================================================================================ UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X|
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2004 |
OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003 or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________.
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto. |
Commission File Number: 1-14100
IMPAC MORTGAGE HOLDINGS, INC.
(Exact
(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.)
Maryland | 33-0675505 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1401 Dove Street, Newport Beach, California 92660
(Address
(Address of principal executive offices)
(949) 475-3600
(Registrant's
(Registrant’s telephone number, including area code)
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 value New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Title of each class | Name of each exchange on which registered | |
Common Stock, $0.01 par value Preferred Share Purchase Rights | New York Stock Exchange New York 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|x No |_|
¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes |X|x No |_|
¨
As of October 31, 2003April 29, 2004 the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $791.7 million,$1.2 billion, based on the closing sales price of common stock on the New York Stock Exchange on that date. For purposes of the calculation, only in addition to affiliated companies, all
directors and executive officers of the registrant have been deemed affiliates.
There were 53,084,40562,670,695 shares of common stock outstanding as of October 31, 2003.
================================================================================
IMPAC MORTGAGE HOLDINGS, INC.
FORM 10-Q QUARTERLY REPORT
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of September 30, 2003 and
December 31, 2002 ......................................... 1
Consolidated Statements of Operations and Comprehensive
Earnings, For the Three and Nine Months Ended September 30,
2003 and 2002 ............................................. 2
Consolidated Statements of Cash Flows, For the Nine Months
Ended September 30, 2003 and 2002 ......................... 3
Notes to Consolidated Financial Statements ................... 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements ................................... 15
Financial Highlights for the Third Quarter of 2003 ........... 15
General and Business Operations .............................. 16
Available Information ........................................ 17
Critical Accounting Policies ................................. 17
Results of Operations--Impac Mortgage Holdings, Inc.--
For the Three Months Ended September 30, 2003 .......... 18
Results of Operations--Impac Mortgage Holdings, Inc. --
For the Nine Months Ended September 30, 2003 ........... 29
Liquidity and Capital Resources .............................. 34
Risk Factors ................................................. 38
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ...... 52
ITEM 4. CONTROLS AND PROCEDURES ......................................... 54
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ............................................... 54
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ....................... 54
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ................................. 55
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ............. 55
ITEM 5. OTHER INFORMATION ............................................... 55
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ................................ 55
SIGNATURES ...................................................... 56
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ITEM 1. | CONSOLIDATED FINANCIAL STATEMENTS |
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in
(dollars in thousands, except per share data)
(unaudited)
March 31, 2004 | December 31, 2003 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 193,638 | $ | 127,381 | ||||
CMO collateral | 11,252,373 | 8,735,434 | ||||||
Finance receivables | 526,396 | 630,030 | ||||||
Mortgages held-for-investment | 136,707 | 652,814 | ||||||
Allowance for loan losses | (46,299 | ) | (38,596 | ) | ||||
Mortgages held-for-sale | 611,068 | 395,090 | ||||||
Accrued interest receivable | 47,839 | 39,347 | ||||||
Derivative assets | 22,127 | 23,479 | ||||||
Other assets | 280,960 | 109,678 | ||||||
Total assets | $ | 13,024,809 | $ | 10,674,657 | ||||
LIABILITIES | ||||||||
CMO borrowings | $ | 11,183,583 | $ | 8,526,838 | ||||
Reverse repurchase agreements | 1,117,944 | 1,568,807 | ||||||
Accumulated dividends payable | 40,723 | — | ||||||
Other liabilities | 73,789 | 70,522 | ||||||
Total liabilities | 12,416,039 | 10,166,167 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock; $0.01 par value; 7,500,000 shares authorized; none issued and outstanding at outstanding as of March 31, 2004 and December 31, 2003, respectively | — | — | ||||||
Series A junior participating preferred stock, $0.01 par value; 2,500,000 shares authorized; none outstanding as of March 31, 2004 and December 31, 2003 | — | — | ||||||
Common stock, $0.01 par value; 200,000,000 shares authorized and 62,650,696 and 56,368,368 shares issued and outstanding as of March 31, 2004 and December 31, 2003, respectively | 627 | 564 | ||||||
Additional paid-in capital | 749,878 | 629,662 | ||||||
Accumulated other comprehensive loss | (33,670 | ) | (8,348 | ) | ||||
Net accumulated deficit: | ||||||||
Cumulative dividends declared | (347,754 | ) | (307,031 | ) | ||||
Retained earnings | 239,689 | 193,643 | ||||||
Net accumulated deficit | (108,065 | ) | (113,388 | ) | ||||
Total stockholders’ equity | 608,770 | 508,490 | ||||||
Total liabilities and stockholders’ equity | $ | 13,024,809 | $ | 10,674,657 | ||||
See accompanying notes to consolidated financial statements.
1
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS andAND COMPREHENSIVE EARNINGS
(in
(in thousands, except earnings per share data)
(unaudited)
For the Three Months Ended March 31, | |||||||
2004 | 2003 | ||||||
INTEREST INCOME: | |||||||
Mortgage Assets | $ | 115,833 | $ | 75,478 | |||
Other interest income | 440 | 681 | |||||
Total interest income | 116,273 | 76,159 | |||||
INTEREST EXPENSE: | |||||||
CMO borrowings | 54,060 | 41,684 | |||||
Reverse repurchase agreements | 9,554 | 6,790 | |||||
Other borrowings | 66 | 883 | |||||
Total interest expense | 63,680 | 49,357 | |||||
Net interest income | 52,593 | 26,802 | |||||
Provision for loan losses | 9,725 | 6,484 | |||||
Net interest income after provision for loan losses | 42,868 | 20,318 | |||||
NON-INTEREST INCOME: | |||||||
Gain on sale of loans | 31,138 | 1,616 | |||||
Equity in net earnings of Impac Funding Corporation | — | 5,167 | |||||
Other income | 315 | 1,027 | |||||
Total non-interest income | 31,453 | 7,810 | |||||
NON-INTEREST EXPENSE: | |||||||
Personnel expense | 13,668 | 692 | |||||
General and administrative expense | 3,173 | 435 | |||||
Professional services | 1,831 | 1,037 | |||||
Mark-to-market loss—derivative instruments | 1,280 | — | |||||
Amortization and impairment of mortgage servicing rights | 1,080 | — | |||||
Occupancy expense | 841 | 61 | |||||
Data processing expense | 805 | 189 | |||||
Equipment expense | 784 | 79 | |||||
Provision for repurchases | (1,183 | ) | — | ||||
(Gain) loss on disposition of other real estate owned | (503 | ) | 90 | ||||
Total non-interest expense | 21,776 | 2,583 | |||||
Net earnings before income taxes | 52,545 | 25,545 | |||||
Income taxes | 6,499 | — | |||||
Net earnings | $ | 46,046 | $ | 25,545 | |||
OTHER COMPREHENSIVE EARNINGS: | |||||||
Net unrealized gains on securities arising during period | 1,241 | — | |||||
Net unrealized holding (losses) gains on derivatives arising during period | (26,563 | ) | 3,589 | ||||
Reclassification of net losses included in net earnings | — | 522 | |||||
Net unrealized (losses) gains arising during period | (25,322 | ) | 4,111 | ||||
Other comprehensive earnings | $ | 20,724 | $ | 29,656 | |||
NET EARNINGS PER SHARE: | |||||||
Basic | $ | 0.77 | $ | 0.54 | |||
Diluted | $ | 0.76 | $ | 0.53 | |||
DIVIDENDS DECLARED PER COMMON SHARE | $ | 0.65 | $ | 0.50 | |||
See accompanying notes to consolidated financial statements.
2
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
(in thousands)
(unaudited)
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net earnings | $ | 46,046 | $ | 25,545 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
Equity in net earnings of Impac Funding Corporation | — | (5,167 | ) | |||||
Provision for loan losses | 9,725 | 6,484 | ||||||
Amortization of CMO premiums and deferred securitization costs | 24,055 | 14,299 | ||||||
(Gain) loss on sale of other real estate owned | (503 | ) | 90 | |||||
Gain on sale of loans | (31,138 | ) | (1,616 | ) | ||||
Purchase of mortgages held-for-sale | (3,469,082 | ) | — | |||||
Sale and principal reductions on mortgages held-for-sale | 3,283,978 | — | ||||||
Net change in deferred taxes | 1,030 | — | ||||||
Gain on sale of investment securities available-for-sale | (291 | ) | (122 | ) | ||||
Depreciation and amortization | 755 | — | ||||||
Amortization and impairment of mortgage servicing rights | 1,080 | — | ||||||
Net change in accrued interest receivable | (8,492 | ) | (1,168 | ) | ||||
Net change in other assets and liabilities | (166,962 | ) | (40,431 | ) | ||||
Net cash used in operating activities | (309,799 | ) | (2,086 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Net change in CMO collateral | (2,574,835 | ) | (1,117,985 | ) | ||||
Net change in finance receivables | 103,634 | 308,622 | ||||||
Purchase of premises and equipment | (839 | ) | — | |||||
Net change in mortgages held-for-investment | 513,841 | (17,355 | ) | |||||
Dividend from Impac Funding Corporation | — | 4,455 | ||||||
Net principal reductions on investment securities available-for-sale | 627 | 1,673 | ||||||
Proceeds from the sale of other real estate owned, net | 9,737 | 5,410 | ||||||
Net cash used in investing activities | (1,947,835 | ) | (815,180 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Net change in reverse repurchase agreements and other borrowings | (450,863 | ) | (312,393 | ) | ||||
Proceeds from CMO borrowings | 3,356,924 | 1,483,605 | ||||||
Repayments of CMO borrowings | (700,179 | ) | (374,308 | ) | ||||
Dividends paid | — | (21,754 | ) | |||||
Net change in mortgage servicing rights | 355 | — | ||||||
Proceeds from sale of common stock | 106,280 | 37,778 | ||||||
Proceeds from sale of common stock via equity distribution agreement | 10,729 | 4,083 | ||||||
Proceeds from exercise of stock options | 645 | 442 | ||||||
Net cash provided by financing activities | 2,323,891 | 817,453 | ||||||
Net change in cash and cash equivalents | 66,257 | 187 | ||||||
Cash and cash equivalents at beginning of period | 127,381 | 113,345 | ||||||
Cash and cash equivalents at end of period | $ | 193,638 | $ | 113,532 | ||||
SUPPLEMENTARY INFORMATION: | ||||||||
Interest paid | $ | 57,890 | $ | 48,485 | ||||
Taxes paid | 797 | — | ||||||
NON-CASH TRANSACTIONS: | ||||||||
Transfer of mortgages to other real estate owned | $ | 9,169 | $ | 8,436 | ||||
Dividends declared and unpaid | 40,723 | 24,598 | ||||||
Net change in other comprehensive earnings | (25,322 | ) | 4,111 |
See accompanying notes to consolidated financial statements.
3
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(in thousands)
(unaudited)
For the Nine Months
Ended September 30,
--------------------------
2003 2002
----------- -----------
SUPPLEMENTARY INFORMATION:
Interest paid .................................................. $ 160,898 $ 96,398
NON-CASH TRANSACTIONS:
Transfer of mortgages held-for-investment to CMO collateral .... $3,999,457 $ 2,449,994
Transfer of mortgages to other real estate owned ............... 26,678 11,219
Dividends declared and unpaid .................................. 26,535 19,309
Net unrealized gains (losses) .................................. 18,235 (24,338)
Issuance of shares for the purchase of Impac Funding Corporation 125 --
The following table presents the acquisition of the assets and liabilities
of Impac Funding Corporation as of July 1, 2003 (in thousands):
ASSETS ACQUIRED
Cash and cash equivalents ....................................... $ 24,135
Mortgages held-for-sale ......................................... 451,432
Accrued interest receivable ..................................... 564
Goodwill ........................................................ 486
Other assets .................................................... 71,377
--------
Total assets ............................................ $547,994
========
LIABILITIES ASSUMED
Warehouse borrowings ............................................ 447,951
Other liabilities ............................................... 73,206
--------
Total liabilities .......................................... 521,157
--------
Total stockholders' equity ................................. 26,837
--------
Total liabilities and stockholders' equity .............. $547,994
========
Net Assets Acquired:
Investment in Impac Funding Corporation ...................... $ 26,087
Cash paid for common stock ................................... 625
Shares issued for common stock ............................... 125
--------
$ 26,837
========
See accompanying notes to consolidated financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1--Basis1—Basis of Financial Statement Presentation
The accompanying consolidated financial statements of Impac Mortgage Holdings, Inc. (IMH) and our subsidiaries, (collectively, the Company)IMH Assets Corp. (IMH Assets), Impac Warehouse Lending Group (IWLG), Impac Multifamily Capital Corp. (IMCC) and Impac Funding Corporation (IFC), together with its wholly-owned subsidiary Novelle Financial Services, Inc. (NFS), collectively, (the Company, we, us or our), 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 nine-month periodsthree-month period ended September 30, 2003March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.2004. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company'sour annual report on Form 10-K for the year ended December 31, 2002.2003.
The results of operations for the three months ended March 31, 2004 reflect the consolidation of IFC on July 1, 2003. On July 1, 2003, IMH entered into a stock purchase agreement with Joseph R. Tomkinson, our Chairman, Chief Executive Officer and a director, William S. Ashmore, our Chief Operating Officer, President and a director, and the Johnson Revocable Living Trust, of which Richard J. Johnson, our Executive Vice President and Chief Financial Officer is trustee, whereby IMH purchased all of the outstanding shares of voting common stock of Impac Funding Corp (IFC), which represents 1%IFC for aggregate consideration of the economic
interest of IFC, from Joseph R. Tomkinson, the Company's Chairman, Chief
Executive Officer and director, William S. Ashmore, the Company's President,
Chief Operating Officer and director and the Johnson Revocable Living Trust, of
which Richard J. Johnson, the Company's Executive Vice President and Chief
Financial Officer, is trustee.$750,000. Each of Messer's.Messer’s. Tomkinson and Ashmore and the Johnson Revocable Living Trust owned one-third of the outstanding common stock of IFC. The purchaseMr. Tomkinson elected to receive $125,000 worth of IFC'shis consideration for the sale of his IFC shares of common stock combined within the Company's existing
ownershipform of 7,687 shares of IMH common stock. The fairness opinion related to the purchase price of IFC, as rendered by an independent financial advisor, and the subsequent transaction was approved by our board of directors. As a result of acquiring 100% of IFC’s common stock on July 1, 2003, IMH owns all of IFC'sthe common stock and preferred stock which represents 99% of IFC's
economic interest, resulted in the Company consolidatingIFC and began to consolidate IFC as of July 1, 2003.
Prior to July 1, 2003,that date. As such, the Company accountedconsolidated financial statements for its investment in IFC using the equity method of accounting.
The Company'sthree months ended March 31, 2004 (consolidation period) reflect the results of operations of IFC on a consolidated basis. The consolidated financial statements for the three-monthsthree months ended September
30,March 31, 2003 (non-consolidation period) include the financial results of its wholly-owned subsidiaries, which
are IFC, IMH Assets Corporation (IMH Assets), Impac Warehouse Lending Group
(IWLG) and Impac Multifamily Capital Corporation (IMCC). The Company's results of operations for the nine-months ended September 30, 2003 include the financial
results of IFC for the six-months ended June 30, 2003 as "Equityequity in net earnings of Impac Funding Corporation," andIFC.
We will not reclassify prior periods’ financial statements to conform to the consolidation of IFC's results of
operations for the three-months ended September 30, 2003 along with the
financial results of IMH Assets, IWLG and IMCC, as stand alone entities, for the
nine-months ended September 30, 2003.IFC. The consolidated financial statements are prepared on the accrual basis of accounting in accordance with 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. Certain amounts in the prior periods'
consolidated financial statements have been reclassified to conform to the
current presentation.
Note 2--Business2—Business Summary
IMH is
We are a mortgage real estate investment trust (REIT). Together with itsour subsidiaries the Company is primarilywe are a nationwide acquirer and originator of primarily non-conforming Alt-A mortgage loans (Alt-A mortgages). Alt-A mortgages are primarily first lien mortgages made to borrowers whose credit is generally within typical Fannie Mae and Freddie Mac guidelines, but have loan characteristics that make them non-conforming under those guidelines.
The Company operates
We operate three core businesses:
o
The long-term investment operations, conducted by IMH, IMH Assets and IMCC, invest primarily in adjustable and fixed rate Alt-A mortgages that are acquired and originated by the mortgage operations and small balance, multi-family mortgages (multi-family mortgages) originated by IMCC. This business primarily generates net interest income from 5
collateralized mortgage obligations (CMO) financing, warehouse facilities, proceeds from the sale of capital stock and cash.
The mortgage operations, conducted by IFC, acquire, originate, sell and securitize primarily adjustable and fixed rate Alt-A mortgages and, to a lesser extent, sub-prime mortgages (B/C mortgages). B/C mortgages are residential
mortgages made to borrowers with lower credit ratings than borrowers of Alt-A
mortgages and are normally subject to higher rates of loss and delinquency than
Alt-A mortgages. The mortgage operations generate income by securitizing and selling loans to permanent investors, including the long-term investment operations, and, to a lesser extent, interest income earned on mortgages held-for-sale and revenue from fees associated with mortgage acquisitions and originations, mortgage servicing rights and master servicing agreements and interest income earned on
mortgages held-for-sale.agreements. The mortgage operations use warehouse facilities provided by the warehouse lending operations, conducted by IWLG, to finance the acquisition and origination of mortgages.
The warehouse lending operations provide short-term financing to mortgage loan originators, including the mortgage operations, by funding mortgages from their closing date until they are sold to pre-approved investors. This business earns fees from warehouse transactions as well as net interest income from the difference between its cost of borrowings and the interest earned on warehouse advances.
advances as well as fees from warehouse transactions.
Note 3--Earnings3—Earnings Per Share
The following table presents the computation of basic and diluted net earnings per share as if all stock options were outstanding for the periods indicated (in thousands, except net earnings per share):
For the Three Months | ||||||
Ended March 31, | ||||||
2004 | 2003 | |||||
Numerator for earnings per share: | ||||||
Net earnings | $ | 46,046 | $ | 25,545 | ||
Denominator for earnings per share: | ||||||
Basic weighted average number of common shares outstanding | 59,692 | 47,069 | ||||
Net effect of dilutive stock options | 1,120 | 827 | ||||
Diluted weighted average common and common equivalent shares | 60,812 | 47,896 | ||||
Net earnings per share: | ||||||
Basic | $ | 0.77 | $ | 0.54 | ||
Diluted | $ | 0.76 | $ | 0.53 | ||
The Company had zeronone and 42420,000 stock options outstanding during the three months ended September 30,March 31, 2004 and 2003, and 2002, respectively, and 363,136 and 229,694
stock options outstanding during the nine months ended September 30, 2003 and
2002, respectively, that were not considered in the calculation of diluted weighted average common and common equivalent shares because their effect was
antidilutive.
as the exercise price of the stock options were greater than the average market price during the periods.
Note 4--Stock4—Stock Options
Stock options and awards may be granted to the directors, officers and employees of the Company.key employees. The exercise price for any qualified incentive stock options (ISOs) or non-qualified stock option
(NQSO) or incentiveoptions (NQSOs) granted under our stock option (ISO) grantedplans may not be less than 100% (or 110% in the case of ISOs granted to an employee who is deemed to own in excess of 10% of the outstanding common stock) of the fair market value of the shares of common stock at the time the NQSO or ISO is granted. Grants under stock option plans are made and administered by the board of directors. IMHWe currently maintainshave a 1995 Stock Option, Deferred Stock and Restricted Stock Plan (1995 Plan). Duringplan) and during 2001 the board of directors and stockholders approved a new Stock Option, Deferred Stock and Restricted Stock Plan (2001 Plan)plan), collectively, (the stock plans). The 1995 Plan and
the 2001 Plan shall collectively be referred to as the Stock Option Plans. Each of the Stock Option Plans providestock plan provides for the grant of qualified incentive stock
options (ISOs), non-qualified stock options (NQSOs),ISOs, NQSOs, deferred stock, and restricted stock, and, in the case of the 2001 Plan,plan, dividend equivalent rights and, in the case of the 1995 Plan,plan, stock appreciation rights and limited stock appreciation rights awards (Awards)(awards). To enable IMH to deduct, in full, all
amounts of ordinary income recognized by its executive officers in connection
with the exercise of non-qualified stock options granted in the future,
stockholders approved an amendment to
6
the 2001 Plan in June 2003 that limits the maximum number of shares for which
stock options may be granted to any eligible employee in any fiscal year to
1,500,000 shares.
In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting StandardsSFAS No. 148, "Accounting“Accounting for Stock-Based Compensation - Compensation—Transition and Disclosure"Disclosure” (SFAS 148), an amendment toof FASB Statement No. 123, "Accounting“Accounting for Stock-Based Compensation,"” (SFAS 123). SFAS 148 amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements. On December 15, 2002,January 1, 2003, IMH adopted the disclosure requirements of SFAS 148. In November 1995, the FASB issued SFAS No. 123, established“Accounting for Stock-Based Compensation” (SFAS 123). This statement establishes financial accounting standards for stock-based employee compensation plans, whichplans. SFAS 123 permits management to choose either a new fair value based method or anthe current Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (APB 25) intrinsic value based method of accounting for its stock-based compensation arrangements in accordance with APB Opinion No. 25 (APB
25).arrangements. SFAS 123 requires pro forma disclosures of net earnings (loss) computed as if the fair value based method had been applied in financial statements of companies that continue to follow the intrinsic value methodcurrent practice in accounting for such arrangements under APB 25. SFAS 123 applies to all stock-based employee compensation plans in which an employer grants shares of its stock or other equity instruments to employees except for employee stock ownership plans. SFAS 123 also applies to plans in which the employer incurs liabilities to employees in amounts based on the price of the employer'semployer’s stock, i.e., stock option plans, stock purchase plans, restricted stock plans and stock appreciation rights. The statement also specifies the accounting for transactions in which a company issues stock options or other equity instruments for services provided by non-employees or to acquire goods or services from outside suppliers or vendors.
As of September 30, 2003, the CompanyMarch 31, 2004, we had stock-based compensation plans and we applied APB 25 in accounting for our plans. No compensation cost has been recognized for fixed stock option plans that it
accountedplans. If compensation cost for using the intrinsic value method in accordance with APB 25 and
which did not require the recognition of compensation expense. However, if
compensation expense forour stock-based compensation plans had been recognized
using the fair value based methodwere recorded consistent with SFAS 123, as amended by SFAS
148,our net earnings and earnings per share would have been reduced to the pro forma amounts indicated below (in(dollars in thousands, except per share amounts):
For the Three Months | ||||||||
Ended March 31, | ||||||||
2004 | 2003 | |||||||
Net earnings as reported | $ | 46,046 | $ | 25,545 | ||||
Less: Total stock-based employee compensation expense using the fair value method | (241 | ) | (136 | ) | ||||
Pro forma net earnings | $ | 45,805 | $ | 25,409 | ||||
Net earnings per share as reported: | ||||||||
Basic | $ | 0.77 | $ | 0.54 | ||||
Diluted | $ | 0.76 | $ | 0.53 | ||||
Pro forma net earnings: | ||||||||
Basic | $ | 0.77 | $ | 0.54 | ||||
Diluted | $ | 0.75 | $ | 0.53 | ||||
There were no stock options granted during the thirdfirst quarter of 2004 and 2003, therefore, pro forma net earnings and 2002 was approximately $1.09 and $1.21, respectively,net earnings per share reflect the amortization of previously granted stock option,options which is derived based onare amortized as expense over the stock option date of grant usinglife in determining the Black-Scholes option pricing model with the following weighted average
assumptions:
For the Threepro forma impact.
Note 5—Segment Reporting
We internally review and For the Three and
Nine Months Ended Nine Months Ended
September 30, 2003 September 30, 2002
-------------------- ---------------------
Risk-free interest rate............. 1.22% 1.45%
Expected lives (in years)........... 4 3-10
Expected volatility................. 28.83% 35.07%
Expected dividend yield............. 10.00% 10.00%
7
Note 5--Segment Reporting
The Company internally reviews and analyzes itsanalyze our operating segments as follows:
o the
The following table presents business segment informationsegments as of and for the periods
indicatedthree months ended March 31, 2004 (in thousands):
Long-Term | Warehouse | ||||||||||||||||
Investment | Lending | Mortgage | Inter- | ||||||||||||||
Operations | Operations | Operations | Company (1) | Consolidated | |||||||||||||
Balance Sheet Items: | |||||||||||||||||
CMO collateral and mortgages held-for-investment | $ | 11,395,437 | $ | — | $ | — | $ | (6,357 | ) | $ | 11,389,080 | ||||||
Mortgages held-for-sale | — | — | 611,068 | — | 611,068 | ||||||||||||
Finance receivables | — | 1,228,823 | — | (702,427 | ) | 526,396 | |||||||||||
Total assets | 12,310,254 | 1,240,748 | 728,167 | (1,254,360 | ) | 13,024,809 | |||||||||||
Total stockholders’ equity | 955,068 | 122,144 | 29,006 | (497,448 | ) | 608,770 | |||||||||||
Income Statement Items: | |||||||||||||||||
Net interest income | $ | 39,033 | $ | 8,417 | $ | 5,143 | $ | — | $ | 52,593 | |||||||
Provision for loan losses | 4,285 | 5,440 | — | — | 9,725 | ||||||||||||
Non-interest income | (77 | ) | 1,958 | 29,572 | — | 31,453 | |||||||||||
Non-interest expense and income taxes | 1,744 | 1,521 | 25,010 | — | 28,275 | ||||||||||||
Net earnings | $ | 32,927 | $ | 3,414 | $ | 9,705 | $ | — | $ | 46,046 | |||||||
The following table presents business segment informationsegments as of and for the periods
indicatedthree months ended March 31, 2003 (in thousands):
Long-Term | Warehouse | ||||||||||||
Investment | Lending | Inter- | |||||||||||
Operations | Operations | Company (1) | Consolidated | ||||||||||
Balance Sheet Items: | |||||||||||||
CMO collateral and mortgages held-for-investment | $ | 6,321,728 | $ | — | $ | — | $ | 6,321,728 | |||||
Finance receivables | — | 893,907 | (62,372 | ) | 831,535 | ||||||||
Total assets | 6,800,997 | 957,636 | (363,139 | ) | 7,395,494 | ||||||||
Total stockholders’ equity | 554,507 | 96,999 | (300,657 | ) | 350,849 | ||||||||
Income Statement Items: | |||||||||||||
Net interest income | $ | 20,732 | $ | 6,070 | $ | — | $ | 26,802 | |||||
Provision for loan losses | 5,889 | 595 | — | 6,484 | |||||||||
Non-interest income (2) | 1,283 | 1,360 | 5,167 | 7,810 | |||||||||
Non-interest expense | 1,485 | 1,098 | — | 2,583 | |||||||||
Net earnings | $ | 14,641 | $ | 5,737 | $ | 5,167 | $ | 25,545 | |||||
(1) | Elimination of |
(2) | Non-interest income |
Note 6--Allowance6—Allowance for Loan Losses
A provision
An allowance is recordedmaintained for losses on mortgages held-for-investment, mortgages held as CMO collateral and finance receivables (loans provided for) at an amount that management believes is sufficient to provide adequate protection against
estimated inherent losses for the subsequent twelve-month period in accordance
with GAAP. The Company provides for losses inherent in those loan losses by maintainingportfolios. We have implemented a ratiomethodology designed to analyze the performance of allowance forvarious loan losses to mortgages held as CMO collateral, finance
receivables and mortgages held-for-investmentportfolios based upon the relatively homogeneous nature within a range of 40 basis points
to 45 basis points. As of September 30, 2003, the ratio of allowance forthese loan losses to mortgages provided for was 47 basis points as allowance for loan
losses increased to $39.1 million.portfolios. The allowance for loan losses is reduced by losses incurred for mortgages
deemed to be uncollectible, delinquent mortgages sold at a loss and the
write-down of mortgages to the fair market value of real estate acquired through
foreclosure proceedings. Subsequent recoveries on mortgages previously charged
off are credited back to the allowance. The provision for estimated loan losses
is primarily based on historical loss statistics, including cumulative loss
percentages and loss severity, of similar mortgages. The provision for loan
losses is also determined based onanalyzed using the following:
o management'sfollowing factors:
In evaluating the adequacy of the allowance for loan losses, management takes several items into consideration. For instance, a detailed analysis of historical loan performance data is accumulated and reviewed. This data is analyzed for loss performance and prepayment performance by product type, origination year and securitization issuance. As allowed under SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” and as amended by SFAS No. 118, “Accounting by Creditors for Impairment of a Loan—Income Recognition and Disclosures,” (SFAS 114) we determine impairment collectively on loan pools as they are made up of smaller balance homogenous loans. These homogeneous loans are assessed for impairment by loan type. The following table presents activitylargest mortgage loan pools by type consist of residential mortgages, however, multifamily and B/C mortgages are loan pools that are also assessed for impairment. The results of that analysis are then applied to our current loan portfolios and an estimate is created.
