ACCREDITED HOME LENDERS HOLDING CO - 10-Q Quarterly Report

UNITED STATES

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 March 31, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 0-50179

ACCREDITED HOME LENDERS HOLDING CO.

(Exact name of registrant as specified in its charter)

Delaware

04-3669482

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

15090 Avenue of Science

San Diego, California 92128

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: 858-676-2100

Former name, former address and former fiscal year, if changed since last report: not applicable

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x or No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ or No x

The number of outstanding shares of the registrant’s common stock as of April 30, 2004 was 20,799,250.

TABLE OF CONTENTS


		Page
PART I	FINANCIAL INFORMATION
Item 1.	Unaudited Financial Statements	2
	Condensed Consolidated Balance Sheets as of December 31, 2003 and March 31, 2004	2
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2003 and March 31, 2004	3
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and March 31, 2004	4
	Notes to Unaudited Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	48

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	49
Item 2.	Changes in Securities and Use of Proceeds	49
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Submission of Matters to a Vote of Security Holders	49
Item 5.	Other Information	49
Item 6.	Exhibits and Reports on Form 8-K	49

	Signatures	S-1
	Exhibit Index	Ex-1
	Certifications

FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements. When used in this report, statements which are not historical in nature, including the words “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend” and similar expressions are intended to identify forward-looking statements. They also include statements containing a projection of revenues, earnings or losses, capital expenditures, dividends, capital structure or other financial terms.

The forward-looking statements in this report are based upon our management’s beliefs, assumptions and expectations of our future operations and economic performance, taking into account the information currently available to them. These statements are not statements of historical fact. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us, that may cause our actual results, performance or financial condition to be materially different from the expectations of future results, performance or financial condition that we express or imply in any forward-looking statements. Some of the important factors that could cause our actual results, performance or financial condition to differ materially from expectations are:

•

changes in demand for, or value of, mortgage loans due to the attributes of the loans we originate; the characteristics of our borrowers; and fluctuations in the real estate market, interest rates or the market in which we sell or securitize our loans;

•

a general deterioration in economic or political conditions;

•

our ability to protect and hedge our mortgage loan portfolio against adverse interest rate movements;

•

changes in government regulations that affect our ability to originate and service mortgage loans;

•

changes in the credit markets, which affect our ability to borrow money to originate mortgage loans;

•

the degree and nature of our competition;

•

our ability to employ and retain qualified employees; and

•

the other factors referenced in this report, including, without limitation, under the section entitled “ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this report might not occur. We qualify any and all of our forward-looking statements entirely by these cautionary factors.

In this Form 10-Q, unless the context requires otherwise, “Accredited,” “Company,” “we,” “our,” and “us” means Accredited Home Lenders Holding Co. and its subsidiary.

PART I

Item 1. Financial Statements

ACCREDITED HOME LENDERS HOLDING CO. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)


(dollars in thousands)	December 31, 2003			March 31, 2004
ASSETS
Cash and cash equivalents	$	27,119		$	34,542
Restricted cash		209			5,660
Mortgage loans held for sale, net of market reserve of $12,213 and $12,833, respectively		1,615,994			1,907,341
Securitized loans, net of allowance for loan losses of $19,890 and $24,686, respectively		1,751,318			2,139,009
Mortgage-related securities, at fair value		3,692			4,286
Mortgage servicing rights, net		1,119			812
Furniture, fixtures and equipment, net		20,674			26,310
Other receivables		44,911			57,149
Deferred income tax asset		16,052			18,288
Prepaid expenses and other assets		20,329			22,249

TOTAL	$	3,501,417		$	4,215,646

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Warehouse facilities	$	1,515,195		$	1,816,200
Securitization bond financing		1,724,389			2,094,043
Income taxes payable		2,949			12,266
Accounts payable and accrued liabilities		46,661			54,946

Total liabilities		3,289,194			3,977,455

COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS’ EQUITY:
Preferred stock, $.001 par value; authorized 5,000,000 shares; no shares issued and outstanding		—			—
Common stock, $.001 par value; authorized 40,000,000 shares; issued and outstanding 20,366,314 shares at December 31, 2003 and 20,740,534 shares at March 31, 2004 (including 326,113 and 496,025, respectively, of restricted stock awarded under the deferred compensation plan)		20			21
Additional paid-in capital		61,585			70,444
Note receivable for common stock		(1,250	)		(1,250	)
Unearned compensation		(5,623	)		(11,021	)
Retained earnings		157,491			179,997

Total stockholders’ equity		212,223			238,191

TOTAL	$	3,501,417		$	$4,215,646

See notes to condensed consolidated financial statements.

