10-Q 1 am033105-10q.txt QUARTER 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 March 31, 2005. 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) 538 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 April 29, 2005, there were 40,353,512 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 (Unaudited) Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004........................................1 Consolidated Statements of Income for the Three Months Ended March 31, 2005 and 2004..........................2 Consolidated Statements of Stockholders' Equity for the Three Months Ended March 31, 2005 and 2004...........3 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004......................4 Notes to Consolidated Financial Statements ...................................................................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................23 Item 3. Quantitative and Qualitative Disclosures About Market Risk ..................................................44 Item 4. Controls and Procedures......................................................................................46 PART II-OTHER INFORMATION Item 1. Legal Proceedings............................................................................................47 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..................................................47 Item 3. Defaults Upon Senior Securities..............................................................................47 Item 4. Submission of Matters to a Vote of Security Holders..........................................................47 Item 5. Other Information............................................................................................47 Item 6. Exhibits ....................................................................................................47
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)
March 31, December 31, 2005 2004 -------------------------------- Assets: Cash and cash equivalents $ 162,762 $ 192,821 Accounts receivable and servicing advances 103,295 116,978 Mortgage-backed securities (including securities pledged of $6,956,681 as of March 31, 2005 and $5,968,969 as of December 31, 2004) 7,181,170 6,016,866 Mortgage loans held for sale, net 1,627,891 4,853,394 Derivative assets 73,383 24,803 Mortgage servicing rights, net 228,412 151,436 Premises and equipment, net 55,986 51,576 Goodwill 92,745 90,877 Other assets 49,332 57,046 ------------ ------------ Total assets $ 9,574,976 $ 11,555,797 ============ ============ Liabilities and Stockholders' Equity: Liabilities: Warehouse lines of credit $ 658,686 $ 735,783 Drafts payable 28,391 26,200 Commercial paper 858,382 529,790 Reverse repurchase agreements 6,720,167 7,071,168 Collateralized debt obligations -- 2,022,218 Derivative liabilities 1,945 1,860 Accrued expenses and other liabilities 176,859 152,413 Notes payable 159,339 135,761 Income taxes payable 54,250 54,342 ------------ ------------ Total liabilities 8,658,019 10,729,535 ------------ ------------ Commitments and contingencies Stockholders' Equity: Preferred Stock, par value $0.01 per share, 10,000,000 shares authorized: 9.75% Series A Cumulative Redeemable, 2,150,000 shares issued and outstanding as of March 31, 2005 and December 31, 2004, respectively 50,857 50,857 9.25% Series B Cumulative Redeemable, 3,450,000 shares issued and outstanding as of March 31, 2005 and December 31, 2004, respectively 83,183 83,183 Common stock, par value $0.01 per share, 100,000,000 shares authorized, 40,335,255 and 40,288,077 shares issued and outstanding as of March 31, 2005 and December 31, 2004, respectively 403 403 Additional paid-in capital 632,828 631,530 Retained earnings 193,064 99,628 Accumulated other comprehensive loss (43,378) (39,339) ------------ ------------ Total stockholders' equity 916,957 826,262 ------------ ------------ Total liabilities and stockholders' equity $ 9,574,976 $ 11,555,797 ============ ============
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 March 31, ---------------------------------- 2005 2004 ------------ ------------ Net interest income: Interest income $ 146,894 $ 34,050 Interest expense (88,091) (21,278) ------------ ------------ Total net interest income 58,803 12,772 ------------ ------------ Non-interest income: Gain on sales of mortgage loans 35,253 52,581 Gain on securitizations of mortgage loans 69,919 1,856 Gain on sales of mortgage-backed securities and derivatives 6,132 6,632 Unrealized gain on mortgage-backed securities and derivatives 57,499 18,909 Loan servicing fees 11,312 10,318 Amortization of mortgage servicing rights (8,501) (7,346) Impairment recovery (provision) of mortgage servicing rights 3,419 (12,584) ------------ ------------ Net loan servicing fees (loss) 6,230 (9,612) ------------ ------------ Other non-interest income 1,466 978 ------------ ------------ Total non-interest income 176,499 71,344 ------------ ------------ Non-interest expenses: Salaries, commissions and benefits, net 68,475 39,627 Occupancy and equipment 12,671 8,094 Data processing and communications 5,950 3,213 Office supplies and expenses 4,429 3,118 Marketing and promotion 4,130 2,212 Travel and entertainment 3,928 2,577 Professional fees 3,470 2,428 Other 6,869 5,438 ------------ ------------ Total non-interest expenses 109,922 66,707 ------------ ------------ Net income before income tax benefit 125,380 17,409 Income tax benefit -- (3,814) ------------ ------------ Net income $ 125,380 $ 21,223 ============ ============ Dividends on preferred stock 3,305 -- ------------ ------------ Net income available to common shareholders $ 122,075 $ 21,223 ============ ============ Per share data: Basic $ 3.03 $ 0.71 Diluted $ 2.99 $ 0.70 Weighted average number of shares - basic 40,308 30,030 Weighted average number of shares - diluted 40,811 30,508
See notes to consolidated financial statements -2- AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) THREE MONTHS ENDED MARCH 31, 2005 AND 2004
------------------------------------------------------------------------------------------------------------------------------------ Accumulated Additional Other Total Preferred Common Paid-in Retained Comprehensive Stockholders' (Dollars in thousands) Stock Stock Capital Earnings Loss Equity ------------------------------------------------------------------------------------------------------------------------------------ Balance at January 1, 2004 $ -- $ 252 $ 281,432 $ 121,029 $ (4,743) $ 397,970 --------- --------- --------- --------- --------- --------- Comprehensive income: Net income -- -- -- 21,223 -- 21,223 Net change in unrealized gain on mortgage-backed securities available for sale -- -- -- -- 10,221 10,221 Net change in unrealized loss on cash flow hedges, net of amortization -- -- -- -- (14,153) (14,153) --------- Comprehensive income 17,291 Issuance of common stock - offering -- 144 339,647 -- -- 339,791 Issuance of common stock - earnouts -- -- 109 -- -- 109 Issuance of common stock, 1999 Omnibus Stock Incentive Plan -- 3 1,166 -- -- 1,169 Tax benefit from stock options exercised -- -- 1,599 -- -- 1,599 Dividends declared on common stock -- -- -- (16,748) -- (16,748) --------- --------- --------- --------- --------- --------- Balance at March 31, 2004 $ -- $ 399 $ 623,953 $ 125,504 $ (8,675) $ 741,181 ========= ========= ========= ========= ========= ========= Balance at January 1, 2005 $ 134,040 $ 403 $ 631,530 $ 99,628 $ (39,339) $ 826,262 --------- --------- --------- --------- --------- --------- Comprehensive income: Net income -- -- -- 125,380 -- 125,380 Net change in unrealized loss on mortgage-backed securities available for sale -- -- -- -- (24,435) (24,435) Net change in unrealized gain on cash flow hedges, net of amortization -- -- -- -- 20,396 20,396 --------- Comprehensive income 121,341 Issuance of common stock - earnouts -- -- 846 -- -- 846 Issuance of common stock, 1999 Omnibus Stock Incentive Plan -- -- 452 -- -- 452 Dividends declared on Series A preferred stock -- -- -- (1,310) -- (1,310) Dividends declared on Series B preferred stock -- -- -- (1,995) -- (1,995) Dividends declared on common stock -- -- -- (28,639) -- (28,639) --------- --------- --------- --------- --------- --------- Balance at March 31, 2005 $ 134,040 $ 403 $ 632,828 $ 193,064 $ (43,378) $ 916,957 ========= ========= ========= ========= ========= =========
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 March 31, ------------------------------ 2005 2004 ------------ ------------ Cash flows from operating activities: Net income $ 125,380 $ 21,223 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,439 1,977 Amortization and impairment of mortgage servicing rights 5,082 19,930 Amortization of mortgage-backed securities premiums, net 4,593 2,952 Deferred cash flow hedge gain, net of amortization 17,052 415 Loss (gain) on sales of mortgage-backed securities and derivatives 3,336 (6,705) Unrealized loss (gain) on mortgage-backed securities 51,003 (10,217) Unrealized gain on free standing derivatives (40,312) -- Additions to mortgage servicing rights on securitized loans (79,711) (9,863) Additions to mortgage servicing rights on sold loans (2,347) (5,802) Decrease (increase) in interest rate lock commitments 210 (9,990) Decrease (increase) in deferred origination costs 26,025 (884) Decrease in SFAS No. 133 basis adjustments 4,929 5,524 Other 1,177 (2,504) Decrease in operating assets: Accounts receivable and servicing advances 13,683 3,885 Other assets 7,714 1,703 Increase (decrease) in operating liabilities: Accrued expenses and other liabilities 21,432 (8,092) Income taxes payable (92) (13,113) Forward delivery contracts (9,595) (5,809) Origination of mortgage loans held for sale (7,255,400) (4,413,174) Proceeds from sales and repayments of mortgage loans 3,080,795 3,292,010 Proceeds from securitizations and repayments of mortgage loans 7,336,612 969,436 Additions to mortgage-backed securities (2,840,259) (897,322) Proceeds from sales of mortgage-backed securities -- 23,861 Principal repayments of mortgage-backed securities 124,959 13,734 ------------ ------------ Net cash provided by (used in) operating activities 598,705 (1,026,825) ------------ ------------ Cash flows from investing activities: Purchases of premises and equipment (6,849) (1,473) Purchases of mortgage-backed securities -- (2,094,101) Proceeds from sales of mortgage-backed securities 1,133,989 697,268 Principal repayments of mortgage-backed securities 368,671 49,985 Other -- (353) ------------ ------------ Net cash provided by (used in) investing activities 1,495,811 (1,348,674) ------------ ------------ Cash flows from financing activities: (Decrease) increase in warehouse lines of credit, net (77,097) 130,085 (Decrease) increase in reverse repurchase agreements, net (351,001) 2,050,614 Decrease in collateralized debt obligations (2,022,218) -- Decrease in payable for securities purchased -- (125,054) Increase in commercial paper, net 328,592 -- Increase in drafts payable, net 2,191 38,685 Proceeds from issuance of common stock 311 341,882 Dividends paid (28,931) (23,072) Increase in notes payable, net 23,578 6,768 ------------ ------------ Net cash (used in) provided by financing activities (2,124,575) 2,419,908 ------------ ------------ Net (decrease) increase in cash and cash equivalents (30,059) 44,409 Cash and cash equivalents, beginning of period 192,821 53,148 ------------ ------------ Cash and cash equivalents, end of period $ 162,762 $ 97,557 ============ ============ Supplemental disclosure of cash flow information: Interest paid $ 79,937 $ 13,254 Income taxes paid 115 6,361
See notes to consolidated financial statements. -4- AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) -------------------------------------------------------------------------------- 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 Irving, Texas 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. The unaudited consolidated financial statements included herein have been prepared in conformity with generally accepted accounting principles ("GAAP") for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Management believes all adjustments considered necessary for a fair presentation have been included. The consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the Company's Form 10-K/A for the year ended December 31, 2004. 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 Cash Equivalents - Cash and cash equivalents include cash on hand, amounts due from banks and overnight deposits. The carrying amount of cash and cash equivalents approximates its fair value. 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 consolidated statements of income. 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) based on estimated credit losses, prepayment speeds and the length of time in an unrealized loss position. 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 prior 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 -5- requirements, 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 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 interest rate 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 the estimated service lives of the premises and equipment. 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 in the consolidated statements of income. 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. We further test to ensure that the fair value of all of our business units does not exceed our total market capitalization. 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 borrowings and recorded as a liability on the consolidated balance sheet. Collateralized Debt Obligations - The Company has issued adjustable-rate collateralized debt obligations to finance certain portions of its mortgage loans held for sale. The collateralized debt obligations are collateralized by adjustable-rate mortgage ("ARM") loans held for sale that have been placed in a trust and bear interest rates that have historically moved in close relationship to the LIBOR. Collateralized debt obligations are accounted for as borrowings and recorded as a liability on the consolidated 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 borrowing and recorded as a liability on the consolidated 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. -6- 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 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 the value 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 MSRs 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 is 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 income (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 income (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. -7- 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 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 $33.8 million and $20.7 million due to direct loan origination costs, including commission costs, incurred for the three months ended March 31, 2005 and 2004, 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. -8- The following table presents pro forma net income available to common shareholders, basic earnings per share and diluted earnings per share had compensation cost been determined based on the fair value at the grant dates for awards under the Plan:
