Edgar Filing: Tree.com, Inc.

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TABLE OF CONTENTS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2010
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File No. 001-34063

TREE.COM, INC.
(Exact name of Registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		26-2414818 (I.R.S. Employer Identification No.)

11115 Rushmore Drive, Charlotte, North Carolina 28277
(Address of principal executive offices)

(704) 541-5351
(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. Yes ý No o

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period than the Registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o		Accelerated filer o		Non-accelerated filer ý (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

As of November 2, 2010 there were 11,083,129 shares of the Registrant's common stock, par value $.01 per share, outstanding.

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TABLE OF CONTENTS

		Page Number

PART I—FINANCIAL INFORMATION
Item 1.	*Financial Statements*	3
Item 2.	*Management's Discussion and Analysis of Financial Condition and Results of Operations*	37
Item 3.	*Quantitative and Qualitative Disclosures About Market Risk*	53
Item 4T.	*Controls and Procedures*	54
PART II—OTHER INFORMATION
Item 1.	*Legal Proceedings*	55
Item 1A.	*Risk Factors*	55
Item 2.	*Unregistered Sales of Equity Securities and Use of Proceeds*	58
Item 6.	*Exhibits*	59

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PART 1—FINANCIAL INFORMATION

Item 1. Financial Statements

TREE.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

			Three Months Ended September 30,						Nine Months Ended September 30,

			2010			2009			2010			2009
			(In thousands, except per share amounts)
Revenue
		LendingTree Loans	$	34,760		$	24,109		$	87,147		$	94,738
		Exchanges and other		15,204			18,610			48,013			52,662
		Real Estate		3,213			7,997			11,825			21,549

	Total revenue			53,177			50,716			146,985			168,949
Cost of revenue
		LendingTree Loans		11,049			11,685			30,752			38,437
		Exchanges and other		1,346			1,949			3,654			6,054
		Real Estate		2,074			5,056			7,312			13,712

	Total cost of revenue (exclusive of depreciation shown separately below)			14,469			18,690			41,718			58,203

	Gross margin			38,708			32,026			105,267			110,746
Operating expenses
	Selling and marketing expense			17,830			17,435			55,035			45,149
	General and administrative expense			14,035			17,515			39,263			50,929
	Product development			1,013			1,673			2,964			4,842
	Litigation settlements and contingencies			1,546			14			1,588			406
	Restructuring expense			321			78			3,363			(158	)
	Amortization of intangibles			519			1,055			2,405			3,636
	Depreciation			1,523			1,698			4,539			5,049
	Asset impairments			—			—			—			3,903

		Total operating expenses		36,787			39,468			109,157			113,756

		Operating income/(loss)		1,921			(7,442	)		(3,890	)		(3,010	)
Other income (expense)
	Interest income			—			9			7			84
	Interest expense			(60	)		(149	)		(393	)		(451	)

Total other (expense), net				(60	)		(140	)		(386	)		(367	)

Income/(loss) before income taxes				1,861			(7,582	)		(4,276	)		(3,377	)
Income tax (provision) benefit				(42	)		182			(850	)		(121	)

Net income/(loss)			$	1,819		$	(7,400	)	$	(5,126	)	$	(3,498	)

Weighted average common shares outstanding				11,023			10,844			10,993			10,413

Weighted average diluted shares outstanding				11,163			10,844			10,993			10,413

Net income/(loss) per share available to common shareholders
	Basic		$	0.16		$	(0.68	)	$	(0.47	)	$	(0.34	)

	Diluted		$	0.16		$	(0.68	)	$	(0.47	)	$	(0.34	)

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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TREE.COM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		September 30, 2010			December 31, 2009

		(unaudited)
		(In thousands, except par value and share amounts)
ASSETS:
Cash and cash equivalents		$	57,294		$	86,093
Restricted cash and cash equivalents			11,104			12,019
Accounts receivable, net of allowance of $511 and $518, respectively			7,799			6,835
Loans held for sale ($163,319 and $92,236 measured at fair value, respectively)			164,460			93,596
Prepaid and other current assets			14,663			10,758

	Total current assets		255,320			209,301
Property and equipment, net			12,543			12,257
Goodwill			12,917			12,152
Intangible assets, net			55,221			57,626
Other non-current assets			706			496

	Total assets	$	336,707		$	291,832

LIABILITIES:
Warehouse lines of credit		$	140,112		$	78,481
Accounts payable, trade			5,810			5,905
Deferred revenue			1,982			1,731
Deferred income taxes			2,033			2,211
Accrued expenses and other current liabilities			39,806			54,694

	Total current liabilities		189,743			143,022
Income taxes payable			94			510
Other long-term liabilities			12,987			12,010
Deferred income taxes			16,581			15,380

	Total liabilities		219,405			170,922
Commitments and contingencies (Note 12)
SHAREHOLDERS' EQUITY:
Preferred stock $.01 par value; authorized 5,000,000 shares; none issued or outstanding			—			—
Common stock $.01 par value; authorized 50,000,000 shares; issued 11,881,606 and 10,904,330 shares, respectively, and outstanding 11,211,581 and 10,904,330 shares, respectively			119			109
Additional paid-in capital			908,031			901,818
Accumulated deficit			(786,143	)		(781,017	)
Treasury stock 670,025 and -0- shares, respectively			(4,705	)		—

	Total shareholders' equity		117,302			120,910

	Total liabilities and shareholders' equity	$	336,707		$	291,832

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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TREE.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(Unaudited)

					Common Stock										Treasury Stock

		Total			Number of Shares		Amount		Additional Paid-in Capital			Accumulated Deficit			Number of Shares		Amount
		(In thousands)
Balance as of December 31, 2009		$	120,910			10,904	$	109	$	901,818		$	(781,017	)		—	$	—
Comprehensive loss:
	Net loss for the nine months ended September 30, 2010		(5,126	)		—		—		—			(5,126	)		—		—

Comprehensive loss			(5,126	)		—		—		—			—			—		—
Non-cash compensation			2,840			—		—		2,840			—			—		—
Issuance of common stock upon exercise of stock options and vesting of restricted stock units, net of withholding taxes			(575	)		293		4		(579	)		—			—		—
Issuance of restricted stock			—			150		1		(1	)		—			—		—
Purchase of treasury stock			(4,705	)		—		—		—			—			670		(4,705	)
Exchange of preferred stock issued by a subsidiary to common stock issued by the parent			3,958			535		5		3,953			—			—		—

Balance as of September 30, 2010		$	117,302			11,882	$	119	$	908,031		$	(786,143	)		670	$	(4,705	)

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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TREE.COM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		Nine Months Ended September 30,

		2010			2009
		(In thousands)
Cash flows from operating activities:
Net loss		$	(5,126	)	$	(3,498	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
	Loss on disposal of fixed assets		9			949
	Amortization of intangibles		2,405			3,636
	Depreciation		4,539			5,049
	Intangible impairment		—			3,903
	Non-cash compensation expense		2,840			3,060
	Non-cash restructuring expense		301			161
	Deferred income taxes		1,023			393
	Gain on origination and sale of loans		(79,301	)		(89,701	)
	Loss on impaired loans not sold		—			564
	Loss on sale of real estate acquired in satisfaction of loans		377			51
	Bad debt expense		45			325
Changes in current assets and liabilities:
	Accounts receivable		(1,010	)		(1,208	)
	Origination of loans		(1,940,925	)		(2,232,380	)
	Proceeds from sales of loans		1,953,564			2,335,100
	Principal payments received on loans		1,200			781
	Payments to investors for loan repurchases and early payoff obligations		(9,114	)		(5,641	)
	Prepaid and other current assets		(996	)		(1,149	)
	Accounts payable and other current liabilities		(14,931	)		3,580
	Income taxes payable		(388	)		(551	)
	Deferred revenue		109			(130	)
	Other, net		4,363			1,154

