United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q/A
Amendment No. 1
[X]|X| Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended June 30, 2001March 31, 2002.
OR
[_]|_| Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from ____________________ to ___________________.
Commission File Number: 0-198611-14100
Impac Mortgage Holdings, Inc.
(Exact name of registrant as specified in its charter)
Maryland 33-0675505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1401 Dove Street
Newport Beach, CA 92660
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (949) 475-3600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class whichWhich registered
------------------------------------ --------------------------------------------------------------- -----------------------
Common Stock $0.01 par value American Stock Exchange
Preferred Share Purchase Rights American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]|X| No [_]|_|
On August 9, 2001,May 13, 2002, the aggregate market value of the voting stock held by
non-
affiliatesnon-affiliates of the registrant was approximately $155.1$418.1 million, based on the
closing sales price of the Common Stockcommon stock on the American Stock Exchange. For
purposes of the calculation only, in addition to affiliated companies, all
directors and executive officers of the registrant have been deemed affiliates.
The number of shares of Common Stockcommon stock outstanding as of August 9, 2001May 13, 2002 was
20,466,100.
Documents39,422,163.
No documents are incorporated by reference: Nonereference to this Quarterly Report
1
IMPAC MORTGAGE HOLDINGS, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - IMPAC MORTGAGE HOLDINGS, INC.
Page #
AND SUBSIDIARIES ------
Consolidated Balance Sheets as of June 30, 2001March 31, 2002 and December 31, 2000.................................2001............................... 3
Consolidated Statements of Operations and Comprehensive Earnings, (Loss),
For the Three and Six Months Ended
June 30, 2001March 31, 2002 and 2000.............................................2001.............................................................................. 4
Consolidated Statements of Cash Flows, For the SixThree Months Ended June 30, 2001March 31, 2002 and 2000................2001............ 6
Notes to Consolidated Financial Statements............................................................Statements........................................................... 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................................................. 17OPERATIONS............................................................................ 16
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................ 32RISK........................................... 29
PART II. OTHER INFORMATION
---------------------------
Item 1. LEGAL PROCEEDINGS..................................................................................... 33PROCEEDINGS.................................................................................... 30
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............................................................. 33PROCEEDS............................................................ 30
Item 3. DEFAULTS UPON SENIOR SECURITIES....................................................................... 33SECURITIES...................................................................... 30
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................... 33HOLDERS.................................................. 30
Item 5. OTHER INFORMATION..................................................................................... 33INFORMATION.................................................................................... 30
Item 6. EXHIBITS AND REPORTS ON FORM 8-K...................................................................... 33
SIGNATURES 348-K..................................................................... 30
SIGNATURE............................................................................................ 31
2
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
June 30,March 31, December 31,
2002 2001
2000
---------- ----------
ASSETS
----------------- ------------
ASSETS
Cash and cash equivalents.................................................................equivalents .................................................................. $ 22,58852,827 $ 17,94451,887
Investment securities available-for-sale.................................................. 31,763 36,921available-for-sale ................................................... 28,640 32,989
Loan Receivables:
CMO collateral......................................................................... 1,439,848 1,372,996collateral ........................................................................... 2,563,621 2,229,168
Finance receivables.................................................................... 429,590 405,438receivables ...................................................................... 639,489 466,649
Mortgage loans held-for-investment..................................................... 199,908 16,720held-for-investment ....................................................... 8,882 20,078
Allowance for loan losses.............................................................. (7,817) (5,090)
---------- ----------losses ................................................................ (14,764) (11,692)
----------- -----------
Net loan receivables.............................................................. 2,061,529 1,790,064receivables .................................................................. 3,197,228 2,704,203
Investment in Impac Funding Corporation................................................... 15,978 15,762Corporation .................................................... 20,377 19,126
Due from affiliates.......................................................................affiliates ........................................................................ 14,500 14,500
Accrued interest receivable............................................................... 12,059 12,988receivable ................................................................ 16,199 14,565
Derivative assets .......................................................................... 9,991 5,128
Other real estate owned................................................................... 6,014 4,669
Derivative assets......................................................................... 8,081 61owned .................................................................... 6,989 8,137
Other assets.............................................................................. 4,961 5,929
---------- ----------assets ............................................................................... 2,477 4,199
----------- -----------
Total assets......................................................................... $2,177,473 $1,898,838
========== ==========assets .......................................................................... $ 3,349,228 $ 2,854,734
=========== ===========
LIABILITIES
-----------
CMO borrowings............................................................................ $1,361,972 $1,291,284borrowings ............................................................................. $ 2,470,726 $ 2,151,400
Reverse repurchase agreements............................................................. 608,967 398,653agreements .............................................................. 576,094 469,491
Borrowings secured by investment securities available-for-sale............................ 16,888 21,124
Senior subordinated debentures............................................................ -- 6,979available-for-sale ............................. 11,260 12,997
Accumulated dividends payable............................................................. 788 788payable .............................................................. 15,766 14,081
Other liabilities......................................................................... 1,023 1,570
---------- ----------liabilities .......................................................................... 5,242 3,400
----------- -----------
Total liabilities.................................................................... 1,989,638 1,720,398
---------- ----------liabilities ..................................................................... 3,079,088 2,651,369
----------- -----------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock; $.01$0.01 par value; 6,300,000 shares authorized; none issued or
outstanding at June 30, 2001March 31, 2002 and December 31, 2000, respectively.......................2001, respectively ........................ -- --
Series A junior participating preferred stock, $.01$0.01 par value; 2,500,000 shares
authorized; none issued and outstanding at June 30, 2001March 31, 2002 and December 31, 2000.........2001 .......... -- --
Series C 10.5% cumulative convertible preferred stock, $.01$0.01 par value; $30,000
liquidation value; 1,200,000
shares authorized; 1,200,000 issued andnone outstanding at June 30, 2001March 31, 2002 and December 31, 2000..................................... 12 122001 .............. -- --
Common stock; $.01$0.01 par value; 50,000,000 shares authorized; 20,460,66639,422,163 and
20,409,95632,001,997 shares issued and outstanding at June 30, 2001March 31, 2002 and December 31,
2000,
respectively........................................................................... 205 2042001, respectively ....................................................................... 394 320
Additional paid-in capital................................................................ 325,567 325,350capital ................................................................. 416,224 359,279
Accumulated other comprehensive gain (loss)............................................... 531 (568)
Accumulated comprehensive loss - FAS 133.................................................. (244) --....................................................... (10,904) (19,857)
Notes receivable from common stock sales.................................................. (930) (902)sales ................................................... -- (920)
Net accumulated deficit:
Cumulative dividends declared.......................................................... (105,548) (103,973)
Accumulated deficit.................................................................... (31,758) (41,683)
---------- ----------declared ............................................................ (142,718) (126,952)
Retained earnings (accumulated deficit) .................................................. 7,144 (8,505)
----------- -----------
Net accumulated deficit............................................................. (137,306) (145,656)
---------- ----------deficit ................................................................. (135,574) (135,457)
----------- -----------
Total stockholders' equity........................................................ 187,835 178,440
---------- ----------equity ............................................................ 270,140 203,365
----------- -----------
Total liabilities and stockholders' equity........................................ $2,177,473 $1,898,838
========== ==========equity ............................................ $ 3,349,228 $ 2,854,734
=========== ===========
See accompanying notes to consolidated financial statements.
3
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
and COMPREHENSIVE EARNINGS
(LOSS)
(in thousands, except per share data)
For the Three Months
For the Six Months
Ended June 30, Ended June 30,
-------------------- -------------------March 31,
----------------------------
2002 2001
2000 2001 2000
------- ------- ------- --------------- --------
INTEREST INCOME:
Mortgage Assets................................................. $37,011Assets ............................................................ $ 34,041 $75,80242,426 $ 67,63138,793
Other interest income........................................... 655 489 1,263 1,039
-------income ...................................................... 642 606
-------- ------- --------
Total interest income......................................... 37,666 34,530 77,065 68,670
-------income .................................................... 43,068 39,399
-------- ------- --------
INTEREST EXPENSE:
CMO borrowings.................................................. 17,175 20,578 37,767 39,710borrowings ............................................................. 22,406 20,592
Reverse repurchase agreements................................... 8,938 7,489 17,797 14,842agreements .............................................. 4,290 8,859
Borrowings secured by investment securities available-for-sale............................... 660 807 1,338 1,692available-for-sale ............. 549 678
Senior subordinated debentures.................................. 252 316 563 630debentures ............................................. -- 311
Other borrowings................................................ 90 2 157 43
-------borrowings ........................................................... 176 66
-------- ------- --------
Total interest expense...................................... 27,115 29,192 57,622 56,917
-------expense ................................................... 27,421 30,506
-------- ------- --------
Net interest income............................................. 10,551 5,338 19,443 11,753
Provision for loan losses................................... 3,905 3,304 7,943 16,488
------- -------- ------- --------
Net interest income (loss)........................................................ 15,647 8,893
Provision for loan losses ................................................ 3,707 4,038
-------- --------
Net interest income after provision for loan losses...... 6,646 2,034 11,500 (4,735)losses ................... 11,940 4,855
NON-INTEREST INCOME:
Equity in net earnings (loss) of Impac Funding Corporation...... 3,528 (1,488) 4,818 (1,080)Corporation ........................ 4,609 1,290
Loan servicing fees............................................. 290 176 582 338fees ........................................................ 66 292
Other income.................................................... 971 264 1,514 1,054
-------income ............................................................... 977 543
-------- ------- --------
Total non-interest income................................... 4,789 (1,048) 6,914 312income ............................................. 5,652 2,125
NON-INTEREST EXPENSE:
Mark-to-market loss - FAS 133................................... 581 -- 1,445 --
General and administrative and other expense.................... 549 377 925 680
Professional services........................................... 463 458 1,082 1,087
Personnel expense............................................... 272 160 576 307
Write-down on investment securities available-for-sale.......... 108 29,426 107 53,404
(Gain)available-for-sale ..................... 1,039 --
Professional services ...................................................... 860 619
Personnel expense .......................................................... 401 305
General, administrative and other expense .................................. 79 376
Mark-to-market loss - SFAS 133 ............................................. -- 864
Gain on disposition of other real estate owned........... (327) 880 (965) 1,307
-------owned ............................. (436) (639)
-------- ------- --------
Total non-interest expense.................................. 1,646 31,301 3,170 56,785
-------expense ............................................ 1,943 1,525
-------- ------- --------
Earnings (loss) before extraordinary item and cumulative effect of change in accounting principle........................ 9,789 (30,315) 15,244 (61,208)
Extraordinary item.......................................... (1,006) -- (1,006) --principle ........... 15,649 5,455
Cumulative effect of change in accounting principle......... --principle ........................ -- (4,313)
--
------- -------- ------- --------
Net earnings (loss)............................................. 8,783 (30,315) 9,925 (61,208).................................................................. 15,649 1,142
Less: Cash dividends on 10.5% cumulative convertible preferred stock................................. (787)stock ....... -- (788)
(1,575) (1,575)
------- -------- ------- --------
Net earnings (loss) available to common stockholders............ 7,996 (31,103) 8,350 (62,783)stockholders ................................. 15,649 354
Other comprehensive earnings (loss):
Unrealized gains (losses) on securities:earnings:
Unrealized holding gains (losses) on securities arising during period..... 571 (264) 969 2,806
Less:period ...... (1,230) 401
Unrealized holding gains on hedging instruments arising during period ...... 10,407 --
Reclassification of losses included in earnings (loss).......................................... (43) 2,940 (114) 6,962
-------............................ (224) (72)
-------- ------- --------
Net unrealized gains arising during period............... 528 2,676 855 9,768
-------period ............................... 8,953 329
-------- ------- --------
Comprehensive earnings (loss)........................................................................................ $ 9,311 $(27,639) $10,780 $(51,440)
=======24,602 $ 1,471
======== ======= ========
See accompanying notes to consolidated financial statements.
4
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
and COMPREHENSIVE EARNINGS
(LOSS)
(in thousands, except per share data)
For the Three Months
For the Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------March 31,
--------------------------
2002 2001
2000 2001 2000
-------- -------- -------- ----------------- ---------
Earnings (loss) per share before extraordinary item and cumulative effect of change in accounting principle:
Basic..................................................Basic ........................................................................... $ 0.44 $ (1.45)0.23
========= =========
Diluted ......................................................................... $ 0.670.43 $ (2.93)
======= ======== ======= ========
Diluted................................................ $ 0.36 $ (1.45) $ 0.57 $ (2.93)
======= ======== ======= ========0.20
========= =========
Net earnings (loss) per share
Basic..................................................share:
Basic ........................................................................... $ 0.390.44 $ (1.45)0.02
========= =========
Diluted ......................................................................... $ 0.410.43 $ (2.93)
======= ======== ======= ========
Diluted................................................ $ 0.33 $ (1.45) $ 0.37 $ (2.93)
======= ======== ======= ========0.04
========= =========
See accompanying notes to consolidated financial statements.
5
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the SixThree Months
Ended June 30,
-------------------------------March 31,
---------------------------
2002 2001
2000
------------- ----------------------- ---------
Cash flows from operating activities:
Net earnings (loss)...................................................................................................................................... $ 14,23815,649 $ (61,208)5,455
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
Cumulative effect of change in accounting principle...................principle ....................................... -- (4,313) --
Equity in net (earnings) lossearnings of Impac Funding Corporation............ (4,818) 1,080Corporation ....................................... (4,609) (1,290)
Provision for loan losses............................................. 7,943 16,488losses ................................................................. 3,707 4,038
Amortization of loan premiums and securitization costs................ 5,161 8,393
(Gain) losscosts .................................... 7,306 2,425
Gain on disposition of other real estate owned................. (965) 1,307
Write-off of securitization costs from senior subordinated debentures. 1,006 --owned ............................................ 436 639
Write-down of investment securities available-for-sale................ 107 53,404
Gain on sale of investment securities available-for-sale.............. (159)available-for-sale .................................... 1,039 --
Net change in accrued interest receivable............................. 929 311receivable ................................................. (1,634) 627
Net change in other assets and liabilities............................ (7,987) (4,547)liabilities ................................................ (1,299) 1,040
--------- ---------
Net cash provided by operating activities........................... 11,142 15,228activities ............................................... 20,595 8,621
--------- ---------
Cash flows from investing activities:
Net change in CMO collateral............................................. (75,475) 90,785collateral ................................................................ (330,518) 117,922
Net change in finance receivables........................................ (24,758) (99,807)receivables ........................................................... (172,840) (50,654)
Net change in mortgage loans held-for-investment......................... (189,884) (109,472)held-for-investment ............................................ 10,126 (187,163)
Proceeds from sale of other real estate owned, net....................... 5,168 9,239net .......................................... 2,200 1,104
Dividend from Impac Funding Corporation.................................. 4,419 --
Sale of investment securities available-for-sale......................... 5,154 5,704Corporation ..................................................... 1,980 1,945
Net principal reductions on investment securities available-for-sale..... 1,079 2,088available-for-sale ........................ 1,347 997
--------- ---------
Net cash used in investing activities............................... (274,297) (101,463)provided by operating activities ............................................... (487,705) (115,849)
--------- ---------
Cash flows from financing activities:
Net change in reverse repurchase agreements and other borrowings......... 206,191 (144,838)borrowings ............................ 104,866 214,634
Proceeds from CMO borrowings............................................. 357,843 451,950borrowings ................................................................ 495,000 --
Repayments of CMO borrowings............................................. (287,155) (221,029)borrowings ................................................................ (175,674) (114,061)
Dividends paid........................................................... (1,575) (6,964)
Retirementpaid .............................................................................. (14,081) (788)
Proceeds from sale of senior subordinated debentures............................. (7,747)common stock .......................................................... 56,968 --
Proceeds from exercise of stock options.................................. 270options ..................................................... 51 --
Advances and reductions on notes receivable-common stock................. (28) 5stock .................................... 920 (18)
--------- ---------
Net cash provided by financing activities........................... 267,799 79,124activities ............................................... 468,050 99,767
--------- ---------
Net change in cash and cash equivalents.................................... 4,644 (7,111)equivalents ..................................................... 940 (7,461)
Cash and cash equivalents at beginning of period...........................period ............................................ 51,887 17,944 20,152
--------- ---------
Cash and cash equivalents at end of period.................................period .................................................. $ 22,58852,827 $ 13,04110,483
========= =========
Supplementary information:
Interest paid............................................................paid ............................................................................... $ 58,63827,534 $ 52,08629,420
Non-cash transactions:
Transfer of mortgage loans held-for-investment to CMO collateral......... $ 359,643 $377,016
Dividends declared and unpaid............................................unpaid ............................................................... $ 15,766 $ 788 3,356
Accumulated other comprehensive gain..................................... 855 9,768gain (loss) ................................................. 8,953 329
Loans transferred to other real estate owned............................. 5,548 7,948
owned ................................................ 1,488 3,358
See accompanying notes to consolidated financial statements.
6
IMPAC MORTGAGE HOLDINGS, INC. and SUBSIDIARIES
Notes to Consolidated Financial Statements
(unaudited)
Unless the context otherwise requires, references herein to the "Company"
refer to Impac Mortgage Holdings, Inc. (IMH) and its subsidiaries and related
companies, IMH Assets Corporation (IMH Assets), Impac Warehouse Lending Group,
Inc. (IWLG), and Impac Funding Corporation (together with its wholly-owned
subsidiary, Impac Secured Assets Corporation, IFC, collectively). References to
IMH refer to Impac Mortgage Holdings, Inc. as a separate entity from IMH Assets,
IWLG, and IFC.
1. Basis of Financial Statement Presentation
The accompanying consolidated financial statements of Impac Mortgage
Holdings, Inc. (IMH) and subsidiaries 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, (consistingconsisting of normal recurring
adjustments)adjustments, considered necessary for a fair presentation have been included.
Operating results for the three- and six-monththree-month period ended June 30,
2001March 31, 2002 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2001.2002. The accompanying consolidated financial statements should be
read in conjunction with the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2000.
The2001.
IMH's results of operations of IMH have been presented in the consolidated
financial statements for the three-three-months ended March 31, 2002 and six- months ended June 30, 2001 and 2000 and
include the financial results of IMH's equity interest in net earnings of IFC
and IMH Assets and IWLG as stand-alone entities.Impac
Funding Corporation (IFC). The results of operations of IFC, of which 100% of
IFC's preferred stock and 99% of theits economic interest is owned by IMH, are
included in the results of operations of the Company as "Equity in net earnings (loss) of Impac
Funding Corporation." Additionally, IMH's results of operations include the
financial results of IMH Assets Corp. (IMH Assets) and Impac Warehouse Lending
Group (IWLG) as stand-alone entities.
2. Organization
The CompanyIMH is a mortgage real estate investment trust (Mortgage REIT)
which, together(REIT). Together with its
subsidiaries and related companies,affiliate, IFC, the Company is a nationwide acquirer and
originator of non-conforming Alt-A mortgage loans (Alt-A). Alt-A mortgage loans
consist primarily operates
three businesses: (1) the Long-Term Investment Operations, (2) the Mortgage
Operations, and (3) the Warehouse Lending Operations. The Long-Term Investment
Operations invests primarily in non-conforming residentialof mortgage loans that are first lien mortgage loans made to
borrowers whose credit is generally within typical Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie
Mac) guidelines, but that have loan characteristics that make them
non-conforming under those guidelines. For instance, the loans may have higher
loan-to-value (LTV) ratios than allowable or may have excluded certain
documentation or verifications. Therefore, in making credit decisions, the
Company is more reliant upon the borrower's credit score and the adequacy of the
underlying collateral. Management believes that Alt-A mortgage loans provide an
attractive net earnings profile by producing higher yields without
commensurately higher credit losses than other types of mortgage loans. Since
1999, the Company has acquired and originated and acquired by the Mortgage Operations and securities backed by
suchprimarily Alt-A mortgage loans.
