** **

**UNITED STATES SECURITIES ANDEXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934.**  |
|------------|-------------------------------------------------------------------------------------------------|
|       |                                                                                            |
|       | **For the quarterly period ended: March 31, 2003**                                              |
|       |                                                                                            |
| **OR**     |
|       |                                                                                            |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934.** |
|       |                                                                                            |
|       | **Commission File Number:   1-13485**                                                      |

 

| **AMERICAN  RESIDENTIAL INVESTMENT TRUST, INC.**                                    |
|-------------------------------------------------------------------------------------|
| (Exact  name of registrant as specified in its charter)                             |
|                                                                                |   |   |
| **Maryland**                                                                        |   | **33-0741174** |
| (State  or other jurisdiction of  incorporation or organization)                    |   | (I.R.S.  Employer Identification No.) |
|                                                                                |   |   |
| **10421  Wateridge Circle, Suite 250  San Diego, California**                       |   | **92121** |
| (Address  of principal executive offices)                                           |   | (Zip  Code) |
|                                                                                |   |   |
| **(858)  909-1200**                                                                 |
| (Registrant’s  telephone number, including area code)                          |
|                                                                                |   |   |
| (Former  name, former address and former fiscal year, if changed since last report) |

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

ý   YES          o   NO

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Act). Yes o No ý

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 
| Common Stock ($0.01) |   | 7,863,437  as of April 16, 2003 |
|----------------------|--------|---------------------------------|

 

 

----

 
| INDEX                                                                                                                                |
|--------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                 |
| PART I.   FINANCIAL INFORMATION                                                                                                 |
|                                                                                                                                 |
| Item 1. Consolidated Financial Statements                                                                                            |
|                                                                                                                                 |
| Consolidated Balance Sheets at March 31, 2003  and December 31, 2002                                                                 |
|                                                                                                                                 |
| Consolidated  Statements of Operations and Comprehensive Income (Loss) for the three months  ended March 31, 2003 and March 31, 2002 |
|                                                                                                                                 |
| Consolidated Statements of Cash Flows for  the three months ended March 31, 2003 and March 31, 2002.                                 |
|                                                                                                                                 |
| Notes to Consolidated Financial Statements                                                                                           |
|                                                                                                                                 |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                  |
|                                                                                                                                 |
| Item 3. Quantitative and Qualitative Disclosures  about Market Risk                                                                  |
|                                                                                                                                 |
| Item 4 Controls and Procedures                                                                                                       |
|                                                                                                                                 |
| PART II.  OTHER INFORMATION                                                                                                     |
|                                                                                                                                 |
| Item 1. Legal Proceedings                                                                                                            |
|                                                                                                                                 |
| Item 2. Changes in Securities and Use of  Proceeds                                                                                   |
|                                                                                                                                 |
| Item 3. Defaults Upon Senior Securities                                                                                              |
|                                                                                                                                 |
| Item 4. Submission of Matters to a Vote of  Security Holders                                                                         |
|                                                                                                                                 |
| Item 5. Other Information                                                                                                            |
|                                                                                                                                 |
| Item 6. Exhibits and Reports on Form 8-K                                                                                             |

 

2

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PARTI.  FINANCIAL INFORMATION

Item1.  Consolidated Financial Statements

 

**American Residential InvestmentTrust, Inc. and Subsidiaries**

Consolidated Balance Sheets

(inthousands, except share and per share data)

 
|                                                                                                                                                                                             |   | **(unaudited)**

**March 31,  2003** |       | **December  31, 2002** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|------------------------|------------|
| ASSETS                                                                                                                                                                                           |   |                                 | ** ** |                   | ** ** |
| Cash and cash equivalents                                                                                                                                                                        |   | $                                    | 22,786     |                   | $          | 13,640 |   |
| Cash and cash equivalents –  restricted                                                                                                                                                     |   | 1,750                                |       | 1,132                  |       |
| Mortgage loans held for  sale, net, pledged, (lower of cost or market)                                                                                                                           |   | 488,007                              |       | 390,125                |       |
| Bond collateral, mortgage  loans, net                                                                                                                                                            |   | 230,804                              |       | 259,851                |       |
| Bond collateral, real  estate owned                                                                                                                                                              |   | 7,973                                |       | 9,527                  |       |
| Accounts receivable –  mortgage loans sold/funded                                                                                                                                           |   | 4,954                                |       | 6,205                  |       |
| Derivative financial  instruments                                                                                                                                                                |   | (1,126                               | )          | (2,307                 | )          |
| Accrued interest receivable                                                                                                                                                                      |   | 1,573                                |       | 1,852                  |       |
| Deferred tax asset                                                                                                                                                                               |   | 6,679                                |       | —                 |       |
| Other assets                                                                                                                                                                                     |   | 3,753                                |       | 2,975                  |       |
|                                                                                                                                                                                             |   | $                                    | 767,153    |                   | $          | 683,000 |   |
|                                                                                                                                                                                             |   |                                 |       |                   |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                        |   |                                 |       |                   |       |
| Liabilities:                                                                                                                                                                                     |   |                                 |       |                   |       |
| Short-term debt                                                                                                                                                                                  |   | $                                    | 477,445    |                   | $          | 378,553 |   |
| Long-term debt, net                                                                                                                                                                              |   | 206,098                              |       | 237,456                |       |
| Accrued interest payable                                                                                                                                                                         |   | 488                                  |       | 582                    |       |
| Accrued expenses and other  liabilities                                                                                                                                                          |   | 11,362                               |       | 6,811                  |       |
| Total liabilities                                                                                                                                                                                |   | 695,393                              |       | 623,402                |       |
|                                                                                                                                                                                             |   |                                 |       |                   |       |
| Minority interest                                                                                                                                                                                |   | 116                                  |       | 113                    |       |
|                                                                                                                                                                                             |   |                                 |       |                   |       |
| Stockholders’ Equity:                                                                                                                                                                       |   |                                 |       |                   |       |
| Preferred stock, par value  $.01 per share; 1,000 shares authorized; no shares issued and outstanding                                                                                            |   |                                 |       | —                 |       |
| Common stock, par value  $.01 per share; 25,000,000 shares authorized; 7,863,437 shares issued and  outstanding at March 31, 2003 and 7,880,090 shares issued and outstanding at  March 31, 2002 |   | 79                                   |       | 79                     |       |
| Additional paid-in-capital                                                                                                                                                                       |   | 108,762                              |       | 108,760                |       |
| Accumulated deficit                                                                                                                                                                              |   | (37,197                              | )          | (49,354                | )          |
| Total stockholders’ equity                                                                                                                                                                  |   | 71,644                               |       | 59,485                 |       |
|                                                                                                                                                                                             |   | $                                    | 767,153    |                   | $          | 683,000 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

3

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American Residential Investment Trust, Inc. and Subsidiaries

Consolidated Statementsof Operations and Comprehensive Income (Loss), unaudited

(inthousands, except per share data)

 
|                                                                                                                                                   |   | **For the  Three Months Ended March 31, 2003** |   | **For the  Three Months Ended  March 31, 2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|-------------------------------------------------|--------|
| **Revenues**                                                                                                                                           |   |                                           |   |                                            |   |
| Gain on sales of loans                                                                                                                                 |   | $                                              | 20,209 |                                            | $      | 1,944 |   |
| Derivative financial  instruments and market adjustments                                                                                               |   | (2,211                                         | )      | (87                                             | )      |
| Interest on mortgage  assets, net of premium amortization                                                                                              |   | 9,246                                          |   | 6,920                                           |   |
| Other income                                                                                                                                           |   | 215                                            |   | 470                                             |   |
| Total revenue, net of  derivative financial instruments and adjustments                                                                                |   | 27,459                                         |   | 9,247                                           |   |
|                                                                                                                                                   |   |                                           |   |                                            |   |
| **Expenses**                                                                                                                                           |   |                                           |   |                                            |   |
| Employee compensation and  benefits                                                                                                                    |   | 9,484                                          |   | 2,946                                           |   |
| Interest expense                                                                                                                                       |   | 4,213                                          |   | 3,828                                           |   |
| Office and occupancy  expense                                                                                                                          |   | 566                                            |   | 363                                             |   |
| Provision for loan losses                                                                                                                              |   | 919                                            |   | 2,103                                           |   |
| (Gain) loss on sale of  real estate owned, net                                                                                                         |   | (184                                           | )      | 85                                              |   |
| Professional Fees                                                                                                                                      |   | 1,405                                          |   | 764                                             |   |
| Other operating expenses                                                                                                                               |   | 3,753                                          |   | 1,060                                           |   |
| Total expenses                                                                                                                                         |   | 20,156                                         |   | 11,149                                          |   |
|                                                                                                                                                   |   |                                           |   |                                            |   |
| Income (loss) before  income taxes                                                                                                                     |   | 7,303                                          |   | (1,902                                          | )      |
| Income taxes                                                                                                                                           |   | 1,826                                          |   | 5                                               |   |
| Income tax benefit from  utilization ofREIT net  operating losses                                                                                      |   | (6,679                                         | )      | —                                          |   |
| Net income (loss)                                                                                                                                      |   | 12,156                                         |   | (1,907                                          | )      |
|                                                                                                                                                   |   |                                           |   |                                            |   |
| Other comprehensive (loss)  income                                                                                                                     |   |                                           |   |                                            |   |
| Unrealized gains on  retained interest in securitization, net of tax                                                                                   |   | —                                         |   | 2                                               |   |
| Total comprehensive income  (loss)                                                                                                                     |   | $                                              | 12,156 |                                            | $      | (1,905 | ) |
|                                                                                                                                                   |   |                                           |   |                                            |   |
| Net income (loss) per  share of common stock basic – March   31, 2003 and 2002 weighted average shares 7,862,869 and 7,918,805  respectively |   | $                                              | 1.55   |                                            | $      | (0.24 | ) |
| Net income (loss) per  share of common stock diluted – March 31, 2003 and 2002 weighted average  shares 7,945,795 and 7,918,805 respectively      |   | $                                              | 1.53   |                                            | $      | (0.24 | ) |

 

Seeaccompanying notes to consolidated financial statements

 

4

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AmericanResidential Investment Trust, Inc. and Subsidiaries

Consolidated Statements of CashFlows, unaudited

(inthousands)

 
|                                                                                  |   | **For the********Three Months Ended********March 31, 2003** |   | **For the  Three Months Ended********March 31, 2002** |   |
|---------------------------------------------------------------------------------------|--------|-------------------------------------------------------------|--------|-------------------------------------------------------|--------|
|                                                                                  |   |                                                        |   |                                                  |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES                                                 |   |                                                        |   |                                                  |   |
| Net income  (loss)                                                                    |   | $                                                           | 12,156 |                                                  | $      | (1,907 | ) |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities: |   |                                                        |   |                                                  |   |
| Amortization of  mortgage assets premiums                                             |   | 994                                                         |   | 3,100                                                 |   |
| Amortization of  CMO capitalized costs                                                |   | 99                                                          |   | 158                                                   |   |
| Provision for  loan losses                                                            |   | 919                                                         |   | 2,103                                                 |   |
| Decrease on  retained interest in securitization                                      |   | —                                                      |   | 85                                                    |   |
| Loss on sale of  real estate owned                                                    |   | 811                                                         |   | 85                                                    |   |
| Mortgage loans  held for sale, market adjustment                                      |   | —                                                      |   | 449                                                   |   |
| Proceeds from  sale of mortgage loans held for sale                                   |   | 1,982,410                                                   |   | 287,204                                               |   |
| Mortgage loan  originations                                                           |   | (2,080,293                                                  | )      | (370,549                                              | )      |
| Decrease in  accounts receivable–mortgage loans sold/funded                      |   | 1,251                                                       |   | 335                                                   |   |
| Decrease  (increase) in restricted cash                                               |   | 1,797                                                       |   | (23                                                   | )      |
| Increase in  derivative financial instruments                                         |   | (1,181                                                      | )      | (4,533                                                | )      |
| Decrease in  accrued interest receivable                                              |   | 279                                                         |   | 224                                                   |   |
| Increase in  deferred tax asset                                                       |   | (6,679                                                      | )      | —                                                |   |
| (Increase) in  other assets                                                           |   | (778                                                        | )      | (525                                                  | )      |
| (Decrease)  increase in accrued interest payable                                      |   | (94                                                         | )      | 8                                                     |   |
| Increase in  accrued and other expenses                                               |   | 2,137                                                       |   | 92                                                    |   |
| Increase in  minority interest                                                        |   | 3                                                           |   | 3                                                     |   |
| Net cash used  in operating activities                                                |   | (86,169                                                     | )      | (83,691                                               | )      |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                |   |                                                        |   |                                                  |   |
| Principal  payments on bond collateral, mortgage loans, net                           |   | 24,888                                                      |   | 45,258                                                |   |
| Proceeds from  sale of real estate owned                                              |   | 2,989                                                       |   | 3,976                                                 |   |
| Net cash  provided by investing activities                                            |   | 27,877                                                      |   | 49,234                                                |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                |   |                                                        |   |                                                  |   |
| Payments on  long-term debt                                                           |   | (31,456                                                     | )      | (53,406                                               | )      |
| Increase  (decrease) in net borrowings from short-term debt                           |   | 98,892                                                      |   | 85,279                                                |   |
| Stock options  exercised                                                              |   | 2                                                           |   | —                                                |   |
| Purchase  treasury stock                                                              |   | —                                                      |   | (199                                                  | )      |
| Net cash  provided by financing activities                                            |   | 67,438                                                      |   | 31,674                                                |   |
| Net increase  (decrease) in cash and cash equivalents                                 |   | 9,146                                                       |   | (2,783                                                | )      |
| Cash and cash  equivalents at beginning of period                                     |   | 13,640                                                      |   | 10,726                                                |   |
| Cash and cash  equivalents at end of period                                           |   | 22,786                                                      |   | $                                                     | 7,943  |   |
| Supplemental  information–interest paid                                          |   | $                                                           | 4,202  |                                                  | $      | 3,820 |   |
|                                                                                  |   |                                                        |   |                                                  |   |
| Non-cash  transactions:                                                               |   |                                                        |   |                                                  |   |
| Transfers from  bond collateral, mortgage loans, net to real estate owned             |   | $                                                           | 2,245  |                                                  | $      | 856 |   |

 

See accompanying notes toconsolidated financial statements.

 

5

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AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

**Note 1.  Summary ofSignificant Accounting Policies and Practices**

 

*Basis of Financial Statement Presentation*

 

The interim financialstatements included herein have been prepared by American ResidentialInvestment Trust, Inc., (“AmRIT” or the “Company”) without audit, pursuant tothe rules and regulations of the Securities and Exchange Commission(“SEC”).  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America (“GAAP”) have been condensed or omitted pursuant to such SEC rulesand regulations.  These financialstatements should be read in conjunction with the audited financial statementsand notes thereto included in the Company’s latest Annual Report.  In the opinion of management, alladjustments, including normal recurring adjustments necessary to present fairlythe consolidated financial position of the Company with respect to the interimfinancial statements and the results of the operations for the interim periodended March 31, 2003, have been included. Certain reclassifications may have been made to prior interim periodamounts to conform to the current presentation.  The results of operations for interim periods are not necessarilyindicative of results for the full year.