Net cash (used in) provided by operating activities			(81,016	)		24,448

Cash flows from investing activities:
	Acquisitions		(50	)		(5,726	)
	Capital expenditures		(4,999	)		(2,200	)
	Other, net		765			3,253

Net cash used in investing activities			(4,284	)		(4,673	)

Cash flows from financing activities:
	Borrowing under warehouse lines of credit		1,374,460			1,964,237
	Repayments of warehouse lines of credit		(1,312,829	)		(1,973,294	)
	Issuance of common stock, net of withholding taxes		(575	)		3,373
	Purchase of treasury stock		(4,705	)		—
	Decrease (increase) in restricted cash		150			(875	)

Net cash provided by (used in) financing activities			56,501			(6,559	)

Net (decrease) increase in cash and cash equivalents			(28,799	)		13,216
Cash and cash equivalents at beginning of period			86,093			73,643

Cash and cash equivalents at end of period		$	57,294		$	86,859

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—ORGANIZATION

Spin-Off

On August 20, 2008, Tree.com, Inc. ("Tree.com" or the "Company") was spun off from its parent company, IAC/InterActiveCorp ("IAC") into a separate publicly traded company. In these consolidated financial statements, we refer to the separation transaction as the "spin-off." In connection with the spin-off, Tree.com was incorporated as a Delaware corporation in April 2008.

Company Overview

Tree.com is the parent of LendingTree, LLC and the owner of several brands and businesses that provide information, tools, advice, products and services for critical transactions in our customers' lives. Our family of brands includes: LendingTree.com®, GetSmart.com®, RealEstate.com®, DegreeTree.com^SM, HealthTree.com^SM, LendingTreeAutos.com, DoneRight.com®, and InsuranceTree.com^SM. Together, these brands serve as an ally for consumers who are looking to comparison shop for loans, real estate and other services from multiple businesses and professionals who will compete for their business.

These businesses and brands are operated under the segments known as LendingTree Loans, the Exchanges and Real Estate.

LendingTree Loans

The LendingTree Loans segment originates, processes, approves and funds various residential real estate loans through Home Loan Center, Inc. dba LendingTree Loans ("HLC"). The HLC and LendingTree Loans brand names are collectively referred to in these consolidated financial statements as "LendingTree Loans."

Exchanges

The Exchanges segment consists of online lead generation networks and call centers (principally LendingTree.com, Tree.com, DegreeTree.com, LendingTreeAutos and GetSmart.com) that connect consumers and service providers principally in the lending, higher education and automobile marketplaces.

Real Estate

The Real Estate segment consists of a proprietary full service real estate brokerage (RealEstate.com, REALTORS®) that operates in 20 U.S. markets, as well as an online lead generation network accessed at www.RealEstate.com, that connects consumers with third party real estate brokerages around the country.

The Corporate segment consists of unallocated expenses and consolidation transactions.

Tree.com maintains operations solely in the United States.

Business Combinations

In September 2010, Tree.com purchased certain assets of a company with an aggregate purchase price of $0.8 million in cash and contingent consideration. The purchase is part of our strategic initiative to diversify our revenue streams outside of the mortgage and real estate industries.

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1—ORGANIZATION (Continued)

This asset purchase is being accounted for under the acquisition method of accounting. Accordingly, the purchase price is allocated to the acquired assets and liabilities based on their estimated fair values at the acquisition date. The purchase price has been allocated resulting in $0.8 million to be accounted for as goodwill. The pro forma effect of this purchase was not material to our results of operations.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements as of September 30, 2010 and 2009 and for the three and nine months then ended have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of the Company's management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company's financial position for the periods presented. The results for the three and nine months ended September 30, 2010 are not necessarily indicative of the results to be expected for the year ending December 31, 2010, or any other period. These financial statements and notes should be read in conjunction with the audited financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2009, as amended by Amendment No. 1 to the Company's annual report on Form 10-K/A.

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

Accounting Estimates

Tree.com's management is required to make certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with U.S. generally accepted accounting principles ("GAAP"). These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates.

Significant estimates underlying the accompanying consolidated financial statements include: valuation allowance for impaired loans held for sale; loan loss obligations; the fair value of loans held for sale and related derivatives; the recoverability of long-lived assets, goodwill and intangible assets; the determination of income taxes payable and deferred income taxes, including related valuation allowances; restructuring reserves; contingent consideration related to business combinations; various other allowances, reserves and accruals; and assumptions related to the determination of stock-based compensation.

Reclassifications

Certain prior period amounts have been reclassified to conform with the current presentation with no effect on net income/(loss) or accumulated deficit. Specifically, compensation and other-employee related costs within the Exchanges segment totaling $0.2 million for the nine months ended

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)

September 30, 2010, and $0.4 million and $1.3 million for the three and nine months ending September 30, 2009, respectively, were reclassified from the Exchanges segment to the LendingTree Loans segment, both within cost of revenue. There was no impact on the consolidated financial results.

Restricted Cash and Cash Equivalents

Restricted cash and cash equivalents consists of the following (in thousands):

		September 30, 2010		December 31, 2009

Cash in escrow for future operating lease commitments		$	—	$	788
Cash in escrow for surety bonds			5,030		5,030
Cash in escrow for corporate purchasing card program			800		2,203
Minimum required balances for warehouse lines of credit			1,725		1,875
Mortgage lending escrow funds			2,922		1,292
Other			627		831

	Total restricted cash and cash equivalents	$	11,104	$	12,019

Recent Accounting Pronouncements

On June 12, 2009, the Financial Accounting Standards Board ("FASB") issued the accounting standard for transfers and servicing of financial assets. The objective is to improve relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor's continuing involvement, if any, in transferred financial assets. This standard is effective for annual reporting periods beginning after November 15, 2009. Tree.com adopted this standard on January 1, 2010 and determined there was no material impact to the financial statements.

On January 21, 2010, the FASB amended and Tree.com adopted the accounting standard for fair value measurements and disclosures, which added new requirements for disclosures about transfers into and out of Level 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. The amendment also clarifies existing fair value disclosures about the level of disaggregation and the inputs and valuation techniques used to measure fair value. This amendment is effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances and settlements on a gross basis, which will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early adoption is permitted. See Note 9 for further information.

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3—GOODWILL AND INTANGIBLE ASSETS

The balance of goodwill and intangible assets, net is as follows (in thousands):

		September 30, 2010		December 31, 2009

Goodwill		$	12,917	$	12,152
Intangible assets with indefinite lives			52,733		52,733
Intangible assets with definite lives, net			2,488		4,893

	Total goodwill and intangible assets, net	$	68,138	$	69,778

Intangible assets with indefinite lives relate principally to trade names and trademarks acquired in various acquisitions.

At September 30, 2010, intangible assets with definite lives relate to the following (in thousands):

		Cost		Accumulated Amortization			Net

Purchase agreements		$	76,352	$	(76,175	)	$	177	5.7
Technology			30,491		(29,728	)		763	3.0
Customer lists			7,388		(6,677	)		711	3.9
Other			9,813		(8,976	)		837	4.1

	Total	$	124,044	$	(121,556	)	$	2,488

At December 31, 2009, intangible assets with definite lives relate to the following (in thousands):

		Cost		Accumulated Amortization			Net

Purchase agreements		$	76,352	$	(74,657	)	$	1,695	5.7
Technology			30,491		(29,396	)		1,095	3.0
Customer lists			7,388		(6,631	)		757	3.9
Other			9,813		(8,467	)		1,346	4.1

	Total	$	124,044	$	(119,151	)	$	4,893

Amortization of intangible assets with definite lives is computed on a straight-line basis and, based on September 30, 2010 balances, such amortization for the next five years is estimated to be as follows (in thousands):

		Amount

Three months ending December 31, 2010		$	307
Year ending December 31, 2011			1,086
Year ending December 31, 2012			411
Year ending December 31, 2013			144
Year ending December 31, 2014			84
Thereafter			456

	Total	$	2,488

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TREE.COM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3—GOODWILL AND INTANGIBLE ASSETS (Continued)

Accrued expenses and other current liabilities consist of the following (in thousands):

The other category above reflects an earnout payable related to an acquisition, franchise taxes, self-insured health claims and other miscellaneous accrued expenses.