The Mortgage Operations are comprised of the Conduit
Operations, which primarily purchases non-conforming mortgage loans from
correspondent brokers,Company also provides warehouse and subsequently sells or securitizes such loans, and the
Wholesale and Retail Lending Operations, which allows brokers and retail
customers to access the Company directly to originate, underwrite and fund their
loans. The Warehouse Lending Operations provides short-term lines of creditrepurchase financing to originators of
mortgage loans. The Company's goal is to generate consistent and reliable income
for distribution to its stockholders primarily from the earnings of its core
businesses.
The Company primarily operates three core businesses: the long-term
investment operations, the mortgage operations, and the warehouse lending
operations. IMH is organized as a REIT for federal income tax purposes, which
generally allows it to pass through qualified income to stockholders without
federal income tax at the corporate level, provided that the Companyit distributes 90% of
its taxable income to common stockholders.
Long-Term Investment Operations
The Long-Term Investment Operations,Company's long-term investment operations, conducted by IMH and IMH
Assets, investsinvest primarily in non-conforming residentialAlt-A mortgages loans. This business primarily
generates net interest income on its mortgage loan and investment securities
portfolios. The Company's investment in Alt-A mortgage loans is financed with
collateralized mortgage obligations (CMO) financing, warehouse facilities and
mortgage-
backed securities secured by or representing interests in such loansproceeds from the sale of capital stock. The mortgage operations acquire,
originate, sell and to a
lesser extent, in secondsecuritize primarily Alt-A mortgage loans. The Long-Term Investment Operations
investment strategy is to only acquire or invest in investment securities that
are securedmortgage
operations generate income by mortgage loans underwrittensecuritizing and purchased by IFC (Impac
Securities). Non-conforming residential mortgage loans are residential mortgages
that do not qualify for purchase by government-sponsored agencies such as the
Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage
Corporation (FHLMC). The principal differences between conforming loans and non-
conforming loans include applicable loan-to-value ratios, credit and income
histories of the mortgagors, documentation required for approval of the
mortgagors, type of properties securing the mortgage loans, loan sizes, and the
mortgagors' occupancy status with respect to the mortgaged properties. Second
mortgage loans are mortgage loans secured by a second lien on the property and
made to borrowers owning single-family homes for the purpose of debt
consolidation, home improvements, education and a variety of other purposes.
7
Mortgage Operations
The Conduit Operations, conducted by IFC, purchases primarily non-
conforming mortgage loans and, to a lesser extent, second mortgage loans from
its network of first party correspondents and other sellers. IFC subsequently
securitizes or sells suchselling loans to permanent
investors, including the Long-Term
Investment Operations. IMH owns 99% of the economiclong-term investment operations. This business also
earns revenues from fees associated with mortgage servicing rights, master
servicing agreements and interest in IFC, while
Joseph R. Tomkinson, Chairman and Chief Executive Officer, William S. Ashmore,
President and Chief Operating Officer, and Richard J. Johnson, Executive Vice
President and Chief Financial Officer, are the holders of all the outstanding
voting stock of, and 1% of the economic interest in, IFC.income earned on loans held for sale. The
Wholesale and Retail Lending Operations, conducted by Impac Lending
Group (ILG), a division of IFC, markets, underwrites, processes and funds
mortgage loans for both wholesale and retail customers. Through the wholesale
division, ILG allows mortgage brokers to work directly with the Company to
originate, underwrite and fund their mortgage loans. Many of the Company's
wholesale customers cannot conduct business with the Conduit Operations as
correspondent sellers because they do not meet the higher net worth requirements
or do not have the ability to close the loan in their name. Through the retail
division, ILG markets mortgage loans directly to the public. Both the wholesale
and retail mortgage divisions offer all of the loan programs that are offered by
the Conduit Operations.
Warehouse Lending Operations
The Warehouse Lending Operations, conducted by IWLG, provides short-termoperations primarily use warehouse lines of credit to affiliated companiesfinance the
acquisition and origination of mortgage loans. The warehouse lending operations
provide short-term financing to approved mortgage bankers to
financeloan originators by funding mortgage
loans duringfrom their closing date until they are sold to pre-approved investors,
including the timelong-term investment operations. The warehouse lending operations
earn fees, as well as a
7
spread, from the closingdifference between its cost of borrowings and the interest
earned on advances. Generally, the Company seeks to acquire Alt-A mortgage loans
to their
sale or other settlementfunded with pre-approved investors. Most offacilities provided by the affiliated
companies are correspondents of IFC.warehouse lending operations, which
provides synergies with the long-term investment operations and mortgage
operations.
3. Summary of Significant Accounting Policies
Method of Accounting
The consolidated financial statements are prepared on the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America.GAAP. The preparation of financial statements in
conformity with GAAP requires management to make significant estimates and
assumptions that affect the reported amounts of assets, liabilities and
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results may
differ materially from those estimates. Significant estimates made by management
include "Accounting for Derivative Instruments and Hedging Activities" and
"Allowance for loan losses," which are presented in detail in footnotes 4 and 7,
respectively.
Reclassifications
Certain amounts in the consolidated financial statements for prior periods
have been reclassified to conform to the current presentation.
Recent Accounting Pronouncements
In September 2000, theThe Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 140 to replace SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 140 provides the accounting and
reporting guidance for transfers and servicing of financial assets and
extinguishments of liabilities. SFAS No. 140 will be the authoritative
accounting literature for: (1) securitization transactions involving financial
assets; (2) sales of financial assets (including loan participations); (3)
factoring transactions; (4) wash sales; (5) servicing assets and liabilities;
(6) collateralized borrowing arrangements; (7) securities lending transactions;
(8) repurchase agreements; and (9) extinguishment of liabilities. The accounting
provisions are effective after June 30, 2001. The reclassification and
disclosure provisions are effective for fiscal years beginning after December
31, 2000. The Company adopted the disclosure required by SFAS No. 140 and has
included all appropriate and necessary disclosures required by SFAS No. 140 in
its December 31, 2000 Form 10-K. The adoption of the accounting provision is not
expected to have a material impact on the Company's consolidated balance sheet
or results of operations.
In November 1999, the FASB issued Emerging Issues Task Force No. 99-20
(EITF 99-20) "Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets."
8
EITF 99-20 sets forth the rules for (1) recognizing interest income (including
amortization of premium or discount) on (a) all credit sensitive mortgage assets
and asset-backed securities and (b) certain prepayment-sensitive securities and
(2) determining whether these securities must be written down to fair value due
to impairment. EITF 99-20 is effective for the Company after March 31, 2001. The
adoption of EITF 99-20 did not have a material impact on the Company's
consolidated balance sheet or results of operations.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" (SFAS
141) and SFAS No. 142, "Goodwill and Other Intangible
Assets"Assets," (SFAS 142).
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. The use of the pooling-of-
interests method will be prohibited. The adoption of SFAS 141 is not expected to
have a material impact on the Company's consolidated balance sheet or results of
operations. SFAS 142 applies to all acquired intangible assets whether
acquired singularly, as a part of a group, or in a business combination. SFAS 142
supercedes APBsupersedes Accounting Principles Bulletin (APB) Opinion No. 17, "Intangible
Assets," and will carrycarries forward provisions in AFBAPB Opinion No. 17 related to
internally developed intangible assets. SFAS 142 changes the accounting for
goodwill from an amortization method to an impairment-only approach. Goodwill
should no longer be amortized, but instead tested for impairment at least
annually at the reporting unit level. The accounting provisions are effective
for fiscal years beginning after December 31, 2001. The adoptionAs of SFAS 142March 31, 2002, the
Company's intangible assets and goodwill are not significant. It is anticipated
that the financial impact of this statement will not expected to have a material impact on
the Company's consolidated balance sheet orfinancial condition and results of operations.
4. Accounting for Derivatives Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No.
138, (collectively, SFAScollectively, (SFAS 133). SFAS 133 establishes accounting and reporting
standards for derivative instruments, including a number of derivative
instruments embedded in other contracts, collectively referred to as
derivatives, and for hedging activities. It requires that an entity recognizesrecognize
all derivatives as either assets or liabilities in the balance sheetstatement of financial
position and measuresmeasure those instruments at fair value. The accounting for gains and losses
associated with changes in the fair value of the derivatives are reported in
current earnings or other comprehensive income, depending on whether they
qualify for hedge accounting and whether the hedge is highly effective in
achieving offsetting changes in the fair value or cash flows of the asset or
liability hedged. If specific conditions are
met, a derivative may be specifically designated as:as (1) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment; (2) a hedge of the exposure to variable cash flows
of a forecasted transaction; or (3) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available for sale security or a foreign-currency-denominated forecasted
transaction.
Under SFAS 133, an entity
that elects to apply hedge accounting is required to establish at the inception
of the hedge the method it will use for assessing the effectiveness of the
hedging derivative and the measurement and approach for determining the
ineffective aspect of the hedge. Those methods must be consistent with the
entity's approach to managing risk. The Company adopted SFAS 133 on January 1,
2001, and recorded a transition amount associated with establishing the fair
values of the derivative instruments as of December 31, 2000.
As part of the Company's secondary marketing activities, it purchases
various derivative instruments to hedge against adverse changes in interest
rates. In general, the derivative instruments are allocated to existing or
forecasted CMOs to provide a hedge against a rise in interest rates. On January 1, 2001, the Company adopted SFAS 133 and the fair market value
of derivative instruments are reflected on the Company's financial statements.
On August 10, 2001, the Derivatives Implementation Group (DIG) of the FASB
published DIG G20, which further interpreted SFAS 133. On October 1, 2001, the
Company 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.
The Company follows a hedging program intended to limit its exposure to
changes in interest rates primarily associated with its CMO borrowings. The
Company's primary objective is to hedge its exposure to the variability in
future cash flows attributable to the variability of one-month London Interbank
Offered Rate (LIBOR), which is the underlying index of its CMO borrowings. The
Company also monitors on an ongoing basis the prepayment risks that arise in
fluctuating interest rate environments. The Company's hedging program is
formulated with the intent to offset
8
the potential adverse effects of changing interest rates on CMO borrowings
resulting from the following: interest rate adjustment limitations on mortgage
loans due to periodic and lifetime interest rate cap features and mismatched
interest rate adjustment periods of mortgage loans and CMO borrowings.
The Company primarily acquires for long-term investment six-month LIBOR
adjustable rate mortgages (ARMs) and hybrid ARMs. Six-month LIBOR 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 six months, or over the
life of the mortgage loan. Periodic caps limit the maximum interest rate change,
which can occur on any interest rate change date to generally a maximum of 1%
per semiannual 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 would increase or decrease at that time, designateda faster rate than
the periodic interest rate adjustments on mortgage loans would allow, which
could effect net interest income. In addition, if market rates were to exceed
the maximum interest rates of our ARMs, borrowing costs would increase while
interest rates on ARMs would remain constant.
The Company's mortgage loan portfolio is also subject to risk from the
mismatched nature of interest rate adjustment periods on mortgage loans and
interest rates on the related borrowings. Six-month LIBOR mortgage loans can
adjust upwards or downwards every six months, subject to periodic cap
limitations, while adjustable rate CMO borrowings adjust every month.
Additionally, the Company has hybrid ARMs which have an initial fixed interest
rate period generally ranging from two to three years, and to a lesser extent
five years, which subsequently convert to six-month LIBOR ARMs. Again, during a
rapidly increasing or decreasing interest rate environment, financing costs
would increase or decrease more rapidly than would interest rates on mortgage
loans, which would remain fixed until their next interest rate adjustment date.
To mitigate exposure from the effect of changing interest rates on CMO
borrowings, the Company purchases and sells derivative instruments in accordance with the requirementsform
of interest rate cap agreements, or caps, interest rate floor agreements, or
floors, and interest rate swap agreements, or swaps. The Company also
simultaneously purchases or sells caps and floors, which are referred to as
collars. These derivative instruments are referred to collectively as
derivatives. An interest rate cap or floor is a contractual agreement. If
prevailing interest rates reach levels specified in the new standard.cap or floor agreement,
the Company may either receive or pay cash. An interest rate 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. Swap agreements have the effect of fixing
borrowing costs on a similar amount of swaps and, as a result, the Company can
reduce the interest rate variability of borrowings. The Company's 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 increase at greater speeds than the underlying collateral supporting the
borrowings. These cash flow derivative instruments hedge the variability of forecasted
cash flows attributable to CMO borrowings and protect net interest rate risk. Derivative gains and losses not
considered effective in hedging the change in expected cash flows of the hedged
item are recognized immediately in the income statement as mark-to-market loss -
FAS 133. The company recorded $722,000 in expense related to these hedges during
the six months ended June 30, 2001.
With the implementation of SFAS 133, the Company recorded transition
amounts associated with establishing the fair values of the derivative
instruments as of December 31, 2000 as a decrease to net earnings of $4.3
million and reflected as a cumulative change in accounting principle in the
Company's statement of operations. During the first six months of 2001, the
Company recorded a mark-to-market loss of $1.4 million when establishing the
fair market valuation of derivative instruments outstanding as of June 30, 2001.
9
During the second quarter of 2001 the Company purchased derivative
instruments to protect itself against fluctuations in interest rates on existing
CMO collateral and borrowings. The objective was to lock in a steady stream of
cash flows when interest rates fall below or above certain levels. When interest
rates rise, our CMO borrowing expense increases at a greater speed than the
underlying collateral of loans. The hedging instruments will protect the Company by
providing cash flows at certain triggers during changing interest rate
environments. Cash flow hedges are accounted forIn all hedging transactions, counterparties must have a AAA credit
rating as determined by recordingvarious credit rating agencies.
Caps qualify as derivative instruments under provisions of SFAS 133. The
hedging instrument is the specific LIBOR cap 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 Company assessed the hedging effectiveness of its caps utilizing only the
intrinsic value of the derivativecaps. DIG G20 allows the Company to utilize the terminal
value of the caps to assess effectiveness. DIG G20 also allows the Company to
amortize the initial fair value of the caps 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 are considered effective hedges and
are marked to market each reporting period with the entire change in market
value being recognized in other comprehensive income on the balance sheet.
Floors, swaps and collars qualify as cash flow hedges under the provisions
of SFAS 133. The hedging instrument is the specific LIBOR floor, swap or collar
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 DIG G20, these derivatives were marked to market with the
entire change in the market value of the intrinsic component recognized in other
comprehensive income on the balance sheet as either an asset or liabilityeach reporting period. The time value
component of these agreements were marked to market and recognized in
non-interest expense on the statement of operations.
9
Subsequent to the adoption of DIG G20, these derivatives are marked to market
with a corresponding offset recordedthe entire change in the market value recognized in other comprehensive
income within
stockholders' equity. Any ineffective portionon the balance sheet.
Effectiveness of derivatives is measured by the fact that both the hedged
item, CMO borrowings, and the hedging instrument is 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 assesses the
effectiveness and ineffectiveness of the hedging instruments at the inception of
the hedge is includedand 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 has concluded that the changes in current earnings.cash flows attributable to the risk
being hedged are expected to be completely offset by the hedging derivatives,
subject to subsequent assessments that the critical terms have not changed.
At March 31, 2002, caps allocated to CMO borrowings had a remaining
notional balance of $1.5 billion. Pursuant to the terms of the caps, the Company
will receive cash payments if one-month LIBOR reaches certain strike prices,
ranging from 1.76% to 10.25%, with a weighted average strike price of 4.49% over
the life of the caps. At March 31, 2002, collars allocated to CMO borrowings had
a remaining notional balance of $913.3 million. Pursuant to the terms of the
collars, the Company will receive cash payments if one-month LIBOR reaches
strike prices ranging from 2.07% to 6.53% with a weighted average strike price
of 4.18% over the life of the collars. The company recorded $723,000Company will make cash payments if
one-month LIBOR reaches strike prices ranging from 1.32% to 5.88% with a
weighted average strike price of 3.50%. At March 31, 2002, swaps allocated to
CMO borrowings had a remaining notional balance of $68.7 million. Pursuant to
the terms of the swaps, the Company will receive cash payments based on
one-month LIBOR and make cash payments at fixed rates ranging from 4.83% to
5.18%, with a weighted average fixed rate of 4.94% over the life of the swaps.
The notional amounts of allocated caps, collars and swaps are amortized
according to projected prepayment rates on CMO borrowings. However, regarding
the floor component of the collar, the notional amount equals the actual
principal balance of the CMO borrowings. As of March 31, 2002, the fair market
value of the allocated caps, collars and swaps was $901,000. These derivatives
are marked to market each reporting period with the entire change in expense related to these
hedges during the six months ended June 30, 2001. Interest rates decreased
during the first six months of 2001. Approximately $244,000 of net gain reportedmarket
value being recognized in other comprehensive income will be reclassified into earnings withinon the next
twelve months.balance sheet.
During 2001, the Company purchased a collar at strike prices tied to the
one-month LIBOR forward yield curve to protect cash flows on CMO borrowings,
which are secured by hybrid ARMs with remaining fixed terms and that did not
have derivative instruments allocated to the original CMO structures. As of
March 31, 2002, the collar had a notional amount of $718.6 million with a
one-month LIBOR cap strike price ranging from 4.29% to 5.42% and a weighted
average strike price of 4.90% over the life of the cap. The collar has a
one-month LIBOR floor strike price ranging from 4.21% to 4.98% and a weighted
average strike price of 4.51% over the life of the floor. The collar matures on
March 25, 2004. The notional amount of the collar is amortized according to
projected prepayment rates reflected in CMO borrowings. As of March 31, 2002,
the fair market value of the collar was $10.0 million. The collar is marked to
market each reporting period with the entire change in market value being
recognized in accumulated other comprehensive income on the balance sheet.
The following table presents certain information related to derivative
instruments and hedging activities as of March 31, 2002 (dollars in thousands):
Related
Original Fair Amount in Related Related
Notional Value Other Unamortized Amount in Amount
Face of Comprehensive Derivative Derivative in CMO
Amount Derivatives Index Income Instruments Asset Account Collateral
---------- ----------- ------ ------------- ----------- ------------- ----------
Caps and collars not
associated with 1 mo.
CMOs ............. $1,063,516 $ (6,185) LIBOR $ (8,626) $ 2,441 $ (6,185) $ --
Cash in margin
account .......... 16,176 16,176 N/A -- -- 16,176 --
Caps, collars and ..
swaps associated 1 mo.
with CMOs ........ 2,933,832 901 LIBOR (7,132) 8,033 -- 901
---------- -------- -------- ------- -------- ----
Totals ............. $4,013,524 $ 10,892 $(15,758) $10,474 $ 9,991 $901
========== ======== ======== ======= ======== ====
10
The following table presents certain information related to derivative
instruments and hedging activities as of December 31, 2001 (dollars in
thousands):
Related
Original Fair Amount in Related Related
Notional Value Other Unamortized Amount in Amount
Face of Comprehensive Derivative Derivative in CMO
Amount Derivatives Index Income Instruments Asset Account Collateral
----------- ----------- ----- -------------- ----------- ------------- ----------
Caps and collars not
associated with 1 mo.
