UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
Commission File Number: 001-11981
MUNICIPAL MORTGAGE & EQUITY, LLC
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 52-1449733
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
218 NORTH CHARLES STREET, SUITE 500 21201
BALTIMORE, MARYLAND
(Address of Principal Executive Offices) (Zip Code)
(443) 263-2900
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
The Registrant had 28,836,030 common shares outstanding as of August 5,
2003.
EXPLANATORY NOTE
This Form 10-Q/A amends and replaces in its entirety the Form 10-Q (the "Form
10-Q") filed by Municipal Mortgage & Equity, LLC on August 13, 2003. This
amendment is being filed solely to correct the signature page to the Form 10-Q.
MUNICIPAL MORTGAGE & EQUITY, LLC
INDEX TO FORM 10-Q/A
Part I - FINANCIAL INFORMATION
Item 1. Financial Statements 2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 24
Item 3. Quantitative and Qualitative Disclosures about Market Risk 37
Item 4. Controls and Procedures 37
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 37
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
June 30, 2003 December 31, 2002
------------- -----------------
ASSETS
Investment in tax-exempt bonds, net (Note 2) $ 775,793 $ 770,345
Loans receivable, net (Note 3) 451,397 422,299
Loans receivable held for sale (Note 3) 11,023 39,149
Investments in partnerships 98,239 99,966
Residual interests in bond securitizations (Note 4) 13,099 11,039
Investment in derivative financial instruments (Note 5) 3,170 18,762
Cash and cash equivalents 81,335 43,745
Interest receivable 17,252 16,157
Restricted assets 69,529 40,318
Other assets (Note 6) 35,400 46,592
Mortgage servicing rights, net 10,869 11,009
Goodwill 33,607 33,537
----------- -----------
TOTAL ASSETS $ 1,600,713 $ 1,552,918
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable (Note 7) $ 436,949 $ 450,924
Short-term debt (Note 7) 211,670 219,945
Long-term debt (Note 7) 142,006 147,357
Residual interests in bond securitizations (Note 4) 1,343 1,447
Investment in derivative financial instruments (Note 5) 21,792 49,359
Accounts payable and accrued expenses 6,436 7,436
Interest payable 5,383 6,677
Unearned revenue and other liabilities 33,336 19,263
Distributions payable 2,995 2,994
----------- -----------
TOTAL LIABILITIES 861,910 905,402
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 8) -- --
PREFERRED SHAREHOLDERS' AND MINORITY INTERESTS' EQUITY IN SUBSIDIARY COMPANIES 160,142 160,452
SHAREHOLDERS' EQUITY:
Common shares, par value $0 (32,303,599 shares authorized, including 28,922,533
shares issued and outstanding, and 34,595 deferred shares at June 30, 2003 and
29,083,599 authorized, 25,571,580 shares issued and outstanding, and 29,844
deferred shares at December 31, 2002) 568,576 471,946
Less common shares held in treasury at cost (124,715 and 55,444 at June 30, 2003 and
December 31, 2002, respectively) (2,615) (857)
Less unearned compensation (deferred shares) (Note 12) (2,939) (3,274)
Accumulated other comprehensive income 15,639 19,249
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 578,661 487,064
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,600,713 $ 1,552,918
=========== ===========
The accompanying notes are an integral part of these financial statements.
2
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
For the three For the six
months ended months ended
June 30, June 30,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
INCOME:
Interest income
Interest on bonds and residual interests in bond securitizations $ 13,929 $ 15,399 $ 29,914 $ 30,561
Interest on loans 7,563 8,594 17,066 17,024
Interest on short-term investments 332 244 524 731
-------- -------- -------- --------
Total interest income 21,824 24,237 47,504 48,316
-------- -------- -------- --------
Fee income
Syndication fees 1,825 2,380 3,236 3,998
Origination fees 2,219 1,505 2,917 2,594
Loan servicing fees 1,838 1,660 3,747 3,568
Asset management and advisory fees 1,198 1,040 2,274 1,907
Other income 3,309 1,259 5,506 2,404
-------- -------- -------- --------
Total fee income 10,389 7,844 17,680 14,471
-------- -------- -------- --------
Net gain on sales 1,453 703 2,731 2,869
-------- -------- -------- --------
TOTAL INCOME 33,666 32,784 67,915 65,656
-------- -------- -------- --------
EXPENSES:
Interest expense 8,724 8,487 19,092 17,459
Salaries and benefits 8,671 5,930 14,637 10,757
General and administrative 2,113 1,697 3,938 3,423
Professional fees 877 1,967 1,866 2,604
Amortization of mortgage servicing rights and other intangibles 414 333 803 651
-------- -------- -------- --------
TOTAL EXPENSES 20,799 18,414 40,336 34,894
-------- -------- -------- --------
Net holding gains (losses) on derivatives (2,449) (7,721) 424 (4,609)
Impairments and valuation allowances related to investments (Notes 2 and 3) (1,144) -- (1,144) (110)
Net gains (losses) from equity investments in partnerships (1,606) 94 (2,353) (229)
-------- -------- -------- --------
NET INCOME BEFORE INCOME TAXES, INCOME ALLOCATED TO PREFERRED
SHAREHOLDERS AND MINORITY INTERESTS IN SUBSIDIARY COMPANIES
AND DISCONTINUED OPERATIONS 7,668 6,743 24,506 25,814
Income tax expense (benefit) (540) 828 (472) 1,859
-------- -------- -------- --------
NET INCOME BEFORE INCOME ALLOCATED TO PREFERRED SHAREHOLDERS
AND MINORITY INTERESTS IN SUBSIDIARY COMPANIES AND
DISCONTINUED OPERATIONS 8,208 5,915 24,978 23,955
Income allocable to preferred shareholders and minority interests
in subsidiary companies 2,854 2,995 5,679 5,989
-------- -------- -------- --------
NET INCOME FROM CONTINUING OPERATIONS 5,354 2,920 19,299 17,966
Discontinued operations (Note 9) 25,748 -- 25,748 --
-------- -------- -------- --------
NET INCOME $ 31,102 $ 2,920 $ 45,047 $ 17,966
======== ======== ======== ========
NET INCOME ALLOCATED TO:
Term growth shares $ -- $ -- $ -- $ 153
======== ======== ======== ========
Common shares $ 31,102 $ 2,920 $ 45,047 $ 17,813
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
3
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
For the three months ended For the six months ended
June 30, June 30,
--------------------------------- ---------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
BASIC EARNINGS PER COMMON SHARE:
Net income from continuing operations $ 0.19 $ 0.12 $ 0.69 $ 0.73
Discontinued operations 0.89 -- 0.91 --
-------------- -------------- -------------- --------------
Basic earnings per common share $ 1.08 $ 0.12 $ 1.60 $ 0.73
============== ============== ============== ==============
Weighted average common shares outstanding 28,857,305 25,252,124 28,104,281 24,423,091
DILUTED EARNINGS PER COMMON SHARE:
Net income from continuing operations $ 0.18 $ 0.11 $ 0.68 $ 0.71
Discontinued operations 0.88 -- 0.90 --
-------------- -------------- -------------- --------------
Diluted earnings per common share $ 1.06 $ 0.11 $ 1.58 $ 0.71
============== ============== ============== ==============
Weighted average common shares outstanding 29,213,062 25,835,808 28,451,480 25,022,631
The accompanying notes are an integral part of these financial statements.
4
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
For the three For the six
months ended months ended
June 30, June 30,
---------------------- ----------------------
2003 2002 2003 2002
-------- -------- -------- --------
NET INCOME $ 31,102 $ 2,920 $ 45,047 $ 17,966
-------- -------- -------- --------
Other comprehensive income (loss):
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising during the period 16,540 2,928 21,116 (1,166)
Reclassification adjustment for gains included in net income (24,726) -- (24,726) (996)
-------- -------- -------- --------
Other comprehensive income (loss) (8,186) 2,928 (3,610) (2,162)
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 22,916 $ 5,848 $ 41,437 $ 15,804
======== ======== ======== ========
The accompanying notes are an integral part of these financial statements.
5
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
For the six months ended
June 30,
------------------------
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 45,047 $ 17,966
Adjustments to reconcile net income to net cash provided by operating activities:
Income allocated to preferred shareholders and minority interests in subsidiary companies 5,679 5,989
Net holding (gains) losses on trading securities (424) 4,609
Impairments and valuation allowances related to investments 1,144 110
Net gain on sales (2,731) (2,869)
Loss from investments in partnerships 2,353 229
Distributions received from investments in partnerships 5,224 245
Net amortization of premiums, discounts and fees on investments (185) 26
Depreciation and amortization 1,048 942
Discontinued operations (25,748) --
Deferred income taxes 1,283 700
Tax benefit from deferred share compensation 330 400
Deferred share compensation expense 883 862
Common and deferred shares issued under the Non-Employee Directors' Share Plans 135 96
Net change in assets and liabilities:
Increase in interest receivable (1,095) (851)
Decrease (increase) in other assets and goodwill 11,306 (4,840)
Increase (decrease) in accounts payable, accrued expenses and other liabilities 10,353 (3,272)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 54,602 20,342
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of tax-exempt bonds and residual interests in bond securitizations (73,769) (49,399)
Loan originations (176,742) (181,216)
Purchases of property and equipment (394) (291)
Net investment in restricted assets (29,211) (8,312)
Principal payments received 219,706 219,872
Investments in partnerships (42,140) (86,352)
Return of capital invested in partnerships 36,566 9,040
Termination of derivative financial instruments (10,809) --
Proceeds from sales of investments 44,558 12,179
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (32,235) (84,479)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from credit facilities 350,710 344,543
Repayment of credit facilities (364,685) (385,243)
Proceeds from short-term debt 27,250 32,547
Repayment of short-term debt (35,525) (28,992)
Proceeds from long-term debt -- 3,538
Repayment of long-term debt (5,351) --
Issuance of common shares 71,871 77,555
Redemption of preferred shares -- (19,298)
Proceeds from stock options exercised 1,122 2,255
Distributions on common shares (24,181) (20,976)
Distributions to preferred shareholders in a subsidiary company (5,988) (5,955)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 15,223 (26)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 37,590 (64,163)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 43,745 97,373
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 81,335 $ 33,210
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 15,624 $ 14,771
========= =========
Income taxes paid $ 143 $ 731
========= =========
The accompanying notes are an integral part of these financial statements.
6
MUNICIPAL MORTGAGE & EQUITY, LLC
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)
ACCUMULATED
OTHER
COMMON TREASURY UNEARNED COMPREHENSIVE
SHARES SHARES COMPENSATION INCOME TOTAL
------ ------ ------------ ------ -----
BALANCE, JANUARY 1, 2003 $471,946 $(857) $(3,274) $19,249 $487,064
Net income 45,047 -- -- -- 45,047
Unrealized gains on investments, net of
reclassifications -- -- -- (3,610) (3,610)
Distributions (24,181) -- -- -- (24,181)
Purchase of treasury shares 1,758 (1,758) -- -- --
Options exercised 1,122 -- -- -- 1,122
Issuance of common shares 71,891 -- -- -- 71,891
Deferred shares issued under the
Non-Employee Directors' Share Plans (Note 12) 115 -- -- -- 115
Deferred share grants (Note 12) 1,000 -- (1,000) -- --
Forfeiture of deferred shares (452) -- 452 -- --
Amortization of deferred compensation (Note 12) -- -- 883 -- 883
Tax benefit from exercise of options and
vesting of deferred shares 330 -- -- -- 330
-------- -------- -------- ------- --------
BALANCE, JUNE 30, 2003 $568,576 $(2,615) $(2,939) $15,639 $578,661
======== ======== ======== ======= ========
COMMON TREASURY
SHARE ACTIVITY: SHARES SHARES
------ ------
BALANCE, JANUARY 1, 2003 25,545,980 55,444
Options exercised 61,125 --
Purchase of treasury shares (69,271) 69,271
Issuance of common shares 3,220,822 --
Issuance of common shares under
employee share incentive plans (Note 12) 69,006 --
Deferred shares issued under the
Non-Employee Directors' Share Plans (Note 12) 4,751 --
---------- -------
BALANCE, JUNE 30, 2003 28,832,413 124,715
========== =======
The accompanying notes are an integral part of these financial statements.