 

The Company reports segmentsin accordance with SFAS No. 131, “Disclosures about Segments of an Enterpriseand Related Information” (SFAS 131). SFAS 131 establishes standards for the way companies report informationabout operating segments in annual financial statements. Effective January 1,2002, the Company began reporting in two segments: the Mortgage BankingBusiness and the Mortgage Asset Portfolio Business.

 

During the first half of 1998, AmRIT formedAmerican Residential Holdings Inc. (“Holdings”), through which a portion of theCompany’s non-conforming adjustable-rate and fixed-rate, single-family wholeloans (collectively, “Mortgage Loans”), acquisition and finance activities areconducted. AmRIT owns all of the preferred stock of Holdings and has anon-voting 95% economic interest in Holdings. Because AmRIT does not havevoting control of Holdings, its investment in Holdings was accounted for underthe equity method prior to January 1, 2003. Under the equity method, originalequity investments in Holdings were recorded at cost and adjusted by AmRIT’sshare of earnings or losses and decreased by dividends received. InJanuary 2003, the FASB issued FIN 46, “Consolidation of Variable InterestEntities—an interpretation of ARB No. 51.” FIN 46 addresses consolidationby business enterprises of variable interest entities, which have one or bothof the following characteristics: 1) the equity investment at risk is notsufficient to permit the entity to finance its activities without additionalsubordinated financial support from other parties, which is provided throughother interests that will absorb some or all of the expected losses of theentity; and 2) the equity investors lack an essential characteristic of acontrolling financial interest. The Company interprets FIN 46 to require theconsolidation  of Holdings rather thanaccounting for Holdings under the equity method.  Prior period financial statements have been restated to includeHoldings as a consolidated entity.

 

**Stock Options**

 

The Company elected to apply APBOpinion No. 25 in accounting for its equity compensation plans: the 1997Stock Incentive Plan, 1997 Stock Option Plan, 1997 Employee Stock Purchase Planand 1997 Outside Directors Stock Option Plan and, accordingly, no compensationcost has been recognized in the financial statements. SFAS 123 requirespro forma disclosures of loss computed as if the fair value based method hadbeen applied for in financial statements of companies that continue to followcurrent practice in accounting for such arrangements under Opinion No. 25.

 

In December 2002 the FinancialAccounting Standards Board (“FASB”) issued SFAS 148, Accounting For StockBased Compensation Transition and Disclosure, which amends SFAS No. 123.SFAS No. 148 requires more prominent and frequent disclosures about theeffects of stock-based compensation, which the Company elected to early adoptfor the twelve month period ending December 31, 2002. The Company willcontinue to account for its stock based compensation according to theprovisions of APB Opinion No. 25.

 

The Company does not recognizecompensation cost of stock options, but had compensation cost for the Company’sstock options been recognized based upon the estimated fair value on the grantdate under the fair value methodology prescribed by SFAS No. 123 asamended by SFAS No. 148, the Company’s net income and earnings per sharewould have been as follows (in thousands except earnings per share):

 

6

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| **Three Months Ended (unaudited)**                                                                           |   | **March 31, 2003** |   | **March 31, 2002** |   |
|--------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|--------------------|--------|
|                                                                                                         |   |               |   |               |   |
| Net earnings as  reported                                                                                    |   | $                  | 12,156 |               | $      | (1,907 | ) |
| Deduct: Total  stock-based compensation expense determined under fair value based method net  of tax effects |   | (518               | )      | (309               | )      |
|                                                                                                         |   |               |   |               |   |
| Pro forma net  earnings (loss)                                                                               |   | $                  | 11,638 |               | $      | (2,216 | ) |
| Earnings per  share                                                                                          |   |               |   |               |   |
| Basic as  reported                                                                                           |   | $                  | 1.55   |               | $      | (0.24 | ) |
| Basic pro forma                                                                                              |   | $                  | 1.48   |               | $      | (0.28 | ) |
| Diluted as  reported                                                                                         |   | $                  | 1.53   |               | $      | (0.24 | ) |
| Diluted pro  forma                                                                                           |   | $                  | 1.46   |               | $      | (0.28 | ) |

 

The assumptions used tocalculate the fair value of options granted are evaluated and revised asnecessary to reflect market conditions and the Company’s experience.

 

**Note 2.  Concentrationof Mortgage Loan Sales**

 

Historically,the Company has sold a substantial portion of the mortgage loans it produces toone investor. The Company’s primary consideration in deciding where to sellloans is price.  The Company alsoconsiders speed of execution and loan product guidelines.  The Company believes that the majority ofloans it sells currently could be sold to a number of investors with littleprice or execution degradation.

 

**Note 3.  Income (Loss)Per Share**

 

The following table illustrates thecomputation of basic and diluted loss per share (in thousands, except share andper share data):

 

 
|                                                                                                                     |   | **For the  Three months ended  March 31, 2003** |   | **For the  Three months ended  March 31, 2002** |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------|--------|-------------------------------------------------|--------|
|                                                                                                                     |   | **(in  thousands, except share data)**          |   |
|                                                                                                                     |   | **(unaudited)**                                 |   |
| Numerator:                                                                                                               |   |                                            |   |                                            |   |
| Numerator for basic income  (loss) per share                                                                        |   | $                                               | 12,156 |                                            | $      | (1,907 | ) |
| Denominator:                                                                                                             |   |                                            |   |                                            |   |
| Denominator for basic  income (loss) per share - weighted average number of common shares  outstanding during the period |   | 7,862,869                                       |   | 7,918,805                                       |   |
| Denominator for diluted  income (loss) per share                                                                         |   | 7,945,795                                       |   | 7,918,805                                       |   |
|                                                                                                                     |   |                                            |   |                                            |   |
| Income (loss) per share -  basic                                                                                         |   | $                                               | 1.55   |                                            | $      | (0.24 | ) |
| Income (loss) per share -  diluted                                                                                       |   | $                                               | 1.53   |                                            | $      | (0.24 | ) |

 

For the three months ended March 31, 2003 and2002 there were 1,526,227 and 1,134,475 options, respectively, that wereantidilutive and, therefore, not included in the calculations above.

 

**Note 4.  Mortgageloans held for sale, net pledged**

 

The AmRIT subsidiary AmericanMortgage Network, Inc. (“AmNet”) has pledged loans held for sale totalingapproximately $482.2 million to secure credit lines (warehouse facilities) fromthree financial institutions. See Note 8, “Short-Term Debt.” Mortgage loansheld for sale at March 31, 2003 consist of loans which have been committed forsale of approximately $259.2 million and loans available for sale atapproximately $223.0 million, all of which are carried at the lower of cost or market.

 

**Note 5.  BondCollateral, Mortgage Loans, net**

 

AmRIT has pledged mortgageloans as collateral in order to secure long-term-debt.  Mortgage loan bond collateral consistsprimarily

 

7

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of adjustable-rate, conventional, 30-yearmortgage loans secured by first liens on one to four-family residentialproperties.  All such mortgage loan bondcollateral is pledged to secure repayment of the related long-term-debt obligation.  All principal and interest (less

servicing and related fees) on this bondcollateral is remitted to a trustee and is available for payment on thelong-term-debt obligation.  Theobligations under the long-term debt are payable solely from the bond collateraland are otherwise non-recourse to AmRIT. The components of this bond collateralat March 31, 2003 and December 31, 2002 are summarized as follows (dollars inthousands)(unaudited):

 
|                                                |   | **CMO/REMIC  2000-2  Securitization** |       | **CMO/REMIC  1999-A  Securitization** |       | **CMO  1999-2  Securitization** |       | **CMO  1999-1  Securitization** |       | **CMO/FASIT  1998-1  Securitization** |       | **TOTAL  Bond Collateral** |       |
|-----------------------------------------------------|--------|---------------------------------------|------------|---------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------------|------------|----------------------------|------------|
| **At March  31, 2003**                              |   |                                  | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                  | ** ** |                       | ** ** |
| Mortgage loans                                      |   | $                                     | 13,027     |                                  | $          | 56,985                          |       | $                               | 85,974     |                                  | $          | 41,382                     |       | $ | 29,974 |   | $ | 227,342 |   |
| Unamortized premium                                 |   | 546                                   |       | 1,297                                 |       | 3,010                           |       | 1,171                           |       | 291                                   |       | 6,315                      |       |
| Allowance for loan losses                           |   | (138                                  | )          | (891                                  | )          | (872                            | )          | (474                            | )          | (478                                  | )          | (2,853                     | )          |
|                                                |   | $                                     | 13,435     |                                  | $          | 57,391                          |       | $                               | 88,112     |                                  | $          | 42,079                     |       | $ | 29,787 |   | $ | 230,804 | ** ** |
|                                                |   |                                  | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                  | ** ** |                       | ** ** |
| Weighted average net coupon                         |   | 9.17                                  | %          | 9.46                                  | %          | 8.97                            | %          | 8.86                            | %          | 9.52                                  | %          | 9.16                       | %          |
| Unamortized premiums as a percent of Mortgage loans |   | 4.19                                  | %          | 2.28                                  | %          | 3.50                            | %          | 2.83                            | %          | 0.97                                  | %          | 2.78                       | %          |
|                                                |   |                                  | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                  | ** ** |                       | ** ** |
| **At  December 31, 2002**                           |   |                                  | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                  | ** ** |                       | ** ** |
| Mortgage loans                                      |   | $                                     | 15,590     |                                  | $          | 63,155                          |       | $                               | 99,214     |                                  | $          | 45,329                     |       | $ | 32,726 |   | $ | 256,014 |   |
| Unamortized premium                                 |   | 602                                   |       | 1,462                                 |       | 3,481                           |       | 1,355                           |       | 409                                   |       | 7,309                      |       |
| Allowance for loan losses                           |   | (116                                  | )          | (1,112                                | )          | (771                            | )          | (838                            | )          | (635                                  | )          | (3,472                     | )          |
|                                                |   | $                                     | 16,076     |                                  | $          | 63,505                          |       | $                               | 101,924    |                                  | $          | 45,846                     |       | $ | 32,500 |   | $ | 259,851 | ** ** |
|                                                |   |                                  | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                  | ** ** |                       | ** ** |
| Weighted average net coupon                         |   | 9.17                                  | %          | 9.50                                  | %          | 8.99                            | %          | 8.86                            | %          | 9.71                                  | %          | 9.20                       | %          |
| Unamortized premiums as a percent of Mortgage loans |   | 3.86                                  | %          | 2.31                                  | %          | 3.51                            | %          | 2.99                            | %          | 1.25                                  | %          | 2.85                       | %          |

 

The Company maintains an allowance for losseson mortgage loan bond collateral at an amount which it believes is sufficientto provide adequate protection against losses in the mortgage loan portfolio.

 

**Note 6.  DerivativeFinancial Instruments**

 

The following is a summary ofAmNet’s forward sales of mortgage backed securities (MBS) and options onmortgage backed securities (dollars in thousands)(unaudited):

 
| **Security**             |   | **Notional  Amount** |    | **Derivative** |   | **Short  Long** |   | **Expiration** |                                 |
|--------------------------|--------|----------------------|---------|----------------|--------|-----------------|--------|----------------|--------------------------------------|
| FNMA  15 – Year MBS |   | $                    | 254,000 |           | TBA    |            | Short  |           | May  19, 2003 – June 17, 2003   |   |
| FNMA  30 – Year MBS |   | $                    | 511,500 |           | TBA    |            | Short  |           | April  14, 2003 – June 12, 2003 |   |
| GNMA  30 – Year MBS |   | $                    | 91,000  |           | TBA    |            | Short  |           | May  21, 2003 – June 19, 2003   |   |
| FNMA  30 – Options  |   | $                    | 135,000 |           | Puts   |            | Long   |           | April  14, 2003 – June 12, 2003 |   |
| GNMA  30 – Options  |   | $                    | 15,000  |           | Puts   |            | Long   |           | April  23, 2003                      |   |

 

These derivatives are accounted for as tradingsecurities in the accompanying consolidated financial statements. The decreasein fair market value of derivative financial instruments is included in theConsolidated Statements of Operations and Comprehensive Loss.

 

The short and long positionsnoted in the schedule above represent forward sales or options to purchase orsell the underlying security. Generally, long positions gain in value as market interest ratesincrease and short positions gain in value as market interest rates decrease.

 

The value of the mortgage loans that AmNet originates is at risk due tofluctuations in interest rates during two time periods: (1) the periodbeginning when AmNet has committed to funding the loan and ending when the loancloses, or funds; and (2) the time period beginning when the loan closes andending when AmNet commits to sell or sells the loans to third-party purchasers.These loans are collectively referred to as the loan pipeline. AmNet usesderivative instruments, or “hedges” to mitigate the adverse impact interest ratefluctuations can have on the value of the loan pipeline. AmNet purchases derivative instruments in order totry and protect profit margins on locked loans and closed loans before they arecommitted for sale. Protection is needed as a result of changes in interestrates from the point loan lock is made until the loan is committed for sale.The derivative instruments used are forward commitments on 

 

8

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mortgage backed securities (“TBA”) andoptions to purchase or sell mortgage backed securities. Changes in the price ofthese derivative instruments closely relate to changes in the sale price ofloans held for sale. The Company cannot assure however, thatAmNet’s use of derivative securities will offset the risk of changes ininterest rates. In certain instances it may even increase this risk. See

 

Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.

 

At March 31,2003 AmNet had committed for sale to specific investors approximately $259.2Million in mortgage loans and had $223.0 million in funded loans that had notyet been committed for sale or sold. These mortgages loans are for single family residences collateralized byfirst trust deeds.

 

In the Company’s mortgage banking business determinations of fairmarket value (“FMV”) are made for hedging instruments (derivatives), itspipeline and loans in which held for sale (lower of cost or market) are madebased on consistently applied methods accepted within the regulatory climate inwhich the Company operates. Hedging instruments are marked to market accordingto similar or identical financial instruments available in the market place atthe time of the mark. The loan pipeline mark is determined by recording marketprices available for loan sales and deriving a value for those loans, less afactor for loans which will not close (loan fallout) based on Company's historyof loan fallout. By accounting rules, the Company is not allowed to recognizeany revenue from loan sales until a true sale has taken place. However if theseloans are stated at a value less than could be obtained by sale in themarketplace, the lower value must be used. The Company adheres to this methodof book valuation.

 

**Note 7.  BondCollateral, Real Estate Owned**

 

The Company owned 134properties and 148 properties as of March 31, 2003 and December 31, 2002,respectively.  Upon transfer of  loans to real estate owned (as a result ofdefault or foreclosure), the Company records a corresponding charge against theallowance for loan losses to write-down the real estate owned to fair valueless estimated cost of disposal.  As ofMarch 31, 2003 and December 31, 2002, real estate owned totaled approximately$7.9 million and $9.5 million, respectively (including loss reserves).

