AIC Arlington Asset Investment Corp

Aames Investment Corporation (NYSE:AIC), a mortgage real estate investment trust today announced financial results for the third quarter of 2005. Core diluted EPS for the quarter equaled $0.20, while diluted net income per common share for the September 2005 quarter equaled $0.34. During the quarter, the Company recorded a pretax mark-to-market derivative gain under FASB 133 of $7.1 million and a pretax $1.6 million monoline insurance premium reimbursement, representing non-core diluted earnings per share of $0.14. Earnings per share for the third quarter of 2005 resulted from a combination of net interest income generated by the Company's loans held for investment portfolio and net gain realized from the sales of loans into the secondary market by the Company's taxable REIT subsidiary, or TRS. Third Quarter 2005 Highlights -- Net loans held for investment increased to $4.2 billion; -- Gross gain on sale rate of loans was 2.39%; -- Net cost to originate declined to 2.08%, 10.7% lower than the second quarter of 2005; -- Total loan production of $1.9 billion, a 19.8% increase from the second quarter of 2005; -- Taxable REIT net interest margin equaled 2.12%. Mr. A. Jay Meyerson, Chairman and CEO of Aames, commented, "The results of the third quarter validate the strategy we have pursued since converting to a REIT: building a stable dividend stream from our REIT portfolio, balancing loan production growth and value, expanding our retail franchise, and focusing on lowering our cost to originate. During the quarter we found strong demand for our production, and achieved an overall gross gain on sale rate of 2.39% for the quarter, including the sale of our lower value fixed and second lien loans. The continued growth in our retail franchise, combined with corporate cost control initiatives, resulted in a net cost to originate of just above 200 basis points. While recognizing the challenging market environment and the outlook for higher market interest rates, we are committed to maintaining our disciplined operating strategy." Dividend Guidance The Company reaffirmed previous dividend guidance for the fourth quarter of 2005. Based on the characteristics of the current loans held for investment portfolio and management's view of near term loan production, management estimates that the REIT portfolio will generate a dividend per share of $0.34 to $0.36 for the fourth quarter of 2005. Financial Disclosure The Company has included measurements of core financial metrics, including core net interest income, core net income and loss and core diluted earnings and loss per share, which are non-GAAP financial metrics. Core earnings excludes the mark-to-market derivative gain or loss under FASB 133, as well as non-core charges or credits to income. The Company does not account for its derivative financial instruments as cash flow or fair value hedges under the provisions of Statement of Financial Accounting Standards No. 133 (Accounting for Derivative Financial Instruments and Hedging Activities) and, as a result, the unrealized gains or losses on the derivative instruments are recorded as income or losses, even thought the cash flows will not be received until sometime in the future. By excluding the impact of the mark-to-market gain or loss from the net income or net loss, management believes that core net interest income and core net income or loss can provide a useful measurement of the Company's operating performance. Throughout this press release, the Company will provide comparisons between the third quarter of 2005 and both the second quarter of 2005 and the third quarter of 2004. Due to the change in the Company's primary operating strategy following its November 2004 reorganization from a mortgage banking platform, where the Company originated and sold all of its production for a cash gain, to a mortgage REIT in which the Company retains a substantial portion of its production for its loans held for investment portfolio and generates interest income, management believes that some comparisons to prior year periods do not provide the best measurement of the Company's financial performance. Financial Summary The Company achieved its targeted REIT portfolio leverage ratio during the third quarter and as a result, began to sell a larger percentage of its production into the secondary markets compared to the past two quarters. This shift to higher loans sales, which management anticipates continuing in the fourth quarter, generated higher net gain on sale of loans for the third quarter compared to the first two quarters of 2005. Combined with a lower net cost to originate and net interest income, the higher total revenue resulted in core net income for the September 2005 quarter of $12.5 million, or $0.20 of net income per diluted share. Including the pretax mark-to-market derivative gain under FASB 133 of $7.1 million and a pretax monoline insurance premium reimbursement of $1.6 million, total net income for the third quarter equaled $21.3 million, or $0.34 of net income per diluted share. Revenue The following table details the