-----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, DOcmeVuCZYbR7qD7GYhAO6SJ4flL4VoyxSGl8l/0ddss/pj2Hzq7LCeb3/mF1V3A sSvGZ9z5L1fqrh/Mf2CRZw== 0000914121-04-002321.txt : 20041110 0000914121-04-002321.hdr.sgml : 20041110 20041109172127 ACCESSION NUMBER: 0000914121-04-002321 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041109 DATE AS OF CHANGE: 20041109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN HOME MORTGAGE INVESTMENT CORP CENTRAL INDEX KEY: 0001256536 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 200103914 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-31916 FILM NUMBER: 041130685 MAIL ADDRESS: STREET 1: 520 BROADHOLLOW ROAD CITY: MELVILLE STATE: NY ZIP: 11747 10-Q 1 am3q04-10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004. ------------------- 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: 001-31916 --------- AMERICAN HOME MORTGAGE INVESTMENT CORP. - -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Maryland 20-0103914 - -------------------------------------------------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 520 Broadhollow Road, Melville, New York 11747 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (516) 949-3900 - -------------------------------------------------------------------------------- (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. 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 5, 2004, there were 40,195,686 shares of the registrant's common stock, par value $0.01 per share, outstanding. AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES TABLE OF CONTENTS PART I-FINANCIAL INFORMATION Page ---- Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003 ................................................. 1 Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2004 and 2003 ................................. 2 Consolidated Statements of Stockholders' Equity for the Nine Months Ended September 30, 2004 and 2003 .............................................................. 3 Consolidated Statements of Cash Flows for the Three and Nine Months Ended September 30, 2004 and 2003 ................................. 4 Notes to Consolidated Financial Statements ........................ 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................. 24 Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 42 Item 4. Controls and Procedures ........................................... 44 PART II-OTHER INFORMATION Item 1. Legal Proceedings ................................................. 45 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ....... 45 Item 3. Defaults Upon Senior Securities ................................... 45 Item 4. Submission of Matters to a Vote of Security Holders ............... 45 Item 5. Other Information ................................................. 45 Item 6. Exhibits .......................................................... 45 SIGNATURES INDEX TO EXHIBITS PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in thousands, except per share amounts)
September 30, December 31, 2004 2003 ------------- ------------- Assets: Cash and due from banks $ 118,441 $ 53,148 Money market investments 68,039 - ------------- ------------- Cash and cash equivalents 186,480 53,148 ------------- ------------- Accounts receivable and servicing advances 101,105 84,311 Mortgage-backed securities (including securities pledged of $7,036,293 and $1,426,477 as of September 30, 2004 and December 31, 2003, respectively) 7,331,888 1,763,628 Mortgage loans held for sale, net 1,131,661 1,216,353 Derivative assets 11,630 30,611 Mortgage servicing rights, net 160,435 117,784 Premises and equipment, net 47,955 41,738 Goodwill 89,196 83,445 Other assets 16,645 13,672 ------------- ------------- Total assets $ 9,076,995 $ 3,404,690 ============= ============= Liabilities and Stockholders' Equity: Liabilities: Warehouse lines of credit $ 547,584 $ 1,121,760 Drafts payable 45,526 25,625 Commercial paper 462,712 - Reverse repurchase agreements 6,899,024 1,344,327 Payable for securities purchased - 259,701 Derivative liabilities 18,237 12,694 Accrued expenses and other liabilities 154,339 76,156 Notes payable 128,448 99,655 Income taxes payable 30,133 66,802 ------------- ------------- Total liabilities 8,286,003 3,006,720 ------------- ------------- Commitments and contingencies - - Stockholders' Equity: 9.75% Series A Cumulative Redeemable Preferred Stock: par value $0.01 per share, 10,000,000 shares authorized, 2,150,000 and 0 shares issued and outstanding as of September 30, 2004 and December 31, 2003, respectively 50,857 - Common stock: par value $0.01 per share, 100,000,000 shares authorized, 40,184,333 and 25,270,100 shares issued and outstanding as of September 30, 2004 and December 31, 2003, respectively 402 252 Additional paid-in capital 629,807 281,432 Retained earnings 151,297 121,029 Accumulated other comprehensive loss (41,371) (4,743) ------------- ------------- Total stockholders' equity 790,992 397,970 ------------- ------------- Total liabilities and stockholders' equity $ 9,076,995 $ 3,404,690 ============= ============= See notes to consolidated financial statements.
- 1 - AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share amounts)
Three Months Ended Nine Months Ended September 30, September 30, --------------------- ---------------------- 2004 2003 2004 2003 -------- --------- --------- --------- Net interest income: Interest income $ 94,298 $ 29,693 $ 198,347 $ 76,117 Interest expense (61,405) (16,009) (132,596) (38,790) -------- --------- --------- --------- Total net interest income 32,893 13,684 65,751 37,327 -------- --------- --------- --------- Non-interest income: Gain on sales of mortgage loans 28,373 105,577 98,095 323,070 Gain on sales of mortgage-backed securities and derivatives 22,341 - 37,310 - Unrealized gain on mortgage-backed securities and derivatives 27,069 - 82,041 - Loan servicing fees 9,822 8,306 28,870 29,255 Amortization of mortgage servicing rights (7,755) (14,903) (22,865) (44,958) Impairment (provision) recovery of mortgage servicing rights (4,807) 7,825 (10,139) (4,360) -------- --------- --------- --------- Net loan servicing (loss) fees (2,740) 1,228 (4,134) (20,063) -------- --------- --------- --------- Other non-interest income 3,349 1,423 5,553 5,592 -------- --------- --------- --------- Total non-interest income 78,392 108,228 218,865 308,599 -------- --------- --------- --------- Non-interest expenses: Salaries, commissions and benefits, net 46,482 62,698 128,805 161,551 Occupancy and equipment 9,984 7,340 26,086 19,642 Data processing and communications 3,745 3,682 10,296 9,509 Office supplies and expenses 3,012 3,557 9,345 10,427 Marketing and promotion 2,610 3,232 7,018 8,836 Travel and entertainment 3,620 3,122 9,084 8,000 Professional fees 2,524 2,319 6,781 5,832 Other 6,363 5,153 15,883 17,241 -------- --------- --------- --------- Total non-interest expenses 78,340 91,103 213,298 241,038 -------- --------- --------- --------- Net income before income tax (benefit) expense 32,945 30,809 71,318 104,888 Income tax (benefit) expense (9,998) 12,115 (26,330) 43,004 -------- --------- --------- --------- Net income 42,943 18,694 97,648 61,884 -------- --------- --------- --------- Dividends on preferred stock 1,648 - 1,648 - -------- --------- --------- --------- Net income available to common shareholders $ 41,295 $ 18,694 $ 96,000 $ 61,884 ======== ========= ========= ========= Per share data: Basic $ 1.03 $ 1.08 $ 2.61 $ 3.64 Diluted $ 1.02 $ 1.06 $ 2.58 $ 3.57 Weighted average number of shares - basic 40,145 17,272 36,737 17,003 Weighted average number of shares - diluted 40,605 17,705 37,198 17,358 See notes to consolidated financial statements.
- 2 - AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Accumulated Additional Other Total Preferred Common Paid-in Retained Comprehensive Stockholders' (Dollars in thousands) Stock Stock Capital Earnings Loss Equity - ---------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 2003 $ - $ 167 $ 95,785 $ 68,144 $ - $ 164,096 ========= ====== ========== ======== ============= ============= Comprehensive income: Net income - - - 61,884 - 61,884 ------------- Comprehensive income 61,884 Issuance of common stock - earnouts - 3 3,302 - - 3,305 Issuance of common stock - 1999 Omnibus Stock Incentive Plan - 3 1,933 - - 1,936 Issuance of common stock - warrants - - 78 - - 78 Dividends declared on common stock - - - (4,752) - (4,752) --------- ------ ---------- -------- ------------- ------------- Balance at September 30, 2003 $ - $ 173 $ 101,098 $125,276 $ - $ 226,547 ========= ====== ========== ======== ============= ============= Balance at December 31, 2003 $ - $ 252 $ 281,432 $121,029 $ (4,743) $ 397,970 ========= ====== ========== ======== ============= ============= Comprehensive income: Net income - - - 97,648 - 97,648 Unrealized gain on mortgage-backed securities available for sale - - - - 1,780 1,780 Unrealized loss on cash flow hedges, net of amortization - - - - (38,408) (38,408) ------------- Comprehensive income 61,020 Issuance of preferred stock - offering 50,857 - - - - 50,857 Issuance of common stock - offering - 144 339,647 - - 339,791 Issuance of common stock - earnouts - 2 4,843 - - 4,845 Issuance of common stock - 1999 Omnibus Stock Incentive Plan - 4 2,286 - - 2,290 Tax benefit from stock options exercised - - 1,599 - - 1,599 Dividends declared on preferred stock - - - (1,648) - (1,648) Dividends declared on common stock - - - (65,732) - (65,732) --------- ------ ---------- -------- ------------- ------------- Balance at September 30, 2004 $ 50,857 $ 402 $ 629,807 $151,297 $ ($41,371) $ 790,992 ========= ====== ========== ======== ============= ============= See notes to consolidated financial statements.
- 3 - AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Three Months Ended Nine Months Ended September 30, September 30, 2004 2003 2004 2003 ----------------------------------------------------------- Cash flows from operating activities: Net income $ 42,943 $ 18,694 $ 97,648 $ 61,884 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,151 1,589 6,116 4,202 Amortization and impairment of mortgage servicing rights 12,562 7,078 33,004 49,318 Amortization of mortgage-backed securities premiums, net 9,477 - 19,759 - Amortization of cash flow hedges (7,019) - (5,148) - Gain on sales of mortgage-backed securities and derivatives (22,341) - (37,310) - Unrealized gain on securities held in trading (23,916) - (40,402) - Unrealized loss (gain) on free standing derivatives 20,128 - (21,323) - Additions to mortgage servicing rights on securitized loans (27,203) - (59,580) - Additions to mortgage servicing rights on sold loans (3,976) (27,711) (16,075) (43,316) Decrease (increase) in interest rate lock commitments 7,358 9,605 18,981 (5,198) (Increase) decrease in deferred origination costs (808) 8,885 3,334 (4,372) (Increase) decrease in SFAS No. 133 basis adjustments (1,009) 6,064 15,173 (5,899) Other (2,662) 130 (3,898) 469 Increase in operating assets: Accounts receivable and servicing advances (616) (13,773) (16,794) (6,335) Other assets (2,857) (2,793) (2,729) (4,468) Increase (decrease) in operating liabilities: Accrued expenses and other liabilities 32,761 (14,940) 65,921 1,539 Income taxes payable (10,995) 4,249 (36,669) 23,692 Forward delivery contracts (9,004) 11,904 (5,564) 4,700 Origination of mortgage loans held for sale (2,688,820) (7,052,401) (10,387,703) (17,536,117) Proceeds from sales of mortgage loans 2,806,070 7,070,846 10,741,622 16,690,090 ----------- ------------ ------------ ------------ Net cash provided by (used in) operating activities 132,224 27,426 368,363 (769,811) ----------- ------------ ------------ ------------ Cash flows from investing activities: Purchases of premises and equipment, net (5,565) (2,983) (12,333) (8,132) Origination of mortgage loans held for securitization (2,603,371) - (5,937,304) - Proceeds from securitizations of mortgage loans 2,779,409 - 5,649,568 - Purchases and additions to mortgage-backed securities (3,317,250) - (11,019,093) - Proceeds from sales of mortgage-backed securities and derivatives 3,008,523 - 4,758,637 - Principal repayments on mortgage-backed securities 397,727 - 753,933 - Other - 414 (244) 12 ----------- ------------ ------------ ------------ Net cash provided by (used in) investing activities 259,473 (2,569) (5,806,836) (8,120) ----------- ------------ ------------ ------------ Cash flows from financing activities: (Decrease) increase in warehouse lines of credit (124,872) (4,667) (574,176) 801,644 Increase in reverse repurchase agreements 485,518 - 5,554,697 - Decrease in payable for securities purchased (423,909) - (259,701) - (Decrease) increase in commercial paper (584,324) - 462,712 - (Decrease) increase in drafts payable (40,774) (18,762) 19,901 6,407 Proceeds from issuance of preferred stock 52,057 - 52,057 - Proceeds from issuance of capital stock 426 564 342,637 1,629 Dividends paid (24,468) (2,237) (55,115) (4,751) Increase (decrease) in notes payable 21,211 10,994 28,793 (1,831) ----------- ------------ ------------ ------------ Net cash (used in) provided by financing activities (639,135) (14,108) 5,571,805 803,098 ----------- ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents (247,438) 10,749 133,332 25,167 Cash and cash equivalents, beginning of period 433,918 38,834 53,148 24,416 ----------- ------------ ------------ ------------ Cash and cash equivalents, end of period $ 186,480 $ 49,583 $ 186,480 $ 49,583 =========== ============ ============ ============ Supplemental disclosure of cash flow information: Interest paid $ 28,887 $ 10,812 $ 65,485 $ 29,797 Income taxes paid 996 7,974 7,357 20,697 See notes to consolidated financial statements.
- 4 - AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization - On December 3, 2003, American Home Mortgage Investment Corp. ("AHM Investment") completed its merger with Apex Mortgage Capital, Inc. ("Apex"), a Maryland corporation that operated and elected to be treated as a real estate investment trust, or REIT. Under the terms of the transaction, American Home Mortgage Holdings, Inc. ("AHM Holdings") reorganized through a reverse triangular merger that caused AHM Investment, a newly formed Maryland corporation that operates and has elected to be treated as a REIT for federal income tax purposes, to become AHM Holdings' parent. AHM Investment was formed to combine the net assets of Apex, consisting primarily of mortgage-backed securities, with the mortgage origination and servicing businesses of AHM Holdings. As used herein, references to the "Company," "American Home," "we," "our" and "us" refer to AHM Investment collectively with its subsidiaries. AHM Investment is a mortgage REIT focused on earning net interest income from purchased and self-originated mortgage-backed securities, and through its taxable subsidiaries, on earning income from originating and selling mortgage loans and servicing mortgage loans for institutional investors. Mortgages are originated through a network of loan origination offices as well as through mortgage brokers and are serviced at the Company's Columbia, Maryland servicing center. Basis of Presentation - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company's estimates and assumptions primarily arise from risks and uncertainties associated with interest rate volatility, prepayment volatility, credit exposure and regulatory changes. Although management is not currently aware of any factors that would significantly change its estimates and assumptions in the near term, future changes in market trends and conditions may occur which could cause actual results to differ materially. When necessary, certain reclassifications of prior year financial statement amounts have been made to conform to the current year presentation. Due to the Company's exercising significant influence on the operations of its joint ventures, their balances and operations have been fully consolidated in the accompanying consolidated financial statements and all intercompany accounts and transactions have been eliminated. Cash and Due From Banks - Cash and due from banks include cash on hand, amounts due from banks and overnight deposits. The carrying amount of cash and due from banks approximates its fair value. Money Market Investments - Money market investments include short-term purchases of securities under agreements to resell ("repurchase agreements"). The amount advanced under repurchase agreements approximates its fair value and is reported as an asset on the balance sheet. Mortgage-backed Securities - Mortgage-backed securities are classified as either trading or available for sale. Trading securities are reported at fair value, and changes in fair value are reported in unrealized gain on mortgage-backed securities and derivatives in the statements of operations. Available for sale securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income (loss). Realized gains and losses on sales of available for sale securities are determined on an average cost basis and included in gain on sales of mortgage-backed securities and derivatives. When the fair value of an available for sale security is less than amortized cost, management considers whether there is an other-than-temporary impairment in the value of the security (e.g., whether the security is likely to be sold prior to the recovery of fair value). If, in management's judgment, an other-than-temporary impairment exists, the cost basis of the security is written down to the then-current fair value, and the unrealized loss is transferred from accumulated other comprehensive income as an immediate reduction of current earnings (i.e., as if the loss had been realized in the period of impairment). Premiums and discounts on the Company's mortgage-backed securities held in available for sale are amortized to interest income using the level yield method over the estimated life of the security. Mortgage Loans Held for Sale - Mortgage loans held for sale are carried at the lower of cost or aggregate market value. The cost basis includes the capitalized value of the interest rate lock commitments ("IRLCs") related to the mortgage loans and any net deferred origination costs. For mortgage loans held for sale that are hedged with forward sale commitments, if the Company meets hedge accounting requirements, the carrying value is adjusted for the change in market during the time the hedge was deemed to be highly effective. The - 5 - market value is determined by outstanding commitments from investors or current investor yield requirements calculated on the aggregate basis. Mortgage Servicing Rights - Mortgage servicing rights ("MSRs") are carried at the lower of cost or fair value, based on defined risk strata, and are amortized in proportion to and over the period of estimated net servicing income. When the Company sells certain loans and retains the servicing rights, it allocates the cost basis of the loans between the assets sold and the MSRs based on their relative fair values on the date of sale. The Company estimates the fair value of its MSRs by obtaining market information from one of the primary MSR brokers. When the book value of capitalized MSRs exceeds its fair value, impairment is recognized through a valuation allowance. In determining impairment, our mortgage servicing portfolio is stratified by the predominant risk characteristic of the underlying mortgage loans. The Company has determined that the predominant risk characteristic is the interest rate on the underlying loans. The Company measures impairment for each stratum by comparing the estimated fair value to the recorded book value. Temporary impairment is recorded through a valuation allowance and amortization expense in the period of occurrence. In addition, the Company periodically evaluates its 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 assuming a 200-basis-point instantaneous increase in interest rates from an independent MSR broker. The fair value estimate includes 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. Premises and Equipment - Premises and equipment is stated at cost less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over their estimated service lives. Leasehold improvements are amortized over the lesser of the life of the lease or service lives of the improvements using the straight-line method. Depreciation and amortization are recorded within occupancy and equipment expense within the consolidated financial statements. Goodwill - Goodwill represents the excess purchase price over the fair value of net assets acquired from business acquisitions. The Company tests for impairment at least annually and will test for impairment more frequently if events or circumstances indicate that an asset may be impaired. 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 related to the Company's loan origination segment includes a forecast of the expected future loan originations and the related revenues and expenses. The discounted cash flow calculation related to the Company's mortgage-backed securities holdings segment includes a forecast of the expected future net interest income, gain on mortgage-backed securities and the related revenues and expenses. These cash flows are discounted using a rate that is estimated to be a weighted-average cost of capital for similar companies. Reverse Repurchase Agreements - The Company has entered into reverse repurchase agreements to finance certain of its investments. These agreements are secured by a portion of the Company's investments and bear interest rates that have historically moved in close relationship to the London Inter-Bank Offer Rate ("LIBOR"). Reverse repurchase agreements are accounted for as short-term borrowings and recorded as a liability on the balance sheet. Commercial Paper - The Company formed a wholly owned special purpose entity for the purpose of issuing commercial paper in the form of short-term Secured Liquidity Notes ("SLNs") to finance certain portions of the Company's mortgage loans held for sale. The commercial paper is secured by the Company's loans held for sale, mortgage-backed securities and cash and bears interest at prevailing money market rates approximating LIBOR. Commercial paper is accounted for as a short-term borrowing and recorded as a liability on the balance sheet. Drafts Payable - Drafts payable represent outstanding mortgage loan disbursements that the Company has provided to its customers for the purchase of a home. The amounts outstanding do not bear interest and are transferred into one of the warehouse facilities when they are presented to a bank. Derivative Financial Instruments - The Company has developed risk management programs and processes designed to manage market risk associated with normal business activities. Interest Rate Lock Commitments. The Company's mortgage committed pipeline includes IRLCs that have been extended to borrowers who have applied for loan funding and meet certain defined credit and underwriting criteria. The Company classifies and accounts for the IRLCs associated with loans expected to be sold or securitized as free-standing derivatives. Accordingly, IRLCs are recorded at fair value with - 6 - changes in fair value recorded to current earnings. The fair value of the IRLCs initiated on or before March 31, 2004 is determined by an estimate of the ultimate gain on sale of the loans, including the value of MSRs, net of estimated net costs to originate the loan. In March 2004, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 105 ("SAB No. 105"), which provided industry guidance that changed the timing of recognition of MSRs for IRLCs initiated after March 31, 2004. In SAB No. 105, the SEC stated that the value of expected future cash flows related to servicing rights should be excluded when determining the fair value of derivative IRLCs. Under the new policy, the value of the expected future cash flow related to servicing rights is not recognized until the underlying loans are sold. Forward Delivery Commitments Used to Hedge IRLCs. The Company uses mortgage forward delivery contracts 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. Forward Delivery Commitments Used to Hedge Mortgage Loans Held for Sale. The Company's risk management objective for its mortgage loans held for sale is to protect earnings from an unexpected charge due to a decline in value. The Company's strategy is to engage in a risk management program involving the use of mortgage forward delivery contracts designated as fair value hedging instruments to hedge 100% of its agency-eligible conforming loans and most of its non-conforming loans held for sale. At the inception of the hedge, to qualify for hedge accounting, 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 transaction. For conventional conforming fixed-rate loans, the notional amount of the forward delivery contracts, along with the underlying rate and terms of the contracts, are equivalent to the unpaid principal amount of the mortgage inventory being hedged; hence, the forward delivery contracts effectively fix the forward sales price and thereby substantially eliminate interest rate and price risk to the Company. The Company classifies and accounts for these forward delivery contracts as fair value hedges. The derivatives are carried at fair value with the changes in fair value recorded to current earnings. When the hedges are deemed highly effective, the book value of the hedged loans held for sale is adjusted for its change in fair value during the hedge period. Interest Rate Swap Agreements. The Company enters into interest rate swap agreements which require it to pay a fixed interest rate and receive a variable interest rate based on LIBOR. The fair value of interest rate swap agreements are based on the net present value of estimated future interest payments over the remaining life of the interest rate swap agreement. All changes in the unrealized gains and losses on swap agreements designated as cash flow hedges have been recorded in "accumulated other comprehensive loss" and are reclassified to earnings as interest expense is recognized on the Company's hedged borrowings. For interest rate swap agreements accounted for as cash flow hedges, the net amount accrued for the variable interest receivable and fixed interest payable affects the amount recorded as "interest expense." If it becomes probable that the forecasted transaction, which in this case refers to interest payments to be made under the Company's short-term borrowing agreements, will not occur by the end of the originally specified time period, as documented at the inception of the hedging relationship, or within an additional two-month time period thereafter, then the related gain or loss in accumulated other comprehensive loss would be reclassified to income. Certain swap agreements are designated as cash flow hedges against the benchmark interest rate risk associated with the Company's borrowings. Although the terms and characteristics of the Company's swap agreements and hedged borrowings are nearly identical, due to the explicit requirements of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," the Company does not account for these hedges under a method defined in SFAS No. 133 as the "shortcut" method, but rather the Company calculates the effectiveness of these hedges on an ongoing basis, and, to date, has calculated effectiveness of approximately 100%. The Company classifies and accounts for interest rate swap agreements that are not designated as cash flow hedges as free-standing derivatives. Accordingly, these swap agreements are recorded at fair value with changes in fair value recorded to current earnings as a component of "unrealized gain on mortgage-backed securities and derivatives" as they are used to offset the price change exposure of mortgage-backed securities classified as trading. For interest rate swap agreements accounted for as free-standing derivatives, the net amount accrued for the variable interest receivable and fixed interest payable is recorded in current earnings as "unrealized gain on mortgage-backed securities and derivatives." Termination of Hedging Relationships. The Company employs a number of risk management monitoring procedures to ensure that the designated hedging relationships are demonstrating, and are expected to continue to demonstrate, a high level of effectiveness. Hedge accounting is discontinued on a prospective basis if it is determined that the hedging relationship is no longer highly effective or expected to be highly effective in offsetting changes in fair value of the hedged item. Additionally, the Company may elect to de-designate a hedge relationship during an interim period and re-designate upon the rebalancing of a hedge profile and the corresponding hedge relationship. When hedge accounting is discontinued, the Company continues to carry the derivative instruments at fair value with changes in their value recorded in earnings. Gain on Sale of Loans - The Company recognizes gain on sale of loans for the difference between the sales price and the adjusted book value of the loans at the time of sale. The adjusted book value of the loans includes the original principal amount plus adjustments related to previously recognized income plus deferrals of fees and points received and direct loan origination costs. Loan Origination Fees and Direct Origination Costs - The Company records loan fees, discount points and certain direct origination costs as an adjustment of the cost of the loan or security and such amounts are included in revenues when the loan or security is sold. When loans - 7 - are securitized and held as securities available for sale, net deferred origination costs are amortized over the life of the security using the level-yield method and such amounts are included in interest income. When loans are securitized and held as trading securities, net deferred origination costs are an adjustment to the cost of the security and such amounts affect the amount recorded as unrealized gain on mortgage-backed securities and derivatives. Gain on sales of mortgage loans and salaries, commissions and benefits have been reduced by $71.8 million and $70.4 million due to direct loan origination costs, including commission costs, incurred for the nine months ended September 30, 2004 and 2003, respectively. Interest Recognition - The Company accrues interest income as it is earned. Loans are placed on a nonaccrual status when any portion of the principal or interest is 90 days past due or earlier when concern exists as to the ultimate collectibility of principal or interest. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible. Interest expense is recorded on outstanding lines of credit at a rate based on a spread to the LIBOR. The Company enters into interest rate swap agreements which require it to pay a fixed interest rate and receive a variable interest rate based on the LIBOR. For interest rate swap agreements accounted for as cash flow hedges, the net amount accrued for the variable interest receivable and fixed interest payable affects the amount recorded as "interest expense." For interest rate swap agreements accounted for as free-standing derivatives, the net amount accrued for the variable interest receivable and fixed interest payable is recorded in current earnings as "unrealized gain on mortgage-backed securities and derivatives." Servicing Fees - The Company recognizes servicing fees when the fees are collected. Marketing and Promotion - The Company charges the costs of marketing, promotion and advertising to expense in the period incurred. Income Taxes - The Company accounts for income taxes in conformity with SFAS No. 109, "Accounting for Income Taxes," which requires an asset and liability approach for accounting and reporting of income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences ("temporary differences") attributable to the differences between the carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. A valuation allowance is provided for deferred tax assets where realization is not considered "more likely than not." The Company recognizes the effect of changes in tax laws or rates on deferred tax assets and liabilities in the period that includes the enactment date. Stock Option Plans - In 1999, the Company established the 1999 Omnibus Stock Incentive Plan, as amended (the "Plan"). The Company has elected to account for the Plan using Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and to provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants as if the fair-value based method, as required by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123," had been applied. Had compensation cost been determined based on the fair value at the grant dates for awards under the Plan, the Company's net income available to common stockholders would have been $95.4 million and $61.4 million for the nine months ended September 30, 2004 and 2003, respectively. Basic earnings per share would have been $2.60 and $3.61 for the nine months ended September 30, 2004 and 2003, respectively. Diluted earnings per share would have been $2.56 and $3.54 for the nine months ended September 30, 2004 and 2003, respectively. - 8 -
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- (In thousands, except per share data) 2004 2003 2004 2003 -------------- ------------ ------------ ----------- Net income available to common shareholders - as reported $ 41,295 $18,694 $ 96,000 $ 61,884 Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (272) (224) (638) (518) -------------- ------------ ------------ ----------- Net income available to common shareholders - pro forma $ 41,023 $18,470 $ 95,362 $ 61,366 ============== ============ ============ =========== Earnings per share: Basic - as reported $ 1.03 $ 1.08 $ 2.61 $ 3.64 Basic - pro forma $ 1.02 $ 1.07 $ 2.60 $ 3.61 Diluted - as reported $ 1.02 $ 1.06 $ 2.58 $ 3.57 Diluted - pro forma $ 1.01 $ 1.04 $ 2.56 $ 3.54
Earnings Per Share - Basic earnings per share excludes dilution and is computed by dividing net income available to common shareholders by the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Cash Flows - Cash and cash equivalents are demand deposits and short-term investments with a maturity of 90 days or less. Recently Issued Accounting Standards - In March of 2004, the Emerging Issues Task Force ("EITF") reached consensus on the guidance provided in EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments." Among other investments, this guidance is applicable to debt and equity securities that are within the scope of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." EITF 03-1 specifies that an impairment would be considered other-than-temporary unless (a) the investor has the ability and intent to hold an investment for a reasonable period of time sufficient for the recovery of the fair value up to (or beyond) the cost of the investment and (b) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. A company's liquidity and capital requirements should be considered when assessing its intent and ability to hold an investment for a reasonable period of time that would allow the fair value of the investment to recover up to or beyond its cost. Although not presumptive, a pattern of selling investments prior to the forecasted fair value recovery may call into question a company's intent. In addition, the severity and duration of the impairment should also be considered when determining whether the impairment is other-than-temporary. This new guidance was to be effective for reporting periods beginning after June 15, 2004, but was subsequently deferred to periods ending after December 15, 2004 pending issuance of a Financial Accounting Standards Board Staff Position. The Company is currently evaluating the impact this guidance will have on its process for determining whether other-than-temporary declines exist within its available for sale securities portfolio. Adoption of this guidance may accelerate the recognition of losses from declines in value on available for sale securities due to interest rates; however, it is not anticipated to have a significant impact on stockholders' equity as changes in market value of available for sale securities are already included in "accumulated other comprehensive loss." - 9 - NOTE 2 - MORTGAGE-BACKED SECURITIES The following table presents the Company's mortgage-backed securities as of September 30, 2004 and December 31, 2003:
September 30, 2004 ----------------------------------------------------------------------- (In thousands) Trading Securities Securities Available for Sale Total Securities - ----------------------- ------------------ ----------------------------- ---------------- Adjusted cost $ 2,651,063 $ 4,667,454 $ 7,318,517 Gross unrealized gains 16,074 18,341 34,415 Gross unrealized losses (5,775) (15,269) (21,044) ------------------ ----------------------------- ---------------- Fair value $ 2,661,362 $ 4,670,526 $ 7,331,888 ================== ============================= ================ December 31, 2003 ----------------------------------------------------------------------- (In thousands) Trading Securities Securities Available for Sale Total Securities ----------------------------------------------------------------------- Adjusted cost $ 476,541 $ 1,282,523 $ 1,759,064 Gross unrealized gains 3,382 1,969 5,351 Gross unrealized losses (110) (677) (787) ------------------ ----------------------------- ---------------- Fair value $ 479,813 $ 1,283,815 $ 1,763,628 ================== ============================= ================
