UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2003
Commission File Number: 001-11981
MUNICIPAL MORTGAGE & EQUITY, LLC
--------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1449733
---------- ------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
218 North Charles Street, Suite 500, 21201
Baltimore, Maryland
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(Address of Principal Executive Offices) (Zip Code)
(443) 263-2900
----------------
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [x] No [ ]
The Registrant had 28,869,553 common shares outstanding as of May 5, 2003.
MUNICIPAL MORTGAGE & EQUITY, LLC
INDEX TO FORM 10-Q
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
Item 4. Controls and Procedures 24
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
Certifications 26
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
March 31, 2003 December 31, 2002
-------------------- ---------------------
ASSETS
Investment in tax-exempt bonds, net (Note 2) $ 801,288 $ 770,345
Loans receivable, net (Note 3) 440,112 461,448
Investments in partnerships 98,756 99,966
Residual interests in bond securitizations (Note 4) 10,999 11,039
Investment in derivative financial instruments (Note 5) 18,404 18,762
Cash and cash equivalents 47,274 43,745
Interest receivable 18,712 16,157
Restricted assets 43,582 40,318
Other assets (Note 6) 30,164 46,592
Mortgage servicing rights, net 11,059 11,009
Goodwill 33,589 33,537
-------------------- ---------------------
Total assets $ 1,553,939 $ 1,552,918
==================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable (Note 7) $ 381,073 $ 450,924
Short-term debt (Note 7) 219,590 219,945
Long-term debt (Note 7) 146,987 147,357
Residual interests in bond securitizations (Note 4) 1,438 1,447
Investment in derivative financial instruments (Note 5) 46,128 49,359
Accounts payable and accrued expenses 8,324 14,113
Unearned revenue and other liabilities 19,734 19,250
Distributions payable 2,994 2,994
-------------------- ---------------------
Total liabilities 826,268 905,389
-------------------- ---------------------
Commitments and contingencies (Note 8) - -
Preferred shareholders' equity in a subsidiary company 160,465 160,465
Shareholders' equity:
Common shares, par value $0 (32,303,599 shares authorized, including 28,869,430
shares issued and outstanding, and 32,311 deferred shares at March 31, 2003
and 29,083,599 authorized, 25,571,580 shares issued and outstanding, and
29,844 deferred shares at December 31, 2002) 547,516 471,946
Less common shares held in treasury at cost (55,444 at March 31, 2003 and
December 31, 2002) (857) (857)
Less unearned compensation (deferred shares) (Note 12) (3,278) (3,274)
Accumulated other comprehensive income 23,825 19,249
-------------------- ---------------------
Total shareholders' equity 567,206 487,064
-------------------- ---------------------
Total liabilities and shareholders' equity $ 1,553,939 $ 1,552,918
==================== =====================
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
(unaudited)
For the three months ended
March 31,
-------------------------------
2003 2002
-------------- --------------
INCOME:
Interest income
Interest on bonds and residual interests in bond securitizations $ 15,985 $ 15,162
Interest on loans 9,503 8,430
Interest on short-term investments 192 487
-------------- --------------
Total interest income 25,680 24,079
-------------- --------------
Fee income
Syndication fees 1,411 1,618
Origination fees 698 1,089
Loan servicing fees 1,909 1,908
Asset management and advisory fees 1,076 867
Other income 2,197 1,145
-------------- --------------
Total fee income 7,291 6,627
-------------- --------------
Net gain on sales 1,278 2,166
-------------- --------------
Total income 34,249 32,872
-------------- --------------
EXPENSES:
Interest expense 10,368 8,972
Salaries and benefits 5,966 4,827
General and administrative 1,656 1,726
Professional fees 989 637
Amortization of mortgage servicing rights and other intangibles 389 318
-------------- --------------
Total expenses 19,368 16,480
-------------- --------------
Net holding gains on derivatives 2,873 3,112
Impairments and valuation allowances related to investments (Notes 2 and 3) - (110)
Net losses from equity investments in partnerships (747) (323)
-------------- --------------
Net income before income taxes and income allocated to
preferred shareholders in a subsidiary company 17,007 19,071
Income tax expense 68 1,031
-------------- --------------
Net income before income allocated to preferred shareholders
in a subsidiary company 16,939 18,040
Income allocable to preferred shareholders in a subsidiary company 2,994 2,994
-------------- --------------
Net income $ 13,945 $ 15,046
============== ==============
Net income allocated to:
Term growth shares $ - $ 153
============== ==============
Common shares $ 13,945 $ 14,893
============== ==============
Basic earnings per common share:
Basic earnings per common share $ 0.51 $ 0.63
============== ==============
Weighted average common shares outstanding 27,342,870 23,584,635
Diluted earnings per common share:
Diluted earnings per common share $ 0.50 $ 0.62
============== ==============
Weighted average common shares outstanding 27,681,511 24,200,030
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(unaudited)
For the three months ended
March 31,
---------------------------------
2003 2002
---------------- ---------------
Net income $ 13,945 $ 15,046
---------------- ---------------
Other comprehensive income (loss):
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising during the period 4,576 (4,134)
Reclassification adjustment for gains included in net income - (956)
---------------- ---------------
Other comprehensive income (loss) 4,576 (5,090)
---------------- ---------------
Comprehensive income $ 18,521 $ 9,956
================ ===============
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the three months ended
March 31,
--------------------------------
2003 2002
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,945 $ 15,046
Adjustments to reconcile net income to net cash provided by operating activities:
Income allocated to preferred shareholders in a subsidiary company 2,994 2,994
Net holding gains on trading securities (2,873) (3,112)
Impairments and valuation allowances related to investments - 110
Net gain on sales (1,278) (2,166)
Loss from investments in partnerships 747 323
Distributions received from investments in partnerships 1,714 128
Net amortization of premiums, discounts and fees on investments (116) 18
Depreciation and amortization 531 459
Tax benefit from deferred share benefit 313 171
Deferred share compensation expense 444 448
Common and deferred shares issued under the Non-Employee Directors' Share Plans 67 45
Net change in assets and liabilities:
(Increase) decrease in interest receivable (2,555) 670
Decrease in other assets and goodwill 16,275 4,627
Decrease in accounts payable, accrued expenses and other liabilities (5,305) (5,376)
--------------- ---------------
Net cash provided by operating activities 24,903 14,385
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of tax-exempt bonds and residual interests in bond securitizations (27,345) (32,156)
Loan originations (89,078) (85,870)
Purchases of property and equipment (78) (132)
Net (investment) reduction in restricted assets (3,264) 2,165
Principal payments received 112,317 144,158
Investments in partnerships (19,770) (6,519)
Return of capital invested in partnerships 18,617 -
Proceeds from sales of investments - 4,179
--------------- ---------------
Net cash (used in) provided by investing activities (8,601) 25,825
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from credit facilities 167,522 101,296
Repayment of credit facilities (237,373) (187,602)
Proceeds from short-term debt - 3,905
Repayment of short-term debt (355) (28,965)
Proceeds from long-term debt - 3,538
Repayment of long-term debt (370) (49)
Issuance of common shares 71,944 77,547
Redemption of preferred shares - (19,298)
Proceeds from stock options exercised 188 611
Distributions on common shares (11,335) (9,831)
Distributions to preferred shareholders in a subsidiary company (2,994) (2,960)
--------------- ---------------
Net cash used in financing activities (12,773) (61,808)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents 3,529 (21,598)
Cash and cash equivalents at beginning of period 43,745 97,373
--------------- ---------------
Cash and cash equivalents at end of period $ 47,274 $ 75,775
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 10,238 $ 8,608
=============== ===============
Income taxes paid $ 64 $ 220
=============== ===============
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share data) (unaudited)
Accumulated
Other
Common Treasury Unearned Comprehensive
Shares Shares Compensation Income Total
------------- ----------- -------------- --------------- ---------------
Balance, January 1, 2003 $ 471,946 $ (857) $ (3,274) $ 19,249 $ 487,064
Net income 13,945 - - - 13,945
Unrealized gains on investments, net of
reclassifications - - - 4,576 4,576
Distributions (11,335) - - - (11,335)
Options exercised 188 - - - 188
Issuance of common shares 71,953 - - - 71,953
Deferred shares issued under the
Non-Employee Directors' Share Plans (Note 12) 58 - - - 58
Deferred share grants (Note 12) 900 - (900) - -
Forfeiture of deferred shares (452) - 452 -
Amortization of deferred compensation (Note 12) - - 444 - 444
Tax benefit from exercise of options and
vesting of deferred shares 313 - - - 313
------------- ----------- -------------- --------------- ---------------
Balance, March 31, 2003 $ 547,516 $ (857) $ (3,278) $ 23,825 $ 567,206
============= =========== ============== =============== ===============
Common Treasury
SHARE ACTIVITY: Shares Shares
------------- -----------
Balance, January 1, 2003 25,545,980 55,444
Options exercised 10,000 -
Issuance of common shares 3,220,381 -
Issuance of common shares under
employee share incentive plans (Note 12) 67,469 -
Deferred shares issued under the
Non-Employee Directors' Share Plans (Note 12) 2,467 -
------------- -----------
Balance, March 31, 2003 28,846,297 55,444
============= ===========
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
Municipal Mortgage & Equity, LLC ("MuniMae" and, together with its
subsidiaries, the "Company") provides debt and equity financing to developers of
multifamily housing. The Company invests in tax-exempt bonds, or interests in
bonds, issued by state and local governments or their agencies or authorities to
finance multifamily housing developments. Interest income derived from the
majority of these bond investments is exempt income for federal income tax
purposes. Multifamily housing developments, as well as the rents paid by the
tenants, secure these investments.
