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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-19861
IMPERIAL CREDIT 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 Number)
20371 Irvine Avenue 92707
Santa Ana Heights, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 556-0122
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock $0.01 par value American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant based upon the closing sales price of its Common Stock on November
12, 1996 on the American Stock Exchange was approximately $144.2 million.
The number of shares of Common Stock outstanding as of November 12, 1996:
6,767,500
DOCUMENTS INCORPORATED BY REFERENCE
None
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IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
1996 FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
PAGE #
PART I. CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
ITEM 1. FINANCIAL INFORMATION - IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.
Consolidated Balance Sheets, September 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations, Three- and Nine Months Ended September 30, 1996 and 1995 4
Consolidated Statements of Changes in Stockholders' Equity 5
Consolidated Statements of Cash Flows, Nine Months Ended September 30, 1996 and 1995 6
Selected Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 23
ITEM 2. THRU 5. NOT APPLICABLE 23
ITEM 6. EXHIBIT - STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE 24
SIGNATURES 25
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
ASSETS
- ------
Cash and cash equivalents $ 4,988 $ 2,284
Investment securities available-for-sale 47,942 17,378
Loan receivables:
CMO collateral 544,213 -
Finance receivables 183,427 583,021
Mortgage loans held for investment 1,238 -
Allowance for loan losses (3,839) (100)
Lease payment receivables - 8,441
Accrued interest receivable 6,987 1,645
Due from affiliates 670 113
Investment in ICI Funding Corporation 9,712 866
Other assets 104 40
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$ 795,442 $ 613,688
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CMO Borrowings $ 517,875 $ -
Reverse-repurchase agreements 191,129 567,727
Accrued dividends 3,519 -
Other liabilities 1,691 725
Due to affiliates 41 -
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Total Liabilities 714,255 568,452
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Commitments and Contingencies
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; $10 million shares
authorized; none issued or outstanding at September
30, 1996 (unaudited) and at December 31, 1995 - -
Common Stock; $.01 par value; 50 million shares
authorized; 6,767,500 and 4,250,000 shares issued
and outstanding at September 30, 1996 (unaudited)
and at December 31, 1995, respectively 68 43
Additional paid-in capital 81,947 44,971
Investment securities valuation allowance (1,108) (93)
Cumulative dividends declared (7,429) -
Retained earnings 7,709 315
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Total Stockholders' Equity 81,187 45,236
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$ 795,442 $ 613,688
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See accompanying notes to consolidated financial statements.
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except earnings per share figures)
(unaudited)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------- -------------------
1996 1995 1996 1995
------- ------- ------- -------
REVENUES
- --------
Interest income $17,356 $ 488 $44,338 $ 785
Equity in net income of ICI Funding Corporation 101 (600) 718 1,118
Fee income 280 80 607 166
------- ------- ------- -------
17,737 (32) 45,663 2,069
EXPENSES
- --------
Interest on CMO borrowings and reverse repurchase
agreements 11,920 - 31,372 -
Advisory fee 986 - 2,157 -
Provision for loan losses 835 192 3,739 388
Interest on borrowings from SPTL - 247 - 423
Professional services 220 4 433 13
Personnel expense 117 28 303 67
General and administrative expense 94 21 265 40
------- ------- ------- -------
14,172 492 38,269 931
Income (loss) before income taxes 3,565 (524) 7,394 1,138
Income taxes - 32 - 8
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Net Income (loss) $ 3,565 $ (556) $ 7,394 $ 1,130
==================== ==================
Primary income per common share $ 0.52 $ 1.40
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Cumulative dividends declared per common share 0.52 1.44
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See accompanying notes to consolidated financial statements.
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except for number of shares)
Number of Additional Securities Cumulative Total
Shares Common Paid-In Contributed Valuation Dividends Retained Stockholders'
Outstanding Stock Capital Capital Allowance Declared Earnings Equity
----------- ------ ---------- ----------- ---------- ---------- -------- -------------
Balance, December 31, 1994 - $ - $ - $ 358 $ - $ - $ 6,496 $ 6,854
Contribution Transaction 500,000 5 515 (358) - - (8,239) (8,077)
Net proceeds, from initial
public offering 3,750,000 38 44,456 - - - - 44,494
Net income, 1995 - - - - - - 2,058 2,058
Securities valuation
allowance, net - - - - (93) - - (93)
----------- ------ ---------- ----------- ---------- ---------- -------- -------------
Balance, December 31, 1995 4,250,000 43 44,971 - (93) - 315 45,236
Cumulative dividends declared
($1.44 per share)
(unaudited) - - - - - (7,429) - (7,429)
Net proceeds from public
stock offering (unaudited) 2,500,000 25 36,716 - - - - 36,741
Sale of common stock
(unaudited) 17,500 - 260 - - - - 260
Net income, nine months
ended September 30, 1996
(unaudited) - - - - - - 7,394 7,394
Change in securities
valuation allowance
(unaudited) - - - - (1,015) - - (1,015)
----------- ------ ---------- ----------- ---------- ---------- -------- -------------
Balance, September 30,
1996 (unaudited) 6,767,500 68 81,947 - (1,108) (7,429) 7,709 81,187
=========== ====== ========== =========== ========== ========== ======== =============
See accompanying notes to consolidated financial statements.
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
FOR THE NINE MONTHS
ENDED, SEPTEMBER 30,
----------------------
1996 1995
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Cash flows from operating activities:
Net income $ 7,394 $ 1,130
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of ICI Funding Corporation (719) (1,118)
Provision for loan losses 3,739 387
Net change in accrued interest on loans and
investments (5,341) (57)
Net change in other assets and liabilities 385 -
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Net cash provided by operating activities 5,458 342
Cash flows from investing activities:
Change in CMO collateral (544,213) -
Change in finance receivables 399,594 (15,341)
Change in mortgage loans held for investment (1,238) -
Purchase of investment securities available-
for-sale (31,579) -
Net decrease (increase) in lease payment
receivables 8,441 -
Contributions to ICI Funding Corporation (8,128) -
--------- --------
Net cash used in investing activities (177,123) (15,341)
Cash flows from financing activities:
Proceeds from public stock offerings, net 36,742 -
Net change in borrowings from SPTL - 14,999
Net change in reverse repurchase agreements (376,599) -
Net change in CMO borrowings 517,875 -
Dividends paid (3,910) -
Proceeds from sale of additional common stock 261 -
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Net cash provided by financing activities 174,369 14,999
Net change in cash and cash equivalents 2,704 -
Cash and cash equivalents at beginning of period 2,284 -
--------- --------
Cash and cash equivalents at end of period $ 4,988 $ -
========= ========
Supplementary information:
Interest paid $ 31,347 $ 423
Income taxes paid - -
========= ========
Non-cash transactions:
Unrealized losses on investment securities
available-for-sale $ (1,108) $ -
Accrued dividends 3,519 -
See accompanying notes to consolidated financial statements
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Unless the context otherwise requires, references herein to the "Company"
refer to Imperial Credit Mortgage Holdings, Inc. ("IMH"), ICI Funding
Corporation ("ICIFC"), IMH Assets Corp. ("IMH Assets"), and Imperial
Warehouse Lending Group, Inc. ("IWLG"), collectively. References to IMH
refer to Imperial Credit Mortgage Holdings, Inc. as a separate entity from
ICIFC, IMH Assets, and IWLG.
