UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2006.
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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
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AMERICAN HOME MORTGAGE INVESTMENT CORP.
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(Exact Name of Registrant as Specified in its Charter)
Maryland 20-0103914
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
538 Broadhollow Road, Melville, New York 11747
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(Address of Principal Executive Offices) (Zip Code)
(516) 949-3900
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(Registrant's telephone number, including area code)
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(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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer [X] Accelerated Filer [_] Non-Accelerated Filer [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [__] No [X]
As of November 3, 2006, there were 50,192,257 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 September 30, 2006 and
December 31, 2005................................................1
Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2006 and 2005..........................2
Consolidated Statements of Stockholders' Equity for the
Nine Months Ended September 30, 2006 and 2005.....................3
Consolidated Statements of Cash Flows for the Three and Nine
Months Ended September 30, 2006 and 2005..........................4
Notes to Consolidated Financial Statements..........................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................32
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........57
Item 4. Controls and Procedures............................................59
PART II-OTHER INFORMATION
Item 1. Legal Proceedings..................................................60
Item 1A. Risk Factors.......................................................60
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........60
Item 3. Defaults Upon Senior Securities....................................60
Item 4. Submission of Matters to a Vote of Security Holders................60
Item 5. Other Information..................................................60
Item 6. Exhibits...........................................................61
SIGNATURES
INDEX TO EXHIBITS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
September 30, December 31,
2006 2005
------------- ------------
(Unaudited)
Assets:
Cash and cash equivalents $ 298,079 $ 575,650
Accounts receivable and servicing advances 350,965 329,132
Mortgage-backed securities (including securities pledged
of $7,424,977 as of September 30, 2006 and
$10,063,621 as of December 31, 2005) 8,957,373 10,602,104
Mortgage loans held for sale, net 1,365,595 2,208,749
Mortgage loans held for investment, net of allowance of
$10,903 as of September 30, 2006 and $2,142 as of
December 31, 2005 5,797,801 3,479,721
Derivative assets 26,323 44,594
Mortgage servicing rights 460,913 319,671
Premises and equipment, net 82,288 68,782
Goodwill 111,890 99,527
Other assets 53,100 26,815
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Total assets $ 17,504,327 $ 17,754,745
============= ============
Liabilities and Stockholders' Equity:
Liabilities:
Warehouse lines of credit $ 1,890,034 $ 3,474,191
Drafts payable 8,749 20,754
Commercial paper 1,283,858 1,079,179
Reverse repurchase agreements 7,232,503 9,806,144
Collateralized debt obligations 3,484,873 1,057,906
Payable for securities purchased 1,221,105 261,539
Derivative liabilities 40,170 16,773
Trust preferred securities 282,340 203,688
Accrued expenses and other liabilities 383,585 277,476
Notes payable 317,161 319,309
Income taxes payable 95,808 30,770
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Total liabilities 16,240,186 16,547,729
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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 September 30, 2006 and
December 31, 2005, respectively 50,857 50,857
9.25% Series B Cumulative Redeemable, 3,450,000 shares
issued and outstanding as of September 30, 2006 and
December 31, 2005, respectively 83,183 83,183
Common Stock, par value $0.01 per share, 100,000,000 shares
authorized, 50,182,257 and 49,639,646 shares issued
and outstanding as of September 30, 2006 and
December 31, 2005, respectively 502 496
Additional paid-in capital 962,903 947,512
Retained earnings 245,473 203,778
Accumulated other comprehensive loss (78,777) (78,810)
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Total stockholders' equity 1,264,141 1,207,016
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Total liabilities and stockholders' equity $ 17,504,327 $ 17,754,745
============= ============
See notes to consolidated financial statements (unaudited).
-1-
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Net interest income:
Interest income $ 332,875 $ 180,038 $ 963,684 $ 462,250
Interest expense (289,878) (133,169) (823,905) (311,596)
--------- --------- --------- ---------
Total net interest income 42,997 46,869 139,779 150,654
--------- --------- --------- ---------
Provision for loan losses (5,365) - (10,655) -
--------- --------- --------- ---------
Total net interest income after provision
for loan losses 37,632 46,869 129,124 150,654
--------- --------- --------- ---------
Non-interest income:
Gain on sales of mortgage loans 210,621 123,658 607,122 236,288
Gain on sales of current period securitized
mortgage loans - 19,960 - 194,256
Gain on sales of mortgage-backed securities
and derivatives 9,849 6,116 8,952 12,868
Unrealized gain (loss) on mortgage-backed
securities and derivatives 1,050 (10,965) 2,635 36,242
Loan servicing fees 43,379 21,099 98,129 49,381
Amortization and impairment of mortgage
servicing rights - (3,478) - (41,790)
Change in fair value of mortgage servicing
rights:
Due to realization of cash flows (28,839) - (73,880) -
Due to changes in valuation assumptions, net
of hedge gain (loss) (16,799) - (9,209) -
--------- --------- --------- ---------
Net loan servicing (loss) fees (2,259) 17,621 15,040 7,591
--------- --------- --------- ---------
Other non-interest income 2,018 1,585 5,912 5,594
--------- --------- --------- ---------
Total non-interest income 221,279 157,975 639,661 492,839
--------- --------- --------- ---------
Non-interest expenses:
Salaries, commissions and benefits, net 105,676 101,378 308,100 264,712
Occupancy and equipment 19,228 15,328 56,961 42,396
Data processing and communications 5,700 6,479 19,559 18,386
Office supplies and expenses 5,346 5,024 14,823 15,110
Marketing and promotion 4,868 5,104 17,051 14,360
Travel and entertainment 7,798 4,670 22,344 14,025
Professional fees 6,076 3,744 16,420 10,646
Other 16,588 7,360 49,662 21,072
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Total non-interest expenses 171,280 149,087 504,920 400,707
--------- --------- --------- ---------
Net income before income tax expense (benefit) 87,631 55,757 263,865 242,786
Income tax expense (benefit) 15,611 2,549 65,035 (1,302)
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Net income $ 72,020 $ 53,208 $ 198,830 $ 244,088
========= ========= ========= =========
Dividends on preferred stock 3,305 3,304 9,914 9,913
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Net income available to common shareholders $ 68,715 $ 49,904 $ 188,916 $ 234,175
========= ========= ========= =========
Per share data:
Basic $ 1.37 $ 1.10 $ 3.78 $ 5.58
Diluted $ 1.36 $ 1.09 $ 3.75 $ 5.51
Weighted average number of shares - basic 50,148 45,174 49,975 41,973
Weighted average number of shares - diluted 50,553 45,669 50,363 42,471
See notes to consolidated financial statements (unaudited).
-2-
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(In thousands)
Accumulated
Additional Other Total
Preferred Common Paid-in Retained Comprehensive Stockholders'
Stock Stock Capital Earnings Loss Equity
--------- ------ ---------- -------- ------------- -------------
Balance at January 1, 2005 $ 134,040 $ 403 $ 631,530 $ 99,628 $ (39,339) $ 826,262
--------- ------ ---------- -------- ------------- -------------
Comprehensive income:
Net income - - - 244,088 - 244,088
Net change in unrealized loss on
mortgage-backed securities
available for sale - - - - (33,452) (33,452)
Net change in unrealized gain on
cash flow hedges, net of
amortization - - - - 21,700 21,700
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Comprehensive income 232,336
Issuance of common stock - offering - 90 304,033 - - 304,123
Issuance of common stock - earnouts - 2 5,990 - - 5,992
Issuance of common stock - 1999
Omnibus
Stock Incentive Plan - 1 1,914 - - 1,915
Tax benefit for stock options
exercised - - 2,638 - - 2,638
Dividends declared on Series A
Preferred Stock - - - (3,930) - (3,930)
Dividends declared on Series B
Preferred Stock - - - (5,983) - (5,983)
Dividends declared on Common Stock - - - (98,247) - (98,247)
--------- ------ ---------- -------- ------------- -------------
Balance at September 30, 2005 $ 134,040 $ 496 $ 946,105 $235,556 $ (51,091) $ 1,265,106
========= ====== ========== ======== ============= =============
Balance at January 1, 2006 $ 134,040 $ 496 $ 947,512 $203,778 $ (78,810) $ 1,207,016
--------- ------ ---------- -------- ------------- -------------
Comprehensive income:
Net income - - - 198,830 - 198,830
Net change in unrealized loss on
mortgage-backed securities
available for sale - - - - (4,740) (4,740)
Net change in unrealized gain on
cash flow hedges,
net of amortization - - - - 4,773 4,773
-------------
Comprehensive income 198,863
Cumulative effect adjustment as of
beginning of year - - - (2,917) - (2,917)
Issuance of common stock - earnouts - 3 9,851 - - 9,854
Issuance of common stock - 1999
Omnibus Stock Incentive Plan - 3 3,190 - - 3,193
Stock-based employee compensation
expense - - 820 - - 820
Tax benefit for stock options exercised - - 1,530 - - 1,530
Dividends declared on Series A
Preferred Stock - - - (3,931) - (3,931)
Dividends declared on Series B
Preferred Stock - - - (5,983) - (5,983)
Dividends declared on Common Stock - - - (144,304) - (144,304)
--------- ------ ---------- -------- ------------- -------------
Balance at September 30, 2006 $ 134,040 $ 502 $ 962,903 $245,473 $ (78,777) $ 1,264,141
========= ====== ========== ======== ============= =============
See notes to consolidated financial statements (unaudited).
-3-
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net income $ 72,020 $ 53,208 $ 198,830 $ 244,088
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Depreciation and amortization 4,275 3,098 13,242 8,276
Provision for loan losses 5,365 - 10,655 -
Change in fair value of mortgage
servicing rights 52,753 - 90,204 -
Amortization and impairment of
mortgage servicing rights - 3,478 - 41,790
Accretion and amortization of mortgage-
backed securities, net 4,696 (2,571) 9,033 853
Deferred cash flow hedge gain, net of
amortization 5,509 1,689 19,927 20,479
(Gain) loss on sales of mortgage-
backed securities and derivatives (4,735) 2,819 (4,735) 6,602
Unrealized (gain) loss on mortgage-
backed securities (1,588) 74,595 16,093 121,065
Unrealized loss (gain) on free
standing derivatives 20,629 (31,137) 14,826 (45,546)
Increase (decrease) in forward delivery
contracts 42,315 (12,820) 12,238 (8,485)
Capitalized mortgage servicing rights
on securitized loans - (27,536) - (169,876)
Capitalized mortgage servicing rights
on sold loans (79,493) (14,762) (230,290) (21,136)
(Increase) decrease in interest rate
lock commitments (5,069) 14,501 (2,385) 8,447
(Increase) decrease in mortgage loan
basis adjustments (10,125) (12,649) (7,550) 7,721
Excess tax benefits from share-based
payment arrangements (332) - (1,530) -
Other (569) 1,469 (1,400) 491
(Increase) decrease in operating assets:
Accounts receivable 2,740 (218,519) (3,937) (219,968)
Servicing advances (11,461) (382) (15,894) 1,210
Income taxes receivable - - - 25,797
Other assets (18,648) (10,512) (23,681) (448)
Increase in operating liabilities:
Accrued expenses and other
liabilities 25,988 53,657 86,887 73,820
Income taxes payable 15,611 8,557 62,495 1,968
Origination of mortgage loans held
for sale (14,664,704) (12,394,139) (41,239,157) (30,296,568)
Principal received from sales of
mortgage loans held for sale 14,241,440 9,448,293 41,627,935 16,986,607
Proceeds from securitizations of
mortgage loans held for sale - 2,993,315 - 16,185,841
Additions to mortgage-backed securities
and derivatives - (1,191,209) - (4,497,990)
Principal proceeds from sales of self-
originated mortgage-backed securities - - 1,908,882 1,104,227
Cash received from residual assets in
securitizations 16,785 35,431 65,085 75,526
Principal repayments of mortgage-backed
securities 35,677 274,035 190,007 554,610
------------ ------------ ------------ ------------
Net cash (used in) provided by
operating activities (250,921) (948,091) 2,795,780 209,401
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchases of premises and equipment (6,267) (5,831) (26,748) (20,874)
Origination of mortgage loans held for
investment (599,384) (1,301,364) (2,129,722) (1,435,121)
Proceeds from repayments of mortgage
loans held for investment 446,199 5,108 824,147 5,108
Purchases of mortgage-backed securities (1,666,650) (2,417,565) (3,517,111) (3,351,494)
Principal proceeds from sales of
purchased mortgage-backed securities 1,503,760 518,517 1,503,760 1,673,468
Principal repayments of purchased
mortgage-backed securities 529,441 414,667 1,468,977 1,144,387
Net increase in investment in Federal
Home Loan Bank stock, at cost (54) - (162) -
Acquisition of business - - (550,077) -
------------ ------------ ------------ ------------
Net cash provided by (used in)
investing activities 207,045 (2,786,468) (2,426,936) (1,984,526)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Increase (decrease) in warehouse lines
of credit, net 413,076 1,499,457 (1,584,157) 1,429,371
(Decrease) increase in reverse
repurchase agreements, net (1,707,283) 1,703,949 (2,573,641) 970,411
(Decrease) increase in collateralized
debt obligations (240,005) - 2,426,967 (2,022,218)
Increase in payable for securities
purchased 1,221,105 554,717 959,566 554,717
Increase in commercial paper, net 395,382 42,612 204,679 804,506
Decrease in drafts payable, net (3,600) (7,775) (12,005) (7,437)
Increase in trust preferred securities 29,560 48,550 78,652 96,964
(Decrease) increase in notes payable, net (20,539) 49,706 (2,148) 170,005
Proceeds from issuance of Common Stock 1,068 304,522 2,847 305,420
Excess tax benefits from share-based
payment arrangements 332 - 1,530 -
Dividends paid (51,409) (34,130) (148,705) (95,011)
------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities 37,687 4,161,608 (646,415) 2,206,728
------------ ------------ ------------ ------------
Net (decrease) increase in cash and
cash equivalents (6,189) 427,049 (277,571) 431,603
Cash and cash equivalents, beginning
of period 304,268 197,375 575,650 192,821
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 298,079 $ 624,424 $ 298,079 $ 624,424
============ ============ ============ ============
Supplemental disclosure of cash flow
information:
Interest paid $ 264,303 $ 111,172 $ 786,400 $ 311,969
Income taxes paid 2 118 2,540 906
Supplemental disclosure of non-cash
investing information:
Net transfer of loans held for sale to
loans held for investment $ 307,431 $ - $ 1,006,950 $ -
See notes to consolidated financial statements (unaudited).
-4-
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - American Home Mortgage Investment Corp. ("AHM Investment") is a
mortgage REIT focused on earning net interest income from mortgage loans and
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 and mortgage brokers or are purchased from correspondents,
and are serviced at the Company's Irving, Texas servicing center. As used
herein, references to the "Company," "American Home," "we," "our" and "us" refer
to AHM Investment collectively with its subsidiaries.
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.
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 are demand deposits and
short-term investments with a maturity of 90 days or less. 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 (loss) 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 (loss) on sales of mortgage-backed securities and derivatives.
When the fair value of an available for sale security is less than amortized
cost, management evaluates 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 assessment, 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 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 Loans Held for Investment - Mortgage loans held for investment
represent loans securitized through transactions structured as financings, or
pending securitization through transactions that are expected to be structured
as financings. Mortgage loans held for investment are carried at the aggregate
of their remaining unpaid principal balances, including the capitalized value of
the prior IRLCs related to the mortgage loans, plus net deferred origination
costs, less any related charge-offs and allowance for loan losses. Loan fees and
direct origination costs are deferred and amortized into interest income over
the contractual life of the loan using the level-yield method.
Allowance for Losses on Mortgage Loans Held for Investment - The Company
maintains an allowance for loan losses for its mortgage loans held for
investment, based on the Company's estimate of current existing losses.
Additions to the allowance for loan losses are based on assessments of certain
factors, including historical loan loss experience of similar types of loans,
the Company's loan loss experience, the
-5-
amount of past due and nonperforming loans, specific known risks, the value of
collateral securing the loans, and current and anticipated economic and interest
rate conditions. Evaluation of these factors involves subjective estimates and
judgments that may change. Additions to the allowance for loan losses are
provided through a charge to income and recorded within provision for loan
losses in the consolidated statements of income. The allowance for loan losses
is reduced by subsequent charge-offs, net of recoveries.
Mortgage Servicing Rights - In March 2006, the Financial Accounting Standards
Board ("FASB") released Statement of Financial Accounting Standards ("SFAS") No.
156, "Accounting for Servicing Financial Assets, an amendment of SFAS No. 140"
("SFAS No. 156"). SFAS No. 156 amends SFAS No. 140 to require that all
separately recognized servicing assets and liabilities be initially measured at
fair value, if practical. The effective date of this statement is as of the
beginning of the entity's first fiscal year that begins after September 15,
2006; however, early adoption is permitted as of the beginning of any fiscal
year, provided the entity has not issued financial statements for the interim
period. The initial recognition and measurement of servicing assets and
servicing liabilities are required to be applied prospectively to transactions
occurring after the effective date. The Company elected to early adopt SFAS No.
156 as of January 1, 2006, and has recorded its mortgage servicing rights
("MSRs") at fair value. The Company's election increased MSRs by $1.2 million.
Prior to January 1, 2006, MSRs were carried at the lower of cost or fair value,
based on defined interest rate risk strata, and the gross MSR asset was
amortized in proportion to and over the period of estimated net servicing
income. The Company estimates the fair value of its MSRs by obtaining market
information from one of the market's primary independent MSR brokers.
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 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 ("CDOs") to finance certain portions of its
mortgage loans. The collateralized debt obligations are collateralized by
adjustable-rate mortgage ("ARM") loans that have been placed in a trust and bear
interest rates that have historically moved in close relationship to LIBOR. CDOs
are accounted for as borrowings and recorded as a liability on the consolidated
balance sheet.
Commercial Paper - The Company maintains 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 and mortgage loans held for investment. The commercial paper
may be secured by the Company's mortgage loans held for sale, mortgage loans
held for investment, mortgage-backed securities or 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.
Trust Preferred Securities - The Company has formed wholly owned statutory
business trusts ("Trusts") for the purpose of issuing trust preferred
securities. The Company does not consolidate its Trusts, which results in a
liability to the Trusts, which is recorded in trust preferred securities on the
consolidated balance sheet. The securities begin to mature in 2035 and bear
interest at rates ranging from LIBOR +240 basis points to LIBOR +300 basis
points.
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 the obligation is
transferred into one of the Company's warehouse facilities when the related
draft is presented to a bank.
Derivative Financial Instruments - The Company has developed risk management
programs and processes designed to manage market risk associated with normal
business activities.
-6-
Interest Rate Lock Commitments ("IRLCs"). 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 and
have locked their terms and rates. The Company uses mortgage forward delivery
contracts to economically hedge the IRLCs. The Company classifies and accounts
for the IRLCs associated with loans expected to be sold as free-standing
derivatives. Accordingly, IRLCs related to loans held for sale are recorded at
fair value with changes in fair value recorded to current earnings.
Forward Delivery Commitments Used to Economically 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.
Total Return Swaps Used to Economically Hedge MSRs. The Company uses agency
trust principal only total return swaps to economically hedge its MSRs, 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.
