Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 1-13237
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
---------------------------------------------
(Exact name of Registrant as specified in its Trust Agreement)
Delaware 13-3949418
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
625 Madison Avenue, New York, New York 10022
- -------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 421-5333
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 Exchange Act Rule 12b-2). Yes X No ____
PART I - FINANCIAL
Item 1. Financial Statements
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
================= =================
September 30, December 31,
2003 2002
----------------- -----------------
(Unaudited)
ASSETS
Revenue bonds-at fair value $1,712,897 $1,579,590
Other investments 39,908 44,096
Mortgage servicing rights 32,803 35,595
Cash and cash equivalents 83,115 13,699
Cash and cash equivalents-restricted 84,005 46,785
Interest receivable - net 10,019 9,020
Promissory notes and mortgages receivable 17,636 53,278
Deferred costs - net of amortization of $11,495 and $8,451 55,125 48,693
Goodwill 5,560 4,793
Other intangible assets - net of amortization of
$2,107 and $1,750 10,959 11,316
Other assets 6,388 6,003
---------- ----------
Total assets $2,058,415 $1,852,868
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Financing arrangements $ 863,621 $ 671,659
Preferred shares of subsidiary (subject to mandatory
repurchase) 273,500 --
Notes payable 83,695 68,556
Interest rate hedges 3,453 5,504
Accounts payable, accrued expenses and other liabilities 14,041 32,378
Deferred income 14,067 8,998
Due to Manager and affiliates 3,965 4,126
Deferred tax liability 6,567 10,790
Distributions payable 20,936 19,020
---------- ----------
Total liabilities 1,283,845 821,031
--------- ----------
Preferred shares of subsidiary (subject to mandatory
repurchase) -- 273,500
---------- ----------
Minority interest in consolidated subsidiary 5,788 4,822
---------- ----------
Commitments and contingencies
Shareholders' equity:
Beneficial owners' equity - convertible CRA share-
holders (6,074,767 and 3,835,002 shares, issued and
outstanding in 2003 and 2002, respectively) 112,412 58,174
Beneficial owner's equity-manager 1,130 1,126
Beneficial owners' equity-other common shareholders
(100,000,000 shares authorized; 42,089,694 shares issued
and 42,081,294 outstanding and 41,168,618
shares issued and 41,160,218 outstanding in
2003 and 2002, respectively) 608,539 604,496
Treasury shares of beneficial interest (8,400 shares) (103) (103)
Accumulated other comprehensive income 46,804 89,822
---------- ----------
Total shareholders' equity 768,782 753,515
---------- ----------
Total liabilities and shareholders' equity $2,058,415 $1,852,868
========= =========
See accompanying notes to consolidated financial statements.
2
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share amounts)
(Unaudited)
============================= ============================
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ----------------------------
2003 2002 2003 2002
-------------- -------------- -------------- -------------
Revenues:
Interest income:
Revenue bonds $ 30,353 $ 22,819 $ 83,528 $ 67,764
Other interest income 686 1,141 2,342 4,189
Promissory notes 82 166 363 489
Mortgage banking fees 898 594 3,072 3,644
Mortgage servicing fees 2,273 2,050 6,639 5,912
Other income 1,556 1,314 5,033 2,949
--------- --------- --------- ---------
Total revenues 35,848 28,084 100,977 84,947
--------- --------- --------- ---------
Expenses:
Interest expense 4,889 3,850 13,592 11,634
Interest expense - distributions to
preferred shareholders of subsidiary 4,724 -- 14,173 --
Recurring fees - securitizations 1,039 811 3,021 2,289
Bond servicing 1,123 875 3,185 2,519
General and administrative 6,550 4,166 17,477 14,939
Depreciation and amortization 2,242 2,024 6,844 6,024
Loss on impairment of revenue bonds 1,758 532 1,758 532
--------- --------- --------- ---------
Total expenses 22,325 12,258 60,050 37,937
--------- --------- --------- ---------
Income before gain on repayment of revenue
bonds, sale of loans and equity in earnings
of ARCap 13,523 15,826 40,927 47,010
Equity in earnings of ARCap 555 555 1,665 1,664
Gain on sales of loans 444 1,465 2,994 7,871
Gain on repayment of revenue bonds 557 -- 2,797 3,979
--------- --------- --------- ---------
Income before allocation to preferred
shareholders of subsidiary and minority
interest 15,079 17,846 48,383 60,524
Income allocated to preferred shareholders
of subsidiary -- (4,724) -- (12,541)
(Income) loss allocated to minority interest 147 (124) 186 (377)
--------- --------- --------- ---------
Income before benefit (provision) for income
taxes 15,226 12,998 48,569 47,606
Benefit (provision) for income taxes 689 656 3,453 (983)
--------- --------- --------- ---------
Net income $ 15,915 $ 13,654 $ 52,022 $ 46,623
========= ========= ========= =========
Allocation of net income to:
Special distribution to Manager $ 1,583 $ 1,294 $ 4,453 $ 3,622
========= ========= ========= =========
Manager $ 2 $ 124 $ 5 $ 430
========= ========= ========= =========
Common shareholders $ 12,727 $ 11,327 $ 43,132 $ 40,266
Convertible CRA shareholders 1,603 909 4,432 2,305
--------- --------- --------- ---------
Total for shareholders $ 14,330 $ 12,236 $ 47,564 $ 42,571
========= ========= ========= =========
Net income per share
Basic $ 0.31 $ 0.28 $ 1.05 $ 1.01
--------- --------- --------- ---------
Diluted $ 0.31 $ 0.28 $ 1.04 $ 1.01
--------- --------- --------- ---------
Weighted average shares
outstanding:
Basic 46,331,385 44,209,982 45,484,538 42,030,318
========== ========== ========== ==========
Diluted 46,366,342 44,282,733 45,517,942 42,099,407
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
3
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
Beneficial
Owners' Equity Beneficial Beneficial Treasury Accumulated
- Convertible Owner's Owners' Equity- Shares of Other
CRA Equity - Other Common Beneficial Comprehensive Comprehensive
Shareholders Manager Shareholders Interest Income Income (Loss) Total
------------ ------- ------------ -------- ------ ------------ -----
Balance at January 1, 2003 $ 58,174 $ 1,126 $604,496 $(103) $ 89,822 $753,515
Comprehensive income:
Net income 4,432 4,458 43,132 $ 52,022 52,022
--------
Other comprehensive gain (loss):
Net unrealized gain on interest rate
derivatives 2,073
Net unrealized loss on revenue bonds:
Unrealized holding loss arising during
the period (42,294)
Less: Reclassification adjustment for
net loss included in net income (2,797)
--------
Total other comprehensive loss: (43,018) (43,018) (43,018)
--------
Total comprehensive income $ 9,004
========
Issuance of Convertible CRA Shares 53,783 53,783
Options exercised 2,456 2,456
Distributions (3,977) (4,454) (41,545) (49,976)
--------- -------- -------- ---- -------- -------
Balance at September 30, 2003 $112,412 $ 1,130 $608,539 $(103) $ 46,804 $768,782
======= ======= ======= ==== ======== =======
4
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
==================================
Nine Months Ended
September 30,
----------------------------------
2003 2002
----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 52,022 $ 46,623
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on repayment of revenue bonds (2,797) (3,979)
Loss on impairment of revenue bonds 1,758 532
Other amortization 2,062 815
Amortization of other intangible assets 357 357
Amortization of bond selection costs 1,587 1,354
Amortization of mortgage servicing rights 4,688 4,944
Distributions to preferred shareholders of subsidiary 14,173 --
Income allocated to preferred shareholders
of subsidiary -- 12,541
Equity in earnings of ARCap, in excess of
distributions received -- (104)
Increase in mortgage servicing rights (1,897) (7,498)
Increase in provision for loss under FNMA DUS
product line -- 596
Income (loss) allocated to minority interest (186) 377
Issuance of shares of subsidiary - compensation expense 1,152 498
Decrease in mortgages receivable 28,439 --
Changes in operating assets and liabilities:
Interest receivable (1,042) (1,191)
Other assets 3,257 (64)
Deferred income 5,099 4,809
Accounts payable, accrued expenses and
other liabilities (18,339) 1,774
Deferred tax liability (4,223) 143
Due to Manager and affiliates (340) 156
Fair value of interest rate cap 22 (100)
--------- ---------
Net cash provided by operating activities 85,792 62,583
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from repayments of revenue bonds 72,276 86,130
Periodic principal payments of revenue bonds 12,793 4,179
Proceeds from repayment of note -- 6,600
Purchase/advances to revenue bonds (265,796) (279,018)
Other investments 4,188 (5,263)
Increase in deferred bond selection costs (6,928) (6,629)
Increase in promissory notes -- (3,409)
Increase in cash and cash equivalents - restricted (37,219) (41,726)
Decrease in notes receivable -- 10,562
Goodwill (767) (2,983)
Loans made to properties (1,879) --
Principal payments received from loans
made to properties 9,082 1,939
-------- --------
Net cash used in investing activities (214,250) (229,618)
-------- --------
Continued
5
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
==================================
Nine Months Ended
September 30,
2003 2002
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to the Manager and Common
shareholders (44,232) (39,319)
Distributions paid to preferred shareholders
of subsidiary (14,173) (11,510)
Distributions paid to Convertible CRA
shareholders (3,617) (1,732)
Proceeds from financing arrangements 192,699 54,500
Principal repayments of financing arrangements (737) (67,282)
Increase (decrease) in notes payable 15,139 (10,562)
Increase in deferred costs relating to the
Private Label Tender Option Program (554) (636)
Options exercised and stock compensation 2,426 --
Issuance of Convertible CRA Shares 53,783 --
Issuance of common shares -- 92,353
Retirement of Convertible CRA Shares -- 22,938
Issuance of preferred stock of subsidiary -- 55,000
Increase in deferred costs relating to the
preferred shares offering -- (2,068)
Increase in other deferred costs (2,860) (2,002)
---------- ----------
Net cash provided by financing activities 197,874 89,680
-------- ---------
Net increase (decrease) in cash and cash equivalents 69,416 (77,355)
Cash and cash equivalents at the
beginning of the period 13,699 105,364
--------- --------
Cash and cash equivalents at the
end of the period $ 83,115 $ 28,009
========= =========
SUPPLEMENTAL INFORMATION:
Interest paid $ 28,600 $ 21,757
========= =========
Taxes paid $ 135 $ 582
========= =========
See accompanying notes to consolidated financial statements.
