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 September 30, 2005.
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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)
538 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 November 4, 2005, there were 49,590,821 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 (Unaudited)
Consolidated Balance Sheets as of September 30, 2005
and December 31, 2004 .............................................1
Consolidated Statements of Income for the Three and
Nine Months Ended September 30, 2005 and 2004 .....................2
Consolidated Statements of Stockholders' Equity for
the Nine Months Ended September 30, 2005 and 2004 .................3
Consolidated Statements of Cash Flows for the Three
and Nine Months Ended September 30, 2005 and 2004 .................4
Notes to Consolidated Financial Statements .........................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..............................26
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........55
Item 4. Controls and Procedures ...........................................57
PART II-OTHER INFORMATION
Item 1. Legal Proceedings .................................................58
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .......58
Item 3. Defaults Upon Senior Securities ...................................58
Item 4. Submission of Matters to a Vote of Security Holders ...............58
Item 5. Other Information .................................................59
Item 6. Exhibits ..........................................................59
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)
September 30, December 31,
2005 2004
---------------------------------
Assets:
Cash and cash equivalents $ 624,424 $ 192,821
Accounts receivable and servicing advances 335,736 116,978
Mortgage-backed securities (including securities pledged of $8,338,884 as of
September 30, 2005 and $5,968,969 as of December 31, 2004) 9,208,172 6,016,866
Mortgage loans held for sale, net 1,901,293 4,853,394
Mortgage loans held for investment, net 1,445,429 --
Derivative assets 67,185 24,803
Mortgage servicing rights, net 300,659 151,436
Premises and equipment, net 64,174 51,576
Goodwill 99,268 90,877
Other assets 31,697 57,046
------------ ------------
Total assets $ 14,078,037 $ 11,555,797
============ ============
Liabilities and Stockholders' Equity:
Liabilities:
Warehouse lines of credit $ 2,165,154 $ 735,783
Drafts payable 18,763 26,200
Commercial paper 1,334,296 529,790
Reverse repurchase agreements 8,041,579 7,071,168
Payable for securities purchased 554,717 --
Collateralized debt obligations -- 2,022,218
Derivative liabilities -- 1,860
Trust preferred securities 96,964 --
Accrued expenses and other liabilities 239,382 152,413
Notes payable 305,766 135,761
Income taxes payable 56,310 54,342
------------ ------------
Total liabilities 12,812,931 10,729,535
------------ ------------
Commitments and contingencies
Stockholders' Equity:
Preferred Stock, par value $0.01 per share, 10,000,000 shares authorized:
9.75% Series A Cumulative Redeemable, 2,150,000 shares issued and outstanding
as of September 30, 2005 and December 31, 2004, respectively 50,857 50,857
9.25% Series B Cumulative Redeemable, 3,450,000 shares issued and outstanding
as of September 30, 2005 and December 31, 2004, respectively 83,183 83,183
Common stock, par value $0.01 per share, 100,000,000 shares authorized,
49,590,821 and 40,288,077 shares issued and outstanding as of September 30, 2005
and December 31, 2004, respectively 496 403
Additional paid-in capital 946,105 631,530
Retained earnings 235,556 99,628
Accumulated other comprehensive loss (51,091) (39,339)
------------ ------------
Total stockholders' equity 1,265,106 826,262
------------ ------------
Total liabilities and stockholders' equity $ 14,078,037 $ 11,555,797
============ ============
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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2005 2004 2005 2004
--------- --------- --------- ----------
Net interest income:
Interest income $ 180,038 $ 94,298 $ 462,250 $ 198,347
Interest expense (133,169) (61,405) (311,596) (132,596)
--------- --------- --------- ---------
Total net interest income 46,869 32,893 150,654 65,751
--------- --------- --------- ---------
Non-interest income:
Gain on sales of mortgage loans 123,658 28,373 236,288 98,095
Gain on sales of current period securitized mortgage loans 19,960 30,461 194,256 40,120
Gain (loss) on sales of mortgage-backed securities and derivatives 6,116 (8,120) 12,868 (2,810)
Unrealized (loss) gain on mortgage-backed securities and derivatives (10,965) 27,069 36,242 82,041
Loan servicing fees 21,099 9,822 49,381 28,870
Amortization of mortgage servicing rights (15,055) (7,755) (36,388) (22,865)
Impairment recovery (provision) of mortgage servicing rights 11,577 (4,807) (5,402) (10,139)
--------- --------- --------- ---------
Net loan servicing fees (loss) 17,621 (2,740) 7,591 (4,134)
--------- --------- --------- ---------
Other non-interest income 1,585 3,349 5,594 5,553
--------- --------- --------- ---------
Total non-interest income 157,975 78,392 492,839 218,865
--------- --------- --------- ---------
Non-interest expenses:
Salaries, commissions and benefits, net 101,378 46,482 264,712 128,805
Occupancy and equipment 15,328 9,984 42,396 26,086
Data processing and communications 6,479 3,745 18,386 10,296
Office supplies and expenses 5,024 3,012 15,110 9,345
Marketing and promotion 5,104 2,610 14,360 7,018
Travel and entertainment 4,670 3,620 14,025 9,084
Professional fees 3,744 2,524 10,646 6,781
Other 7,360 6,363 21,072 15,883
--------- --------- --------- ---------
Total non-interest expenses 149,087 78,340 400,707 213,298
--------- --------- --------- ---------
Net income before income tax expense (benefit) 55,757 32,945 242,786 71,318
Income tax expense (benefit) 2,549 (9,998) (1,302) (26,330)
--------- --------- --------- ---------
Net income $ 53,208 $ 42,943 $ 244,088 $ 97,648
========= ========= ========= =========
Dividends on preferred stock 3,304 1,648 9,913 1,648
--------- --------- --------- ---------
Net income available to common shareholders $ 49,904 $ 41,295 $ 234,175 $ 96,000
========= ========= ========= =========
Per share data:
Basic $ 1.10 $ 1.03 $ 5.58 $ 2.61
Diluted $ 1.09 $ 1.02 $ 5.51 $ 2.58
Weighted average number of shares - basic 45,174 40,145 41,973 36,737
Weighted average number of shares - diluted 45,669 40,605 42,471 37,198
See notes to consolidated financial statements.
- 2 -
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
(In thousands)
Accumulated
Additional Other Total
Preferred Common Paid-in Retained Comprehensive Stockholders'
Stock Stock Capital Earnings Loss Equity
-----------------------------------------------------------------------------
Balance at January 1, 2004 $ -- $ 252 $ 281,432 $ 121,029 $ (4,743) $ 397,970
--------- ------ ---------- --------- ------------- -------------
Comprehensive income:
Net income -- -- -- 97,648 -- 97,648
Net change in unrealized gain on
mortgage-backed securities
available for sale -- -- -- -- 1,780 1,780
Net change in unrealized loss
on cash flow hedges, net
of amortization -- -- -- -- (38,408) (38,408)
-------------
Comprehensive income 61,020
Issuance of Series A preferred
stock - offering 50,857 -- -- -- -- 50,857
Issuance of common stock - offering -- 144 339,647 -- -- 339,791
Issuance of common stock - earnouts -- 2 4,843 -- -- 4,845
Issuance of common stock,
1999 Omnibus Stock Incentive Plan -- 4 2,286 -- -- 2,290
Tax benefit from stock options exercised -- -- 1,599 -- -- 1,599
Dividends declared on Series A
preferred stock -- -- -- (1,648) -- (1,648)
Dividends declared on common stock -- -- -- (65,732) -- (65,732)
--------- ------ ---------- --------- ------------- -------------
Balance at September 30, 2004 $ 50,857 $ 402 $ 629,807 $ 151,297 $ (41,371) $ 790,992
========= ====== ========== ========= ============= =============
Balance at January 1, 2005 $ 134,040 $ 403 $ 631,530 $ 99,628 $ (39,339) $ 826,262
--------- ------ ---------- --------- ------------- -------------
Comprehensive income:
Net income -- -- -- 244,088 -- 244,088
Net change in unrealized loss on
mortgage-backed securities
available for sale -- -- -- -- (33,452) (33,452)
Net change in unrealized gain on
cash flow hedges, net of amortization -- -- -- -- 21,700 21,700
-------------
Comprehensive income 232,336
Issuance of common stock - offering -- 90 304,033 -- -- 304,123
Issuance of common stock - earnouts -- 2 5,990 -- -- 5,992
Issuance of common stock, 1999 Omnibus
Stock Incentive Plan -- 1 1,914 -- -- 1,915
Tax benefit from stock options exercised -- -- 2,638 -- -- 2,638
Dividends declared on Series A
preferred stock -- -- -- (3,930) -- (3,930)
Dividends declared on Series B
preferred stock -- -- -- (5,983) -- (5,983)
Dividends declared on common stock -- -- -- (98,247) -- (98,247)
--------- ------ ---------- --------- ------------- -------------
Balance at September 30, 2005 $ 134,040 $ 496 $ 946,105 $ 235,556 $ (51,091) $ 1,265,106
========= ====== ========== ========= ============= =============
See notes to consolidated financial statements.
- 3 -
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------------
2005 2004 2005 2004
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net income $ 53,208 $ 42,943 $ 244,088 $ 97,648
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 3,098 2,151 8,276 6,116
Amortization and impairment of mortgage servicing rights 3,478 12,562 41,790 33,004
Accretion and amortization of mortgage-backed securities, net (2,571) 9,455 853 19,615
Amortization of deferred cash flow hedge gain (loss) 1,689 (7,019) 20,479 (4,733)
Loss on sales of mortgage-backed securities and derivatives 2,819 6,998 6,602 4,539
Unrealized loss (gain) on mortgage-backed securities 74,595 (33,525) 121,065 (22,766)
Unrealized (gain) loss on free standing derivatives (31,137) 14,856 (45,546) (26,595)
Decrease in forward delivery contracts (12,820) (9,004) (8,485) (5,564)
Capitalized mortgage servicing rights on securitized loans (27,536) (27,203) (169,876) (59,580)
Capitalized mortgage servicing rights on sold loans (14,762) (3,976) (21,136) (16,075)
Decrease in interest rate lock commitments 14,501 7,358 8,447 18,981
(Increase) decrease in mortgage loan basis adjustments (12,649) (1,817) 7,721 18,507
Other 1,469 2,611 491 2,963
(Increase) decrease in operating assets:
Accounts receivable (218,519) (124) (219,968) (17,142)
Servicing advances (382) (492) 1,210 348
Income taxes receivable -- -- 25,797 --
Other assets (10,512) (2,857) (448) (2,729)
Increase (decrease) in operating liabilities:
Accrued expenses and other liabilities 53,657 32,761 73,820 65,921
Income taxes payable 8,557 (10,995) 1,968 (36,669)
Origination of mortgage loans held for sale (12,394,139) (5,292,191) (30,296,568) (16,325,007)
Principal received from sales of mortgage loans held for sale 9,448,293 2,806,070 16,986,607 10,741,622
Proceeds from securitizations of mortgage loans held for sale 2,993,315 2,765,737 16,185,841 5,611,616
Additions to mortgage-backed securities (1,191,209) (1,435,334) (4,497,990) (3,802,902)
Principal proceeds from sales of self-originated
mortgage-backed securities -- 1,023,037 1,104,227 1,168,352
Cash received from residual assets in securitizations 35,431 7,186 75,526 10,709
Principal repayments of mortgage-backed securities 274,035 93,120 554,610 176,028
------------ ------------ ------------ ------------
Net cash (used in) provided by operating activities (948,091) 2,308 209,401 (2,343,793)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchases of premises and equipment (5,831) (5,565) (20,874) (12,333)
Origination of mortgage loans held for investment (1,301,364) -- (1,435,121) --
Proceeds from repayments of mortgage loans held for investment 5,108 -- 5,108 --
Purchases of mortgage-backed securities (2,417,565) (535,056) (3,351,494) (5,186,475)
Principal proceeds from sales of purchased mortgage-backed
securities 518,517 633,036 1,673,468 1,538,587
Principal repayments of purchased mortgage-backed securities 414,667 296,974 1,144,387 565,785
Other -- -- -- (244)
------------ ------------ ------------ ------------
Net cash (used in) provided by investing activities (2,786,468) 389,389 (1,984,526) (3,094,680)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Increase (decrease) in warehouse lines of credit, net 1,499,457 (124,872) 1,429,371 (574,176)
Increase in reverse repurchase agreements, net 1,703,949 485,518 970,411 5,554,697
Decrease in collateralized debt obligations -- -- (2,022,218) --
Increase (decrease) in payable for securities purchased 554,717 (423,909) 554,717 (259,701)
Increase (decrease) in commercial paper, net 42,612 (584,324) 804,506 462,712
(Decrease) increase in drafts payable, net (7,775) (40,774) (7,437) 19,901
Increase in trust preferred securities 48,550 -- 96,964 --
Increase in notes payable, net 49,706 21,211 170,005 28,793
Proceeds from issuance of preferred stock -- 52,057 -- 52,057
Proceeds from issuance of common stock 304,522 426 305,420 342,637
Dividends paid (34,130) (24,468) (95,011) (55,115)
------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities 4,161,608 (639,135) 2,206,728 5,571,805
------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 427,049 (247,438) 431,603 133,332
Cash and cash equivalents, beginning of period 197,375 433,918 192,821 53,148
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 624,424 $ 186,480 $ 624,424 $ 186,480
============ ============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 111,172 $ 28,887 $ 311,969 $ 65,485
Income taxes paid 118 996 906 7,357
See notes to consolidated financial statements.
- 4 -
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - American Home Mortgage Investment Corp. ("AHM Investment") is a
mortgage REIT focused on earning net interest income from mortgage loans and
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 and mortgage brokers or are purchased from correspondents,
and are serviced at the Company's Irving, Texas servicing center. As used
herein, references to the "Company," "American Home," "we," "our" and "us" refer
to AHM Investment collectively with its subsidiaries.
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.
The unaudited consolidated financial statements included herein have been
prepared in conformity with generally accepted accounting principles ("GAAP")
for interim financial information. Accordingly, they do not include all of the
information and notes required by GAAP for complete financial statements.
Management believes all adjustments considered necessary for a fair presentation
have been included. The consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto included in the Company's report on Form 10-K/A for the year ended
December 31, 2004.
Due to the Company's exercising 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 are demand deposits and
short-term investments with a maturity of 90 days or less. The carrying amount
of cash and cash equivalents approximates its fair value.
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 unrealized gain on mortgage-backed
securities and derivatives in the consolidated statements of income. 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-backed securities and derivatives.
When the fair value of an available for sale security is less than amortized
cost, management evaluates whether there is an other-than-temporary impairment
in the value of the security (e.g., whether the security is likely to be sold
prior to the recovery of fair value) based on estimated credit losses,
prepayment speeds and the length of time in an unrealized loss position. If, in
management's assessment, 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 prior 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, if the Company meets
hedge accounting requirements, 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.
- 5 -
Mortgage Loans Held for Investment - Mortgage loans held for investment are
carried at the aggregate of their remaining unpaid principal balances, less any
related charge-offs, net deferred origination costs and allowance for loan
losses. Loan fees and direct origination costs are deferred and amortized into
interest income over the contractual life of the loan using the level-yield
method.
Mortgage Servicing Rights - Mortgage servicing rights ("MSRs") are carried at
the lower of cost or fair value, based on defined interest rate risk strata, and
are amortized in proportion to and over the period of estimated net servicing
income. When the Company sells certain loans 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 the estimated service lives of the premises and
equipment. 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 in the consolidated statements of income.
Goodwill - Goodwill represents the excess purchase price over the fair value of
net assets acquired from business acquisitions. The Company tests for impairment
at least annually and 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. We further test to
ensure that the fair value of all of our business units does not exceed our
total market capitalization.
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 the London Inter-Bank Offer Rate
("LIBOR"). Reverse repurchase agreements are accounted for as borrowings and
recorded as a liability on the consolidated balance sheet.
Collateralized Debt Obligations - The Company has issued adjustable-rate
collateralized debt obligations to finance certain portions of its mortgage
loans held for sale. The collateralized debt obligations are collateralized by
adjustable-rate mortgage ("ARM") loans held for sale that have been placed in a
trust and bear interest rates that have historically moved in close relationship
to the LIBOR. Collateralized debt obligations are accounted for as borrowings
and recorded as a liability on the consolidated 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 the Company's 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
borrowing and recorded as a liability on the consolidated 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 Company's warehouse facilities when they are presented to a bank.
- 6 -
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("IRLCs"). 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 or securitized 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 provided industry guidance that changed the timing of
recognition of the value of MSRs for IRLCs initiated after March 31, 2004. In
SAB No. 105, the SEC stated that the value of expected future cash flows related
to MSRs should be excluded when determining the fair value of derivative IRLCs.
Under the policy in effect as of April 1, 2004, the value of the expected future
cash flows related to MSRs is not recognized until the underlying loans are
sold.
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, to
qualify for hedge accounting, 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.
Interest Rate Swap Agreements. The Company enters into interest rate swap
agreements which require it to pay a fixed interest rate and receive a variable
interest rate based on LIBOR. The fair value of interest rate swap agreements is
based on the net present value of estimated future interest payments over the
remaining life of the interest rate swap agreement. All changes in the
unrealized gains and losses on swap agreements designated as cash flow hedges
have been recorded in accumulated other comprehensive income (loss) and are
reclassified to earnings as interest expense is recognized on the Company's
hedged borrowings. For interest rate swap agreements accounted for as cash flow
hedges, the net amount accrued for the variable interest receivable and fixed
interest payable affects the amount recorded as interest expense. 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 income (loss) would be reclassified to income. 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%. 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 a component of unrealized gain on mortgage-backed securities and derivatives
as they are used to offset the price change exposure of mortgage-backed
securities classified as trading. For interest rate swap agreements accounted
for as free-standing derivatives, the net amount accrued for the variable
interest receivable and fixed interest payable is recorded in current earnings
as unrealized gain on mortgage-backed securities and derivatives.