CMOs ............. $1,860,790 $(13,659) LIBOR $(15,240) $1,581 $(13,659) $ --
Cash in margin
account .......... 18,787 18,787 N/A -- -- 18,787 --
Caps, collars and
swaps associated 1 mo.
with CMOs ........ 1,070,500 (4,372) LIBOR (12,722) 8,350 -- (4,372)
99% of OCI activity
at IFC ........... 36,000 (158) FNMA (90) -- -- --
---------- -------- -------- ------ -------- -------
Totals ............. $2,986,077 $ 598 $(28,052) $9,931 $ 5,128 $(4,372)
========== ======== ======== ====== ======== =======
5. Reconciliation of Net Earnings (Loss) per Share
The following table presents the computation of basic and diluted net
earnings (loss) per share for the periods shown, as if all stock options and 10.5%
Cumulative Convertible Preferred Stockcumulative convertible preferred stock (Preferred Stock), if dilutive, were
outstanding for these periods (in thousands, except per share data):):
For the Three Months
Ended June 30,
----------------------------March 31,
-------------------------
2002 2001
2000
------------ ------------------- --------
Numerator for earnings per share:
Earnings (loss) before extraordinary item......................................................cumulative effect of change in accounting principle ................. $15,649 $ 9,789 $(30,315)
Extraordinary item............................................................................. (1,006)5,455
Cumulative effect of change in accounting principle ................................ -- (4,313)
------- --------
Earnings (loss)Net earnings after extraordinary item..................................................... 8,783 (30,315)cumulative effect of change in accounting principle ............. 15,649 1,142
Less: Dividends paid to preferred stockholders................................................ (787)stockholders .................................... -- (788)
------- --------
Net earnings (loss) available to common stockholders.........................................stockholders ......................................... $15,649 $ 7,996 $(31,103)354
======= ========
Denominator for earnings per share:
Basic weighted average number of common shares outstanding during the period................... 20,421 21,401period .......... 35,926 20,385
Impact of assumed conversion of Preferred Stock................................................Stock ....................................... -- 6,356 --
Net effect of dilutive stock options........................................................... 240 --options .................................................. 473 10
------- --------
Diluted weighted average common and common equivalent shares................................. 27,017 21,401shares ....................... 36,399 26,751
======= ========
Earnings (loss) per share before extraordinary item:
Basic................................................................................cumulative effect of change in accounting principle:
Basic .............................................................................. $ 0.44 $ (1.45)0.23
======= ========
Diluted..............................................................................Diluted ............................................................................ $ 0.360.43 $ (1.45)0.20
======= ========
Net earnings (loss) per share:
Basic................................................................................Basic .............................................................................. $ 0.390.44 $ (1.45)0.02
======= ========
Diluted..............................................................................Diluted ............................................................................ $ 0.330.43 $ (1.45)0.04
======= ========
The Company had 5,8391,500 and 684187,036 stock options forduring the quarterthree months
ended June 30,March 31, 2002 and March 31, 2001, and June 30, 2000, respectively, that were not considered
in the dilutive calculation of earnings per share as the exercise price was
higher than the market price for the period. The antidilutive effectsIn August 2001, 1,200,000 shares of outstanding
Preferred Stock aswere converted into 6,355,932 shares of June 30, 2001 and June 30, 2000 was none and 6,356,000 shares,
respectively.
10
For the Six Months
Ended June 30,
-----------------------------
2001 2000
--------- -----------
Numerator for earnings per share:
Earnings (loss) before extraordinary item and cumulative effect of
Change in accounting principle................................................... $15,244 $(61,208)
Extraordinary item................................................................. (1,006) --
Cumulative effect of change in accounting principle................................ (4,313) --
------- --------
Earnings (loss) after extraordinary item and cumulative effect of change
in accounting principle....................................................... 9,925 (61,208)
Less: Dividends paid to preferred stockholders.................................... (1,575) (1,575)
------- --------
Net earnings (loss) available to common stockholders............................. $ 8,350 $(62,783)
======= ========
Denominator for earnings per share:
Basic weighted average number of common shares outstanding during the period....... 20,432 21,401
Impact of assumed conversion of Preferred Stock.................................... 6,356 --
Net effect of dilutive stock options............................................... 83 --
------- --------
Diluted weighted average common and common equivalent shares............. 26,871 21,401
======= ========
Net earnings (loss) per share before extraordinary item and cumulative effect of
Change in accounting principle:
Basic.................................................................... $ 0.67 $ (2.93)
======= ========
Diluted.................................................................. $ 0.57 $ (2.93)
======= ========
Net earnings (loss) per share:
Basic.................................................................... $ 0.41 $ (2.93)
======= ========
Diluted.................................................................. $ 0.37 $ (2.93)
======= ========
The Company had 15,136 and 420 stock options for the six-months ended
June 30, 2001 and June 30, 2000, respectively, that were not considered in the
dilutive calculation of earnings per share as the exercise price was higher than
the market price for the period. The antidilutive effects of outstanding
Preferred Stock as of June 30, 2001 and June 30, 2000 was none and 6,356,000
shares, respectively.
11
common stock.
6. Mortgage Assets
Mortgage Assets consist of investment securities available-for-sale,
mortgage loans held-for-investment, CMO collateral and finance receivables. At
June 30, 2001March 31, 2002 and December 31, 2000,2001, Mortgage Assets consisted of the following
(in thousands):
11
June 30,March 31, December 31,
2002 2001
2000
--------------------- ------------
Investment securities available-for-sale:
Subordinated securities collateralized by mortgages.......................mortgages ...................... $ 31,19024,359 $ 37,92026,661
Net unrealized gain (loss)................................................ 573 (999)
---------- ----------(1) .................................................. 4,281 6,328
----------- -----------
Carrying value of investment securities available-for-sale........... 31,763 36,921
---------- ----------available-for-sale ............. 28,640 32,989
----------- -----------
Loan Receivables:
CMO collateral--
CMO collateral, unpaid principal balance.................................. 1,404,889 1,333,487balance ................................. 2,511,292 2,186,561
Unamortized net premiums on loans......................................... 21,769 22,759loans ........................................ 39,677 35,397
Securitization expenses................................................... 11,104 14,123
Hedgingexpenses .................................................. 11,751 11,582
Fair value of derivative instruments allocated to CMO collateral........................... 2,086 2,627
---------- ----------collateral ......... 901 (4,372)
----------- -----------
Carrying value of CMO collateral..................................... 1,439,848 1,372,996collateral ....................................... 2,563,621 2,229,168
Finance receivables--receivables (2)--
Due from affiliates....................................................... 197,836 267,033affiliates, net of pledge accounts .............................. 375,546 166,078
Due from other mortgage banking companies................................. 231,754 138,405
---------- ----------companies ................................ 263,943 300,571
----------- -----------
Carrying value of finance receivables................................ 429,590 405,438receivables .................................. 639,489 466,649
Mortgage loans held-for-investment--
Mortgage loans held-for-investment, unpaid principal balance.............. 197,387 16,928balance ............. 8,936 20,086
Unamortized net premiums (discounts)discounts on loans............................. 2,521 (208)
---------- ----------loans ....................................... (54) (8)
----------- -----------
Carrying value of mortgage loans held-for-investment................. 199,908 16,720held-for-investment ................... 8,882 20,078
Carrying value of Gross Loan Receivables....................................... 2,069,346 1,795,154Receivables .................................... 3,211,992 2,715,895
Allowance for loan losses................................................. (7,817) (5,090)
---------- ----------losses ................................................ (14,764) (11,692)
----------- -----------
Carrying value of Net Loan Receivables............................... 2,061,529 1,790,064
---------- ----------Receivables ................................. 3,197,228 2,704,203
----------- -----------
Total carrying value of Mortgage Assets................................... $2,093,292 $1,826,985
========== ==========
7. Segment Reporting
The basis for the Company's segments is to separate its entities as
follows: segments that derive income from investment in long-term Mortgage
Assets, segments that derive income by providing short-term financing and
segments that derive income from the purchase and sale or securitizationAssets
Carrying value of
mortgage loans.
The Company internally reviews and analyzes its segments as follows:
. The Long-Term Investment Operations, conducted by IMH and IMH Assets,
invests primarily in non-conforming residential mortgage loans and
mortgage-backed securities secured by or representing interests in such
loans and in second mortgage loans.
. The Warehouse Lending Operations, conducted by IWLG, provides warehouse
and repurchase financing to affiliated companies and to approved
mortgage banks, most of which are correspondents of IFC, to finance
mortgage loans.
. The Mortgage Operations, conducted by IFC and ILG, purchases and
originates non-conforming mortgage loans and second mortgage loans from
its network of third party correspondent sellers, wholesale brokers and
retail customers.
12
The following table shows the Company's reporting segments as of and for
the six months ended June 30, 2001 (in thousands):
Long-Term Warehouse
Investment Lending (a)
Operations Operations Eliminations Consolidated
-------------- ------------- ---------------- ---------------
Balance Sheet Items
CMO collateral $1,439,848 $ -- $ -- $1,439,848
Total assets 1,829,747 676,335 (328,609) 2,177,473
Total stockholders' equity 268,931 67,151 (148,247) 187,835
Income Statement Items
Interest income $ 58,405 $ 23,264 $ (4,604) $ 77,065
Interest expense 44,361 17,865 (4,604) 57,622
Equity interest in net earnings
of IFC (b) -- -- 4,818 4,818
Net earnings 252 4,855 4,818 9,925
The following table shows the Company's reporting segments for the three months ended June 30, 2001 (in thousands):
Income Statement Items
Interest income $ 29,006 $ 11,483 $ (2,823) $ 37,666
Interest expense 20,947 8,991 (2,823) 27,115
Equity interest in net earnings
of IFC (b) -- -- 3,528 3,528
Net earnings 2,991 2,264 3,528 8,783
The following table shows the Company's reporting segments as of and for the six months ended June 30, 2000 (in thousands):
Long-Term Warehouse
Investment Lending (a)
Operations Operations Eliminations Consolidated
-------------- ------------- ---------------- ---------------
Balance Sheet Items
CMO collateral $1,182,125 $ -- $ -- $1,182,125
Total assets 1,495,516 454,651 (250,048) 1,700,119
Total stockholders' equity 251,336 54,440 (125,117) 180,659
Income Statement Items
Interest income $ 50,675 $ 21,265 $ (3,270) $ 68,670
Interest expense 45,338 14,849 (3,270) 56,917
Equity interest in net loss
of IFC (b) -- -- (1,080) (1,080)
Net earnings (loss) (65,884) 5,756 (1,080) (61,208)
The following table shows the Company's reporting segments for the three months ended June 30, 2000 (in thousands):
Income Statement Items
Interest income $ 24,596 $ 10,333 $ (399) $ 34,530
Interest expense 22,100 7,491 (399) 29,192
Equity interest in net loss
of IFC (b) -- -- (1,488) (1,488)
Net earnings (loss) (31,198) 2,371 (1,488) (30,315)
(a) Elimination of inter-segment balance sheet and income statement items.
(b) The Mortgage Operations are accounted for using the equity method and is an
unconsolidated subsidiary of the Company.
13
8. Investment in Impac Funding Corporation
The Company is entitled to 99% of the earnings or losses of IFC through its
ownership of all of the non-voting preferred stock of IFC. As such, the Company
records its investment in IFC using the equity method. Under this method,
original investments are recorded at cost and adjusted by the Company's share of
earnings or losses. Gain or loss on the sale of loans or securities by IFC to
IMH are deferred and amortized or accreted over the estimated life of the loans
or securities using the interest method. The following is financial information
for IFC for the periods presented (in thousands):
BALANCE SHEETS
June 30, December 31,
2001 2000
-------- ------------
ASSETS
------
Cash $ 9,624 $ 8,281
Investment securities available-for-sale 10,736 266
Mortgage loans held-for-sale 202,056 275,570
Mortgage servicing rights 11,128 10,938
Premises and equipment, net 4,912 5,037
Accrued interest receivable 327 1,040
Other assets 8,759 16,031
-------- --------
Total assets $247,542 $317,163
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Borrowings from IWLG $192,877 $266,994
Due to affiliates 14,500 14,500
Deferred revenue 5,937 5,026
Accrued interest expense 592 2,176
Other liabilities 17,501 12,546
-------- --------
Total liabilities 231,407 301,242
-------- --------
Shareholders' Equity:
Preferred stock 18,053 18,053
Common stock 182 182
Retained earnings (accumulated deficit) 2,547 (2,300)
Cumulative dividends declared (4,464) --
Accumulated other comprehensive loss (183) (14)
-------- --------
Total shareholders' equity 16,135 15,921
-------- --------
Total liabilities and shareholders' equity $247,542 $317,163
======== ========
14
STATEMENTS OF OPERATIONS
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ ---------------------
2001 2000 2001 2000
-------- ---------- --------- --------
Interest income $ 5,253 $ 7,107 $12,745 $12,052
Interest expense 4,774 7,014 11,972 12,674
------- ------- ------- -------
Net interest income (expense) 479 93 773 (622)
Gain on sale of loans 12,875 4,149 20,523 9,370
Loan servicing income 769 1,012 1,800 2,548
Other non-interest income 65 384 112 408
------- ------- ------- -------
Total non-interest income 13,709 5,545 22,435 12,326
Personnel expense 3,453 2,259 6,638 4,581
General and administrative and other expense 3,382 3,136 5,655 4,907
Amortization of mortgage servicing rights 1,188 1,265 2,445 2,457
Provision for repurchases 8 7 14 71
Write-down on investment securities available-for-sale -- 1,537 -- 1,537
Mark-to-market gain - FAS 133 -- -- (17) --
------- ------- ------- -------
Total non-interest expense 8,031 8,204 14,735 13,553
Earnings (loss) before income taxes and cumulative effect
of change in accounting principle 6,157 (2,566) 8,473 (1,849)
Income taxes (2,608) (1,060) (3,609) (756)
------- ------- ------- -------
Earnings (loss) before cumulative effect of change
in accounting principle 3,549 (1,506) 4,864 (1,093)
Cumulative effect of change in accounting principle -- -- 17 --
------- ------- ------- -------
Net earnings (loss) 3,549 (1,506) 4,847 (1,093)
Less: Cash dividends on preferred stock (2,500) -- (4,464) --
------- ------- ------- -------
Net earnings (loss) available to common stockholders............. $ 1,049 $(1,506)3,225,868 $ 383 $(1,093)
======= ======= ======= =======2,737,192
=========== ===========
9. Stockholders' Equity
On June 26, 2001,(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 Company declared a second quarter cash dividend of
$788,000 or $0.65625 per sharewarehouse lending
operations makes to preferred stockholders. This dividend was paid
on July 24, 2001.
On March 27, 2001, the Company declared a first quarter cash dividend of
$788,000 or $0.65625 per share to preferred stockholders. This dividend was
paid on April 24, 2001.
On February 20, 2001, IFC purchased $5.0 million of the Company's Preferred
Stock from LBP, Inc. (LBPI) at cost plus accumulated dividends. On March 27,
2001, IFC purchased an additional $5.0 million of the Company's Preferred Stock
from LBPI for $5.25 million plus accumulated dividends.
10. Commitmentsaffiliates and Contingencies
Currently, IFC is protesting the California Franchise Tax Board's (FTB)
examination results for the income tax years ended December 31, 1996 and 1995.
The examination was the result of an audit of Imperial Credit Industries, Inc.
for which the FTB has raised certain claims, resulting in the issuance of Notice
of Proposed Assessments for the above years stated. During the fourth quarter of
2000, the Company recorded income tax provisions related to a potential tax
assessment.
11. Subsequent Events
On July 13, 2001, IFC signed an Asset Purchase Agreement to acquire the
assets and assume selected liabilities of Old Kent Mortgage Corporation, a
wholesale mortgage originator. While IFC has only acquired the assets and
selected liabilities of the Old Kent Mortgage Corporation, IFC expects to
operate this business as a division of IFC under the name of Novelle Financial
Services (NFS). The asset sale is scheduled to close on August 31, 2001.
15
The Board of Directors has authorized the redemption of all of Preferred
Stock for the cash amount of $25.00 per share. The Company has 1,200,000 shares
of Preferred Stock outstanding and has set a redemption date of September 21,
2001. As per the terms of the Preferred Stock redemption rights, the Company may
redeem its Preferred Stock if the closing sales price of its common stock as
reported by the American Stock Exchange, the Company's principal stock exchange,
averages in excess of 150% of the conversion price of $4.72 for a period of at
least 20 consecutive trading days. As of July 23, 2001, the Company's common
stock closed at $7.50 with a 20-day average consecutive closing price of $7.19
or 152% of the conversion price. The Preferred Stock conversion rate into common
stock is an aggregate amount of 6,356,000 common shares.
12.external customers.
7. Allowance for Loan Losses
The Company makes a monthly provision for estimated loan losses on its
long-term investment portfolio as an increase to allowance for loan losses. The
provision for estimated loan losses is primarily based on a migration analysis
based on historical loss statistics, including cumulative loss percentages and
loss severity, of similar loans in the Company's long-term investment portfolio.
The loss percentage is used to determine the estimated inherent losses in the
investment portfolio. Provision for loan losses is also based on management's
judgment of net loss potential, including specific allowances for known impaired
loans, changes in the nature and volume of the portfolio, the value of the
collateral and current economic conditions that may affect the borrowers'
ability to pay.
The adequacy of the allowance for loan losses is evaluated on a monthly
basis by management to maintain the allowance at levels sufficient to provide
for inherent losses. The migration system analyzes historical migration of
mortgage loans from original current status to 30-, 60- and 90-day delinquency,
foreclosure, other real estate owned and paid. The principal balance of all
loans currently in the long-term investment portfolio are included in the
migration analysis until the principal balance of loans either become real
estate owned or are paid in full. The statistics generated by the migration
analysis are used to establish the general valuation for loan losses.
Activity for allowance for loan losses was as follows (in thousands):
For the Three Months Ended,
---------------------------
March 31, March 31,
2002 2001
---------- ----------
Balance, beginning of period ................ $ 11,692 $ 5,090
Provision for loan losses ................... 3,707 4,038
Charge-offs, net of recoveries .............. (635) (2,833)
-------- -------
Balance, end of period ...................... $ 14,764 $ 6,295
======== =======
12
8. Segment Reporting
The Company internally reviews and analyzes its operating segments as
follows:
o the long-term investment operations, conducted by IMH and IMH
Assets, invests primarily in non-conforming Alt-A residential
mortgage loans and mortgage-backed securities secured by or
representing interests in such loans and in second mortgage loans;
o the warehouse lending operations, conducted by IWLG, provides
warehouse and repurchase financing to affiliated companies and to
approved mortgage banks, most of which are correspondents of IFC, to
finance mortgage loans; and
o the mortgage operations, conducted by IFC, Impac Lending Group
(ILG), a division of IFC, and Novelle Financial Services (NFS), a
subsidiary of IFC, purchases and originates primarily non-conforming
Alt-A mortgage loans and second mortgage loans from its network of
third party correspondent sellers, mortgage brokers and retail
customers.
The following table shows the Company's reporting segments as of and for
the three months ended March 31, 2002 (in thousands):
Long-Term Warehouse
Investment Lending (a)
Operations Operations Eliminations Consolidated
---------- ---------- ------------ ------------
Balance Sheet Items
CMO collateral $2,563,621 $ -- $ -- $2,563,621
Total assets 2,885,218 655,436 (191,426) 3,349,228
Total stockholders' equity 385,686 75,880 (191,426) 270,140
Income Statement Items
Interest income $ 35,455 $ 7,620 $ (7) $ 43,068
Interest expense 22,981 4,447 (7) 27,421
Equity interest in net earnings of IFC (b) -- -- 4,609 4,609
Net earnings 7,923 3,117 4,609 15,649
The following table shows the Company's reporting segments as of and for
the three months ended March 31, 2001 (in thousands):
Long-Term Warehouse
Investment Lending (a)
Operations Operations Eliminations Consolidated
---------- ---------- ------------ ------------
Balance Sheet Items
CMO collateral $ 1,250,728 $ -- $ -- $1,250,728
Total assets 1,641,690 680,530 (322,562) 1,999,658
Total stockholders' equity 259,148 64,887 (144,982) 179,053
Income Statement Items
Interest income $ 29,399 $ 11,781 $ (1,781) $ 39,399
Interest expense 23,413 8,874 (1,781) 30,506
Equity interest in net earnings of IFC (b) -- -- 1,290 1,290
Net earnings (loss) (2,739) 2,591 1,290 1,142
(a) Elimination of inter-segment balance sheet and income statement items.
(b) The mortgage operations are accounted for using the equity method and is
an unconsolidated qualified REIT subsidiary of the Company.
