form10-ka.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K/A
(Amendment
No. 1)
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31, 2009
Commission
file number 1-12616
SUN COMMUNITIES,
INC.
(Exact
Name of Registrant as Specified in its Charter)
Maryland
|
|
38-2730780
|
(State
of Incorporation)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
27777
Franklin Rd.
|
|
|
Suite
200
|
|
|
Southfield,
Michigan
|
|
48034
|
(Address
of Principal Executive Offices)
|
|
(Zip
Code)
|
(Registrant’s
telephone number, including area code)
Common
Stock, Par Value $0.01 per Share
|
New
York Stock Exchange
|
Securities
Registered Pursuant to Section 12(b) of the Act
|
Name
of each exchange on which
registered
|
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
[ ] No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange
Act. Yes[ ] No [X]
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
[ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
[ ] No [ ]
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 Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
(Check one):
Large
accelerated filer [ ]
|
Accelerated
filer [ X]
|
Non-accelerated
filer [ ]
|
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[ ] No
[X]
As of June
30, 2009, the aggregate market value of the Registrant’s stock held by
non-affiliates was approximately $229,522,000 (computed by reference to the
closing sales price of the Registrant’s common stock as of June 30, 2009). For
this computation, the Registrant has excluded the market value of all shares of
common stock reported as beneficially owned by executive officers and directors
of the Registrant; such exclusion shall not be deemed to constitute an admission
that any such person is an affiliate of the Registrant.
Number of
shares of Common Stock, $0.01 par value per share, outstanding as of March 1,
2010: 18,830,191
EXPLANATORY
NOTE
Sun
Communities, Inc. (the “Company”) is filing this Amendment No. 1 to its Annual
Report on Form 10-K for the year ended December 31, 2009 (this “Amended
Report”), which was originally filed with the U.S. Securities and Exchange
Commission (the “SEC”) on March 11, 2010, (the “Original Report”) to include the
financial statements of Origen Financial, Inc. (“Origen”), an unconsolidated
affiliate of the Company which met the conditions of a significant subsidiary
under Rule 1-02(w) of Regulation S-X, whose financial statements were
not available at time of filing of the Original Report. This Amended Report does
not affect any other items in the Original Report.
Amendment
No. 1 to the Report is being filed solely to include the separate financial
statements of Origen as provided in Exhibit 99.1 attached hereto. In
addition, in connection with the filing of this Amendment No. 1 to the
Report and pursuant to Rule 12b-15 of the Securities Exchange Act of 1934,
as amended, the currently dated certifications of the principal executive
officer and principal financial officer of the Company are attached as exhibits
hereto.
Item 15
is the only portion of the Report being supplemented or amended by this Form
10-K/A. Except as described above, this Form 10-K/A does not amend, update or
change the financial statements or any other items or disclosures contained in
the Report and does not otherwise reflect events occurring after the original
filing date of the Report. Accordingly, this Form 10-K/A should be read in
conjunction with the Company’s filings with the SEC subsequent to the filing of
the Report.
Item 15. Exhibits and Financial
Schedules
Item 15
of the Report filed on March 11, 2010, is amended by the addition of the
following exhibits:
Exhibits
Exhibit
Number
|
|
Description
|
23.1
|
|
Consent
of Baker Tilly Virchow Krause, LLP
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
|
99.1
|
|
Financial
Statements of Origen Financial, Inc. for the year ended December 31,
2009
|
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.
|
|
SUN
COMMUNITIES, INC., a Maryland corporation
|
Dated:
March 30, 2010
|
|
By:
|
/s/
Karen J. Dearing
|
|
|
|
Karen
J. Dearing, Executive Vice President,
Chief
Financial Officer, Secretary and
Treasurer
|
EXHIBITS
FILED HEREWITH
Exhibit
Number
|
|
Description
|
23.1
|
|
Consent
of Baker Tilly Virchow Krause, LLP
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
32.1
|
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
|
99.1
|
|
Financial
Statements of Origen Financial, Inc. for the year ended December 31,
2009
|
ex23consent.htm
Exhibit
23.1
CONSENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent
to the inclusion of our report on our audit of the basic financial statements of
Origen Financial Inc. as of and for the period ending December 31, 2009 (the
“Report”) with the amendment to the Annual Report of Sun Communities, Inc., on
Form 10-K/A (as filed with the Securities Exchange Commission March 30, 2010)
and the incorporation by reference of our Report in the registration statements
of Sun Communities, Inc. and its subsidiaries on Forms S-3 (File No. 333-158623,
effective May 14, 2009; File No. 333-149016, effective February 1, 2008); and on
Form S-8 (File No. 333-162216, effective September 30, 2009). Our
Report appears on page 1. That audit was conducted for the purpose of forming an
opinion on the basic financial statements of Origen Financial Inc. taken as a
whole.
/s/
BAKER TILLY VIRCHOW KRAUSE, LLP
BAKER TILLY
VIRCHOW KRAUSE, LLP
Southfield,
Michigan
March 30,
2010
ex31-1.htm
Exhibit
31.1
CERTIFICATIONS
(As
Adopted Under Section 302 of the Sarbanes-Oxley Act of 2002)
I, Gary
A. Shiffman, certify that:
1.
|
I
have reviewed this Amendment No. 1 to the annual report on Form 10-K/A of
Sun Communities, Inc.;
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
|
a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, 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;
|
|
c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation;
and
|
|
d)
|
Disclosed in this report any
change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial
reporting
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent
function):
|
|
a)
|
All
significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
|
|
|
|
Dated: March
30, 2010
|
|
|
/s/
Gary A. Shiffman
|
|
|
|
Gary
A. Shiffman, Chief Executive
Officer
|
ex31-2.htm
Exhibit
31.2
CERTIFICATIONS
(As
Adopted Under Section 302 of the Sarbanes-Oxley Act of 2002)
I, Karen
J. Dearing, certify that:
1. I have
reviewed this Amendment No. 1 to the annual report on Form 10-K/A of Sun
Communities, Inc.;
2.
|
Based
on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
4.
|
The
registrant’s other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
|
a)
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
|
|
b)
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, 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;
|
|
c)
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation;
and
|
|
d)
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial
reporting
|
5.
|
The
registrant’s other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent
function):
|
|
a)
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
b)
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
|
|
|
|
Dated: March
30, 2010
|
|
|
/s/
Karen J. Dearing
|
|
|
|
Karen
J. Dearing, Chief Financial Officer
|
ex32-1.htm
Exhibit
32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350
(Adopted
Under Section 906 of the Sarbanes-Oxley Act of 2002)
The
undersigned officers, Gary A. Shiffman and Karen J. Dearing, hereby certify that
to the best of their knowledge: (a) this Ammendment No. 1 to the Annual Report
on Form 10-K of Sun Communities, Inc., for the year ended December 31, 2009,
fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; and (b) the information contained in this Form
10-Q fairly presents, in all material respects, the financial condition and
results of operations of the issuer.
Signature
|
|
Date
|
|
|
|
/s/
Gary A. Shiffman
|
|
March
30, 2010
|
Gary
A. Shiffman, Chief Executive Officer
|
|
|
|
/s/
Karen J. Dearing
|
|
March
30, 2010
|
Karen
J. Dearing, Chief Financial Officer
|
|
|
|
A signed
original of this written statement required by Section 906 has been provided to
Sun Communities, Inc. and will be retained by Sun Communities, Inc. and
furnished to the Securities and Exchange Commission or its staff upon
request.
ex99-1.htm
ORIGEN
FINANCIAL, INC.
Southfield,
Michigan
CONSOLIDATED
FINANCIAL STATEMENTS
Including
Independent Auditors' Report
December 31, 2009
and 2008
TABLE OF
CONTENTS
|
|
Independent
Auditors' Report
|
1
|
Financial
Statements
|
|
Consolidated
Balance Sheets
|
2
|
Consolidated
Statements of Operations
|
3
|
Consolidated
Statements of Comprehensive Income (Loss)
|
4
|
Consolidated
Statements of Changes in Stockholders' Equity
|
5
|
Consolidated
Statements of Cash Flows
|
6
|
Notes to
Consolidated Financial Statements
|
7 -
44
|
INDEPENDENT
AUDITORS' REPORT
Stockholders and
Board of Directors
Origen Financial,
Inc.
Southfield,
Michigan
We have audited the
accompanying consolidated balance sheet of Origen Financial, Inc. as of December
31, 2009 and the related consolidated statements of operations, comprehensive
income (loss), changes in stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The 2008 financial statements of Origen
Financial, Inc. were audited by other auditors whose report dated March 26,
2008, expressed an unqualified opinion on those statements.
We conducted our
audit in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the
financial statements referred to above present fairly, in all material respects,
the financial position of Origen Financial, Inc. as of December 31, 2009 and the
results of its operations and cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of
America.
/s/
Baker Tilly Virchow Krause, LLP
Baker Tilly
Virchow Krause,
LLP
Southfield,
Michigan
March 15,
2010
CONSOLIDATED
BALANCE SHEETS
(In thousands,
except share data)
December 31, 2009
and 2008
ASSETS
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
3,827 |
|
|
$ |
14,118 |
|
Restricted
cash
|
|
|
10,419 |
|
|
|
12,927 |
|
Investments
|
|
|
8,727 |
|
|
|
9,739 |
|
Loans
receivable, net
|
|
|
808,360 |
|
|
|
911,947 |
|
Furniture,
fixtures and equipment, net
|
|
|
197 |
|
|
|
401 |
|
Repossessed
houses, net
|
|
|
7,918 |
|
|
|
4,543 |
|
Other
assets
|
|
|
6,834 |
|
|
|
11,858 |
|
TOTAL
ASSETS
|
|
$ |
846,282 |
|
|
$ |
965,533 |
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
LIABILITIES
|
|
|
|
|
|
|
Securitization
financing
|
|
$ |
689,762 |
|
|
$ |
775,120 |
|
Notes payable
- related party
|
|
|
15,638 |
|
|
|
29,351 |
|
Derivative
liabilities
|
|
|
33,065 |
|
|
|
57,887 |
|
Other
liabilities
|
|
|
13,711 |
|
|
|
24,980 |
|
Total
Liabilities
|
|
|
752,176 |
|
|
|
887,338 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value per share
|
|
|
125 |
|
|
|
125 |
|
10,000,000 shares authorized
|
|
|
|
|
|
|
|
|
125 shares issued and outstanding
|
|
|
|
|
|
|
|
|
$1,000 per share liquidation preference
|
|
|
|
|
|
|
|
|
Common stock,
$.01 par value per share
|
|
|
259 |
|
|
|
259 |
|
125,000,000 shares authorized
|
|
|
|
|
|
|
|
|
25,926,149 shares issued and outstanding
|
|
|
|
|
|
|
|
|
Additional
paid in capital
|
|
|
225,542 |
|
|
|
225,542 |
|
Accumulated
other comprehensive loss
|
|
|
(32,834 |
) |
|
|
(57,328 |
) |
Distributions
in excess of earnings
|
|
|
(98,986 |
) |
|
|
(90,403 |
) |
Total
Stockholders' Equity
|
|
|
94,106 |
|
|
|
78,195 |
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$ |
846,282 |
|
|
$ |
965,533 |
|
See accompanying
notes to financial statements and independent auditors' report.
Page 2
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In thousands,
except share data)
Years Ended
December 31, 2009 and 2008
|
|
2009
|
|
|
2008
|
|
INTEREST
INCOME
|
|
|
|
|
|
|
Interest
income
|
|
$ |
82,159 |
|
|
$ |
90,827 |
|
Interest
expense
|
|
|
(50,706 |
) |
|
|
(60,732 |
) |
Net Interest
Income Before Loan Losses and Impairments
|
|
|
31,453 |
|
|
|
30,095 |
|
|
|
|
21,112 |
|
|
|
17,745 |
|
Provision for
loan losses
|
Impairment of
purchased loan pool
|
|
|
644 |
|
|
|
749 |
|
Net Interest
Income After Loan Losses and Impairment
|
|
|
9,697 |
|
|
|
11,601 |
|
NON-INTEREST
INCOME (LOSS)
|
|
|
|
|
|
|
|
|
Servicing
Income
|
|
|
- |
|
|
|
1,366 |
|
Origination
Income
|
|
|
- |
|
|
|
1,520 |
|
Loss on loan
sales
|
|
|
- |
|
|
|
(22,377 |
) |
Other
|
|
|
2,465 |
|
|
|
(3,239 |
) |
Total
Non-Interest Income (Loss)
|
|
|
2,465 |
|
|
|
(22,730 |
) |
NON-INTEREST
EXPENSES
|
|
|
|
|
|
|
|
|
Personnel
|
|
|
4,319 |
|
|
|
18,936 |
|
Loan
origination and servicing
|
|
|
11,537 |
|
|
|
7,336 |
|
Investment
impairment
|
|
|
1,002 |
|
|
|
32 |
|
State
business taxes
|
|
|
34 |
|
|
|
475 |
|
Other
operating
|
|
|
3,860 |
|
|
|
6,487 |
|
Total
Non-Interest Expense
|
|
|
20,752 |
|
|
|
33,266 |
|
Loss
From Continuing Operations Before Income Taxes
|
|
|
(8,590 |
) |
|
|
(44,395 |
) |
INCOME
TAX EXPENSE
|
|
|
152 |
|
|
|
61 |
|
Loss
From Continuing Operations
|
|
|
(8,742 |
) |
|
|
(44,456 |
) |
INCOME
FROM DISCONTINUED OPERATIONS, NET of TAX
|
|
|
175 |
|
|
|
9,092 |
|
NET
LOSS
|
|
$ |
(8,567 |
) |
|
$ |
(35,364 |
) |
Weighted
average common shares outstanding, basic
|
|
|
25,926,149 |
|
|
|
25,689,639 |
|
Weighted
average common shares outstanding, diluted
|
|
|
25,926,149 |
|
|
|
25,689,639 |
|
Basic and
fully diluted (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
Loss from
continuing operations
|
|
|
(0.33 |
) |
|
|
(1.73 |
) |
Income from
discontinued operations
|
|
|
- |
|
|
|
0.35 |
|
NET LOSS –
per common share
|
|
|
(0.33 |
) |
|
|
(1.38 |
) |
See accompanying
notes to financial statements and independent auditors' report.
