UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2004.
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: 001-31916
AMERICAN HOME MORTGAGE INVESTMENT CORP.
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(Exact Name of Registrant as Specified in its Charter)
Maryland 20-0103914
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
520 Broadhollow Road, Melville, New York 11747
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(Address of Principal Executive Offices) (Zip Code)
(516) 949-3900
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [__]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [__]
As of August 4, 2004, there were 40,137,829 shares of the registrant's
common stock, par value $0.01 per share, outstanding.
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I-FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2004 and
December 31, 2003.....................................................1
Consolidated Statements of Income for the Three and Six
Months Ended June 30, 2004 and 2003...................................2
Consolidated Statements of Stockholders' Equity for the
Six Months Ended June 30, 2004 and 2003...............................3
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2004 and 2003..........................................4
Notes to Consolidated Financial Statements ...........................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................23
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..........40
Item 4. Controls and Procedures..............................................42
PART II-OTHER INFORMATION
Item 1. Legal Proceedings....................................................43
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities.......................................43
Item 3. Defaults Upon Senior Securities......................................44
Item 4. Submission of Matters to a Vote of Security Holders..................44
Item 5. Other Information....................................................44
Item 6. Exhibits and Reports on Form 8-K ....................................44
SIGNATURES
INDEX TO EXHIBITS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except per share amounts)
June 30, December 31,
2004 2003
-------------- --------------
Assets:
Cash and cash equivalents $ 433,918 $ 53,148
Accounts receivable and servicing advances 100,489 84,311
Mortgage-backed securities (including securities pledged of $6,786,841 and
$1,426,477 as of June 30, 2004 and December 31, 2003, respectively) 7,331,162 1,763,628
Mortgage loans held for sale, net 1,435,998 1,226,127
Derivative assets 44,608 20,837
Mortgage servicing rights, net 141,818 117,784
Premises and equipment, net 44,541 41,738
Goodwill 88,799 83,445
Other assets 13,788 13,672
-------------- --------------
Total assets $ 9,635,121 $3,404,690
============== ==============
Liabilities and Stockholders' Equity:
Liabilities:
Warehouse lines of credit $ 672,456 $1,121,760
Drafts payable 86,300 25,625
Commercial paper 1,047,036 -
Reverse repurchase agreements 6,413,506 1,344,327
Payable for securities purchased 423,909 259,701
Derivative liabilities 10,098 12,694
Accrued expenses and other liabilities 119,885 76,156
Notes payable 107,237 99,655
Income taxes payable 41,128 66,802
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Total liabilities 8,921,555 3,006,720
-------------- --------------
Commitments and contingencies - -
Stockholders' Equity:
Preferred stock, $0.01 per share par value, 10,000,000 shares authorized, none
issued and outstanding - -
Common stock, $0.01 per share par value, 100,000,000 shares authorized,
40,111,559 and 25,270,100 shares issued and outstanding as of June 30, 2004
and December 31, 2003, respectively 401 252
Additional paid-in capital 629,203 281,432
Retained earnings 134,515 121,029
Accumulated other comprehensive loss (50,553) (4,743)
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Total stockholders' equity 713,566 397,970
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Total liabilities and stockholders' equity $ 9,635,121 $3,404,690
============== ==============
See notes to consolidated financial statements.
-1-
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- --------------------------------
2004 2003 2004 2003
---------------- ---------------- ---------------- ---------------
Net interest income:
Interest income $ 72,404 $ 25,446 $106,454 $ 46,424
Interest expense (52,318) (12,572) (73,596) (22,781)
---------------- ---------------- ---------------- ---------------
Total net interest income 20,086 12,874 32,858 23,643
---------------- ---------------- ---------------- ---------------
Non-interest income:
Gain on sales of mortgage loans and
mortgage-backed securities 59,840 129,282 139,973 217,493
Loan servicing fees 8,730 9,821 19,048 20,949
Amortization (7,764) (17,286) (15,110) (30,055)
Impairment reserve recovery (provision) 7,252 (6,472) (5,332) (12,185)
---------------- ---------------- ---------------- ---------------
Net loan servicing fees (loss) 8,218 (13,937) (1,394) (21,291)
---------------- ---------------- ---------------- ---------------
Other non-interest income 1,226 1,241 2,204 4,169
---------------- ---------------- ---------------- ---------------
Total non-interest income 69,284 116,586 140,783 200,371
---------------- ---------------- ---------------- ---------------
Non-interest expenses:
Salaries, commissions and benefits, net 42,851 54,206 82,633 98,853
Occupancy and equipment 8,008 6,679 16,102 12,302
Data processing and communications 3,338 2,748 6,551 5,827
Office supplies and expenses 3,215 3,847 6,333 6,870
Marketing and promotion 2,196 2,805 4,408 5,604
Travel and entertainment 2,887 2,891 5,464 4,878
Professional fees 1,829 1,672 4,257 3,513
Other 4,082 8,423 9,520 12,088
---------------- ---------------- ---------------- ---------------
Total non-interest expenses 68,406 83,271 135,268 149,935
---------------- ---------------- ---------------- ---------------
Net income before income tax (benefit) expense 20,964 46,189 38,373 74,079
Income tax (benefit) expense (12,518) 19,312 (16,332) 30,889
---------------- ---------------- ---------------- ---------------
Net income $ 33,482 $ 26,877 $ 54,705 $ 43,190
================ ================ ================ ===============
Per share data:
Basic $ 0.84 $ 1.58 $ 1.56 $ 2.56
Diluted $ 0.83 $ 1.55 $ 1.54 $ 2.51
Weighted average number of shares - basic 40,000 16,981 35,015 16,866
Weighted average number of shares - diluted 40,445 17,348 35,476 17,182
See notes to consolidated financial statements.
-2-
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
Accumulated
Shares of Additional Other Total
Common Common Paid-in Retained Comprehensive Stockholders'
(Dollars in thousands) Stock Stock Capital Earnings Loss Equity
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Balance at December 31, 2002 16,717,459 $ 167 $ 95,785 $ 68,144 $ - $ 164,096
============== ========= ============ ============= =============== ==============
Comprehensive income:
Net income - - - 43,190 - 43,190
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Comprehensive income 43,190
Issuance of common stock, earnouts 295,976 3 3,076 - - 3,079
Issuance of common stock, 1999 Omnibus
Stock Incentive Plan 190,614 2 1,308 - - 1,310
Dividends declared - - - (2,515) - (2,515)
-------------- --------- ------------ ------------- --------------- --------------
Balance at June 30, 2003 17,204,049 $ 172 $ 100,169 $ 108,819 $ - $ 209,160
============== ========= ============ ============= =============== ==============
Balance at December 31, 2003 25,270,100 $ 252 $ 281,432 $ 121,029 $ (4,743) $ 397,970
============== ========= ============ ============= =============== ==============
Comprehensive income:
Net income - - - 54,705 - 54,705
Net unrealized loss on mortgage-backed
securities available for sale - - - - (51,165) (51,165)
Gross unrealized gain on interest rate
swaps from cash flow hedges - - - - 5,355 5,355
--------------
Comprehensive income 8,895
Issuance of common stock, offering 14,375,000 144 339,647 - - 339,791
Issuance of common stock, earnouts 211,539 2 4,692 - - 4,694
Issuance of common stock, 1999 Omnibus
Stock Incentive Plan 254,920 3 1,833 - - 1,836
Tax benefit from stock options exercised - - 1,599 - - 1,599
Dividends declared - - - (41,219) - (41,219)
-------------- --------- ------------ ------------- --------------- --------------
Balance at June 30, 2004 40,111,559 $ 401 $ 629,203 $ 134,515 $ (50,553) $ 713,566
============== ========= ============ ============= =============== ==============
See notes to consolidated financial statements.
-3-
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Six Months Ended June 30,
--------------------------------------------
2004 2003
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Cash flows from operating activities:
Net income $ 54,705 $ 43,190
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 3,965 2,613
Amortization and impairment of mortgage servicing rights 20,442 42,240
Origination of mortgage loans held for sale (11,032,816) (10,483,716)
Proceeds on sales and securitizations of mortgage loans 10,822,945 9,594,024
(Decrease) increase in income taxes payable (25,674) 19,443
Amortization of mortgage-backed securities premiums, net 10,282 -
Unrealized gain on securities held in trading (16,486) -
Unrealized gain on free standing derivatives (41,451) -
Capitalization of mortgage servicing rights (44,476) (15,605)
Other 633 339
(Increase) decrease in operating assets:
Accounts receivable and servicing advances (16,178) 7,438
Derivative assets 14,715 (14,803)
Other assets 128 (1,675)
Increase (decrease) in operating liabilities:
Accrued expenses and other liabilities 33,160 16,479
Forward delivery contracts 3,440 (7,204)
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Net cash used in operating activities (212,666) (797,237)
--------------------- ---------------------
Cash flows from investing activities:
Purchases of premises and equipment, net (6,768) (5,149)
Purchases and additions to mortgage-backed securities (7,701,843) -
Sales of mortgage-backed securities 1,735,145 -
Principal repayments on mortgage-backed securities 356,206 -
Other (244) (402)
--------------------- ---------------------
Net cash used in investing activities (5,617,504) (5,551)
--------------------- ---------------------
Cash flows from financing activities:
(Decrease) increase in warehouse lines of credit (449,304) 806,311
Increase in reverse repurchase agreements 5,069,179 -
Increase in payable for securities purchased 164,208 -
Increase in commercial paper 1,047,036 -
Increase in drafts payable 60,675 25,169
Proceeds from issuance of capital stock 342,211 1,065
Dividends paid (30,647) (2,514)
Increase (decrease) in notes payable 7,582 (12,825)
--------------------- ---------------------
Net cash provided by financing activities 6,210,940 817,206
--------------------- ---------------------
Net increase in cash and cash equivalents 380,770 14,418
Cash and cash equivalents, beginning of period 53,148 24,416
--------------------- ---------------------
Cash and cash equivalents, end of period $ 433,918 $ 38,834
===================== =====================
Supplemental disclosure of cash flow information:
Interest paid $ 36,598 $ 18,985
Income taxes paid 6,361 12,723
See notes to consolidated financial statements.
-4-
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - On December 3, 2003, American Home Mortgage Investment Corp.
("AHM Investment") completed its merger with Apex Mortgage Capital, Inc.
("Apex"), a Maryland corporation that operated and elected to be treated as a
real estate investment trust, or REIT. Under the terms of the transaction,
American Home Mortgage Holdings, Inc. ("AHM Holdings") reorganized through a
reverse triangular merger that caused AHM Investment, a newly formed Maryland
corporation that operates and will elect to be treated as a REIT, for federal
income tax purposes, to become AHM Holdings' parent. AHM Investment was formed
to combine the net assets of Apex, consisting primarily of mortgage-backed
securities, with the mortgage origination and servicing businesses of AHM
Holdings. As used herein, references to the "Company," "American Home," "we,"
"our" and "us" refer to AHM Investment collectively with its subsidiaries.
AHM Investment is a mortgage REIT focused on earning net interest income from
purchased and self-originated mortgage-backed securities, and through its
taxable subsidiaries, on earning income from originating and selling mortgage
loans and servicing mortgage loans for institutional investors. Mortgages are
originated through a network of loan origination offices as well as through
mortgage brokers and are serviced at the Company's Columbia, Maryland servicing
center.
Basis of Presentation - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company's estimates and assumptions
primarily arise from risks and uncertainties associated with interest rate
volatility, prepayment volatility, credit exposure and regulatory changes.
Although management is not currently aware of any factors that would
significantly change its estimates and assumptions in the near term, future
changes in market trends and conditions may occur which could cause actual
results to differ materially. When necessary, certain reclassifications of prior
year financial statement amounts have been made to conform to the current year
presentation.
Due to the fact that the Company exercises significant influence on the
operations of its joint ventures, their balances and operations have been fully
consolidated in the accompanying consolidated financial statements and all
intercompany accounts and transactions have been eliminated.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand,
amounts due from banks and overnight deposits.
Mortgage-backed Securities - Mortgage-backed securities are classified as either
trading or available for sale. Trading securities are reported at fair value,
and changes in fair value are reported in gain on sales of mortgage loans and
mortgage-backed securities in the statements of operations. Available for sale
securities are reported at fair value, with unrealized gains and losses excluded
from earnings and reported in accumulated other comprehensive income (loss).
Realized gains and losses on sales of available for sale securities are
determined on an average cost basis and included in gain on sales of mortgage
loans and mortgage-backed securities.
When the fair value of an available for sale security is less than amortized
cost, management considers whether there is an other-than-temporary impairment
in the value of the security (e.g., whether the security will be sold prior to
the recovery of fair value). If, in management's judgment, an
other-than-temporary impairment exists, the cost basis of the security is
written down to the then-current fair value, and the unrealized loss is
transferred from accumulated other comprehensive income as an immediate
reduction of current earnings (i.e., as if the loss had been realized in the
period of impairment). Premiums and discounts on the Company's mortgage-backed
securities held in available for sale are amortized to interest income using the
level yield method over the estimated life of the security.
Mortgage Loans Held for Sale - Mortgage loans held for sale are carried at the
lower of cost or aggregate market value. The cost basis includes the capitalized
value of the interest rate lock commitments ("IRLCs") related to the mortgage
loans and any net deferred origination costs. For mortgage loans held for sale
that are hedged with forward sale commitments, the carrying value is adjusted
for the change in market during the time the hedge was deemed to be highly
effective. The market value is determined by outstanding commitments from
investors or current investor yield requirements calculated on the aggregate
basis.
Mortgage Servicing Rights - Mortgage servicing rights ("MSRs") are carried at
the lower of cost or fair value, based on defined risk strata, and are amortized
in proportion to and over the period of estimated net servicing income. When the
Company sells certain loans
-5-
and retains the servicing rights, it allocates the cost basis of the loans
between the assets sold and the MSRs based on their relative fair values on the
date of sale.
The Company estimates the fair value of its MSRs by obtaining market information
from one of the primary MSR brokers. When the book value of capitalized MSRs
exceeds its fair value, impairment is recognized through a valuation allowance.
In determining impairment, our mortgage servicing portfolio is stratified by the
predominant risk characteristic of the underlying mortgage loans. The Company
has determined that the predominant risk characteristic is the interest rate on
the underlying loans. The Company measures impairment for each stratum by
comparing the estimated fair value to the recorded book value. Temporary
impairment is recorded through a valuation allowance and amortization expense in
the period of occurrence. In addition, the Company periodically evaluates its
MSRs for other than temporary impairment to determine if the carrying value
before the application of the valuation allowance is recoverable. The Company
receives a sensitivity analysis of the estimated fair value of its MSRs assuming
a 200-basis-point instantaneous increase in interest rates from an independent
MSR broker. The fair value estimate includes changes in market assumptions that
would be expected given the increase in mortgage rates (e.g., prepayment speeds
would be lower). The Company believes this 200-basis-point increase in mortgage
rates to be an appropriate threshold for determining the recoverability of the
temporary impairment because that size rate increase is foreseeable and
consistent with historical mortgage rate fluctuations. When using this
instantaneous change in rates, if the fair value of the strata of MSRs is
estimated to increase to a point where all of the impairment would be recovered,
the impairment is considered to be temporary. When the Company determines that a
portion of the MSRs is not recoverable, the related MSRs and the previously
established valuation allowance are correspondingly reduced to reflect other
than temporary impairment.