9. Investment in Impac Funding Corporation
The Company is entitled to 99% of the earnings or losses of IFC through
its ownership of 100% of the non-voting preferred stock of IFC. As such, the
Company records its investment in IFC using the equity method. Under this
13
method, original investments are recorded at cost and adjusted by the Company's
share of earnings or losses. The following is financial information for IFC for
the periods presented (in thousands):
BALANCE SHEETS
March 31, December 31,
2002 2001
--------- ------------
ASSETS
Cash $ 31,149 $ 28,612
Investment securities available-for-sale 173 3,394
Mortgage loans held-for-sale 386,373 174,172
Mortgage servicing rights 7,814 8,468
Premises and equipment, net 5,002 5,333
Accrued interest receivable 460 130
Other assets 19,883 19,693
--------- ---------
Total assets $ 450,854 $ 239,802
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings from IWLG $ 383,778 $ 174,136
Due to affiliates 14,500 14,500
Deferred revenue 3,858 4,479
Accrued interest expense (291) 453
Other liabilities 28,427 26,914
--------- ---------
Total liabilities 430,272 220,482
--------- ---------
Shareholders' Equity:
Preferred stock 18,053 18,053
Common stock 182 182
Retained earnings 13,378 8,722
Cumulative dividends declared (10,984) (8,984)
Accumulated other comprehensive gain (loss) (47) 1,347
--------- ---------
Total shareholders' equity 20,582 19,320
--------- ---------
Total liabilities and shareholders' equity $ 450,854 $ 239,802
========= =========
STATEMENTS OF OPERATIONS
For the Three Months
Ended ------------------------------
June 30, 2001 March 31,
---------------------------
2002 2001
------------- ---------------------- ---------
Balance, beginningInterest income $ 6,646 $ 7,492
Interest expense 4,975 7,198
-------- ---------
Net interest income 1,671 294
-------- ---------
Gain on sale of period........ $ 6,295 $ 5,090loans 16,158 7,649
Loan servicing income (expense) (357) 1,032
Other non-interest income 1,735 46
-------- ---------
Total non-interest income 17,536 8,727
-------- ---------
Personnel expense 5,573 3,185
General, administrative and other expense 4,090 2,479
Amortization of mortgage servicing rights 1,499 1,053
Provision for loan losses........... 3,905 4,038
Charge-offs, netrepurchases 435 6
Mark-to-market gain - SFAS 133 (448) (17)
-------- ---------
Total non-interest expense 11,149 6,706
-------- ---------
Earnings before income taxes and cumulative effect of recoveries...... (2,383) (2,833)
------- -------
Balance, endchange in
change in accounting principle 8,058 2,315
Income taxes 3,403 1,000
-------- ---------
Earnings before cumulative effect of period..............change in accounting principle 4,655 1,315
Cumulative effect of change in accounting principle -- 17
-------- ---------
Net earnings 4,655 1,298
Less: Cash dividends on preferred stock (1,980) (1,964)
-------- ---------
Net earnings (loss) available to common stockholders $ 7,8172,675 $ 6,295
======= =======
For the Three Months Ended
------------------------------
June 30, 2000 March 31, 2000
------------- --------------
Balance, beginning of period........ $12,768 $ 4,029
Provision for loan losses........... 3,304 13,184
Charge-offs, net of recoveries...... (3,205) (4,445)
------- -------
Balance, end of period.............. $12,867 $12,768
======= =======(666)
======== =========
14
10. Stockholders' Equity
During the three months ended March 31, 2002, accumulated other
comprehensive loss decreased by $9.0 million due to a $1.4 million decrease in
unrealized gain on investment securities available-for-sale and a $10.4 million
decrease in unrealized loss on derivative assets.
On February 7, 2002, the Company issued 7.4 million shares of common stock
at a price of $8.25 per share and received net proceeds of $57.0 million.
On March 26, 2002, the Company declared a first quarter cash dividend of
$0.40 per common share, or $15.8 million, which was paid on April 16, 2002 to
common stockholders of record on April 3, 2002.
15
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain information contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations constitute forward-
lookingThis Quarterly Report contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended,1934. Forward-looking statements, some of which canare
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," "expect,"believe," "intend," "should,"expect,"
"anticipate," "estimate,"continue," or "believe"similar terms or variations on those terms or the
negatives thereof or other variations thereon or comparable terminology.
The Company'snegative of those terms. Actual results could differ materially from those set
forth in forward-looking statements due to a variety of factors, including, but
not limited to, adverse economic conditions, the ability to generate sufficient
liquidity, including completing securitizations and earning interest on our
mortgage loans, different interest rate fluctuations on our assets and
liabilities, changes in the difference between short-term and long-term interest
rates, increase in prepayment rates on our mortgage assets, changes in
assumptions regarding estimated loan losses, the availability of financing and,
if available, the terms of any financing. For a discussion of the risks and
uncertainties that could cause actual results mayto differ materially from those contained in
the forward-looking statements. Factors which may cause a difference to occur
include the rate of growth and expansion of the Company's new divisions, the
conditionsstatements, see "Risk Factors" in the securities markets and ability to complete securitizations,
ownership and disposition of Mortgage Assets (which depend on the type of
Mortgage Asset involved) and yields available from time to time on such Mortgage
Assets, interest rate fluctuations, the ability to maintain sufficient cash
flows for the payment of dividends fluctuations and increase in prepayment
rates, the availability of suitable financing and investments, trends in the
economy which affect confidence and demand on the Company's portfolio of
Mortgage Assets and other factors referenced in this report and other reports
filed by the Company with the SEC, including its Annual
Report on Form 10-K. 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.
Unless the context otherwise requires, the terms "Company," "we," "us,"
and "our" refer to Impac Mortgage Holdings, Inc., a Maryland corporation
incorporated in August 1995, and its subsidiaries, IMH Assets Corp., or "IMH
Assets," Impac Warehouse Lending Group, Inc., or "IWLG," and its affiliate,
Impac Funding Corporation, or "IFC," together with its wholly-owned subsidiaries
Impac Secured Assets Corp. and Novelle Financial Services, Inc. References to
Impac Mortgage Holdings, Inc., or "IMH," are made to differentiate IMH, the
publicly traded company, as a separate entity from IMH Assets, IWLG and IFC.
SIGNIFICANT TRANSACTIONS
On June 20, 2001,February 7, 2002, the Company retired its 11% senior subordinated
debenturesissued 7.4 million shares of common stock
at a price of $8.25 per share and wrote-off $1.0 millionreceived net proceeds of discounts and securitization costs
related to these debentures.
On February 20, 2001, IFC purchased $5.0 million of the Company's Series C
10.5% Cumulative Convertible Preferred Stock ("Preferred Stock") from LBP, Inc.
("LBPI") at cost plus accumulated dividends.$57.0 million.
On March 27, 2001, IFC purchased
an additional $5.026, 2002, the Company declared a first quarter cash dividend of
$0.40 per common share, or $15.8 million, which was paid on April 16, 2002 to
common stockholders of the Company's Preferred Stock from LBPI for $5.25
million plus accumulated dividends.record on April 3, 2002.
CORE BUSINESS OPERATIONS
Long-Term Investment Operations: During the first six monthsquarter of 2001,2002, the
Long-Term Investment Operationslong-term investment operations acquired $555.5$500.3 million of primarily
non-conforming Alt-A adjustable-rate mortgages ("ARMs") secured by first liens
on residential property from IFC as compared to $156.9$182.1 million of mortgages
acquired during the same period in 2000.of 2001. "Alt-A" credit quality loans generally
have a credit score of 600 or better while "A" credit quality loans generally
have a credit score of 640 or better. Alt-A mortgage loans primarily consist of
mortgage loans that are first lien mortgage loans made to borrowers whose credit
is generally within typical Federal National Mortgage Association ("Fannie Mae")
or Federal Home Loan Mortgage Corporation ("Freddie Mac") guidelines. However,
Alt-A mortgages have loan characteristics, such as lack of documentation or
verifications, that make them ineligible under Fannie Mae or Freddie Mac
guidelines. Of the mortgages acquired during the first quarter of 2002, 61% were
acquired with prepayment penalty features with a weighted average coupon of
6.54% and a weighted average credit score of 684. During the first six monthsquarter of
2001,2002, IMH Assets issued a
Collateralized Mortgage Obligations ("CMO")CMOs for $357.8$495.0 million as compared to a
CMO totaling $452.0that were secured by $500.0
million during the same period in 2000.of primarily Alt-A mortgage loans. As of June 30,
2001,March 31, 2002, the Long-Term Investment Operations'long-term
investment operations portfolio of mortgage loans consisted of $1.4$2.6 billion of
mortgage loans held in trust as collateral for CMOscollateralized mortgage
obligations ("CMOs") and $200.0$9.0 million of mortgage loans held-for-investment, of
which approximately 19%11% were fixed-rate mortgages ("FRMs") and 81%89% were ARMs.
The weighted average coupon of the Long-Term Investment Operationsmortgage loan investment portfolio of mortgage loans was 8.89%7.57%
at June 30, 2001March 31, 2002 with a weighted average margin of 3.90%3.29%. The portfolioAs of March 31, 2002,
95% of CMO collateral were Alt-A mortgage loans included 95%acquired or originated by the
mortgage operations, of "A" credit quality, non-conforming mortgage
loanswhich 57% had prepayment penalties and 5% of "B" and "C" credit quality, non-conforming mortgage loans.
Borrowers60% were hybrid
ARMs with a Fair Isaac Credit Score ("FICO") of 620 or better are generally
considered to be "A"weighted average credit grade and "A-" grade loans generally have a FICO score of 550 or better.672. The FICO was developed by Fair Isaac Co., Inc. and is
an electronic evaluation of past and present credit accounts on the borrower's
credit bureau report. The loan delinquency rate of
mortgages in the Long-Term Investment
Operationsmortgage loan investment portfolio which were 60 or more days
past due, inclusive of foreclosures and delinquent bankruptcies, was 4.38%3.85% at
June 30, 2001March 31, 2002 as compared to 4.89%3.84% at December 31, 2000. Total non-performing loans, including 90 days
past due, foreclosures and other real estate owned increased to 2.58% of total
assets at June 30, 2001 as compared to 2.30% of total assets at December 31,
2000.
Conduit2001.
16
Mortgage Operations: The Conduit Operations, conductedLoan production by IFC, continues to
support the Long-Term Investment Operations of the Company by supplying IMH with
mortgages for long-term investment. In acting as the mortgage conduit for the
Company, IFC's mortgage acquisitionsoperations increased
58%98% to $1.4$1.2 billion during the first six monthsquarter of 20012002 as compared to $886.0$607.2
million acquired during the same period in 2000. IFC2001. During the first quarter of 2002,
correspondent mortgage acquisitions, excluding premiums paid, were $877.7
million, or 74% of total production, wholesale loan originations were $235.4
million, or 20% of total production and Novelle Financial Services ("NFS") were
$71.2 million, or 6% of total production. During the first quarter of 2001,
correspondent mortgage acquisitions were $466.8 million, or 78% of total
production, and wholesale loan originations were $130.3 million, or 22% of total
production. Of mortgages acquired or originated during the first quarter of
2002, $817.3 million, or 69% of total production, had prepayment penalty
features as compared to $382.1 million, or 64% of total production, during the
same period in 2001. ARM production was $808.1 million, or 68% of total
production, during the first quarter of 2002 as compared to $155.3 million, or
26% of total production, during the same period in 2001. During the first
quarter of 2002, the mortgage operations issued real estate mortgage investment
conduits ("REMICs") totaling $444.7 million, sold $491.8 million of loans to IMH
and $84.2 million of loans to first party investors, or securitized $880.6
million, which contributed to the gain on sale of loans of $20.5 million, during
the first six months of 2001. This compares to loan sales to first party
investors or securitizations of $621.6 million, contributing to gain
on sale of loans of $9.4 million, during the same period in 2000. Of the $880.6 million of
whole loan sales and securitizations during the first six months of 2001, IFC
issued four real estate mortgage investment conduits ("REMICs"), for a total of
$852.4$16.2 million. IFC had deferred income of $5.9 million at June 30, 2001 as
compared to $5.0 million at December 31, 2000. Deferred income results from the
sale of mortgages to IMH, which are deferred
17
and amortized or accreted over the estimated life of the loans using the
interest method. During the first six monthsquarter of 2001, IFCthe
mortgage operations issued REMICs totaling $450.1 million, sold $546.9$179.2 million
in
principal balance of mortgagesloans to IMH as comparedand $11.9 million of loans to $155.2 million during the
same periodfirst party investors, which
contributed to gain on sale of 2000. IFC'sloans of $7.6 million. The master servicing
portfolio increased 20%11% to $4.8$6.2 billion at June 30, 2001March 31, 2002 as compared to $4.0$5.6
billion at December 31, 2000. IFC
had mortgage servicing rights of $11.1 million at June 30, 2001 as compared to
$10.9 million at December 31, 2000.2001. The loan delinquency rate of mortgages in IFC'sthe
master servicing portfolio which were 60 or more days past due, inclusive of
foreclosures and delinquent bankruptcies, was 5.02%5.13% at June 30, 2001March 31, 2002 as
compared to 4.82%, 4.24%, 3.87% and 4.14% for the last four quarter-end periods.
Wholesale and Retail Lending Operations: The Wholesale and Retail Lending
Operations, conducted by ILG, increased total loan originations to $301.7
million during the first six months of 2001 as compared to $79.9 million during
the same period of 2000. As of June 30, 2001, ILG approved mortgage brokers
increased to 1,566 as compared to 9835.38% at December 31, 2000.2001.
Warehouse Lending Operations: At June 30, 2001,As of March 31, 2002, the Warehouse Lending
Operationswarehouse lending
operations had $1.2 billion$481.0 million of short-term warehouse lines of credit available
to 55 borrowers. There59 non-affiliated customers, of which $263.9 million was $429.6outstanding, as
compared to $447.0 million and 57, respectively, of which $300.6 million was
outstanding thereunder, after eliminationas of borrowings to the Long-Term Investment Operations, including $192.9 million
outstanding to IFC.December 31, 2001.
RESULTS OF OPERATIONS--IMPAC MORTGAGE HOLDINGS, INC.
For the Three Months Ended June 30, 2001March 31, 2002 as compared to the Three Months Ended
June 30, 2000March 31, 2001
Results of Operations
Net earnings increased to $8.8for the first quarter of 2002 were $15.6 million, or $0.33$0.43
per diluted commonshare, as compared to net earnings of $1.1 million, or $0.04 per
diluted share, for the secondfirst quarter of 2001 as compared to a net loss of $(30.3) million, or
$(1.45) per diluted common share, for the second quarter of 2000.2001. Net earnings rose as net interest
income increased during the second quarter of 2001 as the Company recorded non-
recurring, non-cash accounting charges ("accounting charges") of $33.6 million
during the second quarter of 2000. Of the $33.6 million accounting charges the
Company recognized during the second quarter of 2000, $29.2 million was related
to write-downs on investment securities available-for-sale ("investment
securities") and $2.6 million was provided for additional increases in the
Company's allowance for loan losses related to its high loan-to-value ("HLTV")
second trust deed portfolio. As of June 30, 2001, the Company had outstanding
HLTV loans in its long-term investment portfolio of $41.7by $6.8 million and no
investment securities that were collateralized by HLTV loans. Since 1998, the
Company's investment strategy has been only to acquire or investequity in investment
securities that are secured by mortgage loans underwritten and purchased by IFC
due to their superior historical performance.
Core operating earnings were $10.4 million, or $0.38 per diluted common
share, for the second quarter of 2001 as compared to core operatingnet earnings of IFC increased by
$3.3 million, or $0.12 per diluted common share, for the second quarter of 2000.
Core operatingmillion. Additionally, net earnings during the secondfirst quarter of 2001 excludes the current
effect of a $581,000 mark-to-market loss as a result of2002 were
unaffected by fair market adjustments on derivative instruments, in accordance
with Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and a $1.0Hedging Activities," as compared to
mark-to-market losses of $5.2 million write-down of
discounts and prepaid securitization costs related to the retirement of senior
subordinated debt. See "Effect of SFAS 133" for additional information. Core
operating earningsrecorded during the secondfirst quarter of 2000 excludes accounting charges
of $33.6 million. Core operating earnings2001.
Net interest income increased 215%to $15.6 million during the secondfirst quarter of
2002 as compared to $8.9 million during the first quarter of 2001 as compared to the second quarter of 2000 as a result of a $5.2
million increase inaverage
Mortgage Assets increased and net interest income and a $5.0 million increase in equity in
net earnings of IFC. See "Net Interest Income" and "Non-Interest Income" for
additional information.
Higher than anticipated net earningsmargins widened. Total average
Mortgage Assets increased 58% to $3.0 billion during the first half of 2001 allowed
the Company to retire its senior subordinated debt in June, almost three years
before its original maturity date, acquire $10.0 million of its Preferred Stock
and increase liquidity. Although the Company took a one-time charge of $1.0
million during the second quarter of 2001 as a write-off of discounts and
securitization costs from the retirement of the senior subordinated debt, the
Company will realize savings of approximately $2.2 million in interest expense
over the original remaining life of the debt. While using its cash to acquire
mortgages, retire debt and acquire Preferred Stock, the Company increased total
combined cash balances by $6.0 million to $32.2 million at June 30, 2001 from
$26.2 million at December 31, 2000.
Consistent with the Company's goal of restructuring its balance sheet to
provide more reliable net interest margins, the Company continues to improve the
credit quality of mortgages held for long-term investment and increased
prepayment protection by acquiring mortgages from the Mortgage Operations with
prepayment penalties. The credit quality of mortgages held as CMO collateral
improved as the weighted average FICO at origination increased to 667
18
as of June 30, 2001 as compared to 603 as of December 31, 1999. As of June 30,
2001, 39% of the Company's CMO collateral had prepayment penalties ranging from
one to five years with a weighted average life to prepayment penalty expiration
of approximately 25 months. During the second quarter, the Company completed a
CMO of $358.0 million of which approximately 63% of the collateral included
prepayment penalties. Of the outstanding CMO collateral on the Company's
balance sheet at June 30, 2001, 75% of CMO collateral was acquired or originated
by the Company during the last 18 months.
Total assets were $2.2 billion at June 30, 20012002
as compared to $1.9 billion during the first quarter of 2001 and net interest
margins widened to 2.02% from 1.82%, respectively, as short-term interest rate
reductions by the Federal Reserve Bank reduced CMO financing costs. Yields on
CMO borrowings decreased to 3.96% during the first quarter of 2002 as compared
to 6.60% during the first quarter of 2001 as one-month London Interbank Offered
Rate ("LIBOR") decreased. Interest rates on CMO borrowings are determined by
adding a contractual margin to the one-month LIBOR interest rate. Refer to "Net
Interest Income" below for more information on average Mortgage Assets and the
effect of interest rates on yields and net interest margins.
Equity in net earnings of IFC increased to $4.6 million during the first
quarter of 2002 as compared to $1.3 million during the first quarter of 2001 as
gain on sale of loans at IFC increased to $16.2 million from $7.6 million,
respectively. Gain on sale of loans increased as IFC sold a higher volume of
loans at more favorable prices during the first quarter of 2002 as compared to
the first quarter of 2001. During the first quarter of 2002, IFC also recorded a
gain of $1.7 million on the sale of 377,028 shares of IMH common stock that it
acquired during 2001. The sale of IMH common stock by IFC during the first
quarter of 2002 represented the remaining shares held by IFC. Refer to "Results
of Operations--Impac Funding Corporation" below for more information on the
operating results of IFC.