Page
3
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In
thousands)
Years Ended
December 31, 2009 and 2008
|
|
2009
|
|
|
2008
|
|
Net
loss
|
|
|
(8,567 |
) |
|
|
(35,364 |
) |
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
Net
unrealized gains (losses) on interest rate swaps, designated as cash flow
hedges
|
|
|
24,601 |
|
|
|
(41,421 |
) |
Reclassification
adjustment for net realized (gains) losses included in net income
(loss)
|
|
|
(107 |
) |
|
|
4,105 |
|
Total Other
Comprehensive Income (Loss)
|
|
|
24,494 |
|
|
|
(37,316 |
) |
COMPREHENSIVE
INCOME (LOSS)
|
|
|
15,927 |
|
|
|
(72,680 |
) |
See accompanying
notes to financial statements and independent auditors' report.
Page
4
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended
December 31, 2009 and 2008
(In thousands,
except share data)
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid
in
Capital
|
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
|
Distributions
In
Excess of
Earnings
|
|
|
Total
Stockholders'
Equity
|
|
BALANCES,
January 1, 2008
|
|
$ |
125 |
|
|
$ |
260 |
|
|
$ |
221,842 |
|
|
$ |
(20,012 |
) |
|
$ |
(53,830 |
) |
|
$ |
148,385 |
|
Retirement of
non-
|
|
|
- |
|
|
|
(1 |
) |
|
|
(122 |
) |
|
|
- |
|
|
|
- |
|
|
|
(123 |
) |
vested
stock
|
Issuance of
common stock purchase warrants
|
|
|
- |
|
|
|
- |
|
|
|
858 |
|
|
|
- |
|
|
|
- |
|
|
|
858 |
|
Share based
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
2,964 |
|
|
|
- |
|
|
|
- |
|
|
|
2,964 |
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(35,364 |
) |
|
|
(35,364 |
) |
Other
comprehensive loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(37,316 |
) |
|
|
- |
|
|
|
(37,316 |
) |
Cash
distribution paid ($0.05 per common share)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,209 |
) |
|
|
(1,209 |
) |
BALANCES,
December 31, 2008
|
|
|
125 |
|
|
|
259 |
|
|
|
225,542 |
|
|
|
(57,328 |
) |
|
|
(90,403 |
) |
|
|
78,195 |
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(8,567 |
) |
|
|
(8,567 |
) |
Net
loss
|
Other
comprehensive income
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
24,494 |
|
|
|
- |
|
|
|
24,494 |
|
Cash
distribution paid ($0.00 per common share)
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(16 |
) |
|
|
(16 |
) |
BALANCES,
December 31, 2009
|
|
$ |
125 |
|
|
$ |
259 |
|
|
$ |
225,542 |
|
|
$ |
(32,834 |
) |
|
$ |
(98,986 |
) |
|
$ |
94,106 |
|
See accompanying
notes to financial statements and independent auditors' report.
Page
5
STATEMENTS OF CASH
FLOWS
Years Ended
December 31, 2009 and 2008
|
|
2009
|
|
|
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(8,567 |
) |
|
$ |
(35,364 |
) |
Adjustments
to reconcile to net cash flows from operating activities
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
21,112 |
|
|
|
17,745 |
|
Investment impairment
|
|
|
1,002 |
|
|
|
32 |
|
Impairment of purchased loan pool
|
|
|
644 |
|
|
|
749 |
|
Depreciation and amortization
|
|
|
2,163 |
|
|
|
5,755 |
|
Compensation expense recognized under share based compensation
plans
|
|
|
- |
|
|
|
2,963 |
|
Proceeds from sale of loans
|
|
|
- |
|
|
|
162,336 |
|
Loss on loan sales
|
|
|
- |
|
|
|
22,377 |
|
Gain on sale of servicing rights
|
|
|
- |
|
|
|
(6,523 |
) |
Gain on sale of third party origination platform
|
|
|
- |
|
|
|
(551 |
) |
Decrease in servicing assets
|
|
|
- |
|
|
|
1,079 |
|
Decrease (Increase) in other assets
|
|
|
23,028 |
|
|
|
(3,483 |
) |
(Decrease) increase in other liabilities
|
|
|
(36,090 |
) |
|
|
2,725 |
|
Net Cash Flows from Operating Activities
|
|
|
3,292 |
|
|
|
169,840 |
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Decrease in
restricted cash
|
|
|
2,508 |
|
|
|
3,363 |
|
Proceeds from
sale of investments
|
|
|
- |
|
|
|
22,400 |
|
Proceeds from
sale of servicing operation assets
|
|
|
- |
|
|
|
37,047 |
|
Proceeds from
sale of origination and insurance operation assets
|
|
|
- |
|
|
|
1,000 |
|
Origination
and purchase of loans
|
|
|
- |
|
|
|
(45,266 |
) |
Principal
collections on loans
|
|
|
71,877 |
|
|
|
94,684 |
|
Proceeds from
sale of repossessed houses
|
|
|
11,487 |
|
|
|
10,763 |
|
Capital
expenditures
|
|
|
27 |
|
|
|
409 |
|
Net Cash
Flows from Investing Activities
|
|
|
85,899 |
|
|
|
124,400 |
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Retirement of
common stock
|
|
|
- |
|
|
|
(123 |
) |
Dividends
paid
|
|
|
(16 |
) |
|
|
(1,209 |
) |
Payment upon
termination of hedging transaction
|
|
|
- |
|
|
|
(4,197 |
) |
Repayment of
securitization financing
|
|
|
(85,466 |
) |
|
|
(109,659 |
) |
Proceeds from
advances under repurchase agreements
|
|
|
- |
|
|
|
1,888 |
|
Repayment of
advances under repurchase agreements
|
|
|
- |
|
|
|
(19,541 |
) |
Proceeds from
warehouse financing
|
|
|
- |
|
|
|
30,800 |
|
Repayment of
warehouse financing
|
|
|
- |
|
|
|
(203,872 |
) |
Proceeds from
note payable - related party
|
|
|
- |
|
|
|
46,000 |
|
Repayment of
note payable - related party
|
|
|
(14,000 |
) |
|
|
(31,000 |
) |
Net Cash
Flows from Financing Activities
|
|
|
(99,482 |
) |
|
|
(290,913 |
) |
Net
Change in Cash and Cash Equivalents
|
|
|
(10,291 |
) |
|
|
3,327 |
|
CASH
AND CASH EQUIVALENTS - Beginning of Year
|
|
|
14,118 |
|
|
|
10,791 |
|
CASH
AND CASH EQUIVALENTS - END OF YEAR
|
|
$ |
3,827 |
|
|
$ |
14,118 |
|
Supplemental
cash flow disclosures
|
|
|
|
|
|
|
|
|
Cash paid for
interest
|
|
$ |
49,647 |
|
|
$ |
59,583 |
|
Cash paid for
income taxes
|
|
|
68 |
|
|
|
100 |
|
Noncash
financing activities
|
|
|
|
|
|
|
|
|
Loans
transferred to repossessed assets
|
|
$ |
37,648 |
|
|
$ |
23,699 |
|
See accompanying
notes to financial statements and independent auditors' report.
Page
6
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
1 - Organization and Summary of Significant Accounting
Policies
|
Company
Formation and Nature of Operations
Origen Financial,
Inc., a Delaware corporation (the “Company”), was incorporated on July 31, 2003.
On October 8, 2003, the Company completed a private placement of $150 million of
its common stock to certain institutional and accredited investors. In
connection with and as a condition to the October 2003 private placement, the
Company acquired all of the equity interests of Origen Financial L.L.C. in a
transaction accounted for as a purchase. As part of these transactions the
Company took steps to qualify Origen Financial, Inc. as a real estate investment
trust (“REIT”) commencing with its taxable year ended December 31,
2003.
Through March 2008
the Company’s business was to originate, purchase and service manufactured
housing loans. The Company’s manufactured housing loans are amortizing loans
that range in amounts from $10,000 to $250,000 and have terms of seven to thirty
years and are located throughout the United States. The Company generally
securitized or placed the manufactured housing loans it originated with
institutional investors and retained the right to service the loans on behalf of
those investors.
In March 2008,
because of the lack of a reliable source for a loan warehouse facility and the
unavailability of a profitable exit in the securitization market, the Company
ceased originating loans for its own account and sold its portfolio of
unsecuritized loans at a substantial loss. The proceeds from the loan sale were
used to pay off its existing loan warehouse line of credit, which was not
renewed.
In April 2008, the
Company completed a secured financing transaction with a related party and used
the proceeds, combined with other funds, to pay off the outstanding balance of a
supplemental advance credit facility which would have expired in June
2008.
At the Company’s
annual stockholders meeting on June 25, 2008, the Company’s stockholders
approved an Asset Disposition and Management Plan. Pursuant to this plan, the
company executed a number of transactions and took several actions, as
follow:
·
|
On June 30,
2008, the Company completed a transaction for the sale of its loan
servicing platform assets and ceased all loan servicing
operations.
|
·
|
In July 2008,
the Company completed the sale of certain assets of its loan origination
and insurance business and used the proceeds to reduce its related party
debt.
|
On January 14,
2009, the Company completed the sale of all the issued and outstanding stock of
Origen Servicing, Inc ("Origen Servicing”) to Prime RF Holdings LLC. The
purchase price was $175,000 and proceeds from the sale were used to reduce the
Company’s related party debt. Origen Servicing was a wholly owned subsidiary of
the Company that prior to the sale of substantially all of Origen Servicing’s
assets to Green Tree in July 2008, conducted all of the Company’s servicing
operations.
Currently, most of
the Company’s activities are conducted through Origen Financial L.L.C., which is
a wholly owned subsidiary. After the sale of the servicing and origination
assets as described above, the Company’s business essentially consists of
actively managing its residual interests in its securitized loan
portfolios.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
1 - Organization and Summary of Significant Accounting Policies
(cont.)
|
Basis
of Financial Statement Presentation
These consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”). The accompanying
consolidated financial statements include the financial position, results of
operations and cash flows of the Company, its wholly owned qualified REIT and
taxable REIT subsidiaries. All intercompany amounts have been eliminated.
Certain amounts from prior periods have been reclassified in order to reflect
the servicing platform and insurance business assets as discontinued operations.
(See Note 20 — “Discontinued Operations” for further discussions.)
Use
of Estimates in the Preparation of Financial Statements
The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Included in these financial statements are the
following significant estimates: allowance for loan losses, valuation of
repossessed homes, valuation of derivatives, and valuation of investments in
loan pools and debt securities acquired with evidence of deterioration of credit
quality. Actual results could materially differ from those
estimates.
Cash
and Cash Equivalents
Cash and cash
equivalents represent short-term highly liquid investments with original
maturities of three months or less and include cash and interest bearing
deposits at banks. The Company has restricted cash related to securitized loans
that are held in trust. The restricted cash represents principal and interest
payments on manufactured housing loans that will be remitted to securitized
trusts for distribution to bond holders. Cash balances may be in excess of
amounts insured by the Federal Deposit Insurance Corporation.
Investments
Except for
investments in debt securities acquired with evidence of deterioration of credit
quality since origination, which are accounted for as described below,
investments in debt securities and certain securities with readily determinable
fair values are accounted for under Accounting Standards Codification (ASC)
Topic 320, "Investments - Debt and Equity Securities." The investments are
classified as held-to-maturity. Investments classified as
held-to-maturity are carried on the Company’s balance sheet at amortized cost.
All investments are regularly measured for impairment. Management uses its
judgment to determine whether an investment has sustained an
other-than-temporary decline in value. If management determines that an
investment has sustained an other-than-temporary decline in its value, the
investment is written down to its fair value by a charge to earnings, and a new
cost basis is established for the investment. An evaluation of an
other-than-temporary decline is dependent on the specific facts and
circumstances. Factors considered in determining whether an other-than-temporary
decline in value has occurred include: the estimated fair value of the
investment in relation to its cost basis; the financial condition of the related
entity; and the intent and ability to retain the investment for a sufficient
period of time to allow for recovery in the fair value of the
investment.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
1 - Organization and Summary of Significant Accounting Policies
(cont.)
|
Loan
Pools and Debt Securities Acquired with Evidence of Deterioration of Credit
Quality
The Company
accounts for its investments in loan pools and debt securities acquired with
evidence of deterioration of credit quality at the time of acquisition in
accordance with ASC Topic 310, "Receivables, Loans, and Debt Securities Acquired
with Deteriorated Credit Quality." The carrying values of such purchased loan
pools and debt securities were approximately $17.4 million and $2.3 million,
respectively, at December 31, 2009 and $20.3 million and $3.4 million,
respectively, at December 31, 2008, and are included in loans receivable and
investments, respectively, in the consolidated balance sheets.
Under the
provisions of ASC Topic 310, each static pool of loans and debt securities is
statistically modeled to determine its projected cash flows. The Company
considers historical cash collections for loan pools and debt securities with
similar characteristics as well as expected prepayments and estimates the amount
and timing of undiscounted expected principal, interest and other cash flows for
each pool of loans and debt securities. An internal rate of return is calculated
for each static pool of loans and debt securities based on the projected cash
flows and applied to the balance of the static pool. The resulting revenue
recognized is based on the internal rate of return applied to the remaining
balance of each static pool of loans and debt securities. Each static pool is
analyzed at least quarterly to assess the actual performance compared to the
expected performance. To the extent there are differences in actual performance
versus expected performance, the internal rate of return is adjusted
prospectively to reflect the revised estimate of cash flows over the remaining
life of the static pool. Beginning January 2005, if revised cash flow estimates
are less than the original estimates, ASC Topic 310 requires that the internal
rate of return remain unchanged and an immediate impairment be recognized. For
loans and debt securities acquired with evidence of deterioration of credit
quality, if cash flow estimates increase subsequent to recording an impairment,
ASC Topic 310 requires reversal of the previously recognized impairment before
any increases to the internal rate of return are made. For any remaining
increases in estimated future cash flows for loan pools or debt securities
acquired with evidence of deterioration of credit quality, the Company adjusts
the amount of accretable yield recognized on a prospective basis over the
remaining life of the loan pool or debt security.
Application of the
interest method of accounting requires the use of estimates to calculate a
projected internal rate of return for each pool. These estimates are based on
historical cash collections. If future cash collections are materially different
in amount or timing than projected cash collections, earnings could be affected,
either positively or negatively. Higher collection amounts or cash collections
that occur sooner than projected will have a favorable impact on yields and
revenues. Lower collection amounts or cash collections that occur later than
projected will have an unfavorable impact and result in an immediate impairment
being recognized.
