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 June 30, 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
AMERICAN HOME MORTGAGE INVESTMENT CORP.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Maryland 20-0103914
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
538 Broadhollow Road, Melville, New York 11747
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(516) 949-3900
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [__]
Indicate by check mark whether the registrant is 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 August 4, 2006, there were 50,141,464 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 June 30, 2006 and December 31, 2005.....................................1
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2006 and 2005...............2
Consolidated Statements of Stockholders' Equity for the Six Months Ended June 30, 2006 and 2005..........3
Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2006 and 2005...........4
Notes to Consolidated Financial Statements ...............................................................5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................32
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..............................................58
Item 4. Controls and Procedures..................................................................................60
PART II-OTHER INFORMATION
Item 1. Legal Proceedings........................................................................................61
Item 1A. Risk Factors.............................................................................................61
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds..............................................61
Item 3. Defaults Upon Senior Securities..........................................................................61
Item 4. Submission of Matters to a Vote of Security Holders......................................................62
Item 5. Other Information........................................................................................62
Item 6. Exhibits ................................................................................................63
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)
June 30, December 31,
2006 2005
------------ ------------
Assets:
Cash and cash equivalents $ 304,268 $ 575,650
Accounts receivable and servicing advances 342,244 329,132
Mortgage-backed securities (including securities pledged of $8,982,953 as of
June 30, 2006 and $10,063,621 as of December 31, 2005) 9,299,224 10,602,104
Mortgage loans held for sale, net 1,243,702 2,208,749
Mortgage loans held for investment, net of allowance of $6,885 as of
June 30, 2006 and $2,142 as of December 31, 2005 5,337,138 3,479,721
Derivative assets 139,397 44,594
Mortgage servicing rights 434,173 319,671
Premises and equipment, net 80,296 68,782
Goodwill 110,759 99,527
Other assets 34,398 26,815
------------ ------------
Total assets $ 17,325,599 $ 17,754,745
============ ============
Liabilities and Stockholders' Equity:
Liabilities:
Warehouse lines of credit $ 1,476,958 $ 3,474,191
Drafts payable 12,349 20,754
Commercial paper 888,476 1,079,179
Reverse repurchase agreements 8,939,786 9,806,144
Collateralized debt obligations 3,724,878 1,057,906
Payable for securities purchased - 261,539
Derivative liabilities 3,280 16,773
Trust preferred securities 252,780 203,688
Accrued expenses and other liabilities 355,009 277,476
Notes payable 337,700 319,309
Income taxes payable 80,529 30,770
------------ ------------
Total liabilities 16,071,745 16,547,729
------------ ------------
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 June 30, 2006 and December 31, 2005, respectively 50,857 50,857
9.25% Series B Cumulative Redeemable, 3,450,000 shares issued and outstanding
as of June 30, 2006 and December 31, 2005, respectively 83,183 83,183
Common Stock, par value $0.01 per share, 100,000,000 shares authorized,
50,107,214 and 49,639,646 shares issued and outstanding
as of June 30, 2006 and December 31, 2005, respectively 501 496
Additional paid-in capital 960,995 947,512
Retained earnings 227,450 203,778
Accumulated other comprehensive loss (69,132) (78,810)
------------ ------------
Total stockholders' equity 1,253,854 1,207,016
------------ ------------
Total liabilities and stockholders' equity $ 17,325,599 $ 17,754,745
============ ============
See notes to consolidated financial statements (unaudited).
- 1 -
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts)
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Net interest income:
Interest income $ 330,196 $ 135,318 $ 630,809 $ 282,212
Interest expense (279,992) (90,336) (534,027) (178,427)
--------- --------- --------- ---------
Total net interest income 50,204 44,982 96,782 103,785
--------- --------- --------- ---------
Provision for loan losses (3,979) - (5,290) -
--------- --------- --------- ---------
Total net interest income after provision for loan losses 46,225 44,982 91,492 103,785
--------- --------- --------- ---------
Non-interest income:
Gain on sales of mortgage loans 224,594 77,377 396,501 112,630
Gain on sales of current period securitized mortgage loans - 104,377 - 174,296
(Loss) gain on sales of mortgage-backed securities and derivatives (47) 620 (897) 6,752
Unrealized (loss) gain on mortgage-backed securities and derivatives (7,730) (10,292) 1,585 47,207
Loan servicing fees 30,417 16,970 54,750 28,282
Amortization and impairment of mortgage servicing rights - (33,230) - (38,312)
Change in fair value of mortgage servicing rights (18,830) - (37,451) -
--------- --------- --------- ---------
Net loan servicing fees (loss) 11,587 (16,260) 17,299 (10,030)
--------- --------- --------- ---------
Other non-interest income 2,125 2,543 3,894 4,009
--------- --------- --------- ---------
Total non-interest income 230,529 158,365 418,382 334,864
--------- --------- --------- ---------
Non-interest expenses:
Salaries, commissions and benefits, net 103,157 94,859 202,424 163,334
Occupancy and equipment 19,763 14,397 37,733 27,068
Data processing and communications 6,733 5,957 13,859 11,907
Office supplies and expenses 5,145 5,657 9,477 10,086
Marketing and promotion 6,383 5,126 12,183 9,256
Travel and entertainment 7,793 5,427 14,546 9,355
Professional fees 5,013 3,432 10,344 6,902
Other 17,192 6,843 33,074 13,712
--------- --------- --------- ---------
Total non-interest expenses 171,179 141,698 333,640 251,620
--------- --------- --------- ---------
Net income before income tax expense (benefit) 105,575 61,649 176,234 187,029
Income tax expense (benefit) 33,224 (3,851) 49,424 (3,851)
--------- --------- --------- ---------
Net income $ 72,351 $ 65,500 $ 126,810 $ 190,880
========= ========= ========= =========
Dividends on preferred stock 3,304 3,304 6,609 6,609
--------- --------- --------- ---------
Net income available to common shareholders $ 69,047 $ 62,196 $ 120,201 $ 184,271
========= ========= ========= =========
Per share data:
Basic $ 1.38 $ 1.54 $ 2.41 $ 4.57
Diluted $ 1.37 $ 1.52 $ 2.39 $ 4.51
Weighted average number of shares - basic 50,056 40,384 49,887 40,346
Weighted average number of shares - diluted 50,487 40,886 50,270 40,849
See notes to consolidated financial statements (unaudited).
- 2 -
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(In thousands)
Accumulated
Additional Other Total
Preferred Common Paid-in Retained Comprehensive Stockholders'
Stock Stock Capital Earnings Loss Equity
-------------------------------------------------------------------------
Balance at January 1, 2005 $134,040 $ 403 $631,530 $ 99,628 $(39,339) $ 826,262
-------- -------- -------- --------- -------- -----------
Comprehensive income:
Net income - - - 190,880 - 190,880
Net change in unrealized loss on
mortgage-backed securities available for sale - - - - (17,534) (17,534)
Net change in unrealized gain on cash flow hedges,
net of amortization - - - - 12,573 12,573
-----------
Comprehensive income 185,919
Issuance of common stock - earnouts - 2 5,851 - - 5,853
Issuance of common stock - 1999 Omnibus
Stock Incentive Plan - - 1,214 - - 1,214
Dividends declared on Series A Preferred Stock - - - (2,620) - (2,620)
Dividends declared on Series B Preferred Stock - - - (3,990) - (3,990)
Dividends declared on Common Stock - - - (59,456) - (59,456)
-------- -------- -------- --------- -------- -----------
Balance at June 30, 2005 $134,040 $ 405 $638,595 $ 224,442 $(44,300) $ 953,182
======== ======== ======== ========= ======== ===========
Balance at January 1, 2006 $134,040 $ 496 $947,512 $ 203,778 $(78,810) $ 1,207,016
-------- -------- -------- --------- -------- -----------
Comprehensive income:
Net income - - - 126,810 - 126,810
Net change in unrealized loss on
mortgage-backed securities available for sale - - - - (80,275) (80,275)
Net change in unrealized gain on cash flow hedges,
net of amortization - - - - 89,953 89,953
-----------
Comprehensive income 136,488
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 - 2 1,947 - - 1,949
Stock-based employee compensation expense - - 783 - - 783
Tax benefit for stock options exercised - - 1,198 - - 1,198
Dividends declared on Series A Preferred Stock - - - (2,620) - (2,620)
Dividends declared on Series B Preferred Stock - - - (3,990) - (3,990)
Dividends declared on Common Stock - - - (93,611) - (93,611)
-------- -------- -------- --------- -------- -----------
Balance at June 30, 2006 $134,040 $ 501 $960,995 $ 227,450 $(69,132) $ 1,253,854
======== ======== ======== ========= ======== ===========
See notes to consolidated financial statements (unaudited).
- 3 -
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2006 2005 2006 2005
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net income $ 72,351 $ 65,500 $ 126,810 $ 190,880
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 5,014 2,739 8,967 5,178
Provision for loan losses 3,979 - 5,290 -
Change in fair value of mortgage servicing rights 18,830 - 37,451 -
Amortization and impairment of mortgage servicing rights - 33,230 - 38,312
Accretion and amortization of mortgage-backed securities, net 2,006 (1,169) 4,337 3,424
Deferred cash flow hedge gain, net of amortization 10,509 1,738 14,418 18,790
Loss on sales of mortgage-backed securities and derivatives - 447 - 3,783
Unrealized loss (gain) on mortgage-backed securities 14,591 (4,533) 17,681 46,470
Unrealized (gain) loss on free standing derivatives (1,038) 25,903 (5,803) (14,409)
(Decrease) increase in forward delivery contracts (6,036) 13,930 (30,077) 4,335
Capitalized mortgage servicing rights on securitized loans - (62,629) - (142,340)
Capitalized mortgage servicing rights on sold loans (81,029) (4,027) (150,797) (6,374)
(Increase) decrease in interest rate lock commitments (4,447) (6,264) 2,684 (6,054)
(Increase) decrease in mortgage loan basis adjustments (2,156) (10,584) 2,575 20,370
Excess tax benefits from share-based payment arrangements (1,198) - (1,198) -
Other (633) (2,155) (831) (978)
(Increase) decrease in operating assets:
Accounts receivable (13,506) (14,401) (6,677) (1,449)
Servicing advances (1,152) 861 (4,433) 1,592
Income taxes receivable - 25,797 - 25,797
Other assets (3,582) 2,350 (5,033) 10,064
Increase (decrease) in operating liabilities:
Accrued expenses and other liabilities (32,977) (1,269) 60,899 20,163
Income taxes payable 30,711 (6,497) 46,884 (6,589)
Origination of mortgage loans held for sale (14,371,439) (10,647,029) (26,574,453) (17,902,429)
Principal received from sales of mortgage loans held for sale 14,013,921 4,457,519 27,386,495 7,538,314
Proceeds from securitizations of mortgage loans held for sale - 5,855,914 - 13,192,526
Additions to mortgage-backed securities and derivatives - (466,522) - (3,306,781)
Principal proceeds from sales of self-originated mortgage-backed
securities 99,086 1,104,227 1,908,882 1,104,227
Cash received from residual assets in securitizations 20,947 23,539 48,300 40,095
Principal repayments of mortgage-backed securities 60,485 172,172 154,330 280,575
------------ ------------ ------------ ------------
Net cash (used in) provided by operating activities (166,763) 558,787 3,046,701 1,157,492
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchases of premises and equipment (9,716) (8,194) (20,481) (15,043)
Origination of mortgage loans held for investment (560,003) (133,757) (1,530,338) (133,757)
Proceeds from repayments of mortgage loans held for investment 240,403 - 377,948 -
Purchases of mortgage-backed securities (461,125) (933,929) (1,850,461) (933,929)
Principal proceeds from sales of purchased mortgage-backed securities - 20,962 - 1,154,951
Principal repayments of purchased mortgage-backed securities 501,239 361,049 939,536 729,720
Net increase in investment in Federal Home Loan Bank stock, at cost (108) - (108) -
Acquisition of business - - (550,077) -
------------ ------------ ------------ ------------
Net cash (used in) provided by investing activities (289,310) (693,869) (2,633,981) 801,942
------------ ------------ ------------ ------------
Cash flows from financing activities:
(Decrease) increase in warehouse lines of credit, net (277,623) 7,011 (1,997,233) (70,086)
Increase (decrease) in reverse repurchase agreements, net 40,736 (382,537) (866,358) (733,538)
Increase (decrease) in collateralized debt obligations 819,679 - 2,666,972 (2,022,218)
Decrease in payable for securities purchased (215,114) - (261,539) -
(Decrease) increase in commercial paper, net (185,154) 433,302 (190,703) 761,894
(Decrease) increase in drafts payable, net (4,028) (1,853) (8,405) 338
Increase in trust preferred securities 48,762 48,414 49,092 48,414
Increase in notes payable, net 6,986 96,721 18,391 120,299
Proceeds from issuance of Common Stock 1,127 587 1,779 898
Excess tax benefits from share-based payment arrangements 1,198 - 1,198 -
Dividends paid (48,819) (31,950) (97,296) (60,881)
------------ ------------ ------------ ------------
Net cash provided by (used in) financing activities 187,750 169,695 (684,102) (1,954,880)
------------ ------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (268,323) 34,613 (271,382) 4,554
Cash and cash equivalents, beginning of period 572,591 162,762 575,650 192,821
------------ ------------ ------------ ------------
Cash and cash equivalents, end of period $ 304,268 $ 197,375 $ 304,268 $ 197,375
============ ============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 340,142 $ 120,860 $ 522,097 $ 200,797
Income taxes paid 2,506 673 2,538 788
Supplemental disclosure of non-cash investing information:
Net transfer of loans held for sale to loans held for investment $ 699,519 $ - $ 699,519 $ -
See notes to consolidated financial statements (unaudited).
- 4 -
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - American Home Mortgage Investment Corp. ("AHM Investment") is a
mortgage REIT focused on earning net interest income from mortgage loans and
securities, and through its taxable subsidiaries, on earning income from
originating and selling mortgage loans and servicing mortgage loans for
institutional investors. Mortgages are originated through a network of loan
origination offices and mortgage brokers or are purchased from correspondents,
and are serviced at the Company's Irving, Texas servicing center. As used
herein, references to the "Company," "American Home," "we," "our" and "us" refer
to AHM Investment collectively with its subsidiaries.
Basis of Presentation - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company's estimates and assumptions
primarily arise from risks and uncertainties associated with interest rate
volatility, prepayment volatility, credit exposure and regulatory changes.
Although management is not currently aware of any factors that would
significantly change its estimates and assumptions in the near term, future
changes in market trends and conditions may occur which could cause actual
results to differ materially.
Due to the Company's exercising significant influence on the operations of its
joint ventures, their balances and operations have been fully consolidated in
the accompanying consolidated financial statements and all intercompany accounts
and transactions have been eliminated.
Cash and Cash Equivalents - Cash and cash equivalents are demand deposits and
short-term investments with a maturity of 90 days or less. The carrying amount
of cash and cash equivalents approximates its fair value.
Mortgage-backed Securities - Mortgage-backed securities are classified as either
trading or available for sale. Trading securities are reported at fair value,
and changes in fair value are reported in unrealized gain (loss) on
mortgage-backed securities and derivatives in the consolidated statements of
income. Available for sale securities are reported at fair value, with
unrealized gains and losses excluded from earnings and reported in accumulated
other comprehensive income (loss). Realized gains and losses on sales of
available for sale securities are determined on an average cost basis and
included in gain (loss) on sales of mortgage-backed securities and derivatives.
When the fair value of an available for sale security is less than amortized
cost, management evaluates whether there is an other-than-temporary impairment
in the value of the security (e.g., whether the security is likely to be sold
prior to the recovery of fair value) based on estimated credit losses,
prepayment speeds and the length of time in an unrealized loss position. If, in
management's assessment, an other-than-temporary impairment exists, the cost
basis of the security is written down to the then-current fair value, and the
unrealized loss is transferred from accumulated other comprehensive income as an
immediate reduction of current earnings (i.e., as if the loss had been realized
in the period of impairment). Premiums and discounts on the Company's
mortgage-backed securities held in available for sale are amortized to interest
income using the level yield method over the estimated life of the security.
Mortgage Loans Held for Sale - Mortgage loans held for sale are carried at the
lower of cost or aggregate market value. The cost basis includes the capitalized
value of the prior interest rate lock commitments ("IRLCs") related to the
mortgage loans and any net deferred origination costs. For mortgage loans held
for sale that are hedged with forward sale commitments, if the Company meets
hedge accounting requirements, the carrying value is adjusted for the change in
market during the time the hedge was deemed to be highly effective. The market
value is determined by outstanding commitments from investors or current
investor yield requirements calculated on the aggregate basis.
Mortgage Loans Held for Investment - Mortgage loans held for investment
represent loans securitized through transactions structured as financings, or
pending securitization through transactions that are expected to be structured
as financings. Mortgage loans held for investment are carried at the aggregate
of their remaining unpaid principal balances, including the capitalized value of
the prior IRLCs related to the mortgage loans, plus net deferred origination
costs, less any related charge-offs and allowance for loan losses. Loan fees and
direct origination costs are deferred and amortized into interest income over
the contractual life of the loan using the level-yield method.
Allowance for Losses on Mortgage Loans Held for Investment - The Company
maintains an allowance for loan losses for its mortgage loans held for
investment, based on the Company's estimate of current existing losses.
Additions to the allowance for loan losses are based on assessments of certain
factors, including historical loan loss experience of similar types of loans,
the Company's loan loss experience, the
- 5 -
amount of past due and nonperforming loans, specific known risks, the value of
collateral securing the loans, and current and anticipated economic and interest
rate conditions. Evaluation of these factors involves subjective estimates and
judgments that may change. Additions to the allowance for loan losses are
provided through a charge to income and recorded within provision for loan
losses in the consolidated statements of income. The allowance for loan losses
is reduced by subsequent charge-offs, net of recoveries.
Mortgage Servicing Rights - In March 2006, the Financial Accounting Standards
Board ("FASB") released Statement of Financial Accounting Standards ("SFAS") No.
156, "Accounting for Servicing Financial Assets, an amendment of SFAS No. 140"
("SFAS No. 156"). SFAS No. 156 amends SFAS No. 140 to require that all
separately recognized servicing assets and liabilities be initially measured at
fair value, if practical. The effective date of this statement is as of the
beginning of the entity's first fiscal year that begins after September 15,
2006; however, early adoption is permitted as of the beginning of any fiscal
year, provided the entity has not issued financial statements for the interim
period. The initial recognition and measurement of servicing assets and
servicing liabilities are required to be applied prospectively to transactions
occurring after the effective date. The Company elected to early adopt SFAS No.
