptcy proceedings that are paying their
mortgage payments in contractual compliance with the bankruptcy
court approved mortgage payment obligations. Loan balances are
charged off when it becomes evident that balances are not fully
collectible.
The Company sells REO which was repossessed or foreclosed from
borrowers in default of their loans or notes. Sales of REO
involve the sale and, in most circumstances, the financing of
both a home and related real estate. Revenues from the sales of
REO are recognized by the full accrual method where appropriate.
However, the requirement for a minimum 5% initial cash
investment (for primary residences), frequently is not
F-10
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
met. When this is the case, losses are immediately recognized,
and gains are deferred and recognized by the installment method
until the borrowers investment reaches the minimum 5%. At
that time, revenue is recognized by the full accrual method.
Allowance
for Loan Losses on Residential Loans
The residential loan portfolio is collectively evaluated for
impairment as the individual loans are smaller balances and
homogenous in nature. The allowance for loan losses is
established based on managements judgment and estimate of
credit losses inherent in the Companys residential loan
portfolio. Managements periodic evaluation of the adequacy
of the allowance for loan losses on residential loans is based
on, but not limited to, the Companys past loss experience,
known and inherent risks in the portfolio, delinquencies, the
estimated value of the underlying real estate collateral and
current economic and market conditions within the applicable
geographic areas surrounding the underlying real estate. The
allowance for losses on residential loans is increased by
provisions for losses charged to income and is reduced by
charge-offs, net of recoveries. As the amount of residential
loans decreases and as they age, the credit exposure is reduced,
resulting in decreasing provisions.
Real
Estate Owned
REO, which consists of real estate acquired in satisfaction of
residential loans, is recorded at the lower of cost or estimated
fair value less estimated costs to sell, which is based on
historical resale recovery rates and current market conditions.
Property
and Equipment
Property and equipment are recorded at cost less accumulated
depreciation. Depreciation is recorded on the straight-line
method over the estimated useful lives of the assets. Gains and
losses upon disposition are reflected in the statement of income
in the period of disposition. Maintenance and repair costs are
charged to expense as incurred.
Accounting
for the Impairment of Long-Lived Assets and
Goodwill
Long-lived assets, including goodwill, are reviewed for
impairment whenever events or changes in circumstances indicate
that the book value of the asset may not be recoverable and, in
the case of goodwill, at least annually. The Company
periodically evaluates whether events and circumstances have
occurred that indicate possible impairment.
The Company uses estimates of future cash flows of the related
asset, asset grouping or reporting unit in measuring whether the
assets are recoverable. Changes in market conditions and actual
or estimated future cash flows could have an impact on the
recoverability of such assets, resulting in future impairment
charges.
In 2008, the Company recorded a charge of $12.3 million for
the impairment of goodwill. As a result of further deterioration
in the subprime mortgage markets, the Company analyzed its
goodwill for potential impairment. The fair value was determined
using a discounted cash flow approach which indicated that the
carrying value exceeded the fair value and that there was no
implied value of goodwill. The discount rate of interest used to
determine both the fair value of the reporting unit and the
implied value of goodwill was a contributing factor in this
impairment charge. The continued increase in perceived risk in
the financial services markets resulted in a significant
increase in the discount rate applied to the projected future
cash flows, as compared to the discount rate applied to similar
analyses performed in previous periods. As a result of this
write-off, the Company no longer has any goodwill on its balance
sheet.
F-11
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred
Debt Issuance Costs
Deferred debt issuance costs represent debt issue costs related
to the mortgage-backed debt of the trusts. These costs are
amortized into interest expense over the life of the trusts
using the interest method.
Mortgage-Backed
Debt
The Company has historically funded its residential loans
through the securitization market. As of December 31, 2009,
the Company had nine separate non-recourse securitization trusts
where it services the underlying collateral and one non-recourse
securitization for which it does not service the underlying
collateral. These ten trusts have an aggregate of
$1.3 billion of outstanding debt, collateralized by
$1.5 billion of assets, including residential loans, REO
and restricted short-term investments, at December 31, 2009.
Borrower remittances received on the residential loan collateral
are used to make payments on the mortgage-backed debt. The
maturity of the mortgage-backed debt is directly affected by
principal prepayments on the related residential loan
collateral. As a result, the actual maturity of the
mortgage-backed debt is likely to occur earlier than the stated
maturity. Certain of the Companys mortgage-backed debt is
also subject to redemption according to specific terms of the
respective indenture agreements.
Hedging
Activities
The Company has, in the past, entered into interest rate hedge
agreements designed to reduce the risk of rising interest rates
on the forecasted amount of securitization debt to be issued to
finance residential loans. Changes in the fair value of interest
rate hedge agreements that were designated and effective as
hedges were recorded in accumulated other comprehensive income
(loss), or AOCI. Deferred gains or losses from settled hedges
determined to be effective have been reclassified from AOCI to
interest expense in the statement of income in the same period
as the underlying transactions were recorded and are recognized
in the caption interest expense. Cash flows from
hedging activities are reported in the statement of cash flows
in the same classification as the hedged item. Changes in the
fair value of interest rate hedge agreements that are not
effective are immediately recorded in the statement of income.
There were no hedges outstanding as of December 31, 2009.
Insurance
Claims (Hurricane Losses)
Accruals for property liability claims and claims expense are
recognized when probable and reasonably estimable at amounts
necessary to settle both reported and unreported claims of
insured property liability losses, based upon the facts in each
case and the Companys experience with similar matters. The
establishment of appropriate accruals, including accruals for
catastrophes such as hurricanes, is an inherently uncertain
process. Accrual estimates are regularly reviewed and updated,
using the most current information available.
The Company recorded a provision of $3.9 million in 2008
for hurricane insurance losses, net of reinsurance proceeds
received from unrelated insurance carriers. These estimates were
recorded for claims losses as a result of damage from Hurricanes
Ike and Gustav in the Companys geographic footprint. There
were no significant hurricane losses in the other years
presented.
F-12
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table provides a reconciliation of the liability
for unpaid claims and claim adjustment expenses for the years
ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Gross liability, beginning of year
|
|
$
|
2,906
|
|
|
$
|
1,510
|
|
|
$
|
2,501
|
|
Less: Reinsurance recoverables
|
|
|
|
|
|
|
(79
|
)
|
|
|
(1,383
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability, beginning of year
|
|
|
2,906
|
|
|
|
1,431
|
|
|
|
1,118
|
|
Incurred losses related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
4,801
|
|
|
|
8,759
|
|
|
|
4,718
|
|
Prior years
|
|
|
(318
|
)
|
|
|
(236
|
)
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
4,483
|
|
|
|
8,523
|
|
|
|
4,735
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
4,136
|
|
|
|
6,593
|
|
|
|
4,059
|
|
Prior years
|
|
|
2,238
|
|
|
|
648
|
|
|
|
1,713
|
|
Less: Reinsurance recoveries
|
|
|
|
|
|
|
(193
|
)
|
|
|
(1,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Paid
|
|
|
6,374
|
|
|
|
7,048
|
|
|
|
4,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability, end of year
|
|
|
1,015
|
|
|
|
2,906
|
|
|
|
1,431
|
|
Plus: Reinsurance recoverables
|
|
|
|
|
|
|
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability, end of year
|
|
$
|
1,015
|
|
|
$
|
2,906
|
|
|
$
|
1,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported claims liability
|
|
$
|
365
|
|
|
$
|
1,505
|
|
|
$
|
709
|
|
Incurred but not reported claims liability
|
|
|
650
|
|
|
|
1,401
|
|
|
|
801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross liability, end of year
|
|
$
|
1,015
|
|
|
$
|
2,906
|
|
|
$
|
1,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-Based
Compensation Plans
The Company has in effect stock incentive plans under which
restricted stock, restricted stock units and non-qualified stock
options have been granted to employees and non-employee members
of the Board of Directors. The Company is required to estimate
the fair value of share-based awards on the date of grant. The
value of the award is principally recognized as expense using
the graded method over the requisite service periods. The fair
value of the Companys restricted stock and restricted
stock units is generally based on the average of the high and
low market price of its common stock on the date of grant. The
Company has estimated the fair value of non-qualified stock
options as of the date of grant using the Black-Scholes option
pricing model. The Black-Scholes model considers, among other
factors, the expected life of the award, the expected volatility
of the Companys stock price and expected dividends.
Income
Taxes
The Company has elected to be taxed as a REIT under the Internal
Revenue Code of 1986, as amended, or Code, and the corresponding
provisions of state law. To qualify as a REIT the Company must
distribute at least 90% of its annual REIT taxable income to
shareholders (not including taxable income retained in its
taxable subsidiaries) within the timeframe set forth in the Code
and also meet certain other requirements.
The Company assesses its tax positions for all open tax years
and determines whether it has any material unrecognized
liabilities in accordance with the guidance on accounting for
uncertain tax positions. The Company classifies interest and
penalties on uncertain tax positions as other expense and
general and administrative expenses, respectively, in its
consolidated statement of income.
F-13
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Basic
and Diluted Net Income Available to Common Stockholders per
Share
Basic net income available to common stockholders per share is
computed by dividing net income available to common
stockholders, after the allocation of income to participating
securities, by the weighted-average number of common shares
outstanding for the period. Diluted net income available to
common stockholders per share is computed by dividing net income
available to common stockholders, after the allocation of income
to participating securities, by the sum of the weighted-average
number of common shares outstanding for the period plus the
assumed exercise of all dilutive securities, using the treasury
stock method.
Litigation
and Investigations
The Company is involved in litigation, investigations and claims
arising out of the normal conduct of its business. The Company
estimates and accrues liabilities resulting from such matters
based on a variety of factors, including outstanding legal
claims and proposed settlements and assessments by internal
counsel of pending or threatened litigation. These accruals are
recorded when the costs are determined to be probable and are
reasonably estimable. The Company believes its has adequately
accrued for these potential liabilities; however, facts and
circumstances may change that could cause the actual liabilities
to exceed the estimates, or that may require adjustments to the
recorded liability balances in the future.
Notwithstanding the foregoing, WMC is a party to a lawsuit
entitled Casa Linda Homes, et al. v. Walter Mortgage
Company, et al., Cause
No. C-2918-08-H,
389th
Judicial District Court of Hidalgo County, Texas, claiming
breach of contract, fraud, negligent misrepresentation, breach
of fiduciary duty and bad faith, promissory estoppel and unjust
enrichment. The plaintiffs are seeking actual and exemplary
damages, the amount of which have not been specified, but if
proven could be material. The allegations arise from a claim
that WMC breached a contract with the plaintiffs by failing to
purchase a certain amount of loan pool packages from the
corporate plaintiff, a Texas real estate developer. The Company
believes the case to be without merit and is vigorously pursuing
the defense of the claim.
As discussed in Note 15, Walter Energy is in dispute with
the Internal Revenue Service, or IRS, on a number of federal
income tax issues. Walter Energy has stated in its public
filings that it believes that all of its current and prior tax
filing positions have substantial merit and that Walter Energy
intends to defend vigorously any tax claims asserted. Under the
terms of the tax separation agreement between the Company and
Walter Energy dated April 17, 2009, Walter Energy is
responsible for the payment of all federal income taxes
(including any interest or penalties applicable thereto) of the
consolidated group, which includes the aforementioned claims of
the IRS. However, to the extent that Walter Energy is unable to
pay any amounts owed, the Company could be responsible for any
unpaid amounts.
Recent
Accounting Guidance
In June 2009, the Financial Accounting Standards Board, or FASB,
issued new guidance concerning the organization of authoritative
guidance under U.S. GAAP. The new guidance created the FASB
Accounting Standards Codification, or the Codification or ASC.
The Codification is now the single source of authoritative
nongovernmental GAAP, superseding existing FASB, American
Institute of Certified Public Accountants, or AICPA, Emerging
Issues Task Force, or EITF, and related accounting literature.
The ASC reorganizes the thousands of GAAP pronouncements into
roughly 90 accounting topics and displays them using a
consistent structure. Also included is relevant Securities and
Exchange Commission, or SEC, guidance organized using the same
topical structure in separate sections. The guidance is
effective for financial statements issued for reporting periods
that end after September 15, 2009. The adoption of this
guidance on September 30, 2009 did not have a significant
impact on the Companys consolidated financial statements.
