United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended June 30, 2001
OR
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from _______________ to ______________
Commission File Number: 0-19861
Impac Mortgage Holdings, Inc.
(Exact name of registrant as specified in its charter)
Maryland 33-0675505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1401 Dove Street
Newport Beach, CA 92660
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (949) 475-3600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
----------------------------- -------------------------
Common Stock $0.01 par value American Stock Exchange
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 [_]
On August 9, 2001, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $155.1 million, based on the
closing sales price of the Common Stock on the American Stock Exchange. For
purposes of the calculation only, in addition to affiliated companies, all
directors and executive officers of the registrant have been deemed affiliates.
The number of shares of Common Stock outstanding as of August 9, 2001 was
20,466,100.
Documents incorporated by reference: None
1
IMPAC MORTGAGE HOLDINGS, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X]Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended March 31, 2001
OR
[_]Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from _______________ to ______________
Commission File Number: 0-19861
Impac Mortgage Holdings, Inc.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)33-0675505
(I.R.S. Employer
Identification No.)
1401 Dove Street
Newport Beach, CA
(Address of Principal Executive Offices)92660
(Zip Code)
Registrant’s telephone number, including area code: (949) 475-3600
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on
which registered
Common Stock $0.01 par valueAmerican Stock Exchange
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 [_]
On May 11, 2001, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $115.8 million, based on the closing sales price of the Common Stock on the American Stock Exchange. For purposes of the calculation only, in addition to affiliated companies, all directors and executive officers of the registrant have been deemed affiliates. The number of shares of Common Stock outstanding as of May 11, 2001 was 20,394,956.
Documents incorporated by reference: None
1
IMPAC MORTGAGE HOLDINGS, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
March 31, December 31, 2000
2001
ASSETS Cash and cash equivalents $ 10,483 $ 17,944 Investment securities available-for-sale 36,253 36,921 Loan Receivables: CMO collateral 1,250,728 1,372,996 Finance receivables 455,517 405,438 Mortgage loans held-for-investment 200,188 16,720 Allowance for loan losses (6,295
) (5,090
) Net loan receivables 1,900,138 1,790,064 Investment in Impac Funding Corporation 15,107 15,762 Due from affiliates 14,500 14,500 Accrued interest receivable 12,361 12,988 Other real estate owned 6,284 4,669 Other assets 4,532
5,990
Total assets $ 1,999,658
$ 1,898,838
LIABILITIES CMO borrowings $ 1,177,223 $ 1,291,284 Reverse repurchase agreements 615,367 398,653 Borrowings secured by investment securities available-for-sale 18,976 21,124 Senior subordinated debentures 7,047 6,979 Accrued dividends payable 788 788 Other liabilities 1,204
1,570
Total liabilities 1,820,605
1,720,398
STOCKHOLDERS’ EQUITY Preferred stock; $.01 par value; 6,300,000 shares authorized; none issued or outstanding at March 31, 2001 and December 31, 2000, respectively — — Series A junior participating preferred stock, $.01 par value; 2,500,000 shares authorized; none issued and outstanding at March 31, 2001 and December 31, 2000 — — Series C 10.5% cumulative convertible preferred stock, $.01 par value; $30,000 liquidation value; 1,200,000 shares authorized; 1,200,000 issued and outstanding at March 31, 2001 and December 31, 2000 12 12 Common stock; $.01 par value; 50,000,000 shares authorized; 20,385,456 and 20,409,956 shares issued and outstanding at March 31, 2001 and December 31, 2000, respectively 204 204 Additional paid-in capital 325,298 325,350 Accumulated other comprehensive loss (239 ) (568 ) Notes receivable from common stock sales (920 ) (902 ) Net accumulated deficit: Cumulative dividends declared (104,761 ) (103,973 ) Accumulated deficit (40,541
) (41,683
) Net accumulated deficit (145,302
) (145,656
) Total stockholders’ equity 179,053
178,440
Total liabilities and stockholders’ equity $ 1,999,658
$ 1,898,838
See accompanying notes to consolidated financial statements.
3
For the Three Months
Ended March 31,
2001
2000
INTEREST INCOME: Mortgage Assets $ 38,793 $ 33,591 Other interest income 606
549
Total interest income 39,399
34,140
INTEREST EXPENSE: CMO borrowings 20,592 19,131 Reverse repurchase agreements 8,859 7,352 Borrowings secured by investment securities available-for-sale 678 885 Senior subordinated debentures 311 315 Other borrowings 66
42
Total interest expense 30,506
27,725
Net interest income 8,893 6,415 Provision for loan losses 4,038
13,183
Net interest income (loss) after provision for loan losses 4,855 (6,768 ) NON-INTEREST INCOME: Equity in net earnings of Impac Funding Corporation 1,290 408 Loan servicing fees 292 162 Other income 543
791
Total non-interest income 2,125 1,361 NON-INTEREST EXPENSE: Professional services 619 660 General and administrative and other expense 376 273 Personnel expense 305 146 Mark-to-market loss - FAS 133 864 — (Gain) loss on disposition of other real estate owned (639 ) 428 Write-down on investment securities available-for-sale —
23,979
Total non-interest expense 1,525
25,486
Earnings (loss) before cumulative effect of change in accounting principle 5,455 (30,893 ) Cumulative effect of change in accounting principle (4,313
) —
Net earnings (loss) after cumulative effect of change in accounting principle 1,142 (30,893 ) Less: Cash dividends on cumulative convertible preferred stock (788
) (788
) Net earnings (loss) available to common stockholders 354 (31,681 ) Other comprehensive earnings (loss): Unrealized gains on securities: Unrealized holding gains arising during period 401 3,279 Less: Reclassification of losses included in earnings (loss) (72
) 3,814
Net unrealized gains arising during period 329
7,093
Comprehensive earnings (loss) $ 1,471
$(23,800
) Earnings (loss) per share before cumulative effect of change in accounting principle Earnings (loss) per share—basic $ 0.23
$ (1.48
) Earnings (loss) per share—diluted $ 0.20
$ (1.48
) Net Earnings (loss) per share after cumulative effect of change in accounting principle Net earnings (loss) per share—basic $ 0.02
$ (1.48
) Net earnings (loss) per share—diluted $ 0.04
$ (1.48
)
See accompanying notes to consolidated financial statements.
4
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Three Months
Ended March 31,
2001
2000
Cash flows from operating activities: Net earnings (loss) $ 5,455 $(30,893 ) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Cumulative effect of change in accounting principle (4,313 ) — Equity in net earnings of Impac Funding Corporation (1,290 ) (408 ) Provision for loan losses 4,038 13,183 Amortization of loan premiums and securitization costs ; 2,425 4,452 (Gain) loss on disposition of other real estate owned (639 ) 428 Write-down of investment securities available-for-sale ; — 23,979 Net change in accrued interest receivable 627 343 Net change in other assets and liabilities 1,040
(891
) Net cash provided by operating activities 7,343
10,193
Cash flows from investing activities: Net change in CMO collateral 117,922 (3,443 ) Net change in finance receivables (50,654 ) (25,213 ) Net change in mortgage loans held-for-investment (187,163 ) 9,617 Proceeds from sale of other real estate owned, net 2,382 4,647 Dividend from Impac Funding Corporation 1,945 — Net principal reductions on investment securities available-for-sale 997
980
Net cash used in investing activities (114,571
) (13,412
) Cash flows from financing activities: Net change in reverse repurchase agreements and other borrowings 214,634 (320,033 ) Proceeds from CMO borrowings — 451,950 Repayments of CMO borrowings (114,061 ) (123,583 ) Dividends paid (788 ) (3,608 ) Advances to purchase common stock, net of principal reductions (18
) —
Net cash provided by financing activities 99,767
4,726
Net change in cash and cash equivalents (7,461 ) 1,507 Cash and cash equivalents at beginning of period 17,944
20,152
Cash and cash equivalents at end of period $ 10,483
$ 21,659
Supplementary information: Interest paid $ 29,420 $ 24,537 Non-cash transactions: Transfer of mortgage loans held-for-investment to CMO collateral $ — $ 337,016 Dividends declared and unpaid 788 3,356 Accumulated other comprehensive gain 329 7,093 Loans transferred to other real estate owned 3,358 3,861
See accompanying notes to consolidated financial statements.
5
Mortgage Operations
The Conduit Operations, conducted by IFC, purchases primarily non-conforming mortgage loans and, to a lesser extent, second mortgage loans from its network of first party correspondents and other sellers. IFC subsequently securitizes or sells such loans to permanent investors, including the Long-Term Investment Operations. IMH owns 99% of the economic interest in IFC, while Joseph R. Tomkinson, Chairman and Chief Executive Officer, William S. Ashmore, President and Chief Operating Officer, and Richard J. Johnson, Executive Vice President and Chief Financial Officer, are the holders of all the outstanding voting stock of, and 1% of the economic interest in, IFC.
The Wholesale and Retail Lending Operations, conducted by Impac Lending Group (ILG), a division of IFC, markets, underwrites, processes and funds mortgage loans for both wholesale and retail customers. Through the wholesale division, ILG allows mortgage brokers to work directly with the Company to originate, underwrite and fund their mortgage loans. Many of the Company’s wholesale customers cannot conduct business with the Conduit Operations as correspondent sellers because they do not meet the higher net worth requirements or do not have the ability to close the loan in their name. Through the retail division, ILG markets mortgage loans directly to the public. Both the wholesale and retail mortgage divisions offer all of the loan programs that are offered by the Conduit Operations.
Warehouse Lending Operations
The Warehouse Lending Operations, conducted by IWLG, provides short-term lines of credit to affiliated companies and to approved mortgage bankers, most of which are correspondents of IFC, to finance mortgage loans during the time from the closing of the loans to their sale or other settlement with pre-approved investors.
3. Summary of Significant Accounting Policies
Method of Accounting
The consolidated financial statements are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in conformity with GAAP requires management to make significant estimates and assumptions that affect the reported amounts of assets, liabilities and contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ materially from those estimates.
Reclassifications
Certain amounts in the consolidated financial statements for prior periods have been reclassified to conform to the current presentation.
Recent Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 140 to replace SFAS No. 125, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 140 provides the accounting and reporting guidance for transfers and servicing of financial assets and extinguishments of liabilities. SFAS No. 140 will be the authoritative accounting literature for: (1) securitization transactions involving financial assets; (2) sales of financial assets (including loan participations); (3) factoring transactions; (4) wash sales; (5) servicing assets and liabilities; (6) collateralized borrowing arrangements; (7) securities lending transactions; (8) repurchase agreements; and (9) extinguishment of liabilities. The accounting provisions are effective after March 31, 2001. The reclassification and disclosure provisions are effective for fiscal years beginning after December 31, 2000. The Company adopted the disclosure required by SFAS No. 140 and has included all appropriate and necessary disclosures required by SFAS No. 140 in its December 31, 2000 Form 10-K. The adoption of the accounting provision is not expected to have a material impact on the Company’s consolidated balance sheet or results of operations.
In November 1999, the FASB issued Emerging Issues Task Force No. 99-20 (EITF 99-20) “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets.” EITF 99-20 sets forth the rules for (1) recognizing interest income (including amortization of premium or discount) on (a) all credit sensitive mortgage assets and asset-backed securities and (b) certain prepayment-sensitive securities and (2) determining whether these securities must be written down to fair value due to impairment. EITF 99-20 is effective for the Company after March 31, 2001. The adoption of EITF 99-20 is not expected to have a material impact on the Company’s consolidated balance sheet or results of operations.
7
4. Accounting for Derivatives and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137 and SFAS No. 138 (collectively, SFAS 133). SFAS 133 establishes accounting and reporting standards for derivative instruments, including a number of derivative instruments embedded in other contracts, collectively referred to as derivatives, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. If specific conditions are met, a derivative may be specifically designated as: (1) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment; (2) a hedge of the exposure to variable cash flows of a forecasted transaction; or (3) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available for sale security or a foreign-currency-denominated forecasted transaction. Under SFAS 133, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement and approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the entity’s approach to managing risk. The Company adopted SFAS 133 on January 1, 2001, and recorded a transition amount associated with establishing the fair values of the derivative instruments as of December 31, 2000.
As part of the Company’s secondary marketing activities, it purchases interest rate caps to hedge against adverse changes in interest rates. The Company does not recognize unrealized gains and losses on these contracts in the balance sheet or statement of income. In general, the interest rate caps are allocated to CMOs to provide a hedge against a rise in interest rates. On January 1, 2001, the Company adopted SFAS 133, and at that time, designated the derivative instruments in accordance with the requirements of the new standard. These cash flow derivative instruments hedge the variability of forecasted cash flows attributable to interest rate risk. Cash flow hedges are accounted for by recording the value of the derivative instrument on the balance sheet as either an asset or liability with a corresponding offset recorded in other comprehensive income within stockholders’ equity. Amounts are reclassified from other comprehensive income to the income statement in the period the hedged cash flow occurs. Derivative gains and losses not considered effective in hedging the change in expected cash flows of the hedged item are recognized immediately in the income statement.
With the implementation of SFAS 133, the Company recorded transition amounts associated with establishing the fair values of the derivative instruments as of December 31, 2000 as a decrease to net earnings of $4.3 million and reflected as a cumulative change in accounting principle in the Company’s statement of operations. During the first quarter of 2001, the Company recorded a mark-to-market loss of $864,000 when establishing the fair market valuation of derivative instruments outstanding as of March 31, 2001. The fair value of the Company’s derivative instruments at March 31, 2001 was $1.1 million.
5. Net Earnings (Loss) per Share
The following table presents the computation of basic and diluted net earnings (loss) per share for the periods shown, as if all stock options and cumulative convertible preferred stock (Preferred Stock), if dilutive, were outstanding for these periods (in thousands, except per share data):
8
For the Three Months
Ended March 31,
2001 2000 Numerator: Earnings (loss) before cumulative effect of change in accounting principle $ 5,455 $(30,893 ) Cumulative effect of change in accounting principle (4,313 ) —
Net earnings (loss) after cumulative effect of change in accounting principle 1,142 (30,893 ) Less: Dividends paid to preferred stockholders (788 ) (788 )
Net earnings (loss) after cumulative effect of change in accounting principle available to common stockholders $ 354 $(31,681 )
Denominator: Basic weighted average number of common shares outstanding during the period 20,385 21,401 Impact of assumed conversion of Preferred Stock 6,356 — Net effect of dilutive stock options 10 —
Diluted weighted average common and common equivalent shares 26,751 21,401
Earnings (loss) per share before cumulative effect of change in accounting principle Earnings (loss) per share—basic $ 0.23 $ (1.48 )
Earnings (loss) per share—diluted $ 0.20 $ (1.48 )
Net earnings (loss) per share after cumulative effect of change in accounting principle Net earnings (loss) per share—basic $ 0.02 $ (1.48 )
Net earnings (loss) per share—diluted $ 0.04 $ (1.48 )
The Company had 187,036 and 689,002 stock options at March 31, 2001 and March 31, 2000, respectively, that were not considered in the dilutive calculation of earnings per share as the exercise price was higher than the market price for the period. The antidilutive effects of outstanding Preferred Stock as of December 31, 2000 was 6,356,000 shares.
6. Mortgage Assets
Mortgage Assets consist of investment securities available-for-sale mortgage loans held-for-investment, CMO collateral and finance receivables. At March 31,......................... 16,888 21,124
Senior subordinated debentures ......................................................... -- 6,979
Accumulated dividends payable .......................................................... 788 788
Other liabilities ...................................................................... 1,023 1,570
----------- -----------
Total liabilities ................................................................. 1,989,638 1,720,398
----------- -----------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock; $.01 par value; 6,300,000 shares authorized; none issued or
outstanding at June 30, 2001 and December 31, 2000, respectively .................... -- --
Series A junior participating preferred stock, $.01 par value; 2,500,000 shares
authorized; none issued and outstanding at June 30, 2001 and December 31, 2000 ...... -- --
Series C 10.5% cumulative convertible preferred stock, $.01 par value; $30,000
liquidation value; 1,200,000 shares authorized; 1,200,000 issued and
outstanding at June 30, 2001 and December 31, 2000 .................................. 12 12
Common stock; $.01 par value; 50,000,000 shares authorized; 20,460,666 and
20,409,956 shares issued and outstanding at June 30, 2001 and December 31, 2000,
respectively ........................................................................ 205 204
Additional paid-in capital ............................................................. 325,567 325,350
Accumulated other comprehensive gain (loss) ............................................ 531 (568)
Accumulated comprehensive loss - FAS 133 ............................................... (244) --
Notes receivable from common stock sales ............................................... (930) (902)
Net accumulated deficit:
Cumulative dividends declared ....................................................... (105,548) (103,973)
Accumulated deficit ................................................................. (31,758) (41,683)
----------- -----------
Net accumulated deficit .......................................................... (137,306) (145,656)
----------- -----------
Total stockholders' equity ..................................................... 187,835 178,440
----------- -----------
Total liabilities and stockholders' equity ..................................... $ 2,177,473 $ 1,898,838
=========== ===========
See accompanying notes to consolidated financial statements.
