United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended September 30, 1998
OR
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from _______________ to ______________
Commission File Number: 0-19861
Impac Mortgage Holdings, Inc.
(Exact name of registrant as specified in its charter)
Maryland 33-0675505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20371 Irvine Avenue
Santa Ana Heights, California 92707
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (714) 556-0122
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ----------------------------------- --------------------------------------------
Common Stock $0.01 par value American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
On November 11, 1998, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $94.9 million, based on
the closing sales price of the Common Stock on the American Stock Exchange. For
purposes of the calculation only, in addition to affiliated companies, all
directors and executive officers of the registrant have been deemed affiliates.
The number of shares of Common Stock outstanding as of November 11, 1998 was
24,557,211.
Documents incorporated by reference: None
IMPAC MORTGAGE HOLDINGS, INC.
1998 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, September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations, For the Three Months Ended September 30, 1998 and 1997
and For the Nine Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows, For the Nine Months Ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 14
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 29
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 30
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 30
Item 3. DEFAULTS UPON SENIOR SECURITIES 30
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 30
Item 5. OTHER INFORMATION 30
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 30
SIGNATURES 31
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)
September 30, December 31,
1998 1997
--------------------- ---------------------
ASSETS
Cash and cash equivalents $ 2,204 $ 16,214
Investment securities available-for-sale 111,082 67,011
Loan Receivables:
CMO collateral 1,291,722 794,893
Finance receivables 562,429 533,101
Mortgage loans held-for-sale 61,181 -
Mortgage loans held-for-investment 24,907 257,717
Allowance for loan losses (5,390) (5,129)
--------------------- ---------------------
Net loan receivables 1,934,849 1,580,582
Investment in Impac Funding Corporation 23,210 27,122
Accrued interest receivable 11,270 15,012
Premises and equipment, net 8,906 3,866
Other real estate owned 7,541 5,662
Investment in Impac Commercial Holdings, Inc. 6,726 17,985
Due from affiliates 6,706 16,679
Other assets 3,254 2,679
--------------------- ---------------------
$ 2,115,748 $ 1,752,812
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CMO borrowings $ 1,198,074 $ 741,907
Reverse repurchase agreements 619,238 755,559
Other borrowings 9,715 -
Due to affiliates 39,552 12,421
Accrued dividends payable 12,033 10,371
Other liabilities 5,721 3,524
--------------------- ---------------------
Total liabilities 1,884,333 1,523,782
--------------------- ---------------------
Stockholders' Equity:
Preferred Stock; $.01 par value; 10 million shares authorized; none
issued or outstanding at September 30, 1998 and at December 31, 1997 - -
Common Stock; $.01 par value; 50 million shares authorized;
24,549,840 and 22,545,664 shares issued and outstanding at
September 30, 1998 and at December 31, 1997 246 225
Additional paid-in capital 314,225 283,012
Accumulated other comprehensive loss (1,354) (5,116)
Cumulative dividends declared (79,080) (43,927)
Notes receivable from common stock sales (954) (1,330)
Retained earnings (1,668) (3,834)
--------------------- ---------------------
Total stockholders' equity 231,415 229,030
--------------------- ---------------------
$ 2,115,748 $ 1,752,812
===================== =====================
See accompanying notes to consolidated financial statements.
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except earnings per share data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------------------------------------
1998 1997 1998 1997
---------------------------- -----------------------------
Revenues:
Interest income $ 45,916 $ 29,557 $ 127,591 $ 76,709
Equity in net earnings (loss) of Impac Funding Corporation (7,860) 2,429 (3,912) 6,132
Equity in net earnings (loss) of Impac Commercial Holdings, Inc. (1,840) 403 (998) (778)
Mark-to-market loss on loans held-for-sale (1,200) - (1,200) -
Fee and other income 1,366 378 3,225 788
Gain on sale of securities - - - 648
------------- -------------- ------------- ---------------
36,382 32,767 124,706 83,499
------------- -------------- ------------- ---------------
Expenses:
Interest on CMO borrowings and reverse repurchase agreements 34,240 21,790 94,632 54,816
Write-down on investment securities available-for-sale 11,584 - 12,825 -
Loss on equity investment 9,076 - 9,076 -
General and administrative and other expense 893 227 1,811 530
Professional services 748 212 1,604 758
(Gain) loss on sale of other real estate owned 610 (144) 120 (121)
Personnel expense 139 135 373 227
Advisory fees - 1,485 - 4,313
Provision for loan losses (292) 1,868 2,099 4,243
------------- -------------- ------------- ---------------
56,998 25,573 122,540 64,766
------------- -------------- ------------- ---------------
Net earnings (loss) $ (20,616) $ 7,194 $ 2,166 $ 18,733
============= ============== ============= ===============
Weighted average shares outstanding - basic 24,351 15,621 23,699 14,738
============= ============== ============= ===============
Weighted average shares outstanding - diluted 24,351 15,836 23,871 14,947
============= ============== ============= ===============
Net earnings (loss) per share - basic $ (0.85) $ 0.46 $ 0.09 $ 1.27
============= ============== ============= ===============
Net earnings (loss) per share - diluted $ (0.85) $ 0.45 $ 0.09 $ 1.25
============= ============== ============= ===============
Dividends declared per common share $ 0.49 $ 0.43 $ 0.97 $ 1.22
============= ============== ============= ===============
See accompanying notes to consolidated financial statements.
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Nine Months Ended September 30,
1998 1997
----------------------- ----------------------
Cash flows from operating activities:
Net earnings $ 2,166 $ 18,733
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Equity in net earnings (loss) of Impac Funding Corporation 3,912 (6,132)
Equity in net loss of Impac Commercial Holdings, Inc. 998 778
Loss on equity investment in Impac Commercial Holdings, Inc. 9,076 -
Mark-to-market loss on mortgage loans held-for-sale 1,200 -
Provision for loan losses 2,099 4,243
Depreciation and amortization 458 25
Net change in accrued interest receivable 3,742 (4,968)
Net change in other assets and liabilities 34,547 (23,011)
----------------------- ----------------------
Net cash provided by (used in) operating activities 58,198 (10,332)
----------------------- ----------------------
Cash flows from investing activities:
Net change in CMO collateral (501,650) (192,643)
Net change in finance receivables (29,570) 60,942
Net change in mortgage loans held-for-investment 225,410 (105,244)
Increase in mortgage loans held-for-sale (62,381) -
Proceeds from sale of other real estate owned, net 8,746 (8,111)
Purchase of investment securities available-for-sale (64,589) (19,295)
Sale of investment securities available-for-sale 5,303 9,637
Net principal reductions on investment securities available-for-sale 6,152 2,635
Write-down of investment securities available-for-sale 12,825 -
Purchase of premises and equipment (1,318) (64)
Contributions to Impac Funding Corporation - (8,910)
Contributions to Impac Commercial Holdings, Inc. - (15,123)
Dividends from Impac Commercial Holdings, Inc. 1,184 -
----------------------- ----------------------
Net cash used in investing activities (399,888) (276,176)
----------------------- ----------------------
Cash flows from financing activities:
Net change in reverse repurchase agreements and other borrowings (126,606) 41,578
Proceeds from CMO borrowings 767,355 521,054
Repayments of CMO borrowings (311,188) (350,422)
Dividends paid (33,491) (16,585)
Proceeds from exercise of stock options 108 701
Net proceeds from stock issued through structured equity shelf 3,289 -
Proceeds from dividend reinvestment and stock purchase plan 27,837 20,970
Proceeds from public stock offering - 83,065
Advances to purchase common stock, net of principal reductions 376 (556)
----------------------- ----------------------
Net cash provided by financing activities 327,680 299,805
----------------------- ----------------------
Net change in cash and cash equivalents (14,010) 13,297
Cash and cash equivalents at beginning of period 16,214 22,610
======================= ======================
Cash and cash equivalents at end of period $ 2,204 $ 35,907
======================= ======================
Supplementary information:
Interest paid $ 94,413 $ 53,626
Non-cash transactions:
Transfer of mortgage loans from held-for investment to held-for-sale $ 62,381 $ -
Dividends declared and unpaid 12,033 10,371
Decrease in accumulated other comprehensive loss 3,762 843
See accompanying notes to consolidated financial statements.
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, IMH
Assets Corporation (IMH Assets), Impac Warehouse Lending Group, Inc.
(IWLG), IMH/ICH Dove St., LLC (Dove), 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, Dove and IFC.
1. Basis of Financial Statement Presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles (GAAP) for
interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the nine-month period ended
September 30, 1998 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1998. 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, 1997.
The operations of IMH have been presented in the consolidated financial
statements for the three and nine months ended September 30, 1998 and 1997
and include the financial results of IMH's equity interest in net earnings
(loss) of IFC, IMH's equity interest in net earnings (loss) of Impac
Commercial Holdings, Inc. (ICH), IMH's equity interest in net loss of
Impac Commercial Capital Corporation (ICCC), prior to ICH's initial public
offering (ICH IPO) on August 8, 1997, and results of operations of IMH,
IMH Assets, IWLG and Dove as stand-alone entities, subsequent to the
Company's initial public offering (IPO) on November 20, 1995.
The results of operations of IFC, of which 99% of the economic interest is
owned by IMH, are included in the results of operations of the Company as
"Equity in net earnings (loss) of Impac Funding Corporation." The results
of operations of ICH, of which 9.8% of ICH's Common Stock is owned by IMH,
are included in the results of operations of IMH as "Equity in net
earnings (loss) of Impac Commercial Holdings." The results of operations
of ICCC prior to the ICH IPO, of which 95% of the economic interest was
owned by IMH, are included in the results of operations of IMH as a
component of "Fee and other income."
2. Organization
The Company is a specialty finance company which, together with its
subsidiaries and related companies, primarily 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. The
Warehouse Lending Operations provides warehouse and repurchase financing
to originators of mortgage loans. These latter two businesses include
certain ongoing operations contributed (the Contribution Transaction) to
the Company in 1995 by Imperial Credit Industries, Inc. (NASDAQ - 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, provided that the Company distributes
95% of its taxable income to stockholders.
Long-Term Investment Operations. The Long-Term Investment Operations,
conducted by IMH and IMH Assets, invests primarily in non-conforming
residential mortgage loans and mortgage-backed securities secured by or
representing interests in such loans and, to a lesser extent, in second
mortgage loans. 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.
Conduit 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 third party correspondents and other
sellers, and subsequently securitizes or sells such loans to permanent
investors, including the Long-Term Investment Operations. Prior to the
Contribution Transaction, IFC was a division or subsidiary of ICII. IMH
owns 99% of the economic interest in IFC, while Joseph R. Tomkinson, Chief
Executive Officer of IMH and IFC, William S. Ashmore, President of IMH and
IFC, and Richard J. Johnson, Executive Vice President and Chief Financial
Officer of IMH and IFC, are the holders of all the outstanding voting
stock of, and 1% of the economic interest in, IFC.