Total assets increased 14% to $3.3 billion as of March 31, 2002 as
compared to $2.9 billion as of December 31, 2001 as the long-term investment
operations acquired $491.8 million in unpaid principal balance of primarily
Alt-A
17
mortgage loans from the mortgage operations during the first quarter of
2002. The following table summarizes mortgage loan acquisitions for the periods
indicated (in thousands):
LOAN ACQUISITION SUMMARY
(excludes premiums paid)
For the Three Months
Ended March 31,
-----------------------------------
2002 2001
--------------- --------------
Balance % Balance %
-------- --- ------- ---
Volume by Type:
Adjustable rate $491,781 100 $179,168 100
Fixed rate -- 0 -- 0
-------- --------
Total Loan Acquisitions $491,781 $179,168
======== ========
Volume by Product:
Six month LIBOR indexed ARMs $322,933 66 $ 3,096 2
Six month LIBOR indexed hybrids (1) 168,848 34 176,072 98
Second trust deeds -- 0 -- 0
-------- --------
Total Loan Acquisitions $491,781 $179,168
======== ========
Volume by Credit Quality:
Alt-A loans $489,927 100 $176,767 99
B/C loans 1,854 0 2,401 1
-------- --------
Total Loan Acquisitions $491,781 $179,168
======== ========
Volume by Purpose:
Purchase $290,019 59 $127,123 71
Refinance 201,762 41 52,045 29
-------- --------
Total Loan Acquisitions $491,781 $179,168
======== ========
Volume by Prepayment Penalty:
With prepayment penalty $301,525 61 $110,637 62
Without prepayment penalty 190,256 39 68,531 38
-------- --------
Total Loan Acquisitions $491,781 $179,168
======== ========
(1) Mortgage loans are fixed rate for initial two to five year periods and
subsequently adjust to the indicated index plus a margin.
To finance the acquisition of mortgage loans during the first quarter of
2002, we issued $495.0 million of CMOs, which included $470.0 million of AAA
rated bonds and $25.0 million of BBB rated bonds that were priced on a weighted
average basis of one-month LIBOR plus 42 basis points and were secured by $500.0
million of primarily Alt-A mortgage loans. The high credit quality and favorable
credit loss history of our Alt-A mortgage loans allows us to borrow a higher
percentage against mortgage loans securing CMOs. In addition, we raised $57.0
million upon the issuance of 7.4 million shares of common stock, which reduced
our total leverage ratio to 12.40 to 1 as of March 31, 2002 as compared to 14.04
to 1 as of December 31, 2001. The issuance of additional shares of common stock
was accretive to diluted book value per share as it increased to $6.85 per share
as of March 31, 2002 as compared to $6.35 per share as of December 31, 2001.
During the first quarter of 2002, 66% of mortgage loans acquired by the
long-term investment operations from the mortgage operations were six-month
LIBOR indexed ARMs as compared to 2% during the first quarter of 2001. The shift
by borrowers from six-month LIBOR indexed hybrids, which have fixed interest
rate periods from two to five years, to six-month LIBOR indexed ARMs, which are
subject to interest rate adjustments every six months, reflects a widening gap
between short- and long-term interest rates and adjustable- and fixed-rate
mortgages. Over the last two calendar quarters, the long-term investment
operations has acquired $1.1 billion of primarily Alt-A ARMs, which represented
approximately 44% of our long-term mortgage loan portfolio as of March 31, 2002.
The acquisition for long-term investment of a higher than expected volume
of ARMs over the last two calendar quarters combined with an increase in
projected acquisitions over the remainder of 2002 has shifted projected earnings
from less reliance on gain on sale of loans as a source of revenue to net
interest income generated from the balance sheet. We anticipate that the balance
sheet will generate as much as, if not greater than, 80% of our total
18
earnings during 2002 as compared to 67% of total earnings during 2001 as we have
revised our 2002 projections of total assets to $4.2 billion from our original
year-end projections of $3.7 billion.
Higher outstanding advances on warehouse lines, or finance receivables,
that the warehouse lending operations makes to our affiliates and external
customers also contributed to the increase in total assets at quarter-end. The
warehouse lending operations had outstanding finance receivables of $639.5
million as of March 31, 2002 as compared to $466.6 million outstanding as of
December 31, 2001. The increase in finance receivables was primarily the result
of a 23% increase in loan production by IFC, the Company's taxable REIT
subsidiary. Loan production by IFC increased to $1.1 billion during the first
quarter of 2002 as compared to $977.1 million during the fourth quarter of 2001.
Additionally, the warehouse lending operations increased approved warehouse
lines available to non-affiliated customers to $481.0 million as of March 31,
2002 as compared to $447.0 million as of December 31, 2001.
Allowance for loan losses increased 27% to $14.8 million as of March 31,
2002 as compared to $11.7 million as of December 31, 2001. Allowance for loan
losses expressed as a percentage of loans receivable, which includes CMO
collateral, mortgage loans held-for-investment and finance receivables, was
0.46% at March 31, 2002 as compared to 0.43% at December 31, 2000. Diluted book value (calculated by including Preferred
Stock conversion rights2001. During the
first quarter of approximately 6.42002, provision for loan losses was $3.7 million common shares) increased to
$7.00 per common share at June 30, 2001while actual
loan charge-offs, net of recoveries, were $635,000 as compared to $6.67 per common share at$4.0 million
and $2.8 million, respectively, for the first quarter of 2001. The Company makes
a monthly provision for estimated loan losses on its long-term investment
portfolio as an increase to allowance for loan losses. As of March 31, 2002,
total non-performing assets were $80.4 million, or 2.40% of total assets, as
compared to $69.3 million, or 2.43% of total assets, as of December 31, 2000.2001.
Mortgage loans that were 60 or more days delinquent, including foreclosures and
delinquent bankruptcies, was 3.85% of the long-term mortgage investment
portfolio as of March 31, 2002 as compared to 3.84% as of December 31, 2001.
Core Operating Earnings. Core operating earnings for the first quarter of
2002 increased to $16.7 million, or $0.46 per diluted share, as compared to core
operating earnings of $6.3 million, or $0.24 per diluted share, for the first
quarter of 2001. Core operating earnings reflect recurring earnings from
operations and exclude one-time, non-recurring income and expense items and the
effect of fair market accounting for derivative instruments and hedging
activities. Core operating earnings for the first quarter of 2002 were higher
than net earnings as core operating earnings exclude $1.0 million in write-down
of investment securities available-for-sale. Core operating earnings is a
concept not recognized by generally accepted accounting principles ("GAAP") and
may not be comparable to core operating earnings of other companies. The
following table summarizes the calculation of core operating earnings and a
reconciliation of core operating earnings to net earnings (in thousands, except
per share amounts):
For the Three Months
Ended March 31,
--------------------
2002 2001
------- ------
Net earnings .................................................. $15,649 $1,142
Adjustments to net earnings:
Mark-to-market loss - SFAS 133 ............................. -- 864
Write-down on investment securities available-for-sale ..... 1,039 --
Cumulative effect of change in accounting principle ........ -- 4,313
------- ------
Core operating earnings ....................................... $16,688 $6,319
======= ======
Core operating earnings per share ............................. $ 0.46 $ 0.24
======= ======
Estimated Taxable Earnings. Estimated taxable earnings for the first
quarter of 2002 were $17.0 million, or $0.47 per diluted share, as compared to
$8.6 million, or $0.32 per diluted share, during the first quarter of 2001.
Estimated taxable earnings during the first quarter were greater than net
earnings as the provision for loan losses of $3.7 million was in excess of
actual loan charge-offs, net of recoveries, of $635,000. Excess provision for
loan losses of $3.1 million cannot be deducted from taxable earnings. In
addition, estimated taxable earnings for the first quarter reflects a $2.0
million dividend from IFC on its after-tax net earnings of $4.7 million. The
board of directors previously declared a cash dividend of $0.40 per share during
the first quarter of 2002, which was paid on April 16, 2002 to stockholders of
record on April 3, 2002. The first quarter of 2002 dividend is not deducted from
estimated taxable earnings. The following table summarizes the calculation of
estimated taxable earnings and a reconciliation of estimated taxable earnings to
net earnings (in thousands, except per share amounts):
19
For the Three Months
Ended March 31,
--------------------
2002 2001
-------- -------
Net earnings .................................................... $ 15,649 $ 1,142
Adjustments to net earnings:
Mark-to-market loss - SFAS 133 ............................... -- 864
Write-down on investment securities available-for-sale ....... 1,039 --
Cumulative effect of change in accounting principle .......... -- 4,313
Loan loss provision .......................................... 3,707 4,038
Dividends from IFC ........................................... 1,980 1,944
Cash received from previously charged-off assets ............. 175 389
Tax deduction for actual loan losses ......................... (635) (2,833)
Equity in net earnings of IFC ................................ (4,609) (1,290)
Tax difference of amortization of derivative instruments ..... (316) --
-------- -------
Estimate taxable earnings (1) ................................... $ 16,990 $ 8,567
======== =======
Estimated taxable earnings per share (1) ........................ $ 0.47 $ 0.32
======== =======
(1) Reflects calculation of estimated taxable earnings generated by the
Company during periods shown. Excludes remaining $870,000 tax deduction
for 2002 and quarterly tax deduction of $2.7 million during 2001 for
amortization of the termination of the Company's management agreement in
1997, the deduction for dividends paid and the availability of a deduction
attributable to a net operating loss carryforward.
Net Interest Income
Net interest income increased 100%75% to $10.6$15.6 million during the secondfirst
quarter of 20012002 as compared to $5.3$8.9 million during the secondfirst quarter of 2000.2001.
Net interest income increased as a result of decreased adjustable rate CMO
borrowing costs and wider net interest margins as interest rates on adjustable rate CMO borrowings
continued to decline due to short-term interest rate reductions by the Federal Reserve Bank. However, in anticipation of the likelihood thatBank
decreased short-term interest rates may rise sometime in the future, the Company purchased derivative
instrumentsduring 2001. Total average Mortgage Assets
increased 58% to $3.0 billion during the secondfirst quarter of 2002 as compared to
$1.9 billion during the first quarter of 2001 as the long-term investment
operations continued to mitigate possible adverse
changes in net interest margins.
Duringacquire primarily adjustable rate Alt-A mortgage loans
from the second quarter of 2001, net interest income increased as net
interest margins on Mortgage Assets increased to 2.07% as compared to 1.20%
during the second quarter of 2000.mortgage operations. Mortgage Assets include CMO collateral, mortgage
loans held-for-investment, finance receivables and investment securities. Net
interest margins on Mortgage Assets increased 20 basis points to 2.02% during
the secondfirst quarter of 20012002 as compared to 1.82% during the first quarter of 2001.
Net interest margins on Mortgage Assets increased during the first quarter of
2002 primarily as a result of average CMO borrowing costs decreasing 168264 basis
points to 5.53% during the second quarter of 20013.96% as compared to 7.21%6.60% during the secondfirst quarter of 2000. Borrowing costs on CMO financing continues
to trend lower as recent2001.
We expect a favorable interest rate reductionsenvironment for the remainder of 2002.
The Federal Reserve Bank did not raise short-term interest rates at its last
meeting as it indicated that the pace of the economic recovery remains
uncertain. Additionally, there appears to be no imminent plans by the Federal
Reserve Bank improved netto increase short-term interest marginsin the near term. We feel that
interest rate hedging instruments that are currently in place and a significant
volume of adjustable rate mortgages that were acquired during the secondfirst quarter
of 2002 and the fourth quarter of 2001 and should
improve netwill help mitigate any possible adverse
effects that rising interest margins for the remainder of the year.
Becauserates may have on future earnings. In addition, we
continue to acquire a significant portion of CMO collateral includesmortgage loans with prepayment
penalties, the Company believespenalty features, which will help to mitigate any possible adverse effects that the effect of early prepayments on net
interest income due to
refinance activity, will be partially mitigated.which has been fueled by low mortgage rates, may have on
future earnings. As of June 30, 2001, 39%March 31, 2002, 57% of the Company's CMO collateral had prepayment
penalties with
a weighted average life to prepayment penalty expiration of approximately 25
months. During the second quarter of 2001, the Company completed a CMO of
$358.0 million of which approximately 63% of the collateral included prepayment
penalties.
Net interest income also increased as average Mortgage Assets increased 18%
to $2.0 billion during the second quarter of 2001 as compared to $1.7 billion
during the second quarter of 2000. The increase in Mortgage Assets was
primarily the result of a $233.8 million increase in average CMO collateral and
mortgage loans held-for investment. CMO collateral and mortgage loans held-for
investment increased during the second quarter of 2001 as the Company acquired
$373.4 million of primarily ARMs from the Mortgage Operations as compared to
$116.5 million during the second quarter of 2000.
The following table summarizes average balance, interest and weighted
average yield on Mortgage Assets and borrowings on Mortgage Assets for the secondfirst
quarters of 20012002 and 20002001 and includes interest income on Mortgage Assets and
interest expense related to borrowings on Mortgage Assets only (dollars in
thousands):
1920
For the Three Months For the Three Months
Ended June 30,March 31, 2002 Ended March 31, 2001
Ended June 30, 2000------------------------------------ --------------------------------
--------------------------------------
Average WtdWtd. Avg Average Wtd Avg
MORTGAGE ASSETS
Balance Interest Yield Balance Interest Yield
--------------------------------------------------- -------------------------------- --------------------------------------
MORTGAGE ASSETS
Investment securities available-for-sale:
Securities collateralized by mortgages $ 32,66332,364 $ 992 12.15%433 5.35% $ 64,00736,419 $ 1,511 9.44%
Securities collateralized by other loans -- -- -- 5,673 70 4.94
---------- ------- ---------- -------
Total investment securities 32,663 992 12.15 69,680 1,581 9.08
---------- ------- ---------- -------1,326 14.56%
Loan receivables:
CMO collateral 1,317,851 24,290 7.37 1,243,379 22,153 7.132,340,187 34,451 5.89 1,327,557 26,032 7.84
Mortgage loans held-for-investment 177,195 3,108 7.02 17,881 402 8.99(1) 14,979 (31) (0.83) 89,782 1,478 6.58
Finance receivables:
Affiliated 232,464 4,135 7.12 266,910 6,540 9.80385,813 4,290 4.45 302,972 6,648 8.78
Non-affiliated 222,019 4,486 8.08 128,952 3,365 10.44
---------- ------- ---------- -------239,579 3,283 5.48 143,797 3,309 9.20
----------------------- ----------------------
Total finance receivables 454,483 8,621 7.59 395,862 9,905 10.01
---------- ------- ---------- -------625,392 7,573 4.84 446,769 9,957 8.91
----------------------- ----------------------
Total Loan receivables 1,949,529 36,019 7.39 1,657,122 32,460 7.84
---------- ------- ---------- -------2,980,558 41,993 5.64 1,864,108 37,467 8.04
----------------------- ----------------------
Total Mortgage Assets $1,982,192 $37,011 7.47% $1,726,802 $34,041 7.89%
========== ======= ========== =======$3,012,922 $ 42,426 5.63% $1,900,527 $38,793 8.16%
======================= ======================
BORROWINGS
----------
CMO borrowings $1,242,049 $17,175 5.53% $1,141,240 $20,578 7.21%(2) $2,261,902 $ 22,406 3.96% $1,247,222 $20,592 6.60%
Reverse repurchase agreements - mortgages 595,421 8,938 6.00 393,431 7,489 7.61581,247 4,290 2.95 503,973 8,859 7.03
Borrowings secured by investment securities 18,189 660 14.51 27,549 807 11.72
---------- ------- ---------- -------12,345 549 17.79 20,329 678 13.34
----------------------- ----------------------
Total Borrowings on Mortgage Assets $1,855,659 $26,773 5.77% $1,562,220 $28,874 7.39%
========== ======= ========== =======$2,855,494 $ 27,245 3.82% $1,771,524 $30,129 6.80%
======================= ======================
Net Interest Spread (1) 1.70% 0.50%(3) 1.82% 1.36%
Net Interest Margin (2) 2.07% 1.20%(4) 2.02% 1.82%
(1) Interest income includes amortization of acquisition costs and net cash
payments or receipts on derivatives pending allocation to specific CMO
borrowings.
(2) Interest expense includes amortization of acquisition costs and net cash
payments or receipts on derivatives not associated with CMO borrowings.
(3) Net interest spread is calculated by subtracting the weighted average
yield on total borrowings on Mortgage Assets from the weighted average
yield on total Mortgage Assets.
(2)(4) Net interest margin is calculated by subtracting interest expense on total
borrowings on Mortgage Assets from interest income on total Mortgage
Assets and then dividing by the total average balance for Mortgage Assets.
Interest Income on Mortgage Assets
Interest income on CMO collateral increased 9%33% to $24.3$34.5 million during
the secondfirst quarter of 20012002 as compared to $22.2$26.0 million during the secondfirst quarter
of 20002001 as average CMO collateral increased 8%77% to $1.3$2.3 billion as compared to
$1.2$1.3 billion, respectively. Interest income onAverage CMO collateral increased primarily as the Company issued a CMO for $358.0 million during Maylong-term
investment operations acquired $1.8 billion of primarily Alt-A mortgage loans
since the end of the first quarter of 2001. During the secondfirst quarter of 2001,2002,
constant prepayment rates ("CPR") on CMO collateral increaseddecreased to 41%26% as compared
to 26%29% during the secondfirst quarter of 2000.2001. CPR results from the unscheduled
principal pay down or payoff of mortgage loans prior to the contractual maturity
date or contractual payment schedule of the mortgage loan. Although interest rates continued to decrease during the second
quarter of 2001, an increase inThe Company believes
that mortgage loans acquired from IFCthe mortgage operations with prepayment
penalties should partiallycontinues to mitigate increased CPR and corresponding premium
amortizations.amortization from refinance activity. In addition, the Company reduced its
exposure to premium amortization as total capitalized premiums were 158 basis
points of outstanding CMO collateral as of March 31, 2002 as compared to 162
basis points of outstanding CMO collateral as of December 31, 2001. Loan
premiums paid for acquiring mortgage loans and
securitization costs incurred when CMOs are issued are amortized to interest income and interest expense, respectively, over
the estimated lives of the mortgage loans. The weighted average yield on CMO
collateral increaseddecreased 195 basis points to 7.37%5.89% during the secondfirst quarter of 2002
as compared to 7.84% during the first quarter of 2001 as compared to 7.13% during the second quarter
of 2000. The rapid reduction of interestmortgage rates
during the second quarter of
2001 should improve net interest income for the remainder of the year as
adjustable-rate CMO collateral, which is restricted to periodic cap limitations,
will reprice downwards more slowly than adjustable-rate CMO borrowings, which is
generally indexed to one-month LIBOR.declined.
Interest income on mortgage loans held-for-investment increased 671%decreased to
$3.1$(31,000) during the first quarter of 2002 as compared to $1.5 million during
the secondfirst quarter of 2001 as compared to $402,000 during
the second quarter of 2000 as average mortgage loans held-for-investment
increased 894%decreased 83% to $177.2$15.0 million as compared to $17.9$89.8 million, respectively.
The
Long-Term Investment Operations
20Interest income on mortgage loans held-for-investment was reduced by $134,000
from the amortization of acquisition costs on derivatives prior to the
derivatives
21
acquired $373.4being allocated to CMO structures. In addition, interest income was not accrued
on average non-performing loans held-for-investment of $8.2 million of mortgages during the
secondfirst quarter of 2001 as
compared to $116.5 million of mortgages during2002. During the secondfirst quarter of 2000. The2002, average non-performing
loans held-for-investment represented 55% of total average loans
held-for-investment. However, the outstanding balance of non-performing loans
held-for-investment decreased 47% to $6.5 million as of March 31, 2002 from
$12.2 million as of March 31, 2001. As such, the weighted average yield on
mortgage loans held-for-investment decreased to 7.02%(0.83)% during the secondfirst quarter
of 20012002 as compared to 8.99% during the second quarter
of 2000 as mortgage interest rates declined6.58% during the first halfquarter of 2001.
