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 SEPTEMBER 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
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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)
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 September 30, 2002, 16,448,122 shares of the Registrant's
Common Stock, $0.01 par value, were outstanding.
AMERICAN HOME MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
QUARTER ENDED SEPTEMBER 30, 2002
INDEX
PART I-FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets (unaudited) - September
30, 2002 and December 31, 2001
Condensed Consolidated Statements of Income (unaudited) - Nine
months ended September 30, 2002 and 2001 and Three months
ended September 30, 2002 and 2001
Condensed Consolidated Statements of Cash Flows (unaudited) -
Nine months ended September 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
Item 4. Controls and Procedures
PART II-OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
ITEM 1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN HOME MORTGAGE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
- --------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------- --------------
ASSETS
Cash and cash equivalents $ 21,273,540 $ 26,392,590
Accounts receivable and servicing advances 20,611,984 18,558,211
Mortgage loans held for sale, net 948,260,567 419,192,096
Mortgage loans - other 2,915,876 1,305,902
Real estate owned 629,143 438,533
Mortgage servicing rights, net 104,413,435 45,551
Premises and equipment, net 12,868,212 9,072,133
Goodwill 51,824,191 16,874,185
Other assets 19,038,337 9,245,771
-------------- --------------
TOTAL ASSETS $1,181,835,285 $ 501,124,972
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Warehouse lines of credit $ 866,724,356 $ 351,453,879
Drafts payable 10,131,265 35,359,821
Accrued expenses and other liabilities 44,155,346 15,108,385
Income taxes payable 35,633,825 16,994,415
Notes payable 77,072,105 3,014,314
-------------- --------------
Total liabilities 1,033,716,897 421,930,814
-------------- --------------
COMMITMENTS AND CONTINGENCIES -- --
MINORITY INTEREST 624,497 577,392
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, 16,448,122 and 11,991,200 shares
issued and outstanding, respectively 164,481 119,912
Additional paid-in capital 92,127,456 47,952,517
Retained earnings 55,201,954 30,544,337
-------------- --------------
Total stockholders' equity 147,493,891 78,616,766
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,181,835,285 $ 501,124,972
============== ==============
See Notes to Condensed Consolidated Financial Statements.
AMERICAN HOME MORTGAGE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
- --------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
---------------- --------------- ----------------- --------------
REVENUES:
Gain on sale of mortgage loans $ 74,081,358 $ 29,191,606 $ 139,841,229 $ 79,828,909
Interest income - net 6,757,174 2,770,316 13,686,295 6,271,962
Loan servicing fees 8,729,784 -- 10,298,928 --
Amortization and impairment (16,808,597) -- (17,656,566) --
------------- ------------- ------------- -------------
Net loan servicing fees (8,078,813) -- (7,357,638) --
Other 952,619 23,828 1,952,682 296,202
------------- ------------- ------------- -------------
Total revenues 73,712,338 31,985,750 148,122,568 86,397,073
------------- ------------- ------------- -------------
EXPENSES:
Salaries, commissions and benefits, net 34,958,276 13,704,915 67,898,686 39,300,596
Occupancy and equipment 4,737,414 1,959,955 10,524,075 6,082,550
Marketing and promotion 1,860,286 1,742,773 5,412,429 4,685,821
Data processing and communications 2,343,031 1,284,008 5,426,622 2,999,038
Professional fees 1,528,000 526,105 3,403,754 1,481,808
Travel and entertainment 1,307,322 433,256 2,905,818 1,119,330
Other 5,396,792 2,375,054 10,191,137 6,169,002
------------- ------------- ------------- -------------
Total expenses 52,131,121 22,026,066 105,762,521 61,838,145
------------- ------------- ------------- -------------
INCOME BEFORE INCOME TAXES AND MINORITY
INTEREST IN INCOME OF CONSOLIDATED
JOINT VENTURES 21,581,217 9,959,684 42,360,047 24,558,928
INCOME TAXES 8,515,362 4,152,480 15,790,364 10,256,652
------------- ------------- ------------- -------------
NET INCOME BEFORE MINORITY INTEREST IN