Premises and Equipment - Premises and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line method over their estimated service lives. Leasehold improvements
are amortized over the lesser of the life of the lease or service lives of the
improvements using the straight-line method. Depreciation and amortization are
recorded within occupancy and equipment expense within the consolidated
financial statements.
Goodwill - Goodwill represents the excess purchase price over the fair value of
net assets acquired from business acquisitions and which were being amortized
over their initial estimated lives, generally 20 years. The Company does not
amortize goodwill, but instead tests for impairment at least annually. The
Company will test for impairment more frequently if events or circumstances
indicate that an asset may be impaired. The Company tests for impairment by
comparing the fair value of goodwill, as determined by using a discounted cash
flow method, with its carrying value. Any excess of carrying value over the fair
value of the goodwill would be recognized as an impairment loss in continuing
operations. The discounted cash flow calculation related to the Company's loan
origination segment includes a forecast of the expected future loan originations
and the related revenues and expenses. The discounted cash flow calculation
related to the Company's mortgage-backed securities holdings segment includes a
forecast of the expected future net interest income, gain on mortgage-backed
securities and the related revenues and expenses. These cash flows are
discounted using a rate that is estimated to be a weighted-average cost of
capital for similar companies.
Reverse Repurchase Agreements - The Company has entered into reverse repurchase
agreements to finance certain of its investments. These agreements are secured
by a portion of the Company's investments and bear interest rates that have
historically moved in close relationship to LIBOR. Reverse repurchase agreements
are accounted for as short-term borrowings and recorded as a liability on the
balance sheet.
Commercial Paper - The Company formed a wholly owned special purpose entity for
the purpose of issuing commercial paper in the form of short-term Secured
Liquidity Notes ("SLNs") to finance certain portions of its mortgage loans held
for sale. The commercial paper is secured by the Company's loans held for sale,
mortgage-backed securities and cash and bears interest at prevailing money
market rates approximating LIBOR. Commercial paper is accounted for as a
short-term borrowing and recorded as a liability on the balance sheet.
Drafts Payable - Drafts payable represent outstanding mortgage loan
disbursements that the Company has provided to its customers for the purchase of
a home. The amounts outstanding do not bear interest and are transferred into
one of the warehouse facilities when they are presented to a bank.
Derivative Financial Instruments - The Company has developed risk management
programs and processes designed to manage market risk associated with normal
business activities.
Interest Rate Lock Commitments - Loans to be Sold. The Company's mortgage
committed pipeline includes IRLCs that have been extended to borrowers who have
applied for loan funding and meet certain defined credit and underwriting
criteria. The Company classifies and accounts for the IRLCs associated with
loans expected to be sold as free-standing derivatives. Accordingly, IRLCs are
recorded at fair value with changes in fair value recorded to current earnings.
The fair value of the IRLCs initiated on or before March 31, 2004 is determined
by an estimate of the ultimate gain on sale of the loans, including the value of
MSRs, net of estimated net costs to originate the loan. In March 2004, the
Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No.
105 ("SAB No. 105"), which changed the timing of recognition of MSRs for IRLCs
initiated after March 31, 2004. See "Recently Issued Accounting
-6-
Standards" in this note. IRLCs associated with loans held for securitization are
not classified and accounted for as derivative financial instruments.
Forward Delivery Commitments Used to Hedge IRLCs. The Company uses mortgage
forward delivery contracts to economically hedge the IRLCs, which are also
classified and accounted for as free-standing derivatives and thus are recorded
at fair value with the changes in fair value recorded to current earnings.
Forward Delivery Commitments Used to Hedge Mortgage Loans Held for Sale. The
Company's risk management objective for its mortgage loans held for sale is to
protect earnings from an unexpected charge due to a decline in value. The
Company's strategy is to engage in a risk management program involving the use
of mortgage forward delivery contracts designated as fair value hedging
instruments to hedge 100% of its agency-eligible conforming loans and most of
its non-conforming loans held for sale. At the inception of the hedge, the
Company formally documents the relationship between the forward delivery
contracts and the mortgage inventory as well as its objective and strategy for
undertaking the hedge transaction. For conventional conforming fixed-rate loans,
the notional amount of the forward delivery contracts, along with the underlying
rate and terms of the contracts, are equivalent to the unpaid principal amount
of the mortgage inventory being hedged; hence, the forward delivery contracts
effectively fix the forward sales price and thereby substantially eliminate
interest rate and price risk to the Company. The Company classifies and accounts
for these forward delivery contracts as fair value hedges. The derivatives are
carried at fair value with the changes in fair value recorded to current
earnings. When the hedges are deemed highly effective, the book value of the
hedged loans held for sale is adjusted for its change in fair value during the
hedge period.
Forward Purchase Contracts Used to Hedge MSRs. From time to time, the Company
hedges its exposure to impairment of the MSRs by the use of mortgage forward
purchase contracts. These derivatives are classified and accounted for as fair
value hedges. The mortgage forward purchase contracts are carried at fair value
with the changes in their fair value recorded to current earnings. When the
hedges are deemed to be highly effective, the book value of the hedged MSRs is
adjusted for its change in fair value attributable to the hedged risk during the
hedge period. The Company assesses the effectiveness of the hedge by using
statistical analysis to measure the correlation of the changes in the value of
the forward purchase contract to the changes in the value of the MSRs being
hedged during the hedge period. During the six months ended June 30, 2004 and
the year ended December 31, 2003, the Company did not hedge its exposure to
impairment of the MSRs by the use of mortgage forward purchase contracts.
Interest Rate Swap Agreements - The Company classifies and accounts for interest
rate swap agreements that are not designated as cash flow hedges as
free-standing derivatives. Accordingly, these swap agreements are recorded at
fair value with changes in fair value recorded to current earnings as "gain on
sales of mortgage loans and mortgage-backed securities" as they are used to
offset the price change exposure of mortgage-backed securities classified as
trading. Certain swap agreements are designated as cash flow hedges against the
benchmark interest rate risk associated with the Company's borrowings. Although
the terms and characteristics of the Company's swap agreements and hedged
borrowings are nearly identical, due to the explicit requirements of Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," the Company does not account for these
hedges under a method defined in SFAS No. 133 as the "shortcut" method, but
rather the Company calculates the effectiveness of these hedges on an ongoing
basis, and, to date, has calculated effectiveness of approximately 100%. All
changes in the unrealized gains and losses on swap agreements designated as cash
flow hedges have been recorded in "accumulated other comprehensive loss" and are
reclassified to earnings as interest expense is recognized on the Company's
hedged borrowings. If it becomes probable that the forecasted transaction, which
in this case refers to interest payments to be made under the Company's
short-term borrowing agreements, will not occur by the end of the originally
specified time period, as documented at the inception of the hedging
relationship, or within an additional two-month time period thereafter, then the
related gain or loss in accumulated other comprehensive loss would be
reclassified to income.
Termination of Hedging Relationships. The Company employs a number of risk
management monitoring procedures to ensure that the designated hedging
relationships are demonstrating, and are expected to continue to demonstrate, a
high level of effectiveness. Hedge accounting is discontinued on a prospective
basis if it is determined that the hedging relationship is no longer highly
effective or expected to be highly effective in offsetting changes in fair value
of the hedged item. Additionally, the Company may elect to de-designate a hedge
relationship during an interim period and re-designate upon the rebalancing of a
hedge profile and the corresponding hedge relationship. When hedge accounting is
discontinued, the Company continues to carry the derivative instruments at fair
value with changes in their value recorded in earnings.
Gain on Sale of Loans - The Company recognizes gain on sale of loans for the
difference between the sales price and the adjusted book value of the loans at
the time of sale. The adjusted book value of the loans includes the original
principal amount plus adjustments related to previously recognized income plus
deferrals of fees and points received and direct loan origination costs.
Loan Origination Fees and Direct Origination Costs - The Company records loan
fees, discount points and certain direct origination costs as an adjustment of
the cost of the loan or security and such amounts are included in revenues when
the loan or security is sold. When loans are securitized and held, net deferred
origination costs are amortized over the life of the security using the
level-yield method and such amounts are included in interest income. Gain on
sales of mortgage loans and salaries, commissions and benefits have been
-7-
reduced by $47.8 million and $43.7 million due to direct loan origination costs,
including commission costs, incurred for the six months ended June 30, 2004 and
2003, respectively.
Interest Recognition - The Company accrues interest income as it is earned.
Loans are placed on a nonaccrual status when any portion of the principal or
interest is 90 days past due or earlier when concern exists as to the ultimate
collectibility of principal or interest. Loans return to accrual status when
principal and interest become current and are anticipated to be fully
collectible. Interest expense is recorded on outstanding lines of credit at a
rate based on a spread to the LIBOR.
Servicing Fees - The Company recognizes servicing fees when the fees are
collected.
Marketing and Promotion - The Company charges the costs of marketing, promotion
and advertising to expense in the period incurred.
Income Taxes - The Company accounts for income taxes in conformity with SFAS No.
109, "Accounting for Income Taxes," which requires an asset and liability
approach for accounting and reporting of income taxes. Deferred tax assets and
liabilities are recognized for the future tax consequences ("temporary
differences") attributable to the differences between the carrying amounts of
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which temporary differences are expected to be recovered
or settled. A valuation allowance is provided for deferred tax assets where
realization is not considered "more likely than not." The Company recognizes the
effect of changes in tax laws or rates on deferred tax assets and liabilities in
the period that includes the enactment date.
Stock Option Plans - In 1999, the Company established the 1999 Omnibus Stock
Incentive Plan, as amended (the "Plan"). The Company has elected to account for
the Plan using Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and to provide pro forma net income and pro
forma earnings per share disclosures for employee stock option grants as if the
fair-value based method, as required by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123," had been applied. Had compensation cost been determined
based on the fair value at the grant dates for awards under the Plan, the
Company's net income would have been $54.3 million and $42.9 million for the six
months ended June 30, 2004 and 2003, respectively. Basic earnings per share
would have been $1.55 and $2.54 for the six months ended June 30, 2004 and 2003,
respectively. Diluted earnings per share would have been $1.53 and $2.50 for the
six months ended June 30, 2004 and 2003, respectively.
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -------------------------------
(In thousands, except per share data) 2004 2003 2004 2003
------------- ------------- ------------- --------------
Net income, as reported $ 33,482 $ 26,877 $ 54,705 $ 43,190
Less: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (179) (160) (366) (294)
------------- ------------- ------------- --------------
Pro forma net income $ 33,303 $ 26,717 $ 54,339 $ 42,896
============= ============= ============= ==============
Earnings per share:
Basic - as reported $ 0.84 $ 1.58 $ 1.56 $ 2.56
Basic - pro forma $ 0.83 $ 1.57 $ 1.55 $ 2.54
Diluted - as reported $ 0.83 $ 1.55 $ 1.54 $ 2.51
Diluted - pro forma $ 0.82 $ 1.54 $ 1.53 $ 2.50
Earnings Per Share - Basic earnings per share excludes dilution and is computed
by dividing net income available to common stockholders by the weighted-average
number of shares of common stock outstanding for the period. Diluted earnings
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 or resulted in the issuance of common stock that then shared in the
earnings of the Company.
Cash Flows - Cash and cash equivalents are demand deposits and short-term
investments with a maturity of 90 days or less.
-8-
Recently Issued Accounting Standards - On March 9, 2004, the SEC issued SAB No.
105, which provides guidance regarding loan commitments that are accounted for
as derivative instruments under SFAS No. 133 (as amended), "Accounting for
Derivative Instruments and Hedging Activities." In SAB No. 105, the SEC stated
that the value of expected future cash flows related to servicing rights should
be excluded when determining the fair value of derivative IRLCs. This guidance
must be applied to derivative IRLCs initiated after March 31, 2004. Under the
new policy, the value of the expected future cash flow related to servicing
rights is not recognized until the underlying loans are sold. The Company's
second quarter of 2004 results of operations were reduced $18.7 million on a
pre-tax basis by its adoption of SAB No. 105.
NOTE 2 - MORTGAGE-BACKED SECURITIES
The following table presents the Company's mortgage-backed securities as of June
30, 2004 and December 31, 2003:
June 30, 2004
----------------------------------------------------------------
Trading Securities
(In thousands) Securities Available for Sale Total Securities
-------------------- -------------------- --------------------
Adjusted cost $ 2,205,480 $ 5,183,932 $ 7,389,412
Gross unrealized gains - 2,716 2,716
Gross unrealized losses (8,377) (52,589) (60,966)
-------------------- -------------------- --------------------
Fair value $ 2,197,103 $ 5,134,059 $ 7,331,162
==================== ==================== ====================
December 31, 2003
----------------------------------------------------------------
Trading Securities
(In thousands) Securities Available for Sale Total Securities
----------------------------------------------------------------
Adjusted cost $ 476,541 $ 1,282,523 $ 1,759,064
Gross unrealized gains 3,382 1,969 5,351
Gross unrealized losses (110) (677) (787)
-------------------- -------------------- --------------------
Fair value $ 479,813 $ 1,283,815 $ 1,763,628
==================== ==================== ====================
During the quarter ended June 30, 2004, the Company sold $947.7 million of
mortgage-backed securities and realized $10.7 million in gains and $4.2 million
in losses.
During the six months ended June 30, 2004, the Company sold $1.7 billion of
mortgage-backed securities and realized $20.1 million in gains and $5.1 million
in losses.
The Company's mortgage-backed securities with gross unrealized losses at June
30, 2004 have been in an unrealized loss position for less than three months.
-9-
The Company has credit exposure on loans it has securitized. The following table
summarizes the loan delinquency information as of June 30, 2004 and December 31,
2003:
June 30, 2004
---------------------------------------------------------------------
(Dollars in thousands)
Loan Loan Percent of Total Percent of Total
Delinquency Status Count Balance Securitizations Assets
-----------------------------------------------------------------------------------------------
60 to 89 days 8 $ 1,436 0.05% 0.01%
90 and greater days 5 500 0.02% 0.01%
Foreclosure 6 1,196 0.05% 0.01%
---------- ------------- ---------------------- ------------------
19 $ 3,132 0.12% 0.03%
========== ============= ====================== ==================
December 31, 2003
---------------------------------------------------------------------
(Dollars in thousands)
Loan Loan Percent of Total Percent of Total
Delinquency Status Count Balance Securitizations Assets
-----------------------------------------------------------------------------------------------
60 to 89 days 1 $ 692 0.13% 0.02%
---------- ------------- ---------------------- ------------------
1 $ 692 0.13% 0.02%
========== ============= ====================== ==================
As of June 30, 2004, the Company had a payable for securities purchased of
$423.9 million of mortgage-backed securities.