F-14
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidation
and Business Combinations
In December 2007, the FASB issued new guidance on noncontrolling
interests in consolidated financial statements to establish
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements. The adoption of this guidance on January 1,
2009 did not have a significant impact on the Companys
consolidated financial statements.
Also in December 2007, the FASB issued new guidance on business
combinations that changes or clarifies the acquisition method of
accounting for acquired contingencies, transaction costs, step
acquisitions, restructuring costs and other major areas
affecting how the acquirer recognizes and measures the assets
acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. In addition, this guidance amends
previous interpretations of intangible asset accounting by
requiring the capitalization of in-process research and
development and proscribing impacts to current income tax
expense (rather than a reduction to goodwill) for changes in
deferred tax benefits related to a business combination. This
guidance was applied prospectively for business combinations
occurring after December 31, 2008. The adoption of this
guidance impacted the Companys operating results in 2009
with the completion of the business combination with Hanover.
Acquisition costs and fees were expensed, resulting in a
decrease in the Companys operating results.
In June 2009, the FASB issued new guidance which modifies how a
company determines when a variable interest entity, or VIE,
should be consolidated. It also requires a qualitative
assessment of an entitys determination of the primary
beneficiary of a VIE based on whether the entity (1) has
the power to direct the activities of a VIE that most
significantly impact the entitys economic performance, and
(2) has the obligation to absorb losses of the entity that
could potentially be significant to the VIE or the right to
receive benefits from the entity that could potentially be
significant to the VIE. An ongoing assessment is also required
to determine whether a company is the primary beneficiary of a
VIE as well as additional disclosures about a companys
involvement in VIEs. The guidance is effective for fiscal years
beginning after November 15, 2009. The Company is
continuing to evaluate the impact that the guidance will have on
the Companys consolidated financial statements.
Investments
In April 2009, the FASB issued new guidance related to
investments in debt and equity securities which clarifies the
determination of an
other-than-temporary
impairment. The guidance (i) changes existing guidance for
determining whether an impairment is
other-than-temporary
to debt securities and (ii) replaces the existing
requirement that the entitys management assert it has both
the intent and ability to hold an impaired security until
recovery with a requirement that management assert: (a) it
does not have the intent to sell the security; and (b) it
is more likely than not it will not have to sell the security
before recovery of its cost basis. Under the existing guidance,
declines in the fair value of
held-to-maturity
and
available-for-sale
securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses to the
extent the impairment is related to credit losses. The amount of
impairment related to other factors is recognized in other
comprehensive income. The guidance is effective for interim and
annual periods ending after June 15, 2009. The adoption of
the guidance on June 30, 2009 did not have a significant
impact on the Companys consolidated financial statements
or disclosures.
Transfers
and Servicing
In February 2008, the FASB issued guidance related to transfers
and servicing of financial assets which requires an assessment
as to whether assets purchased from a counterparty and financed
through a repurchase agreement with the same counterparty can be
considered and accounted for as separate transactions. If
certain criteria are met, the transaction is considered a sale
and a subsequent financing. If certain criteria are not met,
F-15
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the transaction is not considered a sale with a subsequent
financing, but rather a linked transaction that is recorded
based upon the economics of the combined transaction, which is
generally a forward contract. The new guidance was effective for
fiscal years beginning after November 15, 2008, and it is
applied to all initial transfers and repurchase financings
entered into after the effective date. The adoption of this
guidance on January 1, 2009 did not have a significant
impact on the Companys consolidated financial statements.
In December 2008, the FASB issued new accounting guidance
concerning the disclosures by public entities of transfers of
financial assets and interests in variable interest entities
which requires expanded disclosures for transfers of financial
assets and involvement with VIEs. Under this guidance, the
disclosure objectives related to transfers of financial assets
now include providing information on (i) the Companys
continued involvement with financial assets transferred in a
securitization or asset backed financing arrangement,
(ii) the nature of restrictions on assets held by the
company that relate to transferred financial assets, and
(iii) the impact on financial results of continued
involvement with assets sold and assets transferred in secured
borrowing arrangements. VIE disclosure objectives now include
providing information on (i) significant judgments and
assumptions used by the company to determine the consolidation
or disclosure of a VIE, (ii) the nature of restrictions
related to the assets of a consolidated VIE, (iii) the
nature of risks related to the companys involvement with
the VIE and (iv) the impact on financial results related to
the companys involvement with the VIE. Certain disclosures
are also required where the company is a non-transferor sponsor
or servicer of a QSPE. The guidance was effective for the first
reporting period ending after December 15, 2008. See
Note 5 to the consolidated financial statements for the
additional disclosures required by the guidance.
In June 2009, the FASB issued new accounting guidance concerning
the accounting for transfers of financial assets which amends
the existing derecognition accounting and disclosure guidance.
The guidance eliminates the exemption from consolidation for
QSPEs, it also requires a transferor to evaluate all existing
QSPEs to determine whether it must be consolidated in accordance
with the accounting guidance concerning variable interest
entities. The guidance is effective for financial asset
transfers occurring after the beginning of an entitys
first fiscal year that begins after November 15, 2009. The
Company is continuing to evaluate the impact that guidance will
have on the Companys consolidated financial statements.
Derivatives
and Hedging
In March 2008, the FASB issued new guidance concerning
disclosures of derivative instruments and hedging activities.
The guidance amends and expands the disclosure requirements of
previous guidance to provide greater transparency about how and
why an entity uses derivative instruments, how derivative
instruments and related hedge items are accounted for, and how
derivative instruments and related hedged items affect an
entitys financial position, results of operations, and
cash flows. The guidance requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of gains and losses on
derivative instruments, and disclosures about
credit-risk-related contingent features in derivative
agreements. The guidance was effective January 1, 2009. The
adoption of this guidance on January 1, 2009, did not have
a significant impact on the Companys consolidated
financial statements.
Fair
Value Measurements and Disclosures
In October 2008, the FASB issued new accounting guidance
concerning the determination of fair value of a financial asset
when the market for that asset is not active. The new guidance
clarifies the application of the existing fair value accounting
guidance in a market that is not active. The guidance applies to
financial assets within the scope of accounting guidance that
require or permit fair value measurements in accordance with the
existing guidance and provides an example to illustrate key
considerations in determining the fair value of a financial
asset when the market for that financial asset is not active.
The guidance was effective upon issuance,
F-16
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
including prior periods for which financial statements have not
been issued. Revisions resulting from a change in the valuation
technique or its application are to be accounted for as a change
in accounting estimate. The adoption of this guidance did not
have a significant impact on the Companys consolidated
financial statements or disclosures.
In April 2009, the FASB issued new accounting guidance
concerning the determination of fair value when the volume and
level of activity for the asset or liability have significantly
decreased and the identification of transactions are not
orderly. The guidance affirms the objective of fair value when a
market is not active, clarifies and includes additional factors
for determining whether there has been a significant decrease in
market activity, eliminates the presumption that all
transactions are distressed unless proven otherwise, and
requires an entity to disclose a change in valuation technique.
The guidance is effective for interim and annual periods ending
after June 15, 2009. The adoption of the guidance on
June 30, 2009 did not have a significant impact on the
Companys consolidated financial statements or disclosures.
In August 2009, the FASB updated the accounting standards to
provide additional guidance on estimating the fair value of a
liability in a hypothetical transaction where the liability is
transferred to a market participant. The standard is effective
for the first reporting period, including interim periods,
beginning after issuance. The adoption of this guidance on
December 31, 2009 did not have a material effect on the
Companys consolidated financial statements or disclosures.
In January 2010, the FASB updated the accounting standards to
require new disclosures for fair value measurements and to
provide clarification for existing disclosure requirements. More
specifically, this update will require (a) an entity to
disclose separately the amounts of significant transfers in and
out of levels 1 and 2 fair value measurements and to
describe the reasons for the transfers and (b) information
about purchases, sales, issuances, and settlements to be
presented separately (i.e., present the activity on a gross
basis rather than net) in the roll forward of fair value
measurements using significant unobservable inputs (Level 3
inputs). This update clarifies existing disclosure requirements
for the level of disaggregation used for classes of assets and
liabilities measured at fair value and requires disclosures
about the valuation techniques and inputs used to measure for
fair value for both recurring and nonrecurring fair value
measurements using Level 2 and Level 3 inputs. The
standard is effective for interim and annual reporting periods
beginning after December 15, 2009, except for the
disclosures about purchases, sales, issuances, and settlements
in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years
beginning after December 12, 2010, and for interim periods
within those fiscal years. The Company does not expect the
adoption of this guidance to have a material effect on the
Companys disclosures.
Financial
Instruments
In January 2009, the FASB issued new impairment guidance
concerning beneficial interests which amends the existing
impairment guidance to achieve a more consistent determination
of whether an
other-than-temporary
impairment has occurred for all beneficial interests. The
guidance eliminates the requirement that a holders best
estimate of cash flows be based upon those that a market
participant would use and instead requires that an
other-than-temporary
impairment be recognized as a realized loss through earnings
when it its probable there has been an adverse
change in the holders estimated cash flows from cash flows
previously projected. This change is consistent with the
impairment models contained in the accounting guidance
concerning accounting for certain investments in debt and equity
securities. The guidance emphasizes that the holder must
consider all available information relevant to the
collectability of the security, including information about past
events, current conditions and reasonable and supportable
forecasts, when developing the estimate of future cash flows.
Such information generally should include the remaining payment
terms of the security, prepayments speeds, financial condition
of the issuer, expected defaults, and the value of any
underlying collateral. The holder should also consider industry
analyst reports and forecasts, sector credit ratings, and other
market data that are relevant to the collectability of the
consolidated security. The adoption of the guidance on
December 31, 2008 did not have a significant impact on the
Companys consolidated financial statements.
F-17
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In April 2009, the FASB issued new guidance related to financial
instruments which amends disclosures about fair value of
financial instruments. The guidance requires a public entity to
provide disclosures about fair value of financial instruments in
interim financial information. This guidance is effective for
interim and annual financial periods ending after June 15,
2009. The adoption of the guidance as of June 30, 2009 did
not have a significant impact on the Companys consolidated
financial statements. See Note 4 for the Companys
fair value disclosures.
Compensation
In June 2008, the FASB issued new accounting guidance concerning
the determination of whether instruments granted in share-based
payment transactions are participating securities which provides
that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall
be included in the computation of earnings per share pursuant to
the two-class method. The guidance requires that all previously
reported earnings per share, or EPS, data is retrospectively
adjusted to conform to the provisions of the new accounting
guidance. Current period EPS amounts have been adjusted to
reflect the adoption of the guidance on January 1, 2009.
Subsequent
Events
In May 2009, FASB issued guidelines on subsequent event
accounting to establish general standards of accounting for and
disclosure of events that occur after the balance sheet date but
before financial statements are issued. This guidance was
subsequently amended in February 2010 to no longer require
disclosure of the date through which an entity has evaluated
subsequent events. The adoption of this guidance did not have a
significant impact on the Companys consolidated financial
statements.
|
|
3.
|
Business
Separation and Merger
|
On September 30, 2008, Walter Energy outlined its plans to
separate its Financing business from its core Natural Resources
businesses through a spin-off to stockholders and subsequent
Merger with Hanover. In furtherance of these plans, on
September 30, 2008, Walter Energy and WIM entered into a
definitive agreement to merge with Hanover, which agreement was
amended and restated on February 17, 2009. To effect the
separation, WIM was formed on February 3, 2009, as a
wholly-owned subsidiary of Walter Energy, having no independent
assets or operations. Immediately prior to the spin-off,
substantially all of the assets and liabilities related to the
Financing business were contributed, through a series of
transactions, to WIM in return for WIMs membership unit.