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 SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), the Company
does not account for these hedges under a method defined in SFAS No. 133 as the
"shortcut" method, but rather the Company calculates the effectiveness of these
hedges on an ongoing basis, and, to date, has calculated effectiveness of
approximately 100%. The Company classifies and accounts for interest rate swap
agreements that are not designated as cash flow hedges as free-standing
derivatives. Accordingly, these swap agreements are recorded at fair value with
changes in fair value recorded to current earnings as a component of unrealized
gain on mortgage-backed securities and derivatives as they are used to offset
the price change exposure of mortgage-backed securities classified as trading.
For interest rate swap agreements accounted for as free-standing derivatives,
the net amount accrued for the variable interest receivable and fixed interest
payable is recorded in current earnings as unrealized gain on mortgage-backed
securities and derivatives.
Termination of Hedging Relationships. The Company employs a number of risk
management monitoring procedures to ensure that the designated hedging
relationships are demonstrating, and are expected to continue to demonstrate, a
high level of effectiveness. Hedge accounting is discontinued on a prospective
basis if it is determined that the hedging relationship is no longer highly
effective or expected to be highly effective in offsetting changes in fair value
of the hedged item. Additionally, the Company may elect to de-designate a hedge
relationship during an interim period and re-designate upon the rebalancing of a
hedge profile and the corresponding hedge relationship. When hedge accounting is
discontinued, the Company continues to carry the derivative instruments at fair
value with changes in their value recorded in earnings.
Gain on Sale of Loans - The Company recognizes gain on sale of loans for the
difference between the sales price and the adjusted book value of the loans at
the time of sale. The adjusted book value of the loans includes the original
principal amount plus SFAS No. 133 basis adjustments plus deferrals of fees and
points received and direct loan origination costs.
-7-
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 held for investment are securitized,
net deferred origination costs are amortized over the life of the loan using the
level-yield method and such amounts adjust 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.
Interest Recognition - The Company accrues interest income as it is earned and
interest expense as it is incurred. 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.
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"). Prior to January 1, 2006, the Company
accounted for the Plan using Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB Opinion No. 25"), and provided
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" ("SFAS No. 148"), had been applied. Prior
to January 1, 2006, in accordance with APB Opinion No. 25, no stock-based
compensation cost was reflected in the Company's net income for grants of stock
options to employees because the Company granted stock options with an exercise
price equal to the market value of the stock on the date of grant. Had the
Company used the fair value based accounting method for stock compensation
expense prescribed by SFAS Nos. 123 and 148 for the three and nine months ended
September 30, 2005, the Company's consolidated net income and earnings per share
would have been reduced to the pro-forma amounts presented in the following
table:
-8-
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2005
------------------ -----------------
(In thousands, except per share data)
Net income available to common
shareholders - as reported $ 49,904 $ 234,175
Less: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related effects (268) (953)
------------------ -----------------
Net income available to common
shareholders - pro forma $ 49,636 $ 233,222
================== =================
Earnings per share:
Basic - as reported $ 1.10 $ 5.58
Basic - pro forma $ 1.10 $ 5.56
Diluted - as reported $ 1.09 $ 5.51
Diluted - pro forma $ 1.09 $ 5.49
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" ("SFAS
No. 123R"), which requires that the compensation cost relating to share-based
payment transactions (including employee stock options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase
plans) be recognized as an expense in the Company's consolidated financial
statements. Under SFAS No. 123R, the related compensation cost is measured based
on the fair value of the award at the date of grant. In March 2005, the
Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin
("SAB") No. 107, "Share-Based Payment," which expresses views of the SEC Staff
about the application of SFAS No. 123R. SFAS No. 123 requires only that the
expense relating to employee stock options be disclosed in the footnotes to the
consolidated financial statements. SFAS No. 123R replaced SFAS No. 123 and
superseded APB Opinion No. 25. While SFAS No. 123R was originally to have been
effective for interim and annual reporting periods beginning after June 15,
2005, the SEC, in April 2005, deferred the compliance date to the first annual
reporting period beginning after June 15, 2005.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS No. 123R, using the modified prospective method. Under this
method, compensation cost in the nine months ended September 30, 2006 includes
the portion vesting in the period for (1) all share-based payments granted prior
to, but not vested as of December 31, 2005, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123 and (2) all
share-based payments granted subsequent to December 31, 2005, based on the grant
date fair value estimated using a binomial lattice-based option valuation model.
Results of prior periods do not reflect any restated amounts and the Company had
no cumulative effect adjustment upon adoption of SFAS No. 123R under the
modified prospective method. The Company's policy is to recognize compensation
cost for awards with only service conditions and a graded vesting schedule on a
straight-line basis over the requisite service period for the entire award.
Additionally, the Company's policy is to issue authorized but unissued shares of
common stock to satisfy stock option exercises.
During the nine months ended September 30, 2006, the Company's adoption of SFAS
No. 123R decreased income before income taxes by $820 thousand, decreased net
income by $655 thousand and decreased basic and diluted net income per share by
$0.01 per share. The income tax benefit recognized in income for the nine months
ended September 30, 2006 for stock options was $165 thousand. The expense,
before income tax effect, is included in salaries, commissions and benefits
expense.
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.
-9-
Recently Issued Accounting Standards - In July 2006, the FASB issued FIN 48,
"Accounting for Uncertainty in Income Taxes - An Interpretation of SFAS No. 109"
("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, "Accounting for Income Taxes." FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company is evaluating the potential impact of FIN 48 on its
consolidated financial statements.
On September 13, 2006, the SEC issued SAB No. 108 on quantifying financial
statement misstatements. In summary, SAB No. 108 was issued to address the
diversity in practice of evaluating and quantifying financial statement
misstatements and the related accumulation of such misstatements. SAB No. 108
states that both a balance sheet approach and an income statement approach
should be used when quantifying and evaluating the materiality of a potential
misstatement and contains guidance for correcting errors under this dual
perspective. SAB No. 108 is effective for the Company's financial statements
beginning January 1, 2007. The Company does not expect that the adoption of SAB
No. 108 will have a significant impact on its consolidated financial statements.
On September 15, 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
("SFAS No. 157") which provides for enhanced guidance for using the fair value
to measure assets and liabilities. SFAS No. 157 defines fair value, establishes
a framework for measuring fair value in generally accepted accounting principles
("GAAP"), and expands disclosures about fair value measurements. SFAS No. 157 is
applicable under other accounting pronouncements that either require or permit
fair value measurements and does not require any new fair value measurements.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company is in the process of analyzing the implications of SFAS No.
157 on its consolidated financial statements.
NOTE 2 - MORTGAGE-BACKED SECURITIES
The following tables present the Company's mortgage-backed securities available
for sale as of September 30, 2006 and December 31, 2005:
September 30, 2006
-----------------------------------------------------------------
Gross Unrealized Gross Unrealized
Adjusted Cost Gains Losses Fair Value
------------- ---------------- ---------------- ----------
(In thousands)
Agency securities $ 110,732 $ - $ (4,247) $ 106,485
Privately issued:
Rated 8,037,091 1,215 (52,462) 7,985,844
Unrated 5,539 153 - 5,692
------------- ---------------- ---------------- ----------
Securities available for sale $ 8,153,362 $ 1,368 $ (56,709) $8,098,021
============= ================ ================ ==========
December 31, 2005
-----------------------------------------------------------------
Gross Unrealized Gross Unrealized
Adjusted Cost Gains Losses Fair Value
------------- ---------------- ---------------- ----------
(In thousands)
Agency securities $ 135,545 $ - $ (5,225) $ 130,320
Privately issued:
Rated 7,282,916 4,562 (49,963) 7,237,515
Unrated 7,176 25 - 7,201
------------- ---------------- ---------------- ----------
Securities available for sale $ 7,425,637 $ 4,587 $ (55,188) $7,375,036
============= ================ ================ ==========
-10-
The following tables present the Company's mortgage-backed securities available
for sale in an unrealized loss position as of September 30, 2006 and December
31, 2005:
September 30, 2006
-------------------------------------------------------------------------------
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 $ - $ - $ 106,485 $ (4,247) $ 106,485 $ (4,247)
Privately issued:
Rated 3,066,177 (7,524) 3,489,505 (44,938) 6,555,682 (52,462)
----------- ----------- ---------- ---------- ---------- ----------
Securities available for sale $ 3,066,177 $ (7,524) $3,595,990 $ (49,185) $6,662,167 $ (56,709)
=========== =========== ========== ========== ========== ==========
December 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 $ - $ - $ 130,320 $ (5,225) $ 130,320 $ (5,225)
Privately issued:
Rated 3,834,893 (29,230) 926,942 (20,733) 4,761,835 (49,963)
----------- ----------- ---------- ---------- ---------- ----------
Securities available for sale $ 3,834,893 $ (29,230) $1,057,262 $ (25,958) $4,892,155 $ (55,188)
=========== =========== ========== ========== ========== ==========
The Company has evaluated its mortgage-backed securities available for sale in
an unrealized loss position for twelve months or more and determined there was
no other-than-temporary impairment as of September 30, 2006. The Company has the
ability and intent to hold its mortgage-backed securities available for sale in
an unrealized loss position until a market price recovery or maturity.
The following table presents the Company's mortgage-backed trading securities as
of September 30, 2006 and December 31, 2005:
September 30, 2006 December 31, 2005
------------------ -----------------
Fair Value
(In thousands) --------------------------------------
Privately issued:
Rated $ 647,188 $ 2,997,650
Unrated 212,164 229,418
------------------ -----------------
Trading securities $ 859,352 $ 3,227,068
================== =================
During the three months ended September 30, 2006, the Company recorded $1.6
million in unrealized gains on trading securities that related to trading
securities held at September 30, 2006. During the three months ended September
30, 2005, the Company recorded $37.6 million in unrealized losses on trading
securities that related to trading securities held at September 30, 2005.
During the nine months ended September 30, 2006, the Company recorded $12.0
million in unrealized losses on trading securities that related to trading
securities held at September 30, 2006. During the nine months ended September
30, 2005, the Company recorded $7.2 million in unrealized gains on trading
securities that related to trading securities held at September 30, 2005.
-11-
During the three months ended September 30, 2006, the Company sold $1.5 billion
of mortgage-backed securities and realized $9.8 million in gains, net of hedges.
The $1.5 billion of mortgage-backed securities sold were market-purchased.
During the three months ended September 30, 2005, the Company sold $521 million
of mortgage-backed securities, excluding securities sold contemporaneously with
the execution of securitization transactions, and realized $5.8 million in
gains, net of hedges. The $521 million of mortgage-backed securities sold were
primarily market-purchased. During the three months ended September 30, 2005,
the Company securitized and held in its portfolio $1.2 billion of
mortgage-backed securities.
During the nine months ended September 30, 2006, the Company sold $3.4 billion
of mortgage-backed securities and realized $9.0 million in gains, net of hedges.
The $3.4 billion of mortgage-backed securities sold were primarily
self-originated.
During the nine months ended September 30, 2005, the Company sold $2.8 billion
of mortgage-backed securities, excluding securities sold contemporaneously with
the execution of securitization transactions, and realized $6.7 million in
gains, net of hedges. During the nine months ended September 30, 2005, the
Company securitized and held in its portfolio $4.4 billion of mortgage-backed
securities.
The Company's mortgage-backed securities held at September 30, 2006 were
primarily either agency obligations or were rated AAA or AA by Standard &
Poor's.
The Company has credit exposure on $11.7 billion and $15.1 billion of loans it
has securitized privately as of September 30, 2006 and December 31, 2005,
respectively. The following tables summarize the loan delinquency information as
of September 30, 2006 and December 31, 2005:
September 30, 2006
------------------------------------------------------------
(Dollars in thousands)
Percentage of Percentage of
Delinquency Status Loan Count Loan Balance Total Portfolio Total Assets
------------------------------------ ---------- ------------ --------------- -------------
60 to 89 days 37 $ 4,439 0.04% 0.03%
90 and greater days 97 20,000 0.17% 0.11%
Pending foreclosure 1,054 236,757 2.03% 1.35%
---------- ------------ --------------- -------------
Loans 60 days and greater delinquent 1,188 $ 261,196 2.24% 1.49%
========== ============ =============== =============
December 31, 2005
------------------------------------------------------------
(Dollars in thousands)
Percentage of Percentage of
Delinquency Status Loan Count Loan Balance Total Portfolio Total Assets
------------------------------------ ---------- ------------ --------------- -------------
60 to 89 days 49 $ 10,194 0.07% 0.06%
90 and greater days 82 13,596 0.09% 0.08%
Pending foreclosure 451 119,181 0.79% 0.67%
---------- ------------ --------------- -------------
Loans 60 days and greater delinquent 582 $ 142,971 0.95% 0.81%
========== ============ =============== =============
As of September 30, 2006 and December 31, 2005, the fair value of residual
assets from securitizations reported in mortgage-backed securities was $224.3
million and $276.0 million, respectively.
The significant assumptions used in estimating the fair value of residual cash
flows as of September 30, 2006 and December 31, 2005 were as follows:
September 30, 2006 December 31, 2005
------------------ -----------------
Weighted-average prepayment speed (CPR) 31.45% 30.63%
Weighted-average discount rate 16.34% 16.52%
Weighted-average annual default rate 0.54% 0.54%
-12-
NOTE 3 - MORTGAGE LOANS, NET
Mortgage Loans Held For Sale, Net
The following table presents the Company's mortgage loans held for sale, net, as
of September 30, 2006 and December 31, 2005:
September 30, December 31,
(In thousands) 2006 2005
--------------------------------- ------------- ------------
Mortgage loans held for sale $ 1,353,674 $ 2,190,062
SFAS No. 133 basis adjustments 1,154 (2,099)
Deferred origination costs, net 10,767 20,786
------------- ------------
Mortgage loans held for sale, net $ 1,365,595 $ 2,208,749
============= ============
During the three months ended September 30, 2006, the Company sold mortgage
loans to third parties totaling $14.3 billion and realized $210.6 million in
gains.
During the nine months ended September 30, 2006, the Company sold mortgage loans
to third parties totaling $41.7 billion and realized $607.1 million in gains.
During the three and nine months ended September 30, 2006, the Company deferred
$192.0 million and $481.7 million, respectively, of loan origination costs as an
adjustment to the cost basis for additions to mortgage loans held for sale. The
Company's gain on sale of loans was reduced by $192.1 million and $491.8 million
of deferred origination costs associated with mortgage loans sold during the
three and nine months ended September 30, 2006, respectively.
The following tables summarize delinquency information as of September 30, 2006
and December 31, 2005 for the Company's mortgage loans held for sale:
September 30, 2006
-------------------------------------------
(Dollars in thousands)
Percentage of
Delinquency Status Loan Count Loan Balance Total Portfolio
------------------------------------ ---------- ------------ ---------------
60 to 89 days 21 $ 2,733 0.20%
90 and greater days 96 11,970 0.88%
Pending foreclosure 262 41,010 3.02%
---------- ------------ ---------------
Loans 60 days and greater delinquent 379 $ 55,713 4.10%
========== ============ ===============
December 31, 2005
-------------------------------------------
(Dollars in thousands)
Percentage of
Delinquency Status Loan Count Loan Balance Total Portfolio
------------------------------------ ---------- ------------ ---------------
60 to 89 days 15 $ 2,404 0.11%
90 and greater days 51 6,530 0.30%
Pending foreclosure 32 4,824 0.22%
---------- ------------ ---------------
Loans 60 days and greater delinquent 98 $ 13,758 0.63%
========== ============ ===============
-13-
Mortgage Loans Held For Investment, Net
The following table presents the Company's mortgage loans held for investment,
net, as of September 30, 2006 and December 31, 2005:
September 30, December 31,
(In thousands) 2006 2005
------------- ------------
Mortgage loans held for investment $ 5,750,950 $ 3,438,425
SFAS No. 133 basis adjustments (4,147) -
Deferred origination costs, net 61,901 43,438
Allowance for loan losses (10,903) (2,142)
------------- ------------
Mortgage loans held for investment, net $ 5,797,801 $ 3,479,721
============= ============
In June 2006, the Company transferred $964.9 million of its mortgage loans held
for investment to American Home Mortgage Investment Trust 2006-2 (the "2006-2
Trust") in a securitization transaction accounted for as a financing of the
loans held for investment.
In March 2006, the Company transferred $2.0 billion of its mortgage loans held
for investment to American Home Mortgage Investment Trust 2006-1 (the "2006-1
Trust") in a securitization transaction accounted for as a financing of the
loans held for investment.
During the three and nine months ended September 30, 2006, the Company deferred
$8.7 million and $29.1 million, respectively, of loan origination costs as an
adjustment to the cost basis for mortgage loans added to its held for investment
portfolio. The Company's interest income was reduced by $4.3 million and $10.6
million of deferred origination cost amortization on mortgage loans held for
investment during the three and nine months ended September 30, 2006,
respectively.
The following table presents the activity in the Company's allowance for loan
losses for the three and nine months ended September 30, 2006:
Three Months Ended Nine Months Ended
September 30, 2006 September 30, 2006
------------------ ------------------
(In thousands)
Balance at beginning of period $ 6,885 $ 2,142
Provision for loan losses 5,365 10,655
Charge-offs (1,347) (1,894)
------------------ ------------------
Balance at end of period $ 10,903 $ 10,903
================== ==================
-14-
The following tables summarize delinquency information as of September 30, 2006
and December 31, 2005 for the Company's mortgage loans held for investment:
September 30, 2006
-------------------------------------------
(Dollars in thousands)
Percentage of
Delinquency Status Loan Count Loan Balance Total Portfolio
------------------------------------ ---------- ------------ ---------------
60 to 89 days 51 $ 5,419 0.09%
90 and greater days 176 11,122 0.19%
Pending foreclosure 347 71,611 1.24%
---------- ------------ ---------------
Loans 60 days and greater delinquent 574 $ 88,152 1.52%
========== ============ ===============
December 31, 2005
-------------------------------------------
(Dollars in thousands)
Percentage of
Delinquency Status Loan Count Loan Balance Total Portfolio
------------------------------------ ---------- ------------ ---------------
60 to 89 days 23 $ 2,898 0.08%
90 and greater days 26 2,489 0.07%
Pending foreclosure 49 8,797 0.26%
---------- ------------ ---------------
Loans 60 days and greater delinquent 98 $ 14,184 0.41%
========== ============ ===============
NOTE 4 - DERIVATIVE ASSETS AND LIABILITIES
The following table presents the Company's derivative assets and liabilities as
of September 30, 2006 and December 31, 2005:
September 30, December 31,
(In thousands) 2006 2005
------------- ------------
Derivative Assets
Interest rate lock commitments $ 16,471 $ 14,086
Interest rate swaps 9,749 30,508
Total return swaps 103 -
------------- ------------
Derivative assets $ 26,323 $ 44,594
============= ============
Derivative Liabilities
Forward delivery contracts - loan commitments $ 17,599 $ 8,659
Forward delivery contracts - loans held for sale 11,412 8,114
Interest rate swaps 9,906 -
Other 1,253 -
------------- ------------
Derivative liabilities $ 40,170 $ 16,773
============= ============
As of September 30, 2006, the notional amount of forward delivery contracts and
interest rate swap agreements was approximately $3.6 billion and $8.7 billion,
respectively.