The Company is also a mortgage banker. Mortgage banking activities include
the origination, investment in and servicing of investments in multifamily
housing, both for its own account and on behalf of third parties. These
investments generate taxable income.
The Company also invests in (1) other housing-related debt and equity
investments, including equity investments in income-producing real estate
operating partnerships and tax-exempt bonds, or interests in bonds, secured by
student housing or assisted living developments, and (2) tax-exempt community
development bonds, typically secured by special taxes imposed on single-family
or other community development districts or by assessments imposed on the
residents or other lot owners of those developments.
The Company also acquires and sells interests in partnerships that provide
low-income housing tax credits for investors. The Company earns syndication fees
on the placement of these interests with investors, including the Federal
National Mortgage Association ("Fannie Mae") and a number of corporate
investors. The Company also earns asset management fees for managing the
low-income housing tax credit funds syndicated.
MuniMae is a Delaware limited liability company. As a limited liability
company, the Company combines the limited liability, governance and management
characteristics of a corporation with the pass-through income features of a
partnership. Since MuniMae is classified as a partnership for federal income tax
purposes, no recognition of income taxes is made at the corporate level (except
for income earned through subsidiaries of the Company organized as
corporations). Instead, the distributive share of MuniMae's income, deductions
and credits is included in each shareholder's income tax return.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission and in the opinion of management contain all adjustments
(consisting of only normal recurring accruals) necessary to present a fair
statement of the results for the periods presented. These results have been
determined on the basis of accounting principles and policies discussed in Note
1 to the Company's Annual Report on Form 10-K for the year ended December 31,
2002 (the "Company's 2002 Form 10-K"). Certain information and footnote
disclosures normally included in financial statements presented in accordance
with generally accepted accounting principles ("GAAP") have been condensed or
omitted. The accompanying financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's 2002
Form 10-K. Certain 2002 amounts have been reclassified to conform to the 2003
presentation.
The Company posts all Securities and Exchange Commission reports on their
website at http://www.munimaemidland.com. These reports are available free of
charge.
New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board approved
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46 requires the consolidation of a Company's equity investment in a variable
interest entity ("VIE") if the Company is the primary beneficiary of the VIE and
if risks are not effectively dispersed among the owners of the VIE. The Company
is considered to be the primary beneficiary of the VIE if the Company absorbs
the majority of the losses of the VIE. FIN 46 is effective for VIEs created
after January 31, 2003. For any VIE in which the Company held an interest that
it acquired before February 1, 2003, FIN 46 is effective for the first interim
reporting period after June 15, 2003. No VIEs were created during the quarter
ended March 31, 2003. The Company is currently reviewing the impact of FIN 46 on
the tax credit syndication funds that a wholly owned subsidiary of the Company
sponsors and asset manages. The Company will continue to review new investments
in order to determine if they should be accounted for in accordance with FIN 46.
NOTE 2 - INVESTMENT IN TAX-EXEMPT BONDS
The Company originates investments in tax-exempt bonds and taxable loans
primarily to the affordable multifamily housing industry. Tax-exempt bonds are
issued by state and local government authorities to finance multifamily housing
developments or other real estate financings. The bonds are typically secured by
nonrecourse mortgage loans or tax levies on the underlying properties. The
Company's sources of capital to fund these lending activities include proceeds
from equity offerings, securitizations, and draws on lines of credit. The
Company earns interest income from its investment in tax-exempt bonds and
taxable loans. The Company also earns origination and construction
administration fees from originating the bonds and servicing the bonds during
the construction period. For further discussion of the general terms of
tax-exempt bonds see Note 1 to the Company's 2002 Form 10-K.
As of March 31, 2003 and December 31, 2002, the Company held $801.3 million
and $770.3 million of tax-exempt bonds, respectively. The following table
summarizes tax-exempt bonds by type.
March 31, 2003
--------------------------------------------------------------
Face Amortized Unrealized Fair
(000s) Amount Cost Gain (Loss) Value
------------- ------------- ------------ --------------
Non-participating bonds $ 678,542 $ 648,146 $ (1,157) $ 646,989
Participating bonds 82,735 81,839 2,506 84,345
Subordinate non-participating bonds 19,037 17,698 153 17,851
Subordinate participating bonds 58,890 35,799 16,304 52,103
------------- ------------- ------------ --------------
Total $ 839,204 $ 783,482 $ 17,806 $ 801,288
============= ============= ============ ==============
December 31, 2002
--------------------------------------------------------------
Face Amortized Unrealized Fair
(000s) Amount Cost Gain (Loss) Value
------------- ------------- ------------ --------------
Non-participating bonds $ 651,737 $ 621,594 $ (4,692) $ 616,902
Participating bonds 82,852 81,956 1,893 83,849
Subordinate non-participating bonds 19,039 17,700 106 17,806
Subordinate participating bonds 58,890 35,799 15,989 51,788
------------- ------------- ------------ --------------
Total $ 812,518 $ 757,049 $ 13,296 $ 770,345
============= ============= ============ ==============
During the first quarter of 2003, the Company invested in tax-exempt bonds
with a face amount of $18.7 million for $18.7 million. These investments
represent new primary investments (bonds which the Company originated).
In order to facilitate the securitization (see Note 1 to the Company's 2002
Form 10-K) of certain assets at higher leverage ratios than otherwise available
to the Company without the posting of additional collateral, the Company has
pledged additional bonds as collateral for senior interests in certain
securitization trusts and credit enhancement facilities. At March 31, 2003 and
December 31, 2002, the total carrying amount of the tax-exempt bonds pledged as
collateral for such trusts and facilities was $387.8 million and $372.9 million,
respectively.
NOTE 3 - LOANS RECEIVABLE
The Company's loans receivable consist primarily of construction loans,
permanent loans, supplemental loans and other taxable loans. For further
discussion of the general terms of loans held by the Company see the description
of mortgage banking activities in Note 1 to the Company's 2002 Form 10-K. The
following table summarizes loans receivable by loan type at March 31, 2003 and
December 31, 2002.