6
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
NOTE 1 - General
Charter Municipal Mortgage Acceptance Company ("CharterMac"), along with its
consolidated subsidiaries (the "Company"), is a Delaware statutory trust
principally engaged in the acquisition and ownership (directly or indirectly) of
tax-exempt multifamily housing revenue bonds ("Revenue Bonds") and other
investments that produce tax-exempt income, issued by various state or local
governments, agencies, or authorities. The Company is also engaged in providing
credit enhancements and certain other guarantees, and originates loans for
multifamily housing through its subsidiary PW Funding Inc. ("PWF"). Revenue
Bonds are primarily secured by participating and non-participating first
mortgage loans on underlying properties ("Underlying Properties"). In some cases
the Company also acquires smaller taxable loans in conjunction with acquiring a
Revenue Bond.
The Company is governed by a board of trustees comprised of three independent
managing trustees and five managing trustees who are affiliated with Related
Capital Company ("Related"), a nationwide, fully integrated real estate
financial services firm. CharterMac, through CharterMac Corporation ("CM
Corp."), a wholly-owned subsidiary, has engaged Related Charter L.P. (the
"Manager"), an affiliate of Related, to manage its day-to-day affairs.
CharterMac has also directly engaged the Manager to provide additional
management services.
On December 18, 2002, the Company announced it had entered into an agreement to
acquire 100% of the ownership interests in and substantially all of the
businesses operated by Related (other than specific excluded interests which
will be retained by the principals of Related). The acquisition will enable the
Company to terminate its outside management agreement with the Manager and to
become an internally-managed company. The annual meeting to vote on the
acquisition of Related, originally scheduled for October 29, 2003, was
rescheduled to November 17, 2003, due to the low number of votes received.
The consolidated financial statements include the accounts of CharterMac and
five subsidiary statutory trusts which it controls: CM Holding Trust, CharterMac
Equity Issuer Trust, CharterMac Origination Trust I, CharterMac Owner Trust I
and Tax-Exempt Multifamily Housing Trust and one wholly-owned corporation, CM
Corp. CM Corp. owns approximately 85% of the economics of and has voting control
over PWF, which is also included in the consolidated financial statements. All
intercompany accounts and transactions have been eliminated in consolidation.
Unless otherwise indicated, the "Company", as hereinafter used, refers to
Charter Municipal Mortgage Acceptance Company and its consolidated subsidiaries.
The accompanying interim financial statements have been prepared without audit.
In the opinion of management, the financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial statements of the interim periods. However, the operating results
for the interim periods may not be indicative of the results for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America ("GAAP") have been condensed or
omitted. It is suggested that these financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-K for the year ended December 31, 2002.
The consolidated financial statements of the Company are prepared using the
accrual method of accounting in conformity with GAAP, which requires the Manager
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates in the financial statements include the
valuation of the Company's investments in Revenue Bonds, mortgage servicing
rights ("MSRs") and interest rate derivatives.
7
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Certain amounts in the 2002 financial statements have been reclassified to
conform to the 2003 presentation.
Significant Accounting Policies
- -------------------------------
Investment in Revenue Bonds
The Company accounts for its investments in Revenue Bonds as available-for-sale
debt securities under the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115") due to a provision in most of its Revenue Bonds under
which the Company has a right to require redemption of the Revenue Bonds prior
to their maturity, although it can and may elect to hold them up to their
maturity dates unless otherwise modified. As such, SFAS 115 requires the Company
to classify these investments as "available-for-sale." Accordingly, investments
in Revenue Bonds are carried at their estimated fair values, with unrealized
gains and losses reported in other comprehensive income. Unrealized gains or
losses do not affect the cash flow generated from property operations,
distributions to shareholders, the characterization of the tax-exempt income
stream or the financial obligations under the Revenue Bonds.
If, in the judgment of the Manager, it is determined probable that the Company
will not receive all contractual payments required, when they are due, the
Revenue Bond is deemed impaired and is written down to its then estimated fair
value, with the amount of the write-down accounted for as a realized loss.
Because Revenue Bonds have a limited market, the Company estimates fair value
for each bond as the present value of its expected cash flows using a discount
rate for comparable tax-exempt investments. This process is based upon
projections of future economic events affecting the real estate collateralizing
the bonds, such as property occupancy rates, rental rates, operating cost
inflation, market capitalization rates and an appropriate market rate of
interest, all of which are based on good faith estimates and assumptions
developed by the Manager. Changes in market conditions and circumstances may
occur which would cause these estimates and assumptions to change; therefore,
actual results may vary from the estimates and the variance may be material.
For certain Revenue Bonds, management believes that certain factors have
impacted the near-term fair value. In these instances, the Revenue Bonds are
valued at either the outstanding face amount of the bond or management's
estimate of the fair value, whichever is lower.
Other Investments
Other investments include the following items:
Investment in ARCap - The Company's preferred equity investment in ARCap
Investors, L.L.C. ("ARCap") is accounted for using the equity method because
the Company has the ability to exercise significant influence, but not
control, over ARCap's operating and financial policies.
Guaranteed Investment Contracts - The Company, through PWF, is participating
in the Federal National Mortgage Association ("Fannie Mae") "Guaranteed
Investment Agreement Rate Lock Loan Financing" program for properties which
are in the construction phase. Under this program, Fannie Mae commits to a
fixed interest rate on a permanent loan, which will be closed at the
completion of the construction phase of the property. The rate lock forward
commitment provided by Fannie Mae exists for a maximum period of twenty-four
months. Fannie Mae loans the Company the amount of the future permanent loan,
which is required to be deposited in a guaranteed investment contract during
the construction phase. In exchange for such loan, the Company issues Fannie
Mae a promissory note whose interest is paid from the interest on the
guaranteed investment contract and the negative arbitrage paid by the
borrower. The interest rate on the note is equivalent to the fixed rate
committed to on the permanent loan. At the close of the construction phase,
the Company unwinds the guaranteed investment contract to repay the note to
Fannie Mae. The Company originates the permanent loan to the borrower at the
rate
8
locked amount, which is subsequently purchased from the Company by Fannie
Mae. The Company has commitments from Fannie Mae under this program of
approximately $5.2 million as of September 30, 2003.
Temporary Investments - Temporary investments may consist of puttable
floating option tax-exempt receipts, short-term senior securities which bear
interest at a floating rate that is reset weekly and other short-term
investments that generate tax-exempt and taxable interest income. These
investments are recorded at cost, which is equal to market value.
