UNITED STATES SECURITIES AND EXCHANGE COMMISSION
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: June 30, 2004
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: 001-11914
THORNBURG MORTGAGE, INC.
| Maryland (State or other jurisdiction of incorporation or organization) |
85-0404134 (IRS Employer Identification Number) |
| 150 Washington Avenue Santa Fe, New Mexico (Address of principal executive offices) |
87501 (Zip Code) |
Registrant’s telephone number, including area code: (505) 989-1900
(Former name, former address and former fiscal year, if changed since last report)
Not applicable
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 Securities Exchange Act of 1934).
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock ($.01 par value) 84,085,951 as of May 6, 2004
INDEX
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
THORNBURG MORTGAGE, INC. AND SUBSIDIARIES
| June 30, 2004 |
December 31, 2003 |
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ASSETS |
||||||||
Adjustable-rate mortgage (“ARM”) assets: |
||||||||
ARM securities, net |
$ | 14,434,131 | $ | 11,520,741 | ||||
ARM loans: |
||||||||
Securitized ARM loans, net |
3,263,469 | 3,687,466 | ||||||
ARM loans collateralizing debt obligations, net |
4,872,050 | 3,146,961 | ||||||
ARM loans held for securitization, net |
520,470 | 496,998 | ||||||
ARM loans |
8,655,989 | 7,331,425 | ||||||
ARM assets |
23,090,120 | 18,852,166 | ||||||
Cash and cash equivalents |
875,838 | 85,366 | ||||||
Restricted cash and cash equivalents |
304,702 | 51,600 | ||||||
Hedging instruments |
156,228 | 40,356 | ||||||
Accrued interest receivable |
88,726 | 73,702 | ||||||
Prepaid expenses and other |
25,257 | 15,609 | ||||||
| $ | 24,540,871 | $ | 19,118,799 | |||||
LIABILITIES |
||||||||
Reverse repurchase agreements |
$ | 17,492,989 | $ | 13,926,858 | ||||
Collateralized debt obligations (“CDOs”) |
4,823,351 | 3,114,047 | ||||||
Whole loan financing facilities |
294,763 | 369,343 | ||||||
Hedging instruments |
37,286 | 113,518 | ||||||
Senior notes |
251,263 | 251,080 | ||||||
Accrued interest payable |
27,065 | 26,114 | ||||||
Dividends payable |
— | 47,350 | ||||||
Payable for assets purchased |
23,071 | — | ||||||
Accrued expenses and other |
35,156 | 31,385 | ||||||
| 22,984,944 | 17,879,695 | |||||||
COMMITMENTS AND CONTINGENCIES |
||||||||
SHAREHOLDERS’ EQUITY |
||||||||
Common stock: par value $.01 per share;
499,978 shares authorized,
83,024 and 73,985 shares issued
and outstanding, respectively |
830 | 740 | ||||||
Additional paid-in-capital |
1,623,750 | 1,376,879 | ||||||
Accumulated other comprehensive loss |
(131,441 | ) | (142,778 | ) | ||||
Retained earnings |
62,788 | 4,263 | ||||||
| 1,555,927 | 1,239,104 | |||||||
| $ | 24,540,871 | $ | 19,118,799 | |||||
See Notes to Consolidated Financial Statements.
3
THORNBURG MORTGAGE, INC. AND SUBSIDIARIES
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, |
June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Interest income from ARM assets and
cash equivalents |
$ | 217,487 | $ | 136,897 | $ | 413,300 | $ | 260,093 | ||||||||
Interest expense on borrowed funds |
(143,435 | ) | (82,166 | ) | (269,528 | ) | (153,328 | ) | ||||||||
Net interest income |
74,052 | 54,731 | 143,772 | 106,765 | ||||||||||||
Servicing income, net |
1,370 | 637 | 2,192 | 941 | ||||||||||||
Gain (loss) on ARM assets and
hedging instruments, net
instruments, net |
(896 | ) | 2,574 | 2,648 | 2,574 | |||||||||||
Hedging expense |
(149 | ) | (220 | ) | (307 | ) | (397 | ) | ||||||||
Provision for credit losses |
(391 | ) | — | (823 | ) | — | ||||||||||
Management fee |
(3,936 | ) | (2,686 | ) | (7,563 | ) | (5,171 | ) | ||||||||
Performance fee |
(8,480 | ) | (6,924 | ) | (16,814 | ) | (13,111 | ) | ||||||||
Long-term incentive awards |
344 | (3,075 | ) | (4,151 | ) | (4,744 | ) | |||||||||
Other operating expenses |
(4,015 | ) | (2,845 | ) | (7,692 | ) | (5,591 | ) | ||||||||
NET INCOME |
$ | 57,899 | $ | 42,192 | $ | 111,262 | $ | 81,266 | ||||||||
Net income |
$ | 57,899 | $ | 42,192 | $ | 111,262 | $ | 81,266 | ||||||||
Dividends on preferred stock |
— | (1,670 | ) | — | (3,340 | ) | ||||||||||
Net income available to common
shareholders |
$ | 57,899 | $ | 40,522 | $ | 111,262 | $ | 77,926 | ||||||||
Basic earnings per share: |
||||||||||||||||
Net income |
$ | 0.71 | $ | 0.68 | $ | 1.41 | $ | 1.35 | ||||||||
Average number of shares outstanding |
81,373 | 59,879 | 79,002 | 57,767 | ||||||||||||
Diluted earnings per share: |
||||||||||||||||
Net income |
$ | 0.71 | $ | 0.67 | $ | 1.41 | $ | 1.34 | ||||||||
Average number of shares outstanding |
81,373 | 62,639 | 79,002 | 60,527 | ||||||||||||
Dividends declared per common share |
$ | 0.66 | $ | 0.62 | $ | 1.31 | $ | 1.22 | ||||||||
See Notes to Consolidated Financial Statements.
