UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006.
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 May 4, 2006, there were 50,036,033 shares of the registrant's common
stock, par value $0.01 per share, outstanding.
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I-FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2006 and December 31,
2005..................................................................1
Consolidated Statements of Income for the Three Months Ended March
31, 2006 and 2005.....................................................2
Consolidated Statements of Stockholders' Equity for the Three Months
Ended March 31, 2006 and 2005.........................................3
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2006 and 2005...............................................4
Notes to Consolidated Financial Statements............................5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................27
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..........45
Item 4. Controls and Procedures..............................................47
PART II-OTHER INFORMATION
Item 1. Legal Proceedings....................................................48
Item 1A. Risk Factors.........................................................48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..........48
Item 3. Defaults Upon Senior Securities......................................48
Item 4. Submission of Matters to a Vote of Security Holders..................49
Item 5. Other Information....................................................49
Item 6. Exhibits.............................................................49
SIGNATURES
INDEX TO EXHIBITS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands, except per share amounts)
March 31, December 31,
2006 2005
------------------- ------------------
Assets:
Cash and cash equivalents $ 572,591 $ 575,650
Accounts receivable and servicing advances 327,586 329,132
Mortgage-backed securities (including securities pledged of $9,068,102 as of
March 31, 2006 and $10,063,621 as of December 31, 2005) 9,580,963 10,602,104
Mortgage loans held for sale, net 1,589,613 2,208,749
Mortgage loans held for investment, net of allowance of $3,454 as of 4,315,384 3,479,721
March 31, 2006 and $2,142 as of December 31, 2005
Derivative assets 102,267 44,594
Mortgage servicing rights, net 371,974 319,671
Premises and equipment, net 75,594 68,782
Goodwill 110,330 99,527
Other assets 30,708 26,815
------------------- ------------------
Total assets $ 17,077,010 $ 17,754,745
=================== ==================
Liabilities and Stockholders' Equity:
Liabilities:
Warehouse lines of credit $ 1,754,581 $ 3,474,191
Drafts payable 16,377 20,754
Commercial paper 1,073,630 1,079,179
Reverse repurchase agreements 8,899,050 9,806,144
Collateralized debt obligations 2,905,199 1,057,906
Payable for securities purchased 215,114 261,539
Derivative liabilities 7,512 16,773
Trust preferred securities 204,018 203,688
Accrued expenses and other liabilities 385,392 277,476
Notes payable 330,714 319,309
Income taxes payable 51,016 30,770
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Total liabilities 15,842,603 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 March 31, 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 March 31, 2006 and December 31, 2005, respectively 83,183 83,183
Common Stock, par value $0.01 per share, 100,000,000 shares authorized,
50,004,965 and 49,639,646 shares issued and outstanding
as of March 31, 2006 and December 31, 2005, respectively 500 496
Additional paid-in capital 958,175 947,512
Retained earnings 206,512 203,778
Accumulated other comprehensive loss (64,820) (78,810)
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Total stockholders' equity 1,234,407 1,207,016
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Total liabilities and stockholders' equity $ 17,077,010 $ 17,754,745
=================== ==================
See notes to consolidated financial statements.
-1-
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts)
Three Months Ended March 31,
-------------------------------------------------
2006 2005
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Net interest income:
Interest income $ 300,613 $ 146,894
Interest expense (254,035) (88,091)
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Total net interest income 46,578 58,803
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Provision for loan losses (1,311) -
----------------- ------------------
Total net interest income after provision for loan losses 45,267 58,803
----------------- ------------------
Non-interest income:
Gain on sales of mortgage loans 171,907 35,253
Gain on sales of current period securitized mortgage loans - 69,919
(Loss) gain on sales of mortgage-backed securities and derivatives (850) 6,132
Unrealized gain on mortgage-backed securities and derivatives 9,315 57,499
Loan servicing fees 24,333 11,312
Amortization and impairment of mortgage servicing rights - (5,082)
Change in fair value of mortgage servicing rights (18,621) -
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Net loan servicing fees 5,712 6,230
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Other non-interest income 1,769 1,466
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Total non-interest income 187,853 176,499
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Non-interest expenses:
Salaries, commissions and benefits, net 99,267 68,475
Occupancy and equipment 17,970 12,671
Data processing and communications 7,126 5,950
Office supplies and expenses 4,332 4,429
Marketing and promotion 5,800 4,130
Travel and entertainment 6,753 3,928
Professional fees 5,331 3,470
Other 15,882 6,869
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Total non-interest expenses 162,461 109,922
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Net income before income tax expense 70,659 125,380
Income tax expense 16,200 -
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Net income $ 54,459 $ 125,380
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Dividends on preferred stock 3,305 3,305
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Net income available to common shareholders $ 51,154 $ 122,075
================= ==================
Per share data:
Basic $ 1.03 $ 3.03
Diluted $ 1.02 $ 2.99
Weighted average number of shares - basic 49,715 40,308
Weighted average number of shares - diluted 50,070 40,811
See notes to consolidated financial statements.
-2-
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
(In thousands)
Accumulated
Additional Other Total
Preferred Common Paid-in Retained Comprehensive Stockholders'
Stock Stock Capital Earnings Loss Equity
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Balance at January 1, 2005 $ 134,040 $ 403 $ 631,530 $ 99,628 $ (39,339) $ 826,262
------------ ------------ ------------- ------------- ----------------- ----------------
Comprehensive income:
Net income - - - 125,380 - 125,380
Net change in unrealized loss on
mortgage-backed securities available
for sale - - - - (24,435) (24,435)
Net change in unrealized gain on cash
flow hedges, net of amortization - - - - 20,396 20,396
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Comprehensive income 121,341
Issuance of common stock - earnouts - - 846 - - 846
Issuance of common stock - 1999 Omnibus
Stock Incentive Plan - - 452 - - 452
Dividends declared on Series A
Preferred Stock - - - (1,310) - (1,310)
Dividends declared on Series B
Preferred Stock - - - (1,995) - (1,995)
Dividends declared on Common Stock - - - (28,639) - (28,639)
------------ ------------ ------------- ------------- ----------------- ----------------
Balance at March 31, 2005 $ 134,040 $ 403 $ 632,828 $ 193,064 $ (43,378) $ 916,957
============ ============ ============= ============= ================= ================
Balance at January 1, 2006 $ 134,040 $ 496 $ 947,512 $ 203,778 $ (78,810) $ 1,207,016
------------ ------------ ------------- ------------- ----------------- ----------------
Comprehensive income:
Net income - - - 54,459 - 54,459
Net change in unrealized loss on
mortgage-backed securities available
for sale - - - - (35,765) (35,765)
Net change in unrealized gain on cash
flow hedges, net of amortization - - - - 49,755 49,755
----------------
Comprehensive income 68,449
Cumulative effect adjustment as of
beginning of year - - - (2,917) - (2,917)
Issuance of common stock - earnouts - 3 9,555 - - 9,558
Issuance of common stock - 1999 Omnibus
Stock Incentive Plan - 1 698 - - 699
Stock-based employee compensation
expense - - 410 - - 410
Dividends declared on Series A
Preferred Stock - - - (1,310) - (1,310)
Dividends declared on Series B
Preferred Stock - - - (1,995) - (1,995)
Dividends declared on Common Stock - - - (45,503) - (45,503)
------------ ------------ ------------- ------------- ----------------- ----------------
Balance at March 31, 2006 $ 134,040 $ 500 $ 958,175 $ 206,512 $ (64,820) $ 1,234,407
============ ============ ============= ============= ================= ================
See notes to consolidated financial statements.
-3-
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended
March 31,
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2006 2005
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Cash flows from operating activities:
Net income $ 54,459 $ 125,380
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,953 2,439
Provision for loan losses 1,311 -
Change in fair value of mortgage servicing rights 18,621 -
Amortization and impairment of mortgage servicing rights - 5,082
Accretion and amortization of mortgage-backed securities, net 2,331 4,593
Deferred cash flow hedge gain, net of amortization 3,909 17,052
Loss on sales of mortgage-backed securities and derivatives - 3,336
Unrealized loss on mortgage-backed securities 3,090 51,003
Unrealized gain on free standing derivatives (4,765) (40,312)
Decrease in forward delivery contracts (24,041) (9,595)
Capitalized mortgage servicing rights on securitized loans - (79,711)
Capitalized mortgage servicing rights on sold loans (69,768) (2,347)
Decrease in interest rate lock commitments 7,131 210
Decrease in mortgage loan basis adjustments 4,731 30,954
Other (198) 1,177
(Increase) decrease in operating assets:
Accounts receivable 6,829 12,952
Servicing advances (3,281) 731
Other assets (1,451) 7,714
Increase (decrease) in operating liabilities:
Accrued expenses and other liabilities 93,876 21,432
Income taxes payable 16,173 (92)
Origination of mortgage loans held for sale (12,203,014) (7,255,400)
Principal received from sales of mortgage loans held for sale 13,372,574 3,080,795
Proceeds from securitizations of mortgage loans held for sale - 7,336,612
Additions to mortgage-backed securities and derivatives - (2,840,259)
Principal proceeds from sales of self-originated mortgage-backed
securities 1,809,796 -
Cash received from residual assets in securitizations 27,353 16,556
Principal repayments of mortgage-backed securities 93,845 108,403
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Net cash provided by operating activities 3,213,464 598,705
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Cash flows from investing activities:
Purchases of premises and equipment (10,765) (6,849)
Origination of mortgage loans held for investment (970,335) -
Proceeds from repayments of mortgage loans held for investment 137,545 -
Purchases of mortgage-backed securities (1,389,336) -
Principal proceeds from sales of purchased mortgage-backed
securities - 1,133,989
Principal repayments of purchased mortgage-backed securities 438,297 368,671
Acquisition of business (550,077) -
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Net cash (used in) provided by investing activities (2,344,671) 1,495,811
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Cash flows from financing activities:
Decrease in warehouse lines of credit, net (1,719,610) (77,097)
Decrease in reverse repurchase agreements, net (907,094) (351,001)
Increase (decrease) in collateralized debt obligations 1,847,293 (2,022,218)
Decrease in payable for securities purchased (46,425) -
(Decrease) increase in commercial paper, net (5,549) 328,592
(Decrease) increase in drafts payable, net (4,377) 2,191
Increase in trust preferred securities 330 -
Increase in notes payable, net 11,405 23,578
Proceeds from issuance of Common Stock 652 311
Dividends paid (48,477) (28,931)
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Net cash used in financing activities (871,852) (2,124,575)
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Net decrease in cash and cash equivalents (3,059) (30,059)
Cash and cash equivalents, beginning of period 575,650 192,821
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Cash and cash equivalents, end of period $ 572,591 $ 162,762
============== =============
Supplemental disclosure of cash flow information:
Interest paid $ 181,955 $ 79,937
Income taxes paid 32 115
See notes to consolidated financial statements.