NOTE 3 - MORTGAGE LOANS HELD FOR SALE, NET
The following table presents the Company's mortgage loans held for sale, net, as
of June 30, 2004 and December 31, 2003:
June 30, December 31,
(In thousands) 2004 2003
-------------------- --------------------
Mortgage loans held for sale $ 1,414,417 $ 1,187,314
SFAS No. 133 basis adjustments 307 16,489
Deferred origination costs, net 21,274 22,324
-------------------- --------------------
Mortgage loans held for sale, net $ 1,435,998 $ 1,226,127
==================== ====================
-10-
NOTE 4 - DERIVATIVE ASSETS AND LIABILITIES
The following table presents the Company's derivative assets and liabilities as
of June 30, 2004 and December 31, 2003:
June 30, December 31,
(In thousands) 2004 2003
---------------- ----------------
Derivative Assets:
Interest rate lock commitments $ 6,122 $ 20,837
Interest rate swaps 38,486 -
---------------- ----------------
Derivative assets $ 44,608 $ 20,837
================ ================
Derivative Liabilities:
Forward delivery contracts - loan commitments $ 5,683 $ 4,358
Forward delivery contracts - loans held for sale 4,415 2,300
Interest rate swaps - 6,036
---------------- ----------------
Derivative liabilities $ 10,098 $ 12,694
================ ================
The notional amount of the Company's interest rate swaps as of June 30, 2004 was
$4.4 billion.
At June 30, 2004, the notional amount of forward delivery contracts amounted to
approximately $835.1 million. The forward delivery contracts have a high
correlation to the price movement of the loans being hedged. The ineffectiveness
recognized in hedging loans held for sale recorded on the balance sheet was
insignificant as of June 30, 2004.
NOTE 5 - MORTGAGE SERVICING RIGHTS, NET
The following table presents the activity in the Company's mortgage servicing
rights, net, for the three and six months ended June 30, 2004 and 2003:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------- ---------------------------------------
(In thousands) 2004 2003 2004 2003
------------------- ------------------- ------------------ ------------------
Mortgage Servicing Rights:
Balance at beginning of period $ 129,971 $ 112,288 $ 121,652 $ 119,225
Additions 28,811 9,773 44,476 15,605
Amortization (7,764) (17,286) (15,110) (30,055)
------------------- ------------------- ------------------ ------------------
Balance at end of period $ 151,018 $ 104,775 $ 151,018 $ 104,775
------------------- ------------------- ------------------ ------------------
Impairment Allowance:
Balance at beginning of period $ (16,452) $ (15,915) $ (3,868) $ (10,202)
Impairment recovery (provision) 7,252 (6,472) (5,332) (12,185)
------------------- ------------------- ------------------ ------------------
Balance at end of period $ (9,200) $ (22,387) $ (9,200) $ (22,387)
------------------- ------------------- ------------------ ------------------
Mortgage servicing rights, net $ 141,818 $ 82,388 $ 141,818 $ 82,388
=================== =================== ================== ==================
-11-
Aggregate Amortization Expense
------------------------------
Six months ended June 30, 2004 $ 15,110
Estimated Amortization Expense
------------------------------
Year ended June 30, 2005 $ 25,805
Year ended June 30, 2006 21,676
Year ended June 30, 2007 17,124
Year ended June 30, 2008 13,805
Year ended June 30, 2009 11,391
Thereafter 61,217
On a quarterly basis, the Company reviews MSRs for impairment based on risk
strata. The MSRs are stratified based on the predominant risk characteristics of
the underlying loans. The Company's predominant risk characteristic is interest
rate. A valuation allowance is recognized for MSRs that have an amortized
balance in excess of the estimated fair value for the individual risk
stratification.
The estimated fair value of MSRs is determined by obtaining a market valuation
from an independent MSR broker. To determine the market value of MSRs, the MSR
broker uses a valuation model which incorporates assumptions relating to the
estimate of the cost of servicing the loan, a discount rate, a float value, an
inflation rate, ancillary income per loan, prepayment speeds and default rates
that market participants use for similar MSRs. Market assumptions are held
constant over the life of the portfolio.
The significant assumptions used in estimating the fair value of MSRs at June
30, 2004 and December 31, 2003 were as follows:
June 30, 2004 December 31, 2003
------------- -----------------
Weighted-average prepayment speed (PSA) 280 397
Weighted-average discount rate 10.02% 9.82%
Weighted-average default rate 2.70% 4.02%
The following table presents certain information regarding the Company's
servicing portfolio of loans serviced for others at June 30, 2004 and December
31, 2003:
June 30, 2004 December 31, 2003
------------- -----------------
(Dollars in thousands)
Loan servicing portfolio -
loans sold or securitized $ 10,196,733 $ 8,272,294
Average loan size $ 146 $ 120
Weighted-average servicing fee 0.358% 0.347%
Weighted-average note rate 5.39% 5.72%
Weighted-average remaining term (in months) 313 298
Weighted-average age (in months) 20 27
NOTE 6 - GOODWILL
The following table presents the activity in the Company's goodwill for the six
months ended June 30, 2004:
Loan Mortgage-Backed
Origination Securities Holdings
(In thousands) Segment Segment Total
----------- ------------------- -------
Balance at December 31, 2003 $ 58,605 $ 24,840 $ 83,445
Earnouts from previous acquisitions 5,354 - 5,354
----------- ------------------- -------
Balance at June 30, 2004 $ 63,959 $ 24,840 $ 88,799
=========== =================== =======
-12-
NOTE 7 - WAREHOUSE LINES OF CREDIT, REVERSE REPURCHASE AGREEMENTS AND COMMERCIAL
PAPER
Warehouse Lines of Credit
As of June 30, 2004, the Company has a committed bank syndicated facility led by
Residential Funding Corporation ("RFC") and a pre-purchase facility with UBS
Real Estate Securities Inc. (formerly Paine Webber Real Estate Securities Inc.)
("UBS"). The Company also has committed facilities with CDC Mortgage Capital
Inc. ("CDC"), Morgan Stanley Bank ("Morgan Stanley") and Credit Lyonnais. In
addition, the Company has a gestation facility with Greenwich Capital Financial
Products, Inc. The RFC facility is for $450 million, the UBS facility is for
$1.2 billion, the CDC facility is for $450 million, the Morgan Stanley facility
is for $350 million and the Credit Lyonnais facility is for $200 million. The
interest rate on outstanding balances fluctuates daily based on a spread to the
LIBOR and interest is paid monthly.
The facilities are secured by mortgage loans and other assets of the Company.
The facilities contain various covenants pertaining to maintenance of net worth,
working capital and maximum leverage. At June 30, 2004, the Company was in
compliance with respect to the loan covenants.
Included within the RFC line of credit, the Company has a working capital
sub-limit that allows for borrowings up to $35.0 million at a rate based on a
spread to the LIBOR that may be adjusted for earnings on compensating balances
on deposit at creditors' banks. As of June 30, 2004, borrowings under the
working capital line of credit were $30.6 million.
The following table presents the Company's warehouse lines of credit as of June
30, 2004 and December 31, 2003:
June 30, 2004 December 31, 2003
--------------------------------- -----------------------------------
Weighted Weighted
Outstanding Average Outstanding Average
(Dollars in thousands) Balance Rate Balance Rate
--------------------------------- -----------------------------------
CDC $ 226,261 2.09 % $ 406,444 1.98 %
Credit Lyonnais 199,540 1.92 200,702 1.88
RFC 199,362 2.56 293,344 2.06
Morgan Stanley 44,236 2.05 92,925 1.92
UBS 3,057 3.67 128,345 3.21
---------------- ------------------
Warehouse lines of credit $ 672,456 2.18 % $1,121,760 2.12 %
================== ==================
Reverse Repurchase Agreements
The Company has arrangements to enter into reverse repurchase agreements, a form
of collateralized short-term borrowing, with 13 different financial institutions
and on June 30, 2004 had borrowed funds from nine of these firms. Because the
Company borrows money under these agreements based on the fair value of its
mortgage-backed securities, and because changes in interest rates can negatively
impact the valuation of mortgage-backed securities, the Company's borrowing
ability under these agreements could be limited and lenders could initiate
margin calls in the event interest rates change or the value of the Company's
mortgage-backed securities declines for other reasons.
As of June 30, 2004, the Company had $6.4 billion of reverse repurchase
agreements outstanding with a weighted-average borrowing rate of 1.64% and a
weighted-average remaining maturity of 6.5 months. As of December 31, 2003, the
Company had $1.3 billion of reverse repurchase agreements outstanding with a
weighted-average borrowing rate of 1.26% and a weighted-average remaining
maturity of 6.9 months.
-13-
At June 30, 2004 and December 31, 2003, the Company's reverse repurchase
agreements had the following remaining maturities:
June 30, December 31,
2004 2003
----------------- -------------------
(In thousands)
Within 30 days $ 490,908 $ 184,302
31 to 89 days 1,285,198 -
90 to 365 days 4,637,400 1,160,025
----------------- -------------------
Reverse repurchase agreements $ 6,413,506 $ 1,344,327
================= ===================
Commercial Paper
In May 2004, the Company formed a wholly owned special purpose entity for the
purpose of issuing commercial paper in the form of short-term Secured Liquidity
Notes ("SLNs") to finance certain portions of its mortgage loans held for sale.
The special purpose entity allows for issuance of short-term notes with
maturities of up to 180 days, extendable up to 300 days. The SLNs bear interest
at prevailing money market rates approximating LIBOR. The SLN program capacity,
based on aggregate commitments of underlying credit enhancers, was $2.0 billion
at June 30, 2004.
As of June 30, 2004, the Company had $1.0 billion of SLNs outstanding, with an
average interest cost of 1.58%. The SLNs were collateralized by loans held for
sale, mortgage-backed securities and cash with a balance of $1.1 billion as of
June 30, 2004.
At June 30, 2004, the Company's commercial paper had the following remaining
maturities:
June 30,
2004
-------------------------
(In thousands)
Within 30 days $ 706,241
31 to 89 days 291,149
90 to 365 days 49,646
-------------------------
Commercial paper $ 1,047,036
=========================
-14-
NOTE 8 - EARNINGS PER SHARE
The following is a reconciliation of the denominators used in the computations
of basic and diluted earnings per share for the three and six months ended June
30, 2004 and 2003:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------- ---------------------------------
(Dollars in thousands, except per share amounts) 2004 2003 2004 2003
-------------- -------------- -------------- --------------
Numerator for basic earnings per share - Net income $ 33,482 $ 26,877 $ 54,705 $ 43,190
============== ============== ============== ==============
Denominator:
Denominator for basic earnings per share
Weighted average number of common shares
outstanding during the period 40,000,162 16,980,679 35,015,205 16,866,454
Net effect of dilutive stock options 445,015 367,154 461,088 315,938
-------------- -------------- -------------- --------------
Denominator for diluted earnings per share 40,445,177 17,347,833 35,476,293 17,182,392
============== ============== ============== ==============
Net income per share:
Basic $ 0.84 $ 1.58 $ 1.56 $ 2.56
============== ============== ============== ==============
Diluted $ 0.83 $ 1.55 $ 1.54 $ 2.51
============== ============== ============== ==============
NOTE 9 - STOCK OPTION PLANS
In 1999, the Company established the 1999 Omnibus Stock Incentive Plan, as
amended (the "Plan"). Pursuant to the Plan, eligible employees, officers and
directors are offered the opportunity to acquire the Company's common stock
through the grant of options and the award of restricted stock under the Plan.
The total number of shares that may be optioned or awarded under the Plan is
3,000,000 shares of common stock. The Plan provides for the granting of options
at the fair market value on the date of grant. The options issued primarily vest
50% on the two-year anniversary of the grant date and 50% on the three-year
anniversary of the grant date, and expire ten years from the grant date.
As of June 30, 2004, the Company has awarded 181,545 shares of restricted stock
under the Plan. During the six months ended June 30, 2004 and 2003, the Company
recognized compensation expense of $524 thousand and $245 thousand,
respectively, relating to shares of restricted stock. At June 30, 2004, 111,085
shares are vested. In general, unvested restricted stock is forfeited upon the
recipient's termination of employment.
The Plan is a compensatory stock option plan. There was no intrinsic value of
the options when granted, as the exercise price was equal to the quoted market
price at the grant date. No compensation cost has been recognized for the six
months ended June 30, 2004 and 2003.
Pursuant to the terms of the Company's merger with Apex, which was consummated
on December 3, 2003 (following the approval of the Company's stockholders at a
special meeting held on November 21, 2003), the Company assumed the Amended and
Restated 1997 Stock Option Plan of Apex (the "Apex Plan"). Upon the closing of
the merger with Apex, Apex caused all unvested options granted under the Apex
Plan to become vested, and each option granted under the Apex Plan that was not
exercised as of December 3, 2003 was terminated and not assumed by the Company.
An aggregate of 1 million shares of common stock were available for issuance
upon exercise of stock options granted under the Apex Plan. As of the effective
date of the merger, Apex had granted options to purchase 791,000 shares of
common stock, which options were either (i) previously caused to become vested
or (ii) terminated and not assumed by the Company. Accordingly, options to
purchase an aggregate of 209,000 shares of the Company's common stock remain
available for grant under the Apex Plan.
-15-
There were 204,691 and 378,014 options granted under the Plan in the three
months and six months ended June 30, 2004. The weighted-average fair value per
share of options granted during the three months and six months ended June 30,
2004 was $4.69 and $5.12, respectively.
There were 174,376 options granted under the Plan in the three months and six
months ended June 30, 2003. The weighted-average fair value of options granted
in the three months and six months ended June 30, 2003 was $4.32.
The fair value of the options granted is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
the grants:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ---------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Dividend yield 9.0 % 3.0 % 8.1 % 3.0 %
Expected volatility 44.0 % 47.0% 47.3% 47.0%
Risk-free interest rate 5.0 % 5.0% 5.0% 5.0%
Expected life 3 years 3 years 3 years 3 years
NOTE 10 - ACQUISITIONS
Apex Mortgage Capital, Inc.
On December 3, 2003, AHM Investment completed its merger with Apex, a Maryland
corporation that operated and elected to be treated as a REIT for federal income
tax purposes. Immediately prior to the merger, under the terms of the
reorganization agreement between AHM Holdings and AHM Investment, AHM Holdings
reorganized through a reverse triangular merger that caused AHM Investment, a
newly formed Maryland corporation that operates and will elect to be treated as
a REIT for federal income tax purposes, to become AHM Holdings' parent. The
shares of AHM Investment issued to former Apex stockholders in the merger were
valued at $177.3 million.
The following table summarizes the required disclosures of the pro forma
combined entity, as if the acquisition occurred at the beginning of the year for
the six months ended June 30, 2003:
Six Months Ended
(In thousands, except per share amounts) June 30, 2003
---------------------
Revenue $ 250,237
Income before income taxes 96,838
---------------------
Net income $ 65,949
=====================
Earnings per share - basic $ 2.69
=====================
Earnings per share - diluted $ 2.65
=====================
Valley Bancorp, Inc.
