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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2003
Commission File Number: 001-11981
MUNICIPAL MORTGAGE & EQUITY, LLC
(Exact Name of Registrant as Specified in Its Charter)
Delaware 52-1449733
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
218 North Charles Street, Suite 500 21201
Baltimore, Maryland
(Address of Principal Executive Offices) (Zip Code)
(443) 263-2900
(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 [ ]
The Registrant had 28,836,030 common shares outstanding as of August 5,2003.
MUNICIPAL MORTGAGE & EQUITY, LLC
INDEX TO FORM 10-Q
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 30
Item 4. Controls and Procedures 30
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 31
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
- ----------------------------
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
June 30, 2003 December 31, 2002
--------------------- ---------------------
ASSETS
Investment in tax-exempt bonds, net (Note 2) $ 775,793 $ 770,345
Loans receivable, net (Note 3) 451,397 422,299
Loans receivable held for sale (Note 3) 11,023 39,149
Investments in partnerships 98,239 99,966
Residual interests in bond securitizations (Note 4) 13,099 11,039
Investment in derivative financial instruments (Note 5) 3,170 18,762
Cash and cash equivalents 81,335 43,745
Interest receivable 17,252 16,157
Restricted assets 69,529 40,318
Other assets (Note 6) 35,400 46,592
Mortgage servicing rights, net 10,869 11,009
Goodwill 33,607 33,537
--------------------- ---------------------
Total assets $ 1,600,713 $ 1,552,918
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable (Note 7) $ 436,949 $ 450,924
Short-term debt (Note 7) 211,670 219,945
Long-term debt (Note 7) 142,006 147,357
Residual interests in bond securitizations (Note 4) 1,343 1,447
Investment in derivative financial instruments (Note 5) 21,792 49,359
Accounts payable and accrued expenses 6,436 7,436
Interest payable 5,383 6,677
Unearned revenue and other liabilities 33,336 19,263
Distributions payable 2,995 2,994
--------------------- ---------------------
Total liabilities 861,910 905,402
--------------------- ---------------------
Commitments and contingencies (Note 8) - -
Preferred shareholders' and minority interests' equity in subsidiary companies 160,142 160,452
Shareholders' equity:
Common shares, par value $0 (32,303,599 shares authorized, including 28,922,533
shares issued and outstanding, and 34,595 deferred shares at June 30, 2003
and 29,083,599 authorized, 25,571,580 shares issued and outstanding, and
29,844 deferred shares at December 31, 2002) 568,576 471,946
Less common shares held in treasury at cost (124,715 and 55,444 at June 30, 2003 and
December 31, 2002, respectively) (2,615) (857)
Less unearned compensation (deferred shares) (Note 12) (2,939) (3,274)
Accumulated other comprehensive income 15,639 19,249
--------------------- ---------------------
Total shareholders' equity 578,110 487,064
--------------------- ---------------------
Total liabilities and shareholders' equity $ 1,600,713 $ 1,552,918
===================== =====================
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
(unaudited)
For the three months ended For the six months ended
June 30, June 30,
-------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ -------------
INCOME:
Interest income
Interest on bonds and residual interests in bond securitizations $ 13,929 $ 15,399 $ 29,914 $ 30,561
Interest on loans 7,563 8,594 17,066 17,024
Interest on short-term investments 332 244 524 731
------------ ------------ ------------ -------------
Total interest income 21,824 24,237 47,504 48,316
------------ ------------ ------------ -------------
Fee income
Syndication fees 1,825 2,380 3,236 3,998
Origination fees 2,219 1,505 2,917 2,594
Loan servicing fees 1,838 1,660 3,747 3,568
Asset management and advisory fees 1,198 1,040 2,274 1,907
Other income 3,309 1,259 5,506 2,404
------------ ------------ ------------ -------------
Total fee income 10,389 7,844 17,680 14,471
------------ ------------ ------------ -------------
Net gain on sales 1,453 703 2,731 2,869
------------ ------------ ------------ -------------
Total income 33,666 32,784 67,915 65,656
------------ ------------ ------------ -------------
EXPENSES:
Interest expense 8,724 8,487 19,092 17,459
Salaries and benefits 8,671 5,930 14,637 10,757
General and administrative 2,113 1,697 3,938 3,423
Professional fees 877 1,967 1,866 2,604
Amortization of mortgage servicing rights and other intangibles 414 333 803 651
------------ ------------ ------------ -------------
Total expenses 20,799 18,414 40,336 34,894
------------ ------------ ------------ -------------
Net holding gains (losses) on derivatives (2,449) (7,721) 424 (4,609)
Impairments and valuation allowances related to investments (Notes 2 and 3) (1,144) - (1,144) (110)
Net gains (losses) from equity investments in partnerships (1,606) 94 (2,353) (229)
------------ ------------ ------------ -------------
Net income before income taxes, income allocated to preferred shareholders
and minority interests in subsidiary companies and
discontinued operations 7,668 6,743 24,506 25,814
Income tax expense (benefit) (540) 828 (472) 1,859
------------ ------------ ------------ -------------
Net income before income allocated to preferred shareholders
and minority interests in subsidiary companies and
discontinued operations 8,208 5,915 24,978 23,955
Income allocable to preferred shareholders and minority interests
in subsidiary companies 2,854 2,995 5,679 5,989
------------ ------------ ------------ -------------
Net income from continuing operations 5,354 2,920 19,299 17,966
Discontinued operations (Note 9) 25,748 - 25,748 -
------------ ------------ ------------ -------------
Net income $ 31,102 $ 2,920 $ 45,047 $ 17,966
============ ============ ============ =============
Net income allocated to:
Term growth shares $ - $ - $ - $ 153
============ ============ ============ =============
Common shares $ 31,102 $ 2,920 $ 45,047 $ 17,813
============ ============ ============ =============
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
(unaudited)
For the three months ended For the six months ended
June 30, June 30,
--------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- ---------------
Basic earnings per common share:
Net income from continuing operations $ 0.19 $ 0.12 $ 0.69 $ 0.73
Discontinued operations 0.89 - 0.91 -
------------- ------------- ------------- ---------------
Basic earnings per common share $ 1.08 $ 0.12 $ 1.60 $ 0.73
============= ============= ============= ===============
Weighted average common shares outstanding 28,857,305 25,252,124 28,104,281 24,423,091
Diluted earnings per common share:
Net income from continuing operations $ 0.18 $ 0.11 $ 0.68 $ 0.71
Discontinued operations 0.88 - 0.90 -
------------- ------------- ------------- ---------------
Diluted earnings per common share $ 1.06 $ 0.11 $ 1.58 $ 0.71
============= ============= ============= ===============
Weighted average common shares outstanding 29,213,062 25,835,808 28,451,480 25,022,631
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(unaudited)
For the three months ended For the six months ended
June 30, June 30,
--------------------------- -------------------------
2003 2002 2003 2002
------------- ------------ ------------ ------------
Net income $ 31,102 $ 2,920 $ 45,047 $ 17,966
------------- ------------ ------------ ------------
Other comprehensive income (loss):
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising during the period 16,540 2,928 21,116 (1,166)
Reclassification adjustment for gains included in net income (24,726) - (24,726) (996)
------------- ------------ ------------ ------------
Other comprehensive income (loss) (8,186) 2,928 (3,610) (2,162)
------------- ------------ ------------ ------------
Comprehensive income $ 22,916 $ 5,848 $ 41,437 $ 15,804
============= ============ ============ ============
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
For the six months ended
June 30,
----------------------------------
2003 2002
--------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 45,047 $ 17,966
Adjustments to reconcile net income to net cash provided by operating activities:
Income allocated to preferred shareholders and minority interests
in subsidiary companies 5,679 5,989
Net holding (gains) losses on trading securities (424) 4,609
Impairments and valuation allowances related to investments 1,144 110
Net gain on sales (2,731) (2,869)
Loss from investments in partnerships 2,353 229
Distributions received from investments in partnerships 5,224 245