 

**Note 8.  Short-TermDebt**

 

As of March 31, 2003,short-term debt consisted of revolving credit lines (warehouse facilities) usedto fund the Company’s lending activities. As of March 31, 2003, mortgageloans held for sale were pledged as collateral for the warehouse facilities.The warehouse facilities consist of borrowings of $474.4 million withfinancial institutions for a maximum amount of borrowing capacity of$960 million as of March 31, 2003, with outstanding amounts maturing on variousdates within one year secured by mortgage loans held for sale, generallybearing interest at LIBOR plus spread (2.75% per annum at March 31, 2003).The weighted-average interest rate was 2.73% per annum for the first quarter of2003 and the facility fee was 0.25% per annum on the aggregate committed amountof the warehouse facilities. The warehouse facilities are repaid as principalpayments on mortgage loans are received, or as the mortgage loans are sold. Theagreements governing these facilities contain a number of covenants, includingcovenants based on tangible net worth, cash flows, net income, and liquidity ofthe Company. The Company is in compliance with these covenants at March 31,2003.

 

In 2001, the Company alsoentered into a $5 million senior subordinated secured revolving loanagreement (Subordinated Loan Agreement). The Subordinated Loan Agreement bearsinterest at 12% and matured in December 2002, with provisions forextension of two additional one-year periods at the Company’s option. TheCompany extended the loan for one year. The Subordinated Loan Agreementcontains a number of covenants, including covenants based on tangible networth, cash flows, net income and liquidity of the Company. As ofMarch 31, 2003, there was $3 million in borrowings on theSubordinated Loan Agreement.  TheCompany is in compliance with these covenants at March 31, 2003.

 

**Note 9.  Long-TermDebt, Net**

 

The components of thelong-term-debt at March 31, 2003 and December 31, 2002, along with selectedother information are summarized below (dollars in thousands)(unaudited):

 
|                                |   | **CMO/REMIC  2000-2  Securitization** |       | **CMO/REMIC  1999-A  Securitization** |       | **CMO  1999-2  Securitization** |       | **CMO  1999-1  Securitization** |       | **CMO/FASIT  1998-1  Securitization** |       | **TOTAL  Long-Term Debt** |       |
|-------------------------------------|--------|---------------------------------------|------------|---------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------------|------------|---------------------------|------------|
| **At March  31, 2003**              |   |                                  | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                  | ** ** |                      | ** ** |
| Long-term debt                      |   | $                                     | 12,794     |                                  | $          | 51,023                          |       | $                               | 80,339     |                                  | $          | 32,220                    |       | $ | 30,440 |   | $ | 206,816 |   |
| Capitalized costs on long-term debt |   | (49                                   | )          | (5                                    | )          | (389                            | )          | (275                            | )          | —                                |       | (718                      | )          |
| Total long-term debt                |   | $                                     | 12,745     |                                  | $          | 51,018                          |       | $                               | 79,950     |                                  | $          | 31,945                    |       | $ | 30,440 |   | $ | 206,098 |   |
|                                |   |                                  | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                  | ** ** |                      | ** ** |
| Weighted average financing rates    |   | 2.11                                  | %          | 1.51                                  | %          | 3.11                            | %          | 2.04                            | %          | 2.39                                  | %          | 2.38                      | %          |
|                                |   |                                  | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                  | ** ** |                      | ** ** |
| **At  December 31, 2002**           |   |                                  | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                  | ** ** |                      | ** ** |
| Long-term debt                      |   | $                                     | 15,520     |                                  | $          | 58,369                          |       | $                               | 94,411     |                                  | $          | 36,855                    |       | $ | 33,116 |   | $ | 238,271 |   |
| Capitalized costs on long-term debt |   | (59                                   | )          | (5                                    | )          | (447                            | )          | (304                            | )          | —                                |       | (815                      | )          |
| Total long-term debt                |   | $                                     | 15,461     |                                  | $          | 58,364                          |       | $                               | 93,964     |                                  | $          | 36,551                    |       | $ | 33,116 |   | $ | 237,456 |   |
|                                |   |                                  | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                  | ** ** |                      | ** ** |
| Weighted average financing rates    |   | 2.04                                  | %          | 1.55                                  | %          | 3.10                            | %          | 1.73                            | %          | 2.44                                  | %          | 2.35                      | %          |

 

9

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**Note 10. StockOption Plans**

 

As of March 31, 2003, shares of commonstock were reserved for issuance under the Company’s option plans as follows(unaudited):

 
|                                  |   | **1997  Stock  Incentive  Plan** |   | **1997  Stock  Option  Plan** |   | **1997  Employee  Stock  Purchase  Plan** |   | **1997  Outside  Director  Stock Option********Plan** |   | **Total** |   |
|---------------------------------------|--------|----------------------------------|--------|-------------------------------|--------|-------------------------------------------|--------|-------------------------------------------------------|--------|-----------|--------|
|                                  |   |                             |   |                          |   |                                      |   |                                                  |   |      |   |
| Total Options  Authorized at 1/1/2003 |   | 315,200                          |   | 1,474,800                     |   | 20,000                                    |   | 210,000                                               |   | 2,020,000 |   |
| Total Options  Issued                 |   | 284,800                          |   | 1,152,800                     |   |                                      |   | 172,500                                               |   | 1,610,100 |   |
| Options  Reserved for Issuance        |   | 30,400                           |   | 322,000                       |   | 20,000                                    |   | 37,500                                                |   | 409,900   |   |

 

Stock option activity during theperiods presented is as follows (unaudited):

 
|                          |   | **Number of********Options** |   | **Weighted-Average  Exercise Price** |   |
|-------------------------------|--------|------------------------------|--------|--------------------------------------|--------|
|                          |   |                         |   |                                 |   |
| Balance at December  31, 2002 |   | 1,244,600                    |   | $                                    | 9.01   |   |
| Granted                       |   | 389,000                      |   | 4.08                                 |   |
| Forfeited                     |   | (23,500                      | )      | (3.17                                | )      |
|                          |   |                         |   |                                 |   |
| Balance at  March 31, 2003    |   | 1,610,100                    |   | 7.90                                 |   |
|                               |        |                              |        |                                      |        |  |

 

At March 31, 2003, therange of exercise prices for outstanding options was $1.75 to $15.00 and theweighted-average remaining contractual life of outstanding options was6.88 years. The weighted average exercise price of exercisable outstandingoptions was $7.90.  At March 31,2003, 1,112,091 of the outstanding options were exercisable.

 

The per share weighted-averagefair value of stock options granted between January 1 and March 31, 2003 was$1.33 on the dates of grant using the Black-Scholes option-pricing model usingthe following weighted-average assumptions (unaudited):

 

|                     |   | **March 31  2003** |   |
|--------------------------|--------|--------------------|--------|
|                     |   |               |   |
| Expected  dividend yield |   | 0.00               | %      |
| Risk-free  interest rate |   | 2.78               | %      |
| Expected  volatility     |   | 31.50              | %      |
| Expected life  (years)   |   | 5                  |   |

 

**Note 11.  Commitments and Contingencies**

 

The Company has used, andwill continue to use, Forward Loan Sale Commitments  to help mitigate the loan pipeline exposure ($746 million atMarch 31, 2003) to market interest rate fluctuations (See Management’sDiscussion and Analysis of

 

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FinancialCondition and Results of Operations – MortgageBanking Business).  Thesecommitments provide that the Company agrees to sell an established volume ofmortgage loans to a particular institution at a fixed price.  An established time frame, or settlementdate is also agreed upon. The Company could incur a loss if the loan volumecommitted for sale is not delivered.

 

**Note 12.  BusinessSegments**

 

The Company reports itsfinancial results in two segments: the Mortgage Banking Business and theMortgage Asset Portfolio Business. The Mortgage Banking Business originateshome mortgage loans through a network of mortgage loan brokers.  These

mortgage loans are subsequently sold tofinancial institutions. The Mortgage Asset Portfolio Business segment manages aportfolio of mortgage loans pledged as collateral for long-term debt.

 

The accounting policies ofthe segments are the same as described in Note 1, “Summary of SignificantAccounting Policies and Practices.” The Company evaluates the performance ofits business segments based on income before income taxes. Expenses under thedirect control of each business segment and the expense of premises andequipment incurred to support business operations are allocated accordingly, bysegment.

 

The table below reflects thefirst quarter statement of operations activity by segment.

 

AmericanResidential Investment Trust, Inc. and SubsidiariesConsolidated Statements of Operations by Business Segment, unaudited(in thousands)

 
|                                                                |   | **For the  Three Months Ended  March 31, 2003  Mortgage Banking** |   | **For the  Three Months Ended  March 31, 2003  Mortgage Asset  Portfolio** |   | **For the  Three Months Ended  March 31, 2003  Combined Segments** |   |
|---------------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|----------------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|
| **Revenues**                                                        |   |                                                              |   |                                                                       |   |                                                               |   |
| Gain on sales of loans                                              |   | $                                                                 | 20,209 |                                                                       | $      | —                                                             |   | $ | 20,209 |   |
| Derivative financial  instruments and market adjustments            |   |                                                              |   |                                                                       |   |                                                               |   |
| Derivative financial  instruments - forward commitments and options |   | (52                                                               | )      | —                                                                     |   | (52                                                                | )      |
| Market adjustment on  interest rate lock commitments                |   | (2,159                                                            | )      | —                                                                     |   | (2,159                                                             | )      |
| Total derivative financial  instruments and market adjustments      |   | (2,211                                                            | )      | —                                                                     |   | (2,211                                                             | )      |
| Interest on mortgage  assets, net of premium amortization           |   | 5,902                                                             |   | 3,344                                                                      |   | 9,246                                                              |   |
| Other income                                                        |   | 17                                                                |   | 198                                                                        |   | 215                                                                |   |
| Total revenue                                                       |   | 23,917                                                            |   | 3,542                                                                      |   | 27,459                                                             |   |
|                                                                |   |                                                              |   |                                                                       |   |                                                               |   |
| **Expenses**                                                        |   |                                                              |   |                                                                       |   |                                                               |   |
| Employee compensation and  benefits                                 |   | 9,145                                                             |   | 339                                                                        |   | 9,484                                                              |   |
| Interest expense                                                    |   | 2,674                                                             |   | 1,539                                                                      |   | 4,213                                                              |   |
| Office and occupancy  expense                                       |   | 566                                                               |   | —                                                                     |   | 566                                                                |   |
| Provision for loan losses                                           |   | —                                                            |   | 919                                                                        |   | 919                                                                |   |
| Loss on sale of real  estate owned, net                             |   | —                                                            |   | (184                                                                       | )      | (184                                                               | )      |
| Professional fees                                                   |   | 1,090                                                             |   | 316                                                                        |   | 1,405                                                              |   |
| Other operating expenses                                            |   | 3,495                                                             |   | 258                                                                        |   | 3,753                                                              |   |
| Total expenses                                                      |   | 16,970                                                            |   | 3,186                                                                      |   | 20,156                                                             |   |
|                                                                |   |                                                              |   |                                                                       |   |                                                               |   |
| Income before income taxes                                          |   | 6,947                                                             |   | 356                                                                        |   | 7,303                                                              |   |
| Income taxes                                                        |   | 1,826                                                             |   | —                                                                     |   | 1,826                                                              |   |
| Income tax benefit from  utilization of REIT net operating losses   |   | (6,679                                                            | )      | —                                                                     |   | 6,679                                                              |   |
| Net income                                                          |   | $                                                                 | 11,800 |                                                                       | $      | 356                                                                |   | $ | 12,156 |   |

 

An income tax benefit fromutilization of REIT net operating losses is expected for 2003 due to thetaxable income generated by the mortgage banking business, and accordingly thisbenefit is attributable to the mortgage banking segment.

 
|                                                           |   | **For the  Three Months Ended  March 31, 2002  Mortgage Banking** |   | **For the  Three Months Ended  March 31, 2002  Mortgage Asset** **Portfolio** |   | **For the  Three Months Ended  March 31, 2002  Combined Segments** |   |
|----------------------------------------------------------------|--------|-------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|
| **Revenues**                                                   |   |                                                              |   |                                                                               |   |                                                               |   |
|                                                           |   | $                                                                 | 1,944  |                                                                               | $      | —                                                             |   | $ | 1,944 |   |
| Derivative financial  instruments and market adjustments       |   |                                                              |   |                                                                               |   |                                                               |   |
| Derivative financial  instruments - Treasury futures           |   | 648                                                               |   | —                                                                             |   | 648                                                                |   |
| Market adjustment on  interest rate lock commitments           |   | (735                                                              | )      | —                                                                             |   | (735                                                               | )      |
| Total derivative financial  instruments and market adjustments |   | (87                                                               | )      | —                                                                             |   | (87                                                                | )      |
| Interest on mortgage  assets, net of premium amortization      |   | 1,461                                                             |   | 5,459                                                                              |   | 6,920                                                              |   |
| Other income                                                   |   | 4                                                                 |   | 466                                                                                |   | 470                                                                |   |
| Total revenue                                                  |   | 3,322                                                             |   | 5,925                                                                              |   | 9,247                                                              |   |
|                                                           |   |                                                              |   |                                                                               |   |                                                               |   |
| **Expenses**                                                   |   |                                                              |   |                                                                               |   |                                                               |   |
| Employee compensation and  benefits                            |   | 2,929                                                             |   | 17                                                                                 |   | 2,946                                                              |   |
| Interest expense                                               |   | 695                                                               |   | 3,133                                                                              |   | 3,828                                                              |   |
| Office and occupancy  expense                                  |   | 363                                                               |   | —                                                                             |   | 363                                                                |   |
| Provision for loan losses                                      |   | —                                                            |   | 2,103                                                                              |   | 2,103                                                              |   |
| Loss on sale of real  estate owned, net                        |   | —                                                            |   | 85                                                                                 |   | 85                                                                 |   |
| Professional fees                                              |   | 448                                                               |   | 316                                                                                |   | 764                                                                |   |
| Other operating expenses                                       |   | 865                                                               |   | 195                                                                                |   | 1,060                                                              |   |
| Total expenses                                                 |   | 5,300                                                             |   | 5,849                                                                              |   | 11,149                                                             |   |
|                                                           |   |                                                              |   |                                                                               |   |                                                               |   |
| Income before income taxes                                     |   | (1,978                                                            | )      | 76                                                                                 |   | (1,902                                                             | )      |
| Income taxes                                                   |   | —                                                            |   | 5                                                                                  |   | 5                                                                  |   |
| Net income                                                     |   | $                                                                 | (1,978 | )                                                                                  | $      | 71                                                                 |   | $ | (1,907 | ) |

 

11

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For the purpose of internal managementreporting, the Company records inter-segment funds transfers and eliminatesthese transfers on a consolidated basis for GAAP reporting.  Inter-segment assets and liabilitieseliminated for consolidation purposes were $35.9 million for the three monthperiod ending March 31, 2003.

 

**Note 13.  SubsequentEvents**

 

Subsequent to the periodending March 31, 2003, the Company secured additional warehouse line capacityof $200 million from UBS Warburg. The UBS Warburg additional capacity is toexpire July 1, 2003.  As of the filingdate of this report, the Company has $1.16 billion of warehouse loan capacity.