156 as of January 1, 2006, and has recorded its mortgage servicing rights
("MSRs") at fair value. The Company's election increased MSRs by $1.2 million.
Prior to January 1, 2006, MSRs were carried at the lower of cost or fair value,
based on defined interest rate risk strata, and the gross MSR asset was
amortized in proportion to and over the period of estimated net servicing
income. The Company estimates the fair value of its MSRs by obtaining market
information from one of the market's primary independent MSR brokers.
Premises and Equipment - Premises and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation is provided using the
straight-line method over the estimated service lives of the premises and
equipment. Leasehold improvements are amortized over the lesser of the life of
the lease or service lives of the improvements using the straight-line method.
Depreciation and amortization are recorded within occupancy and equipment
expense in the consolidated statements of income.
Goodwill - Goodwill represents the excess purchase price over the fair value of
net assets acquired from business acquisitions. The Company tests for impairment
at least annually and will test for impairment more frequently if events or
circumstances indicate that an asset may be impaired. The Company tests for
impairment by comparing the fair value of goodwill, as determined by using a
discounted cash flow method, with its carrying value. Any excess of carrying
value over the fair value of the goodwill would be recognized as an impairment
loss in continuing operations. The discounted cash flow calculation related to
the Company's loan origination segment includes a forecast of the expected
future loan originations and the related revenues and expenses. The discounted
cash flow calculation related to the Company's mortgage holdings segment
includes a forecast of the expected future net interest income, gain on
mortgage-backed securities and the related revenues and expenses. These cash
flows are discounted using a rate that is estimated to be a weighted-average
cost of capital for similar companies. We further test to ensure that the fair
value of all of our business units does not exceed our total market
capitalization.
Reverse Repurchase Agreements - The Company has entered into reverse repurchase
agreements to finance certain of its investments. These agreements are secured
by a portion of the Company's investments and bear interest rates that have
historically moved in close relationship to the London Inter-Bank Offer Rate
("LIBOR"). Reverse repurchase agreements are accounted for as borrowings and
recorded as a liability on the consolidated balance sheet.
Collateralized Debt Obligations - The Company has issued adjustable-rate
collateralized debt obligations ("CDOs") to finance certain portions of its
mortgage loans. The collateralized debt obligations are collateralized by
adjustable-rate mortgage ("ARM") loans that have been placed in a trust and bear
interest rates that have historically moved in close relationship to LIBOR. CDOs
are accounted for as borrowings and recorded as a liability on the consolidated
balance sheet.
Commercial Paper - The Company maintains a wholly owned special purpose entity
for the purpose of issuing commercial paper in the form of short-term Secured
Liquidity Notes ("SLNs") to finance certain portions of the Company's mortgage
loans held for sale and mortgage loans held for investment. The commercial paper
may be secured by the Company's mortgage loans held for sale, mortgage loans
held for investment, mortgage-backed securities 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 +255 basis points to LIBOR +300 basis points.
Drafts Payable - Drafts payable represent outstanding mortgage loan
disbursements that the Company has provided to its customers for the purchase of
a home. The amounts outstanding do not bear interest and the obligation is
transferred into one of the Company's warehouse facilities when the related
draft is presented to a bank.
Derivative Financial Instruments - The Company has developed risk management
programs and processes designed to manage market risk associated with normal
business activities.
- 6 -
Interest Rate Lock Commitments ("IRLCs"). The Company's mortgage committed
pipeline includes IRLCs that have been extended to borrowers who have applied
for loan funding and meet certain defined credit and underwriting criteria and
have locked their terms and rates. The Company uses mortgage forward delivery
contracts to economically hedge the IRLCs. The Company classifies and accounts
for the IRLCs associated with loans expected to be sold as free-standing
derivatives. Accordingly, IRLCs related to loans held for sale are recorded at
fair value with changes in fair value recorded to current earnings.
Forward Delivery Commitments Used to Economically Hedge IRLCs. The Company uses
mortgage forward delivery contracts to economically hedge the IRLCs, which are
also classified and accounted for as free-standing derivatives and thus are
recorded at fair value with the changes in fair value recorded to current
earnings.
Forward Delivery Commitments Used to Hedge Mortgage Loans Held for Sale. The
Company's risk management objective for its mortgage loans held for sale is to
protect earnings from an unexpected charge due to a decline in value. The
Company's strategy is to engage in a risk management program involving the use
of mortgage forward delivery contracts designated as fair value hedging
instruments to hedge 100% of its agency-eligible conforming loans and most of
its non-conforming loans held for sale. At the inception of the hedge, to
qualify for hedge accounting, the Company formally documents the relationship
between the forward delivery contracts and the mortgage inventory as well as its
objective and strategy for undertaking the hedge transaction. For conventional
conforming fixed-rate loans, the notional amount of the forward delivery
contracts, along with the underlying rate and terms of the contracts, are
equivalent to the unpaid principal amount of the mortgage inventory being
hedged; hence, the forward delivery contracts effectively fix the forward sales
price and thereby substantially eliminate interest rate and price risk to the
Company. The Company classifies and accounts for these forward delivery
contracts as fair value hedges. The derivatives are carried at fair value with
the changes in fair value recorded to current earnings. When the hedges are
deemed highly effective, the book value of the hedged loans held for sale is
adjusted for its change in fair value during the hedge period.
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.
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
- 7 -
such amounts adjust interest income. When loans are securitized and held as
trading securities, net deferred origination costs are an adjustment to the cost
of the security and such amounts affect the amount recorded as unrealized gain
on mortgage-backed securities and derivatives.
Interest Recognition - The Company accrues interest income as it is earned and
interest expense as it is incurred. Loans are placed on a nonaccrual status when
any portion of the principal or interest is 90 days past due or earlier when
concern exists as to the ultimate collectibility of principal or interest. Loans
return to accrual status when principal and interest become current and are
anticipated to be fully collectible.
The Company enters into interest rate swap agreements which require it to pay a
fixed interest rate and receive a variable interest rate based on the LIBOR. For
interest rate swap agreements accounted for as cash flow hedges, the net amount
accrued for the variable interest receivable and fixed interest payable affects
the amount recorded as interest expense. For interest rate swap agreements
accounted for as free-standing derivatives, the net amount accrued for the
variable interest receivable and fixed interest payable is recorded in current
earnings as unrealized gain on mortgage-backed securities and derivatives.
Servicing Fees - The Company recognizes servicing fees when the fees are
collected.
Marketing and Promotion - The Company charges the costs of marketing, promotion
and advertising to expense in the period incurred.
Income Taxes - The Company accounts for income taxes in conformity with SFAS No.
109, "Accounting for Income Taxes," which requires an asset and liability
approach for accounting and reporting of income taxes. Deferred tax assets and
liabilities are recognized for the future tax consequences ("temporary
differences") attributable to the differences between the carrying amounts of
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which temporary differences are expected to be recovered
or settled. A valuation allowance is provided for deferred tax assets where
realization is not considered "more likely than not." The Company recognizes the
effect of changes in tax laws or rates on deferred tax assets and liabilities in
the period that includes the enactment date.
Stock Option Plans - In 1999, the Company established the 1999 Omnibus Stock
Incentive Plan, as amended (the "Plan"). Prior to January 1, 2006, the Company
accounted for the Plan using Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB Opinion No. 25"), and provided
pro forma net income and pro forma earnings per share disclosures for employee
stock option grants as if the fair-value based method, as required by SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of FASB Statement No. 123" ("SFAS No. 148"), had been applied. Prior
to January 1, 2006, in accordance with APB Opinion No. 25, no stock-based
compensation cost was reflected in the Company's net income for grants of stock
options to employees because the Company granted stock options with an exercise
price equal to the market value of the stock on the date of grant. Had the
Company used the fair value based accounting method for stock compensation
expense prescribed by SFAS Nos. 123 and 148 for the three and six months ended
June 30, 2005, the Company's consolidated net income and earnings per share
would have been reduced to the pro-forma amounts presented in the following
table:
- 8 -
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands, except per share data) 2005 2005
----------- -----------
Net income available to common
shareholders - as reported $ 62,196 $ 184,271
Less: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax effects (342) (685)
----------- -----------
Net income available to common
shareholders - pro forma $ 61,854 $ 183,586
=========== ===========
Earnings per share:
Basic - as reported $ 1.54 $ 4.57
Basic - pro forma $ 1.53 $ 4.55
Diluted - as reported $ 1.52 $ 4.51
Diluted - pro forma $ 1.51 $ 4.49
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment" ("SFAS
No. 123R"), which requires that the compensation cost relating to share-based
payment transactions (including employee stock options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase
plans) be recognized as an expense in the Company's consolidated financial
statements. Under SFAS No. 123R, the related compensation cost is measured based
on the fair value of the award at the date of grant. In March 2005, the
Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin
("SAB") No. 107, "Share-Based Payment," which expresses views of the SEC Staff
about the application of SFAS No. 123R. SFAS No. 123 requires only that the
expense relating to employee stock options be disclosed in the footnotes to the
consolidated financial statements. SFAS No. 123R replaced SFAS No. 123 and
superseded APB Opinion No. 25. While SFAS No. 123R was originally to have been
effective for interim and annual reporting periods beginning after June 15,
2005, the SEC, in April 2005, deferred the compliance date to the first annual
reporting period beginning after June 15, 2005.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS No. 123R, using the modified prospective method. Under this
method, compensation cost in the six months ended June 30, 2006 includes the
portion vesting in the period for (1) all share-based payments granted prior to,
but not vested as of December 31, 2005, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123 and (2) all
share-based payments granted subsequent to December 31, 2005, based on the grant
date fair value estimated using a binomial lattice-based option valuation model.
Results of prior periods do not reflect any restated amounts and the Company had
no cumulative effect adjustment upon adoption of SFAS No. 123R under the
modified prospective method. The Company's policy is to recognize compensation
cost for awards with only service conditions and a graded vesting schedule on a
straight-line basis over the requisite service period for the entire award.
Additionally, the Company's policy is to issue authorized but unissued shares of
common stock to satisfy stock option exercises.
During the three months ended June 30, 2006, the Company's adoption of SFAS No.
123R decreased income before income taxes by $373 thousand, decreased net income
by $299 thousand, decreased basic net income per share by $.01 per share and
decreased diluted net income per share by less than $.01 per share. The income
tax benefit recognized in income for the three months ended June 30, 2006 for
stock options was $74 thousand. During the six months ended June 30, 2006, the
Company's adoption of SFAS No. 123R decreased income before income taxes by $783
thousand, decreased net income by $608 thousand and decreased basic and diluted
net income per share by $.01 per share. The income tax benefit recognized in
income for the six months ended June 30, 2006 for stock options was $175
thousand. The expense, before income tax effect, is included in salaries,
commissions and benefits expense.
Earnings Per Share - Basic earnings per share excludes dilution and is computed
by dividing net income available to common shareholders by the weighted-average
number of shares of common stock outstanding for the period. Diluted earnings
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the Company.
Cash Flows - Cash and cash equivalents are demand deposits and short-term
investments with a maturity of 90 days or less.
- 9 -
Recently Issued Accounting Standards - In July 2006, the FASB issued FIN 48,
"Accounting for Uncertainty in Income Taxes - An Interpretation of SFAS No. 109"
("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with FASB
Statement No. 109, "Accounting for Income Taxes." FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company is evaluating the potential impact of FIN 48 on its
consolidated financial position, results of operations and cash flows.
NOTE 2 - MORTGAGE-BACKED SECURITIES
The following tables present the Company's mortgage-backed securities available
for sale as of June 30, 2006 and December 31, 2005:
June 30, 2006
------------------------------------------------------------
Gross Unrealized Gross Unrealized
Adjusted Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
(In thousands)
Agency securities $ 119,329 $ - $ (5,983) $ 113,346
Privately issued:
Rated 8,171,168 110 (125,312) 8,045,966
Unrated 5,974 309 - 6,283
---------- ---------- ---------- ----------
Securities available for sale $8,296,471 $ 419 $ (131,295) $8,165,595
========== ========== ========== ==========
December 31, 2005
------------------------------------------------------------
Gross Unrealized Gross Unrealized
Adjusted Cost Gains Losses Fair Value
---------- ---------- ---------- ----------
(In thousands)
Agency securities $ 135,545 $ - $ (5,225) $ 130,320
Privately issued:
Rated 7,282,916 4,562 (49,963) 7,237,515
Unrated 7,176 25 - 7,201
---------- ---------- ---------- ----------
Securities available for sale $7,425,637 $ 4,587 $ (55,188) $7,375,036
========== ========== ========== ==========
- 10 -
The following tables present the Company's mortgage-backed securities available
for sale in an unrealized loss position as of June 30, 2006 and December 31,
2005:
June 30, 2006
------------------------------------------------------------------------
Less Than 12 Months 12 Months or More Total
--------------------- --------------------- ----------------------
Gross Gross Gross
Unrealized Unrealized Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
--------------------- --------------------- ----------------------
(In thousands)
Agency securities $ - $ - $ 113,346 $ (5,983) $ 113,346 $ (5,983)
Privately issued:
Rated 6,545,229 (87,312) 1,428,855 (38,000) 7,974,084 (125,312)
--------------------- --------------------- ----------------------
Securities available for sale $6,545,229 $(87,312) $1,542,201 $(43,983) $8,087,430 $(131,295)
===================== ===================== ======================
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 June 30, 2006. The Company has the
ability and intent to hold its mortgage-backed securities available for sale in
an unrealized loss position until a market price recovery or maturity.
The following table presents the Company's mortgage-backed trading securities as
of June 30, 2006 and December 31, 2005:
June 30, December 31,
2006 2005
------------ ------------
Fair Value
--------------------------
(In thousands)
Privately issued:
Rated $ 917,607 $2,997,650
Unrated 216,022 229,418
---------- ----------
Trading securities $1,133,629 $3,227,068
========== ==========
During the three months ended June 30, 2006, the Company recorded $14.6 million
in unrealized losses on trading securities that related to trading securities
held at June 30, 2006. During the three months ended June 30, 2005, the Company
recorded $21.5 million in unrealized gains on trading securities that related to
trading securities held at June 30, 2005.
During the six months ended June 30, 2006, the Company recorded $13.6 million in
unrealized losses on trading securities that related to trading securities held
at June 30, 2006. During the six months ended June 30, 2005, the Company
recorded $44.8 million in unrealized gains on trading securities that related to
trading securities held at June 30, 2005.
- 11 -
During the three months ended June 30, 2006, the Company sold $99.1 million of
mortgage-backed securities and realized $47 thousand in losses, net of hedges.
The $99.1 million of mortgage-backed securities sold were self-originated.
During the three months ended June 30, 2005, the Company sold $1.1 billion of
mortgage-backed securities, excluding securities sold contemporaneously with the
execution of securitization transactions, and realized $4.2 million in gains,
net of hedges. The $1.1 billion of mortgage-backed securities sold were
primarily self-originated. During the three months ended June 30, 2005, the
Company securitized and held in its portfolio $463 million of mortgage-backed
securities.
During the six months ended June 30, 2006, the Company sold $1.9 billion of
mortgage-backed securities and realized $0.9 million in losses, net of hedges.
The $1.9 billion of mortgage-backed securities sold were self-originated.
During the six months ended June 30, 2005, the Company sold $2.3 billion of
mortgage-backed securities, excluding securities sold contemporaneously with the
execution of securitization transactions, and realized $0.9 million in gains,
net of hedges. During the six months ended June 30, 2005, the Company
securitized and held in its portfolio $3.2 billion of mortgage-backed
securities.
The Company's mortgage-backed securities held at June 30, 2006 were primarily
either agency obligations or were rated AAA or AA by Standard & Poor's.
The Company has credit exposure on $12.7 billion and $15.1 billion of loans it
has securitized privately as of June 30, 2006 and December 31, 2005,
respectively. The following tables summarize the loan delinquency information as
of June 30, 2006 and December 31, 2005:
June 30, 2006
-----------------------------------------------------
(Dollars in thousands)
Loan Loan Percentage of Percentage of
Delinquency Status Count Balance Total Portfolio Total Assets
--------------------------------- -----------------------------------------------------
60 to 89 days 45 $ 5,780 0.05% 0.03%
90 and greater days 71 14,652 0.12% 0.08%
Pending foreclosure 837 201,584 1.58% 1.17%
-------- -------- -------- --------
Loans 60 days and greater delinquent 953 $222,016 1.75% 1.28%
======== ======== ======== ========
December 31, 2005
-----------------------------------------------------
(Dollars in thousands)
Loan Loan Percentage of Percentage of
Delinquency Status Count Balance Total Portfolio Total Assets
--------------------------------- -----------------------------------------------------
60 to 89 days 49 $ 10,194 0.07% 0.06%
90 and greater days 82 13,596 0.09% 0.08%
Pending foreclosure 451 119,181 0.79% 0.67%
-------- -------- -------- --------
Loans 60 days and greater delinquent 582 $142,971 0.95% 0.81%
======== ======== ======== ========
As of June 30, 2006 and December 31, 2005, the fair value of residual assets
from securitizations reported in mortgage-backed securities was $234.8 million
and $276.0 million, respectively.
The significant assumptions used in estimating the fair value of residual cash
flows as of June 30, 2006 and December 31, 2005 were as follows:
June 30, December 31,
2006 2005
------ -------
Weighted-average prepayment speed (CPR) 29.93% 30.63%
Weighted-average discount rate 16.44% 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 June 30, 2006 and December 31, 2005:
June 30, December 31,
(In thousands) 2006 2005
----------- -----------
Mortgage loans held for sale $ 1,237,841 $ 2,190,062
SFAS No. 133 basis adjustments (4,911) (2,099)
Deferred origination costs, net 10,772 20,786
----------- -----------
Mortgage loans held for sale, net $ 1,243,702 $ 2,208,749
=========== ===========
During the three months ended June 30, 2006, the Company sold mortgage loans to
third parties totaling $13.9 billion and realized $224.6 million in gains.
During the six months ended June 30, 2006, the Company sold mortgage loans to
third parties totaling $27.4 billion and realized $396.5 million in gains.
