AIC Arlington Asset Investment Corp

Aames Investment Corporation (NYSE: AIC): -- Company to Convert to C Corp. Status Through Corporate Restructuring and Creation of Captive REIT -- Wholesale Cost Reductions Begun with Closure of 2 Centers and Elimination of 100 Positions -- Core EPS for the Quarter of $0.02, GAAP EPS Loss of $0.07 Aames Investment Corporation (NYSE: AIC), a nationwide subprime mortgage lender today announced full financial results for the fourth quarter of 2005 and provided an update on recently announced corporate changes. Diluted core EPS for the quarter equaled $0.02, while diluted net loss per common share for the December 2005 quarter equaled $0.07 on a GAAP basis. During the quarter, the Company recorded a pretax mark-to-market derivative loss under FASB 133 of $5.3 million, representing a diluted non-core loss per share of $0.09. Fourth Quarter 2005 Highlights -- Net cost to originate of 1.75%, compared to 2.08% in the September 2005 quarter; -- Total loan production of $1.9 billion, with the Retail Channel accounting for 43% of total; -- Taxable portfolio net interest margin of 2.75%; -- Weighted average interest rate of 7.81% on the quarter's production, up 40 basis points from the third quarter of 2005. Mr. A. Jay Meyerson, Chairman and CEO of Aames, commented, "The fourth quarter results highlight our commitment to improving our efficiency, further growing our retail originations and to increasing the coupons on our loan production. We were pleased to achieve a 1.75% net cost to originate ratio, well below where we started the year, and to have our retail channel contribute over 40% of total production. We also made progress during the quarter in raising rates on our production, a trend that continues in the first quarter of 2006. Notwithstanding these improvements, the mortgage banking business faced a sustained challenge to sell loans at a profitable level in the fourth quarter. While whole loan sale pricing decreased across the board during the quarter, prices paid for second lien and selected other loans in particular decreased quickly and impacted our net gain rate. We remain cautious regarding whole loan sales premiums moving into early 2006, and will focus on making significant reductions in our cost to originate ratio in response to this outlook." Update on Corporate Restructuring Mr. Meyerson commented on the Company's restructuring, "In our summary earnings announcement on the 17th of March we mentioned our plan to eliminate our REIT status at the parent company level and to expand our corporate cost reduction initiatives. The actions that we are taking are designed to substantially reduce our cost to originate, increase our stockholders' equity and improve our ability to generate meaningful net income. We have taken these steps because we believe that the recent challenges in the subprime sector are likely to continue into the foreseeable future. Aames, however, has a number of unique assets through which we can effectively address the challenges currently faced by the subprime industry, including our strong retail franchise, and $304.1 million of net operating loss carry-forward (NOLs) in our taxable REIT subsidiary." Elimination of REIT Status Meyerson stated, "In order to take full advantage of our NOLs, while eliminating the REIT status at the parent company level to preserve capital, we decided to reorganize so that Aames Financial, our current TRS will become our parent company and a C Corp for tax purposes, and our existing REIT will become a captive REIT subsidiary. This structure will allow us to utilize our NOLs to shelter the vast majority of the income produced by our current loan portfolio. In addition, we currently believe that the captive REIT structure will allow us to potentially access the preferred stock market to fund additional portfolio growth." Aames expects to file shortly a proxy/registration statement with the SEC in connection with the corporate restructuring and will seek shareholder approval of the change at a special shareholders meeting in the next several months. Wholesale Consolidation Mr. Meyerson also commented on the consolidation of the Company's wholesale operations and the resulting cost reductions. "We continue to improve our efficiency in our retail platform, lowering our net cost to originate each quarter of 2005. Our wholesale operation, however, has struggled to achieve meaningful operating leverage in the current environment, requiring us to make a number of structural changes to our cost base. We are in the process of closing two wholesale operating centers, in Deerfield, Florida and Parsippany, New Jersey, and will consolidate the functions previously performed in those centers into our Irvine, California, Jacksonville, Florida and Dallas, Texas locations. We have also eliminated 100 positions in our wholesale channel. We estimate that the combined annual savings from these initial actions will be $10 million. We have identified additional cost reductions in operating expenses of approximately $10 million, which we plan on eliminating within the next four months. We are making a number of other changes to our wholesale operations, in order to reduce our fixed and variable cost