-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 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
-5-
assessments of certain factors, including historical loan loss experience of
similar types of loans, the Company's loan loss experience, the 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 and cash and bears interest at
prevailing money market rates approximating LIBOR. Commercial paper is accounted
for as a borrowing and recorded as a liability on the consolidated balance
sheet.
Trust Preferred Securities - The Company formed wholly owned statutory business
trusts ("Trusts") for the purpose of issuing trust preferred securities. The
Company does not consolidate its Trusts and 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 +235 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.
-6-
Derivative Financial Instruments - The Company has developed risk management
programs and processes designed to manage market risk associated with normal
business activities.
Interest Rate Lock Commitments ("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.
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 months ended March 31,
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
March 31,
(In thousands, except per share data) 2005
----------------------
Net income available to common
shareholders - as reported $ 122,075
Less: Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects (343)
----------------------
Net income available to common
shareholders - pro forma $ 121,732
======================
Earnings per share:
Basic - as reported $ 3.03
Basic - pro forma $ 3.02
Diluted - as reported $ 2.99
Diluted - pro forma $ 2.98
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 three months ended March 31, 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 three months ended March 31, 2006, the Company's adoption of SFAS No.
123R decreased income before income taxes by $410 thousand, decreased net income
by $309 thousand and decreased basic and diluted net income per share by $.01
per share. The expense, before income tax effect, is included in salaries,
commissions and benefits expense. The income tax benefit recognized in income
for the three months ended March 31, 2006 for stock options was $101 thousand.
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-
NOTE 2 - MORTGAGE-BACKED SECURITIES
The following table presents the Company's mortgage-backed securities available
for sale as of March 31, 2006 and December 31, 2005:
March 31, 2006
------------------------------------------------------------------
Gross Unrealized Gross Unrealized
Adjusted Cost Gains Losses Fair Value
------------- ---------------- ---------------- ----------
(In thousands)
Agency securities $ 128,573 $ -- $ (5,716) $ 122,857
Privately issued:
Rated 8,222,041 81 (81,191) 8,140,931
Unrated 6,552 460 -- 7,012
------------- ---------------- ---------------- ----------
Securities available for sale $ 8,357,166 $ 541 $ (86,907) $8,270,800
============= ================ ================ ==========
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 table presents the Company's mortgage-backed securities available
for sale in an unrealized loss position as of March 31, 2006 and December 31,
2005:
March 31, 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 $ -- $ -- $ 122,857 $ (5,716) $ 122,857 $ (5,716)
Privately issued:
Rated 6,790,519 (53,252) 1,175,988 (27,939) 7,966,507 (81,191)
---------- ---------- ---------- ---------- ---------- ----------
Securities available for sale $6,790,519 $ (53,252) $1,298,845 $ (33,655) $8,089,364 $ (86,907)
========== ========== ========== ========== ========== ==========
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 March 31, 2006.
The following table presents the Company's mortgage-backed trading securities as
of March 31, 2006 and December 31, 2005:
March 31, 2006 December 31, 2005
---------------------- -----------------------
Fair Value
-----------------------------------------------
(In thousands)
Privately issued:
Rated $ 1,080,385 $ 2,997,650
Unrated 229,778 229,418
---------------------- -----------------------
Trading securities $ 1,310,163 $ 3,227,068
====================== =======================
During the three months ended March 31, 2006, the Company recorded $1.0 million
in unrealized gains on trading securities that related to trading securities
held at March 31, 2006. During the three months ended March 31, 2005, the
Company recorded $23.2 million in unrealized gains on trading securities that
related to trading securities held at March 31, 2005.
During the three months ended March 31, 2006, the Company sold $1.8 billion of
mortgage-backed securities and realized $0.9 million in losses, net of hedges.
The $1.8 billion of mortgage-backed securities sold were self-originated.
During the three months ended March 31, 2005, the Company sold $1.1 billion of
mortgage-backed securities, excluding securities sold contemporaneously with the
execution of securitization transactions, and realized $6.1 million in gains,
net of hedges. The $1.1 billion of
-11-
mortgage-backed securities sold were market-purchased. During the three months
ended March 31, 2005, the Company securitized and held in its portfolio $2.8
billion of mortgage-backed securities.
The Company's mortgage-backed securities held at March 31, 2006 were primarily
either agency obligations or were rated AAA or AA by Standard & Poor's.
The Company has credit exposure on $13.9 billion and $15.1 billion of loans it
has securitized privately as of March 31, 2006 and December 31, 2005,
respectively. The following table summarizes the loan delinquency information as
of March 31, 2006 and December 31, 2005:
March 31, 2006
--------------------------------------------------------
(Dollars in thousands)
Percentage of Percentage of
Delinquency Status Loan Count Loan Balance Total Portfolio Total Assets
------------------- ---------- ------------ --------------- -------------
60 to 89 days 38 $ 5,960 0.04% 0.03%
90 and greater days 75 12,982 0.09% 0.08%
Foreclosure 662 165,733 1.19% 0.97%
---------- ------------ --------------- -------------
775 $ 184,675 1.32% 1.08%
========== ============ =============== =============
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%
Foreclosure 451 119,181 0.79% 0.67%
---------- ------------ --------------- -------------
582 $ 142,971 0.95% 0.81%
========== ============ =============== =============
As of March 31, 2006 and December 31, 2005, the fair value of residual assets
from securitizations reported in mortgage-backed securities was $261.0 million
and $276.0 million, respectively.
The significant assumptions used in estimating the fair value of residual cash
flows as of March 31, 2006 and December 31, 2005 were as follows:
March 31, 2006 December 31, 2005
-------------- -----------------
Weighted-average prepayment speed (CPR) 29.20% 30.63%
Weighted-average discount rate 16.77% 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 March 31, 2006 and December 31, 2005:
March 31, December 31,
(In thousands) 2006 2005
----------- ------------
Mortgage loans held for sale $ 1,579,842 $ 2,190,062
SFAS No. 133 basis adjustments (4,187) (2,099)
Deferred origination costs, net 13,958 20,786
----------- ------------
Mortgage loans held for sale, net $ 1,589,613 $ 2,208,749
=========== ============
During the three months ended March 31, 2006, the Company sold mortgage loans to
third parties totaling $13.5 billion and realized $171.9 million in gains.
During the three months ended March 31, 2006, the Company deferred $127.9
million 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 $134.7 million of deferred origination costs associated with
mortgage loans sold during the three months ended March 31, 2006.
The following tables summarize delinquency information as of March 31, 2006 and
December 31, 2005 for the Company's mortgage loans held for sale:
March 31, 2006
---------------------------------------
(Dollars in thousands)
Loan Loan Percentage of
Delinquency Status Count Balance Total Portfolio
---------------------------- ----- ------------- ---------------
60 to 89 days 20 $ 1,826 0.12%
90 and greater days 77 9,869 0.63%
Foreclosure 84 15,650 0.99%
----- ------------- ---------------
Mortgage loans held for sale 181 $ 27,345 1.74%
===== ============= ===============
December 31, 2005
----------------------------------------
(Dollars in thousands)
Loan Loan Percentage of
Delinquency Status Count Balance Total Portfolio
---------------------------- ----- ------------- ---------------
60 to 89 days 15 $ 2,404 0.11%
90 and greater days 51 6,530 0.30%
Foreclosure 32 4,824 0.22%
----- ------------- ---------------
Mortgage loans held for sale 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 March 31, 2006 and December 31, 2005:
March 31, December 31,
(In thousands) 2006 2005
----------- ------------
Mortgage loans held for investment $ 4,271,215 $ 3,438,425
SFAS No. 133 basis adjustments (1,441) --
Deferred origination costs, net 49,064 43,438
Allowance for loan losses (3,454) (2,142)
----------- ------------
Mortgage loans held for investment, net $ 4,315,384 $ 3,479,721
=========== ============
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 months ended March 31, 2006, the Company deferred $8.4 million
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 $2.8 million of deferred origination cost amortization on mortgage
loans held for investment during the three months ended March 31, 2006.
During the three months ended March 31, 2006, the Company provided a $1.3
million allowance for loan losses through a charge to provision for loan losses.
There were no subsequent charge-offs, net of recoveries, to the allowance for
loan losses for the three months ended March 31, 2006.
The following tables summarize delinquency information as of March 31, 2006 and
December 31, 2005 for the Company's mortgage loans held for investment:
March 31, 2006
---------------------------------
(Dollars in thousands)
Loan Loan Percentage of
Delinquency Status Count Balance Total Portfolio
---------------------------------- ----- ------- ---------------
60 to 89 days 19 $ 2,159 0.05%
90 and greater days 17 1,585 0.04%
Foreclosure 97 14,746 0.35%
----- ------- ---------------
Mortgage loans held for investment 133 $18,490 0.44%
===== ======= ===============
December 31, 2005
---------------------------------
(Dollars in thousands)
Loan Loan Percentage of
Delinquency Status Count Balance Total Portfolio
---------------------------------- ----- ------- ---------------
60 to 89 days 23 $ 2,898 0.08%
90 and greater days 26 2,489 0.07%
Foreclosure 49 8,797 0.26%
----- ------- ---------------
Mortgage loans held for investment 98 $14,184 0.41%
===== ======= ===============
-14-
NOTE 4 - DERIVATIVE ASSETS AND LIABILITIES
The following table presents the Company's derivative assets and liabilities as
of March 31, 2006 and December 31, 2005:
March 31, December 31,
2006 2005
--------- ------------
(In thousands)
Derivative Assets
Interest rate swaps $ 80,152 $ 30,508
Interest rate lock commitments 14,467 14,086
Forward delivery contracts - loan commitments 5,190 --
Forward delivery contracts - loans held for sale 2,078 --
Interest rate caps 380 --
--------- ------------
Derivative assets $ 102,267 $ 44,594
========= ============
Derivative Liabilities
Interest rate lock commitments $ 7,512 $ --
Forward delivery contracts - loan commitments -- 8,659
Forward delivery contracts - loans held for sale -- 8,114
--------- ------------
Derivative liabilities $ 7,512 $ 16,773
========= ============
As of March 31, 2006, the notional amount of forward delivery contracts and
interest rate swap agreements was approximately $2.9 billion and $9.2 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.