(000s) March 31, 2003 December 31, 2002
-------------------- -------------------
Loan Type:
Construction loans $ 304,406 $ 300,266
Taxable permanent loans 12,671 44,665
Supplemental loans 87,623 80,459
Other taxable loans 36,484 37,130
-------------------- -------------------
441,184 462,520
Allowance for loan losses (1,072) (1,072)
-------------------- -------------------
Total $ 440,112 $ 461,448
==================== ===================
The Company pledges its construction loans and permanent loans as
collateral for the Company's notes payable and line of credit borrowings. In
addition, in order to facilitate the securitization of certain assets at higher
leverage ratios than otherwise available to the Company without the posting of
additional collateral, the Company has pledged additional taxable loans to a
pool that acts as collateral for senior interests in certain securitization
trusts and credit enhancement facilities. At March 31, 2003 and December 31,
2002, the total carrying amount of the loans receivable pledged as collateral
was $357.0 million and $417.1 million, respectively.
NOTE 4 - RESIDUAL INTERESTS IN BOND SECURITIZATIONS
At March 31, 2003 and December 31, 2002, the Company's residual interests
in bond securitizations are investments in Residual Interest Tax-Exempt
Securities Receipts ("RITESSM"). For further discussion of the Company's
securitization programs see Note 1 to the Company's 2002 Form 10-K. The
following table provides certain information with respect to the residual
interests in bond securitizations held by the Company at March 31, 2003 and
December 31, 2002.
(000s) March 31, 2003
-------------------------------------------------------------------------------------------
Fair Value (1)
Face Amortized Unrealized ---------------------------------------------
Amount Cost Gain (Loss) Assets Liabilities (2) Net
------------ ------------ ------------- ------------- -------------- ------------
Total RITESSM (3) $ 329 $ 3,542 $ 6,019 $ 10,999 $ (1,438) $ 9,561
============ ============ ============= ============= ============== ============
(000s) December 31, 2002
-------------------------------------------------------------------------------------------
Fair Value (1)
Face Amortized Unrealized ---------------------------------------------
Amount Cost Gain (Loss) Assets Liabilities (2) Net
------------ ------------ ------------- ------------- -------------- ------------
Total RITESSM (3) $ 334 $ 3,639 $ 5,953 $ 11,039 $ (1,447) $ 9,592
============ ============ ============= ============= ============== ============
(1) The amounts disclosed represent the fair values of all the Company's
investments in residual interests in bond securitizations at the reporting
date.
(2) The aggregate negative fair value of the investments is included in
liabilities for financial reporting purposes. The negative fair value of
these investments is considered temporary and is not indicative of the
future earnings on these investments.
(3) The amount of outstanding Puttable Floating Option Tax-Exempt Receipts
("P-FloatsSM"), which are senior to the Company's RITESSM investments and
which are not reflected in the Company's balance sheet, was $177.6 million
and $177.8 million at March 31, 2003 and December 31, 2002, respectively.
The Company did not purchase or sell any RITESSM interests in the first
quarter of 2003.
RITESSM Valuation Analysis
The fair value of a RITESSM investment is derived from the quote on the
underlying bond reduced by the outstanding corresponding P-FLOATsSM face amount.
The Company bases the fair value of the underlying bond, which has a limited
market, on quotes from external sources, such as brokers, for these or similar
bonds. The fair value of the underlying bond includes a prepayment risk factor.
The prepayment risk factor is reflected in the fair value of the bond by
assuming the bond will prepay at the most adverse time to the Company given
current market rates and estimates of future market rates. Based on this, an
adverse change in prepayment risk would not have an effect on the fair value of
the Company's RITESSM investments. In addition, the RITESSM investments are not
subject to prepayment risk as the term of the securitization trusts is only for
a period during which the underlying bond cannot be prepaid. Based on historical
information, credit losses were estimated to be zero.
At March 31, 2003 and December 31, 2002, a 10% and 20% adverse change
in key assumptions used to estimate the fair value of the Company's RITESSM
would have the following impact.
(000s) March 31, 2003 December 31, 2002
---------------- -------------------
Fair value of retained interests, net $9,561 $9,592
Residual cash flows discount rate (annual rate) 3.2% - 8.6% 3.8% - 8.1%
Impact on fair value of 10% adverse change ($8,963) ($9,108)
Impact on fair value of 20% adverse change ($17,162) ($17,444)
The sensitivity analysis presented above is hypothetical in nature and
presented for information purposes only. The analysis shows the effect on fair
value of a variation in one assumption and is calculated without considering the
effect of changes in any other assumption. In reality, changes in one assumption
may affect the others, which may magnify or offset the sensitivities.
NOTE 5 - INVESTMENT IN DERIVATIVE FINANCIAL INSTRUMENTS
At March 31, 2003 and December 31, 2002, the Company's investments in
derivative financial instruments consisted of interest rate swaps and put option
contracts. For further discussion of the Company's investment in derivative
financial instruments see Note 6 to the Company's 2002 Form 10-K. The Company
did not purchase or sell any derivative financial instruments in the first
quarter of 2003. The following table provides certain information with respect
to the derivative financial instruments held by the Company at March 31, 2003
and December 31, 2002.
March 31, 2003 December 31, 2002
--------------------------------------------- ---------------------------------------------
(000s) Notional Fair Value (2) Notional Fair Value (2)
Amount (1) Assets Liabilities(3) Amount (1) Assets Liabilities(3)
------------ ---------------- --------------- ------------ ---------------- ---------------
Interest rate swap agreements $ 349,810 $ 18,404 $ (46,128) $ 349,810 $ 18,762 $ (49,359)
Put option agreements 98,539 - - 98,539 - -
---------------- --------------- ---------------- ---------------
Total investment in derivative financial instruments $ 18,404 $ (46,128) $ 18,762 $ (49,359)
================ =============== ================ ===============
(1) For the interest rate swap agreements, notional amount represents total
amount of the Company's interest rate swap contracts ($598,415 as of March
31, 2003 and December 31, 2002, respectively) less the total amount of the
Company's reverse interest rate swap contracts ($248,605 as of March 31,
2003 and December 31, 2002, respectively). For put option agreements, the
notional amount represents the Company's aggregate obligation under the put
option agreements.
(2) The amounts disclosed represent the net fair values of all the Company's
derivatives at the reporting date.
(3) The aggregate negative fair value of the investments is included in
liabilities for financial reporting purposes. The negative fair value of
these investments is considered temporary and is not indicative of the
future earnings on these investments.
NOTE 6 - OTHER ASSETS
The Company's investment in other assets includes prepaid expenses, other
receivables, debt issue costs, property and equipment, and certain investments
in interest-only securities. Included in the other asset balance at March 31,
2003 and December 31, 2002, is $7.3 million and $23.3 million, respectively, of
receivables due from various syndicated low-income housing tax credit funds (for
further discussion of syndicated low-income housing tax credit funds, see Note 1
to the Company's 2002 Form 10-K). The decrease in this receivable from December
31, 2002 to March 31, 2003 is due to certain funds repaying the Company after
obtaining an alternative source of financing.
NOTE 7 - NOTES PAYABLE AND DEBT
The Company's notes payable consist primarily of notes payable and advances
under line of credit arrangements, which are used to: (1) finance construction
lending needs; (2) finance working capital needs; (3) warehouse real estate
operating partnerships before they are placed into tax credit equity funds; and
(4) warehouse permanent loans before they are sold. The Company's short- and
long-term debt relates to securitization transactions that the Company has
recorded as borrowings (see Notes 1 and 9 to the Company's 2002 Form 10-K). The
following table summarizes notes payable and debt at March 31, 2003 and December
31, 2002.