Three Months Ended March 31, ------------------------------ (In thousands, except per share data) 2005 2004 ------------ ------------ Net income available to common shareholders - as reported $ 122,075 $ 21,223 Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (343) (187) ------------ ------------ Net income available to common shareholders - pro forma $ 121,732 $ 21,036 ============ ============ Earnings per share: Basic - as reported $ 3.03 $ 0.71 Basic - pro forma $ 3.02 $ 0.70 Diluted - as reported $ 2.99 $ 0.70 Diluted - pro forma $ 2.98 $ 0.69
In December 2004, the FASB issued SFAS 123 (Revised 2004), "Share-Based Payment" ("SFAS 123R"), SFAS 123R requires compensation cost related to share-based payments to employees to be recognized in the financial statements based on their fair value. In April 2005, the Securities and Exchange Commission issued a rule which delays the required effective date to the beginning of an entity's fiscal year which begins after June 15, 2005. Accordingly, we will adopt SFAS 123R effective January 1, 2006, using the modified prospective method of transition. This method requires the provisions of SFAS 123R be applied to new awards and awards modified, repurchased or cancelled after the effective date. The Company will adopt this statement when effective and is currently evaluating the impact. The impact, had the Company adopted the fair-value based method under existing guidance, is shown in the table above. 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 - Emerging Issues Task Force ("EITF") Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments," was ratified by the FASB in March 2004. This EITF addresses how to determine the meaning of other-than-temporary impairment and its application to investments classified as either available for sale or held to maturity under SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (including individual securities and investments in mutual funds), and investments accounted for under the cost method or the equity method. In September 2004, the FASB delayed the effective date of the portion of this EITF that relates to measuring and recognizing other-than-temporary impairment until implementation guidance is finalized. This delay does not suspend the requirement to recognize other-than-temporary impairment required by existing accounting literature. -9- NOTE 2 - MORTGAGE-BACKED SECURITIES The following table presents the Company's mortgage-backed securities available for sale as of March 31, 2005 and December 31, 2004:
March 31, 2005 ----------------------------------------------------------------------------- Gross Unrealized Gross Unrealized Adjusted Cost Gains Losses Fair Value ------------- ----------------- ---------------- ------------ (In thousands) Agency securities $ 232,320 $ 6 $ (7,003) $ 225,323 Privately issued: Rated 2,448,365 514 (27,371) 2,421,508 Unrated 12,181 -- -- 12,181 ------------ ------------ ------------ ------------ Securities available for sale $ 2,692,866 $ 520 $ (34,374) $ 2,659,012 ============ ============ ============ ============
December 31, 2004 ----------------------------------------------------------------------------- Gross Unrealized Gross Unrealized Adjusted Cost Gains Losses Fair Value ------------- ----------------- ---------------- ------------ (In thousands) Agency securities $ 620,196 $ 17 $ (7,700) $ 612,513 Privately issued: Rated 3,584,211 10,791 (12,527) 3,582,475 Unrated 15,952 -- -- 15,952 ------------ ------------ ------------ ------------ Securities available for sale $ 4,220,359 $ 10,808 $ (20,227) $ 4,210,940 ============ ============ ============ ============
-10- The following table presents the Company's securities available for sale in an unrealized loss position as of March 31, 2005 and December 31, 2004:
March 31, 2005 ----------------------------------------------------------------------------------------- Less Than 12 Months 12 Months or More Total --------------------------- --------------------------- --------------------------- Gross Gross Gross Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses --------------------------- --------------------------- --------------------------- (In thousands) Agency securities $ 3,275 $ (30) $ 220,886 $ (6,973) $ 224,161 $ (7,003) Privately issued: Rated 1,733,282 (13,897) 594,551 (13,474) 2,327,833 (27,371) --------------------------- --------------------------- --------------------------- Securities available for sale $ 1,736,557 $ (13,927) $ 815,437 $ (20,447) $ 2,551,994 $ (34,374) =========================== =========================== ===========================
December 31, 2004 ----------------------------------------------------------------------------------------- Less Than 12 Months 12 Months or More Total --------------------------- --------------------------- --------------------------- Gross Gross Gross Unrealized Unrealized Unrealized Fair Value Losses Fair Value Losses Fair Value Losses --------------------------- --------------------------- --------------------------- (In thousands) Agency securities $ 608,730 $ (7,700) $ -- $ -- $ 608,730 $ (7,700) Privately issued: Rated 1,861,777 (12,527) -- -- 1,861,777 (12,527) --------------------------- --------------------------- --------------------------- Securities available for sale $ 2,470,507 $ (20,227) $ -- $ -- $ 2,470,507 $ (20,227) =========================== =========================== ===========================
The following table presents the Company's mortgage-backed trading securities as of March 31, 2005 and December 31, 2004: March 31, 2005 December 31, 2004 ----------------------------------- Fair Value Fair Value --------------- --------------- (In thousands) Privately issued: Rated $ 4,349,079 $ 1,751,335 Unrated 173,079 54,591 --------------- --------------- Trading securities $ 4,522,158 $ 1,805,926 =============== =============== During the three months ended March 31, 2005, the Company recorded $23.2 million in unrealized gains on trading securities that related to trading securities held at March 31, 2005. During the three months ended March 31, 2005, the Company sold $1.1 billion of mortgage-backed securities, excluding securities sold contemporaneously with the execution of securitization transactions, and realized $3.3 million in losses. The $1.1 billion of mortgage-backed securities sold were market-purchased. During the three months ended March 31, 2005, the Company securitized and held in its portfolio $2.8 billion of mortgage-backed securities. The Company's mortgage-backed securities held at March 31, 2005 are primarily either agency obligations or are rated AAA or AA by Standard & Poor's. -11- The Company has credit exposure on $10.7 billion of loans it has securitized privately as of March 31, 2005. The following table summarizes the loan delinquency information as of March 31, 2005 and December 31, 2004:
March 31, 2005 ----------------------------------------------------------- (Dollars in thousands) Loan Loan Percentage of Percentage of Delinquency Status Count Balance Total Portfolio Total Assets ------------------------------ ------------ ------------ --------------- ------------- 60 to 89 days 22 $ 5,622 0.05% 0.06% 90 and greater days 23 2,769 0.03% 0.03% Foreclosure 132 33,329 0.31% 0.35% ------------ ------------ ------------ ------------ 177 $ 41,720 0.39% 0.44% ============ ============ ============ ============
December 31, 2004 ----------------------------------------------------------- (Dollars in thousands) Loan Loan Percentage of Percentage of Delinquency Status Count Balance Total Portfolio Total Assets ------------------------------ ------------ ------------ --------------- ------------- 60 to 89 days 6 $ 2,018 0.05% 0.02% 90 and greater days 2 418 0.01% ---% Foreclosure 48 13,666 0.35% 0.12% ------------ ------------ ------------ ------------ 56 $ 16,102 0.41% 0.14% ============ ============ ============ ============
As of March 31, 2005, the fair value of residual assets from securitizations reported in mortgage-backed securities was $249.8 million. The significant assumptions used in estimating the fair value of residual cash flows as of March 31, 2005 were as follows: March 31, 2005 ------------------------- Weighted-average prepayment speed (CPR) 28.83% Weighted-average discount rate 17.14% Weighted-average default rate 0.54% NOTE 3 - MORTGAGE LOANS HELD FOR SALE, NET The following table presents the Company's mortgage loans held for sale, net, as of March 31, 2005 and December 31, 2004: March 31, December 31, (In thousands) 2005 2004 ------------ ------------ Mortgage loans held for sale $ 1,621,200 $ 4,815,749 SFAS No. 133 basis adjustments (4,889) 40 Deferred origination costs, net 11,580 37,605 ------------ ------------ Mortgage loans held for sale, net $ 1,627,891 $ 4,853,394 ============ ============ During the three months ended March 31, 2005, the Company securitized mortgage loans totaling $7.3 billion, of which $4.5 billion were sold, and realized $69.9 million in gains. -12- NOTE 4 - DERIVATIVE ASSETS AND LIABILITIES The following table presents the Company's derivative assets and liabilities as of March 31, 2005 and December 31, 2004:
March 31, December 31, (In thousands) 2005 2004 ------------ ------------ Derivative Assets Interest rate lock commitments $ 13,760 $ 12,025 Forward delivery contracts - Loan commitments 4,390 -- Forward delivery contracts - Loans held for sale 3,345 -- Interest rate swaps 12,474 9,192 Interest rate caps - free standing derivatives 557 1,459 Interest rate swaps - free standing derivatives 38,857 2,127 ------------ ------------ Derivative assets $ 73,383 $ 24,803 ============ ============ Derivative Liabilities Forward delivery contracts - Loan commitments $ -- $ 896 Forward delivery contracts - Loans held for sale -- 964 Interest rate swaps 1,945 -- ------------ ------------ Derivative liabilities $ 1,945 $ 1,860 ============ ============
As of March 31, 2005, the notional amount of forward delivery contracts and interest rate swap agreements amounted to approximately $1.4 billion and $5.8 billion, respectively. As of December 31, 2004, the notional amount of forward delivery contracts and interest rate swap agreements amounted to approximately $954 million and $3.4 billion, respectively. During the three months ended March 31, 2005, the Company realized $9.5 million in gains on sales of interest rate swap agreements associated with its securitizations of mortgage loans. These gains are recorded in gain on sales of mortgage-backed securities and derivatives in the consolidated statements of income. The forward delivery contracts have a high correlation to the price movement of the loans being hedged. The ineffectiveness in hedging loans held for sale recorded on the consolidated balance sheets was insignificant as of March 31, 2005 and December 31, 2004. As of March 31, 2005, the unrealized loss on interest rate swap agreements relating to cash flow hedges recorded in accumulated other comprehensive loss was a loss of $9.5 million. The Company estimates that $3.8 million of this unrealized loss will be reclassified from accumulated other comprehensive loss to interest expense for the twelve months ended March 31, 2006. -13- NOTE 5 - MORTGAGE SERVICING RIGHTS, NET The following table presents the activity in the Company's mortgage servicing rights, net, for the three months ended March 31, 2005 and 2004: Three Months Ended March 31, ---------------------------------- (In thousands) 2005 2004 --------------- --------------- Mortgage Servicing Rights: Balance at beginning of period $ 163,374 $ 121,652 Additions 82,058 15,665 Amortization (8,501) (7,346) --------------- --------------- Balance at end of period $ 236,931 $ 129,971 --------------- --------------- Impairment Allowance: Balance at beginning of period $ (11,938) $ (3,868) Impairment (provision) recovery 3,419 (12,584) --------------- --------------- Balance at end of period $ (8,519) $ (16,452) --------------- --------------- Mortgage servicing rights, net $ 228,412 $ 113,519 =============== =============== Aggregate Amortization Expense ------------------------------ Three months ended March 31, 2005 $ 8,501 Estimated Amortization Expense ------------------------------ Twelve months ended March 31, 2006 $ 46,388 Twelve months ended March 31, 2007 36,779 Twelve months ended March 31, 2008 27,370 Twelve months ended March 31, 2009 21,103 Twelve months ended March 31, 2010 17,027 Thereafter 88,264 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 March 31, 2005 and December 31, 2004 were as follows: March 31, 2005 December 31, 2004 -------------- ----------------- Weighted-average prepayment speed (PSA) 289 316 Weighted-average discount rate 11.27% 10.37% Weighted-average default rate 2.44% 2.76% -14- The following table presents certain information regarding the Company's servicing portfolio of loans serviced for others at March 31, 2005 and December 31, 2004:
March 31, 2005 December 31, 2004 --------------- ----------------- (Dollars in thousands) Loan servicing portfolio - loans sold or securitized $ 18,237,603 $ 11,955,608 Average loan size $ 171 $ 156 Weighted-average servicing fee 0.344% 0.348% Weighted-average note rate 5.21% 5.48% Weighted-average remaining term (in months) 331 318 Weighted-average age (in months) 14 20
