SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Exchange Act of 1934 (Amendment No. )
Filed by a Party other than the Registrant [ ]
[ ] |
Preliminary Proxy Statement
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Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2)) |
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Definitive Proxy Statement |
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[X] |
Definitive Additional Materials |
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Soliciting Material Pursuant to
§240.14a-12. |
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American Home Mortgage Investment Corp.
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The following material was mailed to stockholders of American Home Mortgage Investment Corp. (the "Company") as the cover to the Company's 2004 Annual Report.
| 2004 Annual Report |
| American Home Mortgage Investment Corp. |
| Profiting from Self-Originated Assets |
| To Our Stockholders: |
I am pleased to report that 2004 was a successful year for our company on many fronts. During the year, our company took major steps in implementing our strategy of holding self-originated securities for net interest income, while earning additional revenue from selling newly-originated loans and from mortgage servicing. The overall result was record levels of revenue and earnings, and strong adjusted earnings per share*. Additionally, we increased our dividend significantly throughout the year.
During the year, our adjusted mortgage-backed securities portfolio* grew to $7.6 billion at December 31, 2004 compared to $1.8 billion at December 31, 2003. In addition, our adjusted net interest margin* on the portfolio grew throughout the year, as the benefits from substituting our self-originated securities for market-purchased securities enhanced our overall yield. During the year, we continued to manage our portfolio defensively, by running a “matched book”, with the duration of our liabilities and hedges approximately equal to the duration of our assets. We also worked to reduce risk by holding mortgage securities backed by ARM loans that are less susceptible to losses as interest rates change, and by holding high credit quality securities. As of December 31, 2004, 94.5% of our adjusted securities portfolio* was either agency obligations or rated AAA by Standard & Poor’s, while 2.1% was AA or A and 3.4% was BBB or unrated.
The year 2004 saw a significant increase in our origination business with total originations growing to $23.1 billion compared to $21.7 billion in 2003. This was achieved during a period when national originations declined from $3.9 trillion to $2.7 trillion, and resulted in an increase in our market share. Specifically, our market share rose from 0.56% in 2003 to 0.69%, 0.90%, 0.77% and 1.00%, in the first, second, third and fourth quarters of 2004, respectively, and to 1.16% in the first quarter of 2005**. During 2004, our origination business experienced growth in both its retail and wholesale channels, as a result of our organic growth and through strategic acquisitions. In 2004, we completed an acquisition of 85 branches from Washington Mutual. Additionally, in April 2005 we acquired 21 branches from Irwin Mortgage. Perhaps the most significant accomplishment for our origination segment was that its growth transcended the traditional pull-back that occurs when a refinance boom slows. This was made possible by our origination business focusing on lending to home purchasers as opposed to refinance applicants. During 2004, loans to homebuyers
accounted for 52% of originations while refinances were 48% of originations compared to 33% for home buyers and 67% for refinance applicants in 2003.
Our mortgage servicing segment experienced a loss in 2004 as a result of relatively rapid
amortization and impairment charges. The servicing segment is expected to become profitable during
periods of higher interest rates, and indeed, was profitable during the first quarter of 2005. Our
servicing segment is also the repository ?")*]54\_E@1Z)2#ZOFB.7B".HH]Z+*]
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MJI?[^$"5:1BJ0>+/X) I am proud that in 2004 our stockholders gained a significant total return as a result of both our
dividends and stock price appreciation. It is our company’s goal to continue to grow the dividend
through solid financial performance. During 2004, our company’s adjusted return on equity* was
21.12%, while our adjusted return on assets* was 1.73%. During 2004, our company also significantly
increased its stockholders’ equity and book value per common share as a result of an accretive
capital raise and retained earnings. As a result, adjusted book value per common share* grew to
$18.95 at December 31, 2004, from $15.75 at December 31, 2003.
I want to thank my fellow professionals at our company for their efforts which led to our success
in 2004. I also wish to thank you, our stockholders, for your continued support.
