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 September 30, 2003
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.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-4066303
- ------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
520 Broadhollow Road, Melville, NY 11747
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(Address of Principal Executive Offices) (Zip Code)
(516) 949-3900
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ].
As of November 10, 2003, 17,396,006 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) -
September 30, 2003 and December 31, 2002 ...................... 1
Interim Condensed Consolidated Statements of Income (unaudited)
-Three and nine months ended September 30, 2003 and 2002 ...... 2
Interim Condensed Consolidated Statements of Cash Flows
(unaudited) - Nine months ended September 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 ............................................. 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk ........ 25
Item 4. Controls and Procedures ........................................... 26
PART II-OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ......................... 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)
- ------------------------------------------------------------------------------------------------------
September 30, December 31,
2003 2002
------------ ------------
Assets:
Cash and cash equivalents $ 49,583 $ 24,416
Accounts receivable and servicing advances 78,898 72,563
Mortgage loans held for sale, net 1,667,486 811,188
Mortgage loans held for investment, net 552 1,714
Mortgage servicing rights, net 103,021 109,023
Premises and equipment, net 16,931 13,001
Goodwill 54,930 50,932
Derivative assets 35,269 30,071
Real estate owned 1,001 629
Other assets 9,981 5,513
------------ ------------
Total assets $ 2,017,652 $ 1,119,050
============ ============
Liabilities and Stockholders' Equity:
Liabilities:
Warehouse lines of credit $ 1,530,110 $ 728,466
Notes payable 66,430 68,261
Drafts payable 49,006 42,599
Accrued expenses and other liabilities 66,281 64,945
Derivative liabilities 11,904 7,204
Income taxes payable 66,647 42,955
------------ ------------
Total liabilities 1,790,378 954,430
------------ ------------
Commitments and Contingencies -- --
Minority interest 727 524
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, 17,307,817 and 16,717,459 shares
issued and outstanding, respectively 173 167
Additional paid-in capital 101,098 95,785
Retained earnings 125,276 68,144
------------ ------------
Total stockholders' equity 226,547 164,096
------------ ------------
Total liabilities and stockholders' equity $ 2,017,652 $ 1,119,050
============ ============
See Notes to Interim Condensed Consolidated Financial Statements.
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AMERICAN HOME MORTGAGE HOLDINGS, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
- ----------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues
Gain on sales of mortgage loans $ 105,577 $ 71,204 $ 323,070 $ 136,964
Interest income, net 12,366 6,757 33,770 13,686
Loan servicing fees 9,624 11,607 32,812 13,176
Amortization and impairment (7,078) (16,809) (49,318) (17,657)
------------ ------------ ------------ ------------
Net loan servicing fees 2,546 (5,202) (16,506) (4,481)
Other 1,423 953 5,592 1,953
------------ ------------ ------------ ------------
Total revenues 121,912 73,712 345,926 148,122
------------ ------------ ------------ ------------
Expenses
Salaries, commissions and benefits, net 62,698 34,958 161,551 67,898
Occupancy and equipment 7,340 4,738 19,642 10,525
Data processing and communications 3,682 2,343 9,510 5,427
Office supplies and expenses 3,557 1,976 10,427 4,297
Marketing and promotion 3,232 1,860 8,836 5,412
Travel and entertainment 3,122 1,307 8,000 2,905
Professional fees 2,319 1,528 5,832 3,404
Other 4,963 3,421 16,296 5,894
------------ ------------ ------------ ------------
Total expenses 90,913 52,131 240,094 105,762
------------ ------------ ------------ ------------
Income before income taxes and minority interest in
income of consolidated joint ventures 30,999 21,581 105,832 42,360
Income taxes 12,115 8,515 43,004 15,790
------------ ------------ ------------ ------------
Net income before minority interest in
income of consolidated joint ventures 18,884 13,066 62,828 26,570
Minority interest in income of consolidated joint ventures 190 294 945 594
------------ ------------ ------------ ------------
Net income $ 18,694 $ 12,772 $ 61,883 $ 25,976
============ ============ ============ ============
Per share data:
Basic $ 1.08 $ 0.78 $ 3.64 $ 1.88
Diluted $ 1.06 $ 0.76 $ 3.57 $ 1.83
Weighted average number of shares - basic 17,272,319 16,430,377 17,003,229 13,819,174
Weighted average number of shares - diluted 17,704,524 16,783,057 17,357,923 14,186,164
See Notes to Interim Condensed Consolidated Financial Statements.
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AMERICAN HOME MORTGAGE HOLDINGS, INC.
INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
- --------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30,
2003 2002
------------ ------------
Cash flows from operating activities :
Net income $ 61,883 $ 25,976
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 4,202 2,301
Amortization and impairment of mortgage servicing rights 49,318 13,890
Origination of mortgage loans held for sale (17,536,117) (7,097,178)
Proceeds on sale of mortgage loans 16,679,819 6,757,359
Increase in income taxes payable 23,692 444
Other 470 (48)
(Increase) decrease in operating assets:
Accounts receivable and servicing advances (6,335) 5,716
Derivative assets (5,198) (9,302)
Other assets (4,468) 2,134
Increase in operating liabilities:
Minority interest 203 47
Accrued expenses and other liabilities 1,336 21,677
Derivative liabilities 4,700 --
------------ ------------
Net cash used in operating activities (726,495) (276,984)
------------ ------------
Cash flows from investing activities:
Purchase of real estate owned, net (372) (190)
Purchases of premises and equipment, net (8,132) (3,469)
Acquisition of businesses, net of cash acquired -- (33,822)
Earnouts related to previous acquisitions (778) (2,201)
Capitalization of mortgage servicing rights (43,316) (16,258)
Net sales of loans held for investment 1,162 145
------------ ------------
Net cash used in investing activities (51,436) (55,795)
------------ ------------
Cash flows from financing activities
Increase in warehouse lines of credit 801,644 335,017
Increase (decrease) in drafts payable 6,407 (35,916)
Proceeds from issuance of capital stock 1,629 44,121
Dividends paid (4,751) (1,220)
Decrease in notes payable (1,831) (14,342)
------------ ------------
Net cash provided by financing activities 803,098 327,660
------------ ------------
Net increase (decrease) in cash and cash equivalents 25,167 (5,119)
Cash and cash equivalents, beginning of period 24,416 26,393
------------ ------------
Cash and cash equivalents, end of period $ 49,583 $ 21,274
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 29,787 $ 12,260
Income taxes paid 20,697 15,363
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 condensed consolidated financial statements
of American Home Mortgage Holdings, Inc. ("American Home") and its subsidiaries,
American Home Mortgage Corp. ("AHM") and Columbia National, Incorporated
("Columbia") (collectively, the "Company"), reflect all adjustments which, in
the opinion of management, are necessary for a fair presentation of the results
of the interim periods presented. All such adjustments are of a normal recurring
nature. All intercompany accounts and transactions have been eliminated.
Operating results for the nine months ended September 30, 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 Sept. 30, Nine Months Ended Sept. 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Numerator for basic earnings per share - net income $ 18,694 $ 12,772 $ 61,883 $ 25,976
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per share
Weighted average number of shares of common
stock outstanding during the period 17,272,319 16,430,377 17,003,229 13,819,174
Net effect of dilutive stock options 432,205 352,680 354,694 366,990
----------- ----------- ----------- -----------
Denominator for diluted earnings per share 17,704,524 16,783,057 17,357,923 14,186,164
=========== =========== =========== ===========
Net income per share:
Basic $ 1.08 $ 0.78 $ 3.64 $ 1.88
Diluted $ 1.06 $ 0.76 $ 3.57 $ 1.83
An aggregate of approximately 35,000 and 165,000 employee stock options for the
three months ended September 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 137,000 and 85,000 employee
stock options for the nine months ended September 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- 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
nine months ended September 30, 2002:
Nine Months Ended
September 30, 2002
------------------
Revenue $184,231
Income before income taxes and minority interest 44,346
Net income 27,166
Earnings per share - basic $ 1.97
Earnings per share - diluted $ 1.91
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.
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, AHM Investment Corp. filed
a Registration Statement on Form S-4 (Registration Statement No. 333-107545)
with the Securities and Exchange Commission to register the shares of common
stock of AHM Investment Corp. issuable in connection with the reorganization and
the merger. The Registration Statement includes a joint proxy
statement/prospectus that has been sent to the stockholders of American Home and
Apex.
-5-
NOTE 4 - DERIVATIVE INVESTMENTS AND HEDGING ACTIVITIES
The following table summarizes derivative assets and liabilities at September
30, 2003 and December 31, 2002:
September 30, December 31,
2003 2002
------------- ------------
Derivative Assets:
Interest rate lock commitments $ 35,269 $ 29,346
Options on treasury future contracts - 725
-------- --------
Derivative assets $ 35,269 $ 30,071
======== ========
Derivative Liabilities:
Forward delivery contracts - loan commitments $ 11,904 $ 7,204
Forward delivery contracts - loans held for sale(1) 5,533 1,866
-------- --------
Derivative liabilities $ 17,437 $ 9,070
======== ========
(1) This amount is included in loans held for sale.
At September 30, 2003, the notional amount of forward delivery commitments
amounted to approximately $2.1 billion. These contracts have a high correlation
to the price movement of the loans being hedged. The ineffectiveness in hedging
loans held for sale recorded on the balance sheet was a $512 thousand gain as of
September 30, 2003.