7
MUNICIPAL MORTGAGE & EQUITY, LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
Municipal Mortgage & Equity, LLC ("MUNIMAE" and, together with its
subsidiaries, the "COMPANY") provides debt and equity financing to developers of
multifamily housing. The Company invests in tax-exempt bonds, or interests in
bonds, issued by state and local governments or their agencies or authorities to
finance multifamily housing developments. Interest income derived from the
majority of these bond investments is exempt income for federal income tax
purposes. Multifamily housing developments, as well as the rents paid by the
tenants, secure these investments.
The Company is also a mortgage banker. Mortgage banking activities include
the origination, investment in and servicing of investments in multifamily
housing, both for its own account and on behalf of third parties. These
investments generate taxable income.
The Company also invests in (1) other housing-related debt and equity
investments, including equity investments in income-producing real estate
operating partnerships and tax-exempt bonds, or interests in bonds, secured by
student housing or assisted living developments, and (2) tax-exempt community
development bonds, typically secured by special taxes imposed on single-family
or other community development districts or by assessments imposed on the
residents or other lot owners of those developments.
The Company also acquires and sells interests in partnerships that provide
low-income housing tax credits for investors. The Company earns syndication fees
on the placement of these interests with investors, including the Federal
National Mortgage Association ("FANNIE MAE") and a number of corporate
investors. The Company also earns asset management fees for managing the
low-income housing tax credit funds syndicated.
MuniMae is a Delaware limited liability company. As a limited liability
company, MuniMae combines the limited liability, governance and management
characteristics of a corporation with the pass-through income features of a
partnership. Since MuniMae is classified as a partnership for federal income tax
purposes, no recognition of income taxes is made at the corporate level (except
for income earned through subsidiaries of the Company organized as
corporations). Instead, the distributive share of MuniMae's income, deductions
and credits is included in each shareholder's income tax return.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission and in the opinion of management contain all adjustments
(consisting of only normal recurring accruals) necessary to present a fair
statement of the results for the periods presented. These results have been
determined on the basis of accounting principles and policies discussed in Note
1 to the Company's
8
Annual Report on Form 10-K for the year ended December 31, 2002 (the "COMPANY'S
2002 FORM 10-K"). Certain information and footnote disclosures normally included
in financial statements presented in accordance with generally accepted
accounting principles ("GAAP") have been condensed or omitted. The accompanying
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's 2002 Form 10-K. Certain 2002 amounts
have been reclassified to conform to the 2003 presentation.
The Company posts all Securities and Exchange Commission reports on their
website at http://www.mmafin.com. These reports are available free of charge.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2003, the Financial Accounting Standards Board approved Statement
of Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("FAS 150").
FAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify those financial instruments with certain
debt-like characteristics as liabilities. The scope of FAS 150 includes
financial instruments issued in the form of mandatorily redeemable shares. These
types of shares embody an unconditional obligation requiring the issuer to
redeem them by transferring assets at a specified date. Management has
determined that the Company's preferred shareholders' equity in a subsidiary
company appears to fall within the scope of FAS 150. Therefore, the Company will
be required to reclassify its preferred shareholders' equity of $160.5 million
to the liability section of the consolidated balance sheets. In addition,
amounts currently classified as distributions paid to the preferred shareholders
will be recorded as interest expense. FAS 150 is effective for instruments held
by the Company at the beginning of the first interim period beginning after June
15, 2003.
In January 2003, the Financial Accounting Standards Board approved
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46 requires the consolidation of a Company's equity investment in a variable
interest entity ("VIE") if the Company is the primary beneficiary of the VIE and
if risks are not effectively dispersed among the owners of the VIE. The Company
is considered to be the primary beneficiary of the VIE if the Company absorbs
the majority of the losses of the VIE. FIN 46 is effective for VIEs created
after January 31, 2003. For any VIE in which the Company held an interest that
it acquired before February 1, 2003, FIN 46 is effective for the first interim
reporting period beginning after June 15, 2003. The Company is currently
reviewing the impact of FIN 46 on the tax credit syndication funds that a wholly
owned subsidiary of the Company sponsors and asset manages, as well as
investments accounted for under the equity method of accounting. The Company
will continue to review new investments in order to determine if they should be
accounted for in accordance with FIN 46.
NOTE 2 - INVESTMENT IN TAX-EXEMPT BONDS
The Company originates investments in tax-exempt bonds and taxable loans
primarily to the
9
affordable multifamily housing industry. Tax-exempt bonds are issued by state
and local government authorities to finance multifamily housing developments or
other real estate financings. The bonds are typically secured by nonrecourse
mortgage loans or tax levies on the underlying properties. The Company's sources
of capital to fund these lending activities include proceeds from equity
offerings, securitizations, and lines of credit. The Company earns interest
income from its investment in tax-exempt bonds and taxable loans. The Company
also earns origination and construction administration fees from originating the
bonds and servicing the bonds during the construction period. For further
discussion of the general terms of tax-exempt bonds see Note 1 to the Company's
2002 Form 10-K.
As of June 30, 2003 and December 31, 2002, the Company held $775.8 million
and $770.3 million of tax-exempt bonds, respectively. The following table
summarizes tax-exempt bonds by type.
June 30, 2003
------------------------------------------------------------
Face Amortized Unrealized Fair
(000s) Amount Cost Gain (Loss) Value
------ ---- ----------- -----
Non-participating bonds $651,518 $632,417 $ (9,659) $622,758
Participating bonds 82,717 81,820 2,408 84,228
Subordinate non-participating bonds 19,003 17,664 (11) 17,653
Subordinate participating bonds 58,890 35,799 15,355 51,154
-------- -------- -------- --------
Total $812,128 $767,700 $ 8,093 $775,793
======== ======== ======== ========
December 31, 2002
------------------------------------------------------------
Face Amortized Unrealized Fair
(000s) Amount Cost Gain (Loss) Value
------ ---- ----------- -----
Non-participating bonds $651,737 $621,594 $ (4,692) $616,902
Participating bonds 82,852 81,956 1,893 83,849
Subordinate non-participating bonds 19,039 17,700 106 17,806
Subordinate participating bonds 58,890 35,799 15,989 51,788
-------- -------- -------- --------
Total $812,518 $757,049 $ 13,296 $770,345
======== ======== ======== ========
During the second quarter of 2003, the Company invested in tax-exempt
bonds with a face amount of $4.6 million for $4.4 million. These investments
represent new primary investments
10
(bonds which the Company originated).
The Company invested an additional $14.0 million in existing tax-exempt
draw down bonds with a face amount of $14.0 million. Since the end of 2002, the
Company has structured tax-exempt bonds that allow the borrower to make draws on
the bonds throughout the construction period. The initial draws on these bonds
have been reported as new primary investments in prior quarters.
In order to facilitate the securitization (see Note 1 to the Company's
2002 Form 10-K) of certain assets at higher leverage ratios than otherwise
available, the Company has pledged additional bonds as collateral for senior
interests in certain securitization trusts and credit enhancement facilities. At
June 30, 2003 and December 31, 2002, the total carrying amount of the tax-exempt
bonds pledged as collateral for such trusts and facilities was $360.7 million
and $372.9 million, respectively.
NOTE 3 - LOANS RECEIVABLE
The Company's loans receivable consist primarily of construction loans,
permanent loans, supplemental loans and other taxable loans. For further
discussion of the general terms of loans held by the Company and the allowance
for loan losses see the description of mortgage banking activities in Note 1 to
the Company's 2002 Form 10-K. The following table summarizes loans receivable by
loan type at June 30, 2003 and December 31, 2002.
(in thousands) JUNE 30, 2003 DECEMBER 31, 2002
-------------- ------------- -----------------
Loan Type:
Construction loans $ 338,120 $ 300,266
Supplemental loans 81,330 80,459
Other taxable loans 33,356 42,646
--------- ---------
452,806 423,371
Allowance for loan losses (1,409) (1,072)
--------- ---------
TOTAL $ 451,397 $ 422,299
========= =========
The Company has loans receivable held for sale of $11.0 million and $39.1
million at June 30, 2003 and December 31, 2002, respectively. These loans are
sold to Fannie Mae and third party conduit lenders. Due to the short time the
Company holds these loans, carrying value approximates fair value.
The Company pledges its construction loans, permanent loans and
supplemental loans as collateral for the Company's notes payable and line of
credit borrowings. In addition, in order to facilitate the securitization of
certain assets at higher leverage ratios than otherwise available, the Company
has pledged additional taxable loans to a pool that acts as collateral for
senior interests in certain securitization trusts and credit enhancement
facilities. At June 30, 2003 and December 31, 2002, the total carrying amount of
the loans receivable pledged as collateral was $407.2 million and
11
$417.1 million, respectively.
NOTE 4 - RESIDUAL INTERESTS IN BOND SECURITIZATIONS
At June 30, 2003 and December 31, 2002, the Company's residual interests
in bond securitizations are investments in Residual Interest Tax-Exempt
Securities Receipts ("RITES(SM)"). For further discussion of the Company's
securitization programs see Note 1 to the Company's 2002 Form 10-K. The
following table provides certain information with respect to the residual
interests in bond securitizations held by the Company at June 30, 2003 and
December 31, 2002.
(000s) June 30, 2003
----------------------------------------------------------------------------------------
Fair Value (1)
Face Amortized Unrealized ----------------------------------------
Amount Cost Gain (Loss) Assets Liabilities (2) Net
------ ---- ----------- ------ --------------- ---
Total RITES(SM)(3) $ 334 $ 4,209 $ 7,547 $13,099 $(1,343) $11,756
======= ======= ======= ======= ======= =======
(000s) December 31, 2002
----------------------------------------------------------------------------------------
Fair Value (1)
Face Amortized Unrealized ----------------------------------------
Amount Cost Gain (Loss) Assets Liabilities (2) Net
------ ---- ----------- ------ --------------- ---
Total RITES(SM)(3) $ 334 $ 3,639 $ 5,953 $11,039 $(1,447) $ 9,592
======= ======= ======= ======= ======= =======
(1) The amounts disclosed represent the fair values of all the Company's
investments in residual interests in bond securitizations at the reporting date.
(2) The aggregate negative fair value of the investments is included in
liabilities for financial reporting purposes. The negative fair value of these
investments is considered temporary and is not indicative of the future earnings
on these investments.
(3) The amount of outstanding Puttable Floating Option Tax-Exempt Receipts
("P-FLOATS(SM)"), which are senior to the Company's RITES(SM) investments and
which are not reflected in the Company's balance sheet, was $190.2 million and
$177.8 million at June 30, 2003 and December 31, 2002, respectively.
The Company purchased $13,000 of RITES(SM) for $0.8 million in the second
quarter of 2003. The Company also collapsed a $5,000 RITES(SM) position and
placed the related $27.3 million bond in the MBIA securitization program.
