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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002.
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO ________.
COMMISSION FILE NUMBER 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
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) 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(g) 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] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [_]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of the voting stock held by
non-affiliates of the registrant based upon the closing sale price of its Common
Stock on June 28, 2002, on the NASDAQ National Market was $198,411,419.
As of March 24, 2003, there were 16,773,913 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
The information required to be furnished pursuant to Part III of this Form
10-K will be set forth in, and incorporated by reference from, the registrant's
definitive proxy statement for the registrant's 2003 annual meeting of
stockholders, which definitive proxy statement will be filed by the registrant
with the Securities and Exchange Commission not later than 120 days from the end
of the fiscal year ended December 31, 2002.
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. BUSINESS.........................................................1
ITEM 2. PROPERTIES......................................................10
ITEM 3. LEGAL PROCEEDINGS...............................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.............................................11
ITEM 6. SELECTED FINANCIAL DATA.........................................12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................15
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.....................28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..............29
ITEM 11. EXECUTIVE COMPENSATION..........................................29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS......................29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................29
ITEM 14 CONTROLS AND PROCEDURES.........................................29
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K........................................................30
SIGNATURES..................................................................31
INDEX TO FINANCIAL STATEMENTS
INDEX TO EXHIBITS
i
PART I
This report contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended. Readers are
cautioned that actual results could differ materially from those indicated in
such statements as a result of certain factors, including those set forth under
"Business - Special Notes of Caution" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and elsewhere in, or
incorporated by reference into, this report.
ITEM 1. BUSINESS
GENERAL
American Home Mortgage Holdings, Inc. ("American Home" and, together
with its wholly-owned subsidiaries, American Home Mortgage Corp. ("AHM") and
Columbia National, Incorporated ("Columbia"), 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. As of December 31, 2002, the Company made loans
from 131 community loan offices across the country as well as over the Internet
and through mortgage brokers. The Company operates primarily as a mortgage
banker, underwriting, funding and selling its loan products.
Since its founding in 1988, AHM has increased its origination volume
through the expansion of its branch office network and the addition of sales
personnel. The Company's loan originations totaled $12.2 billion in 2002.
On June 15, 1999, American Home was formed to serve as a holding
company for AHM. In conjunction with the closing of the initial public offering
of the common stock of American Home, all of the issued and outstanding shares
of common stock of AHM were exchanged for 4,999,900 shares of American Home's
common stock. On October 6, 1999, American Home completed its initial public
offering of 2.5 million shares of common stock at a price of $6.00 per share.
Since its initial public offering, the Company has grown by
acquisition. Major acquisitions are as follows:
On December 30, 1999, American Home acquired Marina Mortgage
Company, Inc. ("Marina"), a California mortgage banking corporation. Marina, a
full service retail mortgage lender, initially operated as a wholly-owned
subsidiary of American Home and was merged into AHM on December 31, 2001.
On June 30, 2000, American Home acquired First Home Mortgage Corp.
("First Home"), an Illinois corporation. Prior to the acquisition, First Home
was an independent mortgage lender based in metropolitan Chicago.
On October 31, 2000, the Company acquired four loan origination
offices from Roslyn National Mortgage Corporation.
On March 30, 2001, the Company acquired the Pennsylvania and
Maryland loan production offices of ComNet Mortgage Services ("ComNet"), the
residential mortgage division of Commonwealth Bank, a subsidiary of Commonwealth
Bancorp ("Commonwealth").
On June 13, 2002, the Company acquired Columbia National,
Incorporated, a Delaware corporation ("Columbia") and its captive reinsurance
subsidiary, CNI Reinsurance, Ltd. Prior to the acquisition, Columbia was an
independent mortgage lender based in Columbia, Maryland. Columbia, which now
operates as a wholly-owned subsidiary of American Home, 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.
The Company is currently licensed or authorized to conduct its
business in all 50 states and the District of Columbia.
The Company's Web site is http://www.MortgageSelect.com. Upon
request, the Company makes available free of charge its annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended. As soon as reasonably
practicable after this annual report is filed with the Securities and Exchange
Commission, the Company's annual reports on Form 10-K and quarterly reports on
Form 10-Q also will be available through the Company's Web site.
1
RECENT DEVELOPMENTS
On February 4, 2003, the Company signed a definitive agreement to
acquire the retail lending branches of Principal Residential Mortgage
("Principal"), the mortgage banking subsidiary of the Principal Financial Group.
Principal's retail branch network includes 75 mortgage branches located in 21
states and Principal has 212 primarily commission-compensated loan originators.
Principal produced approximately $3.4 billion of residential mortgage loans in
2002. Under the terms of the agreement, subject to normal closing conditions,
upon consummation of the transaction (which is expected to occur in the first
quarter of 2003) the Company will pay Principal $2.4 million for the current
application pipeline and the assets of the branch network, and assume related
lease obligations.
In August of 2001, the Company entered into an agreement to acquire
Valley Bancorp, Inc. ("Valley Bancorp") and its wholly-owned subsidiary, Valley
Bank of Maryland ("Valley Bank"), a federal savings bank located in suburban
Baltimore, Maryland, for a combination of cash and stock, subject to certain
adjustments. Under the terms of the definitive agreement, the Company will pay
1.25 times Valley Bancorp's book value, or approximately $5.6 million. In
response to comments received from the Office of Thrift Supervision (OTS), the
Company withdrew its application to the OTS for approval as a thrift holding
company and plans to resubmit a new application with a revised business plan
that incorporates changes suggested by the OTS. The acquisition agreement
between American Home and Valley Bancorp has been extended through June 2003.
This transaction is subject to regulatory approval and no assurance can be given
that such approval will be obtained or that the acquisition agreement with
Valley Bancorp will be further extended if necessary.
OPERATIONS
The Company has two segments, the Loan Production Segment and the
Loan Servicing Segment. The Loan Production Segment originates loans through the
Company's retail and Internet branches and loans sourced through mortgage
brokers (the wholesale channel). The Loan Servicing Segment includes investments
in mortgage servicing rights as well as servicing operations primarily for other
financial institutions. The Loan Servicing Segment was immaterial prior to the
acquisition of Columbia in June 2002 and thus the Loan Servicing Segment results
are included in the Loan Production Segment results in prior years.
FINANCIAL INFORMATION REGARDING SEGMENTS
Financial information regarding the Company's two business segments
is set forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and in Note 23 to Consolidated Financial Statements,
entitled "Segments and Related Information," and is incorporated herein by
reference.
LOAN PRODUCTION SEGMENT
Lending to Home Buyers. The Company has focused on making loans to
home buyers rather than to home owners seeking to refinance their mortgages.
However, because of the historically low interest rates, there was substantial
refinancing activity in 2002. In 2002, 38% of the mortgage loans the Company
originated were made to home buyers, compared to 62% which were made to home
owners seeking refinancing.
Web Site. The Company's Web site, MortgageSelect.com, provides
customers with 24-hour access to its interest rates, online applications and
educational resources. Consumers are able to file a pre-approval request,
complete a purchase, refinance or home equity application, and check the status
of their pending applications online. The Company's Web site also provides
mortgage customers with an array of "tools" and content that allow them to track
interest rates, assists them in determining how much financing they can afford,
explains the home buying process, and otherwise provides answers to frequently
asked questions.
Underwriting Loans to the Standards of Investors who Buy the
Company's Loans. The Company's underwriting process is designed to ensure that
virtually every loan it originates is in a standardized form and can be sold to
a third-party investor by conforming the loan to the underwriting and credit
standards of that investor. Whenever possible, the Company uses "artificial
intelligence" underwriting systems, including Fannie Mae's Desktop
Underwriter(R), to ensure consistency with its investors' predetermined
standards. These systems interface with the Company's "enterprise" computer
system. In addition, the Company has a series of internal and external quality
control procedures in place to ensure compliance with its underwriting
standards.
Sales. The Company's loan originators are primarily compensated
through sales commissions, which is customary in the industry and encourages
responsiveness to the Company's customers. The Company's loan originators
actively guide customers through the loan application process, keeping customers
informed about rate changes and market conditions.
2
BUSINESS CHANNELS AND MARKETS
The Company's loan production business is organized into the
following three channels, each of which focuses on a distinct area of the
residential loan market: the retail channel, the Internet channel and the
wholesale channel.
THE RETAIL CHANNEL
In 2002, the Company's retail channel accounted for approximately
72% of its origination volume. The Company's retail channel has four origination
programs: community loan offices; direct-to-consumer advertising; realtor joint
ventures; and the Corporate Affinity Program.
Community Loan Offices. The Company's community loan offices serve
the regions in which they operate and obtain business by developing and
nurturing a referral network of realtors, real estate attorneys, builders and
accountants. They also facilitate the efficient processing and closing of a
borrower's loan. Available services include pre-approval commitments based on
Fannie Mae's Desktop Underwriter(R), flexible rate lock-in and extension
policies, holding of escrows and other accommodations that help a borrower and
facilitate a real estate transaction. The Company's community loan offices
provide special services to builders, including issuing commitments to lend to
buyers in their projects as their onsite resource for mortgage financing.
In order to attract and retain experienced loan originators, the
Company offers a high level of support that includes a broad product line,
technical help desk support, flexible extension policies, participation in trade
shows, educational seminars, point of sale technology, personalized Web sites
and other marketing initiatives and promotional materials.
Direct to Consumer Advertising. The Company advertises its products
in selected local and regional print media. Customer calls generated by
advertising are handled by the Company's more experienced loan originators who
use the Company's consultative sales approach which includes, for example,
discussing with customers financing options, factors affecting interest rates,
the impact of borrowing a higher or lower percentage of a home's purchase price
and other considerations.
Realtor Joint Ventures. The Company uses joint ventures with
mid-size real estate brokerage firms to expand distribution of its mortgage
offerings. Typically, the Company and its joint venture partners each have a 50%
interest in the venture. Each venture makes loans, retaining the application and
processing fees, points and discounts earned in connection with the mortgages it
originates. The venture then sells the mortgage loans to the Company, which in
turn resells the loans to institutional buyers.
Corporate Affinity Program. Under this program, the Company makes
loans to employees of large companies and firms who are members of its Corporate
Affinity Program. The employees receive special group discounts, service
guarantees and other accommodations.
THE INTERNET CHANNEL
The Company launched its Internet channel, MortgageSelect.com, in
January of 1999. In 2002, the Company's Internet channel accounted for
approximately 13% of its loan origination volume. MortgageSelect.com primarily
reaches customers by serving as the exclusive or semi-exclusive mortgage
provider on other destination Web sites, including aggregators, specialty
interest sites and bank sites serviced under private label outsourcing
agreements. Customers also reach MortgageSelect.com directly by accessing
www.MortgageSelect.com. Internet customers can apply for mortgage loans online,
shop for rates, check their loan status, receive e-mail notification when a
desired rate becomes available, educate themselves on the loan process, use
analytical tools and perform other functions, 24 hours a day, seven days a week.
The Company currently operates three full service Internet call
centers in Kingston, New York, Melville, New York and Laguna Hills, California.
THE WHOLESALE CHANNEL
In 2002, the Company's wholesale channel accounted for approximately
15% of its loan origination volume. The wholesale channel accepts loans from
mortgage brokers.
A mortgage broker works directly with the borrower and submits the
fully processed loan application to the Company for an underwriting
determination. The Company applies its customary underwriting standards to each
wholesale-originated mortgage, issues a written commitment and, upon
satisfaction of all lending conditions, closes the mortgage. The Company offers
mortgage brokers direct access to Fannie Mae's Desktop Underwriter(R), which
enables them to give their clients
3
immediate approvals. The Company also offers to these mortgage brokers access to
the Company's entire product line, the ability to provide approval within 24 to
48 hours of the Company's receipt of a file, flexible lock-in and extension
policies, personalized service, knowledgeable and experienced wholesale account
executives and sponsorship of mortgage broker industry events, such as trade
shows and educational seminars. The Company services mortgage brokers from three
facilities located in Melville, New York, Chicago, Illinois and Norristown,
Pennsylvania.
The Company conducts due diligence on mortgage brokers with whom it
considers doing business. The Company's due diligence process includes reviewing
the brokers' financial condition, running credit checks on their principals,
checking business references and verifying a broker's good standing status with
applicable regulators. Once approved, the Company requires that a mortgage
broker sign an agreement that governs the mechanics of doing business with the
Company and that sets forth the representations and warranties the broker makes
to the Company regarding each loan.
THE COMPANY'S MORTGAGE PRODUCTS
The Company offers a broad and competitive range of mortgage
products that aim to meet the mortgage needs of primarily high-credit-quality
borrowers. Its product line includes conventional conforming fixed rate loans,
adjustable rate mortgages, government fixed rate loans, jumbo fixed rate loans,
non-prime loans, home equity or second mortgage loans, alternate "A" loans,
construction loans and bridge loans.
The following table summarizes information with respect to the most
important categories of mortgage loans the Company originated for the years
ended December 31, 2002 and 2001:
MORTGAGE LOAN ORIGINATION SUMMARY
NUMBER OF % OF TOTAL
MORTGAGE TYPE LOANS DOLLAR VOLUME DOLLAR VOLUME
- ------------- YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
------------- ---------------- -------------
2002 2001 2002 2001 2002 2001
----- ----- ----- ------ ----- -----
($ in millions)
Conventional Conforming Fixed Rate 43,767 27,850 $7,163.8 $4,569.1 58.7% 58.8%
Adjustable Rate (ARMs)............ 7,418 2,987 1,775.5 960.6 14.5 12.4
Government Fixed Rate............. 12,811 10,228 1,739.7 1,368.5 14.2 17.6
Jumbo Fixed Rate.................. 2,390 1,709 1,060.5 668.1 8.7 8.6
Non-Prime Loans................... 1,384 577 227.5 79.4 1.9 1.0
Home Equity/Second................ 3,903 2,670 143.3 91.7 1.2 1.2
Alternate "A" Loans............... 362 62 71.6 12.7 0.6 0.2
Construction Loans................ 27 13 6.5 7.1 0.1 0.1
Bridge Loans...................... 60 67 7.1 8.5 0.1 0.1
------ ------ --------- -------- ----- -----
TOTAL........................ 72,122 46,163 $12,195.5 $7,765.7 100.0% 100.0%
====== ====== ========= ======== ===== =====
Conventional Conforming Fixed Rate Loans. These mortgage loans
conform to the underwriting standards established by the Federal National
Mortgage Association ("Fannie Mae") or the Federal Home Loan Mortgage
Corporation ("Freddie Mac"). This product is limited to high-quality borrowers
with good credit records and involves adequate down payments or mortgage
insurance.
Adjustable Rate Mortgages (ARM). The ARM's defining feature is a
variable interest rate that fluctuates over the life of the loan, usually 30
years. Interest rate fluctuations are based on an index that is related to
Treasury bill rates, regional or national average cost of funds of savings and
loan associations, or another widely published rate, such as LIBOR. The period
between the rate changes is called an adjustment period and may change every six
months or one year. The Company also offers ARMs with a fixed period of three
years, five years or ten years. Some of the Company's ARMs may include payment
caps, which limit the interest rate increase for each adjustment period.
Government Fixed Rate Loans. These mortgage loans conform to the
underwriting standards established the Federal Housing Authority (FHA) or the
Veterans Administration (VA). These loans may qualify for insurance from the FHA
or guarantees from the VA. The Company has been designated by the U.S.
Department of Housing and Urban Development (HUD) as a direct endorser of loans
insured by the FHA and as an automatic endorser of loans partially guaranteed by
the VA, allowing it to offer FHA or VA mortgages to qualified borrowers. FHA and
VA mortgages must be underwritten within specific governmental guidelines, which
include borrower income verification, asset verification, borrower
creditworthiness, property value and property condition.
4
Jumbo Loans. Jumbo loans are considered non-conforming mortgage
loans because they have a principal loan amount in excess of the loan limits set
by Fannie Mae and Freddie Mac (currently, $322,700 for single-family, one-unit
mortgage loans in the continental United States). The Company offers jumbo loans
with creative financing features, such as the pledging of security portfolios.
Its jumbo loan program is geared to the more financially-sophisticated borrower.
Non-Prime Mortgage Loans. The non-prime mortgage loan focuses on
customers whose borrowing needs are not served by traditional financial
institutions. Borrowers of non-prime mortgage loans may have impaired or limited
credit profiles, high levels of debt service to income, or other factors that
disqualify them for conforming loans. When the Company originates mortgage loans
of borrowers with higher credit risk, the Company offsets this risk with higher
interest rates than would be charged for its conventional and government loans.
Offering this category of mortgage loans on a limited basis allows the Company
to provide loan products to borrowers with a variety of credit profiles.
Home Equity or Second Mortgage Loans. These loans are generally
secured by second liens on the related property. Home equity mortgage loans can
take the form of a home equity line of credit, which generally bears an
adjustable interest rate, while second mortgage loans are closed-end loans with
fixed interest rates. Both types of loans are designed for borrowers with
high-quality credit profiles. Home equity lines generally provide for a 5- or
15-year draw period where the borrower withdraws needed cash and pays interest
only, followed by a 10- to 20-year repayment period. Second mortgage loans are
fixed in amount at the time of origination and typically amortize over 15 to 30
years with a balloon payment due after 15 years.
Alternate "A" Loans. Alternate "A" mortgage loans consist primarily
of mortgage loans that are first lien mortgage loans made to borrowers whose
credit is generally within typical Fannie Mae or Freddie Mac guidelines, but
that have loan characteristics that make them non-conforming under these
guidelines. From a credit risk standpoint, alternate "A" loan borrowers present
a risk profile comparable to that of conforming loan borrowers, but entail
special underwriting considerations, such as a higher loan to value ratio or
limited income verification.
Construction Loans. The Company offers a variety of construction
loans for owner-occupied, single-family residences. These loans are available on
a rollover basis, meaning that the borrower can secure funding for the land
purchase and construction of the home, then roll the financing over into a
permanent mortgage loan. During the construction period, interest-only payments
are made. Withdrawals during the construction period, to cover the costs
associated with each stage of completion, are usually made in five to ten
disbursements.
Bridge Loans. The bridge loans that the Company makes are short-term
loans and may be used in conjunction with its other loan products. Bridge loans
provide a means for a borrower to obtain cash based on the equity of a current
home that is on the market but not yet sold and to use that cash to purchase a
new home.
SALE OF LOANS AND SERVICING RIGHTS
The Company's business strategy is to sell the loans it originates,
typically within 45 days of origination. The Company sells its loans to Fannie
Mae, Freddie Mac, large national banks, thrifts and smaller banks, securities
dealers, real estate investment trusts and other institutional loan buyers. The
Company also swaps loans with Fannie Mae and Freddie Mac in exchange for
mortgage-backed securities, which the Company then sells.
Typically, the Company sells loans with limited recourse to it. By
doing so, with some exceptions, the Company reduces its exposure to default risk
at the time it sells the loan, except that it may be required to repurchase the
loan if it breaches the representations or warranties that it makes in
connection with the sale of the loan, in the event of an early payment default,
or if the loan does not comply with the underwriting standards or other
requirements of the ultimate investor.
The Company sells the loans under agreements that generally do not
have a limit as to the value of loans that the Company may sell and establish an
ongoing sale program under which these investors and institutions stand ready to
buy so long as the loans the Company offers for sale meet their underwriting
standards.
In 2002, the three institutions that bought the most loans from the
Company were Wells Fargo Funding, Countrywide Financial Corporation and Fannie
Mae, which accounted for 51%, 18% and 11%, respectively, of the Company's total
loan sales.
Generally, the Company sells the servicing rights to its loans at
the time it sells those loans. The prices at which the Company is able to sell
its mortgage servicing rights vary over time and may be materially adversely
affected by a number of factors, including, for example, the general supply of,
and demand for, mortgage servicing rights and changes in interest rates.
5
Recently, the Company has begun to retain the servicing rights on a portion of
its loan production. When the Company retains servicing rights, it earns an
annual servicing fee.
LOAN UNDERWRITING
The Company's primary goal in making a decision whether to extend a
loan is whether that loan conforms to the expectations and underwriting
standards of the secondary mortgage market. Typically, these standards focus on
a potential borrower's credit history (often as summarized by credit scores),
income and stability of income, liquid assets and net worth and the value and
the condition of the property securing the loan. Whenever possible, the Company
uses "artificial intelligence" underwriting systems to determine whether a
particular loan meets those standards and expectations. In those cases where
artificial intelligence is not available, the Company relies on its credit
officer staff to make the determination.