1. BASIS OF FINANCIAL STATEMENT PRESENTATION
accompanying consolidated financial statements have been prepared in
accordance with Generally Accepted Accounting Principals 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
Generally Accepted Accounting Principals for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have
been included. Operating results for the three- and nine-month periods
ended September 30, 1996 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996. 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, 1995.
References to financial information of IMH for the three- and nine-month
periods ended September 30, 1995 reflect the pro forma financial data of
IMH's equity interest in net income in Imperial Credit Industries, Inc.
("ICII") mortgage conduit operations and Southern Pacific Thrift and Loan
("SPTL") warehouse lending operations, prior to November 20, 1995 (the
"Initial Public Offering"). References to financial information of IMH for
the three- and nine-month periods ended September 30, 1996 and as of
December 31, 1995 reflect financial results of IMH's equity interest in net
income in ICIFC and results of operations of IMH, IMH Assets, and IWLG as
stand-alone entities, subsequent to the Initial Public Offering. Refer to
"The Contribution Transaction" for additional information.
The results of operations of ICIFC, of which 99% of the economic interest
is owned by IMH, are included in the results of operations for IMH as
"Equity in net income of ICI Funding Corporation." For the three- and nine-
month periods ended September 30, 1995, the financial statements included
elsewhere herein reflect management's estimate of the level of previous
capital and the amounts of interest charges and general and administrative
expense and income taxes that ICII's mortgage conduit operations would have
incurred had it operated as an entity separate from ICII.
2. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
IMH is a specialty finance company which, together with its subsidiaries
and related companies, operates three businesses: (1) the Long-Term
Investment Operations, (2) the Conduit Operations, and (3) the Warehouse
Lending Operations. The Long-Term Investment Operations invests primarily
in non-conforming residential mortgage loans and securities backed by such
loans. The Conduit Operations purchases and sells or securitizes primarily
non-conforming mortgage loans, and the Warehouse Lending Operations
provides warehouse and repurchase financing to originators of mortgage
loans. These latter two businesses include certain ongoing operations
contributed to
the Company in 1995 by ICII , a leading specialty finance company. IMH is
organized as a real estate investment trust ("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.
IMH's principal sources of net income are (1) net income from the Long-Term
Investment Operations, (2) net income from the Warehouse Lending
Operations, and (3) equity in net income of the Conduit Operations. The net
income of the Conduit Operations is fully subject to federal and state
income taxes. The principal source of income from IMH's Long-Term
Investment Operations is net interest income, which is the net spread
between interest earned on mortgage loans and securities held for
investment and the interest costs associated with the borrowings used to
finance such loans and securities, including Collateralized Mortgage
Obligation ("CMO") debt. The principal sources of income from the Warehouse
Lending Operations are net interest income, which is the net spread between
interest earned on warehouse loans and the interest costs associated with
the borrowings used to finance such loans, and the fee income received from
the borrowers in connection with such loans. The principal sources of
income from the Conduit Operations are gains recognized on the sale of
mortgage loans and securities, net interest income earned on loans
purchased by ICIFC pending their securitization or resale, servicing fees,
commitment fees and processing fees.
Long-Term Investment Operations. The Long-Term Investment Operations,
conducted by IMH, invests primarily in non-conforming residential mortgage
loans and mortgage-backed securities secured by or representing interests
in such loans and, to a lesser extent, in second mortgage loans. Non-
conforming residential mortgage loans are residential mortgages that do not
qualify for purchase by government-sponsored agencies such as Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC"). Such loans generally provide higher yields than
conforming loans. The principal differences between conforming loans and
non-conforming loans include the applicable loan-to-value ratios, the
credit and income histories of the mortgagors, the documentation required
for approval of the mortgagors, the type of properties securing the
mortgage loans, the loan sizes, and the mortgagors' occupancy status with
respect to the mortgaged properties. Second mortgage loans are higher
yielding 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. At September 30, 1996, the Company's mortgage loan and securities
investment portfolio consisted of $544.2 million of mortgage loans held in
trust as collateral for CMOs, $47.9 million of mortgage-backed or other
collateralized securities and $1.2 million of mortgage loans held for
investment.
Conduit Operations. The Conduit Operations, conducted by ICIFC, primarily
purchases non-conforming mortgage loans and, to a lesser extent, second
mortgage loans from its network of third party correspondents and
subsequently securitizes or sells such loans to permanent investors
including the Long-Term Investment Operations. ICIFC's ability to design
non-conforming mortgage loans, which suit the needs of its correspondent
loan originators and their borrowers, while providing sufficient credit
quality to investors, as well as its efficient loan purchasing process,
flexible purchase commitment options and competitive pricing, enable it to
compete effectively with other non-conforming mortgage loan conduits. In
addition to earnings generated from ongoing securitizations and sales to
third party investors, ICIFC supports the Long-Term Investment Operations
of the Company by supplying IMH with non-conforming mortgage loans and
securities backed by such loans. For the three- and nine-month periods
ended September 30, 1996, ICIFC acquired $506.5 million and $1.2 billion,
respectively, in mortgage loans and sold or securitized $572.7 million and
$1.5 billion, respectively, of mortgage loans. For the three- and nine-
month periods ended September 30, 1996, the long-term investment operations
acquired $297.8 million
and $591.0 million of such loans as well as $21.1 million and $29.6
million, respectively, of securities created by ICIFC.
Warehouse Lending Operations. The Warehouse Lending Operations, conducted
by IWLG, provides warehouse and repurchase financing to ICIFC and to
approved mortgage banks, most of which are correspondents of ICIFC, to
finance mortgage loans during the time from the closing of the loans to
their sale or other settlement with pre-approved investors. At September
30, 1996, the Warehouse Lending Operations had $183.4 million in finance
receivables outstanding, of which $169.0 million was outstanding with
ICIFC.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125 (SFAS 125), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". SFAS 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. These standards are based on consistent application of
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial
and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered and
derecognizes liabilities when extinguished. SFAS 125 provides consistent
standards for distinguishing transfers of financial assets that are sales
from transfers that are secured borrowings. SFAS 125 requires that
liabilities and derivatives incurred or obtained by transferors as part of
a transfer of financial assets be initially measured at fair value, if
practicable. It also requires that servicing assets and other retained
interest in the transferred assets be measured by allocating the previous
carrying amount between the asserts sold, if any, and retained interest, if
any, based on their relative fair values at the date of the transfers. SFAS
125 includes specific provisions to deal with servicing assets or
liabilities. SFAS 125 will be effective for transactions occurring after
December 31, 1996. It is not anticipated that the financial impact of this
statement will have a material effect on the Company.