RITES(SM) Valuation Analysis
The fair value of a RITES(SM) investment is derived from the quote on the
underlying bond reduced by the outstanding corresponding P-FLOATs(SM) face
amount. The Company bases the fair value of the underlying bond, which has a
limited market, on quotes from external sources, such as brokers, for these or
similar bonds. The fair value of the underlying bond includes a prepayment risk
factor. The prepayment risk factor is reflected in the fair value of the bond by
assuming the bond will prepay at the most adverse time to the Company given
current market rates and estimates of future market rates. Based on this, an
adverse change in prepayment risk would not have an effect on the fair value of
the Company's RITES(SM) investments. In addition, the RITES(SM) investments are
not subject to prepayment risk as the term of the securitization trusts is only
for a period during which the underlying bond cannot be prepaid. Based on
historical experience, credit losses were estimated to be zero.
12
At June 30, 2003 and December 31, 2002, a 10% and 20% adverse change in
key assumptions used to estimate the fair value of the Company's RITES(SM) would
have the following impact.
(000s) June 30, 2003 December 31, 2002
------------- -----------------
Fair value of retained interests, net $11,756 $ 9,592
Residual cash flows discount rate (annual rate) 3.1% - 8.5% 3.8% - 8.1%
Impact on fair value of 10% adverse change ($ 8,406) ($ 9,108)
Impact on fair value of 20% adverse change ($16,109) ($17,444)
The sensitivity analysis presented above is hypothetical in nature and
presented for information purposes only. The analysis shows the effect on fair
value of a variation in one assumption and is calculated without considering the
effect of changes in any other assumption. In reality, changes in one assumption
may affect the others, which may magnify or offset the sensitivities.
NOTE 5 - INVESTMENT IN DERIVATIVE FINANCIAL INSTRUMENTS
At June 30, 2003 and December 31, 2002, the Company's investments in
derivative financial instruments consisted of interest rate swaps and put option
contracts. For further discussion of the Company's investment in derivative
financial instruments see Note 6 to the Company's 2002 Form 10-K. The Company
terminated swap contracts with a total notional amount of $105.7 million ($319.4
million in swap contracts and $213.6 million in reverse swap contracts). In
addition, a swap contract with a notional amount of $13.1 million expired in the
second quarter of 2003. The following table provides certain information with
respect to the derivative financial instruments held by the Company at June 30,
2003 and December 31, 2002.
13
June 30, 2003 December 31, 2002
------------------------------------- --------------------------------------
(000s) Notional Fair Value (2) Notional Fair Value (2)
Amount (1) Assets Liabilities(3) Amount(1) Assets Liabilities(3)
---------- ------ -------------- --------- ------ --------------
Interest rate swap agreements $230,975 $ 3,170 $(21,792) $349,810 $ 18,762 $(49,359)
Put option agreements 97,314 -- -- 98,539 -- --
-------- -------- -------- --------
Total investment in derivative financial instruments $ 3,170 $(21,792) $ 18,762 $(49,359)
======== ======== ======== ========
(1) For the interest rate swap agreements, notional amount represents total
amount of the Company's interest rate swap contracts ($265,935 as of June 30,
2003 and $598,415 as of December 31, 2002) less the total amount of the
Company's reverse interest rate swap contracts ($34,960 as of June 30, 2003 and
$248,605 as of December 31, 2002). For put option agreements, the notional
amount represents the Company's aggregate obligation under the put option
agreements.
(2) The amounts disclosed represent the net fair values of all the Company's
derivatives at the reporting date.
(3) The aggregate negative fair value of the investments is included in
liabilities for financial reporting purposes. The negative fair value of these
investments is considered temporary and is not indicative of the future earnings
on these investments.
NOTE 6 - OTHER ASSETS
The Company's investment in other assets includes prepaid expenses, other
receivables, debt issue costs, property and equipment, and certain investments
in interest-only securities. Included in the other asset balance at June 30,
2003 and December 31, 2002 is $9.5 million and $23.3 million, respectively, of
receivables due from various syndicated low-income housing tax credit funds (for
further discussion of syndicated low-income housing tax credit funds, see Note 1
to the Company's 2002 Form 10-K). The decrease in this receivable from December
31, 2002 to June 30, 2003 is due to certain funds repaying the Company after
obtaining an alternative source of financing.
NOTE 7 - NOTES PAYABLE AND DEBT
The Company's notes payable consist primarily of notes payable and
advances under line of credit arrangements, which are used to: (1) finance
construction lending needs; (2) finance working capital needs; (3) warehouse
real estate operating partnerships before they are placed into tax credit equity
funds; and (4) warehouse permanent loans before they are sold. The Company's
short- and long-term debt relates to securitization transactions that the
Company has recorded as borrowings (see Notes 1 and 9 to the Company's 2002 Form
10-K). The following table summarizes notes payable and debt at June 30, 2003
and December 31, 2002.
14
(000s) Total of Facilities June 30, 2003 December 31, 2002
------------------- ------------- -----------------
Short-term notes payable N/A $232,301 $126,410
Lines of credit - unaffiliated entities $280,000 60,444 110,821
Lines of credit - affiliated entities $240,000 29,869 89,053
Short-term debt N/A 211,670 219,945
-------- --------
Total short-term notes payable and debt 534,284 546,229
-------- --------
Long-term notes payable N/A 114,335 124,640
Long-term debt N/A 142,006 147,357
-------- --------
Total long-term notes payable and debt 256,341 271,997
-------- --------
Total notes payable and debt $790,625 $818,226
======== ========
Covenant Compliance
Under the terms of the various credit facilities, the Company is required
to comply with covenants including net worth, interest coverage, collateral and
other terms and conditions. The Company was in compliance with its debt
covenants at June 30, 2003.
NOTE 8 - GUARANTEES, COMMITMENTS AND CONTINGENCIES
For discussion of the Company's commitments and contingencies see Note 11
to the Company's 2002 Form 10-K. Since December 31, 2002, there has been no
material change to the information related to commitments and contingencies.
Guarantees
The Company's maximum exposure under its guarantee obligations is not
indicative of the likelihood of the expected loss under the guarantees. The
Company recognizes contingent liabilities on guarantees when the losses are
probable and can be reasonably estimated.
The following table summarizes the Company's guarantees by type at June
30, 2003.
15
(in millions) JUNE 30, 2003
-------------------------------------------------------------------------------------------------
MAXIMUM CARRYING
GUARANTEE NOTE EXPOSURE AMOUNT SUPPORTING COLLATERAL
--------- ---- -------- ------ ---------------------
Loss-Sharing Agreement with
Fannie Mae and GNMA/HUD (1) $ 168.5 $ -- $5.0 million Letter of Credit pledged
Bank Line of Credit Guarantees (2) 87.0 -- Investments in partnerships and loans totaling $69.9 million
Tax Credit Related Guarantees (3) 48.8 0.1 None
Other Financial/Payment
Guarantees (4) 211.6 1.6 $3.8 million of tax-exempt bonds and cash
Put Options (5) 101.6 -- $43.3 million of loans and tax-exempt bonds
Letter of Credit Guarantees (6) 32.9 -- $1.1 of tax-exempt bonds
Indemnification Contracts (7) 14.4 -- None
-------- ------
$ 664.8 $ 1.7
======== ======
Notes:
(1) As a Fannie Mae DUS lender and Government National Mortgage
Association ("GNMA") loan servicer, the Company may share in losses
relating to underperforming real estate mortgage loans delivered to
Fannie Mae and GNMA. More specifically, if the borrower fails to
make a payment on a DUS loan originated by the Company and sold to
Fannie Mae, of principal, interest, taxes or insurance premiums, the
Company may be required to make servicing advances to Fannie Mae.
Also, the Company may participate in a deficiency after foreclosure
on DUS and GNMA loans. As a DUS lender, the Company must maintain a
minimum net worth and collateral with a custodian. The term of the
loss sharing agreement is based on the contractual requirements of
the underlying loans delivered to Fannie Mae and GNMA, which varies
to a maximum of 40 years.
(2) The Company provides payment or performance guarantees for certain
borrowings under line of credit facilities with a term of 1 year or
less.
(3) The Company acquires and sells interests in partnerships that
provide low-income housing tax credits for investors. In conjunction
with the sale of these partnership interests, the Company may
provide performance guarantees on the underlying properties owned by
the partnerships or guarantees to the fund investors. These
guarantees have various expirations to a maximum term of 18 years.
(4) The Company has entered into arrangements that require the Company
to make payment in the event a specified third party fails to
perform on its financial obligation. The Company typically provides
these guarantees in conjunction with the sale of an asset to a third
party or the Company's investment in equity ventures. The term of
the guarantee varies based on loan payoff schedules or Company
divestitures.
(5) The Company has entered into put option agreements with
counterparties whereby the counterparty has the right to sell to the
Company, and the Company has the obligation to buy, an underlying
investment at a specified price. These put option agreements expire
at various dates between February 1, 2006 and April 1, 2007.
(6) The Company provides a guarantee of the repayment on losses incurred
under letters of credit issued by third parties or provide a
guarantee to provide substitute letters of credit at a predetermined
future date. In addition, the Company may provide a payment
guarantee for certain assets in securitization programs. These
guarantees expire at various dates between March 1, 2004 and
September 1, 2017.
(7) The Company has entered into indemnification contracts, which
require the guarantor to make payments to the guaranteed party based
on changes in an underlying investment that is related to an asset
or liability of the guaranteed party. These agreements typically
require the Company to reimburse the guaranteed party for legal and
other costs in the event of an adverse judgment in a lawsuit or the
imposition of additional taxes due to a change in the tax law or an
adverse interpretation of the tax law. The term of the
indemnification varies based on the underlying program life, loan
payoffs, or Company divestitures. Based on the terms of the
underlying contracts, the maximum exposure amount only includes
amounts that can be reasonably estimated at this time; the actual
exposure amount could vary significantly.
NOTE 9 - DISCONTINUED OPERATIONS
In April 2003, the Company acquired a property by deed in lieu of
foreclosure. This property
16
previously served as collateral for a tax-exempt bond held by the Company. In
June 2003, the Company sold the property for net proceeds of $38.1 million. The
Company used the proceeds to terminate interest rate swaps (see Note 5 for
further discussion) and to purchase third party P-Floats(SM). The P-Floats(SM)
replaced the tax-exempt bond as collateral with Merrill Lynch. All activity
related to this property has been classified as discontinued operations in the
consolidated statements of income. The following table summarizes the components
of discontinued operations.
For the three months ended For the six months ended
June 30, June 30,
-------------------------- --------------------------
(000s) 2003 2002 2003 2002
-------- -------- -------- --------
Loss from operations of
property $ (1,015) $ -- $ (1,015) $ --
Gain on disposal of property 26,763 -- 26,763 --
-------- -------- -------- --------
Discontinued operations $ 25,748 $ -- $ 25,748 $ --
======== ======== ======== ========
The net assets of the property as of the date of sale were as follows:
(000s) 2003
--------
Fixed assets, net $ 12,553
Other assets 252
Other liabilities (446)
--------
Net assets of discontinued operations $ 12,359
========
NOTE 10 - EARNINGS PER SHARE
The following table reconciles the numerators and denominators in the
basic and diluted earnings per share ("EPS") calculations for common shares for
the three and six months ended June 30, 2003 and 2002. The effect of all
potentially dilutive securities was included in the calculation. The Company did
not have any options to purchase common shares that were not included in the
computations of diluted EPS at June 30, 2003 or 2002 due to the options'
exercise prices being greater than the average price of the common shares for
the period.