During the quarter ended September 30, 2004, the Company sold $3.0 billion of mortgage-backed securities and realized $38.6 million in gains and $16.3 million in losses, net of associated interest rate swaps. During the nine months ended September 30, 2004, the Company sold $4.7 billion of mortgage-backed securities and realized $58.7 million in gains and $21.4 million in losses, net of associated interest rate swaps. The Company's mortgage-backed securities with gross unrealized losses at September 30, 2004 have been in an unrealized loss position for less than six months. The Company has credit exposure on loans it has securitized. The following table summarizes the loan delinquency information as of September 30, 2004 and December 31, 2003:
September 30, 2004 --------------------------------------------------------------------------------------- (Dollars in thousands) Delinquency Status Loan Count Loan Balance Percent of Total Securitizations Percent of Total Assets - ------------------- ---------- ------------ -------------------------------- ----------------------- 60 to 89 days 24 $ 5,857 0.20% 0.06% 90 and greater days 6 1,580 0.05% 0.02% Foreclosure 13 3,334 0.11% 0.04% ---------- ------------ -------------------------------- ----------------------- 43 $ 10,771 0.36% 0.12% ========== ============ ================================ =======================
- 10 -
December 31, 2003 ----------------------------------------------------------------------------------- (Dollars in thousands) Delinquency Status Loan Count Loan Balance Percent of Total Securitizations Percent of Total Assets - ------------------ ---------- ------------ -------------------------------- ----------------------- 60 to 89 days 1 $ 692 0.13% 0.02% ---------- ------------ -------------------------------- ----------------------- 1 $ 692 0.13% 0.02% ========== ============= =============================== =======================
NOTE 3 - MORTGAGE LOANS HELD FOR SALE, NET The following table presents the Company's mortgage loans held for sale, net, as of September 30, 2004 and December 31, 2003: September 30, December 31, (In thousands) 2004 2003 ------------- ------------- Mortgage loans held for sale $ 1,121,129 $ 1,187,314 SFAS No. 133 basis adjustments 1,316 16,489 Deferred origination costs, net 9,216 12,550 ------------- ------------- Mortgage loans held for sale, net $ 1,131,661 $ 1,216,353 ============= ============= NOTE 4 - DERIVATIVE ASSETS AND LIABILITIES The following table presents the Company's derivative assets and liabilities as of September 30, 2004 and December 31, 2003: September 30, December 31, (In thousands) 2004 2003 ------------- ------------- Derivative Assets: Interest rate lock commitments $ 11,630 $ 30,611 ------------- ------------- Derivative assets $ 11,630 $ 30,611 ============= ============= Derivative Liabilities: Forward delivery contracts - loan commitments $ 980 $ 4,358 Forward delivery contracts - loans held for sale 114 2,300 Interest rate swaps 7,324 6,036 Interest rate swaps - free standing derivatives 9,819 - ------------- ------------- Derivative liabilities $ 18,237 $ 12,694 ============= ============= The notional amount of the Company's interest rate swaps as of September 30, 2004 was $2.8 billion. At September 30, 2004, the notional amount of forward delivery contracts amounted to approximately $843.5 million. The forward delivery contracts have a high correlation to the price movement of the loans being hedged. The ineffectiveness recognized in hedging loans held for sale recorded on the balance sheet was insignificant as of September 30, 2004. - 11 - NOTE 5 - MORTGAGE SERVICING RIGHTS, NET The following table presents the activity in the Company's mortgage servicing rights, net, for the three and nine months ended September 30, 2004 and 2003:
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- (In thousands) 2004 2003 2004 2003 --------- --------- --------- --------- Mortgage Servicing Rights: Balance at beginning of period $ 151,018 $ 104,775 $ 121,652 $ 119,225 Additions 31,179 27,711 75,655 43,316 Amortization (7,755) (14,903) (22,865) (44,958) --------- --------- --------- --------- Balance at end of period $ 174,442 $ 117,583 $ 174,442 $ 117,583 --------- --------- --------- --------- Impairment Allowance: Balance at beginning of period $ (9,200) $ (22,387) $ (3,868) $ (10,202) Impairment recovery (provision) (4,807) 7,825 (10,139) (4,360) --------- --------- --------- --------- Balance at end of period $ (14,007) $ (14,562) $ (14,007) $ (14,562) --------- --------- --------- --------- Mortgage servicing rights, net $ 160,435 $ 103,021 $ 160,435 $ 103,021 ========= ========= ========= =========
Aggregate Amortization Expense - ------------------------------ Nine months ended September 30, 2004 $ 22,865 Estimated Amortization Expense - ------------------------------ Year ended September 30, 2005 $ 39,835 Year ended September 30, 2006 33,436 Year ended September 30, 2007 22,369 Year ended September 30, 2008 15,355 Year ended September 30, 2009 11,479 Thereafter 51,968 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, 2004 and December 31, 2003 were as follows: - 12 -
September 30, 2004 December 31, 2003 ------------------ ----------------- Weighted-average prepayment speed (PSA) 352 397 Weighted-average discount rate 10.42% 9.82% Weighted-average default rate 2.64% 4.02%
The following table presents certain information regarding the Company's servicing portfolio of loans serviced for others at September 30, 2004 and December 31, 2003:
September 30, 2004 December 31, 2003 ------------------ ----------------- (Dollars in thousands) Loan servicing portfolio - loans sold or securitized $ 12,539,467 $ 8,272,294 Average loan size $ 160 $ 120 Weighted-average servicing fee 0.354% 0.347% Weighted-average note rate 5.41% 5.72% Weighted-average remaining term (in months) 327 298 Weighted-average age (in months) 18 27
NOTE 6 - GOODWILL The following table presents the activity in the Company's goodwill for the nine months ended September 30, 2004:
Mortgage-Backed Loan Origination Securities Holdings (In thousands) Segment Segment Total ----------------- -------------------- ---------- Balance at December 31, 2003 $ 58,605 $ 24,840 $ 83,445 Earnouts from previous acquisitions 5,751 - 5,751 ----------------- -------------------- ---------- Balance at September 30, 2004 $ 64,356 $ 24,840 $ 89,196 ================= ==================== ==========
NOTE 7 - WAREHOUSE LINES OF CREDIT, REVERSE REPURCHASE AGREEMENTS AND COMMERCIAL PAPER Warehouse Lines of Credit As of September 30, 2004, the Company has a committed bank syndicated facility led by Bank of America and a pre-purchase facility with UBS Real Estate Securities Inc. ("UBS"). The Company also has committed facilities with CDC Mortgage Capital Inc. ("CDC"), Morgan Stanley Bank ("Morgan Stanley") and Calyon Americas. In addition, the Company has a gestation facility with Greenwich Capital Financial Products, Inc. The Bank of America facility is for $600 million, the UBS facility is for $1.2 billion, the CDC facility is for $450 million, the Morgan Stanley facility is for $350 million and the Calyon Americas facility is for $200 million. The interest rate on outstanding balances fluctuates daily based on a spread to the LIBOR and interest is paid monthly. The facilities are secured by mortgage loans and other assets of the Company. The facilities contain various covenants pertaining to maintenance of net worth, working capital and maximum leverage. At September 30, 2004, the Company was in compliance with respect to the loan covenants. Included within the Bank of America line of credit, the Company has a working capital sub-limit that allows for borrowings up to $50 million at a rate based on a spread to the LIBOR that may be adjusted for earnings on compensating balances on deposit at creditors' banks. As of September 30, 2004, borrowings under the working capital line of credit were $24 million. - 13 - The following table presents the Company's warehouse lines of credit as of September 30, 2004 and December 31, 2003:
September 30, 2004 December 31, 2003 ---------------------- ------------------------ Weighted Weighted Outstanding Average Outstanding Average (Dollars in thousands) Balance Rate Balance Rate ---------------------- ------------------------ Calyon Americas $ 199,540 2.44% $ 200,702 1.88% Bank of America 187,096 2.92 - - CDC 156,946 2.63 406,444 1.98 Morgan Stanley 4,002 2.57 92,925 1.92 RFC - - 293,344 2.06 UBS - - 128,345 3.21 ----------- ------------- Warehouse lines of credit $ 547,584 2.66% $ 1,121,760 2.12% =========== =============
Reverse Repurchase Agreements The Company has arrangements to enter into reverse repurchase agreements, a form of collateralized short-term borrowing, with thirteen different financial institutions and on September 30, 2004 had borrowed funds from nine of these firms. Because the Company borrows money under these agreements based on the fair value of its mortgage-backed securities, and because changes in interest rates can negatively impact the valuation of mortgage-backed securities, the Company's borrowing ability under these agreements could be limited and lenders could initiate margin calls in the event interest rates change or the value of the Company's mortgage-backed securities declines for other reasons. As of September 30, 2004, the Company had $6.9 billion of reverse repurchase agreements outstanding with a weighted-average borrowing rate of 1.78% and a weighted-average remaining maturity of four months. As of December 31, 2003, the Company had $1.3 billion of reverse repurchase agreements outstanding with a weighted-average borrowing rate of 1.26% and a weighted-average remaining maturity of seven months. At September 30, 2004 and December 31, 2003, the Company's reverse repurchase agreements had the following remaining maturities:
September 30, December 31, 2004 2003 --------------- ------------- (In thousands) Within 30 days $ 1,122,546 $ 184,302 31 to 89 days 1,782,846 - 90 to 365 days 3,993,632 1,160,025 --------------- ------------- Reverse repurchase agreements $ 6,899,024 $ 1,344,327 =============== =============
Commercial Paper In May 2004, the Company formed a wholly owned special purpose entity for the purpose of issuing commercial paper in the form of short-term Secured Liquidity Notes ("SLNs") to finance certain portions of the Company's mortgage loans held for sale. The special purpose entity allows for issuance of short-term notes with maturities of up to 180 days, extendable up to 300 days. The SLNs bear interest at prevailing money market rates approximating LIBOR. The SLN program capacity, based on aggregate commitments of underlying credit enhancers, was $2.0 billion at September 30, 2004. As of September 30, 2004, the Company had $462.7 million of SLNs outstanding, with an average interest cost of 1.83%. The SLNs were collateralized by loans held for sale, mortgage-backed securities and cash with a balance of $467.8 million as of September 30, 2004. - 14 - At September 30, 2004, the Company's commercial paper had the following remaining maturities: September 30, 2004 ------------- (In thousands) Within 30 days $ 409,731 31 to 89 days 52,981 ------------- Commercial paper $ 462,712 ============= NOTE 8 - COMMON STOCK AND PREFERRED STOCK In March 2004, the Company issued 14,375,000 shares of its common stock ("Common Stock") at a price of $25 per share, which included the exercise of the underwriters' option to purchase 1,875,000 additional shares of Common Stock to cover over-allotments. The total proceeds to the Company, including proceeds from the exercise of the over-allotment option, were $359.3 million, before underwriting discounts, commissions and other offering expenses. In July 2004, the Company issued 2,150,000 shares of 9.75% Series A Cumulative Redeemable Preferred Stock ("Preferred Stock") at a price of $25 per share. The total number of shares of Preferred Stock outstanding includes: 1,400,000 shares of Preferred Stock issued in an underwritten public offering (the "Initial Offering"), which closed on July 7, 2004; 100,000 shares of Preferred Stock issued in connection with the underwriters' election to purchase a portion of the shares of Preferred Stock offered to them in connection with the Initial Offering to cover over-allotments, which closed on July 12, 2004; and 650,000 shares of Preferred Stock issued and sold to the underwriters in connection with a subsequent public offering of Preferred Stock, which closed on July 20, 2004. The total proceeds from both offerings to the Company were $53.8 million before underwriting discounts, commissions and other offering expenses. On September 8, 2004, the Company declared a dividend of $0.61 per common share, which was paid on October 21, 2004 to common shareholders of record as of October 5, 2004. On September 8, 2004, the Company declared a dividend of $0.76663 per preferred share, which was paid on November 1, 2004 to preferred shareholders of record as of October 5, 2004. NOTE 9 - INCOME TAXES The following table presents a reconciliation of the statutory income tax provision to the effective income tax provision:
Three Months Ended September 30, Nine Months Ended September 30, --------------------------------------------- ------------------------------------------- 2004 2003 2004 2003 ------------------- ------------------------ -------------------- --------------------- (Dollars in thousands) Tax provision at statutory rate $ 11,534 35.0% $ 10,850 35.0% $ 24,961 35.0% $ 36,710 35.0% Non-taxable REIT income (20,313) (61.6) - - (47,807) (66.9) - - State and local taxes, net of federal income tax benefit (1,369) (4.2) 987 3.2 (4,004) (5.6) 6,148 5.9 Minority income adjustment - - (67) (0.2) - - (330) (0.3) Other 150 0.5 345 1.1 520 0.7 476 0.4 -------- ------ -------- ----- -------- ------ -------- ----- Income tax (benefit) expense $ (9,998) (30.3%) $ 12,115 39.1% $(26,330) (36.8%) $ 43,004 41.0% ======== ====== ======== ===== ======== ====== ======== =====
- 15 - The following table presents the major sources of temporary differences, and their deferred tax effects, as of September 30, 2004 and December 31, 2003:
September 30, December 31, 2004 2003 ------------- ------------- (In thousands) Deferred tax liabilities: Capitalized cost of mortgage servicing rights $ 69,784 $ 50,083 Loan origination costs 9,746 11,926 Depreciation 2,341 576 Mark-to-market adjustments 1,081 11,041 ------------- ------------- Deferred tax liabilities 82,952 73,626 ------------- ------------- Deferred tax assets: Tax loss carryforwards 10,204 10,441 Allowance for bad debts and foreclosure reserve 2,967 3,133 Deferred state income taxes 3,389 2,855 Broker fees 1,972 - Other 846 691 ------------- ------------- Deferred tax assets 19,378 17,120 ------------- ------------- Net deferred tax liabilities $ 63,574 $ 56,506 ============= =============
- 16 - NOTE 10 - EARNINGS PER SHARE The following is a reconciliation of the denominators used in the computations of basic and diluted earnings per share for the three and nine months ended September 30, 2004 and 2003:
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- (Dollars in thousands, except per share amounts) 2004 2003 2004 2003 ---------- ---------- ---------- ---------- Numerator for basic earnings per share - Net income available to common shareholders $ 41,295 $ 18,694 $ 96,000 $ 61,884 ========== ========== ========== ========== Denominator: Denominator for basic earnings per share Weighted average number of common shares outstanding during the period 40,144,601 17,272,319 36,737,484 17,003,229 Net effect of dilutive stock options 460,453 432,205 460,568 354,694 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share 40,605,054 17,704,524 37,198,052 17,357,923 ========== ========== ========== ========== Net income per share available to common shareholders: Basic $ 1.03 $ 1.08 $ 2.61 $ 3.64 ========== ========== ========== ========== Diluted $ 1.02 $ 1.06 $ 2.58 $ 3.57 ========== ========== ========== ==========
NOTE 11 - STOCK OPTION PLANS In 1999, the Company established the 1999 Omnibus Stock Incentive Plan, as amended (the "Plan"). Pursuant to the Plan, eligible employees, officers and directors are offered the opportunity to acquire the Company's common stock through the grant of options and the award of restricted stock under the Plan. The total number of shares that may be optioned or awarded under the Plan is 3,000,000 shares of common stock. The Plan provides for the granting of options at the fair market value on the date of grant. The options issued primarily vest 50% on the two-year anniversary of the grant date and 50% on the three-year anniversary of the grant date, and expire ten years from the grant date. As of September 30, 2004, the Company has awarded 208,579 shares of restricted stock under the Plan. During the nine months ended September 30, 2004 and 2003, the Company recognized compensation expense of $603 thousand and $385 thousand, respectively, relating to shares of restricted stock. At September 30, 2004, 134,401 shares are vested. In general, unvested restricted stock is forfeited upon the recipient's termination of employment. For options granted under the Plan, there was no intrinsic value of the options when 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, 2004 and 2003. Pursuant to the terms of the Company's merger with Apex, which was consummated on December 3, 2003 (following the approval of the Company's stockholders at a special meeting held on November 21, 2003), the Company assumed the Amended and Restated 1997 Stock Option Plan of Apex (the "Apex Plan"). Upon the closing of the merger with Apex, Apex caused all unvested options granted under the Apex Plan to become vested, and each option granted under the Apex Plan that was not exercised as of December 3, 2003 was terminated and not assumed by the Company. An aggregate of 1 million shares of common stock were available for issuance upon exercise of stock options granted under the Apex Plan. As of the effective date of the merger, Apex had granted options to purchase 791,000 shares of common stock, which options were either (i) previously caused to become vested or (ii) terminated and not assumed by the Company. Accordingly, options to purchase an aggregate of 209,000 shares of the Company's common stock remain available for grant under the Apex Plan. - 17 - There were 110,000 and 422,413 options granted under the Plan in the three months and nine months ended September 30, 2004. The weighted-average fair value per share of options granted during the three months and nine months ended September 30, 2004 was $4.58 and $5.00, respectively. There were 40,000 and 214,376 options granted under the Plan in the three months and nine months ended September 30, 2003. The weighted-average fair value per share of options granted in the three months and nine months ended September 30, 2003 was $5.44 and $4.62, respectively. The fair value of the options granted is estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the grants:
Three Months Ended September 30, Nine Months Ended September 30, -------------------------------- ------------------------------- 2004 2003 2004 2003 ------- ------- ------- ------- Dividend yield 9.0 % 3.0 % 8.3 % 3.0 % Expected volatility 38.3 % 50.9 % 44.5 % 50.9 % Risk-free interest rate 5.0 % 5.0 % 5.0 % 5.0 % Expected life 3 years 3 years 3 years 3 years
NOTE 12 - ACQUISITIONS Apex Mortgage Capital, Inc. On December 3, 2003, AHM Investment completed its merger with Apex, a Maryland corporation that operated and elected to be treated as a REIT for federal income tax purposes. Immediately prior to the merger, under the terms of the reorganization agreement between AHM Holdings and AHM Investment, AHM Holdings reorganized through a reverse triangular merger that caused AHM Investment to become AHM Holdings' parent. The shares of AHM Investment issued to former Apex stockholders in the merger were valued at $177.3 million. The following table summarizes the required disclosures of the pro forma combined entity, as if the acquisition occurred at the beginning of the nine months ended September 30, 2003: Nine Months Ended (In thousands, except per share amounts) September 30, 2003 ------------------ Revenue $ 291,553 Income before income taxes 46,445 ------------------ Net income $ 3,441 ================== Earnings per share - basic $ 0.14 ================== Earnings per share - diluted $ 0.14 ================== Valley Bancorp, Inc. In August 2001, AHM Holdings entered into an agreement to acquire Valley Bancorp, Inc. ("Valley Bancorp") and its wholly-owned subsidiary, Valley Bank of Maryland, a federal savings bank located in suburban Baltimore, Maryland, for a combination of cash and stock, subject to certain adjustments. Under the terms of the definitive agreement, the Company will pay $46 for each share of Valley Bancorp common stock outstanding, or approximately $6.0 million. The acquisition agreement between AHM Holdings and Valley Bancorp has been extended through July 31, 2005. This transaction is subject to regulatory approval and no assurance can be given that such approval will be obtained or that the acquisition agreement with Valley Bancorp will be further extended if necessary. - 18 - Acquisition of Certain Home Loan Centers of Washington Mutual, Inc. On August 2, 2004, the Company acquired certain residential mortgage home loan centers and associated satellite offices that Washington Mutual Inc. and its subsidiaries ("Washington Mutual") previously slated for closure in 18 states. The Company hired 498 employees who support these home loan centers and associated satellite offices with the vast majority being sales professionals focused on retail loan originations. The purchase price was insignificant to the Company's consolidated financial statements. Under the terms of the acquisition, the Company assumed Washington Mutual's lease obligations and purchased certain fixed assets in the acquired offices. The acquisition was funded from current cash reserves. NOTE 13 - SEGMENTS AND RELATED INFORMATION The Company has three segments, the Mortgage-Backed Securities Holdings segment, the Loan Origination segment and the Loan Servicing segment. The Mortgage-Backed Securities Holdings segment uses the Company's equity capital and borrowed funds to invest in mortgage-backed securities, thereby producing net interest income. The Loan Origination 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 MSRs as well as servicing operations primarily for other financial institutions. The Mortgage-Backed Securities Holdings segment includes realized gains or losses on sales of mortgage-backed securities, unrealized mark-to-market gains or losses subsequent to the securitization date on mortgage-backed securities classified as trading securities and realized and unrealized gains or losses on related interest rate swaps. The Loan Origination segment includes realized gains or losses on sales of loans and mortgage-backed securities, unrealized gains or losses that exist on the date of securitization of self-originated loans that are classified as trading securities and realized and unrealized gains or losses on related interest rate swaps. The Loan Origination segment's pre-tax income consists of income from our qualified REIT subsidiary ("QRS") and our taxable REIT subsidiaries ("TRSs"). - 19 -
Three Months Ended September 30, 2004 ------------------------------------------------------ (In thousands) Mortgage-Backed Securities Loan Loan Holdings Origination Servicing Segment Segment Segment Total ------------------------------------------------------ Net interest income: Interest income $ 66,856 $ 27,442 $ - $ 94,298 Interest expense (42,124) (18,252) (1,029) (61,405) ------------------------------------------------------ Total net interest income 24,732 9,190 (1,029) 32,893 ------------------------------------------------------ Non-interest income: Gain on sales of mortgage loans - 28,373 - 28,373 (Loss) gain on sales of mortgage-backed securities and derivatives (4,610) 26,951 - 22,341 Unrealized (loss) gain on mortgage-backed securities and derivatives (1,784) 28,853 - 27,069 Loan servicing fees - - 9,822 9,822 Amortization of mortgage servicing rights - - (7,755) (7,755) Impairment provision of mortgage servicing rights - - (4,807) (4,807) ------------------------------------------------------ Net loan servicing fees (loss) - - (2,740) (2,740) Other non-interest income - 3,349 - 3,349 ------------------------------------------------------ Total non-interest income (6,394) 87,526 (2,740) 78,392 ------------------------------------------------------ Non-interest expenses: Salaries, commissions and benefits, net 55 45,151 1,276 46,482 Occupancy and equipment 5 9,858 121 9,984 Data processing and communications 5 3,637 103 3,745 Office supplies and expenses - 2,831 181 3,012 Marketing and promotion - 2,608 2 2,610 Travel and entertainment - 3,609 11 3,620 Professional fees 44 2,389 91 2,524 Other 2,036 3,591 736 6,363 ------------------------------------------------------ Total non-interest expenses 2,145 73,674 2,521 78,340 ------------------------------------------------------ Net income before income tax benefit 16,193 23,042 (6,290) 32,945 ------------------------------------------------------ Income tax benefit - (7,510) (2,488) (9,998) ------------------------------------------------------ Net income 16,193 30,552 (3,802) 42,943 ------------------------------------------------------ Dividends on preferred stock 1,648 - - 1,648 ------------------------------------------------------ Net income available to common shareholders $ 14,545 $ 30,552 $ (3,802) $ 41,295 ====================================================== September 30, 2004 ------------------------------------------------------ Segment assets $ 7,489,460 $ 1,378,704 $ 208,831 $ 9,076,995 ======================================================
- 20 -
Three Months Ended September 30, 2003 ------------------------------------------------------------ (In thousands) Mortgage-Backed Securities Loan Loan Holdings Origination Servicing Segment Segment Segment Total ------------------------------------------------------------ Net interest income: Interest income $ - $ 29,693 $ - $ 29,693 Interest expense - (15,755) (254) (16,009) ------------------------------------------------------------ Total net interest income - 13,938 (254) 13,684 ------------------------------------------------------------ Non-interest income: Gain on sales of mortgage loans - 105,577 - 105,577 Loan servicing fees - - 8,306 8,306 Amortization of mortgage servicing rights - - (14,903) (14,903) Impairment recovery of mortgage servicing rights - - 7,825 7,825 ------------------------------------------------------------ Net loan servicing fees - - 1,228 1,228 Other non-interest income - 1,423 - 1,423 ------------------------------------------------------------ Total non-interest income - 107,000 1,228 108,228 ------------------------------------------------------------ Non-interest expenses: Salaries, commissions and benefits, net - 61,902 796 62,698 Occupancy and equipment - 7,220 120 7,340 Data processing and communications - 3,659 23 3,682 Office supplies and expenses - 3,362 195 3,557 Marketing and promotion - 3,229 3 3,232 Travel and entertainment - 3,103 19 3,122 Professional fees - 2,118 201 2,319 Other - 4,355 798 5,153 ------------------------------------------------------------ Total non-interest expenses - 88,948 2,155 91,103 ------------------------------------------------------------ Net income before income tax expense (benefit) - 31,990 (1,181) 30,809 ------------------------------------------------------------ Income tax expense (benefit) - 12,873 (758) 12,115 ------------------------------------------------------------ Net income - 19,117 (423) 18,694 ------------------------------------------------------------ Dividends on preferred stock - - - - ------------------------------------------------------------ Net income available to common shareholders $ - $ 19,117 $ (423) $ 18,694 ============================================================ December 31, 2003 ------------------------------------------------------------ Segment assets $ 1,865,414 $ 1,375,276 $ 164,000 $ 3,404,690 ============================================================
- 21 -
Nine Months Ended September 30, 2004 ---------------------------------------------------- (In thousands) Mortgage-Backed Securities Loan Loan Holdings Origination Servicing Segment Segment Segment Total ---------------------------------------------------- Net interest income: Interest income $ 123,194 $ 75,153 $ - $ 198,347 Interest expense (82,026) (47,736) (2,834) (132,596) ------------------------------------------------------ Total net interest income 41,168 27,417 (2,834) 65,751 ------------------------------------------------------ Non-interest income: Gain on sales of mortgage loans - 98,095 - 98,095 (Loss) gain on sales of mortgage-backed securities and derivatives (22,874) 60,184 - 37,310 Unrealized gain on mortgage-backed securities and derivatives 29,131 52,910 - 82,041 Loan servicing fees - - 28,870 28,870 Amortization of mortgage servicing rights - - (22,865) (22,865) Impairment provision of mortgage servicing rights - - (10,139) (10,139) ------------------------------------------------------ Net loan servicing fees (loss) - - (4,134) (4,134) Other non-interest income - 5,553 - 5,553 ------------------------------------------------------ Total non-interest income 6,257 216,742 (4,134) 218,865 ------------------------------------------------------ Non-interest expenses: Salaries, commissions and benefits, net 159 125,053 3,593 128,805 Occupancy and equipment 5 25,691 390 26,086 Data processing and communications 11 10,068 217 10,296 Office supplies and expenses - 8,525 820 9,345 Marketing and promotion - 7,013 5 7,018 Travel and entertainment 2 8,947 135 9,084 Professional fees 251 6,060 470 6,781 Other 5,109 8,044 2,730 15,883 ------------------------------------------------------ Total non-interest expenses 5,537 199,401 8,360 213,298 ------------------------------------------------------ Net income before income tax benefit 41,888 44,758 (15,328) 71,318 ------------------------------------------------------ Income tax benefit - (20,267) (6,063) (26,330) ------------------------------------------------------ Net income 41,888 65,025 (9,265) 97,648 ------------------------------------------------------ Dividends on preferred stock 1,648 - - 1,648 ------------------------------------------------------ Net income available to common shareholders $ 40,240 $ 65,025 $ (9,265) $ 96,000 ====================================================== September 30, 2004 ------------------------------------------------------ Segment assets $ 7,489,460 $ 1,378,704 $ 208,831 $ 9,076,995 ======================================================
- 22 -
Nine Months Ended September 30, 2003 ------------------------------------------------------------ (In thousands) Mortgage-Backed Securities Loan Loan Holdings Origination Servicing Segment Segment Segment Total ------------------------------------------------------------ Net interest income: Interest income $ - $ 76,117 $ - $ 76,117 Interest expense - (37,036) (1,754) (38,790) ------------------------------------------------------------ Total net interest income - 39,081 (1,754) 37,327 ------------------------------------------------------------ Non-interest income: Gain on sales of mortgage loans - 323,070 - 323,070 Loan servicing fees - - 29,255 29,255 Amortization of mortgage servicing rights - - (44,958) (44,958) Impairment provision of mortgage servicing rights - - (4,360) (4,360) ------------------------------------------------------------ Net loan servicing fees (loss) - - (20,063) (20,063) Other non-interest income - 5,592 - 5,592 ------------------------------------------------------------ Total non-interest income - 328,662 (20,063) 308,599 ------------------------------------------------------------ Non-interest expenses: Salaries, commissions and benefits, net - 159,027 2,524 161,551 Occupancy and equipment - 19,338 304 19,642 Data processing and communications - 9,436 73 9,509 Office supplies and expenses - 9,526 901 10,427 Marketing and promotion - 8,822 14 8,836 Travel and entertainment - 7,977 23 8,000 Professional fees - 5,318 514 5,832 Other - 14,796 2,445 17,241 ------------------------------------------------------------ Total non-interest expenses - 234,240 6,798 241,038 ------------------------------------------------------------ Net income before income tax expense (benefit) - 133,503 (28,615) 104,888 ------------------------------------------------------------ Income tax expense (benefit) - 54,736 (11,732) 43,004 ------------------------------------------------------------ Net income - 78,767 (16,883) 61,884 ------------------------------------------------------------ Dividends on preferred stock - - - - ------------------------------------------------------------ Net income available to common shareholders $ - $ 78,767 $ (16,883) $ 61,884 ============================================================ December 31, 2003 ------------------------------------------------------------ Segment assets $ 1,865,414 $ 1,375,276 $ 164,000 $ 3,404,690 ============================================================