In addition, management provides an allowance for loan losses on Alt-A mortgages that are retained for long-term investment and which are not underwritten to our specific underwriting guidelines. These mortgages are acquired on a bulk basis by the mortgage operations from other mortgage originators that underwrite mortgages substantially similar, but not specific, to our mortgage underwriting guidelines (non-Impac mortgages). Management also recognizes that there are qualitative factors that must be taken into consideration when evaluating and measuring inherent loss in our loan portfolios. These items include, but are not limited to, economic indicators that may affect the borrower’s ability to pay, changes in value of collateral, political factors and industry statistics.
At the end of March of 2004, we discovered that one client of the warehouse lending operations and certain of its officers had perpetrated a fraud pursuant to which they defrauded the warehouse lending operations into making advances pursuant to a warehouse line of credit. As of the date the fraud was discovered, an aggregate of $12.6 million of fraudulent loan advances were outstanding. We immediately terminated the warehouse line of credit and have been cooperating with federal investigators in their ongoing investigation of the defrauding parties.
We retained an independent consultant to investigate the matter; the investigator reported that no principals of the warehouse lending operations had knowingly participated in the fraud. As a result of the fraud, during the first quarter of 2004 we established a specific allowance for loan losses in the amount of $6.0 million to provide for anticipated losses on the fraudulent warehouse advances as we have deemed this amount to be non-collectible. Based on available information, we believe we will be able to recover the remaining $6.6 million of related warehouse advances over time. To the extent that we believe that the actual losses will exceed the $6.0 million allowance, we will make an additional allowance for loan losses when, or if, we determine it is appropriate to do so as events and circumstances dictate. However, we believe that this specific allowance is adequate to provide for anticipated loan losses based on currently available information.
Activity for allowance for loan losses for the periods shown was as follows (in thousands):
For the Three Months Ended, | ||||||||
March 31, 2004 | December 31, 2003 | |||||||
Beginning balance | $ | 38,596 | $ | 39,122 | ||||
Provision for loan losses (1) | 9,725 | 3,490 | ||||||
Charge-offs, net of recoveries | (2,022 | ) | (4,016 | ) | ||||
Ending balance | $ | 46,299 | $ | 38,596 | ||||
(1) | Includes estimated partial impairment on specific warehouse advances of |
In the opinion of prior period percentagemanagement and in accordance with the loan loss allowance methodology, the present allowance for loan losses is considered adequate to reflect exclusion of
affiliated finance receivables upon consolidation of IFC.
provide for losses inherent in the loan portfolios. Subsequent recoveries on loans previously charged to the allowance for loan losses are credited back to the allowance for loan losses.
Note 7--Derivative7—Derivative Instruments and Hedging Activities
The Company follows a hedging program intended to limit its exposure to
changes in interest rates primarily associated with cash flows on CMO borrowings
and also enters into forward commitments and derivative instruments to mitigate
changes in the value of its "locked pipeline" of fixed rate mortgages. The
locked pipeline are mortgages that have not yet been acquired, however, the
mortgage operations has committed to acquire the mortgages in the future at
pre-determined rates through rate-lock commitments. The Company seeks
Our primary objective is to hedge exposure to the variability in future cash flows attributable to the variability of one-month London Interbank Offered Rate (LIBOR),LIBOR, which is the underlying index of our adjustable rate CMO borrowings. The CompanyWe also monitorsmonitor on an ongoing basis the prepayment risks that arise in fluctuating interest rate environments. The Company'sOur interest rate hedging program is formulated with the intent to offset the potential adverse effects of changing interest rates on cash flows on CMO borrowings resulting from the following:
o
To mitigate exposure to the effect of changing interest rates on cash flows on CMO borrowings, the Company purchases or sells financialwe purchase derivative instruments
primarily in the form of interest rate swap agreements (swaps) and, to a lesser
extent,, interest rate cap agreements (caps) and interest rate floor agreements (floors), collectively referred to as (derivatives). A swap is generally a contractual agreement that obligates one party to receive or make cash payments based on an adjustable rate index and the other party to receive or make cash payments based on a fixed rate. Swaps have the effect of fixing borrowing costs on a similar amount of mortgagesswaps and, as a result, can reduce the interest rate variability of borrowings. A purchase or sale of a cap or floor is a contractual agreement for which the Company maywe pay or receive a fee. If prevailing interest rates reach levels specified in the cap or floor agreement, the Companywe may either receive or pay cash. The Company'sOur objective is to lock in a reliable stream of cash flows when interest rates fall below or rise above certain levels. For instance, when interest rates rise, borrowing costs may increase at greater speeds than the underlying collateral supporting the borrowings. DerivativesThese derivative instruments hedge the variability of forecasted cash flows attributable to CMO borrowings and protect net interest income by providing cash flows at certain triggers during changing interest rate environments. Counter-parties on
derivatives that are deposited into a CMO trustIn all interest-rate hedging transactions, counter-parties must have AAA credit ratings
while counter-parties on derivatives that are not deposited into a CMO trust
generally have an A or above credit ratingbe highly rated as determined by various credit rating agencies.
SFAS No. 133, "Accounting for Derivative Instruments
Caps and Hedging
Activities," as amended by SFAS No. 137 and SFAS No. 138, collectively, (SFAS
133), established accounting and reporting standards for derivatives, including
a number of derivatives embedded in other contracts and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position 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. On January 1, 2001, IMH
adopted SFAS 133 and the fair value of derivatives were reflected in financial
condition and results of operations. On August 10, 2001, the Derivatives
Implementation Group (DIG) of the FASB published DIG G20, which further
interpreted SFAS 133. On October 1, 2001, IMH adopted the provisions of DIG G20
and net income and accumulated other comprehensive income were adjusted by the
amount needed to reflect the cumulative impact of adopting the provisions of DIG
G20.
Capsfloors qualify as derivativesderivative instruments under provisions of SFAS 133. The hedgingderivative instrument is the specific LIBOR cap or floor that is hedging the LIBOR based CMO borrowings. The nature of the risk being hedged is the variability of the cash flows associated with the LIBOR borrowings. Prior to the adoption of DIG G20, the Companymanagement assessed the hedging effectiveness of its caps and floors utilizing only the intrinsic value of the caps. DIG G20 allows the Companymanagement to utilize the terminal value of the caps and floors to assess effectiveness. DIG G20 also allows for amortization of the initial fair value of the caps and floors over the life of the caps based on the maturity date of the individual caplets. Upon adoption of DIG G20, net income and accumulated other comprehensive income were adjusted by the amount needed to reflect the cumulative impact of adopting the provisions of DIG G20. Subsequent to the adoption of DIG G20, caps and floors are considered effective hedges and are marked to market each reporting period with the entire change in market value being recognized in accumulated other comprehensive income.
Floors and swaps qualify as cash flow hedges underearnings.
Under SFAS 133, an entity that elects to apply hedge accounting is required to establish at the provisions of SFAS
133. The hedging instrument is the specific LIBOR floor or swap that is hedging
the LIBOR based CMO borrowings. The natureinception of the risk being hedged ishedge the variabilitymethod it will use for assessing the effectiveness of the cash flows associatedderivative instrument and the measurement and approach for determining the ineffective aspect of the hedge. Those methods must be consistent with the LIBOR borrowings. Priorentity’s approach to DIG
G20, these derivatives were marked to market with the entire change in the
market valuemanaging interest rate risk. This statement was effective for all fiscal quarters of the intrinsic component recognized in accumulated other
comprehensive income each reporting period. The time value component of these
agreements were marked to market and recognized in non-interest expense in the
statement of operations. Subsequent to the adoption of DIG G20, these
derivatives are marked to market with the entire change in the market value
recognized in accumulated other comprehensive income.fiscal years beginning after June 15, 2000. Effectiveness of derivativesderivative instruments is measured by the fact that the hedged item, CMO borrowings, and the derivative instrument are based on one-month LIBOR. As both instruments are tied to the same index, the hedge is expected to be highly effective both at inception and on an ongoing basis. The Company assessesWe assess the effectiveness and ineffectiveness of the hedging instrumentshedges at the inception of the hedge and at each reporting period. Based on the fact that, at inception, the critical terms of the hedges and forecasted CMO borrowings are the same, the Company haswe have concluded that the changes in cash flows attributable to the risk being hedged are expected to be substantially offset by the derivatives,derivative instrument, subject to subsequent assessments that the critical terms have not changed.
11
The mortgage operations recordsenters into forward commitments and derivative transactions to mitigate changes in the fair market value of its lockedmortgage pipeline. The mortgage pipeline are mortgages that have not yet been acquired, however, the mortgage operations have committed to acquire the mortgages in the future at pre-determined rates through rate-lock commitments. Prior to the issuance of fixed rate mortgagesSAB 105, “Application of Accounting Principles to Loan Commitments,” (SAB 105), which clarifies the SEC’s position on the accounting for loan commitments, the mortgage operations recorded the fair value of its
mortgage pipeline, excluding servicing value, as it qualifies as a derivative instrument under the provisions of SFAS 133, however, it does not qualify for hedging treatment. Therefore,SAB 105 also addresses the locked pipeline and the related fair market value of derivatives
is marked to market each reporting period along with a corresponding entry to
non-interest expense. The mortgage operations also enter into forward
commitments and derivatives to lock in the forecasted sale profitability of
fixed rate mortgages held-for-sale. The mortgage operations generally sells
mortgage back securities, call or buys put options on U.S. Treasury bonds and
mortgage-backed securities and swaps to hedge against adverse movements of
interest rates affecting the value of mortgages held-for-sale. The risk in
writing a call option is that the mortgage operations give up the opportunity
for profit if the market price of the mortgage increases and the option is
exercised. The mortgage operations has the additional riskissues of not being able to
enter into a closing transaction if a liquid secondary market does not exist.
The risk of buying a put option is limitedrecognizing cash flows associated with servicing prior to the premium paid forsale or securitization of funded loans and certain other disclosure issues pertaining to loan commitments. SAB 105 also significantly limits a company’s ability to record an asset on its mortgage pipeline. We have adopted the put
option. These hedges are treatednew requirements within SAB 105, and as cash flow hedges under the provisionsa result, we have not recorded an asset related to our outstanding mortgage pipeline as of SFAS 133 to hedge forecasted transactions with the entire change in market value
of the hedges recorded through accumulated other comprehensive income.
March 31, 2004.
The following tables presenttable presents certain information related to derivatives and the related component in the financial statements as of September 30, 2003
(inMarch 31, 2004 (dollars in thousands):
Fair Value of | Index | Deferred Taxes | Related Amount in OCI | Unamortized Derivative Instruments | Related Amount in Derivative Asset Account | Related Amount in CMO Collateral | Related Amount in Other Assets/ Liabilities | ||||||||||||||||||||
Derivatives not associated with CMOs | $ | (1,520 | ) | 1 mo. LIBOR | $ | — | $ | (2,104 | ) | 584 | $ | (1,520 | ) | $ | — | $ | — | ||||||||||
Cash in margin account | 23,371 | N/A | — | — | — | 23,371 | — | — | |||||||||||||||||||
Derivatives associated with CMOs | (33,872 | ) | 1 mo. LIBOR | — | (35,780 | ) | 1,923 | — | (33,872 | ) | — | ||||||||||||||||
Derivative instruments hedging mortgages held-for-sale | (4 | ) | LIBOR | 3 | (3 | ) | — | — | — | (4 | ) | ||||||||||||||||
Derivative instruments hedging the mortgage pipeline | (25 | ) | LIBOR | — | — | — | — | — | (25 | ) | |||||||||||||||||
Value of mortgage pipeline | 276 | N/A | — | — | — | 276 | — | — | |||||||||||||||||||
Totals | $ | (11,774 | ) | $ | 3 | $ | (37,887 | ) | 2,507 | $ | 22,127 | $ | (33,872 | ) | $ | (29 | ) | ||||||||||
The following table presents certain information related to derivatives and the related component in the financial statements as of December 31, 2002
(in2003 (dollars in thousands):
Fair Value of | Index | Deferred Taxes | Related Amount in OCI | Unamortized Derivative Instruments | Related Amount in Derivative Asset Account | Related Amount in CMO Collateral | Related Amount in Other Assets/ Liabilities | |||||||||||||||||||||||
Derivatives not associated with CMOs | $ | (6,460 | ) | 1 mo. LIBOR | $ | — | $ | (6,081 | ) | $ | (367 | ) | $ | (6,460 | ) | $ | — | $ | — | |||||||||||
Cash in margin account | 27,740 | N/A | — | — | — | 27,740 | — | — | ||||||||||||||||||||||
Derivatives associated with CMOs | (3,314 | ) | 1 mo. LIBOR | — | (5,156 | ) | 1,842 | — | (3,314 | ) | — | |||||||||||||||||||
Derivative instruments hedging mortgages held-for-sale | — | LIBOR | (732 | ) | (1,466 | ) | — | 2,199 | — | — | ||||||||||||||||||||
Derivative instruments hedging the mortgage pipeline | (1,953 | ) | LIBOR | — | — | — | — | (1,953 | ) | (1,953 | ) | |||||||||||||||||||
Value of mortgage pipeline | 3,207 | N/A | — | — | — | — | — | 3,207 | ||||||||||||||||||||||
Totals | $ | 19,220 | $ | (732 | ) | $ | (12,703 | ) | $ | 1,475 | $ | 23,479 | $ | (5,267 | ) | $ | 1,254 | |||||||||||||
Note 8--Income8—Income Taxes
The Company operates
We operate so as to qualify as a REIT under the requirements of the Internal Revenue Code (the Code). Requirements for qualification as a REIT include various restrictions on ownership of IMH'sIMH’s stock, requirements concerning distribution of taxable income and certain restrictions on the nature of assets and sources of income. A REIT must distribute at least
90% of its taxable income to its stockholders of which 85% must be distributed within the taxable year in order to avoid the imposition of an excise tax and thetax. The remaining balance may extend until timely filing of itsour tax return in itsthe subsequent taxable year. Qualifying distributions of its taxable income are deductible by a REIT in computing its taxable income. If in any tax year the CompanyIMH should not qualify as a REIT, itwe would be taxed as a corporation and distributions to the stockholders would not be deductible in computing taxable income. If the CompanyIMH were to fail to qualify as a REIT in any tax year, itwe would not be permitted to qualify for that year and the succeeding four years. The Company hasAs of December 31, 2003, we had estimated federal and state net operating loss tax carry-forwards of $18.7 million which expire in
the year 2020, that are available to offset 2003 and future taxable income.
IFC is a taxable REIT subsidiary and is therefore subject to corporate income taxes. Deferred tax assets and liabilities of the mortgage operations are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Note 9--Gain on Sale of Loans
The Company recognizes gains or losses on the sale of mortgages when the
sales transaction settles or upon the securitization of mortgages when the risks
of ownership have passed to the purchasing party. Gains and losses may be
increased or decreased by the amount of any servicing released premiums received
and costs associated with the acquisition or origination of mortgages. Gains on
the sale of loans or securities by the mortgage operations to the long-term
investment operations are eliminated in consolidation. A transfer of financial
assets in which control is surrendered is accounted for as a sale to the extent
that consideration other than a beneficial interest in the transferred assets is
received in the exchange. Liabilities and derivatives incurred or obtained by
the transfer of financial assets are required to be measured at fair value, if
practicable. Also, servicing assets and other retained interests in the
transferred assets must be measured by allocating the previous carrying value
between the asset sold and the interest retained, if any, based on their
relative fair values at the date of transfer. To determine the value of the
securities, the Company estimates future rates of prepayments, prepayment
penalties to be received, delinquencies, defaults and default loss severity and
their impact on estimated cash flows.
Note 10--Acquisitions
On July 1, 2003, IMH purchased from Joseph R. Tomkinson, IMH's Chairman,
Chief Executive Officer and a director, William S. Ashmore, IMH's Chief
Operating Officer, President and a director, and the Johnson Revocable Living
Trust, of which Richard J. Johnson, IMH's Executive Vice President and Chief
Financial Officer, all of the outstanding shares of common stock of IFC for
aggregate consideration of $750,000 which resulted in goodwill of approximately
$486,000. The fairness opinion related to the purchase of IFC, as rendered by an
independent financial advisor, and the subsequent transaction was approved by
the board of directors. The common stock of IFC represents 1% of the economic
interest in IFC. IMH currently owns all of the outstanding common and preferred
stock of IFC, which represents 100% of the interest in IFC. Each of Messer's.
Tomkinson and Ashmore and the Johnson Revocable Living Trust owned one-third of
the outstanding common stock of IFC. As a result of acquiring 100% of IFC's
common stock, as of July 1, 2003 IMH consolidates IFC. The Company will not
reclassify prior periods' financial statements to conform to the current
presentation.
13
Note 11--Recent9—Recent Accounting Pronouncements
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57 and 107 and a rescission of
FASB Interpretation No. 34 (FIN 45). FIN 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantees issued. FIN
45 also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of FIN 45 are applicable to
guarantees issued or modified after46 (revised December 31, 2002 and are not expected to
have a material effect on the Company's financial statements. The disclosure
requirements are effective for financial statements of interim or annual periods
ending after December 15, 2002.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" (SFAS 148)2003), an amendment
of SFAS No. 123 "Accounting for Stock-Based Compensation," (SFAS 123). SFAS 148
amends SFAS 123 to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements. Certain portions of the disclosure modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements. The Company has adopted the disclosure
requirement of SFAS 148 and will continue to account for stock options using the
intrinsic value method.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation“Consolidation of Variable Interest Entities, an interpretation of ARB No. 51"Entities” (FIN 46). FIN 46
addresses the consolidation by business enterprises of variable interest
entities as defined in FIN 46. FIN 46 applies immediately to variable interests
in variable interest entities created after January 31, 2003 and to variable
interests in variable interest entities obtained after January 31, 2003. For
non-public enterprises, such as IFC, with a variable interest in46R), requires a variable interest entity created before February 1, 2003to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. Prior to FIN 4646R, a company included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46R also requires disclosures about variable interest entities that the company is appliednot required to the
enterprise no later thanconsolidate but in which it has a significant variable interest. The consolidated requirements of FIN 46R apply to all variable interest entities (VIEs) by the end of the first reporting period beginningthat ends after JuneDecember 15, 2003. OnThe provisions of FIN 46R for interests held by public entities in VIEs that are not qualified special purpose entities are required to be applied by the first reporting period that ends after March 15, 2004. In connection with our CMO transactions, mortgages are transferred into trusts that are classified as VIEs and are consolidated with the financial results of IMH and its subsidiaries. After the purchase of IFC’s common stock by IMH on July 1, 2003, IMH purchased allwe began to consolidate IFC’s financial results as of that date.
SAB 105 clarifies the outstanding sharesSEC’s position on the accounting for loan commitments. Consistent with SFAS 149, SAB 105 states that loan commitments are treated as derivative instruments. SAB 105 also addresses the issues of voting common stocknot recognizing cashflows associated with servicing prior to the sale or securitization of IFC. Asfunded loans and certain other disclosure issues pertaining to loan commitments. SAB 105 also significantly limits a company’s ability to record an asset on its mortgage pipeline. We have adopted the new requirements within SAB 105 and as a result, of acquiring 100% of IFC's common stock,we have not recorded an asset related to our outstanding mortgage pipeline as of July 1, 2003March 31, 2004.
ITEM 2: | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Unless the context otherwise requires, the terms “Company,” “we,” “us,” and “our” refer to Impac Mortgage Holdings, Inc., or “IMH,” a Maryland corporation incorporated in August 1995, and our subsidiaries, IMH consolidatesAssets Corp., or “IMH Assets,” Impac Warehouse Lending Group, Inc., or “IWLG,” Impac Multifamily Capital Corporation, or “IMCC,” and Impac Funding Corporation, or “IFC,” together with its wholly-owned subsidiary Novelle Financial Services, Inc., or “NFS.” References to IMH are made to differentiate IMH, the publicly traded company, as a separate entity from IMH Assets, IWLG, IMCC and IFC. The Company will not reclassify prior
periods' financial statements to conform to the current presentation.
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" (SFAS 149), clarifies and amends financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS 133. In
general, SFAS 149 is effective for contracts entered into or modified after
September 30, 2003 and for hedging relationships designated after September 30,
2003. It is anticipated that the financial impact of SFAS 149 will not have a
material effect on the Company.
SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" (SFAS 150), establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity that have been
presented either entirely as equity or between the liabilities section and the
equity section of the statement of financial position. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. It is anticipated that the financial impact of SFAS 150 will not have
a material effect on the Company.
Note 12--Subsequent Events
Recently, there have been a large number of fires in certain areas of
California. Although, we have a large percentage of loans secured by properties
in California, we do not anticipate the fires to have a material impact on our
results of operations.
14
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This quarterly report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements, some of which are based on various assumptions and events that are beyond our control may be identified by reference to a future period or periods or by the use of forward-looking terminology, such as "may," "will," "believe," "expect,"
"plan," "anticipate," "continue,"“may,” “will,” “believe,” “expect,” “plan,” “anticipate,” “continue,” or similar terms or variations on those terms or the negative of those terms. Actual results could differ materially from those set forth in forward-looking statements due to a number of factors, including, among other things,but not limited to, failure to achieve projected earningearnings levels, the timely and successful
implementation of strategic initiatives, the ability to generate sufficient liquidity, the ability to access the capital markets, the size and frequency of our securitizations, the ability to generate taxable income and pay dividends, interest rate fluctuations on our assets that differ from those on our liabilities, changesincrease in prepayment rates on our mortgage assets, changes in assumptions regarding estimated loan losses or fair value amounts, changes in expectations of future interest rates, the availability of financing and, if available, the terms of any financing, changes in estimations of acquisition and origination and resale pricing of mortgages, changes in markets which we serve and changes in general market and economic conditions and other factors described in this
quarterly report.conditions. For a discussion of the risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors"“Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this quarterly report. We do not undertake, and specifically disclaim any obligation, to publicly release the results of any revisions that may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.
Financial Highlights for the Third Quarter of 2003
o Earnings per diluted share increased to $0.63 compared to $0.58 for
the second quarter of 2003 and $0.47 for the third quarter of 2002;
o Estimated taxable income per diluted share was $0.61 compared to
$0.56 for the second quarter of 2003 and $0.61 for the third quarter
of 2002 (refer to reconciliation of net earnings to estimated
taxable income below);
o Cash dividends declared per share were $0.50 for the second and
third quarters of 2003 compared to $0.45 for the third quarter of
2002 and we expect to declare and pay at least a $0.50 cash dividend
during the fourth quarter of 2003;
o Total assets increased to $9.0 billion as of September 30, 2003
compared to $6.6 billion as of December 31, 2002 and $5.4 billion as
of September 30, 2002;
o Book value per share increased 21% to $8.11 as of September 30, 2003
compared to $6.70 as of December 31, 2002 and $6.40 as of September
30, 2002;
o Total market capitalization increased to $859.2 million as of
September 30, 2003 compared to $521.2 million as of December 31,
2002 and $478.4 million as of September 30, 2002;
o Dividend yield as of September 30, 2003 was 12.35%, based on an
annualized third quarter cash dividend of $0.50 per share and
closing stock price of $16.19 per share as of September 30, 2003;
o Return on average assets and equity was 1.56% and 34.82% compared to
1.52% and 34.48% for the second quarter of 2003 and 1.64% and 29.27%
for the third quarter of 2002;
o The mortgage operations, acquired and originated $2.7 billion of
primarily non-conforming Alt-A mortgages, or "Alt-A mortgages,"
compared to $1.9 billion for the second quarter of 2003 and $1.7
billion for the third quarter of 2002;
o The long-term investment operations retained $1.4 billion of
primarily Alt-A mortgages compared to $806.6 million for the second
quarter of 2003 and $1.1 billion for the third quarter of 2002;
15
o Novelle Financial Services, Inc., an originator of sub-prime, or
"B/C mortgages," and an operating unit of the mortgage operations,
originated $138.7 million of B/C mortgages compared to $105.7
million for the second quarter of 2003 and $126.0 million for the
third quarter of 2002;
o Impac Multifamily Capital Corporation originated $90.0 million of
small balance, multi-family mortgages, or "multi-family mortgages,"
compared to $74.1 million for the second quarter of 2003 and $42.1
million for the first quarter of 2003; and
o Average short-term warehouse advances made by the warehouse lending
operations to non-affiliated customers increased to $666.8 million
compared to $551.8 million for the second quarter of 2003 and $347.7
million for the third quarter of 2002.