17
For the three months ended June 30, 2003
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
BASIC EPS
Net income from continuing operations
allocable to common shares $ 5,354 $ 0.19
Discontinued operations 25,748 0.89
---------- ----------
Income allocable to common shares $ 31,102 28,857,305 $ 1.08
========== ==========
EFFECT OF DILUTIVE SECURITIES
Options and deferred shares 355,757
Earnings contingency --
----------
DILUTED EPS
Net income from continuing operations
allocable to common shares $ 5,354 $ 0.18
Discontinued operations 25,748 0.88
---------- ----------
Income allocable to common shares
plus assumed conversions $ 31,102 29,213,062 $ 1.06
========== ========== ==========
For the three months ended June 30, 2002
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
BASIC EPS
Net income from continuing operations
allocable to common shares $ 2,920 $ 0.12
Discontinued operations -- --
---------- ----------
Income allocable to common shares $ 2,920 25,252,124 $ 0.12
========== ==========
EFFECT OF DILUTIVE SECURITIES
Options and deferred shares 450,829
Earnings contingency 132,855
----------
DILUTED EPS
Net income from continuing operations
allocable to common shares $ 2,920 $ 0.11
Discontinued operations -- --
---------- ----------
Income allocable to common shares
plus assumed conversions $ 2,920 25,835,808 $ 0.11
========== ========== ==========
For the six months ended June 30, 2003
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
BASIC EPS
Net income from continuing operations
allocable to common shares $ 19,299 $ 0.69
Discontinued operations 25,748 0.91
---------- ----------
Income allocable to common shares $ 45,047 28,104,281 $ 1.60
========== ==========
EFFECT OF DILUTIVE SECURITIES
Options and deferred shares 347,199
Earnings contingency --
----------
DILUTED EPS
Net income from continuing operations
allocable to common shares $ 19,299 $ 0.68
Discontinued operations 25,748 0.90
---------- ----------
Income allocable to common shares
plus assumed conversions $ 45,047 28,451,480 $ 1.58
========== ========== ==========
For the six months ended June 30, 2002
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
BASIC EPS
Net income from continuing operations
allocable to common shares $ 17,813 $ 0.73
Discontinued operations -- --
---------- ----------
Income allocable to common shares $ 17,813 24,423,091 $ 0.73
========== ==========
EFFECT OF DILUTIVE SECURITIES
Options and deferred shares 466,685
Earnings contingency 132,855
----------
DILUTED EPS
Net income from continuing operations
allocable to common shares $ 17,813 $ 0.71
Discontinued operations -- --
---------- ----------
Income allocable to common shares
plus assumed conversions $ 17,813 25,022,631 $ 0.71
========== ========== ==========
NOTE 11 - DISTRIBUTIONS
On July 17, 2003, the Board of Directors declared a distribution of
$0.4475 for the three months ended June 30, 2003, to common shareholders of
record on July 28, 2003. The payment date was August 8, 2003.
18
NOTE 12 - NON-EMPLOYEE DIRECTORS' SHARE PLANS AND EMPLOYEE SHARE INCENTIVE PLANS
The Company accounts for both the non-employee director share plans and
the employee share incentive plans (see Note 1 and Note 15 to the Company's 2002
Form 10-K) under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation expense has been recognized for the options issued
under the plans during the second quarter of 2003. The Company issued 7,000
options in the first quarter of 2003 and 30,000 options in the second quarter of
2003. The Company issued 30,000 options in the second quarter of 2002. The
Company estimated the fair value of each option awarded using the Black Scholes
option-pricing model with the following assumptions.
For the three months ended June 30, For the six months ended June 30,
----------------------------------- ---------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Risk-free interest rate 3% 4% 3% 4%
Dividend yield 7.1% 6.7% 7.0% 6.7%
Volatility 14% 11% 14% 11%
Expected option life 7.5 years 7.5 years 7.5 years 7.5 years
Weighted average fair value of options $ 0.78 $ 1.13 $ 0.87 $ 1.13
The following table illustrates the effect on net income and earnings per
share as if the compensation expense had been determined based on the fair value
recognition provisions of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" as amended by Financial Accounting Standards
No.148 "Accounting for Stock-Based Compensation-Transition and Disclosure."
For the three months ended June 30, For the six months ended June 30,
----------------------------------- ---------------------------------
(000s) 2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Net income allocated to common shares, as reported $ 31,102 $ 2,920 $ 45,047 $ 17,813
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (23) (34) (32) (34)
--------------- --------------- --------------- ---------------
Net income allocated to common shares, pro forma $ 31,079 $ 2,886 $ 45,015 $ 17,779
=============== =============== =============== ===============
EARNINGS PER COMMON SHARE:
Basic - as reported $ 1.08 $ 0.12 $ 1.60 $ 0.73
=============== =============== =============== ===============
Basic - pro forma $ 1.08 $ 0.11 $ 1.60 $ 0.73
=============== =============== =============== ===============
Diluted - as reported $ 1.06 $ 0.11 $ 1.58 $ 0.71
=============== =============== =============== ===============
Diluted - pro forma $ 1.06 $ 0.11 $ 1.58 $ 0.71
=============== =============== =============== ===============
NOTE 13 - BUSINESS SEGMENT REPORTING
The Company has two reportable business segments: (1) an operating segment
consisting of subsidiaries that primarily generate taxable fee income by
providing loan servicing, loan origination
19
and other related services and (2) an investing segment consisting primarily of
subsidiaries holding investments producing tax-exempt interest income. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies in Note 1 to the Company's 2002 Form
10-K. A complete description of the Company's reporting segments is included in
Note 18 to the Company's 2002 Form 10-K.
The following table reflects the results of the Company's business
segments for the three and six months ended June 30, 2003 and 2002.
20
MUNICIPAL MORTGAGE & EQUITY, LLC
SEGMENT REPORTING FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
(IN THOUSANDS) (UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 2003
------------------------------------------------------------
TOTAL
INVESTING OPERATING ADJUSTMENTS CONSOLIDATED
--------- --------- ----------- ------------
INCOME:
Interest income
Interest on bonds and residual interests in
bond securitizations $13,687 $ 242 $ -- $13,929
Interest on loans 771 6,792 -- 7,563
Interest on short-term investments 1,417 75 (1,160)(1) 332
------- ------- ------- -------
Total interest income 15,875 7,109 (1,160) 21,824
------- ------- ------- -------
Fee income
Syndication fees -- 1,825 -- 1,825
Origination fees -- 2,711 (492)(2) 2,219
Loan servicing fees -- 1,838 -- 1,838
Asset management and advisory fees -- 1,198 -- 1,198
Other income 1,877 1,432 -- 3,309
------- ------- ------- -------
Total fee income 1,877 9,004 (492) 10,389
------- ------- ------- -------
Net gain (loss) on sales 759 694 -- 1,453
------- ------- ------- -------
TOTAL INCOME 18,511 16,807 (1,652) 33,666
------- ------- ------- -------
EXPENSES:
Interest expense 3,589 6,295 (1,160)(1) 8,724
Salaries and benefits 972 7,699 -- 8,671
General and administrative 596 1,517 -- 2,113
Professional fees 393 484 -- 877
Amortization of mortgage servicing rights and other
intangibles -- 414 -- 414
------- ------- ------- -------
TOTAL EXPENSES 5,550 16,409 (1,160) 20,799
------- ------- ------- -------
Net holding gains (losses) on derivatives (2,449) -- -- (2,449)
Impairments and valuation allowances related to
investments (1,097) (47) -- (1,144)
Net gains (losses) from equity investments in
partnerships -- (1,606) -- (1,606)
------- ------- ------- -------
NET INCOME BEFORE INCOME TAXES, INCOME ALLOCATED
TO PREFERRED SHAREHOLDERS AND MINORITY INTERESTS
IN SUBSIDIARY COMPANIES AND DISCONTINUED OPERATIONS 9,415 (1,255) (492) 7,668
Income tax expense (benefit) -- (540) -- (540)
------- ------- ------- -------
NET INCOME BEFORE INCOME ALLOCATED TO PREFERRED
SHAREHOLDERS AND MINORITY INTERESTS IN
SUBSIDIARY COMPANIES AND DISCONTINUED OPERATIONS 9,415 (715) (492) 8,208
Income allocable to preferred shareholders and minority
interests in subsidiary companies 2,994 (140) -- 2,854
------- ------- ------- -------
NET INCOME FROM CONTINUING OPERATIONS 6,421 (575) (492) 5,354
Discontinued operations 25,748 -- -- 25,748
------- ------- ------- -------
NET INCOME (LOSS) $32,169 $(575) $(492) $31,102
======= ======= ======= =======
FOR THE THREE MONTHS ENDED JUNE 30, 2002
---------------------------------------------------------
TOTAL
INVESTING OPERATING ADJUSTMENTS CONSOLIDATED
--------- --------- ----------- ------------
INCOME:
Interest income
Interest on bonds and residual interests in
bond securitizations $14,594 $ 805 $ -- $15,399
Interest on loans 832 7,762 -- 8,594
Interest on short-term investments 194 50 -- 244
------- ------- ------- -------
Total interest income 15,620 8,617 -- 24,237
------- ------- ------- -------
Fee income
Syndication fees -- 2,380 -- 2,380
Origination fees -- 3,005 (1,500)(2) 1,505
Loan servicing fees -- 1,660 -- 1,660
Asset management and advisory fees -- 1,040 -- 1,040
Other income 112 1,147 -- 1,259
------- ------- ------- -------
Total fee income 112 9,232 (1,500) 7,844
------- ------- ------- -------
Net gain (loss) on sales (3,074) 3,777 -- 703
------- ------- ------- -------
TOTAL INCOME 12,658 21,626 (1,500) 32,784
------- ------- ------- -------
EXPENSES:
Interest expense 2,125 6,362 -- 8,487
Salaries and benefits 511 5,419 -- 5,930
General and administrative 341 1,356 -- 1,697
Professional fees 398 1,569 -- 1,967
Amortization of mortgage servicing rights and other
intangibles -- 333 -- 333
------- ------- ------- -------
TOTAL EXPENSES 3,375 15,039 -- 18,414
------- ------- ------- -------
Net holding gains (losses) on derivatives (7,721) -- -- (7,721)
Impairments and valuation allowances related to
investments -- -- -- --
Net gains (losses) from equity investments in
partnerships -- 94 -- 94
------- ------- ------- -------
NET INCOME BEFORE INCOME TAXES, INCOME ALLOCATED
TO PREFERRED SHAREHOLDERS AND MINORITY INTERESTS
IN SUBSIDIARY COMPANIES AND DISCONTINUED OPERATIONS 1,562 6,681 (1,500) 6,743
Income tax expense (benefit) -- 828 -- 828
------- ------- ------- -------
NET INCOME BEFORE INCOME ALLOCATED TO PREFERRED
SHAREHOLDERS AND MINORITY INTERESTS IN
SUBSIDIARY COMPANIES AND DISCONTINUED OPERATIONS 1,562 5,853 (1,500) 5,915
Income allocable to preferred shareholders and minority
interests in subsidiary companies 2,995 -- -- 2,995
------- ------- ------- -------
NET INCOME FROM CONTINUING OPERATIONS (1,433) 5,853 (1,500) 2,920
Discontinued operations -- -- -- --
------- ------- ------- -------
NET INCOME (LOSS) $(1,433) $5,853 $(1,500) $ 2,920
======= ======= ======= =======
Notes:
(1) Adjustments represent intercompany interest and expense that are
eliminated in consolidation.
(2) Adjustments represent origination fees on purchased investments which are
deferred and amortized into income over the life of the investment.
