PINX:SGGH Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

PINX:SGGH (): Fair Value Estimate
Premium
PINX:SGGH (): Consider Buying
Premium
PINX:SGGH (): Consider Selling
Premium
PINX:SGGH (): Fair Value Uncertainty
Premium
PINX:SGGH (): Economic Moat
Premium
PINX:SGGH (): Stewardship
Premium
 
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2012

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 001-08007

 

 

SIGNATURE GROUP HOLDINGS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Nevada   95-2815260

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

15303 Ventura Boulevard, Suite 1600

Sherman Oaks, California 91403

  (805) 435-1255
(Address of Principal Executive Offices)(Zip Code)   (Registrant’s Telephone Number, including Area Code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 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).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer   ¨    Accelerated Filer   ¨
Non-Accelerated Filer   ¨ (Do not check if a smaller reporting company)    Smaller Reporting Company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    ¨  Yes    x  No

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    x  Yes    ¨  No

The number of shares outstanding of the registrant’s common stock as of August 10, 2012 was 119,931,857 shares.

 

 

 


Table of Contents

SIGNATURE GROUP HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

For the Quarterly Period Ended June 30, 2012

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

  

Item 1. Financial Statements

     1   

  Consolidated Balance Sheets

     1   

  Consolidated Statements of Operations

     2   

  Consolidated Statements of Comprehensive Loss

     3   

  Consolidated Statement of Changes in Shareholders’ Equity

     4   

  Consolidated Statements of Cash Flows

     5   

  Notes to Unaudited Consolidated Financial Statements

     6   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     29   

Item 3. Quantitative and Qualitative Disclosures About Market Risks

     52   

Item 4. Controls and Procedures

     52   

PART II OTHER INFORMATION

  

Item 1. Legal Proceedings

     54   

Item 1A. Risk Factors

     55   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     55   

Item 3. Defaults Upon Senior Securities

     55   

Item 4. Mine Safety Disclosures

     55   

Item 5. Other Information

     55   

Item 6. Exhibits

     56   


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Signature Group Holdings, Inc.

Consolidated Balance Sheets

 

(Dollars in thousands, except per share amounts)    June 30,
2012
    December 31,
2011
 
     (Unaudited)        
ASSETS     

Cash and cash equivalents

   $ 53,366      $ 52,439   

Investment securities, available for sale

     5,146        4,991   

Loans held for sale, net

     —          20,317   

Loans receivable, net

     27,625        3,750   

Trade and other receivables, net

     4,715        4,112   

Inventories

     9,385        8,681   

Intangible assets, net

     5,752        6,978   

Goodwill

     18,180        18,180   

Other assets

     4,631        2,754   

Assets of discontinued operations

     4,170        20,816   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 132,970      $ 143,018   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Liabilities:

    

Lines of credit

   $ 1,700      $ 5,116   

Accrued expenses and other liabilities

     6,189        5,916   

Contingent consideration

     3,746        3,597   

Long-term debt

     48,982        51,613   

Common stock warrant liability

     2,000        1,403   

Liabilities of discontinued operations

     10,834        11,536   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     73,451        79,181   

Commitments and contingencies (Note 15)

    

Shareholders’ equity:

    

Preferred stock, $0.01 par value; 10,000,000 shares authorized; none issued or outstanding

     —          —     

Common stock, $0.01 par value; 190,000,000 shares authorized; 119,931,857 and 117,431,856 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively

     1,156        1,151   

Additional paid-in capital

     447,607        446,805   

Accumulated deficit

     (389,451     (384,315

Accumulated other comprehensive income

     207        196   
  

 

 

   

 

 

 

Total shareholders’ equity—Signature Group Holdings, Inc.

     59,519        63,837   

Noncontrolling interest

     —          —     
  

 

 

   

 

 

 

TOTAL SHAREHOLDERS’ EQUITY

     59,519        63,837   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

   $ 132,970      $ 143,018   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

1


Table of Contents

Signature Group Holdings, Inc.

Consolidated Statements of Operations

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
(Dollars in thousands, except per share amounts)    2012     2011     2012     2011  

Revenues:

        

Net sales

   $ 9,119      $ 295      $ 17,160      $ 840   

Interest

     667        1,046        2,141        1,935   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     9,786        1,341        19,301        2,775   
        

Expenses:

        

Cost of goods sold

     5,727        247        10,672        521   

Selling, general and administrative

     901        1,987        1,741        2,597   

Compensation

     2,011        764        4,235        1,043   

Professional fees

     2,139        1,460        3,886        2,536   

Amortization of intangibles

     605        78        1,210        104   

Interest

     1,059        905        2,172        1,794   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     12,442        5,441        23,916        8,595   
        

Other income (expense):

        

Discount recognized on payoff of loans receivable, net

     230        —          230        —     

Change in market valuation allowance on loans held for sale, net

     —          187        2,776        625   

Change in fair value of common stock warrant liability

     (600     (128     (597     673   

Gain on extinguishment of long-term debt

     396        —          396        —     

Loss on investment securities, available for sale

     (620     —          (620     —     

Other income (expense)

     (54     —          (130     281   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (648     59        2,055        1,579   
        

Loss from continuing operations before reorganization items, net and income taxes

     (3,304     (4,041     (2,560     (4,241

Reorganization items, net

     (14     826        80        1,325   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (3,290     (4,867     (2,640     (5,566
        

Income tax expense (benefit)

     36        (14     85        (112
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (3,326     (4,853     (2,725     (5,454

Loss from discontinued operations, net of income taxes

     (564     (1,403     (2,411     (4,975
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (3,890     (6,256     (5,136     (10,429
        

Loss attributable to noncontrolling interest

     —          (101     —          (61
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Signature Group Holdings, Inc.

   $ (3,890   $ (6,155   $ (5,136   $ (10,368
  

 

 

   

 

 

   

 

 

   

 

 

 
        

LOSS PER SHARE:

        

Basic and diluted:

        

Loss from continuing operations

   $ (0.03   $ (0.04   $ (0.02   $ (0.05

Loss from discontinued operations, net of income taxes

     —          (0.01     (0.02     (0.04
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Signature Group Holdings, Inc.

   $ (0.03   $ (0.05   $ (0.04   $ (0.09
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

2


Table of Contents

Signature Group Holdings, Inc.

Consolidated Statements of Comprehensive Loss

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
(Dollars in thousands)    2012     2011     2012     2011  

Net loss attributable to Signature Group Holdings, Inc.

   $ (3,890   $ (6,155   $ (5,136   $ (10,368

Other comprehensive income (loss):

        

Net change in unrealized gains (losses) during period:

        

Investment securities, available for sale

     (350     (1     11        18   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (350     (1     11        18   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive loss

   $ (4,240   $ (6,156   $ (5,125   $ (10,350
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3


Table of Contents

Signature Group Holdings, Inc.

Consolidated Statement of Changes in Shareholders’ Equity

(Unaudited)

 

                                                                                                                                                                       
     Preferred Stock      Common Stock      Additional
Paid-in
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income
     Total  
(Dollars in thousands)    Number of
Outstanding
Shares
     Amount      Number of
Outstanding
Shares
     Amount            

Balance, December 31, 2011

     —         $ —           117,431,856       $ 1,151       $ 446,805      $ (384,315   $ 196       $ 63,837   

Net loss attributable to Signature Group Holdings, Inc.

     —           —           —           —           —          (5,136     —           (5,136

Issuance of restricted stock, net of forfeitures

     —           —           2,500,001         —           —          —          —           —     

Restricted stock vested

     —           —           —           5         (5     —          —           —     

Amortization of share-based compensation

     —           —           —           —           747        —          —           747   

Common stock warrant consideration

     —           —           —           —           60        —          —           60   

Change in accumulated other comprehensive income

     —           —           —           —           —          —          11         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance, June 30, 2012

     —         $ —           119,931,857       $ 1,156       $ 447,607      $ (389,451   $ 207       $ 59,519   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

4


Table of Contents

Signature Group Holdings, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

     Six Months Ended
June 30,
 
(Dollars in thousands)    2012     2011  

Cash flows from operating activities:

    

Net loss

   $ (5,136   $ (10,429

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Loss from discontinued operations, net of income taxes

     2,411        4,975   

Depreciation and amortization

     1,243        227   

Discount recognized on payoff of loans receivable, net

     (230     —     

Change in market valuation allowance on loans held for sale, net

     (2,776     (625

Change in fair value of common stock warrant liability

     597        (673

Gain on extinguishment of long-term debt

     (396     —     

Loss on investment securities, available for sale

     620        —     

Amortization of share-based compensation

     747        155   

Principal collections on loans held for sale, net

     92        118   

Other (income) expense

     149        (281

Accretion of discounts

     (299     (184

Changes in assets and liabilities:

    

Trade and other receivables, net

     (603     298   

Inventories

     (704     (206

Other assets

     876        (581

Accrued expenses and other liabilities

     (210     742   

Net cash provided by (used in) operating activities of discontinued operations

     9,635        (3,733
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     6,016        (10,197
    

Cash flows from investing activities:

    

Acquisition of business, net of cash

     —          (1,000

Purchases of loans receivable

     —          (4,250

Purchases of investment securities, available for sale

     (2,560     —     

Repayments (advances), net under revolving credit facilities in loans receivable, net

     (1,591     134   

Principal collections on loans receivable, net

     802        50   

Purchases of property and equipment

     (47     (5

Net cash provided by investing activities of discontinued operations

     3,892        7,423   
  

 

 

   

 

 

 

Net cash provided by investing activities

     496        2,352   
    

Cash flows from financing activities:

    

Repayments on lines of credit, net of advances

     (3,416     (1,234

Principal payments on long-term debt

     (877     —     

Extinguishment of long-term debt

     (1,358     —     

Common stock warrant consideration

     60        60   
  

 

 

   

 

 

 

Net cash used in financing activities

     (5,591     (1,174
    

Increase (decrease) in cash and cash equivalents

     921        (9,019

Cash and cash equivalents, beginning of period

     52,556        70,992   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 53,477      $ 61,973   
  

 

 

   

 

 

 
    

Cash and cash equivalents, end of period—continuing operations

   $ 53,366      $ 61,856   

Cash and cash equivalents, end of period—discontinued operations

     111        117   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 53,477      $ 61,973   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for income taxes

   $ 99      $ 56   

Cash paid for interest

     2,083        1,794   

Transfer of loans held for sale, net (continuing operations) to loans receivable, net

     23,000        —     

Transfers of loans held for sale, net (discontinued operations) to real estate owned, net

     493        229   

Commercial loans received from sale of business assets

     3,643        —     

Preferred stock received from sale of business assets

     800        —     

Common stock received in exchange for investment securities, available for sale

     1,940     

Transfer of other assets to premises, held for sale

     —          2,348   

Change in accumulated other comprehensive income

     11        18   

See accompanying notes to unaudited consolidated financial statements.

 

5


Table of Contents

Signature Group Holdings, Inc.

Notes to Unaudited Consolidated Financial Statements

NOTE 1 — BUSINESS AND OPERATIONS

Signature Group Holdings, Inc. (“Signature” or the “Company”) is a diversified business and financial services enterprise with principal holdings in cash, financial assets, and controlling ownership interests in two operating subsidiaries, North American Breaker Co., LLC (“NABCO”) and Cosmed, Inc. (“Cosmed”).

NABCO, a wholly owned subsidiary headquartered in Burbank, California, is one of the largest independent suppliers of circuit breakers in the country. NABCO’s niche is focused on the replacement market, particularly for commercial and industrial circuit breakers where replacement time is extremely important, but it also supplies residential circuit breakers in order to provide its customers with a single source solution for their circuit breaker needs. NABCO operates from five warehouse locations across the country, which allows NABCO to service a broad section of its customer base with next day ground shipping.

Cosmed is 92% owned by the Company with the remaining 8% noncontrolling interest held by the former owners of Costru Company, LLC (“Costru”), the entity that sold substantially all of its assets to Cosmed. Cosmed does business under the trade name Cosmedicine™ and owns the intellectual property and proprietary product formulations for a line of anti-aging skin care products. The Cosmedicine formulations are proven effective at reducing dryness, fine lines and wrinkles, skin discolorations, and multiple forms of acne. Cosmed markets and sells its skin care line in specialty retail stores across the country, as well as through certain specialty internet channels. Cosmed’s products are manufactured in an outsourced U.S. Federal Drug Administration and over-the-counter approved laboratory.

The Company’s Signature Special Situations business unit primarily acquires sub-performing and non-performing commercial and industrial loans, leases, and mortgages typically at a discount to unpaid principal balance. The Company may also originate secured debt financings to middle market companies in a variety of situations, including supporting another transaction such as an acquisition, recapitalization or restructuring. The Company takes positions in corporate bonds, trade claims, and other structured debt instruments, which may be performing, sub-performing or non-performing. The Company may also acquire specialized assets, such as product or brand licenses, royalty streams, or subscriber bases. The largest asset in this segment is a portfolio of residential real estate loans.

Additionally, the Company’s operations include a discontinued operations segment, where it holds and manages certain assets and liabilities related to the former businesses of the Company, then known as Fremont General Corporation (“Fremont”), including Federal Home Loan Bank (“FHLB”) stock, residential real estate mortgages, residential real estate acquired through foreclosure, commercial real estate investments, litigation claims under fidelity insurance bonds, and contingent liabilities for litigation and repurchase claims. The assets and liabilities of discontinued operations are being managed to maximize their cash recoveries and limit costs and exposures to the Company.

