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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2003
[ ] 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)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ].
As of June 30, 2003, 17,204,049 shares of the registrant's Common
Stock, $0.01 par value, were outstanding.
AMERICAN HOME MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I-FINANCIAL INFORMATION
Item 1. Interim Condensed Consolidated Financial Statements
Interim Condensed Consolidated Balance Sheets (unaudited) - June 30,
2003 and December 31, 2002.........................................1
Interim Condensed Consolidated Statements of Income (unaudited) -
Three and six months ended June 30, 2003 and 2002..................2
Interim Condensed Consolidated Statements of Cash Flows
(unaudited) - Six months ended June 30, 2003 and 2002..............3
Notes to Interim Condensed Consolidated Financial Statements
(unaudited)........................................................4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..............................12
Item 3. Quantitative and Qualitative Disclosures about Market Risk
..................................................................24
Item 4. Controls and Procedures.......................................25
PART II-OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.....................26
Item 4. Submission of Matters to a Vote of Security Holders...........26
Item 5. Other Information........... .................................27
Item 6. Exhibits and Reports on Form 8-K..............................27
SIGNATURES
EXHIBITS
ITEM 1.
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN HOME MORTGAGE HOLDINGS, INC.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
- --------------------------------------------------------------------------------
June 30, December 31,
2003 2002
---------- -------------
ASSETS
Cash and cash equivalents $ 38,834 $ 24,416
Accounts receivable and servicing advances 65,125 72,563
Mortgage loans held for sale, net 1,700,880 811,188
Mortgage loans held for investment, net 1,192 1,714
Mortgage servicing rights, net 82,388 109,023
Premises and equipment, net 15,537 13,001
Goodwill 54,552 50,932
Derivative assets 44,874 30,071
Real estate owned 1,002 629
Other assets 7,188 5,513
---------- -----------
TOTAL ASSETS $2,011,572 $ 1,119,050
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Warehouse lines of credit $1,534,777 $ 728,466
Notes payable 55,436 68,261
Drafts payable 67,768 42,599
Accrued expenses and other liabilities 81,415 64,945
Derivative liabilities - 7,204
Income taxes payable 62,398 42,955
---------- ------------
Total liabilities 1,801,794 954,430
---------- -----------
COMMITMENTS AND CONTINGENCIES -- --
MINORITY INTEREST 618 524
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 per share par value,
1,000,000 shares authorized, none issued
and outstanding -- --
Common stock, $.01 per share par value, 19,000,000
shares authorized, 17,204,049 and 16,717,459
shares issued and outstanding, respectively 172 167
Additional paid-in capital 100,169 95,785
Retained earnings 108,819 68,144
---------- ------------
Total stockholders' equity 209,160 164,096
---------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,011,572 $ 1,119,050
========== ============
See Notes to Interim Condensed Consolidated Financial Statements.
-1-
AMERICAN HOME MORTGAGE HOLDINGS, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
REVENUES:
Gain on sale of mortgage loans $ 129,282 $ 35,127 $ 217,493 $ 65,760
Interest income, net 11,604 3,932 21,404 6,929
Loan servicing fees 11,091 1,569 23,188 1,569
Amortization and impairment (23,758) (848) (42,240) (848)
---------- ---------- ---------- ----------
Net loan servicing fees (12,667) 721 (19,052) 721
Other 1,241 688 4,169 1,000
---------- ---------- ---------- ----------
Total revenues 129,460 40,468 224,014 74,410
---------- ---------- ---------- ----------
EXPENSES:
Salaries, commissions and benefits, net 54,206 17,939 98,853 32,940
Occupancy and equipment 6,679 3,406 12,302 5,787
Data processing and communications 2,748 1,649 5,828 3,084
Office supplies and expenses 3,847 1,185 6,870 2,321
Marketing and promotion 2,805 1,976 5,604 3,552
Travel and entertainment 2,891 943 4,878 1,598
Professional fees 1,672 1,340 3,513 1,876
Other 7,900 1,785 11,333 2,473
---------- ---------- ---------- ----------
Total expenses 82,748 30,223 149,181 53,631
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES AND MINORITY
INTEREST IN INCOME OF CONSOLIDATED
JOINT VENTURES 46,712 10,245 74,833 20,779
INCOME TAXES 19,312 3,556 30,889 7,275
---------- ---------- ---------- ----------
NET INCOME BEFORE MINORITY INTEREST IN
INCOME OF CONSOLIDATED JOINT VENTURES 27,400 6,689 43,944 13,504
MINORITY INTEREST IN INCOME OF CONSOLIDATED
JOINT VENTURES 523 188 755 300
---------- ---------- ---------- ----------
NET INCOME $ 26,877 $ 6,501 $ 43,189 $ 13,204
========== ========== ========== ==========
Per share data:
Basic $ 1.58 $ 0.50 $ 2.56 $ 1.06
Diluted $ 1.55 $ 0.49 $ 2.51 $ 1.02
Weighted average number of shares - basic 16,980,679 12,912,523 16,866,454 12,491,933
Weighted average number of shares - diluted 17,347,833 13,401,391 17,182,392 12,981,866
See Notes to Interim Condensed Consolidated Financial Statements.
-2-
AMERICAN HOME MORTGAGE HOLDINGS, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
- --------------------------------------------------------------------------------
Six Months Ended
June 30,
2003 2002
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 43,189 $ 13,204
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 2,613 1,246
Amortization and impairment of mortgage servicing rights 42,240 848
Origination of mortgage loans held for sale (10,176,396) (3,658,655)
Proceeds on sale of mortgage loans 9,286,704 3,817,956
Increase (decrease) in income taxes payable 19,443 (7,787)
Other 245 -
(Increase) decrease in operating assets:
Accounts receivable 7,438 10,519
Derivative assets (14,803) (13,744)
Other assets (1,675) (7,945)
Increase (decrease) in operating liabilities:
Minority interest 94 91
Accrued expenses and other liabilities 16,479 3,626
Derivative liabilities (7,204) 6,986
-------- --------
Net cash (used in) provided by operating activities (781,633) 166,345
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) sale of real estate owned, net (373) 224
Purchases of premises and equipment, net (5,149) (2,391)
Acquisition of businesses, net of cash acquired - (33,452)
Earnouts related to previous acquisitions (550) (8,635)
Capitalization of mortgage servicing rights (15,605) (4,489)
Net sales of loans held for investment 522 9
-------- --------
Net cash used in investing activities (21,155) (48,734)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in warehouse lines of credit 806,311 (101,290)
Increase (decrease) in drafts payable 25,169 (22,989)
Proceeds from issuance of capital stock 1,065 38,631
Dividends paid (2,514) (722)
Decrease in notes payable (12,825) (2,204)
-------- --------
Net cash provided by (used in) financing activities 817,206 (88,574)
-------- --------
NET INCREASE IN CASH 14,418 29,037
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 24,416 26,393
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 38,834 $ 55,430
======== ========
SUPPLEMENTAL DISCLOSURE--CASH PAID FOR:
Interest $ 18,985 $ 4,912
Taxes 12,723 15,153
See Notes to Interim Condensed Consolidated Financial Statements.