(000s) Total of Facilities March 31, 2003 December 31, 2002
--------------------- ----------------- -------------------
Short-term notes payable N/A 123,635 $ 126,410
Lines of credit - unaffiliated entities $ 154,000 59,834 110,821
Lines of credit - affiliated entities $ 240,000 45,181 89,053
Short-term debt N/A 219,590 219,945
----------------- --------------------
Total short-term notes payable and debt 448,240 546,229
----------------- --------------------
Long-term notes payable N/A 152,423 124,640
Long-term debt N/A 146,987 147,357
----------------- --------------------
Total long-term notes payable and debt 299,410 271,997
----------------- --------------------
Total notes payable and debt $ 747,650 $ 818,226
================= ====================
Covenant Compliance
Under the terms of the various credit facilities, the Company is required
to comply with covenants including net worth, interest coverage, collateral and
other terms and conditions. The Company was in compliance with its debt
covenants at March 31, 2003.
NOTE 8 - GUARANTEES, COMMITMENTS AND CONTINGENCIES
For discussion of the Company's commitments and contingencies see Note 11
to the Company's 2002 Form 10-K. Since December 31, 2002, there has been no
material change to the information related to commitments and contingencies.
Guarantees
The Company's maximum exposure under its guarantee obligations is not
indicative of the likelihood of the expected loss under the guarantees. The
Company recognizes contingent liabilities on guarantees when the losses are
probable and can be reasonably estimated.
The following table summarizes the Company's guarantees by type at March
31, 2003.
(in millions) March 31, 2003
----------------------------------------------------------------------------------
Maximum Carrying
Guarantee Note Exposure Amount Supporting Collateral
-------------------------------- -------- ----------- ----------- ----------------------------------------------------------
Loss-Sharing Agreement with Fannie
Mae and GNMA/HUD (1) $ 170.4 $ - $5.0 million Letter of Credit pledged
Bank Line of Credit Guarantees (2) 105.0 - Investment in partnership and loans totaling $87.6 million
Tax Credit Related Guarantees (3) 42.8 0.1 None
Other Financial/Payment Guarantees (4) 408.9 1.8 None
Put Options (5) 101.6 - $30 million of loans and tax-exempt bonds
Letter of Credit Guarantees (6) 25.8 - None
Indemnification Contracts (7) 13.6 - None
----------- -----------
$ 868.1 $ 1.9
=========== ===========
Notes:
(1) As a Fannie Mae DUS lender and Government National Mortgage Association
("GNMA") loan servicer, the Company may share in losses relating to
underperforming real estate mortgage loans delivered to Fannie Mae and
GNMA. More specifically, if the borrower fails to make a payment on a DUS
loan originated by the Company and sold to Fannie Mae, of principal,
interest, taxes or insurance premiums, the Company may be required to make
servicing advances to Fannie Mae. Also, the Company may participate in a
deficiency after foreclosure on DUS and GNMA loans. As a DUS lender, the
Company must maintain a minimum net worth and collateral with a custodian.
The term of the loss sharing agreement is based on the contractual
requirements of the underlying loans delivered to Fannie Mae and GNMA,
which varies to a maximum of 30 years.
(2) The Company, or its subsidiaries, provides payment or performance
guarantees for certain borrowings under line of credit facilities with a
term of 1 year or less.
(3) The Company acquires and sells interests in partnerships that provide
low-income housing tax credits for investors. In conjunction with the sale
of these partnership interests, the Company may provide performance
guarantees on the underlying properties owned by the partnerships or
guarantees to the fund investors. These guarantees have various expirations
to a maximum term of 18 years.
(4) The Company, or its subsidiaries, has entered into arrangements that
require the Company to make payment in the event a specified third party
fails to perform on its financial obligation. The Company typically
provides these guarantees in conjunction with the sale of an asset to a
third party or the Company's investment in equity ventures. The term of the
guarantee varies based on loan payoff schedules or Company divestitures.
(5) The Company has entered into put option agreements with counterparties
whereby the counterparty has the right to sell to the Company, and the
Company has the obligation to buy, an underlying investment at a specified
price. These put option agreements expire at various dates between February
1, 2006 and February 26, 2008.
(6) The Company, or its subsidiaries, provide a guarantee of the repayment on
losses incurred under letters of credit issued by third parties or provide
a guarantee to provide substitute letters of credit at a predetermined
future date. In addition, the Company may provide a payment guarantee for
certain assets in securitization programs. These guarantees expire at
various dates between March 1, 2004 and September 1, 2017.
(7) The Company has entered into indemnification contracts, which require the
guarantor to make payments to the guaranteed party based on changes in an
underlying investment that is related to an asset or liability of the
guaranteed party. These agreements typically require the Company to
reimburse the guaranteed party for legal and other costs in the event of an
adverse judgment in a lawsuit or the imposition of additional taxes due to
a change in the tax law or an adverse interpretation of the tax law. The
term of the indemnification varies based on the underlying program life,
loan payoffs, or Company divestitures. Based on the terms of the underlying
contracts, the maximum exposure amount only includes amounts that can be
reasonably estimated at this time; the actual exposure amount could vary
significantly.
NOTE 9 - COMMON SHARE OFFERING
In February 2003, the Company sold to the public 2.8 million common shares
at a price of $23.60 per share and granted the underwriters an option to
purchase up to an aggregate of 420,000 common shares to cover over-allotments at
the same price. Net proceeds on the 2.8 million shares approximated $62.5
million. On February 11, 2003, the underwriters exercised their option to
purchase 420,000 common shares, generating net proceeds of approximately $9.4
million. The net proceeds from this offering will be used for general corporate
purposes, including funding of new investments, paying down debt and working
capital.
NOTE 10 - EARNINGS PER SHARE
The following table reconciles the numerators and denominators in the
basic and diluted earnings per share ("EPS") calculations for common shares for
the three months ended March 31, 2003 and 2002. The effect of all potentially
dilutive securities was included in the calculation.
For the three months ended March 31, 2003 For the three months ended March 31, 2002
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- -------------- ---------- ------------- --------------- ------------
(000s, except share and per share data)
Basic EPS
Income allocable to common shares $ 13,945 27,342,870 $ 0.51 $ 14,893 23,584,635 $ 0.63
========== ============
Effect of Dilutive Securities
Options and deferred shares - 338,641 - 482,540
Earnings contingency - - - 132,855
------------- -------------- ------------- ---------------
Diluted EPS
Income allocable to common shares
plus assumed conversions $ 13,945 27,681,511 $ 0.50 $ 14,893 24,200,030 $ 0.62
============= ============== ========== ============= =============== ============
NOTE 11 - DISTRIBUTIONS
On April 17, 2003, the Board of Directors declared a distribution of
$0.4450 for the three months ended March 31, 2003, to common shareholders of
record on April 28, 2003. The payment date was May 9, 2003.
NOTE 12 - NON-EMPLOYEE DIRECTORS' SHARE PLANS AND EMPLOYEE SHARE INCENTIVE PLANS
The Company accounts for both the non-employee director share plans and the
employee share incentive plans (see Note 1 and Note 15 to the Company's 2002
Form 10-K) under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation expense has been recognized for the options issued
under the plans during the first quarter of 2003. There were no options issued
in the first quarter of 2002. The Company estimated the fair value of each
option awarded in the first quarter of 2003 using the Black-Scholes
option-pricing model with the following assumptions.
For the Three
Months Ended
March 31, 2003
-----------------------
Risk-free interest rate 3%
Dividend yield 7.5%
Volatility 20%
Expected option life 7.5 years
Weighted average fair value of options $ 1.40
The following table illustrates the effect on net income and earnings per
share as if the compensation expense had been determined based on the fair value
recognition provisions of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" as amended by Financial Accounting Standards
No.148 "Accounting for Stock-Based Compensation-Transition and Disclosure."