3
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
and COMPREHENSIVE EARNINGS (LOSS)
(in thousands, except per share data)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------- ---------------------
2001 2000 2001 2000
--------- -------- -------- --------
INTEREST INCOME:
Mortgage Assets consisted.......................................... $ 37,011 $ 34,041 $ 75,802 $ 67,631
Other interest income .................................... 655 489 1,263 1,039
-------- -------- -------- --------
Total interest income .................................. 37,666 34,530 77,065 68,670
-------- -------- -------- --------
INTEREST EXPENSE:
CMO borrowings ........................................... 17,175 20,578 37,767 39,710
Reverse repurchase agreements ............................ 8,938 7,489 17,797 14,842
Borrowings secured by investment
securities available-for-sale .......................... 660 807 1,338 1,692
Senior subordinated debentures ........................... 252 316 563 630
Other borrowings ......................................... 90 2 157 43
-------- -------- -------- --------
Total interest expense ................................. 27,115 29,192 57,622 56,917
-------- -------- -------- --------
Net interest income ...................................... 10,551 5,338 19,443 11,753
Provision for loan losses .............................. 3,905 3,304 7,943 16,488
-------- -------- -------- --------
Net interest income (loss) after provision for loan losses 6,646 2,034 11,500 (4,735)
NON-INTEREST INCOME:
Equity in net earnings (loss) of Impac Funding Corporation 3,528 (1,488) 4,818 (1,080)
Loan servicing fees ...................................... 290 176 582 338
Other income ............................................. 971 264 1,514 1,054
-------- -------- -------- --------
Total non-interest income .............................. 4,789 (1,048) 6,914 312
NON-INTEREST EXPENSE:
Mark-to-market loss - FAS 133 ............................ 581 -- 1,445 --
General and administrative and other expense ............. 549 377 925 680
Professional services .................................... 463 458 1,082 1,087
Personnel expense ........................................ 272 160 576 307
Write-down on investment securities available-for-sale ... 108 29,426 107 53,404
(Gain) loss on disposition of other real estate owned .... (327) 880 (965) 1,307
-------- -------- -------- --------
Total non-interest expense ............................. 1,646 31,301 3,170 56,785
-------- -------- -------- --------
Earnings (loss) before extraordinary item and cumulative
effect of change in accounting principle ................. 9,789 (30,315) 15,244 (61,208)
Extraordinary item ..................................... (1,006) -- (1,006) --
Cumulative effect of change in accounting principle .... -- -- (4,313) --
-------- -------- -------- --------
Net earnings (loss) ...................................... 8,783 (30,315) 9,925 (61,208)
Less: Cash dividends on 10.5% cumulative
convertible preferred stock ............................ (787) (788) (1,575) (1,575)
-------- -------- -------- --------
Net earnings (loss) available to common stockholders ..... 7,996 (31,103) 8,350 (62,783)
Other comprehensive earnings (loss):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 571 (264) 969 2,806
Less: Reclassification of losses included
in earnings (loss) ..................................... (43) 2,940 (114) 6,962
-------- -------- -------- --------
Net unrealized gains arising during period .......... 528 2,676 855 9,768
-------- -------- -------- --------
Comprehensive earnings (loss) ............................ $ 9,311 $(27,639) $ 10,780 $(51,440)
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
4
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
and COMPREHENSIVE EARNINGS (LOSS)
(in thousands, except per share data)
For the following (in thousands):Three Months For the Six Months
Ended June 30, Ended June 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Earnings (loss) per share before extraordinary item and
cumulative effect of change in accounting principle:
Basic .............................................. $ 0.44 $ (1.45) $ 0.67 $ (2.93)
======== ======== ======== ========
Diluted ............................................ $ 0.36 $ (1.45) $ 0.57 $ (2.93)
======== ======== ======== ========
Net earnings (loss) per share
Basic .............................................. $ 0.39 $ (1.45) $ 0.41 $ (2.93)
======== ======== ======== ========
Diluted ............................................ $ 0.33 $ (1.45) $ 0.37 $ (2.93)
======== ======== ======== ========
March 31,
2001 December 31,
2000 Investment securities available-for-sale: Subordinated securities collateralized by mortgages $ 37,328 $ 37,920 Net unrealized losses (1,075 ) (999 )
Carrying value of investment securities available-for-sale 36,253 36,921
Loan Receivables: CMO collateral— CMO collateral, unpaid principal balance 1,218,379 1,333,487 Unamortized net premiums on loans 21,057 22,759 Securitization expenses 10,769 14,123 Hedging costs 523 2,627
Carrying value of CMO collateral 1,250,728 1,372,996 Finance receivables— Due from affiliates 222,320 267,033 Due from other mortgage banking companies 233,197 138,405
Carrying value of finance receivables 455,517 405,438 Mortgage loans held-for-investment— Mortgage loans held-for-investment, unpaid principal balance 197,652 16,928 Unamortized net premiums (discounts) on loans 2,536 (208 )
Carrying value of mortgage loans held-for-investment 200,188 16,720 Carrying value of Gross Loan Receivables 1,906,433 1,795,154 Allowance for loan losses (6,295 ) (5,090 )
Carrying value of Net Loan Receivables 1,900,138 1,790,064
Total carrying value of Mortgage Assets $ 1,936,391 $ 1,826,985
See accompanying notes to consolidated financial statements.
5
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
7. Segment Reporting
The basis
For the Six Months
Ended June 30,
-----------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net earnings (loss) .................................................... $ 14,238 $ (61,208)
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Cumulative effect of change in accounting principle ................. (4,313) --
Equity in net (earnings) loss of Impac Funding Corporation .......... (4,818) 1,080
Provision for loan losses ........................................... 7,943 16,488
Amortization of loan premiums and securitization costs .............. 5,161 8,393
(Gain) loss on disposition of other real estate owned ............... (965) 1,307
Write-off of securitization costs from senior subordinated debentures 1,006 --
Write-down of investment securities available-for-sale .............. 107 53,404
Gain on sale of investment securities available-for-sale ............ (159) --
Net change in accrued interest receivable ........................... 929 311
Net change in other assets and liabilities .......................... (7,987) (4,547)
--------- ---------
Net cash provided by operating activities ......................... 11,142 15,228
--------- ---------
Cash flows from investing activities:
Net change in CMO collateral ........................................... (75,475) 90,785
Net change in finance receivables ...................................... (24,758) (99,807)
Net change in mortgage loans held-for-investment ....................... (189,884) (109,472)
Proceeds from sale of other real estate owned, net ..................... 5,168 9,239
Dividend from Impac Funding Corporation ................................ 4,419 --
Sale of investment securities available-for-sale ....................... 5,154 5,704
Net principal reductions on investment securities available-for-sale ... 1,079 2,088
--------- ---------
Net cash used in investing activities ............................. (274,297) (101,463)
--------- ---------
Cash flows from financing activities:
Net change in reverse repurchase agreements and other borrowings ....... 206,191 (144,838)
Proceeds from CMO borrowings ........................................... 357,843 451,950
Repayments of CMO borrowings ........................................... (287,155) (221,029)
Dividends paid ......................................................... (1,575) (6,964)
Retirement of senior subordinated debentures ........................... (7,747) --
Proceeds from exercise of stock options ................................ 270 --
Advances and reductions on notes receivable-common stock ............... (28) 5
--------- ---------
Net cash provided by financing activities ......................... 267,799 79,124
--------- ---------
Net change in cash and cash equivalents .................................. 4,644 (7,111)
Cash and cash equivalents at beginning of period ......................... 17,944 20,152
--------- ---------
Cash and cash equivalents at end of period ............................... $ 22,588 $ 13,041
========= =========
Supplementary information:
Interest paid .......................................................... $ 58,638 $ 52,086
Non-cash transactions:
Transfer of mortgage loans held-for-investment to CMO collateral ....... $ 359,643 $ 377,016
Dividends declared and unpaid .......................................... 788 3,356
Accumulated other comprehensive gain ................................... 855 9,768
Loans transferred to other real estate owned ........................... 5,548 7,948
See accompanying notes to consolidated financial statements.
6
IMPAC MORTGAGE HOLDINGS, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
Unless the context otherwise requires, references herein to the "Company"
refer to Impac Mortgage Holdings, Inc. (IMH) and its subsidiaries and related
companies, IMH Assets Corporation (IMH Assets), Impac Warehouse Lending Group,
Inc. (IWLG), and Impac Funding Corporation (together with its wholly-owned
subsidiary, Impac Secured Assets Corporation, IFC, collectively). References to
IMH refer to Impac Mortgage Holdings, Inc. as a separate entity from IMH Assets,
IWLG, and IFC.
1. Basis of Financial Statement Presentation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America (GAAP) for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three- and six-month period ended June 30,
2001 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2001. The accompanying consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes included in the Company's Annual Report on Form
10-K for the year ended December 31, 2000.
The operations of IMH have been presented in the consolidated financial
statements for the three- and six- months ended June 30, 2001 and 2000 and
include the financial results of IMH's equity interest in net earnings of IFC
and IMH Assets and IWLG as stand-alone entities. The results of operations of
IFC, of which 99% of the economic interest is owned by IMH, are included in the
results of operations of the Company as "Equity in net earnings (loss) of Impac
Funding Corporation."
2. Organization
The Company is a mortgage real estate investment trust (Mortgage REIT)
which, together with its subsidiaries and related companies, primarily operates
three businesses: (1) the Long-Term Investment Operations, (2) the Mortgage
Operations, and (3) the Warehouse Lending Operations. The Long-Term Investment
Operations invests primarily in non-conforming residential mortgage loans that
are originated and acquired by the Mortgage Operations and securities backed by
such mortgage loans. The Mortgage Operations are comprised of the Conduit
Operations, which primarily purchases non-conforming mortgage loans from
correspondent brokers, and subsequently sells or securitizes such loans, and the
Wholesale and Retail Lending Operations, which allows brokers and retail
customers to access the Company directly to originate, underwrite and fund their
loans. The Warehouse Lending Operations provides short-term lines of credit to
originators of mortgage loans. IMH is organized as a REIT for federal income tax
purposes, which generally allows it to pass through qualified income to
stockholders without federal income tax at the corporate level, provided that
the Company distributes 90% of its taxable income to common stockholders.
Long-Term Investment Operations
The Long-Term Investment Operations, conducted by IMH and IMH Assets,
invests primarily in non-conforming residential mortgage loans and
mortgage-backed securities secured by or representing interests in such loans
and, to a lesser extent, in second mortgage loans. The Long-Term Investment
Operations investment strategy is to only acquire or invest in investment
securities that are secured by mortgage loans underwritten and purchased by IFC
(Impac Securities). Non-conforming residential mortgage loans are residential
mortgages that do not qualify for purchase by government-sponsored agencies such
as the Federal National Mortgage Association (FNMA) and the Federal Home Loan
Mortgage Corporation (FHLMC). The principal differences between conforming loans
and non-conforming loans include applicable loan-to-value ratios, credit and
income histories of the mortgagors, documentation required for approval of the
mortgagors, type of properties securing the mortgage loans, loan sizes, and the
mortgagors' occupancy status with respect to the mortgaged properties. Second
mortgage loans are mortgage loans secured by a second lien on the property and
made to borrowers owning single-family homes for the purpose of debt
consolidation, home improvements, education and a variety of other purposes.
7
Mortgage Operations
The Conduit Operations, conducted by IFC, purchases primarily
non-conforming mortgage loans and, to a lesser extent, second mortgage loans
from its network of first party correspondents and other sellers. IFC
subsequently securitizes or sells such loans to permanent investors, including
the Long-Term Investment Operations. IMH owns 99% of the economic interest in
IFC, while Joseph R. Tomkinson, Chairman and Chief Executive Officer, William S.
Ashmore, President and Chief Operating Officer, and Richard J. Johnson,
Executive Vice President and Chief Financial Officer, are the holders of all the
outstanding voting stock of, and 1% of the economic interest in, IFC.
The Wholesale and Retail Lending Operations, conducted by Impac Lending
Group (ILG), a division of IFC, markets, underwrites, processes and funds
mortgage loans for both wholesale and retail customers. Through the wholesale
division, ILG allows mortgage brokers to work directly with the Company to
originate, underwrite and fund their mortgage loans. Many of the Company's
wholesale customers cannot conduct business with the Conduit Operations as
correspondent sellers because they do not meet the higher net worth requirements
or do not have the ability to close the loan in their name. Through the retail
division, ILG markets mortgage loans directly to the public. Both the wholesale
and retail mortgage divisions offer all of the loan programs that are offered by
the Conduit Operations.
Warehouse Lending Operations
The Warehouse Lending Operations, conducted by IWLG, provides short-term
lines of credit to affiliated companies and to approved mortgage bankers to
finance mortgage loans during the time from the closing of the loans to their
sale or other settlement with pre-approved investors. Most of the affiliated
companies are correspondents of IFC.
3. Summary of Significant Accounting Policies
Method of Accounting
The consolidated financial statements are prepared on the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America. The preparation of financial statements in conformity
with GAAP requires management to make significant estimates and assumptions that
affect the reported amounts of assets, liabilities and contingent liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ materially from
those estimates.
Reclassifications
Certain amounts in the consolidated financial statements for prior periods
have been reclassified to conform to the current presentation.
Recent Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 140 to replace SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 140 provides the accounting and
reporting guidance for transfers and servicing of financial assets and
extinguishments of liabilities. SFAS No. 140 will be the authoritative
accounting literature for: (1) securitization transactions involving financial
assets; (2) sales of financial assets (including loan participations); (3)
factoring transactions; (4) wash sales; (5) servicing assets and liabilities;
(6) collateralized borrowing arrangements; (7) securities lending transactions;
(8) repurchase agreements; and (9) extinguishment of liabilities. The accounting
provisions are effective after June 30, 2001. The reclassification and
disclosure provisions are effective for fiscal years beginning after December
31, 2000. The Company adopted the disclosure required by SFAS No. 140 and has
included all appropriate and necessary disclosures required by SFAS No. 140 in
its December 31, 2000 Form 10-K. The adoption of the accounting provision is not
expected to have a material impact on the Company's consolidated balance sheet
or results of operations.
In November 1999, the FASB issued Emerging Issues Task Force No. 99-20
(EITF 99-20) "Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets."
8
EITF 99-20 sets forth the rules for (1) recognizing interest income (including
amortization of premium or discount) on (a) all credit sensitive mortgage assets
and asset-backed securities and (b) certain prepayment-sensitive securities and
(2) determining whether these securities must be written down to fair value due
to impairment. EITF 99-20 is effective for the Company after March 31, 2001. The
adoption of EITF 99-20 did not have a material impact on the Company's
consolidated balance sheet or results of operations.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" (SFAS
141) and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. The use of the
pooling-of-interests method will be prohibited. The adoption of SFAS 141 is not
expected to have a material impact on the Company's consolidated balance sheet
or results of operations.
SFAS 142 applies to all acquired intangible assets whether acquired
singularly, as a part of a group, or in a business combination. SFAS 142
supercedes APB Opinion No. 17, "Intangible Assets," and will carry forward
provisions in AFB Opinion No. 17 related to internally developed intangible
assets. SFAS 142 changes the accounting for goodwill from an amortization method
to an impairment-only approach. Goodwill should no longer be amortized, but
instead tested for impairment at least annually at the reporting unit level. The
accounting provisions are effective for fiscal years beginning after December
31, 2001. The adoption of SFAS 142 is not expected to have a material impact on
the Company's consolidated balance sheet or results of operations.
4. Accounting for Derivatives and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138
(collectively, SFAS 133). SFAS 133 establishes accounting and reporting
standards for derivative instruments, including a number of derivative
instruments embedded in other contracts, collectively referred to as
derivatives, and for hedging activities. It requires that an entity recognizes
all derivatives as either assets or liabilities in the balance sheet and
measures those instruments at fair value. The accounting for gains and losses
associated with changes in the fair value of the derivatives are reported in
current earnings or other comprehensive income, depending on whether they
qualify for hedge accounting and whether the hedge is highly effective in
achieving offsetting changes in the fair value or cash flows of the asset or
liability hedged. If specific conditions are met, a derivative may be
specifically designated as: (1) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment; (2)
a hedge of the exposure to variable cash flows of a forecasted transaction; or
(3) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available for sale security or a
foreign-currency-denominated forecasted transaction. Under SFAS 133, an entity
that elects to apply hedge accounting is required to establish at the inception
of the hedge the method it will use for assessing the effectiveness of the
hedging derivative and the measurement and approach for determining the
ineffective aspect of the hedge. Those methods must be consistent with the
entity's approach to managing risk. The Company adopted SFAS 133 on January 1,
2001, and recorded a transition amount associated with establishing the fair
values of the derivative instruments as of December 31, 2000.
As part of the Company's secondary marketing activities, it purchases
various derivative instruments to hedge against adverse changes in interest
rates. In general, the derivative instruments are allocated to existing or
forecasted CMOs to provide a hedge against a rise in interest rates. On January
1, 2001, the Company adopted SFAS 133, and at that time, designated the
derivative instruments in accordance with the requirements of the new standard.
These cash flow derivative instruments hedge the variability of forecasted cash
flows attributable to interest rate risk. Derivative gains and losses not
considered effective in hedging the change in expected cash flows of the hedged
item are recognized immediately in the income statement as mark-to-market loss -
FAS 133. The company recorded $722,000 in expense related to these hedges during
the six months ended June 30, 2001.
With the implementation of SFAS 133, the Company recorded transition
amounts associated with establishing the fair values of the derivative
instruments as of December 31, 2000 as a decrease to net earnings of $4.3
million and reflected as a cumulative change in accounting principle in the
Company's statement of operations. During the first six months of 2001, the
Company recorded a mark-to-market loss of $1.4 million when establishing the
fair market valuation of derivative instruments outstanding as of June 30, 2001.
9
During the second quarter of 2001 the Company purchased derivative
instruments to protect itself against fluctuations in interest rates on existing
CMO collateral and borrowings. The objective was to lock in a steady stream of
cash flows when interest rates fall below or above certain levels. When interest
rates rise, our CMO borrowing expense increases at a greater speed than the
underlying collateral of loans. The hedging instruments will protect the Company
by providing cash flows at certain triggers during changing interest rate
environments. Cash flow hedges are accounted for by recording the value of the
derivative instrument on the balance sheet as either an asset or liability with
a corresponding offset recorded in other comprehensive income within
stockholders' equity. Any ineffective portion of the hedge is included in
current earnings. The company recorded $723,000 in expense related to these
hedges during the six months ended June 30, 2001. Interest rates decreased
during the first six months of 2001. Approximately $244,000 of net gain reported
in other comprehensive income will be reclassified into earnings within the next
twelve months.
