**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: September 30, 2002** |
|--------|--------------------------------------------------------|

 

**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 INVESTMENTTRUST, INC.**

(Exactname 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) |

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 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 the number of sharesoutstanding of each of the issuer’s classes of common stock, as of the latestpracticable date.

 

| Common  Stock ($0.01) |   | 7,862,490  as of October 16, 2002 |
|-----------------------|--------|-----------------------------------|

 

 

----

 
| INDEX                                                                                                                                                                                                                               |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                |
| PART I.  FINANCIAL INFORMATION                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                |
| Item 1.  Consolidated Financial Statements                                                                                                                                                                                          |
|                                                                                                                                                                                                                                |
| Consolidated  Balance Sheets at September 30, 2002 and December 31, 2001                                                                                                                                                            |
|                                                                                                                                                                                                                                |
| Consolidated  Statements of Operations and Comprehensive Income (Loss) for the three months  ended September 30, 2002 and September 30, 2001 and for the nine months ended  September 30, 2002 and September 30, 2001 respectively. |
|                                                                                                                                                                                                                                |
| Consolidated  Statements of Cash Flows for the nine months ended September 30, 2002 and  September 30, 2001.                                                                                                                        |
|                                                                                                                                                                                                                                |
| 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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PART I.  FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

 

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

ConsolidatedBalance Sheets, Unaudited

(inthousands, except share and per share data)

 
|                                                                                                                                                                                                    |   | **September  30, 2002** |       | **December  31, 2001** |       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|------------------------|------------|
| ASSETS                                                                                                                                                                                                  |   |                    | ** ** |                   | ** ** |
| Cash and cash equivalents                                                                                                                                                                               |   | $                       | 11,650     |                   | $          | 10,945 |   |
| Cash and cash equivalents –  restricted                                                                                                                                                            |   | 2,856                   |       | —                 |       |
| Mortgage loans held for  sale, net, pledged, (lower of cost or market)                                                                                                                                  |   | 243,929                 |       | 38,095                 |       |
| Bond collateral, mortgage  loans, net                                                                                                                                                                   |   | 294,413                 |       | 452,152                |       |
| Bond collateral, real  estate owned                                                                                                                                                                     |   | 11,269                  |       | 9,226                  |       |
| Accounts Receivable –  mortgage loans sold/funded                                                                                                                                                  |   | 22,422                  |       | —                 |       |
| Retained interests in  securitization                                                                                                                                                                   |   | 458                     |       | 1,582                  |       |
| Derivative financial  instruments                                                                                                                                                                       |   | 2,097                   |       | 926                    |       |
| Accrued interest receivable                                                                                                                                                                             |   | 2,024                   |       | 3,048                  |       |
| Due from affiliate                                                                                                                                                                                      |   | —                  |       | 159                    |       |
| Investment in American  Residential Holdings, Inc.                                                                                                                                                      |   | 2,056                   |       | 1,789                  |       |
| Other assets                                                                                                                                                                                            |   | 2,215                   |       | 1,802                  |       |
|                                                                                                                                                                                                    |   | $                       | 595,389    |                   | $          | 519,724 |   |
|                                                                                                                                                                                                    |   |                    |       |                   |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                               |   |                    |       |                   |       |
| Liabilities:                                                                                                                                                                                            |   |                    |       |                   |       |
| Short-term debt                                                                                                                                                                                         |   | $                       | 255,890    |                   | $          | 35,265 |   |
| Long-term debt, net                                                                                                                                                                                     |   | 273,016                 |       | 422,349                |       |
| Accrued interest payable                                                                                                                                                                                |   | 458                     |       | 85                     |       |
| Due to affiliate                                                                                                                                                                                        |   | 2,049                   |       | 1,786                  |       |
| Accrued expenses and other  liabilities                                                                                                                                                                 |   | 9,150                   |       | 1,612                  |       |
| Total liabilities                                                                                                                                                                                       |   | 540,563                 |       | 461,097                |       |
|                                                                                                                                                                                                    |   |                    |       |                   |       |
| 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; 7,862,490 shares issued and  outstanding at September 30, 2002 and 7,959,900 shares issued and outstanding  at December 31, 2001 |   | 79                      |       | 80                     |       |
| Additional paid-in-capital                                                                                                                                                                              |   | 108,760                 |       | 108,995                |       |
| Accumulated other  comprehensive income                                                                                                                                                                 |   | —                  |       | 448                    |       |
| Accumulated deficit                                                                                                                                                                                     |   | (54,013                 | )          | (50,896                | )          |
| Total stockholders’ equity                                                                                                                                                                         |   | 54,826                  |       | 58,627                 |       |
|                                                                                                                                                                                                    |   | $                       | 595,389    |                   | $          | 519,724 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

3

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American Residential Investment Trust, Inc. and Subsidiaries

Consolidated Statements of Operations, unaudited

(inthousands, except per share data)

 
|                                                                                      |   | **For the  Three Months Ended  September 30, 2002** | ** ** | **For the  Three Months Ended  September 30, 2001** | ** ** | **For the  Nine Months Ended  September 30, 2002** | ** ** | **For the  Nine Months Ended  September 30, 2001** | ** ** |
|-------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|----------------------------------------------------|------------|
| **Revenues**                                                                              |   |                                                |       |                                                |       |                                               |       |                                               |       |
| Gain on sales  of loans                                                                   |   | $                                                   | 18,808     |                                                | $          | —                                             |       | $                                                  | 25,254     |   | $ | — |   |
| Derivative  financial instruments and market adjustments                                  |   |                                                |       |                                                |       |                                               |       |                                               |       |
| Derivative  financial instruments - Treasury futures                                      |   | (8,000                                              | )          | —                                              |       | (18,123                                            | )          | (9                                                 | )          |
| Derivative  financial instruments - forward commitments and options                       |   | (9,668                                              | )          | —                                              |       | (9,791                                             | )          | —                                             |       |
| Market  adjustment on interest rate lock commitments                                      |   | 2,466                                               |       | —                                              |       | 4,311                                              |       | —                                             |       |
| Total  derivative financial instruments and market adjustments                            |   | (15,202                                             | )          | —                                              |       | (23,603                                            | )          | (9                                                 | )          |
| Interest on  mortgage assets                                                              |   | 9,359                                               |       | 12,590                                              |       | 29,401                                             |       | 44,648                                             |       |
| Litigation  settlements                                                                   |   | —                                              |       | —                                              |       | 10,281                                             |       | —                                             |       |
| Other income                                                                              |   | 245                                                 |       | 941                                                 |       | 1,081                                              |       | 3,224                                              |       |
| Total revenue,  net of derivative financial instruments and adjustments                   |   | 13,210                                              |       | 13,531                                              |       | 42,414                                             |       | 47,863                                             |       |
|                                                                                      |   |                                                |       |                                                |       |                                               |       |                                               |       |
| **Expenses**                                                                              |   |                                                |       |                                                |       |                                               |       |                                               |       |
| Employee  compensation and benefits                                                       |   | 5,170                                               |       | 41                                                  |       | 11,868                                             |       | 110                                                |       |
| Interest expense                                                                          |   | 4,792                                               |       | 7,079                                               |       | 12,691                                             |       | 30,318                                             |       |
| Office and  occupancy expense                                                             |   | 383                                                 |       | 3                                                   |       | 1,073                                              |       | 8                                                  |       |
| Premium  amortization                                                                     |   | 2,203                                               |       | 6,935                                               |       | 7,830                                              |       | 12,371                                             |       |
| Provision for  loan losses                                                                |   | 1,492                                               |       | 2,176                                               |       | 4,619                                              |       | 4,596                                              |       |
| Loss on sale  of real estate owned, net                                                   |   | (281                                                | )          | 111                                                 |       | 152                                                |       | 264                                                |       |
| Other  operating expenses                                                                 |   | 2,997                                               |       | 755                                                 |       | 7,291                                              |       | 2,109                                              |       |
| Management  fees                                                                          |   | —                                              |       | 552                                                 |       | —                                             |       | 1,992                                              |       |
| Total expenses                                                                            |   | 16,756                                              |       | 17,652                                              |       | 45,524                                             |       | 51,768                                             |       |
|                                                                                      |   |                                                |       |                                                |       |                                               |       |                                               |       |
| Income before  income taxes and the cumulative effect of a change in accounting principle |   | (3,546                                              | )          | (4,121                                              | )          | (3,110                                             | )          | (3,905                                             | )          |
| Adoption of  SFAS 133 accounting change:                                                  |   |                                                |       |                                                |       |                                               |       |                                               |       |
| Reduce cap  agreement cost to market                                                      |   | —                                              |       | —                                              |       | —                                             |       | (1,106                                             | )          |
| Net loss  before income taxes                                                             |   | (3,546                                              | )          | (4,121                                              | )          | (3,110                                             | )          | (5,011                                             | )          |
| Income taxes                                                                              |   | —                                              |       | —                                              |       | 7                                                  |       | —                                             |       |
| Net income                                                                                |   | (3,546                                              | )          | (4,121                                              | )          | (3,117                                             | )          | (5,011                                             | )          |
|                                                                                      |   |                                                |       |                                                |       |                                               |       |                                               |       |
| Other  comprehensive income (loss)                                                        |   |                                                |       |                                                |       |                                               |       |                                               |       |
| Unrealized  gains (losses) on retained interest in securitization                         |   | (32                                                 | )          | 3                                                   |       | (449                                               | )          | 217                                                |       |
| Unrealized  holding gains (losses) arising during the period                              |   | (32                                                 | )          | 3                                                   |       | (449                                               | )          | 217                                                |       |
| Comprehensive  income (loss)                                                              |   | $                                                   | (3,578     | )                                                   | $          | (4,118                                             | )          | $                                                  | (3,566     | ) | $ | (4,794 | ) |
|                                                                                      |   |                                                |       |                                                |       |                                               |       |                                               |       |
| Net loss per  share before cumulative effect of accounting change                         |   | $                                                   | (0.45      | )                                                   | $          | (0.52                                              | )          | $                                                  | (0.39      | ) | $ | (0.49 | ) |
| Net loss per  share of common stock basic and diluted                                     |   | $                                                   | (0.45      | )                                                   | $          | (0.52                                              | )          | $                                                  | (0.39      | ) | $ | (0.63 | ) |

 

See accompanying notes to consolidated financial statements

 

4

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AmericanResidential Investment Trust, Inc. and Subsidiaries

Consolidated Statements ofCash Flows, unaudited

(inthousands)

 
|                                                                                                     |   | **For the  Nine Months Ended  September 30, 2002** |   | **For the  Nine Months Ended  September 30, 2001** |   |
|----------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|----------------------------------------------------|--------|
| CASH FLOWS FROM OPERATING ACTIVITIES                                                                     |   |                                               |   |                                               |   |
| Net loss                                                                                                 |   | $                                                  | (3,117 | )                                                  | $      | (5,011 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |   |                                               |   |                                               |   |
| Amortization of mortgage assets premiums                                                                 |   | 7,830                                              |   | 12,371                                             |   |
| Cumulative effect of change in accounting principle                                                      |   | —                                             |   | 1,106                                              |   |
| Amortization of interest rate cap agreements                                                             |   | —                                             |   | 9                                                  |   |
| Amortization of CMO capitalized costs                                                                    |   | 455                                                |   | 894                                                |   |
| Amortization of CMO premium                                                                              |   | —                                             |   | (78                                                | )      |
| Provision for loan losses                                                                                |   | 4,619                                              |   | 4,596                                              |   |
| Equity in undistributed income of American Residential Holdings, Inc.                                    |   | (267                                               | )      | (233                                               | )      |
| Decrease in deposits to retained interest in securitization                                              |   | 467                                                |   | 1,877                                              |   |
| Decrease in retained interest in securitization                                                          |   | 209                                                |   | 4                                                  |   |
| Loss on sale of real estate owned                                                                        |   | 2,513                                              |   | 132                                                |   |
| Proceeds from sale of mortgage loans held for sale                                                       |   | 2,014,622                                          |   | —                                             |   |
| Mortgage loan originations                                                                               |   | (2,220,456                                         | )      | —                                             |   |
| Increase in receivable – funded loans                                                               |   | (16,466                                            | )      | —                                             |   |
| Increase in receivable – sold loans                                                                 |   | (5,947                                             | )      | —                                             |   |
| Increase in restricted cash                                                                              |   | (2,856                                             | )      | —                                             |   |
| Increase in derivative financial instruments                                                             |   | (1,171                                             | )      | —                                             |   |
| Decrease in accrued interest receivable                                                                  |   | 1,024                                              |   | 5,437                                              |   |
| Increase (decrease) in due from affiliate                                                                |   | 159                                                |   | (93                                                | )      |
| Increase in other assets                                                                                 |   | (422                                               | )      | 271                                                |   |
| Increase (decrease) in accrued interest payable                                                          |   | 373                                                |   | (184                                               | )      |
| Increase in due to affiliate                                                                             |   | 263                                                |   | 339                                                |   |
| Increase in accrued expenses and other liabilities                                                       |   | 7,538                                              |   | 386                                                |   |
| Net cash (used in) provided by operating activities                                                      |   | (210,630                                           | )      | 21,281                                             |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                                    |   |                                               |   |                                               |   |
| Principal payments on bond collateral, mortgage loans, net                                               |   | 131,987                                            |   | 292,863                                            |   |
| Proceeds from sale of real estate owned                                                                  |   | 8,958                                              |   | 9,572                                              |   |
| Net cash provided by investing activities                                                                |   | 140,945                                            |   | 302,435                                            |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                    |   |                                               |   |                                               |   |
| Increase (decrease) in net borrowings from short-term debt                                               |   | 220,625                                            |   | (4,145                                             | )      |
| Dividends paid                                                                                           |   | —                                             |   | (1,606                                             | )      |
| Payments on long-term debt                                                                               |   | (149,788                                           | )      | (307,969                                           | )      |
| Payment of additional premium                                                                            |   | (211                                               | )      | —                                             |   |
| Purchase of Treasury Stock                                                                               |   | (236                                               | )      | (196                                               | )      |
| Net cash provided by (used in) financing activities                                                      |   | 70,390                                             |   | (313,916                                           | )      |
| Net increase in cash and cash equivalents                                                                |   | 705                                                |   | 9,800                                              |   |
| Cash and cash equivalents at beginning of period                                                         |   | 10,945                                             |   | 14,688                                             |   |
| Cash and cash equivalents at end of period                                                               |   | $                                                  | 11,650 |                                               | $      | 24,488 |   |
| Supplemental information – interest paid                                                            |   | $                                                  | 12,318 |                                               | $      | 29,319 |   |
| Non-cash transactions:                                                                                   |   |                                               |   |                                               |   |
| Transfers from bond collateral mortgage loans to bond collateral real  estate owned                      |   | $                                                  | 13,514 |                                               | $      | — |   |

 

Seeaccompanying notes to consolidated financial statements.