General and Business Operations
Unless the context otherwise requires, the terms "we," "us," and "our"
refer to Impac Mortgage Holdings, Inc., or "IMH," a Maryland corporation
incorporated in August 1995, and its subsidiaries, IMH Assets Corp., or "IMH
Assets," Impac Warehouse Lending Group, Inc., or "IWLG," Impac Multifamily
Capital Corporation, or "IMCC," and Impac Funding Corporation, or "IFC." IFC
became a wholly-owned subsidiary of IMH in July 2003. References to IMH are made
to differentiate IMH, the publicly traded company, as a separate entity from IMH
Assets, IWLG, IMCC and IFC.
We are a mortgage real estate investment trust, or "REIT." Together with
our subsidiaries we are primarily“REIT,” that is a nationwide acquirer, originator, seller and originatorinvestor of primarily non-conforming Alt-A mortgages, or “Alt-A mortgages,” and to a lesser extent, an originator ofsmall-balance, multi-family mortgages, or “multi-family mortgages” and B/sub-prime mortgages, or “B/C mortgages.” We also provide warehouse and repurchase financing to originators of mortgages.
We operate three core businesses:
The long-term investment operations primarily invest in adjustable and fixed rate Alt-A mortgages that are acquired and originated by our mortgage operations. Alt-A mortgages are primarily first lien mortgages made to borrowers whose credit is generally within typical Fannie Mae and Freddie Mac guidelines, but have loan characteristics that make them non-conforming under those guidelines. Some of the principal differences between mortgages purchased by Fannie Mae and Freddie Mac and Alt-A mortgages are as follows:
o
For instance, Alt-A mortgages that we acquire and originate may not have certain documentation or verifications that are required by Fannie Mae and Freddie Mac.
In addition, the borrower's debt to income ratio, if calculated at all, may be
higher than those allowed by Fannie Mae or Freddie Mac. Therefore,Mac and, therefore, in making our credit decisions, we aremay be more reliant upon the borrower'sborrower’s credit score
and the adequacy of the underlying collateral. We believe that Alt-A mortgages provide an attractive net earnings profile by producing higher yields without commensurately higher credit losses than other types of mortgages. Since 1999 we
have acquired and originated primarily Alt-A mortgages.
B/C mortgages that we originate are residential mortgages made to
borrowers with lower credit ratings than borrowers of higher credit quality
mortgages and are normally subject to higher rates of loss and delinquency than
Alt-A mortgages. As a result, B/C mortgages normally bear a higher rate of
interest and are typically subject to higher fees, including greater prepayment
fees and late payment penalties, than Alt-A mortgages. In general, greater
emphasis is placed upon the value of the mortgaged property and, consequently,
the quality of appraisals and less upon the credit history of the borrower in
underwriting B/C mortgages.
We also provide warehouse and repurchase financing to originators of
mortgages. Our goal is to generate consistent reliable income for distribution
to our stockholders primarily from earnings generated by our mortgage assets. We
operate the following core businesses:
o long-term investment operations;
o mortgage operations; and
o warehouse lending operations.
16
The long-term investment operations also originate and invest in adjustable and fixed rate
Alt-A mortgages originated by our mortgage operations and, to a lesser extent,
multi-family mortgages originated by IMCC. This businesswith initial fixed interest rate periods of three, five and seven years that subsequently adjust to adjustable rate mortgages with loan balances that generally range from $250,000 to $3.0 million. Multi-family mortgages have interest rate floors, which is the initial start rate, and prepayment penalty periods of three, five and seven years. Multi-family mortgages provide greater asset diversification on our balance sheet as borrowers of multi-family mortgages typically have higher credit scores and longer lives than Alt-A mortgages.
The long-term investment operations generate earnings primarily generatesfrom net interest income fromearned on mortgages held for long-term investment. Our investment, which consists of mortgages held as CMO collateral and mortgages held for investment on our balance sheet. Investment in Alt-A mortgages isand multi-family mortgages are initially financed with collateralized mortgage obligations, or "CMO,"
financing, short-term borrowings under reverse repurchase agreements which are subsequently converted to long-term financing in the form of collateralized mortgage obligations, or “CMO,” financing. Cash flow from the mortgage loan investment portfolio and proceeds from the sale of capital stock also finance new Alt-A and cash.
multi-family mortgage acquisitions and originations.
The mortgage operations acquire and originate sell and securitizeprimarily adjustable and fixed rate Alt-A mortgages and, to a lesser extent, B/C mortgages. Ourmortgages as follows:
The mortgage operations generate income by securitizing and selling loansmortgages to permanent investors, including ourthe long-term investment operations, and, to a
lesser extent,operations. This business also earns revenue from net interest income earned on mortgages held-for-sale and fees associated with mortgage acquisitions and originations, mortgage servicing rights and master servicing agreements. OurThe mortgage operations use warehouse facilities provided by the warehouse lending operations to finance the acquisition and origination of mortgages.
The warehouse lending operations provide short-term financing to mortgage loan originators, including the mortgage operations, by funding mortgages from their closing date until they are soldsale to pre-approved investors. This business earns fees from warehouse transactions as well as net interest income from the difference between its cost of borrowings and the interest earned on warehouse advances.
Consolidation of IFC
On July 1, 2003, we entered into a Stock Purchase Agreement with Joseph R.
Tomkinson, our Chairman, Chief Executive Officer and a director, William S.
Ashmore, our Chief Operating Officer, President and a director, and the Johnson
Revocable Living Trust, of which Richard J. Johnson, our Executive Vice
President and Chief Financial Officer, is trustee, whereby we purchased all of
the outstanding shares of voting common stock of IFC for aggregate consideration
of $750,000. The fairness opinion related to the purchase price of IFC, as
rendered by an independent financial advisor, and the subsequent transaction was
approved by our board of directors. The common stock of IFC represents 1% of the
economic interest in IFC. We currently own all of the outstanding non-voting
preferred stock of IFC, which represents 99% of the economic interest in IFC.
Each of Messer's. Tomkinson and Ashmore and the Johnson Revocable Living Trust
owned one-third of the outstanding common stock of IFC. As a result of acquiring
100% of IFC's common stock, as of July 1, 2003 IMH consolidates IFC. The Company
will not reclassify prior periods' financial statements to conform to the
current presentation.
Available Information
Our Internet website address is www.impaccompanies.com. We make our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K
and proxy statement for our annual stockholders' meetings,advances as well as any
amendmentsfees from warehouse transactions.
Our goal is to those reports, available free of charge throughgenerate consistent reliable income for distribution to our website as
soon as reasonably practicable after we electronically file such material with,
or furnish it to, the Securities and Exchange Commission, or "SEC." You can
learn more about usstockholders primarily from earnings generated by reviewing our SEC filings on our website by clicking on
"Investor Relations" located on our home page. The SEC also maintains a website
at www.sec.gov that contains reports, proxy statements and other information
regarding SEC registrants, including IMH.
core operating businesses.
We define critical accounting policies as those that are important to the portrayal of our financial condition and results of operations and require estimates and assumptions based on our judgment of changing market conditions and the performance of our assets and liabilities at any given time. In determining which accounting policies meet this definition, we considered our policies with respect to the valuation of our assets and liabilities and estimates and assumptions used in determining those valuations. We believe the most critical accounting issues that require the most complex and difficult judgments and that are particularly susceptible to significant change to our financial condition and results of operations includinginclude the following:
o
Allowance for loan losses.losses. We provide an allowance for loan losses for mortgages held as CMO collateral, finance receivables and mortgages held-for-investment.held-for-investment, or “loans provided for.” In evaluating the adequacy of the allowance for
loan losses, management
17
In
accordance with Statement of Financial Accounting Standards No. 5, management
believesWe believe that pooling of mortgages with similar characteristics is an appropriate methodology in which to evaluate the allowance for loan losses. In addition, management acknowledgesprovides an allowance for loan losses for Alt-A mortgages that there are mortgages in the mortgage
portfolio that were acquiredretained for long-term investment and which are not underwritten to our specific underwriting guidelines. These mortgages are acquired on a bulk basis by the mortgage operations from other mortgage originators that underwrite mortgages substantially similar, but not specific, to our mortgage underwriting guidelines, or “non-Impac mortgages.” Management also recognizes that there are qualitative factors that must be taken into consideration when evaluating and measuring potential impairmentinherent loss in the mortgage portfolio.our loan portfolios. These items include, but are not limited to, economic indicators that may affect the borrower'sborrower’s ability to pay, changes in value of collateral, political factors and industry statistics. For additional information regarding provisionallowance for loan losses refer to "Results“Results of Operations"
below.
Derivative instruments.Operations and Financial Condition—Impac Mortgage Holdings, Inc.”
Valuation of derivative instruments. The mortgage operations enter into forward
commitments andacquire derivative transactionsinstruments to mitigate changes in the value of its "locked pipeline"mortgage pipeline. The mortgage pipeline consist of fixed rate mortgages. The locked pipeline are mortgages that have not yet been acquired, however, the mortgage operations has committed to acquire the mortgages in the future at pre-determined interest rates through rate-lock commitments. TheOn March 9, 2004, the SEC issued Staff Accounting Bulletin 105, “Application of Accounting Principles to Loan Commitments,” or “SAB 105,” which clarifies the SEC’s position on the accounting for loan commitments. Consistent with SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” or “SFAS 149,” SAB 105 states that loan commitments are treated as derivative instruments. Prior to the issuance of SAB 105, the mortgage operations recordsrecorded the fair market value of its lockedmortgage pipeline, excluding mortgage servicing value, as it qualifies as a derivative instrument under the provisions of SFASStatement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities, or “SFAS 133,” however, it does not qualify for hedging treatment. Therefore, the lockedmortgage pipeline and the related fair market value of derivative instruments arewere marked to market each reporting period along with a corresponding entry to non-interest expense. SAB 105 also addresses the issues of not recognizing cash flows associated with servicing prior to the sale or securitization of funded loans and certain other disclosure issues pertaining to loan commitments. SAB 105 also significantly limits a company’s ability to record an asset on its mortgage pipeline. We have adopted the new requirements within SAB 105, and as a result, we have not recorded an asset related to our outstanding mortgage pipeline as of March 31, 2004.
Financial Highlights for the First Quarter of 2004
Results of Operations and Financial Condition
Condition—Impac Mortgage Holdings, Inc.
Consolidation of IFC
The results of operations for the three months ended March 31, 2004 reflect the consolidation of IFC on July 1, 2003. On July 1, 2003, IMH entered into a stock purchase agreement with Joseph R. Tomkinson, our Chairman, Chief Executive Officer and a director, William S. Ashmore, our Chief Operating Officer, President and a director, and the Johnson Revocable Living Trust, of which Richard J. Johnson, our Executive Vice President and Chief Financial Officer is trustee, whereby IMH purchased all of the outstanding shares of voting common stock of IFC for aggregate consideration of $750,000. Each of Messer’s. Tomkinson and Ashmore and the Johnson Revocable Living Trust owned one-third of the outstanding common stock of IFC. Mr. Tomkinson elected to receive $125,000 worth of his consideration for the sale of his IFC shares of common stock in the form of 7,687 shares of IMH common stock. The fairness opinion related to the purchase price of IFC, as rendered by an independent financial advisor, and the subsequent transaction was approved by our board of directors. As a result of acquiring 100% of IFC’s common stock on July 1, 2003, IMH owns all of the common stock and preferred stock of IFC and began to consolidate IFC as of that date. As such, the consolidated financial statements for the three months ended March 31, 2004, or “consolidation period,” reflect the results of operations of IFC on a consolidated basis. The consolidated financial statements for the three months ended March 31, 2003, or “non-consolidation period,” include the results of operations of IFC as equity in net earnings of IFC.
Results of Operations - Operations—
For the Three Months Ended September 30, 2003 asMarch 31, 2004 compared to the Three Months Ended September 30, 2002
March 31, 2003
Net Earnings
Net earnings increased 72%80% to $33.4$46.0 million, or $0.63$0.76 per diluted share, for the thirdfirst quarter of 20032004 compared to $19.4$25.5 million, or $0.47$0.53 per diluted share, for the thirdfirst quarter of 2002.2003. The third quarter-over-quarter increase in net earnings of $14.0$20.5 million was primarily due to the following:
o $8.1
Taxable Income
Estimated
After adjusting for our estimates of the differences between net earnings and taxable income, estimated taxable income was $32.5$45.5 million, or $0.61$0.75 per diluted share, for the thirdfirst quarter of 20032004 as compared to $25.5$28.0 million, or $0.61$0.58 per diluted share, for the thirdfirst quarter of 2002.2003. When we file our annual tax returns there are certain adjustments that we make to net earnings and taxable income due to differences in the nature and extent that revenues and expenses are recognized under the two methods. For instance, to calculate taxable income we can only
deduct loan loss provisions to the extent that we incurred actual loan losses as compared to the determination of net earnings whichthat require a deduction of loan loss provisions to
derive net earnings.which are determined based on estimated losses inherent in our loan portfolios. To maintain our REIT status, we are required to distribute a minimum of 90% of our annual taxable income to our stockholders. Because we pay dividends based on taxable income, dividends may be more or less than net earnings. WeAs such, we believe that the disclosure of estimated taxable income, which is a non-GAAPnon-generally accepted accounting principle, or “GAAP,” financial measurement, is useful information for our investors. 18
subsequent years. The following table presents a reconciliation of net earnings to estimated taxable income for the periods indicated (in(dollars in thousands, except per share amounts):
For the Three Months Ended March 31, | ||||||||
2004 | 2003 | |||||||
Net earnings | $ | 46,046 | $ | 25,545 | ||||
Adjustments to net earnings: | ||||||||
Provision for loan losses | 9,725 | 6,484 | ||||||
Dividend from IFC | 7,500 | 4,455 | ||||||
Tax deduction for actual loan losses | (2,022 | ) | (3,325 | ) | ||||
Anticipated partial worthlessness deduction on warehouse advances (1) | (6,000 | ) | — | |||||
Equity in net earnings of IFC | (9,703 | ) | (5,167 | ) | ||||
Estimated taxable income (2) | $ | 45,546 | $ | 27,992 | ||||
Estimated taxable income per diluted share | $ | 0.75 | $ | 0.58 | ||||
Estimated taxable income per outstanding share | $ | 0.73 | $ | 0.57 | ||||
(1) | Represents estimated partial impairment on specific warehouse advances that we anticipate will be non-collectible. For additional information, refer to “Provision for Loan Losses and Allowance for Loan Losses” below. |
(2) | Excludes the |
Net Interest Income
Consolidating effect of a
deduction attributable to net operating tax loss carry-forwards, if any.
The following table presents dividends declared and paid in 2003 that will
be applied to taxableIFC. Net interest income for 2003:
Per Share
Stockholder Dividend
Period Covered Record Date Amount
- ------------------------------------------------ --------------- ----------
Quarter ended December 31, 2002 ................ January 2, 2003 $ 0.48
Quarter ended March 31, 2003 ................... April 4, 2003 $ 0.50
Quarter ended June 30, 2003 .................... July 3, 2003 $ 0.50
Quarter ended September 30, 2003 ............... October 3, 2003 $ 0.50
In addition, we expect to declare and pay at least a dividend distribution
of $0.50 per share during the fourth quarter of 2003 which combined with the
dividends previously declared and paid during 2003 should be sufficient to meet
REIT taxable income distribution requirements for the year. Upon filing our 2002
tax return, we had federal and state net operating loss tax carry-forwards of
$18.7 million, which may or may not offset taxable income in 2003 or in
subsequent years.
The increase in third quarter-over-quarter net earnings was driven by
record mortgage acquisitions and originations. During the third quarter of 2003,
the mortgage operations acquired and originated $2.7 billion of mortgages
compared to $1.7 billion during the third quarter of 2002. An additional $90.0
million of multi-family mortgages were originated by IMCC during the third
quarter of 2003. Mortgages acquired through correspondents as bulk acquisitions,
which are generally not underwritten through our proprietary automated
underwriting system, were $932.2 million, or 34% of total mortgage acquisitions
and originations, during the third quarter of 2003 compared to $237.3 million,
or 14% of total mortgage acquisitions and originations, during the third quarter
of 2002.
19
The following table summarizes the principal balance of mortgage
acquisitions and originationsgenerated by the mortgage operations by loan characteristicwas reported on a consolidated basis for the periods indicated (in thousands):
For the Three Months Ended September 30,
----------------------------------------consolidation period, however, prior to July 1, 2003, 2002
---------------- ----------------
Principal Principal
Balance % Balance %
---------- --- ---------- ---
By Loan Type:
Fixed rate first trust deed .............................. $1,244,444 45 $ 552,751 33
Fixed rate second trust deed ............................. 45,417 2 24,032 1
Adjustable rate:
Six-month London Interbank Offered Rate ("LIBOR") ARMs . 452,924 17 724,101 43
Six-month LIBOR hybrids (1) ............................ 993,623 36 379,102 23
---------- --- ---------- ---
Total adjustable rate ............................... 1,446,547 53 1,103,203 66
---------- --- ---------- ---
Total Mortgage Acquisitions and Originations ........ $2,736,408 100 $1,679,986 100
========== === ========== ===
By Production Channel:
Correspondent acquisitions:
Flow ................................................... $1,270,677 46 $1,021,222 61
Bulk ................................................... 932,187 35 237,263 14
---------- --- ---------- ---
Total correspondent acquisitions .................... 2,202,864 81 1,258,485 75
---------- --- ---------- ---
Wholesale and retail originations ...................... 394,884 14 295,518 18
Novelle Financial Services, Inc. ....................... 138,660 5 125,983 7
---------- --- ---------- ---
Total Mortgage Acquisitions and Originations ........ $2,736,408 100 $1,679,986 100
========== === ========== ===
By Credit Quality:
Alt-A mortgages .......................................... $2,589,974 95 $1,545,239 92
B/C mortgages (2) ........................................ 146,434 5 134,747 8
---------- --- ---------- ---
Total Mortgage Acquisitions and Originations ........ $2,736,408 100 $1,679,986 100
========== === ========== ===
By Purpose:
Purchase ................................................. $1,260,247 46 $ 985,755 59
Refinance ................................................ 1,476,161 54 694,231 41
---------- --- ---------- ---
Total Mortgage Acquisitions and Originations ........ $2,736,408 100 $1,679,986 100
========== === ========== ===
By Prepayment Penalty:
With prepayment penalty .................................. $1,867,746 68 $1,372,735 82
Without prepayment penalty ............................... 868,662 32 307,251 18
---------- --- ---------- ---
Total Mortgage Acquisitions and Originations ........ $2,736,408 100 $1,679,986 100
========== === ========== ===
- ------------
(1) Mortgages are fixed rate for initial two to ten year periods and
subsequently adjust to the indicated index plus a margin.
(2) The third quarter of 2003 and 2002 includes $138.7 million and $126.0
million, respectively, of B/C mortgages originated by Novelle Financial
Services, Inc., that are subsequently held-for-sale or sold to third party
investors for cash gains.
As a result of record mortgage acquisitions and originations, we retained
$1.4 billion of mortgages during the third quarter of 2003 compared to $1.1
billion during the third quarter of 2002. The increase in mortgage acquisitions
by the long-term investment operations and the growth of our warehouse lending
operations resulted in significant growth of our mortgage portfolio. The
mortgage portfolio grew 69% to $8.8 billion as of September 30, 2003 compared to
$5.2 billion as of September 30, 2002, which in turn generated higher levels of
net interest income.
20
The following table summarizes the principal balance of mortgages acquired
from the mortgage operations and originated by the long-term investment
operations by loan characteristic for the periods indicated (in thousands):
For the Three Months Ended
September 30,
-----------------------------------
2003 2002
---------------- ----------------
Principal Principal
Balance % Balance %
------- - ------- -
Volume by Type:
Adjustable rate ................ $1,326,364 92 $ 892,092 82
Fixed rate ..................... 108,679 8 200,004 18
---------- ----------
Total Mortgage Acquisitions . $1,435,043 100 $1,092,096 100
========== ==========
Volume by Product:
Six-month LIBOR ARMs ........... $ 357,636 25 $ 619,225 57
Six-month LIBOR hybrids (1) .... 968,728 67 272,867 25
Fixed rate first trust deeds ... 108,679 8 200,004 18
Fixed rate second trust deeds .. -- 0 -- 0
---------- ----------
Total Mortgage Acquisitions . $1,435,043 100 $1,092,096 100
========== ==========
Volume by Credit Quality:
Alt-A mortgages ................ $1,339,512 94 $1,086,719 100
Multi-family mortgages ......... 90,022 6 -- 0
B/C mortgages .................. 5,509 0 5,377 0
---------- ----------
Total Mortgage Acquisitions . $1,435,043 100 $1,092,096 100
========== ==========
Volume by Purpose:
Purchase ....................... $ 839,870 59 $ 681,739 62
Refinance ...................... 595,173 41 410,357 38
---------- ----------
Total Mortgage Acquisitions . $1,435,043 100 $1,092,096 100
========== ==========
Volume by Prepayment Penalty:
With prepayment penalty ........ $1,087,377 76 $ 913,959 84
Without prepayment penalty ..... 347,666 24 178,137 16
---------- ----------
Total Mortgage Acquisitions . $1,435,043 100 $1,092,096 100
========== ==========
- ------------
(1) Mortgages are fixed rate for initial two to ten year periods and
subsequently adjust to the indicated index plus a margin.
Net interest income increased by $8.1 million to $31.2 million for the
third quarter of 2003 compared to $23.1 million for the third quarter of 2002.
The third quarter-over-quarter increase in net interest income was primarily due
to a $3.8 billion increase in average Mortgage Assets, which increased to $8.4
billion for the third quarter of 2003 compared to $4.6 billion for the third
quarter of 2002 as the long-term investment operations retained $4.8 billion of
primarily Alt-A mortgages from the mortgage operations and $207.4 million of
multi-family mortgages since the end of the third quarter of 2002. We retain
mortgages acquired and originatedgenerated by the mortgage operations and multi-family
mortgages originated by IMCC that fit within our criteria, which are generally
ARMs and fixed rate mortgages ("FRMs") with good credit profiles, insurance
enhancements, when we require, and prepayment penalty features. Growthwas a component of equity in net earnings of IFC on the warehouse lending operations also contributed to an increase inconsolidated financial statements for the non-consolidation period. For additional detail regarding the breakdown of net interest income forby business segment, refer to Note 5—Segment Reporting in the third quarter of 2003 as average finance receivablesnotes to non-affiliated customers increased 92% to $666.8 million compared to $347.7
million for the third quarter of 2002.consolidated financial statements.
Description. We earn interest income primarily on Mortgage Assets which includesinclude CMO collateral, mortgages held-for-investment, mortgages held-for-sale, finance receivables and investment securities available-for-sale, or collectively, “Mortgage Assets,” and, to a lesser extent, interest income earned on cash and cash equivalents and due from
affiliates.equivalents. Interest expense is primarily interest paid on borrowings on Mortgage Assets, which include CMO borrowings, reverse repurchase agreements and borrowings on investment securities available-for-sale, and, to a lesser extent,
interest expense paid on due to affiliates.available-for-sale. We also receive or make cash payments on derivative instruments as an adjustment to the yield on Mortgage Assets or borrowings on Mortgage Assets depending on whether certain specified contractual interest rate levels are reached. 21
Comparative Yield Table. The following table summarizes average balance, interest and weighted average yield on Mortgage Assets and borrowings on Mortgage Assets for the third
quarters of 2003 and 2002 and include interest income on Mortgage Assets and
interest expense related to borrowings on Mortgage Assets only (inperiods indicated (dollars in thousands):
For the Three Months Ended March 31, | ||||||||||||||||||
2004 | 2003 | |||||||||||||||||
Average Balance | Interest | Yield | Average Balance | Interest | Yield | |||||||||||||
MORTGAGE ASSETS | ||||||||||||||||||
Investment securities available-for-sale | $ | 12,981 | $ | 907 | 27.95 | % | $ | 25,536 | $ | 753 | 11.80 | % | ||||||
CMO collateral (1) | 9,581,443 | 88,549 | 3.70 | 5,533,475 | 60,051 | 4.34 | ||||||||||||
Mortgages held-for-investment and mortgages held-for-sale (2) | 1,434,117 | 21,280 | 5.94 | 180,912 | 3,251 | 7.19 | ||||||||||||
Finance receivables: | ||||||||||||||||||
Affiliated (3) | — | — | — | 464,636 | 4,685 | 4.03 | ||||||||||||
Non-affiliated | 457,039 | 5,097 | 4.46 | 523,182 | 6,738 | 5.15 | ||||||||||||
Total finance receivables | 457,039 | 5,097 | 4.46 | 987,818 | 11,423 | 4.63 | ||||||||||||
Total Mortgage Assets | $ | 11,485,580 | $ | 115,833 | 4.03 | % | $ | 6,727,741 | $ | 75,478 | 4.49 | % | ||||||
BORROWINGS | ||||||||||||||||||
CMO borrowings | $ | 9,341,138 | $ | 54,060 | 2.31 | % | $ | 5,417,690 | $ | 41,684 | 3.08 | % | ||||||
Reverse repurchase agreements | 1,742,935 | 9,554 | 2.19 | 1,129,251 | 6,790 | 2.41 | ||||||||||||
Borrowings secured by investment securities (4) | — | — | — | 6,233 | 632 | 40.56 | ||||||||||||
Total borrowings on Mortgage Assets | $ | 11,084,073 | $ | 63,614 | 2.30 | % | $ | 6,553,174 | $ | 49,106 | 3.00 | % | ||||||
Net interest spread (5) | 1.73 | % | 1.49 | % | ||||||||||||||
Net interest margin (6) | 1.82 | % | 1.57 | % |
(1) | Includes amortization of acquisition costs and net cash payments on derivative instruments. |
(2) | Includes mortgages held-for-sale which were acquired via the |
(3) | Advances to subsidiaries and affiliates were eliminated during the first three months of 2004 due to the consolidation of the mortgage operations. |
(4) | Payments and excess cash flows received from investment securities |
(5) | Net interest spread is calculated by subtracting the weighted average yield on total borrowings on Mortgage Assets |
(6) | Net interest margin |
Net interest income was $52.6 million for the yield during the thirdfirst quarter of 2003.