MUNICIPAL MORTGAGE & EQUITY, LLC
SEGMENT REPORTING FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(IN THOUSANDS) (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003
---------------------------------------------------------
TOTAL
INVESTING OPERATING ADJUSTMENTS CONSOLIDATED
--------- --------- ----------- ------------
INCOME:
Interest income
Interest on bonds and residual interests in
bond securitizations $29,426 $ 488 $ -- $29,914
Interest on loans 1,600 15,466 -- 17,066
Interest on short-term investments 2,615 136 (2,227)(1) 524
--------- --------- ----------- ------------
Total interest income 33,641 16,090 (2,227) 47,504
--------- --------- ----------- ------------
Fee income
Syndication fees -- 3,236 -- 3,236
Origination fees -- 3,870 (953)(2) 2,917
Loan servicing fees -- 3,747 -- 3,747
Asset management and advisory fees -- 2,274 -- 2,274
Other income 3,185 2,321 -- 5,506
--------- --------- ----------- ------------
Total fee income 3,185 15,448 (953) 17,680
--------- --------- ----------- ------------
Net gain (loss) on sales 759 1,972 -- 2,731
--------- --------- ----------- ------------
TOTAL INCOME 37,585 33,510 (3,180) 67,915
--------- --------- ----------- ------------
EXPENSES:
Interest expense 7,081 14,238 (2,227)(1) 19,092
Salaries and benefits 1,446 13,191 -- 14,637
General and administrative 1,148 2,790 -- 3,938
Professional fees 937 929 -- 1,866
Amortization of mortgage servicing rights and other
intangibles -- 803 -- 803
--------- --------- ----------- ------------
TOTAL EXPENSES 10,612 31,951 (2,227) 40,336
--------- --------- ----------- ------------
Net holding gains (losses) on derivatives 424 -- -- 424
Impairments and valuation allowances related to
investments (1,097) (47) -- (1,144)
Net gains (losses) from equity investments in
partnerships -- (2,353) -- (2,353)
--------- --------- ----------- ------------
NET INCOME BEFORE INCOME TAXES, INCOME ALLOCATED
TO PREFERRED SHAREHOLDERS AND MINORITY INTERESTS
IN SUBSIDIARY COMPANIES AND DISCONTINUED OPERATIONS 26,300 (841) (953) 24,506
Income tax expense (benefit) -- (472) -- (472)
--------- --------- ----------- ------------
NET INCOME BEFORE INCOME ALLOCATED TO PREFERRED
SHAREHOLDERS AND MINORITY INTERESTS IN
SUBSIDIARY COMPANIES AND DISCONTINUED OPERATIONS 26,300 (369) (953) 24,978
Income allocable to preferred shareholders and minority
interests in subsidiary companies 5,989 (310) -- 5,679
--------- --------- ----------- ------------
NET INCOME FROM CONTINUING OPERATIONS 20,311 (59) (953) 19,299
Discontinued operations 25,748 -- -- 25,748
--------- --------- ----------- ------------
NET INCOME (LOSS) $46,059 (59) (953) $45,047
========= ========= =========== ============
FOR THE SIX MONTHS ENDED JUNE 30, 2002
---------------------------------------------------------
TOTAL
INVESTING OPERATING ADJUSTMENTS CONSOLIDATED
--------- --------- ----------- ------------
INCOME:
Interest income
Interest on bonds and residual interests in
bond securitizations $28,702 $ 1,859 -- $30,561
Interest on loans 1,680 15,344 -- 17,024
Interest on short-term investments 635 96 -- 731
--------- --------- ----------- ------------
Total interest income 31,017 17,299 -- 48,316
--------- --------- ----------- ------------
Fee income
Syndication fees -- 3,998 -- 3,998
Origination fees -- 4,513 (1,919)(2) 2,594
Loan servicing fees -- 3,568 -- 3,568
Asset management and advisory fees -- 1,907 -- 1,907
Other income 469 1,935 -- 2,404
--------- --------- ----------- ------------
Total fee income 469 15,921 (1,919) 14,471
--------- --------- ----------- ------------
Net gain (loss) on sales (2,118) 4,987 -- 2,869
--------- --------- ----------- ------------
TOTAL INCOME 29,368 38,207 (1,919) 65,656
--------- --------- ----------- ------------
EXPENSES:
Interest expense 4,514 12,945 -- 17,459
Salaries and benefits 1,618 9,139 -- 10,757
General and administrative 754 2,669 -- 3,423
Professional fees 375 2,229 -- 2,604
Amortization of mortgage servicing rights and other
intangibles -- 651 -- 651
--------- --------- ----------- ------------
TOTAL EXPENSES 7,261 27,633 -- 34,894
--------- --------- ----------- ------------
Net holding gains (losses) on derivatives (4,609) -- -- (4,609)
Impairments and valuation allowances related to
investments (110) -- -- (110)
Net gains (losses) from equity investments in
partnerships -- (229) -- (229)
--------- --------- ----------- ------------
NET INCOME BEFORE INCOME TAXES, INCOME ALLOCATED
TO PREFERRED SHAREHOLDERS AND MINORITY INTERESTS
IN SUBSIDIARY COMPANIES AND DISCONTINUED OPERATIONS 17,388 10,345 (1,919) 25,814
Income tax expense (benefit) -- 1,859 -- 1,859
--------- --------- ----------- ------------
NET INCOME BEFORE INCOME ALLOCATED TO PREFERRED
SHAREHOLDERS AND MINORITY INTERESTS IN
SUBSIDIARY COMPANIES AND DISCONTINUED OPERATIONS 17,388 8,486 (1,919) 23,955
Income allocable to preferred shareholders and minority
interests in subsidiary companies 5,989 -- -- 5,989
--------- --------- ----------- ------------
NET INCOME FROM CONTINUING OPERATIONS 11,399 8,486 (1,919) 17,966
Discontinued operations -- -- -- --
--------- --------- ----------- ------------
NET INCOME (LOSS) $11,399 $ 8,486 $(1,919) $17,966
========= ========= =========== ============
Notes:
(1) Adjustments represent intercompany interest and expense that are
eliminated in consolidation.
(2) Adjustments represent origination fees on purchased investments which are
deferred and amortized into income over the life of the investment.
NOTE 14 - RELATED PARTY TRANSACTIONS
See Note 14 of the Company's 2002 Form 10-K for a detailed description
of the Company's related party transactions. Except as disclosed below, there
has been no material change since December 31, 2002 to the information related
to related party transactions.
In June 2003, the Company received approximately $0.8 million in cash
and a 34.1% limited partnership interest in SCA Associates 86-II Limited
Partnership ("SCA86-II") from SCA Custodial Co., Inc. ("SCAC"). The general
partner of SCA86-II is Shelter Development Holdings, Inc. ("SHELTER HOLDINGS").
Mr. Mark K. Joseph, the Company's Chief Executive Officer and Chairman of its
Board of Directors, controls and is an officer of Shelter Holdings. Mr. Joseph
also owns a 20.8% limited partnership interest in SCA86-II. In addition, Mr.
Michael L. Falcone, the Company's President and Chief Operating Officer, owns a
3% limited partnership interest in SCA86-II. SCAC is indirectly wholly owned by
The Shelter Policy Institute, Inc., which is controlled by Mr. Joseph.
The cash received by the Company was recorded as other income in the
consolidated statements of income and is an accumulation of distributions from
the 34.1% limited partnership interest in SCA86-II. SCA86-II's sole asset is
shares of the Company. Therefore, the shares allocated to the Company's interest
in SCA86-II are classified as treasury shares on the consolidated balance
sheets. The partnership interest was held by SCAC as collateral for guaranteed
obligations related to a tax-exempt bond held by the Company. In April 2003, the
Company acquired the property that collateralized this bond by deed in lieu of
foreclosure and subsequently sold the property to a third party (See Note 9).
The sale of the property fulfilled all remaining guaranteed obligations and
allowed the release of the collateral held by SCAC.
The Company no longer leases office space from an affiliate due to the
sale of the building to a third party in February 2003.
NOTE 15 - SUBSEQUENT EVENTS
On July 1, 2003, the Company acquired Housing and Community Investment
("HCI"), the tax credit equity unit of Lend Lease Real Estate Investments, for
$102 million in cash. The acquisition was financed by a $120 million secured
term credit facility provided by a syndicate of banks led by the Royal Bank of
Canada. HCI is a market leading syndicator of low income tax credit equity
investments. In connection with this acquisition, the Company's operating
subsidiary, MuniMae Midland, LLC, has been renamed MMA Financial, LLC.
23
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------
GENERAL BUSINESS
The Company provides debt and equity financing to developers of
multifamily housing. The Company invests in tax-exempt bonds, or interests in
bonds, issued by state and local governments or their agencies or authorities to
finance multifamily housing developments. Interest income derived from the
majority of these bond investments is exempt income for federal income tax
purposes. Multifamily housing developments, as well as the rents paid by the
tenants, secure these investments.
The Company is also a mortgage banker. Mortgage banking activities
include the origination, investment in and servicing of investments in
multifamily housing, both for its own account and on behalf of third parties.
These investments generate taxable income.
The Company also invests in (1) other housing-related debt and equity
investments, including equity investments in income-producing real estate
operating partnerships and tax-exempt bonds, or interests in bonds, secured by
student housing or assisted living developments, and (2) tax-exempt community
development bonds, typically secured by special taxes imposed on single-family
or other community development districts or by assessments imposed on the
residents or other lot owners of those developments.
The Company also acquires and sells interests in partnerships that
provide low-income housing tax credits for investors. The Company earns
syndication fees on the placement of these interests with investors, including
Fannie Mae and a number of corporate investors. The Company also earns asset
management fees for managing the low-income housing tax credit funds syndicated.
LIQUIDITY AND CAPITAL RESOURCES
The Company's sources of capital to fund its tax-exempt bond lending
activities include proceeds from equity offerings, securitizations, and draws on
lines of credit. The Company's sources of capital to fund its mortgage banking
activities include (1) warehousing facilities and short-term lines of credit
with commercial banks and pension funds, (2) debt and equity financings, either
through the Midland Affordable Housing Group Trust or the Midland Multifamily
Equity REIT ("MMER"), and (3) working capital.
The Company relies on the regular availability of capital from pension
funds, government sponsored entities ("GSES"), equity offerings, bank lines of
credit and securitization transactions to finance its growth. The Company
expects to meet its cash needs in the short-term, which consist primarily of
funding of new investments, payment of distributions to shareholders and funding
of mortgage banking activities, from equity offering proceeds, cash on hand and
bank lines of credit. To continue to grow these activities, the Company will
need to increase its access to capital in 2003 and future years. The Company
expects it will need $100 to $200 million in new capital to meet its 2003
production targets for its lending and tax credit equity businesses. The
Company's February 2003 equity offering generated net proceeds of $71.9 million
to satisfy a portion of the new capital needed.
24
The Company has also increased its borrowing capacity on two existing lines of
credit by a total of $126 million. In addition, the Company is seeking to
establish relationships with additional pension funds and to expand its
relationships with GSEs. If the Company is unable to secure the remaining
additional capital needed during 2003, its production targets may decrease by
$130 to $225 million.
For the three months ended June 30, 2003, the Company structured $65.7
million in tax-exempt bond transactions. This includes both construction and
permanent transactions because, although they relate to the same loans, the
Company counts them as separate loans for consistency with tracking of taxable
lending, where construction and permanent loans are legally distinct loans. In
addition, the Company originated $94.0 million of construction loans, $118.4
million of permanent loans and $7.7 million of supplemental loans. The Company
also closed $38.1 million for investment in syndicated tax credit equity funds
and originated $46.9 million of conventional market rate equity transactions.
Since December 31, 2002, there has been no material change to the
information related to the Company's liquidity and capital resources except as
discussed below.