As of December 31, 2005, the notional amount of forward delivery contracts and
interest rate swap agreements was approximately $2.2 billion and $8.7 billion,
respectively.
-15-
As of September 30, 2006, the notional amount of total return swaps was
approximately $126.5 million.
During the three months ended September 30, 2006, the Company recognized in
earnings $564 thousand in unrealized losses on free standing derivatives. During
the three months ended September 30, 2005, the Company recognized in earnings
$26.6 million in unrealized gains on free standing derivatives.
During the nine months ended September 30, 2006, the Company recognized in
earnings $14.6 million in unrealized gains on free standing derivatives. During
the nine months ended September 30, 2005, the Company recognized in earnings
$29.1 million in unrealized gains on free standing derivatives. These gains are
recorded in unrealized gain (loss) on mortgage-backed securities and derivatives
in the consolidated statements of income.
During the three months ended September 30, 2005, the Company realized $0.3
million in gains on sales of interest rate swap agreements associated with its
securitizations of mortgage loans.
During the nine months ended September 30, 2005, the Company realized $6.1
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 Company's 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
September 30, 2006 and December 31, 2005.
As of September 30, 2006, the unrealized loss on interest rate swap agreements,
interest rate caps and other derivative liabilities relating to cash flow hedges
recorded in accumulated other comprehensive loss was $23.4 million. The Company
estimates that $6.2 million of this unrealized loss will be reclassified from
accumulated other comprehensive loss to interest expense for the twelve months
ended September 30, 2007. As of December 31, 2005, the unrealized loss on
interest rate swap agreements relating to cash flow hedges recorded in
accumulated other comprehensive loss was $28.2 million.
NOTE 5 - MORTGAGE SERVICING RIGHTS
The Company elected to early adopt SFAS No. 156 as of January 1, 2006, and has
recorded its MSRs at fair value. The Company's adoption of SFAS No. 156 resulted
in a cumulative-effect adjustment as of January 1, 2006, which increased MSRs by
$1.2 million.
Prior to January 1, 2006, MSRs were carried at the lower of cost or fair value,
based on defined interest rate risk strata, and the gross MSR asset was
amortized in proportion to and over the period of estimated net servicing
income. Prior to the Company's adoption of SFAS No. 156, the Company evaluated
MSRs for impairment based on risk strata and a valuation allowance was
recognized for MSRs that had an amortized balance in excess of the estimated
fair value for the individual risk stratification.
-16-
The following table presents the activity in the Company's MSRs for the three
and nine months ended September 30, 2006 and 2005:
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
(In thousands) 2006 2005 2006 2005
--------- --------- --------- ---------
Balance at beginning of period $ 434,173 $ 290,756 $ 340,377 $ 163,374
Cumulative-effect adjustment as of beginning of year - - 1,156 -
Fair value measurement method adjustment - - (20,706) -
Additions 79,493 42,298 230,290 191,013
Amortization - (15,055) - (36,388)
Changes in fair value resulting from:
Realization of cash flows (28,839) - (73,880) -
Changes in valuation assumptions (23,914) - (16,324) -
--------- --------- --------- ---------
Balance at end of period $ 460,913 $ 317,999 $ 460,913 $ 317,999
--------- --------- --------- ---------
Impairment allowance:
Balance at beginning of period $ - $ (28,917) $ (20,706) $ (11,938)
Fair value measurement method adjustment - - 20,706 -
Impairment recovery (provision) - 11,577 - (5,402)
--------- --------- --------- ---------
Balance at end of period $ - $ (17,340) $ - $ (17,340)
--------- --------- --------- ---------
Mortgage servicing rights $ 460,913 $ 300,659 $ 460,913 $ 300,659
========= ========= ========= =========
The amount of contractually specified servicing fees earned by the Company
during the three months ended September 30, 2006 and 2005 were $27.3 million and
$18.4 million, respectively.
The amount of contractually specified servicing fees earned by the Company
during the nine months ended September 30, 2006 and 2005 were $67.4 million and
$43.9 million, respectively. The Company reports contractually specified
servicing fees in loan servicing fees in the consolidated statements of income.
The estimated fair value of MSRs is determined by obtaining a market valuation
from one of the market's primary independent MSR brokers. 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
key risks inherent in MSRs are changes in interest rates and prepayment speeds.
The Company uses free standing derivatives (economic hedges) to hedge the risk
of changes in fair value of MSRs, with the resulting gain or loss reflected in
income. During the three months ended September 30, 2006, the Company recognized
in earnings $7.1 million in unrealized gains on free standing derivatives used
to economically hedge the MSRs. These gains are recorded in change in fair value
of mortgage servicing rights due to changes in valuation assumptions, net of
hedge gain (loss), in the consolidated statements of income.
The significant assumptions used in estimating the fair value of MSRs at
September 30, 2006 and December 31, 2005 were as follows:
September 30, 2006 December 31, 2005
------------------ -----------------
Weighted-average prepayment speed (PSA) 501 315
Weighted-average discount rate 11.60% 11.94%
Weighted-average default rate 2.39% 2.78%
-17-
The following table presents certain information regarding the Company's
servicing portfolio of loans serviced for others at September 30, 2006 and
December 31, 2005:
September 30, 2006 December 31, 2005
------------------ -----------------
(Dollars in thousands)
Loan servicing portfolio - loans sold or securitized $ 35,932,126 $ 25,044,676
ARM loans as a percentage of total loans 75% 73%
Average loan size $ 230 $ 194
Weighted-average servicing fee 0.339% 0.330%
Weighted-average note rate 6.77% 5.79%
Weighted-average remaining term (in months) 362 337
Weighted-average age (in months) 15 15
NOTE 6 - GOODWILL
The following table presents the activity in the Company's goodwill for the nine
months ended September 30, 2006 and 2005:
Loan Origination Mortgage Holdings
(In thousands) Segment Segment Total
----------------------------------- ---------------- ----------------- --------
Balance at January 1, 2005 $ 66,037 $ 24,840 $ 90,877
Earnouts from previous acquisitions 8,391 - 8,391
---------------- ----------------- --------
Balance at September 30, 2005 $ 74,428 $ 24,840 $ 99,268
================ ================= ========
Balance at January 1, 2006 $ 74,687 $ 24,840 $ 99,527
Acquisitions 1,099 - 1,099
Earnouts from previous acquisitions 11,264 - 11,264
---------------- ----------------- --------
Balance at September 30, 2006 $ 87,050 $ 24,840 $111,890
================ ================= ========
As of December 31, 2005, 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 either a $3.3 billion
SLN commercial paper program, a $2.0 billion pre-purchase facility with UBS Real
Estate Securities Inc., a facility of $2.5 billion with Bear Stearns, a $1.3
billion bank syndicated facility led by Bank of America, N.A. (which includes a
$438 million term loan facility which the Company uses to finance its MSRs), a
facility of $750 million with Morgan Stanley Bank ("Morgan Stanley"), a facility
of $125 million with J.P. Morgan Chase, a $750 million facility with IXIS Real
Estate Capital, Inc. ("IXIS"), a $350 million facility with Credit Suisse First
Boston Mortgage Capital LLC, and a $1.4 billion syndicated facility led by
Calyon New York Branch ("Calyon"). The Bank of America, IXIS, Morgan Stanley and
Calyon facilities are committed facilities. The interest rate on outstanding
balances fluctuates daily based on a spread to the LIBOR and interest is paid
monthly.
The facilities are secured by mortgage loans and other assets of the Company.
The facilities contain various covenants pertaining to maintenance of net worth,
working capital and maximum leverage. At September 30, 2006, the Company was in
compliance with respect to the loan covenants.
-18-
Included within the Bank of America line of credit, the Company has a working
capital sub-limit that allows for borrowings up to $50 million at a rate based
on a spread to the LIBOR that may be adjusted for earnings on compensating
balances on deposit at creditors' banks. As of September 30, 2006, borrowings
under the working capital line of credit were $44.0 million.
As of September 30, 2006, the Company had $1.9 billion of warehouse lines of
credit outstanding with a weighted-average borrowing rate of 5.89%. As of
December 31, 2005, the Company had $3.5 billion of warehouse lines of credit
outstanding with a weighted-average borrowing rate of 4.78%.
Reverse Repurchase Agreements
-----------------------------
The Company has arrangements to enter into reverse repurchase agreements, a form
of collateralized short-term borrowing, with seventeen different financial
institutions and on September 30, 2006 had borrowed funds from ten of these
firms. Because the Company borrows money under these agreements based on the
fair value of its mortgage-backed securities, and because changes in interest
rates can negatively impact the valuation of mortgage-backed securities, the
Company's borrowing ability under these agreements could be limited and lenders
could initiate margin calls in the event interest rates change or the value of
the Company's mortgage-backed securities declines for other reasons.
As of September 30, 2006, the Company had $7.2 billion of reverse repurchase
agreements outstanding with a weighted-average borrowing rate of 5.39% and a
weighted-average remaining maturity of 1.1 years. As of December 31, 2005, the
Company had $9.8 billion of reverse repurchase agreements outstanding with a
weighted-average borrowing rate of 4.40% and a weighted-average remaining
maturity of four months.
As of September 30, 2006 and December 31, 2005, the Company's reverse repurchase
agreements had the following remaining maturities:
September 30, December 31,
2006 2005
------------- ------------
(In thousands)
Within 30 days $ 607,243 $ 689,469
31 to 89 days 293,504 4,817,885
90 to 365 days 304,103 4,298,790
Greater than 1 year 6,027,653 -
------------- ------------
Reverse repurchase agreements $ 7,232,503 $ 9,806,144
============= ============
The Company's average reverse repurchase agreements outstanding were $8.8
billion and $6.5 billion for the three months ended September 30, 2006 and 2005,
respectively.
The Company's average reverse repurchase agreements outstanding were $9.0
billion and $6.6 billion for the nine months ended September 30, 2006 and 2005,
respectively.
Commercial Paper
The Company maintains a wholly owned special purpose entity for the purpose of
issuing commercial paper in the form of short-term SLNs to finance certain
portions of the Company's mortgage loans. The special purpose entity allows for
issuance of short-term SLNs 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 $3.3 billion at September 30, 2006.
As of September 30, 2006, the Company had $1.3 billion of SLNs outstanding, with
an average interest cost of 5.39%. The SLNs were collateralized by mortgage
loans held for sale, mortgage loans held for investment and cash with a balance
of $1.4 billion as of September 30, 2006. As of December 31, 2005, the Company
had $1.1 billion of SLNs outstanding, with an average interest cost of 4.35%.
The SLNs were collateralized by mortgage loans held for sale, mortgage loans
held for investment and cash with a balance of $1.2 billion as of December 31,
2005.
-19-
As of September 30, 2006 and December 31, 2005, the Company's SLNs had the
following remaining maturities:
September 30, December 31,
2006 2005
------------- ------------
(In thousands)
Within 30 days $ 1,234,238 $ 1,079,179
31 to 89 days 49,620 -
------------- ------------
Commercial paper $ 1,283,858 $ 1,079,179
============= ============
NOTE 8 - COLLATERALIZED DEBT OBLIGATIONS
In June 2006, the Company transferred $964.9 million of its mortgage loans held
for investment to the 2006-2 Trust in a securitization transaction. In this
transaction, the Company issued $944.7 million of CDOs in the form of AAA and
AA-rated floating-rate pass-through certificates to third-party investors and
the Company retained $20.2 million of subordinated certificates, which provide
credit support to the certificates issued to third parties. The Company's CDOs
are collateralized by loans held for investment transferred to the 2006-2 Trust.
The interest rates on the floating-rate pass-through certificates reset monthly
and are indexed to one-month LIBOR. In the second quarter of 2006, the Company
incurred CDO issuance costs of $2.1 million, which were deducted from the
proceeds of the transactions and are being amortized over the expected life of
the CDOs. This securitization transaction was accounted for as a financing of
the mortgage loans held for investment.
In March 2006, the Company transferred $2.0 billion of its mortgage loans held
for investment to the 2006-1 Trust in a securitization transaction. In this
transaction, the Company issued $1.9 billion of CDOs in the form of AAA and
AA-rated floating-rate pass-through certificates to third-party investors and
the Company retained $61.3 million of subordinated certificates, which provide
credit support to the certificates issued to third parties. The Company's CDOs
are collateralized by loans held for investment transferred to the 2006-1 Trust.
The interest rates on the floating-rate pass-through certificates reset monthly
and are indexed to one-month LIBOR. In the first quarter of 2006, the Company
incurred CDO issuance costs of $4.0 million, which were deducted from the
proceeds of the transactions and are being amortized over the expected life of
the CDOs. This securitization transaction was accounted for as a financing of
the mortgage loans held for investment.
In the fourth quarter of 2005, the Company transferred $1.2 billion of its
mortgage loans held for investment to two American Home Mortgage Investment
Trusts (the "2005 Trusts") in two securitization transactions. In these
transactions, the Company issued $1.1 billion of CDOs in the form of AAA and
AA-rated floating-rate pass-through certificates to third-party investors and
the Company retained $134.6 million of subordinated certificates, which provide
credit support to the certificates issued to third parties. The Company's CDOs
are collateralized by loans held for investment transferred to the 2005 Trusts.
The interest rates on the floating-rate pass-through certificates reset monthly
and are indexed to one-month LIBOR. In the fourth quarter of 2005, the Company
incurred CDO issuance costs of $5.5 million, which were deducted from the
proceeds of the transactions and are being amortized over the expected life of
the CDOs. These securitization transactions were accounted for as financings of
the mortgage loans held for investment.
In December 2004, the Company transferred $3.5 billion of its mortgage loans
held for sale to American Home Mortgage Investment Trust 2004-4 (the "2004-4
Trust") in a securitization transaction. In the transaction, the Company issued
$2.0 billion of CDOs, which were collateralized by loans held for sale
transferred to the 2004-4 Trust. This securitization transaction was accounted
for as a financing of the mortgage loans held for sale. This securitization
transaction qualified for sale treatment under SFAS No. 140 in the first quarter
of 2005, and consequently the loans were derecognized.
As of September 30, 2006, the Company's CDOs had a balance of $3.5 billion and
an effective interest cost of 5.55%. As of September 30, 2006, the CDOs were
collateralized by mortgage loans held for investment of $3.5 billion.
As of December 31, 2005, the Company's CDOs had a balance of $1.1 billion and an
effective interest cost of 4.54%. As of December 31, 2005, the CDOs were
collateralized by mortgage loans held for investment of $1.1 billion.
-20-
As of September 30, 2006 and December 31, 2005, the Company's CDOs had the
following remaining contractual maturities:
September 30, December 31,
2006 2005
------------- ------------
(In thousands)
15 to 20 years $ 39,147 $ 68,214
20 to 25 years 175,125 177,016
25 to 30 years 763,833 34,316
Greater than 30 years 2,506,768 778,360
------------- ------------
Collateralized debt obligations $ 3,484,873 $ 1,057,906
============= ============
NOTE 9 - NOTES PAYABLE
Notes payable primarily consist of amounts borrowed under a term loan facility
with a bank syndicate led by Bank of America. Under the terms of this facility,
the Company may borrow the lesser of 70% of the value of its MSRs, or $437.5
million. As of September 30, 2006, borrowings under the term loan were $201.0
million. This term loan expires on August 9, 2007, but the Company has an option
to extend the term for twelve additional months at a higher interest rate.
Interest is based on a spread to the LIBOR and may be adjusted for earnings on
compensating balances. As of September 30, 2006, the interest rate was 6.05%.
In 2005, the Company sold $85.0 million in Mortgage Warehouse Subordinated Notes
("Subordinated Notes"). The Company received a premium, net of issuance costs,
of $1.5 million related to the Subordinated Notes offering, which is being
amortized to interest expense over the expected life of the Subordinated Notes.
As of September 30, 2006, the balance of Subordinated Notes outstanding, net of
unamortized premium and issuance costs, was $86.0 million. The Subordinated
Notes mature on May 20, 2009. The interest rates on the Subordinated Notes reset
monthly and are indexed to one-month LIBOR. As of September 30, 2006, the
interest rate was 7.33%.
As of September 30, 2006, included in notes payable is a mortgage note of $25.6
million on an office building located in Melville, New York at a rate of 5.82%,
and a mortgage note of $1.0 million on an office building located in Mount
Prospect, Illinois at a rate of 7.18%.
As of September 30, 2006, the Company had $3.6 million of Federal Home Loan Bank
("FHLB") advances with an interest rate of 5.34% and with remaining maturities
within 30 days. Advances from the FHLB are collateralized by pledges of
one-to-four family first mortgage loans with an aggregate principal balance of
$7.3 million.
The following table presents the Company's notes payable as of September 30,
2006 and December 31, 2005:
September 30, December 31,
(In thousands) 2006 2005
------------- ------------
Term loan $ 201,000 $ 206,188
Subordinated note 86,006 86,322
Notes - office buildings 26,555 26,799
FHLB advances 3,600 -
------------- ------------
Notes payable $ 317,161 $ 319,309
============= ============
-21-
The following table presents the maturities of the Company's notes payable as of
September 30, 2006 and December 31, 2005:
September 30, December 31,
2006 2005
------------- ------------
(In thousands)
Within 1 year $ 205,463 $ 207,009
1 to 2 years 1,413 843
2 to 3 years 64,579 1,540
3 to 4 years 21,729 85,606
4 to 5 years 468 447
Greater than 5 years 23,509 23,864
------------- ------------
Notes payable $ 317,161 $ 319,309
============= ============
NOTE 10 - COMMON STOCK AND PREFERRED STOCK
In August 2005, the Company issued 9,000,000 shares of its common stock, par
value $0.01 per share ("Common Stock") at a price of $35.50 per share. The total
proceeds to the Company were $319.5 million, before underwriting discounts,
commissions and other offering expenses.
Under the Company's charter, the Company's 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 September
30, 2006, there were 50,182,257 shares of Common Stock issued and outstanding,
2,150,000 shares of 9.75% Series A Cumulative Redeemable Preferred Stock
("Series A Preferred Stock") issued and outstanding and 3,450,000 shares of
9.25% Series B Cumulative Redeemable Preferred Stock ("Series B Preferred
Stock") issued and outstanding. On or after July 7, 2009, the Company may, at
its option, redeem the Series A Preferred Stock, in whole or part, at any time
and from time to time, for cash at a price of $25 per share, plus accumulated or
unpaid dividends (whether or not declared), if any, to the date of redemption.
On or after December 15, 2009, the Company may, at its option, redeem the Series
B Preferred Stock, in whole or part, at any time and from time to time, for cash
at a price of $25 per share, plus accumulated or unpaid dividends (whether or
not declared), if any, to the date of redemption.
During the three months ended September 30, 2006, the Company declared dividends
totaling $50.7 million, or $1.01 per share of Common Stock, which were paid on
October 30, 2006. During the three months ended September 30, 2005, the Company
declared dividends totaling $38.8 million, or $0.86 per share of Common Stock,
which were paid on October 27, 2005.