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.
- 7 -
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 SFAS No. 133 basis adjustments 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 as securities
available for sale, 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. When loans are securitized and held as trading securities, net
deferred origination costs are an adjustment to the cost of the security and
such amounts affect the amount recorded as unrealized gain on mortgage-backed
securities and derivatives. Gain on sales of mortgage loans and salaries,
commissions and benefits have been reduced by $113.5 million and $71.8 million
due to direct loan origination costs, including commission costs, incurred for
the nine months ended September 30, 2005 and 2004, 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.
The Company enters into interest rate swap agreements which require it to pay a
fixed interest rate and receive a variable interest rate based on the LIBOR. For
interest rate swap agreements accounted for as cash flow hedges, the net amount
accrued for the variable interest receivable and fixed interest payable affects
the amount recorded as interest expense. For interest rate swap agreements
accounted for as free-standing derivatives, the net amount accrued for the
variable interest receivable and fixed interest payable is recorded in current
earnings as unrealized gain on mortgage-backed securities and derivatives.
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.
- 8 -
The following table presents pro forma net income available to common
shareholders, basic earnings per share and diluted earnings per share had
compensation cost been determined based on the fair value at the grant dates for
awards under the Plan:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
(In thousands, except per share data) 2005 2004 2005 2004
--------- --------- --------- ----------
Net income available to common
shareholders - as reported $ 49,904 $ 41,295 $ 234,175 $ 96,000
Less: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects (268) (272) (953) (638)
--------- --------- --------- ---------
Net income available to common
shareholders - pro forma $ 49,636 $ 41,023 $ 233,222 $ 95,362
========= ========= ========= =========
Earnings per share:
Basic - as reported $ 1.10 $ 1.03 $ 5.58 $ 2.61
Basic - pro forma $ 1.10 $ 1.02 $ 5.56 $ 2.60
Diluted - as reported $ 1.09 $ 1.02 $ 5.51 $ 2.58
Diluted - pro forma $ 1.09 $ 1.01 $ 5.49 $ 2.56
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
123 (Revised 2004), "Share-Based Payment"("SFAS 123R"). SFAS 123R requires
compensation cost related to share-based payments to employees to be recognized
in the financial statements based on their fair value. In April 2005, the SEC
issued a rule which delays the required effective date to the beginning of an
entity's fiscal year which begins after June 15, 2005. Accordingly, we will
adopt SFAS 123R effective January 1, 2006, using the modified prospective method
of transition. This method requires the provisions of SFAS 123R be applied to
new awards and awards modified, repurchased or cancelled after the effective
date. The Company will adopt this statement when effective and is currently
evaluating the impact. The impact, had the Company adopted the fair-value based
method under existing guidance, is shown in the table above.
Earnings Per Share - Basic earnings per share excludes dilution and is computed
by dividing net income available to common shareholders 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.
- 9 -
NOTE 2 - MORTGAGE-BACKED SECURITIES
The following table presents the Company's mortgage-backed securities available
for sale as of September 30, 2005 and December 31, 2004:
September 30, 2005
---------------------------------------------------
Gross Gross
Unrealized Unrealized
Adjusted Cost Gains Losses Fair Value
------------- ---------- ---------- ----------
(In thousands)
Agency securities $ 171,023 $ 3 $ (6,055) $ 164,971
Privately issued:
Rated 4,507,912 267 (37,086) 4,471,093
Unrated 8,261 -- -- 8,261
---------- ---------- ---------- ----------
Securities available for sale $4,687,196 $ 270 $ (43,141) $4,644,325
========== ========== ========== ==========
December 31, 2004
---------------------------------------------------
Gross Gross
Unrealized Unrealized
Adjusted Cost Gains Losses Fair Value
------------- ---------- ---------- ----------
(In thousands)
Agency securities $ 620,196 $ 17 $ (7,700) $ 612,513
Privately issued:
Rated 3,584,211 10,791 (12,527) 3,582,475
Unrated 15,952 -- -- 15,952
---------- ---------- ---------- ----------
Securities available for sale $4,220,359 $ 10,808 $ (20,227) $4,210,940
========== ========== ========== ==========
- 10 -
The following table presents the Company's securities available for sale in an
unrealized loss position as of September 30, 2005 and December 31, 2004:
September 30, 2005
----------------------------------------------------------------------------------------
Less Than 12 Months 12 Months or More Total
------------------------- -------------------------- ---------------------------
Gross Gross Gross
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
------------------------- -------------------------- ---------------------------
(In thousands)
Agency securities $ 1,343 $ (4) $ 162,661 $ (6,051) $ 164,004 $ (6,055)
Privately issued:
Rated 3,603,232 (21,387) 655,437 (15,699) 4,258,669 (37,086)
------------------------- -------------------------- ---------------------------
Securities available for sale $3,604,575 $ (21,391) $ 818,098 $ (21,750) $4,422,673 $ (43,141)
========================= ========================== ===========================
December 31, 2004
----------------------------------------------------------------------------------------
Less Than 12 Months 12 Months or More Total
------------------------- -------------------------- ---------------------------
Gross Gross Gross
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
------------------------- -------------------------- ---------------------------
(In thousands)
Agency securities $ 608,730 $ (7,700) $ -- $ -- $ 608,730 $ (7,700)
Privately issued:
Rated 1,861,777 (12,527) -- -- 1,861,777 (12,527)
------------------------- -------------------------- ---------------------------
Securities available for sale $2,470,507 $ (20,227) $ -- $ -- $2,470,507 $ (20,227)
========================= ========================== ===========================
The following table presents the Company's mortgage-backed trading securities as
of September 30, 2005 and December 31, 2004:
September 30, 2005 December 31, 2004
---------------------------------------
Fair Value Fair Value
----------------- ------------------
(In thousands)
Privately issued:
Rated $4,311,283 $1,751,335
Unrated 252,564 54,591
----------------- ------------------
Trading securities $4,563,847 $1,805,926
================= ==================
During the three months ended September 30, 2005, the Company recorded $37.6
million in unrealized losses on trading securities that related to trading
securities held at September 30, 2005.
During the nine months ended September 30, 2005, the Company recorded $7.2
million in unrealized gains on trading securities that related to trading
securities held at September 30, 2005.
During the three months ended September 30, 2005, the Company sold $521 million
of mortgage-backed securities, excluding securities sold contemporaneously with
the execution of securitization transactions, and realized $5.8 million in
gains, net of hedges. The $521 million of
- 11 -
mortgage-backed securities sold were primarily market-purchased. During the
three months ended September 30, 2005, the Company securitized and held in its
portfolio $1.2 billion of mortgage-backed securities.
During the nine months ended September 30, 2005, the Company sold $2.8 billion
of mortgage-backed securities, excluding securities sold contemporaneously with
the execution of securitization transactions, and realized $6.7 million in
gains, net of hedges. During the nine months ended September 30, 2005, the
Company securitized and held in its portfolio $4.4 billion of mortgage-backed
securities.
The Company's mortgage-backed securities held at September 30, 2005 are
primarily either agency obligations or are rated AAA or AA by Standard & Poor's.
The Company has credit exposure on $16.5 billion and $3.9 billion of loans it
has securitized privately as of September 30, 2005 and December 31, 2004,
respectively. The following table summarizes the loan delinquency information as
of September 30, 2005 and December 31, 2004:
September 30, 2005
--------------------------------------------------
(Dollars in thousands)
Loan Loan Percentage of Percentage of
Delinquency Status Count Balance Total Portfolio Total Assets
------------------ ----- ------- --------------- ------------
60 to 89 days 61 $ 12,703 0.08% 0.09%
90 and greater days 81 14,758 0.09% 0.10%
Foreclosure 240 62,091 0.38% 0.44%
--- ---------- ---- ----
382 $ 89,552 0.55% 0.63%
=== ========== ==== ====
December 31, 2004
--------------------------------------------------
(Dollars in thousands)
Loan Loan Percentage of Percentage of
Delinquency Status Count Balance Total Portfolio Total Assets
------------------ ----- ------- --------------- ------------
60 to 89 days 6 $ 2,018 0.05% 0.02%
90 and greater days 2 418 0.01% --%
Foreclosure 48 13,666 0.35% 0.12%
--- ---------- ---- ----
56 $ 16,102 0.41% 0.14%
=== ========== ==== ====
As of September 30, 2005, the fair value of residual assets from securitizations
reported in mortgage-backed securities was $318.0 million.
The significant assumptions used in estimating the fair value of residual cash
flows as of September 30, 2005 and December 31, 2004 were as follows:
September 30, 2005 December 31, 2004
------------------ -----------------
Weighted-average prepayment speed (CPR) 28.46% 27.27%
Weighted-average discount rate 17.14% 17.83%
Weighted-average default rate 0.54% 0.49%
- 12 -
NOTE 3 - MORTGAGE LOANS, NET
The following table presents the Company's mortgage loans held for sale, net, as
of September 30, 2005 and December 31, 2004:
September 30, December 31,
(In thousands) 2005 2004
------------ ------------
Mortgage loans held for sale $ 1,886,785 $ 4,815,749
SFAS No. 133 basis adjustments (1,306) 40
Deferred origination costs, net 15,814 37,605
------------ ------------
Mortgage loans held for sale, net $ 1,901,293 $ 4,853,394
============ ============
During the three months ended September 30, 2005, the Company sold
non-securitized mortgage loans to third parties totaling $9.9 billion and
realized $123.7 million in gains.
During the nine months ended September 30, 2005, the Company sold
non-securitized mortgage loans to third parties totaling $17.5 billion and
realized $236.3 million in gains.
During the three months ended September 30, 2005, the Company securitized
mortgage loans totaling $2.5 billion, of which $1.3 billion were sold, and
realized $20.0 million in gains.
During the nine months ended September 30, 2005, the Company securitized
mortgage loans totaling $16.7 billion, of which $12.3 billion were sold, and
realized $194.3 million in gains.
The following table presents the Company's mortgage loans held for investment,
net, as of September 30, 2005:
September 30,
(In thousands) 2005
--------------
Mortgage loans held for investment $ 1,430,013
Deferred origination costs, net 15,416
--------------
Mortgage loans held for investment, net $ 1,445,429
==============
- 13 -
NOTE 4 - DERIVATIVE ASSETS AND LIABILITIES
The following table presents the Company's derivative assets and liabilities as
of September 30, 2005 and December 31, 2004:
September 30, December 31,
(In thousands) 2005 2004
------------ ------------
Derivative Assets
Interest rate swaps - free standing derivatives $ 38,536 $ 2,127
Interest rate swaps - cash flow hedges 17,285 9,192
Interest rate lock commitments 3,578 12,025
Forward delivery contracts - loan commitments 3,392 --
Forward delivery contracts - loans held for sale 3,233 --
Mortgage put options 727 --
Interest rate caps - free standing derivatives 434 1,459
------------ ------------
Derivative assets $ 67,185 $ 24,803
============ ============
Derivative Liabilities
Forward delivery contracts - loan commitments $ -- $ 896
Forward delivery contracts - loans held for sale -- 964
------------ ------------
Derivative liabilities $ -- $ 1,860
============ ============
As of September 30, 2005, the notional amount of forward delivery contracts and
interest rate swap agreements was approximately $1.6 billion and $6.9 billion,
respectively.
As of December 31, 2004, the notional amount of forward delivery contracts and
interest rate swap agreements was approximately $954 million and $3.4 billion,
respectively.
During the three months ended September 30, 2005, the Company realized $0.3
million in gains on sales of interest rate swap agreements associated with its
securitizations of mortgage loans.
During the nine months ended September 30, 2005, the Company realized $6.1
million in gains on sales of interest rate swap agreements associated with its
securitizations of mortgage loans. These gains are recorded in gain (loss) on
sales of mortgage-backed securities and derivatives in the consolidated
statements of income.
During the three months ended September 30, 2005, the Company recognized in
earnings $26.6 million in unrealized gains on free standing derivatives.
During the nine months ended September 30, 2005, the Company recognized in
earnings $29.1 million in unrealized gains on free standing derivatives. These
gains are recorded in unrealized (loss) gain on mortgage-backed securities and
derivatives in the consolidated statements of income.
The forward delivery contracts have a high correlation to the price movement of
the loans being hedged. The ineffectiveness in hedging loans held for sale
recorded on the consolidated balance sheets was insignificant as of September
30, 2005 and December 31, 2004.
As of September 30, 2005, the unrealized loss on interest rate swap agreements
relating to cash flow hedges recorded in accumulated other comprehensive loss
was a loss of $8.2 million.
- 14 -
The following table presents the Company's estimate of amounts that will be
reclassified from accumulated other comprehensive loss to interest expense:
(In thousands)
Twelve months ended September 30, 2006 $2,382
Twelve months ended September 30, 2007 609
Twelve months ended September 30, 2008 3,095
Twelve months ended September 30, 2009 1,972
Twelve months ended September 30, 2010 163
NOTE 5 - MORTGAGE SERVICING RIGHTS, NET
The following table presents the activity in the Company's mortgage servicing
rights, net, for the three and nine months ended September 30, 2005 and 2004:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------
(In thousands) 2005 2004 2005 2004
--------- --------- --------- ---------
Mortgage Servicing Rights:
Balance at beginning of period $ 290,756 $ 151,018 $ 163,374 $ 121,652
Additions 42,298 31,179 191,013 75,655
Amortization (15,055) (7,755) (36,388) (22,865)
--------- --------- --------- ---------
Balance at end of period $ 317,999 $ 174,442 $ 317,999 $ 174,442
--------- --------- --------- ---------
Impairment Allowance:
Balance at beginning of period $ (28,917) $ (9,200) $ (11,938) $ (3,868)
Impairment recovery (provision) 11,577 (4,807) (5,402) (10,139)
--------- --------- --------- ---------
Balance at end of period $ (17,340) $ (14,007) $ (17,340) $ (14,007)
--------- --------- --------- ---------
Mortgage servicing rights, net $ 300,659 $ 160,435 $ 300,659 $ 160,435
========= ========= ========= =========
Aggregate Amortization Expense
------------------------------
Nine months ended September 30, 2005 $ 36,388
Estimated Amortization Expense
------------------------------
Twelve months ended September 30, 2006 $ 61,436
Twelve months ended September 30, 2007 53,872
Twelve months ended September 30, 2008 42,401
Twelve months ended September 30, 2009 32,831
Twelve months ended September 30, 2010 24,777
Thereafter 102,682
On a quarterly basis, the Company evaluates 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.
- 15 -
The significant assumptions used in estimating the fair value of MSRs at
September 30, 2005 and December 31, 2004 were as follows:
September 30, 2005 December 31, 2004
------------------ -----------------
Weighted-average prepayment speed (PSA) 341 316
Weighted-average discount rate 11.83% 10.37%
Weighted-average default rate 3.55% 2.76%
The following table presents certain information regarding the Company's
servicing portfolio of loans serviced for others at September 30, 2005 and
December 31, 2004:
September 30, 2005 December 31, 2004
------------------ -----------------
(Dollars in thousands)
Loan servicing portfolio - loans sold or securitized $ 24,247,837 $ 11,955,608
ARM loans as a percentage of total loans 74% 60%
Average loan size $ 189 $ 156
Weighted-average servicing fee 0.331% 0.348%
Weighted-average note rate 5.73% 5.48%
Weighted-average remaining term (in months) 337 318
Weighted-average age (in months) 13 20
NOTE 6 - GOODWILL
The following table presents the activity in the Company's goodwill for the nine
months ended September 30, 2005 and 2004:
Mortgage-Backed
Loan Origination Securities Holdings
(In thousands) Segment Segment Total
---------------- -------------------- -----------
Balance at January 1, 2004 $58,605 $24,840 $83,445
Earnouts from previous acquisitions 5,751 -- 5,751
------- ------- -------
Balance at September 30, 2004 $64,356 $24,840 $89,196
======= ======= =======
Balance at January 1, 2005 $66,037 $24,840 $90,877
Earnouts from previous acquisitions 8,391 -- 8,391
------- ------- -------
Balance at September 30, 2005 $74,428 $24,840 $99,268
======= ======= =======
As of December 31, 2004, the Company completed a goodwill impairment test by
comparing the fair value of goodwill with its carrying value and did not
recognize impairment.
- 16 -
NOTE 7 - WAREHOUSE LINES OF CREDIT, REVERSE REPURCHASE AGREEMENTS AND COMMERCIAL
PAPER
Warehouse Lines of Credit
To originate a mortgage loan, the Company draws against a $3.3 billion Secured
Liquidity Note Program, a $1.5 billion pre-purchase facility with UBS Real
Estate Securities Inc. ("UBS"), a facility of $1.5 billion with Bear Stearns, a
$1.0 billion bank syndicated facility led by Bank of America (which includes a
$350 million term loan facility which the Company uses to finance its MSRs), a
facility of $750 million with Goldman Sachs, a facility of $750 million with
Morgan Stanley Bank ("Morgan Stanley"), a $450 million facility with IXIS Real
Estate Capital Inc. (formerly CDC Mortgage Capital Inc.) ("IXIS"), a facility of
$500 million with Lehman Brothers, an early purchase program facility with
Countrywide Home Loans, Inc. ("Countrywide") and a facility of $250 million with
Calyon New York Branch ("Calyon"). The Bank of America, IXIS, Morgan Stanley and
Calyon facilities are committed facilities. In addition, the Company has a
gestation facility with Greenwich Capital Financial Products, Inc.
("Greenwich"). 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 September 30, 2005, the Company was in
compliance with respect to the loan covenants.