On April 17, 2009, the Company completed its separation
from Walter Energy. In connection with the separation, WIM and
Walter Energy executed the following transactions or agreements
which involved no cash:
|
|
|
|
|
Walter Energy distributed 100% of its interest in WIM to holders
of Walter Energys common stock;
|
|
|
|
All intercompany balances between WIM and Walter Energy were
settled with the net balance recorded as a dividend to Walter
Energy;
|
|
|
|
In accordance with the Tax Separation Agreement, Walter Energy
will, in general, be responsible for any and all taxes reported
on any joint return through the date of the separation, which
may also include WIM for periods prior to the separation. WIM
will be responsible for any and all taxes reported on any WIM
separate tax return and on any consolidated returns for Walter
Investment subsequent to the separation;
|
|
|
|
Walter Energys share-based awards held by WIM employees
were converted to equivalent share-based awards of Walter
Investment, with the number of shares and the exercise price
being equitably adjusted to preserve the intrinsic value. The
conversion was accounted for as a modification pursuant to the
guidance concerning stock compensation.
|
F-18
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The assets and liabilities transferred to WIM from Walter Energy
also included $26.6 million in cash, which was contributed
to WIM by Walter Energy on April 17, 2009. Following the
spin-off, WIM paid a taxable dividend consisting of cash of
$16.0 million and additional equity interests to its
members.
The Merger occurred immediately following the spin-off and
taxable dividend on April 17, 2009. The surviving company,
Walter Investment, continues to operate as a publicly traded
REIT subsequent to the Merger. After the spin-off and Merger,
Walter Energys stockholders that became members of WIM as
a result of the spin-off, and certain holders of options to
acquire limited liability company interests of WIM, collectively
owned 98.5% and stockholders of Hanover owned 1.5% of the shares
of common stock of Walter Investment outstanding or reserved for
issuance in settlement of restricted stock units of Walter
Investment. As a result, the business combination has been
accounted for as a reverse acquisition, with WIM considered the
accounting acquirer. Walter Investment applied for, and was
granted approval, to list its shares on the NYSE Amex. On
April 20, 2009, the Companys common stock began
trading on the NYSE Amex under the symbol WAC.
The reverse acquisition of the operations of Hanover has been
accounted for pursuant to the Business Combinations guidance,
with WIM as the accounting acquirer. As a result, the historical
financial statements of WIM have become the historical financial
statements of Walter Investment. The Hanover assets acquired and
the liabilities assumed were recorded at the date of acquisition
(April 17, 2009) at their respective fair values. The
results of operations of Hanover were included in the
consolidated statements of income for periods subsequent to the
Merger.
The purchase price for the acquisition was $2.2 million
based on the fair value of Hanover (308,302 Hanover shares,
which represented 1.5% of the shares of common stock at the time
of the transaction, at $7.09, the closing stock price of Walter
Investment) on April 17, 2009.
The above purchase price has been allocated to the tangible
assets acquired and liabilities assumed based on
managements estimates of their current fair values.
Acquisition-related transaction costs, including legal and
accounting fees and other external costs directly related to the
Merger, were expensed as incurred.
The purchase price has been allocated as of April 17, 2009
as follows (in thousands):
|
|
|
|
|
Cash
|
|
$
|
774
|
|
Receivables
|
|
|
330
|
|
Subordinate security
|
|
|
1,600
|
|
Residential loans, net
|
|
|
4,532
|
|
Other assets
|
|
|
388
|
|
Accounts payable and accrued expenses
|
|
|
(2,093
|
)
|
Mortgage-backed debt
|
|
|
(2,666
|
)
|
Other liabilities
|
|
|
(679
|
)
|
|
|
|
|
|
|
|
$
|
2,186
|
|
|
|
|
|
|
F-19
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The amounts of revenue and net loss of Hanover included in the
Companys consolidated statement of income from the
acquisition date to December 31, 2009 are as follows (in
thousands):
|
|
|
|
|
|
|
For the Period
|
|
|
April 17, 2009
|
|
|
to December 31, 2009
|
|
Total revenue
|
|
$
|
1,622
|
|
Net loss
|
|
$
|
(686
|
)
|
The following unaudited pro forma information assumes that the
Merger occurred on January 1, 2008. The unaudited pro forma
supplemental results have been prepared based on estimates and
assumptions, which management believes are reasonable but are
not necessarily indicative of the consolidated financial
position or results of income had the Merger occurred on
January 1, 2008, nor of future results of income.
The unaudited pro forma results for the years ended
December 31, 2009 and 2008 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
December 31,
|
|
|
2009
|
|
2008
|
|
Total revenue
|
|
$
|
187,740
|
|
|
$
|
202,269
|
|
Net income
|
|
$
|
35,924
|
|
|
$
|
38,357
|
|
These amounts have been calculated after applying the
Companys accounting policies and adjusting the results of
Hanover for operations that will not continue post-Merger,
together with the consequential tax effects.
Prior to the acquisition, the Company loaned Hanover funds under
a revolving line of credit, as well as a loan and security
agreement which were automatically terminated by operation of
law upon consummation of the Merger.
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants. A three-tier fair value
hierarchy is used to prioritize the inputs used in measuring
fair value. The hierarchy gives the highest priority to
unadjusted quoted market prices in active markets for identical
assets or liabilities and the lowest priority to unobservable
inputs. A financial instruments level within the fair
value hierarchy is based on the lowest level of any input that
is significant to the fair value measurement. The three levels
of the fair value hierarchy are as follows:
Basis or
Measurement
Level 1 Unadjusted quoted prices in active markets that are
accessible at the measurement date for identical, unrestricted
assets or liabilities.
Level 2 Inputs other than quoted prices included in Level 1
that are observable for the asset or liability, either directly
or indirectly.
Level 3 Prices or valuations that require inputs that are
both significant to the fair value measurement and unobservable.
The accounting guidance concerning fair value allows the Company
to elect to measure certain items at fair value and report the
changes in fair value through the statements of income. This
election can only be made at certain specified dates and is
irrevocable once made. The Company does not have a policy
regarding specific assets or liabilities to elect to measure at
fair value, but rather makes the election on an instrument by
F-20
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
instrument basis as they are acquired or incurred. The Company
has not made the fair value election for any financial assets or
liabilities as of December 31, 2009.
The Company determines fair value based upon quoted broker
prices when available or through the use of alternative
approaches, such as discounting the expected cash flows using
market rates commensurate with the credit quality and duration
of the investment.
The subordinate security is measured in the consolidated
financial statements at fair value on a recurring basis in
accordance with the accounting guidance concerning debt and
equity securities and is categorized in the table below based
upon the lowest level of significant input to the valuation (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
|
|
|
Significant
|
|
|
|
|
|
|
for Identical
|
|
|
Significant Other
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Observable Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
Subordinate security
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,801
|
|
|
$
|
1,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,801
|
|
|
$
|
1,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets valued by Level 3 methods are less than 1% of
the Companys total assets as of December 31, 2009.
The subordinate security was acquired as part of the Merger.
The following table provides a reconciliation of the beginning
and ending balances of the Companys subordinate security
which is measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the year
ended December 31, 2009 (in thousands):
|
|
|
|
|
|
|
As of and for
|
|
|
|
the Year Ended
|
|
|
|
December 31, 2009
|
|
|
Beginning balance
|
|
$
|
|
|
Principal reductions
|
|
|
|
|
Total gains (losses):
|
|
|
|
|
Included in net income
|
|
|
|
|
Included in other comprehensive income
|
|
|
189
|
|
Purchases, sales, issuances and settlements, net
|
|
|
1,612
|
|
Transfer into or out of Level 3 category
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,801
|
|
|
|
|
|
|
Total gains (losses) for the period included in earnings
attributable to the change in unrealized gains or losses
relating to assets still held at the reporting date
|
|
$
|
|
|
|
|
|
|
|
At the time a residential loan becomes real estate owned, the
Company records the property at the lower of its carrying amount
or estimated fair value less estimated costs to sell. Upon
foreclosure and through liquidation, the Company evaluates the
propertys fair value as compared to its carrying amount
and records a valuation adjustment when the carrying amount
exceeds fair value. Any valuation adjustment at the time the
loan becomes real estate owned is charged to the allowance for
loan losses.
F-21
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Carrying values, and gains and losses recognized during the
period, for Level 3 assets and liabilities measured in the
consolidated financial statements at fair value on a
non-recurring basis are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
Real
|
|
Active Markets for
|
|
Significant Other
|
|
Significant
|
|
|
|
|
Estate
|
|
Identical Assets
|
|
Observable Inputs
|
|
Unobservable Inputs
|
|
Fair Value
|
Fair Value at
|
|
Owned
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Adjustment
|
|
December 31, 2009
|
|
$
|
63,124
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
63,124
|
|
|
$
|
(15,045
|
)
|
December 31, 2008
|
|
|
48,198
|
|
|
|
|
|
|
|
|
|
|
|
48,198
|
|
|
|
(12,628
|
)
|
The following table presents the carrying values and estimated
fair values of assets and liabilities that are required to be
recorded or disclosed at fair value as of December 31, 2009
and 2008, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
December 31, 2008
|
|
|
Carrying Amount
|
|
Estimated Fair Value
|
|
Carrying Amount
|
|
Estimated Fair Value
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
99,286
|
|
|
$
|
99,286
|
|
|
$
|
1,319
|
|
|
$
|
1,319
|
|
Cash and short-term investments, restricted
|
|
|
51,654
|
|
|
|
51,654
|
|
|
|
49,196
|
|
|
|
49,196
|
|
Receivables, net
|
|
|
3,052
|
|
|
|
3,052
|
|
|
|
5,447
|
|
|
|
5,447
|
|
Residential loans, net
|
|
|
1,644,346
|
|
|
|
1,533,267
|
|
|
|
1,771,675
|
|
|
|
1,460,000
|
|
Subordinate security
|
|
|
1,801
|
|
|
|
1,801
|
|
|
|
|
|
|
|
|
|
Real estate owned
|
|
|
63,124
|
|
|
|
63,124
|
|
|
|
48,198
|
|
|
|
48,198
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
14,045
|
|
|
|
14,045
|
|
|
|
2,181
|
|
|
|
2,181
|
|
Accrued expenses
|
|
|
28,296
|
|
|
|
28,296
|
|
|
|
46,367
|
|
|
|
46,367
|
|
Mortgage-backed debt, net of deferred debt issuance costs
|
|
|
1,249,004
|
|
|
|
1,147,142
|
|
|
|
1,353,076
|
|
|
|
1,075,000
|
|
Accrued interest
|
|
|
8,755
|
|
|
|
8,755
|
|
|
|
9,717
|
|
|
|
9,717
|
|
For assets and liabilities measured in the consolidated
financial statements on a historical cost basis, the estimated
fair value shown in the above table is for disclosure purposes
only. The following methods and assumptions were used to
estimate fair value:
Cash, restricted cash and short-term investments,
receivables, accounts payable, accrued expenses, and accrued
interest The estimated fair value of these
financial instruments approximates their carrying value due to
their high liquidity or short-term nature.
Residential loans The fair value of
residential loans is estimated by discounting the net cash flows
estimated to be generated from the asset. The discounted cash
flows were determined using assumptions such as, but not limited
to, interest rates, prepayment speeds, default rates, loss
severities, and a risk-adjusted market discount rate. The value
of these assets is very sensitive to changes in interest rates.
Subordinate security The fair value of the
subordinate security is measured in the consolidated financial
statements at fair value on a recurring basis by discounting the
net cash flows estimated to be generated from the asset.
Unrealized gains and losses are reported in accumulated other
comprehensive income. To the extent that the cost basis exceeds
the fair value and the unrealized loss is considered to be
F-22
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
other-than-temporary,
an impairment charge is recognized and the amount recorded in
accumulated other comprehensive income or loss is reclassified
to earnings as a realized loss.
Real estate owned Real estate owned is
recorded at the lower of its carrying amount or estimated fair
value less estimated costs to sell. The estimates utilize
managements assumptions, which are based on historical
resale recovery rates and current market conditions.
Mortgage-backed debt, net of deferred debt issuance
costs The fair value of mortgage-backed
debt is determined by discounting the net cash outflows
estimated to be used to repay the debt. These obligations are to
be satisfied using the proceeds from the residential loans that
secure these obligations and are non-recourse to the Company.
The value of mortgage-backed debt is very sensitive to changes
in interest rates.