For the Three
Months Ended
(000s) March 31, 2003
--------------------
Net income allocated to common shares, as reported $ 13,945
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (10)
--------------------
Net income allocated to common shares, pro forma $ 13,935
====================
Earnings per common share:
Basic - as reported $ 0.51
====================
Basic - pro forma $ 0.51
====================
Diluted - as reported $ 0.50
====================
Diluted - pro forma $ 0.50
====================
NOTE 13 - BUSINESS SEGMENT REPORTING
The Company has two reportable business segments: (1) an operating segment
consisting of subsidiaries that primarily generate taxable fee income by
providing loan servicing, loan origination and other related services and (2) an
investing segment consisting primarily of subsidiaries holding investments
producing tax-exempt interest income. The accounting policies of the segments
are the same as those described in the summary of significant accounting
policies in Note 1 to the Company's 2002 Form 10-K. A complete description of
the Company's reporting segments is described in Note 18 to the Company's 2002
Form 10-K.
The following table reflects the results of the Company's business segments
for the three months ended March 31, 2003 and 2002.
Municipal Mortgage & Equity, LLC
Segment Reporting for the three months ended March 31, 2003 and 2002
(in thousands) (unaudited)
For the three months ended March 31, 2003
------------------------------------------------------------
Total
Investing Operating Adjustments Consolidated
------------ ------------ --------------- --------------
INCOME:
Interest income
Interest on bonds and residual interest in bond securitizations 15,739 246 - 15,985
Interest on loans 829 8,674 - 9,503
Interest on short-term investments 1,197 61 (1,066)(1) 192
------------ ------------ -------------- --------------
Total interest income 17,765 8,981 (1,066) 25,680
------------ ------------ -------------- --------------
Fee income
Syndication fees - 1,411 - 1,411
Origination fees - 1,160 (462)(2) 698
Loan servicing fees - 1,909 - 1,909
Asset management and advisory fees - 1,076 - 1,076
Other income 1,308 889 - 2,197
------------ ------------ -------------- --------------
Total fee income 1,308 6,445 (462) 7,291
------------ ------------ -------------- --------------
Net gain on sales - 1,278 - 1,278
------------ ------------ -------------- --------------
Total Income 19,073 16,704 (1,528) 34,249
------------ ------------ -------------- --------------
Expenses:
Interest expense 3,491 7,943 (1,066)(1) 10,368
Salaries and benefits 473 5,493 - 5,966
General and administrative 553 1,103 - 1,656
Professional fees 544 445 - 989
Amortization of mortgage servicing rights and other intangibles - 389 - 389
------------ ------------ -------------- --------------
Total expenses 5,061 15,373 (1,066) 19,368
------------ ------------ -------------- --------------
Net holding gains on derivatives 2,873 - - 2,873
Impairments and valuation allowances related to investments - - - -
Net losses from equity investments in partnerships - (747) - (747)
------------ ------------ -------------- --------------
Net income before income taxes and income allocated to
preferred shareholders in a subsidiary company 16,885 584 (462) 17,007
Income tax expense - 68 - 68
------------ ------------ -------------- --------------
Net income before income allocated to preferred shareholders
in a subsidiary company 16,885 516 (462) 16,939
Income allocable to preferred shareholders in a subsidiary company 2,994 - - 2,994
------------ ------------ -------------- --------------
Net income 13,891 516 (462) 13,945
============ ============ ============-- ==============
For the three months ended March 31, 2002
------------------------------------------------------------
Total
Investing Operating Adjustments Consolidated
------------ ------------ -------------- --------------
INCOME:
Interest income
Interest on bonds and residual interest in bond securitizations 14,108 1,054 - 15,162
Interest on loans 848 7,582 - 8,430
Interest on short-term investments 441 46 - 487
------------ ------------ -------------- --------------
Total interest income 15,397 8,682 - 24,079
------------ ------------ -------------- --------------
Fee income
Syndication fees - 1,618 - 1,618
Origination fees - 1,508 (419)(2) 1,089
Loan servicing fees - 1,908 - 1,908
Asset management and advisory fees - 867 - 867
Other income 357 788 - 1,145
------------ ------------ -------------- --------------
Total fee income 357 6,689 (419) 6,627
------------ ------------ -------------- --------------
Net gain on sales 956 1,210 - 2,166
------------ ------------ -------------- --------------
Total Income 16,710 16,581 (419) 32,872
------------ ------------ -------------- --------------
Expenses:
Interest expense 2,389 6,583 - 8,972
Salaries and benefits 1,108 3,719 - 4,827
General and administrative 413 1,313 - 1,726
Professional fees (25) 662 - 637
Amortization of mortgage servicing rights and other intangibles - 318 - 318
------------ ------------ -------------- --------------
Total expenses 3,885 12,595 - 16,480
------------ ------------ -------------- --------------
Net holding gains on derivatives 3,112 - - 3,112
Impairments and valuation allowances related to investments (110) - - (110)
Net losses from equity investments in partnerships - (323) - (323)
------------ ------------ -------------- --------------
Net income before income taxes and income allocated to
preferred shareholders in a subsidiary company 15,827 3,663 (419) 19,071
Income tax expense - 1,031 - 1,031
------------ ------------ -------------- --------------
Net income before income allocated to preferred shareholders
in a subsidiary company 15,827 2,632 (419) 18,040
Income allocable to preferred shareholders in a subsidiary company 2,994 - - 2,994
------------ ------------ -------------- --------------
Net income 12,833 2,632 (419) 15,046
============ ============ ============== ===============
Notes:
(1) Adjustments represents intercompany interest income and expense that are
eliminated in consolidation.
(2) Adjustments represent origination fees on purchased investments which are
deferred and amortized into income over the life of the investment.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General Business
The Company provides debt and equity financing to developers of multifamily
housing. The Company invests in tax-exempt bonds, or interests in bonds, issued
by state and local governments or their agencies or authorities to finance
multifamily housing developments. Interest income derived from the majority of
these bond investments is exempt income for federal income tax purposes.
Multifamily housing developments, as well as the rents paid by the tenants,
secure these investments. The Company is also a mortgage banker. Mortgage
banking activities include the origination, investment in and servicing of
investments in multifamily housing, both for its own account and on behalf of
third parties. These investments generate taxable income.
The Company also invests in (1) other housing-related debt and equity
investments, including equity investments in income-producing real estate
operating partnerships and tax-exempt bonds, or interests in bonds, secured by
student housing or assisted living developments, and (2) tax-exempt community
development bonds, typically secured by special taxes imposed on single-family
or other community development districts or by assessments imposed on the
residents or other lot owners of those developments.
The Company also acquires and sells interests in partnerships that provide
low-income housing tax credits for investors. The Company earns syndication fees
on the placement of these interests with investors, including Fannie Mae and a
number of corporate investors. The Company also earns asset management fees for
managing the low-income housing tax credit funds syndicated.
Liquidity and Capital Resources
The Company's sources of capital to fund its tax-exempt bond lending
activities include proceeds from equity offerings, securitizations, and draws on
lines of credit. The Company's sources of capital to fund its mortgage banking
activities include (1) warehousing facilities and short-term lines of credit
with commercial banks and pension funds, (2) debt and equity financings, either
through the Midland Affordable Housing Group Trust or the Midland Multifamily
Equity REIT ("MMER"), and (3) working capital.
The Company relies on the regular availability of capital from pension
funds, government sponsored entities ("GSEs"), equity offerings, bank lines of
credit and securitization transactions to finance its growth. The Company
expects to meet its cash needs in the short-term, which consist primarily of
funding of new investments, payment of distributions to shareholders and funding
of mortgage banking activities, from equity offering proceeds, cash on hand and
bank lines of credit. To continue to grow these activities, the Company will
need to increase its access to capital in 2003 and future years. The Company
expects it will need $300 to $400 million in new capital to meet its 2003
production targets for its lending and tax credit equity businesses. The
Company's February 2003 equity offering generated net proceeds of $71.9 million
to satisfy a portion of the new capital needed. The Company has entered into
discussions with its existing capital providers to increase their financing
commitments. In addition, the Company is seeking to establish relationships with
additional pension funds and to expand its relationships with GSEs. If the
Company is unable to secure the remaining additional capital needed during 2003,
its production targets may decrease by $400 to $450 million.
