-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PWdFqsXsa75u/GJeE9L2uSivOFElhhQWtI+RT40iLAg7JBQerkUpRhQ4MdFyCMFM 9gXb09r5aVIwZkem1cDMbg== 0001095811-00-001404.txt : 20000515 0001095811-00-001404.hdr.sgml : 20000515 ACCESSION NUMBER: 0001095811-00-001404 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN RESIDENTIAL INVESTMENT TRUST INC CENTRAL INDEX KEY: 0001035744 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 330741174 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13485 FILM NUMBER: 628211 BUSINESS ADDRESS: STREET 1: 445 MARINE VIEW AVE SUITE 230 STREET 2: STE 260 CITY: DEL MAR STATE: CA ZIP: 92014 BUSINESS PHONE: 6193505008 MAIL ADDRESS: STREET 1: 445 MARINE VIEW AVE SUITE 230 CITY: DEL MAR STATE: CA ZIP: 92014 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 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: March 31, 2000 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: 1-13485 AMERICAN RESIDENTIAL INVESTMENT TRUST, INC. (Exact name of registrant as specified in its charter) Maryland 33-0741174 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 445 Marine View Avenue, Suite 230 Del Mar, California 92014 (Address of principal executive offices) (Zip Code) (858) 350-5000 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) 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. [X] YES [ ] NO Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock ($0.01) 8,055,500 as of April 10, 2000 2 INDEX
Page ---- PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets at March 31, 2000 and December 31, 1999 1 Consolidated Statements of Operations and Comprehensive Income for the quarters ended March 31, 2000 and March 31, 1999 2 Consolidated Statements of Cash Flows for the quarters ended March 31, 2000 and March 31, 1999 3 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities and Use of Proceeds 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14
3 PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements American Residential Investment Trust, Inc. and Subsidiaries Consolidated Balance Sheets (in thousands, except share and per share data) ASSETS
March 31, 2000 December 31, 1999 -------------- ----------------- (unaudited) Cash and cash equivalents $ 14,173 $ 8,550 Mortgage loans held-for-investment, net, pledged 60,340 126,216 Bond collateral, mortgage loans, net 1,051,117 1,153,731 Bond collateral, real estate owned 6,005 5,187 Retained interest in securitization 5,770 6,610 Interest rate cap agreements 1,369 1,556 Accrued interest receivable, net 8,368 9,665 Due from affiliate 694 394 Investment in American Residential Holdings, Inc. 881 881 Other assets 311 552 ----------- ----------- $ 1,149,028 $ 1,313,342 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Short-term debt $ 63,139 $ 119,003 Long-term debt, net 996,005 1,103,258 Accrued interest payable 692 619 Due to affiliate 625 597 Accrued expenses and other liabilities 88 176 Management fees payable 722 418 Accrued dividends -- 2,417 ----------- ----------- Total liabilities 1,061,271 1,226,488 Stockholders' Equity: Preferred stock, par value $0.01 per share; 1,000 shares authorized; no shares issued and outstanding -- -- Common stock, par value $0.01 per share; 25,000,000 shares authorized; 8,055,500 shares issued and outstanding 81 81 Additional paid-in-capital 109,271 109,271 Accumulated other comprehensive loss (3,100) (2,500) Accumulated deficit (18,495) (19,998) ----------- ----------- Total stockholders' equity 87,757 86,854 ----------- ----------- $ 1,149,028 $ 1,313,342 =========== ===========
See accompanying notes to consolidated financial statements. 1 4 American Residential Investment Trust, Inc. and Subsidiaries Consolidated Statements of Operations and Comprehensive Income, unaudited (in thousands, except per share data)
For the For the Quarter ended Quarter ended March 31, 2000 March 31, 1999 -------------- -------------- Interest income: Mortgage assets $ 25,029 $ 14,384 Cash and cash equivalents and investments 180 400 Interest rate cap and floor agreement expense (139) (598) -------- -------- Total interest income 25,070 14,186 Interest expense 18,856 8,043 -------- -------- Net interest spread 6,214 6,143 Premium amortization 3,438 3,715 -------- -------- Net interest income 2,776 2,428 Provision for loan losses 402 950 -------- -------- Net interest income after provision for loan losses 2,374 1,478 -------- -------- Other operating income: Management fee income 111 102 Equity in income of American Residential Holdings, Inc. -- 104 Prepayment penalty income 936 720 -------- -------- Total other operating income 1,047 926 -------- -------- Net operating income 3,421 2,404 Other expenses: Loss on sale of real estate owned, net 298 -- Management fees 1,093 632 General and administrative expenses 527 158 -------- -------- Total other expenses 1,918 790 -------- -------- Net income 1,503 1,614 -------- -------- Other comprehensive income Unrealized holding gains (losses) (600) 42 -------- -------- Unrealized holding gains (losses) arising during the period (600) 42 -------- -------- Comprehensive income $ 903 $ 1,656 ======== ======== Net income per share of common stock-basic and diluted $ 0.19 $ 0.20 Dividends per share of common stock for the related period $ 0.20 $ 0.20