5. Net Earnings (Loss) per Share
The following table presents the computation of basic and diluted net
earnings (loss) per share for the periods shown, as if all stock options and
10.5% Cumulative Convertible Preferred Stock (Preferred Stock), if dilutive,
were outstanding for these periods (in thousands, except per share data):
For the Company’s segments isThree Months
Ended June 30,
---------------------
2001 2000
-------- --------
Numerator for earnings per share:
Earnings (loss) before extraordinary item .................................. $ 9,789 $(30,315)
Extraordinary item ......................................................... (1,006) --
-------- --------
Earnings (loss) after extraordinary item ................................ 8,783 (30,315)
Less: Dividends paid to separate its entities as follows: segments that derive incomepreferred stockholders ............................ (787) (788)
-------- --------
Net earnings (loss) available to common stockholders .................... $ 7,996 $(31,103)
======== ========
Denominator for earnings per share:
Basic weighted average number of common shares outstanding during the period 20,421 21,401
Impact of assumed conversion of Preferred Stock ............................ 6,356 --
Net effect of dilutive stock options ....................................... 240 --
-------- --------
Diluted weighted average common and common equivalent shares ............ 27,017 21,401
======== ========
Earnings (loss) per share before extraordinary item:
Basic .......................................................... $ 0.44 $ (1.45)
======== ========
Diluted ........................................................ $ 0.36 $ (1.45)
======== ========
Net earnings (loss) per share:
Basic .......................................................... $ 0.39 $ (1.45)
======== ========
Diluted ........................................................ $ 0.33 $ (1.45)
======== ========
The Company had 5,839 and 684 stock options for the quarter ended June 30,
2001 and June 30, 2000, respectively, that were not considered in the dilutive
calculation of earnings per share as the exercise price was higher than the
market price for the period. The antidilutive effects of outstanding Preferred
Stock as of June 30, 2001 and June 30, 2000 was none and 6,356,000 shares,
respectively.
10
For the Six Months
Ended June 30,
---------------------
2001 2000
-------- --------
Numerator for earnings per share:
Earnings (loss) before extraordinary item and cumulative effect of
Change in accounting principle .......................................... $ 15,244 $(61,208)
Extraordinary item ......................................................... (1,006) --
Cumulative effect of change in accounting principle ........................ (4,313) --
-------- --------
Earnings (loss) after extraordinary item and cumulative effect of change
in accounting principle ............................................... 9,925 (61,208)
Less: Dividends paid to preferred stockholders ............................ (1,575) (1,575)
-------- --------
Net earnings (loss) available to common stockholders .................... $ 8,350 $(62,783)
======== ========
Denominator for earnings per share:
Basic weighted average number of common shares outstanding during the period 20,432 21,401
Impact of assumed conversion of Preferred Stock ............................ 6,356 --
Net effect of dilutive stock options ....................................... 83 --
-------- --------
Diluted weighted average common and common equivalent shares ............ 26,871 21,401
======== ========
Net earnings (loss) per share before extraordinary item and cumulative
effect of Change in accounting principle:
Basic .......................................................... $ 0.67 $ (2.93)
======== ========
Diluted ........................................................ $ 0.57 $ (2.93)
======== ========
Net earnings (loss) per share:
Basic .......................................................... $ 0.41 $ (2.93)
======== ========
Diluted ........................................................ $ 0.37 $ (2.93)
======== ========
The Company had 15,136 and 420 stock options for the six-months ended June
30, 2001 and June 30, 2000, respectively, that were not considered in the
dilutive calculation of earnings per share as the exercise price was higher than
the market price for the period. The antidilutive effects of outstanding
Preferred Stock as of June 30, 2001 and June 30, 2000 was none and 6,356,000
shares, respectively.
11
6. Mortgage Assets
Mortgage Assets consist of investment securities available-for-sale,
mortgage loans held-for-investment, CMO collateral and finance receivables. At
June 30, 2001 and December 31, 2000, Mortgage Assets consisted of the following
(in thousands):
June 30, December 31,
2001 2000
----------- ------------
Investment securities available-for-sale:
Subordinated securities collateralized by mortgages ........ $ 31,190 $ 37,920
Net unrealized gain (loss) ................................. 573 (999)
----------- -----------
Carrying value of investment securities available-for-sale 31,763 36,921
----------- -----------
Loan Receivables:
CMO collateral--
CMO collateral, unpaid principal balance ................... 1,404,889 1,333,487
Unamortized net premiums on loans .......................... 21,769 22,759
Securitization expenses .................................... 11,104 14,123
Hedging instruments allocated to CMO collateral ............ 2,086 2,627
----------- -----------
Carrying value of CMO collateral ......................... 1,439,848 1,372,996
Finance receivables--
Due from investment in long-termaffiliates ........................................ 197,836 267,033
Due from other mortgage banking companies .................. 231,754 138,405
----------- -----------
Carrying value of finance receivables .................... 429,590 405,438
Mortgage loans held-for-investment--
Mortgage loans held-for-investment, unpaid principal balance 197,387 16,928
Unamortized net premiums (discounts) on loans .............. 2,521 (208)
----------- -----------
Carrying value of mortgage loans held-for-investment ..... 199,908 16,720
Carrying value of Gross Loan Receivables ...................... 2,069,346 1,795,154
Allowance for loan losses .................................. (7,817) (5,090)
----------- -----------
Carrying value of Net Loan Receivables ................... 2,061,529 1,790,064
----------- -----------
Total carrying value of Mortgage Assets segments that derive income by providing short-term financing and segments that derive income from the purchase and sale or securitization of mortgage loans. The Company internally reviews and analyzes its segments as follows:
9
.................... $ 2,093,292 $ 1,826,985
=========== ===========
7. Segment Reporting
The basis for the Company's segments is to separate its entities as
follows: segments that derive income from investment in long-term Mortgage
Assets, segments that derive income by providing short-term financing and
segments that derive income from the purchase and sale or securitization of
mortgage loans.
The Company internally reviews and analyzes its segments as follows:
o The Long-Term Investment Operations, conducted by IMH and IMH Assets,
invests primarily in non-conforming residential mortgage loans and
mortgage-backed securities secured by or representing interests in
such loans and in second mortgage loans.
o The Warehouse Lending Operations, conducted by IWLG, provides
warehouse and repurchase financing to affiliated companies and to
approved mortgage banks, most of which are correspondents of IFC, to
finance mortgage loans.
o The Mortgage Operations, conducted by IFC and ILG, purchases and
originates non-conforming mortgage loans and second mortgage loans
from its network of third party correspondent sellers, wholesale
brokers and retail customers.
12
The following table shows the Company's reporting segments as of and for
the six months ended June 30, 2001 (in thousands):
The following table shows the Company’s reporting segments as of and for the three months ended
March 31, 2001 (in thousands):
Long-Term
Investment
Operations
Warehouse
Lending
Operations
(a)
Eliminations
Consolidated
Balance Sheet Items CMO collateral $ 1,250,728 $ — $ — $1,250,728 Total assets 1,641,690 680,530 (322,562 ) 1,999,658 Total stockholders’ equity 259,148 64,887 (144,982 ) 179,053 Income Statement Items Interest income $ 29,399 $ 11,781 $ (1,781 ) $ 39,399 Interest expense 23,413 8,874 (1,781 ) 30,506 Equity interest in net earnings of IFC (b) — — 1,290 1,290 Net earnings (loss) (2,739 ) 2,591 1,290 1,142
The following table shows the Company’s reporting segments as of and for the three months ended
March 31, 2000 (in thousands):
Long-Term
Investment
Operations
Warehouse
Lending
Operations
(a)
Eliminations
Consolidated
Balance Sheet Items CMO collateral $ 1,282,327 $ — $ — $ 1,282,327 Total assets 1,514,899 274,599 (136,270 ) 1,653,228 Total stockholders’ equity 283,210 52,069 (123,629 ) 211,650 Income Statement Items Interest income $ 26,079 $ 10,933 $ (2,872 ) $ 34,140 Interest expense 23,238 7,359 (2,872 ) 27,725 Equity interest in net earnings of IFC (b) — — 408 408 Net earnings (loss) (34,687 ) 3,386 408 (30,893 )
Long-Term Warehouse
Investment Lending (a) Elimination of inter-segment balance sheet and income statement items.
(b)The Mortgage
Operations are accounted for using the equity method and is an unconsolidated subsidiary of the Company.
8. Investment in Impac Funding Corporation
The Company is entitled to 99% of the earnings or losses of IFC through its ownership of all of the non-voting preferred stock of IFC. As such, the Company records its investment in IFC using the equity method. Under this method, original investments are recorded at cost and adjusted by the Company’s share of earnings or losses. Gain or loss on the sale of loans or securities by IFC to IMH are deferred and amortized or accreted over the estimated life of the loans or securities using the interest method. The following is financial information for IFC for the periods presented (in thousands):
10
BALANCE SHEETS
March 31,
2001
December 31,
2000
ASSETS Cash $ 17,360 $ 8,281 Investment securities available-for-sale 10,622 266 Mortgage loans held-for-sale 218,010 275,570 Mortgage servicing rights 11,588 10,938 Premises and equipment, net 5,823 5,037 Accrued interest receivable 755 1,040 Other assets 9,222 16,031
Total assets $ 273,380 $ 317,163
LIABILITIES AND SHAREHOLDERS’ EQUITY Borrowings from IWLG $ 219,462 $ 266,994 Due to affiliates 14,500 14,500 Deferred revenue 6,220 5,026 Accrued interest expense 1,506 2,176 Other liabilities 16,603 12,546
Total liabilities 258,291 301,242
Shareholders’ Equity: Preferred stock 18,053 18,053 Common stock 182 182 Accumulated deficit (1,002 ) (2,300 ) Cumulative dividends declared (1,964 ) — Accumulated other comprehensive loss (180 ) (14 )
Total shareholders’ equity 15,089 15,921
Total liabilities and shareholders’ equity $ 273,380 $ 317,163
STATEMENTS OF OPERATIONS
For the Three
Months Ended
March 31,
2001
2000
Interest income $ 7,492 $ 4,945 Interest expense 7,198 5,660
Net interest income (expense) 294 (715 ) Gain on sale of loans 7,649 5,221 Loan servicing income 1,032 1,536 Other non-interest income 46 23
Total non-interest income 8,727 6,780 Personnel expense 3,185 2,322 General and administrative and other expense 2,479 1,771 Amortization of mortgage servicing rights 1,053 1,192 Provision for repurchases 6 64 Mark-to-market gain - FAS 133 (17 ) —
Total non-interest expense 6,706 5,349
Earnings before income taxes and cumulative effect of change in accounting principle 2,315 716 Income taxes 1,000 304
Earnings before cumulative effect of change in accounting principle 1,315 412 Cumulative effect of change in accounting principle 17 —
Net earnings after cumulative effect of change in accounting principle 1,298 412 Less: Cash dividends on preferred stock (1,964 ) —
Net earnings (loss) available to common stockholders $ (666 ) $ 412
11
9. Stockholders’Equity
On March 27, 2001, the Company declared a first quarter cash dividend of $788,000 or $0.65625 per share to preferred stockholders. This dividend was paid on April 24, 2001.
On February 20, 2001, IFC purchased $5.0 million of the Company’s Series C 10.5% Cumulative Convertible Preferred Stock from LBP, Inc. (LBPI) at cost plus accrued interest.
10. Commitments and Contingencies
Currently, IFC is under examination with the California Franchise Tax Board (FTB) for income tax years ended December 31, 1995 and 1996. The examination was the result of an audit of Imperial Credit Industries, Inc. The FTB has raised certain claims, which may result in the issuance of Notice of Proposed Assessments for the above years stated. During the fourth quarter of 2000, the Company recorded income tax provisions related to a potential tax assessment.
11. Dividend Policy
As a result of higher than anticipated taxable income generated during the first quarter of 2001, the Company projects that it may completely utilize its tax loss carry forward as early as the third quarter of this year. After utilizing its tax loss carry forward, the Company would be required under REIT rules to distribute at least 90% of its taxable income for the remainder of the year.
12. Subsequent Events
On March 27, 2001, the Company’s Board of Directors authorized management to call and retire the Company’s 11% senior subordinated debentures due February 15, 2004. As of March 31, 2001, the senior subordinated debentures carrying amount was $7.0 million, including discounts of $700,000. The Company expects to call these securities in June of this year at a price of par plus accrued interest.
13. Allowance for Loan Losses
Activity for allowance for loan losses was as follows (in thousands):
For the Three Months
Ended March 31,
2001
2000
Balance, beginning of period $ 5,090 $ 4,029 Provision for loan losses 4,038 13,183 Charge-offs, net of recoveries (2,833
) (4,444
) Balance, end of period $ 6,295
$ 12,768
12
Wholesale and Retail Lending Operations: The Wholesale and Retail Lending Operations, conducted by ILG, increased total loan originations to $130.2 million during the first quarter of 2001 as compared to $5.0 million during the first quarter of 2000. As of March 31, 2001, ILG approved mortgage brokers increased to 1,300 as compared to 983 at December 31, 2000.
Warehouse Lending Operations: At March 31, 2001, the Warehouse Lending Operations had $1.1 billion of short-term warehouse lines of credit available to 59 borrowers. There was $455.5 million outstanding thereunder, after elimination of borrowings to the Long-Term Investment Operations, including $222.3 million outstanding to IFC.
RESULTS OF OPERATIONS--IMPAC MORTGAGE HOLDINGS, INC.
For the Three Months Ended March 31, 2001 as compared to the Three Months Ended March 31, 2000
Results of Operations
Net earnings increased to $1.1 million, or $0.04 per diluted common share, for the first quarter of 2001 as compared to a net loss of $(30.9) million, or $(1.48) per diluted common share, for the first quarter of 2000. The increase in net earnings was primarily the result of the Company recording non-cash accounting charges (“accounting charges”) of $5.2 million during the first quarter of 2001 as compared to $35.3 million during the first quarter of 2000. The accounting charges recorded during the first quarter of 2001 were the result of fair market valuations of the Company’s derivative instruments, as required by SFAS 133. The accounting charges recorded during the first quarter of 2000 were primarily related to the Company’s decision to write-off an investment security available-for-sale collateralized by high loan-to-value (“HLTV”) second trust deeds acquired in 1997 and to increase the allowance for loan losses for HLTV loans held in the long-term investment portfolio. As of March 31, 2001, the Company had outstanding HLTV loans in its long-term investment portfolio of $46.6 million and no investment securities available-for-sale collateralized by HLTV loans. Since 1998, the Company’s investment strategy has been only to acquire or invest in investment securities that are secured by mortgage loans underwritten and purchased by IFC.
Net earnings during the first quarter of 2001 includes the cumulative effect of a change in accounting principle resulting from fair market valuations of the Company’s hedging instruments, as required by SFAS 133. During the first quarter, the Company recognized a cumulative charge to earnings of $4.3 million as a fair market valuation of the Company’s hedging instruments outstanding at December 31, 2000 in accordance with the implementation of SFAS 133. As part of the Company’s secondary marketing activities, it purchases interest rate caps as a hedge against adverse changes in interest rates and the corresponding adverse effect on net interest margins. The primary effect of SFAS 133 on the Company’s financial position is to change the prior accounting treatment which amortized interest rate cap costs over the life of the caps to recording only the change in the fair market value of interest rate caps as an adjustment to current earnings. In addition, the effect of the fair market valuation at March 31, 2001 was a decrease to net earnings of $864,000. After implementation of SFAS 133, the market value of interest rates caps was $1.1 million at March 31, 2001. The Company does not intend to change its interest rate cap hedge policy, as the Company believes that it is the best protection against increases in interest rates. Net earnings in the future will experience some level of volatility from quarter to quarter due to the timing and expense recognition of hedge activity by the Company as a result of implementation of SFAS 133.
Core operating earnings were $6.3 million, or $0.24 per diluted common share, for the first quarter of 2001 as compared to core operating earnings of $4.4 million, or $0.16 per diluted common share, for the first quarter of 2000. Core operating earnings during the first quarter of 2001 excludes the effect of SFAS 133 of $5.2 million. Core operating earnings during the first quarter of 2000 excludes accounting charges of $35.3 million.
14
Net earnings during the first quarter of 2001 were positively affected by a reduction of interest rates, which increased net interest income by 39% to $8.9 million as compared to $6.4 million during the first quarter of 2000, see “—Net Interest Income” for additional information. Borrowing costs on CMO financing continues to trend lower as recent interest rate reductions by the Federal Reserve Bank should continue to improve net interest margins for the remainder of the year. Because a significant portion ofEliminations Consolidated
---------- ---------- ------------ ------------
Balance Sheet Items
CMO collateral includes prepayment penalties, the effect of early prepayments on net interest income due to refinance activity will be partially mitigated. As of March 31, 2001, 30% of the Company’s CMO collateral had prepayment penalties with a weighted average life to prepayment penalty expiration of approximately 26 months. In addition, the Company expects to complete a CMO during May 2001 for approximately $300.0 million, of which approximately 60% of the mortgage loans will include prepayment penalties ranging from one to five years.
As a result of higher than anticipated taxable income generated by the Company during the first quarter of 2001, the Company projects that it may completely utilize its tax loss carry forward as early as the third quarter of this year. After utilizing its tax loss carry forward, the Company would be required under REIT rules to distribute at least 90% of its taxable income for the remainder of the year. In addition, after 2001 the Company will no longer be able to reduce taxable income by an estimated $10.9 million per year from the amortization of the termination of the management agreement. Estimated taxable income for the first quarter of 2001 was $7.5 million, or $0.28 per diluted common share, as compared to taxable income of $1.4 million, or $0.05 per diluted common share, for the quarter ended December 31, 2000. The remaining 2001 tax loss carry forward was reduced to $12.6 million after the first quarter as a result of applying first quarter estimated taxable income of $7.5 million.
$1,439,848 $ -- $ -- $1,439,848
Total assets were $2.0 billion at March 31, 2001 as compared to $1.9 billion at December 31, 2000. Diluted book value (calculated by including preferred stock conversion rights of 6.4 million common shares) increased to $6.70 per common share at March 31, 2001 as compared to $6.67 per common share at December 31, 2000.
Net Interest1,829,747 676,335 (328,609) 2,177,473
Total stockholders' equity 268,931 67,151 (148,247) 187,835
Income
Net interest income increased 39% to $8.9 million during the first quarter of 2001 as compared to $6.4 million during the first quarter of 2000. The increase in net interest income was primarily the result of higher yields on CMO collateral, lower CMO borrowing costs due to reductions in one-month LIBOR, which is the index used to re-price the Company’s adjustable-rate CMO borrowings, and an increase in average Mortgage Assets. These factors resulted in a 0.39% increase in net interest margins to 1.82% during the first quarter of 2001 as compared to 1.43% during the first quarter of 2000.