- 23 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Regarding Forward-Looking Statements This report, including, but not limited to, "Management's Discussion and Analysis of Financial Condition and Results of Operations," contains certain forward-looking statements within the meaning of the federal securities laws. Some of the forward-looking statements can be identified by the use of forward-looking words. When used in this report, statements which are not historical in nature, including the words "anticipate," "may," "estimate," "should," "seek," "expect," "plan," "believe," "intend," and similar words, or the negatives of those words, are intended to identify forward-looking statements. Statements which also contain a projection of revenues, earnings (loss), capital expenditures, dividends, capital structure or other financial terms are intended to be forward-looking statements. Certain statements regarding the following particularly are forward-looking in nature: o our business strategy; o future performance, developments, market forecasts or projected dividends; o projected acquisitions or joint ventures; and o projected capital expenditures. It is important to note that the description of our business in general, and our mortgage-backed securities holdings in particular, is a statement about our operations as of a specific point in time. It is not meant to be construed as an investment policy, and the types of assets we hold, the amount of leverage we use, the liabilities we incur and other characteristics of our assets and liabilities are subject to reevaluation and change without notice. The forward-looking statements in this report are based on our management's beliefs, assumptions, and expectations of our future economic performance, taking into account the information currently available to it. These statements are not statements of historical fact. Forward-looking statements are subject to a number of factors, risks and uncertainties, some of which are not currently known to us, that may cause our actual results, performance or financial condition to be materially different from our expectations of future results, performance or financial position. These factors include, without limitation: o our limited operating history with respect to our proposed portfolio strategy; o our proposed portfolio strategy may be changed or modified by our management without advance notice to stockholders, and that we may suffer losses as a result of such modifications or changes; o our need for a significant amount of cash to operate our business; o risks associated with the use of leverage; o disruptions in the market for repurchase facilities; o failure to match the interest rates on our borrowings with the interest rates on the mortgage-backed securities we hold; o failure to maintain our status as a real estate investment trust; o changes in federal and state tax laws affecting real estate investment trusts; o general economic, political, market, financial or legal conditions; and o those risks and uncertainties discussed in our filings with the Securities and Exchange Commission. In light of these risks, uncertainties and assumptions, any forward-looking events discussed in this report might not occur, and we qualify any and all of our forward-looking statements entirely by these cautionary factors. You are cautioned not to place undue reliance on forward-looking statements. Such forward-looking statements are inherently uncertain, and actual results may differ from expectations. We are not - 24 - under any obligation, and we expressly disclaim any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. Critical Accounting Policies and Estimates Our accounting policies are described in Note 1 to the Consolidated Financial Statements. We have identified the following accounting policies that are critical to the presentation of our financial statements and that require critical accounting estimates by management. Mortgage-Backed Securities - We record our mortgage-backed securities at fair value. The fair values of our mortgage-backed securities are generally based on market prices provided by certain dealers who make markets on these financial instruments or third-party pricing services. If the fair value of a mortgage-backed security is not reasonably available, management estimates the fair value, which requires management's judgment and may not be indicative of the amounts we could realize in a current market exchange. Mortgage Loans Held for Sale - Mortgage loans held for sale are carried at the lower of cost or aggregate market value. For mortgage loans held for sale that are hedged with forward sale commitments, the carrying value is adjusted for the change in market during the time the hedge was deemed to be highly effective. The market value is determined by outstanding commitments from investors or current yield requirements calculated on an aggregate basis. Mortgage Servicing Rights ("MSRs") - When we acquire servicing assets through either purchase or origination of loans and sell or securitize 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 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. We estimate the fair value of the servicing assets by obtaining market information from a primary MSR broker. 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. We have determined that the predominant risk characteristic is the interest rate on the underlying loan. We measure 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, we periodically evaluate our MSRs for other than temporary impairment to determine if the carrying value before the application of the valuation allowance is recoverable. We receive a sensitivity analysis of the estimated fair value of our MSRs assuming a 200-basis-point instantaneous increase in interest rates from an independent MSR broker. The fair value estimate includes changes in market assumptions that would be expected given the increase in mortgage rates (e.g., prepayment speeds would be lower). We believe 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 we determine 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 Assets and Derivative Liabilities - Our 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. IRLCs associated with loans expected to be sold are recorded at fair value with changes in fair value recorded to current earnings. The fair value of the IRLCs initiated on or before March 31, 2004 is determined by an estimate of the ultimate gain on sale of the loans, including the value of MSRs, net of estimated net costs remaining to originate the loan and any net deferred origination costs. In March 2004, the SEC issued SAB No. 105, which provides industry guidance which changed the timing of recognition of MSRs for IRLCs initiated after March 31, 2004. In SAB No. 105, the SEC stated that the value of expected future cash flows related to servicing rights should be excluded when determining the fair value of derivative IRLCs. Under the new policy, the value of the expected future cash flow related to servicing rights is not recognized until the underlying loans are sold. We use 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. We use mortgage forward delivery contracts designated as fair value hedging instruments to hedge 100% of our agency-eligible conforming fixed-rate loans and most of our non-conforming fixed-rate loans held for sale. At the inception of the hedge, we formally document the relationship between the forward delivery contracts and the mortgage inventory, as well as our objective and strategy for undertaking the hedge transactions. In the case of our conventional conforming fixed-rate loan products, 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 - 25 - being hedged; hence, the forward delivery contracts effectively fix the forward sales price and thereby substantially eliminate interest rate and price risk to us. We classify and account 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. We enter into interest rate swap agreements to manage our interest rate exposure when financing our adjustable-rate mortgage loans and mortgage-backed securities. Certain swap agreements accounted for as cash flow hedges and certain swap agreements not designated as cash flow hedges are both carried on the balance sheet at fair value. The fair values of our swap agreements are generally based on market prices provided by certain dealers who make markets in these financial instruments or third-party pricing services. If the fair value of an interest rate swap agreement is not reasonably available, management estimates the fair value, which requires management's judgment and may not be indicative of the amounts we could realize in a current market exchange. Goodwill - Goodwill represents the excess purchase price over the fair value of net assets stemming from business acquisitions, including identifiable intangibles. We test 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 related to our loan origination segment includes a forecast of the expected future loan originations and the related revenues and expenses. The discounted cash flow calculation related to our Mortgage-Backed Securities Holdings segment includes a forecast of the expected future net interest income, gain on mortgage-backed securities and the related revenues and expenses. These cash flows are discounted using a rate that is estimated to be a weighted-average cost of capital for similar companies. We further test to ensure that the fair value of all our business units does not exceed our total market capitalization. - 26 - Financial Condition At September 30, 2004, 80.8% of our total assets were mortgage-backed securities and 12.5% were mortgage loans held for sale, compared to 51.8% and 35.7%, respectively, at December 31, 2003. Total assets increased $5.7 billion to $9.1 billion at September 30, 2004 from $3.4 billion at December 31, 2003. The increase primarily reflects an increase in mortgage-backed securities of $5.6 billion. The growth in mortgage-backed securities was primarily funded by an increase in reverse repurchase agreements of $5.6 billion. We began issuing commercial paper in the quarter ended June 30, 2004, to fund our loans held for sale. As of September 30, 2004, we had $462.7 million of commercial paper outstanding, which allowed us to reduce the amount of loans funded by warehouse lines of credit. The following table summarizes our mortgage-backed securities owned at September 30, 2004 and December 31, 2003, classified by type of issuer and by ratings categories:
September 30, 2004 -------------------------------------------------------------------------------- Trading Securities Securities Available for Sale Total ---------------------- ----------------------------- ---------------------- Carrying Portfolio Carrying Portfolio Carrying Portfolio Value Mix Value Mix Value Mix ---------- --------- ---------- --------- ---------- --------- (Dollars in thousands) Agency securities $ 760,957 28.6% $ 854,122 18.3% $1,615,079 22.0% Privately issued: AAA 1,714,299 64.4 3,750,873 80.3 5,465,172 74.5 AA - - 17,750 0.4 17,750 0.2 A 59,199 2.2 17,938 0.4 77,137 1.1 BBB 70,601 2.7 9,081 0.2 79,682 1.1 Unrated (1) 56,306 2.1 20,762 0.4 77,068 1.1 ---------- --------- ---------- --------- ---------- --------- Total $2,661,362 100.0% $4,670,526 100.0% $7,331,888 100.0% ========== ========= ========== ========= ========== ========= (1) Unrated subordinated certificates retained by the Company as credit enhancements for its privately issued securities. December 31, 2003 -------------------------------------------------------------------------------- Trading Securities Securities Available for Sale Total ---------------------- ----------------------------- ---------------------- Carrying Portfolio Carrying Portfolio Carrying Portfolio Value Mix Value Mix Value Mix ---------- --------- ---------- --------- ---------- --------- (Dollars in thousands) Agency securities $287,577 60.0% $ 713,790 55.6% $1,001,367 56.8% Privately issued: AAA 167,974 35.0 570,025 44.4 737,999 41.8 AA 11,322 2.4 - - 11,322 0.6 A 6,470 1.3 - - 6,470 0.4 Unrated (1) 6,470 1.3 - - 6,470 0.4 ---------- --------- ---------- --------- ---------- --------- Total $479,813 100.0% $1,283,815 100.0% $1,763,628 100.0% ========== ========= ========== ========= ========== ========= (1) An unrated subordinated certificate retained by the Company as a credit enhancement for its privately issued securities.
- 27 - The following table classifies our mortgage-backed securities portfolio by type of interest rate index at September 30, 2004 and December 31, 2003:
September 30, 2004 -------------------------------------------------------------------------- Securities Trading Securities Available for Sale Total ---------------------- ----------------------- ---------------------- Carrying Portfolio Carrying Portfolio Carrying Portfolio Value Mix Value Mix Value Mix ---------- --------- ---------- ---------- ---------- --------- (Dollars in thousands) Index: One-month LIBOR $ 124,265 4.7% $ 127,196 2.7% $ 251,461 3.4% Six-month LIBOR 751,600 28.2 2,532,795 54.3 3,284,395 44.9 One-year LIBOR 1,777,154 66.8 1,466,573 31.4 3,243,727 44.2 One-year constant maturity treasury 8,343 0.3 543,962 11.6 552,305 7.5 ---------- --------- ---------- --------- ---------- --------- Total $2,661,362 100.0% $4,670,526 100.0% $7,331,888 100.0% ========== ========= ========== ========= ========== ========= December 31, 2003 -------------------------------------------------------------------------- Securities Trading Securities Available for Sale Total ---------------------- ----------------------- ---------------------- Carrying Portfolio Carrying Portfolio Carrying Portfolio Value Mix Value Mix Value Mix ---------- --------- ---------- ---------- ---------- --------- (Dollars in thousands) Index: One-month LIBOR $ 189,772 39.6% $ - -% $ 189,772 10.8% Six-month LIBOR - - 517,248 40.3 517,248 29.3 One-year LIBOR 261,548 54.5 610,963 47.6 872,511 49.5 One-year constant maturity treasury 28,493 5.9 155,604 12.1 184,097 10.4 ---------- --------- ---------- --------- ---------- --------- Total $ 479,813 100.0% $1,283,815 100.0% $1,763,628 100.0% ========== ========= ========== ========= ========== =========
- 28 - The following table classifies our mortgage-backed securities portfolio by product type at September 30, 2004 and December 31, 2003:
September 30, 2004 -------------------------------------------------------------------------- Securities Trading Securities Available for Sale Total ---------------------- ----------------------- ---------------------- Carrying Portfolio Carrying Portfolio Carrying Portfolio Value Mix Value Mix Value Mix ---------- --------- ---------- --------- ---------- --------- (Dollars in thousands) Product: ARMs less than 3 years $ 163,946 6.2% $1,049,350 22.5% $1,213,296 16.6% 3/1 Hybrid ARM 460,672 17.3 561,420 12.0 1,022,092 13.9 5/1 Hybrid ARM 2,036,744 76.5 3,059,756 65.5 5,096,500 69.5 ---------- --------- ---------- --------- ---------- --------- Total $2,661,362 100.0% $4,670,526 100.0% $7,331,888 100.0% ========== ========= ========== ========= ========== ========= December 31, 2003 -------------------------------------------------------------------------- Securities Trading Securities Available for Sale Total ---------------------- ----------------------- ---------------------- Carrying Portfolio Carrying Portfolio Carrying Portfolio Value Mix Value Mix Value Mix ---------- --------- ---------- --------- ---------- --------- (Dollars in thousands) Product: ARMs less than 3 years $ 189,771 39.6% $ 212,897 16.6% $ 402,668 22.9% 3/1 Hybrid ARM 133,019 27.7 415,674 32.4 548,693 31.1 5/1 Hybrid ARM 133,140 27.7 619,688 48.2 752,828 42.6 7/1 Hybrid ARM 23,883 5.0 35,556 2.8 59,439 3.4 ---------- --------- ---------- --------- ---------- --------- Total $ 479,813 100.0% $1,283,815 100.0% $1,763,628 100.0% ========== ========= ========== ========= ========== =========
During the three months ended September 30, 2004, we purchased $0.5 billion of mortgage-backed securities and added $2.8 billion of self-originated mortgage-backed securities to our portfolio. During the nine months ended September 30, 2004, we purchased $5.2 billion of mortgage-backed securities and added $5.8 billion of self-originated mortgage-backed securities to our portfolio. During the three months and nine months ended September 30, 2004, we sold $3.0 billion and $4.7 billion of mortgage-backed securities, respectively. The average cost basis of our mortgage-backed securities, excluding unrealized gains and losses, was 100.7% of par as of September 30, 2004 and 101.5% of par as of December 31, 2003. We had a payable for securities purchased of $259.7 million as of December 31, 2003. - 29 - Results of Operations - Comparison of the Three Months Ended September 30, 2004 and 2003
Three Months Ended September 30, 2004 ----------------------------------------------------- (In thousands) Mortgage-Backed Securities Loan Loan Holdings Origination Servicing Segment Segment Segment Total ----------------------------------------------------- Net interest income: Interest income $ 66,856 $ 27,442 $ - $ 94,298 Interest expense (42,124) (18,252) (1,029) (61,405) ----------------------------------------------------- Total net interest income 24,732 9,190 (1,029) 32,893 ----------------------------------------------------- Non-interest income: Gain on sales of mortgage loans - 28,373 - 28,373 (Loss) gain on sales of mortgage-backed securities and derivatives (4,610) 26,951 - 22,341 Unrealized (loss) gain on mortgage-backed securities and derivatives (1,784) 28,853 - 27,069 Loan servicing fees - - 9,822 9,822 Amortization of mortgage servicing rights - - (7,755) (7,755) Impairment provision of mortgage servicing rights - - (4,807) (4,807) ----------------------------------------------------- Net loan servicing fees (loss) - - (2,740) (2,740) Other non-interest income - 3,349 - 3,349 ----------------------------------------------------- Total non-interest income (6,394) 87,526 (2,740) 78,392 ----------------------------------------------------- Non-interest expenses: Salaries, commissions and benefits, net 55 45,151 1,276 46,482 Occupancy and equipment 5 9,858 121 9,984 Data processing and communications 5 3,637 103 3,745 Office supplies and expenses - 2,831 181 3,012 Marketing and promotion - 2,608 2 2,610 Travel and entertainment - 3,609 11 3,620 Professional fees 44 2,389 91 2,524 Other 2,036 3,591 736 6,363 ----------------------------------------------------- Total non-interest expenses 2,145 73,674 2,521 78,340 ----------------------------------------------------- Net income before income tax benefit 16,193 23,042 (6,290) 32,945 ----------------------------------------------------- Income tax benefit - (7,510) (2,488) (9,998) ----------------------------------------------------- Net income 16,193 30,552 (3,802) 42,943 ----------------------------------------------------- Dividends on preferred stock 1,648 - - 1,648 ----------------------------------------------------- Net income available to common shareholders $ 14,545 $ 30,552 $ (3,802) $ 41,295 ===================================================== September 30, 2004 ----------------------------------------------------- Segment assets $ 7,489,460 $1,378,704 $ 208,831 $9,076,995 =====================================================
- 30 -
Three Months Ended September 30, 2003 ----------------------------------------------------- (In thousands) Mortgage-Backed Securities Loan Loan Holdings Origination Servicing Segment Segment Segment Total ----------------------------------------------------- Net interest income: Interest income $ - $ 29,693 $ - $ 29,693 Interest expense - (15,755) (254) (16,009) ----------------------------------------------------- Total net interest income - 13,938 (254) 13,684 ----------------------------------------------------- Non-interest income: Gain on sales of mortgage loans - 105,577 - 105,577 Loan servicing fees - - 8,306 8,306 Amortization of mortgage servicing rights - - (14,903) (14,903) Impairment recovery of mortgage servicing rights - - 7,825 7,825 ----------------------------------------------------- Net loan servicing fees - - 1,228 1,228 Other non-interest income - 1,423 - 1,423 ----------------------------------------------------- Total non-interest income - 107,000 1,228 108,228 ----------------------------------------------------- Non-interest expenses: Salaries, commissions and benefits, net - 61,902 796 62,698 Occupancy and equipment - 7,220 120 7,340 Data processing and communications - 3,659 23 3,682 Office supplies and expenses - 3,362 195 3,557 Marketing and promotion - 3,229 3 3,232 Travel and entertainment - 3,103 19 3,122 Professional fees - 2,118 201 2,319 Other - 4,355 798 5,153 ----------------------------------------------------- Total non-interest expenses - 88,948 2,155 91,103 ----------------------------------------------------- Net income before income tax expense (benefit) - 31,990 (1,181) 30,809 ----------------------------------------------------- Income tax expense (benefit) - 12,873 (758) 12,115 ----------------------------------------------------- Net income - 19,117 (423) 18,694 ----------------------------------------------------- Dividends on preferred stock - - - - ----------------------------------------------------- Net income available to common shareholders $ - $ 19,117 $ (423) $ 18,694 ===================================================== December 31, 2003 ----------------------------------------------------- Segment assets $ 1,865,414 $1,375,276 $ 164,000 $3,404,690 =====================================================
- 31 - Overview Net income available to common shareholders for the three months ended September 30, 2004 was $41.3 million, compared to $18.7 million for the three months ended September 30, 2003, an increase of $22.6 million, or 120.9%. This increase was the result of a $22.1 million decrease in income tax expense, a $19.2 million increase in net interest income and a $12.8 million decrease in non-interest expense, partly offset by a $29.8 million decrease in non-interest income and a $1.7 million increase in dividends on preferred stock. The $29.8 million decrease in non-interest income consists of a $77.2 million decrease in gain on sales of mortgage loans and a $4.0 million decrease in net loan servicing fees, partly offset by a $49.4 million increase in realized and unrealized gain on mortgage-backed securities and derivatives and a $2.0 million increase in non-interest income in the third quarter of 2004 versus the third quarter of 2003. Mortgage-Backed Securities Holdings Segment Our Mortgage-Backed Securities Holdings segment began operations on December 3, 2003 as a result of the reorganization of the Company into a REIT and the merger with Apex. The segment's business is the holding for net interest income of adjustable-rate mortgage ("ARM")-backed securities. The following table presents the average balances for the Mortgage-Backed Securities Holdings segment's mortgage-backed securities and reverse repurchase agreements, corresponding annualized effective rate of interest and the related interest income or expense:
Three Months Ended September 30, ----------------------------------------------- (Dollars in thousands) 2004 ----------------------------------------------- Average Balance Interest Average Yield/Cost --------------- -------- ------------------ Mortgage-backed securities, net (1) $ 7,179,816 $ 66,856 3.72% --------------- -------- ------------------ Reverse repurchase agreements (2) 6,776,787 42,124 2.46% --------------- -------- ------------------ Net interest income $ 24,732 ======== Interest rate spread 1.26% ================== Net interest margin 1.40% ==================
(1) The average yield does not give effect to changes in the fair value that are reflected as a component of stockholders' equity. (2) Includes $13.2 million of net interest expense on interest rate swap agreements. Revenues. Total revenues for the Mortgage-Backed Securities Holdings segment for the three months ended September 30, 2004 were $18.3 million, consisting of net interest income of $24.7 million, loss on sales of mortgage-backed securities and derivatives of $4.6 million and unrealized loss on mortgage-backed securities and derivatives of $1.8 million. Loan Origination Segment Our Loan Origination segment's primary business is the origination and sale or securitization of primarily one-to-four family residential mortgage loans. Total loan originations for the three months ended September 30, 2004 were $5.3 billion compared to $7.1 billion for the third quarter of 2003, a 25.0% decrease. Our retail originations, which are conducted through our community loan production offices and Internet call center, were 51% of our loan originations in the three months ended September 30, 2004 compared to 78% of our originations in the three months ended September 30, 2003. Mortgage brokers accounted for 49% of our loan originations in the three months ended September 30, 2004 compared to 22% of our originations in the three months ended September 30, 2003. Mortgage brokers accounted for an increased percentage of our originations in the three months ended September 30, 2004 due to the opening of wholesale branches in the western United States. Gain on Sales of Mortgage Loans, Mortgage-Backed Securities and Derivatives. Gain on sales of mortgage loans, mortgage-backed securities and derivatives for the three months ended September 30, 2004 was $84.2 million compared to $105.6 million in the three months ended September 30, 2003. - 32 - Gain on sales of mortgage loans for the three months ended September 30, 2004 totaled $28.4 million on non-securitized loan sales of $2.9 billion, compared to $105.6 million on loan sales of $7.0 billion for the three months ended September 30, 2003. The average gain on sale margin decreased to 0.98% in the third quarter of 2004 from 1.52% in the third quarter of 2003. The decline in average margin reflects the rise in fees paid to brokers on wholesale originations as a result of the increased percentage of wholesale originations in the third quarter of 2004 versus the third quarter of 2003. The Loan Origination segment recognized $27.0 million of gain on sales of mortgage-backed securities and derivatives during the third quarter of 2004. These gains reflect the gains that existed on the date of securitization of self-originated loans and realized gains or losses on related interest rate swaps. The Loan Origination segment recognized $28.9 million of unrealized gain on mortgage-backed securities and derivatives relating to market valuations of mortgage-backed securities classified in the trading portfolio during the three months ended September 30, 2004. These unrealized gains reflect the gains that existed on the date of securitization of self-originated loans that are classified as trading securities and unrealized gains or losses on related interest rate swaps. Net Interest Income. Total interest income for the three months ended September 30, 2004 on our Loan Origination segment's mortgage loans held for sale was $27.4 million, compared to interest income for the three months ended September 30, 2003 of $29.7 million, a decrease of $2.3 million, or 7.6%. Our Loan Origination segment funds its loan inventory primarily through a $2.0 billion Secured Liquidity Note Program and borrowing facilities with several mortgage warehouse lenders. Total interest expense for the three months ended September 30, 2004 was $18.3 million, compared to interest expense for the three months ended September 30, 2003 of $15.8 million, a $2.5 million increase. Included in interest expense in the third quarter of 2004 is $4.3 million of net interest expense on interest rate swap agreements accounted for as cash flow hedges. Other Non-Interest Income. Other non-interest income totaled $3.3 million for the three months ended September 30, 2004 and $1.4 million for the three months ended September 30, 2003. For the three months ended September 30, 2004, other non-interest income primarily includes revenue from a legal settlement of $1.5 million, reinsurance premiums earned totaling approximately $0.6 million, revenue from rental income of $0.5 million and revenue from title services of $0.2 million. For the three months ended September 30, 2003, other non-interest income primarily consists of volume incentive bonuses received from loan purchasers totaling approximately $0.6 million and revenue from title services of $0.4 million. Non-Interest Expenses. Total non-interest expenses of our Loan Origination segment for the three months ended September 30, 2004 were $73.7 million, compared to $88.9 million for the three months ended September 30, 2003. Our operating expenses represent costs that are not eligible to be added to the book value of the loans because they are not considered direct origination costs under the rules of SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Costs of Leases." Direct origination costs are added to the book value of loans and either reduce the gain on sale of loans if the loans are sold or are amortized over the life of the loan. Salaries, commissions and benefits for the three months ended September 30, 2004 were $45.2 million, or 85 basis points of total loan originations, compared to $61.9 million, or 87 basis points of total loan originations, for the three months ended September 30, 2003. The decrease in basis points reflects the higher percentage of wholesale originations in the third quarter of 2004 versus the third quarter of 2003. The third quarter of 2004 salaries, commissions and benefits expenses include salaries relating to our acquisition of certain home loan centers of Washington Mutual, Inc. (the "Washington Mutual branches") in August 2004. Operating expenses, excluding salaries, commissions and benefits, were $28.5 million, or 54 basis points of total loan originations for the three months ended September 30, 2004, compared to $27.0 million, or 38 basis points of total loan originations for the three months ended September 30, 2003. The increase in operating expenses in basis points includes an 8 basis point increase in occupancy and equipment expense in the third quarter of 2004 versus the third quarter of 2003. The third quarter of 2004 operating expenses include lease obligations and certain fixed asset expenses relating to our acquisition of the Washington Mutual branches in August 2004. Income Tax Expense. Income tax expense decreased to a benefit of $7.5 million for the three months ended September 30, 2004 from an expense of $12.9 million for the three months ended September 30, 2003, a decrease of $20.4 million. The decrease in income tax expense in the third quarter of 2004 versus the third quarter of 2003 reflects a decrease in income before income taxes relating to our taxable REIT subsidiary ("TRS"). - 33 - Loan Servicing Segment The Loan Servicing segment total revenues for the three months ended September 30, 2004 were a loss of $3.8 million compared to $0.9 million for the three months ended September 30, 2003, a decrease of $4.7 million. Net loan servicing fees were losses of $2.7 million for the three months ended September 30, 2004, compared to revenues of $1.2 million for the three months ended September 30, 2003. Loan servicing fees increased to $9.8 million for the three months ended September 30, 2004 from $8.3 million for the three months ended September 30, 2003, an increase of $1.5 million, or 18.3%. The increase in loan servicing fees in the third quarter of 2004 versus the third quarter of 2003 is primarily the result of an increase in loans serviced for others. Included in loan servicing fees are gains on Ginnie Mae early buy-out sales of $0.7 million for the three months ended September 30, 2004 compared to $2.8 million for the three months ended September 30, 2003, a decrease of $2.1 million. Amortization decreased to $7.8 million for the three months ended September 30, 2004 from $14.9 million for the three months ended September 30, 2003, a decrease of $7.1 million. The decrease in amortization was due to a rise in interest rates which resulted in slower prepayment speeds in the three months ended September 30, 2004 versus the three months ended September 30, 2003. We recognized a temporary impairment provision of $4.8 million for the three months ended September 30, 2004 versus a temporary impairment recovery of $7.8 million for the three months ended September 30, 2003, resulting in a decrease in net loan servicing fees of $12.6 million. The increase in impairment provision in the three months ended September 30, 2004 was due to a decrease in the fair value of MSRs attributable to an increase in estimated future prepayment speeds. Non-Interest Expenses. Total non-interest expenses of our Loan Servicing segment were $2.5 million for the three months ended September 30, 2004 and $2.2 million for the three months ended September 30, 2003. Income Tax Benefit. Income tax benefit increased to $2.5 million for the three months ended September 30, 2004 from a $0.8 million benefit for the three months ended September 30, 2003, an increase of $1.7 million. - 34 - Results of Operations - Comparison of the Nine Months Ended September 30, 2004 and 2003
Nine Months Ended September 30, 2004 ------------------------------------------------------ (In thousands) Mortgage-Backed Securities Loan Loan Holdings Origination Servicing Segment Segment Segment Total ------------------------------------------------------ Net interest income: Interest income $ 123,194 $ 75,153 $ - $ 198,347 Interest expense (82,026) (47,736) (2,834) (132,596) ------------------------------------------------------ Total net interest income 41,168 27,417 (2,834) 65,751 ------------------------------------------------------ Non-interest income: Gain on sales of mortgage loans - 98,095 - 98,095 (Loss) gain on sales of mortgage-backed securities and derivatives (22,874) 60,184 - 37,310 Unrealized gain on mortgage-backed securities and derivatives 29,131 52,910 - 82,041 Loan servicing fees - - 28,870 28,870 Amortization of mortgage servicing rights - - (22,865) (22,865) Impairment provision of mortgage servicing rights - - (10,139) (10,139) ------------------------------------------------------ Net loan servicing fees (loss) - - (4,134) (4,134) Other non-interest income - 5,553 - 5,553 ------------------------------------------------------ Total non-interest income 6,257 216,742 (4,134) 218,865 ------------------------------------------------------ Non-interest expenses: Salaries, commissions and benefits, net 159 125,053 3,593 128,805 Occupancy and equipment 5 25,691 390 26,086 Data processing and communications 11 10,068 217 10,296 Office supplies and expenses - 8,525 820 9,345 Marketing and promotion - 7,013 5 7,018 Travel and entertainment 2 8,947 135 9,084 Professional fees 251 6,060 470 6,781 Other 5,109 8,044 2,730 15,883 ------------------------------------------------------ Total non-interest expenses 5,537 199,401 8,360 213,298 ------------------------------------------------------ Net income before income tax benefit 41,888 44,758 (15,328) 71,318 ------------------------------------------------------ Income tax benefit - (20,267) (6,063) (26,330) ------------------------------------------------------ Net income 41,888 65,025 (9,265) 97,648 ------------------------------------------------------ Dividends on preferred stock 1,648 - - 1,648 ------------------------------------------------------ Net income available to common shareholders $ 40,240 $ 65,025 $ (9,265) $ 96,000 ====================================================== September 30, 2004 ------------------------------------------------------ Segment assets $ 7,489,460 $ 1,378,704 $ 208,831 $ 9,076,995 ======================================================
- 35 -
Nine Months Ended September 30, 2003 ------------------------------------------------------ (In thousands) Mortgage-Backed Securities Loan Loan Holdings Origination Servicing Segment Segment Segment Total ------------------------------------------------------ Net interest income: Interest income $ - $ 76,117 $ - $ 76,117 Interest expense - (37,036) (1,754) (38,790) ------------------------------------------------------ Total net interest income - 39,081 (1,754) 37,327 ------------------------------------------------------ Non-interest income: Gain on sales of mortgage loans - 323,070 - 323,070 Loan servicing fees - - 29,255 29,255 Amortization of mortgage servicing rights - - (44,958) (44,958) Impairment provision of mortgage servicing rights - - (4,360) (4,360) ------------------------------------------------------ Net loan servicing fees (loss) - - (20,063) (20,063) Other non-interest income - 5,592 - 5,592 ------------------------------------------------------ Total non-interest income - 328,662 (20,063) 308,599 ------------------------------------------------------ Non-interest expenses: Salaries, commissions and benefits, net - 159,027 2,524 161,551 Occupancy and equipment - 19,338 304 19,642 Data processing and communications - 9,436 73 9,509 Office supplies and expenses - 9,526 901 10,427 Marketing and promotion - 8,822 14 8,836 Travel and entertainment - 7,977 23 8,000 Professional fees - 5,318 514 5,832 Other - 14,796 2,445 17,241 ------------------------------------------------------ Total non-interest expenses - 234,240 6,798 241,038 ------------------------------------------------------ Net income before income tax expense (benefit) - 133,503 (28,615) 104,888 ------------------------------------------------------ Income tax expense (benefit) - 54,736 (11,732) 43,004 ------------------------------------------------------ Net income - 78,767 (16,883) 61,884 ------------------------------------------------------ Dividends on preferred stock - - - - ------------------------------------------------------ Net income available to common shareholders $ - $ 78,767 $ (16,883) $ 61,884 ====================================================== December 31, 2003 ------------------------------------------------------ Segment assets $ 1,865,414 $ 1,375,276 $ 164,000 $ 3,404,690 ======================================================
- 36 - Overview Net income available to common shareholders for the nine months ended September 30, 2004 was $96.0 million, compared to $61.9 million for the nine months ended September 30, 2003, an increase of $34.1 million, or 55.1%. This increase was the result of a $69.4 million decrease in income tax expense, a $28.4 million increase in net interest income and a $27.7 million decrease in non-interest expense, partly offset by an $89.7 million decrease in non-interest income and a $1.7 million increase in dividends on preferred stock. The $89.7 million decrease in non-interest income consists of a $225.0 million decrease in gain on sales of mortgage loans, partly offset by a $119.4 million increase in realized and unrealized gain on mortgage-backed securities and derivatives and a $15.9 million increase in net loan servicing fees in the 2004 period versus the 2003 period. Mortgage-Backed Securities Holdings Segment The following table presents the average balances for the Mortgage-Backed Securities Holdings segment's mortgage-backed securities and reverse repurchase agreements, corresponding annualized effective rate of interest and the related interest income or expense:
Nine Months Ended September 30, ----------------------------------------------- (Dollars in thousands) 2004 ----------------------------------------------- Average Balance Interest Average Yield/Cost --------------- -------- ------------------ Mortgage-backed securities, net (1) $ 4,659,398 $123,194 3.53% --------------- -------- ------------------ Reverse repurchase agreements (2) 4,366,228 82,026 2.50% --------------- -------- ------------------ Net interest income $ 41,168 ======== Interest rate spread 1.03% ================== Net interest margin 1.19% ================== (1) The average yield does not give effect to changes in the fair value that are reflected as a component of stockholders' equity. (2) Includes $31.6 million of net interest expense on interest rate swap agreements.