In November 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123).
This statement establishes financial accounting standards for stock-based
employee compensation plans. SFAS 123 permits the Company to choose either
the fair value based method from SFAS 123 or intrinsic value based method
of accounting for its stock-based compensation arrangements under APB
Opinion 25. SFAS 123 requires pro forma disclosures of net income and
income per share computed as if the fair value based method had been
applied in financial statements of companies that continue to follow
current practice in accounting for such arrangements under Opinion 25. SFAS
123 applies to all stock-based employee compensation plans in which an
employer grants shares of its stock or other equity instruments to
employees except for employee stock ownership plans. SFAS 123 also applies
to plans in which the employer incurs liabilities to employees in amounts
based on the price of the employer's stock, i.e., stock option plans, stock
purchase plans, restricted stock plans, and stock appreciation rights. The
statement also specifies the accounting for transactions in which a company
issues stock options or other equity instruments for services provided by
nonemployees or to acquire goods or services from outside suppliers or
vendors. The recognition provision of SFAS 123 for companies choosing to
adopt the new fair value based method of accounting for stock-based
compensation arrangements may be adopted immediately and will apply to all
transactions entered into in fiscal years that begin after December 15,
1995. The disclosure provisions of SFAS 123 are effective for fiscal years
beginning after December 15, 1995; however, disclosure of the pro forma net
income and income per share, as if the fair value method of accounting for
stock-based compensation had been elected, is required for all awards
granted in fiscal years beginning after December 31, 1994. The Company will
continue to account for stock-based compensation under
APB Opinion 25 and, as a result, SFAS 123 will not have a material impact
on the Company's operations.
THE CONTRIBUTION TRANSACTION
On November 20, 1995, ICII contributed to ICIFC certain of the operating
assets and certain customer lists of ICII's mortgage conduit operations,
including all of ICII's mortgage conduit operations' commitments to
purchase mortgage loans subject to rate locks from correspondents (having a
principal balance of $44.3 million on November 20, 1995) in exchange for
shares representing 100% of the common stock and 100% of the non-voting
preferred stock of ICIFC. Simultaneously, on November 20, 1995, in exchange
for 500,000 shares of Common Stock, (1) ICII contributed to IMH all of the
outstanding non-voting preferred stock of ICIFC, which represents 99% of
the economic interest in ICIFC, (2) SPTL contributed to IMH certain of the
operating assets and certain customer lists of SPTL's warehouse lending
division, and (3) ICII and SPTL executed a Non-Compete Agreement and a
Right of First Refusal Agreement, each having a term of two years from
November 20, 1995. Of the 500,000 shares issued pursuant to the
Contribution Transaction, 450,000 shares were issued to ICII and 50,000
shares of common stock were issued to SPTL. All of the outstanding shares
of common stock of ICIFC were retained by ICII. Lastly, IMH contributed to
IWLG all of the aforementioned operating assets of SPTL's warehouse lending
operations contributed to it in exchange for shares representing 100% of
the common stock of IWLG thereby forming it as a wholly owned subsidiary.
On November 20, 1995, the net tangible book value of the assets contributed
pursuant to the Contribution Transaction was $525,000. ICII and SPTL
retained all other assets and liabilities related to contributed
operations, which at November 20, 1995 consisted mostly of $11.7 million of
MSRs, $22.4 million of finance receivables and $26.6 million in advances
made by ICII and SPTL to fund the mortgage conduit loan acquisitions and
finance receivables, respectively.
3. ICI FUNDING CORPORATION
Summarized financial information for ICIFC ( in thousands).
BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
ASSETS
------
Cash....................................... $ 4,979 $ 2,184
Mortgage loans held for sale, net.......... 171,704 544,275
Accrued interest receivable................ 549 2,985
Due from affiliates........................ 425 2,542
Mortgage Servicing Rights.................. 7,537 -
Premises and equipment, net................ 556 516
Other assets............................... 394 129
------------------ -----------------
$ 186,144 $ 552,631
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Borrowings from IWLG....................... $ 168,990 $ 550,291
Other liabilities.......................... 4,160 -
Accrued interest expense................... 2,514 1,348
Due to affiliates.......................... 670 118
------------------ -----------------
Total liabilities........................ 176,334 551,757
------------------ -----------------
Shareholders' equity:
Preferred stock........................... 9,143 1,014
Common stock.............................. 92 10
Retained earnings (accumulated deficit)... 575 (150)
------------------ -----------------
Total shareholders' equity............. 9,810 874
------------------ -----------------
$ 186,144 $ 552,631
================== =================
THREE MONTHS ENDED, NINE MONTHS ENDED,
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
-------- -------- -------- --------
Revenues:
Interest income............................. $ 8,725 $ - $ 26,535 $ -
Gain on sale of loans....................... 1,593 (539) 5,555 2,695
Loan servicing income....................... 353 1,536 622 4,196
Gain on sale of servicing rights............ - - - 370
--------------------------------------------
10,671 997 32,712 7,261
--------------------------------------------
Expenses:
Interest on borrowings from IWLG............ 8,081 - 25,557 -
Interest on borrowings from ICII............ - 141 - 407
General and administrative and other........ 2,077 960 4,875 2,836
Amortization of mortgage servicing rights... 176 941 286 2,070
Provision for loan losses................... 152 - 728 -
--------------------------------------------
10,486 2,042 31,446 5,313
--------------------------------------------
Income before income taxes................... 185 (1,045) 1,266 1,948
Income tax expense (benefit)................. 83 (439) 540 818
--------------------------------------------
Net income................................. $ 102 $ (606) $ 726 $ 1,130
============================================
4. INVESTMENT IN ICIFC
The Company records its investment in ICIFC on the equity method. ICII owns
all of the common stock of ICIFC and is entitled to 1% of the earnings or
loss of ICIFC. The Company is entitled to 99% of the earnings or losses of
ICIFC through its ownership of all of the non-voting preferred stock in
ICIFC. ICIFC is a mortgage loan conduit organization which purchases
mortgage loans and subsequently securitizes or sells such loans to permanent
investors, including IMH.
5. INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The Company accounts for investment securities in accordance with Statement
of Financial Accounting Standard No. 115 "Accounting for Certain Investments
in Debt and Equity Securities." This statement requires the Company to
classify investment and mortgage-backed securities as held-to-maturity,
available-for-sale, and/or trading securities. Held-to-maturity investment
and mortgage-backed securities are reported at amortized cost, available-
for-sale securities are reported at fair value with unrealized gains and
losses, net of related income taxes, as a separate component of
stockholders' equity, and trading securities are reported at fair value with
unrealized gains and losses reported in income. Discounts obtained on
investment securities are amortized to interest income over the estimated
life of the investment securities using the interest method.
At September 30, 1996 the Company's investment securities available-for-sale
included $20.2 million of subordinated securities collateralized by
mortgages. In general, subordinated classes of a particular series of
securities bear all losses prior to the related senior classes. In
connection with ICIFC's REMIC securitizations of $645.9 million in issuance
amount for the nine months ended September 30, 1996, IMH has retained $29.6
million of securities as regular interests. At September 30, 1996, such
regular interests included $113,000 of "principal only" and $19.8 million of
"interest-only" securities. Such retained securities or investments may
subject the Company to credit, interest rate and/or prepayment risks.
The Company's investment securities are held as available-for-sale, reported
at fair value with unrealized gains and losses reported as a separate
component of stockholders' equity. As the Company qualifies as a REIT and no
income taxes are paid, the unrealized gains and losses are reported gross in
stockholders' equity.
6. MORTGAGE LOANS HELD FOR INVESTMENT AND CMO COLLATERAL
The Company purchases certain non-conforming mortgage loans to be held as
long-term investments or as collateral for CMO's. Mortgage loans held for
investment and CMO collateral are recorded at cost at the date of purchase.
Mortgage loans held for investment and CMO collateral include various types
of adjustable-rate loans secured by mortgages on single-family residential
real estate properties and fixed-rate loans secured by second trust deeds on
single-family residential real estate properties, accounting for 92.2% and
7.8%, respectively, of the long-term investment portfolio at September 30,
1996. At December 31, 1995 the Company had no mortgage loans held for
investment. Approximately 56.8% of the mortgage loans held for investment
and CMO collateral at September 30, 1996 were collateralized by properties
located in California. Premiums and discounts and the market valuation
related to these loans are amortized over their estimated lives using the
interest method. The loans are continually evaluated for collectibility and,
if appropriate, the loans may be placed on nonaccrual status, generally 90
days past due, and previously accrued interest reversed from income.
The Company maintains an allowance for losses on mortgage loans held for
investment and CMO collateral at an amount which it believes is sufficient
to provide adequate protection against future losses in the mortgage loan
portfolio. The allowance for losses is determined primarily on the basis of
management's judgment of net loss potential, including specific allowances
for known impaired loans and other factors such as changes in the nature and
volume of the portfolio, value of the collateral and current economic
condition that may affect the borrowers' ability to pay. A provision is
recorded for all loans or portions thereof deemed to be uncollectible
thereby increasing the allowance for loan losses. Loans are continually
evaluated for collectibility and, if appropriate, the loan is placed on
nonaccrual status, generally 90 days past due, and previously accrued
interest reversed from income. As of September 30, 1996, there were 46 loans
on nonaccrual status with a principal balance of $6.1 million.
7. COLLATERALIZED MORTGAGE OBLIGATIONS
The Company issues CMOs secured by non-conforming mortgage loans as a means
of financing its long-term investment operations. For accounting and tax
purposes, the mortgage loans financed through the issuance of CMOs are
treated as assets of the Company and the CMOs are treated as debt of the
Company. Each issue of CMOs is fully payable from the principal and interest
payments on the underlying mortgage loans collateralizing such debt and any
investment income on such collateral. The maturity of each class of CMO is
directly affected by the rate of principal prepayments on the related CMO
collateral. Each CMO series is also subject to redemption according to
specific terms of the respective indentures. As a result, the actual
maturity of any class of a CMO series is likely to occur earlier than the
stated maturities of the underlying mortgage loans. The weighted average
maturity of the CMO collateral ranges from 14 to 29 years. The CMOs are
structured as one month LIBOR "floaters" with interest payable monthly at
LIBOR plus 0.32% to 0.50%, currently increasing to LIBOR plus 1.00% to 1.32%
after seven years.
CMO COLLATERAL CONSISTS OF THE FOLLOWING:
At September 30, 1996
---------------------
Loans secured primarily by single-family residential real
estate properties......................................... $ 528,324,124
Premiums on loans........................................... 13,983,671
Securitization expenses related to issuance of CMOs......... 1,904,807
---------------------
$ 544,212,602
---------------------
The long-term investment operations earns the net interest spread between
the interest income on the mortgage loans and the interest and other
expenses associated with the CMO debt. The net interest spread may be
directly impacted by the levels of prepayment of the underlying mortgage
loans and, to the extent CMO classes have variable rates of interest, may
be affected by changes in short-term interest rates. As of September 30,
1996, the Company had outstanding CMO debt of $517.9 million and
corresponding mortgage loans held as collateral of $544.2 million.
The Company maintains an allowance for losses on loans held as collateral
for CMOs at an amount which it believes is sufficient to provide adequate
protection against losses in the portfolio. The allowance for losses is
determined primarily on the basis of management's judgment of net loss
potential, including specific allowances for known impaired loans. All
accounts or portions thereof deemed to be uncollectible are written-off to
the allowance for loan losses.
8. FINANCE RECEIVABLES
Finance receivables represent transactions with customers, including ICIFC,
involving predominantly residential real estate lending. As a warehouse
lender, the Company is a secured creditor of the mortgage bankers and
brokers to which it extends credit and is subject to the risks inherent in
that status, including the risk of borrower default and bankruptcy. Any
claim of the Company as a secured lender in a bankruptcy proceeding may be
subject to adjustment and delay.
The Company maintains an allowance for losses on finance receivables at an
amount which it believes is sufficient to provide adequate protection
against losses in the portfolio. The allowance for losses is determined
primarily on the basis of management's judgment of net loss potential,
including specific allowances for known impaired loans. A provision is
recorded for all accounts or portions thereof deemed to be uncollectible.
Finance receivables are stated at the principal balance outstanding.
Interest income is recorded on the accrual basis in accordance with the
terms of the loans. Finance receivables are continually evaluated for
collectibility and, if appropriate, the receivable is placed on nonaccrual
status, generally 90 days past due. Future collections of interest income
are included in interest income or applied to the loan balance based on an
assessment of the likelihood that the loans will be repaid.
The Company earns interest rates at prime (8.25%) on warehouse lines to
ICIFC and prime to prime plus two percent on its warehouse lines to other
mortgage banking companies. These lines have maturities which range from on
demand to one year and are generally collateralized by mortgages on single
family residences.