QUALITY CONTROL
The Company performs monthly quality control testing on a
statistical sample of the loans it originates. The quality control testing
includes checks on the accuracy of the borrower's income and assets and the
credit report used to make the loan, reviews whether the loan buyer's
underwriting standards were properly applied, examines whether the loan complies
with government regulations and, for 10% of the loans sampled, reappraises the
underlying property. Quality control findings are summarized in monthly reports
which the Company uses to identify areas that need corrective action or could
use improvement. To date, those reports have not identified any material quality
control concerns, although there can be no assurances that the Company will not
experience material quality control concerns in the future.
LOAN SERVICING SEGMENT
The Company acquired a $8.5 billion servicing portfolio in
connection with the acquisition of Columbia. Prior to the acquisition, Columbia
serviced on a non-recourse basis substantially all of the mortgage loans that it
originated pursuant to contracts with Fannie Mae, Ginnie Mae and Freddie Mac.
Currently, the Company sells the majority of its loans on a serviced-released
basis, retaining servicing on certain Fannie Mae and Freddie Mac loans.
Servicing mortgage loans includes collecting and remitting loan payments,
responding to borrower inquires, making property protection and principal and
interest advances when required, accounting for principal and interest, holding
custodial (impound) funds for payment of property taxes and hazard insurance,
making physical inspections of the property, counseling delinquent mortgagors,
supervising foreclosures and property dispositions in the event of unremedied
defaults and generally administering the loans. The Company receives an annual
fee for servicing mortgage loans, ranging generally from 1/4% to 1/2% of the
declining principal balances of the loans. The Company also realizes other
revenues generated from its loan servicing activities, such as late charges.
Additionally, the Company benefits from administering custodial balances through
a reduction in the interest rate paid on warehouse borrowings.
6
The following table sets forth certain information regarding the
Company's servicing portfolio of single-family mortgage loans serviced for
others, for the periods indicated:
LOANS SERVICED FOR OTHERS
YEAR ENDED DECEMBER 31,
------------------------
2002 2001
--------- -------
Composition of Servicing Portfolio at Period End: ($ in millions)
Conventional Mortgage Loans.......................... $ 5,111.6 $ 23.1
FHA-Insured Mortgage Loans........................... 2,801.5 0.8
VA-Guaranteed Mortgage Loans......................... 628.7 -
--------- -------
Total Servicing Portfolio...................... $ 8,541.8 $ 23.9
========= =======
Beginning Servicing Portfolio........................ $ 23.9 $ 7.9
Acquisition of Columbia........................... 8,453.8 -
Loans sold with servicing retained................ 2,178.8 26.8
Prepayments and foreclosures...................... (1,957.2) -
Amortization...................................... (157.5) (10.8)
--------- -------
Ending Servicing Portfolio........................... $ 8,541.8 $ 23.9
========= =======
Delinquent Mortgage Loans and Pending
Foreclosures at Period End:
30 days........................................ $ 345.0 $ 0.7
60 days........................................ 82.6 0.2
90 days........................................ 89.3 0.2
--------- -------
Total delinquencies....................... $ 516.9 $ 1.1
========= =======
Foreclosures Pending................................. $ 104.4 $ -
========= =======
At December 31, 2002, the Company's servicing portfolio of
single-family mortgage loans was stratified by interest rate as follows:
TOTAL PORTFOLIO AT DECEMBER 31, 2002
---------------------------------------------------------------------------
WEIGHTED AVERAGE
PRINCIPAL BALANCE PERCENT MATURITY MSR BALANCE
INTEREST RATE (IN MILLIONS) OF TOTAL (YEARS) (IN MILLIONS)
------------- ------------- -------- ------- -------------
Under 6% $1,369.7 16.0% 24.2 $ 15.0
6.00-6.99% 2,859.4 33.5% 24.3 32.6
7.00-7.99% 3,412.6 40.0% 25.4 44.6
8% and over 900.1 10.5% 23.8 16.8
------- ----- -------
$8,541.8 100.0% 24.6 $ 109.0
======== ===== =======
The weighted average interest rate of the single-family mortgage
loans in the Company's servicing portfolio as of December 31, 2002 was 6.8%. As
of December 31, 2002, 88% of the loans in the servicing portfolio bore interest
at fixed rates and 12% bore interest at adjustable rates. The weighted average
net service fee of the loans in the portfolio was 0.348% as of December 31,
2002. The weighted average interest rate of the fixed-rate loans in the
servicing portfolio was 6.99% as of December 31, 2002.
GOVERNMENT REGULATION
The Company's Loan Production and Loan Servicing Segments are
subject to extensive and complex rules and regulations of, and examinations by,
various federal, state and local government authorities and government sponsored
enterprises, including, without limitation, HUD, FHA, VA, Fannie Mae, Freddie
Mac and Ginnie Mae. These rules and regulations impose obligations and
restrictions on the Company's loan origination and credit activities, including,
without limitation, the processing, underwriting, making, selling, securitizing
and servicing of mortgage loans.
The Company's lending activities also are subject to various federal
laws, including the Federal Truth-in-Lending Act and Regulation Z thereunder,
the Homeownership and Equity Protection Act of 1994, the Federal Equal Credit
Opportunity Act and Regulation B thereunder, the Fair Credit Reporting Act of
1970, the Real Estate Settlement Procedures Act of 1974 and Regulation X
thereunder, the Fair Housing Act, the Home Mortgage Disclosure Act and
Regulation C thereunder and the Federal Debt Collection Practices Act, as well
as other federal statutes and regulations affecting its activities. The
Company's loan origination activities also are subject to the laws and
regulations of each of the states in which it conducts its activities.
7
These laws, rules, regulations and guidelines limit mortgage loan
amounts and the interest rates, finance charges and other fees the Company may
assess, mandate extensive disclosure and notice to its customers, prohibit
discrimination, impose qualification and licensing obligations on it, establish
eligibility criteria for mortgage loans, provide for inspections and appraisals
of properties, require credit reports on prospective borrowers, regulate payment
features, and prohibit kickbacks and referral fees, among other things. These
rules and requirements also impose on the Company certain reporting and net
worth requirements. Failure to comply with these requirements can lead to, among
other things, loss of approved status, termination of contractual rights without
compensation, demands for indemnification or mortgage loan repurchases, certain
rights of rescission for mortgage loans, class action lawsuits and
administrative enforcement actions.
The Company is subject to audits by various regulatory authorities.
In addition, the Company's "enterprise" computer application assists it in
complying with government regulations by automatically selecting the requisite
loan disclosure documents, calculating permissible fees and charges and assuring
that products offered to a particular borrower meet the requirements of that
borrower's state. The Company's legal compliance is reviewed as part of its
quality control process, which is performed by an independent contractor with
expertise in these matters.
Although the Company believes that it has systems and procedures in
place to ensure compliance with these requirements and that it currently is in
compliance in all material respects with applicable federal, state and local
laws, rules and regulations, there can be no assurance of full compliance with
current laws, rules and regulations, that more restrictive laws, rules and
regulations will not be adopted in the future, or that existing laws, rules and
regulations or the mortgage loan documents with borrowers will not be
interpreted in a different or more restrictive manner. The occurrence of any
such event could make compliance substantially more difficult or expensive,
restrict the Company's ability to originate, purchase, sell or service mortgage
loans, further limit or restrict the amount of interest and other fees and
charges earned from mortgage loans that the Company originates, purchases or
services, expose it to claims by borrowers and administrative enforcement
actions, or otherwise materially and adversely affect its business, financial
condition and results of operations.
Members of Congress, government officials and political candidates
have from time to time suggested the elimination of the mortgage interest
deduction for federal income tax purposes, either entirely or in part, based on
borrower income, type of loan or principal amount. Because many of the Company's
loans are made to borrowers for the purpose of purchasing a home, the
competitive advantage of tax deductible interest, when compared with alternative
sources of financing, could be eliminated or seriously impaired by this type of
governmental action. Accordingly, the reduction or elimination of these tax
benefits could have a material adverse effect on the demand for the kind of
mortgage loans the Company offers.
The Company also is performing various mortgage-related operations
on the Internet. The Internet, and the laws, rules and regulations related to
it, are relatively new and still evolving. As such, there exist many
opportunities for the Company's business operations on the Internet to be
challenged or to become subject to legislation, any of which may materially and
adversely affect its business, financial condition and results of operations.
INFORMATION SYSTEMS
The Company's loan production enterprise system controls most
aspects of the Company's loan production operations, from the processing of a
loan application through the closing of the loan and the sale of the loan to
institutional investors. The system also performs checks and balances on many
aspects of the Company's operations and supports the Company's marketing
efforts. The Company's enterprise system functions on a wide area network that
connects all of its branches in "real time." With its wide area network, a
transaction at any one of its locations is committed centrally and is therefore
immediately available to all personnel at all other locations. An important
benefit of the enterprise system is that it aids the Company in controlling its
business process. The system assures that the Company's underwriting policies
are adhered to, that only loans that are fully approved are disbursed, and that
the correct disclosures and loan documents for a borrower are used based upon
such borrower's state and loan program. The Company's enterprise system also
provides its management with operating reports and other key data. In addition,
the Company has developed a proprietary Web site and supporting call center
software through the efforts of its in-house computer programming staff.
The Company's loan servicing system, LSAMS ("Loan Servicing and
Accounting Management System"), manages most aspects of the loan servicing
function, from loan closing to its ultimate payoff or disposition. The Company
has developed enhancements and ancillary systems to further automate this
function. Efficiencies have been gained through the use of Interactive Voice
Response units that allow customers to ask questions and receive answers 24
hours a day. The Company also utilizes CTI ("Computer-Telephone Integration") to
speed the work of customer service agents. The Company's customers are able to
utilize the Internet to check on current account information as well as to make
monthly payments. FORTRACS, a foreclosure tracking system, has been implemented
to streamline the foreclosure process, track bankruptcies, expedite foreclosure
claims processing and dispose of real estate owned ("REO") property. The
Company's loan servicing system is scalable well beyond its current workload.
8
SEASONALITY
Seasonality affects the Loan Production and Loan Servicing Segments,
as loan originations and payoffs are typically at their lowest levels during the
first and fourth quarters due to a reduced level of home buying activity during
the winter months. Loan originations and payoffs generally increase during the
warmer months, beginning in March and continuing through October. As a result,
the Company may experience higher earnings in the second and third quarters and
lower earnings in the first and fourth quarters from its Loan Production
Segment. Conversely, the Company may experience lower earnings in the second and
third quarters and higher earnings in the first and fourth quarters from its
Loan Servicing Segment.
COMPETITION
Mortgage banking is highly competitive. A large number of banks and
non-bank mortgage lenders are in the business of originating, selling and
servicing mortgage loans. Additionally, there are a number of mortgage brokers
that offer mortgage loans. Many of these competitors share a business strategy
and capability similar to that of the Company and many of them are larger than
the Company, with substantially more capital and greater marketing and technical
resources than the Company.
EMPLOYEES
The Company recruits, hires and retains individuals with the
specific skills that complement its corporate growth and business strategies. As
of December 31, 2002, the Company had 2,481 and 57 full time production and
servicing employees, respectively, and 47 part time production employees.
SPECIAL NOTES OF CAUTION
REGARDING FORWARD-LOOKING STATEMENTS
Some of the information in this report may constitute
"forward-looking statements" within the meaning of the federal securities laws.
Forward-looking statements generally discuss the Company's plans and objectives
for future operations. They also include statements containing a projection of
revenues, income, capital expenditures, dividends, capital structure or other
financial terms. Statements regarding the following are particularly
forward-looking in nature:
o the Company's strategy;
o development of the Company's Internet capabilities;
o projected joint ventures or acquisitions; and
o projected capital expenditures.
The forward-looking statements in this report are based on the
Company's management's beliefs, assumptions and expectations of its future
economic performance, taking into account the information currently available to
them. These statements are not statements of historical fact. Forward-looking
statements involve risks and uncertainties, some of which are not currently
known to the Company, that may cause its actual results, performance or
financial condition to be materially different from the expectations of future
results, performance or financial condition it expresses or implies in any
forward-looking statements. The Company undertakes no obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. Some of the important factors that could cause the
Company's actual results, performance or financial condition to differ
materially from its expectations are:
o general volatility of the capital markets and the market price
of the Company's common stock;
o an increase in interest rates, reducing loan originations;
o a decrease in interest rates, reducing the value of mortgage
servicing rights;
o changes in the real estate market or the general economy of
the markets in which the Company operates;
o economic, technological or regulatory changes affecting the
use of the Internet;
o the Company's ability to employ and retain qualified
employees;
9
o changes in government regulations that are applicable to the
Company;
o changes in tax laws that are applicable to the Company;
o the Company's ability to identify and complete acquisitions
and successfully integrate businesses it acquires;
o changes in the demand for the Company's services;
o the degree and nature of the Company's competition; and
o the other factors referenced in this report, including,
without limitation, those under the captions "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
When used in this report, the words "plan," "intend," "believe,"
"anticipate," "estimate," "should," "expect," "objective," "projection," "will,"
"continue," "forecast," "goal" or similar words are intended to identify
forward-looking statements. The Company qualifies any and all of its
forward-looking statements entirely by these cautionary factors.
ITEM 2. PROPERTIES
The Company's current Executive and Administrative Offices are
located at 520 Broadhollow Road, Melville, New York 11747, and consist of
approximately 58,200 square feet. The lease covering these premises expires in
January of 2009 and the annual rent is $1,140,000. The Company owns an office
building in Mt. Prospect, Illinois, which consists of approximately 35,700
square feet. The Company also leases premises in Maryland, which serve as the
regional operation center and loan servicing center of Columbia and consist of
60,500 square feet. The lease covering these premises expires in 2003 and the
annual rent is approximately $745,000. The Company also leases premises at an
additional 131 locations in 25 states, ranging in size from 300 to 45,950 square
feet with remaining lease terms ranging from one to seven years. The aggregate
annual rent for these locations is approximately $6.9 million.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is at times
subject to various legal proceedings. The Company does not believe that any of
its current legal proceedings, individually or in the aggregate, will have a
material adverse effect on its operations or financial condition.
A multitude of class action lawsuits have been filed against
companies in the mortgage banking industry, which allege, among other things,
violations of the terms of the mortgage loan documents and certain laws, rules
and regulations (including, without limitation, consumer protection laws). These
lawsuits may result in similar suits being filed against the Company. In
addition, the publicity generated by such lawsuits may result in legislation
that affects the manner in which the Company conducts its business and its
relationships with mortgage brokers, correspondents and others. Any of these
developments may materially and adversely affect the Company's business,
financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of its security
holders during the fiscal quarter ended December 31, 2002.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is listed on the NASDAQ National Market
under the symbol AHMH and began trading on October 4, 1999. The following table
sets forth the high, low and closing sales prices for the Company's common stock
as reported by the NASDAQ National Market for the periods indicated.
2002 2001
------------------------------------- --------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
------------------------------------- --------------------------------------
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------------------------------------- --------------------------------------
High $ 16.21 $ 17.90 $ 12.85 $ 11.86 $ 8.13 $ 13.09 $ 18.00 $ 20.87
Low 11.75 10.87 9.43 8.39 5.13 6.60 10.45 11.87
End of period 15.47 12.46 10.99 11.00 7.50 11.90 10.45 12.07
As of March 24, 2003, the closing sales price of the Company's
common stock, as reported on the NASDAQ National Market, was $10.12.
The Company began paying a quarterly cash dividend in the amount of
$0.03 per share of common stock in April of 2001. The Company paid three such
dividends in both 2001 and 2002. On September 19, 2002, the Company increased
its quarterly cash dividend to $0.04 per share. The Company paid one such
dividend in 2002. On December 19, 2002, the Company declared a fourth quarter
dividend of $0.05 payable on January 16, 2003 to shareholders of record as of
January 2, 2003. On January 24, 2003, the Company declared a dividend of $0.10
payable on April 17, 2003 to shareholders of record on April 3, 2003.
As of March 24, 2003, the Company had 26 stockholders of record. The
Company believes, based on the number of proxy statements and related materials
requested in connection with its annual meeting of stockholders, that there are
approximately 2,850 beneficial owners of its common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides certain information as of December 31,
2002 with respect to the Company's equity compensation plan under which equity
securities of the Company are authorized for issuance:
NUMBER OF
REMAINING SECURITIES
NUMBER OF WEIGHTED FOR FUTURE ISSUANCE
SECURITIES TO AVERAGE UNDER EQUITY
BE ISSUED UPON EXERCISE COMPENSATION PLANS
EXERCISE OF PRICE OF (EXCLUDING
OUTSTANDING OUTSTANDING SECURITIES IN THE
OPTIONS OPTIONS FIRST COLUMN)
-------------- ----------- --------------------
Equity compensation plan
approved by security
holders (a)................ 1,000,258 $8.17 690,673
Equity compensation plans
not approved by security
holders (b)................ - - -
(a) Represents the 1999 Omnibus Stock Option Plan.
(b) The Company does not have any equity compensation plan that has not been
authorized by its stockholders.
11
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 2002 and
2001 and for the years ended December 31, 2002, 2001 and 2000 have been derived
from the Company's audited consolidated financial statements, beginning on page
F-1 of this report. The selected financial data as of December 31, 1999 and 1998
and for the years ended December 31, 1999 and 1998 have been derived from prior
year audited consolidated financial statements. These consolidated financial
statements include all adjustments which the Company considers necessary for a
fair presentation of its consolidated financial position and results of
operations for these periods. You should not assume that the results below
indicate results that the Company will achieve in the future. The operating data
are derived from unaudited financial information that the Company compiled.
You should read the information below along with all the other
financial information and analysis presented in this report, including the
Company's financial statements and related notes, and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
12
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2002 2001 2000 1999 1998
----------- -------- -------- ------- -------
(In thousands, except per share data)
STATEMENT OF INCOME DATA:
Revenues
Gain on sales of mortgage loans .................................... $ 216,595 $118,554 $ 52,731 $21,957 $18,981
Interest income, net ............................................... 23,671 9,098 3,271 1,704 734
Loan servicing fees ................................................ 25,139 -- -- -- --
Amortization and impairment of mortgage servicing rights ........... (36,731) -- -- -- --
----------- -------- -------- ------- -------
Net loan servicing fees (loss) ..................................... (11,592) -- -- -- --
----------- -------- -------- ------- -------
Other .............................................................. 4,147 401 2,278 1,201 502
----------- -------- -------- ------- -------
Total revenues ..................................................... 232,821 128,053 58,280 24,862 20,217
----------- -------- -------- ------- -------
Expenses
Salaries, commissions and benefits, net ............................ 106,895 55,778 27,894 11,611 9,430
Occupancy and equipment ............................................ 15,506 8,250 5,584 2,429 1,654
Marketing and promotion ............................................ 7,996 6,313 4,058 1,774 1,236
Data processing and communications ................................. 7,853 4,442 2,826 1,133 952
Office supplies and expenses ....................................... 6,511 4,359 2,150 807 529
Professional fees .................................................. 5,443 2,454 1,612 336 158
Travel and entertainment ........................................... 4,587 1,682 976 335 249
Other .............................................................. 9,577 4,188 3,014 1,100 760
----------- -------- -------- ------- -------
Total expenses ..................................................... 164,368 87,466 48,114 19,525 14,968
----------- -------- -------- ------- -------
Income before income taxes and minority interest ................... 68,453 40,587 10,166 5,337 5,249
Income taxes(1) .................................................... 28,075 16,253 4,267 1,441 328
Minority interest .................................................. 893 1,028 508 35 51
----------- -------- -------- ------- -------
Net income before cumulative effect of change in
accounting principle ............................................... 39,485 23,306 5,391 3,861 4,870
Cumulative effect of change in accounting principle,
net of income taxes ................................................ -- 2,142 -- -- --
----------- -------- -------- ------- -------
Net income ......................................................... $ 39,485 $ 25,448 $ 5,391 $ 3,861 $ 4,870
=========== ======== ======== ======= =======
Net income per share:
Basic before cumulative effect of change in accounting principle ... $ 2.72 $ 2.25 $ 0.63 $ 0.69 $ 0.97
Basic after cumulative effect of change in accounting principle .... $ 2.72 $ 2.45 $ 0.63 $ 0.69 $ 0.97
Diluted before cumulative effect of change in accounting principle . $ 2.65 $ 2.14 $ 0.63 $ 0.69 $ 0.97
Diluted after cumulative effect of change in accounting principle .. $ 2.65 $ 2.34 $ 0.63 $ 0.69 $ 0.97
Weighted average number of shares outstanding:
Basic .............................................................. 14,509 10,374 8,580 5,595 5,000
Diluted ............................................................ 14,891 10,883 8,580 5,603 5,000
BALANCE SHEET DATA:
Cash and cash equivalents .......................................... $ 26,530 $ 26,393 $ 6,005 $ 3,414 $ 2,892
Mortgage loans held for sale, net .................................. 811,188 419,351 143,967 65,115 34,667
Total assets ....................................................... 1,121,164 501,125 183,532 85,884 42,392
Warehouse lines of credit .......................................... 730,579 351,454 130,484 56,805 34,070
Other liabilities .................................................. 225,965 70,477 25,855 11,056 2,298
Total stockholders' equity ......................................... 164,096 78,617 26,612 18,000 5,924
- ----------
(1) Prior to September 29, 1999, the Company elected to be treated as an S
corporation for federal and state income tax purposes. Prior to the
Company's election to be treated as an S corporation, all federal taxes
were taxable to and paid by the Company's sole shareholder. Income taxes
for the year ended December 31, 1998 reflect state income taxes only.