During the three months ended March 31, 2006, the Company recognized in earnings
$8.3 million in unrealized gains on free standing derivatives. During the three
months ended March 31, 2005, the Company recognized in earnings $34.3 million in
unrealized gains on free standing derivatives. These gains are recorded in
unrealized gain on mortgage-backed securities and derivatives in the
consolidated statements of income.
During the three months ended March 31, 2005, the Company realized $9.5 million
in gains on sales of interest rate swap agreements associated with its
securitizations of mortgage loans. These gains are recorded in (loss) 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
March 31, 2006 and December 31, 2005.
As of March 31, 2006, the unrealized gain on interest rate swap agreements
relating to cash flow hedges recorded in accumulated other comprehensive loss
was $21.5 million. 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.
The following table presents the Company's estimate of amounts that will be
reclassified from accumulated other comprehensive loss to interest expense:
(In thousands)
Twelve months ended March 31, 2007 $ 17,931
Twelve months ended March 31, 2008 7,180
Twelve months ended March 31, 2009 4,419
Twelve months ended March 31, 2010 609
-15-
NOTE 5 - MORTGAGE SERVICING RIGHTS, NET
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.
The following table presents the activity in the Company's MSRs, net, for the
three months ended March 31, 2006 and 2005:
Three Months Ended
March 31,
----------------------
(In thousands) 2006 2005
--------- ---------
Mortgage Servicing Rights
Balance at beginning of period $ 340,377 $ 163,374
Cumulative-effect adjustment as of beginning of year 1,156 --
Fair value measurement method adjustment (20,706) --
Additions 69,768 82,058
Amortization -- (8,501)
Change in fair value (18,621) --
--------- ---------
Balance at end of period $ 371,974 $ 236,931
--------- ---------
Impairment Allowance
Balance at beginning of period $ (20,706) $ (11,938)
Fair value measurement method adjustment 20,706 --
Impairment recovery -- 3,419
--------- ---------
Balance at end of period $ -- $ (8,519)
--------- ---------
Mortgage servicing rights, net $ 371,974 $ 228,412
========= =========
The amount of contractually specified servicing fees earned by the Company
during the three months ended March 31, 2006 and 2005 were $20.4 million and
$10.1 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 significant assumptions used in estimating the fair value of MSRs at March
31, 2006 and December 31, 2005 were as follows:
March 31, 2006 December 31, 2005
-------------- -----------------
Weighted-average prepayment speed (PSA) 379 315
Weighted-average discount rate 11.46% 11.94%
Weighted-average default rate 2.01% 2.78%
-16-
The following table presents certain information regarding the Company's
servicing portfolio of loans serviced for others at March 31, 2006 and December
31, 2005:
March 31, December 31,
2006 2005
------------ ------------
(Dollars in thousands)
Loan servicing portfolio - loans sold or securitized $ 28,976,495 $ 25,044,676
ARM loans as a percentage of total loans 72% 73%
Average loan size $ 204 $ 194
Weighted-average servicing fee 0.329% 0.330%
Weighted-average note rate 6.09% 5.79%
Weighted-average remaining term (in months) 345 337
Weighted-average age (in months) 14 15
NOTE 6 - GOODWILL
The following table presents the activity in the Company's goodwill for the
three months ended March 31, 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 1,868 -- 1,868
---------------- ----------------- --------
Balance at March 31, 2005 $ 67,905 $ 24,840 $ 92,745
================ ================= ========
Balance at January 1, 2006 $ 74,687 $ 24,840 $ 99,527
Acquisitions 700 -- 700
Earnouts from previous acquisitions 10,103 -- 10,103
---------------- ----------------- --------
Balance at March 31, 2006 $ 85,490 $ 24,840 $110,330
================ ================= ========
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 $2.5 billion pre-purchase facility with UBS Real
Estate Securities Inc., a facility of $2.0 billion with Bear Stearns, a facility
of $1.0 billion with Barclays Bank PLC, a $1.0 billion bank syndicated facility
led by Bank of America, N.A. (which includes a $350 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 $150 million with J.P.
Morgan Chase, a $450 million facility with IXIS Real Estate Capital, Inc.
(formerly CDC Mortgage Capital Inc.) ("IXIS"), 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.
-17-
The facilities are secured by mortgage loans and other assets of the Company.
The facilities contain various covenants pertaining to maintenance of net worth,
working capital and maximum leverage. At March 31, 2006, the Company was in
compliance with respect to the loan covenants.
Included within the Bank of America line of credit, the Company has a working
capital sub-limit that allows for borrowings up to $50 million at a rate based
on a spread to the LIBOR that may be adjusted for earnings on compensating
balances on deposit at creditors' banks. As of March 31, 2006, borrowings under
the working capital line of credit were $29.7 million.
As of March 31, 2006, the Company had $1.8 billion of warehouse lines of credit
outstanding with a weighted-average borrowing rate of 5.18%. 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 March 31, 2006 had borrowed funds from thirteen of these
firms. Because the Company borrows money under these agreements based on the
fair value of its mortgage-backed securities, and because changes in interest
rates can negatively impact the valuation of mortgage-backed securities, the
Company's borrowing ability under these agreements could be limited and lenders
could initiate margin calls in the event interest rates change or the value of
the Company's mortgage-backed securities declines for other reasons.
As of March 31, 2006, the Company had $8.9 billion of reverse repurchase
agreements outstanding with a weighted-average borrowing rate of 4.81% and a
weighted-average remaining maturity of three months. 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 March 31, 2006 and December 31, 2005, the Company's reverse repurchase
agreements had the following remaining maturities:
March 31, December 31,
2006 2005
---------- ------------
(In thousands)
Within 30 days $ 290,161 $ 689,469
31 to 89 days 4,649,235 4,817,885
90 to 365 days 3,959,654 4,298,790
--------- ---------
Reverse repurchase agreements $8,899,050 $ 9,806,144
========== ============
The Company's average reverse repurchase agreements outstanding were $9.3
billion and $6.9 billion for the three months ended March 31, 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 notes with maturities of up to 180 days, extendable up to
300 days. The SLNs bear interest at prevailing money market rates approximating
the LIBOR. The SLN program capacity, based on aggregate commitments of
underlying credit enhancers, was $3.3 billion at March 31, 2006.
As of March 31, 2006, the Company had $1.1 billion of SLNs outstanding, with an
average interest cost of 4.75%. 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 March 31, 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.
As of March 31, 2006 and December 31, 2005, the Company's SLNs had remaining
maturities within 30 days.
-18-
NOTE 8 - COLLATERALIZED DEBT OBLIGATIONS
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 March 31, 2006, the Company's CDOs had a balance of $2.9 billion and an
effective interest cost of 5.09%. As of March 31, 2006, the CDOs were
collateralized by mortgage loans held for investment of $2.9 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.
NOTE 9 - 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 March 31,
2006, there were 50,004,965 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 March 31, 2006, the Company declared dividends
totaling $45.5 million, or $0.91 per share of Common Stock, which were paid on
April 28, 2006. During the three months ended March 31, 2005, the Company
declared dividends totaling $28.6 million, or $0.71 per share of Common Stock,
which were paid on April 27, 2005.
During the three months ended March 31, 2006, the Company declared dividends
totaling $1.3 million, or $0.609375 per share of Series A Preferred Stock, which
were paid on May 1, 2006. During the three months ended March 31, 2005, the
Company declared dividends totaling $1.3 million, or $0.609375 per share of
Series A Preferred Stock, which were paid on May 2, 2005.
-19-
During the three months ended March 31, 2006, the Company declared dividends
totaling $2.0 million, or $0.578125 per share of Series B Preferred Stock, which
were paid on May 1, 2006. During the three months ended March 31, 2005, the
Company declared dividends totaling $2.0 million, or $0.578125 per share of
Series B Preferred Stock, which were paid on May 2, 2005.
NOTE 10 - INCOME TAXES
A reconciliation of the statutory income tax provision to the effective income
tax expense is as follows:
Three Months Ended March 31,
---------------------------------------
2006 2005
------------------ ------------------
(Dollars in thousands)
Tax provision at statutory rate $ 24,731 35.0% $ 43,880 35.0%
Non-taxable REIT income (10,989) (15.6) (43,802) (34.9)
State and local taxes, net of
federal income tax benefit 1,997 2.8 (272) (0.2)
Meals and entertainment 461 0.7 194 0.1
-------- ------- -------- -------
Income tax expense $ 16,200 22.9% $ -- --%
======== ======= ======== =======
The major sources of temporary differences and their deferred tax effect at
March 31, 2006 and December 31, 2005 are as follows:
March 31, December 31,
2006 2005
------------ ------------
(In thousands)
Deferred tax liabilities:
Capitalized cost of mortgage servicing rights $180,685 $150,926
Loan origination costs 4,323 8,973
Depreciation 3,083 3,083
Broker fees 2,640 --
Deferred state income taxes 432 1,465
Other 132 11
------------ ----------
Deferred tax liabilities 191,295 164,458
------------ ----------
Deferred tax assets:
Tax loss carryforwards 125,242 109,145
Allowance for bad debts and foreclosure reserve 4,791 2,817
Mark-to-market adjustments 7,943 10,721
AMT credit 1,745 1,745
Broker fees -- 958
Bonus accrual 347 8,399
Deferred compensation 4,707 3,436
------------ ----------
Deferred tax assets 144,775 137,221
------------ ----------
Net deferred tax liabilities $ 46,520 $ 27,237
============ ==========
American Home Mortgage Servicing, Inc. has approximately $40 million of separate
company net operating loss carryforwards which begin to expire in 2008. In
addition, American Home Mortgage Holdings, Inc. has approximately $355 million
of federal and approximately $416 million of state net operating loss
carryforwards which begin to expire in 2024 and 2009, respectively.