See accompanying notes to consolidated financial statements. 2 5 American Residential Investment Trust, Inc. and Subsidiaries Consolidated Statements of Cash Flows, unaudited (in thousands)
For The For The Quarter Ended Quarter Ended March 31, 2000 March 31, 1999 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,503 $ 1,614 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of mortgage assets premiums 3,438 3,715 Amortization of interest rate cap agreements 178 184 Amortization of CMO capitalized costs 193 35 Amortization of CMO premium (39) (40) Provision for loan losses 402 950 Equity in income of American Residential Holdings, Inc. -- (104) (Increase) decrease in deposits to over-collateralization account 240 (847) Loss on sale of real estate owned 298 -- (Increase) decrease in accrued interest receivable 1,708 (299) (Increase) decrease in other assets 241 (274) Increase in due from affiliate (300) (567) Increase in accrued interest payable 73 247 Increase in accrued expenses and management fees payable 216 565 Increase (decrease) in due to affiliate 28 (12) --------- -------- Net cash provided by operating activities 8,179 5,167 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of mortgage loans held-for-investment (622) (77,522) Sale of mortgage loans held-for-investment 65,570 -- Purchase of interest rate cap agreements 9 -- Principal payments on mortgage securities available-for-sale -- 2,811 Principal payments on mortgage loans held-for-investment 1,059 6,798 Principal payments on bond collateral 95,451 44,477 Proceeds from sale of real estate owned 1,665 -- --------- -------- Net cash provided by (used in) investing activities 163,132 (23,436) CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in net borrowings from short-term debt (55,864) 64,385 Increase in capitalized costs -- (21) Dividends paid (2,417) (1,208) Payments on long-term debt (107,407) (44,674) --------- -------- Net cash provided by (used in) financing activities (165,688) 18,482 Net increase in cash and cash equivalents 5,623 213 Cash and cash equivalents at beginning of period 8,550 34,645 --------- -------- Cash and cash equivalents at end of period $ 14,173 $ 34,858 ========= ========
3 6 American Residential Investment Trust, Inc. and Subsidiaries Consolidated Statements of Cash Flows, unaudited (in thousands)
For the For the Quarter Ended Quarter Ended March 31, 2000 March 31, 1999 -------------- -------------- Supplemental information - interest paid $ 18,984 $ 7,826 ========= ======== Non-cash transactions: Transfers from bond collateral to real estate owned $ 3,192 $ 2,470 ========= ========
See accompanying notes to consolidated financial statements. 4 7 AMERICAN RESIDENTIAL INVESTMENT TRUST, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES Basis of Financial Statement Presentation The interim financial statements included herein have been prepared by American Residential Investment Trust, Inc., ("AmRIT") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such SEC rules and regulations. These financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's latest Annual Report. In the opinion of management, all adjustments, including normal recurring adjustments necessary to present fairly the consolidated financial position of the Company with respect to the interim financial statements and the results of the operations for the interim period ended March 31, 2000, have been included. Certain reclassifications may have been made to interim period amounts to conform to the current presentation. The results of operations for interim periods are not necessarily indicative of results for the full year. NOTE 2. INCOME PER SHARE The following table illustrates the computation of basic and diluted earnings per share (in thousands, except share and per share data):
For the For the Quarter ended Quarter ended March 31, 2000 March 31, 1999 -------------- -------------- Numerator: Numerator for basic income per share net earnings $ 1,503 $ 1,614 Denominator: Denominator for basic income per share - weighted average number of common shares outstanding during the period 8,055,500 8,055,500 Incremental common shares attributable to exercise of outstanding options -- 273 --------- ---------- Denominator for diluted income per share 8,055,500 8,055,773 Basic and diluted income per share $ 0.19 $ 0.20
At March 31, 2000 and 1999 there were 1,021,100 and 695,627, respectively, of options that were antidilutive and, therefore, not included in the calculation above. 5 8 NOTE 3. MORTGAGE LOANS HELD FOR INVESTMENT, NET, PLEDGED At March 31, 2000 and December 31, 1999, mortgage loans held for investment consisted of the following (dollars in thousands):
2000 1999 ---- ---- Mortgage loans held-for-investment, principal $ 58,217 $ 122,036 Unamortized premium 2,133 4,343 Allowance for loan losses (10) (163) -------- --------- $ 60,340 $ 126,216 ======== =========