Pension Funds
MMER is a Maryland real estate investment trust established by a group
of pension funds that the Company has had relationships with for over
twenty-five years. During the second quarter of 2003, MMER received an
additional $7 million in share subscriptions. Of this additional subscription
amount, $2 million was from a pension fund that the Company had not had a
relationship with in the past, which brought the total number of investors in
MMER to five.
Lines of Credit
During the second quarter of 2003, the Company expanded the capacity of
a general bank line of credit used to fund supplemental loans from $4 million to
$30 million. In addition, the Company expanded a loan warehousing line from $100
million to $200 million. The uses of this line were also expanded to include
warehousing of tax-exempt bonds, new construction loans and pre-development
loans. In addition, the Company's mortgage servicing rights have been added as a
source of collateral.
Leverage
The Company's leverage ratio was 51.7% and 55.8% at June 30, 2003 and
December 31, 2002, respectively. This leverage ratio is based on total debt
(notes payable, short- and long-term debt) divided by the Company's total
capitalization (notes payable, short- and long-term debt, preferred
shareholders' and minority interests' equity in subsidiary companies, and
shareholders' equity). Management includes short-term debt in this calculation
because of the importance of short-term debt to the Company's management of its
overall cost of capital. It should be noted that this leverage ratio is one of
many ways to measure leverage. For example, as of June 30, 2003, this ratio
excludes $257.5 million of securitization interests that are senior to the
Company's investments that were previously accounted for as sales and includes
$183.5 million of construction loans where the
25
economic risk belongs to a third party.
The Company will continue to try to maintain overall leverage ratios in
the 50% to 65% range, with certain assets at significantly higher ratios, up to
approximately 99%, and other assets not leveraged at all.
Factors that Could Affect Future Results
The Company's 2002 Form 10-K contains a detailed description of the
Company's factors that could affect future results. There has been no material
change since December 31, 2002 to the information related to factors that could
affect future results.
Acquisition of Housing and Community Investment Unit of Lend Lease Real Estate
Investments
On July 1, 2003, the Company acquired Housing and Community Investment
("HCI"), the tax credit equity unit of Lend Lease Real Estate Investments, for
$102 million in cash. The acquisition was financed by a $120 million secured
term credit facility provided by a syndicate of banks led by the Royal Bank of
Canada. HCI is a market leading syndicator of low income tax credit equity
investments. In connection with this acquisition, the Company's operating
subsidiary, MuniMae Midland, LLC, has been renamed MMA Financial, LLC.
Contractual Obligations
The Company's 2002 Form 10-K contains a description of the Company's
material contractual obligations. Except as disclosed below, there has been no
material change since December 31, 2002 to the information related to
contractual obligations.
During the second quarter of 2003, the Company entered into an
operating lease for 21,283 square feet of new office space. The initial term of
the lease is ten years commencing October 1, 2003. Rent will be charged at the
rate of $25.20 per square foot with an escalation of 3% per year.
Guarantees and Off-Balance Sheet Arrangements
The Company's 2002 Form 10-K contains a summary of the Company's
guarantees and off-balance sheet arrangements. Since December 31, 2002, there
has been no material change to the information related to guarantees and
off-balance sheet obligations. See Note 8 for a table that summarizes the
Company's guarantees by type as of June 30, 2003.
Dividend Policy and Cash Available for Distribution
Consistent with its strategy of maximizing shareholder value through
steady increases in cash distributions to shareholders, the Company uses cash
available for distribution ("CAD") as a primary measure of its ability to pay
distributions. The Company believes CAD is the most relevant measure of its
ability to pay distributions, as CAD is a measure of current earnings. The
Company uses this
26
measure of current earnings as a basis for declaring its quarterly
distributions.
CAD differs from net income because of variations between GAAP income
and actual cash received. There are three primary differences between CAD and
GAAP income. The first is the treatment of loan origination fees, which for CAD
purposes are recognized as income when received but for GAAP purposes are
amortized into income over the life of the associated investment. The second
difference is the non-cash gain and loss recognized for GAAP associated with
valuations, sales of investments and capitalization and amortization of mortgage
servicing rights, which are not included in the calculation of CAD. The third
difference is the treatment of the Company's investments in partnerships. For
GAAP, the Company records its allocable share of the income (loss) from the
partnership as income, while for CAD reporting, the Company records the cash
distributions it receives from the partnership as income.
Since the first quarter of 2002, when the Company completed the
redemption of preferred shares and term growth shares, the Company's entire net
cash flow has been available for distribution to the common shares. The
Company's current policy is to distribute to common shareholders at least 80% of
its annual CAD to common shares. The table below shows the Company's CAD
available to common shares, CAD per common share, dividend per common share and
payout ratio for the three and six months ended June 30, 2003 and 2002.
For the three months ended June 30, For the six months ended June 30,
----------------------------------- ---------------------------------
2003 2002 2003 2002
------------ --------- ------------ ------------
CAD available to common shares (000s) $ 15,121 $ 12,385 $ 29,537 $ 24,198
CAD per common share (1) 0.52 0.49 1.02 0.96
Dividend per common share 0.4475 0.4375 0.8925 0.8725
Payout ratio 85.3% 89.4% 87.3% 91.1%
(1) CAD per common share is calculated based on the number of shares outstanding
at the end of each fiscal quarter.
The following table reconciles the Company's GAAP net income to CAD for
the three and six months ended June 30, 2003 and 2002.
27
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2003 2002 2003 2002
-------- -------- -------- --------
NET INCOME ALLOCATED TO COMMON SHARES - GAAP BASIS $ 31,102 $ 2,920 $ 45,047 $ 17,813
======== ======== ======== ========
Conversion to Cash Available for Distribution:
(1) Mark to market adjustments $ 2,449 $ 7,721 $ (424) $ 4,609
(2) Equity investments 3,181 79 5,591 519
(3) Net gain on sales (10,486) (601) (10,813) (2,727)
(3) Amortization of capitalized mortgage servicing fees 414 333 766 651
(4) Origination fees and other income, net 1,335 1,450 1,616 2,123
(5) Valuation allowances and other-than-temporary
impairments 1,097 -- 1,097 110
(6) Deferred tax expense 984 483 1,612 1,100
(7) Discontinued operations (25,748) -- (25,748) --
(7) Interest income 10,793 -- 10,793 --
-------- -------- -------- --------
CASH AVAILABLE FOR DISTRIBUTION (CAD) $ 15,121 $ 12,385 $ 29,537 $ 24,198
======== ======== ======== ========
NOTES
-----
(1) For GAAP reporting, the Company records the non-cash change in fair value of
its investment in interest rate swaps and other derivative financial instruments
through net income. These non-cash gains and losses are not included in the
Company's calculation of CAD.
(2) For GAAP reporting, the Company accounts for various investments in
partnerships using the equity accounting method. As a result, the Company's
allocable share of the income or loss from the partnerships is reported in
income (losses) from equity investments in partnerships. The income from these
partnerships includes depreciation expense and changes in the fair value of
investments in derivatives. For GAAP reporting, distributions are treated as a
return of capital. For CAD reporting, the Company records the cash distributions
it receives from the partnerships as other income. In addition, a portion of the
income or loss from partnerships is reduced by a minority interest for both GAAP
and CAD.
(3) For GAAP reporting, the Company recognizes non-cash gains and losses
associated with the sale of assets or capitalization of mortgage servicing
rights. The capitalized mortgage servicing rights are amortized into expense
over the estimated life of the serviced loans. The non-cash gains and the
associated amortization expense are not included in CAD.
(4) Origination fees and certain other income amounts are recognized as income
when received for CAD purposes, but for GAAP reporting these items are deferred
and amortized into income over the life of the associated investment. This
adjustment represents the net difference, for the relevant period, between fees
taken into income when received for CAD and the amortization of fees recorded
for GAAP.
(5) For GAAP reporting, the Company records valuation allowances and
other-than-temporary impairments on its investments in loans, bonds and other
bond-related investments. Such non-cash charges do not affect the cash flow
generated from the operation of the underlying properties, distributions to
shareholders, or the tax-exempt status of the income of the financial obligation
under the bonds. Therefore, these items are not included in the calculation of
CAD.
(6) For GAAP reporting, the Company's income tax expense contains both a current
and a deferred component. Only the Company's current income tax expense is
reflected in CAD.
(7) For GAAP reporting, the Company recognized a gain upon the sale of a
property. This gain was required to be classified as discontinued operations
because the Company owned the property prior to the sale. For CAD reporting, the
gain was significantly less due to recording a portion of the proceeds as
interest income. In addition, the carrying value of the tax-exempt bond
associated with the property was significantly more for CAD due to an impairment
of $12.4 million previously recognized for GAAP.
The calculation of CAD is the basis for the determination of the
Company's quarterly distributions to common shares, is used by securities
analysts, and is presented as a supplemental measure of the Company's
performance. The calculation is not approved by the Securities and Exchange
Commission nor is it required by GAAP and should not be considered as an
alternative to net income as an indicator of the Company's operating performance
or as an alternative to cash flows as a measure of liquidity. The Company
believes that CAD provides relevant information about its operations and is
necessary, along with net income, for understanding its operating results.
28
RESULTS OF OPERATIONS AND CRITICAL ACCOUNTING ESTIMATES
Net Interest Income
For the three months ended June 30, For the six months ended June 30,
----------------------------------------- -----------------------------------------
(000s) 2003 % 2002 % 2003 % 2002 %
-------- ----- -------- ----- -------- ----- -------- -----
Interest on bonds and residual
interests in bond securitizations $ 13,929 106.3% $ 15,399 97.8% $ 29,914 105.3% $ 30,561 99.0%
Interest on loans 7,563 57.7% 8,594 54.6% 17,066 60.1% 17,024 55.2%
Interest on short-term investments 332 2.5% 244 1.5% 524 1.8% 731 2.4%
-------- -------- -------- --------
Total interest income 21,824 24,237 47,504 48,316
Interest expense (8,724) -66.5% (8,487) -53.9% (19,092) -67.2% (17,459) -56.6%
-------- ----- -------- ----- -------- ----- -------- -----
Net interest income $ 13,100 100.0% $ 15,750 100.0% $ 28,412 100.0% $ 30,857 100.0%
======== ===== ======== ===== ======== ===== ======== =====
Net interest income for the quarter ended June 30, 2003 decreased $2.7
million compared to the same period last year due primarily to: (1) a $2.5
million decrease in the accrual of interest on bonds, residual interests in bond
securitizations and loans; and (2) a $0.2 million increase in interest expense
due to an increase in financing costs related to on-balance sheet
securitizations and larger average notes payable balances outstanding during the
quarter.
Net interest income for the six months ended June 30, 2003 decreased
$2.4 million compared to the same period last year due primarily to: (1) a $0.6
million decrease in the accrual of interest on bonds and residual interests in
bond securitizations; and (2) a $1.6 million increase in interest expense due to
an increase in financing costs related to on-balance sheet securitizations and
larger average notes payable balances outstanding during the 2003 period.