INCOME OF CONSOLIDATED JOINT VENTURES 13,065,855 5,807,204 26,569,683 14,302,276
MINORITY INTEREST IN INCOME OF CONSOLIDATED
JOINT VENTURES 293,801 189,143 593,452 592,638
------------- ------------- ------------- -------------
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 12,772,054 5,618,061 25,976,231 13,709,638
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF INCOME TAXES -- -- -- 2,142,552
------------- ------------- ------------- -------------
NET INCOME $ 12,772,054 $ 5,618,061 $ 25,976,231 $ 15,852,190
============= ============= ============= =============
Per share data:
Basic before cumulative effect of change in
accounting principle $ 0.78 $ 0.49 $ 1.88 $ 1.39
Basic after cumulative effect of change in
accounting principle $ 0.78 $ 0.49 $ 1.88 $ 1.61
Diluted before cumulative effect of change in
accounting principle $ 0.76 $ 0.47 $ 1.83 $ 1.33
Diluted after cumulative effect of change in
accounting principle $ 0.76 $ 0.47 $ 1.83 $ 1.54
Weighted average number of shares - basic 16,430,377 11,503,116 13,819,174 9,844,552
============= ============= ============= =============
Weighted average number of shares - diluted 16,783,057 12,053,916 14,186,164 10,279,630
============= ============= ============= =============
See Notes to Condensed Consolidated Financial Statements.
AMERICAN HOME MORTGAGE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 25,976,231 $ 15,852,190
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,300,763 1,792,076
Amortization and impairment of mortgage servicing rights 13,889,964 6,463
Origination of mortgage loans held for sale (7,097,178,173) (4,847,866,524)
Proceeds on sale of mortgage loans 6,757,358,802 4,703,288,770
Increase in income taxes payable 443,812 8,033,707
Other (48,364) 484,002
(Increase) decrease in operating assets:
Accounts receivable 5,716,074 (8,618,604)
Derivative assets (9,301,844) (4,716,869)
Other assets 2,134,073 (1,130,083)
Increase (decrease) in operating liabilities:
Minority interest 47,105 (199,837)
Accrued expenses and other liabilities 21,677,205 3,724,431
--------------- ---------------
Net cash used in operating activities (276,984,352) (129,350,278)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) sale of real estate owned, net (190,610) 213,317
Purchases of premises and equipment, net (3,469,008) (2,054,050)
Acquisition of businesses (33,821,634) (1,777,062)
Earnouts related to previous acquisitions (2,200,689) --
Increase in mortgage servicing rights (16,257,848) --
Net sales of loans - other 144,685 --
--------------- ---------------
Net cash used in investing activities (55,795,104) (3,617,795)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in warehouse lines of credit 335,017,312 110,142,786
(Decrease) increase in drafts payable (35,915,497) 13,879,287
Proceeds from issuance of capital stock 44,120,955 24,191,018
Dividends paid (1,220,155) (615,940)
Decrease in notes payable (14,342,209) (658,125)
--------------- ---------------
Net cash provided by financing activities 327,660,406 146,939,026
--------------- ---------------
NET (DECREASE) INCREASE IN CASH (5,119,050) 13,970,953
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 26,392,590 6,005,392
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,273,540 $ 19,976,345
=============== ===============
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
------------------ -----------------
SUPPLEMENTAL DISCLOSURE--CASH PAID FOR:
Interest $ 12,260,357 $ 4,007,777
Taxes 15,363,004 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 nine months ended September 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 - DERIVATIVE INVESTMENTS 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. If the derivatives are designated as fair value hedges and are highly
effective in achieving offsetting changes in the fair value of the asset or
liability hedged, the book value of the hedged item is adjusted by its change in
fair value attributable to the hedged risk. 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 treasury futures contracts. At September 30, 2002, forward delivery
commitments amounted to approximately $1,705 million and options on treasury
futures contracts amounted to approximately $100 million. These contracts have a
high correlation to the price movement of the loans being hedged.