On January 28, 2000, the Company sold $66.0 million in mortgage loans held-for-investment back to the originator that sold these loans to the Company during the fourth quarter of 1999. Certain irregularities were discovered during the Company's routine post-funding quality control review related to underwriting compliance and loan documents. The buyback was pursuant to certain representations and warranty obligations of the originator related to underwriting criteria and regulatory compliance. NOTE 4. BOND COLLATERAL, MORTGAGE LOANS AmRIT has pledged mortgage loans as collateral in order to secure long-term-debt. Bond collateral consists primarily of adjustable-rate, conventional, 30-year mortgage loans secured by first liens on one- to four-family residential properties. All bond collateral is pledged to secure repayment of the related long-term-debt obligation. All principal and interest (less servicing and related fees) on the bond collateral is remitted to a trustee and is available for payment on the long-term-debt obligation. The obligations under the long-term-debt are payable solely from the bond collateral and are otherwise non-recourse to AmRIT. The components of the bond collateral at March 31, 2000 and December 31, 1999 are summarized as follows (dollars in thousands):
CMO/REMIC CMO CMO CMO/FASIT 1999-A 1999-2 1999-1 1998-1 TOTAL SECURITIZATION SECURITIZATION SECURITIZATION SECURITIZATION BOND COLLATERAL -------------- -------------- -------------- -------------- --------------- AT MARCH 31, 2000 Mortgage loans $ 303,300 $ 371,008 $ 186,365 $ 156,766 $ 1,017,439 Unamoritized premium 11,594 13,737 7,989 4,674 37,994 Allowance for loan losses (296) (221) (1,710) (2,089) (4,316) --------- --------- --------- --------- ----------- $ 314,598 $ 384,524 $ 192,644 $ 159,351 $ 1,051,117 ========= ========= ========= ========= =========== Weighted average net coupon 9.43% 9.01% 9.01% 10.64% 9.39% Unamortized premiums as a percent of mortgage loans 3.82% 3.70% 4.29% 2.98% 3.73% AT DECEMBER 31, 1999 Mortgage loans $ 319,606 $ 385,795 $ 200,884 $ 210,584 $ 1,116,869 Unamoritized premium 12,227 14,284 8,622 6,279 41,412 Allowance for loan losses (298) (332) (1,443) (2,477) (4,550) --------- --------- --------- --------- ----------- $ 331,535 $ 399,747 $ 208,063 $ 214,386 $ 1,153,731 ========= ========= ========= ========= =========== Weighted average net coupon 9.39% 9.03% 8.91% 10.15% 9.32% Unamortized premiums as a percent of mortgage loans 3.83% 3.70% 4.29% 2.98% 3.71%
6 9 At March 31, 2000 and December 31, 1999, approximately 33% and 38%, respectively of the collateral was located in California for the CMO/FASIT 1998-1 and no other state represented more than 7% and 8%, respectively. At March 31, 2000 and December 31, 1999, approximately 38% of the collateral was located in California for the CMO 1999-1 and no other state represented more than 6% and 7%, respectively. At March 31, 2000 and December 31, 1999, approximately 21% of the collateral was located in California for the CMO 1999-2 and no other state represented more than 7%. At March 31, 2000 and December 31, 1999, approximately 12% and 13%, respectively of the collateral was located in Michigan for the CMO/REMIC 1999-A and no other state represented more than 10%. Impaired loans included in the Company's bond collateral, mortgage loans as of March 31, 2000 and December 31, 1999 were approximately $47.1 million and $37.5 million, respectively. At March 31, 2000 and December 31, 1999, the allowance related to these loans was approximately $4.3 million and $4.6 million, respectively. NOTE 5. BOND COLLATERAL, REAL ESTATE OWNED The Company owned 83 properties and 68 properties as of March 31, 2000 and December 31, 1999, respectively. Upon transfer of the loans to real estate owned, the Company recorded a corresponding charge against the allowance for loan losses to write-down the real estate owned to fair value less estimated cost of disposal. At March 31, 2000 and December 31, 1999 real estate owned totaled approximately $6.0 million and $5.2 million, respectively. NOTE 6. INTEREST RATE CAP AGREEMENTS The amortized cost of the Company's interest rate agreements was $1.4 million net of accumulated amortization of $1.3 million, and $1.6 million net of accumulated amortization of $1.1 million at March 31, 2000 and December 31, 1999, respectively. NOTE 7. SHORT-TERM DEBT At March 31, 2000 and December 31, 1999, the Company had approximately $57.2 million and $119.0 million, respectively of mortgage loans reverse repurchase agreements outstanding with a weighted average borrowing rate of 6.64% and 6.05%, respectively. The highest month end balance and the average balance outstanding for the quarter ended March 31, 2000 were approximately $57.6 million and $57.3 million, respectively. The highest month end balance and the average balance outstanding during the quarter ended December 31, 1999 were approximately $119.0 million and $50.5 million, respectively. The remaining maturity was one day for both 2000 and 1999. At March 31, 2000 and December 31, 1999, the mortgage loans reverse repurchase agreements had the following characteristics (dollars in thousands): 7 10
March 31, 2000 ------------------------------------------------ Repurchase Underlying Interest Rate Liability Collateral (per annum) ---------- ---------- ------------ Bear Stearns $ 57,216 $ 58,217 6.64% -------- -------- ---- $ 57,216 $ 58,217 6.64% ======== ======== ====
December 31, 1999 ------------------------------------------------ Repurchase Underlying Interest Rate Liability Collateral (per annum) ---------- ---------- ------------ Bear Stearns $ 119,003 $ 122,017 6.05% --------- --------- ---- $ 119,003 $ 122,017 6.05% ========= ========= ====