(2) Includes amortization of acquisition costs and net cash payments on
derivative instruments allocated2004 compared to specific CMOs.
(3) Mortgages held-for-sale were acquired via$26.8 million for the acquisition of Impac Funding
Corporation on July 1, 2003.
(4) Includes amortization of acquisition costs and net cash payments on
derivative instruments not allocated to specific CMOs.
(5) Advances to subsidiaries and affiliates have been eliminated during the
third quarter of 2003 due to the consolidation of the mortgage operations.
(6) Payments and excess cash flows received from the investment securities
collateralizing this loan are used to pay down the outstanding borrowings.
The payments are received from a collateral base that is in excess of the
borrowings. Therefore, while the payment amounts should remain relatively
stable, the average balance of the borrowings will continue to decrease.
These borrowings were paid off during the thirdfirst quarter of 2003. The yield
reflects discount and securitization costs that were recorded asquarter-over-quarter increase in net interest expense upon repayment of borrowings.
(7) Net interest spread is calculated by subtracting the weightedincome was primarily due to an increase in average
yield on total borrowings on Mortgage Assets, which increased to $11.5 billion for the first quarter of 2004 compared to $6.7 billion for the first quarter of 2003 as the long-term investment operations retained $7.2 billion of primarily Alt-A mortgages from the weighted average
yield on total Mortgage Assets.
(8) Net interest margin is calculatedmortgage operations and $342.9 million of multi-family mortgages originated by subtracting interest expense on total
borrowings on Mortgage Assets from interest income on total Mortgage
AssetsIMCC since the end of the first quarter of 2003. We primarily retain Alt-A mortgages that are acquired and then dividingoriginated by the total averagemortgage operations and multi-family mortgages originated by IMCC that fit within our investment criteria. Alt-A and multi-family mortgages are ARMs and FRMs with good credit profiles with mortgage insurance enhancements, when required, that generally have prepayment penalty features and are primarily purchase money transactions. The following table summarizes the principal balance of Alt-A mortgages acquired by the long-term investment operations from the mortgage operations and multi-family mortgages originated by IMCC by loan characteristic for Mortgage Assets.
the periods indicated (in thousands):
For the Three Months Ended March 31, | ||||||||||
2004 | 2003 | |||||||||
Principal Balance | % | Principal Balance | % | |||||||
Volume by Type: | ||||||||||
Adjustable rate | $ | 2,696,543 | 92 | $ | 866,253 | 60 | ||||
Fixed rate | 249,883 | 8 | 567,986 | 40 | ||||||
Total Mortgage Acquisitions | $ | 2,946,426 | 100 | $ | 1,434,239 | 100 | ||||
Volume by Product: | ||||||||||
Primarily six-month LIBOR indexed ARMs (1) | $ | 676,743 | 23 | $ | 491,241 | 34 | ||||
Primarily six-month LIBOR indexed hybrids (1) (2) | 2,019,800 | 69 | 375,011 | 26 | ||||||
Fixed rate first trust deeds | 249,883 | 8 | 564,639 | 39 | ||||||
Fixed rate second trust deeds | — | 0 | 3,348 | 1 | ||||||
Total Mortgage Acquisitions | $ | 2,946,426 | 100 | $ | 1,434,239 | 100 | ||||
Volume by Credit Quality: | ||||||||||
Alt-A loans | $ | 2,934,124 | 100 | $ | 1,427,484 | 100 | ||||
B/C loans (3) | 12,302 | 0 | 6,755 | 0 | ||||||
Total Mortgage Acquisitions | $ | 2,946,426 | 100 | $ | 1,434,239 | 100 | ||||
Volume by Purpose: | ||||||||||
Purchase | $ | 1,839,942 | 62 | $ | 611,529 | 43 | ||||
Refinance | 1,106,484 | 38 | 822,710 | 57 | ||||||
Total Mortgage Acquisitions | $ | 2,946,426 | 100 | $ | 1,434,239 | 100 | ||||
Volume by Prepayment Penalty: | ||||||||||
With prepayment penalty | $ | 2,247,046 | 76 | $ | 1,163,745 | 81 | ||||
Without prepayment penalty | 699,380 | 24 | 270,494 | 19 | ||||||
Total Mortgage Acquisitions | $ | 2,946,426 | 100 | $ | 1,434,239 | 100 | ||||
(1) Also includes minimal principal balances of one-year LIBOR and constant maturity Treasury ARMs.
(2) Mortgages are fixed rate for initial two to five year periods and subsequently adjust to the indicated index plus a margin.
(3) B/C loans, as defined by us, which were acquired and originated through correspondent or wholesale channels.
The increase in net interest income was offset, in part, by a decreasealso due to an increase in net interest margins on Mortgage Assets, which declined 44 basis pointsincreased to 1.48%1.82% for the thirdfirst quarter of 20032004 as compared to 1.92%1.57% for the third quarter of 2002.
Although net interest margins declined third quarter-over-quarter, net interest
margins improved from 1.36% during the secondfirst quarter of 2003. The overall
decreaseincrease in net interest margins during the third quarter of 2003 as comparedwas primarily due to the third quarterfollowing:
Expiration of September 30, 2003 compared to 6.88% as of September
30, 2002.
Higher composition of FRMs.more expensive derivative instruments. We generally earn smaller net interest margins
on FRMs financed with fixed rate CMO borrowings than on ARMs financed with
adjustable rate CMO borrowings. In order to compensate CMO bondholders for
investing in fixed rate CMOs, which generally have longer lives than adjustable
rate CMOs and are fixed over the life of the investment, we must pay a higher
yield on the bonds in much the same way that long-term certificates of deposit
generally have higher yields than short-term certificates of deposit. In other
words, we are compensating fixed rate CMO bondholders for the risk that market
interest rates may rise while interest rates on the CMO bonds will remain fixed.
Therefore, overall net interest margins on CMO collateral declined during the
third quarter of 2003 compared to the third quarter of 2002, in part, because we
acquired and retained more FRMs for long-term investment. As of September 30,
2003 18% of mortgages held as CMO collateral were FRMs compared to 9% of FRMs
held as CMO collateral as of September 30, 2002. However, we believe that FRMs
generally have longer lives than ARMs, generate cash flows over a longer time
horizon and produce a comparable return on average equity as on ARMs.
Net cash payments on derivative instruments. The notional amount ofcurrently acquire derivative instruments, rose as we acquired derivative instruments asprimarily interest rate hedges for CMO borrowings, which were used to finance the retention of $4.8
billion of mortgages by the long-term investment operations since the end of the
third quarter of 2002. The increase in the notional amount of derivative
instruments combined with the decline of short-term interest rates increased net
cash payments made on derivative instruments. We acquire derivative instrumentsswaps, to offset possible increased CMO borrowing costs resultingwhich may result from changingrising interest rates. Net interest margins on Mortgage Assets improved as more expensive derivative instruments, primarily interest rate caps and floors that were acquired in 2001, expired during 2003 and during the first quarter of 2004. As a result, net cash payments and amortization fromof derivative instruments was $14.1 million fordeclined 20 basis points of total average Mortgage Assets to 43 basis points of total average Mortgage Assets during the thirdfirst quarter of 20032004 as compared to $6.3
million for63 basis points of total average Mortgage Assets during the thirdfirst quarter of 2002.2003. The goal of our interest rate hedging policy is to provide stable net interest margins and cash flows to our investors in various interest rate environments. Our interest rate hedging strategy is designed to protect net interest margins and net earnings from changing interest rates, which, absent interest rate hedging instruments, would, in all likelihood, have an adverse effect on both. We believe that our interest rate hedging policy is sound and net interest margins will remain relatively stable even if interest rates change from current levels.
In addition
Consolidation of mortgages held by the mortgage operations. The consolidation of mortgages held by the mortgage operations during the first quarter of 2004 contributed to the positive contribution ofan increase in net interest incomemargins on Mortgage Assets. During the first quarter of 2004, net interest margins on mortgages held by the mortgage operations was 3.19% on average outstanding balances of $685.8 million, which added an additional 9 basis points to consolidated net earnings,interest margins on Mortgage Assets. As a comparison, net earnings frominterest margins on mortgages held by the mortgage operations was 2.77% during the first quarter of 2003. Net interest margins on mortgages held by the mortgage operations increased $8.7 milliondue to $11.5 milliona steeper yield curve during the thirdfirst quarter of 20032004 as compared to $2.8
million during the thirdfirst quarter of 2002. This2003. The yield curve represents the mathematical difference between short-term interest rates and long-term interest rates. Because the mortgage operations establishes interest rates on its mortgages by indexing those interest rates to long-term market interest rates and finances mortgages with borrowings that are indexed to short-term interest rates, a steep yield curve benefits net interest margins.
Non-Interest Income
Consolidating effect of IFC. Non-interest income generated by the mortgage operations was reported on a consolidated basis for the consolidation period, however, prior to July 1, 2003, non-interest income generated by the mortgage operations was a component of equity in net earnings of IFC on the consolidated financial statements for the non-consolidation period. For additional detail regarding the breakdown of non-interest income by business segment refer to Note 5—Segment Reporting in the notes to consolidated financial statements.
Due to the consolidation of IFC, non-interest income increased to $31.5 million for the first quarter of 2004 as compared to $7.8 million for the first quarter of 2003. The quarter-over-quarter increase in non-interest income of $23.7 million was primarily due to anthe following:
These quarter-over-quarter variances are discussed in loan
sales volume combined with greater profitability per loan sold. The sale of
Alt-A mortgages and multi-family mortgages to third party investors and the
completion of CMOs during the third quarter of 2003 resulted in gain on sale of
loans of $33.9 million compared to gain on sale of loans of $13.7 million for
the third quarter of 2002. Of the $2.7 billion of mortgage acquisitions and
originations during the third quarter of 2003, the mortgage operations sold $1.3
billion of mortgages to third party investors and $1.3 billion to the long-term
investment. This compares to $371.8 million of mortgages sold to third party
investors and $1.1 billion of mortgages sold to the long-term investment
operations during the third quarter of 2002. The long-term investment operations
also completed $1.6 billion of CMOs during the third quarter of 2003 as compared
to $696.5 million of CMOs completed during the third quarter of 2002. further detail below.
Gain on saleSale of loans was 127 basis points on total loan sales volume of $2.7 billion
for the third quarter of 2003 compared to 93 basis points on total loan sales
volume of $1.5 billion for the third quarter of 2002.Loans. Gain on sale of loans includes the difference between the price we acquire and originate mortgages and the price we receive upon the sale or securitization of mortgages plus or minus direct mortgage origination revenue and costs, i.e. loan and underwriting fees, commissions, appraisal review fees, document expense, etc. Gain on sale
of loans acquired and originated by the mortgage operations also includes a premium for the sale of mortgage servicing rights upon the sale or 23
mortgages. Allmortgages, including real estate mortgage investment conduits, or “REMICs,” and CMOs. Substantially all mortgages sold or securitized during the third
quarterfirst quarters of 2004 and 2003 were done so on a servicing released basis, which resultsresulted in substantially all cash gains.
The $29.5 million increase in gain on sale of loans was primarily due to the consolidation of the mortgage operations. Gain on sale of loans increased to $31.1 million for the first quarter of 2004 as the mortgage operations sold $632.2 million of mortgages as whole loan sales and REMICs, on a servicing released basis, and the long-term investment operations completed $3.4 billion of CMOs, at which time mortgage servicing rights on the mortgages securing the CMOs were sold, as compared to gain on sale of loans of $1.6 million during the first quarter of 2003. As a further comparison, the mortgage operations sold $502.4 million of mortgages as whole loan sales and REMICs, on a servicing released basis, and the long-term investment operations completed $1.5 billion of CMOs, at which time mortgage servicing rights on the mortgages securing the CMOs were sold, during the first quarter of 2003, which resulted in gain on sale of loans of $22.0 million during the first quarter of 2003. In order to minimize risks associated with the accumulation of our mortgages, we seek to securitize or sell our mortgages more
frequently by creating smaller transactions,between 15 to 45 days from acquisition or origination, thereby reducing our exposure to interest rate risk and price volatility during the accumulation period of mortgages.
Equity in net earnings of IFC. The $5.2 million decrease in equity in net earnings of IFC was due to the consolidation of the mortgage operations. Net earnings of IFC was reported on a consolidated basis for the consolidation period, however, prior to July 1, 2003, 99% of the net earnings of IFC was reflected as equity in net earnings of IFC on the consolidated financial statements for the non-consolidation period. As a comparison, net earnings of IFC was $9.7 million for the first quarter of 2004 as compared to net earnings of $5.2 million for the first quarter of 2003. The increase in net earnings of IFC during the first quarter of 2004 as compared to the first quarter of 2003 was primarily due to an increase in gain on sale of loans as the mortgage operations sold a higher volume of mortgages and mortgage servicing rights.
Non-Interest Expense
Consolidating effect of IFC. Non-interest income generated by the mortgage operations was reported on a consolidated basis for the consolidation period, however, prior to July 1, 2003, non-interest income generated by the mortgage operations was a component of equity in net earnings of IFC on the consolidated financial statements for the non-consolidation period. For additional detail regarding the breakdown of non-interest expense by business segment refer to Note 5—Segment Reporting in the notes to consolidated financial statements.
Due to the consolidation of IFC, non-interest expense, including income taxes, increased to $28.3 million for the first quarter of 2004 as compared to $2.6 million for the first quarter of 2003. The quarter-over-quarter increase in non-interest expense of $25.7 million was primarily due to the following:
These quarter-over-quarter variances are discussed in further detail below.
Operating costs. The $18.6 million increase in operating costs was primarily due to the consolidation of the mortgage operations. Operating costs increased to $21.1 million for the first quarter of 2004 as compared to $2.5 million for the first quarter of 2003. Operating costs include personnel expense, professional services, equipment expense, occupancy expense, data processing expense and general and administrative and other expense. As a comparison, operating costs increased 33% to $21.1 million for the first quarter of 2004 as compared to combined operating costs, including operating costs of the mortgage operations, of $15.9 million for the first quarter of 2003. The increase in operating costs was primarily due to a 94% increase in mortgage acquisitions and originations to $3.5 billion during the first quarter of 2004 as compared to $1.8 billion during the first quarter of 2003. The following table summarizes the principal balance of mortgages soldmortgage acquisitions and originations by loan characteristic for the periods indicated (in thousands):
For the Three Months
Ended September 30,
-----------------------
2003 2002
---------- ----------
Real estate
For the Three Months Ended March 31, | ||||||||||
2004 | 2003 | |||||||||
Principal Balance | % | Principal Balance | % | |||||||
By Loan Type: | ||||||||||
Fixed rate first trust deed | $ | 654,398 | 19 | $ | 894,427 | 50 | ||||
Fixed rate second trust deed | 111,358 | 3 | 28,896 | 2 | ||||||
Adjustable rate: | ||||||||||
Primarily six-month LIBOR indexed ARMs (1) | 669,444 | 19 | 500,067 | 28 | ||||||
Primarily six-month LIBOR indexed hybrids (2) | 2,033,882 | 59 | 347,965 | 20 | ||||||
Total adjustable rate | 2,703,326 | 78 | 848,032 | 48 | ||||||
Total Mortgage Acquisitions and Originations | $ | 3,469,082 | 100 | $ | 1,771,355 | 100 | ||||
By Production Channel: | ||||||||||
Correspondent acquisitions: | ||||||||||
Flow | $ | 2,171,424 | 63 | $ | 1,042,306 | 59 | ||||
Bulk | 782,746 | 22 | 317,409 | 18 | ||||||
Total correspondent acquisitions | 2,954,170 | 85 | 1,359,715 | 77 | ||||||
Wholesale and retail originations | 371,578 | 11 | 305,090 | 17 | ||||||
Novelle Financial Services, Inc. | 143,334 | 4 | 106,550 | 6 | ||||||
Total Mortgage Acquisitions and Originations | $ | 3,469,082 | 100 | $ | 1,771,355 | 100 | ||||
By Credit Quality: | ||||||||||
Alt-A | $ | 3,312,135 | 95 | $ | 1,656,908 | 94 | ||||
B/C (3) | 156,947 | 5 | 114,447 | 6 | ||||||
Total Mortgage Acquisitions and Originations | $ | 3,469,082 | 100 | $ | 1,771,355 | 100 | ||||
By Purpose: | ||||||||||
Purchase | $ | 2,055,085 | 59 | $ | 764,032 | 43 | ||||
Refinance | 1,413,997 | 41 | 1,007,323 | 57 | ||||||
Total Mortgage Acquisitions and Originations | $ | 3,469,082 | 100 | $ | 1,771,355 | 100 | ||||
By Prepayment Penalty: | ||||||||||
With prepayment penalty | $ | 2,435,576 | 70 | $ | 1,471,904 | 83 | ||||
Without prepayment penalty | 1,033,506 | 30 | 299,451 | 17 | ||||||
Total Mortgage Acquisitions and Originations | $ | 3,469,082 | 100 | $ | 1,771,355 | 100 | ||||
(1) | Also includes minimal principal balances of one-year LIBOR and constant maturity Treasury ARMs. |
(2) | Mortgages are fixed rate for initial two to five year periods and subsequently adjust to the indicated index plus a margin. |
(3) | The first quarter of 2004 and 2003 includes $143.3 million and $106.6 million, respectively, of B/C mortgages originated by NFS, a subsidiary of IFC, that are subsequently sold to third party investors for cash gains. |
We believe that our efficient centralized operating structure and our web-based automated underwriting system, Impac Direct Access System for Lending, allows us to maintain our position as a low cost nationwide acquirer and originator of Alt-A mortgages. In addition, a higher percentage of non-Impac mortgage investment conduits ("REMICs") $ 400,000 $ --
Whole loan sales to third party investors .......... 931,160 371,834
Loan sales to the long-term investment operations .. 1,345,021 1,092,096
---------- ----------
Total sales ..................................... $2,676,181 $1,463,930
========== ==========
Non-interest expense increased to $18.6 million for the third quarter of
2003 compared to $2.3 million for the third quarter of 2002 as non-interest
expense of the mortgage operations was consolidated during the third quarter of
2003. However, for comparative purposes, when including non-interest expense of
the mortgage operations for the third quarter of 2002, consolidated non-interest
expense was $12.8 million. The $5.8 million increase in non-interest expense
includes the following:
o $4.2 million increase in operating expense, which includes personnel
expense, professional services and general and administrative
expense; and
o $3.1 million decrease in mark-to-market gain on derivative
instruments;
which were partially offset by the following:
o $1.2 million decrease in loss on disposition of other real estate
owned; and
o $738,000 decrease in provision for repurchases.
Operating expense increased 33% to $17.1 million for the third quarter of
2003 compared to $12.9 million for the third quarter of 2002. This increase was
primarily due to a 59% increase in mortgage acquisitions and originations by the
mortgage operations to $2.7 billion for the third quarter of 2003 compared to
$1.7 billion for the third quarter of 2002, which resulted in an increase in
staff levels. However, operational efficiencies created by IDASL combined with
the higher level of correspondent bulk acquisitions during the thirdfirst quarter of 2003 resulted in2004 contributed to lower per loan correspondent acquisition costs as compared to the thirdfirst quarter of 2002. Bulk2003 as non-Impac Alt-A mortgage acquisitions generally require less staffingpersonnel and corresponding personnel expense and other operating expensecosts than Impac Alt-A mortgages, which are acquired on a flow, or loan-by-loan basis.
The following table summarizes the mortgage operations weighted average
fully-loaded production cost to acquire or originate a single mortgage by
production channel
Provision for the periods indicated (in basis points of mortgage
acquisition or origination):
For the Three Months
Ended September 30,
---------------------
Production Channel Company/Division 2003 2002
- ----------------------------------------- ----------------------------------- --------- ---------
Correspondent acquisitions Impac Funding Corporation 42.96 77.53
Wholesale/retail originations Impac Lending Group 92.82 95.59
B/C originations Novelle Financial Services, Inc. 205.06 197.65
--------- ---------
Total Weighted Average Production Cost....................................... 58.37 78.77
========= =========
Fully-loaded cost to acquire or originate a single mortgage is based on
mortgage production costs, including sales commissions which are a component of
gain on sale of loans in the financial statements,Loan Losses and corporate administrative
costs, including human resources, accounting, management information systems,
corporate administration and marketing. Mortgage production costs exclude other
non-production related expenses, including amortization and impairment of
mortgage servicing rights, mark-to-market gain on derivative instruments and
write-down of investment securities.
24
The mark-to-market gain on derivative instruments was due to a fair market
valuation of the mortgage pipeline and derivative instruments acquired to hedge
interest rates on those mortgages until close and eventual sale or
securitization. The $3.1 million decrease in mark-to-market gain on derivative
instruments was due to a $239.9 million decrease in the mortgage operations'
locked pipeline of fixed rate mortgages, which declined to $261.4 million as of
September 30, 2003 compared to $501.3 million as of June 30, 2003.
Gain on disposition of other real estate owned was $642,000Allowance for the third
quarter of 2003 compared to a loss on disposition of other real estate owned of
$514,000 for the third quarter of 2002. When we acquire real estate through
foreclosure proceedings we record a write-down on foreclosed property to a
percentage of appraised value or a real estate broker's price opinion. Gain or
loss on disposition of other real estate owned results when there is a
difference between the initial write-down on foreclosed property and the
ultimate proceeds received upon disposition of foreclosed property. During the
third quarter of 2003 the initial write-downs on foreclosed property were in
excess of the proceeds received on the sale of real estate owned, which resulted
in a gain. The opposite occurred on real estate disposition during the third
quarter of 2002. We monitor the relationship between the appraised value or
broker's price opinion and the sales price of other real estate owned in the
context of current market conditions, including changes in real estate values.
The percentage write-down of newly acquired real estate to appraised value or
broker's price opinion is adjusted accordingly based on the past sales
performance of real estate dispositions.
Loan Losses
Provision for loan losses were $7.8$9.7 million for the thirdfirst quarter of 20032004 as compared to $5.4$6.5 million for the thirdfirst quarter of 2002.2003. An allowance is maintained for losses on mortgages held-for-investment, mortgages held as CMO collateral and finance receivables, or “loans provided for,” at an amount that management believes provides for losses inherent in those loan portfolios. We have implemented a methodology designed to analyze the performance of various loan portfolios based upon the relatively homogeneous nature within these loan portfolios. The provisionallowance for
estimated loan losses are primarily based on historical loss statistics,
including cumulative loss percentages and loss severity, of similar mortgages in
our mortgage portfolio. The loss percentage is used to determine the estimated
inherent losses in the mortgage portfolio. The provision for loan losses is also determined based onanalyzed using the following:
o management'sfollowing factors:
In evaluating the adequacy of the allowance for loan losses, management takes several items into consideration. For instance, a detailed analysis of historical loan performance data is accumulated and reviewed. This data is analyzed for loss performance and prepayment performance by product type, origination year and securitization issuance. As allowed under SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” and as amended by SFAS No. 118, “Accounting by Creditors for Impairment of a
Loan—Income Recognition and Disclosures,” (SFAS 114) we determine impairment collectively on loan pools as they are made up of smaller balance homogenous loans. These homogeneous loans are assessed for impairment by loan type. The largest mortgage loan pools by type consist of residential mortgages, however, multifamily and B/C mortgages are loan pools that are also assessed for impairment. The results of that analysis are then applied to our current loan portfolios and an estimate is created.
In addition, management provides an allowance for loan losses on Alt-A mortgages that are retained for long-term investment and which are not underwritten to our specific underwriting guidelines. These mortgages are acquired on a bulk basis by the mortgage operations from other mortgage originators that underwrite mortgages substantially similar, but not specific, to our mortgage underwriting guidelines, or “non-Impac mortgages.” Management also recognizes that there are qualitative factors that must be taken into consideration when evaluating and measuring inherent loss in our loan portfolios. These items include, but are not limited to, economic indicators that may affect the borrower’s ability to pay, changes in value of collateral, political factors and industry statistics.
At the end of March of 2004, we discovered that one client of the warehouse lending operations and certain of its officers had perpetrated a fraud pursuant to which they defrauded the warehouse lending operations into making advances pursuant to a warehouse line of credit. As of the date the fraud was discovered, an aggregate of $12.6 million of fraudulent loan advances were outstanding. We immediately terminated the warehouse line of credit and have been cooperating with federal investigators in their ongoing investigation of the defrauding parties. It appears that the defrauding parties had perpetrated a similar fraud on another warehouse lender.
We retained an independent consultant to investigate the matter; the investigator reported that no principals of the warehouse lending operations had knowingly participated in the fraud and stated that it is not likely that any other client of the warehouse lending operations could duplicate the same fraud. With the aid of the independent counsel, the audit committee of our board of directors reviewed the report and the scope of the investigation and concurs with the assessment set forth in the report. In response, we have taken steps to enhance procedures at our warehouse lending operations, including improvements of the application approval and funding processes of mortgage bankers and follow-up quality control checks. As a result of the fraud, during the first quarter of 2004 we established a specific allowance for loan losses in the amount of $6.0 million to provide for anticipated losses on the fraudulent warehouse advances as we have deemed this amount to be non-collectible. Based on available information, we believe we will be able to recover the remaining $6.6 million of related warehouse advances over time. Because we deem $6.0 million of the total warehouse advances to be non-collectible and anticipate that it will result in a tax deduction upon the filing of our 2004 corporate income tax return, we reflected the $6.0 million as a reduction to estimated taxable income for the first quarter of 2004 as shown in the reconciliation of net earnings to estimated taxable income above. To the extent that we believe that the actual losses will exceed the $6.0 million allowance, we will make an additional allowance for loan losses when, or if, we determine it is appropriate to do so as events and circumstances dictate. However, we believe that this specific allowance is adequate to provide for anticipated loan losses based on currently available information.
As of March 31, 2004, allowance for loan losses increased to $46.3 million as compared to $38.6 million as of December 31, 2003. In our opinion and in accordance with our loan loss allowance methodology, we believe that the present allowance for loan losses is adequate to provide for losses inherent in our loan portfolios. For additional information regarding delinquencies of mortgages in our mortgage loan investment portfolio refer to “Financial Condition” below.