Residential loans are held for investment and consist of
unencumbered residential loans and residential loans held in
securitization trusts, summarized in the table below (in
thousands). Residential loans consist of residential mortgage
loans and residential retail instalment agreements.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
Unencumbered residential loans, net
|
|
$
|
333,636
|
|
|
$
|
363,741
|
|
Residential loans held in securitization trusts, net
|
|
|
1,310,710
|
|
|
|
1,407,934
|
|
|
|
|
|
|
|
|
|
|
Residential loans, net
|
|
$
|
1,644,346
|
|
|
$
|
1,771,675
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the activity in the residential
loan allowance for loan losses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Balance, December 31
|
|
$
|
18,969
|
|
|
$
|
13,992
|
|
|
$
|
13,011
|
|
Provision charged to income
|
|
|
15,182
|
|
|
|
20,968
|
|
|
|
13,476
|
|
Less: Charge-offs, net of recoveries
|
|
|
(16,490
|
)
|
|
|
(15,991
|
)
|
|
|
(12,495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
$
|
17,661
|
|
|
$
|
18,969
|
|
|
$
|
13,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents delinquencies as a percent of
amounts outstanding on the principal balance of residential
loans:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
31-60 days
|
|
|
1.33
|
%
|
|
|
1.58
|
%
|
61-90 days
|
|
|
0.74
|
%
|
|
|
0.72
|
%
|
91 days or more
|
|
|
3.37
|
%
|
|
|
3.05
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
5.44
|
%
|
|
|
5.35
|
%
|
|
|
|
|
|
|
|
|
|
F-23
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Unencumbered
Residential Loans
Unencumbered residential loans, net consist of instalment notes
receivable and mortgage loans and are summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
Unencumbered residential loans, principal balance
|
|
$
|
365,797
|
|
|
$
|
399,099
|
|
Less: Yield adjustment, net(1)
|
|
|
(28,701
|
)
|
|
|
(31,940
|
)
|
Less: Allowance for loan losses
|
|
|
(3,460
|
)
|
|
|
(3,418
|
)
|
|
|
|
|
|
|
|
|
|
Unencumbered residential loans, net(2)
|
|
$
|
333,636
|
|
|
$
|
363,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Deferred origination costs, premiums and discounts are amortized
over the life of the note portfolio. Deferred origination costs
included in the yield adjustment, net for unencumbered
residential loans, net at December 31, 2009 and 2008 were
$2.8 million and $3.1 million, respectively. Premiums
and discounts, net included in the yield adjustment, net for
unencumbered residential loans, net at December 31, 2009
and 2008 were $35.9 million and $38.8 million,
respectively. |
|
(2) |
|
The weighted average life of the portfolio approximates
10 years based on assumptions for prepayment speeds,
default rates and losses. |
The following table summarizes the activity in the allowance for
loan losses on unencumbered residential loans, net (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Balance, December 31
|
|
$
|
3,418
|
|
|
$
|
1,737
|
|
|
$
|
293
|
|
Provision charged to income
|
|
|
4,359
|
|
|
|
5,894
|
|
|
|
2,737
|
|
Less: Charge-offs, net of recoveries
|
|
|
(4,317
|
)
|
|
|
(4,213
|
)
|
|
|
(1,293
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
$
|
3,460
|
|
|
$
|
3,418
|
|
|
$
|
1,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of unencumbered residential loans, net that had been
put on nonaccrual status due to delinquent payments of ninety
days past due or greater was $21.4 million and
$16.0 million at December 31, 2009 and
December 31, 2008, respectively. Residential loans are
placed on non-accrual status when any portion of the principal
or interest is ninety days past due. When placed on non-accrual
status, the related interest receivable is reversed against
interest income of the current period. Residential loans are
removed from non-accrual status when the amount financed and the
associated interest are no longer over ninety days past due.
The following table presents delinquencies as a percent of
amounts outstanding on the principal balance of unencumbered
residential loans:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
31-60 days
|
|
|
1.98
|
%
|
|
|
2.29
|
%
|
61-90 days
|
|
|
1.53
|
%
|
|
|
0.92
|
%
|
91 days or more
|
|
|
5.84
|
%
|
|
|
4.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
9.35
|
%
|
|
|
7.24
|
%
|
|
|
|
|
|
|
|
|
|
Residential
Loans Held in Securitization Trusts, Net
Residential loans held in securitization trusts, net consist of
residential loans that the Company has securitized in structures
that are accounted for as financings. These securitizations are
structured legally as
F-24
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
sales, but for accounting purposes are treated as financings
under the accounting guidance for transfers of financial assets,
as amended. Accordingly, the loans in these securitizations
remain on the balance sheet as residential loans. Given this
treatment, retained interests are not created, and
securitization mortgage-backed debt is reflected on the balance
sheet as a liability. The assets of the securitization trusts
are not available to satisfy claims of general creditors of the
Company and the mortgage-backed debt issued by the
securitization trusts is to be satisfied solely from the
proceeds of the residential loans held in securitization trusts
and are non-recourse to the Company. The Company records
interest income on residential loans held in securitization
trusts and interest expense on mortgage-backed debt issued in
the securitizations over the life of the securitizations.
Deferred debt issuance costs and discounts related to the
mortgage-backed debt are amortized on a level yield basis over
the estimated life of the mortgage-backed debt.
Residential loans held in securitization trusts, net are
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
Residential loans held in securitization trusts, principal
balance
|
|
$
|
1,454,062
|
|
|
$
|
1,565,879
|
|
Less: Yield adjustment, net(1)
|
|
|
(129,151
|
)
|
|
|
(142,394
|
)
|
Less: Allowance for loan losses
|
|
|
(14,201
|
)
|
|
|
(15,551
|
)
|
|
|
|
|
|
|
|
|
|
Residential loans held in securitization trusts, net(2)
|
|
$
|
1,310,710
|
|
|
$
|
1,407,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Deferred origination costs, premiums and discounts are amortized
over the life of the note portfolio. Deferred origination costs
included in the yield adjustment, net for residential loans held
in securitization trusts, net at December 31, 2009 and 2008
were $8.8 million and $9.6 million, respectively.
Premiums and discounts, net included in the yield adjustment,
net for residential loans held in securitization trusts, net at
December 31, 2009 and 2008 were $145.8 million and
$162.2 million, respectively. |
|
(2) |
|
The weighted average life of the portfolio approximates
8 years based on assumptions for prepayment speeds, default
rates and losses. |
The following table summarizes the activity in the allowance for
loan losses on residential loans held in securitization trusts,
net (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Balance, December 31
|
|
$
|
15,551
|
|
|
$
|
12,255
|
|
|
$
|
12,718
|
|
Provision charged to income
|
|
|
10,823
|
|
|
|
15,074
|
|
|
|
10,739
|
|
Less: Charge-offs, net of recoveries
|
|
|
(12,173
|
)
|
|
|
(11,778
|
)
|
|
|
(11,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
$
|
14,201
|
|
|
$
|
15,551
|
|
|
$
|
12,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of residential loans held in securitization trusts,
net that had been put on nonaccrual status due to delinquent
payments of ninety days past due or greater was
$39.8 million and $42.3 million at December 31,
2009 and 2008, respectively. Residential loans are placed on
non-accrual status when any portion of the principal or interest
is ninety days past due. When placed on non-accrual status, the
related interest receivable is reversed against interest income
of the current period. Residential loans are removed from
non-accrual status when the amount financed and the associated
interest are no longer over ninety days past due.
All of the Companys residential loans held in
securitization trusts, net are pledged as collateral for the
mortgage-backed debt (see Note 7). The Companys only
continued involvement with the residential loans held in
securitization trusts, net is retaining all of the beneficial
interests in the securitization trusts and servicing the
residential loans collateralizing the mortgage-backed debt.
F-25
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents delinquencies as a percent of
amounts outstanding on the principal balance of residential
loans held in securitization trusts:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
31-60 days
|
|
|
1.17
|
%
|
|
|
1.39
|
%
|
61-90 days
|
|
|
0.54
|
%
|
|
|
0.67
|
%
|
91 days or more
|
|
|
2.74
|
%
|
|
|
2.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
4.45
|
%
|
|
|
4.84
|
%
|
|
|
|
|
|
|
|
|
|
The Companys fixed-rate subordinate security consists of a
single security backed by notes that are collateralized by
manufactured housing. Approximately one-third of the notes
include attached real estate on which the manufactured housing
is located as additional collateral. Subordinate security
totaled $1.8 million and $0 at December 31, 2009 and
2008, respectively. The subordinate security was acquired as
part of the Merger with Hanover. Subordinate security is
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
Principal balance
|
|
$
|
3,812
|
|
|
$
|
|
|
Purchase price and other adjustments
|
|
|
(2,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized cost
|
|
$
|
1,612
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain
|
|
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying value (fair value)
|
|
$
|
1,801
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Actual maturities on mortgage-backed securities are generally
shorter than the stated contractual maturities because the
actual maturities are affected by the contractual lives of the
underlying notes, periodic payments of principal, and
prepayments of principal. The contractual maturity of the
subordinate security is 2038.
F-26
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
Mortgage-Backed
Debt and Related Collateral
|
Mortgage-Backed
Debt
Mortgage-backed debt consists of mortgage-backed/asset-backed
notes and collateralized mortgage obligations, summarized as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Stated
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate at
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Final
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
Maturity
|
|
|
Trust IV Asset-Backed Notes
|
|
$
|
123,588
|
|
|
$
|
144,950
|
|
|
|
8.33
|
%
|
|
|
2030
|
|
Trust VI Asset-Backed Notes
|
|
|
110,373
|
|
|
|
121,776
|
|
|
|
7.42
|
%
|
|
|
2035
|
|
Trust VII Asset-Backed Notes
|
|
|
100,852
|
|
|
|
106,874
|
|
|
|
6.34
|
%
|
|
|
2036
|
|
Trust VIII Asset-Backed Notes
|
|
|
111,549
|
|
|
|
120,506
|
|
|
|
7.79
|
%
|
|
|
2038
|
|
Trust X Asset-Backed Notes
|
|
|
169,512
|
|
|
|
183,489
|
|
|
|
6.30
|
%
|
|
|
2036
|
|
Trust XI Asset-Backed Notes
|
|
|
159,042
|
|
|
|
167,448
|
|
|
|
5.51
|
%
|
|
|
2038
|
|
Trust 2004-1
Trust Asset-Backed
Notes
|
|
|
150,432
|
|
|
|
160,277
|
|
|
|
6.64
|
%
|
|
|
2037
|
|
Trust 2005-1
Trust Asset-Backed
Notes
|
|
|
160,799
|
|
|
|
172,921
|
|
|
|
6.15
|
%
|
|
|
2040
|
|
Trust 2006-1
Trust Asset-Backed
Notes
|
|
|
179,006
|
|
|
|
194,580
|
|
|
|
6.28
|
%
|
|
|
2040
|
|
Hanover Capital Grantor Trust Collateralized Mortgage
Obligations
|
|
|
2,301
|
|
|
|
|
|
|
|
5.46
|
%
|
|
|
2029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,267,454
|
|
|
$
|
1,372,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The securitization trusts beneficially owned by WMC and its
wholly owned subsidiary, Mid-State Capital, LLC, are the
depositors under the Companys outstanding mortgage-backed
and asset-backed notes (the Trust Notes), which
consist of eight separate series of public debt offerings and
one private offering. The Company acquired the Hanover Capital
Grantor Trust, acquired from Hanover as part of the Merger, is a
public debt offering. Prior to April 30, 2008, the Company
was a borrower under a $150.0 million and a
$200.0 million Variable Funding Loan Agreement (the
Warehouse Facilities). The Trust Notes provide
long-term financing for instalment notes receivable and mortgage
loans purchased by WMC, while the Warehouse Facilities provided
temporary financing.