Warehouse Lending Operations. 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 during the time from the closing of the
loans to their sale or other settlement with pre-approved investors.
3. Summary of Significant Accounting Policies
Method of Accounting
The consolidated financial statements are prepared on the accrual basis of
accounting in accordance with 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 and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results may differ materially from those estimates.
Reclassifications
Certain amounts in the consolidated financial statements as of and for the
three and nine months ended September 30, 1997 have been reclassified to
conform to the 1998 presentation.
New Accounting Statements
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier financial statements
for comparative purposes. SFAS No. 130 establishes standards for reporting
and the display of comprehensive income and its components in the
financial statements. SFAS No. 130 requires that items meeting the
criteria of a component of comprehensive income (such as gains or losses
on certain investments in debt and equity securities classified as
available-for-sale), be shown in the financial statements as adjustments
to reported net earnings to arrive at a disclosure of comprehensive
income. SFAS No. 130 provides informative disclosure but does not and will
not impact previously reported or future net earnings and earnings per
share. The following table represents comprehensive income (in thousands):
For the Three Months For the Nine months
Ended September 30, Ended September 30,
--------------------------- ----------------------------
1998 1997 1998 1997
-------------- ------------ --------------- -------------
Net earnings (loss) $ (20,616) 7,194 $ 2,166 18,733
Unrealized net (gain)/loss arising during period 915 1,804 (528) 843
Realized net (gain)/loss included in income 4,718 - 4,290 (648)
============== ============ =============== =============
Comprehensive income (loss) $ (14,983) 8,998 $ 5,928 18,928
============== ============ =============== =============
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards
for the way that public enterprises report information about operating
segments in annual financial statements and requires that selected
information about those operating segments be reported in interim financial
statements. This statement supersedes SFAS No. 14 "Financial Reporting for
Segments of a Business Enterprise." SFAS No. 131 requires that all public
enterprises report financial and descriptive information about its
reportable operating segments. Operating segments are defined as components
evaluated regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance. This statement is
effective for fiscal years beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years
should be restated. SFAS No. 131 need not be applied to interim financial
statements in the initial year of its application, but comparative
information for interim periods in the initial year of application is to be
reported in financial statements for interim periods in the second year of
application. To date, the Company is still examining the impact of SFAS No.
131 and has not determined what operating segments will be reported.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred
to as derivatives) and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as
(a) a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment, (b) a hedge of the
exposure to variable cash flows of a forecasted transaction, or (c) 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. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. To date, the Company is still examining the impact of SFAS No. 133
and has not determined its effect on financial position and results of
operations.
4. Net Earnings (Loss) per Share
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings
per Share." SFAS No. 128 replaced the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of stock options. Diluted earnings per share
is very similar to the previously reported fully diluted earnings per
share. Basic earnings per share is computed on the basis of the weighted
average number of shares outstanding for the period. Diluted earnings per
share is computed on the basis of the weighted average number of shares
and common equivalent shares outstanding for the period. The following
tables represent the computation of basic and diluted earnings per share
for the three and nine months ended September 30, 1998 and 1997 (in
thousands, except per share data):
For the Three For the Three
Months Ended Months Ended
September 30, 1998 September 30, 1997
----------------------- ---------------------
Numerator:
Numerator for basic earnings per share--
Net earnings (loss) $ (20,616) $ 7,194
----------------------- ----------------------
Denominator:
Denominator for basic earnings per share-- 24,351 15,621
Weighted average number of common shares
Outstanding during the period
Net effect of dilutive stock options - 215
----------------------- ----------------------
Denominator for diluted earnings per share 24,351 15,836
======================= ======================
Net earnings (loss) per share--basic $ (0.85) $ 0.46
======================= ======================
Net earnings (loss) per share--diluted $ (0.85) $ 0.45
======================= ======================
Common stock options of 148,000 were excluded from the dilutive
calculation of earnings per share as they were antidilutive for the
quarter-ended September 30, 1998.
For the Nine For the Nine
Months Ended Months Ended
September 30, 1998 September 30, 1997
----------------------- -----------------------
Numerator:
Numerator for basic earnings per share--
Net earnings $ 2,166 $ 18,733
----------------------- -----------------------
Denominator:
Denominator for basic earnings per share-- 23,699 14,738
Weighted average number of common shares
outstanding during the period
Net effect of dilutive stock options 172 209
----------------------- -----------------------
Denominator for diluted earnings per share 23,871 14,947
======================= =======================
Net earnings per share--basic $ 0.09 $ 1.27
======================= =======================
Net earnings per share--diluted $ 0.09 $ 1.25
======================= =======================
5. Mortgage Assets
Mortgage Assets consist of investment securities available-for-sale,
mortgage loans held-for-investment, CMO collateral, finance receivables
and loans held-for-sale. At September 30, 1998 and December 31, 1997,
Mortgage Assets consisted of the following (in thousands):
September 30, 1998 December 31, 1997
---------------------- ---------------------
Investment securities available-for-sale:
Subordinated securities collateralized by mortgages $ 107,050 $ 66,811
Subordinated securities collateralized by other loans 5,386 5,316
Net unrealized losses (1,354) (5,116)
------------------------ ----------------------
Carrying value $ 111,082 $ 67,011
------------------------ ----------------------
Loan Receivables:
CMO collateral--
CMO collateral, unpaid principal balance 1,237,713 762,939
Unamortized net premiums on loans 42,694 28,617
Securitization expenses 13,315 3,337
------------------------ ----------------------
Carrying value 1,291,722 794,893
Finance receivables--
Due from affiliates 455,650 474,317
Due from other mortgage banking companies 106,779 58,784
------------------------ ----------------------
Carrying value 562,429 533,101
Mortgage loans held-for-investment--
Mortgage loans held-for-investment, unpaid principal 23,520 247,026
balance
Unamortized net premiums on loans 1,387 10,691
------------------------ ----------------------
Carrying value 24,907 257,717
Mortgage loans held-for-sale--
Mortgage loans held-for-sale, unpaid principal balance 61,181 -
Carrying value of Gross Loan Receivables 1,940,229 1,585,711
Allowance for loan losses (5,390) (5,129)
------------------------ ----------------------
Carrying value of Net Loan Receivables 1,934,849 1,580,582
------------------------ ----------------------
Total carrying value of Mortgage Assets $ 2,045,931 $ 1,647,593
======================== ======================
6. 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
September 30, 1998 December 31, 1997
------------------------ ----------------------
ASSETS
Cash $ 1,382 $ 359
Investment securities available-for-sale 7,098 6,083
Investment securities available-for-trading 5,297 -
Mortgage loans held-for-sale 464,921 620,549
Due from affiliates 34,633 969
Mortgage servicing rights 19,461 15,568
Accrued interest receivable 3,235 4,755
Premises and equipment, net 2,013 1,788
Other assets 6,833 6,873
-------------------------- =====================
$ 544,873 $ 656,944
========================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings from IWLG $ 432,659 $ 458,066
Other borrowings 45,864 149,144
Due to affiliates 27,419 6,198
Deferred revenue 13,251 7,048
Other liabilities 2,232 9,092
-------------------------- ---------------------
Total liabilities 521,425 629,548
-------------------------- ---------------------
Shareholders' Equity:
Preferred stock 18,053 18,053
Common stock 182 182
Retained earnings 5,213 9,161
-------------------------- ---------------------
Total shareholders' equity 23,448 27,396
========================== =====================
$ 544,873 $ 656,944
========================== =====================
STATEMENTS OF OPERATIONS
For the Three Months Ended, For the Nine Months Ended,
September 30, September 30,
--------------------------------- ----------------------------------
1998 1997 1998 1997
---------------- --------------- ----------------- ----------------
Revenues:
Interest income $ 15,673 $ 14,839 $ 40,330 $ 32,004
Mark to market loss on mortgage loans (21,041) - (21,041) -
Gain on sale of loans 10,061 5,280 18,932 14,378
Loan servicing income 1,815 1,081 4,521 3,018
Other income 63 211 374 505
---------------- --------------- ----------------- ----------------
6,571 21,411 43,116 49,905
---------------- --------------- ----------------- ----------------
Expenses:
Interest on borrowings from IWLG 12,637 11,192 27,207 25,041
Interest on other borrowings 1,027 - 5,206 -
Interest on borrowings from affiliates 623 1,310 1,181 3,495
Personnel expense 2,582 1,496 7,363 5,277
Amortization of mortgage servicing rights 1,758 947 4,683 1,896
General and administrative and other expense 1,658 1,090 3,943 1,930
Provision for repurchases 26 1,131 366 1,548
---------------- --------------- ----------------- ----------------
20,311 17,166 49,949 39,187
---------------- --------------- ----------------- ----------------
Earnings (loss) before income taxes (13,740) 4,245 (6,833) 10,718
Income taxes (benefit) (5,800) 1,792 (2,885) 4,525
---------------- --------------- ----------------- ----------------
Net earnings (loss) $ (7,940) $ 2,453 $ (3,948) $ 6,193
================ =============== ================= ================
7. Investment in Impac Commercial Holdings, Inc.
Subsequent to the ICH IPO, the Company was entitled to 17.4% of the
earnings losses of ICH through its ownership of 1,394,000 shares, or 9.8%,
of the combined ICH voting Common Stock and ICH non-voting Class A Common
Stock. To maintain its REIT status, the Company cannot own more than 9.8%
of securities in any company at any time. When ICH issues additional
shares of voting Common Stock, the Company's non-voting Class A Common
Stock can be converted into ICH voting Common Stock on a one-for-one
basis. Therefore, when ICH issued 2,000,000 additional shares of Common
Stock through a secondary stock offering in June 1998, the Company
converted its shares of ICH non-voting Class A Common Stock for ICH voting
Common Stock not to exceed the 9.8% limit. As of the date of ICH's
secondary stock offering, the Company was entitled to 13.9% of the
earnings or losses of ICH through its ownership of 937,084 shares of ICH
voting Common Stock and 456,916 shares of ICH non-voting Class A Common
Stock. As such, the Company recorded its investment in ICH using the
equity method. Under this method, original investments are recorded at
cost and adjusted by the Company's share of earnings or losses. On October
21, 1998, ICH repurchased from IMH 937,084 shares of Common Stock and
456,916 shares of Class A Common Stock at a price of $4.375 per share for
a repurchase of $6.1 million, representing a loss to IMH of $9.1 million
that was recorded in the third quarter of 1998.
