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, 2001
OR
[_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the transition period from _______________ to ______________
Commission File Number: 0-19861
Impac Mortgage Holdings, Inc.
(Exact name of registrant as specified in its charter)
Maryland 33-0675505
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1401 Dove Street
Newport Beach, CA 92660
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (949) 475-3600
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock $0.01 par value American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
On November 12, 2001, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $31.5 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 12, 2001 was
31,961,321.
Documents incorporated by reference: None
1
IMPAC MORTGAGE HOLDINGS, INC.
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - IMPAC MORTGAGE
HOLDINGS, INC. AND SUBSIDIARIES Page #
------
Consolidated Balance Sheets as of September 30, 2001 and
December 31, 2000............................................. 3
Consolidated Statements of Operations and Comprehensive
Earnings (Loss), For the Three and Nine Months Ended
September 30, 2001 and 2000................................... 4
Consolidated Statements of Cash Flows, For the Nine Months
Ended September 30, 2001 and 2000......... 6
Notes to Consolidated Financial Statements..................... 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................... 18
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..... 35
PART II. OTHER INFORMATION
--------------------------
Item 1. LEGAL PROCEEDINGS.............................................. 36
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...................... 36
Item 3. DEFAULTS UPON SENIOR SECURITIES................................ 36
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 36
Item 5. OTHER INFORMATION.............................................. 37
Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 37
SIGNATURES 38
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
September 30, December 31,
2001 2000
----------- ------------
ASSETS
------
Cash and cash equivalents .................................................................... $ 17,871 $ 17,944
Investment securities available-for-sale ..................................................... 34,329 36,921
Loan Receivables:
CMO collateral ............................................................................ 1,672,581 1,372,996
Finance receivables ....................................................................... 464,503 405,438
Mortgage loans held-for-investment ........................................................ 151,283 16,720
Allowance for loan losses ................................................................. (7,942) (5,090)
----------- -----------
Net loan receivables ................................................................. 2,280,425 1,790,064
Investment in Impac Funding Corporation ...................................................... 22,114 15,762
Due from affiliates .......................................................................... 14,500 14,500
Accrued interest receivable .................................................................. 12,946 12,988
Other real estate owned ...................................................................... 6,066 4,669
Derivative assets ............................................................................ 6,506 61
Other assets ................................................................................. 1,985 5,929
----------- -----------
Total assets ............................................................................ $ 2,396,742 $ 1,898,838
=========== ===========
LIABILITIES
-----------
CMO borrowings ............................................................................... $ 1,597,936 $ 1,291,284
Reverse repurchase agreements ................................................................ 598,210 398,653
Borrowings secured by investment securities available-for-sale ............................... 14,923 21,124
Senior subordinated debentures ............................................................... -- 6,979
Accumulated dividends payable ................................................................ 6,708 788
Other liabilities ............................................................................ 2,374 1,570
----------- -----------
Total liabilities ....................................................................... 2,220,151 1,720,398
----------- -----------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock; $.01 par value; 6,300,000 shares authorized; none issued or
outstanding at September 30, 2001 and December 31, 2000, respectively ..................... -- --
Series A junior participating preferred stock, $.01 par value; 2,500,000 shares authorized
none issued and outstanding at September 30, 2001 and December 31, 2000 ................... -- --
Series C 10.5% cumulative convertible preferred stock, $.01 par value; $30,000
liquidation value; 1,200,000 shares authorized; none and 1,200,000 issued and
outstanding at September 30, 2001 and December 31, 2000 ................................... -- 12
Common stock; $.01 par value; 50,000,000 shares authorized; 26,832,329 and
20,409,956 shares issued and outstanding at September 30, 2001 and December 31, 2000,
respectively ................................................................................. 268 204
Additional paid-in capital ................................................................... 325,583 325,350
Accumulated other comprehensive loss ......................................................... (12,608) (568)
Notes receivable from common stock sales ..................................................... (930) (902)
Net accumulated deficit:
Cumulative dividends declared ............................................................. (112,256) (103,973)
Accumulated deficit ....................................................................... (23,466) (41,683)
----------- -----------
Net accumulated deficit ................................................................ (135,722) (145,656)
----------- -----------
Total stockholders' equity ........................................................... 176,591 178,440
----------- -----------
Total liabilities and stockholders' equity ........................................... $ 2,396,742 $ 1,898,838
=========== ===========
See accompanying notes to consolidated financial statements.