components of total and core revenues for the quarters ended September and June 2005 and September 2004. -0- *T (dollars in thousands) Quarter Ended Percentage Change -------------------------------- ----------------- 9/30/2005 9/30/2004 6/30/2005 Y-Y Sequential ---------- ---------- ---------- ------ ---------- Net interest income after provision for loan losses (1) $42,677 $14,111 $16,632 202.4% 156.6% Non interest income 21,300 51,709 6,030 -58.8% 253.2% ---------- ---------- ---------- Total revenue 63,977 65,820 22,662 -2.8% 182.3% Mark-to-market loss (gain) on derivative financial instruments (7,121) - 11,495 nm nm ---------- ---------- ---------- Total core revenue $56,856 $65,820 $34,157 -13.6% 66.5% ========== ========== ========== (1) NII for all 2005 periods includes the FASB 133 mark-to-market gain or loss on derivative financial instruments. *T Total core revenue for the third quarter of 2005 of $56.9 million increased by 66.5% sequentially over the second quarter of 2005. The increase resulted from: (1) higher net interest income generated by a larger loans held for investment portfolio and a higher average balance of loans held for sale and (2) higher net gain on sale of loans into the secondary market as the Company returned to selling a significant portion of its core hybrid loans for cash gain, which generated a higher net gain on sale ratio than in the past several quarters. Total core revenue for the September 2005 quarter decreased by 13.6% compared to the prior year's quarter. The decline was due to a lower gain on sale of loans resulting from a lower volume of loans sold into the secondary market as well as a lower gain on sale rate. The lower gain on sale was partially offset by higher net interest income after provision for loan losses generated by a higher balance of loans held for investments. Prior to its conversion to a mortgage REIT, the Company typically sold nearly all of its quarterly production into the secondary markets. Since its REIT conversion in November 2004, the Company has retained a portion of its loans for the loans held for investment portfolio in order to generate a stable stream of net interest income, which in turn, is the primary driver for dividends for shareholders. Net Interest Income The following table details the components of net interest income before the provision for loan losses for the quarters ended September and June 2005 and September 2004. -0- *T (dollars in thousands) Quarter Ended Percentage Change -------------------------------- ----------------- 9/30/2005 9/30/2004 6/30/2005 Y-Y Sequential ---------- ---------- ---------- ------ ---------- Interest earned on: Loans held for investment $74,651 $- $59,261 nm 26.0% Loans held for sale 10,601 24,145 6,754 -56.1% 57.0% Overnight investments 812 - 520 nm 56.2% Income from derivative financial instruments 8,244 - 4,629 nm 78.1% Amortization of net deferred loan origination costs (1,345) - (1,142) nm 17.8% Prepayment penalty fees 7,946 - 4,856 nm 63.6% Other 82 65 65 26.2% 26.2% ---------- ---------- ---------- Total interest income $100,991 $24,210 $74,943 317.1% 34.8% Interest expense $48,731 $8,174 $32,326 496.2% 50.7% Mark-to-market (gain) loss on derivative financial instruments (7,121) - 11,495 nm nm Amortization of financing costs 3,550 1,420 2,087 150.0% 70.1% Other 154 505 538 -69.5% -71.4% ---------- ---------- ---------- Total interest expense $45,314 $10,099 $46,446 348.7% -2.4% Net interest income (1) $55,677 $14,111 $28,497 294.6% 95.4% Add (subtract) mark-to-market (gain) loss on derivative financial instruments (7,121) - 11,495 ---------- ---------- ---------- Core net interest income (1) $48,556 $14,111 $39,992 244.1% 21.4% ========== ========== ========== (1) Before the provision for losses on loans held for investment. *T The Company reported a core net interest income for the September 2005 quarter of $48.6 million, a 21.4% sequential increase over the second quarter of the 2005. The growth in core net interest income resulted from a higher average balance of loans in both the loans held for investment and held for sale portfolio, offset by a higher funding cost for both portfolios. During the September 2005 quarter the Company added approximately $313.2 million to its loans held for investment portfolio, which at September 30, 2005 was $4.2 billion. Under current market conditions, the Company anticipates modestly growing the loans held for investment portfolio and selling the majority of its loan production into the secondary markets. The average balance of the Company's loans held for investment portfolio for the third quarter was $4.2 billion, an increase of approximately $900 million from the second quarter of 2005. The REIT net interest margin for the quarter, which excludes net interest income on the held for sale portfolio, interest earned on temporary investments, the provision for losses on loans held for investment and the FASB 133 mark-to-market adjustment, was 2.43%, compared to 2.60% in the second quarter of 2005. The 17 basis points, or 6.5%, decrease in the net interest margin reflects the higher cost of funding