 

**Note 14.  Income Taxes**

 

During 1997,the Company elected to be taxed as a real estate investment trust (“REIT”)under the Internal Revenue Code of 1986, as amended.  As a result of this election, the Company was not, with certainexceptions, taxed at the corporate level on the net income distributed to theCompany’s shareholders.  On July 19,2002, the shareholders of the Company approved two proposals that allowed theconversion of the Company from a REIT to a fully taxable entity, effectiveJanuary 1, 2003.  On February 7, 2003,the Company filed a notice with the Internal Revenue Service of its decision tode-REIT, effective beginning January 1, 2003. As a result of the  conversion tofully taxable status, an income tax benefit and related deferred tax asset of$6.7 million was recorded in January 2003. The deferred tax asset will be reduced by realization of income taxprovisions over time.  As a result ofthe above, the income tax expense recorded for the first quarter of 2003 was$1.8 million and the Company's effective tax rate was 25%.

 

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ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS.

 

*The statementscontained in this Quarterly Report on Form 10-Q that are not purelyhistorical are forward looking statements. Such forward looking statements include those regarding ourexpectations, hopes, beliefs, intentions, or strategies regarding the future.Such statements use the words “expect,” “will,” “may,” “anticipate,” “goal,”“intend,” “seek,” “believe,” “plan,” “strategy” and derivatives of suchwords.  Forward looking statements inthis report include those statements regarding:*

 

***•****              ourexpectations surrounding the total size of the loan origination market, ourability to maintain average monthly loan fundings in a potentially decliningmarket and our loan origination volume;*

 

*•              ourexpectation of maintaining quarter-over-quarter profitability inthe Mortgage Banking Business;*

 

*•              ourexpectations surrounding our cash requirements, expenses, cash flow fromoperations, the sufficiency of our capital base, the sufficiency of our cashreserves and our sources of liquidity, including our intention to increase thesize of our warehouse lending facilities and the factors we expect to affectour ability to do so;*

 

*•              theexpected adequacy of our various reserves;*

 

*•              AmNet’sintention to expand operations in 2003 and the expected costs of doing so;*

 

*•              AmNet’sintent to continue to try and hedge against market fluctuations in interestrates, the instruments AmNet intends to use and the expected inverserelationship of gains on hedging to margins on loan sales;*

 

*•              ourexpectation of selling loans on a service-released basis withinapproximately 30 days from origination;*

 

*•              theexpected correlation of our success to loan origination volume;*

 

*•              AmNet’sbelief it will continue to qualify for correspondent lending programs and itsability to find alternative buyers for loans it originates;*

 

*•              theexpected concentration of AmNet’s loans in California;*

 

*•              ourexpectation interest rates may rise and the anticipated effect on variousaspects of our business from changes in interest rates, including increased perloan costs of loan generation;*

 

*•              ourbeliefs regarding future prepayment rates and their effect and anticipatedprepayment penalties;*

 

*•              ourexpectation revenues and cash flow from our Mortgage Asset Portfolio Businesswill continue to decline;*

 

*•              ourexpected effective tax rates;*

 

*•              whowe anticipate will be our competitors;*

 

*•              anexpected increase in the level of our general and administrative expenses,including directors’ and professional fees;*

 

*•              theanticipated impact of changes in laws;*

 

*•              theexpected affect of seasonality on our business;*

 

*•              ourintent to hold mortgage loan bond collateral to maturity; and*

 

•              *our expected increasing reliance on informationtechnology systems and the necessity of developing and upgrading such systems.*

 

*These forwardlooking statements are based on information available to us on the date hereof,and we assume no obligation to update any such forward looking statements. Itis important to note that our actual results and timing of certain events coulddiffer materially from those in such forward looking statements due to a numberof factors, including but not limited to, general economic conditions, theworld political climate, unexpected expense increases, overall interest rates,volatility in interest rates, the shape of the yield curve, reductions in thevalue of retained interests in securitizations, our ability to successfullygrow AmNet, the ability to obtain the financing necessary to fund AmNet,changes in accounting rules or their application, changes in the margins gainedon sale of originated loans, changes in the demand of mortgage brokers forAmNet’s loan products and services or of loan purchasers for originated loans,the availability of capital and our ability to qualify for such capital,increases in prepayment rates and default rates, the effect of terminating ourstatus as a REIT, changes in the requirements of correspondent loan programs orour ability to meet such requirements and changes in AmNet’s and our anticipatedcash requirements. Other risk factors that could cause actual results to differmaterially are set forth in this item under the heading “Business RiskFactors.”*

 

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**Introduction**

 

Our Company was founded in 1997as an externally managed Real Estate Investment Trust. Until 2001,substantially all of our operations consisted of the acquisition of residentialmortgages for investment purposes. In mid-2001, our Board of Directors andmanagement determined that it was in the best interest of the stockholders tofundamentally shift the strategic direction of the Company to mortgage banking.We began implementation in 2001 by forming American Mortgage Network, Inc.(“AmNet”), a wholly owned subsidiary, to engage in mortgage banking activities.AmNet originates mortgage loans to prime credit quality borrowers secured byfirst trust deeds through a network of independent mortgage brokers. Aconcentration of our business is in California (35.3% of loans originated inthe first quarter of 2003). We sell the loans that we originate toinstitutional purchasers on a servicing—released basis.

 

We generate revenue in ourMortgage Banking Business segment two principal ways:

 

•                                          *Interest income*. From the time we originate a loan until the timewe sell the loan, we earn interest on the loan, which is paid by the borrower.The interest that we earn is partially offset by the interest we pay under ourwarehouse credit facilities used to finance our mortgage originations.

 

•                                          *Gain on loan sales*. We sell the whole loans that we originate toinstitutional purchasers, on a servicing released basis for cash. We record thedifference between the sale price of loans that we have sold and our cost tooriginate the sold loans as gain on loan sales revenue. We recognize revenue atthe time that we complete the loan sale, which is generally when we receiveloan sale proceeds from the purchaser. Gain on loan sales also includes fees we charge for loan originationsuch as, underwriting fees, loan document preparation fees and wiringfees.  

 

We continue to generate revenuefrom our Mortgage Asset Portfolio Business, although we expect that revenuesfrom this segment of our business will continue to decline. We generate revenueon the interest we receive on the mortgage loans we hold for investment. Ourprimary expense is the interest we pay on borrowings used to fund our mortgageloan portfolio.

 

Our mortgage banking operationsgrew significantly in 2002 and represented 43.6% of our 2002 revenue and 84.1%of first quarter 2003 revenue. At the same time, the Mortgage Asset PortfolioBusiness has significantly declined as mortgage loans in our portfolio haveprepaid over time and have not been replenished.

 

As a result of the change infocus of our Company’s strategic direction and the decision to emphasizetaxable operating activities and retain earnings for growth, our shareholders,based upon a recommendation from our Board of Directors, approved two proposalsthat permit us to amend our charter documents to terminate our status as aREIT. In February of 2003 we notified the Internal Revenue Service of ourdecision to de-REIT, effective for the tax year beginning January 1,2003.  As a REIT, we generally did notpay federal taxes at the corporate level on income we distributed tostockholders. We have not distributed income to our stockholders since Januaryof 2001.

 

Effective January 1, 2003, webecame an income tax paying entity and that electing to de-REIT, and as such wemust recognize deferred tax assets that are largely a result of previous netoperating losses and that provide a reduction in our effective income tax ratefor 2003.  Our effective income tax ratefor 2003 will be approximately 25%.

 

Upon termination of our REITstatus, we were no longer eligible for listing on the New York Stock Exchange.As of January 31, 2003, we moved from the New York Stock Exchange to theAmerican Stock Exchange. Our ticker symbol, INV, remains the same.

 

 

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**Mortgage BankingBusiness**

 

*Summary*

 

AmNet originates mortgage loansreferred by mortgage brokers for subsequent sale on a servicing released basisto large investors.

 

AmNet utilizes a dedicated salesforce to offer loan products to approved wholesale mortgage brokers, who refertheir client’s loans to us for underwriting and funding. Loans meeting ourunderwriting criteria are approved and funded at our regional underwriting loancenters. Our headquarters office performs various functions through multipledepartments including establishment of policy, risk management, secondarymarketing, finance, accounting, administration, human resources, andinformation technology.

 

We funded $2.1 billion inhome loans during the three month period ending March 31, 2003. For the twelvemonth period ending December 31, 2002, we funded $4.2 billion in homeloans. As of  March 31, 2003, wehad 398 loan production and loan operations employees. As of March 31,2003, we operated fifteen regional centers and three satellite centers aroundthe continental United States of America.

 

We borrow funds under our creditfacilities to fund and accumulate loans prior to sale to correspondentinvestors on a servicing released basis. As of May 1, 2003 we have threewarehouse facilities that enable us to borrow up to an aggregate of$1.16 billion. We are allowed to borrow from 98% to 99% of par balance,and must comply with various lender covenants restricting, among other things,the absolute level of leverage and minimum levels of cash reserves. We expectto increase our warehouse borrowing facilities to enable increased loanproduction. (See Note 12 “Subsequent Events” to financial statements).

 

We typically expect to sell allloans we fund on a servicing-released basis, usually within 30 days offunding.

 

**Critical Accounting Policies**

 

The following analysis of financial conditionand results of operations are based upon our consolidated financial statements,and the notes thereto, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”). Thepreparation of these consolidated financial statements requires us to make anumber of estimates and assumptions that affect the reported amounts anddisclosures in the consolidated financial statements. On an ongoing basis, weevaluate our estimates and assumptions based upon historical experience andvarious other factors and circumstances. We believe that our estimates andassumptions are reasonable in the circumstances; however, actual results maydiffer significantly from these estimates and assumptions, which could have amaterial impact on the carrying value of assets and liabilities at the balancesheet dates and our results of operations for the reporting periods.

 

Our accounting policies relating to the basicprocedures listed below have not changed in the three month period ending March31, 2003:

 

•  Provision for loan losses

•  Derivative financial instruments

•  Premium amortization on bond collateral,mortgage loans

•  Gainon sale of loans

•  Income taxes

 

Please refer to the Company Form 10-K for theone-year period ending December 31, 2002, for a detailed discussion of theseprocedures except income taxes, which is discussed in this report (See notes tofinancial statements - Note 14 "Income Taxes").

 

**Results of Operations**

 

***Three MonthResults***

 

Mortgage Banking Business

 

Gain on the sale of loans for the three-monthperiod ending March 31, 2003, amounted to $20.2 million. For thecomparable period ending March 31, 2002, there was a $1.9 million gain onthe sale of loans. AmNet’s increase in net gains on the sale of loans is theresult of the increase in its loan production volume. For the three monthperiod ending March 31, 2003 and March 31, 2002, AmNet recorded loan salesvolume of $2.0 billion and $287 million respectively. Gains on the sale ofloans were offset by a loss on the Company’s derivative financial instrumentstotaling $2.2 million and $86.8 thousand for the same periods,respectively.

 

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For the three months endingMarch 31, 2003, AmNet’s gainon saleof loans of $20.2 million is a combination of various accountcategories.  This represents an $ 18.3million increase over the same period ending March 31, 2002.  Loan premiums of approximately$45.7 million represent the price at which AmNet sells the loans toinvestors in excess of the principal balance of loans sold. Fee income ofapproximately $5.8 million represents various charges to brokers forservices rendered, which are deferred and recognized as part of the gain on thesales of the loans. Gross gain and fee income are offset by capitalized(deferred) loan acquisition costs. The largest deferred cost associated withloan production is broker fees and yield spread premiums totaling approximately$25.0 million. Other deferred costs include (i) deferred originationcosts, which are recognized at the time of loan sale, of approximately$2.5 million and (ii) loan premiums repaid to investors (“premium recapture”)and loan loss reserve costs aggregating approximately $1.5 million.Premium recapture expenses represent repayment of a portion of certain loansale premiums to investors on previously sold loans which subsequently payoffwithin six months of loan sale.  Gain onthe sale of loans of $20.2 million for the three-month period endingMarch 31, 2003 represents approximately 102 basis points (1.02%) on loansales of $2.0 billion.  For thesame period ending March 31, 2002, gain on the sale of loans was $1.9 millionwhich represented approximately 68 basis points (0.68%) on loan sales of$287 million.

 

During the first three months of2003, AmNet incurred net losses on its derivative financial instrumentstotaling $2.2 million.  For thesame period ending March 31, 2002 net losses on derivative financialinstruments totaled $87 thousand. Derivative financial instruments are purchased to offset any loss frommarket interest rate movement which adversely affects gain on loan sales.During the first quarter of 2003, AmNet used forward sales of mortgage backedsecurities (TBA-MBS) as its primary hedging vehicle. During 2002, AmNet usedtreasury futures and options on treasury futures as prime hedgingvehicles.  Due to declines in yields onmortgages during first quarter of 2003, AmNet recorded net losses on derivativefinancial instruments, but we expect offsetting higher gains on the sale ofloans. In the first quarter of 2002, AmNet recorded net gains on derivativefinancial instruments but these gains were offset by lower than expected gainson the sale of loans.

 

AmNet recorded interest incomeof $5.9 million for the three months ended March 31, 2003 and $1.5million for the same period ending March 31, 2002. AmNet earns interest on aloan from the date the loan is funded until final disposition. Accordingly,interest income is a function of the volume of loans funded, the interest rateon the loans and the length of time the loans are held prior to sale. To theextent AmNet funds loans with borrowings under its warehouse facilities, itrecords interest expense based on the same factors. Interest expense for theperiod was $2.7 million. The resulting net interest income earned on loaninventories was $3.2 million, representing 16 basis points (0.16%) on 2003 loanproduction of $2.1 billion.

 

Expenses incurred in theMortgage Banking Business consist of employee compensation and benefits, officeand occupancy expense and other operating expenses (in aggregate referred to asOperating Expenses). For the  three monthperiod ending March 31, 2003, Operating Expenses totaled$17.0 million. For the comparable period ending March 31, 2002, therewas approximately $5.3 million of expenses incurred. The increase was dueto the establishment/expansion and ongoing overhead of AmNet’s mortgage bankingoperations, which are comprised of regional loan production offices andheadquarter operations. For the three months ended March 31, 2003,estimated variable expenses were approximately $6.0 million which wereapproximately 29 basis points (0.29%) on $2.1 billion in funded loans.Operating Expenses that were not directly variable totaled $11.0 million,or approximately 53 basis points (0.53%) on $2.1 billion in funded loansfor the first quarter of 2003.

 

Interest rate movements aredifficult to predict but it is recognized that interest rates on residentialmortgages were continuing from 2002 to be historically low throughout the firstquarter of 2003. While rates have continued to remain at historical lows in2003, rates are expected to increase  inthe second half of 2003 and we expect that the total number of home purchaseand refinancing transactions to decline, causing a significant overallcontraction of the loan origination market. Our financial projections for 2003assume a significant contraction in the size of the market by the fourthquarter of 2003, and total funded loan volume of $8.0 to $9.5 billion. Duringthe first quarter of 2003, we generated an average monthly funded loan volumeof $693 million. For the same period ending March 31,2002 we generated an average monthly funded loan value of $123 million. Despite an assumed mortgage market contraction, wedo not expect our monthly loan fundings to decline at a greater rate than themarket in 2003 due to initiatives to increase sales coverage and brokerpenetration in existing markets and planned expansion into new markets.However, in formulating our financial projections and above noted earningsguidance, we do anticipate higher costs per loan and lower per loan revenues asa direct consequence of the expected market contraction. We expect continuedquarterly profitability in our mortgage banking business.