 

5

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AMERICAN RESIDENTIAL INVESTMENT TRUST, INC.

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

 

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

 

*Basis of Financial Statement Presentation*

 

The interim financial statements includedherein have been prepared by American Residential Investment Trust, Inc.,(“AmRIT” or the “Company”) without audit, pursuant to the rules and regulationsof the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) have been condensedor omitted pursuant to such SEC rules and regulations.  These financial statements should be read inconjunction with the audited financial statements and notes thereto included inthe Company’s latest Annual Report.  Inthe opinion of management, all adjustments, including normal recurringadjustments necessary to present fairly the consolidated financial position ofthe Company with respect to the interim financial statements and the results ofthe operations for the interim period ended September 30, 2002, have beenincluded.  Certain reclassifications mayhave been made to prior interim period amounts to conform to the currentpresentation.  The results of operationsfor interim periods are not necessarily indicative of results for the fullyear.

 

The Company reports segments in accordancewith SFAS No. 131, “Disclosures about Segments of an Enterprise and RelatedInformation” (SFAS 131).  SFAS 131establishes standards for the way companies report information about operatingsegments in annual financial statements. Effective January 1, 2002, the Companybegan reporting in two segments: the Mortgage Banking Business and the MortgageAsset Portfolio Business. The Mortgage Banking financial results for the threemonth period ending September 30, 2002 have, for the first time, become moresignificant to the Company’s financial over all results. Therefore, the formatof the income statement has been changed to be comparable with similarcompanies within the Mortgage Banking business.  The prior period income statement has been revised to conform tothe new format.

 

*New Accounting Standards*

 

In June 2002, the FASB issued SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146),which addresses financial accounting and reporting for costs associated withexit or disposal activities and nullifies Emerging Issues Task Force (EITF)Issue No. 94-3 “Liability Recognition for Certain Employee TerminationsBenefits and Other Costs to Exit an Activity (including Certain Costs Incurredin a Restructuring).”  SFAS 146 requiresthat a liability for a cost associated with an exit or disposal activity berecognized when the liability is incurred as opposed to the date of an entity’scommitment to an exit plan as required under EITF Issue No. 94-3.  SFAS 146 also requires that measurement ofthe liability associated with exit or disposal activities be at fairvalue.  SFAS 146 is effective for theCompany for exit or disposal activities that are initiated after December 31,2002.  The implementation of SFAS 146 isnot expected to have a material impact on the Company’s financial statements.

 

SFAS 144, “Accounting for the Impairment orDisposal of Long-Lived Assets” (SFAS 144), provides guidance on how along-lived asset that is used as a part of a group should be evaluated forimpairment, establishes criteria for when a long-lived asset is held for sale,and prescribes the accounting for a long-lived asset that will be disposed ofother than by sale. The Company adopted SFAS 144 beginning January 1,2002.  The Company does not expect theadoption of SFAS 144 for long-lived assets held for use to have a materialimpact on the Company’s consolidated financial statements.

 

SFAS 147, “Acquisitions ofCertain Financial Institutions”, (SFAS 147), addresses accounting foracquisitions of certain financial institutions and removes acquisitions offinancial institutions from the scope of both Statement 72 Accounting forCertain Acquisitions of Banking or Thrift Institutions, and FASB InterpretationNo. 9, Applying APB Opinions No. 16 and 17. When a Savings and Loan Associationor a Similar Institution Is Acquired in a Business Combination Accounted for bythe Purchase Method, and requires that those transactions be accounted for inaccordance with FASB Statements No. 141, Business Combinations, and No. 142,Goodwill and Other Intangible Assets. In addition, this Statement amends FASB Statement No. 144, Accountingfor the Impairment or Disposal of Long-Lived Assets, to include in its scopelong-term customer-relationship intangible assets of financial institutionssuch as depositor- and borrower-relationship intangible assets and creditcardholder intangible assets.  SFAS 147is effective for acquisitions for which the date of acquisition is on or afterOctober 1, 2002.  The Company has notyet determined the impact that SFAS 147 will have on the Company’s financialresults.

 

**Note 2.  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  September 30, 2002** |   | **For the  Three months ended  September 30, 2001** |   | **For the  Nine Months Ended  September 30, 2002** |   | **For the  Nine Months Ended  September 30, 2001** |   |
|-------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------|--------|-----------------------------------------------------|--------|----------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                                                                              |   | **(in  thousands, except share data)**              |   |
|                                                                                                              |   | **(unaudited)**                                     |   |
| Numerator:                                                                                                        |   |                                                |   |                                                |   |                                               |   |                                               |   |
| Numerator for  basic loss per share before cumulative effect of accounting change                                 |   | $                                                   | (3,546 | )                                                   | $      | (4,121                                             | )      | $                                                  | (3,117 | ) | $ | (3,905 | ) |
| Numerator for  basic income (loss) per share net earnings                                                         |   | (3,546                                              | )      | (4,121                                              | )      | (3,117                                             | )      | (5,011                                             | )      |
| Denominator:                                                                                                      |   |                                                |   |                                                |   |                                               |   |                                               |   |
| Denominator  for basic income per share - weighted average number of common shares  outstanding during the period |   | 7,879,229                                           |   | 7,959,900                                           |   | 7,892,563                                          |   | 7,963,274                                          |   |
| Denominator  for diluted income per share                                                                         |   | 7,879,229                                           |   | 7,959,900                                           |   | 7,892,563                                          |   | 7,963,274                                          |   |
|                                                                                                              |   |                                                |   |                                                |   |                                               |   |                                               |   |
| Loss per share  before cumulative effect of accounting change                                                     |   | $                                                   | (0.45  | )                                                   | $      | (0.52                                              | )      | $                                                  | (0.39  | ) | $ | (0.49 | ) |
| Basic and  diluted loss per share                                                                                 |   | (0.45                                               | )      | $                                                   | (0.52  | )                                                  | (0.39  | )                                                  | (0.63  | ) |

 

For the nine months ended September 30, 2002and 2001 there were 1,342,100 and 1,202,100 options, respectively, that wereantidilutive and, therefore, not included in the calculations above. 

6

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**Note 3.  Mortgageloans held for sale, net pledged**

 

The AmRIT subsidiary, American MortgageNetwork, Inc. (“AmNet”) has pledged loans held for sale totaling approximately$244.0 million to secure credit lines (warehouse facilities) from threefinancial institutions. See Note 7, “Short-Term Debt.” Mortgage loans held forsale at September 30, 2002, consist of loans which have been committed for saleof approximately $142.6 million and loans available for sale at approximately$101.4 million, all of which are carried at the lower of cost or market.

 

**Note 4.  BondCollateral, Mortgage Loans, net**

 

AmRIT has pledged mortgage loans as collateralin order to secure long-term-debt. Mortgage loan bond collateral consists primarily of adjustable-rate,conventional, 30-year mortgage loans secured by first liens on one tofour-family residential properties.  Allsuch mortgage loan bond collateral is pledged to secure repayment of therelated long-term-debt obligation.  Allprincipal 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 bondcollateral and are otherwise non-recourse to AmRIT. The components of this bondcollateral at September 30, 2002 and December 31, 2001 are summarized asfollows (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  Bond Collateral** |       |
|-----------------------------------------------------|--------|---------------------------------------|------------|---------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|----------------------------------------|------------|----------------------------|------------|
| **At  September 30, 2002**                          |   |                                  | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                   | ** ** |                       | ** ** |
| Mortgage loans                                      |   | $                                     | 19,094     |                                  | $          | 72,246                          |       | $                               | 110,702    |                                   | $          | 50,916                     |       | $ | 36,458 |   | $ | 289,416 |   |
| Unamoritized premium                                |   | 620                                   |       | 1,802                                 |       | 4,239                           |       | 1,587                           |       | 464                                    |       | 8,712                      |       |
| Allowance for loan losses                           |   | (205                                  | )          | (1,117                                | )          | (1,091                          | )          | (882                            | )          | (420                                   | )          | (3,715                     | )          |
|                                                |   | $                                     | 19,509     |                                  | $          | 72,931                          |       | $                               | 113,850    |                                   | $          | 51,621                     |       | $ | 36,502 | ** ** | $ | 294,413 | ** ** |
|                                                |   |                                  | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                   | ** ** |                       | ** ** |
| Weighted average net coupon                         |   | 9.18                                  | %          | 9.55                                  | %          | 9.00                            | %          | 8.95                            | %          | 9.96                                   | %          | 9.27                       | %          |
| Unamortized premiums as a percent of Mortgage loans |   | 3.25                                  | %          | 2.49                                  | %          | 3.83                            | %          | 3.12                            | %          | 1.27                                   | %          | 3.01                       | %          |
|                                                |   |                                  | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                   | ** ** |                       | ** ** |
| **At  December 31, 2001**                           |   |                                  | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                   | ** ** |                       | ** ** |
| Mortgage loans                                      |   | $                                     | 32,340     |                                  | $          | 112,770                         |       | $                               | 173,118    |                                   | $          | 71,732                     |       | $ | 50,719 |   | $ | 440,679 |   |
| Unamoritized premium                                |   | 1,127                                 |       | 3,978                                 |       | 7,233                           |       | 2,623                           |       | 1,369                                  |       | 16,330                     |       |
| Allowance for loan losses                           |   | (246                                  | )          | (1,582                                | )          | (1,137                          | )          | (761                            | )          | (1,131                                 | )          | (4,857                     | )          |
|                                                |   | $                                     | 33,221     |                                  | $          | 115,166                         |       | $                               | 179,214    |                                   | $          | 73,594                     |       | $ | 50,957 | ** ** | $ | 452,152 | ** ** |
|                                                |   |                                  | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                   | ** ** |                       | ** ** |
| Weighted average net coupon                         |   | 9.23                                  | %          | 9.99                                  | %          | 9.31                            | %          | 9.29                            | %          | 10.84                                  | %          | 9.65                       | %          |
| Unamortized premiums as a percent of Mortgage loans |   | 3.48                                  | %          | 3.53                                  | %          | 4.18                            | %          | 3.66                            | %          | 2.70                                   | %          | 3.71                       | %          |

 

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 5.  DerivativeFinancial Instruments**

 

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

 
| **Security**            |   | **Notional  Amount** |    | **Strike  Average** |   | **Derivative** |   | **Short  Long** |   | **Expiration** |               |
|-------------------------|--------|----------------------|---------|---------------------|--------|----------------|--------|-----------------|--------|----------------|--------------------|
| FNMA 15 – Year MBS |   | $                    | 106,000 |                | 100.93 |           | TBA    |            | Short  |           | November  19, 2002 |   |
| FNMA 15 – Year MBS |   | $                    | 15,000  |                | 100.34 |           | TBA    |            | Short  |           | December  17, 2002 |   |
| FNMA 30 – Year MBS |   | $                    | 264,000 |                | 100.58 |           | TBA    |            | Short  |           | November  14, 2002 |   |
| FNMA 30 – Year MBS |   | $                    | 20,000  |                | 100.11 |           | TBA    |            | Short  |           | December  12, 2002 |   |
| GNMA 15 – Year MBS |   | $                    | 1,000   |                | 102.21 |           | TBA    |            | Short  |           | December  17, 2002 |   |
| GNMA 30 – Year MBS |   | $                    | 39,500  |                | 100.83 |           | TBA    |            | Short  |           | November  20, 2002 |   |
| GNMA 30 – Year MBS |   | $                    | 6,000   |                | 101.10 |           | TBA    |            | Short  |           | December  19, 2002 |   |
|                    |   |                 |    |                |   |           |   |            |   |           |               |
| Ten Year Treasuries     |   | $                    | 200,000 |                | 94     |           | Puts   |            | Long   |           | December  19, 2002 |   |
| Ten Year Treasuries     |   | $                    | 100,000 |                | 92     |           | Puts   |            | Long   |           | December  19, 2002 |   |
|                    |   |                 |    |                |   |           |   |            |   |           |               |
| FNMA 30 –Year MBS  |   | $                    | 45,000  |                | 100.48 |           | Puts   |            | Long   |           | November  14, 2002 |   |
| FNMA 30 –Year MBS  |   | $                    | 30,000  |                | 101.11 |           | Puts   |            | Long   |           | December  12, 2002 |   |

 

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 positions noted in theschedule above represent options to purchase or sell the underlyingsecurity.  Generally, long positionsgain in value as market interest rates increase and short positions gain invalue as market interest rates decrease.

 

The value of the mortgage loansthat AmNet originates is at risk due to fluctuations in interest rates duringtwo time periods: (1) the period beginning when AmNet has committed to fundingthe loan and ending when the loan closes, or funds; and (2) the time periodbeginning when the loan closes and ending when AmNet commits to sell or sellsthe loans to third-party purchasers. These loans collectively referred to asthe loan pipeline. AmNet uses derivative instruments, or "hedges" tomitigate the adverse impact interest rate fluctuations can have on the value ofthe loan pipeline. The Company cannot assure however, that AmNet's use ofderivative securities will offset the risk of changes in interest rates. Incertain instances it may even increase this risk. See Management's Discussionand Analysis of Financial Condition and Results of Operations.

7

----

 

At September 30, 2002 AmNet hadcommitted to fund approximately $633.7 Million in mortgage loans and had $101.4million in funded loans that had not yet been committed for sale or sold.  These mortgages loans are for single familyresidences collateralized by first trust deeds.

 

**Note 6.  BondCollateral, Real Estate Owned**

 

The Company owned 159 properties and 148properties as of September 30, 2002 and December 31, 2001, respectively.  Upon transfer of  loans to real estate owned (as a result of default orforeclosure), the Company records a corresponding charge against the allowancefor loan losses to write-down the real estate owned to fair value lessestimated cost of disposal.  As ofSeptember 30, 2002 and December 31, 2001, real estate owned totaledapproximately $11.3 million and $9.2 million, respectively.

 

**Note 7.  Short-TermDebt**

 

AmNET uses secured creditfacilities, referred to as warehouse facilities, to finance each of themortgage loans it funds, from the time the loan is originated until the loan issold.  The warehouse facilities aresecured by the funded mortgage loans. The facilities are repaid as payments on the loans are received, or asthe mortgage loans are sold. These secured credit facility agreements contain a number of covenants,including covenants based on tangible net worth, cash flows, net income andliquidity of the Company. At September 30, 2002 the Company was not incompliance with two covenants. Waivers were obtained from the warehousefacility lender.

 

As of September 30, 2002, AmNethad an aggregate of $525 million in available warehouse credit capacity fromthree lenders bearing interest at LIBOR plus spread (3.18% at September 30,2002), of which $252.9 million was outstanding. For the nine month period endedSeptember 30, 2002, the weighted average interest rate on the outstandingbalance under the warehouse facilities was 3.20%.  A facility fee of 0.25% is also applied to all amountsoutstanding.