During the nine months ended September 30, 2006, the Company declared dividends
totaling $144.3 million, or $2.88 per share of Common Stock. During the nine
months ended September 30, 2005, the Company declared dividends totaling $98.2
million, or $2.33 per share of Common Stock.
During the three months ended September 30, 2006, the Company declared dividends
totaling $1.3 million, or $0.609375 per share of Series A Preferred Stock, which
were paid on October 31, 2006. During the three months ended September 30, 2005,
the Company declared dividends totaling $1.3 million, or $0.609375 per share of
Series A Preferred Stock, which were paid on October 31, 2005.
During the nine months ended September 30, 2006, the Company declared dividends
totaling $3.9 million, or $1.828125 per share of Series A Preferred Stock.
During the nine months ended September 30, 2005, the Company declared dividends
totaling $3.9 million, or $1.828125 per share of Series A Preferred Stock.
During the three months ended September 30, 2006, the Company declared dividends
totaling $2.0 million, or $0.578125 per share of Series B Preferred Stock, which
were paid on October 31, 2006. During the three months ended September 30, 2005,
the Company declared dividends totaling $2.0 million, or $0.578125 per share of
Series B Preferred Stock, which were paid on October 31, 2005.
During the nine months ended September 30, 2006, the Company declared dividends
totaling $6.0 million, or $1.734375 per share of Series B Preferred Stock.
During the nine months ended September 30, 2005, the Company declared dividends
totaling $6.0 million, or $1.734375 per share of Series B Preferred Stock.
-22-
NOTE 11 - INCOME TAXES
A reconciliation of the statutory income tax provision to the effective income
tax expense (benefit) is as follows:
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------- ----------------------------------------
2006 2005 2006 2005
------------------ ------------------ ------------------ -------------------
(Dollars in thousands)
Tax provision at statutory rate $ 30,670 35.0% $ 19,516 35.0% $ 92,351 35.0% $ 84,975 35.0%
Non-taxable REIT income (14,033) (16.0) (17,487) (31.4) (34,152) (12.9) (87,339) (36.0)
State and local taxes, net of
federal income tax benefit (1,385) (1.6) 253 0.5 5,693 2.2 (47) -
Meals and entertainment 320 0.4 218 0.4 1,187 0.4 728 0.3
Other 39 - 49 0.1 (44) - 381 0.1
-------- ------- -------- ------- -------- ------- -------- -------
Income tax expense (benefit) $ 15,611 17.8% $ 2,549 4.6% $ 65,035 24.7% $ (1,302) (0.6)%
======== ======= ======== ======= ======== ======= ======== =======
The major sources of temporary differences and their deferred tax effect at
September 30, 2006 and December 31, 2005 are as follows:
September 30, December 31,
2006 2005
------------- ------------
(In thousands)
Deferred income tax liabilities:
Capitalized cost of mortgage servicing rights $ 165,154 $ 150,926
Loan origination costs 28,356 8,973
Depreciation 1,667 3,083
Deferred state income taxes - 1,465
Mark-to-market adjustments 10,522 -
Other - 11
------------- ------------
Deferred income tax liabilities 205,699 164,458
------------- ------------
Deferred income tax assets:
Tax loss carryforwards 95,195 109,145
Allowance for bad debts and foreclosure
reserve 8,831 2,817
Deferred state income taxes 414 -
Mark-to-market adjustments - 10,721
AMT credit 1,745 1,745
Broker fees - 958
Bonus accrual 1,209 8,399
Deferred compensation 5,754 3,436
Other 390 -
------------- ------------
Deferred income tax assets 113,538 137,221
------------- ------------
Net deferred income tax liabilities $ 92,161 $ 27,237
============= ============
American Home Mortgage Servicing, Inc. has approximately $40 million of separate
company federal net operating loss carryforwards which begin to expire in 2008.
In addition, American Home Mortgage Holdings, Inc. has approximately $274
million of federal and approximately $203 million of state net operating loss
carryforwards which begin to expire in 2024 and 2009, respectively. The weighted
average of the expiration of the state net operating loss carryforwards is
approximately sixteen years.
-23-
At September 30, 2006 and December 31, 2005, 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 assessments. 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 12 - EARNINGS PER SHARE
The following is a reconciliation of the denominators used in the computations
of basic and diluted earnings per share for the three and nine months ended
September 30, 2006 and 2005:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
(Dollars in thousands, except per share amounts) 2006 2005 2006 2005
----------- ----------- ----------- -----------
Numerator for basic earnings per share - Net income
available to common shareholders $ 68,715 $ 49,904 $ 188,916 $ 234,175
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per share
Weighted average number of common shares
outstanding during the period 50,148,422 45,173,834 49,975,027 41,972,908
Net effect of dilutive stock options 404,333 494,784 387,852 498,269
----------- ----------- ----------- -----------
Denominator for diluted earnings per share 50,552,755 45,668,618 50,362,879 42,471,177
=========== =========== =========== ===========
Net income per share available to common shareholders:
Basic $ 1.37 $ 1.10 $ 3.78 $ 5.58
=========== =========== =========== ===========
Diluted $ 1.36 $ 1.09 $ 3.75 $ 5.51
=========== =========== =========== ===========
NOTE 13 - STOCK INCENTIVE 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 4,000,000 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.
Effective January 1, 2006, the Company adopted SFAS No. 123R, which requires
that the compensation cost relating to share-based payment transactions
(including employee stock options, restricted share plans, performance-based
awards, share appreciation rights, and employee share purchase plans) be
recognized as an expense in the Company's consolidated financial statements.
Under SFAS No. 123R, the related compensation cost is measured based on the fair
value of the award at the date of grant. The Company adopted the fair value
recognition provisions of SFAS No. 123R, using the modified prospective method.
Under this method, compensation cost in the nine months ended September 30, 2006
includes the portion vesting in the period for (1) all share-based payments
granted prior to, but not vested as of, December 31, 2005, based on the grant
date fair value estimated in accordance with the original provisions of SFAS No.
123 and (2) all share-based payments granted subsequent to December 31, 2005,
based on the grant date fair value estimated using a binomial lattice-based
option valuation model.
-24-
During the nine months ended September 30, 2006, the Company recognized
compensation expense of $820 thousand relating to stock options granted under
the Plan. The expense, before income tax effect, is included in salaries,
commissions and benefits expense. The income tax benefit recognized in income
for the nine months ended September 30, 2006 for stock options was $165
thousand. No compensation cost was recognized for the nine months ended
September 30, 2005.
During the nine months ended September 30, 2006, the fair value of the options
granted was estimated using the binomial lattice option-pricing model. Under the
binomial lattice option-pricing model, the fair value of each option award is
estimated, with the assistance of an outside consulting service, on the date of
grant, which incorporates ranges of assumptions for inputs as shown in the
following table. The assumptions are as follows:
Dividend yield range: The expected dividend yield assumption is based on the
Company's current dividend yield as the best estimate of projected dividend
yield for periods within the contractual life of the option.
Expected volatility: The expected volatility assumption is a blend of implied
volatility based on market-traded options on the Company's Common Stock and
historical volatility of the Company's Common Stock over the contractual life of
the options.
Risk-free interest rate range: The risk-free interest rate assumption is based
on the U.S. Treasury yield curve in effect at the time of grant for periods
within the contractual life of the option.
Expected term range: The Company uses historical data to estimate option
exercise and employee termination behavior within the valuation model; separate
groups of employees that have similar historical exercise behavior are
considered separately for valuation purposes. The expected life of options
granted is derived from the output of the option valuation model and represents
the period of time the options are expected to be outstanding.
The weighted-average fair value per share of options granted during the nine
months ended September 30, 2006 was $4.65. The fair value of the options granted
during the nine months ended September 30, 2006 was estimated using the binomial
lattice option-pricing model with the following assumptions used for the grants:
Nine Months Ended September 30,
2006
--------------------------------
Dividend yield range 11.9% - 13.1%
Expected volatility 39.1 %
Risk-free interest rate range 4.3% - 5.0%
Expected term range (in years) 7.0 - 7.9
Prior to adoption of SFAS No. 123R as of January 1, 2006, the Company's pro
forma disclosures reflected the fair value of each option grant estimated on the
date of grant using the Black-Scholes option-pricing model. Under the
Black-Scholes option-pricing model, the Company estimated volatility using only
its historical share price performance over the expected life of the option.
The weighted-average fair value per share of options granted during the nine
months ended September 30, 2005 was $3.82 . The fair value of the options
granted during the nine months ended September 30, 2005 was estimated using the
Black-Scholes option-pricing model with the following assumptions used for the
grants:
Nine Months Ended September 30,
2005
--------------------------------
Dividend yield 9.1 %
Expected volatility 29.1 %
Risk-free interest rate 5.0 %
Expected term (in years) 3.0
-25-
The following table presents a summary of the Company's stock option activity
for the three and nine months ended September 30, 2006 and 2005:
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------------- -----------------------------------------------
2006 2005 2006 2005
--------------------------------------------- -----------------------------------------------
Weighted Weighted Weighted Weighted
Number Average Number Average Number Average Number Average
of Exercise of Exercise of Exercise of Exercise
Options Price Options Price Options Price Options Price
--------------------------------------------- -----------------------------------------------
Options outstanding - beginning
of period 1,747,433 $ 25.56 1,535,321 $ 22.28 1,501,384 $ 23.09 1,248,102 $ 18.65
Granted - - 25,000 34.18 452,159 28.45 392,419 32.67
Exercised (57,903) 18.46 (46,448) 10.56 (205,513) 13.85 (117,835) 11.79
Canceled (5,000) 28.45 - - (63,500) 18.47 (8,813) 15.67
--------- --------- --------- ---------
Options outstanding -
end of period 1,684,530 $ 25.80 1,513,873 $ 22.83 1,684,530 $ 25.80 1,513,873 $ 22.83
========= ========= ========= =========
Options exercisable -
end of period 489,352 $ 16.98 489,352 $ 16.98
========= =========
The intrinsic value of an option is defined as the difference between an
option's current market value and the grant price. The intrinsic value of
options exercised during the three and nine months ended September 30, 2006 was
$0.9 million and $3.9 million, respectively.
As of September 30, 2006, the intrinsic value and weighted-average remaining
life of the Company's options outstanding were $15.3 million and 8.1 years,
respectively.
As of September 30, 2006, the intrinsic value of the Company's exercisable
options outstanding was $8.8 million.
As of September 30, 2006, the total remaining unrecognized compensation expense
related to the Company's unvested stock options was $2.7 million. This
unrecognized compensation expense is expected to be recognized over a
weighted-average period of 2.1 years.
As of September 30, 2006, the Company has awarded 230,496 shares of restricted
stock under the Plan. During the three months ended September 30, 2006 and 2005,
the Company recognized compensation expense of $176 thousand and $212 thousand,
respectively, relating to shares of restricted stock granted under the Plan.
During the nine months ended September 30, 2006 and 2005, the Company recognized
compensation expense of $346 thousand and $527 thousand, respectively, relating
to shares of restricted stock granted under the Plan. As of September 30, 2006,
198,453 shares are vested. In general, unvested restricted stock is forfeited
upon the recipient's termination of employment.
NOTE 14 - CONCENTRATIONS OF CREDIT RISK
Loan concentrations are considered to exist when there are amounts loaned to a
multiple number of borrowers with similar characteristics, which would cause
their ability to meet contractual obligations to be similarly impacted by
economic or other conditions. The Company invests in negative amortization ARM,
interest-only ARM, HELOC and certain other types of loans described in FSP SOP
94-6-1, "Terms of Loan Products that May Give Rise to a Concentration of Credit
Risk." The Company, however, generally has purchased supplemental credit
insurance for the loans of these types retained in the Company's portfolio if
such loans have an initial loan-to-value ratio between 75% and 80%. In addition,
the Company generally is the beneficiary of a borrower-paid insurance policy on
these types of loans if the initial loan-to-value ratio is greater than 80%. A
substantial portion of the Company's mortgage loans held for investment at
September 30, 2006 are the types of loans described in FSP SOP 94-6-1.
The Company had originations of loans during the nine months ended September 30,
2006 exceeding 5% of total originations in the following states:
Nine Months Ended
September 30, 2006
------------------------------
California 24.8 %
Florida 12.1
Illinois 6.7
Virginia 5.0
-26-
During the nine months ended September 30, 2006, the three institutions that
bought the most loans from the Company accounted for 44% of the Company's total
loan sales.
NOTE 15 - ACQUISITIONS
Waterfield Financial Corporation
On January 12, 2006, American Home Mortgage Corp. ("AHM"), an indirect,
wholly-owned subsidiary of the Company, entered into a Stock and Mortgage Loan
Purchase Agreement with Union Federal Bank of Indianapolis ("Union Federal") and
Waterfield Financial Corporation ("WFC"), pursuant to which AHM agreed to
purchase from Union Federal 100% of the outstanding capital stock of WFC and
certain mortgage loans held by Union Federal, comprised of warehouse loans held
for sale by Union Federal as of December 31, 2005 (the "Warehouse Loans"),
construction loans held by Union Federal as of the closing (the "Construction
Loans") and certain other loans held by Union Federal as of the closing, for a
cash purchase price equal to the net book value of such assets, as modified by
certain agreed upon adjustments, as of the respective closing dates (or, in the
case of the Warehouse Loans, as of January 12, 2006).
The following table summarizes the fair value of the assets acquired and
liabilities assumed as of the date of the acquisition:
(In thousands)
Mortgage loans held for sale, net $559,340
Accounts receivable 2,002
Other assets 2,442
--------
Total assets acquired 563,784
--------
Other liabilities 13,707
--------
Total liabilities assumed 13,707
--------
Net assets acquired 550,077
Cash paid 550,077
--------
Goodwill $ -
========
NOTE 16 - SEGMENTS AND RELATED INFORMATION
The Company has three segments, the Mortgage Holdings segment, the Loan
Origination segment and the Loan Servicing segment. The Mortgage Holdings
segment uses the Company's equity capital and borrowed funds to invest in
mortgage-backed securities and mortgage loans held for investment, thereby
producing net interest income. The Loan Origination segment originates mortgage
loans through the Company's retail and wholesale loan production offices and its
correspondent channel, as well as its direct-to-consumer channel supported by
its call center. The Loan Servicing segment includes investments in MSRs as well
as servicing operations primarily for other financial institutions. The
Company's segments are presented on a consolidated basis and do not include the
effects of separately recording intercompany transactions.
The Mortgage 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.