Additionally, in conjunction with the 1999-A securitization, Eagle 2 received additional financing from Greenwich Capital Financial Products, Inc. ("GCFP"). The financing agreement was entered into on August 26, 1999 with a maturity date of February 26, 2001. AmRIT has guaranteed the payment and performance when due of all obligations of Eagle 2 to GCFP under the financing agreement. The Investor Certificate for 1999-A is pledged as collateral for this debt. At March 31, 2000, the balance of the short-term debt was approximately $5.9 million. At December 31, 1999, additional financing from GCFP was approximately $6.1 million and classified as long-term debt. NOTE 8. LONG-TERM DEBT, NET The components of the long-term-debt at March 31, 2000 and December 31, 1999, along with selected other information are summarized below (dollars in thousands):
CMO/REMIC CMO CMO CMO/FASIT 1999-A 1999-2 1999-1 1998-1 TOTAL SECURITIZATION SECURITIZATION SECURITIZATION SECURITIZATION BOND COLLATERAL -------------- -------------- -------------- -------------- --------------- AT MARCH 31, 2000 Long-Term debt $ 298,917 $ 361,637 $ 184,184 $ 154,213 $ 998,951 CMO premium, net -- -- -- 198 198 Capitalized costs on long-term debt (29) (1,616) (1,209) (290) (3,144) --------- --------- --------- --------- ----------- Total Long-Term debt $ 298,888 $ 360,021 $ 182,975 $ 154,121 $ 996,005 ========= ========= ========= ========= =========== Weighted average financing rates 5.95% 6.36% 6.23% 6.35% 6.21% AT DECEMBER 31, 1999 Long-Term debt $ 317,057 $ 376,855 $ 198,228 $ 208,120 $ 1,100,260 CMO premium, net -- -- -- 237 237 Capitalized costs on long-term debt (30) (1,679) (1,299) (329) (3,337) --------- --------- --------- --------- ----------- Total Long-Term debt $ 317,027 $ 375,176 $ 196,929 $ 208,028 $ 1,097,160 ========= ========= ========= ========= =========== Weighted average financing rates 5.57% 6.11% 5.94% 5.98% 5.90%
NOTE 9. SUBSEQUENT EVENTS On April 20, 2000, the Company declared a $0.20 per share dividend payable on May 10, 2000 to shareholders of record as of May 3, 2000. 8 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The statements contained in this Form 10-Q that are not purely historical are forward looking statements, including statements regarding the Company's expectations, hopes, beliefs, intentions, or strategies regarding the future. Statements which use the words "expects", "will", "may", "anticipates", "seeks" and derivatives of such words are forward looking statements. These forward looking statements, including statements regarding changes in the Company's future income, mortgage asset portfolio, financings, ways the Company may seek to grow income, the Company's belief regarding future prepayment rates and the effect on the Company's operations of changes in interest rates are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward looking statement. It is important to note that the Company's actual results could differ materially from those in such forward looking statements. Among the factors that could cause actual results to differ materially are the factors set forth under item 1 under the heading "Business Risks". In particular, the Company's future income could be affected by interest rate increases, high levels of prepayments, mortgage loan defaults, reductions in the value of retained interest in securitizations, and inability to acquire or finance new mortgage assets. OVERVIEW The Company's revenue primarily consists of interest income generated from its mortgage assets and its cash and investment balances (collectively, "earning assets"), management fees, and prepayment penalty income and income. The Company funds its acquisitions of earning assets with both its equity capital and with borrowings. For that portion of the Company's earning assets funded with equity capital ("equity-funded lending"), net interest income is derived from the average yield on earning assets. Due to the adjustable-rate nature of the majority of its earning assets, the Company expects that income from this source will tend to increase as interest rates rise and will tend to decrease as interest rates fall, but only after the expiration of any initial fixed teaser periods and then only periodically once or twice each year. For that portion of the Company's earning assets funded with borrowings ("spread lending"), the resulting net interest income is a function of the volume of spread lending and the difference between the Company's average yield on earning assets and the cost of borrowed funds. Income from spread lending will decrease following an increase in short term interest rates due to increases in borrowing costs but a lag in adjustments to the earning asset yields. Yields on adjustable rate loans generally adjust based on a short term interest rate index, but the majority of the Company's earning assets are adjustable rate loans which are subject to an initial fixed teaser period of two years, and then adjust periodically every six months. Income from spread lending will generally increase following a decrease in short-term interest rates due to decreases in borrowing costs but a lag