The following is financial information for ICH for the periods presented
(in thousands):
BALANCE SHEETS
September 30, 1998 December 31, 1997
---------------------- ----------------------
ASSETS
Cash and cash equivalents $ 7,177 $ 15,908
Investment securities available-for-sale 16,807 19,353
Residual interest in securitization, held-for-trading 9,232 9,936
Loan receivables:
CMO collateral 340,537 4,255
Finance receivables 176,930 95,711
Commercial Mortgages held-for-investment 25,894 62,790
Allowance for loan losses (1,701) (564)
---------------------- ----------------------
Net loan receivables 541,660 162,192
Due from affiliates 44,017 1,592
Premises and equipment, net 8,906 3,857
Investment in Impac Commercial Capital Corporation (11,531) 4,182
Accrued interest receivable 3,606 1,361
Other assets 1,616 458
---------------------- ----------------------
$ 621,490 $ 218,839
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CMO borrowings $ 284,841 $ 4,176
Warehouse line agreements 180,181 90,374
Reverse repurchase agreements 13,895 9,841
Other borrowings 6,502 -
Due to affiliates 14,560 8,067
Other liabilities 10,352 3,139
---------------------- ----------------------
Total liabilities 510,331 115,597
---------------------- ----------------------
Stockholders' Equity:
Common stock 96 73
Class A common stock 5 7
Additional paid-in capital 133,127 104,761
Accumulated other comprehensive loss (930) (160)
Cumulative dividends declared (15,575) (4,250)
Retained earnings (5,564) 2,811
---------------------- ----------------------
Total stockholders' equity 111,159 103,242
---------------------- ----------------------
$ 621,490 $ 218,839
====================== ======================
STATEMENTS OF OPERATIONS
For the period from
For the Three Months Ended, For the Nine January 15, 1997
September 30, Months Ended (commencement of
------------------------------ September 30, operations) through
1998 1997 1998 September 30, 1997
-------------- -------------- ---------------- -----------------------
Revenues:
Interest income $ 11,258 $ 2,457 $ 25,736 $ 3,810
Equity in net earnings (loss) of Impac
Commercial Capital Corporation (14,837) 627 (15,714) 627
Rental and other income 594 58 1,021 58
-------------- -------------- ---------------- -----------------------
(2,985) 3,142 11,043 4,495
-------------- -------------- ---------------- -----------------------
Expenses:
Interest expense on warehouse line and
reverse repurchase agreements 4,826 540 11,861 1,206
Interest expense on CMO borrowings 2,124 - 2,259 -
Interest expense on other borrowings (18) 205 593 341
Write-down of investment securities 1,085 - 1,085 -
Provision for loan losses 1,020 22 1,137 55
General and administrative and
other expense 997 277 1,898 465
Management advisory fees 206 1 585 1
Stock compensation expense - - - 2,697
-------------- -------------- ---------------- -----------------------
10,240 1,045 19,418 4,765
-------------- -------------- ---------------- -----------------------
Net earnings (loss) $ (13,225) $ 2,097 $ (8,375) $ (270)
============== ============== ================ =======================
8. Stockholders' Equity
During the nine months ended September 30, 1998, the Company raised
capital of $27.8 million from the sale of 1.8 million shares of Common
Stock issued through its Dividend Reinvestment and Stock Purchase Plan
(DRSPP) and $3.2 million from the sale of 206,400 shares of Common Stock
issued through its Structured Equity Shelf program (SES).
On September 28, 1998, the Company declared a third quarter dividend of
$12.0 million, or $0.49 per share payable on October 26, 1998 to
stockholders of record on October 9, 1998. However, on October 8, 1998 the
Company announced that the third quarter dividend would be delayed and
paid on January 6, 1999.
On June 23, 1998, the Company declared a second quarter dividend of $11.8
million, or $0.49 per share. This dividend was paid on July 15, 1998 to
stockholders of record on July 1, 1998.
On March 30, 1998, the Company declared a first quarter dividend of
$11.3 million, or $0.48 per share. This dividend was paid on April 24,
1998 to stockholders of record on April 9, 1998.
9. Subsequent Events
On October 7, 1998, the Company's Board of Directors adopted a Stockholder
Rights Plan in which Preferred Stock Purchase Rights were distributed as a
dividend at the rate of one Right for each outstanding share of common
stock on October 19, 1998. The Rights are attached to the Company's common
stock. For additional information regarding the Stockholder Rights Plan,
refer to "Item 2. Management's Discussion of Financial Condition and
Results of Operations-- Significant Transactions."
On October 21, 1998, ICH repurchased from IMH 937,084 shares of Common
Stock and 456,916 Class A Common Stock at a per share price of $4.375,
based upon the closing price on October 19, 1998, for a total repurchase
of $6.1 million. IMH recorded a loss of $9.1 million in the third quarter
of 1998.On October 27, 1998, the Company sold to ICH its remaining 50%
ownership interest in a commercial office building in Newport Beach,
California. After the sale of its 50% ownership interest to ICH, the
Company has no remaining ownership interest in the building. The Company
recorded a gain of $1.6 million on the sale.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain information contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations constitute
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Exchange Act of
1934, as amended, which can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "intend," "should,"
"anticipate," "estimate," or "believe" or the negatives thereof or other
variations thereon or comparable terminology. The Company's actual results
may differ materially from those contained in the forward-looking
statements. Factors which may cause a difference to occur include the
effectiveness of the Stockholder Rights Plan, increased costs and delays
related to Year 2000 compliance, the availability of suitable
opportunities for the acquisition, ownership and dispositions of mortgage
assets (which depend on the type of mortgage asset involved) and yields
available from time to time on such mortgage assets, interest rates,
changes in estimates of book basis and tax basis earnings, the
availability of suitable financing and investments, and trends in the
economy which affect confidence and demand on the Company's portfolio of
mortgage assets.
SIGNIFICANT TRANSACTIONS
On September 25, 1998, the Company's Board of Directors authorized the
Company to repurchase up to $5.0 million worth of the Company's common
stock, $.01 par value, in open market purchases from time to time in the
discretion of the Company's management; the timing and extent of the
repurchases will depend on market conditions. The Company intends to
effect such repurchases, if any, in compliance with the Rule 10b-18 under
the Securities Exchange Act of 1934. The acquired shares will be canceled.
On October 7, 1998, the Company's Board of Directors adopted a Stockholder
Rights Plan in which Preferred Stock Purchase Rights were distributed as a
dividend at the rate of one Right for each outstanding share of common
stock. The dividend distribution was made on October 19, 1998, payable to
stockholders of record on that date. The Rights are attached to the
Company's common stock. The Rights will be exercisable and trade
separately only in the event that a person or group acquires or announces
the intent to acquire 10 percent or more of the Company's common stock.
Each Right will entitle stockholders to buy one-hundredth of a share of a
new series of junior
participating preferred stock at an exercise price of $30.00. If the
Company is acquired in a merger or other transaction after a person has
acquired 10 percent or more of Company outstanding common stock, each
Right will entitle the stockholder to purchase, at the Right's
then-current exercise price, a number of the acquiring Company's common
shares having a market value of twice such price. In addition, if a person
or group acquires 10 percent or more of the Company's common stock, each
Right will entitle the stockholder (other than the acquiring person) to
purchase, at the Right's then-current exercise price, a number of shares
of the Company's common stock having a market value of twice such price.
Following the acquisition by a person of 10 percent or more of the
Company's common stock and before an acquisition of 50 percent or more of
the common stock, the Board of Directors may exchange the Rights (other
than the Rights owned by such person) at an exchange ratio of one share of
common stock per Right. Before a person or group acquires beneficial
ownership of 10 percent or more of the Company's common stock, the Rights
are redeemable for $.0001 per right at the option of the Board of
Directors. The Rights will expire on October 19, 2008. The Rights
distribution is not taxable to stockholders. The Rights are intended to
enable all the Company stockholders to realize the long-term value of
their investment in the Company. They will not prevent a takeover but
should encourage anyone seeking to acquire the Company to negotiate with
the Board of Directors prior to attempting a takeover.
On October 21, 1998, ICH repurchased from IMH 937,084 shares of Common
Stock and 456,916 Class A Common Stock at a per share price of $4.375,
based upon the closing price on October 19, 1998, for a total repurchase
of $6.1 million. IMH recorded a loss of $9.1 million in the third quarter
of 1998.
On October 27, 1998, the Company sold to ICH its remaining 50% ownership
interest in a commercial office building in Newport Beach, California.
After the sale of its 50% ownership interest to ICH, the Company has no
remaining ownership interest in the building. The Company recorded a gain
of $1.6 million on the sale.
BUSINESS OPERATIONS
Long-Term Investment Operations: During the nine months ended September
30, 1998, the Long-Term Investment Operations, conducted by IMH and IMH
Assets, acquired $841.6 million of mortgages from IFC as compared to
$533.4 million acquired during the same period in 1997. Mortgages
purchased by the Long-Term Investment Operations during the first nine
months of 1998 consisted of $616.4 million of fixed-rate mortgages
("FRMs") and $219.0 million of adjustable-rate mortgages ("ARMs") secured
by first liens on residential property and $6.2 million of fixed-rate
second trust deeds secured by residential property. For the first nine
months of 1998, IMH Assets issued CMOs totaling $768.0 million as compared
to CMOs totaling $348.0 million during the same period in 1997. As of
September 30, 1998, the Long-Term Investment Operations portfolio of
mortgage loans consisted of $1.3 billion of mortgage loans held in trust
as collateral for CMOs and $24.9 million of mortgage loans
held-for-investment of which approximately 56% were FRMs and 44% were
ARMs. The weighted average coupon of the Long-Term Investment Operations
portfolio of mortgage loans was 9.36% at September 30, 1998 with a
weighted average margin of 4.67%. The portfolio of mortgage loans included
72% of "A" credit quality non-conforming mortgage loans and 28% of "B" and
"C" credit quality, non-conforming mortgage loans, as defined by the
Company. The Long-Term Investment Operations also sold $151.3 million of
mortgage loans to IFC and $4.5 million of mortgage loans to third parties
during the first nine months of 1998 as compared to zero during the same
period in 1997. In addition, during the first nine months of 1998 the
Long-Term Investment Operations acquired $64.6 million of securities
created by IFC through the issuance of real estate mortgage investment
conduits ("REMICs") as compared to $19.3 million during the same period in
1997. As of September 30, 1998, the Long-Term Investment Operations had
$111.1 million of investment securities available-for-sale.