During the three and six months ended June 30, 2006, the Company deferred $161.8
million and $289.7 million, respectively, of loan origination costs as an
adjustment to the cost basis for additions to mortgage loans held for sale. The
Company's gain on sale of loans was reduced by $164.9 million and $299.7 million
of deferred origination costs associated with mortgage loans sold during the
three and six months ended June 30, 2006, respectively.
The following tables summarize delinquency information as of June 30, 2006 and
December 31, 2005 for the Company's mortgage loans held for sale:
June 30, 2006
--------------------------
(Dollars in thousands)
Percentage
Loan Loan of Total
Delinquency Status Count Balance Portfolio
------------------------------------ ------- ------- -------
60 to 89 days 16 $ 1,734 0.14%
90 and greater days 85 10,821 0.88%
Pending foreclosure 112 14,452 1.17%
------- ------- -------
Loans 60 days and greater delinquent 213 $27,007 2.19%
======= ======= =======
December 31, 2005
--------------------------
(Dollars in thousands)
Percentage
Loan Loan of Total
Delinquency Status Count Balance Portfolio
------------------------------------ ------- ------- -------
60 to 89 days 15 $ 2,404 0.11%
90 and greater days 51 6,530 0.30%
Pending foreclosure 32 4,824 0.22%
------- ------- -------
Loans 60 days and greater delinquent 98 $13,758 0.63%
======= ======= =======
- 13 -
Mortgage Loans Held For Investment, Net
The following table presents the Company's mortgage loans held for investment,
net, as of June 30, 2006 and December 31, 2005:
June 30, December 31,
(In thousands) 2006 2005
----------- -----------
Mortgage loans held for investment $ 5,290,334 $ 3,438,425
SFAS No. 133 basis adjustments (3,832) -
Deferred origination costs, net 57,521 43,438
Allowance for loan losses (6,885) (2,142)
----------- -----------
Mortgage loans held for investment, net $ 5,337,138 $ 3,479,721
=========== ===========
In June 2006, the Company transferred $964.9 million of its mortgage loans held
for investment to American Home Mortgage Investment Trust 2006-2 (the "2006-2
Trust") in a securitization transaction accounted for as a financing of the
loans held for investment.
In March 2006, the Company transferred $2.0 billion of its mortgage loans held
for investment to American Home Mortgage Investment Trust 2006-1 (the "2006-1
Trust") in a securitization transaction accounted for as a financing of the
loans held for investment.
During the three and six months ended June 30, 2006, the Company deferred $12.0
million and $20.4 million, respectively, of loan origination costs as an
adjustment to the cost basis for mortgage loans added to its held for investment
portfolio. The Company's interest income was reduced by $3.6 million and $6.3
million of deferred origination cost amortization on mortgage loans held for
investment during the three and six months ended June 30, 2006, respectively.
The following table presents the activity in the Company's allowance for loan
losses for the three and six months ended June 30, 2006:
Three Months Ended Six Months Ended
June 30, 2006 June 30, 2006
--------------- ---------------
(In thousands)
Balance at beginning of period $ 3,453 $ 2,142
Provision for loan losses 3,979 5,290
Charge-offs (547) (547)
--------------- ---------------
Balance at end of period $ 6,885 $ 6,885
=============== ===============
- 14 -
The following tables summarize delinquency information as of June 30, 2006 and
December 31, 2005 for the Company's mortgage loans held for investment:
June 30, 2006
--------------------------
(Dollars in thousands)
Percentage
Loan Loan of Total
Delinquency Status Count Balance Portfolio
------------------------------------ ------- ------- -------
60 to 89 days 20 $ 2,094 0.04%
90 and greater days 37 4,780 0.09%
Pending foreclosure 200 36,042 0.68%
------- ------- -------
Loans 60 days and greater delinquent 257 $42,916 0.81%
======= ======= =======
December 31, 2005
--------------------------
(Dollars in thousands)
Percentage
Loan Loan of Total
Delinquency Status Count Balance Portfolio
------------------------------------ ------- ------- -------
60 to 89 days 23 $ 2,898 0.08%
90 and greater days 26 2,489 0.07%
Pending foreclosure 49 8,797 0.26%
------- ------- -------
Loans 60 days and greater delinquent 98 $14,184 0.41%
======= ======= =======
NOTE 4 - DERIVATIVE ASSETS AND LIABILITIES
The following table presents the Company's derivative assets and liabilities as
of June 30, 2006 and December 31, 2005:
June 30, December 31,
(In thousands) 2006 2005
---------- ----------
Derivative Assets
Interest rate swaps $ 111,113 $ 30,508
Interest rate lock commitments 14,682 14,086
Forward delivery contracts - loan commitments 7,480 --
Forward delivery contracts - loans held for sale 5,824 --
Interest rate caps 298 --
---------- ----------
Derivative assets $ 139,397 $ 44,594
========== ==========
Derivative Liabilities
Interest rate lock commitments $ 3,280 $ --
Forward delivery contracts - loan commitments -- 8,659
Forward delivery contracts - loans held for sale -- 8,114
---------- ----------
Derivative liabilities $ 3,280 $ 16,773
========== ==========
As of June 30, 2006, the notional amount of forward delivery contracts and
interest rate swap agreements was approximately $2.9 billion and $10.9 billion,
respectively.
As of December 31, 2005, the notional amount of forward delivery contracts and
interest rate swap agreements was approximately $2.2 billion and $8.7 billion,
respectively.
- 15 -
During the three months ended June 30, 2006, the Company recognized in earnings
$6.8 million in unrealized gains on free standing derivatives. During the three
months ended June 30, 2005, the Company recognized in earnings $31.8 million in
unrealized losses on free standing derivatives.
During the six months ended June 30, 2006, the Company recognized in earnings
$15.2 million in unrealized gains on free standing derivatives. During the six
months ended June 30, 2005, the Company recognized in earnings $2.4 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 June 30, 2005, the Company realized $3.6 million
in losses on sales of interest rate swap agreements associated with its
securitizations of mortgage loans.
During the six months ended June 30, 2005, the Company realized $5.9 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
June 30, 2006 and December 31, 2005.
As of June 30, 2006, the unrealized gain on interest rate swap agreements
relating to cash flow hedges recorded in accumulated other comprehensive loss
was $61.7 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 June 30, 2007 $ 12,355
Twelve months ended June 30, 2008 3,423
Twelve months ended June 30, 2009 1,790
Twelve months ended June 30, 2010 (130)
NOTE 5 - MORTGAGE SERVICING RIGHTS
The Company elected to early adopt SFAS No. 156 as of January 1, 2006, and has
recorded its MSRs at fair value. The Company's adoption of SFAS No. 156 resulted
in a cumulative-effect adjustment as of January 1, 2006, which increased MSRs by
$1.2 million.
Prior to January 1, 2006, MSRs were carried at the lower of cost or fair value,
based on defined interest rate risk strata, and the gross MSR asset was
amortized in proportion to and over the period of estimated net servicing
income. Prior to the Company's adoption of SFAS No. 156, the Company evaluated
MSRs for impairment based on risk strata and a valuation allowance was
recognized for MSRs that had an amortized balance in excess of the estimated
fair value for the individual risk stratification.
- 16 -
The following table presents the activity in the Company's MSRs for the three
and six months ended June 30, 2006 and 2005:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
(In thousands) 2006 2005 2006 2005
--------- --------- --------- ---------
Balance at beginning of period $ 371,974 $ 236,931 $ 340,377 $ 163,374
Cumulative-effect adjustment as of beginning of year -- -- 1,156 --
Fair value measurement method adjustment -- -- (20,706) --
Additions 81,029 66,657 150,797 148,715
Amortization -- (12,832) -- (21,333)
Changes in fair value resulting from:
Changes in valuation inputs or assumptions 10,783 -- 22,094 --
Other changes in fair value (1) (29,613) -- (59,545) --
--------- --------- --------- ---------
Balance at end of period $ 434,173 $ 290,756 $ 434,173 $ 290,756
--------- --------- --------- ---------
Impairment allowance:
Balance at beginning of period $ -- $ (8,519) $ (20,706) $ (11,938)
Fair value measurement method adjustment -- -- 20,706 --
Impairment provision -- (20,398) -- (16,979)
--------- --------- --------- ---------
Balance at end of period $ -- $ (28,917) $ -- $ (28,917)
--------- --------- --------- ---------
Mortgage servicing rights $ 434,173 $ 261,839 $ 434,173 $ 261,839
========= ========= ========= =========
(1) Includes changes due to servicing runoff totaling $26.3 million and $45.1
million for the three and six months ended June 30, 2006
The amount of contractually specified servicing fees earned by the Company
during the three months ended June 30, 2006 and 2005 were $19.7 million and
$15.4 million, respectively.
The amount of contractually specified servicing fees earned by the Company
during the six months ended June 30, 2006 and 2005 were $40.1 million and $25.5
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 June
30, 2006 and December 31, 2005 were as follows:
June 30, 2006 December 31, 2005
----------------- -----------------
Weighted-average prepayment speed (PSA) 375 315
Weighted-average discount rate 11.66% 11.94%
Weighted-average default rate 2.11% 2.78%
- 17 -
The following table presents certain information regarding the Company's
servicing portfolio of loans serviced for others at June 30, 2006 and December
31, 2005:
June 30, 2006 December 31, 2005
--------------------- ----------------------
(Dollars in thousands)
Loan servicing portfolio - loans sold or securitized $32,624,889 $25,044,676
ARM loans as a percentage of total loans 73% 73%
Average loan size $ 212 $ 194
Weighted-average servicing fee 0.336% 0.330%
Weighted-average note rate 6.38% 5.79%
Weighted-average remaining term (in months) 353 337
Weighted-average age (in months) 14 15
NOTE 6 - GOODWILL
The following table presents the activity in the Company's goodwill for the six
months ended June 30, 2006 and 2005:
Loan Mortgage
Origination Holdings
(In thousands) Segment Segment Total
-------- -------- --------
Balance at January 1, 2005 $ 66,037 $ 24,840 $ 90,877
Earnouts from previous acquisitions 7,949 - 7,949
-------- -------- --------
Balance at June 30, 2005 $ 73,986 $ 24,840 $ 98,826
======== ======== ========
Balance at January 1, 2006 $ 74,687 $ 24,840 $ 99,527
Acquisitions 899 - 899
Earnouts from previous acquisitions 10,333 - 10,333
-------- -------- --------
Balance at June 30, 2006 $ 85,919 $ 24,840 $110,759
======== ======== ========
As of December 31, 2005, the Company completed a goodwill impairment test by
comparing the fair value of goodwill with its carrying value and did not
recognize impairment.
NOTE 7 - WAREHOUSE LINES OF CREDIT, REVERSE REPURCHASE AGREEMENTS AND COMMERCIAL
PAPER
Warehouse Lines of Credit
To originate a mortgage loan, the Company draws against either a $3.3 billion
SLN commercial paper program, a $2.0 billion pre-purchase facility with UBS Real
Estate Securities Inc., a facility of $2.0 billion with Bear Stearns, 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 $125 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.
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 June 30, 2006, the Company was in
compliance with respect to the loan covenants.
- 18 -
Included within the Bank of America line of credit, the Company has a working
capital sub-limit that allows for borrowings up to $50 million at a rate based
on a spread to the LIBOR that may be adjusted for earnings on compensating
balances on deposit at creditors' banks. As of June 30, 2006, borrowings under
the working capital line of credit were $29.7 million.
As of June 30, 2006, the Company had $1.5 billion of warehouse lines of credit
outstanding with a weighted-average borrowing rate of 5.57%. 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 June 30, 2006 had borrowed funds from eleven 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 June 30, 2006, the Company had $8.9 billion of reverse repurchase
agreements outstanding with a weighted-average borrowing rate of 5.29% and a
weighted-average remaining maturity of six 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 June 30, 2006 and December 31, 2005, the Company's reverse repurchase
agreements had the following remaining maturities:
June 30, December 31,
2006 2005
---------- ----------
(In thousands)
Within 30 days $1,349,228 $ 689,469
31 to 89 days 4,572,249 4,817,885
90 to 365 days 713,540 4,298,790
Greater than 1 year 2,304,769 -
---------- ----------
Reverse repurchase agreements $8,939,786 $9,806,144
========== ==========
The Company's average reverse repurchase agreements outstanding were $9.0
billion and $6.3 billion for the three months ended June 30, 2006 and 2005,
respectively.
The Company's average reverse repurchase agreements outstanding were $9.1
billion and $6.6 billion for the six months ended June 30, 2006 and 2005,
respectively.
Commercial Paper
The Company maintains a wholly owned special purpose entity for the purpose of
issuing commercial paper in the form of short-term SLNs to finance certain
portions of the Company's mortgage loans. The special purpose entity allows for
issuance of short-term 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 June 30, 2006.
As of June 30, 2006, the Company had $888.5 million of SLNs outstanding, with an
average interest cost of 5.14%. The SLNs were collateralized by mortgage loans
held for sale, mortgage loans held for investment and cash with a balance of
$1.0 billion as of June 30, 2006. As of December 31, 2005, the Company had $1.1
billion of SLNs outstanding, with an average interest cost of 4.35%. The SLNs
were collateralized by mortgage loans held for sale, mortgage loans held for
investment and cash with a balance of $1.2 billion as of December 31, 2005.
As of June 30, 2006 and December 31, 2005, the Company's SLNs had remaining
maturities within 30 days.
- 19 -
NOTE 8 - COLLATERALIZED DEBT OBLIGATIONS
In June 2006, the Company transferred $964.9 million of its mortgage loans held
for investment to the 2006-2 Trust in a securitization transaction. In this
transaction, the Company issued $944.7 million of CDOs in the form of AAA and
AA-rated floating-rate pass-through certificates to third-party investors and
the Company retained $20.2 million of subordinated certificates, which provide
credit support to the certificates issued to third parties. The Company's CDOs
are collateralized by loans held for investment transferred to the 2006-2 Trust.
The interest rates on the floating-rate pass-through certificates reset monthly
and are indexed to one-month LIBOR. In the second quarter of 2006, the Company
incurred CDO issuance costs of $2.1 million, which were deducted from the
proceeds of the transactions and are being amortized over the expected life of
the CDOs. This securitization transaction was accounted for as a financing of
the mortgage loans held for investment.
In March 2006, the Company transferred $2.0 billion of its mortgage loans held
for investment to the 2006-1 Trust in a securitization transaction. In this
transaction, the Company issued $1.9 billion of CDOs in the form of AAA and
AA-rated floating-rate pass-through certificates to third-party investors and
the Company retained $61.3 million of subordinated certificates, which provide
credit support to the certificates issued to third parties. The Company's CDOs
are collateralized by loans held for investment transferred to the 2006-1 Trust.
The interest rates on the floating-rate pass-through certificates reset monthly
and are indexed to one-month LIBOR. In the first quarter of 2006, the Company
incurred CDO issuance costs of $4.0 million, which were deducted from the
proceeds of the transactions and are being amortized over the expected life of
the CDOs. This securitization transaction was accounted for as a financing of
the mortgage loans held for investment.
In the fourth quarter of 2005, the Company transferred $1.2 billion of its
mortgage loans held for investment to two American Home Mortgage Investment
Trusts (the "2005 Trusts") in two securitization transactions. In these
transactions, the Company issued $1.1 billion of CDOs in the form of AAA and
AA-rated floating-rate pass-through certificates to third-party investors and
the Company retained $134.6 million of subordinated certificates, which provide
credit support to the certificates issued to third parties. The Company's CDOs
are collateralized by loans held for investment transferred to the 2005 Trusts.
The interest rates on the floating-rate pass-through certificates reset monthly
and are indexed to one-month LIBOR. In the fourth quarter of 2005, the Company
incurred CDO issuance costs of $5.5 million, which were deducted from the
proceeds of the transactions and are being amortized over the expected life of
the CDOs. These securitization transactions were accounted for as financings of
the mortgage loans held for investment.
In December 2004, the Company transferred $3.5 billion of its mortgage loans
held for sale to American Home Mortgage Investment Trust 2004-4 (the "2004-4
Trust") in a securitization transaction. In the transaction, the Company issued
$2.0 billion of CDOs, which were collateralized by loans held for sale
transferred to the 2004-4 Trust. This securitization transaction was accounted
for as a financing of the mortgage loans held for sale. This securitization
transaction qualified for sale treatment under SFAS No. 140 in the first quarter
of 2005, and consequently the loans were derecognized.
As of June 30, 2006, the Company's CDOs had a balance of $3.7 billion and an
effective interest cost of 5.54%. As of June 30, 2006, the CDOs were
collateralized by mortgage loans held for investment of $3.7 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.
As of June 30, 2006 and December 31, 2005, the Company's CDOs had the following
remaining maturities:
June 30, December 31,
2006 2005
---------- ----------
(In thousands)
15 to 20 years $ 47,923 $ 68,214
20 to 25 years 199,029 177,016
25 to 30 years 817,698 34,316
Greater than 30 years 2,660,228 778,360
---------- ----------
Collateralized debt obligations $3,724,878 $1,057,906
========== ==========
- 20 -
NOTE 9 - NOTES PAYABLE
Notes payable primarily consist of amounts borrowed under a term loan facility
with a bank syndicate led by Bank of America. Under the terms of this facility,
the Company may borrow the lesser of 70% of the value of its MSRs, or $350.0
million. As of June 30, 2006, borrowings under the term loan were $221.3
million. This term loan expires on August 11, 2006, but the Company has an
option to extend the term for twelve additional months at a higher interest
rate. Interest is based on a spread to the LIBOR and may be adjusted for
earnings on compensating balances. As of June 30, 2006, the interest rate was
6.15%.
In 2005, the Company sold $85.0 million in Mortgage Warehouse Subordinated Notes
("Subordinated Notes"). The Company received a premium, net of issuance costs,
of $1.5 million related to the Subordinated Notes offering, which is being
amortized to interest expense over the expected life of the Subordinated Notes.
As of June 30, 2006, the balance of Subordinated Notes outstanding, net of
unamortized premium and issuance costs, was $86.1 million. The Subordinated
Notes mature on May 20, 2009. The interest rates on the Subordinated Notes reset
monthly and are indexed to one-month LIBOR. As of June 30, 2006, the interest
rate was 7.27%.
As of June 30, 2006, included in notes payable is a mortgage note of $25.7
million on an office building located in Melville, New York at a rate of 5.82%,
and a mortgage note of $1.0 million on an office building located in Mount
Prospect, Illinois at a rate of 7.18%.