Yields on CMO collateral increased 115 basis points to 7.84% during the first quarter of 2001 as compared to 6.69% during the same period of 2000. As the Federal Reserve Bank increased short-term interest rates during 2000, the Long-Term Investment Operations acquired mortgage loans from IFC with higher coupons. The rapid decrease in interest rates during the first quarter of 2001 should improve net interest income for the remainder of the year as adjustable-rate CMO collateral, which is restricted to periodic cap limitations, will re-price downwards more slowly than adjustable-rate CMO borrowings, which is generally indexed to six-month LIBOR.
CMO borrowing costs decreased 34 basis points to 6.60% during the first quarter of 2001 as compared to 6.94% during the same period of 2000 as the Federal Reserve Bank decreased short-term interest rates during the first quarter of 2001. During the first quarter of 2001, one-month LIBOR averaged 5.51% as compared to 5.92% during the first quarter of 2000, which caused CMO borrowing costs to decrease to 6.60% as compared to 6.94%, respectively. Additional interest rate decreases by the Federal Reserve Bank during the second quarter of 2001 should further decrease CMO borrowing costs and improve net interest income through the remainder of the year.
Mortgage Assets increased to $1.9 billion during the first quarter of 2001 as compared to $1.7 billion during the first quarter of 2000. The increase in Mortgage Assets was primarily the result of a $128.5 million increase in average finance receivables. Average finance receivables increased during the first quarter of 2001 as the Warehouse Lending Operations added external customers and IFC increased loan production which increased usage of approved short-term warehouse lines of credit.
15
The following table summarizes average balance, interest and weighted average yield on Mortgage Assets and borrowings on Mortgage Assets for the first quarters of 2001 and 2000 and includes interest income on Mortgage Assets and interest expense related to borrowings on Mortgage Assets only (dollars in thousands):
For the Three Months
Ended March 31, 2001
For the Three Months
Ended March 31, 2000
Average
Balance
Interest
Weighted
Avg Yield
Average
Balance
Interest
Weighted
Avg Yield
MORTGAGE ASSETS Investment securities available-for-sale: Securities collateralized by mortgages $ 36,419 $ 1,326 14.56 % $ 87,875 $ 2,879 13.10 % Securities collateralized by other loans —
—
—
5,660
203
14.35
Total investment securities
available-for-sale
36,419
1,326
14.56
93,535
3,082
13.18
Loan receivables: CMO collateral 1,327,557 26,032 7.84 1,204,818 20,155 6.69 Mortgage loans held-for-investment 89,782 1,478 6.58 119,878 2,335 7.79 Finance receivables: Affiliated 302,972 6,648 8.78 208,727 5,176 9.92 Non-affiliated 143,797
3,309
9.20
109,591
2,843
10.38
Total finance receivables 446,769
9,957
8.91
318,318
8,019
10.08
Total Loan receivables 1,864,108
37,467
8.40
1,643,014
30,509
7.43
Total Mortgage Assets $1,900,527
$38,793
8.16
% $1,736,549
$33,591
7.74
% BORROWINGS CMO borrowings $1,247,222 $20,592 6.60 % $1,101,898 $19,131 6.94 % Reverse repurchase agreements —
mortgages 503,973 8,859 7.03 415,798 7,352 7.07 Borrowings secured by investment securities available-for-sale 20,329
678
13.34
30,271
885
11.69
Total borrowings on Mortgage Assets $1,771,524
$30,129
6.80
% $1,547,967
$27,368
7.07
% Net Interest Spread 1.36 % 0.67 % Net Interest Margin 1.82 % 1.43 %
Interest Income on Mortgage Assets
Statement Items
Interest income on CMO collateral increased 29% to $26.0 million during the first quarter of 2001 as compared to $20.2 million during the first quarter of 2000 as average CMO collateral increased to $1.3 billion as compared to $1.2 billion, respectively. Interest income on CMO collateral increased primarily due to rising interest and mortgage rates and the acquisition of higher yielding mortgage loans from IFC during 2000. During the first quarter of 2001, constant prepayment rates (“CPR”) on CMO collateral increased to 29% as compared to 27% during the first quarter of 2000. CPR results from the unscheduled principal pay down or payoff of mortgage loans prior to the contractual maturity date or contractual payment schedule of the mortgage loan. Although interest rates decreased during the first quarter of 2001, an increase in loans acquired from IFC with prepayment penalties will partially mitigate increased CPR and corresponding premium amortizations. Loan premiums paid for acquiring mortgage loans and securitization costs incurred when CMOs are issued are amortized to interest income and interest expense, respectively, over the estimated lives of the mortgage loans. The weighted average yield on CMO collateral increased to 7.84% during the first quarter of 2001 as compared to 6.69% during the first quarter of 2000 primarily due to the aforementioned increase in interest rates during 2000.
Interest income on mortgage loans held-for-investment decreased to $1.5 million during the first quarter of 2001 as compared to $2.3 million during the first quarter of 2000 as average mortgage loans held-for-investment decreased to $89.8 million as compared to $119.9 million, respectively. The Long-Term Investment Operations acquired $182.1 million of mortgage loans from IFC during the first quarter of 2001 in anticipation of issuing a CMO during the second quarter of 2001. The weighted average yield on mortgage loans held-for-investment decreased to 6.58% during the first quarter of 2001 as compared to 7.79% during the first quarter of 2000. The yield on mortgage loans held-for-investment decreased due to remaining non-performing loans from the collapse of pre-existing CMO collateral during November 2000. During the first quarter of 2001, the Company completed whole loan sales to liquidate a portion of non-performing mortgage loans held-for-investment.
16
Interest income on finance receivables increased 25% to $10.0 million during the first quarter of 2001 as compared to $8.0 million during the first quarter of 2000 as average finance receivables increased 40% to $446.8 million as compared to $318.3 million, respectively. Interest income on finance receivables to affiliates increased 27% to $6.6 million during the first quarter of 2001 as compared to $5.2 million during the first quarter of 2000 as average finance receivables to affiliated companies increased 45% to $303.0 million as compared to $208.7 million, respectively. The increase in average affiliate finance receivables was primarily due to increased mortgage acquisitions and originations by IFC during the first quarter of 2001. The weighted average yield on affiliated finance receivables decreased to 8.78% during the first quarter of 2001 as compared to 9.92% during the first quarter of 2000 primarily due to a decrease in Bank of America’s prime rate (“prime”), which is the index used to determine interest rates on finance receivables, and a decrease in borrowing costs on warehouse lines with IWLG.
Interest income on finance receivables to non-affiliated mortgage banking companies increased 18% to $3.3 million during the first quarter of 2001 as compared to $2.8 million during the first quarter of 2000 as average finance receivables outstanding to non-affiliated mortgage banking companies increased 31% to $143.8 million as compared to $109.6 million, respectively. Average finance receivables to non-affiliates increased during the first quarter of 2001 as compared to the first quarter of 2000 primarily due to increased usage of short-term warehouse lines of credit and the addition of new customers. The weighted average yield on non-affiliated finance receivables decreased to 9.20% during the first quarter of 2001 as compared to 10.38% during the first quarter of 2000 primarily due to the aforementioned decrease in prime.
Interest income on investment securities available-for-sale decreased 58% to $1.3 million during the first quarter of 2001 as compared to $3.1 million during the first quarter of 2000 as average investment securities available-for-sale, net of securities valuation allowance, decreased 61% to $36.4 million as compared to $93.5 million, respectively. Average securities available-for-sale decreased as the Company wrote-off $52.6 million of investment securities available-for-sale during the first half of 2000, which affected the average for the first quarter of 2001. The weighted average yield on investment securities available-for-sale increased to 14.56% during the first quarter of 2001 as compared to 13.18% during the first quarter of 2000 as lower yielding investment securities were written-off during the first half of 2000.
Interest Expense on Mortgage Assets
$ 58,405 $ 23,264 $ (4,604) $ 77,065
Interest expense on CMO borrowings increased 8% to $20.6 million during the first quarter of 2001 as compared to $19.1 million during the first quarter of 2000 as average borrowings on CMO collateral increased 9% to $1.2 billion as compared to $1.1 billion, respectively. The increase in44,361 17,865 (4,604) 57,622
Equity interest expense on CMO borrowings was primarily attributable to the increase in average CMO borrowings as opposed to changes in interest rates, which decreased during the first quarter of 2001. One-month LIBOR, which is the index used to re-price the Company’s adjustable-rate CMO borrowings, decreased as a result of the Federal Reserve Bank decreasing short-term interest rates during the first quarter of 2001. During the first quarter of 2001, one-month LIBOR averaged 5.51% as compared to 5.92% during the first quarter of 2000, which caused CMO borrowing costs to decrease to 6.60% as compared to 6.94%, respectively. Borrowing costs on CMO financing continues to trend lower as interest rate reductions by the Federal Reserve Bank, subsequent to quarter-end, should continue to lower CMO borrowing costs and improve net interest margins for the remainder of the year.
Interest expense on reverse repurchase agreements used to fund the acquisition of mortgage loans and finance receivables increased 20% to $8.9 million during the first quarter of 2001 as compared to $7.4 million during the first quarter of 2000 as average reverse repurchase agreements increased 21% to $504.0 million as compared to $415.6 million, respectively. The increase in interest expense on reverse repurchase agreements was primarily the result of an increase in total average finance receivables made to internal and external customers of the Warehouse Lending Operations. The weighted average yield on reverse repurchase agreements decreased to 7.03% during the first quarter of 2001 as compared 7.07% during the first quarter of 2000.
The Company also uses mortgage-backed securities as collateral to borrow and fund the purchase of mortgage assets and to act as an additional source of liquidity for the Company’s operations. Interest expense on borrowings secured by investment securities available-for sale decreased 23% to $678,000 during the first quarter of 2001 as compared to $885,000 during the first quarter of 2000 as the average balance on these borrowings decreased 33% to $20.3 million as compared to $30.3 million, respectively. The weighted average yield of these borrowings increased to 13.34% during the first quarter of 2001 as compared 11.69% during the first quarter of 2000 primarily as the Company re-securitized a portion of its investment securities available-for-sale portfolio with long-term financing at a higher interest rate, as opposed to short-term reverse repurchase financing which are subject to margin calls. The re-securitization did not have a major effect on average outstanding balances until the fourth quarter of 2000. The Company did not have any short-term reverse repurchase financing outstanding at March 31, 2001 and December 31, 2000.
17
Provision for Loan Losses
The Company’s total allowance for loan losses expressed as a percentage of Gross Loan Receivables, which includes loans held-for-investment, CMO collateral and finance receivables, increased to 0.33% at March 31, 2001 as compared to 0.28% at December 31, 2000. During the first quarter of 2001, the Company added provision for loan losses of $4.0 million as compared to $13.2 million during the first quarter of 2000 which increased the allowance for loan losses by 24% to $6.3 million as of March 31, 2001 as compared to $5.1 million as of December 31, 2000. The Company recorded net charge-offs of $2.8 million during the first quarter of 2001 as the Company sold non-performing loans from the collapse of pre-existing CMO collateral. The allowance for loan losses is determined primarily on the basis of management’s judgment of net loss potential, including specific allowances for known impaired loans, changes in the nature and volume of the portfolio, the value of the collateral and current economic conditions that may affect the borrowers’ ability to pay.
Total non-performing loans, including 90 days past due, foreclosures and other real estate owned, increased 23% to $53.9 million, or 2.83%, of the long-term investment portfolio at March 31, 2001 as compared to $43.7 million, or 2.43%, of the long-term investment portfolio at December 31, 2000. The loan delinquency rate of mortgages in the long-term investment portfolio which were 60 or more days past due, inclusive of foreclosures and delinquent bankruptcies, decreased to 4.84% at March 31, 2001 as compared to 4.89% at December 31, 2000.
Non-Interest Income
Non-interest income includes equity in net earnings
of IFC and other non-interest(b) -- -- 4,818 4,818
Net earnings 252 4,855 4,818 9,925
The following table shows the Company's reporting segments for the three
months ended June 30, 2001 (in thousands):
Income Statement Items
Interest income primarily including loan servicing fees and fees associated with the Company’s Warehouse Lending Operations. During the first quarter of 2001, non-interest income was $2.1 million as compared to $1.4 million during the first quarter of 2000. The increase in non-interest income during the first quarter of 2001 was primarily due to an increase of $882,000 in equity in net earnings of IFC. The Company records 99% of the earnings or losses from IFC as the Company owns 100% of IFC’s preferred stock, which represents 99% of the economic$ 29,006 $ 11,483 $ (2,823) $ 37,666
Interest expense 20,947 8,991 (2,823) 27,115
Equity interest in IFC. Equity in net earnings
of IFC increased(b) -- -- 3,528 3,528
Net earnings 2,991 2,264 3,528 8,783
The following table shows the Company's reporting segments as of and for
the six months ended June 30, 2000 (in thousands):
Long-Term Warehouse
Investment Lending (a)
Operations Operations Eliminations Consolidated
----------- ---------- ------------ ------------
Balance Sheet Items
CMO collateral $ 1,182,125 $ -- $ -- $ 1,182,125
Total assets 1,495,516 454,651 (250,048) 1,700,119
Total stockholders' equity 251,336 54,440 (125,117) 180,659
Income Statement Items
Interest income $ 50,675 $ 21,265 $ (3,270) $ 68,670
Interest expense 45,338 14,849 (3,270) 56,917
Equity interest in net loss
of IFC (b) -- -- (1,080) (1,080)
Net earnings (loss) (65,884) 5,756 (1,080) (61,208)
The following table shows the Company's reporting segments for the three
months ended June 30, 2000 (in thousands):
Income Statement Items
Interest income $ 24,596 $ 10,333 $ (399) $ 34,530
Interest expense 22,100 7,491 (399) 29,192
Equity interest in net loss
of IFC (b) -- -- (1,488) (1,488)
Net earnings (loss) (31,198) 2,371 (1,488) (30,315)
(a) Elimination of inter-segment balance sheet and income statement items.
(b) The Mortgage Operations are accounted for using the equity method and is an
unconsolidated subsidiary of the Company.
13
8. Investment in Impac Funding Corporation
The Company is entitled to 99% of the earnings or losses of IFC through its
ownership of all of the non-voting preferred stock of IFC. As such, the Company
records its investment in IFC using the equity method. Under this method,
original investments are recorded at cost and adjusted by the Company's share of
earnings or losses. Gain or loss on the sale of loans or securities by IFC to
IMH are deferred and amortized or accreted over the estimated life of the loans
or securities using the interest method. The following is financial information
for IFC for the periods presented (in thousands):
BALANCE SHEETS
June 30, December 31,
2001 2000
--------- ------------
ASSETS
------
Cash $ 9,624 $ 8,281
Investment securities available-for-sale 10,736 266
Mortgage loans held-for-sale 202,056 275,570
Mortgage servicing rights 11,128 10,938
Premises and equipment, net 4,912 5,037
Accrued interest receivable 327 1,040
Other assets 8,759 16,031
--------- ---------
Total assets $ 247,542 $ 317,163
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Borrowings from IWLG $ 192,877 $ 266,994
Due to $1.3 million duringaffiliates 14,500 14,500
Deferred revenue 5,937 5,026
Accrued interest expense 592 2,176
Other liabilities 17,501 12,546
--------- ---------
Total liabilities 231,407 301,242
--------- ---------
Shareholders' Equity:
Preferred stock 18,053 18,053
Common stock 182 182
Retained earnings (accumulated deficit) 2,547 (2,300)
Cumulative dividends declared (4,464) --
Accumulated other comprehensive loss (183) (14)
--------- ---------
Total shareholders' equity 16,135 15,921
--------- ---------
Total liabilities and shareholders' equity $ 247,542 $ 317,163
========= =========
14
STATEMENTS OF OPERATIONS
For the first quarterThree Months For the Six Months
Ended June 30, Ended June 30,
-------------------- ---------------------
2001 2000 2001 2000
-------- ------- -------- --------
Interest income $ 5,253 $ 7,107 $ 12,745 $ 12,052
Interest expense 4,774 7,014 11,972 12,674
-------- ------- -------- --------
Net interest income (expense) 479 93 773 (622)
Gain on sale of 2001 as compared to $408,000 during the first quarterloans 12,875 4,149 20,523 9,370
Loan servicing income 769 1,012 1,800 2,548
Other non-interest income 65 384 112 408
-------- ------- -------- --------
Total non-interest income 13,709 5,545 22,435 12,326
Personnel expense 3,453 2,259 6,638 4,581
General and administrative and other expense 3,382 3,136 5,655 4,907
Amortization of 2000 as IFC’s net earnings increased. Refer to “Results of Operations —Impac Funding Corporation”mortgage servicing rights 1,188 1,265 2,445 2,457
Provision for additional information regarding results of operations for IFC.Non-Interest Expense
During the first quarter of 2001, non-interest expense, excluding write-downrepurchases 8 7 14 71
Write-down on investment securities available-for-sale and the mark-to-market loss as a result of-- 1,537 -- 1,537
Mark-to-market gain - FAS 133 decreased to $661,000 as compared to $1.5 million during the first quarter of 2000. The expected loss on the disposition of other real estate owned was less than anticipated. This resulted in a $1.1 million favorable reduction in (gain) loss on disposition of other real estate owned.
RESULTS OF OPERATIONS-- IMPAC FUNDING CORPORATION
For the Three Months Ended March 31, 2001 as compared to the Three Months Ended March 31, 2000
Results of Operations
Net earnings increased to $1.3 million during the first quarter of 2001 as compared to net earnings of $412,000 for the first quarter of 2000 primarily due to a $2.4 million increase in gain on sale of loans. During the first quarter of 2001, IFC sold whole loans or securitized $462.0 million of mortgages contributing to a gain on sale of $7.6 million as compared to $335.1 million and $5.2 million, respectively, during the first quarter of 2000. In addition to selling more loans during the first quarter of 2001, profit margins on securitizations improved significantly as compared to securitizations completed during the first quarter of 2000. IFC sold loans on a servicing released basis and anticipates that it will continue to sell related loan servicing rights from the securitization of its loans. However, IFC will continue to act as master servicer on all its securitizations. IFC completed two REMICs during the first quarter of 2001 and anticipates completing two REMICs per quarter for the remainder of the year. By securitizing loans more frequently, IFC expects that less capital will be required, higher liquidity will be maintained and less interest rate and price volatility during the mortgage loan accumulation period will be achieved.