NOTE 6 - GOODWILL The following table presents the activity in the Company's goodwill for the three months ended March 31, 2005 and 2004:
Mortgage- Backed Loan Securities Origination Holdings (In thousands) Segment Segment Total ------------ ------------ ------------ Balance at January 1, 2004 $ 58,605 $ 24,840 $ 83,445 Earnouts from previous acquisitions 307 -- 307 ------------ ------------ ------------ Balance at March 31, 2004 $ 58,912 $ 24,840 $ 83,752 ============ ============ ============ Balance at January 1, 2005 $ 66,037 $ 24,840 $ 90,877 Earnouts from previous acquisitions 1,868 -- 1,868 ------------ ------------ ------------ Balance at March 31, 2005 $ 67,905 $ 24,840 $ 92,745 ============ ============ ============
As of December 31, 2004, the Company completed a goodwill impairment test by comparing the fair value of goodwill with its carrying value and did not recognize impairment. NOTE 7 - WAREHOUSE LINES OF CREDIT, REVERSE REPURCHASE AGREEMENTS AND COMMERCIAL PAPER Warehouse Lines of Credit ------------------------- To originate a mortgage loan, the Company draws against a $2.0 billion Secured Liquidity Note Program, a $1.2 billion pre-purchase facility with UBS Real Estate Securities Inc. ("UBS"), a $600 million bank syndicated facility led by Bank of America (which includes a $150.0 million term loan facility which the Company uses to finance its MSRs), a $450 million facility with IXIS Real Estate Capital Inc. (formerly CDC Mortgage Capital Inc.) ("IXIS"), a facility of $350 million with Morgan Stanley Bank ("Morgan Stanley"), a facility of $250 million with Lehman Brothers, a facility of $500 million with Bear Stearns and a facility of $250 million with Calyon New York Branch ("Calyon"). The Bank of America, IXIS, Morgan Stanley and Calyon facilities are committed facilities. In addition, the Company has a gestation facility with Greenwich Capital Financial Products, Inc. ("Greenwich"). 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 March 31, 2005, the Company was in compliance with respect to the loan covenants. -15- 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 March 31, 2005, borrowings under the working capital line of credit were $22.1 million. The following table presents the amounts outstanding on the Company's warehouse lines of credit as of March 31, 2005 and December 31, 2004:
March 31, 2005 December 31, 2004 ---------------------------- ---------------------------- Weighted Weighted Outstanding Average Outstanding Average (Dollars in thousands) Balance Rate Balance Rate ---------------------------- ---------------------------- Calyon $ 250,322 3.46% $ 249,540 3.05% IXIS 211,391 3.66 207,841 2.81 Bank of America 182,148 4.11 244,462 3.53 Greenwich 14,825 3.34 33,400 2.89 Morgan Stanley -- -- 540 3.06 ------------ ------------ Warehouse lines of credit $ 658,686 3.70% $ 735,783 3.13% ============ ============
Reverse Repurchase Agreements ----------------------------- The Company has arrangements to enter into reverse repurchase agreements, a form of collateralized short-term borrowing, with fourteen different financial institutions and on March 31, 2005 had borrowed funds from seven 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 March 31, 2005, the Company had $6.7 billion of reverse repurchase agreements outstanding with a weighted-average borrowing rate of 2.55 % and a weighted-average remaining maturity of two months. As of December 31, 2004, the Company had $7.1 billion of reverse repurchase agreements outstanding with a weighted-average borrowing rate of 2.13% and a weighted-average remaining maturity of three months. As of March 31, 2005 and December 31, 2004, the Company's reverse repurchase agreements had the following remaining maturities: March 31, December 31, 2005 2004 --------------- --------------- (In thousands) Within 30 days $ 4,254,124 $ 3,617,325 31 to 89 days 946,034 2,050,529 90 to 365 days 1,520,009 1,403,314 --------------- --------------- Reverse repurchase agreements $ 6,720,167 $ 7,071,168 =============== =============== The Company's average reverse repurchase agreements outstanding were $6.9 billion and $1.8 billion for the three months ended March 31, 2005 and 2004, respectively. 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 the LIBOR. The SLN program capacity, based on aggregate commitments of underlying credit enhancers, was $2.0 billion at March 31, 2005. -16- As of March 31, 2005, the Company had $858.4 million of SLNs outstanding, with an average interest cost of 2.89%. The SLNs were collateralized by loans held for sale and cash with a balance of $897.5 million as of March 31, 2005. As of December 31, 2004, the Company had $529.8 million of SLNs outstanding, with an average interest cost of 2.51%. The SLNs were collateralized by loans held for sale and cash with a balance of $550.0 million as of December 31, 2004. The Company's commercial paper had the following remaining maturities as of March 31, 2005 and December 31, 2004 : March 31, December 31, 2005 2004 --------------- --------------- (In thousands) Within 30 days $ 858,382 $ 529,790 31 to 89 days -- -- --------------- --------------- Commercial paper $ 858,382 $ 529,790 =============== =============== NOTE 8 - COLLATERALIZED DEBT OBLIGATIONS In December of 2004, the Company transferred $3.5 billion of its mortgage loans held for sale to American Home Mortgage Investment Trust 2004-4 (the "Trust") in a securitization transaction. This securitization transaction was accounted for as a financing of the mortgage loans held for sale. The Company financed the transaction by issuing $2.0 billion of collateralized debt obligations, which were collateralized by loans held for sale transferred to the Trust. As of March 31, 2005, the Company had no collateralized debt obligations. As of December 31, 2004, the collateralized debt obligations had a balance of $2.0 billion and an effective interest cost of 3.16%. As of December 31, 2004, the collateralized debt obligations were collateralized by mortgage loans held for sale of $2.0 billion. NOTE 9 - COMMON STOCK AND PREFERRED STOCK Under our charter, our Board of Directors is authorized to issue 110,000,000 shares of stock, of which up to 100,000,000 shares may be common stock and up to 10,000,000 shares may be preferred stock. As of March 31, 2005, there were 40,335,255 shares of common stock issued and outstanding, 2,150,000 shares of our 9.75% Series A Cumulative Redeemable Preferred Stock issued and outstanding and 3,450,000 shares of our 9.25% Series B Cumulative Redeemable Preferred Stock issued and outstanding. During the three months ended March 31, 2005, the Company declared a dividend totaling $28.6 million, or $0.71 per common share, which was paid on April 27, 2005. During the three months ended March 31, 2004, the Company declared dividends totaling $16.7 million, or $0.55 per common share, of which $9.2 million was paid on March 10, 2004 and $7.5 million was paid on April 14, 2004. During the three months ended March 31, 2005, the Company declared a dividend of $1.3 million, or $0.609375 per Series A Preferred share, which was paid on May 2, 2005. During the three months ended March 31, 2005, the Company declared a dividend of $2.0 million, or $0.578125 per Series B Preferred share, which was paid on May 2, 2005. -17- NOTE 10 - INCOME TAXES A reconciliation of the statutory income tax provision to the effective income tax benefit is as follows:
Three Months Ended March 31, ------------------------------------------------------------------------- 2005 2004 ---------------------------------- ---------------------------------- (Dollars in thousands) Tax provision at statutory rate $ 43,880 35.0% $ 6,093 35.0% Non-taxable REIT income (43,802) (34.9) (9,356) (53.7) State and local taxes, net of federal income tax benefit (78) (0.1) (551) (3.2) --------------- --------------- --------------- --------------- Income tax benefit $ -- -% $ (3,814) (21.9%) =============== =============== =============== ===============
The major sources of temporary differences and their deferred tax effect at March 31, 2005 and December 31, 2004 are as follows:
March 31, December 31, 2005 2004 --------------- --------------- (In thousands) Deferred tax liabilities: Capitalized cost of mortgage servicing rights $ 100,422 $ 82,399 Loan origination costs 11,882 11,236 Depreciation 3,083 2,341 Deferred state income taxes 182 -- --------------- --------------- Deferred tax liabilities 115,569 95,976 --------------- --------------- Deferred tax assets: Tax loss carryforwards 45,246 36,384 Allowance for bad debts and foreclosure reserve 3,506 2,711 Mark-to-market adjustments 3,546 811 Deferred state income taxes -- 353 Broker fees 1,046 528 Accrued bonuses 4,847 -- AMT credit 1,745 -- Other 1,383 847 --------------- --------------- Deferred tax assets 61,319 41,634 --------------- --------------- Net deferred tax liabilities $ 54,250 $ 54,342 =============== ===============
AHM Holdings acquired all of the outstanding stock of American Home Mortgage Servicing, Inc. ("AHM Servicing") (formerly known as Columbia National, Incorporated). The acquisition was accounted for under the purchase method of accounting for financial statement purposes. For federal income tax purposes, the historical basis of the assets and liabilities were carried over to AHM Holdings. AHM Servicing has approximately $40 million of separate company net operating loss carryforwards which begin to expire in 2008. In addition, AHM Holdings has approximately $70 million of federal and approximately $187 million of state net operating loss carryforwards which begin to expire in 2024 and 2009, respectively. -18- At March 31, 2005 and December 31, 2004, no valuation allowance has been established against deferred tax assets since it is more likely than not that the deferred tax assets will be realized. The Company has been audited by various state tax jurisdictions which have settled with a no change decision. In addition, the Company is currently under examination by other tax jurisdictions which the Company expects to result in no material assessment. The Company regularly assesses the likelihood of additional assessments in each of the tax jurisdictions in the calculation of its provision and maintains an appropriate reserve as needed. NOTE 11 - 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 months ended March 31, 2005 and 2004:
Three Months Ended March 31, --------------------------------- (Dollars in thousands, except per share amounts) 2005 2004 --------------- --------------- Numerator for basic earnings per share - Net income available to common shareholders $ 122,075 $ 21,223 =============== =============== Denominator: Denominator for basic earnings per share Weighted average number of common shares outstanding during the period 40,307,617 30,030,248 Net effect of dilutive stock options 503,082 477,570 --------------- --------------- Denominator for diluted earnings per share 40,810,699 30,507,818 =============== =============== Net income per share available to common shareholders: Basic $ 3.03 $ 0.71 =============== =============== Diluted $ 2.99 $ 0.70 =============== ===============
NOTE 12 - 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 may be 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 March 31, 2005, the Company has awarded 211,410 shares of restricted stock under the Plan. During the three months ended March 31, 2005 and 2004, the Company recognized compensation expense of $141 thousand and $188 thousand, respectively, relating to shares of restricted stock granted under the Plan. At March 31, 2005, 133,463 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 three months ended March 31, 2005 and 2004. 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"). Prior to December 3, 2003, the effective date of the merger with Apex, Apex caused all unvested options granted under the Apex Plan to become vested and exercisable, 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. -19- Prior to the Apex merger, an aggregate of one 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 and exercised or (ii) unexercised as of the effective date of the merger, and therefore 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. There were 267,419 options granted under the Plan, with a weighted-average exercise price of $32.88, in the three months ended March 31, 2005. The weighted-average fair value per share of options granted during the three months ended March 31, 2005 was $3.72. There were 173,323 options granted under the Plan, with a weighted-average exercise price of $22.52, in the three months ended March 31, 2004. The weighted-average fair value per share of options granted during the three months ended March 31, 2004 was $5.62. 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 March 31, ---------------------------------- 2005 2004 --------------- --------------- Dividend yield 9.1 % 7.0 % Expected volatility 28.4 % 49.0 % Risk-free interest rate 5.0 % 5.0 % Expected life 3 years 3 years NOTE 13 - ACQUISITION 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. In 2004, subsequent to the merger with Apex and internal reorganization, AHM Investment, as successor in interest to AHM Holdings, entered into an amended and restated agreement and plan of reorganization with Valley Bancorp. Under the terms of the definitive agreement, the Company will pay $46 for each share of Valley Bancorp common stock outstanding, and will pay in cash to the holders of Valley Bancorp stock options the difference between $46 and the exercise price of such options, or an aggregate of approximately $6.3 million. The acquisition agreement between AHM Investment 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. NOTE 14 - 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 and unrealized mark-to-market gains or losses subsequent to the securitization date on mortgage-backed securities classified as trading securities. The Loan Origination segment includes unrealized gains or losses that exist on the date of securitization of self-originated loans that are classified as trading securities. -20-