NOTE 2 — FINANCIAL STATEMENT PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited consolidated financial statements include the accounts of Signature, its wholly owned subsidiaries and its majority owned subsidiaries. The Company accounts for investments in companies over which it has the ability to exercise significant influence, but does not hold a controlling interest, under the equity method of accounting, and the Company records its proportionate share of income or losses in other income (expense) in the consolidated statements of operations. The Company accounts for investments in companies over which it does not have the ability to exercise significant influence under the cost method of accounting. These investments are carried at cost within other assets in the consolidated balance sheets and are adjusted only for other-than-temporary declines in fair value.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation, have been included. The Company evaluates subsequent events through the date of filing with the Securities and Exchange Commission (“SEC” or “Commission”). Operating results for the three and six months ended June 30, 2012 are not indicative of the results that may be expected for the year ending December 31, 2012. These interim period unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2011, which are included in the Company’s Annual Report on Form 10-K (the “Annual Report”), as filed with the SEC on March 30, 2012.

All significant intercompany balances and transactions have been eliminated in consolidation. Certain previously reported amounts as of December 31, 2011, for the three months ended March 31, 2012 and for the three and six months ended June 30, 2011 have been reclassified to conform to the current presentation. Material prior period reclassifications include the following:

 

   

The Company’s performing residential real estate loans, previously held for sale in discontinued operations, were reclassified as loans held for investment within loans receivable, net in continuing operations as a result of management’s decision to

 

6


Table of Contents
 

terminate its efforts to sell these loans. The loans are presented as loans held for sale, net in continuing operations as of December 31, 2011, reflecting the Company’s intent as of that date. Effective April 1, 2012, the loans are presented as a component of loans receivable, net.

 

   

Interest income, changes in the market valuation allowance and loan servicing expenses previously presented in discontinued operations are now presented in continuing operations as a result of the reclassification of the loans to continuing operations.

Use of estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that materially affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the consolidated financial statements and revenues and expenses during the reporting periods. Actual results could differ from those estimates. Certain of the accounts that require significant judgment by management include valuation of loans held for sale, commercial real estate investments, real estate owned (“REO”), common stock warrant liability and contingent consideration; the allowance for loan losses on loans receivable; litigation and repurchase reserves; impairment of long-lived assets; valuation allowance on deferred tax assets; and fair values used in the allocation of purchase price in business combinations.

The Company’s significant accounting policies are disclosed in the Annual Report. Material additions to these accounting policies are described below.

Allowance for loan losses

The Company has three classes of loans within loans receivable: residential real estate loans, commercial real estate loans and commercial loans. An allowance for loan losses for each class of loans receivable is maintained at levels deemed adequate by management to provide for probable and inherent losses. Provisions for loan losses are added to, and charge-offs deducted from, the respective allowance for loan losses.

Residential real estate loans are comprised of first lien mortgages secured by single-family homes. The allowance for residential real estate loan losses is based on past loan loss experience, loan portfolio composition and risk, current economic conditions that may affect the borrower’s ability to pay, delinquencies and the underlying collateral value. Residential real estate loans are deemed uncollectible and charged off at the completion of foreclosure.

Commercial real estate loans are comprised of participation interests in multi-family real estate loans. The allowance for commercial real estate loan losses is primarily based on default assumptions, which are based, at least in part, on past loss experience, loan portfolio composition and risk, current economic conditions that may affect the borrower’s ability to pay, delinquencies and the underlying collateral value. Commercial real estate loans are deemed uncollectible and charged off at the completion of foreclosure.

Commercial loans include revolving line of credit facilities and term debt, generally secured by assets of the debtor. The allowance for commercial loan losses is based on financial information provided by borrowers, current economic conditions that may affect the borrower’s ability to pay, delinquencies and the underlying collateral value. Commercial loans are charged off when all possible means of collection have been exhausted and the remaining balance due is deemed uncollectible.

The allowance for loan losses on purchased credit-impaired loans is used to maintain the effective yield of each credit-impaired loan or portfolio acquired. The allowance for loan losses on purchased credit-impaired loans is determined using expected cash flow models for each loan or portfolio acquired, and is established in any period where the discounted expected future cash flows, using the loan or portfolio effective yield, is less than the carrying value of the loan portfolio. The provision for loan losses is added to the allowance for loan losses on purchased credit-impaired loans and the allowance related to each purchased credit-impaired loan or portfolio is available to absorb losses only from that loan or loans in that acquired portfolio. Purchased credit-impaired loans removed from a pool as a result of the completion of foreclosure or short sale are charged off and deducted from the allowance for loan losses on purchased credit-impaired loans, to the extent available. Where the discounted expected future cash flows, using the loan or portfolio effective yield, is greater than the carrying value of the portfolio, the carrying value is increased to the level at which the book yield will be maintained. The increase in carrying value is achieved through the reversal of the allowance for loan losses and corresponding provision. To the extent the discounted expected future cash flows are greater than the carrying value after the allowance is reduced to zero, the effective yield is increased to a level such that the discounted expected future cash flows, using the higher effective yield, will equal the recorded investment in the loan or portfolio.

All classes of loans receivable are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect scheduled payments of principal and interest when due according to the contractual terms of the loan agreements. Impairment is measured on a loan-by-loan basis by comparing the fair value of the underlying collateral, net of estimated selling or disposal costs (“net realizable value”), against the recorded investment of the loan.

The net realizable values of collateral underlying residential and commercial real estate loans are estimated by management from broker price opinions and internet real estate web sites. The net realizable values of collateral underlying commercial loans are estimated by management from financial information provided by borrowers, appraisals and other valuation analyses. Estimated net realizable values are updated quarterly after a loan becomes impaired; however, management considers information received from the primary loan servicer, special servicers and direct contact with borrowers to ensure that impaired loans are measured appropriately at the end of each period presented. While management uses

 

7


Table of Contents

available information to estimate losses on loans receivable, future additions to any of the allowance for loan losses may be necessary, based on changes in estimates resulting from changes in economic and other conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revisions as more information becomes available.

Management estimates an allowance for loan losses on loans not identified as impaired through the use of various migration analyses. The migration analyses provide management a range of losses based upon various risk characteristics, including origination vintage, delinquency, geographic distribution, and underlying property type. Additionally, management considers various qualitative or environmental factors to adjust the quantitatively computed inherent losses projected by the migration analyses. Qualitative factors include delinquency, loss and collateral value trends, specific industry trends, and changes in unemployment, gross domestic product, consumer prices, housing data and other leading economic indicators.

Troubled debt restructurings

Troubled debt restructurings are renegotiated loans where borrower concessions have been granted, which the Company would not otherwise make. Concessions may include forbearance through interest rate reductions or interest only periods; accrued but unpaid interest and advances may be added to the outstanding principal balance. The Company classifies troubled debt restructured loans as impaired and evaluates the need for an allowance for loan losses at the time of restructuring. An allowance for loan losses is based on the present value of estimated future cash flows and the estimated net realizable value of the underlying collateral.

NOTE 3 — CASH AND CASH EQUIVALENTS

Cash and cash equivalents are held in non-interest bearing deposit accounts in financial institutions and money market funds. As of June 30, 2012 and December 31, 2011, $4.4 million of cash and cash equivalents were restricted. At June 30, 2012 and December 31, 2011, restricted cash included $0.9 million related to amounts on deposit securing a letter of credit associated with insurance policies; and $3.5 million related to amounts on deposit pending decisions on legal cases currently on appeal or awaiting final determination. Included in cash and cash equivalents as of June 30, 2012 and December 31, 2011 was $0.4 million and $0.9 million, respectively, representing borrower remittances, held in trust accounts maintained by the Company’s loan servicer.

NOTE 4 — INVESTMENT SECURITIES, AVAILABLE FOR SALE

The following table presents the components of investment securities, available for sale as of:

 

                                       
(Dollars in thousands)    June 30,
2012
     December 31,
2011
 

Corporate bonds

   $ 5,146       $ 4,991   
  

 

 

    

 

 

 

Investment securities, available for sale

   $ 5,146       $ 4,991   
  

 

 

    

 

 

 

The following table presents the contractual maturities of corporate bonds as of:

 

                                       
     June 30, 2012  
(Dollars in thousands)    Amortized Cost      Fair Value  

Due in one year or less

   $ —         $ —     

Due after one year through three years

     4,939         5,146   

Due after three years through five years

     —           —     
  

 

 

    

 

 

 

Total

   $ 4,939       $ 5,146   
  

 

 

    

 

 

 

The amortized cost and gross unrealized holding gains for investment securities, available for sale consisted of the following as of:

 

                                       
(Dollars in thousands)    June 30,
2012
     December 31,
2011
 

Amortized cost

   $ 4,939       $ 4,795   

Gross unrealized holding gains

     207         196   
  

 

 

    

 

 

 

Estimated fair value

   $ 5,146       $ 4,991   
  

 

 

    

 

 

 

An issuer of securities held in the corporate bond portfolio at March 31, 2012 filed for bankruptcy protection in April 2012 and emerged from bankruptcy in June 2012. Under the confirmed plan of reorganization, the junior bonds held in the Company’s

 

8


Table of Contents

corporate bond portfolio were converted to a new class of common stock of the reorganized debtor. The estimated fair value of the common stock the Company received upon the reorganized debtor’s emergence from bankruptcy is the new cost basis of common stock received in full satisfaction of the junior bonds. As of June 30, 2012, fair value was determined based on the pro forma capital structure exiting bankruptcy prepared by a third party analyst, as there was no public market for the common stock. Accordingly, the common stock is recorded at cost and classified in other assets in the accompanying unaudited consolidated balance sheets. As a result of this recapitalization, the Company recognized the reversal of $0.4 million of unrealized gains reported at March 31, 2012, and recorded a realized loss of $0.6 million in the quarter ended June 30, 2012. In addition to the realized loss, the Company also reversed $0.5 million of accrued interest income as a result of the bankruptcy.

NOTE 5 — LOANS

Loans consist of loans held for sale, net and loans receivable, net. The following tables present the Company’s loans as of June 30, 2012 and December 31, 2011:

Loans held for sale, net

 

                                             
(Dollars in thousands)    June 30,
2012
     December 31,
2011
 

Unpaid principal balance

   $ —         $ 47,014   

Market valuation allowance

     —           (26,697
  

 

 

    

 

 

 

Loans held for sale, net

   $ —         $ 20,317   
  

 

 

    

 

 

 

Loans receivable, net

 

                                             
(Dollars in thousands)    June 30,
2012
    December 31,
2011
 

Residential real estate loans:

    

Unpaid principal balance

   $ 46,173      $ —     

Discount

     (23,544     —     
  

 

 

   

 

 

 

Recorded investment

     22,629        —     

Allowance for loan losses

     —          —     
  

 

 

   

 

 

 

Total residential real estate loans

     22,629        —     

Commercial real estate loans:

    

Unpaid principal balance

     1,839        1,923   

Discount

     (12     —     
  

 

 

   

 

 

 

Recorded investment

     1,827        1,923   

Allowance for loan losses

     (50     (50
  

 

 

   

 

 

 

Total commercial real estate loans

     1,777        1,873   

Commercial loans:

    

Revolving lines of credit

     2,764        1,036   

Term note unpaid principal balance

     1,000        —     

Term note discount

     (545     —     

Purchased credit-impaired term loan unpaid principal balance

     —          5,099   

Purchased credit-impaired term loan discount

     —          (4,258
  

 

 

   

 

 

 

Recorded investment

     3,219        1,877   

Allowance for loan losses

     —          —     
  

 

 

   

 

 

 

Total commercial loans

     3,219        1,877   
  

 

 

   

 

 

 

Loans receivable, net

   $ 27,625      $ 3,750   
  

 

 

   

 

 

 

Loans held for sale, net

In April 2012, the Company determined that the economics of a “hold and retain” strategy were advantageous as compared to the secondary market bids received for the performing (less than sixty days past due) subprime residential real estate loan portfolio. Given the portfolio’s six month effective yield of 13.9% and the Company’s current liquidity position, management intends to hold these loans for investment for the foreseeable future. On April 1, 2012, $23.0 million of performing residential real estate loans were

 

9


Table of Contents

reclassified to loans receivable, net within Signature Special Situations in continuing operations, from loans held for sale, net within discontinued operations. As a result of the reclassification, the loans are presented as loans held for sale, net in the consolidated balance sheets presented as of and prior to March 31, 2012. Furthermore, the results of operations related to these loans have been reclassified from discontinued operations to continuing operations for all periods presented. As of June 30, 2012, the loans are presented as a component of loans receivable, net in the unaudited consolidated balance sheet.

Loans receivable, net

Residential real estate loans are comprised of loans with maturities of up to thirty years and are typically secured by first deeds of trust on single-family residences. Many of the loans have principal amortization terms in excess of thirty years or no principal amortization (interest-only loans). The loans were generally made to borrowers who did not satisfy all of the credit, documentation and other underwriting standards prescribed by conventional mortgage lenders and loan buyers, such as Fannie Mae and Freddie Mac, and are commonly referred to as “subprime” or “non-prime” borrowers. As discussed above, during the second quarter of 2012, the Company transferred loans less than sixty days past due with an aggregate carrying value of $23.0 million from loans held for sale, net within discontinued operations to loans receivable, net, within continuing operations, to reflect the intentions of the Company. This reclassification of loans to the held for investment classification was made at fair value on the date of transfer and resulted in no gain or loss. The discount on residential real estate loans is accreted to interest income using the interest method over the contractual life, using the contractual terms of each loan.

Commercial real estate loans consist primarily of a participation interest in a pool of adjustable rate multi-family loans.