Net amortization of premiums, discounts and fees on investments (185) 26
Depreciation and amortization 1,048 942
Discontinued operations (25,748) -
Deferred income taxes 1,283 700
Tax benefit from deferred share compensation 330 400
Deferred share compensation expense 883 862
Common and deferred shares issued under the Non-Employee Directors' Share Plans 135 96
Net change in assets and liabilities:
Increase in interest receivable (1,095) (851)
Decrease (increase) in other assets and goodwill 11,306 (4,840)
Increase (decrease) in accounts payable, accrued expenses and other liabilities 10,353 (3,272)
--------------- --------------
Net cash provided by operating activities 54,602 20,342
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of tax-exempt bonds and residual interests in bond securitizations (73,769) (49,399)
Loan originations (176,742) (181,216)
Purchases of property and equipment (394) (291)
Net investment in restricted assets (29,211) (8,312)
Principal payments received 219,706 219,872
Investments in partnerships (42,140) (86,352)
Return of capital invested in partnerships 36,566 9,040
Termination of derivative financial instruments (10,809) -
Proceeds from sales of investments 44,558 12,179
--------------- --------------
Net cash used in investing activities (32,235) (84,479)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from credit facilities 350,710 344,543
Repayment of credit facilities (364,685) (385,243)
Proceeds from short-term debt 27,250 32,547
Repayment of short-term debt (35,525) (28,992)
Proceeds from long-term debt - 3,538
Repayment of long-term debt (5,351) -
Issuance of common shares 71,871 77,555
Redemption of preferred shares - (19,298)
Proceeds from stock options exercised 1,122 2,255
Distributions on common shares (24,181) (20,976)
Distributions to preferred shareholders in a subsidiary company (5,988) (5,955)
--------------- --------------
Net cash provided by (used in) financing activities 15,223 (26)
--------------- --------------
Net increase (decrease) in cash and cash equivalents 37,590 (64,163)
Cash and cash equivalents at beginning of period 43,745 97,373
--------------- --------------
Cash and cash equivalents at end of period $ 81,335 $ 33,210
=============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 15,624 $ 14,771
=============== ==============
Income taxes paid $ 143 $ 731
=============== ==============
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share data) (unaudited)
Accumulated
Other
Common Treasury Unearned Comprehensive
Shares Shares Compensation Income Total
--------------- ------------ --------------- ---------------- ---------------
Balance, January 1, 2003 $ 471,946 $ (857) $ (3,274) $ 19,249 $ 487,064
Net income 45,047 - - - 45,047
Unrealized gains on investments, net of
reclassifications - - - (3,610) (3,610)
Distributions (24,181) - - - (24,181)
Purchase of treasury shares 1,758 (1,758) - - -
Options exercised 1,122 - - - 1,122
Issuance of common shares 71,891 - - - 71,891
Deferred shares issued under the
Non-Employee Directors' Share Plans (Note 12) 115 - - - 115
Deferred share grants (Note 12) 1,000 - (1,000) - -
Forfeiture of deferred shares (452) - 452 -
Amortization of deferred compensation (Note 12) - - 883 - 883
Tax benefit from exercise of options and
vesting of deferred shares 330 - - - 330
--------------- ------------ --------------- ---------------- ---------------
Balance, June 30, 2003 $ 568,576 $ (2,615) $ (2,939) $ 15,639 $ 578,661
=============== ============ =============== ================ ===============
Common Treasury
SHARE ACTIVITY: Shares Shares
--------------- ------------
Balance, January 1, 2003 25,545,980 55,444
Options exercised 61,125 -
Purchase of treasury shares (69,271) 69,271
Issuance of common shares 3,220,822 -
Issuance of common shares under
employee share incentive plans (Note 12) 69,006 -
Deferred shares issued under the
Non-Employee Directors' Share Plans (Note 12) 4,751 -
--------------- ------------
Balance, June 30, 2003 28,832,413 124,715
=============== ============
The accompanying notes are an integral part of these financial statements.
MUNICIPAL MORTGAGE & EQUITY, LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
Municipal Mortgage & Equity, LLC ("MuniMae" and, together with its
subsidiaries, the "Company") provides debt and equity financing to developers of
multifamily housing. The Company invests in tax-exempt bonds, or interests in
bonds, issued by state and local governments or their agencies or authorities to
finance multifamily housing developments. Interest income derived from the
majority of these bond investments is exempt income for federal income tax
purposes. Multifamily housing developments, as well as the rents paid by the
tenants, secure these investments.
The Company is also a mortgage banker. Mortgage banking activities include
the origination, investment in and servicing of investments in multifamily
housing, both for its own account and on behalf of third parties. These
investments generate taxable income.
The Company also invests in (1) other housing-related debt and equity
investments, including equity investments in income-producing real estate
operating partnerships and tax-exempt bonds, or interests in bonds, secured by
student housing or assisted living developments, and (2) tax-exempt community
development bonds, typically secured by special taxes imposed on single-family
or other community development districts or by assessments imposed on the
residents or other lot owners of those developments.
The Company also acquires and sells interests in partnerships that provide
low-income housing tax credits for investors. The Company earns syndication fees
on the placement of these interests with investors, including the Federal
National Mortgage Association ("Fannie Mae") and a number of corporate
investors. The Company also earns asset management fees for managing the
low-income housing tax credit funds syndicated.
MuniMae is a Delaware limited liability company. As a limited liability
company, MuniMae combines the limited liability, governance and management
characteristics of a corporation with the pass-through income features of a
partnership. Since MuniMae is classified as a partnership for federal income tax
purposes, no recognition of income taxes is made at the corporate level (except
for income earned through subsidiaries of the Company organized as
corporations). Instead, the distributive share of MuniMae's income, deductions
and credits is included in each shareholder's income tax return.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission and in the opinion of management contain all adjustments
(consisting of only normal recurring accruals) necessary to present a fair
statement of the results for the periods presented. These results have been
determined on the basis of accounting principles and policies discussed in Note
1 to the Company's Annual Report on Form 10-K for the year ended December 31,
2002 (the "Company's 2002 Form 10-K"). Certain information and footnote
disclosures normally included in financial statements presented in accordance
with generally accepted accounting principles ("GAAP") have been condensed or
omitted. The accompanying financial statements should be read in conjunction
with the financial statements and notes thereto included in the Company's 2002
Form 10-K. Certain 2002 amounts have been reclassified to conform to the 2003
presentation.
The Company posts all Securities and Exchange Commission reports on their
website at http://www.mmafin.com. These reports are available free of charge.
New Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board approved Statement of
Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("FAS 150").
FAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify those financial instruments with certain
debt-like characteristics as liabilities. The scope of FAS 150 includes
financial instruments issued in the form of mandatorily redeemable shares. These
types of shares embody an unconditional obligation requiring the issuer to
redeem them by transferring assets at a specified date. Management has
determined that the Company's preferred shareholders' equity in a subsidiary
company appears to fall within the scope of FAS 150. Therefore, the Company will
be required to reclassify its preferred shareholders' equity of $160.5 million
to the liability section of the consolidated balance sheets. In addition,
amounts currently classified as distributions paid to the preferred shareholders
will be recorded as interest expense. FAS 150 is effective for instruments held
by the Company at the beginning of the first interim period beginning after June
15, 2003.