 

In 2001, the Company entered into a seniorsubordinated revolving loan agreement (Subordinated Loan Agreement) with anaffiliate of a significant shareholder. Borrowings related to the SubordinatedLoan Agreement are secured by an interest in a securitization held by theCompany. The Subordinated Loan Agreement bears interest at 12% and matures inDecember 2002, with provisions for extension of two additional one–yearperiods at the Company’s option. The Subordinated Loan Agreement contains anumber of covenants, including covenants based on tangible net worth, cashflows, net income and liquidity of the Company. As ofSeptember 30, 2002, the Company has $3.0 million in borrowings on theSubordinated Loan Agreement.

 

**Note 8.  Long-TermDebt, Net**

 

The components of the long-term-debt atSeptember 30, 2002 and December 31, 2001, along with selected other informationare 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  September 30, 2002**          |   |                                   | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                  | ** ** |                      | ** ** |
| Long-term debt                      |   | $                                      | 18,953     |                                  | $          | 68,275                          |       | $                               | 106,026    |                                  | $          | 43,295                    |       | $ | 37,385 |   | $ | 273,934 |   |
| Capitalized costs on long-term debt |   | (73                                    | )          | (6                                    | )          | (497                            | )          | (342                            | )          | —                                |       | (918                      | )          |
| Total long-term debt                |   | $                                      | 18,880     |                                  | $          | 68,269                          |       | $                               | 105,529    |                                  | $          | 42,953                    |       | $ | 37,385 |   | $ | 273,016 |   |
|                                |   |                                   | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                  | ** ** |                      | ** ** |
| Weighted average financing rates    |   | 2.41                                   | %          | 1.99                                  | %          | 3.34                            | %          | 2.18                            | %          | 2.92                                  | %          | 2.69                      | %          |
|                                |   |                                   | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                  | ** ** |                      | ** ** |
| **At  December 31, 2001**           |   |                                   | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                  | ** ** |                      | ** ** |
| Long-term debt                      |   | $                                      | 31,809     |                                  | $          | 107,574                         |       | $                               | 167,200    |                                  | $          | 65,546                    |       | $ | 51,592 |   | $ | 423,721 |   |
| Capitalized costs on long-term debt |   | (122                                   | )          | (10                                   | )          | (761                            | )          | (479                            | )          | —                                |       | (1,372                    | )          |
| Total long-term debt                |   | $                                      | 31,687     |                                  | $          | 107,564                         |       | $                               | 166,439    |                                  | $          | 65,067                    |       | $ | 51,592 |   | $ | 422,349 |   |
|                                |   |                                   | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                  | ** ** |                      | ** ** |
| Weighted average financing rates    |   | 2.56                                   | %          | 2.25                                  | %          | 3.45                            | %          | 2.45                            | %          | 3.27                                  | %          | 2.90                      | %          |

 

**Note 9.  Commitmentsand Contingencies**

 

The Company has used, and will continue touse, Forward Loan Sale Commitments  tohelp mitigate the loan pipeline exposure to market interest rate fluctuations(See Management’s Discussion and Analysis of Financial Condition and Results ofOperations – Mortgage Banking Business).  These commitments provide that the Companyagrees to sell an established volume of mortgage loans to a particularinstitution at a fixed price.  Anestablished time frame, or settlement date is also agreed upon. The Companycould incur a loss if the loan volume committed for sale is not delivered.

 

**Note 10.  BusinessSegments**

 

The Company has now begun reporting 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 soldto financial institutions. The Mortgage Asset Portfolio Business segmentmanages a portfolio of mortgage loans pledged as collateral for long-term debt.

 

The accounting policies of the segments arethe same as described in Note 1, “Summary of Significant Accounting Policiesand Practices.” The Company evaluates the performance of its business segmentsbased on income before income taxes. Expenses under the direct control of eachbusiness segment and the expense of premises and equipment incurred to supportbusiness operations are allocated accordingly, by segment.

 

8

----

 

The table below reflects the third quarter andyear to date income statement activity by segment.

 

AmericanResidential Investment Trust, Inc. and Subsidiaries

ConsolidatedStatements of Operations by Business Segment, unaudited

(inthousands)

 
|                                                                |   | **For the  Three Months Ended  September 30, 2002** |   | **For the  Three Months Ended  September 30, 2002** |   | **For the  Three Months Ended  September 30, 2002** |   | **For the  Nine Months Ended  September 30, 2002** |   | **For the  Nine Months Ended  September 30, 2002** |   | **For the  Nine Months Ended  September 30, 2002** |   |
|---------------------------------------------------------------------|--------|-----------------------------------------------------|--------|-----------------------------------------------------|--------|-----------------------------------------------------|--------|----------------------------------------------------|--------|----------------------------------------------------|--------|----------------------------------------------------|--------|
|                                                                |   | **Mortgage  Banking**                               |   | **Mortgage  Asset**

**Portfolio**                  |   | **Combined  Segments**                              |   | **Mortgage  Banking**                              |   | **Mortgage  Asset**

**Portfolio**                 |   | **Combined  Segments**                             |   |
| **Revenues**                                                        |   |                                                |   |                                                |   |                                                |   |                                               |   |                                               |   |                                               |   |
| Gain on sales  of loans                                             |   | $                                                   | 18,808 |                                                | $      | —                                              |   | $                                                  | 18,808 |                                               | $      | 25,254                                             |   | $ | — |   | $ | 25,254 |   |
| Derivative financial  instruments and market adjustments            |   |                                                |   |                                                |   |                                                |   |                                               |   |                                               |   |                                               |   |
| Derivative  financial instruments - Treasury futures                |   | (8,000                                              | )      | —                                              |   | (8,000                                              | )      | (18,123                                            | )      | —                                             |   | (18,123                                            | )      |
| Derivative  financial instruments - forward commitments and options |   | (9,668                                              | )      | —                                              |   | (9,668                                              | )      | (9,791                                             | )      | —                                             |   | (9,791                                             | )      |
| Market  adjustment on interest rate lock commitments                |   | 2,466                                               |   | —                                              |   | 2,466                                               |   | 4,311                                              |   | —                                             |   | 4,311                                              |   |
| Total  derivative financial instruments and market adjustments      |   | (15,202                                             | )      | —                                              |   | (15,202                                             | )      | (23,603                                            | )      | —                                             |   | (23,603                                            | )      |
| Interest on  mortgage assets                                        |   | 4,158                                               |   | 5,201                                               |   | 9,359                                               |   | 8,051                                              |   | 21,350                                             |   | 29,401                                             |   |
| Litigation  settlement                                              |   | —                                              |   | —                                              |   | —                                              |   | —                                             |   | 10,281                                             |   | 10,281                                             |   |
| Other income                                                        |   | 2                                                   |   | 243                                                 |   | 245                                                 |   | 8                                                  |   | 1,073                                              |   | 1,081                                              |   |
| Total revenue                                                       |   | 7,766                                               |   | 5,444                                               |   | 13,210                                              |   | 9,710                                              |   | 32,704                                             |   | 42,414                                             |   |
|                                                                |   |                                                |   |                                                |   |                                                |   |                                               |   |                                               |   |                                               |   |
| **Expenses**                                                        |   |                                                |   |                                                |   |                                                |   |                                               |   |                                               |   |                                               |   |
| Employee  compensation and benefits                                 |   | 5,033                                               |   | 137                                                 |   | 5,170                                               |   | 11,577                                             |   | 291                                                |   | 11,868                                             |   |
| Interest  expense                                                   |   | 2,409                                               |   | 2,383                                               |   | 4,792                                               |   | 4,233                                              |   | 8,458                                              |   | 12,691                                             |   |
| Office and  occupancy expense                                       |   | 383                                                 |   | —                                              |   | 383                                                 |   | 1,073                                              |   | —                                             |   | 1,073                                              |   |
| Premium  amortization                                               |   | —                                              |   | 2,203                                               |   | 2,203                                               |   | —                                             |   | 7,830                                              |   | 7,830                                              |   |
| Provision for  loan losses                                          |   | —                                              |   | 1,492                                               |   | 1,492                                               |   | —                                             |   | 4,619                                              |   | 4,619                                              |   |
| Loss on sale of  real estate owned, net                             |   | —                                              |   | (281                                                | )      | (281                                                | )      | —                                             |   | 152                                                |   | 152                                                |   |
| Other operating  expenses                                           |   | 2,290                                               |   | 707                                                 |   | 2,997                                               |   | 5,300                                              |   | 1,991                                              |   | 7,291                                              |   |
| Total expenses                                                      |   | 10,115                                              |   | 6,641                                               |   | 16,756                                              |   | 22,183                                             |   | 23,341                                             |   | 45,524                                             |   |
|                                                                |   |                                                |   |                                                |   |                                                |   |                                               |   |                                               |   |                                               |   |
| Income before  income taxes                                         |   | (2,349                                              | )      | (1,197                                              | )      | (3,546                                              | )      | (12,473                                            | )      | 9,363                                              |   | (3,110                                             | )      |
| Income taxes                                                        |   | —                                              |   | —                                              |   | —                                              |   | 1                                                  |   | 6                                                  |   | 7                                                  |   |
| Net income                                                          |   | $                                                   | (2,349 | )                                                   | $      | (1,197                                              | )      | $                                                  | (3,546 | )                                                  | $      | (12,474                                            | )      | $ | 9,357 |   | $ | (3,117 | ) |

 

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 liabilities eliminatedfor consolidation purposes were $33.0 million for the nine month period endingSeptember 30, 2002.

 

**Note 12.  SubsequentEvents**

 

Subsequent to the period ending September 30,2002, the Company secured additional warehouse line capacity of $200 millionfrom Countrywide Home Loans, Inc. By prior agreement, with the addition of thisfacility an existing warehouse line was reduced by $15 million. As of the dateof this report, the Company has $710 million of warehouse loan capacity. Forpurposes of clarifying a press release by the Company on November 1, 2002 inwhich $250 million of additional warehouse capacity was cited; $100 million wasin place prior to September 30, 2002 and $200 million came after September 30,2002 ($150 million procurred before the press release and $50 million procurredafter the press release).

 

9

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

*The statements contained in this Form 10-Qthat are not purely historical are forward looking statements, includingstatements regarding our expectations, hopes, beliefs, intentions, orstrategies regarding the future. Statements that use the words “expects,”“will,” “may,” “anticipates,” “goal,” “intends,” “seeks,” “believes,” “plans,”“strategy” and derivatives of such words are forward looking statements. Theseforward looking statements include statements regarding:*

 
| · |   | *the anticipated impact of new accounting  standards;*                                                                                                                                                                |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                  |
| · |   | *the Company's expectations regarding its  cash requirements, its expenses, cash flow from its operations, the  sufficiency of its capital base, the sufficiency of its cash reserves and its  sources of liquidity;* |
|   |   |                                                                                                                                                                                                                  |
| · |   | *the sufficiency of  allowances for losses taken in the  Company’s financial statements and the Company's its intent to set aside  reserves for non-saleable loans;*                                        |
|   |   |                                                                                                                                                                                                                  |
| · |   | *the anticipated timing of terminating the  Company’s REIT status;*                                                                                                                                              |
|   |   |                                                                                                                                                                                                                  |
| · |   | *the ability of the Company to qualify for  listing on another exchange;*                                                                                                                                             |
|   |   |                                                                                                                                                                                                                  |
| · |   | *AmNet’s intention to expand operations in  2002 and 2003;*                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                  |
| · |   | *the percentage of the pipeline that will  likely result in mortgage loan fundings;*                                                                                                                                  |
|   |   |                                                                                                                                                                                                                  |
| · |   | *AmNet's ability to hedge against market  fluctuations in interest rates;*                                                                                                                                            |
|   |   |                                                                                                                                                                                                                  |
| · |   | *AmNet’s expectation of being able to  increase its warehouse borrowing facilities;*                                                                                                                             |
|   |   |                                                                                                                                                                                                                  |
| · |   | *the Company’s expectation of selling loans  on a service-released basis;*                                                                                                                                       |
|   |   |                                                                                                                                                                                                                  |
| · |   | *the anticipated decline of the real estate  owned activity;*                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                  |
| · |   | *the Company’s anticipated lack of dividends  in 2002;*                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                  |
| · |   | *the Company’s expected tax loss for 2002;*                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                  |
| · |   | *the expected correlation of profitability  to loan origination volume;*                                                                                                                                              |
|   |   |                                                                                                                                                                                                                  |
| · |   | *the expectation that AmNet's primary source  of revenues will be gains on sales of loans, net of gains or losses on  derivative financial instruments;*                                                              |
|   |   |                                                                                                                                                                                                                  |
| · |   | *the expected size of the loan origination  market;*                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                  |
| · |   | *the Company’s belief that the quality of  its loan products and services will permit it to gain market share even if  demand for mortgages declines;*                                                           |
|   |   |                                                                                                                                                                                                                  |
| · |   | *AmNet's belief it will continue to qualify  for correspondent lending programs;*                                                                                                                                     |
|   |   |                                                                                                                                                                                                                  |
| · |   | *the expected concentration of AmNet’s loans  in California;*                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                  |
| · |   | *the anticipated effect on the Company’s  interest income, interest expense, gains on sales of loans, gain/loss on  derivative financial instruments and operating performance from changes in  interest rates;* |
|   |   |                                                                                                                                                                                                                  |
| · |   | *the Company’s beliefs regarding future  prepayment rates, anticipated prepayment penalties, future borrowing costs  and appropriate premium amortization levels; and*                                           |
|   |   |                                                                                                                                                                                                                  |
| · |   | *the Company’s intent to hold mortgage loan  bond collateral to maturity.*                                                                                                                                       |

 

*These forward looking statements are based oninformation available to the Company on the date hereof, and the Companyassumes no obligation to update any such forward looking statements. It isimportant to note that the Company’s actual results and timing of certainevents could differ materially from those in such forward looking statementsdue to a number of factors, including but not limited to, general economicconditions, overall interest rates, volatility in interest rates, the shape ofthe yield curve, reductions in the value of retained interests insecuritizations, the Company’s ability to successfully grow AmNet, the abilityto obtain the financing necessary to fund AmNet, changes in accounting rules ortheir application, changes in the margins gained on sale of originated loans,changes in the demand of mortgage brokers for AmNet's loan products andservices or of loan purchasers for originated loans, the availability ofcapital and the Company's ability to qualify for such capital, increases inprepayment rates and default rates, the effect of terminating the Company'sstatus as a REIT, changes in the requirements of correspondent loan programs orthe Company's ability to meet such requirements and changes in AmNet's and theCompany's anticipated cash requirements. Other risk factors that could causeactual results to differ materially are set forth in this item under the headings“Mortgage Banking—Business Risks" and "Mortgage Asset PortfolioBusiness—Business Risks.”*

 

**Overview**

 

American Residential wasfounded in 1997 as an externally managed Real Estate Investment Trust.  Until 2002, substantially all of itsoperations consisted of the acquisition of mortgages for investmentpurposes.  It generated revenue on theinterest it received on the mortgage loans it held for investment.  Its primary expense was the interest it paidon borrowings used to fund its mortgage loan acquisitions.