18
The Mortgage Operations continued to experience steady growth during the first quarter of 2001 as loan production continued to benefit from increased loan submissions and underwriting approvals generated and processed through its Impac Direct Access System for Lending (IDASL). During the first quarter of 2001, IFC’s customers increased the monthly volume of loans submitted through the IDASL system by 29% to $719.2 million per month as compared to $555.5 million per month during the first quarter of 2000. At March 31, 2001, substantially all of IFC’s correspondents were submitting loans through IDASL and 100% of all wholesale loans delivered by brokers were directly underwritten through IDASL.
Net Interest Income (Expense)
Net interest income increased to $294,000 during the first quarter of 2001 as compared to net interest expense of $(715,000) during the first quarter of 2000 primarily as a result of a decrease in borrowing costs, which are indexed to prime, and the spread charged by IWLG. IWLG decreased the spread on IFC’s warehouse borrowings during the first quarter of 2001. Average prime decreased to 8.62% during the first quarter of 2001 as compared to 8.69% during the first quarter of 2000.
Non-Interest Income
During the first quarter of 2001, non-interest income increased to $8.7 million as compared to $6.8 million during the first quarter of 2000 primarily due to a $2.4 million increase in gain on sale of loans. The increase in gain on sale of loans during the first quarter of 2001 was primarily the result of selling more loans at higher margins as compared to the first quarter of 2000. Loan servicing income decreased to $1.0 million during the first quarter of 2001 as compared to $1.5 million during the first quarter of 2000 as IFC sold servicing rights during 2000 and 2001.
Non-Interest Expense
During the first quarter of 2001,-- -- (17) --
-------- ------- -------- --------
Total non-interest expense increased to $6.7 million as compared to $5.3 million during the first quarter of 2000 primarily due to an increase in personnel expense. Staffing rose to 252 employees at March 31, 2001 as compared to 198 employees at March 31, 2000 as production levels increased.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Historically, the Company’s business operations are primarily funded from monthly interest8,031 8,204 14,735 13,553
Earnings (loss) before income taxes and principal payments from its mortgage loan and investment securities portfolios, adjustable- and fixed-rate CMO financing, reverse repurchase agreements secured by mortgage loans, borrowings secured by mortgage-backed securities, proceeds from the sale of mortgage loans and the issuance of REMICs and proceeds from the issuance of Common Stock through secondary stock offerings, Dividend Reinvestment and Stock Purchase Plan (“DRSPP”), and its structured equity shelf program (“SES Program”). The acquisition of mortgage loans and mortgage-backed securities by the Long-Term Investment Operations are primarily funded from monthly principal and interest payments, reverse repurchase agreements, CMO financing, and proceeds from the sale of Common Stock. The issuance of CMO financing provides the Long-Term Investment Operations with immediate liquidity, a relatively stable interest rate spread and eliminates the Company’s exposure to margin calls on such loans. Presently, the Company has suspended both the DRSPP and SES Program and has issued no new shares of Common Stock through these programs or through secondary stock offerings during the first three months of 2001. The acquisition of mortgage loans by the Conduit Operations are funded from reverse repurchase agreements, the sale of mortgage loans and mortgage-backed securities and the issuance of REMICs. Short-term warehouse financing, finance receivables, provided by the Warehouse Lending Operations are primarily funded from reverse repurchase agreements.
The Company’s ability to meet its long-term liquidity requirements is subject to the renewal of its credit and repurchase facilities and/or obtaining other sources of financing, including additional debt or equity from time to time. Any decision by the Company’s lenders and/or investors to make additional funds available to the Company in the future will depend upon a number of factors, such as the Company’s compliance with the terms of its existing credit arrangements, the Company’s financial performance, industry and market trends in the Company’s various businesses, the general availability of and rates applicable to financing and investments, such lenders’and/or investors’own resources and policies concerning loans and investments, and the relative attractiveness of alternative investment or lending opportunities. The Company believes that current liquidity levels, available financing facilities and additional liquidity provided by operating activities will adequately provide for the Company’s projected funding needs, asset growth and the payment of dividends for the near term. The Company is continuously exploring alternatives for increasing liquidity and monitors current and future cash requirements through its asset/liability committee (“ALCO”). However, no assurances can be given that such alternatives will be available, or if available, under comparable rates and terms as currently exist.
19
Long-Term Investment Operations
Primary Source of Funds
The Long-Term Investment Operations uses CMO borrowings to finance substantially its entire mortgage loan portfolio. Terms of the CMO borrowings require that an independent first party custodian hold the mortgages. The maturity of each class is directly affected by the rate of principal prepayments on the related collateral. Equity in the CMOs is established at the time the CMOs are issued at levels sufficient to achieve desired credit ratings on the securities from rating agencies. The amount of equity invested in CMOs by the Long-Term Investment Operations is also determined by the Company based upon the anticipated return on equity as compared to the estimated proceeds from additional debt issuance. Total credit loss exposure is limited to the equity invested in the CMOs at any point in time. For the first three months of 2001, the Company issued no CMOs. At March 31, 2001, the Long-Term Investment Operations had $1.2 billion of CMO borrowings used to finance $1.3 billion of CMO collateral.
The Long-Term Investment Operations may pledge mortgage-backed securities as collateral to borrow funds under short-termed reverse repurchase agreements. The terms under these short-term reverse repurchase agreements are generally for 30 days with interest rates ranging from the one-month LIBOR plus a spread depending on the type of collateral provided. As of March 31, 2001, the Long-Term Investment Operations had no amounts outstanding under short-term reverse repurchase agreements secured by investment securities available-for-sale.
Primary Use of Funds
During the first three months of 2001, the Long-Term Investment Operations acquired $182.1 million in mortgage loans from IFC.
Warehouse Lending Operations
Primary Source of Funds
The Warehouse Lending Operations finances the acquisition of mortgage loans by the Long-Term Investment Operations and Conduit Operations primarily through borrowings on reverse repurchase agreements with first party lenders. IWLG has obtained reverse repurchase facilities from major investment banks to provide financing as needed. Terms of the reverse repurchase agreements require that the mortgages be held by an independent first party custodian giving the Warehouse Lending Operations the ability to borrow against the collateral as a percentage of the outstanding principal balance. The borrowing rates vary from 85 basis points to 200 basis points over one-month LIBOR, depending on the type of collateral provided. The advance rates on the reverse repurchase agreements are based on the type of mortgage collateral used and generally range from 75% to 101% of the fair market value of the collateral. At March 31, 2001, the Warehouse Lending Operations had $615.4 million outstanding on uncommitted reverse repurchase agreements at a rate of one-month LIBOR plus 0.85% to 2.00%.
Primary Use of Funds
During the first three months of 2001, the Warehouse Lending Operations increased outstanding finance receivables by $50.1 million.
20
Mortgage Operations
Primary Source of Funds
The Mortgage Operations has entered into reverse repurchase agreements to obtain financing of up to $600.0 million from the Warehouse Lending Operations to provide IFC mortgage loan financing during the period that IFC accumulates mortgage loans and until the mortgage loans are securitized and sold. The margins on the reverse repurchase agreements are based on the type of collateral provided and generally range from 95% to 100% of the fair market value of the collateral. Interest rates on the borrowings are indexed to prime plus 1.00%, which was 8.00% at March 31, 2001. At March 31, 2001, the Conduit Operations had $222.3 million outstanding under the reverse repurchase agreements.
During the first three months of 2001, the Mortgage Operations sold $462.0 million in principal balance of mortgage loans to first party investors. In addition, IFC sold $179.2 million in principal balance of mortgage loans to the Long-Term Investment Operations during the first three months of 2001. By securitizing and selling loans on a periodic and consistent basis the reverse repurchase agreements were sufficient to handle IFC’s liquidity needs during the three months ended March 31, 2001.
Primary Use of Funds
During the first three months of 2001, the Mortgage Operations acquired and originated $611.6 million of mortgage loans.
Cash Flows
Operating Activities — During the first three months of 2001, net cash provided by operating activities was $7.3 million. The Company recorded a non-cash charge of $4.3 million for the cumulative effect
of change in accounting principle.
Investing Activities —principle 6,157 (2,566) 8,473 (1,849)
Income taxes (2,608) (1,060) (3,609) (756)
-------- ------- -------- --------
Earnings (loss) before cumulative effect of change
in accounting principle 3,549 (1,506) 4,864 (1,093)
Cumulative effect of change in accounting principle -- -- 17 --
-------- ------- -------- --------
Net earnings (loss) 3,549 (1,506) 4,847 (1,093)
Less: Cash dividends on preferred stock (2,500) -- (4,464) --
-------- ------- -------- --------
Net earnings (loss) available to common stockholders $ 1,049 $(1,506) $ 383 $ (1,093)
======== ======= ======== ========
9. Stockholders' Equity
On June 26, 2001, the Company declared a second quarter cash dividend of
$788,000 or $0.65625 per share to preferred stockholders. This dividend was paid
on July 24, 2001.
On March 27, 2001, the Company declared a first quarter cash dividend of
$788,000 or $0.65625 per share to preferred stockholders. This dividend was paid
on April 24, 2001.
On February 20, 2001, IFC purchased $5.0 million of the Company's Preferred
Stock from LBP, Inc. (LBPI) at cost plus accumulated dividends. On March 27,
2001, IFC purchased an additional $5.0 million of the Company's Preferred Stock
from LBPI for $5.25 million plus accumulated dividends.
10. Commitments and Contingencies
Currently, IFC is protesting the California Franchise Tax Board's (FTB)
examination results for the income tax years ended December 31, 1996 and 1995.
The examination was the result of an audit of Imperial Credit Industries, Inc.
for which the FTB has raised certain claims, resulting in the issuance of Notice
of Proposed Assessments for the above years stated. During the fourth quarter of
2000, the Company recorded income tax provisions related to a potential tax
assessment.
11. Subsequent Events
On July 13, 2001, IFC signed an Asset Purchase Agreement to acquire the
assets and assume selected liabilities of Old Kent Mortgage Corporation, a
wholesale mortgage originator. While IFC has only acquired the assets and
selected liabilities of the Old Kent Mortgage Corporation, IFC expects to
operate this business as a division of IFC under the name of Novelle Financial
Services (NFS). The asset sale is scheduled to close on August 31, 2001.
15
The Board of Directors has authorized the redemption of all of Preferred
Stock for the cash amount of $25.00 per share. The Company has 1,200,000 shares
of Preferred Stock outstanding and has set a redemption date of September 21,
2001. As per the terms of the Preferred Stock redemption rights, the Company may
redeem its Preferred Stock if the closing sales price of its common stock as
reported by the American Stock Exchange, the Company's principal stock exchange,
averages in excess of 150% of the conversion price of $4.72 for a period of at
least 20 consecutive trading days. As of July 23, 2001, the Company's common
stock closed at $7.50 with a 20-day average consecutive closing price of $7.19
or 152% of the conversion price. The Preferred Stock conversion rate into common
stock is an aggregate amount of 6,356,000 common shares.
12. Allowance for Loan Losses
The Company makes a monthly provision for estimated loan losses on its
long-term investment portfolio as an increase to allowance for loan losses. The
provision for estimated loan losses is primarily based on a migration analysis
based on historical loss statistics, including cumulative loss percentages and
loss severity, of similar loans in the Company's long-term investment portfolio.
The loss percentage is used to determine the estimated inherent losses in the
investment portfolio. Provision for loan losses is also based on management's
judgment of net loss potential, including specific allowances for known impaired
loans, changes in the nature and volume of the portfolio, the value of the
collateral and current economic conditions that may affect the borrowers'
ability to pay.
The adequacy of the allowance for loan losses is evaluated on a monthly
basis by management to maintain the allowance at levels sufficient to provide
for inherent losses. The migration system analyzes historical migration of
mortgage loans from original current status to 30-, 60- and 90-day delinquency,
foreclosure, other real estate owned and paid. The principal balance of all
loans currently in the long-term investment portfolio are included in the
migration analysis until the principal balance of loans either become real
estate owned or are paid in full. The statistics generated by the migration
analysis are used to establish the general valuation for loan losses.
Activity for allowance for loan losses was as follows (in thousands):
For the Three Months Ended
--------------------------------
June 30, 2001 March 31, 2001
------------- --------------
Balance, beginning of period ....... $ 6,295 $ 5,090
Provision for loan losses ......... 3,905 4,038
Charge-offs, net of recoveries (2,383) (2,833)
------- -------
Balance, end of period ............ $ 7,817 $ 6,295
======= =======
For the Three Months Ended
---------------------------------
June 30, 2000 March 31, 2000
------------- --------------
Balance, beginning of period . $ 12,768 $ 4,029
Provision for loan losses .... 3,304 13,184
Charge-offs, net of recoveries (3,205) (4,445)
-------- --------
Balance, end of period ....... $ 12,867 $ 12,768
======== ========
16
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain information contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as
amended, which can be identified by the use of forward-looking terminology such
as "may," "will," "expect," "intend," "should," "anticipate," "estimate," or
"believe" or the negatives thereof or other variations thereon or comparable
terminology. The Company's actual results may differ materially from those
contained in the forward-looking statements. Factors which may cause a
difference to occur include the rate of growth and expansion of the Company's
new divisions, the conditions in the securities markets and ability to complete
securitizations, ownership and disposition of Mortgage Assets (which depend on
the type of Mortgage Asset involved) and yields available from time to time on
such Mortgage Assets, interest rate fluctuations, the ability to maintain
sufficient cash flows for the payment of dividends fluctuations and increase in
prepayment rates, the availability of suitable financing and investments, trends
in the economy which affect confidence and demand on the Company's portfolio of
Mortgage Assets and other factors referenced in this report and other reports
filed by the Company with the SEC, including its Annual Report on Form 10-K.
SIGNIFICANT TRANSACTIONS
On June 20, 2001, the Company retired its 11% senior subordinated
debentures and wrote-off $1.0 million of discounts and securitization costs
related to these debentures.
On February 20, 2001, IFC purchased $5.0 million of the Company's Series C
10.5% Cumulative Convertible Preferred Stock ("Preferred Stock") from LBP, Inc.
("LBPI") at cost plus accumulated dividends. On March 27, 2001, IFC purchased an
additional $5.0 million of the Company's Preferred Stock from LBPI for $5.25
million plus accumulated dividends.
BUSINESS OPERATIONS
Long-Term Investment Operations: During the first six months of 2001, the
Long-Term Investment Operations acquired $555.5 million of primarily
adjustable-rate mortgages ("ARMs") secured by first liens on residential
property from IFC as compared to $156.9 million of mortgages acquired during the
same period in 2000. During the first six months of 2001, IMH Assets issued a
Collateralized Mortgage Obligations ("CMO") for $357.8 million as compared to a
CMO totaling $452.0 million during the same period in 2000. As of June 30, 2001,
the Long-Term Investment Operations' portfolio of mortgage loans consisted of
$1.4 billion of mortgage loans held in trust as collateral for CMOs and $200.0
million of mortgage loans held-for-investment, of which approximately 19% were
fixed-rate mortgages ("FRMs") and 81% were ARMs. The weighted average coupon of
the Long-Term Investment Operations portfolio of mortgage loans was 8.89% at
June 30, 2001 with a weighted average margin of 3.90%. The portfolio of mortgage
loans included 95% of "A" credit quality, non-conforming mortgage loans and 5%
of "B" and "C" credit quality, non-conforming mortgage loans. Borrowers with a
Fair Isaac Credit Score ("FICO") of 620 or better are generally considered to be
"A" credit grade and "A-" grade loans generally have a FICO score of 550 or
better. The FICO was developed by Fair Isaac Co., Inc. and is an electronic
evaluation of past and present credit accounts on the borrower's credit bureau
report. The loan delinquency rate of the Long-Term Investment Operations
portfolio which were 60 or more days past due, inclusive of foreclosures and
delinquent bankruptcies, was 4.38% at June 30, 2001 as compared to 4.89% at
December 31, 2000. Total non-performing loans, including 90 days past due,
foreclosures and other real estate owned increased to 2.58% of total assets at
June 30, 2001 as compared to 2.30% of total assets at December 31, 2000.
Conduit Operations: The Conduit Operations, conducted by IFC, continues to
support the Long-Term Investment Operations of the Company by supplying IMH with
mortgages for long-term investment. In acting as the mortgage conduit for the
Company, IFC's mortgage acquisitions increased 56% to $1.4 billion during the
first six months of 2001 as compared to $886.0 million acquired during the same
period in 2000. IFC sold loans to first party investors or securitized $880.6
million, which contributed to the gain on sale of loans of $20.5 million, during
the first six months of 2001. This compares to loan sales to first party
investors or securitizations of $621.6 million, contributing to gain on sale of
loans of $9.4 million, during the same period in 2000. Of the $880.6 million of
whole loan sales and securitizations during the first six months of 2001, IFC
issued four real estate mortgage investment conduits ("REMICs"), for a total of
$852.4 million. IFC had deferred income of $5.9 million at June 30, 2001 as
compared to $5.0 million at December 31, 2000. Deferred income results from the
sale of mortgages to IMH, which are deferred
17
and amortized or accreted over the estimated life of the loans using the
interest method. During the first six months of 2001, IFC sold $546.9 million in
principal balance of mortgages to IMH as compared to $155.2 million during the
same period of 2000. IFC's master servicing portfolio increased 20% to $4.8
billion at June 30, 2001 as compared to $4.0 billion at December 31, 2000. IFC
had mortgage servicing rights of $11.1 million at June 30, 2001 as compared to
$10.9 million at December 31, 2000. The loan delinquency rate of mortgages in
IFC's master servicing portfolio which were 60 or more days past due, inclusive
of foreclosures and delinquent bankruptcies, was 5.02% at June 30, 2001 as
compared to 4.82%, 4.24%, 4.15% and 4.33% for the last four quarter-end periods.