-3-
AMERICAN HOME MORTGAGE HOLDINGS, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of American
Home Mortgage Holdings, Inc. ("American Home") and its subsidiaries, American
Home Mortgage Corp. ("AHM") and Columbia National, Incorporated ("Columbia")
(collectively, the "Company"), reflect all adjustments which, in the opinion of
management, are necessary for a fair presentation of the results of the interim
periods presented. All such adjustments are of a normal recurring nature. All
intercompany accounts and transactions have been eliminated. Operating results
for the six months ended June 30, 2003 are not necessarily indicative of the
results that may be expected for the full year ended December 31, 2003. Certain
prior year balances have been reclassified to conform with current year
presentation.
The unaudited interim condensed consolidated financial statements should be read
in conjunction with the Company's audited consolidated financial statements and
notes thereto for the year ended December 31, 2002, included in the Company's
Annual Report on Form 10-K for the year then ended.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share 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 is computed by dividing
net income available to common stockholders by the weighted-average number of
shares of common stock outstanding, assuming all potential dilutive shares of
common stock were issued.
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
------------------ ------------------ ------------------ ------------------
Numerator for basic earnings per share - Net income $ 26,877 $ 6,501 $ 43,189 $ 13,204
========== ========== ========== ==========
Denominator:
Denominator for basic earnings per share
Weighted average number of shares of common
stock outstanding during the period 16,980,679 12,912,523 16,866,454 12,491,933
Net effect of dilutive stock options 367,154 488,868 315,938 489,933
---------- ---------- ---------- ----------
Denominator for diluted earnings per share 17,347,833 13,401,391 17,182,392 12,981,866
========== ========== ========== ==========
Net income per share:
Basic $ 1.58 $ 0.50 $ 2.56 $ 1.06
Diluted $ 1.55 $ 0.49 $ 2.51 $ 1.02
An aggregate of approximately 113,000 and 45,000 employee stock options and
restricted shares for the three months ended June 30, 2003 and 2002,
respectively, were not included in the diluted earnings per share calculation
because their effect would have been anti-dilutive. An aggregate of
approximately 256,000 and 45,000 employee stock options and shares of restricted
common stock for the six months ended June 30, 2003 and 2002, respectively, were
not included in the diluted earnings per share calculation because their effect
would have been anti-dilutive.
-4-
NOTE 3 - DERIVATIVE INVESTMENTS AND HEDGING ACTIVITIES
The following table summarizes derivative assets and liabilities at June 30,
2003 and December 31, 2002:
June 30, December 31,
2003 2002
------------- -------------
Derivative Assets
Interest rate lock commitments $ 27,311 $ 29,346
Options on treasury future contracts - 725
Forward delivery contracts - Loan commitments 17,563 -
Forward delivery contracts - Loans held for sale(1) 736 -
------------- -------------
Total Derivative Assets $ 45,610 $ 30,071
============= =============
Derivative Liabilities
Forward delivery contracts - Loan commitments $ - $ (7,204)
Forward delivery contracts - Loans held for sale(1) - (1,866)
------------- -------------
Total Derivative Liabilities $ - $ (9,070)
============= =============
(1) This amount is included in loans held for sale.
At June 30, 2003, the notional amount of forward delivery commitments amounted
to approximately $4.3 billion. These contracts have a high correlation to the
price movement of the loans being hedged.
NOTE 4 - MORTGAGE SERVICING RIGHTS
Mortgage servicing rights activity for the three months and six months ended
June 30, 2003 was as follows:
Three Months Ended Six Months Ended
June 30, 2003 June 30, 2003
------------------- -------------------
Mortgage Servicing Rights
Balance at beginning of period $ 112,288 $ 119,225
Additions 9,773 15,605
Amortization (17,286) (30,055)
------------------- -------------------
Balance at end of period $ 104,775 $ 104,775
------------------- -------------------
Impairment Allowance
Balance at beginning of period $ (15,915) $ (10,202)
Impairment provision (6,472) (12,185)
------------------- -------------------
Balance at end of period $ (22,387) $ (22,387)
------------------- -------------------
Total $ 82,388 $ 82,388
=================== ===================
-5-
Aggregate Amortization Expense
- ------------------------------
Six months ended June 30, 2003 $ 30,054
Estimated Amortization Expense
- ------------------------------
Twelve months ended June 30, 2004 26,927
Twelve months ended June 30, 2005 18,231
Twelve months ended June 30, 2006 13,097
Twelve months ended June 30, 2007 9,849
Twelve months ended June 30, 2008 7,544
NOTE 5 - GOODWILL
The changes in the carrying amount of goodwill for the six months ended June 30,
2003 are as follows:
Balance as of December 31, 2002 $ 50,932
Earnouts from previous acquisitions 3,620
--------
Balance as of June 30, 2003 $ 54,552
========
NOTE 6- ACQUISITIONS
Effective June 13, 2002, the Company acquired Columbia National, Incorporated
("Columbia"), a Maryland corporation. In consideration of the acquisition, the
shareholders of Columbia received $37 million in cash. Prior to the acquisition,
Columbia was an independent mortgage lender based in Columbia, Maryland.
Columbia now operates as a wholly-owned subsidiary of American Home. Columbia
engages in the origination, sale and servicing of residential first mortgage
loans.
The following table summarizes the required disclosures of the pro forma
combined entity, as if the merger occurred at the beginning of the year for the
three and six months ended June 30, 2002:
Three Months Six Months
Ended June 30, 2002 Ended June 30, 2002
------------------- -------------------
Revenue $56,354 $ 109,614
Income before income taxes and minority
interest $11,760 $ 23,269
Net income $ 7,409 $ 14,697
Earnings per share - basic $0.57 $1.18
Earnings per share - diluted $0.55 $1.13
In February 2003, the Company purchased the retail mortgage lending branches of
Principal Residential Mortgage, Inc. (the "Principal Branches"). The Company
paid $2.4 million in cash for the current application pipeline and the assets of
the Principal Branches consisting of 75 branches in 21 states.