 

In mid-2001, the Company’sBoard of Directors and management determined that it was in the best interestof the stockholders to pursue a different strategy.  In 2001, the Company formed AmNet, a wholly owned subsidiary, toengage in mortgage banking activities. AmNet originates mortgage loans to prime credit quality borrowerssecured by first trust deeds through a network of independent mortgagebrokers.  It sells the loans that itoriginates to institutional purchasers.

 

In December 2001, in connectionwith the Company’s new focus on developing a mortgage banking business, theCompany negotiated the termination of its management contract with Home AssetManagement Company, Inc. (Hamco).  Priorto termination of the contract, the Company paid Hamco management fees based onits REIT portfolio and was reimbursed by Hamco for substantially all of itsemployee compensation and occupancy expenses. Since termination of the contract, the Company no longer pays managementfees and is responsible for all compensation and occupancy expenses related toits business.

 

Effective January 1 2002, theCompany began reporting its financial results in two segments, the MortgageBanking Business and the Mortgage Asset Portfolio Business.  The Company’s mortgage banking operationshave grown significantly in 2002.  Atthe same time, the Mortgage Asset Portfolio Business has significantly declinedas the mortgage loans in the Company’s portfolio have been prepaid over timeand have not been replenished.  As aresult, in the third quarter of 2002, the

 

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Mortgage Banking Businesssignificantly exceeded the Mortgage Asset Portfolio Business.  Accordingly, the Company’s financial resultspresentation has been changed to better reflect the Company’s current principaloperations, the Mortgage Banking Business.

 

As a result of the change infocus of the Company’s strategic direction and decision to emphasize taxableoperating activities and retain earnings for growth, it intends to elect toterminate its status as a REIT in the first quarter of 2003.  In mid-2002, the Company’s stockholdersapproved two proposals that permit the Company to amend its charter documentsto accomplish this.   As a REIT, theCompany generally did not pay federal taxes at the corporate level on income itdistributed to stockholders.  TheCompany has not distributed income to its stockholders since January of 2000.

 

Upon termination of theCompany’s REIT status, the Company will no longer be listed on the New YorkStock Exchange.  At that time, theCompany plans to move to another national exchange.

 

**MortgageBanking Business**

 

*Operations*

 

The Company’s primary strategy in diversifyingits income stream has been to establish a mortgage banking business thatoriginates loans for subsequent sale on a servicing released basis through itsAmNet subsidiary.

 

AmNet utilizes a dedicated sales force tooffer AmNet’s loan products to approved wholesale mortgage brokers, who refertheir client’s loans to AmNet for underwriting and funding. Loans meetingAmNet’s underwriting criteria are approved and funded at AmNet’s regionalunderwriting loan centers. AmNet’s headquarters office performs variousfunctions through multiple departments including establishment of policy, riskmanagement, secondary marketing, finance, accounting, administration, humanresources, and information technology.

 

AmNet funded $1.3 billion in home loans duringthe three month period ending September 30, 2002. For the nine month periodending September 30, 2002 AmNet funded $2.2 billion in home loans. As ofSeptember 30, 2002, AmNet has hired 269 loan production and loan operationsemployees. Two regional production centers located in Oregon and NorthernCalifornia began originating loans in November 2001. As of September 30, 2002AmNet operates six regional centers and seven satellite centers around thecontinental United States of America.

 

AmNet borrows funds under its warehouse creditfacilities to fund and accumulate loans prior to sale to its correspondentinvestors.  AmNet currently has threewarehouse facilities that enable it to borrow up to an aggregate of $710million. AmNet is required to maintain an equity investment in its loaninventory ranging from 1% to 4%, and must comply with various lender covenantsrestricting the absolute level of leverage and minimum levels of cash reserves.AmNet expects to increase its warehouse borrowing facilities to enable it toincrease loan production. There can be no assurances that credit lines will beobtained in time to enable continued growth and expansion of AmNet’s loanorigination.

 

All loans funded are expected to be sold on aservicing-released basis to loan purchasers, typically within 30 days offunding.

 

As is customary in the mortgage bankingindustry, AmNet routinely provides rate lock commitments to borrowers for up to60 days prior to funding, with such loans priced to reflect AmNet’s targetedgain on sale margin.  AmNet has exposureto interest rate changes on its loan pipeline, which includes rate lockcommitments and loans that it has funded, until the time the loans arecommitted for sale or sold, because a large majority of rate locks will closeif interest market rates subsequently increase, and conversely, rate locks mayfall out if market interest rates decline significantly. AmNet projects thepercentage of its loan pipeline that will close, but these projections aredifficult, especially during periods of volatile interest rates. The gain onsales of loans (loan sale margin) will generally decline if rates have risen,since the loans which were priced when rates were lower carrylower-than-current-market interest rates and conversely the loan sale marginwill generally increase if rates have fallen. AmNet attempts to hedge (or protect) its loan sale margin in itspipeline and closed loan inventory by utilizing certain derivative financialinstruments, Forward Loan Sale Commitments and similar agreements.  Hedges are typically designed to protectagainst rising interest rates.  Shouldrates drop unexpectedly and significantly hedge losses may occur, and may notalways be offset by higher loan sale margins due to loan pipeline fallout.

 

AmNet has generally adjusted its hedgecoverage on a daily basis based on changes in the composition of the pipeline,market conditions and market volatility while seeking to meet its loan salemargin targets.  For a variety ofreasons, however, the Company does not believe its hedging strategy wasentirely effective in the second and third quarters. As a result, AmNetreorganized its hedging operations and in August, 2002 retained MortgageCapital Management, Inc. (“MCM”) to perform interest rate risk management.  MCM is a quantitative software and advisoryfirm that currently serves a number of clients in the mortgage bankingindustry.  MCM is performing pipelineexposure analysis and is making hedging recommendations on a daily basis forAmNet.

 

**MortgageAsset Portfolio Business**

 

*Operations*

 

Currently, the Company’s mortgage assetportfolio business revenue primarily consists of net interest income generatedfrom its bond collateral mortgage loans (consisting mainly of A- and Bsub-prime mortgage loans secured by residential properties) and its cash andinvestment balances (collectively, “earning assets”), prepayment penalty incomeand income generated by equity in income of American Residential Holdings, Inc.

 

For that portion of the Company’s earningassets funded with borrowings, the resulting net interest income is thedifference between the Company’s average yield on earning assets and the costof borrowed funds.   The table belowillustrates interest rates on mortgage loans (net coupon) and interest rates onlong-term debt (financing rates)(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** |       |
|-----------------------------------|--------|---------------------------------------|------------|---------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------------|------------|-----------|------------|
| **At  September 30, 2002**        |   |                                  | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                  | ** ** |      | ** ** |
| Weighted average net coupon       |   | 9.18                                  | %          | 9.55                                  | %          | 9.00                            | %          | 8.95                            | %          | 9.96                                  | %          | 9.27      | %          |
| Weighted average financing  rates |   | 2.41                                  | %          | 1.99                                  | %          | 3.34                            | %          | 2.18                            | %          | 2.92                                  | %          | 2.69      | %          |
|                              |   |                                  | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                  | ** ** |      | ** ** |
| **At  December 31, 2001**         |   |                                  | ** ** |                                  | ** ** |                            | ** ** |                            | ** ** |                                  | ** ** |      | ** ** |
| Weighted average net coupon       |   | 9.23                                  | %          | 9.99                                  | %          | 9.31                            | %          | 9.29                            | %          | 10.84                                 | %          | 9.65      | %          |
| Weighted average financing  rates |   | 2.56                                  | %          | 2.25                                  | %          | 3.45                            | %          | 2.45                            | %          | 3.27                                  | %          | 2.90      | %          |

 

Gross income from the Mortgage Asset PortfolioBusiness will generally decrease following an increase in short term interestrates due to increases in borrowing costs but a lag in adjustments to theearning asset yields.  The majority ofthe Company’s earning assets are adjustable rate loans that adjust periodicallyevery six months

 

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based on a margin over the six-month LIBORindex.  Gross income from Mortgage AssetPortfolio Business will generally increase following a fall in short terminterest rates due to decreases in borrowing costs and a lag and/or ‘floor’ indownward adjustments to the earning asset yields.

 

The Company’s primary expenses, besides itsborrowing costs, are premium amortization (amortization of loan purchasepremiums), provision for loan losses and losses on sale of real estate owned(“REO”) net. Provision for loan losses represent the Company’s best estimate ofexpenses related to loan defaults. Gains or losses on the sale of REO net, represent differences betweensale proceeds and the net carrying amount of the property. The carrying valueincludes a reduction (valuation reserve) to reflect an estimate of expectedproceeds at time of sale.  The estimateof carrying value for REO properties may result in a slight gain or a slightloss at the time of sale.  The goal isto estimate net realizable value at the time of sale as closely aspossible.  Premiums are amortized usingthe interest method over their estimated lives.

 

Since the year 2000, the Company’s bondcollateral, mortgage loans, net has declined due to the Company’s decision toavoid loan acquisitions if market conditions did not meet its investmentcriteria and to reserve capital for the pursuit of mortgage banking strategies.Revenues from the Mortgage Asset Portfolio Business have declined in directproportion to this decline. The mortgage loan portfolio was approximately $1.3billion at December 31, 1999 to $858 million at December 31, 2000; $452 millionat December 31, 2001; and $294 million at September 30, 2002.  Simultaneously, premium amortization andprovision for loan losses expense have increased as a percentage of  gross revenue, reflecting increases inprepayments and delinquencies tied to a favorable refinance market and normalseasoning of the mortgage loans in the Company’s portfolio. See  Mortgage Asset Portfolio Business – BusinessRisks.

 

**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 nine-month period endingSeptember 30, 2002:

 

•  Provisionfor loan losses

•  Premiumamortization on bond collateral, mortgage loans

•  Derivativefinancial instruments

 

Please refer to the Company Form 10-K for theone-year period ending December 31, 2001, for a detailed discussion of theseprocedures.

 

**Results of Operations**

***Three MonthResults***

 

Mortgage Banking Business

 

Revenue, net of derivative financialinstruments and adjustments, generated in the Mortgage Banking Business for thethree month period ending September 30, 2002, was $7.8 million.  This represents new activity for theCompany; for the comparable period ending September 30, 2001, there wasapproximately $12 thousand of revenue. AmNet’s increase in revenue is theresult of the increase in its loan production volume.   AmNet  recorded Gain onSale of Loans revenue totaling  $18.8million on loan dispositions totaling $1.0 billion. This revenue wassubstantially offset by a loss on the Company’s derivative financialinstruments.

 

AmNet's net Gain on Sale ofLoans revenue of $18.8 million is a combination of various accountcategories.  Loan premiums ofapproximately $34.7 million represent the price at which AmNet sells the loanto an investor less the raw cost par value of loans sold.  Fee income of approximately $3.9 million,represents various charges to brokers for services rendered. Gross gain and feeincome are offset by capitalized loan acquisition costs.  The largest cost associated with loanproduction is broker fees yield spread premiums totaling approximately $16.3million.  Offsetting gains also include(i) deferred origination costs, which are recognized at the time of loansale, of approximately $2.0 million and (ii) loan premium repaid to investors('premium recapture') and loan loss reserve costs of 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 origination.  NetGains on the Sale of Loans of $18.8 million represents approximately 180 basispoints (1.8%) on loan sales of $1.0 billion.

 

During the third quarter of 2002, AmNetincurred losses on its derivative financial instruments totaling $17.7million.  Until August 2002, AmNet hadused treasury futures and options to hedge its loan pipeline  against changes in value caused by increasesin market interest rates.  In August2002, AmNet sold or closed its position in substantially all of its remaining optionson treasury futures.  Losses andcommissions associated with investments in treasury options and selling orclosing AmNet’s position in these options were approximately $8.0 million forthe third quarter.  In August, AmNetbegan using forward sales of mortgage backed securities (TBA-MBS) as itsprimary hedging vehicle.  Due to continualdeclines in yields on mortgages during August and September, AmNet recordedlosses of $9.7 million on these hedges but had offsetting increases in thevalue of its loan commitment pipeline of $2.5 million, and higher than expectedgains on the sale of loans.

 

AmNet recorded interest income of  $4.1 million for the period.  AmNet earns interest on a loan from the datethe loan is funded until final disposition. Accordingly, interest income is a function of the volume of loansfunded, the interest rate on the loans and the length of time the loans areheld prior to sale. To the extent AmNet funds loans with borrowings under itswarehouse facilities, it records interest expense based on the samefactors.  Interest expense for theperiod was $2.4 million.

 

Operating expenses incurred in the MortgageBanking Business consist of total expenses less interest expense for the threemonth period ending September 30, 2002, operating expenses increased to $7.7million.  For the comparable periodending September 30, 2001, there was approximately $12 thousand of expensesincurred.  The increase was primarilydue to the establishment and ongoing overhead of AmNet origination operationswhich are comprised of regional loan production offices and headquarter operations.  Operating expenses included approximately$2.7 million in sales commissions and other expenses that vary with the volumeof loan originations.  Operatingexpenses represented 0.61 basis points (.61%) on $1.3 billion in funded loansfor the period as compared to 0.81 basis points in operating expense for thenine month period ending September 30, 2002. The decline in operating cost per loan is due to scale efficiencies andthe fact that operating expenses for the nine month period include one-time startup costs.

 

Mortgage Asset PortfolioBusiness

 

Interest on mortgage assets decreasedapproximately $7.4 million for the three months ended September 30, 2002 fromapproximately $12.6 million for the three months ended September 30, 2001.  This decrease was primarily due to adecrease in the value of mortgage loans. Mortgage loans were approximately $294.4 million at September 30, 2002and approximately $524.4 million at September 30, 2001 which represents approximatelya 43.85% decline. The mortgage loan decline was the result of high prepaymentactivity and no portfolio replenishment. Due to a favorable refinance market, the adjustable rate mortgage re-setrates are generally higher than rates available in the market place.  Furthermore, in many cases, prepaymentpenalties have expired, or have not served as a deterrent to refinances.

 

Other income decreased by approximately $686thousand to approximately $243 thousand for the three months ended September30, 2002 from approximately $929 thousand for the three months ended September30, 2001.  This decrease was primarilydue to the decrease in prepayment penalty income.  Although high prepayment activity is being experienced, theprepayment penalty periods are expiring. A decline in interest income on cash and investments also contributed tothe other income decrease.  Interestrates have declined, as well as cash balances, from the three month periodending September 30, 2001 to the three month period ending September 30, 2002.

 

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Employee compensation and benefits increasedapproximately $96 thousand to approximately $137 thousand for the three monthsended September 30, 2002 from approximately $41 thousand for the three monthsended September 30, 2001.  During thethree month period ending September 30, 2001, the Company was subject to amanagement agreement pursuant to which nearly all human resource expenses werereimbursed by the manager and not reflected in the Company’s expenses.  However certain personnel costs were notcovered by the management agreement.