Included within the Bank of America line of credit, the Company has a working
capital sub-limit that allows for borrowings up to $50 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 September 30, 2005, borrowings
under the working capital line of credit were $20.3 million.
As of September 30, 2005, the Company had $2.2 billion of warehouse lines of
credit outstanding with a weighted-average borrowing rate of 4.29%. As of
December 31, 2004, the Company had $735.8 million of warehouse lines of credit
outstanding with a weighted-average borrowing rate of 3.13%.
Reverse Repurchase Agreements
The Company has arrangements to enter into reverse repurchase agreements, a form
of collateralized short-term borrowing, with fourteen different financial
institutions and on September 30, 2005 had borrowed funds from eight 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 September 30, 2005, the Company had $8.0 billion of reverse repurchase
agreements outstanding with a weighted-average borrowing rate of 3.84% and a
weighted-average remaining maturity of six months. As of December 31, 2004, the
Company had $7.1 billion of reverse repurchase agreements outstanding with a
weighted-average borrowing rate of 2.13% and a weighted-average remaining
maturity of three months.
As of September 30, 2005 and December 31, 2004, the Company's reverse repurchase
agreements had the following remaining maturities:
September 30, December 31,
2005 2004
------------ ------------
(In thousands)
Within 30 days $ 2,605,619 $ 3,617,325
31 to 89 days 1,206,468 2,050,529
90 to 365 days 4,229,492 1,403,314
------------ ------------
Reverse repurchase agreements $ 8,041,579 $ 7,071,168
============ ============
The Company's average reverse repurchase agreements outstanding were $6.5
billion and $6.8 billion for the three months ended September 30, 2005 and 2004,
respectively.
The Company's average reverse repurchase agreements outstanding were $6.6
billion and $4.4 billion for the nine months ended September 30, 2005 and 2004,
respectively.
- 17 -
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 the Company's 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 the LIBOR. The SLN
program capacity, based on aggregate commitments of underlying credit enhancers,
was $3.3 billion at September 30, 2005.
As of September 30, 2005, the Company had $1.3 billion of SLNs outstanding, with
an average interest cost of 3.71%. The SLNs were collateralized by loans held
for sale and cash with a balance of $1.4 billion as of September 30, 2005. As of
December 31, 2004, the Company had $529.8 million of SLNs outstanding, with an
average interest cost of 2.51%. The SLNs were collateralized by loans held for
sale and cash with a balance of $550.0 million as of December 31, 2004.
The Company's commercial paper had the following remaining maturities as of
September 30, 2005 and December 31, 2004 :
September 30, December 31,
2005 2004
------------ ------------
(In thousands)
Within 30 days $ 1,309,383 $ 529,790
31 to 89 days 24,913 --
------------ ------------
Commercial paper $ 1,334,296 $ 529,790
============ ============
NOTE 8 - COLLATERALIZED DEBT OBLIGATIONS
In December 2004, the Company transferred $3.5 billion of its mortgage loans
held for sale to American Home Mortgage Investment Trust 2004-4 (the "Trust") in
a securitization transaction. This securitization transaction was accounted for
as a financing of the mortgage loans held for sale. The Company financed the
transaction by issuing $2.0 billion of collateralized debt obligations, which
were collateralized by loans held for sale transferred to the Trust. This
securitization transaction qualified for sale treatment under SFAS No. 140 in
the first quarter of 2005, and consequently the Company had no collateralized
debt obligations as of March 31, 2005. As of September 30, 2005, the Company had
no collateralized debt obligations. As of December 31, 2004, the collateralized
debt obligations had a balance of $2.0 billion and an effective interest cost of
3.16%. As of December 31, 2004, the collateralized debt obligations were
collateralized by mortgage loans held for sale of $2.0 billion.
NOTE 9 - COMMON STOCK AND PREFERRED STOCK
In August 2005, the Company issued 9,000,000 shares of its common stock ("Common
Stock") at a price of $35.50 per share. The total proceeds to the Company were
$319.5 million, before underwriting discounts, commissions and other offering
expenses.
Under our charter, our Board of Directors is authorized to issue 110,000,000
shares of stock, of which up to 100,000,000 shares may be common stock and up to
10,000,000 shares may be preferred stock. As of September 30, 2005, there were
49,590,821 shares of common stock issued and outstanding, 2,150,000 shares of
our 9.75% Series A Cumulative Redeemable Preferred Stock ("Series A Preferred")
issued and outstanding and 3,450,000 shares of our 9.25% Series B Cumulative
Redeemable Preferred Stock ("Series B Preferred") issued and outstanding.
During the three months ended September 30, 2005, the Company declared dividends
totaling $38.8 million, or $0.86 per common share, which were paid on October
27, 2005. During the three months ended September 30, 2004, the Company declared
a dividend totaling $24.5 million, or $0.61 per common share, which was paid on
October 21, 2004.
During the nine months ended September 30, 2005, the Company declared dividends
totaling $98.2 million, or $2.33 per common share.
During the nine months ended September 30, 2004, the Company declared dividends
totaling $65.7 million, or $1.77 per common share.
- 18 -
During the three months ended September 30, 2005, the Company declared a
dividend of $1.3 million, or $0.609375 per Series A Preferred share, which was
paid on October 31, 2005.
During the nine months ended September 30, 2005, the Company declared dividends
of $3.9 million, or $1.828125 per Series A Preferred share.
During the three months ended September 30, 2005, the Company declared a
dividend of $2.0 million, or $0.578125 per Series B Preferred share, which was
paid on October 31, 2005.
During the nine months ended September 30, 2005, the Company declared dividends
of $6.0 million, or $1.734375 per Series B Preferred share.
NOTE 10 - INCOME TAXES
A reconciliation of the statutory income tax provision to the effective income
tax expense (benefit) is as follows:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------------- ---------------------------------------------
(Dollars in thousands) 2005 2004 2005 2004
------------------ -------------------- --------------------- --------------------
Tax provision at statutory rate $ 19,516 35.0% $ 11,534 35.0% $ 84,975 35.0% $ 24,961 35.0%
Non-taxable REIT income (17,487) (31.4) (20,313) (61.6) (87,339) (36.0) (47,807) (66.9)
State and local taxes, net of
federal income tax benefit 253 0.5 (1,369) (4.2) (47) (0.0) (4,004) (5.6)
Other 267 0.5 150 0.5 1,109 0.4 520 0.7
-------- --- -------- ----- -------- ---- -------- -----
Income tax expense (benefit) $ 2,549 4.6% $ (9,998) (30.3%) $ (1,302) (0.6%) $(26,330) (36.8%)
======== === ======== ===== ======== ==== ======== =====
The major sources of temporary differences and their deferred tax effect at
September 30, 2005 and December 31, 2004 are as follows:
September 30, December 31,
2005 2004
------------ ------------
(In thousands)
Deferred tax liabilities:
Capitalized cost of mortgage servicing rights $ 134,302 $ 82,399
Loan origination costs 16,846 11,236
Depreciation 3,083 2,341
Deferred state income taxes 48 --
------------ ------------
Deferred tax liabilities 154,279 95,976
------------ ------------
Deferred tax assets:
Tax loss carryforwards 77,979 36,384
Allowance for bad debts and foreclosure reserve 2,842 2,711
Mark-to-market adjustments 17,007 811
Deferred state income taxes -- 353
Broker fees 958 528
AMT credit 1,745 --
Other 377 847
------------ ------------
Deferred tax assets 100,908 41,634
------------ ------------
Net deferred tax liabilities $ 53,371 $ 54,342
============ ============
- 19 -
In June 2002, American Home Mortgage Holdings Inc., ("AHM Holdings"), currently
a wholly owned subsidiary of AHM Investment, acquired all of the outstanding
stock of American Home Mortgage Servicing, Inc. ("AHM Servicing") (formerly
known as Columbia National, Incorporated). The acquisition was accounted for
under the purchase method of accounting for financial statement purposes. For
federal income tax purposes, the historical basis of the assets and liabilities
were carried over to AHM Holdings. AHM Servicing has approximately $40 million
of separate company net operating loss carryforwards which begin to expire in
2008. In addition, AHM Holdings has approximately $130 million of federal and
approximately $229 million of state net operating loss carryforwards which begin
to expire in 2024 and 2009, respectively.
At September 30, 2005 and December 31, 2004, no valuation allowance has been
established against deferred tax assets since it is more likely than not that
the deferred tax assets will be realized.
The Company has been audited by various state tax jurisdictions which have
settled with a "no change" decision. In addition, the Company is currently under
examination by other tax jurisdictions which the Company expects to result in no
material assessments. The Company regularly assesses the likelihood of
additional assessments in each of the tax jurisdictions in the calculation of
its provision and maintains an appropriate reserve as needed.
NOTE 11 - 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 nine months ended
September 30, 2005 and 2004:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
(Dollars in thousands, except per share amounts) 2005 2004 2005 2004
------------- ------------ ------------ ------------
Numerator for basic earnings per share - Net income
available to common shareholders $ 49,904 $ 41,295 $ 234,175 $ 96,000
============ ============ ============ ============
Denominator:
Denominator for basic earnings per share
Weighted average number of common shares
outstanding during the period 45,173,834 40,144,601 41,972,908 36,737,484
Net effect of dilutive stock options 494,784 460,453 498,269 460,568
------------ ------------ ------------ ------------
Denominator for diluted earnings per share 45,668,618 40,605,054 42,471,177 37,198,052
============ ============ ============ ============
Net income per share available to common shareholders:
Basic $ 1.10 $ 1.03 $ 5.58 $ 2.61
============ ============ ============ ============
Diluted $ 1.09 $ 1.02 $ 5.51 $ 2.58
============ ============ ============ ============
NOTE 12 - 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 may be 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
4,000,000 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 September 30, 2005, the Company has awarded 213,343 shares of restricted
stock under the Plan. During the three months ended September 30, 2005 and 2004,
the Company recognized compensation expense of $212 thousand and $79 thousand,
respectively, relating to shares of restricted stock granted under the Plan.
During the nine months ended September 30, 2005 and 2004, the Company recognized
- 20 -
compensation expense of $527 thousand and $603 thousand, respectively, relating
to shares of restricted stock granted under the Plan. At September 30, 2005,
175,509 shares are vested. In general, unvested restricted stock is forfeited
upon the recipient's termination of employment.
For options granted under the 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 nine months ended
September 30, 2005 and 2004.
There were 25,000 and 382,419 options granted under the Plan in the three months
and nine months ended September 30, 2005, with weighted-average exercise prices
of $34.18 and $32.63, in the three months and nine months ended September 30,
2005, respectively. The weighted-average fair value per share of options granted
during the three months and nine months ended September 30, 2005 was $4.81 and
$3.82, respectively.
There were 110,000 and 422,413 options granted under the Plan in the three
months and nine months ended September 30, 2004, with weighted-average exercise
prices of $27.13 and $24.62, in the three months and nine months ended September
30, 2004, respectively. The weighted-average fair value per share of options
granted during the three months and nine months ended September 30, 2004 was
$4.58 and $5.00, respectively.
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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2005 2004 2005 2004
-------------- --------------- ------------- ---------------
Dividend yield 10.2 % 9.0 % 9.1 % 8.3 %
Expected volatility 36.1 % 38.3 % 29.1 % 44.5 %
Risk-free interest rate 5.0 % 5.0 % 5.0 % 5.0 %
Expected life 3 years 3 years 3 years 3 years
NOTE 13 - ACQUISITION
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. In
2004, subsequent to the merger with Apex and internal reorganization, AHM
Investment, as successor in interest to AHM Holdings, entered into an amended
and restated agreement and plan of reorganization with Valley Bancorp. Under the
terms of the definitive agreement, the Company will pay $46 for each share of
Valley Bancorp common stock outstanding, and will pay in cash to the holders of
Valley Bancorp stock options the difference between $46 and the exercise price
of such options, or an aggregate of approximately $6.3 million. The acquisition
agreement between AHM Investment and Valley Bancorp has been extended through
November 30, 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.
NOTE 14 - 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 and unrealized mark-to-market
gains or losses subsequent to the securitization date on mortgage-backed
securities classified as trading securities.
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.
- 21 -
Three Months Ended September 30, 2005
------------------------------------------------------------
(In thousands)
Mortgage-Backed
Securities Loan Loan
Holdings Origination Servicing
Segment Segment Segment Total
------------------------------------------------------------------
Net interest income:
Interest income $ 84,560 $ 95,478 $ -- $ 180,038
Interest expense (62,945) (68,937) (1,287) (133,169)
------------------------------------------------------------
Total net interest income 21,615 26,541 (1,287) 46,869
------------------------------------------------------------
Non-interest income:
Gain on sales of mortgage loans -- 123,658 -- 123,658
Gain on sales of current period securitized mortgage loans -- 19,960 -- 19,960
Gain on sales of mortgage-backed securities and derivatives 5,816 300 -- 6,116
Unrealized (loss) gain on mortgage-backed securities and derivatives (43,581) 32,616 -- (10,965)
Loan servicing fees -- -- 21,099 21,099
Amortization of mortgage servicing rights -- -- (15,055) (15,055)
Impairment recovery of mortgage servicing rights -- -- 11,577 11,577
------------------------------------------------------------
Net loan servicing fees -- -- 17,621 17,621
Other non-interest income -- 1,114 471 1,585
------------------------------------------------------------
Total non-interest income (37,765) 177,648 18,092 157,975
------------------------------------------------------------
Non-interest expenses:
Salaries, commissions and benefits, net 1,488 96,738 3,152 101,378
Occupancy and equipment 2 14,985 341 15,328
Data processing and communications 22 6,373 84 6,479
Office supplies and expenses 4 4,616 404 5,024
Marketing and promotion -- 5,088 16 5,104
Travel and entertainment -- 4,588 82 4,670
Professional fees 807 2,753 184 3,744
Other 1,726 3,123 2,511 7,360
------------------------------------------------------------
Total non-interest expenses 4,049 138,264 6,774 149,087
------------------------------------------------------------
Net income before income tax (benefit) expense (20,199) 65,925 10,031 55,757
------------------------------------------------------------
Income tax (benefit) expense -- (1,221) 3,770 2,549
------------------------------------------------------------
Net income $ (20,199) $ 67,146 $ 6,261 $ 53,208
============================================================
Dividends on preferred stock 3,304 -- -- 3,304
------------------------------------------------------------
Net income available to common shareholders $ (23,503) $ 67,146 $ 6,261 $ 49,904
============================================================
September 30, 2005
------------------------------------------------------------
Segment assets $ 9,432,484 $ 4,197,165 $ 448,388 $ 14,078,037
============================================================
- 22 -
Three Months Ended September 30, 2004
------------------------------------------------------------
(in thousands)
Mortgage-Backed
Securities Loan Loan
Holdings Origination Servicing
Segment Segment Segment Total
------------------------------------------------------------------
Net interest income:
Interest income $ 66,856 $ 27,442 $ -- $ 94,298
Interest expense (42,124) (18,252) (1,029) (61,405)
------------------------------------------------------------
Total net interest income 24,732 9,190 (1,029) 32,893
------------------------------------------------------------
Non-interest income:
Gain on sales of mortgage loans -- 28,373 -- 28,373
Gain on sales of current period securitized mortgage loans -- 30,461 -- 30,461
Loss on sales of mortgage-backed securities and derivatives (4,610) (3,510) -- (8,120)
Unrealized (loss) gain on mortgage-backed securities and derivatives (1,784) 28,853 -- 27,069
Loan servicing fees -- -- 9,822 9,822
Amortization of mortgage servicing rights -- -- (7,755) (7,755)
Impairment provision of mortgage servicing rights -- -- (4,807) (4,807)
------------------------------------------------------------
Net loan servicing loss -- -- (2,740) (2,740)
Other non-interest income -- 3,349 -- 3,349
------------------------------------------------------------
Total non-interest income (6,394) 87,526 (2,740) 78,392
------------------------------------------------------------
Non-interest expenses:
Salaries, commissions and benefits, net 55 45,151 1,276 46,482
Occupancy and equipment 5 9,858 121 9,984
Data processing and communications 5 3,637 103 3,745
Office supplies and expenses -- 2,831 181 3,012
Marketing and promotion -- 2,608 2 2,610
Travel and entertainment -- 3,609 11 3,620
Professional fees 44 2,389 91 2,524
Other 2,036 3,591 736 6,363
------------------------------------------------------------
Total non-interest expenses 2,145 73,674 2,521 78,340
------------------------------------------------------------
Net income before income tax benefit 16,193 23,042 (6,290) 32,945
------------------------------------------------------------
Income tax benefit -- (7,510) (2,488) (9,998)
------------------------------------------------------------
Net income $ 16,193 $ 30,552 $ (3,802) $ 42,943
============================================================
Dividends on preferred stock 1,648 -- -- 1,648
------------------------------------------------------------
Net income available to common shareholders $ 14,545 $ 30,552 $ (3,802) $ 41,295
============================================================
December 31, 2004
------------------------------------------------------------
Segment assets $ 6,136,642 $ 5,194,387 $ 224,768 $ 11,555,797
============================================================
- 23 -
Nine Months Ended September 30, 2005
------------------------------------------------------------
(in thousands)
Mortgage-Backed
Securities Loan Loan
Holdings Origination Servicing
Segment Segment Segment Total
------------------------------------------------------------------
Net interest income:
Interest income $ 219,906 $ 242,344 $ -- $ 462,250
Interest expense (154,168) (152,799) (4,629) (311,596)
------------------------------------------------------------
Total net interest income 65,738 89,545 (4,629) 150,654
------------------------------------------------------------
Non-interest income:
Gain on sales of mortgage loans -- 236,288 -- 236,288
Gain on sales of current period securitized mortgage loans -- 194,256 -- 194,256
Gain on sales of mortgage-backed securities and derivatives 6,725 6,143 -- 12,868
Unrealized (loss) gain on mortgage-backed securities and derivatives (41,496) 77,738 -- 36,242
Loan servicing fees -- -- 49,381 49,381
Amortization of mortgage servicing rights -- -- (36,388) (36,388)
Impairment provision of mortgage servicing rights -- -- (5,402) (5,402)
------------------------------------------------------------
Net loan servicing fees -- -- 7,591 7,591
Other non-interest income -- 3,722 1,872 5,594
------------------------------------------------------------
Total non-interest income (34,771) 518,147 9,463 492,839
------------------------------------------------------------
Non-interest expenses:
Salaries, commissions and benefits, net 6,057 250,179 8,476 264,712
Occupancy and equipment 5 41,645 746 42,396
Data processing and communications 64 17,953 369 18,386
Office supplies and expenses 5 13,955 1,150 15,110
Marketing and promotion 2 14,281 77 14,360
Travel and entertainment 5 13,589 431 14,025
Professional fees 2,829 7,060 757 10,646
Other 6,331 9,439 5,302 21,072
------------------------------------------------------------
Total non-interest expenses 15,298 368,101 17,308 400,707
------------------------------------------------------------
Net income before income tax expense (benefit) 15,669 239,591 (12,474) 242,786
------------------------------------------------------------
Income tax expense (benefit) -- 3,777 (5,079) (1,302)
------------------------------------------------------------
Net income $ 15,669 $ 235,814 $ (7,395) $ 244,088
============================================================
Dividends on preferred stock 9,913 -- -- 9,913
------------------------------------------------------------
Net income available to common shareholders $ 5,756 $ 235,814 $ (7,395) $ 234,175
============================================================
September 30, 2005
------------------------------------------------------------
Segment assets $ 9,432,484 $ 4,197,165 $ 448,388 $ 14,078,037
============================================================
- 24 -
Nine Months Ended September 30, 2004
------------------------------------------------------------
(in thousands)
Mortgage-Backed
Securities Loan Loan
Holdings Origination Servicing
Segment Segment Segment Total
------------------------------------------------------------------
Net interest income:
Interest income $ 123,194 $ 75,153 $ -- $ 198,347
Interest expense (82,026) (47,736) (2,834) (132,596)
------------------------------------------------------------
Total net interest income 41,168 27,417 (2,834) 65,751
------------------------------------------------------------
Non-interest income:
Gain on sales of mortgage loans -- 98,095 -- 98,095
Gain on sales of current period securitized mortgage loans -- 40,120 -- 40,120
Gain (loss) on sales of mortgage-backed securities and derivatives 1,578 (4,388) -- (2,810)
Unrealized gain on mortgage-backed securities and derivatives 14,385 67,656 -- 82,041
Loan servicing fees -- -- 28,870 28,870
Amortization of mortgage servicing rights -- -- (22,865) (22,865)
Impairment provision of mortgage servicing rights -- -- (10,139) (10,139)
------------------------------------------------------------
Net loan servicing loss -- -- (4,134) (4,134)
Other non-interest income -- 5,553 -- 5,553
------------------------------------------------------------
Total non-interest income 15,963 207,036 (4,134) 218,865
------------------------------------------------------------
Non-interest expenses:
Salaries, commissions and benefits, net 159 125,053 3,593 128,805
Occupancy and equipment 5 25,691 390 26,086
Data processing and communications 11 10,068 217 10,296
Office supplies and expenses -- 8,525 820 9,345
Marketing and promotion -- 7,013 5 7,018
Travel and entertainment 2 8,947 135 9,084
Professional fees 251 6,060 470 6,781
Other 5,109 8,044 2,730 15,883
------------------------------------------------------------
Total non-interest expenses 5,537 199,401 8,360 213,298
------------------------------------------------------------
Net income before income tax benefit 51,594 35,052 (15,328) 71,318
------------------------------------------------------------
Income tax benefit -- (20,267) (6,063) (26,330)
------------------------------------------------------------
Net income $ 51,594 $ 55,319 $ (9,265) $ 97,648
============================================================
Dividends on preferred stock 1,648 -- -- 1,648
------------------------------------------------------------
Net income available to common shareholders $ 49,946 $ 55,319 $ (9,265) $ 96,000
============================================================
December 31, 2004
------------------------------------------------------------
Segment assets $ 6,136,642 $ 5,194,387 $ 224,768 $ 11,555,797
============================================================
- 25 -
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Cautionary Note 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 portfolio strategy;
o our 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 those risks and uncertainties discussed in our filings with the
Securities and Exchange Commission ("SEC").