 

There is a degree of seasonality to ourbusiness.  Summer and fall seasons aretypically stronger home buying months than other parts of the year.  We may expect greater loan volume as aresult of this seasonality. 

 

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*Mortgage AssetPortfolio Business*

 

For the first quarters endedMarch 31, 2003 and 2002, we generated net income of approximately $338thousand and  $72 thousand,respectively.  Although this is anincrease in net income for 2003, all revenue and expense categories declined asa result of a decline of our mortgage asset portfolio from $397.1 million atMarch 31, 2002 to $230.8 million at March 31, 2003. Our decision to avoidportfolio acquisitions from 2000 to date has resulted in a continued decline inthe size of Bond Collateral Mortgage Loan portfolio. This decline resulted in adecrease in net interest income from $5.4 million for the three month periodending March 31, 2002 to $2.8 million for the three month period ending March31, 2003.

 

Net interest spread is theprimary source of revenue in this segment of our business. The weighted averageinterest rate we receive from our bond collateral was 9.2% at March 31,2003 and was 9.47% at March 31, 2002, while the weighted average interest ratewe paid was 2.4% and 2.69% for the same periods, respectively. The differenceis our gross interest spread earnings on the mortgage asset portfolio. As ourportfolio balances continue to decline, we find that a key expense itemcontinues to be premium amortization and credit losses. Our portfolio has beendeclining in size rapidly as a result of borrowers refinancing their mortgageswhich necessitates writing off our premium at accelerated rates. Credit losseson collateral are not decreasing in proportion to the decline in our portfoliobalances. Less credit worthy borrowers have difficulty procuring refinancingterms while those more credit worthy are able to find lower interest ratesavailable and opt to payoff their loans before they are due (prepayment).Therefore with less credit worthy borrowers remaining in our portfolio assets,events of default occur more frequently and necessitate a higher proportion ofcredit reserves.

 

Most of the intermediateadjustable rate mortgages in the CMO/FASIT, 1999-1, 1999-A, 1999-2 and 2000-2segments of the Bond Collateral Mortgage Loans portfolio have reached theirfirst contractual interest rate adjustment and prepayment penalties clauses onthe underlying pool of loans have expired or declined, resulting in a higherprobability of refinancing (principal prepayments). There can be no assurancethat prepayment rates will not increase. Our financial condition and results ofoperations could be materially adversely affected if prepayment levels increasesignificantly.

 

During the first quarter of2003, other income decreased approximately $268 thousand over the three monthperiod  ended March 31, 2002 from$466 thousand to $198 thousand, primarily due to a decrease of approximately$274 thousand in prepayment penalty income.

 

For the three month period endedMarch 31, 2003, total expenses decreased approximately $4.7 million(from $8.9 million to $4.2 million) over the three month period endedMarch 31, 2002. During 2003, our Company incurred decreases in all of themajor expense categories for this segment of our business as a result of thedecrease of $166 million in bond collateral. The primary decreases included thefollowing: interest expense decreased approximately $1.6 million; premiumamortization decreased by approximately $2.1 million, and provision forloan losses decreased by approximately $1.2 million

 

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During 1997,the Company elected to be taxed as a real estate investment trust (“REIT”)under the Internal Revenue Code of 1986, as amended.  As a result of this election, the Company was not, with certainexceptions, taxed at the corporate level on the net income distributed to theCompany’s shareholders.  At our 2002shareholders meeting, the shareholders of the Company approved two proposalsthat allowed the conversion of the Company from a REIT to a fully taxable entity,effective January 1, 2003.  On February7, 2003, the Company filed a notice with the Internal Revenue Service of ourdecision to de-REIT, effective beginning January 1, 2003.  As a result of the conversion to fullytaxable status, an income tax benefit and related deferred tax asset of $6.7million was recorded in January 2003. As a result of the above, the income tax expense recorded for the firstquarter of 2003 was $1.8 million and our effective tax rate was 25%.

 

 **Liquidity andCapital Resources**

 

*General*

 

Our current sources of liquidityprimarily consist of the following:

 

•                                          borrowings under our warehouse and other creditfacilities;

 

•                                          revenues generated by our mortgage bankingoperating activities including interest, branch fees and loan sale proceeds;and

 

•                                          excess interest spread and over collateralization“step down” payments related to the mortgage asset portfolio business, net ofrepayments to servicers for past principal and interest advances on completedreal estate owned dispositions.

 

Our primary cash requirementsinclude:

 

•                                          funding our mortgage loan originations;

 

•                                          interest expense under our warehouse facilities;

 

•                                          operating expenses, including commissions;

 

•                                          repayment of our borrowings; and

 

•                                          maintaining “restricted cash” accounts, whichinclude amounts required to be held by certain of our warehouse lenders thatmay not be used in our operations, as well as amounts held in escrow for thirdparties.

 

As our mortgage bankingoperations have grown and our mortgage asset portfolio has declined, our cashflow from mortgage asset portfolio investment activities has continued todecline in amounts and materiality.

 

*Cash Generated Byand Used In Our Operations*

 

During the three monthperiod  ended March 31, 2003, on aconsolidated basis we generated a net positive cash flow of $9.1 million.This net positive number can be better understood by explaining the majorcomponents:

 

***MortgageBanking Business:***

 

•                                          Cash reserves utilized to fund loan inventoriesand maintain cash collateral accounts in our Mortgage Banking Business wereapproximately $6.4 million.

 

Our warehouse line lendingagreements allow us to borrow from 98% to 99% of par for each mortgageloan.  These agreements containrestrictive covenants.  As ofMarch 31, 2003, we are in compliance with all covenants associated withthese agreements. We pay an 

 

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additional 1% to 2% of the loanprincipal amount in fees or yield spread premium to the mortgage brokers.Lastly, a small portion of our loan inventory is funded with equity capital. Wetypically have cash invested totaling between 2% to 4% of the principal amountof loans held for sale, which is recouped when the loans are purchased byinvestors. Should we increase the amount of loan inventory, either by holdingloans for longer periods, or due to increased loan funding volume, the cashreserves necessary to carry loan inventories will increase in direct proportionto the inventory held.

 

•                                          Cash receipts in excess of cash expenditures inthe Mortgage Banking Business were approximately $9.5 million for thefirst quarter of 2003.

 

Our financial condition can beaffected by turmoil in world markets, which could directly impact domesticliquidity. As stated earlier, we intend to renew existing financing facilitiesand seek new financing sources as the need arises. There can be no assurancethat we will be able to secure new short or long-term financing or thatfinancing will be available on favorable terms.

 

We anticipate our liquidity willbe predominantly impacted by our Mortgage Banking Business. Specifically, weexpect to continue to originate $500 million to $1 billion per monthof new mortgage loans and fund these originations with equity capital andwarehouse facility borrowings. We also expect to continue to engage in hedgingtransactions that may require cash investment to maintain or adjust hedgedpositions. Furthermore, we anticipate greater general and administrative costsassociated with the operations of our Mortgage Banking Business. We intend touse cash reserves, borrowings under the warehouse facilities and theSubordinated Debt Facility and cash flow generated by the mortgage assetportfolio, as well as cash flow generated from the origination and sale ofmortgage loans, to fund our operations. We are therefore dependent onsignificant and increasing levels of warehouse financing to help execute ourmortgage banking strategy. Furthermore, we must originate a certain minimumlevel of loans to remain profitable. See Business Risk Factors.

 

***Mortgage Asset Portfolio Business:***

 

•                                          Net cash flow from our mortgage asset portfoliowas negative at approximately $367 thousand for the first quarter of 2003.

 

The Mortgage Asset Portfoliobusiness generates cash from interest and principal received from bondcollateral and proceeds from the sale of real estate owned bond collateral. Thebond trustees (master servicer) offset this cash by paying interest andprincipal to bondholders, paying servicer and trustee fees, bond insurancepremiums and reimbursing servicers for any advances made on real estate owneddispositions. Any excess cash flow is remitted to us from the bond trustees ona monthly basis. There are various factors that affect this flow, such asmarket interest rate changes. Additionally, our bond agreement provisionsspecify the requirements for over collateralization accounts. Ifovercollateralization accounts are deficient, this can restrict our receipt ofexcess cash flow and be used instead by the bond trustee to pay down long termdebt (as was the case in the first quarter of 2003).

 

Cash flow from the mortgageasset portfolio is expected to decline in 2003 due to a decline in the size ofthe portfolio and potential increases in overcollateralization accounts.

 

•                                          Administrative expenditures for our Mortgage AssetPortfolio Business aggregated approximately $913 thousand.

 

Administrative expensesallocated to our Mortgage Asset Portfolio Business included portfoliomanagement payroll allocations of approximately $340 thousand, generallegal expenses of approximately $235 thousand, professional and consultingfees of approximately $68 thousand, director fees of $34 thousand, stockexchange fees of $65 thousand and liability insurance of approximately$83 thousand. Stock exchange fees relate to our change from the New YorkStock Exchange to the American Stock Exchange. We do expect director fees andgeneral legal and professional expenses to increase due to the implementationof various new corporate governance measures required by the Sarbanes-Oxley Actof 2002.

 

**BusinessRisk Factors**

 

**Risks Associated with Changing Our Business Strategy**

 

*We Have a LimitedOperating History in the Mortgage Origination Industry, Which Makes itDifficult to Evaluate Our Current Business Performance and Future Prospects*

 

Our Company was formed in 1997and operated as a mortgage REIT (mortgage portfolio investment) until thefourth quarter of 2001, at which time we began originating and sellingmortgages (mortgage banking). As a result, comparisons between financial

performance in current quarters and pastquarters may not be helpful in evaluating our current performance or our future

 

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prospects. We must originate increasing amounts of mortgages in the future to growour business. While our executive officers have extensive mortgage originationand mortgage banking experience, and have hired experienced personnel in ourmortgage banking subsidiary, there are a significant number of risks and uncertaintiesinherent in the mortgage origination industry, especially in light of ourlimited relevant operating history relative to our mortgage banking activities.

 

*We Expect OurOperating Expenses to Increase, which May Adversely Affect Our Results ofOperations*

 

We had net income ofapproximately $12.2 million for the three month period endingMarch 31, 2003 which included a one-time income tax benefit of $6.7million. We expect to incur additional costs and expenses related to theexpansion of our sales force and the opening of new regional underwritingcenters, as well as the expansion of our management team and establishment ofthe internal infrastructure necessary to support the growth of our mortgagebanking business. If these expenses do not generate adequate revenues, ourfinancial performance will suffer. In addition, these expenses will require theuse of cash, which will reduce our ability to fund loans until such time as wegenerate additional revenues. See “Risks Associated with Our Mortgage BankingBusiness — Overhead Expenses May Not Be Covered by Sufficient Revenues toSustain Profitable Operations.”

 

*We May Not Be Ableto Effectively Manage the Growth of Our Business*

 

Recently, we have experiencedrapid growth. In the beginning of 2001, we had approximately 20 employees. Asof March 31, 2003, we had approximately 398 employees. Many of theseemployees have very limited experience with us and a limited understanding ofour systems. Many of our financial, operational and managerial systems were designedfor a small business and have only recently been adopted or replaced to supportlarger scale operations. At the same time, we will need to continue to upgradeand expand our financial, technological, operational and managerial systems andpolicies and procedures. If we fail to manage our growth effectively, ourexpenses could increase and management’s time and attention could be diverted.If we do not succeed in these efforts, we will be unable to effectively growand manage the business, and our financial results could be negativelyaffected.

 

**Risks Associated withOur Mortgage Banking Business**

 

*Failure to Renew andObtain Adequate Financing May Adversely Affect Results Of Operations*

 

As of March 31, 2003 we hadwarehouse borrowing facilities in place totaling $960 million. In April of2003, we obtained an additional $200 million in warehouse borrowing facilities.In order to continue to increase loan origination volumes, we must obtainadditional warehouse lines of credit, or reduce the time loans are held forsale (warehoused). There are a number of financial institutions whichspecialize in lending to mortgage banking companies and these types of securedborrowings. We expect to expand our current warehouse facilities with JPMorgan/Chase, UBS Warburg and Countrywide Warehouse Lending; however, there canbe no assurances that we will expand our current warehouse facilities or obtainadditional warehouse facilities. Failure to obtain additional facilities wouldlimit our potential for growth and may adversely affect our financial results.Among the factors that will affect our ability to expand our warehouse lineborrowings are financial market conditions and the value and performance of ourcompany prior to the time of such financing. There can be no assurance that anysuch financing can be successfully completed at advantageous rates or at all.Our warehouse credit facilities contain extensive restrictions and covenantsthat, among other things, require us to satisfy specified financial, assetquality and loan performance tests. If we fail to meet or satisfy any of thesecovenants, we would be in default under these agreements and our lenders couldelect to declare all amounts outstanding under the agreements to be immediatelydue and payable, enforce their interests against collateral pledged under suchagreements and restrict our ability to make additional borrowings. Theseagreements also contain cross-default provisions, so that if a default occursunder one agreement, the lenders under our other agreements could also declarea default. Any default under our credit facilities would have an adverse effecton our financial results.

 

The covenants and restrictionsin our warehouse credit facilities may restrict our ability to, among otherthings:

 

•                                          incur additional debt by virtue of havingwarehouse loan covenants;

 

•                                          make certain investments or acquisitions;

 

•                                          repurchase or redeem capital stock;

 

•                                          engage in mergers or consolidations;

 

•                                          finance loans with certain attributes;

 

•                                          reduce liquidity below certain levels; and

 

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•                                          hold loans for longer than established timeperiods.

 

These restrictions may interferewith our ability to obtain financing or to engage in other business activities,which may 

significantly harm our business financialcondition, liquidity and results of operations. As of the date of filing thisreport, we are in compliance with all restrictions and covenants contained inour warehouse borrowing facilities.

 

*Overhead ExpensesMay Not Be Covered By Sufficient Revenues To Sustain Profitable Operations*

 

We made a number of fixedoverhead commitments to establish the operational and administrativeinfrastructure necessary to support the loan origination business. AtMarch 31, 2003, lease commitments for headquarter and regional officestotaled approximately 111,500 square feet. There were 398 salaried and hourlyemployees. In order to achieve profitability, our monthly originations must bein the $450 million to $500 million range, such that the expectedrevenues associated with this loan production exceed fixed and variableoverhead costs. Since our revenues are tied directly to the level of loanproduction, it is imperative that we achieve a profitable level oforiginations, and the level of future profitability from mortgage banking willbe in direct correlation to the level of loan origination volume. There can beno assurances that we will be able to maintain loan origination volumessufficient to cover our fixed overhead costs, and should we incur significantoperating losses, our capital base and cash reserves could be materiallyadversely impacted, precluding us from fully implementing our mortgage bankingstrategies.