Wholesale and Retail Lending Operations: The Wholesale and Retail Lending
Operations, conducted by ILG, increased total loan originations to $433.8
million during the first six months of 2001 as compared to $79.9 million during
the same period of 2000. As of June 30, 2001, ILG approved mortgage brokers
increased to 1,566 as compared to 983 at December 31, 2000.
Warehouse Lending Operations: At June 30, 2001, the Warehouse Lending
Operations had $1.2 billion of short-term warehouse lines of credit available to
55 borrowers. There was $429.6 million outstanding thereunder, after elimination
of borrowings to the Long-Term Investment Operations, including $192.9 million
outstanding to IFC.
RESULTS OF OPERATIONS--IMPAC MORTGAGE HOLDINGS, INC.
For the Three Months Ended June 30, 2001 as compared to the Three Months Ended
June 30, 2000
Results of Operations
Net earnings increased to $8.8 million, or $0.33 per diluted common share,
for the second quarter of 2001 as compared to a net loss of $(30.3) million, or
$(1.45) per diluted common share, for the second quarter of 2000. Net earnings
increased during the second quarter of 2001 as the Company recorded
non-recurring, non-cash accounting charges ("accounting charges") of $33.6
million during the second quarter of 2000. Of the $33.6 million accounting
charges the Company recognized during the second quarter of 2000, $29.2 million
was related to write-downs on investment securities available-for-sale
("investment securities") and $2.6 million was provided for additional increases
in the Company's allowance for loan losses related to its high loan-to-value
("HLTV") second trust deed portfolio. As of June 30, 2001, the Company had
outstanding HLTV loans in its long-term investment portfolio of $41.7 million
and no investment securities that were collateralized by HLTV loans. Since 1998,
the Company's investment strategy has been only to acquire or invest in
investment securities that are secured by mortgage loans underwritten and
purchased by IFC due to their superior historical performance.
Core operating earnings were $10.4 million, or $0.38 per diluted common
share, for the second quarter of 2001 as compared to core operating earnings of
$3.3 million, or $0.12 per diluted common share, for the second quarter of 2000.
Core operating earnings during the second quarter of 2001 excludes the current
effect of a $581,000 mark-to-market loss as a result of Statement of Financial
Accounting Standards No. 133 ("SFAS 133") and a $1.0 million write-down of
discounts and prepaid securitization costs related to the retirement of senior
subordinated debt. See "Effect of SFAS 133" for additional information. Core
operating earnings during the second quarter of 2000 excludes accounting charges
of $33.6 million. Core operating earnings increased 215% during the second
quarter of 2001 as compared to the second quarter of 2000 as a result of a $5.2
million increase in net interest income and a $2.0 million increase in equity in
net earnings of IFC. See "Net Interest Income" and "Non-Interest Income" for
additional information.
Higher than anticipated net earnings during the first half of 2001 allowed
the Company to retire its senior subordinated debt in June, almost three years
before its original maturity date, acquire $10.0 million of its Preferred Stock
and increase liquidity. Although the Company took a one-time charge of $1.0
million during the second quarter of 2001 as a write-off of discounts and
securitization costs from the retirement of the senior subordinated debt, the
Company will realize savings of approximately $2.2 million in interest expense
over the original remaining life of the debt. While using its cash to acquire
mortgages, retire debt and acquire Preferred Stock, the Company increased total
combined cash balances by $6.0 million to $32.2 million at June 30, 2001 from
$26.2 million at December 31, 2000.
Consistent with the Company's goal of restructuring its balance sheet to
provide more reliable net interest margins, the Company continues to improve the
credit quality of mortgages held for long-term investment and increased
prepayment protection by acquiring mortgages from the Mortgage Operations with
prepayment penalties. The credit quality of mortgages held as CMO collateral
improved as the weighted average FICO at origination increased to 667
18
as of June 30, 2001 as compared to 603 as of December 31, 1999. As of June 30,
2001, 39% of the Company's CMO collateral had prepayment penalties ranging from
one to five years with a weighted average life to prepayment penalty expiration
of approximately 25 months. During the second quarter, the Company completed a
CMO of $358.0 million of which approximately 63% of the collateral included
prepayment penalties. Of the outstanding CMO collateral on the Company's balance
sheet at June 30, 2001, 75% of CMO collateral was acquired or originated by the
Company during the last 18 months.
Total assets were $2.2 billion at June 30, 2001 as compared to $1.9 billion
at December 31, 2000. Diluted book value (calculated by including Preferred
Stock conversion rights of approximately 6.4 million common shares) increased to
$7.00 per common share at June 30, 2001 as compared to $6.67 per common share at
December 31, 2000.
Net Interest Income
Net interest income increased 100% to $10.6 million during the second
quarter of 2001 as compared to $5.3 million during the second quarter of 2000.
Net interest income increased as a result of decreased borrowing costs and wider
net interest margins as interest rates on adjustable rate CMO borrowings
continued to decline due to short-term interest rate reductions by the Federal
Reserve Bank. However, in anticipation of the likelihood that short-term
interest rates may rise sometime in the future, the Company purchased derivative
instruments during the second quarter of 2001 to mitigate possible adverse
changes in net interest margins.
During the second quarter of 2001, net interest income increased as net
interest margins on Mortgage Assets increased to 2.07% as compared to 1.20%
during the second quarter of 2000. Mortgage Assets include CMO collateral,
mortgage loans held-for-investment, finance receivables and investment
securities. Net interest margins on Mortgage Assets increased during the second
quarter of 2001 primarily as a result of average CMO borrowing costs decreasing
168 basis points to 5.53% during the second quarter of 2001 as compared to 7.21%
during the second quarter of 2000. Borrowing costs on CMO financing continues to
trend lower as recent interest rate reductions by the Federal Reserve Bank
improved net interest margins during the second quarter of 2001 and should
improve net interest margins for the remainder of the year.
Because a significant portion of CMO collateral includes prepayment
penalties, the Company believes that the effect of early prepayments on net
interest income due to refinance activity will be partially mitigated. As of
June 30, 2001, 39% of the Company's CMO collateral had prepayment penalties with
a weighted average life to prepayment penalty expiration of approximately 25
months. During the second quarter of 2001, the Company completed a CMO of $358.0
million of which approximately 63% of the collateral included prepayment
penalties.
Net interest income also increased as average Mortgage Assets increased 18%
to $2.0 billion during the second quarter of 2001 as compared to $1.7 billion
during the second quarter of 2000. The increase in Mortgage Assets was primarily
the result of a $233.8 million increase in average CMO collateral and mortgage
loans held-for investment. CMO collateral and mortgage loans held-for investment
increased during the second quarter of 2001 as the Company acquired $373.4
million of primarily ARMs from the Mortgage Operations as compared to $116.5
million during the second quarter of 2000.
The following table summarizes average balance, interest and weighted
average yield on Mortgage Assets and borrowings on Mortgage Assets for the
second quarters of 2001 and 2000 and includes interest income on Mortgage Assets
and interest expense related to borrowings on Mortgage Assets only (dollars in
thousands):
19
For the first three months ofThree Months For the Three Months
Ended June 30, 2001 net cash used in investing activities was $114.6 million. Cash used in investing activities was primarily due to an increase in mortgageEnded June 30, 2000
------------------------------------ -----------------------------------
Average Wtd Avg Average Wtd Avg
Balance Interest Yield Balance Interest Yield
------------------------------------ -----------------------------------
MORTGAGE ASSETS
---------------
Investment securities available-for-sale:
Securities collateralized by mortgages $ 32,663 $ 992 12.15 % $64,007 $ 1,511 9.44 %
Securities collateralized by other loans -- -- -- 5,673 70 4.94
----------------------- -----------------------
Total investment securities 32,663 992 12.15 69,680 1,581 9.08
----------------------- -----------------------
Loan receivables:
CMO collateral 1,317,851 24,290 7.37 1,243,379 22,153 7.13
Mortgage loans held-for-investment of $187.2 million as the Long-Term Investment Operations purchased and retained mortgage loans from the177,195 3,108 7.02 17,881 402 8.99
Finance receivables:
Affiliated 232,464 4,135 7.12 266,910 6,540 9.80
Non-affiliated 222,019 4,486 8.08 128,952 3,365 10.44
----------------------- -----------------------
Total finance receivables 454,483 8,621 7.59 395,862 9,905 10.01
----------------------- -----------------------
Total Loan receivables 1,949,529 36,019 7.39 1,657,122 32,460 7.84
----------------------- -----------------------
Total Mortgage Operations. Cash was also generatedAssets $1,982,192 $37,011 7.47 % $1,726,802 $34,041 7.89 %
======================= =======================
BORROWINGS
----------
CMO borrowings $1,242,049 $17,175 5.53 % $1,141,240 $20,578 7.21 %
Reverse repurchase agreements - mortgages 595,421 8,938 6.00 393,431 7,489 7.61
Borrowings secured by investment securities 18,189 660 14.51 27,549 807 11.72
----------------------- -----------------------
Total Borrowings on Mortgage Assets $1,855,659 $26,773 5.77 % $1,562,220 $28,874 7.39 %
======================= =======================
Net Interest Spread (1) 1.70 % 0.50 %
Net Interest Margin (2) 2.07 % 1.20 %
(1) Net interest spread is calculated by subtracting the weighted average
yield on total borrowings on Mortgage Assets from the weighted average
yield on total Mortgage Assets.
(2) Net interest margin is calculated by subtracting interest expense on
total borrowings on Mortgage Assets from interest income on total Mortgage
Assets and then dividing by the total average balance for Mortgage Assets.
Interest Income on Mortgage Assets
Interest income on CMO collateral increased 9% to $24.3 million during the
second quarter of 2001 as compared to $22.2 million during the second quarter of
2000 as average CMO collateral increased 8% to $1.3 billion as compared to $1.2
billion, respectively. Interest income on CMO collateral increased primarily as
the Company issued a CMO for $358.0 million during May of 2001. During the
second quarter of 2001, constant prepayment rates ("CPR") on CMO collateral
increased to 41% as compared to 26% during the second quarter of 2000. CPR
results from the unscheduled principal pay down or payoff of mortgage loans
prior to the contractual maturity date or contractual payment schedule of the
mortgage loan. Although interest rates continued to decrease during the second
quarter of 2001, an increase in loans acquired from IFC with prepayment
penalties should partially mitigate increased CPR and corresponding premium
amortizations. Loan premiums paid for acquiring mortgage loans and
securitization costs incurred when CMOs are issued are amortized to interest
income and interest expense, respectively, over the estimated lives of the
mortgage loans. The weighted average yield on CMO collateral increased to 7.37%
during the second quarter of 2001 as compared to 7.13% during the second quarter
of 2000. The rapid reduction of interest rates during the second quarter of 2001
should improve net interest income for the remainder of the year as
adjustable-rate CMO collateral, which is restricted to periodic cap limitations,
will reprice downwards more slowly than adjustable-rate CMO borrowings, which is
generally indexed to one-month LIBOR.
Interest income on mortgage loans held-for-investment increased 671% to
$3.1 million during the second quarter of 2001 as compared to $402,000 during
the second quarter of 2000 as average mortgage loans held-for-investment
increased 894% to $177.2 million as compared to $17.9 million, respectively. The
Long-Term Investment Operations
20
acquired $373.4 million of mortgages during the second quarter of 2001 as
compared to $116.5 million of mortgages during the second quarter of 2000. The
weighted average yield on mortgage loans held-for-investment decreased to 7.02%
during the second quarter of 2001 as compared to 8.99% during the second quarter
of 2000 as mortgage interest rates declined during the first half of 2001.
Interest income on total finance receivables decreased 13% to $8.6 million
during the second quarter of 2001 as compared to $9.9 million during the second
quarter of 2000 as average total finance receivables increased 15% to $454.5
million as compared to $395.9 million, respectively. The weighted average yield
on total finance receivables decreased to 7.59% during the second quarter of
2001 as compared to 10.01% during the second quarter of 2000. The decrease in
yield was primarily due to a reduction in Bank of America's prime rate
("Prime"), which is the index used to determine interest rates on finance
receivables, and a 0.50% decrease in the spread indexed to Prime on warehouse
lines made available to affiliates.
Interest income on finance receivables to affiliates decreased 37% to $4.1
million during the second quarter of 2001 as compared to $6.5 million during the
second quarter of 2000 as average finance receivables to affiliated companies
decreased 13% to $232.5 million as compared to $266.9 million, respectively. The
decrease in average affiliate finance receivables was primarily due to
accelerated securitizations by the Mortgage Operations during 2001 as compared
to 2000 and the corresponding shorter accumulation and holding period of loans
held-for-sale. The weighted average yield on affiliated finance receivables
decreased to 7.12% during the second quarter of 2001 as compared to 9.80% during
the second quarter of 2000 primarily due to a decrease in Prime and a 0.50%
decrease in the spread indexed to Prime on warehouse lines with IWLG.
Interest income on finance receivables to non-affiliated mortgage banking
companies increased 32% to $4.5 million during the second quarter of 2001 as
compared to $3.4 million during the second quarter of 2000 as average finance
receivables outstanding to non-affiliated mortgage banking companies increased
72% to $222.0 million as compared to $129.0 million, respectively. Average
finance receivables to non-affiliates increased during the second quarter of
2001 as compared to the second quarter of 2000 primarily due to increased usage
of short-term warehouse lines of credit and the addition of new customers. The
weighted average yield on non-affiliated finance receivables decreased to 8.08%
during the second quarter of 2001 as compared to 10.44% during the second
quarter of 2000 primarily due to the aforementioned decrease in Prime.
Interest income on investment securities decreased 38% to $992,000 during
the second quarter of 2001 as compared to $1.6 million during the second quarter
of 2000 as average investment securities decreased 53% to $32.7 million as
compared to $69.7 million, respectively. Average investment securities decreased
as the Company wrote-off $52.6 million of investment securities during the first
half of 2000. The weighted average yield on investment securities increased to
12.15% during the second quarter of 2001 as compared to 9.08% during the second
quarter of 2000 as non-performing investment securities were written-off during
the first half of 2000.
Interest Expense on Mortgage Assets
Interest expense on CMO borrowings decreased 17% to $17.2 million during
the second quarter of 2001 as compared to $20.6 million during the second
quarter of 2000 as average borrowings on CMO collateral increased 9% to $1.2
billion as compared to $1.1 billion, respectively. The decrease in interest
expense on CMO borrowings was primarily attributable to the reduction in
short-term interest rates by the Federal Reserve Bank during the first half of
2001. As a result, one-month LIBOR, which is the index used to re-price the
Company's adjustable-rate CMO borrowings, decreased to an average of 4.27%
during the second quarter of 2001 as compared to 6.47% during the second quarter
of 2000. Short-term interest rate reductions caused CMO borrowing costs to
decrease 168 basis points to 5.53% during the second quarter of 2001 as compared
to 7.21% during the second quarter of 2000.
Interest expense on reverse repurchase agreements used to fund the
acquisition of mortgage loans and finance receivables increased 19% to $8.9
million during the second quarter of 2001 as compared to $7.5 million during the
second quarter of 2000 as average reverse repurchase agreements increased 51% to
$595.4 million as compared to $393.4 million, respectively. The increase in
interest expense on reverse repurchase agreements was primarily the result of an
increase in average non-affiliate finance receivables as IWLG added customers
during the first half of 2001. The weighted average yield on reverse repurchase
agreements decreased to 6.00% during the second quarter of 2001 as compared
7.61% during the second quarter of 2000 as a result of short-term interest rate
reductions.
21
The Company also uses mortgage-backed securities as collateral to borrow
and fund the purchase of mortgage assets and to act as an additional source of
liquidity for the Company's operations. Interest expense on borrowings secured
by investment securities decreased 18% to $660,000 during the second quarter of
2001 as compared to $807,000 during the second quarter of 2000 as the average
balance on these borrowings decreased 34% to $18.2 million as compared to $27.5
million, respectively. The weighted average yield of these borrowings increased
to 14.51% during the second quarter of 2001 as compared 11.72% during the second
quarter of 2000 primarily as the Company re-securitized a portion of its
investment securities portfolio with long-term financing at a higher interest
rate, as opposed to short-term reverse repurchase financing which are subject to
margin calls. The Company did not have short-term reverse repurchase financing
collateralized by investment securities outstanding at June 30, 2001.
Provision for Loan Losses
The Company's total allowance for loan losses expressed as a percentage of
Gross Loan Receivables, which includes loans held-for-investment, CMO collateral
and finance receivables, increased to 0.38% at June 30, 2001 as compared to
0.28% at December 31, 2000. During the second quarter of 2001, the Company added
provision for loan losses of $3.9 million as compared to $3.3 million during the
second quarter of 2000, which increased the allowance for loan losses by 53% to
$7.8 million as of June 30, 2001 as compared to $5.1 million as of December 31,
2000. The Company recorded net charge-offs of $2.4 million during the second
quarter of 2001 as the Company continued to liquidate its non-performing
collateral that remained from previously collapsed CMO collateral.
Total non-performing loans, including 90 days past due, foreclosures and
other real estate owned increased to 2.58% of total assets at June 30, 2001 as
compared to 2.30% of total assets at December 31, 2000. The loan delinquency
rate of mortgages in the long-term investment portfolio which were 60 or more
days past due, inclusive of foreclosures and delinquent bankruptcies, decreased
to 4.38% at June 30, 2001 as compared to 5.11% at December 31, 2000. The unpaid
principal balance of mortgage loans in the long-term investment portfolio at
June 30, 2001 was $1.5 billion as compared to $1.3 billion at December 31, 2000.
Non-Interest Income
Non-interest income includes equity in net earnings (loss) of IFC and other
non-interest income, primarily loan servicing fees and fees associated with the
Company's Warehouse Lending Operations. During the second quarter of 2001,
non-interest income was $4.8 million as compared to $(1.0) million during the
second quarter of 2000. The increase in non-interest income was primarily due to
an increase of $5.0 million in equity in net earnings (loss) of IFC to $3.5
million during the second quarter of 2001 from $(1.5) million during the second
quarter of 2000. IFC's net earnings increased primarily as a result of an
increase of $8.7 million in gain on sale of loans. The Company records 99% of
the earnings or losses from IFC as the Company owns 100% of IFC's preferred
stock, which represents 99% of the economic interest in IFC. Refer to "Results
of Operations--Impac Funding Corporation" for additional information. In
addition, during the second quarter of 2001 loan servicing fees and other income
increased $821,000 to $1.3 million from $440,000 during the second quarter of
2000 as activity fees on non-affiliate warehouse lines rose as a result of
increased line usage and the addition of new customers.