components and move the net cost ratio down to a level that allows us to achieve a profit in our wholesale division in the current market environment. We have made solid progress in achieving our goal of a 2006 net cost to originate ratio at or below our current level." In connection with these cost reduction initiatives, Aames estimates that it will incur a first quarter 2006 charge of approximately $2.0 million. The Company anticipates that it will begin to realize the benefits of these cost reductions beginning in the second quarter of 2006. Aames also continues to review its entire cost structure to determine additional expense reductions to further improve efficiency. Earnings Guidance Policy The Company believes that current market conditions preclude it from providing a narrow range of estimates for earnings at this time and that any estimates are subject to changes given the volatile market conditions in the subprime sector. Based on the Company's current outlook, core EPS for 2006 is estimated to range from $0.80 to $1.00 per share. The Company expects that the current loan pricing environment, along with its focus on restructuring activities will result in a core net loss for the first quarter of 2006, with a target of returning to profitability by the second quarter. The Company will review its guidance policy each quarter based on changes in market conditions and its own financial performance. Financial Disclosure The Company has included measurements of core financial metrics, including core net interest income, core net income and loss and core diluted earnings and loss per share, which are non-GAAP financial metrics. Core earnings excludes the mark-to-market derivative gain or loss under FASB 133, as well as non-core charges or credits to income. The Company does not account for its derivative financial instruments as cash flow or fair value hedges under the provisions of Statement of Financial Accounting Standards No. 133 (Accounting for Derivative Financial Instruments and Hedging Activities) and, as a result, the unrealized mark to market gains or losses on the derivative instruments are recorded as income or losses, even thought the cash flows will not be received until sometime in the future. By excluding the impact of the mark-to-market gain or loss from the net income or net loss, management believes that core net interest income and core net income or loss can provide a useful measurement of the Company's operating performance. Throughout this press release, the Company will provide comparisons between the fourth quarter of 2005 and both the third quarter of 2005 and the fourth quarter of 2004. Due to the change in the Company's primary operating strategy following its November 2004 reorganization from a mortgage banking platform, where the Company originated and sold all of its production for a cash gain, to a mortgage REIT in which the Company retains a substantial portion of its production for its loans held for investment portfolio and generates interest income, management believes that some comparisons to prior year periods do not provide the best measurement of the Company's financial performance. Revenue The following table details the components of total and core revenues for the quarters ended December and September 2005 and December 2004. -0- *T (dollars in Quarter Ended Percentage Change thousands) ---------------------------------- ----------------- 12/31/2005 12/31/2004 9/30/2005 Y-Y Sequential ----------- ----------- ---------- ------ ---------- Net interest income after provision for loan losses(1) $34,734 $21,690 $42,677 60.1% -18.6% Noninterest income 2,554 10,989 21,300 -76.8% -88.0% ----------- ----------- ---------- Total revenue 37,288 32,679 63,977 14.1% -41.7% Mark-to-market loss (gain) on derivative financial instruments 5,300 (6,344) (7,121) nm -174.4% ----------- ----------- ---------- Total core revenue $42,588 $26,335 $56,856 61.7% -25.1% =========== =========== ========== (1) NII for all 2005 periods includes the FASB 133 mark-to-market gain or loss on derivative financial instruments. *T Total core revenue for the December 2005 quarter equaled $42.6 million, a 25% sequential decrease from the September 2005 quarter. The decrease resulted from an 88% decline in non interest income, related entirely to the net gain on sale for the December quarter falling to $0.3 million from $19.6 million in the September quarter. Total revenue for the fourth quarter of 2005 was $37.3 million compared to $64.0 million in the third quarter of the year. Included in the total revenue numbers were a mark to market loss of $5.3 million for the fourth quarter and a mark to market gain of $7.1 million in the third quarter. Net Interest Income The following table details the components of net interest income before the provision for loan losses for the quarters ended December and September 2005 and December 2004. -0- *T (dollars in Quarter Ended Percentage Change thousands) ---------------------------------- ----------------- 12/31/2005 12/31/2004 9/30/2005 Y-Y Sequential ----------- ----------- ---------- ------ ---------- Interest earned on: Loans held for investment $71,371 $15,957 $74,651 347.3% -4.4% Loans held for sale 18,987 15,289 10,601 