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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
[ ] 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 000-27081
AMERICAN HOME MORTGAGE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-4066303
------------------------------- ------------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
520 BROADHOLLOW ROAD, MELVILLE, NY 11747
- --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(516) 949-3900
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE
Common Stock, $0.01 par value NASDAQ National Market
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
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] or No [ ].
As of June 30, 2002, 15,885,622 shares of the Registrant's Common
Stock, $0.01 par value, were outstanding.
AMERICAN HOME MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
QUARTER ENDED JUNE 30, 2002
INDEX
PART I-FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets - June 30, 2002
(unaudited) and December 31, 2001
Condensed Consolidated Statements of Income (unaudited) - Six
months ended June 30, 2002 and 2001 and Three months ended
June 30, 2002 and 2001
Condensed Consolidated Statements of Cash Flows (unaudited) -
Six months ended June 30, 2002 and 2001
Notes to Condensed Consolidated Financial Statements
(unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
PART II-OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN HOME MORTGAGE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
2002 2001
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 55,429,667 $ 26,392,590
Accounts receivable 21,128,516 23,877,352
Mortgage loans held for sale, net 457,313,520 419,192,096
Mortgage loans - other 3,003,348 1,305,902
Real estate owned 214,894 438,533
Mortgage servicing rights, net 105,686,376 45,551
Premises and equipment, net 12,845,304 9,072,133
Goodwill 50,889,104 16,874,185
Other assets 13,449,318 3,926,630
------------ ------------
TOTAL ASSETS $719,960,047 $501,124,972
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Warehouse lines of credit $430,416,905 $351,453,879
Drafts payable 16,058,259 35,359,821
Accrued expenses and other 26,473,426 15,108,385
Income taxes payable 27,402,883 16,994,415
Notes payable 89,210,257 3,014,314
------------ ------------
Total liabilities 589,561,730 421,930,814
------------ ------------
COMMITMENTS AND CONTINGENCIES -- --
MINORITY INTEREST 668,499 577,392
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 per share par value, 1,000,000 shares
authorized, none issued and outstanding -- --
Common stock, $.01 per share par value, 19,000,000
shares authorized, 15,885,622 and 11,991,200 shares
issued and outstanding, respectively 158,856 119,912
Additional paid-in capital 86,544,806 47,952,517
Retained earnings 43,026,156 30,544,337
------------ ------------
Total stockholders' equity 129,729,818 78,616,766
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $719,960,047 $501,124,972
============ ============
See Notes to Condensed Consolidated Financial Statements.
AMERICAN HOME MORTGAGE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
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FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
REVENUES:
Gain on sale of mortgage loans $34,946,814 $29,479,313 $65,579,846 $50,637,303
Interest income - net 3,931,955 2,864,067 6,929,121 3,501,646
Other 1,454,035 6,249 1,766,238 272,374
----------- ----------- ----------- -----------
Total revenues 40,332,804 32,349,629 74,275,205 54,411,323
----------- ----------- ----------- -----------
EXPENSES:
Salaries, commissions and benefits, net 17,758,739 14,944,377 32,760,385 25,595,681
Occupancy and equipment 3,405,724 2,294,975 5,786,661 4,122,595
Marketing and promotion 1,975,773 1,521,670 3,552,143 2,943,048
Data processing and communications 1,649,100 938,466 3,083,591 1,715,030
Professional fees 1,192,910 587,333 1,728,115 955,703
Travel and entertainment 811,359 359,729 1,466,503 686,074
Other 3,294,761 1,896,501 5,118,975 3,793,946
----------- ----------- ----------- -----------
Total expenses 30,088,366 22,543,051 53,496,373 39,812,077
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES AND MINORITY
INTEREST IN INCOME OF CONSOLIDATED
JOINT VENTURES 10,244,438 9,806,578 20,778,832 14,599,246
INCOME TAXES 3,555,998 4,110,225 7,275,002 6,104,172
----------- ----------- ----------- -----------
NET INCOME BEFORE MINORITY INTEREST IN
INCOME OF CONSOLIDATED JOINT VENTURES 6,688,440 5,696,353 13,503,830 8,495,074
MINORITY INTEREST IN INCOME OF
CONSOLIDATED JOINT VENTURES 187,769 138,442 299,651 403,496
----------- ----------- ----------- -----------
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 6,500,671 5,557,911 13,204,179 8,091,578
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF INCOME
TAXES -- -- -- 2,142,552
----------- ----------- ----------- -----------
NET INCOME $ 6,500,671 $ 5,557,911 $13,204,179 $10,234,130
=========== =========== =========== ===========
Per share data:
Basic before cumulative effect of change in
accounting principle $ 0.50 $ 0.62 $ 1.06 $ 0.90
Basic after cumulative effect of change in
accounting principle $ 0.50 $ 0.62 $ 1.06 $ 1.14
Diluted before cumulative effect of change in
accounting principle $ 0.49 $ 0.59 $ 1.02 $ 0.86
Diluted after cumulative effect of change in
accounting principle $ 0.49 $ 0.59 $ 1.02 $ 1.09
Weighted average number of shares - basic 12,912,523 9,002,261 12,491,933 9,001,524
=========== =========== =========== ===========
Weighted average number of shares - diluted 13,401,391 9,491,296 12,981,866 9,379,156
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements.
