10-Q 1 am677419-10q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2003 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 000-27081 AMERICAN HOME MORTGAGE HOLDINGS, INC. ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) Delaware 13-4066303 ------------------------------- ------------------------------------ (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 520 Broadhollow Road, Melville, NY 11747 --------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (516) 949-3900 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]. As of November 10, 2003, 17,396,006 shares of the registrant's Common Stock, $0.01 par value, were outstanding. AMERICAN HOME MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES FORM 10-Q INDEX PART I-FINANCIAL INFORMATION Item 1. Interim Condensed Consolidated Financial Statements Interim Condensed Consolidated Balance Sheets (unaudited) - September 30, 2003 and December 31, 2002 ...................... 1 Interim Condensed Consolidated Statements of Income (unaudited) -Three and nine months ended September 30, 2003 and 2002 ...... 2 Interim Condensed Consolidated Statements of Cash Flows (unaudited) - Nine months ended September 30, 2003 and 2002 ... 3 Notes to Interim Condensed Consolidated Financial Statements (unaudited) ................................................... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................. 13 Item 3. Quantitative and Qualitative Disclosures about Market Risk ........ 25 Item 4. Controls and Procedures ........................................... 26 PART II-OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds ......................... 27 Item 6. Exhibits and Reports on Form 8-K .................................. 27 SIGNATURES EXHIBITS ITEM 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AMERICAN HOME MORTGAGE HOLDINGS, INC. INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) (Unaudited) ------------------------------------------------------------------------------------------------------

See Notes to Interim Condensed Consolidated Financial Statements. -1- AMERICAN HOME MORTGAGE HOLDINGS, INC. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data) (Unaudited) ----------------------------------------------------------------------------------------------------------------------------------

See Notes to Interim Condensed Consolidated Financial Statements. -2- AMERICAN HOME MORTGAGE HOLDINGS, INC. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) --------------------------------------------------------------------------------------------------------

See Notes to Interim Condensed Consolidated Financial Statements. -3- AMERICAN HOME MORTGAGE HOLDINGS, INC. NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (Unaudited) NOTE 1 - BASIS OF PRESENTATION The accompanying unaudited interim condensed consolidated financial statements of American Home Mortgage Holdings, Inc. ("American Home") and its subsidiaries, American Home Mortgage Corp. ("AHM") and Columbia National, Incorporated ("Columbia") (collectively, the "Company"), reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of the interim periods presented. All such adjustments are of a normal recurring nature. All intercompany accounts and transactions have been eliminated. Operating results for the nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the full year ended December 31, 2003. Certain prior year balances have been reclassified to conform with current year presentation. The unaudited interim condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 2002, included in the Company's Annual Report on Form 10-K for the year then ended. NOTE 2 - EARNINGS PER SHARE Basic earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding, assuming all potential dilutive shares of common stock were issued.

An aggregate of approximately 35,000 and 165,000 employee stock options for the three months ended September 30, 2003 and 2002, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive. An aggregate of approximately 137,000 and 85,000 employee stock options for the nine months ended September 30, 2003 and 2002, respectively, were not included in the diluted earnings per share calculation because their effect would have been anti-dilutive. -4- NOTE 3- ACQUISITIONS Effective June 13, 2002, the Company acquired Columbia National, Incorporated ("Columbia"), a Maryland corporation. In consideration of the acquisition, the shareholders of Columbia received $37 million in cash. Prior to the acquisition, Columbia was an independent mortgage lender based in Columbia, Maryland. Columbia now operates as a wholly-owned subsidiary of American Home. Columbia engages in the origination, sale and servicing of residential first mortgage loans. The following table summarizes the required disclosures of the pro forma combined entity, as if the merger occurred at the beginning of the year for the nine months ended September 30, 2002: Nine Months Ended September 30, 2002 ------------------ Revenue $184,231 Income before income taxes and minority interest 44,346 Net income 27,166 Earnings per share - basic $ 1.97 Earnings per share - diluted $ 1.91 In February 2003, the Company purchased the retail mortgage lending branches of Principal Residential Mortgage, Inc. (the "Principal Branches"). The Company paid $2.4 million in cash for the current application pipeline and the assets of the Principal Branches consisting of 75 branches in 21 states. In June 2003, the Company purchased the retail, wholesale and internet mortgage lending branches of American Mortgage LLC (the "American Mortgage Branches"). The Company paid $1.6 million in cash and received the current application pipeline of the American Mortgage Branches including $550 million of locked loan applications. On July 12, 2003, American Home entered into a definitive agreement and plan of merger (the "Merger Agreement") with Apex Mortgage Capital, Inc. ("Apex") and American Home Mortgage Investment Corp. (formerly called AHM New Holdco, Inc.), a direct, wholly-owned subsidiary of American Home ("AHM Investment Corp."). Under the Merger Agreement, Apex will merge with and into AHM Investment Corp., with AHM Investment Corp. emerging as the surviving corporation. Prior to the merger, American Home will engage in an internal reorganization pursuant to which American Home will merge with and into AHM Merger Sub, Inc., a wholly-owned subsidiary of AHM Investment Corp. created for the purpose of effectuating the reorganization. As a result, AHM Investment Corp. will become the new parent company and will own 100% of the capital stock of American Home. As a result of the reorganization, each outstanding share of common stock of American Home will be converted into one share of common stock of AHM Investment Corp. At the effective time of the merger, each share of common stock of Apex issued and outstanding immediately prior to the effective time of the merger will be converted automatically into and become exchangeable for a number of shares of common stock of AHM Investment Corp. equal to 107.5% of Apex's book value per share, subject to a collar adjustment, as more fully described in the Merger Agreement. The merger is subject to various conditions, including, among other things, regulatory consents and approval by the stockholders of American Home and Apex. A copy of the Merger Agreement has been filed as Exhibit 2.1 to the Form 8-K filed by American Home on July 14, 2003. In addition, AHM Investment Corp. filed a Registration Statement on Form S-4 (Registration Statement No. 333-107545) with the Securities and Exchange Commission to register the shares of common stock of AHM Investment