In January 2003, the Financial Accounting Standards Board approved
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46 requires the consolidation of a Company's equity investment in a variable
interest entity ("VIE") if the Company is the primary beneficiary of the VIE and
if risks are not effectively dispersed among the owners of the VIE. The Company
is considered to be the primary beneficiary of the VIE if the Company absorbs
the majority of the losses of the VIE. FIN 46 is effective for VIEs created
after January 31, 2003. For any VIE in which the Company held an interest that
it acquired before February 1, 2003, FIN 46 is effective for the first interim
reporting period beginning after June 15, 2003. The Company is currently
reviewing the impact of FIN 46 on the tax credit syndication funds that a wholly
owned subsidiary of the Company sponsors and asset manages, as well as
investments accounted for under the equity method of accounting. The Company
will continue to review new investments in order to determine if they should be
accounted for in accordance with FIN 46.
NOTE 2 - INVESTMENT IN TAX-EXEMPT BONDS
The Company originates investments in tax-exempt bonds and taxable loans
primarily to the affordable multifamily housing industry. Tax-exempt bonds are
issued by state and local government authorities to finance multifamily housing
developments or other real estate financings. The bonds are typically secured by
nonrecourse mortgage loans or tax levies on the underlying properties. The
Company's sources of capital to fund these lending activities include proceeds
from equity offerings, securitizations, and lines of credit. The Company earns
interest income from its investment in tax-exempt bonds and taxable loans. The
Company also earns origination and construction administration fees from
originating the bonds and servicing the bonds during the construction period.
For further discussion of the general terms of tax-exempt bonds see Note 1 to
the Company's 2002 Form 10-K.
As of June 30, 2003 and December 31, 2002, the Company held $775.8 million
and $770.3 million of tax-exempt bonds, respectively. The following table
summarizes tax-exempt bonds by type.
June 30, 2003
--------------------------------------------------------------
Face Amortized Unrealized Fair
(000s) Amount Cost Gain (Loss) Value
------------- ------------- ------------ --------------
Non-participating bonds $ 651,518 $ 632,417 $ (9,659) $ 622,758
Participating bonds 82,717 81,820 2,408 84,228
Subordinate non-participating bonds 19,003 17,664 (11) 17,653
Subordinate participating bonds 58,890 35,799 15,355 51,154
------------- ------------- ------------ --------------
Total $ 812,128 $ 767,700 $ 8,093 $ 775,793
============= ============= ============ ==============
December 31, 2002
--------------------------------------------------------------
Face Amortized Unrealized Fair
(000s) Amount Cost Gain (Loss) Value
------------- ------------- ------------ --------------
Non-participating bonds $ 651,737 $ 621,594 $ (4,692) $ 616,902
Participating bonds 82,852 81,956 1,893 83,849
Subordinate non-participating bonds 19,039 17,700 106 17,806
Subordinate participating bonds 58,890 35,799 15,989 51,788
------------- ------------- ------------ --------------
Total $ 812,518 $ 757,049 $ 13,296 $ 770,345
============= ============= ============ ==============
During the second quarter of 2003, the Company invested in tax-exempt bonds
with a face amount of $4.6 million for $4.4 million. These investments represent
new primary investments (bonds which the Company originated).
The Company invested an additional $14.0 million in existing tax-exempt
draw down bonds with a face amount of $14.0 million. Since the end of 2002, the
Company has structured tax-exempt bonds that allow the borrower to make draws on
the bonds throughout the construction period. The initial draws on these bonds
have been reported as new primary investments in prior quarters.
In order to facilitate the securitization (see Note 1 to the Company's 2002
Form 10-K) of certain assets at higher leverage ratios than otherwise available,
the Company has pledged additional bonds as collateral for senior interests in
certain securitization trusts and credit enhancement facilities. At June 30,
2003 and December 31, 2002, the total carrying amount of the tax-exempt bonds
pledged as collateral for such trusts and facilities was $360.7 million and
$372.9 million, respectively.
NOTE 3 - LOANS RECEIVABLE
The Company's loans receivable consist primarily of construction loans,
permanent loans, supplemental loans and other taxable loans. For further
discussion of the general terms of loans held by the Company and the allowance
for loan losses see the description of mortgage banking activities in Note 1 to
the Company's 2002 Form 10-K. The following table summarizes loans receivable by
loan type at June 30, 2003 and December 31, 2002.
(in thousands) June 30, 2003 December 31, 2002
----------------------- -----------------------
Loan Type:
Construction loans $ 338,120 $ 300,266
Supplemental loans 81,330 80,459
Other taxable loans 33,356 42,646
----------------------- -----------------------
452,806 423,371
Allowance for loan losses (1,409) (1,072)
----------------------- -----------------------
Total $ 451,397 $ 422,299
======================= =======================
The Company has loans receivable held for sale of $11.0 million and $39.1
million at June 30, 2003 and December 31, 2002, respectively. These loans are
sold to Fannie Mae and third party conduit lenders. Due to the short time the
Company holds these loans, carrying value approximates fair value.
The Company pledges its construction loans, permanent loans and
supplemental loans as collateral for the Company's notes payable and line of
credit borrowings. In addition, in order to facilitate the securitization of
certain assets at higher leverage ratios than otherwise available, the Company
has pledged additional taxable loans to a pool that acts as collateral for
senior interests in certain securitization trusts and credit enhancement
facilities. At June 30, 2003 and December 31, 2002, the total carrying amount of
the loans receivable pledged as collateral was $407.2 million and $417.1
million, respectively.
NOTE 4 - RESIDUAL INTERESTS IN BOND SECURITIZATIONS
At June 30, 2003 and December 31, 2002, the Company's residual interests in
bond securitizations are investments in Residual Interest Tax-Exempt Securities
Receipts ("RITESSM"). For further discussion of the Company's securitization
programs see Note 1 to the Company's 2002 Form 10-K. The following table
provides certain information with respect to the residual interests in bond
securitizations held by the Company at June 30, 2003 and December 31, 2002.
(000s) June 30, 2003
-------------------------------------------------------------------------------------------
Fair Value (1)
Face Amortized Unrealized ---------------------------------------------
Amount Cost Gain (Loss) Assets Liabilities (2) Net
------------ ------------ ------------- ------------- -------------- ------------
Total RITESSM (3) $ 334 $ 4,209 $ 7,547 $ 13,099 $ (1,343) $ 11,756
============ ============ ============= ============= ============== ============
(000s) December 31, 2002
-------------------------------------------------------------------------------------------
Fair Value (1)
Face Amortized Unrealized ---------------------------------------------
Amount Cost Gain (Loss) Assets Liabilities (2) Net
------------ ------------ ------------- ------------- -------------- ------------
Total RITESSM (3) $ 334 $ 3,639 $ 5,953 $ 11,039 $ (1,447) $ 9,592
============ ============ ============= ============= ============== ============
(1) The amounts disclosed represent the fair values of all the Company's
investments in residual interests in bond securitizations at the reporting date.
(2) The aggregate negative fair value of the investments is included in
liabilities for financial reporting purposes. The negative fair value of these
investments is considered temporary and is not indicative of the future earnings
on these investments.
(3) The amount of outstanding Puttable Floating Option Tax-Exempt Receipts
("P-FloatsSM"), which are senior to the Company's RITESSM investments and which
are not reflected in the Company's balance sheet, was $190.2 million and $177.8
million at June 30, 2003 and December 31, 2002, respectively.
The Company purchased $13,000 of RITESSM for $0.8 million in the second
quarter of 2003. The Company also collapsed a $5,000 RITESSM position and placed
the related $27.3 million bond in the MBIA securitization program.
RITESSM Valuation Analysis
The fair value of a RITESSM investment is derived from the quote on the
underlying bond reduced by the outstanding corresponding P-FLOATsSM face amount.
The Company bases the fair value of the underlying bond, which has a limited
market, on quotes from external sources, such as brokers, for these or similar
bonds. The fair value of the underlying bond includes a prepayment risk factor.