An additional $8.3 million and $6.4 million of accrued loan loss liability related to loans previously sold are classified in other long term liabilities at September 30, 2010 and December 31, 2009, respectively.

Borrowings on warehouse lines of credit were $140.1 million and $78.5 million at September 30, 2010 and December 31, 2009, respectively.

As of September 30, 2010, LendingTree Loans had two committed lines of credit totaling $125.0 million of borrowing capacity. The total borrowing capacity under these lines was increased to $150.0 million effective October 29, 2010 upon renewal of the second line. LendingTree Loans also has a $25.0 million uncommitted line with one of these lenders. Borrowings under these lines of credit are used to fund, and are secured by, consumer residential loans that are held for sale. Loans under these lines of credit are repaid using proceeds from the sales of loans held for sale by LendingTree Loans.

The $50.0 million first line is scheduled to expire June 29, 2011. This line can be cancelled at the option of the lender without default upon sixty days notice. This first line includes an additional uncommitted credit facility of $25.0 million. This first line is also guaranteed by Tree.com, Inc., LendingTree, LLC and LendingTree Holdings Corp. The interest rate under the first line is 2.25% plus the greater of (a) 30-day LIBOR or (b) 2.00%. The interest rate under the $25.0 million uncommitted line is 30-day LIBOR plus 1.50%. LendingTree Loans is also required to sell at least 25% of the loans it originates to the lender under this line or pay a "pair-off fee" of 0.25% on the difference between the required and actual volume of loans sold.

The borrowing capacity of the second line was increased from $75.0 million to $100.0 million upon renewal of the line effective October 29, 2010. The expiration date of this line is October 28, 2011. This second line is also guaranteed by Tree.com, Inc., LendingTree, LLC and LendingTree Holdings Corp. The interest rate under this line was decreased from 30-day Adjusted LIBOR or 2.0% (whichever is greater) plus 2.50% to 3.0% prior to renewal, to 30-day Adjusted LIBOR or 2.0% (whichever is greater) plus 2.25% to 2.5% after renewal, for loans being sold to the lender. Additionally, the interest rate for loans not being sold to the lender was decreased from 30-day Adjusted LIBOR or 2.0% (whichever is greater) plus 2.75% prior to renewal, to 30-day Adjusted LIBOR or 2.0% (whichever is greater) plus 2.25% after renewal.

Under the terms of these warehouse lines, LendingTree Loans is required to maintain various financial and other covenants. These financial covenants include, but are not limited to, maintaining (i) minimum tangible net worth of $25.0 million, (ii) minimum liquidity, (iii) a minimum current ratio, (iv) a maximum ratio of total liabilities to net worth, (v) a maximum leverage ratio, (vi) pre-tax net income requirements and (vii) a maximum warehouse capacity ratio. During the quarter ended September 30, 2010, LendingTree Loans was in compliance with the covenants under the lines.

The LendingTree Loans business is highly dependent on the availability of these warehouse lines. Although we believe that our existing lines of credit are adequate for our current operations, reductions in our available credit, or the inability to renew or replace these lines, would have a material adverse effect on our business, financial condition and results of operations. Management has determined that it could continue to operate the LendingTree Loans business at a reduced capacity if one, but not both, of the warehouse lines were lost.

The overall concept that Tree.com employs in determining its reportable segments and related financial information is to present them in a manner consistent with how the chief operating decision maker and executive management view the Tree.com businesses, how the businesses are organized as to segment management, and the focus of the Tree.com businesses with regards to the types of products or services offered or the target market.

The expenses presented below for each of the business segments include an allocation of certain corporate expenses that are identifiable and directly benefit those segments. The unallocated expenses are those corporate overhead expenses that are not directly attributable to a segment and include: corporate expenses such as finance, legal, executive, technology support, and human resources, as well as elimination of inter-segment revenue and costs.

Tree.com's primary performance metrics are EBITDA and Adjusted EBITDA. EBITDA is defined as earnings before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA excluding (1) non-cash compensation expense, (2) non-cash intangible asset impairment charges, (3) gain/loss on disposal of assets, (4) restructuring expenses, (5) litigation loss contingencies and settlements, (6) pro forma adjustments for significant acquisitions, and (7) one-time items, which are truly one-time in nature and non-recurring, infrequent or unusual, and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. For the periods presented in this report, there are no one-time items. These measures are two of the primary metrics by which Tree.com evaluates the performance of its businesses, on which its internal budgets are based and by which management is compensated. Tree.com believes that investors should

have access to the same set of tools that it uses in analyzing its results. EBITDA and Adjusted EBITDA have certain limitations in that they do not take into account the impact to Tree.com's statement of operations of certain expenses, including depreciation, non-cash compensation and acquisition related accounting. Tree.com endeavors to compensate for the limitations of the non-GAAP measure presented by also providing the comparable GAAP measure with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the non-GAAP measure.

During the third quarter of 2010, the Company changed its accounting policy for inter-segment revenue and inter-segment marketing expense between the LendingTree Loans and Exchanges segments. This change only impacts the segment results, and does not impact the consolidated financial results of Tree.com.

Marketing expense for the Exchanges is primarily the building and maintaining of the Company's core brands, using both online and offline spending, and generates leads not only for the Exchanges but for other segments as well. Previously, marketing expense for LendingTree Loans was primarily comprised of inter-segment purchases of leads from the Exchanges, leveraging the LendingTree and GetSmart brands. The Exchanges received inter-segment revenue for the sale of these leads, and that revenue and the related marketing expense at LendingTree Loans would then be eliminated in consolidation of the total Company results.

The Company now uses a cost sharing approach for these marketing expenses, whereby LendingTree Loans and the Exchanges now share the marketing expense on a pro rata basis, based on the quantity of leads received by each segment. There is no longer inter-segment revenue or inter-segment marketing expense related to these leads. Management believes that this cost sharing approach is preferable because it more closely aligns the overall goals of the Company with the goals of segment management, and will ultimately drive the Company to better performance. Segment reporting results for prior periods have been restated to conform to the new presentation.

Summarized information by segment and reconciliation to EBITDA and Adjusted EBITDA is as follows (in thousands):

Significant components of revenue for the three and nine months ended September 30, 2010 and 2009 are as follows (in thousands):

Total assets by segment at September 30, 2010 and December 31, 2009 are as follows (in thousands):

The following table sets forth the computation of Basic and Diluted earnings per share:

Non-cash compensation expense related to equity awards is included in the following line items in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2010 and 2009 (in thousands):

The forms of stock-based awards granted to Tree.com employees are principally restricted stock units ("RSUs"), restricted stock and stock options. RSUs are awards in the form of units, denominated in a hypothetical equivalent number of shares of Tree.com common stock and with the value of each award equal to the fair value of Tree.com common stock at the date of grant. RSUs may be settled in cash, stock or both, as determined by the Compensation Committee at the time of grant. Each stock-based award is subject to service-based vesting, where a specific period of continued employment must pass before an award vests. Certain restricted stock awards also include performance-based vesting, where certain performance targets set at the time of grant must be achieved before an award vests. Tree.com recognizes expense for all stock-based awards for which vesting is considered probable. For stock-based awards, the accounting charge is measured at the grant date as the fair value of Tree.com common stock and expensed ratably as non-cash compensation over the vesting term. For performance-based awards, the expense is measured at the grant date as the fair value of Tree.com common stock and expensed as non-cash compensation over the vesting period if the performance targets are considered probable of being achieved.

The amount of stock-based compensation expense recognized in the consolidated statement of operations is reduced by estimated forfeitures, as the amount recorded is based on awards ultimately expected to vest. The forfeiture rate is estimated at the grant date based on historical experience and revised, if necessary, in subsequent periods if the actual forfeiture rate differs from the estimated rate.