9. REVERSE-REPURCHASE AGREEMENTS
The Company enters into reverse-repurchase agreements with major brokerage
firms for its mortgage warehouse lending operations and to fund the purchase
of mortgage loans and mortgage-backed securities. Mortgage loans underlying
certain of the agreements are delivered to the dealers that arrange the
transactions. At September 30, 1996, the Company had outstanding reverse-
repurchase agreements of $191.1 million which included accrued interest
payable of $689,000.
10. STOCKHOLDERS' EQUITY
IMH intends to distribute 95% or more of its net taxable income (which does
not necessarily equal net income as calculated in accordance with GAAP) to
its common stockholder's each year so as to comply with the REIT provisions
of the Code. Holders of the common stock are entitled to such dividends as
the Company's Board of Directors, in its discretion, may declare out of
funds available. In the event of liquidation of IMH, holders of common stock
are entitled to receive, pro rata, all of the assets of IMH available for
distribution. Holders of the common stock have no conversion or preemptive
or other subscription rights and there are no redemption or sinking fund
provisions applicable to the common stock.
On October 7, 1996, 114,500 stock options were issued to officers and
employees of ICIFC at an exercise price of $20.625 per share. The 114,500
stock options become exercisable at a rate of 1/3 per year on the
anniversary of the date of grant and expire three years from the date they
were granted.
11. COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business. Such instruments include short-term
commitments to extend credit to borrowers under warehouse lines of credit
which involve elements of credit risk. In addition, the Company is exposed
to credit loss in the event of nonperformance by the counterparties to the
various agreements associated with loan purchases. However, the Company does
not anticipate nonperformance by such borrowers or counterparties. Unless
noted otherwise, the Company does not require collateral or other security
to support such commitments. The Company uses the same credit policies in
making commitments and conditional obligations as it does for on-balance
sheet instruments. The contract or notional amounts of forward contracts do
not represent exposure to credit loss. The Company controls the credit risk
of its forward contracts through credit approvals, limits and monitoring
procedures. As of September 30, 1996 and December 31, 1995, the Company had
no forward contract, interest rate swap or other similar contractual
arrangements.
LOAN COMMITMENTS
IWLG's warehouse lending operations provides secured short-term revolving
financing to small- and medium-size mortgage originators and ICIFC to
finance mortgage loans from the closing of the loans until sold to permanent
investors. As of September 30, 1996, the Company had extended 16
committed lines of credit in the aggregate principal amount of approximately
$673.5 million, of which $183.4 million was outstanding.
12. SUBSEQUENT EVENTS (unaudited)
On September 17, 1996, the Board of Directors declared a $0.52 cash
dividend, all to be taxable as ordinary income, to be paid on October 15,
1996 to stockholders of record on September 30, 1996.
A special cash dividend of $0.42 was approved by the Board of Directors to be
paid on December 16, 1996 to all stockholders of record on November 15, 1996.
The special cash dividend is intended to distribute excess taxable income not
previously distributed by the Company as dividends, in order to comply with
REIT guidelines. The special cash dividend should not be interpreted as a
recurring dividend nor a dividend in lieu of the Company's regular fourth
quarter dividend.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
References to the Pre-Contribution Transaction period refer to the
periods prior to November 20, 1995. References to the Post-Contribution
Transaction period refer to periods after November 20, 1995. References to
financial information of IMH Post-Contribution Transaction reflect the
financial operations of IMH and its subsidiaries, IWLG and IMH Assets, and
IMH's equity interest in ICIFC. References to financial information of IMH
Pre-Contribution Transaction reflect the pro forma financial data of IMH's
equity interest in SPTL's warehouse lending operations and ICII's mortgage
conduit operations Pre-Contribution Transaction. References to financial
information of ICIFC reflect the financial data of ICIFC Post-Contribution
Transaction and the pro forma financial information of ICII's mortgage
conduit operation Pre-Contribution Transaction.
GENERAL INFORMATION
IMH's principal sources of net income are (1) net income from the Long-Term
Investment Operations, (2) net income from the Warehouse Lending Operations,
and (3) equity in net income of the Conduit Operations. The net income of
the Conduit Operations is fully subject to federal and state income taxes.
The principal source of income from IMH's Long-Term Investment Operations is
net interest income, which is the net spread between interest earned on
mortgage loans and securities held for investment and the interest costs
associated with the borrowings used to finance such loans and securities,
including CMO debt. The principal sources of income from the Warehouse
Lending Operations are net interest income, which is the net spread between
interest earned on warehouse loans and the interest costs associated with the
borrowings used to finance such loans, and the fee income received from the
borrowers in connection with such loans. The principal sources of income
from the Conduit Operations are gains recognized on the sale of mortgage
loans and securities, net interest income earned on loans purchased by ICIFC
pending their securitization or resale, servicing fees, commitment fees and
processing fees.
SIGNIFICANT TRANSACTIONS
On October 25, 1996, the Company filed Form S-11 Registration Statement with
the Securities and Exchange Commission for a secondary public stock offering
of 2,500,000 shares of common stock. The net proceeds of this offering to
the Company are estimated to be $51.8 million (or $59.7 million if the
underwriter's over-allotment option is exercised in full) assuming a public
offering price of $22.25 after deducting estimated offering expenses and
underwriting discounts and commissions. It is expected that 70% and 20% of
such proceeds will be used to provide funding for the Company's Long-Term
Investment Operations and its Warehouse Lending Operations, respectively.
The balance of such proceeds will be used for working capital and general
corporate purposes.
As part of its financing strategies, the Company completed $296.3 million of
CMO financing in April 1996. The CMO was structured as a one month LIBOR
"floater" with interest payable
monthly based on one month LIBOR plus 0.50%. The CMO is guaranteed for the
holders thereof by a mortgage insurer giving the CMO the highest credit
rating established by a nationally-recognized rating agency.
In August 1996, the Company completed $259.8 million of CMO financing. The
CMO was structured as a one month LIBOR "floater" with interest payable
monthly based on one month LIBOR plus 0.32%. The CMO is guaranteed for the
holders thereof by a mortgage insurer giving the CMO the highest credit
rating established by a nationally-recognized rating agency.
HISTORICAL AND RECENT TRENDS
ICIFC's mortgage loan acquisitions decreased from $1.7 billion in 1994 to
$1.1 billion in 1995, which included $585.9 million of mortgage loans
acquired from ICII and its affiliates Post-Contribution Transaction.
Management attributes this decrease in mortgage loan acquisitions to the
overall decrease in mortgage loan originations throughout the mortgage
industry as a result of increased interest rates in 1995. In addition, the
decrease in mortgage loan acquisitions resulted from ICIFC's refocus from the
conforming to the non-conforming mortgage loan market and increased
competition in such non-conforming market. ICIFC was also adversely affected
by the increase in interest rates during 1994, resulting in a 20% decline in
mortgage acquisitions in 1994 to $1.7 billion from $2.1 billion acquired in
1993. The aforementioned decline in mortgage acquisitions resulted in higher
operating costs as a percentage of acquisitions, despite ICIFC's efforts to
reduce excess production capacity through 1994 and 1995.