24.2% 79.1% Overnight investments 1,120 281 812 298.6% 37.9% Income from derivative financial instruments 11,922 488 8,244 nm 44.6% Amortization of net deferred loan origination costs (1,578) (200) (1,345) nm 17.3% Prepayment penalty fees 9,015 88 7,946 nm 13.5% Other 92 121 82 -24.0% 12.2% ----------- ----------- ---------- Total interest income $110,929 $32,024 $100,991 246.4% 9.8% Interest expense $59,134 $12,525 $48,731 372.1% 21.3% Mark-to-market (gain) loss on derivative financial instruments 5,300 (6,344) (7,121) nm nm Amortization of financing costs 2,662 1,718 3,550 54.9% -25.0% Other 170 535 154 -68.2% 10.4% ----------- ----------- ---------- Total interest expense $67,266 $8,434 $45,314 697.6% 48.4% Net interest income(1) $43,663 $23,590 $55,677 85.1% -21.6% Add (subtract) mark-to-market (gain) loss on derivative financial instruments 5,300 (6,344) (7,121) ----------- ----------- ---------- Core net interest income(1) $48,963 $17,246 $48,556 183.9% 0.8% =========== =========== ========== (1) Before the provision for losses on loans held for investment. *T Core net interest income for the fourth quarter of 2005, which excludes the impact of any mark-to-market gains or losses on derivative instruments, was $49.0 million, compared to $48.6 million in the third quarter of 2005. Net interest income for the quarter reflected higher interest income from loans held for sale, the benefit of the Company's interest rate derivative instruments, higher prepayment penalty income and lower amortization of financing costs, offset by lower income from loans held for investment and higher interest expense. During the fourth quarter of 2005, the average balance of loans held for investment decreased by approximately $126 million to $4.1 billion, as the Company chose to sell the majority of lower coupon loans produced earlier in the quarter as it increased coupons and retain for its portfolio the higher coupon loans originated later in the quarter. The table below provides the details of the components of the REIT net interest margin for the December and September 2005 quarters. -0- *T Quarter Ended ---------------------- 12/31/2005 9/30/2005 ----------- ---------- Gross yield on LHFI 6.97% 7.07% Prepayment penalty fees 0.88% 0.75% Amortization of premiums -0.70% -0.43% Amortization of deferred loan fees and costs -0.15% -0.13% ----------- ---------- Net yield on LHFI 7.00% 7.26% Net cost of funding for LHFI 3.63% 3.63% Hedge premium amortization 0.07% 0.76% ----------- ---------- Net interest margin 3.30% 2.87% Servicing costs -0.47% -0.45% ----------- ---------- Portfolio net interest margin 2.83% 2.42% Net charge-offs -0.11% 0.00% Portfolio income margin 2.72% 2.42% =========== ========== LHFI = Loans held for investment *T The net interest margin for the Company's REIT portfolio for the fourth quarter of 2005 equaled 2.72%, compared to 2.42% in the third quarter of the year. The increase in the net interest margin resulted from a lower funding cost, driven by a reduced amortization of interest rate hedge expenses, partially offset by a lower interest income ratio, driven by a lower gross yield on loans held for investment and higher amortization of deferred premium. The reduced hedge premium amortization for the quarter reflected a true up of the amortization level to more closely match the income expected from the derivative financial instruments. The Company had been amortizing its hedge premiums based on estimated notional balance run-off. The Company estimates that a normalized hedge premium amortization is approximately 65 basis points, which results in a pro forma fourth quarter 2005 portfolio income margin of 2.14%. Noninterest Income The following table details the components of noninterest income for the quarters ended December and September 2005 and December 2004. -0- *T (dollars in Quarter Ended Percentage Change thousands) ---------------------------------- ----------------- 12/31/2005 12/31/2004 9/30/2005 Y-Y Sequential ----------- ----------- ---------- ------ ---------- Noninterest income: Gain on sale of loans $348 $10,258 $19,580 -96.6% -98.2% Loan servicing revenue 2,206 731 1,720 201.8% 28.3% ----------- ----------- ---------- Total noninterest income $2,554 $10,989 $21,300 -76.8% -88.0% =========== =========== ========== *T Total noninterest income for the fourth quarter of 2005 decreased by $18.7 million compared to the third quarter of 2005, due to a decrease in the net gain on sale of loans, partially offset by higher servicing revenue. The following table details the components of the gain on sale of loans for the quarters ended December and September 2005 and December 2004. -0- *T (dollars in Quarter Ended Percentage Change thousands) ---------------------------------- ----------------- 12/31/2005 12/31/2004 9/30/2005 Y-Y Sequential ----------- ----------- ---------- ------ ---------- Gain on sale of loans: Gain on whole loan sales $14,087 $9,417 $21,838 49.6% -35.5% Loan originations fees, net 330 2,160 1,558 -84.7% -78.8% Provision for representation, warranty and other losses (13,848) (494) (3,796) nm 264.8% Gains (losses) on interest rate cap hedges for loans held for sale - (584) - nm Miscellaneous costs (221) (241) (20) -8.3% 