Cash and Cash Equivalents
Cash and cash equivalents includes cash in banks and investments in short-term
instruments with an original maturity of three months or less. Certain amounts
of cash and cash equivalents are restricted and serve as additional collateral
for borrowings within our existing securitization programs.
Mortgage Banking Activities
PWF is an approved seller/servicer of multifamily mortgage loans for Fannie Mae,
Federal Home Loan Mortgage Corporation ("Freddie Mac") and the Government
National Mortgage Association ("Ginnie Mae"). For Fannie Mae, PWF is approved
under the Delegated Underwriting and Servicing ("DUS") program. Under DUS, upon
obtaining a commitment from Fannie Mae with regard to a particular loan, Fannie
Mae commits to acquire the mortgage loan based upon PWF's underwriting and PWF
agrees to bear a portion of the risk of potential losses in the event of a
default. Fannie Mae commitments may be made to acquire the mortgage loan for
cash or in exchange for a mortgage-backed security backed by the mortgage loan.
As a Program Plus lender for Freddie Mac, Freddie Mac agrees to acquire for cash
from PWF loans for which PWF has issued commitments. Ginnie Mae agrees to
exchange FHA-insured mortgages originated by PWF for Ginnie Mae securities.
Mortgage loans originated for Fannie Mae, Freddie Mac or Ginnie Mae are closed
in the name of PWF which uses corporate cash obtained by borrowing from a
warehouse lender to fund the loans. Approximately a week to a month following
closing of a loan, loan documentation and an assignment are delivered to Fannie
Mae, Freddie Mac, Ginnie Mae, or a document custodian on its behalf, and the
cash purchase price or mortgage-backed security is delivered to PWF. Cash is
used to repay warehouse loans and mortgage-backed securities are sold pursuant
to prior agreements for cash which is used to repay warehouse loans. PWF also
underwrites and originates multifamily and commercial mortgages for insurance
companies and banks.
PWF receives a fee ranging from 50bps to 100bps for its origination services,
included in mortgage banking fees in the Consolidated Statements of Income.
Neither the Company nor PWF retains any interest in any of the mortgage loans,
except for MSRs and certain liabilities under the loss-sharing arrangement with
Fannie Mae.
Mortgage Servicing Rights
The Company recognizes as assets the rights to service mortgage loans for
others, whether the MSRs are acquired through a separate purchase or through
loan origination, by allocating total costs incurred between the loan and the
MSRs retained based on their relative fair value. MSRs are being carried at
their adjusted cost basis. MSRs are amortized in proportion to, and over the
period of, estimated net servicing income.
The Company has two areas of loss exposure related to its lending activities.
First, while a loan is recorded on the balance sheet, there is exposure to
potential loss if a loan becomes impaired and defaults. Second, the Company has
exposure to loss due to its retention of a portion of credit risk within its
servicing contract under the Fannie Mae DUS program.
9
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
When a loan is owned by PWF and recorded on the balance sheet, PWF identifies
loans that are impaired and evaluates the allowance for loss on a specific loan
basis for losses believed to currently exist in the recorded loan portfolio. An
impaired loan is defined, as noted within accounting guidance, when contractual
payments are not made. PWF's primary tool for determining which loans are likely
to currently have a loss associated with them is to evaluate the debt service
coverage ratio based on PWF's historical experience of similar properties and
the frequency of such losses. Loans that are impaired and specific loans that
are not impaired but have debt service coverage ratios below a certain threshold
as having a high likelihood of future foreclosure and currently have an existing
loss, are evaluated. The estimate of currently existing loss, includes the
estimated severity of the loss which would include any advances made or existing
property loss. Property maintenance costs (when foreclosure occurs) are expensed
when incurred and not included in the loss estimate. However, as most loans are
sold very quickly after origination, there typically is not a significant amount
of loan loss allowance recorded.
The Company has exposure to loss due to its retention of a portion of credit
risk within PWF's servicing contract under the Fannie Mae DUS program. For loans
which have been sold as commercial mortgage-backed securities for which PWF
retains the servicing under Fannie Mae's DUS program, PWF's share of loss is
associated with the servicing contract and determined in accordance with the
loss sharing provisions under the program. Prior to the issuance of
Interpretation No. 45, "Guarantors' Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"),
because the loss sharing on these serviced loans was associated with the
servicing contract, they are valued within the servicing right and the
anticipated cash flows that are associated with such servicing activities. The
Com-pany has determined that these potential losses are guarantees under the
definition of FIN 45 and therefore, will record an asset and a corresponding
liability based on the Company's estimate of the portion of the servicing cash
flows deemed to represent compensation to the Company for its guarantee for
loans originated on/or after January 1, 2003. On an ongoing basis, the Company
will account for the asset by offsetting cash received for the guarantee against
the asset and crediting interest income for the change in asset due to the
passage of time. The portion of the liability representing an accrual for
probable losses under SFAS No. 5, "Accounting for Contingencies" ("FAS 5") will
be adjusted as loss estimates change; the portion representing the Company's
willingness to stand by as guarantor will be amortized over the expected life of
the guarantee.
The components of the change in MSRs are as follows:
Servicing Assets (Dollars in millions)
--------------------------------------------------- ----------------------
Balance at December 31, 2002 $35.5
MSR's capitalized during the nine
months ended September 30, 2003 4.3
Amortization (4.6)
Increase in reserves (2.4)
-------
Balance at September 30, 2003 $32.8
====
Reserve for Loan Loss Reserves of
Servicing Assets
---------------------------------------------------
Balance at December 31, 2002 $ 4.3
Additions 2.4
-----
Balance at September 30, 2003 $ 6.7
=====
The estimated fair values of the MSRs were $37.8 million and $36.7 million, at
September 30, 2003 and December 31, 2002, respectively.
10
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
The significant assumptions used by the third party valuation firm in estimating
the fair value of the servicing assets at September 30, 2003 were as follows:
Fannie Mae FHA Freddie Mac
--------------- -------------- ---------------
Weighted average discount rate 17.07% 16.86% 16.99%
Weighted average pre-pay speed 12.12% 10.58% 15.09%
Weighted average lockout period 56 months 31 months 73 months
Cost to service loans $2,493 $1,365 $1,942
Acquisition cost (per loan) $1,500 $ 471 $1,480
Revenue Recognition
The Company derives its revenues from a variety of investments and guarantees,
summarized as follows:
Interest Income from Revenue Bonds - Interest income is recognized at the
stated rate as it accrues and when collectibility of future amounts is
reasonably assured. Participating interest is recognized when received.
Interest income from Revenue Bonds with modified terms or where the
collectibility of future amounts is uncertain is recognized based upon
expected cash receipts. Certain construction Revenue Bonds carry different
interest rates during the construction and permanent financing periods. In
these cases, the Company calculates the effective yield on the Revenue Bond
and uses that rate to recognize interest income over the life of the bond.
Interest Income from Promissory Notes and Mortgages Receivable - Interest
on mortgage loans and notes receivable is recognized on the accrual basis
as it becomes due. Deferred loan origination costs and fees are amortized
over the life of the applicable loan as an adjustment to interest income,
using the interest method. Interest which was accrued is reversed out of
income if deemed to be uncollectible.
Other Interest Income - Interest income from temporary investments, such as
cash in banks and short-term instruments, is recognized on the accrual
basis as it becomes due.
Equity in Earnings of ARCap - The Company's equity in the earnings of ARCap
is accrued at the preferred dividend rate of 12% on the preferred shares
held by the Company, unless ARCap does not have earnings and cash flows
adequate to meet this dividend requirement.
Construction Service Fees - The Company receives fees, in advance, from
borrowers for servicing Revenue Bonds during the construction period. These
fees are deferred and amortized into other income over the anticipated
construction period.
Credit Enhancement and Guarantee Fees - The Company receives fees for
providing credit enhancement and for backing up primary guarantors'
obligations to guarantee agreed upon internal rates of return to the
investors in programs sponsored by Related (see Note 5). The credit
enhancement fees are received monthly and recognized in other income when
received. The guarantee fees are deferred and recognized in other income on
a prorata basis over the guarantee periods.
Mortgage Banking Fees - PWF fees earned for arranging financings under the
Fannie Mae DUS product line on behalf of Freddie Mac, insurance companies
and banks or other lenders are recorded at the point the financing
commitment is accepted by the mortgagor and the interest rate of the
mortgage loan is fixed.