As part of the Company's mortgage servicing rights hedging program,
mortgage-backed securities are purchased with forward settlement dates. At
September 30, 2002, forward purchase commitments amounted to $900 million. The
contracts have a high correlation to the price movements of the servicing rights
being hedged.
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 - DERIVATIVE ASSETS AND LIABILITIES
The following table summarizes derivative assets and liabilities which are
included as a component of other assets:
September 30, 2002 December 31, 2001
------------------ -----------------
Interest rate lock commitments .................................... $ 34,490,299 $ 95,966
Forward delivery contracts ........................................ (20,455,761) 5,769,510
Options on treasury futures contracts ............................. 661,719 161,750
Forward purchase contracts ........................................ 632,813 --
------------ ------------
Total ............................................................. $ 15,329,070 $ 6,027,226
============ ============
NOTE 5 - MORTGAGE SERVICING RIGHTS
Mortgage servicing rights
Balance - June 30, 2002 .................................................................... $ 105,686,376
Additions .................................................................................. 11,769,054
Amortization ............................................................................... (11,132,039)
Change in fair value attributable to hedged risk ........................................... 4,098,309
-------------
Balance - September 30, 2002 ............................................................... 110,421,700
Valuation allowance for impairment of mortgage servicing rights
Balance - June 30, 2002 .................................................................... --
Additions .................................................................................. (6,008,265)
-------------
Balance - September 30, 2002 ............................................................... (6,008,265)
-------------
Mortgage servicing rights, net ............................................................... $ 104,413,435
=============
NOTE 6 - 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 September 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 7- ACQUISITIONS
Effective June 13, 2002, the Company acquired Columbia National ("Columbia"),
Incorporated, a Delaware corporation. The shareholders of Columbia received $37
million in cash. Columbia is an independent mortgage lender based in Columbia,
Maryland. Columbia engages in the origination, sale and servicing of residential
first mortgage loans. Columbia 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
nine months ended September 30, 2002 and 2001:
Nine months ended September 30,
2002 2001
---- ----
Revenue ............................ $196,580,347 $171,183,943
Income before income taxes ......... 44,850,159 35,480,857
Net income ......................... 27,469,041 22,364,077
Earnings per share - basic ......... $ 1.67 $ 1.58
Earnings per share - diluted ....... $ 1.64 $ 1.54
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 8- 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 9 - 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.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 147. Statement of Financial
Accounting Standards No. 147, "Acquisitions of Certain Financial Institutions,
an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9"
("SFAS 147"), addresses the financial accounting and reporting for the
acquisition of all or part of a financial institution, except for transactions
between two or more mutual enterprises; this Statement removes acquisitions of
financial institutions from the scope of both Statement 72 and Interpretation
No. 9 and requires that those transactions be accounted for in accordance with
FASB Statements No. 141, "Business Combinations," and No. 142, "Goodwill and
Other Intangible Assets." Thus, the requirement in paragraph 5 of Statement 72
to recognize (and subsequently amortize) any excess of the fair value of
liabilities assumed over the fair value of tangible and identifiable intangible
assets acquired as an unidentifiable intangible asset no longer applies to
acquisitions within the scope of this Statement. In addition, this Statement
amends FASB Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor- and
borrower-relationship intangible assets and credit cardholder intangible assets.
Consequently, those intangible assets are subject to the same undiscounted cash
flow recoverability test and impairment loss recognition and measurement
provisions that Statement 144 requires for other long-lived assets that are held
and used. The provisions of SFAS 147 are to be applied prospectively to
acquisitions of certain financial institutions initiated after October 31, 2002.
Management believes that the financial impact of SFAS 147 will not have a
material effect on the Company.