1005.0% ----------- ----------- ---------- Total gain on sale of loans $348 $10,258 $19,580 -96.6% -98.2% =========== =========== ========== Whole loan market sales $1,165,887 $426,736 $915,457 Gross gain on sale rate 1.21% 2.21% 2.39% Net gain on sale rate 0.03% 2.40% 2.14% *T The gross gain on sale of loans for the fourth quarter of 2005 equaled 1.21% of loans sold, a ratio that reflects both the composition of the loans sold as well as current market premiums for whole loan sales. During the fourth quarter, a number of issues impacted the gain on sale of loans, including the dramatic reduction in the demand and pricing for second lien loans and the rapid increase in the coupons required by loan buyers on loans to obtain premium pricing. Loans originated during the third quarter and held for sale into the fourth quarter accounted for 40.0% of total loan sales for the December quarter and had coupons below the prevailing rate on more recent loans. Second lien loans accounted for 8.8% of total loan sales during the fourth quarter. During the fourth quarter, pricing for second liens decreased dramatically, with most second loans trading below par, reflecting the market's concern over general credit conditions and home values. The proportion of second liens in the total loan sales also negatively impacted the net points and fees realized in the gain on sale ratio, since the majority of the Company's second lien loans are originated in the wholesale channel where Aames collects only modest amounts of such revenue. Combined with a $13.8 million provision for LOCOM, representation, warranty and other losses, the lower points and fees resulted in a net gain on sale ratio of 0.03% for the December 2005 quarter. The provision for representation, warranty and other losses included the following items for the fourth quarter of 2005. -0- *T (dollars in thousands) Provision for representation, warranty and other losses: Lower of cost or market provision (15,193) Representation and warranty provision 1,345 --------- Total $(13,848) ========= *T The provision for representations, warranty and other losses on loans sold during the quarter also contributed to the substantially reduced net gain on sale of loans. Based on the market valuation of loans held for sale as of December 31, 2005, the Company made a lower of cost or market provision of $15.2 million. This was partially offset by a benefit for representations and warranty contingencies of $1.3 million, as the contingent exposure on certain loans sold in earlier periods expired with lower actual representation and warranty losses than anticipated. Servicing revenue for the December 2005 quarter equaled $2.2 million, compared to $1.7 million in the September quarter. The increase reflects higher late charges and other fees collected on loans serviced, primarily in the Company's held for investment portfolio. Noninterest Expense The following table details the components of noninterest expense for the quarters ended December and September 2005 and December 2004. -0- *T (dollars in Quarter Ended Percentage Change thousands) ---------------------------------- ----------------- 12/31/2005 12/31/2004 9/30/2005 Y-Y Sequential ----------- ----------- ---------- ------ ---------- Noninterest expense: Personnel $24,107 $40,064 $23,783 -39.8% 1.4% Production 8,716 8,605 9,258 1.3% -5.9% General and administrative 8,567 15,476 10,312 -44.6% -16.9% ----------- ----------- ---------- Total noninterest expense 41,390 64,145 43,353 -35.5% -4.5% Non-core income (expense) - (21,512) 1,635 nm nm ----------- ----------- ---------- Core noninterest expense $41,390 $42,633 $44,988 -2.9% -8.0% =========== =========== ========== *T Total core noninterest expense for the December 2005 quarter decreased by approximately $3.6 million, or 8% compared to the September 2005 quarter. The sequential decrease in core noninterest expense reflects lower production and G&A expense, offset slightly by higher personnel expenses. During the fourth quarter the Company undertook additional cost reduction actions, including the consolidation of additional retail branches into Super Branch locations. As of December 31, 2005, the Company had a total of 76 retail locations, down from 83 at September 30, 2005. As of December 31, 2005, 50 of the Company's 76 retail branches were Super Branches. Net Cost to Originate The net cost to originate loans is a non GAAP measurement of the Company's efficiency trends within the meaning of Regulation G promulgated by the Securities and Exchange Commission. The data represents reported operating expenses, plus the origination costs deferred under SFAS No. 91 (Accounting for Nonrefundable Fees and Costs Associated with Origination or Acquiring Loans and Initial Direct Costs of Leases), less (i) the cost of servicing the Company's loans held for investment portfolio, (ii) certain corporate overhead costs and (iii) the fees received on originations less points paid on wholesale originations. The Company believes that the non GAAP measurement of the net cost to originate is indicative of its ability to generate profits from the sale of its loans into the secondary markets and an indication of its overall efficiency. The table below details the components