The prepayment risk factor is reflected in the fair value of the bond by
assuming the bond will prepay at the most adverse time to the Company given
current market rates and estimates of future market rates. Based on this, an
adverse change in prepayment risk would not have an effect on the fair value of
the Company's RITESSM investments. In addition, the RITESSM investments are not
subject to prepayment risk as the term of the securitization trusts is only for
a period during which the underlying bond cannot be prepaid. Based on historical
experience, credit losses were estimated to be zero.
At June 30, 2003 and December 31, 2002, a 10% and 20% adverse change in key
assumptions used to estimate the fair value of the Company's RITESSM would have
the following impact.
(000s) June 30, 2003 December 31, 2002
------------- -----------------
Fair value of retained interests, net $11,756 $9,592
Residual cash flows discount rate (annual rate) 3.1% - 8.5% 3.8% - 8.1%
Impact on fair value of 10% adverse change ($8,406) ($9,108)
Impact on fair value of 20% adverse change ($16,109) ($17,444)
The sensitivity analysis presented above is hypothetical in nature and
presented for information purposes only. The analysis shows the effect on fair
value of a variation in one assumption and is calculated without considering the
effect of changes in any other assumption. In reality, changes in one assumption
may affect the others, which may magnify or offset the sensitivities.
NOTE 5 - INVESTMENT IN DERIVATIVE FINANCIAL INSTRUMENTS
At June 30, 2003 and December 31, 2002, the Company's investments in
derivative financial instruments consisted of interest rate swaps and put option
contracts. For further discussion of the Company's investment in derivative
financial instruments see Note 6 to the Company's 2002 Form 10-K. The Company
terminated swap contracts with a total notional amount of $105.7 million ($319.4
million in swap contracts and $213.6 million in reverse swap contracts). In
addition, a swap contract with a notional amount of $13.1 million expired in the
second quarter of 2003. The following table provides certain information with
respect to the derivative financial instruments held by the Company at June 30,
2003 and December 31, 2002.
June 30, 2003 December 31, 2002
---------------------------------------------- --------------------------------------------
(000s) Notional Fair Value (2) Notional Fair Value (2)
Amount (1) Assets Liabilities (3) Amount (1) Assets Liabilities (3)
------------ --------------- ---------------- ------------ -------------- ---------------
Interest rate swap agreements $ 230,975 $ 3,170 $ (21,792) $ 349,810 $ 18,762 $ (49,359)
Put option agreements 97,314 - - 98,539 - -
--------------- ---------------- -------------- ---------------
Total investment in derivative financial instruments $ 3,170 $ (21,792) $ 18,762 $ (49,359)
=============== ================ ============== ===============
(1) For the interest rate swap agreements, notional amount represents total
amount of the Company's interest rate swap contracts ($265,935 as of June 30,
2003 and $598,415 as of December 31, 2002) less the total amount of the
Company's reverse interest rate swap contracts ($34,960 as of June 30, 2003 and
$248,605 as of December 31, 2002). For put option agreements, the notional
amount represents the Company's aggregate obligation under the put option
agreements.
(2) The amounts disclosed represent the net fair values of all the Company's
derivatives at the reporting date.
(3) The aggregate negative fair value of the investments is included in
liabilities for financial reporting purposes. The negative fair value of these
investments is considered temporary and is not indicative of the future earnings
on these investments.
NOTE 6 - OTHER ASSETS
The Company's investment in other assets includes prepaid expenses, other
receivables, debt issue costs, property and equipment, and certain investments
in interest-only securities. Included in the other asset balance at June 30,
2003 and December 31, 2002 is $9.5 million and $23.3 million, respectively, of
receivables due from various syndicated low-income housing tax credit funds (for
further discussion of syndicated low-income housing tax credit funds, see Note 1
to the Company's 2002 Form 10-K). The decrease in this receivable from December
31, 2002 to June 30, 2003 is due to certain funds repaying the Company after
obtaining an alternative source of financing.
NOTE 7 - NOTES PAYABLE AND DEBT
The Company's notes payable consist primarily of notes payable and advances
under line of credit arrangements, which are used to: (1) finance construction
lending needs; (2) finance working capital needs; (3) warehouse real estate
operating partnerships before they are placed into tax credit equity funds; and
(4) warehouse permanent loans before they are sold. The Company's short- and
long-term debt relates to securitization transactions that the Company has
recorded as borrowings (see Notes 1 and 9 to the Company's 2002 Form 10-K). The
following table summarizes notes payable and debt at June 30, 2003 and December
31, 2002.
(000s) Total of Facilities June 30, 2003 December 31, 2002
------------------- ----------------- -------------------
Short-term notes payable N/A $ 232,301 $ 126,410
Lines of credit - unaffiliated entities $ 280,000 60,444 110,821
Lines of credit - affiliated entities $ 240,000 29,869 89,053
Short-term debt N/A 211,670 219,945
----------------- --------------------
Total short-term notes payable and debt 534,284 546,229
----------------- --------------------
Long-term notes payable N/A 114,335 124,640
Long-term debt N/A 142,006 147,357
----------------- --------------------
Total long-term notes payable and debt 256,341 271,997
----------------- --------------------
Total notes payable and debt $ 790,625 $ 818,226
================= ====================
Covenant Compliance
Under the terms of the various credit facilities, the Company is required
to comply with covenants including net worth, interest coverage, collateral and
other terms and conditions. The Company was in compliance with its debt
covenants at June 30, 2003.
NOTE 8 - GUARANTEES, COMMITMENTS AND CONTINGENCIES
For discussion of the Company's commitments and contingencies see Note 11
to the Company's 2002 Form 10-K. Since December 31, 2002, there has been no
material change to the information related to commitments and contingencies.
Guarantees
The Company's maximum exposure under its guarantee obligations is not
indicative of the likelihood of the expected loss under the guarantees. The
Company recognizes contingent liabilities on guarantees when the losses are
probable and can be reasonably estimated.
The following table summarizes the Company's guarantees by type at June 30,
2003.
(in millions) June 30, 2003
-------------------------------------------------------------------
Maximum Carrying
Guarantee Note Exposure Amount Supporting Collateral
- ------------------------------------------------------ ------- ------------- ---------- ------------------------------------------
Loss-Sharing Agreement with Fannie Mae and GNMA/HUD (1) $ 168.5 $ - $5.0 million Letter of Credit pledged
Bank Line of Credit Guarantees (2) 87.0 - Investment in partnership and loans
totaling $69.9 million
Tax Credit Related Guarantees (3) 48.8 0.1 None
Other Financial/Payment Guarantees (4) 211.6 1.6 $3.8 million of tax-exempt bonds and cash
Put Options (5) 101.6 - $43.3 million of loans and tax-exempt bonds
Letter of Credit Guarantees (6) 32.9 - $1.1 of tax-exempt bonds
Indemnification Contracts (7) 14.4 - None
------------- ----------
$ 664.8 $ 1.7
============= ==========
Notes:
(1) As a Fannie Mae DUS lender and Government National Mortgage Association
("GNMA") loan servicer, the Company may share in losses relating to
underperforming real estate mortgage loans delivered to Fannie Mae and
GNMA. More specifically, if the borrower fails to make a payment on a DUS
loan originated by the Company and sold to Fannie Mae, of principal,
interest, taxes or insurance premiums, the Company may be required to make
servicing advances to Fannie Mae. Also, the Company may participate in a
deficiency after foreclosure on DUS and GNMA loans. As a DUS lender, the
Company must maintain a minimum net worth and collateral with a custodian.
The term of the loss sharing agreement is based on the contractual
requirements of the underlying loans delivered to Fannie Mae and GNMA,
which varies to a maximum of 40 years.
(2) The Company provides payment or performance guarantees for certain
borrowings under line of credit facilities with a term of 1 year or less.
(3) The Company acquires and sells interests in partnerships that provide
low-income housing tax credits for investors. In conjunction with the sale
of these partnership interests, the Company may provide performance
guarantees on the underlying properties owned by the partnerships or
guarantees to the fund investors. These guarantees have various expirations
to a maximum term of 18 years.