Commercial loans are comprised of senior secured debt of a manufacturing company that specializes in retail store fixtures and merchandise displays. On March 30, 2012, the debtor surrendered all of its assets serving as collateral securing the obligations owed to Signature, including trade receivables, equipment, inventories, and other operating assets in full satisfaction of the obligations owed. Simultaneously with the asset surrender, Signature sold all of the assets to a new company, majority owned and controlled by the original founder of the debtor business and certain new members of management. In connection with the sale of assets, Signature provided a secured revolving line of credit and secured term note, and received preferred stock in the new borrower and contingent consideration. The revolving line of credit is secured by the assets of the borrower, provides for maximum borrowings of $7.0 million, of which $3.2 million was initially drawn, has an interest rate of prime plus 2.75%, with a floor of 5.75% and matures on March 31, 2017. The term note in the amount of $1.0 million is secured by the assets of the borrower, has an interest rate of prime plus 2.75%, with a floor of 5.75% and also matures on March 31, 2017. Interest on the revolving line of credit and term note are due monthly. Draws on the revolving line of credit are subject to a borrowing base each period, with any outstanding balance due at maturity. Principal on the term note is due monthly beginning on April 1, 2015, with a final principal payment on March 31, 2017 totaling the outstanding principal on that date. The preferred stock has a stated value of $2.0 million, earns a 4.00% cumulative preferred return, and is convertible into 45.0% of the common stock of the borrower on a fully diluted basis. Contingent consideration in the amount of $0.5 million will be paid should certain pretax income targets be achieved by the borrower in any fiscal year ending on or before December 31, 2016. Signature estimated the fair value of each of the components of consideration received as of the date of the asset sale as follows: revolving line of credit—$3.2 million; term note—$0.4 million; preferred stock—$0.8 million; and contingent consideration—zero. No gain or loss was recognized in connection with the surrender and simultaneous sale of assets. At June 30, 2012, the new debtor is current and in compliance with all debt covenants.

Prior to the surrender of the assets in full satisfaction of the outstanding loans, the commercial term loan was accounted for as a purchased credit-impaired loan. The following table shows activity for the accretable yield on the purchased credit-impaired commercial term loan for the six months ended June 30, 2012 and 2011:

 

                     
     Six Months Ended
June 30,
 
(Dollars in thousands)    2012     2011  

Accretable yield, beginning of period

   $ 3,002      $ —     

Purchases of credit-impaired loans

     —          2,994   

Accretion

     (107     (117

Reclassifications

     —          329   

Dispositions

     (2,895     —     
  

 

 

   

 

 

 

Accretable yield, end of period

   $ —        $ 3,206   
  

 

 

   

 

 

 

Purchased credit-impaired loans are accounted for using the expected cash flows method, which accretes interest income regardless of the delinquency status of the loan. Other than the purchased credit-impaired loan, there were no loans accruing interest that were greater than ninety days past due at June 30, 2012 and December 31, 2011.

 

10


Table of Contents

The following table presents information about the Company’s loans receivable that were in nonaccrual status as of June 30, 2012 and December 31, 2011:

 

                                                                                                                                   
     June 30, 2012     December 31, 2011  
(Dollars in thousands)    Recorded
Investment -
Nonaccrual
Loans
     Recorded
Investment -
Total Portfolio
     Percentage
of
Nonaccrual
    Recorded
Investment -
Nonaccrual
Loans
     Recorded
Investment -
Total Portfolio
     Percentage
of
Nonaccrual
 

Residential real estate loans

   $ 441       $ 22,629         1.9   $ —         $ —           0.0

Commercial real estate loans

     38         1,827         2.1     38         1,923         2.0

Commercial loans:

                

Revolving lines of credit

     —           2,764         0.0     —           1,036         0.0

Term note

     —           455         0.0     —           —           0.0

Purchased credit-impaired term loan

     —           —           0.0     —           841         0.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total commercial loans

     —           3,219         0.0     —           1,877         0.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 
   $ 479       $ 27,675         1.7   $ 38       $ 3,800         1.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

The following table presents the unpaid principal balance and recorded investment of impaired loans as of June 30, 2012 and December 31, 2011:

 

                                                                                                                   
     Unpaid  Principal
Balance -
Impaired Loans
     Recorded Investment - Impaired Loans      Total  Recorded
Investment -
Impaired Loans
 
(Dollars in thousands)       With
Allowance
     Without
Allowance
    

As of June 30, 2012

           

Residential real estate loans

   $ 24,662       $ —         $ 11,085       $ 11,085   

Commercial real estate loans

     1,839         —           38         38   

Commercial loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 26,501       $ —         $ 11,123       $ 11,123   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011

           

Commercial real estate loans

   $ 1,923       $ —         $ 38       $ 38   

Commercial loans

     5,099         —           841         841   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 7,022       $ —         $ 879       $ 879   
  

 

 

    

 

 

    

 

 

    

 

 

 

The average recorded investment of impaired loans during the six months ended June 30, 2012 and the year ended December 31, 2011 was $11.4 million and $0.8 million, respectively. Interest income recognized on impaired loans during the six months ended June 30, 2012 and the year ended December 31, 2011 was $0.8 million and $0.3 million, respectively.

No loans classified as loans receivable, net at December 31, 2011 were modified under troubled debt restructurings in 2011. The following table presents the unpaid principal balance and recorded investment of loans modified and classified as troubled debt restructurings during the six months ended June 30, 2012:

 

                                                                                                                   
(Dollars in thousands)    Unpaid Principal
Balance - TDRs
     Recorded Investment - TDRs      Total Recorded
Investment - TDRs
 
      With
Allowance
     Without
Allowance
    

Residential real estate loans

   $ 297       $ —         $ 80       $ 80   

Commercial real estate loans

     51         —           38         38   

Commercial loans

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 348       $ —         $ 118       $ 118   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no losses on troubled debt restructurings in the three and six months ended June 30, 2012 and 2011. During the twelve month period ended June 30, 2012, $82 thousand of loans modified under troubled debt restructurings reached ninety or more days past due.

 

11


Table of Contents

There was no activity in the allowance for loan losses in the three and six month periods ended June 30, 2012 and 2011. The allowance for loan losses at June 30, 2012 and 2011 related only to commercial real estate loans and totaled $50 thousand and $48 thousand, respectively.

Credit quality indicator

A credit quality indicator is a statistic used by management to monitor and assess the credit quality of loans receivable. Management monitors delinquencies as its primary credit quality indicator and the following table presents delinquency information for loans receivable as of June 30, 2012 and December 31, 2011:

 

                                                                                                           
(Dollars in thousands)    30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days or More
Past Due
     Total
Past Due
     Current      Total  

As of June 30, 2012

                 

Residential real estate loans

   $ 1,739       $ 689       $ 394       $ 2,822       $ 19,807       $ 22,629   

Commercial real estate loans

     —           —           38         38         1,789         1,827   

Commercial loans:

                 

Revolving lines of credit

     —           —           —           —           2,764         2,764   

Term note

     —           —           —           —           455         455   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     —           —           —           —           3,219         3,219   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,739       $ 689       $ 432       $ 2,860       $ 24,815       $ 27,675   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011

                 

Commercial real estate loans

   $ —         $ —         $ 38       $ 38       $ 1,885       $ 1,923   

Commercial loans:

                 

Revolving lines of credit

     —           —           —           —           1,036         1,036   

Purchased credit-impaired term loan

     —           —           841         841         —           841   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial loans

     —           —           841         841         1,036         1,877   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ —         $ 879       $ 879       $ 2,921       $ 3,800   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

NOTE 6 — TRADE AND OTHER RECEIVABLES, NET

Trade and other receivables, net consisted of the following as of:

 

                         
(Dollars in thousands)    June 30,
2012
    December 31,
2011
 

Trade accounts receivable

   $ 4,983      $ 4,315   

Sales returns and allowances

     (228     (185

Other accounts receivable

     —          26   
  

 

 

   

 

 

 
     4,755        4,156   

Allowance for uncollectible accounts

     (40     (44
  

 

 

   

 

 

 

Trade and other receivables, net

   $ 4,715      $ 4,112   
  

 

 

   

 

 

 

At June 30, 2012 and December 31, 2011, all of NABCO’s trade receivables, totaling $4.9 million and $4.3 million, respectively, were pledged as collateral to secure outstanding balances on NABCO’s term loan and line of credit.

At June 30, 2012, $22 thousand, or 0.5% of the trade accounts receivable were more than ninety days past due, and at December 31, 2011, $67 thousand, or 1.6% of the trade accounts receivable were more than ninety days past due.

 

12


Table of Contents

NOTE 7 — INVENTORIES

Inventories at NABCO consist of electrical components, primarily new electrical circuit breakers for use in commercial, industrial and residential applications. Inventories at Cosmed consist of a line of skin care products. The following table presents the composition of the Company’s inventories as of:

 

                                             
(Dollars in thousands)    June 30,
2012
    December 31,
2011
 

Raw materials

   $ 535      $ 728   

Work in progress

     101        130   

Finished goods

     8,823        8,148   
  

 

 

   

 

 

 

Subtotal

     9,459        9,006   

Valuation adjustment for obsolete, damaged and slow-moving inventory

     (74     (325
  

 

 

   

 

 

 

Total inventories

   $ 9,385      $ 8,681   
  

 

 

   

 

 

 

The Company recognized valuation adjustments for obsolete, damaged and slow-moving inventory of $0.1 million for each of the three and six months ended June 30, 2012, and zero for the three and six months ended June 30, 2011.

At June 30, 2012 and December 31, 2011, all of NABCO’s inventories, totaling $8.6 million and $7.8 million, respectively, were pledged as collateral to secure outstanding balances on NABCO’s term loan and line of credit.

NOTE 8 — DEBT

The following table presents the Company’s debt as of:

 

                                             
(Dollars in thousands)    June 30,
2012
     December 31,
2011
 

Lines of credit

   $ 1,700       $ 5,116   
  

 

 

    

 

 

 

Notes payable

   $ 37,246       $ 39,000   

Term loan

     7,400         7,800   

Seller notes

     4,336         4,813   
  

 

 

    

 

 

 

Long-term debt

   $ 48,982       $ 51,613   
  

 

 

    

 

 

 

Lines of credit

Lines of credit consist of NABCO’s $8.0 million revolving, asset-based loan, which matures in September 2014 and is subject to a borrowing base. At June 30, 2012 and December 31, 2011, outstanding borrowings on the revolving line of credit were $1.7 million and $5.1 million, respectively. For the three and six months ended June 30, 2012, repayments, net of advances, under the line of credit totaled $1.4 million and $3.4 million, respectively. As of June 30, 2012, excess available borrowing capacity under the revolving line of credit was $5.6 million. This line of credit has a variable interest rate based upon the lender’s base rate, which was 4.0% at June 30, 2012. The line of credit is secured by all of NABCO’s assets.

Interest expense on lines of credit was $28 thousand and $63 thousand for the three and six months ended June 30, 2012, respectively, and $23 thousand and $39 thousand for the three and six months ended June 30, 2011, respectively.

At June 30, 2012, NABCO was in compliance with the covenants under its line of credit facility.

Notes payable

At June 30, 2012 and December 31, 2011, notes payable were comprised of $37.2 million and $39.0 million in aggregate notes payable, respectively, due December 2016 (“Notes Payable”). The Notes Payable were issued on July 15, 2010 and bear interest at a rate of 9.0% per annum. The Company acquired approximately $1.8 million of the Notes Payable in an open market trade in May 2012, for approximately $1.4 million and recognized a $0.4 million gain on extinguishment of debt in other income (expense) in the accompanying unaudited consolidated statements of operations.

The indenture related to the Notes Payable contains covenants that limit the ability of the Company and certain subsidiaries, subject to certain exceptions and qualifications, to (i) pay dividends or make distributions, repurchase equity securities, or make guarantee payments on the foregoing; (ii) make payments on debt securities that rank pari passu or junior to the Notes Payable; (iii) effect a change in control of the Company; or (iv) enter into transactions with insiders.

 

13


Table of Contents

Interest expense on Notes Payable was $0.9 million and $1.7 million for the three and six months ended June 30, 2012, respectively, and $0.9 million and $1.8 million for the three and six months ended June 30, 2011, respectively.

Term loan

The term loan consists of NABCO’s $8.0 million term loan maturing in September 2016, which had an outstanding balance of $7.4 million and $7.8 million at June 30, 2012 and December 31, 2011, respectively. The term loan is subject to annual principal payments of $0.8 million in year one, $1.2 million in each of years two and three, $1.6 million in each of years four and five, with a balloon payment of any remaining principal balance due at maturity. The term loan has a variable interest rate based upon the lender’s base rate plus 1.00% per annum. In the event of default, the interest rate will increase by 5.00% per annum. At June 30, 2012, the interest rate on the term loan was 5.00%. The term loan is secured by all of NABCO’s assets.

Interest expense on the term loan was $0.1 million and $0.2 million for the three and six months ended June 30, 2012, respectively, and zero for the three and six months ended June 30, 2011.

At June 30, 2012, NABCO was in compliance with the covenants under the term loan.

Seller notes

Seller notes are comprised of $5.0 million in obligations owed to the former owners of NABCO that were issued in connection with the 2011 acquisition of NABCO and had outstanding balances aggregating $4.3 million and $4.8 million at June 30, 2012 and December 31, 2011, respectively. The seller notes mature on January 29, 2016 and are subject to scheduled quarterly principal payments, and accelerated principal payments subject to NABCO exceeding certain annual earnings before interest, taxes, depreciation and amortization (“EBITDA”) targets beginning with the fiscal year ending December 31, 2011. Based on 2011 EBITDA, $1.2 million of accelerated principal payments are due in the year ending December 31, 2012. The seller notes bear interest at 6.00% per annum and interest is paid quarterly. Interest expense on the seller notes was $66 thousand and $0.1 million for the three and six months ended June 30, 2012, respectively, and zero for the three and six months ended June 30, 2011.