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. We are not
- 26 -
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.
Mortgage Loans Held for Sale - Mortgage loans held for sale are carried at the
lower of cost or aggregate market value. 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 ("MSRs") - 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 interest rate lock commitments ("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 and any net
deferred origination costs. In March 2004, the SEC issued Staff Accounting
Bulletin No. 105 ("SAB No. 105"), which provides industry guidance which changed
the timing of recognition of MSRs for IRLCs initiated after March 31, 2004. 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. Under the new policy, the value of the expected future cash
flows related to servicing rights is not recognized until the underlying loans
are sold.
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 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
- 27 -
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.
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, at least annually, 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.
- 28 -
Adjusted Financial Measures
The Company securitizes a substantial portion of its mortgage loans held for
sale each quarter and has intended for each of these transactions to qualify as
a sale under Statement of Financial Accounting Standards No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS 140"). Our December 2004 securitization ("Q4-04
Securitization") did not qualify as a sale at December 31, 2004 and was
accounted for as a financing in accordance with SFAS 140 because we retained a
small amount of securities which were benefited by derivative contracts embedded
in the securitization trust. These securities were sold during the first quarter
of 2005, qualifying the Q4-04 Securitization as a sale at March 31, 2005 in
accordance with SFAS 140. The Q4-04 Securitization was originally accounted for
as a sale. The subsequent discovery of the retained derivative benefit resulted
in our restating our financial statements for the period ended December 31,
2004, which restated financial statements were included in an amended Annual
Report on Form 10-K/A filed with the SEC on April 22, 2005. Throughout the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" section of this Quarterly Report on Form 10-Q, the term "as
adjusted" identifies financial measures that are not prepared in accordance with
generally accepted accounting principles ("GAAP"). These adjusted financial
measures reflect the effect of treating the Q4-04 Securitization as a sale in
the fourth quarter of 2004 rather than in the first quarter of 2005 when the
transaction subsequently qualified as a sale. Since the filing of our amended
Annual Report on Form 10-K/A, we have enforced our policies, procedures and
controls to ensure all securitizations are accounted for in accordance with SFAS
140. The Company has been, and expects to continue to be, managed on the basis
of the adjusted financial measures. The adjusted financial measures should be
read in conjunction with the Company's GAAP consolidated balance sheets and
consolidated statements of income. The following financial tables include GAAP,
adjusted and reconciling information for the reasons and purposes described
herein:
- 29 -
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
--------------------------------------------------------------------------------
September 30, December 31, December 31, December 31,
2005 2004 2004 2004
------------- ------------ ------------ ------------
(1) As
GAAP Adjustments Adjusted
------------- ------------ ------------ ------------
Assets:
Cash and cash equivalents $ 624,424 $ 192,821 $ -- $ 192,821
Accounts receivable and servicing advances 335,736 116,978 (11,640) 105,338
Mortgage-backed securities 9,208,172 6,016,866 1,584,927 7,601,793
Mortgage loans held for sale, net 1,901,293 4,853,394 (3,536,785) 1,316,609
Mortgage loans held for investment, net 1,445,429 -- -- --
Derivative assets 67,185 24,803 (1,459) 23,344
Mortgage servicing rights, net 300,659 151,436 37,793 189,229
Premises and equipment, net 64,174 51,576 -- 51,576
Goodwill 99,268 90,877 -- 90,877
Other assets 31,697 57,046 (10,490) 46,556
------------ ------------ ------------ ------------
Total assets $ 14,078,037 $ 11,555,797 $ (1,937,654) $ 9,618,143
============ ============ ============ ============
Liabilities and Stockholders' Equity:
Liabilities:
Warehouse lines of credit $ 2,165,154 $ 735,783 $ -- $ 735,783
Drafts payable 18,763 26,200 -- 26,200
Commercial paper 1,334,296 529,790 -- 529,790
Reverse repurchase agreements 8,041,579 7,071,168 -- 7,071,168
Payable for securities purchased 554,717 -- -- --
Collateralized debt obligations -- 2,022,218 (2,022,218) --
Derivative liabilities -- 1,860 -- 1,860
Trust preferred securities 96,964 -- -- --
Accrued expenses and other liabilities 239,382 152,413 13,213 165,626
Notes payable 305,766 135,761 -- 135,761
Income taxes payable 56,310 54,342 -- 54,342
------------ ------------ ------------ ------------
Total liabilities 12,812,931 10,729,535 (2,009,005) 8,720,530
------------ ------------ ------------ ------------
Stockholders' Equity:
Preferred Stock 134,040 134,040 -- 134,040
Common stock 496 403 -- 403
Additional paid-in capital 946,105 631,530 -- 631,530
Retained earnings 235,556 99,628 71,351 170,979
Accumulated other comprehensive loss (51,091) (39,339) -- (39,339)
------------ ------------ ------------ ------------
Total stockholders' equity 1,265,106 826,262 71,351 897,613
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity $ 14,078,037 $ 11,555,797 $ (1,937,654) $ 9,618,143
============ ============ ============ ============
Note:
(1) - Adjustments reflect the net effect on the period presented to reconcile
the Company's operating statistics, results of operations and financial
condition prepared in accordance with GAAP to the amounts adjusted as if the
Company's fourth quarter 2004 securitization had qualified for SFAS 140 sale
accounting treatment in the fourth quarter of 2004.
- 30 -
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended
-----------------------------------------------------------
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2005 2005 2005 2004 2004
----------- -------- --------- -------- ----------
(1) (1)
As As
Adjusted Adjusted
----------- -------- --------- -------- ----------
Net interest income:
Interest income $ 180,038 $ 135,318 $ 119,969 $ 113,785 $ 94,298
Interest expense (133,169) (90,336) (71,325) (67,002) (61,405)
--------- --------- --------- --------- ---------
Net interest income 46,869 44,982 48,644 46,783 32,893
--------- --------- --------- --------- ---------
Non-interest income:
Gain on sales of mortgage loans 123,658 77,377 35,253 36,004 28,373
Gain on sales of current period securitized mortgage loans 19,960 104,377 44,661 40,674 30,461
Gain (loss) on sales of mortgage-backed securities and derivatives 6,116 620 4,732 2,873 (8,120)
Unrealized (loss) gain on mortgage-backed securities and derivatives (10,965) (10,292) 20,236 27,224 27,069
Loan servicing fees 21,099 16,970 14,163 11,701 9,822
Amortization (15,055) (12,832) (10,671) (9,750) (7,755)
Impairment reserve recovery (provision) 11,577 (20,398) 5,467 (5,013) (4,807)
--------- --------- --------- --------- ---------
Net loan servicing fees (loss) 17,621 (16,260) 8,959 (3,062) (2,740)
--------- --------- --------- --------- ---------
Other non-interest income 1,585 2,543 1,466 1,480 3,349
--------- --------- --------- --------- ---------
Non-interest income 157,975 158,365 115,307 105,193 78,392
--------- --------- --------- --------- ---------
Non-interest expenses:
Salaries, commissions and benefits, net 101,378 94,859 68,475 60,588 46,482
Occupancy and equipment 15,328 14,397 12,671 11,556 9,984
Data processing and communications 6,479 5,957 5,950 5,869 3,745
Office supplies and expenses 5,024 5,657 4,429 4,385 3,012
Marketing and promotion 5,104 5,126 4,130 3,391 2,610
Travel and entertainment 4,670 5,427 3,928 5,106 3,620
Professional fees 3,744 3,432 3,470 5,378 2,524
Other 7,360 6,843 6,869 6,333 6,363
--------- --------- --------- --------- ---------
Non-interest expenses 149,087 141,698 109,922 102,606 78,340
--------- --------- --------- --------- ---------
Net income before income tax expense (benefit) 55,757 61,649 54,029 49,370 32,945
Income tax expense (benefit) 2,549 (3,851) -- 755 (9,998)
--------- --------- --------- --------- ---------
Net income $ 53,208 $ 65,500 $ 54,029 $ 48,615 $ 42,943
========= ========= ========= ========= =========
Dividends on preferred stock 3,304 3,304 3,305 2,340 1,648
--------- --------- --------- --------- ---------
Net income available to common shareholders $ 49,904 $ 62,196 $ 50,724 $ 46,275 $ 41,295
========= ========= ========= ========= =========
Per share data:
Basic $ 1.10 $ 1.54 $ 1.26 $ 1.15 $ 1.03
Diluted $ 1.09 $ 1.52 $ 1.24 $ 1.14 $ 1.02
Weighted average number of shares - basic 45,174 40,384 40,308 40,216 40,145
Weighted average number of shares - diluted 45,669 40,886 40,811 40,737 40,605
Note:
(1) - Adjusted as if the Company's fourth quarter 2004 securitization had
qualified for SFAS 140 sale accounting treatment in the fourth quarter of 2004.
- 31 -
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended
---------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
--------------------------------------- ----------------------------------------
(1) (1)
GAAP Adjustments As Adjusted GAAP Adjustments As Adjusted
---------- ------------- ------------- ----------- ------------- -------------
Net interest income:
Interest income $ 146,894 $ (26,925) $ 119,969 $ 115,957 $ (2,172) $ 113,785
Interest expense (88,091) 16,766 (71,325) (68,777) 1,775 (67,002)
--------- --------- --------- --------- --------- ---------
Net interest income 58,803 (10,159) 48,644 47,180 (397) 46,783
--------- --------- --------- --------- --------- ---------
Non-interest income:
Gain on sales of mortgage loans 35,253 -- 35,253 36,004 -- 36,004
Gain on sales of current period securitized
mortgage loans 69,919 (25,258) 44,661 -- 40,674 40,674
Gain on sales of mortgage-backed securities
and derivatives 6,132 (1,400) 4,732 2,873 -- 2,873
Unrealized gain (loss) on mortgage-backed
securities and derivatives 57,499 (37,263) 20,236 (6,579) 33,803 27,224
Loan servicing fees 11,312 2,851 14,163 11,701 -- 11,701
Amortization (8,501) (2,170) (10,671) (9,750) -- (9,750)
Impairment reserve recovery (provision) 3,419 2,048 5,467 (2,284) (2,729) (5,013)
--------- --------- --------- --------- --------- ---------
Net loan servicing fees (loss) 6,230 2,729 8,959 (333) (2,729) (3,062)
--------- --------- --------- --------- --------- ---------
Other non-interest income 1,466 -- 1,466 1,480 -- 1,480
--------- --------- --------- --------- --------- ---------
Non-interest income 176,499 (61,192) 115,307 33,445 71,748 105,193
--------- --------- --------- --------- --------- ---------
Non-interest expenses:
Salaries, commissions and benefits, net 68,475 -- 68,475 60,588 -- 60,588
Occupancy and equipment 12,671 -- 12,671 11,556 -- 11,556
Data processing and communications 5,950 -- 5,950 5,869 -- 5,869
Office supplies and expenses 4,429 -- 4,429 4,385 -- 4,385
Marketing and promotion 4,130 -- 4,130 3,391 -- 3,391
Travel and entertainment 3,928 -- 3,928 5,106 -- 5,106
Professional fees 3,470 -- 3,470 5,378 -- 5,378
Other 6,869 -- 6,869 6,333 -- 6,333
--------- --------- --------- --------- --------- ---------
Non-interest expenses 109,922 -- 109,922 102,606 -- 102,606
--------- --------- --------- --------- --------- ---------
Net income before income tax expense 125,380 (71,351) 54,029 (21,981) 71,351 49,370
Income tax expense -- -- -- 755 -- 755
--------- --------- --------- --------- --------- ---------
Net income $ 125,380 $ (71,351) $ 54,029 $ (22,736) $ 71,351 $ 48,615
========= ========= ========= ========= ========= =========
Dividends on preferred stock 3,305 -- 3,305 2,340 -- 2,340
--------- --------- --------- --------- --------- ---------
Net income available to common shareholders $ 122,075 $ (71,351) $ 50,724 $ (25,076) $ 71,351 $ 46,275
========= ========= ========= ========= ========= =========
Per share data:
Basic $ 3.03 $ (1.77) $ 1.26 $ (0.62) $ 1.77 $ 1.15
Diluted $ 2.99 $ (1.75) $ 1.24 $ (0.62) $ 1.75 $ 1.14
Weighted average number of shares - basic 40,308 40,308 40,308 40,216 40,216 40,216
Weighted average number of shares - diluted 40,811 40,811 40,811 40,737 40,737 40,737
Note:
(1) - Adjustments reflect the net effect on the period presented to reconcile
the Company's operating statistics, results of operations and financial
condition prepared in accordance with GAAP to the amounts adjusted as if the
Company's fourth quarter 2004 securitization had qualified for SFAS 140 sale
accounting treatment in the fourth quarter of 2004.