The securitization trusts contain provisions that require the
cash payments received from the underlying residential loans be
applied to reduce the principal balance of the Trust Notes
unless certain over-collateralization or other similar targets
are satisfied. The securitization trusts also contain
delinquency and loss triggers, that, if exceeded, result in any
excess over-collateralization going to pay down the
Trust Notes for that particular securitization at an
accelerated pace. Assuming no servicer trigger events have
occurred and the over-collateralization targets have been met,
any excess cash is released to the Company. As of
December 31, 2009, three of the Companys
securitization trusts exceeded certain triggers and did not
provide any significant levels of excess cash flow to the
Company during 2009. In February 2010, the Company purchased
Trust X REO at its par value of approximately
$3.0 million. As a result of this transaction, the
Trust X loss trigger has been cured. Consequently, on
February 16, 2010 the Company received a $4.2 million
cash release from this securitization.
The Company has historically funded its residential loans
through the securitization market. As of December 31, 2009,
the Company has nine separate non-recourse securitization trusts
for which it services the underlying collateral and one
non-recourse securitization for which is does not service the
underlying collateral. These ten trusts have an aggregate of
$1.3 billion of outstanding debt, collateralized by
$1.5 billion of assets, including residential loans, REO
and restricted short-term investments. All of the Companys
F-27
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
mortgage-backed debt is non-recourse and not
cross-collateralized and, therefore, must be satisfied
exclusively from the proceeds of the residential loans and REO
held in each securitization trust. As the Company has retained
the beneficial interests in the securitizations and will absorb
a majority of any losses on the underlying collateral, the
Company has consolidated the securitization entities and treats
the residential loans as its assets and the related
mortgage-backed debt as its debt.
Borrower remittances received on the residential loan collateral
are used to make payments on the mortgage-backed debt. The
maturity of the mortgage-backed debt is directly affected by
principal prepayments on the related residential loan
collateral. As a result, the actual maturity of the
mortgage-backed debt is likely to occur earlier than the stated
maturity. Certain of the Companys mortgage-backed debt is
also subject to redemption according to specific terms of the
respective indenture agreements.
At the beginning of the second quarter of 2008, the Company was
a borrower under a $200.0 million warehouse facility and a
$150.0 million warehouse facility, together the Warehouse
Facilities, providing temporary financing to the Company for its
purchases
and/or
originations of residential loans. On April 30, 2008, the
Company repaid all outstanding borrowings and terminated the
Warehouse Facilities using funds provided by Walter Energy.
Since the termination of the Warehouse Facilities, the Company
has neither used nor accessed the mortgage-backed securitization
market.
Prior to the termination of the Warehouse Facilities, the
Company held multiple interest rate hedge agreements with
various counterparties with an aggregate notional value of
$215.0 million. The objective of these hedges was to
protect against changes in the benchmark interest rate on the
forecasted issuance of mortgage-backed notes in a
securitization. At March 31, 2008, the hedges no longer
qualified for hedge accounting treatment because the Company no
longer planned to access the securitization market due to
existing market conditions. As a result, the Company recognized
a loss on interest rate hedge ineffectiveness of
$17.0 million in the first quarter of 2008. On
April 1, 2008, the Company settled the hedges for a payment
of $17.0 million. There are no hedges outstanding at
December 31, 2009.
Collateral
for Mortgage-Backed Debt
The following table summarizes the carrying value of the
collateral for the mortgage-backed debt as of December 31,
2009 and 2008, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
December 31, 2008
|
|
|
Residential loans in securitization trusts, principal balance
|
|
$
|
1,454,062
|
|
|
$
|
1,565,879
|
|
Real estate owned
|
|
|
41,143
|
|
|
|
35,763
|
|
Restricted cash and short-term investments
|
|
|
45,752
|
|
|
|
48,985
|
|
|
|
|
|
|
|
|
|
|
Total mortgage-backed debt collateral
|
|
$
|
1,540,957
|
|
|
$
|
1,650,627
|
|
|
|
|
|
|
|
|
|
|
|
|
8.
|
Share-Based
Compensation Plans
|
Prior to the spin-off from Walter Energy, certain employees of
the Company participated in Walter Energys 2002 Long-Term
Incentive Award Plan, or the 2002 Plan, and the Long-Term
Incentive Stock Plan approved by Walter Energys
stockholders in October 1995, or the 1995 Plan, and amended in
September 1997. Under both plans (collectively, the Walter
Energy Equity Award Plans), employees were granted options to
purchase stock in Walter Energy as well as restricted stock
units. The share-based expense related to Company employees
under the Walter Energy Equity Award Plans has been reflected in
the Companys consolidated statements of income in salaries
and benefits expense.
In connection with the spin-off, Walter Energys
share-based awards held by Company employees were converted to
equivalent share-based awards of the Company, if elected, based
on the ratio of the Companys fair market value of stock
when issued to the fair market value of Walter Energys
stock. The number of
F-28
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
shares and, for options, the ratio of the exercise price to
market price were equitably adjusted to preserve the intrinsic
value of the award as of immediately prior to the spin-off. Each
Walter Investment share-based award has the same term and
conditions as were applicable under the corresponding Walter
Energy share-based award. The conversion was accounted for as a
modification under the provisions of the Stock Compensation
guidance and resulted in no increase in the fair value of the
awards to be recognized immediately upon modification. The
remaining $0.1 million of modification expense associated
with the awards will be recorded through February 2011.
In connection with the spin-off, the Companys Board of
Directors adopted Hanovers 1999 Equity Incentive Plan, or
the 1999 EIP, and 2009 Long Term Incentive Plan, or the 2009
LTIP, providing for future awards to the Companys
employees and directors.
The 2009 LTIP permits grants of stock options, restricted stock
and other awards to the Companys officers, employees and
consultants, including directors. The 2009 LTIP is administered
by the Compensation Committee, which is comprised of two or more
non-employee Board of Director members. The number of shares
available for issuance under the 2009 LTIP is 3.0 million.
No participant may receive options, restricted stock or other
awards under the 2009 LTIP that exceeds 1.2 million in any
calendar year. Each contractual term of an option granted is
fixed by the Compensation Committee but, except in limited
circumstances, the term cannot exceed 10 years from the
grant date. Restricted stock awards have a vesting period as
defined by the award agreement. No awards will be granted after
the termination of the plan unless extended by shareholder
approval.
As of December 31, 2009, there were approximately 0 and
1.9 million shares underlying the 1999 EIP and 2009 LTIP
(collectively, the Walter Investment Equity Award Plans),
respectively, that are authorized, but not yet granted.
Option
Activity
On April 20, 2009, the Company granted stock options to
each of its non-employee directors under the 1999 EIP to
purchase 2,000 shares of the Companys common stock
which were fully vested as of the date of the grant. The
exercise price for the stock option grants is $8.00, which is
equal to the close price of the Companys common stock on
the NYSE Amex on the grant date as provided under the 1999 EIP.
Each of the non-employee directors were also issued options to
purchase 8,333 shares of the Companys common stock
under the 2009 LTIP. The exercise price for the stock option
grants is $7.67, which is equal to the average high and low of
the Companys common stock on the NYSE Amex on the grant
date as provided under the 2009 LTIP. These stock options vest
in equal installments over three years.
On May 19, 2009, the Company granted stock options under
the 1999 EIP and 2009 LTIP to purchase approximately
0.3 million shares of the Companys common stock to
certain employees. The exercise price of the stock option grants
is $13.37, which is equal to the average high and low of the
Companys common stock on the NYSE Amex on the grant date.
The stock options vest in equal installments over three years.
The grant date fair value of the stock options granted
subsequent to the spin-off and Merger approximated
$0.7 million.
F-29
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the activity in all plans for
option grants by Walter Energy prior to the spin-off and by the
Company subsequent to the spin-off as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
|
|
|
Price
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
per Share
|
|
|
(In years)
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(In $000s)
|
|
|
Option activity under Walter Energys equity plans prior
to spin-off
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
130,337
|
|
|
$
|
16.64
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
13,625
|
|
|
|
53.45
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(85,703
|
)
|
|
|
14.56
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
58,259
|
|
|
|
28.30
|
|
|
|
6.77
|
|
|
$
|
183
|
|
Awards remaining with Walter Energy(1)
|
|
|
(28,781
|
)
|
|
|
16.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at April 17, 2009
|
|
|
29,478
|
|
|
|
34.10
|
|
|
|
|
|
|
|
|
|
Option activity under the Companys plans subsequent to
the spin-off
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional options issued by the Company at spin-off to preserve
intrinsic value(2)
|
|
|
70,204
|
|
|
|
11.24
|
|
|
|
|
|
|
|
|
|
Granted(3)
|
|
|
334,998
|
|
|
|
14.57
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(6,456
|
)
|
|
|
8.40
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
428,224
|
|
|
$
|
13.89
|
|
|
|
8.86
|
|
|
$
|
937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009
|
|
|
62,906
|
|
|
$
|
21.05
|
|
|
|
7.00
|
|
|
$
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents options of the Companys employees who elected
to retain Walter Energy options rather than to convert them to
those of the Company in connection with the spin-off. |
|
(2) |
|
Represents additional options granted at spin-off. The number of
shares and the exercise price were equitably adjusted to
preserve the option holders intrinsic value. |
|
(3) |
|
Represents options granted after the spin-off. Includes 1,005
fully vested options held by employees of Hanover that were
converted to those of the Company in connection with the Merger. |
The weighted-average grant-date fair values of stock options of
the Company and Walter Energy granted to employees of the
Company during the years ended December 31, 2009, 2008, and
2007 were $2.26, $20.23, and $9.37, respectively. The total
amount of cash received by the Company from the exercise of
stock options by the Companys employees was
$0.1 million, $1.2 million, and $0.1 million for
the years ended December 31, 2009, 2008, and 2007,
respectively. The total intrinsic value of stock awards
exercised or converted by the Companys employees during
the years ended December 31, 2009, 2008 and 2007 was
$0.1 million, $4.2 million, and $0.4 million,
respectively. The total fair value of options designated to
employees of the Company that vested during the years 2009,
2008, and 2007 were $0.1 million, $0.2 million, and
$0.3 million, respectively.
F-30
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Method
and Assumptions Used to Estimate Fair Value of
Options
The fair value of each stock option grant was estimated at the
date of grant using the Black-Scholes option-pricing model. The
weighted-average assumptions Walter Energy used in the
Black-Scholes option pricing model are shown below for the years
ended December 31, 2008 and 2007. The weighted-average
assumptions the Company used for the year ended
December 31, 2009 are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Risk free interest rate
|
|
|
2.32
|
%
|
|
|
2.78
|
%
|
|
|
4.75
|
%
|
Dividend yield
|
|
|
13.40
|
%
|
|
|
0.65
|
%
|
|
|
0.73
|
%
|
Expected life (years)
|
|
|
5.00
|
|
|
|
5.11
|
|
|
|
4.31
|
|
Volatility
|
|
|
60.39
|
%
|
|
|
40.85
|
%
|
|
|
34.47
|
%
|
Forfeiture rate
|
|
|
4.62
|
%
|
|
|
4.62
|
%
|
|
|
4.62
|
%
|
The risk-free interest rate is based on the U.S. Treasury
yield in effect at the time of grant with a term equal to the
expected life. The expected dividend yield is based on the
Companys estimated annual dividend payout at grant date.
The expected life of the options represents the period of time
the options are expected to be outstanding. Expected volatility
is based on the REIT industry volatility for the S&P 1500
REIT index due to a lack of stock price history.
Non-vested
Share Activity
The Companys non-vested share-based awards consist of
restricted stock and restricted stock units.
Effective March 1, 2007, Walter Energy adopted the 2007
Long-term Incentive Award Plan, or the 2007 Plan, of JWH Holding
Company, LLC, the Companys immediate parent prior to the
spin-off and Merger. The 2007 plan allowed for up to 20% of the
LLC interest to be awarded or granted as incentive and
non-qualified stock options to eligible employees, consultants
and directors. Certain of the Companys executives were
eligible employees under the 2007 Plan. In 2006, the Board of
Directors of Walter Energy granted a special equity award to
certain executives of the JWH Holding Company, LLC whereby the
employees received non-qualified options in JWH Holding Company,
LLC to acquire the equivalent of 11.25% of the total combined
designated equity of the Company. The exercise price of these
options was equal to the fair value at the date of grant. In
conjunction with the spin-off, these awards were cancelled and
replaced with restricted stock units of WIMC. These awards were
fully vested, in accordance with the original vesting terms, and
expensed prior to the spin-off; therefore, no additional expense
was recorded.