Non-Interest Expense
During the second quarter of 2001, non-interest expense decreased to $1.6
million as compared to $31.3 million during the second quarter of 2000.
Excluding write-down on investment securities and mark-to-market loss as a
result of SFAS 133, non-interest expense decreased to $1.1 million during the
second quarter of 2001 as compared to $1.9 million during the second quarter of
2000. This decrease was primarily the result of a $1.2 million decrease in
disposition of other real estate owned to $(327,000) during the second quarter
of 2001 as compared to $880,000 during the second quarter of 2000.
Effect of SFAS 133
During the second quarter of 2001, the Company recognized a current loss to
earnings of $581,000 as a fair market valuation of the Company's derivative
instruments outstanding at June 30, 2001 in accordance with SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." As part of the
Company's secondary marketing activities, it purchases derivative instruments as
a hedge against adverse changes in interest rates and the corresponding adverse
effect on net interest margins. The primary effect of SFAS 133 on the Company's
financial
22
position is to change the prior accounting treatment, which amortized the cost
of derivative instruments over its life, to recording only the change in the
fair market value of the derivative instruments as an adjustment to current
earnings.
During the second quarter of 2001, the effect of the fair market valuation
loss was $581,000, compared to a $1.2 million of amortization of interest rate
cap costs, which prior to SFAS 133 would have been recorded as interest expense.
Since the implementation of SFAS 133, net interest margins will not reflect the
amortization of interest rate cap costs. The Company does not intend to change
its interest rate hedge policy. Net earnings in the future may experience some
level of volatility from quarter to quarter due to the timing and expense
recognition of hedge activity by the Company as a result of implementation of
SFAS 133.
RESULTS OF OPERATIONS-- IMPAC FUNDING CORPORATION
For the Three Months Ended June 30, 2001 as compared to the Three Months
Ended June 30, 2000
Results of Operations
Net earnings increased to $3.5 million during the second quarter of 2001 as
compared to net loss of $(1.5) million for the second quarter of 2000 primarily
as a result of an $8.7 million increase in gain on sale of loans. See
"Non-Interest Income" for additional information.
Loan acquisitions and originations by IFC the Mortgage Operations increased
82% to $776.0 million as compared to $427.3 million during the second quarter of
2000. Loan production during the second quarter of 2001 was driven by lower
interest rates and IDASL, the Company's web-based automated underwriting system
which has enhanced the origination process. IDASL stands for Impac Direct Access
System for Lending. During the second quarter of 2001, average monthly volume of
loans submitted through IDASL increased by 9% to $783.0 million in loan
submissions as compared to $719.2 million per month in loan submissions during
the prior quarter and $555.5 million per month during the fourth quarter of
2000. IDASL usage will in all likelihood not show dramatic increases in the near
future due to the complete rollout of IDASL to all our customers and with 100%
of current production being processed through IDASL.
Net Interest Income
Net interest income increased to $479,000 during the second quarter of 2001
as compared to $93,000 during the second quarter of 2000. The increase in net
interest income was the result of a decrease in the interest rate spread over
Prime, which was reduced from Prime to Prime minus 0.50% during the second
quarter of 2001, and the rapid decrease of short-term interest rates. Average
Prime decreased to 7.34% during the second quarter of 2001 as compared to 9.25%
during the second quarter of 2000.
Non-Interest Income
During the second quarter of 2001, non-interest income increased to $13.7
million as compared to $5.5 million during the second quarter of 2000. The
increase was primarily due to an $8.7 million increase in gain on sale of loans.
During the second quarter of 2001, IFC sold whole loans or securitized $418.7
million of mortgages contributing to a gain on sale of $12.9 million as compared
to $462.0 million and $4.1 million, respectively, during the second quarter of
2000. Gain on sale of loans increased as profit margins on securitizations
improved significantly as compared to securitizations completed during the
second quarter of 2000. IFC sold loans on a servicing released basis during the
second quarter of 2001 and anticipates that it will continue to sell related
loan servicing rights from the securitization of its loans. IFC will continue to
act as master servicer on all its securitizations. IFC completed two REMICs
during the second quarter of 2001 and anticipates completing two REMICs per
quarter for the remainder of the year. By securitizing loans more frequently,
IFC expects that less capital will be required, higher liquidity will be
maintained and less interest rate and price volatility during the mortgage loan
accumulation period will be achieved.
Non-Interest Expense
During the second quarter of 2001, non-interest expense decreased to $8.0
million as compared to $8.2 million during the second quarter of 2000. Excluding
write-down on investment securities recorded during the second quarter of 2000,
non-interest expense increased 19% to $8.0 million during the second quarter of
2001 as compared to $6.7 million during the second quarter of 2000. Personnel
expense accounted for the primary increase in non-interest
23
expense during the second quarter of 2001 as it increased 52% to $3.5 million as
compared to $2.3 million during the second quarter of 2000 as staffing rose to
232 employees at June 30, 2001 as compared to 183 employees at June 30, 2000.
Due to increased utilization of IDASL since the second quarter of 2000,
personnel expense rose at a much slower rate than the increase in loan
acquisitions and originations, which increased 82% during the second quarter of
2001 as compared to the second quarter of 2000.
Effect of SFAS 133
As part of IFC's secondary marketing activities, IFC utilizes options and
futures contracts to hedge the value of its mortgage pipeline against adverse
changes in interest rates. IFC did not experience any material impact during the
quarter related to the adoption of SFAS 133 in its mortgage pipeline hedging
activities. IFC does not hedge mortgage servicing rights, however, valuation
changes in mortgage servicing rights continue to be recorded against current
earnings. Net earnings in the future will experience some level of volatility
from quarter to quarter due to the timing and expense recognition of hedge
activity by IFC as a result of implementation of SFAS 133.
RESULTS OF OPERATIONS--IMPAC MORTGAGE HOLDINGS, INC.
For the Six Months Ended June 30, 2001 as compared to the Six Months Ended June
30, 2000
Results of Operations
Net earnings increased to $9.9 million, or $0.37 per diluted common share,
for the first six months of 2001 as compared to a net loss of $(61.2) million,
or $(2.93) per diluted common share, for the same period of 2000. Net earnings
increased during the first six months of 2001 as the Company recorded accounting
charges of $68.9 million during the first six months of 2000. Of the $68.9
million accounting charges the Company recognized during the first six months of
2000, $52.6 million was related to write-downs on investment securities and
$14.5 million was provided for additional increases in the Company's allowance
for loan losses related to its HLTV second trust deed portfolio.
Core operating earnings were $16.6 million, or $0.62 per diluted common
share, for the first six months of 2001 as compared to core operating earnings
of $7.7 million, or $0.28 per diluted common share, for the same period of 2000.
Core operating earnings during the first six months of 2001 excludes the current
effect of a $1.4 million mark-to-market loss as a result of SFAS 133, a $4.3
million cumulative effect of change in accounting principle as a result of SFAS
133, and a $1.0 million write-down of discounts and prepaid securitization costs
related to the retirement of senior subordinated debt. Core operating earnings
during the first six months of 2000 excludes accounting charges of $68.9
million. Core operating earnings increased 116% during the first six months of
2001 as compared to the same period of 2000 as a result of a $7.6 million
increase in net interest income and a $5.9 million increase in equity in net
earnings of IFC. See "Net Interest Income" and "Non-Interest Income" for
additional information.
Net Interest Income
Net interest income increased 64% to $19.4 million during the first six
months of 2001 as compared to $11.8 million during the same period of 2000. Net
interest income increased as a result of decreased borrowing costs and wider net
interest margins as interest rates on adjustable CMO borrowings continued to
decline due to short-term interest rate reductions by the Federal Reserve Bank.
However, in anticipation of the likelihood that short-term interest rates may
rise sometime in the future, the Company purchased interest rate sensitive
financial instruments during the second quarter of 2001 to mitigate possible
adverse changes in net interest margins.
During the first six months of 2001, net interest income increased as net
interest margins on Mortgage Assets increased to 1.95% as compared to 1.32%
during the same period of 2000. Net interest margins on Mortgage Assets
increased during the first six months of 2001 primarily as a result of average
CMO borrowing costs decreasing 101 basis points to 6.07% during the first six
months of 2001 as compared to 7.08% during the same period of 2000. Borrowing
costs on CMO financing continues to trend lower as interest rate reductions by
the Federal Reserve Bank during the first half of 2001 improved net interest
margins and should improve net interest margins for the remainder of the year.
Because a significant portion of CMO collateral includes prepayment penalties,
the effect of early prepayments on net interest income due to refinance activity
will be partially mitigated.
24
Net interest income also increased as average Mortgage Assets increased 12%
to $1.9 billion during the first six months of 2001 as compared to $1.7 billion
during the first six months of 2000. The increase in Mortgage Assets was
primarily the result of a $163.4 million increase in average CMO collateral and
mortgage loans held-for investment. CMO collateral and mortgage loans held-for
investment increased during the first six months of 2001 as the Company acquired
$555.5 million of primarily ARMs from the Mortgage Operations as compared to
$116.5 million during the same period of 2000.
The following table summarizes average balance, interest and weighted
average yield on Mortgage Assets and borrowings on Mortgage Assets for the first
six months of 2001 and 2000 and includes interest income on Mortgage Assets and
interest expense related to borrowings on Mortgage Assets only (dollars in
thousands):
For the Six Months For the Six Months
Ended June 30, 2001 Ended June 30, 2000
------------------------------------------ -----------------------------------------
Average Wtd Avg Average Wtd Avg
Balance Interest Yield Balance Interest Yield
------------------------------------------ -----------------------------------------
MORTGAGE ASSETS
Investment securities:
Securities collateralized by mortgages $ 34,531 $ 2,318 13.43 % $ 75,942 $ 4,390 11.56 %
Securities collateralized by other loans -- -- -- 5,665 273 9.64
------------------------ ------------------------
Total investment securities 34,531 2,318 13.43 81,607 4,663 11.43
------------------------ ------------------------
Loan receivables:
CMO collateral of $117.9 million, which was partially offset by a $50.7 million in increase1,322,677 50,321 7.61 1,224,099 42,307 6.91
Mortgage loans held-for-investment 133,730 4,586 6.86 68,879 2,737 7.95
Finance receivables:
Affiliated 267,523 10,783 8.06 237,818 11,716 9.85
Non-affiliated 183,124 7,794 8.51 119,272 6,208 10.41
------------------------ ------------------------
Total finance receivables.Financing Activities — During the first three months of 2001, net cash provided by financing activities was $99.8 million. Cash provided by financing activities was primarily the result of an increase in reversereceivables 450,647 18,577 8.24 357,090 17,924 10.04
------------------------ ------------------------
Total Loan receivables 1,907,054 73,484 7.71 1,650,068 62,968 7.63
------------------------ ------------------------
Total Mortgage Assets $1,941,585 $75,802 7.81 % $1,731,675 $67,631 7.81 %
======================== ========================
Total Mortgage Assets
BORROWINGS
CMO borrowings $1,244,621 $37,767 6.07 % $1,121,569 $39,709 7.08 %
Reverse repurchase agreements and other borrowings of $214.6 million, which was partially offset- mortgages 549,945 17,797 6.47 404,615 14,842 7.34
Borrowings secured by repayment of CMO borrowings of $114.1 million.
Inflation
The Financial Statements and Notes thereto presented herein have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased costs of the Company’s operations. Unlike industrial companies, nearly all of the assets and liabilities of the Company’s operations are monetary in nature. As a result, interest rates have a greater impactinvestment securities 19,253 1,337 13.89 28,910 1,692 11.71
------------------------ ------------------------
Total Borrowings on the Company’s operations’ performance than do the effects of general levels of inflation. Inflation affects the Company’s operations primarily through its effect on interest rates, since interest rates normally increase during periods of high inflation and decrease during periods of low inflation. During periods of increasing interest rates, demand for mortgage loans and a borrower’s ability to qualify for mortgage financing in a purchase transaction may be adversely affected. During periods of decreasing interest rates, borrowers may prepay their mortgages, which in turn may adversely affect the Company’s yield and subsequently the value of its portfolio of Mortgage Assets.
21
(1) Net interest spread is calculated by subtracting the weighted average
yield on total borrowings on Mortgage Assets from the weighted average
yield on total Mortgage Assets.
(2) Net interest margin is calculated by subtracting interest expense on
total borrowings on Mortgage Assets from interest income on total Mortgage
Assets and then dividing by the total average balance for Mortgage Assets.
Interest Income on Mortgage Assets
Interest income on CMO collateral increased 19% to $50.3 million during the
first six months of 2001 as compared to $42.3 million during the first six
months of 2000 as average CMO collateral increased 8% to $1.3 billion as
compared to $1.2 billion, respectively. Interest income on CMO collateral
increased primarily as the Company issued a CMO for $358.0 million during May of
2001. During the first six months of 2001, CPR on CMO collateral increased to
35% as compared to 26% during the first six months of 2000. Although interest
rates continued to decrease during the first six months of 2001, an increase in
loans acquired from IFC with prepayment penalties should partially mitigate
increased CPR and corresponding premium amortizations. The weighted average
yield on CMO collateral increased to 7.61% during the first six months of 2001
as compared to 6.91% during the first six months of 2000. The rapid reduction of
interest rates during the first six months of 2001 should improve net interest
income for
25
the remainder of the year as adjustable-rate CMO collateral, which is restricted
to periodic cap limitations, will re-price downwards more slowly than
adjustable-rate CMO borrowings, which is generally indexed to six-month LIBOR.
Interest income on mortgage loans held-for-investment increased 70% to $4.6
million during the first six months of 2001 as compared to $2.7 million during
the first six months of 2000 as average mortgage loans held-for-investment
increased 94% to $133.7 million as compared to $68.9 million, respectively. The
Long-Term Investment Operations acquired $555.5 million of mortgages during the
first six months of 2001 as compared to $156.9 million of mortgages during the
first six months of 2000. The weighted average yield on mortgage loans
held-for-investment decreased to 6.86% during the first six months of 2001 as
compared to 7.95% during the first six months of 2000 as mortgage interest rates
declined during the first half of 2001.
Interest income on total finance receivables increased 4% to $18.6 million
during the first six months of 2001 as compared to $17.9 million during the
first six months of 2000 as average total finance receivables increased 26% to
$450.6 million as compared to $357.1 million, respectively. The weighted average
yield on total finance receivables decreased to 8.24% during the first six
months of 2001 as compared to 10.04% during the first six months of 2000. The
decrease in yield was primarily due to a reduction in Prime and a 0.50% decrease
in the spread indexed to Prime on warehouse lines made available to affiliates.
Interest income on finance receivables to affiliates decreased 8% to $10.8
million during the first six months of 2001 as compared to $11.7 million during
the first six months of 2000 as average finance receivables to affiliated
companies increased 12% to $267.5 million as compared to $237.8 million,
respectively. The increase in average affiliate finance receivables was
primarily due to higher mortgage acquisitions during the first six months of
2001. The weighted average yield on affiliated finance receivables decreased to
8.06% during the first six months of 2001 as compared to 9.85% during the first
six months of 2000 primarily due to a decrease in Prime and a 0.50% decrease in
the spread indexed to Prime on warehouse lines with IWLG.
Interest income on finance receivables to non-affiliated mortgage banking
companies increased 26% to $7.8 million during the first six months of 2001 as
compared to $6.2 million during the first six months of 2000 as average finance
receivables outstanding to non-affiliated mortgage banking companies increased
54% to $183.1 million as compared to $119.3 million, respectively. Average
finance receivables to non-affiliates increased during the first six months of
2001 as compared to the first six months of 2000 primarily due to increased
usage of short-term warehouse lines of credit and the addition of new customers.
The weighted average yield on non-affiliated finance receivables decreased to
8.51% during the first six months of 2001 as compared to 10.41% during the first
six months of 2000 primarily due to the aforementioned decrease in Prime.
Interest income on investment securities decreased 51% to $2.3 million
during the first six months of 2001 as compared to $4.7 million during the first
six months of 2000 as average investment securities decreased 58% to $34.5
million as compared to $81.6 million, respectively. Average investment
securities decreased as the Company wrote-off $52.6 million of investment
securities during the first half of 2000. The weighted average yield on
investment securities increased to 13.43% during the first six months of 2001 as
compared to 11.43% during the first six months of 2000 as non-performing
investment securities were written-off during the first half of 2000.
Interest Expense on Mortgage Assets
Interest expense on CMO borrowings decreased 5% to $37.8 million during the
first six months of 2001 as compared to $39.7 million during the first six
months of 2000 as average borrowings on CMO collateral increased 9% to $1.2
billion as compared to $1.1 billion, respectively. The decrease in interest
expense on CMO borrowings was primarily attributable to the reduction in
short-term interest rates by the Federal Reserve Bank during the first half of
2001. As a result, one-month LIBOR, which is the index used to re-price the
Company's adjustable-rate CMO borrowings, decreased to an average of 4.91%
during the first six months of 2001 as compared to 6.97% during the first six
months of 2000. Short-term interest rate reductions caused CMO borrowing costs
to decrease 101 basis points to 6.07% during the first six months of 2001 as
compared to 7.08% during the first six months of 2000.
Interest expense on reverse repurchase agreements increased 20% to $17.8
million during the first six months of 2001 as compared to $14.8 million during
the first six months of 2000 as average reverse repurchase agreements increased
36% to $549.9 million as compared to $404.6 million, respectively. The increase
in interest expense on reverse repurchase agreements was primarily the result of
an increase in average non-affiliate finance receivables as
26
IWLG added customers during the first half of 2001. The weighted average yield
on reverse repurchase agreements decreased to 6.47% during the first six months
of 2001 as compared 7.34% during the first six months of 2000 as a result of
short-term interest rate reductions.