Corp. issuable in connection with the reorganization and the merger. The Registration Statement includes a joint proxy statement/prospectus that has been sent to the stockholders of American Home and Apex. -5- NOTE 4 - DERIVATIVE INVESTMENTS AND HEDGING ACTIVITIES The following table summarizes derivative assets and liabilities at September 30, 2003 and December 31, 2002: September 30, December 31, 2003 2002 ------------- ------------ Derivative Assets: Interest rate lock commitments $ 35,269 $ 29,346 Options on treasury future contracts - 725 -------- -------- Derivative assets $ 35,269 $ 30,071 ======== ======== Derivative Liabilities: Forward delivery contracts - loan commitments $ 11,904 $ 7,204 Forward delivery contracts - loans held for sale(1) 5,533 1,866 -------- -------- Derivative liabilities $ 17,437 $ 9,070 ======== ======== (1) This amount is included in loans held for sale. At September 30, 2003, the notional amount of forward delivery commitments amounted to approximately $2.1 billion. These 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 balance sheet was a $512 thousand gain as of September 30, 2003. NOTE 5 - MORTGAGE SERVICING RIGHTS Mortgage servicing rights ("MSR") activity for the three months and nine months ended September 30, 2003 was as follows: Three Months Ended Nine Months Ended September 30, 2003 September 30, 2003 ------------------ ------------------ Mortgage Servicing Rights: Balance at beginning of period $ 104,775 $ 119,225 Additions 27,711 43,316 Amortization (14,903) (44,958) ------------------ ----------------- Balance at end of period $ 117,583 $ 117,583 ------------------ ----------------- Impairment Allowance: Balance at beginning of period $ (22,387) $ (10,202) Impairment recovery (provision) 7,825 (4,360) ------------------ ----------------- Balance at end of period $ (14,562) $ (14,562) ------------------ ----------------- Mortgage servicing rights, net $ 103,021 $ 103,021 ================== ================= -6- Aggregate Amortization Expense ------------------------------ Nine months ended September 30, 2003 $ 44,958 Estimated Amortization Expense ------------------------------ Twelve months ended September 30, 2004 26,426 Twelve months ended September 30, 2005 19,492 Twelve months ended September 30, 2006 14,547 Twelve months ended September 30, 2007 11,159 Twelve months ended September 30, 2008 8,751 Thereafter 37,208 On a quarterly basis, the Company reviews MSRs for impairment based on risk strata. The MSRs are stratified based on the predominant risk characteristics of the underlying loans. The Company's predominant risk characteristic is interest rate. A valuation allowance is recognized for MSRs that have an amortized balance in excess of the estimated fair value for the individual risk stratification. The estimated fair value of MSRs is determined by obtaining a market valuation from an independent MSR broker. To determine the market value of MSRs, the MSR broker uses a valuation model which incorporates assumptions relating to the estimate of the cost of servicing the loan, a discount rate, a float value, an inflation rate, ancillary income per loan, prepayment speeds and default rates that market participants use for similar MSRs. Market assumptions are held constant over the life of the portfolio. The significant assumptions used in estimating the fair value of MSRs at September 30, 2003 and December 31, 2002 were as follows: September 30, 2003 December 31, 2002 ------------------------------------------------------------ ----------------- Weighted average prepayment speed (PSA) 504 620 Weighted average discount rate 9.77% 10.13% Weighted average default rate 6.77% 9.00% NOTE 6 - GOODWILL The changes in the carrying amount of goodwill for the nine months ended September 30, 2003 are as follows: Balance as of December 31, 2002 $ 50,932 Earnouts from previous acquisitions 3,998 -------- Balance as of September 30, 2003 $ 54,930 ======== NOTE 7- STOCK OPTION PLAN In 1999, the Company established the 1999 Omnibus Stock Incentive Plan (the "Plan"). Pursuant to the Plan, employees, officers and directors are offered the opportunity to acquire the Company's common stock through the grant of options and the award of shares of restricted stock under the Plan. The total number of shares that may be optioned or awarded under the Plan is 2,250,000 shares of common stock. The Plan provides for the granting of options at the fair market value at the date of grant. The options issued generally vest 50% on the two-year -7- anniversary of the grant date and 50% on the three-year anniversary of the grant date and expire ten years from the grant date. The Company has elected to follow Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its employee stock options and awards. Under APB No. 25, no compensation expense is recognized when the exercise prices of the options equals or exceeds the fair value (market price) of the underlying stock on the date of grant. The Plan is a compensatory stock option plan. There was no intrinsic value of the options granted, as the exercise price was equal to the quoted market price at the grant date. No compensation cost has been recognized for the nine months ended September 30, 2003 and 2002. Under the Plan, the Company awarded 15,000, 98,210 and 50,001 shares of restricted stock during 2003, 2002 and 1999, respectively. (No shares of restricted stock were awarded in 2000 or 2001.) During the three months and nine months ended September 30, 2003, the Company recognized compensation expense of $140 thousand and $385 thousand, respectively, relating to shares of restricted stock. At September 30, 2003, 63,958 shares of restricted stock are vested. In general, unvested shares of restricted stock are forfeited upon the recipient's termination of employment. Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), requires the Company to disclose pro forma information regarding option grants made to its employees. SFAS No. 123 specifies certain valuation techniques that produce estimated compensation charges for purposes of valuing stock option grants. These amounts have not been included in the Company's interim condensed consolidated statements of income, in accordance with APB No. 25. If these amounts were included, the Company's pro forma net income and the related basic and diluted earnings per share would have been as follows: Three Months Ended September 30, Nine Months Ended September 30, 2003 2002 2003 2002 -------------- ---------------- -------------- --------------- Net income, as reported $ 18,694 $ 12,772 $ 61,883 $ 25,976 Less: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 180 170 466 470 -------- -------- -------- -------- Pro forma net income $ 18,514 $ 12,602 $ 61,417 $ 25,506 ======== ======== ======== ======== Earnings per share: Basic - as reported $ 1.08 $ 0.78 $ 3.64 $ 1.88 Basic - pro forma $ 1.07 $ 0.77 $ 3.61 $ 1.85 Diluted - as reported $ 1.06 $ 0.76 $ 3.57 $ 1.83 Diluted - pro forma $ 1.05 $ 0.75 $ 3.54 $ 1.80