In June 2003, the Company purchased the retail, wholesale and internet mortgage
lending branches of American Mortgage LLC (the "American Mortgage Branches").
The Company paid $1.6 million in cash and received the current application
pipeline of the American Mortgage Branches including $550 million of locked loan
applications.
-6-
NOTE 7- 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 shares 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 generally vest 50% on the
two-year anniversary of the grant date and 50% on the three-year anniversary of
the grant date and expire ten years from the grant date.
The Company has elected to follow Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for its employee stock options and awards. Under APB No. 25, no
compensation expense is recognized when the exercise prices of the options
equals or exceeds the fair value (market price) of the underlying stock on the
date of grant. 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 six months ended June 30, 2003 and 2002.
Under the Plan, the Company awarded 68,210 and 50,001 shares of restricted stock
during 2002 and 1999, respectively. During the three months and six months ended
June 30, 2003, the Company recognized compensation expense of $123 thousand and
$245 thousand, respectively, relating to shares of restricted stock. At June 30,
2003, 50,001 shares of restricted stock are vested. In general, unvested shares
of restricted stock are forfeited upon the recipient's termination of
employment.
Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), requires the Company to disclose pro
forma information regarding option grants made to its employees. SFAS No. 123
specifies certain valuation techniques that produce estimated compensation
charges for purposes of valuing stock option grants. These amounts have not been
included in the Company's interim condensed consolidated statements of income,
in accordance with APB No. 25. If these amounts were included, the Company's pro
forma net income and the related basic and diluted earnings per share would have
been as follows:
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
------------ -------------- ------------ --------------
Net income, as reported $ 26,877 $ 6,501 $ 43,189 $ 13,204
Less: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects 129 158 263 300
-------- ------- -------- --------
Pro forma net income $ 26,748 $ 6,343 $ 42,926 $ 12,904
======== ======= ======== ========
Earnings per share:
Basic - as reported $ 1.58 $ 0.50 $ 2.56 $ 1.06
Basic - pro forma $ 1.58 $ 0.49 $ 2.55 $ 1.03
Diluted - as reported $ 1.55 $ 0.49 $ 2.51 $ 1.02
Diluted - pro forma $ 1.54 $ 0.47 $ 2.50 $ 0.99
-7-
There were 116,876 options granted during the three months and six months ended
June 30, 2003. The weighted average fair value of options granted during the
three months and six months ended June 30, 2003 was $3.59. The fair value of the
options granted was estimated using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for the grants:
Dividend yield 3.0%
Expected volatility 47.0%
Risk-free interest rate 5.0%
Expected life 3 years
NOTE 8 - SEGMENTS
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 periods.
-8-
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
------------ -------------- ---------- --------------
Loan Production Segment
Revenues:
Gain on sale of mortgage loans $ 129,282 $ 35,127 $ 217,493 $ 65,760
Interest income - net 13,588 4,080 25,143 7,078
Other 1,241 688 4,169 1,000
--------- -------- --------- ---------
Total revenues 144,111 39,895 246,805 73,838
Expenses:
Salaries, commissions and benefits - net 53,284 17,804 97,125 32,806
Occupancy and equipment 6,626 3,384 12,118 5,765
Data processing and communications 2,725 1,647 5,777 3,081
Office supplies and expenses 3,500 1,138 6,164 2,275
Marketing and promotion 2,796 1,976 5,593 3,552
Travel and entertainment 2,888 943 4,874 1,598
Professional fees 1,491 1,317 3,200 1,853
Other 6,659 1,658 9,686 2,345
--------- -------- --------- ---------
Operating expenses 79,969 29,867 144,537 53,275
--------- -------- --------- ---------
Net income before income taxes and minority
interest in income of consolidated joint
ventures 64,142 10,028 102,268 20,563
Income taxes 26,279 3,556 41,863 7,275
Minority interest in income of consolidated
joint ventures 523 188 755 300
--------- -------- --------- ---------
Net income $ 37,340 $ 6,284 $ 59,650 $ 12,988
========= ======== ========= =========
June 30, 2003 December 31, 2002
Segment assets $ 1,888,665 $ 997,826
=========== =========
-9-
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
------------ --------------- -------------- ------------
Loan Servicing Segment
Revenues:
Servicing revenue $ 7,869 $ 1,569 $ 16,350 $ 1,569
Gain on Ginnie Mae early buy-out sales 3,222 - 6,838 -
Amortization and impairment (23,758) (848) (42,240) (848)
--------- -------- --------- --------
Net loan servicing fees (loss) (12,667) 721 (19,052) 721
Interest expense - net (1,984) (148) (3,739) (148)
--------- -------- --------- --------
Total revenues (14,651) 573 (22,791) 573
Expenses:
Salaries and benefits - net 922 135 1,728 135
Occupancy and equipment 53 22 184 22
Data processing and communications 23 2 50 2
Office supplies and expenses 347 46 706 46
Marketing and promotion 9 - 11 -
Travel and entertainment 3 - 4 -
Professional fees 181 23 313 23
Other 1,241 128 1,647 128
--------- -------- --------- --------
Operating expenses 2,779 356 4,643 356
--------- -------- --------- --------
Net (loss) income before income
tax (benefit) (17,430) 217 (27,434) 217
Income tax (benefit) (6,967) - (10,974) -
--------- -------- --------- --------
Net (loss) income $ (10,463) $ 217 $ (16,460) $ 217
========= ======== ========= ========
June 30, 2003 December 31, 2002
------------- -----------------
Segment assets $ 122,907 $ 121,224
------------- -----------------
NOTE 9 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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" ("FIN No. 46"), which addresses
consolidation by business enterprises of variable interest entities ("VIEs")
when specific characteristics are met. FIN No. 46 clarifies the application of
ARB No. 51 to certain entities in which equity investors 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
were effective February 1, 2003 for new and modified VIEs and July 1, 2003 for
other entities. Management believes that the implementation of FIN No. 46 will
not have a material effect on the Company.
On April 30, 2003, the Financial Accounting Standards Board issued SFAS No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities"
("SFAS No. 149"). SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and
-10-
for hedging activities under SFAS No. 133. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The Company is currently in the
process of evaluating the impact SFAS No. 149 may have on its consolidated
financial statements.