Interest income on total finance receivables decreased 13%24% to $8.6$7.6 million
during the secondfirst quarter of 2002 as compared to $10.0 million during the first
quarter of 2001 as compared to $9.9 million during the second
quarter of 2000 as average total finance receivables increased 15% to $454.5
million as compared to $395.9 million, respectively. The weighted average yield on total finance receivables
decreased to 7.59% during the second quarter of
20014.84% as compared to 10.01% during the second quarter of 2000.8.91%, respectively. The decrease in yield was
primarily due to a reduction in Bank of America's prime rate ("Prime"prime"), which is
the index used to determine interest rates on finance receivables, and a 0.50%receivables. The decrease
in yield was partially offset by an increase in average finance receivables to
$625.4 million during the spread indexedfirst quarter of 2002 as compared to Prime on$446.8 million
during the first quarter of 2001 as loan production by the mortgage operations
and warehouse lines made available to affiliates.activity from non-affiliates increased.
Interest income on finance receivables to affiliates decreased 37%35% to $4.1$4.3
million during the secondfirst quarter of 2002 as compared to $6.6 million during the
first quarter of 2001 as compared to $6.5 million during the
second quarter of 2000 as average finance receivables to affiliated companies
decreased 13% to $232.5 million as compared to $266.9 million, respectively. The
decrease in average affiliate finance receivables was primarily due to
accelerated securitizations by the Mortgage Operations during 2001 as compared
to 2000 and the corresponding shorter accumulation and holding period of loans
held-for-sale. The weighted average yield on affiliated finance
receivables decreased to 7.12%4.45% as compared to 8.78%, respectively, as prime
decreased. The decrease in yield was partially offset as average finance
receivables to affiliated companies increased 27% to $385.8 million during the
secondfirst quarter of 2002 as compared to $303.0 million during the first quarter of
2001 as compared to 9.80% duringloan production by the second quarter of 2000 primarily due to a decrease in Prime and a 0.50%
decrease in the spread indexed to Prime on warehouse lines with IWLG.mortgage operations increased.
Interest income on finance receivables to non-affiliated mortgage banking
companies increased 32% to $4.5was $3.3 million during the secondfirst quarter of 2002 and 2001. Although
the weighted average yield on non-affiliated finance receivables decreased to
5.48% during the first quarter of 2002 as compared to 9.20% during the first
quarter of 2001 as
compareddue to $3.4 million during the second quarter of 2000a decrease in prime, it was offset as average finance
receivables outstanding to non-affiliated mortgage banking companies increased
72%67% to $222.0$239.6 million as compared to $129.0$143.8 million, respectively. Average
finance receivables to non-affiliates increased during the second quarter of
2001 as compared to the second quarter of 2000 primarily due to increasednew customers were added and
usage of short-term warehouse lines of credit and the addition of new customers. The
weighted average yield on non-affiliated finance receivables decreased to 8.08%
during the second quarter of 2001 as compared to 10.44% during the second
quarter of 2000 primarily due to the aforementioned decrease in Prime.by existing customers increased.
Interest income on investment securities decreased 38%67% to $992,000$433,000 during
the secondfirst quarter of 2002 as compared to $1.3 million during the first quarter
of 2001 as compared to $1.6 million during the second quarter
of 2000 as average investment securities decreased 53% to $32.7 million as
compared to $69.7 million, respectively. Average investment securities
decreased as the Company wrote-off $52.6 million of investment securities during
the first half of 2000. The weighted average yield on investment securities increaseddecreased to
12.15% during the second quarter of 20015.35% as compared to 9.08%
during the second quarter of 2000 as non-performing14.56%, respectively, and average investment securities
were
written-off during the first half of 2000.decreased 11% to $32.3 million as compared to $36.4 million, respectively.
Interest Expense on Mortgage Assets
Interest expense on CMO borrowings decreased 17%increased 9% to $17.2$22.4 million during
the secondfirst quarter of 20012002 as compared to $20.6 million during the secondfirst quarter
of 20002001 as average borrowings on CMO collateral increased 9%92% to $1.2$2.3 billion as
compared to $1.1$1.2 billion, respectively. The decreaselarge increase in average CMO
borrowings produced smaller incremental increases in interest expense on CMO
borrowings was primarily attributableas short-term interest rate reductions during 2001 caused CMO
borrowing yields to the reduction in short-
term interest rates by the Federal Reserve Bankdecline 264 basis points to 3.96% during the first halfquarter
of 2002 as compared to 6.60% during the first quarter of 2001. As a result, one-month LIBOR, which is the index used to re-price the Company's
adjustable-rateInterest expense
and yields on CMO borrowings decreased to an average of 4.27%includes $4.5 million in net cash payments made on
derivatives not associated with specific CMO borrowings during the secondfirst quarter
of 2002 as compared to none during the first quarter of 2001. Although $2.0
billion of CMOs were issued since the end of the first quarter of 2001, the
Company reduced its exposure to securitization cost amortization as total
capitalized securitization costs were 47 basis points of outstanding CMO
collateral as of March 31, 2002 as compared to 6.47% during the second quarter of 2000.
Short-term interest rate reductions caused CMO borrowing costs to decrease 16853 basis points of outstanding
CMO collateral as of December 31, 2001. Securitization costs are incurred when
CMOs are issued and amortized to 5.53% duringinterest expense over the second quarterestimated lives of
2001 as compared to 7.21%
during the second quarter of 2000.mortgage loans.
Interest expense on reverse repurchase agreements used to fund the
acquisition of mortgage loans and finance receivables increased 19%decreased 52% to $4.3
million during the first quarter of 2002 as compared to $8.9 million during the
secondfirst quarter of 2001 as compared to $7.5 million during the
second quarter of 2000 as average reverse repurchase agreements increased 51% to
$595.4 million as compared to $393.4 million, respectively. The increase in
interest expense on reverse repurchase agreements was primarily the result of an
increase in average non-affiliate finance receivables as IWLG added customers
during the first half of 2001. The weighted average yield on reverse repurchase
agreements decreased 408 basis points to 6.00%2.95% as compared to 7.03%,
respectively. Average reverse repurchase agreements increased 15% to $581.2
million during the secondfirst quarter of 2002 as compared to $504.0 million during
the first quarter of 2001 as compared
7.61% duringloan production by the second quarter of 2000 as a result of short-term interest rate
reductions.
21mortgage operations and
warehouse advances to non-affiliated customers increased.
22
The Company also uses mortgage-backed securities as collateral to borrow
and fund the purchase of mortgage assets and to act as an additional source of
liquidity for the Company's operations.liquidity. Interest expense on borrowings secured by investment securities
decreased 18%19% to $660,000$549,000 during the secondfirst quarter of 20012002 as compared to
$807,000$678,000 during the secondfirst quarter of 20002001 as the average balance on these
borrowings decreased 34%39% to $18.2$12.3 million as compared to $27.5$20.3 million,
respectively. The weighted average yield of these borrowings increased to 14.51%17.79%
during the secondfirst quarter of 20012002 as compared 11.72%13.34% during the secondfirst quarter of 2000 primarily as the Company re-securitized a portion of its
investment securities portfolio with long-term financing at a higher interest
rate, as opposed to short-term reverse repurchase financing which are subject to
margin calls. The Company did not have short-term reverse repurchase financing
collateralized by investment securities outstanding at June 30,
2001.
Provision for Loan Losses
The Company's total allowance for loan losses expressed as a percentage of
Gross Loan Receivables, which includes loans held-for-investment, CMO collateral
and finance receivables, increased to 0.38% at June 30, 2001 as compared to
0.28% at December 31, 2000. During the secondfirst quarter of 2001, the Company added2002, provision for loan losses was $3.7
million while actual loan charge-offs, net of $3.9recoveries, were $635,000 as
compared to $4.0 million and $2.8 million, respectively, for the first quarter
of 2001. The Company makes a monthly provision for estimated loan losses on its
long-term investment portfolio as an increase to allowance for loan losses. The
provision for estimated loan losses is primarily based on a migration analysis
based on historical loss statistics, including cumulative loss percentages and
loss severity, of similar loans in the Company's long-term investment portfolio.
The loss percentage is used to determine the estimated inherent losses in the
investment portfolio. Provision for loan losses is also based on management's
judgment of net loss potential, including specific allowances for known impaired
loans, changes in the nature and volume of the portfolio, the value of the
collateral and current economic conditions that may affect the borrowers'
ability to pay.
Non-Interest Income
During the first quarter of 2002, non-interest income was $5.7 million as
compared to $3.3$2.1 million during the secondfirst quarter of 2000, which increased the allowance for loan losses by 53% to
$7.8 million as of June 30, 2001 as compared to $5.1 million as of December 31,
2000. The Company recorded net charge-offs of $2.4 million during the second
quarter of 2001 as the Company continued to liquidate its non-performing
collateral that remained from previously collapsed CMO collateral.
Total non-performing loans, including 90 days past due, foreclosures and
other real estate owned increased to 2.58% of total assets at June 30, 2001 as
compared to 2.30% of total assets at December 31, 2000. The loan delinquency
rate of mortgages in the long-term investment portfolio which were 60 or more
days past due, inclusive of foreclosures and delinquent bankruptcies, decreased
to 4.38% at June 30, 2001 as compared to 4.89% at December 31, 2000. The unpaid
principal balance of mortgage loans in the long-term investment portfolio at
June 30, 2001 was $1.5 billion as compared to $1.3 billion at December 31, 2000.
Non-Interest Income2001. Non-interest income
includes equity in net earnings (loss) of IFC and other non-interest income, primarily
loan servicing fees and fees associated with the Company's Warehouse Lending Operations. During the second quarter of 2001, non-
interest income was $4.8 million as compared to $(1.0) million during the second
quarter of 2000.warehouse lending operations.
The increase in non-interest income was primarily due to an increase of $5.0 million in equity
in net earnings (loss) of IFC to $3.5$4.6 million during the secondfirst quarter of 2001 from $(1.5)2002 as
compared to $1.3 million during the secondfirst quarter of 2000.2001. IFC's net earnings
increased primarily as a result of an increase of $8.7$8.6 million in gain on sale
of loans.loans and a $1.7 million gain on the sale of 377,028 shares of IMH common
stock that it acquired during 2001. The Company records 99% of the earnings or
losses from IFC as the Company owns 100% of IFC's preferred stock, which
represents 99% of the economic interest in IFC. Refer to "Results of
Operations--Impac Funding Corporation" for additional information. In addition,
during the second quarterinformation regarding
operating results of 2001 loan servicing fees and other income increased
$821,000 to $1.3 million from $440,000 during the second quarter of 2000 as
activity fees on non-affiliate warehouse lines rose as a result of increased
line usage and the addition of new customers.IFC.
Non-Interest Expense
During the secondfirst quarter of 2001,2002, non-interest expense decreasedincreased to $1.6$1.9
million as compared to $31.3$1.5 million during the secondfirst quarter of 2000.2001. Excluding
the write-down on investment securities and a mark-to-market loss as a result of
SFAS 133, non-interest expense decreasedincreased to $1.1 million$904,000 during the secondfirst quarter of
2002 as compared to $661,000 during the first quarter of 2001 as compared to $1.9 million during the second quarter of
2000. This decrease was primarily the result of a $1.2 million decrease ingain on
disposition of other real estate owned to $(327,000) during the second quarter
of 2001 as compared to $880,000 during the second quarter of 2000.
Effect of SFAS 133
During the second quarter of 2001, the Company recognized a current loss to
earnings of $581,000 as a fair market valuation of the Company's derivative
instruments outstanding at June 30, 2001 in accordance with SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." As part of the
Company's secondary marketing activities, it purchases derivative instruments as
a hedge against adverse changes in interest rates and the corresponding adverse
effect on net interest margins. The primary effect of SFAS 133 on the Company's
financial
22
position is to change the prior accounting treatment, which amortized the cost
of derivative instruments over its life, to recording only the change in the
fair market value of the derivative instruments as an adjustment to current
earnings.
During the second quarter of 2001, the effect of the fair market valuation
loss was $581,000, compared to a $1.2 million of amortization of interest rate
cap costs, which prior to SFAS 133 would have been recorded as interest expense.
Since the implementation of SFAS 133, net interest margins will not reflect the
amortization of interest rate cap costs. The Company does not intend to change
its interest rate hedge policy. Net earnings in the future may experience some
level of volatility from quarter to quarter due to the timing and expense
recognition of hedge activity by the Company as a result of implementation of
SFAS 133.decreased $203,000.
RESULTS OF OPERATIONS--IMPACOPERATIONS -- IMPAC FUNDING CORPORATION
For the Three Months Ended June 30, 2001March 31, 2002 as compared to the Three Months
Ended June 30, 2000March 31, 2001
Results of Operations
Net earnings increased to $3.5$4.7 million during the secondfirst quarter of 20012002 as
compared to net loss of $(1.5)$1.3 million forduring the secondfirst quarter of 20002001. The increase in net
earnings was primarily as athe result of an $8.7$8.6 million increase in gain on sale of
loans. See "Non-
Interest Income" for additional information.loans, a $1.7 million gain on sale of IMH stock and a $1.4 million increase in
net interest income.
Loan acquisitions and originations, excluding premiums paid, by IFC the
Mortgage Operationsmortgage operations increased 82%98% to $776.0 million$1.2 billion during the first quarter of
2002 as compared to $427.3$597.2 million during the secondfirst quarter of 2000. Loan2001. We believe
that loan production during the secondfirst quarter of 20012002 was driven by lower interestlow mortgage
rates, strong housing demand, our innovative loan programs and IDASL, the Company's web-basedour automated
underwriting system, IDASL, which has enhancedenhances the origination process. IDASL stands
for Impac Direct Access System for Lending. DuringLending and can be viewed on our website at
www.impaccompanies.com. The following table summarizes mortgage loan
acquisitions and originations for the second quarter of 2001,
average monthly volume of loans submitted through IDASL increased by 9% to
$783.0 million in loan submissions as compared to $719.2 million per month in
loan submissions during the prior quarter and $555.5 million per month during
the fourth quarter of 2000. IDASL usage will in all likelihood not show
dramatic increases in the near future due to the complete rollout of IDASL to
all our customers and with 100% of current production being processed through
IDASL.periods indicated (in thousands):
23
LOAN PRODUCTION SUMMARY
(excludes premiums paid)
For the Three Months
Ended March 31,
------------------------------------
2002 2001
------------------ --------------
Balance % Balance %
------- --- ------- ---
Volume by Type:
Fixed rate $ 362,806 31 $431,868 72
Second trust deeds 13,496 1 9,954 2
Adjustable rate:
Six month LIBOR ARMs 523,731 3,044
Six month LIBOR hybrids 284,352 152,302
---------- --------
Total adjustable rate 808,083 68 155,346 26
---------- --------
Total Loan Production $1,184,385 $597,168
========== ========
Volume by Channel:
Correspondent acquisitions $ 877,742 74 $466,820 78
Wholesale and retail originations 235,417 20 130,348 22
Novelle Financial Services 71,226 6 -- 0
---------- --------
Total Loan Production $1,184,385 $597,168
========== ========
Volume by Credit Quality:
Alt-A loans $1,107,650 94 $591,384 99
B/C loans 76,735 6 5,784 1
---------- --------
Total Loan Production $1,184,385 $597,168
========== ========
Volume by Purpose:
Purchase $ 648,230 55 $382,240 64
Refinance 536,155 45 214,928 36
---------- --------
Total Loan Production $1,184,385 $597,168
========== ========
Volume by Prepayment Penalty:
With prepayment penalty $ 817,251 69 $382,142 64
Without prepayment penalty 367,134 31 215,026 36
---------- --------
Total Loan Production $1,184,385 $597,168
========== ========
Net Interest Income
Net interest income increased to $479,000$1.7 million during the secondfirst quarter of
2002 as compared to net interest income of $294,000 during the first quarter of
2001. Net interest income rose as average loans held for sale increased to
$390.2 million during the first quarter of 2002 as compared to $311.1 million
during the first quarter of 2001 as compareda result of higher loan production levels
and widening of net interest margins. Net interest margins increased to $93,0001.72%
during the secondfirst quarter of 2000. The increase in net
interest income was the result of a decrease in the interest rate spread over
Prime, which was reduced from Prime to Prime minus 0.50% during the second
quarter of 2001, and the rapid decrease of short-term interest rates. Average
Prime decreased to 7.34% during the second quarter of 20012002 as compared to 9.25%0.53% during the secondfirst quarter
of 2000.2001. Net interest margins increased as yields on average borrowing costs
decreased at a faster rate than weighted average coupons on mortgage loans.
Average prime, which is the index used to determine borrowing costs on warehouse
lines with the warehouse lending operations, decreased to 4.75% during the first
quarter of 2002 as compared to 8.62% during the first quarter of 2001.
Non-Interest Income
During the secondfirst quarter of 2001,2002, non-interest income increased to $13.7$17.5
million as compared to $5.5$8.7 million during the secondfirst quarter of 2000. The
increase was2001 primarily
due toas a result of an $8.7 million increase in gain on sale of loans. During the second quarter of 2001, IFC sold whole loans or securitized $418.7
million of mortgages contributing to a gain on sale of $12.9 million as compared
to $462.0 million and $4.1 million, respectively, during the second quarter of
2000. Gain on sale of loans
increased to $16.2 million on loan sales of $1.0 billion during the first
quarter of 2002 as compared to $7.6 million and $641.2 million, respectively,
during the first quarter of 2001. Additionally, profit margins on securitizations
improved significantlymortgage loans
sold during the first quarter of 2002 were more favorable as compared to securitizations completedprofit
margins on mortgage loans sold during the secondfirst quarter of 2000.2001. During the
first quarter of 2002, IFC securitized $444.7 million of mortgages as REMICs as
compared to $450.1 million during the first quarter of 2001. IFC sold loans on a
servicing released basis during the second quarterfirst quarters of 20012002 and 2001. The
mortgage operations anticipates that it will continue to sell related loan
servicing rights from the securitization of its loans. IFCloans and will continue to act
as master servicer on all its securitizations. IFC completed two REMICs
during the second quarter of 2001 and anticipates completing two REMICs per
quarter for the remainder of the year. By securitizingIFC's goal is to securitize loans
more frequently IFC expects thatas less capital will beis required, higher liquidity will beis maintained and
less interest rate and price volatility during the mortgage loan accumulation
period will be achieved.results. Additionally, during the first quarter of
24
2002 IFC recorded gains of $1.7 million on the sale of 377,028 shares of IMH
common stock it acquired during 2001. The sale of IMH common stock during the
first quarter of 2002 represented the remaining shares owned by IFC.
Non-Interest Expense
During the secondfirst quarter of 2001, non-interest expense decreased to $8.0
million as compared to $8.2 million during the second quarter of 2000. Excluding
write-down on investment securities recorded during the second quarter of 2000,2002, non-interest expense increased 19% to $8.0$11.1
million during the second quarter of
2001 as compared to $6.7 million during the secondfirst quarter of 2000.2001. Personnel
expense accounted for the primary increase in non-interest 23
expense during the
secondfirst quarter of 20012002 as it increased 52%75% to $3.5$5.6 million as compared to $2.3 million during the second quarter of 2000 as staffing rose to
232 employees at June 30, 2001 as compared to 183 employees at June 30, 2000.
Due to increased utilization of IDASL since the second quarter of 2000,
personnel expense rose at a much slower rate than the increase in loan
acquisitions and originations, which increased 82% during the second quarter of
2001 as compared to the second quarter of 2000.
Effect of SFAS 133
As part of IFC's secondary marketing activities, IFC utilizes options and
futures contracts to hedge the value of its mortgage pipeline against adverse
changes in interest rates. IFC did not experience any material impact during the
quarter related to the adoption of SFAS 133 in its mortgage pipeline hedging
activities. IFC does not hedge mortgage servicing rights, however, valuation
changes in mortgage servicing rights continue to be recorded against current
earnings. Net earnings in the future will experience some level of volatility
from quarter to quarter due to the timing and expense recognition of hedge
activity by IFC as a result of implementation of SFAS 133.