NOTE 5 - MORTGAGE SERVICING RIGHTS
Mortgage servicing rights ("MSR") activity for the three months and nine months
ended September 30, 2003 was as follows:
Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2003
------------------ ------------------
Mortgage Servicing Rights:
Balance at beginning of period $ 104,775 $ 119,225
Additions 27,711 43,316
Amortization (14,903) (44,958)
------------------ -----------------
Balance at end of period $ 117,583 $ 117,583
------------------ -----------------
Impairment Allowance:
Balance at beginning of period $ (22,387) $ (10,202)
Impairment recovery (provision) 7,825 (4,360)
------------------ -----------------
Balance at end of period $ (14,562) $ (14,562)
------------------ -----------------
Mortgage servicing rights, net $ 103,021 $ 103,021
================== =================
-6-
Aggregate Amortization Expense
- ------------------------------
Nine months ended September 30, 2003 $ 44,958
Estimated Amortization Expense
- ------------------------------
Twelve months ended September 30, 2004 26,426
Twelve months ended September 30, 2005 19,492
Twelve months ended September 30, 2006 14,547
Twelve months ended September 30, 2007 11,159
Twelve months ended September 30, 2008 8,751
Thereafter 37,208
On a quarterly basis, the Company reviews MSRs for impairment based on risk
strata. The MSRs are stratified based on the predominant risk characteristics of
the underlying loans. The Company's predominant risk characteristic is interest
rate. A valuation allowance is recognized for MSRs that have an amortized
balance in excess of the estimated fair value for the individual risk
stratification.
The estimated fair value of MSRs is determined by obtaining a market valuation
from an independent MSR broker. To determine the market value of MSRs, the MSR
broker uses a valuation model which incorporates assumptions relating to the
estimate of the cost of servicing the loan, a discount rate, a float value, an
inflation rate, ancillary income per loan, prepayment speeds and default rates
that market participants use for similar MSRs. Market assumptions are held
constant over the life of the portfolio.
The significant assumptions used in estimating the fair value of MSRs at
September 30, 2003 and December 31, 2002 were as follows:
September 30, 2003 December 31, 2002
- ------------------------------------------------------------ -----------------
Weighted average prepayment speed (PSA) 504 620
Weighted average discount rate 9.77% 10.13%
Weighted average default rate 6.77% 9.00%
NOTE 6 - GOODWILL
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2003 are as follows:
Balance as of December 31, 2002 $ 50,932
Earnouts from previous acquisitions 3,998
--------
Balance as of September 30, 2003 $ 54,930
========
NOTE 7- STOCK OPTION PLAN
In 1999, the Company established the 1999 Omnibus Stock Incentive 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
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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 nine months ended September 30, 2003 and 2002.
Under the Plan, the Company awarded 15,000, 98,210 and 50,001 shares of
restricted stock during 2003, 2002 and 1999, respectively. (No shares of
restricted stock were awarded in 2000 or 2001.) During the three months and nine
months ended September 30, 2003, the Company recognized compensation expense of
$140 thousand and $385 thousand, respectively, relating to shares of restricted
stock. At September 30, 2003, 63,958 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 September 30, Nine Months Ended September 30,
2003 2002 2003 2002
-------------- ---------------- -------------- ---------------
Net income, as reported $ 18,694 $ 12,772 $ 61,883 $ 25,976
Less: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects 180 170 466 470
-------- -------- -------- --------
Pro forma net income $ 18,514 $ 12,602 $ 61,417 $ 25,506
======== ======== ======== ========
Earnings per share:
Basic - as reported $ 1.08 $ 0.78 $ 3.64 $ 1.88
Basic - pro forma $ 1.07 $ 0.77 $ 3.61 $ 1.85
Diluted - as reported $ 1.06 $ 0.76 $ 3.57 $ 1.83
Diluted - pro forma $ 1.05 $ 0.75 $ 3.54 $ 1.80
-8-
There were 40,000 and 214,376 options granted during the three months and nine
months ended September 30, 2003. The weighted average fair value of options
granted during the three months and nine months ended September 30, 2003 was
$5.44 and $4.62, respectively. 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 49.7%
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.