As of June 30, 2006, the Company had $3.6 million of Federal Home Loan Bank
("FHLB") advances with an interest rate of 5.60% and with remaining maturities
within 30 days. Advances from the FHLB are collateralized by pledges of
one-to-four family first mortgage loans with an aggregate principal balance of
$7.3 million.
The following table presents the Company's notes payable as of June 30, 2006 and
December 31, 2005:
June 30, December 31,
2006 2005
(In thousands) ---------- ----------
Term loan $ 221,345 $ 206,188
Subordinated note 86,102 86,322
Notes - office buildings 26,653 26,799
FHLB advances 3,600 -
---------- ----------
Notes payable $ 337,700 $ 319,309
========== ==========
The following table presents the maturities of the Company's notes payable as of
June 30, 2006 and December 31, 2005:
June 30, December 31,
2006 2005
---------- ----------
(In thousands)
Within 1 year $ 225,802 $ 207,009
1 to 2 years 1,223 843
2 to 3 years 43,577 1,540
3 to 4 years 43,010 85,606
4 to 5 years 461 447
Greater than 5 years 23,627 23,864
---------- ----------
Notes payable $ 337,700 $ 319,309
========== ==========
- 21 -
NOTE 10 - COMMON STOCK AND PREFERRED STOCK
In August 2005, the Company issued 9,000,000 shares of its common stock, par
value $0.01 per share ("Common Stock") at a price of $35.50 per share. The total
proceeds to the Company were $319.5 million, before underwriting discounts,
commissions and other offering expenses.
Under the Company's charter, the Company's Board of Directors is authorized to
issue 110,000,000 shares of stock, of which up to 100,000,000 shares may be
Common Stock and up to 10,000,000 shares may be Preferred Stock. As of June 30,
2006, there were 50,107,214 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 June 30, 2006, the Company declared dividends
totaling $48.1 million, or $0.96 per share of Common Stock, which were paid on
July 27, 2006. During the three months ended June 30, 2005, the Company declared
dividends totaling $30.8 million, or $0.76 per share of Common Stock, which were
paid on July 27, 2005.
During the six months ended June 30, 2006, the Company declared dividends
totaling $93.6 million, or $1.87 per share of Common Stock. During the six
months ended June 30, 2005, the Company declared dividends totaling $59.5
million, or $1.47 per share of Common Stock.
During the three months ended June 30, 2006, the Company declared dividends
totaling $1.3 million, or $0.609375 per share of Series A Preferred Stock, which
were paid on July 31, 2006. During the three months ended June 30, 2005, the
Company declared dividends totaling $1.3 million, or $0.609375 per share of
Series A Preferred Stock, which were paid on August 1, 2005.
During the six months ended June 30, 2006, the Company declared dividends
totaling $2.6 million, or $1.21875 per share of Series A Preferred Stock. During
the six months ended June 30, 2005, the Company declared dividends totaling $2.6
million, or $1.21875 per share of Series A Preferred Stock.
During the three months ended June 30, 2006, the Company declared dividends
totaling $2.0 million, or $0.578125 per share of Series B Preferred Stock, which
were paid on July 31, 2006. During the three months ended June 30, 2005, the
Company declared dividends totaling $2.0 million, or $0.578125 per share of
Series B Preferred Stock, which were paid on August 1, 2005.
During the six months ended June 30, 2006, the Company declared dividends
totaling $4.0 million, or $1.15625 per share of Series B Preferred Stock. During
the six months ended June 30, 2005, the Company declared dividends totaling $4.0
million, or $1.15625 per share of Series B Preferred Stock.
NOTE 11 - INCOME TAXES
A reconciliation of the statutory income tax provision to the effective income
tax expense (benefit) is as follows:
Three Months Ended June 30, Six Months Ended June 30,
---------------------- --------------------- ------------------------ -----------------------
2006 2005 2006 2005
---------------------- --------------------- ------------------------ -----------------------
(Dollars in thousands)
Tax provision at statutory rate $ 36,950 35.0% $ 21,579 35.0% $ 61,681 35.0% $ 65,459 35.0%
Non-taxable REIT income (9,130) (8.6) (26,050) (42.2) (20,119) (11.4) (69,852) (37.4)
State and local taxes, net of
federal income tax benefit 5,081 4.8 (28) - 7,078 4.0 (300) (0.2)
Meals and entertainment 406 0.4 316 0.5 867 0.5 510 0.3
Other (83) (0.1) 332 0.5 (83) (0.1) 332 0.2
-------- -------- -------- -------- -------- -------- -------- --------
Income tax expense (benefit) $ 33,224 31.5% $ (3,851) (6.2)% $ 49,424 28.0% $ (3,851) (2.1)%
======== ======== ======== ======== ======== ======== ======== ========
- 22 -
The major sources of temporary differences and their deferred tax effect at June
30, 2006 and December 31, 2005 are as follows:
June 30, December 31,
2006 2005
---------- ----------
(In thousands)
Deferred income tax liabilities:
Capitalized cost of mortgage servicing rights $ 193,244 $ 150,926
Loan origination costs 20,424 8,973
Depreciation 3,083 3,083
Deferred state income taxes - 1,465
Other 360 11
---------- ----------
Deferred income tax liabilities 217,111 164,458
---------- ----------
Deferred income tax assets:
Tax loss carryforwards 120,051 109,145
Allowance for bad debts and foreclosure reserve 5,351 2,817
Deferred state income taxes 1,446 -
Mark-to-market adjustments 4,589 10,721
AMT credit 1,745 1,745
Broker fees 282 958
Bonus accrual 347 8,399
Deferred compensation 5,419 3,436
---------- ----------
Deferred income tax assets 139,230 137,221
---------- ----------
Net deferred income tax liabilities $ 77,881 $ 27,237
========== ==========
American Home Mortgage Servicing, Inc. has approximately $40 million of separate
company federal net operating loss carryforwards which begin to expire in 2008.
In addition, American Home Mortgage Holdings, Inc. has approximately $359
million of federal and approximately $420 million of state net operating loss
carryforwards which begin to expire in 2024 and 2009, respectively. The weighted
average of the expiration of the state net operating loss carryforwards is
approximately sixteen years.
At June 30, 2006 and December 31, 2005, no valuation allowance has been
established against deferred tax assets since it is more likely than not that
the deferred tax assets will be realized.
The Company has been audited by various state tax jurisdictions which have
settled with a "no change" decision. In addition, the Company is currently under
examination by other tax jurisdictions which the Company expects to result in no
material assessments. The Company regularly assesses the likelihood of
additional assessments in each of the tax jurisdictions in the calculation of
its provision and maintains an appropriate reserve as needed.
- 23 -
NOTE 12 - EARNINGS PER SHARE
The following is a reconciliation of the denominators used in the computations
of basic and diluted earnings per share for the three and six months ended June
30, 2006 and 2005:
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- --------------------------
(Dollars in thousands, except per share amounts) 2006 2005 2006 2005
----------- ----------- ----------- -----------
Numerator for basic earnings per share - Net income
available to common shareholders $ 69,047 $ 62,196 $ 120,201 $ 184,271
=========== =========== =========== ===========
Denominator:
Denominator for basic earnings per share
Weighted average number of common shares
outstanding during the period 50,056,479 40,383,799 49,886,529 40,345,919
Net effect of dilutive stock options 430,033 502,464 383,743 502,703
----------- ----------- ----------- -----------
Denominator for diluted earnings per share 50,486,512 40,886,263 50,270,272 40,848,622
=========== =========== =========== ===========
Net income per share available to common shareholders:
Basic $ 1.38 $ 1.54 $ 2.41 $ 4.57
=========== =========== =========== ===========
Diluted $ 1.37 $ 1.52 $ 2.39 $ 4.51
=========== =========== =========== ===========
NOTE 13 - STOCK INCENTIVE PLAN
Pursuant to the Plan, eligible employees, officers and directors may be offered
the opportunity to acquire the Company's Common Stock through the grant of
options and the award of restricted stock under the Plan. The total number of
shares that may be optioned or awarded under the Plan is 4,000,000 shares of
Common Stock. The Plan provides for the granting of options at the fair market
value on the date of grant. The options issued primarily vest 50% on the
two-year anniversary of the grant date and 50% on the three-year anniversary of
the grant date, and expire ten years from the grant date.
Effective January 1, 2006, the Company adopted SFAS No. 123R, which requires
that the compensation cost relating to share-based payment transactions
(including employee stock options, restricted share plans, performance-based
awards, share appreciation rights, and employee share purchase plans) be
recognized as an expense in the Company's consolidated financial statements.
Under SFAS No. 123R, the related compensation cost is measured based on the fair
value of the award at the date of grant. The Company adopted the fair value
recognition provisions of SFAS No. 123R, using the modified prospective method.
Under this method, compensation cost in the six months ended June 30, 2006
includes the portion vesting in the period for (1) all share-based payments
granted prior to, but not vested as of December 31, 2005, based on the grant
date fair value estimated in accordance with the original provisions of SFAS No.
123 and (2) all share-based payments granted subsequent to December 31, 2005,
based on the grant date fair value estimated using a binomial lattice-based
option valuation model.
During the three and six months ended June 30, 2006, the Company recognized
compensation expense of $373 thousand and $783 thousand, respectively, 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 and six months ended June 30, 2006
for stock options was $74 thousand and $175 thousand, respectively. No
compensation cost was recognized for the six months ended June 30, 2005.
During the six months ended June 30, 2006, the fair value of the options granted
was estimated using the binomial lattice option-pricing model. Under the
binomial lattice option-pricing model, the fair value of each option award is
estimated, with the assistance of an outside consulting service, on the date of
grant, which incorporates ranges of assumptions for inputs as shown in the
following table. The assumptions are as follows:
Dividend yield range: The expected dividend yield assumption is based on the
Company's current dividend yield as the best estimate of projected dividend
yield for periods within the contractual life of the option.
- 24 -
Expected volatility: The expected volatility assumption is a blend of implied
volatility based on market-traded options on the Company's Common Stock and
historical volatility of the Company's Common Stock over the contractual life of
the options.
Risk-free interest rate range: The risk-free interest rate assumption is based
on the U.S. Treasury yield curve in effect at the time of grant for periods
within the contractual life of the option.
Expected term range: The Company uses historical data to estimate option
exercise and employee termination behavior within the valuation model; separate
groups of employees that have similar historical exercise behavior are
considered separately for valuation purposes. The expected life of options
granted is derived from the output of the option valuation model and represents
the period of time the options are expected to be outstanding.
The weighted-average fair value per share of options granted during the three
and six months ended June 30, 2006 was $4.94 and $4.65, respectively. The fair
value of the options granted during the three and six months ended June 30, 2006
was estimated using the binomial lattice option-pricing model with the following
assumptions used for the grants:
Three Months Ended Six Months Ended
June 30, June 30,
2006 2006
-------------------------------------------
Dividend yield range 11.9 % 11.9% - 13.1%
Expected volatility 36.0 % 39.1 %
Risk-free interest rate range 4.8% - 5.0% 4.3% - 5.0%
Expected term range (in years) 7.9 7.0 - 7.9
Prior to adoption of SFAS No. 123R as of January 1, 2006, the Company's pro
forma disclosures reflected the fair value of each option grant estimated on the
date of grant using the Black-Scholes option-pricing model. Under the
Black-Scholes option-pricing model, the Company estimated volatility using only
its historical share price performance over the expected life of the option.
The weighted-average fair value per share of options granted during the three
and six months ended June 30, 2005 was $3.83 and $3.75, respectively. The fair
value of the options granted during the three and six months ended June 30, 2005
was estimated using the Black-Scholes option-pricing model with the following
assumptions used for the grants:
Three Months Ended Six Months Ended
June 30, June 30,
2005 2005
-------------------------------------------
Dividend yield 8.9 % 9.1 %
Expected volatility 29.4 % 28.7 %
Risk-free interest rate 5.0 % 5.0 %
Expected term (in years) 3.0 3.0
- 25 -
The following table presents a summary of the Company's stock option activity
for the three and six months ended June 30, 2006 and 2005:
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------------- --------------------------------------------
2006 2005 2006 2005
-------------------------------------------- --------------------------------------------
Weighted Weighted Weighted Weighted
Number Average Number Average Number Average Number Average
of Exercise of Exercise of Exercise of Exercise
Options Price Options Price Options Price Options Price
-------------------------------------------- --------------------------------------------
Options outstanding - beginning of period 1,749,192 $24.52 1,499,638 $21.39 1,501,384 $23.09 1,248,102 $18.65
Granted 100,000 30.72 90,000 31.74 452,159 28.45 367,419 32.56
Exercised (96,259) 11.70 (45,504) 12.93 (147,610) 12.04 (71,387) 12.59
Canceled (5,500) 31.41 (8,813) 15.67 (58,500) 17.62 (8,813) 15.67
---------- ---------- ---------- ----------
Options outstanding - end of period 1,747,433 $25.56 1,535,321 $22.28 1,747,433 $25.56 1,535,321 $22.28
========== ========== ========== ==========
Options exercisable - end of period 440,755 $15.82 440,755 $15.82
========== ==========
The intrinsic value of an option is defined as the difference between an
option's current market value and the grant price. The intrinsic value of
options exercised during the three and six months ended June 30, 2006 was $2.1
million and $3.0 million, respectively.
As of June 30, 2006, the intrinsic value and weighted-average remaining life of
the Company's options outstanding were $19.8 million and 8.3 years,
respectively.
As of June 30, 2006, the intrinsic value of the Company's exercisable options
outstanding was $9.3 million.
As of June 30, 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 June 30, 2006, the Company has awarded 221,934 shares of restricted stock
under the Plan. During the three months ended June 30, 2006 and 2005, the
Company recognized compensation expense of $123 thousand and $174 thousand,
respectively, relating to shares of restricted stock granted under the Plan.
During the six months ended June 30, 2006 and 2005, the Company recognized
compensation expense of $170 thousand and $315 thousand, respectively, relating
to shares of restricted stock granted under the Plan. As of June 30, 2006,
192,560 shares are vested. In general, unvested restricted stock is forfeited
upon the recipient's termination of employment.
NOTE 14 - CONCENTRATIONS OF CREDIT RISK
Loan concentrations are considered to exist when there are amounts loaned to a
multiple number of borrowers with similar characteristics, which would cause
their ability to meet contractual obligations to be similarly impacted by
economic or other conditions. The Company invests in negative amortization ARM,
interest-only ARM, HELOC and certain other types of loans described in FSP SOP
94-6-1, "Terms of Loan Products that May Give Rise to a Concentration of Credit
Risk." The Company, however, generally has purchased supplemental credit
insurance for the loans of these types retained in the Company's portfolio if
such loans have an initial loan-to-value ratio between 75% and 80%. In addition,
the Company generally is the beneficiary of a borrower paid insurance policy on
these types of loans if the initial loan-to-value ratio is greater than 80%. A
substantial portion of the Company's mortgage loans held for investment at June
30, 2006 are the types of loans described in FSP SOP 94-6-1.
The Company had originations of loans during the six months ended June 30, 2006
exceeding 5% of total originations in the following states:
Six Months Ended
June 30, 2006
----------------
California 25.1%
Florida 11.7
Illinois 7.0
Virginia 5.1
- 26 -
During the six months ended June 30, 2006, the three institutions that bought
the most loans from the Company accounted for 37% of the Company's total loan
sales.
NOTE 15 - 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 $ -
========
NOTE 16 - SEGMENTS AND RELATED INFORMATION
The Company has three segments, the Mortgage Holdings segment, the Loan
Origination segment and the Loan Servicing segment. The Mortgage Holdings
segment uses the Company's equity capital and borrowed funds to invest in
mortgage-backed securities and mortgage loans held for investment, thereby
producing net interest income. The Loan Origination segment originates mortgage
loans through the Company's retail and wholesale loan production offices and its
correspondent channel, as well as its direct-to-consumer channel supported by
its call center. The Loan Servicing segment includes investments in MSRs as well
as servicing operations primarily for other financial institutions. The
Company's segments are presented on a consolidated basis and do not include the
effects of separately recording intercompany transactions.
The Mortgage Holdings segment includes realized gains or losses on sales of
mortgage-backed securities and unrealized mark-to-market gains or losses
subsequent to the securitization date on mortgage-backed securities classified
as trading securities.
The Loan Origination segment includes unrealized gains or losses that exist on
the date of securitization of self-originated loans that are classified as
trading securities.