Loans
Receivable
Loans receivable
consist of manufactured housing loans under contracts collateralized by the
borrowers’ manufactured houses and in some instances, related land. Generally,
loans receivable are classified as held for investment and are carried at
amortized cost, except for loans purchased with evidence of deterioration of
credit quality since origination, which are accounted for as described above,
under “Loan Pools and Debt Securities Acquired with Evidence of Deterioration of
Credit Quality.” Interest on loans is credited to income when earned. Loans held
for investment include accrued interest and are presented net of deferred loan
origination fees and costs and an allowance for estimated loan losses. All of
the Company’s loans receivable were classified as held for investment at
December 31, 2009 and 2008.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
1 - Organization and Summary of Significant Accounting Policies
(cont.)
|
Allowance
for Loan Losses
The allowance for
possible loan losses is maintained at a level believed adequate by management to
absorb losses on loans in the Company’s loan portfolio. In accordance with
Statement of Financial Accounting Standards No. 5, “Accounting for
Contingencies,” the Company provides an allowance for loan losses when it is
probable that a loan asset has been impaired and the amount of such loss can be
reasonably estimated. The Company’s loan portfolio is comprised of homogenous
manufactured housing loans with average loan balances of approximately $46,000
at December 31, 2009 and $47,000 at December 31, 2008. The allowance for loan
losses is developed at a portfolio level and the amount of the allowance is
determined by establishing a calculated range of probable losses. A range of
probable losses is calculated by applying historical loss rate factors to the
loan portfolio on a stratified basis using the Company’s current portfolio
performance and delinquency levels (0-30 days, 31-60 days, 61-90 days and more
than 90 days delinquent) and by the extrapolation of probable loan impairment
based on the correlation of historical losses by vintage year of origination.
The Company makes a determination of the best estimate within the calculated
range of loan losses. Such determination may include, in addition to historical
charge off experience, the impact of changed circumstances on current impairment
of the loan portfolio. The accrual of interest is discontinued when a loan
becomes more than 90 days past due. Cash receipts on impaired loans are applied
first to accrued interest and then to principal. Impaired loans, or portions
thereof, are charged off when deemed uncollectible. The allowance for loan
losses represents an unallocated allowance. There are no elements of the
allowance allocated to specific individual loans or to impaired
loans.
Servicing
Rights
On July 1, 2008,
the Company completed the sale of its servicing platform assets to Green Tree
and ceased servicing loans. Prior to that the Company adopted ASC Topic 860,
"Servicing Assets and Liabilities."
Furniture,
Fixtures and Equipment
Furniture, fixtures
and equipment are stated at cost less accumulated depreciation. Depreciation is
recognized on a straight-line basis over the estimated useful lives of the
assets as follows:
Furniture and
fixtures
|
7
years
|
Computers
|
5
years
|
Software
|
3
years
|
Leasehold
improvements
|
Shorter of
useful life or lease term
|
Repossessed
Houses
Manufactured houses
acquired through foreclosure or similar proceedings are recorded at the lesser
of the related loan balance or the estimated fair value of the
house.
Other
Assets
Other assets are
comprised of prepaid expenses, deferred financing costs and other miscellaneous
receivables. Prepaid expenses are amortized over the expected service period.
Deferred financing costs are capitalized and amortized over the life of the
corresponding obligation.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
1 - Organization and Summary of Significant Accounting Policies
(cont.)
|
Derivative
Instruments and Hedging Activities
Derivative
instruments are carried at fair value on the consolidated balance sheets. The
accounting for changes in the fair value (i.e., gains or losses) of a derivative
instrument is determined by whether it has been designated and qualifies as part
of a hedging relationship. For those derivative instruments that are designated
and qualify as hedging instruments, the Company designates the hedging
instrument, based upon the exposure being hedged. For derivative instruments
that are designated and qualify as cash flow hedges (i.e., hedging the exposure
to variability in expected future cash flows that is attributable to a
particular risk), the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive income and
reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. The remaining gain or loss on the derivative
instrument in excess of the cumulative change in the present value of future
cash flows of the hedged item (i.e., the ineffective portion), if any, is
recognized in current earnings during the period of change. For derivative
instruments not designated as hedging instruments, the gain or loss is
recognized in current earnings during the period of change.
For derivatives
designated as hedging instruments at inception, the Company performs an analysis
to assess effectiveness. Each derivative designated as a hedge has
been and is expected to be highly effective in offsetting changes in cash flows
of the hedged item. All components of each derivative instrument's gain or loss
are included in the assessment of hedge effectiveness. Net hedge ineffectiveness
is recorded in "interest expense" on the consolidated statements of
income.
On January 1, 2009,
the Company adopted new guidance relating to disclosures about derivative
instruments and hedging activities. This new guidance requires entities to
provide greater transparency about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for, and (c) how derivative instruments and related hedged items
affect an entity's financial position, results of operations and cash flows. To
meet those objectives, the guidance requires (1) qualitative disclosures about
objectives for using derivatives by primary underlying risk exposure (e.g.,
interest rate, credit or foreign exchange rate) and by purpose or strategy (fair
value hedge, cash flow hedge, net investment hedge and non-hedges), (2)
information about the volume of derivative activity in a flexible format that
the preparer believes is the most relevant and practicable, (3) tabular
disclosures about balance sheet location and gross fair value amounts of
derivative instruments, income statement and other comprehensive income location
of gain and loss amounts on derivative instruments by type of contract, and (4)
disclosures about credit-risk-related contingent features in derivative
agreements. See footnote 9 for additional information.
Securitizations
Structured as Financings
In prior years, the
Company engaged in securitizations of its manufactured housing loan receivables.
The Company structured all loan securitizations occurring since 2003 as
financings for accounting purposes under ASC Topic 860, "Transfers and
Servicing." When a loan securitization is structured as a financing, the
financed asset remains on the Company’s books along with the recorded liability
that evidences the financing, typically bonds. Income from both the loan
interest spread and the servicing fees received on the securitized loans are
recorded into income as earned. An allowance for credit losses is maintained on
the loans. Deferred debt issuance costs and discount related to the bonds are
amortized on a level yield basis over the estimated life of the
bonds.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
1 - Organization and Summary of Significant Accounting Policies
(cont.)
|
Servicing
Income Revenue Recognition
On July 1, 2008,
the Company completed the sale of its servicing platform assets to Green Tree
and ceased servicing loans. Income on loan servicing was generally recorded as
payments were collected and were based on a percentage of the principal balance
of the respective loans. Loan servicing expenses were charged to operations when
incurred. The contractual servicing fee was recorded as a component of interest
income on the consolidated statements of operation for loans owned by the
Company, and it was recorded as servicing income on the consolidated statements
of operations for loans serviced for others.
Share-Based
Compensation
The Company
utilizes accounting guidance within ASC Topic 718, "Compensation-Stock
Compensation," to account for its stock based compensation. This accounting
guidance requires all share-based payments to employees, including grants of
employee stock options, to be recognized as expense in the statement of
operations based on their fair values. The amount of compensation is
measured at the fair value of the options when granted and this cost is expensed
over the required service period, which is normally the vesting period of the
options. This accounting guidance applies to awards granted or
modified after January 1, 2006 or any unvested awards outstanding prior to that
date.
Advertising
Expense
Advertising costs
are expensed as incurred. Advertising expenses were approximately $0 and
$25,000, for the years ended December 31, 2009 and 2008,
respectively.
Income
Taxes
The Company has
elected to be taxed as a REIT as defined under Section 856(c)(1) of the Internal
Revenue Code of 1986, as amended (the “Code”). In order for the Company to
qualify as a REIT, at least ninety-five percent (95%) of the Company’s gross
income in any year must be derived from qualifying sources. In addition, a REIT
must distribute at least ninety percent (90%) of its REIT taxable net income to
its stockholders.
Qualification as a
REIT involves the satisfaction of numerous requirements (some on an annual and
quarterly basis) established under highly technical and complex Code provisions
for which there are only limited judicial or administrative interpretations, and
involves the determination of various factual matters and circumstances not
entirely within the Company’s control. In addition, frequent changes occur in
the area of REIT taxation, which requires the Company continually to monitor its
tax status.
As a REIT, the
Company generally will not be subject to U.S. federal income taxes at the
corporate level on the ordinary taxable income it distributes to its
stockholders as dividends. If the Company fails to qualify as a REIT in any
taxable year, its taxable income will be subject to U.S. federal income tax at
regular corporate rates (including any applicable alternative minimum tax). Even
if the Company qualifies as a REIT, it may be subject to certain state and local
income taxes and to U.S. federal income and excise taxes on its undistributed
taxable income. In addition, taxable income from non-REIT activities managed
through taxable REIT subsidiaries, if any, is subject to federal and state
income taxes. An income tax allocation is required to be estimated on the
Company’s taxable income generated by its taxable REIT subsidiaries. Deferred
tax components arise based upon temporary differences between the book and tax
basis of items such as the allowance for loan losses, accumulated depreciation,
share based compensation and goodwill.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
1 - Organization and Summary of Significant Accounting Policies
(cont.)
|
The provision for
income taxes is based on amounts reported in the consolidated statements of
income and includes deferred income taxes on temporary differences between the
income tax basis and financial accounting basis of assets and liabilities.
Deferred tax assets are evaluated for realization based on available evidence of
loss carry back capacity, future reversals of existing taxable temporary
differences, and assumptions made regarding future events. A valuation allowance
is provided when it is more-likely-
than-not that some
portion of the deferred tax asset will not be realized. The provision for income
taxes assigned to discontinued operations is based on statutory rates, adjusted
for permanent differences generated by those operations.
The Company
classifies interest and penalties on income tax liabilities in income tax
expense on the consolidated statements of income.
Fair
Value of Financial Instruments
Fair values
of financial instruments are based upon estimates at the balance sheet date of
the price that would be received in an orderly transaction between market
participants. The Company uses quoted market prices and observable inputs when
available. However, these inputs are often not available in the markets for many
of the Company’s assets. In these cases management typically performs discounted
cash flow analysis using its best estimates of key assumptions such as credit
losses, prepayment speeds and discount rates based on both historical experience
and its interpretation of how comparable market data in more active markets
should be utilized. These estimates are subjective in nature and involve
uncertainties and significant judgment in the interpretation of current market
data. Therefore, the fair values presented may differ from amounts the Company
could realize or settle currently.
Recent
Accounting Pronouncements
Accounting
Standards Update No. 2009-16 - Transfers and Servicing (Topic 860)
During June 2009,
the FASB amended the accounting and disclosure standards related to transfers of
financial assets. The amendment eliminates the exception from
consolidation for qualifying special purpose entities and limits the
circumstances in which a financial asset, or portion of a financial asset,
should be derecognized when the transferor has not transferred the entire
original financial asset to an entity that is not consolidated with the
transferor in the financial statements being presented and/or when the
transferor has continuing involvement with the transferred financial
asset. The amendment also requires certain additional
disclosures. The amendment is effective for fiscal years beginning
after November 15, 2009. The Company does not believe that the
adoption of the amendment will have a material effect on its results of
operations, financial position or cash flows.
Accounting
Standards Update No. 2009-17 - Consolidation (Topic 810)
During June 2009,
the FASB amended the accounting and disclosure standards related to the
consolidation of variable interest entities (“VIEs”). The amendment
changes how an enterprise determines when an entity that is insufficiently
capitalized or is not controlled through voting rights should be
consolidated. The determination of whether an enterprise is required
to consolidate an entity is based on, among other things, the entity’s purpose
and design, and the enterprise’s ability to direct the activities of the entity
that most significantly impact the entity’s economic performance. The
amendment requires an enterprise to perform a qualitative analysis when
determining whether or not it is required to consolidate a VIE, to continually
reassess that determination, and eliminates the exception from applying the
standard to qualifying special purpose entities. Additionally, the
amendment requires enhanced disclosures about: an enterprise’s involvement with
VIEs, any significant changes in an enterprise’s risk exposure due to its
involvement with VIEs, how an enterprise’s involvement with VIEs impacts its
financial statements, and any significant judgments and assumptions that an
enterprise used to determine whether or not to consolidate a VIE. The
amendment is effective for fiscal years beginning after November 15, 2009. The
Company is currently assessing the effect that the amendment will have on its
results of operations, financial position and cash flows.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
1 - Organization and Summary of Significant Accounting Policies
(cont.)
|
ASU No.
2009-05—Fair Value Measurements and Disclosures (Topic 820)—Measuring
Liabilities at Fair Value
During August 2009,
the FASB issued Accounting Standards Update (ASU) No. 2009-05, “Fair Value
Measurements and Disclosures (Topic 820)—Measuring Liabilities at Fair
Value.” ASU No. 2009-05 amends the accounting standards related to
the fair value measurement of liabilities. The amendment clarifies
that in circumstances in which a quoted price in an active market for the
identical liability is not available, a reporting entity is required to measure
fair value using one or more of the following techniques:
1. A
valuation technique that uses:
a. The
quoted price of the identical liability when traded as an asset.
b. Quoted
prices for similar liabilities or similar liabilities when traded as
assets.
2. Another
valuation technique that is consistent with the principles of the fair value
accounting standard, such as the income or market approaches.
The amendment
clarifies that when estimating the fair value of a liability, a reporting entity
is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of the
liability. The amendment also clarifies that both a quoted price in
an active market for the identical liability at the measurement date and the
quoted price for the identical liability when traded as an asset in an active
market when no adjustments to the quoted price of the asset are required are
level 1 fair value measurements.
Reclassifications
Certain amounts for
prior periods have been reclassified to conform with current financial statement
presentation.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
2 - Earnings Per Share
|
Basic earnings per
share is computed by dividing net loss by the weighted average number of common
shares outstanding during the period. Diluted earnings per share incorporates
the potential dilutive effect of common stock equivalents outstanding on an
average basis during the period. Potential dilutive common shares primarily
consist of employee stock options, non-vested common stock awards, stock
purchase warrants and convertible notes. The following table presents a
reconciliation of basic and diluted loss per share for the years ended December
31, 2009 and 2008 (in thousands, except share and per share data):
|
|
2009
|
|
|
2008
|
|
Numerator:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(8,567 |
) |
|
$ |
(35,364 |
) |
Preferred
stock dividends
|
|
|
(16 |
) |
|
|
(16 |
) |
Loss
available to common shareholders, basic
|
|
$ |
(8,583 |
) |
|
$ |
(35,380 |
) |
Loss
available to common shareholders, diluted
|
|
$ |
(8,583 |
) |
|
$ |
(35,380 |
) |
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted
average basic common shares outstanding
|
|
|
25,926,149 |
|
|
|
25,689,639 |
|
Effect of
dilutive securities: Incremental share - non-vested stock
awards
|
|
|
- |
|
|
|
- |
|
Weighted
average diluted common shares outstanding
|
|
|
25,926,149 |
|
|
|
25,689,639 |
|
Net loss for
common stockholders per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.33 |
) |
|
$ |
(1.38 |
) |
Diluted
|
|
$ |
(0.33 |
) |
|
$ |
(1.38 |
) |
The weighted
average anti-dilutive outstanding stock purchase warrants that were excluded
from the computation of diluted loss per share for the years ended December 31,
2009 and 2008 were 2,600,000 and 1,903,825, respectively. The stock
purchase warrants are considered anti-dilutive if assumed proceeds per share
exceed the average market price of the Company’s common stock during the
relevant period or if the Company realized a net loss for the
period. Assumed proceeds include proceeds from the exercise of the
stock purchase warrants.