on loans added to the loans held for investment portfolio during the third quarter of 2005, partially offset by higher prepayment penalty fees and somewhat lower amortization of deferred loan acquisition premiums and net deferred loan origination costs. The table below provides the details of the components of the REIT net interest margin for the September and June 2005 quarters. -0- *T Quarter Ended --------------------- 9/30/2005 6/30/2005 ---------- ---------- Gross yield on LHFI 7.07% 7.16% Prepayment penalty fees 0.75% 0.58% Amortization of premiums -0.43% -0.64% Amortization of deferred loan fees and costs -0.13% -0.14% ---------- ---------- Net yield on LHFI 7.26% 6.96% Net cost of funding for LHFI 4.38% 3.88% ---------- ---------- Net interest margin 2.88% 3.08% Servicing costs -0.45% -0.48% ---------- ---------- REIT net interest margin 2.43% 2.60% Management fees & other REIT costs -0.31% -0.21% ---------- ---------- REIT taxable income margin 2.12% 2.39% ========== ========== LHFI = Loans held for investment *T For the September quarter, taxable REIT income equaled $22.4 million, or an annualized 2.12% of the average loans held for investment portfolio, compared to $19.8 million, or an annualized 2.39% for the second quarter of 2005. The REIT loans held for investment portfolio did not experience any charge-offs during either period. As previously reported, the Company declared a $0.35 per share dividend for the third quarter, equal to $22.2 million of taxable REIT income. The Company retained approximately $0.003 per share in income to recapture a portion of the $0.03 per share return of capital included in the $0.34 per share dividend declared for the second quarter of 2005. Management anticipates declaring a dividend for the fourth quarter of 2005 in the $0.34 to $0.36 per share range, after recapture of the remaining $.027 per share return of capital in the June quarter. Noninterest Income The following table details the components of noninterest income for the quarters ended September and June 2005 and September 2004. -0- *T (dollars in thousands) Quarter Ended Percentage Change -------------------------------- ----------------- 9/30/2005 9/30/2004 6/30/2005 Y-Y Sequential ---------- ---------- ---------- ------ ---------- Noninterest income: Gain on sale of loans $19,580 $49,458 $4,666 -60.4% 319.6% Loan servicing revenue 1,720 2,251 1,364 -23.6% 26.1% ---------- ---------- ---------- Total noninterest income $21,300 $51,709 $6,030 -58.8% 253.2% ========== ========== ========== *T Total noninterest income for the third quarter of 2005 increased by $15.3 million compared to the second quarter of 2005, due primarily to an increase in the net gain on sale of loans. Compared to the prior year quarter, total noninterest income decreased by $30.4 million. The decrease was due primarily to a lower net gain on sale of loans in the September 2005 quarter resulting from a lower volume of loans sold into the secondary market, as well as lower servicing income from a decreased balance of loans serviced for others. The following table details the components of the gain on sale of loans for quarters ended September and June 2005 and September 2004. -0- *T (dollars in thousands) Quarter Ended Percentage Change --------------------------------- ------------------ 9/30/2005 9/30/2004 6/30/2005 Y-Y Sequential ---------- ----------- ---------- ------- ---------- Gain on sale of loans: Gain on sale of loans $21,838 $64,913 $7,060 -66.4% 209.3% Loan originations fees and costs, net 1,558 (7,963) 2,617 nm -40.5% Provision for representation, warranty and other losses (3,796) (7,627) (4,016) -50.2% -5.5% Miscellaneous costs (20) 135 (995) nm -98.0% ---------- ----------- ---------- Gain on sale of loans $19,580 $49,458 $4,666 -60.4% 319.6% ========== =========== ========== Whole loan market sales $915,457 $1,964,934 $410,714 Gross gain on sale rate 2.39% 3.30% 1.72% Net gain on sale rate 2.14% 2.52% 1.14% *T The increased gain on sale rate for the third quarter of 2005 compared to the June 2005 quarter resulted from the mix in the composition of the loans sold by the Company. As previously stated, during the first half of 2005, the Company sold primarily lower margin loans, including fixed rate, second lien and higher FICO loans, in order to retain its core higher value hybrid loans in the loans held for investment portfolio. Upon achieving its targeted REIT portfolio leverage ratio during the third quarter of 2005, the Company began selling higher value hybrid loans into the secondary markets. During the third quarter the Company sold approximately $915.5 million of loans into the secondary markets for a gross gain on sale of 2.39%. The recognition of net loan origination fees and costs for the September 2005 quarter decreased by approximately $1.0 million compared to the June 2005 quarter, a result of the higher percentage of wholesale loans sold in the September quarter than in the June quarter. The decrease in recognized net loan origination fees and costs was partially offset by a lower provision for representation, warranty and other losses. The net