A summary of changes in outstanding stock options for the nine months ended September 30, 2010 is as follows:

The following table summarizes the information about stock options outstanding and exercisable as of September 30, 2010:

Nonvested RSUs and restricted stock outstanding as of September 30, 2010 and changes during the nine months ended September 30, 2010 were as follows:

Tree.com categorizes its assets and liabilities measured at fair value into a fair value hierarchy that prioritizes the assumptions used in pricing the asset or liability into the following three levels:

LendingTree Loans enters into commitments with consumers to originate loans at a specified interest rate (interest rate lock commitments—"IRLCs"). Tree.com reports IRLCs as derivative instruments at fair value with changes in fair value being recorded in current earnings as a component of revenue from the origination and sale of loans. IRLCs for loans to be sold to investors using a mandatory or assignment of trade ("AOT") method are hedged using "to be announced mortgage-backed securities" ("TBA MBS") and are valued using quantitative risk models. The IRLCs derive their base value from an underlying loan type with similar characteristics using the TBA MBS market which is actively quoted and easily validated through external sources. The most significant data inputs used in this valuation include, but are not limited to, loan type, underlying loan amount, note rate, loan program, and expected sale date of the loan. IRLCs for loans sold to investors on a best efforts basis are hedged using best efforts forward delivery commitments and are valued on an individual loan basis using a proprietary database program. These valuations are based on investor pricing tables stratified by product, note rate and term. The valuation is adjusted at the loan level to consider the servicing release premium and loan pricing adjustments specific to each loan. The Company applies an anticipated loan funding probability based on its own experience to value IRLCs, which results in the classification of these derivatives as Level 3. At September 30, 2010 and December 31, 2009, there were $370.3 million and $258.4 million, respectively, of IRLCs notional value outstanding.

Loans held for sale measured at fair value and sold to investors using a mandatory or AOT method are also hedged using TBA MBS and valued using quantitative risk models. The valuation is based on the loan amount, note rate, loan program, and expected sale date of the loan. Loans held for sale measured at fair value and sold to investors on a best efforts basis are hedged using best efforts forward delivery commitments and are valued using a proprietary database program. The best efforts valuations are based on daily investor pricing tables stratified by product, note rate and term. These valuations are adjusted at the loan level to consider the servicing release premium and loan pricing adjustments specific to each loan. Loans held for sale, excluding impaired loans, are classified as Level 2. Loans held for sale measured at fair value that become impaired are transferred from Level 2 to Level 3, as the estimate of fair value is based on the Company's experience considering lien position and current status of the loan. LendingTree Loans recognizes interest income separately from other changes in fair value.

Under LendingTree Loans' risk management policy, LendingTree Loans economically hedges the changes in fair value of IRLCs and loans held for sale caused by changes in interest rates by using TBA MBS and entering into best efforts forward delivery commitments. These hedging instruments are recorded at fair value with changes in fair value recorded in current earnings as a component of revenue from the origination and sale of loans. TBA MBS used to hedge both IRLCs and loans are valued using quantitative risk models based primarily on inputs related to characteristics of the MBS stratified by product, coupon, and settlement date. These derivatives are classified as Level 2. Best efforts forward delivery commitments are valued using a proprietary database program using investor pricing tables considering the current base loan price. An anticipated loan funding probability is applied to value best efforts commitments hedging IRLCs, which results in the classification of these contracts as Level 3. The best efforts forward delivery commitments hedging loans held for sale are classified as Level 2, so such contracts are transferred from Level 3 to Level 2 at the time the underlying loan is originated. For the purposes of the tables below, we refer to TBA MBS and best efforts forward delivery commitments collectively as "Forward Delivery Contracts".

The following presents Tree.com's assets and liabilities that are measured at fair value on a recurring basis at September 30, 2010 and December 31, 2009 (in thousands):

The following presents the changes in Tree.com's assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2010 and 2009 (in thousands):

The following presents the gains (losses) included in earnings for the three and nine months ended September 30, 2010 and 2009 relating to Tree.com's assets and liabilities that are measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):

The following table summarizes the Company's derivative instruments not designated as hedging instruments as of September 30, 2010 and December 31, 2009 (in thousands):

The gain/(loss) recognized in the consolidated statements of operations for derivatives for the periods ended September 30, 2010 and 2009 was as follows (in thousands):

Tree.com has elected to account for loans held for sale originated on or after January 1, 2008 at fair value. Electing the fair value option allows a better offset of the changes in fair values of the loans and the forward delivery contracts used to economically hedge them without the burden of complying with the requirements for hedge accounting.

Tree.com did not elect the fair value option on loans held for sale originated prior to January 1, 2008 and on loans that were repurchased from investors on or subsequent to that date. As of September 30, 2010 and December 31, 2009, 26 and 29 such loans, respectively, all of which were impaired, were included in loans held for sale and were carried at the lower of cost or market ("LOCOM") value assessed on an individual loan basis. The market value (or fair value) of these impaired loans at September 30, 2010 and December 31, 2009, measured on a non-recurring basis using significant unobservable inputs (Level 3), was $1.1 million and $1.4 million, respectively. This fair value measurement is management's best estimate of the market value of such loans and considers the lien position and loan status.

The following presents the difference between the aggregate principal balance of loans held for sale for which the fair value option has been elected and for loans measured at LOCOM as of September 30, 2010 and December 31, 2009 (in thousands):

During the three months ended September 30, 2010 and 2009, the change in fair value of loans held for sale for which the fair value option was elected were gains of $0.8 million and $1.6 million, respectively, and is included as a component of LendingTree Loans revenue in the accompanying consolidated statements of operations.

During the nine months ended September 30, 2010 and 2009, the change in fair value of loans held for sale for which the fair value option was elected was a gain of $5.5 million and a loss of $0.4 million, respectively, and is included as a component of LendingTree Loans revenue in the accompanying consolidated statements of operations.

NOTE 10—ORIGINATION AND SALE OF LOANS, LOANS HELD FOR SALE AND LOAN LOSS OBLIGATIONS

LendingTree Loans' revenues are primarily derived from the origination and sale of loans. Mortgage loans are funded through warehouse lines of credit and are recorded at fair value. Changes in the fair value of mortgage loans are recorded through revenue prior to the sale of the loans to investors, which typically occurs within thirty days. The gain or loss on the sale of loans is recognized on the date the loans are sold and is based on the difference between the sale proceeds received and the fair value of the loans. The Company sells its loans on a servicing released basis in which the Company gives up the right to service the loans.

A summary of the initial unpaid principal balance of loans sold by type of loan for the three and nine months ended September 30, 2010 and 2009 is presented below ($ amounts in millions):

NOTE 10—ORIGINATION AND SALE OF LOANS, LOANS HELD FOR SALE AND LOAN LOSS OBLIGATIONS (Continued)

LendingTree Loans originates all of its residential real estate loans with the intent to sell them in the secondary market. Loans held for sale consist primarily of residential first mortgage loans that are secured by residential real estate throughout the United States.

The following table represents the loans held for sale by type of loan as of September 30, 2010 and December 31, 2009 (in thousands):

The following presents the difference between the aggregate principal balance of loans on nonaccrual status for which the fair value option has been elected and for loans measured at lower of cost or market valuation as of September 30, 2010 and December 31, 2009 (in thousands):

NOTE 10—ORIGINATION AND SALE OF LOANS, LOANS HELD FOR SALE AND LOAN LOSS OBLIGATIONS (Continued)

Included within the loans on nonaccrual status are repurchased loans with a net book value of $0.5 million and $0.7 million at September 30, 2010 and December 31, 2009, respectively. During the three months ended September 30, 2010, LendingTree did not repurchase any loans. During the nine months ended September 30, 2010, LendingTree repurchased one loan with a balance of $0.3 million. During the three and nine months ended September 30, 2009, LendingTree Loans repurchased one loan with a balance of $0.1 million.