 

Interest expense decreased by approximately$4.7 million to approximately $2.4 million for the three months ended September30, 2002 from approximately $7.1 million for the three months ended September30, 2001. This decrease is attributable to lower borrowings outstanding as wellas lower borrowing rates. A majority of the Company’s borrowing rates are basedupon a spread over the one-month London InterBank Offered Rate (“LIBOR”). Onemonth LIBOR rates decreased from approximately 2.63% at September 30, 2001 toapproximately 1.81% at September 30, 2002.

 

The premium amortization rate for the threemonths ended September 30, 2002 decreased approximately $4.7 million from thesame period ended September 30, 2001. The decrease was due to thegradual maturation of the mortgage loan portfolio. The reason for this is theuse of a  level yield method ofamortization which is gradually reducing the monthly amortization required.Checks are continuously made to assure unamortized premium stays a relativelyconstant percentage of the total portfolio balance of mortgage loan bondcollateral. Premium amortization expense represents the amortization ofpurchase premiums paid for mortgage loans acquired in excess of the par valueof the loans.  Premium amortizationexpense, including adjustments, was approximately $6.9 million for the threemonths ended September 30, 2001 and approximately $2.2 million for the threemonths ended September 30, 2001.

 

Loan loss provision decreased $684 thousandfrom approximately $2.2 million for the three months ended September 30, 2001to approximately $1.5 million for the three months ended September 30,2002.  The provision for loan losses asa percentage of interest income from mortgage loan bond collateral has beensteadily increasing due to normal aging of the mortgage asset portfolio (bondcollateral). For the three month period ending September 30, 2002 thepercentage of the provision for loan losses to interest income  from mortgage loan bond collateral wasapproximately 28.7%. The percentage has increased from approximately 17.3% forthe three month period ending September 30, 2001. The increases are related toseasoning of the sub-prime mortgage portfolio. Although portfolio balances are decreasing the amount of loans inforeclosure has increased as a percentage of the total portfolio.

 

For the three months ended September 30, 2002,loss on sale of real estate owned, net decreased approximately $392 thousand ascompared to the three months ended September 30, 2001, primarily due to certainreal estate owned realizing gains upon sale in the three month period endingSeptember 30, 2002.  Generally, lossesare incurred as real estate owned is sold. As the portfolio of mortgage loans continue to mature, the real estateowned activity will level off and eventually decline.  Other factors, including continued prepayment activity andgeneral economic conditions, will influence the rate at which properties becomereal estate owned and the rate at which the Company is able to sell theseproperties.

 

For the three months ended September 30, 2002,other operating expenses decreased $36 thousand as compared to the three monthsended September 30, 2001. This decrease was mainly the result of write-off ofcosts associated with a potential acquisition during the nine month periodending September 30, 2001.

 

For the three months ended September 30, 2002,management fee expense was zero while for the same period ended September 30,2001 management fee expense was approximately $552 thousand. The managementagreement was cancelled as of December 2001.

 

***Nine Month Results***

 

Mortgage Banking Business

 

Revenue, net of derivativefinancial instruments and adjustments, generated in the Mortgage BankingBusiness for the nine month period ending September 30, 2002, was $9.7million.  This represents a new sourceof revenue for the Company; for the comparable period ending September 30,2001, there was approximately $12 thousand of mortgage banking revenue. AmNet’sincrease in revenue is the result of the increase in its loan productionvolume.   AmNet recorded Gain on Sale ofLoans revenue totaling  $25.3 million onloan dispositions totaling $1.8 billion. This revenue was substantially offsetby a loss on the Company’s derivative financial instruments.

 

AmNet Gain on Sale of Loansrevenue of $25.3 million is a combination of various account categories.  The loan premium of approximately $48.5million represents the investor purchase price over the raw cost of loanorigination. Fee income of approximately $6.3 million, represents variouscharges for services rendered.  Thelargest portion of cost associated with loan production are broker fees ofapproximately $23.7 million; capitalized costs, which are expensed at the timeof loan sale of approximately $3.8 million and; premium recapture and loanreserve costs of approximately $2.0 million. Premium recapture expensesrepresent repayment of certain loan sale premiums to investors on previouslysold loans which subsequently payoff within six months of origination. Gain ofSale on Loans of $25.3 million represents approximately 1.4% of loan sales of$1.8 billion. 

 

During the nine months endingSeptember 30, 2002, AmNet incurred losses on its derivative financialinstruments totaling $23.6 million. Until August 2002, AmNet had used treasuryfutures and options to hedge its loan pipeline against changes in value causedby increases in market interest rates. In August 2002, AmNet sold or closed its position in substantially allof its remaining options on treasury futures. Losses and commissions associated with investments in treasury optionsand selling or closing AmNet’s position in these options were approximately$18.1 million for the nine months ending September 30, 2002.  In August, AmNet began using forward salesof mortgage backed securities (TBA-MBS) as its primary hedging vehicle.

 

AmNet recorded interest incomeof $8.1 million for the period.  AmNetearns interest on a loan from the date the loan is funded until finaldisposition. Accordingly, interest income is a function of the volume of loansfunded, the interest rate on the loans and the length of time the loans areheld prior to sale. To the extent AmNet funds loans with borrowings under itswarehouse facilities, it records interest expense based on the same factors.Interest expense for the nine month period ending September 30, 2002 was $4.2million.

 

Expenses incurred in theMortgage Banking Business for the nine month period ending September 30, 2002,increased to $18.0 million (excluding $4.2 million of interest expense).  For the comparable period ending September30, 2001, there was approximately $12 thousand of expenses incurred.  The increase in expenses resulted primarilyfrom the increased operating expenses related to the establishment and ongoingoverhead of AmNet origination operations which are comprised of regional loanproduction offices and headquarter operations. Operating expenses, which were$18.0 million, included approximately $4.3 million in sales commissions andother expenses that vary with the volume of loan originations.  Total operating expenses of approximately$18.0 million represented 0.81 basis points on $2.2 billion in funded loans. 

 

Mortgage Asset PortfolioBusiness

 

Interest on mortgage assets decreasedapproximately $23.3 million for the nine months ended September 30, 2002 fromapproximately $44.6 million for the nine months ended September 30, 2001.  This decrease was primarily due to adecrease in the value of mortgage loans. Mortgage loans were approximately $294.4 million at September 30, 2002and approximately $524.4 million at September 30, 2001, which representsapproximately a 43.85% decline. The mortgage loan decline was the result ofhigh prepayment activity and no portfolio replenishment.  Due to a favorable refinance market, theadjustable rate mortgage re-set rates are generally higher than rates availablein the market place.  Furthermore, inmany cases, prepayment penalties have expired, or have not served as adeterrent to refinances.

 

Litigation settlements resulted in a gain ofapproximately $10.3 million for the nine months ended September 30, 2002. Therewere no litigation settlements for the period ending September 30, 2001.

 

Other income decreased by approximately $2.1million to approximately $1.1 million for the nine months ended September 30,2002 from approximately $3.2 million for the nine months ended September 30,2001.  This decrease was primarily dueto the decrease in prepayment penalty income of approximately $1.7million.  Although high prepaymentactivity is being experienced, the prepayment penalty periods areexpiring.  A decline in interest incomeon cash and investments contributed to the other income decrease with a declineof approximately $447 thousand. Interest rates have declined as well as cash balances from the ninemonth period ending September 30, 2001 to the nine month period endingSeptember 30, 2002.

 

Employee compensation and benefits increasedapproximately $181 thousand to approximately $291 thousand for the nine monthsended September 30, 2002 from approximately $110 thousand for the nine monthsended September 30, 2001.  During thenine month period ending September 30, 2001, the Company was subject to amanagement agreement pursuant to which nearly all human resource expenses werereimbursed by the manager and not reflected in the Company’s expenses.  However certain personnel costs were notcovered by the management agreement.

 

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Interest expense decreased by approximately$21.9 million to approximately $8.5 million for the nine months ended September30, 2002 from approximately $30.3 million for the nine months ended September30, 2001. This decrease is attributable to lower borrowings outstanding as wellas lower borrowing rates. A majority of the Company’s borrowing rates are basedupon a spread over the one-month London InterBank Offered Rate (“LIBOR”). Onemonth LIBOR rates decreased from approximately 2.63% at September 30, 2001 toapproximately 1.81% at September 30, 2002.

 

The premium amortization rate for the ninemonths ended September 30, 2002 decreased approximately $4.5 million from thesame period ended September 30, 2001 due to the use of a level yieldamortization method.  Use of this methodhas kept the amortization rate in line with declining portfolio balances.  Premium amortization expense represents theamortization of purchase premiums paid for mortgage loans acquired in excess ofthe par value of the loans.  Premiumamortization expense including adjustments, was approximately $7.8 million forthe nine months ended September 30, 2002 and approximately $12.4 million forthe nine months ended September 30, 2001.

 

The following chart represents constantprepayment rates (“CPRs”):

 
|                           |   | **As of  September 30, 2002** |   | **As of  September 30, 2001** |   |
|--------------------------------|--------|-------------------------------|--------|-------------------------------|--------|
|                           |   | **Three  Months**             |   | **Six  Months**               |   | **Life-  Time** |   | **Three  Months** |   | **Six  Months** |   | **Life-  Time** |   |
| Mortgage Loan Bond collateral: |   |                          |   |                          |   |   |   |   |   |   |   |   |   |
| CMO/FASIT 1998-1               |   | 31.9                          | %      | 36.1                          | %      | 42.1 | % | 38.3 | % | 49.9 | % | 44.8 | % |
| CMO 1999-1                     |   | 39.2                          | %      | 35.9                          | %      | 35.2 | % | 39.2 | % | 38.7 | % | 34.7 | % |
| CMO 1999-2                     |   | 39.6                          | %      | 46.2                          | %      | 32.9 | % | 64.3 | % | 57.3 | % | 29.6 | % |
| CMO 1999-A                     |   | 39.5                          | %      | 43.1                          | %      | 37.4 | % | 62.0 | % | 64.3 | % | 35.0 | % |
| CMO 2000-2                     |   | 53.5                          | %      | 57.7                          | %      | n/a |   | 32.6 | % | 31.0 | % | 23.0 | % |

 

Loan loss provision increased $23 thousandfrom approximately $4.6 million for the nine months ended September 30, 2001 toapproximately $4.6 million for the nine months ended September 30, 2002.  The provision for loan losses as apercentage of interest income from mortgage loan bond collateral has beensteadily increasing due to normal aging of the mortgage asset portfolio (bondcollateral). For the nine month period ending September 30, 2002 the percentageof the provision for loan losses to interest income from mortgage loan bond collateral was approximately21.6%.  The percentage has increasedfrom approximately 10.3% for the nine month period ending September 30, 2001.The increases are related to seasoning of the sub-prime mortgage portfolio andexpected increases in the number of loans in foreclosure which are likely toresult in a loss to the Company. Although portfolio balances are decreasing the amount of loans inforeclosure has increased as a percentage of the total portfolio.

 

For the nine months ended September 30, 2002,loss on sale of real estate owned, net decreased approximately $112 thousand ascompared to the nine months ended September 30, 2001, primarily due to theoverall decline in the number of properties for the total portfolio. As theportfolio of mortgage loans continue to mature the real estate owned activitywill level off and eventually decline. Other factors, including continuedprepayment activity and general economic conditions, will influence the rate atwhich properties become real estate owned and the rate at which the Company isable to sell these properties.

 

For the nine months ended September 30, 2002,other operating expenses decreased approximately $97 thousand as compared tothe nine months ended September 30, 2001. This decrease was mainly the resultof write-off of costs associated with a potential acquisition during the ninemonth period ending September 30, 2001.

 

For the nine months ended September 30, 2002,management fee expense was zero while for the same period ended September 30,2001 management fee expense was approximately $2.0 million. The managementagreement was cancelled as of December 2001.

 

**Liquidity and Capital Resources**

 

During the nine months ended September 30,2002, net cash used in operating activities was approximately $210.6million.  The difference between net useof cash provided by operating activities and the net loss of approximately $3.1million was primarily the result of using $205.8 million net in additional loanoriginations over proceeds from loan originations. The remaining difference wasdivided among several categories, the largest of which were sources of cash inaccrued expenses and other liabilities of approximately $7.5 million; provisionfor loan losses of approximately $4.6 million; amortization of mortgage assetspremium of approximately $7.8 million; and loss on real estate owned ofapproximately $2.5 million.  Thesesources were more than offset by uses of cash in the following categories:increase in accounts receivable funded loans of approximately $16.5 million;increase in receivable sold loans of approximately $5.9 million, an increase inrestricted cash (trust accounts and deposits) of approximately $2.9 million andan increase in derivative financial instruments of approximately $1.2 million.

 

Net cash provided by investing activities forthe nine months ended September 30, 2002 was approximately $140.9 million. Cashflows from investing activities for the nine months ended September 30, 2002came from principal payments on mortgage loan bond collateral of approximately$132.0 million and proceeds from the sale of real estate owned of approximately$9.0 million.

 

For the nine months ended September 30, 2002,net cash provided by financing activities was approximately $70.4 million,primarily due to the increase in short-term debt of approximately $220.6million.  The increase in cash waspartially offset by payments on long-term debt of approximately $149.8 millionand the purchase of outstanding common stock pursuant to the share repurchaseprogram of approximately $236 thousand. Available short-term credit increasedapproximately $265 million during the period from approximately $260 million toapproximately $525 million by increases in loan limits from an existingwarehouse loan facility and the addition of a short-term borrowingfacility.  (See Note 7 to the financialstatements). The Company’s mortgage banking strategy requires that the Companyincrease its loan origination levels. In order to continue to increase loanorigination volumes, the Company must obtain additional warehouse lines ofcredit, or reduce the time loans are held for sale (warehoused). There are anumber of financial institutions which specialize in lending to mortgagebanking companies and these types of secured borrowings. AmNet expects toexpand its current warehouse lines of credit, however; there can be noassurances that AmNet will be successful in obtaining additional warehousefacilities.

 

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The Company’s mortgage banking activities haverequired a significant level of cash reserves and capital to support start-upoperating losses, loan inventories and hedge positions. Specifically, theCompany operations from mortgage banking have been cash flow negative toneutral for the first eight months of 2002. Additionally, while AmNet utilizeswarehouse credit facilities to fund its loan origination activity, AmNet mustinvest cash equity in its loan inventories approximating 1% to 4% of the costbasis for these loans. The Company also holds derivative financial instruments,requiring cash payments as those instruments mature. While the Company believesits capital base, cash reserves and cash revenues from its mortgage assetportfolio business and mortgage banking revenues will be sufficient to enablethe Company to execute its mortgage banking strategy, there can be noassurances that capital shortages will not occur, requiring the Company toraise additional debt or equity capital or decrease or cease its originationactivities.