Interest expense on borrowings secured by investment securities decreased
24% to $1.3 million during the first six months of 2001 as compared to $1.7
million during the first six months of 2000 as the average balance on these
borrowings decreased 33% to $19.3 million as compared to $28.9 million,
respectively. The weighted average yield of these borrowings increased to 13.89%
during the first six months of 2001 as compared 11.71% during the first six
months of 2000 primarily as the Company re-securitized a portion of its
investment securities portfolio with long-term financing at a higher interest
rate, as opposed to short-term reverse repurchase financing which are subject to
margin calls. The Company did not have short-term reverse repurchase financing
collateralized by investment securities outstanding at June 30, 2001.
Provision for Loan Losses
During the first six months of 2001, the Company added provision for loan
losses of $7.9 million as compared to $16.5 million during the first six months
of 2000 as the Company added $14.5 million during the first six months of 2000
to provide for higher than expected delinquencies and losses in the HLTV
portfolio. Excluding additional loan loss provisions for the HLTV portfolio,
provision for loan losses increased to $7.9 million during the first six months
of 2001 as compared to $2.0 million during the same period of 2000. The Company
recorded net charge-offs of $5.2 million during the first six months as compared
to $7.7 million during the same period of 2000. The Company continued to
liquidate its non-performing collateral that remained from previously collapsed
CMO collateral during the first six months of 2001.
Non-Interest Income
Non-interest income includes equity in net earnings (loss) of IFC and other
non-interest income, primarily loan servicing fees and fees associated with the
Company's Warehouse Lending Operations. During the first six months of 2001,
non-interest income was $6.9 million as compared to $312,000 during the first
six months of 2000. The increase in non-interest income was primarily due to an
increase of $5.9 million in equity in net earnings (loss) of IFC to $4.8 million
during the first six months of 2001 from $(1.1) million during the first six
months of 2000. IFC's net earnings increased primarily as a result of an
increase of $11.1 million in gain on sale of loans. The Company records 99% of
the earnings or losses from IFC as the Company owns 100% of IFC's preferred
stock, which represents 99% of the economic interest in IFC. Refer to "Results
of Operations--Impac Funding Corporation" for additional information.
Non-Interest Expense
During the first six months of 2001, non-interest expense decreased to $3.2
million as compared to $56.8 million during the first six months of 2000.
Excluding write-down on investment securities and mark-to-market loss as a
result of SFAS 133, non-interest expense decreased to $1.6 million during the
first six months of 2001 as compared to $3.4 million during the first six months
of 2000. This decrease was primarily the result of a $2.3 million decrease in
disposition of other real estate owned to $(965,000) during the first six months
of 2001 as compared to $1.3 million during the first six months of 2000.
Effect of SFAS 133
During the first six months of 2001, the Company recognized a current loss
to earnings of $1.4 million as a fair market valuation of the Company's
derivative instruments outstanding at June 30, 2001 in accordance with SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." As part of the
Company's secondary marketing activities, it purchases derivative instruments as
a hedge against adverse changes in interest rates and the corresponding adverse
effect on net interest margins. The primary effect of SFAS 133 on the Company's
financial position is to change the prior accounting treatment, which amortized
the cost of derivative instruments over its life, to recording only the change
in the fair market value of the derivative instruments as an adjustment to
current earnings.
During the first six months of 2001, the effect of the fair market
valuation loss was $1.4 million, compared to a $1.2 million of amortization of
interest rate cap costs, which prior to SFAS 133 would have been recorded as
interest expense. Since the implementation of SFAS 133, net interest margins
will not reflect the amortization of interest rate cap costs. The Company does
not intend to change its interest rate hedge policy. Net earnings in the future
may
27
experience some level of volatility from quarter to quarter due to the timing
and expense recognition of hedge activity by the Company as a result of
implementation of SFAS 133.
RESULTS OF OPERATIONS-- IMPAC FUNDING CORPORATION
For the Six Months Ended June 30, 2001 as compared to the Six Months Ended
June 30, 2000
Results of Operations
Net earnings increased to $4.8 million during the first six months of 2001
as compared to net loss of $(1.1) million for the first six months of 2000
primarily as a result of an $11.1 million increase in gain on sale of loans. See
"Non-Interest Income" for additional information.
Loan acquisitions by the Mortgage Operations set new records during the
first six months of 2001. During the first six months of 2001, loan acquisitions
and originations increased 56% to $1.4 billion as compared to $886.0 million
during the first six months of 2000. Loan production during the first six months
of 2001 was driven by lower interest rates and IDASL, the Company's web-based
automated underwriting system which has substantially enhanced the origination
process. During the first six months of 2001, average monthly volume of loans
submitted through IDASL increased by 48% to $652.8 million in loan submissions
as compared to $442.4 million per month in loan submissions during the prior six
months.
Net Interest Income
Net interest income increased to $773,000 during the first six months of
2001 as compared to $(622,000) during the first six months of 2000. The increase
in net interest income was the result of a decrease in the interest rate spread
over Prime, which was reduced from Prime to Prime minus 0.50% during the first
six months of 2001, and the rapid decrease of short-term interest rates. Average
Prime decreased to 7.99% during the first six months of 2001 as compared to
8.96% during the first six months of 2000.
Non-Interest Income
During the first six months of 2001, non-interest income increased to $22.4
million as compared to $12.3 million during the first six months of 2000. The
increase was primarily due to an $11.1 million increase in gain on sale of
loans. During the first six months of 2001, IFC sold whole loans or securitized
$880.6 million of mortgages contributing to a gain on sale of $20.5 million as
compared to $621.6 million and $9.4 million, respectively, during the first six
months of 2000. In addition to selling more loans during the first six months of
2001, gain on sale of loans increased as profit margins on securitizations
improved significantly as compared to securitizations completed during the first
six months of 2000.
Non-Interest Expense
During the first six months of 2001, non-interest expense increased to
$14.7 million as compared to $13.6 million during the first six months of 2000.
Excluding write-down on investment securities recorded during the first six
months of 2000, non-interest expense increased 23% to $14.7 million during the
first six months of 2001 as compared to $12.0 million during the first six
months of 2000. Personnel expense accounted for the primary increase in
non-interest expense during the first six months of 2001 as it increased 43% to
$6.6 million as compared to $4.6 million during the first six months of 2000 as
staffing rose to 232 employees at June 30, 2001 as compared to 183 employees at
June 30, 2000. Due to increased utilization of IDASL since the first six months
of 2000, personnel expense rose at a much slower rate than the increase in loan
acquisitions and originations, which increased 56% during the first six months
of 2001 as compared to the first six months of 2000.
Effect of SFAS 133
As part of IFC's secondary marketing activities, IFC utilizes options and
futures contracts to hedge the value of its mortgage pipeline against adverse
changes in interest rates. IFC did not experience any material impact during the
quarter related to the adoption of SFAS 133 in its mortgage pipeline hedging
activities. IFC does not hedge mortgage servicing rights, however, valuation
changes in mortgage servicing rights continue to be recorded against current
28
earnings. Net earnings in the future will experience some level of volatility
from quarter to quarter due to the timing and expense recognition of hedge
activity by IFC as a result of implementation of SFAS 133.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Historically, the Company's business operations are primarily funded from
monthly interest and principal payments from its mortgage loan and investment
securities portfolios, adjustable- and fixed-rate CMO financing, reverse
repurchase agreements secured by mortgage loans, borrowings secured by
mortgage-backed securities, proceeds from the sale of mortgage loans and the
issuance of REMICs and proceeds from the issuance of Common Stock through
secondary stock offerings, Dividend Reinvestment and Stock Purchase Plan
("DRSPP"), and its structured equity shelf program ("SES Program"). The
acquisition of mortgage loans and mortgage-backed securities by the Long-Term
Investment Operations are primarily funded from monthly principal and interest
payments, reverse repurchase agreements, CMO financing, and proceeds from the
sale of Common Stock. The issuance of CMO financing provides the Long-Term
Investment Operations with immediate liquidity, a relatively stable interest
rate spread and eliminates the Company's exposure to margin calls on such loans.
Presently, the Company has suspended both the DRSPP and SES Program and has
issued no new shares of Common Stock through these programs or through secondary
stock offerings during the first six months of 2001. The acquisition of mortgage
loans by the Mortgage Operations are funded from reverse repurchase agreements,
the sale of mortgage loans and mortgage-backed securities and the issuance of
REMICs. Short-term warehouse financing, finance receivables, provided by the
Warehouse Lending Operations are primarily funded from reverse repurchase
agreements.
The Company's ability to meet its long-term liquidity requirements is
subject to the renewal of its credit and repurchase facilities and/or obtaining
other sources of financing, including additional debt or equity from time to
time. Any decision by the Company's lenders and/or investors to make additional
funds available to the Company in the future will depend upon a number of
factors, such as the Company's compliance with the terms of its existing credit
arrangements, the Company's financial performance, industry and market trends in
the Company's various businesses, the general availability of and rates
applicable to financing and investments, such lenders' and/or investors' own
resources and policies concerning loans and investments, and the relative
attractiveness of alternative investment or lending opportunities. The Company
believes that current liquidity levels, available financing facilities and
additional liquidity provided by operating activities will adequately provide
for the Company's projected funding needs, asset growth and the payment of
dividends for the near term. The Company is continuously exploring alternatives
for increasing liquidity and monitors current and future cash requirements
through its asset/liability committee ("ALCO"). However, no assurances can be
given that such alternatives will be available, or if available, under
comparable rates and terms as currently exist.
Long-Term Investment Operations
Primary Source of Funds
The Long-Term Investment Operations uses CMO borrowings to finance
substantially its entire mortgage loan portfolio. Terms of the CMO borrowings
require that an independent first party custodian hold the mortgages. The
maturity of each class is directly affected by the rate of principal prepayments
on the related collateral. Equity in the CMOs is established at the time the
CMOs are issued at levels sufficient to achieve desired credit ratings on the
securities from rating agencies. The amount of equity invested in CMOs by the
Long-Term Investment Operations is also determined by the Company based upon the
anticipated return on equity as compared to the estimated proceeds from
additional debt issuance. Total credit loss exposure is limited to the equity
invested in the CMOs at any point in time. For the first six months of 2001, the
Company issued one CMO for $357.8 million. At June 30, 2001, the Long-Term
Investment Operations had $1.36 billion of CMO borrowings used to finance $1.44
billion of CMO collateral.
The Long-Term Investment Operations may pledge mortgage-backed securities
as collateral to borrow funds under short-term reverse repurchase agreements.
The terms under these reverse repurchase agreements are generally for 30 days
with interest rates ranging from the one-month LIBOR plus a spread depending on
the type of collateral provided. As of June 30, 2001, the Long-Term Investment
Operations had no amounts outstanding under short-term reverse repurchase
agreements secured by investment securities.
29
Primary Use of Funds
During the first six months of 2001, the Long-Term Investment Operations
acquired $555.5 million in mortgage loans from IFC.
Warehouse Lending Operations
Primary Source of Funds
The Warehouse Lending Operations finances the acquisition of mortgage loans
by the Long-Term Investment Operations and Mortgage Operations primarily through
borrowings on reverse repurchase agreements with first party lenders. IWLG has
obtained reverse repurchase facilities from major investment banks to provide
financing as needed. Terms of the reverse repurchase agreements require that the
mortgages be held by an independent first party custodian giving the Warehouse
Lending Operations the ability to borrow against the collateral as a percentage
of the outstanding principal balance. The borrowing rates vary from 85 basis
points to 200 basis points over one-month LIBOR, depending on the type of
collateral provided. The advance rates on the reverse repurchase agreements are
based on the type of mortgage collateral used and generally range from 75% to
101% of the fair market value of the collateral. At June 30, 2001, the Warehouse
Lending Operations had $609.0 million outstanding on uncommitted reverse
repurchase agreements at a rate of one-month LIBOR plus 0.85% to 2.00%.
Primary Use of Funds
During the first six months of 2001, the Warehouse Lending Operations
increased outstanding finance receivables by $24.2 million.
Mortgage Operations
Primary Source of Funds
The Mortgage Operations has entered into reverse repurchase agreements to
obtain financing of up to $600.0 million from the Warehouse Lending Operations
to provide IFC mortgage loan financing during the period that IFC accumulates
mortgage loans and until the mortgage loans are securitized and sold. The
margins on the reverse repurchase agreements are based on the type of collateral
provided and generally range from 95% to 100% of the fair market value of the
collateral. Interest rates on the borrowings are indexed to Prime, which was
8.00% at June 30, 2001, minus 0.50%. At June 30, 2001, the Mortgage Operations
had $192.9 million outstanding under reverse repurchase agreements.
During the first six months of 2001, the Mortgage Operations sold $880.6
million in principal balance of primarily FRMs to first party investors. In
addition, IFC sold $546.9 million in principal balance of primarily ARMs to the
Long-Term Investment Operations during the first six months of 2001. By
securitizing and selling loans on a periodic and consistent basis, the reverse
repurchase agreements were sufficient to handle IFC's liquidity needs during the
six months ended June 30, 2001.
Primary Use of Funds
During the first six months of 2001, the Mortgage Operations acquired and
originated $1.4 billion of mortgage loans.
Cash Flows
Operating Activities - During the first six months of 2001, net cash
provided by operating activities was $11.1 million. Net cash was provided as the
Company recorded net earnings of $14.2 million during the first six months of
2001.
Investing Activities - During the first six months of 2001, net cash used
in investing activities was $274.3 million. Net cash used in investing
activities was primarily due to an increase of $265.4 million in CMO collateral
and mortgage loans held-for-investment as the Long-Term Investment Operations
purchased and retained mortgage loans from the Mortgage Operations. Cash was
also used to increase finance receivables by $24.8 million.
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Financing Activities - During the first six months of 2001, net cash
provided by financing activities was $267.8 million. Net cash provided by
financing activities was primarily the result of proceeds from the issuance of a
new CMO for $357.8 million and an increase in reverse repurchase agreements and
other borrowings of $206.2 million. Net cash provided was partially offset by
the repayment of CMO borrowings of $287.2 million.
Inflation
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which require the measurement of financial
position and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increased costs of the
Company's operations. Unlike industrial companies, nearly all of the assets and
liabilities of the Company's operations are monetary in nature. As a result,
interest rates have a greater impact on the Company's operations' performance
than do the effects of general levels of inflation. Inflation affects the
Company's operations primarily through its effect on interest rates, since
interest rates normally increase during periods of high inflation and decrease
during periods of low inflation. During periods of increasing interest rates,
demand for mortgage loans and a borrower's ability to qualify for mortgage
financing in a purchase transaction may be adversely affected. During periods of
decreasing interest rates, borrowers may prepay their mortgages, which in turn
may adversely affect the Company's yield and subsequently the value of its
portfolio of Mortgage Assets.
31
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Securitizations/Sales - Hedging Interest Rate Risk. The most significant
variable in the determination of gain on sale in a securitization is the spread
between the weighted average coupon on the securitized loans and the
pass-through interest rate. In the interim period between loan origination or
purchase and securitization or sale of such loans, the Company is exposed to
interest rate risk. Most of the loans are securitized or sold within 45 to 90
days of origination of purchase. However, a portion of the loans are
held-for-sale or securitization for as long as 12 months (or longer, in very
limited circumstances) prior to securitization or sale. If interest rates rise
during the period that the mortgage loans are held, in the case of a
securitization, the spread between the weighted average interest rate on the
loans to be securitized and the pass-through interest rates on the securities to
be sold (the latter having increased as a result of market rate movements) would
narrow. Upon securitization or sale, this would result in a reduction of the
Company's related gain or an increase in the Company's loss on sale.
Interest- and Principal-Only Strips. The Company had interest- and
principal-only strips of $6.6 million and $7.7 million outstanding at June 30,
2001 and December 31, 2000, respectively. These instruments are carried at
market value at June 30, 2001 and December 31, 2000. The Company values these
assets based on the present value of future cash flow streams net of expenses
using various assumptions.
These assets are subject to risk of accelerated mortgage prepayment or
losses in excess of assumptions used in valuation. Ultimate cash flows realized
from these assets would be reduced should prepayments or losses exceed
assumptions used in the valuation. Conversely, cash flows realized would be
greater should prepayments or losses be below expectations.
32
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On September 1, 2000, a complaint captioned Michael P. and Shellie Gilmor
v. Preferred Credit Corporation and Impac Funding Corporation, et. al. was filed
in the United States District Court for the Western District of Missouri, Case
#4-00-00795-SOW. In July 2001, the complaint was amended to include IMH and
other IMH related entities. The plaintiffs are alleging a class action lawsuit
whereby the defendants violated Missouri's Second Loans Act and Merchandising
Practices Act by marketing loans and charging certain origination fees or
finders' fees or mortgage broker or broker fees or closing fees and costs on
second mortgage loans on residential real estate, which caused a conversion from
the illegal charge of interest or closing costs or fees. The plaintiffs are also
alleging a defendant class action. IFC was a purchaser of second mortgage loans
originated by Preferred Credit Corporation which the plaintiffs contend are
included in this lawsuit. The plaintiffs are seeking damages that include a
permanent injunction enjoining the defendants, together with their officers,
directors, employees, agents, partners or representatives, successors and any
and all persons acting in concert from, directly or indirectly, engaging in the
wrongful acts described therein, disgorgement or restitution of all improperly
collected charges and the imposition of an equitable constructive trust over
such amounts for the benefit of the plaintiffs, the right to rescind the loan
transactions and a right to offset any finance charges, closing costs, points or
other loan fees paid against the principal amounts due on the loans, actual
damages, punitive damages, reasonable attorney's fees, pre- and post- judgment
interest and costs and expenses. Damages are unspecified. The Company believes
that it has meritorious defenses to such claims and intends to defend these
claims vigorously. Nevertheless, litigation is uncertain, and the Company may
not prevail in this suit.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K:
1. Form 8-K reporting Item 9 filed on June 1, 2001
2. Form 8-K reporting Item 9 filed on June 27, 2001
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IMPAC MORTGAGE HOLDINGS, INC.
By: /s/ Richard J. Johnson
Richard J. Johnson
Executive Vice President
and Chief Financial Officer
Date: August 14, 2001
34