On April 29, 2009, the Company granted 3,078 shares of
restricted stock to each of its non-employee directors under the
1999 EIP. The restricted stock vests on a three year cliff
vesting schedule.
On May 19, 2009, the Company granted approximately
0.2 million restricted stock units under the 2009 LTIP to
certain employees. The restricted stock units vest in equal
installments over three years.
The grant date fair value of the share-based awards granted
subsequent to the spin-off and Merger approximated
$2.1 million.
F-31
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the activity in all plans for
non-vested awards, consisting of restricted stock and restricted
stock units, by Walter Energy prior to the spin-off and by the
Company subsequent to the spin-off as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Aggregate
|
|
|
Average
|
|
|
|
|
|
|
Intrinsic Value
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
($000)
|
|
|
Term in Years
|
|
|
Non-vested share activity under Walter Energys equity
plans prior to spin-off
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
58,043
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
11,716
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(11,282
|
)
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
58,477
|
|
|
$
|
1,024
|
|
|
|
0.71
|
|
Vested
|
|
|
(18,566
|
)
|
|
|
|
|
|
|
|
|
Awards remaining with Walter Energy(1)
|
|
|
(17,933
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at April 17, 2009
|
|
|
21,978
|
|
|
|
|
|
|
|
|
|
Non-vested share activity under the Companys plans
subsequent to the spin-off
|
|
|
|
|
|
|
|
|
|
|
|
|
Replaced units at spin-off(2)
|
|
|
737,486
|
|
|
|
|
|
|
|
|
|
Granted(3)
|
|
|
182,723
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
942,187
|
|
|
$
|
13,502
|
|
|
|
9.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents restricted stock units of the Companys
employees who elected to retain Walter Energy restricted stock
units rather than to convert them to those of the Company in
connection with the spin-off. |
|
(2) |
|
Represents additional restricted stock units granted at the
spin-off. The number of restricted stock units were equitably
adjusted to preserve the holders intrinsic value. |
|
(3) |
|
Represents restricted stock and restricted stock units granted
after the spin-off. |
The weighted-average grant-date fair values of non-vested shares
of the Company and Walter Energy granted to employees of the
Company during the years ended December 31, 2009, 2008, and
2007 were $12.84, $53.45, and $28.12, respectively. The
weighted-average grant-date fair value of non-vested shares of
the Company at December 31, 2009 was $8.62. The total
intrinsic value of non-vested shares that vested or converted by
the Companys employees during the years ended
December 31, 2009, 2008 and 2007 was $0, $0.6 million,
and $0.3 million, respectively. The total fair value of
non-vested shares designated to employees of the Company that
vested during the years 2009, 2008, and 2007 were $0,
$0.1 million, and $0.2 million, respectively.
F-32
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Share-Based
Compensation Expense
The components of share-based compensation expense are presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In millions)
|
|
|
Plans sponsored by Walter Energy
|
|
$
|
0.2
|
|
|
$
|
0.5
|
|
|
$
|
1.5
|
|
|
|
|
|
Walter Investment stock options, restricted stock and restricted
stock units
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1.4
|
|
|
$
|
0.5
|
|
|
$
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The compensation expense recognized is net of estimated
forfeitures. Forfeitures are estimated based on historical
termination behavior, as well as an analysis of actual option
forfeitures.
As of December 31, 2009, there was $0.4 million of
total unrecognized compensation cost related to unvested stock
options granted under the Companys share option plans. The
cost is expected to be recognized over a weighted-average period
of 2.4 years. For restricted stock and restricted stock
units, there was $1.4 million of total unrecognized
compensation cost expected to vest over the weighted-average
period of 2.4 years as of December 31, 2009.
Walter Energy arranged letters of credit in order to secure the
Companys obligations under certain reinsurance contracts.
The outstanding letters of credit were $0, $9.9 million,
and $10.0 million at December 31, 2009, 2008, and
2007, respectively. The Company has included letter of credit
charges in general and administrative expenses in the amount of
$0.1 million, $0.2 million, and $0.2 million for
the years ended December 31, 2009, 2008, and 2007,
respectively. A letter of credit was canceled by the Company in
June 2009. The Company replaced the letter of credit with a
deposit of $5.9 million in an insurance trust account used
to secure the payments under the Companys reinsurance
agreements.
Syndicated
Credit Agreement
On April 20, 2009, the Company entered into a syndicated
credit agreement, or the Syndicated Credit Agreement, that
establishes a secured $15.0 million bank revolving credit
facility, with a letter of credit
sub-facility
in an amount not to exceed $10.0 million outstanding at any
time. The Syndicated Credit Agreement is guaranteed by the
subsidiaries of the Company other than Walter Investment
Reinsurance, Co., Ltd., Mid-State Capital, LLC, Hanover SPC-A,
Inc. and the Companys securitization trusts. In addition,
Walter Energy posted a letter of credit, or the Support Letter
of Credit, in an amount equal to $15.7 million to secure
the Companys obligations under the Syndicated Credit
Agreement. The loans under the Syndicated Credit Agreement shall
be used for general corporate purposes of the Company and its
subsidiaries. The Syndicated Credit Agreement contains customary
events of default and covenants, including covenants that
restrict the ability of the Company and certain of their
subsidiaries to incur certain additional indebtedness, create or
permit liens on assets, engage in mergers or consolidations, and
certain restrictive financial covenants. The Syndicated Credit
Agreement also requires the Company to maintain unencumbered
assets with an unpaid principal balance of at least
$75.0 million at all times. If an event of default shall
occur and be continuing, the commitments under the related
credit agreement may be terminated and all obligations under the
Syndicated Credit Agreement may be due and payable. All loans
under the Syndicated Credit Agreement shall be available until
the termination date, which is April 20, 2011, at which
point all obligations under the Syndicated Credit Agreement
shall be due and payable. The commitment fee on the unused
portion of the Syndicated Credit Agreement is 0.50%. All loans
made under the Syndicated Credit Agreement will bear interest at
a rate equal to LIBOR plus 4.00%.
F-33
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2009, no funds have been drawn under the
Syndicated Credit Agreement and the Company is in compliance
with all covenants.
Revolving
Credit Agreement and Security Agreement
On April 20, 2009, the Company entered into a revolving
credit agreement and security agreement, or the Revolving Credit
Agreement, among the Company, certain of its subsidiaries and
Walter Energy, as lender. The Revolving Credit Agreement
establishes a guaranteed $10.0 million revolving facility,
secured by a pledge of unencumbered assets with an unpaid
principal balance of at least $10.0 million. The Revolving
Credit Agreement also is guaranteed by the subsidiaries of the
Company that guarantee the Syndicated Credit Agreement. The
Revolving Credit Agreement is available only after a major
hurricane has occurred with projected losses greater than the
$2.5 million self-insured retention, or the Revolving
Credit Agreement Effective Date. The Revolving Credit Agreement
contains customary events of default and covenants, including
covenants that restrict the ability of the Company and certain
of their subsidiaries to incur certain additional indebtedness,
create or permit liens on assets, engage in mergers or
consolidations, and certain restrictive financial covenants. The
Revolving Credit Agreement also requires the Company to maintain
unencumbered assets with an unpaid principal balance of at least
$75.0 million at all times. If an event of default shall
occur and be continuing, the commitments under the related
credit agreement may be terminated and all obligations under the
Revolving Credit Agreement may be due and payable. All loans
under the Revolving Credit Agreement shall be available from the
Revolving Credit Agreement Effective Date until the termination
date, which is April 20, 2011, at which point all
obligations under the Revolving Credit Agreement shall be due
and payable. Upon initial activation of the Revolving Credit
Agreement, the Company will pay Walter Energy a funding fee in
an amount equal to $25,000. A commitment fee of 0.50% is payable
on the daily amount of the unused commitments after the
Revolving Credit Agreement Effective Date. All loans made under
the Revolving Credit Agreement will bear interest at a rate
equal to LIBOR plus 4.00%.
As of December 31, 2009, no funds have been drawn under the
Revolving Credit Agreement and the Company is in compliance with
all covenants.
Support
Letter of Credit Agreement
On April 20, 2009, the Company entered into a support
letter of credit agreement, or the Support LC Agreement, between
the Company and Walter Energy. The Support LC Agreement was
entered into in connection with the Support Letter of Credit of
$15.7 million and the bonds similarly posted by Walter
Energy in support of the Companys obligations. The Support
LC Agreement provides that the Company will reimburse Walter
Energy for all costs incurred by it in posting the Support
Letter of Credit as well as for any draws under bonds posted in
support of the Company. In addition, upon any draw under the
Support Letter of Credit, the obligations of the Company to
Walter Energy will be secured by a perfected security interest
in unencumbered assets with an unpaid principal balance of at
least $65.0 million. The Support LC Agreement contains
customary events of default and covenants, including covenants
that restrict the ability of the Company and certain of their
subsidiaries to incur certain additional indebtedness, create or
permit liens on assets, engage in mergers or consolidations, and
certain restrictive financial covenants. The Support LC
Agreement also requires the Company to maintain unencumbered
assets with an unpaid principal balance of at least
$75.0 million at all times. If an event of default shall
occur and be continuing, the commitments under the related
credit agreement may be terminated and all obligations under the
Support LC Agreement may be due and payable. All obligations
under the LC Support Agreement shall be due and payable on
April 20, 2011. The Support LC Agreement provides that any
draws under the Support Letter of Credit will be deemed to
constitute loans of Walter Energy to the Company and will bear
interest at a rate equal to LIBOR plus 6.00%.
F-34
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2009, no funds have been drawn under the
Support Letter of Credit Agreement and the Company is in
compliance with all covenants.
|
|
11.
|
Transactions
with Walter Energy
|
Following the spin-off, Walter Investment and Walter Energy have
operated independently, and neither has any ownership interest
in the other. In order to govern certain of the ongoing
relationships between the Company and Walter Energy after the
spin-off and to provide mechanisms for an orderly transition,
the Company and Walter Energy entered into certain agreements,
pursuant to which (a) the Company and Walter Energy provide
certain services to each other, (b) the Company and Walter
Energy will abide by certain non-compete and non-solicitation
arrangements, and (c) the Company and Walter Energy will
indemnify each other against certain liabilities arising from
their respective businesses. The specified services that the
Company and Walter Energy may provide each other, as requested,
include tax and accounting services, certain human resources
services, communications systems and support, and insurance/risk
management. Each party will be compensated for services
rendered, as set forth in the Transition Services Agreement. The
Transition Services Agreement provides for terms not to exceed
24 months for the various services, with some of the terms
capable of extension.
As discussed in the
Form S-4
filed on February 17, 2009, Walter Energy and the Company
have also entered into certain other agreements including the
Tax Separation Agreement, Joint Litigation Agreement, and
Trademark License Agreement. See Note 3 for further
information regarding the spin-off transaction.
|
|
12.
|
Comprehensive
Income and Accumulated Other Comprehensive Income
|
The components of comprehensive income are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net income
|
|
$
|
113,779
|
|
|
$
|
2,437
|
|
|
$
|
24,263
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in postretirement benefit plans, net of $502, $69 and
$112 tax effect, respectively
|
|
|
(41
|
)
|
|
|
(106
|
)
|
|
|
(299
|
)
|
Net unrealized gain on subordinate security
|
|
|
189
|
|
|
|
|
|
|
|
|
|
Net amortization of realized gain on closed hedges, net of $347,
$137 and $144 tax effect, respectively
|
|
|
48
|
|
|
|
(258
|
)
|
|
|
(282
|
)
|
Net recognized loss on hedges, net of $0, $3,329 and $3,445 tax
effect, respectively
|
|
|
|
|
|
|
6,130
|
|
|
|
(6,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
113,975
|
|
|
$
|
8,203
|
|
|
$
|
17,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-35
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of accumulated other comprehensive income are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess of
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
Net Amortization of
|
|
|
Net Unrealized Gain
|
|
|
|
|
|
|
Employee Benefits
|
|
|
Realized Gain on
|
|
|
on Subordinate
|
|
|
|
|
|
|
Liability
|
|
|
Closed Hedges
|
|
|
Security
|
|
|
Total
|
|
|
Balance at December 31, 2008
|
|
$
|
1,158
|
|
|
$
|
589
|
|
|
$
|
|
|
|
$
|
1,747
|
|
Pre-tax amount
|
|
|
(543
|
)
|
|
|
(299
|
)
|
|
|
189
|
|
|
|
(653
|
)
|
Tax benefit
|
|
|
1
|
|
|
|
58
|
|
|
|
|
|
|
|
59
|
|
Change in tax due to REIT conversion
|
|
|
501
|
|
|
|
289
|
|
|
|
|
|
|
|
790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
1,117
|
|
|
$
|
637
|
|
|
$
|
189
|
|
|
$
|
1,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
Common
Stock and Earnings Per Share
|
In June 2008, the FASB issued guidance on determining whether
share-based awards are participating securities. In accordance
with the accounting guidance concerning EPS, unvested
share-based payment awards that include non-forfeitable rights
to dividends, whether paid or unpaid, are considered
participating securities. As a result, the awards are required
to be included in the calculation of basic earnings per common
share pursuant to the two-class method. For the
Company, participating securities are comprised of certain
unvested restricted stock and restricted stock units. In
accordance with the accounting guidance concerning earnings per
share, the basic and diluted earnings per share amounts have
been calculated for the year ended December 31, 2009 using
the two-class method. The basic and diluted earnings per share
amounts for the years ended December 31, 2008 and 2007 were
not adjusted retrospectively as there were no participating
securities outstanding during these periods.