13
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2002 2001 2000 1999 1998
------- ------- ------- ------- -------
(In thousands, except per share data)
OPERATING DATA:
Total mortgage originations (in millions) ......................... $ 12,196 $ 7,766 $ 3,043 $1,348 $1,158
Home purchases.................................................. $ 4,662 $ 3,326 $ 2,590 $ 978 $ 749
Refinancings.................................................... $ 7,534 $ 4,440 $ 452 $ 370 $ 409
Number of loans originated......................................... 72,122 46,163 18,923 7,732 6,543
Loans sold (in millions) .......................................... $ 12,331 $ 7,497 $ 2,967 $1,330 $1,179
Loan originators at period end..................................... 1,024 551 475 220 76
Number of branches at period end................................... 131 63 53 28 12
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company has made forward-looking statements in this annual
report on Form 10-K that are subject to risks and uncertainties. Forward-looking
statements include information concerning the Company's possible or assumed
future results of operations. Also, when the Company has used such words as
"believe," "expect," "anticipate," "plan," "could," "intend" or similar
expressions, it is making forward-looking statements. You should note that an
investment in the Company's securities involves certain risks and uncertainties
that could affect its future financial results. The Company's actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in
"Business - Special Notes of Caution" and elsewhere in this annual report on
Form 10-K.
As a mortgage bank, the Company generates revenues through the
origination and subsequent resale of funded loans and through the servicing of
loans owned by others. These revenues are made up of gain on sale of mortgage
loans, net interest income and net servicing fees. Gain on sale of mortgage
loans consists of the gain on the sale of mortgage loans, which are sold
generally within 45 days of origination. This gain is recognized based on the
difference between the selling price of the loans and the carrying value of the
mortgage loans sold. Gain on sale of mortgage loans also includes loan-related
fees consisting of application, documentation, commitment and processing fees
paid by borrowers. Net interest income consists of the difference between
interest received by the Company on its mortgage loans held for sale and
interest paid by it under its credit facilities. Net servicing fees consists of
the difference between loan servicing fees received by the Company and
amortization and impairment of mortgage servicing rights.
The Company's expenses largely consist of:
o salaries, commissions and benefits paid to employees;
o occupancy and equipment costs;
o Internet-related expenses, including licensing and participation
fees and Internet advertising costs;
o marketing, promotion and advertising costs; and
o data processing and communication costs.
A substantial portion of the Company's expenses are variable in
nature. Commissions paid to loan originators are 100% variable, while other
salaries and benefits fluctuate from quarter to quarter based on the Company's
assessment of the appropriate levels of non-loan originator staffing, which
correlates to the current level of loan origination volume and the Company's
perception of future loan origination volume.
Seasonality affects the mortgage industry, as loan originations are
typically at their lowest levels during the first and fourth quarters due to a
reduced level of home buying activity during the winter months. Loan
originations generally increase during the warmer months, beginning in March and
continuing through October. As a result, the Company may experience higher
earnings in the second and third quarters and lower earnings in the first and
fourth quarters.
Interest rate and economic cycles also affect the mortgage industry,
as loan originations typically fall in rising interest rate environments. During
these periods, refinancing originations decrease, as higher interest rates
provide reduced economic incentives for borrowers to refinance their existing
mortgages. Due to stable and decreasing interest rate environments over recent
years, the Company's to-date performance may not be indicative of results in
rising interest rate environments. In addition, the Company's recent and rapid
growth may distort some of its ratios and financial statistics and may make
period-to-period comparisons difficult. In light of this growth, the Company's
to-date earnings performance may be of little relevance in predicting future
performance. Furthermore, the Company's financial statistics may not be
indicative of its results in future periods.
On December 30, 1999, the Company acquired Marina, a residential
mortgage lender headquartered in Irvine, California, with offices in California
and Arizona. The Company agreed to issue 753,420 shares of its common stock in
exchange for the 34,600 outstanding shares of Marina common stock and to pay
$2.5 million in cash over five years. The Company issued 201,043 shares on
October 15, 2000, and 157,985 shares on January 31, 2001, to the prior Marina
shareholders in accordance with the first and second earnout provisions of the
merger agreement and the prior shareholders may receive additional consideration
15
over the next four years based on two additional earnout provisions, which are
primarily based on derived earnings formulas. The Company issued 180,541 shares
on June 6, 2002, in connection with these earnout provisions. The Company
accounted for this acquisition as a purchase transaction and generated goodwill
of approximately $4.5 million, which was originally to be amortized over 20
years. Marina was merged into AHM, the Company's wholly-owned subsidiary, on
December 31, 2001.
On June 30, 2000, American Home acquired First Home, which was
merged into AHM, one of the Company's wholly-owned subsidiaries. The
shareholders of First Home received an aggregate of 489,760 shares of American
Home's common stock and $3.6 million over a period of two years. In addition,
the shareholders of First Home may receive additional consideration consisting
of cash and shares of common stock of the Company based on the future results of
the financial performance of the First Home division of the Company. During
2002, the Company paid approximately $1.6 million and issued 88,660 shares to
the previous shareholders of First Home in connection with the earnout
provisions of the acquisition agreement. First Home, now a division of the
Company, is a full-service retail lender based in metropolitan Chicago. First
Home originates and purchases mortgage loans for sale in the secondary mortgage
market.
On October 31, 2000, American Home acquired four loan origination
offices from Roslyn National Mortgage Corporation ("RNMC") for $509,478 and the
assumption of certain liabilities, including the assumption of the real property
leases for the four acquired branch offices. These branch offices are located in
Maryland, Virginia, Connecticut and New York and are full-service retail lending
offices.
On March 30, 2001, the Company closed an asset purchase transaction
with Commonwealth. Under the agreement, the Company acquired five loan
production offices of ComNet. The terms of the transaction included a nominal
amount of cash consideration for the purchase of ComNet's mortgage application
pipeline, fixed assets and trademark, as well as the assumption of real property
leases of the five acquired branch offices, which are located in Pennsylvania
and Maryland.
On June 13, 2002, the Company acquired Columbia. The shareholders of
Columbia received $37 million in cash. Prior to the acquisition, Columbia was an
independent mortgage lender based in Columbia, Maryland. Columbia, which now
operates as a wholly-owned subsidiary of American Home, 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.
In August of 2001, the Company entered into an agreement to acquire
Valley Bancorp and its wholly-owned subsidiary, Valley Bank, a federal savings
bank located in suburban Baltimore, Maryland, for a combination of cash and
stock, subject to certain adjustments. Under the terms of the definitive
agreement, the Company will pay 1.25 times Valley Bancorp's book value, or
approximately $5.6 million. In response to comments received from the Office of
Thrift Supervision (OTS), the Company withdrew its application to the OTS for
approval as a thrift holding company and is resubmitting a new application with
a revised business plan that incorporates changes suggested by the OTS. The
acquisition agreement between American Home and Valley Bancorp has been extended
through June 2003. This transaction is subject to regulatory approval. The
Company has had substantial discussions with the OTS relating to the Company's
application and, although the Company believes that it meets all of the
applicable requirements for obtaining the necessary regulatory approval, no
assurance can be given that such approval will be obtained on a timely basis or
that the acquisition agreement with Valley Bancorp will be further extended, if
necessary.
On February 4, 2003, the Company signed a definitive agreement to
acquire the retail lending branches of Principal. Principal's retail branch
network includes 75 mortgage branches located in 21 states and Principal has 212
primarily commission-compensated loan originators. Principal produced
approximately $3.4 billion of residential mortgage loans in 2002. Under the
terms of the agreement, subject to normal closing conditions, upon consummation
of the transaction (which is expected to occur in the first quarter of 2003) the
Company will pay Principal $2.4 million for the current application pipeline and
the assets of the branch network, and assume related lease obligations.
The Company may, from time to time, engage in other acquisitions.
Any acquisition made by the Company may result in potentially dilutive issuances
of equity securities, the incurrence of additional debt and the amortization of
expenses related to other intangible assets. The Company also may experience
difficulties in integrating the operations, services, products and personnel of
acquired companies or the diversion of management's attention from ongoing
business operations.
CRITICAL ACCOUNTING ESTIMATES
Financial Reporting Release No. 60, released by the Securities and
Exchange Commission, requires all companies to include a discussion of critical
accounting estimates or methods used in the preparation of financial statements.
16
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 market value as determined by
outstanding commitments from investors or current investor yield requirements
calculated on the aggregate loan basis less an estimate of the costs to complete
the loan less the deferral of fees and points received plus the deferral of
direct loan origination costs paid. Gains or losses on such sales are recognized
at the time legal title transfers to the investor and are based upon the
difference between the sales proceeds from the final investor and the adjusted
book value of the loan sold.
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 sell or securitize 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.
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 by obtaining market information
from one of the primary mortgage servicing rights brokers. When the book value
of capitalized servicing assets exceeds their fair value, impairment is
recognized through a valuation allowance. In determining impairment, the
mortgage servicing portfolio is stratified by the predominant risk
characteristic of the underlying mortgage loans. The Company has determined that
the predominant risk characteristic is the interest rate on the underlying loan.
The Company measures impairment for each stratum by comparing the estimated fair
value to the recorded book value. Temporary impairment is recorded through a
valuation allowance and amortization expense in the period of occurrence. In
addition, the Company periodically evaluates its mortgage servicing rights for
other than temporary impairment to determine if the carrying value before the
application of the valuation allowance is recoverable. When the Company
determines that a portion of the mortgage servicing rights is not recoverable,
the related mortgage servicing rights and the previously established valuation
allowance are correspondingly reduced to reflect other than temporary
impairment.
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
SFAS 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 fair value of the IRLCs is determined by
an estimate of the ultimate gain on sale of the loans net of estimated net costs
to originate the loan. 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 loans and most of its non-conforming loans held
for sale. At the inception of the hedge, the Company formally documents the
relationship between the forward delivery contracts and the mortgage inventory,
as well as its objective and strategy for undertaking the hedge 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 from time
to time 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
17
value of the hedged mortgage servicing rights is adjusted for its change in fair
value attributable to the hedged risk during the hedge period. The Company
assesses the effectiveness of the hedge by using statistical analysis to measure
the correlation of the changes in the value of the hedge to the changes in the
value of the mortgage servicing rights being hedged 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 highly
effective or expected to be highly effective in offsetting changes in fair value
of the hedged item. Additionally, the Company may elect to de-designate a hedge
relationship during an interim period and re-designate upon the rebalancing of a
hedge profile and the corresponding hedge relationship. When hedge accounting is
discontinued, the Company continues to carry the derivative instruments at fair
value with changes in their value recorded in earnings.
GOODWILL - Goodwill represents the excess purchase price over the
fair value of net assets stemming from business acquisitions and which were
being amortized over their initial estimated lives, generally 20 years. In
accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"), effective January 1, 2002 the Company no longer amortizes
goodwill, but instead tests for impairment at least annually. The Company will
test for impairment more frequently if events or circumstances indicate that an
asset may be impaired. In accordance with SFAS 142, the Company tests for
impairment by comparing the fair value of goodwill, as determined by using a
discounted cash flow method, with its carrying value. Any excess of carrying
value over the fair value of the goodwill would be recognized as an impairment
loss in continuing operations. The discounted cash flow calculation includes a
forecast of the expected future loan originations and the related revenues and
expense. These cash flows are discounted using a rate that is estimated to be a
weighted average cost of capital for similar mortgage companies. The Company
further tests to ensure that the fair value of all its business units does not
exceed its total market capitalization.
18
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
Company's Loan Production Segment's operating results, including percentage of
total revenues. Any trends illustrated in the following table are not
necessarily indicative of future results.
YEAR ENDED DECEMBER 31,
LOAN PRODUCTION SEGMENT (DOLLARS IN MILLIONS)
2002 2001 2000
-------------- -------------- -------------
RESULTS OF OPERATIONS:
Gain on sales of mortgage loans .......................... $216.6 87.5% $118.6 92.6% $52.7 90.5%
Interest income, net ..................................... 26.7 10.8 9.1 7.1 3.3 5.6
Other .................................................... 4.2 1.7 0.4 0.3 2.3 3.9
------ ------ -----
Total revenues ....................................... 247.5 100.0 128.1 100.0 58.3 100.0
------ ------ -----
Salaries, commissions and benefits, net .................. 105.2 42.5 55.8 43.6 27.9 47.9
Occupancy and equipment .................................. 15.3 6.2 8.2 6.4 5.6 9.6
Marketing and promotion .................................. 8.0 3.2 6.3 4.9 4.1 7.0
Data processing and communications ....................... 7.8 3.1 4.4 3.5 2.8 4.8
Office supplies and expenses ............................. 5.9 2.4 4.4 3.4 2.1 3.7
Professional fees ........................................ 5.2 2.1 2.5 1.9 1.6 2.8
Travel and entertainment ................................. 4.6 1.9 1.7 1.3 1.0 1.7
Other .................................................... 8.7 3.5 4.2 3.3 3.0 5.1
------ ------ -----
Total expenses ....................................... 160.7 64.9 87.5 68.3 48.1 82.6
------ ------ -----
Income before income taxes and minority interest in
income of in consolidated joint ventures ............... 86.8 35.1 40.6 31.7 10.2 17.4
Income taxes ............................................. 35.7 14.4 16.3 12.7 4.3 7.3
Minority interest in income of consolidated joint ventures 0.9 0.4 1.0 0.8 0.5 0.8
------ ------ -----
Net income before cumulative effect of change in
accounting principle, as reported ...................... $ 50.2 20.3% $ 23.3 18.2% $ 5.4 9.3%
====== ====== =====
The following table sets forth, for the periods indicated, the
Company's Loan Servicing Segment's operating results. Any trends illustrated in
the following table are not necessarily indicative of future results.
YEAR ENDED DECEMBER 31,
LOAN SERVICING SEGMENT (DOLLARS IN MILLIONS)
--------------------------
2002 2001 2000
------ ------ ------
RESULTS OF OPERATIONS:
Loan servicing fees .............................. $ 19.3 $ -- $ --
Gain on Ginnie Mae early buy-out sales ........... 5.8 -- --
Amortization and impairment of mortgage
servicing rights................................ (36.7) -- --
------ ------ ------
Net loan servicing fees (loss) ............. (11.6) -- --
------ ------ ------
Interest expense, net ............................ (3.1) -- --
------ ------ ------
Total revenues ............................. (14.7) -- --
------ ------ ------
Salaries and benefits, net ....................... 1.7 -- --
Office supplies and expenses ..................... 0.6 -- --
Occupancy and equipment .......................... 0.2 -- --
Professional fees ................................ 0.2 -- --
Data processing and communications ............... 0.1 -- --
Other ............................................ 0.8 -- --
------ ------ ------
Total expenses ............................. 3.6 -- --
------ ------ ------
Loss before income tax benefit ................... (18.3) -- --
Income tax benefit ............................... (7.6) -- --
------ ------ ------
Net loss before cumulative effect of change
in accounting principle, as reported ............. $(10.7) $ -- $ --
====== ====== ======
19
YEAR ENDED DECEMBER 31, 2002, COMPARED TO YEAR ENDED DECEMBER 31,
2001
Loan Production Segment
Total Revenues. The Loan Production Segment total revenues for the
year ended December 31, 2002, were $247.5 million compared to $128.1 million in
2001, an increase of $119.4 million, or 93.3%. The increase was a result of
increases in gains on sale of mortgage loans, net interest income and other
income.
Gain on sales of mortgage loans increased to $216.6 million in 2002
from $118.6 million in 2001, an increase of $98.0 million, or 82.7%. In general,
the increase was the result of higher originations, sales and pipeline values,
as well as improved margins. The higher volumes were a result of lower interest
rates which generated higher purchase and refinance volumes from existing
locations. Additionally, the increase is attributable to the acquisition of
Columbia.
Interest income, net, increased to $26.7 million in 2002 from $9.1
million in 2001, an increase of $17.6 million, or 193.9%. The increase resulted
primarily from an increase in loans held for sale, an increase in the Company's
effective interest rate spread and the acquisition of Columbia.
Other revenue totaled $4.1 million in 2002 compared to $401,000 in
2001. For the year ended December 31, 2002, other income primarily consists of
revenue from title services in the amount of $1.9 million and volume incentive
bonuses received from loan purchasers totaling approximately $0.8 million. For
the year ended December 31, 2001, other income primarily consists of volume
incentive bonuses received from loan purchasers totaling approximately $336,000.
Salaries, Commissions and Benefits. Salaries, commissions and
benefits increased to $105.2 million in 2002 from $55.8 million in 2001, an
increase of $49.4 million, or 88.6%. The increase was largely due to the
inclusion of expenses of Columbia, and increased staffing levels and overtime
due to increased loan volumes. As of December 31, 2002, the Company employed
2,528 loan production employees loan production employees compared to 1,325
loan production employees at December 31, 2001.
Occupancy and Equipment Expenses. Occupancy and equipment expenses
increased to $15.3 million in 2002 from $8.2 million in 2001, an increase of
$7.1 million, or 85.4%. 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. Marketing and promotion expenses
increased to $8.0 million in 2002 from $6.3 million in 2001, an increase of $1.7
million, or 26.4%. The increase was primarily due to increased loan volume and
the inclusion of Columbia expenses.
Data Processing and Communications. Data processing and
communication costs increased to $7.8 million in 2002 from $4.4 million in 2001,
an increase of $3.3 million, or 75.3%. The increase was a result of the
inclusion of expenses of Columbia and the opening of new community loan offices.
Office Supplies and Expenses. Office supplies and expenses increased
to $5.9 million in 2002 from $4.4 million in 2001, an increase of $1.5 million,
or 35.4%. The increase was a result of the inclusion of expenses of Columbia and
the opening of new community loan offices.
Professional Fees. Professional fees increased to $5.2 million in
2002 from $2.5 million in 2001, an increase of $2.7 million, or 111.8%. This
increase was primarily due to the inclusion of expenses of Columbia.
Travel and Entertainment. Travel and entertainment expenses
increased to $4.6 million in 2002 from $1.7 million in 2001, an increase of $2.9
million, or 172.3%. This increase was primarily due to the inclusion of expenses
of Columbia and the addition of new loan originators.
Other Expenses. Other expenses increased to $8.7 million in 2002
from $4.2 million in 2001, an increase of $4.6 million, or 108.7%. These
expenses, which consist generally of insurance, indemnification and foreclosure
costs, outside services, storage and moving expenses and licenses and permits,
increased as a result of the inclusion of Columbia, the opening of new community
offices and higher loan production.
Income Taxes. Income taxes increased to $35.7 million in 2002 from
$16.3 million in 2001, an increase of $19.4 million, or 119.6%.
20
Net Income. Net income, before cumulative effect of change in
accounting principle, increased to $50.2 million in 2002 from $23.3 million in
2001, an increase of $26.9 million, or 115.4%. The increase was generally a
result of an increase in loan volume, due in large part to a favorable interest
rate environment and the inclusion of Columbia for a six-month period.
Loan Servicing Segment
The Loan Servicing Segment was immaterial prior to the acquisition of
Columbia in June of 2002 and thus the Loan Servicing Segment results are
included in the Loan Production Segment results in prior years.
Total Revenues. The Loan Servicing Segment's total revenues for the
year ended December 31, 2002, were a loss of $14.7 million which included a net
loan servicing fees loss of $11.6 million and interest expense, net, of $3.1
million.
Net loan servicing fees was a loss of $11.6 million in 2002. The
loan servicing portfolio was acquired as part of the Columbia acquisition in
June of 2002. The servicing losses are a result of the reduction in interest
rates since the acquisition which resulted in both faster actual prepayments and
higher forecasted future prepayments than what were expected at the time of the
acquisition. The loss in 2002 primarily resulted from a temporary impairment
provision of $10.2 million due to a reduction in the fair value of servicing
rights attributable to an increase in estimated future prepayment speeds and
$26.4 million amortization as a result of faster than expected loan repayments.
Total Servicing Segment Expenses. These expenses are associated with
the administration of the servicing portfolio acquired through the Columbia
acquisition in June 2002.
Income Tax Benefit. Income tax benefit was $7.6 million in 2002.