AMERICAN HOME MORTGAGE HOLDINGS, INC.
CONSENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
FOR THE SIX MONTHS ENDED
JUNE 30,
2002 2001
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES :
Net income $ 13,204,179 $ 10,234,130
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,093,610 1,164,795
Origination of mortgage loans held for sale (3,658,654,830) (3,227,902,858)
Proceeds on sale of mortgage loans 3,811,197,790 3,123,662,135
(Decrease) increase in income taxes payable (7,787,130) 105,234
Other -- 307,001
(Increase) decrease in operating assets:
Accounts receivable 10,518,638 (5,463,661)
Other assets (7,944,508) (498,511)
Increase (decrease) in operating liabilities:
Minority interest 91,107 (29,160)
Accrued expenses and other liabilities 3,625,775 4,451,153
--------------- ---------------
Net cash provided by (used in) operating activities 166,344,631 (93,969,742)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of real estate owned, net 223,639 259,254
Purchases of premises and equipment, net (2,390,979) (1,597,637)
Acquisition of businesses (33,452,124) (780,000)
Earnouts related to previous acquisitions (8,635,112) --
Increase in mortgage servicing rights (4,488,793) --
Net sales of loans held for investment - other 8,849 --
--------------- ---------------
Net cash used in investing activities (48,734,520) (2,118,383)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in warehouse lines of credit (101,290,139) 78,107,501
Increase (decrease) in drafts payable (22,988,503) 19,325,439
Proceeds from issuance of capital stock 38,631,233 --
Dividends paid (721,568) (269,068)
Decrease in notes payable (2,204,057) (472,355)
--------------- ---------------
Net cash (used in) provided by financing activities (88,573,034) 96,691,517
--------------- ---------------
NET INCREASE IN CASH 29,037,077 603,392
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 26,392,590 6,005,392
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 55,429,667 $ 6,608,784
=============== ===============
CONTINUED
SUPPLEMENTAL DISCLOSURE--CASH PAID FOR:
Interest $ 4,911,598 $ 4,007,777
Taxes 15,153,259 3,538,246
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVIITES
Effective June 13, 2002, the Company purchased all the stock of Columbia
National, Incorporated in an all cash transaction for $37 million. In
conjunction with the acquisition, assets acquired and liabilities assumed were
as follows:
Assets:
Mortgage loans held for sale $ 189,249,006
Mortgage servicing rights 102,000,000
Accounts receivable 7,312,201
Other assets 12,461,956
Liabilities:
Warehouse lines of credit 180,253,165
Notes payable 88,400,000
Income taxes payable 18,195,598
Other liabilities 13,154,207
See Notes to Condensed Consolidated Financial Statements.
AMERICAN HOME MORTGAGE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1-BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial statements
of American Home Mortgage Holdings, Inc. ("American Home") and its subsidiaries,
American Home Mortgage Corp. ("AHM") and Columbia National, Incorporated
("Columbia") (collectively the "Company"), reflect all adjustments which, in the
opinion of management, are necessary for a fair presentation of the results of
the interim periods presented. All such adjustments are of a normal recurring
nature. All intercompany accounts and transactions have been eliminated.
Operating results for the six months ended June 30, 2002 are not necessarily
indicative of the results that may be expected for the full year ended December
31, 2002. Certain prior year balances have been reclassified to conform with
current year presentation.
The unaudited interim condensed consolidated financial statements should be read
in conjunction with the Company's audited consolidated financial statements and
notes thereto for the year ended December 31, 2001, included in the Company's
Annual Report on Form 10-K for the year then ended.
NOTE 2-EARNINGS PER SHARE
Earnings per share is calculated on both a basic and diluted basis. Basic
earnings per share is based on the weighted average number of shares outstanding
and excludes the dilutive effect of common stock equivalents. Diluted earnings
per share is based on the weighted average number of shares outstanding and
includes the dilutive effect of common stock equivalents.
NOTE 3-ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES
On January 1, 2001, the Company adopted Financial Accounting Standards Board
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") which requires the recognition
of all derivative financial instruments at fair value and reported as either
assets or liabilities in the balance sheet. The accounting for gains and losses
associated with changes in the fair value of derivatives are reported in current
earnings, net of tax, depending on whether they qualify for hedge accounting and
whether the hedge is highly effective in achieving offsetting changes in the
fair value or cash flows of the asset or liability hedged. Under the provisions
of SFAS 133, the method used for assessing the effectiveness of a hedging
derivative, as well as the measurement approach for determining the ineffective
aspects of the hedge, must have been established at the inception of the hedge.