On May 15, 2003, the Financial Accounting Standards Board issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. Most of the guidance in SFAS No.
150 is effective for all financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. Management believes that the
implementation of SFAS No. 150 will not have a material effect on the Company.
NOTE 10 - SUBSEQUENT EVENT
On July 12, 2003, American Home entered into a definitive agreement and plan of
merger (the "Merger Agreement") with Apex Mortgage Capital, Inc. ("Apex") and
American Home Mortgage Investment Corp. (formerly called AHM New Holdco, Inc.),
a direct, wholly-owned subsidiary of American Home ("AHM Investment Corp.").
Under the Merger Agreement, Apex will merge with and into AHM Investment Corp.,
with AHM Investment Corp. emerging as the surviving corporation. Prior to the
merger, American Home will engage in an internal reorganization pursuant to
which American Home will merge with and into AHM Merger Sub, Inc., a
wholly-owned subsidiary of AHM Investment Corp. created for the purpose of
effectuating the reorganization. As a result, AHM Investment Corp. will become
the new parent company and will own 100% of the capital stock of American Home.
As a result of the reorganization, each outstanding share of common stock of
American Home will be converted into one share of common stock of AHM Investment
Corp. At the effective time of the merger, each share of common stock of Apex
issued and outstanding immediately prior to the effective time of the merger
will be converted automatically into and become exchangeable for a number of
shares of common stock of AHM Investment Corp. equal to 107.5% of Apex's book
value per share, subject to a collar adjustment, as more fully described in the
Merger Agreement. The merger is subject to various conditions, including, among
other things, regulatory consents and approval by the stockholders of American
Home and Apex.
A copy of the Merger Agreement has been filed as Exhibit 2.1 to the Form 8-K
filed by American Home on July 14, 2003. In addition, a copy of the press
release announcing the proposed transaction has been filed as Exhibit 99.1 to
the Form 8-K filed by American Home on July 14, 2003.
At June 30, 2003, Apex had total assets of approximately $2.6 billion
consisting primarily of mortgage-related fixed income securities.
-11-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is a retail mortgage banking company engaged in two business
segments: originating residential mortgage loans (the "Loan Production Segment")
and servicing residential mortgage loans (the "Loan Servicing Segment").
The Loan Production Segment makes home loans to consumers and then resells those
home loans into the secondary mortgage market. As of June 30, 2003, lending was
conducted through 211 loan production offices located in 37 states across the
country, through mortgage brokers and through three Internet call centers that
serve customers located in all 50 states. The Company offers a broad array of
mortgage products, but primarily makes high-credit-quality loans; more than 80%
of its originations are eligible for Fannie Mae, Freddie Mac or Ginnie Mae,
while most of the balance of its loans are jumbo loans for borrowers with FICO
credit scores above 660.
The Loan Servicing Segment administers existing mortgage loans owned by Fannie
Mae, Freddie Mac, Ginnie Mae, the State of Maryland Housing Authority and other
institutional mortgage holders. Administrative responsibilities include
responding to customers inquiring about their loans, collecting mortgage
payments, ensuring that proper homeowners' insurance is in place with respect to
the underlying collateral securing the mortgage loans and recovering and
reselling collateral on defaulted loans. 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 periods.
Net income for the three months ended June 30, 2003 was $26.9 million or $1.55
per share on a diluted basis, compared to $6.5 million or $0.49 per share for
the same period in 2002. Net income for the six months ended June 30, 2003 was
$43.2 million or $2.51 per share on a diluted basis, compared to $13.2 million
or $1.02 per share for the same period in 2002.
Loan originations increased 205% in the three months ended June 30, 2003,
totaling $6.2 billion (including $1.3 billion, $228 million and $305 million
attributable to Columbia, the Principal Branches and the American Mortgage
Branches, respectively) compared to $2.0 billion in the same period in 2002.
Loan originations increased 167% in the six months ended June 30, 2003, totaling
$10.5 billion (including $2.3 billion, $412 million and $305 million
attributable to Columbia, the Principal Branches and the American Mortgage
Branches, respectively), compared to $3.9 billion in the same period in 2002.
Subsequent Event
On July 12, 2003, American Home entered into a definitive agreement and plan of
merger (the "Merger Agreement") with Apex Mortgage Capital, Inc. ("Apex") and
American Home Mortgage Investment Corp. (formerly called AHM New Holdco, Inc.),
a direct, wholly-owned subsidiary of American Home ("AHM Investment Corp.").
Under the Merger Agreement, Apex will merge with and into AHM Investment Corp.,
with AHM Investment Corp. emerging as the surviving corporation. Prior to the
merger, American Home will engage in an internal reorganization pursuant to
which American Home will merge with and into AHM Merger Sub, Inc., a
wholly-owned subsidiary of AHM Investment Corp. created for the purpose of
effectuating the reorganization. As a result, AHM Investment Corp. will
become the new parent company and will own 100% of the capital stock of American
Home.
As a result of the reorganization, each outstanding share of common stock of
American Home will be converted into one share of common stock of AHM Investment
Corp. At the effective time of the merger, each share of common stock of Apex
issued and outstanding immediately prior to the effective time of the merger
will be converted automatically into and become exchangeable for a number of
shares of common stock of AHM
-12-
Investment Corp. equal to 107.5% of Apex's book value per share, subject to a
collar adjustment, as more fully described in the Merger Agreement. The merger
is subject to various conditions, including, among other things, regulatory
consents and approval by the stockholders of American Home and Apex.
A copy of the Merger Agreement has been filed as Exhibit 2.1 to the Form 8-K
filed by American Home on July 14, 2003. In addition, a copy of the press
release announcing the proposed transaction has been filed as Exhibit 99.1 to
the Form 8-K filed by American Home on July 14, 2003.
Critical Accounting Estimates
Mortgage Loans Held for Sale - Mortgage loans held for sale represent mortgage
loans originated and held pending sale to interim and permanent investors. The
hedged mortgage loans are carried at fair 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 certain
direct loan origination costs. The unhedged mortgage loans are carried at the
lower of cost or fair value as determined by outstanding commitments from
investors or current investor yield requirements calculated on the aggregate
loan basis, less the deferral of fees and points received, plus the deferral of
certain direct loan origination costs. 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 - When the Company acquires servicing assets through
either purchase or origination of loans and sells or securitizes those loans
with servicing assets retained, the total cost of the loans is allocated to the
servicing assets and the loans (without the servicing assets) based on their
relative fair values. The amount attributable to the servicing assets is
capitalized as mortgage servicing rights ("MSRs") on the consolidated balance
sheets. The MSRs are amortized to expense in proportion to and over the period
of estimated net servicing income.