11
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Mortgage Servicing Fees - PWF receives fees for servicing the loans it has
originated or purchased. This income is recognized on an accrual basis over
the estimated life of the loans being serviced.
Deferred Costs
Fees paid to the Manager (see Note 5) for its activities performed to originate
Revenue Bonds, including their evaluation and selection, negotiation of mortgage
loan terms, coordination of property developers and government agencies, and
other direct expenditures of acquiring or investing in Revenue Bonds, are
capitalized and amortized as a reduction to interest income over the terms of
the Revenue Bonds. Direct costs relating to unsuccessful acquisitions and all
indirect costs relating to the Revenue Bonds are charged to operations.
Costs incurred in connection with the Company's Private Label Tender Option
Program ("TOP"), such as legal, accounting, documentation and other direct
costs, have been capitalized and are being amortized using the straight-line
method over 10 years, which approximates the average remaining term to maturity
of the Revenue Bonds in this program.
Costs incurred in connection with the issuance of cumulative preferred shares of
the Equity Issuer Trust subsidiary, such as legal, accounting, documentation and
other direct costs, have been capitalized and are being amortized using the
straight line method over the period to the mandatory repurchase date of the
shares, approximately 50 years. Costs incurred in connection with the issuance
of Convertible Community Reinvestment Act ("CRA") Shares, such as legal,
accounting, documentation and other direct costs, have been accounted for as an
offset to beneficial owners' equity of such shares.
Financial Risk Management and Derivatives
The Company has entered into two interest rate swaps, an interest rate cap and
several forward commitments, all of which are accounted for under the Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), as amended and interpreted.
The Company designated the two interest rate swaps as cash flow hedges on the
variable interest payments in the floating rate financing (described in Note 8).
Accordingly, the interest rate swaps are recorded at their respective fair
market value each accounting period, with changes in market value being recorded
in other comprehensive income to the extent the hedges are effective in
achieving offsetting cash flows. These hedges have been highly effective, so
there has been no ineffectiveness included in earnings. The interest rate cap,
although designed to mitigate the Company's exposure to rising interest rates,
was not designated as a hedging derivative; therefore, any change in fair market
value flows through the Consolidated Statements of Income, where it is included
in interest income. The forward commitments (see Note 7) create derivative
instruments under SFAS 133, which have been designated as cash flow hedges of
the anticipated funding of the Revenue Bonds, and will be recorded at fair
value, with changes in fair value recorded in other comprehensive income until
the Revenue Bonds are funded.
Fair Value of Financial Instruments
As described above, the Company's investments in Revenue Bonds, its MSRs and its
liability under the interest rate derivatives are carried at estimated fair
values. The Company has determined that the fair value of its remaining
financial instruments, including its temporary investments, cash and cash
equivalents, promissory notes receivable, mortgage notes receivable and
borrowings approximate their carrying values at September 30, 2003 and December
31, 2002.
Income Taxes
Effective July 1, 2001, the Company began operation of a new wholly-owned,
taxable subsidiary -- CM Corp., which on December 31, 2001, purchased PWF. CM
Corp. will conduct most of the Company's taxable business, including
fee-generating activities in which the Company may engage and provide management
services to CharterMac and its other subsidiaries. The Company
12
provides for income taxes in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("FAS 109"). FAS 109 requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of temporary differences between the financial statement
carrying amounts and the tax basis of assets and liabilities.
13
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
New Pronouncements
- ------------------
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections".
SFAS No. 145, among other things, rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt", and accordingly, the reporting of gains or
losses from the early extinguishments of debt as extraordinary items will only
be required if they meet the specific criteria of extraordinary items included
in Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations". The revision of SFAS No. 4 became effective January 2003. The
implementation of SFAS No. 145 did not have a material impact on the Company's
consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities". SFAS No. 146 replaces current accounting
literature and requires the recognition of costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 became effective January 1,
2003. The implementation of SFAS No. 146 did not have a material impact on the
Company's consolidated financial statements.
In November 2002, the FASB issued FIN 45. FIN 45 elaborates on the disclosures
to be made by a guarantor in its financial statements about its obligations
under certain guarantees that it has issued. It also clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. This
Interpretation does not prescribe a specific approach for subsequently measuring
the guarantor's recognized liability over the term of the related guarantee. The
initial recognition and initial measurement provisions of this FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company entered into one credit enhancement transaction
and two yield guarantee transactions prior to December 31, 2002. The fee for the
credit enhancement transaction is received monthly and recognized as income when
due. The fees for the yield guarantee transactions, received in advance, were
deferred and amortized over the guarantee periods. During the third quarter of
2003, the Company entered into its second yield guarantee transaction. The
Company believes the fee received for this guarantee approximates the fair value
of the obligation undertaken in issuing the guarantee and has recorded a
liability included in deferred income equal to the fair value of the obligation.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure," an amendment of FASB statement No. 123.
This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation" to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employer compensation. Because
the Company accounts for its share options using the fair value method,
implementation of this statement did not have an impact on the Company's
consolidated financial statements. The Company has adopted the provisions of
SFAS No. 123 for its share options issued to non-employees. Accordingly,
compensation cost is accrued based on the estimated fair value of the options
issued, and amortized over the vesting period. Because vesting of the options is
contingent upon the recipient continuing to provide services to the Company
until the vesting date, the Company estimates the fair value of the non-employee
options at each period-end up to the vesting date, and adjusts expensed amounts
accordingly. The fair value of each option grant is estimated using the
Black-Scholes option-pricing model.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The provision of
FIN 46 will be immediately effective for all variable interests in variable
interest entities created after January 31, 2003, and the Company is required to
apply its provisions to any existing variable interests in variable interest
entities beginning December 31, 2003. The Company does not believe that it
currently has any variable interests in variable interest entities requiring
consolidation, however, the Company is evaluating whether such variable
interests may exist should the proposed acquisition of Related be completed.
14
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies
the accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
133. SFAS 149 is generally effective for contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30,
2003. The adoption of SFAS No. 149 on July 1, 2003, as required, had no impact
on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This statement
requires that certain financial instruments that have the characteristics of
debt and equity be classified as debt. SFAS No. 150 was effective for financial
instruments entered into or modified after May 31, 2003, and otherwise was
effective at the beginning of the first interim period beginning after June 15,
2003. Pursuant to SFAS No. 150, on July 1, 2003 the Company classified the
$273.5 million previously shown in the "mezzanine" (between liabilities and
equity) in the consolidated balance sheets as "preferred shares of subsidiary
subject to mandatory redemption" into the liability section, and the dividends
paid on such shares (approximately $4.7 million and $14.1 million for the three
and nine month periods ended September 30, 2003) has been classified as interest
expense; dividends related to prior periods continue to be classified as income
allocated to preferred shareholders of subsidiary.
NOTE 2 - Revenue Bonds
Total interest income from Revenue Bonds, including participating interest, was
approximately $83,528,000 and $67,764,000, for the nine months ended September
30, 2003 and 2002, which represents an average annual yield of 7.14% and 7.48%
based on weighted average face amounts of approximately $1,559,869,000 and
$1,208,528,000, respectively.
The amortized cost basis of the Company's portfolio of Revenue Bonds at
September 30, 2003 and December 31, 2002 was $1,662,600,968 and $1,484,202,610,
respectively. The net unrealized gain on Revenue Bonds in the amount of
$50,296,031 at September 30, 2003 consisted of gross unrealized gains and losses
of $58,888,083 and $8,592,052, respectively. The net unrealized gain on Revenue
Bonds of $95,387,390 at December 31, 2002 consisted of gross unrealized gains
and losses of $100,964,090 and $5,576,700, respectively.
The following is a table summarizing the maturity dates of the Company's Revenue
Bonds.
Outstanding Weighted Average
(Dollars in thousands) Bond Amount Fair Value Interest Rate
- -----------------------------------------------------------------------------------------------------------
Due in less than one year $ 3,174 $ 2,982 9.22%
Due between one and five years 30,994 30,086 6.81%
Due after five years 1,640,859 1,679,829 7.02%
- -----------------------------------------------------------------------------------------------------------
Total $1,675,027 $1,712,897 7.02%
- -----------------------------------------------------------------------------------------------------------
All of the Company's Revenue Bonds have fixed interest rates.
15
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
2003 Transactions
- -----------------
The following table summarizes the Company's acquisition activity for the nine
months ended September 30, 2003.