F-36
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following is a reconciliation of the numerators and
denominators of the basic and diluted EPS computations shown on
the face of the accompanying consolidated statements of income
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
113,779
|
|
|
$
|
2,437
|
|
|
$
|
24,263
|
|
Less: net income allocated to unvested restricted stock units
|
|
|
(603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders (numerator)
|
|
$
|
113,176
|
|
|
$
|
2,437
|
|
|
$
|
24,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
21,008
|
|
|
|
19,871
|
|
|
|
19,871
|
|
Add: vested restricted stock units
|
|
|
488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted-average common shares outstanding (denominator)
|
|
|
21,496
|
|
|
|
19,871
|
|
|
|
19,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
5.26
|
|
|
$
|
0.12
|
|
|
$
|
1.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
113,779
|
|
|
$
|
2,437
|
|
|
$
|
24,263
|
|
Less: net income allocated to unvested restricted stock units
|
|
|
(601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders (numerator)
|
|
$
|
113,178
|
|
|
$
|
2,437
|
|
|
$
|
24,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
21,008
|
|
|
|
19,871
|
|
|
|
19,871
|
|
Add: Potentially dilutive stock options and restricted stock
units
|
|
|
557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average common shares outstanding (denominator)
|
|
|
21,565
|
|
|
|
19,871
|
|
|
|
19,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
5.25
|
|
|
$
|
0.12
|
|
|
$
|
1.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The calculation of diluted earnings per share for the year ended
December 31, 2009 does not include 320,349 shares
because their effect would have been anti-dilutive. There were
no anti-dilutive shares for the years ended December 31,
2008 and 2007.
Common
Stock Offering
On September 22, 2009, the Company filed a registration
statement on
Form S-11
with the SEC (Registration Number
333-162067),
as amended on October 8, 2009 and October 16, 2009, to
offer 5 million shares of common stock. In addition, the
underwriters of the offering, Credit Suisse and SunTrust
Robinson Humphrey, exercised their over-allotment option to
purchase an additional 0.8 million shares of common stock.
The offering closed on October 21, 2009 with all
5.0 million shares plus the over-allotment of
0.8 million shares sold. This secondary offering of the
Companys common stock, including the exercise of the
over-allotment option, generated net proceeds to the Company of
approximately $76.8 million, after deducting underwriting
discounts and commissions and offering expenses.
Share-Based
Payment Grants Subsequent to the Balance Sheet
Date
On January 4, 2010, certain executive officers of the
Company were awarded a total of 0.1 million restricted
stock units, or the Executive RSUs, of the Company pursuant to
the 2009 LTIP. The Executive RSUs granted to each executive
officer of the Company will vest in equal installments on the
first, second and third anniversary of the date of grant. The
settlement date for each of the Executive RSUs is
January 4, 2013, and
F-37
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
each such Executive RSU vested on such date will be paid out
with a single share of common stock of the Company. As a result
of the Executive RSUs, each executive receiving Executive RSUs
will be entitled to receive cash payments equivalent to any
dividend paid to the holders of common stock of the Company, but
they will not be entitled to any voting rights otherwise
associated with the Executive RSUs.
On January 4, 2010, certain executive officers of the
Company were awarded a total of 0.1 million nonqualified
options, or the Executive Options, to acquire common stock of
the Company pursuant to the 2009 LTIP. The Executive Options
granted to each executive officer of the Company will vest and
become exercisable in equal installments on the first, second
and third anniversary of the date of grant. The exercise price
of $14.39 for each of the Executive Options was determined based
on the mean of the high and low sales prices for a share of
common stock of the Company as reported by the NYSE Amex on the
date of grant.
On January 22, 2010, an executive, in connection with his
employment with the Company, was awarded a total of 135,556
restricted stock units, or RSUs, of the Company under the 2009
LTIP. Of the RSUs granted, 110,000 will vest in equal
installments on the first, second and third anniversary of the
date of grant. The settlement date for these RSUs is
January 22, 2013, and each such RSU vested on such date
will be paid out with a single share of common stock of the
Company. The remaining 25,556 RSUs granted will vest on the
first anniversary of the date of grant. The settlement date for
these RSUs is March 14, 2011, and each such RSU vested on
such date will be paid out with a single share of common stock
of the Company. As a result of the RSU grants, each of the RSUs
will be entitled to receive cash payments equivalent to any
dividend paid to the holders of common stock of the Company, but
they will not be entitled to any voting rights otherwise
associated with the RSUs.
On January 22, 2010, an executive, in connection with his
employment with the Company, was awarded a total of
0.1 million nonqualified options to acquire common stock of
the Company pursuant to the 2009 LTIP. The options granted will
vest and become exercisable on the fourth anniversary of the
award. The exercise price of $14.29 for each option was
determined based on the mean of the high and low sales prices
for a share of common stock of the Company as reported by the
NYSE Amex on the date of grant.
Effective with the Merger, the Companys operations related
to its residential loan portfolios qualify for treatment as a
REIT for federal income tax purposes. REITs are generally not
required to pay federal income taxes contingent upon the Company
meeting applicable distribution, income, asset and ownership
criteria. The REIT-qualifying operations are conducted by the
Company and its wholly owned subsidiaries, other than those
wholly owned subsidiaries for which taxable REIT subsidiary, or
TRS, elections have been made. The Companys use of TRSs,
which are taxed as C corporations, enables the Company to engage
in non-REIT qualifying businesses without violating the REIT
requirements. Effective with the Merger, the Companys
insurance and consulting businesses have been conducted through
wholly owned TRSs.
If the Company fails to qualify as a REIT in any taxable year
and does not qualify for certain statutory relief provisions, it
will be subject to U.S. federal income and applicable state
and local tax at regular corporate rates and may be precluded
from qualifying as a REIT for the subsequent four taxable years
following the year during which it fails to qualify as a REIT.
Even if the Company qualifies for taxation as a REIT, it may be
subject to some U.S. federal, state and local taxes on its
income or property.
As a consequence of the Companys qualification as a REIT,
the Company was not permitted to retain earnings and profits
accumulated during years when the Company was taxed as a C
corporation. Therefore, in order to remain qualified as a REIT,
the Company distributed these earnings and profits by making a
one-time special distribution to stockholders, which the Company
refers to as the special E&P distribution, on
April 17, 2009. The special E&P distribution, with an
aggregate value of approximately $80.0 million, consisted
of $16.0 million in cash and approximately
12.7 million shares of WIM common stock valued at
approximately $64.0 million.
F-38
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company recorded an income tax expense (benefit) of
$(76.2) million, $3.1 million and $14.5 million
for the years ended December 31, 2009, 2008 and 2007,
respectively. The income tax benefit for the year ended
December 31, 2009 was largely due to the reversal of
$82.1 million in mortgage-related deferred tax liabilities
that were no longer necessary as a result of the Companys
REIT qualification as well as $0.8 million related to the
reversal of tax benefits previously reflected in accumulated
other comprehensive income. Excluding the tax benefit related to
the reversal of deferred tax liabilities, the Company recorded
an income tax expense of $5.9 million for the year ended
December 31, 2009, which was largely due to the
Companys C corporation earnings before the Merger and
resulting REIT qualification.
Income tax expense (benefit) consists of the following
components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
Federal
|
|
|
and Local
|
|
|
Total
|
|
|
For the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
6,248
|
|
|
$
|
(660
|
)
|
|
$
|
5,588
|
|
Deferred
|
|
|
(76,173
|
)
|
|
|
(5,576
|
)
|
|
$
|
(81,749
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(69,925
|
)
|
|
$
|
(6,236
|
)
|
|
$
|
(76,161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
11,628
|
|
|
$
|
(752
|
)
|
|
$
|
10,876
|
|
Deferred
|
|
|
(5,299
|
)
|
|
|
(2,478
|
)
|
|
$
|
(7,777
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,329
|
|
|
$
|
(3,230
|
)
|
|
$
|
3,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
20,291
|
|
|
$
|
1,327
|
|
|
$
|
21,618
|
|
Deferred
|
|
|
(8,052
|
)
|
|
|
964
|
|
|
$
|
(7,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,239
|
|
|
$
|
2,291
|
|
|
$
|
14,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax expense at the Companys effective tax rate
differed from the statutory rate as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Income from operations before income tax expense
|
|
$
|
37,618
|
|
|
$
|
5,536
|
|
|
$
|
38,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax provision at the statutory tax rate of 35%(1)
|
|
$
|
13,166
|
|
|
$
|
1,938
|
|
|
$
|
13,578
|
|
Effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local income tax
|
|
|
(1,534
|
)
|
|
|
(2,914
|
)
|
|
|
701
|
|
REIT income not subject to federal income tax
|
|
|
(6,658
|
)
|
|
|
|
|
|
|
|
|
Non-deductible goodwill
|
|
|
|
|
|
|
3,813
|
|
|
|
|
|
REIT conversion
|
|
|
(81,293
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
158
|
|
|
|
262
|
|
|
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax expense (benefit) recognized
|
|
$
|
(76,161
|
)
|
|
$
|
3,099
|
|
|
$
|
14,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate(2)
|
|
|
(202.5
|
)%
|
|
|
56.0
|
%
|
|
|
37.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Statutory tax rate applies to the Companys income for the
period prior to the Merger and the taxable REIT subsidiaries for
the year ended December 31, 2009. |
|
(2) |
|
The Companys effective tax rate for 2009 was (202.5)%,
compared to 56.0% for 2008 and 37.5% for 2007. The effective tax
rate for 2009 was significantly different that the rates used in
2008 and 2007 due to the REIT conversion in 2009 and the
resulting reversal of deferred taxes. The effective tax rate for
2008 was higher than the rate used for 2007 primarily due to
non-deductible goodwill, net of state and local income tax
benefits related to uncertain tax positions. |
F-39
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred tax assets (liabilities) related to the following as of
December 31, (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Contingent interest
|
|
$
|
|
|
|
$
|
3,854
|
|
Allowance for losses on instalment notes receivable
|
|
|
|
|
|
|
6,940
|
|
Interest rate hedge agreements
|
|
|
|
|
|
|
(343
|
)
|
Accrued expenses
|
|
|
284
|
|
|
|
6,358
|
|
Federal benefit of state deductions
|
|
|
|
|
|
|
3,028
|
|
Federal net operating loss carryfowards
|
|
|
3,337
|
|
|
|
|
|
Other
|
|
|
1,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
5,521
|
|
|
|
19,837
|
|
Valuation allowance
|
|
|
(5,101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets, net of valuation allowance
|
|
|
420
|
|
|
|
19,837
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation/Amortization
|
|
|
|
|
|
|
(63
|
)
|
Interest income on instalment notes
|
|
|
|
|
|
|
(68,337
|
)
|
Deferred origination costs
|
|
|
|
|
|
|
(4,659
|
)
|
Prepaid assets
|
|
|
(593
|
)
|
|
|
(2,308
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(593
|
)
|
|
|
(75,367
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(173
|
)
|
|
$
|
(55,530
|
)
|
|
|
|
|
|
|
|
|
|
Walter Energy will file a consolidated federal and Florida
income tax return which includes the Company through
April 17, 2009, the date of the spin-off and Merger. The
Company provided for federal and state income tax on a modified
separate income tax return basis through the date of the
spin-off. The income tax expense is based on the statement of
income. Current tax liabilities for federal and Florida state
income taxes were paid to Walter Energy immediately prior to the
spin-off and have been adjusted to include the effect of related
party interest income earned from Walter Energy that have not
been reflected in the statement of income. Separate company
state tax liabilities and uncertain tax position liabilities
have also been adjusted to include these related party
transactions.