Sincerely yours,
Michael Strauss
Chairman, President and Chief Executive Officer
*
See reconciliation of adjusted financial information to our reported financial information in
accordance with GAAP in Appendix A of this Annual Report.
**
Market share based on actual Company closings and Freddie Mac’s estimate of the national market.
| Profiting from Self-Originated Assets |
Tax-Advantaged REIT
Mortgage Holdings
The Company holds a leveraged portfolio of mortgage-backed securities for net interest income. A
growing portion of the portfolio is self-originated by the Company’s origination business, and is
serviced by its servicing business. On March 31, 2005, the Company held $7.2 billion of
mortgage-backed securities, and $650.0 million of adjustable rate mortgage (ARM) loans held pending
securitization.
The Company’s primary goals in managing its portfolio are to gain yield through the benefit of self-origination, and otherwise to seek to reduce risk. Credit risk is reduced because the large majority of the Company’s holdings are rated AAA by Standard & Poor’s or Moody’s or are obligations of Fannie Mae or Freddie Mac. The Company attempts to minimize the exposure of its holdings to the risks posed by changing interest rates by “match funding” its assets and their related liabilities and hedges. Specifically, the Company attempts to set the duration of its liabilities and hedges to equal the duration of its assets. The Company further seeks to mitigate risk by concentrating its holdings on ARM securities. The Company projects that match-funded AAA-rated and agency ARM securities offer the opportunity for a portfolio with relatively low risk compared to other portfolios of mortgage assets.
Taxable Subsidiary
Originations
The Company operates a mortgage origination business that includes approximately 475 retail and
wholesale production offices located in 44 states. The origination business produced $23.1 billion
of loans in 2004 and was recently ranked as the nation’s 20th largest residential mortgage lender
by National Mortgage News. The origination business’ production of mortgage-backed securities
assets at relatively low costs helps drive the return earned by the mortgage holdings business. The
origination business also sells loans into the secondary mortgage market for a cash gain.
The mortgage origination business has been built over the past six years through nine opportunistic acquisitions of small and mid-sized mortgage companies. Through these acquisitions, the Company has grown its branch networks and sales forces, while building depth and enhanced capabilities in its core origination business operations. It has also improved the economies of its origination business through lower per loan operating costs, reduced borrowing costs and better terms of business with loan buyers and credit insurers. During 2004, the Company completed a major franchise acquisition of 85 branches from Washington Mutual. Additionally, in April 2005, the Company acquired 21 branches from Irwin Mortgage. The Company plans to seek to grow the market share of its mortgage origination business in the future.
Loan Servicing
The Company’s loan servicing business primarily services loans securitized by the Company. On March
31, 2005, the Company serviced 106,637 loans with an outstanding principal amount of $18.2 billion.
Loans are serviced for a fee which typically ranges from 0.25% to 0.50% of the principal amount of
the loan per year. The Company’s servicing capabilities are rated “Select Servicer” by Standard &
Poor’s.