Anti-dilutive
outstanding common stock options that were excluded from the computation of
diluted loss per share for the years ended December 31, 2009 and 2008 were
135,000 and 183,157, respectively. The common stock options are considered
anti-dilutive if assumed proceeds per share exceed the average market price of
the Company’s common stock during the relevant period or if the Company realized
a net loss for the period. Assumed proceeds include proceeds from the exercise
of the common stock options, as well as unearned compensation related to the
common stock options.
Anti-dilutive
outstanding convertible debt shares that were excluded from the computation of
diluted loss per share for the years ended December 31, 2009 and 2008 were 0 and
286,728, respectively. The convertible debt shares are considered anti-dilutive
for any period where interest expense per common share obtainable on conversion
exceeds basic earnings per share.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
The Company follows
the provisions of ASC Topics 320 and 310 in reporting its investments. The
investments are carried on the Company’s balance sheet at $8.7 million and $9.7
million at December 31, 2009 and 2008, respectively.
At December 31,
2009 and 2008 the Company’s investments are accounted for under the provisions
of ASC Topic 320 - “Investments Debt and Equity Securites” and classified as
held-to-maturity and were carried on the Company’s balance sheet at an amortized
cost of $6.4 million and $6.3 million, respectively. Such investments consist of
an asset backed security with a principal amount at December 31, 2009 and 2008
of $6.8 million and $6.8 million, respectively. The investment is collateralized
by manufactured housing loans and has a contractual maturity date of December
28, 2033. As prescribed by the provisions of ASC Topic 320, as of December 31,
2009 and 2008 the Company had both the intent and ability to hold the investment
to maturity. The investment will not be sold in response to changing market
conditions, changing fund sources or terms, changing availability and yields on
alternative investments or other asset liability management reasons. The
investment is regularly measured for impairment through the use of a discounted
cash flow analysis based on the historical performance of the underlying loans
that collateralize the investment. The cash flow analysis evaluates voluntary
prepayment speeds, default assumptions, loss severity and discount rates. If it
is determined that there has been a decline in fair value below amortized cost
and the decline is other-than-temporary, the cost basis of the investment is
written down to fair value as a new cost basis and the amount of the write-down
is included in earnings. No impairment was recorded relating to investments
classified as held-to-maturity during the years ended December 31, 2009 and
2008.
There were no
securities that have been in a continuous unrealized loss position, at December
31, 2009 and 2008.
Debt securities
acquired with evidence of deterioration of credit quality since origination are
accounted for under the provisions of ASC Topic 310. The carrying value of the
debt securities accounted for under the provisions of ASC Topic 310 was
approximately $2.3 million and $3.4 million at December 31, 2009 and 2008,
respectively. See “Note 5 — Loan pools and Debt Securities Acquired with
Evidence of Deterioration of Credit Quality” for further discussion related to
the Company’s debt securities accounted for under the provisions of ASC Topic
310.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
4 - Loans Receivable
|
The carrying
amounts and fair value of loans receivable consisted of the following at
December 31 (in thousands):
|
|
2009
|
|
|
2008
|
|
Manufactured
housing loans - securitized
|
|
$ |
828,470 |
|
|
$ |
934,369 |
|
Manufactured
housing loans - unsecuritized
|
|
|
2,020 |
|
|
|
2,696 |
|
Accrued
interest receivable
|
|
|
5,515 |
|
|
|
5,452 |
|
Deferred loan
origination costs
|
|
|
2,865 |
|
|
|
3,186 |
|
Discount on
originated loans (1)
|
|
|
(16,900 |
) |
|
|
(18,753 |
) |
Discount on
purchased loans
|
|
|
(1,498 |
) |
|
|
(2,564 |
) |
Allowance for
purchased loans
|
|
|
(2,307 |
) |
|
|
(1,662 |
) |
Allowance for
loan losses
|
|
|
(9,805 |
) |
|
|
(10,777 |
) |
Total
|
|
$ |
808,360 |
|
|
$ |
911,947 |
|
(1) Represents
the fair market value of servicing rights sold in July 2008 which are related to
loans held-for-investment. The discount is accreted into interest
income over the life of the loans on a level yield method.
The following table
sets forth the average per loan balance, weighted average loan yield, and
weighted average initial term at December 31 (dollars in
thousands):
|
|
2009
|
|
|
2008
|
|
Number of
loans receivable
|
|
|
18,108 |
|
|
|
19,788 |
|
Average loan
balance
|
|
$ |
46 |
|
|
$ |
47 |
|
Weighted
average loan yield
|
|
|
9.40 |
% |
|
|
9.44 |
% |
Weighted
average initial term
|
|
20
years
|
|
|
20
years
|
|
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
4 - Loans Receivable
(cont.)
|
The following table
sets forth the concentration by state of the manufactured housing loan portfolio
at December 31 (dollars in thousands):
|
|
2009
|
|
|
2008
|
|
|
|
Principal
|
|
|
Percent
|
|
|
Principal
|
|
|
Percent
|
|
California
|
|
$ |
340,069 |
|
|
|
41.0 |
|
|
$ |
379,728 |
|
|
|
40.5 |
|
Texas
|
|
|
67,165 |
|
|
|
8.1 |
|
|
|
76,189 |
|
|
|
8.1 |
|
New
York
|
|
|
40,725 |
|
|
|
4.9 |
|
|
|
45,364 |
|
|
|
4.9 |
|
Florida
|
|
|
28,443 |
|
|
|
3.4 |
|
|
|
31,883 |
|
|
|
3.4 |
|
Alabama
|
|
|
24,875 |
|
|
|
3.0 |
|
|
|
27,763 |
|
|
|
3.0 |
|
Michigan
|
|
|
24,574 |
|
|
|
2.9 |
|
|
|
30,275 |
|
|
|
3.2 |
|
Other
|
|
|
304,639 |
|
|
|
36.7 |
|
|
|
345,863 |
|
|
|
36.9 |
|
Total
|
|
$ |
830,490 |
|
|
|
100.0 |
|
|
$ |
937,065 |
|
|
|
100.0 |
|
The following table
sets forth the number and value of loans for various original terms for the
manufactured housing loan portfolio at December 31 (dollars in
thousands):
|
|
2009
|
|
|
2008
|
|
Original
Term in Years
|
|
Number of
Loans
|
|
|
Principal
Balance
|
|
|
Number of
Loans
|
|
|
Principal
Balance
|
|
5 or
less
|
|
|
9 |
|
|
$ |
30 |
|
|
|
13 |
|
|
$ |
164 |
|
6-10
|
|
|
1,305 |
|
|
|
18,809 |
|
|
|
1,500 |
|
|
|
24,476 |
|
11-12
|
|
|
151 |
|
|
|
3,189 |
|
|
|
175 |
|
|
|
4,024 |
|
13-15
|
|
|
4,561 |
|
|
|
120,333 |
|
|
|
4,988 |
|
|
|
140,040 |
|
16-20
|
|
|
9,699 |
|
|
|
529,684 |
|
|
|
10,508 |
|
|
|
592,869 |
|
21-25
|
|
|
999 |
|
|
|
53,916 |
|
|
|
1,108 |
|
|
|
60,354 |
|
26-30
|
|
|
1,384 |
|
|
|
104,529 |
|
|
|
1,496 |
|
|
|
115,138 |
|
Total
|
|
|
18,108 |
|
|
$ |
830,490 |
|
|
|
19,788 |
|
|
$ |
937,065 |
|
Delinquency
statistics for the manufactured housing loan portfolio are as follows at
December 31 (dollars in thousands):
|
|
2009
|
|
|
2008
|
|
Days
Delinquent
|
|
Number of
Loans
|
|
|
Principal
Balance
|
|
|
% of
Portfolio
|
|
|
Number of
Loans
|
|
|
Principal
Balance
|
|
|
% of
Portfolio
|
|
31-60
|
|
|
207 |
|
|
$ |
8,794 |
|
|
|
1.1 |
|
|
|
231 |
|
|
$ |
10,197 |
|
|
|
1.1 |
|
61-90
|
|
|
66 |
|
|
|
3,606 |
|
|
|
0.4 |
|
|
|
73 |
|
|
|
3,385 |
|
|
|
0.4 |
|
Greater than
90
|
|
|
159 |
|
|
|
10,655 |
|
|
|
1.3 |
|
|
|
170 |
|
|
|
8,500 |
|
|
|
0.9 |
|
The Company defines
non-performing loans as those loans that are greater than 90 days delinquent in
contractual principal payments. The average balance of all non-performing loans
as a group was $9.3 million and $8.1 million for the years ended December 31,
2009 and 2008, respectively.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
5 - Loan Pools and Debt Securities Acquired with Evidence of Deterioration
of Credit Quality
|
The Company has
loan pools and debt securities that were acquired, for which there was at
acquisition, evidence of deterioration of credit quality, and for which it was
probable, at acquisition, that all contractually required payments would not be
collected. These loan pools and debt securities are accounted for under the
provisions of ASC Topic 310.
Loan Pools Acquired with Evidence of
Deterioration of Credit Quality
The carrying amount
of loan pools acquired with evidence of deterioration of credit qualify was as
follows at December 31 (in thousands):
|
|
2009
|
|
|
2008
|
|
Outstanding
balance
|
|
$ |
20,316 |
|
|
$ |
23,711 |
|
Carrying
amount, net of allowance of $2,307 and $1,662,
respectively
|
|
$ |
17,404 |
|
|
$ |
20,270 |
|
Accretable yield
represents the excess of expected future cash flows over the remaining carrying
value of the purchased portfolio, which is recognized as interest income on a
level yield basis over the life of the loan portfolio. Nonaccretable difference
represents the difference between the remaining expected cash flows and the
total contractual obligation outstanding of the purchased receivables. Changes
in accretable yield for the years ended December 31 were as follows (in
thousands):
|
|
2009
|
|
|
2008
|
|
Beginning
balance
|
|
$ |
11,326 |
|
|
$ |
14,627 |
|
Accretion
|
|
|
(1,557 |
) |
|
|
(1,959 |
) |
Change in
estimate of future cash flow
|
|
|
- |
|
|
|
(1,179 |
) |
Disposals
|
|
|
- |
|
|
|
(163 |
) |
Ending
balance
|
|
$ |
9,769 |
|
|
$ |
11,326 |
|
During the years
ended December 31, 2009 and 2008, the Company increased the allowance by charges
to the income statement of approximately $644,000 and $749,000, respectively. No
allowances were reversed during the years ended December 31, 2009 and
2008.
During the years
ended December 31, 2009 and 2008, there were no loans acquired for which it was
probable at acquisition that all contractually required payments would not be
collected.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
5 - Loan Pools and Debt Securities Acquired with Evidence of Deterioration
of Credit Quality
|
Debt
Securities Acquired with Evidence of Deterioration of Credit
Quality
The carrying amount
of debt securities acquired with evidence of deterioration of credit quality was
as follows at December 31 (in thousands):
|
|
2009
|
|
|
2008
|
|
Outstanding
balance
|
|
$ |
8,612 |
|
|
$ |
8,612 |
|
Carrying
amount, net
|
|
$ |
2,313 |
|
|
$ |
3,400 |
|
Accretable yield
represents the excess of expected future cash flows over the remaining carrying
value of the debt securities, which is recognized as interest income on a level
yield basis over the life of the debt securities. Nonaccretable difference
represents the difference between the remaining expected cash flows and the
total contractual obligation outstanding of the debt securities. Changes in
accretable yield for the years ended December 31 were as follows (in
thousands):
|
|
2009
|
|
|
2008
|
|
Beginning
balance
|
|
$ |
7,554 |
|
|
$ |
8,879 |
|
Accretion
|
|
|
(598 |
) |
|
|
(619 |
) |
Change in
estimate of future cash flows
|
|
|
(3,949 |
) |
|
|
(706 |
) |
Ending
balance
|
|
$ |
3,007 |
|
|
$ |
7,554 |
|
During the years
ended December 31, 2009 and 2008 the Company recognized an other-than-temporary
impairment of $1,002,000 and $32,000, respectively on the principal balance of
the security.
During the years
ended December 31, 2009 and 2008, there were no debt securities acquired for
which it was probable at acquisition that all contractually required payments
would not be collected.
NOTE
6 - Allowance for Loan Losses
|
The allowance for
loan losses and related additions and deductions to the allowance for the years
ended December 31 were as follows (in thousands):
|
|
2009
|
|
|
2008
|
|
Balance at
beginning of period
|
|
$ |
16,463 |
|
|
$ |
12,160 |
|
Provision for
loan losses
|
|
|
21,112 |
|
|
|
17,745 |
|
Allocation
for loan sale
|
|
|
- |
|
|
|
(313 |
) |
Gross charge
offs
|
|
|
(25,657 |
) |
|
|
(23,952 |
) |
Recoveries
|
|
|
9,605 |
|
|
|
10,823 |
|
Balance at
end of period
|
|
$ |
21,523 |
|
|
$ |
16,463 |
|
Allocation to
carrying value of repossessed houses
|
|
|
(11,718 |
) |
|
|
(5,686 |
) |
Net
Allowance
|
|
$ |
9,805 |
|
|
$ |
10,777 |
|
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
7 - Servicing Rights
|
Changes in
servicing rights for the years ended December 31 were as follows (in
thousands):
|
|
2009
|
|
|
2008
|
|
Beginning
balance of servicing rights
|
|
$ |
- |
|
|
$ |
2,146 |
|
Amortization
|
|
|
- |
|
|
|
(155 |
) |
Sale of
servicing rights
|
|
|
- |
|
|
|
(1,991 |
) |
Balance of
servicing rights at end of period
|
|
$ |
- |
|
|
$ |
- |
|
On April 30, 2008
the Company entered into an agreement for the sale of its servicing platform
assets to Green Tree. The transaction was approved by the Company’s stockholders
as part of an Asset Disposition and Management Plan at the Company’s annual
meeting of stockholders held on June 25, 2008. On July 1, 2008, the Company
completed the sale of its servicing platform assets to Green Tree.