 

*Non-saleable orRepurchased Loans May Adversely Impact Results of Operations and Our FinancialPosition*

 

In connection with the sale ofloans to correspondent investors, we make a variety of representations andwarranties regarding the loans, including those that are customary in theindustry relating to, among other things, compliance with laws, regulations andinvestor program standards and the accuracy of information on the loandocuments and loan file. In the event that an investor finds that a loan orgroup of loans violates our representations, the investor may require us torepurchase the loan or loan group and bear any potential related loss on thedisposition of the loans, or provide an indemnification for any lossessustained by the investor on the loans. Additionally, we may originate a loanthat does not meet investor underwriting criteria or has some other defect,requiring us to sell the loan at a significant discount. We have hiredexperienced personnel at all levels and have established significant controlsto ensure that all loans are originated to our underwriting standards, and aremaintained in compliance with all of the representations made by us inconnection with our loan sale agreements. However, there can be no assurancesthat mistakes will not be made or that certain employees will not deliberatelyviolate our lending policies and, accordingly, we are subject to repurchaserisk and losses on unsaleable loans. Typically, with respect to any loan thatmight be repurchased or unsaleable, we would correct the flaws if possible andre-sell the loan in the market. We have created repurchase allowances toprovide for this contingency on our financial statements, but there can be noassurances that loan losses associated with repurchased or unsaleable loanswill not adversely impact our results of operations or our financial conditionof our Company.

 

*Volatility inInterest Rates May Adversely Affect Our Results of Operations and Our FinancialPosition*

 

Our primary source of revenue isgains on sales of loans, net of gains or losses on derivative financial instruments.We set rates and pay broker premiums for loans we fund based on a pricingprocess designed to create a targeted profit margin on each loan. Appropriatelypricing these loans can be complex, and we may not always successfully priceour loans with adequate margin to compensate us for the risk of interest ratevolatility.

 

The value of the mortgage loansthat we originate is at risk due to fluctuations in interest rates during twotime periods: (1) the period beginning when we have committed to fundingthe loan and ending when the loan closes, or funds; and (2) the timeperiod beginning when the loan closes and ending when we commit to sell or sellthe loans to third-party purchasers. These loans are collectively referred toas our loan pipeline. To manage the interest rate risk of our pipeline, wecontinuously project the percentage of the pipeline loans we expect to close.Because projecting a percentage of pipeline loans that will close is especiallydifficult during periods of volatile interest rates, we cannot assure that ourprojections will be accurate. On the basis of such projections, we use forwardsale of mortgage loan securities (TBA-MBS), which are classified as derivativeinstruments. These “hedges” are designed to mitigate the adverse impactinterest rate fluctuations on the value of the loan pipeline. Our use of hedgesis driven by our estimates as to the percentage of loans that will close, andtherefore we cannot assure you that our use of derivative securities willoffset the risk of changes in interest rates.

 

If interest rates make anunanticipated change, the actual percentage of pipeline loans that close maydiffer from the projected percentage. A sudden increase in interest rates cancause a higher percentage of pipeline loans to close than projected. We may nothave made forward sales commitments to sell these additional loans andconsequently may incur significant losses upon their sale at current marketprices, which may not be offset by gains in the value of derivative securities,adversely affecting results of operations. Likewise, if a lower percentage ofpipeline loans closes than was projected, due to a sudden decrease in interestrates or otherwise, we have and may in the future adjust hedge positions ormandatory sales commitments at a significant cost, adversely affecting ourresults of operations. This risk is greater during times of volatile interestrates.

 

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*Our HedgingStrategies May Not Be Successful in Mitigating Our Risks Associated WithInterest Rate Changes*

 

We use forward sale of mortgageloan securities (TBA-MBS), which are classified as derivative financialinstruments, to provide a level of protection against interest rate risks. Whenrates change we expect to record a gain or loss on derivatives which would beoffset by an inverse change in the value of our pipeline of rate lockcommitments and loans not yet committed for sale. We cannot assure you,however, that our use of derivatives will offset all of our risk related tochanges in interest rates. There have been periods, and it likely that therewill be periods in the future, during which we will incur losses afteraccounting for our derivative financial instruments. The derivative financialinstruments we select may not have the desired effect of reducing our interestrate risk. In addition, the nature and timing of hedging transactions mayinfluence the effectiveness of these strategies. If we poorly design strategiesor improperly execute transactions we could actually increase our exposure tointerest rate risk and potential losses. In addition, hedging strategiesinvolve transaction and other costs. We cannot assure you that our hedgingstrategy and the derivatives that we use will adequately offset the risk ofinterest rate volatility or that our hedging transactions will not result inlosses.

 

*Capital ShortagesCould Impede the Ability to Execute Our Mortgage Banking Strategy*

 

Our mortgage banking activitiesrequire a significant level of cash reserves and capital to support loaninventories and overhead exposure. Additionally, while we utilize warehousecredit facilities to fund our loan origination activity, we must invest cashequity in our loan inventories approximating 1% to 4% of the cost basis forthese loans. We also maintain derivative financial instruments, potentiallyrequiring cash payments as those instruments mature. While we believe ourcapital base, cash reserves and cash revenues from our mortgage asset portfoliobusiness and mortgage banking revenues will be sufficient to cover overheadexpenses, there can be no assurances that capital shortages will not occur,requiring us to raise additional debt or equity capital or decrease or ceaseour origination activities.

 

*The Nationwide Scopeof Our Operations Exposes Us to Risks of Noncompliance with an Increasing andInconsistent Body of Complex Laws and Regulations at the Federal, State andLocal Levels*

 

We originate mortgage loans inmany states. We must comply with the laws and regulations, as well as judicialand administrative decisions, of all of these jurisdictions, as well as anextensive body of federal laws and regulations. The volume of new or modifiedlaws and regulations has increased in recent years, and, in addition,individual cities and counties have begun to enact laws that restrict loanorigination activities in those cities and counties. The laws and regulationsof each of these jurisdictions are different, complex and, in some cases, indirect conflict with each other. As our operations continue to grow, it may bemore difficult to comprehensively identify, to accurately interpret and toproperly program our technology systems and effectively train our personnelwith respect to all of these laws and regulations, thereby potentiallyincreasing our exposure to the risks of noncompliance with these laws andregulations.

 

Our failure to comply with theselaws can lead to the following consequences, any of which could have an adverseeffect on our ability to operate our business and our financial results:

 

•                                          civil and criminal liability;

 

•                                          loss of approved status within certain states;

 

•                                          demands for indemnification or loan repurchasesfrom purchasers of our loans;

 

•                                          class action lawsuits;

 

•                                          assignee liability, which may make our loansunsaleable; and

 

•                                          administrative enforcement actions.

 

*The IncreasingNumber of State and Local “Anti-predatory Lending” Laws May Restrict OurAbility to Originate or Increase Our Risk of Liability With Respect To CertainMortgage Loans and Could Increase Our Cost of Doing Business*

 

In recent years, severalfederal, state and local laws, rules and regulations have been adopted, or areunder consideration, that are intended to eliminate so-called “predatory”lending practices. These laws, rules and regulations impose certainrestrictions on loans on which certain points and fees or the annual percentagerate (“APR”) exceeds specified thresholds. Some of these restrictions expose alender to risks of litigation and regulatory sanction no matter how carefully aloan is underwritten. In addition, an increasing number 

 

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of these laws, rules and regulations seek toimpose liability for violations on purchases of loans, regardless of whether apurchaser knew of or participated in the violation.

 

Although it is against ourpolicy to engage in predatory lending practices, we have generally avoidedoriginating loans that exceed the APR or “points and fees” thresholds of theselaws, rules and regulations, because the companies that buy our loans and/orprovide financing for our loan origination operations generally do not want tobuy or finance such loans. The continued enactment of these laws, rules andregulations may prevent us from making certain loans and may cause us to reducethe APR or the points and fees on loans that we do make. In addition, thedifficulty of managing the risks presented by these laws, rules and regulationsmay decrease the availability of warehouse financing and the overall demand forloans, making it difficult to fund, sell or securitize any of our loans. If wedecide to relax our restrictions on loans subject to these laws, rules andregulations because the companies which buy our loans and/or provide financingfor our loan origination operations relax their restrictions, we will besubject to greater risks for actual or perceived non-compliance with such laws,rules and regulations, including demands for indemnification or loanrepurchases from our lenders and loan purchasers, class action lawsuits,increased defenses to foreclosure of individual loans in default, individualclaims for significant monetary damages and administrative enforcement actions.The growing number of these laws, rules and regulations will likely increaseour cost of doing business as we are required to develop systems and proceduresto ensure that we do not violate any aspect of these new requirements. Any ofthe foregoing could materially and adversely affect our business, financialcondition, liquidity and results of operations.

 

 

*Competition In TheMortgage Banking Industry and Demand for Mortgages May Hinder Our Ability toAchieve or Sustain Profitable Origination Levels*

 

Our success in the mortgagebanking strategy will depend, in large part, on our ability to originate “A”paper loans in sufficient quantity such that the gain on sales of loans net ofhedge costs are in excess of both fixed and variable overhead costs. There canbe no assurance that we will be able to originate sufficient levels of mortgagesto achieve and sustain profitability. In originating and selling A paper loans,we will compete with investment banking firms, savings and loan associations,banks, mortgage bankers and other entities originating A paper for residential1-4 unit mortgages, many of which have greater financial resources than us. Wewill also face competition from companies already established in these markets.In addition to the level of home purchase activity, the origination market isdirectly tied to the general level of interest rates and refinance activity.The origination market exceeded $1.2 trillion in 2000 and $2 trillion in 2001,due to both strong home sales and low interest rates. While it is believed thatthe loan origination market was over a two trillion dollars in 2002 and will beover two trillion dollars in 2003 and beyond, the overall market size couldcontract if interest rates rise, increasing competitiveness in the mortgagemarkets and putting pressure on the market competitors to reduce revenues tosustain origination volumes and market share. We believe that the variety andcompetitiveness of our loan products and customer service levels will allow usto gain market share over the next several years, even if the overall demandfor mortgages declines; however, there can be no assurance that we will be ableto successfully compete.

 

*We Must Attract andRetain Qualified Account Executives to Produce Our Desired Level of Revenues*

 

We rely on commissioned accountexecutives to generate loan referrals from professional mortgage brokers. Theseaccount executives typically have established relationships with our brokerclients. Our overall loan fundings are in direct proportion to the number ofaccount executives, and as such, our sustained loan production and market sharegrowth are dependent on the successful retention and recruitment of our salesforce. Due to this very competitive labor market, there can be no assurances wewill be able to retain and recruit account executives.

 

*We Are Subject ToLosses Due To Fraudulent Acts On The Part Of Loan Applicants, Employees orMortgage Brokers*

 

Mortgage brokers who assist loanapplicants in obtaining mortgage loans refer all of the mortgage loansoriginated by us. As such, the loan application, property appraisal, creditreport and other supporting documentation are furnished by the mortgage brokerand used by our underwriters to make approval or denial decisions. There couldalso be the potential of collusion between the broker and an employee toproduce a fraudulent loan. Our employees usually have virtually no contact withapplicants, and rely on the mortgage broker to obtain and furnish all of thedocumentation supporting the mortgage loan application. Mortgage brokers maymake mistakes in completing the documentation for a loan, leading to anincreased risk of our holding a non-saleable loan.

 

Further, in rare cases, themortgage broker may knowingly or unknowingly submit an application whereinmultiple parties to the transaction (borrower, appraiser, seller, or titleinsurer) work in collusion to inflate the property value and/or falsify otherdocumentation in order to obtain a mortgage loan. These types of fraudulentmortgage loans will have a high risk of default, and will likely not be fullyrecoverable through disposition of the underlying property securing themortgage loan.

 

Should material fraud bedetected on a mortgage loan prior to sale to an investor, the mortgage loansmay have to be sold 

 

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at a significant discount or may not besaleable. Should material fraud or mistakes in loan documentation be detectedafter a mortgage loan is sold to a correspondent investor, we may be requiredto repurchase the loan or indemnify the investor. While the investor and/or wecan initiate foreclosure proceedings on any loans deemed to be fraudulentlyobtained, we could incur significant losses on these fraudulent mortgage loansif principal or interest is not fully recovered through the foreclosure anddisposition of the underlying property securing the mortgage loan.

 

We have established riskmanagement and quality control committees to set policy and manage exposure tocredit losses due to fraud, compliance errors or non-compliance with ourunderwriting standards. Regular quality control audits are done onrepresentative samples of mortgage loans and all mortgage loans submitted bybrokers who come under suspicion in the normal course business. Additionally,we have numerous controls and processes to ensure that all of the mortgage loanapplications submitted through mortgage brokers are not based on fraudulent orintentionally misrepresented documentation. However, there can be no assurancesthat the broker and/or borrowers do not submit fraudulent or inaccurate documentationthat is not detected by our personnel or by electronic fraud checks utilized byus. Should we originate significant numbers of fraudulent loans or loans basedon inaccurate documentation, our results of operations and financial conditioncould be materially adversely affected.

 

*We May be Subject toFines or Other Penalties Based Upon the Conduct of Our Independent Brokers*

 

The mortgage brokers from whichwe obtain loans have legal obligations to which they are subject. While theselaws may not explicitly hold the originating lenders responsible for the legalviolations of mortgage brokers, increasingly federal and state agencies havesought to impose such assignee liability. Recently, for example, the UnitedStates Federal Trade Commission (“FTC”) entered into a settlement agreementwith a mortgage lender in which the FTC characterized a broker that had placedall of its loan production with a single lender as the “agent” of the lender,and the FTC imposed a fine on the lender in part because, as “principal,” thelender was legally responsible for the mortgage broker’s unfair and deceptiveacts and practices. The United States Justice Department in the past has soughtto hold a mortgage lender responsible for the pricing practices of its mortgagebrokers, alleging that the mortgage lender was directly responsible for thetotal fees and charges paid by the borrower under the Fair Housing Act even ifthe lender neither dictated what the mortgage broker could charge nor kept themoney for its own account. Accordingly, we may be subject to fines or otherpenalties based upon the conduct of our independent mortgage brokers.

 

*We Are Subject toCounterparty Risks on Loan Sale Commitments and Hedging Transactions*

 

In connection with our mortgageloan sales, which involve the sale of mortgage loans and mortgage-backedsecurities on a forward or other deferred delivery and payment basis, we mayenter into hedging transactions which involve option purchases and sales.  We have credit risk exposure to the extentpurchasers/sellers are unable to meet the terms of their forward purchase/salecontracts. As is customary in the marketplace, none of the forward paymentobligations of any of our counterparties is currently secured or subject tomargin requirements. We attempt to limit our credit exposure on forward salesarrangements on mortgage loans and mortgage-backed securities by entering intoforward contracts only with institutions that we believe are acceptable creditrisks, and which have substantial capital and an established track record incorrespondent lending. However, there can be no assurances that counterpartieswill perform. If counterparties do not perform, our results of operations maybe adversely affected.