NOTE 9 — INCOME TAXES

As of December 31, 2011, the Company had estimated federal and California net operating loss carryforwards (“NOLs”) of approximately $890 million and $977 million, respectively. The Company’s federal NOLs have a 20-year life and begin to expire in 2027. The Company’s California NOLs have either a 10-year or 20-year life and begin to expire in 2017.

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that the deferred tax assets will be realized. The ultimate realization of deferred tax assets depends on the ability to recover previously paid taxes through loss carrybacks and the generation of future taxable income during the periods in which temporary differences become deductible. As a result of generating losses since 2006, among other factors, the Company has determined that sufficient uncertainty exists as to the realizability of its deferred tax asset and as such, has placed a valuation allowance of $410.5 million and $409.0 million on its deferred tax assets at June 30, 2012 and December 31, 2011, respectively.

NOTE 10 — SHARE-BASED PAYMENTS

The Company’s independent director compensation program provides for annual grants of restricted shares of the Company’s common stock on the first business day of each calendar year, with an aggregate grant date fair value of $75 thousand per independent director, and vest on January 1 of the following year. On January 3, 2012, each independent director received 277,778 restricted shares of common stock. The shares of common stock for these awards were granted through the Amended and Restated Signature Group Holdings, Inc. 2006 Performance Incentive Plan (the “Incentive Plan”). On the grant date, the total number of restricted shares of common stock issued was 1,666,668 shares, with an aggregate fair value of $0.5 million.

On May 8, 2012, the Company issued 833,333 shares of restricted stock and 1,090,000 options to purchase the Company’s common stock to certain nonexecutive employees under the Incentive Plan, with varying vesting schedules. On the grant date, the aggregate fair value of the restricted stock and stock option awards was $0.3 million and $0.1 million, respectively.

Compensation expense for share-based awards, including restricted common stock awards and common stock options was $0.4 million and $0.7 million for the three and six months ended June 30, 2012, respectively, and $0.1 million and $0.2 million for the three and six months ended June 30, 2011, respectively. At June 30, 2012 and December 31, 2011, unrecognized compensation expense for share-based awards was $2.2 million and $2.2 million, respectively.

 

14


Table of Contents

The following table presents the changes in nonvested shares of restricted common stock during the six months ended June 30, 2012:

 

     Number of Shares     Weighted Average
Grant Date

Fair Value
 

Nonvested restricted common stock, December 31, 2011

     2,315,040      $ 0.60   

Granted

     2,500,001        0.28   

Vested

     (535,137     0.71   

Forfeited

     —          —     
  

 

 

   

 

 

 

Nonvested restricted common stock, June 30, 2012

     4,279,904      $ 0.40   
  

 

 

   

 

 

 

As of June 30, 2012 and December 31, 2011, unrecognized share-based compensation expense for restricted common stock awards was $1.1 million and $0.8 million, respectively.

The following table presents the changes in nonvested common stock options during the six months ended June 30, 2012:

 

     Number of Shares     Weighted Average
Grant Date

Fair Value
 

Nonvested common stock options, December 31, 2011

     8,816,000      $ 0.19   

Granted

     1,090,000        0.13   

Vested

     (1,898,586     0.17   

Forfeited

     —          —     
  

 

 

   

 

 

 

Nonvested common stock options, June 30, 2012

     8,007,414      $ 0.19   
  

 

 

   

 

 

 

Common stock options exercisable at June 30, 2012

     1,898,586      $ 0.17   
  

 

 

   

 

 

 

As of June 30, 2012, 1,898,586 stock options were exercisable with a weighted average exercise price of $0.51 per share. As of June 30, 2012 and December 31, 2011, unrecognized share-based compensation expense for common stock option awards was $1.2 million and $1.4 million, respectively. As of June 30, 2012, the weighted average remaining contractual term of nonvested common stock option awards was 9.0 years.

NOTE 11 — LOSS PER SHARE

Basic loss per share is computed by dividing net loss attributable to Signature Group Holdings, Inc. by the weighted average number of common shares outstanding during the reporting period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted earnings per share, the basic weighted average number of shares is increased by the dilutive effect of common stock options, restricted common stock awards and warrants determined using the treasury stock method.

Restricted common stock, common stock options and warrants are anti-dilutive and excluded from the computation of diluted earnings per share if the assumed proceeds upon exercise or vesting are greater than the cost to reacquire the same number of shares at the average market price during the period. The dilutive impact of these securities could be included in future computations of diluted earnings per share if the market price of the Company’s common stock increases.

 

15


Table of Contents

The following table sets forth the computation of basic and diluted loss per share for the periods indicated:

 

    

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
(Dollars in thousands, except per share amounts)    2012     2011     2012     2011  

Loss from continuing operations

   $ (3,326   $ (4,853   $ (2,725   $ (5,454

Loss attributable to noncontrolling interest

     —          (101     —          (61
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations attributable to Signature Group Holdings, Inc.

     (3,326     (4,752     (2,725     (5,393

Loss from discontinued operations, net of income taxes

     (564     (1,403     (2,411     (4,975
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Signature Group Holdings, Inc.

   $ (3,890   $ (6,155   $ (5,136   $ (10,368
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average basic and diluted shares outstanding

     115,651,953        112,104,768        115,651,953        112,104,768   

Basic and diluted loss per share:

        

Continuing operations

   $ (0.03   $ (0.04   $ (0.02   $ (0.05

Discontinued operations

     —          (0.01     (0.02     (0.04
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted loss per share

   $ (0.03   $ (0.05   $ (0.04   $ (0.09
  

 

 

   

 

 

   

 

 

   

 

 

 

For the three and six months ended June 30, 2012 and 2011, the impact of all outstanding unvested restricted stock, vested, but unexercised stock options and warrants to purchase the Company’s common stock (the “Warrants”) issued in connection with its emergence from bankruptcy proceedings (“Bankruptcy Proceedings”) are excluded from diluted loss per share as their impact would be anti-dilutive.

NOTE 12 — DISCONTINUED OPERATIONS

Discontinued operations presents the financial condition and results of operations of the assets, liabilities, businesses and operations that were sold or discontinued by Fremont prior to emerging from Chapter 11 bankruptcy proceedings. The following tables present summarized financial information for discontinued operations for the periods indicated:

 

                                             
(Dollars in thousands)    June 30,
2012
     December 31,
2011
 

Cash and cash equivalents

   $ 111       $ 117   

FHLB stock

     2,051         2,051   

Loans held for sale, net

     560         12,383   

Real estate owned, net

     1,250         3,966   

Other assets

     198         2,299   
  

 

 

    

 

 

 

Assets of discontinued operations

   $ 4,170       $ 20,816   
  

 

 

    

 

 

 

Repurchase reserve

   $ 8,000       $ 8,500   

Accrued expenses and other liabilities

     2,834         3,036   
  

 

 

    

 

 

 

Liabilities of discontinued operations

   $ 10,834       $ 11,536   
  

 

 

    

 

 

 

 

                                                                                           
    

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
(Dollars in thousands)    2012     2011     2012     2011  

Revenues and other income (expense)

   $ 1,270      $ 655      $ 1,281      $ 1,068   

Expenses

     1,834        2,217        3,692        5,616   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (564     (1,562     (2,411     (4,548

Income taxes

     —          (159     —          427   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of income taxes

   $ (564   $ (1,403   $ (2,411   $ (4,975
  

 

 

   

 

 

   

 

 

   

 

 

 

 

16


Table of Contents

FHLB stock

Fremont’s former primary operating subsidiary, Fremont Investment & Loan (“FIL”), was previously a member of the FHLB of San Francisco. The Company can redeem the FHLB stock, at par value, five years following the surrendered of FIL’s bank charter, which was surrendered in July 2008.

Loans held for sale, net

Loans held for sale, net are comprised of non-performing residential real estate loans and are typically secured by first deeds of trust on single-family residences. Many of the loans have principal amortization terms in excess of thirty years. The loans were generally made to borrowers who did not satisfy all of the credit, documentation and other underwriting standards prescribed by conventional mortgage lenders and loan buyers, such as Fannie Mae and Freddie Mac, and are commonly referred to as “subprime” or “non-prime” borrowers.

A valuation allowance is maintained to adjust the loans to the lower of cost or estimated fair value. Provisions (recoveries) for market valuation allowances are recorded in gain (loss) on loans held for sale in the statements of operations of discontinued operations.

On March 30, 2012, the Company sold a pool of its non-performing residential real estate loans held for sale. The loans, with an unpaid principal balance of $27.6 million, were sold for $9.3 million and resulted in a $1.0 million gain.

On June 28, 2012, the Company sold the majority of the remaining non-performing residential real estate loans held for sale. The loans, with an unpaid principal balance of $9.5 million, were sold for $2.9 million and resulted in a $0.5 million gain. At June 30, 2012, loans held for sale, net were comprised of five loans with a carrying value of $0.6 million.

In April 2012, the Company determined that the economics of a hold and retain strategy were advantageous compared to the secondary market bids received for the performing (less than sixty days past due) subprime residential real estate loan portfolio. Given the portfolio’s six month effective yield of 13.9% and the Company’s current liquidity position, management intends to hold these loans for investment for the foreseeable future. As such, on April 1, 2012, $23.0 million of performing residential real estate loans were reclassified to loans receivable, net within Signature Special Situations in continuing operations, from loans held for sale, net within discontinued operations. Furthermore, the results of operations related to these loans have been reclassified from discontinued operations to continuing operations for all periods presented. The Company continues to actively market the five non-performing loans that remain in loans held for sale within discontinued operations.

Real estate owned, net

REO, net consists of single-family residential properties acquired through or in lieu of foreclosure on loans secured by the properties. REO is reported at the lower of cost or estimated net realizable value in the consolidated financial statements.

Other assets

Other assets include $0.1 million of participations in community development projects and similar types of loans and investments that FIL previously maintained for compliance under the Community Reinvestment Act and $0.1 million of prepaid expenses at June 30, 2012. At December 31, 2011, other assets include $0.2 million in community development projects and similar types of loans and investments, a $1.9 million note receivable related to the sale of certain commercial real estate assets, $0.1 million of accrued interest receivable on loans held for sale and $0.1 million of prepaid expenses.

Repurchase reserve

The repurchase reserve represents the estimated liability the Company has for material breaches of representations and warranties on loans previously sold by Fremont, and includes estimates for both known and unknown claims. The reserve is based on outstanding repurchase claims, recent repurchase settlements, expected future repurchase trends for loans sold in whole loan sale transactions and the expected valuation of such loans when repurchased. Provisions and recoveries of provisions for the repurchase reserve are charged against gain (loss) on loans held for sale in the statements of operations of discontinued operations. The estimated reserve is based upon currently available information, is subject to known and unknown uncertainties using multiple assumptions requiring significant judgment. Actual results may vary significantly from the current estimate.

At June 30, 2012 and December 31, 2011, repurchase reserves totaled $8.0 million and $8.5 million, respectively. There were no new repurchase claims received or settlements of outstanding repurchase claims during the three or six months ended June 30, 2012. Recoveries of provisions for repurchase reserves were $0.2 million and $0.5 million for the three and six months ended June 30, 2012, and zero for each of the three and six months ended June 30, 2011.

 

17


Table of Contents

NOTE 13 — FAIR VALUE MEASUREMENTS

Recurring Fair Value Measurements

The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis, for each of the levels within the fair value hierarchy:

 

                                                                                   
(Dollars in thousands)    Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total Fair Value  

As of June 30, 2012:

           

Assets:

           

Investment securities, available for sale

   $ 5,146       $ —         $ —         $ 5,146   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Contingent consideration

   $ —         $ —         $ 3,746       $ 3,746   

Common stock warrant liability

     —           —           2,000         2,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 5,746       $ 5,746   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011:

           

Assets:

           

Investment securities, available for sale

   $ 4,991       $ —         $ —         $ 4,991   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Contingent consideration

   $ —         $ —         $ 3,597       $ 3,597   

Common stock warrant liability

     —           —           1,403         1,403   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 5,000       $ 5,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

 

                                                                                                               
(Dollars in thousands)    Beginning
Balance
     Income
(Expense)
Realized  in

Earnings
    Transfers
In/Out of
Level 3
     Purchases      Issuances      Settlements      Ending
Balance
 

Three months ended June 30, 2012:

                   

Contingent consideration

   $ 3,671       $ (75   $ —         $ —         $ —         $ —         $ 3,746   

Common stock warrant liability

     1,400         (600     —           —           —           —           2,000   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,071       $ (675   $ —         $ —         $ —         $ —         $ 5,746   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Three months ended June 30, 2011:

                   

Common stock warrant liability

   $ 4,899       $ (128   $ —         $ —         $ —         $ —         $ 5,027   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Six months ended June 30, 2012:

                   

Contingent consideration

   $ 3,597       $ (149   $ —         $ —         $ —         $ —         $ 3,746   

Common stock warrant liability

     1,403         (597     —           —           —           —           2,000   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,000       $ (746   $ —         $ —         $ —         $ —         $ 5,746   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Six months ended June 30, 2011:

                   

Common stock warrant liability

   $ 5,700       $ 673      $ —         $ —         $ —         $ —         $ 5,027   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

Nonrecurring Fair Value Measurements

From time to time, the Company is required to measure certain assets and liabilities at estimated fair value. These fair value measurements typically result from the application of specific accounting guidance under GAAP and are considered nonrecurring fair value measurements under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820-10, Fair Value Measurement. The following table presents financial and nonfinancial assets and liabilities measured using nonrecurring fair value measurements:

 

                                                                                           
(Dollars in thousands)    Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total Fair Value  

As of June 30, 2012:

           

Assets:

           

Real estate owned, net (1)

   $ —         $ —         $ 761       $ 761   

Loans held for sale, net (discontinued operations)

     —           —           560         560   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 1,321       $ 1,321   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011:

           

Assets:

           

Loans held for sale, net (continuing operations)

   $ —         $ —         $ 20,317       $ 20,317   

Real estate owned, net (1)

     —           —           2,377         2,377   

Commercial real estate investments, net

     —           —           33         33   

Loans held for sale, net (discontinued operations)

     —           —           12,383         12,383   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 35,110       $ 35,110   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Amounts represent the carrying value of the Company’s real estate owned that resulted in gains (losses) recorded on a nonrecurring basis during the period.