For the three months ended March 31, 2003, the Company structured $32.1
million in tax-exempt bond transactions. This includes both construction and
permanent transactions because, although they relate to the same loans, the
Company counts them as separate loans for consistency with tracking of taxable
lending, where construction and permanent loans are legally distinct loans. In
addition, the Company originated $38.6 million of construction loans, $37.2
million of permanent loans and $16.8 million of supplemental loans. The Company
also closed $35.3 million for investment in syndicated tax credit equity funds
and originated $3.3 million of conventional market rate equity transactions.
Since December 31, 2002, there has been no material change to the
information related to the Company's liquidity and capital resources except as
discussed below.
Pension Funds
MMER is a Maryland real estate investment trust established by a group of
pension funds that the Company has had relationships with for over twenty-five
years. In 2001, four pension funds subscribed to invest a total of $70 million
in MMER. In 2002, two of the funds subscribed to an additional $30 million. As
of March 31, 2003, $70 million of the total $100 million subscription has been
received by MMER.
Equity Offerings
In February 2003, the Company sold to the public 3.2 million common shares
(including the entire underwriters' over-allotment option) at a price of $23.60
per share. Net proceeds of this offering were $71.9 million. The net proceeds
from this offering will be used for general corporate purposes, including
funding of new investments, paying down debt and working capital.
Leverage
The Company's leverage ratio was 50.7% and 55.8% at March 31, 2003 and
December 31, 2002, respectively. This leverage ratio is based on total debt
(notes payable, short- and long-term debt) divided by the Company's total
capitalization (notes payable, short- and long-term debt, preferred
shareholders' equity in a subsidiary company, and shareholders' equity).
Management includes short-term debt in this calculation because of the
importance of short-term debt to the Company's management of its overall cost of
capital. It should be noted that this leverage ratio is one of many ways to
measure leverage. For example, as of March 31, 2003, this ratio excludes $245.1
million of securitization interests that are senior to the Company's investments
that were previously accounted for as sales and includes $157.5 million of
construction loans where the economic risk belongs to a third party.
The Company will continue to try to maintain overall leverage ratios in
the 50% to 65% range, with certain assets at significantly higher ratios, up to
approximately 99%, and other assets not leveraged at all.
Factors that Could Affect Future Results
The Company's 2002 Form 10-K contains a detailed description of the
Company's factors that could affect future results. Since December 31, 2002,
there has been no material change to the information related to factors that
could affect future results.
Contractual Obligations
The Company's 2002 Form 10-K contains a description of the Company's
material contractual obligations. Since December 31, 2002, there has been no
material change to the information related to contractual obligations.
Guarantees and Off-Balance Sheet Arrangements
The Company's 2002 Form 10-K contains a summary of the Company's guarantees
and off-balance sheet arrangements. Since December 31, 2002, there has been no
material change to the information related to guarantees and off-balance sheet
obligations. See Note 8 for a table that summarizes the Company's guarantees by
type as of March 31, 2003.
Dividend Policy and Cash Available for Distribution
Consistent with its strategy of maximizing shareholder value through steady
increases in cash distributions to shareholders, the Company uses cash available
for distribution ("CAD") as a primary measure of its ability to pay
distributions. The Company believes CAD is the most relevant measure of its
ability to pay distributions, as CAD is a measure of current earnings. The
Company uses this measure of current earnings as a basis for declaring its
quarterly distributions.
CAD differs from net income because of variations between GAAP income and
actual cash received. There are three primary differences between CAD and GAAP
income. The first is the treatment of loan origination fees, which for CAD
purposes are recognized as income when received but for GAAP purposes are
amortized into income over the life of the associated investment. The second
difference is the non-cash gain and loss recognized for GAAP associated with
valuations, sales of investments and capitalization and amortization of mortgage
servicing rights, which are not included in the calculation of CAD. The third
difference is the treatment of the Company's investments in partnerships. For
GAAP, the Company records its allocable share of the income (loss) from the
partnership as income, while for CAD reporting, the Company records the cash
distributions it receives from the partnership as income.
Since the first quarter of 2002, when the Company completed the redemption
of preferred shares and term growth shares, the Company's entire net cash flow
has been available for distribution to the common shares. The Company's current
policy is to distribute to common shareholders at least 80% of its annual CAD to
common shares. The table below shows the Company's CAD available to common
shares, CAD per common share, dividend per common share and payout ratio for the
three months ended March 31, 2003 and 2002.
2003 2002
-------------- -------------
CAD available to common shares (000s) $ 14,416 $ 11,813
CAD per common share (1) 0.50 0.47
Dividend per common share 0.4450 0.4350
Payout ratio 89.0% 92.8%
(1) CAD per common share is calculated based on the number of shares
outstanding at the end of each fiscal quarter.
The following table reconciles the Company's GAAP net income to CAD for
the three months ended March 31, 2003 and 2002.
MUNICIPAL MORTGAGE & EQUITY, LLC
RECONCILIATION OF GAAP INCOME TO CASH AVAILABLE FOR DISTRIBUTION
(In thousands)
(unaudited)
For the three For the three
months ended months ended
March 31, 2003 March 31, 2002
-------------------------------
Net income allocated to common shares - GAAP Basis $ 13,945 $ 14,893
=============== ===============
Conversion to Cash Available for Distribution:
(1)Mark to market adjustments $ (2,873) $ (3,112)
(2)Equity investments 2,409 440
(3)Net gain on sales (327) (2,126)
(3)Amortization of capitalized mortgage servicing fees 352 318
(4)Origination fees and other income, net 282 673
(5)Valuation allowances and other-than-temporary impairments - 110
(6)Deferred tax expense 628 617
--------------- ---------------
Cash Available for Distribution (CAD) $ 14,416 $ 11,813
=============== ===============
Notes
(1) For GAAP reporting, the Company records the non-cash change in fair value
of its investment in interest rate swaps and other derivative financial
instruments through net income. These non-cash gains and losses are not
included in the Company's calculation of CAD.
(2) For GAAP reporting, the Company accounts for various investments in
partnerships using the equity accounting method. As a result, the Company's
allocable share of the income or loss from the partnerships is reported in
income (losses) from equity investments in partnerships. The income from
these partnerships includes depreciation expense and changes in the fair
value of investments in derivatives. For GAAP reporting, distributions are
treated as a return of capital. For CAD reporting, the Company records the
cash distributions it receives from the partnerships as other income.
(3) For GAAP reporting, the Company recognizes non-cash gains and losses
associated with the sale of assets or capitalization of mortgage servicing
rights. The capitalized mortgage servicing rights are amortized into
expense over the estimated life of the serviced loans. The non-cash gains
and the associated amortization expense are not included in CAD.
(4) Origination fees and certain other income amounts are recognized as income
when received for CAD purposes, but for GAAP reporting these items are
deferred and amortized into income over the life of the associated
investment. This adjustment represents the net difference, for the relevant
period, between fees taken into income when received for CAD and the
amortization of fees recorded for GAAP.
(5) For GAAP reporting, the Company records valuation allowances and
other-than-temporary impairments on its investments in loans, bonds and
other bond-related investments. Such non-cash charges do not affect the
cash flow generated from the operation of the underlying properties,
distributions to shareholders, or the tax-exempt status of the income of
the financial obligation under the bonds. Therefore, these items are not
included in the calculation of CAD.
(6) For GAAP reporting, the Company's income tax expense contains both a
current and a deferred component. Only the Company's current income tax
expense is reflected in CAD.
The calculation of CAD is the basis for the determination of the Company's
quarterly distributions to common shares, is used by securities analysts, and is
presented as a supplemental measure of the Company's performance. The
calculation is not approved by the Securities and Exchange Commission nor is it
required by GAAP and should not be considered as an alternative to net income as
an indicator of the Company's operating performance or as an alternative to cash
flows as a measure of liquidity. The Company believes that CAD provides relevant
information about its operations and is necessary, along with net income, for
understanding its operating results.