- 27 -
Three Months Ended June 30, 2006
------------------------------------------------------------
(In thousands)
Mortgage Loan Origination Loan Servicing
Holdings Segment Segment Segment Total
------------------------------------------------------------
Net interest income:
Interest income $ 181,266 $ 148,930 $ - $ 330,196
Interest expense (153,197) (122,989) (3,806) (279,992)
------------ ------------ ------------ ------------
Net interest income 28,069 25,941 (3,806) 50,204
------------ ------------ ------------ ------------
Provision for loan losses (2,389) (1,590) - (3,979)
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 25,680 24,351 (3,806) 46,225
------------ ------------ ------------ ------------
Non-interest income:
Gain on sales of mortgage loans - 224,594 - 224,594
Loss on sales of mortgage-backed securities and derivatives (47) - - (47)
Unrealized loss on mortgage-backed securities and derivatives (7,730) - - (7,730)
Loan servicing fees - - 30,417 30,417
Change in fair value of mortgage servicing rights - - (18,830) (18,830)
------------ ------------ ------------ ------------
Net loan servicing fees - - 11,587 11,587
------------ ------------ ------------ ------------
Other non-interest income - 1,668 457 2,125
------------ ------------ ------------ ------------
Total non-interest income (7,777) 226,262 12,044 230,529
------------ ------------ ------------ ------------
Non-interest expenses:
Salaries, commissions and benefits, net 2,585 96,683 3,889 103,157
Occupancy and equipment 1 19,472 290 19,763
Data processing and communications 44 6,689 - 6,733
Office supplies and expenses 13 5,027 105 5,145
Marketing and promotion 3 6,141 239 6,383
Travel and entertainment 2 7,762 29 7,793
Professional fees 924 4,077 12 5,013
Other 320 14,319 2,553 17,192
------------ ------------ ------------ ------------
Total non-interest expenses 3,892 160,170 7,117 171,179
------------ ------------ ------------ ------------
Net income before income tax expense 14,011 90,443 1,121 105,575
------------ ------------ ------------ ------------
Income tax expense - 33,079 145 33,224
------------ ------------ ------------ ------------
Net income $ 14,011 $ 57,364 $ 976 $ 72,351
============ ============ ============ ============
Dividends on preferred stock 3,304 - - 3,304
------------ ------------ ------------ ------------
Net income available to common shareholders $ 10,707 $ 57,364 $ 976 $ 69,047
============ ============ ============ ============
June 30, 2006
------------------------------------------------------------
Segment assets $ 13,154,573 $ 3,577,819 $ 593,207 $ 17,325,599
============ ============ ============ ============
- 28 -
Three Months Ended June 30, 2005
------------------------------------------------------------
(In thousands)
Mortgage Loan Origination Loan Servicing
Holdings Segment Segment Segment Total
------------------------------------------------------------
Net interest income:
Interest income $ 77,041 $ 58,277 $ - $ 135,318
Interest expense (52,238) (36,127) (1,971) (90,336)
------------ ------------ ------------ ------------
Total net interest income 24,803 22,150 (1,971) 44,982
------------ ------------ ------------ ------------
Non-interest income:
Gain on sales of mortgage loans - 77,377 - 77,377
Gain on sales of current period securitized mortgage loans - 104,377 - 104,377
Gain (loss) on sales of mortgage-backed securities and derivatives 4,246 (3,626) - 620
Unrealized (loss) gain on mortgage-backed securities and derivatives (14,755) 4,463 - (10,292)
Loan servicing fees - - 16,970 16,970
Amortization and impairment of mortgage servicing rights - - (33,230) (33,230)
------------ ------------ ------------ ------------
Net loan servicing loss - - (16,260) (16,260)
------------ ------------ ------------ ------------
Other non-interest income - 1,945 598 2,543
------------ ------------ ------------ ------------
Total non-interest income (10,509) 184,536 (15,662) 158,365
------------ ------------ ------------ ------------
Non-interest expenses:
Salaries, commissions and benefits, net 3,493 87,837 3,529 94,859
Occupancy and equipment 1 14,118 278 14,397
Data processing and communications 20 5,766 171 5,957
Office supplies and expenses - 5,214 443 5,657
Marketing and promotion - 5,091 35 5,126
Travel and entertainment 5 5,158 264 5,427
Professional fees 1,049 2,063 320 3,432
Other 2,043 3,881 919 6,843
------------ ------------ ------------ ------------
Total non-interest expenses 6,611 129,128 5,959 141,698
------------ ------------ ------------ ------------
Net income before income tax expense (benefit) 7,683 77,558 (23,592) 61,649
------------ ------------ ------------ ------------
Income tax expense (benefit) - 4,998 (8,849) (3,851)
------------ ------------ ------------ ------------
Net income $ 7,683 $ 72,560 $ (14,743) $ 65,500
============ ============ ============ ============
Dividends on preferred stock 3,304 - - 3,304
------------ ------------ ------------ ------------
Net income available to common shareholders $ 4,379 $ 72,560 $ (14,743) $ 62,196
============ ============ ============ ============
June 30, 2005
------------------------------------------------------------
Segment assets $ 7,018,101 $ 2,460,260 $ 332,553 $ 9,810,914
============ ============ ============ ============
- 29 -
Six Months Ended June 30, 2006
------------------------------------------------------------
(In thousands)
Mortgage Loan Origination Loan Servicing
Holdings Segment Segment Segment Total
------------------------------------------------------------
Net interest income:
Interest income $ 336,212 $ 294,597 $ - $ 630,809
Interest expense (281,752) (245,316) (6,959) (534,027)
------------ ------------ ------------ ------------
Net interest income 54,460 49,281 (6,959) 96,782
------------ ------------ ------------ ------------
Provision for loan losses (4,896) (394) - (5,290)
------------ ------------ ------------ ------------
Net interest income after provision for loan losses 49,564 48,887 (6,959) 91,492
------------ ------------ ------------ ------------
Non-interest income:
Gain on sales of mortgage loans - 396,501 - 396,501
Loss on sales of mortgage-backed securities and derivatives (897) - - (897)
Unrealized gain on mortgage-backed securities and derivatives 1,310 275 - 1,585
Loan servicing fees - - 54,750 54,750
Change in fair value of mortgage servicing rights - - (37,451) (37,451)
------------ ------------ ------------ ------------
Net loan servicing fees - - 17,299 17,299
------------ ------------ ------------ ------------
Other non-interest income - 2,450 1,444 3,894
------------ ------------ ------------ ------------
Total non-interest income 413 399,226 18,743 418,382
------------ ------------ ------------ ------------
Non-interest expenses:
Salaries, commissions and benefits, net 7,610 187,020 7,794 202,424
Occupancy and equipment 3 37,122 608 37,733
Data processing and communications 60 13,638 161 13,859
Office supplies and expenses 13 9,305 159 9,477
Marketing and promotion 7 11,932 244 12,183
Travel and entertainment 2 14,463 81 14,546
Professional fees 2,378 7,954 12 10,344
Other 2,323 19,335 11,416 33,074
------------ ------------ ------------ ------------
Total non-interest expenses 12,396 300,769 20,475 333,640
------------ ------------ ------------ ------------
Net income before income tax expense (benefit) 37,581 147,344 (8,691) 176,234
------------ ------------ ------------ ------------
Income tax expense (benefit) - 52,939 (3,515) 49,424
------------ ------------ ------------ ------------
Net income $ 37,581 $ 94,405 $ (5,176) $ 126,810
============ ============ ============ ============
Dividends on preferred stock 6,609 - - 6,609
------------ ------------ ------------ ------------
Net income available to common shareholders $ 30,972 $ 94,405 $ (5,176) $ 120,201
============ ============ ============ ============
June 30, 2006
------------------------------------------------------------
Segment assets $ 13,154,573 $ 3,577,819 $ 593,207 $ 17,325,599
============ ============ ============ ============
- 30 -
Six Months Ended June 30, 2005
------------------------------------------------------------
(In thousands)
Mortgage Loan Origination Loan Servicing
Holdings Segment Segment Segment Total
------------------------------------------------------------
Net interest income:
Interest income $ 135,346 $ 146,866 $ - $ 282,212
Interest expense (91,223) (83,862) (3,342) (178,427)
------------ ------------ ------------ ------------
Total net interest income 44,123 63,004 (3,342) 103,785
------------ ------------ ------------ ------------
Non-interest income:
Gain on sales of mortgage loans - 112,630 - 112,630
Gain on sales of current period securitized mortgage loans - 174,296 - 174,296
Gain on sales of mortgage-backed securities and derivatives 909 5,843 - 6,752
Unrealized gain on mortgage-backed securities and derivatives 2,085 45,122 - 47,207
Loan servicing fees - - 28,282 28,282
Amortization and impairment of mortgage servicing rights - - (38,312) (38,312)
------------ ------------ ------------ ------------
Net loan servicing loss - - (10,030) (10,030)
------------ ------------ ------------ ------------
Other non-interest income - 2,608 1,401 4,009
------------ ------------ ------------ ------------
Total non-interest income 2,994 340,499 (8,629) 334,864
------------ ------------ ------------ ------------
Non-interest expenses:
Salaries, commissions and benefits, net 4,569 153,441 5,324 163,334
Occupancy and equipment 3 26,660 405 27,068
Data processing and communications 42 11,580 285 11,907
Office supplies and expenses 1 9,339 746 10,086
Marketing and promotion 2 9,193 61 9,256
Travel and entertainment 5 9,001 349 9,355
Professional fees 2,022 4,307 573 6,902
Other 4,605 6,316 2,791 13,712
------------ ------------ ------------ ------------
Total non-interest expenses 11,249 229,837 10,534 251,620
------------ ------------ ------------ ------------
Net income before income tax expense (benefit) 35,868 173,666 (22,505) 187,029
------------ ------------ ------------ ------------
Income tax expense (benefit) - 4,998 (8,849) (3,851)
------------ ------------ ------------ ------------
Net income $ 35,868 $ 168,668 $ (13,656) $ 190,880
============ ============ ============ ============
Dividends on preferred stock 6,609 - - 6,609
------------ ------------ ------------ ------------
Net income available to common shareholders $ 29,259 $ 168,668 $ (13,656) $ 184,271
============ ============ ============ ============
June 30, 2005
------------------------------------------------------------
Segment assets $ 7,018,101 $ 2,460,260 $ 332,553 $ 9,810,914
============ ============ ============ ============
- 31 -
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
- 32 -
circumstances which may affect the borrowers' ability to repay, the estimated
value of the underlying real estate collateral and current market conditions
within the geographic areas surrounding the underlying real estate. The
allowance for loan losses is increased by provision to loan losses charged to
income and reduced by charge-offs, net of recoveries.
Mortgage Servicing Rights ("MSRs") - When we acquire servicing assets through
either purchase or origination of loans and sell or securitize those loans with
servicing assets retained, the fair value attributable to the servicing assets
is capitalized as MSRs on the consolidated balance sheets. We estimate the fair
value of the servicing assets by obtaining market information from one of the
market's primary independent MSR brokers.
Derivative Assets and Derivative Liabilities - Our mortgage-committed pipeline
includes interest rate lock commitments ("IRLCs") that have been extended to
borrowers who have applied for loan funding and meet certain defined credit and
underwriting criteria and have locked their terms and rates. IRLCs associated
with loans expected to be sold are recorded at fair value with changes in fair
value recorded to current earnings.
We use other derivative instruments, including mortgage forward delivery
contracts and treasury futures options, to economically hedge the IRLCs, which
are also classified and accounted for as free-standing derivatives and thus are
recorded at fair value with the changes in fair value recorded to current
earnings.
We use mortgage forward delivery contracts designated as fair value hedging
instruments to hedge 100% of our agency-eligible conforming fixed-rate loans and
most of our non-conforming fixed-rate loans held for sale. At the inception of
the hedge, we formally document the relationship between the forward delivery
contracts and the mortgage inventory, as well as our objective and strategy for
undertaking the hedge transactions. In the case of our conventional conforming
fixed-rate loan products, the notional amount of the forward delivery contracts,
along with the underlying rate and terms of the contracts, are equivalent to the
unpaid principal amount of the mortgage inventory being hedged; hence, the
forward delivery contracts effectively fix the forward sales price and thereby
substantially eliminate interest rate and price risk to us. We classify and
account for these forward delivery contracts as fair value hedges. The
derivatives are carried at fair value with the changes in fair value recorded to
current earnings. When the hedges are deemed to be highly effective, the book
value of the hedged loans held for sale is adjusted for its change in fair value
during the hedge period.
We enter into interest rate swap agreements to manage our interest rate exposure
when financing our mortgage-backed securities and certain ARM loans. Certain
swap agreements accounted for as cash flow hedges and certain swap agreements
not designated as cash flow hedges are both carried on the balance sheet at fair
value. The fair values of our swap agreements are generally based on market
prices provided by certain dealers who make markets in these financial
instruments or by third-party pricing services.
Goodwill - Goodwill represents the excess purchase price over the fair value of
net assets stemming from business acquisitions, including identifiable
intangibles. We test for impairment, at least annually, by comparing the fair
value of goodwill, as determined by using a discounted cash flow method, with
its carrying value. Any excess of carrying value over the fair value of the
goodwill would be recognized as an impairment loss in continuing operations. The
discounted cash flow calculation related to our loan origination segment
includes a forecast of the expected future loan originations and the related
revenues and expenses. The discounted cash flow calculation related to our
Mortgage Holdings segment includes a forecast of the expected future net
interest income, gain on mortgage-backed securities and the related revenues and
expenses. These cash flows are discounted using a rate that is estimated to be a
weighted-average cost of capital for similar companies. We further test to
ensure that the fair value of all our business units does not exceed our total
market capitalization.
- 33 -
Financial Condition
The following table presents the Company's consolidated balance sheets as of
June 30, 2006 and December 31, 2005:
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
June 30, December 31,
2006 2005
------------ ------------
Assets:
Cash and cash equivalents $ 304,268 $ 575,650
Accounts receivable and servicing advances 342,244 329,132
Mortgage-backed securities 9,299,224 10,602,104
Mortgage loans held for sale, net 1,243,702 2,208,749
Mortgage loans held for investment, net 5,337,138 3,479,721
Derivative assets 139,397 44,594
Mortgage servicing rights 434,173 319,671
Premises and equipment, net 80,296 68,782
Goodwill 110,759 99,527
Other assets 34,398 26,815
------------ ------------
Total assets $ 17,325,599 $ 17,754,745
============ ============
Liabilities and Stockholders' Equity:
Liabilities:
Warehouse lines of credit $ 1,476,958 $ 3,474,191
Drafts payable 12,349 20,754
Commercial paper 888,476 1,079,179
Reverse repurchase agreements 8,939,786 9,806,144
Collateralized debt obligations 3,724,878 1,057,906
Payable for securities purchased - 261,539
Derivative liabilities 3,280 16,773
Trust preferred securities 252,780 203,688
Accrued expenses and other liabilities 355,009 277,476
Notes payable 337,700 319,309
Income taxes payable 80,529 30,770
------------ ------------
Total liabilities 16,071,745 16,547,729
------------ ------------
Stockholders' Equity:
Preferred Stock 134,040 134,040
Common Stock 501 496
Additional paid-in capital 960,995 947,512
Retained earnings 227,450 203,778
Accumulated other comprehensive loss (69,132) (78,810)
------------ ------------
Total stockholders' equity 1,253,854 1,207,016
------------ ------------
Total liabilities and stockholders' equity $ 17,325,599 $ 17,754,745
============ ============
- 34 -
Total assets at June 30, 2006 were $17.3 billion, a $429.1 million decrease from
$17.8 billion at December 31, 2005. The decrease in total assets primarily
reflects a decrease in mortgage-backed securities of $1.3 billion and a decrease
in mortgage loans held for sale of $1.0 billion, partly offset by an increase in
mortgage loans held for investment of $1.9 billion. At June 30, 2006, 53.7% of
our total assets were mortgage-backed securities, 30.8% were mortgage loans held
for investment and 7.2% were mortgage loans held for sale, compared to 59.7%,
19.6% and 12.4%, respectively, at December 31, 2005.
The following tables summarize our mortgage-backed securities owned at June 30,
2006 and December 31, 2005, classified by type of issuer and by ratings
categories:
June 30, 2006
-----------------------------------------------------------------------------
Trading Securities Securities Available for Sale Total
----------------------- ----------------------- -----------------------
Carrying Carrying Carrying
Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix
----------------------- ----------------------- -----------------------
(Dollars in thousands)
Agency securities $ - -% $ 113,346 1.4% $ 113,346 1.2%
Privately issued:
AAA 563,436 49.7 8,029,798 98.3 8,593,234 92.6
AA 47,596 4.2 8,485 0.1 56,081 0.6
A 166,610 14.7 5,398 0.1 172,008 1.8
BB 4,587 0.4 - - 4,587 0.0
BBB 135,378 11.9 2,285 0.0 137,663 1.4
Unrated 216,022 19.1 6,283 0.1 222,305 2.4
---------- ---------- ---------- ---------- ---------- ----------
Total $1,133,629 100.0% $8,165,595 100.0% $9,299,224 100.0%
========== ========== ========== ========== ========== ==========
December 31, 2005
-----------------------------------------------------------------------------
Trading Securities Securities Available for Sale Total
----------------------- ----------------------- -----------------------
Carrying Carrying Carrying
Value Portfolio Mix Value Portfolio Mix 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%
========== ========== ========== ========== ========== ==========
- 35 -
The following tables classify our mortgage-backed securities portfolio by type
of interest rate index at June 30, 2006 and December 31, 2005:
June 30, 2006
-----------------------------------------------------------------------------
Trading Securities Securities Available for Sale Total
----------------------- ----------------------- -----------------------
Carrying Carrying Carrying
Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix
----------------------- ----------------------- -----------------------
(Dollars in thousands)
Index:
One-month LIBOR $ 386,683 34.1% $ 88,827 1.1% $ 475,510 5.1%
Six-month LIBOR 470,992 41.6 4,733,291 57.9 5,204,283 56.0
One-year LIBOR 221,602 19.5 2,871,629 35.2 3,093,231 33.2
One-year constant maturity treasury 446 0.0 471,848 5.8 472,294 5.1
One-year monthly treasury average 53,906 4.8 - - 53,906 0.6
---------- ---------- ---------- ---------- ---------- ----------
Total $1,133,629 100.0% $8,165,595 100.0% $9,299,224 100.0%
========== ========== ========== ========== ========== ==========
December 31, 2005
-----------------------------------------------------------------------------
Trading Securities Securities Available for Sale Total
----------------------- ----------------------- -----------------------
Carrying Carrying Carrying
Value Portfolio Mix Value Portfolio Mix 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%
========== ========== ========== ========== =========== ==========
- 36 -
The following tables classify our mortgage loans held for investment and
mortgage-backed securities portfolio by product type at June 30, 2006 and
December 31, 2005:
June 30, 2006
------------------------------------------------------------------------------------------------------
Securities Loans Held
Trading Securities Available for Sale for Investment Total
------------------------ ------------------------- ------------------------ --------------------------
Carrying Carrying Carrying Carrying
Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix
------------------------ ------------------------- ------------------------ --------------------------
(Dollars in thousands)
Product:
ARMs less than 3 years $ 650,509 57.4% $ 327,400 4.0% $2,938,906 55.1% $ 3,916,815 26.8%
3/1 Hybrid ARM 167,427 14.8 196,930 2.4 6,919 0.1 371,276 2.5
5/1 Hybrid ARM 315,693 27.8 7,641,265 93.6 321,073 6.1 8,278,031 56.6
Home equity/Second - - - - 237,502 4.4 237,502 1.6
Other ARM - - - - 251,032 4.7 251,032 1.7
Fixed rate - - - - 1,581,706 29.6 1,581,706 10.8
---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
Total $1,133,629 100.0% $8,165,595 100.0% $5,337,138 100.0% $14,636,362 100.0%
========== ========== ========== ========== ========== ========== =========== ==========
December 31, 2005
------------------------------------------------------------------------------------------------------
Securities Loans Held
Trading Securities Available for Sale for Investment Total
------------------------ ------------------------- ------------------------ --------------------------
Carrying Carrying Carrying Carrying
Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix Value Portfolio Mix
------------------------ ------------------------- ------------------------ --------------------------
(Dollars in thousands)
Product:
ARMs less than 3 years $ 700,164 21.7% $ 487,122 6.6% $2,628,977 75.6% $ 3,816,263 27.1%
3/1 Hybrid ARM 194,313 6.0 262,598 3.6 11,563 0.3 468,474 3.3
5/1 Hybrid ARM 2,332,591 72.3 6,625,316 89.8 121,227 3.5 9,079,134 64.5
Home equity/Second - - - - 611,370 17.6 611,370 4.3
Other ARM - - - - 31,862 0.9 31,862 0.2
Fixed rate - - - - 74,722 2.1 74,722 0.6
---------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
Total $3,227,068 100.0% $7,375,036 100.0% $3,479,721 100.0% $14,081,825 100.0%
========== ========== ========== ========== ========== ========== =========== ==========
During the three and six months ended June 30, 2006, we purchased $461.1 million
and $1.9 billion of mortgage-backed securities, respectively.