(4) The Company has entered into arrangements that require the Company to make
payment in the event a specified third party fails to perform on its
financial obligation. The Company typically provides these guarantees in
conjunction with the sale of an asset to a third party or the Company's
investment in equity ventures. The term of the guarantee varies based on
loan payoff schedules or Company divestitures.
(5) The Company has entered into put option agreements with counterparties
whereby the counterparty has the right to sell to the Company, and the
Company has the obligation to buy, an underlying investment at a specified
price. These put option agreements expire at various dates between February
1, 2006 and April 1, 2007.
(6) The Company provides a guarantee of the repayment on losses incurred under
letters of credit issued by third parties or provide a guarantee to provide
substitute letters of credit at a predetermined future date. In addition,
the Company may provide a payment guarantee for certain assets in
securitization programs. These guarantees expire at various dates between
March 1, 2004 and September 1, 2017.
(7) The Company has entered into indemnification contracts, which require the
guarantor to make payments to the guaranteed party based on changes in an
underlying investment that is related to an asset or liability of the
guaranteed party. These agreements typically require the Company to
reimburse the guaranteed party for legal and other costs in the event of an
adverse judgment in a lawsuit or the imposition of additional taxes due to
a change in the tax law or an adverse interpretation of the tax law. The
term of the indemnification varies based on the underlying program life,
loan payoffs, or Company divestitures. Based on the terms of the underlying
contracts, the maximum exposure amount only includes amounts that can be
reasonably estimated at this time; the actual exposure amount could vary
significantly.
NOTE 9 - DISCONTINUED OPERATIONS
In April 2003, the Company acquired a property by deed in lieu of
foreclosure. This property previously served as collateral for a tax-exempt bond
held by the Company. In June 2003, the Company sold the property for net
proceeds of $38.1 million. The Company used the proceeds to terminate interest
rate swaps (see Note 5 for further discussion) and to purchase third party
P-FloatsSM. The P-FloatsSM replaced the tax-exempt bond as collateral with
Merrill Lynch. All activity related to this property has been classified as
discontinued operations in the consolidated statements of income. The following
table summarizes the components of discontinued operations.
For the three months ended For the six months ended
June 30, June 30,
---------------- ----------------- ---------------- -----------------
(000's) 2003 2002 2003 2002
---------------- ----------------- ---------------- -----------------
Loss from operations of
property $ (1,015) $ - $ (1,015) $ -
Gain on disposal of property 26,763 - 26,763 -
---------------- ----------------- ---------------- -----------------
Discontinued operations $ 25,748 $ - $ 25,748 $ -
================ ================= ================ =================
The net assets of the property as of the date of sale were as follows:
(000's) 2003
----------------
Fixed assets, net $ 12,553
Other assets 252
Other liabilities (446)
----------------
Net assets of discontinued operations $ 12,359
================
NOTE 10 - EARNINGS PER SHARE
The following table reconciles the numerators and denominators in the basic
and diluted earnings per share ("EPS") calculations for common shares for the
three and six months ended June 30, 2003 and 2002. The effect of all potentially
dilutive securities was included in the calculation. The Company did not have
any options to purchase common shares that were not included in the computation
of diluted EPS at June 30, 2003 or 2002 due to options' exercise prices being
greater than the average price of the common shares for the period.
For the three months ended June 30, 2003 For the three months ended June 30, 2002
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------------ -------------------------------------------
(unaudited)
(in thousands, except share and per share data)
Basic EPS
Net income from continuing operations $ 5,354 $ 0.19 $ 2,920 $ 0.12
Discontinued operations 25,748 0.89 - -
------------ ----------- ----------- ------------
Income allocable to common shares $ 31,102 28,857,305 $ 1.08 $ 2,920 25,252,124 $ 0.12
============ =========== =========== ============
Effect of Dilutive Securities
Options and deferred shares 355,757 450,829
Earnings contingency - 132,855
--------------- --------------
Diluted EPS
Net income from continuing operations $ 5,354 $ 0.18 $ 2,920 $ 0.11
Discontinued operations 25,748 0.88 - -
------------ ----------- ------------- ------------
Income allocable to common shares
plus assumed conversions $ 31,102 29,213,062 $ 1.06 $ 2,920 25,835,808 $ 0.11
============ =============== =========== ============= ============== ============
For the six months ended June 30, 2003 For the six months ended June 30, 2002
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------------ -------------------------------------------
(in thousands, except share and per share data)
Basic EPS
Net income from continuing operations $ 19,299 $ 0.69 $ 17,813 $ 0.73
Discontinued operations 25,748 0.91 - -
------------ ----------- ----------- ------------
Income allocable to common shares $ 45,047 28,104,281 $ 1.60 $ 17,813 24,423,091 $ 0.73
============ =========== ============
Effect of Dilutive Securities
Options and deferred shares 347,199 466,685
Earnings contingency - 132,855
--------------- --------------
Diluted EPS
Net income from continuing operations $ 19,299 $ 0.68 $ 17,813 $ 0.71
Discontinued operations 25,748 0.90 - -
------------ ----------- ----------- ------------
Income allocable to common shares
plus assumed conversions $ 45,047 28,451,480 $ 1.58 $ 17,813 25,022,631 $ 0.71
============ =============== =========== ============= ============== ============
NOTE 11 - DISTRIBUTIONS
On July 17, 2003, the Board of Directors declared a distribution of $0.4475
for the three months ended June 30, 2003, to common shareholders of record on
July 28, 2003. The payment date was August 8, 2003.
NOTE 12 - NON-EMPLOYEE DIRECTORS' SHARE PLANS AND EMPLOYEE SHARE INCENTIVE PLANS
The Company accounts for both the non-employee director share plans and the
employee share incentive plans (see Note 1 and Note 15 to the Company's 2002
Form 10-K) under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation expense has been recognized for the options issued
under the plans during the second quarter of 2003. The Company issued 7,000
options in the first quarter of 2003 and 30,000 options in the second quarter of
2003. The Company issued 30,000 options in the second quarter of 2002. The
Company estimated the fair value of each option awarded using the Black Scholes
option-pricing model with the following assumptions.
For the three months ended June 30, For the six months ended June 30,
------------------------------------ ---------------------------------------
2003 2002 2003 2002
------------------ ----------------- -------------------- ------------------
Risk-free interest rate 3% 4% 3% 4%
Dividend yield 7.1% 6.7% 7.0% 6.7%
Volatility 14% 11% 14% 11%
Expected option life 7.5 years 7.5 years 7.5 years 7.5 years
Weighted average fair value of options $ 0.78 $ 1.13 $ 0.87 $ 1.13
The following table illustrates the effect on net income and earnings per
share as if the compensation expense had been determined based on the fair value
recognition provisions of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" as amended by Financial Accounting Standards
No.148 "Accounting for Stock-Based Compensation-Transition and Disclosure."
For the three months ended June 30, For the six months ended June 30,
------------------------------------------------------------------------------
(000s) 2003 2002 2003 2002
------------------ ----------------- -------------------- ------------------
Net income allocated to common shares, as reported $ 31,102 $ 2,920 $ 45,047 $ 17,813
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (23) (34) (32) (34)
------------------ ----------------- -------------------- ------------------
Net income allocated to common shares, pro forma $ 31,079 $ 2,886 $ 45,015 $ 17,779
================== ================= ==================== ==================
Earnings per common share:
Basic - as reported $ 1.08 $ 0.12 $ 1.60 $ 0.73
================== ================= ==================== ==================
Basic - pro forma $ 1.08 $ 0.11 $ 1.60 $ 0.73
================== ================= ==================== ==================
Diluted - as reported $ 1.06 $ 0.11 $ 1.58 $ 0.71
================== ================= ==================== ==================
Diluted - pro forma $ 1.06 $ 0.11 $ 1.58 $ 0.71
================== ================= ==================== ==================
NOTE 13 - BUSINESS SEGMENT REPORTING
The Company has two reportable business segments: (1) an operating segment
consisting of subsidiaries that primarily generate taxable fee income by
providing loan servicing, loan origination and other related services and (2) an
investing segment consisting primarily of subsidiaries holding investments
producing tax-exempt interest income. The accounting policies of the segments
are the same as those described in the summary of significant accounting
policies in Note 1 to the Company's 2002 Form 10-K. A complete description of
the Company's reporting segments is included in Note 18 to the Company's 2002
Form 10-K.