of the net cost to originate loans for the quarters ended December and September 2005 and December 2004. -0- *T (dollars in Quarter Ended Percentage Change thousands) ----------------------------------- ----------------- 12/31/2005 12/31/2004 9/30/2005 Y-Y Sequential ----------- ----------- ----------- ------ ---------- Total noninterest expense $41,390 $64,145 $43,353 -35.5% -4.5% Non-core income (expense) - (21,512) 1,635 nm nm Deferred loan origination costs 24,306 19,619 24,319 23.9% -0.1% Loan servicing and other costs (3,274) (1,739) (2,733) 88.3% 19.8% ----------- ----------- ----------- Total expenses 62,422 60,513 66,574 3.2% -6.2% Loan origination fees received (29,567) (13,820) (26,716) 113.9% 10.7% ----------- ----------- ----------- Net cost to originate $32,855 $46,693 $39,858 -29.6% -17.6% =========== =========== =========== Total loan originations $1,882,603 $1,709,536 $1,913,296 10.1% -1.6% Cost Ratios: Core noninterest expense 2.20% 2.49% 2.35% -11.8% -6.5% Deferred loan origination costs 1.29% 1.15% 1.27% 12.5% 1.6% Loan servicing and other costs -0.17% -0.10% -0.14% 71.0% 21.7% ----------- ----------- ----------- Total expenses 3.32% 3.54% 3.48% -6.3% -4.7% Loan origination fees received -1.57% -0.81% -1.40% 94.3% 12.5% ----------- ----------- ----------- Net cost to originate 1.75% 2.73% 2.08% -36.1% -16.2% =========== =========== =========== *T The net cost to originate for the December 2005 quarter equaled 1.75% of total loan production, a 16% decrease from the third quarter of 2005. The improvement in the cost ratio resulted from retail loans representing a higher percentage of total originations and lower core operating expenses. As previously stated, the Company believes that in the current market environment, a cost to originate ratio in the 1.40% to 1.50% range is required to produce net profits in its mortgage banking division. The Company intends to achieve this lower cost ratio through a combination of a higher percentage of originations from the retail channel as well as the planned wholesale cost reductions. Loan Portfolio Total loans held for investment as of December 31, 2005 equaled $4.1 billion, compared to $4.2 billion as of September 30, 2005. The Company also had $951.2 million of loans held for sale as of December 31, 2005. At the end of the fourth quarter, the Company's leverage ratio, defined as total loans held for investment divided by total consolidated shareholders' equity, equaled 15.2 times. This leverage ratio is slightly higher than the previous 12 to 14 times equity range of the Company's targets. As a C Corp, the Company currently expects to maintain a leverage ratio near 15 times its equity base. Loan Production The following table details the Company's loan production for the quarters ended December and September 2005 and December 2004. -0- *T (dollars in Quarter Ended Percentage Change thousands) ----------------------------------- ---------------- 12/31/2005 12/31/2004 9/30/2005 Y-Y Sequential ----------- ----------- ----------- ----- ---------- Retail $811,096 $574,625 $793,851 41.2% 2.2% Wholesale 1,071,507 1,134,911 1,119,445 -5.6% -4.3% ----------- ----------- ----------- Total loan production $1,882,603 $1,709,536 $1,913,296 10.1% -1.6% =========== =========== =========== *T Loan production for the fourth quarter of 2005 equaled $1.9 billion, a $30.7 million sequential decrease from the third quarter of 2005 primarily as a result of normal seasonal volatility. Retail loans increased by 2.2% over the September 2005 level and by 41.2% over the December 2004 quarter, while wholesale loans decreased by 4.3% and 5.6% respectively for the same periods. Wholesale production accounted for 56.9% of total production for the fourth quarter of 2005, compared to 58.5% for the third quarter, while retail production accounted for 43.1% for the December 2005 quarter and 41.5% for the September quarter. Credit Quality The allowance for loan losses for the loans held for investment portfolio as of December 31, 2005 equaled $43.4 million, or 1.05% of the gross loans held for investment portfolio. The Company provided $8.9 million for loan losses during the fourth quarter of 2005. Total delinquencies in the loans held for investment portfolio equaled 7.0% at the end of the December 2005 quarter, compared to 4.4% at the end of the September 2005 quarter. While the level of delinquencies in the held for investment portfolio is higher than anticipated, the Company continues to experience loan losses that are better than expectations. The December 2005 quarter was the first quarter in which the REIT portfolio experienced any net charge-offs, with total net losses of $1.4 million, or an annualized 0.14% of the average held for investment portfolio. The Company continues to anticipate an increase in the level of delinquencies and credit losses as the loans held for investment portfolio seasons and less new loans are added to the portfolio. The Company continues to evaluate exposure to its production levels and delinquencies as a result of hurricanes Katrina, Rita and Wilma. While no assurances can be given, the Company currently believes that its consolidated financial position and results of operations will not be materially effected by the events. About Aames Investment Corporation Aames is a fifty-year old national mortgage banking company that originating subprime residential mortgage loans in 47 states through wholesale and retail channels under the name "Aames Home Loan." To find out more about Aames, please visit www.aames.com. Information Regarding Forward Looking Statements This press release may contain forward-looking statements under federal securities laws. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The risks and uncertainties that may cause the Company's performance and results to vary include: (i) limited cash flow to fund operations and dependence on short-term financing facilities; (ii) changes in overall economic conditions and interest rates; (iii) increased delinquency rates in the portfolio; (iv) intense competition in the mortgage lending industry; (v) adverse changes in the securitization and whole loan market for mortgage loans; (vi) declines in real estate values; (vii) an inability to originate subprime hybrid/adjustable mortgage loans; (viii) obligations to repurchase mortgage loans and indemnify investors; (ix) concentration of operations in California, Florida, New York and Texas; the occurrence of natural disasters (including the adverse impact of hurricanes Katrina, Rita and Wilma); (x) extensive government regulation; and (xi) an inability to comply with the federal tax requirements applicable to REITs and effectively operate within limitations imposed on REITs by federal tax rules. For a more complete discussion of these risks and uncertainties and information relating to the Company, see the Form 10-K for the year ended December 31, 2005 and other filings with the SEC made by the Company. Aames Investment expressly disclaims any obligation to update or revise any forward-looking statements in this press release. Further Information For more information, contact Steven C. Canup, Senior Vice President, Corporate Development and Investor Relations, in Aames Investment's Investor Relations Department at (323) 210-5311 or at investorinfo@aamescorp.com Financial tables and supplementary information follows. -0- *T AAMES INVESTMENT CORPORATION and SUBSIDIARIES Condensed Balance Sheets (In thousands) December 31, December 31, 2005 2004 ------------- --------------- (unaudited) Assets Cash and cash equivalents: Unrestricted $36,078 $31,641 Restricted 87,094 6,139 Loans held for sale, at lower of cost or market 951,177 484,963 Loans held for investment, net 4,085,536 1,725,046 Advances and other receivables 39,591 22,740 Derivative financial instruments, at estimated fair value 58,147 31,947 Prepaid and other assets 70,012 98,399 ------------- --------------- Total assets $5,327,635 $2,400,875 ------------- --------------- Liabilities and Stockholders' Equity Financings on loans held for investment $3,623,188 $1,157,470 Revolving warehouse and repurchase facilities 1,341,683 809,213 Other borrowings 16,487 7,680 Other liabilities 76,773 68,886 ------------- --------------- Total liabilities 5,058,131 2,043,249 Stockholders' equity 269,504 357,626 ------------- --------------- Total liabilities and stockholders' equity $5,327,635 $2,400,875 ------------- --------------- Shares outstanding 61,828 61,360 ------------- --------------- AAMES INVESTMENT CORPORATION and SUBSIDIARIES Condensed Statements of Operations (Unaudited) (In thousands, except per share data) Three Months Twelve Months Ended Ended December 31, December 31, ------------------- ------------------ 2005 2004 2005 2004 --------- --------- --------- -------- Interest income $110,929 $32,024 $340,515 $93,181 Interest expense 67,266 8,434 170,942 32,396 --------- --------- --------- -------- Net interest income 43,663 23,590 169,573 60,785 Provision for losses on loans held for investment 8,929 1,900 40,294 1,900 --------- --------- --------- -------- Net interest income after provision for loan losses 34,734 21,690 129,279 58,885 --------- --------- --------- -------- Noninterest income: Gain on sale of loans 348 10,258 30,277 177,607 Loan servicing 2,206 731 6,330 6,634 --------- --------- --------- -------- Total noninterest income 2,554 10,989 36,607 184,241 --------- --------- --------- -------- Net interest income after provision for loan losses and noninterest income 37,288 32,679 165,886 243,126 --------- --------- --------- -------- Noninterest expense: Personnel 24,107 40,064 91,217 120,608 Production 8,716 8,605 35,351 36,504 General and administrative 8,567 15,476 44,707 49,162 --------- --------- --------- -------- Total noninterest expense 41,390 64,145 171,275 206,274 --------- --------- --------- -------- Income (loss) before income taxes (4,102) (31,466) (5,389) 36,852 Income tax provision (benefit) 73 37 842 (4,933) --------- --------- --------- -------- Net income (loss) $(4,175) $(31,503) $(6,231) $41,785 --------- --------- --------- -------- Net income (loss) to common stockholders: Basic $(4,175) $(32,595) $(6,231) $32,085 Diluted $(4,175) $(31,503) $(6,231) $41,785 Net income (loss) per common share: Basic $(0.07) $(0.53) $(0.10) $0.52 Diluted $(0.07) $(0.51) $(0.10) $0.68 Weighted average number of common shares outstanding: Basic 62,512 61,335 62,517 61,316 Diluted 62,512 61,335 