Weighted Weighted
Aggregate Average Average Number of
Purchase Construction Permanent Revenue
(Dollars in thousands) Face Amount Price Interest Rate Interest Rate Bonds
- -------------------------------------------------------------------------------------------------------------------
Non-participating Revenue Bonds
Construction/rehabilitation
properties $265,796 $271,512 5.98% 6.37% 33
During the nine months ended September 30, 2003 the Company advanced additional
funds of approximately $11,320,000 to Revenue Bonds which were previously
acquired.
During the nine months ended September 30, 2003, nine Revenue Bonds were repaid.
The Company received net proceeds of approximately $72.3 million. The bonds had
a net carrying value of approximately $69.5 million, resulting in a gain of
approximately $2.8 million.
The original developer of Waterford Place Phase II, is in the process of
divesting its assets and unwinding its business, which triggered defaults under
the Company's guarantees with the developer. Additionally, the Company has
determined there has been a softening of this market. The equity investor, an
affiliate of the Manager, has agreed to release and transfer its ownership to a
nominee of the Company, who will foreclose on the underlying property. The
Company has determined this bond is impaired, has stopped accruing interest, and
wrote down the bond to its estimated fair value of approximately $900,000,
taking a loss on impairment of approximately $1.8 million during the quarter
ended September 30, 2003. The Company determined the fair value of the property
as equal to the appraised value of the land plus the cost of certain
improvements made to date, discounted for the softening in the market.
During the second quarter of 2001, the borrowers of Lexington Trails failed to
make the regular interest payments. As a result, the Company determined the bond
was impaired, has stopped accruing interest, and wrote down the bond to its
estimated fair value of approximately $5.5 million and took a loss on impairment
of $400,000. During the fourth quarter of 2001, the Company caused the trustee,
for the benefit of the Company, to foreclose on the underlying property. During
the fourth quarter of 2002, the Company began marketing the underlying property
for sale, and the Company wrote this bond down to its estimated fair value of
$4.5 million resulting in a recorded loss of $932,000. The Company continues to
actively pursue the disposition of this property.
NOTE 3 - Deferred Costs
The components of deferred costs are as follows:
(Dollars in thousands)
September 30, December 31,
2003 2002
--------------- ------------------
Deferred bond selection costs (1) $ 40,871 $ 34,810
Deferred financing costs 8,584 8,030
Deferred costs relating to the issuance of preferred
shares of subsidiary 10,445 10,445
Deferred costs relating to acquisition of Related 3,945 2,483
Other deferred costs 2,775 1,376
------- ---------
66,620 57,144
Less: Accumulated amortization (11,495) (8,451)
-------- ---------
16
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
$ 55,125 $ 48,693
======== ========
17
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
(1) This primarily represents the 2% bond selection fee paid to the Manager (see
Note 5).
NOTE 4 - Goodwill and Intangible Assets
The Company adopted SFAS 141 on July 1, 2001 and SFAS 142, on January 1, 2002.
The Company has determined that the amounts previously capitalized as goodwill
relating to the initial formation of the Company and to the merger of American
Tax Exempt Bond Trust, meet the criteria in SFAS 141 for recognition as
intangible assets apart from goodwill, and accordingly will continue to be
amortized over their remaining useful lives, subject to impairment testing.
During the quarter ended June 30, 2002, PWF engaged a third party valuation firm
to evaluate PWF's licenses with Fannie Mae, Freddie Mac, FHA, GNMA and various
private investors. As a result of this process approximately $8.6 million has
been reclassified from goodwill to intangible assets, representing the estimated
market value of PWF's licenses. These licenses have an indefinite life and, as a
result, are not being amortized.
During 2002 and the nine months ended September 30, 2003, the Company, pursuant
to the original acquisition agreement, paid approximately $3.0 and $.7 million,
respectively, in "true-up" payments representing payments due to the original
PWF stockholders which was recorded as additional goodwill during the fourth
quarter of 2002 and the first nine months of 2003. These true-up payments were
based on i) the increase in the value of MSRs due to certain loans closing, ii)
positive changes between PWF's audited balance sheet used for the initial
purchase price and the audited balance sheet at December 31, 2001, iii) payments
of certain servicing fees, and iv) forward conversions of loans previously
committed. The acquisition agreement stipulates additional true-up payments to
be made periodically for a period of up to three years from the acquisition
date.
The following table provides further information regarding the Company's
intangible assets:
(Dollars in thousands)
Other Identifiable PWF
Intangible Assets Licenses Total
----------------------------------------------------------
Balance at December 31, 2002 $ 4,427 $ 8,639 $ 13,066
Accumulated amortization (1,750) - (1,750)
------- ------- -------
Net balance at December 31, 2002 2,677 8,639 11,316
Amortization expense 357 - 357
------- ------- -------
Balance at September 30, 2003 $ 2,320 $ 8,639 $ 10,959
====== ======= =======
Amortization expense for the nine months
ended September 30, 2003 $ 357 $ - $ 357
======= ====== =======
Estimated amortization expense per year for
next five years $ 477 $ - $ 477
======= ====== =======
The amortization is included as a reduction to Revenue Bond interest income.
The amount indicated as goodwill in the accompanying consolidated financial
statements as of September 30, 2003 is related to the acquisition, on December
31, 2001 of PWF. This amount represents goodwill under SFAS 142, and therefore,
is not being amortized. In accordance with SFAS 142, the Company tested this
goodwill for impairment during the fourth quarter of 2002 and determined there
was no impairment. The Company will perform the required annual impairment test
in the fourth quarter of 2003.
18
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
NOTE 5 - Related Party Transactions
The Manager is entitled to subcontract its obligations under the Management
Agreements to an affiliate. In accordance with the foregoing, the Manager has
assigned its rights and obligations to Related.
Pursuant to the terms of the Management Agreements, the Manager is entitled to
receive the fees and other compensation set forth below:
Fees/Compensation* Amount
- ------------------ ------
Bond Selection Fee 2.00% of the face amount of each asset
invested in or acquired by CharterMac or
its subsidiaries.
Special Distributions/Investment 0.375% per annum of the total invested
Management Fee assets of CharterMac or its
subsidiaries.
Loan Servicing Fee 0.25% per annum based on the outstanding
face amount of revenue bonds and other
investments owned by CharterMac or its
subsidiaries.
Operating Expense Reimbursement For direct expenses incurred by the
Manager in an amount not to exceed
$1,027,206 per annum (subject to
increase based on increases in
CharterMac's and its subsidiaries'
assets and to annual increases based
upon increases in the Consumer Price
Index).
Incentive Share Options The Manager may receive options to
acquire additional Common Shares
pursuant to the Share Option Plan only
if CharterMac's distributions in any
year exceed $0.9517 per Common Share and
the Compensation Committee of the Board
of Trustees determines to grant such
options.
Liquidation Fee 1.50% of the gross sales price of the
assets sold by CharterMac in connection
with a liquidation of CharterMac assets
supervised by the Manager.
* The Manager is also permitted to earn miscellaneous compensation which may
include, without limitation, construction fees, escrow interest, property
management fees, leasing commissions and insurance brokerage fees. The payment
of any such compensation is generally limited to the competitive rate for the
services being performed. A bond placement fee of 1.0% to 1.5% of the face
amount of each asset invested in or acquired by CharterMac or its subsidiaries
is payable to the Manager by the borrower, and not by CharterMac or its
subsidiaries.
The term of each of the management agreements is one year. The management
agreements may be renewed, subject to evaluation of the performance of the
Manager by CharterMac's Board of Trustees. Both agreements may be terminated (i)
without cause by the Manager; or (ii) for cause by a majority of CharterMac's
Board of Trustees, in each case without penalty and each upon 60 days prior
written notice to the non-terminating party. The management agreements which
were due to expire on September 30, 2003 were renewed for the earlier of the
date the acquisition of Related is completed or December 31, 2003.
19
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
The costs, expenses and the special distributions incurred to the Manager and
its affiliates for the three and nine months ended September 30, 2003 and 2002
were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
(Dollars in thousands) (Dollars in thousands)
------------------------- ------------------------
2003 2002 2003 2002
--------- ----------- --------- ---------
Bond selection fees $ 2,670 $ 1,681 $ 5,274 $ 5,662
Special distribution/Investment
management fee 1,690 1,336 4,712 3,747
Bond servicing 1,123 875 3,185 2,519
Expense reimbursement 269 200 748 547
-------- -------- -------- --------
$ 5,752 $ 4,092 $13,919 $12,475
======= ======= ====== ======
Certain of the Revenue Bonds held by the Company are supported by various
guarantees including, but not limited to, construction and operating guarantees
from affiliates of the Manager.