gain on sale of loans for the September 2005 quarter was 2.14%, compared to 1.14% for the June 2005 quarter. Based on current market conditions in the secondary market, and the anticipated mix of the composition of loan sales in the fourth quarter, the Company believes that the gross gain on sale rates earned on whole loan sales during the fourth quarter of 2005 may be below the gross gain on sale rate reported for the third quarter of 2005. Servicing revenue for the September 2005 quarter of $1.7 million increased 26.1% from the June 2005 quarter and decreased 23.6% from the prior year quarter. The decrease from the prior year reflects the elimination of off-balance sheet securitizations on which the Company earned contractual servicing fee income, as well as a decrease in loans serviced for third parties. The Company anticipates that servicing fee income in the next several quarters will remain relatively stable to the levels earned in the third quarter of 2005. Noninterest Expense The following table details the components of noninterest expense for the quarters ended September and June 2005 and September 2004. -0- *T (dollars in thousands) Quarter Ended Percentage Change -------------------------------- ----------------- 9/30/2005 9/30/2004 6/30/2005 Y-Y Sequential ---------- ---------- ---------- ------ ---------- Noninterest expense: Personnel $23,783 $22,596 $20,980 5.3% 13.4% Production 9,258 8,560 8,577 8.2% 7.9% General and administrative 10,312 11,519 15,015 -10.5% -31.3% ---------- ---------- ---------- Total noninterest expense 43,353 42,675 44,572 1.6% -2.7% Non-core income (expense) 1,635 - (3,700) nm nm ---------- ---------- ---------- Core noninterest expense $44,988 $42,675 $40,872 5.4% 10.1% ========== ========== ========== *T Total core noninterest expense for the September 2005 quarter was $4.1 million, 10.1%, higher than in the June 2005 quarter and $2.3 million, or 5.4%, above the year ago quarter. The sequential increase in core noninterest expense reflects the higher production volume in the third quarter of 2005 compared to the second quarter as well as a higher compensation expense from increased staffing related to selected additions to support anticipated growth. Core general and administrative expenses were relatively flat from the second quarter of 2005, a result of the Company's cost containment efforts. Net Cost to Originate The net cost to originate loans is a non GAAP measurement of the Company's efficiency trends within the meaning of Regulation G promulgated by the Securities and Exchange Commission. The data represents reported operating expenses, plus the origination costs deferred under SFAS No. 91 (Accounting for Nonrefundable Fees and Costs Associated with Origination or Acquiring Loans and Initial Direct Costs of Leases), less (i) the cost of servicing the Company's loans held for investment portfolio, (ii) certain corporate overhead costs and (iii) the fees received on originations less points paid on wholesale originations. The Company believes that the non GAAP measurement of the net cost to originate is indicative of its ability to generate profits from the sale of its loans into the secondary markets and an indication of its overall efficiency. The table below details the components of the net cost to originate loans for the quarters ended September and June 2005 and September 2004. -0- *T (dollars in thousands) Quarter Ended Percentage Change ----------------------------------- ----------------- 9/30/2005 9/30/2004 6/30/2005 Y-Y Sequential ----------- ----------- ----------- ------ ---------- Total noninterest expense $43,353 $42,675 $44,572 1.6% -2.7% Non-core income (expense) 1,635 - (3,700) nm nm Deferred loan origination costs 24,319 21,780 19,434 11.7% 25.1% Loan servicing and other costs (2,733) (2,341) (2,274) 16.7% 20.2% ----------- ----------- ----------- Total expenses 66,574 62,114 58,032 7.2% 14.7% Loan origination fees received (26,716) (16,466) (20,901) 62.2% 27.8% ----------- ----------- ----------- Net cost to originate $39,858 $45,648 $37,131 -12.7% 7.3% =========== =========== =========== Total Originations $1,913,296 $1,878,012 $1,597,014 1.9% 19.8% Cost Ratios: Core noninterest expense 2.35% 2.27% 2.56% 3.5% -8.2% Deferred loan origination costs 1.27% 1.16% 1.22% 9.5% 4.1% Loan servicing and other costs -0.14% -0.12% -0.14% 16.7% 0.0% ----------- ----------- ----------- Total expenses 3.48% 3.31% 3.63% 5.2% -4.1% Loan origination fees received -1.40% -0.88% -1.31% 59.1% 6.9% ----------- ----------- ----------- Net Cost to Originate 2.08% 2.43% 2.33% -14.4% -10.7% =========== =========== =========== *T The 2.08% net cost to originate ratio for the September 2005 quarter represented a 10.7% decrease from the 2.33% ratio for the second quarter of 2005 and a 14.4% decrease from the September 2004 ratio. The decrease in the net cost to originate ratio from both periods resulted from higher loan production, corporate cost containment efforts and the continued benefits from a higher production contribution from the Company's retail channel, the points and fees from which reduce the net cost to