Net Loss. Net loss, before cumulative effect of change in accounting
principle, was $10.7 million, which was generally a result of the net servicing
fee loss.
YEAR ENDED DECEMBER 31, 2001, COMPARED TO YEAR ENDED DECEMBER 31, 2000
Loan Production Segment
Total Revenues. The Company's total revenues for the year ended
December 31, 2001, compared to the year ended December 31, 2000, increased to
$128.1 million from $58.3 million in 2000, an increase of $69.8 million, or
119.7%, primarily as a result of strong origination growth and the subsequent
sale of loans and a generally favorable interest rate environment.
Gain on sales of mortgage loans increased to $118.6 million in 2001
from $52.7 million in 2000, an increase of $65.8 million, or 124.8%. The
increase primarily resulted from an increased loan volume, due in large part to
the First Home, ComNet and RNMC acquisitions, and Internet-generated loan
closings.
Interest income, net, increased to $9.1 million in 2001 from $3.3
million in 2000, an increase of $5.8 million, or 178.1%. The improvement
resulted primarily from an increase in loans held for sale and an increase in
the Company's effective interest rate spread.
Other revenue totaled $401,000 in 2001 compared to $2.3 million in
2000. Other income primarily consists of volume incentive bonuses received from
loan purchasers. The decline was a result of the Company selling loans to loan
buyers that offer high prices, but do not offer volume bonuses.
Salaries, Commissions and Benefits. Salaries, commissions and benefits
increased to $55.8 million in 2001 from $27.9 million in 2000, an increase of
$27.9 million, or 100.0%. The increase was largely due to the inclusion of a
full year of expenses for First Home and the RNMC branches, and the inclusion of
the ComNet branches following their acquisition, increased staffing levels and
overtime at the Company's corporate headquarters and increased staffing levels
at MortgageSelect.com's call centers. As of December 31, 2001, the Company
employed 1,325 people compared to 1,006 people at December 31, 2000.
Occupancy and Equipment Expenses. Occupancy and equipment expenses
increased to $8.3 million in 2001 from $5.6 million in 2000, an increase of $2.7
million, or 47.7%. The increase in costs reflects the inclusion of First Home
and the RNMC branches for a full year and 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.
21
Marketing and Promotion Expenses. Marketing and promotion expenses
increased to $6.3 million in 2001 from $4.1 million in 2000, an increase of $2.2
million, or 55.6%. Increased advertising expenses in support of retail
operations and the Company's MortgageSelect.com Web site accounted for the
increase.
Data Processing and Communications. Data processing and
communication costs increased to $4.4 million in 2001 from $2.8 million in 2000,
an increase of $1.6 million, or 57.2%. The increase was a result of operating
First Home and the RNMC branches for a full year, the acquisition of the ComNet
branches, the growth of MortgageSelect.com's call centers and the opening of new
community loan offices.
Office Supplies and Expenses. Office supplies and expenses increased
to $4.4 million in 2001 from $2.1 million in 2000, an increase of $2.2 million,
or 102.8%. The increase was a result of the growth of MortgageSelect.com's call
centers, the inclusion of a full year of expenses for First Home and the RNMC
branches, and the inclusion of the ComNet branches following their acquisition,
new office openings and higher loan production.
Professional Fees. Professional fees increased to $2.5 million in
2001 from $1.6 million in 2000, an increase of $0.9 million, or 52.2%. This
increase was primarily due to the growth of MortgageSelect.com's call centers,
the inclusion of a full year of expenses for First Home and the RNMC branches,
and the inclusion of the ComNet branches following their acquisition, new office
openings and higher loan production.
Travel and Entertainment. Travel and entertainment expenses
increased to $1.7 million in 2001 from $1.0 million in 2000, an increase of $0.7
million, or 72.3%. This increase was primarily due to the growth of
MortgageSelect.com's call centers, the inclusion of a full year of expenses for
First Home and the RNMC branches, the inclusion of the ComNet branches following
their acquisition, new office openings and higher loan production.
Other Expenses. Other expenses increased to $4.2 million in 2001
from $3.0 million in 2000, an increase of $1.2 million, or 39.0%. These
expenses, which consist generally of insurance, outside services, storage and
moving expenses and licenses and permits, have increased as a result of the
growth of MortgageSelect.com's call centers, the inclusion of a full year of
expenses for First Home and the RNMC branches, the inclusion of the ComNet
branches following their acquisition, new office openings and higher loan
production.
Income Taxes. Income taxes increased to $16.3 million in 2001 from
$4.3 million in 2000, an increase of $12.0 million, or 280.9%. The increase was
primarily due to increased revenue.
Net Income. Net income, before cumulative effect of change in
accounting principle, increased to $23.3 million in 2001 from $5.4 million in
2000, an increase of $17.9 million, or 332.3%. The increase was generally a
result of an increase in loan volume, due in large part to a favorable interest
rate environment, the inclusion of First Home and the RNMC branches for a full
year, the ComNet acquisition and Internet-generated loan closings.
LIQUIDITY AND CAPITAL RESOURCES
To originate a mortgage loan, the Company draws against a $450
million pre-purchase facility with UBS Paine Webber ("Paine Webber"), a $450
million bank syndicated facility led by Residential Funding Corporation ("RFC"),
a $300 million facility with CDC IXIS Capital Markets North America Inc. ("CDC")
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 March 24, 2003, the aggregate outstanding balance under
the warehouse facilities was $740 million, the aggregate outstanding balance in
drafts payable was $29 million and the aggregate maximum amount available for
additional borrowings was $535 million.
The documents governing the Company's warehouse facilities contain a
number of compensating balance requirements and restrictive financial and other
covenants that, among other things, require the Company to maintain a minimum
ratio of total liabilities to tangible net worth and maintain a minimum level of
tangible net worth, liquidity, stockholders' equity and leverage ratios, as well
as to comply with applicable regulatory and investor requirements. The facility
agreements also contain covenants limiting the ability of the Company's
subsidiaries to:
o transfer or sell assets;
o create liens on the collateral; and
o incur additional indebtedness,
22
without obtaining the prior consent of the lenders, which consent may not be
unreasonably withheld. These limits on its subsidiaries may in turn restrict
American Home's ability, as the holding company, to pay cash or stock dividends
on its stock.
In addition, under the Company's warehouse facilities, the Company
cannot continue to finance a mortgage loan that it holds if:
o the loan is rejected as "unsatisfactory for purchase" by the
ultimate investor and has exceeded its permissible 120-day warehouse
period;
o the Company fails to deliver the applicable mortgage note or other
documents evidencing the loan within the requisite time period;
o the underlying property that secures the loan has sustained a
casualty loss in excess of 5% of its appraised value; or
o the loan ceases to be an eligible loan (as determined pursuant to
the warehousing agreement).
As of December 31, 2002, the Company's aggregate warehouse facility
borrowings were $730.6 million (including $15.1 million of borrowings under a
working capital sub-limit) and its outstanding drafts payable were $42.6
million, compared to $351.5 million in borrowings and $35.4 million in drafts
payable as of December 31, 2001. At December 31, 2002, its loans held for sale
were $811.2 million compared to $419.4 million at December 31, 2001.
In addition to the Paine Webber, CDC, RFC and Morgan Stanley
warehouse facilities, the Company has purchase and sale agreements with Paine
Webber, Greenwich Capital Financial Products, Inc. and Fannie Mae. These
agreements allow the Company to accelerate the sale of its mortgage loan
inventory resulting in a more effective use of the warehouse facility. The
combined capacity available under the Company's purchase and sale agreements is
$1.0 billion. Amounts sold and being held under these agreements at December 31,
2002 and 2001 were $801 million and $499 million, respectively. The amount so
held under these agreements at March 24, 2003 was $369 million. At March 24,
2003, the maximum combined amount was $459 million. These agreements are not
committed facilities and may be terminated at the discretion of the
counterparties.
The Company makes certain representations and warranties under the
purchase and sale agreements regarding, among other things, the loans'
compliance with laws and regulations, their conformity with the ultimate
investors' underwriting standards and the accuracy of information. In the event
of a breach of these representations or warranties or in the event of an early
payment default, the Company may be required to repurchase the loans and
indemnify the investor for damages caused by that breach. The Company has
implemented strict procedures to ensure quality control and conformity to
underwriting standards and minimize the risk of being required to repurchase
loans. In addition, an outside firm performs quality control tests for the
Company. Please see "Business--Quality Control." The Company has been required
to repurchase loans it has sold from time to time; however, these repurchases
have not had a material impact on the Company.
The Company also has a $75 million term loan facility with a bank
syndicate led by RFC which it uses to finance its mortgage servicing rights. The
term loan facility expires on May 31, 2003. Interest is based on a spread to the
LIBOR and may be adjusted for earnings on escrow balances. At December 31, 2002,
borrowings under the Company's term loan were $66.0 million.
Cash and cash equivalents increased to $26.5 million at December 31,
2002, from $26.4 million at December 31, 2001.
The Company's primary sources of cash and cash equivalents during
the year ended December 31, 2002, were as follows:
o $186.1 million increase in warehouse lines of credit;
o $ 43.7 million in proceeds from issuance of capital stock; and
o $ 19.3 million increase in accrued expenses and other liabilities.
The Company's primary uses of cash and cash equivalents during the
year ended December 31, 2002, were as follows:
o $202.6 million net increase in mortgage loans held for sale;
o $ 33.5 million for the acquisition of businesses;
23
o $ 25.4 million increase in accounts receivable;
o $ 10.4 million decrease in notes payable;
o $ 4.6 million to purchase furniture and office and computer
equipment for new branch offices; and
o $ 3.4 million decrease in drafts payable.
Cash and cash equivalents increased to $26.4 million at December 31,
2001, from $6.0 million at December 31, 2000.
The Company's primary sources of cash and cash equivalents during
the year ended December 31, 2001, were as follows:
o $221.0 million increase in warehouse lines of credit;
o $ 25.8 million in proceeds from issuance of capital stock;
o $ 27.0 million increase in drafts payable; and
o $ 6.0 million increase in accrued expenses and other liabilities.
The Company's primary uses of cash and cash equivalents during the
year ended December 31, 2001, were as follows:
o $275.2 million net increase in mortgage loans held for sale;
o $ 9.6 million increase in accounts receivable;
o $ 3.6 million to purchase furniture and office and computer
equipment for new branch offices;
o $ 2.8 million for the acquisition of businesses;
o $ 1.4 million increase in prepaid expenses and security deposits;
and
o $ 1.4 million increase in loans held for investment.
The Company's ability to originate loans depends in large part on
its ability to sell these mortgage loans at par or for a premium in the
secondary market so that it may generate cash proceeds to repay borrowings under
its warehouse facilities. The value of the Company's loans depends on a number
of factors, including:
o interest rates on the Company's loans compared to market interest
rates;
o the borrower credit risk classification;
o loan-to-value ratios; and
o general economic conditions.
The Company's existing cash balances and funds available under its
working capital credit facilities, together with cash flows from operations, are
expected to be sufficient to meet its liquidity requirements for at least the
next 12 months. The Company does, however, expect to continue its expansion and
expects that eventually it will have to arrange for additional sources of
capital through the issuance of debt or equity or additional bank borrowings.
The Company has no commitments for any additional financings, and it cannot
ensure that it will be able to obtain any additional financing at the times
required and on terms and conditions acceptable to it. If the Company fails to
obtain needed additional financing, its growth could slow and operations could
be affected.
INFLATION
For the period 1997 to 2002, inflation has been relatively low and
the Company believes that inflation has not had a material effect on its results
of operations. To the extent inflation increases in the future, interest rates
will also likely rise, which would reduce the number of loans the Company
originates. Such a reduction would adversely affect the Company's future results
of operations.
24
COMMITMENTS
The Company had the following commitments (excluding derivative
financial instruments) at December 31, 2002:
LESS THAN AFTER
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
----- ------ --------- --------- -------
Warehouse facilities.. $730,579,171 $730,579,171 $ -- $ -- $ --
Operating leases ..... 18,862,780 7,282,136 8,230,963 2,985,406 364,275
Notes payable ........ 68,261,518 66,591,271 729,815 180,249 760,183
RISK MANAGEMENT
Movements in interest rates can pose a major risk to the Company in
either a rising or declining interest rate environment. The Company depends on
substantial borrowings to conduct its business. These borrowings are all done at
variable interest rate terms which will increase as short term interest rates
rise. Additionally, when interest rates rise, loans held for sale and any
applications in process with locked-in rates decrease in value. To preserve the
value of such loans or applications in process with locked-in rates, agreements
are executed for mandatory loan sales to be settled at future dates with fixed
prices. These sales take the form of forward sales of mortgage-backed
securities.
When interest rates decline, fallout may occur as a result of
customers withdrawing their applications. In those instances, the Company may be
required to purchase loans at current market prices to fulfill existing
mandatory loan sale agreements, thereby incurring losses upon sale. The Company
uses an interest rate hedging program to manage these risks. Through this
program, mortgage-backed securities are purchased and sold forward and options
are acquired on treasury futures contracts.
In the event that the Company does not deliver into the forward
delivery commitments or exercise its option contracts, the instruments can be
settled on a net basis. Net settlement entails paying or receiving cash based
upon the change in market value of the existing instrument. All forward delivery
commitments and option contracts to buy securities are to be contractually
settled within six months of the balance sheet date.
The Company's hedging program contains an element of risk because
the counterparties to its mortgage and treasury securities transactions may be
unable to meet their obligations. While the Company does not anticipate
nonperformance by any counterparty, it is exposed to potential credit losses in
the event the counterparty fails to perform. The Company's exposure to credit
risk in the event of default by a counterparty is the difference between the
contract and the current market price. The Company minimizes its credit risk
exposure by limiting the counterparties to well-capitalized banks and securities
dealers who meet established credit and capital guidelines.
Movements in interest rates also impact the value of 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 increased 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 tables summarize the Company's interest rate sensitive
instruments:
DECEMBER 31, 2002 DECEMBER 31, 2001
------------------------------- ------------------------------
NOTIONAL AMOUNT FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
--------------- ----------- --------------- -----------
Instruments:
Commitments to fund mortgages at agreed-upon
rates......................................... $1,644,700,515 $ 29,345,406 $ 554,466,137 $ 95,966
Loans held for sale ............................ 663,544,480 674,249,987 335,442,033 339,461,803
Mortgage servicing rights ...................... 8,541,789,800 109,022,689 23,950,684 45,551
Forward delivery commitments ................... 1,763,449,868 (9,070,273) 1,412,999,769 5,769,510
Option contracts to buy securities ............. 150,000,000 725,250 175,000,000 161,750
25
The following describes the methods and assumptions the Company uses
in estimating fair values of the above financial instruments:
o Fair value estimates are made as of a specific point in time
based on estimates using present value or other valuation
techniques. These techniques involve uncertainties and are
significantly affected by the assumptions used and the
judgments made regarding risk characteristics of various
financial instruments, discount rates, estimates of future
cash flows, future expected loss experience and other factors.
o Changes in assumptions could significantly affect these
estimates and the resulting fair values. Derived fair value
estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in an
immediate sale of the instrument. Also, because of differences
in methodologies and assumptions used to estimate fair values,
the fair values used by the Company should not be compared to
those of other companies.
o The fair value of commitments to fund with agreed upon rates
are estimated using the fees and rates currently charged to
enter into similar agreements, taking into account the
remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loan
commitments, fair value also considers the difference between
current market interest rates and the existing committed
rates.
o The fair value of these instruments is estimated using current
market prices for dealer or investor commitments relative to
the Company's existing positions.
SUBSEQUENT EVENT
On February 4, 2003, the Company signed a definitive agreement to
acquire the retail lending branches of Principal. Principal's retail branch
network includes 75 mortgage branches located in 21 states and Principal has 212
primarily commission compensated loan originators. Principal produced
approximately $3.4 billion of residential mortgage loans in 2002. Under the
terms of the agreement, subject to normal closing conditions, upon consummation
of the transaction (which is expected to occur in the first quarter of 2003) the
Company will pay Principal $2.4 million for the current application pipeline and
the assets of the branch network, and assume related lease obligations.
NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted Financial Accounting
Standards Board SFAS 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 as of December 31, 2002.
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), which 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.
In April 2002, the Financial Accounting Standards Board issued SFAS
No. 145, "Rescission of SFAS Statements No. 4, 44, and 64, Amendment of SFAS
Statement No. 13, and Technical Corrections" ("SFAS 145"), which updates,
26
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.
In June 2002, the Financial Accounting Standards Board issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
("SFAS 146"), which 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.
In October 2002, the Financial Accounting Standards Board issued
SFAS No. 147, "Acquisitions of Certain Financial Institutions, an amendment of
FASB Statements No. 72 and 144 and FASB Interpretation No. 9" ("SFAS 147"),
which 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 No. 72 and Interpretation No. 9
and requires that those transactions be accounted for in accordance with SFAS
No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible
Assets." Thus, the requirement in paragraph 5 of Statement No. 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 SFAS 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 SFAS 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. The implementation of SFAS 147 did not have a
material effect on the Company.
The Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123," which amends SFAS No. 123 "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for a
voluntary change to the fair values based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
The Financial Accounting Standards Board issued FASB Interpretation
(FIN) No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," which
expands on the accounting guidance of SFAS No. 5, "Accounting for
Contingencies," SFAS No. 57 "Related Party Disclosures," and SFAS No. 107
"Disclosures about Fair Value of Financial Instruments." FIN No. 45 elaborates
on the disclosures to be made by a guarantor about its obligations under certain
guarantees issued. FIN No. 45 also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements of FIN No. 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002. Management believes that the
financial impact of FIN No. 45 will not have a material effect on the Company.
The Financial Accounting Standards Board issued FIN No. 46,
"Consolidation of Variable Interest Entities, a Clarification of Accounting
Research Bulletin (ARB) No. 51, Consolidated Financial Statements," which
addresses consolidation by business enterprises of variable interest entities
when specific characteristics are met. FIN No. 46 clarifies the application of
ARB No. 51 to certain entities with equity investors who do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The provisions of FIN No. 46
are effective beginning the third quarter of 2003. Management believes that the
implementation of FIN No. 46 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 SFAS
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.
27
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required to be included in this Item 7A regarding
Quantitative and Qualitative Disclosures about Market Risk is included in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Management."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated by reference
to the Company's Consolidated Financial Statements together with the Notes to
Consolidated Financial Statements and Independent Auditors' Report included in
this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company intends to file with the Securities and Exchange
Commission a definitive proxy statement (the "Proxy Statement") in connection
with the Company's 2003 Annual Meeting of Stockholders, which will involve the
election of directors, within 120 days of the end of the year covered by this
Form 10-K. Information regarding directors of the Company will appear under the
caption "Election of Directors" in the Proxy Statement and is incorporated
herein by reference. Information regarding executive officers of the Company
will appear under the caption "Executive Officers" in the Proxy Statement and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation will appear under the
caption "Executive Compensation" in the Proxy Statement and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information to be included under the caption "Securities Ownership
of Certain Beneficial Owners and Management and Related Stockholder Matters" in
the Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information to be included under the caption "Certain Relationships
and Related Transactions" in the Proxy Statement is incorporated herein by
reference.
ITEM 14. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this Form 10-K, 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 General Counsel, 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 General Counsel, 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. As part of the Company's ongoing assessment of its
internal controls and procedures, several changes have been made to enhance and
improve internal controls and procedures, including the controls and procedures
related to the recording and reconciliation of intercompany accounts, the
reconciliation of the mark-to-market of loans held for sale and the procedures
for reconciliation of the split of the mortgage servicing portfolio between
loans sold and loans held for sale. No change was made to any of the Company's
financial statements reported in its annual and quarterly reports.
29
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed with this Report.
The following documents are filed as part of this Form 10-K.
1. Financial Statements
The information called for by this paragraph is set forth in the
Financial Statements and Independent Auditors' Report beginning at page F-1 of
this Form 10-K.
2. Financial Statement Schedules
None.
3. Exhibits
The information called for by this paragraph is contained in the
Index to Exhibits of this Form 10-K, which is incorporated herein by reference.
(b) Reports on Form 8-K.
During the quarter ended December 31, 2002, the Company did not file
any Current Reports on Form 8-K with the Securities and Exchange Commission.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant, American Home Mortgage
Holdings, Inc., a corporation organized and existing under the laws of the State
of Delaware, has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 28th day of March, 2003.
AMERICAN HOME MORTGAGE HOLDINGS,
INC.