On September 24, 2003, the Company completed its second yield guarantee
transaction, agreeing to back up a primary guarantor's obligation to guarantee
an agreed-upon internal rate of return ("IRR") to the investor in Related
Capital Guaranteed Corporate Partners II, L.P. - Series B ("RCGCP - Series B").
RCGCP - Series B is a fund sponsored by Related, which is an affiliate of the
Manager.
During the quarter ended September 30, 2002, the Company agreed to back up a
primary guarantor's obligation to guarantee an agreed-upon internal rate of
return to the investor in Related Capital Guaranteed Corporate Partners II, L.P.
("RCGCP"). RCGCP is a fund sponsored by Related, which is an affiliate of the
Manager. The Company is the beneficiary of a guarantee against losses associated
with construction and operating stabilization for each of the properties in
RCGCP, which is capped at $15 million. The guarantee has been provided by The
Related Companies, L.P. ("TRCLP"), an affiliate of Related. TRCLP has also
agreed, if needed, after construction completion and property stabilization, to
fund up to the first $2.5 million of operating deficits of the underlying
properties or any amounts required to pay the guaranteed IRR to the investor. If
the Company's acquisition of Related is completed, then this guarantee will no
longer be in force.
In connection with the refinancing of River Run, the general partners of which
are affiliates of the Manager, the Company entered into an agreement which
allows the Revenue Bond to be put to the Company should the owner of the
underlying property default on the bond. The Company, in turn, entered into
agreements which allow the Company to put the bond to the general partners. The
Company's put right is secured by collateral assignments of the general
partners' partnership interests in the limited partnership which owns the
underlying property.
The Company has entered into a credit enhancement transaction with Merrill Lynch
Capital Services ("MLCS"). TRCLP has provided the Company with an indemnity
covering 50% of any losses incurred by the Company.
Effective April 1, 2003, PWF took on the day-to-day responsibility of a $598
million portfolio of loans subserviced by CreditRe Mortgage Servicing Company,
L.L.C. ("CMC"), an affiliate of The Related Companies L.P.
NOTE 6 - Earnings Per Share
Net income per share is computed in accordance with SFAS No. 128, "Earnings Per
Share". Basic income per share is calculated by dividing income allocated to
Common and Convertible CRA Shareholders ("Shareholders") by the weighted average
number of Common and Convertible CRA Shares outstanding during the period. The
Convertible CRA Shares are included in the calculation of shares outstanding as
they share the same economic benefits as Common Shares, including payment of the
same dividends per share as Common Shares. Diluted income per share is
20
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
calculated using the weighted average number of shares outstanding during the
period plus the additional dilutive effect of common share equivalents. The
dilutive effect of outstanding share options is calculated using the treasury
stock method.
Pursuant to the Company's Trust Agreement and the Management Agreements with the
Manager, the Manager is entitled, in its capacity as the general partner of the
Company, to a special distribution equal to .375% per annum of the Company's
total invested assets (which equals the face amount of the Revenue Bonds and
other investments), payable quarterly. Income is allocated first to the Manager
in an amount equal to the special distribution. The net remaining profits or
losses, after a special allocation of .01% to the Manager, are then allocated to
shareholders in accordance with their percentage interests.
During the quarter ended September 30, 2002, the Company issued 40,000 options
at a strike price of $17.56. These options vest equally, in thirds, in September
2003, 2004 and 2005 and expire in 10 years. The dilutive effect of these
outstanding share options is calculated using the treasury stock method.
During the nine months ended September 30, 2003, 137,943 of the Company's stock
options were exercised.
21
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
(Dollars in thousands) (Dollars in thousands)
Three Months Ended September 30, 2003 Nine Months Ended September 30, 2003
------------------------------------------- -------------------------------------------
Income Shares Per Share Income Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount
--------------- ----------- ---------- ------------ ----------- ----------
Net income allocable to share-
holders (Basic EPS) $ 14,330 46,331,385 $ .31 $ 47,564 45,484,538 $ 1.05
======= =======
Effect of dilutive securities
125,566 share options -- 34,957 -- 33,404
------------- ---------- --------- ---------
Diluted net income allocable to
shareholders (Diluted EPS) $ 14,330 46,366,342 $ .31 $ 47,564 45,517,942 $ 1.04
============= ========== ======= ========= ========== =======
(Dollars in thousands) (Dollars in thousands)
Three Months Ended September 30, 2003 Nine Months Ended September 30, 2003
------------------------------------------- -------------------------------------------
Income Shares Per Share Income Shares Per Share
Numerator Denominator Amount Numerator Denominator Amount
--------------- ----------- ---------- ------------ ----------- ----------
Net income allocable to share-
holders (Basic EPS) $ 12,236 44,209,982 $ .28 $ 42,571 42,030,318 $ 1.01
======= =======
Effect of dilutive securities
223,509 stock options -- 72,751 -- 69,089
------------- ---------- --------- ---------
Diluted net income allocable to
shareholders (Diluted EPS) $ 12,236 44,282,733 $ .28 $ 42,571 42,099,407 $ 1.01
============== ========== ======= ========= =========== =======
* Includes Common and Convertible CRA Shares.
22
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
NOTE 7 - Commitments and Contingencies
Litigation
On October 24, 2003, the New York Supreme Court for Nassau County issued a final
judgment approving the stipulation of compromise and settlement of the class and
derivative action entitled Dulitz v. Hirmes, which had challenged certain
aspects of the Company's acquisition of Related. Pursuant to that settlement,
certain terms of the acquisition will be modified, as fully detailed in the
Company's proxy statement that was previously mailed to shareholders and filed
with the Commission on September 5, 2003, together with the Notice of Pendency
of Class and Derivative Action.
Although the defendants in the action denied all wrongdoing and believe they had
meritorious defenses, the settlement eliminates the cloud of litigation over the
acquisition in connection with Dulitz and provides the Company and its
shareholders with certain benefits described in the proxy statement and Notice.
The Court also approved an award pursuant to the settlement of $400,000 for
attorney's fees and expenses payable by the Company to the plaintiff's
attorneys.
The Company is subject to routine litigation and administrative proceedings
arising in the ordinary course of business. Management does not believe that
such matters will have a materially adverse impact on the Company's financial
position, results of operations or cash flows.
Mortgage Banking Activities
Through PWF, the Company originates and services multifamily mortgage loans for
Fannie Mae, Freddie Mac and FHA. PWF's mortgage lending business is subject to
various governmental and quasi-governmental regulation. PWF, collectively, is
licensed or approved to service and/or originate and sell loans under Fannie
Mae, Freddie Mac, Ginnie Mae and FHA programs. FHA and Ginnie Mae are agencies
of the Federal government and Fannie Mae and Freddie Mac are federally-chartered
investor-owned corporations. These agencies require PWF and its subsidiaries to
meet minimum net worth and capital requirements and to comply with other
requirements. Mortgage loans made under these programs are also required to meet
the requirements of these programs. In addition, under Fannie Mae's DUS program,
PWF has the authority to originate loans without a prior review by Fannie Mae
and is required to share in the losses on loans originated under this program.
The DUS program is Fannie Mae's principal loan program. Under the Fannie Mae DUS
Product Line, the Company, through PWF, originates, underwrites and services
mortgage loans on multifamily residential properties and sells the project loans
directly to Fannie Mae. The Company assumes responsibility for a portion of any
loss that may result from borrower defaults, based on the Fannie Mae loss
sharing formulas, Levels I, II or III. At September 30, 2003, all of the
Company's loans consisted of Level I loans. For such loans, the Company is
responsible for the first 5% of the unpaid principal balance and a portion of
any additional losses to a maximum of 20% of the original principal balance.
Level II and Level III loans carry a higher loss sharing percentage. Fannie Mae
bears any remaining loss.
Under the terms of the Master Loss Sharing Agreement between Fannie Mae and the
Company, the Company is responsible for funding 100% of mortgagor delinquency
(principal and interest) and servicing (taxes, insurance and foreclosure costs)
advances until the amounts advanced exceed 5% of the unpaid principal balance at
the date of default. Thereafter, for Level I loans, the Company may request
interim loss sharing adjustments which allow the Company to fund 25% of such
advances until final settlement under the Master Loss Sharing Agreement. No
interim loss sharing adjustments are available for Level II and Level III loans.