-8- There were 40,000 and 214,376 options granted during the three months and nine months ended September 30, 2003. The weighted average fair value of options granted during the three months and nine months ended September 30, 2003 was $5.44 and $4.62, respectively. The fair value of the options granted was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the grants: Dividend yield 3.0% Expected volatility 49.7% Risk-free interest rate 5.0% Expected life 3 years NOTE 8 - SEGMENTS The Company has two segments, the Loan Production Segment and the Loan Servicing Segment. The Loan Production Segment originates mortgage loans through the Company's retail and Internet branches and loans sourced through mortgage brokers (wholesale channel). The Loan Servicing Segment includes investments in mortgage servicing rights as well as servicing operations primarily for other financial institutions. The Loan Servicing Segment was immaterial prior to the acquisition of Columbia in June 2002 and thus the Loan Servicing Segment results are included in the Loan Production Segment results in prior periods. -9- Three Months Ended September 30, Nine Months Ended September 30, 2003 2002 2003 2002 ---------- ---------- --------- ------------ Loan Production Segment Revenues: Gain on sales of mortgage loans $ 105,577 $ 71,204 $ 323,070 $ 136,964 Interest income - net 13,938 7,803 39,081 14,881 Other 1,423 953 5,592 1,953 --------- -------- --------- --------- Total revenues 120,938 79,960 367,743 153,798 Expenses: Salaries, commissions and benefits - net 61,902 34,187 159,027 66,993 Occupancy and equipment 7,220 4,655 19,338 10,420 Data processing and communications 3,660 2,298 9,437 5,379 Office supplies and expenses 3,362 1,742 9,526 4,017 Marketing and promotion 3,229 1,856 8,822 5,408 Travel and entertainment 3,103 1,305 7,977 2,903 Professional fees 2,118 1,455 5,318 3,308 Other 4,165 2,534 13,851 4,879 --------- -------- --------- --------- Operating expenses 88,759 50,032 233,296 103,307 --------- -------- --------- --------- Net income before income taxes and minority interest in income of consolidated joint ventures 32,179 29,928 134,447 50,491 Income taxes 12,873 11,894 54,736 19,169 Minority interest in income of consolidated joint ventures 190 294 945 594 --------- -------- --------- --------- Net income $ 19,116 $ 17,740 $ 78,766 $ 30,728 ========= ======== ========= ========= September 30, 2003 December 31, 2002 ------------------ ------------------- Segment assets $ 1,868,366 $ 997,826 =========== ===========

-10- Three Months Ended September 30, Nine Months Ended September 30, 2003 2002 2003 2002 ---------- ----------- ---------- ----------- Loan Servicing Segment Revenues: Servicing revenue $ 6,809 $ 8,730 $ 23,159 $ 10,299 Gain on Ginnie Mae early buy-out sales 2,815 2,877 9,653 2,877 Amortization and impairment (7,078) (16,809) (49,318) (17,657) --------- -------- --------- --------- Net loan servicing fees (loss) 2,546 (5,202) (16,506) (4,481) Interest expense - net (1,572) (1,046) (5,311) (1,195) --------- -------- --------- --------- Total revenues 974 (6,248) (21,817) (5,676) Expenses: Salaries and benefits - net 796 771 2,524 905 Occupancy and equipment 120 83 304 105 Data processing and communications 22 45 73 48 Office supplies and expenses 195 234 901 280 Marketing and promotion 3 4 14 4 Travel and entertainment 19 2 23 2 Professional fees 201 73 514 96 Other 798 887 2,445 1,015 --------- -------- --------- --------- Operating expenses 2,154 2,099 6,798 2,455 --------- -------- --------- --------- Net loss before income benefit (1,180) (8,347) (28,615) (8,131) Income tax benefit (758) (3,379) (11,732) (3,379) --------- -------- --------- --------- Net loss $ (422) $ (4,968) $ (16,883) $ (4,752) ======= ======== ========== ========= September 30, 2003 December 31, 2002 ------------------ ----------------- Segment assets $ 149,286 $ 121,224 ========== =========

NOTE 9 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued FIN No. 46, "Consolidation of Variable Interest Entities, a Clarification of Accounting Research Bulletin (ARB) No. 51, Consolidated Financial Statements" ("FIN No. 46"), which addresses consolidation by business enterprises of variable interest entities ("VIEs") when specific characteristics are met. FIN No. 46 clarifies the application of ARB No. 51 to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The provisions of FIN No. 46 were effective February 1, 2003 for new and modified VIEs and July 1, 2003 for other entities. The implementation of FIN No. 46 did not have a material impact on the Company's consolidated financial statements. On April 30, 2003, the Financial Accounting Standards Board issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and -11- for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The implementation of SFAS No. 149 did not have a material impact on the Company's consolidated financial statements. On May 15, 2003, the Financial Accounting Standards Board issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. Most of the guidance in SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The implementation of SFAS No. 150 did not have a material impact on the Company's consolidated financial statements. -12- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL American Home is a mortgage banking company engaged in two business segments: originating residential mortgage loans (the "Loan Production Segment") and servicing residential mortgage loans (the "Loan Servicing Segment"). The Loan Production Segment makes home loans to consumers and then resells those home loans into the secondary mortgage market. As of September 30, 2003, lending was conducted through 267 loan production offices located in 34 states across the country, through mortgage brokers and through two Internet call centers that serve customers located in all 50 states. American Home offers a broad array of mortgage products, but primarily makes high-credit-quality loans; more than 80% of its originations are eligible for Fannie Mae, Freddie Mac or Ginnie Mae, while most of the balance of its loans are jumbo loans for borrowers with FICO credit scores above 660. The Loan Servicing Segment administers existing mortgage loans owned by Fannie Mae, Freddie Mac, Ginnie Mae, the State of Maryland Housing Authority and other institutional mortgage holders. Administrative responsibilities include responding to customers inquiring about their loans, collecting mortgage payments, ensuring that proper homeowners' insurance is in place with respect to the underlying collateral securing the mortgage loans and recovering and reselling collateral on defaulted loans. The Loan Servicing Segment was immaterial prior to the acquisition of Columbia in June 2002 and thus the Loan Servicing Segment results are included in the Loan Production Segment results in prior periods. Net income for the three months ended September 30, 2003 was $18.7 million or $1.06 per share on a diluted basis, compared to $12.8 million or $0.76 per share for the same period in 2002. Net income for the nine months ended September 30, 2003 was $61.9 million or $3.57 per share on a diluted basis, compared to $26.0 million or $1.83 per share for the same period in 2002. Loan originations increased 94% in the three months ended September 30, 2003, totaling $7.0 billion (including $1.4 billion, $386 million and $929 million attributable to Columbia, the Principal Branches and the American Mortgage Branches, respectively) compared to $3.6 billion in the same period in 2002. Loan originations increased 132% in the nine months ended September 30, 2003, totaling $17.5 billion (including $3.6 billion, $798 million and $1.2 billion attributable to Columbia, the Principal Branches and the American Mortgage Branches, respectively), compared to $7.6 billion in the same period in 2002. Critical Accounting Estimates Mortgage Loans Held for Sale - Mortgage loans held for sale represent mortgage loans originated and held pending sale to interim and permanent investors. The interim investor is a counterparty that acquires title to the loans and the associated forward loan sale commitments ("FLSCs") prior to the FLSC date with the permanent investor. Under the purchase and sale agreement with the interim investor, the Company assigns title to the loans and its rights and obligations