Revenues. Total revenues for the Mortgage-Backed Securities Holdings segment for the nine months ended September 30, 2004 were $47.4 million, consisting of net interest income of $41.2 million, unrealized gain on mortgage-backed securities and derivatives of $29.1 million and loss on sales of mortgage-backed securities and derivatives of $22.9 million. Loan Origination Segment Total loan originations for the nine months ended September 30, 2004 were $16.3 billion compared to $17.5 billion for the nine months ended September 30, 2003, a 6.9% decrease. Our retail originations, which are conducted through our community loan production offices and Internet call center, were 48% of our loan originations in the nine months ended September 30, 2004 compared to 80% of our originations in the nine months ended September 30, 2003. Mortgage brokers accounted for 52% of our loan originations in the nine months ended September 30, 2004 compared to 20% of our originations in the nine months ended September 30, 2003. Mortgage brokers accounted for an increased percentage of our originations in the nine months ended September 30, 2004 due to the opening of wholesale branches in the western United States. Gain on Sales of Mortgage Loans, Mortgage-Backed Securities and Derivatives. Gain on sales of mortgage loans, mortgage-backed securities and derivatives for the nine months ended September 30, 2004 was $211.2 million compared to $323.1 million in the nine months ended September 30, 2003. The change in fair value of IRLCs included in gain on sale of loans in the 2004 period was reduced as a result of the Company's adoption of Staff Accounting Bulletin No. 105 ("SAB No. 105"). Gain on sales of mortgage loans for the nine months ended September 30, 2004 totaled $98.1 million on non-securitized loans sales of $10.7 billion, compared to $323.1 million on loan sales of $16.7 billion for the nine months ended September 30, 2003. The average gain on sale - 37 - margin decreased to 0.91% in the 2004 period from 1.93% in the 2003 period. The decline in average margin reflects higher broker fee expenses included as a reduction to gain on sale of loans as a result of the increased percentage of wholesale originations in the 2004 period versus the 2003 period. The Loan Origination segment recognized $60.2 million of gain on sales of mortgage-backed securities and derivatives during the nine months ended September 30, 2004. These gains reflect the gains that existed on the date of securitization of self-originated loans and realized gains or losses on related interest rate swaps. The Loan Origination segment recognized $52.9 million of unrealized gain on mortgage-backed securities and derivatives relating to market valuations of mortgage-backed securities classified in the trading portfolio during the nine months ended September 30, 2004. These unrealized gains reflect the gains that existed on the date of securitization of self-originated loans that are classified as trading securities and unrealized gains or losses on related interest rate swaps. Net Interest Income. Total interest income for the nine months ended September 30, 2004 on our Loan Origination segment's mortgage loans held for sale was $75.1 million, compared to interest income for the nine months ended September 30, 2003 of $76.1 million, a decrease of $1.0 million, or 1.3%. Our Loan Origination segment funds its loan inventory primarily through a $2.0 billion Secured Liquidity Note Program and borrowing facilities with several mortgage warehouse lenders. Total interest expense for the nine months ended September 30, 2004 was $47.7 million, compared to interest expense for the nine months ended September 30, 2003 of $37.0 million, a $10.7 million increase, which was primarily due to increased borrowings to fund our increased loan inventory. Other Non-Interest Income. Other non-interest income totaled $5.6 million for the nine months ended September 30, 2004 and the nine months ended September 30, 2003. For the nine months ended September 30, 2004, other non-interest income primarily includes rental income of $1.6 million, income from a legal settlement of $1.5 million, reinsurance premiums earned totaling approximately $1.1 million and revenue from title services of $0.7 million. For the nine months ended September 30, 2003, other non-interest income primarily consists of Principal fulfillment fees of $1.9 million, volume incentive bonuses received from loan purchasers totaling approximately $1.4 million and revenue from title services of $1.0 million. The Principal fulfillment fees represent non-recurring fees received from Principal Residential Mortgage, Inc. ("PRM") for loans closed by us on behalf of PRM. As part of the agreement to acquire the retail branches of PRM, we 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. Non-Interest Expenses. Total non-interest expenses of our Loan Origination segment for the nine months ended September 30, 2004 were $199.4 million, compared to $234.2 million for the nine months ended September 30, 2003. Our operating expenses represent costs that are not eligible to be added to the book value of the loans because they are not considered direct origination costs under the rules of SFAS No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Costs of Leases." Direct origination costs are added to the book value of loans and either reduce the gain on sale of loans if the loans are sold or are amortized over the life of the loan. Salaries, commissions and benefits for the nine months ended September 30, 2004 were $125.1 million, or 77 basis points of total loan originations, compared to $159.0 million, or 91 basis points of total loan originations, for the nine months ended September 30, 2003. The decrease in expenses reflects the higher percentage of wholesale originations in the 2004 period versus the 2003 period. Operating expenses, excluding salaries, commissions and benefits, were $74.3 million, or 46 basis points of total loan originations for the nine months ended September 30, 2004 compared to $75.2 million, or 43 basis points of total loan originations for the nine months ended September 30, 2003. The increase in basis points in operating expenses is primarily the result of a 5 basis point increase in occupancy and equipment expense in the 2004 period versus the 2003 period. The operating expenses in the 2004 period include lease obligations and certain fixed asset expenses relating to our acquisition of the Washington Mutual branches in August 2004. Income Tax Expense. Income tax expense decreased to a benefit of $20.3 million for the nine months ended September 30, 2004 from an expense of $54.7 million for the nine months ended September 30, 2003, a decrease of $75.0 million. The decrease in income tax expense in the 2004 period versus the 2003 period reflects a decrease in income before income taxes relating to our TRS. Loan Servicing Segment The Loan Servicing segment total revenues for the nine months ended September 30, 2004 were a loss of $7.0 million compared to a loss of $21.8 million for the nine months ended September 30, 2003, an increase of $14.8 million. Net loan servicing fees were a loss of $4.1 million for the nine months ended September 30, 2004, compared to a loss of $20.1 million for the nine months ended September 30, 2003. - 38 - Loan servicing fees decreased to $28.9 million for the nine months ended September 30, 2004 from $29.3 million for the nine months ended September 30, 2003, a decrease of $0.4 million, or 1.3%. Included in loan servicing fees are gains on Ginnie Mae early buy-out sales of $3.7 million for the nine months ended September 30, 2004 compared to $9.7 million for the nine months ended September 30, 2003, a decrease of $6.0 million, or 61.1%. This decrease was partly offset by an increase in loan servicing fees in the 2004 period versus the 2003 period as a result of an increase in loans serviced for others. Amortization decreased to $22.9 million for the nine months ended September 30, 2004 from $45.0 million for the nine months ended September 30, 2003, a decrease of $22.1 million, or 49.1%. The decrease in amortization was due to a rise in interest rates which resulted in slower prepayment speeds in the nine months ended September 30, 2004 versus the nine months ended September 30, 2003. We recognized a temporary impairment provision of $10.1 million for the nine months ended September 30, 2004 versus a temporary impairment provision of $4.4 million for the nine months ended September 30, 2003, resulting in a decrease in net loan servicing fees of $5.7 million. The increase in impairment provision in the nine months ended September 30, 2004 is due to a decrease in the fair value of servicing rights attributable to an increase in estimated future prepayment speeds. Non-Interest Expenses. Total non-interest expenses of our Loan Servicing segment for the nine months ended September 30, 2004 were $8.4 million, compared to $6.8 million for the nine months ended September 30, 2003. Income Tax Benefit. Income tax benefit decreased to $6.0 million for the nine months ended September 30, 2004 from an $11.7 million benefit for the nine months ended September 30, 2003, a decrease of $5.7 million, or 48.3%. Liquidity and Capital Resources We have arrangements to enter into reverse repurchase agreements, a form of collateralized short-term borrowing, with thirteen different financial institutions and on September 30, 2004 had borrowed funds from nine of these firms. Because we borrow money under these agreements based on the fair value of our mortgage-backed securities, and because changes in interest rates can negatively impact the valuation of mortgage-backed securities, our borrowing ability under these agreements could be limited and lenders could initiate margin calls in the event interest rates change or the value of our mortgage-backed securities declines for other reasons. As of September 30, 2004, we had $6.9 billion of reverse repurchase agreements outstanding with a weighted-average borrowing rate of 1.78% before the impact of interest rate swaps and a weighted-average remaining maturity of four months. To originate a mortgage loan, we draw against a $2.0 billion Secured Liquidity Note Program, $1.2 billion pre-purchase facility with UBS Real Estate Securities Inc. (formerly Paine Webber Real Estate Securities Inc.) ("UBS"), a $600 million bank syndicated facility led by Bank of America, a $450 million facility with CDC Mortgage Capital Inc. ("CDC"), a facility of $350 million with Morgan Stanley Bank ("Morgan Stanley") and a facility of $200 million with Calyon Americas. In addition, the Company has a gestation facility with Greenwich Capital Financial Products, Inc. These facilities are secured by the mortgages owned by us and by certain of our other assets. Advances drawn under the facilities bear interest at rates that vary depending on the type of mortgages securing the advances. These loans are subject to sublimits, advance rates and terms that vary depending on the type of securing mortgages and the ratio of the Company's liabilities to its tangible net worth. At November 4, 2004, the aggregate outstanding balance under the warehouse facilities was $1.3 billion, the aggregate outstanding balance in drafts payable was $39.1 million and the aggregate maximum amount available for additional borrowings was $2.0 billion. The documents governing our warehouse facilities contain a number of compensating balance requirements and restrictive financial and other covenants that, among other things, require us to adhere to a maximum ratio of total liabilities to tangible net worth and maintain a minimum level of tangible net worth and liquidity, as well as to comply with applicable regulatory and investor requirements. The facility agreements also contain covenants limiting the ability of our subsidiaries to transfer or sell assets other than in the ordinary course of business and to create liens on the collateral without obtaining the prior consent of the lenders, which consent may not be unreasonably withheld. In addition, under our warehouse facilities, we cannot continue to finance a mortgage loan that we hold if: o the loan is rejected as "unsatisfactory for purchase" by the ultimate investor and has exceeded its permissible 120-day warehouse period; o we fail to deliver the applicable mortgage note or other documents evidencing the loan within the requisite time period; - 39 - 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, 2004, our aggregate warehouse facility borrowings were $547.6 million (including $23.9 million of borrowings under a working capital sub-limit) and our outstanding drafts payable were $45.5 million, compared to $1.1 billion (including $29.0 million of borrowings under a working capital sub-limit) and our outstanding drafts payable were $25.6 million as of December 31, 2003. At September 30, 2004, our loans held for sale were $1.1 billion compared to $1.2 billion at December 31, 2003. In addition to the UBS, CDC, Bank of America, Morgan Stanley, and Calyon Americas warehouse facilities, we have a purchase and sale agreement with UBS and Greenwich Capital. This agreement allows us to accelerate the sale of our mortgage loan inventory, resulting in a more effective use of the warehouse facility. Amounts sold and being held under this agreement at September 30, 2004 and December 31, 2003 were $464.4 thousand and $236.0 million, respectively. There was no amount so held under this agreement at November 4, 2004. This agreement is not a committed facility and may be terminated at the discretion of the counterparty. We make 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, we may be required to repurchase the loans and indemnify the investor for damages caused by that breach. We have implemented strict procedures to ensure quality control and conformity to underwriting standards and minimize the risk of being required to repurchase loans. From time to time we have been required to repurchase loans that we sold; however, the liability for the fair value of those obligations has been immaterial. We also have a $150.0 million term loan facility with a bank syndicate led by Bank of America which we use to finance our MSRs. The term loan facility expires on December 14, 2005. Interest is based on a spread to the LIBOR and may be adjusted for earnings on escrow balances. At September 30, 2004 and December 31, 2003, borrowings under our term loan facility were $101.0 million and $71.5 million, respectively. Cash and cash equivalents increased to $186.5 million at September 30, 2004 from $53.1 million at December 31, 2003. Our primary sources of cash and cash equivalents during the nine months ended September 30, 2004, were as follows: o $5.6 billion increase in reverse repurchase agreements; o $462.7 million increase in commercial paper; and o $357.0 million net decrease in mortgage loans held for sale. Our primary uses of cash and cash equivalents during the nine months ended September 30, 2004, were as follows: o $5.5 billion net increase in mortgage-backed securities; o $574.2 million net decrease in warehouse lines of credit; and o $287.7 million net increase in mortgage loans held for securitization. - 40 - Commitments The Company had the following commitments (excluding derivative financial instruments) at September 30, 2004:
Less Than After Total 1 Year 1 - 3 Years 4 - 5 Years 5 Years ------------------------------------------------------------- (in thousands) Warehouse facilities $ 547,584 $ 547,584 $ - $ - $ - Operating leases 62,931 19,523 29,024 13,167 1,217 Notes payable 128,448 102,505 718 804 24,421 Commercial paper 462,712 462,712 - - - Reverse repurchase agreements 6,899,024 6,899,024 - - -
- 41 - 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 fixed-rate 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 nine 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 MSRs. When interest rates decline, the loans underlying the MSRs are generally expected to prepay faster, which reduces the market value of the MSRs. 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 MSRs. Lower mortgage rates generally reduce the fair value of the MSRs, as increased prepayment speeds are highly correlated with lower levels of mortgage interest rates. The Company enters into interest rate swap agreements ("Swap Agreements") to manage its interest rate exposure when financing its adjustable-rate loans and its mortgage-backed securities. The Company generally borrows money based on short-term interest rates, by entering into borrowings with maturity terms of less than one year, and frequently nine to twelve months. The Company's adjustable-rate loans and mortgage-backed securities financing vehicles generally have an interest rate that reprices based on frequency terms of one to twelve months. The Company's mortgage-backed securities have an initial fixed interest rate period of three to five years. When the Company enters into a Swap Agreement, it generally agrees to pay a fixed rate of interest and to receive a variable interest rate, generally based on LIBOR. These Swap Agreements have the effect of converting the Company's variable-rate debt into fixed-rate debt over the life of the Swap Agreements. These instruments are used as a cost-effective way to lengthen the average repricing period of the Company's variable-rate and short-term borrowings such that the average repricing of the borrowings more closely matches the average repricing of the Company's mortgage-backed securities. The Company's duration gap was less than one month on September 30, 2004. - 42 - The following table summarizes the Company's interest rate sensitive instruments: September 30, 2004 ----------------------- Carrying Estimated Value Fair Value ---------- ---------- Assets: Mortgage-backed securities $7,331,888 $7,331,888 Derivative assets (1) 11,630 37,159 Mortgage loans held for sale, net 1,131,661 1,148,827 Mortgage servicing rights, net 160,435 163,047 Liabilities: Reverse repurchase agreements $6,899,024 $6,892,190 Derivative liabilities 18,237 18,237 December 31, 2003 ----------------------- Carrying Estimated Value Fair Value ---------- ---------- Assets: Mortgage-backed securities $1,763,628 $1,763,628 Derivative assets 30,611 30,611 Mortgage loans held for sale, net 1,216,353 1,218,667 Mortgage servicing rights, net 117,784 117,784 Liabilities: Reverse repurchase agreements $1,344,327 $1,344,327 Derivative liabilities 12,694 12,694 (1) Derivative assets consist of interest rate lock commitments ("IRLCs") to fund mortgage loans. The carrying value excludes the value of the mortgage servicing rights ("MSRs") attached to the IRLCs in accordance with SEC Staff Accounting Bulletin No. 105. The fair value includes the value of MSRs. The Company had total commitments to lend at September 30, 2004 and December 31, 2003 of $6.5 billion and $4.0 billion, respectively. - 43 - ITEM 4. CONTROLS AND PROCEDURES The Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its 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")), as of the end of the fiscal quarter covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures were effective as of the end of the fiscal quarter covered by this quarterly report. The Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the Company's internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to determine whether any changes occurred during the third quarter of 2004 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there has been no such change during the third quarter of 2004. - 44 - PART II-OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. UNREGISTERED SALES OF EQUITY 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, 2004. The Company acquired First Home Mortgage Corp. ("First Home") on September 30, 2000. In addition to the shares paid to former First Home shareholders as initial consideration, the Company may be 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, 2004, pursuant to these earnout provisions, the Company issued an aggregate of 2,051 shares of common stock to the former First Home shareholders as additional consideration. In addition, on August 16, 2004, the Company issued 3,783 shares of common stock to such shareholders as additional consideration. These securities were exempt from registration under Section 4(2) of the Securities Act because they were issued pursuant to the terms of a private transaction rather than through a public offering. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS The following exhibits are filed as part of this Quarterly Report on Form 10-Q: Exhibit 10.1 Credit Agreement, dated August 30, 2004 (the "Credit Agreement"), by and among American Home Mortgage Servicing, Inc., American Home Mortgage Corp., American Home Mortgage Acceptance, Inc., collectively as Borrowers, the Lenders from time to time party thereto, Bank of America, N.A., as Administrative Agent and Swing Line Lender, Calyon Bank New York Branch and Deutsche Bank Securities, as Co-Syndication Agents, ABN AMRO Bank N.V., Citibank, N.A. and U.S. Bank National Association, as Co-Documentation Agents, and Banc of America Securities LLC, as Sole Lead Arranger and Sole Book Manager (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on September 3, 2004). - 45 - Exhibit 10.2 Security and Collateral Agency Agreement, dated August 30, 2004, by and among American Home Mortgage Servicing, Inc., American Home Mortgage Corp., American Home Mortgage Acceptance, Inc., collectively as Borrowers, Bank of America, N.A., as Administrative Agent for the Lenders from time to time party to the Credit Agreement, and Deutsche Bank National Trust Company, as Custodian and Collateral Agent (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on September 3, 2004). Exhibit 10.3 Guaranty, dated August 30, 2004, by American Home Mortgage Investment Corp. and American Home Mortgage Holdings, Inc., jointly and severally, in favor of the Lenders and Bank of America, N.A., as Administrative Agent for the Lenders, for the Borrowers' obligations under the Credit Agreement (incorporated by reference to Exhibit 10.3 to the Company's Current Report on Form 8-K filed with the SEC on September 3, 2004). Exhibit 10.4 Amendment No. 6, dated as of September 27, 2004, to the Amended and Restated Master Loan and Security Agreement, dated as of November 26, 2003, by and among American Home Mortgage Corp., American Home Mortgage Investment Corp., American Home Mortgage Holdings, Inc., American Home Mortgage Acceptance, Inc., and American Home Mortgage Servicing, Inc., collectively as Borrowers, the Lenders from time to time parties thereto (the "MS Lenders"), and Morgan Stanley Bank, as agent for the MS Lenders. Exhibit 10.5 Amendment No. 1, dated as of September 27, 2004, to the Amended and Restated Custodial Agreement, dated as of November 26, 2003, by and among American Home Mortgage Corp., American Home Mortgage Investment Corp., American Home Mortgage Holdings, Inc., American Home Mortgage Acceptance, Inc., and American Home Mortgage Servicing, Inc., collectively as Borrowers, Deutsche Bank National Trust Company, as Custodian, and Morgan Stanley Bank, as Agent for the MS Lenders. Exhibit 10.6 First Amendment, dated as of September 1, 2004, to the Mortgage Loan Purchase and Sale Agreement (Whole Loan Purchase and Sale Agreement), dated January 1, 2004, by and among Greenwich Capital Financial Products, Inc., as Purchaser, and American Home Mortgage Corp. and American Home Mortgage Servicing, Inc., together as Sellers. Exhibit 10.7 Second Amended and Restated Revolving Credit Agreement, dated as of September 24, 2004, by and among American Home Mortgage Corp. and American Home Mortgage Servicing, Inc., together as Borrowers, and U.S. Bank National Association, as Lender. Exhibit 10.8 Second Amended and Restated Pledge and Security Agreement, dated as of September 24, 2004, by and among American Home Mortgage Corp. and American Home Mortgage Servicing, Inc., together as Borrowers, and U.S. Bank National Association, as Lender. Exhibit 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - 46 - 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 INVESTMENT CORP. (Registrant) Date: November 9, 2004 By: /s/ Michael Strauss ----------------------------------------- Michael Strauss Chairman of the Board, Chief Executive Officer and President Date: November 9, 2004 By: /s/ Stephen A. Hozie ----------------------------------------- Stephen A. Hozie Executive Vice President and Chief Financial Officer (Principal Financial Officer) - 47 - EX-10.4 2 am3q04-ex10_4.txt AMENDMENT NO. 6 TO MASTER LOAN AND SECURITY AGMT EXHIBIT 10.4 AMENDMENT NO. 6 TO THE AMENDED AND RESTATED MASTER LOAN AND SECURITY AGREEMENT Amendment No. 6, dated as of September 27, 2004 (this "Amendment"), to the Amended and Restated Master Loan and Security Agreement, dated as of November 26, 2003 (as amended, restated, supplemented or otherwise modified prior to the date hereof, the "Existing Loan Agreement"; as amended, hereby and as further amended, restated, supplemented or otherwise modified and in effect from time to time, the "Loan Agreement"), by and among American Home Mortgage Corp. ("AHMC"), AMERICAN HOME MORTGAGE INVESTMENT CORP. ("AHM Investment"), AMERICAN HOME MORTGAGE HOLDINGS, INC. ("AHM Holdings"), AMERICAN HOME MORTGAGE ACCEPTANCE, INC. ("AHM Acceptance"), and AMERICAN HOME MORTGAGE SERVICING, INC., formerly known as Columbia National, Incorporated ("AHM Servicing" and together with AHMC, AHM Investment, AHM Holdings and AHM Acceptance, collectively, the "Borrowers", each, a "Borrower"), the lenders from time to time parties thereto (the "Lenders") and Morgan Stanley Bank, as agent for the Lenders (in such capacity, the "Agent"). Capitalized terms used but not otherwise defined herein shall have the meanings given to them in the Existing Loan Agreement. RECITALS The Borrowers have requested that the Lenders agree to amend the Existing Loan Agreement to extend the Termination Date from September 30, 2004 to September 26, 2005 and to effect certain other changes, as set forth in this Amendment. The Lenders are willing to agree to such amendment, but only on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Borrowers, the Lenders and the Agent hereby agree as follows: SECTION 1. Amendments. (a) The table of contents in the Existing Loan Agreement is hereby amended by adding in proper numerical order the following reference to Schedule 8: "Schedule 8 Leverage Calculations" (b) Section 1.01 of the Existing Loan Agreement is hereby amended by inserting in proper alphabetical order the following new defined terms: "'Recognized Assets' shall mean, at any time, the total amount of recognized assets of the Borrowers, determined in accordance with the calculations set forth in respect thereof on Schedule 8 hereto." "'Sixth Amendment' shall mean that certain Amendment No. 6 and Agreement, dated as of September 27, 2004, by and among the Borrowers, the Lender and the Agent." "'Sixth Amendment Effective Date' shall mean the "Amendment Effective Date", as defined in the Sixth Amendment." "'Total Liabilities' shall mean, at any time, the total amount of liabilities of the Borrowers, determined in accordance with GAAP on a consolidated basis." (c) Section 1.01 of the Existing Loan Agreement is hereby amended by deleting the definition of "Applicable Collateral Percentage" in its entirety and substituting in lieu thereof the following new definition: "'Applicable Collateral Percentage' shall mean, with respect to each Eligible Mortgage Loan, the applicable collateral percentage set forth in the chart below opposite the applicable type of Mortgage Loan: ------------------------------------------------------------------- Type of Mortgage Loan Applicable Collateral Percentage ------------------------------------------------------------------- Agency Eligible Mortgage Loan 98.0% Alternate 'A' Mortgage Loan 97.0% Conduit Eligible Mortgage Loan 97.0% Interest-Only Mortgage Loan 97.0%" ------------------------------------------------------------------- (d) Section 1.01 of the Existing Loan Agreement is hereby amended by deleting the definition of "Applicable Margin" in its entirety and substituting in lieu thereof the following new definition: "'Applicable Margin' shall mean 70 basis points (0.70%) per annum." (e) Section 1.01 of the Existing Loan Agreement is hereby amended by deleting clause (i) from the definition of "Collateral Value" in its entirety and substituting in lieu thereof the following new clause (i): "(i) The aggregate Collateral Value of all Alternate 'A' Mortgage Loans included in the Borrowing Base at any time shall not exceed 40% of the Maximum Credit at such time;" (f) Section 1.01 of the Existing Loan Agreement is hereby amended by deleting clause (iii) from the definition of "Collateral Value" in its entirety and substituting in lieu thereof the following new clause (iii): "(iii) The aggregate Collateral Value of all Interest-Only Mortgage Loans with an LTV greater than 80% and less than or equal to 95% included in the Borrowing Base at any time shall not exceed $50,000,000;" (g) Section 1.01 of the Existing Loan Agreement is hereby amended by deleting the definition of "Termination Date" in its entirety and substituting in lieu thereof the following new definition: -2- "'Termination Date' shall mean September 26, 2005 or such earlier date on which this Loan Agreement shall terminate in accordance with the provisions hereof or by operation of law." (h) Section 3.04 of the Existing Loan Agreement is hereby deleted in its entirety and the following shall be inserted in lieu thereof: "3.04 Minimum Usage Fee. If, as tested on the first Business Day of each fiscal quarter, the average principal balance of the Loans outstanding hereunder ("Average Usage") during the immediately preceding fiscal quarter shall be an amount less than $120,000,000, the Borrowers hereby agree to pay to the Agent, for the account of the Lenders, a minimum usage fee ("Minimum Usage Fee"), computed at the rate of 70 basis points (0.70%) per annum on the amount equal to the difference between the Maximum Credit and the Average Usage, in each case payable quarterly in arrears on the first Business Day of the following fiscal quarter and on the Termination Date, such payment to be made in dollars in immediately available funds, without deduction, set-off or counterclaim, to the Agent at the account set forth in Section 3.01(a) hereof." (i) Section 6.01 of the Existing Loan Agreement is hereby deleted in its entirety and the following shall be inserted in lieu thereof: "6.01 Legal Name. On the Sixth Amendment Effective Date, the exact legal name of the each Borrower is, and during the four months immediately preceding the date hereof, such name has been, respectively, American Home Mortgage Corp., American Home Mortgage Investment Corp., American Home Mortgage Holdings, Inc., American Home Mortgage Acceptance, Inc. and in the case of AHM Servicing such legal name is American Home Mortgage Servicing, Inc. on the date hereof and has also been Columbia National, Incorporated during the four months immediately preceding the Sixth Amendment Effective Date; and no Borrower has used any previous names, assumed names or trade names except as set forth on Schedule 4 attached hereto." (j) Section 7.08 of the Existing Loan Agreement is hereby deleted in its entirety and the following shall be inserted in lieu thereof: "7.08 Reports. (a) The Borrowers shall provide the Agent with a monthly production report, which shall include a summary of all loans closed by the Borrowers and all loan applications approved by the Borrowers during the preceding calendar month." (b) The Borrowers shall provide the Agent with a quarterly report, which report shall include, among other items, a summary of the Borrower's delinquency and loss experience with respect to mortgage loans serviced by the Borrowers, any Servicer or any designee of either, plus any such additional reports as the Agent may reasonably request with respect to the Borrowers' or any Servicer's servicing portfolio or pending originations of mortgage loans." (k) Section 8(p) of the Existing Loan Agreement is hereby deleted in its entirety and the following shall be inserted in lieu thereof: -3- "Tangible Net Worth of AHM Investment shall at any time be less than the sum of $500,000,000 plus 50% of net proceeds from the issuance of any equity securities of AHM Investment or any of AHM Investment's consolidated Subsidiaries." (l) Section 8(q) of the Existing Loan Agreement is hereby deleted in its entirety and the following shall be inserted in lieu thereof: "The amount of Recognized Assets shall at any time be less than the amount of Total Liabilities." (m) The Existing Loan Agreement is hereby amended by deleting Schedule 3 to the Existing Custodial Agreement in its entirety and substituting in lieu thereof the Schedule 3 attached hereto. (n) The Existing Loan Agreement is hereby amended by deleting Schedule 4 to the Existing Custodial Agreement in its entirety and substituting in lieu thereof the Schedule 4 attached hereto. (o) The Existing Loan Agreement is hereby amended by inserting in proper numerical order Schedule 8 attached hereto. SECTION 2. Conditions Precedent. This Amendment and its provisions shall become effective on the first date (the "Amendment Effective Date") on which all of the following conditions precedent shall have been satisfied, and upon satisfaction of such conditions precedent the Amendment Effective Date shall be the date of this Amendment: 2.1 Delivered Documents. On or before the Amendment Effective Date, the Agent shall have received the following documents, each of which shall be satisfactory to the Agent in form and substance: (a) Amendment. This Amendment, executed and delivered by a duly authorized officer of each of the Borrowers, the Lenders and the Agent; (b) Amendment to Custodial Agreement. An amendment to the Custodial Agreement providing for a revised Annex 1, executed and delivered by a duly authorized officer of each of the Borrowers, the Custodian and the Agent; (c) Secretary's Certificates of Borrowers. A certificate of the Secretary or Assistant Secretary of each Borrower, substantially in the form of Exhibit A hereto, dated as of the date hereof, and (i) attaching certificates dated as of a recent date from the Secretary of State or other appropriate authority, evidencing the good standing of such Borrower in the jurisdiction of its organization, (ii) attaching a copy of the resolutions, in form and substance satisfactory to the Agent, of the Board of Directors of such Borrower authorizing (A) the execution, delivery and performance of this Amendment, and (B) the borrowings contemplated under the Loan Agreement, -4- (iii) attaching certified copies of the charter and by-laws (or equivalent documents) and all amendments thereto of such Borrower, which are in full force and effect as of the date hereof, and (iv) certifying as to the incumbency and specimen signature of each officer executing this Amendment; (d) Legal Opinions. Legal opinions of counsel to the Borrowers; and (e) Other Documents. Such other documents as the Agent or counsel to the Agent may reasonably request. 