The following table reflects the results of the Company's business segments
for the three and six months ended June 30, 2003 and 2002.
Municipal Mortgage & Equity, LLC
Segment Reporting for the three months ended June 30, 2003 and 2002
(in thousands) (unaudited)
For the three months ended June 30, 2003
----------------------------------------------
Total
Investing Operating Adjustments Consolidated
--------- --------- ------------- ------------
INCOME:
Interest income
Interest on bonds and residual interests in $ 13,687 $ 242 $ - $ 13,929
bond securitizations
Interest on loans 771 6,792 - 7,563
Interest on short-term investments 1,417 75 (1,160)(1) 332
--------- --------- ---------- ----------
Total interest income 15,875 7,109 (1,160) 21,824
--------- --------- ---------- ----------
Fee income
Syndication fees - 1,825 - 1,825
Origination fees - 2,711 (492)(2) 2,219
Loan servicing fees - 1,838 - 1,838
Asset management and advisory fees - 1,198 - 1,198
Other income 1,877 1,432 - 3,309
--------- --------- ---------- ----------
Total fee income 1,877 9,004 (492) 10,389
--------- --------- ---------- ----------
Net gain (loss) on sales 759 694 - 1,453
--------- --------- ---------- ----------
Total Income 18,511 16,807 (1,652) 33,666
--------- --------- ---------- ----------
EXPENSES:
Interest expense 3,589 6,295 (1,160)(1) 8,724
Salaries and benefits 972 7,699 - 8,671
General and administrative 596 1,517 - 2,113
Professional fees 393 484 - 877
Amortization of mortgage servicing rights and other intangibles - 414 - 414
--------- --------- ---------- ----------
Total expenses 5,550 16,409 (1,160) 20,799
--------- --------- ---------- ----------
Net holding gains (losses) on derivatives (2,449) - - (2,449)
Impairments and valuation allowances related to investments (1,097) (47) - (1,144)
Net gains (losses) from equity investments in partnerships - (1,606) - (1,606)
--------- --------- ---------- ----------
Net income before income taxes, income allocated to
preferred shareholders and minority interests in
subsidiary companies and discontinued operations 9,415 (1,255) (492) 7,668
Income tax expense (benefit) - (540) - (540)
--------- --------- ---------- ----------
Net income before income allocated to preferred
shareholders and minority interests in subsidiary
companies and discontinued operations 9,415 (715) (492) 8,208
Income allocable to preferred shareholders and minority interests
in subsidiary companies 2,994 (140) - 2,854
--------- --------- ---------- ----------
Net income from continuing operations 6,421 (575) (492) 5,354
Discountinued operations 25,748 - - 25,748
--------- --------- ---------- ----------
Net income (loss) $ 32,169 $ (575) $ (492) $ 31,102
========= ========= ========== ==========
Municipal Mortgage & Equity, LLC
Segment Reporting for the three months ended June 30, 2003 and 2002
(in thousands) (unaudited)
For the three months ended June 30, 2002
-----------------------------------------------
Total
Investing Operating Adjustments Consolidated
---------- ---------- ------------ -------------
INCOME:
Interest income
Interest on bonds and residual interests in $ 14,594 $ 805 $ - $ 15,399
bond securitizations
Interest on loans 832 7,762 - 8,594
Interest on short-term investments 194 50 - 244
-------------------- ---------- -----------
Total interest income 15,620 8,617 - 24,237
-------------------- ---------- -----------
Fee income
Syndication fees - 2,380 - 2,380
Origination fees - 3,005 (1,500)(2) 1,505
Loan servicing fees - 1,660 - 1,660
Asset management and advisory fees - 1,040 - 1,040
Other income 112 1,147 - 1,259
-------------------- ---------- -----------
Total fee income 112 9,232 (1,500) 7,844
-------------------- ---------- -----------
Net gain (loss) on sales (3,074) 3,777 - 703
-------------------- ---------- -----------
Total Income 12,658 21,626 (1,500) 32,784
-------------------- ---------- -----------
EXPENSES:
Interest expense 2,125 6,362 - 8,487
Salaries and benefits 511 5,419 - 5,930
General and administrative 341 1,356 - 1,697
Professional fees 398 1,569 - 1,967
Amortization of mortgage servicing rights and other intangibles - 333 - 333
-------------------- ---------- -----------
Total expenses 3,375 15,039 - 18,414
-------------------- ---------- -----------
Net holding gains (losses) on derivatives (7,721) - - (7,721)
Impairments and valuation allowances related to investments - - - -
Net gains (losses) from equity investments in partnerships - 94 - 94
-------------------- ---------- -----------
Net income before income taxes, income allocated to
preferred shareholders and minority interests in
subsidiary companies and discontinued operations 1,562 6,681 (1,500) 6,743
Income tax expense (benefit) - 828 - 828
-------------------- ---------- -----------
Net income before income allocated to preferred
shareholders and minority interests in subsidiary
companies and discontinued operations 1,562 5,853 (1,500) 5,915
Income allocable to preferred shareholders and minority interests
in subsidiary companies 2,995 - 2,995
-------------------- ---------- -----------
Net income from continuing operations (1,433) 5,853 (1,500) 2,920
Discountinued operations - - - -
-------------------- ---------- -----------
Net income (loss) $ (1,433) $ 5,853 $ (1,500) $ 2,920
========== ========= ========== ===========
Municipal Mortgage & Equity, LLC
Segment Reporting for the six months ended June 30, 2003 and 2002
(in thousands) (unaudited)
For the six months ended June 30, 2003
-------------------------------------------------
Total
Investing Operating Adjustments Consolidated
---------- --------- ------------ -------------
INCOME:
Interest income
Interest on bonds and residual interests in $ 29,426 $ 488 $ - $ 29,914
bond securitizations
Interest on loans 1,600 15,466 - 17,066
Interest on short-term investments 2,615 136 (2,227)(1) 524
---------- --------- ----------- ------------
Total interest income 33,641 16,090 (2,227) 47,504
---------- --------- ----------- ------------
Fee income
Syndication fees - 3,236 - 3,236
Origination fees - 3,870 (953)(2) 2,917
Loan servicing fees - 3,747 - 3,747
Asset management and advisory fees - 2,274 - 2,274
Other income 3,185 2,321 - 5,506
---------- --------- ----------- ------------
Total fee income 3,185 15,448 (953) 17,680
---------- --------- ----------- ------------
Net gain (loss) on sales 759 1,972 - 2,731
---------- --------- ----------- ------------
Total Income 37,585 33,510 (3,180) 67,915
---------- --------- ----------- ------------
EXPENSES:
Interest expense 7,081 14,238 (2,227)(1) 19,092
Salaries and benefits 1,446 13,191 - 14,637
General and administrative 1,148 2,790 - 3,938
Professional fees 937 929 - 1,866
Amortization of mortgage servicing rights and other intangibles - 803 - 803
---------- --------- ----------- ------------
Total expenses 10,612 31,951 (2,227) 40,336
---------- --------- ----------- ------------
Net holding gains (losses) on derivatives 424 - - 424
Impairments and valuation allowances related to investments (1,097) (47) - (1,144)
Net gains (losses) from equity investments in partnerships - (2,353) - (2,353)
---------- --------- ----------- ------------
Net income before income taxes, income allocated to
preferred shareholders and minority interests in
subsidiary companies and discontinued operations 26,300 (841) (953) 24,506
Income tax expense (benefit) - (472) - (472)
---------- --------- ----------- ------------
Net income before income allocated to preferred
shareholders and minority interests in subsidiary
companies and discontinued operations 26,300 (369) (953) 24,978
Income allocable to preferred shareholders and minority interests
in subsidiary companies 5,989 (310) - 5,679
---------- --------- ----------- ------------
Net income from continuing operations 20,311 (59) (953) 19,299