Real estate properties acquired in satisfaction of loans totaled $0.1 million and $0.9 million, net of estimated selling expenses, at September 30, 2010 and December 31, 2009, respectively. This amount is included in prepaid and other current assets in the accompanying consolidated balance sheet.

LendingTree Loans sells loans it originates to investors on a servicing released basis so the risk of loss or default by the borrower is generally transferred to the investor. However, LendingTree Loans is required by these investors to make certain representations relating to credit information, loan documentation and collateral. These representations and warranties may extend through the contractual life of the mortgage loan. Subsequent to the sale, if underwriting deficiencies, borrower fraud or documentation defects are discovered in individual mortgage loans, LendingTree Loans may be obligated to repurchase the respective mortgage loan or indemnify the investors for any losses from borrower defaults if such deficiency or defect cannot be cured within the specified period following discovery.

In the case of early loan payoffs, which occurs when a borrower prepays a loan prior to the end of a specified period, LendingTree Loans may be required to repay all or a portion of the premium initially paid by the investor. The estimated obligation associated with early loan payoffs is calculated based on historical loss experience by type of loan.

The obligation for losses related to the representations and warranties and other provisions discussed above is initially recorded at its estimated fair value, which includes a projection of expected future losses as well as a market based premium. Because LendingTree Loans does not service the loans it sells, it does not maintain nor have access to the current balances and loan performance data with respect to the individual loans previously sold to investors. Accordingly, the Company is unable to determine, with precision, its maximum exposure under its representations and warranties. However, LendingTree Loans utilizes the original loan balance (before it was sold to an investor), historical and projected loss frequency and loss severity ratios by loan type as well as analyses of losses in process to estimate its exposure to losses on loans previously sold. The Company maintains a liability related to this exposure based, in part, on historical and projected loss frequency and loss severity using its loan loss history (adjusted for recent trends in loan loss experience), the original principal amount of the loans previously sold, the year the loans were sold, and loan type. Accordingly, subsequent adjustments to the obligation, if any, are not made based on changes in the fair value of the obligation, which might include an estimated change in losses that may be expected in the future, but are made once further losses are estimated to be both probable and estimable. As such, given current general industry trends in mortgage loans as well as housing prices, market expectations around losses related to the Company's obligations could vary significantly from the obligation recorded as of the balance sheet date or the range estimated below. In estimating its exposure to loan losses, LendingTree Loans categorizes

NOTE 10—ORIGINATION AND SALE OF LOANS, LOANS HELD FOR SALE AND LOAN LOSS OBLIGATIONS (Continued)

its loan sales into four types based on the extent of the documentation provided by the borrower to substantiate income and/or assets (full or limited documentation) and the lien position of the mortgage in the underling property (first or second position). Each of these loan types has a different loss experience with full documentation, first lien position loans generally having the lowest loss ratios and limited documentation, second lien position loans generally having the highest loss ratios.

The following table represents the loans sold for the period shown and the aggregate loan losses through September 30, 2010:

The pipeline of 91 loan repurchase requests and indemnifications as of September 30, 2010 was considered in determining the appropriate reserve amount. The status of these 91 loans varied from an initial review stage, which may result in a rescission of the request, to in process, where the probability of incurring a loss is high, to indemnification, whereby the Company has agreed to reimburse the purchaser of that loan if and when losses are incurred. The indemnification may have a specific term, thereby limiting the Company's exposure. The original principal amount of these loans is approximately $15.1 million, comprised of approximately 62% full documentation first liens, 4% full documentation second liens, 25% limited documentation first liens, and 9% limited documentation second liens.

In the fourth quarter of 2009, LendingTree Loans entered into settlement negotiations with two buyers of previously purchased limited documentation loans. The settlement with one buyer was completed in December 2009 and included a payment of $1.9 million related to all second lien loans sold to this buyer, including both full and limited documentation. This amount was not determined on an individual loan basis and is, therefore, not included in the loss amounts disclosed above based on the year such loans were sold. The settlement was included as a charge off to the reserve in 2009. Negotiations with the second buyer were completed in January 2010. This settlement of $4.5 million, to be paid in four equal quarterly installments in 2010, relates to all future losses on limited documentation second lien loans sold to this buyer. LendingTree Loans must also pay an additional amount of up to $0.3 million in conjunction with this settlement if it does not sell a certain volume of loans to this buyer in 2010. This amount is being accrued throughout 2010 and is included in the total settlement amount and the estimated settlement payments remaining to be paid. This settlement amount is included as a charge off to the reserve in 2010 and is not included in the table above.

NOTE 10—ORIGINATION AND SALE OF LOANS, LOANS HELD FOR SALE AND LOAN LOSS OBLIGATIONS (Continued)

Based on historical experience, it is anticipated that the Company will continue to receive repurchase requests and incur losses on loans sold in prior years. However, the two settlements discussed above will eliminate future repurchase requests from those buyers for the loan types included in those settlements. As of September 30, 2010 LendingTree Loans estimated the range of remaining possible losses due to representations and warranty issues based on the methodology described above, excluding the $1.4 million settlement remaining to be paid in 2010, as $11 million to $16 million. The Company believes that it has adequately reserved for these losses.

The activity related to loss reserves on previously sold loans for the nine months ended September 30, 2010 and 2009, is as follows (in thousands):

Based on an analysis of the Company's historical loan loss experience, it has been determined that a portion of the loan losses expected to be made by investors will be made more than twelve months after the current reporting date. Accordingly, the Company has estimated the portion of its loans sold reserve that it anticipates it will be liable for after twelve months and has classified that portion of the reserve as a long-term liability. The liability for losses on previously sold loans, including the remaining portion of the settlement discussed above, is presented in the accompanying consolidated balance sheet as of September 30, 2010 and December 31, 2009 as follows (in thousands):

For the three months ended September 30, 2010 and 2009, Tree.com recorded a tax (provision) benefit of $(0.05) million and $0.2 million, respectively, which represents effective tax rates of 2.2% and (2.4)%, respectively. For both periods, the tax rate is lower than the federal statutory rate of 35% mainly due to the change in the valuation allowance on deferred tax assets and a partial release of reserves for uncertain tax positions.

For the nine months ended September 30, 2010 and 2009, Tree.com recorded a tax provision of $0.9 million and $0.1 million, respectively, which represents effective tax rates of 19.9% and 3.6%, respectively. For the nine months ended September 30, 2010, the tax rate is lower than the federal statutory rate of 35% mainly due to an increase in the valuation allowance on deferred tax assets. For the nine months ended September 30, 2009, there was an increase in the valuation allowance and non-deductible impairment charges that caused the tax rate to be lower than the federal statutory rate.

Tree.com's unrecognized tax benefits decreased by approximately $0.5 million in the third quarter of 2010. The decrease was due to a partial release of the reserves for uncertain tax positions. Tree.com believes that it is reasonably possible that its remaining unrecognized tax benefits could decrease by approximately $0.1 million within twelve months of the current reporting date due to the expiration of state statute of limitations. An estimate of other changes in unrecognized tax benefits cannot be made, but are not expected to be significant.

For the nine months ended September 30, 2010, Tree.com determined that its valuation allowance yielded an unusual effective tax rate; therefore, Tree.com utilized the actual year to date effective tax rate for purposes of determining year to date tax expense. This approach is consistent with the nine months ended September 30, 2009.

During the nine months ended September 30, 2010 and 2009, provisions for litigation settlements of $1.6 million and $0.4 million, respectively, were recorded in litigation settlements and contingencies in the accompanying consolidated statements of operations. The balance of the related liability was $1.5 million and $12.8 million at September 30, 2010 and December 31, 2009, respectively. The $12.8 million liability at December 31, 2009 was paid in 2010.