By: /s/ Michael Strauss
----------------------------
Name: Michael Strauss
Title: President & Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Michael Strauss Chairman of the Board, President March 28, 2003
- ------------------------------ & Chief Executive Officer
Michael Strauss (Principal Executive Officer)
/s/ Stephen A. Hozie Chief Financial Officer March 28, 2003
- ------------------------------ (Principal Financial Officer &
Stephen A. Hozie Chief Accounting Officer)
/s/ John A. Johnston Director March 28, 2003
- ------------------------------
John A. Johnston
/s/ Nicholas R. Marfino Director March 28, 2003
- ------------------------------
Nicholas R. Marfino
/s/ Michael A. McManus, Jr. Director March 28, 2003
- ------------------------------
Michael A. McManus, Jr.
/s/ C. Cathleen Raffaeli Director March 28, 2003
- ------------------------------
C. Cathleen Raffaeli
/s/ Kenneth P. Slosser Director March 28, 2003
- ------------------------------
Kenneth P. Slosser
31
CERTIFICATIONS
I, Michael Strauss, certify that:
1. I have reviewed this annual report on Form 10-K of American Home Mortgage
Holdings, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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
March 28, 2003
32
CERTIFICATIONS
I, Stephen A. Hozie, certify that:
1. I have reviewed this annual report on Form 10-K of American Home Mortgage
Holdings, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual 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
March 28, 2003
33
INDEX TO FINANCIAL STATEMENTS
AMERICAN HOME MORTGAGE HOLDINGS, INC.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002 AND 2001 AND
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2002:
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-2
Consolidated Statements of Income for the Years Ended
December 31, 2002, 2001 and 2000 F-3
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2002, 2001 and 2000 F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001 and 2000 F-5
Notes to Consolidated Financial Statements F-6 - F-38
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
American Home Mortgage Holdings, Inc.
We have audited the accompanying consolidated balance sheets of American Home
Mortgage Holdings, Inc. and its subsidiaries (the "Company") as of December 31,
2002 and 2001, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of American Home Mortgage Holdings,
Inc. and its subsidiaries at December 31, 2002 and 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
March 21, 2003
F-1
AMERICAN HOME MORTGAGE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
- --------------------------------------------------------------------------------
2002 2001
---------------- ----------------
ASSETS
Cash and cash equivalents $ 26,529,978 $ 26,392,590
Accounts receivable and servicing advances 72,562,769 18,558,211
Mortgage loans held for sale - net 811,187,897 419,351,016
Mortgage loans held for investment - net 1,713,956 1,305,902
Real estate owned 629,143 438,533
Mortgage servicing rights - net 109,022,689 45,551
Premises and equipment - net 13,001,551 9,072,133
Goodwill 50,932,020 16,874,185
Derivative assets 30,070,657 5,868,306
Other assets 5,513,309 3,218,545
-------------- ------------
TOTAL ASSETS $1,121,163,969 $501,124,972
============== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Warehouse lines of credit $ 730,579,171 $351,453,879
Notes payable 68,261,518 3,014,314
Drafts payable 42,598,578 35,359,821
Accrued expenses and other liabilities 64,945,109 15,108,385
Derivative liabilities 7,204,008 --
Income taxes payable 42,955,532 16,994,415
-------------- ------------
Total liabilities 956,543,916 421,930,814
-------------- ------------
COMMITMENTS AND CONTINGENCIES (Note 14)
MINORITY INTEREST
524,029 577,392
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 per share, 1,000,000 shares authorized, none
issued and outstanding -- --
Common stock, $.01 per share par value, 19,000,000 shares authorized,
16,717,459 and 11,991,200 shares issued and outstanding in 2002 and
2001, respectively 167,175 119,912
Additional paid-in capital 95,784,696 47,952,517
Retained earnings 68,144,153 30,544,337
-------------- ------------
Total stockholders' equity 164,096,024 78,616,766
-------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,121,163,969 $501,124,972
============== ============
See notes to consolidated financial statements.
F-2
AMERICAN HOME MORTGAGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
2002 2001 2000
------------- ------------ -----------
REVENUE
Gain on sales of mortgage loans $ 216,594,793 $118,553,988 $52,730,668
Interest income - net 23,670,722 9,098,292 3,271,064
Loan servicing fees 25,139,037 -- --
Amortization and impairment (36,731,453) -- --
------------- ------------ -----------
Net loan servicing fees (loss) (11,592,416) -- --
Other 4,147,424 400,685 2,278,321
------------- ------------ -----------
Total revenues 232,820,523 128,052,965 58,280,053
------------- ------------ -----------
EXPENSES:
Salaries, commissions and benefits - net 106,895,098 55,778,233 27,893,827
Occupancy and equipment 15,506,095 8,249,806 5,583,648
Marketing and promotion 7,995,706 6,312,777 4,058,105
Data processing and communications 7,853,183 4,441,850 2,825,895
Office supplies and expenses 6,511,227 4,358,765 2,149,704
Professional fees 5,442,629 2,453,826 1,612,376
Travel and entertainment 4,586,962 1,682,471 976,048
Other 9,576,664 4,188,540 3,013,929
------------- ------------ -----------
Total expenses 164,367,564 87,466,268 48,113,532
------------- ------------ -----------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST
IN INCOME OF CONSOLIDATED JOINT VENTURES 68,452,959 40,586,697 10,166,521
INCOME TAXES 28,075,365 16,252,852 4,266,727
------------- ------------ -----------
INCOME BEFORE MINORITY INTEREST IN INCOME OF
CONSOLIDATED JOINT VENTURES 40,377,594 24,333,845 5,899,794
MINORITY INTEREST IN INCOME OF CONSOLIDATED
JOINT VENTURES 892,541 1,027,912 508,344
------------- ------------ -----------
NET INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 39,485,053 23,305,933 5,391,450
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF INCOME TAXES -- 2,142,552 --
------------- ------------ -----------
NET INCOME $ 39,485,053 $ 25,448,485 $ 5,391,450
============= ============ ===========
Per share data:
Basic before cumulative effect of change in accounting principle $ 2.72 $ 2.25 $ 0.63
Basic after cumulative effect of change in accounting principle $ 2.72 $ 2.45 $ 0.63
Diluted before cumulative effect of change in accounting principle $ 2.65 $ 2.14 $ 0.63
Diluted after cumulative effect of change in accounting principle $ 2.65 $ 2.34 $ 0.63
Weighted average number of shares - basic 14,508,515 10,373,858 8,579,859
Weighted average number of shares - diluted 14,891,001 10,883,403 8,579,859
See notes to consolidated financial statements.
F-3
AMERICAN HOME MORTGAGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
SHARES ADDITIONAL TOTAL
OF COMMON COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
---------- -------- ----------- ------------ --------------
BALANCE, DECEMBER 31, 1999 8,253,437 $ 82,534 $17,249,390 $ 667,769 $ 17,999,693
Net income -- -- -- 5,391,450 5,391,450
Issuance of common stock, purchase
of First Home Mortgage Corp. 489,804 4,898 2,206,462 -- 2,211,360
Issuance of common stock, purchase
of Marina Mortgage Company, Inc. 201,043 2,010 968,019 -- 970,029
Issuance of common stock,
Omnibus Stock Plan 33,300 333 -- -- 333
Issuance of common stock,
purchase of Coastline 8,000 80 38,920 -- 39,000
---------- -------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 2000 8,985,584 89,855 20,462,791 6,059,219 26,611,865
Net income -- -- -- 25,448,485 25,448,485
Issuance of common stock, purchase
of Marina Mortgage Company, Inc. 157,985 1,580 968,449 -- 970,029
Issuance of common stock, Omnibus
Stock Plan 270,515 2,705 1,870,841 -- 1,873,546
Tax benefit from stock options
exercised -- -- 1,438,885 -- 1,438,885
Issuance of common stock, warrants 174,916 1,750 1,363,250 -- 1,365,000
Issuance of common stock, secondary
stock offering 2,402,200 24,022 21,848,301 -- 21,872,323
Dividends paid -- -- -- (963,367) (963,367)
---------- -------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 2001 11,991,200 119,912 47,952,517 30,544,337 78,616,766
Net income -- -- -- 39,485,053 39,485,053
Issuance of common stock, secondary
stock offering 3,700,000 37,000 36,835,695 -- 36,872,695
Issuance of common stock,
underwriter's over allotment 555,000 5,550 5,602,725 -- 5,608,275
Issuance of common stock, earnouts 269,201 2,692 3,401,353 -- 3,404,045
Issuance of common stock, Omnibus
Stock Plan 187,058 1,871 1,306,022 -- 1,307,893
Issuance of common stock, warrants 15,000 150 116,850 -- 117,000
Tax benefit from stock options
exercised -- -- 569,534 -- 569,534
Dividends paid -- -- -- (1,885,237) (1,885,237)
---------- -------- ----------- ------------ -------------
BALANCE, DECEMBER 31, 2002 16,717,459 $167,175 $95,784,696 $ 68,144,153 $ 164,096,024
========== ======== =========== ============ =============
See notes to consolidated financial statements.
F-4
AMERICAN HOME MORTGAGE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
2002 2001 2000
---------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 39,485,053 $ 25,448,485 $ 5,391,450
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 3,347,945 2,568,590 1,562,334
Amortization and impairment of mortgage servicing rights 24,140,520 6,463 1,114
Provision for loss 250,000 352,463 127,000
Origination of mortgage loans held for sale (11,569,424,977) (7,328,170,495) (2,769,766,933)
Proceeds from sales of mortgage loans 11,366,837,102 7,052,945,525 2,694,153,009
Increase in income taxes payable 11,965,519 12,526,011 3,089,916
Tax benefit received from stock options exercised 569,534 1,438,885 --
Other 213,404 297,539 (781)
(Increase) decrease in operating assets:
Accounts receivable (25,441,584) (9,575,758) (893,109)
Derivative assets (24,202,351) (6,027,226) --
Other assets 1,827,586 (1,383,266) 1,167,511
Increase (decrease) in operating liabilities:
Minority interest (53,363) (4,026) 558,046
Accrued expenses and other liabilities 19,345,936 6,043,130 (5,345,612)
Derivative liabilities 7,204,008 -- --
---------------- --------------- ---------------
Net cash used in operating activities (143,935,668) (243,533,680) (69,956,055)
---------------- --------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of real estate owned - net (190,610) (82,716) (242,952)
Net sales (purchases) of loans held for investment 1,048,241 (1,398,122) 728,342
Acquisition of businesses, net of cash acquired (33,452,124) (2,771,427) (2,072,376)
Earnouts related to previous acquisitions (1,643,633) -- --
Increase in mortgage servicing rights (31,117,658) (15,000) (7,000)
Purchases of premises and equipment - net (4,649,529) (3,647,966) (2,057,712)
---------------- --------------- ---------------
Net cash used in investing activities (70,005,313) (7,915,231) (3,651,698)
---------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in warehouse lines of credit 186,072,127 220,970,208 71,030,144
(Decrease) increase in drafts payable (3,448,184) 27,010,339 4,933,072
Proceeds from issuance of capital stock 43,692,459 25,776,896 --
(Decrease) increase in notes payable (10,352,796) (957,967) 235,912
Dividends paid (1,885,237) (963,367) --
---------------- --------------- ---------------
Net cash provided by financing activities 214,078,369 271,836,109 76,199,128
---------------- --------------- ---------------
NET INCREASE IN CASH 137,388 20,387,198 2,591,375
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 26,392,590 6,005,392 3,414,017
---------------- --------------- ---------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 26,529,978 $ 26,392,590 $ 6,005,392
================ =============== ===============
SUPPLEMENTAL DISCLOSURE - Cash paid for:
Interest $ 22,360,556 $ 6,878,771 $ 6,533,695
Taxes 15,736,286 3,417,444 1,176,811
See notes to consolidated financial statements.
F-5
AMERICAN HOME MORTGAGE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OWNERSHIP - American Home Mortgage Holdings, Inc. is a holding company
whose principal assets are its investments in its wholly-owned
subsidiaries, American Home Mortgage Corp. ("American Home Mortgage") and
Columbia National, Incorporated ("Columbia") (collectively referred to
herein as "the Company"). Columbia has one active wholly-owned subsidiary,
CNI Reinsurance, Ltd.
On June 15, 1999, American Home Mortgage Holdings, Inc. was formed. On
September 29, 1999, Michael Strauss exchanged his shares of American Home
Mortgage for 4,999,900 shares of common stock of American Home Mortgage
Holdings, Inc.
On October 6, 1999, the Company completed its initial public offering of
2.5 million shares of common stock, $0.01 par value (the "Common Stock"),
at a price of $6.00 per share.
On June 28, 2001, the Company completed a public stock offering which
raised approximately $23.1 million through the sale of 2.4 million shares
of Common Stock.
On June 28, 2002, the Company completed a public stock offering which
raised approximately $37.5 million through the sale of 3.7 million shares
of Common Stock. On July 3, 2002 the Company completed the sale of an
additional 550,000 shares of Common Stock pursuant to the exercise in full
of the underwriters' over-allotment option, which raised $5.9 million.
Certain shares of Common Stock issued in connection with the initial
public offering and the acquisitions of Marina Mortgage Company, Inc.
("Marina") and First Home Mortgage Corp. ("First Home") are subject to
restrictions as to disposition into the market, ranging from one to four
years.
CONSOLIDATION - Due to the fact that the Company exercises significant
influence on the operations of the joint ventures (see Note 16), their
balances and operations have been fully consolidated in the accompanying
consolidated financial statements and all intercompany accounts and
transactions have been eliminated.
BASIS OF PRESENTATION - The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. The
Company's estimates and assumptions primarily arise from risks and
uncertainties associated with interest rate volatility, credit exposure
and regulatory changes. Although management is not currently aware of any
factors that would significantly change its estimates and assumptions in
the near term, future changes in market trends and conditions may occur
which could cause actual results to differ materially.
RECLASSIFICATIONS - Certain reclassifications have been made to the 2001
and 2000 consolidated financial statements to conform to the 2002
presentation.
F-6
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on
hand, amounts due from banks and overnight deposits.
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 market value as determined by
outstanding commitments from investors or current investor yield
requirements calculated on the aggregate loan basis less an estimate of
the costs to complete the loan less the deferral of fees and points
received plus the deferral of direct origination costs.
MORTGAGE LOANS HELD FOR INVESTMENT - Periodically, the Company originates
or repurchases loans which are unable to be sold through normal investor
channels. When loans are transferred or repurchased into this category,
they are recorded at the lower of cost or market and are subsequently
carried at amortized cost, less allowance for loan losses. The Company has
the intent and ability to hold these loans for the foreseeable future. The
Company defers net loan origination costs as a component of the loan
balance and amortizes the deferred costs into interest income over the
life of the loan using the effective interest method. The loans are
evaluated for impairment based on the collateral value of the property
securing the loan.
PROVISION FOR FORECLOSURE AND LOAN LOSSES - A provision for loss is
provided based on management's periodic evaluation of its loss exposures
for loans held for investment. The provision for loans held for investment
is based on certain default and foreclosure. Due to the relatively small
number of loans held for investment, analysis is performed on a specific
loan basis. The pertinent factors in determining the exposures include the
underlying quality of the loans, actual loss experience, current economic
conditions, detailed analysis of individual loans for which full
collectibility may not be assured, and determination of the existence and
realizable value of the collateral and any guarantees securing such loans.
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 sell
or securitize 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.
SFAS No. 140 also requires that capitalized servicing assets be assessed
for impairment based on the fair value of those assets. The Company
estimates the fair value of its servicing assets by obtaining market
information from one of the primary mortgage servicing rights brokers.
When the book value of capitalized servicing assets exceeds their fair
value, impairment is recognized through a valuation allowance. In
determining impairment, the mortgage servicing portfolio is stratified by
the predominant risk characteristic of the underlying mortgage loans. The
Company has determined that the predominant risk characteristic is the
interest rate on the underlying loans. The Company measures impairment for
each stratum by comparing the estimated fair value to the recorded book
value. Temporary impairment is recorded through a valuation allowance and
amortization expense in the period of occurrence. In addition, the Company
periodically evaluates its mortgage servicing rights for other than
temporary impairment to determine if the carrying value before the
application of the valuation allowance is recoverable. When the Company
determines that a portion of the mortgage servicing rights is not
recoverable, the related mortgage servicing rights and the previously
established valuation allowance are correspondingly reduced to reflect the
other than temporary impairment. At December 31, 2002, the temporary
F-7
servicing impairment valuation allowance was $10.2 million. Servicing
assets are amortized in proportion to, and over the period of, estimated
net servicing income.
PREMISES AND EQUIPMENT - Premises and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation is provided in
amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives using the straight-line method.
Leasehold improvements are amortized over the lesser of the life of the
lease or service lives of the improvements using the straight-line method.
Depreciation and amortization are recorded within occupancy and equipment
expense within the consolidated financial statements.
GOODWILL - Goodwill represents the excess purchase price over the fair
value of net assets acquired from business acquisitions and which were
being amortized over their initial estimated lives, generally 20 years. In
accordance with the provisions of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142")
(see Note 20), effective January 1, 2002 the Company no longer amortizes
goodwill, but instead tests for impairment at least annually. The Company
will test for impairment more frequently if events or circumstances
indicate that an asset may be impaired. In accordance with SFAS 142, the
Company tests for impairment by comparing the fair value of goodwill, as
determined by using a discounted cash flow method, with its carrying
value. Any excess of carrying value over the fair value of the goodwill
would be recognized as an impairment loss in continuing operations. The
discounted cash flow calculation includes a forecast of the expected
future loan originations and the related revenues and expenses. These cash
flows are discounted using a rate that is estimated to be a weighted
average cost of capital for similar mortgage companies. The Company
further tests to ensure that the fair value of all its business units does
not exceed its total market capitalization. The Company did not record any
impairment charges in connection with the implementation of SFAS 142.
F-8
Summarized below is the pro forma net income for the years ended December
31, 2001 and 2000 as adjusted for the amortization expense no longer
recorded in accordance with SFAS 142.
YEAR ENDED DECEMBER 31,
2002 2001 2000
-------------- -------------- --------------
Net income before cumulative effect of change in accounting
principle as reported $ 39,485,053 $ 23,305,933 $ 5,391,450
Goodwill amortization, net of taxes -- 833,839 419,400
Adjusted net income before cumulative effect of change in -------------- -------------- --------------
accounting principle $ 39,485,053 $ 24,139,772 $ 5,810,850
============== ============== ==============
EARNINGS PER SHARE
Basic before cumulative effect of change in accounting principle $ 2.72 $ 2.25 $ 0.63
Goodwill amortization, net of taxes -- 0.08 0.05
Adjusted basic before cumulative effect of change in accounting -------------- -------------- --------------
principle $ 2.72 $ 2.33 $ 0.68
============== ============== ==============
Diluted before cumulative effect of change in accounting principle $ 2.65 $ 2.14 $ 0.63
Goodwill amortization, net of taxes -- 0.08 0.05
Adjusted diluted before cumulative effect of change in accounting -------------- -------------- --------------
principle $ 2.65 $ 2.22 $ 0.68
============== ============== ==============
Net income after cumulative effect of change in accounting
principle as reported $ 39,485,053 $ 25,448,485 $ 5,391,450
Goodwill amortization, net of taxes -- 833,839 419,400
Adjusted net income after cumulative effect of change in -------------- -------------- --------------
accounting principle $ 39,485,053 $ 26,282,324 $ 5,810,850
============== ============== ==============
EARNINGS PER SHARE
Basic after cumulative effect of change in accounting principle $ 2.72 $ 2.45 $ 0.63
Goodwill amortization, net of taxes -- 0.08 0.05
Adjusted basic after cumulative effect of change in accounting -------------- -------------- --------------
principle $ 2.72 $ 2.53 $ 0.68
============== ============== ==============
Diluted after cumulative effect of change in accounting principle $ 2.65 $ 2.34 $ 0.63
Goodwill amortization, net of taxes -- 0.08 0.05
Adjusted diluted after cumulative effect of change in accounting -------------- -------------- --------------
principle $ 2.65 $ 2.42 $ 0.68
============== ============== ==============
The changes in the carrying amount of goodwill for the year ended December
31, 2002 are as follows:
Balance as of December 31, 2001 $ 16,874,185
Acquisition of Columbia 22,010,157
Earnouts from previous acquisitions 12,047,678
------------
Balance as of December 31, 2002 $ 50,932,020
============
F-9
DRAFTS PAYABLE - Drafts payable represent outstanding mortgage loan
disbursements that the Company has provided to its customers for the
purchase of a home. The amounts outstanding do not bear interest and are
transferred into the warehouse facility when they are presented to a bank.
DERIVATIVE FINANCIAL INSTRUMENTS - The Company has developed risk
management programs and processes designed to manage market risk
associated with normal business activities.
On January 1, 2001, the Company adopted Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended ("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 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.