Three Months Ended March 31, 2005 ------------------------------------------------------------- (In thousands) Mortgage- Backed Securities Loan Loan Holdings Origination Servicing Segment Segment Segment Total ------------------------------------------------------------- Net interest income: Interest income $ 58,305 $ 88,589 $ -- $ 146,894 Interest expense (38,985) (47,735) (1,371) (88,091) ------------------------------------------------------------- Total net interest income 19,320 40,854 (1,371) 58,803 ------------------------------------------------------------- Non-interest income: Gain on sales of mortgage loans -- 35,253 -- 35,253 Gain on securitizations of mortgage loans -- 69,919 -- 69,919 Loss (gain) on sales of mortgage-backed securities and derivatives (3,337) 9,469 -- 6,132 Unrealized gain on mortgage-backed securities and derivatives 16,840 40,659 -- 57,499 Loan servicing fees -- -- 11,312 11,312 Amortization of mortgage servicing rights -- -- (8,501) (8,501) Impairment recovery of mortgage servicing rights -- -- 3,419 3,419 ------------------------------------------------------------- Net loan servicing fees -- -- 6,230 6,230 Other non-interest income -- 663 803 1,466 ------------------------------------------------------------- Total non-interest income 13,503 155,963 7,033 176,499 ------------------------------------------------------------- Non-interest expenses: Salaries, commissions and benefits, net 1,076 65,604 1,795 68,475 Occupancy and equipment 2 12,542 127 12,671 Data processing and communications 22 5,814 114 5,950 Office supplies and expenses 1 4,125 303 4,429 Marketing and promotion 2 4,102 26 4,130 Travel and entertainment -- 3,843 85 3,928 Professional fees 973 2,244 253 3,470 Other 2,562 2,435 1,872 6,869 ------------------------------------------------------------- Total non-interest expenses 4,638 100,709 4,575 109,922 ------------------------------------------------------------- Net income before income tax expense (benefit) 28,185 96,108 1,087 125,380 ------------------------------------------------------------- Income tax expense (benefit) -- -- -- -- ------------------------------------------------------------- Net income $ 28,185 $ 96,108 $ 1,087 $ 125,380 ============================================================= Dividends on preferred stock 3,305 -- -- 3,305 ------------------------------------------------------------- Net income available to common shareholders $ 24,880 $ 96,108 $ 1,087 $ 122,075 ============================================================= March 31, 2005 ------------------------------------------------------------- Segment assets $ 7,354,423 $ 1,905,139 $ 315,414 $ 9,574,976 =============================================================
-21-
Three Months Ended March 31, 2004 ------------------------------------------------------------- (In thousands) Mortgage- Backed Securities Loan Loan Holdings Origination Servicing Segment Segment Segment Total ------------------------------------------------------------- Net interest income: Interest income $ 15,149 $ 18,901 $ -- $ 34,050 Interest expense (9,412) (10,962) (904) (21,278) ------------------------------------------------------------- Total net interest income 5,737 7,939 (904) 12,772 ------------------------------------------------------------- Non-interest income: Gain on sales of mortgage loans -- 52,581 -- 52,581 Gain on securitizations of mortgage loans -- 1,856 -- 1,856 Gain (loss) on sales of mortgage-backed securities and derivatives 7,510 (878) -- 6,632 Unrealized gain on mortgage-backed securities and derivatives 4,163 14,746 -- 18,909 Loan servicing fees -- -- 10,318 10,318 Amortization of mortgage servicing rights -- -- (7,346) (7,346) Impairment provision of mortgage servicing rights -- -- (12,584) (12,584) ------------------------------------------------------------- Net loan servicing loss -- -- (9,612) (9,612) Other non-interest income -- 978 -- 978 ------------------------------------------------------------- Total non-interest income 11,673 69,283 (9,612) 71,344 ------------------------------------------------------------- Non-interest expenses: Salaries, commissions and benefits, net 50 38,445 1,132 39,627 Occupancy and equipment -- 7,935 159 8,094 Data processing and communications 2 3,181 30 3,213 Office supplies and expenses -- 2,747 371 3,118 Marketing and promotion -- 2,212 -- 2,212 Travel and entertainment 2 2,462 113 2,577 Professional fees 71 2,213 144 2,428 Other 1,045 3,324 1,069 5,438 ------------------------------------------------------------- Total non-interest expenses 1,170 62,519 3,018 66,707 ------------------------------------------------------------- Net income before income tax expense (benefit) 16,240 14,703 (13,534) 17,409 ------------------------------------------------------------- Income tax expense (benefit) -- 1,735 (5,549) (3,814) ------------------------------------------------------------- Net income $ 16,240 $ 12,968 $ (7,985) $ 21,223 ============================================================= Dividends on preferred stock -- -- -- -- ------------------------------------------------------------- Net income available to common shareholders $ 16,240 $ 12,968 $ (7,985) $ 21,223 ============================================================= December 31, 2004 ------------------------------------------------------------- Segment assets $ 6,136,642 $ 5,194,387 $ 224,768 $ 11,555,797 =============================================================
-22- 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 -23- 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. 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 Staff Accounting Bulletin No. 105 ("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 flows 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 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 -24- 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. 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, at least annually, 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. -25- Adjusted Financial Measures The Company securitizes a substantial portion of its mortgage loans held for sale each quarter and intends for each of these transactions to qualify as a sale under Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 140"). Our December 2004 securitization ("Q4-04 Securitization") did not qualify as a sale at December 31, 2004 and was accounted for as a financing in accordance with SFAS 140 because we retained a small amount of securities which were benefited by derivative contracts embedded in the securitization trust. These securities were sold during the first quarter of 2005, qualifying the Q4-04 Securitization as a sale at March 31, 2005 in accordance with SFAS 140. The Q4-04 Securitization was originally accounted for as a sale. The subsequent discovery of the retained derivative benefit resulted in our restating our financial statements for the period ended December 31, 2004, which restated financial statements were included in our amended Annual Report on Form 10-K/A filed with the SEC on April 22, 2005. Throughout "Management's Discussion and Analysis" below, the term "as adjusted" identifies financial measures that are not prepared in accordance with generally accepted accounting principles ("GAAP"). These adjusted financial measures reflect the effect of treating the Q4-04 Securitization as a sale in the fourth quarter of 2004 rather than in the first quarter of 2005 when the transaction subsequently qualified as a sale. Since the filing of our amended Annual Report on Form 10-K/A, we have enforced our policies, procedures and controls to ensure all securitizations are accounted for in accordance with SFAS 140. The Company has been, and expects to continue to be, managed on the basis of the adjusted financial measures. The adjusted financial measures should be read in conjunction with the Company's GAAP consolidated balance sheets and consolidated statements of income. The following financial tables include GAAP, adjusted and reconciling information for the reasons and purposes described herein: -26- AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
------------------------------------------------------------------------------------------------------------------------------------ March 31, December 31, December 31, December 31, 2005 2004 2004 2004 ------------ ------------ ------------ ------------ (1) (1) As GAAP Adjustments Adjusted ------------ ------------ ------------ ------------ Assets: Cash and cash equivalents $ 162,762 $ 192,821 $ -- $ 192,821 Accounts receivable and servicing advances 103,295 116,978 (11,640) 105,338 Mortgage-backed securities 7,181,170 6,016,866 1,584,927 7,601,793 Mortgage loans held for sale, net 1,627,891 4,853,394 (3,536,785) 1,316,609 Derivative assets 73,383 24,803 (1,459) 23,344 Mortgage servicing rights, net 228,412 151,436 37,793 189,229 Premises and equipment, net 55,986 51,576 -- 51,576 Goodwill 92,745 90,877 -- 90,877 Other assets 49,332 57,046 (10,490) 46,556 ------------ ------------ ------------ ------------ Total assets $ 9,574,976 $ 11,555,797 $ (1,937,654) $ 9,618,143 ============ ============ ============ ============ Liabilities and Stockholders' Equity: Liabilities: Warehouse lines of credit $ 658,686 $ 735,783 $ -- $ 735,783 Drafts payable 28,391 26,200 -- 26,200 Commercial paper 858,382 529,790 -- 529,790 Reverse repurchase agreements 6,720,167 7,071,168 -- 7,071,168 Collateralized debt obligations -- 2,022,218 (2,022,218) -- Derivative liabilities 1,945 1,860 -- 1,860 Accrued expenses and other liabilities 176,859 152,413 13,213 165,626 Notes payable 159,339 135,761 -- 135,761 Income taxes payable 54,250 54,342 -- 54,342 ------------ ------------ ------------ ------------ Total liabilities 8,658,019 10,729,535 (2,009,005) 8,720,530 ------------ ------------ ------------ ------------ Stockholders' Equity: Preferred Stock 134,040 134,040 -- 134,040 Common stock 403 403 -- 403 Additional paid-in capital 632,828 631,530 -- 631,530 Retained earnings 193,064 99,628 71,351 170,979 Accumulated other comprehensive loss (43,378) (39,339) -- (39,339) ------------ ------------ ------------ ------------ Total stockholders' equity 916,957 826,262 71,351 897,613 ------------ ------------ ------------ ------------ Total liabilities and stockholders' equity $ 9,574,976 $ 11,555,797 $ (1,937,654) $ 9,618,143 ============ ============ ============ ============
Note: (1) - Adjustments reflect the net effect on the period presented to reconcile the Company's operating statistics, results of operations and financial condition prepared in accordance with GAAP to the amounts adjusted as if the Company's fourth quarter 2004 securitization had qualified for SFAS 140 sale accounting treatment in the fourth quarter of 2004. -------------------------------------------------------------------------------- -27- AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts)
Three Months Ended March 31, ------------------------------------------------------------ 2005 2005 2005 2004 ------------ ------------ ------------ ------------ (1) (1) As GAAP Adjustments Adjusted ------------ ------------ ------------ ------------ Net interest income: Interest income $ 146,894 $ (26,925) $ 119,969 $ 34,050 Interest expense (88,091) 16,766 (71,325) (21,278) ------------ ------------ ------------ ------------ Net interest income 58,803 (10,159) 48,644 12,772 ------------ ------------ ------------ ------------ Non-interest income: Gain on sales of mortgage loans 35,253 -- 35,253 52,581 Gain on securitizations of mortgage loans 69,919 (25,258) 44,661 1,856 Gain on sales of mortgage-backed securities and derivatives 6,132 (1,400) 4,732 6,632 Unrealized gain on mortgage-backed securities and derivatives 57,499 (37,263) 20,236 18,909 Loan servicing fees 11,312 2,851 14,163 10,318 Amortization (8,501) (2,170) (10,671) (7,346) Impairment reserve recovery (provision) 3,419 2,048 5,467 (12,584) ------------ ------------ ------------ ------------ Net loan servicing fees (loss) 6,230 2,729 8,959 (9,612) ------------ ------------ ------------ ------------ Other non-interest income 1,466 -- 1,466 978 ------------ ------------ ------------ ------------ Non-interest income 176,499 (61,192) 115,307 71,344 ------------ ------------ ------------ ------------ Non-interest expenses: Salaries, commissions and benefits, net 68,475 -- 68,475 39,627 Occupancy and equipment 12,671 -- 12,671 8,094 Data processing and communications 5,950 -- 5,950 3,213 Office supplies and expenses 4,429 -- 4,429 3,118 Marketing and promotion 4,130 -- 4,130 2,212 Travel and entertainment 3,928 -- 3,928 2,577 Professional fees 3,470 -- 3,470 2,428 Other 6,869 -- 6,869 5,438 ------------ ------------ ------------ ------------ Non-interest expenses 109,922 -- 109,922 66,707 ------------ ------------ ------------ ------------ Net income before income tax benefit 125,380 (71,351) 54,029 17,409 Income tax benefit -- -- -- (3,814) ------------ ------------ ------------ ------------ Net income $ 125,380 $ (71,351) $ 54,029 $ 21,223 ============ ============ ============ ============ Dividends on preferred stock 3,305 -- 3,305 -- ------------ ------------ ------------ ------------ Net income available to common shareholders $ 122,075 $ (71,351) $ 50,724 $ 21,223 ============ ============ ============ ============ Per share data: Basic $ 3.03 $ (1.77) $ 1.26 $ 0.71 Diluted $ 2.99 $ (1.75) $ 1.24 $ 0.70 Weighted average number of shares - basic 40,308 40,308 40,308 30,030 Weighted average number of shares - diluted 40,811 40,811 40,811 30,508
Note: (1) - Adjustments reflect the net effect on the period presented to reconcile the Company's operating statistics, results of operations and financial condition prepared in accordance with GAAP to the amounts adjusted as if the Company's fourth quarter 2004 securitization had qualified for SFAS 140 sale accounting treatment in the fourth quarter of 2004. -28- AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME MORTGAGE-BACKED SECURITIES HOLDINGS SEGMENT (In thousands)