in adjustments to the earning asset yields. The Company purchases interest rate cap agreements to partially offset the impacts of significant increases in short-term interest rates and the loss of spread income which occurs when borrowing rates (which generally adjust monthly) increase more than earning asset yields (which generally adjust only after the expiration of any fixed teaser periods and then only periodically, once or twice a year). The Company's primary expenses, beside its borrowing costs, are amortization of loan purchase premiums, provision for loan losses, management and administrative expenses and interest rate cap and floor agreement expenses. Premiums are amortized over their estimated lives using the interest method. Management fees and administrative costs are generally based on the size of the earning asset portfolio, and to a lesser degree, the level of loan purchase activity. Interest rate cap and floor agreement costs are based on size of the portfolio subject to gap risk and the market prices for interest rate cap agreements. The Company may seek to generate growth in net income in a variety of ways, including through (i) improving productivity by increasing the size of the earning assets , (ii) changing the mix of mortgage asset types among the earning assets and lowering premiums paid in an effort to improve returns and reduce the 9 12 Company's sensitivity to prepayments, (issuing new common stock and increasing the size of the earning assets, and (iii) increasing the efficiency with which the Company uses its equity capital over time by maintaining the Company's use of debt when prudent and by issuing subordinated debt, preferred stock or other forms of debt and equity. There can be no assurance, however, that the Company's efforts will be successful or that the Company will increase or maintain its income level. Results of Operations For the quarter ended March 31, 2000, the Company generated net income of approximately $1.5 million and net income per share of common stock diluted of $0.19 compared to the quarter ended March 31, 1999 when the Company generated net income of approximately $1.6 million and net income per share of common stock diluted of $0.20. The growth in mortgage asset interest income of $10.6 million to approximately $25.1 million for the quarter ended March 31, 2000 from approximately $14.4 million for the quarter ended March 31, 1999 was primarily due to an increase in the Company's mortgage assets held during the period, and higher asset yields due to a change in the composition of mortgage assets. The increase in mortgage asset interest income was offset by an increase of $10.8 million in interest expense to approximately $18.9 million for the quarter ended March 31, 2000 from approximately $8.0 million for the quarter ended March 31, 1999. Interest expense was higher between the quarters ended March 31, 2000 and 1999 due to the larger base of mortgage assets held by the Company and an increase in borrowing rates. A majority of the Company's borrowing rates are based upon a spread over the one-month London InterBank Offered Rate ("LIBOR"). LIBOR rates have steadily increased over the last several months. These increases have closely corresponded to increases in the Federal Funds rate as set by the Federal Open Market Committee headed by Alan Greenspan. Based upon current market sentiment, the Company expects its borrowing costs will continue to increase. Net interest income increased $348,000 to approximately $2.8 million for the quarter ended March 31, 2000 from approximately $2.4 million for the quarter ended March 31, 1999 due to the increase in net interest spread and the decrease in premium amortization. Premium amortization expense represents the amortization of purchase premiums paid for mortgage loans acquired in excess of the par value of the loans. Actual repayment rates (the amount of principal repayments during a period compared to the beginning principal balance) are applied to the remaining unamortized premium to calculate amortization expense. Premium amortization expense was approximately $3.4 million for the quarter ended March 31, 2000 and approximately $3.7 million for the quarter ended March 31, 1999. Lower premium amortization expense is due to a reduction in the unamortized premium on the CMO/FASIT 1998-1 portfolio ($1.6 million for the quarter ended March 31, 2000, compared to $3.3 million for the quarter ended March 31, 1999), offset by higher amortization associated with the growth in the size of the portfolio during the second half of 1999. The following chart represents constant repayment rates ("CPRs"):
CPR Rates March 31, 2000 --------------------- Three Lifetime Months -------- ------ Bond collateral: CMO/FASIT 1998-1 42.3% 61.9% COM 1999-1 23.9% 33.9% CMO 1999-2 13.3% 13.0% CMO/REMIC 1999-A 16.5% 20.8%
At March 31, 2000, unamortized premiums as a percentage of the remaining principal amount of bond collateral, mortgage loans were 3.73%, as compared to 3.71% at December 31, 1999 and 8.31% at March 31, 1999. The chart below provides a breakdown of prepayment coverage and the weighted average months remaining until the next interest rate adjustment for each segment of the mortgage loan portfolio: 10 13