Those methods must also be consistent with the entity's approach to managing
risk. Although the Company continues to hedge its exposures to interest rate
changes under the same risk management approach, SFAS 133 may cause an increase
or decrease to reported net income in certain periods depending on levels of
interest rates and other variables affecting the fair values of derivative
instruments and hedged items, but will have no effect on actual cash flows or
the overall economics of the transactions.
As part of the Company's secondary marketing and related hedging activities,
mortgage-backed securities are purchased and sold forward, and options are
acquired on mortgage and treasury securities. At June 30, 2002, forward delivery
commitments amounted to approximately $1,038 million and options to buy
securities amounted to approximately $230 million. These contracts have a high
correlation to the price movement of the loans being hedged. The Company
considers these hedges to be fair value hedges.
On January 1, 2001, the Company recognized the fair value of all freestanding
derivative instruments, which resulted in recording an asset in the amount of
$7.5 million and a liability in the amount of $3.7 million. The net transition
adjustment for the Company's derivatives resulted in an after tax gain of $2.1
million and was recognized as a cumulative-effect-type adjustment to net income,
effective January 1, 2001. The related derivative asset and liability accounts
have been adjusted for changes in their respective fair values.
NOTE 4 - GOODWILL
On January 1, 2002, the Company adopted Financial Accounting Standards Board
Statements of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"), and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
These Statements make significant changes to the accounting for business
combinations, goodwill, and intangible assets. SFAS 141 eliminates the
pooling-of-interests method of accounting for business combinations. In
addition, it further clarifies the criteria for recognition of intangible assets
separately from goodwill. This statement was effective for business combinations
completed after June 30, 2001.
SFAS 142 discontinues the practice of amortizing goodwill and indefinite lived
intangible assets and initiates an annual review for impairment. Impairment
would be examined more frequently if certain indicators of such are encountered.
Intangible assets with a determinable useful life will continue to be amortized
over that period. The Company has reviewed its impairment analysis of recorded
goodwill and intangible assets and has concluded that no impairment exists at
this time.
NOTE 5- ACQUISITIONS
Effective June 13, 2002, the Company acquired Columbia National, Incorporated, a
Delaware corporation. The shareholders of Columbia received $37 million in cash.
Columbia is an independent mortgage lender based in Columbia, Maryland. Formed
in 1939, Columbia engages in the origination, sale and servicing of residential
first mortgage loans. It operates 57 loan production offices in 17 states and
has 361 primarily commission-compensated loan originators. At June 13, 2002,
Columbia had assets of $336 million. This transaction generated goodwill of
approximately $25 million.
The following table summarizes the required disclosures of the pro forma
combined entity, as if the merger occurred at the beginning of the year for the
quarter and six months ended June 30, 2002:
Three months Six months
ended June 30, ended June
2002 30, 2002
------------- -----------
Revenue.................................. $56,721,246 $110,731,890
Income before income taxes............... 11,939,826 24,087,146
Net income............................... 7,630,565 15,368,958
Earnings per share - basic............... $0.59 $1.23
Earnings per share - diluted............. $0.57 $1.18
On April 1, 2001, the Company acquired the Pennsylvania and Maryland loan
production offices of ComNet Mortgage Services (the "ComNet Branches"), the
residential mortgage division of Commonwealth Bank, a subsidiary of Commonwealth
Bancorp, Inc. ("Commonwealth"), Commonwealth's mortgage application pipeline and
certain fixed assets and assumed the real property leases of the ComNet
Branches. The ComNet Branches have become part of the American Home branch
network and have helped the Company to expand its originations in the
mid-Atlantic region through both a retail and wholesale presence.
NOTE 6- STOCK OFFERING
On June 28, 2002, the Company completed a public stock offering which raised
approximately $37.5 million through the sale of 3,700,000 shares of common
stock. These proceeds primarily were used for the acquisition of Columbia. On
July 3, 2002, the Company completed the sale of an additional 555,000 shares of
common stock pursuant to the exercise in full of the underwriters'
over-allotment option, which raised $5.9 million. These proceeds will be used
for general corporate purposes, including working capital, acquisitions and
capital expenditures.
NOTE 7 - NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 144. Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. SFAS 144 supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a business segment. SFAS
144 also eliminates the exception to consolidation for a subsidiary for which
control is likely to be temporary. The provisions of SFAS 144 are effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years. The provisions of SFAS 144
generally are to be applied prospectively. Management believes that the
financial impact of SFAS 144 will not have a material effect on the Company.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 145. Statement of Financial
Accounting Standards No. 145, "Rescission of SFAS Statements No. 4, 44, and 64,
Amendment of SFAS Statement No. 13, and Technical Corrections" ("SFAS 145"),
updates, clarifies and simplifies existing accounting pronouncements. SFAS 145
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt."