-20-
At March 31, 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 11 - EARNINGS PER SHARE
The following is a reconciliation of the denominators used in the computations
of basic and diluted earnings per share for the three months ended March 31,
2006 and 2005:
Three Months Ended
March 31,
------------------------
(Dollars in thousands, except per share amounts) 2006 2005
----------- -----------
Numerator for basic earnings per share - Net income
available to common shareholders $ 51,154 $ 122,075
=========== ===========
Denominator:
Denominator for basic earnings per share
Weighted average number of common shares
outstanding during the period 49,715,423 40,307,617
Net effect of dilutive stock options 354,813 503,082
----------- -----------
Denominator for diluted earnings per share 50,070,236 40,810,699
=========== ===========
Net income per share available to common shareholders:
Basic $ 1.03 $ 3.03
=========== ===========
Diluted $ 1.02 $ 2.99
=========== ===========
NOTE 12 - 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 three months ended March 31, 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.
-21-
During the three months ended March 31, 2006, the Company recognized
compensation expense of $410 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 three months ended March 31, 2006 for stock options was $101 thousand.
No compensation cost was recognized for the three months ended March 31, 2005.
During the three months ended March 31, 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: 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 three
months ended March 31, 2006 was $4.57. The fair value of the options granted
during the three months ended March 31, 2006 was estimated using the binomial
lattice option-pricing model with the following assumptions used for the grants:
Three Months Ended March 31,
2006
----------------------------
Dividend yield range 12.6% - 13.1%
Expected volatility 40.0 %
Risk-free interest rate range 4.3% - 4.6%
Expected term (in years) 7.0 - 7.6
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 three
months ended March 31, 2005 was $3.72. The fair value of the options granted
during the three months ended March 31, 2005 was estimated using the
Black-Scholes option-pricing model with the following assumptions used for the
grants:
Three Months Ended March 31,
2005
----------------------------
Dividend yield 9.1 %
Expected volatility 28.4 %
Risk-free interest rate 5.0 %
Expected term (in years) 3.0
-22-
The following table presents a summary of the Company's stock option activity
for the three months ended March 31, 2006 and 2005:
Three Months Ended March 31,
--------------------------------------------
2006 2005
--------------------------------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Options Price Options Price
---------- -------- ---------- --------
Options outstanding - beginning of
period 1,501,384 $ 23.09 1,248,102 $ 18.65
Granted 352,159 27.81 277,419 32.83
Exercised (51,351) 12.68 (25,883) 12.01
Canceled (53,000) 16.18 -- --
---------- ----------
Options outstanding - end of period 1,749,192 $ 24.52 1,499,638 $ 21.39
========== ==========
Options exercisable - end of period 400,693 $ 12.73
==========
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 months ended March 31, 2006 was $869
thousand.
As of March 31, 2006, the intrinsic value and weighted-average remaining life of
the Company's options outstanding were $12.5 million and 8.3 years,
respectively.
As of March 31, 2006, the intrinsic value of the Company's exercisable options
outstanding was $7.4 million.
As of March 31, 2006, the total remaining unrecognized compensation expense
related to the Company's unvested stock options was $2.8 million. This
unrecognized compensation expense is expected to be recognized over a
weighted-average period of 2.4 years.
As of March 31, 2006, the Company has awarded 215,944 shares of restricted stock
under the Plan. During the three months ended March 31, 2006 and 2005, the
Company recognized compensation expense of $47 thousand and $141 thousand,
respectively, relating to shares of restricted stock granted under the Plan. As
of March 31, 2006, 188,402 shares are vested. In general, unvested restricted
stock is forfeited upon the recipient's termination of employment.
NOTE 13 - 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 March
31, 2006 are the types of loans described in FSP SOP 94-6-1.
The Company had originations of loans during the three months ended March 31,
2006 exceeding 5% of total originations in the following states:
California 24.3 %
Florida 11.2
Illinois 7.3
New York 5.1
Virginia 5.1
Arizona 5.0
During the three months ended March 31, 2006, the three institutions that bought
the most loans from the Company accounted for 43% of the Company's total loan
sales.
-23-
NOTE 14 - ACQUISITIONS
Waterfield Financial Corporation
--------------------------------
On January 12, 2006, American Home Mortgage Corp. ("AHM"), a 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 $ --
========
Valley Bancorp, Inc.
--------------------
In August 2001, AHM Holdings entered into an agreement to acquire Valley
Bancorp, Inc. ("Valley Bancorp") and its wholly-owned subsidiary, Valley Bank of
Maryland, a federal savings bank located in suburban Baltimore, Maryland. In
2004, subsequent to AHM Investment's merger with Apex Mortgage Capital, Inc. and
internal reorganization, AHM Investment, as successor in interest to AHM
Holdings, entered into an amended and restated agreement and plan of
reorganization with Valley Bancorp. Under the terms of the definitive agreement,
the Company will pay $46 for each share of Valley Bancorp common stock
outstanding, and will pay in cash to the holders of Valley Bancorp stock options
the difference between $46 and the exercise price of such options, or an
aggregate of approximately $6.3 million. This transaction is subject to
regulatory approval and no assurance can be given that such approval will be
obtained or that the acquisition agreement with Valley Bancorp will be further
extended if necessary.
NOTE 15 - 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.
-24-
Three Months Ended March 31, 2006
----------------------------------------------------------------------
(In thousands)
Mortgage Loan Origination Loan Servicing
Holdings Segment Segment Segment Total
---------------- ---------------- -------------- ------------
Net interest income:
Interest income $ 154,946 $ 145,667 $ -- $ 300,613
Interest expense (128,555) (122,327) (3,153) (254,035)
---------------- ---------------- -------------- ------------
Net interest income 26,391 23,340 (3,153) 46,578
---------------- ---------------- -------------- ------------
(Provision) recovery of loan losses (2,507) 1,196 -- (1,311)
---------------- ---------------- -------------- ------------
Net interest income after (provision) recovery of
loan losses 23,884 24,536 (3,153) 45,267
---------------- ---------------- -------------- ------------
Non-interest income:
Gain on sales of mortgage loans -- 171,907 -- 171,907
Loss on sales of mortgage-backed securities and
derivatives (850) -- -- (850)
Unrealized gain on mortgage-backed securities and
derivatives 9,040 275 -- 9,315
Loan servicing fees -- -- 24,333 24,333
Change in fair value of mortgage servicing rights -- -- (18,621) (18,621)
---------------- ---------------- -------------- ------------
Net loan servicing fees -- -- 5,712 5,712
---------------- ---------------- -------------- ------------
Other non-interest income -- 782 987 1,769
---------------- ---------------- -------------- ------------
Total non-interest income 8,190 172,964 6,699 187,853
---------------- ---------------- -------------- ------------
Non-interest expenses:
Salaries, commissions and benefits, net 5,025 90,337 3,905 99,267
Occupancy and equipment 2 17,650 318 17,970
Data processing and communications 16 6,949 161 7,126
Office supplies and expenses -- 4,278 54 4,332
Marketing and promotion 4 5,791 5 5,800
Travel and entertainment -- 6,701 52 6,753
Professional fees 1,454 3,877 -- 5,331
Other 2,003 5,016 8,863 15,882
---------------- ---------------- -------------- ------------
Total non-interest expenses 8,504 140,599 13,358 162,461
---------------- ---------------- -------------- ------------
Net income before income tax expense (benefit) 23,570 56,901 (9,812) 70,659
---------------- ---------------- -------------- ------------
Income tax expense (benefit) -- 19,860 (3,660) 16,200
----------------------------------------------------------------------
Net income $ 23,570 $ 37,041 $ (6,152) $ 54,459
================ ================ ============== ============
Dividends on preferred stock 3,305 -- -- 3,305
----------------------------------------------------------------------
Net income available to common shareholders $ 20,265 $ 37,041 $ (6,152) $ 51,154
================ ================ ============== ============
March 31, 2006
----------------------------------------------------------------------
Segment assets $ 12,935,531 $ 3,650,025 $ 491,454 $ 17,077,010
================ ================ ============== ============
-25-
Three Months Ended March 31, 2005
----------------------------------------------------------------------
(In thousands)
Mortgage Loan Origination Loan Servicing
Holdings Segment Segment Segment Total
---------------- ---------------- -------------- ------------
Net interest income:
Interest income $ 58,305 $ 88,589 $ -- $ 146,894
Interest expense (38,985) (47,735) (1,371) (88,091)
---------------- ---------------- -------------- ------------
Total net interest income 19,320 40,854 (1,371) 58,803
---------------- ---------------- -------------- ------------
Non-interest income:
Gain on sales of mortgage loans -- 35,253 -- 35,253
Gain on sales of current period securitized mortgage
loans -- 69,919 -- 69,919
(Loss) gain on sales of mortgage-backed securities and
derivatives (3,337) 9,469 -- 6,132
Unrealized gain on mortgage-backed securities and
derivatives 16,840 40,659 -- 57,499
Loan servicing fees -- -- 11,312 11,312
Amortization of mortgage servicing rights -- -- (8,501) (8,501)
Impairment recovery of mortgage servicing rights -- -- 3,419 3,419
---------------- ---------------- -------------- ------------
Net loan servicing fees -- -- 6,230 6,230
---------------- ---------------- -------------- ------------
Other non-interest income -- 663 803 1,466
---------------- ---------------- -------------- ------------
Total non-interest income 13,503 155,963 7,033 176,499
---------------- ---------------- -------------- ------------
Non-interest expenses:
Salaries, commissions and benefits, net 1,076 65,604 1,795 68,475
Occupancy and equipment 2 12,542 127 12,671
Data processing and communications 22 5,814 114 5,950
Office supplies and expenses 1 4,125 303 4,429
Marketing and promotion 2 4,102 26 4,130
Travel and entertainment -- 3,843 85 3,928
Professional fees 973 2,244 253 3,470
Other 2,562 2,435 1,872 6,869
---------------- ---------------- -------------- ------------
Total non-interest expenses 4,638 100,709 4,575 109,922
---------------- ---------------- -------------- ------------
Net income before income tax expense 28,185 96,108 1,087 125,380
---------------- ---------------- -------------- ------------
Income tax expense -- -- -- --
---------------- ---------------- -------------- ------------
Net income $ 28,185 $ 96,108 $ 1,087 $ 125,380
================ ================ ============== ============
Dividends on preferred stock 3,305 -- -- 3,305
---------------- ---------------- -------------- ------------
Net income available to common shareholders $ 24,880 $ 96,108 $ 1,087 $ 122,075
================ ================ ============== ============
March 31, 2005
----------------------------------------------------------------------
Segment assets $ 7,354,423 $ 1,905,139 $ 315,414 $ 9,574,976
================ ================ ============== ============
-26-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTES OF CAUTION
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
-27-
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.