 

*We Sell aSubstantial Portion of Loans We Originate to a Competitor*

 

We have warehouse linefacilities with Countrywide Home Loans, Inc. (Countrywide). We also sell asubstantial portion of our loans to Countrywide. We may have to find otherinvestors for loan sales or be forced to find other sources of warehouse linelending if Countrywide changes its policies and procedures. Either of theseresults may have an adverse effect on our results of operations.

 

*Mortgage BankingRevenues Can Fluctuate From Period to Period Based on a Number of Factors*

 

Our operating results have andmay in the future fluctuate significantly from period to period as a result ofa number of factors, including the volume of loan origination, interest ratesand the level of unrealized gains/losses in unsold loans, pipeline loans or positionsin derivative securities. Accordingly, the consolidated net income of ourCompany may fluctuate from period to period.

 

*Dependency onCorrespondent Investors, Secondary Markets*

 

Our ability to generate gains onthe sale of mortgages is largely dependent upon the continuation ofcorrespondent lending programs offered by large correspondent lenders, as wellas our continued eligibility to participate in such programs. Although we arein good standing with a number of large correspondent lenders and are not awareof any proposed discontinuation of, or significant reduction in, the operationof such programs, any such changes could have a material adverse effect ouroperations. We anticipate that we will continue to remain eligible toparticipate in such programs, but any significant impairment of sucheligibility would materially 

 

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adversely affect our operations.

 

*Our OriginationActivity Is Concentrated In California, Making Our Results Subject to AdverseEconomic Conditions In California.*

 

A large proportion of loans(35.3% of all loans closed for the three month period ending March 31,2003) we fund are concentrated in California. Although we are expanding ouroperations in the East Coast of the United States in 2003, a significantportion of our loan origination volume is likely to be based in California forthe foreseeable future. Consequently, our results of operations and financialcondition are dependent upon general trends in the California economy and itsresidential real estate market. Residential real estate market declines mayadversely affect the levels of new mortgages in California or the value paid bycorrespondent lenders for loans in California, potentially adversely affectingour results of operations and financial condition.

 

*A Housing and UrbanDevelopment Department (“HUD”) Proposed Rule to Reform Real Estate SettlementProcedures (“RESPA”) May Adversely Affect the Way We Conduct Business withMortgage Brokers*

 

HUD is proposing to improve themanner in which mortgage broker fees are disclosed by requiring that yieldspread premiums (“YSP”) (and other mortgage broker compensation) be reported aspayments from the lender. The purpose of this would be to have the mortgagebroker only receive direct compensation from borrowers and attempt to eliminatedisputes regarding improper broker payments. This proposed rule may adverselyaffect our business by requiring changes in systems and procedures which maycause delays and re-work to meet regulatory requirements.

 

*An Interruption Inor Breach of Our Information Systems May Result In Lost Business*

 

We rely heavily uponcommunications and information systems to conduct our business. As we implementour growth strategy and increase our volume of loan production, that reliancewill increase. Any failure or interruption or breach in security of ourinformation systems or the third-party information systems on which we relycould cause underwriting or other delays and could result in fewer loan applicationsbeing received, slower processing of applications and reduced efficiency inloan servicing. We utilize proprietary software for our main loan originationsystem, and this software is not fully documented and we have a limited numberof employees who are knowledgeable about this program. We cannot assure youthat systems failure or interruptions will not occur, or if they do occur thatthey will be adequately addressed by us or the third parties on which we rely.The occurrence of any failures or interruptions could significantly harm ourbusiness.

 

*The Success andGrowth of Our Business Will Depend Upon Our Ability to Adapt to and ImplementTechnological Changes*

 

Our mortgage loan originationbusiness is currently dependent upon our ability to effectively interface withour brokers, borrowers and other third parties and to efficiently process loanapplications and closings. The origination process is becoming more dependentupon technological advancement, such as the ability to process applications overthe Internet, accept electronic signatures, and provide process status updatesinstantly and other customer-expected conveniences that are cost-efficient toour process. Implementing this new technology and becoming proficient with itmay also require significant capital expenditures. As these requirementsincrease in the future, we will have to fully develop these technologicalcapabilities to remain competitive or our business will be significantlyharmed.

 

*If We Are Unable toMaintain and Expand Our Network of Independent Brokers, Our Loan OriginationBusiness Will Decrease*

 

All of our loan originations ofmortgage loans come from independent brokers. Our brokers are not contractuallyobligated to do business with us. Further, our competitors also haverelationships with our brokers and actively compete with us in our efforts toexpand our broker networks. Accordingly, we cannot assure you that we will besuccessful in maintaining our existing relationships or expanding our brokernetworks, the failure of which would significantly harm our business, financialcondition, liquidity and results of operations.

 

*Our FinancialResults Fluctuate As a Result of Seasonality and Other Timing Factors, WhichMakes It Difficult To Predict Our Future Performance and May Affect the Priceof Our Common Stock*

 

Our business is generallysubject to seasonal trends. These trends reflect the general pattern of housingsales, which typically peak during the spring and summer seasons. Our quarterlyoperating results have fluctuated in the past and are expected to fluctuate inthe future, reflecting the seasonality of the industry. Further, if the closingof a sale of loans is postponed, the recognition of gain from the sale is alsopostponed. If such a delay causes us to recognize income in the next quarter,our results of operation for the previous quarter could be significantlydepressed. If our results of operation do not meet the expectations of ourstockholders, the price of our common stock may decrease.

 

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**Risks Associated withOur Mortgage Asset Portfolio Business**

 

*High Levels of BondCollateral Mortgage Loan Prepayments May Reduce Operating Income*

 

The level of prepayments of BondCollateral Mortgage Loans we purchased at a premium directly impacts the levelof amortization of capitalized premiums. We use a calculation for determiningthe premium amortization which is based on the interest method. If prepaymentlevels exceed projections used for the premium amortization calculation, thepotential exists for impairment write-downs as a result of under-amortizedpremiums.

 

Bond Collateral Mortgage Loansprepayment rates generally increase when market interest rates fall below thecurrent interest rates on mortgage loans. Prepayment experience also may beaffected by the expiration of prepayment penalty clauses, the ability of theborrower to obtain a more favorable mortgage loan, geographic location of theproperty securing the adjustable-rate mortgage loans, the assumability of amortgage loan, conditions in the housing and financial markets and generaleconomic conditions. The level of prepayments is also subject to the sameseasonal influences as the residential real estate industry with prepaymentrates generally being highest in the summer months and lowest in the wintermonths. We have experienced high levels of prepayments during 1999 through 2000on the CMO/FASIT segment of our Bond Collateral Mortgage Loan portfolio, dueprincipally to the fact that the underlying adjustable rate loans were subjectto their first initial interest rate adjustment (after being fixed for thefirst two years), prepayment penalty clauses expired and borrowers were able tosecure more favorable rates by refinancing. In 2001, the same phenomenonoccurred in the 99-A and 1999-2 segments of our portfolio, as the loans inthese portfolios reached the end of their 2-year fixed rate periods andprepayment penalty clauses expired. The overall rate of prepayments hasdecreased over the past three months, averaging 36.7%  in the first quarter of 2003, 37.57% in the fourth quarter of2002, down from 38.53% in the third quarter of 2002 and 44.23% in the secondquarter of 2002. We anticipate that overall prepayment rates are likely toremain in the 30% to 45% range in 2003. There can be no assurance thatprepayment rates will not be higher or that prepayment penalty income willoffset premium amortization expense. Accordingly, our financial condition andresults of operations could be materially adversely affected.

 

As of March 31, 2003approximately 17.1% of our Company’s Bond Collateral Mortgage Loan portfoliohad prepayment penalty clauses, with a weighted average of thirteen monthsremaining before prepayment penalties expire.

 

*Borrower CreditDefaults, Special Hazard Losses and National Recessions May Decrease Value OfBond Collateral Mortgage Assets Held By Our Company*

 

During the time we hold bondcollateral mortgage assets or retained interests in securitizations, we aresubject to credit risks, including risks of borrower defaults, bankruptcies andspecial hazard losses that are not covered by standard hazard insurance (suchas those occurring from earthquakes or floods). In the event of a default onany mortgage loan we hold or mortgages underlying bond collateral, we will bearthe risk of loss of principal to the extent of any deficiency between the valueof the secured property and the amount owing on the mortgage loan, less anypayments from an insurer or guarantor. Although we have established anallowance for loan losses, there can be no assurance that any allowance forloan losses which is established will be sufficient to offset losses onmortgage loans in the future.

 

Credit risks associated withnon-conforming mortgage loans, especially sub-prime mortgage loans, will begreater than those associated with mortgage loans that conform to FNMA andFHLMC guidelines. The principal difference between sub-prime mortgage loans andconforming mortgage loans is that sub-prime mortgage loans typically includeone or more of the following: worse credit and income histories of themortgagors, higher loan-to-value ratios, reduced or alternative documentationrequired for approval of the mortgagors, different types of properties securingthe mortgage loans, higher loan sizes and the mortgagor’s non-owner occupancystatus with respect to the mortgaged property. As a result of these and otherfactors, the interest rates charged on non-conforming mortgage loans are oftenhigher than those charged for conforming mortgage loans. The combination ofdifferent underwriting criteria and higher rates of interest may lead to higherdelinquency rates and/or credit losses for non-conforming as compared toconforming mortgage loans and thus require high loan loss allowances. All ofour Bond Collateral Mortgage Loans at March 31, 2003, were originated assub-prime mortgage loans.

 

A down-turn in the nationaleconomy and the resultant adverse impact on employment rates could adverselyaffect mortgage loan defaults. Additional credit could become scarce in such anenvironment and therefore risk of loss through loan default and 

 

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decreased property value could increase. Ourallowances may be deemed inadequate should economic conditions worsensignificantly, causing higher than expected defaults and property valuedecreases. We believe the allowances for loan losses are adequate as ofMarch 31, 2003.

 

Even assuming that propertiessecured by the mortgage loans we hold provide adequate security for suchmortgage loans, substantial delays could be encountered in connection with theforeclosure of defaulted mortgage loans, with corresponding delays in thereceipt of related proceeds. State and local statutes and rules may delay or preventour foreclosure on or sale of the mortgaged property and typically prevent usfrom receiving net proceeds sufficient to repay all amounts due on the relatedmortgage loan.

 

*Requirements toMaintain Over-collateralization Accounts May Reduce Our Cash Flow and InhibitPlans for Expansion of the Mortgage Banking Business*

 

In connection with securing longterm debt, virtually all of our Bond Collateral Mortgage Loans have beenpledged as collateral to secure long term debt. Certain over collateralizationaccounts have been established representing the excess principal amount ofthese mortgages over the associated bond obligations. Various indentureagreements associated with these securitizations call for the overcollateralization levels to be maintained on an ongoing basis depending on theamount of remaining bond obligations as well as the status of delinquency ofthe underlying bond collateral or the loan loss performance of bond collateral.Although long-term financing agreements are non-recourse, net interest incomefrom some segments of our Bond Collateral Mortgage Loans has in the past, andcould in the future, be “trapped” to pay down debt in order for us to achieveour over-collateralization requirements. While we believe that we havesufficient cash reserves and other liquidity to support our planned mortgagebanking activities, there can be no assurance that we will not be required toreduce or cease our planned mortgage banking activities should we be requiredto divert cash flow to maintain over collateralization requirements.

 

*Because MortgageAssets Are Pledged to Secure Long-Term Debt, We May Not Be Able to Sell SuchAssets and Therefore Our Liquidity and Capital Resources May Be AdverselyAffected*

 

All of our Company’s bondcollateral mortgage assets at March 31, 2003 were pledged as bond collateral tosecure Long-Term Debt. These assets are subject to the terms of the Long-TermDebt agreements and may not be separately sold or exchanged. While we may sellour interests in the bond collateral subject to the liens and otherrestrictions of the Long-Term Debt agreements, there is not a liquid market forsuch encumbered interests and a significant liquidity discount would beapplied. As such, we would expect to receive less than our book value should wesell our interest in the bond collateral.

 

*Increases In ShortTerm Interest Rates May Increase Our Cost of Borrowings, Which May ReduceIncome From Operations*

 

The majority of our BondCollateral Mortgage Loans have a repricing frequency of six months or less,while substantially all of our borrowings have a repricing frequency of onemonth or less. Accordingly, the interest rates on these borrowings may be basedon interest rate indices which are different from, and adjust more rapidlythan, the interest rate indices of our related mortgage loans. Consequently,increases in (short-term) interest rates may significantly influence our netinterest income. While increases in short-term interest rates will increase theyields on a portion of our adjustable-rate Bond Collateral Mortgage Loans,rising short term rates will also increase our cost of borrowings. To theextent such costs rise more than the yields on such Bond Collateral MortgageLoans, our net interest income will be reduced or a net interest loss mayresult. We may mitigate this “gap” risk by purchasing interest rate hedges(referred to as “caps”), however potential income from these hedges may onlypartially offset the adverse impact of rising borrowing costs.

 

*Loans Serviced byThird Parties May Result in Increased Delinquency Rates and Credit Losses,which May Adversely Affect Our Results of Operations and Financial Condition*

 

All of our Bond CollateralMortgage Loans are serviced by sub-servicers. We continually monitor theperformance of the sub-servicers through performance reviews, comparablestatistics for delinquencies and on-site visits. We have on occasion determinedthat sub-servicers have not followed standard collection and servicingpractices related to our Bond Collateral Mortgage Loans, which we believe haveled to increased delinquencies and higher loan losses on selected segments. Wecontinue to monitor these servicers, have put these entities on notice of suchdeficiencies, and have instituted other mitigating processes. We have arrangedfor servicing with entities that have particular expertise in non-conformingmortgage loans. Although we have established these relationships andprocedures, there can be no assurance that these sub-servicers will service ourmortgage loans in such a way as to minimize delinquency rates and/or creditlosses and not cause an adverse effect on our results of operations.

 

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ITEM3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

A primary market risk facing our Company isinterest rate risk, which is highly sensitive to many factors, includinggovernmental monetary and tax policies, domestic and international economic andpolitical considerations and other factors beyond the control of our control.We attempt to manage this risk in our Mortgage Banking and Mortgage AssetPortfolio businesses.

 

**Mortgage BankingBusiness**

 

*Interest Rate Risk*

 

Rate lock commitments andmortgage loans held for sale (loan pipeline) are subject to market price fluctuationuntil committed for sale. These fluctuations are primarily tied to changes inmarket interest rates and the relationship of short term rates to long-termrates (yield curve). In order to mitigate this risk, a variety of financialderivative instruments (including forward mandatory mortgage security sale(TBA-MBS) and options on TBA-MBS sales) are utilized to hedge or mitigatemarket price fluctuations. These instruments are classified as derivativefinancial instruments on our financial statements. Our hedge positions arecontinually adjusted based on routine and ongoing quantification of our risk,but hedges may or may not be fully successful in complete risk mitigation. Inparticular, our capital markets personnel must make estimates of the percentageof rate lock commitments expected to close under different interest ratechanges. Losses on the sale of mortgage loans not offset by corresponding gainson hedge positions, or hedging activity not offset by corresponding gains onthe sale of mortgages, could adversely impact results of operations and ourfinancial position.