NOTE
8 - Property and Equipment
|
Furniture, fixtures
and equipment are summarized as follows at December 31 (in
thousands):
|
|
2009
|
|
|
2008
|
|
Furniture and
fixtures
|
|
$ |
396 |
|
|
$ |
517 |
|
Leasehold
improvements
|
|
|
204 |
|
|
|
204 |
|
Computer
equipment
|
|
|
378 |
|
|
|
349 |
|
Capitalized
software
|
|
|
130 |
|
|
|
119 |
|
Total
|
|
|
1,108 |
|
|
|
1,189 |
|
Less:
accumulated depreciation
|
|
|
(911 |
) |
|
|
(788 |
) |
Net Property
and Equipment
|
|
$ |
197 |
|
|
$ |
401 |
|
Depreciation
expense was approximately $177,000 and $704,000, for the years ended December
31, 2009 and 2008, respectively. Depreciation expense for the year ended
December 31, 2009 has decreased significantly from 2008 due to assets that
became fully depreciated during 2008 and 2009 and as a result of the sale of the
majority of the Company’s servicing platform’s furniture fixtures and equipment
to Green Tree on July 1, 2008.
In the normal
course of business, the Company enters into various transactions involving
derivatives to manage exposure to fluctuations in interest rates. These
financial instruments involve, to varying degrees, elements of credit and market
risk.
Credit risk is the
possible loss that may occur in the event of nonperformance by the counterparty
to a financial instrument. The Company attempts to minimize credit risk arising
from financial instruments by
evaluating the
creditworthiness of each counterparty, adhering to the same credit approval
process used for traditional lending activities. Counterparty risk limits and
monitoring procedures also facilitate the management of credit risk. The Company
generally does not receive collateral when it enters into a derivative
contract.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
9 - Derivatives
(cont.)
|
Market risk is the
potential loss that may result from movements in interest rates that cause an
unfavorable change in the value of a financial instrument. Market risk arising
from derivative instruments is reflected in the consolidated financial
statements. The Company manages this risk by establishing monetary exposure
limits and monitoring compliance with those limits. Market risk inherent in
derivative instruments held or issued for risk management purposes is typically
offset by changes in the fair value of the assets or liabilities being
hedged.
When hedge
accounting is discontinued because the Company determines that the derivative no
longer qualifies as a hedge, the derivative will continue to be recorded on the
consolidated balance sheet at its fair value. Any change in the fair value of a
derivative no longer qualifying as a hedge is recognized in current period
earnings. For terminated cash flow hedges or cash flow hedges that no longer
qualify as highly effective, the effective position previously recorded in
accumulated other comprehensive income is recorded in earnings when the hedged
item affects earnings.
Derivative
Instruments
Derivative
instruments are traded over an organized exchange or negotiated
over-the-counter. Credit risk associated with exchange traded contracts is
typically assumed by the organized exchange. Over-the-counter contracts are
tailored to meet the needs of the counterparties involved and, therefore,
contain a greater degree of credit risk and liquidity risk than exchange traded
contracts, which have standardized terms and readily available price
information. The Company reduces exposure to credit and liquidity risks from
over-the-counter derivative instruments entered into for risk management
purposes, by conducting such transactions with investment grade
domestic financial institutions and subjecting counterparties to credit
approvals, limits and monitoring procedures similar to those used in making
other extensions of credit.
Detailed
discussions of each class of derivative instruments held or issued by the
Company for both risk management are as follows.
Interest
Rate Swaps
Interest rate swaps
are agreements in which two parties periodically exchange fixed cash payments
for variable payments based on a designated market rate or index, or variable
payments based on two different rates or indices, applied to a specified
notional amount until a stated maturity. The Company's swap agreements are
structured such that variable payments are primarily based on one month LIBOR or
three-month LIBOR. These instruments are principally negotiated over-the-counter
and are subject to credit risk, market risk and liquidity risk. All
interest rate swaps entered into by the Company were purchased with the intent
to offset potential increases in interest expense and potential variability in
cash flows under various interest rate environments. The Company does
not speculate on interest rates. All interest rate swaps were entered
into for the purpose of hedging the Company’s exposure to interest rate
risk. When it is determined that a derivative is not highly effective
as a hedge or that it has ceased to be a highly effective hedge the Company
discontinues hedge accounting and all changes in value in the derivative
instrument are recorded in interest expense in the income
statement.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
9 - Derivatives
(cont.)
|
The following table
presents the composition of the Company's derivative instruments at December 31,
2009 and 2008 (in thousands):
|
|
December
31,2009
|
|
|
|
|
|
|
Fair
Value
|
|
|
|
Notional/
Contract
Amount
|
|
|
Asset
Derivatives
(Unrealized
Gains)
|
|
|
Liabilities
Derivatives
(Unrealized Losses)
|
|
Derivatives
designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Interest rate
contracts: Swaps - cash flow - receive floating/pay fixed
|
|
$ |
376,684 |
|
|
$ |
- |
|
|
$ |
33,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
contracts: Swaps - cash flow - receive floating/pay fixed
|
|
|
350,016 |
|
|
|
257 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Derivatives
|
|
$ |
726,700 |
|
|
$ |
257 |
|
|
$ |
33,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,2008
|
|
|
|
|
|
|
|
Fair
Value
|
|
|
|
Notional/
Contract
Amount
|
|
|
Asset
Derivatives
(Unrealized
Gains)
|
|
|
Liabilities
Derivatives
(Unrealized Losses)
|
|
Derivatives
designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
contracts: Swaps - cash flow - receive floating/pay fixed
|
|
$ |
418,411 |
|
|
$ |
- |
|
|
$ |
57,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
contracts: Swaps - cash flow - receive floating/pay fixed
|
|
|
408,259 |
|
|
|
326 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Derivatives
|
|
$ |
826,670 |
|
|
$ |
326 |
|
|
$ |
57,887 |
|
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
9 - Derivatives
(cont.)
|
By
purchasing and writing derivative contracts, the Company is exposed to credit
risk if the counterparties fail to perform. The Company minimizes credit risk
through credit approvals, limits, monitoring procedures and collateral
requirements. Nonperformance risk, including credit risk, is included in the
determination of net fair value.
At December 31,
2009, master netting arrangements were in place with all interest rate swap
counterparties. These arrangements effectively reduce credit risk by permitting
settlement, on a net basis, of contracts entered into with the same
counterparty.
The Company employs
a variety of financial instruments for risk management purposes. Activity
related to these instruments is centered predominantly in the interest rate
markets and mainly involves interest rate swaps.
As part of a cash
flow hedging strategy, the Company entered into interest rate swap agreements
(weighted average original maturity of 5.24 years) that effectively converts a
portion of existing floating rate debt to a fixed rate basis, thus reducing the
impact of interest rate changes on future interest expense over the life of the
agreements.
If interest rates,
interest yield curves and notional amounts remain at current levels, the Company
expects to reclassify $19.0 million of net gains, net of tax, on derivative
instruments designated as cash flow hedges from accumulated other comprehensive
income (loss) to earnings during the next twelve months due to receipt of
variable interest associated with existing and forecasted floating rate
debt.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
9 - Derivatives
(cont.)
|
The following table
summarizes the expected weighted average remaining maturity of the notional
amount of interest rate swaps and the weighted average interest rates associated
with amounts expected to be received or paid on interest rate swap agreements as
of December 31, 2009 and 2008 (in thousands).
|
|
|
|
|
December
31,2009
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
Notional
Amount
|
|
|
Receive
Rate
|
|
|
Pay
Rate
|
|
Interest rate
contracts:
|
|
|
|
|
|
|
|
|
|
Swaps - cash
flow - receiver floating/pay fixed rate - Designated as hedging
instruments
|
|
$ |
376,684 |
|
|
|
0.23 |
% |
|
|
5.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps - cash
flow - receiver floating/pay fixed rate - Not designated as hedging
instruments
|
|
|
350,016 |
|
|
|
0.23 |
% |
|
|
5.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Derivatives
|
|
$ |
726,700 |
|
|
|
0.23 |
% |
|
|
5.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,2008
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
Notional
Amount
|
|
|
Receive
Rate
|
|
|
Pay
Rate
|
|
Interest rate
contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps - cash
flow - receiver floating/pay fixed rate - Designated as hedging
instruments
|
|
$ |
418,411 |
|
|
|
1.20 |
% |
|
|
5.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Swaps - cash
flow - receiver floating/pay fixed rate - Not designated as hedging
instruments
|
|
|
408,259 |
|
|
|
1.20 |
% |
|
|
5.28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Derivatives
|
|
$ |
826,670 |
|
|
|
1.20 |
% |
|
|
5.28 |
% |
Management believes
these hedging strategies achieve the desired relationship between the fixed cash
flow requirements of the derivative contracts and the variable cash flow
requirements of its securitization financing which, in turn, reduce
the overall exposure of net interest expense to interest rate risk, although
there can be no assurance that such strategies will be successful.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
10 - Loan Securitizations
|
Periodically the
Company securitized manufactured housing loans. The Company recorded each
transaction based on its legal structure. Under the legal structure of the
current securitizations, the Company exchanged manufactured housing loans it
originated and purchased with a trust for cash. The trust then issued ownership
interests to investors in asset backed bonds secured by the loans.
The Company
structured all loan securitizations occurring since 2003 as financings for
accounting purposes. When securitizations are structured as financings no gain
or loss is recognized, nor is any allocation made to residual interests or
servicing rights. Rather, the loans securitized continue to be carried by the
Company as assets, and the asset backed bonds secured by the loans are carried
as a liability. The Company records interest income on securitized loans and
interest expense on the bonds issued in the securitizations over the life of the
securitizations. Deferred debt issuance costs and discount related to the bonds
are amortized on a level yield basis over the estimated life of the
bonds.
Prior to 2003, the
Company sold loan pools that were treated as true sales in accordance with the
accounting guidance within ASC Topic 860, "Transfers and
Servicing."
Whenever the
Company sells loans, it makes customary representations and warranties to
purchasers about various characteristics of each loan, such as the manner of
origination, the nature and extent of underwriting standards applied, and the
types of documentation being provided. Typically these representations and
warranties are in place for the life of the loan. If a loan does not perform,
and a defect in the origination process is identified, the Company may be
required to either repurchase the loan or indemnify the purchaser for losses it
may incur on such loan. To date, the Company has not experienced any claims on
it representations and warranties for loan pool sales that were accounted for as
true sales. The Company has an insurance contract in place against losses in
excess of $250,000 relating to representation and warranty claims. The Company
does not believe that it has any exposure to representation and warranty claims;
therefore it has not created an accrual for potential claims.
Total debt
outstanding was as follows at December 31 (in thousands):
|
|
2009
|
|
|
2008
|
|
Securitization
financing
|
|
$ |
689,762 |
|
|
$ |
775,120 |
|
Notes payable
- related party
|
|
|
15,638 |
|
|
|
29,351 |
|
Total
|
|
$ |
705,400 |
|
|
$ |
804,471 |
|
Warehouse
Financing — Citigroup
The Company,
through its operating subsidiary Origen Financial L.L.C., previously had a short
term securitization facility used for warehouse financing with Citigroup Global
Markets Realty Corporation (“Citigroup”). Under the terms of the agreement,
originally entered into in March 2003 and amended periodically, most recently in
August 2007, the Company pledged loans as collateral and in turn was advanced
funds. The facility had a maximum advance amount of $200 million at an annual
interest rate equal to LIBOR plus a spread. Additionally, the facility included
a $55 million supplemental advance amount collateralized by the Company’s
residual interests in its 2004-A, 2004-B, 2005-A, 2005-B, 2006-A, 2007-A and
2007-B securitizations. This facility was paid off in full and terminated in
April 2008.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
Securitization
Financing — 2004-A Securitization
On February 11,
2004, the Company completed a securitization of approximately $238.0 million in
principal balance of manufactured housing loans. The securitization was
accounted for as a financing. As part of the securitization the Company, through
a special purpose entity, issued $200.0 million in notes
payable. The notes
are stratified into six different classes and pay interest at a duration
weighted average rate of approximately 5.12%. The notes have a contractual
maturity date of October 2013 with respect to the Class A-1 notes; August 2017,
with respect to the Class A-2 notes; December 2020, with respect to the Class
A-3 notes; and January 2035, with respect to the Class A-4, Class M-1 and Class
M-2 notes. The outstanding balance on the 2004-A securitization notes was
approximately $73.8 million and $83.5 million at December 31, 2009 and 2008,
respectively.
Securitization
Financing — 2004-B Securitization
On September 29,
2004, the Company completed a securitization of approximately $200.0 million in
principal balance of manufactured housing loans. The securitization was
accounted for as a financing. As part of the securitization the Company, through
a special purpose entity, issued $169.0 million in notes payable. The notes are
stratified into seven different classes and pay interest at a duration-weighted
average rate of approximately 5.27%. The notes have a contractual maturity date
of June 2013 with respect to the Class A-1 notes; December 2017, with respect to
the Class A-2 notes; August 2021, with respect to the Class A-3 notes; and
November 2035, with respect to the Class A-4, Class M-1, Class M-2 and Class B-1
notes. The outstanding balance on the 2004-B securitization notes was
approximately $71.3 million and $80.8 million at December 31, 2009 and 2008,
respectively.
Securitization
Financing — 2005-A Securitization
On May 12, 2005,
the Company completed a securitization of approximately $190.0 million in
principal balance of manufactured housing loans. The securitization was
accounted for as a financing. As part of the securitization the Company, through
a special purpose entity, issued $165.3 million in notes payable. The notes are
stratified into seven different classes and pay interest at a duration-weighted
average rate of approximately 5.30%. The notes have a contractual maturity date
of July 2013 with respect to the Class A-1 notes; May 2018, with respect to the
Class A-2 notes; October 2021, with respect to the Class A-3 notes; and June
2036, with respect to the Class A-4, Class M-1, Class M-2 and Class B notes. The
outstanding balance on the 2005-A securitization notes was approximately $80.9
million and $92.9 million at December 31, 2009 and 2008,
respectively.