The MSRs are assessed for impairment based on the fair value of those assets.
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
remaining 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
-13-
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.
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, including identifiable
intangibles. The Company will test for impairment annually or more frequently if
events or circumstances indicate that an asset may be impaired. In accordance
with SFAS No. 142, "Goodwill and Other Intangible Assets," 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.
-14-
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.
Loan Production Segment Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
(Dollars in millions)
RESULTS OF OPERATIONS:
Gain on sales of mortgage
loans.......................... $129.3 89.7% $ 35.1 88.1% $217.5 88.1% $ 65.8 89.0%
Interest income, net........... 13.6 9.4 4.1 10.2 25.1 10.2 7.1 9.6
Other.......................... 1.2 0.9 0.7 1.7 4.2 1.7 1.0 1.4
------ ----- ------ -----
Total revenues.............. 144.1 100.0 39.9 100.0 246.8 100.0 73.9 100.0
------ ----- ------ -----
Salaries, commissions and
benefits, net................ 53.3 37.0 17.8 44.6 97.1 39.4 32.8 44.2
Occupancy and equipment........ 6.6 4.6 3.4 8.5 12.1 4.9 5.8 7.0
Data processing and
communications............... 2.8 1.9 1.7 4.1 5.8 2.3 3.1 4.2
Office supplies and
expenses....................... 3.5 2.4 1.1 2.9 6.2 2.5 2.3 3.4
Marketing and promotion........ 2.8 1.9 2.0 5.0 5.6 2.3 3.6 4.7
Travel and entertainment....... 2.9 2.0 0.9 2.4 4.9 2.0 1.6 1.9
Professional fees.............. 1.5 1.0 1.3 3.3 3.2 1.3 1.8 1.6
Other.......................... 6.6 4.6 1.7 4.1 9.6 3.9 2.3 2.0
------ ----- ------ -----
Total expenses.............. 80.0 55.4 29.9 74.9 144.5 58.6 53.3 69.0
------ ----- ------ -----
Income before income
taxes and minority
interest in income of
consolidated joint
ventures..................... 64.1 44.6 10.0 25.1 102.3 41.4 20.6 31.0
Income taxes................... 26.2 18.2 3.5 8.9 41.9 17.0 7.3 11.0
Minority interest in
income of consolidated
joint ventures............... 0.5 0.4 0.2 0.4 0.8 0.3 0.3 0.3
------ ----- ------ -----
Net income..................... $ 37.4 26.0% $ 6.3 15.8% $ 59.6 24.1% $13.0 19.7%
====== ===== ====== =====
-15-
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. 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 periods.
Loan Servicing Segment Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
-------- -------- -------- --------
(Dollars in millions)
RESULTS OF OPERATIONS:
Loan servicing fees........................... $ 7.9 $ 1.6 $ 16.4 $ 1.6
Gain on Ginnie Mae early buy-out sales........ 3.2 -- 6.8 --
Amortization and impairment of mortgage
servicing rights........................... (23.8) (0.9) (42.3) (0.9)
------ ------ ------ ------
Net loan servicing fees (loss)............. (12.7) 0.7 (19.1) 0.7
------ ------ ------ ------
Interest expense, net......................... (2.0) (0.1) (3.7) (0.1)
------ ------ ------ ------
Total revenues............................. (14.7) 0.6 (22.8) 0.6
------ ------ ------ ------
Salaries and benefits, net.................... 0.9 0.1 1.7 0.1
Office supplies and expenses.................. 0.3 0.1 0.7 0.1
Occupancy and equipment....................... 0.1 -- 0.2 --
Professional fees............................. 0.2 0.1 0.3 0.1
Other......................................... 1.2 0.1 1.7 0.1
------ ------ ------ ------
Total expenses............................. 2.7 0.4 4.6 0.4
------ ------ ------ ------
Net (loss) income before income tax (benefit). (17.4) 0.2 (27.4) 0.2
Income tax (benefit).......................... (6.9) -- (10.9) --
------ ------ ------ ------
Net (loss) income............................. $(10.5) $ 0.2 $(16.5) $ 0.2
====== ====== ====== ======
-16-
THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 2002
Loan Production Segment
REVENUES
The Loan Production Segment total revenues for the quarter ended June 30, 2003,
were $144.1 million compared to $39.9 million in 2002, an increase of $104.2
million, or 261.2%. 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 $129.3 million for the second
quarter of 2003 from $35.1 million for the second quarter of 2002, an increase
of $94.2 million, or 268.0%. In general, the increase was the result of higher
loan 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, and the acquisition of
Columbia, the Principal Branches and the American Mortgage Branches.
Interest income, net, increased to $13.6 million for the second quarter of 2003
from $4.1 million for the second quarter of 2002, an increase of $9.5 million,
or 233.0%. The increase resulted primarily from an increase in loans held for
sale and an increase in the Company's interest rate spread on loans held for
sale.
Other revenue totaled $1.2 million for the second quarter of 2003 compared to
$0.7 million for the second quarter of 2002. For the quarter ended June 30,
2003, other income primarily consists of revenue from title services. For the
quarter ended June 30, 2002, other income primarily consists of volume incentive
bonuses received from loan purchasers.
EXPENSES
Salaries, commissions and benefits increased to $53.3 million for the second
quarter of 2003 from $17.8 million for the second quarter of 2002, an increase
of $35.5 million, or 199.3%. The increase was largely due to the inclusion of
expenses of Columbia, increased staffing levels and overtime due to increased
loan volumes, as well as the increase in loan officers due to the acquisition of
the Principal Branches and the American Mortgage Branches.
Occupancy and equipment expenses increased to $6.6 million for the second
quarter of 2003 from $3.4 million for the second quarter of 2002, an increase of
$3.2 million, or 95.8%. The increase in costs reflects the inclusion of expenses
of Columbia, the Principal Branches and the American Mortgage Branches, the
opening of new community loan offices and greater depreciation charges as a
result of the Company's increased investments in computer networks.