In an effort to increase profitability, ICIFC reduced operating expenses in
1994 and 1995, primarily through a reduction in personnel. At December 31,
1995, ICIFC had 60 employees, a 15% decrease from 71 employees at December
31, 1994. At December 31, 1994, the conduit operations of ICII employed 71
employees, a 57% decrease from 167 employees at December 31, 1993. ICIFC
continues to assess its work force in order to properly match its loan
acquisition capacity to current market demands. In 1995, ICIFC also
emphasized the acquisition of higher margin non-conforming mortgage loan
products which provided a higher return than conforming loans.
During the nine months ended September 30, 1996, ICIFC's mortgage loan
acquisitions increased 149% to $1.2 billion as compared to $472.4 million for
the same period in 1995. Excluding the acquisition of mortgage loans from
ICII or its affiliated mortgage banking operations, ICIFC's mortgage loan
acquisitions increased 103% to $957.3 million in the first nine months of
1996 as compared to $472.4 million for the same period in 1995. The increase
in mortgage loan acquisitions for the nine-month period ended September 30,
1996 as compared to the same period in 1995 was primarily the result of the
Company's increased marketing and sales efforts subsequent to the Initial
Public Offering, increased concentration on identifying and servicing
productive conduit sellers under master commitment programs, and
significantly increased sales activity from two conduit sellers affiliated
with ICII. In the second quarter of 1996, the two conduit sellers were
divested from ICII. ICIFC has and expects to continue to acquire loans from
one of these mortgage banking entities. In conjunction with the increase in
flow (loan-by-loan) acquisitions, as opposed to bulk loan acquisitions,
subsequent to the Contribution Transaction, the Company has added additional
personnel. At September 30, 1996, ICIFC employed 91 employees, an increase
of 250% from 26 employees at September 30, 1995.
ACCOUNTING FOR SERVICING RIGHTS
When ICIFC purchases loans that include the associated servicing rights, the
price paid for the servicing rights, net of amortization based on assumed
prepayment rates, is reflected on its financial statements as Mortgage
Servicing Rights ("MSRs").
On May 12, 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights," an amendment to SFAS No. 65. ICIFC elected to adopt this
standard retroactive to January 1, 1995 which has no impact on 1995
operations.
SFAS No. 122 requires that a portion of the cost of acquiring a mortgage
loan be allocated to the mortgage loan servicing rights based on its fair
value relative to the loan as a whole. To determine the fair value of the
servicing rights created, ICIFC uses a valuation model that calculates the
present value of future net servicing revenues to determine the fair value of
the servicing rights. In using this valuation method, ICIFC incorporates
assumptions that market participants would use in estimating future net
servicing income which includes estimates of the cost of servicing, a
discount rate, an inflation rate, ancillary income per loan, a prepayment
rate, and a default rate.
ICIFC determines servicing value impairment by disaggregating its mortgage
conduit operations' servicing portfolio into its predominant risk
characteristics. ICIFC determines those risk characteristics to be loan
program type and interest rate. These segments of the portfolio are then
evaluated, using market prices under comparable servicing sale contracts,
when available, or alternatively using the same model as was used to
originally determine the fair value at acquisition, using current assumptions
at the end of the quarter. The calculated value is then compared to the
capitalized recorded value of each loan type and interest rate segment to
determine if a valuation allowance is required. At September 30, 1996, ICIFC
had capitalized $7.5 million of MSR's.
MSRs are subject to some degree of volatility in the event of unanticipated
prepayments or defaults. Prepayments in excess of those anticipated at the
time MSRs are recorded could result in a decline in the fair values of the
MSR's below their carrying value requiring a provision to increase the MSR's
valuation allowance. The rate of prepayment of loans is affected by a
variety of economic and other factors, including prevailing interest rates
and the availability of alternative financing. The effect of those factors
on loan prepayment rates may vary depending on the particular type of loan.
Estimates of prepayment rates are made based on management's expectations of
future prepayment rates, which are based, in part, on the historical rate of
prepayment of ICIFC's loans, and other considerations. There can be no
assurance of the accuracy of management's prepayments estimates. If actual
prepayment with respect to loans serviced occur more quickly than were
projected at the time such loans were sold, the carrying value of the MSRs
may have to be reduced through a provision recorded to increase the MSR's
valuation allowance in the period the fair value declined below the MSR's
carrying value. If actual prepayments with respect to loans occur more
slowly than estimated, the carrying value of MSRs would not increase,
although total income would exceed previously estimated amounts and the
related valuation allowance, if any, could be unnecessary.
COMMITMENTS AND CONTINGENCIES
As part of its marketing strategy, ICIFC establishes mortgage loan purchase
commitments ("Master Commitments") with sellers that, subject to certain
conditions, entitle the seller to sell to ICIFC and obligate ICIFC to
purchase a specified dollar amount of mortgage loans over a period generally
ranging from six months to one year. As of September 30, 1996 and December
31, 1995, ICIFC had open short-term Master Commitments with 62 and 18
sellers, respectively, to
purchase mortgage loans in the aggregate principal amount of $774.0 million
and $241.0 million, respectively, over periods generally ranging from six
months to one year, of which $79.9 million and $35.7 million, respectively,
had been purchased or committed to be purchased pursuant to rate-locks.
At September 30, 1996, the Company had a $250 million committed financing
facility as well as additional uncommitted facilities to provide financing
for the Company's three businesses. Subsequent to September 30, 1996, the
Company established an additional $100 million reverse repurchase facility.
Terms of the reverse repurchase agreements require that the mortgages be held
by an independent third party custodian, which gives the Company the ability
to borrow against the collateral as a percentage of the outstanding principal
balance. The borrowing rates quoted vary from 65 basis points to 100 basis
points over one-month LIBOR, depending on the type of collateral provided by
the Company. The margins on the reverse repurchase agreements are based on
the type of mortgage collateral used and generally range from 90% to 98% of
the fair market value of the collateral.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AS COMPARED TO THE THREE MONTHS ENDED
---------------------------------------------------------------------------
SEPTEMBER 30,1995
-----------------
Net income (loss) for the quarter ended September 30, 1996 increased to $3.6
million as compared to $(556,000) for the same period of the prior year. Net
income per share for the three months ended September 30,1996 was $0.52.