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.
-28-
Financial Condition
The following table presents the Company's consolidated balance sheets as of
March 31, 2006 and December 31, 2005:
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
--------------------------------------------------------------------------------
March 31, December 31,
2006 2005
------------ -------------
Assets:
Cash and cash equivalents $ 572,591 $ 575,650
Accounts receivable and servicing advances 327,586 329,132
Mortgage-backed securities 9,580,963 10,602,104
Mortgage loans held for sale, net 1,589,613 2,208,749
Mortgage loans held for investment, net 4,315,384 3,479,721
Derivative assets 102,267 44,594
Mortgage servicing rights, net 371,974 319,671
Premises and equipment, net 75,594 68,782
Goodwill 110,330 99,527
Other assets 30,708 26,815
------------ -------------
Total assets $ 17,077,010 $ 17,754,745
============ =============
Liabilities and Stockholders' Equity:
Liabilities:
Warehouse lines of credit $ 1,754,581 $ 3,474,191
Drafts payable 16,377 20,754
Commercial paper 1,073,630 1,079,179
Reverse repurchase agreements 8,899,050 9,806,144
Collateralized debt obligations 2,905,199 1,057,906
Payable for securities purchased 215,114 261,539
Derivative liabilities 7,512 16,773
Trust preferred securities 204,018 203,688
Accrued expenses and other liabilities 385,392 277,476
Notes payable 330,714 319,309
Income taxes payable 51,016 30,770
------------ -------------
Total liabilities 15,842,603 16,547,729
------------ -------------
Stockholders' Equity:
Preferred Stock 134,040 134,040
Common Stock 500 496
Additional paid-in capital 958,175 947,512
Retained earnings 206,512 203,778
Accumulated other comprehensive loss (64,820) (78,810)
------------ -------------
Total stockholders' equity 1,234,407 1,207,016
------------ -------------
Total liabilities and stockholders' equity $ 17,077,010 $ 17,754,745
============ =============
-29-
Total assets at March 31, 2006 were $17.1 billion, a $677.7 million decrease
from $17.8 billion at December 31, 2005. The decrease in total assets primarily
reflects a decrease in mortgage-backed securities of $1.0 billion and a decrease
in mortgage loans held for sale of $619.1 million, partly offset by an increase
in mortgage loans held for investment of $835.7 million. At March 31, 2006,
56.1% of our total assets were mortgage-backed securities, 25.3% were mortgage
loans held for investment and 9.3% were mortgage loans held for sale, compared
to 59.7%, 19.6% and 12.4%, respectively, at December 31, 2005.
The following table summarizes our mortgage-backed securities owned at March 31,
2006 and December 31, 2005, classified by type of issuer and by ratings
categories:
March 31, 2006
--------------------------------------------------------------------------------------------------
Trading Securities Securities Available for Sale Total
------------------------------ ------------------------------ ------------------------------
Carrying Value Portfolio Mix Carrying Value Portfolio Mix Carrying Value Portfolio Mix
-------------- ------------- -------------- ------------- -------------- -------------
(Dollars in thousands)
Agency securities $ -- --% $ 122,857 1.5% $ 122,857 1.3%
Privately issued:
AAA 716,822 54.7 8,121,911 98.2 8,838,733 92.3
AA 47,427 3.6 9,443 0.1 56,870 0.6
A 166,212 12.7 6,641 0.1 172,853 1.8
BB 4,549 0.4 -- -- 4,549 0.0
BBB 145,376 11.1 2,936 0.0 148,312 1.5
Unrated 229,777 17.5 7,012 0.1 236,789 2.5
-------------- ------------- -------------- ------------- -------------- -------------
Total $ 1,310,163 100.0% $ 8,270,800 100.0% $ 9,580,963 100.0%
============== ============= ============== ============= ============== =============
December 31, 2005
--------------------------------------------------------------------------------------------------
Trading Securities Securities Available for Sale Total
------------------------------ ------------------------------ ------------------------------
Carrying Value Portfolio Mix Carrying Value Portfolio Mix Carrying Value Portfolio 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%
============== ============= ============== ============= ============== =============
-30-
The following table classifies our mortgage-backed securities portfolio by type
of interest rate index at March 31, 2006 and December 31, 2005:
March 31, 2006
--------------------------------------------------------------------------------------------------
Trading Securities Securities Available for Sale Total
------------------------------ ------------------------------ ------------------------------
Carrying Value Portfolio Mix Carrying Value Portfolio Mix Carrying Value Portfolio Mix
-------------- ------------- -------------- ------------- -------------- -------------
(Dollars in thousands)
Index:
One-month LIBOR $ 394,201 30.1% $ 55,612 0.7% $ 449,813 4.7%
Six-month LIBOR 613,440 46.8 4,909,712 59.4 5,523,152 57.6
One-year LIBOR 243,128 18.6 2,813,206 34.0 3,056,334 31.9
One-year constant maturity
treasury 318 0.0 492,270 5.9 492,588 5.2
One-year monthly treasury
average 59,076 4.5 -- -- 59,076 0.6
-------------- ------------- -------------- ------------- -------------- -------------
Total $ 1,310,163 100.0% $ 8,270,800 100.0% $ 9,580,963 100.0%
============== ============= ============== ============= ============== =============
December 31, 2005
--------------------------------------------------------------------------------------------------
Trading Securities Securities Available for Sale Total
------------------------------ ------------------------------ ------------------------------
Carrying Value Portfolio Mix Carrying Value Portfolio Mix Carrying Value Portfolio 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%
============== ============= ============== ============= ============== =============
-31-
The following table classifies our mortgage loans held for investment and
mortgage-backed securities portfolio by product type at March 31, 2006 and
December 31, 2005:
March 31, 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 $ 681,672 52.0% $ 403,904 4.9% $2,971,903 68.9% $ 4,057,479 29.2%
3/1 Hybrid ARM 185,648 14.2 230,485 2.8 16,376 0.4 432,509 3.1
5/1 Hybrid ARM 442,843 33.8 7,636,411 92.3 327,696 7.6 8,406,950 60.5
Home equity/Second -- -- -- -- 222,722 5.2 222,722 1.6
Other -- -- -- -- 776,687 17.9 776,687 5.6
---------- --------- ---------- --------- ---------- --------- ----------- ---------
Total $1,310,163 100.0% $8,270,800 100.0% $4,315,384 100.0% $13,896,347 100.0%
========== ========= ========== ========= ========== ========= =========== =========
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 -- -- -- -- 106,584 3.0 106,584 0.8
---------- --------- ---------- --------- ---------- --------- ----------- ---------
Total $3,227,068 100.0% $7,375,036 100.0% $3,479,721 100.0% $14,081,825 100.0%
========== ========= ========== ========= ========== ========= =========== =========
During the three months ended March 31, 2006, we purchased $1.4 billion of
mortgage-backed securities.
During the three months ended March 31, 2006, we sold $1.8 billion of
mortgage-backed securities.
During the three months ended March 31, 2006, we added $835.7 million of loans
held for investment to our portfolio.