RESULTS OF OPERATIONS--IMPAC MORTGAGE HOLDINGS, INC.
For the Six Months Ended June 30, 2001 as compared to the Six Months Ended
June 30, 2000
Results of Operations
Net earnings increased to $9.9 million, or $0.37 per diluted common share,
for the first six months of 2001 as compared to a net loss of $(61.2) million,
or $(2.93) per diluted common share, for the same period of 2000. Net earnings
increased during the first six months of 2001 as the Company recorded accounting
charges of $68.9$3.2
million during the first six months of 2000. Of the $68.9
million accounting charges the Company recognized during the first six months of
2000, $52.6 million was related to write-downs on investment securities and
$14.5 million was provided for additional increases in the Company's allowance
for loan losses related to its HLTV second trust deed portfolio.
Core operating earnings were $16.7 million, or $0.62 per diluted common
share, for the first six months of 2001 as compared to core operating earnings
of $7.8 million, or $0.28 per diluted common share, for the same period of 2000.
Core operating earnings during the first six months of 2001 excludes the current
effect of a $1.4 million mark-to-market loss as a result of SFAS 133, a $4.3
million cumulative effect of change in accounting principle as a result of SFAS
133, and a $1.0 million write-down of discounts and prepaid securitization costs
related to the retirement of senior subordinated debt. Core operating earnings
during the first six months of 2000 excludes accounting charges of $68.9
million. Core operating earnings increased 116% during the first six months of
2001 as compared to the same period of 2000 as a result of a $7.6 million
increase in net interest income and a $5.9 million increase in equity in net
earnings of IFC. See "Net Interest Income" and "Non-Interest Income" for
additional information.
Net Interest Income
Net interest income increased 64% to $19.4 million during the first six
months of 2001 as compared to $11.8 million during the same period of 2000. Net
interest income increased as a result of decreased borrowing costs and wider net
interest margins as interest rates on adjustable CMO borrowings continued to
decline due to short-term interest rate reductions by the Federal Reserve Bank.
However, in anticipation of the likelihood that short-term interest rates may
rise sometime in the future, the Company purchased interest rate sensitive
financial instruments during the second quarter of 2001 to mitigate possible
adverse changes in net interest margins.
During the first six months of 2001, net interest income increased as net
interest margins on Mortgage Assets increased to 1.95% as compared to 1.32%
during the same period of 2000. Net interest margins on Mortgage Assets
increased during the first six months of 2001 primarily as a result of average
CMO borrowing costs decreasing 101 basis points to 6.07% during the first six
months of 2001 as compared to 7.08% during the same period of 2000. Borrowing
costs on CMO financing continues to trend lower as interest rate reductions by
the Federal Reserve Bank during the first half of 2001 improved net interest
margins and should improve net interest margins for the remainder of the year.
Because a significant portion of CMO collateral includes prepayment penalties,
the effect of early prepayments on net interest income due to refinance activity
will be partially mitigated.
24
Net interest income also increased as average Mortgage Assets increased 12%
to $1.9 billion during the first six months of 2001 as compared to $1.7 billion
during the first six months of 2000.2001. The increase in Mortgage Assets was
primarily the result of a $163.4 million increase in average CMO collateral and
mortgage loans held-for investment. CMO collateral and mortgage loans held-for
investment increased during the first six months of 2001 as the Company acquired
$555.5 million of primarily ARMs from the Mortgage Operations as compared to
$116.5 million during the same period of 2000.
The following table summarizes average balance, interest and weighted
average yield on Mortgage Assets and borrowings on Mortgage Assets for the first
six months of 2001 and 2000 and includes interest income on Mortgage Assets and
interestpersonnel expense related to borrowings on Mortgage Assets only (dollars in
thousands):
For the Six Months For the Six Months
Ended June 30, 2001 Ended June 30, 2000
-------------------------------- --------------------------------
Average Wtd Avg Average Wtd Avg
MORTGAGE ASSETS Balance Interest Yield Balance Interest Yield
--------------- -------------------------------- --------------------------------
Investment securities:
Securities collateralized by mortgages $ 34,531 $ 2,318 13.43% $ 75,941 $ 4,390 11.56%
Securities collateralized by other loans -- -- -- 5,666 273 9.64
---------- ------- ---------- -------
Total investment securities 34,531 2,318 13.43 81,607 4,663 11.43
---------- ------- ---------- -------
Loan receivables:
CMO collateral 1,322,677 50,321 7.61 1,224,099 42,307 6.91
Mortgage loans held-for-investment 133,730 4,586 6.86 68,879 2,737 7.95
Finance receivables:
Affiliated 267,523 10,783 8.06 237,818 11,716 9.85
Non-affiliated 183,124 7,794 8.51 119,272 6,208 10.41
---------- ------- ---------- -------
Total finance receivables 450,647 18,577 8.24 357,090 17,924 10.04
---------- ------- ---------- -------
Total Loan receivables 1,907,054 73,484 7.71 1,650,068 62,968 7.63
---------- ------- ---------- -------
Total Mortgage Assets $1,941,585 $75,802 7.81% $1,731,675 $67,631 7.81%
========== ======= ========== =======
BORROWINGS
----------
CMO borrowings $1,244,621 $37,767 6.07% $1,121,569 $39,709 7.08%
Reverse repurchase agreements - mortgages 549,945 17,797 6.47 404,615 14,842 7.34
Borrowings secured by investment securities 19,253 1,337 13.89 28,910 1,692 11.71
---------- ------- ---------- -------
Total Borrowings on Mortgage Assets $1,813,819 $56,901 6.27% $1,555,094 $56,243 7.23%
========== ======= ========== =======
Net Interest Spread (1) 1.54% 0.58%
Net Interest Margin (2) 1.95% 1.32%
(1) Net interest spread is calculated by subtracting the weighted average
yield on total borrowings on Mortgage Assets from the weighted average
yield on total Mortgage Assets.
(2) Net interest margin is calculated by subtracting interest expense on
total borrowings on Mortgage Assets from interest income on total Mortgage
Assets and then dividing by the total average balance for Mortgage Assets.
Interest Income on Mortgage Assets
Interest income on CMO collateral increased 19% to $50.3 million during the
first six months of 2001 as compared to $42.3 million during the first six
months of 2000 as average CMO collateral increased 8% to $1.3 billion as
compared to $1.2 billion, respectively. Interest income on CMO collateral
increased primarily as the Company issued a CMO for $358.0 million during May of
2001. During the first six months of 2001, CPR on CMO collateral increased to
35% as compared to 26% during the first six months of 2000. Although interest
rates continued to decrease during the first six months of 2001, an increase in
loans acquired from IFC with prepayment penalties should partially mitigate
increased CPR and corresponding premium amortizations. The weighted average
yield on CMO collateral increased to 7.61% during the first six months of 2001
as compared to 6.91% during the first six months of 2000. The rapid reduction of
interest rates during the first six months of 2001 should improve net interest
income for
25
the remainder of the year as adjustable-rate CMO collateral, which is restricted
to periodic cap limitations, will re-price downwards more slowly than
adjustable-rate CMO borrowings, which is generally indexed to six-month LIBOR.
Interest income on mortgage loans held-for-investment increased 70% to $4.6
million during the first six months of 2001 as compared to $2.7 million during
the first six months of 2000 as average mortgage loans held-for-investment
increased 94% to $133.7 million as compared to $68.9 million, respectively. The
Long-Term Investment Operations acquired $555.5 million of mortgages during the
first six months of 2001 as compared to $156.9 million of mortgages during the
first six months of 2000. The weighted average yield on mortgage loans held-for-
investment decreased to 6.86% during the first six months of 2001 as compared to
7.95% during the first six months of 2000 as mortgage interest rates declined
during the first half of 2001.
Interest income on total finance receivables increased 4% to $18.6 million
during the first six months of 2001 as compared to $17.9 million during the
first six months of 2000 as average total finance receivables increased 26% to
$450.6 million as compared to $357.1 million, respectively. The weighted average
yield on total finance receivables decreased to 8.24% during the first six
months of 2001 as compared to 10.04% during the first six months of 2000. The
decrease in yield was primarily due to a reduction in Prime and a 0.50% decrease
in the spread indexed to Prime on warehouse lines made available to affiliates.
Interest income on finance receivables to affiliates decreased 8% to $10.8
million during the first six months of 2001 as compared to $11.7 million during
the first six months of 2000 as average finance receivables to affiliated
companies increased 12% to $267.5 million as compared to $237.8 million,
respectively. The increase in average affiliate finance receivables was
primarily due to higher mortgage acquisitions during the first six months of
2001. The weighted average yield on affiliated finance receivables decreased to
8.06% during the first six months of 2001 as compared to 9.85% during the first
six months of 2000 primarily due to a decrease in Prime and a 0.50% decrease in
the spread indexed to Prime on warehouse lines with IWLG.
Interest income on finance receivables to non-affiliated mortgage banking
companies increased 26% to $7.8 million during the first six months of 2001 as
compared to $6.2 million during the first six months of 2000 as average finance
receivables outstanding to non-affiliated mortgage banking companies increased
54% to $183.1 million as compared to $119.3 million, respectively. Average
finance receivables to non-affiliates increased during the first six months of
2001 as compared to the first six months of 2000 primarily due to increased
usage of short-term warehouse lines of credit and the addition of new customers.
The weighted average yield on non-affiliated finance receivables decreased to
8.51% during the first six months of 2001 as compared to 10.41% during the first
six months of 2000 primarily due to the aforementioned decrease in Prime.
Interest income on investment securities decreased 51% to $2.3 million
during the first six months of 2001 as compared to $4.7 million during the first
six months of 2000 as average investment securities decreased 58% to $34.5
million as compared to $81.6 million, respectively. Average investment
securities decreased as the Company wrote-off $52.6 million of investment
securities during the first half of 2000. The weighted average yield on
investment securities increased to 13.43% during the first six months of 2001 as
compared to 11.43% during the first six months of 2000 as non-performing
investment securities were written-off during the first half of 2000.
Interest Expense on Mortgage Assets
Interest expense on CMO borrowings decreased 5% to $37.8 million during the
first six months of 2001 as compared to $39.7 million during the first six
months of 2000 as average borrowings on CMO collateral increased 9% to $1.2
billion as compared to $1.1 billion, respectively. The decrease in interest
expense on CMO borrowings was primarily attributable to the reduction in short-
term interest rates by the Federal Reserve Bank during the first half of 2001.
As a result, one-month LIBOR, which is the index used to re-price the Company's
adjustable-rate CMO borrowings, decreased to an average of 4.91% during the
first six months of 2001 as compared to 6.97% during the first six months of
2000. Short-term interest rate reductions caused CMO borrowing costs to decrease
101 basis points to 6.07% during the first six months of 2001 as compared to
7.08% during the first six months of 2000.
Interest expense on reverse repurchase agreements increased 20% to $17.8
million during the first six months of 2001 as compared to $14.8 million during
the first six months of 2000 as average reverse repurchase agreements increased
36% to $549.9 million as compared to $404.6 million, respectively. The increase
in interest expense on reverse repurchase agreements was
primarily the result of an increase in average non-affiliate finance receivables as
26
IWLG added customers during the first half of 2001. The weighted average yield
on reverse repurchase agreements decreased to 6.47% during the first six months
of 2001 as compared 7.34% during the first six months of 2000 asloan production and a result of
short-term interest rate reductions.
Interest expense on borrowings secured by investment securities decreased
24% to $1.3 million during the first six months of 2001 as compared to $1.7
million during the first six months of 2000 as the average balance on these
borrowings decreased 33% to $19.3 million as compared to $28.9 million,
respectively. The weighted average yield of these borrowings increased to 13.89%
during the first six months of 2001 as compared 11.71% during the first six
months of 2000 primarily as the Company re-securitized a portion of its
investment securities portfolio with long-term financing at a higher interest
rate, as opposed to short-term reverse repurchase financing which are subject to
margin calls. The Company did not have short-term reverse repurchase financing
collateralized by investment securities outstanding at June 30, 2001.
Provision for Loan Losses
During the first six months of 2001, the Company added provision for loan
losses of $7.9 million as compared to $16.5 million during the first six months
of 2000 as the Company added $14.5 million during the first six months of 2000
to provide for higher than expected delinquencies and lossescorresponding
increase in staff. Staff in the HLTV
portfolio. Excluding additional loan loss provisions for the HLTV portfolio,
provision for loan losses increasedconduit and wholesale lending operations rose to
$7.9 million during the first six months
of 2001282 employees at March 31, 2002 as compared to $2.0 million during the same period of 2000. The Company
recorded net charge-offs of $5.2 million during the first six months as compared
to $7.7 million during the same period of 2000. The Company continued to
liquidate its non-performing collateral that remained from previously collapsed
CMO collateral during the first six months of 2001.
Non-Interest Income
Non-interest income includes equity in net earnings (loss) of IFC and other
non-interest income, primarily loan servicing fees and fees associated with the
Company's Warehouse Lending Operations. During the first six months of 2001,
non-interest income was $6.9 million as compared to $312,000 during the first
six months of 2000. The increase in non-interest income was primarily due to an
increase of $5.9 million in equity in net earnings (loss) of IFC to $4.8 million
during the first six months of 2001 from $(1.1) million during the first six
months of 2000. IFC's net earnings increased primarily as a result of an
increase of $11.1 million in gain on sale of loans. The Company records 99% of
the earnings or losses from IFC as the Company owns 100% of IFC's preferred
stock, which represents 99% of the economic interest in IFC. Refer to "Results
of Operations--Impac Funding Corporation" for additional information.
Non-Interest Expense
During the first six months of 2001, non-interest expense decreased to $3.2
million as compared to $56.8 million during the first six months of 2000.
Excluding write-down on investment securities and mark-to-market loss as a
result of SFAS 133, non-interest expense decreased to $1.6 million during the
first six months of 2001 as compared to $3.4 million during the first six months
of 2000. This decrease was primarily the result of a $2.3 million decrease in
disposition of other real estate owned to $(965,000) during the first six months
of 2001 as compared to $1.3 million during the first six months of 2000.
Effect of SFAS 133
During the first six months of 2001, the Company recognized a current loss
to earnings of $1.4 million as a fair market valuation of the Company's
derivative instruments outstanding at June 30, 2001 in accordance with SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." As part of the
Company's secondary marketing activities, it purchases derivative instruments as
a hedge against adverse changes in interest rates and the corresponding adverse
effect on net interest margins. The primary effect of SFAS 133 on the Company's
financial position is to change the prior accounting treatment, which amortized
the cost of derivative instruments over its life, to recording only the change
in the fair market value of the derivative instruments as an adjustment to
current earnings.
During the first six months of 2001, the effect of the fair market
valuation loss was $1.4 million, compared to a $1.2 million of amortization of
interest rate cap costs, which prior to SFAS 133 would have been recorded as
interest expense. Since the implementation of SFAS 133, net interest margins
will not reflect the amortization of interest rate cap costs. The Company does
not intend to change its interest rate hedge policy. Net earnings in the future
may
27
experience some level of volatility from quarter to quarter due to the timing
and expense recognition of hedge activity by the Company as a result of
implementation of SFAS 133.
RESULTS OF OPERATIONS--IMPAC FUNDING CORPORATION
For the Six Months Ended June 30, 2001 as compared to the Six Months Ended
June 30, 2000
Results of Operations
Net earnings increased to $4.8 million during the first six months of 2001
as compared to net loss of $(1.1) million for the first six months of 2000
primarily as a result of an $11.1 million increase in gain on sale of loans. See
"Non-Interest Income" for additional information.
Loan acquisitions by the Mortgage Operations set new records during the
first six months of 2001. During the first six months of 2001, loan
acquisitions and originations increased 58% to $1.4 billion as compared to
$886.0 million during the first six months of 2000. Loan production during the
first six months of 2001 was driven by lower interest rates and IDASL, the
Company's web-based automated underwriting system which has substantially
enhanced the origination process. During the first six months of 2001, average
monthly volume of loans submitted through IDASL increased by 48% to $652.8
million in loan submissions as compared to $442.4 million per month in loan
submissions during the prior six months.
Net Interest Income
Net interest income increased to $773,000 during the first six months of
2001 as compared to $(622,000) during the first six months of 2000. The increase
in net interest income was the result of a decrease in the interest rate spread
over Prime, which was reduced from Prime to Prime minus 0.50% during the first
six months of 2001, and the rapid decrease of short-term interest rates. Average
Prime decreased to 7.99% during the first six months of 2001 as compared to
8.96% during the first six months of 2000.
Non-Interest Income
During the first six months of 2001, non-interest income increased to $22.4
million as compared to $12.3 million during the first six months of 2000. The
increase was primarily due to an $11.1 million increase in gain on sale of
loans. During the first six months of 2001, IFC sold whole loans or securitized
$880.6 million of mortgages contributing to a gain on sale of $20.5 million as
compared to $621.6 million and $9.4 million, respectively, during the first six
months of 2000. In addition to selling more loans during the first six months of
2001, gain on sale of loans increased as profit margins on securitizations
improved significantly as compared to securitizations completed during the first
six months of 2000.
Non-Interest Expense
During the first six months of 2001, non-interest expense increased to
$14.7 million as compared to $13.6 million during the first six months of 2000.
Excluding write-down on investment securities recorded during the first six
months of 2000, non-interest expense increased 23% to $14.7 million during the
first six months of 2001 as compared to $12.0 million during the first six
months of 2000. Personnel expense accounted for the primary increase in non-
interest expense during the first six months of 2001 as it increased 43% to $6.6
million as compared to $4.6 million during the first six months of 2000 as
staffing rose to 232 employees at June 30,March 31, 2001
as compared to 183while total staff at Novelle Financial Services was 75 employees at June 30, 2000. Due to increased utilizationMarch 31,
2002. Novelle Financial Services was acquired and became a subsidiary of IDASL sinceIFC
after the first six monthsquarter of 2000, personnel expense rose at a much slower rate than the increase in loan
acquisitions and originations, which increased 56% during the first six months
of 2001 as compared to the first six months of 2000.
Effect of SFAS 133
As part of IFC's secondary marketing activities, IFC utilizes options and
futures contracts to hedge the value of its mortgage pipeline against adverse
changes in interest rates. IFC did not experience any material impact during the
quarter related to the adoption of SFAS 133 in its mortgage pipeline hedging
activities. IFC does not hedge mortgage servicing rights, however, valuation
changes in mortgage servicing rights continue to be recorded against current
28
earnings. Net earnings in the future will experience some level of volatility
from quarter to quarter due to the timing and expense recognition of hedge
activity by IFC as a result of implementation of SFAS 133.2001.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Historically,We recognize the need to have funds available for our operating businesses
and our customer's demands for obtaining short-term warehouse financing until
the settlement or sale of mortgage loans 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 loan demand and to allow us to meet abnormal
and unexpected funding requirements. We plan to meet liquidity through normal
operations with the goal of avoiding unplanned sales of assets or emergency
borrowing of funds. Toward this goal, the Company's asset and liability
committee ("ALCO") is responsible for monitoring our liquidity position and
funding needs. ALCO is comprised of the senior executives of IMH. 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 in adverse market conditions. Our liquidity consists of cash and cash
equivalents, short-term and marketable investment securities rated AAA through
BBB and maturing mortgage loans, or "liquid assets." Our policy is to maintain a
liquidity threshold of 5% of liquid assets to warehouse borrowings, reverse
repurchase agreements, dividends payable and other short-term liabilities.
During the first quarter of 2002, we were in compliance with this policy, which
ALCO reports to the board of directors at least quarterly. As of March 31, 2002,
overall liquidity was 12%.