SFAS 145 amends SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. The provisions of SFAS
145 related to SFAS No. 4 and SFAS No. 13 are effective for fiscal years
beginning and transactions occurring after May 15, 2002, respectively.
Management believes that the financial impact of SFAS 145 will not have a
material effect on the Company.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 146. Statement of Financial
Accounting Standards No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" ("SFAS 146"), requires the Company to recognize costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. SFAS 146 replaces
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The provisions of SFAS
146 are to be applied prospectively to exit or disposal activities initiated
after December 31, 2002.
The Financial Accounting Standards Board is considering a number of mortgage
banking industry-related issues concerning the implementation of Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The ultimate conclusions reached concerning these
issues could result in material changes to the recorded carrying values of the
Company's derivative instruments, which would have a significant impact on its
reported earnings.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is an independent retail mortgage banking company primarily engaged
in the business of originating and selling residential mortgage loans. The
Company offers a broad array of residential mortgage products targeted primarily
to high-credit-quality borrowers over the Internet, as well as through its 920
primarily commission-compensated loan originators. The Company operates from 131
community loan offices across the country. The Company operates primarily as a
mortgage banker, underwriting, funding and then reselling its loan products to
more than 45 different buyers. The Company markets its mortgage products over
the Internet through its Internet site, MORTGAGESELECT.COM. Mortgage products
are originated online through arrangements with a number of popular Web sites
and through the Company's own Web site, which was established in 1999. The
Company also originates loans through mortgage brokers who work directly with
the borrower and submit a fully processed loan application for an underwriting
determination.
Net income for the second quarter of 2002 totaled $6.5 million or $0.49 per
share on a diluted basis, compared to $5.6 million or $0.59 per share in the
second quarter of 2001. Net income for the six months ended June 30, 2002 was
$13.2 million or $1.02 per share on a diluted basis, compared to $8.1 million or
$0.86 for the six months ended June 30, 2001, before cumulative effect of change
in accounting principle.
Loan originations decreased 4.3% in the second quarter of 2002, totaling $2.0
billion compared to $2.1 billion in the 2001 second quarter. Loan originations
for the six months ended June 30, 2002 totaled $3.9 billion, compared to $3.4
billon in 2001.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, recently released by the Securities and
Exchange Commission, requires all companies to include a discussion of critical
accounting policies or methods used in the preparation of financial statements.
MORTGAGE LOANS HELD FOR SALE - Mortgage loans held for sale represent mortgage
loans originated and held pending sale to interim and permanent investors. The
mortgages are carried at the lower of cost or market as determined by
outstanding commitments from investors or current investor yield requirements
calculated on the aggregate loan basis. The Company generally sells whole loans
without servicing retained. Gains or losses on such sales are recognized at the
time legal title transfers to the investor based upon the difference between the
sales proceeds from the final investor and the basis of the loan sold, adjusted
for net deferred loan fees and certain direct costs and selling costs. The
Company defers net loan origination costs as a component of the loan balance on
the balance sheet. Such costs are not amortized and are recognized into income
as a component of the gain or loss upon sale.
MORTGAGE SERVICING RIGHTS - Effective April 1, 2001, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which supersedes, but generally retains, the requirements of SFAS No. 125
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," which supersedes, but generally retains, the requirements of
SFAS No. 122, "Accounting for Mortgage Servicing Rights." All three statements
require that entities that acquire servicing assets through either purchase or
origination of loans and sells or securitizes those loans with servicing assets
retained must allocate the total cost of the loans to the servicing assets and
the loans (without the servicing assets) based on their relative fair values.
The adoption of SFAS No 140 did not have a material impact on the financial
statements. The amount attributable to the servicing assets is to be capitalized
as servicing assets on the consolidated balance sheets. At June 30, 2002 and
December 31, 2001, the Company has capitalized $105.7 million (including $102.0
million acquired from Columbia) and $46,000 of mortgage servicing assets, net.
SFAS No. 140 also requires that capitalized servicing assets be assessed for
impairment based on the fair value of those assets. The Company estimates fair
value of the servicing assets using market prices (if available) or using a
discounted cash flow valuation model incorporating prepayment, default, cost to
service and interest rate assumptions that market participants use for similar
instruments. Impairment is to be recognized through a valuation allowance. In
determining impairment, the post-implementation mortgage servicing portfolio has
been stratified into the predominant risk characteristics of the underlying
mortgage loans. The Company has determined those risk characteristics to be loan
type and interest rate. These strata within the portfolio were then valued using
the same model assumptions described above. At June 30, 2002 and December 31,
2001, no servicing impairment allowance was required. Servicing assets are
amortized in proportion to, and over the period of, estimated net servicing
income.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company has developed risk management
programs and processes designed to manage market risk associated with normal
business activities.