The Company maintains an accrued liability for probable losses under FAS 5 for
loans originated under the Fannie Mae DUS product line at a level that, in
management's judgment, is adequate to provide for estimated losses. At September
30, 2003, that liability was approximately $6.7 million, which the Company
believes represents its probable liability at this time. Unlike loans originated
23
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
for Fannie Mae, The Company does not share the risk of loss for loans PWF
originates for Freddie Mac or FHA.
In connection with the PWF warehouse line, both CharterMac and CM Corp. have
entered into guarantees for the benefit of Fleet National Bank ("Fleet"),
guaranteeing the total advances drawn under the line, up to the maximum of $100
million, together with interest, fees, costs, and charges related to the PWF
warehouse line.
PWF maintains, as of September 30, 2003, treasury notes of approximately $5.6
million and a money market account of approximately $209,000, which is included
in restricted cash and securities in the consolidated balance sheet, to satisfy
the Fannie Mae collateral requirements of $5.7 million.
Due to the nature of PWF's mortgage banking activities, PWF is subject to
supervision by certain regulatory agencies. Among other things, these agencies
require PWF to meet certain minimum net worth requirements, as defined. PWF met
these requirements for all agencies, as applicable, as of September 30, 2003.
At September 30, 2003, PWF had commitments of approximately $18.5 million to six
borrowers.
Credit Enhancement Transaction
In December 2001, the Company completed a credit enhancement transaction with
Merrill Lynch Capital Services, Inc. ("MLCS"), as described above. Pursuant to
the terms of the transaction, CM Corp. assumed MLCS's $46.9 million first loss
position on a $351.9 million pool of tax-exempt weekly variable rate multifamily
mortgage loans. The Related Companies, L.P. has provided CM Corp. with an
indemnity covering 50% of any losses that are incurred by CM Corp. as part of
this transaction. As the loans mature or prepay, the first loss exposure and the
fees paid to CM Corp. will both be reduced. The latest maturity date on any loan
in the portfolio occurs in 2009. The remainder of the real estate exposure after
the $46.9 million first loss position has been assumed by Fannie Mae and Freddie
Mac. In connection with the transaction, CharterMac has guaranteed the
obligations of CM Corp., and has met its obligation to post collateral, in an
amount equal to 40% of the first loss amount. The Company's maximum exposure
under the terms of this transaction is approximately $23.5 million.
CM Corp. performed due diligence on each property in the pool, including an
examination of loan-to-value and debt service coverage both on a current and
"stressed" basis. CM Corp. analyzed the portfolio on a "stressed" basis by
increasing capitalization rates and assuming an increase in the low floater bond
rate. As of September 30, 2003, the credit enhanced pool of properties are
performing according to their contractual obligations and the Company does not
anticipate any losses to be incurred on its guaranty. Should the Company's
analysis of risk of loss change in the future, a provision for probable loss
might be required; such provision could be material.
Fees related to the credit enhancement transaction for the three and nine months
ended September 30, 2003, included in other income, were approximately $250,673
and $874,482, respectively. Income is recognized monthly as the monthly fees are
received.
Yield Guarantee Transactions
On September 24, 2003, the Company entered into two agreements with Merrill
Lynch (the "Primary Guarantor") to guarantee an agreed-upon IRR for a pool of 14
multifamily properties each owned by a local partnership which in turn, is
majority-owned by RCGCP - Series B for which the Company will receive two
guarantee fees totaling approximately $5.9 million.
The transaction was structured as two separate guarantees, one primarily
guaranteeing the IRR through the lease-up phase of the properties and the other
guaranteeing the IRR through the operating phase of the properties. The fee for
the first guarantee, in the amount of approximately $3.6 million, was paid in
September 2003 at closing. The fee for the second guarantee will be paid in two
installments. The first installment, in the amount of approximately $1.7
million, will be paid in
24
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
July 2004, and the final installment, in the amount of approximately $562,000,
will be paid in January 2005. These fees will be recognized in income on a
straight line basis over the period of the respective guarantees. The total
potential liability to the Company pursuant to these guarantees is approximately
$74 million. The Company has analyzed the expected operations of the underlying
properties and believes there is no risk of loss at this time. Should the
Company's analysis of risk of loss change in the future, a provision for
possible losses might be required; such provision could be material.
Of the 14 local partnerships, 13 financed their properties with the proceeds of
Revenue Bonds acquired by an affiliate of CharterMac. In connection with the
transaction, the Primary Guarantor required that those Revenue Bonds be
deposited into a trust pursuant to which the Revenue Bonds were divided into
senior and subordinated interests with 50% of each Revenue Bond being
subordinated. The Company has financed the senior trust interest as part of the
Merrill Lynch P-FloatsSM/RitesSM program. The subordinate trust interests are
being used as collateral in other of the Company's financing programs.
In connection with the transaction, the Company posted $14.5 million of Revenue
Bonds as collateral to the Primary Guarantor in the form of either cash or
Revenue Bonds.
On July 18, 2002, the Company entered into two agreements with Merrill Lynch
(the "Primary Guarantor") to guarantee an agreed-upon IRR for a pool of 11
multifamily properties each owned by a local partnership which in turn, is
majority-owned by RCGCP.
The total potential liability to the Company pursuant to these guarantees is
approximately $44 million. The Company has analyzed the expected operations of
the underlying properties and believes there is no risk of loss at this time.
Should the Company's analysis of risk of loss change in the future, a provision
for probable losses might be required; such provision could be material.
In connection with the transaction, the Company posted $18.2 million of Revenue
Bonds as collateral to the Primary Guarantor, which will be reduced to $1.4
million over a period of up to 20 years as the properties reach certain
operating benchmarks. In addition, the Company agreed to subordinate 25% of each
of the bonds it acquired that are secured by the properties and to not use the
subordinated portion of such bonds as collateral in connection with any
borrowings.
To mitigate risk, the Company is the beneficiary of a guarantee against losses
associated with construction and operating stabilization for each of the
properties in RCGCP, which is capped at $15 million. The guarantee has been
provided by TRCLP. If the Company's acquisition of Related is completed, then
this guarantee will no longer be in force. As of December 31, 2002, TRCLP had a
GAAP net worth of approximately $175.0 million with liquid assets of
approximately $70.1 million. In addition, the developers of each of the
properties have also been required to give recourse completion, stabilization
and operating deficit guarantees. TRCLP has also agreed, if needed, after
construction completion and property stabilization, to fund up to the first $2.5
million of operating deficits of the underlying properties or any amounts
required to pay the guaranteed IRR to the investor.
The structure of the guaranteed transaction that closed on July 18, 2002, was
reorganized on September 24, 2003, to conform to the structure of the Company's
second guaranteed transaction, which simultaneously closed on September 24,
2003. The new structure requires the Company to subordinate 50% of each of the
Revenue Bonds it acquired that are secured by the properties involved in that
transaction. The Senior and the Junior Certificates are available to the Company
to be used as collateral in the Company's securitization programs. Before the
restructuring, the Company only subordinated 25% of the Revenue Bonds. In
connection with this transaction, the Company was able to lower the required
collateral posted to the Primary Guarantor from $18.2 million to $11.0 million.
25
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
Revenue Bond Forward Transactions
During July 2003, the Company entered into a transaction to purchase two series
of Revenue Bonds related to a property named Middle Creek Village Apartments.
Pursuant to the terms of the transaction, a third party, unrelated lender will
advance funds to the developer, as needed, at a floating rate. At the earlier of
stabilization or conversion to permanent financing, as long as completion is
achieved, the Company is obligated to acquire Series A Revenue Bonds at a
predetermined price and interest rate. The Company is only obligated to buy the
Series B Revenue Bonds if, at the date the Series A bonds are stabilized, the
property's cash flow is sufficient to provide debt service coverage of 1.15x for
both the Series A and B bonds. The two forward commitments create derivative
instruments under SFAS No. 133, which have been designated as a cash flow hedge
of the anticipated funding of the Revenue Bonds, and are recorded at fair value,
with changes in fair value recorded in other comprehensive income until the
Revenue Bonds are funded. The Series A Revenue Bond is expected to be
approximately $15.8 million and the Series B Revenue Bond is expected to be
$350,000, which combined represents the Company's maximum purchase commitment.
At September 30, 2003, the fair value of these forward transactions is not
significant.