-9-
Three Months Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
---------- ---------- --------- ------------
Loan Production Segment
Revenues:
Gain on sales of mortgage loans $ 105,577 $ 71,204 $ 323,070 $ 136,964
Interest income - net 13,938 7,803 39,081 14,881
Other 1,423 953 5,592 1,953
--------- -------- --------- ---------
Total revenues 120,938 79,960 367,743 153,798
Expenses:
Salaries, commissions and benefits - net 61,902 34,187 159,027 66,993
Occupancy and equipment 7,220 4,655 19,338 10,420
Data processing and communications 3,660 2,298 9,437 5,379
Office supplies and expenses 3,362 1,742 9,526 4,017
Marketing and promotion 3,229 1,856 8,822 5,408
Travel and entertainment 3,103 1,305 7,977 2,903
Professional fees 2,118 1,455 5,318 3,308
Other 4,165 2,534 13,851 4,879
--------- -------- --------- ---------
Operating expenses 88,759 50,032 233,296 103,307
--------- -------- --------- ---------
Net income before income taxes and minority
interest in income of consolidated joint ventures 32,179 29,928 134,447 50,491
Income taxes 12,873 11,894 54,736 19,169
Minority interest in income of consolidated
joint ventures 190 294 945 594
--------- -------- --------- ---------
Net income $ 19,116 $ 17,740 $ 78,766 $ 30,728
========= ======== ========= =========
September 30, 2003 December 31, 2002
------------------ -------------------
Segment assets $ 1,868,366 $ 997,826
=========== ===========
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Three Months Ended September 30, Nine Months Ended September 30,
2003 2002 2003 2002
---------- ----------- ---------- -----------
Loan Servicing Segment
Revenues:
Servicing revenue $ 6,809 $ 8,730 $ 23,159 $ 10,299
Gain on Ginnie Mae early buy-out sales 2,815 2,877 9,653 2,877
Amortization and impairment (7,078) (16,809) (49,318) (17,657)
--------- -------- --------- ---------
Net loan servicing fees (loss) 2,546 (5,202) (16,506) (4,481)
Interest expense - net (1,572) (1,046) (5,311) (1,195)
--------- -------- --------- ---------
Total revenues 974 (6,248) (21,817) (5,676)
Expenses:
Salaries and benefits - net 796 771 2,524 905
Occupancy and equipment 120 83 304 105
Data processing and communications 22 45 73 48
Office supplies and expenses 195 234 901 280
Marketing and promotion 3 4 14 4
Travel and entertainment 19 2 23 2
Professional fees 201 73 514 96
Other 798 887 2,445 1,015
--------- -------- --------- ---------
Operating expenses 2,154 2,099 6,798 2,455
--------- -------- --------- ---------
Net loss before income benefit (1,180) (8,347) (28,615) (8,131)
Income tax benefit (758) (3,379) (11,732) (3,379)
--------- -------- --------- ---------
Net loss $ (422) $ (4,968) $ (16,883) $ (4,752)
======= ======== ========== =========
September 30, 2003 December 31, 2002
------------------ -----------------
Segment assets $ 149,286 $ 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. The implementation of FIN No. 46 did not have a material impact
on the Company's consolidated financial statements.
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
-11-
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 implementation of SFAS No. 149
did not have a material impact on the Company's 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. The implementation of SFAS No. 150 did not
have a material impact on the Company's consolidated financial statements.
-12-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
American Home is a 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 September 30, 2003, lending
was conducted through 267 loan production offices located in 34 states across
the country, through mortgage brokers and through two Internet call centers that
serve customers located in all 50 states. American Home 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 September 30, 2003 was $18.7 million or
$1.06 per share on a diluted basis, compared to $12.8 million or $0.76 per share
for the same period in 2002. Net income for the nine months ended September 30,
2003 was $61.9 million or $3.57 per share on a diluted basis, compared to $26.0
million or $1.83 per share for the same period in 2002.
Loan originations increased 94% in the three months ended September 30, 2003,
totaling $7.0 billion (including $1.4 billion, $386 million and $929 million
attributable to Columbia, the Principal Branches and the American Mortgage
Branches, respectively) compared to $3.6 billion in the same period in 2002.
Loan originations increased 132% in the nine months ended September 30, 2003,
totaling $17.5 billion (including $3.6 billion, $798 million and $1.2 billion
attributable to Columbia, the Principal Branches and the American Mortgage
Branches, respectively), compared to $7.6 billion in the same period in 2002.
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
interim investor is a counterparty that acquires title to the loans and the
associated forward loan sale commitments ("FLSCs") prior to the FLSC date with
the permanent investor. Under the purchase and sale agreement with the interim
investor, the Company assigns title to the loans and its rights and obligations
to sell the loans to the permanent investor under the FLSC at the agreed upon
delivery terms, and the interim investor then sells the loans to the permanent
investors. There is no distinction in the timing of sale recognition between
sales 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
activities to complete the loan include the pursuit of minor documentation that
is required to complete an originated loan and the completion of loan files in
accordance with investor guidelines for the loans to be salable with perfected
-13-
security interests. These activities do not impact the timing of recognition of
the loan, as the Company recognizes the loans as assets upon distribution of the
loan funds.