Conduit Operations: The Conduit Operations, conducted by IFC, continues to
support the Long-Term Investment Operations of the Company by supplying
IMH and IMH Assets with mortgages for IMH's long-term investment
portfolio. In acting as the mortgage conduit for the Company, IFC's
mortgage acquisitions increased 27% to $1.9 billion during the first nine
months of 1998 as compared to $1.5 billion of mortgages acquired during
the same period in 1997. In addition, IFC securitized $927.9 million of
mortgages and sold whole loans to third party investors totaling $315.6
million, resulting in gain on sale of loans of $18.9 million, during the
first nine months of 1998. This compares to securitizations and whole loan
sales to third parties of $1.1 billion, resulting in gain on sale of loans
of $14.4 million, during the same period in 1997. IFC had deferred income
of $13.3 million at September 30, 1998 as compared to $7.0 million at
December 31, 1997. The increase in deferred income relates to the sale of
$817.9 million in principal balance of mortgages to IMH during the first
nine months of 1998, which are deferred and amortized or accreted over the
estimated life of the loans. IFC's servicing portfolio increased 42% to
$3.4 billion at September 30, 1998 as compared to $2.4 billion at
September 30, 1997. The loan delinquency rate of mortgages in IFC's
servicing portfolio which were 60 or more days past due, inclusive of
foreclosures and delinquent bankruptcies, was 5.21% at September 30, 1998
as compared to 4.29%, 3.20%, 3.05%, and 4.03% for the last four
quarter-end periods. During the third quarter of 1998, 352 loans were
removed from 90 days or more delinquent status of which 153 loans, or 43%,
were reinstated, repurchased or paid-in-full ("cure rate").
Warehouse Lending Operations: At September 30, 1998, the Warehouse Lending
Operations, conducted by IWLG, had $811.4 million of warehouse lines of
credit available to 36 borrowers, of which $669.6 million was outstanding
thereunder, including $432.9 million outstanding to IFC, $122.7 million
outstanding to the Long-Term Investment Operations, and $7.3 million
outstanding to Walsh Securities, Inc. ("WSI"). James Walsh, Executive Vice
President of WSI, is also a Director of IMH and ICH.
RESULTS OF OPERATIONS; IMPAC MORTGAGE HOLDINGS, INC. THREE MONTHS ENDED
SEPTEMBER 30, 1998 AS COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1997
Net Earnings
The Company recorded a net loss of $(20.6) million, or $(0.85) per diluted
share, on revenues of $36.4 million for the third quarter of 1998 as
compared to net earnings of $7.2 million, or $0.45 per diluted share, on
revenues of $32.8 million for the third quarter of 1997. The net loss for
the third quarter of 1998 was primarily due to non-cash charges that
required the Company and its subsidiaries to make certain write-downs of
its mortgage loans, equity investments and investment securities
available-for-sale portfolios. The non-cash charges included an impairment
charge of $9.1 million on the Company's equity investment in ICH, which
reflected the price at which the ICH common stock was sold on October 19,
1998, an impairment charge of $11.6 million on the Company's investment
securities available-for-sale and a non-cash mark-to-market adjustment of
$21.0 million at IFC, which represents losses on mortgage loans
held-for-sale. The Company sold $250.4 million of mortgage loans in the
fourth quarter of 1998 on a whole loan basis, which improved the Company's
liquidity position and helped provide additional liquidity to protect the
Company against any future margin calls on existing borrowings under its
current warehouse lines of credit and reverse repurchase facilities that
are secured by existing mortgage loans and mortgage-backed securities. In
addition, net earnings were negatively affected during the third quarter
of 1998 by an increase of $1.2 million in general and administrative and
other expense and professional services, a mark-to-market loss on loans
held-for-sale of $1.2 million, and an increase of $754,000 in loss on sale
of other real estate owned as compared to the third quarter of 1997.
However, while earnings were negatively affected by these items and by the
non-cash charges recorded by the Company in the third quarter of 1998,
earnings were positively affected by a $3.9 million increase in net
interest income, a decrease of $2.2 million in provision for loan losses
and a $1.5 million decrease in advisory fees as compared to the third
quarter of 1997.
Subsequent to quarter-end, the Company made significant changes in its
business strategy and operations and completed various transactions that
provided positive results in the Company's liquidity position.
Business Strategy.
The Company made changes in its business strategy to more effectively
compete in the current market environment, including:
Raising interest rates on its loan programs.
Decreasing the amount of premium paid on its loan acquisitions.
Reducing staffing levels by approximately 20% at IFC.
While the Company expects that this decision will result in lower
origination balances in the fourth quarter of 1998 and possibly into early
1999, the Company anticipates better results on the subsequent sale or
securitization of its loans.
Liquidity.
The Company sold $250.4 million of mortgage loans and $8.9 million of
mortgage-backed securities in order to generate liquidity and help the
Company with any margin calls on current warehouse lines and reverse
repurchase facilities backed by existing mortgage loans and
mortgage-backed securities. The financial result of the sale of mortgage
loans and mortgage-backed securities was in line with the mark-to-market
charge taken in the third quarter of 1998. These sales generated net cash
proceeds of $13.6 million after paying down the related warehouse line and
reverse repurchase balances.
The Company sold to ICH its remaining 50% ownership interest in a
commercial office building in Newport Beach, California. After the sale of
its 50% ownership interest to ICH, the Company has no remaining ownership
interest in the building. The Company recorded a $1.6 million gain on the
sale and repaid its outstanding borrowings on the property.
Net Interest Income
Net interest income increased 50% to $11.7 million during the third
quarter of 1998 as compared to $7.8 million during the third quarter of
1997. Interest income is primarily interest on Mortgage Assets and
includes interest income on cash and cash equivalents and due from
affiliates. Interest expense is primarily borrowings on Mortgage Assets
and includes interest expense on due to affiliates. The increase in net
interest income was primarily the result of higher average Mortgage
Assets, which increased 57% to $2.2 billion during the third quarter of
1998 as compared to $1.4 billion during the same period of 1997. However,
net interest spread on Mortgage Assets decreased to 1.46% during the third
quarter of 1998 as compared to 1.81% during the third quarter of 1997 as
the yield on Mortgage Assets decreased to 8.06% as compared to 8.39%,
respectively. The decrease in the net interest spread and the yield on
Mortgage Assets was primarily the result of a decrease in the yield on CMO
collateral, which represents the largest portion of Mortgage Assets on a
weighted-average basis. The net interest spread on CMO collateral was
0.77% during the third quarter of 1998 as compared to 1.33% during the
third quarter of 1997. The yield on borrowings on Mortgage Assets
increased slightly to 6.60% during the third quarter of 1998 as compared
to 6.58% during the third quarter of 1997. The Company expects that net
interest income will be adversely affected by a reduction in mortgage loan
originations.
The following table summarizes average balance, interest and
weighted-average yield on Mortgage Assets and borrowings for the three
months ended September 30, 1998 and 1997 and includes interest income on
Mortgage Assets and interest expense related to borrowings on Mortgage
Assets only (dollars in thousands):
For the Three Months For the Three Months
Ended September 30, 1998 Ended September 30, 1997
----------------------------------- -------------------------------------
Average Weighted Average Weighted
Balance Interest Avg Yield Balance Interest Avg Yield
------------- ----------- ---------- -------------------------------------
MORTGAGE ASSETS
Investment securities available-for-sale:
Subordinated securities collateralized by mortgages $ 102,662 $ 3,234 12.60% $ 56,163 $ 1,747 12.44%
Subordinated securities collateralized by other loans 5,379 153 11.38 5,348 237 17.73
------------- ---------- ----------- -----------
Total investment securities available-for-sale 108,041 3,387 12.54 61,511 1,984 12.90
------------- ---------- ----------- -----------
Loan receivables:
CMO collateral 1,374,131 25,256 7.35 744,916 14,110 7.58
Mortgage loans held-for-investment 62,294 1,372 8.81 37,411 834 8.92
Finance receivables:
Affiliated 610,378 13,041 8.55 531,304 11,788 8.87
Non-affiliated 93,581 2,225 9.51 36,164 892 9.87
------------- ---------- ----------- -----------
Total finance receivables 703,959 15,266 8.67 567,468 12,680 8.94
------------- ---------- ----------- -----------
Total Loan Receivables 2,140,384 41,894 7.83 1,349,795 27,624 8.19
------------- ---------- ----------- -----------
TOTAL MORTGAGE ASSETS $ 2,248,425 $ 45,281 8.06% $ 1,411,306 $ 29,608 8.39%
============= ========== =========== ===========
BORROWINGS
CMO borrowings $ 1,277,826 $ 21,027 6.58% $ 693,822 $ 10,834 6.25%
Reverse repurchase agreements - mortgages 716,216 11,849 6.62 578,462 10,077 6.97
Reverse repurchase agreements - securities 38,150 639 6.70 45,154 759 6.72
------------ ---------- ----------- -----------
TOTAL BORROWINGS ON
MORTGAGE ASSETS $ 2,032,192 $ 33,515 6.60% $ 1,317,438 $ 21,670 6.58%
============ ========== =========== ===========
NET INTEREST SPREAD 1.46% 1.81%
NET INTEREST MARGIN 2.09% 2.25%
Interest Income on Mortgage Assets: Interest income on CMO collateral
increased 79% to $25.3 million during the third quarter of 1998 as
compared to $14.1 million during the third quarter of 1997 as average CMO
collateral increased 88% to $1.4 billion as compared to $744.9 million,
respectively. Average CMO collateral increased as the Long-Term Investment
Operations issued CMOs totaling $941.7 million which were collateralized
by $965.4 million of mortgages held by the Long-Term Investment Operations
since the end of the third quarter of 1997. Over 81%, or $768.0 million,
of CMOs issued by the Long-Term Investment Operations since the end of the
third quarter of 1997 were issued during the first nine months of 1998.
The weighted-average yield on CMO collateral decreased to 7.35% during the
third quarter of 1998 as compared to 7.58% during the third quarter of
1997. The decreases in the yield and net interest spread on CMO collateral
during the third quarter of 1998 was primarily due to higher rates of
mortgage loan prepayments and correspondingly higher rates of premium
amortization expense as compared to the third quarter of 1997.
Interest income on mortgage loans held-for-investment increased 68% to
$1.4 million during the third quarter of 1998 as compared to $834,000
during the third quarter of 1997 as average mortgage loans
held-for-investment increased 67% to $62.3 million as compared to $37.4
million, respectively. Since the Company did not issue CMOs during the
third quarter of 1998, average mortgage loans held-for-investment
increased during the third quarter of 1998 as compared to the third
quarter of 1997. The weighted-average yield on mortgage loans
held-for-investment decreased to 8.81% during the third quarter of 1998 as
compared to 8.92% during the same period of 1997 due to higher rates of
mortgage loan prepayments and correspondingly higher rates of premium
amortization expense as compared to the third quarter of 1997.