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
SFAS 133, 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 fair value of
the IRLCs is determined by an estimate of the ultimate gain on sale of the
loans net of estimated net costs to originate the loan. 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 loans
and most of its non-conforming loans held for sale. At the inception of
the hedge, the Company formally documents the relationship between the
forward delivery contracts and the mortgage inventory as well as its
objective and strategy for undertaking the hedge 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 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. From time to time, the
Company hedges its exposure to impairment of the mortgage servicing rights
by the use of mortgage forward purchase contracts. These derivatives are
F-10
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. The Company assesses the effectiveness of the
hedge by using statistical analysis to measure the correlation of the
changes in the value of the hedge to the changes in the value of the
mortgage servicing rights being hedged 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 highly effective or expected to be highly
effective in offsetting changes in fair value of the hedged item.
Additionally, the Company may elect to de-designate a hedge relationship
during an interim period and re-designate upon the rebalancing of a hedge
profile and the corresponding hedge relationship. When hedge accounting is
discontinued, the Company continues to carry the derivative instruments at
fair value with changes in their value recorded in earnings.
GAIN ON SALE OF LOANS - The Company recognizes gain on sale of loans for
the difference between the sales price and the adjusted book value of the
loans at the time of sale. The adjusted book value of the loans includes
the original principal amount plus adjustments related to previously
recognized income plus deferrals of fees and points received and direct
loan origination costs 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 and such amounts are included in gain
on sales of loans when the loan is sold. Accordingly, salaries,
compensation and benefits have been reduced by approximately $57,490,000,
$44,235,000 and $16,732,000 due to direct loan origination costs,
including commission costs, incurred for the years ended December 31,
2002, 2001 and 2000, respectively.
INTEREST RECOGNITION - The Company accrues interest income as it is
earned. Loans are placed on a nonaccrual status when any portion of the
principal or interest is 90 days past due or earlier when concern exists
as to the ultimate collectibility of principal or interest. Loans return
to accrual status when principal and interest become current and are
anticipated to be fully collectible. Interest expense is recorded on
outstanding lines of credit at a rate based on a spread to the LIBOR.
Interest expense has been netted with interest income within the
consolidated statements of income in the amounts of $33,809,920,
$36,396,081 and $7,469,603, for the years ended December 31, 2002, 2001
and 2000, respectively.
SERVICING FEES - The Company recognizes servicing fees when the fees are
collected.
MARKETING AND PROMOTION - The Company charges the costs of marketing,
promotion and advertising to expense in the period incurred.
INCOME TAXES - The Company accounts for income taxes pursuant to the asset
and liability method prescribed by SFAS 109, "Accounting for Income
Taxes." Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to the differences between the financial
statement carrying amount of assets and liabilities and their respective
tax basis.
STOCK OPTION PLANS - The Company has elected to account for its stock
option plan using Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and to provide pro forma net
income and pro forma earnings per share disclosures for employee stock
F-11
option grants as if the fair-value based method, as required by Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," had been applied.
EARNINGS PER SHARE - Basic earnings per share excludes dilution and is
computed by dividing net income available to common stockholders by the
weighted-average number of shares of Common Stock outstanding for the
period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue Common Stock were
exercised or converted into Common Stock or resulted in the issuance of
Common Stock that then shared in the earnings of the Company.
CASH FLOWS - Cash and cash equivalents are demand deposits and short-term
investments with a maturity of 90 days or less. The supplemental
information for the cash flow statement for the Company's noncash
investing and financing activities are as follows:
During 2002, the Company issued 269,201 shares of Common Stock in earnouts
relating to previous acquisitions (see Note 22).
On October 15, 2000 and January 31, 2001, the Company issued 201,043 and
157,985 shares of Common Stock, respectively, as additional consideration
for the purchase of Marina.
On August 31, 2000, the Company issued 8,000 shares of Common Stock for
the purchase of Coastline.
On June 30, 2000, the Company issued 489,804 shares of Common Stock in
exchange for 100% of the outstanding shares of First Home.
The Company purchased all of the stock of Columbia and First Home during
2002 and 2000, respectively. In conjunction with the acquisitions,
liabilities were assumed as follows:
2002 2000
--------------- --------------
Fair value of assets acquired $ 311,023,163 $ 2,877,477
Goodwill 22,010,157 15,640,733
Stock issued -- 2,211,360
Cash paid 37,000,000 3,075,000
--------------- --------------
Liabilities assumed $ 296,033,320 $ 13,231,850
=============== ==============
F-12
2. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following as of December 31:
2002 2001
----------- -----------
Investor receivables $21,984,944 $13,143,040
Ginnie Mae repurchase provision(1) 20,793,172 --
Mortgage payments receivable 12,741,136 3,973,252
Tax and insurance advances 9,213,408 --
Sundry receivables 5,105,809 1,058,394
Due from related parties 1,583,469 368,950
Accrued interest 1,140,831 14,575
----------- -----------
Accounts receivable $72,562,769 $18,558,211
=========== ===========
(1) The Company makes advances to the Government National Mortgage
Association ("Ginnie Mae") mortgage pools that are guaranteed by the
Federal Housing Administration ("FHA") or by the Department of Veterans
Affairs ("VA"). These advances are made to buy out government
agency-guaranteed delinquent loans, according to the Company's sale and
servicing agreements. The Company undertakes the collection efforts and
foreclosure process on behalf of FHA and VA, and is reimbursed for
substantially all costs incurred after the foreclosure process is
complete.
Ginnie Mae pool buyouts represent securitized assets that are eligible to
be repurchased according to the terms of the sale and servicing
agreements. At December 31, 2002, the Company had an asset and offsetting
liability of $20,793,172, to reflect the fair value of all contracts sold
after March 31, 2001 that are eligible to be repurchased. The offsetting
liability is reflected in the accrued expenses and other liabilities line
of the consolidated balance sheet.
3. MORTGAGE LOANS HELD FOR SALE - NET
Mortgage loans held for sale consist of the following as of December 31:
2002 2001
------------- ------------
Mortgage loans held for sale $ 798,896,859 $411,856,621
Deferred origination costs - net 14,157,302 7,335,475
Forward delivery contracts (1,866,264) 158,920
------------- ------------
Mortgage loans held for sale - net $ 811,187,897 $419,351,016
============= ============
4. MORTGAGE LOANS HELD FOR INVESTMENT - NET
Mortgage loans held for investment consist of the following as of December
31:
2002 2001
----------- -----------
Mortgage loans held for investment $ 2,037,907 $ 1,546,152
Less allowance for loss (323,951) (240,250)
----------- -----------
Mortgage loans held for investment - net $ 1,713,956 $ 1,305,902
=========== ===========
F-13
The activity in the allowance for loss was as follows:
2002 2001 2000
--------- --------- ---------
Balance, beginning of year $ 240,250 $ 150,411 $ 121,911
Provision 250,000 352,463 127,000
Charge-offs (166,299) (262,624) (98,500)
--------- --------- ---------
Balance, end of year $ 323,951 $ 240,250 $ 150,411
========= ========= =========
5. MORTGAGE SERVICING RIGHTS - NET
The Company recognizes mortgage servicing rights (MSRs) as an asset
separate from the underlying originated mortgage loans. Upon sale of a
loan, the Company measures the retained MSRs by allocating the total cost
of originating a mortgage loan between the loan and the servicing right
based on their estimated fair values. MSRs are carried at the lower of
cost, less accumulated amortization, or fair value. MSRs are amortized in
proportion to and over the period of estimated future net servicing
income.
The estimated fair value of MSRs is determined by obtaining a market
valuation from one of the primary MSR brokers. To determine the market
value of MSRs, the MSR broker uses a valuation model which incorporates
assumptions relating to the estimate of the cost of servicing per loan, a
discount rate, a float value, an inflation rate, ancillary income per
loan, prepayment speeds and default rates that market participants use for
similar servicing rights. For purposes of performing the impairment
analysis of MSRs at December 31, 2002, the MSR broker estimated the market
value at December 31, 2002 using the following assumptions: weighted
average prepayment speed of 620 PSA (Public Securities Association
prepayment speed measurement); weighted average discount rate of 10.13%;
and weighted average default rate of 9.00%. The Company records a
valuation allowance where estimated fair value is below the carrying
amount of individual stratifications, even though the overall fair value
of the servicing assets may exceed amortized cost.
F-14
MSR activity for the year ended December 31, 2002 was as follows:
MORTGAGE
SERVICING IMPAIRMENT
RIGHTS ALLOWANCE TOTAL
------------- ------------ -------------
Balance, December 31, 2001 $ 45,551 $ -- $ 45,551
Acquisition of Columbia 102,000,000 -- 102,000,000
Additions 31,117,658 -- 31,117,658
Amortization (26,398,915) -- (26,398,915)
Impairment provision -- (10,201,661) (10,201,661)
Change in fair value
attributable to hedged
risk during the hedge period 12,460,056 -- 12,460,056
--
------------- ------------ -------------
Balance, December 31, 2002 $ 119,224,350 $(10,201,661) $ 109,022,689
============= ============ =============
Aggregate Amortization Expense
Year ended December 31, 2002 $26,398,915
Estimated Amortization Expense
Year ended December 31, 2003 29,672,478
Year ended December 31, 2004 18,812,686
Year ended December 31, 2005 13,111,470
Year ended December 31, 2006 9,727,148
Year ended December 31, 2007 7,464,147
The table below illustrates hypothetical fair values of the Company's MSRs
at December 31, 2002 caused by assumed immediate adverse changes to the
key assumptions used by the Company to determine fair value (dollars in
thousands):
Fair value of MSRs at December 31, 2002 $109,023
Prepayment speed:
Fair value after impact of 10% change 105,555
Fair value after impact of 20% change 102,508
Discount rate:
Fair value after impact of 10% change 108,144
Fair value after impact of 20% change 107,321
Default rate:
Fair value after impact of 10% change 108,926
Fair value after impact of 20% change 108,812
F-15
These sensitivities are hypothetical, are presented for illustrative
purposes only, and should be used with caution.
6. PREMISES AND EQUIPMENT - NET
Premises and equipment consist of the following as of December 31:
2002 2001
------------ ------------
Office equipment $ 12,818,695 $ 8,386,371
Furniture and fixtures 5,629,792 3,563,640
Building 1,850,000 1,850,000
Leasehold improvements 1,253,446 493,801
------------ ------------
Gross premises and equipment 21,551,933 14,293,812
Less accumulated depreciation and amortization (8,550,382) (5,221,679)
------------ ------------
Premises and equipment - net $ 13,001,551 $ 9,072,133
============ ============
Depreciation and amortization expense for the years ended December 31,
2002, 2001 and 2000 was $3,347,945, $1,728,287 and $1,065,364,
respectively.
7. DERIVATIVE ASSETS AND LIABILITIES
The following table summarizes derivative assets and liabilities as of
December 31, 2002 and 2001.
DECEMBER 31,
-----------------------------
2002 2001
------------ ----------
DERIVATIVE ASSETS
Interest rate lock commitments $ 29,345,407 $ 95,966
Options on treasury future contracts 725,250 161,750
Forward delivery contracts -
Loan commitments -- 5,610,590
Forward delivery contracts -
Loans held for sale (1) -- 158,920
------------ ----------
Total Derivative Assets $ 30,070,657 $6,027,226
============ ==========
DERIVATIVE LIABILITIES
Forward delivery contracts -
Loan commitments $ (7,204,008) $ --
Forward delivery contracts -
Loans held for sale(1) (1,866,264) --
------------ ----------
Total Derivative Liabilities $ (9,070,272) $ --
============ ==========
(1) This amount is included in loans held for sale (see Note 3).
8. WAREHOUSE FACILITIES
As of December 31, 2002, American Home Mortgage and Columbia have a
committed bank syndicated facility led by Residential Funding Corporation
("RFC") and a pre-purchase facility with UBS Paine Webber ("Paine
Webber"). American Home Mortgage also has committed facilities with CDC
IXIS Capital Markets North America Inc. ("CDC") and Morgan Stanley Bank
("Morgan Stanley"). The RFC facility is for $450 million, the Paine Webber
facility is for $450 million, CDC facility is for $300 million and the
F-16
Morgan Stanley facility is for $75 million. The interest rate on
outstanding balances fluctuates daily based on a spread to the LIBOR and
interest is paid monthly.
On December 31, 2002, a committed facility between American Home Mortgage
and Residential Funding Corporation was not renewed in connection with
American Home and Columbia's borrowings from RFC being consolidated into
one facility. Residential Funding Corporation extended the line for an
additional 60 days to allow the loans remaining to settle.
The lines of credit are secured by mortgage loans and all other assets of
American Home Mortgage. The lines contain various covenants pertaining to
maintenance of net worth and working capital and certain restrictions on
dividends to shareholders. At December 31, 2002, American Home Mortgage
was in compliance with the loan covenants.
Included within the RFC line of credit, American Home Mortgage and
Columbia have a working capital sub-limit that allows for borrowings up to
$25 million at a rate based on a spread to the LIBOR that may be adjusted
for earnings on escrow balances on deposit at creditors' banks. As of
December 31, 2002, borrowings under the working capital line of credit
were $15,100,000.
Warehouse lines of credit consist of the following as of December 31, 2002
and 2001:
2002 2001
---------------------- ----------------------
WEIGHTED WEIGHTED
OUTSTANDING AVERAGE OUTSTANDING AVERAGE
BALANCE RATE BALANCE RATE
------- ---- ------- ----
RFC $289,190,019 3.21% $ -- -- %
CDC 244,294,979 2.35 -- --
Paine Webber 142,261,702 3.06 309,600,955 3.93
Morgan Stanley 54,832,471 2.18 27,893,416 2.67
First Union -- -- 13,959,508 3.32
------------ ------------
Total warehouse lines of credit $730,579,171 2.82 % $351,453,879 3.81 %
============ ============
9. NOTES PAYABLE
Notes payable primarily consist of amounts borrowed under a term loan
facility with a bank syndicate led by RFC. Under the terms of this
facility, American Home Mortgage and Columbia may borrow up to $75
million. As of December 31, 2002, borrowings under the term loan were
$66.0 million. This term loan expires on May 31, 2003. Interest is based
on a spread to the LIBOR and may be adjusted for earnings on escrow
balances. At December 31, 2002, the interest rate was 4.0%.
Also included in notes payable is a mortgage note on an office building at
a rate of 7.5% and the discounted value of note obligations incurred for
acquiring Marina and First Home. The Company is obligated to pay Marina's
prior shareholders $2.5 million over a five-year period expiring in 2004.
The Company was obligated to pay First Home's shareholders $600,000 over a
two-year period which expired in 2002. The payments for other notes have
been discounted at an imputed interest rate of 10%.
F-17
Notes payable consists of the following as of December 31, 2002 and 2001:
2002 2001
----------- ----------
Term loan $66,000,000 $ --
Note - office building 1,164,973 1,229,304
Notes to Marina shareholders 1,096,545 1,570,809
Notes to First Home shareholders -- 214,201
----------- ----------
$68,261,518 $3,014,314
=========== ==========
Maturities of notes payable are as follows:
2003 $ 66,591,271
2004 649,308
2005 80,507
2006 86,757
2007 93,492
Thereafter 760,183
------------
$ 68,261,518
============
F-18
10. OTHER REVENUES AND EXPENSES
The significant components of other revenues and expense are as follows:
2002 2001 2000
---------- ---------- ----------
Other revenues:
Title services revenue $1,935,739 $ -- $ --
Volume incentives 801,492 336,157 2,028,997
Reinsurance premiums 563,861 -- --
Other 846,332 64,528 249,324
---------- ---------- ----------
Other revenues $4,147,424 $ 400,685 $2,278,321
========== ========== ==========
Other expenses
Indemnification and
foreclosure costs $2,153,449 $ -- $ --
Insurance 1,377,038 686,570 676,509
Outside services 603,689 644,672 364,684
Storage and moving 581,794 261,996 224,006
Licenses and permits 578,988 191,398 301,530
Other 4,281,706 2,403,904 1,447,200
---------- ---------- ----------
Other expenses $9,576,664 $4,188,540 $3,013,929
========== ========== ==========
11. INCOME TAXES
A reconciliation of the statutory income tax provision and income tax rate
to the effective income tax provision and rate, as applied to income for
the years ended December 31, is as follows:
2002 2001 2000
-------------------- -------------------- -----------------
% % %
---- ---- ----
Tax provision at statutory rate $ 23,958,535 35.0% $ 14,205,344 35.0% $3,455,317 34.0%
State and local taxes,
net of federal
income tax benefit 4,225,834 6.2 2,014,729 5.0 754,526 7.4
Minority income adjustment (312,389) (0.5) (389,923) (1.0) (172,836) (1.7)
Goodwill -- -- 289,076 0.7 155,380 1.5
Other 203,385 0.3 133,626 0.3 74,340 0.7
------------ ------------ ----------
Income taxes $ 28,075,365 41.0% $ 16,252,852 40.0% $4,266,727 41.9%
============ ============ ==========
F-19
The income tax provision for each of the years ended December 31 is
comprised of the following components:
2002 2001 2000
----------- ------------ ----------
Current tax provision
Federal $ 4,785,557 $ 12,676,275 $2,234,671
State 1,445,768 3,191,470 453,931
----------- ------------ ----------
6,231,325 15,867,745 2,688,602
Deferred tax provision
Federal 17,306,925 476,994 1,277,530
State 4,537,115 (91,887) 300,595
----------- ------------ ----------
21,844,040 385,107 1,578,125
----------- ------------ ----------
Income taxes $28,075,365 $ 16,252,852 $4,266,727
=========== ============ ==========
The major sources of temporary differences and their deferred tax effect
at December 31 are as follows:
2002 2001
----------- ----------
Deferred tax liabilities:
Capitalized cost of
mortgage servicing rights $45,915,748 $ 24,268
Loan origination costs 7,522,525 3,617,672
Cumulative effect of change in
accounting principle -- 1,697,016
Depreciation 608,572 304,448
Mark to market adjustments 12,057,102 --
----------- ----------
Total deferred tax liabilities 66,103,947 5,643,404
Deferred tax assets:
Tax loss carry forwards 21,504,275 --
Allowance for bad debts and
foreclosure reserve 3,152,320 114,958
Mark to market adjustments -- 1,476,003
Deferred state income taxes 1,788,552 --
Other 277,477 9,656
----------- ----------
Total deferred tax assets 26,722,624 1,600,617
----------- ----------
Net deferred tax liability $39,381,323 $4,042,787
=========== ==========
As discussed in Note 22, effective June 13, 2002, the Company acquired all
of the outstanding stock of Columbia. This was accounted for under the
purchase method of accounting for financial statement purposes. For
Federal income tax purposes, the historical basis of the assets and
liabilities were carried over to the Company. Columbia has approximately
$54 million of net operating loss carryforwards which begin to expire in
2008.
F-20
12. EARNINGS PER SHARE
The following is a reconciliation of the denominators used in the
computations of basic and diluted earning per share.
2002 2001 2000
----------- ----------- -------------
Numerator:
Numerator for basic earnings per share - Net income
Net income before cumulative effect of change in
accounting principle $39,485,053 $23,305,933 $ 5,391,450
=========== =========== =============
Net income $39,485,053 $25,448,485 $ 5,391,450
=========== =========== =============
Denominator:
Denominator for basic earnings per share
Weighted average number of common shares
outstanding during the period 14,508,515 10,373,858 8,579,859
Net effect of dilutive stock options 382,486 509,545 --
----------- ----------- -------------
Denominator for diluted earnings per share 14,891,001 10,883,403 8,579,859
=========== =========== =============
Net income per share:
Basic before cumulative effect of change in accounting
principle $ 2.72 $ 2.25 $ 0.63
=========== =========== =============
Basic after cumulative effect of change in accounting
principle $ 2.72 $ 2.45 $ 0.63
=========== =========== =============
Diluted before cumulative effect of change in accounting
principle $ 2.65 $ 2.14 $ 0.63
=========== =========== =============
Diluted after cumulative effect of change in accounting
principle $ 2.65 $ 2.34 $ 0.63
=========== =========== =============
13. STOCK OPTIONS
In 1999, the Company established the 1999 Omnibus Stock Option Plan (the
"Plan"). Pursuant to the Plan, employees, officers and directors are
offered the opportunity to acquire the Company's Common Stock through the
grant of options and the award of restricted stock under the Plan. The
total number of shares that may be optioned or awarded under the Plan is
2,250,000 shares of Common Stock. The Plan provides for the granting of
options at the fair market value at the date of grant. The options issued
primarily vest on the two-year anniversary from the grant date and expire
ten years from the grant date. Under the Plan, the Company awarded 68,210
and 50,001 restricted shares of restricted stock during 2002 and 1999,
respectively. During 2002 and 2001, the Company recognized compensation
expense of $213,404 and $304,002 relating to restricted shares. At
December 31, 2002, 50,001 shares are vested. In general, unvested
restricted stock is forfeited upon the recipient's termination of
employment.