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 MSRs for other than temporary
impairment to determine if the carrying value before the application of the
valuation allowance is recoverable. The Company receives a sensitivity analysis
of the estimated fair value of its MSRs under instantaneous interest rate shocks
from an independent mortgage servicing rights broker. The Company used an
increase of 200 basis points to the mortgage rates to have the broker determine
the estimated fair value of the MSRs. The fair value estimate included changes
in market assumptions that would be expected given the increase in mortgage
rates (e.g., prepayment speeds would be lower). The Company believes this
200-basis-point increase in mortgage rates to be an appropriate threshold for
determining the recoverability of the temporary impairment because that size
rate increase is foreseeable and consistent with historical mortgage rate
fluctuations. When using this instantaneous change in rates, if the fair value
of the strata of MSRs is estimated to increase to a point where all of the
impairment would be recovered, the impairment is considered to be temporary.
When the Company determines that a portion of the MSRs is not recoverable, the
related MSRs and the previously established valuation allowance are
correspondingly reduced to reflect other than temporary impairment.
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 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
-14-
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.
-15-
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the operating results
of the Company's Loan Production Segment, 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 September 30, Nine Months Ended September 30,
2003 2002 2003 2002
--------------- ------------------ ----------------- ------------------
(Dollars in millions)
RESULTS OF OPERATIONS:
Gain on sales of mortgage loans....... $105.6 87.3% $ 71.2 89.0% $323.1 87.9% $ 137.0 89.0%
Interest income, net.................. 14.0 11.5 7.8 9.8 39.1 10.6 14.9 9.7
Other................................. 1.4 1.2 0.9 1.2 5.6 1.5 1.9 1.3
------ ------ ------ -------
Total revenues................... 121.0 100.0 79.9 100.0 367.8 100.0 153.8 100.0
------ ------ ------ -------
Salaries, commissions and benefits,
net................................ 61.9 51.2 34.2 42.8 159.0 43.2 67.0 43.6
Occupancy and equipment............... 7.2 6.0 4.6 5.8 19.3 5.2 10.4 6.8
Data processing and
communications............. 3.7 3.0 2.3 2.9 9.5 2.6 5.4 3.5
Office supplies and expenses.......... 3.4 2.8 1.7 2.2 9.6 2.6 4.0 2.6
Marketing and promotion............... 3.2 2.7 1.8 2.3 8.8 2.4 5.4 3.5
Travel and entertainment.............. 3.1 2.6 1.3 1.6 8.0 2.2 2.9 1.9
Professional fees..................... 2.1 1.7 1.5 1.8 5.3 1.4 3.3 2.1
Other................................. 4.2 3.4 2.6 3.2 13.8 3.8 4.9 3.2
------ ------ ------ -------
Total expenses................... 88.8 73.4 50.0 62.6 233.3 63.4 103.3 67.2
------ ------ ------ -------
Income before income taxes and
minority interest in income of
consolidated joint ventures........ 32.2 26.6 29.9 37.4 134.5 36.6 50.5 32.8
Income taxes.......................... 12.9 10.6 11.9 14.8 54.8 14.9 19.2 12.4
Minority interest in income of
consolidated joint ventures........ 0.1 0.2 0.3 0.4 0.9 0.3 0.6 0.4
------ ------ ------ -------
Net income............................ $19.2 15.8% $ 17.7 22.2% $ 78.8 21.4% $ 30.7 20.0%
===== ====== ====== =======
-16-
The following table sets forth, for the periods indicated, the operating results
of the Company's Loan Servicing Segment. 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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------- ------- ------- -------
(Dollars in millions)
RESULTS OF OPERATIONS:
Loan servicing fees....................................... $ 6.7 $ 8.7 $ 23.1 $ 10.3
Gain on Ginnie Mae early buy-out sales.................... 2.9 2.9 9.7 2.9
Amortization and impairment of mortgage servicing rights.. (7.0) (16.8) (49.3) (17.7)
------ ------- ------- ------
Net loan servicing fees (loss)........................ 2.6 (5.2) (16.5) (4.5)
------ ------- ------- ------
Interest expense, net..................................... (1.6) (1.1) (5.3) (1.2)
------ ------- ------- ------
Total revenues....................................... 1.0 (6.3) (21.8) (5.7)
------ ------- ------- ------
Salaries and benefits, net................................ 0.8 0.8 2.5 0.9
Occupancy and equipment................................... 0.1 0.1 0.3 0.1
Data processing and communications........................ 0.1 - 0.1 -
Office supplies and expenses.............................. 0.2 0.2 0.9 0.3
Professional fees......................................... 0.2 - 0.5 0.1
Other..................................................... 0.8 0.9 2.5 1.0
------ ------- ------- ------
Total expenses....................................... 2.2 2.0 6.8 2.4
------ ------- ------- ------
Net loss before income benefit............................ (1.2) (8.3) (28.6) (8.1)
Income tax benefit........................................ (0.8) (3.4) (11.7) (3.4)
------ ------- ------- ------
Net loss.................................................. $ (0.4) $ (4.9) $ (16.9) $ (4.7)
====== ======= ======= ======
-17-
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2002
Loan Production Segment
REVENUES
The Loan Production Segment total revenues for the quarter ended September 30,
2003, were $121.0 million compared to $79.9 million in 2002, an increase of
$41.1 million, or 51.2%. The increase was a result of increases in gain on sales
of mortgage loans, net interest income and other income.