The following table summarizes the total gains (losses) on assets and liabilities measured using estimated fair values on a nonrecurring basis for the periods indicated:

 

                                                                                           
     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
(Dollars in thousands)        2012             2011             2012         2011  

Loans held for sale, net:

        

Continuing operations

   $ —        $ 438      $ 2,776      $ 625   

Discontinued operations

     14        (356     (1,062     20   

Real estate owned, net

     (275     (26     (689     (275

Commercial real estate investments, net

     —          (445     (121     (445
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ (261   $ (389   $ 904      $ (75
  

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

The Company’s Level 3 assets and liabilities include financial instruments whose values are determined using valuation techniques that incorporate unobservable inputs that require significant judgment or estimation. The following table presents quantitative information about the valuation techniques and unobservable inputs applied to Level 3 fair value measurements as of June 30, 2012:

 

(Dollars in thousands)    Fair Value
June 30, 2012
    

Valuation Technique

  

Unobservable Input

   Range (Weighted Average)  

Assets:

           

Preferred stock

   $ 800       Discounted cash flow    Discount rate      20% - 30% (25%)   
         Holding period      4 years - 6 years (5 years)   

Common stock

     1,940       Third party analyst report    Pro forma capital structure    $ 404.7 million ($404.7 million)   
         Common stock pro forma price per share    $ 7.1377 ($7.1377)   

Real estate owned, net

     1,250       Property valuation services    Marketability discounts      20.0% (20.0%)   

(discontinued operations)

         Estimated selling costs      8.0% (8.0%)   

Loans held for sale, net

     560       Discounted cash flow    Delinquency rate      100% (100%)   
  

 

 

          

(discontinued operations)

         Prepayment rate      5.50% (5.50%)   
         Default rate      47.1% (47.1%)   
         Loss severity rate      65% (65%)   
         Discount rate      15% - 25% (20%)   

Total

   $ 4,550            
  

 

 

          

Liabilities:

           

Contingent consideration

   $ 3,746       Discounted cash flow    Discount rate      8.1% (8.1%)   
         Probability of achieving EBITDA targets      90% - 100% (97.5%)   

Common stock warrant liability

     2,000       Lattice option pricing model    Exercise multiple      2.8x (2.8x)   
  

 

 

          
         Expected term      7.6 years (7.6 years)   

Total

   $ 5,746            
  

 

 

          

Significant unobservable inputs used in the fair value measurement of preferred stock include the discount rate and holding period. The Company estimates future cash flows related to dividends on the preferred stock, as well as an estimated redemption value at a range of future dates, which are discounted at a range of rates. Significant increases in discount rates or reductions in estimated future cash flows or delays in the timing of those cash flows would result in a decrease in the estimated fair value of preferred stock, while decreases in discount rates or increases in estimated future cash flows or accelerations in the timing of those cash flows would result in an increase in the estimated fair value of preferred stock.

Significant unobservable inputs used in the fair value measurement of common stock are the pro forma capital structure of the issuer and pro forma common stock price per share included in a third party analyst report. A significant decrease in the value of the issuer would result in a decrease in the estimated fair value of common stock, while an increase in the value of the issuer would result in a higher estimated fair value of common stock.

Significant unobservable inputs used in the fair value measurement of REO are marketability discounts and estimated selling costs. The Company utilizes third party collateral valuation services and real estate internet web sites to estimate the fair value of REO and adjusts these values to account for various factors, such as historical loss experience, anticipated liquidation timing and estimated selling costs. Significant increases in these assumptions would result in a decrease in the estimated fair value of REO, while decreases in these assumptions would result in a higher estimated fair value.

Significant unobservable inputs used in the fair value measurement of loans held for sale include delinquency, prepayment, default and loss severity rates and discount rate. The Company estimates future cash flows of its loans held for sale using these unobservable inputs, which are then discounted at a range of rates. Significant increases in the discount rate or reductions in estimated future cash flows or delays in the timing of those cash flows would result in a decrease in the estimated fair value of loans held for sale, while decreases in the discount rate or increases in estimated future cash flows or accelerations in the timing of those cash flows would result in an increase in the estimated fair value of loans held for sale.

Significant unobservable inputs used in the fair value measurement of contingent consideration include the probability that EBITDA targets are met and the associated discount rate applied to the forecasted contingent consideration payments. The Company assigns various probabilities that EBITDA targets will be achieved in determining the forecasted contingent consideration payments, which are then discounted. Significant increases in the discount rate or reductions in probabilities of achieving EBITDA targets would result in a decrease in the estimated fair value of contingent consideration, while decreases in the discount rate or increases in probabilities of achieving EBITDA targets would result in an increase in the estimated fair value of contingent consideration.

Significant unobservable inputs used in the fair value measurement of common stock warrant liability include the exercise multiple and expected term, using a trinomial lattice option pricing model. Significant increases in the exercise multiple or a significant decrease in the expected term would result in a decrease in the estimated fair value of common stock warrant liability, while significant decreases in the exercise multiple or a significant increase in the expected term would result in an increase in the estimated fair value of common stock warrant liability.

 

20


Table of Contents

FASB ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of certain financial instruments and the methods and significant assumptions used to estimate such fair values. The following table presents the carrying values and fair value estimates of financial instruments as of:

 

                                                                                            
          June 30, 2012  
(Dollars in thousands)   

Fair Value
Hierarchy

   Carrying Amount      Estimated
Fair Value
 

ASSETS

        

Continuing operations:

        

Cash and cash equivalents

   Level 1    $ 53,366       $ 53,366   

Investment securities, available for sale

   Level 1      5,146         5,146   

Loans receivable, net

   Level 3      27,625         27,625   

Preferred stock

   Level 3      800         800   

Common stock

   Level 3      1,940         1,940   

Discontinued operations:

        

Cash and cash equivalents

   Level 1      111         111   

FHLB stock

   Level 1      2,051         2,051   

Loans held for sale, net

   Level 3      560         560   

Commercial real estate investments, net

   Level 3      74         74   

LIABILITIES

        

Continuing operations:

        

Lines of credit

   Level 3    $ 1,700       $ 1,700   

Contingent consideration

   Level 3      3,746         3,746   

Long-term debt

   Level 1/3      48,982         41,384   

Common stock warrant liability

   Level 3      2,000         2,000   

 

                                                                                            
           December 31, 2011  
(Dollars in thousands)   

Fair Value
Hierarchy

   Carrying Amount      Estimated
Fair Value
 

ASSETS

        

Continuing operations:

        

Cash and cash equivalents

   Level 1    $ 52,439       $ 52,439   

Investment securities, available for sale

   Level 1      4,991         4,991   

Loans held for sale, net

   Level 3      20,317         20,317   

Loans receivable, net

   Level 3      3,750         3,750   

Discontinued operations:

        

Cash and cash equivalents

   Level 1      117         117   

FHLB stock

   Level 1      2,051         2,051   

Loans held for sale, net

   Level 3      12,383         12,383   

Commercial real estate investments, net

   Level 3      231         231   

Note receivable

   Level 3      1,861         1,861   

LIABILITIES

        

Continuing operations:

        

Lines of credit

   Level 3    $ 5,116       $ 5,116   

Contingent consideration

   Level 3      3,597         3,597   

Long-term debt

   Level 1/3      51,613         42,036   

Common stock warrant liability

   Level 3      1,403         1,403   

 

21


Table of Contents

The Company used the following methods and assumptions to estimate the fair value of each class of financial instrument at June 30, 2012 and December 31, 2011:

Cash and cash equivalents

Cash and cash equivalents are recorded at historical cost. The carrying amount is a reasonable estimate of fair value as these instruments have short-term maturities and market interest rates.

Investment securities, available for sale

Investment securities, available for sale are comprised of corporate bonds. Fair values for investment securities, available for sale are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments with similar credit, maturity and interest rate characteristics.

Loans held for sale, net

Loans held for sale, net is comprised of the performing residential real estate loans that were reclassified to held for investment in April 2012, and non-performing loans classified in discontinued operations. The fair value of loans held for sale, net is based on several factors, including current bids and market indications for similar assets, recent sales, discounted cash flow analyses, estimated values of underlying collateral and actual loss severity experience in portfolios backed by similar assets.

Loans receivable, net

Loans receivable, net, consists of residential real estate loans, commercial real estate loans, commercial lines of credit, commercial term notes and purchased credit-impaired commercial term loans. The fair value of commercial real estate loans and commercial lines of credit consider estimated credit losses and variable interest rates, which approximate market interest rates.

The fair value of the residential real estate loans is based on several factors, including current bids and market indications for similar assets, recent sales, discounted cash flow analyses, estimated values of underlying collateral and actual loss severity experience in portfolios backed by similar assets.

The fair value of the commercial term note is based on a discounted cash flow analysis, which includes assumptions about the amount and timing of expected future cash flows, discounted at rates that reflect the inherent credit, liquidity and uncertainty risks associated with the underlying borrower.

The fair value of purchased credit-impaired commercial term loans is based on a discounted cash flow analysis utilizing assumptions, including interest rates that approximate market rates and the amount and timing of expected cash flows and other recoveries.

Preferred stock

Preferred stock consists of 4% cumulative convertible preferred stock of a privately-held company that is a borrower under Signature Special Situations’ commercial loans. The preferred stock has a stated value of $2.0 million and is convertible to 45% of the common stock of the company, on a fully diluted basis. The fair value of preferred stock is based on a discounted cash flow analysis, which includes assumptions about the amount and timing of expected future cash flows for dividends and the estimated redemption value, discounted at rates that reflect the inherent noncontrol, liquidity and uncertainty risks associated with the security and the underlying issuer.

Common stock

Common stock consists of securities of a privately-held company that the Company received in exchange for its position in such company’s defaulted corporate bonds pursuant to the issuer’s plan of reorganization in bankruptcy. As of June 30, 2012, there was no active market for the common stock. The fair value of common stock is based on a third party analyst report, available to the public, which includes assumptions about the pro forma capital structure of the reorganized debtor and the pro forma common stock price.

FHLB stock

FHLB stock is recorded at cost. Sales of these securities are at par value with the issuer and can be redeemed five years following the surrender of FIL’s charter, which occurred in July 2008. The fair value of investments in FHLB stock is equal to the carrying amount.

Commercial real estate investments

Commercial real estate investments include participations in community development projects and similar types of loans and investments that FIL previously maintained for compliance under the Community Reinvestment Act. The fair value of commercial real estate investments is based on various factors including current bids and market indications of similar assets, recent sales and discounted cash flow analyses.

 

22


Table of Contents

Note receivable

The note receivable is a short-term note received in connection with the sale of commercial real estate investments. The fair value of the note receivable considers the short-term nature of the instrument, as well as the estimated credit worthiness of the counterparty. The note receivable matured and was repaid during the first quarter of 2012.

Lines of credit

Lines of credit are short-term borrowing facilities, used primarily to support ongoing operations. The carrying amount is a reasonable estimate of fair value as these instruments have short-term maturities and market interest rates.

Contingent consideration

Contingent consideration consists of payments due as a result of business combinations. The fair value of contingent consideration is based on the Company’s expectation of future operating results and includes assumptions related to discount rates and probabilities of various projected operating result scenarios.

Long-term debt

Long-term debt includes Notes Payable, term loan and seller notes. The fair value of Notes Payable is based on quoted market prices. The fair value of the term loan is based on the market characteristics of the loan terms, including a variable interest rate, principal amortization and maturity date, generally consistent with market terms. The fair value of the seller notes is based on the market characteristics of the loan terms, scheduled and accelerated principal amortization and maturity date, generally consistent with market terms.

Common stock warrant liability

Common stock warrant liability is a derivative liability related to the Warrants, which include ratchet anti-dilution protection provisions. The fair value of the common stock warrant liability is based on a trinomial lattice option pricing model that utilizes various assumptions, including expected term and exercise multiple.

NOTE 14 — OPERATIONS BY REPORTABLE SEGMENT

Within continuing operations, the Company has three operating segments: Signature Special Situations, NABCO and Cosmed. The fourth operating segment consists of discontinued operations. Results of operations and other financial measures that are not included in the Company’s four operating segments are included in corporate and other. The following tables present the operating results and other key financial measures for the Company’s operating segments as of and for the periods indicated:

 

                                                                                                       
     Continuing Operations     Discontinued
Operations
    Total  
(Dollars in thousands)    Signature
Special
Situations
    NABCO     Cosmed     Corporate
and Other
    Eliminations     Total      

Three months ended June 30, 2012:

                

Revenues from external customers

   $ 649      $ 9,062      $ 57      $ 18      $ —        $ 9,786      $ 1,165      $ 10,951   

Intersegment revenues

     159        —          —          265        (424     —          —          —     

Expenses

     303        7,760        287        4,516        (424     12,442        1,739        14,181   

Other income (expense)

     (371     (75     —          (202     —          (648     105        (543
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before reorganization items, net and income taxes

     134        1,227        (230     (4,435     —          (3,304     (469     (3,773

Reorganization items, net

     —          —          —          (14     —          (14     95        81   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes and loss attributable to noncontrolling interest

     134        1,227        (230     (4,421     —          (3,290     (564     (3,854

Income tax expense (benefit)

     13        489        —          (466     —          36        —          36   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     121        738        (230     (3,955     —          (3,326     (564     (3,890

Loss attributable to noncontrolling interest

     —          —          —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to Signature Group Holdings, Inc.