4
THORNBURG MORTGAGE, INC. AND SUBSIDIARIES
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, |
June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net income |
$ | 57,899 | $ | 42,192 | $ | 111,262 | $ | 81,266 | ||||||||
Other comprehensive income: |
||||||||||||||||
Unrealized gains (losses) on securities: |
||||||||||||||||
Net unrealized holdings gains (losses)
arising during the period |
(254,061 | ) | 11,617 | (167,007 | ) | 15,467 | ||||||||||
Reclassification adjustment for net (gains) losses
included in income |
149 | (2,425 | ) | (2,863 | ) | (2,425 | ) | |||||||||
Net change in unrealized gains (losses) on securities |
(253,912 | ) | 9,192 | (169,870 | ) | 13,042 | ||||||||||
Unrealized gains (losses) on hedging instruments: |
||||||||||||||||
Net unrealized gains (losses) arising during the period |
230,264 | (85,801 | ) | 52,812 | (121,340 | ) | ||||||||||
Reclassification adjustment for net losses
included in income |
66,916 | 35,306 | 128,395 | 66,436 | ||||||||||||
Net change in unrealized gains (losses) on hybrid
hedging instruments |
297,180 | (50,495 | ) | 181,207 | (54,904 | ) | ||||||||||
Other comprehensive income |
$ | 101,167 | $ | 889 | $ | 122,599 | $ | 39,404 | ||||||||
See Notes to Consolidated Financial Statements.
5
THORNBURG MORTGAGE, INC. AND SUBSIDIARIES
| Accum. Other | Notes | |||||||||||||||||||||||||||
| Compre- | Receivable | |||||||||||||||||||||||||||
| Preferred | Common | Additional Paid- | hensive | From Stock | Retained | |||||||||||||||||||||||
| Stock |
Stock |
in Capital |
Income (Loss) |
Sales |
Earnings |
Total |
||||||||||||||||||||||
Balance, December 31, 2002 |
$ | 65,805 | $ | 528 | $ | 878,929 | $ | (105,254 | ) | $ | (7,437 | ) | $ | 471 | $ | 833,042 | ||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income |
81,266 | 81,266 | ||||||||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||||||
Available-for-sale assets: |
||||||||||||||||||||||||||||
Fair value adjustment |
13,041 | 13,041 | ||||||||||||||||||||||||||
Hedging instruments: |
||||||||||||||||||||||||||||
Fair value adjustment, net of
amortization |
(54,903 | ) | (54,903 | ) | ||||||||||||||||||||||||
Issuance of common stock |
87 | 178,567 | 178,654 | |||||||||||||||||||||||||
Interest and principal payments on
notes receivable from stock sales |
141 | 420 | 561 | |||||||||||||||||||||||||
Dividends declared on preferred
stock - $1.21 per share |
(3,340 | ) | (3,340 | ) | ||||||||||||||||||||||||
Dividends declared on common
stock - $0.60 per share |
(35,743 | ) | (35,743 | ) | ||||||||||||||||||||||||
Balance, June 30, 2003 |
$ | 65,805 | $ | 615 | $ | 1,057,637 | $ | (147,116 | ) | $ | (7,017 | ) | $ | 42,654 | $ | 1,012,578 | ||||||||||||
Balance, December 31, 2003 |
$ | — | $ | 740 | $ | 1,376,879 | $ | (142,778 | ) | $ | — | $ | 4,263 | $ | 1,239,104 | |||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income |
111,262 | 111,262 | ||||||||||||||||||||||||||
Other comprehensive income (loss): |
||||||||||||||||||||||||||||
Available-for-sale assets: |
||||||||||||||||||||||||||||
Fair value adjustment |
(169,870 | ) | (169,870 | ) | ||||||||||||||||||||||||
Hedging instruments: |
||||||||||||||||||||||||||||
Fair value adjustment, net of
amortization |
181,207 | 181,207 | ||||||||||||||||||||||||||
Issuance of common stock |
90 | 246,871 | 246,961 | |||||||||||||||||||||||||
Dividends declared on common
stock - $0.65 per share |
(52,737 | ) | (52,737 | ) | ||||||||||||||||||||||||
Balance, June 30, 2004 |
$ | — | $ | 830 | $ | 1,623,750 | $ | (131,441 | ) | $ | — | $ | 62,788 | $ | 1,555,927 | |||||||||||||
See Notes to Consolidated Financial Statements.