Three Months Ended March 31, ----------------------------------------------------------- 2005 2005 2005 2004 ------------ ------------ ------------ ----------- (1) (1) As GAAP Adjustments Adjusted ------------ ------------ ------------ ----------- Net interest income: Interest income $ 58,305 $ 19,968 $ 78,273 $ 15,149 Interest expense (38,985) -- (38,985) (9,412) ------------ ------------ ------------ ----------- Net interest income 19,320 19,968 39,288 5,737 ------------ ------------ ------------ ----------- Non-interest income: Gain on sales of mortgage loans -- -- -- -- Gain on securitizations of mortgage loans -- -- -- -- (Loss) gain on sales of mortgage-backed securities and derivatives (3,337) (1,400) (4,737) 7,510 Unrealized gain (loss) on mortgage-backed securities and derivatives 16,840 (19,083) (2,243) 4,163 Loan servicing fees -- -- -- -- Amortization -- -- -- -- Impairment reserve recovery (provision) -- -- -- -- ------------ ------------ ------------ ----------- Net loan servicing fees (loss) -- -- -- -- ------------ ------------ ------------ ----------- Other non-interest income -- -- -- -- ------------ ------------ ------------ ----------- Non-interest income 13,503 (20,483) (6,980) 11,673 ------------ ------------ ------------ ----------- Non-interest expenses: Salaries, commissions and benefits, net 1,076 -- 1,076 50 Occupancy and equipment 2 -- 2 -- Data processing and communications 22 -- 22 2 Office supplies and expenses 1 -- 1 -- Marketing and promotion 2 -- 2 -- Travel and entertainment -- -- -- 2 Professional fees 973 -- 973 71 Other 2,562 -- 2,562 1,045 ------------ ------------ ------------ ----------- Non-interest expenses 4,638 -- 4,638 1,170 ------------ ------------ ------------ ----------- Net income before income tax expense (benefit) 28,185 (515) 27,670 16,240 Income tax expense (benefit) -- -- -- -- ------------ ------------ ------------ ----------- Net income $ 28,185 $ (515) $ 27,670 $ 16,240 ============ ============ ============ ===========
Note: (1) - Adjustments reflect the net effect on the period presented to reconcile the Company's operating statistics, results of operations and financial condition prepared in accordance with GAAP to the amounts adjusted as if the Company's fourth quarter 2004 securitization had qualified for SFAS 140 sale accounting treatment in the fourth quarter of 2004. -29- AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME LOAN ORIGINATION SEGMENT (In thousands)
Three Months Ended March 31, ------------------------------------------------------------ 2005 2005 2005 2004 ------------ ------------ ------------ ------------ (1) (1) As GAAP Adjustments Adjusted ------------ ------------ ------------ ------------ Net interest income: Interest income $ 88,589 $ (46,893) $ 41,696 $ 18,901 Interest expense (47,735) 16,766 (30,969) (10,962) ------------ ------------ ------------ ------------ Net interest income 40,854 (30,127) 10,727 7,939 ------------ ------------ ------------ ------------ Non-interest income: Gain on sales of mortgage loans 35,253 -- 35,253 52,581 Gain on securitizations of mortgage loans 69,919 (25,258) 44,661 1,856 Gain (loss) on sales of mortgage-backed securities and derivatives 9,469 -- 9,469 (878) Unrealized gain on mortgage-backed securities and derivatives 40,659 (18,180) 22,479 14,746 Loan servicing fees -- -- -- -- Amortization -- -- -- -- Impairment reserve recovery (provision) -- -- -- -- ------------ ------------ ------------ ------------ Net loan servicing fees (loss) -- -- -- -- ------------ ------------ ------------ ------------ Other non-interest income 663 -- 663 978 ------------ ------------ ------------ ------------ Non-interest income 155,963 (43,438) 112,525 69,283 ------------ ------------ ------------ ------------ Non-interest expenses: Salaries, commissions and benefits, net 65,604 -- 65,604 38,445 Occupancy and equipment 12,542 -- 12,542 7,935 Data processing and communications 5,814 -- 5,814 3,181 Office supplies and expenses 4,125 -- 4,125 2,747 Marketing and promotion 4,102 -- 4,102 2,212 Travel and entertainment 3,843 -- 3,843 2,462 Professional fees 2,244 -- 2,244 2,213 Other 2,435 -- 2,435 3,324 ------------ ------------ ------------ ------------ Non-interest expenses 100,709 -- 100,709 62,519 ------------ ------------ ------------ ------------ Net income before income tax expense 96,108 (73,565) 22,543 14,703 Income tax expense -- -- -- 1,735 ------------ ------------ ------------ ------------ Net income $ 96,108 $ (73,565) $ 22,543 $ 12,968 ============ ============ ============ ============
Note: (1) - Adjustments reflect the net effect on the period presented to reconcile the Company's operating statistics, results of operations and financial condition prepared in accordance with GAAP to the amounts adjusted as if the Company's fourth quarter 2004 securitization had qualified for SFAS 140 sale accounting treatment in the fourth quarter of 2004. -30- AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME LOAN SERVICING SEGMENT (In thousands)
Three Months Ended March 31, ----------------------------------------------------------- 2005 2005 2005 2004 ------------ ------------ ------------ ----------- (1) (1) As GAAP Adjustments Adjusted ------------ ------------ ------------ ----------- Net interest income: Interest income $ -- $ -- $ -- $ -- Interest expense (1,371) -- (1,371) (904) ------------ ------------ ------------ ----------- Net interest income (1,371) -- (1,371) (904) ------------ ------------ ------------ ----------- Non-interest income: Gain on sales of mortgage loans -- -- -- -- Gain on securitizations of mortgage loans -- -- -- -- Gain (loss) on sales of mortgage-backed securities and derivatives -- -- -- -- Unrealized gain (loss) on mortgage-backed securities and derivatives -- -- -- -- Loan servicing fees 11,312 2,851 14,163 10,318 Amortization (8,501) (2,170) (10,671) (7,346) Impairment reserve recovery (provision) 3,419 2,048 5,467 (12,584) ------------ ------------ ------------ ----------- Net loan servicing fees (loss) 6,230 2,729 8,959 (9,612) ------------ ------------ ------------ ----------- Other non-interest income 803 -- 803 -- ------------ ------------ ------------ ----------- Non-interest income 7,033 2,729 9,762 (9,612) ------------ ------------ ------------ ----------- Non-interest expenses: Salaries, commissions and benefits, net 1,795 -- 1,795 1,132 Occupancy and equipment 127 -- 127 159 Data processing and communications 114 -- 114 30 Office supplies and expenses 303 -- 303 371 Marketing and promotion 26 -- 26 -- Travel and entertainment 85 -- 85 113 Professional fees 253 -- 253 144 Other 1,872 -- 1,872 1,069 ------------ ------------ ------------ ----------- Non-interest expenses 4,575 -- 4,575 3,018 ------------ ------------ ------------ ----------- Net income before income tax benefit 1,087 2,729 3,816 (13,534) Income tax benefit -- -- -- (5,549) ------------ ------------ ------------ ----------- Net income $ 1,087 $ 2,729 $ 3,816 $ (7,985) ============ ============ ============ ===========
Note: (1) - Adjustments reflect the net effect on the period presented to reconcile the Company's operating statistics, results of operations and financial condition prepared in accordance with GAAP to the amounts adjusted as if the Company's fourth quarter 2004 securitization had qualified for SFAS 140 sale accounting treatment in the fourth quarter of 2004. -31- Financial Condition Total assets at March 31, 2005 were $9.6 billion, a $2.0 billion decrease from $11.6 billion at December 31, 2004 and flat to the $9.6 billion of total assets as adjusted at December 31, 2004. The decrease in total assets primarily reflects a decrease in mortgage loans held for sale of $3.2 billion, partly offset by an increase in mortgage-backed securities of $1.2 billion. Total assets at December 31, 2004 includes the full $3.5 billion amount of the loans held for sale in the Q4-04 Securitization and excludes $1.5 billion of mortgage-backed securities that the Company retained in connection with the transaction. At March 31, 2005, 75.0% of our total assets were mortgage-backed securities and 17.0% were mortgage loans held for sale, compared to 52.1% and 42.0%, respectively, at December 31, 2004 and 79.0% and 13.7%, respectively, at December 31, 2004 as adjusted. The following table summarizes our mortgage-backed securities owned at March 31, 2005, December 31, 2004 and December 31, 2004 as adjusted, classified by type of issuer and by ratings categories:
March 31, 2005 ----------------------------------------------------------------------------------------- Trading Securities Securities Available for Sale Total --------------------------- ----------------------------- --------------------------- Carrying Portfolio Carrying Portfolio Carrying Portfolio Value Mix Value Mix Value Mix ------------ ------------ ------------ ------------ ------------ ------------ (Dollars in thousands) Agency securities $ -- --% $ 225,323 8.5% $ 225,323 3.1% Privately issued: AAA 4,161,411 92.1 2,387,208 89.8 6,548,619 91.2 AA -- -- 14,234 0.5 14,234 0.2 A 77,111 1.7 13,424 0.5 90,535 1.3 BBB 110,557 2.4 6,642 0.2 117,199 1.6 Unrated 173,079 3.8 12,181 0.5 185,260 2.6 ------------ ------------ ------------ ------------ ------------ ------------ Total $ 4,522,158 100.0% $ 2,659,012 100.0% $ 7,181,170 100.0% ============ ============ ============ ============ ============ ============
December 31, 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 $ -- --% $ 612,513 14.5% $ 612,513 10.2% Privately issued: AAA 1,634,702 90.6 3,542,772 84.1 5,177,474 86.0 AA -- -- 16,043 0.4 16,043 0.3 A 58,480 3.2 15,750 0.4 74,230 1.2 BBB 58,153 3.2 7,910 0.2 66,063 1.1 Unrated 54,591 3.0 15,952 0.4 70,543 1.2 ------------ ------------ ------------ ------------ ------------ ------------ Total $ 1,805,926 100.0% $ 4,210,940 100.0% $ 6,016,866 100.0% ============ ============ ============ ============ ============ ============
-32-
December 31, 2004 (as adjusted) ----------------------------------------------------------------------------------------- Trading Securities Securities Available for Sale Total --------------------------- ----------------------------- --------------------------- Carrying Portfolio Carrying Portfolio Carrying Portfolio Value Mix Value Mix Value Mix ------------ ------------ ------------ ------------ ------------ ------------ (Dollars in thousands) Agency securities $ -- --% $ 612,513 14.5% $ 612,513 8.1% Privately issued: AAA 3,025,975 89.3 3,542,772 84.1 6,568,747 86.4 AA -- -- 16,043 0.4 16,043 0.2 A 129,840 3.8 15,750 0.4 145,590 1.9 BBB 105,567 3.1 7,910 0.2 113,477 1.5 Unrated 129,471 3.8 15,952 0.4 145,423 1.9 ------------ ------------ ------------ ------------ ------------ ------------ Total $ 3,390,853 100.0% $ 4,210,940 100.0% $ 7,601,793 100.0% ============ ============ ============ ============ ============ ============
The following table classifies our mortgage-backed securities portfolio by type of interest rate index at March 31, 2005, December 31, 2004 and December 31, 2004 as adjusted:
March 31, 2005 ----------------------------------------------------------------------------------------- Trading Securities Securities Available for Sale Total --------------------------- ----------------------------- --------------------------- Carrying Portfolio Carrying Portfolio Carrying Portfolio Value Mix Value Mix Value Mix ------------ ------------ ------------ ------------ ------------ ------------ (Dollars in thousands) Index: One-month LIBOR $ 202,677 4.5% $ 103,144 3.9% $ 305,821 4.3% Six-month LIBOR 3,474,690 76.8 1,668,785 62.7 5,143,475 71.6 One-year LIBOR 836,972 18.5 712,289 26.8 1,549,261 21.6 One-year constant maturity treasury 7,819 0.2 174,794 6.6 182,613 2.5 ------------ ------------ ------------ ------------ ------------ ------------ Total $ 4,522,158 100.0% $ 2,659,012 100.0% $ 7,181,170 100.0% ============ ============ ============ ============ ============ ============
December 31, 2004 ----------------------------------------------------------------------------------------- Trading Securities Securities Available for Sale Total --------------------------- ----------------------------- --------------------------- Carrying Portfolio Carrying Portfolio Carrying Portfolio Value Mix Value Mix Value Mix ------------ ------------ ------------ ------------ ------------ ------------ (Dollars in thousands) Index: One-month LIBOR $ 86,199 4.8% $ 114,149 2.7% $ 200,348 3.3% Six-month LIBOR 829,413 45.9 2,385,582 56.7 3,214,995 53.4 One-year LIBOR 890,314 49.3 1,231,392 29.2 2,121,706 35.3 One-year constant maturity treasury -- -- 479,817 11.4 479,817 8.0 ------------ ------------ ------------ ------------ ------------ ------------ Total $ 1,805,926 100.0% $ 4,210,940 100.0% $ 6,016,866 100.0% ============ ============ ============ ============ ============ ============
-33-
December 31, 2004 (as adjusted) ----------------------------------------------------------------------------------------- Trading Securities Securities Available for Sale Total --------------------------- ----------------------------- --------------------------- Carrying Portfolio Carrying Portfolio Carrying Portfolio Value Mix Value Mix Value Mix ------------ ------------ ------------ ------------ ------------ ------------ (Dollars in thousands) Index: One-month LIBOR $ 198,201 5.8% $ 114,149 2.7% $ 312,350 4.1% Six-month LIBOR 2,266,802 66.9 2,385,582 56.7 4,652,384 61.2 One-year LIBOR 925,850 27.3 1,231,392 29.2 2,157,242 28.4 One-year constant maturity treasury -- -- 479,817 11.4 479,817 6.3 ------------ ------------ ------------ ------------ ------------ ------------ Total $ 3,390,853 100.0% $ 4,210,940 100.0% $ 7,601,793 100.0% ============ ============ ============ ============ ============ ============
The following table classifies our mortgage-backed securities portfolio by product type at March 31, 2005, December 31, 2004 and December 31, 2004 as adjusted:
March 31, 2005 ----------------------------------------------------------------------------------------- Trading Securities 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 $ 338,472 7.5% $ 805,680 30.3% $ 1,144,152 15.9% 3/1 Hybrid ARM 373,221 8.3 423,996 15.9 797,217 11.1 5/1 Hybrid ARM 3,810,465 84.2 1,429,336 53.8 5,239,801 73.0 ------------ ------------ ------------ ------------ ------------ ------------ Total $ 4,522,158 100.0% $ 2,659,012 100.0% $ 7,181,170 100.0% ============ ============ ============ ============ ============ ============
December 31, 2004 ----------------------------------------------------------------------------------------- Trading Securities 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 $ 149,040 8.3% $ 954,794 22.7% $ 1,103,834 18.3% 3/1 Hybrid ARM 381,831 21.1 488,696 11.6 870,527 14.5 5/1 Hybrid ARM 1,275,055 70.6 2,767,450 65.7 4,042,505 67.2 ------------ ------------ ------------ ------------ ------------ ------------ Total $ 1,805,926 100.0% $ 4,210,940 100.0% $ 6,016,866 100.0% ============ ============ ============ ============ ============ ============