to sell the loans to the permanent investor under the FLSC at the agreed upon delivery terms, and the interim investor then sells the loans to the permanent investors. There is no distinction in the timing of sale recognition between sales to interim and permanent investors. The hedged mortgage loans are carried at fair value as determined by outstanding commitments from investors or current investor yield requirements calculated on the aggregate loan basis, less an estimate of the costs to complete the loan, less the deferral of fees and points received, plus the deferral of certain direct loan origination costs. The activities to complete the loan include the pursuit of minor documentation that is required to complete an originated loan and the completion of loan files in accordance with investor guidelines for the loans to be salable with perfected -13- security interests. These activities do not impact the timing of recognition of the loan, as the Company recognizes the loans as assets upon distribution of the loan funds. The unhedged mortgage loans are carried at the lower of cost or fair value as determined by outstanding commitments from investors or current investor yield requirements calculated on the aggregate loan basis, less the deferral of fees and points received, plus the deferral of certain direct loan origination costs. Gains or losses on such sales are recognized at the time legal title transfers to the investor and are based upon the difference between the sales proceeds from the final investor and the adjusted book value of the loan sold. Mortgage Servicing Rights - When the Company acquires servicing assets through either purchase or origination of loans and sells or securitizes those loans with servicing assets retained, the total cost of the loans is allocated to the servicing assets and the loans (without the servicing assets) based on their relative fair values. The amount attributable to the servicing assets is capitalized as mortgage servicing rights ("MSRs") on the consolidated balance sheets. The MSRs are amortized to expense in proportion to and over the period of estimated net servicing income. The MSRs are assessed for impairment based on the fair value of those assets. The Company estimates fair value of the servicing assets by obtaining market information from one of the primary mortgage servicing rights brokers. When the book value of capitalized servicing assets exceeds their fair value, impairment is recognized through a valuation allowance. In determining impairment, the mortgage servicing portfolio is stratified by the predominant risk characteristic of the underlying mortgage loans. The Company has determined that the predominant risk characteristic is the interest rate on the underlying loan. The Company measures impairment for each stratum by comparing the estimated fair value to the recorded book value. Temporary impairment is recorded through a valuation allowance and amortization expense in the period of occurrence. In addition, the Company periodically evaluates its MSRs for other than temporary impairment to determine if the carrying value before the application of the valuation allowance is recoverable. The Company receives a sensitivity analysis of the estimated fair value of its MSRs under instantaneous interest rate shocks from an independent mortgage servicing rights broker. The Company used an increase of 200 basis points to the mortgage rates to have the broker determine the estimated fair value of the MSRs. The fair value estimate included changes in market assumptions that would be expected given the increase in mortgage rates (e.g., prepayment speeds would be lower). The Company believes this 200-basis-point increase in mortgage rates to be an appropriate threshold for determining the recoverability of the temporary impairment because that size rate increase is foreseeable and consistent with historical mortgage rate fluctuations. When using this instantaneous change in rates, if the fair value of the strata of MSRs is estimated to increase to a point where all of the impairment would be recovered, the impairment is considered to be temporary. When the Company determines that a portion of the MSRs is not recoverable, the related MSRs and the previously established valuation allowance are correspondingly reduced to reflect other than temporary impairment. Derivative Financial Instruments - The Company has developed risk management programs and processes designed to manage market risk associated with normal business activities. Risk Management of the Mortgage Pipeline. The Company's 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. Effective with the adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, the Company classifies and accounts for the IRLCs as free-standing derivatives. Accordingly, IRLCs are recorded at fair value with changes in fair value recorded to current earnings. The fair value of the IRLCs is determined by an estimate of the ultimate gain on sale of the loans net of estimated net costs remaining to originate the loan. The Company uses 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. Risk Management of 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 -14- 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, 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 transactions. 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 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. 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. Goodwill - Goodwill represents the excess purchase price over the fair value of net assets stemming from business acquisitions, including identifiable intangibles. The Company will test for impairment annually or more frequently if events or circumstances indicate that an asset may be impaired. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," 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 includes a forecast of the expected future loan originations and the related revenues and expense. These cash flows are discounted using a rate that is estimated to be a weighted-average cost of capital for similar mortgage companies. The Company further tests to ensure that the fair value of all its business units does not exceed its total market capitalization. -15- RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the operating results of the Company's Loan Production Segment, including percentage of total revenues. Any trends illustrated in the following table are not necessarily indicative of future results. Loan Production Segment Three Months Ended September 30, Nine Months Ended September 30, 2003 2002 2003 2002 --------------- ------------------ ----------------- ------------------ (Dollars in millions) RESULTS OF OPERATIONS: Gain on sales of mortgage loans....... $105.6 87.3% $ 71.2 89.0% $323.1 87.9% $ 137.0 89.0% Interest income, net.................. 14.0 11.5 7.8 9.8 39.1 10.6 14.9 9.7 Other................................. 1.4 1.2 0.9 1.2 5.6 1.5 1.9 1.3 ------ ------ ------ ------- Total revenues................... 121.0 100.0 79.9 100.0 367.8 100.0 153.8 100.0 ------ ------ ------ ------- Salaries, commissions and benefits, net................................ 61.9 51.2 34.2 42.8 159.0 43.2 67.0 43.6 Occupancy and equipment............... 7.2 6.0 4.6 5.8 19.3 5.2 10.4 6.8 Data processing and communications............. 3.7 3.0 2.3 2.9 9.5 2.6 5.4 3.5 Office supplies and expenses.......... 3.4 2.8 1.7 2.2 9.6 2.6 4.0 2.6 Marketing and promotion............... 3.2 2.7 1.8 2.3 8.8 2.4 5.4 3.5 Travel and entertainment.............. 3.1 2.6 1.3 1.6 8.0 2.2 2.9 1.9 Professional fees..................... 2.1 1.7 1.5 1.8 5.3 1.4 3.3 2.1 Other................................. 4.2 3.4 2.6 3.2 13.8 3.8 4.9 3.2 ------ ------ ------ ------- Total expenses................... 88.8 73.4 50.0 62.6 233.3 63.4 103.3 67.2 ------ ------ ------ ------- Income before income taxes and minority interest in income of consolidated joint ventures........ 32.2 26.6 29.9 37.4 134.5 36.6 50.5 32.8 Income taxes.......................... 12.9 10.6 11.9 14.8 54.8 14.9 19.2 12.4 Minority interest in income of consolidated joint ventures........ 0.1 0.2 0.3 0.4 0.9 0.3 0.6 0.4 ------ ------ ------ ------- Net income............................ $19.2 15.8% $ 17.7 22.2% $ 78.8 21.4% $ 30.7 20.0% ===== ====== ====== =======