-27-
Three Months Ended September 30, 2006
----------------------------------------------------------------------
(In thousands)
Mortgage Loan Origination Loan Servicing
Holdings Segment Segment Segment Total
---------------- ---------------- -------------- ------------
Net interest income:
Interest income $ 195,654 $ 137,221 $ - $ 332,875
Interest expense (167,222) (118,706) (3,950) (289,878)
-----------------------------------------------------------------------
Net interest income 28,432 18,515 (3,950) 42,997
-----------------------------------------------------------------------
Provision for loan losses (1,343) (4,022) - (5,365)
-----------------------------------------------------------------------
Net interest income after provision
for loan losses 27,089 14,493 (3,950) 37,632
-----------------------------------------------------------------------
Non-interest income:
Gain on sales of mortgage loans - 210,621 - 210,621
Gain on sales of mortgage-backed
securities and derivatives 9,849 - - 9,849
Unrealized gain on mortgage-backed
securities and derivatives 1,050 - - 1,050
Loan servicing fees - - 43,379 43,379
Change in fair value of mortgage
servicing rights
Due to realization of cash flows - - (28,839) (28,839)
Due to changes in valuation
assumptions, net of hedge gain (loss) - - (16,799) (16,799)
-----------------------------------------------------------------------
Net loan servicing loss - - (2,259) (2,259)
-----------------------------------------------------------------------
Other non-interest income - 1,352 666 2,018
-----------------------------------------------------------------------
Total non-interest income 10,899 211,973 (1,593) 221,279
-----------------------------------------------------------------------
Non-interest expenses:
Salaries, commissions and benefits,
net 2,734 99,292 3,650 105,676
Occupancy and equipment 2 18,928 298 19,228
Data processing and communications 76 5,619 5 5,700
Office supplies and expenses 65 4,871 410 5,346
Marketing and promotion 4 4,862 2 4,868
Travel and entertainment 37 7,677 84 7,798
Professional fees 30 5,971 75 6,076
Other 5,184 5,415 5,989 16,588
-----------------------------------------------------------------------
Total non-interest expenses 8,132 152,635 10,513 171,280
-----------------------------------------------------------------------
Net income before income tax expense
(benefit) 29,856 73,831 (16,056) 87,631
-----------------------------------------------------------------------
Income tax expense (benefit) - 20,689 (5,078) 15,611
-----------------------------------------------------------------------
Net income $ 29,856 $ 53,142 $ (10,978) $ 72,020
=======================================================================
Dividends on preferred stock 3,305 - - 3,305
-----------------------------------------------------------------------
Net income available to common shareholders $ 26,551 $ 53,142 $ (10,978) $ 68,715
=======================================================================
September 30, 2006
-----------------------------------------------------------------------
Segment assets $ 12,796,523 $ 4,057,868 $ 649,936 $ 17,504,327
=======================================================================
-28-
Three Months Ended September 30, 2005
-----------------------------------------------------------------------
(In thousands)
Mortgage Holdings Loan Origination Loan Servicing
Segment Segment Segment Total
-----------------------------------------------------------------------
Net interest income:
Interest income $ 84,560 $ 95,478 $ - $ 180,038
Interest expense (62,945) (68,937) (1,287) (133,169)
-----------------------------------------------------------------------
Total net interest income 21,615 26,541 (1,287) 46,869
-----------------------------------------------------------------------
Non-interest income:
Gain on sales of mortgage loans - 123,658 - 123,658
Gain on sales of current period
securitized mortgage loans - 19,960 - 19,960
Gain on sales of mortgage-backed securities
and derivatives 5,816 300 - 6,116
Unrealized (loss) gain on mortgage-backed
securities and derivatives (43,581) 32,616 - (10,965)
Loan servicing fees - - 21,099 21,099
Amortization and impairment of mortgage
servicing rights - - (3,478) (3,478)
-----------------------------------------------------------------------
Net loan servicing fees - - 17,621 17,621
-----------------------------------------------------------------------
Other non-interest income - 1,114 471 1,585
-----------------------------------------------------------------------
Total non-interest income (37,765) 177,648 18,092 157,975
-----------------------------------------------------------------------
Non-interest expenses:
Salaries, commissions and benefits, net 1,488 96,738 3,152 101,378
Occupancy and equipment 2 14,985 341 15,328
Data processing and communications 22 6,373 84 6,479
Office supplies and expenses 4 4,616 404 5,024
Marketing and promotion - 5,088 16 5,104
Travel and entertainment - 4,588 82 4,670
Professional fees 807 2,753 184 3,744
Other 1,726 3,123 2,511 7,360
-----------------------------------------------------------------------
Total non-interest expenses 4,049 138,264 6,774 149,087
-----------------------------------------------------------------------
Net income before income tax (benefit) expense (20,199) 65,925 10,031 55,757
-----------------------------------------------------------------------
Income tax (benefit) expense - (1,221) 3,770 2,549
-----------------------------------------------------------------------
Net income $ (20,199) $ 67,146 $ 6,261 $ 53,208
=======================================================================
Dividends on preferred stock 3,304 - - 3,304
-----------------------------------------------------------------------
Net income available to common shareholders $ (23,503) $ 67,146 $ 6,261 $ 49,904
=======================================================================
September 30, 2005
-----------------------------------------------------------------------
Segment assets $ 9,432,484 $ 4,197,165 $ 448,388 $ 14,078,037
=======================================================================
-29-
Nine Months Ended September 30, 2006
-----------------------------------------------------------------------
(In thousands)
-----------------------------------------------------------------------
Mortgage Holdings Loan Origination Loan Servicing
Segment Segment Segment Total
-----------------------------------------------------------------------
Net interest income:
Interest income $ 531,866 $ 431,818 $ - $ 963,684
Interest expense (448,974) (364,022) (10,909) (823,905)
-----------------------------------------------------------------------
Net interest income 82,892 67,796 (10,909) 139,779
-----------------------------------------------------------------------
Provision for loan losses (6,239) (4,416) - (10,655)
-----------------------------------------------------------------------
Net interest income after provision
for loan losses 76,653 63,380 (10,909) 129,124
-----------------------------------------------------------------------
Non-interest income:
Gain on sales of mortgage loans - 607,122 - 607,122
Gain on sales of mortgage-backed securities
and derivatives 8,952 - - 8,952
Unrealized gain on mortgage-backed
securities and derivatives 2,360 275 - 2,635
Loan servicing fees - - 98,129 98,129
Change in fair value of mortgage servicing
rights
Due to realization of cash flows - - (73,880) (73,880)
Due to changes in valuation assumptions,
net of hedge gain (loss) - - (9,209) (9,209)
-----------------------------------------------------------------------
Net loan servicing fees - - 15,040 15,040
-----------------------------------------------------------------------
Other non-interest income - 3,802 2,110 5,912
-----------------------------------------------------------------------
Total non-interest income 11,312 611,199 17,150 639,661
-----------------------------------------------------------------------
Non-interest expenses:
Salaries, commissions and benefits, net 10,344 286,312 11,444 308,100
Occupancy and equipment 5 56,050 906 56,961
Data processing and communications 136 19,257 166 19,559
Office supplies and expenses 78 14,176 569 14,823
Marketing and promotion 11 16,794 246 17,051
Travel and entertainment 39 22,140 165 22,344
Professional fees 2,408 13,925 87 16,420
Other 7,507 24,750 17,405 49,662
-----------------------------------------------------------------------
Total non-interest expenses 20,528 453,404 30,988 504,920
-----------------------------------------------------------------------
Net income before income tax expense (benefit) 67,437 221,175 (24,747) 263,865
-----------------------------------------------------------------------
Income tax expense (benefit) - 73,628 (8,593) 65,035
-----------------------------------------------------------------------
Net income $ 67,437 $ 147,547 $ (16,154) $ 198,830
=======================================================================
Dividends on preferred stock 9,914 - - 9,914
-----------------------------------------------------------------------
Net income available to common shareholders $ 57,523 $ 147,547 $ (16,154) $ 188,916
=======================================================================
September 30, 2006
-----------------------------------------------------------------------
Segment assets $ 12,796,523 $ 4,057,868 $ 649,936 $ 17,504,327
=======================================================================
-30-
Nine Months Ended September 30, 2005
-----------------------------------------------------------------------
(In thousands)
Mortgage Holdings Loan Origination Loan Servicing
Segment Segment Segment Total
-----------------------------------------------------------------------
Net interest income:
Interest income $ 219,906 $ 242,344 $ - $ 462,250
Interest expense (154,168) (152,799) (4,629) (311,596)
-----------------------------------------------------------------------
Total net interest income 65,738 89,545 (4,629) 150,654
-----------------------------------------------------------------------
Non-interest income:
Gain on sales of mortgage loans - 236,288 - 236,288
Gain on sales of current period securitized
mortgage loans - 194,256 - 194,256
Gain on sales of mortgage-backed securities
and derivatives 6,725 6,143 - 12,868
Unrealized (loss) gain on mortgage-backed
securities and derivatives (41,496) 77,738 - 36,242
Loan servicing fees - - 49,381 49,381
Amortization and impairment of mortgage
servicing rights - - (41,790) (41,790)
-----------------------------------------------------------------------
Net loan servicing fees - - 7,591 7,591
-----------------------------------------------------------------------
Other non-interest income - 3,722 1,872 5,594
-----------------------------------------------------------------------
Total non-interest income (34,771) 518,147 9,463 492,839
-----------------------------------------------------------------------
Non-interest expenses:
Salaries, commissions and benefits, net 6,057 250,179 8,476 264,712
Occupancy and equipment 5 41,645 746 42,396
Data processing and communications 64 17,953 369 18,386
Office supplies and expenses 5 13,955 1,150 15,110
Marketing and promotion 2 14,281 77 14,360
Travel and entertainment 5 13,589 431 14,025
Professional fees 2,829 7,060 757 10,646
Other 6,331 9,439 5,302 21,072
-----------------------------------------------------------------------
Total non-interest expenses 15,298 368,101 17,308 400,707
-----------------------------------------------------------------------
Net income before income tax expense (benefit) 15,669 239,591 (12,474) 242,786
-----------------------------------------------------------------------
Income tax expense (benefit) - 3,777 (5,079) (1,302)
-----------------------------------------------------------------------
Net income $ 15,669 $ 235,814 $ (7,395) $ 244,088
=======================================================================
Dividends on preferred stock 9,913 - - 9,913
-----------------------------------------------------------------------
Net income available to common shareholders $ 5,756 $ 235,814 $ (7,395) $ 234,175
=======================================================================
September 30, 2005
-----------------------------------------------------------------------
Segment assets $ 9,432,484 $ 4,197,165 $ 448,388 $ 14,078,037
=======================================================================
NOTE 17 - SUBSEQUENT EVENT
On October 19, 2006, the Company, through its wholly-owned subsidiary, American
Home Mortgage Holdings, Inc., completed its acquisition of Flower Bank, fsb,
("Flower"), of Chicago, Illinois. In connection with its acquisition, the
Company recapitalized Flower through a $50 million investment in its new
subsidiary. Flower is expected to hold mortgages, consumer loans and securities
as its primary assets, and fund its holdings through deposits including the
escrow balances. The Company recorded approximately $17 million of goodwill as a
result of the Flower acquisition.
-31-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
This report 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 that are not historical in nature, including, but not limited to, 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. In addition, statements that
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 and are not guarantees of future performance,
events or results. 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 the expectations of future results, performance or
financial position. These factors include, without limitation, those factors set
forth in Item 1A of our Annual Report on Form 10-K for the year ended December
31, 2005, entitled "Risk Factors," as well as general economic, political,
market, financial or legal conditions and any other factors, risks and
uncertainties discussed in filings we make with the Securities and Exchange
Commission ("SEC").
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 you must recognize that
actual results may differ from expectations. We are not 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 in 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 Loans Held for Investment - Mortgage loans held for investment are
carried at the aggregate of their remaining unpaid principal balances, plus net
deferred origination costs, less any related charge-offs and allowance for loan
losses. Our periodic evaluation of the adequacy of the allowance for loan losses
is based on our past loan loss experience, known and inherent risks in the loan
portfolio, adverse
-32-
circumstances which may affect the borrowers' ability to repay, the estimated
value of the underlying real estate collateral and current market conditions
within the geographic areas surrounding the underlying real estate. The
allowance for loan losses is increased by provision to loan losses charged to
income and reduced by charge-offs, net of recoveries.
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 fair value attributable to the servicing assets
is capitalized as MSRs on the consolidated balance sheets. We estimate the fair
value of the servicing assets by obtaining market information from one of the
market's primary independent MSR brokers.
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 and have locked their terms and rates. IRLCs associated
with loans expected to be sold are recorded at fair value with changes in fair
value recorded to current earnings.
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 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 mortgage-backed securities and certain ARM loans. 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 by third-party pricing services.
We use agency trust principal only total return swaps to economically hedge the
MSRs. Total return swaps are 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.
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 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.
-33-
Financial Condition
The following table presents the Company's consolidated balance sheets as of
September 30, 2006 and December 31, 2005:
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2006 2005
------------- ------------
Assets:
Cash and cash equivalents $ 298,079 $ 575,650
Accounts receivable and servicing advances 350,965 329,132
Mortgage-backed securities 8,957,373 10,602,104
Mortgage loans held for sale, net 1,365,595 2,208,749
Mortgage loans held for investment, net 5,797,801 3,479,721
Derivative assets 26,323 44,594
Mortgage servicing rights 460,913 319,671
Premises and equipment, net 82,288 68,782
Goodwill 111,890 99,527
Other assets 53,100 26,815
------------- ------------
Total assets $ 17,504,327 $ 17,754,745
============= ============
Liabilities and Stockholders' Equity:
Liabilities:
Warehouse lines of credit $ 1,890,034 $ 3,474,191
Drafts payable 8,749 20,754
Commercial paper 1,283,858 1,079,179
Reverse repurchase agreements 7,232,503 9,806,144
Collateralized debt obligations 3,484,873 1,057,906
Payable for securities purchased 1,221,105 261,539
Derivative liabilities 40,170 16,773
Trust preferred securities 282,340 203,688
Accrued expenses and other liabilities 383,585 277,476
Notes payable 317,161 319,309
Income taxes payable 95,808 30,770
------------- ------------
Total liabilities 16,240,186 16,547,729
------------- ------------
Stockholders' Equity:
Preferred Stock 134,040 134,040
Common Stock 502 496
Additional paid-in capital 962,903 947,512
Retained earnings 245,473 203,778
Accumulated other comprehensive loss (78,777) (78,810)
------------- ------------
Total stockholders' equity 1,264,141 1,207,016
------------- ------------
Total liabilities and stockholders' equity $ 17,504,327 $ 17,754,745
============= ============
-34-
Total assets at September 30, 2006 were $17.5 billion, a $250.4 million decrease
from $17.8 billion at December 31, 2005. . The decrease in total assets
primarily reflects a decrease in mortgage-backed securities of $1.6 billion and
a decrease in mortgage loans held for sale of $843.2 million, partially offset
by an increase in mortgage loans held for investment of $2.3 billion. . At
September 30, 2006, 51.2% of our total assets were mortgage-backed securities,
33.1% were mortgage loans held for investment and 7.8% were mortgage loans held
for sale, compared to 59.7%, 19.6% and 12.4%, respectively, at December 31,
2005.
The following tables summarize our mortgage-backed securities owned at September
30, 2006 and December 31, 2005, classified by type of issuer and by ratings
categories:
September 30, 2006
---------------------------------------------------------------------------
Securities
Trading Securities Available for Sale Total
---------------------- ---------------------- -----------------------
Carrying Portfolio Carrying Portfolio Carrying Portfolio
Value Mix Value Mix Value Mix
---------- --------- ---------- --------- ----------- ---------
(Dollars in thousands)
Agency securities $ -- --% $ 106,485 1.3% $ 106,485 1.2%
Privately issued:
AAA 296,154 34.5 7,971,179 98.4 8,267,333 92.3
AA 47,534 5.5 7,961 0.1 55,495 0.6
A 166,568 19.4 4,765 0.1 171,333 1.9
BB 4,650 0.5 -- -- 4,650 0.1
BBB 132,282 15.4 1,939 0.0 134,221 1.5
Unrated 212,164 24.7 5,692 0.1 217,856 2.4
---------- --------- ---------- --------- ----------- ---------
Total $ 859,352 100.0% $8,098,021 100.0% $ 8,957,373 100.0%
========== ========= ========== ========= =========== =========
December 31, 2005
---------------------------------------------------------------------------
Securities
Trading Securities Available for Sale Total
---------------------- ---------------------- -----------------------
Carrying Portfolio Carrying Portfolio Carrying Portfolio
Value Mix Value Mix Value Mix
---------- --------- ---------- --------- ----------- ---------
(Dollars in thousands)
Agency securities $ -- --% $ 130,320 1.8% $ 130,320 1.2%
Privately issued:
AAA 2,619,546 81.1 7,216,527 97.9 9,836,073 92.8
AA 47,253 1.5 9,989 0.1 57,242 0.5
A 166,507 5.2 7,558 0.1 174,065 1.6
BBB 164,344 5.1 3,441 0.0 167,785 1.7
Unrated 229,418 7.1 7,201 0.1 236,619 2.2
---------- --------- ---------- --------- ----------- ---------
Total $3,227,068 100.0% $7,375,036 100.0% $10,602,104 100.0%
========== ========= ========== ========= =========== =========
-35-
The following tables classify our mortgage-backed securities portfolio by the
type of interest rate index at September 30, 2006 and December 31, 2005:
September 30, 2006
---------------------------------------------------------------------------
Securities
Trading Securities Available for Sale Total
---------------------- ---------------------- -----------------------
Carrying Portfolio Carrying Portfolio Carrying Portfolio
Value Mix Value Mix Value Mix
---------- --------- ---------- --------- ----------- ---------
(Dollars in thousands)
Index:
One-month LIBOR $ 372,908 43.4% $ 58,754 0.7% $ 431,662 4.8%
Six-month LIBOR 224,809 26.2 4,409,048 54.4 4,633,857 51.8
One-year LIBOR 209,044 24.2 3,205,397 39.7 3,414,441 38.1
One-year constant maturity treasury 431 0.1 334,509 4.1 334,940 3.7
One-year monthly treasury average 52,160 6.1 90,313 1.1 142,473 1.6
---------- --------- ---------- --------- ----------- ---------
Total $ 859,352 100.0% $8,098,021 100.0% $ 8,957,373 100.0%
========== ========= ========== ========= =========== =========
December 31, 2005
---------------------------------------------------------------------------
Securities
Trading Securities Available for Sale Total
---------------------- ---------------------- -----------------------
Carrying Portfolio Carrying Portfolio Carrying Portfolio
Value Mix Value Mix Value Mix
---------- --------- ---------- --------- ----------- ---------
(Dollars in thousands)
Index:
One-month LIBOR $ 402,311 12.5% $ 10,836 0.1% $ 413,147 3.9%
Six-month LIBOR 2,538,016 78.6 4,838,532 65.6 7,376,548 69.6
One-year LIBOR 218,530 6.8 2,128,376 28.9 2,346,906 22.1
One-year constant maturity treasury 2,054 0.1 397,292 5.4 399,346 3.8
One-year monthly treasury average 66,157 2.0 -- -- 66,157 0.6
---------- --------- ---------- --------- ----------- ---------
Total $3,227,068 100.0% $7,375,036 100.0% $10,602,104 100.0%
========== ========= ========== ========= =========== =========
-36-
The following tables classify our mortgage loans held for investment and
mortgage-backed securities portfolio by product type at September 30, 2006 and
December 31, 2005:
September 30, 2006
-----------------------------------------------------------------------------------------------------
Securities Loans Held
Trading Securities Available for Sale for Investment Total
---------------------- ---------------------- ---------------------- -----------------------
Carrying Portfolio Carrying Portfolio Carrying Portfolio Carrying Portfolio
Value Mix Value Mix Value Mix Value Mix
---------- --------- ---------- --------- ---------- --------- ----------- ---------
(Dollars in thousands)
Product:
ARMs less than 3 years $ 630,024 73.3% $ 377,979 4.7% $2,659,194 45.9% $ 3,667,197 24.9%
3/1 Hybrid ARM 154,714 18.0 169,474 2.1 50,513 0.9 374,701 2.5
5/1 Hybrid ARM 74,614 8.7 6,787,690 83.8 378,191 6.5 7,240,495 49.1
Home equity/Second -- -- 762,878 9.4 197,190 3.4 960,068 6.5
Other ARM -- -- -- -- 446,793 7.7 446,793 3.0
Fixed rate -- -- -- -- 2,065,920 35.6 2,065,920 14.0
---------- --------- ---------- --------- ---------- --------- ----------- ---------
Total $ 859,352 100.0% $8,098,021 100.0% $5,797,801 100.0% $14,755,174 100.0%
========== ========= ========== ========= ========== ========= =========== =========
December 31, 2005
-----------------------------------------------------------------------------------------------------
Securities Loans Held
Trading Securities Available for Sale for Investment Total
---------------------- ---------------------- ---------------------- -----------------------
Carrying Portfolio Carrying Portfolio Carrying Portfolio Carrying Portfolio
Value Mix Value Mix Value Mix Value Mix
---------- --------- ---------- --------- ---------- --------- ----------- ---------
(Dollars in thousands)
Product:
ARMs less than 3 years $ 700,164 21.7% $ 487,122 6.6% $2,628,977 75.6% $ 3,816,263 27.1%
3/1 Hybrid ARM 194,313 6.0 262,598 3.6 11,563 0.3 468,474 3.3
5/1 Hybrid ARM 2,332,591 72.3 6,625,316 89.8 121,227 3.5 9,079,134 64.5
Home equity/Second -- -- -- -- 611,370 17.6 611,370 4.3
Other ARM -- -- -- -- 31,862 0.9 31,862 0.2
Fixed rate -- -- -- -- 74,722 2.1 74,722 0.6
---------- --------- ---------- --------- ---------- --------- ----------- ---------
Total $3,227,068 100.0% $7,375,036 100.0% $3,479,721 100.0% $14,081,825 100.0%
========== ========= ========== ========= ========== ========= =========== =========
During the three and nine months ended September 30, 2006, we purchased $1.7
billion and $3.5 billion of mortgage-backed securities, respectively.
During the three and nine months ended September 30, 2006, we sold $1.5 billion
and $3.4 billion of mortgage-backed securities, respectively.
During the three and nine months ended September 30, 2006, we added $906.8
million and $3.1 billion of loans held for investment to our portfolio,
respectively.