- 32 -
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Nine Months Ended September 30,
--------------------------------------------------------------
2005 2005 2005 2004
------------- ------------ ------------ ------------
(1) As
GAAP Adjustments Adjusted
------------- ------------ ------------ ------------
Net interest income:
Interest income $ 462,250 $ (26,925) $ 435,325 $ 198,347
Interest expense (311,596) 16,766 (294,830) (132,596)
------------ ------------ ------------ ------------
Net interest income 150,654 (10,159) 140,495 65,751
------------ ------------ ------------ ------------
Non-interest income:
Gain on sales of mortgage loans 236,288 -- 236,288 98,095
Gain on sales of current period securitized mortgage loans 194,256 (25,258) 168,998 40,120
Gain (loss) on sales of mortgage-backed securities and derivatives 12,868 (1,400) 11,468 (2,810)
Unrealized gain (loss) on mortgage-backed securities and derivatives 36,242 (37,263) (1,021) 82,041
Loan servicing fees 49,381 2,851 52,232 28,870
Amortization (36,388) (2,170) (38,558) (22,865)
Impairment reserve provision (5,402) 2,048 (3,354) (10,139)
------------ ------------ ------------ ------------
Net loan servicing fees (loss) 7,591 2,729 10,320 (4,134)
------------ ------------ ------------ ------------
Other non-interest income 5,594 -- 5,594 5,553
------------ ------------ ------------ ------------
Non-interest income 492,839 (61,192) 431,647 218,865
------------ ------------ ------------ ------------
Non-interest expenses:
Salaries, commissions and benefits, net 264,712 -- 264,712 128,805
Occupancy and equipment 42,396 -- 42,396 26,086
Data processing and communications 18,386 -- 18,386 10,296
Office supplies and expenses 15,110 -- 15,110 9,345
Marketing and promotion 14,360 -- 14,360 7,018
Travel and entertainment 14,025 -- 14,025 9,084
Professional fees 10,646 -- 10,646 6,781
Other 21,072 -- 21,072 15,883
------------ ------------ ------------ ------------
Non-interest expenses 400,707 -- 400,707 213,298
------------ ------------ ------------ ------------
Net income before income tax benefit 242,786 (71,351) 171,435 71,318
Income tax benefit (1,302) -- (1,302) (26,330)
------------ ------------ ------------ ------------
Net income $ 244,088 $ (71,351) $ 172,737 $ 97,648
============ ============ ============ ============
Dividends on preferred stock 9,913 -- 9,913 1,648
------------ ------------ ------------ ------------
Net income available to common shareholders $ 234,175 $ (71,351) $ 162,824 $ 96,000
============ ============ ============ ============
Per share data:
Basic $ 5.58 $ (1.70) $ 3.88 $ 2.61
Diluted $ 5.51 $ (1.68) $ 3.83 $ 2.58
Weighted average number of shares - basic 41,973 41,973 41,973 36,737
Weighted average number of shares - diluted 42,471 42,471 42,471 37,198
Note:
(1) - Adjustments reflect the net effect on the period presented to reconcile
the Company's operating statistics, results of operations and financial
condition prepared in accordance with GAAP to the amounts adjusted as if the
Company's fourth quarter 2004 securitization had qualified for SFAS 140 sale
accounting treatment in the fourth quarter of 2004.
- 33 -
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
MORTGAGE-BACKED SECURITIES HOLDINGS SEGMENT
(In thousands)
Nine Months Ended September 30,
--------------------------------------------------------------
2005 2005 2005 2004
------------- ------------ ------------ ------------
(1) As
GAAP Adjustments Adjusted
------------- ------------ ------------ ------------
Net interest income:
Interest income $ 219,906 $ 19,968 $ 239,874 $ 123,194
Interest expense (154,168) -- (154,168) (82,026)
------------ ------------ ------------ ------------
Net interest income 65,738 19,968 85,706 41,168
------------ ------------ ------------ ------------
Non-interest income:
Gain on sales of mortgage loans -- -- -- --
Gain on sales of current period securitized mortgage loans -- -- -- --
Gain on sales of mortgage-backed securities and derivatives 6,725 (1,400) 5,325 1,578
Unrealized (loss) gain on mortgage-backed securities and derivatives (41,496) (19,083) (60,579) 14,385
Loan servicing fees -- -- -- --
Amortization -- -- -- --
Impairment reserve recovery (provision) -- -- -- --
------------ ------------ ------------ ------------
Net loan servicing fees -- -- -- --
------------ ------------ ------------ ------------
Other non-interest income -- -- -- --
------------ ------------ ------------ ------------
Non-interest income (34,771) (20,483) (55,254) 15,963
------------ ------------ ------------ ------------
Non-interest expenses:
Salaries, commissions and benefits, net 6,057 -- 6,057 159
Occupancy and equipment 5 -- 5 5
Data processing and communications 64 -- 64 11
Office supplies and expenses 5 -- 5 --
Marketing and promotion 2 -- 2 --
Travel and entertainment 5 -- 5 2
Professional fees 2,829 -- 2,829 251
Other 6,331 -- 6,331 5,109
------------ ------------ ------------ ------------
Non-interest expenses 15,298 -- 15,298 5,537
------------ ------------ ------------ ------------
Net income before income tax expense (benefit) 15,669 (515) 15,154 51,594
Income tax expense (benefit) -- -- -- --
------------ ------------ ------------ ------------
Net income $ 15,669 $ (515) $ 15,154 $ 51,594
============ ============ ============ ============
Note:
(1) - Adjustments reflect the net effect on the period presented to reconcile
the Company's operating statistics, results of operations and financial
condition prepared in accordance with GAAP to the amounts adjusted as if the
Company's fourth quarter 2004 securitization had qualified for SFAS 140 sale
accounting treatment in the fourth quarter of 2004.
- 34 -
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
LOAN ORIGINATION SEGMENT
(In thousands)
Nine Months Ended September 30,
--------------------------------------------------------------
2005 2005 2005 2004
------------- ------------ ------------ ------------
(1) As
GAAP Adjustments Adjusted
------------- ------------ ------------ ------------
Net interest income:
Interest income $ 242,344 $ (46,893) $ 195,451 $ 75,153
Interest expense (152,799) 16,766 (136,033) (47,736)
------------ ------------ ------------ ------------
Net interest income 89,545 (30,127) 59,418 27,417
------------ ------------ ------------ ------------
Non-interest income:
Gain on sales of mortgage loans 236,288 -- 236,288 98,095
Gain on sales of current period securitized mortgage loans 194,256 (25,258) 168,998 40,120
Gain (loss) on sales of mortgage-backed securities and derivatives 6,143 -- 6,143 (4,388)
Unrealized gain on mortgage-backed securities and derivatives 77,738 (18,180) 59,558 67,656
Loan servicing fees -- -- -- --
Amortization -- -- -- --
Impairment reserve recovery (provision) -- -- -- --
------------ ------------ ------------ ------------
Net loan servicing fees -- -- -- --
------------ ------------ ------------ ------------
Other non-interest income 3,722 -- 3,722 5,553
------------ ------------ ------------ ------------
Non-interest income 518,147 (43,438) 474,709 207,036
------------ ------------ ------------ ------------
Non-interest expenses:
Salaries, commissions and benefits, net 250,179 -- 250,179 125,053
Occupancy and equipment 41,645 -- 41,645 25,691
Data processing and communications 17,953 -- 17,953 10,068
Office supplies and expenses 13,955 -- 13,955 8,525
Marketing and promotion 14,281 -- 14,281 7,013
Travel and entertainment 13,589 -- 13,589 8,947
Professional fees 7,060 -- 7,060 6,060
Other 9,439 -- 9,439 8,044
------------ ------------ ------------ ------------
Non-interest expenses 368,101 -- 368,101 199,401
------------ ------------ ------------ ------------
Net income before income tax expense (benefit) 239,591 (73,565) 166,026 35,052
Income tax expense (benefit) 3,777 -- 3,777 (20,267)
------------ ------------ ------------ ------------
Net income $ 235,814 $ (73,565) $ 162,249 $ 55,319
============ ============ ============ ============
Note:
(1) - Adjustments reflect the net effect on the period presented to reconcile
the Company's operating statistics, results of operations and financial
condition prepared in accordance with GAAP to the amounts adjusted as if the
Company's fourth quarter 2004 securitization had qualified for SFAS 140 sale
accounting treatment in the fourth quarter of 2004.
- 35 -
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
LOAN SERVICING SEGMENT
(In thousands)
Nine Months Ended September 30,
--------------------------------------------------------------
2005 2005 2005 2004
------------- ------------ ------------ ------------
(1) As
GAAP Adjustments Adjusted
------------- ------------ ------------ ------------
Net interest income:
Interest income $ -- $ -- $ -- $ --
Interest expense (4,629) -- (4,629) (2,834)
------------ ------------ ------------ ------------
Net interest income (4,629) -- (4,629) (2,834)
------------ ------------ ------------ ------------
Non-interest income:
Gain on sales of mortgage loans -- -- -- --
Gain on sales of current period securitized mortgage loans -- -- -- --
Gain (loss) on sales of mortgage-backed securities and derivatives -- -- -- --
Unrealized gain (loss) on mortgage-backed securities and derivatives -- -- -- --
Loan servicing fees 49,381 2,851 52,232 28,870
Amortization (36,388) (2,170) (38,558) (22,865)
Impairment reserve provision (5,402) 2,048 (3,354) (10,139)
------------ ------------ ------------ ------------
Net loan servicing fees (loss) 7,591 2,729 10,320 (4,134)
------------ ------------ ------------ ------------
Other non-interest income 1,872 -- 1,872 --
------------ ------------ ------------ ------------
Non-interest income 9,463 2,729 12,192 (4,134)
------------ ------------ ------------ ------------
Non-interest expenses:
Salaries, commissions and benefits, net 8,476 -- 8,476 3,593
Occupancy and equipment 746 -- 746 390
Data processing and communications 369 -- 369 217
Office supplies and expenses 1,150 -- 1,150 820
Marketing and promotion 77 -- 77 5
Travel and entertainment 431 -- 431 135
Professional fees 757 -- 757 470
Other 5,302 -- 5,302 2,730
------------ ------------ ------------ ------------
Non-interest expenses 17,308 -- 17,308 8,360
------------ ------------ ------------ ------------
Net income before income tax benefit (12,474) 2,729 (9,745) (15,328)
Income tax benefit (5,079) -- (5,079) (6,063)
------------ ------------ ------------ ------------
Net income $ (7,395) $ 2,729 $ (4,666) $ (9,265)
============ ============ ============ ============
Note:
(1) - Adjustments reflect the net effect on the period presented to reconcile
the Company's operating statistics, results of operations and financial
condition prepared in accordance with GAAP to the amounts adjusted as if the
Company's fourth quarter 2004 securitization had qualified for SFAS 140 sale
accounting treatment in the fourth quarter of 2004.
- 36 -
Financial Condition
Total assets at September 30, 2005 were $14.1 billion, a $2.5 billion increase
from $11.6 billion at December 31, 2004, and an increase of $4.5 billion
compared to the $9.6 billion of total assets as adjusted at December 31, 2004.
The increase in total assets primarily reflects an increase in mortgage-backed
securities of $3.2 billion and an increase in mortgage loans held for investment
of $1.4 billion, partly offset by a decrease in mortgage loans held for sale of
$3.0 billion. Total assets at December 31, 2004 includes the full $3.5 billion
amount of the loans held for sale in the Q4-04 Securitization and excludes $1.5
billion of mortgage-backed securities that the Company retained in connection
with the transaction. At September 30, 2005, 65.4% of our total assets were
mortgage-backed securities, 13.5% were mortgage loans held for sale and 10.3%
were mortgage loans held for investment, compared to 52.1%, 42.0% and 0.0%,
respectively, at December 31, 2004 and 79.0%, 13.7% and 0.0%, respectively, at
December 31, 2004 as adjusted.
The following table summarizes our mortgage-backed securities owned at September
30, 2005, December 31, 2004 and December 31, 2004 as adjusted, classified by
type of issuer and by ratings categories:
September 30, 2005
-------------------------------------------------------------------------------------------
Trading Securities Securities Available for Sale Total
------------------------------- ------------------------------ ----------------------------
Carrying Carrying Carrying
Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix
---------- ------------- -------- ------------- -------- -------------
(Dollars in thousands)
Agency securities $ -- --% $ 164,971 3.6% $ 164,971 1.8%
Privately issued:
AAA 3,909,617 85.7 4,446,652 95.7 8,356,269 90.8
AA 47,235 1.0 11,252 0.2 58,487 0.6
A 169,337 3.7 8,978 0.2 178,315 1.9
BBB 185,094 4.1 4,211 0.1 189,305 2.1
Unrated 252,564 5.5 8,261 0.2 260,825 2.8
---------- ----- ---------- ----- ---------- -----
Total $4,563,847 100.0% $4,644,325 100.0% $9,208,172 100.0%
========== ===== ========== ===== ========== =====
December 31, 2004
-------------------------------------------------------------------------------------------
Trading Securities Securities Available for Sale Total
------------------------------- ------------------------------ ----------------------------
Carrying Carrying Carrying
Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix
---------- ------------- -------- ------------- -------- -------------
(Dollars in thousands)
Agency securities $ -- --% $ 612,513 14.5% $ 612,513 10.2%
Privately issued:
AAA 1,634,702 90.6 3,542,772 84.1 5,177,474 86.0
AA -- -- 16,043 0.4 16,043 0.3
A 58,480 3.2 15,750 0.4 74,230 1.2
BBB 58,153 3.2 7,910 0.2 66,063 1.1
Unrated 54,591 3.0 15,952 0.4 70,543 1.2
---------- ----- ---------- ----- ---------- -----
Total $1,805,926 100.0% $4,210,940 100.0% $6,016,866 100.0%
========== ===== ========== ===== ========== =====
- 37 -
December 31, 2004 (as adjusted)
-------------------------------------------------------------------------------------------
Trading Securities Securities Available for Sale Total
------------------------------- ------------------------------ ----------------------------
Carrying Carrying Carrying
Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix
---------- ------------- -------- ------------- -------- -------------
(Dollars in thousands)
Agency securities $ -- --% $ 612,513 14.5% $ 612,513 8.1%
Privately issued:
AAA 3,025,975 89.3 3,542,772 84.1 6,568,747 86.4
AA -- -- 16,043 0.4 16,043 0.2
A 129,840 3.8 15,750 0.4 145,590 1.9
BBB 105,567 3.1 7,910 0.2 113,477 1.5
Unrated 129,471 3.8 15,952 0.4 145,423 1.9
---------- ----- ---------- ----- ---------- -----
Total $3,390,853 100.0% $4,210,940 100.0% $7,601,793 100.0%
========== ===== ========== ===== ========== =====
The following table classifies our mortgage-backed securities portfolio by type
of interest rate index at September 30, 2005, December 31, 2004 and December 31,
2004 as adjusted:
September 30, 2005
-------------------------------------------------------------------------------------------
Trading Securities Securities Available for Sale Total
------------------------------- ------------------------------ ----------------------------
Carrying Carrying Carrying
Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix
---------- ------------- -------- ------------- -------- -------------
(Dollars in thousands)
Index:
One-month LIBOR $ 516,148 11.3% $ 74,711 1.6% $ 590,859 6.4%
Six-month LIBOR 3,603,106 79.0 2,209,179 47.6 5,812,285 63.1
One-year LIBOR 383,812 8.4 2,080,197 44.8 2,464,009 26.8
One-year constant maturity
treasury 510 0.0 280,238 6.0 280,748 3.0
One-year monthly treasury
average 60,271 1.3 -- -- 60,271 0.7
---------- ----- ---------- ----- ---------- -----
Total $4,563,847 100.0% $4,644,325 100.0% $9,208,172 100.0%
========== ===== ========== ===== ========== =====
December 31, 2004
-------------------------------------------------------------------------------------------
Trading Securities Securities Available for Sale Total
------------------------------- ------------------------------ ----------------------------
Carrying Carrying Carrying
Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix
---------- ------------- -------- ------------- -------- -------------
(Dollars in thousands)
Index:
One-month LIBOR $ 86,199 4.8% $ 114,149 2.7% $ 200,348 3.3%
Six-month LIBOR 829,413 45.9 2,385,582 56.7 3,214,995 53.4
One-year LIBOR 890,314 49.3 1,231,392 29.2 2,121,706 35.3
One-year constant maturity
treasury -- -- 479,817 11.4 479,817 8.0
---------- ----- ---------- ----- ---------- -----
Total $1,805,926 100.0% $4,210,940 100.0% $6,016,866 100.0%
========== ===== ========== ===== ========== =====
- 38 -
December 31, 2004 (as adjusted)
-------------------------------------------------------------------------------------------
Trading Securities Securities Available for Sale Total
------------------------------- ------------------------------ ----------------------------
Carrying Carrying Carrying
Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix
---------- ------------- -------- ------------- -------- -------------
(Dollars in thousands)
Index:
One-month LIBOR $ 198,201 5.8% $ 114,149 2.7% $ 312,350 4.1%
Six-month LIBOR 2,266,802 66.9 2,385,582 56.7 4,652,384 61.2
One-year LIBOR 925,850 27.3 1,231,392 29.2 2,157,242 28.4
One-year constant maturity
treasury -- -- 479,817 11.4 479,817 6.3
---------- ----- ---------- ----- ---------- -----
Total $3,390,853 100.0% $4,210,940 100.0% $7,601,793 100.0%
========== ===== ========== ===== ========== =====
The following table classifies our mortgage-backed securities portfolio by
product type at September 30, 2005, December 31, 2004 and December 31, 2004 as
adjusted:
September 30, 2005
-------------------------------------------------------------------------------------------
Trading Securities Securities Available for Sale Total
------------------------------- ------------------------------ ----------------------------
Carrying Carrying Carrying
Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix
---------- ------------- -------- ------------- -------- -------------
(Dollars in thousands)
Product:
ARMs less than 3 years $ 857,415 18.8% $ 597,387 12.9% $1,454,802 15.8%
3/1 Hybrid ARM 217,452 4.8 302,752 6.5 520,204 5.6
5/1 Hybrid ARM 3,488,980 76.4 3,744,186 80.6 7,233,166 78.6
---------- ----- ---------- ----- ---------- -----
Total $4,563,847 100.0% $4,644,325 100.0% $9,208,172 100.0%
========== ===== ========== ===== ========== =====
December 31, 2004
-------------------------------------------------------------------------------------------
Trading Securities Securities Available for Sale Total
------------------------------- ------------------------------ ----------------------------
Carrying Carrying Carrying
Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix
---------- ------------- -------- ------------- -------- -------------
(Dollars in thousands)
Product:
ARMs less than 3 years $ 149,040 8.3% $ 954,794 22.7% $1,103,834 18.3%
3/1 Hybrid ARM 381,831 21.1 488,696 11.6 870,527 14.5
5/1 Hybrid ARM 1,275,055 70.6 2,767,450 65.7 4,042,505 67.2
---------- ----- ---------- ----- ---------- -----
Total $1,805,926 100.0% $4,210,940 100.0% $6,016,866 100.0%
========== ===== ========== ===== ========== =====
- 39 -
December 31, 2004 (as adjusted)
-------------------------------------------------------------------------------------------
Trading Securities Securities Available for Sale Total
------------------------------- ------------------------------ ----------------------------
Carrying Carrying Carrying
Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix
---------- ------------- -------- ------------- -------- -------------
(Dollars in thousands)
Product:
ARMs less than 3 years $ 342,694 10.1% $ 954,794 22.7% $1,297,488 17.1%
3/1 Hybrid ARM 381,831 11.3 488,696 11.6 870,527 11.5
5/1 Hybrid ARM 2,666,328 78.6 2,767,450 65.7 5,433,778 71.4
---------- ----- ---------- ----- ---------- -----
Total $3,390,853 100.0% $4,210,940 100.0% $7,601,793 100.0%
========== ===== ========== ===== ========== =====
During the three months ended September 30, 2005, we purchased $2.4 billion of
mortgage-backed securities and added $1.2 billion of self-originated
mortgage-backed securities to our portfolio.