During the three and six months ended June 30, 2006, we sold $99.1 million and
$1.9 billion of mortgage-backed securities, respectively.
During the three and six months ended June 30, 2006, we added $1.0 billion and
$1.9 billion of loans held for investment to our portfolio, respectively.
Loan Delinquency and Reserves
We are exposed to credit losses due to defaults on the loans underlying our
residual assets, and from our loans held for investment and loans held for sale.
As of June 30, 2006, credit losses have been nominal, primarily due to our loans
held for investment and loans underlying our residual assets being originated
within the past 30 months and, consequently, have not yet seasoned to the point
in time where losses are expected to occur. We expect losses to increase as our
loans season.
- 37 -
We hold reserves and allowances for expected losses, as well as other credit
related expenses, including losses due to loan repurchases. Reserves and
allowances include embedded loss assumptions, which reduce the projected future
cash flows and carrying value of our residual assets, in addition to specific
reserves. The following table presents our total reserves and allowances
compared to our loans that are 60 or more days delinquent:
June 30, December 31,
(In thousands) 2006 2005
---------- ----------
Loans 60 days and greater delinquent:
Loans underlying residual assets $ 222,016 $ 142,971
Loans held for investment 42,916 14,184
Loans held for sale 27,007 13,758
---------- ----------
Loans 60 days and greater delinquent $ 291,939 $ 170,913
========== ==========
Credit impairment reserves and allowances
including forecasted losses included in
carrying value of residual assets $ 88,415 $ 72,743
---------- ----------
Credit impairment reserves and allowances
as a percentage of loans 60 days or greater
delinquent 30.29% 42.56%
========== ==========
We generally target our reserves to equal our expected losses from our
delinquent loans. Currently, our expected losses are approximately 22% of our
loans that are 60 days or greater delinquent, but this expected loss percentage
is expected to decline because we began purchasing supplemental credit insurance
on a greater percentage of loans beginning in the second half of 2005.
- 38 -
Results of Operations
The following tables present our consolidated and segment statements of income:
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended
---------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30,
2006 2006 2005 2005 2005
--------- --------- --------- --------- ---------
Net interest income:
Interest income $ 330,196 $ 300,613 $ 265,435 $ 180,038 $ 135,318
Interest expense (279,992) (254,035) (215,057) (133,169) (90,336)
--------- --------- --------- --------- ---------
Net interest income 50,204 46,578 50,378 46,869 44,982
--------- --------- --------- --------- ---------
Provision for loan losses (3,979) (1,311) (2,142) - -
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses 46,225 45,267 48,236 46,869 44,982
--------- --------- --------- --------- ---------
Non-interest income:
Gain on sales of mortgage loans 224,594 171,907 98,777 123,658 77,377
Gain on sales of current period securitized mortgage loans - - - 19,960 104,377
(Loss) gain on sales of mortgage-backed securities and derivatives (47) (850) 38,068 6,116 620
Unrealized (loss) gain on mortgage-backed securities and derivatives (7,730) 9,315 (44,778) (10,965) (10,292)
Loan servicing fees 30,417 24,333 26,715 21,099 16,970
Amortization and impairment of mortgage servicing rights - - (18,745) (3,478) (33,230)
Change in fair value of mortgage servicing rights (18,830) (18,621) - - -
--------- --------- --------- --------- ---------
Net loan servicing fees (loss) 11,587 5,712 7,970 17,621 (16,260)
--------- --------- --------- --------- ---------
Other non-interest income 2,125 1,769 2,181 1,585 2,543
--------- --------- --------- --------- ---------
Non-interest income 230,529 187,853 102,218 157,975 158,365
--------- --------- --------- --------- ---------
Non-interest expenses:
Salaries, commissions and benefits, net 103,157 99,267 95,237 101,378 94,859
Occupancy and equipment 19,763 17,970 16,459 15,328 14,397
Data processing and communications 6,733 7,126 6,402 6,479 5,957
Office supplies and expenses 5,145 4,332 4,612 5,024 5,657
Marketing and promotion 6,383 5,800 5,951 5,104 5,126
Travel and entertainment 7,793 6,753 6,982 4,670 5,427
Professional fees 5,013 5,331 3,586 3,744 3,432
Other 17,192 15,882 10,946 7,360 6,843
--------- --------- --------- --------- ---------
Non-interest expenses 171,179 162,461 150,175 149,087 141,698
--------- --------- --------- --------- ---------
Net income before income tax expense (benefit) 105,575 70,659 279 55,757 61,649
Income tax expense (benefit) 33,224 16,200 (16,419) 2,549 (3,851)
--------- --------- --------- --------- ---------
Net income $ 72,351 $ 54,459 $ 16,698 $ 53,208 $ 65,500
========= ========= ========= ========= =========
Dividends on preferred stock 3,304 3,305 3,304 3,304 3,304
--------- --------- --------- --------- ---------
Net income available to common shareholders $ 69,047 $ 51,154 $ 13,394 $ 49,904 $ 62,196
========= ========= ========= ========= =========
Per share data:
Basic $ 1.38 $ 1.03 $ 0.27 $ 1.10 $ 1.54
Diluted $ 1.37 $ 1.02 $ 0.27 $ 1.09 $ 1.52
Weighted average number of shares - basic 50,056 49,715 49,605 45,174 40,384
Weighted average number of shares - diluted 50,487 50,070 49,998 45,669 40,886
- 39 -
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Six Months Ended June 30,
----------------------
2006 2005
--------- ---------
Net interest income:
Interest income $ 630,809 $ 282,212
Interest expense (534,027) (178,427)
--------- ---------
Total net interest income 96,782 103,785
--------- ---------
Provision for loan losses (5,290) -
--------- ---------
Total net interest income after provision for loan losses 91,492 103,785
--------- ---------
Non-interest income:
Gain on sales of mortgage loans 396,501 112,630
Gain on sales of current period securitized mortgage loans - 174,296
(Loss) gain on sales of mortgage-backed securities and derivatives (897) 6,752
Unrealized gain on mortgage-backed securities and derivatives 1,585 47,207
Loan servicing fees 54,750 28,282
Amortization and impairment of mortgage servicing rights - (38,312)
Change in fair value of mortgage servicing rights (37,451) -
--------- ---------
Net loan servicing fees (loss) 17,299 (10,030)
--------- ---------
Other non-interest income 3,894 4,009
--------- ---------
Total non-interest income 418,382 334,864
--------- ---------
Non-interest expenses:
Salaries, commissions and benefits, net 202,424 163,334
Occupancy and equipment 37,733 27,068
Data processing and communications 13,859 11,907
Office supplies and expenses 9,477 10,086
Marketing and promotion 12,183 9,256
Travel and entertainment 14,546 9,355
Professional fees 10,344 6,902
Other 33,074 13,712
--------- ---------
Total non-interest expenses 333,640 251,620
--------- ---------
Net income before income tax expense (benefit) 176,234 187,029
Income tax expense (benefit) 49,424 (3,851)
--------- ---------
Net income $ 126,810 $ 190,880
========= =========
Dividends on preferred stock 6,609 6,609
--------- ---------
Net income available to common shareholders $ 120,201 $ 184,271
========= =========
Per share data:
Basic $ 2.41 $ 4.57
Diluted $ 2.39 $ 4.51
Weighted average number of shares - basic 49,887 40,346
Weighted average number of shares - diluted 50,270 40,849
- 40 -
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
MORTGAGE HOLDINGS SEGMENT
(In thousands)
Six Months Ended June 30,
----------------------
2006 2005
--------- ---------
Net interest income:
Interest income $ 336,212 $ 135,346
Interest expense (281,752) (91,223)
--------- ---------
Net interest income 54,460 44,123
--------- ---------
Provision for loan losses (4,896) -
--------- ---------
Net interest income after provision for loan losses 49,564 44,123
--------- ---------
Non-interest income:
(Loss) gain on sales of mortgage-backed securities and derivatives (897) 909
Unrealized gain on mortgage-backed securities and derivatives 1,310 2,085
--------- ---------
Non-interest income 413 2,994
--------- ---------
Non-interest expenses:
Salaries, commissions and benefits, net 7,610 4,569
Occupancy and equipment 3 3
Data processing and communications 60 42
Office supplies and expenses 13 1
Marketing and promotion 7 2
Travel and entertainment 2 5
Professional fees 2,378 2,022
Other 2,323 4,605
--------- ---------
Non-interest expenses 12,396 11,249
--------- ---------
Net income before income tax expense 37,581 35,868
Income tax expense - -
--------- ---------
Net income $ 37,581 $ 35,868
========= =========
Dividends on preferred stock 6,609 6,609
--------- ---------
Net income available to common shareholders $ 30,972 $ 29,259
========= =========
- 41 -
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
LOAN ORIGINATION SEGMENT
(In thousands)
Six Months Ended June 30,
----------------------
2006 2005
--------- ---------
Net interest income:
Interest income $ 294,597 $ 146,866
Interest expense (245,316) (83,862)
--------- ---------
Net interest income 49,281 63,004
--------- ---------
Provision for loan losses (394) -
--------- ---------
Net interest income after provision for loan losses 48,887 63,004
--------- ---------
Non-interest income:
Gain on sales of mortgage loans 396,501 112,630
Gain on sales of current period securitized mortgage loans - 174,296
Gain on sales of mortgage-backed securities and derivatives - 5,843
Unrealized gain on mortgage-backed securities and derivatives 275 45,122
Other non-interest income 2,450 2,608
--------- ---------
Non-interest income 399,226 340,499
--------- ---------
Non-interest expenses:
Salaries, commissions and benefits, net 187,020 153,441
Occupancy and equipment 37,122 26,660
Data processing and communications 13,638 11,580
Office supplies and expenses 9,305 9,339
Marketing and promotion 11,932 9,193
Travel and entertainment 14,463 9,001
Professional fees 7,954 4,307
Other 19,335 6,316
--------- ---------
Non-interest expenses 300,769 229,837
--------- ---------
Net income before income tax expense 147,344 173,666
Income tax expense 52,939 4,998
--------- ---------
Net income $ 94,405 $ 168,668
========= =========
Dividends on preferred stock - -
--------- ---------
Net income available to common shareholders $ 94,405 $ 168,668
========= =========
- 42 -
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
LOAN SERVICING SEGMENT
(In thousands)
Six Months Ended June 30,
---------------------
2006 2005
-------- --------
Net interest income:
Interest income $ - $ -
Interest expense (6,959) (3,342)
-------- --------
Net interest income (6,959) (3,342)
-------- --------
Non-interest income:
Loan servicing fees 54,750 28,282
Amortization and impairment of mortgage servicing rights - (38,312)
Change in fair value of mortgage servicing rights (37,451) -
-------- --------
Net loan servicing fees (loss) 17,299 (10,030)
-------- --------
Other non-interest income 1,444 1,401
-------- --------
Non-interest income 18,743 (8,629)
-------- --------
Non-interest expenses:
Salaries, commissions and benefits, net 7,794 5,324
Occupancy and equipment 608 405
Data processing and communications 161 285
Office supplies and expenses 159 746
Marketing and promotion 244 61
Travel and entertainment 81 349
Professional fees 12 573
Other 11,416 2,791
-------- --------
Non-interest expenses 20,475 10,534
-------- --------
Net income before income tax benefit (8,691) (22,505)
Income tax benefit (3,515) (8,849)
-------- --------
Net income $ (5,176) $(13,656)
======== ========
Dividends on preferred stock - -
-------- --------
Net income available to common shareholders $ (5,176) $(13,656)
======== ========
- 43 -
Comparison of the Three Months Ended June 30, 2006 and 2005
Overview
Net income for the three months ended June 30, 2006 was $72.4 million compared
to $65.5 million for the three months ended June 30, 2005, an increase of $6.9
million, or 10.5%. The increase in net income was the result of a $72.2 million
increase in non-interest income and a $5.2 million increase in net interest
income, partly offset by a $37.0 million increase in income tax expense, a $29.5
million increase in non-interest expenses and a $4.0 million increase in
provision for loan losses. The $72.2 million increase in non-interest income
consists of a $147.2 million increase in gain on sales of mortgage loans, a
$27.9 million increase in net loan servicing fees and a $1.9 million increase in
realized and unrealized gains on mortgage-backed securities and derivatives,
partly offset by a $104.4 million decrease in gain on sales of current period
securitized mortgage loans and a $0.4 million decrease in other non-interest
income in the three months ended June 30, 2006 versus the three months ended
June 30, 2005.
Net Interest Income
The following table presents the average balances for our interest-earning
assets, interest-bearing liabilities, corresponding annualized effective rates
of interest and the related interest income or expense for the three months
ended June 30, 2006 compared to the three months ended June 30, 2005:
(Dollars in thousands) Three Months Ended June 30,
---------------------------------------------------------------------------
2006 2005
------------------------------------ -------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------- -------- ---------- ----------- -------- ----------
Interest earning assets:
Mortgage-backed securities, net (1) $ 9,503,262 $130,498 5.49% $ 6,804,436 $ 77,042 4.53%
Mortgage loans held for sale 7,577,871 127,084 6.71% 3,861,999 58,276 6.04%
Mortgage loans held for investment 4,172,288 72,614 6.96% - - -
----------- -------- ----------- --------
21,253,421 330,196 6.21% 10,666,435 135,318 5.07%
----------- -------- ----------- --------
Interest bearing liabilities:
Warehouse lines of credit (2) 6,140,929 85,990 5.60% 1,790,318 20,587 4.55%
Commercial paper (3) 2,410,639 29,751 4.94% 1,845,695 14,760 3.16%
Reverse repurchase agreements (4) 8,950,889 114,497 5.12% 6,296,377 52,237 3.28%
Collateralized debt obligations (5) 2,902,206 39,281 5.41% - - -
Trust preferred securities 245,165 5,270 8.60% 26,923 482 7.08%
Notes payable 358,066 5,203 5.81% 189,313 2,270 4.74%
----------- -------- ----------- --------
21,007,894 279,992 5.33% 10,148,626 90,336 3.52%
----------- -------- ----------- --------
Net interest income $ 50,204 $ 44,982
======== ========
Interest rate spread 0.88% 1.55%
========== ==========
Net interest margin 0.94% 1.72%
========== ==========
(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 $103 thousand of net interest expense on interest rate swap
agreements for the 2005 period.
(3) Includes $258 thousand of net interest income on interest rate swap
agreements for the 2006 period.
(4) Includes $1.0 million and $4.5 million of net interest expense on interest
rate swap agreements for the 2006 and 2005 periods, respectively.
(5) Includes $407 thousand of net interest expense on interest rate swap
agreements for the 2006 period.
- 44 -
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 June 30,
2006 compared to the three months ended June 30, 2005:
Three Months Ended June 30, 2006
Compared to
(In thousands) Three Months Ended June 30, 2005
-------------------------------
Average Average
Rate Volume Total
-------- -------- --------
Mortgage-backed securities, net $ 18,615 $ 34,841 $ 53,456
Mortgage loans held for sale 7,113 61,695 68,808
Mortgage loans held for investment - 72,614 72,614
-------- -------- --------
Interest income 25,728 169,150 194,878
-------- -------- --------
Warehouse lines of credit 5,678 59,725 65,403
Commercial paper 9,702 5,289 14,991
Reverse repurchase agreements 35,519 26,741 62,260
Collateralized debt obligations - 39,281 39,281
Trust preferred securities 420 4,368 4,788
Notes payable 591 2,342 2,933
-------- -------- --------
Interest expense 51,910 137,746 189,656
-------- -------- --------
Net interest income $(26,182) $ 31,404 $ 5,222
======== ======== ========
Interest Income: Interest income on mortgage-backed securities for the three
months ended June 30, 2006 was $130.5 million, compared to $77.0 million for the
three months ended June 30, 2005, a $53.5 million, or 69.4%, increase. This
increase reflects primarily the growth of our mortgage-backed securities
portfolio and higher interest rates in the second quarter of 2006 versus the
second quarter of 2005.
Interest income on our mortgage loans held for sale for the three months ended
June 30, 2006 was $127.1 million, compared to $58.3 million for the three months
ended June 30, 2005, an increase of $68.8 million, or 118.1%. 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 second quarter of 2006
versus the second quarter of 2005.
For the three months ended June 30, 2006, we recognized $72.6 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 June 30, 2006, we have entered into reverse repurchase
agreements, a form of collateralized short-term borrowing, with seventeen
different financial institutions and had borrowed funds from eleven 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 June 30,
2006 was $114.5 million, compared to interest expense for the three months ended
June 30, 2005 of $52.2 million, a $62.3 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 second quarter of 2006 versus the second 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 June 30, 2006 was $86.0 million, compared to
interest expense for the three months ended June 30, 2005 of $20.6 million, a
$65.4 million increase. The increase in warehouse lines of credit interest
expense was primarily the result of an increase in average volume due to higher
- 45 -
mortgage origination volume and an increase in average rate due to generally
higher short-term interest rates in the second quarter of 2006 versus the second
quarter of 2005.
In May 2004, we formed a wholly-owned special purpose entity for the purpose of
issuing commercial paper in the form of SLNs to finance certain portions of our
mortgage loans. Interest expense on commercial paper for the three months ended
June 30, 2006 was $29.8 million, versus $14.8 million for the three months ended
June 30, 2005, a $15.0 million increase. The increase in commercial paper
interest expense was the result of an increase in average interest rates in the
second quarter of 2006 versus the second quarter of 2005 and an increase in
average volume. The increase in average volume in the second quarter of 2006
versus the second quarter of 2005 related to higher borrowings used to fund our
loan inventory. By funding a portion of our loan inventory through the
commercial paper program, we were able to reduce our average funding cost versus
borrowing exclusively through warehouse lenders.