-37-
Results of Operations
The following tables present our consolidated and segment statements of income:
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended
---------------------------------------------------------
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
2006 2006 2006 2005 2005
--------- --------- --------- --------- ---------
Net interest income:
Interest income $ 332,875 $ 330,196 $ 300,613 $ 265,435 $ 180,038
Interest expense (289,878) (279,992) (254,035) (215,057) (133,169)
--------- --------- --------- --------- ---------
Net interest income 42,997 50,204 46,578 50,378 46,869
--------- --------- --------- --------- ---------
Provision for loan losses (5,365) (3,979) (1,311) (2,142) --
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses 37,632 46,225 45,267 48,236 46,869
--------- --------- --------- --------- ---------
Non-interest income:
Gain on sales of mortgage loans 210,621 224,594 171,907 98,777 123,658
Gain on sales of current period securitized mortgage loans -- -- -- -- 19,960
Gain (loss) on sales of mortgage-backed securities and derivatives 9,849 (47) (850) 38,068 6,116
Unrealized gain (loss) on mortgage-backed securities and derivatives 1,050 (7,730) 9,315 (44,778) (10,965)
Loan servicing fees 43,379 30,417 24,333 26,715 21,099
Amortization and impairment of mortgage servicing rights -- -- -- (18,745) (3,478)
Change in fair value of mortgage servicing rights:
Due to realization of cash flows (28,839) (26,306) (18,735) -- --
Due to changes in valuation assumptions, net of hedge gain (loss) (16,799) 7,476 114 -- --
--------- --------- --------- --------- ---------
Net loan servicing (loss) fees (2,259) 11,587 5,712 7,970 17,621
--------- --------- --------- --------- ---------
Other non-interest income 2,018 2,125 1,769 2,181 1,585
--------- --------- --------- --------- ---------
Non-interest income 221,279 230,529 187,853 102,218 157,975
--------- --------- --------- --------- ---------
Non-interest expenses:
Salaries, commissions and benefits, net 105,676 103,157 99,267 95,237 101,378
Occupancy and equipment 19,228 19,763 17,970 16,459 15,328
Data processing and communications 5,700 6,733 7,126 6,402 6,479
Office supplies and expenses 5,346 5,145 4,332 4,612 5,024
Marketing and promotion 4,868 6,383 5,800 5,951 5,104
Travel and entertainment 7,798 7,793 6,753 6,982 4,670
Professional fees 6,076 5,013 5,331 3,586 3,744
Other 16,588 17,192 15,882 10,946 7,360
--------- --------- --------- --------- ---------
Non-interest expenses 171,280 171,179 162,461 150,175 149,087
--------- --------- --------- --------- ---------
Net income before income tax expense (benefit) 87,631 105,575 70,659 279 55,757
Income tax expense (benefit) 15,611 33,224 16,200 (16,419) 2,549
--------- --------- --------- --------- ---------
Net income $ 72,020 $ 72,351 $ 54,459 $ 16,698 $ 53,208
========= ========= ========= ========= =========
Dividends on preferred stock 3,305 3,304 3,305 3,304 3,304
--------- --------- --------- --------- ---------
Net income available to common shareholders $ 68,715 $ 69,047 $ 51,154 $ 13,394 $ 49,904
========= ========= ========= ========= =========
Per share data:
Basic $ 1.37 $ 1.38 $ 1.03 $ 0.27 $ 1.10
Diluted $ 1.36 $ 1.37 $ 1.02 $ 0.27 $ 1.09
Weighted average number of shares - basic 50,148 50,056 49,715 49,605 45,174
Weighted average number of shares - diluted 50,553 50,487 50,070 49,998 45,669
-38-
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Nine Months
Ended September 30,
------------------------
2006 2005
---------- ----------
Net interest income:
Interest income $ 963,684 $ 462,250
Interest expense (823,905) (311,596)
---------- ----------
Total net interest income 139,779 150,654
---------- ----------
Provision for loan losses (10,655) --
---------- ----------
Total net interest income after provision for loan losses 129,124 150,654
---------- ----------
Non-interest income:
Gain on sales of mortgage loans 607,122 236,288
Gain on sales of current period securitized mortgage loans -- 194,256
Gain on sales of mortgage-backed securities and derivatives 8,952 12,868
Unrealized gain on mortgage-backed securities and derivatives 2,635 36,242
Loan servicing fees 98,129 49,381
Amortization and impairment of mortgage servicing rights -- (41,790)
Change in fair value of mortgage servicing rights:
Due to realization of cash flows (73,880) --
Due to changes in valuation assumptions, net of hedge gain (loss) (9,209) --
---------- ----------
Net loan servicing fees 15,040 7,591
---------- ----------
Other non-interest income 5,912 5,594
---------- ----------
Total non-interest income 639,661 492,839
---------- ----------
Non-interest expenses:
Salaries, commissions and benefits, net 308,100 264,712
Occupancy and equipment 56,961 42,396
Data processing and communications 19,559 18,386
Office supplies and expenses 14,823 15,110
Marketing and promotion 17,051 14,360
Travel and entertainment 22,344 14,025
Professional fees 16,420 10,646
Other 49,662 21,072
---------- ----------
Total non-interest expenses 504,920 400,707
---------- ----------
Net income before income tax expense (benefit) 263,865 242,786
Income tax expense (benefit) 65,035 (1,302)
---------- ----------
Net income $ 198,830 $ 244,088
========== ==========
Dividends on preferred stock 9,914 9,913
---------- ----------
Net income available to common shareholders $ 188,916 $ 234,175
========== ==========
Per share data:
Basic $ 3.78 $ 5.58
Diluted $ 3.75 $ 5.51
Weighted average number of shares - basic 49,975 41,973
Weighted average number of shares - diluted 50,363 42,471
-39-
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
MORTGAGE HOLDINGS SEGMENT
(In thousands)
Nine Months
Ended September 30,
------------------------
2006 2005
---------- ----------
Net interest income:
Interest income $ 531,866 $ 219,906
Interest expense (448,974) (154,168)
---------- ----------
Net interest income 82,892 65,738
---------- ----------
Provision for loan losses (6,239) --
---------- ----------
Net interest income after provision for loan losses 76,653 65,738
---------- ----------
Non-interest income:
Gain on sales of mortgage-backed securities and derivatives 8,952 6,725
Unrealized gain (loss) on mortgage-backed securities and derivatives 2,360 (41,496)
---------- ----------
Non-interest income 11,312 (34,771)
---------- ----------
Non-interest expenses:
Salaries, commissions and benefits, net 10,344 6,057
Occupancy and equipment 5 5
Data processing and communications 136 64
Office supplies and expenses 78 5
Marketing and promotion 11 2
Travel and entertainment 39 5
Professional fees 2,408 2,829
Other 7,507 6,331
---------- ----------
Non-interest expenses 20,528 15,298
---------- ----------
Net income before income tax expense 67,437 15,669
Income tax expense -- --
---------- ----------
Net income $ 67,437 $ 15,669
========== ==========
Dividends on preferred stock 9,914 9,913
---------- ----------
Net income available to common shareholders $ 57,523 $ 5,756
========== ==========
-40-
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
LOAN ORIGINATION SEGMENT
(In thousands)
Nine Months
Ended September 30,
------------------------
2006 2005
---------- ----------
Net interest income:
Interest income $ 431,818 $ 242,344
Interest expense (364,022) (152,799)
---------- ----------
Net interest income 67,796 89,545
---------- ----------
Provision for loan losses (4,416) --
---------- ----------
Net interest income after provision for loan losses 63,380 89,545
---------- ----------
Non-interest income:
Gain on sales of mortgage loans 607,122 236,288
Gain on sales of current period securitized mortgage loans -- 194,256
Gain on sales of mortgage-backed securities and derivatives -- 6,143
Unrealized gain on mortgage-backed securities and derivatives 275 77,738
Other non-interest income 3,802 3,722
---------- ----------
Non-interest income 611,199 518,147
---------- ----------
Non-interest expenses:
Salaries, commissions and benefits, net 286,312 250,179
Occupancy and equipment 56,050 41,645
Data processing and communications 19,257 17,953
Office supplies and expenses 14,176 13,955
Marketing and promotion 16,794 14,281
Travel and entertainment 22,140 13,589
Professional fees 13,925 7,060
Other 24,750 9,439
---------- ----------
Non-interest expenses 453,404 368,101
---------- ----------
Net income before income tax expense 221,175 239,591
Income tax expense 73,628 3,777
---------- ----------
Net income $ 147,547 $ 235,814
========== ==========
Dividends on preferred stock -- --
---------- ----------
Net income available to common shareholders $ 147,547 $ 235,814
========== ==========
-41-
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
LOAN SERVICING SEGMENT
(In thousands)
Nine Months
Ended September 30,
--------------------
2006 2005
-------- --------
Net interest income:
Interest income $ -- $ --
Interest expense (10,909) (4,629)
-------- --------
Net interest income (10,909) (4,629)
-------- --------
Non-interest income:
Loan servicing fees 98,129 49,381
Amortization and impairment of mortgage servicing rights -- (41,790)
Change in fair value of mortgage servicing rights
Due to realization of cash flows (73,880) --
Due to changes in valuation assumptions, net of hedge gain (loss) (9,209) --
-------- --------
Net loan servicing fees 15,040 7,591
-------- --------
Other non-interest income 2,110 1,872
-------- --------
Non-interest income 17,150 9,463
-------- --------
Non-interest expenses:
Salaries, commissions and benefits, net 11,444 8,476
Occupancy and equipment 906 746
Data processing and communications 166 369
Office supplies and expenses 569 1,150
Marketing and promotion 246 77
Travel and entertainment 165 431
Professional fees 87 757
Other 17,405 5,302
-------- --------
Non-interest expenses 30,988 17,308
-------- --------
Net income before income tax benefit (24,747) (12,474)
Income tax benefit (8,593) (5,079)
-------- --------
Net income $(16,154) $ (7,395)
======== ========
Dividends on preferred stock -- --
-------- --------
Net income available to common shareholders $(16,154) $ (7,395)
======== ========
-42-
Comparison of the Three Months Ended September 30, 2006 and 2005
Overview
--------
Net income for the three months ended September 30, 2006 was $72.0 million
compared to $53.2 million for the three months ended September 30, 2005, an
increase of $18.8 million, or 35.4%. The increase in net income was the result
of a $63.3 million increase in non-interest income, partially offset by a $22.2
million increase in non-interest expenses, a $13.0 million increase in income
tax expense, a $5.4 million increase in provision for loan losses and a $3.9
million decrease in net interest income. The $63.3 million increase in
non-interest income consists of an $87.0 million increase in gain on sales of
mortgage loans, a $15.8 million increase in realized and unrealized gains on
mortgage-backed securities and derivatives and a $0.4 million increase in other
non-interest income, partially offset by a $20.0 million decrease in gain on
sales of current period securitized mortgage loans and a $19.9 million decrease
in net loan servicing fees in the three months ended September 30, 2006 versus
the three months ended September 30, 2005.
Net Interest Income
-------------------
The following table presents 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 September 30, 2006 compared to the three months ended September 30, 2005:
(Dollars in thousands) Three Months Ended September 30,
----------------------------------------------------------------------------
2006 2005
------------------------------------ ------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------- -------- ---------- ----------- -------- ----------
Interest earning assets:
Mortgage-backed securities, net (1) $ 9,272,899 $129,241 5.57% $ 7,101,548 $ 84,560 4.76%
Mortgage loans held for sale 6,688,543 113,098 6.76% 4,911,711 89,936 7.32%
Mortgage loans held for investment 5,135,395 90,536 7.05% 754,057 5,542 2.94%
----------- -------- ----------- --------
21,096,837 332,875 6.31% 12,767,316 180,038 5.64%
----------- -------- ----------- --------
Interest bearing liabilities:
Warehouse lines of credit 5,466,151 78,741 5.76% 2,689,507 40,099 5.83%
Commercial paper (2) 2,404,704 31,605 5.26% 2,787,060 26,088 3.66%
Reverse repurchase agreements (3) 8,827,655 114,458 5.19% 6,529,138 62,945 3.84%
Collateralized debt obligations (4) 3,666,068 53,393 5.83% -- -- --
Trust preferred securities 274,163 6,209 9.06% 85,870 1,584 7.22%
Notes payable 375,069 5,472 5.84% 207,357 2,453 4.63%
----------- -------- ----------- --------
21,013,810 289,878 5.52% 12,298,932 133,169 4.24%
----------- -------- ----------- --------
Net interest income $ 42,997 $ 46,869
======== ========
Interest rate spread 0.79% 1.40%
========== ==========
Net interest margin 0.82% 1.56%
========== ==========
(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 $403 thousand of net interest income on interest rate swap
agreements for the 2006 period.
(3) Includes $6.8 million of net interest income and $3.4 million of net
interest expense on interest rate swap agreements for the 2006 and 2005
periods, respectively.
(4) Includes $272 thousand of net interest expense on interest rate swap
agreements for the 2006 period.
-43-
The following table presents 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 September
30, 2006 compared to the three months ended September 30, 2005:
Three Months Ended September 30, 2006
Compared to
(In thousands) Three Months Ended September 30, 2005
--------------------------------------
Average Average
Rate Volume Total
---------- ---------- ----------
Mortgage-backed securities, net $ 15,976 $ 28,705 $ 44,681
Mortgage loans held for sale (41,365) 64,527 23,162
Mortgage loans held for investment 27,981 57,013 84,994
---------- ---------- ----------
Interest income 2,592 150,245 152,837
---------- ---------- ----------
Warehouse lines of credit (3,469) 42,111 38,642
Commercial paper 25,503 (19,986) 5,517
Reverse repurchase agreements 25,739 25,774 51,513
Collateralized debt obligations -- 53,393 53,393
Trust preferred securities 1,255 3,370 4,625
Notes payable 738 2,281 3,019
---------- ---------- ----------
Interest expense 49,766 106,943 156,709
---------- ---------- ----------
Net interest income $ (47,174) $ 43,302 $ (3,872)
========== ========== ==========
Interest Income: Interest income on mortgage-backed securities for the three
months ended September 30, 2006 was $129.2 million, compared to $84.5 million
for the three months ended September 30, 2005, a $44.7 million, or 52.8%,
increase. This increase reflects primarily the growth of our mortgage-backed
securities portfolio and higher interest rates in the third quarter of 2006
versus the third quarter of 2005.
Interest income on our mortgage loans held for sale for the three months ended
September 30, 2006 was $113.1 million, compared to $89.9 million for the three
months ended September 30, 2005, an increase of $23.2 million, or 25.8%. The
increase in interest income on mortgage loans held for sale was primarily the
result of an increase in average volume in 2006 versus 2005 due to higher
mortgage origination volume.
In June 2005, we began our strategy of holding certain loans in our investment
portfolio. For the three months ended September 30, 2006, we recognized $90.5
million of interest income on loans held for investment, compared to $5.5
million for the three months ended September 30, 2005.
Interest Expense: As of September 30, 2006, we have entered into reverse
repurchase agreements, a form of collateralized short-term borrowing, with
seventeen different financial institutions and had borrowed funds from ten of
these counterparties. We borrow funds under these arrangements based on the fair
value of our mortgage-backed securities and loans held for investment. Total
interest expense on reverse repurchase agreements for the three months ended
September 30, 2006 was $114.5 million, compared to interest expense for the
three months ended September 30, 2005 of $63.0 million, a $51.5 million
increase. The increase in reverse repurchase agreements interest expense in 2006
versus 2005 was primarily the result of an increase in average rate due to
generally higher short-term interest rates in the third quarter of 2006 versus
the third quarter of 2005, and an increase in borrowings used to fund the growth
of our mortgage-backed securities and loans held for investment portfolio.
We fund our loan inventory primarily through borrowing facilities with several
mortgage warehouse lenders and through a $3.3 billion commercial paper, or
secured liquidity note ("SLN"), program. Interest expense on warehouse lines of
credit for the three months ended September 30, 2006 was $78.7 million, compared
to interest expense for the three months ended September 30, 2005 of $40.1
million, a
-44-
$38.6 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 in the third quarter of 2006 versus the third
quarter of 2005.
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. Interest expense on commercial paper for the three months ended
September 30, 2006 was $31.6 million, versus $26.1 million for the three months
ended September 30, 2005, a $5.5 million increase. The increase in commercial
paper interest expense was the result of an increase in average interest rates
in the third quarter of 2006 versus the third quarter of 2005, partially offset
by a decrease in average volume. The decrease in average volume in the third
quarter of 2006 versus the third quarter of 2005 related to lower borrowings
used to fund our loan inventory.
For the three months ended September 30, 2006, we recognized $53.4 million of
interest expense on collateralized debt obligations, related to borrowings used
to fund our securitizations which were accounted for as financings.
Gain on Mortgage Loans, Mortgage-Backed Securities and Derivatives
------------------------------------------------------------------
Gain on Sales and Securitizations of Mortgage Loans: During the three months
ended September 30, 2006, gain on sales and securitizations of mortgage loans in
our Loan Origination segment totaled $210.6 million, or 1.47%, of mortgage loans
sold or securitized, compared to $176.5 million, or 1.42%, of mortgage loans
sold or securitized during the three months ended September 30, 2005. The
increase primarily reflects a $1.9 billion increase in mortgage loans sold or
securitized to $14.3 billion in the third quarter of 2006 from $12.4 billion in
the third quarter of 2005.
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
September 30, 2006 and 2005:
Gains on Sales and Securitizations of Mortgage Loans
Three Months
Ended September 30,
----------------------------
2006 2005
------------ ------------
(Dollars in thousands)
Gain on sales of mortgage loans $ 210,621 $ 123,658
Gain on sales of current period securitized mortgage loans -- 19,960
Gain on sales of free standing derivatives -- 300
Unrealized gain on self-originated mortgage-backed
securities retained in period -- 22,604
Unrealized gain on free standing derivatives -- 10,012
------------ ------------
Total gain on sales and securitizations of mortgage loans $ 210,621 $ 176,534
============ ============
Total mortgage loans sold or securitized $ 14,331,910 $ 12,397,436
============ ============
Total gain on sales and securitizations of mortgage
loans as a % of total mortgage loans sold or securitized 1.47% 1.42%
Portfolio Gains and Losses: During the three months ended September 30, 2006,
portfolio gains and losses in our Mortgage Holdings segment were a portfolio
gain of $10.9 million compared to a portfolio loss of $37.8 million during the
three months ended September 30, 2005. The increase in portfolio gains in the
third quarter of 2006 compared to the third quarter of 2005 was the result of a
$44.6 million net increase in unrealized gain on mortgage-backed securities and
free standing derivatives, and a $4.0 million increase in gain on sales of
mortgage-backed securities and derivatives.
The following table presents the components of portfolio gains and losses in our
Mortgage Holdings segment during the three months ended September 30, 2006 and
2005:
-45-
Portfolio Gains and Losses
Three Months
Ended September 30,
--------------------
2006 2005
-------- --------
(In thousands)
Gain on sales of mortgage-backed securities and
derivatives $ 9,849 $ 5,816
Unrealized gain (loss) on mortgage-backed securities 1,615 (60,211)
Unrealized (loss) gain on free standing derivatives (565) 16,630
-------- --------
Net unrealized gain (loss) on mortgage-backed securities
and free standing derivatives 1,050 (43,581)
-------- --------
Total portfolio gain (loss) $ 10,899 $(37,765)
======== ========
The following table presents the components of gains on sales of mortgage-backed
securities and derivatives shown in our consolidated statements of income:
Components of Gain on Sales of Mortgage-backed Securities and Derivatives
Three Months
Ended September 30,
--------------------
2006 2005
-------- --------
(In thousands)
Gain on sales of mortgage-backed securities and derivatives $ 9,849 $ 5,816
Gain on sales of free standing derivatives -- 300
-------- --------
Gain on sales of mortgage-backed securities and derivatives $ 9,849 $ 6,116
======== ========
The following table presents the components of unrealized loss on
mortgage-backed securities and derivatives shown in our consolidated statements
of income:
Components of Unrealized Gain (Loss) on Mortgage-backed Securities and
Derivatives
Three Months
Ended September 30,
--------------------
2006 2005
-------- --------
(In thousands)
Unrealized gain on self-originated mortgage-backed securities
retained in period $ -- $ 22,604
Unrealized gain (loss) on mortgage-backed securities 1,615 (60,211)
Unrealized (loss) gain on free standing derivatives (565) 26,642
-------- --------
Unrealized gain (loss) on mortgage-backed securities and derivatives $ 1,050 $(10,965)
======== ========
Net Loan Servicing Fees
-----------------------
Net loan servicing fees were a loss of $2.3 million for the three months ended
September 30, 2006, compared to income of $17.6 million for the three months
ended September 30, 2005.