During the nine months ended September 30, 2005, we purchased $3.4 billion of
mortgage-backed securities and added $4.5 billion of self-originated
mortgage-backed securities to our portfolio, including $1.5 billion from the
Q4-04 Securitization.
During the three and nine months ended September 30, 2005, we sold $521.3
million and $2.8 billion of mortgage-backed securities, respectively.
Results of Operations - Comparison of the Three Months Ended September 30, 2005
and 2004
Overview
Net income for the three months ended September 30, 2005 was $53.2 million
compared to $42.9 million for the three months ended September 30, 2004, an
increase of $10.3 million, or 23.9%. The increase in net income was the result
of a $79.6 million increase in non-interest income and a $14.0 million increase
in net interest income, partly offset by a $70.7 million increase in
non-interest expenses and a $12.6 million increase in income tax expense. The
$79.6 million increase in non-interest income consists of a $95.3 million
increase in gain on sales of mortgage loans and a $20.4 million increase in net
loan servicing fees, offset by a $23.8 million decrease in realized and
unrealized gains on mortgage-backed securities and derivatives, a $10.5 million
decrease in gain on sales of current period securitized mortgage loans and a
$1.8 million decrease in other non-interest income.
Net Interest Income
The following tables present the average balances for our interest-earning
assets, interest-bearing liabilities, corresponding annualized effective rates
of interest and the related interest income or expense for the three months
ended September 30, 2005 compared to the three months ended September 30, 2004:
- 40 -
(Dollars in thousands) Three Months Ended September 30,
---------------------------------------------------------------------------------------
2005 2004
------------------------------------------- ------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------ ----------- ---------- ----------- ----------- ------------
Interest earning assets:
Mortgage-backed securities, net (1) $ 7,101,548 $ 84,560 4.76% $ 7,179,816 $ 66,856 3.72%
Mortgage loans 5,665,768 95,478 6.74% 2,422,596 27,442 4.53%
----------- ----------- ----------- -----------
12,767,316 180,038 5.64% 9,602,412 94,298 3.93%
----------- ----------- ----------- -----------
Interest bearing liabilities:
Warehouse lines of credit (2) 2,689,507 40,099 5.83% 1,110,441 12,659 4.56%
Commercial paper 2,787,060 26,088 3.66% 1,300,726 5,400 1.66%
Reverse repurchase agreements (3) 6,529,138 62,945 3.84% 6,776,787 42,124 2.47%
Trust preferred securities 85,870 1,584 7.22% -- -- --
Notes payable 207,357 2,453 4.63% 119,536 1,222 4.09%
----------- ----------- ----------- -----------
12,298,932 133,169 4.24% 9,307,490 61,405 2.64%
----------- ----------- ----------- -----------
Net interest income $ 46,869 $ 32,893
=========== ===========
Interest rate spread 1.40% 1.28%
==== ====
Net interest margin 1.56% 1.37%
==== ====
(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 $4.3 million of net interest expense on interest rate swap
agreements for the 2004 period.
(3) Includes $3.4 million and $13.2 million of net interest expense on interest
rate swap agreements for the 2005 and 2004 periods, respectively.
The following table presents the effects of changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities on
our interest income and interest expense for the three months ended September
30, 2005 compared to the three months ended September 30, 2004:
Three Months Ended September 30, 2005
Compared to
(In thousands) Three Months Ended September 30, 2004
---------------------------------------
Average Average
Rate Volume Total
------- ------- -------
Mortgage-backed securities, net $22,649 $(4,945) $17,704
Mortgage loans 18,167 49,869 68,036
------- ------- -------
Interest income 40,816 44,924 85,740
------- ------- -------
Warehouse lines of credit 4,506 22,934 27,440
Commercial paper 10,621 10,067 20,688
Reverse repurchase agreements 30,949 (10,128) 20,821
Trust preferred securities -- 1,584 1,584
Notes payable 188 1,043 1,231
------- ------- -------
Interest expense 46,264 25,500 71,764
------- ------- -------
Net interest income $(5,448) $19,424 $13,976
======= ======= =======
--------------------------------------------------------------------------------
- 41 -
Interest Income: Interest income on mortgage-backed securities for the three
months ended September 30, 2005 was $84.6 million, compared to $66.9 million for
the three months ended September 30, 2004, a $17.7 million, or 26.5%, increase.
This increase primarily reflects higher interest rates in 2005 versus 2004.
Interest income on our mortgage loans for the three months ended September 30,
2005 was $95.5 million, compared to $27.5 million for the three months ended
September 30, 2004, an increase of $68.0 million, or 247.9%. The increase in
interest income on mortgage loans was primarily the result of an increase in
average volume in 2005 versus 2004 due to higher mortgage origination volume.
Interest Expense: We fund our loan inventory primarily through borrowing
facilities with several mortgage warehouse lenders and through a $3.3 billion
commercial paper, or secured liquidity note ("SLN"), program. Interest expense
on warehouse lines of credit for the three months ended September 30, 2005 was
$40.1 million, compared to interest expense for the three months ended September
30, 2004 of $12.7 million, a $27.4 million increase. The increase in warehouse
lines of credit interest expense was primarily the result of an increase in
average volume due to higher mortgage origination volume and an increase in
average rate due to generally higher short-term interest rates in 2005 versus
2004. In May 2004, we formed a wholly-owned special purpose entity for the
purpose of issuing commercial paper in the form of SLNs to finance certain
portions of our mortgage loans held for sale. Interest expense on commercial
paper for the three months ended September 30, 2005 was $26.1 million, versus
$5.4 million for the three months ended September 30, 2004, a $20.7 million
increase. By funding a portion of our loan inventory through the commercial
paper program, we were able to reduce our average funding cost versus borrowing
exclusively through warehouse lenders.
We have entered into reverse repurchase agreements, a form of collateralized
short-term borrowing, with fourteen different financial institutions and, as of
September 30, 2005, have borrowed funds from eight of these counterparties. We
borrow funds under these arrangements based on the fair value of our
mortgage-backed securities. Total interest expense on reverse repurchase
agreements for the three months ended September 30, 2005 was $62.9 million,
compared to interest expense for the three months ended September 30, 2004 of
$42.1 million, a $20.8 million increase. The increase in reverse repurchase
agreements interest expense was primarily the result of higher short-term
interest rates in 2005 versus 2004.
Gain on Mortgage Loans, Mortgage-Backed Securities and Derivatives
Gain on Sales and Securitizations of Mortgage Loans: Gain on sales and
securitizations of mortgage loans in our Loan Origination segment during the
three months ended September 30, 2005 totaled $176.5 million, or 1.42% of
mortgage loans sold or securitized, compared to $84.2 million, or 1.50%, of
mortgage loans sold or securitized during the three months ended September 30,
2004. The increase primarily reflects a $6.8 billion increase in mortgage loans
sold or securitized to $12.4 billion in the third quarter of 2005 from $5.6
billion in the third quarter of 2004.
The following table presents the components of gain on sales and securitizations
of mortgage loans in our Loan Origination segment during the three months ended
September 30, 2005 and 2004:
Gains on Sales and Securitizations of Mortgage Loans
Three Months Ended September 30,
----------------------------------
2005 2004
---------------- --------------
(Dollars in thousands)
Gain on sales of mortgage loans $ 123,658 $ 28,373
Gain on sales of current period securitized mortgage loans 19,960 30,461
Gain (loss) on sales of free standing derivatives 300 (3,510)
Unrealized gain on self-originated mortgage-backed securities retained in
period 22,604 28,853
Unrealized gain on free standing derivatives 10,012 --
------------ ------------
Total gain on sales and securitizations of mortgage loans $ 176,534 $ 84,177
============ ============
Total mortgage loans sold or securitized $ 12,397,436 $ 5,613,060
============ ============
Total gain on sales and securitizations of mortgage loans as a % of total
mortgage loans sold or securitized 1.42% 1.50%
- 42 -
Portfolio Gains and Losses: During the three months ended September 30, 2005,
portfolio losses in our Mortgage-Backed Securities Holdings segment were $37.8
million compared to a portfolio loss of $6.4 million during the three months
ended September 30, 2004. The increase in portfolio losses in the third quarter
of 2005 compared to the third quarter of 2004 was primarily the result of a
$41.8 million net increase in unrealized losses on mortgage-backed securities
and free standing derivatives, partly offset by a $10.4 million increase in gain
on sales of mortgage-backed securities.
The following table presents the components of portfolio gains and losses in our
Mortgage-Backed Securities Holdings segment during the three months ended
September 30, 2005 and 2004:
Portfolio Gains and Losses
Three Months Ended September 30,
--------------------------------
2005 2004
-------- --------
(In thousands)
Gain (loss) on sales of mortgage-backed securities $ 5,816 $ (4,610)
Unrealized (loss) gain on mortgage-backed securities (60,211) 18,344
Unrealized gain (loss) on free standing derivatives 16,630 (20,128)
-------- --------
Net unrealized loss on mortgage-backed securities and free standing
derivatives (43,581) (1,784)
-------- --------
Total portfolio loss $(37,765) $ (6,394)
======== ========
The following table presents the components of gains and losses on sales of
mortgage-backed securities and derivatives shown in the Company's consolidated
statements of income:
Components of Gains and Losses on Sales of Mortgage-backed Securities and
Derivatives
Three Months Ended September 30,
--------------------------------
2005 2004
-------- --------
(In thousands)
Gain (loss) on sales of mortgage-backed securities $ 5,816 $ (4,610)
Gain (loss) on sales of free standing interest rate swap derivatives 300 (3,510)
-------- --------
Gain (loss) on sales of mortgage-backed securities and derivatives $ 6,116 $ (8,120)
======== ========
The following table presents the components of unrealized gains and losses on
mortgage-backed securities and derivatives shown in the Company's consolidated
statements of income:
Components of Unrealized Gains and Losses on Mortgage-backed Securities and
Derivatives
Three Months Ended September 30,
--------------------------------
2005 2004
-------- --------
(In thousands)
Unrealized gain on self-originated mortgage-backed securities
retained in period $ 22,604 $ 28,853
Unrealized (loss) gain on mortgage-backed securities (60,211) 18,344
Unrealized gain (loss) on free standing derivatives 26,642 (20,128)
-------- --------
Unrealized (loss) gain on mortgage-backed securities and
derivatives $(10,965) $ 27,069
======== ========
Net Loan Servicing Fees
Net loan servicing fees were a gain of $17.6 million for the three months ended
September 30, 2005 compared to a loss of $2.7 million for the three months ended
September 30, 2004.
- 43 -
Loan Servicing Fees: Loan servicing fees increased to $21.1 million for the
three months ended September 30, 2005 from $9.8 million for the three months
ended September 30, 2004, an increase of $11.3 million, or 114.8%. Included in
loan servicing fees are gains on Ginnie Mae early buy-out sales of $0.4 million
for the three months ended September 30, 2005 compared to $0.7 million for the
three months ended September 30, 2004, a decrease of $0.3 million, or 38.9%.
This decrease partly offset the increase in loan servicing fees in the third
quarter of 2005 versus the third quarter of 2004 as a result of an increase in
loans serviced for others.
Amortization of MSRs: Amortization of MSRs increased to $15.1 million for the
three months ended September 30, 2005 from $7.8 million for the three months
ended September 30, 2004, an increase of $7.3 million, or 94.1%. The increase in
amortization was due to a higher average servicing portfolio in the third
quarter of 2005 versus the third quarter of 2004.
Impairment Recovery (Provision) of MSRs: We recognized a temporary impairment
recovery of $11.6 million for the three months ended September 30, 2005 versus a
temporary impairment provision of $4.8 million for the three months ended
September 30, 2004, resulting in an increase in net loan servicing fees of $16.4
million. The decrease in impairment provision in the three months ended
September 30, 2005 was due to higher interest rates, which was attributable to a
subsequent decrease in estimated future prepayment speeds versus the initial
estimated future prepayment speeds used to value the MSR upon securitization.
The following table presents net loan servicing fees and losses shown in the
Company's consolidated statements of income:
Three Months Ended September 30,
--------------------------------
2005 2004
-------- --------
(In thousands)
Loan servicing fees $ 21,099 $ 9,822
Amortization (15,055) (7,755)
Impairment reserve recovery (provision) 11,577 (4,807)
-------- --------
Net loan servicing fees (loss) $ 17,621 $ (2,740)
======== ========
Other Non-Interest Income
Other non-interest income totaled $1.6 million for the three months ended
September 30, 2005 compared to $3.4 million for the three months ended September
30, 2004. For the three months ended September 30, 2005, other non-interest
income primarily includes reinsurance premiums earned totaling approximately
$0.8 million, rental income of $0.4 million and revenue from title services of
$0.3 million. For the three months ended September 30, 2004, other non-interest
income primarily includes revenue from a legal settlement of $1.5 million,
reinsurance premiums earned totaling approximately $0.6 million, rental income
of $0.5 million, and revenue from title services of $0.2 million.
Non-Interest Expenses
Our non-interest expenses for the three months ended September 30, 2005 were
$149.1 million compared to $78.3 million for the three months ended September
30, 2004, an increase of $70.8 million, or 90.3%. The increase primarily
reflects a $64.6 million rise in our Loan Origination segment non-interest
expenses to $138.3 million, or 1.01% of total loan originations in the third
quarter of 2005, from $73.7 million, or 1.39% of total loan originations in the
third quarter of 2004.
Our operating expenses represent costs that are not eligible to be added to the
book value of the loans because they are not considered to be certain direct
origination costs under the rules of Statement of Financial Accounting Standards
("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, net: Salaries, commissions and benefits,
net, for the three months ended September 30, 2005 were $101.4 million, compared
to $46.5 million for the three months ended September 30, 2004, an increase of
$54.9 million, or 118.1%. The increase in expenses reflects higher origination
volume and a resulting higher commission expense and higher salaries due to an
increase in employees to 6,467 at September 30, 2005 from 4,145 at September 30,
2004.
Other Operating Expenses: Operating expenses, excluding salaries, commissions
and benefits, were $47.7 million for the three months ended September 30, 2005,
compared to $31.8 million for the three months ended September 30, 2004, an
increase of $15.9 million, or 49.8%. The increase in operating expenses in the
third quarter of 2005 versus the third quarter of 2004 includes a $5.3 million
increase in
- 44 -
occupancy and equipment expense, due to higher lease obligations and certain
fixed asset expenses relating to the increased number of branches in the 2005
period.
Income Tax Expense (Benefit)
We recognized $2.5 million of income tax expense for the three months ended
September 30, 2005, compared to a benefit of $10.0 million for the three months
ended September 30, 2004. The increase in income tax expense in the third
quarter of 2005 versus the third quarter of 2004 reflects an increase in income
before income taxes relating to our taxable REIT subsidiary ("TRS").
Loan Originations
We originate and sell or securitize one-to-four family residential mortgage
loans. Total loan originations for the three months ended September 30, 2005
were $13.7 billion compared to $5.3 billion for the three months ended September
30, 2004, a 158.8% 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 three months ended September 30, 2005 compared
to 51% of our originations in the three months ended September 30, 2004.
Mortgage brokers accounted for 54% of our loan originations in the three months
ended September 30, 2005 compared to 49% of our originations in the three months
ended September 30, 2004.
Results of Operations - Comparison of the Nine Months Ended September 30, 2005
and 2004
Overview
Net income for the nine months ended September 30, 2005 was $244.1 million
compared to $97.7 million for the nine months ended September 30, 2004, an
increase of $146.4 million, or 150.0%. Net income for the nine months ended
September 30, 2005 includes approximately $71.4 million of revenues related to
the delay in recognizing the Q4-04 Securitization as a sale into the first
quarter of 2005. The increase in net income was the result of a $273.9 million
increase in non-interest income and an $84.9 million increase in net interest
income, partly offset by a $187.4 million increase in non-interest expenses and
a $25.0 million decrease in income tax benefit. The $273.9 million increase in
non-interest income consists of a $154.1 million increase in gain on sales of
current period securitized mortgage loans, a $138.2 million increase in gain on
sales of mortgage loans and an $11.7 million increase in net loan servicing
fees, partly offset by a $30.1 million decrease in realized and unrealized gains
on mortgage-backed securities and derivatives in the nine months ended September
30, 2005 versus the nine months ended September 30, 2004.