Financial Condition
Total assets grew 21% to $13.0 billion as of March 31, 2004 as compared to $10.7 billion as of December 31, 2003 as the long-term investment operations retained $2.9 billion of primarily adjustable and fixed Alt-A mortgages and multi-family mortgages during the first quarter of 2004. The following table presents selected financial data foras of the periodsdates indicated (in(dollars in thousands, except per share data)data and master servicing portfolio):
As of and For the Quarter Ended, | ||||||||||||
March 31, 2004 | December 31, 2003 | March 31, 2003 | ||||||||||
Book value per share | $ | 9.72 | $ | 9.02 | $ | 7.13 | ||||||
Return on average assets | 1.57 | % | 1.58 | % | 1.48 | % | ||||||
Return on average equity | 33.22 | % | 36.79 | % | 31.69 | % | ||||||
Assets to equity ratio | 21.40:1 | 20.99:1 | 21.07:1 | |||||||||
Debt to equity ratio | 20.21:1 | 19.85:1 | 19.98:1 | |||||||||
Mortgages owned 60+ days delinquent | $ | 192,464 | $ | 175,313 | $ | 190,003 | ||||||
60+ day delinquency of mortgages owned | 1.62 | % | 1.79 | % | 3.17 | % | ||||||
Mortgages owned 90+ days delinquent and other real estate owned | $ | 142,379 | $ | 140,369 | $ | 155,597 | ||||||
90+ days delinquency of mortgages owned and other real estate owned to total assets | 1.09 | % | 1.31 | % | 2.10 | % | ||||||
Master servicing portfolio (in billions) | $ | 16,240 | $ | 13,920 | $ | 9,529 |
The retention of prior period percentagemortgages during the first quarter of 2004 resulted in a 30% increase in mortgages held as CMO collateral to reflect exclusion of
affiliated finance receivables upon consolidation of IFC.
Total assets grew 36% to $9.0$11.3 billion as of September 30, 2003March 31, 2004 as compared to $6.6$8.7 billion as of December 31, 2002 as the long-term investment operations
retained $3.6 billion of adjustable and fixed rate Alt-A mortgages and $206.2
million of multi-family mortgages during the first nine months of 2003. Due to
the retention and subsequent securitization of $4.0
25
billion of CMOs during the first nine months of 2003, CMO collateral increased
to $7.4 billion as of September 30, 2003 compared to $5.1 billion as of December
31, 2002.
The warehouse lending operations also grew as average finance receivables
to non-affiliated customers increased 92% to $666.8 million for the third
quarter of 2003 compared to $347.7 million for the third quarter of 2002. As of
September 30, 2003 the warehouse lending operations had approved warehouse lines
available to non-affiliated customers of $956.0 million representing 64 clients
compared to $665.0 million in approved warehouse lines to 61 clients as of
December 31, 2002.
Due to record mortgage acquisitions and originations for the third quarter
of 2003, average mortgages held for sale increased 63% to $647.5 million for the
third quarter of 2003 compared to $396.2 for the third quarter of 2002. The
mortgage operations had a locked pipeline of fixed rate mortgages in process of
$261.4 million as of September 30, 2003 compared to $501.3 million as of June
30, 2003. We anticipate the majority of the locked pipeline will close during
the fourth quarter of 2003.
During the third quarter of 2003, we exercised our right to call some of
our investment securities that we subsequently sold for a $3.5 million gain. In
addition, we used the proceeds from the sale of investment securities that
secured higher yielding borrowings to repay those borrowings. The following table presents detail on Mortgage Assets for the periods
indicated (in thousands):
September 30, December 31,
2003 2002
------------- -------------
Investment securities available-for-sale--
Subordinated securities collateralized by mortgages ......... $ 9,641 $ 17,710
Net unrealized gain (1) ..................................... 5,705 8,355
------------- -------------
Carrying value of investment securities available-for-sale 15,346 26,065
Mortgages held-for-sale--
Mortgages held-for-sale ................................... 567,725 --
Unamortized net premiums on mortgages ..................... 4,214 --
------------- -------------
Carrying value of mortgages held-for-sale .............. 571,939 --
CMO collateral--
CMO collateral, unpaid principal balance .................... 7,301,516 5,082,208
Unamortized net premiums on mortgages ....................... 110,129 75,987
Securitization expenses ..................................... 33,208 21,817
Fair value of derivative instruments ........................ (15,792) (30,332)
------------- -------------
Carrying value of CMO collateral ......................... 7,429,061 5,149,680
Finance receivables (2)--
Due from affiliates (3) ..................................... -- 476,227
Due from non-affiliated customers ........................... 650,991 664,021
------------- -------------
Carrying value of finance receivables .................... 650,991 1,140,248
Mortgages held-for-investment--
Mortgages held-for-investment, unpaid principal balance ..... 150,126 56,898
Unamortized net premiums on mortgages ....................... 1,757 566
Deferred costs .............................................. 180 72
------------- -------------
Carrying value of mortgages held-for-investment .......... 152,063 57,536
Allowance for loan losses ................................... (39,122) (26,602)
------------- -------------
Carrying value of Mortgage Assets .............................. $ 8,780,278 $ 6,346,927
============= =============
- ---------
(1) Unrealized gains on investment securities available-for-sale is a
component of accumulated other comprehensive loss in stockholders' equity.
(2) Outstanding advances on warehouse lines that the warehouse lending
operations make to affiliates and non-affiliated customers.
(3) Advances to affiliates were eliminatedselected information about mortgages held as the financial resultsCMO collateral as of the mortgage operations consolidate as of July 1, 2003.
dates indicated:
As of the Quarter Ended, | ||||||
March 31, 2004 | December 31, 2003 | March 31, 2003 | ||||
Percent of Alt-A mortgages | 99 | 99 | 99 | |||
Percent of ARMs | 88 | 86 | 79 | |||
Percent of FRMs | 12 | 14 | 21 | |||
Percent of hybrid ARMs | 55 | 48 | 31 | |||
Weighted average coupon | 5.53 | 5.56 | 6.29 | |||
Weighted average margin | 3.19 | 3.10 | 2.99 | |||
Weighted average original LTV | 78 | 79 | 80 | |||
Weighted average original credit score | 695 | 694 | 687 | |||
Prior 3-month constant prepayment rate, or “CPR” | 25 | 31 | 24 | |||
Prior 12-month CPR | 31 | 28 | 24 | |||
Percent with active prepayment penalty | 80 | 81 | 78 | |||
Percent of mortgages in California | 64 | 64 | 62 | |||
Percent of purchase transactions | 59 | 57 | 57 | |||
Percent of owner occupied | 86 | 87 | 91 | |||
Percent of first lien | 99 | 99 | 99 |
We believe that in order for us to generate positive cash flows and earnings we must successfully manage the following primary operational and market risks:
26
o
Credit Risk. We manage credit risk by investing inretaining for long-term investment high credit quality Alt-A mortgages that are acquired and originated by our mortgage operations and multi-family mortgages, originated by IMCC, adequately providing for loan losses and actively managing delinquencies and defaults. Alt-A mortgages are primarily first lien mortgages made to borrowers whose credit is generally within typical Fannie Mae and Freddie Mac guidelines, but that have loan characteristics that make them non-conforming under those guidelines.
We believe that by improving the overall credit quality of our long-term mortgage portfolio we can consistently generate stable future cash flow and earnings for
our stockholders. During the third quarter of 2003, we retained adjustable and
fixed rate Alt-A mortgages from the mortgage operations with an original
weighted average credit score of 701 and an original weighted average LTV ratio
of 77%. We primarily acquire non-conforming "A" or "A-" credit quality
mortgages, collectively, Alt-A mortgages. As defined by us, A credit quality
mortgages generally have a credit score of 640 or better and A- credit quality
mortgages generally have a credit score of between 600 and 639 while B/C
mortgages generally have credit scores of 599 and below. As a comparison, Fannie
Mae and Freddie Mac generally purchase conforming mortgages with credit scores
greater than 620.net earnings. As of September 30, 2003,March 31, 2004, the original weighted average credit score of mortgages held as CMO collateral was 691695 and the original weighted average LTV ratio was 79%78%. During the first quarter of 2004, we retained $2.9 billion of primarily adjustable and fixed rate Alt-A mortgages that were acquired or originated by the mortgage operations with an original weighted average credit score of 697 and an original weighted average LTV ratio of 78%. In addition, to retainingduring the first quarter of 2004, we retained $639.0 million of non-Impac mortgages from ourthat were acquired by the mortgage operations with an original weighted average credit score of 702 and an original weighted average LTV ratio of 78%. IMCC also originated $206.2$94.5 million of multi-family mortgages IMCC during the first nine
monthswith a weighted average credit score of 2003. IMCC was formed to primarily originate adjustable rate
multi-family mortgages with high credit quality, conservative debt service
ratios722 and lowan original weighted average LTV ratios with balances generally ranging from $250,000 to $2.0
million. Multi-family mortgages provide greater asset diversification on our
balance sheet as multi-family mortgages typically have higher interest rate
spreads and longer lives than residential mortgages. All multi-family mortgages
originated during the first nine months of 2003 had interest rate floors with
prepayment penalty periods ranging from three to five years.
We believe that we adequately provide for loan losses by maintaining a
ratio of allowance for loan losses to mortgages held as CMO collateral, finance
receivables and mortgages held-for-investment within a range of 40 basis points
to 45 basis points. As of September 30, 2003, the ratio of allowance for loan
losses to mortgages provided for was 47 basis points as allowance for loan
losses increased to $39.1 million. However, as mortgages held as CMO collateral
season, there is generally a historical upward curve whereby some mortgages will
move through the delinquency cycle with the expectation that some of the
delinquent mortgages will eventually be acquired through foreclosure proceedings
and sold at a gain or loss. Mortgages acquired during 2001 and 2000 reflect this
pattern which resulted in an increase in actual loan losses to $2.1 million for
the third quarter of 2003 compared to $731,000 for the third quarter of 2002.
Mortgages held as CMO collateral acquired during 2003 and 2002 are unseasoned
mortgages and have not experienced material losses as of September 30, 2003.
66%.
We monitor our sub-servicers to make sure that they perform loss mitigation, foreclosure and collection functions according to our servicing guidelines.guide. This includes an effective and aggressive collection effort in order to minimize the proportion of mortgages which becomefrom becoming seriously delinquent. However, when resolving delinquent mortgages, sub-servicers are required to take timely and aggressive action. The sub-servicer is required to determine payment collection under various circumstances, which will result in maximum financial benefit. This is accomplished by either working with the borrower to bring the mortgage current or by foreclosing and liquidating the property. We perform ongoing review of mortgages that display weaknesses and believe that we maintain adequate loss allowance on the mortgages. When a borrower fails to make required payments on a mortgage and does not cure the delinquency within 60 days, we generally record a notice of default and commence foreclosure proceedings. If the mortgage is not reinstated within the time permitted by law for reinstatement, the property may then be sold at a foreclosure sale. In foreclosure sales, we generally acquire title to the property. As of September
30, 2003March 31, 2004, our long-term mortgage portfolio included 2.88%1.62% of mortgages that were 60 days or more delinquent compared to 3.22%1.79% as of December 31, 2002.
27
At September 30, At December 31,
2003 2002
---------------- ----------------
60-89 days delinquent ............................ $ 50,921 $ 41,762
90 or more days delinquent ....................... 36,313 33,822
Foreclosures ..................................... 134,218 74,597
Delinquent bankruptcies .......................... 9,701 11,079
---------------- ----------------
Total 60 or more days delinquent .............. $ 231,153 $ 161,260
================ ================
At March 31, 2004 | At December 31, 2003 | |||||
60-89 days delinquent | $ | 66,246 | $ | 51,173 | ||
90 or more days delinquent | 37,936 | 52,080 | ||||
Foreclosures | 78,521 | 66,767 | ||||
Delinquent bankruptcies | 9,761 | 5,293 | ||||
Total 60 or more days delinquent | $ | 192,464 | $ | 175,313 | ||
Seriously delinquent assets consist of mortgages that are 90 days or more delinquent, including loans in foreclosure and delinquent bankruptcies. When real estate is acquired in settlement of loans, referred to as otheror “other real estate owned,” the mortgage is written-down to a percentage of the property'sproperty’s appraised value or broker'sbroker’s price opinion. As of September 30, 2003,March 31, 2004, seriously delinquent assets and other real estate owned as a percentage of total assets was 2.14%1.09% as compared to 1.99%1.31% as of December 31, 2002.2003. The following table summarizes mortgages in our long-term mortgage portfolio that were seriously delinquent and other real estate owned for the periods indicated (in thousands):
At March 31, 2004 | At December 31, 2003 | |||||
90 or more days delinquent | $ | 126,218 | $ | 124,140 | ||
Other real estate owned | 16,161 | 16,229 | ||||
Total | $ | 142,379 | $ | 140,369 | ||
Prepayment Risk. 74% As of Alt-A mortgages retained by the long-term
investment operations during the third quarter of 2003 had prepayment penalty
features ranging from one to five years and as of September 30, 2003, 81%March 31, 2004, 80% of mortgages held as CMO collateral had active prepayment penaltiespenalty features as compared to 70%81% as of September 30, 2002. In addition, our six-month LIBOR ARMs do not have
specified interest rate floors. Therefore, in declining interest rate
environments, coupons onDecember 31, 2003. 76% of Alt-A mortgages retained during the mortgages may decline to levels that do not give
the borrower an incentive to refinance. During the thirdfirst quarter of 2003
constant2004 had prepayment ratespenalty features ranging from two to seven years as compared to 81% during the first quarter of mortgages2003.
Mortgages held as CMO collateral was 29%had a 25% CPR during the first quarter of 2004 as compared to 33% for24% CPR during the thirdfirst quarter of 2002.
2003.
Liquidity Risk.We employ a leveraging strategy to increase assets by financing our long-term mortgage portfolioporfolio primarily with CMO borrowings, reverse repurchase agreements and capital and then using cash proceeds to acquire additional Mortgage Assets.mortgage assets. We acquire adjustableretain ARMs and fixed rate mortgages fromFRMs that are acquired and originated by the mortgage operations and multi-family mortgages from IMCC and finance the acquisition of those mortgages, during this accumulation period, with reverse repurchase agreements, which is
referred to as the accumulation period.agreements. After accumulating a pool of adjustable
and fixed rate mortgages, generally between $200 million and $1.0 billion, we securitize the mortgages in the form of CMOs. Our strategy is to securitize our mortgages every 3015 to 45 days in order to reduce the accumulation period that mortgages are outstanding on short-term warehouse or reverse repurchase facilities, thereby reducingwhich reduces our exposure to margin calls on these facilities. CMOs are classes of bonds that are sold to investors in mortgage-backed securities and as such are not subject to margin calls. In addition, CMOs generally require a smaller initial cash investment as a percentage of mortgages financed than does interim warehouse and reverse repurchase financing.
Because of the historically favorable prepayment and loss rates of our
high credit quality Alt-A mortgages, we have received favorable credit ratings on our CMOs from credit rating agencies, which has reduced our required initial capital investment as a percentage of mortgages securing CMO financing. The ratio of total assets to total equity, or "leverage“leverage ratio,"” was 20.9821.40 to 1 as of September 30, 2003March 31, 2004 compared to 21.5920.99 to 1 as of December 31, 2002 and 19.66 to 1
as of September 30, 2002. With increased leverage, we have been able to grow our
balance sheet by efficiently using available capital while maintaining adequate
levels of liquidity.2003. We continually monitor our leverage ratio and liquidity levels to insure that we are adequately protected against adverse changes in market conditions. For additional information regarding liquidity refer to "Liquidity“Liquidity and Capital Resources"Resources” below.
Interest Rate Risk.Refer to Item 3. "Quantitative“Quantitative and Qualitative Disclosures About Market Risk."
28
Results of Operations
Results of Operations - For the Nine Months Ended September 30, 2003 as compared
to the Nine Months Ended September 30, 2002
Net earnings increased 68% to $88.7 million, or $1.75 per diluted share,
for the first nine months of 2003 compared to $52.8 million, or $1.34 per
diluted share, for the first nine months of 2002. The period-over-period
increase in net earnings of $35.9 million was primarily due to the following:
o $28.4 million increase in net interest income; and
o $15.4 million increase in net earnings of the mortgage operations;
o which were partially offset by an $8.1 million increase in provision
for loan losses.
Taxable Income
Estimated taxable income was $89.2 million, or $1.76 per diluted share,
for the first nine months of 2003 compared to $59.8 million, or $1.51 per
diluted share, for the first nine months of 2002.
The following table presents a reconciliation of net earnings to estimated
taxable income for the periods indicated (in thousands, except per share
amounts):
For the Nine Months
Ended September 30,
--------------------
2003 2002
-------- --------
Net earnings ................................................................. $ 88,680 $ 52,808
Adjustments to net earnings:
Provision for loan losses ................................................. 21,363 13,302
Dividend from the mortgage operations ..................................... 22,385 9,900
Tax deduction for actual loan losses ...................................... (8,843) (3,430)
Tax loss on sale of investment securities available-for-sale .............. (1,180) --
Recovery of previously charged-off investment securities available-for-sale (4,999) --
Net earnings of the mortgage operations ................................... (11,464) --
Equity in net earnings of IFC ............................................. (16,698) (12,816)
-------- --------
Estimated taxable income (1) ................................................. $ 89,244 $ 59,764
======== ========
Estimated taxable income per diluted share (1) ............................... $ 1.76 $ 1.51
======== ========
- ----------------
(1) Excludes the deduction for dividends paid and the availability of a
deduction attributable to net operating tax loss carry-forwards, if any.
The increase in period-over-period net earnings was driven by record
mortgage acquisitions and originations. During the first nine months of 2003 the
mortgage operations acquired and originated $6.4 billion of mortgages compared
to $4.3 billion during the first nine months of 2002. An additional $206.2
million of multi-family mortgages were originated by IMCC during the first nine
months of 2003 compared to none during the first nine months of 2002 as IMCC was
formed in July 2002. Mortgages acquired through our correspondent channel as
bulk acquisitions, which are generally not underwritten through IDASL, were $1.6
billion, or 25% of total mortgage acquisitions and originations, during the
first nine months of 2003 compared to $453.8 million, or 11% of total mortgage
acquisitions and originations, during the first nine months of 2002.
29
The following table summarizes the principal balance of mortgage
acquisitions and originations by the mortgage operations by loan characteristic
for the periods indicated (in thousands):
For the Nine Months Ended September 30,
--------------------------------------------
2003 2002
------------------- -------------------
Principal Principal
Balance % Balance %
---------- --- ---------- ---
By Loan Type:
Fixed rate first trust deed ....................... $3,130,037 49 $1,319,446 31
Fixed rate second trust deed ...................... 99,224 1 61,719 1
Adjustable rate:
Six-month LIBOR ARMs ............................ 1,376,026 22 1,875,105 44
Six-month LIBOR hybrids (1) ..................... 1,802,921 28 995,520 24
---------- --- ---------- ---
Total adjustable rate ........................ 3,178,947 50 2,870,625 68
---------- --- ---------- ---
Total Mortgage Acquisitions and Originations . $6,408,208 100 $4,251,790 100
========== === ========== ===
By Production Channel:
Correspondent acquisitions:
Flow ............................................ $3,399,605 53 $2,718,871 64
Bulk ............................................ 1,595,632 25 453,827 11
---------- --- ---------- ---
Total correspondent acquisitions ............. 4,995,237 78 3,172,698 75
---------- --- ---------- ---
Wholesale and retail originations ............... 1,062,071 17 787,317 18
Novelle Financial Services, Inc. ................ 350,900 5 291,775 7
---------- --- ---------- ---
Total Mortgage Acquisitions and Originations . $6,408,208 100 $4,251,790 100
========== === ========== ===
By Credit Quality:
Alt-A mortgages ................................... $6,031,313 94 $3,940,267 93
B/C mortgages (2) ................................. 376,895 6 311,523 7
---------- --- ---------- ---
Total Mortgage Acquisitions and Originations . $6,408,208 100 $4,251,790 100
========== === ========== ===
By Purpose:
Purchase .......................................... $2,886,647 45 $2,473,125 58
Refinance ......................................... 3,521,561 55 1,778,665 42
---------- --- ---------- ---
Total Mortgage Acquisitions and Originations . $6,408,208 100 $4,251,790 100
========== === ========== ===
By Prepayment Penalty:
With prepayment penalty ........................... $4,897,549 76 $3,291,851 77
Without prepayment penalty ........................ 1,510,659 24 959,939 23
---------- --- ---------- ---
Total Mortgage Acquisitions and Originations . $6,408,208 100 $4,251,790 100
========== === ========== ===
- -----------
(1) Mortgages are fixed rate for initial two to ten year periods and
subsequently adjust to the indicated index plus a margin.
(2) The first nine months of 2003 and 2002 includes $350.9 million and $291.8
million, respectively, of B/C mortgages originated by Novelle Financial
Services, Inc., which are subsequently held-for-sale or sold to third
party investors for cash gains.
As a result of record mortgage acquisitions and originations, we retained
$3.8 billion of mortgages during the first nine months of 2003 compared to $2.7
billion during the first nine months of 2002. The increase in mortgage
acquisitions by the long-term investment operations and the growth of our
warehouse lending operations resulted in significant growth of our mortgage
portfolio. The mortgage portfolio grew 69% to $8.8 billion as of September 30,
2003 compared to $5.2 billion as of September 30, 2002, which in turn generated
higher levels of net interest income.
30
The following table summarizes the principal balance of mortgages acquired
from the mortgage operations and originated by the long-term investment
operations by loan characteristic for the periods indicated (in thousands):
For the Nine Months Ended
September 30,
--------------------------------------------
2003 2002
------------------- -------------------
Principal Principal
Balance % Balance %
------- - ------- -
Volume by Type:
Adjustable rate ................. $3,111,514 82 $2,479,017 93
Fixed rate ...................... 680,535 18 200,871 7
---------- ----------
Total Mortgage Acquisitions .. $3,792,049 100 $2,679,888 100
========== ==========
Volume by Product:
Six-month LIBOR ARMs ............ $1,203,717 32 $1,727,198 65
Six-month LIBOR hybrids (1) ..... 1,907,798 50 751,819 28
Fixed rate first trust deeds .... 673,791 18 200,560 7
Fixed rate second trust deeds ... 6,743 0 311 0
---------- ----------
Total Mortgage Acquisitions .. $3,792,049 100 $2,679,888 100
========== ==========
Volume by Credit Quality:
Alt-A mortgages ................. $3,568,153 95 $2,667,877 100
Multi-family mortgages .......... 206,201 5 -- 0
B/C mortgages ................... 17,695 0 12,011 0
---------- ----------
Total Mortgage Acquisitions .. $3,792,049 100 $2,679,888 100
========== ==========
Volume by Purpose:
Purchase ........................ $1,986,152 52 $1,652,564 62
Refinance ....................... 1,805,897 48 1,027,324 38
---------- ----------
Total Mortgage Acquisitions .. $3,792,049 100 $2,679,888 100
========== ==========
Volume by Prepayment Penalty:
With prepayment penalty ......... $3,074,048 81 $2,050,608 77
Without prepayment penalty ...... 718,001 19 629,280 23
---------- ----------
Total Mortgage Acquisitions .. $3,792,049 100 $2,679,888 100
========== ==========
- ----------
(1) Mortgages are fixed rate for initial two to ten year periods and
subsequently adjust to the indicated index plus a margin.
Net interest income increased by $28.4 million to $84.7 million for the
first nine months of 2003 compared to $56.3 million for the first nine months of
2002. The period-over-period increase in net interest income was primarily due
to a $3.8 billion increase in average Mortgage Assets, which increased to $7.6
billion for the first nine months of 2003 compared to $3.8 billion for the first
nine months of 2002 as the long-term investment operations retained $4.8 billion
of primarily Alt-A mortgages from the mortgage operations and $207.4 million of
multi-family mortgages since the end of the third quarter of 2002. We retain
Alt-A mortgages acquired and originated by the mortgage operations and
multi-family mortgages originated by IMCC that fit within our criteria, which
are generally ARMs and FRMs with good credit profiles, insurance enhancements,
when we require, and prepayment penalty features. Growth of the warehouse
lending operations also contributed to an increase in net interest income for
the first nine months of 2003 as average finance receivables to non-affiliated
customers increased 108% to $581.1 million compared to $279.3 million for the
first nine months of 2002.
31
The following table summarizes average balance, interest and weighted
average yield on Mortgage Assets and borrowings on Mortgage Assets for the first
nine months of 2003 and 2002 and includes interest income on Mortgage Assets and
interest expense related to borrowings on Mortgage Assets only (in thousands):
For the Nine Months For the Nine Months
Ended September 30, 2003 Ended September 30, 2002
------------------------------- -----------------------------
Average Average
Balance Interest Yield Balance Interest Yield
---------- -------- ----- ---------- -------- -----
MORTGAGE ASSETS
Investment securities available-for-sale (1) .. $ 22,703 $ 6,126 35.98% $ 29,806 $ 1,449 6.48%
CMO collateral (2) ............................ 6,189,396 185,839 4.00 2,981,957 120,487 5.39
Mortgages held-for-sale (3) ................... 218,158 10,621 6.49 -- -- --
Mortgages held-for-investment (4) ............. 237,585 9,369 5.26 81,195 2,865 4.70
Finance receivables:
Affiliated (5) ............................. 345,255 10,513 4.06 397,980 13,542 4.54
Non-affiliated ............................. 581,100 22,101 5.07 279,273 12,095 5.77
---------- -------- ---------- --------
Total finance receivables ................ 926,355 32,614 4.69 677,253 25,637 5.05
---------- -------- ---------- --------
Total Mortgage Assets ...................... $7,594,197 $244,569 4.29% $3,770,211 $150,438 5.32%
========== ======== ========== ========
BORROWINGS
CMO borrowings ................................ $6,058,805 $135,950 2.99% $2,894,017 $ 79,021 3.64%
Reverse repurchase agreements ................. 1,290,996 23,066 2.39 706,696 15,724 2.97
Borrowings secured by investment securities (6) 3,622 2,316 85.26 10,760 1,455 18.03
---------- -------- ---------- --------
Total borrowings on Mortgage Assets ........ $7,353,423 $161,332 2.93% $3,611,473 $ 96,200 3.55%
========== ======== ========== ========
Net interest spread (7) ....................... 1.36% 1.77%
Net interest margin (8) ....................... 1.46% 1.92%
- ---------------
(1) Principal recovery on a previously charged-off security inflated the yield
during 2003.
(2) Includes amortization of acquisition costs and net cash payments on
derivative instruments allocated to specific CMOs.
(3) Mortgages held-for-sale were acquired via the acquisition of Impac Funding
Corporation on July 1, 2003.
(4) Includes amortization of acquisition costs and net cash payments on
derivative instruments not allocated to specific CMOs.