Data processing and communication costs increased to $2.8 million for the second
quarter of 2003 from $1.7 million for the second quarter of 2002, an increase of
$1.1 million, or 65.4%. The increase was a result of the opening of new
community loan offices and the inclusion of expenses of Columbia, the Principal
Branches and the American Mortgage Branches.
Office supplies and expenses increased to $3.5 million for the second quarter of
2003 from $1.1 million for the second quarter of 2002, an increase of $2.4
million, or 207.4%. The increase was a result of the opening of new community
loan offices and the inclusion of expenses of Columbia, the Principal Branches
and the American Mortgage Branches.
Marketing and promotion expenses increased to $2.8 million for the second
quarter of 2003 from $2.0 million for the second quarter of 2002, an increase of
$0.8 million, or 41.5%. The increase was primarily due to increased loan volume
and an increase in promotional expenses attributable to the acquisition of the
Principal Branches.
-17-
Travel and entertainment expenses increased to $2.9 million for the second
quarter of 2003 from $0.9 million for the second quarter of 2002, an increase of
$2.0 million, or 206.2%. This increase was primarily due to the inclusion of
expenses of Columbia and the addition of new loan originators due to the
acquisition of the Principal Branches and the American Mortgage Branches.
Professional fees increased to $1.5 million for the second quarter of 2003 from
$1.3 million for the second quarter of 2002, an increase of $0.2 million, or
13.2%. This increase was primarily due to the inclusion of expenses of Columbia
and the growth of the Company's business.
Other expenses increased to $6.6 million for the second quarter of 2003 from
$1.7 million for the second quarter of 2002, an increase of $4.9 million, or
301.8%. This increase includes $3.3 million for litigation expense relating to
the settlement of a lawsuit against the Company. In addition, 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 increased to $26.2 million for the second quarter of 2003 from $3.5
million for the second quarter of 2002, an increase of $22.7 million, or 639.0%.
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 periods.
The Loan Servicing Segment's total revenues for the quarter ended June 30, 2003,
were a loss of $14.7 million, which included a net loan servicing fees loss of
$12.7 million and interest expense, net, of $2.0 million, compared to revenue of
$0.6 million for the second quarter of 2002.
Net loan servicing fees was a loss of $12.7 million for the second quarter of
2003 compared to income of $0.7 million for the second quarter of 2002. The
servicing losses in the second quarter of 2003 are a result of the reduction in
interest rates since the acquisition of Columbia, which resulted in both faster
actual prepayments and higher forecasted future prepayments than what were
expected at the time of the acquisition. The loss for the second quarter of 2003
resulted primarily from amortization of $17.3 million and an additional
temporary impairment provision of $6.5 million, increasing the impairment
reserve to $22.4 million at June 30, 2003 from $15.9 million at March 31, 2003.
The impairment provision is due to a reduction in the fair value of servicing
rights attributable to an increase in estimated future prepayment speeds. The
amortization of $17.3 million is a result of faster than expected loan
repayments.
Total Loan Servicing Segment expenses are associated with the administration of
the servicing portfolio acquired through the Columbia acquisition in June 2002.
Income tax benefit was $6.9 million for the second quarter of 2003.
-18-
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 2002
Loan Production Segment
REVENUES
The Loan Production Segment total revenues for the six months ended June 30,
2003, were $246.8 million compared to $73.9 million for the same period in 2002,
an increase of $172.9 million, or 234.3%. 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 $217.5 million for the six months
ended June 30, 2003 from $65.8 million for the same period in 2002, an increase
of $151.7 million, or 230.7%. In general, the increase was the result of higher
loan 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, and the acquisition of
Columbia, the Principal Branches and the American Mortgage Branches.
Interest income, net, increased to $25.1 million for the six months ended June
30, 2003 from $7.1 million for the same period in 2002, an increase of $18.0
million, or 255.3%. The increase resulted primarily from an increase in loans
held for sale and an increase in the Company's interest rate spread on loans
held for sale.
Other revenue totaled $4.2 million for the six months ended June 30, 2003
compared to $1.0 million for the same period in 2002. For the six months ended
June 30, 2003, other income primarily consists of fulfillment fees of $1.9
million and revenue from title services. Fulfillment fees of approximately $1.9
million represent non-recurring fees received from Principal Residential
Mortgage, Inc. ("PRM") for loans closed by the Company on behalf of PRM. As part
of the agreement to acquire the retail branches of PRM ("the Principal
Branches"), the Company agreed to assume the costs incurred to close out PRM's
application pipeline as of the date of the agreement on behalf of PRM for a per
loan fee. For the six months ended June 30, 2002, other income primarily
consists of volume incentive bonuses received from loan purchasers.
EXPENSES
Salaries, commissions and benefits increased to $97.1 million for the six months
ended June 30, 2003 from $32.8 million for the same period in 2002, an increase
of $64.3 million, or 196.1%. The increase was largely due to the inclusion of
expenses of Columbia, increased staffing levels and overtime due to increased
loan volumes, as well as the increase in loan officers due to the acquisition of
the Principal Branches and the American Mortgage Branches.
Occupancy and equipment expenses increased to $12.1 million for the six months
ended June 30, 2003 from $5.8 million for the same period in 2002, an increase
of $6.3 million, or 110.2%. The increase in costs reflects the inclusion of
expenses of Columbia, the Principal Branches and the American Mortgage Branches,
the opening of new community loan offices and greater depreciation charges as a
result of the Company's increased investments in computer networks.
Data processing and communication costs increased to $5.8 million for the six
months ended June 30, 2003 from $3.1 million for the same period in 2002, an
increase of $2.7 million, or 87.5%. The increase was a result of the opening of
new community loan offices and the inclusion of expenses of Columbia, the
Principal Branches and the American Mortgage Branches.
Office supplies and expenses increased to $6.2 million for the six months ended
June 30, 2003 from $2.3 million for the same period in 2002, an increase of $3.9
million, or 171.0%. The increase was a result of the opening of new community
loan offices and the inclusion of expenses of Columbia, the Principal Branches
and the American Mortgage Branches.
-19-
Marketing and promotion expenses increased to $5.6 million for the six months
ended June 30, 2003 from $3.6 million for the same period in 2002, an increase
of $2.0 million, or 57.5%. The increase was primarily due to increased loan
volume and an increase in promotional expense attributable to the acquisition of
the Principal Branches.
Travel and entertainment expenses increased to $4.9 million for the six months
ended June 30, 2003 from $1.6 million for the same period in 2002, an increase
of $3.3 million, or 204.9%. This increase was primarily due to the inclusion of
expenses of Columbia and the addition of new loan originators due to the
acquisition of the Principal Branches and the American Mortgage Branches.