In August 2001, AHM Holdings entered into an agreement to acquire Valley
Bancorp, Inc. ("Valley Bancorp") and its wholly-owned subsidiary, Valley Bank of
Maryland, a federal savings bank located in suburban Baltimore, Maryland, for a
combination of cash and stock, subject to certain adjustments. Under the terms
of the definitive agreement, the Company will pay $46 for each share of Valley
Bancorp common stock outstanding, or approximately $6.0 million. The acquisition
agreement between AHM Holdings and Valley Bancorp has been extended through July
31, 2005. This transaction is subject to regulatory approval and no assurance
can be given that such approval will be obtained or that the acquisition
agreement with Valley Bancorp will be further extended if necessary.
-16-
NOTE 11 - SEGMENTS AND RELATED INFORMATION
The Company has three segments, the Mortgage-Backed Securities Holdings segment,
the Loan Origination segment and the Loan Servicing segment. The Mortgage-Backed
Securities Holdings segment uses the Company's equity capital and borrowed funds
to invest in mortgage-backed securities, thereby producing net interest income.
The Loan Origination segment originates mortgage loans through the Company's
retail and internet branches and loans sourced through mortgage brokers
(wholesale channel). The Loan Servicing segment includes investments in MSRs as
well as servicing operations primarily for other financial institutions.
The Mortgage-Backed Securities Holdings segment includes realized gains or
losses on sales of mortgage-backed securities, unrealized mark-to-market gains
or losses subsequent to the securitization date on mortgage-backed securities
classified as trading securities and realized and unrealized gains or losses on
related interest rate swaps.
The Loan Origination segment includes unrealized gains or losses that exist on
the date of securitization of self-originated loans that are classified as
trading securities and realized and unrealized gains or losses on related
interest rate swaps.
-17-
Three Months Ended June 30, 2004
---------------------------------------------------------------------
(In thousands)
Mortgage-Backed
Securities Loan Origination Loan Servicing
Holdings Segment Segment Segment Total
---------------------------------------------------------------------
Net interest income:
Interest income $ 41,189 $ 31,215 $ - $ 72,404
Interest expense (30,490) (20,927) (901) (52,318)
---------------------------------------------------------------------
Total net interest income 10,699 10,288 (901) 20,086
---------------------------------------------------------------------
Non-interest income:
Gain on sales of mortgage loans and
mortgage-backed securities - 59,840 - 59,840
Loan servicing fees - - 8,730 8,730
Amortization - - (7,764) (7,764)
Impairment reserve recovery - - 7,252 7,252
---------------------------------------------------------------------
Net loan servicing fees - - 8,218 8,218
Other non-interest income - 1,226 - 1,226
---------------------------------------------------------------------
Total non-interest income - 61,066 8,218 69,284
---------------------------------------------------------------------
Non-interest expenses:
Salaries, commissions and benefits, net 54 41,612 1,185 42,851
Occupancy and equipment - 7,898 110 8,008
Data processing and communications 4 3,250 84 3,338
Office supplies and expenses - 2,947 268 3,215
Marketing and promotion - 2,193 3 2,196
Travel and entertainment - 2,876 11 2,887
Professional fees 136 1,458 235 1,829
Other 2,028 1,129 925 4,082
---------------------------------------------------------------------
Total non-interest expenses 2,222 63,363 2,821 68,406
---------------------------------------------------------------------
Net income before income tax expense (benefit) 8,477 7,991 4,496 20,964
---------------------------------------------------------------------
Income tax expense (benefit) - (14,492) 1,974 (12,518)
---------------------------------------------------------------------
Net income $ 8,477 $ 22,483 $ 2,522 $ 33,482
=====================================================================
June 30, 2004
---------------------------------------------------------------------
Segment assets $ 7,511,774 $ 1,921,370 $ 201,977 $ 9,635,121
=====================================================================
-18-
Three Months Ended June 30, 2003
--------------------------------------------------------------------------------
(In thousands)
Mortgage-Backed
Securities Loan Origination Loan Servicing
Holdings Segment Segment Segment Total
--------------------------------------------------------------------------------
Net interest income:
Interest income $ - $ 25,446 $ - $ 25,446
Interest expense - (11,860) (712) (12,572)
--------------------------------------------------------------------------------
Total net interest income - 13,586 (712) 12,874
--------------------------------------------------------------------------------
Non-interest income:
Gain on sales of mortgage loans - 129,282 - 129,282
Loan servicing fees - - 9,821 9,821
Amortization - - (17,286) (17,286)
Impairment reserve provision - - (6,472) (6,472)
--------------------------------------------------------------------------------
Net loan servicing fees (loss) - - (13,937) (13,937)
Other non-interest income - 1,241 - 1,241
--------------------------------------------------------------------------------
Total non-interest income - 130,523 (13,937) 116,586
--------------------------------------------------------------------------------
Non-interest expenses:
Salaries, commissions and benefits, net - 53,284 922 54,206
Occupancy and equipment - 6,626 53 6,679
Data processing and communications - 2,725 23 2,748
Office supplies and expenses - 3,500 347 3,847
Marketing and promotion - 2,796 9 2,805
Travel and entertainment - 2,888 3 2,891
Professional fees - 1,491 181 1,672
Other - 7,182 1,241 8,423
--------------------------------------------------------------------------------
Total non-interest expenses - 80,492 2,779 83,271
--------------------------------------------------------------------------------
Net income before income tax expense (benefit) - 63,617 (17,428) 46,189
--------------------------------------------------------------------------------
Income tax expense (benefit) - 26,279 (6,967) 19,312
--------------------------------------------------------------------------------
Net income $ - $ 37,338 $ (10,461) $ 26,877
================================================================================
December 31, 2003
--------------------------------------------------------------------------------
Segment assets $ 1,865,414 $ 1,375,276 $ 164,000 $ 3,404,690
================================================================================
-19-
Six Months Ended June 30, 2004
----------------------------------------------------------------------------
(In thousands)
Mortgage-Backed
Securities Loan Origination Loan Servicing
Holdings Segment Segment Segment Total
----------------------------------------------------------------------------
Net interest income:
Interest income $ 56,338 $ 50,116 $ - $ 106,454
Interest expense (39,902) (31,889) (1,805) (73,596)
----------------------------------------------------------------------------
Total net interest income 16,436 18,227 (1,805) 32,858
----------------------------------------------------------------------------
Non-interest income:
Gain on sales of mortgage loans and
mortgage-backed securities 12,651 127,322 - 139,973
Loan servicing fees - - 19,048 19,048
Amortization - - (15,110) (15,110)
Impairment reserve provision - - (5,332) (5,332)
----------------------------------------------------------------------------
Net loan servicing fees (loss) - - (1,394) (1,394)
Other non-interest income - 2,204 - 2,204
----------------------------------------------------------------------------
Total non-interest income 12,651 129,526 (1,394) 140,783
----------------------------------------------------------------------------
Non-interest expenses:
Salaries, commissions and benefits, net 104 80,212 2,317 82,633
Occupancy and equipment - 15,833 269 16,102
Data processing and communications 6 6,431 114 6,551
Office supplies and expenses - 5,694 639 6,333
Marketing and promotion - 4,405 3 4,408
Travel and entertainment 2 5,338 124 5,464
Professional fees 207 3,671 379 4,257
Other 3,073 4,453 1,994 9,520
----------------------------------------------------------------------------
Total non-interest expenses 3,392 126,037 5,839 135,268
----------------------------------------------------------------------------
Net income before income tax expense (benefit) 25,695 21,716 (9,038) 38,373
----------------------------------------------------------------------------
Income tax expense (benefit) - (12,757) (3,575) (16,332)
----------------------------------------------------------------------------
Net income $ 25,695 $ 34,473 $ (5,463) $ 54,705
============================================================================
June 30, 2004
----------------------------------------------------------------------------
Segment assets $ 7,511,774 $ 1,921,370 $ 201,977 $ 9,635,121
============================================================================
-20-
Six Months Ended June 30, 2003
----------------------------------------------------------------------------
(in thousands)
Mortgage-Backed
Securities Loan Origination Loan Servicing
Holdings Segment Segment Segment Total
----------------------------------------------------------------------------
Net interest income:
Interest income $ - $ 46,424 $ - $ 46,424
Interest expense - (21,281) (1,500) (22,781)
----------------------------------------------------------------------------
Total net interest income - 25,143 (1,500) 23,643
----------------------------------------------------------------------------
Non-interest income:
Gain on sales of mortgage loans - 217,493 - 217,493
Loan servicing fees - - 20,949 20,949
Amortization - - (30,055) (30,055)
Impairment reserve provision - - (12,185) (12,185)
----------------------------------------------------------------------------
Net loan servicing fees (loss) - - (21,291) (21,291)
Other non-interest income - 4,169 - 4,169
----------------------------------------------------------------------------
Total non-interest income - 221,662 (21,291) 200,371
----------------------------------------------------------------------------
Non-interest expenses:
Salaries, commissions and benefits, net - 97,125 1,728 98,853
Occupancy and equipment - 12,118 184 12,302
Data processing and communications - 5,777 50 5,827
Office supplies and expenses - 6,164 706 6,870
Marketing and promotion - 5,593 11 5,604
Travel and entertainment - 4,874 4 4,878
Professional fees - 3,200 313 3,513
Other - 10,441 1,647 12,088
----------------------------------------------------------------------------
Total non-interest expenses - 145,292 4,643 149,935
----------------------------------------------------------------------------
Net income before income tax expense (benefit) - 101,513 (27,434) 74,079
----------------------------------------------------------------------------
Income tax expense (benefit) - 41,863 (10,974) 30,889
----------------------------------------------------------------------------
Net income $ - $ 59,650 $ (16,460) $ 43,190
============================================================================
December 31, 2003
----------------------------------------------------------------------------
Segment assets $ 1,865,414 $ 1,375,276 $ 164,000 $ 3,404,690
============================================================================
-21-
NOTE 12 - SUBSEQUENT EVENTS
Acquisition of Certain Home Loan Centers of Washington Mutual
On July 28, 2004, the Company announced it signed a definitive agreement with
Washington Mutual, Inc. and its subsidiaries to acquire certain residential
mortgage home loan centers and associated satellite offices that Washington
Mutual previously slated for closure in 18 states. Approximately 500 employees
are currently supporting these home loan centers and associated satellite
offices with the vast majority being sales professionals focused on retail loan
originations. The Company is currently in the process of hiring a number of the
Washington Mutual employees who work at the acquired home loan centers.
Under the terms of the acquisition, the Company assumed Washington Mutual's
lease obligations and purchased certain fixed assets in the acquired offices.
The acquisition closed on August 2, 2004 and was funded from current cash
reserves. The Company projects that the newly hired staff will add to its retail
loan production in the third and fourth quarters of 2004.
Preferred Stock Issuance
In July 2004, the Company issued 2,150,000 shares of 9.75% Series A Cumulative
Redeemable Preferred Stock ("Preferred Stock") at a price of $25 per share. The
total number of shares of Preferred Stock outstanding includes: 1,400,000 shares
of Preferred Stock issued in an underwritten public offering (the "Initial
Offering"), which closed on July 7, 2004; 100,000 shares of Preferred Stock
issued in connection with the underwriters' election to purchase a portion of
the shares of Preferred Stock offered to them in connection with the Initial
Offering to cover over-allotments, which closed on July 12, 2004; and 650,000
shares of Preferred Stock issued and sold to the underwriters in connection with
a subsequent public offering of Preferred Stock, which closed on July 20, 2004.
The total proceeds from both offerings to the Company were $53.8 million before
underwriting discounts, commissions and other expenses. The Company intends to
use the net proceeds of these offerings for general corporate purposes,
including investing in mortgage-backed securities.
The Preferred Stock, which has no stated maturity date, and is non-callable for
five years, is listed on the New York Stock Exchange under the symbol "AHM PrA."
-22-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Regarding Forward-Looking Statements
This report, including, but not limited to, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contains certain
forward-looking statements within the meaning of the federal securities laws.
Some of the forward-looking statements can be identified by the use of
forward-looking words. When used in this report, statements which are not
historical in nature, including the words "anticipate," "may," "estimate,"
"should," "seek," "expect," "plan," "believe," "intend," and similar words, or
the negatives of those words, are intended to identify forward-looking
statements. Statements which also contain a projection of revenues, earnings
(loss), capital expenditures, dividends, capital structure or other financial
terms are intended to be forward-looking statements. Certain statements
regarding the following particularly are forward-looking in nature:
o our business strategy;
o future performance, developments, market forecasts or projected
dividends;
o projected acquisitions or joint ventures; and
o projected capital expenditures.
It is important to note that the description of our business in general, and our
mortgage-backed securities holdings in particular, is a statement about our
operations as of a specific point in time. It is not meant to be construed as an
investment policy, and the types of assets we hold, the amount of leverage we
use, the liabilities we incur and other characteristics of our assets and
liabilities are subject to reevaluation and change without notice.
The forward-looking statements in this report are based on our management's
beliefs, assumptions, and expectations of our future economic performance,
taking into account the information currently available to it. These statements
are not statements of historical fact. Forward-looking statements are subject to
a number of factors, risks and uncertainties, some of which are not currently
known to us, that may cause our actual results, performance or financial
condition to be materially different from our expectations of future results,
performance or financial position. These factors include, without limitation:
o our limited operating history with respect to our proposed portfolio
strategy;
o our proposed portfolio strategy may be changed or modified by our
management without advance notice to stockholders, and that we may
suffer losses as a result of such modifications or changes;
o our need for a significant amount of cash to operate our business;
o risks associated with the use of leverage;
o disruptions in the market for repurchase facilities;
o failure to match the interest rates on our borrowings with the
interest rates on the mortgage-backed securities we hold;
o failure to maintain our status as a real estate investment trust;
o changes in federal and state tax laws affecting real estate
investment trusts;
o general economic, political, market, financial or legal conditions;
and
o the other factors referenced in this report, including, without
limitation, those under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
In light of these risks, uncertainties and assumptions, any forward-looking
events discussed in this report might not occur, and we qualify any and all of
our forward-looking statements entirely by these cautionary factors. You are
cautioned not to place undue reliance on forward-looking statements. Such
forward-looking statements are inherently uncertain, and actual results may
differ from expectations.
-23-
We are not under any obligation, and we expressly disclaim any obligation, to
update or alter any forward-looking statements, whether as a result of new
information, future events or otherwise.
Critical Accounting Policies and Estimates
Our accounting policies are described in Note 1 to the Consolidated Financial
Statements. We have identified the following accounting policies that are
critical to the presentation of our financial statements and that require
critical accounting estimates by management.