2.2 Facility Fee. On or before the Amendment Effective Date, the Agent shall have received for the account of the Lenders payment from the Borrowers of an amount equal to 10 basis points (0.10%) times the Maximum Credit, such payment to be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, to the account specified in Section 3.01(a) of the Loan Agreement. 2.3 Consents, Licenses, Approvals, etc. On or before the Amendment Effective Date, the Agent shall have received copies certified by the Borrowers of all consents, licenses and approvals, if any, required in connection with the execution, delivery and performance by the Borrowers of, and the validity and enforceability of, the Loan Documents, which consents, licenses and approvals shall be in full force and effect. 2.4 No Default. On the Amendment Effective Date, upon giving effect to the provisions hereof and other than as subject to the Waiver, (i) each Borrower shall be in compliance with all the terms and provisions set forth in the Existing Loan Agreement and the other Loan Documents on its part to be observed or performed, (ii) the representations and warranties made and restated by each Borrower pursuant to Section 3 of this Amendment shall be true and complete on and as of such date with the same force and effect as if made on and as of such date, and (iii) no Default or Event of Default shall have occurred and be continuing on such date. SECTION 3. Representations and Warranties. Each Borrower hereby represents and warrants to the Agent and the Lenders, as of the date hereof and as of the Amendment Effective Date, that, upon giving effect to the provisions hereof and other than as subject to the Waiver, it is in compliance with all the terms and provisions set forth in the Loan Documents on its part to be observed or performed, and that no Default or Event of Default has occurred or is continuing, and hereby confirms and reaffirms the representations and warranties contained in Section 6 of the Loan Agreement. SECTION 4. Limited Effect. Except as expressly amended and modified by this Amendment, the Existing Loan Agreement and each of the other Loan Documents shall continue to be, and shall remain, in full force and effect in accordance with its respective terms; provided, however, that upon the Amendment Effective Date, each reference therein and herein to the "Loan Documents" shall be deemed to include, in any event, this Amendment and each reference to the "Loan Agreement" in any of the Loan Documents shall be deemed to be a reference to the Loan Agreement as amended hereby. -5- SECTION 5. Counterparts. This Amendment may be executed by each of the parties hereto on any number of separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment in Portable Document Format (PDF) or by facsimile transmission shall be effective as delivery of a manually executed original counterpart thereof. SECTION 6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. [SIGNATURES FOLLOW] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first above written. BORROWERS --------- AMERICAN HOME MORTGAGE CORP. By: /s/ Craig Pino ------------------------------------ Name: Craig Pino Title: SVP AMERICAN HOME MORTGAGE INVESTMENT CORP. By: /s/ Craig Pino ------------------------------------ Name: Craig Pino Title: SVP AMERICAN HOME MORTGAGE HOLDINGS, INC. By: /s/ Craig Pino ------------------------------------ Name: Craig Pino Title: SVP AMERICAN HOME MORTGAGE ACCEPTANCE, INC. By: /s/ Craig Pino ------------------------------------ Name: Craig Pino Title: SVP AMERICAN HOME MORTGAGE SERVICING, INC. (f/k/a Columbia National, Incorporated) By: /s/ Craig Pino ------------------------------------ Name: Craig Pino Title: SVP AMENDMENT NO. 6 AGENT AND LENDER ---------------- MORGAN STANLEY BANK By: /s/ Paul Najarian ------------------------------------ Name: Paul Najarian Title: Vice President AMENDMENT NO. 6 Exhibit A --------- Form of Secretary's Certificate Pursuant to Section 2.1(c) of that certain Amendment No. 6, dated as of September 27, 2004 (the "Sixth Amendment"), to the Amended and Restated Master Loan and Security Agreement, dated as of November 26, 2003 (as amended, restated, supplemented or otherwise modified prior to the date hereof, the "Existing Loan Agreement"; as amended by the Sixth Amendment and as further amended, restated, supplemented or otherwise modified and in effect from time to time, the "Loan Agreement"; capitalized terms used but not otherwise defined herein shall have the meanings assigned thereto by the Loan Agreement), by and among AMERICAN HOME MORTGAGE CORP. ("AHMC"), AMERICAN HOME MORTGAGE INVESTMENT CORP. ("AHM Investment"), AMERICAN HOME MORTGAGE HOLDINGS, INC. ("AHM Holdings"), AMERICAN HOME MORTGAGE ACCEPTANCE, INC. ("AHM Acceptance"), and AMERICAN HOME MORTGAGE SERVICING, INC., formerly known as Columbia National, Incorporated ("AHM Servicing" and together with AHMC, AHM Investment, AHM Holdings and AHM Acceptance, collectively, the "Borrowers", each, a "Borrower"), the lenders from time to time parties thereto (the "Lenders") and MORGAN STANLEY BANK, as agent for the Lenders (in such capacity, the "Agent"), the undersigned hereby certifies on behalf of [AHMC / AHM Investment / AHM Holdings / AHM Acceptance / AHM Servicing] (the "Specified Borrower") as follows: (a) Attached hereto as "Annex A" is an original certificate dated as of a recent date from the Secretary of State or other appropriate authority evidencing the good standing of the Specified Borrower in its jurisdiction of organization; (b) Attached hereto as "Annex B" is a true, correct and complete copy of the resolutions of the Specified Borrower, together with any and all amendments thereto, authorizing the execution, delivery and performance of the Sixth Amendment and the borrowings contemplated under the Loan Agreement, such resolutions having not been amended, modified, revoked or rescinded, and the same being in full force and effect in the attached form as of the date hereof; (c) Attached hereto as "Annex C" is a true, correct and complete copy of the Certificate of Incorporation of the Specified Borrower and all amendments thereto, which is in full force and effect in the attached form as of the date hereof, and no amendment or other document relating to or affecting the Certificate of Incorporation has been filed with the Secretary of State of the State of Delaware since ___________, 20__, and no action has been taken by the Specified Borrower, its stockholders or directors in connection with the filing of such amendment or other document; (d) Attached hereto as "Annex D" is a true, correct and complete copy of the By-laws of the Specified Borrower and all amendments thereto, which are in full force and effect in the attached form as of the date hereof, and such By-laws are the only by-laws of the Specified Borrower and were in full force and effect at all times from ___________, 20__, through the date hereof and have not otherwise been revoked, rescinded or modified, and no amendment to the By-laws has been authorized by the stockholders or directors of the Specified Borrower; and (e) The following named individuals are duly elected, qualified and acting officers of the Specified Borrower, each such individual holding the office(s) set forth opposite his respective name as of the date hereof, and the signatures set forth beside the respective name and title of said officers and authorized signatories are true, authentic signatures: Name Title Signature - ---- ----- --------- Michael Strauss President and Chief Executive Officer ______________________ Stephen A. Hozie Executive Vice President and Chief Financial Officer ______________________ Alan Horn Executive Vice President and General Counsel, and Secretary ______________________ Craig Pino Senior Vice President and Treasurer ______________________ [Signatures Follow] A-2 IN WITNESS WHEREOF, the undersigned has hereunto executed this Secretary's Certificate as of this ___ day of September, 2004. By:_______________________________________ Name: Alan Horn Title: Executive Vice President, General Counsel and Secretary The undersigned, Stephen A. Hozie, does hereby certify that he is the duly elected and presently incumbent Executive Vice President and Chief Financial Officer of the Specified Borrower and in such capacity does hereby certify to the Lender that Alan Horn is the duly elected and presently incumbent Secretary of the Specified Borrower. By:_______________________________________ Name: Stephen A. Hozie Title: Executive Vice President and Chief Financial Officer A-3 Schedule 3 SUBSIDIARIES ------------ [See attached] Schedule 4 Borrower Trade Names -------------------- [See attached] Schedule 8 Leverage Calculations --------------------- [See attached] EX-10.5 3 am3q04-ex10_5.txt AMEND. NO. 1 TO AMEND. & RESTATED CUSTODIAL AGMT. EXHIBIT 10.5 AMENDMENT NO. 1 TO THE AMENDED AND RESTATED CUSTODIAL AGREEMENT AMENDMENT NO. 1, dated as of September 27, 2004 (this "Amendment"), to the Amended and Restated Custodial Agreement, dated as of November 26, 2003 (as amended, restated, supplemented or otherwise modified prior to the date hereof, the "Existing Custodial Agreement", a as amended, hereby and as further amended, restated, supplemented or otherwise modified and in effect from time to time, the "Custodial Agreement"), by and among AMERICAN HOME MORTGAGE CORP., a New York corporation, AMERICAN HOME MORTGAGE INVESTMENT CORP., a Maryland corporation, AMERICAN HOME MORTGAGE HOLDINGS, INC., a Delaware corporation, AMERICAN HOME MORTGAGE ACCEPTANCE, INC., a Maryland corporation, and AMERICAN HOME MORTGAGE SERVICING, INC., a Maryland corporation (formerly known as Columbia National, Incorporated) (each a "Borrower", collectively the "Borrowers"), DEUTSCHE BANK NATIONAL TRUST COMPANY, as custodian (in such capacity, the "Custodian"), and MORGAN STANLEY BANK (the "Lender Agent"). RECITALS The Borrowers, the Lender Agent and the Custodian are parties to the Existing Custodial Agreement. Capitalized terms used but not otherwise defined herein shall have the meanings given to them in the Existing Custodial Agreement. The Borrowers, the Lender Agent and the Custodian have agreed, subject to the terms and conditions of this Amendment, that the Existing Custodial Agreement be amended to revise Annex I of the Existing Custodial Agreement. Accordingly, the Borrowers, the Lender Agent and the Custodian hereby agree, in consideration of the mutual premises and mutual obligations set forth herein, that the Existing Custodial Agreement is hereby amended as follows: Section 1. Amendments. 1.1 The Existing Custodial Agreement is hereby amended by deleting Annex I to the Existing Custodial Agreement in its entirety and substituting in lieu thereof the Annex I attached hereto. 1.2 Annex 4 paragraph 11 of the Existing Loan Agreement is hereby deleted in its entirety and the following shall be inserted in lieu thereof: "11 based upon a review of the Mortgage Note, items (d), (f), (g), (h), (m), (p), (bb), (hh), (jj), (ggg) and (ooo) of Annex 1 as set forth in the Mortgage Loan Schedule delivered by the applicable Borrower to the Custodian are correct;" Section 2. Conditions Precedent. This Amendment and its provisions shall become effective on the date (the "Amendment Effective Date") on which the following -2- conditions precedent shall have been satisfied, and upon satisfaction of such conditions precedent the Amendment Effective Date shall be the date of this Amendment: 2.1 Delivered Documents. On or before the Amendment Effective Date, the Lender Agent shall have received the following documents, each of which shall be satisfactory to the Lender Agent in form and substance: (a) Amendment. This Amendment, executed and delivered by a duly authorized officer of each of the Borrowers, the Custodian, and the Lender Agent; (b) Amendment to the Loan Agreement. An amendment to the Loan Agreement dated as of September 27, 2004, executed and delivered by a duly authorized officer of each of the Borrowers and the Lender Agent (the "Sixth Amendment"); and (c) Other Documents. Such other documents as the Lender Agent or counsel to the Lender may reasonably request. 2.2 No Default. On the Amendment Effective Date, after giving effect to the Sixth Amendment, (i) each Borrower shall be in compliance with all the terms and provisions set forth in the Existing Custodial Agreement on its part to be observed or performed, (ii) the representations and warranties made and restated by each Borrower pursuant to Section 3 of this Amendment shall be true and complete on and as of such date with the same force and effect as if made on and as of such date, and (iii) no Default shall have occurred and be continuing on such date. Section 3. Representations and Warranties. After giving effect to the Sixth Amendment, each Borrower hereby represents and warrants to the Lender Agent and the Custodian that it is in compliance with all the terms and provisions set forth in the Loan Documents on its part to be observed or performed, and that no Default has occurred or is continuing, and hereby confirms and reaffirms its representations and warranties contained in Section 10 of the Existing Custodial Agreement. Section 4. Limited Effect. Except as expressly amended and modified by this Amendment, the Existing Custodial Agreement shall continue to be, and shall remain, in full force and effect in accordance with its terms; provided, however, that reference therein and herein to the "Loan Documents" shall be deemed to include, in any event, this Amendment. Each reference to the Custodial Agreement in any of the Loan Documents shall be deemed to be a reference to the Custodial Agreement as amended hereby. The execution of this Amendment by the Lender or Custodian shall not operate as a waiver of any of their rights, powers or privileges under the Custodial Agreement or under any of the other Loan Documents except as expressly set forth herein. Section 5. Counterparts. This Amendment may be executed by each of the parties hereto on any number of separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment in Portable Document Format (PDF) or by facsimile transmission shall be effective as delivery of a manually executed original counterpart thereof. Section 6. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. [SIGNATURE PAGE FOLLOWS] IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first above written. BORROWERS AMERICAN HOME MORTGAGE CORP. By: /s/ Craig Pino ------------------------------------ Name: Craig Pino Title: SVP AMERICAN HOME MORTGAGE INVESTMENT CORP. By: /s/ Craig Pino ------------------------------------ Name: Craig Pino Title: SVP AMERICAN HOME MORTGAGE HOLDINGS, INC. By: /s/ Craig Pino ------------------------------------ Name: Craig Pino Title: SVP AMERICAN HOME MORTGAGE ACCEPTANCE, INC. By: /s/ Craig Pino ------------------------------------ Name: Craig Pino Title: SVP AMERICAN HOME MORTGAGE SERVICING, INC. (f/k/a Columbia National, Incorporated) By: /s/ Craig Pino ------------------------------------ Name: Craig Pino Title: SVP LENDER AGENT ------------ MORGAN STANLEY BANK By: /s/ Paul Najarian ------------------------------------ Name: Paul Najarian Title: Vice President CUSTODIAN --------- DEUTSCHE BANK NATIONAL TRUST COMPANY By: /s/ Andrew Hays ------------------------------------ Name: Andrew Hays Title: Associate By: /s/ Tsutomu Yoshida ------------------------------------ Name: Tsutomu Yoshida Title: Assistant Vice President Annex 1 to Custodial Agreement ---------------------- INFORMATION TO BE PROVIDED WITH RESPECT TO ELIGIBLE MORTGAGE LOANS For each Mortgage Loan, the applicable Borrower shall provide the following information: (a) Number of Times Delinquent 30 days in last 12 months; (b) Number of Times Delinquent 60 days in last 12 months; (c) Number of Times Delinquent 90+ days in last 12 months; (d) Address City; (e) Address County; (f) Address State; (g) Address Street; (h) Address Zipcode; (i) Amort Type (Fixed or ARM); (j) Backend Debt Ratio (all debt/income); (k) Balance Appraisal; (l) Balance Current; (m) Balance Original; (n) Balance Senior; (o) Balloon; (p) Borrower Name; (q) CLTV Original; (r) Co-Borrower's Credit Score (if applicable); (s) Co-Borrower's Name (if applicable); (t) Commitment Expiration; (u) Convertible; Annex 1-1 (v) Coupon Current; (w) Coupon Init Per Cap; (x) Coupon IO; (y) Coupon Life Cap; (z) Coupon Max; (aa) Coupon Min; (bb) Coupon Original; (cc) Coupon Periodic Cap; (dd) Coupon Periodic Floor; (ee) Credit Score (FICO); (ff) Credit Score Type (Beacon, Equifax, TransUnion or Merge); (gg) Date First Cpn Change; (hh) Date First Payment; (ii) Date First Pmt Change; (jj) Date Maturity; (kk) Date Next Coupon Change; (ll) Date Next Due; (mm) Date Next Pay Change; (nn) Date Orig; (oo) Date Paid Thru; (pp) Day Count; (qq) Debt Ratio Back; (rr) Debt Ratio Front; (ss) Delinq Status; (tt) Documentation Type; Annex 1-2 (uu) Escrow Flag (Yes or No); (vv) Forclosure/REO/Bankruptcy Status; (ww) Freq Coupon Adj; (xx) Freq Payment Adj; (yy) Frequency Pmt; (zz) Frontend Debt Ratio (mortgage debt/income); (aaa) Fund Date; (bbb) Index (for ARMs); (ccc) IO Flag (Yes or No); (ddd) Lien Status; (eee) Loan Purpose; (fff) Loan Type (residential, etc..); (ggg) Loan Id Number; (hhh) LTV Current; (iii) LTV Original; (jjj) Margin; (kkk) Number of Units; (lll) Occupancy; (mmm) Ownership Type (Leasehold, Fee Simple, etc...); (nnn) P&I Current; (ooo) P&I Original; (ppp) PMI (Yes or No); (qqq) PMI Percentage (if applicable); (rrr) PMI Provider (if applicable); (sss) Prepayment Penalty (Yes or No); Annex 1-3 (ttt) Prepayment Penalty Description; (uuu) Prepayment Penalty Term (Months Freely Prepayable); (vvv) Product Type; (www) Property Purchase Amount/Sales Price; (xxx) Property Type; (yyy) Rating; (zzz) Rounding Factor; (aaaa) S&P Appraisal Type; (bbbb) S&P Document Type; (cccc) Section 32 Flag; (dddd) Service Fee Amount; (eeee) Social Security Number; (ffff) Takeout Investor; (gggg) Takeout Price; (hhhh) Term Amort Original; (iiii) Term Coupon Teaser; (jjjj) Term IO Original; (kkkk) Term Original; (llll) Term PNI Teaser; (mmmm) Warehouse Amount;and (nnnn) Warehouse Bank. Annex 1-4 EX-10.6 4 am3q04-ex10_6.txt FIRST AMEND. TO MORT. LOAN PURCHASE & SALE AGMT. EXHIBIT 10.6 FIRST AMENDMENT TO MORTGAGE LOAN PURCHASE AND SALE AGREEMENT ------------------------------------------------------------ This First Amendment dated as of September 1, 2004, is to that certain Mortgage Loan Purchase and Sale Agreement (Whole Loan Purchase and Sale Agreement) dated January 1, 2004 (the "P&S Agreement") by and between Greenwich Capital Financial Products, Inc. ("Purchaser"), American Home Mortgage Corp. (a "Seller") and American Home Mortgage Servicing, Inc. f/k/a Columbia National Incorporated (a "Seller", and together with American Home Mortgage Corp., the "Sellers"); WHEREAS, Purchaser and Sellers have entered into the P&S Agreement; WHEREAS, Purchaser and Sellers desire to amend the P&S Agreement in certain respects; NOW, THEREFORE, the parties, intending to be legally bound, amend the P&S Agreement as follows: 1. Effective as of the date hereof, Section 1 of the P&S Agreement is hereby amended by replacing or adding the following definitions: "Hedge Trade": means a forward or other trade available to be assigned by Sellers to Purchaser through a Trade Assignment in the event Purchaser exercises its right to accept assignment of such Trade Assignment. In every circumstance in which a Seller assigns a Hedge Trade, the amount of Mortgage Loans available to be sold into the Hedge Trade and all other aspects of the Hedge Trade shall be acceptable to Purchaser in its sole discretion. "Trade Assignment": The assignment by a Seller to Purchaser of the related Seller's rights under a specific Takeout Commitment, in the form of Exhibit D-1, or of the related Seller's rights under all Takeout Commitments, in the form of Exhibit D-2, or of the related Seller's rights under a Hedge Trade, in the form acceptable to Purchaser in its sole discretion. "Trade Price": Either (a) the trade price set forth on a Takeout Commitment less any applicable Price Adjustment, or (b) in the event there is no Takeout Commitment, the trade price established by Purchaser. 2. Effective as of the date hereof, Section 2 of the P&S Agreement is hereby restated to read in its entirety as follows: (a) Purchaser may, in its sole discretion, from time to time, purchase one or more Mortgage Loan Pools from Sellers. Prior to Purchaser's actual purchase of any Mortgage Loan Pool, the applicable provisions of Section 4 of the Custodial Agreement shall have been satisfied and Purchaser shall have received from Custodian (i) by facsimile, a Notice of Intent to Issue Trust Receipt, (ii) a copy of the Takeout Confirmation, if applicable, related to the Mortgage Loan(s) in such Mortgage Loan Pool, together with a Trade Assignment in the form of Exhibit D-1 or Exhibit D-2, executed by the related Seller and Takeout Investor, (iii) an original letter in the form of Exhibit B-1 (an "Exhibit B-1 Letter") from the applicable Warehouse Lender (if any), or an original letter in the form of Exhibit C-1 (an "Exhibit C-1 Letter") in the event that there is no Warehouse Lender, and (iv) shall have the right to receive in transactions in which the Seller is not providing a Takeout Commitment, from the related Seller a report generated by the related Seller demonstrating that Hedge Trades exist and are available to be assigned to Purchaser in an amount and of a kind sufficient to hedge all Mortgage Loans purchased by Purchaser from the related Seller for which no Trade Assignments exist. (b) Simultaneously with the payment by Purchaser of the Purchase Price, in accordance with the Warehouse Lender's Wire Instructions or Seller's Wire Instructions, as applicable, with respect to a Mortgage Loan Pool, the related Seller will have conveyed to Purchaser all of the related Seller's right, title and interest in and to the related Mortgage Loan(s) free and clear of any lien, claim or encumbrance. Upon payment of the Purchase Price, the Trust Receipt covering all Mortgage Loans (including the Mortgage Loan Pool being purchased) shall be delivered in accordance with the provisions of the Custodial Agreement by facsimile with the original Trust Receipt to be sent by overnight mail to arrive on the Business Day after the day it is sent by facsimile. Notwithstanding the satisfaction by the related Seller of the conditions specified in this Section 2, prior to the payment by Purchaser of the Purchase Price (or the execution of any written commitment by the Purchaser to purchase any specific Mortgage Loans hereunder), Purchaser is not obligated to purchase any Mortgage Loans offered to it hereunder. (c) If Purchaser elects to purchase any Mortgage Loan Pool, Purchaser shall pay the amount of the Purchase Price for such Mortgage Loan Pool by wire transfer of immediately available funds in accordance with the provisions of the Custodial Agreement and the Warehouse Lender's Wire Instructions or if there is no Warehouse Lender, Seller's Wire Instructions. Upon such payment and not otherwise, Purchaser shall be deemed to have accepted the related Trade Assignment. Sellers shall not offer for sale to Purchaser any Mortgage Loan as to which the Expiration Date of any related Takeout Commitment is two (2) Business Days or less following the Purchase Date. (d) In the event that Purchaser rejects a Mortgage Loan for purchase for any reason and does not transmit the applicable Purchase Price, Purchaser shall not consummate the transactions contemplated in the applicable Takeout Confirmation or Hedge Trade with respect to any such Mortgage Loan and shall deliver to Takeout Investor (with a copy to the related Seller and Custodian) a Notice of Rejection of Trade Assignment, provided, however, that failure of Purchaser to give such notice shall not affect the rejection by Purchaser of the Trade Assignment, and if Purchaser shall nevertheless receive any portion of the related Takeout Proceeds, Purchaser shall promptly pay such Takeout Proceeds to the related Seller in accordance with Seller's Wire Instructions. (e) The terms and conditions of the purchase of each Mortgage Loan Pool shall be as set forth in this Agreement. 2 (f) In the event the related Seller does not deliver to Purchaser a Takeout Commitment and related Trade Assignment on the date Purchaser purchases Mortgage Loans, the related Seller shall have thirty (30) days from the Purchase Date to either (i) deliver to Purchaser a Takeout Commitment and related Trade Assignment, or (ii) or repurchase the subject Mortgage Loans from Purchaser. In the event, the related Seller fails to deliver timely such Takeout Commitment and Trade Assignment or repurchase the Mortgage Loans, the related Seller shall have waived its right to receive the Completion Fee otherwise payable in accordance with Section 4 hereof and Purchaser may, at any time thereafter, demand an assignment of appropriate Hedge Trades sufficient in Purchaser's reasonable judgment to hedge fully the Mortgage Loans purchased by Purchaser from Seller for which no Takeout Commitment and related Trade Assignment exists. 3. Effective as of the date hereof, Sections 3(a) and (b) of the P&S Agreement are hereby restated to read in their entirety as follows: (a) With respect to Mortgage Loan(s) that Purchaser has elected to purchase and in the event there exists a Takeout Commitment, Purchaser may, at its option, either (i) instruct Custodian to deliver to Takeout Investor, in accordance with Takeout Investor's instructions, the Custodial File in respect of such Mortgage Loans, in the manner and at the time set forth in the Custodial Agreement, or (ii) provide for the delivery of the Custodial File through an escrow arrangement satisfactory to Purchaser and Takeout Investor. In the event that a Takeout Investor exists, the related Seller shall, within ten (10) Business Days following the Purchase Date, but in no event later than two (2) Business Days prior to the related Expiration Date, deliver to Takeout Investor the related Credit File and thereafter any and all additional documents requested by Takeout Investor to enable Takeout Investor to purchase such Mortgage Loan(s) on or before the related Expiration Date. (b)(1) Subject to the provisions of Section 4(e) herein, except when Purchaser has accepted a Settlement Modification Letter, unless the Takeout Proceeds are received by Purchaser (in immediately available funds in accordance with Purchaser's Wire Instructions) with respect to the Mortgage Loans in a Mortgage Pool, on or before the related Cure Date, the Completion Fee relating to such Mortgage Pool shall not be payable until the earlier to occur of (1) the date of receipt by Purchaser of the Takeout Proceeds and, (2) the satisfaction by the related Seller of its obligations pursuant to the exercise by Purchaser of any remedial election authorized by this Section 3. Upon receipt by Purchaser, prior to the Cure Date, of a Settlement Modification Letter, duly executed by Takeout Investor and the related Seller, Purchaser may, at its election, agree to the postponement of the Settlement Date and such other matters as are set forth in the Settlement Modification Letter. If Purchaser elects to accept a Settlement Modification Letter, Purchaser shall, not later than two (2) Business Days after receipt of such Settlement Modification Letter execute the Settlement Modification Letter and send, via facsimile, copies of such fully executed Settlement Modification Letter to the related Seller and Takeout Investor. Subject to the provisions of Section 4(e) herein, upon execution by Purchaser of a Settlement Modification Letter, Purchaser shall recalculate the amount of the Completion Fee, if any, due to the related Seller using the new terms included in the Settlement Modification 3 Letter and shall pay to the related Seller, not later than two (2) Business Days after Takeout Investor's purchase of the related Mortgage Loans pursuant to such Settlement Modification Letter, the amount of such recalculated Completion Fee. (b)(2) In the event that the related Seller fails to deliver within thirty (30) days from the Purchase Date a Takeout Commitment and Trade Assignment, the related Seller shall have waived its right to receive the Completion Fee otherwise payable in accordance with Section 4 hereof. 4. Effective as of the date hereof, Section 4(a) of the P&S Agreement is hereby restated to read in its entirety as follows: (a) Subject to paragraph 2(f), 4(d) and 3(b)(2), with respect to each Mortgage Loan Pool that Purchaser elects to purchase hereunder, Purchaser shall pay to the related Seller a Completion Fee. In the event that the Completion Fee is payable by Purchaser in connection with any Mortgage Loan Pool, it shall be paid by Purchaser as provided in subsection (d) below. 5. Effective as of the date hereof, Section 4(d) of the P&S Agreement is hereby restated to read in its entirety as follows: (d) In the event that a Seller delivers to Purchaser a Takeout Commitment through a Trade Assignment (other than a Hedge Trade) in accordance with Section 2 hereof, the Completion Fee relating to each Mortgage Loan Pool is payable on the earlier to occur of (1) the date of receipt by Purchaser of the Trade Price, and (2) the satisfaction by the related Seller of its obligations pursuant to this Agreement notwithstanding the exercise by Purchaser of any remedial election authorized herein. In the event, the related Seller fails to deliver timely such Takeout Commitment and Trade Assignment in accordance with Section 2(f), the related Seller shall have waived its right to receive the Completion Fee. 6. Effective as of the date hereof, Section 6 of the P&S Agreement is hereby restated to read in its entirety as follows: Section 6. Trade Assignments. To the extent Purchaser (i) elects to accept any Trade Assignment and (ii) pay the Discount to the related Seller in accordance therewith, the related Seller hereby assigns to Purchaser, free of any security interest, lien, claim or encumbrance of any kind, the related Seller's rights, under each Takeout Commitment or Hedge Trade to deliver the Mortgage Loan(s) specified therein to the related Takeout Investor or counter-party and to receive the Takeout Proceeds therefor from such Takeout Investor or amounts owed under the Hedge Trade, as applicable. Purchaser shall not be deemed to have accepted any Trade Assignment unless and until it purchases the related Mortgage Loans, and nothing set forth herein shall be deemed to impair Purchaser's right to reject any Mortgage Loan for any reason, in its sole discretion. 