Aames Financial Corporation Announces September 30, 2004 Results; September 2004 Quarter Net Income of $28.4 Million

Business Wire, Oct 25, 2004

LOS ANGELES -- September 2004 Quarter Loan Production of $1.9 Billion Compared to $1.5 Billion a Year Ago

Aames Financial Corporation (OTCBB:AMSF), a 50 year old national subprime mortgage lender, today reported net income during the three months ended September 30, 2004 of $28.4 million, compared to net income of $28.7 million during the comparable three month period a year ago. Net income during the three months ended September 30, 2004 and 2003 included income tax benefits of $5.3 million and $18.2 million, respectively.

During the three months ended September 30, 2004, basic and diluted net income to common stockholders were $25.5 million and $28.9 million, respectively, resulting in basic and diluted net income per common share of $3.55 and $0.28, respectively. Basic and diluted net income to common stockholders during the three months ended September 30, 2003 were $25.2 million and $29.5 million, respectively, resulting in basic and diluted net income per common share of $3.66 and $0.28, respectively.

Summary of Financial Results

Net interest income and other income. During the three months ended September 30, 2004, net interest income and other income, which is comprised of gain on sale of loans and loan servicing income, was $65.8 million, a decrease of $1.5 million, or 2.2%, from $67.3 million reported during the three months ended September 30, 2003.

Net interest income. During the three months ended September 30, 2004, net interest income increased $4.8 million, or 51.6%, to $14.1 million over $9.3 million during the three months ended September 30, 2003.

Other Income. Other income includes the Company's largest revenue component, gain on sale of loans, and loan servicing income. Gain on sale of loans is impacted by the timing of loan origination and sales as net loan origination fees and costs related to mortgage loans originated and held for sale are deferred and recognized in gain on sale of loans at the time the mortgage loans are sold. During the three months ended September 30, 2004, other income decreased $6.3 million, or 10.9%, to $51.7 million from $58.0 million during the three months ended September 30, 2003. The decrease in other income was attributable to a decrease of $6.5 million in gain on sale of loans, partially offset by a $0.3 million increase in loan servicing income. The $6.5 million decrease in gain on sale consisted of a $17.9 million increase in gain on sale of loans (due to $778.8 million increase in loans sold) offset by the increase in the deferral of $16.5 million of net loan origination fees attributable to loans originated in the current period but not sold and the increase in the recognition of $7.9 million of net deferred loan origination costs attributable to loans originated in prior periods and sold in the quarter ended September 30, 2004.

Operating Expenses. Similar to the accounting for gain on sale, net loan origination costs related to mortgage loans originated and held for sale are deferred and recognized in gain on sale of loans at the time the mortgage loans are sold. During the three months ended September 30, 2004, operating expenses, which included personnel, production and general and administrative expenses, decreased $14.1 million to $42.7 million from $56.8 million of total operating expenses during the three months ended September 30, 2003. The decrease in operating expenses was attributable to a decrease of $15.4 million in personnel expense partially offset by increases of $1.2 million and $0.1 million in production expense and general and administrative expenses, respectively, from levels reported during the three months ended September 30, 2003. The $15.4 million decrease in personnel expense was due primarily to increases in commissions, salaries and medical and other benefit costs, offset by a $21.8 million increase in the deferral of loan origination compensatory costs during the three months ended September 30, 2004.

Mortgage loan production

During the three months ended September 30, 2004, the Company's total mortgage loan production was $1.9 billion compared to $1.5 billion and $2.0 billion of total mortgage loan production during the three months ended September 30, 2003 and June 30, 2004, respectively.

During the three months ended September 30, 2004, total retail production increased $38.3 million, or 6.6%, to $615.1 million over $576.8 of total retail mortgage loan production during the three months ended September 30, 2003. Total wholesale mortgage loan production increased $342.3 million, or 37.2%, to $1.3 billion during the three months ended September 30, 2004 over $920.6 million of total wholesale mortgage loan production during the comparable three month period a year ago.

The Company believes that the $380.6 million, or 25.4%, increase in total mortgage loan origination volume during the three months ended September 30, 2004 over total mortgage loan production reported during the three months ended September 30, 2003 was due to a combination of continued strong demand for subprime products despite a generally increasing mortgage interest rate environment prevailing in the marketplace and improved geographic diversification in the wholesale and retail channels.