Mortgage-Backed Securities - We record our mortgage-backed securities at fair
value. The fair values of our mortgage-backed securities are generally based on
market prices provided by certain dealers who make markets on these financial
instruments or third-party pricing services. If the fair value of a
mortgage-backed security is not reasonably available, management estimates the
fair value, which requires management's judgment and may not be indicative of
the amounts we could realize in a current market exchange.
Mortgage Loans Held for Sale - Mortgage loans held for sale are carried at the
lower of cost or aggregate market value. The cost basis includes the capitalized
value of the IRLCs related to the mortgage loans and any net deferred
origination costs. For mortgage loans held for sale that are hedged with forward
sale commitments, the carrying value is adjusted for the change in market during
the time the hedge was deemed to be highly effective. The market value is
determined by outstanding commitments from investors or current yield
requirements calculated on an aggregate basis.
Mortgage Servicing Rights - When we acquire servicing assets through either
purchase or origination of loans and sell or securitize those loans with
servicing assets retained, the total cost of the loans is allocated to the
servicing assets and the loans (without the servicing assets) based on their
relative fair values. The amount attributable to the servicing assets is
capitalized as MSRs on the consolidated balance sheets. The MSRs are amortized
to expense in proportion to and over the period of estimated net servicing
income.
The MSRs are assessed for impairment based on the fair value of those assets. We
estimate the fair value of the servicing assets by obtaining market information
from a primary MSR broker. When the book value of capitalized servicing assets
exceeds their fair value, impairment is recognized through a valuation
allowance. In determining impairment, the mortgage servicing portfolio is
stratified by the predominant risk characteristic of the underlying mortgage
loans. We have determined that the predominant risk characteristic is the
interest rate on the underlying loan. We measure impairment for each stratum by
comparing the estimated fair value to the recorded book value. Temporary
impairment is recorded through a valuation allowance and amortization expense in
the period of occurrence. In addition, we periodically evaluate our MSRs for
other than temporary impairment to determine if the carrying value before the
application of the valuation allowance is recoverable. We receive a sensitivity
analysis of the estimated fair value of our MSRs assuming a 200-basis-point
instantaneous increase in interest rates from an independent MSR broker. The
fair value estimate includes changes in market assumptions that would be
expected given the increase in mortgage rates (e.g., prepayment speeds would be
lower). We believe this 200-basis-point increase in mortgage rates to be an
appropriate threshold for determining the recoverability of the temporary
impairment because that size rate increase is foreseeable and consistent with
historical mortgage rate fluctuations. When using this instantaneous change in
rates, if the fair value of the strata of MSRs is estimated to increase to a
point where all of the impairment would be recovered, the impairment is
considered to be temporary. When we determine that a portion of the MSRs is not
recoverable, the related MSRs and the previously established valuation allowance
are correspondingly reduced to reflect other than temporary impairment.
Derivative Assets and Derivative Liabilities - Our mortgage-committed pipeline
includes IRLCs that have been extended to borrowers who have applied for loan
funding and meet certain defined credit and underwriting criteria. IRLCs
associated with loans expected to be sold are recorded at fair value with
changes in fair value recorded to current earnings. The fair value of the IRLCs
initiated on or before March 31, 2004 is determined by an estimate of the
ultimate gain on sale of the loans, including the value of MSRs, net of
estimated net costs remaining to originate the loan. In March 2004, the SEC
issued SAB No. 105, which provides industry guidance which changed the timing of
recognition of MSRs for IRLCs initiated after March 31, 2004. See "Recently
Issued Accounting Standards" in Note 1 to the Consolidated Financial Statements.
IRLCs associated with loans held for securitization are not classified and
accounted for as derivative financial instruments.
We use other derivative instruments, including mortgage forward delivery
contracts and treasury futures options, to economically hedge the IRLCs, which
are also classified and accounted for as free-standing derivatives and thus are
recorded at fair value with the changes in fair value recorded to current
earnings.
We use mortgage forward delivery contracts designated as fair value hedging
instruments to hedge 100% of our agency-eligible conforming fixed-rate loans and
most of our non-conforming fixed-rate loans held for sale. At the inception of
the hedge, we formally document the relationship between the forward delivery
contracts and the mortgage inventory, as well as our objective and strategy for
undertaking the hedge transactions. In the case of our conventional conforming
fixed-rate loan products, the notional amount of the forward delivery contracts,
along with the underlying rate and terms of the contracts, are equivalent to the
unpaid principal amount of the
-24-
mortgage inventory being hedged; hence, the forward delivery contracts
effectively fix the forward sales price and thereby substantially eliminate
interest rate and price risk to us. We classify and account for these forward
delivery contracts as fair value hedges. The derivatives are carried at fair
value with the changes in fair value recorded to current earnings. When the
hedges are deemed to be highly effective, the book value of the hedged loans
held for sale is adjusted for its change in fair value during the hedge period.
We enter into interest rate swap agreements to manage our interest rate exposure
when financing our adjustable-rate mortgage loans and mortgage-backed
securities. Certain swap agreements accounted for as cash flow hedges and
certain swap agreements not designated as cash flow hedges are both carried on
the balance sheet at fair value. The fair values of our swap agreements are
generally based on market prices provided by certain dealers who make markets in
these financial instruments or third-party pricing services. If the fair value
of a trading security is not reasonably available, management estimates the fair
value, which requires management's judgment and may not be indicative of the
amounts we could realize in a current market exchange.
Goodwill - Goodwill represents the excess purchase price over the fair value of
net assets stemming from business acquisitions, including identifiable
intangibles. We test for impairment by comparing the fair value of goodwill, as
determined by using a discounted cash flow method, with its carrying value. Any
excess of carrying value over the fair value of the goodwill would be recognized
as an impairment loss in continuing operations. The discounted cash flow
calculation related to our loan origination segment includes a forecast of the
expected future loan originations and the related revenues and expenses. The
discounted cash flow calculation related to our Mortgage-Backed Securities
Holdings segment includes a forecast of the expected future net interest income,
gain on mortgage-backed securities and the related revenues and expenses. These
cash flows are discounted using a rate that is estimated to be a
weighted-average cost of capital for similar companies. We further test to
ensure that the fair value of all our business units does not exceed our total
market capitalization.
-25-
Financial Condition
At June 30, 2004, 76.1% of our total assets were mortgage-backed securities and
14.9% were mortgage loans held for sale, compared to 51.8% and 36.0%,
respectively, at December 31, 2003.
Total assets increased $6.2 billion to $9.6 billion at June 30, 2004 from $3.4
billion at December 31, 2003. The increase primarily reflects an increase in
mortgage-backed securities of $5.6 billion and a $0.2 billion rise in mortgage
loans held for sale. The growth in mortgage-backed securities was primarily
funded by an increase in reverse repurchase agreements of $5.1 billion. We began
issuing commercial paper in the quarter ended June 30, 2004, to fund our loans
held for sale. As of June 30, 2004, we had $1.0 billion of commercial paper
outstanding, which allowed us to reduce the amount of loans funded by warehouse
lines of credit.
The following table summarizes our mortgage-backed securities owned at June 30,
2004 and December 31, 2003, classified by type of issuer and by ratings
categories:
June 30, 2004
-------------------------------------------------------------------------------------------------
Trading Securities Securities Available for Sale Total
------------------------------ ----------------------------------------------------------------
Carrying Portfolio Carrying Portfolio Carrying Portfolio
Value Mix Value Mix Value Mix
-------------------------------------------------------------------------------------------------
(Dollars in thousands)
Agency securities $ 1,060,417 48.3% $ 1,544,723 30.1% $ 2,605,140 35.5%
Privately issued:
AAA 1,013,391 46.1 3,504,782 68.3 4,518,173 61.6
AA 55,372 2.5 31,821 0.6 87,193 1.2
A 19,805 0.9 19,972 0.4 39,777 0.5
BBB 8,286 0.4 10,218 0.2 18,504 0.3
Unrated (1) 39,832 1.8 22,543 0.4 62,375 0.9
----------------- ----------- ----------------- ----------- ----------------- ------------
Total $ 2,197,103 100.0% $ 5,134,059 100.0% $ 7,331,162 100.0%
================= =========== ================= =========== ================= ============
(1) Unrated subordinated certificates retained by the Company as credit
enhancements for its privately issued securities.
December 31, 2003
-------------------------------------------------------------------------------------------------
Trading Securities Securities Available for Sale Total
------------------------------ ----------------------------------------------------------------
Carrying Portfolio Carrying Portfolio Carrying Portfolio
Value Mix Value Mix Value Mix
-------------------------------------------------------------------------------------------------
(Dollars in thousands)
Agency securities $ 287,577 60.0% $ 713,790 55.6% $ 1,001,367 56.8%
Privately issued:
AAA 167,974 35.0 570,025 44.4 737,999 41.8
AA 11,322 2.4 - - 11,322 0.6
A 6,470 1.3 - - 6,470 0.4
Unrated (1) 6,470 1.3 - - 6,470 0.4
-------------- ----------- ----------------- ----------- ------------------ -----------
Total $ 479,813 100.0% $ 1,283,815 100.0% $ 1,763,628 100.0%
============== =========== ================= =========== ================== ===========
(1) An unrated subordinated certificate retained by the Company as a credit
enhancement for its privately issued securities.
-26-
The following table classifies our mortgage-backed securities portfolio by type
of interest rate index at June 30, 2004 and December 31, 2003:
June 30, 2004
---------------------------------------------------------------------------
Securities
Trading Securities Available for Sale Total
------------------------- ------------------------ ------------------------
Carrying Portfolio Carrying Portfolio Carrying Portfolio
Value Mix Value Mix Value Mix
---------------------------------------------------------------------------
(Dollars in thousands)
Index:
One-month LIBOR $ 239,667 10.9% $ 142,623 2.8% $ 382,290 5.2%
Six-month LIBOR 336,197 15.3 2,331,786 45.4 2,667,983 36.4
One-year LIBOR 1,602,889 73.0 1,946,900 37.9 3,549,789 48.4
One-year constant maturity treasury 18,350 0.8 712,750 13.9 731,100 10.0
-------------- ---------- -------------- --------- -------------- ---------
Total $ 2,197,103 100.0% $ 5,134,059 100.0% $ 7,331,162 100.0%
============== ========== ============== ========= ============== =========
December 31, 2003
-------------------------------------------------------------------------
Securities
Trading Securities Available for Sale Total
----------------------- ------------------------ ------------------------
Carrying Portfolio Carrying Portfolio Carrying Portfolio
Value Mix Value Mix Value Mix
-------------------------------------------------------------------------
(Dollars in thousands)
Index:
One-month LIBOR $ 189,772 39.6% $ - - % $ 189,772 10.8%
Six-month LIBOR - - 517,248 40.3 517,248 29.3
One-year LIBOR 261,548 54.5 610,963 47.6 872,511 49.5
One-year constant maturity treasury 28,493 5.9 155,604 12.1 184,097 10.4
------------- --------- -------------- --------- -------------- ---------
Total $ 479,813 100.0% $ 1,283,815 100.0% $ 1,763,628 100.0%
============= ========= ============== ========= ============== =========
-27-
The following table classifies our mortgage-backed securities portfolio by
product type at June 30, 2004 and December 31, 2003:
June 30, 2004
---------------------------------------------------------------------------------------------------
Securities
Trading Securities Available for Sale Total
-------------------------------- ------------------------------- --------------------------------
Carrying Portfolio Carrying Portfolio Carrying Portfolio
Value Mix Value Mix Value Mix
---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Product:
ARM less than 3 years $ 374,157 17.0% $ 1,145,102 22.3% $ 1,519,259 20.8%
3/1 Hybrid ARM 805,466 36.7 882,901 17.2 1,688,367 23.0
5/1 Hybrid ARM 1,017,480 46.3 3,106,056 60.5 4,123,536 56.2
---------------- ------------- ---------------- ------------- ---------------- --------------
Total $ 2,197,103 100.0% $ 5,134,059 100.0% $ 7,331,162 100.0%
================ ============= ================ ============= ================ ==============
December 31, 2003
---------------------------------------------------------------------------------------------------
Securities
Trading Securities Available for Sale Total
-------------------------------- ------------------------------- --------------------------------
Carrying Portfolio Carrying Portfolio Carrying Portfolio
Value Mix Value Mix Value Mix
---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Product:
ARM less than 3 years $ 189,771 39.6% $ 212,897 16.6% $ 402,668 22.9%
3/1 Hybrid ARM 133,019 27.7 415,674 32.4 548,693 31.1
5/1 Hybrid ARM 133,140 27.7 619,688 48.2 752,828 42.6
7/1 Hybrid ARM 23,883 5.0 35,556 2.8 59,439 3.4
---------------- ------------- ---------------- ------------- ---------------- --------------
Total $ 479,813 100.0% $ 1,283,815 100.0% $ 1,763,628 100.0%
================ ============= ================ ============= ================ ==============
During the six months ended June 30, 2004, we purchased $4.7 billion of
mortgage-backed securities and added $3.1 billion of self-originated
mortgage-backed securities.
During the six months ended June 30, 2004, we sold $1.7 billion of
mortgage-backed securities.
The average cost basis of our mortgage-backed securities, excluding unrealized
gains and losses, was 100.8% of par as of June 30, 2004 and 101.5% of par as of
December 31, 2003.
We had payables for securities purchased of $423.9 million and $259.7 million as
of June 30, 2004 and December 31, 2003, respectively.