4 7. In connection with the execution of this First Amendment, each of Purchaser and Sellers represent and warrant as follows: (i) It is duly organized and existing under the laws of the jurisdiction of its organization with full power and authority to execute and deliver this First Amendment and to perform all of the duties and obligations to be performed by it hereunder; (ii) This First Amendment and the performance of all transactions contemplated hereunder have been duly authorized, executed and delivered in accordance with all requisite corporate action, and this First Amendment constitutes a valid, legal and binding obligation enforceable in accordance with its terms, except as may be limited by bankruptcy, insolvency or similar laws, or by equitable principles relating to or limiting creditors' rights generally; and (iii) The execution, delivery and performance of this First Amendment and the transactions contemplated hereunder will not violate any agreement by which it is bound or by which any of its assets are affected, or its charter, or by-laws, or any statute, regulation, rule, order or judgment applicable to it. 8. This First Amendment shall become effective as of the date hereof upon execution by the parties hereto. From and after the execution hereof, reference to this First Amendment need not be made in the P&S Agreement or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to, or with respect to, the P&S Agreement, any reference in any of such items to the Agreement being sufficient to refer to the P&S Agreement as amended hereby. Except as amended hereby, the P&S Agreement shall continue in full force and effect in accordance with its terms. 9. In order to induce the Purchaser to execute and deliver this First Amendment, the Sellers hereby represent to the Purchaser that as of the date hereof, after giving effect to this First Amendment, the Sellers are in full compliance with all of the terms and conditions of the P&S Agreement. 10. THIS FIRST AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS, AND REMEDIES OF THE PARTIES HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS WITHOUT REGARD TO CONFLICT OF LAWS DOCTRINE APPLIED IN SUCH STATE. 11. This First Amendment may be executed by each of the parties hereto on any number of separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. 5 IN WITNESS WHEREOF, the Seller and Purchaser have caused this First Amendment to be duly executed as of the date and year first above written. GREENWICH CAPITAL FINANCIAL PRODUCTS, INC. By: /s/ Joseph S. Bartolotta --------------------------- Name: Joseph S. Bartolotta Title: Managing Director AMERICAN HOME MORTGAGE CORP. By: /s/ Craig Pino --------------------------- Name: Craig Pino Title: SVP and Treasurer AMERICAN HOME MORTGAGE SERVICING, INC. F/K/A COLUMBIA NATIONAL, INCORPORATED By: /s/ Craig Pino --------------------------- Name: Craig Pino Title: SVP and Treasurer EX-10.7 5 am3q04-ex10_7.txt SECOND AMENDED & RESTATED REVOLVING CREDIT AGMT. EXHIBIT 10.7 SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT This Second Amended and Restated Revolving Credit Agreement (this "Agreement"), dated as of September 24, 2004 (but is effective retroactively to August 30, 2004), is by and among AMERICAN HOME MORTGAGE SERVICING, INC. f/k/a Columbia National, Incorporated, a Maryland corporation ("AHMS"), AMERICAN HOME MORTGAGE CORP. ("AHMC" and collectively with AHMS, each a "Borrower" and collectively, the "Borrowers") and U.S. BANK NATIONAL ASSOCIATION, a national banking association (the "Bank"). RECITALS WHEREAS, AHMS and AHMC and the Bank are parties to an Amended and Restated Revolving Credit Agreement dated as of May 30, 2003, (as amended, the "Existing Credit Agreement"); WHEREAS, the Borrowers desire that the Bank agree to, and the Bank has agreed to, amend and restate the Existing Credit Agreement pursuant to the terms and conditions of this Agreement. NOW THEREFORE, in consideration of the forgoing Recitals and other good and valuable consideration, the parties hereto do hereby agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1.1 Definitions. As used herein, in each exhibit hereto, the following terms shall have the following respective meanings (such terms to be equally applicable to both the singular and plural forms of the terms defined): "Affiliate": with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with such Person, whether through the ownership of voting securities, by contract or otherwise. "Authorized Persons": each of those persons named on Exhibit B, as the same may be amended from time to time. "Business Day": a day on which the Bank is open for the transaction of business in Minneapolis, Minnesota, and for purposes of determining and changing the Floating LIBOR Rate, on which dealings in Dollars may be carried on by the Bank in the interbank eurodollar market and on which banks are open for business in London, England and New York City. "Collateral": the "Collateral" as defined in the Pledge and Security Agreement. "Cash Collateral Account": Account number 104755871670 of the Borrowers maintained with the Bank. "Commitment": The maximum unpaid principal Advances which may from time to time be outstanding hereunder, being $50,000,000, as the same may be reduced from time to time pursuant to Section 2.3 and, as the context may require, the agreement of the Bank to make Advances to the Borrowers subject to the terms and conditions of this Agreement. "Credit Agreement": that certain Credit Agreement dated as of August 30, 2004, among the Borrowers, Bank of America, N.A., as Administrative Agent and Swingline Lender, the Lenders party thereto and certain other parties. "Floating LIBOR Rate": With respect to any date of determination, the average offered rate for one month deposits in United States dollars (rounded upward, if necessary, to the nearest 1/16 of 1%), which appears on Telerate page 3750 as of 11:00 A.M., London time (or such other time as of which such rate appears) on such date of determination, or the rate for such deposits determined by the Bank at such time based on such other published service of general application as shall be selected by the Bank for such purpose; provided, that in lieu of determining the rate in the foregoing manner, the Bank may determine the rate based on rates at which one month deposits in United States dollars are offered to the Bank in the interbank Eurodollar market at such time for delivery in Immediately Available Funds (rounded upward, if necessary, to the nearest 1/16 of 1%). "Telerate page 3750" means the display designated as such on the Telerate reporting system operated by Telerate System Incorporated (or such other page as may replace page 3750 for the purpose of displaying London interbank offered rates of major banks for United States dollar deposits). For purposes of determining any interest rate hereunder or under any other Loan Document which is based on the Floating LIBOR Rate, such interest rate shall change as and when the Floating LIBOR Rate shall change. "Immediately Available Funds": funds with good value on the day and in the city in which payment is received. "Investment Collateral Account" shall mean the Borrowers' account no. 385000004 maintained with the Bank. "Loan Documents": this Agreement, the Notes, the Pledge and Security Agreement and the other documents, certificates, or exhibits executed and delivered by any Borrower under the terms of this Agreement. "Maturity Date": the earlier of (i) August 30, 2005, or (ii) the date on which the Bank terminates the Commitment pursuant to Section 6.2 hereof. "Note": the executed promissory note, substantially in the form of Exhibit A hereto, dated as of the date of this Agreement, executed by the Borrowers to the order of the Bank in the original principal amount of the highest amount of the Commitment, as the same may be amended, modified or restated from time to time hereafter. "Permitted Investments": the following, in each case not subject to any lien, security interest, right of offset, or other encumbrance (except in favor of the Bank): (i) cash, (ii) securities with remaining maturities of 90 days or less issued or fully guaranteed by the United States Government or other securities with remaining maturities of 90 days or less issued or fully guaranteed by any state, political subdivision or taxing authority (provided that such 2 other securities are rated at least A by Standard & Poor's Ratings Group or Moody's Investors Service, Inc.), and (iii) commercial paper with remaining maturities of 90 days or less of a domestic issuer rated as least A-1 by Standard & Poor's Ratings Group or P-1 by Moody's Investors Service, Inc. "Person": any natural person, corporation, partnership, joint venture, firm, association, trust, governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity. "Pledge and Security Agreement": the executed Second Amended and Restated Pledge and Security Agreement substantially in the form of Exhibit C hereto, covering, among other things, the Cash Collateral Account, the Investment Collateral Account and the Permitted Investments carried in the Investment Collateral Account, as amended from time to time, and each financing statement and other document required by the Bank to perfect or record its interest thereunder. "Subsidiary": any corporation a majority of the shares of the outstanding capital stock of which is owned by any Borrower, either directly or through one or more subsidiaries. 1.2 Accounting Terms and Calculations. All accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP. To the extent any change in GAAP after the date hereof affects any computation or determination required to be made pursuant to this Agreement, such computation or determination shall be made as if such change in GAAP had not occurred unless the Borrowers and the Bank agree in writing on an adjustment to such computation or determination to account for such change in GAAP. 1.3 Computation of Time Periods. In this Agreement, in the computation of a period of time from a specified date to a later specified date, unless otherwise mated the word "from" means "from and including" and the word "to" or "until" each means "to but excluding". 1.4 Other Terms. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and section, schedule, exhibit and like references are to this Agreement unless otherwise clearly requires, "or" has the inclusive meaning represented by the phrase "and/or." The singular includes the plural and the singular. All incorporation by reference of covenants, terms, definitions or other provisions from other agreements are incorporated into this Agreement as if such provisions were fully set forth herein, and such incorporation shall include all necessary definitions and related provisions from such other agreements but including only amendments thereto agreed to by the Bank, and shall survive any termination of such other agreements until the obligations of the Borrowers under this Agreement and the Note are irrevocably paid in full and the Commitment has been terminated. ARTICLE II COMMITMENTS OF THE BANK 2.1 Commitment. Prior to the Maturity Date and subject to the terms and conditions of this Agreement, the Bank agrees to lend to the Borrowers, jointly and severally and secured by 3 the Collateral, up to the amount of the Commitment in the aggregate outstanding at any time in the form of loans ("Advances"), provided, that the Permitted Investments to which such Advance relate have been credited to the Investment Collateral Account (as defined in the Pledge and Security Agreement), and provided however, that the principal amount of any Advance shall not exceed the purchase price of the Permitted Investments that shall be purchased with the proceeds of such Advance. Within the foregoing limits, and subject to the additional terms and conditions of this Agreement, the Borrowers may from time to time borrow, repay in whole or in part and reborrow, regardless of the cumulative amount of the Advances. The Bank shall not be obligated to make Advances if, after giving effect thereto, any of the foregoing limitations would be exceeded. 2.2 Use of Proceeds of Advances. The Advances shall be used solely to purchase Permitted Investments, which Permitted Investments will be credited to the Investment Collateral Account and included in the Collateral. 2.3 Optional Reduction or Termination of Commitment. The Borrowers may, at any time, upon no less than three Business Days' prior written notice to the Bank, reduce the Commitment, with any such reduction in a minimum amount of $1,000,000 or an integral multiple thereof. Upon any reduction in the Commitment pursuant to this Section, the Borrowers shall pay to the Bank the amount, if any, by which the aggregate unpaid principal amount of outstanding Advances exceeds the Commitment as so reduced. Amounts so paid cannot be reborrowed. The Borrowers may, at any time, upon not less than three Business Days' prior written notice to the Bank, terminate the Commitment in its entirety. Upon termination of the Commitment pursuant to this Section, the Borrowers shall pay to the Bank the full amount of all outstanding Advances, all accrued and unpaid interest thereon, and all other unpaid obligations of the Borrowers to the Bank hereunder. 2.4 Time and Method of Payments. All payments and prepayments by the Borrowers of principal of the Notes shall be made in Immediately Available Funds not later than 12:00 noon (Minneapolis time) on the dates called for under this Agreement at the main office of the Bank in Minneapolis, Minnesota. Funds received after such hour shall be deemed to have been received by the Bank on the next Business Day. The Borrowers hereby authorize the Bank to charge the Cash Collateral Account in an amount equal to any such payment or prepayment when due and payable to the Bank under this Agreement on the date due and agrees to maintain collected funds in such Cash Collateral Account sufficient to make such payments as and when due. If any payment of principal on the Notes becomes due and payable on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall in such case be included in the computation of any interest on such principal payment. 2.5 Borrowing of Advances. The Borrowers shall give the Bank telephonic notice of each request for an Advance (promptly confirmed in writing) under the Commitment not later than 12:00 noon (Minneapolis time) on the date of the requested Advance, specifying the amount requested; provided, that the Borrowers shall have a reasonable expectation of maintaining Available Balances so that no "Deficiency" (as determined in accordance with Section 2.9) shall exist for such month. Each request for an Advance shall specify the date and the amount of such Advance which shall be in a minimum amount of $100,000. The Bank shall deposit into the 4 Cash Collateral Account in Immediately Available Funds by not later than 5:00 P.M. (Minneapolis time) on said date the total amount of the Advance or Advances to be made by the Bank. Upon such deposit, the Cash Collateral Account will be debited to purchase the related Permitted Investments and, upon such purchase, such Permitted Investments will be credited to the Investment Account. 2.6 Note Evidencing Advances. All Advances shall be evidenced by the Note. The date and amount of each Advance may be noted by the Bank on a schedule annexed to the Note or on the Bank's ledgers or computer records. The aggregate amount of Advances made by the Bank under the Note less repayments of principal thereof shall be the principal amount owing and unpaid on the Note. The notations made by a Bank on the schedule annexed to the Note or its ledgers and computer records shall be presumed to be accurate absent manifest error, provided however, that the failure of the Bank to make such notations or to maintain such records shall not affect the validity or enforceability of the Note. 2.7 Payment and Prepayment of Advances. The Borrowers shall pay the principal of the Note as follows: (a) Maturity Date. The entire unpaid principal balance of the Note shall be due and payable on the Maturity Date. (b) Mandatory Prepayments. If at any time the aggregate outstanding amount of the Advances exceed the Commitment, reduced as provided in the definition of "Commitment" and as provided in Section 2.3, the Borrowers shall immediately make principal payments of such excess. (c) Optional Prepayments. The Borrowers may prepay the Advances, in whole or in part, at any time, without premium or penalty. Any such prepayment must be accompanied by accrued and unpaid interest on the amount prepaid. Each partial prepayment shall be in an amount of $100,000. 2.8 Interest Rate Applicable to the Notes. The Borrowers will pay the Bank interest on the unpaid principal balance of each Advance from time to time outstanding as follows: (a) Before Maturity. Subject to adjustment of the rate of interest applicable to any given month as provided in Section 2.9 the unpaid principal amount of each Advance shall bear interest prior to maturity at a rate of 0.70% per annum. (b) After Maturity. Any amount of any Advances not paid when due, whether at the date scheduled therefor or earlier upon acceleration, shall bear interest until paid in full at a rate per annum equal to the Floating LIBOR Rate plus 2.70% per annum. (c) Payment of Interest. Except as provided in Section 2.9, interest accrued on the Notes through the last day of each calendar month shall be payable on the first Business Day of the next succeeding calendar month. (d) Computation. All interest on the Notes (including any increase or decreases to the rate of interest, as provided in Section 2.9) and interest determinations 5 made for purposes of Section 2.9 shall be computed based on actual days elapsed in a year of 360 days. 2.9 Adjustment to Interest Rate. (a) Maintenance of Balances. The Borrowers shall maintain on deposit in a non-interest bearing account with the Bank for each calendar month for which any Advance is outstanding, Average Daily Available Deposits in an amount (the "Required Available Deposit Amount") equal to the Average Daily Advance Amount for such month divided by the Average Daily Reserve Factor for such month. (b) Additional Required Balances. The Borrowers and the Bank may from time to time agree to reduce the interest rate on an agreed portion of an Advance to not less than 0.125% per annum (the mutually agreed reduced rate is called a "Reduced Fixed Rate"). The Borrowers agree to maintain on deposit in a non-interest bearing account with the Bank for each calendar month for which any Reduced Fixed Rate is applicable, Average Daily Available Deposits (the "Additional Required Available Deposit Amount"), in addition to those required under Section 2.9(a), in an amount determined in accordance with the following formula: ARADA = ILF x 360 ---------------- --- ARF x ECR n In such formula: "ARADA" is the Additional Required Available Deposit Amount. "ARF" is the Average Daily Reserve Factor for such month "ECR" is the earnings credit rate per annum established by the Bank for non-bearing demand deposits from time to time. "ILF" is the interest loss factor, calculated to equal the remainder of (i) the amount of interest that would have accrued on the Advance subject to the Reduced Fixed Rate at the rate provided in Section 2.8(a) for such month, less (ii) the amount of interest that accrued on the such Advance at the Reduced Fixed Rate. "n" is the number of days in such month. (c) Surpluses and Deficiencies The Bank shall determine for each calendar month the amount of Average Daily Available Deposits and the amount, if any, by which such Average Daily Available Deposits exceeds (a "Deposit Surplus") or is less than (a "Deposit Deficiency") the Total Required Deposits for such month. Any Deposit Surplus or Deposit Deficiency for any month will be carried forward and applied to increase or reduce, as the case may be, Deposit Surpluses or Deposit-Deficiencies determined for subsequent calendar months in the same calendar quarter. Unless the Bank shall otherwise agree with the Borrowers, net Deposit Surpluses shall not be carried forward to 6 succeeding fiscal years. If a net Deposit Deficiency exists for a full calendar quarter, the Borrowers shall pay to the Bank additional interest (in addition to that paid under Section 2.8) equal to the product of (a) such net Deposit Deficiency, times (b) the Average Daily Floating LIBOR Rate for such quarter, times (c) the quotient of (i) the actual number of days in such quarter divided by 3, divided by (ii) 360. The Bank shall notify the Borrowers in writing of the amount of monthly Deposit Surpluses or Deficiencies and of the amount of any Deficiency Fee as soon as practicable after the end of each calendar quarter, and the additional interest within five (5) days after such notice. The Bank's written notice shall be presumed to be correct in the absence of manifest error. (c) Additional Definitions. For purposes of this Section 2.9 the following capitalized terms have the following meanings: "Available Deposits": at the time of any determination, interest-free collected deposit balances maintained by the Borrowers with the Bank which are not attributed to any other facility or service, in excess of those which the Bank determines to be necessary to support other banking services provided to the Borrowers and to compensate the Bank for costs of insurance of the Federal Deposit Insurance Corporation (or any successor), which services and costs are not covered by cash payments by the Borrowers. "Average Daily Available Deposits": with respect to a calendar month, the average daily amount of Available Deposits on deposit with the Bank during such calendar month. "Average Daily Floating LIBOR Rate": with respect to a calendar quarter, the average daily Floating LIBOR Rate in effect during such calendar quarter. "Average Daily Reserve Factor": with respect to any calendar month, the average daily amount of the Reserve Factor in effect during such month. "Average Daily Advance Amount": with respect to any calendar month, the total average daily unpaid principal balance of the Advances outstanding during such calendar month. "Reserve Factor": as of any date, a number equal to the number one (1) minus the percentage (expressed as a decimal rather than a percentage) stipulated by Regulation D of the Federal Reserve Board as the highest marginal percentage of net demand deposits required to be maintained on reserve by the Bank. "Total Required Deposits": the sum, for any calendar month, of the Required Available Deposit Amount and Additional Required Available Deposit Amount for such calendar month. 2.10 Persons Authorized to Request Advances. Until otherwise directed in writing by an Authorized Person, the Borrowers hereby authorize the Bank, upon receipt of telephonic instructions (confirmed in writing as soon as practicable) from any one of the Authorized 7 Persons, to make Advances in the amount and type, in each case, designated by such Authorized Person. The list of Authorized Persons may be changed by the Borrowers at any time upon written notice to the Bank. The Bank may assume, and act upon the assumption, that any person giving the Bank instructions hereunder is the person he or she purports to be. 2.11 Capital Adequacy. If the Bank shall reasonably determine that the application or adoption of any law, rule, regulation, directive, interpretation, treaty or guideline regarding capital adequacy, or any change therein or in the interpretation or administration thereof, whether or not having the force of law, increases the amount of capital required or expected to be maintained by the Bank or any Person controlling the Bank, and such increase is based upon the existence of the Bank's obligations hereunder and under other commitments of this type, then from time to time, within 10 Business Days after written demand from the Bank, the Borrowers shall pay to the Bank such amount or amounts as will compensate the Bank or such controlling Person, as the case may be, for such increased capital requirement. The Bank's determination of any amount to be paid by the Borrowers under this Section shall take into consideration the policies of the Bank or any Person controlling the Bank with respect to capital adequacy and shall be based upon any reasonable averaging, attribution and allocation methods. A certificate of the Bank setting forth the amount or amounts as shall be necessary to compensate the Bank hereunder shall be deemed conclusive in the absence of manifest error. ARTICLE III CONDITIONS PRECEDENT 3.1 Conditions of Initial Advance. The obligation of the Bank to make the initial Advance pursuant to this Agreement shall be subject to the satisfaction of the following conditions precedent, in addition to the applicable conditions precedent set forth in Section 3.2 below, that the Bank shall have received all of the following, in form and substance satisfactory to the Bank, each duly executed and certified or dated the date of the initial Advance or such other date as is satisfactory to the Bank: (a) The Note executed by a duly authorized officer (or officers) of the Borrower. (b) A copy of the separate corporate resolution of each Borrower authorizing the execution, delivery and performance of the Loan Documents, certified by the Secretary or an Assistant Secretary of such Borrower, together with a certificate of incumbency of officers signing the Loan Documents, and certified copies of the Articles of Incorporation and By-Laws (or the equivalent) of such Borrower. (c) A Certificate of Good Standing for each Borrower in the jurisdiction of its incorporation. (d) The Pledge and Security Agreement executed by a duly authorized officer (or officers) of the Borrowers. (e) An opinion of counsel to the Borrowers, addressed to the Bank, in substantially the form of Exhibit D. 8 3.2 Conditions Precedent to all Advances. The obligation of the Bank to make any Advance hereunder (including the initial Advance) shall be subject to the satisfaction of the following conditions precedent (and each request for an Advance shall be deemed a representation by the Borrowers that the following have been satisfied): (a) Before and after giving effect to such Advance, the representation and warranties contained in Article IV shall be true and correct, as though made on the date of such Advance; and (b) Before and after giving effect to such Advance, no Default or Event of Default (each such term as defined in Article VI) shall have occurred and be continuing. ARTICLE IV REPRESENTATIONS AND WARRANTIES To induce the Bank to enter into this Agreement, to grant the Commitment and to make the Advances hereunder, each Borrower represents and warrants to the Bank that each of the representations and warranties made by any Borrower in the Credit Agreements are true and correct. For purposes of this incorporation, any reference in the representations and warranties made by any Borrower in the Credit Agreement to "this Agreement", "the Loan Documents", "herein" and similar references shall be deemed to refer to this Agreement, the Note or the Loan Documents, as applicable, and any reference in the Credit Agreement to the "Credit Agent" or the "Lenders" shall be deemed to refer to the Bank. ARTICLE V COVENANTS From the date of this Agreement and thereafter until the Commitment is terminated or expires and the Advances and all other liabilities of the Borrowers to the Bank hereunder and under the Note have been paid in full, unless the Bank shall otherwise expressly consent in writing, the Borrowers will comply with each of the terms, covenants and agreements set forth in the Credit Agreements, and will supply to the Bank each report and statement required thereunder (except to the extent that it is already supplying such items to the Bank in its capacity as a Lender under the Credit Agreement). For purposes of this incorporation, any reference to "this Agreement", "the Loan Documents", "herein" and similar references shall be deemed to refer to this Agreement, the Note or the Loan Documents, as applicable, and any reference in the Credit Agreement to the "Agent" or the "Lenders" shall be deemed to refer to the Bank. ARTICLE VI EVENTS OF DEFAULT AND REMEDIES 6.1 Events of Default. The occurrence of any one or more of the following events shall constitute an Event of Default: (a) Any Borrower shall fail to make when due, whether by acceleration or otherwise, any payment of principal of or interest on the Note or any fee or other amount required to be made to the Bank pursuant to the Loan Documents; 9 (b) Any representation or warranty made or deemed to have been made by or on behalf of any Borrower or any Subsidiary in the Loan Documents or by or on behalf of any Borrower or any Subsidiary in any certificate, statement, report or other writing furnished by or on behalf of any Borrower to the Bank pursuant to the Loan Documents shall prove to have been false or misleading in any material respect on the date as of which the facts set forth are stated or certified or deemed to have been stated or certified; (c) Any default or event of default, however denominated, shall have occurred and continued under the Credit Agreement; or (d) Any Borrower shall fail to comply with any agreement, covenant, condition, provision or term contained in the Loan Documents (and such failure shall not constitute an Event of Default under any of the other provisions of this Section 6.1) and such failure to comply shall continue for 30 calendar days after notice thereof to the Borrowers by the Bank. 6.2 Remedies. If (a) any Event of Default that is an automatic Event of Default without action by the Credit Agent or lenders under the Credit Agreement shall occur with respect to any Borrower, the Commitment shall automatically terminate and the outstanding unpaid principal balance of the Note, the accrued interest thereon and all other obligations of the Borrowers to the Bank under the Loan Documents shall automatically become immediately due and payable; or (b) any other Event of Default shall occur and be continuing, then the Bank may take any or all of the following actions: (i) declare that the Commitment is terminated, whereupon the Commitment shall terminate, (ii) declare that the outstanding unpaid principal balance of the Note, the accrued and unpaid interest thereon and all other obligations of the Borrowers to the Bank under the Loan Documents to be forthwith due and payable, whereupon the Note, all accrued and unpaid interest thereon and all such obligations shall immediately become due and payable, in each case without demand or notice of any kind, all of which are hereby expressly waived, anything in this Agreement or in the Note to the contrary notwithstanding, (iii) exercise all rights and remedies under any other instrument, document or agreement between any Borrower and the Bank, and (iv) enforce all rights and remedies under any applicable law. 6.3 Offset. In addition to the remedies set forth above, upon the occurrence of any Event of Default or at any time thereafter while such Event of Default continues, the Bank or any other holder of the Note may offset any and all balances, credits, deposits (general or special, time or demand, provisional or final), accounts or monies of the Borrowers then or thereafter with the Bank or such other holder, or any obligations of the Bank or such other holder of the Note, against the Indebtedness then owed by the Borrowers to the Bank. ARTICLE VII MISCELLANEOUS 7.1 Waiver and Amendment. No failure on the part of the Bank or the holder of the Note to exercise and no delay in exercising any power or right hereunder or under any other Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any power or right preclude any other or further exercise thereof or the exercise of any other power 10 or right. The remedies herein and in any other instrument, document or agreement delivered or to be delivered to the Bank hereunder or in connection herewith are cumulative and not exclusive of any remedies provided by law. No notice to or demand on the Borrowers not required hereunder or under the Note shall in any event entitle the Borrowers to any other or further notice or demand in similar or other circumstances or constitute a waiver of the right of the Bank or the holder of the Note to any other or further action in any circumstances without notice or demand. No amendment, modification or waiver of any provision of the Loan Documents or consent to any departure by any Borrower therefrom shall be effective unless the same shall be in writing and signed by the Bank, and then such amendment, modifications, waiver or consent shall be effective only in the specific instances and for the specific purpose for which given. 