Sources of Liquidity
Our business operations are primarily funded fromas follows:
o monthly interest and principal payments from itsour mortgage loan and
investment securities portfolios, adjustable-portfolios;
o CMO and fixed-rate CMO financing, reverse repurchase agreements secured by mortgage loans borrowings secured by mortgage-
backed securities,and
mortgage-backed securities;
o proceeds from thesecuritization and whole loan sale of mortgage loansloans;
and
the issuance of
REMICs and proceedso cash from the issuance of Common Stock through secondary stock
offerings, Dividend Reinvestmentsecurities.
We use CMO borrowings and Stock Purchase Plan ("DRSPP"), and its
structured equity shelf program ("SES Program"). The acquisitionreverse repurchase agreements to fund
substantially all of our mortgage loansloan and mortgage-backed securities
portfolios. As we accumulate mortgage loans for long-term investment, we issue
CMOs secured by the Long-Term Investment Operations are
primarily funded from monthly principal and interest payments, reverse
repurchase agreements, CMOmortgage loans as a means of providing long-term financing
and proceeds from the salerepaying short-term warehouse advances. The use of Common
Stock. The issuance of CMO financingCMOs provides the
Long-Term Investment
Operations with immediate liquidity, a relatively stable interest rate spreadfollowing benefits:
o allows us to lock in our financing cost over the life of the
mortgage loans securing the CMO borrowings; and
o eliminates the Company's exposure to margin calls on such loans. Presently,
the Company has suspended both the DRSPP and SES Program and has issued no new
shares of Common Stock through these programs or through secondary stock
offerings during the first six months of 2001. The acquisition of mortgage loans
by the Mortgage Operationsborrowings that are fundedconverted from
reverse repurchase agreements the
sale of mortgage loans and mortgage-backed securities and the issuance of
REMICs. Short-term warehouse financing, finance receivables, provided by the
Warehouse Lending Operations are primarily funded from reverse repurchase
agreements.
The Company's ability to meet its long-term liquidity requirements is
subject to the renewal of its credit and repurchase facilities and/or obtaining
other sources of financing, including additional debt or equity from time to
time. Any decision by the Company's lenders and/or investors to make additional
funds available to the Company in the future will depend upon a number of
factors, such as the Company's compliance with the terms of its existing credit
arrangements, the Company's financial performance, industry and market trends in
the Company's various businesses, the general availability of and rates
applicable to financing and investments, such lenders' and/or investors' own
resources and policies concerning loans and investments, and the relative
attractiveness of alternative investment or lending opportunities. The Company
believes that current liquidity levels, available financing facilities and
additional liquidity provided by operating activities will adequately provide
for the Company's projected funding needs, asset growth and the payment of
dividends for the near term. The Company is continuously exploring alternatives
for increasing liquidity and monitors current and future cash requirements
through its asset/liability committee ("ALCO"). However, no assurances can be
given that such alternatives will be available, or if available, under
comparable rates and terms as currently exist.
Long-Term Investment Operations
Primary Source of Funds
The Long-Term Investment Operations uses CMO borrowings to finance
substantially its entire mortgage loan portfolio.financing.
Terms of the CMO borrowings require that an independent firstthird party custodian
hold the mortgages.mortgage loans as collateral. The maturity of each CMO bond class is
directly affected by the rate of early principal prepaymentspayments on the related
collateral. Interest rates on adjustable rate CMOs can range from a low of 0.26%
over one-month LIBOR on "AAA" credit rated bonds to a high of 3.60% over
one-month LIBOR on "BBB" credit rated bonds. As of March 31, 2002, interest
rates on adjustable rate CMOs ranged from 0.26% to 2.40% over one-month LIBOR,
or 2.16% to 4.30%. Interest rates on fixed rate CMOs range from 6.65% to 7.25%
depending on the class of CMOs issued. Equity in the CMOs is established at the
time the CMOs are issued at levels sufficient to achieve desired credit ratings on
the securities from rating agencies. TheWe also determine the amount of equity
invested in CMOs by the
Long-Term Investment Operations is also determined by the Company based upon the anticipated return on
25
equity as compared to the estimated proceeds from additional debt issuance. Total
credit loss exposure is limited to the equity invested in the CMOs at any point
in time.
ForDuring the first six monthsquarter of 2001, the
Company2002, we issued one CMO for $357.8 million. At June 30, 2001, the Long-Term
Investment Operations had $1.36 billion$495.0 million of CMO borrowings used to finance $1.44
billionCMOs, which
included $470.0 million of CMO collateral.
The Long-Term Investment Operations may pledge mortgage-backed securities
as collateral to borrow funds under short-term reverse repurchase agreements.
The terms under these reverse repurchase agreements are generally for 30 days
with interest rates ranging from theAAA rated bonds and $25.0 million of BBB rated bonds
that were priced on a weighted average basis of one-month LIBOR plus a spread depending on
the type42 basis
points, to provide long-term financing for $500.0 million of collateral provided. As of June 30, 2001, the Long-Term Investment
Operations had no amounts outstanding under short-term reverse repurchase
agreements secured by investment securities.
Primary Use of Funds
29
During the first six months of 2001, the Long-Term Investment Operations
acquired $555.5 million in mortgage loans
securing CMOs. In April of 2002, we issued a CMO for $496.3 million which
included $472.5 million of AAA rated bonds and $23.8 million of BBB rated bonds
that were priced on a weighted average basis of one-month LIBOR plus 37 basis
points. Because of the credit profile, historical loss performance and
prepayment characteristics of our non-conforming Alt-A mortgages, we have been
able to borrow a higher percentage against mortgage loans securing CMOs, which
means that we have to provide less capital. By decreasing the amount of capital
we have to invest in our CMOs, we have been able to grow with the liquidity
generated from IFC.
Warehouse Lending Operations
Primary Sourceour business operations.
Before the issuance of Funds
The Warehouse Lending Operations financesCMOs, we finance the acquisition of mortgage loans
by the Long-Term Investment Operations and Mortgage Operations
primarily through borrowings on reverse repurchase agreements with firstthird party
lenders. IWLG has
obtainedWhen we have accumulated a sufficient amount of mortgage loans, we
issue CMOs and convert short-term advances under reverse repurchase facilities fromagreements
to long-term CMO financing. Since 1995, we have had an uncommitted repurchase
facility with a major investment bank to finance the acquisition of mortgage
loans as needed. In order to give us more flexibility in our borrowing
arrangements and to reduce our reliance on one lender, we are currently in
negotiations with other investment banks to provide financing as needed.additional uncommitted
reverse repurchase facilities.
Terms of the reverse repurchase agreementsagreement require that the
mortgagesmortgage loans be
held by an independent firstthird party custodian, giving the Warehouse
Lending Operationswhich gives us the ability to
borrow against the collateral as a percentage of the outstanding principal balance.balance of the mortgage
loans. The borrowing rates vary from 85 basis points to 200 basis points over
one-month LIBOR, depending on the type of collateral provided. The advance rates
on the reverse repurchase agreements areagreement is based on the type of mortgage collateral
usedprovided and generally range from 75%70% to 101%98% of the fair market value of the
collateral. At June 30, 2001, the Warehouse
Lending OperationsAs of March 31, 2002, we had $609.0$576.1 million outstanding on uncommittedthe
reverse repurchase agreements at a ratefacility, which included the funding of one-month LIBOR plus 0.85% to 2.00%.
Primary Useour mortgage loans
and those of Funds
During the first six months of 2001, the Warehouse Lending Operations
increased outstanding finance receivables by $24.2 million.
Mortgage Operations
Primary Source of Fundsour customers.
The Mortgage Operations has entered into reverse repurchasemortgage operations currently have warehouse line agreements to obtain
financing of up to $600.0 million from the Warehouse Lending Operationswarehouse lending operations to
provide IFCinterim mortgage loan financing during the period that IFCthe mortgage
operations accumulates mortgage loans and until the mortgage loans are securitized
andor sold. The margins on the reverse repurchase agreements are based on the type of
collateral provided by the mortgage operations and generally range from 95% to
100%99% of the fair market value of the collateral. InterestThe interest rates on the
borrowings are indexed to Prime,prime minus 0.50%, which was 8.00%4.75% at June 30, 2001, minus 0.50%. At June 30, 2001,March 31, 2002.
As of March 31, 2002, the Mortgage Operationsmortgage operations had $192.9$383.8 million outstanding
under reverse repurchasethe warehouse line agreements.
We expect to continue to use short-term warehouse facilities to fund the
acquisition of mortgage loans. 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. Additionally, if for any reason the market value of our mortgage loans
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 mortgage loans at substantial losses.
When the mortgage operations accumulates a sufficient amount of mortgage
loans, it sells or securitizes the mortgage loans. During the first six monthsquarter of
2001,2002, the Mortgage Operationsmortgage operations securitized $444.7 million of mortgage loans as
REMICs and sold $880.6
million$491.8 billion, in unpaid principal balance, of primarily FRMsmortgage loans
to first party investors.the long-term investment operations. In addition, IFCthe mortgage operations
sold $546.9$84.2 million, in unpaid principal balance, of primarily ARMsmortgage loans to the
Long-Term Investment Operationsother
investors. The mortgage operations sold mortgage servicing rights on all ARM and
FRM securitizations completed during the first six monthsquarter of 2001. By2002. This generated
100% cash gains on securitization and sale of mortgage loans. Cash from the sale
of mortgage servicing rights was deployed in the mortgage operations and used to
acquire and originate additional mortgage loans.
In order to mitigate interest rate and market risk, we attempt to
securitize our mortgage loans more frequently. Although securitizing mortgage
loans more frequently adds operating and sellingsecuritization costs, we believe the
added cost is offset as less capital is required and more liquidity is provided
with less interest rate and price volatility, as the accumulation and holding
period of mortgage loans is shortened. The mortgage operations currently has
agreements in place for the sale of mortgage loans and mortgage servicing rights
with an investment bank and large mortgage loan
26
servicer, respectively. This allows the mortgage operations to forward price its
REMIC and CMO transactions on a periodicservicing released basis and consistent basis,achieve greater
stability in the reverse
repurchase agreements were sufficientexecution of its securitizations.
On December 1, 2001, we filed a registration statement with the SEC, which
allows us to handle IFC's liquidity needssell up to $300.0 million of securities, including common stock,
preferred stock, debt securities and warrants. This type of registration
statement is commonly referred to as a "shelf" registration process. In
conjunction with the filing of the shelf, we completed the sale of 7,402,000
shares of common stock during the six months ended June 30, 2001.
Primary Usefirst quarter of Funds2002, which provided net
proceeds of approximately $57.0 million.
Uses of Liquidity
Our business operations primarily use funds as follows:
o acquisition and origination of mortgage loans;
o provide short-term warehouse financing; and
o pay common stock dividends.
During the first six monthsquarter of 2001, the Mortgage Operations2002, we acquired and originated $1.4$1.2 billion
of mortgage loans of which we retained $491.8 million for long-term investment.
The acquisition and origination of mortgage loans by the mortgage operations
during the first quarter of 2002 resulted in premium costs of 1.39% of the
outstanding principal balance of mortgage loans. Our equity investment in
mortgage loans is outstanding until we sell or securitize our mortgage loans,
which is one of the reasons we attempt to securitize our mortgage loans
frequently. When we complete CMOs our required equity investment ranges from
approximately 3% to 5% of the outstanding principal balance of mortgage loans,
depending on our premium costs, securitization costs and the capital investment
required. Since we rely significantly upon securitizations to generate cash
proceeds to repay borrowings and to create credit availability, any disruption
in our ability to complete 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 securitizations of our mortgage loans increase
our risk by exposing us to credit and interest rate risks for this extended
period of time. Furthermore, gains on sales from our securitizations represent a
significant portion of our earnings.
We utilize our uncommitted warehouse line with a major investment bank to
provide short-term warehouse financing to affiliates and external customers of
the warehouse lending operations. The mortgage operations has a $600.0 million
warehouse facility with the warehouse lending operations to fund the acquisition
and origination of mortgage loans until sale or securitization. The warehouse
lending operations provides financing to affiliates at prime minus 0.50%. As of
March 31, 2002, affiliates had $383.8 million outstanding on the warehouse line
with the warehouse lending operations. During January 2002, affiliates deposited
a total of $8.1 million in pledge accounts with the warehouse lending operations
that allows them to finance 100% of the fair market value of their mortgage
loans.
The warehouse lending operations provides financing to non-affiliates at
prime plus a spread. Non-affiliates can generally finance between 95% and 98% of
the fair market value of the mortgage loans. As of March 31, 2002, the warehouse
lending operations had $481.0 million of approved warehouse lines available to
its customers of which $263.9 million was outstanding. Our ability to meet
liquidity requirements and the financing need 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 time to time.
Any decision our lenders or investors make to provide available financing to us
in the future will depend upon a number of factors, including:
o our compliance with the terms of our existing credit arrangements;
o our financial performance;
o industry and market trends in our various businesses;
o the general availability of and rates applicable to financing and
investments;
o our lenders or investors resources and policies concerning loans and
investments; and
o the relative attractiveness of alternative investment or lending
opportunities.
During the first quarter of 2002, we declared common stock dividends of
$0.40 per common share, or $15.8 million, which was paid on April 16, 2002.
27
Cash Flows
Operating Activities - During the first six monthsquarter of 2001,2002, net cash provided by
operating activities was $11.1$20.6 million. Net cash was provided as the
Company recorded net earnings of $14.2$15.6 million duringprovided
most of the first six months of
2001.cash flows from operating activities.
Investing Activities - During the first six monthsquarter of 2001,2002, net cash used in
investing activities was $274.3$487.7 million. Net cash flows of $330.5 million,
including principal repayments, was used in investing activities was primarily due to an increase of $265.4 million in CMO collateralacquire and
originate mortgage loans held-for-investment as the Long-Term Investment Operations
purchased and retained mortgage loans from the Mortgage Operations. Cash$172.8 million was
also used to increase finance receivables by $24.8 million.
30
provide short-term
advances warehouse advances to affiliates and external customers.
Financing Activities - During the first six monthsquarter of 2001,2002, net cash provided by
financing activities was $267.8$468.1 million. Net cash flows of $319.3 million was
provided by financing activitiesCMO proceeds, $104.9 million was primarily the result of proceeds fromprovided by advances on warehouse
lines, and $57.0 million was provided by the issuance of a
new CMO for $357.8 million and an increase in reverse repurchase agreements and
other borrowings of $206.2 million. Net cash provided was partially offset by
the repayment of CMO borrowings of $287.2 million.common stock.
Inflation
The Financial Statementsconsolidated financial statements and Notes thereto presented hereincorresponding 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 the
Company'sour operations. Unlike industrial companies,
nearly all of theour assets and liabilities of the Company's operations are monetary in nature. As a result,
interest rates have a greater impact on the Company's operations'our performance than do the effects of
general levels of inflation. Inflation affects the
Company'sour operations primarily through
its effect on interest rates, since interest rates normally increase during
periods of high inflation and decrease during periods of low inflation. During
periods of increasing interest rates, demand for mortgage loans and a borrower's
ability to qualify for mortgage financing in a purchase transaction may be
adversely affected. During periods of decreasing interest rates, borrowers may
prepay their mortgages, which in turn may adversely affect the Company'sour yield and
subsequently the value of itsour portfolio of Mortgage Assets.
31mortgage assets.
28
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Securitizations/Sales - Hedging Interest Rate Risk. The most significant
variable in the determination of gain on sale in a securitization is the spread
between the weighted average coupon on the securitized loans and the
pass-
throughpass-through interest rate. In the interim period between loan origination or
purchase and securitization or sale of such loans, the Company is exposed to
interest rate risk. Most of the loans are securitized or sold within 45 to 90
days of origination of purchase. However, a portion of the loans are
held-for-
saleheld-for-sale or securitization for as long as 12 months (or longer, in very
limited circumstances) prior to securitization or sale. If interest rates rise
during the period that the mortgage loans are held, in the case of a
securitization, the spread between the weighted average interest rate on the
loans to be securitized and the pass-through interest rates on the securities to
be sold (the latter having increased as a result of market rate movements) would
narrow. Upon securitization or sale, this would result in a reduction of the
Company's related gain or an increase in the Company's loss on sale.
Interest- and Principal-Only Strips. The Company had interest- and
principal-only strips of $6.6$3.6 million and $7.7$4.9 million outstanding at June 30,
2001March 31,
2002 and December 31, 2000,2001, respectively. These instruments are carried at
market value at June 30, 2001March 31, 2002 and December 31, 2000.2001. The Company values these
assets based on the present value of future cash flow streams net of expenses
using various assumptions.
These assets are subject to risk of accelerated mortgage prepayment or
losses in excess of assumptions used in valuation. Ultimate cash flows realized
from these assets would be reduced should prepayments or losses exceed
assumptions used in the valuation. Conversely, cash flows realized would be
greater should prepayments or losses be below expectations.
3229
PART II. OTHER INFORMATION
---------------------------
ITEM 1: LEGAL PROCEEDINGS
On September 1, 2000,The Company is a complaint captioned Michael P.party to litigation and Shellie Gilmor
v. Preferred Credit Corporation and Impac Funding Corporation, et. al. was filedclaims, which are normal in the
United States District Court forcourse of its operations. While the Western Districtresults of Missouri, Case
#4-00-00795-SOW. In July 2001,such litigation and claims cannot
be predicted with certainty, the complaint was amended to include IMH and
other IMH related entities. The plaintiffs are allegingCompany believes the final outcome of such
matters will not have a class action lawsuit
whereby the defendants violated Missouri's Second Loans Act and Merchandising
Practices Act by marketing loans and charging certain origination fees or
finders' fees or mortgage broker or broker fees or closing fees and costs on
second mortgage loans on residential real estate, which caused a conversion from
the illegal charge of interest or closing costs or fees. The plaintiffs are also
alleging a defendant class action. IFC was a purchaser of second mortgage loans
originated by Preferred Credit Corporation which the plaintiffs contend are
included in this lawsuit. The plaintiffs are seeking damages that include a
permanent injunction enjoining the defendants, together with their officers,
directors, employees, agents, partners or representatives, successors and any
and all persons acting in concert from, directly or indirectly, engaging in the
wrongful acts described therein, disgorgement or restitution of all improperly
collected charges and the imposition of an equitable constructive trust over
such amounts for the benefit of the plaintiffs, the right to rescind the loan
transactions and a right to offset any finance charges, closing costs, points or
other loan fees paid against the principal amounts duematerial adverse effect on the loans, actual
damages, punitive damages, reasonable attorney's fees, pre- and post- judgment
interest and costs and expenses. Damages are unspecified. The Company believes
that it has meritorious defenses to such claims and intends to defend these
claims vigorously. Nevertheless, litigation is uncertain, and the Company may
not prevail in this suit.Company.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K:
1. Form 8-K reporting Item 9 filed on June 1, 2001January 4, 2002
2. Form 8-K reporting Items 5 and 7 filed on January 24, 2002
3. Form 8-K reporting Items 5 and 7 filed on February 8, 2002
4. Form 8-K reporting Item 9 filed on June 27, 2001
33March 4, 2002
5. Form 8-K reporting Item 9 filed on March 28, 2002
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IMPAC MORTGAGE HOLDINGS, INC.
By: /s/ Richard J. Johnson
Richard J. Johnson
Executive Vice President
and Chief Financial Officer
Date: October 11, 2001
34August 22, 2002
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IMPAC MORTGAGE HOLDINGS, INC.
/s/ Richard J. Johnson
by: Richard J. Johnson
Executive Vice President
and Chief Financial Officer
(authorized officer of registrant and principal financial officer)
Date: August 22, 2002
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Impac Mortgage Holdings, Inc.
(the "Company") on Form 10-Q for the period ending March 31, 2002 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), each
of the undersigned, in the capacities and on the dates indicated below, hereby
certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Joseph R. Tomkinson
Joseph R. Tomkinson
Chief Executive Officer
August 22, 2002
/s/ Richard J. Johnson
Richard J. Johnson
Chief Financial Officer
August 22, 2002
32