As of March 31, 2000 (dollars in thousands) ----------------------------------------------------------------------- Percentage Weighted Average Weighted Average of Loans with Months Remaining Months Until Principal Prepayment on Prepayment Initial Interest Balance Penalties Coverage* Rate Adjustment ---------- ------------- ---------------- ---------------- Mortgage Loans Held- for-Investment $ 58,217 83% 29 24 ========== ===== ======= ======== Bond Collateral, Mortgage Loans: CMO/FASIT 1998-1 $ 156,766 29% 15 0 COM 1999-1 186,365 72 15 7 CMO 1999-2 371,008 85 24 15 CMO/REMIC 1999-A 303,300 80 21 15 ---------- ----- ------- -------- $1,017,439 72% 20 11 ========== ===== ======= ========
- --------------------- * Prepayment coverage is the number of months remaining before the prepayment clause in the mortgage loan contracts expire and borrowers may prepay the loan without prepayment penalty charges. Most of the intermediate adjustable rate mortgages in the CMO/FASIT segment of the bond collateral portfolio have reached their first contractual interest rate adjustment (increase) and prepayment penalties on these loans have expired, resulting in a higher probability of refinancing and principal prepayments. The Company anticipates that prepayment rates on the newer mortgage loans will increase as these predominately adjustable rate loans reach their initial adjustments or when prepayment penalty clauses expire. There can be no assurance that the Company will be able to achieve or maintain lower prepayment rates, and related premium amortization, or that prepayment rates will not increase. Net interest income, after provision for loan losses, increased $896,000 from approximately $1.5 million in income for the quarter March 31, 1999 to approximately $2.4 million for the quarter ended March 31, 2000 due primarily to lower premium amortization. During the quarter ended March 31, 2000, other operating income increased approximately $121,000 over the quarter ended March 31, 1999, primarily due an increase of $216,000 in prepayment penalty income due to an increase in the size of the mortgage loan portfolio and the proportion of loans with prepayment penalties. This increase was offset by a decrease in equity in income of American Residential Holdings, Inc. of approximately $104,000. For the quarter ended March 31, 2000, other expenses increased approximately $830,000 (excluding the loss on sale of real estate owned of approximately $298,000 for the quarter ended March 31, 2000) over the quarter ended March 31, 1999. Management fees increased approximately $461,000 as a result of an increase in the size of mortgage assets. General and administrative expenses increased approximately $369,000 from the quarter ended March 31, 1999 to quarter ended March 31, 2000. Liquidity and Capital Resources During the quarter ended March 31, 2000, net cash provided by operating activities was approximately $8.2 million. The difference between net cash provided by operating activities and the net income of approximately $1.5 million was primarily the result of amortization of mortgage asset premiums, provision for loan losses and a decrease in accrued interest receivable. Both amortization of mortgage premium and provisions for loan losses are non-cash charges. Accrued interest receivable increased cash flow during the first quarter of 2000 due to the mortgage asset portfolio decreasing by $168.5 million. Cash charges that decreased net cash provided by operating activities primarily included an increase in due from affiliate. During the quarter ended March 31, 1999, net cash provided by operating activities was approximately $5.2 million. The difference between net cash provided by operating activities and the net income of 11 14 approximately $1.6 million was primarily the result of amortization of mortgage asset premiums and provisions for loan losses. Both amortization of mortgage premium and provisions for loan losses are non-cash charges. Cash charges that decreased net cash provided by operating activities primarily included an increase in due from affiliate and deposits to the over-collateralization account. Net cash provided by investing activities for the quarter ended March 31, 2000 was approximately $163.1 million. Net cash used for the quarter ended March 31, 2000 was positively affected by the sale of mortgage loans held-for-investment of approximately $65.6 million, principal payments of approximately $96.5 million and proceeds from the sale of real estate owned of approximately $1.7 million. Net cash used in investing activities for the quarter ended March 31, 1999 was approximately $23.4 million, made up of approximately $77.5 million of mortgage loans purchased, offset by principal payments of mortgage assets of approximately $54.1 million. For the quarter ended March 31, 2000, net cash used in financing activities was approximately $165.7 million, primarily due to payments on long-term debt of $107.4 million and payments on short-term debt of $55.9 million. For the quarter ended March 31, 1999, net cash provided by financing activities was approximately $18.5 million. Net cash provided by financing activities was positively affected by the increase in net borrowings from short-term debt of approximately $64.4 million. Net