Interest income on finance receivables increased 20% to $15.3 million
during the third quarter of 1998 as compared to $12.7 million during the
third quarter of 1997 as average finance receivables increased 24% to
$704.0 million as compared to $567.5 million, respectively. The increase
in interest income on finance receivables was primarily the result of an
increase of 159% in average finance receivables to non-affiliated mortgage
banking companies to $93.6 million during the third quarter of 1998 as
compared to $36.2 million during the third quarter of 1997. Interest
income on finance receivables to non-affiliates increased 147% to $2.2
million during the third quarter of 1998 as compared to $892,000 during
the third quarter of 1997. The weighted-average yield on non-affiliated
finance receivables was 9.51% during the third quarter of 1998 as compared
to 9.87% during the third quarter of 1997. Average finance receivables
outstanding to affiliates increased 15% to $610.4 million during the third
quarter of 1998 as compared to $531.3 million during the third quarter of
1997. Interest income on finance receivables to affiliates increased 10%
to $13.0 million during the third quarter of 1998 as compared to $11.8
million during the third quarter of 1997. The weighted-average yield on
affiliated finance receivables decreased to 8.55% during the third quarter
of 1998 as compared to 8.87% during the third quarter of 1997. The overall
weighted-average yield on finance receivables decreased to 8.67% during
the third quarter of 1998 as compared to 8.94% during the third quarter of
1997.
Interest income on investment securities available-for-sale increased 70%
to $3.4 million during the third quarter of 1998 as compared to $2.0
million during the third quarter of 1997 as average investment securities
available-for-sale, net of securities valuation allowance, increased 76%
to $108.0 million as compared to $61.5 million, respectively. The increase
in average securities available-for-sale during the third quarter of 1998
was the result of the Long-Term Investment Operations purchasing and
retaining mortgage-backed securities of $16.9 million that were issued by
IFC as REMICs. The weighted-average yield on investment securities
available-for-sale decreased to 12.54% during the third quarter of 1998 as
compared to 12.90% during the third quarter of 1997.
Interest expense on borrowings: Interest expense on CMO borrowings
increased 94% to $21.0 million during the third quarter of 1998 as
compared to $10.8 million during the third quarter of 1997 as average
borrowings on CMO collateral increased 87% to $1.3 billion as compared to
$693.8 million, respectively. Average CMO borrowings increased as the
Long-Term Investment Operations issued CMOs totaling $941.7 million since
the end of the third quarter of 1997. The weighted-average yield of CMO
borrowings increased to 6.58% during the third quarter of 1998 as compared
to 6.25% during the third quarter of 1997. This increase was the result of
the Company issuing fixed-rate CMOs totaling $583.0 million during the
first nine months of 1998 at higher interest rates than the initial
interest rates on variable-rate CMOs the Company has issued in the past.
Although borrowing rates on the fixed-rate CMOs are generally higher than
the initial interest rates on variable-rate CMOs, the Company receives a
comparable interest rate spread on fixed-rate CMOs as it does on its
variable-rate CMOs.
Interest expense on reverse repurchase borrowings used to fund the
acquisition of mortgage loans and finance receivables increased 17% to
$11.8 million during the third quarter of 1998 as compared to $10.1
million during the third quarter of 1997. The average balance of these
reverse repurchase agreements increased 24% to $716.2 million during the
first quarter of 1998 as compared to $578.5 million during the third
quarter of 1997. This increase was primarily related to an increase in
finance receivables made to IFC as IMH's acquisition of mortgage loans
from IFC were lower during the third quarter of 1998 as compared to the
same period in 1997. The weighted-average yield of these reverse
repurchase agreements increased to 6.62% during the third quarter of 1998
as compared 6.97% during the third quarter of 1997.
The Company also uses mortgage-backed securities as collateral to borrow
under reverse repurchase agreements to fund the purchase of
mortgage-backed securities and to act as an additional source of liquidity
for the Company's operations. Interest expense on these reverse repurchase
agreements decreased 16% to $639,000 during the third quarter of 1998 as
compared to $759,000 during the third quarter of 1997. The average balance
on these reverse repurchase agreements decreased 15% to $38.2 million
during the third quarter of 1998 as compared to $45.2 million during the
third quarter of 1997. This decrease was primarily the result of increased
liquidity from other sources that reduced the Company's reliance on these
borrowings as a funding source. The weighted-average yield of these
reverse repurchase agreements decreased to 6.70% during the third quarter
of 1998 as compared 6.72% during the third quarter of 1997.
Earnings from IFC
Equity in net earnings (loss) of IFC decreased to a loss of $(7.9) million
during the third quarter of 1998 as compared to earnings of $2.4 million
during the third quarter of 1997. IFC's earnings during the third quarter
of 1998 decreased primarily due to a non-cash mark-to-market adjustment of
$21.0 million, which represents losses on mortgage loans held-for-sale.
Additionally, IFC's earnings were negatively affected by increases in
personnel expense, amortization of mortgage servicing rights ("MSRs") and
general and administrative expense, which was partially offset by
increases in loan servicing income. The overall increase in operating
expenses during the third quarter of 1998 as compared to the third quarter
of 1997 was primarily the result of an increase in staffing and overhead
as the Company's loan origination operations and loan servicing portfolio
grew.
Personnel expense increased 73% to $2.6 million during the third quarter
of 1998 as compared to $1.5 million during the third quarter of 1997. The
increase in personnel expense was primarily due to an increase in staff
and incentive compensation. IFC increased staff 22% to 174 at September
30, 1998 as compared to 143 at September 30, 1997. However, subsequent to
quarter-end, the Company reduced staffing at IFC by approximately 20% to
140 employees.
Amortization of MSRs increased to $1.8 million during the third quarter of
1998 as compared to $947,000 during the third quarter of 1997 due to
continued growth of IFC's servicing portfolio. Since September 30, 1997,
the Company has securitized $1.6 billion in principal balance of mortgage
loans and, accordingly, has capitalized MSRs related to those
securitizations which are amortized over the estimated life of the loans.
Loan servicing income increased as IFC generally retains servicing rights
on mortgages acquired resulting in an increase of 42% in IFC's servicing
portfolio to $3.4 billion at September 30, 1998 as compared to $2.4
billion at September 30, 1997.
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.
Earnings from ICH
Equity in net earnings (loss) of ICH decreased to a loss of $(1.8) million
for the third quarter of 1998 as compared to earnings of $403,000 for the
third quarter of 1997 primarily due to an impairment charge of $1.1
million on its residual interest in securitization and a decrease in net
earnings (loss) of Impac Commercial Capital Corporation, the conduit
operations of ICH, due to a non-cash charge of $15.0 million related to a
mark-to-market adjustment on loans held-for-sale. The Company recorded
equity in net earnings (loss) in ICH through the Company's ownership of
9.8% of ICH's voting common stock and 100% of class A non-voting common
stock. Subsequently, in October 1998, ICH repurchased 937,084 shares of
common stock and 456,916 shares of class A common stock, which represented
all ICH stock that IMH owned.
General and Administrative and Other Expense
General and administrative and other expense increased to $893,000 during
the third quarter of 1998 as compared to $227,000 during the third quarter
of 1997. The increase in general and administrative expense was primarily
related to property expense on a commercial office building in which the
Company had a 50% ownership interest prior to quarter-end and an increase
in professional services. Property expense increased to $458,000 during
the third quarter of 1998 as compared to $30,000 during the third quarter
of 1997. Subsequent to quarter-end, the Company sold to ICH its remaining
50% ownership interest. Professional services increased to $748,000 during
the third quarter of 1998 as compared to $212,000 during the third quarter
of 1997. Professional services includes legal and public accounting and
tax work performed for the Company.
Advisory Fees
Earnings were positively affected by a reduction in advisory fees
resulting from the Company's buyout of its management agreement with
Imperial Credit Advisors, Inc. ("ICAI") in December 1997. As a result of
the buyout, there were no advisory fees paid by IMH during the third
quarter of 1998 as compared to $1.5 million in advisory fees paid by IMH
during the third quarter of 1997.
Provision for Loan Losses
The Company recorded loan loss provisions (recoveries) of $(292,000)
during the third quarter of 1998 as compared to $1.9 million during the
third quarter of 1997. The amount provided for loan losses during the
third quarter of 1998 decreased primarily due to the reduction in exposure
to future losses through the sale of delinquent loans and the transfer of
certain loans from the held-for-investment to the held-for-sale portfolio,
which resulted in a mark-to-market adjustment of $1.2 million.
Credit Exposures
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 was 0.29% at September 30, 1998 as
compared to 0.32% at December 31, 1997. The allowance for loan losses as a
percentage of Gross Loan Receivables decreased by accelerated loan
charge-offs from the sale of delinquent loans, resulting in losses of $1.1
million during 1998, which was charged against the allowance. The Company
sold delinquent loans in order to reduce the Company's overall exposure to
delinquent loans and future loan losses. Excluding the loss on sale of
delinquent loans, the allowance for loan losses as a percentage of Gross
Loan Receivables would have been 0.35% at September 30, 1998. The
allowance for loan losses is determined primarily on the basis of
management's judgment of net loss potential including specific allowances
for any known impaired loans, changes in the nature and volume of the
portfolio, value of the collateral and current economic conditions that
may affect the borrowers' ability to pay. The Company recorded losses on
the disposition of real estate owned of $610,000 during the third quarter
of 1998 as compared to gains on disposition of real estate owned of
$144,000 during the third quarter of 1997.
RESULTS OF OPERATIONS; IMPAC MORTGAGE HOLDINGS, INC.
NINE MONTHS ENDED SEPTEMBER 30, 1998 AS COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
Net Earnings
Net earnings for the nine months ended September 30, 1998 was $2.2
million, or $0.09 per basic and diluted common share, as compared to net
earnings of $18.7 million, or $1.25 per diluted common share, for the same
period of 1997. The net earnings for the first nine months of 1998 was
primarily due to non-cash charges that required the Company and its
subsidiaries to make certain write-downs of its mortgage loans, equity
investments and investment securities available-for-sale portfolios. The
non-cash charges included an impairment charge of $9.1 million on the
Company's equity investment in ICH, which reflected the price at which the
ICH common stock was sold on October 19, 1998, an impairment charge of
$12.8 million on the Company's investment securities available-for-sale
and a non-cash mark-to-market adjustment of $21.0 million at IFC, which
represents losses on mortgage loans held-for-sale. The Company sold $250.4
million of mortgage loans in the fourth quarter of 1998 on a whole loan
basis which improved the Company's liquidity position and helped provide
additional liquidity to protect the Company against future margin calls on
existing borrowings under its current warehouse lines of credit and
reverse repurchase facilities that are secured by existing mortgage loans
and mortgage-backed securities. In addition, net earnings were negatively
affected during the first nine months of 1998 by an increase of $2.2
million in general and administrative and other expense and professional
services and a mark-to-market loss on loans held-for-sale of $1.2 million.
However, while earnings were negatively affected by these items and by the
non-cash charges recorded by the Company in the third quarter of 1998,
earnings were positively affected by a $11.1 million increase in net
interest income, a $4.3 million decrease in advisory fees and a decrease
of $2.1 million in provision for loan losses during the first nine months
of 1998 as compared to the same period of 1997.