Discountinued operations 25,748 - - 25,748
---------- --------- ----------- ------------
Net income (loss) $ 46,059 $ (59) $ (953) $ 45,047
========== ========= =========== ============
Municipal Mortgage & Equity, LLC
Segment Reporting for the six months ended June 30, 2003 and 2002
(in thousands) (unaudited)
For the six months ended June 30, 2002
-----------------------------------------------
Total
Investing Operating Adjustments Consolidated
---------- --------- ------------ ------------
INCOME:
Interest income
Interest on bonds and residual interests in $ 28,702 $ 1,859 $ - $ 30,561
bond securitizations
Interest on loans 1,680 15,344 - 17,024
Interest on short-term investments 635 96 - 731
---------- --------- ---------- -----------
Total interest income 31,017 17,299 - 48,316
---------- --------- ---------- -----------
Fee income
Syndication fees - 3,998 - 3,998
Origination fees - 4,513 (1,919)(2) 2,594
Loan servicing fees - 3,568 - 3,568
Asset management and advisory fees - 1,907 - 1,907
Other income 469 1,935 - 2,404
---------- --------- ---------- -----------
Total fee income 469 15,921 (1,919) 14,471
---------- --------- ---------- -----------
Net gain (loss) on sales (2,118) 4,987 - 2,869
---------- --------- ---------- -----------
Total Income 29,368 38,207 (1,919) 65,656
---------- --------- ---------- -----------
EXPENSES:
Interest expense 4,514 12,945 - 17,459
Salaries and benefits 1,618 9,139 - 10,757
General and administrative 754 2,669 - 3,423
Professional fees 375 2,229 - 2,604
Amortization of mortgage servicing rights and other intangibles - 651 - 651
---------- --------- ---------- -----------
Total expenses 7,261 27,633 - 34,894
---------- --------- ---------- -----------
Net holding gains (losses) on derivatives (4,609) - - (4,609)
Impairments and valuation allowances related to investments (110) - - (110)
Net gains (losses) from equity investments in partnerships - (229) - (229)
---------- --------- ---------- -----------
Net income before income taxes, income allocated to
preferred shareholders and minority interests in
subsidiary companies and discontinued operations 17,388 10,345 (1,919) 25,814
Income tax expense (benefit) - 1,859 - 1,859
---------- --------- ---------- -----------
Net income before income allocated to preferred
shareholders and minority interests in subsidiary
companies and discontinued operations 17,388 8,486 (1,919) 23,955
Income allocable to preferred shareholders and minority interests
in subsidiary companies 5,989 - - 5,989
---------- --------- ---------- -----------
Net income from continuing operations 11,399 8,486 (1,919) 17,966
Discountinued operations - - - -
---------- --------- ---------- -----------
Net income (loss) $ 11,399 $ 8,486 $ (1,919) $ 17,966
========== ========= ========== ===========
Notes:
(1) Adjustments represent intercompany interest and expense that are eliminated
in consolidation
(2) Adjustments represent origination fees on purchased investments which are
deferred and amortized into income over the life of the investment
NOTE 14 - RELATED PARTY TRANSACTIONS
See Note 14 of the Company's 2002 Form 10-K for a detailed description of
the Company's related party transactions. Except as disclosed below, there has
been no material change since December 31, 2002 to the information related to
related party transactions.
In June 2003, the Company received approximately $0.8 million in cash and a
34.1% limited partnership interest in SCA Associates 86-II Limited Partnership
("SCA86-II") from SCA Custodial Co., Inc. ("SCAC"). The general partner of
SCA86-II is Shelter Development Holdings, Inc. ("Shelter Holdings"). Mr. Mark K.
Joseph, the Company's Chief Executive Officer and Chairman of its Board of
Directors, controls and is an officer of Shelter Holdings. Mr. Joseph also owns
a 20.8% limited partnership interest in SCA86-II. In addition, Mr. Michael L.
Falcone, the Company's President and Chief Operating Officer, owns a 3% limited
partnership interest in SCA86-II. SCAC is indirectly wholly owned by The Shelter
Policy Institute, Inc., which is controlled by Mr. Joseph.
The cash received by the Company was recorded as other income in the
consolidated statements of income and is an accumulation of distributions from
the 34.1% limited partnership interest in SCA86-II. SCA86-II's sole asset is
shares of the Company. Therefore, the shares allocated to the Company's interest
in SCA86-II are classified as treasury shares on the consolidated balance
sheets. The partnership interest was held by SCAC as collateral for guaranteed
obligations related to a tax-exempt bond held by the Company. In April 2003, the
Company acquired the property that collateralized this bond by deed in lieu of
foreclosure and subsequently sold the property to a third party (See Note 9).
The sale of the property fulfilled all remaining guaranteed obligations and
allowed the release of the collateral held by SCAC.
The Company no longer leases office space from an affiliate due to the sale
of the building to a third party in February 2003.
NOTE 15 - SUBSEQUENT EVENTS
On July 1, 2003, the Company acquired Housing and Community Investment
("HCI"), the tax credit equity unit of Lend Lease Real Estate Investments, for
$102 million in cash. The acquisition was financed by a $120 million secured
term credit facility provided by a syndicate of banks led by the Royal Bank of
Canada. HCI is a market leading syndicator of low income tax credit equity
investments. In connection with this acquisition, the Company's operating
subsidiary, MuniMae Midland, LLC, has been renamed MMA Financial, LLC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
General Business
The Company provides debt and equity financing to developers of multifamily
housing. The Company invests in tax-exempt bonds, or interests in bonds, issued
by state and local governments or their agencies or authorities to finance
multifamily housing developments. Interest income derived from the majority of
these bond investments is exempt income for federal income tax purposes.
Multifamily housing developments, as well as the rents paid by the tenants,
secure these investments.
The Company is also a mortgage banker. Mortgage banking activities include
the origination, investment in and servicing of investments in multifamily
housing, both for its own account and on behalf of third parties. These
investments generate taxable income.
The Company also invests in (1) other housing-related debt and equity
investments, including equity investments in income-producing real estate
operating partnerships and tax-exempt bonds, or interests in bonds, secured by
student housing or assisted living developments, and (2) tax-exempt community
development bonds, typically secured by special taxes imposed on single-family
or other community development districts or by assessments imposed on the
residents or other lot owners of those developments.
The Company also acquires and sells interests in partnerships that provide
low-income housing tax credits for investors. The Company earns syndication fees
on the placement of these interests with investors, including Fannie Mae and a
number of corporate investors. The Company also earns asset management fees for
managing the low-income housing tax credit funds syndicated.
Liquidity and Capital Resources
The Company's sources of capital to fund its tax-exempt bond lending
activities include proceeds from equity offerings, securitizations, and draws on
lines of credit. The Company's sources of capital to fund its mortgage banking
activities include (1) warehousing facilities and short-term lines of credit
with commercial banks and pension funds, (2) debt and equity financings, either
through the Midland Affordable Housing Group Trust or the Midland Multifamily
Equity REIT ("MMER"), and (3) working capital.