cash provided by financing activities was negatively impacted by payments on long-term-debt of approximately $44.7 million and dividends paid of approximately $1.2 million. BUSINESS RISKS INTEREST RATE INCREASES MAY REDUCE INCOME FROM OPERATIONS The majority of the Company's mortgage loans have a repricing frequency of two years or less, while substantially all of the Company's borrowings have a repricing frequency of one month or less. Accordingly, the interest rates on the Company's borrowings may be based on interest rate indices which are different from, and adjust more rapidly than, the interest rate indices of its related mortgage loans. Consequently, increases in (short-term) interest rates may significantly influence the Company's net interest income. While increases in short-term interest rates will increase the yields on a portion of the Company's adjustable-rate mortgage loans, rising short-term rates will also increase the cost of borrowings by the Company. To the extent such costs rise more than the yields on such mortgage loans, the Company's net interest income will be reduced or a net interest loss may result. The Company mitigates its `gap' risk by purchasing interest rate hedges (referred to as `caps'), however potential income from these hedges may only partially offset the adverse impact of rising borrowing costs. The value of retained interest in securitization could be adversely impacted by increases in short-term interest rates which may negatively impact the Company's financial condition and results of operations. HIGH LEVELS OF MORTGAGE ASSET PREPAYMENTS WILL REDUCE OPERATING INCOME The levels of prepayments of mortgage assets purchased with a premium by the Company directly impacts the level of amortization of capitalized premiums. Mortgage asset prepayment rates generally increase when new mortgage loan interest rates fall below the current interest rates on mortgage loans. Prepayment experience also may be affected by the expiration of prepayment penalty clauses, the ability of the borrower to obtain a more favorable mortgage loan, geographic location of the property securing the adjustable-rate mortgage loans, the assumability of a mortgage loan, conditions in the housing and financial markets and general economic conditions. The level of prepayments is also subject to the same seasonal influences as the residential real estate industry with prepayment rates generally being highest in the summer months and lowest in the winter months. The Company experienced high levels of prepayments during the first quarter of 2000 on its CMO/FASIT segment of its mortgage loan portfolio due principally to the fact that the underlying adjustable-rate loans were subject to their first initial interest rate adjustment (after being fixed for the first two years), prepayment penalty clauses were expired and borrowers were able to secure more favorable rates by 12 15 refinancing. The Company anticipates that overall prepayment rates are likely to continue at relatively high levels for an indefinite period on the CMO/FASIT segment of the portfolio, and that prepayment rates will increase on the other segments of the mortgage loan portfolio as the underlying loans are subject to rate increases and prepayment penalties expire. There can be no assurance that the Company will be able to achieve or maintain lower prepayment rates or that prepayment penalty income will offset premium amortization expense. Accordingly, the Company's financial condition and results of operations could be materially adversely affected. As of March 31, 2000 approximately 75% of the mortgage loan portfolio had prepayment penalty clauses, with a weighted average of 20 months remaining before prepayment penalties expire. Prepayment penalty clauses serve as a deterrent to early prepayments and the penalties collected help to offset the premium amortization expense. However, prepayment penalty fees may be in an amount which is less than the figure which would fully compensate the Company for its remaining capitalized premiums, and prepayment penalty provisions may expire before the prepayment occurs. BORROWER CREDIT MAY DECREASE VALUE OF MORTGAGE ASSETS During the time the Company holds mortgage loans held-for-investment, bond collateral or retained interest in securitizations it is subject to credit risks, including risks of borrower defaults, bankruptcies and special hazard losses that are not covered by standard hazard insurance (such as those occurring from earthquakes or floods). In the event of a default on any mortgage loan held by the Company or mortgage underlying retained interest in securitization, the Company will bear the risk of loss of principal to the extent of any deficiency between the value of the secured property and the amount owing on the mortgage loan, less any payments from an insurer or guarantor. Although the Company has established an allowance for mortgage loan losses, there can be no assurance that any allowance for mortgage loan losses which is established will be sufficient to offset losses on mortgage loans in the future. Credit risks associated with non-conforming mortgage loans, especially sub-prime mortgage loans, may be greater than those associated with mortgage loans that conform