Risk Management of the Mortgage Pipeline. The Company's 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. Effective with the adoption of the Financial
Accounting Standards Board Statement of Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended, the
Company classifies and accounts for the IRLCs as free-standing derivatives.
Accordingly, IRLCs are recorded at fair value with changes in fair value
recorded to current earnings. The Company uses other derivative instruments to
economically hedge the IRLCs, which are also classified and accounted for as
free-standing derivatives. Gains (losses) on IRLCs represent the change in value
from rate-lock inception to funding date.
Risk Management of 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 and non-conforming loans. At the inception of the
hedge, the Company formally documents the relationship between the forward
delivery contracts and the mortgage inventory as well as its objective and
strategy for undertaking the hedge transactions. 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. 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.
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 effective
or expected to be 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.
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. These fees and costs are included in gain on sales of
loans when the loan is sold.
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 are returned to an 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 and the Fed Funds rate.
RESULTS OF OPERATIONS
The following table sets forth information derived from the Company's Condensed
Consolidated Statements of Income expressed as a percentage of total revenues:
For the three months For the six months
ended June 30, ended June 30,
---------------- ----------------
2002 2001 2002 2001
----- ----- ----- -----
Revenues
Gain on sale of mortgage loans........ 86.7% 91.1% 88.3% 93.1%
Interest income, net.................. 9.7 8.8 9.3 6.4
Other................................. 3.6 0.1 2.4 0.5
----- ----- ----- -----
Total revenues........................ 100.0 100.0 100.0 100.0
----- ----- ----- -----
Expenses
Salaries, commissions and benefits, net 44.0 46.2 44.1 47.0
Occupancy and equipment............... 8.4 7.1 7.8 7.6
Marketing and promotion............... 4.9 4.7 4.7 5.4
Data processing and communications.... 4.1 2.9 4.2 3.2
Professional fees..................... 3.0 1.8 2.3 1.8
Travel and entertainment.............. 2.0 1.1 2.0 1.3
Other................................. 8.2 5.9 6.9 6.9
----- ----- ----- -----
Total expenses........................ 74.6 69.7 72.0 73.2
----- ----- ----- -----
Income before income taxes and
minority interest.................. 25.4 30.3 28.0 26.8
Income taxes.......................... 8.8 12.7 9.8 11.2
Minority interest..................... 0.5 0.4 0.4 0.7
----- ----- ----- -----
Net income before cumulative effect of
change in Accounting principle..... 16.1 17.2 17.8 14.9
Cumulative effect of change in
accounting principle............... -- -- -- 3.9
----- ----- ----- -----
Net income 16.1% 17.2% 17.8% 18.8%
===== ===== ===== =====
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2001
REVENUES
Revenues for the second quarter of 2002 were $40.3 million compared to $32.3
million in the second quarter of 2001, an increase of 24.7%. The increase was a
result of increased gains on sale of mortgage loans, increased net interest
income and an increase in other income.
Gain on sale of mortgage loans increased by 18.5% to $34.9 million from $29.5
million in the second quarter of 2001, generally a result of improved margins.
Loans sold in the second quarter of 2002 were $2.0 billion compared to $2.1
billion in the second quarter in 2001 (which amounts include $133.0 million and
$102.4 million, respectively, of brokered, as opposed to funded, originations
and $206.0 million of loans sold by Columbia in the second quarter of 2002).
Interest income - net increased to $3.9 million from $2.9 million in the second
quarter of 2001, an increase of 37.3%. The increase resulted primarily from an
increase in loans held for sale and an increase in the Company's effective
interest rate spread.
Other income was $1.5 million for the quarter compared to $6,000 for the second
quarter of 2001. Other income primarily consists of servicing income and title
insurance agency revenues.
EXPENSES
Salaries, commissions and benefits increased by 18.8% to $17.8 million for the
current quarter from $14.9 million for the 2001 second quarter. The increase was
largely due to increased staffing levels and overtime at the Company's corporate
headquarters, increased staffing levels at MortgageSelect.com's call centers due
to increased loan volumes and the inclusion of Columbia following the
acquisition.
Occupancy and equipment costs increased by 48.4% to $3.4 million for the current
quarter from $2.3 million in the second quarter of 2001. The increase in costs
reflects the opening of new community loan offices, greater depreciation charges
as a result of the Company's increased investments in computer networks and the
inclusion of Columbia following the acquisition.
Marketing and promotion expenses increased by 29.8% to $2.0 million for the
current quarter from $1.5 million in the second quarter of 2001. The increase
was due to increased loan volumes.
Data processing and communications increased by 75.7% to $1.6 million from $0.9
million in the second quarter of 2001. The expense increase was a result of
opening of new community loan offices.