6
THORNBURG MORTGAGE, INC. AND SUBSIDIARIES
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, |
June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Operating Activities: |
||||||||||||||||
Net income |
$ | 57,899 | $ | 42,192 | $ | 111,262 | $ | 81,266 | ||||||||
Adjustments to reconcile net income to net cash provided
by operating activities: |
||||||||||||||||
Amortization |
14,712 | 10,546 | 27,433 | 18,713 | ||||||||||||
(Gain) loss on ARM assets and hedging instruments, net |
896 | (2,574 | ) | (2,648 | ) | (2,574 | ) | |||||||||
Provision for credit losses |
391 | — | 823 | — | ||||||||||||
Hedging expense |
149 | 220 | 307 | 397 | ||||||||||||
Change in assets and liabilities: |
||||||||||||||||
Accrued interest receivable |
(6,633 | ) | (7,235 | ) | (15,024 | ) | (12,786 | ) | ||||||||
Prepaid expenses and other |
(8,067 | ) | (1,834 | ) | (12,640 | ) | 343 | |||||||||
Accrued interest payable |
(3,652 | ) | 3,925 | 951 | 5,587 | |||||||||||
Accrued expenses and other |
236 | 17,447 | 3,771 | 21,204 | ||||||||||||
Net cash provided by operating activities |
55,931 | 62,687 | 114,235 | 112,150 | ||||||||||||
Investing Activities: |
||||||||||||||||
ARM securities: |
||||||||||||||||
Purchases |
(2,795,341 | ) | (3,115,786 | ) | (6,359,193 | ) | (4,963,138 | ) | ||||||||
Proceeds on sales |
— | — | 348,709 | — | ||||||||||||
Principal payments |
2,062,190 | 1,073,494 | 3,084,024 | 1,908,041 | ||||||||||||
Securitized ARM loans: |
||||||||||||||||
Issuance costs |
— | (1,076 | ) | — | (2,108 | ) | ||||||||||
Principal payments |
195,370 | 394,344 | 324,839 | 698,005 | ||||||||||||
ARM loans collateralizing debt obligations: |
||||||||||||||||
Principal payments |
320,251 | 66,527 | 437,047 | 91,382 | ||||||||||||
ARM loans held for securitization: |
||||||||||||||||
Purchases and originations |
(1,129,828 | ) | (1,146,227 | ) | (2,127,699 | ) | (2,350,716 | ) | ||||||||
Principal payments |
16,581 | 6,684 | 28,427 | 16,087 | ||||||||||||
Termination of interest rate swap agreements |
2,144 | 2,144 | ||||||||||||||
Net cash used in investing activities |
(1,328,633 | ) | (2,722,040 | ) | (4,261,702 | ) | (4,602,447 | ) | ||||||||
Financing Activities: |
||||||||||||||||
Net borrowings from reverse repurchase agreements |
1,095,910 | 1,944,138 | 3,415,560 | 3,659,551 | ||||||||||||
Net borrowings of CDOs |
719,952 | 967,485 | 1,709,304 | 712,070 | ||||||||||||
Net whole loan financing facilities (paydowns) borrowings |
188,858 | (447,734 | ) | (74,580 | ) | 25,422 | ||||||||||
Net senior unsecured debt proceeds |
— | 194,340 | — | 194,340 | ||||||||||||
Payments received (made) on Eurodollar contracts |
1,031 | (6,975 | ) | (1,223 | ) | (12,554 | ) | |||||||||
Proceeds from common stock issued, net |
78,630 | 56,501 | 246,961 | 178,654 | ||||||||||||
Dividends paid |
(52,736 | ) | (37,411 | ) | (100,087 | ) | (69,947 | ) | ||||||||
Payments on notes receivable from stock sales |
— | 390 | — | 561 | ||||||||||||
Purchase of interest rate cap agreements |
(4,895 | ) | (8,940 | ) | (4,894 | ) | (8,940 | ) | ||||||||
Net increase in restricted cash and cash equivalents |
(181,656 | ) | (8,940 | ) | (253,102 | ) | (8,940 | ) | ||||||||
Net cash provided by financing activities |
1,845,094 | 2,652,854 | 4,937,939 | 4,670,217 | ||||||||||||
Net increase (decrease) in cash and cash equivalents |
572,392 | (6,499 | ) | 790,472 | 179,920 | |||||||||||
Cash and cash equivalents at beginning of period |
303,446 | 308,639 | 85,366 | 122,220 | ||||||||||||
Cash and cash equivalents at end of period |
$ | 875,838 | $ | 302,140 | $ | 875,838 | $ | 302,140 | ||||||||
Supplemental disclosure of cash flow information and non-cash activities is included in Note 4.