Net income as adjusted for the nine months ended September 30, 2005 was $172.7
million, an increase of $75.1 million, or 76.9%, over net income for the nine
months ended September 30, 2004. The increase in net income as adjusted was the
result of a $212.8 million increase in non-interest income as adjusted and a
$74.7 million increase in net interest income as adjusted, partly offset by a
$187.4 million increase in non-interest expenses and a $25.0 million decrease in
income tax benefit. The $212.8 million increase in non-interest income as
adjusted consists of a $138.2 million increase in gain on sales of mortgage
loans, a $128.9 million increase in gain on sales of current period securitized
mortgage loans as adjusted and a $14.5 million increase in net loan servicing
fees as adjusted, partly offset by a $68.8 million decrease in realized and
unrealized gains on mortgage-backed securities and derivatives as adjusted in
the nine months ended September 30, 2005 versus the nine months ended September
30, 2004.
Net Interest Income
The following table presents the average balances for our interest-earning
assets, interest-bearing liabilities, corresponding annualized effective rates
of interest and the related interest income or expense for the nine months ended
September 30, 2005 compared to the nine months ended September 30, 2004 and for
the nine months ended September 30, 2005 as adjusted compared to the nine months
ended September 30, 2004:
- 45 -
(Dollars in thousands) Nine Months Ended September 30,
---------------------------------------------------------------------------------------
2005 2004
------------------------------------------- ------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------ ----------- ---------- ----------- ----------- ------------
Interest earning assets:
Mortgage-backed securities, net (1) $ 6,591,006 $ 219,906 4.45% $ 4,659,398 $ 123,194 3.53%
Mortgage loans 5,253,770 242,344 6.15% 2,019,746 75,153 4.96%
----------- ----------- ----------- -----------
11,844,776 462,250 5.20% 6,679,144 198,347 3.96%
----------- ----------- ----------- -----------
Interest bearing liabilities:
Warehouse lines of credit (2) 2,002,754 77,642 5.11% 1,355,512 40,193 3.91%
Commercial paper 1,947,314 46,906 3.18% 553,160 6,942 1.65%
Reverse repurchase agreements (3) 6,573,306 161,906 3.29% 4,366,228 82,026 2.51%
Collateralized debt obligations 655,083 16,766 3.37% -- -- --
Trust preferred securities 37,912 2,066 7.19% -- -- --
Notes payable 182,563 6,310 4.56% 119,261 3,435 3.80%
----------- ----------- ----------- -----------
11,398,932 311,596 3.60% 6,394,161 132,596 2.73%
----------- ----------- ----------- -----------
Net interest income $ 150,654 $ 65,751
=========== ===========
Interest rate spread 1.60% 1.22%
==== ====
Net interest margin 1.73% 1.34%
==== ====
(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 $2.8 million and $9.7 million of net interest expense on interest
rate swap agreements for the 2005 and 2004 periods, respectively.
(3) Includes $13.9 million and $31.6 million of net interest expense on interest
rate swap agreements for the 2005 and 2004 periods, respectively.
- 46 -
(Dollars in thousands) Nine Months Ended September 30,
---------------------------------------------------------------------------------------
2005(As Adjusted) 2004
------------------------------------------- ------------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------ ----------- ---------- ----------- ----------- ------------
Interest earning assets:
Mortgage-backed securities, net (1) $ 7,102,047 $ 239,874 4.50% $ 4,659,398 $ 123,194 3.53%
Mortgage loans 4,117,270 195,451 6.33% 2,019,746 75,153 4.96%
----------- ----------- ----------- -----------
11,219,317 435,325 5.17% 6,679,144 198,347 3.96%
----------- ----------- ----------- -----------
Interest bearing liabilities:
Warehouse lines of credit (2) 2,002,754 77,642 5.11% 1,355,512 40,193 3.91%
Commercial paper 1,947,314 46,906 3.18% 553,160 6,942 1.65%
Reverse repurchase agreements (3) 6,573,306 161,906 3.29% 4,366,228 82,026 2.51%
Trust preferred securities 37,912 2,066 7.19% -- -- --
Notes payable 182,563 6,310 4.56% 119,261 3,435 3.80%
----------- ----------- ----------- -----------
10,743,849 294,830 3.62% 6,394,161 132,596 2.73%
----------- ----------- ----------- -----------
Net interest income $ 140,495 $ 65,751
=========== ===========
Interest rate spread 1.55% 1.22%
==== ====
Net interest margin 1.71% 1.34%
==== ====
(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 $2.8 million and $9.7 million of net interest expense on interest
rate swap agreements for the 2005 and 2004 periods, respectively.
(3) Includes $13.9 million and $31.6 million of net interest expense on interest
rate swap agreements for the 2005 and 2004 periods, respectively.
The following table presents the effects of changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities on
our interest income and interest expense for the nine months ended September 30,
2005 compared to the nine months ended September 30, 2004 and for the nine
months ended September 30, 2005 as adjusted compared to the nine months ended
September 30, 2004:
Nine Months Ended September 30, 2005
Compared to
(In thousands) Nine Months Ended September 30, 2004
---------------------------------------
Average Average
Rate Volume Total
-------- -------- --------
Mortgage-backed securities, net $ 37,443 $ 59,269 $ 96,712
Mortgage loans 21,768 145,423 167,191
-------- -------- --------
Interest income 59,211 204,692 263,903
-------- -------- --------
Warehouse lines of credit 14,668 22,781 37,449
Commercial paper 10,682 29,282 39,964
Reverse repurchase agreements 30,448 49,432 79,880
Collateralized debt obligations -- 16,766 16,766
Trust preferred securities -- 2,066 2,066
Notes payable 787 2,088 2,875
-------- -------- --------
Interest expense 56,585 122,415 179,000
-------- -------- --------
Net interest income $ 2,626 $ 82,277 $ 84,903
======== ======== ========
--------------------------------------------------------------------------------
- 47 -
Nine Months Ended September 30, 2005
(As Adjusted) Compared to
(In thousands) Nine Months Ended September 30, 2004
---------------------------------------
Average Average
Rate Volume Total
------- ------- -------
Mortgage-backed securities, net $ 40,380 $ 76,300 $116,680
Mortgage loans 25,243 95,055 120,298
-------- -------- --------
Interest income 65,623 171,355 236,978
-------- -------- --------
Warehouse lines of credit 14,668 22,781 37,449
Commercial paper 10,682 29,282 39,964
Reverse repurchase agreements 30,448 49,432 79,880
Trust preferred securities -- 2,066 2,066
Notes payable 787 2,088 2,875
-------- -------- --------
Interest expense 56,585 105,649 162,234
-------- -------- --------
Net interest income $ 9,038 $ 65,706 $ 74,744
======== ======== ========
Interest Income: Interest income on mortgage-backed securities for the nine
months ended September 30, 2005 was $219.9 million, compared to $123.2 million
for the nine months ended September 30, 2004, a $96.7 million, or 78.5%
increase. This increase reflects primarily the growth of our mortgage-backed
securities portfolio and higher interest rates in 2005 versus 2004.
Interest income on mortgage-backed securities as adjusted for the nine months
ended September 30, 2005 was $239.9 million, compared to $123.2 million for the
nine months ended September 30, 2004, a $116.7 million, or 94.7% increase. This
increase reflects primarily the growth of our mortgage-backed securities
portfolio and higher interest rates in 2005 versus 2004.
Interest income on our mortgage loans for the nine months ended September 30,
2005 was $242.3 million compared to $75.1 million for the nine months ended
September 30, 2004, an increase of $167.2 million, or 222.5%. The increase in
interest income on mortgage loans was primarily the result of an increase in
average volume in 2005 versus 2004 due to accounting for the Q4-04
Securitization as a financing for most of the first quarter of 2005 and higher
mortgage origination volume.
Interest income on our mortgage loans as adjusted for the nine months ended
September 30, 2005 was $195.4 million compared to $75.1 million for the nine
months ended September 30, 2004, an increase of $120.3 million, or 160.1%. The
increase in loan interest income was primarily the result of an increase in
average volume in 2005 versus 2004 due to higher mortgage origination volume.
Interest Expense: We fund our loan inventory primarily through borrowing
facilities with several mortgage warehouse lenders and through a $3.3 billion
commercial paper, or secured liquidity note ("SLN"), program. Interest expense
on warehouse lines of credit for the nine months ended September 30, 2005 was
$77.6 million, compared to interest expense for the nine months ended September
30, 2004 of $40.2 million, a $37.4 million increase. The increase in warehouse
lines of credit interest expense was primarily the result an increase in average
volume due to higher mortgage origination volume and an increase in average rate
due to generally higher short-term interest rates in 2005 versus 2004. In May
2004, we formed a wholly-owned special purpose entity for the purpose of issuing
commercial paper in the form of SLNs to finance certain portions of our mortgage
loans. Interest expense on commercial paper for the nine months ended September
30, 2005 was $46.9 million versus $6.9 million for the nine months ended
September 30, 2004, a $40.0 million increase. By funding a portion of our loan
inventory through the commercial paper program, we were able to reduce our
average funding cost versus borrowing exclusively through warehouse lenders.
We have entered into reverse repurchase agreements, a form of collateralized
short-term borrowing, with fourteen different financial institutions and, as of
September 30, 2005, have borrowed funds from eight of these counterparties. We
borrow funds under these arrangements based on the fair value of our
mortgage-backed securities. Total interest expense on reverse repurchase
agreements for the nine months ended September 30, 2005 was $161.9 million,
compared to interest expense for the nine months ended September 30, 2004 of
- 48 -
$82.0 million, a $79.9 million increase. The increase in reverse repurchase
agreements interest expense in 2005 versus 2004 was primarily the result of an
increase in borrowings used to fund the growth of our mortgage-backed securities
portfolio.
For the nine months ended September 30, 2005, we recognized $16.8 million of
interest expense on collateralized debt obligations related to accounting for
the Q4-04 Securitization as a financing for most of the first quarter of 2005.
Gain on Mortgage Loans, Mortgage-Backed Securities and Derivatives
Gain on Sales and Securitizations of Mortgage Loans: Gain on sales and
securitizations of mortgage loans in our Loan Origination segment during the
nine months ended September 30, 2005 totaled $514.4 million including $43.4
million recognized in connection with the Q4-04 Securitization. Gain on sales
and securitizations of mortgage loans in our Loan Origination segment, as
adjusted, during the nine months ended September 30, 2005 were $471.0 million,
or 1.59%, of mortgage loans sold or securitized, as adjusted, compared to $201.5
million, or 1.22%, of mortgage loans sold or securitized during the nine months
ended September 30, 2004. The increase primarily reflects a $13.1 billion
increase in mortgage loans sold or securitized, as adjusted, to $29.6 billion,
as adjusted, in the first nine months of 2005 from $16.5 billion in the first
nine months of 2004. The change in fair value of IRLCs included in gain on sales
of mortgage loans in the 2004 period was reduced as a result of our adoption of
SAB No. 105.
The following table presents the components of gain on sales and securitizations
of mortgage loans in our Loan Origination segment during the nine months ended
September 30, 2005 and 2004:
Gains on Sales and Securitizations of Mortgage Loans
Nine Months Ended September 30,
----------------------------------------------------------
2005 2005 2005 2004
----------------------------------------------------------
GAAP Adjustments As Adjusted
----------------------------------------------------------
(Dollars in thousands)
Gain on sales of mortgage loans $ 236,288 $ -- $ 236,288 $ 98,095
Gain on sales of current period securitized mortgage loans 194,256 (25,258) 168,998 40,120
Gain (loss) on sales of free standing derivatives 6,143 -- 6,143 (4,388)
Unrealized gain on self-originated mortgage-backed securities
retained in period 72,806 (18,180) 54,626 67,656
Unrealized gain on free standing derivatives 4,932 -- 4,932 --
----------------------------------------------------------
Total gain on sales and securitizations of mortgage loans $ 514,425 $ (43,438) $ 470,987 $ 201,483
==========================================================
Total mortgage loans sold or securitized $33,101,422 $(3,526,123) $29,575,299 $ 16,514,175
==========================================================
Total gain on sales and securitizations of mortgage loans as
a % of total mortgage loans sold or securitized 1.55% 1.59% 1.22%
Portfolio Gains and Losses: During the nine months ended September 30, 2005,
portfolio gains and losses in our Mortgage-Backed Securities Holdings segment,
as adjusted, were a portfolio loss of $55.3 million compared to a portfolio gain
of $16.0 million during the nine months ended September 30, 2004. The decrease
in portfolio gains in the first nine months of 2005 compared to the first nine
months of 2004 was the result of a $75.0 million net decrease in unrealized gain
on mortgage-backed securities and free standing derivatives, as adjusted, partly
offset by a $3.7 million increase in gain on sales of mortgage-backed
securities, as adjusted.
The following table presents the components of portfolio gains and losses in our
Mortgage-Backed Securities Holdings segment during the nine months ended
September 30, 2005 and 2004:
- 49 -
Portfolio Gains and Losses
Nine Months Ended September 30,
----------------------------------------------------------
2005 2005 2005 2004
----------------------------------------------------------
GAAP Adjustments As Adjusted
----------------------------------------------------------
(In thousands)
Gain on sales of mortgage-backed securities $ 6,725 $ (1,400) $ 5,325 $ 1,578
Unrealized loss on mortgage-backed securities (65,640) (19,083) (84,723) (6,938)
Unrealized gain on free standing derivatives 24,144 -- 24,144 21,323
----------------------------------------------------------
Net unrealized (loss) gain on mortgage-backed securities and
free standing derivatives (41,496) (19,083) (60,579) 14,385
----------------------------------------------------------
Total portfolio (loss) gain $ (34,771) $ (20,483) $ (55,254) $ 15,963
==========================================================
The following table presents the components of gains and losses on sales of
mortgage-backed securities and derivatives shown in the Company's consolidated
statements of income:
Components of Gain (Loss) on Sales of Mortgage-backed Securities and Derivatives
Nine Months Ended September 30,
----------------------------------------------------------
2005 2005 2005 2004
----------------------------------------------------------
GAAP Adjustments As Adjusted
----------------------------------------------------------
(In thousands)
Gain on sales of mortgage-backed securities $ 6,725 $ (1,400) $ 5,325 $ 1,578
Gain (loss) on sales of free standing interest rate swap
derivatives 6,143 -- 6,143 (4,388)
----------------------------------------------------------
Gain (loss) on sales of mortgage-backed securities and
derivatives $ 12,868 $ (1,400) $ 11,468 $ (2,810)
==========================================================
The following table presents the components of unrealized gains and losses on
mortgage-backed securities and derivatives shown in the Company's consolidated
statements of income:
Components of Unrealized Gains and Losses on Mortgage-backed Securities and
Derivatives
Nine Months Ended September 30,
----------------------------------------------------------------
2005 2005 2005 2004
----------------------------------------------------------------
GAAP Adjustments As Adjusted
----------------------------------------------------------------
(In thousands)
Unrealized gain on self-originated mortgage-backed
securities retained in period $ 72,806 $ (18,180) $ 54,626 $ 67,656
Unrealized loss on mortgage-backed securities (65,640) (19,083) (84,723) (6,938)
Unrealized gain on free standing derivatives 29,076 -- 29,076 21,323
----------------------------------------------------------------
Unrealized gain (loss) on mortgage-backed securities and
derivatives $ 36,242 $ (37,263) $ (1,021) $ 82,041
================================================================
Net Loan Servicing Fees
Net loan servicing fees were $7.6 million for the nine months ended September
30, 2005 compared to a loss of $4.1 million for the nine months ended September
30, 2004.
Loan Servicing Fees: Loan servicing fees increased to $49.4 million for the nine
months ended September 30, 2005 from $28.9 million for the nine months ended
September 30, 2004, an increase of $20.5 million, or 71.0%. Included in loan
servicing fees are gains on Ginnie Mae early buy-out sales of $1.2 million for
the nine months ended September 30, 2005 compared to $3.7 million for the nine
months ended September 30, 2004, a decrease of $2.5 million, or 67.9%. This
decrease partly offset the increase in loan servicing fees in the first nine
months of 2005 versus the first nine months of 2004, as a result of an increase
in loans serviced for others.
- 50 -
Amortization of MSRs: Amortization of MSRs increased to $36.4 million for the
nine months ended September 30, 2005 from $22.9 million for the nine months
ended September 30, 2004, an increase of $13.5 million, or 59.1%. The increase
in amortization was due to a higher average servicing portfolio in the first
nine months of 2005 versus the first nine months of 2004.
Impairment Provision of MSRs: We recognized a temporary impairment provision of
$5.4 million for the nine months ended September 30, 2005 versus a temporary
impairment provision of $10.1 million for the nine months ended September 30,
2004, resulting in an increase in net loan servicing fees of $4.7 million. The
decrease in impairment provision in the nine months ended September 30, 2005 was
due to higher interest rates, which was attributable to a subsequent decrease in
estimated future prepayment speeds versus the initial estimated future
prepayment speeds used to value the MSR upon securitization.