The Company relies on the regular availability of capital from pension
funds, government sponsored entities ("GSEs"), equity offerings, bank lines of
credit and securitization transactions to finance its growth. The Company
expects to meet its cash needs in the short-term, which consist primarily of
funding of new investments, payment of distributions to shareholders and funding
of mortgage banking activities, from equity offering proceeds, cash on hand and
bank lines of credit. To continue to grow these activities, the Company will
need to increase its access to capital in 2003 and future years. The Company
expects it will need $100 to $200 million in new capital to meet its 2003
production targets for its lending and tax credit equity businesses. The
Company's February 2003 equity offering generated net proceeds of $71.9 million
to satisfy a portion of the new capital needed. The Company has also increased
its borrowing capacity on two existing lines of credit by a total of $126
million. In addition, the Company is seeking to establish relationships with
additional pension funds and to expand its relationships with GSEs. If the
Company is unable to secure the remaining additional capital needed during 2003,
its production targets may decrease by $130 to $225 million.
For the three months ended June 30, 2003, the Company structured $65.7
million in tax-exempt bond transactions. This includes both construction and
permanent transactions because, although they relate to the same loans, the
Company counts them as separate loans for consistency with tracking of taxable
lending, where construction and permanent loans are legally distinct loans. In
addition, the Company originated $94.0 million of construction loans, $118.4
million of permanent loans and $7.7 million of supplemental loans. The Company
also closed $38.1 million for investment in syndicated tax credit equity funds
and originated $46.9 million of conventional market rate equity transactions.
Since December 31, 2002, there has been no material change to the
information related to the Company's liquidity and capital resources except as
discussed below.
Pension Funds
MMER is a Maryland real estate investment trust established by a group of
pension funds that the Company has had relationships with for over twenty-five
years. During the second quarter of 2003, MMER received an additional $7 million
in share subscriptions. Of this additional subscription amount, $2 million was
from a pension fund that the Company had not had a relationship with in the
past, which brought the total number of investors in MMER to five.
Lines of Credit
During the second quarter of 2003, the Company expanded the capacity of a
general bank line of credit used to fund supplemental loans from $4 million to
$30 million. In addition, the Company expanded a loan warehousing line from $100
million to $200 million. The uses of this line were also expanded to include
warehousing of tax-exempt bonds, new construction loans and pre-development
loans. In addition, the Company's mortgage servicing rights have been added as a
source of collateral.
Leverage
The Company's leverage ratio was 51.7% and 55.8% at June 30, 2003 and
December 31, 2002, respectively. This leverage ratio is based on total debt
(notes payable, short- and long-term debt) divided by the Company's total
capitalization (notes payable, short- and long-term debt, preferred
shareholders' and minority interests' equity in subsidiary companies, and
shareholders' equity). Management includes short-term debt in this calculation
because of the importance of short-term debt to the Company's management of its
overall cost of capital. It should be noted that this leverage ratio is one of
many ways to measure leverage. For example, as of June 30, 2003, this ratio
excludes $257.5 million of securitization interests that are senior to the
Company's investments that were previously accounted for as sales and includes
$183.5 million of construction loans where the economic risk belongs to a third
party.
The Company will continue to try to maintain overall leverage ratios in the
50% to 65% range, with certain assets at significantly higher ratios, up to
approximately 99%, and other assets not leveraged at all.
Factors that Could Affect Future Results
The Company's 2002 Form 10-K contains a detailed description of the
Company's factors that could affect future results. There has been no material
change since December 31, 2002 to the information related to factors that could
affect future results.
Acquisition of Housing and Community Investment Unit of Lend Lease Real Estate
Investments
On July 1, 2003, the Company acquired Housing and Community Investment
("HCI"), the tax credit equity unit of Lend Lease Real Estate Investments, for
$102 million in cash. The acquisition was financed by a $120 million secured
term credit facility provided by a syndicate of banks led by the Royal Bank of
Canada. HCI is a market leading syndicator of low income tax credit equity
investments. In connection with this acquisition, the Company's operating
subsidiary, MuniMae Midland, LLC, has been renamed MMA Financial, LLC.
Contractual Obligations
The Company's 2002 Form 10-K contains a description of the Company's
material contractual obligations. Except as disclosed below, there has been no
material change since December 31, 2002 to the information related to
contractual obligations.
During the second quarter of 2003, the Company entered into an operating
lease for 21,283 square feet of new office space. The initial term of the lease
is ten years commencing October 1, 2003. Rent will be charged at the rate of
$25.20 per square foot with an escalation of 3% per year.
Guarantees and Off-Balance Sheet Arrangements
The Company's 2002 Form 10-K contains a summary of the Company's guarantees
and off-balance sheet arrangements. Since December 31, 2002, there has been no
material change to the information related to guarantees and off-balance sheet
obligations. See Note 8 for a table that summarizes the Company's guarantees by
type as of June 30, 2003.
Dividend Policy and Cash Available for Distribution
Consistent with its strategy of maximizing shareholder value through steady
increases in cash distributions to shareholders, the Company uses cash available
for distribution ("CAD") as a primary measure of its ability to pay
distributions. The Company believes CAD is the most relevant measure of its
ability to pay distributions, as CAD is a measure of current earnings. The
Company uses this measure of current earnings as a basis for declaring its
quarterly distributions.
CAD differs from net income because of variations between GAAP income and
actual cash received. There are three primary differences between CAD and GAAP
income. The first is the treatment of loan origination fees, which for CAD
purposes are recognized as income when received but for GAAP purposes are
amortized into income over the life of the associated investment. The second
difference is the non-cash gain and loss recognized for GAAP associated with
valuations, sales of investments and capitalization and amortization of mortgage
servicing rights, which are not included in the calculation of CAD. The third
difference is the treatment of the Company's investments in partnerships. For
GAAP, the Company records its allocable share of the income (loss) from the
partnership as income, while for CAD reporting, the Company records the cash
distributions it receives from the partnership as income.
Since the first quarter of 2002, when the Company completed the redemption
of preferred shares and term growth shares, the Company's entire net cash flow
has been available for distribution to the common shares. The Company's current
policy is to distribute to common shareholders at least 80% of its annual CAD to
common shares. The table below shows the Company's CAD available to common
shares, CAD per common share, dividend per common share and payout ratio for the
three and six months ended June 30, 2003 and 2002.
For the three months ended June 30, For the six months ended June 30,
-------------------------------------- --------------------------------------
2003 2002 2003 2002
------------------ ------------------ ------------------ ------------------
CAD available to common shares (000s) $ 15,121 $ 12,385 $ 29,537 $ 24,198
CAD per common share (1) 0.52 0.49 1.02 0.96
Dividend per common share 0.4475 0.4375 0.8925 0.8725
Payout ratio 85.3% 89.4% 87.3% 91.1%
(1) CAD per common share is calculated based on the number of shares outstanding
at the end of each fiscal quarter.
The following table reconciles the Company's GAAP net income to CAD for the
three and six months ended June 30, 2003 and 2002.
For the three months ended For the six months ended
June 30, June 30,
---------------------------------- ---------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- ---------------
Net income allocated to common shares - GAAP Basis $ 31,102 $ 2,920 $ 45,047 $ 17,813
================ ================ ================ ===============
Conversion to Cash Available for Distribution:
(1)Mark to market adjustments $ 2,449 $ 7,721 $ (424) $ 4,609
(2)Equity investments 3,181 79 5,591 519
(3)Net gain on sales (10,486) (601) (10,813) (2,727)
(3)Amortization of capitalized mortgage servicing fee 414 333 766 651
(4)Origination fees and other income, net 1,335 1,450 1,616 2,123
(5)Valuation allowances and other-than-temporary impairments 1,097 - 1,097 110
(6)Deferred tax expense 984 483 1,612 1,100
(7)Discontinued operations (25,748) - (25,748) -
(8)Interest income