The Company's revenue during the three months ended September 30,1996
increased to $17.7 million from $(32,000) for the same period of the prior
year, primarily as a result of an increase in interest income from
outstanding finance receivables, interest income earned on the Company's
mortgage loans held for investment as CMO collateral and investment
securities available-for-sale, and net income from its equity interest in
ICIFC. Average finance receivables outstanding for the three months ended
September 30, 1996 increased to $425.9 million from $16.4 million for the
same period of the prior year, primarily as the result of the Company
providing warehouse facilities to ICIFC subsequent to the Initial Public
Offering. Interest income increased as average CMO collateral outstanding
for the three months ended September 30, 1996 increased to $379.0 million as
compared to zero for the same period in 1995, as a result of the Company
financing $567.0 million of mortgage loans held in its investment portfolio
through two CMO structures created in the second and third quarters of 1996.
Additionally, the Company invested in investment securities available-for-
sale with an average outstanding balance of $39.3 million for the three
months ended September 30, 1996 as compared to zero for the same period in
1995. The Company had total investment securities available-for-sale and
cash and cash equivalents of $52.9 million at September 30, 1996. Lastly,
the Company's equity interest in net income of ICIFC increased to $101,000
for the three months ended September 30, 1996 as compared to $(600,000) for
the same period of the prior year.
Expenses for the three months ended September 30, 1996 increased to $14.2
million as compared to $492,000 for the same period in 1995. The increase in
expense was due to the following: (1) higher daily average borrowings under
reverse repurchase agreements and CMO debt, (2) management advisory fees paid
to Imperial Credit Advisors, Inc. ("ICAI") executed on the date of the
Initial Public Offering, (3) loan loss reserves, and (4) other operating
expenses.
Interest expense for the three month period ended September 30, 1996
increased to $11.9 million as compared to $247,000 in the same period of the
prior year. The Company's increased borrowings on finance and repurchase
lines was the result of increased funding of finance receivables made to
ICIFC post-contribution transaction and increased CMO borrowings for the
purpose of financing the Company's CMO Collateral which was not present
during the three months ended September 30, 1995. The average outstanding
borrowings on finance and repurchase agreements and CMO borrowings was $423.0
million and $364.3 million, respectively, for the third quarter of 1996 as
compared to $15.9 million and zero, respectively, for the same period of the
prior year. Advisory fees for the three months ended September 30, 1996
increased to $986,000 as compared to zero advisory fees for the same period
of the prior year as the management agreement became effective on the date of
the Initial Public Offering. The provision for loan losses increased to
$835,000 for the third quarter of 1996 as compared to $192,000 for the same
period of the prior year. The increase in the provision for loan losses was
the result of the Company's effort to increase mortgage loans held for
investment and CMO collateral post-contribution transaction. Other operating
expenses increased to $431,000 for the three months ended September 30, 1996
as compared to $53,000 for the same period of the prior year primarily as a
result of increases in salary and benefit costs and professional expenses.
Salary and benefit costs increased to $117,000 for the third quarter of 1996
as compared to $28,000 for the same period in the prior year due to increases
in staffing by the warehouse lending operations and accruals made for
employee bonuses. Professional expenses increased to $220,000 in the third
quarter of 1996 from $4,000 for the same period of the prior year as costs to
support the new public entity along with accounting and legal fees increased
as compared to the same period of the prior year.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
------------------------------------------------------------------
SEPTEMBER 30, 1995
------------------
Net income for the nine months ended September 30, 1996 increased to $7.4
million as compared to $1.1 million for the same period in 1955. Net income
per share for the nine months ended September 30, 1996 was $1.40.
Revenues for the nine months ended September 30, 1996 increased to $45.7
million as compared to $2.1 million for the same period in 1995, primarily as
a result of an increase in interest income from finance receivables and
secondarily as a result of interest income on the Company's mortgage loans
held as CMO collateral and investment securities available for sale. Average
finance receivables outstanding for the nine months ended September 30, 1996
increased to $439.8 million as compared to $9.9 million for the same period
in 1995, primarily as a result of the Company providing warehouse facilities
to ICIFC subsequent to the Initial Public Offering. At September 30, 1996,
ICIFC accounted for 92% of the Company's total gross finance receivables
outstanding. Average CMO collateral outstanding for the nine months ended
September 30, 1996 increased to $199.8 million as compared to zero for the
same period in 1995, as a result of the Company financing $567.0 million of
mortgage loans held in its investment portfolio through two CMO structures
created during that period. Lastly, the Company invested in investment
securities available for sale with an average balance of $31.3 million for
the nine months ended September 30, 1996. No such investment securities
portfolio existed prior to the Initial Public Offering. At September 30,
1996, finance receivables decreased to $183.4 million from $583.0 million at
December 31, 1995 due to the sale during the first nine months of 1996 of a
substantial amount of the mortgage loans held for sale by ICIFC at December
31, 1995. Such loan sales were made to the Long-Term Investment Operations
or to the other investors, and the proceeds reduced ICIFC's borrowings from
IWLG.
Expenses for the nine months ended September 30, 1996 increased to $38.3
million as compared to $931,000 for the same period in 1995, primarily as a
result of (1) an increase in borrowings associated with the financing of the
Company's finance receivables, CMO collateral and investment securities
available for sale, (2) an increase in the provision for loan losses and (3)
the
payment of fees associated with the Management Agreement. Interest expense
from reverse-repurchase borrowings, CMO borrowings or borrowings from SPTL
increased to $31.4 million for the nine months ended September 30, 1996 as
compared to $423,000 for the same period in 1995. The increase in interest
expense was the result of increased borrowings to finance the growth in the
Company's earning assets as discussed above. The provision for loan losses
increased to $3.7 million for the nine months ended September 30, 1996 as
compared to $388,000 for the same period in 1995 as a result of establishing
an allowance for credit losses relating to the $544.2 million of CMO
collateral and $183.4 million of finance receivables at September 30, 1996.
The provision in 1995 was the result of a write-off of a customer's
outstanding balance on a finance receivable. While the Company believes that
it has adequately provided for any future credit losses, the Company may
have to add to its loan loss allowance based upon actual loan loss experience
or an increase in the Company's investments. Management fees under the
Management Agreement were $2.2 million for the nine months ended September
30, 1996. No such fees were paid during the same period in 1995, which was
prior to the Contribution Transaction.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements result from the need to fund
the acquisition of mortgage loans held for sale by ICIFC, the investment in
mortgage loans and mortgage-backed securities by IMH, and the origination of
finance receivables by IWLG. Pre-Contribution Transaction, ICIFC was funded
by ICII through committed reverse-repurchase agreements and capital
contributions. Historically, SPTL's warehouse lending operations were funded
by SPTL through deposits, other borrowings and equity. However, Post-
Contribution Transaction, the Long-Term Investment Operations, the Conduit
Operations and the Warehouse Lending Operations are funded by reverse
repurchase agreements, the sale of mortgage securities, the issuance of CMOs
and the proceeds from the issuance of common stock.