F-21
The following table summarizes certain information regarding the Plan at
December 31, 2002:
AVERAGE
NUMBER OF EXERCISE PRICE EXERCISE
SHARES PER SHARE RATE
--------- ------------------ --------
Balance at December 31, 1999 640,000 $ 6.00 $ 6.00
Options granted 318,765 $ 4.75 - $ 6.44 5.71
Options cancelled (208,894) $ 4.75 - $ 6.44 5.97
--------- --------
Balance at December 31, 2000 749,871 $ 4.75 - $ 6.44 5.87
Options granted 476,242 $ 4.75 - $ 19.61 7.89
Options exercised (253,800) $ 6.00 6.00
Options cancelled (3,951) $ 5.13 - $ 5.50 5.31
--------- --------
Balance at December 31, 2001 968,362 $ 4.75 - $ 19.61 6.84
Options granted 268,708 $ 9.40 - $ 14.40 11.71
Options exercised (187,058) $ 4.75 - $ 6.44 5.93
Options cancelled (49,754) $ 5.50 - $ 13.50 9.72
--------- --------
Balance at December 31, 2002 1,000,258 $ 4.75 - $ 19.61 $ 8.17
========= ========
Options exercisable 438,297 $ 4.75 - $ 8.88 $ 5.73
========= ========
The following table summarizes stock options outstanding at December 31,
2002:
OUTSTANDING EXERCISABLE WEIGHTED AVG.
NUMBER OF WEIGHTED NUMBER OF WEIGHTED REMAINING
RANGE OF EXERCISE OPTIONS AVERAGE OPTIONS AVERAGE CONTRACTUAL
PRICE OUTSTANDING EXERCISE PRICE EXERCISABLE EXERCISE PRICE LIFE (YEARS)
----- ----------- -------------- ----------- -------------- ------------
$ 4.75 - $ 5.50 324,950 $ 5.25 218,740 $ 5.15 8.2
6.00 - 6.44 255,557 6.18 209,557 6.17 7.1
7.13 - 8.88 40,000 7.80 10,000 8.88 8.0
9.40 - 10.25 49,500 10.15 -- -- 8.7
10.50 - 10.95 129,912 10.76 -- -- 9.8
11.19 - 12.25 88,064 12.02 -- -- 8.2
12.98 - 13.00 45,232 12.99 -- -- 9.3
14.20 - 19.61 67,043 15.38 -- -- 9.1
--------- -------
1,000,258 $ 8.17 438,297 $ 5.73 8.3
========= =======
The Plan is a compensatory stock option plan. There was no intrinsic value
of the options granted, as the exercise price was equal to the quoted
market price at the grant date. No compensation cost has been recognized
for the years ended December 31, 2002, 2001 and 2000.
F-22
Had compensation cost for the Plan been determined based on the fair value
at the grant dates for awards under the Plan, the Company's net income
before cumulative effect of change in accounting principle would have been
$37.7 million for 2002, $22.0 million for 2001 and $4.0 million for 2000.
Basic earnings per share would have been $2.60, $2.32 and $0.46 for 2002,
2001 and 2000, respectively. Diluted earnings per share would have been
$2.53, $2.21 and $0.46 for 2002, 2001 and 2000, respectively.
2002 2001 2000
------------ ------------ -----------
Net income, as reported $ 39,485,053 $ 25,448,485 $ 5,391,450
Less: Total stock-based employee
compensation expense determined
under fair value based method for
all rewards, net of related tax
effects (1,822,522) (1,351,151) (1,427,011)
------------ ------------ -----------
Pro forma net income $ 37,662,531 $ 24,097,334 $ 3,964,439
============ ============ ===========
Earnings per share:
Basic - as reported $ 2.72 $ 2.45 $ 0.63
Basic - pro forma $ 2.60 $ 2.32 $ 0.46
Diluted - as reported $ 2.65 $ 2.34 $ 0.63
Diluted - pro forma $ 2.53 $ 2.21 $ 0.46
The weighted-average fair value of options granted during 2002, 2001 and
2000 was $10.71, $7.74 and $5.69, respectively. The fair value of the
options granted is estimated using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for the grants:
2002 2001 2000
---- ---- ----
Dividend yield 3.0 % 1.0 % -
Expected volatility 54.0 % 85.0 % 57.0 %
Risk-free interest rate 5.0 % 5.0 % 5.0 %
Expected life 3 years 2 years 2 years
14. COMMITMENTS AND CONTINGENCIES
LOANS SOLD TO INVESTORS - Generally, the Company is not exposed to
significant credit risk on its loans sold to investors. In the normal
course of business, the Company is obligated to repurchase loans which are
subsequently unable to be sold through normal investor channels.
Management believes this is a rare occurrence and that the Company can
usually sell the loans directly to a permanent investor.
LOAN FUNDING AND DELIVERY COMMITMENTS - At December 31, 2002 and 2001, the
Company had commitments to fund loans approximating $3.7 billion and $734
million, respectively. At December 31, 2002 and 2001, the Company had
commitments to fund loans with agreed upon rates approximating $1.6
billion and $554 million, respectively. The Company hedges the interest
rate risk of such commitments primarily with mandatory delivery
commitments, which totaled $1.1 billion and $948 million at December 31,
2002 and 2001, respectively. The remaining commitments to fund loans with
agreed-upon rates are anticipated to be sold through "best-efforts" and
investor programs. The Company does not anticipate any material losses
from such sales.
NET WORTH REQUIREMENTS - The Company's subsidiaries are required to
maintain certain specified levels of minimum net worth to maintain their
approved
F-23
status with Fannie Mae, FHLMC, HUD and other investors. At December 31,
2002, the highest minimum net worth requirement applicable to each
subsidiary was $1,000,000.
OUTSTANDING LITIGATION - The Company is involved in litigation arising in
the normal course of business. Although the amount of any ultimate
liability arising from these matters cannot presently be determined, the
Company does not anticipate that any such liability will have a material
effect on the Company's consolidated financial position or results of
operations.
MORTGAGE REINSURANCE - Columbia's captive reinsurance subsidiary, CNI
Reinsurance, Ltd. ("CNIRE") has entered mortgage reinsurance agreements
with two primary mortgage insurance companies. Under these agreements,
CNIRE absorbs mortgage insurance losses in excess of a specified
percentage of the principal balance of a pool of loans, subject to a cap,
in exchange for a portion of the pool's mortgage insurance premium.
Approximately $566.5 million of the conventional servicing portfolio is
covered by such mortgage reinsurance agreements. Each annual book of
business has a maximum life of ten years and the maximum exposure is the
amount of assets held in the trust on behalf of CNIRE. At December 31,
2002, those assets totaled $1,648,184. No reserve has been recorded and
management believes no reserve is required based upon loss experience.
PENDING ACQUISITION - See Note 22.
15. OPERATING LEASES
Certain facilities and equipment are leased under short-term lease
agreements expiring at various dates through January 2009. All such leases
are accounted for as operating leases. Total rental expense for premises
and equipment, which is included in occupancy and equipment expense within
the consolidated financial statements, amounted to $10,059,752, $6,208,132
and $3,466,025 for the years ended December 31, 2002, 2001 and 2000,
respectively.
Obligations under noncancelable operating leases which have an initial
term of more than a year are as follows:
2003 $ 7,282,136
2004 4,971,278
2005 3,259,685
2006 1,901,634
2007 1,083,772
Thereafter 364,275
-----------
Total $18,862,780
===========
16. MINORITY INTEREST
On April 23, 1998, the Company entered into a joint venture with a realtor
in which the Company and the realtor each own a 50% interest. The Company
entered into a second joint venture on March 31, 1999, with a realtor in
which the Company and the realtor each own a 50% interest. The Company
entered into a third joint venture on May 14, 2000, with a home
builder/developer in which the Company and home builder/developer each own
a 50% interest. The latest joint venture had no activity prior to 2001.
The Company sold its interest in the second joint venture in June 2000 and
took a one-time charge of $79,214. The first joint venture was dissolved
in the third quarter of 2002. The Company purchases all of the loans
originated by the remaining joint venture.
F-24
The Company acquired a 50% interest in five joint ventures of which one
was dissolved in 2001. Two of the joint ventures are managed by
independent parties and the other two are managed by an employee. The
employment agreement for this employee requires the Company to pay the
employee all profit or loss associated with the two joint ventures.
Minority interest in income was reduced in the following table by
$247,980, $334,735 and $193,869 for 2002, 2001 and 2000, respectively,
which was offset against a receivable from this employee. The Company
purchases all of the loans originated by the joint ventures.
The activity in the minority interest account is as follows:
Balance, December 31, 1999 $ 23,372
Capital contribution by minority partner 366,319
Minority interest in income 314,475
Sale of Calloway Mortgage 34,252
Distribution to minority partner (157,000)
---------
Balance, December 31, 2000 581,418
Minority interest in income 693,177
Distribution to minority partners (697,203)
---------
Balance, December 31, 2001 577,392
Minority interest in income 644,561
Distribution to minority partners (697,924)
---------
Balance, December 31, 2002 $ 524,029
=========
17. RELATED PARTY TRANSACTIONS
The largest stockholder of the Company was a majority stockholder in
another company that provided title services to the Company in the normal
course of business. The total amount due the Company from this related
party was $0 and $99,600 as of December 31, 2002 and 2001, respectively.
18. CONCENTRATIONS OF CREDIT RISK
The Company has originated loans predominantly in the eastern United
States, California and Illinois. Loan concentrations are considered to
exist when there are amounts loaned to a multiple number of borrowers with
similar characteristics, which would cause their ability to meet
contractual obligations to be similarly impacted by economic or other
conditions. In management's opinion, at December 31, 2002 and 2001, there
were no significant concentrations of credit risk within loans held for
sale.
F-25
The Company had originations of loans during the year ended December 31,
2002, exceeding 5% of total originations as follows:
Illinois 18.4%
California 14.1
Maryland 13.3
New York 9.7
Virginia 8.3
New Jersey 5.6
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made as of a specific point in time based on
estimates using present value or other valuation techniques. These
techniques involve uncertainties and are significantly affected by the
assumptions used and the judgments made regarding risk characteristics of
various financial instruments, discount rates, estimates of future cash
flows, future expected loss experience, and other factors.
Changes in assumptions could significantly affect these estimates and the
resulting fair values. Derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases,
could not be realized in an immediate sale of the instrument. Also,
because of differences in methodologies and assumptions used to estimate
fair values, the Company's fair values should not be compared to those of
other companies. All forward delivery commitments and option contracts to
buy securities are to be contractually settled within six months of the
balance sheet date.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial
instruments. Accordingly, the aggregate fair value amounts presented do
not represent the underlying value of the Company.
The fair value of certain assets and liabilities approximate cost due to
their short-term nature, terms of repayment or interest rate associated
with the asset or liability. Such assets or liabilities include cash,
accounts receivable, accrued expenses and other liabilities, and warehouse
lines of credit.
The following describes the methods and assumptions used by the Company in
estimating fair values of other financial instruments:
a. Mortgage Loans Held for Sale - net - Fair value is estimated using
the quoted market prices for securities backed by similar types of
loans and current investor or dealer commitments to purchase loans.
b. Mortgage Loans Held for Investment - net - Fair value is estimated
by using the quoted market prices for securities backed by similar
types of loans and current investor or dealer commitments to
purchase loans.
c. Mortgage Servicing Rights - The estimated fair value of MSRs is
determined by obtaining a market valuation from one of the primary
MSR brokers. To determine the market value of MSRs, the MSR broker
uses a valuation model which incorporates assumptions relating to
the estimate of the cost of servicing per loan, a discount rate, a
float value, an inflation rate, ancillary income per loan,
prepayment speeds and default rates that market participants use for
similar servicing rights.
F-26
d. Commitments to Fund with Agreed Upon Rates - The fair value of
commitments to fund with agreed upon rates is estimated using the
fees and rates currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the
present creditworthiness of the counterparties. For fixed rate loan
commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. These
commitment obligations are considered in conjunction with the
Company's lower of cost or market valuation of its mortgage loans
held for sale.
e. Commitments to Deliver Mortgages and Option Contracts to Buy
Securities - The fair value of these instruments is estimated using
current market prices for dealer or investor commitments relative to
the Company's existing positions. These instruments contain an
element of risk in the event that the counterparties may be unable
to meet the terms of such agreements. The Company minimizes its risk
exposure by limiting the counterparties to those major banks,
investment bankers and private investors who meet established credit
and capital guidelines. Management does not expect any counterparty
to default on its obligations and, therefore, does not expect to
incur any loss due to counterparty default. These commitments and
option contracts are considered in conjunction with the Company's
lower of cost or market valuation of its mortgage loans held for
sale.
f. Other Financial Liabilities - Fair market value is estimated based
on the maturity and interest rate of the related debt instruments.
Carrying amount estimates fair market value.
F-27
The following tables set forth information about financial instruments and
other selected assets, except for those noted above for which the carrying
value approximates fair value.
NOTIONAL CARRYING ESTIMATED
AMOUNT AMOUNT FAIR VALUE
------ ------ ----------
DECEMBER 31, 2002
-----------------------------------------------
Assets:
Mortgage loans held for sale - net $ 788,191,352 $ 813,054,161 $ 815,050,197
Mortgage loans held for investment - net 2,037,907 1,713,956 2,143,262
Mortgage servicing rights 8,541,789,800 109,022,689 109,022,689
Other financial liablities 841,439,267 841,439,267 841,439,267
Commitments and contingencies:
Mortgage loans held for sale related positions:
Commitments to fund mortgage loans at
agreed-upon rates $1,644,700,515 $ 29,345,406 $ 29,345,406
Forward delivery commitments- Loan commitments 1,099,905,388 (7,204,008) (7,204,008)
Forward delivery commitments - Loans held for sale (1) 663,544,480 (1,866,264) (1,866,264)
Option contracts to buy securities 150,000,000 725,250 725,250
DECEMBER 31, 2001
-----------------------------------------------
Assets:
Mortgage loans held for sale - net $ 411,856,621 $ 419,192,096 $ 421,425,372
Mortgage loans held for investment - net 1,546,152 1,305,902 1,468,844
Mortgage servicing rights 23,950,684 45,551 45,551
Other financial liablities 389,828,014 389,828,014 389,828,014
Commitments and contingencies:
Mortgage loans held for sale related positions:
Commitments to fund mortgage loans at
agreed-upon rates $ 554,466,137 $ 95,966 $ 95,966
Forward delivery commitments- Loan commitments 1,130,786,990 5,610,590 5,610,590
Forward delivery commitments - Loans held for sale (1) 282,212,779 158,920 158,920
Option contracts to buy securities 175,000,000 161,750 161,750
(1) This amount is included in loans held for sale (see Note 3).
20. RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 2001, the Company adopted Financial Accounting Standards
Board Statement No. 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 No. 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 No. 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
F-28
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 December 31,
2002 and 2001, forward delivery commitments amounted to approximately $1.8
billion and $0.9 billion, respectively, and options to buy securities
amounted to approximately $150 million and $175 million, respectively.
These contracts have a high correlation to the price movement of the loans
being hedged. The Company considers the hedges against loans held for sale
to be fair value hedges and considers the hedges (including forward sales
and options) against IRLCs to be free standing derivatives.
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,
2002.
The Financial Accounting Standards Board is considering a number of
mortgage banking industry-related issues concerning the implementation of
SFAS No. 133. The ultimate conclusions reached concerning these issues
could result in material changes to the recorded carrying values of the
Company's derivatives.
On July 20, 2001, the Financial Accounting Standards Board issued
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.
Effective January 1, 2002, the Company adopted SFAS 142. 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. In connection with the adoption
of SFAS 142, the Company ceased the amortization of goodwill. The Company
did not record any impairment charges in connection with the
implementation of SFAS 142.
In August 2001, the Financial Accounting Standards Board issued SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which
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. The implementation of SFAS 144 did not have a material
effect on the Company.
F-29
In April 2002, the Financial Accounting Standards Board issued SFAS 145,
"Rescission of SFAS Statements No. 4, 44, and 64, Amendment of SFAS
Statement No. 13, and Technical Corrections," which updates, clarifies and
simplifies existing accounting pronouncements. SFAS 145 rescinds SFAS No.
4, "Reporting Gains and Losses from Extinguishment of Debt." 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.
In June 2002, the Financial Accounting Standards Board issued SFAS 146,
"Accounting for Costs Associated with Exit or Disposal Activities," which
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.
In October 2002, the Financial Accounting Standards Board issued SFAS 147,
"Acquisitions of Certain Financial Institutions, an amendment of FASB
Statements No. 72 and 144 and FASB Interpretation No. 9," which 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. The implementation of SFAS 147 did not have a
material effect on the Company.
The Financial Accounting Standards Board issued SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of
FASB Statement No. 123," which amends SFAS No. 123 "Accounting for
Stock-Based Compensation," to provide alternative methods of transition
for a voluntary change to the fair values based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results.
The Financial Accounting Standards Board issued FASB Interpretation (FIN)
No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others,"
which expands on the accounting guidance of SFAS No. 5, "Accounting for
Contingencies," SFAS No. 57, "Related Party Disclosures," and SFAS No.
107, "Disclosures about Fair Value of Financial Instruments." FIN No. 45
elaborates on the disclosures to be made by a guarantor about its
obligations under certain guarantees issued. FIN No. 45 also clarifies
that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
F-30
issuing the guarantee. The initial recognition and measurement provisions
of this interpretation are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements of
FIN No. 45 are effective for financial statements of interim or annual
periods ending after December 15, 2002. Management believes that the
financial impact of FIN No. 45 will not have a material effect on the
Company.
The Financial Accounting Standards Board issued FIN No. 46, "Consolidation
of Variable Interest Entities, a Clarification of Accounting Research
Bulletin (ARB) No. 51, Consolidated Financial Statements," which addresses
consolidation by business enterprises of variable interest entities when
specific characteristics are met. FIN No. 46 clarifies the application of
ARB No. 51 to certain entities with equity investors who do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The
provisions of FIN No. 46 are effective beginning the third quarter of
2003. Management believes that the implementation of FIN No. 46 will not
have a material effect on the Company.
21. CONDENSED FINANCIAL INFORMATION OF AMERICAN HOME MORTGAGE HOLDINGS, INC.
The following provides condensed financial information for the financial
position, results of operations and cash flows of American Home Mortgage
Holdings, Inc. (parent company only):
CONDENSED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
------------ -----------
ASSETS:
Cash $ 1,000 $ 1,000
Investment in subsidiaries 164,095,024 78,615,766
------------ -----------
TOTAL ASSETS $164,096,024 $78,616,766
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ -- $ --
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value,
1,000,000 shares authorized, no
shares issued and outstanding -- --
Common stock, $0.01 par value, 19,000,000
shares authorized, 16,717,459 and
11,991,200 shares issued and
outstanding, respectively 167,175 119,912
Additional paid-in capital 95,784,696 47,952,517
Retained earnings 68,144,153 30,544,337
------------ -----------
Total stockholders' equity 164,096,024 78,616,766
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $164,096,024 $78,616,766
============ ===========
F-31
CONDENSED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
----------- ----------- ----------
REVENUES
Equity in earnings of subsidiaries $39,485,053 $25,448,485 $5,391,450
----------- ----------- ----------
NET INCOME $39,485,053 $25,448,485 $5,391,450
=========== =========== ==========
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
----------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $39,485,053 $25,448,485 $5,391,450
Increase in:
Investment in earnings of subsidiaries (39,485,053) (25,448,485) (5,391,450)
----------- ---------- ----------
Cash provided by operating activities -- -- --
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiaries (37,000,000) -- --
----------- ---------- ----------
Cash used in investing activities (37,000,000) -- --
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of capital stock 37,000,000 -- --
----------- ---------- ----------
Cash provided by financing activities 37,000,000 -- --
----------- ---------- ----------
NET INCREASE IN CASH -- -- --
CASH, BEGINNING OF PERIOD 1,000 1,000 1,000
----------- ---------- ----------
CASH, END OF PERIOD $ 1,000 $ 1,000 $ 1,000
=========== =========== ==========
22. ACQUISITIONS
Columbia National, Incorporated ("Columbia")
Effective June 13, 2002, the Company acquired 100 percent of the
outstanding common shares of Columbia, a Delaware corporation. The results
of Columbia's operations have been included in the consolidated financial
statements since that date. 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. The purchase price was $37
million.
F-32
The following table summarizes the fair value of the assets acquired and
liabilities assumed at the date of acquisition.