 

The Company does not expect to pay dividendsin 2002.  As a REIT, it has been theCompany’s policy to distribute at least 90% of taxable income to itsshareholders in the form of dividends. The Company expects to have a loss in 2002 for tax purposes.  This is because (i) the Company has certainloss carry forwards from previous years, and (ii) certain expenses and chargestaken for GAAP purposes in previous years, primarily related to loan premiumamortization and credit provisions, will be expensed for tax purposes in 2002and 2003.

 

During the nine months endedSeptember 30, 2001, net cash provided by operating activities was approximately$21.3 million.  The difference betweennet cash provided by operating activities and the net loss of approximately$4.8 million was primarily the result of amortization of Mortgage Assetpremiums, a decrease in deposits to retained interest in securitization, adecrease in accrued interest receivable, and a reduction of interest rate capagreements to market value, provision for loan losses which are non-cashcharges. Accrued interest receivable increased cash flow during the first ninemonths of 2001 due to the Mortgage Asset portfolio decreasing approximately$322.9 million from December 31, 2000 to September 30, 2001.  The primary uses of cash that loweredamounts available to fund operations included: an increase in other assets(miscellaneous receivables, furniture and fixtures, prepaid expenses, leaseholdimprovements); an increase in equity income of American Residential Holdings,Inc.; a decrease in accrued interest payable; and payments that increaseamounts due from affiliates.

 

Net cash provided by investingactivities for the nine months ended September 30, 2001 was approximately$302.4 million. Cash flows from investing activities for the nine months endedSeptember 30, 2001 came from principal payments on mortgage loan bondcollateral of approximately $292.9 million and proceeds from the sale of realestate owned of approximately $9.6 million.

 

For the nine months endedSeptember 30, 2001, net cash used in financing activities was approximately$313.9 million, primarily due to payments on long-term debt of approximately$308.0 million and payments on short-term debt of approximately $4.1 million.  Net cash used in financing was furtherincreased by the payment of dividends of approximately $1.6 million and thepurchase of outstanding common stock pursuant to the share repurchase programof approximately $196 thousand.

 

**Risks Associated with Changing the Company’s BusinessStrategy**

 

*The Company has a Limited Operating History in the MortgageOrigination Industry, which Makes it Difficult to Evaluate the Company’sCurrent Business Performance and Future Prospects*

 

The Company was formed in1997 and operated as a mortgage REIT (mortgage portfolio investment) until thefourth quarter of 2001, at which time the Company began originating and sellingmortgages (mortgage banking). The Company must originate increasing amounts ofmortgages in the future to grow its business. While the Company’s executiveofficers have extensive mortgage origination and mortgage banking experience,and have hired experienced personnel in its mortgage banking subsidiary, thereare a significant number of risks and uncertainties inherent in the mortgageorigination industry, especially in light of the Company’s limited relevantoperating history and experience originating mortgages.

 

*Operating Expenses to Increase Significantly which MayAdversely Affect its Results of Operations*

 

The Company had a net loss ofapproximately $3.1 million for the nine month period ending September 30,2002.  Included in the loss is a gainfrom  lawsuit and arbitration settlementstotaling $10.3 million. Without these settlements the Company would haveincurred a net loss of approximately $13.4 million for the first nine months of2002. The Company expects operating losses to continue, which may render itunable to generate sufficient revenues to be profitable in the future. Inparticular, the Company expects to incur additional costs and expenses relatedto the expansion of the sales force and regional underwriting centers as wellas the expansion of its management team and internal infrastructure necessaryto support the growth of the mortgage banking business.

 

Unprofitable operations mayhave an adverse effect on the price of the Company’s common stock.

 

*The Company May Not Be Able to Effectively Manage the Growthof its Business*

 

Recently, the Company hasexperienced rapid growth. In the beginning of 2001, the Company hadapproximately 20 employees. As of September 30, 2002, it had approximately 269employees. Many of these employees have very limited experience with theCompany and a limited understanding of its systems. Many of the Company’s financial,operational and managerial systems were designed for a small business and haveonly recently been adopted or replaced to support larger scale operations. TheCompany will need to attract and retain sales and management personnel in anintensely competitive hiring environment. At the same time, the Company willneed to continue to upgrade and expand its financial, operational andmanagerial systems and policies and procedures.  If the Company fails to manage its growth effectively, theCompany’s expenses could increase and the management’s time and attention couldbe diverted. If the Company does not succeed in these efforts, it will beunable to effectively grow and manage the business, and its financial resultscould be negatively affected.

 

**Mortgage Banking Business—Business Risks**

 

*Failure to Renew and Obtain Adequate Financing May AdverselyAffect Results Of Operations*

 

The Company’s mortgagebanking strategy requires that the Company increase its loan origination levelsto a profitable level and continue to increase loan production volumes forsustained and increased profitability. The Company currently has warehouseborrowing facilities in place totaling $525 million. In order to continue toincrease loan origination volumes, the Company must obtain additional warehouselines of credit, or reduce the time loans are held for sale (warehoused). Thereare a number of financial institutions which specialize in lending to mortgagebanking companies and these types of secured borrowings. AmNet expects toexpand its current warehouse facilities with its warehouse providers; however,there can be no assurances that AmNet will expand its current warehousefacility or obtain additional warehouse facilities.

 

Among thefactors that will affect AmNet’s ability to expand its warehouse lineborrowings are financial market conditions and the value and performance ofAmNet prior to the time of such financing. There can be no assurance that anysuch financing can be 

successfully completed atadvantageous rates or at all. Additionally, the Company’s warehouse borrowingfacilities contain various financial covenants, including maximum leverage andcash reserve (liquidity) requirements. Failure to comply with these covenantswould accelerate these debt agreements, and if waivers or modifications couldnot be obtained, the Company

 

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couldhave an interruption in its ability to fund its mortgage loan originations,which could materially adversely impact the Company’s results of operations andfinancial condition.

 

*Overhead Expenses May Not Be Covered By Sufficient RevenuesTo Sustain Profitable Operations.*

 

The Company made a number offixed overhead commitments to establish the operational and administrativeinfrastructure necessary to support the mortgage banking business. At September30, 2002, lease commitments for headquarter and regional offices totaledapproximately 35,000 square feet. In order to achieve profitability, AmNet’smonthly originations must be in the $350 million to $400 million range, suchthat the revenues associated with this loan production exceed fixed andvariable overhead costs. Since AmNet’s revenues are tied directly to the levelof loan production, it is imperative that AmNet achieves 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 AmNet will be able to maintain its loan origination volumessufficiently to cover its fixed overhead costs, and should it incur significantoperating losses, its capital base and cash reserves could be materiallyadversely impacted, precluding the Company from fully implementing its mortgagebanking strategies.

 

*Non-saleable or Repurchased Loans May Adversely ImpactResults of Operations and The Company’s Financial Position*

 

In connection with the saleof loans to correspondent investors, AmNet makes a variety of representationsand warranties on the loans, including those that are customary in the industryrelating to, among other things, compliance with laws, regulations and investorprogram standards and the accuracy of information on the loan documents andloan file. In the event that an investor finds that a loan or group of loansviolates AmNet’s representations, the investor may require AmNet to repurchasethe loan and bear any potential related loss on the disposition of the loan, orprovide an indemnification for any losses sustained by the investor on the

loan. Additionally, AmNet may originate a loanthat does not meet investor underwriting criteria or has some other defect,requiring AmNet to sell the loan at a significant discount. AmNet has hiredexperienced personnel at all levels and has established significant controls toensure that all loans are originated to AmNet’s underwriting standards, and aremaintained in compliance with all of the representations made by AmNet inconnection with its loan sale agreements. However, there can be no assurancesthat mistakes will not be made or that certain employees will not deliberatelyviolate AmNet’s lending policies and, accordingly, AmNet is subject torepurchase risk and losses on unsaleable loans. Typically, with respect to anyloan that might be repurchased or unsaleable, AmNet would correct the flaws ifpossible and re-sell the loan in the market. AmNet intends to create repurchaseallowances to provide for this contingency on its financial statements, butthere can be no assurances that loan losses associated with repurchased orunsaleable loans will not adversely impact results of operations or thefinancial condition of the Company.

 

*Volatility in Interest Rates May Adversely Affect Results ofOperations and The Company’s Financial Position*

 

AmNet’s primary source ofrevenues is expected to be gains on sales of loans, net of gains or losses onderivative financial instruments.  AmNetsets rates and pays broker premiums based on a pricing process designed tocreate a targeted profit margin on each loan. Appropriately pricing these loans can be complex, and AmNet may notalways successfully price its loans with adequate margin to compensate it forthe risk of interest rate volatility. In addition, AmNet uses forward loan sale commitments in an effort tolimit its exposure to changes in interest rates between the time it makes arate lock commitment and the time each loan is closed and/or sold to investors.

 

The value ofthe mortgage loans that AmNet originates is at risk due to fluctuations ininterest rates during two time periods: (1) the period beginning when AmNet has committed to funding the loanand ending when the loan closes, or funds; and (2) the time period beginningwhen the loan closes and ending when AmNet commits to sell or sells the loansto third-party purchasers.  These loansare collectively referred to as the loan pipeline.  To manage the interest rate risk of AmNet's pipeline, AmNetcontinuously projects the percentage of the pipeline loans it expects toclose.  Because projecting a percentageof pipeline loans that will close is especially difficult during periods ofvolatile interest rates, the Company cannot assure that its projections will beaccurate.  On the basis of suchprojections, AmNet uses derivative instruments, or “hedges” to mitigate theadverse impact interest rate fluctuations can have on the value of the loanpipeline. TheCompany cannot assure however, that AmNet’s use of derivative securities willoffset the risk of changes in interest rates. In certain instances it may even increase this risk. See Management’sDiscussion and Analysis of Financial Condition and Results of Operations -Results of Operations - Nine Month Results.

 

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. AmNet maynot have 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, AmNet has and may in the future adjust its hedge positionsor mandatory sales commitments at a significant cost, adversely affectingresults of operations. This risk is greater during times of volatile interestrates.

 

*Changes in Interest Rates Could Adversely Impact Results ofOperations*

 

The profitability of AmNet islikely to be adversely affected during any period of unexpected or rapidincreases in interest rates. Such interest rate increases could have the effectof reducing the value of loans held for sale with such decline not fully offsetby gains from hedging activities. Higher mortgage rates could also cause adecline in the overall market for new loans, adversely impacting AmNet’sorigination levels. Furthermore, while the Company currently enjoys a positivenet interest spread on its loans held for sale, inverse or flattened interestyield curves (when long term rates are less than or equal to short term rates)could have an adverse impact on AmNet’s warehouse interest spread incomebecause AmNet generally has loans in inventory based on the 30-year fixed ratewhile the warehouse line of credit facility bears a short-term interest rate.

 

*Capital Shortages Could Impede the Company’s Ability to ExecuteIts Mortgage Banking Strategy*

 

The Company’s mortgagebanking activities will require a significant level of cash reserves andcapital to support start-up operating losses, loan inventories and hedgepositions. Specifically, the Company expects its operations from mortgagebanking to be cash flow negative for several months. Additionally, while AmNetutilizes warehouse credit facilities to fund its loan origination activity,AmNet must invest cash equity in its loan inventories approximating 1% to 4% ofthe cost basis for these loans. The Company also maintains derivative financialinstruments, requiring cash payments as those instruments mature. While theCompany believes its capital base, cash reserves and cash revenues from itsmortgage asset portfolio business and mortgage banking revenues will besufficient to enable the Company to execute its mortgage banking strategy,there can be no assurances that capital shortages will not occur, requiring theCompany to raise additional debt or equity capital or decrease or cease itsorigination activities.

 

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

* *

                AmNetoriginates mortgage loans in many states. We must comply with the laws and regulations, as well as judicial andadministrative decisions, of all of these jurisdictions, as well as anextensive body of federal laws and regulations.  The volume of new or modified laws and regulations has increasedin recent years, and, in addition, individual cities and counties have begun toenact laws that restrict loan origination activities in those cities andcounties.  The laws and regulations ofeach of these jurisdictions are different, complex and, in some cases, indirect conflict with each other.  As ouroperations continue to grow, it may be more difficult to comprehensively identify,to accurately interpret and to properly program our technology systems andeffectively train our personnel with respect to all of these laws andregulations, thereby potentially increasing our exposure to the risks ofnoncompliance with these laws and regulations.

 

                Ourfailure to comply with these laws can lead to:

 

·        civiland criminal liability;

·        lossof approved status;

·        demandsfor indemnification or loan repurchases from purchasers of our loans;

·        classaction lawsuits; and

·        administrativeenforcement actions.

 

 

*The IncreasingNumber of State and Local "Anti-predatory Lending" Laws May RestrictOur Ability To Originate or Increase Our Risk of Liability With Respect ToCertain Mortgage Loans and Could Increase Our Cost of Doing Business*

* *

                In recent years, several federal, state and local laws, rules andregulations have been adopted, or are under consideration, that are intended toeliminate so-called "predatory" lending practices.  These laws, rules and regulations imposecertain restrictions on loans on which certain points and fees or the annualpercentage rate ("APR") exceeds specified thresholds.  Some of these restrictions expose a lenderto risks of litigation and regulatory sanction no matter how carefully a loanis underwritten.  In addition, anincreasing number of these laws, rules and regulations seek to impose liabilityfor violations on purchases of loans, regardless of whether a purchaser knew ofor participated in the violation.

 

                Although it is against our policy to engage in predatory lendingpractices, we have generally avoided originating loans that exceed the APR or"points and fees" thresholds of these laws, rules and regulations,because the companies that buy our loans and/or provide financing for our loanorigination operations generally do not want to buy or finance such loans.  The continued enactment of these laws, rulesand regulations may prevent us from making certain loans and may cause us toreduce the APR or the points and fees on loans that we do make.  In addition, the difficulty of managing therisks presented by these laws, rules and regulations may decrease theavailability of warehouse financing and the overall demand for loans, making itdifficult to fund, sell or securitize any of our loans.  If we decide to relax our restrictions onloans subject to these laws, rules and regulations because the companies whichbuy our loans and/or provide financing for our loan origination operationsrelax their restrictions, we will be subject to greater risks for actual orperceived non-compliance with such laws, rules and regulations, includingdemands for indemnification or loan repurchases from our lenders and loanpurchasers, class action lawsuits, increased defenses to foreclosure ofindividual loans in default, individual claims for significant monetary damagesand administrative enforcement actions. If nothing else, the growing number of these laws, rules and regulationswill increase our cost of doing business as we are required to develop systemsand procedures to ensure that we do not violate any aspect of these newrequirements.  Any of the foregoingcould materially and adversely affect our business, financial condition,liquidity and results of operations.