-32-
Results of Operations - Comparison of the Three Months Ended March 31, 2006 and
2005
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
-----------------------------------------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31,
2006 2005 2005 2005 2005
--------- -------- --------- -------- ---------
Net interest income:
Interest income $ 300,613 $265,435 $ 180,038 $135,318 $ 146,894
Interest expense (254,035) (215,057) (133,169) (90,336) (88,091)
--------- -------- --------- -------- ---------
Net interest income 46,578 50,378 46,869 44,982 58,803
--------- -------- --------- -------- ---------
Provision for loan losses (1,311) (2,142) -- -- --
--------- -------- --------- -------- ---------
Net interest income after provision for loan losses 45,267 48,236 46,869 44,982 58,803
--------- -------- --------- -------- ---------
Non-interest income:
Gain on sales of mortgage loans 171,907 98,777 123,658 77,377 35,253
Gain on sales of current period securitized mortgage loans -- -- 19,960 104,377 69,919
(Loss) gain on sales of mortgage-backed securities and
derivatives (850) 38,068 6,116 620 6,132
Unrealized gain (loss) on mortgage-backed securities and
derivatives 9,315 (44,778) (10,965) (10,292) 57,499
Loan servicing fees 24,333 26,715 21,099 16,970 11,312
Amortization and impairment of mortgage servicing rights -- (18,745) (3,478) (33,230) (5,082)
Change in fair value of mortgage servicing rights (18,621) -- -- -- --
--------- -------- --------- -------- ---------
Net loan servicing fees (loss) 5,712 7,970 17,621 (16,260) 6,230
--------- -------- --------- -------- ---------
Other non-interest income 1,769 2,181 1,585 2,543 1,466
--------- -------- --------- -------- ---------
Non-interest income 187,853 102,218 157,975 158,365 176,499
--------- -------- --------- -------- ---------
Non-interest expenses:
Salaries, commissions and benefits, net 99,267 95,237 101,378 94,859 68,475
Occupancy and equipment 17,970 16,459 15,328 14,397 12,671
Data processing and communications 7,126 6,402 6,479 5,957 5,950
Office supplies and expenses 4,332 4,612 5,024 5,657 4,429
Marketing and promotion 5,800 5,951 5,104 5,126 4,130
Travel and entertainment 6,753 6,982 4,670 5,427 3,928
Professional fees 5,331 3,586 3,744 3,432 3,470
Other 15,882 10,946 7,360 6,843 6,869
--------- -------- --------- -------- ---------
Non-interest expenses 162,461 150,175 149,087 141,698 109,922
--------- -------- --------- -------- ---------
Net income before income tax expense (benefit) 70,659 279 55,757 61,649 125,380
Income tax expense (benefit) 16,200 (16,419) 2,549 (3,851) --
--------- -------- --------- -------- ---------
Net income $ 54,459 $ 16,698 $ 53,208 $ 65,500 $ 125,380
========= ======== ========= ======== =========
Dividends on preferred stock 3,305 3,304 3,304 3,304 3,305
--------- -------- --------- -------- ---------
Net income available to common shareholders $ 51,154 $ 13,394 $ 49,904 $ 62,196 $ 122,075
========= ======== ========= ======== =========
Per share data:
Basic $ 1.03 $ 0.27 $ 1.10 $ 1.54 $ 3.03
Diluted $ 1.02 $ 0.27 $ 1.09 $ 1.52 $ 2.99
Weighted average number of shares - basic 49,715 49,605 45,174 40,384 40,308
Weighted average number of shares - diluted 50,070 49,998 45,669 40,886 40,811
-33-
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
MORTGAGE HOLDINGS SEGMENT
(In thousands)
Three Months Ended
March 31,
---------------------
2006 2005
--------- --------
Net interest income:
Interest income $ 154,946 $ 58,305
Interest expense (128,555) (38,985)
--------- --------
Net interest income 26,391 19,320
--------- --------
Provision for loan losses (2,507) --
--------- --------
Net interest income after provision for loan losses 23,884 19,320
--------- --------
Non-interest income:
Loss on sales of mortgage-backed securities and derivatives (850) (3,337)
Unrealized gain on mortgage-backed securities and derivatives 9,040 16,840
--------- --------
Non-interest income 8,190 13,503
--------- --------
Non-interest expenses:
Salaries, commissions and benefits, net 5,025 1,076
Occupancy and equipment 2 2
Data processing and communications 16 22
Office supplies and expenses -- 1
Marketing and promotion 4 2
Travel and entertainment -- --
Professional fees 1,454 973
Other 2,003 2,562
--------- --------
Non-interest expenses 8,504 4,638
--------- --------
Net income before income tax expense 23,570 28,185
Income tax expense -- --
--------- --------
Net income $ 23,570 $ 28,185
========= ========
Dividends on preferred stock 3,305 3,305
--------- --------
Net income available to common shareholders $ 20,265 $ 24,880
========= ========
-34-
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
LOAN ORIGINATION SEGMENT
(In thousands)
Three Months Ended
March 31,
----------------------
2006 2005
--------- ---------
Net interest income
Interest income $ 145,667 $ 88,589
Interest expense (122,327) (47,735)
--------- ---------
Net interest income 23,340 40,854
--------- ---------
Recovery of loan losses 1,196 --
--------- ---------
Net interest income after recovery of loan losses 24,536 40,854
--------- ---------
Non-interest income:
Gain on sales of mortgage loans 171,907 35,253
Gain on sales of current period securitized mortgage
loans -- 69,919
Gain on sales of mortgage-backed securities and
derivatives -- 9,469
Unrealized gain on mortgage-backed securities and
derivatives 275 40,659
Other non-interest income 782 663
--------- ---------
Non-interest income 172,964 155,963
--------- ---------
Non-interest expenses:
Salaries, commissions and benefits, net 90,337 65,604
Occupancy and equipment 17,650 12,542
Data processing and communications 6,949 5,814
Office supplies and expenses 4,278 4,125
Marketing and promotion 5,791 4,102
Travel and entertainment 6,701 3,843
Professional fees 3,877 2,244
Other 5,016 2,435
--------- ---------
Non-interest expenses 140,599 100,709
--------- ---------
Net income before income tax expense 56,901 96,108
Income tax expense 19,860 --
--------- ---------
Net income $ 37,041 $ 96,108
========= =========
Dividends on preferred stock -- --
--------- ---------
Net income available to common shareholders $ 37,041 $ 96,108
========= =========
-35-
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
LOAN SERVICING SEGMENT
(In thousands)
Three Months Ended
March 31,
--------------------
2006 2005
-------- --------
Net interest income:
Interest income $ -- $ --
Interest expense (3,153) (1,371)
-------- --------
Net interest income (3,153) (1,371)
-------- --------
Non-interest income:
Loan servicing fees 24,333 11,312
Amortization and impairment of mortgage
servicing rights -- (5,082)
Change in fair value of mortgage servicing
rights (18,621) --
-------- --------
Net loan servicing fees 5,712 6,230
-------- --------
Other non-interest income 987 803
-------- --------
Non-interest income 6,699 7,033
-------- --------
Non-interest expenses:
Salaries, commissions and benefits, net 3,905 1,795
Occupancy and equipment 318 127
Data processing and communications 161 114
Office supplies and expenses 54 303
Marketing and promotion 5 26
Travel and entertainment 52 85
Professional fees -- 253
Other 8,863 1,872
-------- --------
Non-interest expenses 13,358 4,575
-------- --------
Net income before income tax benefit (9,812) 1,087
Income tax benefit (3,660) --
-------- --------
Net income $ (6,152) $ 1,087
======== ========
Dividends on preferred stock -- --
-------- --------
Net income available to common shareholders $ (6,152) $ 1,087
======== ========
Overview
--------
Net income for the three months ended March 31, 2006 was $54.5 million compared
to $125.4 million for the three months ended March 31, 2005, a decrease of $70.9
million, or 56.6%. 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 three months ended March 31, 2005 includes approximately $71.4
million of revenues related to the delay in recognizing the Q4-04 Securitization
as a sale into the first quarter of 2005. The decrease in net income was the
result of a $52.5 million increase in non-interest expenses, a $16.2 million
increase in income tax expense, a $12.2 million decrease in net interest income
and a $1.3 million increase in provision for loan losses, partly offset by an
$11.3 million increase in non-interest income. The $11.3 million increase in
non-interest income consists of a $136.6 million increase in gain on sales of
mortgage loans and a $0.3 million increase in other non-interest income, partly
offset by a $69.9 million decrease in gain on sales of current period
securitized mortgage loans, a $55.2 million decrease in realized and unrealized
gains on mortgage-backed securities and derivatives and a $0.5 million decrease
in net loan servicing fees in the three months ended March 31, 2006 versus the
three months ended March 31, 2005.
-36-
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 March 31, 2006 compared to the three months ended March 31, 2005:
(Dollars in thousands) Three Months Ended March 31,
----------------------------------------------------------------------------
2006 2005
------------------------------------ ------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------- -------- ---------- ----------- -------- ----------
Interest earning assets:
Mortgage-backed securities, net (1) $ 9,914,293 $135,093 5.45% $ 5,853,318 $ 58,305 3.98%
Mortgage loans held for sale 6,965,722 102,371 5.88% 6,239,851 88,589 5.68%
Mortgage loans held for investment 3,785,573 63,149 6.67% -- -- --
----------- -------- ----------- --------
20,665,588 300,613 5.82% 12,093,169 146,894 4.86%
----------- -------- ----------- --------
Interest bearing liabilities:
Warehouse lines of credit (2) 6,713,022 85,223 5.08% 1,490,755 16,956 4.55%
Commercial paper 2,666,665 31,047 4.66% 1,184,803 6,058 2.05%
Reverse repurchase agreements (3) 9,309,261 115,505 4.96% 6,898,461 46,724 2.71%
Collateralized debt obligations 1,253,797 13,580 4.33% 1,987,085 16,766 3.37%
Trust preferred securities 210,000 4,245 8.09% -- -- --
Notes payable 317,992 4,435 5.58% 150,167 1,587 4.23%
----------- -------- ----------- --------
20,470,737 254,035 4.96% 11,711,271 88,091 3.01%
----------- -------- ----------- --------
Net interest income $ 46,578 $ 58,803
======== ========
Interest rate spread 0.86% 1.85%
========== ==========
Net interest margin 0.90% 1.94%
========== ==========
(1) The average yield does not give effect to changes in the fair value that
are reflected as a component of stockholders' equity.
(2) Includes $2.7 million of net interest expense on interest rate swap
agreements for 2005.
(3) Includes $8.4 million and $6.0 million of net interest expense on interest
rate swap agreements for 2006 and 2005, respectively.
-37-
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 March 31,
2006 compared to the three months ended March 31, 2005:
Three Months Ended March 31, 2006
Compared to
(In thousands) Three Months Ended March 31, 2005
----------------------------------
Average Average
Rate Volume Total
-------- --------- ---------
Mortgage-backed securities, net $ 26,611 $ 50,177 $ 76,788
Mortgage loans held for sale 3,198 10,584 13,782
Mortgage loans held for investment -- 63,149 63,149
-------- --------- ---------
Interest income 29,809 123,910 153,719
-------- --------- ---------
Warehouse lines of credit 2,191 66,076 68,267
Commercial paper 12,625 12,364 24,989
Reverse repurchase agreements 48,434 20,347 68,781
Collateralized debt obligations 20,128 (23,314) (3,186)
Trust preferred securities -- 4,245 4,245
Notes payable 633 2,215 2,848
-------- --------- ---------
Interest expense 84,011 81,933 165,944
-------- --------- ---------
Net interest income $(54,202) $ 41,977 $ (12,225)
======== ========= =========
Interest Income: Interest income on mortgage-backed securities for the three
months ended March 31, 2006 was $135.1 million, compared to $58.3 million for
the three months ended March 31, 2005, a $76.8 million, or 131.7%, increase.
This increase reflects primarily the growth of our mortgage-backed securities
portfolio and higher interest rates in the first quarter of 2006 versus the
first quarter of 2005.
Interest income on our mortgage loans held for sale for the three months ended
March 31, 2006 was $102.4 million, compared to $88.6 million for the three
months ended March 31, 2005, an increase of $13.8 million, or 15.6%. 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 the first quarter of
2006 versus the first quarter of 2005.
For the three months ended March 31, 2006, we recognized $63.1 million of
interest income on loans held for investment, related to our strategy of holding
certain loans in our investment portfolio beginning in June 2005.
Interest Expense: As of March 31, 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 thirteen 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 March 31,
2006 was $115.5 million, compared to interest expense for the three months ended
March 31, 2005 of $46.7 million, a $68.8 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 first quarter of 2006 versus the first 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 March 31, 2006 was $85.2 million, compared to
interest expense for the three months ended March 31, 2005 of $16.9 million, a
$68.3 million increase. The increase in warehouse lines of credit interest
expense was primarily the result of an increase in average volume due to higher
mortgage origination volume and an increase in average rate due to generally
higher short-term interest rates in the first quarter of 2006 versus the first
quarter of 2005. In May 2004, we formed a wholly-owned special purpose entity
for the purpose of issuing commercial
-38-
paper in the form of SLNs to finance certain portions of our mortgage loans.