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, selling and servicing residential mortgage
loans. The Company offers a broad array of residential mortgage products
targeted primarily to high-credit-quality borrowers through its 1,002 primarily
commission-compensated loan originators as well as over the Internet and through
its broker acceptance program. 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.
Effective June 13, 2002, the Company acquired Columbia National, Incorporated
("Columbia") for $37 million in cash and accounted for the acquisition using
purchase accounting. Thus, the results of operations may not be comparable to
prior periods, as periods prior to the effective date do not include the results
of Columbia.
Net income for the third quarter of 2002 was $12.8 million or $0.76 per share on
a diluted basis, compared to $5.6 million or $0.47 per share in the third
quarter of 2001. Net income for the nine months ended September 30, 2002 was
$26.0 million or $1.83 per share on a diluted basis, compared to $13.7 million
or $1.33 per share for the nine months ended September 30, 2001, before
cumulative effect of change in accounting principle.
Loan originations increased 110.2% in the third quarter of 2002, totaling $3.6
billion (including $900 million attributable to Columbia) compared to $1.7
billion in the 2001 third quarter. Loan originations for the nine months ended
September 30, 2002 totaled $7.6 billion (including $1.1 billion attributable to
Columbia), compared to $5.1 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. 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 Company's financial statements. The amount
attributable to the servicing assets is to be capitalized as servicing assets on
the consolidated balance sheets. At September 30, 2002, and December 31, 2001,
the Company capitalized $104.4 million (including $101.0 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 a discounted cash flow valuation model
incorporating prepayment, default, cost to service, interest rate and discount
rate assumptions that market participants use for similar instruments. 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 into the predominant risk
characteristics of the underlying mortgage loans. The Company has determined
those risk characteristics to be loan type and interest rate. At September 30,
2002, servicing impairment was $6 million. 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,
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.
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 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.
Risk Management of Mortgage Servicing Rights. The Company hedges its exposure to
impairment of the mortgage servicing rights by the use of mortgage forward
purchase contracts. These derivatives are classified and accounted for as fair
value hedges. The mortgage forward purchase contracts are carried at fair value
with the changes in their fair value recorded to current earnings. When the
hedges are deemed to be highly effective, the book value of the hedged mortgage
servicing rights is adjusted for its change in fair value attributable to the
hedged risk 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.
GAIN ON SALE OF LOANS - The Company recognizes gain on sale of loans for the
difference between the sales price and the adjusted book value of the loans at
the time of sale. The adjusted book value of the loans includes the original
principal amount plus adjustments related to previously recognized income plus
deferrals of fees and points received and direct loan origination costs paid.
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.
SERVICING FEES - The Company recognizes servicing fees when the fees are
collected.
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 nine months
ended September 30, ended September 30,
------------------- -------------------
2002 2001 2002 2001
----- ----- ----- -----
Revenues
Gain on sale of mortgage loans ............................................... 100.5% 91.3% 94.4% 92.4%
Interest income - net ........................................................ 9.2 8.6 9.2 7.3
Loan servicing fees .......................................................... 11.8 -- 7.0 --
Amortization and impairment .................................................. (22.8) -- (11.9) --
----- ----- ----- -----
Net loan servicing fees ................................................. (11.0) -- (5.0) --
Other ........................................................................ 1.3 0.1 1.3 0.3
----- ----- ----- -----
Total revenues ............................................................... 100.0 100.0 100.0 100.0
----- ----- ----- -----
Expenses
Salaries, commissions and benefits, net ...................................... 47.4 42.8 45.8 45.5
Occupancy and equipment ...................................................... 6.4 6.1 7.1 7.0
Marketing and promotion ...................................................... 2.5 5.5 3.7 5.4
Data processing and communications ........................................... 3.2 4.0 3.7 3.5
Professional fees ............................................................ 2.1 1.6 2.3 1.7
Travel and entertainment ..................................................... 1.8 1.4 2.0 1.3
Other ........................................................................ 7.3 7.4 6.9 7.1
----- ----- ----- -----
Total expenses ............................................................... 70.7 68.8 71.4 71.5
----- ----- ----- -----
Income before income taxes and minority interest ............................. 29.3 31.2 28.6 28.5
Income taxes ................................................................. 11.6 13.0 10.7 11.9
Minority interest ............................................................ 0.4 0.6 0.4 0.7
----- ----- ----- -----
Net income before cumulative effect of change
in Accounting principle ................................................... 17.3 17.6 17.5 15.9
Cumulative effect of change in accounting
principle ................................................................. -- -- -- 2.5
----- ----- ----- -----
Net income ................................................................... 17.3% 17.6% 17.5% 18.4%
===== ===== ===== =====
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2001
REVENUES
Revenues for the third quarter of 2002 were $73.7 million compared to $32.0
million in the third quarter of 2001, an increase of 130.5%. The increase was a
result of increases in gains on sale of mortgage loans, net interest income and
other income, offset by a loss from net loan servicing fees.