   $ 121      $ 738      $ (230   $ (3,955   $ —        $ (3,326   $ (564   $ (3,890
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents
                                                                                                       
     Continuing Operations     Discontinued
Operations
    Total  
(Dollars in thousands)    Signature
Special
Situations
    NABCO      Cosmed     Corporate
and Other
    Eliminations     Total      

Three months ended June 30, 2011:

                 

Revenues from external customers

   $ 1,012      $ —         $ 295      $ 21      $ —        $ 1,328      $ 288      $ 1,616   

Intersegment revenues

     —          —           —          45        (45     —          —          —     

Expenses

     (35     —           1,182        4,326        (45     5,428        2,217        7,645   

Other income (expense)

     187        —           —          (128     —          59        367        426   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before reorganization items, net and income taxes

     1,234        —           (887     (4,388     —          (4,041     (1,562     (5,603

Reorganization items, net

     —          —           —          826        —          826        —          826   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes and loss attributable to noncontrolling interest

     1,234        —           (887     (5,214     —          (4,867     (1,562     (6,429

Income tax expense (benefit)

     4        —           100        (118     —          (14     (159     (173
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     1,230        —           (987     (5,096     —          (4,853     (1,403     (6,256

Loss attributable to noncontrolling interest

     —          —           (101     —          —          (101     —          (101
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to Signature Group Holdings, Inc.

   $ 1,230      $ —         $ (886   $ (5,096   $ —        $ (4,752   $ (1,403   $ (6,155
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                                                                                       
     Continuing Operations     Discontinued
Operations
    Total  
(Dollars in thousands)    Signature
Special
Situations
     NABCO     Cosmed     Corporate
and Other
    Eliminations     Total      

Six months ended June 30, 2012:

                 

Revenues from external customers

   $ 2,105       $ 16,905      $ 255      $ 36      $ —        $ 19,301      $ 1,657      $ 20,958   

Intersegment revenues

     317         —          —          410        (727     —          —          —     

Expenses

     481         14,435        575        9,152        (727     23,916        3,584        27,500   

Other income (expense)

     2,405         (148     (1     (201     —          2,055        (376     1,679   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before reorganization items, net and income taxes

     4,346         2,322        (321     (8,907     —          (2,560     (2,303     (4,863

Reorganization items, net

     —           —          —          80        —          80        108        188   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes and loss attributable to noncontrolling interest

     4,346         2,322        (321     (8,987     —          (2,640     (2,411     (5,051

Income tax expense (benefit)

     32         927        4        (878     —          85        —          85   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     4,314         1,395        (325     (8,109     —          (2,725     (2,411     (5,136

Loss attributable to noncontrolling interest

     —           —          —          —          —          —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to Signature Group Holdings, Inc.

   $ 4,314       $ 1,395      $ (325   $ (8,109   $ —        $ (2,725   $ (2,411   $ (5,136
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents
                                                                                                                       
     Continuing Operations     Discontinued
Operations
    Total  
(Dollars in thousands)    Signature
Special
Situations
    NABCO      Cosmed     Corporate
and Other
    Eliminations     Total      

Six months ended June 30, 2011:

                 

Revenues from external customers

   $ 1,911      $ —         $ 840      $ 24      $ —        $ 2,775      $ 806      $ 3,581   

Intersegment revenues

     —          —           —          45        (45     —          —          —     

Expenses

     (31     —           1,606        7,065        (45     8,595        5,616        14,211   

Other income (expense)

     625        —           281        673        —          1,579        262        1,841   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before reorganization items, net and income taxes

     2,567        —           (485     (6,323     —          (4,241     (4,548     (8,789

Reorganization items, net

     —          —           —          1,325        —          1,325        —          1,325   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes and loss attributable to noncontrolling interest

     2,567        —           (485     (7,648     —          (5,566     (4,548     (10,114

Income tax expense (benefit)

     6        —           —          (118     —          (112     427        315   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     2,561        —           (485     (7,530     —          (5,454     (4,975     (10,429

Loss attributable to noncontrolling interest

     —          —           (61     —          —          (61     —          (61
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) attributable to Signature Group Holdings, Inc.

   $ 2,561      $ —         $ (424   $ (7,530   $ —        $ (5,393   $ (4,975   $ (10,368
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

                                                                                                                       
     Continuing Operations      Discontinued
Operations
     Total  
(Dollars in thousands)    Signature
Special
Situations
     NABCO      Cosmed      Corporate
and Other
     Eliminations     Total        

Segment assets:

                      

At June 30, 2012

   $ 43,429       $ 37,960       $ 1,496       $ 78,612       $ (32,697   $ 128,800       $ 4,170       $ 132,970   

At December 31, 2011

     37,214         39,428         1,735         62,608         (18,783     122,202         20,816         143,018   

Segment liabilities:

                      

At June 30, 2012

   $ 21,565       $ 27,720       $ 2,453       $ 43,576       $ (32,697   $ 62,617       $ 10,834       $ 73,451   

At December 31, 2011

     9,411         30,582         2,367         44,068         (18,783     67,645         11,536         79,181   

NOTE 15 — COMMITMENTS AND CONTINGENCIES

The Company is a defendant in or a party to a number of legal actions or proceedings that arise in the ordinary course of business. In some of these actions and proceedings, claims for monetary damages are asserted against the Company. In view of the inherent difficulty of predicting the outcome of such legal actions and proceedings, the Company generally cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss related to each pending matter may be, if any.

In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. The estimated loss is based upon currently available information and is subject to significant judgment and a variety of assumptions, and known and unknown uncertainties. The matters underlying the estimated loss will change from time to time, and actual results may vary significantly from the current estimate. Therefore, an estimate of possible loss represents what the Company believes to be an estimate of possible loss only for certain matters meeting these criteria. It does not represent the Company’s maximum loss exposure.

Based on the Company’s current understanding of these pending legal actions and proceedings, management does not believe that judgments or settlements arising from pending or threatened legal matters, individually or in the aggregate, would have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. However, in light of the inherent uncertainties involved in these matters, some of which are beyond the Company’s control, and the very large or indeterminate damages sought in some of these matters, an adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular reporting period.

 

25


Table of Contents

The legal proceedings summarized below are ongoing matters and may have an effect on our business and future financial results.

Faigin Matter. On January 15, 2009, Alan Faigin, a former General Counsel of Fremont, filed a Complaint against Fremont Reorganizing Corporation (“FRC”) in the California Superior Court, County of Los Angeles. On February 3, 2010, Mr. Faigin filed an amended Complaint alleging wrongful termination, breach of his employment agreement, breach of the implied covenant of good faith and fair dealing, fraud and misrepresentation, negligent misrepresentation and violation of various California labor codes, among other allegations under a “joint employer” theory. In February 2010, a jury found for Mr. Faigin and awarded him damages in the amount of approximately $1.4 million. Signature is appealing the judgment. Fremont recorded a liability of approximately $1.4 million in the first quarter of 2010 related to this matter. As a requirement of the appeal process, a cash bond was posted by Signature in the amount of approximately $2.0 million with the court. On May 8, 2012 the California Court of Appeal held a hearing on this matter. On June 7, 2012, the California Court of Appeal issued its opinion affirming the judgment. On June 22, 2012, the Company filed a Petition for Rehearing. On July 9, 2012, the California Court of Appeal granted the Company’s Petition for Rehearing with additional briefing to be completed by August 20, 2012. No date for a hearing has been set. Unless a new court order provides otherwise, the matter will be resubmitted for determination upon completion of the additional briefing.

On April 27, 2009, FRC filed a Cross-Complaint against Mr. Faigin for breach of confidence, breach of fiduciary duty, representing conflicting interests and indemnification. On June 9, 2009, the trial court dismissed the Cross-Complaint pursuant to California’s anti-SLAPP statute. FRC appealed the dismissal of this Cross-Complaint. On August 30, 2011, the Court of Appeals of the State of California reversed and remanded the dismissal of FRC’s Cross-Complaint causes of action against Mr. Faigin for breach of fiduciary and breach of confidence. The Company intends to pursue these actions to recover damages it suffered as a result of these breaches.

Colburn Matter. On December 8, 2009, Gwyneth Colburn, the former Executive Vice President for Fremont’s Commercial Real Estate group filed a complaint against FIL and unnamed defendants for breach of contract related to a Management Continuity Agreement (“MCA”) executed in August 2003, and extended in August 2007. Plaintiff claims she is owed approximately $2.0 million, 87,183 shares of restricted stock valued at $4.01 per share at the time of Plaintiff’s termination effective August 28, 2007, and the value of thirty-six months of welfare benefits. Ms. Colburn filed a proof of claim in the Bankruptcy Proceeding for salary, bonus, and benefits and restricted stock in the amount of $2.6 million. On August 9, 2011, the California Superior Court entered a judgment granting the Company’s Motion for Summary Judgment and dismissing the complaint. On September 22, 2011, Ms. Colburn filed a Notice of Appeal from this dismissal. Appellate briefs are due later this year. A hearing date has not yet been scheduled.

Ms. Colburn’s proof of claim for $2.6 million in the Bankruptcy Proceeding for severance, bonus, welfare benefits and restricted stock remains outstanding and the Company intends to vigorously defend against this claim. A hearing on this matter has been set by the United States Bankruptcy Court for the Central District of California, Santa Ana Division (the “California Federal Bankruptcy Court”) for September 6, 2012.

Walker Matter. On June 10, 2011, Kyle Walker, the former Chief Executive Officer and President of FIL, filed a complaint in the California Superior Court, County of Los Angeles, against the Company and unnamed defendants for breach of contract, certain California Labor Code violations and breach of fiduciary duty related to his MCA executed in August 2003, and extended in August 2006. Mr. Walker claims he is owed at least $3.5 million for severance, the value of 131,185 shares of restricted stock at the time of his termination and the value of 36 months of welfare benefits. On August 26, 2011, Mr. Walker dismissed this complaint, without prejudice, against the Company as successor in interest to Fremont, but not a successor in interest to FIL. Trial has been set to commence on October 16, 2012. The Company intends to vigorously defend itself against this lawsuit.

Mr. Walker’s proof of claim for $2.5 million in the Bankruptcy Proceeding for severance, bonus, welfare benefits and restricted stock remains outstanding. The Company intends to vigorously defend itself against this claim. A hearing on this matter has been set by the California Federal Bankruptcy Court for September 6, 2012.

Cambridge Place Investment Management, Inc. v. Morgan Stanley & Co., Inc. et al. (Cambridge Matter #1). On July 22, 2010, Cambridge Place Investment Management, Inc. (“Cambridge”), as assignee of its investor clients, filed a lawsuit in the Superior Court in the Commonwealth of Massachusetts against over fifty defendants, including the broker/dealers, underwriters, issuers and depositors of approximately 200 residential mortgage-backed securities (“RMBS”) offerings purchased by clients of Cambridge. Cambridge alleges the defendants violated Massachusetts securities laws through untrue statements and material omissions in the RMBS offering documents. The lawsuit alleges that Cambridge clients invested over $2 billion in these RMBS offerings resulting in losses in excess of $1.2 billion. The complaint names Fremont Mortgage Securities Corporation (“FMSC”), a wholly owned special purpose subsidiary of Signature, as a depositor of $8 million in one RMBS offering in 2005. The matter was removed to the U.S. District Court in Massachusetts (the “U.S. District Court”), but the plaintiff filed a motion to remand the case back to Superior Court in Massachusetts (the “Superior Court”), which was approved on August 19, 2011. On November 22, 2011, the defendants filed a joint Motion to Dismiss for lack of standing. On March 14, 2012 the Superior Court denied the Motion to Dismiss. On July 16, 2012, the Superior Court held a hearing on the defendants’ Motion to Dismiss for failure to state an actionable claim. The Superior Court took the matter under submission and did not indicate a date for a ruling. FMSC intends to defend itself vigorously in this matter.

 

26


Table of Contents

Cambridge Place Investment Management, Inc. v. Morgan Stanley & Co., Inc., et al. (Cambridge Matter #2). On February 11, 2011, Cambridge, as assignee of its investor clients, filed a lawsuit in the Superior Court against over thirty defendants, including the broker/dealers, underwriters, issuers and depositors of approximately seventy RMBS offerings purchased by clients of Cambridge. Cambridge alleges the defendants violated Massachusetts securities laws through untrue statements and material omissions in the RMBS offering documents. The lawsuit alleges that Cambridge clients invested approximately $825 million in these RMBS offerings resulting in losses exceeding $260 million. The complaint names FMSC, as a depositor of $101.3 million in four RMBS offerings in 2004, 2005 and 2006. The defendants removed the matter to the U.S. District Court and the plaintiff filed a motion to remand the case back to Superior Court. In August 2011, in light of the ruling on remand in Cambridge Matter #1, the matter was remanded back to the Superior Court by stipulation. On November 22, 2011, the defendants filed a joint Motion to Dismiss for lack of standing. On March 14, 2012 the Superior Court denied the Motion to Dismiss. On July 16, 2012, the Superior Court held a hearing on the defendants’ Motion to Dismiss for failure to state an actionable claim. The Superior Court took the matter under submission and did not indicate a date for a ruling. FMSC intends to defend itself vigorously in this matter.