Tax Basis Earnings
The Company's estimated tax basis earnings for the nine months ended
September 30, 1998 was approximately $21.2 million, or $0.89 basic and
diluted earnings per common share. Tax basis earnings is calculated by
adjusting the Company's book basis earnings by various differences between
book basis earnings and tax basis earnings. Differences between book basis
earnings and tax basis earnings are estimates that are derived from
management's best knowledge as of September 30,1998. Actual tax basis
earnings may differ materially from current estimates. As of September 30,
1998, the Company declared or paid dividends for the 1998 tax year
totaling $37.9 million. Therefore, total dividends declared or paid for
the 1998 tax year exceed estimated tax basis earnings by $16.7 million, or
$0.70 per basic and diluted common share.
Net Interest Income
Net interest income increased 51% to $33.0 million during the first nine
months of 1998 as compared to $21.9 million during the same period in
1997. Interest income is primarily interest on Mortgage Assets and
includes interest income on cash and cash equivalents and due from
affiliates. Interest expense is primarily borrowings on Mortgage Assets
and includes interest expense on due to affiliates. The increase in net
interest income was primarily the result of higher average Mortgage
Assets, which increased 75% to $2.1 billion during the first nine months
of 1998 as compared to $1.2 billion during the same period of 1997.
However, net interest spread on Mortgage Assets decreased to 1.51% during
the first nine months of 1998 as compared to 1.80% during the same period
of 1997 as the yield on Mortgage Assets decreased to 8.14% as compared to
8.19%, respectively. The decrease in the net interest spread and the yield
on Mortgage Assets was primarily the result of a decrease in the yield on
CMO collateral, which represents the largest portion of Mortgage Assets on
a weighted-average basis. The net interest spread on CMO collateral was
0.78% during the first nine months of 1998 as compared to 1.39% during the
first nine months of 1997. The yield on borrowings on Mortgage Assets
increased to 6.63% during the first nine months of 1998 as compared to
6.39% during the first nine months of 1997.
The following table summarizes average balance, interest and
weighted-average yield on Mortgage Assets and borrowings for the nine
months ended September 30, 1998 and 1997 and includes interest income on
Mortgage Assets and interest expense related to borrowings on
Mortgage Assets only (dollars in thousands):
For the Nine Months For the Nine Months
Ended September 30, 1998 Ended September 30, 1997
---------------------------------- -----------------------------------
Average Weighted Average Weighted
Balance Interest Avg Yield Balance Interest Avg Yield
------------- ----------- ----------- ----------- ---------- ----------
MORTGAGE ASSETS
Investment securities available-for-sale:
Subordinated securities collateralized by mortgages $ 86,944 $ 7,986 12.25% $ 56,174 $ 5,288 12.55%
Subordinated securities collateralized by other loans 5,356 533 13.27 6,183 802 17.29
------------ ---------- ----------- ----------
Total investment securities available-for-sale 92,300 8,519 12.31 62,357 6,090 13.02
------------ ----------- ----------- ----------
Loan receivables:
CMO collateral 1,245,516 69,446 7.43 600,988 34,338 7.62
Mortgage loans held-for-investment 188,799 13,089 9.24 151,163 8,251 7.28
Finance receivables:
Affiliated 445,504 28,520 8.54 400,945 25,556 8.50
Non-affiliated 83,188 5,944 9.53 25,627 1,953 10.16
------------ ---------- ----------- ----------
Total finance receivables 528,692 34,464 8.69 426,572 27,509 8.60
------------ ---------- ----------- ----------
Total Loan Receivables 1,963,007 116,999 7.95 1,178,723 70,098 7.93
============ ========== =========== ==========
TOTAL MORTGAGE ASSETS $ 2,055,307 $ 125,518 8.14% $ 1,241,080 $ 76,188 8.19%
============ ========== =========== ==========
BORROWINGS
CMO borrowings $ 1,156,748 $ 57,714 6.65% $ 564,001 $ 26,362 6.23%
Reverse repurchase agreements - mortgages 668,176 33,109 6.61 547,274 26,849 6.54
Reverse repurchase agreements - securities 25,687 1,249 6.48 30,646 1,484 6.46
------------ ---------- ---------- ----------
MORTGAGE ASSETS $ 1,850,611 $ 92,072 6.63% $1,141,921 $ 54,695 6.39%
============ ========== ========== ==========
NET INTEREST SPREAD 1.51% 1.80%
NET INTEREST MARGIN 2.17% 2.31%
Interest income on Mortgage Assets: Interest income on CMO collateral
increased 102% to $69.4 million during the first nine months of 1998 as
compared to $34.3 million during the same period in 1997 as average CMO
collateral increased 100% to $1.2 billion as compared to $601.0 million,
respectively. Average CMO collateral increased as the Long-Term Investment
Operations issued CMOs totaling $941.7 million which were collateralized
by $965.4 million of mortgages held by the Long-Term Investment Operations
since the end of the third quarter of 1997. Over 82%, or $768.0 million,
of CMOs issued by the Long-Term Investment Operations since September 30,
1997 were issued during the first nine months of 1998. The
weighted-average yield on CMO collateral decreased to 7.43% during the
first nine months of 1998 as compared to 7.62% during the same period in
1997. The decrease in the yield on CMO collateral during the first nine
months of 1998 was primarily due to higher rates of mortgage loan
prepayments and correspondingly higher rates of premium amortization
expense as compared to the first nine months of 1997.
Interest income on mortgage loans held-for-investment increased 58% to
$13.1 million during the first nine months of 1998 as compared to $8.3
million during the same period in 1997 as average mortgage loans
held-for-investment increased 25% to $188.8 million as compared to $151.2
million, respectively. The increase in average mortgage loans
held-for-investment was the result of the Long-Term Investment Operations
acquiring $817.9 million in principal balance of mortgages from IFC during
the first nine months of 1998 as compared to $508.8 million in principal
balance of mortgages during the first nine months of 1997. The
weighted-average yield on mortgage loans held-for-investment increased to
9.24% during the first nine months of 1998 as compared to 7.28% during the
same period in 1997.
Interest income on finance receivables increased 25% to $34.5 million
during the first nine months of 1998 as compared to $27.5 million during
the same period in 1997 as average finance receivables increased 24% to
$528.7 million as compared to $426.6 million, respectively. The increase
was primarily the result of an increase of 225% in average finance
receivables to non-affiliated mortgage banking companies to $83.2 million
during the first nine months of 1998 as compared to $25.6 million during
the same period in 1997. Interest income on finance receivables to
non-affiliates increased 195% to $5.9 million during the third quarter of
1998 as compared to $2.0 million during the third quarter of 1997. The
weighted-average yield on non-affiliated finance receivables decreased to
9.53% during the first nine months of 1998 as compared to 10.16% during
the same period in 1997. Average finance receivables outstanding to
affiliates increased 11% to $445.5 million during the first nine months of
1998 as compared to $400.9 million during the same period in 1997
primarily as a result of increased loan acquisitions by IFC. IFC's
mortgage acquisitions increased 27% to $1.9 billion during the first nine
months of 1998 as compared to $1.5 billion during the same period in 1997.
Interest income on finance receivables to affiliates increased 11% to
$28.5 million during the third quarter of 1998 as compared to $25.6
million during the third quarter of 1997. The weighted-average yield on
affiliated finance receivables increased to 8.54% during the first nine
months of 1998 as compared to 8.50% during the same period in 1997. The
overall weighted-average yield on finance receivables increased to 8.69%
during the first nine months of 1998 as compared to 8.60% during the same
period in 1997.
Interest income on investment securities available-for-sale increased 39%
to $8.5 million during the first nine months of 1998 as compared to $6.1
million during the same period in 1997 as average investment securities
available-for-sale, net of securities valuation allowance, increased 48%
to $92.3 million as compared to $62.4 million, respectively. The increase
in average securities available-for-sale during the first nine months of
1998 was the result of the Long-Term Investment Operations purchasing and
retaining mortgage-backed securities of $64.6 million that were issued by
IFC as REMICs. The weighted-average yield on investment securities
available-for-sale decreased to 12.31% during the first nine months of
1998 as compared to 13.02% during the first nine months of 1997.
Interest expense on borrowings: Interest expense on CMO borrowings
increased 119% to $57.7 million during the first nine months of 1998 as
compared to $26.4 million during the same period in 1997 as average
borrowings on CMO collateral increased 113% to $1.2 billion as compared to
$564.0 million, respectively. Average CMO borrowings increased as the
Long-Term Investment Operations issued CMOs totaling $941.7 million since
the end of the third quarter in 1997. The weighted-average yield of CMO
borrowings increased to 6.65% during the first nine months of 1998 as
compared 6.23% during the same period of 1997. This increase is the result
of the Company issuing fixed-rate CMOs totaling $583.0 million during the
first nine months of 1998 at higher interest rates than the initial
interest rates on variable-rate CMOs the Company has issued in the past.
Although borrowing rates on the fixed-rate CMOs are generally higher than
the initial interest rates on variable-rate CMOs, the Company receives a
comparable interest rate spread on fixed-rate CMOs as it does on its
variable-rate CMOs.
Interest expense on reverse repurchase borrowings used to fund the
acquisition of mortgage loans and finance receivables increased 24% to
$33.1 million during the first nine months of 1998 as compared to $26.8
million during the same period in 1997. The average balance of these
reverse repurchase agreements increased 22% to $668.2 million during the
first nine months of 1998 as compared to $547.3 million during the same
period in 1997. This increase was primarily related to an increase in
finance receivables made to non-affiliated mortgage banking companies. The
weighted-average yield of these reverse repurchase agreements increased to
6.61% during the first nine months of 1998 as compared 6.54% during the
same period in 1997.
The Company also uses mortgage-backed securities as collateral to borrow
under reverse repurchase agreements to fund the purchase of
mortgage-backed securities and to act as an additional source of liquidity
for the Company's operations. Interest expense on these reverse repurchase
agreements decreased 20% to $1.2 million during the first nine months of
1998 as compared to $1.5 million during the same period in 1997. The
average balance on these reverse repurchase agreements decreased 16% to
$25.7 million during the first nine months of 1998 as compared to $30.6
million during the same period in 1997. This decrease was primarily the
result of increased liquidity from other sources that reduced the
Company's reliance on these borrowings as a funding source. The
weighted-average yield of these reverse repurchase agreements increased to
6.48% during the first nine months of 1998 as compared to 6.46% during the
same period in 1997.
