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 September 30, 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 October 29, 2004 was 21,199,728.

TABLE OF CONTENTS


		Page
PART I	FINANCIAL INFORMATION
Item 1.	Unaudited Financial Statements	2
	Condensed Consolidated Balance Sheets as of December 31, 2003 and September 30, 2004	2
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2003 and September 30, 2004	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and September 30, 2004	4
	Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2003 and September 30, 2004	5
	Notes to Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	66
Item 4.	Controls and Procedures	67

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	68
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69
Item 3.	Defaults Upon Senior Securities	69
Item 4.	Submission of Matters to a Vote of Security Holders	69
Item 5.	Other Information	69
Item 6.	Exhibits and Reports on Form 8-K	69

	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 subsidiaries.

PART I

Item 1. Financial Statements

ACCREDITED HOME LENDERS HOLDING CO. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)


(dollars in thousands)	December 31, 2003			September 30, 2004
ASSETS
Cash and cash equivalents	$	27,119		$	73,469
Restricted cash		209			5,690
Mortgage loans held for sale, net of market reserve of $12,213 and $14,372, respectively		1,277,075			1,848,376
Mortgage loans held for investment, net of allowance for loan losses of $19,890 and $51,328, respectively		2,090,237			4,047,046
Mortgage-related securities, at fair value		3,692			3,754
Mortgage servicing rights, net		1,119			331
Furniture, fixtures and equipment, net		20,674			32,653
Other receivables		44,911			60,570
Prepaid income taxes		—			19,878
Deferred income tax asset		16,052			17,214
Prepaid expenses and other assets		20,329			27,693

TOTAL	$	3,501,417		$	6,136,674

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Warehouse facilities	$	1,515,195		$	2,411,415
Securitization bond financing		1,724,389			3,275,887
Income taxes payable		2,949			—
Accounts payable and accrued liabilities		46,661			50,975

Total liabilities		3,289,194			5,738,277

COMMITMENTS AND CONTINGENCIES (Note 14)
MINORITY INTEREST IN SUBSIDIARY		—			84,094
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 21,161,641 shares at September 30, 2004 (including 326,113 and 563,767, respectively, of restricted stock awarded under the deferred compensation plan)		20			21
Additional paid-in capital		61,585			78,970
Note receivable for common stock		(1,250	)		(1,250	)
Unearned compensation		(5,623	)		(11,685	)
Other comprehensive loss		—			(1,921	)
Retained earnings		157,491			250,168

Total stockholders’ equity		212,223			314,303

TOTAL	$	3,501,417		$	6,136,674

See notes to condensed consolidated financial statements.

ACCREDITED HOME LENDERS HOLDING CO. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


(dollars and shares outstanding in thousands, except for earnings per share)	Three Months Ended September 30,				Nine Months Ended September 30,
	2003		2004		2003		2004
REVENUES:
Interest income	$	47,870	$	97,493	$	120,484	$	242,792
Gain on sale of loans (including $0, $0, $2,834 and $0, respectively, with a related party)		65,237		77,993		171,317		210,342
Loan servicing income		1,979		1,996		5,789		5,205
Net gain on mortgage-related securities and derivatives		1,051		309		5,439		2,083
Other income		98		283		583		413

Total revenues		116,235		178,074		303,612		460,835

EXPENSES:
Salaries, wages and benefits		28,700		42,674		79,523		117,775
Interest expense (including $0, $0, $597 and $0, respectively, with a related party)		16,616		37,114		43,628		86,137
Occupancy		3,449		4,810		8,448		13,341
Provision for losses		6,537		14,416		22,916		39,708
Depreciation and amortization		1,260		2,911		3,343		6,934
General and administrative expenses		10,590		15,878		29,019		42,002

Total expenses		67,152		117,803		186,877		305,897

INCOME BEFORE INCOME TAXES		49,083		60,271		116,735		154,938
INCOME TAXES		19,634		23,234		46,694		61,101
MINORITY INTEREST—DIVIDENDS ON PREFFERED STOCK OF SUBSIDIARY		—		1,160		—		1,160

NET INCOME	$	29,449	$	35,877	$	70,041	$	92,677

BASIC EARNINGS PER SHARE	$	1.50	$	1.75	$	4.09	$	4.57

DILUTED EARNINGS PER SHARE	$	1.40	$	1.66	$	3.56	$	4.31

WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC		19,651		20,470		17,139		20,287

DILUTED		21,046		21,580		19,687		21,516

See notes to condensed consolidated financial statements.

ACCREDITED HOME LENDERS HOLDING CO. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Nine Months Ended September 30,
(dollars in thousands)	2003			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	70,041		$	92,677
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		3,343			6,934
Amortization of unearned compensation		406			2,473
Loss on disposal of furniture, fixtures, and equipment		120			39
Mortgage loans held for sale originated, net of fees		(4,467,876	)		(6,076,570	)
Proceeds from sale of mortgage loans held for sale, net of fees		4,223,016			5,789,582
Collection of principal payments on mortgage loans held for sale		22,902			52,405
Net change in fair value hedge basis adjustment on mortgage loans held for sale and securitized loans		(10,769	)		(16,910	)
Amortization of net deferred origination fees on securitized loans		(447	)		1,972
Cash received on mortgage-related securities		11,205			2,419
Net unrealized gain on mortgage-related securities		(6,513	)		(2,086	)
Accretion of mortgage-related securities		(671	)		(380	)
Amortization of mortgage servicing rights		1,598			788
Provision for losses		22,916			39,708
Deferred income taxes		(2,743	)		(1,162	)
Income tax deduction for disqualifying stock dispositions		—			5,625
Changes in assets and liabilities:
Other receivables		(15,510	)		(15,659	)
Prepaid income taxes		—			(19,878	)
Other assets		2,442			(2,642	)
Accounts payable and accrued liabilities		10,262			3,691
Income taxes payable		(998	)		(2,949	)

Net cash used in operating activities		(137,276	)		(139,923	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(11,398	)		(18,952	)
Mortgage loans held for investment originated		(1,140,347	)		(2,905,882	)
Principal payments on securitized loans		119,857			581,562

Net cash used in investing activities		(1,031,888	)		(2,343,272	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from warehouse credit facilities		569,573			896,220
Payments of borrowings on residual interest credit facility		(6,859	)		—
Proceeds from issuance of securitization bond financing		719,847			2,167,569
Payments of securitization bond financing.		(141,289	)		(616,071	)
Change in restricted cash		(1,367	)		(5,481	)
Payments on capital leases		(208	)		(12	)
Proceeds from exercise of stock options		547			1,123
Proceeds from issuance of stock under ESPP		1,873

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