Gain on sales of mortgage loans increased to $105.6 million for the third
quarter of 2003 from $71.2 million for the third quarter of 2002, an increase of
$34.4 million, or 48.3%. 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 the
Principal Branches and the American Mortgage Branches.
Interest income, net, increased to $14.0 million for the third quarter of 2003
from $7.8 million for the third quarter of 2002, an increase of $6.2 million, or
78.6%. 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 $1.4 million for the third quarter of 2003 compared to
$0.9 million for the third quarter of 2002, an increase of $0.5 million, or
49.3%. For the quarter ended September 30, 2003, other income primarily consists
of revenue from title services. For the quarter ended September 30, 2002, other
income primarily consists of volume incentive bonuses received from loan
purchasers.
EXPENSES
Salaries, commissions and benefits increased to $61.9 million for the third
quarter of 2003 from $34.2 million for the third quarter of 2002, an increase of
$27.7 million, or 81.1%. The increase was largely due to 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 $7.2 million for the third quarter
of 2003 from $4.6 million for the third quarter of 2002, an increase of $2.6
million, or 55.1%. The increase in costs reflects the inclusion of expenses of
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 $3.7 million for the third
quarter of 2003 from $2.3 million for the third quarter of 2002, an increase of
$1.4 million, or 59.3%. The increase was a result of the opening of new
community loan offices and the inclusion of expenses of the Principal Branches
and the American Mortgage Branches.
Office supplies and expenses increased to $3.4 million for the third quarter of
2003 from $1.7 million for the third quarter of 2002, an increase of $1.7
million, or 93.0%. The increase was a result of the opening of new community
loan offices and the inclusion of expenses of the Principal Branches and the
American Mortgage Branches.
Marketing and promotion expenses increased to $3.2 million for the third quarter
of 2003 from $1.8 million for the third quarter of 2002, an increase of $1.4
million, or 74.0%. The increase was primarily due to increased loan volume and
an increase in promotional expenses attributable to the acquisition of the
Principal Branches.
-18-
Travel and entertainment expenses increased to $3.1 million for the third
quarter of 2003 from $1.3 million for the third quarter of 2002, an increase of
$1.8 million, or 137.8%. This increase was primarily due to the addition of new
loan originators due to the acquisition of the Principal Branches and the
American Mortgage Branches.
Professional fees increased to $2.1 million for the third quarter of 2003 from
$1.5 million for the third quarter of 2002, an increase of $0.6 million, or
45.6%. This increase was primarily due to the growth of the Company's business.
Other expenses increased to $4.2 million for the third quarter of 2003 from $2.6
million for the third quarter of 2002, an increase of $1.6 million, or 64.4%.
Insurance, indemnification and foreclosure costs, outside services, storage and
moving expenses and licenses and permits increased as a result of the opening of
new community offices and higher loan production.
Income taxes increased to $12.9 million for the third quarter of 2003 from $11.9
million for the third quarter of 2002, an increase of $1.0 million, or 8.2%.
Loan Servicing Segment
The Loan Servicing Segment's total revenues for the quarter ended September 30,
2003, were $1.0 million, which included net loan servicing fees of $2.6 million
and interest expense, net, of $1.6 million, compared to a loss of $6.3 million
for the third quarter of 2002.
Net loan servicing fees were $2.6 million for the third quarter of 2003 compared
to a loss of $5.2 million for the third quarter of 2002. The net loan servicing
fees for the third quarter of 2003 included amortization of $14.9 million and a
temporary impairment recovery of $7.8 million, decreasing the impairment reserve
to $14.6 million at September 30, 2003 from $22.4 million at June 30, 2003. The
impairment recovery is due to an increase in the fair value of servicing rights
attributable to a decrease in estimated future prepayment speeds. The
amortization of $14.9 million is a result of slower 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 decreased to $0.8 million for the third quarter of 2003 from
$3.4 million for the third quarter of 2002, a decrease of $2.6 million, or
77.6%.
-19-
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2002
Loan Production Segment
REVENUES
The Loan Production Segment total revenues for the nine months ended September
30, 2003, were $367.8 million compared to $153.8 million for the same period in
2002, an increase of $214.0 million, or 139.1%. The increase was a result of
increases in gain on sales of mortgage loans, net interest income and other
income.