In the ordinary course of business, Tree.com is a party to various lawsuits. Tree.com establishes reserves for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. Management has also identified certain other legal matters where it believes an unfavorable outcome is not probable and, therefore, no reserve is established. Although management currently believes that an unfavorable resolution of claims against Tree.com, including claims where an unfavorable outcome is reasonably possible, will not have a material impact on the liquidity, results of operations, or financial condition of Tree.com, these matters are subject to inherent uncertainties and management's view of these matters may change in the future. It is possible that an unfavorable outcome of one or more of these lawsuits could have a material impact on the liquidity, results of operations, or financial condition of Tree.com. Tree.com also evaluates other contingent matters, including tax contingencies, to assess the probability and estimated extent of potential loss.

The restructuring charges in 2010 primarily relate to continuing lease obligations on facilities previously used for call center operations, for which management had a plan to exit at December 31, 2009, but the cease-use date did not occur until January 2010. The restructuring charges in 2009 primarily relate to Tree.com's segment reorganizations and aligning the cost structure with future revenue opportunities. Costs that relate to ongoing operations are not part of restructuring charges. Restructuring charges by segment and type are as follows (in thousands):

Restructuring charges and spending against liabilities are as follows (in thousands):

At September 30, 2010, restructuring liabilities of $0.9 million are included in accrued expenses and other current liabilities and $2.3 million are included in other long-term liabilities in the accompanying consolidated balance sheet. At December 31, 2009, restructuring liabilities of $1.8 million are included in accrued expenses and other current liabilities and $0.7 million are included in other long-term liabilities in the accompanying consolidated balance sheet. Tree.com does not expect to incur significant additional costs related to the prior restructurings noted above.

On August 30, 2010, the Company entered into and consummated a Share Exchange Agreement (the "Share Exchange Agreement") with Douglas R. Lebda, the Company's Chairman and Chief Executive Officer. Pursuant to the Share Exchange Agreement, Mr. Lebda exchanged 2,902.33 currently outstanding shares of Series A Redeemable Preferred Stock, par value $0.01 per share (the "Preferred Stock"), of LendingTree Holdings Corp., a Delaware corporation and wholly-owned subsidiary of the Company (the "Subsidiary"), owned by him, together with $1.1 million in accrued and unpaid dividends in respect of such shares, for a total of 534,900 newly-issued shares of Tree.com common stock. The Preferred Stock has a liquidation preference of $1,000 per share and cumulative cash dividends accrue on the Preferred Stock at the rate of 12% of the liquidation preference per share per year and unpaid dividends compound at a rate per annum equal to the dividend rate. The value of the Common Stock issued to Mr. Lebda pursuant to the Share Exchange Agreement was approximately $4.0 million and was determined based on the closing price on the Nasdaq Global Market on the trading day preceding the closing of the exchange.

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

On August 20, 2008, Tree.com, Inc. ("Tree.com") was spun off from its parent company, IAC/InterActiveCorp ("IAC") into a separate publicly traded company. We refer to the separation transaction as the "spin-off." In connection with the spin-off, Tree.com was incorporated as a Delaware corporation in April 2008.

Tree.com is the parent of LendingTree, LLC and the owner of several brands and businesses that provide information, tools, advice, products and services for critical transactions in our customers' lives. Our family of brands includes: LendingTree.com®, GetSmart.com®, RealEstate.com®, DegreeTree.com^SM, HealthTree.com^SM, LendingTreeAutos.com, DoneRight.com, and InsuranceTree.com^SM. Together, these brands serve as an ally for consumers who are looking to comparison shop for loans, real estate and other services from multiple businesses and professionals who will compete for their business.

These businesses and brands are operated under the segments known as LendingTree Loans, the Exchanges and Real Estate. Additionally, certain shared indirect costs that are described below are reported as "Unallocated—Corporate."

The Exchanges segment consists of online lead generation networks and call centers (principally LendingTree.com, Tree.com, DegreeTree.com, LendingTreeAutos.com and GetSmart.com) that connect consumers and service providers principally in the lending, higher education and automobile marketplaces.

The Real Estate segment consists of a proprietary full-service real estate brokerage (RealEstate.com, REALTORS®) that operates in 20 U.S. markets, as well as an online lead generation network accessed at www.RealEstate.com, that connects consumers with third party real estate brokerages around the country.

From time to time, we may evaluate the potential acquisition of various assets and other businesses that may complement our current services, enhance our capabilities, improve or sustain our competitive position, or otherwise offer growth opportunities. From time to time, also we may consider the potential disposition of certain of our assets, subsidiaries or lines of businesses. As a general rule, we publicly announce any material acquisitions or dispositions when a definitive agreement has been reached.

Results of operations for the three and nine months ended September 30, 2010 compared to the three and nine months ended September 30, 2009:

For the three months ended September 30, 2010 compared to the three months ended September 30, 2009:

LendingTree Loans revenue in 2010 increased from the same period in 2009 due to a large increase in refinancing activity brought on by low consumer borrowing rates. Third quarter 2010 revenue increased 30% quarter-over-quarter on 17% higher closed units. The quarter again saw unprecedented lows in mortgage interest rates which in turn spurred another surge in refinance loan activity. Third quarter revenue increased 44% from the same period last year on 18% more closed loans and a 12% increase in the revenue generated per loan. Looking at the year-over-year revenue increase, the third quarter 2009 reflected a significant slowdown that followed the previously unprecedented refinance boom experienced earlier that year.

LendingTree Loans originates mortgage loans on property located throughout the United States. Revenue from loans originated for property in California totaled approximately 12% and 8% of Tree.com's consolidated revenue for the three months ended September 30, 2010 and 2009, respectively.

Revenue from Exchanges in 2010 decreased from the same period in 2009 due primarily to a reduction in the amount of closings. Overall matched requests in the third quarter of 2010 declined 7% from the same period in 2009, which reflects a decline of 28% in home loan matches and an increase of 19% in matches for the new consumer vertical areas of higher education, home services and

insurance. Home loan matches were down because of the expansion of volume taken by LendingTree Loans and many lenders experiencing their own high levels of organic lead volume during this low interest rate environment. Matches in new consumer verticals have grown as a result of both business acquisitions completed in 2009 and increased marketing spending. The overall impact on match fees was an increase of 3%, reflecting a shift in pricing on home loan related matches to increase the average match fee (and decrease the average closed loan fee). Also impacting the revenue from closed loan fees was a 24% decline in closed units in the period as a result of the decline in matched loan requests.

No single Exchange network lender accounts for revenue representing more than 10% of Tree.com's consolidated revenue for any periods presented.

Real Estate revenue in 2010 decreased from the same period in 2009 principally due to a decrease in closings due to the persistent negative real estate market conditions contributing to lower home sales prices and fewer real estate transactions overall. In addition, the Company consolidated three office locations in the fourth quarter of 2009, which resulted in lower agent count and transactions in 2010. The dollar value of the Company's real estate closings decreased 58% in 2010, from $330 million in 2009 to $138 million in 2010.

For the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009:

LendingTree Loans revenue in 2010 decreased from the same period in 2009 because loan closing rates declined from 2009. The decrease in loan closing rates was primarily driven by tight secondary credit markets that are unable to serve many consumers who do not have sufficient collateral value or

are not eligible for conforming prime first-lien position loans. The total dollar value of loans closed declined by 13% during 2010, even though the number of consumer loan requests increased by 13% in the same period.

LendingTree Loans originates mortgage loans on property located throughout the United States. Revenue from loans originated for property in California totaled approximately 12% of Tree.com's consolidated revenue for the nine months ended both September 30, 2010 and 2009.