-28-
Results of Operations - Comparison of the Three Months Ended June 30, 2004 and 2003
Three Months Ended June 30, 2004
---------------------------------------------------------------------
(In thousands)
Mortgage-Backed
Securities Loan Origination Loan Servicing
Holdings Segment Segment Segment Total
---------------------------------------------------------------------
Net interest income:
Interest income $ 41,189 $ 31,215 $ - $ 72,404
Interest expense (30,490) (20,927) (901) (52,318)
---------------------------------------------------------------------
Total net interest income 10,699 10,288 (901) 20,086
---------------------------------------------------------------------
Non-interest income:
Gain on sales of mortgage loans and
mortgage-backed securities - 59,840 - 59,840
Loan servicing fees - - 8,730 8,730
Amortization - - (7,764) (7,764)
Impairment reserve recovery - - 7,252 7,252
---------------------------------------------------------------------
Net loan servicing fees - - 8,218 8,218
Other non-interest income - 1,226 - 1,226
---------------------------------------------------------------------
Total non-interest income - 61,066 8,218 69,284
---------------------------------------------------------------------
Non-interest expenses:
Salaries, commissions and benefits, net 54 41,612 1,185 42,851
Occupancy and equipment - 7,898 110 8,008
Data processing and communications 4 3,250 84 3,338
Office supplies and expenses - 2,947 268 3,215
Marketing and promotion - 2,193 3 2,196
Travel and entertainment - 2,876 11 2,887
Professional fees 136 1,458 235 1,829
Other 2,028 1,129 925 4,082
---------------------------------------------------------------------
Total non-interest expenses 2,222 63,363 2,821 68,406
---------------------------------------------------------------------
Net income before income tax expense (benefit) 8,477 7,991 4,496 20,964
---------------------------------------------------------------------
Income tax expense (benefit) - (14,492) 1,974 (12,518)
---------------------------------------------------------------------
Net income $ 8,477 $ 22,483 $ 2,522 $ 33,482
=====================================================================
June 30, 2004
---------------------------------------------------------------------
Segment assets $ 7,511,774 $ 1,921,370 $ 201,977 $ 9,635,121
=====================================================================
-29-
Three Months Ended June 30, 2003
----------------------------------------------------------------------------
(in thousands)
Mortgage-Backed
Securities Loan Origination Loan Servicing
Holdings Segment Segment Segment Total
----------------------------------------------------------------------------
Net interest income:
Interest income $ - $ 25,446 $ - $ 25,446
Interest expense - (11,860) (712) (12,572)
----------------------------------------------------------------------------
Total net interest income - 13,586 (712) 12,874
----------------------------------------------------------------------------
Non-interest income:
Gain on sales of mortgage loans - 129,282 - 129,282
Loan servicing fees - - 9,821 9,821
Amortization - - (17,286) (17,286)
Impairment reserve provision - - (6,472) (6,472)
----------------------------------------------------------------------------
Net loan servicing fees (loss) - - (13,937) (13,937)
Other non-interest income - 1,241 - 1,241
----------------------------------------------------------------------------
Total non-interest income - 130,523 (13,937) 116,586
----------------------------------------------------------------------------
Non-interest expenses:
Salaries, commissions and benefits, net - 53,284 922 54,206
Occupancy and equipment - 6,626 53 6,679
Data processing and communications - 2,725 23 2,748
Office supplies and expenses - 3,500 347 3,847
Marketing and promotion - 2,796 9 2,805
Travel and entertainment - 2,888 3 2,891
Professional fees - 1,491 181 1,672
Other - 7,182 1,241 8,423
----------------------------------------------------------------------------
Total non-interest expenses - 80,492 2,779 83,271
----------------------------------------------------------------------------
Net income before income tax expense (benefit) - 63,617 (17,428) 46,189
----------------------------------------------------------------------------
Income tax expense (benefit) - 26,279 (6,967) 19,312
----------------------------------------------------------------------------
Net income $ - $ 37,338 (10,461) $ 26,877
============================================================================
December 31, 2003
----------------------------------------------------------------------------
Segment assets $ 1,865,414 $ 1,375,276 $ 164,000 $ 3,404,690
============================================================================
-30-
Overview
Net income for the quarter ended June 30, 2004 was $33.5 million, compared to
$26.9 million for the quarter ended June 30, 2003, an increase of $6.6 million,
or 24.5%. This increase was the result of a $31.8 million decrease in income tax
expense, a $14.9 million decrease in non-interest expense and a $7.2 million
increase in net interest income, partly offset by a $47.3 million decrease in
non-interest income.
Mortgage-Backed Securities Holdings Segment
Our Mortgage-Backed Securities Holdings segment began operations on December 3,
2003 as a result of the reorganization of the Company into a REIT and the merger
with Apex. The segment's business is the holding for net interest income of
adjustable-rate mortgage ("ARM")-backed securities.
The following table presents the average balances for the Mortgage-Backed
Securities Holdings segment's mortgage-backed securities and reverse repurchase
agreements, corresponding annualized effective rate of interest and the related
interest income or expense:
Three Months Ended June 30,
------------------------------------------------------------------------
(Dollars in thousands) 2004
------------------------------------------------------------------------
Average Balance Interest Average Yield/Cost
------------------------- ---------------- -----------------------------
Mortgage-backed securities, net (1) $ 4,812,343 $ 41,189 3.42%
------------------------- ---------------- -----------------------------
Reverse repurchase agreements (2) 4,500,076 30,490 2.70%
------------------------- ---------------- -----------------------------
Net interest income $ 10,699
================
Interest rate spread 0.72%
=============================
Net interest margin 0.90%
=============================
(1) The average yield does not give effect to changes in the fair value that are
reflected as a component of stockholders' equity.
(2) Includes net interest expense on interest rate swaps.
Revenues. Total revenues for the Mortgage-Backed Securities Holdings segment for
the three months ended June 30, 2004 were $10.7 million, consisting entirely of
net interest income.
Loan Origination Segment
The Loan Origination segment's primary business is the origination and sale of
primarily one-to-four family residential mortgage loans. Total loan originations
for the quarter ended June 30, 2004 were $6.6 billion compared to $6.2 billion
for the second quarter of 2003, a 6.5% increase. Our retail originations, which
are conducted through our community loan production offices and Internet call
center, were 47% of our loan originations in the quarter ended June 30, 2004
compared to 80% of our originations in the quarter ended June 30, 2003. Mortgage
brokers accounted for 53% of our loan originations in the quarter ended June 30,
2004 compared to 20% of our originations in the quarter ended June 30, 2003.
Mortgage brokers accounted for an increased percentage of our originations in
the quarter ended June 30, 2004 due to the opening of wholesale branches in the
western United States.
Gain on Sales of Mortgage Loans and Mortgage-Backed Securities. Gain on sales of
mortgage loans and mortgage-backed securities for the quarter ended June 30,
2004 was $59.8 million compared to $129.3 million in the quarter ended June 30,
2003. The decrease in gain on sale of loans and mortgage-backed securities was
primarily the result of a decrease in average volume of IRLCs and hedged loans
held for sale, the Company's adoption of SAB No. 105, which reduced the fair
value of IRLCs and loans held for sale and the increased percentage of wholesale
originations in the quarter ended June 30, 2004 compared to the quarter ended
June 30, 2003. The change in fair value of IRLCs included in gain on sale of
loans in the second quarter of 2004 was reduced as a result of the Company's
adoption of SAB No. 105. The change in fair value of IRLCs and hedged loans held
for sale decreased by $27.8 million to a loss of $28.7 million in the quarter
ended June 30, 2004 compared to a loss of $0.9 million in the quarter ended June
30, 2003. Brokers fee expenses included as a reduction to gain on sale of loans
increased $18.6 million from $21.7 million in the quarter ended June 30, 2003 to
$40.3 million in the
-31-
quarter ended June 30, 2004. The rise in fees paid to brokers on wholesale
originations is the result of the increased percentage of wholesale originations
in the second quarter of 2004 versus the second quarter of 2003.
Net Interest Income. Total interest income for the quarter ended June 30, 2004
on our Loan Origination segment's mortgages held for sale was $31.2 million,
compared to interest income for the quarter ended June 30, 2003 of $25.4
million, an increase of $5.8 million, or 22.7%. The increase was primarily due
to higher average loan inventory in the second quarter of 2004 versus the second
quarter of 2003. Our Loan Origination segment funds its loan inventory primarily
through a $2.0 billion Secured Liquidity Note Program and borrowing facilities
with several mortgage warehouse lenders. Total interest expense for the quarter
ended June 30, 2004 was $20.9 million, compared to interest expense for the
quarter ended June 30, 2003 of $11.9 million, a $9.1 million increase, which
was primarily due to increased borrowings to fund our increased loan inventory.
Other Revenue. Other revenue totaled $1.2 million for the quarter ended June 30,
2004 and the quarter ended June 30, 2003. For the quarter ended June 30, 2004,
other income primarily includes revenue from rental income of $0.6 million,
reinsurance premiums earned totaling approximately $0.4 million, and revenue
from title services of $0.2 million. For the quarter ended June 30, 2003, other
income primarily consists of volume incentive bonuses received from loan
purchasers totaling approximately $0.6 million and revenue from title services
of $0.4 million.
Expenses. Total expenses of our Loan Origination segment for the quarter ended
June 30, 2004 were $63.4 million, compared to $80.5 million for the quarter
ended June 30, 2003.
Our operating expenses represent costs that are not eligible to be added to the
book value of the loans because they are not considered direct origination costs
under the rules of SFAS No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Costs of Leases."
Direct origination costs are added to the book value of loans and either reduce
the gain on sale of loans if the loans are sold or are amortized over the life
of the loan.
Salaries, commissions and benefits for the quarter ended June 30, 2004 were
$41.6 million, or 63 basis points of total loan originations, compared to $53.3
million, or 85 basis points of total loan originations, for the quarter ended
June 30, 2003. The decrease in expenses reflects the higher percentage of
wholesale originations in the quarter ended June 30, 2004.
Operating expenses, excluding salaries, commissions and benefits, were 33 basis
points of total loan originations for the quarter ended June 30, 2004 and 44
basis points for the quarter ended June 30, 2003.
Income Tax Expense. Income tax expense decreased to a benefit of $14.5 million
for the quarter ended June 30, 2004 from expense of $26.3 million for the
quarter ended June 30, 2003, a decrease of $40.8 million. The effective tax rate
for the Loan Origination segment in the 2004 period includes permanent
book-to-tax differences related to activity within the REIT and the transactions
between our taxable REIT subsidiary ("TRS") and qualified REIT subsidiary
("QRS").
Loan Servicing Segment
The Loan Servicing segment total revenues for the quarter ended June 30, 2004
were $7.3 million compared to a loss of $14.6 million for the quarter ended June
30, 2003, an increase of $21.9 million.
Net loan servicing fees were $8.2 million for the quarter ended June 30, 2004,
compared to a loss of $13.9 million for the quarter ended June 30, 2003.
Loan servicing fees decreased to $8.7 million for the quarter ended June 30,
2004 from $9.8 million for the quarter ended June 30, 2003, a decrease of $1.1
million, or 11.1%. Included in loan servicing fees are gains on Ginnie Mae early
buy-out sales of $0.6 million for the quarter ended June 30, 2004 compared to
$3.2 million for the quarter ended June 30, 2003, a decrease of $2.6 million.
Amortization decreased to $7.8 million for the quarter ended June 30, 2004 from
$17.3 million for the quarter ended June 30, 2003, a decrease of $9.5 million.
The decrease in amortization was due to a rise in interest rates which resulted
in slower prepayment speeds in the quarter ended June 30, 2004 versus the
quarter ended June 30, 2003.
We recognized a temporary impairment recovery of $7.2 million for the quarter
ended June 30, 2004 versus a temporary impairment provision of $6.5 million for
the quarter ended June 30, 2003, resulting in an increase in net loan servicing
fees of $13.7 million. The increase in impairment recovery in the quarter ended
June 30, 2004 was due to an increase in the fair value of servicing rights
attributable to a decrease in estimated future prepayment speeds. The decrease
in estimated future prepayment speeds was a result of a rise in interest rates
in the quarter ended June 30, 2004.
-32-
Expenses. Total expenses of our Loan Servicing segment for the quarter ended
June 30, 2004 and the quarter ended June 30, 2003 were $2.8 million.
Income Tax Expense. Income tax expense increased to $2.0 million for the quarter
ended June 30, 2004 from a $6.9 million benefit for the quarter ended June 30,
2003, an increase of $8.9 million.
-33-
Results of Operations - Comparison of the Six Months Ended
June 30, 2004 and 2003
Six Months Ended June 30, 2004
--------------------------------------------------------------------------------
(In thousands)
Mortgage-Backed
Securities Loan Origination Loan Servicing
Holdings Segment Segment Segment Total
--------------------------------------------------------------------------------
Net interest income:
Interest income $ 56,338 $ 50,116 $ - $ 106,454
Interest expense (39,902) (31,889) (1,805) (73,596)
--------------------------------------------------------------------------------
Total net interest income 16,436 18,227 (1,805) 32,858
--------------------------------------------------------------------------------
Non-interest income:
Gain on sales of mortgage loans and
mortgage-backed securities 12,651 127,322 - 139,973
Loan servicing fees - - 19,048 19,048
Amortization - - (15,110) (15,110)
Impairment reserve provision - - (5,332) (5,332)
--------------------------------------------------------------------------------
Net loan servicing fees (loss) - - (1,394) (1,394)
Other non-interest income - 2,204 - 2,204
--------------------------------------------------------------------------------
Total non-interest income 12,651 129,526 (1,394) 140,783
--------------------------------------------------------------------------------
Non-interest expenses:
Salaries, commissions and benefits, net 104 80,212 2,317 82,633
Occupancy and equipment - 15,833 269 16,102
Data processing and communications 6 6,431 114 6,551
Office supplies and expenses - 5,694 639 6,333
Marketing and promotion - 4,405 3 4,408
Travel and entertainment 2 5,338 124 5,464
Professional fees 207 3,671 379 4,257
Other 3,073 4,453 1,994 9,520
--------------------------------------------------------------------------------
Total non-interest expenses 3,392 126,037 5,839 135,268
--------------------------------------------------------------------------------
Net income before income tax expense (benefit) 25,695 21,716 (9,038) 38,373
--------------------------------------------------------------------------------
Income tax expense (benefit) - (12,757) (3,575) (16,332)
--------------------------------------------------------------------------------
Net income $ 25,695 $ 34,473 $ (5,463) $ 54,705
================================================================================
June 30, 2004
--------------------------------------------------------------------------------
Segment assets $ 7,511,774 $ 1,921,370 $ 201,977 $ 9,635,121
================================================================================
-34-
Six Months Ended June 30, 2003
--------------------------------------------------------------------------------
(In thousands)
Mortgage-Backed
Securities Loan Origination Loan Servicing
Holdings Segment Segment Segment Total
----------------------------------------------------------------------------
Net interest income:
Interest income $ - $ 46,424 $ - $ 46,424
Interest expense - (21,281) (1,500) (22,781)
----------------------------------------------------------------------------
Total net interest income - 25,143 (1,500) 23,643
----------------------------------------------------------------------------
Non-interest income:
Gain on sales of mortgage loans - 217,493 - 217,493
Loan servicing fees - - 20,949 20,949
Amortization - - (30,055) (30,055)
Impairment reserve provision - - (12,185) (12,185)
----------------------------------------------------------------------------
Net loan servicing fees (loss) - - (21,291) (21,291)
Other non-interest income - 4,169 - 4,169
----------------------------------------------------------------------------
Total non-interest income - 221,662 (21,291) 200,371
----------------------------------------------------------------------------
Non-interest expenses:
Salaries, commissions and benefits, net - 97,125 1,728 98,853
Occupancy and equipment - 12,118 184 12,302
Data processing and communications - 5,777 50 5,827
Office supplies and expenses - 6,164 706 6,870
Marketing and promotion - 5,593 11 5,604
Travel and entertainment - 4,874 4 4,878
Professional fees - 3,200 313 3,513
Other - 10,441 1,647 12,088
----------------------------------------------------------------------------
Total non-interest expenses - 145,292 4,643 149,935
----------------------------------------------------------------------------
Net income before income tax expense (benefit) - 101,513 (27,434) 74,079
----------------------------------------------------------------------------
Income tax expense (benefit) - 41,863 (10,974) 30,889
----------------------------------------------------------------------------
Net income $ - $ 59,650 $ (16,460) $ 43,190
============================================================================
December 31, 2003
----------------------------------------------------------------------------
Segment assets $ 1,865,414 $ 1,375,276 $ 164,000 $ 3,404,690
============================================================================
-35-
Overview
Net income for the six months ended June 30, 2004 was $54.7 million, compared to
$43.2 million for the six months ended June 30, 2003, an increase of $11.5
million, or 26.7%. This increase was the result of a $47.2 million decrease in
income tax expense, a $14.7 million decrease in non-interest expense and a $9.2
million increase in net interest income, partly offset by a $59.6 million
decrease in non-interest income.