Interest expense on commercial paper for the three months ended March 31, 2006
was $31.1 million, versus $6.1 million for the three months ended March 31,
2005, a $25.0 million increase. 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.
Total interest expense on collateralized debt obligations for the three months
ended March 31, 2006 was $13.6 million, compared to interest expense for the
three months ended March 31, 2005 of $16.8 million, a $3.2 million decrease. The
decrease in collateralized debt obligation interest expense was primarily the
result of a decrease in average volume, partly offset by an increase in average
interest rates in the first quarter of 2006 versus the first quarter of 2005.
The decrease in average volume in the 2006 quarter versus the 2005 quarter
related to higher borrowings used to fund the Q4-04 Securitization, which was
accounted for as a financing for most of the first quarter of 2005. The increase
in average rate in 2006 versus 2005 was due to higher interest rates in 2006
versus 2005.
Gain on Mortgage Loans, Mortgage-Backed Securities and Derivatives
------------------------------------------------------------------
Gain on Sales and Securitizations of Mortgage Loans: During the three months
ended March 31, 2006, gain on sales and securitizations of mortgage loans in our
Loan Origination segment totaled $172.2 million, or 1.27%, of mortgage loans
sold or securitized compared to $155.3 million, or 1.49%, of mortgage loans sold
or securitized during the three months ended March 31, 2005. The increase
primarily reflects a $3.1 billion increase in mortgage loans sold or securitized
to $13.5 billion in the first quarter of 2006 from $10.4 billion in the first
quarter 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 three months ended
March 31, 2006 and 2005:
Gains on Sales and Securitizations of Mortgage Loans
Three Months Ended March 31,
----------------------------
2006 2005
----------- ------------
(Dollars in thousands)
Gain on sales of mortgage loans $ 171,907 $ 35,253
Gain on sales of current period securitized mortgage loans -- 69,919
Gain on sales of free standing derivatives -- 9,469
Unrealized gain on self-originated mortgage-backed securities
retained in period -- 41,709
Unrealized gain (loss) on free standing derivatives 275 (1,050)
----------- ------------
Total gain on sales and securitizations of mortgage loans $ 172,182 $ 155,300
=========== ============
Total mortgage loans sold or securitized $13,533,589 $ 10,430,630
=========== ============
Total gain on sales and securitizations of mortgage
loans as a % of total mortgage loans sold or securitized 1.27% 1.49%
Portfolio Gains and Losses: During the three months ended March 31, 2006,
portfolio gains and losses in our Mortgage Holdings segment were a portfolio
gain of $8.2 million compared to a portfolio gain of $13.5 million during the
three months ended March 31, 2005. The decrease in portfolio gains in the first
quarter of 2006 compared to the first quarter of 2005 was the result of a $7.8
million net decrease in unrealized gain on mortgage-backed securities and free
standing derivatives partly offset by a $2.5 million decrease in loss on sales
of mortgage-backed securities.
-39-
The following table presents the components of portfolio gains and losses in our
Mortgage Holdings segment during the three months ended March 31, 2006 and 2005:
Portfolio Gains and Losses
Three Months Ended
March 31,
-------------------
2006 2005
------- --------
(In thousands)
Loss on sales of mortgage-backed securities $ (850) $ (3,337)
Unrealized gain (loss) on mortgage-backed securities 974 (18,460)
Unrealized gain on free standing derivatives 8,066 35,300
------- --------
Net unrealized gain on mortgage-backed securities and free
standing derivatives 9,040 16,840
------- --------
Total portfolio gain $ 8,190 $ 13,503
======= ========
The following table presents the components of gains and losses on sales of
mortgage-backed securities and derivatives shown in our consolidated statements
of income:
Components of (Loss) Gain on Sales of Mortgage-backed Securities and Derivatives
Three Months Ended
March 31,
-------------------
2006 2005
------- --------
(In thousands)
Loss on sales of mortgage-backed securities $ (850) $ (3,337)
Gain on sales of free standing derivatives -- 9,469
------- --------
(Loss) gain on sales of mortgage-backed securities
and derivatives $ (850) $ 6,132
======= ========
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
Three Months Ended
March 31,
------------------
2006 2005
------- --------
(In thousands)
Unrealized gain on self-originated mortgage-backed
securities retained in period $ -- $ 41,709
Unrealized gain (loss) on mortgage-backed securities 974 (18,460)
Unrealized gain on free standing derivatives 8,341 34,250
------- --------
Unrealized gain on mortgage-backed securities and
derivatives $ 9,315 $ 57,499
======= ========
Net Loan Servicing Fees
-----------------------
Net loan servicing fees were $5.7 million for the three months ended March 31,
2006 compared to $6.2 million for the three months ended March 31, 2005.
Loan Servicing Fees: Loan servicing fees increased to $24.3 million for the
three months ended March 31, 2006 from $11.3 million for the three months ended
March 31, 2005, an increase of $13.0 million, or 115.1%. The increase in loan
servicing fees in the first quarter of 2006 versus the first quarter of 2005 was
primarily the result of an increase in loans serviced for others. At March 31,
2006, the principal amount of loans serviced for others, including loans held
for sale and loans held for investment, was $34.8 billion, compared to $19.9
billion at March 31, 2005.
-40-
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 three months ended
March 31, 2006, the change in fair value of MSRs was $18.6 million. The change
in fair value of MSRs in the first quarter of 2006 includes $18.7 million of
reduction in fair value due to servicing runoff and $0.1 million of gain due to
higher interest rates reducing projected future runoff.
Amortization and Impairment of MSRs: Amortization and impairment of MSRs
includes amortization of MSRs of $8.5 million and a temporary impairment
recovery of $3.4 million for the three months ended March 31, 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 quarter of 2006.
The following table presents the components of net loan servicing fees for the
three months ended March 31, 2006 and 2005:
Three Months Ended
March 31,
---------------------
2006 2005
-------- --------
(In thousands)
Loan servicing fees $ 24,333 $ 11,312
Amortization and impairment of mortgage servicing rights -- (5,082)
Change in fair value of mortgage servicing rights (18,621) --
-------- --------
Net loan servicing fees $ 5,712 $ 6,230
======== ========
Other Non-Interest Income
-------------------------
Other non-interest income totaled $1.8 million for the three months ended March
31, 2006 compared to $1.5 million for the three months ended March 31, 2005. For
the three months ended March 31, 2006, other non-interest income primarily
includes reinsurance premiums earned totaling approximately $0.7 million, $0.4
million of other fee income, rental income of $0.3 million and revenue from
title services of $0.2 million. For the three months ended March 31, 2005, other
non-interest income primarily includes reinsurance premiums earned totaling
approximately $0.8 million, rental income of $0.4 million and revenue from title
services of $0.2 million.
Non-Interest Expenses
---------------------
Our non-interest expenses for the three months ended March 31, 2006 were $162.4
million compared to $109.9 million for the three months ended March 31, 2005, an
increase of $52.5 million, or 47.8%. The increase primarily reflects a $42.8
million rise in our Loan Origination segment non-interest expenses to $140.6
million, or 1.07% of total loan originations in the first quarter of 2006, from
$100.7 million, or 1.39% of total loan originations in the first 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 March 31, 2006 were $99.3 million, compared to
$68.5 million for the three months ended March 31, 2005, an increase of $30.8
million, or 45.0%. The increase in expenses reflects higher origination volume
and a resulting higher commission expense and higher salaries due to an increase
in employees to 7,286 at March 31, 2006 from 5,489 at March 31, 2005.
Other Operating Expenses: Operating expenses, excluding salaries, commissions
and benefits, were $63.2 million for the three months ended March 31, 2006,
compared to $41.4 million for the three months ended March 31, 2005, an increase
of $21.8 million, or 52.5%. The increase in operating expenses in the first
quarter of 2006 versus the first quarter of 2005 includes a $9.0 million
increase in other non-interest expense and a $5.3 million increase in occupancy
and equipment expense. The increase in other non-interest expenses in the first
quarter of 2006 versus the first quarter of 2005 was due to a $5.0 million
increase in reserves associated with our servicing assets, 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.
-41-
We recognized $16.2 million of income tax expense for the three months ended
March 31, 2006, compared to no income tax expense or benefit for the three
months ended March 31, 2005. The increase in income tax expense in the first
quarter of 2006 versus the first 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 March 31, 2006 were
$13.2 billion compared to $7.2 billion for the three months ended March 31,
2005, an 81.6% increase. Mortgage brokers, through our wholesale loan production
offices, accounted for 55% of our loan originations in the three months ended
March 31, 2006 compared to 51% of our originations in the three months ended
March 31, 2005. Originations conducted through our retail loan production
offices and internet call center were 40% of our loan originations in the three
months ended March 31, 2006 compared to 49% of our originations in the three
months ended March 31, 2005. During the three months ended March 31, 2006, 5% of
our loan originations were purchased from correspondents.
Liquidity and Capital Resources
-------------------------------
As of March 31, 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 thirteen 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 March 31, 2006, we had $8.9 billion of reverse repurchase agreements
outstanding with a weighted-average borrowing rate of 4.81% before the impact of
interest rate swaps and a weighted-average remaining maturity of three months.
To originate a mortgage loan, we draw against either a $3.3 billion SLN
commercial paper program, a $2.5 billion pre-purchase facility with UBS Real
Estate Securities Inc. ("UBS"), a facility of $2.0 billion with Bear Stearns, a
facility of $1.0 billion with Barclays Bank PLC, a $1.0 billion bank syndicated
facility led by Bank of America, N.A. (which includes a $350 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 $150 million with J.P.
Morgan Chase, a $450 million facility with IXIS Real Estate Capital, Inc.
(formerly CDC Mortgage Capital Inc.) ("IXIS"), an early purchase program
facility with Countrywide Home Loans, Inc. ("Countrywide") 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 a gestation facility with Greenwich Capital Financial
Products, Inc. ("Greenwich"). These facilities are secured by the mortgages
owned by us and by certain of our other assets. Advances drawn under 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 May 4, 2006, the aggregate outstanding
balance under the commercial paper program was $2.7 billion, the aggregate
outstanding balance under the warehouse facilities was $3.7 billion, the
aggregate outstanding balance in drafts payable was $13.1 million and the
aggregate maximum amount available for additional borrowings was $4.4 billion.