Loan Servicing Fees: Loan servicing fees increased to $43.4 million for the
three months ended September 30, 2006 from $21.1 million for the three months
ended September 30, 2005, an increase of $22.3 million, or 105.6%. The increase
in loan servicing fees in the third quarter of 2006 versus the third quarter of
2005 was primarily the result of an increase in loans serviced for others. At
September 30, 2006, the principal amount of loans serviced for others, including
loans held for sale and loans held for investment, was $43.0 billion, compared
to $27.5 billion at September 30, 2005.
Change in Fair Value of MSRs: Effective at the beginning of the first quarter of
2006, we adopted Statement of Financial Accounting Standards No. 156,
"Accounting for Servicing of Financial Assets, an amendment of FASB Statement
No. 140" ("SFAS 156"), and elected the fair value option to subsequently measure
our MSRs. Under the fair value option, all changes in the fair value of MSRs are
reported in
-46-
the consolidated statements of income. For the three months ended September 30,
2006, the change in fair value of MSRs was $45.6 million. The change in fair
value of MSRs in the third quarter of 2006 includes a $28.8 million reduction in
fair value due to the realization of servicing cash flows and a $23.9 million
reduction due to changes in valuation assumptions, partially offset by a $7.1
million gain on MSR related hedges.
Amortization and Impairment of MSRs: Amortization and impairment of MSRs
includes amortization of MSRs of $15.1 million and a temporary impairment
recovery of $11.6 million for the three months ended September 30, 2005.
Effective at the beginning of the first quarter of 2006, we adopted the SFAS 156
fair value option and did not recognize amortization and impairment of MSRs
during the third quarter of 2006.
The following table presents the components of net loan servicing (loss) fees
for the three months ended September 30, 2006 and 2005:
Three Months
Ended September 30,
-------- --------
2006 2005
-------- --------
(In thousands)
Loan servicing fees $ 43,379 $ 21,099
Amortization and impairment of mortgage servicing rights -- (3,478)
Change in fair value of mortgage servicing rights:
Due to realization of cash flows (28,839) --
Due to changes in valuation assumptions (23,914) --
Due to gain on related hedges 7,115 --
-------- --------
Net loan servicing (loss) fees $ (2,259) $ 17,621
======== ========
Other Non-Interest Income
-------------------------
Other non-interest income totaled $2.0 million for the three months ended
September 30, 2006 compared to $1.6 million for the three months ended September
30, 2005. For the three months ended September 30, 2006, other non-interest
income primarily includes reinsurance premiums earned totaling approximately
$1.2 million, rental income of $0.4 million, and revenue from title services of
$0.2 million. For the three months ended September 30, 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
$0.3 million.
Non-Interest Expenses
---------------------
Our non-interest expenses for the three months ended September 30, 2006 were
$171.3 million compared to $149.1 million for the three months ended September
30, 2005, an increase of $22.2 million, or 14.9%. The increase primarily
reflects a $14.4 million rise in our Loan Origination segment non-interest
expenses to $152.6 million, or 1.00% of total loan originations, in the third
quarter of 2006, from $138.2 million, or 1.01% of total loan originations, in
the third quarter of 2005.
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 September 30, 2006 were $105.7 million, compared
to $101.4 million for the three months ended September 30, 2005, an increase of
$4.3 million, or 4.2%. The increase in expenses reflects higher origination
volume and a resulting higher commission expense and higher salaries due to an
increase in employees to 7,400 at September 30, 2006 from 6,467 at September 30,
2005.
Other Operating Expenses: Operating expenses, excluding salaries, commissions
and benefits, were $65.6 million for the three months ended September 30, 2006,
compared to $47.7 million for the three months ended September 30, 2005, an
increase of $17.9 million, or 37.5%. The increase in operating expenses in the
third quarter of 2006 versus the third quarter of 2005 includes a $9.2 million
increase in other non-interest expense and a $3.9 million increase in occupancy
and equipment expense. The increase in other non-interest expenses in the third
quarter of 2006 versus the third quarter of 2005 was primarily due to a $5.0
million increase in lender-paid private mortgage insurance and the remainder was
primarily associated with our acquisition of Waterfield Financial Corporation in
January 2006. The increase in occupancy and equipment expense was due to higher
lease obligations and certain fixed asset expenses relating to the increased
number of branches in the 2006 period.
-47-
We recognized $15.6 million of income tax expense for the three months ended
September 30, 2006, compared to $2.5 million for the three months ended
September 30, 2005. The increase in income tax expense in the third quarter of
2006 versus the third quarter of 2005 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 September 30, 2006
were $15.3 billion compared to $13.7 billion for the three months ended
September 30, 2005, an 11.5% increase. Mortgage brokers, through our wholesale
loan production offices, accounted for 55% of our loan originations in the three
months ended September 30, 2006 compared to 54% of our originations in the three
months ended September 30, 2005. Originations conducted through our retail loan
production offices and internet call center were 38% of our loan originations in
the three months ended September 30, 2006 compared to 45% of our originations in
the three months ended September 30, 2005. During the three months ended
September 30, 2006, 7% of our loan originations were purchased from
correspondents compared to 1% of our originations in the three months ended
September 30, 2005.
-48-
Comparison of the Nine Months Ended September 30, 2006 and 2005
Overview
--------
Net income for the nine months ended September 30, 2006 was $198.8 million
compared to $244.1 million for the nine months ended September 30, 2005, a
decrease of $45.3 million, or 18.5%. Through the third quarter of 2005, we
securitized a substantial portion of our mortgage loans held for sale each
quarter and had intended for each of these transactions to qualify as a sale
under Statement of Financial Accounting Standards ("SFAS") 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. Net income for the nine months ended September 30,
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 decrease in net income was the result of a $104.2 million increase in
non-interest expenses, a $66.3 million increase in income tax expense, a $10.9
million decrease in net interest income and a $10.7 million increase in
provision for loan losses, partially offset by a $146.8 million increase in
non-interest income. The $146.8 million increase in non-interest income consists
of a $370.8 million increase in gain on sales of mortgage loans, a $7.5 million
increase in net loan servicing fees and a $0.3 million increase in other
non-interest income, partially offset by a $194.3 million decrease in gain on
sales of current period securitized mortgage loans and a $37.5 million decrease
in realized and unrealized gains on mortgage-backed securities and derivatives
in the nine months ended September 30, 2006 versus the nine months ended
September 30, 2005.
Net Interest Income
-------------------
The following table presents 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 nine months ended
September 30, 2006 compared to the nine months ended September 30, 2005:
(Dollars in thousands) Nine Months Ended September 30,
--------------------------------------------------------------------------
2006 2005
----------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------- -------- ---------- ----------- -------- ----------
Interest earning assets:
Mortgage-backed securities, net (1) $ 9,561,135 $394,832 5.51% $ 6,591,006 $219,906 4.45%
Mortgage loans held for sale 7,076,364 342,553 6.45% 5,002,432 236,802 6.31%
Mortgage loans held for investment 4,369,363 226,299 6.91% 251,338 5,542 2.94%
----------- -------- ----------- --------
21,006,862 963,684 6.12% 11,844,776 462,250 5.20%
----------- -------- ----------- --------
Interest bearing liabilities:
Warehouse lines of credit (2) 6,102,133 249,954 5.46% 2,002,754 77,642 5.11%
Commercial paper (3) 2,493,043 92,403 4.94% 1,947,314 46,906 3.18%
Reverse repurchase agreements (4) 9,027,504 344,460 5.09% 6,573,306 161,906 3.29%
Collateralized debt obligations (5) 2,567,701 106,254 5.52% 655,083 16,766 3.37%
Trust preferred securities 243,344 15,724 8.62% 37,912 2,066 7.19%
Notes payable 350,585 15,110 5.75% 182,563 6,310 4.56%
----------- -------- ----------- --------
20,784,310 823,905 5.29% 11,398,932 311,596 3.60%
----------- -------- ----------- --------
Net interest income $139,779 $150,654
======== ========
Interest rate spread 0.83% 1.60%
========== ==========
Net interest margin 0.89% 1.73%
========== ==========
(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 $2.8 million of net interest expense on interest rate swap
agreements for the 2005 period.
(3) Includes $661 thousand of net interest income on interest rate swap
agreements for the 2006 period.
(4) Includes $2.6 million and $13.9 million of net interest expense on
interest rate swap agreements for the 2006 and 2005 periods, respectively.
(5) Includes $679 thousand of net interest expense on interest rate swap
agreements for the 2006 period.
-49-
The following table presents 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 nine months ended September 30,
2006 compared to the nine months ended September 30, 2005:
Nine Months Ended September 30, 2006
Compared to
(In thousands) Nine Months Ended September 30, 2005
-------------------------------------
Average Average
Rate Volume Total
---------- ---------- ----------
Mortgage-backed securities, net $ 60,490 $ 114,436 $ 174,926
Mortgage loans held for sale 5,372 100,379 105,751
Mortgage loans held for investment 30,122 190,635 220,757
---------- ---------- ----------
Interest income 95,984 405,450 501,434
---------- ---------- ----------
Warehouse lines of credit 5,543 166,769 172,312
Commercial paper 30,236 15,261 45,497
Reverse repurchase agreements 108,507 74,047 182,554
Collateralized debt obligations 15,998 73,490 89,488
Trust preferred securities 1,550 12,108 13,658
Notes payable 1,948 6,852 8,800
---------- ---------- ----------
Interest expense 163,782 348,527 512,309
---------- ---------- ----------
Net interest income $ (67,798) $ 56,923 $ (10,875)
========== ========== ==========
Interest Income: Interest income on mortgage-backed securities for the nine
months ended September 30, 2006 was $394.8 million, compared to $219.9 million
for the nine months ended September 30, 2005, a $174.9 million, or 79.5%,
increase. This increase reflects primarily the growth of our mortgage-backed
securities portfolio and higher interest rates in 2006 versus 2005.
Interest income on our mortgage loans held for sale for the nine months ended
September 30, 2006 was $342.6 million, compared to $236.7 million for the nine
months ended September 30, 2005, an increase of $105.9 million, or 44.7%. The
increase in interest income on mortgage loans held for sale was primarily the
result of an increase in average volume in 2006 versus 2005 due to higher
mortgage origination volume, and higher interest rates in 2006 versus 2005.
In June 2005, we began our strategy of holding certain loans in our investment
portfolio. For the nine months ended September 30, 2006, we recognized $226.3
million of interest income on loans held for investment, compared to $5.7
million for the nine months ended September 30, 2005.
Interest Expense: As of September 30, 2006, we have entered into reverse
repurchase agreements, a form of collateralized short-term borrowing, with
seventeen different financial institutions and had borrowed funds from ten of
these counterparties. We borrow funds under these arrangements based on the fair
value of our mortgage-backed securities and loans held for investment. Total
interest expense on reverse repurchase agreements for the nine months ended
September 30, 2006 was $344.5 million, compared to interest expense for the nine
months ended September 30, 2005 of $161.9 million, a $182.6 million increase.
The increase in reverse repurchase agreements interest expense in 2006 versus
2005 was primarily the result of an increase in average rate due to generally
higher short-term interest rates in 2006 versus 2005, and an increase in
borrowings used to fund the growth of our mortgage-backed securities and loans
held for investment portfolio.
We fund our loan inventory primarily through borrowing facilities with several
mortgage warehouse lenders and through a $3.3 billion commercial paper, or
secured liquidity note ("SLN"), program. Interest expense on warehouse lines of
credit for the nine months ended September 30, 2006 was $250.0 million, compared
to interest expense for the nine months ended September 30, 2005 of $77.7
million, a $172.3 million increase. The increase in warehouse lines of credit
interest expense was primarily the result of an increase in average volume
-50-
due to higher mortgage origination volume and an increase in average rate due to
generally higher short-term interest rates in 2006 versus 2005.
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. Interest expense on commercial paper for the nine months ended
September 30, 2006 was $92.4 million, versus $46.9 million for the nine months
ended September 30, 2005, a $45.5 million increase. The increase in commercial
paper interest expense was the result of an increase in average interest rates
in 2006 versus 2005 and an increase in average volume. The increase in average
volume in 2006 versus 2005 related to higher borrowings used to fund our loan
inventory. 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.
Interest expense on collateralized debt obligations for the nine months ended
September 30, 2006 was $106.3 million, compared to interest expense for the nine
months ended September 30, 2005 of $16.8 million, an $89.5 million increase. The
increase in collateralized debt obligation interest expense was the result of an
increase in average volume and an increase in average interest rates in 2006
versus 2005. The increase in average volume in 2006 versus 2005 related to
higher borrowings used to fund our securitizations which were accounted for as
financings.
Gain on Mortgage Loans, Mortgage-Backed Securities and Derivatives
------------------------------------------------------------------
Gain on Sales and Securitizations of Mortgage Loans: During the nine months
ended September 30, 2006, gain on sales and securitizations of mortgage loans in
our Loan Origination segment totaled $607.4 million, or 1.46%, of mortgage loans
sold or securitized, compared to $514.4 million, or 1.55%, of mortgage loans
sold or securitized during the nine months ended September 30, 2005. The
increase primarily reflects an $8.6 billion increase in mortgage loans sold or
securitized to $41.7 billion in the first nine months of 2006 from $33.1 billion
in the first nine months of 2005. The 2005 period includes $43.4 million
recognized in connection with the Q4-04 Securitization.
The following table presents the components of gain on sales and securitizations
of mortgage loans in our Loan Origination segment during the nine months ended
September 30, 2006 and 2005:
Gains on Sales and Securitizations of Mortgage Loans
Nine Months
Ended September 30,
----------------------------
2006 2005
------------ ------------
(Dollars in thousands)
Gain on sales of mortgage loans $ 607,122 $ 236,288
Gain on sales of current period securitized mortgage loans -- 194,256
Gain on sales of free standing derivatives -- 6,143
Unrealized gain on self-originated mortgage-backed securities
retained in period -- 72,806
Unrealized gain on free standing derivatives 275 4,932
------------ ------------
Total gain on sales and securitizations of mortgage loans $ 607,397 $ 514,425
============ ============
Total mortgage loans sold or securitized $ 41,693,619 $ 33,101,422
============ ============
Total gain on sales and securitizations of mortgage
loans as a % of total mortgage loans sold or securitized 1.46% 1.55%
Portfolio Gains and Losses: During the nine months ended September 30, 2006,
portfolio gains and losses in our Mortgage Holdings segment were a portfolio
gain of $11.3 million compared to a portfolio loss of $34.8 million during the
nine months ended September 30, 2005. The increase in portfolio gains in the
first nine months of 2006 compared to the first nine months of 2005 was the
result of a $43.9 million net increase in unrealized gain on mortgage-backed
securities and free standing derivatives and a $2.2 million increase in gain on
sales of mortgage-backed securities and derivatives.
-51-
The following table presents the components of portfolio gains and losses in our
Mortgage Holdings segment during the nine months ended September 30, 2006 and
2005:
Portfolio Gains and Losses
Nine Months
Ended September 30,
--------------------
2006 2005
-------- --------
(In thousands)
Gain on sales of mortgage-backed securities
and derivatives $ 8,952 $ 6,725
Unrealized loss on mortgage-backed securities (11,982) (65,640)
Unrealized gain on free standing derivatives 14,342 24,144
-------- --------
Net unrealized gain (loss) on mortgage-backed
securities and free standing derivatives 2,360 (41,496)
-------- --------
Total portfolio gain (loss) $ 11,312 $(34,771)
======== ========
The following table presents the components of gain on sales of mortgage-backed
securities and derivatives shown in our consolidated statements of income:
Components of Gain on Sales of Mortgage-backed Securities and Derivatives
Nine Months
Ended September 30,
--------------------
2006 2005
-------- --------
(In thousands)
Gain on sales of mortgage-backed securities
and derivatives $ 8,952 $ 6,725
Gain on sales of free standing derivatives -- 6,143
-------- --------
Gain on sales of mortgage-backed securities
and derivatives $ 8,952 $ 12,868
======== ========
The following table presents the components of unrealized gain on
mortgage-backed securities and derivatives shown in our consolidated statements
of income:
Components of Unrealized Gain on Mortgage-backed Securities and Derivatives
Nine Months
Ended September 30,
--------------------
2006 2005
-------- --------
(In thousands)
Unrealized gain on self-originated
mortgage-backed securities retained in period $ -- $ 72,806
Unrealized loss on mortgage-backed securities (11,982) (65,640)
Unrealized gain on free standing derivatives 14,617 29,076
-------- --------
Unrealized gain on mortgage-backed
securities and derivatives $ 2,635 $ 36,242
======== ========
Net Loan Servicing Fees
-----------------------
Net loan servicing fees were $15.0 million for the nine months ended September
30, 2006 compared to $7.6 million for the nine months ended September 30, 2005.
Loan Servicing Fees: Loan servicing fees increased to $98.1 million for the nine
months ended September 30, 2006 from $49.4 million for the nine months ended
September 30, 2005, an increase of $48.7 million, or 98.7%. The increase in loan
servicing fees in the first nine months of 2006 versus the first nine months of
2005 was primarily the result of an increase in loans serviced for others. At
September 30, 2006, the principal amount of loans serviced for others, including
loans held for sale and loans held for investment, was $43.0 billion, compared
to $27.5 billion at September 30, 2005.
-52-
Change in Fair Value of MSRs: Effective at the beginning of the first quarter of
2006, we adopted Statement of Financial Accounting Standards No. 156,
"Accounting for Servicing of Financial Assets, an amendment of FASB Statement
No. 140" ("SFAS 156"), and elected the fair value option to subsequently measure
our MSRs. Under the fair value option, all changes in the fair value of MSRs are
reported in the consolidated statements of income. For the nine months ended
September 30, 2006, the change in fair value of MSRs was $83.1 million. The
change in fair value of MSRs in the first nine months of 2006 includes a $73.9
million reduction in fair value due to the realization of servicing cash flows
and a $16.3 million reduction due to changes in valuation assumptions, partially
offset by a $7.1 million gain on MSR related hedges.
Amortization and Impairment of MSRs: Amortization and impairment of MSRs
includes amortization of MSRs of $36.4 million and a temporary impairment
provision of $5.4 million for the nine months ended September 30, 2005.
Effective at the beginning of the first quarter of 2006, we adopted the SFAS 156
fair value option and did not recognize amortization and impairment of MSRs
during the first nine months of 2006.
The following table presents the components of net loan servicing fees for the
nine months ended September 30, 2006 and 2005:
Nine Months
Ended September 30,
--------------------
2006 2005
-------- --------
(In thousands)
Loan servicing fees $ 98,129 $ 49,381
Amortization and impairment of mortgage servicing rights -- (41,790)
Change in fair value of mortgage servicing rights:
Due to realization of cash flows (73,880) --
Due to changes in valuation assumptions (16,324) --
Due to gain on related hedges 7,115 --
-------- --------
Net loan servicing fees $ 15,040 $ 7,591
======== ========
Other Non-Interest Income
-------------------------
Other non-interest income totaled $5.9 million for the nine months ended
September 30, 2006 compared to $5.6 million for the nine months ended September
30, 2005. For the nine months ended September 30, 2006, other non-interest
income primarily includes reinsurance premiums earned totaling approximately
$3.2 million, rental income of $1.0 million, revenue from title services of $0.5
million and other fee income of $0.4 million. For the nine months ended
September 30, 2005, other non-interest income primarily includes reinsurance
premiums earned totaling approximately $3.2 million, rental income of $1.1
million and revenue from title services of $0.9 million.