Securitization
Financing — 2005-B Securitization
On December 15,
2005, the Company completed a securitization of approximately $175.0 million in
principal balance of manufactured housing loans. The securitization was
accounted for as a financing. As part of the securitization the Company, through
a special purpose entity, issued $156.2 million in notes payable. The notes are
stratified into eight different classes and pay interest at a duration-weighted
average rate of approximately 6.15%. The notes have a contractual maturity date
of February 2014 with respect to the Class A-1 notes; December 2018, with
respect to the Class A-2 notes; May 2022, with respect to the Class A-3 notes;
and January 2037, with respect to the Class A-4, Class M-1, Class M-2 , Class
B-1 and B-2 notes. The outstanding balance on the 2005-B securitization notes
was approximately $89.7 million and $103.2 million at December 31, 2009 and
2008, respectively.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
Securitization
Financing — 2006-A Securitization
On August 25, 2006,
the Company completed a securitization of approximately $224.2 million in
principal
balance of
manufactured housing loans. The securitization was accounted for as a financing.
As part of the securitization the Company, through a special purpose entity,
issued $200.6 million in notes payable. The notes are stratified into two
different classes. The Class A-1 notes pay interest at one month LIBOR plus 15
basis points and have a contractual maturity date of November 15, 2018. The
Class A-2 notes pay interest based on a rate established by the auction agent at
each rate determination date and have a contractual maturity date of October
2037. Additional credit enhancement was provided through the issuance of a
financial guaranty insurance policy by Ambac Assurance Corporation. The
outstanding balance on the 2006-A securitization notes was approximately $131.7
million and $147.2 at December 31, 2009 and 2008, respectively.
Securitization Financing — 2007-A
Securitization
On May 2, 2007, the
Company completed a securitization of approximately $200.4 million in principal
balance of manufactured housing loans. The securitization was accounted for as a
financing. As part of the securitization the Company, through a special purpose
entity, issued $184.4 million in notes payable. The notes are stratified into
two different classes. The Class A-1 notes pay interest at one month LIBOR plus
19 basis points and have a contractual maturity date of April 2037. The Class
A-2 notes pay interest based on a rate established by the auction agent at each
rate determination date and have a contractual maturity date of April 2037.
Additional credit enhancement was provided through the issuance of a financial
guaranty insurance policy by Ambac Assurance Corporation. The outstanding
balance on the 2007-A securitization notes was approximately $138.0 million and
$153.7 at December 31, 2009 and 2008, respectively.
Securitization Financing — 2007-B
Securitization
On October 16,
2007, the Company completed a securitization of approximately $140.0 million in
principal balance of manufactured housing loans. The securitization was
accounted for as a financing. As part of the securitization the Company, through
a special purpose entity, issued $126.7 million of a single AAA rated floating
rate class of asset backed notes to a single qualified institutional buyer
pursuant to Rule 144A under the Securities Act of 1933. The notes pay interest
at one month LIBOR plus 120 basis points and have a contractual maturity date of
September 2037. Additional credit enhancement was provided by a guaranty from
Ambac Assurance Corporation. The outstanding balance on the 2007-B
securitization notes was approximately $104.4 million and $113.8 at December 31,
2009 and 2008, respectively.
Repurchase
Agreements — Citigroup
The
Company had previously entered into four repurchase agreements with Citigroup.
Three of the repurchase agreements were for the purpose of financing the
purchase of investments in three asset backed securities with principal balances
of $32.0 million, $3.1 million and $3.7 million respectively. The
fourth repurchase agreement was for the purpose of financing a portion of the
Company’s residual interest in the 2004-B securitization with a principal
balance of $4.0 million. Under the terms of the agreements, the Company
sold its interest in the securities with an agreement to repurchase them at a
predetermined future date at the principal amount sold plus an interest
component. In February 2008 these repurchase agreements were not
renewed.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
Notes
Payable — Related Party
In September 2007,
the Company, through its primary operating subsidiary Origen Financial L.L.C.,
previously entered into a $15 million secured financing arrangement (the $15
Million Loan”) with the William M. Davidson Trust u/a/d 12/13/04 (the
“Lender”). The $15 Million Loan included a $10 million senior secured
promissory note (the “Note”) and a $5 million senior secured convertible
promissory note (the “Convertible Note”). The Note and the Convertible Note were
each one year secured notes bearing interest at 8% per year and were secured by
a portion of the Company’s rights to receive servicing fees on its loan
servicing portfolio. The Note, which had an original principal amount of $10
million, and the Convertible Note, which had an original principal amount of $5
million, were each due on September 11, 2008. The term of the Note and the
Convertible Note could be extended up to 120 days with the payment of additional
fees. The Convertible Note could be converted at the option of the Lender into
shares of the Company’s common stock at a conversion price of $6.237 per share.
In connection with the $15 Million Loan, the Company issued a stock purchase
warrant to the Lender. The stock purchase warrant was a five-year warrant to
purchase 500,000 shares of the Company’s common stock at an exercise price of
$6.16 per share.
On April 8, 2008,
the $15 Million Loan was amended and the Company entered into a $46 million
secured financing arrangement (the “$46 Million Note”) with the
Lender. The $46 Million Note is a three-year secured note bearing
interest at 14.5% per year. The $46 Million Note is due on April 8,
2011, but at the Company’s option, its maturity may be extended for one year if
the Company pays an extension fee equal to 2% of the then outstanding principal
balance. The $46 Million Note is pre-payable, provided however, that if it is
paid off entirely in connection with a refinancing of the entire remaining
principal owing under the note, the Company must pay a prepayment fee equal to
1.5% of the then outstanding principal balance. The Company also issued a
five-year stock purchase warrant (the “Warrant”) to purchase 2,600,000 shares of
the Company’s common stock at an exercise price of $1.22 per share, which was
the closing consolidated bid price for Origen common stock on April 7,
2008. The Lender transferred the $46 Million note and the Warrant to
an affiliated trust, the William M Davidson Trust u/a/d 9/24/08, in January
2010. The Company has granted the Lender certain registration rights
with respect to the common stock issuable upon the exercise of the Warrant and
other unregistered shares that may be owned by the holder of the Warrants and
its affiliates. The amendment to the $15 Million Loan also terminated
the previous conversion rights on the Convertible Note and terminated the
500,000 warrants to purchase the Company’s common stock. The
$46 million Note had an aggregate outstanding balance of $15.6 million at
December 31, 2009 and $29.4 million at December 31, 2008, net of the unamortized
discount related to the fair value of the stock purchase warrant.
The Lender is an
affiliate of William M. Davidson and his estate. Mr. Davidson passed
away in March 2009. Jonathan S. Aaron is married to Mr. Davidson’s
stepdaughter and is the co-trustee of both the Lender and the affiliated trust
that currently holds the Warrant. Mr. Aaron has served as a director
of the Company since November 2008 and from 2004 to July 2009 was employed by
Guardian Industries Corp., of which Mr. Davidson was the principal
shareholder. From the time the $15 Million Loan was made and until
December 2009, Woodward Holding, LLC owned 1,750,000 shares (or approximately
6.7%) of the Company’s common stock. From the time the $15 Million
Loan was made until July 2008, Mr. Davidson was the sole member of Woodward
Holding, LLC and Paul A. Halpern was the sole manager of Woodward Holding,
LLC. Mr. Halpern, who has served as the Chairman of the Board of the
Company since 2003, is employed by Guardian Industries Corp. and its
affiliates. In July 2008, Mr. Davidson sold 60% of the membership
interests of Woodward Holding, LLC to Mr. Halpern and the remaining 40% of the
membership interests to Mr. Aaron. After that sale, Mr. Halpern
continued to serve as the sole manager of Woodward Holding, LLC. In
December 2009, Woodward Holding, LLC distributed 1,050,000 of the shares to an
affiliate of Mr. Halpern and the remaining 700,000 shares to an affiliate of Mr.
Aaron.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
The average balance
and average interest rate of outstanding debt was as follows at December 31
(dollars in thousands):
|
|
2009
|
|
|
2008
|
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
|
Average
Balance
|
|
|
Average
Rate
|
|
Warehouse
financing - Citigroup (1)
|
|
$ |
- |
|
|
|
-
|
% |
|
$ |
43,213 |
|
|
|
6.2 |
% |
Securitization
financing — 2004-A securitization
|
|
|
78,632 |
|
|
|
6.0 |
|
|
|
89,441 |
|
|
|
5.9 |
|
Securitization
financing — 2004-B securitization
|
|
|
76,313 |
|
|
|
6.1 |
|
|
|
88,924 |
|
|
|
6.0 |
|
Securitization
financing — 2005-A securitization
|
|
|
87,068 |
|
|
|
5.7 |
|
|
|
101,053 |
|
|
|
5.5 |
|
Securitization
financing — 2005-B securitization
|
|
|
97,515 |
|
|
|
6.0 |
|
|
|
111,560 |
|
|
|
5.9 |
|
Securitization
financing — 2006-A securitization
|
|
|
139,773 |
|
|
|
6.8 |
|
|
|
158,762 |
|
|
|
6.8 |
|
Securitization
financing — 2007-A securitization
|
|
|
146,186 |
|
|
|
6.5 |
|
|
|
163,240 |
|
|
|
6.5 |
|
Securitization
financing — 2007-B securitization
|
|
|
109,322 |
|
|
|
6.9 |
|
|
|
119,506 |
|
|
|
7.1 |
|
Repurchase
agreements - Citigroup
|
|
|
- |
|
|
|
- |
|
|
|
2,498 |
|
|
|
5.2 |
|
Notes payable
- related party (2)
|
|
|
23,254 |
|
|
|
17.1 |
|
|
|
30,048 |
|
|
|
17.4 |
|
(1) Included
facility fees. This facility was paid off in full and terminated in April
2008.
(2) Includes
the amortization of the fair value of the related stock purchase
warrants.
At December 31,
2009, the total of maturities and amortization of debt during the next five
years and thereafter are approximately as follows: 2010 — $77.6 million; 2011 —
$78.0 million; 2012 — $68.2 million; 2013 — $65.5 million; 2014 — $59.6 million
and $356.6 million thereafter.
NOTE
12 - Employee Benefits
|
The Company
maintains a 401(k) plan covering substantially all employees who meet certain
minimum requirements. Participating employees can make salary contributions to
the plan up to Internal Revenue Code limits. The Company matches $1.00 for each
dollar contributed by each eligible participant in the plan up to the first 1%
of each eligible participant’s annual compensation and $0.50 for each dollar
contributed by each eligible participant in the plan up to the next 5% of each
eligible participant’s annual compensation. The Company’s related expense was
approximately $54,000 and $219,000, respectively for the years ended December
31, 2009 and 2008.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
13 - Share Based Compensation Plan
|
The Company’s
equity incentive plan has approximately 1.8 million shares of common stock
reserved for issuance as either stock options or non-vested stock grants. As of
December 31, 2009, approximately 373,302 shares of common stock remained
available for issuance, as either stock options or non-vested stock grants,
under the plan. The compensation cost that has been charged against income for
those plans was $0 and $3.0 million, for the years ended December 31,
2009 and 2008, respectively.
Stock
Options
Under the plan, the
exercise price of the options will not be less than the fair market value of the
common stock on the date of grant. The date on which the options are first
exercisable is determined by the Compensation Committee of the Board of
Directors as the administrator of the Company’s equity incentive plan, and
options that have been issued to date generally vested over a two-year period,
have 10-year contractual terms and a 5-year expected option term. The Company
does not pay dividends or make distributions on unexercised options. As of
December 31, 2009 there was no unrecognized compensation cost related to stock
options granted under the equity incentive plan.
There were no stock
options granted during the years ended December 31, 2009 or 2008. No stock
options were exercised during the years ended December 31, 2009 and 2008. The
following table summarizes the activity relating to the Company’s stock options
for the year ended December 31, 2009:
|
|
Number of
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average Remaining Contractual Term
|
|
Options
outstanding at January 1, 2009
|
|
|
135,500 |
|
|
$ |
10.00 |
|
|
|
5.0 |
|
Granted
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Options
outstanding at December 31, 2009
|
|
|
135,500 |
|
|
$ |
10.00 |
|
|
|
5.0 |
|
Options
exercisable at December 31, 2009
|
|
|
135,500 |
|
|
$ |
10.00 |
|
|
|
5.0 |
|
Non-Vested Stock
Awards
The Company grants
non-vested stock awards to certain directors, officers and employees under the
equity incentive plan. The grantees of the non-vested stock awards are entitled
to receive all dividends and other distributions paid with respect to the common
shares of the Company underlying such non-vested stock awards at the time such
dividends or distributions are paid to holders of common shares.
The Company
recognizes compensation expense for outstanding non-vested stock awards over
their vesting periods for an amount equal to the fair value of the non-vested
stock awards at grant date. As of December 31, 2009 there was no unrecognized
compensation cost related to non-vested stock awards granted under the equity
incentive plan. On July 1, 2008 as a result of the sale of the Company’s
servicing platform assets to Green Tree, all non-vested stock awards granted
under the equity incentive plan vested and total unrecognized compensation
expense was recognized at that time.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
14 - Stockholders' Equity
|
Effective January
1, 2004, the Company sold 125 shares of its Series A Cumulative Redeemable
Preferred Stock directly to 125 investors at a per share price of $1,000. The
transaction resulted in net proceeds to the Company of $95,000. These shares pay
dividends quarterly at an annual rate of 12.5%.
On October 8, 2003,
the Company completed a private placement of $150.0 million of its common stock
to certain institutional and accredited investors.
On February 4,
2004, the Company completed a private placement of 1,000,000 shares of its
common stock to one institutional investor. The offering provided net proceeds
to the Company of approximately $9.4 million.
On May 6, 2004, the
Company completed an initial public offering of 8.0 million shares of its common
stock. In June 2004 the underwriters of the initial public offering purchased an
additional 625,900 shares of the Company’s common stock pursuant to an
underwriter’s over-allotment option. Net proceeds from these transactions were
$72.2 million after discount and expenses.
In September 2005,
the Securities and Exchange Commission declared effective the Company’s shelf
registration statement on Form S-3 for the proposed offering, from time to time,
of up to $200 million of its common stock, preferred stock and debt securities.
In addition to such debt securities, preferred stock and common stock the
Company may sell under the registration statement from time to time, the Company
registered for sale 1,540,000 shares of its common stock pursuant to a sales
agreement entered into with Brinson Patrick Securities Corporation. Sales under
the agreement commenced on June 5, 2007. There were no sales under this
agreement during the years ended December 31, 2009 and 2008. The Company sold
50,063 shares of common stock under the sales agreement with Brinson Patrick
Securities Corporation during the year ended December 31, 2007, at the price of
the Company’s common stock prevailing at the time of each sale. The Company
received proceeds, net of commissions, of $296,000 during the year ended
December 31, 2007, as a result of these sales.