7.2 Expenses and Indemnities. Whether or not any Advance is made hereunder, the Borrowers agree to reimburse the Bank upon demand for all reasonable expenses paid or incurred by the Bank (including filing and recording costs and fees, charges and disbursements of outside counsel to the Bank (determined on the basis of such counsel's generally applicable rates, which may be higher than the rates such counsel charges the Bank in certain matters) and/or the allocated costs of in-house counsel incurred from time to time) in connection with the preparation, review, execution, delivery, amendment, modification, interpretation, collection and enforcement of the Loan Documents. The Borrowers agree to pay, and save the Bank harmless from all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of the Loan Documents. The Borrowers agree to indemnify and hold the Bank harmless from any loss or expense which arises or is created by the acceptance of telephonic or other instructions from the Borrowers for making Advances or disbursing the proceeds thereof to the Borrowers. The obligations of the Borrowers under this Section 7.2 shall survive any termination of this Agreement. 7.3 Notices. Except when telephonic notice is expressly authorized by this Agreement, any notice or other communication to any party in connection with this Agreement shall be in writing and shall be sent by manual delivery, facsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified on the signature page hereof, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by facsimile transmission, from the first Business Day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed; provided, however, that any notice to the Bank under Article II hereof shall be deemed to have been given only when received by the Bank. 7.4 Successors. This Agreement shall be binding upon the Borrowers and the Bank and their respective successors and assigns, and shall inure to the benefit of the Borrowers and the Bank and the successors and assigns of the Bank. No Borrower shall assign its rights or duties hereunder without the written consent of the Bank. 7.5 Participations and Information. (a) The Bank may sell participation interests in and assign its interest in any or all of the Advances and in all or any portion of the Commitment to any Person. 11 (b) The Bank shall use reasonable efforts to assure that information about the Borrowers and their operations, affairs and financial condition, not generally disclosed to the public or to trade and other creditors, which is furnished to the pursuant to the provisions hereof is used only for the purposes of this Agreement and any other relationship between the Bank and the Borrower and shall not be divulged to any Person other than the Bank, its affiliates and their respective officers, directors, employees and agents, except: (i) to their attorneys and accountants, (ii) in connection with the enforcement of the rights of the Bank hereunder and under the Loan Documents or otherwise in connection with applicable litigation, (iii) in connection with assignments and participations and the solicitation of prospective assignees and participants referred to in Section 3(a) hereof, (iv) if such information is generally available to the public other then as a result of disclosure by the Bank, (v) to any direct or indirect contractual counterparty in any hedging arrangement or such contractual counterparty's professional advisor, (vi) to any nationally recognized rating agency that requires information about the Bank's investment portfolio in connection with ratings issued with respect to the Bank, and (vii) as may otherwise be required or requested by any regulatory authority having jurisdiction over the Bank or by any applicable law, rule, regulation or judicial process, the opinion of the Bank's counsel concerning the making of such disclosure to be binding on the parties hereto. Neither the Bank shall incur any liability to the Borrower by reason of any disclosure permitted by this Section. (c) The Bank may disclose to any assignee or participant and to any prospective assignee or participant any and all financial information in the Bank's possession concerning the Borrowers or any of their subsidiaries which has been delivered to the Bank by or on behalf of the Borrowers or any of their subsidiaries pursuant to this Agreement or which has been delivered to the Bank by or on behalf of the Borrowers or any of their subsidiaries in connection with the Bank's credit evaluation of the Borrowers or any of their subsidiaries prior to entering into this Agreement, provided that prior to disclosing such information, the Bank shall first obtain the agreement of such prospective assignee or participant to comply with the provisions of Section 3(b) hereof. 7.6 Severability. Any provision of the Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. 7.7 Subsidiary References. The provisions of this Agreement relating to Subsidiaries shall apply only during such times as any Borrower has one or more Subsidiaries. 7.8 Captions. The captions or headings herein and any table of contents hereto are for convenience only and in no way define, limit or describe the scope or intent of any provision of this Agreement. 7.9 Entire Agreement. This Agreement and the Note embody the entire agreement and understanding between the Borrowers and the Bank with respect to the subject matter hereof 12 and thereof. This Agreement supersedes all prior agreements and understandings relating to the subject matter hereof. 7.10 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and either of the parties hereto may execute this Agreement by signing any such counterpart. 7.11 Governing Law. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES APPLICABLE TO NATIONAL BANKS. 7.12 Consent to Jurisdiction. AT THE OPTION OF THE BANK, THIS AGREEMENT AND THE NOTE MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING IN MINNEAPOLIS OR ST. PAUL, MINNESOTA; AND THE EACH BORROWER CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT ANY BORROWER COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE BANK AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE. 7.13 Waiver of Jury Trial. EACH BORROWER WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY -RIGHTS (a) UNDER THIS AGREEMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR (b) ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. 7.14 Reaffirmation of Existing Credit Agreement. Prior to giving effect to Section 7.15 hereof, the Borrowers hereby reaffirm all of their obligations under the Existing Credit Agreement and the existing promissory note issued thereunder (the "Existing Note") and Borrower confirms to the Bank that such Borrower's obligations under the Existing Credit Agreement and the Existing Note are and continue to be secured by the security interest granted by such Borrower in favor of the Bank under the Pledge and Security Agreement (as defined in the Existing Credit Agreement), and all of the terms, conditions, provisions, agreements, requirements, promises, obligations, duties, covenants and representations of each Borrower under such documents and any and all other documents and agreements entered into with respect to the obligations under the Existing Credit Agreement are incorporated herein by reference and are hereby ratified and affirmed in all respects by such Borrower. 13 7.15 Effect of Existing Loan Agreement and Existing Note. After giving effect to Section 7.14 hereof, this Agreement amends and restates, and the Note amends and restates, the Existing Loan Agreement and the Existing Note in their respective entireties, provided that the obligations of the Borrowers incurred under the Existing Loan Agreement and the Existing Note shall continue without duplication under this Agreement and the Note, respectively, and shall not in any circumstances be terminated, extinguished or discharged hereby or thereby but shall hereafter be governed by the terms of this Agreement and the Note, respectively. 7.16 Joint and Several Liability. The obligations of the Borrowers hereunder and under the other Loan Documents and any other documents executed by it in connection with loans made under this Agreement shall be joint and several; provided that in no event shall the amount payable by any Borrower exceed an aggregate amount equal to the largest amount that would not render such Borrower's obligations subject to avoidance under Section 548 of the United States Bankruptcy Code or any applicable provision of comparable state law. If it is at any time determined by a court or governmental authority having competent jurisdiction that any Borrower is liable as a guarantor (and not as a co-obligor or co-borrower) with respect to any portion of the Obligations (with respect to such Borrower, its "Guaranteed Obligations"), such Borrower hereby agrees to the terms set forth on Exhibit E hereto with respect to its Guaranteed Obligations. 14 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above. AMERICAN HOME MORTGAGE SERVICING, INC., f/k/a Columbia National, Incorporated By: /s/ Stephen A. Hozie --------------------------------------- Title: EVP & CFO ------------------------------------- 7142 Columbia Gateway Drive Columbia, MD 21046 Attn.: Treasurer AMERICAN HOME MORTGAGE CORP. By: /s/ Stephen A. Hozie --------------------------------------- Title: EVP & CFO ------------------------------------- 520 Broadhollow Road Melville, NY 11747 Attn.: Treasurer U.S. BANK NATIONAL ASSOCIATION By: /s/ Kathleen M. Connor --------------------------------------- Title: Vice President ------------------------------------ 800 Nicollet Mall Mail Station BC-MN-H03B Minneapolis, MN 55402 Attention: Kathleen Connor LIST OF EXHIBITS Exhibit A Note B Schedule of Authorized Persons C Pledge and Security Agreement D Legal Opinion E Guaranteed Obligations NOTE $50,000,000 Minneapolis, Minnesota: September __, 2004 FOR VALUE RECEIVED, the undersigned AMERICAN HOME MORTGAGE SERVICING, INC. f/k/a Columbia National, Incorporated, a Maryland corporation and AMERICAN HOME MORTGAGE CORP. (collective, the "Borrowers"), jointly and severally promises to pay to the order of U.S. BANK NATIONAL ASSOCIATION, a national banking association (the "Bank"), on the Maturity Date, as defined in the Credit Agreement hereinafter referred to, or such earlier date as set forth in such Credit Agreement, the principal sum of FIFTY MILLION DOLLARS ($50,000,000), or if less, the then aggregate unpaid principal amount of the Advances (as such term is defined in the Credit Agreement) as may be borrowed by the Borrowers under the Credit Agreement. All Advances and all payments of principal shall be recorded by the holder in its records which records shall be conclusive evidence of the subject matter thereof, absent manifest error. The Borrowers further promise to pay to the order of the Bank interest on the aggregate unpaid principal amount hereof from time to time outstanding from the date hereof until paid in full at the rates per annum which shall be determined in accordance with the provisions of the Credit Agreement. Accrued interest shall be payable on the dates specified in the Credit Agreement. All payments of principal and interest under this Note shall be made in lawful money of the United States of America in immediately available funds at the Bank's main office in Minneapolis, Minnesota, or at such other place as may be designated by the Bank to the Borrowers in writing. This note is the Note referred to in, and evidences indebtedness incurred under, a Second Amended and Restated Revolving Credit Agreement dated concurrently herewith (herein, as it may be amended, modified or supplemented from time to time, called the "Credit Agreement") between the Borrowers and the Bank, to which Credit Agreement reference is made for a statement of the terms and provisions thereof, including those under which the Borrowers are permitted and required to make prepayments and repayments of principal of such indebtedness and under which such indebtedness may be declared to be immediately due and payable. All parties hereto, whether as makers, endorsers or otherwise, severally waive presentment, demand, protest and notice of dishonor in connection with this Note. A-1 This Note is made under and governed by the internal laws of the State of Minnesota. AMERICAN HOME MORTGAGE SERVICING, INC. f/k/a Columbia National, Incorporated By: ------------------------------------- Title: ---------------------------------- AMERICAN HOME MORTGAGE CORP. By: ------------------------------------- Title: ---------------------------------- A-2 EXHIBIT B TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT AUTHORIZED PERSONS ------------------ Printed Name Title Signature ------------ ----- --------- 1. 2. 3. 4. B-1 EXHIBIT D TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT Opinion of Counsel September ___, 2004 U.S. Bank National Association 800 Nicollet Mall Mail Station BC-MN-H03B Minneapolis, MN 55402 Attention: Kathleen Connor Ladies/Gentlemen: This opinion is delivered to you pursuant to the Second Amended and Restated Revolving Credit Agreement (the "Credit Agreement") dated concurrently herewith entered into among AMERICAN HOME MORTGAGE SERVICING, INC. f/k/a Columbia National Incorporated, and AMERICAN HOME MORTGAGE CORP. (each a "Borrower" and collectively, the "Borrowers") and U.S. Bank National Association (the "Bank"). Unless otherwise defined herein, capitalized terms used herein shall have the respective meanings assigned to such terms in the Credit Agreement. I am the General Counsel to the Borrowers in connection with the preparation, execution and delivery of the Loan Documents. In that connection, I have or a member of my staff working under by supervision has examined such documents as I deemed necessary or appropriate for this opinion. I express no opinion regarding any transactions or any confirmations under any of the Loan Documents or the Loan Documents as supplemented by any transactions or confirmations thereof. Based on the foregoing and upon such investigations as I have deemed necessary, I am of the opinion that: 1. Each Borrower is a corporation duly organized, validly existing and in good standing under the laws of the state of their respective incorporation, and each is duly qualified and in good standing as a foreign corporation in all other jurisdictions in which its respective present operations or properties require such qualification. 2. Each Borrower has full corporate power and authority to own and operate its properties and assets, carry on its business as presently conducted, and enter into and perform its obligations under the Loan Documents to which it is a party. D-1 3. The execution and delivery of the Loan Documents to which a Borrower is a party, the performance by such Borrower of its obligations thereunder, and the borrowing by such Borrower under the Credit Agreement, have been duly authorized by all necessary corporate action, and all of the Loan Documents have been duly executed and delivered on behalf of such Borrower and constitute valid and binding obligations of such Borrower, enforceable in accordance with their respective terms. 4. There is no provision in any Borrower's organizational documents, nor any provision in any indenture, mortgage, contract or agreement to which any Borrower is a party or by which it or its properties may be bound, nor any law, statute, rule or regulation, nor any writ, order or decision of any court or governmental instrumentality binding on such Borrower which would be contravened by the execution and delivery of the Loan Documents to which such Borrower is a party, nor do any of the foregoing prohibit such Borrower's performance of any term, provision, condition, covenant or any other obligation of such Borrower contained therein. 5. There are no actions, suits or proceedings pending or, to my knowledge after due inquiry, threatened against or affecting any Borrower before any court or arbitrator or by or before any administrative agency or government authority, which, if adversely determined, could constitute an Adverse Event. 6. Neither the making nor performance of the Loan Documents, nor the borrowing(s) under the Credit Agreement, requires the consent or approval of any governmental instrumentality. 7. No Borrower a "holding company", a "subsidiary company" of a "holding company" or an "affiliate" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 8. No Borrower is an "investment company" or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. 9. No Borrower is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and, to our knowledge after due inquiry, no part of the proceeds of any loan under the Credit Agreement will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. This opinion is subject to the following additional assumptions, exceptions, qualifications and limitations: A. I have assumed that all parties to the Loan Documents other than the Borrowers have all requisite power and authority to execute, deliver and perform their respective obligations under the Loan Documents, and that the Loan Documents have been duly authorized by all D-2 necessary corporate action on the part of such parties, have been executed and delivered by such parties and constitute the legal, valid and binding obligations of such parties. B. My opinion in paragraph 3 above is subject to the qualifications that (i) the enforceability of the Loan Documents may be limited by the effect of laws relating to (1) bankruptcy, reorganization, insolvency, moratorium or other similar laws now or hereafter in effect relating to creditors' rights generally, including, without limitation, the effect of statutory or other laws regarding fraudulent conveyances or preferential transfers, and (2) general principles of equity upon the specific enforceability of any of the remedies, covenants or other provisions of the Loan Documents and upon the availability of injunctive relief or other equitable remedies and the application of principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) as such principles relate to, limit or affect the enforcement of creditors' rights generally and the discretion of the court before which any proceeding for such enforcement may be brought; and (ii) I express no opinion with respect to the validity, legality, binding effect or enforceability of provisions for indemnification in any Loan Document to the extent such provisions may be held to be unenforceable as contrary to public policy. C. I have assumed, without independent check or certification, that there are no agreements or understandings among the Bank, the Borrowers, and any other party which would expand, modify or otherwise affect the terms of the documents described herein or the respective rights or obligations of the parties thereunder. I am admitted to practice in the State of New York, and I render no opinion herein as to matters involving the laws of any jurisdiction other than the State of New York and the Federal laws of the United States of America. This opinion is delivered to you for your use in connection with the Credit Agreement and may not be relied upon by any other person (other than your participants and assignees and your bank regulators in the course of their regulatory activities), or by you for any other purpose, without my written consent. This opinion is given as of the date hereof, and I disclaim any obligation to advise you of any change of law that occurs, or any facts of which I become aware, after the date of this opinion. This opinion is limited to those matters expressly set forth, and no opinion is to be inf red or implied beyond the matters expressly so stated. Very truly yours, EXHIBIT E TO AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT TERMS WITH RESPECT TO GUARANTEED OBLIGATIONS If at any time determined by a court or governmental authority having competent jurisdiction that any Borrower is liable as a guarantor (and not as a co-obligor or co-borrower) with respect to any portion of the Obligations (with respect to such Borrower, its "Guaranteed Obligations"), such Borrower hereby agrees to the terms set forth herein with respect to its Guaranteed Obligations. 1. Obligations Absolute. No act or thing need occur to establish the liability of any Borrower for its Guaranteed Obligations, and no act or thing, except full payment and discharge of all such Guaranteed Obligations, shall in any way exonerate such Borrower or modify, reduce, limit or release the liability of such Borrower for its Guaranteed Obligations. The obligations of each Borrower for its Guaranteed Obligations shall be absolute, unconditional, and irrevocable, and shall not be subject to any right of setoff or counterclaim by such Borrower. 2. Continuing Guaranty. Each Borrower shall be liable for its Guaranteed Obligations, plus accrued interest thereon and all attorneys' fees, collection costs and enforcement expenses referable thereto. Guaranteed Obligations may be created and continued in any amount without affecting or impairing the liability of such Borrower therefor. No notice of such Guaranteed Obligations already or hereafter contracted or acquired by the Bank, or any renewal or extension of any thereof need be given to such Borrower and none of the foregoing acts shall release such Borrower from liability hereunder. The agreement of each Borrower pursuant to the Loan Agreement with respect to its Guaranteed Obligations is an absolute, unconditional and continuing guaranty of payment of such Guaranteed Obligations and shall continue to be in force and be binding upon such Borrower until such Guaranteed Obligations are paid in full and the Credit Agreement is terminated, and the Bank may continue, at any time and without notice to such Borrower, to extend credit or other financial accommodations and loan monies to or for the benefit of the other Borrower on the faith thereof. Each Borrower hereby waives, to the fullest extent permitted by law, any right they may have to revoke or terminate its guaranty of the Guaranteed Obligations before the Guaranteed Obligations are paid in full and the Loan Agreement is terminated. In the event any Borrower shall have any right under applicable law to otherwise terminate or revoke its guaranty of the Guaranteed Obligations which cannot be waived, such termination or revocation shall not be effective until written notice of such termination or revocation, signed by such Borrower, is actually received by the Bank's officer responsible for such matters. Any notice of termination or revocation described above shall not affect such Borrower's guaranty of the Guaranteed Obligations in relation to (i) any of the Guaranteed Obligations that arose prior to receipt thereof or (ii) any of the Guaranteed Obligations created after receipt thereof, if such Guaranteed Obligations were incurred either through loans by the Bank or letters of credit issued or arranged for by Bank, including, without limitation, advances, readvances or letters of credit in an aggregate outstanding amount not to exceed the aggregate amount of the Commitments as of the time such notice of termination or E-1 revocation was received, and/or for the purpose of protecting any collateral, including, but not limited, to all protective advances, costs, expenses, and attorneys' and paralegals' fees, whensoever made, advanced or incurred by the Bank in connection with the Guaranteed Obligations. If, in reliance on any Borrower's guaranty of its Guaranteed Obligations, the Bank makes loans or other advances to or for the benefit of any other Borrower or takes other action under this Agreement after such aforesaid termination or revocation by the undersigned but prior to the receipt by the Bank of said written notice as set forth above, the rights of the Bank shall be the same as if such termination or revocation had not occurred. 3. Other Transactions. Whether or not any existing relationship between the Borrowers has been changed or ended, the Bank may, but shall not be obligated to, enter into transactions resulting in the creation or continuance of other obligations of any Borrower to the Bank, without consent or approval by the other Borrowers and without notice to the other Borrowers, and all such obligations shall be guaranteed by virtue of the Credit Agreement. The liability of each Borrower under the Loan Agreement with respect to the Guaranteed Obligations shall not be affected or impaired by any of the following acts or things (which the Bank is expressly authorized to do, omit or suffer from time to time, without notice to or approval by any Borrower): (i) any acceptance of collateral security, other guarantors, accommodation parties or sureties for any or all Guaranteed Obligations; (ii) any one or more extensions or renewals of Guaranteed Obligations (whether or not for longer than the original period) or any modification of the interest rates, maturities or other contractual terms applicable to any Guaranteed Obligations; (iii) any waiver or indulgence granted to any other Borrower, any delay or lack of diligence in the enforcement of Guaranteed Obligations, or any failure to institute proceedings, file a claim, give any required notices or otherwise protect any Guaranteed Obligations; (iv) any full or partial release of, settlement with, or agreement not to sue, any other Borrower or any other guarantor or other person liable in respect of any Guaranteed Obligations; (v) any discharge of any evidence of Guaranteed Obligations or the acceptance of any instrument in renewal thereof or substitution therefor; (vi) any failure to obtain collateral security for Guaranteed Obligations, or to see to the proper or sufficient creation and perfection thereof, or to establish the priority thereof, or to protect, ensure, or enforce any collateral security, or any modification, substitution, discharge, impairment or loss of any collateral security; (vii) any foreclosure or enforcement of any collateral security; (viii) any transfer of any Guaranteed Obligations or any evidence thereof; (ix) any order of application of any payments or credits upon Guaranteed Obligations; (x) any release of any collateral security for Guaranteed Obligations; (xi) any amendment to or modification of, any agreement between the Bank and any other Borrower, or any waiver of compliance by any other Borrower with the terms thereof; and (xii) any election by the Lender under Section 1111 (b) of the United States Bankruptcy Code. 4. Waivers of Defenses and Rights. Each Borrower waives any and all defenses, claims and discharges of any other Borrower, or any other obligor, pertaining to the Guaranteed Obligations, except the defense of discharge by payment in full. Without limiting the generality of the foregoing, no Borrower will assert, plead or enforce against the Bank any defense of waiver, release, discharge in bankruptcy, statute of limitations, res judicata, statute of frauds, anti-deficiency statute, fraud, usury, illegality or unenforceability which may be available to the other Borrower or any other person liable in respect of any Guaranteed Obligations, or any setoff available against the Bank to any other Borrower or any such other person, whether or not on account of a related transaction. Each Borrower expressly agrees that such Borrower shall be E-2 and remain liable for any deficiency remaining after foreclosure of any mortgage or security interest securing Guaranteed Obligations, whether or not the liability of or any other obligor for such deficiency is discharged pursuant to statute, judicial decision or contract. Each Borrower waives presentment, demand for payment, notice of dishonor or nonpayment, and protest of any instrument evidencing Guaranteed Obligations. Each Borrower agrees that its liability under the Loan Agreement for the Guaranteed Obligations shall be primary and direct, and that the Bank shall not be required first to resort for payment of the Guaranteed Obligations to any other Borrower or other persons or their properties, or first to enforce, realize upon or exhaust any collateral security for the Guaranteed Obligations, or to commence any action or obtain any judgment against any other Borrower or against any such collateral security or to pursue any other right or remedy the Bank may have against any other Borrower before enforcing the liability of such Borrower for the Guaranteed Obligations under the Loan Agreement. 5. Approval of Credit. Each Borrower has, independently and without reliance upon the Bank or their respective directors, officers, agents or employees, and instead in reliance upon information furnished by the other Borrowers and upon such other information as such Borrower deemed appropriate, made its own independent credit analysis and decision to guaranty the obligations of the other Borrowers pursuant to the Loan Agreement. 6. Waiver of Subrogation. Each Borrower expressly waives any and all rights of subrogation, reimbursement, indemnity, exoneration, contribution or any other claim which it may now or hereafter have against any other Borrower, any endorser or any other guarantor of all or any part of the Guaranteed Obligations, and each Borrower hereby waives any benefit of, and any right to participate in, any security or collateral given to the Bank to secure payment of the Guaranteed Obligations or any other liability of any other Borrower to the Bank. Each Borrower further agrees that any and all claims it may have against any other Borrower, any endorser or any other guarantor of all or any part of the Guaranteed Obligations or against any of their respective properties, whether arising by reason of any payment by such Borrower to the Lender pursuant to the provisions hereof or otherwise, is hereby waived. E-3 EX-10.8 6 am3q04-ex10_8.txt SECOND AMENDED & RESTATED PLEDGE & SECURITY AGMT EXHIBIT 10.8 SECOND AMENDED AND RESTATED PLEDGE AND SECURITY AGREEMENT THIS SECOND AMENDED AND RESTATED PLEDGE AND SECURITY AGREEMENT, dated as of September 24, 2004, is made by and between AMERICAN HOME MORTGAGE SERVICING, INC. f/k/a Columbia National, Incorporated, a Maryland corporation (the "AHMS"), AMERICAN HOME MORTGAGE CORP. ("AHMC"), a Delaware corporation ("AHMC" and collectively with AHMS, each a "Company" and collectively the "AHMS") and U.S. BANK NATIONAL ASSOCIATION, a national banking association, as secured party (in such capacity, the "Bank"). RECITALS -------- A. The Companies and the Bank have entered into a Second Amended and Restated Revolving Credit Agreement dated concurrently herewith (as the same has been and may hereafter be amended, restated or otherwise modified from time to time, the "Credit Agreement"), pursuant to which the Bank has extended certain revolving loan commitments to the Companies. B. AHMS and Bank are also parties to an Amended and Restated Pledge and Security Agreement dated as of May 30, 2003 (as amended, the "Existing Pledge Agreement"). This Agreement amends and restates the Existing Pledge Agreement in its entirety. C. The Companies have requested, and the Bank has agreed, that the Existing Pledge Agreement shall be amended and restated pursuant to this Agreement. NOW, THEREFORE, in consideration of the premises and in order to induce the Bank to issue, continue or extend Letters of Credit, each Company hereby agrees with the Bank for the Bank's benefit as follows: Section 1. Defined Terms. 