 

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*Competition In The Mortgage Banking Industry and Demand forMortgages May Hinder The Company’s Ability to Achieve or Sustain ProfitableOrigination Levels.*

 

The Company’s success in themortgage banking strategy will depend, in large part, on AmNet’s ability tooriginate “A” paper loans in sufficient quantity such that the gain on sales ofloans are in excess of both fixed and variable overhead costs. There can be noassurance that AmNet will be able to originate sufficient levels of mortgagesto achieve and sustain profitability. In originating and selling A paper loans,AmNet will compete with investment banking firms, savings and loanassociations, banks, mortgage bankers and other entities originating A paperfor residential 1-4 unit mortgages, many of which have greater financialresources than AmNet. The Company will also face competition from companiesalready established in these markets while it began originating loans in thefourth quarter of 2001. In addition to the level of home purchase activity, theorigination market is directly tied to the general level of interest rates andrefinance 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 expected that the loan origination market will continue to be inthe trillion-plus level in 2002 and beyond, the overall market size couldcontract, increasing competitiveness in the mortgage markets, and puttingpressure on the market competitors to reduce revenues to sustain originationvolumes and market share. The Company believes that variety and competitivenessof its loan products and customer service levels will allow it to gain marketshare over the next several years, even if the overall demand for mortgagesdeclines; however, there can be no assurance that the Company will be able tosuccessfully compete.

 

AmNet relies on commissionedaccount executives to generate loan referrals from professional mortgagebrokers.  These account executivestypically have established relationships with AmNet’s broker clients.  AmNet’s overall loan fundings are in directproportion to the number of account executives, and as such, sustained loanproduction and market share growth are dependent on the successful retentionand recruitment of the AmNet sales force, however due to a very competitivelabor market, there can be no assurances AmNet will be able to retain andrecruit account executives.

 

*AmNet Is Subject To Losses Due To Fraudulent Acts On ThePart Of Loan Applicants or Mortgage Brokers*

 

Mortgage brokers, who assistloan applicants in obtaining mortgage loans, refer all of the mortgage loansoriginated by AmNet. As such, the loan application, property appraisal, creditreport and other supporting documentation are furnished by the mortgage brokerand used by AmNet’s underwriters to make approval or denial decisions. AmNetemployees have virtually no contact with applicants, and rely on the mortgagebroker to obtain and furnish all of the documentation supporting the mortgageloan application.

 

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 fraudulent mortgage loans will havea high risk of default, and will likely not be fully recoverable throughdisposition of the underlying property securing the mortgage loan.

 

Should material fraud bedetected on a mortgage loan prior to sale to an investor, the mortgage loansmay have to be sold at a significant discount or may not be saleable. Shouldmaterial fraud be detected after a mortgage loan is sold to a correspondentinvestor, AmNet may be required to repurchase the loan or indemnify theinvestor. While the investor and/or AmNet can initiate foreclosure proceedingson any loans deemed to be fraudulently obtained, AmNet could incur significantlosses on these fraudulent mortgage loans if principal or interest is not fullyrecovered through the foreclosure and disposition of the underlying propertysecuring the mortgage loan.

 

AmNet has established riskmanagement and quality control committees to set policy and manage exposure tocredit losses due to fraud, compliance errors or non-compliance with AmNet’sunderwriting 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. Additionally, AmNet hasnumerous 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 inaccuratedocumentation that is not detected by AmNet personnel or by electronic fraudchecks utilized by AmNet. Should AmNet originate significant numbers offraudulent loans, the Company’s results of operations and financial conditioncould be materially adversely affected.

 

*AmNet is Subject to Counterparty Risks on Loan SalesCommitments and Hedging Transactions*

 

In connection with itsmortgage loan sales, which involve the sale of mortgage loans andmortgage-backed securities on a forward or other deferred delivery and paymentbasis, AmNet may enter into treasury option purchases and sales in connectionwith its hedging activities. AmNet has 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 AmNet’s counterparties is currently secured or subject tomargin requirements. AmNet attempts to limit its credit exposure on forwardsales arrangements on mortgage loans and mortgage–backed securities byentering into forward contracts only with institutions that AmNet believes areacceptable credit risks, and which have substantial capital and an establishedtrack record in correspondent lending. In its treasuries futures transactions,AmNet enters into transactions with the Chicago Board of Trade through anapproved dealer to minimize potential trade risk however there can be noassurances that counterparties will perform. If counterparties do not perform,AmNet’s results of  operations mayadversely  affected.

 

AmNet has warehouse linefacilities with Countrywide Home Loans, Inc. (Countrywide). AmNet also sellsloans to Countrywide.  The Company mayhave to find other investors for loan sales or be forced to find other sourcesof warehouse line lending if Countrywide changes its policies andprocedures.  Either of these results mayhave an adverse effect on the Company’s results of operations.

 

*Mortgage Banking Revenues Can Fluctuate From Period toPeriod Based on a Number of Factors*

 

AmNet’s operating resultshave and may in the future fluctuate significantly from period to period as aresult of a number of factors, including the volume of loan origination,interest rates and the level of unrealized gains/losses in unsold loans,pipeline loans or positions in derivative securities. Accordingly, theconsolidated net income of the Company may fluctuate from period to period.

 

*Dependency on Correspondent Investors, Secondary Markets*

 

AmNet’s ability to generategains on the sale of mortgages is largely dependent upon the continuation ofcorrespondent lending programs offered by large correspondent lenders, as wellas AmNet’s continued eligibility to participate in such programs. AlthoughAmNet is in good standing with a number of large correspondent lenders and isnot aware of any proposed discontinuation of, or significant reduction in, theoperation of such programs, any such changes could have a material adverseeffect on AmNet’s 

operations. AmNet anticipates that it willcontinue to remain eligible to participate in such programs, but anysignificant impairment of such eligibility would materially adversely affectits operations.

 

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*Origination Activity Is Concentrated In California, Makingthe Company’s Results Subject to Adverse Economic Conditions In California.*

 

A large proportion of loansexpected to be originated by AmNet will be concentrated in California. AlthoughAmNet has expanded its operations to the East Coast of the United States, asignificant portion of its loan origination volume is likely to be based inCalifornia for the foreseeable future. Consequently, the Company’s results ofoperations and financial condition are dependent upon general trends in theCalifornia economy and its residential real estate market. Residential realestate market declines may adversely affect the levels of new mortgages inCalifornia or the value paid by correspondent lenders for loans in California,potentially adversely affecting the Company’s results of operations andfinancial condition.

 

**Mortgage Asset Portfolio Business— Business Risks**

*High Levels of Bond Collateral Mortgage Loan Prepayments MayReduce Operating Income*

 

The level of prepayments ofbond collateral mortgage loans purchased at a premium by the Company directlyimpacts the level of amortization of capitalized premiums. The Company uses acalculation for determining the premium amortization which is based on theinterest method. If prepayment levels exceed projections used for the premium amortizationcalculation, the potential exists for impairment write-downs as a result ofunder-amortized premiums.

 

Bond collateral mortgage loanprepayment 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. The Company experienced high levels of prepayments during 1999 through2000 on its CMO/FASIT segment of its bond collateral mortgage loan portfoliodue principally to the fact that the underlying adjustable rate loans weresubject to their first initial interest rate adjustment (after being fixed forthe first two years), and prepayment penalty clauses expired and borrowers wereable to secure more favorable rates by refinancing. In 2001 and 2002, the samephenomenon occurred in the 99-A and 1999-2 segments of the portfolio, as theloans in these segments reached the end of their 2 year fixed rate periods andprepayment penalty clauses expired. The overall rate of prepayments hasdecreased over the past several months averaging 39.68% in the first ninemonths of 2002, 41.66% in the fourth quarter of 2001, down from 52.15% in thethird quarter and 49.60% in the second quarter. The Company anticipates thatoverall prepayment rates are likely to remain in the 40% to 50% range in 2002.There can be no assurance that prepayment rates will not be higher or thatprepayment penalty income will offset premium amortization expense.Accordingly, the Company’s financial condition and results of operations couldbe materially adversely affected by higher than anticipated mortgage loanprepayments.

 

As of September 30, 2002approximately 19.4% of the Company’s Bond Collateral Mortgage Loan portfoliohad prepayment penalty clauses, with a weighted average of sixteen monthsremaining before prepayment penalties expire. Prepayment penalty clauses serveas a deterrent to early prepayments and the penalties collected help to offsetthe premium amortization expense. However, prepayment penalty fees may be lessthan required to fully compensate the Company for its remaining capitalizedpremiums, and prepayment penalty provisions may expire before the prepaymentoccurs.

 

*Borrower Credit Defaults, Special Hazard Losses and NationalRecessions May Decrease Value and Cash Flow from the Company Bond CollateralMortgage Assets*

 

During the time the Companyholds bond collateral mortgage assets or retained interest in securitizations,it is subject to credit risks, including risks of borrower defaults,bankruptcies and special hazard losses (such as those occurring fromearthquakes or floods) that are not covered by standard hazard insurance. Inthe event of a default on any mortgage loan held by the Company, or mortgagesunderlying bond collateral or retained interest in securitization, the Companywill bear the risk of loss of principal to the extent of any deficiency betweenthe value of the secured property and the amount owing on the mortgage loan,less any payments from an insurer or guarantor. Although the Company has establishedan allowance 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 loan 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 or the mortgagor’s non-owner

occupancy status with respect to the mortgagedproperty. As a result of these and other factors, the interest rates charged onnon-conforming mortgage loans are often higher than those charged for conformingmortgage loans. The combination of different underwriting criteria and higherrates of interest may lead to higher delinquency rates and/or credit losses fornon-conforming as compared to conforming mortgage loans and thus require highloan loss allowances. All of the Company’s Bond Collateral Mortgage Loans atSeptember 30, 2002 were originated as sub-prime mortgage loans.

 

A downturn 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 decreasedproperty value could increase. The Company’s allowances for

 

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loan losses may be inadequate should economicconditions worsen significantly causing higher than expected defaults andproperty value decreases. Management believes the allowances for loan lossesare adequate as of September 30, 2002.

 

Even assuming that propertiessecured by the mortgage loans held by the Company provide adequate security forsuch mortgage loans, substantial delays could be encountered in connection withthe foreclosure of defaulted mortgage loans, with corresponding delays in thereceipt of related proceeds by the Company. State and local statutes and rulesmay delay or prevent the Company’s foreclosure on or sale of the mortgagedproperty and typically prevent the Company from receiving net proceedssufficient to repay all amounts due on the related mortgage loan.

 

*Requirements to Maintain Over-collateralization Accounts MayReduce the Company’s Cash Flow and Inhibit Plans for Expansion of the MortgageBanking Business*

 

All of the Company’s BondCollateral Mortgage Loans have been pledged as collateral to secure long termdebt. Certain overcollateralization accounts have been established representingthe excess principal amount of these mortgages over the associated bondobligations. Various indenture agreements associated with these financings callfor the overcollateralization levels to be maintained on an ongoing basisdepending on the amount of remaining bond obligations as well as the status ofdelinquency of the underlying bond collateral or the loan loss performance ofbond collateral. Although its long-term financing agreements are non-recourse,net interest income from some segments of the Company’s Bond CollateralMortgage Loans has in the past, and could in the future, be “trapped” to paydown debt in order for the Company to achieve its over-collateralizationrequirements. While the Company believes that it has sufficient cash reservesand other liquidity to support its planned mortgage banking activities, therecan be no assurances that the Company will not be required to reduce or cease itsplanned mortgage banking activities should it be required to divert cash flowto maintain overcollateralization requirements.

 

*Because Mortgage Assets Are Pledged to Secure Long-TermDebt, the Company May not be Able to Sell Such Assets and Therefore theCompany’s Liquidity and Capital Resources May be Adversely Affected*

 

All of the Company’s BondCollateral Mortgage Loans at September 30, 2002 were pledged to secureLong-Term Debt. These assets are subject to the terms of the Long-Term Debtagreements and may not be separately sold or exchanged. While the Company maysell its 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, the Company would expect to receive less than its book valueshould it sell its interests in the bond collateral. As a result, the Company’sliquid capital resources may be affected.

 

*Increases In Short Term Interest Rates May Increase the Costof Borrowings by the Company, Which May Reduce Income From Operations*

 

The majority of the Company’sBond Collateral Mortgage Loans have a repricing frequency of six months orless, while substantially all of the Company’s borrowings have a repricingfrequency of one month or less. Accordingly, the interest rates on theCompany’s borrowings may be based on interest rate indices which are differentfrom, and adjust more rapidly than, the interest rate indices of its relatedmortgage loans. Consequently, increases in (short-term) interest rates maysignificantly influence the Company’s net interest income. While increases inshort-term interest rates will increase the yields on a portion of theCompany’s adjustable-rate Bond Collateral Mortgage Loans, rising short termrates will also increase the cost of borrowings by the Company. To the extentsuch costs rise more than the yields on such Bond Collateral Mortgage Loans,the Company’s net interest income will be reduced or a net interest loss mayresult. The Company may mitigate its “gap’ risk by purchasing interest ratehedges (referred to as “caps’), however potential income from these hedges mayonly partially offset the adverse impact of rising borrowing costs.

 

*Loans Serviced by Third Parties May Result in IncreasedDelinquency Rates and Credit Losses which May Adversely Affect the Company’sResults of Operations and Financial Condition*

 

All of the Company’s BondCollateral Mortgage Loans are serviced by sub-servicers. The Companycontinually monitors the performance of the sub-servicers through performancereviews, comparable statistics for delinquencies and on-site visits. TheCompany has, on occasion, determined that sub-servicers have not followedstandard collection and servicing practices related to the Company’s BondCollateral Mortgage Loans which the Company believes has led to increaseddelinquencies and higher loan losses on selected segments. The Companycontinues to monitor these servicers, has put these entities on notice of suchdeficiencies, and has instituted other mitigating processes. The Company hasarranged for servicing with entities that have particular expertise innon-conforming mortgage loans. Although the Company has established these relationshipsand procedures, there can be no assurance that these sub-servicers will servicethe Company’s mortgage loans in such a way as to minimize delinquency ratesand/or credit losses and not cause an adverse effect on the Company’s resultsof operations.

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

 

A primary market risk facingthe Company is interest rate risk. The Company attempts to manage this risk bystriving to balance its mortgage loan origination and mortgage loan sale business.To a lesser degree the Company also manages the interest rate risk on itsMortgage Asset Portfolio Business between interest earned on bond collateralmortgage assets and interest paid on long term debt collateralized by mortgageassets.

 

The Company has performedvarious sensitivity analyses that quantify the net financial impact of changesin interest rates on its 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 rely upon a number of critical assumptions. The scenariospresented are illustrative. Actual experience may differ materially from theestimated amounts presented for each scenario. To the extent that yield curveshifts are non-parallel and to the extent that actual variations in significantassumptions differ from those applied for purposes of the valuations, theresultant valuations can also be expected to vary. Such variances may provematerial.