For the three months ended June 30, 2006, we recognized $39.3 million of
interest expense on collateralized debt obligations, related to borrowings used
to fund our securitizations which were accounted for as financings.
Gain on Mortgage Loans, Mortgage-Backed Securities and Derivatives
Gain on Sales and Securitizations of Mortgage Loans: During the three months
ended June 30, 2006, gain on sales and securitizations of mortgage loans in our
Loan Origination segment totaled $224.6 million, or 1.62%, of mortgage loans
sold or securitized compared to $182.6 million, or 1.78%, of mortgage loans sold
or securitized during the three months ended June 30, 2005. The increase
primarily reflects a $3.5 billion increase in mortgage loans sold or securitized
to $13.8 billion in the second quarter of 2006 from $10.3 billion in the second
quarter of 2005.
The following table presents the components of gain on sales and securitizations
of mortgage loans in our Loan Origination segment during the three months ended
June 30, 2006 and 2005:
Gains on Sales and Securitizations of Mortgage Loans
Three Months Ended June 30,
---------------------------
2006 2005
----------- ------------
(Dollars in thousands)
Gain on sales of mortgage loans $ 224,594 $ 77,377
Gain on sales of current period securitized mortgage loans - 104,377
Loss on sales of free standing derivatives - (3,626)
Unrealized gain on self-originated mortgage-backed securities
retained in period - 8,493
Unrealized loss on free standing derivatives - (4,030)
----------- ------------
Total gain on sales and securitizations of mortgage loans $ 224,594 $ 182,591
=========== ============
Total mortgage loans sold or securitized $13,828,120 $ 10,273,356
=========== ============
Total gain on sales and securitizations of mortgage
loans as a % of total mortgage loans sold or securitized 1.62% 1.78%
Portfolio Gains and Losses: During the three months ended June 30, 2006,
portfolio gains and losses in our Mortgage Holdings segment were a portfolio
loss of $7.8 million compared to a portfolio loss of $10.5 million during the
three months ended June 30, 2005. The decrease in portfolio losses in the second
quarter of 2006 compared to the second quarter of 2005 was the result of a $7.0
million net decrease in unrealized loss on mortgage-backed securities and free
standing derivatives partly offset by a $4.3 million decrease in gain on sales
of mortgage-backed securities.
The following table presents the components of portfolio gains and losses in our
Mortgage Holdings segment during the three months ended June 30, 2006 and 2005:
- 46 -
Portfolio Gains and Losses
Three Months Ended June 30,
---------------------
2006 2005
-------- --------
(In thousands)
(Loss) gain on sales of mortgage-backed securities $ (47) $ 4,246
Unrealized (loss) gain on mortgage-backed securities (14,571) 13,031
Unrealized gain (loss) on free standing derivatives 6,841 (27,786)
-------- --------
Net unrealized loss on mortgage-backed securities and free
standing derivatives (7,730) (14,755)
-------- --------
Total portfolio loss $ (7,777) $(10,509)
======== ========
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 June 30,
-------------------
2006 2005
------- -------
(In thousands)
(Loss) gain on sales of mortgage-backed securities $ (47) $ 4,246
Loss on sales of free standing derivatives - (3,626)
------- -------
(Loss) gain on sales of mortgage-backed securities and derivatives $ (47) $ 620
======= =======
The following table presents the components of unrealized loss on
mortgage-backed securities and derivatives shown in our consolidated statements
of income:
Components of Unrealized Loss on Mortgage-backed Securities and Derivatives
Three Months Ended June 30,
-------------------------------
2006 2005
-------------------------------
(In thousands)
Unrealized gain on self-originated mortgage-backed securities
retained in period $ - $ 8,493
Unrealized (loss) gain on mortgage-backed securities (14,571) 13,031
Unrealized gain (loss) on free standing derivatives 6,841 (31,816)
-------- --------
Unrealized loss on mortgage-backed securities and derivatives $ (7,730) $(10,292)
======== ========
Net Loan Servicing Fees
Net loan servicing fees were $11.6 million for the three months ended June 30,
2006 compared to a loss of $16.3 million for the three months ended June 30,
2005.
Loan Servicing Fees: Loan servicing fees increased to $30.4 million for the
three months ended June 30, 2006 from $17.0 million for the three months ended
June 30, 2005, an increase of $13.4 million, or 79.2%. The increase in loan
servicing fees in the second quarter of 2006 versus the second quarter of 2005
was primarily the result of an increase in loans serviced for others. At June
30, 2006, the principal amount of loans serviced for others, including loans
held for sale and loans held for investment, was $39.1 billion, compared to
$24.7 billion at June 30, 2005.
Change in Fair Value of MSRs: Effective at the beginning of the first quarter of
2006, we adopted Statement of Financial Accounting Standards No. 156 "Accounting
for Servicing of Financial Assets, an amendment of FASB Statement No. 140"
("SFAS 156"), and elected the fair value option to subsequently measure our
MSRs. Under the fair value option, all changes in the fair value of MSRs are
reported in the consolidated statements of income. For the three months ended
June 30, 2006, the change in fair value of MSRs was $18.8 million. The
- 47 -
change in fair value of MSRs in the second quarter of 2006 includes $10.8
million of gain due to changes in valuation inputs or assumptions, and $29.6
million of other changes in fair value, which primarily includes a $26.3 million
reduction in fair value due to servicing runoff.
Amortization and Impairment of MSRs: Amortization and impairment of MSRs
includes amortization of MSRs of $12.8 million and a temporary impairment
provision of $20.4 million for the three months ended June 30, 2005. Effective
at the beginning of the first quarter of 2006, we adopted the SFAS 156 fair
value option and did not recognize amortization and impairment of MSRs during
the second quarter of 2006.
The following table presents the components of net loan servicing fees (loss)
for the three months ended June 30, 2006 and 2005:
Three Months Ended June 30,
-------------------------------
2006 2005
-------------------------------
(In thousands)
Loan servicing fees $ 30,417 $ 16,970
Amortization and impairment of mortgage servicing rights - (33,230)
Change in fair value of mortgage servicing rights (18,830) -
-------- --------
Net loan servicing fees (loss) $ 11,587 $(16,260)
======== ========
Other Non-Interest Income
Other non-interest income totaled $2.1 million for the three months ended June
30, 2006 compared to $2.5 million for the three months ended June 30, 2005. For
the three months ended June 30, 2006, other non-interest income primarily
includes reinsurance premiums earned totaling approximately $1.3 million, rental
income of $0.3 million and revenue from title services of $0.2 million. For the
three months ended June 30, 2005, other non-interest income primarily includes
reinsurance premiums earned totaling approximately $1.5 million, rental income
of $0.4 million and revenue from title services of $0.3 million.
Non-Interest Expenses
Our non-interest expenses for the three months ended June 30, 2006 were $171.2
million compared to $141.7 million for the three months ended June 30, 2005, an
increase of $29.5 million, or 20.8%. The increase primarily reflects a $31.1
million rise in our Loan Origination segment non-interest expenses to $160.2
million, or 1.07% of total loan originations in the second quarter of 2006, from
$129.1 million, or 1.20% of total loan originations in the second 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 June 30, 2006 were $103.2 million, compared to
$94.9 million for the three months ended June 30, 2005, an increase of $8.3
million, or 8.7%. The increase in expenses reflects higher origination volume
and a resulting higher commission expense and higher salaries due to an increase
in employees to 7,221 at June 30, 2006 from 6,075 at June 30, 2005.
Other Operating Expenses: Operating expenses, excluding salaries, commissions
and benefits, were $68.0 million for the three months ended June 30, 2006,
compared to $46.8 million for the three months ended June 30, 2005, an increase
of $21.2 million, or 45.2%. The increase in operating expenses in the second
quarter of 2006 versus the second quarter of 2005 includes a $10.3 million
increase in other non-interest expense and a $5.4 million increase in occupancy
and equipment expense. The increase in other non-interest expenses in the second
quarter of 2006 versus the second quarter of 2005 was primarily due to a $3.0
million increase in reserves associated with our servicing assets, a $3.0
million increase in lender paid private mortgage insurance and the remainder was
primarily associated with our acquisition of Waterfield Financial Corporation in
January 2006. The increase in occupancy and equipment expense was due to higher
lease obligations and certain fixed asset expenses relating to the increased
number of branches in the 2006 period.
We recognized $33.2 million of income tax expense for the three months ended
June 30, 2006, compared to a $3.9 million income tax benefit for the three
months ended June 30, 2005. The increase in income tax expense in the second
quarter of 2006 versus the second quarter of 2005 reflects an increase in income
before income taxes relating to our taxable REIT subsidiary ("TRS").
- 48 -
Loan Originations
We originate and sell or securitize one-to-four family residential mortgage
loans. Total loan originations for the three months ended June 30, 2006 were
$14.9 billion compared to $10.8 billion for the three months ended June 30,
2005, a 38.5% increase. Mortgage brokers, through our wholesale loan production
offices, accounted for 56% of our loan originations in the three months ended
June 30, 2006 compared to 52% of our originations in the three months ended June
30, 2005. Originations conducted through our retail loan production offices and
internet call center were 38% of our loan originations in the three months ended
June 30, 2006 compared to 48% of our originations in the three months ended June
30, 2005. During the three months ended June 30, 2006, 6% of our loan
originations were purchased from correspondents.
- 49 -
Comparison of the Six Months Ended June 30, 2006 and 2005
Overview
Net income for the six months ended June 30, 2006 was $126.8 million compared to
$190.9 million for the six months ended June 30, 2005, a decrease of $64.1
million, or 33.6%. 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 six months ended June 30, 2005 includes approximately $71.4
million of revenues related to the delay in recognizing the Q4-04 Securitization
as a sale into the first quarter of 2005. The decrease in net income was the
result of an $82.0 million increase in non-interest expenses, a $53.3 million
increase in income tax expense, a $7.0 million decrease in net interest income
and a $5.3 million increase in provision for loan losses, partly offset by an
$83.5 million increase in non-interest income. The $83.5 million increase in
non-interest income consists of a $283.9 million increase in gain on sales of
mortgage loans and a $27.3 million increase in net loan servicing fees, partly
offset by a $174.3 million decrease in gain on sales of current period
securitized mortgage loans, a $53.3 million decrease in realized and unrealized
gains on mortgage-backed securities and derivatives and a $0.1 million decrease
in other non-interest income in the six months ended June 30, 2006 versus the
six months ended June 30, 2005.
Net Interest Income
The following table presents the average balances for our interest-earning
assets, interest-bearing liabilities, corresponding annualized effective rates
of interest and the related interest income or expense for the six months ended
June 30, 2006 compared to the six months ended June 30, 2005:
(Dollars in thousands) Six Months Ended June 30,
---------------------------------------------------------------------------
2006 2005
------------------------------------ -------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------- -------- ---------- ----------- -------- ----------
Interest earning assets:
Mortgage-backed securities, net (1) $ 9,707,642 $265,591 5.47% $ 6,331,504 $135,347 4.28%
Mortgage loans held for sale 7,273,487 229,455 6.31% 5,044,356 146,865 5.82%
Mortgage loans held for investment 3,979,999 135,763 6.82% - - -
----------- -------- ----------- --------
20,961,128 630,809 6.02% 11,375,860 282,212 4.96%
----------- -------- ----------- --------
Interest bearing liabilities:
Warehouse lines of credit (2) 6,425,396 171,213 5.33% 1,623,620 37,543 4.60%
Commercial paper (3) 2,537,945 60,798 4.79% 1,520,347 20,818 2.72%
Reverse repurchase agreements (4) 9,129,085 230,002 5.04% 6,595,756 98,961 2.99%
Collateralized debt obligations (5) 2,009,414 52,861 5.26% 988,053 16,766 3.37%
Trust preferred securities 227,680 9,515 8.36% 13,536 482 7.08%
Notes payable 338,139 9,638 5.70% 169,816 3,857 4.52%
----------- -------- ----------- --------
20,667,659 534,027 5.17% 10,911,128 178,427 3.25%
----------- -------- ----------- --------
Net interest income $ 96,782 $103,785
======== ========
Interest rate spread 0.85% 1.71%
========== ===========
Net interest margin 0.92% 1.84%
========== ===========
(1) The average yield does not give effect to changes in the fair value that
are reflected as a component of stockholders' equity.
(2) Includes $2.8 million of net interest expense on interest rate swap
agreements for the 2005 period.
(3) Includes $258 thousand of net interest income on interest rate swap
agreements for the 2006 period.
(4) Includes $9.4 million and $10.5 million of net interest expense on
interest rate swap agreements for the 2006 and 2005 periods, respectively.
(5) Includes $407 thousand of net interest expense on interest rate swap
agreements for the 2006 period.
- 50 -
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 six months ended June 30, 2006
compared to the six months ended June 30, 2005:
Six Months Ended June 30, 2006
Compared to
(In thousands) Six Months Ended June 30, 2005
----------------------------------
Average Average
Rate Volume Total
--------- --------- ---------
Mortgage-backed securities, net $ 44,637 $ 85,607 $ 130,244
Mortgage loans held for sale 13,217 69,373 82,590
Mortgage loans held for investment - 135,763 135,763
--------- --------- ---------
Interest income 57,854 290,743 348,597
--------- --------- ---------
Warehouse lines of credit 6,817 126,853 133,670
Commercial paper 21,242 18,738 39,980
Reverse repurchase agreements 83,886 47,155 131,041
Collateralized debt obligations 12,661 23,434 36,095
Trust preferred securities 354 8,679 9,033
Notes payable 1,208 4,573 5,781
--------- --------- ---------
Interest expense 126,168 229,432 355,600
--------- --------- ---------
Net interest income $ (68,314) $ 61,311 $ (7,003)
========= ========= =========
Interest Income: Interest income on mortgage-backed securities for the six
months ended June 30, 2006 was $265.6 million, compared to $135.4 million for
the six months ended June 30, 2005, a $130.2 million, or 96.2%, increase. This
increase reflects primarily the growth of our mortgage-backed securities
portfolio and higher interest rates in 2006 versus 2005.
Interest income on our mortgage loans held for sale for the six months ended
June 30, 2006 was $229.5 million, compared to $146.9 million for the six months
ended June 30, 2005, an increase of $82.6 million, or 56.2%. The increase in
interest income on mortgage loans held for sale was primarily the result of an
increase in average volume in 2006 versus 2005 due to higher mortgage
origination volume, and higher interest rates in 2006 versus 2005.
For the six months ended June 30, 2006, we recognized $135.8 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 June 30, 2006, we have entered into reverse repurchase
agreements, a form of collateralized short-term borrowing, with seventeen
different financial institutions and had borrowed funds from eleven 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 six months ended June 30, 2006
was $230.0 million, compared to interest expense for the six months ended June
30, 2005 of $99.0 million, a $131.0 million increase. The increase in reverse
repurchase agreements interest expense in 2006 versus 2005 was primarily the
result of an increase in average rate due to generally higher short-term
interest rates in 2006 versus 2005, and an increase in borrowings used to fund
the growth of our mortgage-backed securities and loans held for investment
portfolio.
We fund our loan inventory primarily through borrowing facilities with several
mortgage warehouse lenders and through a $3.3 billion commercial paper, or
secured liquidity note ("SLN"), program. Interest expense on warehouse lines of
credit for the six months ended June 30, 2006 was $171.2 million, compared to
interest expense for the six months ended June 30, 2005 of $37.5 million, a
$133.7 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 2006 versus 2005.
- 51 -
In May 2004, we formed a wholly-owned special purpose entity for the purpose of
issuing commercial paper in the form of SLNs to finance certain portions of our
mortgage loans. Interest expense on commercial paper for the six months ended
June 30, 2006 was $60.8 million, versus $20.8 million for the six months ended
June 30, 2005, a $40.0 million increase. The increase in commercial paper
interest expense was the result of an increase in average interest rates in 2006
versus 2005 and an increase in average volume. The increase in average volume in
2006 versus 2005 related to higher borrowings used to fund our loan inventory.
By funding a portion of our loan inventory through the commercial paper program,
we were able to reduce our average funding cost versus borrowing exclusively
through warehouse lenders.
Interest expense on collateralized debt obligations for the six months ended
June 30, 2006 was $52.9 million, compared to interest expense for the six months
ended June 30, 2005 of $16.8 million, a $36.1 million increase. The increase in
collateralized debt obligation interest expense was the result of an increase in
average volume and an increase in average interest rates in 2006 versus 2005.
The increase in average volume in 2006 versus 2005 related to higher borrowings
used to fund our securitizations which were accounted for as financings.
Gain on Mortgage Loans, Mortgage-Backed Securities and Derivatives
Gain on Sales and Securitizations of Mortgage Loans: During the six months ended
June 30, 2006, gain on sales and securitizations of mortgage loans in our Loan
Origination segment totaled $396.8 million, or 1.45%, of mortgage loans sold or
securitized compared to $337.9 million, or 1.63%, of mortgage loans sold or
securitized during the six months ended June 30, 2005. The increase primarily
reflects a $6.7 billion increase in mortgage loans sold or securitized to $27.4
billion in the first six months of 2006 from $20.7 billion in the first six
months of 2005. The 2005 period includes $43.4 million recognized in connection
with the Q4-04 Securitization.
The following table presents the components of gain on sales and securitizations
of mortgage loans in our Loan Origination segment during the six months ended
June 30, 2006 and 2005:
Gains on Sales and Securitizations of Mortgage Loans
Six Months Ended June 30,
----------------------------
2006 2005
----------------------------
(Dollars in thousands)
Gain on sales of mortgage loans $ 396,501 $ 112,630
Gain on sales of current period securitized mortgage loans - 174,296
Gain on sales of free standing derivatives - 5,843
Unrealized gain on self-originated mortgage-backed securities
retained in period - 50,202
Unrealized gain (loss) on free standing derivatives 275 (5,080)
------------ ------------
Total gain on sales and securitizations of mortgage loans $ 396,776 $ 337,891
============ ============
Total mortgage loans sold or securitized $ 27,361,709 $ 20,703,986
============ ============
Total gain on sales and securitizations of mortgage
loans as a % of total mortgage loans sold or securitized 1.45% 1.63%
Portfolio Gains and Losses: During the six months ended June 30, 2006, portfolio
gains and losses in our Mortgage Holdings segment were a portfolio gain of $0.4
million compared to a portfolio gain of $3.0 million during the six months ended
June 30, 2005. The decrease in portfolio gains in the first six months of 2006
compared to the first six months of 2005 was the result of a $1.8 million
decrease in gain on sales of mortgage-backed securities, and a $0.8 million net
decrease in unrealized gain on mortgage-backed securities and free standing
derivatives.