62,517 61,348 AAMES INVESTMENT CORPORATION and SUBSIDIARIES Other Financial Data (Unaudited) (In thousands) Twelve Months Ended December 31, --------------------------------- 2005 2004 -------------- ----------------- Condensed Statement of Cash Flows Information Net cash provided by (used in): Operating activities $(450,756) $255,422 Investing activities (2,406,124) (1,730,704) Financing activities 2,942,272 1,501,451 -------------- ----------------- Net increase (decrease) in cash and cash equivalents 85,392 26,169 Cash and cash equivalents, beginning of period 37,780 11,611 -------------- ----------------- Cash and cash equivalents, end of period $123,172 $37,780 -------------- ----------------- December 31, December 31, 2005 2004 -------------- ----------------- Revolving Warehouse and Repurchase Facilities Committed facilities $2,700,000 $2,450,000 Uncommitted facilities 100,000 100,000 -------------- ----------------- Total warehouse and repurchase facilities $2,800,000 $2,550,000 -------------- ----------------- Amount utilized on committed $1,341,683 $809,213 -------------- ----------------- Borrowing capacity on committed $1,358,317 $1,640,787 -------------- ----------------- Liquidity Unrestricted cash $36,078 $31,641 Plus: Unencumbered loans held for sale 87,597 87,955 Less: Margin and ineligible mortgage collateral (80,962) (22,153) Plus: Capacity available under S/T collateralized financing facility 9,154 - -------------- ----------------- $51,867 $97,443 -------------- ----------------- AAMES INVESTMENT CORPORATION (Parent Company Only) (Unaudited) (In thousands) December 31, ---------------------------- Condensed Balance Sheets(1) 2005 2004 ---------------------------- ---------------------------- Cash and cash equivalents: Unrestricted $13,042 $7,206 Restricted 87,094 6,139 Loans held for investment, net: Securitized 3,659,657 1,187,435 Not yet securitized 461,452 531,261 Net deferred loan origination costs 7,787 8,250 Deferred loan acquisition premium 41,131 29,226 Allowance for loan losses (43,359) (1,900) ------------ -------------- Total loans held for investment, net 4,126,668 1,754,272 ------------ -------------- Investment in subsidiaries 78,697 149,028 Accrued interest and other 57,480 24,208 Derivative financial instruments 58,147 31,947 ------------ -------------- Total assets $4,421,128 $1,972,800 ============ ============== Financings on loans held for investment $3,623,188 $1,157,470 Revolving warehouse and repurchase facilities 433,241 409,199 Other borrowings 16,487 - Other liabilities 37,577 19,279 ------------ -------------- Total liabilities 4,110,493 1,585,948 Stockholders' equity 310,635 386,852 ------------ -------------- Total liabilities and stockholders' equity $4,421,128 $1,972,800 ============ ============== (1) Before intercompany elimination entries. Three Months Twelve Months Ended Ended December 31, December 31, Condensed Statements of Operations 2005 2005 ---------------------------------- ------------- -------------- Net interest income $24,491 $113,270 Provision for losses on loans held for investment (8,929) (40,294) ------------ -------------- Net interest income after provision for loan losses 15,562 72,976 Noninterest expense (1,302) (8,784) ------------ -------------- Income before equity in net loss of subsidiary 14,260 64,192 Equity in net loss of subsidiary (25,266) (58,518) ------------ -------------- Net income $(11,006) $5,674 ============ ============== GAAP Net Income to Taxable Income Reconciliation ------------------------------------------------ Net income $(11,006) $5,674 Equity in net loss of subsidiary 25,266 58,518 ------------ -------------- Income before equity in net loss of subsidiary 14,260 64,192 Tax basis adjustments 11,018 20,833 ------------ -------------- Estimated taxable income $25,278 $85,025 ============ ============== AAMES INVESTMENT CORPORATION and SUBSIDIARIES Loan Production Information (Unaudited) Three Months Ended ----------------------------------- December 31, September 30, 2005 2004 2005 ----------- --------- ------------- Retail Loan Production Total dollar amount (in thousands) $811,096 $574,625 $793,851 Number of loans 5,269 4,431 5,194 Average loan amount $153,937 $129,683 $152,840 Average initial LTV 75.05% 75.82% 75.51% Weighted average interest rate 7.56% 7.36% 7.27% Wholesale Loan Production Total dollar amount (in thousands) $1,071,507 $1,134,911 $1,119,445 Number of loans 7,356 7,841 7,809 Average loan amount $145,664 $144,741 $143,353 Average initial LTV 81.90% 81.19% 81.80% Weighted average interest rate 8.00% 7.46% 7.51% Total Loan Production Total dollar amount (in thousands) $1,882,603 $1,709,536 $1,913,296 Number of loans 12,625 12,272 13,003 Average loan amount $149,117 $139,304 $147,143 Average initial LTV 78.95% 79.38% 79.19% Weighted average interest rate 7.81% 7.43% 7.41% Twelve Months Ended ----------------------- December 31, 2005 2004 ----------- ----------- Retail Loan Production Total dollar amount (in thousands) $2,746,321 $2,421,525 Number of loans 18,496 19,088 Average loan amount $148,482 $126,861 Average initial LTV 75.63% 76.77% Weighted average interest rate 7.42% 7.38% Wholesale Loan Production Total dollar amount (in thousands) $4,008,207 $4,998,120 Number of loans 28,023 34,140 Average loan amount $143,033 $146,401 Average initial LTV 81.37% 81.42% Weighted average interest rate 7.70% 7.37% Total Loan Production Total dollar amount (in thousands) $6,754,528 $7,419,645 Number of loans 46,519 53,228 Average loan amount $145,199 $139,394 Average initial LTV 79.03% 79.90% Weighted average interest rate 7.59% 7.37% AAMES INVESTMENT CORPORATION and SUBSIDIARIES Loan Production Information (Unaudited) (In thousands) Three Months Ended ----------------------------------- December 31, September 30, 2005 2004 2005 ----------- -------- ------------- Loan Production by Loan Purpose Cash-out refinance $1,106,317 $1,019,194 $1,100,577 Purchase money 710,890 636,721 742,363 Rate/term refinance 65,396 53,621 70,356 ----------- ----------- ----------- $1,882,603 $1,709,536 $1,913,296 ----------- ----------- ----------- Loan Production by Property Type Single-family $1,638,562 $1,510,413 $1,649,844 Multi-family 136,022 111,322 149,188 Condominiums 108,019 87,801 114,264 ----------- ----------- ----------- $1,882,603 $1,709,536 $1,913,296 ----------- ----------- ----------- Loan Production by State/Region Produced California $389,707 $523,701 $390,278 Florida 459,669 345,653 493,682 New York 157,288 103,796 147,913 Texas 141,395 129,579 146,327 Other Western states 164,982 184,520 161,850 Other Midwestern states 116,635 140,751 100,603 Other Northeastern states 275,863 161,677 291,243 Other Southeastern states 177,064 119,859 181,400 ----------- ----------- ----------- $1,882,603 $1,709,536 $1,913,296 ----------- ----------- ----------- Loan Production by Interest Rate Type Hybrid: Traditional $1,297,802 $1,252,757 $1,172,707 Interest only 167,197 91,203 257,551 Fixed rate 417,604 365,576 483,038 ----------- ----------- ----------- $1,882,603 $1,709,536 $1,913,296 ----------- ----------- ----------- Twelve Months Ended ----------------------- December 31, 2005 2004 ----------- ----------- Loan Production by Loan Purpose Cash-out refinance $3,906,641 $4,423,226 Purchase money 2,618,182 2,674,084 Rate/term refinance 229,705 322,335 ----------- ----------- $6,754,528 $7,419,645 ----------- ----------- Loan Production by Property Type Single-family $5,883,238 $6,498,417 Multi-family 494,107 507,426 Condominiums 377,183 413,802 ----------- ----------- $6,754,528 $7,419,645 ----------- ----------- Loan Production by State/Region Produced California $1,592,215 $2,393,732 Florida 1,623,052 1,444,562 New York 493,117 529,251 Texas 535,525 505,165 Other Western states 594,704 749,268 Other Midwestern states 413,789 638,506 Other Northeastern states 890,394 683,193 Other Southeastern states 611,732 475,968 ----------- ----------- $6,754,528 $7,419,645 ----------- ----------- Loan Production by Interest Rate Type Hybrid: Traditional $4,432,645 $5,382,666 Interest only 763,666 274,180 Fixed rate 1,558,217 1,762,799 ----------- ----------- $6,754,528 $7,419,645 ----------- ----------- AAMES INVESTMENT CORPORATION and SUBSIDIARIES Loan Servicing Information (Unaudited) (Dollars in thousands) December 31, December 31, 2005 2004 ------------- ------------- Servicing Portfolio Mortgage loans serviced: Loans held for investment $4,077,448 $1,718,696 Loans serviced on an interim basis 1,926,876 771,830 Loan subserviced for others on a long-term basis 92,213 129,016 Loans in off-balance sheet securitization trusts - 224,345 ------------- ------------- Total serviced in-house 6,096,537 2,843,887 Loans held for investment subserviced by others 50,202 - ------------- ------------- Total servicing portfolio $6,146,739 $2,843,887 ------------- ------------- Percentage serviced in-house 99.2% 100.0% ------------- ------------- Loan Delinquencies Percentage of dollar amount of delinquent loans serviced (period end): One month 1.9% 0.3% Two months 0.9% 0.2% Three or more months: Not foreclosed 2.5% 1.8% Foreclosed 0.1% 0.2% ------------- ------------- 5.4% 2.5% ------------- ------------- Percentage of dollar amount of delinquent loans in: Loans held for investment serviced: In-house 7.0% 0.2% Loans serviced on an interim basis 2.0% 1.5% Loans subserviced for others on a long-term basis 8.9% 4.8% Loans in off-balance sheet securitization trusts serviced: In-house N/A 22.5% AAMES INVESTMENT CORPORATION and SUBSIDIARIES Loan Servicing Information (Unaudited) (Dollars in thousands) At or During the Twelve Months Ended December 31, ----------------------- 2005 2004 ----------- ----------- Loan Foreclosures Percentage of dollar amount of loans foreclosed during the period to servicing portfolio (period end) 0.3% 0.3% Number of loans foreclosed during the period 147 152 Principal amount of loans foreclosed during the period $16,317 $10,928 Number of loans liquidated during the period 226 397 Net losses on liquidations during the period from: Loans held for investment serviced: In-house $161 $- Loans serviced on an interim basis 5,494 2,960 Loans serviced for others on a long-term basis 38 - Loans in off-balance sheet securitization trusts serviced: In-house 2,850 12,009 ----------- ----------- $8,543 $14,969 ----------- ----------- Percentage of annualized losses to servicing portfolio 0.2% 0.4% Servicing portfolio at period end $6,147,000 $2,844,000 *T