-16- The following table sets forth, for the periods indicated, the operating results of the Company's Loan Servicing Segment. Any trends illustrated in the following table are not necessarily indicative of future results. The Loan Servicing Segment was immaterial prior to the acquisition of Columbia in June of 2002 and thus the Loan Servicing Segment results are included in the Loan Production Segment results in prior periods. Loan Servicing Segment Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ------- ------- ------- ------- (Dollars in millions) RESULTS OF OPERATIONS: Loan servicing fees....................................... $ 6.7 $ 8.7 $ 23.1 $ 10.3 Gain on Ginnie Mae early buy-out sales.................... 2.9 2.9 9.7 2.9 Amortization and impairment of mortgage servicing rights.. (7.0) (16.8) (49.3) (17.7) ------ ------- ------- ------ Net loan servicing fees (loss)........................ 2.6 (5.2) (16.5) (4.5) ------ ------- ------- ------ Interest expense, net..................................... (1.6) (1.1) (5.3) (1.2) ------ ------- ------- ------ Total revenues....................................... 1.0 (6.3) (21.8) (5.7) ------ ------- ------- ------ Salaries and benefits, net................................ 0.8 0.8 2.5 0.9 Occupancy and equipment................................... 0.1 0.1 0.3 0.1 Data processing and communications........................ 0.1 - 0.1 - Office supplies and expenses.............................. 0.2 0.2 0.9 0.3 Professional fees......................................... 0.2 - 0.5 0.1 Other..................................................... 0.8 0.9 2.5 1.0 ------ ------- ------- ------ Total expenses....................................... 2.2 2.0 6.8 2.4 ------ ------- ------- ------ Net loss before income benefit............................ (1.2) (8.3) (28.6) (8.1) Income tax benefit........................................ (0.8) (3.4) (11.7) (3.4) ------ ------- ------- ------ Net loss.................................................. $ (0.4) $ (4.9) $ (16.9) $ (4.7) ====== ======= ======= ======

-17- THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2002 Loan Production Segment REVENUES The Loan Production Segment total revenues for the quarter ended September 30, 2003, were $121.0 million compared to $79.9 million in 2002, an increase of $41.1 million, or 51.2%. The increase was a result of increases in gain on sales of mortgage loans, net interest income and other income. Gain on sales of mortgage loans increased to $105.6 million for the third quarter of 2003 from $71.2 million for the third quarter of 2002, an increase of $34.4 million, or 48.3%. In general, the increase was the result of higher loan originations, sales and pipeline values, as well as improved margins. The higher volumes were a result of lower interest rates, which generated higher purchase and refinance volumes from existing locations, and the acquisition of the Principal Branches and the American Mortgage Branches. Interest income, net, increased to $14.0 million for the third quarter of 2003 from $7.8 million for the third quarter of 2002, an increase of $6.2 million, or 78.6%. The increase resulted primarily from an increase in loans held for sale and an increase in the Company's interest rate spread on loans held for sale. Other revenue totaled $1.4 million for the third quarter of 2003 compared to $0.9 million for the third quarter of 2002, an increase of $0.5 million, or 49.3%. For the quarter ended September 30, 2003, other income primarily consists of revenue from title services. For the quarter ended September 30, 2002, other income primarily consists of volume incentive bonuses received from loan purchasers. EXPENSES Salaries, commissions and benefits increased to $61.9 million for the third quarter of 2003 from $34.2 million for the third quarter of 2002, an increase of $27.7 million, or 81.1%. The increase was largely due to increased staffing levels and overtime due to increased loan volumes, as well as the increase in loan officers due to the acquisition of the Principal Branches and the American Mortgage Branches. Occupancy and equipment expenses increased to $7.2 million for the third quarter of 2003 from $4.6 million for the third quarter of 2002, an increase of $2.6 million, or 55.1%. The increase in costs reflects the inclusion of expenses of the Principal Branches and the American Mortgage Branches, the opening of new community loan offices and greater depreciation charges as a result of the Company's increased investments in computer networks. Data processing and communication costs increased to $3.7 million for the third quarter of 2003 from $2.3 million for the third quarter of 2002, an increase of $1.4 million, or 59.3%. The increase was a result of the opening of new community loan offices and the inclusion of expenses of the Principal Branches and the American Mortgage Branches. Office supplies and expenses increased to $3.4 million for the third quarter of 2003 from $1.7 million for the third quarter of 2002, an increase of $1.7 million, or 93.0%. The increase was a result of the opening of new community loan offices and the inclusion of expenses of the Principal Branches and the American Mortgage Branches. Marketing and promotion expenses increased to $3.2 million for the third quarter of 2003 from $1.8 million for the third quarter of 2002, an increase of $1.4 million, or 74.0%. The increase was primarily due to increased loan volume and an increase in promotional expenses attributable to the acquisition of the Principal Branches. -18- Travel and entertainment expenses increased to $3.1 million for the third quarter of 2003 from $1.3 million for the third quarter of 2002, an increase of $1.8 million, or 137.8%. This increase was primarily due to the addition of new loan originators due to the acquisition of the Principal Branches and the American Mortgage Branches. Professional fees increased to $2.1 million for the third quarter of 2003 from $1.5 million for the third quarter of 2002, an increase of $0.6 million, or 45.6%. This increase was primarily due to the growth of the Company's business. Other expenses increased to $4.2 million for the third quarter of 2003 from $2.6 million for the third quarter of 2002, an increase of $1.6 million, or 64.4%. Insurance, indemnification and foreclosure costs, outside services, storage and moving expenses and licenses and permits increased as a result of the opening of new community offices and higher loan production. Income taxes increased to $12.9 million for the third quarter of 2003 from $11.9 million for the third quarter of 2002, an increase of $1.0 million, or 8.2%. Loan Servicing Segment The Loan Servicing Segment's total revenues for the quarter ended September 30, 2003, were $1.0 million, which included net loan servicing fees of $2.6 million and interest expense, net, of $1.6 million, compared to a loss of $6.3 million for the third quarter of 2002. Net loan servicing fees were $2.6 million for the third quarter of 2003 compared