Professional fees increased 103.1% to $1.2 million for the current quarter from
$0.6 million in the second quarter of 2001.
Travel and entertainment expenses increased 125.5% to $0.8 million for the
current quarter from $0.4 million in the second quarter of 2001. The increase is
due to the addition of new loan originators.
Other expenses increased by 73.7% to $3.3 million, from $1.9 million in the
second quarter of 2001. These expenses, which consist generally of office
supplies, printing and stationery, office expense and insurance, have increased
as a result of opening of new community loan offices and the inclusion of
Columbia following the acquisition.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 2001
REVENUES
Revenues for the six months of 2002 increased to $74.3 million from $54.4
million for the first six months of 2001, an increase of 36.5%. The increase was
a result of increased gains on sale of mortgage loans, increased net interest
income, increased servicing income and an increase in other income.
For the first six months of 2002, gain on sale of mortgage loans totaled $65.6
million compared to $50.6 million in 2001, an increase of 29.5%. The increase
generally resulted from an increase in loan sales volume and the acquisition of
the ComNet branches. The Company sold $4.1 billion of loans on a year-to-date
basis compared to $3.3 billion for the same period in 2001 (which amounts
include $262.0 million and $174.1 million, respectively of brokered as opposed
to funded originations and $206.0 million of loans sold by Columbia in the
second quarter of 2002).
Interest income - net increased by 97.9% to $6.9 million from $3.5 million a
year ago. The increase resulted primarily from an increase in loans held for
sale and an increase in the Company's effective interest rate spread.
Other income was $1.8 million for the current six month period compared to
$272,000 in the like period of 2001. Other income primarily consists of
servicing income and title insurance agency revenues.
EXPENSES
Salaries, commissions and benefits amounted to $32.8 million in the current six
month period, compared to $25.6 million in 2001, an increase of 28.0%. The
increase was largely due to increased staffing levels and overtime at the
Company's corporate headquarters and increased staffing levels at
MortgageSelect.com's call centers due to increased loan volumes and the
inclusion of expenses of the ComNet Branches and Columbia following their
acquisitions.
Occupancy and equipment costs increased by 40.4% to $5.8 million for the current
six month period from $4.1 million in the like period in 2001. The increase in
costs reflects the acquisition of the ComNet Branches, the opening of new
community loan offices and greater depreciation charges as a result of the
Company's increased investments in computer networks.
Marketing and promotion expenses totaled $3.6 million in the current six month
period, compared to $2.9 million in 2001, an increase of 20.7%. The increase was
due to increased loan volume.
Data processing and communications increased by 79.8% to $3.1 million in the
first six months of 2002 from $1.7 million in 2001. The expense increase was a
result of operating the ComNet Branches and the opening of new community loan
offices.
Professional fees totaled $1.7 million in the current six month period, compared
to $1.0 million in 2001, an increase of 80.8%.
Travel and entertainment expenses totaled $1.5 million in the current six month
period, compared to $0.7 million in 2001, an increase of 113.8%. The increase is
due to the addition of new loan originators.
Other expenses increased by 34.9% in the current six month period to $5.1
million, from $3.8 million for the same period in 2001. These expenses, which
consist generally of office supplies, printing and stationery, office expense
and insurance, have increased as a result of opening of new community loan
offices and the acquisition of the ComNet Branches and higher loan production.
LIQUIDITY AND CAPITAL RESOURCES
To originate a mortgage loan, the Company draws against a $240 million
pre-purchase facility with UBS Paine Webber ("Paine Webber"), a $300 million
facility with CDC IXIS Capital Markets North America Inc. ("CDC"), a $100
million facility with Residential Funding Corporation ("RFC"), a $250 million
bank syndicated facility led by RFC and a facility of $75 million with Morgan
Stanley Bank ("Morgan Stanley"). These facilities are secured by the mortgages
owned by the Company, and by certain of its other assets. Advances drawn under
the facilities bear interest at rates that vary depending on the type of
mortgages securing the advances. These loans are subject to sublimits, advance
rates and terms that vary depending on the type of securing mortgages and the
ratio of the Company's liabilities to its tangible net worth. At June 30, 2002,
the aggregate outstanding balance under the warehouse facilities was $430
million, the aggregate outstanding balance in drafts payable was $16 million and
the aggregate maximum amount available for additional borrowings was $535
million.
In addition to the Paine Webber, CDC, RFC, bank syndicate and Morgan Stanley
warehouse facilities, the Company has purchase and sale agreements with Fannie
Mae, Paine Webber and Greenwich Capital Financial Products, Inc. Pursuant to
these agreements, the Company obtains commitments from the ultimate buyer, which
may be a bank, a pension fund or an investment bank, to purchase its loans.