Gain on sale of mortgage loans increased by 153.8% to $74.1 million from $29.2
million in the third quarter of 2001, generally as a result of the Columbia
acquisition and improved margins. Loans sold in the third quarter of 2002 were
$3.1 billion compared to $1.7 billion in the third quarter in 2001 (which
amounts include $190.5 million and $111.5 million, respectively, of brokered
loans, as opposed to funded loan originations).
Interest income - net increased to $6.8 million from $2.8 million in the third
quarter of 2001, an increase of 143.9%. The increase resulted primarily from an
increase in loans held for sale, an increase in the Company's effective interest
rate spread and the Columbia acquisition.
Loan servicing fees, net was a loss of $8.1 million in the third quarter of
2002. This loss resulted from higher than normal amortization as a result of
faster than normal loan repayments and an impairment provision of $6 million due
to a reduction in the fair value of servicing rights attributable to an increase
in estimated future prepayment speeds.
Other income was $1.0 million for the quarter compared to $24,000 for the third
quarter of 2001. Other income primarily consists of title insurance agency
revenues.
EXPENSES
Salaries, commissions and benefits increased by 155.1% to $35.0 million for the
current quarter from $13.7 million for the 2001 third quarter. The increase was
largely due to the inclusion of expenses of Columbia, 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.
Occupancy and equipment costs increased by 141.7% to $4.7 million for the
current quarter from $2.0 million in the third quarter of 2001. The increase in
costs reflects the inclusion of expenses of the Columbia acquisition, 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 increased by 6.7% to $1.9 million for the
current quarter from $1.7 million in the third quarter of 2001. The increase was
due to the inclusion of expenses of Columbia.
Data processing and communications increased by 82.5% to $2.3 million from $1.3
million in the third quarter of 2001. The expense increase was a result of the
inclusion of expenses of Columbia and opening of new community loan offices.
Professional fees increased 190.4% to $1.5 million for the current quarter from
$0.5 million in the third quarter of 2001. The increase was primarily due to the
inclusion of expenses of Columbia.
Travel and entertainment expenses increased 201.7% to $1.3 million for the
current quarter from $0.4 million in the third quarter of 2001. The increase is
due to the inclusion of expenses of Columbia and the addition of new loan
originators.
Other expenses increased by 127.2% to $5.4 million, from $2.4 million in the
third quarter of 2001. These expenses, which consist generally of office
supplies, printing and stationery, office expense and insurance, have increased
as a result of the inclusion of expenses of Columbia and the opening of new
community loan offices.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2001
REVENUES
Revenues for the nine months of 2002 increased to $148.1 million from $86.4
million for the first nine months of 2001, an increase of 71.4%. The increase
was a result of increases in gain on sale of mortgage loans, net interest income
and other income, offset by a loss from net loan servicing fees.