- 52 -
The following table presents the components of portfolio gains and losses in our
Mortgage Holdings segment during the six months ended June 30, 2006 and 2005:
Portfolio Gains and Losses
Six Months Ended June 30,
---------------------
2006 2005
---------------------
(In thousands)
(Loss) gain on sales of mortgage-backed securities $ (897) $ 909
Unrealized loss on mortgage-backed securities (13,597) (5,429)
Unrealized gain on free standing derivatives 14,907 7,514
-------- --------
Net unrealized gain on mortgage-backed securities and free
standing derivatives 1,310 2,085
-------- --------
Total portfolio gain $ 413 $ 2,994
======== ========
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
Six Months Ended June 30,
---------------------
2006 2005
---------------------
(In thousands)
(Loss) gain on sales of mortgage-backed securities $ (897) $ 909
Gain on sales of free standing derivatives - 5,843
-------- --------
(Loss) gain on sales of mortgage-backed securities and derivatives $ (897) $ 6,752
======== ========
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
Six Months Ended June 30,
-------------------------------
2006 2005
-------------------------------
(In thousands)
Unrealized gain on self-originated mortgage-backed securities
retained in period $ - $ 50,202
Unrealized loss on mortgage-backed securities (13,597) (5,429)
Unrealized gain on free standing derivatives 15,182 2,434
-------- --------
Unrealized gain on mortgage-backed securities and derivatives $ 1,585 $ 47,207
======== ========
Net Loan Servicing Fees
Net loan servicing fees were $17.3 million for the six months ended June 30,
2006 compared to a loss of $10.0 million for the six months ended June 30, 2005.
Loan Servicing Fees: Loan servicing fees increased to $54.8 million for the six
months ended June 30, 2006 from $28.3 million for the six months ended June 30,
2005, an increase of $26.5 million, or 93.6%. The increase in loan servicing
fees in the first six months of 2006 versus the first six months of 2005 was
primarily the result of an increase in loans serviced for others. At June 30,
2006, the principal amount of loans serviced for others, including loans held
for sale and loans held for investment, was $39.1 billion, compared to $24.7
billion at June 30, 2005.
- 53 -
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 six months ended June
30, 2006, the change in fair value of MSRs was $37.5 million. The change in fair
value of MSRs in the first six months of 2006 includes $22.1 million of gain due
to changes in valuation inputs or assumptions, and $59.6 million of other
changes in fair value, which primarily includes a $45.1 million reduction in
fair value due to servicing runoff.
Amortization and Impairment of MSRs: Amortization and impairment of MSRs
includes amortization of MSRs of $21.3 million and a temporary impairment
provision of $17.0 million for the six months ended June 30, 2005. Effective at
the beginning of the first quarter of 2006, we adopted the SFAS 156 fair value
option and did not recognize amortization and impairment of MSRs during the
first six months of 2006.
The following table presents the components of net loan servicing fees (loss)
for the six months ended June 30, 2006 and 2005:
Six Months Ended June 30,
---------------------
2006 2005
---------------------
(In thousands)
Loan servicing fees $ 54,750 $ 28,282
Amortization and impairment of mortgage servicing rights - (38,312)
Change in fair value of mortgage servicing rights (37,451) -
-------- --------
Net loan servicing fees (loss) $ 17,299 $(10,030)
======== ========
Other Non-Interest Income
Other non-interest income totaled $3.9 million for the six months ended June 30,
2006 compared to $4.0 million for the six months ended June 30, 2005. For the
six months ended June 30, 2006, other non-interest income primarily includes
reinsurance premiums earned totaling approximately $2.0 million, rental income
of $0.6 million, other fee income of $0.4 million and revenue from title
services of $0.3 million. For the six months ended June 30, 2005, other
non-interest income primarily includes reinsurance premiums earned totaling
approximately $2.4 million, rental income of $0.8 million and revenue from title
services of $0.5 million.
Non-Interest Expenses
Our non-interest expenses for the six months ended June 30, 2006 were $333.6
million compared to $251.6 million for the six months ended June 30, 2005, an
increase of $82.0 million, or 32.6%. The increase primarily reflects a $70.9
million rise in our Loan Origination segment non-interest expenses to $300.7
million, or 1.07% of total loan originations in the first six months of 2006,
from $229.8 million, or 1.27% of total loan originations in the first six months
of 2005.
Our operating expenses represent costs that are not eligible to be added to the
book value of the loans because they are not considered to be certain direct
origination costs under the rules of Statement of Financial Accounting Standards
("SFAS") No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Costs of Leases." Direct origination
costs are added to the book value of loans and either reduce the gain on sale of
loans if the loans are sold or are amortized over the life of the loan.
Salaries, Commissions and Benefits, net: Salaries, commissions and benefits,
net, for the six months ended June 30, 2006 were $202.4 million, compared to
$163.3 million for the six months ended June 30, 2005, an increase of $39.1
million, or 23.9%. The increase in expenses reflects higher origination volume
and a resulting higher commission expense and higher salaries due to an increase
in employees to 7,221 at June 30, 2006 from 6,075 at June 30, 2005.
Other Operating Expenses: Operating expenses, excluding salaries, commissions
and benefits, were $131.2 million for the six months ended June 30, 2006,
compared to $88.3 million for the six months ended June 30, 2005, an increase of
$42.9 million, or 48.6%. The increase in operating expenses in the first six
months of 2006 versus the first six months of 2005 includes a $19.4 million
increase in other non-interest expense and a $10.7 million increase in occupancy
and equipment expense. The increase in other non-interest expenses in the first
six months of 2006 versus the first six months of 2005 was primarily due to an
$8.0 million increase in reserves associated with our servicing assets, a $4.1
million increase in lender paid private mortgage insurance and the remainder was
primarily associated with our acquisition of Waterfield Financial Corporation in
January 2006. The increase in occupancy and equipment expense was due to higher
lease obligations and certain fixed asset expenses relating to the increased
number of branches in the 2006 period.
- 54 -
We recognized $49.4 million of income tax expense for the six months ended June
30, 2006, compared to a $3.9 million income tax benefit for the six months ended
June 30, 2005. The increase in income tax expense in the first six months of
2006 versus the first six months of 2005 reflects an increase in income before
income taxes relating to our taxable REIT subsidiary ("TRS").
Loan Originations
We originate and sell or securitize one-to-four family residential mortgage
loans. Total loan originations for the six months ended June 30, 2006 were $28.1
billion compared to $18.0 billion for the six months ended June 30, 2005, an
55.8% increase. Mortgage brokers, through our wholesale loan production offices,
accounted for 55% of our loan originations in the six months ended June 30, 2006
compared to 51% of our originations in the six months ended June 30, 2005.
Originations conducted through our retail loan production offices and internet
call center were 39% of our loan originations in the six months ended June 30,
2006 compared to 49% of our originations in the six months ended June 30, 2005.
During the six months ended June 30, 2006, 6% of our loan originations were
purchased from correspondents.
Liquidity and Capital Resources
As of June 30, 2006, we had arrangements to enter into reverse repurchase
agreements, a form of collateralized short-term borrowing, with seventeen
different financial institutions and had borrowed funds from eleven 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 June 30, 2006, we had $8.9 billion of reverse repurchase agreements
outstanding with a weighted-average borrowing rate of 5.29% before the impact of
interest rate swaps and a weighted-average remaining maturity of six months.
To originate a mortgage loan, we draw against either a $3.3 billion SLN
commercial paper program, a $2.0 billion pre-purchase facility with UBS Real
Estate Securities Inc. ("UBS"), a facility of $2.0 billion with Bear Stearns, 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 $125 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 gestation facilities with Greenwich Capital
Financial Products, Inc. ("Greenwich") and Deutsche Bank ("Deutsche"). These
facilities are secured by the mortgages owned by us and by certain of our other
assets. Advances drawn under these facilities bear interest at rates that vary
depending on the type of mortgages securing the advances. These loans are
subject to sublimits, advance rates and terms that vary depending on the type of
securing mortgages and the ratio of our liabilities to our tangible net worth.
At August 4, 2006, the aggregate outstanding balance under the commercial paper
program was $2.6 billion, the aggregate outstanding balance under the warehouse
facilities was $3.6 billion, the aggregate outstanding balance in drafts payable
was $18.3 million and the aggregate maximum amount available for additional
borrowings was $4.6 billion.
The documents governing our warehouse facilities contain a number of
compensating balance requirements and restrictive financial and other covenants
that, among other things, require us to adhere to a maximum ratio of total
liabilities to tangible net worth and maintain a minimum level of tangible net
worth and liquidity, as well as to comply with applicable regulatory and
investor requirements. The facility agreements also contain covenants limiting
the ability of our subsidiaries to transfer or sell assets other than in the
ordinary course of business and to create liens on the collateral without
obtaining the prior consent of the lenders, which consent may not be
unreasonably withheld.
In addition, under our warehouse facilities, we cannot continue to finance a
mortgage loan that we hold if:
o the loan is rejected as "unsatisfactory for purchase" by the
ultimate investor and has exceeded its permissible 120-day warehouse
period;
o we fail to deliver the applicable mortgage note or other documents
evidencing the loan within the requisite time period;
o the underlying property that secures the loan has sustained a
casualty loss in excess of 5% of its appraised value; or
o the loan ceases to be an eligible loan (as determined pursuant to
the applicable facility agreement).
As of June 30, 2006, our aggregate warehouse facility borrowings were $1.5
billion (including $29.7 million of borrowings under a working capital
sub-limit) and our outstanding drafts payable were $12.3 million, compared to
$3.5 billion in aggregate warehouse facility borrowings
- 55 -
(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 June
30, 2006, our loans held for investment were $5.3 billion and our loans held for
sale were $1.2 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, Deutsche 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 June 30, 2006 and December 31, 2005 were $4.5
billion and $3.2 billion, respectively. Aggregate amounts so held under these
agreements at August 4, 2006 were $1.6 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, but we have an option to extend the term for twelve
additional months at a higher interest rate. We expect to renew the term loan
facility at similar or better terms prior to the expiration date. Interest is
based on a spread to the LIBOR and may be adjusted for earnings on escrow
balances. At June 30, 2006 and December 31, 2005, borrowings under our term loan
facility were $221.3 million and $206.2 million, respectively.
Cash and cash equivalents decreased to $304.3 million as of June 30, 2006 from
$575.7 million as of December 31, 2005.
Our primary sources of cash and cash equivalents during the six months ended
June 30, 2006 were as follows:
o $27.4 billion of proceeds from principal received from sales of
mortgage loans held for sale;
o $2.7 billion increase in collateralized debt obligations;
o $1.9 billion of principal proceeds from sales of mortgage-backed
securities; and
o $1.1 billion of principal repayments of mortgage-backed securities.
Our primary uses of cash and cash equivalents during the six months ended June
30, 2006 were as follows:
o $28.1 billion of origination of mortgage loans;
o $2.0 billion decrease in warehouse lines of credit, net;
o $1.9 billion of purchases of mortgage-backed securities; and
o $866.4 million decrease in reverse repurchase agreements, net.
- 56 -
Commitments
The Company had the following commitments (excluding derivative financial
instruments) at June 30, 2006:
Less than 1
Total Year 1 - 3 Years 3 - 5 Years After 5 Years
----------------------------------------------------------------------------------
(In thousands)
Warehouse liabilities $1,476,958 $1,476,958 $ - $ - $ -
Commercial paper 888,476 888,476 - - -
Reverse repurchase agreements 8,939,786 6,635,017 2,304,769 - -
Collateralized debt obligations 3,724,878 429,966 2,244,820 839,022 211,070
Trust preferred securities 252,780 - - - 252,780
Notes payable 337,700 225,802 44,800 43,471 23,627
Operating leases 135,562 37,929 55,357 30,605 11,671
- 57 -
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 one month on June 30,
2006.
- 58 -
The following tables summarize the Company's interest rate sensitive instruments
as of June 30, 2006 and December 31, 2005:
June 30, 2006
--------------------------
Carrying Estimated
Amount Fair Value
------------ ------------
Assets:
Mortgage-backed securities $ 9,299,224 $ 9,299,224
Derivative assets (1) 139,397 192,948
Mortgage loans held for sale, net 1,243,702 1,252,099
Mortgage loans held for investment, net 5,337,138 5,414,804
Mortgage servicing rights 434,173 434,173
Liabilities:
Reverse repurchase agreements $ 8,939,786 $ 8,938,826
Collateralized debt obligations 3,724,878 3,725,364
Derivative liabilities 3,280 3,280
December 31, 2005
--------------------------
Carrying Estimated
Amount Fair Value
------------ ------------
Assets:
Mortgage-backed securities $10,602,104 $10,602,104
Derivative assets (1) 44,594 96,176
Mortgage loans held for sale, net 2,208,749 2,224,234
Mortgage loans held for investment, net 3,479,721 3,529,844
Mortgage servicing rights 319,671 320,827
Liabilities:
Reverse repurchase agreements $ 9,806,144 $ 9,805,640
Collateralized debt obligations 1,057,906 1,057,906
Derivative liabilities 16,773 16,773
(1) Derivative assets includes interest rate lock commitments ("IRLCs") to
fund mortgage loans. The carrying value excludes the value of the mortgage
servicing rights ("MSRs") attached to the IRLCs in accordance with SEC SAB
No. 105. The fair value includes the value of MSRs.
- 59 -
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:
June 30, 2006
--------------------------------------------
-100 -50 +50 +100
Basis Basis Basis Basis
(In thousands) Points Points Points Points
-------- -------- -------- --------
Changes in fair value of mortgage-backed securities, net of the
related financing and hedges $(22,864) $ (2,514) $(12,216) $(35,057)
Changes in fair value of mortgage loans held for sale and
interest rate lock commitments, net of the related financing
and hedges (24,108) (9,610) (3,226) (11,377)
Changes in fair value of mortgage loans held for investment, net
of the related financing and hedges 4,177 2,357 (4,227) (10,656)
Changes in fair value of mortgage servicing rights, net of the
related financing (36,581) (14,411) 6,217 9,477
-------- -------- -------- --------
Net change $(79,376) $(24,178) $(13,452) $(47,613)
======== ======== ======== ========
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 second 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 second quarter of 2006.
- 60 -
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 had sought to recover insurance proceeds paid
in connection with certain of those claims, along with applicable fines and
penalties. In May 2006, the Company paid $845,000 to settle this claim. In the
settlement agreement, the Company specifically denied that it had knowledge of
any wrongdoing that was alleged to have occurred at Columbia's Bensalem,
Pennsylvania office prior to the Company's acquisition of Columbia.
ITEM 1A.
RISK FACTORS
There have been no material changes during the quarter ended June 30, 2006 to
the risk factors previously disclosed in the "Risk Factors" section of the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2005.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the quarter ended June 30, 2006, the Company did not issue any securities
that were not registered under the Securities Act of 1933, as amended (the
"Securities Act").
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
- 61 -
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's 2006 Annual Meeting of Stockholders held on June 20, 2006, the
following actions were voted upon by the Company's common stockholders of record
as of May 16, 2006 (on which date there were 50,059,235 shares of the Company's
common stock issued and outstanding), which are described in greater detail in
the Company's Definitive Proxy Statement on Schedule 14A filed with the SEC on
May 1, 2006:
Proposal Votes For Votes Against Votes
Abstained
-------- --------- ------------- ---------
To elect each of C. Cathleen
Raffaeli and Kristian R.
Salovaara to the Board of
Directors of the Company, each,
to serve as a Class I director
for a term of approximately
three years expiring at the
2009 Annual Meeting of
Stockholders, and in each case
until their respective
successors are duly
elected and qualify.
C. Cathleen Raffaeli 46,922,128 -- 161,733
Kristian R. Salovaara 46,915,799 -- 168,062
To ratify Deloitte & Touche LLP
as the Company's independent
auditors for the year ending
December 31, 2006. 46,803,371 248,196 32,292
Each of the above proposals was approved by the Company's stockholders.
ITEM 5.
OTHER INFORMATION
None.
- 62 -
ITEM 6.
EXHIBITS
The following exhibits are filed with this Quarterly Report on Form 10-Q:
Exhibit No. Description
----------- -----------
10.1 -- Whole Loan Purchase and Sale Agreement, dated as of
June 26, 2006, by and among American Home Mortgage
Corp., American Home Mortgage Investment Corp.,
American Home Mortgage Servicing, Inc., Aspen
Funding Corp., Gemini Securitization Corp., LLC and
Newport Funding Corp.
10.1.2 -- Whole Loan Custodial Agreement, dated as of June 26,
2006, by and among American Home Mortgage Corp.,
American Home Mortgage Investment Corp., American
Home Mortgage Servicing, Inc., Aspen Funding Corp.,
Gemini Securitization Corp., LLC, Newport Funding
Corp. and Deutsche Bank National Trust Company.
31.1 -- Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) or 15(d)-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 -- Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) or 15(d)-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 -- Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 -- Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- 63 -
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: August 9, 2006 By: /s/ Michael Strauss
------------------------------------
Michael Strauss
Chairman, Chief Executive Officer
and President
Date: August 9, 2006 By: /s/ Stephen A. Hozie
-----------------------------------
Stephen A. Hozie
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
- 64 -
INDEX TO EXHIBITS
Exhibit No. Description
----------- -----------
10.1 -- Whole Loan Purchase and Sale Agreement, dated as of
June 26, 2006, by and among American Home Mortgage
Corp., American Home Mortgage Investment Corp.,
American Home Mortgage Servicing, Inc., Aspen
Funding Corp., Gemini Securitization Corp., LLC and
Newport Funding Corp.
10.1.2 -- Whole Loan Custodial Agreement, dated as of June 26,
2006, by and among American Home Mortgage Corp.,
American Home Mortgage Investment Corp., American
Home Mortgage Servicing, Inc., Aspen Funding Corp.,
Gemini Securitization Corp., LLC, Newport Funding
Corp. and Deutsche Bank National Trust Company.
31.1 -- Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) or 15(d)-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 -- Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) or 15(d)-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 -- Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 -- Certification of Chief Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- 65 -