National Credit Union Administration v. RBS Securities, et al. On June 20, 2011, The National Credit Union Administration (“NCUA”), the regulator of federal credit unions, acting as liquidator of U.S. Central Federal Credit Union (“U.S. Central”), filed a lawsuit in the U.S. District Court in Kansas for unspecified damages to be proven at trial against the underwriter, issuers and depositors of twenty-nine RMBS offerings purchased by U.S. Central. NCUA alleges that the defendants violated federal and state securities laws through untrue statements and material omissions in the RMBS offering documents. The lawsuit alleges that U.S. Central invested a total of $1.7 billion in these RMBS offerings. The complaint names FMSC, as a depositor of $50 million in two RMBS offerings in 2006. On December 20, 2011, the Company filed a Motion to Dismiss. On July 25, 2012, the U.S. District Court issued an order dismissing FMSC from the action with leave to amend. The NCUA has thirty days from the date of the dismissal order to amend its complaint.

Cambridge and NCUA Defense, Indemnity and Contribution Matters. In addition to the Cambridge and NCUA lawsuits, the Company, as successor to FIL, and FMSC have received several demands for defense, indemnity and contribution in the Cambridge and NCUA actions as well as other RMBS actions in which the Company or its subsidiaries are not named defendants. The Company has rejected each of these demands as it is the Company’s position that the demanding parties are being sued for conduct not chargeable to the Company or its subsidiaries.

Kingstown/McIntyre Matters. On July 15, 2011 and July 18, 2011, James McIntyre, Kingstown Partners Master Ltd. and other entities affiliated therewith, Michael Blitzer, J. Hunter Brown, Robert A. Peiser, Laurie M. Shahon, Joyce White, Robert Willens and Guy Shanon (collectively, the “Shareholder Group”) filed Schedule 13D’s indicating that such persons and entities had formed a “group” (as defined by Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) in connection with the Shareholder Group’s intention to nominate a slate of directors for election to the Company’s Board of Directors (the “Board”) at its next annual meeting of shareholders.

As a result of the formation of the Shareholder Group, the Board continues to evaluate whether the Shareholder Group should be determined to be an “Acquiring Person” (as defined in the Rights Agreement) and if such determination is made, whether a Distribution Date (as defined in the Rights Agreement) for the distribution of rights under and pursuant to the Rights Agreement will occur. The Company previously announced that the Board had extended the date by which such determinations needed to be made until September 30, 2012.

On August 12, 2011, James McIntyre, Kingstown Partners Master Ltd. and other entities affiliated therewith (collectively, the “Plaintiffs”) filed a complaint, as amended (the “Complaint”), with the Second Judicial District Court of the State of Nevada in and for the County of Washoe (the “State Court”) against the Company seeking (i) a declaration that the Rights Agreement has no force and effect; (ii) a declaration that the Plaintiffs are not an Acquiring Person; and (iii) an injunction against the Board from implementing the Rights Agreement (the “Proceeding”). In the Complaint, the Plaintiffs claimed that the Rights Agreement was rejected in connection with the Company’s Bankruptcy Proceeding, which concluded in June 2010, or if the Rights Agreement is determined to not to have been rejected, that the Shareholder Group is not an Acquiring Person and, therefore, the condition for implementing the Rights Agreement cannot be satisfied.

On August 31, 2011, the Company filed a Notice of Removal of Pending State Court Action to remove the Proceeding to the U.S. Bankruptcy Court for the District of Nevada (the “Nevada Federal Bankruptcy Court”). As a result, the Proceeding was removed to the Nevada Federal Bankruptcy Court. The Company removed the Proceeding because, among other reasons, a central issue in the Proceeding is whether the Rights Agreement was assumed, and otherwise remained in full force and effect, under the Company’s reorganization plan (the “Plan”), as confirmed by the California federal Bankruptcy Court (the “Confirmation Order”).

Because the Proceeding involves issues central to the Confirmation Order, the Company also separately filed a motion (the “Motion”) with the California Federal Bankruptcy Court on September 19, 2011 seeking an order confirming that the Rights Agreement was assumed under the Plan and granting related relief.

 

27


Table of Contents

On November 29, 2011, the California Federal Bankruptcy Court ruled at a hearing on the Motion that the Rights Agreement was assumed under the Plan and remains in full force and effect following the Confirmation Order and the Company’s emergence from Bankruptcy Proceedings. On December 9, 2011, the California Federal Bankruptcy Court entered its order on the aforementioned ruling (the “Rights Agreement Order”).

On December 7, 2011, Mr. McIntyre filed an amendment to his Schedule 13D to report the termination of his agreement with the Shareholder Group to (i) solicit proxies or written consents for the election of persons nominated by the Shareholder Group to the Board at the next annual meeting of shareholders and (ii) serve as a nominee on the Shareholder Group’s proposed slate of directors for election to the Board. On the same day, the Plaintiffs filed a Notice of Dismissal with the California Federal Bankruptcy Court dismissing the Proceeding.

On December 21, 2011, (i) Kingstown Partners Master Ltd., Kingstown Partners II L.P. and KTown LP, and (ii) Mr. McIntyre separately filed notices of appeal with the California Federal Bankruptcy Court from the Rights Agreement Order.

On January 6, 2012, James A. McIntyre filed a complaint (the “McIntyre Complaint”) with the Second Judicial District Court of the State of Nevada in and for the County of Washoe against the Company seeking (1) a declaration that: (i) he never took any action that may have triggered the dilution provisions of the Rights Agreement; (ii) the right to vote his shares is not impaired or diminished in any respect by the Rights Agreement; (iii) his right to demand that the Company convene a shareholder meeting or work cooperatively with other shareholders to request a shareholder meeting is not impaired in any way by the Rights Agreement; (iv) his right to nominate director candidates to be elected by the shareholders for service on the Board is not impaired or diminished in any way by the Rights Agreement; (v) his right to submit shareholder proposals for vote at the Company’s next shareholder meeting is not compromised or impaired in any way by the Rights Agreement; and (vi) his right to join other shareholders to effect the election of directors or other shareholders to effect the election of directors or other corporate business is not impaired or diminished by the Rights Agreement; and (2) preliminary injunctions to enjoin the Company from implementing the Rights Agreement against Mr. McIntyre.

On May 17, 2012, the Company filed a Motion to Stay under Nevada Rules of Civil Procedure 41(d) seeking reimbursement of costs and fees arising out of the Company’s defense of these same matters in the California Federal Bankruptcy Court. On July 19, 2012, the Nevada Federal Bankruptcy Court issued an order setting a briefing schedule to consider the Company’s fees and costs request. A hearing date has not yet been set. Should McIntyre continue to pursue this matter, the Company intends to vigorously defend itself.

The Company is involved in additional disputes as summarized below:

Bankruptcy Professional Fee Disputes. As of June 30, 2012, there remained one outstanding bankruptcy professional fee dispute from one firm which amounted to $1.2 million. On May 6, 2011, the California Federal Bankruptcy Court took this dispute under submission. On October 19, 2011, pursuant to a Bankruptcy Court Order, Signature transferred $1.5 million to a trust account for the sole and exclusive purpose of securing payment of any allowed fees and costs awarded to the firm, pursuant to the pending contested fee application. At a July 24, 2012 hearing, the California Federal Bankruptcy Court ruled that the Company was obligated to pay $1.1 million.

Unpaid Claims. As of June 30, 2012, there remained $5.1 million in open claims filed with the California Federal Bankruptcy Court (the “Unpaid Claims”), comprised of two claims by former employees for breach of their respective employment contracts. The Company has objected to these remaining Unpaid Claims and intends to vigorously contest them in the California Federal Bankruptcy Court.

NOTE 16 — SUBSEQUENT EVENTS

Annual meeting of shareholders

On July 24, 2012, the Company held its 2012 annual meeting of shareholders (the “Annual Meeting”). On August 6, 2012, the independent inspector of election for the Annual Meeting, IVS Associates, Inc., delivered its final vote tabulation that certified the voting results for each of the matters submitted to a vote at the Annual Meeting. As confirmed by these final results, the shareholders have (i) elected all five of the Company’s director nominees – G. Christopher Colville, John Koral, Patrick E. Lamb, Craig F. Noell and Philip G. Tinkler – to the Company’s board of directors; (ii) approved an amendment to the Incentive Plan that increased the authorized number of shares of Company common stock that may be issued under the Incentive Plan; (iii) ratified the appointment of Squar, Milner, Peterson, Miranda & Williamson, LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2012; and (iv) approved the adjournment of the Annual Meeting to a later date or dates, if necessary, to permit further solicitation of proxies to approve an amendment to the Company’s Amended and Restated Articles of Incorporation to increase the authorized number of shares of Company common stock. The tabulation of shareholder votes for the proposal to approve an amendment to the Amended and Restated Articles of Incorporation to increase in the authorized shares of Company common stock has not been finalized, as the Annual Meeting was adjourned to a later date with respect to this proposal.

 

28


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Certain statements in this report, including, without limitation, matters discussed in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” should be read in conjunction with the financial statements, related notes, and other detailed information included in Signature Group Holdings, Inc.’s (“Signature,” formerly Fremont General Corporation (“Fremont”), or “Company,” “we,” “us” or “our”) Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the “Annual Report”). We are including this cautionary statement to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are not historical fact are forward-looking statements. Certain of these forward-looking statements can be identified by the use of words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “estimates,” “assumes,” “may,” “should,” “will,” “likely,” “could” or other similar expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors, which could cause actual results, performance or achievements to differ materially from future results, performance or achievements. These forward-looking statements are based on our current beliefs, intentions and expectations. These statements are not guarantees or indicative of future performance. Important assumptions and other important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, those factors, risks and uncertainties described in the Annual Report and in the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012, under the caption “Risk Factors” and in our other filings with the Securities and Exchange Commission (“SEC”).

All forward-looking statements set forth herein are qualified by these cautionary statements and are made only as of the date hereof. We undertake no obligation to update or revise the information contained herein, including without limitation any forward-looking statements whether as a result of new information, subsequent events or circumstances, or otherwise, unless otherwise required by law.

OVERVIEW

Signature is a diversified business and financial services enterprise with principal holdings in cash, financial assets, and controlling ownership interests in two operating subsidiaries, North American Breaker Co., LLC (“NABCO”) and Cosmed, Inc. (“Cosmed”). We anticipate that we will continue to use our cash and other financial assets to grow the Company into a profitable enterprise by completing additional acquisitions of operating businesses, as well as expanding the “Signature Special Situations” financial services business unit, which is described herein.

We seek to engage in acquisitions to acquire controlling interests in middle market businesses that we expect will generate between $7.0 million and $25.0 million in annual earnings before interest, taxes, depreciation and amortization (“EBITDA”), but will also selectively review potential acquisition opportunities of larger businesses. We look to acquire businesses that have talented and experienced management teams, strong margins, defensible market positions and, in most instances, long-term growth potential. We regularly consider acquisitions of businesses that operate in unique industries as well as businesses that we believe to be in transition or are otherwise misunderstood by the marketplace. Post-acquisition, we have and expect to continue to operate the businesses we acquire as autonomous subsidiaries. In addition to the connections that our management team has in the financial industry, we also have strong relationships with significant numbers of potential deal referral sources, including accountants, attorneys, business brokers, commercial and investment bankers, and other professionals, which generate substantial opportunities to assess middle market businesses that may be available for acquisition. Our strategy tends to emphasize non-auction, or proprietary deal flow sourced directly through our management team’s established referral networks.

Our Signature Special Situations business unit primarily acquires sub-performing and non-performing commercial and industrial loans, leases, and mortgages typically at a discount to unpaid principal balance (“UPB”). We may also originate secured debt financings to middle market companies for a variety of situations, including supporting another transaction such as an acquisition, recapitalization or restructuring. We also take positions in corporate bonds, trade claims, and other structured debt instruments, which may be performing, sub-performing or non-performing. We may also acquire specialized assets, such as product or brand licenses, royalty streams, or subscriber bases. The largest asset in this segment is a portfolio of residential real estate loans.

Our operations include a discontinued operations segment, where we hold and are managing certain assets and liabilities related to the former businesses of the Company, then known as Fremont, including Federal Home Loan Bank (“FHLB”) stock, subprime residential real estate loans, residential real estate, commercial real estate investments, litigation claims under fidelity insurance bonds, and contingent liabilities for litigation and repurchase claims. Assets and liabilities are being managed to maximize cash recoveries and limit costs and exposures to the Company.

Operating segments

The presentation set forth below in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the Company’s unaudited consolidated financial statements present the Company’s financial condition and results of operations by operating segment. We report our results of operations under both continuing and discontinued operations segment classifications. All of our activities related to our operating subsidiaries and our growth strategies, as well as ongoing and general corporate functions are

 

29


Table of Contents

included in the continuing operations segment. Discontinued operations presents the financial condition and results of operations of the assets, liabilities, businesses and operations that were sold or discontinued by Fremont prior to the date of emergence from Chapter 11 bankruptcy proceedings, excluding the loans reclassified to continuing operation in the second quarter of 2012, as discussed below in Signature Special Situations.

Continuing Operations: At June 30, 2012, Signature’s continuing operations had approximately $128.8 million in assets, or 97% of our total assets. Our continuing operations consist of three operating units, NABCO, Cosmed and Signature Special Situations, as discussed below.

NABCO

The largest operating unit by revenue, NABCO is a wholly owned subsidiary whose results of operations have been consolidated into Signature’s since July 29, 2011, the date of acquisition. Headquartered in Burbank, California, NABCO is one of the largest independent suppliers of circuit breakers in the country. Circuit breakers are critical safety devices used in virtually all residential, commercial and industrial structures and many large electrical power systems. Circuit breakers automatically shut off an electrical circuit when the flow of electricity increases above a safe level so that potentially serious damage, such as that caused by fire, can be averted. Accordingly, when a circuit breaker is damaged, as a critical component for the overall electrical system, it must be replaced immediately. NABCO’s niche is focused on this replacement market, particularly for commercial and industrial circuit breakers where replacement time is extremely important, but it also supplies residential circuit breakers in order to provide its customers with a single source solution for their circuit breaker needs. In furtherance of its strategy to be a single source supplier for its customers, NABCO began carrying a new product line, fusible panel switches, during the first quarter of 2012.