| AMERICAN HOME MORTGAGE INVESTMENT CORP. |
| * | Market share based on actual Company closings and Freddie Mac’s estimate of the national market. | |||
|
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These adjusted financial measures reflect the reallocation of revenue and earnings of approximately $71.4 million from the Company’s first quarter 2005 GAAP financial results to the Company’s fourth quarter 2004 GAAP financial results. See Appendix A (Adjusted Financial Measures). | |||
| Company Highlights
Loan Production
(dollars in millions)
‘00 $3,043
‘01 $7,766
‘02 $12,196
‘03 $21,705
‘04 $23,069
Market Share*
‘00 0.29%
‘01 0.38%
‘02 0.42%
‘03 0.56%
‘04 0.84%
Total Revenue
(dollars in millions)
‘00 $58.3
‘01 $128.1
‘02 $ 232.8
‘03 $432.1
‘04 $ 365.2GAAP $436.6 Adjusted**
Earnings
(dollars in millions)
‘00 $5.4
‘01 $25.4
‘02 $39.5
‘03 $ 73.8
‘04 $70.9 GAAP $142.3 Adjusted**
Diluted Earnings Per Share
(dollars)
‘00 $0.63
‘01 $2.34
‘02 $2.65
‘03 $4.07
‘04 $1.86 GAAP $3.74 Adjusted**
Book Value Per Share
(dollars)
‘00$2.96
‘01$6.56
‘02 $9.82
‘03 $15.75
‘04 $17.18 GAAP $18.95 Adjusted**
Dividends Per Share
(dollars)
‘01 $0.12
‘02 $0.15
‘03 $0.91
‘04 $2.43
Mortgage Holdings Highlights
Mortgage-Backed Securities
Portfolio Credit Quality
(as of March 31, 2005)
AAA or Agency Eligible 94.3%
AA
0.2%
Other 5.5% Mortgage-Backed Securities Portfolio ARM Product Mix (as of March 31, 2005) 5/1 ARMs 73.0% 3/1 ARMs 11.1% Short Reset (lessthanoneyear) 15.9% Mortgage-Backed Securities Holdings (dollars in billions) 12/31/03 $1.8 3/31/04 $4.0 3/31/05 $7.2 Corporate Highlights • Completed first full year as a Real Estate Investment Trust (REIT). • Completed renaming initiative and now operate approximately 475 nationwide branch offices. • Ranked by National Mortgage News as 20th in its list of Top Mortgage Originators for the fourth quarter of 2004. •Assimilated the loan production offices acquired from Washington Mutual. • Increased regular quarterly dividend on AHM’s common stock to $0.71 per share, or $2.84 annualized. • Closed a $359.3 million public offering. The transaction involved the offering of 14.375 million shares of common stock priced at $25 per share. •Established a commercial paper program to lower the cost of funding loans held pending sale or securitization. |
Appendix A — Adjusted Financial Measures
Adjusted Financial Measures
Certain financial measures presented in the President’s Letter to Stockholders and the accompanying tables are not prepared in accordance with Generally Accepted Accounting Principles (“GAAP”) and differ from the amounts reported in the Company’s enclosed 2004 annual report on Form 10-K/A. These adjusted financial measures reflect the reallocation of revenue and earnings of approximately $71.4 million from the Company’s first quarter 2005 financial results to the Company’s 2004 financial results to present the Company’s 2004 financial results as if its fourth quarter 2004 securitization qualified for sale treatment under Statement of Financial Accounting Standards No. 140 (“SFAS 140”).
Subsequent to filing its 2004 annual report on Form 10-K on March 16, 2005, the Company discovered that it incorrectly accounted for its securitization completed in December 2004 as a sale rather than as a financing. Because the Company created and held securities benefited by embedded derivatives contracts, the effects of treating the Company’s securitization as a sale under SFAS 140 were reversed from the Company’s 2004 GAAP financial results. The amount of retained securities created during the fourth quarter of 2004 that were benefited by embedded derivatives contracts was approximately $97.6 million, or 2.8% of the securitization’s principal of $3.5 billion. The $97.6 million of securities were sold during the first quarter of 2005, and consequently the entire fourth quarter 2004 securitization qualified for sale treatment under SFAS 140 in the first quarter of 2005. The Company restated its GAAP financial statements for 2004 and filed an amended 2004 annual report on Form 10-K/A on April 22, 2005 reflecting the reduction in the Company’s 2004 GAAP revenue and income by approximately $71.4 million. In addition, at December 31, 2004, securities held by the Company that were created during the fourth quarter of 2004 were reclassified on the Company’s balance sheet, and continued to be carried as mortgage loans held for sale, while those securities created and sold by the Company during the fourth quarter of 2004 were reclassified as collateralized debt obligation liabilities rather than sold securities. The Company’s GAAP net income available to common shareholders per diluted share was reduced for 2004 by approximately $1.87 per share, equal to approximately $71.4 million divided by an average diluted share count of 38.1 million shares.