During December 2002, the Company entered into two transactions related to two
properties, Coventry Place and Canyon Springs. Pursuant to the terms of these
transactions, the Company will provide credit support to the construction lender
for project completion and Fannie Mae permanent loan conversion and acquire
subordinated bonds to the extent the construction period bonds do not fully
convert. Up until the point of completion, the Company will reimburse the
construction lender for any draw on its construction letter of credit up to 40%
of the stated amount of the letter of credit. Following completion, up until the
project loan converts to permanent loan status, the Company will, should the
need arise, reimburse the full amount of the letter of credit. The Company
closely monitors these two properties, and believes there is no need currently,
to provide for any potential loss. Should the Company's analysis of risk of loss
change in the future, a provision for loss might be required; such provision
could be material. The developer has also issued several guarantees to the
construction lender, each of which would be called upon before the Company's
guarantees, and each of which would be assigned to the Company should its
guarantees be called. Once the construction loans convert to permanent loans,
the Company is obligated to acquire subordinated loans for the amount by which
each construction loan exceeds the corresponding permanent loan, if any. The
subordinated bonds will bear interest at 10%. Under Fannie Mae guidelines, the
size of the subordinated bonds will be limited to a 1.0x debt service coverage
based on 75% of the cash flow after the senior debt.
The Company's maximum exposure, related to these two transactions, is 40% of the
stated amount of the letter of credit of approximately $27 million.
Also, during December 2002, the Company entered into two transactions related to
properties known as Auburn Glenn and Cottonwood. Pursuant to the terms of the
transactions, a third party, unrelated lender will advance funds to the
developers, as needed, at a floating rate. At the completion of construction,
the Company is obligated to acquire the permanent Revenue Bonds at a
predetermined price and interest rate. The two forward commitments create
derivative instruments under SFAS No. 133, which have been designated as a cash
flow hedge of the anticipated funding of the Revenue Bonds, and are recorded at
fair value, with changes in fair value recorded in other comprehensive income
until the Revenue Bonds are funded. The Revenue Bonds are expected to be $18.8
million for Auburn Glenn and $12.4 million for Cottonwood, which combined
represents the Company's maximum purchase commitment. At September 30, 2003, the
fair value of these forward transactions is not significant.
NOTE 8 - Financial Risk Management and Derivatives
The Company's Revenue Bonds generally bear fixed rates of interest, but the
P-FLOATS and TOP financing programs incur interest expense at variable rates
re-set weekly. The Company is also exposed to interest rate risks due to its
borrowings under a $75 million warehouse facility with Fleet Securities, Inc.
and Wachovia Securities, Inc. (the "Facility") (see Note 11). Various financial
26
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
vehicles exist which allow the Company's management to hedge against the impact
of interest rate fluctuations on the Company's cash flows and earnings.
The Company has entered into two interest rate swaps in order to reduce the
Company's exposure to increases in the floating interest rate on its TOP and
P-FLOATS programs. Under such interest rate swap agreements, the Company is
required to pay MLCS (the "Counterparty") a fixed rate on a notional amount of
debt. In return, the Counterparty will pay the Company a floating rate
equivalent to The BMA Municipal Swap Index, an index of weekly tax-exempt
variable rate issues on which the Company's variable rate financing programs are
based. On January 5, 2001, the Company entered into a five-year interest rate
swap that fixes the BMA index to 3.98% on a notional amount of $50 million. On
February 5, 2001, the Company entered into a three-year interest rate swap that
fixes the BMA index to 3.64% on an additional notional amount of $100 million.
The average BMA rates for the nine months ended September 30, 2003 and 2002,
were 1.02% and 1.35%, respectively. Net swap payments received by the Company,
if any, will be taxable income to the Company and, accordingly, to shareholders.
A possible risk of such swap agreements is the possible inability of the
Counterparty to meet the terms of the contracts with the Company; however, there
is no current indication of such an inability.
At September 30, 2003, these two interest rate swaps were recorded as a
liability with a combined fair market value of approximately $3.5 million,
included in interest rate hedges on the Consolidated Balance Sheets. Interest
paid or payable under the terms of the swaps, of approximately $3,066,000, is
included in interest expense.
During January 2002, the Company entered into an interest rate cap agreement
with Fleet Bank, with a cap of 8% on a notional amount of $30 million. Although
this transaction is designed to mitigate the Company's exposure to rising
interest rates, the Company has not designated this interest rate cap as a
hedging derivative. At September 30, 2003, this interest rate cap was recorded
as an asset with a fair market value of $39,443 included in interest rate hedges
in the Consolidated Balance Sheets. Because the Company has not designated this
derivative as a hedge, the change in fair market value flows through the
Consolidated Statements of Income, where it is included in interest income, in
the amount of ($21,611) for the nine months ended September 30, 2003.
NOTE 9 - Dividends and Restricted Assets
CharterMac may not receive any distributions from its subsidiary, Equity Issuer,
until Equity Issuer has either paid all accrued but unpaid distributions related
to its preferred shares, or in the case of the next following distribution
payment date, set aside funds sufficient for payment. The distributions related
to the preferred shares are payable only from Equity Issuer's quarterly net
income, defined as the tax-exempt income (net of expenses) for the particular
calendar quarter. Equity Issuer is required, under the terms of its preferred
share issuance, to meet certain leverage ratios calculated as its total
obligations divided by the gross fair value of investments. This could limit the
ability of Equity Issuer to distribute cash or Revenue Bonds to the Company or
to make loans or advances to the Company.
Equity Issuer and its subsidiaries hold Revenue Bonds which at September 30,
2003, had an aggregate carrying amount of approximately $1.46 billion that serve
as collateral for securitized borrowings or are securitized. The total
securitized borrowings at September 30, 2003 were approximately $864 million.
Equity Issuer's net assets at September 30, 2003 were approximately $559
million.
NOTE 10 - Business Segments
As a result of the December 2001 acquisition of PWF, the Company has two
reportable business segments: an investing segment and an operating segment.
The investing segment consists of subsidiaries holding investments in Revenue
Bonds producing
27
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
primarily tax-exempt interest income.
28
CHARTER MUNICIPAL MORTGAGE ACCEPTANCE COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(Unaudited)
The operating segment generates taxable interest and fee income. Taxable
interest income is generated through the ownership of taxable bonds, certain
taxable loans and other investments. Taxable fee income includes loan
origination and loan servicing fees (through PWF) on portfolios for third
parties, fees earned and associated with the acquisition or origination of
Revenue Bonds, and fees for credit enhancement and guaranty services.
Segment results include all direct and contractual revenues and expenses of each
segment and allocations of indirect expenses based on specific methodologies.
The reportable segments are strategic business units that primarily generate
revenue streams that are distinctly different and are generally managed
separately. Segment reporting is applicable beginning with the acquisition of
PWF on December 31, 2001; prior to December 31, 2001, all of the Company's
operations were attributable to the investing segment. Of the total assets for
the Company at September 30, 2003 and December 31, 2002, approximately $1.98
billion and $1.73 billion, respectively, are attributable to the investing
segment and approximately $77 million and $124 million, respectively, are
attributable to the operating segment.
29
The following tables provide more information regarding the Company's
segments:
(Dollars in thousands) (Dollars in thousands)
Three Months Ended September 30, 2003 Three Months Ended September 30, 2002
--------------------------------------------- ------------------------------------------
Investing Operating Total Investing Operating Total
--------- --------- ----- --------- --------- -----
Revenues $31,755 $ 4,093 $35,848 $24,204 $ 3,880 $28,084
Interest Revenue 30,586 535 31,121 23,174 952 24,126
Interest Expense 9,468 145 9,613 8,225 1,128 9,353
Depreciation and Amortization
expense 626 1,616 2,242 479 1,545 2,024
Equity in the income of investees
accounted for under the equity
method 555 -- 555 555 -- 555
Income tax or benefit 345 344 689 214 442 656
Net income (loss) 16,870 (955) 15,915 13,036 618 13,654
(Dollars in thousands) (Dollars in thousands)
Nine Months Ended September 30, 2003 Nine Months Ended September 30, 2002
--------------------------------------------- ------------------------------------------
Investing Operating Total Investing Operating Total
--------- --------- ----- --------- --------- -----
Revenues $88,280 $ 12,697 $ 100,977 $ 71,707 $ 13,240 $ 84,947
Interest Revenue 84,372 1,861 86,233 69,573 2,869 72,442
Interest Expense 27,159 606 27,765 23,047 1,12