Income
Tax Exposure
A dispute exists with regard to federal income taxes owed by the
Walter Energy consolidated group. The Company was part of the
Walter Energy consolidated group prior to the spin-off and
Merger. As such, the Company is jointly and severally liable
with Walter Energy for any final taxes, interest
and/or
penalties owed by the Walter Energy consolidated group during
the time that the Company was a part of the Walter Energy
consolidated group. According to Walter Energys most
recent public filing, they state that a controversy exists with
regard to federal income taxes allegedly owed by Walter Energy
for fiscal years ended August 31, 1983 through May 31,
1994, and the amount of tax claimed by the IRS in an adversary
proceeding in bankruptcy court, including interest and
penalties, is substantial. The public filing goes on to disclose
that Walter Energy believes, should the IRS prevail on any such
issues, Walter Energys financial exposure is limited to
interest and possible penalties. Walter Energy discloses further
that it believes that all of its current and prior tax filing
positions have substantial merit and it intends to defend
vigorously any tax claims asserted. Under the terms of the Tax
Separation Agreement between the Company and Walter Energy dated
April 17, 2009, Walter Energy is responsible for the
payment of all federal income taxes (including any interest or
penalties
F-40
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
applicable thereto) of the consolidated group, which includes
the aforementioned claims of the IRS. However, to the extent
that Walter Energy is unable to pay any amounts owed, the
Company could be responsible for any unpaid amounts.
The Tax Separation Agreement also provides that Walter Energy is
responsible for the preparation and filing of any tax returns
for the consolidated group for the periods when the Company was
part of the Walter Energy consolidated group. This arrangement
may result in conflicts between Walter Energy and the Company.
In addition, the spin-off of WIM from Walter Energy was intended
to qualify as a tax-free spin-off under Section 355 of the
Code. The Tax Separation Agreement provides generally that if
the spin-off is determined not to be tax-free pursuant to
Section 355 of the Code, any taxes imposed on Walter Energy
or a Walter Energy shareholder as a result of such determination
(Distribution Taxes) which are the result of the
acts or omissions of Walter Energy or its affiliates, will be
the responsibility of Walter Energy. However, should
Distribution Taxes result from the acts or omissions of the
Company or its affiliates, such Distribution Taxes will be the
responsibility of the Company. The Tax Separation Agreement goes
on to provide that Walter Energy and the Company shall be
jointly liable, pursuant to a designated allocation formula, for
any Distribution Taxes that are not specifically allocated to
Walter Energy or the Company. To the extent that Walter Energy
is unable or unwilling to pay any Distribution Taxes for which
it is responsible under the Tax Separation Agreement, the
Company could be liable for those taxes as a result of being a
member of the Walter Energy consolidated group for the year in
which the spin-off occurred. The Tax Separation Agreement also
provides for payments from Walter Energy in the event that an
additional taxable dividend is required to cure a REIT
disqualification from the determination of a shortfall in the
distribution of non-REIT earnings and profits made immediately
following the spin-off. As with Distribution Taxes, the Company
will be responsible for this dividend if Walter Energy is unable
or unwilling to pay.
Adoption
of Uncertain Tax Position Guidance
On January 1, 2007, as required, the Company adopted the
FASB guidance concerning uncertainty in income taxes. This
guidance clarifies the accounting for income taxes by
prescribing a minimum recognition threshold a tax position is
required to meet before being recognized in the financial
statements. It also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. As a result of adoption, the
Company recognized an increase of $4.4 million in the
liability for unrecognized tax benefits with a corresponding
decrease to retained earnings as of January 1, 2007.
A reconciliation of the beginning and ending balances of the
total amounts of gross unrecognized tax benefits is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Gross unrecognized tax benefits at the beginning of the year
|
|
$
|
8,651
|
|
|
$
|
12,173
|
|
Decreases for tax positions taken in prior years
|
|
|
(980
|
)
|
|
|
(1,072
|
)
|
Increases for tax positions for the current year
|
|
|
|
|
|
|
|
|
Decreases for changes in temporary differences
|
|
|
|
|
|
|
(2,450
|
)
|
|
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits at the end of the year
|
|
$
|
7,671
|
|
|
$
|
8,651
|
|
|
|
|
|
|
|
|
|
|
Accrued interest and penalties
|
|
$
|
6,297
|
|
|
$
|
6,405
|
|
|
|
|
|
|
|
|
|
|
The total amount of net unrecognized tax benefits that, if
recognized, would affect the effective tax rate was
$7.7 million at December 31, 2009. The Company
recognizes interest related to unrecognized tax benefits in
interest expense and penalties in general and administrative
expenses. For the years ended December 31, 2009 and 2008,
interest expense includes $0.2 million and
$1.4 million, respectively, for interest accrued on the
liability for unrecognized tax benefits.
F-41
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Taxable
Income
The Companys earnings and profits, which determine the
taxability of dividends to stockholders, differs from net income
reported for financial reporting purposes, or GAAP income,
generally due to timing differences related to the provision for
loan losses, amortization of yield adjustments and market
discount, among other things. For tax year 2009, an additional
difference relates to the debt discharge income of Hanover that
occurred prior to the Merger.
Taxable income for the consolidated tax group for 2009 includes
the operations of Hanover, the surviving entity for tax purposes
subsequent to the Merger, for the entire calendar year and the
operations of WIM for the period subsequent to the Merger date
(April 17, 2009).
The Companys structure consists of two discrete tax
reporting components: those legal entities that are reported in
the REIT tax filing (the REIT itself and tax disregarded
entities wholly owned by the REIT) and those entities that file
as regular corporations, which are the Companys TRSs.
A reconciliation of GAAP income to taxable income is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2009
|
|
|
|
REIT Group
|
|
|
TRS Group
|
|
|
Total
|
|
|
Reported GAAP income before income taxes
|
|
$
|
31,785
|
|
|
$
|
5,833
|
|
|
$
|
37,618
|
|
Hanover pre-Merger income (loss) before income taxes
|
|
|
38,968
|
|
|
|
(676
|
)
|
|
|
38,292
|
|
WIM pre-Merger income before income taxes
|
|
|
(13,123
|
)
|
|
|
|
|
|
|
(13,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted GAAP income before income taxes
|
|
|
57,630
|
|
|
|
5,157
|
|
|
|
62,787
|
|
Tax adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exclusion of debt discharge income
|
|
|
(43,730
|
)
|
|
|
|
|
|
|
(43,730
|
)
|
Tax amortization of market discount
|
|
|
22,130
|
|
|
|
|
|
|
|
22,130
|
|
GAAP amortization of yield adjustment
|
|
|
(10,303
|
)
|
|
|
|
|
|
|
(10,303
|
)
|
GAAP provision for loan losses
|
|
|
10,154
|
|
|
|
|
|
|
|
10,154
|
|
Disallowed pre-Merger loss
|
|
|
|
|
|
|
676
|
|
|
|
676
|
|
Other
|
|
|
(291
|
)
|
|
|
36
|
|
|
|
(255
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable income before dividends paid deduction
|
|
|
35,590
|
|
|
|
5,869
|
|
|
|
41,459
|
|
Dividends paid deduction
|
|
|
(35,590
|
)
|
|
|
|
|
|
|
(35,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable income
|
|
$
|
|
|
|
$
|
5,869
|
|
|
$
|
5,869
|
|
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In 2009, the largest adjustment to arrive at taxable income was
the result of a transaction that occurred in Hanover prior to
the Merger. Hanover realized, for GAAP purposes, income from the
discharge of indebtedness in an amount of $43.7 million.
This income was excluded from taxable income under the Code
provisions generally referred to as the insolvency
exception to the recognition of debt discharge income.
The most significant recurring difference between the
Companys income before income taxes for GAAP purposes and
the Companys taxable income before the dividends paid
deduction is the tax treatment of market discount.
Market discount is the excess of the stated balance of
residential loan principal over the tax basis of the
Companys residential loans. Because of a certain
transaction that occurred immediately prior to the Merger, the
tax basis of each residential loan in the portfolio was reset to
an amount which was, in the aggregate, approximately
$400.0 million less than stated principal balance and
approximately $219.0 million less than the carrying value
of the portfolio.
F-42
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The dividends paid deduction for qualifying dividends paid to
the Companys stockholders excludes dividend equivalents
paid to holders of the Companys participating share-based
awards due to the treatment of dividend equivalents as
compensation expense for tax purposes.
The market discount results in a substantial increase to taxable
interest income over time, as the discount is required to be
recognized for tax purposes as a yield adjustment as monthly
principal payments are received.
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16.
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Commitments
and Contingencies
|
Securities
Sold with Recourse
In October 1998, Hanover sold 15 adjustable-rate FNMA
certificates and 19 fixed-rate FNMA certificates that the
Company received in a swap for certain adjustable-rate and
fixed-rate mortgage loans. These securities were sold with
recourse. Accordingly, the Company retains credit risk with
respect to the principal amount of these mortgage securities. As
of December 31, 2009, the unpaid principal balance of the
15 remaining mortgage securities was approximately
$1.7 million.
Employment
Agreements
At December 31, 2009, the Company had employment agreements
with its senior officers, with varying terms that provide for,
among other things, base salary, bonus, and
change-in-control
provisions that are subject to the occurrence of certain
triggering events.
Lease
Obligations
The Company leases office space and office equipment under
various operating lease agreements.
Rent expense was $1.5 million for each of the years ended
December 31, 2009, 2008 and 2007. Future minimum payments
under operating leases as of December 31, 2009 are as
follows (in thousands):
|
|
|
|
|
2010
|
|
$
|
1,658
|
|
2011
|
|
|
817
|
|
2012
|
|
|
647
|
|
2013
|
|
|
627
|
|
2014
|
|
|
645
|
|
Thereafter
|
|
|
889
|
|
|
|
|
|
|
Total
|
|
$
|
5,283
|
|
|
|
|
|
|
Income
Tax Exposure
The Company is currently engaged in litigation with regard to
federal income tax disputes; see Note 15 for further
information.
Miscellaneous
Litigation
The Company is a party to a number of lawsuits arising in the
ordinary course of its business. While the results of such
litigation cannot be predicted with certainty, the Company
believes that the final outcome of such litigation will not have
a materially adverse effect on the Companys financial
condition, results of operations or cash flows. See Note 2
for further information.
F-43
WALTER
INVESTMENT MANAGEMENT CORP. AND SUBSIDARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Share-Based
Payment Grants
On December 15, 2009, the Companys Compensation
Committee approved a grant of options and equity awards to
certain of the Companys executive officers, conditional
upon the ratification of the grant of awards by the
Companys Board of Directors, which occurred on
January 4, 2010. See Note 13 for further information.
On January 22, 2010, the Companys Board of Directors
approved a grant of options and equity awards to an executive as
part of his employment agreement. See Note 13 for further
information.
Mid-State
Trust X Trigger Cure
On February 10, 2010, the Company reported to the Trustee
of Mid-State Trust X that the Company had purchased REO at
its par value of approximately $3.0 million. As a result of
this transaction, the loss trigger on Mid-State Trust X has
been cured. Consequently, on February 16, 2010 the Company
received a $4.2 million cash release from this
securitization.
F-44