ACCREDITED HOME LENDERS HOLDING CO. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


(dollars and shares outstanding in thousands, except for earnings per share)	Three Months Ended March 31,
	2003		2004
REVENUES:
Interest income	$	32,297	$	60,626
Gain on sale of loans (including $2,834 and $0, respectively, with a related party)		43,171		54,730
Loan servicing income		1,882		1,563
Net gain on mortgage-related securities and derivatives		1,399		1,842
Other income		391		202

Total revenues		79,140		118,963

EXPENSES:
Salaries, wages and benefits		23,902		35,394
Interest expense (including $597 and $0, respectively, with a related party)		12,167		20,930
Occupancy		2,402		3,853
Provision for losses		6,508		7,449
Depreciation and amortization		1,117		1,774
General and administrative expenses		8,361		12,053

Total expenses		54,457		81,453

INCOME BEFORE INCOME TAXES		24,683		37,510
INCOME TAXES		9,873		15,004

NET INCOME	$	14,810	$	22,506

BASIC EARNINGS PER SHARE	$	1.19	$	1.12

DILUTED EARNINGS PER SHARE	$	0.85	$	1.05

WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC		12,445		20,119

DILUTED		17,419		21,504

See notes to condensed consolidated financial statements.

ACCREDITED HOME LENDERS HOLDING CO. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Three Months Ended March 31,
(dollars in thousands)	2003			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	14,810		$	22,506
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		1,117			1,774
Amortization of unearned compensation		49			777
Loss on disposal of furniture, fixtures, and equipment		—			4
Mortgage loans originated, net of fees		(1,470,267	)		(2,388,770	)
Proceeds from sale of mortgage loans held for sale, net of fees		1,075,857			1,582,909
Collection of principal payments on mortgage loans held for sale		4,551			11,274
Net change in fair value hedge basis adjustment on mortgage loans held for sale and securitized loans		(3,200	)		(14,933	)
Amortization of net deferred origination fees on securitized loans		(125	)		(252	)
Cash received on mortgage-related securities		3,735			1,407
Net unrealized gain on mortgage-related securities		(1,735	)		(2,190	)
Accretion of mortgage-related securities		(346	)		(108	)
Amortization of mortgage servicing rights		565			307
Provision for losses		6,508			7,449
Deferred income taxes		(3,324	)		(2,236	)
Income tax deduction for disqualifying stock dispositions		—			2,294
Changes in assets and liabilities:
Other receivables		(230	)		(12,238	)
Other assets		1,906			(336	)
Accounts payable and accrued liabilities		(6,333	)		6,556
Income taxes payable		7,192			9,317

Net cash used in operating activities		(369,270	)		(774,489	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(2,257	)		(7,414	)
Principal payments on securitized loans		14,270			123,734

Net cash provided by investing activities		12,013			116,320

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from warehouse credit facilities		348,916			301,005
Payments of borrowings on residual interest credit facility		(6,858	)		—
Proceeds from issuance of securitization bond financing		—			505,000
Payments of securitization bond financing		(22,817	)		(135,346	)
Change in restricted cash		(120	)		(5,451	)
Payments on capital leases		(75	)		(7	)
Proceeds from exercise of stock options		134			391
Net proceeds from initial public offering and concurrent private placement		38,773			—

Net cash provided by financing activities		357,953			665,592

NET INCREASE IN CASH AND CASH EQUIVALENTS		696			7,423
BEGINNING BALANCE, CASH AND CASH EQUIVALENTS		11,300			27,119

ENDING BALANCE, CASH AND CASH EQUIVALENTS	$	11,996		$	34,542

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	9,200		$	18,852
Income taxes	$	6,024		$	5,609
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans held for sale to securitized loans	$	—		$	504,925
Transfer of loans held for sale to real estate owned, included in other assets	$	2,172		$	1,584
Transfer of mortgage related securities from other liabilities	$	—		$	297
Unearned compensation	$	48		$	76
Deferred compensation	$	—		$	6,023
Conversion of convertible debt to common stock	$	3,000		$	—
Conversion of preferred stock to common stock	$	5,113		$	—
Conversion of warrants to common stock	$	1		$	—

See notes to condensed consolidated financial statements.

ACCREDITED HOME LENDERS HOLDING CO. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For The Three Months Ended March 31, 2003 and 2004 (Unaudited)

1. THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation—The consolidated financial statements include the accounts of Accredited Home Lenders Holding Co. (“AHLHC”), a Delaware corporation, and its wholly owned subsidiary Accredited Home Lenders, Inc. (“AHL”) (collectively the “Company”). The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. All intercompany balances and transactions have been eliminated. The unaudited consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial statements and related notes thereto included in Accredited Home Lenders Holding Co.’s Annual Report on Form 10-K for the year ended December 31, 2003.

On February 14, 2003, AHLHC completed an initial public offering (the “Offering”) whereby 9,650,000 shares of its common stock (of which 4,493,022 shares were offered by AHLHC) were sold to the public resulting in gross proceeds of $35.9 million to AHLHC. In addition, AHLHC sold 510,697 shares of its common stock in a concurrent private placement resulting in gross proceeds of $3.8 million to AHLHC. Concurrently, 5,893,546 shares of common stock of AHLHC were issued in exchange for all of the issued and outstanding shares of common stock of AHL as part of a reorganization whereby AHL became a wholly owned subsidiary of AHLHC. The acquisition of AHL has been accounted for at historical cost in a manner similar to a pooling of interests, and the accompanying consolidated financial statements have been prepared assuming the reorganization had occurred as of the first day of the earliest period presented herein. The consolidated financial position and results of

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