Results of Operations and Critical Accounting Estimates
Net Interest Income
For the three months ended March 31,
------------------------------------------------
(000s) 2003 % 2002 %
------------ ---------- ------------ ----------
Interest on bonds and residual interests in bond securitizations $ 15,985 104.4% $ 15,162 100.4%
Interest on loans 9,503 62.1% 8,430 55.8%
Interest on short-term investments 192 1.2% 487 3.2%
------------ ------------
Total interest income 25,680 24,079
Interest expense (10,368) -67.7% (8,972) -59.4%
------------ ---------- ------------ ----------
Net interest income $ 15,312 100.0% $ 15,107 100.0%
============ ========== ============ ==========
Total interest income for the quarter ended March 31, 2003 increased $1.6
million over the same period last year due primarily to a $1.9 million increase
in collections of interest on bonds, residual interests in bond securitizations
and loans receivable. This increase resulted from an increase in on-balance
sheet assets related to securitizations and larger average notes receivable
balances and was offset by a $0.3 million decrease in interest on short-term
investments resulting from lower cash balances as well as lower investment
yields. Interest expense increased $1.4 million primarily due to an increase in
financing costs related to on-balance sheet securitizations and larger average
notes payable balances outstanding during the quarter.
Fee Income
For the three months ended March 31,
------------------------------------------------
(000s) 2003 % 2002 %
------------ ---------- ------------ ----------
Syndication fees $ 1,411 19.4% $ 1,618 24.4%
Origination fees 698 9.6% 1,089 16.4%
Loan servicing fees 1,909 26.2% 1,908 28.8%
Asset management and advisory fees 1,076 14.7% 867 13.1%
Other income 2,197 30.1% 1,145 17.3%
------------ ---------- ------------ ----------
Total fee income $ 7,291 100.0% $ 6,627 100.0%
============ ========== ============ ==========
Total fee income for the quarter ended March 31, 2003 increased $0.7
million compared to the same period last year. This increase is due primarily to
a $1.1 million increase in other income and a $0.2 million increase in asset
management and advisory fees, offset by a $0.2 million decrease in syndication
fees and a $0.4 million decrease in origination fees. The $1.1 million increase
in other income is due primarily to prepayment fees from early payment of
tax-exempt bond investments. The $0.2 million increase in asset management and
advisory fees is due to an increase in tax credit equity and MMER assets under
management. The $0.2 million decrease in syndication fees is due to taking $0.5
million of fees for organizational and offering costs related to closed
syndicated tax credit equity funds into income during the quarter ended March
31, 2002. No such fees were recognized during the quarter ended March 31, 2003.
This decrease was offset by an increase in the fees related to an increase in
the volume of syndications closed. The $0.4 million decrease in origination fees
is due to a decrease in the volume of permanent loans and conventional equity
transactions closed during the quarter.
Net Gain on Sales
For the three months ended March 31,
------------------------------------------------
(000s) 2003 % 2002 %
------------ ---------- ------------ ----------
Gain recorded for capitalized mortgage servicing rights $ 404 31.6% $ 1,170 54.0%
Sales and payoffs of investments 776 60.7% 996 46.0%
Sale of investments in partnerships 98 7.7% - -
------------ ---------- ------------ ----------
Total net gain on sales $ 1,278 100.0% $ 2,166 100.0%
============ ========== ============ ==========
Net gain on sales for the quarter ended March 31, 2003 decreased $0.9
million compared to the same period last year. The decrease is due primarily to
a $0.8 million decrease in gain recorded for capitalized mortgage servicing
rights and a $0.2 million decrease in gain on sales and payoffs of investments
offset by a $0.1 million increase in gain on sales of investments in
partnerships. The $0.8 million decrease recorded for capitalized mortgage
servicing rights is due primarily to a decrease in the volume of permanent loans
sold. The $0.2 million decrease in gain on sales and payoffs of investments is
due primarily to a gain of $1.0 million in the same period last year relating to
the restructuring of a securitization trust, offset in the current year by a
$0.8 million increase in premiums on the delivery of loans to HUD and gain on
sale on delivery of loans to a new conduit lender. The $0.1 million increase in
gain on sales of investments in partnerships is due to this item not having
activity until the quarter ended December 31, 2002. The gain is due to the
warehousing and subsequent transfer of tax credit equity properties at
subsidiaries.
Operating Expenses and Amortization
For the three months ended March 31,
------------------------------------------------
(000s) 2003 % 2002 %
------------ ---------- ------------ ----------
Salaries and benefits $ 5,966 66.3% $ 4,827 64.3%
General and administrative 1,656 18.4% 1,726 23.0%
Professional fees 989 11.0% 637 8.5%
Amortization of mortgage servicing rights and other intangibles 389 4.3% 318 4.2%
------------ ---------- ------------ ----------
$ 9,000 100.0% $ 7,508 100.0%
============ ========== ============ ==========
Total expenses for the quarter ended March 31, 2003 increased $1.5 million
compared to the same period last year. This increase is due primarily to a $1.1
million increase in salaries and benefits resulting from a $0.3 million increase
in salaries and other compensation and a $0.9 million increase in bonuses offset
by a $0.1 million decrease in temporary assistance and employment advertising.
In addition, there was a $0.4 million increase in professional fees due
primarily to a $0.2 million increase in legal fees, a $0.5 million increase in
consulting fees and a $0.1 million increase in printing expense offset by a $0.5
million decrease in commission expense. Commission expense is no longer incurred
by the Company because the pass-through of commission income and expense has
been transferred to the syndicated tax credit equity funds.
Net Holding Gains on Derivatives
The Company recorded net holding gains for mark-to-market adjustments on
derivative financial instruments of $2.9 million and $3.1 million for the
quarters ended March 31, 2003 and 2002, respectively.
Impairments and Valuation Allowances Related to Investments
In accordance with the Company's valuation and impairment policies, the
Company did not record any other-than-temporary impairments during the quarter
ended March 31, 2003. During the quarter ended March 31, 2002, the Company
recorded an other-than-temporary impairment of $0.1 million on a bond with a
face amount of $0.7 million.
Net Losses from Equity Investments in Partnerships
Net losses from equity investments in partnerships increased by $0.4
million for the quarter ended March 31, 2003 compared to the same period last
year due primarily to $0.5 million in losses generated from investments in real
estate operating partnerships that are being warehoused before transfer to
syndicated tax credit equity funds. This increase was offset by a decrease in
losses from an investment in income-producing real estate operating partnerships
and related swap partnerships. While these investments generate cash flow to the
Company in the form of quarterly distributions, on a GAAP basis they generate a
net loss due to non-cash adjustments for depreciation and mark-to-market
adjustments related to the swap partnerships. The mark-to-market adjustments
cause volatility in the losses that are recorded.
Income Tax Expense
Income tax expense for the quarter ended March 31, 2003 decreased $1.0
million compared to the same period last year. This decrease is due primarily to
a decrease in net income within the operating segment, which contains
corporations that are subject to income taxes.
Income Allocable to Preferred Shareholders in a Subsidiary Company
Income allocable to preferred shareholders in a subsidiary company for the
quarter ended March 31, 2003 did not change compared to the same period last
year. There have not been any new series of preferred shares issued since
October 2001.
Net Income
Net income for the quarter ended March 31, 2003 decreased by $1.1 million
compared to the same period last year due primarily to: (1) a $1.1 million
increase in salaries and benefits; (2) a $0.9 million decrease in net gain on
sales; (3) a $0.4 million decrease in origination fees; (4) a $0.4 million
increase in net losses from equity investments in partnerships; partially offset
by (5) a $1.1 million increase in other income; and (6) a $1.0 million decrease
in income tax expense.