Fee Income
For the three months ended June 30, For the six months ended June 30,
------------------------------------------ -------------------------------------------
(000s) 2003 % 2002 % 2003 % 2002 %
------- ----- ------ ----- ------- ----- ------- -----
Syndication fees $ 1,825 17.6% $2,380 30.3% $ 3,236 18.3% $ 3,998 27.6%
Origination fees 2,219 21.4% 1,505 19.2% 2,917 16.5% 2,594 17.9%
Loan servicing fees 1,838 17.7% 1,660 21.2% 3,747 21.2% 3,568 24.7%
Asset management and advisory 1,198 11.5% 1,040 13.2% 2,274 12.9% 1,907 13.2%
fees
Other income 3,309 31.8% 1,259 16.1% 5,506 31.1% 2,404 16.6%
------- ----- ------ ----- ------- ----- ------- -----
Total fee income $10,389 100.0% $7,844 100.0% $17,680 100.0% $14,471 100.0%
======= ===== ====== ===== ======= ===== ======= =====
Total fee income for the quarter ended June 30, 2003 increased $2.5
million compared to the same period last year due primarily to: (1) a $2.1
million increase in other income due primarily to: (i) a $1.0 million fee
collected on a conventional equity deal; (ii) $0.8 million collected as the
result of a collateral release after the sale of a property; (iii) $0.8 million
in prepayment fees collected from the early payment of tax-exempt bond
investments; and (iv) a $0.5 million decrease in commission income; (2) a $0.7
million increase in origination fees due to increased volume; and (3) a $0.6
million decrease in syndication fees due to a decrease in the volume of
syndications closed.
Total fee income for the six months ended June 30, 2003 increased $3.2
million compared to the same period last year due primarily to: (1) a $3.1
million increase in other income due primarily to: (i) $1.6 million in fees
collected on a conventional equity deal; (ii) $1.7 million in prepayment fees
collected from the early payment of tax-exempt bond investments; (iii) $0.8
million collected as the result of a collateral release after the sale of a
property; and (iv) a $1.0 million decrease in
29
commission income; (2) a $0.3 million increase in origination fees due to
increased volume; (3) a $0.4 million increase in asset management and advisory
fees due to an increase in tax credit equity and MMER assets under management;
and (4) a $0.8 million decrease in syndication fees due to a decrease in the
volume of syndications closed combined with taking $0.5 million in
organizational and offering cost reimbursements related to closed syndicated tax
credit equity funds into income during the first quarter of 2002, whereas no
such fees were recognized during 2003.
Net Gain on Sales
For the three months ended June 30, For the six months ended June 30,
--------------------------------------- -----------------------------------------
(000s) 2003 % 2002 % 2003 % 2002 %
------ ----- ---- ----- ------ ----- ------ -----
Gain recorded for capitalized
mortgage servicing rights $ 197 13.6% $561 79.8% $ 601 22.0% $1,731 60.3%
Sales and payoffs of investments 336 23.1% 142 20.2% 1,112 40.7% 1,138 39.7%
Swap terminations 742 51.1% -- -- 742 27.2% -- --
Sale of investments in partnerships 178 12.2% -- -- 276 10.1% -- --
------ ----- ---- ----- ------ ----- ------ -----
Total net gain on sales $1,453 100.0% $703 100.0% $2,731 100.0% $2,869 100.0%
====== ===== ==== ===== ====== ===== ====== =====
Net gain on sales for the quarter ended June 30, 2003 increased $0.8
million compared to the same period last year due primarily to: (1) a $0.7
million net gain recorded on the termination of interest rate swaps; (2) a $0.2
million increase in gain on the sales and payoff of investments due to the
increase in premiums on the delivery of loans to HUD; (3) a $0.4 million
decrease in the gain recorded for capitalized mortgage servicing rights due to a
decrease in the dollar amount of permanent loans sold; and (4) a $0.2 million
increase in gain on the sale of investments in partnerships. There was no
activity for this item until the quarter ended December 31, 2002. This gain
relates to the warehousing and subsequent transfer of tax credit equity
properties at subsidiaries.
Net gain on sales for the six months ended June 30, 2003 decreased $0.1
million compared to the same period last year due primarily to: (1) a $0.7
million net gain recorded on the termination of interest rate swaps; (2) a $0.3
million increase in gain on the sale of investments in partnerships as this
activity was new beginning the quarter ended December 31, 2002; and (3) a $1.1
million decrease in the gain recorded for capitalized mortgage servicing rights
due to a decrease in the volume and dollar amount of permanent loans sold.
Operating Expenses and Amortization
For the three months ended June 30, For the six months ended June 30,
------------------------------------ ----------------------------------------
(000s) 2003 % 2002 % 2003 % 2002 %
------- ----- ------ ----- ------- ----- ------- -----
Salaries and benefits $ 8,671 71.8% $5,930 59.7% $14,637 68.9% $10,757 61.7%
General and administrative 2,113 17.5% 1,697 17.1% 3,938 18.5% 3,423 19.6%
Professional fees 877 7.3% 1,967 19.8% 1,866 8.8% 2,604 14.9%
Amortization of mortgage servicing
rights and other intangibles 414 3.4% 333 3.4% 803 3.8% 651 3.8%
------- ----- ------ ----- ------- ----- ------- -----
$12,075 100.0% $9,927 100.0% $21,244 100.0% $17,435 100.0%
======= ===== ====== ===== ======= ===== ======= =====
Total operating expenses and amortization for the quarter ended June
30, 2003 increased $2.1 million compared to the same period last year due
primarily to: (1) a $2.7 million increase in salaries
30
and benefits resulting from a $0.8 million increase in salaries and other
compensation and a $2.0 million increase in bonus expense; (2) a $0.4 million
increase in general and administrative expenses due primarily to: (i) increases
totaling $0.3 million due to telephone, bank fees, memberships and dues and
costs related to the integration of HCI; and (ii) a $0.1 million increase in
travel and entertainment; and (3) a $1.1 million decrease in professional fees
due primarily to: (i) a $0.5 million decrease in commission expense; and (ii) a
$0.4 million decrease in legal fees due to information systems and other
corporate initiatives in the prior year. Commission expense is no longer
incurred by the Company because the pass-through of commission income and
expense has been transferred to the syndicated tax credit equity funds.
Total operating expenses and amortization for the six months ended June
30, 2003 increased $3.8 million compared to the same period last year due
primarily to: (1) a $3.9 million increase in salaries and benefits resulting
from a $1.0 million increase in salaries and other compensation and a $2.9
million increase in bonus expense; (2) a $0.5 million increase in general and
administrative expenses due primarily to: (i) increases totaling $0.4 million
due to telephone, bank fees, letter of credit fees, memberships and dues and
costs related to the integration of HCI; and (ii) a $0.1 million increase in
investment acquisition expenses; and (3) a $0.7 million decrease in professional
fees due primarily to: (i) a $1.0 million decrease in commission expense; and
(ii) a $0.3 million increase in consulting fees due to an internal controls
project and the acquisition of HCI.
Net Holding Gains on Derivatives
The Company recorded net holding losses for mark-to-market adjustments
on derivative financial instruments of $2.4 million and $7.7 million for the
quarters ended June 30, 2003 and 2002, respectively. This $5.3 million decrease
is due primarily to the termination of interest rate swaps with a total notional
amount of $105.7 million.
The Company recorded net holding gains of $0.4 million for the six
months ended June 30, 2003 for mark-to-market adjustments on derivative
financial instruments, which was a $5.0 million decrease from the $4.6 million
of losses recorded in 2002. This $5.0 million decrease is due primarily to the
termination of interest rate swaps with a total notional amount of $105.7
million.
Impairments and Valuation Allowances Related to Investments
In accordance with the Company's valuation and impairment policies, the
Company recorded other-than-temporary impairments and valuation allowances
totaling $1.1 million during the quarter ended June 30, 2003. The impairments
included a $0.7 million impairment on a bond with a face amount of $19.5 million
and $0.4 million of impairments on three taxable loans with total face amounts
of $7.0 million. During the quarter ended June 30, 2002, the Company did not
record any other-than-temporary impairments.
The Company recorded other-than-temporary impairments totaling $1.1
million during the six months ended June 30, 2003. The impairments included a
$0.7 million impairment on a bond with a face amount of $19.5 million and $0.4
million of impairments on three taxable loans with
31
total face amounts of $7.0 million. During the six months ended June 30, 2002,
the Company recorded impairments totaling $0.1 million on a bond with a face
amount of $0.7 million.
Net Losses from Equity Investments in Partnerships
Net losses from equity investments in partnerships increased by $1.7
million for the quarter ended June 30, 2003 compared to the same period last
year due primarily to: (1) $0.4 million in losses generated from investments in
real estate operating partnerships that are being warehoused before transfer to
syndicated tax credit equity funds; and (2) a $1.3 million increase in losses
from an investment in income-producing real estate operating partnerships and
related swap partnerships. While these investments generate cash flow to the
Company in the form of quarterly distributions, on a GAAP basis they generate a
net loss due to non-cash adjustments for depreciation and mark-to-market
adjustments related to the swap partnerships. The mark-to-market adjustments
cause volatility in the losses that are recorded.
Net losses from equity investments in partnerships increased by $2.1
million for the six months ended June 30, 2003 compared to the same period last
year due primarily to: (1) $0.9 million in losses generated from investments in
real estate operating partnerships that are being warehoused before transfer to
syndicated tax credit equity funds; and (2) a $1.2 million increase in losses
from an investment in income-producing real estate operating partnerships and
related swap partnerships.
Income Tax Expense
Income tax expense for the quarter ended June 30, 2003 decreased $1.4
million compared to the same period last year. This decrease is due primarily to
a decrease in net income within the operating segment, which contains
corporations that are subject to income taxes.
Income tax expense for the six months ended June 30, 2003 decreased
$2.3 million compared to the same period last year. This decrease is due
primarily to a decrease in net income within the operating segment, which
contains corporations that are subject to income taxes.
Income Allocable to Preferred Shareholders and Minority Interests in Subsidiary
Companies
Income allocable to preferred shareholders in a subsidiary company
remained the same for the quarter ended and six months ended June 30, 2003 as
compared to the same periods last year. There have not been any new series of
preferred shares issued since October 2001.
Expense allocable to minority interests in subsidiary companies
increased by $0.1 million and $0.3 million for the quarter ended and six months
ended June 30, 2003, respectively. This expense was not present during 2002.
32
Discontinued Operations
During the quarter ended June 30, 2003, the Company acquired a property
by deed in lieu of foreclosure. This property previously served as collateral
for a tax-exempt bond held by the Company. The Company sold the property for net
proceeds of $38.1 million, which resulted in a $26.8 million gain. The $26.8
million gain and $1.0 million of losses from operations of the property were
classified as discontinued operations in the consolidated statements of income.
Net Income
Net income for the quarter ended June 30, 2003 increased by $28.2
million compared to the same period last year due primarily to: (1) a $25.7
million increase from discontinued operations; (2) a $5.3 million decrease in
net holding losses on derivatives; (3) a $2.1 million increase in other income;
(4) a $1.4 million decrease in income tax expense; offset by (5) a $2.7 million
increase in salaries and benefits; (6) a $2.5 million decrease in the accrual of
interest on bonds, residual interests in bond securitizations and loans; and (7)
a $1.7 million increase in net losses from equity investments in partnerships.
Net income for the six months ended June 30, 2003 increased by $27.1
million compared to the same period last year due primarily to: (1) a $25.7
million increase from discontinued operations; (2) a $5.0 million decrease in
net holding losses on derivatives; (3) a $3.1 million increase in other income;
(4) a $2.3 million decrease in income tax expense; offset by (5) a $3.9 million
increase in salaries and benefits; (6) a $2.1 million increase in net losses
from equity investments in partnerships; (7) a $1.6 million increase in interest
expense; and (8) a $1.0 million increase in other-than-temporary impairments
recorded in 2003.
Other Comprehensive Income (Loss)
For the quarter ended June 30, 2003, the net adjustment to other
comprehensive income for unrealized holding gains on tax-exempt bonds and
residual interests in bond securitizations available for sale was $16.5 million.
After a reclassification adjustment for gains of $24.7 million included in net
income, other comprehensive loss for the quarter ended June 30, 2003 was $8.2
million and total comprehensive income was $22.9 million.