Earnings from IFC
Equity in net earnings (loss) of IFC decreased to a loss of $(3.9) million
during the first nine months of 1998 as compared to earnings of $6.1
million during the same period in 1997. IFC's earnings during the first
nine months of 1998 decreased primarily due to a non-cash mark-to-market
adjustment of $21.0 million, which represents losses on mortgage loans
held-for-sale. Additionally, IFC's earnings were negatively affected by
increases in personnel expense, amortization of mortgage servicing rights
("MSRs"), and general and administrative and other expense which was
partially offset by increases in loan servicing income. The overall
increase in operating expenses during the first nine months of 1998 as
compared to the same period in 1997 was primarily the result of an
increase in staffing and overhead as the Company's loan origination
operations and loan servicing portfolio grew.
Personnel expense increased 40% to $7.4 million during the first nine
months of 1998 as compared to $5.3 million during the same period in 1997.
The increase in personnel expense was primarily due to an increase in
staff and incentive compensation. IFC increased staff 22% to 174 at
September 30, 1998 as compared to 143 at September 30, 1997. However,
subsequent to quarter-end the Company reduced staffing at IFC by
approximately 20% to 140 employees.
Amortization of MSRs increased to $4.7 million during the first nine
months of 1998 as compared to $1.9 million during the the same period in
1997 due to continued growth of IFC's servicing portfolio. Since September
30, 1997, the Company has securitized $1.6 billion in principal balance of
mortgage loans and, accordingly, has capitalized MSRs related to those
securitizations which are amortized over the estimated life of the loans.
Loan servicing income increased as IFC generally retains servicing rights
on mortgages acquired resulting in an increase of 42% in IFC's servicing
portfolio to $3.4 billion at September 30, 1998 as compared to $2.4
billion at September 30, 1997.
Earnings from ICH
Equity in net earnings (loss) of ICH decreased to a loss of $(1.0) million
during the first nine months of 1998 as compared to a loss of $(778,000)
for the period from January 15, 1997 (commencement of operations) through
September 30, 1997 primarily due to an impairment charge of $1.1 million
on its residual interest in securitization and a decrease in net earnings
(loss) of Impac Commercial Capital Corporation, the conduit operations of
ICH, due to a non-cash charge of $15.0 million related to a mark-to-market
adjustment on loans held-for-sale. The Company recorded equity in net
earnings (loss) in ICH through the Company's ownership of 9.8% of ICH's
voting common stock and 100% of class A non-voting common stock.
Subsequently, in October 1998, ICH repurchased 937,084 shares of common
stock and 456,916 shares of class A common stock, which represented all
ICH common stock that IMH owned.
General and Administrative and Other Expense
General and administrative and other expense increased to $1.8 million
during the first nine months of 1998 as compared to $530,000 during the
same period of 1997. The increase in general and administrative and other
expense was primarily related to property expense on a commercial office
building in which the Company had a 50% ownership interest prior to
quarter-end. Property expense increased to $793,000 during the first nine
months of 1998 as compared to $30,000 during the same period of 1997.
Subsequent to quarter-end, the Company sold to ICH its remaining 50%
ownership interest. Professional services increased to $1.6 million during
the first nine months of 1998 as compared to $758,000 during the same
period of 1997. Professional services includes legal and public accounting
and tax work performed for the Company.
Advisory Fees
Earnings were positively affected by a reduction in advisory fees
resulting from the Company's buyout of its management agreement with ICAI
in December 1997. As a result of the buyout, there were no advisory fees
paid by IMH during the first nine months of 1998 as compared to $4.3
million in advisory fees paid by IMH during the same period of 1997.
Provision for Loan Losses
Provision for loan losses decreased 50% to $2.1 million as compared to
$4.2 million during the first nine months of 1998 and 1997. The amount
provided for loan losses during the third quarter of 1998 decreased
primarily due to the reduction in exposure to future losses through the
sale of delinquent loans and the transfer of certain loans from the
held-for-investment to the held-for-sale portfolio, which resulted in a
mark-to-market adjustment of $1.2 million.
LIQUIDITY AND CAPITAL RESOURCES
Overview. The Company's business operations are primarily funded from
monthly interest and principal payments from its mortgage loan and
investment securities portfolios, reverse repurchase agreements secured by
mortgage loans and mortgage-backed securities, adjustable- and fixed-rate
CMO financing, proceeds from the sale of mortgage loans and the issuance
of REMICs, short-term unsecured borrowings and proceeds from the issuance
of Common Stock through secondary stock offerings, DRSSP, and SES. The
acquisition of mortgage loans and mortgage-backed securities by the
Long-Term Investment Operations are primarily funded from monthly
principal and interest payments, reverse repurchase agreements, CMO
financing, short-term unsecured borrowings and proceeds from the sale of
Common Stock. The acquisition of mortgage loans by the Conduit Operations
are funded from reverse repurchase agreements, the sale of mortgage loans
and mortgage-backed securities, and the issuance of REMICs. Short-term
financing (finance receivables) provided by the Warehouse Lending
Operations are funded from reverse repurchase agreements and proceeds from
the sale of Common Stock. 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.
During the third quarter of 1998, the deterioration of the mortgage-backed
securities market created a lack of liquidity for the Company as the
Company's lenders made margin calls on their warehouse and reverse
repurchase lines. Margin calls result from the Company's lenders
evaluating the market value of underlying collateral securing the
warehouse lines of credit and requiring additional equity or collateral on
the warehouse lines. These margin calls resulted in the Company delaying
its third quarter dividend and selling mortgage loans and mortgage-backed
securities. Subsequent to quarter-end, the Company completed the sale of
$250.4 million of mortgage loans and $8.9 million of mortgage-backed
securities, which increased the Company's liquidity by $13.6 million after
paying down the related warehouse line and reverse repurchase agreements.
Future cash flows will be negatively impacted by the deterioration of the
mortgage-backed securities market and the subsequent sale of mortgage
loans and mortgage-backed securities as the Company will not benefit from
positive cash flows created by these financial instruments.
By selling mortgage loans, the Company reduced its exposure to margin
calls on existing borrowings under its current warehouse lines and
repurchase facilities by paying down outstanding borrowings on these
facilities. In addition, the Company expects loan originations will
decrease in the fourth quarter of 1998 and possibly through the first
quarter of 1999 and reduce borrowing needs during this period of market
volatility. The Company also expects that the reduction in staff in the
fourth quarter of 1998 will provide additional liquidity from operating
activities.
Even with the sale of mortgage loans and mortgage-backed securities, the
Company does not believe its current operating cash flows are sufficient
to fund the growth of its mortgage loan and investment securities
portfolios, lending activities, repayment of short-term obligations and
payment of cash dividends due to exposure to margin calls on its warehouse
line and reverse repurchase agreements. The Company continues to explore
alternatives for increasing liquidity through additional asset sales and
capital raising efforts. 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: The Long-Term Investment Operations uses
CMO borrowings to finance substantially all of its mortgage loan
portfolio. Terms of the CMO borrowings require that an independent third
party custodian hold the mortgages. The maturity of each class is directly
affected by the rate of principal prepayments on the related collateral.
Equity in the CMOs is established at the time the CMOs are issued at
levels sufficient to achieve desired credit ratings on the securities from
rating agencies. The amount of equity invested in CMOs by the Long-Term
Investment Operations is also determined by the Company based upon the
anticipated return on equity as compared to the estimated proceeds from
additional debt issuance. Total credit loss exposure is limited to the
equity invested in the CMOs at any point in time. At September 30, 1998,
the Long-Term Investment Operations had $1.2 billion of CMO borrowings
used to finance $1.3 billion of CMO collateral.
IMH has a credit arrangement with ICH whereby ICH agreed to advance to IMH
up to maximum amount of $15.0 million. The agreement expires on August 8,
1999. Advances under the credit arrangement are at an interest rate and
maturity determined at the time of each advance with interest and
principal paid monthly. As of September 30, 1998 and December 31, 1997,
there were $6.9 million and none outstanding under the credit arrangement.
Interest expense recorded by IMH for the nine months ended September 30,
1998 and September 30, 1997 related to such advances to ICH was
approximately $259,000 and none, respectively.
IMH has a credit arrangement with ICH whereby IMH agreed to advance to ICH
up to maximum amount of $15.0 million. The agreement expires on August 8,
1999. Advances under the revolving credit arrangement are at an interest
rate and maturity determined at the time of each advance with interest and
principal paid monthly. As of September 30, 1998 and December 31, 1997,
there were no borrowings under the credit arrangement. Interest income
recorded by IMH related to such borrowings from ICH for the nine months
ended September 30, 1998 and 1997 was approximately $43,000 and none,
respectively.
IMH entered into a revolving credit arrangement with a commercial bank
whereby IMH can borrow up to maximum amount of $10.0 million for general
working capital needs. The revolving credit agreement expires on March 29,
1999. Advances under the revolving credit arrangement are at an interest
rate of prime plus 0.25%. Interest is paid monthly and as an open-ended
revolving line of credit there is no set principal payment schedule. As of
September 30, 1998, IMH's outstanding borrowings under the revolving
credit arrangement was $9.7 million.
The Long-Term Investment Operations may pledge mortgage-backed securities
as collateral to borrow funds under reverse repurchase agreements. The
terms under these reverse repurchase agreements are generally for 30 days
with interest rates ranging from the one-month London Interbank Offered
Rate ("LIBOR") plus 0.45% to 2.00% depending on the type of collateral
provided. As of September 30, 1998, the Long-Term Investment Operations
had $35.4 million outstanding under these reverse repurchase agreements
which were secured by $111.1 million in fair market value of
mortgage-backed securities.
In October 1998, the Company sold to ICH its remaining 50% ownership
interest in its commercial office building, which resulted in a gain of
$1.6 million and paid off the Company's outstanding borrowings on the
property.
During the nine months ended September 30, 1998, the Company raised
capital of $27.8 million from the sale 1.8 million shares of Common Stock
issued through its DRSPP and $3.2 million from the sale of 206,400 shares
of Common Stock issued through its SES program.
Conduit Operations: The Conduit Operations has entered into warehouse line
agreements to obtain financing of up to $1.1 billion from the Warehouse
Lending Operations to provide IFC mortgage loan financing during the
period that IFC accumulates mortgage loans and until the mortgage loans
are securitized and sold. The margins on the reverse repurchase agreements
are based on the type of collateral provided and generally range from 95%
to 100% of the fair market value of the collateral. The interest rates on
the borrowings are indexed to Prime, which was 8.50% at September 30,
1998.
As of September 30, 1998, the Conduit Operations had $45.9 million
outstanding under a warehouse line facility from a major investment bank
to finance the acquisition of high loan-to-value loans. As of September
30, 1998, the warehouse line facility expired. Subsequent to quarter-end,
the Conduit Operations sold the remaining high loan-to-value loans,
whereby the proceeds from the sale were used to pay off borrowings on the
warehouse line facility.