The Company has been, and expects to continue to be, managed on the basis of the adjusted financial measures. The adjusted financial measures should be read in conjunction with the Company’s GAAP results. Please refer to the detailed reconciliation of the Company’s GAAP and adjusted results on the following pages A-1 and A-2.
AMERICAN HOME MORTGAGE INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
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| Year Ended December 31, | ||||||||||||||||||||
| 2004 | 2004 | 2004 | 2003 | 2002 | ||||||||||||||||
| (1) | (1) | |||||||||||||||||||
| GAAP | Adjustments | As Adjusted | ||||||||||||||||||
Net interest income: |
||||||||||||||||||||
Interest income |
$ | 314,306 | $ | (2,174 | ) | $ | 312,132 | $ | 106,017 | $ | 55,871 | |||||||||
Interest expense |
(201,373 | ) | 1,775 | (199,598 | ) | (56,986 | ) | (31,034 | ) | |||||||||||
Net interest income |
112,933 | (399 | ) | 112,534 | 49,031 | 24,837 | ||||||||||||||
Non-interest income: |
||||||||||||||||||||
Gain on sales of mortgage loans |
134,099 | — | 134,099 | 376,605 | 216,595 | |||||||||||||||
Gain on securitizations of mortgage loans |
40,120 | 40,674 | 80,794 | Q)6@$YP%J*X*TR596JQ!#^F35SKM3GZ%UG%%'WAAU,A!.)E+(MH%L=#
M;S/!56*A*UG1!&5Q+?1W!OAD'>+"1!@D@?I%!FO@ |
— | |||||||||||||||
Gain on sales of mortgage-backed securities and derivatives |
63 | — | 63 | 2,210 | — | |||||||||||||||
Unrealized gain on mortgage-backed securities and derivatives |
75,460 | 33,805 | 109,265 | 3,272 | — | |||||||||||||||
Loan servicing fees |
40,571 | — | 40,571 | 39,125 | 23,973 | |||||||||||||||
Amortization of mortgage servicing rights |
(32,615 | ) | — | (32,615 | ) | (51,824 | ) | (26,399 | ) | |||||||||||
Impairment reserve (provision) recovery of mortgage
servicing rights |
(12,423 | ) | (2,729 | ) | (15,152 | ) | 6,334 | (10,332 | ) | |||||||||||
Net loan servicing fees (loss) |
(4,467 | ) | (2,729 | ) | (7,196 | ) | (6,365 | ) | (12,758 | ) | ||||||||||
Other non-interest income |
7,033 | — | 7,033 | 7,229 | 4,147 | |||||||||||||||
Non-interest income |
252,308 | 71,750 | 324,058 | 383,100 | 207,984 | |||||||||||||||
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||||||||||||||||||||
Non-interest expenses: |
||||||||||||||||||||
Salaries, commissions and benefits, net |
189,393 | — | 189,393 | 204,939 | 106,895 | |||||||||||||||
Occupancy and equipment |
37,642 | — | 37,642 | 27,015 | 15,506 | |||||||||||||||
Data processing and communications |
16,165 | — | 16,165 | 13,201 | 7,853 | |||||||||||||||
Office supplies and expenses |
13,730 | — | 13,730 | 13,312 | 6,511 | |||||||||||||||
Marketing and promotion |
10,409 | — | 10,409 | 12,239 | 7,996 | |||||||||||||||
Travel and entertainment |
14,190 | — | 14,190 | 9,964 | 4,587 | |||||||||||||||
Professional fees |
12,159 | — | 12,159 | 7,547 | 5,443 | |||||||||||||||
Other |
22,216 | — | 22,216 | 21,897 | 10,470 | |||||||||||||||
Non-interest expenses |
315,904 | — | 315,904 | 310,114 | 165,261 | |||||||||||||||
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