to a loss of $5.2 million for the third quarter of 2002. The net loan servicing fees for the third quarter of 2003 included amortization of $14.9 million and a temporary impairment recovery of $7.8 million, decreasing the impairment reserve to $14.6 million at September 30, 2003 from $22.4 million at June 30, 2003. The impairment recovery is due to an increase in the fair value of servicing rights attributable to a decrease in estimated future prepayment speeds. The amortization of $14.9 million is a result of slower than expected loan repayments. Total Loan Servicing Segment expenses are associated with the administration of the servicing portfolio acquired through the Columbia acquisition in June 2002. Income tax benefit decreased to $0.8 million for the third quarter of 2003 from $3.4 million for the third quarter of 2002, a decrease of $2.6 million, or 77.6%. -19- NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2002 Loan Production Segment REVENUES The Loan Production Segment total revenues for the nine months ended September 30, 2003, were $367.8 million compared to $153.8 million for the same period in 2002, an increase of $214.0 million, or 139.1%. The increase was a result of increases in gain on sales of mortgage loans, net interest income and other income. Gain on sales of mortgage loans increased to $323.1 million for the nine months ended September 30, 2003 from $137.0 million for the same period in 2002, an increase of $186.1 million, or 135.9%. In general, the increase was the result of higher loan originations, sales and pipeline values, as well as improved margins. The higher volumes were a result of lower interest rates, which generated higher purchase and refinance volumes from existing locations, and the acquisition of Columbia, the Principal Branches and the American Mortgage Branches. Interest income, net, increased to $39.1 million for the nine months ended September 30, 2003 from $14.9 million for the same period in 2002, an increase of $24.2 million, or 162.6%. The increase resulted primarily from an increase in loans held for sale and an increase in the Company's interest rate spread on loans held for sale. Other revenue totaled $5.6 million for the nine months ended September 30, 2003 compared to $1.9 million for the same period in 2002, an increase of $3.7 million, or 186.3%. For the nine months ended September 30, 2003, other income primarily includes fulfillment fees of $1.9 million and revenue from title services. Fulfillment fees of approximately $1.9 million represent non-recurring fees received from Principal Residential Mortgage, Inc. ("PRM") for loans closed by the Company on behalf of PRM. As part of the agreement to acquire the retail branches of PRM (the "Principal Branches"), the Company agreed to assume the costs incurred to close out PRM's application pipeline as of the date of the agreement on behalf of PRM for a per loan fee. For the nine months ended September 30, 2002, other income primarily consists of volume incentive bonuses received from loan purchasers. EXPENSES Salaries, commissions and benefits increased to $159.0 million for the nine months ended September 30, 2003 from $67.0 million for the same period in 2002, an increase of $92.0 million, or 137.4%. The increase was largely due to the inclusion of expenses of Columbia, increased staffing levels and overtime due to increased loan volumes, as well as the increase in loan officers due to the acquisition of the Principal Branches and the American Mortgage Branches. Occupancy and equipment expenses increased to $19.3 million for the nine months ended September 30, 2003 from $10.4 million for the same period in 2002, an increase of $8.9 million, or 85.6%. The increase in costs reflects the inclusion of expenses of Columbia, the Principal Branches and the American Mortgage Branches, the opening of new community loan offices and greater depreciation charges as a result of the Company's increased investments in computer networks. Data processing and communication costs increased to $9.5 million for the nine months ended September 30, 2003 from $5.4 million for the same period in 2002, an increase of $4.1 million, or 75.4%. The increase was a result of the opening of new community loan offices and the inclusion of expenses of Columbia, the Principal Branches and the American Mortgage Branches. Office supplies and expenses increased to $9.6 million for the nine months ended September 30, 2003 from $4.0 million for the same period in 2002, an increase of $5.6 million, or 137.1%. The increase was a result of the -20- opening of new community loan offices and the inclusion of expenses of Columbia, the Principal Branches and the American Mortgage Branches. Marketing and promotion expenses increased to $8.8 million for the nine months ended September 30, 2003 from $5.4 million for the same period in 2002, an increase of $3.4 million, or 63.1%. The increase was primarily due to increased loan volume and an increase in promotional expense attributable to the acquisition of the Principal Branches. Travel and entertainment expenses increased to $8.0 million for the nine months ended September 30, 2003 from $2.9 million for the same period in 2002, an increase of $5.1 million, or 174.8%. This increase was primarily due to the inclusion of expenses of Columbia and the addition of new loan originators due to the acquisition of the Principal Branches and the American Mortgage Branches. Professional fees increased to $5.3 million for the nine months ended September 30, 2003 from $3.3 million for the same period in 2002, an increase of $2.0 million, or 60.8%. This increase was primarily due to the inclusion of expenses of Columbia and the growth of the Company's business. Other expenses increased to $13.8 million for the nine months ended September 30, 2003 from $4.9 million for the same period in 2002, an increase of $8.9 million, or 183.9%. This increase includes $3.3 million for litigation expense relating to the settlement of a lawsuit against the Company. In addition, insurance, indemnification and foreclosure costs, outside services, storage and moving expenses and licenses and permits increased as a result of the inclusion of Columbia, the opening of new community offices and higher loan production. Income taxes increased to $54.8 million for the nine months ended September 30, 2003 from $19.2 million for the same period in 2002, an increase of $35.6 million, or 185.5%. Loan Servicing Segment The Loan Servicing Segment was immaterial prior to the acquisition of Columbia in June of 2002 and thus the Loan Servicing Segment results are included in the Loan Production Segment results in prior periods. The Loan Servicing Segment's total revenues for the nine months ended September 30, 2003, were a loss of $21.8 million, which included a net loan servicing fees loss of $16.5 million and interest expense, net, of $5.3 million, compared to a loss of $5.7 million for the same period in 2002. Net loan servicing fees was a loss of $16.5 million for the nine months ended September 30, 2003 compared to a loss of $4.5 million for the same period in 2002. The servicing losses in the nine months ended September 30, 2003 were a result of the reduction in interest rates since the acquisition of Columbia, which resulted in both faster actual prepayments and higher forecasted future prepayments than what were expected at the time of the acquisition. The loss for the nine months ended September 30, 2003 resulted primarily from amortization of $44.9 million and an additional temporary impairment provision of $4.4 million, increasing the impairment reserve to $14.6 million at September 30, 2003 from $10.2 