During the nine months ended September 30, 1998, the Conduit Operations
securitized $927.9 million of mortgage loans as REMICs and sold $315.6
million in principal balance of mortgage loans to third-party investors.
In addition, IFC sold $817.9 million in principal balance of mortgage
loans to the Long-Term Investment Operations during the nine months ended
September 30, 1998. By securitizing and selling loans on a periodic and
consistent basis the warehouse financing facilities were sufficient to
handle IFC's liquidity needs during the nine months ended September
30,1998.
Warehouse Lending Operations: The Warehouse Lending Operations finances
the acquisition of mortgage loans by the Long-Term Investment Operations
and Conduit Operations primarily through borrowings on reverse repurchase
agreements with third party lenders. IWLG has obtained repurchase
facilities from major investment banks to provide financing as needed.
Terms of the reverse repurchase agreements require that the mortgages be
held by an independent third party custodian giving the Warehouse Lending
Operations the ability to borrow against the collateral as a percentage of
the outstanding principal balance. The borrowing rates vary from 55 basis
points to 95 basis points over one-month LIBOR, depending on the type of
collateral provided. The margins on the reverse repurchase agreements are
based on the type of mortgage collateral used and generally range from 75%
to 101% of the fair market value of the collateral.
The following table presents information on available warehouse line
agreements as of September 30, 1998 (dollars in thousands):
Borrowing Amount
Lender Limit Outstanding Interest rate
- ----------------------------------------------------------------------------------------------------------------------
Lender A (1) $ 399,989 $ 399,989 Libor + 0.75%
Lender B (2) 183,878 183,878 Libor + 0.45%-0.95%
=====================================================
Total $ 583,867 $ 583,867
=====================================================
(1) Uncommitted warehouse line facility.
(2) The warehouse line agreement expired on October 22, 1998. On October
30, 1998, the remaining loans pledged as collateral under this
warehouse line agreement were sold.
Cash Flows
Operating Activities - During the nine months ended September 30, 1998 net
cash provided by operating activities was $58.2 million. Cash provided by
operating activities was primarily due to an increase in other assets and
liabilities of $34.5 million, which was primarily the result of a $27.1
million increase in due to affiliates.
Investing Activities - During the nine months ended September 30, 1998 net
cash used in investing activities was $399.9 million. Cash used in
investing activities was primarily due to an increase in CMO collateral of
$501.7 million from the acquisition of mortgage loans which was partially
offset by decreases in mortgage loans held-for-investment of $225.4
million.
Financing Activities - During the nine months ended September 30, 1998 net
cash provided by financing activities was $327.7 million. Cash provided by
financing activities was primarily due to an increase of $767.4 million in
CMO borrowings used to fund the acquisition of mortgage loans which was
partially offset by a decrease in reverse repurchase agreements of $126.6
million.
Inflation
The Financial Statements and Notes thereto presented herein have been
prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money
over time due to inflation. The impact of inflation is reflected in the
increased costs of the Company's operations. Unlike industrial companies,
nearly all of the assets and liabilities of the Company's operations are
monetary in nature. As a result, interest rates have a greater impact on
the Company's operations' performance than do the effects of general
levels of inflation. Inflation affects the Company's operations primarily
through its effect on interest rates, since interest rates normally
increase during periods of high inflation and decrease during periods of
low inflation. During periods of increasing interest rates, demand for
mortgage loans and a borrower's ability to qualify for mortgage financing
in a purchase transaction may be adversely affected. During periods of
decreasing interest rates, borrowers may prepay their mortgages, which in
turn may adversely affect the Company's yield and subsequently the value
of its portfolio of Mortgage Assets.
Year 2000 Compliance
Project Status
The Company's Year 2000 project was approximately 50% complete as of the
end of October 1998. The Company contracted with an outside vendor to
provide coordination, support, testing and implementation in regards to
Year 2000 compliance of hardware and software systems, both on an
information technology ("IT") and non-IT level.
The Company also has its own in-house IT department that is currently
assisting the outside vendor. The Company's primary IT systems include
loan servicing, which is contracted to an outside vendor, loan tracking,
master servicing and accounting and reporting. The loan servicing system
is currently in the process of Year 2000 compliance. The Company is
provided with quarterly status reports from our outside vendor regarding
the loan servicing system. The Company's IT department will continue to
monitor the vendor's progress on Year 2000 compliance. The loan tracking
system is currently in compliance with Year 2000. The master servicing
system is currently being tested and the Company expects that this system
will be Year 2000 compliant in the first quarter of 1999. The accounting
and reporting system is not currently Year 2000 compliant. The vendor for
this software is currently upgrading to a new version, which will be Year
2000 compliant in 1999.
The Company's non-IT systems include its file servers, network systems,
workstations and communication systems. As of September 30, 1998, the
upgrade of the Company's communication systems has been completed, which
regardless of the Year 2000 issue, required an upgrade to comply with
terms of the service agreement. Testing on all other in-house hardware is
currently underway and is expected to be complete by the end of the first
quarter of 1999.
The Year 2000 project is divided into two primary phases, as follows: (1)
define scope of project and identify all IT and non-IT systems, and (2)
testing of existing systems and implementation of new systems, if
required. The outside contractor on the Year 2000 project submits monthly
status reports to the Company's IT manager and communicates with the IT
department on a daily basis. The Company's executive committee which
includes the CEO and Chairman, President, and Chief Financial Officer
review the progress of the Company's Year 2000 project through monthly
status reports and reviews with the Company's IT manager.
Phase I - Define Scope of Project
This phase primarily included the inventorying of Year 2000 items,
contacting outside vendors, including reviewing contractual terms and
conditions, reviewing internal software for compliance and determining
costs to complete the project. As of the end of October 1998, Phase I of
the project had been completed. Phase I of the project also included the
testing and implementation or upgrade of non-IT systems.
Phase II - Testing of Systems
This phase of the Year 2000 project can be divided into four separate
processes, as follows: (1) Compliance Questionnaires, (2) Hardware
Certification Information, (3) Software/Data Testing, and (4) Hardware
Testing.
Compliance Questionnaires and Hardware Certification Information.
As of the end of October 1998, these portions of Phase II were complete.
Software/Data Testing. As of the end of October 1998, this portion of
Phase II was approximately 50% complete. The remaining tasks within this
process include analyzing list of software being used, testing all
software programs, testing all data from incoming sources, testing all
outgoing data processes and reporting. The Company expects that this
process will be complete by March 31, 1999.
Hardware Testing. As of the end of October 1998, this portion of Phase II
had not been started. This phase is contingent on the completion of
software/data testing. Tasks yet to be started include testing all
workstation, servers and network systems. The Company expects to be
compliant with all internal Year 2000 issues by the end of the first
quarter of 1999.
Costs
The total cost associated with required modifications or installations to
become Year 2000 compliant is not expected to be material to the Company's
financial condition. The estimated cost of the project is expected to be
approximately $500,000, of which approximately $108,000 of the cost will
be paid by ICH. The total estimate of the project includes the cost to
upgrade the Company's communications system, which was $140,000. As of the
end of October 1998, the Company had paid $77,000 to the outside vendor
for completed work on the project. The majority of the Company's estimated
cost for the Year 2000 compliance has been or will be spent on software
upgrades and writing new program code on existing proprietary software.
Since most of the Company's hardware has been purchased within the last
two years, the cost of replacing hardware will be minimal.
Risks
The Company does not anticipate any material disruption of its operations
as a result of any failure by the Company to be compliant. However, there
can be no assurance that there will not be a delay in, or increased costs
associated with, the need to address the Year 2000 issue. The Company also
relies, directly and indirectly, on other businesses such as third party
service providers, creditors and financial organizations and governmental
entities. Even if the Company's computer systems are not materially
adversely affected by the Year 2000 issue, the Company's business and
operations could be materially adversely affected by disruptions in the
operations of the enterprises with which the Company interacts.
Contingency Plans
The Company believes its Year 2000 compliance process should enable it to
be successful in modifying its computer systems to be Year 2000 compliant.
As previously stated, acceptance testing and sign-off has begun with
respect to the Company's in-house systems. In addition to Year 2000
compliance system modification plans, the Company has also developed
contingency plans for all other systems classified as critical and high
risk. These contingency plans provide timetables to pursue various
alternatives based upon the failure of a system to be adequately modified
and/or sufficiently tested and validated to ensure Year 2000 compliance.
However, there can be no assurance that either the compliance process or
contingency plans will avoid partial or total system interruptions or the
costs necessary to update hardware and software would not have a material
adverse effect upon the Company's financial condition, results of
operation, business or business prospects.
Transactions with Related Parties
On October 21, 1998, ICH repurchased from IMH 937,084 shares of Common
Stock and 456,916 Class A Common Stock at a per share price of $4.375,
based upon the closing price on October 19, 1998, for a total repurchase
of $6.1 million. IMH recorded a loss of $9.1 million in the third quarter
of 1998.
On October 27, 1998, the Company sold to ICH its remaining 50% ownership
interest in a commercial office building in Newport Beach, California.
After the sale of its 50% ownership interest to ICH, the Company has no
remaining ownership interest in the building. The Company recorded a gain
of $1.6 million on the sale of the property.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Not applicable.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 23,1998, the Company held it's annual meeting of stockholders. Of
the total number of shares eligible to vote (23,927,197), 20,784,188 votes
were returned, or 87%, formulating a quorum. At the stockholders meeting,
the following matters were submitted to stockholders for vote: Proposal I
- Election of Directors, Proposal II Ratify appointment of Company's
independent auditors, KPMG Peat Marwick LLP.
The results of voting on these proposals are as follows:
Proposal I - Election of Directors
Director For Against Elected
Joseph R. Tomkinson 20,650,774 133,414 Yes
William S. Ashmore 20,639,866 144,322 Yes
H. Wayne Snavely 20,641,572 142,616 Yes
James Walsh 20,643,159 141,029 Yes
Frank P. Filipps 20,643,672 140,516 Yes
Stephan R. Peers 20,642,222 141,966 Yes
All directors are elected annually at the Company's annual stockholders
meeting.
Proposal II - Appointment of independent auditors
Proposal II was approved with 20,617,549 shares voted for, 51,111 voted
against, and 115,528 abstained from voting thereby ratifying the
appointment of KPMG Peat Marwick LLP as the Company's independent
auditors.
ITEM 5: OTHER INFORMATION
On July 23, 1998, Ronald M. Morrison was appointed General Counsel and
Secretary of the Company.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None
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: November 16, 1998
5
1,000
9-MOS
DEC-31-1997
JAN-01-1998
SEP-30-1998
2,204
111,082
1,940,239
(5,390)
0
643,790
9,343
(437)
2,115,748
680,538
0
0
0
246
231,169
2,115,748
125,906
125,906
0
0
25,809
3,299
94,632
2,166
0
2,166
0
0
0
2,166
0.09
0.09