In conjunction with
the $15 million secured financing arrangement (See Note 11), the Company
originally issued a stock purchase warrant to the Lender. On April 8, 2008, the
$15 Million Loan was amended and the Company entered into a $46 million dollar
secured financing arrangement (See Note 11). Additionally, 500,000 warrants to
purchase Origen common stock were terminated. These warrants were originally
issued by Origen to the Lender on September 11, 2007 in connection with the $15
Million Loan, were exercisable at Lender’s option until September 11, 2012 and
had an exercise price of $6.16 per share.
In connection with
the $46 Million Note (See Note 11), which the Lender subsequently assigned to an
affiliated trust, the William M Davidson Trust u/a/d 9/24/08, the Company issued
a stock purchase warrant to the Lender (as defined in Note 11). The stock
purchase warrant is a five-year warrant to purchase 2,600,000 shares of the
Company’s common stock at an exercise price of $1.22 per share. The warrant
expires on April 8, 2013. As of April 08, 2008, the warrants are valued at
$858,000 using a Cox, Ross and Rubinstein lattice based pricing model. This
amount has been recorded as an increase in additional paid-in-capital and as a
discount on notes payable in the Company’s consolidated balance sheet. The
amortization of the discount will be recorded as an increase in interest expense
over the life of the notes payable. Interest expense of $286,000 and $209,000
was recorded during the years ended December 31, 2009 and 2008,
respectively, as a result of the amortization of the fair value of
the stock purchase warrant.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
14 - Stockholders' Equity
(cont.)
|
In December 2008,
the Company voluntarily delisted its common stock from the NASDAQ Global Market,
deregistered its common stock under the Securities Act of 1934 and terminated
its shelf registration statement on Form S-3 and its registration statement on
Form S-8.
The Company
maintains an equity incentive plan, but no awards are currently outstanding
under the plan. There were stock award share forfeitures of 0,
and 13,837 during the years ended December 31, 2009 and 2008, respectively,
under the plan. Stock award shares vested during the years ended December 31,
2009 and 2008 were 0 and 516,791, respectively. In connection with the Company’s
sale of its servicing platform assets, all outstanding non-vested stock awards
vested on July 1, 2008 and the compensation expense related to these awards was
$3.0 million for the year ended December 31, 2008. Prior to the sale of the
Company’s servicing platform assets to Green Tree, compensation expense related
to these stock awards was recognized over their estimated service period.
Compensation cost recognized for the non-vested stock awards was approximately
$0 and $1.6 million for the years ended December 31, 2009 and 2008,
respectively.
Data pertaining to
the Company’s distributions declared and paid to common stockholders during the
years ended December 31, 2009 and 2008 are as follows:
Declaration
Date
|
|
Record
Date
|
|
Date
Paid
|
|
Distribution
per
Share
|
|
Total
Distribution
(thousands)
|
September 11,
2008
|
|
September 22,
2008
|
|
September 30,
2008
|
|
$ 0.05
|
|
$ 1,193
|
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
The provision
(benefit) for income taxes is computed by applying the effective federal income
tax rate to income (loss) before income taxes as reported in the consolidated
financial statements after deducting non-taxable items, principally income from
a qualified REIT subsidiary, then adding interest (tax related),
penalties, and state taxes .
In the ordinary
course of business, the Company enters into certain transactions that have tax
consequences. From time to time, the Internal Revenue Service (IRS) may question
and/or challenge the tax position taken by the Company with respect to those
transactions. The Company believes that its tax returns were filed based upon
applicable statutes, regulations and case law in effect at the time of the
transactions. The IRS, an administrative authority, or a court, if presented
with the transactions, could disagree with the Company's interpretation of the
tax law. After evaluating the risks and opportunities, the best outcome may
result in a settlement. The ultimate outcome for each position is not
known.
On January 1, 2007,
the Company adopted new income tax guidance related to accounting for
uncertainty in income taxes. The Company does not believe that
it has any uncertainty as defined by the guidance in its tax
returns. Therefore, there are no accruals for interest and penalties
or uncertain tax positions included in the Company’s tax accrual. The
Company and its subsidiaries file income tax returns in the U.S. federal
jurisdiction and in various state and local jurisdictions. With few exceptions,
the Company and its subsidiaries are no longer subject to U.S. federal or state
and local income tax examinations by tax authorities for years before
2005.
The Company’s
provision for income taxes was $152,000 and $61,000, for the years ended
December 31, 2009 and 2008, respectively related to current income
taxes.
The tax effects of
temporary differences that give rise to significant portions of the deferred tax
assets and deferred tax liabilities at December 31 are as follows (in
thousands):
|
|
2009
|
|
|
2008
|
|
Deferred tax
assets:
|
|
|
|
|
|
|
Net operating
loss carry forwards
|
|
$ |
54 |
|
|
$ |
4,768 |
|
Other
|
|
|
100 |
|
|
|
279 |
|
Gross
deferred tax assets
|
|
|
154 |
|
|
|
5,047 |
|
Less:
valuation allowance
|
|
|
(154 |
) |
|
|
(5,020 |
) |
Total
Deferred Tax Assets
|
|
|
- |
|
|
|
27 |
|
Deferred tax
liabilities:
|
|
|
|
|
|
|
|
|
Amortization
of intangibles
|
|
|
- |
|
|
|
27 |
|
Total
Deferred Tax Liabilities
|
|
|
- |
|
|
|
27 |
|
Net Deferred
Tax Asset
|
|
$ |
- |
|
|
$ |
- |
|
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
15 - Income Taxes
(cont.)
|
The Company
recognizes all of its deferred tax assets if it believes that it is more likely
than not, given all available evidence, that all of the benefits of the net
operating loss carry forwards and other deferred tax assets will be realized.
The Company recorded a valuation allowance of $154,000 and $5.0 million as of
December 31, 2009 and 2008, respectively, associated with the amortization of
intangibles and net operating loss carry forwards for which management believes,
based on the available evidence, it is more likely than not that the Company
will not realize the benefit. Management believes that, based on the available
evidence, it is more likely than not that the Company will realize the benefit
from its remaining deferred tax assets. As of December 31, 2009 the taxable REIT
subsidiaries’ total net operating loss carry forwards were approximately
$160,000. As a result of the sale of the stock of Origen Servicing, Inc, on
January 14, 2009 (Note 1) net operating loss carry forward available decreased
by $13.5 million.
For income tax
purposes, distributions paid to common stockholders consist of ordinary income
and return of capital. Distributions paid were taxable as follows for the years
ended December 31 (dollars in thousands):
|
|
2009
|
|
|
2008
|
|
|
|
Amount
|
|
|
Percentage
|
|
|
Amount
|
|
|
Percentage
|
|
Ordinary
income
|
|
$ |
- |
|
|
|
- |
|
|
$ |
1,193 |
|
|
|
100.0 |
|
Return
of capital
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
- |
|
|
|
- |
|
|
$ |
1,193 |
|
|
|
100.0 |
|
A portion of the
Company’s income from a qualified REIT subsidiary that would otherwise be
classified as a taxable mortgage pool, may be treated as “excess inclusion
income,” which would be subject to the distribution requirements that apply to
the Company and could therefore adversely affect its liquidity. Generally, a
stockholder’s share of excess inclusion income would not be allowed to be offset
by any operating losses otherwise available to the stockholder. Tax exempt
entities that own shares in a REIT must treat their allocable share of excess
inclusion income as unrelated business taxable income. Any portion of a REIT
dividend paid to foreign stockholders that is allocable to excess inclusion
income will not be eligible for exemption from the 30% withholding tax (or
reduced treaty rate) on dividend income. For the year ended December 31, 2009,
no distributions were paid representing excess inclusion
income.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
16 - Liquidity Risks and
Uncertainties
|
The risks
associated with the Company’s business become more acute in any economic
slowdown or recession. Periods of economic slowdown or recession may be
accompanied by decreased demand for consumer credit and declining asset values.
In the manufactured housing business, any material decline in collateral values
increases the loan-to-value ratios of loans previously made, thereby weakening
collateral coverage and increasing the size of losses in the event of default.
Delinquencies, repossessions, foreclosures and losses generally increase during
economic slowdowns or recessions. For the Company’s finance customers, loss of
employment, increases in cost-of-living or other adverse economic conditions
would impair their ability to meet their payment obligations. Higher industry
inventory levels of repossessed manufactured houses may affect recovery rates
and result in future impairment charges and provision for losses. In addition,
in an economic slowdown or recession, servicing and litigation costs generally
increase. Any sustained period of increased delinquencies, repossessions,
foreclosures, losses or increased costs would adversely affect the Company’s
financial condition, results of operations and liquidity. The Company bears the
risk of delinquency and default on securitized loans in which it has a residual
or retained ownership interest. The Company also reacquires the risks of
delinquency and default for loans that it is obligated to repurchase. Repurchase
obligations are typically triggered in sales or securitizations if the loan
materially violates the Company’s representations or warranties.
The availability of
sufficient sources of capital to allow the Company to continue its operations is
dependent on numerous factors, many of which are outside its control. Relatively
small amounts of capital are required for the Company’s ongoing operations and
cash generated from operations should be adequate to fund the continued
operations.
The Company’s
ability to obtain funding from operations may be adversely impacted by, among
other things, market and economic conditions in the manufactured housing
financing markets generally. The ability to obtain funding from sales of
securities or debt financing arrangements may be adversely impacted by, among
other things, market and economic conditions in the manufactured housing
financing markets generally and the Company’s financial condition and
prospects.
The Company,
through its primary operating subsidiary Origen Financial L.L.C., currently has
a $46 million secured financing arrangement with the William M. Davidson Trust
u/a/d 9/24/08. The $46 million Note is a three-year secured note bearing
interest at 14.5% per year and is due on April 8, 2011. The $46 million Note is
secured by all of the Company’s assets. The $46 million Note had a gross
outstanding balance of $16 million at December 31, 2009.
NOTE
17 - Lease Commitments
|
The Company leases
office facilities and equipment under leasing agreements that expire at various
dates. These leases generally contain scheduled rent increases or escalation
clauses and/or renewal options. Future minimum rental payments under agreements
classified as operating leases with non- cancelable terms at December 31, 2009
were as follows (in thousands):
2010
|
|
$ |
589 |
|
2011
|
|
|
402 |
|
Thereafter
|
|
|
- |
|
Total
|
|
$ |
991 |
|
For the years ended
December 31, 2009 and 2008, rental and operating lease expense amounted to
approximately $0.6 million and $1.0 million, respectively. The Company did not
pay any contingent rental expense and received $0.1 million and $0.1 million in
sublease income during the years ended December 31, 2009 and 2008,
respectively.
NOTE
18 - Fair Value Measurements
|
On January 1, 2008,
the Company adopted guidance related to fair value measurements and additional
guidance for financial instruments. This guidance establishes a framework for
measuring fair value and expands disclosures about fair value measurements. The
updated guidance was issued to establish a uniform definition of fair value. The
definition of fair value under this guidance is market based as opposed to
company specific and includes the following:
• Defines
fair value as the price that would be received to sell an asset or paid to
transfer a liability, in either case through an orderly transaction between
market participants at a measurement date, and establishes a framework for
measuring fair value;
• Establishes
a three level hierarchy for fair value measurements based upon the transparency
of inputs to the valuation of an asset or liability as of the measurement
date;
• Nullifies
previous fair value guidance, which required the deferral of profit at inception
of a transaction involving a derivative financial instrument in the absence of
observable data supporting the valuation technique;
• Eliminates
large position discounts for financial instruments quoted in active markets and
requires consideration of the company’s creditworthiness when valuing
liabilities; and
• Expands
disclosures about instruments that are measured at fair value.
The accounting
guidance for financial instruments provides an option to elect fair value as an
alternative measurement for selected financial assets, financial liabilities,
unrecognized Company commitments and written loan commitments not previously
recorded at fair value. The Company has not elected to apply the fair value
option for any financial instruments.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
18 - Fair Value Measurements
(cont.)
|
Determination
of Fair Value
The Company has an
established process for determining fair values. Fair value is based upon quoted
market prices, where available. If listed prices or quotes are not available,
fair value is based upon internally developed models that use primarily
market-based or independently-sourced market parameters, including interest rate
yield curves and option volatilities. Valuation adjustments may be made to
ensure that financial instruments are recorded at fair value. These adjustments
include amounts to reflect counterparty credit quality, creditworthiness,
liquidity and unobservable parameters that are applied consistently over time.
Any changes to the valuation methodology are reviewed by management to determine
appropriateness of the changes. As markets develop and the pricing for certain
products becomes more transparent, the Company expects to continue to refine its
valuation methodologies.
The methods
described above may produce a fair value estimate that may not be indicative of
net realizable value or reflective of future fair values. Furthermore, while the
Company believes its valuation methods are appropriate and consistent with other
market participants, the use of different methodologies or assumptions to
determine the fair value of certain financial instruments could result in
different estimates of fair values of the same financial instruments at the
reporting date.
Valuation
Hierarchy
The accounting
guidance for fair value measurements and disclosures establishes a three-level
valuation hierarchy for disclosure of fair value measurements. The valuation
hierarchy favors the transparency of inputs to the valuation of an asset or
liability as of the measurement date and thereby favors use of Level 1 if
appropriate information is available, and otherwise Level 2 and finally Level 3
if Level 2 input is not available. The three levels are defined as
follows.
• Level
1 — Fair value is based upon quoted prices (unadjusted) for identical assets or
liabilities in active markets in which the Company can participate.
• Level
2 — Fair value is based upon quoted prices for similar (i.e., not identical)
assets and liabilities in active markets, and other inputs that are observable
for the asset or liability, either directly or indirectly, for substantially the
full term of the financial instrument.
• Level
3 — Fair value is based upon financial models using primarily unobservable
inputs.
A financial
instrument’s categorization within the valuation hierarchy is based upon the
lowest level of input within the valuation hierarchy that is significant to the
fair value measurement.
The following is a
description of the valuation methodologies used by the Company for instruments
measured at fair value, as well as the general classification of such
instruments pursuant to the valuation hierarchy
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
18 - Fair Value Measurements
(cont.)
|
Assets
Investments
- - "SOP – 03-3" - These securities are comprised of mortgage-backed
securities that have evidence of deterioration of credit quality at purchase.
The fair values are determined by using a discounted cash flow model. Due to
illiquidity in the markets, the Company determined the fair value of these
securities using internal valuation models and therefore classified them within
the Level 3 valuation hierarchy as these models utilize significant inputs which
are unobservable.