1(a) As used in this Agreement, the following terms shall have the meanings indicated: "Cash Collateral Account": shall have the meaning given to such term in the Credit Agreement. "Collateral" shall mean all property and rights in property now owned or hereafter at any time acquired by any Company in or upon which a Security Interest is granted to the Bank by any Company under this Agreement. "Code" shall mean the Uniform Commercial Code as adopted in the State of Minnesota. "Event of Default" shall have the meaning given to such term in Section 11 hereof. "Financing Statement" shall have the meaning given to such term in Section 4 hereof. "Investments" shall mean all cash (including, without limitation, cash held in money market funds or otherwise), securities, instruments, investment property, financial assets, securities entitlements and other property (including, without limitation, general intangibles or deposit accounts) held in, credited to or registered in the name of the Investment Collateral Account from time to time, including, without limitation, all such items with may be deposited in the Investment Collateral Account or registered in the name of the Investment Collateral Account from time to time hereafter. "Investment Collateral Account" shall mean the Companies' account no. 20971260 maintained with the Bank and any sub-accounts, replacement accounts or successor accounts related thereto. "Lien" shall mean any security interest, mortgage, pledge, lien, charge, encumbrance, title retention agreement or analogous instrument or device (including the interest of the lessors under capitalized leases), in, of or on any Collateral. "Note" shall have the meaning given to such term in the Credit Agreement. "Obligations" shall mean (a) all indebtedness, liabilities and obligations of any Company to the Bank of every kind, nature or description under the Credit Agreement and any note or notes issued thereunder, (b) all liabilities of any Company under this Agreement, and (c) in all of the foregoing cases whether due or to become due, and whether now existing or hereafter arising or incurred. "Person" shall mean any individual, corporation, partnership, limited partnership, limited liability company, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity. "Pledged Investments": shall mean, collectively, at any time, all Investments purchased with the proceeds of Advances under the Credit Agreement (with the expectation that such investments shall be Permitted Investments, as defined by the Credit Agreement, but whether or not such Pledged Investments comply or continue to comply with the definition of Permitted Investments). "Security Interest" shall have the meaning given such term in Section 2 hereof. "Termination Date" shall mean the earliest date, if any, on which each of the following conditions are satisfied: (i) the Obligations (except for inchoate indemnification obligations) have been paid in full, and (ii) the obligations, if any, of the Bank to extend credit accommodations to the Companies have expired. 1(b) All other terms used in this Agreement which are not specifically defined herein shall have the meaning assigned to such terms in Revised Article 9 of the Code. 2 1(c) Unless the context of this Agreement otherwise clearly requires, references to the plural include the singular, the singular, the plural and "or" has the inclusive meaning represented by the phrase "and/or." The words "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation." The words "hereof," "herein," "hereunder" and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. References to Sections are references to Sections in this Agreement unless otherwise provided. Section 2. Grant of Security Interest. As security for the payment and performance of all of the Obligations, each Company hereby grants to the Bank a security interest (the "Security Interest") in all of such Company's right, title, and interest in and to the following, whether now or hereafter owned, existing, arising or acquired and wherever located: 2(a) The Investment Collateral Account and the Investments; 2(b) The Cash Collateral Account, and all sub-accounts, replacement accounts or successor accounts related thereto, and all cash or other property from time to time deposited in or credited to any of the forgoing; and, 2(c) To the extent not otherwise included in the foregoing, all books, records, and other documents relating to and all proceeds and products of any of the foregoing items referenced in Section 2(a) and 2(b). Section 3. Establishment of the Accounts; Title to Collateral; Control 3(a) The Investment Collateral Account and the Cash Collateral Account shall be subject to (i) the Bank's account agreement, if any, relating thereto, as amended from time to time, and (ii) the Bank's rules and regulations that relate to the Investment Collateral Account and the Cash Collateral Account ((i) and (ii) collectively, the "Other Agreements"), provided that, in the event that any of the terms and provisions of the Other Agreements conflict with or are inconsistent with any of the terms and provisions of this Agreement, the terms and conditions of this Agreement shall control. 3(b) The Companies have (or will have at the time they acquires rights in Collateral hereafter acquired or arising) and will maintain so long as the Security Interest may remain outstanding, joint title to each item of Collateral (including the proceeds and products thereof), free and clear of all Liens except the Security Interest. The Companies will defend the Collateral against all claims or demands of all Persons (other than the Bank) claiming the Collateral or any interest therein. 3(c) To the extent that the Cash Collateral Account or the Investment Collateral Account constitutes a "securities account" within the meaning of Section 8-501 of the Code, U.S. Bank National Association, in its capacity as securities intermediary with respect to the Cash Collateral Account and the Investment Collateral Account agrees to comply with all entitlement orders originated by the Bank with respect the Collateral, including any orders to sell, transfer, redeem or reinvest the proceeds of, any or all of the Collateral or to transfer any or all of the Collateral to Bank, in each case without the consent of the Companies. 3 Section 4. Certain Warranties and Covenants. The Companies makes the following warranties and covenants to the Bank: 4(a) The Companies have joint title to the Collateral, free of all Liens except the Security Interest. 4(b) The Companies have full power and authority to execute this Agreement, to perform the Companies' obligations hereunder and to subject the Collateral to the Security Interest created hereby. 4(c) As of the date of execution of this Agreement, no effective financing statement or other similar document used to perfect and preserve a security interest under the laws of any jurisdiction (a "Financing Statement") covering all or any part of the Collateral is on file in any recording office, except such as may have been filed in favor of the Bank relating to this Agreement or the Existing Pledge Agreement. 4(d) Any time, upon the request of the Bank, the Companies will deliver to the Bank all notices, financial statements, reports of other communications received by any Company as owner of the Collateral. Section 5. Names, Offices, Locations, Jurisdiction of Organization. Each Company's legal name (as set forth in its constituent documents filed with the appropriate governmental official or agency) is as set forth in the opening paragraph hereof. The jurisdiction of organization of AHMS is the state of Maryland. The jurisdiction of organization of AHMC is the state of New York The chief place of business and chief executive office of each Company is located at its address set forth on the signature page hereof. Section 6. Release and Substitution of Collateral; Additional Collateral, Etc. 6(a) Release of Collateral. Except as may be permitted by the Bank in its sole and absolute discretion, the Companies shall have no right to substitute other Investments for Investments composing all or part of the Pledged Investments, nor to withdraw such Pledged Investments. Upon the maturity of any Pledged Investment, and provided that no Event of Default has occurred which is continuing, the Cash Collateral Account will be credited in the amount of the proceeds of such Pledged Investment, and such amount will be applied first to the payment of principal of the Note, and the balance of such proceeds (i.e., the portion thereof attributable to the discount received upon the purchase of such Pledged Investment) shall be transferred from the Cash Collateral Account to such account as shall be designated by the Companies. From time to time, the Bank may (in its sole and absolute discretion) release Pledged Investments in contemplation of the sale of those Pledged Investments and the use of the proceeds of those sales as provided in this Section 6(a). All proceeds from the sale of Pledged Instruments shall be credited to the Cash Collateral Account, pending application thereof as provided in this Section 6(a). Except as provided in this Section 6(a) and Section 6(b), the Companies may not withdraw or apply any funds credited to the Cash Collateral Account. 6(b) Rights With Respect to Collateral. As long as no Event of Default shall have occurred and be continuing, the Companies shall be entitled to exercise any voting rights or 4 other powers relating to or pertaining to the Investments for any purpose not inconsistent with the terms of this Agreements. Upon the occurrence and during the continuance of an Event of Default (after giving effect to any applicable right to cure), all such rights shall thereupon become vested in the Bank, which shall have the sole and exclusive right and authority to exercise such voting rights and other powers and to receive and retain the principal and interest payments payable thereon or with respect thereto. 6(c) Interest on Investments. Unless there shall have occurred and be continuing an Event of Default, the Companies shall be entitled to receive and retain, for its own use and benefit, all interest income from the Pledged Instruments, and the Companies shall be entitled to withdraw such interest income from the Cash Collateral Account and deposit such interest income in an account designated by the Companies. All such interest income shall be carried in the Cash Collateral Account pending such withdrawal by the Companies. Upon the occurrence and continuance of an Event of Default, all such rights shall thereupon become vested in the Bank, which shall have the sole and exclusive right and authority to receive and retain all income and receipts payable thereon or with respect thereto, and the Companies shall promptly pay over to the Bank all income and receipts from the Pledged Instruments received or collected by the Companies from and after the date of the Event of Default, and the same shall constitute a part of the Collateral subject to this Pledge Agreement. Section 7. Further Assurances; Attorney-in-Fact. 7(a) Each Company agrees that from time to time, at its expense, it will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or that the Bank may reasonably request, in order to perfect and protect the Security Interest granted or purported to be granted hereby or to enable the Bank to exercise and enforce its rights and remedies hereunder with respect to any Collateral (but any failure to request or assure that any Company execute and deliver such instrument or documents or to take such action shall not affect or impair the validity, sufficiency or enforceability of this Agreement and the Security Interest, regardless of whether any such item was or was not executed and delivered or action taken in a similar context or on a prior occasion). 7(b) Each Company hereby authorizes the Bank to file one or more Financing Statements or continuation statements in respect thereof, and amendments thereto, relating to all or any part of the Collateral without the signature of such Company where permitted by law. A photocopy or other reproduction of this Agreement or any Financing Statement covering the Collateral or any part thereof shall be sufficient as a Financing Statement where permitted by law. 7(c) In furtherance, and not in limitation, of the other rights, powers and remedies granted to the Bank in this Agreement, if an Event of Default shall have occurred and be continuing, each Company hereby appoints the Bank such Company's attorney-in-fact, with full authority in the place and stead of such Company and in the name of such Company or otherwise, from time to time for so long as such Event of Default shall be continuing in the Bank's good faith discretion, to take any action (including the right to collect on any Collateral) 5 and to execute any instrument that the Bank may reasonably believe is necessary or advisable to accomplish the purposes of this Agreement, in a manner consistent with the terms hereof. Section 8. Taxes and Claims. Until such time as the Bank has foreclosed the Collateral, the Companies will promptly pay all taxes and other governmental charges levied or assessed upon or against any Collateral or upon or against the creation, perfection or continuance of the Security Interest. Without limiting the generality of the forgoing, all interest earned upon the Collateral shall be reported to the Internal Revenue Service and all state and local taxing authorities under the name and taxpayer identification number of the Companies. Section 9. Action by the Bank. If any Company at any time fails to perform or observe any of the foregoing agreements, the Bank shall have (and each Company hereby grants to the Bank) the right, power and authority (but not the duty) to perform or observe such agreement on behalf and in the name, place and stead of such Company (or, at the Bank's option, in the Bank's name) and to take any and all other actions which the Bank may reasonably deem necessary to cure or correct such failure; and each Company shall thereupon pay to the Bank on demand the amount of all monies expended and all out-of-pocket costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by the Bank in connection with or as a result of the performance or observance of such agreements or the taking of such action by the Bank, together with interest thereon from the date expended or incurred at the highest lawful rate then applicable to any of the Obligations, and all such monies expended, costs and expenses and interest thereon shall be part of the Obligations secured by the Security Interest. Section 10. The Bank's Duties. The powers conferred on the Bank hereunder are solely to protect its interest in the Collateral and shall not impose any duty upon it to exercise any such powers. The Bank shall be deemed to have exercised reasonable care in the safekeeping of any Collateral in its possession if such Collateral is accorded treatment substantially equal to the safekeeping which the Bank accords its own property of like kind. Except for the safekeeping of any Collateral in its possession and the accounting for monies and for other properties actually received by it hereunder, the Bank shall have no duty, as to any Collateral, as to ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Collateral, whether or not the Bank has or is deemed to have knowledge of such matters, or as to the taking of any necessary steps to preserve rights against any Persons or any other rights pertaining to any Collateral. The Bank will take action in the nature of exchanges, conversions, redemption, tenders and the like requested in writing by the Companies with respect to any of the Collateral in the Bank's possession if the Bank in its reasonable judgment determines that such action will not impair the Security Interest or the value of the Collateral, but a failure of the Bank to comply with any such request shall not of itself be deemed a failure to exercise reasonable care. Section 11. Default. Each of the following occurrences shall constitute an Event of Default under this Agreement: (a) any Company shall fail to comply with any covenant or agreement applicable to such Company under this Agreement; or (b) any representation or warranty made by any Company in this Agreement or any schedule, exhibit, supplement or attachment hereto or in any financial statements, or reports or certificates heretofore or at any time hereafter submitted by or on behalf of such Company to the Bank in connection with 6 Agreement or the Credit Agreement shall prove to have been false or misleading, in each case in any material respect, when made; or (c) any Event of Default shall occur under the Credit Agreement. Section 12. Remedies upon Default. If any Event of Default shall have occurred and be continuing: 12(a) The Bank may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under Revised Article 9 of the Code, and may, without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of the Bank's offices or elsewhere, for cash, on credit or for future delivery and give any entitlement orders with respect to the Collateral, in each case upon such other terms as the Bank may reasonably believe are commercially reasonable. Each Company agrees that, to the extent notice of sale shall be required by law, at least ten days' prior notice to such Company of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Bank shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Bank may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Each Company hereby waives all requirements of law, if any, relating to the marshalling of assets which would be applicable in connection with the enforcement by the Bank of its remedies hereunder, absent this waiver. The Bank may disclaim warranties of title and possession and the like. 12(b) The Bank may notify any Person obligated on any of the Collateral that the same has been assigned or transferred to the Bank and that the same should be performed as requested by, or paid directly to, the Bank, as the case may be. Each Company shall join in giving such notice, if the Bank so requests. The Bank may, in the Bank's name or in any Company's name, demand, sue for, collect or receive any money or property at any time payable or receivable on account of, or securing, any such Collateral or grant any extension to, make any compromise or settlement with or otherwise agree to waive, modify, amend or change the obligation of any such Person. 12(c) Any cash held by the Bank as Collateral and all cash proceeds received by the Bank in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Bank, be held by the Bank as collateral for, or then or at any time thereafter be applied in whole or in part by the Bank against, all or any part of the Obligations (including any expenses of the Bank payable pursuant to Section 16 hereof). Section 13. Waiver of Certain Claims. Each Company acknowledges that because of present or future circumstances, a question may arise under the Securities Act of 1933, as from time to time amended (the "Securities Act"), with respect to any disposition of the Collateral permitted hereunder. Each Company understands that compliance with the Securities Act may very strictly limit the course of conduct of the Bank if the Bank were to attempt to dispose of all or any portion of the Collateral and may also limit the extent to which or the manner in which 7 any subsequent transferee of the Collateral or any portion thereof may dispose of the same. There may be other legal restrictions or limitations affecting the Bank in any attempt to dispose of all or any portion of the Collateral under the applicable Blue Sky or other securities laws or similar laws analogous in purpose or effect. The Bank may be compelled to resort to one or more private sales to a restricted group of purchasers who will be obliged to agree, among other things, to acquire such Collateral for their own account for investment only and not to engage in a distribution or resale thereof. Each Company agrees that the Bank shall not incur any liability, and any liability of any Company for any deficiency shall not be impaired, as a result of the sale of the Collateral or any portion thereof at any such private sale in a manner that the Bank reasonably believes is commercially reasonable (within the meaning of Section 9-627 of the Code). Each Company hereby waives any claims against the Bank arising by reason of the fact that the price at which the Collateral may have been sold at such sale was less than the price that might have been obtained at a public sale or was less than the aggregate amount of the Obligations, even if the Bank shall accept the first offer received and does not offer any portion of the Collateral to more than one possible purchaser. Each Company further agrees that the Bank has no obligation to delay sale of any Collateral for the period of time necessary to permit the issuer of such Collateral to qualify or register such Collateral for public sale under the Securities Act, applicable Blue Sky laws and other applicable state and federal securities laws, even if said issuer would agree to do so. Without limiting the generality of the foregoing, the provisions of this Section would apply if, for example, the Bank were to place all or any portion of the Collateral for private placement by an investment banking firm, or if such investment banking firm purchased all or any portion of the Collateral for its own account, or if the Bank placed all or any portion of the Collateral privately with a purchaser or purchasers. Section 14. Application of Proceeds. All cash proceeds received by the Bank in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Bank, be held by the Bank as collateral for, or then or at any time thereafter be applied in whole or in part by the Bank against, all or any part of the Obligations (including, without limitation, any expenses of the Bank payable pursuant to Section 16 hereof). Section 15. [Reserved] Section 16. Costs and Expenses; Indemnity. Each Company will pay or reimburse the Bank on demand for all out-of-pocket expenses (including filing and recording costs and fees, charges and disbursements of outside counsel to the Bank (determined on the basis of such counsel's generally applicable rates, which may be higher than the rates such counsel charges the Bank in certain matters) and/or the allocated costs of in-house counsel incurred from time to time) incurred by the Bank in connection with the creation, perfection, protection, satisfaction, foreclosure or enforcement of the Security Interest and the preparation, administration, continuance, amendment or enforcement of this Agreement, and all such costs and expenses shall be part of the Obligations secured by the Security Interest. Each Company shall indemnify and hold the Bank harmless from and against any and all claims, losses and liabilities (including reasonable attorneys' fees) growing out of or resulting from this Agreement and the Security Interest hereby created (including enforcement of this Agreement) or the Bank's actions pursuant hereto, except claims, losses or liabilities resulting from the Bank's gross negligence or willful misconduct as determined by a final judgment of a court of competent jurisdiction. Any liability 8 of any Company to indemnify and hold the Bank harmless pursuant to the preceding sentence shall be part of the Obligations secured by the Security Interest. The obligations of the Companies under this Section shall survive any termination of this Agreement. Section 17. Waivers; Remedies; Marshalling. This Agreement can be waived, modified, amended, terminated or discharged, and the Security Interest can be released, only explicitly in a writing signed by the Bank. A waiver so signed shall be effective only in the specific instance and for the specific purpose given. Mere delay or failure to act shall not preclude the exercise or enforcement of any rights and remedies available to the Bank. All rights and remedies of the Bank shall be cumulative and may be exercised singly in any order or sequence, or concurrently, at the Bank's option, and the exercise or enforcement of any such right or remedy shall neither be a condition to nor bar the exercise or enforcement of any other. Each Company hereby waives all requirements of law, if any, relating to the marshalling of assets which would be applicable in connection with the enforcement by the Bank of its remedies hereunder, absent this waiver. Section 18. Notices. Any notice or other communication to any party in connection with this Agreement shall be in writing and shall be sent by manual delivery, facsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified on the signature page hereof, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by facsimile transmission, from the first business day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed. Section 19. Company Acknowledgments. Each Company hereby acknowledges that (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement, (b) the Bank has no fiduciary relationship to any Company, the relationship being solely that of debtor and creditor, and (c) no joint venture exists between any Company and the Bank. Section 20. Continuing Security Interest; Assignments under Credit Agreement. This Agreement shall (a) create a continuing security interest in the Collateral and shall remain in full force and effect until the Termination Date, (b) be binding upon each Company, its successors and assigns, and (c) inure to the benefit of, and be enforceable by, the Bank and its successors, transferees, and assigns. Without limiting the generality of the foregoing clause (c), the Bank may assign or otherwise transfer all or any portion of its rights and obligations under the Credit Agreement to any other Persons to the extent and in the manner provided in the Credit Agreement and may similarly transfer all or any portion of its rights under this Agreement to such Persons. Section 21. Termination of Security Interest. Upon the Termination Date, the Security Interest granted hereby shall terminate. Upon any such termination, the Bank will return to the Companies such of the Collateral then in the possession of the Bank as shall not have been sold or otherwise applied pursuant to the terms hereof and execute and deliver to the Companies such documents as the Companies shall reasonably request to evidence such termination. Any reversion or return of Collateral upon termination of this Agreement and any instruments of 9 transfer or termination shall be at the expense of the Companies and shall be without warranty by, or recourse on, the Bank. As used in this Section, "Company" includes any assigns of any Company, any Person holding a subordinate security interest in any of the Collateral or whoever else may be lawfully entitled to any part of the Collateral. Section 22. Governing Law and Construction. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE MANDATORILY GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF MINNESOTA. Whenever possible, each provision of this Agreement and any other statement, instrument or transaction contemplated hereby or relating hereto shall be interpreted in such manner as to be effective and valid under such applicable law, but, if any provision of this Agreement or any other statement, instrument or transaction contemplated hereby or relating hereto shall be held to be prohibited or invalid under such applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement or any other statement, instrument or transaction contemplated hereby or relating hereto. Section 23. Consent to Jurisdiction. AT THE OPTION OF THE BANK, THIS AGREEMENT MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING IN HENNEPIN OR RAMSEY COUNTY; AND EACH COMPANY CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT ANY COMPANY COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE BANK AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE. Section 24. Waiver of Notice and Hearing. TO THE EXTENT PERMITTED BY LAW, EACH COMPANY HEREBY WAIVES ALL RIGHTS TO A JUDICIAL HEARING OF ANY KIND PRIOR TO THE EXERCISE BY THE BANK OF ITS RIGHTS TO POSSESSION OF THE COLLATERAL WITHOUT JUDICIAL PROCESS OR OF ITS RIGHTS TO REPLEVY, ATTACH, OR LEVY UPON THE COLLATERAL WITHOUT PRIOR NOTICE OR HEARING. EACH COMPANY ACKNOWLEDGES THAT IT HAS BEEN ADVISED BY COUNSEL OF ITS CHOICE WITH RESPECT TO THIS PROVISION AND THIS AGREEMENT. 10 Section 25. Waiver of Jury Trial. EACH COMPANY AND THE BANK, BY ITS ACCEPTANCE OF THIS AGREEMENT, IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. Section 26. Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. Section 27. General. All representations and warranties contained in this Agreement or in the Credit Agreement shall survive the execution, delivery and performance of this Agreement and the creation and payment of the Obligations. Each Company waives notice of the acceptance of this Agreement by the Bank. Captions in this Agreement are for reference and convenience only and shall not affect the interpretation or meaning of any provision of this Agreement. Section 28. Effect of Existing Pledge Agreement. This Agreement amends and replaces in its entirety and restates the Existing Pledge Agreement provided, however, that the obligations of the Companies incurred under, and the security interest granted by the Companies under, the Existing Pledge Agreement shall continue under this Agreement, and shall not in any circumstance be terminated, extinguished or discharged hereby but shall hereafter be governed by the terms of this Agreement. [Remainder of this page intentionally left blank.] 11 WITNESS WHEREOF, the Companies and the Bank have caused this Pledge and Agreement to be duly executed and delivered by its manager thereunto duly authorized as of the date first above written. AMERICAN HOME MORTGAGE SERVICING, INC. f/k/a Columbia National, Incorporated By /s/ Stephen A. Hozie ----------------------------- Title EVP & CFO -------------------------- Address for AHMS: 7142 Columbia Gateway Drive Columbia, MD 21046 Attn.: President Tax ID No,: 52-0957267 AMERICAN HOME MORTGAGE CORP. By /s/ Stephen A. Hozie ----------------------------- Title EVP & CFO -------------------------- Address for AHMC: 520 Broadhollow Road Melville, NY 11747 Attn.: President Tax ID No.: 13-3461558 U.S. BANK NATIONAL ASSOCIATION By /s/ Kathleen M. Connor ----------------------------- Title Vice President -------------------------- Address for the Bank: U.S. Bank National Association U.S. Bancorp Center 800 Nicollet Mall Minneapolis, MN 55402-7020 Attn: Kathleen Connor S-1 (Signature page to Amended and Restated Pledge and Security Agreement) EX-31.1 7 am3q04-ex31_1.txt CERTIFICATION (SECTION 302) CHMN, CEO & PRESIDENT Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Michael Strauss, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of American Home Mortgage Investment Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. /s/ Michael Strauss - --------------------------------------------- Michael Strauss Chairman of the Board, Chief Executive Officer and President November 9, 2004 EX-31.2 8 am3q04-ex31_2.txt CERTIFICATION (SECTION 302) EVP & CFO Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Stephen A. Hozie, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of American Home Mortgage Investment Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c)disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of the Registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. /s/ Stephen A. Hozie - ----------------------------------------------- Stephen A. Hozie Executive Vice President and Chief Financial Officer November 9, 2004 EX-32.1 9 am3q04-ex32_1.txt CERTIFICATION (SECTION 906) CHMN, CEO & PRESIDENT Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of American Home Mortgage Investment Corp. (the "Registrant") on Form 10-Q for the quarter ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael Strauss, Chairman of the Board, Chief Executive Officer and President of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. November 9, 2004 /s/ Michael Strauss ---------------------------------------------- Michael Strauss Chairman of the Board, Chief Executive Officer and President EX-32.2 10 am3q04-ex32_2.txt CERTIFICATION (SECTION 906) EVP & CFO Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of American Home Mortgage Investment Corp. (the "Registrant") on Form 10-Q for the quarter ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen A. Hozie, Executive Vice President and Chief Financial Officer of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. November 9, 2004 /s/ Stephen A. Hozie ---------------------------------------------------- Stephen A. Hozie Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----