(5) Advances to subsidiaries and affiliates have been eliminated during the
third quarter of 2003 due to the consolidation of the mortgage operations.
(6) Payments and excess cash flows received from the investment securities
collateralizing this loan are used to pay down the outstanding borrowings.
The payments are received from a collateral base that is in excess of the
borrowings. Therefore, while the payment amounts should remain relatively
stable, the average balance of the borrowings will continue to decrease.
These borrowings were paid off during the third quarter of 2003. The yield
reflects discount and securitization costs that were recorded as interest
expense upon repayment of borrowings.
(7) 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.
(8) 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.
The increase in net interest income was offset, in part, by a decrease in
net interest margins on Mortgage Assets, which declined 46 basis points to 1.46%
for the first nine months of 2003 compared to 1.92% for the first nine months of
2002. The overall decrease in net interest margins during the first nine months
of 2003 as compared to the first nine months of 2002 was primarily the result of
a decline in net interest margins on CMO collateral, which declined 44 basis
points to 0.60% for the first nine months of 2003 as compared to 1.04% for the
first nine months of 2002. This decline was due to a number of factors as
follows:
o interest rate resets on mortgages;
o higher composition of FRMs; and
o net cash payments on derivative instruments.
32
For detailed information regarding the effect of these factors on net
interest margins on Mortgage Assets refer to the same discussion in "Results of
Operations--For the Three Months Ended September 30, 2003 as compared to the
Three Months Ended September 30, 2002" as the discussion also applies to the
first nine months of 2003 compared to the first nine months of 2002.
In addition to the positive contribution of net interest income to
consolidated net earnings, net earnings from the mortgage operations increased
$15.4 million to $28.3 million during the first nine months of 2003 compared to
$12.9 million during the first nine months of 2002. This increase was primarily
due to an increase in gain on sale of loans, which was the result of an increase
in loan sales volume combined with greater profitability per loan sold. The sale
of Alt-A mortgages and multi-family mortgages to third party investors and the
completion of CMOs during the first nine months of 2003 resulted in gain on sale
of loans of $86.3 million compared to gain on sale of loans of $49.4 million for
the first nine months of 2002. Of the $6.4 billion of mortgage acquisitions and
originations during the first nine months of 2003, the mortgage operations sold
$2.8 billion of mortgages to third party investors and $3.6 billion was sold to
the long-term investment operations. This compares to $1.3 billion of mortgages
sold to third party investors and $2.7 billion of mortgages sold to the
long-term investment operations during the first nine months of 2002. The
long-term investment operations also completed $4.0 billion of CMOs during the
first nine months of 2003 as compared to $2.4 billion of CMOs completed during
the first nine months of 2002. Gain on sale of loans was 135 basis points on
total loan sales volume of $6.4 billion for the first nine months of 2003
compared to 125 basis points on total loan sales volume of $4.0 billion for the
first nine months of 2002.
Gain on sale of loans includes the difference between the price we acquire
and originate mortgages and the price we receive upon the sale or securitization
of mortgages plus or minus direct mortgage origination revenue and costs, i.e.
loan and underwriting fees, commissions, appraisal review fees, document
expense, etc. Gain on sale of loans acquired and originated by the mortgage
operations also includes a premium for the sale of mortgage servicing rights
upon the sale or securitization of mortgages. All mortgages sold or securitized
during the third quarter of 2003 were done so on a servicing released basis,
which results in substantially all cash gains. In order to minimize risks
associated with the accumulation of our mortgages, we seek to securitize or sell
our mortgages more frequently by creating smaller transactions, thereby reducing
our exposure to interest rate risk and price volatility during the accumulation
period of mortgages.
The following table summarizes the principal balance of mortgages sold for
the periods indicated (in thousands):
For the Nine Months
Ended September 30,
-----------------------
2003 2002
---------- ----------
REMICs ............................................... $ 887,500 $ 599,952
Whole loan sales to third party investors ............ 1,933,008 680,422
Loan sales to the long-term investment operations .... 3,585,848 2,679,888
---------- ----------
Total sales ....................................... $6,406,356 $3,960,262
========== ==========
Non-interest expense increased to $23.6 million for the first nine months
of 2003 compared to $6.2 million during the first nine months of 2002. However,
for comparative purposes, when including non-interest expense of the mortgage
operations for the first nine months of 2002, non-interest expense was $51.2
million for the first nine months of 2003 compared to $39.9 million for the
first nine months of 2002. The $11.3 million increase in non-interest expense
includes the following:
o $13.4 million increase in operating expense, including personnel
expense, professional services and general and administrative
expense; and
o $779,000 increase in amortization of MSR's;
which was partially offset by the following:
o $1.2 million decrease in loss on disposition of other real estate
owned;
o $860,000 decrease in write-down on investment securities; and
o $681,000 decrease in provision for repurchases.
33
Operating expense increased 37% to $49.9 million for the first nine months
of 2003 compared to $36.5 million for the first nine months of 2002. This
increase was primarily due to a 49% increase in mortgage acquisitions and
originations by the mortgage operations to $6.4 billion for the first nine
months of 2003 compared to $4.3 billion for the first nine months of 2002 that
resulted in an increase in staff levels. However, operational efficiencies
created by IDASL combined with the higher level of correspondent bulk
acquisitions during the first nine months of 2003 resulted in lower per loan
correspondent acquisition costs as compared to the first nine months of 2002.
Bulk mortgage acquisitions generally require less staffing and corresponding
personnel expense and other operating expense than mortgages acquired on a flow,
or loan-by-loan basis.
The following table summarizes the mortgage operations weighted average
fully-loaded production cost to acquire or originate a single mortgage by
production channel for the periods indicated (in basis points of mortgage
acquisition or origination):
For the Nine Months
Ended September 30,
------------------------
Production Channel Company/Division 2003 2002
- --------------------------------- -------------------------------------------- ------ ------
Correspondent acquisitions Impac Funding Corporation 55.40 78.64
Wholesale/retail originations Impac Lending Group 96.84 99.65
B/C originations Novelle Financial Services, Inc. 239.57 235.43
------ ------
Total Weighted Average Production Cost........................................ 72.35 84.90
====== ======
Fully-loaded cost to acquire or originate a single mortgage is based on
mortgage production costs, including sales commissions which are a component of
gain on sale of loans in the financial statements, and corporate administrative
costs, including human resources, accounting, management information systems,
corporate administration and marketing. Mortgage production costs exclude other
non-production related expenses, including amortization and impairment of
mortgage servicing rights, mark-to-market gain (loss) from SFAS 133 and
write-down of investment securities.
Gain on disposition of other real estate owned was $1.1 million for the
first nine months of 2003 compared to a loss on disposition of other real estate
owned of $120,000 for the first nine months of 2002. When we acquire real estate
through foreclosure proceedings we record a write-down on foreclosed property to
a percentage of appraised value or a real estate broker's price opinion. Gain or
loss on disposition of other real estate owned results when there is a
difference between the initial write-down on foreclosed property and the
ultimate proceeds received upon disposition of foreclosed property. During the
first nine months of 2003 the initial write-downs on foreclosed property were in
excess of the proceeds received on the sale of real estate owned, which resulted
in a gain. The opposite occurred on real estate disposition during the first
nine months of 2002.
Provision for loan losses were $21.4 million for the first nine months of
2003 compared to $13.3 million for the first nine months of 2002. The provision
for estimated loan losses are primarily based on historical loss statistics,
including cumulative loss percentages and loss severity, of similar mortgages in
our mortgage portfolio. The loss percentage is used to determine the estimated
inherent losses in the mortgage portfolio. The provision for loan losses is also
determined based on the following:
o management's judgment of the net loss potential of mortgages based
on prior loan loss experience;
o changes in the nature and volume of the mortgage portfolio;
o value of the collateral;
o delinquency trends; and
o current economic conditions that may affect the borrowers' ability
to pay.
”
Liquidity and Capital Resources
We recognize the need to have funds available for our operating businesses and our customers'customer’s demands for obtaining short-term warehouse financing until the settlement or sale of mortgages with us or with other investors. It is our policy to have adequate liquidity at all times to cover normal cyclical swings in funding availability and mortgage demand and to allow us to meet abnormal and unexpected funding requirements. We plan to meet liquidity needs through normal
34
Asset/Liability Committee,asset/liability committee, or "ALCO,"“ALCO,” is responsible for monitoring our liquidity position and funding needs. ALCO is comprised of senior executives of the mortgage operations and warehouse lending operations. ALCO meets on a weekly basis to review current and projected sources and uses of funds. ALCO monitors the composition of the balance sheet for changes in the liquidity of our assets. Our primary liquidity consists of cash and cash equivalents and maturing mortgages, or “liquid assets.” We believe that current liquidity levels,cash balances, currently available financing facilities, capital raising capabilities and liquidity provided by operating activitiesexcess cash flows generated from our long-term mortgage portfolio will adequately provide for our projected funding needs and asset growth. However, anyif we are unable to raise capital in the future, margin calls and,
depending upon the state of the mortgage industry, terms of any sale of mortgage
assetswe may not be able to grow as planned. Refer to “Risk Factors” for additional information regarding risks that could adversely affect our ability to maintain adequate liquidity levels or
may subject us to future losses. liquidity.
Our operating businesses primarily use available funds as follows:
o
Acquisition and origination of mortgages.mortgages. During the first nine monthsquarter of 20032004, the mortgage operations acquired and originated $6.4$3.5 billion of primarily Alt-A mortgages. Initial capital invested in Alt-A mortgages, includes premiums
paid when mortgages are acquired and originated. The mortgage operations paid
weighted average premiums of 2.02% on the principal balance of mortgages
acquired during the first nine months of 2003.which $2.9 billion was retained for long-term investment. Capital invested in mortgages is outstanding until we sell or securitize mortgages, which is one of the reasons we attempt to sell or securitize mortgages every 30between 15 to 45 days.
The long-term investment operations retained $3.6 billiondays of primarily
Alt-A mortgages from the mortgage operations and originated $206.2 million of
multi-family mortgages for long-term investment.acquisition or origination. Initial capital invested in mortgages includes premiums paid when mortgages are acquired and originated and initial capital investment, or “haircut,” required upon acquisitionfinancing, which is generally determined by the type of collateral provided. The mortgage operations paid weighted average premiums of 2.29% on the principal balance of mortgages acquired and originated during the equity
requiredfirst quarter of 2004, which were financed with warehouse borrowings at a haircut generally between 2% to 5% of the outstanding principal balance of the mortgages.
When we finance mortgages with long-term CMO borrowings, we repay short-term reverse repurchase agreements.
Equity requirementswarehouse financing and recoup our 2% to finance Alt-A5% haircut. Then, depending on credit ratings from national credit rating agencies on our CMOs, we are generally required to provide an over-collateralization, or “OC,” of 0.50% to 1% of the principal balance of mortgages with reverse repurchase
agreements generally range from betweensecuring CMO financing as compared to a haircut of 2% andto 5% of the principal balance of the mortgage depending on the collateral provided. Equity requirements to
finance multi-family mortgages with reverse repurchase agreements is
approximately 13% of the principal balance of the mortgage depending on the
collateral provided.
Multi-family mortgages are financed with a $125.0 millionsecuring short-term warehouse facility that expires in April 2004. When the long-term investment operations
accumulates a pool of mortgages, generally ranging from $200.0 million to $1.0
billion, the mortgages are financed through the issuance of CMOs. When we
complete CMOs, ourfinancing. Our total initial capital investment in CMOs rangesgenerally range from approximately 3% to 5% of the principal balance of Alt-A mortgages and
approximately 8% to 15% for multi-family mortgages, depending onsecuring CMO borrowings which includes premiums paid upon acquisition of mortgages, costs paid for completion of CMOs, costs to acquire derivative instruments and initial capital investment in CMOsOC required to achieve desired credit ratings. Therefore, we also attemptIn addition, IMCC originated $94.5 million of multi-family mortgages which were initially financed with short-term warehouse financing that generally require a 10% to securitize our15% haircut. Multi-family mortgages throughare either sold as whole loan sales or are financed with CMO financing every 30 to 45 days as total capital invested in
CMOs is generally lessborrowings at lower OC requirements than cash requiredhaircut requirements for reverse repurchase financing and
is not subject to margin calls.
warehouse financing.
Provide short-term warehouse advances to affiliates and non-affiliates.We utilize committed and uncommitted warehouse facilities with various lenders to provide short-term warehouse financing to affiliates and non-affiliated customersclients of the warehouse lending operations.
The warehouse lending operations provideprovides short-term financing to the mortgage operations and non-affiliated customersclients from the closing of the mortgages to their sale or other settlement with investors. The warehouse lending operations generally finances between 90%95% and 98% of the lesserfair market value of the unpaid principal balance or fair market value of mortgages, which equates to a cashhaircut requirement of between 2% and 10%5%, at prime rate plus or minus a spread. As
of September 30, 2003, the warehouse lending operations had $956.0 million in
approved warehouse lines available to non-affiliated customers of which $651.0
million was outstanding. Due to a heavy volume of originations at the end of
September 2003 some non-affiliates were granted temporary increases in their
warehouse facilities, most of which expire in November 2003.
Affiliates had $29.4 million in pledge accounts with the warehouse lending
operations as of September 30, 2003, which allows them to finance approximately
100% of the fair market value of their mortgages at prime minus 0.50%. The mortgage operations has uncommitted warehouse line agreements to obtain financing of up to $600.0$800.0 million from the warehouse lending operations to
provide interim mortgage financingat prime minus 0.50% during the period that the mortgage operations accumulates mortgages until the mortgages are securitized or sold. AsIn addition, as of September 30, 2003March 31, 2004, the warehouse lending operations had $572.4$917.0 million in
outstandingof approved warehouse advanceslines available to the mortgage operations, excluding pledge
balances.
non-affiliated clients, of which $526.4 million was outstanding.
Our ability to meet liquidity requirements and the financing needs of our customers is subject to the renewal of our credit and repurchase facilities or obtaining other sources of financing, if required, including additional debt or equity from 35
or capital to us in the future will depend upon a number of factors, including:
o
Pay common stock dividends. We did not pay common stock dividends that normally would have been paid during the first quarter of 2004 as the fourth quarter of 2003 dividend was paid in December 2003. We are required to distribute a minimum of 90% of our taxable income to our stockholders in order to maintain our REIT status, exclusive of the application of any tax loss carry forwards that may be used to offset current period taxable income. Because we pay dividends based on taxable income, dividends may be more or less than net earnings. We declared cash dividends of $0.65 per outstanding share during the first quarter of 2004. A portion of dividends paid to IMH’s stockholders come from dividend distributions from the mortgage operations to IMH. During the first quarter of 2004, the mortgage operations provided a dividend distribution of $7.5 million to IMH. However, because the mortgage operations may seek to retain earnings to fund the acquisition and origination of mortgages or to expand the mortgage operations, the board of directors of the mortgage operations may decide that the mortgage operations should cease making dividend distributions in the future. This could reduce the amount of taxable income that would be distributed to IMH stockholders in the form of dividends.
Our operating businesses are primarily funded as follows:
o
CMO borrowings and reverse repurchase agreements.We use CMO borrowings and reverse repurchase agreements and CMO borrowings to fund substantially all of our
warehouse advancesfinancing to affiliates and non-affiliated customersclients and the acquisition and origination of mortgages to be held for long-term investment.mortgages. As we accumulate mortgages, for long-term investment, we finance the acquisition of mortgages primarily through borrowings on reverse repurchase agreements with third party lenders. Since 1995 we haveWe primarily used anuse committed and uncommitted repurchase facilityfacilities with a major investment bankbanks to finance substantially all warehouse advances to affiliates and non-affiliates and
mortgages acquired for long-term investment,financing, as needed. However, during 2002 andDuring 2003, we added an additional $750.0 million of new warehouse facilities with other lenders to
finance asset growth, which includes $75.0 million of committed warehouse
facilities and $50.0 million of uncommitted warehouse facilities to fund
multi-family mortgages.finance asset growth. The new warehouse facilities provide us with a higher aggregate credit limit to fund the acquisition and origination of mortgages at terms comparable to those we have received in the past and the flexibility of
having financial relationships with a larger cross-section of financial
institutions.past. These reverse repurchase agreements may have certain covenant tests which we continue to satisfy. As of September 30, 2003March 31, 2004, the warehouse lending operations had $1.2$1.950 billion outstanding on warehouseof committed and uncommitted repurchase facilities with various lenders.
lenders of which $1.1 billion was outstanding. Of total repurchase facilities, one of our lenders provides financing up to $125.0 million to finance the origination of multi-family mortgages of which $75.0 million are committed.
From time to time, we may utilize term reverse repurchase financing provided to us by an underwriter who underwrites some of our securitizations. The term reverse repurchase financing funds mortgages that are specifically allocated to securitization transactions, which allows us to reduce overall borrowings outstanding on reverse repurchase agreements with other lenders during the period immediately prior to the settlement of the securitization. Terms and interest rates on the term reverse repurchase facilities are similar to other reverse repurchase agreements. Term reverse repurchase financing are generally repaid with 30 days from the date funds are advanced. During the first quarter of 2004, average balances outstanding on term reverse repurchases were $258.9 million.
We expect to continue to use short-term warehouse facilities to fund the acquisition of mortgages. If we cannot renew or replace maturing borrowings, we may have to sell, on a whole loan basis, the mortgages securing these facilities, which, depending upon market conditions may result in substantial losses. Additionally, if for any reason the market value of our mortgages securing warehouse facilities decline, our lenders may require us to provide them with additional equity or collateral to secure our borrowings, which may require us to sell mortgages at substantial losses.
In order to mitigate the liquidity risk associated with reverse repurchase agreements, we attempt to securitizesell or sellsecuritize our mortgages between 30 and15 to 45 days and extend only short-term interim financing to non-affiliated customers.from acquisition or origination. Although securitizing mortgages more frequently adds operating and securitization costs, we believe the added cost is offset as more liquidity is provided more frequently with less interest rate and price volatility, as the accumulation and holding period of mortgages is shortened. When we have accumulated a sufficient amount of mortgages, generally between $200 million and $1.0 billion, we issue CMOs and convert short-term advances under reverse repurchase agreements to long-term CMO borrowings. The use of CMOsCMO borrowings provides the following benefits:
o
During the first nine monthsquarter of 20032004, we completed $4.0$3.4 billion of CMOs, of which $3.3$3.1 billion waswere adjustable rate CMOs and $656.8$253.5 million waswere fixed rate CMOs, to provide long-term financing for the acquisitionretention of primarily Alt-A mortgages and the origination of $3.8
billion of Alt-A and multi-family mortgages. Because of the credit profile, historical loss performance and prepayment characteristics of our Alt-A mortgages, we have been able to borrow a higher percentage against the principal balance of mortgages held as CMO collateral, which means that we have to provide less initial capital upon completion of CMOs. EquityCapital investment in the CMOs is established at the time CMOs are issued at levels sufficient to achieve desired credit ratings on the securities from credit rating agencies. Total credit loss exposure is limited to theAs of March 31, 2004, total capital invested in mortgages held as CMO collateral was $246.6 million, which includes capitalized premiums paid, capitalized costs incurred to complete CMO borrowings, fair value of derivative instruments and OC.
Excess cash flows from our long-term mortgage portfolio. During the CMOs at any point in time. We also determinefirst quarter of 2004, mortgages held as CMO collateral, which primarily comprises the amountlong-term mortgage portfolio, generated excess cash flows of equity invested in CMOs based upon the anticipated return on equity$60.4 million as compared to estimated proceeds from additional debt issuance. By decreasing$34.2 million during the amountfourth quarter of equity we2003. We receive excess cash flows on mortgages held as CMO collateral after distributions are requiredmade to investinvestors in our CMOs to the extent cash or other collateral required to maintain desired credit ratings we have been ableon the CMOs is fulfilled. Excess cash flows represent the difference between principal and interest payments on the mortgages less the following (in order of priority paid):
Sale and securitization of mortgages.When the mortgage operations accumulates a sufficient amount of mortgages, generally between $200.0$100 million and $1.0 billion,$300 million, it sells mortgages to the long-term investment operations or to third party investors as whole loan sales or securitizes its mortgages. the mortgages as REMICs.
The mortgage operations sold $3.6$2.9 billion of mortgages to the long-term investment operations during the first nine monthsquarter of 2003, $1.9 billion2004 and sold $632.2 million of mortgages to third party investorsas whole loan sales and $888.0 million was securitized as REMICs. The mortgage operations sold mortgage servicing rights on substantially all mortgages sold during the first nine
monthsquarter of 2003.2004. The sale of mortgage servicing rights generated substantially all cash gains, which was used to acquire and originate additional mortgages. mortgage assets.
In order to mitigate interest rate and market risk, the mortgage operations attempts to sell and securitize mortgages between 3015 and 45 days.days from acquisition and origination. Since we rely significantly upon sales and securitizations to generate cash proceeds to repay borrowings and to create credit availability, any disruption in our ability to complete sales and securitizations may require us to utilize other sources of financing, which, if available at all, may be on unfavorable terms. In addition, delays in closing sales and securitizations of our mortgages increase our risk by exposing us to credit and interest rate risk for this extended period of time.
Cash proceeds from the issuance of securities.securities. In December 2001,January 2004, we filed with the SEC a shelf registration statement with the SEC that allows us to sell up to $300.0$500.0 million of securities, including common stock, preferred stock, debt securities and warrants. DuringIn February of 2004, we raised $106.5 million in net proceeds from the nine months ended September 30, 2003 we issued
approximately 3.5 millionissuance of 5,750,000 new shares of common stock from our shelf registration
statement, in the form of a public offering, and received net cash proceeds of
approximately $37.8 million.
Pursuantstock. In addition, pursuant to an equity distribution agreement with UBS Securities, LLC, we also sold 2.1 million and 3.9 million452,165 shares of common stock and received net proceeds of approximately $30.1$10.7 million and $54.6 million of common stock from our shelf
registration statement during the three and nine months ended September 30,
2003, respectively. During eachfirst quarter of the three and nine months ended September 30,
20032004. UBS Securities, LLC received a commission of 3% of the gross sales price per share of the shares of common stock sold pursuant to the equity distribution agreement, which amounted to an aggregate commission of $933,000 and $1.7
million, respectively.
As$332,000. With the sale of September 30, 2003, approximately $77.7 million in securities were
available for issuance under our shelf registration statement.the 452,165 shares, there are no shares of common stock remaining to be sold pursuant to the equity distribution agreement. By issuing new shares periodically throughout the year, we believe that we were able to utilize new capital more efficiently and profitably.
Cash flows from our CMO portfolio. DuringFlows
Operating Activities—Net cash used in operating activities was $309.8 million for the first nine monthsquarter of 2003
mortgages held2004 as CMO collateral, which wascompared to $2.1 million for the majorityfirst quarter of our mortgage
portfolio, generated excess principal and interest2003. Net cash flows of $96.4 million.
We receive excess principal and interest cash flows on mortgages held as CMO
collateral after distributions are made to investors$185.1 million was used in CMOs to the extent cash
or other collateral required to maintain desired credit ratings on the CMOs is
fulfilled. Excess principal and interest cash flows represent the difference
between principal and interest payments on the mortgages less the following:
o interest paid to bondholders;
o pro-rata early principal prepayments paid to bondholders;
o servicing fees paid to mortgage servicers;
o premiums paid to mortgage insurers; and
37
o actual losses incurred on disposition of real estate acquired in
settlement of mortgages.
Cash Flows
Operating Activities - Net cash provided by operating activities was $27.3
million during the first nine monthsto primarily acquire and originate mortgages, net of 2003 compared to net cash provided by
operating activities of $70.0 million during the same period of 2002. Net
earnings of $88.7 million provided most of the cash flows from operating
activities during the first nine months of 2003.
loan sales.
Investing Activities - —Net cash used in investing activities was $2.5$1.9 billion duringfor the first nine monthsquarter of 20032004 as compared to $2.5 billion during$815.2 million for the same periodfirst quarter of 2002.2003. Net cash flows of $2.3$2.6 billion werewas used in investing activities to acquire and originateprimarily invest in mortgages, net of mortgage principal repayments.
Financing Activities - —Net cash provided by financing activities was $2.3 billion duringfor the first nine monthsquarter of 20032004 as compared to $2.5 billion during$817.5 million for the same periodfirst quarter of 2002. CMO financing provided net2003. Net cash flows of $2.2$2.7 billion was provided by financing activities primarily from CMO financing, net of debt reduction, from financing activities.
principal repayments.
Inflation
The consolidated financial statements and corresponding notes to the consolidated financial statements 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 our operations. Unlike industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Inflation affects our 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 mortgages and a borrower'sborrower’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 our yield and subsequently the value of our portfolio of mortgage assets.
Some of the following risk factors relate to a discussion of our assets. For additional information on our asset categories refer to Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Risks Related To Our Businesses
A prolonged economic downturn or recession would likely result in a reduction of our mortgage origination activity which would adversely affect our financial results.
The United States economy has undergone and may in the future, undergo, a period of slowdown, which some observers view as a recession. An economic downturn or a recession may have a significant adverse impact on our operations and our financial condition. For example, a reduction in new mortgages will adversely affect our ability to expand our long-term mortgage portfolio, our principal means of increasing our earnings. In addition, a decline in new mortgage activity will likely result in reduced activity for our warehouse lending operations and our long-term investment operations. In the case of our mortgage operations, a decline in mortgage activity may result in fewer loans that meet its criteria for purchase and securitization or sale, thus resulting in a reduction in interest income and fees and gain on sale of loans. We may also experience larger than previously reported losses on our investmentlong-term mortgage portfolio due to a higher level of defaults or foreclosures on our mortgages.
If we are unable to generate sufficient liquidity we will be unable to conduct our operations as planned.
If we cannot generate sufficient liquidity, we will be unable to continue to grow our operations, grow our asset base, maintain our current hedging policy and pay dividends. We have traditionally derived our liquidity from fourthe following primary sources:
o
We cannot assure you that any of these alternatives will be available to us, or if available, that we will be able to negotiate favorable terms. Our ability to meet our long-term liquidity requirements is subject to the renewal of our credit and repurchase facilities and/or obtaining other sources of financing, including additional debt or equity from time to time. Any decision by our lenders and/or investors to make additional funds available to us in the future will depend upon a number of factors, such as our compliance with the terms of our existing credit arrangements, our financial performance,
industry and market trends in our various businesses, the lenders'lenders’ and/or investors'investors’ own resources and policies concerning loans and investments, and the relative attractiveness of alternative investment or lending opportunities. If we cannot raise cash by selling debt or equity securities, we may be forced to sell our assets at unfavorable prices or discontinue various business activities. Our inability to access the capital markets could have a negative impact on our earnings growth and also our ability to pay dividends.