-34-
December 31, 2004 (as adjusted) ----------------------------------------------------------------------------------------- Trading Securities 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 $ 342,694 10.1% $ 954,794 22.7% $ 1,297,488 17.1% 3/1 Hybrid ARM 381,831 11.3 488,696 11.6 870,527 11.5 5/1 Hybrid ARM 2,666,328 78.6 2,767,450 65.7 5,433,778 71.4 ------------ ------------ ------------ ------------ ------------ ------------ Total $ 3,390,853 100.0% $ 4,210,940 100.0% $ 7,601,793 100.0% ============ ============ ============ ============ ============ ============
During the three months ended March 31, 2005, we added $2.8 billion of self-originated mortgage-backed securities to our portfolio including $1.5 billion from the Q4-04 Securitization. During the three months ended March 31, 2005, we sold $1.1 billion of mortgage-backed securities. The average cost basis of our available for sale mortgage-backed securities, excluding unrealized gains and losses, was 102.1% of par as of March 31, 2005 and 101.7% of par as of December 31, 2004. Results of Operations - Comparison of the Three Months Ended March 31, 2005 and 2004 Overview Net income for the three months ended March 31, 2005 was $125.4 million compared to $21.2 million for the three months ended March 31, 2004, an increase of $104.2 million, or 490.8%. Net income for the three months ended March 31, 2005 includes approximately $71.4 million of revenues related to the delay in recognizing the Q4-04 Securitization as a sale into the first quarter of 2005. The increase in net income was the result of a $105.2 million increase in non-interest income and a $46.0 million increase in net interest income, partly offset by a $43.2 million increase in non-interest expenses and a $3.8 million decrease in income tax benefit. The $105.2 million increase in non-interest income consists of a $68.1 million increase in gain on securitizations of mortgage loans, a $38.1 million increase in realized and unrealized gains on mortgage-backed securities and derivatives, a $15.8 million increase in net loan servicing fees and a $0.5 million increase in other non-interest income partly offset by a $17.3 million decrease in gain on sales of mortgage loans in the three months ended March 31, 2005 versus the three months ended March 31, 2004. Management believes that the generally higher revenues in the first quarter of 2005 due solely to the recognition of two securitization transactions as sales are not recurring and expects that the Company's revenues from securitization activities in future quarterly periods will generally reflect related mortgage securitization volumes in those periods and will not include significant benefits from prior periods. Net income as adjusted for the three months ended March 31, 2005 was $54.0 million, an increase of $32.8 million, or 154.6%, over net income for the three months ended March 31, 2004. The increase in net income as adjusted was the result of a $43.9 million increase in non-interest income as adjusted and a $35.9 million increase in net interest income as adjusted, partly offset by a $43.2 million increase in non-interest expenses and $3.8 million decrease in income tax benefit. The $43.9 million increase in non-interest income as adjusted consists of a $42.8 million increase in gain on securitizations of mortgage loans as adjusted, an $18.6 million increase in net loan servicing fees as adjusted and a $0.4 million increase in other non-interest income, partly offset by a $17.3 million decrease in gain on sales of mortgage loans and by a $0.6 million decrease in realized and unrealized gains on mortgage-backed securities and derivatives as adjusted in the three months ended March 31, 2005 versus the three months ended March 31, 2004. Net Interest Income The following tables present the average balances for our interest-earning assets, interest-bearing liabilities, corresponding annualized effective rates of interest and the related interest income or expense for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 and for the three months ended March 31, 2005 as adjusted compared to the three months ended March 31, 2004: -35-
(Dollars in thousands) Three Months Ended March 31, ----------------------------------------------------------------------------------------- 2005 2004 ------------------------------------------- ------------------------------------------ Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------------ ------------ ------------ ------------ ------------ ------------ Interest earning assets: Mortgage-backed securities, net (1) $ 5,853,318 $ 58,305 3.98% $ 1,958,339 $ 15,149 3.09% Mortgage loans held for sale 6,239,851 88,589 5.68% 1,439,469 18,901 5.25% ------------ ------------ ------------ ------------ 12,093,169 146,894 4.86% 3,397,808 34,050 4.01% ------------ ------------ ------------ ------------ Interest bearing liabilities: Warehouse lines of credit (2) 1,490,755 16,956 4.55% 1,289,570 10,760 3.34% Commercial paper 1,184,803 6,058 2.05% -- -- -- Reverse repurchase agreements (3) 6,898,461 46,724 2.71% 1,795,332 9,412 2.10% Collateralized debt obligations 1,987,085 16,766 3.37% -- -- -- Notes payable 150,167 1,587 4.23% 106,021 1,106 4.17% ------------ ------------ ------------ ------------ 11,711,271 88,091 3.01% 3,190,923 21,278 2.67% ------------ ------------ ------------ ------------ Net interest income $ 58,803 $ 12,772 ============ ============ Interest rate spread 1.85% 1.34% ============ ============= Net interest margin 1.94% 1.50% ============ =============
(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 $2.7 million and $1.1 million of net interest expense on interest rate swap agreements for the 2005 and 2004 periods, respectively. (3) Includes $6.0 million and $3.6 million of net interest expense on interest rate swap agreements for the 2005 and 2004 periods, respectively.
(Dollars in thousands) Three Months Ended March 31, ----------------------------------------------------------------------------------------- 2005 (As Adjusted) 2004 ------------------------------------------- ------------------------------------------ Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------------ ------------ ------------ ------------ ------------ ------------ Interest earning assets: Mortgage-backed securities, net (1) $ 7,406,545 $ 78,273 4.23% $ 1,958,339 $ 15,149 3.09% Mortgage loans held for sale 2,792,467 41,696 5.97% 1,439,469 18,901 5.25% ------------ ------------ ------------ ------------ 10,199,012 119,969 4.71% 3,397,808 34,050 4.01% ------------ ------------ ------------ ------------ Interest bearing liabilities: Warehouse lines of credit (2) 1,490,755 16,956 4.55% 1,289,570 10,760 3.34% Commercial paper 1,184,803 6,058 2.05% -- -- -- Reverse repurchase agreements (3) 6,898,461 46,724 2.71% 1,795,332 9,412 2.10% Notes payable 150,167 1,587 4.23% 106,021 1,106 4.17% ------------ ------------ ------------ ------------ 9,724,186 71,325 2.93% 3,190,923 21,278 2.67% ------------ ------------ ------------ ------------ Net interest income $ 48,644 $ 12,772 ============ ============ Interest rate spread 1.78% 1.34% ============ ============ Net interest margin 1.91% 1.50% ============ ============
(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 $2.7 million and $1.1 million of net interest expense on interest rate swap agreements for the 2005 and 2004 periods, respectively. (3) Includes $6.0 million and $3.6 million of net interest expense on interest rate swap agreements for the 2005 and 2004 periods, respectively. -36- The following tables present the effects of changes in interest rates and changes in volume of interest-earning assets and interest-bearing liabilities on our interest income and interest expense for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 and for the three months ended March 31, 2005 as adjusted compared to the three months ended March 31, 2004:
Three Months Ended March 31, 2005 Compared to (In thousands) Three Months Ended March 31, 2004 --------------------------------------------------- Average Average Rate Volume Total ------------ ------------ ------------ Mortgage-backed securities, net $ 5,453 $ 37,703 $ 43,156 Mortgage loans held for sale 1,657 68,031 69,688 ------------ ------------ ------------ Interest income 7,110 105,734 112,844 ------------ ------------ ------------ Warehouse lines of credit 4,335 1,861 6,196 Commercial paper -- 6,058 6,058 Reverse repurchase agreements 3,476 33,836 37,312 Collateralized debt obligations -- 16,766 16,766 Notes payable 15 466 481 ------------ ------------ ------------ Interest expense 7,826 58,987 66,813 ------------ ------------ ------------ Net interest income $ (716) $ 46,747 $ 46,031 ============ ============ ============
Three Months Ended March 31, 2005 (As Adjusted) Compared to (In thousands) Three Months Ended March 31, 2004 --------------------------------------------------- Average Average Rate Volume Total ------------ ------------ ------------ Mortgage-backed securities, net $ 7,341 $ 55,783 $ 63,124 Mortgage loans held for sale 2,904 19,891 22,795 ------------ ------------ ------------ Interest income 10,245 75,674 85,919 ------------ ------------ ------------ Warehouse lines of credit 4,335 1,861 6,196 Commercial paper -- 6,058 6,058 Reverse repurchase agreements 3,476 33,836 37,312 Notes payable 15 466 481 ------------ ------------ ------------ Interest expense 7,826 42,221 50,047 ------------ ------------ ------------ Net interest income $ 2,419 $ 33,453 $ 35,872 ============ ============ ============ ------------------------------------------------------------------------------------------------------------------------------------
Interest Income: Interest income on mortgage-backed securities for the three months ended March 31, 2005 was $58.3 million, compared to $15.1 million for the three months ended March 31, 2004, a $43.2 million, or 284.9%, increase. This increase reflects primarily the growth of our mortgage-backed securities portfolio over the past twelve months. -37- Interest income on mortgage-backed securities as adjusted for the three months ended March 31, 2005 was $78.2 million compared to interest income on mortgage-backed securities of $15.1 million for the three months ended March 31, 2004, a $63.1 million, or 416.7% increase. This increase reflects primarily the growth of our mortgage-backed securities portfolio over the past twelve months. Interest income on our mortgage loans held for sale for the three months ended March 31, 2005 was $88.6 million compared to $18.9 million for the three months ended March 31, 2004, an increase of $69.7 million, or 368.7%. The increase in interest income on loans held for sale was primarily the result of an increase in average volume in 2005 versus 2004 due to accounting for the Q4-04 Securitization as a financing for most of the first quarter of 2005 and higher mortgage origination volume. Interest income on our mortgage loans held for sale as adjusted for the three months ended March 31, 2005 was $41.7 million compared to $18.9 million for the three months ended March 31, 2004, an increase of $22.8 million, or 120.6%. The increase in loans held for sale interest income was primarily the result of an increase in average volume in 2005 versus 2004 due to higher mortgage origination volume. Interest Expense: We fund our loan inventory primarily through borrowing facilities with several mortgage warehouse lenders and through a $2.0 billion commercial paper, or secured liquidity note ("SLN"), program. Interest expense on warehouse lines of credit for the three months ended March 31, 2005 was $17.0 million, compared to interest expense for the three months ended March 31, 2004 of $10.8 million, a $6.2 million increase. The increase in warehouse lines of credit interest expense was primarily the result of an increase in average volume due to higher mortgage origination volume and an increase in average rate due to the generally higher interest rate environment in 2005 versus 2004. In May 2004, we formed a wholly-owned special purpose entity for the purpose of issuing commercial paper in the form of SLNs to finance certain portions of our mortgage loans held for sale. Interest expense on commercial paper for the three months ended March 31, 2005 was $6.1 million. By funding a portion of our loan inventory through the commercial paper program, we were able to reduce our average funding cost versus borrowing exclusively through warehouse lenders. We have borrowed funds under reverse repurchase agreements, a form of collateralized short-term borrowing, with fourteen different financial institutions as of March 31, 2005. We borrow funds under these arrangements based on the fair value of our mortgage-backed securities. Total interest expense on reverse repurchase agreements for the three months ended March 31, 2005 was $46.7 million, compared to interest expense for the three months ended March 31, 2004 of $9.4 million, a $37.3 million increase. The increase in reverse repurchase agreements interest expense in 2005 versus 2004 was primarily the result of an increase in borrowings used to fund the growth of our mortgage-backed securities portfolio. For the three months ended March 31, 2005, we recognized $16.8 million of interest expense on collateralized debt obligations related to accounting for the Q4-04 Securitization as a financing for most of the first quarter of 2005. Management believes that this expense is non-recurring. Gain on Mortgage Loans, Mortgage-Backed Securities and Derivatives ------------------------------------------------------------------ Gain on Sales and Securitizations of Mortgage Loans: Gain on sales and securitizations of mortgage loans in our Loan Origination segment during the three months ended March 31, 2005 totaled $155.3 million including $43.4 million recognized in connection with the Q4-04 Securitization. Gain on sales and securitizations of mortgage loans in our Loan Origination segment, as adjusted, during the three months ended March 31, 2005 were $111.9 million, or 1.62%, of mortgage loans sold or securitized, as adjusted, compared to $68.3 million, or 1.58%, of mortgage loans sold or securitized during the three months ended March 31, 2004. The increase primarily reflects a $2.6 billion increase in mortgage loans sold or securitized, as adjusted, to $6.9 billion, as adjusted, in the first quarter of 2005 from $4.3 billion in the first quarter of 2004. The following table presents the components of gain on sales and securitizations of mortgage loans in our Loan Origination segment during the three months ended March 31, 2005 and 2004: -38- Gains on Sales and Securitizations of Mortgage Loans