Professional fees increased to $3.2 million for the six months ended June 30,
2003 from $1.8 million for the same period in 2002, an increase of $1.4 million,
or 72.7%. This increase was primarily due to the inclusion of expenses of
Columbia and the growth of the Company's business.
Other expenses increased to $9.6 million for the six months ended June 30, 2003
from $2.3 million for the same period in 2002, an increase of $7.3 million, or
313.0%. This increase includes $3.3 million for litigation expense relating to
the settlement of a lawsuit against the Company. In addition, 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 increased to $41.9 million for the six months ended June 30, 2003
from $7.3 million for the same period in 2002, an increase of $34.6 million, or
475.4%.
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 periods.
The Loan Servicing Segment's total revenues for the six months ended June 30,
2003, were a loss of $22.8 million, which included a net loan servicing fees
loss of $19.1 million and interest expense, net, of $3.7 million, compared to
revenue of $0.6 million for the same period in 2002.
Net loan servicing fees was a loss of $19.1 million for the six months ended
June 30, 2003 compared to income of $0.7 million for the same period in 2002.
The servicing losses in the six months ended June 30, 2003 are a result of the
reduction in interest rates since the acquisition of Columbia, which resulted in
both faster actual prepayments and higher forecasted future prepayments than
what were expected at the time of the acquisition. The loss for the six months
ended June 30, 2003 resulted primarily from amortization of $30.1 million and an
additional temporary impairment provision of $12.2 million, increasing the
impairment reserve to $22.4 million at June 30, 2003 from $10.2 million at
December 31, 2002. The impairment provision is due to a reduction in the fair
value of servicing rights attributable to an increase in estimated future
prepayment speeds. The amortization of $30.1 million is a result of faster than
expected loan repayments.
Total Loan Servicing Segment expenses are associated with the administration of
the servicing portfolio acquired through the Columbia acquisition in June 2002.
Income tax benefit was $10.9 million for the six months ended June 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
To originate a mortgage loan, the Company draws against a $550 million
pre-purchase facility with UBS Paine Webber ("Paine Webber"), a $325 million
bank syndicated facility led by Residential Funding Corporation ("RFC"), a $475
million facility with CDC IXIS Capital Markets North America Inc. ("CDC") and a
facility of $200 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
-20-
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.
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; and
o create liens on the collateral,
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 applicable warehousing agreement).
As of June 30, 2003, the Company's aggregate warehouse facility borrowings were
$1.5 billion (including $22.7 million of borrowings under a working capital
sub-limit) and its outstanding drafts payable were $67.8 million, compared to
$728.5 million in borrowings under warehouse facilities (including $15.1 million
of borrowings under a working capital sub-limit) and $42.6 million in drafts
payable as of December 31, 2002. At June 30, 2003, the aggregate amount
available for additional borrowings under the warehouse facilities was $15
million. At June 30, 2003, its loans held for sale were $1.7 billion compared to
$811.2 million at December 31, 2002.
Subsequent to June 30, 2003, the Company increased its total warehouse borrowing
capacity by $575 million. The RFC warehouse facility increased by $125 million
to $450 million. The Morgan Stanley warehouse facility increased by $250 million
to $450 million. The Company also opened a new $200 million warehouse facility
with Credit Lyonnais.
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 Company has a
combined capacity up to $1.0 billion under these purchase and sale agreements.
Amounts sold and being held under these agreements at June 30, 2003 and December
31, 2002 were $715 million and $801 million, respectively. At June 30, 2003, the
full amount available under these agreements was utilized by the Company. These
agreements are not committed facilities and may be terminated at the discretion
of the counterparties.
-21-
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. The Company has been required to
repurchase loans it has sold from time to time; however, the liability for the
fair value of the obligation is immaterial.
The Company also has a $75 million term loan facility with a bank syndicate led
by RFC, which the Company uses to finance its mortgage servicing rights. The
term loan facility expires on May 28, 2004. Interest is based on a spread to the
LIBOR and may be adjusted for earnings on escrow balances. At June 30, 2003 and
December 31, 2002, borrowings under the Company's term loan were $53.5 million
and $66.0 million, respectively.
Cash and cash equivalents increased to $38.8 million at June 30, 2003,
from $24.4 million at December 31, 2002.
The Company's primary sources of cash and cash equivalents during the six
months ended June 30, 2003, were as follows:
o $806.3 million increase in warehouse lines of credit;
o $ 25.2 million increase in drafts payable;
o $ 16.5 million increase in accrued expenses and other liabilities;
and
o $ 7.4 million decrease in accounts receivable.
The Company's primary uses of cash and cash equivalents during the six
months ended June 30, 2003, were as follows:
o $ 889.7 million net increase in mortgage loans held for sale;
o $ 15.6 million increase in mortgage servicing rights;
o $ 12.8 million decrease in notes payable; and
o $ 5.1 million to purchase furniture and office and computer
equipment for new branch offices.
Commitments
The Company had the following commitments (excluding derivative financial
instruments) at June 30, 2003:
Less Than After
Total 1 Year 1-3 Years 4-5 Years 5 Years
----------- ----------- ----------- ----------- ---------
(in thousands)
Warehouse facilities.......... $1,534,777 $1,534,777 $ - $ - $ -
Operating leases.............. 15,167 6,327 6,448 2,371 21
Notes payable................. 55,436 54,058 474 187 717
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FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. The words "plan,"
"believe," "anticipate," "estimate," "expect," "objective," "projection,"
"forecast," "goal" or similar words are intended to identify forward-looking
statements. Such statements involve risks and uncertainties that exist in the
Company's operations and business environment that could render actual outcomes
and results materially different than predicted. The Company's forward-looking
statements are based on assumptions about many factors, including, but not
limited to, general volatility of the capital markets; changes in the real
estate market, interest rates or the general economy of the markets in which the
Company operates; economic, technological or regulatory changes affecting the
use of the Internet; and changes in government regulations that are applicable
to the Company's regulated brokerage and property management businesses. While
the Company believes that its assumptions are reasonable at the time
forward-looking statements are made, it cautions that it is impossible to
predict the actual outcome of numerous factors and, therefore, readers should
not place undue reliance on such statements. Forward-looking statements speak
only as of the date they are made, and the Company undertakes no obligation to
update such statements in light of new information, future events or otherwise.