Gain on sales of mortgage loans increased to $323.1 million for the nine months
ended September 30, 2003 from $137.0 million for the same period in 2002, an
increase of $186.1 million, or 135.9%. 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 $39.1 million for the nine months ended
September 30, 2003 from $14.9 million for the same period in 2002, an increase
of $24.2 million, or 162.6%. 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 $5.6 million for the nine months ended September 30, 2003
compared to $1.9 million for the same period in 2002, an increase of $3.7
million, or 186.3%. For the nine months ended September 30, 2003, other income
primarily includes 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 nine months ended
September 30, 2002, other income primarily consists of volume incentive bonuses
received from loan purchasers.
EXPENSES
Salaries, commissions and benefits increased to $159.0 million for the nine
months ended September 30, 2003 from $67.0 million for the same period in 2002,
an increase of $92.0 million, or 137.4%. 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 $19.3 million for the nine months
ended September 30, 2003 from $10.4 million for the same period in 2002, an
increase of $8.9 million, or 85.6%. 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 $9.5 million for the nine
months ended September 30, 2003 from $5.4 million for the same period in 2002,
an increase of $4.1 million, or 75.4%. 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 $9.6 million for the nine months ended
September 30, 2003 from $4.0 million for the same period in 2002, an increase of
$5.6 million, or 137.1%. The increase was a result of the
-20-
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 $8.8 million for the nine months
ended September 30, 2003 from $5.4 million for the same period in 2002, an
increase of $3.4 million, or 63.1%. 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 $8.0 million for the nine months
ended September 30, 2003 from $2.9 million for the same period in 2002, an
increase of $5.1 million, or 174.8%. 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 $5.3 million for the nine months ended September
30, 2003 from $3.3 million for the same period in 2002, an increase of $2.0
million, or 60.8%. This increase was primarily due to the inclusion of expenses
of Columbia and the growth of the Company's business.
Other expenses increased to $13.8 million for the nine months ended September
30, 2003 from $4.9 million for the same period in 2002, an increase of $8.9
million, or 183.9%. 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 $54.8 million for the nine months ended September 30,
2003 from $19.2 million for the same period in 2002, an increase of $35.6
million, or 185.5%.
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 nine months ended September
30, 2003, were a loss of $21.8 million, which included a net loan servicing fees
loss of $16.5 million and interest expense, net, of $5.3 million, compared to a
loss of $5.7 million for the same period in 2002.
Net loan servicing fees was a loss of $16.5 million for the nine months ended
September 30, 2003 compared to a loss of $4.5 million for the same period in
2002. The servicing losses in the nine months ended September 30, 2003 were 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 nine months ended September 30, 2003 resulted primarily from amortization of
$44.9 million and an additional temporary impairment provision of $4.4 million,
increasing the impairment reserve to $14.6 million at September 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 $44.9 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 increased $8.3 million to $11.7 million for the nine months
ended September 30, 2003 from $3.4 million for the same period in 2002.
-21-
LIQUIDITY AND CAPITAL RESOURCES
To originate a mortgage loan, the Company draws against a $630 million
pre-purchase facility with UBS Paine Webber ("Paine Webber"), a $450 million
bank syndicated facility led by Residential Funding Corporation ("RFC"), a $450
million facility with CDC IXIS Capital Markets North America Inc. ("CDC"), a
facility of $350 million with Morgan Stanley Bank ("Morgan Stanley") and a
facility of $200 million with Credit Lyonnais. 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.
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 September 30, 2003, the Company's aggregate warehouse facility borrowings
were $1.5 billion (including $24.5 million of borrowings under a working capital
sub-limit) and its outstanding drafts payable were $49.0 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 September 30, 2003, the aggregate amount
available for additional borrowings under the warehouse facilities was $550
million. At September 30, 2003, the Company's loans held for sale were $1.7
billion compared to $811.2 million at December 31, 2002.
In addition to the Paine Webber, CDC, RFC, Morgan Stanley and Credit Lyonnais
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 September 30,
2003 and December 31, 2002 were $566 million and $801 million, respectively. At
September 30, 2003, the amount
-22-
unused and available under these agreements was $304 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. 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 $100 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 September 30, 2003
and December 31, 2002, borrowings under the Company's term loan were $64.6
million and $66.0 million, respectively.
Cash and cash equivalents increased to $49.6 million at September 30, 2003,
from $24.4 million at December 31, 2002.
The Company's primary sources of cash and cash equivalents during the nine
months ended September 30, 2003, were as follows:
o $801.6 million increase in warehouse lines of credit;
o $ 23.7 million increase in income taxes payable; and
o $ 6.4 million increase in drafts payable.