NABCO operates from five warehouse locations across the country. This national presence allows NABCO to service a broad section of its customer base with next day ground shipping, providing a competitive advantage for the mission critical components it supplies. NABCO sells primarily to wholesale electrical distributors as opposed to end users, like electricians and do-it-yourself business owners and homeowners. In 2011, NABCO served approximately 600 customers and shipped approximately 5,000 SKUs to over 3,000 customer locations nationwide. Its customer base includes many of the largest wholesale electrical distribution companies in the nation, who tend to carry a limited amount of circuit breaker inventory and use NABCO, and other circuit breaker distribution specialists like NABCO, as a just-in-time supplier. By providing industry-leading customer service, maintaining an extensive inventory and offering same day shipping, NABCO has become a preferred supplier for most of its large wholesale electrical distributor customers.

The electrical power system in the United States is characterized by an aging infrastructure and largely reflects technology developed in the 1950’s or earlier. According to the United States Department of Energy, it is estimated that 60% of circuit breakers in operation are more than thirty years old. Circuit breakers are manufacturer specific and not interchangeable, so product availability in the replacement niche is very important. Accordingly, NABCO maintains a significant depth of certified, new product inventory from all the major manufacturers and also carries a number of products that have been discontinued by the manufacturer and are no longer widely available. As a result, NABCO does not manage its operations in terms of inventory turns or other traditional operating metrics based on inventory levels. NABCO’s inventory levels have the potential to increase in a declining sales environment if valuable purchase opportunities present themselves as there is minimal risk of obsolescence for these products.

Other business factors pertaining to NABCO include:

 

   

the business is seasonal with higher sales volume occurring during the summer months due to weather conditions driving increased electrical usage;

 

   

the business operates in a highly fragmented market with hundreds of competitors, although few have NABCO’s depth of inventory or national presence; and

 

   

the business does not sell used circuit breakers, nor does it refurbish circuit breakers or provide any other type of service operations.

Cosmed

As measured by revenue, Cosmed is the smallest operating unit in our continuing operations segment. Cosmed is a subsidiary we formed to consummate the acquisition of certain assets and the assumption of certain liabilities of Costru Company, LLC (“Costru”) in February 2011. Cosmed does business under the trade name CosmedicineTM and owns the intellectual property and proprietary product formulations for a line of anti-aging skin care products. The CosmedicineTM formulations are proven effective at reducing dryness, fine lines and wrinkles, skin discolorations, and multiple forms of acne. Cosmed’s products are manufactured in an outsourced U.S. Federal Drug Administration and over-the-counter approved laboratory.

Historically, the Cosmedicine™ product line was only available through high-end retailers and specialty beauty boutiques. Beginning in 2009, Costru management attempted to reposition the business and grow sales by marketing its product line through the major mass market retailers of health and beauty products. Although Cosmed’s management continued having success in rolling-out its products into the mass merchandising channel, the products did not achieve sufficient sales volume to generate re-orders. Accordingly, Cosmed is no longer selling its products through mass merchants. Cosmedicine™ continues to be sold through a number of specialty health and beauty outlets, as well as through certain specialty

 

30


Table of Contents

internet channels. Cosmed is in the process of re-focusing the Cosmedicine™ brand, and is considering private label and custom original equipment manufacturer arrangements to leverage its significant intellectual property and unique formulations. Additionally, Cosmed is seeking strategic partnerships in alternative sales platforms including, but not limited to, leading direct response and network marketing conglomerates. Signature owns 92% of the outstanding common stock of Cosmed, with the remaining 8% noncontrolling interest held by the former owners of Costru.

Signature Special Situations

Our Signature Special Situations business unit primarily acquires sub-performing and non-performing commercial and industrial loans, leases, and mortgages typically at a discount to UPB. We may also originate secured debt financings to middle market companies for a variety of situations including to support another transaction such as an acquisition, recapitalization or restructuring and take positions in corporate bonds, trade claims, and other structured debt instruments, which may be performing, sub-performing or non-performing. We also seek to acquire specialized assets, such as product or brand licenses, royalty streams, or subscriber bases.

The objective of this operation is to generate high risk-adjusted returns in the form of interest income, fees, recovery of discounted principal balances, or market value appreciation, while maintaining an intense focus on managing downside risks and exposure. In some instances, we may also receive equity securities in the form of convertible debt, preferred or convertible preferred stock, and options or warrants, where our returns will come in the form of appreciation gains associated with such equity securities.

After actively marketing and closing the sale of $27.6 million of our non-performing residential real estate loans in the first quarter, we determined that the economics of a “hold and retain” strategy were advantageous as compared to the secondary market bids received for the performing (less than sixty days past due) residential real estate loan portfolio. As a result of management’s analysis and the Company’s current liquidity position, management intends to hold these loans for investment for the foreseeable future. With the change of intention, management reclassified $23.0 million of loans, with an aggregate UPB of $46.9 million, from discontinued operations to Signature Special Situations in continuing operations, effective April 1, 2012.

Corporate and other

Corporate and other costs primarily represent expenses related to those administrative, financial and human resource activities that are not allocated to operations and are excluded from segment results of operations. These costs are not allocated to the segments, as management excludes such costs when assessing the performance of the segments.

Discontinued Operations: At June 30, 2012, our discontinued operations had approximately $4.2 million in assets, or 3% of our total assets, and $10.8 million of liabilities, or 15% of our total liabilities.

Under our business strategy, we seek to maximize the value of the assets of our discontinued operations and expect to redeploy the proceeds in our continuing operations. During the six months ended June 30, 2012, we generated approximately $13.5 million of cash from discontinued operations primarily through the sale of $37.1 million of UPB of our sub-performing and non-performing subprime residential real estate loans, with a carrying value of $10.7 million, sales of $1.6 million of REO and the collection of a $1.9 million note receivable.

The largest liability in our discontinued operations is our residential loan repurchase reserve. At June 30, 2012, the repurchase reserve liability was $8.0 million. This liability represents estimated losses we may experience from repurchase claims, both known and unknown, based on the representations and warranties provided by Fremont Investment & Loan (“FIL”), Fremont’s former California industrial bank subsidiary, to counterparties that purchased the residential real estate loans FIL originated, predominantly from 2002 through 2007. Management estimates the likely range of potential loan repurchase liability based on an number of factors, including, but not limited to, the timing of such claims given when the loan was originated; the quality of the counterparties’ documentation supporting such claims; the number and involvement of cross defendants, if any, related to such claims; and a time and expense estimate if a claim were to result in litigation. There were no repurchase claims received or settled during the six months ended June 30, 2012. The estimated reserve is based upon currently available information, is subject to known and unknown uncertainties using multiple assumptions requiring significant judgment. Actual results may vary significantly from the current estimate. Total outstanding repurchase claims at June 30, 2012 were approximately $101.7 million. Of the outstanding repurchase claims, there has been no communication or other action from the claimants:

 

   

for more than thirty-six months in the case of approximately $70.3 million in claims, or 69.2% of total claims outstanding;

 

   

for more than twenty-four months, but less than thirty-six months, in the case of approximately $3.1 million in claims, or 3.0% of total claims outstanding; and

 

   

for more than twelve months, but less than twenty-four months, in the case of approximately $28.3 million in claims, or 27.8% of total claims outstanding.

Discontinued operations also include expenses and liabilities associated with various litigation matters that pertain to Fremont’s prior business activities. As of June 30, 2012, the Company was involved in seventy defensive cases involving individual home borrowers, the majority of whom are fighting to hold off foreclosure against the loan servicer and current mortgage owner, and where Fremont has been named in the matter because it was the originator of the mortgage. We are also involved in five defensive cases involving Fremont’s securitization transactions and three defensive cases involving former Fremont executives seeking severance claims.

 

31


Table of Contents

Signature is also a plaintiff in eight cases related to mortgage fraud, whose activities account for a significant portion of our professional expenses included in the statements of operations of discontinued operations for the three and six months ended June 30, 2012.

Material weakness in internal control over financial reporting

As of June 30, 2012, the Company’s internal control over financial reporting was not effective and it was determined that the material weakness identified as of December 31, 2011 had not been remediated. The Company is currently working to remediate the material weakness in its internal control over financial reporting. See Item 4, “Controls and Procedures” of this Form 10-Q for more information about the Company’s assessment of its internal control over financial reporting and the related material weakness, as well as the Company’s continuing efforts to remediate such weakness. Notwithstanding the assessment that the Company’s internal control over financial reporting was not effective and that there was a material weakness as discussed in Part I, Item 4 of this Form 10-Q, the Company believes that the financial statements contained in this Form 10-Q and discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, fairly and accurately present the financial position, results of operations and cash flows for each of the periods presented, in all material respects.

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s accounting policies are fundamental to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations. Several of our policies are critical as they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and affect the reported amount of assets, liabilities, revenues and expenses included in the consolidated financial statements. Circumstances and events that differ significantly from those underlying the Company’s estimates, assumptions and judgments could cause the actual amounts reported to differ significantly from these estimates.

These policies govern (i) fair value measurements, (ii) revenue recognition, (iii) purchased credit-impaired loans, (iv) business combinations, (v) inventories, (vi) goodwill and intangible assets, (vii) common stock warrant liability, (viii) income taxes, (ix) accounting for reorganizations, (x) discontinued operations, (xi) loans held for sale, net, (xii) real estate owned, net, and (xiii) guarantees (repurchase reserves). On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at future balance sheet dates and our results of operations for future reporting periods.

There were no changes in our critical accounting policies from those disclosed in the Annual Report.

CONSOLIDATED FINANCIAL PERFORMANCE REVIEW

Q2 2012 Highlights

NABCO continued to perform very well with Adjusted EBITDA of $2.2 million for the three months ended June 30, 2012. Net sales increased to $9.1 million and gross margin remained steady at 37.8% during the period. The strong financial performance allowed NABCO to reduce its outstanding debt by $2.0 million in the second quarter.

After actively marketing and closing the sale of $27.6 million of our non-performing residential real estate loans in the first quarter, we determined that the economics of a “hold and retain” strategy were advantageous as compared to the secondary market bids received for the performing (less than sixty days past due) residential real estate loan portfolio. As a result of management’s analysis and the Company’s current liquidity position, management intends to hold these loans for investment for the foreseeable future. With the change of intention, management reclassified $23.0 million of loans, with an aggregate UPB of $46.9 million, from discontinued operations to Signature Special Situations in continuing operations, effective April 1, 2012.

We further reduced the assets within our discontinued operations to $4.2 million through the sale of nearly all of our remaining residential real estate loans held for sale in discontinued operations, with an aggregate UPB of $9.5 million. Additionally, we sold eight REO properties reducing the carrying value of REO to $1.3 million at June 30, 2012.

Three Months Ended June 30, 2012

The following is a summary of significant operating results for the three months ended June 30, 2012.

 

   

Net loss attributable to Signature Group Holdings, Inc. decreased $2.3 million to $3.9 million, as compared to $6.2 million for the three months ended June 30, 2011.

 

32


Table of Contents
   

Loss from continuing operations decreased $1.6 million to $3.3 million for the three months ended June 30, 2012, as compared to $4.9 million for the comparable 2011 period.

 

   

Loss from discontinued operations, net of income taxes decreased $0.8 million to $0.6 million for the three months ended June 30, 2012, as compared to $1.4 million for the comparable 2011 period.

 

   

Revenues from continuing operations increased to $9.8 million for the three months ended June 30, 2012, as compared to $1.3 million for the comparable 2011 period.

 

   

Expenses from continuing operations increased to $12.4 million for the three months ended June 30, 2012, as compared to $5.4 million for the comparable 2011 period.

Six Months Ended June 30, 2012

The following is a summary of significant operating results for the six months ended June 30, 2012.

 

   

Net loss attributable to Signature Group Holdings, Inc. decreased $5.3 million to $5.1 million, as compared to $10.4 million for the six months ended June 30, 2011.

 

   

Loss from continuing operations decreased $2.7 million to $2.7 million for the six months ended June 30, 2012, as compared to $5.4 million for the comparable 2011 period.

 

   

Loss from discontinued operations, net of income taxes decreased $2.6 million to $2.4 million for the six months ended June 30, 2012, as compared to $5.0 million for the comparable 2011 period.

 

   

Revenues from continuing operations increased to $19.3 million for the six months ended June 30, 2012, as compared to $2.8 million for the comparable 2011 period.

 

   

Expenses from continuing operations increased to $24.0 million for the six months ended June 30, 2012, as compared to $8.6 million for the comparable 2011 period.

CONSOLIDATED RESULTS OF OPERATIONS

The following table presents selected components of the Company’s unaudited consolidated statements of operations for the three and six months ended June 30, 2012 and 2011.

 

                                                           
     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
(Dollars in thousands)    2012     2011     2012     2011  

Revenues

   $ 9,786      $ 1,341      $ 19,301      $ 2,775   

Expenses

     12,442        5,441        23,916        8,595   

Other income (expense)

     (648     59        2,055        1,579   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before reorganization items and income taxes

     (3,304     (4,041     (2,560     (4,241

Reorganization items, net

     (14     826        80        1,325   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes

     (3,290     (4,867     (2,640     (5,566

Income tax expense (benefit)

     36        (14     85        (112
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (3,326     (4,853     (2,725     (5,454

Loss from discontinued operations, net of income taxes

     (564     (1,403     (2,411     (4,975
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (3,890     (6,256     (5,136     (10,429

Loss attributable to noncontrolling interest