Three Months Ended March 31, ------------------------------------------------------------ 2005 2005 2005 2004 ------------ ----------- ----------- ----------- GAAP Adjustments As Adjusted ------------ ----------- ----------- ----------- (Dollars in thousands) Gain on sales of mortgage loans $35,253 $ -- $35,253 $52,581 Gain on securitizations of mortgage loans 69,919 (25,258) 44,661 1,856 Gain (loss) on sales of free standing derivatives 9,469 -- 9,469 (878) Unrealized gain on self-originated mortgage-backed securities retained in period 41,709 (18,180) 23,529 14,746 Unrealized loss on free standing derivatives (1,050) -- (1,050) -- ------------ ----------- ----------- ----------- Total gain on sales and securitizations of mortgage loans $155,300 $(43,438) $111,862 $68,305 ============ =========== =========== =========== Total mortgage loans sold or securitized $10,430,630 $(3,526,123) $6,904,507 $4,333,865 ============ =========== =========== =========== Total gain on sales and securitizations of mortgage loans as a % of total mortgage loans sold or securitized 1.49% 1.62% 1.58%
Portfolio Gains and Losses: During the three months ended March 31, 2005, portfolio gains and losses in our Mortgage-Backed Securities Holdings segment, as adjusted, were a portfolio loss of $7.0 million compared to a portfolio gain of $11.7 million during the three months ended March 31, 2004. The decrease in portfolio gains in the first quarter of 2005 compared to the first quarter of 2004 was the result of a $12.2 million decrease in gain on sales of mortgage-backed securities, as adjusted, a $5.0 million increase in interest carry expense on free standing derivatives, and a $1.4 million net decrease in unrealized gain on mortgage-backed securities and free standing derivatives, as adjusted, excluding interest carry expense. For interest rate swap agreements accounted for as free standing derivatives, the interest carry expense is the net amount accrued for the variable interest receivable and fixed interest payable recorded in current earnings in unrealized gain on mortgage-backed securities and derivatives. The following table presents the components of portfolio gains and losses in our Mortgage-Backed Securities Holdings segment during the three months ended March 31, 2005 and 2004: Portfolio Gains and Losses
Three Months Ended March 31, --------------------------------------------------------- 2005 2005 2005 2004 ------------ ----------- ----------- ----------- GAAP Adjustments As Adjusted ------------ ----------- ----------- ----------- (In thousands) (Loss) gain on sales of mortgage-backed securities $(3,337) $(1,400) $(4,737) $7,510 Unrealized (loss) gain on mortgage-backed securities (18,460) (19,083) (37,543) 4,163 Unrealized gain on free standing derivatives 40,312 -- 40,312 -- ------------ ----------- ----------- ----------- Net unrealized gain on mortgage-backed securities and free standing derivatives excluding interest carry expense 21,852 (19,083) 2,769 4,163 Interest carry expense on free standing derivatives included in unrealized gain (5,012) -- (5,012) -- ------------ ----------- ----------- ----------- Total portfolio gain (loss) $13,503 $(20,483) $(6,980) $11,673 ============ =========== =========== ===========
-39- The following table presents the components of gain on sales of mortgage-backed securities and derivatives shown in the Company's consolidated statements of income: Components of Gain on Sales of Mortgage-backed Securities and Derivatives
Three Months Ended March 31, --------------------------------------------------------- 2005 2005 2005 2004 ------------ ----------- ----------- ----------- GAAP Adjustments As Adjusted ------------ ----------- ----------- ----------- (In thousands) Gain (loss) on sales of mortgage-backed securities $(3,337) $(1,400) $(4,737) $7,510 Gain (loss) on sales of free standing interest rate swap derivatives 9,469 -- 9,469 (878) ------------ ----------- ----------- ----------- Gain on sales of mortgage-backed securities and derivatives $6,132 $(1,400) $4,732 $6,632 ============ =========== =========== ===========
The following table presents the components of unrealized gain on mortgage-backed securities and derivatives shown in the Company's consolidated statements of income: Components of Unrealized Gain on Mortgage-backed Securities and Derivatives
Three Months Ended March 31, --------------------------------------------------------- 2005 2005 2005 2004 ------------ ----------- ----------- ----------- GAAP Adjustments As Adjusted ------------ ----------- ----------- ----------- (In thousands) Unrealized gain on self-originated mortgage-backed securities retained in period $41,709 $(18,180) $23,529 $14,746 Unrealized (loss) gain on mortgage-backed securities (18,460) (19,083) (37,543) 4,163 Unrealized gain on free standing derivatives 39,262 -- 39,262 -- Unrealized loss on free standing derivatives - interest carry (5,012) -- (5,012) -- ------------ ----------- ----------- ----------- Unrealized gain on mortgage-backed securities and derivatives $57,499 $(37,263) $20,236 $18,909 ============ =========== =========== ===========
Net Loan Servicing Fees ----------------------- Net loan servicing fees were a gain of $6.2 million for the three months ended March 31, 2005 compared to a loss of $9.6 million for the three months ended March 31, 2004. Loan Servicing Fees: Loan servicing fees increased to $11.3 million for the three months ended March 31, 2005 from $10.3 million for the three months ended March 31, 2004, an increase of $1.0 million, or 9.6%. Included in loan servicing fees are gains on Ginnie Mae early buy-out sales of $0.4 million for the three months ended March 31, 2005 compared to $2.4 million for the three months ended March 31, 2004, a decrease of $2.0 million, or 83.3%. This decrease partly offset the increase in loan servicing fees in the first quarter of 2005 versus the first quarter of 2004 as a result of an increase in loans serviced for others. Amortization of MSRs: Amortization of MSRs increased to $8.5 million for the three months ended March 31, 2005 from $7.3 million for the three months ended March 31, 2004, an increase of $1.2 million, or 15.7%. The increase in amortization was due to a higher average servicing portfolio in the first quarter of 2005 versus the first quarter of 2004. Impairment (Provision) Recovery of MSRs: We recognized a temporary impairment recovery of $3.4 million for the three months ended March 31, 2005 versus a temporary impairment provision of $12.6 million for the three months ended March 31, 2004, resulting in an increase in net loan servicing fees of $16.0 million. The decrease in impairment provision in the three months ended March 31, 2005 was due to an increase in the fair value of MSRs, which was attributable to a subsequent decrease in estimated future prepayment speeds versus the initial estimated future prepayment speeds used to value the MSR upon securitization. -40- The following table presents GAAP, as adjusted and reconciling adjustments to net loan servicing fees for the three months ended March 31, 2005 and 2004:
Three Months Ended March 31, --------------------------------------------------------------- 2005 2005 2005 2004 ------------ ------------ ------------ ------------ As GAAP Adjustments Adjusted ------------ ------------ ------------ ------------ (In thousands) Loan servicing fees $ 11,312 $ 2,851 $ 14,163 $ 10,318 Amortization (8,501) (2,170) (10,671) (7,346) Impairment reserve recovery (provision) 3,419 2,048 5,467 (12,584) ------------ ------------ ------------ ------------ Net loan servicing fees (loss) $ 6,230 $ 2,729 $ 8,959 $ (9,612) ============ ============ ============ ============
Other Non-Interest Income ------------------------- Other non-interest income totaled $1.5 million for the three months ended March 31, 2005 compared to $1.0 million for the three months ended March 31, 2004. For the three months ended March 31, 2005, other non-interest income primarily includes reinsurance premiums earned totaling approximately $0.8 million, rental income of $0.4 million and revenue from title services of $0.2 million. For the three months ended March 31, 2004, other non-interest income primarily includes rental income of $0.6 million, revenue from title services of $0.2 million and reinsurance premiums earned totaling approximately $0.1 million. Non-Interest Expenses --------------------- Our non-interest expenses for the three months ended March 31, 2005 were $109.9 million compared to $66.7 million for the three months ended March 31, 2004, an increase of $43.2 million, or 64.8%. The increase primarily reflects a $38.2 million rise in our Loan Origination segment non-interest expenses to $100.7 million, or 1.39%, of total loan originations in the first quarter of 2005 from $62.5 million, or 1.42%, of total loan originations in the first quarter of 2004. Our operating expenses represent costs that are not eligible to be added to the book value of the loans because they are not considered to be certain direct origination costs under the rules of Statement of Financial Accounting Standards ("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, net: Salaries, commissions and benefits, net, for the three months ended March 31, 2005 were $68.5 million, compared to $39.6 million for the three months ended March 31, 2004, an increase of $28.9 million, or 72.8%. The increase in expenses reflects higher origination volume and a resulting increase in employees to 5,489 at March 31, 2005 from 3,814 at March 31, 2004. Other Operating Expenses: Operating expenses, excluding salaries, commissions and benefits, were $41.4 million for the three months ended March 31, 2005 compared to $27.1 million for the three months ended March 31, 2004, an increase of $14.3 million, or 53.1%. The increase in operating expenses in the first quarter of 2005 versus the first quarter of 2004 includes a $4.6 million increase in occupancy and equipment expense. The operating expenses in the three months ended March 31, 2005 include lease obligations and certain fixed asset expenses relating to our acquisition of certain residential home loan centers and associated satellite offices of Washington Mutual, Inc. in August of 2004. Income Tax (Benefit) Expense ---------------------------- No income tax expense or benefit was recognized for the three months ended March 31, 2005, compared to a benefit of $3.8 million for the three months ended March 31, 2004. The decrease in income tax benefit in the first quarter of 2005 versus the first quarter of 2004 reflects an increase in income before income taxes relating to our taxable REIT subsidiary ("TRS"). Loan Originations ----------------- We originate and sell or securitize one-to-four family residential mortgage loans. Total loan originations for the three months ended March 31, 2005 were $7.3 billion compared to $4.4 billion for the three months ended March 31, 2004, a 65.9% increase. Our retail originations, which are conducted through our community loan production offices and Internet call center, were 49% of our loan originations in the three months ended March 31, 2005 compared to 45% of our originations in the three months ended March 31, 2004. Mortgage brokers accounted -41- for 51% of our loan originations in the three months ended March 31, 2005 compared to 55% of our originations in the three months ended March 31, 2004. Liquidity and Capital Resources We have arrangements to enter into reverse repurchase agreements, a form of collateralized short-term borrowing, with fourteen different financial institutions and on March 31, 2005 had borrowed funds from seven 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 March 31, 2005, we had $6.7 billion of reverse repurchase agreements outstanding with a weighted-average borrowing rate of 2.55% before the impact of interest rate swaps and a weighted-average remaining maturity of two months. To originate a mortgage loan, we draw against a $2.0 billion commercial paper program, $1.2 billion pre-purchase facility with UBS Real Estate Securities Inc. ("UBS"), a $600 million bank syndicated facility led by Bank of America (which includes a $150.0 million term loan facility which we use to finance our MSRs), a facility of $500 million with Bear Stearns, a $450 million facility with IXIS Real Estate Capital Inc. (formerly CDC Mortgage Capital Inc.) ("IXIS"), a facility of $350 million with Morgan Stanley Bank ("Morgan Stanley"), a facility of $250 million with Lehman Brothers and a facility of $250 million with Calyon New York Branch (Calyon). In addition, the Company has a gestation facility with Greenwich Capital Financial Products, Inc ("Greenwich"). 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 our liabilities to our tangible net worth. At April 29, 2005, the aggregate outstanding balance under the commercial paper program was $1.8 billion, the aggregate outstanding balance under the warehouse facilities was $1.6 billion, the aggregate outstanding balance in drafts payable was $18.8 million and the aggregate maximum amount available for additional borrowings was $2.6 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; 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 March 31, 2005, our aggregate warehouse facility borrowings were $658.7 million (including $22.1 million of borrowings under a working capital sub-limit) and our outstanding drafts payable were $28.4 million, compared to $735.8 million (including $25.5 million of borrowings under a working capital sub-limit) and our outstanding drafts payable were $26.2 million as of December 31, 2004. At March 31, 2005, our loans held for sale were $1.6 billion compared to $4.9 billion at December 31, 2004. In addition to the UBS, IXIS, Bank of America, Morgan Stanley, and Calyon 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 March 31, 2005 and December 31, 2004 were $308.8 million and $443.8 million, respectively. The amount so held under this agreement at April 29, 2005 was $89.3 million. 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 -42- 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 March 31, 2005 and December 31, 2004, borrowings under our term loan facility were $132.2 million and $108.6 million, respectively. Cash and cash equivalents decreased to $162.8 million at March 31, 2005 from $192.8 million at December 31, 2004. Our primary sources of cash and cash equivalents during the three months ended March 31, 2005, were as follows: o $7.3 billion of proceeds from securitizations and repayments of mortgage loans; o $3.1 billion of proceeds from sales and repayments of mortgage loans; and o $1.1 billion of proceeds from sales of mortgage-backed securities. Our primary uses of cash and cash equivalents during the three months ended March 31, 2005, were as follows: o $7.3 billion of origination of mortgage loans held for sale; o $2.8 billion of additions to mortgage-backed securities; and o $2.0 billion decrease in collateralized debt obligations. Commitments The Company had the following commitments (excluding derivative financial instruments) at March 31, 2005:
Less than 1 Total Year 1 - 3 Years 4 - 5 Years After 5 Years ------------ ------------ ------------ ------------ ------------- (In thousands) Warehouse liabilities $ 658,686 $ 658,686 $ -- $ -- $ -- Operating leases 77,868 23,512 36,721 16,290 1,345 Notes payable 159,339 133,574 736 831 24,198 Commercial paper 858,382 858,382 -- -- -- Reverse repurchase agreements 6,720,167 6,720,167 -- -- --
-43- 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 ARM 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 ARM 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 March 31, 2005. -44- The following table summarizes the Company's interest rate sensitive instruments as of March 31, 2005 and December 31, 2004: March 31, 2005 -------------------------------------- Carrying Estimated Amount Fair Value ------------ ------------ Assets: Mortgage-backed securities $ 7,181,170 $ 7,181,170 Derivative assets (1) 73,383 108,958 Mortgage loans held for sale, net 1,627,891 1,666,689 Mortgage servicing rights, net 228,412 233,564 Liabilities: Reverse repurchase agreements $ 6,720,167 $ 6,718,357 Derivative liabilities 1,945 1,945 December 31, 2004 -------------------------------------- Carrying Estimated Amount Fair Value ------------ ------------ Assets: Mortgage-backed securities $ 6,016,866 $ 6,016,866 Derivative assets (1) 24,803 30,838 Mortgage loans held for sale, net 4,853,394 4,931,366 Mortgage servicing rights, net 151,436 152,467 Liabilities: Reverse repurchase agreements $ 7,071,168 $ 7,065,072 Collateralized debt obligations 2,022,218 2,022,218 Derivative liabilities 1,860 1,860 (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 March 31, 2005 and December 31, 2004 of $8.4 billion and $6.2 billion, respectively. -45- ITEM 4. CONTROLS AND PROCEDURES Remediation Efforts related to the Material Weakness in Internal Control over Financial Reporting The Company previously disclosed in its Annual Report on Form 10-K/A for the year ended December 31, 2004 material weaknesses related to the operating efficiencies of certain controls over financial reporting. The Company is enforcing the appropriate policies, procedures and controls over these areas to ensure that they are operating effectively. -46- 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 March 31, 2005. The Company acquired First Home Mortgage Corp. ("First Home") on June 30, 2000. In addition to the shares paid to former First Home shareholders as initial consideration, the Company is required to issue unregistered shares of common stock to the former shareholders as additional consideration under the earnout provisions of the merger agreement. Pursuant to these earnout provisions, on January 1, 2005, February 15, 2005, and March 14, 2005, the Company issued an aggregate of 1,542, 2,385 and 23,078 restricted shares of common stock, respectively, to such stockholders 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 with this Quarterly Report on Form 10-Q: Exhibit No. Description ------------ ------------------------------------------------------------- 10.1 -- Employment Agreement, dated as of January 1, 2005, by and between American Home Mortgage Holdings, Inc. and Richard Loeffler. 10.2 -- Amended and Restated Employment Agreement, dated as of December 14, 2004, by and between American Home Mortgage Holdings, Inc. and John A. Manglardi. -47- 10.3.1 -- First Omnibus Amendment, dated as of December 10, 2004, by and among Calyon New York Branch (successor in interest to Credit Lyonnais New York Branch), Deutsche Bank National Trust Company, American Home Mortgage Corp., AHM SPV I, LLC, and American Home Mortgage Servicing, Inc. 10.3.2 -- Amended and Restated Originator Performance Guaranty, dated as of December 10, 2004, by American Home Mortgage Holdings, Inc. and American Home Mortgage Investment Corp. in favor of AHM SPV I, LLC. 10.3.3 -- Amended and Restated Servicer Performance Guaranty, dated as of December 10, 2004, by American Home Mortgage Holdings, Inc. and American Home Mortgage Investment Corp. in favor of Calyon New York Branch. 10.4.1 -- Amendment No. 1, dated as of May 28, 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 Acceptance, Inc., American Home Mortgage Investment Corp., American Home Mortgage Holdings, Inc., and American Home Mortgage Servicing, Inc. f/k/a Columbia National, Incorporated, the Lenders from time to time party thereto, and Morgan Stanley Bank. 10.4.2 -- Amendment No. 2, dated as of June 23, 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 Acceptance, Inc., American Home Mortgage Investment Corp., American Home Mortgage Holdings, Inc., and American Home Mortgage Servicing, Inc. f/k/a Columbia National, Incorporated, the Lenders from time to time party thereto, and Morgan Stanley Bank. 10.4.3 -- Amendment No. 3, dated as of July 30, 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 Acceptance, Inc., American Home Mortgage Investment Corp., American Home Mortgage Holdings, Inc., and American Home Mortgage Servicing, Inc., the Lenders from time to time party thereto, and Morgan Stanley Bank. 10.4.4 -- Amendment No. 4, dated as of August 13, 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 Acceptance, Inc., American Home Mortgage Investment Corp., American Home Mortgage Holdings, Inc., and American Home Mortgage Servicing, Inc., the Lenders from time to time party thereto, and Morgan Stanley Bank. -48- 10.4.5 -- Amendment No. 5, dated as of September 15, 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 Acceptance, Inc., American Home Mortgage Investment Corp., American Home Mortgage Holdings, Inc., and American Home Mortgage Servicing, Inc., the Lenders from time to time party thereto, and Morgan Stanley Bank. 10.4.6 -- Amendment No. 7, dated as of November 17, 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 Acceptance, Inc., American Home Mortgage Investment Corp., American Home Mortgage Holdings, Inc., and American Home Mortgage Servicing, Inc., the Lenders from time to time party thereto, and Morgan Stanley Bank. 10.4.7 -- Amendment No. 2, dated as of October 21, 2004, to the Amended and Restated Custodial Agreement, dated as of November 26, 2003, by and among American Home Mortgage Corp., American Home Mortgage Acceptance, Inc., American Home Mortgage Investment Corp., American Home Mortgage Holdings, Inc., and American Home Mortgage Servicing, Inc., Deutsche Bank National Trust Company, and Morgan Stanley Bank. 10.4.8 -- Fifth Amended and Restated Promissory Note, dated as of November 17, 2004, made by American Home Mortgage Corp., American Home Mortgage Investment Corp., American Home Mortgage Acceptance, Inc., American Home Mortgage Holdings, Inc., and American Home Mortgage Servicing, Inc. in favor of Morgan Stanley Bank. 10.5.1 -- Mortgage Loan Purchase and Sale Agreement, dated as of January 1, 2004, by and among Greenwich Capital Financial Products, Inc., American Home Mortgage Corp., and American Home Mortgage Servicing, Inc. f/k/a Columbia National, Incorporated. 10.5.2 -- Custodial Agreement, dated as of January 1, 2004, by and among Greenwich Capital Financial Products, Inc., Deutsche Bank National Trust Company, American Home Mortgage Corp., and American Home Mortgage Servicing, Inc. f/k/a Columbia National, Incorporated. 10.6 -- Guaranty, dated as of December 3, 2004, by American Home Mortgage Investment Corp. in favor of Lehman Brothers Inc. and Lehman Commercial Paper Inc. 31.1 -- Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15(d)-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 -- Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15(d)-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 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. 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. -49- 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: May 5, 2005 By: /s/ Michael Strauss ----------------------------------- Michael Strauss Chairman, Chief Executive Officer and President Date: May 5, 2005 By: /s/ Stephen A. Hozie ----------------------------------- Stephen A. Hozie Executive Vice President and Chief Financial Officer (Principal Financial Officer) -50- INDEX TO EXHIBITS ----------------- Exhibit No. Description ------------ ------------------------------------------------------------- 10.1 -- Employment Agreement, dated as of January 1, 2005, by and between American Home Mortgage Holdings, Inc. and Richard Loeffler. 10.2 -- Amended and Restated Employment Agreement, dated as of December 14, 2004, by and between American Home Mortgage Holdings, Inc. and John A. Manglardi. 10.3.1 -- First Omnibus Amendment, dated as of December 10, 2004, by and among Calyon New York Branch (successor in interest to Credit Lyonnais New York Branch), Deutsche Bank National Trust Company, American Home Mortgage Corp., AHM SPV I, LLC, and American Home Mortgage Servicing, Inc. 10.3.2 -- Amended and Restated Originator Performance Guaranty, dated as of December 10, 2004, by American Home Mortgage Holdings, Inc. and American Home Mortgage Investment Corp. in favor of AHM SPV I, LLC. 10.3.3 -- Amended and Restated Servicer Performance Guaranty, dated as of December 10, 2004, by American Home Mortgage Holdings, Inc. and American Home Mortgage Investment Corp. in favor of Calyon New York Branch. 10.4.1 -- Amendment No. 1, dated as of May 28, 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 Acceptance, Inc., American Home Mortgage Investment Corp., American Home Mortgage Holdings, Inc., and American Home Mortgage Servicing, Inc. f/k/a Columbia National, Incorporated, the Lenders from time to time party thereto, and Morgan Stanley Bank. 10.4.2 -- Amendment No. 2, dated as of June 23, 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 Acceptance, Inc., American Home Mortgage Investment Corp., American Home Mortgage Holdings, Inc., and American Home Mortgage Servicing, Inc. f/k/a Columbia National, Incorporated, the Lenders from time to time party thereto, and Morgan Stanley Bank. 10.4.3 -- Amendment No. 3, dated as of July 30, 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 Acceptance, Inc., American Home Mortgage Investment Corp., American Home Mortgage Holdings, Inc., and American Home Mortgage Servicing, Inc., the Lenders from time to time party thereto, and Morgan Stanley Bank. 10.4.4 -- Amendment No. 4, dated as of August 13, 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 Acceptance, Inc., American Home Mortgage Investment Corp., American Home Mortgage Holdings, Inc., and American Home Mortgage Servicing, Inc., the Lenders from time to time party thereto, and Morgan Stanley Bank. 10.4.5 -- Amendment No. 5, dated as of September 15, 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 Acceptance, Inc., American Home Mortgage Investment Corp., American Home Mortgage Holdings, Inc., and American Home Mortgage Servicing, Inc., the Lenders from time to time party thereto, and Morgan Stanley Bank. Exhibit No. Description ------------ ------------------------------------------------------------- 10.4.6 -- Amendment No. 7, dated as of November 17, 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 Acceptance, Inc., American Home Mortgage Investment Corp., American Home Mortgage Holdings, Inc., and American Home Mortgage Servicing, Inc., the Lenders from time to time party thereto, and Morgan Stanley Bank. 10.4.7 -- Amendment No. 2, dated as of October 21, 2004, to the Amended and Restated Custodial Agreement, dated as of November 26, 2003, by and among American Home Mortgage Corp., American Home Mortgage Acceptance, Inc., American Home Mortgage Investment Corp., American Home Mortgage Holdings, Inc., and American Home Mortgage Servicing, Inc., Deutsche Bank National Trust Company, and Morgan Stanley Bank. 10.4.8 -- Fifth Amended and Restated Promissory Note, dated as of November 17, 2004, made by American Home Mortgage Corp., American Home Mortgage Investment Corp., American Home Mortgage Acceptance, Inc., American Home Mortgage Holdings, Inc., and American Home Mortgage Servicing, Inc. in favor of Morgan Stanley Bank. 10.5.1 -- Mortgage Loan Purchase and Sale Agreement, dated as of January 1, 2004, by and among Greenwich Capital Financial Products, Inc., American Home Mortgage Corp., and American Home Mortgage Servicing, Inc. f/k/a Columbia National, Incorporated. 10.5.2 -- Custodial Agreement, dated as of January 1, 2004, by and among Greenwich Capital Financial Products, Inc., Deutsche Bank National Trust Company, American Home Mortgage Corp., and American Home Mortgage Servicing, Inc. f/k/a Columbia National, Incorporated. 10.6 -- Guaranty, dated as of December 3, 2004, by American Home Mortgage Investment Corp. in favor of Lehman Brothers Inc. and Lehman Commercial Paper Inc. 31.1 -- Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15(d)-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 -- Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15(d)-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 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. 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.