-23-
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Movements in interest rates can pose a major risk to the Company in either a
rising or declining interest rate environment. The Company depends on
substantial borrowings to conduct its business. These borrowings are all done at
variable interest rate terms which will increase as short term interest rates
rise. Additionally, when interest rates rise, loans held for sale and any
applications in process with locked-in rates decrease in value. To preserve the
value of such 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. 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 following table summarizes the Company's interest rate sensitive
instruments:
June 30, 2003 December 31, 2002
Notional Notional
Amount Fair Value Amount Fair Value
------------------------------------------------------
(in thousands)
Commitments to fund mortgages at
agreed-upon rates......................$3,152,710 $ 27,311 $1,644,701 $ 29,345
Loans held for sale...................... 1,651,867 1,705,403 788,191 815,050
Mortgage servicing rights................ 7,189,009 82,388 8,541,790 109,023
Forward delivery commitments............. 4,299,128 18,299 1,763,450 (9,070)
Option contracts to buy
securities............................ --- --- 150,000 725
The Company has total commitments to lend of $8.5 billion at June 30, 2003.
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A detailed discussion of market risk is provided in the Company's Annual Report
on Form 10-K for the period ended December 31, 2002.
ITEM 4.
CONTROLS AND PROCEDURES
Based on an evaluation carried out, as of the end of the period covered by this
report, under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
the Chief Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) are effective to ensure that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission. As of the end of the
period covered by this report, there have been no significant changes in the
Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
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PART II-OTHER INFORMATION
ITEM 2.
CHANGES IN SECURITIES AND USE OF PROCEEDS
The following is a description of the Company's securities that were not
registered under the Securities Act of 1933, as amended (the "Securities Act"),
which were sold during the quarter ended June 30, 2003.
The Company acquired Marina Mortgage Company, Inc. ("Marina") on December 29,
1999. In addition to the shares paid to former Marina shareholders as initial
consideration, the Company is required to issue unregistered shares of common
stock to the former shareholders under the earnout provisions of the merger
agreement. On May 16, 2003, pursuant to these earnout provisions, the Company
issued an aggregate of 244,151 shares of common stock to such shareholders as
additional consideration. These securities were exempt from registration under
Section 4(2) of the Securities Act because they were issued pursuant to the
terms of a private transaction rather than through a public offering.
The Company acquired First Home Mortgage Corp. ("First Home") on June 30, 2000.
In addition to the shares paid to former First Home shareholders as initial
consideration, the Company is required to issue unregistered shares of common
stock to the former shareholders as additional consideration under the earnout
provisions of the merger agreement. On May 19, 2003, pursuant to these earnout
provisions, the Company issued an aggregate of 5,133 shares of common stock to
such shareholders as additional consideration. In addition, on June 16, 2003,
the Company issued 21,835 shares of common stock to such shareholders. These
securities were exempt from registration under Section 4(2) of the Securities
Act because they were issued pursuant to the terms of a private transaction
rather than through a public offering.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 21, 2003, the Company held its 2003 Annual Meeting of Stockholders (the
"Meeting"). As of April 17, 2003, the record date for the Meeting, there were
16,787,528 shares of common stock outstanding and entitled to vote. Represented
at the Meeting in person or by proxy were 15,227,971 shares of common stock,
representing a quorum.
At the Meeting, C. Cathleen Raffaeli and Kenneth P. Slosser were elected as
directors of the Company to serve for a term of approximately three-years
expiring at the 2006 Annual Meeting of Stockholders or until their respective
successors have been elected and qualified. With respect to the election of Ms.
Raffaeli, there were 14,146,038 votes for and 1,081,933 votes against. With
respect to the election of Mr. Slosser, there were 12,343,401 votes for and
2,884,570 votes against.
The stockholders of the Company voted upon the ratification of Deloitte & Touche
LLP as the Company's external auditors for the fiscal year ending December 31,
2003. With respect to this matter, there were 15,125,538 votes for, 100,126
votes against, 2,307 abstentions and no broker non-votes.
The stockholders also voted upon amendments to the Company's 1999 Omnibus Stock
Incentive Plan (the "Plan") to increase the number of shares subject to awards
granted under the Plan from 2,250,000 to 3,000,000 and to increase the maximum
number of shares that are available to be granted as incentive stock options
under the Plan from 2,250,000 to 3,000,000. With respect to this matter, there
were 10,013,165 votes for, 5,201,886 votes against, 12,919 abstentions and one
broker non-vote.
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The final proposal voted upon at the Meeting was an amendment to the Company's
Restated Certificate of Incorporation to increase the number of authorized
shares of common stock from 19,000,000 to 50,000,000 and increase the number of
authorized shares of preferred stock from 1,000,000 to 10,000,000. With respect
to this matter, there were 7,636,223 votes for, 5,531,568 votes against, 5,397
abstentions and 2,054,783 broker non-votes.
ITEM 5.
OTHER INFORMATION
On July 24, 2003, the Company issued a press release reporting financial results
for the quarter ended June 30, 2003. A copy of the press release is attached as
Exhibit 99.1 to this Quarterly Report on Form 10-Q.
On April 23, 2003, the Company issued a press release reporting financial
results for the quarter ended March 31, 2003. A copy of the press release is
attached as Exhibit 99.2 to this Quarterly Report on Form 10-Q.
The information in this Item 5, including Exhibits 99.1 and 99.2, are being
furnished and shall not be deemed to be "filed" for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
otherwise subject to the liabilities of such Section, nor shall it be deemed
incorporated by reference in any filing under the Securities Act of 1933, as
amended, or the Exchange Act.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed as part of this Quarterly Report on Form
10-Q:
Exhibit 10 Amended and Restated Master Repurchase Agreement, dated
as of May 14, 2003, by and between CDC Mortgage Capital
Inc., as Buyer, and American Home Mortgage Corp., as
Seller
Exhibit 31.1 Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 99.1 Press Release, dated July 24, 2003
Exhibit 99.2 Press Release, dated April 23, 2003
(b) Reports on Form 8-K.
During the quarter ended June 30, 2003, the Company did not file any
Current Reports on Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN HOME MORTGAGE HOLDINGS, INC.
(Registrant)
Date: August 14, 2003 By: /s/ Michael Strauss
--------------------------------
Michael Strauss
Chief Executive Officer
and President
Date: August 14, 2003 By: /s/ Stephen A. Hozie
--------------------------------
Stephen A. Hozie
Chief Financial Officer
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