Revenue from the Exchanges in 2010 decreased for the same period in 2009 due primarily to a reduction in the amount of closings. Overall matched requests through the third quarter of 2010 declined 11% from the same period in 2009, which reflects a decline of 39% in home loan matches and an increase of 90% in matches for the new consumer vertical areas of higher education, home services and insurance. Home loan matches were down because of the expansion of volume taken by LendingTree Loans and many lenders experiencing their own high levels of organic lead volume during this low interest rate environment. Matches in new consumer verticals have grown as a result of both business acquisitions completed in 2009 and increased marketing spending. The overall impact on match fees was an increase of 20%, reflecting a shift in pricing on home loan related matches to increase the average match fee (and decrease the average close loan fee). Also impacting the revenue from closed loan fees was a 33% decline in closed units in the period as a result of the decline in matched loan requests.

Real Estate revenue in 2010 decreased principally due to a decrease in closings due to the persistent negative real estate market conditions contributing to lower home sales prices and fewer real estate transactions overall. In addition, the Company consolidated three office locations in the fourth quarter of 2009, which resulted in lower agent count and transactions in 2010. The dollar value of the Company's real estate closings decreased 47% in 2010, from $944 million in 2009 to $502 million in 2010.

For the three months ended September 30, 2010 compared to the three months ended September 30, 2009:

Cost of revenue consists primarily of costs associated with loan originations, compensation and other employee related costs (including stock-based compensation) related to customer call centers, real estate network support staff and loan officers, as well as credit scoring fees, consumer incentive costs, real estate agent commissions and website network hosting and server fees.

Cost of revenue in 2010 decreased from 2009 primarily due to decreases of $1.5 million in costs associated with loan originations at LendingTree Loans, $0.6 million in consumer incentive rebates related to decreased closings at the Exchanges and in Real Estate, and $2.7 million in commissions paid to real estate agents as a result of decreased closings, offset by an increase of $1.0 million in compensation costs at LendingTree Loans. The decreases in the cost of loan originations are primarily due to a change in the fee structure in October 2009 whereby the origination fee charged to the borrower was reduced and no longer covered certain origination costs that were previously paid and recorded as expense by LendingTree Loans. Under the current fee structure, these origination costs are passed through to the borrower directly.

For the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009:

Cost of revenue in 2010 decreased from 2009 primarily due to decreases of $7.5 million in costs associated with loan originations at LendingTree Loans, $2.6 million in compensation and other employee related costs, $2.0 million in consumer incentive rebates related to decreased closings at the Exchanges and in Real Estate, and $4.9 million in commissions paid to real estate agents. The decreases in the cost of loan originations are primarily due to a change in the fee structure in October 2009 whereby the origination fee charged to the borrower was reduced and no longer covered certain origination costs that were previously paid and recorded as expense by LendingTree Loans. Under the current fee structure, these origination costs are passed through to the borrower directly.

For the three months ended September 30, 2010 compared to the three months ended September 30, 2009:

		LendingTree Loans			Exchanges			Real Estate			Total

Balance as of December 31, 2009
	Goodwill	$	46,526		$	485,955		$	70,091		$	602,572
	Accumulated impairment losses		(46,526	)		(483,088	)		(60,806	)		(590,420	)

			—			2,867			9,285			12,152

Goodwill acquired during the year			—			765			—			765
Impairment losses			—			—			—			—
Other deductions			—			—			—			—

Balance as of September 30, 2010
	Goodwill		46,526			486,720			70,091			603,337
	Accumulated impairment losses		(46,526	)		(483,088	)		(60,806	)		(590,420	)

		$	—		$	3,632		$	9,285		$	12,917

		September 30, 2010			December 31, 2009

Computer equipment and capitalized software		$	39,367		$	35,881
Leasehold improvements			2,503			2,888
Furniture and other equipment			3,834			4,096
Projects in progress			2,629			1,532

			48,333			44,397
Less: accumulated depreciation and amortization			(35,790	)		(32,140	)

	Total property and equipment, net	$	12,543		$	12,257

		September 30, 2010		December 31, 2009

Accrued loan loss liability related to loans previously sold		$	6,609	$	6,115
Loan loss settlement liability related to loans previously sold			1,350		4,500
Litigation accruals			1,500		12,750
Accrued advertising expense			8,027		8,095
Accrued compensation and benefits			6,701		7,525
Accrued professional fees			1,026		1,528
Accrued restructuring costs			910		1,848
Derivative liabilities			832		356
Customer deposits and escrows			4,088		3,387
Deferred rent			486		793
Other			8,277		7,797

	Total accrued expenses and other current liabilities	$	39,806	$	54,694

		For the Nine Months Ended September 30, 2010:

		LendingTree Loans			Exchanges			Real Estate			Unallocated— Corporate			Total
Revenue		$	87,147		$	48,197		$	11,825		$	(184	)	$	146,985
Cost of revenue (exclusive of depreciation shown separately below)			30,752			3,180			7,312			474			41,718

	Gross margin		56,395			45,017			4,513			(658	)		105,267
Operating expenses:
	Selling and marketing expense		14,597			38,885			1,537			16			55,035
	General and administrative expense		16,446			3,733			4,049			15,035			39,263
	Product development		134			2,360			276			194			2,964
	Litigation settlements and contingencies		1,551			—			36			1			1,588
	Restructuring expense		(7	)		126			652			2,592			3,363
	Amortization of intangibles		—			884			1,483			38			2,405
	Depreciation		1,310			1,373			933			923			4,539

	Total operating expenses		34,031			47,361			8,966			18,799			109,157

Operating income (loss)			22,364			(2,344	)		(4,453	)		(19,457	)		(3,890	)
Adjustments to reconcile to EBITDA and Adjusted EBITDA:
	Amortization of intangibles		—			884			1,483			38			2,405
	Depreciation		1,310			1,373			933			923			4,539

EBITDA			23,674			(87	)		(2,037	)		(18,496	)		3,054
	Restructuring expense		(7	)		126			652			2,592			3,363
	Loss on disposal of assets		—			—			6			3			9
	Non-cash compensation		299			703			118			1,720			2,840
	Litigation settlements and contingencies		1,551			—			36			1			1,588
	Post acquisitions adjustments		—			(849	)		(221	)		—			(1,070	)

Adjusted EBITDA		$	25,517		$	(107	)	$	(1,446	)	$	(14,180	)	$	9,784

Reconciliation to net loss in total:
Operating loss per above														$	(3,890	)
Other expense, net															(386	)

Loss before income taxes															(4,276	)
Income tax provision															(850	)

Net loss														$	(5,126	)

			Three Months Ended September 30,					Nine Months Ended September 30,

			2010			2009		2010			2009
LendingTree Loans:
	Origination and sale of loans		$	31,860		$	22,495	$	79,301		$	89,701
	Other			2,900			1,614		7,846			5,037

		Total LendingTree Loans revenue		34,760			24,109		87,147			94,738
Exchanges:
	Match fees			12,858			12,438		38,683			32,307
	Closed loan fees			1,656			5,318		7,008			18,180
	Other			690			854		2,322			2,175
	Inter-segment			103			—		184			—

		Total Exchanges		15,307			18,610		48,197			52,662
Real Estate revenue				3,213			7,997		11,825			21,549
Inter-segment elimination				(103	)		—		(184	)		—

Total revenue			$	53,177		$	50,716	$	146,985		$	168,949

	September 30, 2010		December 31, 2009

LendingTree Loans	$	232,440	$	167,976
Real Estate		25,709		28,031
Exchanges and Unallocated—Corporate(a)		78,558		95,825

Total	$	336,707	$	291,832

	Three Months Ended September 30,

	2010				2009
	Basic		Diluted		Basic			Diluted
	(In thousands, except per share data)
Numerator:
Net income (loss) available to common shareholders	$	1,819	$	1,819	$	(7,400	)	$	(7,400	)
Denominator:
Weighted average common shares		11,023		11,163		10,844			10,844

Net income (loss) per common share	$	0.16	$	0.16	$	(0.68	)	$	(0.68	)

			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value

					(In years)		(In thousands)
Outstanding at January 1, 2010	1,177,319		$	9.34
Granted	—			—
Exercised	(42,963	)		6.81
Forfeited	(65,714	)		7.46
Expired	(95,615	)		9.83