million at December 31, 2002. The impairment provision is due to a reduction in the fair value of servicing rights attributable to an increase in estimated future prepayment speeds. The amortization of $44.9 million is a result of faster than expected loan repayments. Total Loan Servicing Segment expenses are associated with the administration of the servicing portfolio acquired through the Columbia acquisition in June 2002. Income tax benefit increased $8.3 million to $11.7 million for the nine months ended September 30, 2003 from $3.4 million for the same period in 2002. -21- LIQUIDITY AND CAPITAL RESOURCES To originate a mortgage loan, the Company draws against a $630 million pre-purchase facility with UBS Paine Webber ("Paine Webber"), a $450 million bank syndicated facility led by Residential Funding Corporation ("RFC"), a $450 million facility with CDC IXIS Capital Markets North America Inc. ("CDC"), a facility of $350 million with Morgan Stanley Bank ("Morgan Stanley") and a facility of $200 million with Credit Lyonnais. These facilities are secured by the mortgages owned by the Company and by certain of its other assets. Advances drawn under the facilities bear interest at rates that vary depending on the type of mortgages securing the advances. These loans are subject to sublimits, advance rates and terms that vary depending on the type of securing mortgages and the ratio of the Company's liabilities to its tangible net worth. The documents governing the Company's warehouse facilities contain a number of compensating balance requirements and restrictive financial and other covenants that, among other things, require the Company to maintain a minimum ratio of total liabilities to tangible net worth and maintain a minimum level of tangible net worth, liquidity, stockholders' equity and leverage ratios, as well as to comply with applicable regulatory and investor requirements. The facility agreements also contain covenants limiting the ability of the Company's subsidiaries to: o transfer or sell assets; and o create liens on the collateral, without obtaining the prior consent of the lenders, which consent may not be unreasonably withheld. These limits on its subsidiaries may in turn restrict American Home's ability, as the holding company, to pay cash or stock dividends on its stock. In addition, under the Company's warehouse facilities, the Company cannot continue to finance a mortgage loan that it holds if: o the loan is rejected as "unsatisfactory for purchase" by the ultimate investor and has exceeded its permissible 120-day warehouse period; o the Company fails to deliver the applicable mortgage note or other documents evidencing the loan within the requisite time period; o the underlying property that secures the loan has sustained a casualty loss in excess of 5% of its appraised value; or o the loan ceases to be an eligible loan (as determined pursuant to the applicable warehousing agreement). As of September 30, 2003, the Company's aggregate warehouse facility borrowings were $1.5 billion (including $24.5 million of borrowings under a working capital sub-limit) and its outstanding drafts payable were $49.0 million, compared to $728.5 million in borrowings under warehouse facilities (including $15.1 million of borrowings under a working capital sub-limit) and $42.6 million in drafts payable as of December 31, 2002. At September 30, 2003, the aggregate amount available for additional borrowings under the warehouse facilities was $550 million. At September 30, 2003, the Company's loans held for sale were $1.7 billion compared to $811.2 million at December 31, 2002. In addition to the Paine Webber, CDC, RFC, Morgan Stanley and Credit Lyonnais warehouse facilities, the Company has purchase and sale agreements with Paine Webber, Greenwich Capital Financial Products, Inc. and Fannie Mae. These agreements allow the Company to accelerate the sale of its mortgage loan inventory, resulting in a more effective use of the warehouse facility. The Company has a combined capacity up to $1.0 billion under these purchase and sale agreements. Amounts sold and being held under these agreements at September 30, 2003 and December 31, 2002 were $566 million and $801 million, respectively. At September 30, 2003, the amount -22- unused and available under these agreements was $304 million. These agreements are not committed facilities and may be terminated at the discretion of the counterparties. The Company makes 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, the Company may be required to repurchase the loans and indemnify the investor for damages caused by that breach. The Company has implemented strict procedures to ensure quality control and conformity to underwriting standards and minimize the risk of being required to repurchase loans. The Company has been required to repurchase loans it has sold from time to time; however, the liability for the fair value of the obligation is immaterial. The Company also has a $100 million term loan facility with a bank syndicate led by RFC, which the Company uses to finance its mortgage servicing rights. The term loan facility expires on May 28, 2004. Interest is based on a spread to the LIBOR and may be adjusted for earnings on escrow balances. At September 30, 2003 and December 31, 2002, borrowings under the Company's term loan were $64.6 million and $66.0 million, respectively. Cash and cash equivalents increased to $49.6 million at September 30, 2003, from $24.4 million at December 31, 2002. The Company's primary sources of cash and cash equivalents during the nine months ended September 30, 2003, were as follows: o $801.6 million increase in warehouse lines of credit; o $ 23.7 million increase in income taxes payable; and o $ 6.4 million increase in drafts payable. The Company's primary uses of cash and cash equivalents during the nine months ended September 30, 2003, were as follows: o $ 856.3 million net increase in mortgage loans held for sale; o $ 8.1 million to purchase furniture, and office and computer equipment; and o $ 6.3 million increase in accounts receivable. Commitments The Company had the following commitments (excluding derivative financial instruments) at September 30, 2003: Less Than After Total 1 Year 1 - 3 Years 4 - 5 Years 5 Years ---------- ---------- ----------- ----------- --------- (in thousands) Warehouse facilities......... $1,530,110 $1,530,110 $ - $ - $ - Operating leases............. 13,223 5,692 6,964 567 - Notes payable................ 66,430 65,240 314 191 685

-23- FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. The words "plan," "believe," "anticipate," "estimate," "expect," "objective," "may," "seek," "projection," "forecast," "goal" or similar words, or the negatives of those words, are intended to identify forward-looking statements. Such statements involve known and unknown risks and uncertainties that exist in the Company's operations and business environment that could render actual outcomes and results materially different than predicted. Specific factors that may cause such a difference include, but are not limited, to: general volatility of the capital markets; changes in the real estate market, interest rates or the general economy of the markets in which the Company operates; economic, technological or regulatory changes affecting the use of the Internet; changes in government regulations that are applicable to the mortgage banking business; potential fluctuations in the Company's operating results; and those risks and uncertainties discussed in filings made by the Company with the Securities and Exchange Commission. While the Company believes that its assumptions are reasonable at the