Any significant margin calls under our financing facilities would adversely affect our liquidity and may adversely affect our financial results.
Prior to the fourth quarter of 1998, we generally had no difficulty in obtaining favorable financing facilities or in selling acquired mortgages. However, during the fourth quarter of 1998, the mortgage industry experienced substantial turmoil as a result of a lack of liquidity in the secondary markets. At that time, investors expressed unwillingness to purchase interests in securitizations due, in part, to:
o
As a result, during this period many mortgage originators, including us, were unable to access the securitization market on favorable terms. This resulted in some companies declaring bankruptcy. Originators, like us, were required to sell loans on a whole loan basis and liquidate holdings of mortgage-backed securities to repay short-term borrowings. However, the large amount of mortgages available for sale on a whole loan basis affected the pricing offered for these mortgages, which in turn reduced the value of the collateral underlying the financing facilities. Therefore, many providers of financing facilities initiated margin calls. Margin calls resulted when our lenders evaluated the market value of the collateral securing our financing facilities and required us to provide them with additional equity or collateral to secure our borrowings.
Our financing facilities were short-term borrowings and due to the turmoil in the mortgage industry during the latter part of 1998 many traditional providers of financing facilities were unwilling to provide facilities on favorable terms, or at all. Our current financing facilities continue to be short-term borrowings and we expect this to continue. If we cannot renew or replace maturing borrowings, we may have to sell, on a whole loan basis, the loans securing these facilities, which, depending upon market conditions, may result in substantial losses.
We incurred losses for fiscal years 1997, 1998 and 2000 and may incur losses in the future.
During the year ended December 31, 2000, we experienced a net loss of $54.2 million. The net loss incurred during 2000 included accounting charges of $68.9 million. The accounting charges were the result of write-downs of non-performing investment securities secured by mortgages and additional increases in the provision for loan losses to provide for the deterioration of the performance of collateral supporting specific investment securities. During the year ended December 31, 1998, we experienced a net loss of $5.9 million primarily as the mortgage industry experienced substantial turmoil as a result of a lack of liquidity in the secondary markets, which caused us to sell mortgages at losses to meet margin calls on our financing facilities. During the year ended December 31, 1997, we experienced a net loss of $16.0 million. The net loss incurred during 1997 included an accounting charge of $44.4 million that was the result of expenses related to the termination and buyout of our management agreement with Imperial Credit Advisors, Inc. We cannot be certain that revenues will remain at current levels or improve or that we will be profitable in the future, which could prevent us from effectuating our business strategy.
39
If we are unable to complete securitizations or if we experience delayed mortgage loan sales or securitization closings, we could face a liquidity shortage which would adversely affect our operating results.
We rely significantly upon securitizations to generate cash proceeds to repay borrowings and replenish our borrowing capacity. If there is a delay in a securitization closing or any reduction in our ability to complete securitizations we may be required to utilize other sources of financing, which, if available at all, may be on unfavorable terms. In addition, delays in closing a mortgage sales or securitizations of our mortgages increase our risk by exposing us to credit and interest rate risks for this extended period of time. Furthermore, gains on sales from certain of our securitizations represent a significant portion of our earnings. Several factors could affect our ability to complete securitizations of our mortgages, including:
o
If we are unable to sell a sufficient number of mortgages at a premium or profitably securitize a significant number of our mortgages in a particular financial reporting period, then we could experience lower income or a loss for that period, which could have a material adverse affect on our operations. We cannot assure you that we will be able to continue to profitably securitize or sell our loans on a whole loan basis, or at all.
The market for first loss risk securities, which are securities that take the first loss when mortgages are not paid by the borrowers, is generally limited. In connection with our REMIC securitizations, we endeavor to sell all securities subjecting us to a first loss risk. If we cannot sell these securities, we may be required to hold them for an extended period, subjecting us to a first loss risk.
Our borrowings and use of substantial leverage may cause losses.
Our use of collateralized mortgage obligationsCMOs may expose our operations to credit losses.
To grow our investmentlong-term mortgage portfolio, we borrow a substantial portion of the market value of substantially all of our investments in mortgages in the form of CMOs. Historically, we have borrowed approximately 98% of the market value of
such investments. There are no limitations on the amount we may borrow, other than the aggregate value of the underlying mortgages. We currently use CMOs as financing vehicles to increase our leverage, since mortgages held for CMO collateral are retained for investment rather than sold in a secondary market transaction.
Retaining mortgages as collateral for CMOs exposes our operations to greater credit losses than does the use of other securitization techniques that are treated as sales because as the equity holder in the security, we are allocated losses from the liquidation of defaulted loans first prior to any other security holder. Although our liability under a collateralized mortgage obligation is limited to the collateral used to create the collateralized mortgage obligation, we generally are required to make a cash equity investment to fund collateral in excess of the amount of the securities issued in order to obtain the appropriate credit ratings for the securities being sold, and therefore obtain the lowest interest rate available, on the CMOs. If we experience greater credit losses than expected on the pool of loans subject to the CMO, the value of our equity investment will decrease and we wouldmay have to increase the allowance for loan losses on our financial statements.
If we default under our financing facilities, or if the value of collateral
is less than the amount borrowed, we may be forced to liquidate the collateral
at prices less than the amount borrowed.
collateral.
If we default under our financing facilities, our lenders could force us to liquidate the collateral. If the value of the collateral is less than the amount borrowed, we could be required to pay the difference in cash. Furthermore, if we default under one facility, it would generally cause a default under our other facilities. If we were to declare bankruptcy, some of our reverse repurchase agreements may obtain special treatment and our creditors would then be allowed to liquidate the 40
If we are forced to liquidate, we may have few unpledged assets for distribution to unsecured creditors.
We have pledged a substantial portion of our assets to secure the repayment of CMOs issued in securitizations and our financing facilities. We will also pledge substantially all of our current and future mortgages to secure borrowings pending their securitization or sale. The cash flows we receive from our investments that have not yet been distributed or pledged or used to acquire mortgages or other investments may be the only unpledged assets available to our unsecured creditors if we were liquidated.
Interest rate fluctuations may adversely affect our operating results.
Our operations, as a mortgage loan acquirer and originator or a warehouse lender, may be adversely affected by rising and falling interest rates. Interest rates have been low over the past few years; however any increase in interest rates may discourage potential borrowers from refinancing mortgages, borrowing to purchase homes or seeking second mortgages. This may decrease the amount of mortgages available to be acquired or originated by our mortgage operations and decrease the demand for warehouse financing provided by our warehouse lending operations, which could adversely affect our operating results. If short-term interest rates exceed long-term interest rates, there is a higher risk of increased loan prepayments, as borrowers may seek to refinance their fixed and adjustable rate mortgages at lower long-term fixed interest rates. Increased loan prepayments could lead to a reduction in the number of loans in our investmentlong-term mortgage portfolio and reduce our net interest income. Rising interest rates may also increase delinquencies, foreclosures and losses on our adjustable rate mortgages.
We are subject to the risk of rising mortgage interest rates between the time we commit to purchase mortgages at a fixed price through the issuance of individual, bulk or other rate-locks and the time we sell or securitize those mortgages. An increase in interest rates will generally result in a decrease in the market value of mortgages that we have committed to purchase at a fixed price, but have not been sold or securitized or have not been properly hedged. As a result, we may record a smaller gain, or even a loss, upon the sale or securitization of those mortgages.
We may experience losses if our liabilities re-price at different rates than our assets.
Our principal source of revenue is net interest income or net interest spread from our investmentlong-term mortgage portfolio, which is the difference between the interest we earn on our interest earning assets and the interest we pay on our interest bearing liabilities. The rates we pay on our borrowings are independent of the rates we earn on our assets and may be subject to more frequent periodic rate adjustments. Therefore, we could experience a decrease in net interest income or a net interest loss because the interest rates on our borrowings could increase faster than the interest rates on our assets. If our net interest spread becomes negative, we will be paying more interest on our borrowings than we will be earning on our assets and we will be exposed to a risk of loss.
Additionally, the rates paid on our borrowings and the rates received on our assets may be based upon different indices. If the index used to determine the rate on our borrowings, typically one-month LIBOR, increases faster than the indices used to determine the rates on our assets, such as six-month LIBOR or the prime rate, we will experience a declining net interest spread, which will have a negative effect on our profitability, and may result in losses.
An increase in our adjustable interest rate borrowings may decrease the net interest margin on our adjustable rate mortgages.
Our long-term mortgage portfolio includes mortgages that are six-month LIBOR hybrids.hybrid ARMs. These are mortgages with fixed interest rates for an initial period of time, after which they begin bearing interest based upon short-term interest rate indices and adjust periodically. We generally fund mortgages with adjustable interest rate borrowings having interest rates that are indexed to short-term interest rates and adjust periodically at various intervals. To the extent that there is an increase in the interest rate index used to determine our adjustable interest rate borrowings and that increase is not offset by a corresponding increase in the rates at which interest accrues on our assets or by various interest rate hedges that we have in place at any given time, our net interest margin will decrease or become negative. We may suffer a net interest loss on our adjustable rate mortgagesARMs that have interest rate caps if the interest rates on our related borrowings increase.
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Adjustable rate mortgages
ARMs typically have interest rate caps, which limit interest rates charged to the borrower during any given period. Our borrowings are not subject to similar restrictions. As a result, in a period of rapidly increasing interest rates, the interest rates we pay on our borrowings could increase without limitation, while the interest rates we earn on our adjustable
rate mortgage assetsARMs would be capped. If this occurs, our net interest spread could be significantly reduced or we could suffer a net interest loss.
Increased levels of early prepayments of mortgages may accelerate our expenses and decrease our net income.
Mortgage prepayments generally increase on our adjustable rate mortgagesARMs when fixed mortgage interest rates fall below the then-current interest rates on outstanding adjustable rate mortgages.ARMs. Prepayments on mortgages are also affected by the terms and credit grades of the mortgages, conditions in the housing and financial markets and general economic conditions. If we acquire mortgages at a premium and they are subsequently repaid, we must expense the unamortized premium at the time of the prepayment. We could possibly lose the opportunity to earn interest at a higher rate over the expected life of the mortgage. Also, if
prepayments on mortgages increase when interest rates are declining, our net interest income may decrease if we cannot reinvest the prepayments in mortgage assets bearing comparable rates.
We generally acquire mortgages on a servicing released basis, meaning we acquire both the mortgages and the rights to service them. This strategy requires us to pay a higher purchase price or premium for the mortgages. If the mortgages that we acquire at a premium prepay faster than originally projected, generally accepted accounting principles, or “GAAP,” require us to write down the remaining capitalized premium amounts at a faster speed than was originally projected, which would decrease our current net interest income.
We undertake additional risks by acquiring and investing in mortgages.
We may be subject to losses on mortgages for which we do not obtain credit enhancements.
We do not obtain credit enhancements such as mortgage pool or special hazard insurance for all of our mortgages and investments. Generally, we require mortgage insurance on any mortgage with a loan-to-valuean LTV ratio greater than 80%. During the time we hold mortgages for investment, we are subject to risks of borrower defaults and bankruptcies and special hazard losses that are not covered by standard hazard insurance. If a borrower defaults on a mortgage that we hold, we bear the risk of loss of principal to the extent there is any deficiency between the value of the related mortgaged property and the amount owing on the mortgage loan and any insurance proceeds available to us through the mortgage insurer. In addition, since defaulted mortgages, which under our financing arrangements are mortgages that are generally 60 to 90 days delinquent in payments, may be considered negligible collateral under our borrowing arrangements, we could bear the risk of being required to own these loans without the use of borrowed funds until they are ultimately liquidated or possibly sold at a loss.
Our mortgage products expose us to greater credit risks.
We are an acquirer and originator of Alt-A mortgages, and to a lesser extent, multi-family and B/C mortgages and
multi-family mortgages. These are mortgages that generally may not qualify for purchase by government-sponsored agencies such as Fannie Mae and Freddie Mac. Our operations may be negatively affected due to our investments in these mortgages. Credit risks associated with these mortgages may be greater than those associated with conforming mortgages. The interest rates we charge on these mortgages are often higher than those charged for conforming loans in order to compensate for the higher risk and lower liquidity. Lower levels of liquidity may cause us to hold loans or other mortgage-related assets supported by these loans that we otherwise would not hold. By doing this, we assume the potential risk of increased delinquency rates and/or credit losses as well as interest rate risk. Additionally, the combination of different underwriting criteria and higher rates of interest leads to greater risk, including higher prepayment rates and higher delinquency rates and/or credit losses.
Lending to our type of borrowers may expose us to a higher risk of delinquencies, foreclosures and losses.
Our market includes borrowers who may be unable to obtain mortgage financing from conventional mortgage sources. Mortgages made to such borrowers generally entail a higher risk of delinquency and higher losses than mortgages made to borrowers who utilize conventional mortgage sources. Delinquency, foreclosures and losses generally increase during economic slowdowns or recessions. The actual risk of delinquencies, foreclosures and losses on mortgages made to our borrowers could be higher under adverse economic conditions than those currently experienced in the mortgage lending industry in general.
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Further, any material decline in real estate values increases the loan-to-valueLTV ratios of mortgages previously made by us, thereby weakening collateral coverage and increasing the possibility of a loss in the event of a borrower default. Any sustained period of increased delinquencies, foreclosures or losses after the mortgages are sold could adversely affect the pricing of our future loan sales and our ability to sell or securitize our mortgages in the future. In the past, certain of these factors have caused revenues and net income of many participants in the mortgage industry, including us, to fluctuate from quarter to quarter.
Our multi-family mortgages expose us to increased lending risks.
Generally, we consider multi-family mortgages to involve a higher degree of risk compared to first mortgages on one- to four-family, owner occupied residential properties. These mortgages have higher risks than mortgages secured by residential real estate because repayment of the mortgages often depends on the successful operations and the income stream of the borrowers. Furthermore, multi-family mortgages typically involve larger mortgage balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgages.
Our use of second mortgages exposes us to greater credit risks.
Our security interest in the property securing second mortgages is subordinated to the interest of the first mortgage holder and the second mortgages have a higher combined loan-to-valueLTV ratio than does the first mortgage. If the value of the property is equal to or less than the amount needed to repay the borrower'sborrower’s obligation to the first mortgage holder upon foreclosure, our second mortgage loan will not be repaid.
The geographic concentration of our mortgages increases our exposure to risks in those areas.
We do not set limitations on the percentage of our long-term mortgage asset portfolio composed of properties located in any one area (whether by state, zip code or other geographic measure). Concentration in any one area increases our exposure to the economic and natural hazard risks associated with that area. Historically, a majority of our mortgage acquisitions and originations, by thelong-term mortgage operations, mortgages held for investment by our long term investment
operationsportfolio and loans financed by our warehouse lending operationsfinance receivables were secured by properties in California and, to a lesser extent, Florida. For instance, certain parts of California have experienced an economic downturn in past years and California and Florida have suffered the effects of certain natural hazards. Declines in those residential real estate markets may reduce the values of the properties collateralizing the mortgages, increase foreclosures and losses and have material adverse effect on our results of operations or financial condition.
Furthermore, if borrowers are not insured for natural disasters, which are typically not covered by standard hazard insurance policies, then they may not be able to repair the property or may stop paying their mortgages if the property is damaged. This would cause increased foreclosures and decrease our ability to recover losses on properties affected by such disasters. This would have a material adverse effect on our results of operations or financial condition.
Representations and warranties made by us in our loan sales and securitizations may subject us to liability.
In connection with our securitizations, we transfer mortgages acquired and originated by us into a trust in exchange for cash and, in the case of a CMO, residual certificates issued by the trust. The trustee will have recourse to us with respect to the breach of the standard representations and warranties made by us at the time such mortgages are transferred. While we generally have recourse to our customers for any such breaches, there can be no assurance of our customers'customers’ abilities to honor their respective obligations. Also, we engage in bulk whole loan sales pursuant to agreements that generally provide for recourse by the purchaser against us in the event of a breach of one of our representations or warranties, any fraud or misrepresentation during the mortgage origination process, or upon early default on such mortgage. We generally limit the potential remedies of such purchasers to the potential remedies we receive from the customers from whom we acquired or originated the mortgages. However, in some cases, the remedies available to a purchaser of mortgages from us may be broader than those available to us against the sellers of the mortgages and should a purchaser enforce its remedies against us, we may not always be able to enforce whatever remedies we have against our customers. Furthermore, if we discover, prior to the sale or transfer of a loan, that there is any fraud or misrepresentation with respect to the mortgage and the originator fails to repurchase the mortgage, then we may not be able to sell the mortgage or we may have to sell the mortgage at a discount.
In the ordinary course of our business, we are subject to claims made against us by borrowers and trustees in our securitizations arising from, among other things, losses that are claimed to have been incurred as a result of alleged breaches of fiduciary obligations, misrepresentations, errors and omissions of our employees, officers and agents (including our appraisers), incomplete documentation and our failure to comply with various laws and regulations applicable to our business. Any claims asserted against us may result in legal expenses or liabilities that could have a material adverse effect on our results of operations or financial condition.
A substantial interruption in our use of iDASLg2 may adversely affect our level of mortgage loan acquisitions and originations.
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We utilize the Internet in our business principally for the implementation of our automated mortgage origination program, iDASLg2, which stands for the
second generation of Impac Direct Access System for Lending.iDASLg2. iDASLg2 allows our customers to pre-qualify borrowers for various mortgage programs based on criteria requested from the borrower and renders an automated underwriting decision by issuing an approval of the mortgage loan or a referral for further review or additional information. Substantially, all of our correspondents submit mortgages through iDASLg2 and all wholesale mortgages delivered by mortgage bankers and brokers are directly underwritten through the use of iDASLg2. iDASLg2 may be interrupted if the Internet experiences periods of poor performance, if our computer systems or the systems of our third-party service providers contain defects, or if customers are reluctant to use or have inadequate connectivity to the Internet. Increased government regulation of the Internet could
also adversely affect our use of the Internet in unanticipated ways and discourage our customers from using our services. If our ability to use the Internet in providing our services is impaired, our ability to originate or acquire mortgages on an automated basis could be delayed or reduced. Furthermore, we rely on a third party hosting company in connection with the use of iDASLg2. If the third party hosting company fails for any reason, and adequate back-up is not implemented in a timely manner, it may delay and reduce those mortgage acquisitions and originations done through iDASLg2. Any substantial delay and reduction in our mortgage acquisitions and originations will reduce our net earnings for the applicable period.
We are subject to risks of operational failure that are beyond our control.
Substantially all of our operations are located in Newport Beach, California and San Diego, California. Our systems and operations are vulnerable to damage and interruption from fire, flood, telecommunications failure, break-ins, earthquake and similar events. Our operations may also be interrupted by power disruptions, including rolling black-outs implemented in California due to power shortages. We do not maintain alternative power sources. Furthermore, our security mechanisms may be inadequate to prevent security breaches to our computer systems, including from computer viruses, electronic break-ins and similar disruptions. Such security breaches or operational failures could expose us to liability, impair our operations, result in losses, and harm our reputation.
Competition for mortgages is intense and may adversely affect our operations.
We compete in acquiring and originating Alt-A, B/C and multi-family mortgages and issuing mortgage-backed securities with other mortgage conduit programs, investment banking firms, savings and loan associations, banks, thrift and loan associations, finance companies, mortgage bankers and brokers, insurance companies, other lenders, and other entities purchasing mortgage assets.
We also face intense competition from Internet-based lending companies where entry barriers are relatively low. Some of our competitors are much larger than we are, have better name recognition than we do, and have far greater financial and other resources. Government-sponsored entities, in particular Fannie Mae and Freddie Mac, are also expanding their participation in the Alt-A mortgage industry. These government-sponsored entities have a size and cost-of-funds advantage over us that allows them to price mortgages at lower rates than we are able to offer. This phenomenon may seriously destabilize the Alt-A mortgage industry. In addition, if as a result of what may be less-conservative, risk-adjusted pricing, these government-sponsored entities experience significantly higher-than-expected losses, it would likely adversely affect overall investor perception of the Alt-A and B/C mortgage industry because the losses would be made public due to the reporting obligations of these entities.
The intense competition in the Alt-A, B/C and multi-family mortgage industry has also led to rapid technological developments, evolving industry standards and frequent releases of new products and enhancements. As mortgage products are offered more widely through alternative distribution channels, such as the Internet, we may be required to make significant changes to our current retail and wholesale structure and information systems to compete effectively. Our inability to continue enhancing our current Internet capabilities, or to adapt to other technological changes in the industry, could have a material adverse effect on our business, financial condition, liquidity and results of operations.
The need to maintain mortgage loan volume in this competitive environment creates a risk of price competition in the Alt-A, B/C and multi-family mortgage industry. Competition in the industry can take many forms, including interest rates and costs of a loan, less stringent underwriting standards, convenience in obtaining a loan, customer service, amount and term of a loan and marketing and distribution channels. Price competition would lower the interest rates that we are able to charge borrowers, which would lower our interest income. Price-cutting or discounting reduces profits and will depress earnings if sustained for any length of time. If our competition uses less stringent underwriting standards we will be pressured to do so as well, resulting in greater loan risk without being able to price for that greater risk. Our competitors may lower their underwriting standards to increase their market share. If we do not relax underwriting standards in the face of competition, we may lose 44
We are exposed to potential credit losses in providing warehouse financing.
As a warehouse lender, we lend money to mortgage bankers on a secured basis and we are subject to the risks associated with lending to mortgage bankers, including the risks of fraud, borrower default and bankruptcy, any of which
could result in credit losses for us. OurFraud risk may include the financing of nonexistent loans or fictitious mortgage loan transactions that could result in the loss of all sums we have advanced to the borrower. Also, our claims as a secured lender in a bankruptcy proceeding may be subject to adjustment and delay.
If actual prepayments or defaults with respect to mortgages serviced occurs more
quickly than originally assumed, the value of our mortgage servicing rights
would be subject to downward adjustment.
When we purchase mortgages that include the associated servicing rights,
the allocated cost of the servicing rights is reflected on our financial
statements as mortgage servicing rights. To determine the fair value of these
servicing rights, we use assumptions to estimate future net servicing income
including projected discount rates, mortgage loan prepayments and credit losses.
If actual prepayments or defaults with respect to loans serviced occur more
quickly than we originally assumed, we would have to reduce the carrying value
of our mortgage servicing rights. We do not know if our assumptions will prove
correct.
Our operating results may be adversely affected by the results of our hedging activities.
To offset the risks associated with our mortgage operations, we enter into transactions designed to hedge our interest rate risks. To offset the risks associated with our long-term investment operations,adjustable rate borrowings, we attempt to match the interest rate sensitivities of our adjustable rate mortgage assets held for
investmentARMs with the associated financing liabilities. Our management determines the nature and quantity of the hedging transactions based on various factors, including market conditions and the expected volume of mortgage loan purchases.
We do not limit management's use of certain instruments in such hedging
transactions.acquisitions. While we believe that we properly hedge our interest rate risk, we may not, and in some cases will not, be permitted to use hedge accounting as established by the Financial Accounting Standards Board, or FASB,” under the provisions of SFASStatement of Financial Accounting Standards No. 133, or “SFAS 133,” to account for our hedging activities. The effect of our hedging strategy may result in some volatility in our quarterly earnings as interest rates go up or down. It is possible that there will be periods during which we will incur losses on hedging activities. In addition, if the counter parties to our hedging transactions are unable to perform according to the terms of the contracts, we may incur losses. While we believe we prudently hedge our interest rate risk, our hedging transactions may not offset the risk of adverse changes in net interest margins.
A reduction in the demand for our loan products may adversely affect our operations.
The availability of sufficient mortgages meeting our criteria is dependent in part upon the size and level of activity in the residential real estate lending market and, in particular, the demand for Alt-Aresidential mortgages, which is affected by:
o
If our mortgage purchases decrease,acquisitions and originations decline, we willmay have:
o
Our delinquency ratios and our performance may be adversely affected by the performance of parties who service or sub-service our mortgages.
We sell or contract with third-party sub-servicersthird-parties for the sub-servicingservicing of all the mortgages, in which we retain servicing rights, including those in our securitizations. Our operations are subject to risks associated with inadequate or untimely servicing. Poor performance by a sub-servicerservicer may result in greater than expected delinquencies and losses on our mortgages. A substantial increase in our delinquency or foreclosure rate could adversely affect our ability to access the capital and secondary markets for our financing needs. Also, with respect to mortgages subject to a securitization, greater delinquencies would adversely impact the value of any interest-only,our equity interest, principal-only
and subordinated securitiesif any, we hold in connection with that securitization.
In a securitization, relevant agreements permit us to be terminated as servicer or master servicer under specific conditions described in these agreements, such as the failure of a sub-servicer to perform certain functions
within specific time periods.agreements. If, as a result of a sub-servicer'sservicer or sub-servicer’s failure to perform adequately, we
were terminated as master servicer of a securitization, the value of any master servicing rights held by us would be adversely affected.
We are a defendant in purported class actions and may not prevail in these matters.
Class action lawsuits and regulatory actions alleging improper marketing practices, abusive loan terms and fees, disclosure violations, improper yield spread premiums and other matters are risks faced by all mortgage originators, particularly those in the Alt-A and B/C market. We are a defendant in six purported class actions (including an action that was dismissed but there has been a
notice of an appeal) pending in six different states. Five of whichThe class actions allege generally that the loan originator improperly charged fees in violation of various state lending or consumer protection laws in connection with mortgages that we acquired. Although the suits are not identical, they generally seek unspecified compensatory damages, punitive damages, pre- and post-judgment interest, costs and expenses and rescission of the mortgages, as well as a return of any improperly collected fees. The other purported class action claims damages for sending out unsolicited faxes and seekseeks statutory and treble damages. These actions are in the early stages of litigation and, accordingly, it is difficult to predict the outcome of these matters. We believe we have meritorious defenses to the actions and intend to defend against them vigorously; however, an adverse judgment in any of these matters could have a material adverse effect on us.
Regulatory Risks
We may be subject to fines or other penalties based upon the conduct of our independent brokers or correspondents.