These loans are then sold together with the commitment from the ultimate buyer
to one of the two institutions above, who subsequently take responsibility for
consummating the final transaction. These agreements allow the Company to
accelerate the sale of its mortgage loan inventory resulting in a more effective
use of the warehouse facilities. The combined capacity available under the
Company's purchase and sale agreements is $329 million.
Cash and cash equivalents increased to $55.4 million at June 30, 2002 from $26.4
million at December 31, 2001. Included in cash and cash equivalents at June 30,
2002 is $38.1 million of cash received in settlement of loans that is restricted
to reduce warehouse borrowings.
The Company's primary sources of cash and cash equivalents during the quarter
ended June 30, 2002 were as follows:
o $152.5 million net decrease in mortgage loans held for sale;
o $ 38.6 million proceeds from issuance of capital stock; and
o $ 10.5 million decrease in accounts receivable;
o $ 3.6 million increase in accrued expenses and other liabilities.
The Company's primary uses of cash and cash equivalents during the year ended
June 30, 2002 were as follows:
o $101.3 million decrease in warehouse lines of credit;
o $ 33.5 million acquisition of businesses;
o $ 23.0 million decrease in drafts payable;
o $ 8.6 million for earnouts related to previous acquisitions;
o $ 7.9 million decrease in other assets;
o $ 7.8 million decrease in income taxes payable;
o $ 4.5 million increase in mortgage servicing rights;
o $ 2.4 million to purchase furniture and office and computer equipment
for new branch offices; and
o $ 2.2 million decrease in notes payable.
COMMITMENTS
The Company had the following commitments (excluding derivative financial
instruments) at June 30, 2002:
Less Than 1-3 4-5 After
Total 1 Year Years Years 5 Years
---- --------- ----- ----- -------
Warehouse facilities..... $430,416,905 $430,416,905 $ -- $ -- $ --
Operating leases......... 25,170,472 7,311,934 9,836,597 5,149,974 2,806,967
Notes payable............ 89,210,257 87,237,468 697,129 467,857 807,803
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. The words "plan,"
"believe," "anticipate," "estimate," "expect," "objective," "projection,"
"forecast," "goal" or similar words are intended to identify forward-looking
statements. Such statements involve risks and uncertainties that exist in the
Company's operations and business environment that could render actual outcomes
and results materially different than predicted. The Company's forward-looking
statements are based on assumptions about many factors, including, but not
limited to, general volatility of the capital markets; changes in the real
estate market, interest rates or the general economy of the markets in which the
Company operates; economic, technological or regulatory changes affecting the
use of the Internet and changes in government regulations that are applicable to
the Company's regulated brokerage and property management businesses. These and
other factors are more fully discussed in the Company's prospectus filed with
the Securities and Exchange Commission during the past 12 months. While the
Company believes that its assumptions are reasonable at the time forward-looking
statements are made, it cautions that it is impossible to predict the actual
outcome of numerous factors and, therefore, readers should not place undue
reliance on such statements. Forward-looking statements speak only as of the
date they are made, and the Company undertakes no obligation to update such
statements in light of new information or future events.
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. 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 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 mortgage and treasury securities.
The board of directors of the Company establishes thresholds which limit
exposure to such risk. An analysis is performed daily to determine the risk
exposure under various interest rate scenarios and such risk is managed by
executing the program discussed above. All derivatives are obtained for hedging
(or other than trading) purposes, and management regularly evaluates the
effectiveness of its hedges.
Movements in interest rates also impact the value of mortgage servicing rights.
When interest rates decline, the loans underlying the mortgage servicing rights
generally prepay faster which reduces the market value of the mortgage servicing
rights. 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 mortgage servicing rights.
The following table summarizes the Company's interest rate sensitive
instruments:
June 30, 2002 December 31, 2001
---------------------- ---------------------
Notional Fair Notional Fair
Amount Value Amount Value
-------- ----- -------- -----
Instruments:
Commitments to fund mortgages at
agreed-upon rates........................ $ 886,247,999 $ 20,619,506 $554,466,137 $ 95,966
Loans held for sale........................ 321,171,584 329,538,948 335,442,033 339,461,803
Mortgage servicing rights.................. 8,581,562,067 112,650,932 4,555,100 45,551
Forward delivery commitments............... 1,037,873,129 (10,751,101) 857,999,769 450,369
Option contracts to buy securities......... 230,000,000 731,389 175,000,000 161,750
No material changes in market risk strategy occurred during the current period.
A detailed discussion of market risk is provided in the Company's Annual Report
on Form 10-K for the period ended December 31, 2001.
PART II-OTHER INFORMATION
ITEM 2.
CHANGES IN 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 to various individuals during the quarter ended June 30, 2002.