The Company's primary uses of cash and cash equivalents during the nine
months ended September 30, 2003, were as follows:
o $ 856.3 million net increase in mortgage loans held for sale;
o $ 8.1 million to purchase furniture, and office and computer
equipment; and
o $ 6.3 million increase in accounts receivable.
Commitments
The Company had the following commitments (excluding derivative financial
instruments) at September 30, 2003:
Less Than After
Total 1 Year 1 - 3 Years 4 - 5 Years 5 Years
---------- ---------- ----------- ----------- ---------
(in thousands)
Warehouse facilities......... $1,530,110 $1,530,110 $ - $ - $ -
Operating leases............. 13,223 5,692 6,964 567 -
Notes payable................ 66,430 65,240 314 191 685
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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," "may," "seek,"
"projection," "forecast," "goal" or similar words, or the negatives of those
words, are intended to identify forward-looking statements. Such statements
involve known and unknown risks and uncertainties that exist in the Company's
operations and business environment that could render actual outcomes and
results materially different than predicted. Specific factors that may cause
such a difference include, but are 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; changes
in government regulations that are applicable to the mortgage banking business;
potential fluctuations in the Company's operating results; and those risks and
uncertainties discussed in filings made by the Company with the Securities and
Exchange Commission. 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.
-24-
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:
September 30, 2003 December 31, 2002
Notional Notional
Amount Fair Value Amount Fair Value
-------------------------------------------------------------
(in thousands)
Interest rate lock commitments.......... $1,529,298 $35,269 $1,644,701 $29,346
Loans held for sale..................... 1,637,103 1,677,547 788,191 815,050
Mortgage servicing rights............... 7,785,171 103,021 8,541,790 109,023
Forward delivery commitments............ 2,085,719 (17,437) 1,763,450 (9,070)
Option contracts to buy securities...... -- -- 150,000 725
The Company had total commitments to lend of $5.2 billion at September 30, 2003.
-25-
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.
-26-
PART II-OTHER INFORMATION
ITEM 2.
CHANGES IN SECURITIES AND USE OF PROCEEDS
The following is a description of the Company's securities that were not
registered under the Securities Act of 1933, as amended (the "Securities Act"),
which were sold during the quarter ended September 30, 2003.
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 July 1, 2003, pursuant to these earnout
provisions, the Company issued an aggregate of 3,998 shares of common stock to
such shareholders as additional consideration. In addition, on August 15, 2003,
the Company issued 9,172 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 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 2.1 Agreement and Plan of Merger, dated as of July 12, 2003,
by and among the Company, American Home Mortgage
Investment Corp. (formerly called AHM New Holdco, Inc.)
and Apex Mortgage Capital, Inc.
Exhibit 2.2 Agreement and Plan of Reorganization, dated as of
September 11, 2003, by and among the Company, American
Home Mortgage Investment Corp. and AHM Merger Sub, Inc.
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.
-27-
(b) Reports on Form 8-K.
During the fiscal quarter ended September 30, 2003, the Company filed a Current
Report on Form 8-K on each of July 14, 2003 and September 10, 2003. The Current
Report on Form 8-K filed on July 14, 2003, reported that on July 12, 2003, the
Company entered into a definitive agreement and plan of merger to purchase Apex
Mortgage Capital, Inc. The Current Report on Form 8-K filed on September 10,
2003, reported that on September 10, 2003, the Company announced that it had
hired approximately 325 employees that formerly worked for Capitol Commerce
Mortgage of Sacramento, California, and that the Company had hired Al Cristanty
as its Senior Vice President, Wholesale Originations.
-28-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN HOME MORTGAGE HOLDINGS, INC.
(Registrant)
Date: November 14, 2003 By: /s/ Michael Strauss
----------------------------------
Michael Strauss
Chief Executive Officer
and President
Date: November 14, 2003 By: /s/ Stephen A. Hozie
----------------------------------
Stephen A. Hozie
Chief Financial Officer
-29-
INDEX TO EXHIBITS
-----------------
Exhibit No. Description
----------- -----------
2.1 -- Agreement and Plan of Merger, dated as of July 12,
2003, by and among the Company, American Home
Mortgage Investment Corp. (formerly called AHM New
Holdco, Inc.) and Apex Mortgage Capital, Inc.*
2.2 -- Agreement and Plan of Reorganization, dated as of
September 11, 2003, by and among the Company,
American Home Mortgage Investment Corp. and AHM
Merger Sub, Inc.**
31.1 -- Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 -- Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 -- Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 -- Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- -------------------------------------
All nonmarked Exhibits listed above are filed herewith.
* Incorporated by reference to Exhibit 2.1 to the Form 8-K (file no.
000-27081) filed with the Securities and Exchange Commission on July 14,
2003.
** Incorporated by reference to Annex B to the Definitive Proxy Statement on
Schedule 14A (file no. 000-27081) filed with the Securities and Exchange
Commission on October 29, 2003.