Mortgage-Backed Securities Holdings Segment
The following table presents the average balances for the Mortgage-Backed
Securities Holdings segment's mortgage-backed securities and reverse repurchase
agreements, corresponding annualized effective rate of interest and the related
interest income or expense:
Six Months Ended June 30,
--------------------------------------------------------------
(Dollars in thousands) 2004
--------------------------------------------------------------
Average Average
Balance Interest Yield/Cost
---------------------- ------------- -------------------------
Mortgage-backed securities, net (1) $ 3,385,341 $ 56,338 3.33%
---------------------- ------------- -------------------------
Reverse repurchase agreements (2) 3,147,704 39,902 2.53%
---------------------- ------------- -------------------------
Net interest income $ 16,436
=============
Interest rate spread 0.80%
=========================
Net interest margin 0.98%
=========================
(1) The average yield does not give effect to changes in the fair value that are
reflected as a component of stockholders' equity.
(2) Includes net interest expense on interest rate swaps.
Revenues. Total revenues for the Mortgage-Backed Securities Holdings segment
for the six months ended June 30, 2004 were $29.1 million, consisting entirely
of $16.4 million of net interest income and $12.7 million of gain on
mortgage-backed securities.
Loan Origination Segment
Total loan originations for the six months ended June 30, 2004 were $11.0
billion compared to $10.5 billion for the six months ended June 30, 2003, a 4.8%
increase. Our retail originations, which are conducted through our community
loan production offices and Internet call center, were 46% of our loan
originations in the six months ended June 30, 2004 compared to 81% of our
originations in the six months ended June 30, 2003. Mortgage brokers accounted
for 54% of our loan originations in the six months ended June 30, 2004 compared
to 19% of our originations in the six months ended June 30, 2003. Mortgage
brokers accounted for an increased percentage of our originations in the six
months ended June 30, 2004 due to the opening of wholesale branches in the
western United States.
Gain on Sales of Mortgage Loans and Mortgage-Backed Securities. Gain on sales of
mortgage loans and mortgage-backed securities for the six months ended June 30,
2004 was $127.3 million compared to $217.5 million in the six months ended June
30, 2003. The decrease in gain on sale of loans and mortgage-backed securities
was primarily the result of a decrease in average volume of IRLCs and hedged
loans held for sale, the Company's adoption of SAB No. 105, which reduced the
fair value of IRLCs and loans held for sale and the increased percentage of
wholesale originations in the six months ended June 30, 2004 compared to the six
months ended June 30, 2003. The change in fair value of IRLCs included in gain
on sale of loans in the 2004 period was reduced as a result of the Company's
adoption of SAB No. 105. The change in fair value of IRLCs and hedged loans held
for sale decreased by $40.8 million to a loss of $30.9 million in the six months
ended June 30, 2004 from a gain of $9.9 million in the six months ended June 30,
2003. Broker fee expenses included as a reduction to gain on sale of loans
increased $41.1 million from $33.2 million in the six months ended June 30, 2003
to $74.3 million in the six months ended June 30, 2004. The rise in fees paid to
brokers on wholesale originations is the result of the increased percentage of
wholesale originations in the 2004 period versus the 2003 period.
-36-
Net Interest Income. Total interest income for the six months ended June 30,
2004 on our Loan Origination segment's mortgages held for sale was $50.1
million, compared to interest income for the six months ended June 30, 2003 of
$46.4 million, an increase of $3.7 million, or 8.0%. The increase was primarily
due to higher average loan inventory in 2004. Our Loan Origination segment funds
its loan inventory primarily through a $2.0 billion Secured Liquidity Note
Program and borrowing facilities with several mortgage warehouse lenders. Total
interest expense for the six months ended June 30, 2004 was $31.9 million,
compared to interest expense for the six months ended June 30, 2003 of $21.3
million, a $10.6 million increase, which was primarily due to increased
borrowings to fund our increased loan inventory.
Other Revenue. Other revenue totaled $2.2 million for the six months ended June
30, 2004 compared to $4.2 million for the six months ended June 30, 2003. For
the six months ended June 30, 2004, other income primarily includes rental
income of $1.2 million, reinsurance premiums earned totaling approximately $0.5
million and revenue from title services of $0.4 million. For the six months
ended June 30, 2003, other income primarily consists of Principal fulfillment
fees of $1.9 million, revenue from title services of $0.9 million and volume
incentive bonuses received from loan purchasers totaling approximately $1.0
million. The Principal fulfillment fees represent non-recurring fees received
from Principal Residential Mortgage, Inc. ("PRM") for loans closed by us on
behalf of PRM. As part of the agreement to acquire the retail branches of PRM
(the "Principal Branches"), we agreed to assume the costs incurred to close out
PRM's application pipeline as of the date of the agreement on behalf of PRM for
a per loan fee.
Expenses. Total expenses of our Loan Origination segment for the six months
ended June 30, 2004 were $126.0 million, compared to $145.3 million for the six
months ended June 30, 2003.
Our operating expenses represent costs that are not eligible to be added to the
book value of the loans because they are not considered direct origination costs
under the rules of SFAS No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Costs of Leases."
Direct origination costs are added to the book value of loans and either reduce
the gain on sale of loans if the loans are sold or are amortized over the life
of the loan.
Salaries, commissions and benefits for the six months ended June 30, 2004 were
$80.2 million, or 73 basis points of total loan originations, compared to $97.1
million, or 93 basis points of total loan originations, for the six months ended
June 30, 2003. The decrease in expenses reflects the higher percentage of
wholesale originations in the 2004 period.
Operating expenses, excluding salaries, commissions and benefits, were 42 basis
points of total loan originations for the six months ended June 30, 2004 and 46
basis points for the six months ended June 30, 2003.
Income Tax Expense. Income tax expense decreased to a benefit of $12.8 million
for the six months ended June 30, 2004 from an expense of $41.9 million for the
six months ended June 30, 2003, a decrease of $54.6 million. The effective tax
rate for the Loan Origination segment during the 2004 period includes permanent
book-to-tax differences related to activity within the REIT and the transactions
between the TRS and QRS.
Loan Servicing Segment
The Loan Servicing segment total revenues for the six months ended June 30, 2004
were a loss of $3.2 million compared to a loss of $22.8 million for the six
months ended June 30, 2003, an increase of $19.6 million.
Net loan servicing fees were a loss of $1.4 million for the six months ended
June 30, 2004, compared to a loss of $21.3 million for the six months ended June
30, 2003.
Loan servicing fees decreased to $19.0 million for the six months ended June 30,
2004 from $20.9 million for the six months ended June 30, 2003, a decrease of
$1.9 million, or 9.1%. Included in loan servicing fees are gains on Ginnie Mae
early buy-out sales of $3.0 million for the six months ended June 30, 2004
compared to $6.8 million for the six months ended June 30, 2003, a decrease of
$3.8 million, or 55.9%.
Amortization decreased to $15.1 million for the six months ended June 30, 2004
from $30.1 million for the six months ended June 30, 2003, a decrease of $15.0
million, or 49.7%. The decrease in amortization was due to a rise in interest
rates which resulted in slower prepayment speeds in the six months ended June
30, 2004 versus the six months ended June 30, 2003.
We recognized a temporary impairment provision of $5.3 million for the six
months ended June 30, 2004 versus a temporary impairment provision of $12.2
million for the six months ended June 30, 2003, resulting in an increase in net
loan servicing fees of $6.9 million. The decrease in impairment provision in the
six months ended June 30, 2004 is due to an increase in the fair value of
servicing rights
-37-
attributable to a decrease in estimated future prepayment speeds. The decrease
in estimated future prepayment speeds was a result of a rise in interest rates
in the six months ended June 30, 2004.
Expenses. Total expenses of our Loan Servicing segment for the six months ended
June 30, 2004 were $5.8 million, compared to $4.6 million for the six months
ended June 30, 2003.
Income Tax Benefit. Income tax benefit decreased to $3.6 million for the six
months ended June 30, 2004 from an $11.0 million benefit for the six months
ended June 30, 2003, a decrease of $7.4 million, or 67.3%.
Liquidity and Capital Resources
We have arrangements to enter into reverse repurchase agreements, a form of
collateralized short-term borrowing, with 13 different financial institutions
and on June 30, 2004 had borrowed funds from nine of these firms. Because we
borrow money under these agreements based on the fair value of our
mortgage-backed securities, and because changes in interest rates can negatively
impact the valuation of mortgage-backed securities, our borrowing ability under
these agreements could be limited and lenders could initiate margin calls in the
event interest rates change or the value of our mortgage-backed securities
declines for other reasons.
As of June 30, 2004, we had $6.4 billion of reverse repurchase agreements
outstanding with a weighted-average borrowing rate of 1.64% before the impact of
interest rate swaps and a weighted-average remaining maturity of 6.5 months.
To originate a mortgage loan, we draw against a $2.0 billion Secured Liquidity
Note Program, $1.2 billion pre-purchase facility with UBS Real Estate Securities
Inc. (formerly Paine Webber Real Estate Securities Inc.) ("UBS"), a $450 million
bank syndicated facility led by Residential Funding Corporation ("RFC"), a $450
million facility with CDC Mortgage Capital Inc. ("CDC"), a facility of $350
million with Morgan Stanley Bank ("Morgan Stanley") and a facility of $200
million with Credit Lyonnais. In addition, the Company has a gestation facility
with Greenwich Capital Financial Products, Inc. These facilities are secured by
the mortgages owned by us and by certain of our other assets. Advances drawn
under the facilities bear interest at rates that vary depending on the type of
mortgages securing the advances. These loans are subject to sublimits, advance
rates and terms that vary depending on the type of securing mortgages and the
ratio of the Company's liabilities to its tangible net worth. At August 3, 2004,
the aggregate outstanding balance under the warehouse facilities was $1.9
billion, the aggregate outstanding balance in drafts payable was $56.5 million
and the aggregate maximum amount available for additional borrowings was $1.2
billion.
The documents governing our warehouse facilities contain a number of
compensating balance requirements and restrictive financial and other covenants
that, among other things, require us to adhere to a maximum ratio of total
liabilities to tangible net worth and maintain a minimum level of tangible net
worth and liquidity, as well as to comply with applicable regulatory and
investor requirements. The facility agreements also contain covenants limiting
the ability of our subsidiaries to transfer or sell assets other than in the
ordinary course of business and to create liens on the collateral without
obtaining the prior consent of the lenders, which consent may not be
unreasonably withheld.
In addition, under our warehouse facilities, we cannot continue to finance a
mortgage loan that we hold if:
o the loan is rejected as "unsatisfactory for purchase" by the
ultimate investor and has exceeded its permissible 120-day warehouse
period;
o we fail to deliver the applicable mortgage note or other documents
evidencing the loan within the requisite time period;
o the underlying property that secures the loan has sustained a
casualty loss in excess of 5% of its appraised value; or
o the loan ceases to be an eligible loan (as determined pursuant to
the applicable warehousing agreement).
As of June 30, 2004, our aggregate warehouse facility borrowings were $672.5
million (including $30.6 million of borrowings under a working capital
sub-limit) and our outstanding drafts payable were $86.3 million, compared to
$1.1 billion (including $29.0 million of borrowings under a working capital
sub-limit) and our outstanding drafts payable were $25.6 million as of December
31, 2003. At June 30, 2004, our loans held for sale were $1.4 billion compared
to $1.2 billion at December 31, 2003.
In addition to the UBS, CDC, RFC, Morgan Stanley, and Credit Lyonnais warehouse
facilities, we have a purchase and sale agreement with UBS. This agreement
allows us to accelerate the sale of our mortgage loan inventory, resulting in a
more effective use of the warehouse facility. Amounts sold and being held under
this agreement at June 30, 2004 and December 31, 2003 were $96.9 million and
-38-
$236.0 million, respectively. The amount so held under this agreement at August
3, 2004 was $36.7 million. This agreement is not a committed facility and may be
terminated at the discretion of the counterparty.
We make certain representations and warranties under the purchase and sale
agreements regarding, among other things, the loans' compliance with laws and
regulations, their conformity with the ultimate investors' underwriting
standards and the accuracy of information. In the event of a breach of these
representations or warranties or in the event of an early payment default, we
may be required to repurchase the loans and indemnify the investor for damages
caused by that breach. We have implemented strict procedures to ensure quality
control and conformity to underwriting standards and minimize the risk of being
required to repurchase loans. From time to time we have been required to
repurchase loans that we sold; however, the liability for the fair value of
those obligations has been immaterial.
We also have a $79.6 million term loan facility with a bank syndicate led by RFC
which we use to finance our MSRs. The term loan facility expires on August 30,
2004. Interest is based on a spread to the LIBOR and may be adjusted for
earnings on escrow balances. At June 30, 2004 and December 31, 2003, borrowings
under our term loan facility were $79.6 million and $71.5 million, respectively.
Cash and cash equivalents increased to $433.9 million at June 30, 2004 from
$53.1 million at December 31, 2003.
Our primary sources of cash and cash equivalents during the six months ended
June 30, 2004, were as follows:
o $5.1 billion increase in reverse repurchase agreements;
o $1.0 billion increase in commercial paper; and
o $342.2 million from the issuance of capital stock.
Our primary uses of cash and cash equivalents during the six months ended June
30, 2004, were as follows:
o $5.6 billion net increase in mortgage-backed securities;
o $449.3 million net decrease in warehouse lines of credit; and
o $209.9 million net increase in mortgage loans held for sale.
Commitments
The Company had the following commitments (excluding derivative financial
instruments) at June 30, 2004:
Less Than After
Total 1 Year 1 - 3 Years 4 - 5 Years 5 Years
-------------------------------------------------------------------------
(In thousands)
Warehouse facilities $ 672,456 $ 672,456 $ - $ - $ -
Operating leases 47,290 7,871 23,198 12,726 3,495
Notes payable 107,237 81,213 707 792 24,525
Commercial paper 1,047,036 1,047,036 - - -
Reverse repurchase agreements 6,413,506 6,413,506 - - -
Payable for securities purchased 423,909 423,909 - - -
-39-
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Movements in interest rates can pose a major risk to the Company in either a
rising or declining interest rate environment. The Company depends on
substantial borrowings to conduct its business. These borrowings are all done at
variable interest rate terms which will increase as short-term interest rates
rise. Additionally, when interest rates rise, loans held for sale and any
applications in process with locked-in rates decrease in value. To preserve the
value of such fixed-rate loans or applications in process with locked-in rates,
agreements are executed for mandatory loan sales to be settled at future dates
with fixed prices. These sales take the form of forward sales of mortgage-backed
securities.