The mortgage brokers and correspondents from which we obtain loansmortgages have parallel and separate legal obligations to which they are subject. While these laws may not explicitly hold the originating lenders responsible for the legal violations of mortgage bankers and brokers, increasingly federal and state agencies have sought to impose such liability. Previously, for example, the United States Federal Trade Commission, or "FTC,"“FTC,” entered into a settlement agreement with a mortgage lender where the FTC characterized a broker that had placed all of its loan production with a single lender as the "agent"“agent” of the lender; the FTC imposed a fine on the lender in part because, as "principal,"“principal,” the lender was legally responsible for the mortgage broker'sbroker’s unfair and deceptive acts and practices. The United States Justice Department in the past has sought to hold a sub-prime mortgage lender responsible for the pricing practices of its mortgage bankers and brokers, alleging that the mortgage lender was directly responsible for the total fees and charges paid by the borrower under the Fair Housing Act even if the lender neither dictated what the mortgage brokerbanker could charge nor kept the money for its own account. Accordingly, we may be subject to fines or other penalties based upon the conduct of our independent mortgage bankers and brokers or correspondents.
We are no longer able to rely on the Alternative Mortgage Transactions Parity
Act to preempt certain state law restrictions on prepayment penalties, which may
cause us to be unable to compete effectively with financial institutions that
are exempt from such restrictions on ARMs.
The value of a mortgage depends, in part, upon the expected period of time
that the mortgage will be outstanding. If a borrower pays off a mortgage in
advance of this expected period, the holder of the mortgage does not realize the
full value expected to be received from the mortgage. A prepayment penalty
payable by a borrower who repays a mortgage earlier
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than expected helps discourage such a prepayment or helps offset the reduction
in value resulting from the early payoff. Prepayment penalties are an important
feature on the mortgages we acquire or originate.
Certain state laws restrict or prohibit prepayment penalties on mortgages.
Until July 1, 2003, we had historically relied on the federal Alternative
Mortgage Transactions Parity Act, or the "Parity Act," and related regulations
issued by the Office of Thrift Supervision, or "OTS," to preempt state
limitations on prepayment penalties on ARMs. The Parity Act was enacted to
extend to financial institutions other than federally chartered depository
institutions the federal preemption which federally chartered depository
institutions enjoy. However, on September 25, 2002, the OTS issued final
regulations that reduce the scope of the Parity Act preemption. The OTS
subsequently delayed the effective date of the final regulations until July 1,
2003. The National Home Equity Mortgage Association has filed a lawsuit against
the OTS challenging the OTS's authority to issue the regulations. The court held
in favor of the OTS's authority. NHEMA has appealed this decision. However,
pending the appeal, we may not rely on the Parity Act to preempt state
restrictions on prepayment penalties. It is possible any appellate decision may
again find in favor of the OTS, in which case we will not be able to rely on the
Parity Act to preempt state restrictions on prepayment penalties. The
elimination of this federal preemption could have a material adverse affect on
our ability to compete effectively with financial institutions that will
continue to enjoy federal preemption of state restrictions on prepayment
penalties on ARMs.
Violation of various federal, state and statelocal laws may result in losses on our loans.
o
Applicable state and local laws generally regulate interest rates and other charges, require certain disclosure, and require licensing of the lender. In addition, other state and local laws, public policy and general principles of equity relating to the protection of consumers, unfair and deceptive practices and debt collection practices may apply to the origination, servicing and collection of our loans. Mortgage loans are also subject to federal laws, including:
o
Violations of certain provisions of these federal and state laws may limit our ability to collect all or part of the principal of or interest on the loans and in addition could subject us trust to damages and administrative enforcement and could result in the mortgagors rescinding the loans whether held by us or subsequent holders of the loans.
Our operations may be adversely affected if we are subject to the Investment Company Act.
We intend to conduct our business at all times so as not to become regulated as an investment company under the Investment Company Act. The Investment Company Act exempts entities that are primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.
In order to qualify for this exemption we must maintain at least 55% of our assets directly in mortgages, qualifying pass-through certificates and certain other qualifying interests in real estate. Our ownership of certain mortgage assets may be limited by the provisions of the Investment Company Act. If the Securities and Exchange CommissionSEC adopts a contrary interpretation with respect to these securities or otherwise believes we do not satisfy the above exception, we could be required to restructure our activities or sell certain of our assets. To insure that we continue to qualify for the exemption we may be required at times to adopt less efficient methods of financing certain of our mortgage assets and we may be precluded from acquiring certain types of higher-yielding mortgage assets. The net effect of these factors will be to lower our net interest income. If we fail to qualify for exemption from registration as an investment company, our ability to use 47
New regulatory laws affecting the mortgage industry may increase our costs and decrease our mortgage origination and acquisition.
The regulatory environments in which we operate have an impact on the activities in which we may engage, how the activities may be carried out, and the profitability of those activities. Therefore, changes to laws, regulations or regulatory policies can affect whether and to what extent we are able to operate profitably. For example, , recently enacted and proposed local, state and federal legislation targeted at predatory lending could have the unintended consequence of raising the cost or otherwise reducing the availability of mortgage credit for those potential borrowers with less than prime-quality credit histories, thereby resulting in a reduction of otherwise legitimate Alt-A or B/C lending opportunities. Similarly, recently enacted and proposed local, state and federal privacy laws and laws prohibiting or limiting marketing by telephone, facsimile, email and the Internet may limit our ability to cross market and our ability to access potential loan applicants. For example, the recently enacted Can Spam Act of 2003 establishes the first national standards for the sending of commercial email allowing, among other things, unsolicited commercial email provided it contains certain information and an opt-out mechanism. We cannot provide any assurance that the proposed laws, rules and regulations, or other similar laws, rules or regulations, will not be adopted in the future. Adoption of these laws and regulations could have a material adverse impact on our business by substantially increasing the costs of compliance with a variety of inconsistent federal, state and local rules, or by restricting our ability to charge rates and fees adequate to compensate us for the risk associated with certain loans.
Some states and local governments have enacted, or may enact, laws or regulations that prohibit inclusion of some provisions in mortgage loans that have mortgage rates or origination costs in excess of prescribed levels, and require that borrowers be given certain disclosures prior to the consummation of such mortgage loans. Our failure to comply with these laws could subject us to monetary penalties and could result in the borrowers rescinding the mortgage loans, whether held by us or subsequent holders. Lawsuits have been brought in various states making claims against assignees of these loans for violations of state law.
Risks Related To Our Status As aA REIT
We may not pay dividends to stockholders.
REIT provisions of the Internal Revenue Code generally require that we annually distribute to our stockholders at least 90% of all of our taxable income, exclusive of the application of any tax loss carry forwards that may be used to offset current period taxable income. These provisions restrict our ability to retain earnings and thereby renewgenerate capital forfrom our businessoperating activities. We may decide at a future date to terminate our REIT status, which would cause us to be taxed at the corporate levels and cease paying regular dividends. In addition, for any year that we do not generate taxable income, we are not required to declare and pay dividends to maintain our REIT status. For instance, due to losses incurred in 2000, we did not declare any dividends from September 2000 until September 2001.
To date, a portion of our taxable income and cash flow has been attributable to our receipt of dividend distributions from the mortgage operations. The mortgage operations is not a REIT and is not, therefore, subject to the above-described REIT distribution requirements. Because the mortgage operations is seeking to retain earnings to fund the future growth of our mortgage operations business, its board of directors may decide that the mortgage operations should cease making dividend distributions in the future. This would materially reduce the amount of our taxable income and in turn, would reduce the amount we would be required to distribute as dividends.
If we fail to maintain our REIT status, we may be subject to taxation as a regular corporation.
We believe that we have operated and intend to continue to operate in a manner that enables us to meet the requirements for qualification as a REIT for federal income tax purposes. We have not requested, and do not plan to request, a ruling from the Internal Revenue Service that we qualify as a REIT.
Moreover, no assurance can be given that legislation, new regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification. Our continued qualification as a REIT will depend on our satisfaction of certain asset, income, organizational and stockholder ownership requirements on a continuing basis.
If we fail to qualify as a REIT, we would not be allowed a deduction for distributions to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates. We also may be subject to the federal alternative minimum tax. Unless we are entitled to relief under specific statutory provisions, we could not elect to be taxed 48
youstockholders would be reduced substantially for each of the years involved. Failure to qualify as a REIT could adversely affect the value of our common stock.
Potential characterization of distributions or gain on sale as unrelated business taxable income to tax-exempt investors.
If (1) all or a portion of our assets are subject to the rules relating to taxable mortgage pools, (2) we are a "pension-held“pension-held REIT,"” (3) a tax-exempt stockholder has incurred debt to purchase or hold our common stock, or (4) the residual REMIC interests we buy generate "excess“excess inclusion income,"” then a portion of the distributions to and, in the case of a stockholder described in (3), gains realized on the sale of common stock by such tax-exempt stockholder may be subject to Federal income tax as unrelated business taxable income under the Internal Revenue Code.
Classification as a taxable mortgage pool could subject us or certain of our stockholders to increased taxation.
If we have borrowings with two or more maturities and, (1) those borrowings are secured by mortgages or mortgage-backed securities and, (2) the payments made on the borrowings are related to the payments received on the underlying assets, then the borrowings and the pool of mortgages or mortgage-backed securities to which such borrowings relate may be classified as a taxable mortgage pool under the Internal Revenue Code. If any part of our Company were to be treated as a taxable mortgage pool, then our REIT status would not be impaired, but a portion of the taxable income we recognize may, under regulations to be issued by the Treasury Department, be characterized as "excess inclusion"“excess inclusion” income and allocated among our stockholderstockholders to the extent of and generally in proportion to the distributions we make to each stockholder. Any excess inclusion income would:
o
Based on advice of our tax counsel, we take the position that our existing financing arrangements do not create a taxable mortgage pool.
We may be subject to possible adverse consequences as a result of limits on ownership of our shares.
Our charter limits ownership of our capital stock by any single stockholder to 9.5% of our outstanding shares unless waived by the board of directors. Our board of directors may increase the 9.5% ownership limit. In addition, to the extent consistent with the REIT provisions of the Internal Revenue Code, our board of directors may, pursuant to our articles of incorporation, waive the 9.5% ownership limit for a stockholder or purchaser of our stock. In order to waive the 9.5% ownership limit our board of directors must require the stockholder requesting the waiver to provide certain representations to the Company to ensure compliance with the REIT provisions of the Internal Revenue Code. Our charter also prohibits anyone from buying shares if the purchase would result in us losing our REIT status. This could happen if a share transaction results in fewer than 100 persons owning all of our shares or in five or fewer persons, applying certain broad attribution rules of the Internal Revenue Code, owning more than 50% (by value) of our shares. If you or anyone else acquires shares in excess of the ownership limit or in violation of the ownership requirements of the Internal Revenue Code for REITs, we:
o
The trustee shall sell the shares held in trust and the owner of the excess shares will be entitled to the lesser of:
(a) the price paid by the owner;
(b) if the owner did not purchase the excess shares, the closing price
for the shares on the national securities exchange on which IMH is
listed on the day of the event causing the shares to be held in
trust; or
(c) the price received by the trustee from the sale of the shares.
(a) | the price paid by the owner; |
(b) | if the owner did not purchase the excess shares, the closing price for the shares on the national securities exchange on which IMH is listed on the day of the event causing the shares to be held in trust; or |
(c) | the price received by the trustee from the sale of the shares. |
Limitations on acquisition and change in control ownership limit.
The 9.5% ownership limit discussed above may have the effect of precluding acquisition of control of our Company by a third party without consent of our board of directors.
Risks Related To Ownership Ofof Our Common Stock
Our share prices have been and may continue to be volatile.
Historically, the market price of our common stock has been volatile. The market price of our common stock is likely to continue to be highly volatile and could be significantly affected by factors including:
o
In addition, significant price and volume fluctuations in the stock market have particularly affected the market prices for the common stock of mortgage REIT companies such as ours. These broad market fluctuations have adversely affected and may continue to adversely affect the market price of our common stock. If our results of operations fail to meet the expectations of securities analysts or investors in a future quarter, the market price of our common stock could also be materially adversely affected and we may experience difficulty in raising capital.
Sales of additional common stock may adversely affect its market price.
To sustain our growth strategy we intend to raise capital through the sale of equity. The sale or the proposed sale of substantial amounts of our common stock in the public market could materially adversely affect the market price of our common stock or other outstanding securities. We do not know the actual or perceived effect of these offerings, the timing of these offerings, the potential dilution of the book value or earnings per share of our securities then outstanding; and the effect on
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As of September 30, 2003, we have sold approximately $222.3
million (gross proceeds) worth of common stock from our shelf registration
statement and weWe may currently sell additional securities worth approximately $77.7$10.9 million (gross proceeds) from this shelf registration statement in the future. In December 2003, we filed a shelf registration statement for a total of $500.0 million, which may be used in connection with offerings of debt securities, common stock, preferred stock, warrants, and/or units for general corporate purposes. We have also registered an aggregate of 3,620,069may currently sell additional securities worth approximately $387.9 million (gross proceeds) from this shelf registration statement in the future. In February 2004, we issued 5,750,000 shares of common stock in
connection with our 2001 Stock Option, Deferred Stock and Restricted Stock Plan.
As of September 30, 2003, our 1995 Stock Option, Deferred Stock and Restricted
Stock Plan had 383,212from this shelf. We also have shares reserved and available for future issuance and that were
registered.under our stock plans. The sale of a large amount of shares or the perception that such sales may occur, could adversely affect the market price for our common stock or other outstanding securities.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We focus on effectively managing the various operational and market risks
associated with our businesses. We believe that the most critical of those risks
are:
o credit risk;
o prepayment risk;
o liquidity risk; and
o interest rate risk.
We manage credit risk by acquiring high-credit quality Alt-A mortgages
from the mortgage operations with favorable credit profiles and in certain
circumstances by acquiring mortgages with mortgage insurance enhancements, as we
deem appropriate, which reduces our effective loan-to-value ratio. Our belief is
that high-credit quality Alt-A mortgages will result in favorable foreclosure
rates and will result in favorable loss rates. We also believe that we maintain
an adequate allowance for loan losses to provide for future loan losses. We
manage mortgage prepayment risk by acquiring the majority of Alt-A mortgages
from the mortgage operations with prepayment penalty features. We manage
liquidity risk by frequently securitizing or selling our mortgages. We
securitize mortgages through the issuance of CMOs and REMICs which we attempt to
do every 30 to 45 days. By frequently securitizing our mortgages, we reduce the
volume of mortgages that are financed with short-term reverse repurchase
agreements at any given time. The issuance of CMOs convert short-term reverse
repurchase borrowings, which are subject to margin calls if the value of the
mortgages collateralizing reverse repurchase borrowings decline, to long-term
CMO financing that are not subject to margin calls. By securitizing mortgages as
REMICs or selling mortgages as whole loan sales, ownership of the mortgages
transfers to the trust in the case of REMICs and to the buyer in the case of
whole loan sales. For additional information regarding these risks refer to Item
2. "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ITEM 3: | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
General Overview
Although we manage credit, prepayment and liquidity risk in the normal course of business, we consider interest rate risk to be a significant market risk, which could potentially have the largest material effectimpact on our financial condition and results of operations. Since a significant portion of our revenues and earnings are derived from net interest income, we strive to manage our interest-earning assets and interest-bearing liabilities to generate what we believe to be an appropriate contribution from net interest income. When interest rates fluctuate, profitability can be adversely affected by changes in the fair market value of our assets and liabilities and by the interest spread earned on interest-earning assets and interest-bearing liabilities. We derive income from the differential spread between interest earned on interest-earning assets and interest paid on interest-bearing liabilities. Any change in interest rates affects income received and expenseincome paid from assets and liabilities in varying and typically in unequal amounts. Changing interest rates may compress our interest rate margins and adversely affect overall earnings.
Interest rate risk management is the responsibility of ALCO, which reports results of interest rate risk analysis to the board of directors on at least a quarterly basis. ALCO is comprised of the senior executives of the mortgage operations and
warehouse lending operations. ALCO establishes policies that monitor and coordinate sources, uses and pricing of funds. ALCO also attempts to reduce the volatility in net interest income by managing the relationship of interest rate sensitive assets to interest rate sensitive liabilities. In addition, various modeling techniques are used to value interest sensitive mortgage-backed securities, including interest-only securities. The value of mortgage-backed securities is determined using a discounted cash flow model using prepayment rate, discount rate and credit loss assumptions. Our
investment securities portfolio is available-for-sale, which requires us to perform market valuations of the securities in order to properly record the portfolio. We continually monitor interest rates of our investment securities portfolio as compared to prevalent interest rates in the market. We do not currently maintain a securities trading portfolio and are not exposed to market risk as it relates to trading activities.
Changes in Interest Rates
ALCO follows an interest rate hedging program intended to limit our exposure to changes in interest rates primarily associated with cash flows on our adjustable rate CMO borrowings. Our primary objective is to hedge our exposure to the variability in future cash flows attributable to the variability of one-month LIBOR, which is the underlying index of our adjustable rate CMO borrowings. We also monitor on an ongoing basis the prepayment risks that arise in fluctuating interest rate environments. Our interest rate hedging program is formulated with the intent to attempt to offset the potential adverse effects of changing interest rates on cash flows on our adjustable rate CMO borrowings resulting from the following:
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o
We primarily acquire for long-term investment six-month LIBOR ARMs and six-month
LIBOR hybrids. Six-month LIBORhybrid ARMs and, to a lesser extent, FRMs. ARMs are generally subject to periodic and lifetime interest rate caps. This means that the interest rate of each ARM is limited to upwards or downwards movements on its periodic interest rate adjustment date, generally ninesix months, or over the life of the mortgage. Periodic caps limit the maximum interest rate change, which can occur on any interest rate change date to generally a maximum of 1% per semi-annualsemiannual adjustment. Also, each ARM has a maximum lifetime interest rate cap. Generally, borrowings are not subject to the same periodic or lifetime interest rate limitations. During a period of rapidly increasing or decreasing interest rates, financing costs wouldcould increase or decrease at a faster rate than the periodic interest rate adjustments on mortgages would allow, which could affect net interest income. In addition, if market rates were to exceed the maximum interest rates of our ARMs, borrowing costs wouldcould increase while interest rates on ARMs would remain constant.
We also acquire hybrid ARMs that have initial fixed interest rate periods generally ranging from two to three years and, to a lesser extent, five to seven years which subsequently convert to six-month LIBOR ARMs. During a rapidly increasing or decreasing interest rate environment financing costs would increase or decrease more rapidly than would interest rates on mortgages, which would remain fixed until their next interest rate adjustment date. In order to provide some protection against any resulting basis risk shortfall on the related liabilities, we purchase derivative instruments. Derivative instruments are based upon the principal balance that would result under assumed prepayment speeds.
We measure the sensitivity of our net interest income to changes in interest rates affecting interest sensitive assets and liabilities using various simulations. These simulations take into consideration changes that may occur in investment and financing strategies, changes in the forward yield curve, changes in interest rate hedging strategy, changes in mortgage prepayment speeds and changes in the volume of mortgage acquisitions and originations.
As part of various interest rate simulations, we calculate the effect of potential changes in interest rates on our interest-earning assets and interest-bearing liabilities and their affect on overall earnings. The simulations assume instantaneous and parallel shifts in interest rates and to what degree those shifts affect net interest income. First, we estimate our net interest income for the next twelve months using period-end balance sheetcurrent period end data andalong with 12-month projections of the following:
o
We refer to thisthe 12-month projection of net interest income as the "base“base case."” Once the base case has been established, we "shock"“shock” the base case with instantaneous and parallel shifts in interest rates in 100 basis point increments upward and downward to plus and minus 200 basis points.downward. Calculations are made for each of the defined instantaneous and parallel shifts in interest rates over
or under the forward yield curve used to determine the base case and includeincluding any associated changes in projected mortgage prepayment rates caused by changes in interest rates. The results of each 100 basis point change in interest rates are then compared against the base case to determine the estimated dollar and percentage change to net interest income. The simulations consider the affect of interest rate changes on interest sensitive assets and liabilities as well as derivative instruments. The simulations also consider the impact that instantaneous and parallel shiftsshift in interest rates have on prepayment rates and the resulting affect of accelerating or decelerating amortization rates of premium and securitization costs on net interest income. The following table estimates the financial impact to net interest income from various instantaneous and parallel shifts in interest rates based on both our on- and off-balance sheet structure as of January 31, 2004:
% change in base case net interest income | |||
Instantaneous and Parallel Change in Interest Rates (1) | |||
Up 300 basis points, or 3% | 12 | ||
Up 200 basis points, or 2% | 13 | ||
Up 100 basis points, or 1% | 10 | ||
Down 100 basis points, or 1% | (1 | ) | |
Down 200 basis points, or 2% (2) | n/a |
(1) | Instantaneous and parallel interest rate changes over and under the projected forward yield curve. |
(2) | The current interest rate environment makes this simulation irrelevant as a 200 basis point downward shock to short-term interest rates would result in negative interest rates. |
Our off-balance sheet structure refers to the notional amount of derivative instruments that are not recorded on our balance sheet. Since these estimates are based upon numerous assumptions, actual sensitivity to interest rate changes could vary if actual experience differs from the assumptions used. The use of derivative instruments to hedge changes in interest rates is an integral part of our strategy to limit interest rate risk. Therefore, net interest income may be significantly impacted by cash payments we are required to make or cash payments we receive on derivative instruments. The amount of cash payments or cash receipts on derivative instruments is determined by (1) the notional amount of the derivative instrument and (2) current interest rate levels in relation to the various strike prices of derivative instruments during a particular time period. We believeBy using derivative instruments, we attempt to minimize the effect of both upward and downward interest rate changes on our quantitative risk has not materially changed since our
disclosures under Item 7A. "Quantitativelong-term mortgage portfolio. Our goal is to minimize significant changes to base case net interest income as interest rates change. In the above analysis, base case net interest income without the use of derivative instruments would cause base case net interest income to fluctuate substantially while the use of derivative instruments creates less volatility in net interest income and Qualitative Disclosures About
Market Risk" in our annual report on Form 10-K for the year ended December 31,
2002.
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ITEM 4: CONTROLS AND PROCEDURES
earnings.
ITEM 4: | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
As of September 30, 2003,March 31, 2004, our management, with the participation of our Chief Executive Officer, or "CEO,"“CEO,” and Chief Financial Officer, or "CFO,"“CFO,” performed an evaluation of the effectiveness and the operation of our disclosure controls and procedures as defined in Rules 13a - -– 15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the
"Exchange Act").or the “Exchange Act.” Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2003.
March 31, 2004.
Changes in Internal Controls
There have been no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) Rule 13a-15 or 15d-15 under the Exchange Act that occurred during the quarter ended September 30, 2003March 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On October 14, 2003, an action was filed in the Circuit Court of Cook
County, Illinois as Case No. 03 CH17085 entitled Fast Forward Solutions, LLC v.
Novelle Financial Services, Inc. The complaint contains allegations of a class
action and alleges that the defendant sent out unsolicited faxes in violation of
the Telephone Consumer Protection Act, the Illinois Consumer Fraud Act, and
Illinois Common Law. The plaintiff is seeking statutory and treble damages.
With respect
ITEM 1: | LEGAL PROCEEDINGS |
Please refer to the complaint captioned Frazier, et al. v. Preferred
Credit, et al, which had been pending in the U.S. District Court for the Western
District of Tennessee, Case No. CT004762-01, until it was dismissed on July 31,
2002, with a motion for reconsideration denied on March 7, 2003, as described in
IMH'sIMH’s annual report on Form 10-K for the year ended December 31, 2002, on July
31, 2003 the plaintiffs filed a new complaint captioned, Frazier, et al v. Impac
Funding Corp., et al, Case No. 03-2565 DP, in the same court. The causes of
action in the new action are materially identical to the causes of action stated
in the 2001 action, though the number of defendants is reduced.
With respect to the complaint captioned Deborah Searcy, Shirley Walker, et
al. vs. Impac Funding Corporation, Impac Mortgage Holdings, Inc. et. al., which
is described in IMH's annual report on Form 10-K for the year ended December 31,
2002, in March 2003, the plaintiffs filed an amended complaint adding certain
defendants, including an Impac-related entity, and dropping others, including
certain Impac-related entities, and we have been served with the amended
complaint. A motion to dismiss the amended complaint has been filed. Please
refer to IMH's annual report on Form 10-K for the year ended December 31, 2002
regarding the Searcy action.
We believe that we have meritorious defenses to these complaints and we
intend to defend the claims vigorously. Nevertheless, litigation is uncertain
and we may not prevail in the lawsuits and can express no opinion as to their
ultimate outcome. Please refer to our annual report on Form 10-K for the year
ended December 31, 2002 and our subsequent quarterly reports on form 10-Q
regarding other litigation and claims.
We are a party to other litigation and claims, which are normal in the
course of our operations. While the results of such other litigation and claims
cannot be predicted with certainty, we believe the final outcome of such other
matters will not have a material adverse effect on IMH.
ITEM 2:
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 3: | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 5: OTHER INFORMATION
ITEM 4: | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
ITEM 5: | OTHER INFORMATION |
None.
ITEM 6: | EXHIBITS AND REPORTS ON FORM 8-K |
(a) Exhibits:
31.1 Certification of Chief Executive Officer pursuant to Item 601(b)(31)
of Regulation S-K, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Item 601(b)(31)
of Regulation S-K, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
31.1 | Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(b) Reports on Form 8-K:
8-K
Current Report on Form 8-K, dated July 15, 2003,January 30, 2004, furnished to the SEC reporting Items 5, 9 and 12, relating to a press release issued by the Company on January 29, 2004 reporting financial results for the quarter and fiscal year ended December 31, 2003.
Current Report on Form 8-K, dated February 6, 2004, furnished to the SEC reporting Items 5 and 7, relating to the purchaseexecution of IFC common stockan underwriting agreement with UBS Securities LLC, Friedman, Billings, Ramsey & Co., Inc., Sandler O’Neill & Partners, L.P. and new employment agreements
entered into with certain executive officers.
JMP Securities LLC.
Current Report on Form 8-K, dated August 4, 2003, reporting Items 7 and
12, relatingFebruary 26, 2004, furnished to a press release reporting financial results for the quarter ended June 30, 2003.
Current Report on Form 8-K, dated August 29, 2003,SEC reporting Item 9, relating to the posting of ourthe Company’s unaudited Monthly Fact Sheet.
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Current Report on Form 8-K, dated March 31, 2004, furnished to the SEC reporting Item 9, relating to the posting of the Company’s unaudited monthly fact sheet.
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.
/s/
/s/ Richard J. Johnson
by: Richard J. Johnson
Executive Vice President
and Chief Financial Officer
(authorized
(authorized officer of registrant and principal financial officer)
Date: November 5, 2003
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May 3, 2004
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