For the quarter ended June 30, 2002, the net adjustment to other
comprehensive income for unrealized holding gains on tax-exempt bonds and
residual interests in bond securitizations available for sale was $2.9 million,
and total comprehensive income was $5.8 million.
For the six months ended June 30, 2003, the net adjustment to other
comprehensive income for unrealized holding gains on tax-exempt bonds and
residual interests in bond securitizations available for sale was $21.1 million.
After a reclassification adjustment for gains of $24.7 million included in net
income, other comprehensive loss for the six months ended June 30, 2003 was $3.6
million and total comprehensive income was $41.4 million.
33
For the six months ended June 30, 2002, the net adjustment to other
comprehensive income for unrealized holding losses on tax-exempt bonds and
residual interests in bond securitizations available for sale was $1.2 million.
After a reclassification adjustment for gains of $1.0 million included in net
income, other comprehensive loss for the six months ended June 30, 2002 was $2.2
million and total comprehensive income was $15.8 million.
Critical Accounting Policies and Estimates
The Company's 2002 Form 10-K contains a detailed description of the
Company's critical accounting policies and estimates. Since December 31, 2002,
there has been no material change to the information related to critical
accounting policies and estimates.
New Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board approved
Statement of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity" ("FAS
150"). FAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify those financial instruments with
certain debt-like characteristics as liabilities. The scope of FAS 150 includes
financial instruments issued in the form of mandatorily redeemable shares. These
types of shares embody an unconditional obligation requiring the issuer to
redeem them by transferring assets at a specified date. Management has
determined that the Company's preferred shareholders' equity in a subsidiary
company appears to fall within the scope of FAS 150. Therefore, the Company will
be required to reclassify its preferred shareholders' equity of $160.5 million
to the liability section of the consolidated balance sheets. In addition,
amounts currently classified as distributions paid to the preferred shareholders
will be recorded as interest expense. FAS 150 is effective for instruments held
by the Company at the beginning of the first interim period beginning after June
15, 2003.
In January 2003, the Financial Accounting Standards Board approved
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46").
FIN 46 requires the consolidation of a Company's equity investment in a variable
interest entity ("VIE") if the Company is the primary beneficiary of the VIE and
if risks are not effectively dispersed among the owners of the VIE. The Company
is considered to be the primary beneficiary of the VIE if the Company absorbs
the majority of the losses of the VIE. FIN 46 is effective for VIEs created
after January 31, 2003. For any VIE in which the Company held an interest that
it acquired before February 1, 2003, FIN 46 is effective for the first interim
reporting period beginning after June 15, 2003. The Company is currently
reviewing the impact of FIN 46 on the tax credit syndication funds that a wholly
owned subsidiary of the Company sponsors and asset manages, as well as
investments accounted for under the equity method of accounting. The Company
will continue to review new investments in order to determine if they should be
accounted for in accordance with FIN 46.
34
RELATED PARTY TRANSACTIONS
The Company's 2002 Form 10-K contains a detailed description of the
Company's related party transactions. Except as disclosed below, there has been
no material change since December 31, 2002 to the information related to related
party transactions.
In June 2003, the Company received approximately $0.8 million in cash
and a 34.1% limited partnership interest in SCA Associates 86-II Limited
Partnership ("SCA86-II") from SCA Custodial Co., Inc. ("SCAC"). The general
partner of SCA86-II is Shelter Development Holdings, Inc. ("SHELTER HOLDINGS").
Mr. Mark K. Joseph, the Company's Chief Executive Officer and Chairman of its
Board of Directors, controls and is an officer of Shelter Holdings. Mr. Joseph
also owns a 20.8% limited partnership interest in SCA86-II. In addition, Mr.
Michael L. Falcone, the Company's President and Chief Operating Officer, owns a
3% limited partnership interest in SCA86-II. SCAC is indirectly wholly owned by
The Shelter Policy Institute, Inc., which is controlled by Mr. Joseph.
The cash received by the Company was recorded as other income in the
consolidated statements of income and is an accumulation of distributions from
the 34.1% limited partnership interest in SCA86-II. SCA86-II's sole asset is
shares of the Company. Therefore, the shares allocated to the Company's interest
in SCA86-II are classified as treasury shares on the consolidated balance
sheets. The partnership interest was held by SCAC as collateral for guaranteed
obligations related to a tax-exempt bond held by the Company. In April 2003, the
Company acquired the property that collateralized this bond by deed in lieu of
foreclosure and subsequently sold the property to a third party (See Note 9).
The sale of the property fulfilled all remaining guaranteed obligations and
allowed the release of the collateral held by SCAC.
The Company no longer leases office space from an affiliate due to the
sale of the building to a third party in February 2003.
INCOME TAX CONSIDERATIONS
MuniMae is organized as a limited liability company. This structure
allows MuniMae to combine the limited liability, governance and management
characteristics of a corporation with the pass-through income features of a
partnership. Therefore, the distributive share of MuniMae's income, deductions
and credits is included in each shareholder's income tax return. In addition,
the tax-exempt income derived from certain investments remains tax-exempt when
it is passed through to the shareholders. MuniMae records cash dividends
received from subsidiaries organized as corporations as dividend income for tax
purposes. Shareholders' distributive share of MuniMae's income, deductions and
credits are reported to shareholders on Internal Revenue Service Schedule K-1.
While the bulk of the Company's recurring interest income is
tax-exempt, from time to time the Company may sell or securitize various assets,
which may result in capital gains and losses for tax purposes. Since the Company
is taxed as a partnership, these capital gains and losses are passed through to
shareholders and are reported on each shareholder's Schedule K-1. Until January
1, 2003, the Company had elected under Section 754 of the Internal Revenue Code
to adjust the tax basis of
35
the Company's property on the transfer of shares to reflect the price each
shareholder paid for its shares. As a result, for shares purchased prior to
January 1, 2003, the capital gain and loss allocated to those shares may be
different for each shareholder due to the Company's Section 754 election and
will depend on, among other things, the timing of the shareholder's purchase of
the shares, the timing of transactions that generate gains or losses for the
Company and the difference (the "Basis Difference") between the Company's tax
basis in its property and a shareholder's tax basis in the shares. This means
that for assets purchased by the Company prior to a shareholder's purchase of
shares, the shareholder's basis in the assets may be significantly different
than the Company's basis in those same assets. Although the procedure for
allocating the basis adjustment is complex, the result of the election is that
each share is homogeneous, while each shareholder's basis in the assets of the
Company may be different. Consequently, the capital gains and losses allocated
to individual shareholders may be significantly different than the capital gains
and losses recorded by the Company.
In January 2003, the Company applied to have its election under Section
754 of the Internal Revenue Code revoked. The Company applied for this
revocation due to the increasing administrative burden attributable to this
election resulting from the increased numbers of common shareholders and the
increasing frequency both of events generating capital gain or loss and of
purchases and sales of common shares.
In May 2003, the Internal Revenue Service approved the Company's
application to revoke its election under Section 754 for the Company's tax year
ending December 31, 2003. As a result, for common shares purchased on or after
January 1, 2003, the capital gain and loss allocated from the Company will be
based on their pro-rata share of the Company's gain and loss allocated without
regard to the Basis Difference. In other words, for shares purchased prior to
January 1, 2003, portions of the Basis Difference may from time to time be
recognized and reported on the shareholder's Schedule K-1 as and when the
Company's assets are sold. While for shares purchased on or after January 1,
2003, the Basis Difference will be eliminated when the shareholder sells the
shares.
This change in the method of calculating the Company's tax basis in its
assets could result in the shareholder being allocated more or less income in
any given year than he or she would have received if the Section 754 election
remained in place; however, it is difficult to predict the precise impact of the
change for individual shareholders. The revocation of the Company's 754 election
may result in shareholders who purchase shares on or after January 1, 2003,
experiencing a difference in the overall character of income allocated or
recognized.
A portion of the Company's interest income is derived from private
activity bonds that for income tax purposes are considered tax preference items
for purposes of alternative minimum tax ("AMT"). AMT is a mechanism within the
Internal Revenue Code to ensure that all taxpayers pay at least a minimum amount
of taxes. All taxpayers are subject to the AMT calculation requirements although
the majority of taxpayers will not actually pay AMT. As a result of AMT, the
percentage of the Company's income that is exempt from federal income tax may be
different for each shareholder depending on that shareholder's individual tax
situation.
36
The Company has numerous corporate subsidiaries that are subject to
income taxes. The Company provides for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"). FAS 109 requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax basis of assets and
liabilities.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
------------------------------------------------------------------
Since December 31, 2002 there has been no material change to the
information included in Item 7A of the Company's 2002 Form 10-K.
Item 4. Controls and Procedures
-------------------------------
(a) Evaluation of disclosure controls and procedures
The term "disclosure controls and procedures" is defined in Rules
13a-14(c) and 15d-14(c) of the Securities and Exchange Act of 1934 (the
"Exchange Act"). These rules refer to the controls and other procedures of a
company that are designed to ensure that information required to be disclosed by
a company in the reports that it files under the Exchange Act is recorded,
processed, summarized and reported within required time periods. Our Chief
Executive Officer and our Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures as of a date within 90
days before the filing of this quarterly report (the "Evaluation Date"), and
they have concluded that, as of the Evaluation Date, such controls and
procedures were effective at ensuring that required information will be
disclosed on a timely basis in our reports filed under the Exchange Act.
(b) Changes in internal controls
We maintain a system of internal accounting controls that are designed
to provide reasonable assurance that our books and records accurately reflect
our transactions and that our established policies and procedures are followed.
For the quarter ended June 30, 2003, there were no significant changes to our
internal controls or in other factors that could significantly affect our
internal controls.
PART II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
(a) Exhibits:
31.1 Certification of Mark K. Joseph, Chief Executive
Officer of Municipal Mortgage & Equity, LLC
Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
37
31.2 Certification of William S. Harrison, Chief
Financial Officer of Municipal Mortgage & Equity,
LLC Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of Mark K. Joseph, Chief Executive
Officer and Chairman of the Board of Municipal
Mortgage & Equity, LLC Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of William S. Harrison, Chief
Financial Officer of Municipal Mortgage & Equity,
LLC Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K:
On April 23, 2003, the Company filed a Form 8-K containing the earnings
package reported to securities analysts for the quarter ended March 31,
2003, an earnings press release and financial statements related to the
Company's performance for the quarter ended March 31, 2003 and a
production press release related to the Company's production volume for
the quarter ended March 31, 2003.
On May 15, 2003, the Company filed a Form 8-K containing a press
release announcing that it had entered into a definitive Purchase
Agreement to acquire the Housing and Community Investing business
segment from Lend Lease Corporation Limited.
38
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATE: December 11, 2003 MUNICIPAL MORTGAGE & EQUITY, LLC
By: /s/ Mark K. Joseph
------------------
Name: Mark K. Joseph
Title: Chairman of the Board and
Chief Executive Officer
DATE: December 11, 2003 By: /s/ Mark K. Joseph
------------------
Name: Mark K. Joseph
Title: Chairman of the Board, Chief
Executive Officer (Principal
Executive Officer) and Director
DATE: December 11, 2003 By: /s/ William S. Harrison
-----------------------
Name: William S. Harrison
Title: Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
EXHIBIT INDEX
31.1 Certification of Mark K. Joseph, Chief Executive Officer of Municipal
Mortgage & Equity, LLC Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of William S. Harrison, Chief Financial Officer of
Municipal Mortgage & Equity, LLC Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Mark K. Joseph, Chief Executive Officer and Chairman
of the Board of Municipal Mortgage & Equity, LLC Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of William S. Harrison, Chief Financial Officer of
Municipal Mortgage & Equity, LLC Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.