When interest rates decline, fallout may occur as a result of customers
withdrawing their applications. In those instances, the Company may be required
to purchase loans at current market prices to fulfill existing mandatory loan
sale agreements, thereby incurring losses upon sale. The Company uses an
interest rate hedging program to manage these risks. Through this program,
mortgage-backed securities are purchased and sold forward and options are
acquired on treasury futures contracts.
In the event that the Company does not deliver into the forward delivery
commitments or exercise its option contracts, the instruments can be settled on
a net basis. Net settlement entails paying or receiving cash based upon the
change in market value of the existing instrument. All forward delivery
commitments and option contracts to buy securities are to be contractually
settled within six months of the balance sheet date.
The Company's hedging program contains an element of risk because the
counterparties to its mortgage and treasury securities transactions may be
unable to meet their obligations. While the Company does not anticipate
nonperformance by any counterparty, it is exposed to potential credit losses in
the event the counterparty fails to perform. The Company's exposure to credit
risk in the event of default by a counterparty is the difference between the
contract and the current market price. The Company minimizes its credit risk
exposure by limiting the counterparties to well-capitalized banks and securities
dealers who meet established credit and capital guidelines.
Movements in interest rates also impact the value of MSRs. When interest rates
decline, the loans underlying the MSRs are generally expected to prepay faster,
which reduces the market value of the MSRs. The Company considers the expected
increase in loan origination volumes and the resulting additional origination
related income as a natural hedge against the expected change in the value of
MSRs. Lower mortgage rates generally reduce the fair value of the MSRs, as
increased prepayment speeds are highly correlated with lower levels of mortgage
interest rates.
The Company enters into interest rate swap agreements ("Swap Agreements") to
manage its interest rate exposure when financing its adjustable-rate loans and
its mortgage-backed securities. The Company generally borrows money based on
short-term interest rates, by entering into borrowings with maturity terms of
less than one year, and frequently six to 12 months. The Company's
adjustable-rate loans and mortgage-backed securities financing vehicles
generally have an interest rate that reprices based on frequency terms of one to
12 months. The Company's mortgage-backed securities have an initial fixed
interest rate period of three to five years. When the Company enters into a Swap
Agreement, it generally agrees to pay a fixed rate of interest and to receive a
variable interest rate, generally based on LIBOR. These Swap Agreements have the
effect of converting the Company's variable-rate debt into fixed-rate debt over
the life of the Swap Agreements. These instruments are used as a cost-effective
way to lengthen the average repricing period of the Company's variable-rate and
short-term borrowings such that the average repricing of the borrowings more
closely matches the average repricing of the Company's mortgage-backed
securities. The Company's duration gap was less than one month on June 30, 2004.
-40-
The following table summarizes the Company's interest rate sensitive
instruments:
June 30, 2004
------------------------------------------------------
Notional Carrying Estimated
Amount Amount Fair Value
----------------- ------------------ -----------------
(In thousands)
Assets:
Mortgage-backed securities $ 7,389,412 $ 7,331,162 $ 7,331,162
Interest rate lock commitments - loans to be sold 903,735 6,122 18,492
Interest rate lock commitments - loans held for securitization 1,416,265 - 7,251
Mortgage loans held for sale, net 1,414,417 1,435,998 1,448,259
Mortgage servicing rights, net 10,196,733 141,818 145,122
Interest rate swaps 4,377,000 38,486 38,486
Liabilities:
Reverse repurchase agreements $ 6,413,506 $ 6,413,506 $ 6,404,286
Forward delivery commitments- Loan commitments 469,991 5,683 5,683
Forward delivery commitments - Loans held for sale 365,109 4,415 4,415
December 31, 2003
------------------------------------------------------
Notional Carrying Estimated
Amount Amount Fair Value
----------------- ------------------ -----------------
(In thousands)
Assets:
Mortgage-backed securities $ 1,759,064 $ 1,763,628 $ 1,763,628
Interest rate lock commitments - loans to be sold 1,140,350 20,837 20,837
Mortgage loans held for sale, net 1,187,314 1,226,127 1,228,441
Mortgage servicing rights, net 8,272,294 117,784 117,784
Liabilities:
Reverse repurchase agreements $ 1,344,327 $ 1,344,327 $ 1,344,327
Forward delivery commitments- Loan commitments 477,863 4,358 4,358
Forward delivery commitments - Loans held for sale 1,161,217 2,300 2,300
Interest rate swaps 755,000 6,036 6,036
The Company had total commitments to lend at June 30, 2004 and December 31, 2003
of $6.5 billion and $4.0 billion, respectively.
-41-
ITEM 4.
CONTROLS AND PROCEDURES
The Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of its disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of the end
of the fiscal quarter covered by this quarterly report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures were effective
as of the end of the fiscal quarter covered by this quarterly report. The
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, has evaluated the Company's internal controls over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
to determine whether any changes occurred during the second quarter of 2004 that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting. Based on that evaluation,
there has been no such change during the second quarter of 2004.
-42-
PART II-OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
In June 2002, the Company acquired Columbia National, Incorporated, a Maryland
corporation ("Columbia"), which is a subsidiary of the Company and which
recently changed its name to "American Home Mortgage Servicing, Inc." Before the
Company acquired Columbia, Columbia discovered fraudulent loan activity at its
Bensalem, Pennsylvania office and notified the U.S. Department of Housing and
Urban Development ("HUD"). HUD then instituted an investigation into the loan
originations of the Bensalem office. Shortly thereafter, several years before
Columbia was acquired by the Company, Columbia closed the Bensalem office and
terminated the employees involved in the alleged fraudulent activity. In 2000,
Columbia settled with HUD, paying a fine to HUD in the amount of $24,000 and
agreeing to indemnify HUD for certain losses. Columbia, as loan servicer for
institutional investors, subsequently made FHA insurance claims with respect to
approximately 60 loans that were originated by the Bensalem office between 1997
and 1999. The federal government is now seeking to recover insurance proceeds
paid in connection with certain of those claims, along with potentially
applicable fines and penalties. The Company is cooperating fully with respect to
the federal government's review of these loans. While the amount of any
potential settlement is not known at this time, the Company does not expect that
such amount will materially affect its financial condition or results of
operations.
ITEM 2.
CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Series A Preferred Stock
In July 2004, we issued 2,150,000 shares of 9.75% Series A Cumulative Redeemable
Preferred Stock, liquidation preference $25.00 per share ("Series A Preferred
Stock"), in an underwritten public offering. The Series A Preferred Stock ranks
senior to our common stock with respect to dividend rights, redemption rights
and rights upon our voluntary or involuntary liquidation, dissolution or winding
up. Accordingly, if we liquidate, dissolve or wind up, holders of the Series A
Preferred Stock will have the right to receive the liquidation preference of
$25.00 per share, plus all accumulated and unpaid dividends (whether or not
declared) to the date of payment, before any payments are made to the holders of
our common stock. For a complete description of the rights and preferences of
the Series A Preferred Stock, refer to Exhibits 3.1 and 3.2 of this Quarterly
Report on Form 10-Q.
Issuance of Unregistered Securities
The following is a description of the Company's securities that were not
registered under the Securities Act of 1933, as amended (the "Securities Act"),
which were sold during the quarter ended June 30, 2004.
The Company acquired Marina Mortgage Company, Inc. ("Marina") on December 29,
1999. In addition to the shares paid to former Marina shareholders as initial
consideration, the Company is required to issue unregistered shares of common
stock to the former shareholders under the earnout provisions of the merger
agreement. On May 12, 2004 pursuant to these earnout provisions, the Company
issued an aggregate of 202,582 shares of common stock to such shareholders as
additional consideration. These securities were exempt from registration under
Section 4(2) of the Securities Act because they were issued pursuant to the
terms of a private transaction rather than through a public offering.
The Company acquired First Home Mortgage Corp. ("First Home") on June 30, 2000.
In addition to the shares paid to former First Home shareholders as initial
consideration, the Company is required to issue unregistered shares of common
stock to the former shareholders as additional consideration under the earnout
provisions of the merger agreement. On April 1, 2004, pursuant to these earnout
provisions, the Company issued an aggregate of 1,888 shares of common stock to
such shareholders as additional consideration. In addition, on May 15, 2004, the
Company issued 2,311 shares of common stock to such shareholders. These
securities were exempt from registration under Section 4(2) of the Securities
Act because they were issued pursuant to the terms of a private transaction
rather than through a public offering.
-43-
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2004 Annual Meeting of Stockholders held on June 16, 2004, the
following actions were proposed (which are described in greater detail in the
Company's Definitive Proxy Statement on Schedule 14A filed with the SEC on April
29, 2004):
Proposal Votes For Votes Against Votes Abstained
-------- --------- ------------- ---------------
o To elect each of John A. Johnston and Michael A. McManus,
Jr. as a Class II director to serve for a three-year term
expiring at the 2007 Annual Meeting of Stockholders and to
elect Irving J. Thau as a Class III director to serve for
the remainder of the current term of office of the Class
III directors, which expires at the 2005 Annual Meeting of
Stockholders, and in each case until their respective
successors are duly elected and qualify.
o John A. Johnston 37,074,591 516,599 --
o Michael A. McManus, Jr. 37,351,843 239,347 --
o Irving J. Thau 37,351,843 239,347 --
o To consider and ratify Deloitte & Touche LLP as the
Company's external auditor for the fiscal year ending
December 31, 2004. 36,681,229 810,130 99,831
Each of the above proposals was approved by the Company's stockholders.
ITEM 5.
OTHER INFORMATION
None.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
Exhibit 3.1 Articles Supplementary of the Company establishing and fixing
the rights and preferences of the Company's 9.75% Series A
Cumulative Redeemable Preferred Stock, which the Company filed
with the State Department of Assessments and Taxation of
Maryland on July 6, 2004.
Exhibit 3.2 Articles Supplementary of the Company establishing and fixing
the rights and preferences of 747,000 additional shares of the
Company's 9.75% Series A Cumulative Redeemable Preferred
Stock, which the Company filed with the State Department of
Assessments and Taxation of Maryland on July 19, 2004.
-44-
Exhibit 10.1 Second Amended and Restated Warehousing Credit, Term Loan and
Security Agreement (Syndicated), dated as of May 27, 2004 (the
"RFC Loan Agreement"), by and among Columbia National,
Incorporated, American Home Mortgage Corp., and American Home
Mortgage Acceptance, Inc., collectively "Borrowers,"
Residential Funding Corporation, as credit agent for the
Lenders that are party thereto, and U.S. Bank National
Association and Manufacturers and Traders Trust Company,
together as co-agents.
Exhibit 10.2 Guaranty, dated as of May 27, 2004, made by the Company, as
Guarantor, on behalf of the Borrowers in favor of Residential
Funding Corporation, as credit agent for the Lenders that are
party to the RFC Loan Agreement.
Exhibit 10.3 Second Amended and Restated Master Repurchase Agreement, dated
as of June 1, 2004, by and among the Company, American Home
Mortgage Acceptance, Inc., American Home Mortgage Holdings,
Inc., American Home Mortgage Corp., Columbia National,
Incorporated, and CDC Mortgage Capital Inc.
Exhibit 10.4 Second Amended and Restated Custodial and Disbursement
Agreement, dated as of June 1, 2004, by and among the Company,
American Home Mortgage Acceptance, Inc., American Home
Mortgage Holdings, Inc., American Home Mortgage Corp.,
Columbia National, Incorporated, CDC Mortgage Capital Inc.,
and Deutsche Bank National Trust Company, as custodian and
disbursement agent.
Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Exhibit 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
During the fiscal quarter ended June 30, 2004, the Company filed with the SEC
the following Current Reports on Form 8-K:
o Current Report on Form 8-K, dated April 28, 2004, and furnished to
the SEC on April 28, 2004, which disclosed that the Company issued a
press release reporting its financial results for the fiscal quarter
ended March 31, 2004.
o Current Report on Form 8-K, dated June 21, 2004, and filed on June
21, 2004, which reported that the Company filed a Preliminary
Prospectus Supplement to the Prospectus dated January 12, 2004, and
included as part of the Registration Statement on Form S-3 of the
Company (File No. 333-111546) as filed with the SEC on December 24,
2003, as amended by Amendment No. 1 to the Registration Statement
filed with the Commission on January 8, 2004, relating to the
offering of 3,000,000 shares of the Company's Series A Cumulative
Redeemable Preferred Stock, par value $0.01 per share.
-45-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN HOME MORTGAGE INVESTMENT CORP.
(Registrant)
Date: August 9, 2004 By: /s/ Michael Strauss
-------------------------------------------
Michael Strauss
Chairman of the Board,
Chief Executive Officer
and President
Date: August 9, 2004 By: /s/ Stephen A. Hozie
-------------------------------------------
Stephen A. Hozie
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
-46-
INDEX TO EXHIBITS
-----------------
Exhibit No. Description
----------- -----------
3.1 -- Articles Supplementary of the Company establishing and fixing
the rights and preferences of the Company's 9.75% Series A
Cumulative Redeemable Preferred Stock, which the Company filed
with the State Department of Assessments and Taxation of
Maryland on July 6, 2004.
3.2 -- Articles Supplementary of the Company establishing and fixing
the rights and preferences of 747,000 additional shares of the
Company's 9.75% Series A Cumulative Redeemable Preferred
Stock, which the Company filed with the State Department of
Assessments and Taxation of Maryland on July 19, 2004.
10.1 -- Second Amended and Restated Warehousing Credit, Term Loan and
Security Agreement (Syndicated), dated as of May 27, 2004 (the
"RFC Loan Agreement"), by and among Columbia National,
Incorporated, American Home Mortgage Corp., and American Home
Mortgage Acceptance, Inc., collectively "Borrowers,"
Residential Funding Corporation, as credit agent for the
Lenders that are party thereto, and U.S. Bank National
Association and Manufacturers and Traders Trust Company,
together as co-agents.
10.2 -- Guaranty, dated as of May 27, 2004, made by the Company, as
Guarantor, on behalf of the Borrowers in favor of Residential
Funding Corporation, as credit agent for the Lenders that are
party to the RFC Loan Agreement.
10.3 Second Amended and Restated Master Repurchase Agreement, dated
as of June 1, 2004, by and among the Company, American Home
Mortgage Acceptance, Inc., American Home Mortgage Holdings,
Inc., American Home Mortgage Corp., Columbia National,
Incorporated, and CDC Mortgage Capital Inc.
10.4 Second Amended and Restated Custodial and Disbursement
Agreement, dated as of June 1, 2004, by and among the Company,
American Home Mortgage Acceptance, Inc., American Home
Mortgage Holdings, Inc., American Home Mortgage Corp.,
Columbia National, Incorporated, CDC Mortgage Capital Inc.,
and Deutsche Bank National Trust Company, as custodian and
disbursement agent.
31.1 -- Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 -- Certification of Chief Financial Officer pursuant to Rule
13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934,
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 -- Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 -- Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.