Other Comprehensive Income (Loss)
For the quarter ended March 31, 2003, the net adjustment to other
comprehensive income for unrealized holding gains on tax-exempt bonds and
residual interests in bond securitizations available for sale was $4.6 million,
and total comprehensive income was $18.5 million.
For the quarter ended March 31, 2002, the net adjustment to other
comprehensive income (loss) for unrealized holding losses on tax-exempt bonds
and residual interests in bond securitizations available for sale was $4.1
million. After a reclassification adjustment for gains of $1.0 million included
in net income, other comprehensive loss for the quarter ended March 31, 2002 was
$5.1 million and total comprehensive income was $10.0 million.
Critical Accounting Policies and Estimates
The Company's 2002 Form 10-K contains a detailed description of the
Company's critical accounting policies and estimates. Since December 31, 2002,
there has been no material change to the information related to critical
accounting policies and estimates.
New Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board approved
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46 requires the consolidation of a Company's equity investment in a variable
interest entity ("VIE") if the Company is the primary beneficiary of the VIE and
if risks are not effectively dispersed among the owners of the VIE. The Company
is considered to be the primary beneficiary of the VIE if the Company absorbs
the majority of the losses of the VIE. FIN 46 is effective for VIEs created
after January 31, 2003. For any VIE in which the Company held an interest that
it acquired before February 1, 2003, FIN 46 is effective for the first interim
reporting period after June 15, 2003. No VIEs were created during the quarter
ended March 31, 2003. The Company is currently reviewing the impact of FIN 46 on
the tax credit syndication funds that a wholly owned subsidiary of the Company
sponsors and asset manages. The Company will continue to review new investments
in order to determine if they should be accounted for in accordance with FIN 46.
Related Party Transactions
The Company's 2002 Form 10-K contains a detailed description of the
Company's related party transactions. Since December 31, 2002, there has been no
material change to the information related to related party transactions.
Income Tax Considerations
MuniMae is organized as a limited liability company. This structure allows
MuniMae to combine the limited liability, governance and management
characteristics of a corporation with the pass-through income features of a
partnership. Therefore, the distributive share of MuniMae's income, deductions
and credits is included in each shareholder's income tax return. In addition,
the tax-exempt income derived from certain investments remains tax-exempt when
it is passed through to the shareholders. The Company records cash dividends
received from subsidiaries organized as corporations as dividend income for tax
purposes. Shareholders' distributive share of MuniMae's income, deductions and
credits are reported to shareholders on Internal Revenue Service Schedule K-1.
The Company has elected under Section 754 of the Internal Revenue Code to
adjust the basis of the Company's property on the transfer of shares to reflect
the price each shareholder paid for its shares. While the bulk of the Company's
recurring interest income is tax-exempt, from time to time the Company may sell
or securitize various assets, which may result in capital gains and losses for
tax purposes. Since the Company is taxed as a partnership, these capital gains
and losses are passed through to shareholders and are reported on each
shareholder's Schedule K-1. The capital gain and loss allocated from the Company
may be different for each shareholder due to the Company's Section 754 election
and is a function of, among other things, the timing of the shareholder's
purchase of shares and the timing of transactions that generate gains or losses
for the Company. This means that for assets purchased by the Company prior to a
shareholder's purchase of shares, the shareholder's basis in the assets may be
significantly different than the Company's basis in those same assets. Although
the procedure for allocating the basis adjustment is complex, the result of the
election is that each share is homogeneous, while each shareholder's basis in
the assets of the Company may be different. Consequently, the capital gains and
losses allocated to individual shareholders may be significantly different than
the capital gains and losses recorded by the Company.
In January 2003, the Company applied to have its election under Section 754
of the Internal Revenue Code revoked effective January 1, 2003. The Company
applied for the revocation due to the increased administrative burden
attributable to this election resulting from the increased numbers of partners
and frequency of shifts in ownership. The Internal Revenue Service has not yet
responded to the Company's application to revoke its election under Section 754.
A portion of the Company's interest income is derived from private activity
bonds that for income tax purposes are considered tax preference items for
purposes of alternative minimum tax ("AMT"). AMT is a mechanism within the
Internal Revenue Code to ensure that all taxpayers pay at least a minimum amount
of taxes. All taxpayers are subject to the AMT calculation requirements although
the vast majority of taxpayers will not actually pay AMT. As a result of AMT,
the percentage of the Company's income that is exempt from federal income tax
may be different for each shareholder depending on that shareholder's individual
tax situation.
The Company has numerous corporate subsidiaries which are subject to income
taxes. The Company provides for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). FAS 109 requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax basis of assets and
liabilities.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Since December 31, 2002 there has been no material change to the
information included in Item 7A of the Company's 2002 Form 10-K.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures
The term "disclosure controls and procedures" is defined in Rules 13a-14(c)
and 15d-14(c) of the Securities and Exchange Act of 1934 (the "Exchange Act").
These rules refer to the controls and other procedures of a company that are
designed to ensure that information required to be disclosed by a company in the
reports that it files under the Exchange Act is recorded, processed, summarized
and reported within required time periods. Our Chief Executive Officer and our
Chief Financial Officer have evaluated the effectiveness of our disclosure
controls and procedures as of a date within 90 days before the filing of this
quarterly report (the "Evaluation Date"), and they have concluded that, as of
the Evaluation Date, such controls and procedures were effective at ensuring
that required information will be disclosed on a timely basis in our reports
filed under the Exchange Act.
(b) Changes in internal controls
We maintain a system of internal accounting controls that are designed to
provide reasonable assurance that our books and records accurately reflect our
transactions and that our established policies and procedures are followed. For
the quarter ended March 31, 2003, there were no significant changes to our
internal controls or in other factors that could significantly affect our
internal controls.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
99 Officers' Certificate pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
On January 27, 2003, the Company filed a Form 8-K announcing
the resignation of a Board Member.
On February 6, 2003, the Company filed a Form 8-K to report the
purchase agreement and press release announcing the pricing of an
underwritten offering of 2,800,000 of common shares and that the
Company had granted the underwriters an over-allotment option of
up to 420,000 additional shares.
On February 28, 2003, the Company filed a Form 8-K containing the
supplemental information reported to securities analysts for the
three months ended December 31, 2002.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MUNICIPAL MORTGAGE & EQUITY, LLC
(Registrant)
By: ____/s/ Mark K. Joseph_________________________________________
Mark K. Joseph
Chairman of the Board, Chief Executive Officer (Principal Executive
Officer), and Director
By: ___/s/William S. Harrison_________________________________________
William S. Harrison
Chief Financial Officer (Principal Financial Officer and Principal
Accounting Officer)
DATE: May 12, 2003
CERTIFICATIONS
I, William S. Harrison, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Municipal
Mortgage & Equity, LLC;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 12, 2003
___/s/ William S. Harrison____________
Name: William S. Harrison
Title: Chief Financial Officer
I, Mark K. Joseph, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Municipal
Mortgage & Equity, LLC;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors:
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 12, 2003 ___/s/ Mark K. Joseph _______________
Name: Mark K. Joseph
Title: Chief Executive Officer
EXHIBIT 99
Officers' Certificate
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Each of the undersigned officers of Municipal Mortgage & Equity, LLC, a
Delaware limited liability company (the "Company"), hereby certifies that (i)
the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March
31, 2003 fully complies with the requirements of Section 13(a) of the Securities
Exchange Act of 1934 and (ii) the information contained in the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2003 fairly
presents, in all material respects, the financial condition and results of
operations of the Company, at and for the periods indicated.
A signed original of this written statement required by Section 906 has
been provided to the Company and will be retained by the Company and furnished
to the Securities and Exchange Commission or its staff upon request.
Date: May 12, 2003 ___/s/ Mark K. Joseph _______________
Name: Mark K. Joseph
Title: Chief Executive Officer and
Chairman of the Board
___/s/ William S. Harrison___________
Name: William S. Harrison
Title: Senior Vice President and
Chief Financial Officer