 

**Mortgage AssetPortfolio Business**

 

*Interest Rate Risk*

 

Our operating results for thisbusiness segment will depend in large part on differences between the incomefrom our assets (net of credit losses) and our borrowing costs. All of thisbusiness segment’s mortgage assets are pledged as collateral for long term debt(securitizations). In most cases, the income from assets will respond moreslowly to interest rate fluctuations than the cost of borrowings, which createsa mismatch between asset yields and borrowing rates.  Consequently, changes in interest rates, particularly short-terminterest rates, may influence the Mortgage Asset Portfolio Business net income.Long-term debt interest rates are tied to LIBOR.  Increases in these rates will tend to decrease net income. Asignificant increase in short term interest rates, where the one month LIBORexceeded 12%, could result in interest expense exceeding interest income andwould result in operating losses. In the past, we have attempted to mitigateinterest rate gap risk through hedging instruments called Interest Rate Caps.The majority of mortgages held in the portfolio are adjustable rate mortgages(ARM’s) which adjust every six months. Consequently our gap risk is limited andat the present time we do not believe that the cost of hedging our gap risk isjustified.  Currently we do not have anyInterest Rate Caps in place.

 

*Other Risks*

 

The value of Mortgage Portfolioassets may be affected by prepayment rates on bond collateral mortgageloans.  Prepayment rates are influencedby changes in current interest rates and a variety of economic, geographic andother factors beyond our control. Partial protection comes in the form of prepaymentpenalties, but since our portfolio is becoming more mature, most of theprepayment penalty clauses have expired.

 

Increases in delinquency ratesand defaults by borrower on their mortgages can also negatively  impact the financial results of the MortgageAsset Portfolio Business. We monitor delinquencies and defaults and adjust theloan loss provision and interest reserves accordingly.

 

**Sensitivity Analyses**

 

We have performed varioussensitivity analyses that quantify the net financial impact of changes ininterest rates on our interest rate-sensitive assets, liabilities andcommitments. These analyses presume an instantaneous parallel shift of theyield curve. Various techniques are employed to value the underlying financialinstruments, and these techniques rely upon a number of critical assumptions.The scenarios presented are illustrative. Actual experience may differmaterially from the estimated amounts presented for each scenario. To theextent that yield curve shifts are non-parallel, and to the extent that actualvariations in significant assumptions differ from those applied for purposes ofthe valuations, the resultant valuations can also be expected to vary. Suchvariances may prove material.

 

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|                                                                   |   |                 | **If  Interest Rates Were To** |                      |
|------------------------------------------------------------------------|--------|----------------------|--------------------------------|---------------------------|
|                                                                   |   | **March 31,  2003**  |                           | **Increase**              |   | **Decrease** |   | **Increase** |   | **Decrease** |   |
|                                                                   |   | **Carrying  Amount** |                           | **Estimated  Fair Value** |   | **50 Basis  Points  Estimated Fair Value** |   | **100 Basis  Points  Estimated Fair Value** |   |
| Interest-earning assets:                                               |   |                 |                           |                      |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                              |   | $                    | 22,786                         |                      | $ | 22,786 |   | $ | 22,786 |   | $ | 22,786 |   | $ | 22,786 |   | $ | 22,786 |   |
| Mortgage loans held for sale, net, pledged, (lower of cost or market)) |   | 488,007              |                           | 492,278                   |   | 487,166 |   | 495,599 |   | 481,914 |   | 498,866 |   |
| Bond collateral and real estate owned (net)                            |   | 238,777              |                           | 249,574                   |   | 249,028 |   | 250,113 |   | 248,568 |   | 250,711 |   |
| Derivatives                                                            |   | (1,126               | )                              | (2,746                    | ) | 3,635 |   | (4,245 | ) | 8,760 |   | (7,942 | ) |
| Total interest-earning assets                                          |   | $                    | 748,444                        |                      | $ | 761,892 |   | $ | 762,615 |   | $ | 764,253 |   | $ | 762,028 |   | $ | 764,421 |   |
|                                                                   |   |                 |                           |                      |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                          |   |                 |                           |                      |   |   |   |   |   |   |   |   |   |
| Short-term debt                                                        |   | $                    | 477,445                        |                      | $ | 477,445 |   | $ | 477,445 |   | $ | 477,445 |   | $ | 477,445 |   | $ | 477,445 |   |
| Long-term debt, net                                                    |   | 206,098              |                           | 206,098                   |   | 206,098 |   | 206,098 |   | 206,098 |   | 206,098 |   |
| Total interest-bearing liabilities                                     |   | $                    | 683,543                        |                      | $ | 683,543 |   | $ | 683,543 |   | $ | 683,543 |   | $ | 683,543 |   | $ | 683,543 |   |
|                                                                   |   |                 |                           |                      |   |   |   |   |   |   |   |   |   |
| Effect on equity                                                       |   | $                    | 64,901                         |                      | $ | 78,349 |   | $ | 79,072 |   | $ | 80,710 |   | $ | 78,485 |   | $ | 80,878 |   |

 

|                                                                  |   |                 | **If  Interest Rates Were To** |                      |
|-----------------------------------------------------------------------|--------|----------------------|--------------------------------|---------------------------|
|                                                                  |   | **March 31,  2002**  |                           | **Increase**              |   | **Decrease** |   | **Increase** |   | **Decrease** |   |
|                                                                  |   | **Carrying  Amount** |                           | **Estimated  Fair Value** |   | **50 Basis  Points  Estimated Fair Value** |   | **100 Basis  Points  Estimated Fair Value** |   |
| Interest-earning assets:                                              |   |                 |                           |                      |   |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                             |   | $                    | 8,647                          |                      | $ | 8,647 |   | $ | 8,647 |   | $ | 8,647 |   | $ | 8,647 |   | $ | 8,647 |   |
| Mortgage loans held for sale, net, pledged, (lower of cost or market) |   | 120,991              |                           | 120,991                   |   | 120,728 |   | 121,254 |   | 120,344 |   | 121,644 |   |
| Bond collateral and real estate owned (net)                           |   | 406,856              |                           | 420,538                   |   | 419,350 |   | 422,118 |   | 418,489 |   | 423,808 |   |
| Derivatives                                                           |   | 5,459                |                           | 5,459                     |   | 5,979 |   | 6,607 |   | 5,650 |   | 5,024 |   |
| Total interest-earning assets                                         |   | $                    | 541,953                        |                      | $ | 555,635 |   | $ | 554,704 |   | $ | 558,626 |   | $ | 553,130 |   | $ | 559,123 |   |
|                                                                  |   |                 |                           |                      |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                         |   |                 |                           |                      |   |   |   |   |   |   |   |   |   |
| Short-term debt                                                       |   | $                    | 120,544                        |                      | $ | 120,544 |   | $ | 120,544 |   | $ | 120,544 |   | $ | 120,544 |   | $ | 120,544 |   |
| Long-term debt, net                                                   |   | 369,101              |                           | 369,101                   |   | 369,101 |   | 369,101 |   | 369,101 |   | 369,101 |   |
| Due to affiliate                                                      |   | 1,871                |                           | 1,871                     |   | 1,871 |   | 1,871 |   | 1,871 |   | 1,871 |   |
| Total interest-bearing liabilities                                    |   | $                    | 491,516                        |                      | $ | 491,516 |   | $ | 491,516 |   | $ | 491,516 |   | $ | 491,516 |   | $ | 491,516 |   |
|                                                                  |   |                 |                           |                      |   |   |   |   |   |   |   |   |   |
| Effect on equity                                                      |   | $                    | 50,437                         |                      | $ | 64,119 |   | $ | 63,188 |   | $ | 67,110 |   | $ | 61,614 |   | $ | 67,607 |   |

 

Thefollowing describes the methods and assumptions used by the Company inestimating fair values.

 

*Cash and Cash Equivalents*

 

Thecarrying amount for cash and cash equivalents approximates fair value becausethese instruments are demand deposits and money market mutual funds and do notpresent unanticipated interest rate or credit concerns.

 

*Mortgage Loans Held For Sale, net,pledged, (lower of cost or market)*

 

Thefair value is estimated based on quoted market prices from institutionalinvestors for similar types of mortgage loans. A portion of mortgage loans heldfor sale are committed for sale under mandatory sale arrangements and as suchare not re-valued due to subsequent changes in interest rates.

 

*Bond Collateral and Real EstateOwned*

 

Thefair value of Bond Collateral is estimated based on quoted market prices from dealersand brokers for similar types of mortgage loans in the bulk mortgage market.Market prices reflect various assumptions as to prepayment rates, loan lossesand 

 

29

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financingcosts. However, due to the fact that our Bond Collateral are pledged to securelong term debt, there is not a liquid market for such encumbered interests. Assuch, a significant liquidity discount would be applied.  Since we intend to hold the bond collateralmortgage loans to maturity, such a liquidity discount has not been reflected infair value.

 

*Retained Interest in Securitization*

 

Thissecurity is classified as available-for-sale and as such is carried at fairvalue.

 

*Derivatives*

 

Fairvalues of forward sales of mortgage backed securities and options on treasuryfutures are based on quoted market prices for these instruments. Fair values ofour commitments to originate loans in the quoted market prices for the loansexpected to close vary due to differences between current levels of interestrates and committed rates.

 

*Short-Term Debt*

 

Thefair value of the warehouse line debt approximates the carrying amounts becauseof the short-term nature of the debt and interest on the debt fluctuates withmarket interest rates.

 

*Long-Term Debt*

 

Thefair value of long-term debt is estimated based upon all long-term debt beingat variable rates and therefore cost approximates fair market value.

 

*Due to Affiliate*

 

Thefair value of due to affiliate approximates the carrying amount because of theshort-term nature of the liability.

 

These analyses are limited by the fact thatthey are performed at a particular point in time and do not incorporate otherfactors that would impact our financial performance in each such scenario.Consequently, the preceding estimates should not be viewed as a forecast.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

(a) Under the supervision and with theparticipation of our management, including our principal executive officer andprincipal financial officer, we conducted an evaluation of our disclosurecontrols and procedures, as such term is defined under Rule 13a-14(c)promulgated under the Securities Exchange Act of 1934, as amended, within the90 day period preceding the filing date of this report. Based on this evaluation,our principal executive officer and principal financial officer concluded thatour disclosure controls and procedures were effective as of that date.

 

(b) There have been no significant changes(including corrective actions with regard to significant deficiencies ormaterial weaknesses) in our internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of the evaluationreferenced in paragraph (a) above.

 

PARTII.  OTHER INFORMATION

 
| ITEM 1. | LEGAL PROCEEDINGS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|---------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ITEM 2. | CHANGES IN  SECURITIES AND USE OF PROCEEDS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|    | On January  23, 2003, we filed our Second Articles of Amendment and Restatement.  This filing implemented the changes to our  Articles of Amendment and Restatement approved by our stockholders at our  annual stockholders meeting in 2002. The rights of holders of our common  stock ($0.01) were changed by removing certain prohibitions from our Articles  of Amendment and Restatement intended to preserve our status as a REIT.  As a result of this filing on February 7,  2003, we were able to inform the Internal Revenue Service of our election to  de-REIT, effective beginning January 1, 2003. |
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|    | Not applicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| ITEM 4. | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    | None                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

30

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| ITEM 5. | OTHER INFORMATION             |
|---------|-------------------------------|
|    |      None |
|    |                          |
| ITEM 6. | EXHIBITS AND REPORTS ON 8-K   |

 
| (a)    |   | Exhibits |   |                                                                                                                             |
|--------|--------|----------|--------|----------------------------------------------------------------------------------------------------------------------------------|
|   |   |     |   |                                                                                                                             |
|   | *      | 3.1      |   | Second Articles of  Amendment and Restatement of the Registrant                                                                  |
|   | **     | 3.2      |   | Second Amended and Restated  Bylaws of the Registrant                                                                            |
|   | ***    | 4.1      |   | Rights Plan dated February  2, 1999 by and between the Company and American Stock Transfer Company as  Rights Agent              |
|   |   | 10.20    |   | Lease between American  Residential Investment Trust, Inc. and 

Sorrento Wateridge  Partners, L.P. dated November 30, 2001 |
|   |   | 10.21    |   | Executive Employment  Agreement between American Mortgage Network, Inc. and Lisa Faulk dated March  31, 2003                     |
|   |   | 10.22    |   | Amended and Restated  Employment Agreement between American Mortgage Network, Inc. and John Robbins  dated April 7, 2003         |
|   |   | 10.23    |   | Amended and Restated  Employment Agreement between American Mortgage Network, Inc. and Judith Berry  dated March 31, 2003        |
|   |   | 10.24    |   | Amended and Restated  Employment Agreement between American Mortgage Network, Inc. and Jay Fuller  dated March 31, 2003          |
|   |   | 99.1     |   | Certification of Chief  Executive Officer                                                                                        |
|   |   | 99.2     |   | Certification of Chief  Financial Officer                                                                                        |

 

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|                 | *      |                       |   | Incorporated  by reference to our annual report on Form 10-K for the fiscal year ended  December 31, 2002 filed March 31, 2003.      |
|----------------------|--------|----------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------|
|                 | **     |                       |   | Incorporated by reference  to our quarterly report on Form 10-Q for the fiscal quarter ended June 30,  2002 filed on August 14, 2002 |
|                 | ***    |                       |   | Incorporated by reference  to Form 8-K filed on February 17, 1999.                                                                   |
| (File No. 001-13485) |
|                 |
| (b)                  |   | Reports on Form 8-K - None |

 

SIGNATURES

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
| AMERICAN  RESIDENTIAL INVESTMENT TRUST, INC. |
|----------------------------------------------|
|                                         |   |   |   |
| Dated:  May 14, 2003                    | By: | /s/ Judith A. Berry |   |
|                                         |   | Judith A. Berry, |   |
|                                         |   | Executive Vice President |   |
|                                         |   | Chief Financial Officer |   |

 

31

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**CERTIFICATIONS**

 

I, John M. Robbins, certify that:

 

1. I have reviewed this quarterly report onForm 10-Q of American Residential Investment Trust, Inc.;

 

2. Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4. The registrant’s other certifying officerand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a) designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b) evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officerand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) all significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b) any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6. The registrant’s other certifying officerand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date: May 14, 2003      |
|-------------------------|
|                    |
|                    |
| /s/ John M. Robbins     |   |
| John M. Robbins         |
| Chief Executive Officer |

 

32

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**CERTIFICATIONS**

 

I, Judith A. Berry, certify that:

 

1. I have reviewed this quarterly report onForm 10-Q of American Residential Investment Trust, Inc.;

 

2. Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4. The registrant’s other certifying officerand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

a) designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b) evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officerand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) all significant deficiencies in the designor operation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b) any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6. The registrant’s other certifying officerand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date: May 14, 2003      |
|-------------------------|
|                    |
| /s/ Judith A. Berry     |   |
| Judith A. Berry         |
| Chief Financial Officer |

 

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