See Notes to Consolidated Financial Statements
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information.
In the opinion of management, all material adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. The operating results for the quarter ended June 30, 2004 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2004. The interim financial information should be read in conjunction with Thornburg Mortgage, Inc.’s 2003 Annual Report on Form 10-K/A.
Basis of presentation and principles of consolidation
| The consolidated financial statements include the accounts of Thornburg Mortgage, Inc. (together with its subsidiaries referred to hereafter as the “Company”) and its wholly owned bankruptcy-remote special purpose finance subsidiaries, Thornburg Mortgage Funding Corporation (“TMFC”), Thornburg Mortgage Acceptance Corporation (“TMAC”), Thornburg Mortgage Capital Resources, LLC (“TMCR”), and Thornburg Mortgage Depositor, LLC (“TMD”), its wholly owned mortgage loan origination subsidiary, Thornburg Mortgage Home Loans, Inc. (“TMHL”), and TMHL’s two wholly owned special purpose finance subsidiaries, Thornburg Mortgage Funding Corporation II and Thornburg Mortgage Acceptance Corporation II. TMFC, TMAC, TMCR and TMD are wholly owned qualified real estate investment trust (“REIT”) subsidiaries and are consolidated with the Company for financial statement and tax reporting purposes. TMFC and TMAC ceased operations on May 31, 2004 and were dissolved on June 25, 2004. As of the close of business on May 31, 2004, TMHL and its subsidiaries made the election to be taxable REIT subsidiaries and are consolidated with the Company for financial statement purposes but are not consolidated with the Company for tax reporting purposes from that date forward. All material intercompany accounts and transactions are eliminated in consolidation. Certain prior period amounts have been reclassified to conform to current period classifications. |
Recently adopted accounting pronouncements
| On March 9, 2004, the SEC released Staff Accounting Bulletin 105 (“SAB 105”) providing guidance on how to account for a commitment to purchase a mortgage loan prior to funding the loan. SAB 105 requires that these commitments be recorded at fair value with changes in fair value recognized in current earnings and is intended to eliminate the current diversity in practice that exists relating to the accounting for loan commitments. SAB 105 is effective for loan commitments entered into after March 31, 2004. Management believes that the Company’s method of accounting for loan commitments is consistent with the guidance provided by SAB 105. | ||||
| In December 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer” (“SOP 03-3”). SOP 03-3 addresses the accounting for acquired impaired loans, loans that show evidence of having deteriorated in terms of credit quality since their origination. SOP 03-3 is effective for loans acquired after December 31, 2004. Because the Company acquires loans generally underwritten to “A” quality standards, the Company does not expect the adoption of SOP 03-3 to have a material effect on the financial condition, results of operations, or liquidity of the Company. | ||||
| In June 2004, the Financial Accounting Standards Board issued Emerging Issues Task Force Abstract 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-01”). EITF 03-01 requires an investor to determine when an investment is considered impaired, evaluate whether that impairment is other than temporary, and, if the impairment is other than temporary, recognize an impairment loss equal to the difference between the investment’s cost and its fair value. The guidance also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The impairment loss recognition and measurement guidance is applicable to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. The Company does not expect the adoption of EITF 03-01 to have a material effect on the financial condition, results of operations, or liquidity of the Company. EITF 03-01 also includes annual | ||||
8
| disclosure requirements for investments in an unrealized loss position for which other-than-temporary impairments have not been recognized. These disclosures were included in the Company’s Form 10-K/A Annual Report for the year ended December 31, 2003 as required by the EITF. |
Cash and cash equivalents
| Cash and cash equivalents includes cash on hand and highly liquid investments with original maturities of three months or less. The carrying amount of cash equivalents approximates their fair value. |
Restricted cash and cash equivalents
| Restricted cash and cash equivalents inclu |