The documents governing our warehouse facilities contain a number of
compensating balance requirements and restrictive financial and other covenants
that, among other things, require us to adhere to a maximum ratio of total
liabilities to tangible net worth and maintain a minimum level of tangible net
worth and liquidity, as well as to comply with applicable regulatory and
investor requirements. The facility agreements also contain covenants limiting
the ability of our subsidiaries to transfer or sell assets other than in the
ordinary course of business and to create liens on the collateral without
obtaining the prior consent of the lenders, which consent may not be
unreasonably withheld.
In addition, under our warehouse facilities, we cannot continue to finance a
mortgage loan that we hold if:
o the loan is rejected as "unsatisfactory for purchase" by the
ultimate investor and has exceeded its permissible 120-day warehouse
period;
o we fail to deliver the applicable mortgage note or other documents
evidencing the loan within the requisite time period;
o the underlying property that secures the loan has sustained a
casualty loss in excess of 5% of its appraised value; or
o the loan ceases to be an eligible loan (as determined pursuant to
the applicable facility agreement).
-42-
As of March 31, 2006, our aggregate warehouse facility borrowings were $1.8
billion (including $29.7 million of borrowings under a working capital
sub-limit) and our outstanding drafts payable were $16.4 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 March 31, 2006, our loans held
for investment were $4.3 billion and our loans held for sale were $1.6 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 Capital and Countrywide. These agreements allow us to
accelerate the sale of our mortgage loan inventory, resulting in a more
effective use of the warehouse facility. Aggregate amounts sold and being held
under these agreements as of March 31, 2006 and December 31, 2005 were $4.5
billion and $3.2 billion, respectively. Aggregate amounts so held under these
agreements at May 4, 2006 were $2.3 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 $350.0 million term loan facility with a bank syndicate led by
Bank of America which we use to finance our MSRs. The term loan facility expires
on August 11, 2006. Interest is based on a spread to the LIBOR and may be
adjusted for earnings on escrow balances. At March 31, 2006 and December 31,
2005, borrowings under our term loan facility were $217.8 million and $206.2
million, respectively.
Cash and cash equivalents decreased to $572.6 million as of March 31, 2006 from
$575.7 million as of December 31, 2005.
Our primary sources of cash and cash equivalents during the three months ended
March 31, 2006 were as follows:
o $13.4 billion of proceeds from principal received from sales of
mortgage loans held for sale;
o $1.8 billion of principal proceeds from sales of mortgage-backed
securities;
o $1.8 billion increase in collateralized debt obligations; and
o $532.1 million of principal repayments of mortgage-backed
securities.
Our primary uses of cash and cash equivalents during the three months ended
March 31, 2006 were as follows:
o $13.2 billion of origination of mortgage loans;
o $1.7 billion increase in warehouse lines of credit, net;
o $1.4 billion of purchases of mortgage-backed securities; and
o $907.1 million increase in reverse repurchase agreements, net.
-43-
Commitments
The Company had the following commitments (excluding derivative financial
instruments) at March 31, 2006:
Total Less than 1 Year 1 - 3 Years 3 - 5 Years After 5 Years
---------- ---------------- ----------- ----------- -------------
(In thousands)
Warehouse liabilities $1,754,581 $ 1,754,581 $ -- $ -- $ --
Commercial paper 1,073,630 1,073,630 -- -- --
Reverse repurchase agreements 8,899,050 8,899,050 -- -- --
Collateralized debt obligations 2,905,199 -- 2,049,733 764,060 91,406
Trust preferred securities 204,018 -- -- -- 204,018
Notes payable 330,714 218,553 23,621 64,794 23,746
Operating leases 161,760 59,574 86,857 14,817 512
-44-
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. The Company considers the expected
increase in loan origination volumes and the resulting additional origination
related income as a natural hedge against the expected change in the value of
MSRs. Lower mortgage rates generally reduce the fair value of the MSRs, as
increased prepayment speeds are highly correlated with lower levels of mortgage
interest rates.
The Company enters into interest rate swap agreements ("Swap Agreements") to
manage its interest rate exposure when financing its ARM loans and its
mortgage-backed securities. The Company generally borrows money based on
short-term interest rates by entering into borrowings with maturity terms of
less than one year, and frequently nine to twelve months. The Company's ARM
loans and mortgage-backed securities financing vehicles generally have an
interest rate that reprices based on frequency terms of one to twelve months.
The Company's mortgage-backed securities have an initial fixed interest rate
period of three to five years. When the Company enters into a swap agreement, it
generally agrees to pay a fixed rate of interest and to receive a variable
interest rate, generally based on LIBOR. These swap agreements have the effect
of converting the Company's variable-rate debt into fixed-rate debt over the
life of the swap agreements. These instruments are used as a cost-effective way
to lengthen the average repricing period of the Company's variable-rate and
short-term borrowings such that the average repricing of the borrowings more
closely matches the average repricing of the Company's mortgage-backed
securities. The Company's duration gap was approximately two months on March 31,
2006.
-45-
The following table summarizes the Company's interest rate sensitive instruments
as of March 31, 2006 and December 31, 2005:
March 31, 2006
-----------------------
Carrying Estimated
Amount Fair Value
---------- ----------
Assets:
Mortgage-backed securities $9,580,963 $9,580,963
Derivative assets (1) 102,267 165,072
Mortgage loans held for sale, net 1,589,613 1,607,056
Mortgage loans held for investment, net 4,315,384 4,386,173
Mortgage servicing rights, net 371,974 371,974
Liabilities:
Reverse repurchase agreements $8,899,050 $8,898,132
Collateralized debt obligations 2,905,199 2,905,199
Derivative liabilities 7,512 7,512
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, net 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.
-46-
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:
March 31, 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 $(27,402) $ (2,644) $(16,654) $(48,754)
Changes in fair value of mortgage loans held for
sale and interest rate lock commitments, net of
the related financing and hedges (20,128) (9,502) (189) (4,001)
Changes in fair value of mortgage loans held for
investment, net of the related financing and hedges 9,614 5,532 (6,314) (14,105)
Changes in fair value of mortgage servicing rights, net
of the related financing (48,646) (21,406) 9,493 13,976
-------- -------- -------- --------
Net change $(86,562) $(28,020) $(13,664) $(52,884)
======== ======== ======== ========
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 first 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 first quarter of 2006.
-47-
PART II-OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
In the ordinary course of its business, the Company is from time to time subject
to various legal proceedings. The Company does not believe that any of its
current legal proceedings, individually or in the aggregate, will have a
material adverse effect on its operations or financial condition.
Columbia National, Incorporated
-------------------------------
As previously reported in our periodic reports filed with the SEC, in June 2002,
the Company acquired Columbia National, Incorporated, a Maryland corporation
("Columbia"), which is currently a subsidiary of the Company, and which changed
its name in July 2004 to "American Home Mortgage Servicing, Inc." Prior to the
Company's acquisition of Columbia, Columbia discovered fraudulent loan activity
at its Bensalem, Pennsylvania, office and notified the U.S. Department of
Housing and Urban Development ("HUD"). HUD then instituted an investigation into
the loan originations of the Bensalem office. Shortly thereafter, several years
before Columbia was acquired by the Company, Columbia closed the Bensalem office
and terminated the employees involved in the alleged fraudulent activity. In
2000, Columbia settled with HUD, paying a fine to HUD in the amount of $24,000
and agreeing to indemnify HUD for certain losses. Columbia, as loan servicer for
institutional investors, subsequently made FHA insurance claims with respect to
approximately 60 loans that were originated by the Bensalem office between 1997
and 1999. The federal government is now seeking to recover insurance proceeds
paid in connection with certain of those claims, along with potentially
applicable fines and penalties. The Company is cooperating fully with respect to
the federal government's review of these loans. The Company does not expect that
the amount of any potential settlement will materially affect its financial
condition or results of operations.
ITEM 1A.
RISK FACTORS
There have been no material changes during the quarter ended March 31, 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
The following is a description of the Company's securities that were not
registered under the Securities Act of 1933, as amended (the "Securities Act"),
which were issued or sold during the quarter ended March 31, 2006.
The Company acquired Marina Mortgage Company, Inc. ("Marina") on December 29,
1999. In addition to the shares of Common Stock paid to former Marina
shareholders as initial consideration, the former Marina shareholders were
entitled to receive additional consideration, consisting of unregistered shares
of Common Stock, under the earnout provisions of the merger agreement. On March
14, 2006, pursuant to these earnout provisions, the Company issued an aggregate
of 311,752 unregistered shares of Common Stock to such shareholders as
additional consideration. These securities were exempt from registration under
Section 4(2) of the Securities Act because they were issued pursuant to the
terms of a private transaction rather than through a public offering.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
-48-
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5.
OTHER INFORMATION
None.
ITEM 6.
EXHIBITS
The following exhibits are filed with this Quarterly Report on Form
10-Q:
Exhibit No. Description
----------- -------------------------------------------------------
10.1 -- Employment Agreement, dated as of April 1, 2004, by
and between American Home Mortgage Holdings, Inc.
and Donald Henig.
10.2 -- Employment Agreement, dated as of June 30, 2005, by
and between American Home Mortgage Investment Corp.
and Thomas McDonagh.
31.1 -- Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) or 15(d)-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 -- Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) or 15(d)-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 -- Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 -- Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
-49-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN HOME MORTGAGE INVESTMENT CORP.
(Registrant)
Date: May 10, 2006 By: /s/ Michael Strauss
-----------------------------------------
Michael Strauss
Chairman, Chief Executive Officer
and President
Date: May 10, 2006 By: /s/ Stephen A. Hozie
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Stephen A. Hozie
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
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INDEX TO EXHIBITS
Exhibit No. Description
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10.1 -- Employment Agreement, dated as of April 1, 2004, by and between American
Home Mortgage Holdings, Inc. and Donald Henig.
10.2 -- Employment Agreement, dated as of June 30, 2005, by and between American
Home Mortgage Investment Corp. and Thomas McDonagh.
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.