originate. Loan Portfolio Total loans held for investment as of September 30, 2005 equaled $4.2 billion, an 8.1% increase from the $3.9 billion balance as of June 30, 2005. The Company also had $632.5 million of loans held for sale as of September 30, 2005. At the end of the third quarter, the Company's leverage ratio, defined as total loans held for investment divided by total consolidated shareholders' equity, equaled 13.2 times. This leverage ratio is within the 12 to 14 times equity range of management's targets, and management expects to maintain the ratio within this approximate range during the next several quarters. The Company experienced an average prepayment speed on its loans held for investment portfolio of 35.7%, roughly equal to the rate during the second quarter of 2005. This rate of repayment remains higher than typical for the Company's loans and continues to have a negative impact on its financial performance. In addition to requiring that the Company retain a higher percentage of total production to maintain its loans held for investment portfolio, the higher than typical repayment rate can accelerate the amortization of capitalized loan acquisition and origination costs, thereby reducing the net yield on the loans held for investment portfolio and taxable REIT income. Loan Production The following table details the Company's loan production for the quarters ended September and June 2005 and September 2004. -0- *T (dollars in thousands) Quarter Ended Percentage Change ----------------------------------- ----------------- 9/30/2005 9/30/2004 6/30/2005 Y-Y Sequential ----------- ----------- ----------- ------ ---------- Retail $793,851 $615,082 $624,816 29.1% 27.1% Wholesale 1,119,445 1,262,930 920,506 -11.4% 21.6% Purchased loans - - 51,692 nm nm ----------- ----------- ----------- Total loan production $1,913,296 $1,878,012 $1,597,014 1.9% 19.8% =========== =========== =========== *T Loan production for the third quarter of 2005 equaled $1.9 billion, a $316.3 million sequential increase from the second quarter of 2005 and a $35.3 million increase from the year ago quarter. The increased loan production was due primarily to a combination of increased productivity from the Company's retail channel and a competitive market more aligned with the Company's loan pricing. The components of the Company's loan production during the September 2005 quarter remained consistent with those of prior quarters, with traditional hybrid loans accounting for 61.3% of total production, fixed rate loans 25.2% of total production and interest-only hybrid loans 13.5% of total production. The Company did not purchase any loan pools during the third quarter of 2005, and excluding the pool purchased during the second quarter of the year, total production increased 23.8% sequentially. During the September 2005 quarter wholesale and retail production represented 58.5% and 41.5% of total production, respectively, compared to 67.2% and 32.8% for the September 2004 quarter and 59.6% and 40.4% for the second quarter of 2005, excluding the purchased loans. Management continues to focus on optimizing the retail branch operating structure and increasing the retail division's percentage of total production. The Company continues to believe that its retail franchise represents an important competitive advantage, as it is able to achieve a higher degree of operating leverage as the division increases its lending volume. This impact was apparent in the September 2005 quarter as the higher points and fee retained by the Company from its retail production made a significant contribution to the lower net cost to originate reported for the September 2005 quarter. Credit Quality The allowance for loan losses for the loans held for investment portfolio as of September 30, 2005 equaled $33.3 million, or 0.79% of the loans held for investment portfolio. The Company provided $13.0 million for loan losses during the third quarter of 2005. Total delinquencies in the loans held for investment portfolio equaled 4.4% at the end of the September 2005 quarter, compared to 1.9% at the end of the June 2005 quarter. As in the first two quarters of 2005, the Company did not experience any credit losses during the September quarter, primarily due to the early seasoning of the loans held for investment portfolio and, to a lesser degree, to lower than anticipated levels of defaults in the loans held for investment portfolio. The Company continues to anticipate an increase in the level of delinquencies and credit losses as the loans held for investment portfolio seasons and less new loans are added to the portfolio. The Company continues to evaluate exposure to its production levels and delinquencies as a result of hurricanes Katrina, Rita and Wilma. While no assurances can be given, the Company currently believes that its consolidated financial position and results of operations will not be materially effected by the recent events. About Aames Investment Corporation Aames is a mortgage REIT and, through its subsidiary Aames Financial Corporation, originates mortgage loans in 47 states. Aames Financial is a fifty-year old national mortgage banking company focused primarily on originating subprime residential mortgage loans through wholesale and retail channels under the name "Aames Home Loan." To find out more about Aames, please visit www.aames.com. Information Regarding Forward Looking Statements This press release may contain forward-looking statements under federal securities laws. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The risks and uncertainties that may cause the company's performance and results to vary include: (i) limited cash flow to fund operations and dependence on short-term financing facilities; (ii) changes in overall economic conditions and interest rates; (iii) increased delinquency rates in the portfolio; (iv) intense competition in the mortgage lending industry; (v) adverse changes in the securitization and whole loan market for mortgage loans; (vi) declines in real estate values; (vii) an inability to originate subprime hybrid/adjustable mortgage loans; (viii) obligations to repurchase mortgage loans and indemnify investors; (ix) concentration of operations in California, Florida, New York and Texas; the occurrence of natural disasters (including the adverse impact of hurricanes Katrina, Rita and Wilma); (x) extensive government regulation; and (xi) an inability to comply with the federal tax requirements applicable to REITs and effectively operate within limitations imposed on REITs by federal tax rules. For a more complete discussion of these risks and uncertainties and information relating to the company, see the Form 10-K for the year ended December 31, 2004 and other filings with the SEC made by the company. Aames Investment expressly disclaims any obligation to update or revise any forward-looking statements in this press release. Further Information For more information, contact Steven C. Canup, Senior Vice President, Corporate Development and Investor Relations, in Aames Investment's Investor Relations Department at (323) 210-5311 or at infor@aamescorp.com Financial tables and supplementary information follows. -0- *T AAMES INVESTMENT CORPORATION and SUBSIDIARIES Condensed Balance Sheets (In thousands) September 30, December 31, 2005 2004 ------------- ------------- (unaudited) Assets Cash and cash equivalents: Unrestricted $43,162 $31,641 Restricted 91,388 6,139 Loans held for sale, at lower of cost or market 632,515 484,963 Loans held for investment, net 4,187,076 1,725,046 Advances and other receivables 34,404 22,740 Residual interests, at estimated fair value - 39,082 Derivative financial instruments, at estimated fair value 63,448 31,947 Prepaid and other assets 74,438 59,317 ------------- ------------- Total assets $5,126,431 $2,400,875 ------------- ------------- Liabilities and Stockholders' Equity Financings on loans held for investment $4,137,790 $1,157,470 Revolving warehouse and repurchase facilities 596,440 809,213 Other borrowings - 7,680 Other liabilities 75,453 68,886 ------------- ------------- Total liabilities 4,809,683 2,043,249 Stockholders' equity 316,748 357,626 ------------- ------------- Total liabilities and stockholders' equity $5,126,431 $2,400,875 ------------- ------------- Shares outstanding 61,665 61,360 ------------- ------------- *T -0- *T AAMES INVESTMENT CORPORATION and SUBSIDIARIES Condensed Statements of Operations (Unaudited) (In thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 2005 2004 2005 2004 --------- -------- --------- -------- Interest income $100,991 $24,210 $229,586 $61,157 Interest expense 45,314 10,099 103,676 23,962 --------- -------- --------- -------- Net interest income 55,677 14,111 125,910 37,195 Provision for losses on loans held for investment 13,000 - 31,365 - --------- -------- --------- -------- Net interest income after provision for loan losses 42,677 14,111 94,545 37,195 --------- -------- --------- -------- Noninterest income: Gain on sale of loans 19,580 49,458 29,929 167,349 Loan servicing 1,720 2,251 4,124 5,902 --------- -------- --------- -------- Total noninterest income 21,300 51,709 34,053 173,251 --------- -------- --------- -------- Net interest income after provision for loan losses and noninterest income 63,977 65,820 128,598 210,446 --------- -------- --------- -------- Noninterest expense: Personnel 23,783 22,596 67,110 80,544 Production 9,258 8,560 26,635 27,899 General and administrative 10,312 11,519 36,140 33,686 --------- -------- --------- -------- Total noninterest expense 43,353 42,675 129,885 142,129 --------- -------- --------- -------- Income (loss) before income taxes 20,624 23,145 (1,287) 68,317 Income tax provision (benefit) (661) (5,272) 770 (4,970) --------- -------- --------- -------- Net income (loss) $21,285 $28,417 $(2,057) $73,287 --------- -------- --------- -------- Net income (loss) to common stockholders: Basic $21,285 $25,548 $(2,057) $64,680 --------- -------- --------- -------- Diluted $21,285 $28,939 $(2,057) $73,287 --------- -------- --------- -------- Net income (loss) per common share: Basic $0.34 $3.55 $(0.03) $9.03 --------- -------- --------- -------- Diluted $0.34 $0.28 $(0.03) $0.71 --------- -------- --------- -------- Weighted average number of common shares outstanding: Basic 62,444 7,192 62,519 7,161 --------- -------- --------- -------- Diluted 62,533 103,656 62,519 103,374 --------- -------- --------- -------- *T -0- *T AAMES INVESTMENT CORPORATION and SUBSIDIARIES Other Financial Data (Unaudited) (In thousands) Nine Months Ended September 30, -------------------------- 2005 2004 ------------- ------------ Condensed Statement of Cash Flows Information Net cash provided by (used in): Operating activities $(123,989) $(148,884) Investing activities (2,496,585) (2,727) Financing activities 2,717,344 161,475 ------------- ------------ Net increase (decrease) in cash and cash equivalents 96,770 9,864 Cash and cash equivalents, beginning of period 37,780 11,611 ------------- ------------ Cash and cash equivalents, end of period $134,550 $21,475 ------------- ------------ September 30, December 31, 2005 2004 ------------- ------------ Revolving Warehouse and Repurchase Facilities Committed facilities $2,700,000 $2,450,000 Uncommitted facilities 100,000 100,000 ------------- ------------ Total warehouse and repurchase facilities $2,800,000 $2,550,000 ------------- ------------ Amount utilized on committed $596,440 $809,213 ------------- ------------ Borrowing capacity on committed $2,103,560 $1,640,787 ------------- ------------ Liquidity Unrestricted cash $43,162 $31,641 Plus: Unencumbered loans held for sale 76,382 87,955 Less: Margin and ineligible mortgage collateral (36,206) (22,153) Plus: Retained bond financing 17,328 - ------------- ------------ $100,666 $97,443 ------------- ------------ *T -0- *T AAMES INVESTMENT CORPORATION (Parent Company Only) (Unaudited) (In thousands) September 30, Condensed Balance Sheet (1) 2005 ----------------------------------------- ------------- Cash and cash equivalents: Unrestricted $6,795 Restricted 91,388 Loans held for investment, net: Securitized 4,173,048 Not yet securitized 36,407 Net deferred loan origination costs 10,910 Deferred loan acquisition premium 47,964 Allowance for loan losses (33,289) ------------- Total loans held for investment, net 4,235,040 ------------- Accrued interest and other 153,388 Derivative financial instruments 63,448 ------------- Total assets $4,550,059 ------------- Financings on loans held for investment $4,137,790 Revolving warehouse and repurchase facilities 22,992 Other liabilities 24,565 ------------- Total liabilities 4,185,347 Stockholders' equity 364,712 ------------- Total liabilities and stockholders' equity $4,550,059 ------------- (1) Before intercompany elimination entries. Three Months Nine Months Ended Ended September 30, September 30, Condensed Statements of Operations 2005 2005 ----------------------------------------- ------------- -------------- Net interest income $40,823 $88,779 Provision for losses on loans held for investment (13,000) (31,365) ------------- -------------- Net interest income after provision for loan losses 27,823 57,414 Noninterest expense (3,283) (7,482) ------------- -------------- Income before equity in undistributed net loss of subsidiary 24,540 49,932 Equity in undistributed net loss of subsidiary (317) (33,252) ------------- -------------- Net income $24,223 $16,680 ------------- -------------- GAAP Net Income to Taxable Income Reconciliation ----------------------------------------- Net income $24,223 $16,680 Add: Equity in undistributed net loss of subsidiary 317 33,252 ------------- -------------- Income before equity in undistributed net loss of subsidiary 24,540 49,932 Add (subtract) GAAP to tax items: Provision for losses on loans held for investment 13,000 31,365 Derivative mark to market adjustment (15,132) (22,059) Net recoveries (charge-offs) 24 24 ------------- -------------- Estimated taxable income $22,432 $59,262 ------------- -------------- *T -0- *T AAMES INVESTMENT CORPORATION and SUBSIDIARIES Loan Production Information (Unaudited) Three Months Ended Nine Months Ended ---------------------------------- ----------------------- September 30, June 30, September 30, 2005 2004 2005 2005 2004 ----------- ---------- ----------- ----------- ----------- Retail Loan Production Total dollar amount (in thousands) $793,851 $615,082 $624,816 $1,935,225 $1,846,900 Number of loans 5,194 4,893 4,315 13,227 14,657 Average loan amount $152,840 $125,706 $144,801 $146,309 $126,008 Average initial LTV 75.51% 76.46% 76.33% 75.87% 77.06% Weighted average interest rate 7.27% 7.58% 7.37% 7.37% 7.38% Wholesale Loan Production Total dollar amount (in thousands) $1,119,445 $1,262,930 $920,506 $2,885,009 $3,863,209 Number of loans 7,809 8,722 6,747 20,584 26,299 Average loan amount $143,353 $144,798 $136,432 $140,158 $146,896 Average initial LTV 81.80% 81.17% 81.90% 81.67% 81.49% Weighted average interest rate 7.51% 7.57% 7.78% 7.62% 7.35% Purchased Loans Total dollar amount (in thousands) $- $- $51,692 $51,692 $- Number of loans - - 83 83 - Average loan amount $- $- $622,800 $622,800 $- Average initial LTV - % - % 53.29% 53.29% - % Weighted average interest rate - % - % 5.57% 5.57% - % Total Loan Production Total dollar amount (in thousands) $1,913,296 $1,878,012 $1,597,014 $4,871,926 $5,710,109 Number of loans 13,003 13,615 11,145 33,894 40,956 Average loan amount $147,143 $137,937 $143,294 $143,740 $139,421 Average initial LTV 79.19% 79.62% 78.79% 79.07% 80.06% Weighted average interest rate 7.41% 7.57% 7.55% 7.50% 7.36% *T -0- *T AAMES INVESTMENT CORPORATION and SUBSIDIARIES Loan Production Information (Unaudited) (In thousands) Three Months Ended Nine Months Ended ---------------------------------- ---------------------- September 30, June 30, September 30, 2005 2004 2005 2005 2004 ---------- ----------- ----------- ---------- ----------- Loan Production by Loan Purpose Cash-out refinance $1,100,577 $1,085,506 $900,379 $2,800,324 $3,404,042 Purchase money 742,363 717,421 645,301 1,907,292 2,037,357 Rate/term refinance 70,356 75,085 51,334 164,310 268,710 ---------- ----------- ----------- ---------- ----------- $1,913,296 $1,878,012 $1,597,014 $4,871,926 $5,710,109 ---------- ----------- ----------- ---------- ----------- Loan Production by Property Type Single- family $1,649,844 $1,645,825 $1,399,906 $4,244,676 $4,988,004 Multi-family 149,188 122,449 114,499 358,086 396,104 Condominiums 114,264 109,738 82,609 269,164 326,001 ---------- ----------- ----------- ---------- ----------- $1,913,296 $1,878,012 $1,597,014 $4,871,926 $5,710,109 ---------- ----------- ----------- ---------- ----------- Loan Production by State/Region Produced California $390,278 $585,137 $439,308 $1,202,507 $1,870,031 Florida 493,682 364,979 372,851 1,163,383 1,098,910 New York 147,913 130,896 94,357 335,829 425,455 Texas 146,327 132,929 136,411 394,131 375,585 Other Western states 161,850 174,705 128,581 429,722 564,749 Other Midwestern states 100,603 166,340 101,325 297,154 497,756 Other Northeastern states 291,243 194,421 177,435 614,531 521,515 Other Southeastern states 181,400 128,605 146,746 434,669 356,108 ---------- ----------- ----------- ---------- ----------- $1,913,296 $1,878,012 $1,597,014 $4,871,926 $5,710,109 ---------- ----------- ----------- ---------- ----------- Loan Production by Interest Rate Type Hybrid: Traditional $1,172,707 $1,345,569 $1,014,617 $3,134,843 $4,129,909 Interest only 257,551 89,667 190,110 596,469 182,977 Fixed rate 483,038 442,776 392,287 1,140,614 1,397,223 ---------- ----------- ----------- ---------- ----------- $1,913,296 $1,878,012 $1,597,014 $4,871,926 $5,710,109 ---------- ----------- ----------- ---------- ----------- *T -0- *T AAMES INVESTMENT CORPORATION and SUBSIDIARIES Loan Servicing Information (Unaudited) (Dollars in thousands) September 30, December 31, September 30, 2005 2004 2004 ------------- ------------ ------------- Servicing Portfolio Mortgage loans serviced: Loans held for investment $4,158,876 $1,718,696 $- Loans serviced on an interim basis 1,343,638 771,830 2,608,203 Loan subserviced for others on a long-term basis 100,645 129,016 144,214 Loans in off-balance sheet securitization trusts - 224,345 204,298 ------------- ------------ ------------- Total serviced in-house 5,603,159 2,843,887 2,956,715 Loans held for investment subserviced by others 50,673 - - Loan in off-balance sheet securitization trusts subserviced by others - - 48,587 ------------- ------------ ------------- Total servicing portfolio $5,653,832 $2,843,887 $3,005,302 ------------- ------------ ------------- Percentage serviced in-house 99.1% 100.0% 98.4% ------------- ------------ ------------- Loan Delinquencies Percentage of dollar amount of delinquent loans serviced (period end): One month 1.5% 0.3% 0.4% Two months 0.6% 0.2% 0.2% Three or more months: Not foreclosed 1.4% 1.8% 1.8% Foreclosed 0.1% 0.2% 0.2% ------------- ------------ ------------- 3.6% 2.5% 2.6% ------------- ------------ ------------- Percentage of dollar amount of delinquent loans in: Loans held for investment serviced: In-house 4.4% 0.2% N/A By others 0.0% 0.0% N/A Loans serviced on an interim basis 1.0% 1.5% 0.5% Loans subserviced for others on a long-term basis 7.2% 4.8% 4.3% Loans in off-balance sheet securitization trusts serviced: In-house N/A 22.5% 18.6% By others N/A N/A 39.0% *T -0- *T AAMES INVESTMENT CORPORATION and SUBSIDIARIES Loan Servicing Information (Unaudited) (Dollars in thousands) At or During the Nine Months Ended September 30, ----------------------- 2005 2004 ----------- ----------- Loan Foreclosures Percentage of dollar amount of loans foreclosed during the period to servicing portfolio (period end) 0.2% 0.3% Number of loans foreclosed during the period 105 147 Principal amount of loans foreclosed during the period $9,199 $8,787 Number of loans liquidated during the period 193 318 Net losses on liquidations during the period from: Loans held for investment serviced: In-house $(24) $- By others - - Loans serviced on an interim basis 4,553 2,268 Loans serviced for others on a long-term basis 19 - Loans in off-balance sheet securitization trusts serviced: In-house 2,850 6,352 By others - 3,124 ----------- ----------- $7,398 $11,744 ----------- ----------- Percentage of annualized losses to servicing portfolio 0.2% 0.5% Servicing portfolio at period end $5,654,000 $3,005,000 *T