to Fannie Mae ("FNMA") and Freddie Mac ("FHLMC") guidelines. The principal difference between sub-prime mortgage loans and conforming mortgage loans typically include one or more of the following: worse credit and income histories of the mortgagors, higher loan-to-value ratios, reduced or alternative documentation required for approval of the mortgagors, different types of properties securing the mortgage loans, higher loan sizes and the mortgagor's non-owner occupancy status with respect to the mortgaged property. As a result of these and other factors, the interest rates charged on non-conforming mortgage loans are often higher than those charged for conforming mortgage loans. The combination of different underwriting criteria and higher rates of interest may lead to higher delinquency rates and/or credit losses for non-conforming as compared to conforming mortgage loans and thus require high loan loss allowances. All of the Company's mortgage loans at March 31, 2000 were originated as sub-prime mortgage loans. Even assuming that properties secured by the mortgage loans held by the Company provide adequate security for such mortgage loans, substantial delays could be encountered in connection with the foreclosure of defaulted mortgage loans, with corresponding delays in the receipt of related proceeds by the Company. State and local statutes and rules may delay or prevent the Company's foreclosure on, or sale of, the mortgaged property and typically prevent the Company from receiving net proceeds sufficient to repay all amounts due on the related mortgage Loan. Defaulted mortgage loans also cease to be eligible collateral for reverse repurchase borrowings, and therefore have to be financed by the Company from other funds until ultimately liquidated. The Company attempts to mitigate this risk by utilizing long-term financing vehicles. At March 31, 2000, 5.40% of the Company's borrowings for mortgage assets were in the form reverse repurchase borrowings. 13 16 ACCUMULATION RISK ASSOCIATED WITH MORTGAGE LOANS HELD-FOR-INVESTMENT At various points in time, the Company purchases and holds mortgage loans which are primarily financed with short-term reverse repurchase agreements. Typically mortgages are accumulated for one to six months and then securitized and transferred into bond collateral. During the accumulation period the loans are financed with short-term reverse repurchase agreements. Although the reverse repurchase agreements are committed, lenders have the right to mark the mortgage collateral to market and potentially increase the Company's cash equity investment in the mortgage collateral. During periods of rising interest rates or turbulent market conditions, the market value of these loans may be adversely impacted. At March 31, 2000, there were 491 mortgage loans with a principal balance of approximately $58.2 million being financed by short-term reverse repurchase agreements. INABILITY TO ACQUIRE MORTGAGE ASSETS The Company's net interest income will depend, in large part, on the Company's ability to acquire mortgage assets on acceptable terms and at favorable spreads over the Company's borrowing costs. There can be no assurance that the Company will be able to replenish the mortgage asset portfolio as prepayments occur. In acquiring mortgage assets, the Company will compete with numerous other financial institutions. The effect of the existence of these competitors may be to increase competition for the available supply or price of mortgage assets suitable for purchase by the Company. There can be no assurance that the Company will be able to successfully compete with its competition. To the extent that the Company is unable to fully invest in a sufficient amount of mortgage loans meeting its criteria, the Company's results of operations will be materially adversely affected. The Company's ability to acquire mortgage assets is also dependent on the availability of financing to fund these acquisitions. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is exposed to a variety of risks including changes in interest rates which offset the return of its investments and the cost of its debt. At March 31, 2000, there have not been any material changes in market risk as reported by the Company in its Annual Report on Form 10-K for the year ended December 31, 1999. PART II. OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K: (a) Exhibits 14 17 *3.1 Articles of Amendment and Restatement of the Registrant *3.2 Amended and Restated Bylaws of the Registrant 27. Financial Data Schedule * Incorporated by reference to Registration Statement on Form S-11 (File No. 333-33679) (b) Reports on Form 8-K None 15 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized AMERICAN RESIDENTIAL INVESTMENT TRUST, INC. Dated: May 12, 2000 By: /s/ Judith A. Berry ----------------------------------- Judith A. Berry, Executive Vice President Chief Financial Officer 16 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH 31, 2000 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-2000 MAR-31-2000 14,173 1,115,784 23,397 4,326 0 1,149,028 0 0 1,149,028 65,266 996,005 0 0 0 87,676 1,149,028 0 26,256 0 0 5,495 402 18,856 1,503 0 1,503 0 0 0 1,503 0.19 0.19
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