The following table presents GAAP, as adjusted and reconciling adjustments to
net loan servicing fees (loss) for the nine months ended September 30, 2005 and
2004:
Nine Months Ended September 30,
----------------------------------------------------------
2005 2005 2005 2004
----------------------------------------------------------
GAAP Adjustments As Adjusted
----------------------------------------------------------
Loan servicing fees $ 49,381 $ 2,851 $ 52,232 $ 28,870
Amortization (36,388) (2,170) (38,558) (22,865)
Impairment reserve provision (5,402) 2,048 (3,354) (10,139)
----------------------------------------------------------
Net loan servicing fees (loss) $ 7,591 $ 2,729 $ 10,320 $ (4,134)
==========================================================
Other Non-Interest Income
Other non-interest income totaled $5.6 million for the nine months ended
September 30, 2005 and for the nine months ended September 30, 2004. For the
nine months ended September 30, 2005, other non-interest income primarily
includes reinsurance premiums earned totaling approximately $3.2 million, rental
income of $1.1 million and revenue from title services of $0.9 million. For the
nine months ended September 30, 2004, other non-interest income primarily
includes rental income of $1.6 million, income from a legal settlement of $1.5
million, reinsurance premiums earned totaling approximately $1.1 million and
revenue from title services of $0.7 million.
Non-Interest Expenses
Our non-interest expenses for the nine months ended September 30, 2005 were
$400.7 million compared to $213.3 million for the nine months ended September
30, 2004, an increase of $187.4 million, or 87.9%. The increase primarily
reflects a $168.7 million rise in our Loan Origination segment non-interest
expenses to $368.1 million, or 1.16%, of total loan originations in the first
nine months of 2005 from $199.4 million, or 1.22%, of total loan originations in
the first nine months of 2004.
Our operating expenses represent costs that are not eligible to be added to the
book value of the loans because they are not considered to be certain direct
origination costs under the rules of Statement of Financial Accounting Standards
("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, net: Salaries, commissions and benefits,
net, for the nine months ended September 30, 2005 were $264.7 million, compared
to $128.8 million for the nine months ended September 30, 2004, an increase of
$135.9 million, or 105.5%. The increase in expenses reflects higher origination
volume and a resulting higher commission expense and higher salaries due to an
increase in employees to 6,467 at September 30, 2005 from 4,145 at September 30,
2004.
Other Operating Expenses: Operating expenses, excluding salaries, commissions
and benefits, were $136.0 million for the nine months ended September 30, 2005
compared to $84.5 million for the nine months ended September 30, 2004, an
increase of $51.5 million, or 61.0%. The increase in operating expenses in the
first nine months of 2005 versus the first nine months of 2004 includes a $16.3
million increase in occupancy and equipment expense, due to higher lease
obligations and certain fixed asset expenses relating to the increased number of
branches in the 2005 period.
- 51 -
Income Tax Benefit
A $1.3 million income tax benefit was recognized for the nine months ended
September 30, 2005, compared to a benefit of $26.3 million for the nine months
ended September 30, 2004. The decrease in income tax benefit in the first nine
months of 2005 versus the first nine months of 2004 reflects a decrease in loss
before income taxes relating to our TRS.
Loan Originations
We originate and sell or securitize one-to-four family residential mortgage
loans. Total loan originations for the nine months ended September 30, 2005 were
$31.7 billion compared to $16.3 billion for the nine months ended September 30,
2004, a 94.4% increase. Our retail originations, which are conducted through our
community loan production offices and Internet call center, were 48% of our loan
originations in the nine months ended September 30, 2005 and the nine months
ended September 30, 2004. Mortgage brokers accounted for 52% of our loan
originations in the nine months ended September 30, 2005 and the nine months
ended September 30, 2004.
Liquidity and Capital Resources
We have arrangements to enter into reverse repurchase agreements, a form of
collateralized short-term borrowing, with fourteen different financial
institutions and on September 30, 2005 had borrowed funds from eight 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 September 30, 2005, we had $8.0 billion of reverse repurchase agreements
outstanding with a weighted-average borrowing rate of 3.84% before the impact of
interest rate swaps and a weighted-average remaining maturity of six months.
To originate a mortgage loan, we draw against a $3.3 billion Secured Liquidity
Note Program, a $1.5 billion pre-purchase facility with UBS Real Estate
Securities Inc. ("UBS"), a facility of $1.5 billion with Bear Stearns, a $1.0
billion bank syndicated facility led by Bank of America (which includes a $350
million term loan facility which we use to finance our MSRs), a facility of $750
million with Goldman Sachs, a facility of $750 million with Morgan Stanley Bank
("Morgan Stanley"), a $450 million facility with IXIS Real Estate Capital Inc.
(formerly CDC Mortgage Capital Inc.) ("IXIS"), a facility of $500 million with
Lehman Brothers, an early purchase program facility with Countrywide Home Loans,
Inc. ("Countrywide"), and a facility of $250 million with Calyon New York Branch
("Calyon"). The Bank of America, IXIS, Morgan Stanley and Calyon facilities are
committed facilities. In addition, we have a gestation facility with Greenwich
Capital Financial Products, Inc. ("Greenwich"). 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 our liabilities to our tangible net worth. At November 4, 2005, the
aggregate outstanding balance under the commercial paper program was $3.1
billion, the aggregate outstanding balance under the warehouse facilities was
$2.9 billion, the aggregate outstanding balance in drafts payable was $25.6
million and the aggregate maximum amount available for additional borrowings was
$1.9 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).
- 52 -
As of September 30, 2005, our aggregate warehouse facility borrowings were $2.2
billion (including $20.3 million of borrowings under a working capital
sub-limit) and our outstanding drafts payable were $18.8 million, compared to
$735.8 million (including $25.5 million of borrowings under a working capital
sub-limit) and our outstanding drafts payable were $26.2 million as of December
31, 2004. At September 30, 2005, our loans held for sale were $1.9 billion and
our loans held for investment were $1.4 billion compared to loans held for sale
of $4.9 billion at December 31, 2004.
In addition to warehouse facilities, we have purchase and sale agreements with
UBS, Greenwich Capital and Countrywide. These agreements allow us to accelerate
the sale of our mortgage loan inventory, resulting in a more effective use of
the warehouse facility. Aggregate amounts sold and being held under these
agreements at September 30, 2005 and December 31, 2004 were $3.4 billion and
$443.8 million, respectively. Aggregate amounts so held under these agreements
at November 4, 2005 were $2.4 billion. These agreements are not committed
facilities and may be terminated at the discretion of the counterparties.
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 $350.0 million term loan facility with a bank syndicate led by
Bank of America which we use to finance our MSRs. The term loan facility expires
on August 11, 2006. Interest is based on a spread to the LIBOR and may be
adjusted for earnings on escrow balances. At September 30, 2005 and December 31,
2004, borrowings under our term loan facility were $192.4 million and $108.6
million, respectively.
Cash and cash equivalents increased to $624.4 million at September 30, 2005 from
$192.8 million at December 31, 2004.
Our primary sources of cash and cash equivalents during the nine months ended
September 30, 2005, were as follows:
o $17.0 billion of proceeds from principal received from sales of
mortgage loans held for sale;
o $16.2 billion of proceeds from securitizations of mortgage loans held
for sale;
o $2.8 billion of principal proceeds from sales of mortgage-backed
securities; and
o $1.7 billion of principal repayments of mortgage-backed securities.
Our primary uses of cash and cash equivalents during the nine months ended
September 30, 2005, were as follows:
o $31.7 billion of origination of mortgage loans;
o $4.5 billion of additions to mortgage-backed securities; and
o $3.4 billion of purchases of mortgage-backed securities.
- 53 -
Commitments
The Company had the following commitments (excluding derivative financial
instruments) at September 30, 2005:
Less than 1
Total Year 1 - 3 Years 4 - 5 Years After 5 Years
---------- ---------- ------- ------- -------
(In thousands)
Reverse repurchase agreements $8,041,579 $8,041,579 $ -- $ -- $ --
Commercial paper 1,334,296 1,334,296 -- -- --
Warehouse liabilities 2,165,154 2,165,154 -- -- --
Notes payable 305,766 194,135 1,517 86,135 23,979
Trust preferred securities 96,964 -- -- -- 96,964
Operating leases 169,412 54,129 93,966 21,047 270
- 54 -
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 nine 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 mortgage
("ARM") 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 nine to twelve months. The
Company's ARM loans and mortgage-backed securities financing vehicles generally
have an interest rate that reprices based on frequency terms of one to twelve
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 approximately one month on September
30, 2005.
- 55 -
The following table summarizes the Company's interest rate sensitive instruments
as of September 30, 2005 and December 31, 2004:
September 30, 2005
-------------------------------------
Carrying Estimated
Amount Fair Value
---------- ----------
Assets:
Mortgage-backed securities $9,208,172 $9,208,172
Derivative assets (1) 67,185 75,556
Mortgage loans held for sale, net 1,901,293 1,909,533
Mortgage loans held for investment, net 1,445,429 1,473,965
Mortgage servicing rights, net 300,659 300,772
Liabilities:
Reverse repurchase agreements $8,041,579 $8,041,313
December 31, 2004
-------------------------------------
Carrying Estimated
Amount Fair Value
---------- ----------
Assets:
Mortgage-backed securities $6,016,866 $6,016,866
Derivative assets (1) 24,803 30,838
Mortgage loans held for sale, net 4,853,394 4,931,366
Mortgage servicing rights, net 151,436 152,467
Liabilities:
Reverse repurchase agreements $7,071,168 $7,065,072
Collateralized debt obligations 2,022,218 2,022,218
Derivative liabilities 1,860 1,860
(1) Derivative assets includes interest rate lock commitments ("IRLCs") to fund
mortgage loans. The carrying value excludes the value of the mortgage servicing
rights ("MSRs") attached to the IRLCs in accordance with SEC Staff Accounting
Bulletin No. 105. The fair value includes the value of MSRs.
The Company had total commitments to lend at September 30, 2005 and December 31,
2004 of $11.6 billion and $6.2 billion, respectively.
- 56 -
ITEM 4.
CONTROLS AND PROCEDURES
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 third quarter of 2005 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 third quarter of 2005.
Remediation Efforts Related to Previously Reported Material Weakness in Internal
Control over Financial Reporting
The Company previously disclosed in its report on Form 10-K/A for the year ended
December 31, 2004 material weaknesses related to the operating efficiencies of
certain controls over financial reporting. The Company is enforcing the
appropriate policies, procedures and controls over these areas to ensure that
they are operating effectively.
- 57 -
PART II-OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is from time to time subject
to various legal proceedings. The Company does not believe that any of its
current legal proceedings, individually or in the aggregate, will have a
material adverse effect on its operations or financial condition.
Columbia National, Incorporated
As previously reported in our report on Form 10-K/A for the year ended December
31, 2004, in June 2002, the Company acquired Columbia National, Incorporated, a
Maryland corporation ("Columbia"), which is currently a subsidiary of the
Company, and which changed its name in July 2004 to "American Home Mortgage
Servicing, Inc." Prior to the Company's acquisition of 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. The Company does not expect that the amount of any potential settlement
will materially affect its financial condition or results of operations.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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 September 30, 2005.
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. Pursuant to these earnout provisions, on
July 1, 2005, and August 15, 2005, the Company issued an aggregate of 1,498 and
2,463 unregistered shares of common stock, respectively, to such stockholders 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.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
- 58 -
ITEM 5.
OTHER INFORMATION
None.
ITEM 6.
EXHIBITS
The following exhibits are filed with this Quarterly Report on Form 10-Q:
Exhibit No. Description
----------- ---------------------------------------------------------------
10.1 -- Amended and Restated Credit Agreement, dated as of August 12,
2005, by and among American Home Mortgage Investment Corp.,
American Home Mortgage Servicing, Inc., American Home Mortgage
Corp., American Home Mortgage Acceptance, Inc., the Lenders
from time to time party thereto, and Bank of America, N.A.
10.2.1 -- Amendment No. 9, dated as of September 2, 2005, to the Amended
and Restated Master Loan and Security Agreement, dated as of
November 26, 2003, by and among American Home Mortgage Corp.,
American Home Mortgage Acceptance, Inc., American Home Mortgage
Investment Corp., American Home Mortgage Holdings, Inc., and
American Home Mortgage Servicing, Inc., the Lenders from time
to time party thereto, and Morgan Stanley Bank.
10.2.2 -- Promissory Note, dated September 2, 2005, made by American Home
Mortgage Corp., American Home Mortgage Investment Corp.,
American Home Mortgage Holdings, Inc., American Home Mortgage
Acceptance, Inc., and American Home Mortgage Servicing, Inc. in
favor of Morgan Stanley Mortgage Capital Inc.
10.3 -- Amendment No. 10, dated as of September 26, 2005, to the
Amended and Restated Master Loan and Security Agreement, dated
as of November 26, 2003, by and among American Home Mortgage
Corp., American Home Mortgage Acceptance, Inc., American Home
Mortgage Investment Corp., American Home Mortgage Holdings,
Inc., and American Home Mortgage Servicing, Inc., the Lenders
from time to time party thereto, and Morgan Stanley Bank.
10.4 -- Extension Letter Agreement, dated as of October 5, 2005, by and
among AHM SPV I, LLC, American Home Mortgage Corp., Calyon New
York Branch, and Lloyds TSB Bank plc.
10.5.1 -- Master Repurchase Agreement, dated as of August 31, 2005, among
American Home Mortgage Acceptance, Inc., American Home Mortgage
Corp., and Goldman Sachs Mortgage Company.
10.5.2 -- Custodial Agreement, dated as of August 31, 2005, among Goldman
Sachs Mortgage Company, American Home Mortgage Acceptance,
Inc., American Home Mortgage Corp., and Deutsche Bank National
Trust Company.
10.5.3 -- Guaranty, dated as of August 31, 2005, by American Home
Mortgage Investment Corp. in favor of Goldman Sachs Mortgage
Company.
10.6.1 -- Letter Agreement, dated as of September 13, 2005, by and among
Lehman Brothers Inc., Lehman Commercial Paper Inc., and
American Home Mortgage Acceptance Inc.
10.6.2 -- Second Amendment to Custodial Agreement, dated as of September
13, 2005, to the Custodial Agreement, dated as of December 3,
2004, by and among Lehman Brothers Inc., Lehman Commercial
Paper Inc., American Home Mortgage Acceptance Inc., and
Deutsche Bank National Trust Company.
- 59 -
Exhibit No. Description
----------- ---------------------------------------------------------------
10.6.3 -- Guaranty, dated as of September 13, 2005, by American Home
Mortgage Investment Corp. in favor of Lehman Brothers Inc. and
Lehman Commercial Paper Inc.
31.1 -- Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or 15(d)-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 15(d)-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.
60
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: November 9, 2005 By: /s/ Michael Strauss
-------------------------------------
Michael Strauss
Chairman, Chief Executive Officer
and President
Date: November 9, 2005 By: /s/ Stephen A. Hozie
-------------------------------------
Stephen A. Hozie
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
- 61 -
INDEX TO EXHIBITS
-----------------
Exhibit No. Description
----------- ---------------------------------------------------------------
10.1 -- Amended and Restated Credit Agreement, dated as of August 12,
2005, by and among American Home Mortgage Investment Corp.,
American Home Mortgage Servicing, Inc., American Home Mortgage
Corp., American Home Mortgage Acceptance, Inc., the Lenders
from time to time party thereto, and Bank of America, N.A.
10.2.1 -- Amendment No. 9, dated as of September 2, 2005, to the Amended
and Restated Master Loan and Security Agreement, dated as of
November 26, 2003, by and among American Home Mortgage Corp.,
American Home Mortgage Acceptance, Inc., American Home Mortgage
Investment Corp., American Home Mortgage Holdings, Inc., and
American Home Mortgage Servicing, Inc., the Lenders from time
to time party thereto, and Morgan Stanley Bank.
10.2.2 -- Promissory Note, dated September 2, 2005, made by American Home
Mortgage Corp., American Home Mortgage Investment Corp.,
American Home Mortgage Holdings, Inc., American Home Mortgage
Acceptance, Inc., and American Home Mortgage Servicing, Inc. in
favor of Morgan Stanley Mortgage Capital Inc.
10.3 -- Amendment No. 10, dated as of September 26, 2005, to the
Amended and Restated Master Loan and Security Agreement, dated
as of November 26, 2003, by and among American Home Mortgage
Corp., American Home Mortgage Acceptance, Inc., American Home
Mortgage Investment Corp., American Home Mortgage Holdings,
Inc., and American Home Mortgage Servicing, Inc., the Lenders
from time to time party thereto, and Morgan Stanley Bank.
10.4 -- Extension Letter Agreement, dated as of October 5, 2005, by and
among AHM SPV I, LLC, American Home Mortgage Corp., Calyon New
York Branch, and Lloyds TSB Bank plc.
10.5.1 -- Master Repurchase Agreement, dated as of August 31, 2005, among
American Home Mortgage Acceptance, Inc., American Home Mortgage
Corp., and Goldman Sachs Mortgage Company.
10.5.2 -- Custodial Agreement, dated as of August 31, 2005, among Goldman
Sachs Mortgage Company, American Home Mortgage Acceptance,
Inc., American Home Mortgage Corp., and Deutsche Bank National
Trust Company.
10.5.3 -- Guaranty, dated as of August 31, 2005, by American Home
Mortgage Investment Corp. in favor of Goldman Sachs Mortgage
Company.
10.6.1 -- Letter Agreement, dated as of September 13, 2005, by and among
Lehman Brothers Inc., Lehman Commercial Paper Inc., and
American Home Mortgage Acceptance Inc.
10.6.2 -- Second Amendment to Custodial Agreement, dated as of September
13, 2005, to the Custodial Agreement, dated as of December 3,
2004, by and among Lehman Brothers Inc., Lehman Commercial
Paper Inc., American Home Mortgage Acceptance Inc., and
Deutsche Bank National Trust Company.
10.6.3 -- Guaranty, dated as of September 13, 2005, by American Home
Mortgage Investment Corp. in favor of Lehman Brothers Inc. and
Lehman Commercial Paper Inc.
31.1 -- Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or 15(d)-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 15(d)-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.