For the first nine months of 2002, gain on sale of mortgage loans totaled $139.8
million compared to $79.8 million in 2001, an increase of 75.2%. The increase
generally resulted from the Columbia acquisition and an increase in loan sales
volume. The Company sold $7.2 billion of loans on a year-to-date basis in 2002
compared to $5.0 billion for the same period in 2001 (which amounts include
$452.5 million and $285.6 million, respectively, of brokered loans, as opposed
to funded loan originations).
Interest income - net increased by 118.2% to $13.7 million from $6.3 million a
year ago. The increase resulted primarily from an increase in loans held for
sale, an increase in the Company's effective interest rate spread and the
Columbia acquisition.
Loan servicing fees, net was a loss of $7.4 million for the nine months of 2002.
This loss resulted from higher than normal amortization as a result of faster
than normal loan repayments and an impairment provision of $6 million due to a
reduction in the fair value of servicing rights attributable to an increase in
estimated future prepayment speeds.
Other income was $2.0 million for the current nine-month period compared to
$296,000 in the like period of 2001. Other income primarily consists of title
insurance agency revenues.
EXPENSES
Salaries, commissions and benefits amounted to $67.9 million in the current nine
month period, compared to $39.3 million in 2001, an increase of 72.8%. The
increase was largely due to the inclusion of expenses of Columbia, 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.
Occupancy and equipment costs increased by 73.0% to $10.5 million for the
current nine month period from $6.1 million in the like period in 2001. The
increase in costs reflects the inclusion of expenses of Columbia, 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 $5.4 million in the current nine month
period, compared to $4.7 million in 2001, an increase of 15.5%. The increase was
due to increased loan volume and the inclusion of expenses of Columbia.
Data processing and communications increased by 80.9% to $5.4 million in the
first nine months of 2002 from $3.0 million in 2001. The expense increase was a
result of the inclusion of expenses of Columbia and the opening of new community
loan offices.
Professional fees totaled $3.4 million in the current nine-month period,
compared to $1.5 million in 2001, an increase of 129.7%. The increase was
primarily due to the inclusion of expenses of Columbia.
Travel and entertainment expenses totaled $2.9 million in the current nine-month
period, compared to $1.1 million in 2001, an increase of 159.6%. The increase
was primarily due to the inclusion of expenses of Columbia and the addition of
new loan originators.
Other expenses increased by 65.2% in the current nine month period to $10.2
million from $6.2 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 the inclusion of expenses of
Columbia, the opening of new community loan offices and higher loan production.
LIQUIDITY AND CAPITAL RESOURCES
To originate a mortgage loan, the Company draws against a $290 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 $300 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 September 30,
2002, the aggregate outstanding balance under the warehouse facilities was $867
million, the aggregate outstanding balance in drafts payable was $10 million and
the aggregate maximum amount available for additional borrowings was $185
million.
In addition to the Paine Webber, CDC, RFC, bank syndicate and Morgan Stanley
warehouse facilities, the Company has purchase and sale agreements with Paine
Webber, Greenwich Capital Financial Products, Inc. and Fannie Mae. 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 three 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 $221 million.
Included within the $300 million bank syndicated facility, the Company has a
working capital sublimit that allows for borrowings up to $25 million. Further,
the Company has a term loan facility which allows for borrowings to fluctuate to
the lesser of 65% of the market value of mortgage servicing rights or $90
million. At September 30, 2002, the aggregate outstanding balance under the
working capital sublimit and the term loan facility was $75 million and the
aggregate maximum amount available for additional borrowings was $40 million.
Cash and cash equivalents decreased to $21.3 million at September 30, 2002 from
$26.4 million at December 31, 2001. Included in cash and cash equivalents at
September 30, 2002 is $3.6 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 September 30, 2002 were as follows:
o $335.0 million increase in warehouse lines of credit;
o $ 44.1 million proceeds from issuance of capital stock;
o $ 5.7 million decrease in accounts receivable; and
o $ 21.7 million increase in accrued expenses and other liabilities.