During the nine months ended September 30, 1996 and 1995, net cash provided
by operating activities was $5.5 million and $342,000, respectively. Net
cash provided by operating activities for the nine months ended September 30,
1996 and for fiscal year 1995 decreased due to an increase in accrued
interest receivable as a result of increased finance receivables and mortgage
loans held for investment. IWLG's warehouse lending activities affected net
cash provided by operating activities more significantly during the nine
months ended September 30, 1996 than during the same period of 1995, as a
result of more significant amounts of warehouse lending to ICIFC subsequent
to the Contribution Transaction. The Company retained an investment
portfolio of mortgage loans only subsequent to the Initial Public Offering,
and therefore these activities only affected net cash provided by operating
activities during the nine months ended September 30, 1996.
Net cash (used in) used in investing activities for the nine months ended
September 30, 1996 and 1995 was $(177.1) million and $(15.3) million,
respectively. For the nine months ended September 30, 1995 and in fiscal
year 1995, net cash flows from investing activities decreased due to the
excess of fundings of finance receivables compared with repayments of such
receivables, primarily as a result of higher finance receivables due from
ICIFC, associated with ICIFC's greater mortgage loan acquisition volumes.
For the nine months ended September 30, 1996, net cash flows from investing
activities increased due to higher repayments of finance receivables than
finance receivables funded. During the nine months ended September 30, 1996,
net cash flows from investing activities decreased due to the Company's
decision to create an investment portfolio of mortgage loans and investment
securities available-for-sale.
For the nine months ended September 30, 1996 and 1995, net cash provided by
financing activities was $174.4 million and $15.0 million, respectively.
These net cash figures for the nine months ended September 30, 1996 and the
year ended December 31, 1995 were affected by the Company's increased
investment in CMO collateral and finance receivables, thereby requiring it to
raise additional cash to finance such CMO collateral and finance receivables.
Post-Contribution Transaction, such borrowings consisted of reverse
repurchase agreements and CMO borrowings, while Pre-contribution transaction,
such borrowings consisted of borrowings from SPTL.
At September 30, 1996, the Company had $517.9 million of CMO borrowings to
finance $544.2 million of CMO collateral in its mortgage loan investment
portfolio. The Company uses CMO borrowings to finance substantially all of
its mortgage loan investment portfolio as a means of elimination certain
risks associated with reverse repurchase agreements (such as the potential
need for deposits of additional collateral) that are not present with CMO
borrowings. Terms of the CMO borrowings require that the mortgages be held
by an independent third party custodian, with the interest rate on the
borrowings ranging from 32 basis points to 50 basis points over one-month
LIBOR. Equity in the CMOs is established at the time the CMOs are issued at
levels sufficient to achieve desired credit rating on the securities from the
rating agencies. Total credit loss exposure to the Company is limited to the
equity invested in the CMOs at any point in time.
By September 30, 1996, the Company had utilized all of the net proceeds from
its Initial Public Offering and subsequent offering to provide funding for
the Warehouse Lending Operations and to increase its Long-Term Investment
Operations and its Conduit Operations. Management believes that cash flow
from operations and the aforementioned potential financing arrangements is
sufficient to meet the current liquidity needs of the three businesses.
INFLATION
The consolidated Financial Statements and Notes thereto presented herein have
been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money
over time due to inflation. The impact of inflation is reflected in the
increased costs of the Company's operations. Unlike industrial companies,
nearly all of the assets and liabilities of the Company's operations are
monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Inflation affects the Company's operations primarily through its effect on
interest rates, since interest rates normally increase during periods of high
inflation and decrease during periods of low inflation. During periods of
increasing interest rates, demand for mortgage loans and a borrower's ability
to qualify for mortgage financing in a purchase transaction may be adversely
affected.
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
Michele Perrin, an individual doing business as Perrin and Associates vs.
Thomas O. Markel, an individual; H. Wayne Snavely, an individual; Homemac
Mortgage Bankers, a business association of unknown form; Homemac
Corporation, a California corporation; Homemac Finance Corporation, a
California corporation; Homemac Institutional Mortgage Corporation, a
California corporation; Imperial Credit Mortgage Holdings, Inc., a Maryland
corporation; Imperial Credit Industries, Inc., a California corporation and
DOES 1 through 100, Orange County Superior Court Case No. 768878.
On September 12, 1996, Michele Perrin ("Perrin") filed the aforementioned
complaint seeking damages for breach of contract, breach of fiduciary duty,
breach of the implied covenant of good faith and fair dealing , negligence,
trade secret misappropriation, unfair competition and conversion.
Perrin seeks damages in an unspecified amount, but in no event less than
$200,000, plus punitive and exemplary damages, attorneys' fees and costs, and
the profits from the commercial exploitation of Perrin's confidential and
proprietary business and organizational plans to be a real estate investment
trust dealing primary in sub-A mortgage loans and its plan for going to
market with an initial public offering to be disgorged from defendants and
paid over to Perrin by way of an order for restitution. The Company believes
that the complaint is without merit and intends to vigorously defend the
action.
Additionally, reference is made to Item 1. of the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1996.
The Company is involved in additional litigation arising in the normal course
of business of which management believes based in part upon the advice of
legal counsel, will not have a material effect on the Company.
ITEM 2.- ITEM 5: NOT APPLICABLE
ITEM 6. EXHIBIT
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, 1996 September 30, 1995
------------------ ------------------
Primary earnings per share:
Net income $ 3,565,061 $ 7,393,637
================== ==================
Avg. number of shares outstanding 6,767,120 5,208,150
Net effect of dilutive stock options-
Based on treasury stock method using
average market price 101,642 81,333
------------------ ------------------
Total average shares 6,868,762 5,289,483
================== ==================
Primary earnings per share (a) $ 0.52 $ 1.40
================== ==================
(a) Fully diluted earnings per share were
not materially different
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.
IMPERIAL CREDIT MORTGAGE HOLDINGS, INC.
By: /s/ RICHARD J. JOHNSON
--------------------------
Richard J. Johnson
Senior Vice President
and Chief Financial Officer
Date: November 12, 1996
9
1,000
9-MOS 9-MOS
DEC-31-1995 DEC-31-1994
JAN-01-1996 JAN-01-1995
SEP-30-1996 SEP-30-1995
4,988 0
0 0
0 0
0 0
47,942 0
545,451 0
0 0
183,427 17,978
3,839 0
795,442 25,493
0 0
191,129 17,510
5,251 0
517,875 0
0 0
0 0
68 0
81,119 7,983
795,442 25,493
0 0
44,338 785
0 0
44,338 785
0 0
31,372 423
12,966 362
3,739 388
0 0
3,158 120
7,394 1,138
0 0
0 0
0 0
7,394 1,130
1.40 0
1.40 0
8.38 0
6,090 0
38,846 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