 

20

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|                                         |   |                    |    |                      |   | **If  Interest Rates Were To**             |   |
|----------------------------------------------|--------|-------------------------|---------|---------------------------|--------|--------------------------------------------|--------|
|                                         |   | **September  30, 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                    |   | $                       | 11,650  |                      | $      | 11,650                                     |   | $ | 11,650 |   | $ | 11,650 |   | $ | 11,650 |   | $ | 11,650 |   |
| Accounts receivable mortgage originations(1) |   | 243,929                 |    | 243,929                   |   | 243,463                                    |   | 244,384 |   | 242,083 |   | 244,717 |   |
| Bond collateral and real estate owned (net)  |   | 305,682                 |    | 315,924                   |   | 315,052                                    |   | 316,801 |   | 314,313 |   | 317,685 |   |
| Derivatives(1)                               |   | 2,097                   |    | 2,097                     |   | 2,762                                      |   | 1,540 |   | 3,495 |   | 642 |   |
| Retained interest in securitization          |   | 458                     |    | 458                       |   | 458                                        |   | 458 |   | 458 |   | 458 |   |
| Total interest-earning assets                |   | $                       | 563,816 |                      | $      | 574,058                                    |   | $ | 573,385 |   | $ | 574,833 |   | $ | 571,999 |   | $ | 575,152 |   |
|                                         |   |                    |    |                      |   |                                       |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                |   |                    |    |                      |   |                                       |   |   |   |   |   |   |   |
| Short-term debt                              |   | $                       | 255,890 |                      | $      | 255,890                                    |   | $ | 255,890 |   | $ | 255,890 |   | $ | 255,890 |   | $ | 255,890 |   |
| Long-term debt, net                          |   | 273,016                 |    | 273,016                   |   | 273,016                                    |   | 273,016 |   | 273,016 |   | 273,016 |   |
| Due to affiliate                             |   | 2,049                   |    | 2,049                     |   | 2,049                                      |   | 2,049 |   | 2,049 |   | 2,049 |   |
| Total interest-bearing liabilities           |   | $                       | 530,955 |                      | $      | 530,955                                    |   | $ | 530,955 |   | $ | 530,955 |   | $ | 530,955 |   | $ | 530,955 |   |
|                                         |   |                    |    |                      |   |                                       |   |   |   |   |   |   |   |
| Effect on equity                             |   | $                       | 32,861  |                      | $      | 43,103                                     |   | $ | 42,430 |   | $ | 43,878 |   | $ | 41,044 |   | $ | 44,197 |   |
|                                         |   |                    |    |                      |   |                                       |   |   |   |   |   |   |   |
|                                         |   |                    |    |                      |   | **If  Interest Rates Were To**             |   |
|                                         |   | **September  30, 2001** |    | **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                    |   | $                       | 10,945  |                      | $      | 10,945                                     |   | $ | 10,945 |   | $ | 10,945 |   | $ | 10,945 |   | $ | 10,945 |   |
| Accounts receivable mortgage originations(1) |   | 38,095                  |    | 38,161                    |   | 37,954                                     |   | 38,120 |   | 37,872 |   | 38,203 |   |
| Bond collateral and real estate owned (net)  |   | 461,378                 |    | 475,292                   |   | 473,883                                    |   | 477,127 |   | 471,294 |   | 479,192 |   |
| Derivatives(1)                               |   | 926                     |    | 926                       |   | 1,060                                      |   | 1,080 |   | 1,079 |   | 759 |   |
| Retained interest in securitization          |   | 1,589                   |    | 1,582                     |   | 1,582                                      |   | 1,582 |   | 1,582 |   | 1,582 |   |
| Due from affiliate                           |   | 159                     |    | 159                       |   | 159                                        |   | 159 |   | 159 |   | 159 |   |
| Total interest-earning assets                |   | $                       | 513,085 |                      | $      | 527,065                                    |   | $ | 525,583 |   | $ | 529,013 |   | $ | 522,931 |   | $ | 530,840 |   |
|                                         |   |                    |    |                      |   |                                       |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                |   |                    |    |                      |   |                                       |   |   |   |   |   |   |   |
| Short-term debt                              |   | $                       | 35,265  |                      | $      | 35,265                                     |   | $ | 35,265 |   | $ | 35,265 |   | $ | 35,265 |   | $ | 35,265 |   |
| Long-term debt, net                          |   | 422,349                 |    | 422,349                   |   | 422,349                                    |   | 422,349 |   | 422,349 |   | 422,349 |   |
| Due to affiliate                             |   | 1,786                   |    | 1,786                     |   | 1,786                                      |   | 1,786 |   | 1,786 |   | 1,786 |   |
| Total interest-bearing liabilities           |   | $                       | 459,400 |                      | $      | 459,400                                    |   | $ | 459,400 |   | $ | 459,400 |   | $ | 459,400 |   | $ | 459,400 |   |
|                                         |   |                    |    |                      |   |                                       |   |   |   |   |   |   |   |
| Effect on equity                             |   | $                       | 53,685  |                      | $      | 67,665                                     |   | $ | 66,183 |   | $ | 69,613 |   | $ | 63,531 |   | $ | 71,440 |   |
|                                              |        |                         |         |                           |        |                                            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Mortgage loans held for sale and derivative financial instruments areextremely sensitive to short term interest rate movements.  Forward commitments and options and  options on treasury futures (i.e. puts andcalls) are utilized to mitigate potential declines in the value of loanssubject to rate lock commitments and uncommitted loans held for sale(collectively the loan pipeline) caused by increases in interest rates.  Typically, interest rate exposure on anygiven rate lock or mortgage loan is less than 30 days.  Evaluating these assets on a scale tolonger-term assets does not provide relevant value.  Therefore, mortgage originations and derivative financialinstruments are shown at 10 and 25 basis point shifts (increase and decrease)to provide relevant potential fair value changes.

 

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.

 

*Accounts receivable mortgageoriginations*

 

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 Mortgage Loans is estimated based on quotedmarket prices from dealers and brokers for similar types of mortgage loans inthe bulk mortgage market. Market prices reflect various assumptions as toprepayment rates, loan losses and financing costs. However, due to the fact thatthe Company’s Bond Collateral Mortgage Loans are pledged to secure long termdebt, there is not a liquid market for such encumbered interests. As such, asignificant liquidity discount would be applied.  Since the Company intends to hold the bond collateral mortgageloans to maturity, such a liquidity discount has not been reflected in fairvalue.

 

21

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*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, treasury futures andoptions on treasury futures are based on quoted market prices for theseinstruments. Fair values of the Company’s commitments to originate loans in thequoted market prices for the loans expected to close vary due to differencesbetween current levels of interest rates 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 the Company’s financial performance in each suchscenario. Consequently, the preceding estimates should not be viewed as aforecast.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

(a) Under the supervision and with theparticipation of the Company’s management, including its principal executiveofficer and principal financial officer, the Company conducted an evaluation ofits disclosure controls and procedures, as such term is defined under Rule13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended,within 90 days of the filing date of this report. Based on their evaluation,the Company's principal executive officer and principal financial officerconcluded that the Company’s disclosure controls and procedures are effective.

 

(b) There have been no significant changes(including corrective actions with regard to significant deficiencies ormaterial weaknesses) in the Company’s internal controls or in other factorsthat could significantly affect these controls subsequent to the date of theevaluation referenced in paragraph (a) above.

 

22

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PART II.  OTHER INFORMATION

 
| Item. 1. | Legal Proceedings                          |
|----------|--------------------------------------------|
|     | None                                       |
|     |                                       |
| Item  2. | Changes in Securities and  Use of Proceeds |
|     | None.                                      |
|     |                                       |
| Item  3. | Defaults Upon Senior  Securities           |
|     | Not applicable.                            |

 

Item 4.  Submission of Matters to a Vote of SecurityHolders

The Company distributed itsDefinitive Proxy Statement, Proxy and Annual Report to Stockholders on or aboutJune 12, 2002 to each stockholder of record as of May 30, 2002, for its AnnualMeeting of Stockholders held July 19, 2002. At the Company’s Annual Meeting, the stockholders were asked to considereight proposals.

 

The first proposal consideredby the stockholders at the Annual Meeting involved the election of two Class IIdirectors. The existing Board of Directors selected two nominees, both of whomran unopposed and each of whom was then serving as a Class II director.  The nominees of the Board, and the votingresults with respect thereto, were:

 
| **Name**         |   | **Votes For** |   | **Withheld** |   |
|------------------|--------|---------------|--------|--------------|--------|
| Keith Johnson    |   | 6,660,508     |   | 553,052      |   |
| Richard T. Pratt |   | 6,660,508     |   | 553,052      |   |

 

The following directors’ termsof office continued after the Annual Meeting: John M. Robbins, Jay M. Fuller, Mark J. Reidy, H. James Brown, Ray W.McKewon and John C. Rocchio.

 

The second proposal consideredby the stockholders at the Annual Meeting was a proposal to amend and restatethe Company’s Articles of Amendment and Restatement to eliminate certainsections required to maintain the Company’s status as a REIT.  The number of shares cast for, against andabstentions as of the date of the Annual Meeting with respect to this proposalwere 5,114,103; 724,940 and 28,589 respectively.  The affirmative vote of a majority of the shares of common stockoutstanding as of the record date was required for approval of thisproposal.  As of the date of the AnnualMeeting, the percent of shares voted in favor of this proposal was 64.9% of theshares of common stock outstanding. Therefore, proposal two was approved by the stockholders as of the dateof the Annual Meeting.  Notwithstanding,because this proposal and the third proposal were both related to the Company’spreparations to terminate its status as a REIT, the stockholder vote with respectto the second proposal and the third proposal was adjourned to August 2, 2002,as described below.  On August 2, 2002,the date of the adjourned Annual Meeting, the number of shares cast for,against and abstentions for this proposal were 5,332,585; 765,745 and 27,819respectively.  This proposal wastherefore approved by the stockholders.

 

The third proposal consideredby the stockholders at the Annual Meeting was a proposal to delete a section ofthe Company’s Bylaws requiring the Company to maintain its status as aREIT.  The number of shares cast for,against and abstentions with respect to this proposal were 5,105,153; 725,490and 36,989 respectively as of the date of the Annual Meeting.  The affirmative vote of two-thirds of theshares of common stock outstanding as of the record date was required forapproval of this proposal.  The percentof shares voted in favor of this proposal as of the date of the Annual Meetingwas 64.8% of the shares of common stock outstanding, while over 85% of the sharesvoting had been voted in favor of the proposal.  Because the second and third proposals were both related topreparing the Company to terminate its status as a REIT, a motion wasentertained at the Annual Meeting to adjourn with respect to both the secondand third proposals to permit stockholders additional time to vote on theseproposals.  The required vote on themotion to adjourn the Annual Meeting, the fourth proposal considered by thestockholders at the Annual Meeting was a majority of the shares present at themeeting or represented by proxy holders. Of the 7,213,560 shares present at the Annual Meeting in person or byproxy, 6,807,540 voted in favor of the motion to adjourn.  The motion to adjourn was therefore approvedby the stockholders.  On August 2, 2002,the number of shares cast for, against and abstentions were 5,322,535; 766,295and 37,319 respectively.  This proposalwas therefore approved by the stockholders.

 

The fifth proposal consideredby the stockholders at the Annual Meeting was an increase in the size of thereserve of the Company’s 1997 Stock Option Plan.  The number of shares cast for, against and abstentions withrespect to this proposal were 4,718,775; 1,044,980 and 103,876 respectively.  The affirmative vote of a majority of thevotes cast with respect to this proposal was required for approval of thisproposal.  The percent of shares votedin favor of this proposal was 80.4% of the votes cast with respect to thisproposal at the Annual Meeting.  Thisproposal was therefore approved by the stockholders.

 

The sixth proposal consideredby the stockholders at the Annual Meeting was an increase in the size of thereserve of the Company’s 1997 Outside Directors Stock Option Plan.  The number of shares cast for, against andabstentions with respect to this proposal were 6,807,540; 134,519 and 39,915respectively.  The affirmative vote of amajority of the votes cast with respect to this proposal was required forapproval of this proposal.  The percentof shares voted in favor of this proposal was 97.5% of the votes cast withrespect to this proposal at the Annual Meeting.  This proposal was therefore approved by the stockholders.

 

The seventhproposal considered by the stockholders at the Annual Meeting was to recommendthat the Board redeem the rights outstanding under the Company’s StockholdersRights Plan.   The number of shares castfor, against and abstentions with respect to this proposal were 921,874;4,512,791 and 76,124 respectively.  Theaffirmative vote of a majority of the shares of common stock outstanding as ofthe record date was required for approval of this proposal.  The percent of shares voted in favor of thisproposal was 11.7% of the shares of common stock outstanding as of the recorddate.  This proposal was therefore notapproved by the stockholders.

 

The eighth proposal consideredby the stockholders at the Annual Meeting was to amend the Company’s Bylaws toprevent directors from being reelected if they decided not to vote to redeemthe Rights Plan.  The number of sharescast for, against and abstentions with respect to this proposal were 901,763;4,540,296 and 68,729 respectively.  Theaffirmative vote of a majority of the shares of common stock outstanding as ofthe record date was required for approval of this proposal.  The percent of shares voted in favor of thisproposal was 11.4% of the shares of common stock outstanding as of the recorddate.  This proposal was therefore notapproved by the stockholders.

 

23

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Item 5.  Other Information:    None

 

Item 6.  Exhibits:

 

 
| (a)    | Exhibits |                                                                                                                     |
|--------|----------|--------------------------------------------------------------------------------------------------------------------------|
|   |     |                                                                                                                     |
| *      | 3.1      | Articles of Amendment and  Restatement of the Registrant                                                                 |
| **     | 3.2      | Second Amended and Restated  Bylaws of the Registrant                                                                    |
| ***    | 4.1      | Rights Agreement dated  February 2, 1999 by and between the Company and American Stock Transfer  Company as Rights Agent |
|   | 99.1     | Certification of Chief  Executive Officer                                                                                |
|   | 99.2     | Certification of Chief  Financial Officer                                                                                |

 

----

| *                    |                       | Incorporated by reference to Registration Statement on Form S-11 (File  No. 333-33679)   |
|----------------------|----------------------------|------------------------------------------------------------------------------------------|
| **                   |                       | Incorporated by reference to our quarterly report on Form 10-Q 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:  November 13, 2002               | By:    | /s/ Judith A. Berry |   |
|                                         |   |   | Judith A. Berry, |   |
|                                         |   |   | Executive Vice President |   |
|                                         |   |   | Chief Financial Officer |   |
|                                              |        |  |  |  |  |

 

24

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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 officersand 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, includingits consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this quarterly report isbeing 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 officersand 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 officersand 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: November 13, 2002 |
|-------------------------|
|                    |
|                    |
| /s/ John M. Robbins     |   |
| John M. Robbins         |
| Chief Executive Officer |

 

25

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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 officersand 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 officersand 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 officersand 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: November 13, 2002 |
|-------------------------|
|                    |
| /s/ Judith A. Berry     |   |
| Judith A. Berry         |
| Chief Financial Officer |

 

26

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