The Company's primary uses of cash and cash equivalents during the year ended
September 30, 2002 were as follows:
o $339.8 million net increase in mortgage loans held for sale;
o $ 33.8 million acquisition of businesses;
o $ 35.9 million decrease in drafts payable;
o $ 16.3 million increase in mortgage servicing rights;
o $ 14.3 million decrease in notes payable;
o $ 2.2 million for earnouts related to previous acquisitions;
o $ 3.5 million to purchase premises and equipment; and
o $ 2.1 million increase in other assets.
COMMITMENTS
The Company had the following commitments (excluding derivative financial
instruments) at September 30, 2002:
Less Than After
Total 1 Year 1 - 3 Years 4 - 5 Years 5 Years
----- ------ ----------- ----------- -------
Warehouse facilities ........... $866,724,356 $866,724,356 $ -- $ -- $ --
Operating leases ............... 24,449,701 6,997,233 9,432,936 5,305,142 2,714,390
Notes payable .................. 77,072,105 75,380,320 726,913 180,657 784,215
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 treasury futures contracts
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
are generally expected to 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. Additionally, in the third quarter of 2002, the Company utilized
mortgage forward purchase contracts to hedge its exposure to falling mortgage
interest rates. Lower mortgage rates generally reduce the fair value of the
mortgage servicing rights, as higher prepayment speeds are highly correlated
with lower levels of mortgage interest rates. The mortgage forward purchase
contracts increase in value as mortgage interest rates fall.
The following table summarizes the Company's interest rate sensitive
instruments:
September 30, 2002 December 31, 2001
------------------ -----------------
Notional Amount Fair Value Notional Amount Fair Value
--------------- -------------- --------------- --------------
Instruments:
Commitments to fund mortgages at agreed-upon rates ........ $1,552,631,330 $ 34,490,298 $ 554,466,137 $ 95,966
Loans held for sale ....................................... 743,570,771 760,479,760 335,442,033 339,461,803
Mortgage servicing rights ................................. 8,743,520,817 104,413,435 4,555,100 45,551
Forward delivery commitments .............................. 1,705,008,901 (20,455,761) 1,412,999,769 5,769,510
Option contracts to buy securities ........................ 100,000,000 661,719 175,000,000 161,750
Forward purchase commitments .............................. 900,000,000 632,813 -- --
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.
ITEM 4.
CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this Form 10-Q, an evaluation was
performed under the supervision and with the participation of the Company's
management, including the Chief Executive Officer, Chief Financial Officer and
Principal Accounting Officer, of the effectiveness of the design and operation
of the Company's disclosure controls and procedures. Based on that evaluation,
the Company's management, including the Chief Executive Officer, Chief Financial
Officer and Principal Accounting Officer, concluded that its disclosure controls
and procedures are effective. There have been no significant changes in the
Company's internal controls and procedures or in other factors that could
significantly affect internal controls subsequent to the date the Company
carried out its evaluation.
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 during the quarter ended September 30, 2002.
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 under the earnout provisions of the merger
agreement. On August 29, 2002, pursuant to these earnout provisions, the Company
issued an aggregate of 34,996 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 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 September 30, 2002, the Company filed a Report on Form
8-K on July 15, 2002. The Report on Form 8-K reported the Company's acquisition
of Columbia National, Incorporated, under Item 2 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: November 12, 2002 By: /s/ Michael Strauss
--------------------------------------
Michael Strauss
Chairman of the Board, President
and Chief Executive Officer
Date: November 12, 2002 By: /s/ Stephen A. Hozie
--------------------------------------
Stephen A. Hozie
Chief Financial Officer
CERTIFICATIONS
I, Michael Strauss, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Home
Mortgage Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Michael Strauss
- ------------------------
Michael Strauss
Chief Executive Officer
November 12, 2002
CERTIFICATIONS
I, Stephen A. Hozie, certify that:
1. I have reviewed this quarterly report on Form 10-Q of American Home
Mortgage Holdings, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
/s/ Stephen A. Hozie
- ---------------------------
Stephen A. Hozie
Chief Financial Officer
November 12, 2002