time forward-looking statements are made, it cautions that it is impossible to predict the actual outcome of numerous factors and, therefore, readers should not place undue reliance on such statements. Forward-looking statements speak only as of the date they are made, and the Company undertakes no obligation to update such statements in light of new information, future events or otherwise. -24- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Movements in interest rates can pose a major risk to the Company in either a rising or declining interest rate environment. The Company depends on substantial borrowings to conduct its business. These borrowings are all done at variable interest rate terms which will increase as short term interest rates rise. Additionally, when interest rates rise, loans held for sale and any applications in process with locked-in rates decrease in value. To preserve the value of such loans or applications in process with locked-in rates, agreements are executed for mandatory loan sales to be settled at future dates with fixed prices. These sales take the form of forward sales of mortgage-backed securities. When interest rates decline, fallout may occur as a result of customers withdrawing their applications. In those instances, the Company may be required to purchase loans at current market prices to fulfill existing mandatory loan sale agreements, thereby incurring losses upon sale. The Company uses an interest rate hedging program to manage these risks. Through this program, mortgage-backed securities are purchased and sold forward and options are acquired on treasury futures contracts. In the event that the Company does not deliver into the forward delivery commitments or exercise its option contracts, the instruments can be settled on a net basis. Net settlement entails paying or receiving cash based upon the change in market value of the existing instrument. All forward delivery commitments and option contracts to buy securities are to be contractually settled within six 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 mortgage servicing rights. When interest rates decline, the loans underlying the mortgage servicing rights are generally expected to prepay faster, which reduces the market value of the mortgage servicing rights. 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 mortgage servicing rights. Lower mortgage rates generally reduce the fair value of the mortgage servicing rights, as increased prepayment speeds are highly correlated with lower levels of mortgage interest rates. The following table summarizes the Company's interest rate sensitive instruments: September 30, 2003 December 31, 2002 Notional Notional Amount Fair Value Amount Fair Value ------------------------------------------------------------- (in thousands) Interest rate lock commitments.......... $1,529,298 $35,269 $1,644,701 $29,346 Loans held for sale..................... 1,637,103 1,677,547 788,191 815,050 Mortgage servicing rights............... 7,785,171 103,021 8,541,790 109,023 Forward delivery commitments............ 2,085,719 (17,437) 1,763,450 (9,070) Option contracts to buy securities...... -- -- 150,000 725

The Company had total commitments to lend of $5.2 billion at September 30, 2003. -25- ITEM 4. CONTROLS AND PROCEDURES Based on an evaluation carried out, as of the end of the period covered by this report, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's 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")) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. As of the end of the period covered by this report, there have been no significant changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. -26- PART II-OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS The following is a description of the Company's securities that were not registered under the Securities Act of 1933, as amended (the "Securities Act"), which were sold during the quarter ended September 30, 2003. The Company acquired First Home Mortgage Corp. ("First Home") on June 30, 2000. In addition to the shares paid to former First Home shareholders as initial consideration, the Company is required to issue unregistered shares of common stock to the former shareholders as additional consideration under the earnout provisions of the merger agreement. On July 1, 2003, pursuant to these earnout provisions, the Company issued an aggregate of 3,998 shares of common stock to such shareholders as additional consideration. In addition, on August 15, 2003, the Company issued 9,172 shares of common stock to such shareholders. These securities were exempt from registration under Section 4(2) of the Securities Act because they were issued pursuant to the terms of a private transaction rather than through a public offering. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. The following exhibits are filed as part of this Quarterly Report on Form 10-Q: Exhibit 2.1 Agreement and Plan of Merger, dated as of July 12, 2003, by and among the Company, American Home Mortgage Investment Corp. (formerly called AHM New Holdco, Inc.) and Apex Mortgage Capital, Inc. Exhibit 2.2 Agreement and Plan of Reorganization, dated as of September 11, 2003, by and among the Company, American Home Mortgage Investment Corp. and AHM Merger Sub, Inc. Exhibit 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Exhibit 32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Exhibit 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. -27- (b) Reports on Form 8-K. During the fiscal quarter ended September 30, 2003, the Company filed a Current Report on Form 8-K on each of July 14, 2003 and September 10, 2003. The Current Report on Form 8-K filed on July 14, 2003, reported that on July 12, 2003, the Company entered into a definitive agreement and plan of merger to purchase Apex Mortgage Capital, Inc. The Current Report on Form 8-K filed on September 10, 2003, reported that on September 10, 2003, the Company announced that it had hired approximately 325 employees that formerly worked for Capitol Commerce Mortgage of Sacramento, California, and that the Company had hired Al Cristanty as its Senior Vice President, Wholesale Originations. -28- 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 HOLDINGS, INC. (Registrant) Date: November 14, 2003 By: /s/ Michael Strauss ---------------------------------- Michael Strauss Chief Executive Officer and President Date: November 14, 2003 By: /s/ Stephen A. Hozie ---------------------------------- Stephen A. Hozie Chief Financial Officer -29- INDEX TO EXHIBITS ----------------- Exhibit No. Description ----------- ----------- 2.1 -- Agreement and Plan of Merger, dated as of July 12, 2003, by and among the Company, American Home Mortgage Investment Corp. (formerly called AHM New Holdco, Inc.) and Apex Mortgage Capital, Inc.* 2.2 -- Agreement and Plan of Reorganization, dated as of September 11, 2003, by and among the Company, American Home Mortgage Investment Corp. and AHM Merger Sub, Inc.** 31.1 -- Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 -- Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 -- Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 -- Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ------------------------------------- All nonmarked Exhibits listed above are filed herewith. * Incorporated by reference to Exhibit 2.1 to the Form 8-K (file no. 000-27081) filed with the Securities and Exchange Commission on July 14, 2003. ** Incorporated by reference to Annex B to the Definitive Proxy Statement on Schedule 14A (file no. 000-27081) filed with the Securities and Exchange Commission on October 29, 2003.

AMERICAN HOME MORTGAGE HOLDINGS INC 10-Q