Outstanding at September 30, 2010	973,027		$	9.54		6.4	$	53

Options exercisable at September 30, 2010	303,614		$	12.13		4.6	$	53

	Options Outstanding

			Weighted Average Remaining Contractual Life in Years				Options Exercisable
Range of Exercise Prices	Outstanding at September 30, 2010		Weighted Average Remaining Contractual Life in Years		Weighted Average Exercise Price		Exercisable at September 30, 2010		Weighted Average Exercise Price
$.01 to $4.99		14,265		1.63	$	2.99		14,265	$	2.99
$5.00 to $7.45		12,849		2.16		6.67		12,849		6.67
$7.46 to $9.99		763,034		7.17		8.28		93,621		7.69
$10.00 to $14.99		54,779		2.60		12.23		54,779		12.23
$15.00 to $19.99		81,437		4.65		15.03		81,437		15.03
$20.00 to $24.99		46,663		4.69		20.19		46,663		20.19

		973,027		6.44	$	9.54		303,614	$	12.13

	RSUs					Restricted Stock

	Number of Shares			Weighted Average Grant Date Fair Value		Number of Shares			Weighted Average Grant Date Fair Value
Nonvested at January 1, 2010		704,938		$	8.03		350,000		$	5.42
Granted		454,370			8.20		150,000			9.15
Vested		(283,845	)		10.53		(87,500	)		5.42
Forfeited		(282,638	)		7.33		—			—

Nonvested at September 30, 2010		592,825		$	7.48		412,500		$	6.78

	As of September 30, 2010

	Recurring Fair Value Measurements Using
	Quoted Market Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Total Fair Value Measurements
Loans held for sale	$	—	$	162,283		$	1,036		$	163,319
Interest rate lock commitments ("IRLCs")		—		—			10,249			10,249
Forward delivery contracts		—		(503	)		(17	)		(520	)

Total	$	—	$	161,780		$	11,268		$	173,048

			Three Months Ended September 30, 2010

			Interest Rate Lock Commitments			Forward Delivery Contracts			Loans Held for Sale
Balance at July 1, 2010			$	10,848		$	(20	)	$	957
	Transfers into Level 3			—			—			378
	Transfers out of Level 3			—			(17	)		—
	Total net gains (losses) included in earnings (realized and unrealized)			33,683			20			(34	)
	Purchases, sales, and settlements
		Purchases		—			—			—
		Sales		—			—			(262	)
		Settlements		(3,533	)		—			(3	)
	Transfers of IRLCs to closed loans			(30,749	)		—			—

Balance at September 30, 2010			$	10,249		$	(17	)	$	1,036

	September 30, 2010				December 31, 2009

	Balance Sheet Location	Fair Value			Balance Sheet Location	Fair Value
Interest Rate Lock Commitments	Prepaid and other current assets	$	10,262		Prepaid and other current assets	$	3,919
Forward Delivery Contracts	Prepaid and other current assets		299		Prepaid and other current assets		3,341
Interest Rate Lock Commitments	Accrued expenses and other current liabilities		(13	)	Accrued expenses and other current liabilities		(239	)
Forward Delivery Contracts	Accrued expenses and other current liabilities		(819	)	Accrued expenses and other current liabilities		(117	)

Total Derivatives		$	9,729			$	6,904

			Three Months Ended					Nine Months Ended

		Location of Gain/(Loss) Recognized in Income on Derivative	September 30, 2010		September 30, 2009			September 30, 2010			September 30, 2009
Interest Rate Lock Commitments		LendingTree Loans revenue	$	33,683	$	21,227		$	83,752		$	74,178
Forward Delivery Contracts		LendingTree Loans revenue		3,252		(2,270	)		(3,905	)		149

	Total		$	36,935	$	18,957		$	79,847		$	74,327

	As of September 30, 2010

	Loans Held for Sale— Measured at Fair Value		Loans Held for Sale— Measured at LOCOM			Total Loans Held For Sale
Aggregate unpaid principal balance	$	157,796	$	2,933		$	160,729
Difference between fair value and aggregate unpaid principal balance		5,523		—			5,523
Lower of cost or market valuation allowance		—		(1,783	)		(1,783	)
Deferred loan fees, net of costs		—		(9	)		(9	)

Loans held for sale	$	163,319	$	1,141		$	164,460

	September 30, 2010					December 31, 2009

	Amount		%			Amount		%
Conforming	$	129,428		79	%	$	72,670		77	%
FHA		29,294		18	%		16,596		18	%
Jumbo		5,066		3	%		3,486		4	%
Subprime		582		—	%		720		1	%
Home equity		90		—	%		124		—	%

Total	$	164,460		100	%	$	93,596		100	%

	As of September 30, 2010

	Loans on Nonaccrual— Measured at Fair Value			Loans on Nonaccrual— Measured at LOCOM			Total Loans on Nonaccrual
Aggregate unpaid principal balance	$	1,673		$	2,933		$	4,606
Difference between fair value and aggregate unpaid principal balance		(637	)		—			(637	)
Lower of cost or market valuation allowance		—			(1,783	)		(1,783	)
Deferred loan fees, net of costs		—			(9	)		(9	)

Loans on nonaccrual	$	1,036		$	1,141		$	2,177

	As of September 30, 2010

Period of Loan Sales	Number of loans sold		Original principal balance		Number of loans with losses		Original principal balance of loans with losses		Amount of aggregate losses
	(in billions)						(in millions)		(in millions)
Nine months ended September 30, 2010		8,500	$	1.9		—	$	—	$	—
2009		12,800		2.8		3		0.8		0.1
2008		11,000		2.2		17		3.4		0.7
2007		36,300		6.1		137		17.9		6.1
2006		55,000		7.9		196		21.9		11.9
2005 and prior years		86,700		13.0		86		11.6		4.6

Total		210,300	$	33.9		439	$	55.6	$	23.4

	Nine Months Ended September 30,

	2010			2009
Balance, beginning of period	$	16,985		$	10,451
Provisions		8,132			10,133
Charge offs to reserves(a)		(10,172	)		(6,548	)

Balance, end of period	$	14,945		$	14,036

	As of September 30, 2010		As of December 31, 2009

Current portion related to settlement above, included in accrued expenses and other current liabilities	$	1,350	$	4,500
Other current portion, included in accrued expenses and other current liabilities		6,609		6,115
Long term portion, included in other long-term liabilities		8,336		6,370

Total	$	16,295	$	16,985

	For The Three Months Ended September 30, 2010

	Employee Termination Costs		Continuing Lease Obligations			Asset Write-offs		Total
LendingTree Loans	$	—	$	(14	)	$	—	$	(14	)
Exchanges		44		—			—		44
Real Estate		—		166			122		288
Unallocated—corporate		3		—			—		3

Total	$	47	$	152		$	122	$	321

		Three Months Ended September 30,

		2010			$ Change			% Change			2009
		(Dollars in thousands)
LendingTree Loans:
	Origination and sale of loans	$	31,860		$	9,365			42	%	$	22,495
	Other		2,900			1,286			80	%		1,614

Total LendingTree Loans			34,760			10,651			44	%		24,109
Exchanges:
	Match fees		12,858			420			3	%		12,438
	Closed loan fees		1,656			(3,662	)		(69	)%		5,318
	Other		690			(164	)		(19	)%		854
	Inter-segment revenue		103			103			100	%		—

Total Exchanges			15,307			(3,303	)		(18	)%		18,610
Real Estate			3,213			(4,784	)		(60	)%		7,997
Inter-segment revenue			(103	)		(103	)		(100	)%		—

Total revenue		$	53,177		$	2,461			5	%	$	50,716

	Three Months Ended September 30,

As a Percentage of Segment Revenue	2010			2009
LendingTree Loans		32	%		48	%
Exchanges		9	%		8	%
Real Estate		65	%		63	%
Unallocated—corporate, as a percentage of total revenue		—	%		1	%