On May 14, 2002, the Company awarded 13,793 shares of common stock to Michael
McManus, Jr., one of its non-employee directors. On May 28, 2002, the Company
awarded 13,957 shares of common stock to Nicholas Marfino, one of its
non-employee directors. The shares awarded to Mr. McManus and Mr. Marfino are
subject to the terms and conditions of the Company's 1999 Omnibus Stock
Incentive Plan. With respect to the shares awarded to Mr. McManus, the
restriction period shall expire, and the shares may be sold, transferred or
otherwise disposed of, subject to applicable securities law requirements, as of
December 7, 2003. With respect to the shares awarded to Mr. Marfino, the
restriction period shall expire, and the shares may be sold, transferred or
otherwise disposed of, subject to applicable securities law requirements, as of
July 20, 2003. The shares of stock issued to each of Mr. McManus and Mr. Marfino
were issued in consideration of their services as the Company's non-employee
directors. The issuances of unregistered securities to Mr. McManus and Mr.
Marfino were exempt from registration under Section 4(2) of the Securities Act
because the Company issued the securities in private transactions, rather than
through public offerings.
The Company acquired Marina Mortgage Company, Inc. ("Marina") on December 29,
1999. In addition to the shares paid to former Marina shareholders as initial
consideration, the Company is required to issue unregistered shares of common
stock to the former shareholders under the earnout provisions of the merger
agreement. On June 6, 2002, pursuant to these earnout provisions, the Company
issued an aggregate of 180,541 shares of common stock to such shareholders as
additional consideration. These securities were exempt from registration under
Section 4(2) of the Securities Act because they were issued pursuant to the
terms of a private transaction rather than through a public offering.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 30, 2002, the Company held its 2002 Annual Meeting of Stockholders (the
"Meeting"). As of April 30, 2002, the record date for the Meeting, there were
12,180,722 shares of common stock outstanding and entitled to vote. Represented
at the Meeting in person or by proxy were 11,344,732 shares of common stock,
representing a quorum.
At the Meeting, Michael Strauss and Nicholas Marfino were elected as directors
of the Company to serve for a three-year term expiring at the 2005 Annual
Meeting of Stockholders or until their respective successors have been elected
and qualified. With respect to the election of Mr. Strauss, there were 9,876,734
votes for and 1,467,998 votes withheld. With respect to the election of Mr.
Marfino, there were 10,905,378 votes for and 439,354 votes withheld.
The stockholders of the Company voted upon and ratified the appointment of
Deloitte & Touche LLP as the Company's external auditors for the fiscal year
ending December 31, 2002. With respect to this matter, there were 11,104,127
votes for, 232,004 votes against and 8,601 abstentions.
At the Meeting, the Company's stockholders voted upon and approved amendments to
the 1999 Omnibus Stock Incentive Plan (the "Plan") to increase the number of
shares subject to awards granted under the Plan from 1,500,000 to 2,250,000, to
increase the maximum number of shares that are available to be granted as
incentive stock options under the Plan from 1,500,000 to 2,250,000 and to
provide that any awards granted under the Plan to directors and executive
officers will be approved by the entire board of directors of the Company or a
duly constituted committee thereof, as appropriate. With respect to this matter,
there were 6,365,871 votes for, 2,958,558 votes against and 24,893 abstentions.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed as part of this Quarterly Report on Form
10-Q:
Exhibit 99.1 Certification of Chief Executive Officer
Exhibit 99.2 Certification of Chief Financial Officer
(b) Reports on Form 8-K.
During the quarter ended June 30, 2002, the Company filed Reports on Form 8-K on
each of June 14, 2002 and June 26, 2002.
The Report on Form 8-K filed on June 14, 2002 reported the Company's execution
of a stock purchase agreement with Columbia National, Incorporated ("Columbia")
under Item 2 of Form 8-K. Pursuant to Item 7 of Form 8-K, the Company also
filed: (i) audited consolidated financial statements of Columbia as of and for
the years ended December 31, 2001, 2000 and 1999 and related audit reports of
Arthur Andersen LLP; (ii) unaudited condensed consolidated balance sheet as of
March 31, 2002 and unaudited condensed consolidated statements of income,
changes in shareholders' equity and cash flows for the three-month periods ended
March 31, 2002 and 2001 of Columbia and review report of Deloitte & Touche LLP
on the March 31, 2002 unaudited financial statements; and (iii) pro forma
financial information for the year ended December 31, 2001 and as of and for the
three-month period ended March 31, 2002.
The Report on Form 8-K filed on June 26, 2002 was filed to correct a
typographical error in the Independent Auditors' Report filed with the Company's
Annual Report on Form 10-K for the year ended December 31, 2001 and was reported
under Item 5 of Form 8-K.
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 HOLDINGS, INC.
(Registrant)
Date: August 14, 2002 By: /s/ Michael Strauss
---------------------------------
Michael Strauss
Chairman of the Board, President
and Chief Executive Officer
Date: August 14, 2002 By: /s/ Stephen A. Hozie
---------------------------------
Stephen A. Hozie
Chief Financial Officer