Non-Interest Expenses
---------------------
Our non-interest expenses for the nine months ended September 30, 2006 were
$504.9 million compared to $400.7 million for the nine months ended September
30, 2005, an increase of $104.2 million, or 26.0%. The increase primarily
reflects an $85.3 million rise in our Loan Origination segment non-interest
expenses to $453.4 million, or 1.05% of total loan originations in the first
nine months of 2006, from $368.1 million, or 1.16% of total loan originations in
the first nine months of 2005.
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 nine months ended September 30, 2006 were $308.1 million, compared
to $264.7 million for the nine months ended September 30, 2005, an increase of
$43.4 million, or 16.4%. The increase in expenses reflects higher origination
volume and a resulting higher commission expense and higher salaries due to an
increase in employees to 7,400 at September 30, 2006 from 6,467 at September 30,
2005.
Other Operating Expenses: Operating expenses, excluding salaries, commissions
and benefits, were $196.8 million for the nine months ended September 30, 2006,
compared to $136.0 million for the nine months ended September 30, 2005, an
increase of $60.8 million, or 44.7%. The increase in operating expenses in the
first nine months of 2006 versus the first nine months of 2005 includes a $28.6
million increase in other non-interest expense and a $14.6 million increase in
occupancy and equipment expense. The increase in other non-interest expenses in
the first nine months of 2006 versus the first nine months of 2005 was primarily
due to a $9.1 million increase in lender-paid private mortgage insurance, an
$8.0 million increase in reserves associated with our servicing assets, and the
remainder was primarily
-53-
associated with our acquisition of Waterfield Financial Corporation in January
2006. The increase in occupancy and equipment expense was due to higher lease
obligations and certain fixed asset expenses relating to the increased number of
branches in the 2006 period.
We recognized $65.0 million of income tax expense for the nine months ended
September 30, 2006, compared to a $1.3 million income tax benefit for the nine
months ended September 30, 2005. The increase in income tax expense in the first
nine months of 2006 versus the first nine months of 2005 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 nine months ended September 30, 2006 were
$43.4 billion compared to $31.7 billion for the nine months ended September 30,
2005, a 36.7% increase. Mortgage brokers, through our wholesale loan production
offices, accounted for 56% of our loan originations in the nine months ended
September 30, 2006 compared to 52% of our originations in the nine months ended
September 30, 2005. Originations conducted through our retail loan production
offices and internet call center were 38% of our loan originations in the nine
months ended September 30, 2006 compared to 47% of our originations in the nine
months ended September 30, 2005. During the nine months ended September 30,
2006, 6% of our loan originations were purchased from correspondents compared to
1% of our originations in the nine months ended September 30, 2005.
Liquidity and Capital Resources
As of September 30, 2006, we had arrangements to enter into reverse repurchase
agreements, a form of collateralized short-term borrowing, with seventeen
different financial institutions and had borrowed funds from ten of these
counterparties. Because we borrow money under these agreements based on the fair
value of our mortgage-backed securities, and because changes in interest rates
can negatively impact the valuation of mortgage-backed securities, our borrowing
ability under these agreements could be limited and lenders could initiate
margin calls in the event interest rates change or the value of our
mortgage-backed securities declines for other reasons.
As of September 30, 2006, we had $7.2 billion of reverse repurchase agreements
outstanding with a weighted-average borrowing rate of 5.39% before the impact of
interest rate swaps and a weighted-average remaining maturity of 1.1 years.
We issue adjustable-rate collateralized debt obligations to finance certain
portions of our mortgage loans held for investment. The collateralized debt
obligations are collateralized by adjustable-rate mortgage ("ARM") loans that
have been placed in a trust. As of September 30, 2006, our collateralized debt
obligations had a balance of $3.5 billion and an effective interest cost of
5.55%.
To originate a mortgage loan, we draw against either a $3.3 billion SLN
commercial paper program, a $2.0 billion pre-purchase facility with UBS Real
Estate Securities Inc. ("UBS"), a facility of $2.5 billion with Bear Stearns, a
$1.3 billion bank syndicated facility led by Bank of America, N.A. (which
includes a $437.5 million term loan facility which we use to finance our MSRs),
a facility of $750 million with Morgan Stanley Bank ("Morgan Stanley"), a
facility of $125 million with J.P. Morgan Chase, a $750 million facility with
IXIS Real Estate Capital, Inc. ("IXIS"), a $350 million facility with Credit
Suisse First Boston Mortgage Capital LLC, and a $1.4 billion syndicated facility
led by Calyon New York Branch ("Calyon"). The Bank of America, IXIS, Morgan
Stanley and Calyon facilities are committed facilities. In addition, we have
gestation facilities with UBS, Greenwich Capital Financial Products, Inc.
("Greenwich"), Societe Generale, and Deutsche Bank ("Deutsche"). These
facilities are secured by the mortgages owned by us and by certain of our other
assets. Advances drawn under these 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 November 3, 2006, the aggregate outstanding balance under the commercial
paper program was $2.7 billion, the aggregate outstanding balance under the
warehouse facilities was $4.6 billion, the aggregate outstanding balance in
drafts payable was $14.0 million and the aggregate maximum amount available for
additional borrowings was $4.5 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 generally 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;
-54-
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 facility agreement).
As of September 30, 2006, our aggregate warehouse facility borrowings were $1.9
billion (including $44.0 million of borrowings under a working capital
sub-limit) and our outstanding drafts payable were $8.7 million, compared to
$3.5 billion in aggregate warehouse facility borrowings (including $21.6 million
of borrowings under a working capital sub-limit), and outstanding drafts payable
of $20.8 million as of December 31, 2005. As of September 30, 2006, our loans
held for investment were $5.8 billion and our loans held for sale were $1.4
billion compared to loans held for investment of $3.5 billion and loans held for
sale of $2.2 billion as of December 31, 2005.
In addition to the warehouse facilities, we have purchase and sale agreements
with UBS, Greenwich, Societe Generale, and Deutsche. These agreements allow us
to accelerate the sale of our mortgage loan inventory, resulting in a more
effective use of the warehouse facilities. Aggregate amounts sold and being held
under these agreements as of September 30, 2006 and December 31, 2005 were $3.6
billion and $3.2 billion, respectively. Aggregate amounts so held under these
agreements at November 3, 2006 were $2.5 billion. These agreements are not
committed facilities and may be terminated at the discretion of the
counterparties.
We make certain representations and warranties under the purchase and sale
agreements regarding, among other things, the loans' compliance with laws and
regulations, their conformity with the ultimate investors' underwriting
standards and the accuracy of information. In the event of a breach of these
representations or warranties or in the event of an early payment default, we
may be required to repurchase the loans and/or 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 $438 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
August 9, 2007, but we have an option to extend the term for twelve additional
months at a higher interest rate. We expect to renew the term loan facility at
similar or better terms prior to the expiration date. Interest is based on a
spread to the LIBOR and may be adjusted for earnings on escrow balances. At
September 30, 2006 and December 31, 2005, borrowings under our term loan
facility were $201.0 million and $206.2 million, respectively.
Cash and cash equivalents decreased to $298.1 million as of September 30, 2006
from $575.7 million as of December 31, 2005.
Our primary sources of cash and cash equivalents during the nine months ended
September 30, 2006 were as follows:
o $41.6 billion of proceeds from principal received from sales of mortgage
loans held for sale;
o $3.4 billion of principal proceeds from sales of mortgage-backed
securities;
o $2.4 billion increase in collateralized debt obligations; and
o $1.7 billion of principal repayments of mortgage-backed securities.
Our primary uses of cash and cash equivalents during the nine months ended
September 30, 2006 were as follows:
o $43.4 billion of origination of mortgage loans;
o $3.5 billion of purchases of mortgage-backed securities;
o $2.6 million decrease in reverse repurchase agreements, net; and
o $1.6 billion decrease in warehouse lines of credit, net.
-55-
Commitments
The Company had the following commitments (excluding derivative financial
instruments) at September 30, 2006:
Less than
Total 1 Year 1 - 3 Years 3 - 5 Years After 5 Years
---------- ---------- ----------- ----------- -------------
(In thousands)
Warehouse liabilities $1,890,034 $1,890,034 $ -- $ -- $ --
Commercial paper 1,283,858 1,283,858 -- -- --
Reverse repurchase agreements 7,232,503 1,204,850 6,027,653 -- --
Collateralized debt obligations 3,484,873 377,913 2,108,558 804,678 193,724
Trust preferred securities 282,340 -- -- -- 282,340
Notes payable 317,161 205,463 65,993 22,197 23,508
Operating leases 144,090 20,512 67,007 35,625 20,946
-56-
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, loans held
for investment 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. Additionally, when interest
rates decline, the interest income we receive from our mortgage loans held for
investment as well as mortgage loans held for sale will decrease. 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. To reduce the sensitivity of
earnings to interest rate and market value fluctuations, we may use
free-standing derivatives (economic hedges) to hedge the risk of changes in the
fair value of MSRs, with the resulting gains or losses reflected in income.
Changes in the fair value of the MSRs from changing mortgage interest rates are
generally offset by gains or losses in the fair value of the derivatives
depending on the amount of MSRs we hedge. We may choose not to fully hedge MSRs,
partly because origination volume tends to act as a natural hedge. For example,
as interest rates decline, servicing values decrease and fees from origination
volume tend to increase. Conversely, as interest rates increase, the fair value
of the MSRs increases, while fees from origination volume tend to decline.
The Company enters into interest rate 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 approximately one month on September 30, 2006.
-57-
The following tables summarize the Company's interest rate sensitive instruments
as of September 30, 2006 and December 31, 2005:
September 30, 2006
---------------------------
Carrying Estimated
Amount Fair Value
------------ ------------
Assets:
Mortgage-backed securities $ 8,957,373 $ 8,957,373
Derivative assets (1) 26,323 96,686
Mortgage loans held for sale, net 1,365,595 1,397,843
Mortgage loans held for investment, net 5,797,801 5,912,358
Mortgage servicing rights 460,913 460,913
Liabilities:
Reverse repurchase agreements $ 7,232,503 $ 7,232,534
Collateralized debt obligations 3,484,873 3,486,483
Derivative liabilities 40,170 40,170
December 31, 2005
---------------------------
Carrying Estimated
Amount Fair Value
------------ ------------
Assets:
Mortgage-backed securities $ 10,602,104 $ 10,602,104
Derivative assets (1) 44,594 96,176
Mortgage loans held for sale, net 2,208,749 2,224,234
Mortgage loans held for investment, net 3,479,721 3,529,844
Mortgage servicing rights 319,671 320,827
Liabilities:
Reverse repurchase agreements $ 9,806,144 $ 9,805,640
Collateralized debt obligations 1,057,906 1,057,906
Derivative liabilities 16,773 16,773
(1) Derivative assets includes 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 SAB No. 105. The
fair value includes the value of MSRs.
-58-
Changes in fair value that are stated in the table below are derived based upon
assuming immediate and equal changes to market interest rates of various
maturities. The base or current interest rate curve is adjusted by the levels
shown below:
September 30, 2006
--------------------------------------------
-100 -50 +50 +100
Basis Basis Basis Basis
(In thousands) Points Points Points Points
-------- -------- -------- --------
Changes in fair value of mortgage-backed securities, net of the
related financing and hedges $(51,781) $(15,683) $ (2,289) $(20,112)
Changes in fair value of mortgage loans held for sale and
interest rate lock commitments, net of the related financing
and hedges (10,151) (4,921) (3,280) (10,689)
Changes in fair value of mortgage loans held for investment, net
of the related financing and hedges 6,278 5,698 (1,159) (8,145)
Changes in fair value of mortgage servicing rights, net of the
related financing and hedges (24,902) (11,860) 4,021 2,782
-------- -------- -------- --------
Net change $(80,556) $(26,766) $ (2,707) $(36,164)
======== ======== ======== ========
ITEM 4.
CONTROLS AND PROCEDURES
Controls and Procedures
The Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of its disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the end
of the fiscal quarter covered by this quarterly report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures were effective
as of the end of the fiscal quarter covered by this quarterly report. The
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, has evaluated the Company's internal controls over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
to determine whether any changes occurred during the third quarter of 2006 that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting. Based on that evaluation,
there has been no such change during the third quarter of 2006.
-59-
PART II-OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
None.
ITEM 1A.
RISK FACTORS
There have been no material changes during the quarter ended September 30, 2006
to the risk factors previously disclosed in the "Risk Factors" section of the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2005.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5.
OTHER INFORMATION
None.
-60-
ITEM 6.
EXHIBITS
The following exhibits are filed with this Quarterly Report on Form
10-Q:
Exhibit No. Description
----------- ---------------------------------------------------
10.1 -- Master Repurchase Agreement, dated as of September
13, 2006, by and among American Home Mortgage Corp.,
American Home Mortgage Acceptance, Inc., American
Home Mortgage Servicing, Inc., American Home
Mortgage Investment Corp., American Home Mortgage
Holdings, Inc. and Credit Suisse First Boston
Mortgage Capital LLC.
10.2 -- Guaranty, dated as of September 13, 2006, by
American Home Mortgage Holdings, Inc. in favor of
Credit Suisse First Boston Mortgage Capital LLC.
10.3 -- Custodial Agreement, dated as of September 13, 2006,
by and among American Home Mortgage Corp., American
Home Mortgage Acceptance, Inc., American Home
Mortgage Servicing, Inc., American Home Mortgage
Investment Corp., Credit Suisse First Boston
Mortgage Capital LLC and Deutsche Bank National
Trust Company.
10.4 -- Whole Loan Purchase and Sale Agreement, dated as of
September 22, 2006, by and among American Home
Mortgage Corp., American Home Mortgage Investment
Corp., American Home Mortgage Servicing, Inc., Aspen
Funding Corp., Gemini Securitization Corp., LLC,
Newport Funding Corp. and Sedona Capital Funding
Corp., LLC.
10.5 -- Whole Loan Custodial Agreement, dated as of
September 22, 2006, by and among American Home
Mortgage Corp., American Home Mortgage Investment
Corp., American Home Mortgage Servicing, Inc., Aspen
Funding Corp., Gemini Securitization Corp., LLC,
Newport Funding Corp., Sedona Capital Funding Corp.,
LLC and Deutsche Bank National Trust Company.
10.6 -- Amendment No. 1, dated as of September 29, 2006, to
the Third Amended and Restated Master Repurchase
Agreement, dated as of July 15, 2005, by and among
American Home Mortgage Corp., American Home Mortgage
Investment Corp., American Home Mortgage Acceptance,
Inc., American Home Mortgage Servicing, Inc. and
IXIS Real Estate Capital Inc.
10.7 -- Mortgage Loan Purchase and Sale Agreement, dated as
of October 16, 2006, by and among American Home
Mortgage Corp., American Home Mortgage Servicing,
Inc., the entities party thereto as conduit
purchasers, committed purchasers and funding agents
and Societe Generale, as Administrative Agent.
10.8 -- Performance Guaranty, dated as of October 16, 2006,
by American Home Mortgage Holdings, Inc. and
American Home Mortgage Investment Corp. in favor of
Societe Generale, as Administrative Agent for the
purchasers party to the Mortgage Loan Purchase and
Sale Agreement, dated as of October 16, 2006.
10.9 -- Custodial Agreement, dated as of October 16, 2006,
by and among American Home Mortgage Corp., American
Home Mortgage Servicing, Inc., Societe Generale and
Deutsche Bank National Trust Company.
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.
-61-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN HOME MORTGAGE INVESTMENT CORP.
(Registrant)
Date: November 9, 2006 By: /s/ Michael Strauss
-----------------------------------------
Michael Strauss
Chairman, Chief Executive Officer
and President
Date: November 9, 2006 By: /s/ Stephen A. Hozie
-----------------------------------------
Stephen A. Hozie
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
-62-
INDEX TO EXHIBITS
Exhibit No. Description
----------- ---------------------------------------------------
10.1 -- Master Repurchase Agreement, dated as of September
13, 2006, by and among American Home Mortgage Corp.,
American Home Mortgage Acceptance, Inc., American
Home Mortgage Servicing, Inc., American Home
Mortgage Investment Corp., American Home Mortgage
Holdings, Inc. and Credit Suisse First Boston
Mortgage Capital LLC.
10.2 -- Guaranty, dated as of September 13, 2006, by
American Home Mortgage Holdings, Inc. in favor of
Credit Suisse First Boston Mortgage Capital LLC.
10.3 -- Custodial Agreement, dated as of September 13, 2006,
by and among American Home Mortgage Corp., American
Home Mortgage Acceptance, Inc., American Home
Mortgage Servicing, Inc., American Home Mortgage
Investment Corp., Credit Suisse First Boston
Mortgage Capital LLC and Deutsche Bank National
Trust Company.
10.4 -- Whole Loan Purchase and Sale Agreement, dated as of
September 22, 2006, by and among American Home
Mortgage Corp., American Home Mortgage Investment
Corp., American Home Mortgage Servicing, Inc., Aspen
Funding Corp., Gemini Securitization Corp., LLC,
Newport Funding Corp. and Sedona Capital Funding
Corp., LLC.
10.5 -- Whole Loan Custodial Agreement, dated as of
September 22, 2006, by and among American Home
Mortgage Corp., American Home Mortgage Investment
Corp., American Home Mortgage Servicing, Inc., Aspen
Funding Corp., Gemini Securitization Corp., LLC,
Newport Funding Corp., Sedona Capital Funding Corp.,
LLC and Deutsche Bank National Trust Company.
10.6 -- Amendment No. 1, dated as of September 29, 2006, to
the Third Amended and Restated Master Repurchase
Agreement, dated as of July 15, 2005, by and among
American Home Mortgage Corp., American Home Mortgage
Investment Corp., American Home Mortgage Acceptance,
Inc., American Home Mortgage Servicing, Inc. and
IXIS Real Estate Capital Inc.
10.7 -- Mortgage Loan Purchase and Sale Agreement, dated as
of October 16, 2006, by and among American Home
Mortgage Corp., American Home Mortgage Servicing,
Inc., the entities party thereto as conduit
purchasers, committed purchasers and funding agents
and Societe Generale, as Administrative Agent.
10.8 -- Performance Guaranty, dated as of October 16, 2006,
by American Home Mortgage Holdings, Inc. and
American Home Mortgage Investment Corp. in favor of
Societe Generale, as Administrative Agent for the
purchasers party to the Mortgage Loan Purchase and
Sale Agreement, dated as of October 16, 2006.
10.9 -- Custodial Agreement, dated as of October 16, 2006,
by and among American Home Mortgage Corp., American
Home Mortgage Servicing, Inc., Societe Generale and
Deutsche Bank National Trust Company.
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.
-63-