Loans
receivable
The Company
does not record these loans at fair value on a recurring basis. However, from
time to time a loan is considered impaired and an allowance for loan losses is
established. Loans are considered impaired if it is probable that payment of
interest and principal will not be made in accordance with the contractual terms
of the loan agreement. Once a loan is identified as impaired, the fair value of
the impaired loan is estimated using one of several methods, including
collateral value, market value of similar debt, enterprise value, and
liquidation value or discounted cash flows. Impaired loans do not require an
allowance if the fair value of the expected repayments or collateral exceed the
recorded investments in such loans. At December 31, 2009, substantially all of
the total impaired loans were evaluated based on the fair value of the
collateral rather than on discounted cash flows. Impaired loans where an
allowance is established based on the fair value of collateral require
classification in the fair value hierarchy. When the fair value of the
collateral is based on an observable market price or a current appraised value,
the Company records the impaired loan as a nonrecurring Level 2
valuation.
Repossessed
houses
Loans on
which the underlying collateral has been repossessed are adjusted to fair value
upon transfer to repossessed assets. Subsequently, repossessed assets are
carried at the lower of carrying value or fair value, less anticipated marketing
and selling costs. Fair value is based upon independent market prices, appraised
values of the collateral or management’s estimation of the value of the
collateral. When the fair value of the collateral is based on an observable
market price or a current appraised value, the Company records the repossessed
asset as a nonrecurring Level 2 valuation.
Derivative
Financial Instruments
The Company's
derivative contracts include only interest rate swaps, and are valued by
comparing similar assets in an active market with inputs that are observable and
are classified within Level 2 of the valuation hierarchy.
Liabilities
Warrants
Warrant liabilities
are valued using a Cox, Ross, Rubinstein lattice model. Significant assumptions
include expected volatility, a risk free rate and an expected life. The Company
records the warrants as a nonrecurring Level 2 valuation.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
18 - Fair Value Measurements
(cont.)
|
Assets and
liabilities measured at fair value on a recurring basis are summarized below
(dollars in thousands):
|
|
December 31,
2009
|
|
|
|
Fair Value
Measurement Using
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Assets/Liabilities
at Fair Value
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$ |
- |
|
|
$ |
257 |
|
|
$ |
- |
|
|
$ |
257 |
|
Total
assets
|
|
$ |
- |
|
|
$ |
257 |
|
|
$ |
- |
|
|
$ |
257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$ |
- |
|
|
$ |
33,065 |
|
|
$ |
- |
|
|
$ |
33,065 |
|
Total
liabilities
|
|
$ |
- |
|
|
$ |
33,065 |
|
|
$ |
- |
|
|
$ |
33,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2008
|
|
|
|
Fair Value
Measurement Using
|
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Assets/Liabilities
at Fair Value
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$ |
- |
|
|
$ |
326 |
|
|
$ |
- |
|
|
$ |
326 |
|
Total
assets
|
|
$ |
- |
|
|
$ |
326 |
|
|
$ |
- |
|
|
$ |
326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$ |
- |
|
|
$ |
57,887 |
|
|
$ |
- |
|
|
$ |
57,887 |
|
Total
liabilities
|
|
$ |
- |
|
|
$ |
57,887 |
|
|
$ |
- |
|
|
$ |
57,887 |
|
Derivative assets
are included in other assets on the balance sheet.
The Company did not
have any assets or liabilities measured at fair value on a recurring basis using
significant unobservable inputs (Level 3).
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
18 - Fair Value Measurements
(cont.)
|
The Company also
has assets that under certain conditions are subject to measurement at fair
value on a non-recurring basis. These include assets that are measured at the
lower of cost or market and had a fair value below cost at the end of the period
as summarized below:
|
|
December 31,
2009
|
|
|
|
Fair Value on
a Non-recurring Basis
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Asset/Liability
at Fair Value
|
|
Investments-SOP
– 03-3
|
|
$ |
- |
|
|
$ |
2,313 |
|
|
$ |
- |
|
|
$ |
2,313 |
|
Impaired
loans
|
|
|
- |
|
|
|
4,262 |
|
|
|
- |
|
|
|
4,262 |
|
Repossessed
assets
|
|
|
- |
|
|
|
7,918 |
|
|
|
- |
|
|
|
7,918 |
|
Total
Asset
|
|
$ |
- |
|
|
$ |
14,493 |
|
|
$ |
- |
|
|
$ |
14,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2008
|
|
|
|
Fair Value on
a Non-recurring Basis
|
|
|
|
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Asset/Liability
at Fair Value
|
|
Investment-SOP
– 03-3
|
|
$ |
- |
|
|
$ |
3,400 |
|
|
$ |
- |
|
|
$ |
3,400 |
|
Impaired
loans
|
|
|
- |
|
|
|
3,600 |
|
|
|
- |
|
|
|
3,600 |
|
Repossessed
houses
|
|
|
- |
|
|
|
4,543 |
|
|
|
- |
|
|
|
4,543 |
|
Total
Asset
|
|
$ |
- |
|
|
$ |
11,543 |
|
|
$ |
- |
|
|
$ |
11,543 |
|
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
18 - Fair Value Measurements
(cont.)
|
Required
Financial Disclosure about Financial Instruments
The accounting
guidance for financial instruments requires disclosures of the estimated fair
value of certain financial instruments and the methods and significant
assumptions used to estimate their fair values. Certain financial instruments
and all nonfinancial instruments are excluded from the scope of this guidance.
Accordingly, the fair value disclosures required by this guidance are only
indicative of the value of individual financial instruments as of the dates
indicated and should not be considered an indication of the fair value of the
Company.
|
|
2009
|
|
|
2008
|
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
|
Carrying
Amount
|
|
|
Estimated
Fair Value
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$ |
3,827 |
|
|
$ |
3,827 |
|
|
$ |
14,118 |
|
|
$ |
14,118 |
|
Restricted
cash
|
|
|
10,419 |
|
|
|
10,419 |
|
|
|
12,927 |
|
|
|
12,927 |
|
Investments
|
|
|
8,727 |
|
|
|
8,727 |
|
|
|
9,739 |
|
|
|
5,804 |
|
Loans
receivable
|
|
|
808,360 |
|
|
|
708,772 |
|
|
|
911,947 |
|
|
|
886,088 |
|
Derivatives
|
|
|
257 |
|
|
|
257 |
|
|
|
326 |
|
|
|
326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitization
financing
|
|
|
689,762 |
|
|
|
537,767 |
|
|
|
775,120 |
|
|
|
687,743 |
|
Note payables
- related party
|
|
|
15,638 |
|
|
|
15,638 |
|
|
|
29,351 |
|
|
|
29,351 |
|
Derivatives
|
|
|
33,065 |
|
|
|
33,065 |
|
|
|
57,887 |
|
|
|
57,887 |
|
The methods and
assumptions that were used to estimate the fair value of financial assets and
financial liabilities that are measured at fair value on a recurring or
non-recurring basis are discussed above. The following methods and assumptions
were used to estimate the fair value for other financial instruments for which
it is practicable to estimate that value:
•
|
Cash,
cash equivalents and restricted cash - Due to their short term in
nature, the carrying amount of cash, cash equivalents, and restricted cash
approximates fair value.
|
•
|
Investment-Held-to-Maturity
- The fair value of investments, classified as held to maturity, is
estimated by management using an internally developed cash flow model
using market interest rates inputs as well as management's best estimates
of spreads for similar collateral.
|
•
|
Loans
Receivable - The fair value of loans is estimated by using
internally developed discounted cash flow models using market interest
rate inputs as well as management's best estimate of spreads for similar
collateral.
|
•
|
Notes
Payable Related Party - The fair value of notes payable is
estimated by management by using an internal model using rates currently
available to the Company for debt with similar terms and remaining
maturities.
|
•
|
Securitized
Financing - The fair value of securitized financing traunches that
are due in the next three years and the interest rates are variable. The
carrying value approximates the fair value. For traunches that are fixed
rate and longer term, the fair value is estimated based on a discounted
cash flow model that incorporates the Company's current borrowing rates or
similar types of borrowing
arrangements.
|
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
19 - Related Party Transactions
|
Origen Servicing,
Inc., a wholly owned subsidiary of Origen Financial L.L.C., serviced
approximately $0 and $32.3 million in manufactured housing loans for Sun Home,
Inc., an affiliate of Sun Communities, Inc. as of December 31, 2009 and June 30,
2008, respectively. On July 1, 2008, the Company completed the sale
of its servicing platform assets to Green Tree and ceased servicing
loans. Gary A. Shiffman, one of the Company’s directors is the
Chairman of the Board, Chief Executive Officer and President of Sun Communities.
Sun Communities owns approximately 19% of the Company’s outstanding stock. Mr.
Shiffman beneficially owns approximately 19% of the Company’s outstanding, stock
which amount includes his deemed beneficial ownership of the stock owned by Sun
Communities. Mr. Shiffman and his affiliates beneficially own approximately 10%
of the outstanding common stock of Sun Communities.
With the sale of
the Company’s servicing platform assets, Sun Communities engaged a different
entity to continue the servicing of the loans. In order to transfer the loan
servicing contract to a different servicer, Sun Communities paid the Company a
fee of approximately $0.3 million during the year ended December 31,
2008. Servicing fees paid by Sun Home to Origen Servicing, Inc. were
approximately $0 and $0.2 million during the years ended December 31, 2009 and
2008, respectively.
On July 31, 2008,
the Company completed the sale of certain of its third party origination and
insurance platform assets for $1.0 million to Origen Financial Services, LLC
(“OFS, LLC”), a newly formed venture, the managing member of which is a wholly
owned affiliate of Manage America, a nationally recognized provider of services
to the manufactured housing industry. A subsidiary of Sun Communities owns 25%
of the equity interests of the newly formed venture, OFS, LLC. Sun Communities
appointed Mr. Shiffman, as its voting representative of the management team
assigned to OFS, LLC.
Prior to the sale
of certain of the Company’s third party origination and insurance platform
assets, the Company had agreed to fund loans that met Sun Home’s underwriting
guidelines and then transfer those loans to Sun Home pursuant to a commitment
fee arrangement. The Company recognized no gain or loss on the transfer of these
loans. The Company funded approximately $0 and $12.4 million in loans and
transferred approximately $0 and $12.4 million in loans under this agreement
during the years ended December 31, 2009 and 2008, respectively. The Company
recognized fee income under this agreement of approximately $0 and $230,000 for
the years ended December 31, 2009 and 2008, respectively.
Prior to the sale
of the Company’s servicing platform assets to Green Tree, Sun Home had purchased
certain repossessed houses owned by the Company and located in manufactured
housing communities owned by Sun Communities, subject to Sun Home’s prior
approval. Under this agreement, the Company sold to Sun Home approximately $0
and $0.6 million of repossessed houses during the years ended December 31, 2009
and 2008, respectively. This program allowed the Company to further enhance
recoveries on repossessed houses and allows Sun Home to retain houses for resale
in its communities.
The Company,
through its primary operating subsidiary Origen Financial L.L.C., currently has
a $46 million secured financing arrangement with the William M. Davidson Trust
u/a/d 9/24/08, of which Jonathan S. Aaron, a director of the Company, is a co
trustee. See Note 11 — “Debt” under the subheading “Notes Payable — Related
Party” for further discussion of this arrangement.
The Company leases
its executive offices in Southfield, Michigan from an entity in which Mr.
Shiffman and certain of his affiliates beneficially own approximately a 21%
interest. Ronald A. Klein, a director and the Chief Executive Officer of the
Company, owns less than a 1% interest in the landlord entity. Mr. Davidson’s
estate beneficially owns an approximate 14% interest in the landlord entity. The
Company recorded rental expense for these offices of approximately $568,000 and
$577,000 for the years ended December 31, 2009 and 2008,
respectively.
ORIGEN
FINANCIAL, INC.
NOTES TO FINANCIAL
STATEMENTS
December 31, 2009
and 2008
NOTE
19 - Related Party Transactions
(Continued)
|
In November 2008
the Company entered into an agreement with Viva Beverages LLC (“Viva”) to
sublease approximately 5,200 square feet of the Company’s executive office space
in Southfield, Michigan. Mr. Shiffman owns approximately 46.7% of
Viva’s equity interests and one of his children owns approximately 6.7% of
Viva's interests. The term of the sublease runs through August 2011
and the sublease payments total approximately $52,000 in 2010 and $35,000 in
2011. The sublease payments are equal to the Company's lease
payments under the prime lease with respect to the space that has been
subleased. There were $26,000 and $0 in lease payments for the years ended
December 31, 2009 and 2008, respectively.
NOTE
20 - Discontinued Operations
|
Discontinued
operations include the operating results of the Company’s servicing and
insurance platforms, which meet the definition of a “component of an entity,”
and have been accounted for under SFAS 144, “Accounting for the Impairment or
Disposal of Long-lived Assets” (“SFAS 144”). Accordingly, the Company’s
consolidated financial statements and related notes have been presented to
reflect discontinued operations for all periods presented. On July 1, 2008, the
Company completed the sale of its servicing platform assets to Green Tree for
$37.0 million. The proceeds were used to repay approximately $28.0 million in
related party debt. On July 31, 2008, the Company completed the sale of its
third party origination and insurance platform assets to a newly formed venture,
the managing member of which is a wholly owned affiliate of Manage America, a
nationally recognized provider of services to the manufactured housing industry
for an estimated $1.0 million. The proceeds were used to pay down approximately
$1.0 million of related party debt.
On January 14,
2009, the Company completed the sale of all the issued and outstanding stock of
Origen Servicing Inc to Prime RF Holdings LLC. The Purchase price was
$175,000.
The following
summarizes the results of discontinued operations for the years ended December
31 (in thousands):
|
|
2009
|
|
|
2008
|
|
Revenues from
discontinued operations
|
|
$ |
- |
|
|
$ |
9,934 |
|
Expenses from
discontinued operation
|
|
|
- |
|
|
|
(7,365 |
) |
Gain on sale
of discontinued operations
|
|
|
175 |
|
|
|
6,523 |
|
Income from
discontinued operations
|
|
|
175 |
|
|
|
9,092 |
|
Income tax
expense
|
|
|
- |
|
|
|
- |
|
Income from
discontinued operations, net of income taxes
|
|
$ |
175 |
|
|
$ |
9,092 |
|
NOTE
21 - Subsequent Events
|
The Company has
evaluated subsequent events occurring through March 15, 2010, the date that the
financial statements were available for issuance, for events requiring recording
or disclosure in the financial statement. In January, February and
March 2010, the Company made additional principal payments of $1.0 million each
on its related party debt, reducing the outstanding principal balance to $13.0
million.