At June 13, 2002
----------------
Cash $ 3,547,876
Accounts receivable 7,769,802
Mortgage loans held for sale 189,249,006
Mortgage loans held for investment, net 1,706,295
Mortgage servicing rights 102,000,000
Premises and equipment, net 2,627,834
Other assets 4,122,350
------------
Total assets acquired 311,023,163
------------
Warehouse lines of credit 193,053,165
Drafts payable 3,686,941
Notes payable 75,600,000
Current and deferred tax liabilities 13,995,598
Other liabilities 9,697,616
------------
Total liabilities assumed 296,033,320
------------
Net assets acquired 14,989,843
Cash paid 37,000,000
------------
Goodwill $ 22,010,157
============
The goodwill which resulted from the acquisition of Columbia is not
deductible for tax purposes.
The following table summarizes the required disclosures of the pro forma
combined entity, as if the acquisition occurred on January 1, 2001:
2002 2001
------------ ------------
Revenue $268,929,322 $209,369,016
Income before income taxes and minority interest 70,438,552 46,085,373
Net income before cumulative effect of
change in accounting principle 40,674,965 26,483,680
Earnings per share - basic $ 2.80 $ 2.55
============ ============
Earnings per share - diluted $ 2.73 $ 2.43
============ ============
ComNet Mortgage Services
On March 30, 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. At December 31, 2002, goodwill relating to this
transaction was $1.0 million.
F-33
Roslyn National Mortgage Corporation
On October 31, 2000, the Company acquired from Roslyn National Mortgage
Corporation ("RNMC") four RNMC branches (located in Columbia, Maryland;
Vienna, Virginia; West Hartford, Connecticut; and Patchogue, New York)
(the "Roslyn Branches"), RNMC's mortgage application pipeline and certain
fixed assets and assumed the real property leases of the Roslyn Branches.
The Roslyn 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. At December 31, 2002,
goodwill relating to this transaction was $0.4 million.
First Home
On June 30, 2000, the Company acquired First Home, a residential mortgage
lender headquartered in Illinois, which was immediately merged into
American Home Mortgage. The Company issued 489,804 shares of Common Stock
and paid an additional $3.6 million over a period of two years. In
addition, the shareholders of First Home may receive additional
consideration consisting of cash and shares of the Company's Common Stock
based on the future results of the financial performance of the First Home
division of the Company. The previous shareholders of First Home may
receive such earnouts during a five year period ending in May 2005. During
2002, prior shareholders of First Home received earnouts in cash of $1.6
million and 88,660 shares (valued at $1.0 million) which were accounted
for as goodwill. At December 31, 2002, goodwill relating to the
acquisition of First Home was $18.3 million.
Marina Mortgage Company, Inc.
On December 30, 1999, the Company acquired Marina Mortgage Company, Inc.
("Marina"), a residential mortgage lender headquartered in Irvine,
California, with offices in California and Arizona. The Company issued
753,420 shares of Common Stock in exchange for 34,600 shares of Marina
common stock and will pay $2.5 million in cash over five years. The
Company issued 201,043 shares on October 15, 2000 and 157,985 shares on
January 31, 2001 to the prior Marina shareholders in accordance with the
first and second earn-out provisions. The prior Marina shareholders may
receive additional consideration over the next four years based on an
additional earn-out provision, which is primarily based on the future
results of the financial performance of the Marina division of the
Company. During 2002, the prior Marina shareholders received 180,541
shares (valued at $2.4 million) relating to 2001 results. This transaction
was accounted for under purchase accounting and generated goodwill of
approximately $4.5 million. As of December 31, 2002, goodwill relating to
this transaction was $9.2 million. On December 31, 2001, Marina was merged
into American Home Mortgage.
Pending Acquisition - Valley Bank of Maryland
In August 2001, the Company entered into an agreement to acquire Valley
Bancorp, Inc. ("Valley Bancorp") and its wholly-owned subsidiary, Valley
Bank of Maryland ("Valley Bank"), a federal savings bank located in
suburban Baltimore, Maryland, for a combination of cash and stock, subject
to certain adjustments. Under the terms of the definitive agreement, the
Company will pay 1.25 times Valley Bancorp's book value, or approximately
$5.6 million. In response to comments received from the Office of Thrift
Supervision (OTS), the Company withdrew its application to the OTS for
approval as a thrift holding company and is resubmitting a new application
with a revised business plan that incorporates changes suggested by the
OTS. The acquisition agreement between American Home and Valley Bancorp
has been extended through June 2003.
F-34
The following table summarizes the required disclosures of the pro forma
combined entity, as if the merger occurred on January 1, 2001 (Valley Bank
financial information is for fiscal years ended September 30):
2002 2001
------------ ------------
Revenue $234,525,434 $129,452,242
Income before income taxes 67,186,777 40,789,705
Net income 39,623,587 25,573,582
Earnings per share - basic $ 2.73 $ 2.47
============ ============
Earnings per share - diluted $ 2.66 $ 2.35
============ ============
F-35
23. SEGMENTS AND RELATED INFORMATION
The Company has two segments, the Loan Production Segment and the Loan
Servicing Segment. The Loan Production Segment originates mortgage loans
through the Company's retail and internet branches and loans sourced
through mortgage brokers (wholesale channel). The Loan Servicing Segment
includes investments in mortgage servicing rights as well as servicing
operations primarily for other financial institutions. The Loan Servicing
Segment was immaterial prior to the acquisition of Columbia in June 2002
and thus the Loan Servicing Segment results are included in the Loan
Production Segment results in prior years.
2002 2001 2000
------------ ------------ ------------
LOAN PRODUCTION SEGMENT
Revenues:
Gain on sale of mortgage loans $216,594,793 $118,553,988 $ 52,730,668
Interest income - net 26,740,052 9,098,292 3,271,064
Other 4,147,424 400,685 2,278,321
------------ ------------ ------------
Total revenues 247,482,269 128,052,965 58,280,053
Expenses:
Salaries, commissions and benefits - net 105,198,488 55,778,233 27,893,827
Occupancy and equipment 15,301,887 8,249,806 5,583,648
Marketing and promotion 7,981,620 6,312,777 4,058,105
Data processing and communications 7,786,671 4,441,850 2,825,895
Office supplies and expenses 5,901,064 4,358,765 2,149,704
Professional fees 5,196,918 2,453,826 1,612,376
Travel and entertainment 4,580,597 1,682,471 976,048
Other 8,742,983 4,188,540 3,013,929
------------ ------------ ------------
Operating expenses 160,690,228 87,466,268 48,113,532
------------ ------------ ------------
Net income before income taxes and minority
interest in income of consolidated joint ventures 86,792,041 40,586,697 10,166,521
Income taxes 35,696,100 16,252,852 4,266,727
Minority interest in income of consolidated
joint ventures 892,541 1,027,912 508,344
------------ ------------ ------------
Net income before change in cumulative effect of
change in accounting principle $ 50,203,400 $ 23,305,933 $ 5,391,450
============ ============ ============
Segment assets $999,939,421 $501,124,972 $183,532,376
============ ============ ============
F-36
2002 2001 2000
------------- ------------ ------------
LOAN SERVICING SEGMENT
Revenues:
Servicing revenue $ 19,356,912 $ -- $ --
Gain on GNMA early buy-out sales 5,782,125
Amortization and impairment (36,731,453)
Interest expense - net (3,069,330) -- --
------------- ------------ ------------
Total revenues (14,661,746) -- --
Expenses:
Salaries and benefits - net 1,696,610 -- --
Occupancy and equipment 204,208 -- --
Marketing and promotion 14,086 -- --
Data processing and communications 66,512 -- --
Office supplies and expenses 245,711 -- --
Professional fees 6,365 -- --
Travel and entertainment 610,163 -- --
Other 833,681 -- --
------------- ------------ ------------
Operating expenses 3,677,336 -- --
------------- ------------ ------------
Net loss before income tax benefit (18,339,082) -- --
------------- ------------ ------------
Income tax benefit (7,620,735) -- --
Net loss before change in cumulative effect of
change in accounting principle $ (10,718,347) $ -- $ --
============= ============ ============
Segment assets $ 121,224,548 $ -- $ --
============= ============ ============
24. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data are presented below by quarter for the
years ended December 31, 2002 and 2001 (dollars in thousands, except per
share amounts):
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
2002 2002 2002 2002
---- ---- ---- ----
Gain on sale of mortgage loans $79,631 $71,204 $35,127 $30,633
Total revenues 84,699 73,712 40,468 33,942
Income before income taxes and minority interest 26,094 21,581 10,244 10,534
Net income 13,509 12,772 6,501 6,704
Earnings per share - basic $ 0.81 $ 0.78 $ 0.50 $ 0.56
Earnings per share - diluted $ 0.80 $ 0.76 $ 0.49 $ 0.54
F-37
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
2001 2001 2001 2001
---- ---- ---- ----
Gain on sale of mortgage loans $38,722 $29,192 $29,479 $21,158
Total revenues 41,656 31,986 32,350 22,062
Income before income taxes and minority interest 16,028 9,960 9,807 4,793
Net income before cumulative effect of change
in accounting principle 9,596 5,618 5,558 2,534
Net income 9,596 5,618 5,558 4,676
Earnings per share:
Basic before cumulative effect of change in
accounting principle $ 0.80 $ 0.49 $ 0.62 $ 0.28
Basic after cumulative effect of change in
accounting principle $ 0.80 $ 0.49 $ 0.62 $ 0.52
Dilutive before cumulative effect of change in
accounting principle $ 0.77 $ 0.47 $ 0.59 $ 0.28
Dilutive after cumulative effect of change in
accounting principle $ 0.77 $ 0.47 $ 0.59 $ 0.51
25. SUBSEQUENT EVENT
In February 2003, the company signed a definitive agreement to acquire the
retail mortgage lending branches of Principal Residential Mortgage
("Principal"), the mortgage banking subsidiary of the Principal Financial
Group. The Company will pay Principal $2.4 million for the current
application pipeline and the assets of the branch network, and assume
related lease obligations. The acquisition will be funded from current
cash reserves and is expected to close in the first quarter of 2003,
pending regulatory approvals and other normal closing conditions. The
retail branch network of Principal includes 75 mortgage branches located
in 21 states. In 2002, the lending branches produced approximately $3.4
billion of residential mortgage loans. The addition of this network will
increase the Company's total number of retail branches to 206.
******
F-38
INDEX TO EXHIBITS
Exhibit
No. Description
------- -----------
2.1 -- Agreement and Plan of Merger, dated December 29, 1999,
between the Registrant, Marina Mortgage Company, Inc.
("Marina") and the Stockholders of Marina listed on the
signature pages thereto.*
2.2 -- Agreement and Plan of Merger, dated January 17, 2000, by
and among the Registrant, American Home Mortgage Sub II,
Inc., First Home Mortgage Corp. ("First Home") and the
Stockholders of First Home listed on the signature pages
thereto.**
2.3 -- Agreement and Plan of Reorganization, dated as of August
24, 2001, between the Registrant and Valley Bancorp, Inc.##
2.4 -- Stock Purchase Agreement, dated June 13, 2002, by and among
Columbia National Holdings, Inc., Columbia National,
Incorporated and the Registrant.####
3.1 -- Amended and Restated Certificate of Incorporation of
the Registrant.***
3.2 -- Amended and Restated Bylaws of the Registrant.***
4.1 -- Reference is hereby made to Exhibits 3.1 and 3.2.
4.2 -- Specimen Certificate for the Registrant's Common
Stock.****
10.1.1 -- Employment Agreement, dated as of August 26, 1999,
between the Registrant and Michael Strauss.****
10.1.2 -- Amendment to Employment Agreement, dated as of
April 1, 2000, between the Registrant and Michael
Strauss.#
10.2.1 -- Employment Agreement, dated as of March 9, 1998, between
the Registrant and James P. O'Reilly.
10.2.2 -- Amendment to Employment Agreement, dated as of February 1,
2001, between the Registrant and James P. O'Reilly.#
10.3 -- Employment Agreement, dated January 11, 2001, between the
Registrant and Donald Henig.###
10.4 -- Employment Agreement, dated January 19, 2001, between the
Registrant and Dena Kwaschyn.###
10.5 -- Employment Agreement, dated March 6, 2002, between the
Registrant and Stephen Hozie.###
10.6 -- Employment Agreement, dated as of December 18, 2002,
between the Registrant and Robert Bernstein.^
10.7 -- Employment Agreement, dated as of December 23, 2002,
between the Registrant and Alan Horn.^
10.8 -- 1999 Omnibus Stock Incentive Plan.+
Exhibit
No. Description
------- -----------
10.9 -- Sublease, dated as of December 17, 1997, between Suntory
International Corp. and Michael Strauss, Inc., d/b/a
American Home Mortgage.
10.10 -- Agreement of Lease, dated October 20, 1995, between Reckson
Operating Partnership, L.P., as Landlord, Choicecare Long
Island, Inc., as Assignor, and American Home Mortgage
Corp., as Assignee, as amended on September 30, 1999.++++
10.11 -- Software Licensing Agreement, dated as of July 7, 1999,
between American Home Mortgage Corp. and James P. O'Reilly.
10.12 -- Form of Warrant Agreement, between the Registrant and
Friedman, Billings, Ramsey & Co., Inc.***
10.13 -- Agreement and Plan of Merger, dated December 29,
1999, between the Registrant, Marina Mortgage
Company, Inc. ("Marina") and the Stockholders of
Marina listed on the signature pages thereto.*
10.14 -- Employment Agreement, dated December 29, 1999, between the
Registrant and John A. Johnston.*
10.15 -- Employment Agreement, dated December 29, 1999, between the
Registrant and Ronald Bergum.*
10.16 -- Non-Competition Agreement, dated December 29, 1999, between
the Registrant and John A. Johnston.*
10.17 -- Non-Competition Agreement, dated December 29, 1999, between
the Registrant and Ronald Bergum.*
10.18 -- Agreement and Plan of Merger, dated January 17, 2000, by
and among the Registrant, American Home Mortgage Sub II,
Inc., First Home Mortgage Corp. ("First Home") and the
Stockholders of First Home listed on the signature pages
thereto.**
10.19 -- Employment Agreement, dated January 17, 2000, between the
Registrant and John A. Manglardi.**
10.20 -- Employment Agreement, dated January 17, 2000, between the
Registrant and Vincent Manglardi.**
10.21 -- Employment Agreement, dated January 17, 2000, between the
Registrant and Jeffrey L. Lake.**
10.22 -- Employment Agreement, dated January 17, 2000, between the
Registrant and Thomas J. Fiddler.**
10.23 -- Non-Competition Agreement, dated January 17, 2000, between
the Registrant and John A. Manglardi.**
10.24 -- Non-Competition Agreement, dated January 17, 2000, between
the Registrant and Vincent Manglardi.**
10.25 -- Non-Competition Agreement, dated January 17, 2000, between
the Registrant and Jeffrey L. Lake.**
Exhibit
No. Description
------- -----------
10.26 -- Non-Competition Agreement, dated January 17, 2000, between
the Registrant and Thomas J. Fiddler.**
10.27 -- Stock Purchase Agreement, dated June 13, 2002, by and among
Columbia National Holdings, Inc., Columbia National,
Incorporated and the Registrant.####
10.28 -- Master Loan and Security Agreement, dated as of August 2,
2002, by and among American Home Mortgage Corp., Marina
Mortgage Company, Inc. and Morgan Stanley Bank.^
10.29 -- Custodial Agreement, dated as of August 2, 2002, by and
among American Home Mortgage Corp., Deutsche Bank National
Trust Company and Morgan Stanley Bank.^
10.30 -- Guarantee, dated as of August 2, 2002, made by the
Registrant in favor of Morgan Stanley Bank.^
10.31 -- Amendment No. 1 to the Master Loan and Security Agreement,
dated as of December 11, 2002, to the Master Loan and
Security Agreement, dated as of August 2, 2002, by and
among American Home Mortgage Corp., Marina Mortgage
Company, Inc., and Morgan Stanley Bank.^
10.32 -- Mortgage Loan Purchase Agreement, dated February 26, 1999,
between Paine Webber Real Estate Securities Inc. and
American Home Mortgage.###
10.33 -- Mortgage Loan Repurchase Agreement, dated February 26,
1999, between Paine Webber Real Estate Securities Inc. and
American Home Mortgage.###
10.34 -- Mortgage Loan Custodial Agreement, dated February 26, 1999,
between Paine Webber Real Estate Securities Inc. and
American Home Mortgage.###
10.35 -- Master Repurchase Agreement, dated as of April 17, 2002, by
and between CDC Mortgage Capital Inc., as Buyer, and
American Home Mortgage Corp., as Seller.^
10.36 -- Custodial and Disbursement Agreement, dated as of April 17,
2002, by and among CDC Mortgage Capital Inc., as Buyer,
American Home Mortgage Corp., as Seller, Deutsche Bank
National Trust Company, as Custodian, and Deutsche Bank
National Trust Company, as Disbursement Agent.^
10.37 -- Guarantee, dated as of April 15, 2002, made by the
Registrant on behalf of American Home Mortgage Corp. in
favor of CDC Mortgage Capital Inc.^
10.38 -- Warehousing Credit, Term Loan and Security Agreement, dated
as of May 3, 2001, by and among Columbia National,
Incorporated, the Lenders party thereto, Residential
Funding Corporation, U.S. Bank National Association,
Allfirst Bank and U.S. Bank National Association.^
10.39 -- Guaranty, dated June 28, 2002, made and given by the
Registrant to Residential Funding Corporation, U.S. Bank
National Association, Allfirst Bank, Fleet National Bank,
National City Bank of Kentucky, Credit Lyonnais New York
Branch, Guaranty Bank, F.S.B. and Colonial Bank.^
Exhibit
No. Description
------- -----------
10.40 -- Tenth Amendment to Warehousing Credit, Term Loan and
Security Agreement, dated as of December 31, 2002, by and
among between Columbia National, Incorporated, American
Home Mortgage Corp., Residential Funding Corporation, U.S.
Bank National Association, Allfirst Bank, Fleet National
Bank, Credit Lyonnais New York Branch, Guaranty Bank,
F.S.B., National City Bank of Kentucky and Colonial Bank.^
10.41 -- Eleventh Amendment to Warehousing Credit, Term Loan and
Security Agreement, dated as of March 14, 2003, by and
among Columbia National, Incorporated, American Home
Mortgage Corp., Residential Funding Corporation, U.S. Bank
National Association, Allfirst Bank, Fleet National Bank,
Credit Lyonnais New York Branch, Guaranty Bank, F.S.B. and
Colonial Bank.^
21.1 -- Subsidiaries of the Registrant.^
23.1 -- Consent of Deloitte & Touche LLP.^
99.1 -- Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.^
99.2 -- Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.^
- ------------------
All nonmarked Exhibits listed above are incorporated by reference to the
Exhibits to the Registration Statement on Form S-1 (file no. 333-82409)
filed with the Securities and Exchange Commission on July 9, 1999.
* Incorporated by reference to the Form 8-K (file no. 000-27081) filed with
the Securities and Exchange Commission on January 12, 2000.
** Incorporated by reference to the Form 8-K (file no. 000-27081) filed with
the Securities and Exchange Commission on February 1, 2000.
*** Incorporated by reference to the Exhibits to Amendment No. 4 to the
Registration Statement on Form S-1 (file no. 333-82409) filed with the
Securities and Exchange Commission on September 30, 1999.
**** Incorporated by reference to the Exhibits to Amendment No. 3 to the
Registration Statement on Form S-1 (file no. 333-82409) filed with the
Securities and Exchange Commission on August 31, 1999.
+ Incorporated by reference to the Exhibits to Amendment No. 2 to the
Registration Statement on Form S-1 (file no. 333-82409) filed with the
Securities and Exchange Commission on August 18, 1999.
++ Incorporated by reference to Exhibit B of the Schedule 13D (file no.
005-57001) filed with the Securities and Exchange Commission on October
14, 1999.
+++ Incorporated by reference to Exhibit A attached to Exhibit 1.1 to
Amendment No. 4 to the Registration Statement on Form S-1 (file no.
333-82409) filed with the Securities and Exchange Commission on September
30, 1999.
++++ Incorporated by reference to the Exhibits to the Form 10-K (file no.
000-27081) filed with the Securities and Exchange Commission on March 30,
2000.
# Incorporated by reference to the Exhibits to Amendment No. 2 to Form S-3
on Form S-1 (file no. 333-60050) filed with the Securities and Exchange
Commission on June 6, 2001.
## Incorporated by reference to the Exhibits to the Registration Statement on
Form S-4 (file no. 333-76384) filed with the Securities and Exchange
Commission on January 7, 2002.
### Incorporated by reference to the Exhibits to the Form 10-K (file no.
000-27081) filed with the Securities and Exchange Commission on April 1,
2002.
#### Incorporated by reference to Exhibit 2.1 to the Form 8-K (file no.
000-27081) filed with the Securities and Exchange Commission on June 14,
2002.
^ Filed herewith.