3
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
and COMPREHENSIVE EARNINGS (LOSS)
(in thousands, except per share data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------- -------------------------
2001 2000 2001 2000
-------- -------- --------- ---------
INTEREST INCOME:
Mortgage Assets ................................................... $ 38,355 $ 37,711 $ 114,157 $ 104,893
Other interest income ............................................. 613 261 1,875 1,749
-------- -------- --------- ---------
Total interest income ........................................... 38,968 37,972 116,032 106,642
-------- -------- --------- ---------
INTEREST EXPENSE:
CMO borrowings .................................................... 19,249 19,839 57,016 59,548
Reverse repurchase agreements ..................................... 7,688 11,677 25,485 26,518
Borrowings secured by investment
securities available-for-sale ................................... 620 765 1,958 2,457
Senior subordinated debentures .................................... -- 314 553 944
Other borrowings .................................................. 24 -- 190 45
-------- -------- --------- ---------
Total interest expense .......................................... 27,581 32,595 85,202 89,512
-------- -------- --------- ---------
Net interest income ............................................... 11,387 5,377 30,830 17,130
Provision for loan losses ....................................... 2,615 1,248 10,559 17,735
-------- -------- --------- ---------
Net interest income (loss) after provision for loan losses ........ 8,772 4,129 20,271 (605)
NON-INTEREST INCOME:
Equity in net earnings (loss) of Impac Funding Corporation ........ 3,039 143 7,857 (937)
Loan servicing fees ............................................... 228 193 809 532
Other income ...................................................... 1,094 550 2,610 1,604
-------- -------- --------- ---------
Total non-interest income ......................................... 4,361 886 11,276 1,199
NON-INTEREST EXPENSE:
Mark-to-market loss - FAS 133 ..................................... 2,269 -- 3,713 --
Write-down on investment securities available-for-sale ............ 1,841 171 1,949 53,576
Professional services ............................................. 646 611 1,728 1,697
General and administrative and other expense ...................... 415 388 1,339 1,069
Personnel expense ................................................. 290 177 866 484
(Gain) loss on disposition of other real estate owned ............. (619) 369 (1,584) 1,677
-------- -------- --------- ---------
Total non-interest expense ........................................ 4,842 1,716 8,011 58,503
-------- -------- --------- ---------
Earnings (loss) before extraordinary item and cumulative
effect of change in accounting principle .......................... 8,291 3,299 23,536 (57,909)
Extraordinary item .............................................. -- -- (1,006) --
Cumulative effect of change in accounting principle ............. -- -- (4,313) --
-------- -------- --------- ---------
Net earnings (loss) ............................................... 8,291 3,299 18,217 (57,909)
Less: Cash dividends on 10.5% cumulative
convertible preferred stock ..................................... -- (788) (1,575) (2,363)
-------- -------- --------- ---------
Net earnings (loss) available to common stockholders .............. 8,291 2,511 16,642 (60,272)
Other comprehensive earnings (loss):
Unrealized holding gains (losses)
on securities arising during period ............................. 10,724 (830) 12,624 1,225
Unrealized holding gains (losses)
on hedging instruments arising during period .................... (23,496) -- (23,740) --
Reclassification of losses included in earnings (loss) ............ (123) (51) (924) 7,662
-------- -------- --------- ---------
Net unrealized gains (losses) arising during period ............. (12,895) (881) (12,040) 8,887
-------- -------- --------- ---------
Comprehensive earnings (loss) ..................................... $ (4,604) $ 2,418 $ 6,177 $ (49,022)
======== ======== ========= =========
See accompanying notes to consolidated financial statements.
4
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
and COMPREHENSIVE EARNINGS (LOSS)
(in thousands, except per share data)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2001 2000 2001 2000
------ ------ ------ ------
Earnings (loss) per share before extraordinary item and
cumulative effect of change in accounting principle:
Basic ..................................................... $0.37 $0.12 $0.97 $(2.82)
===== ===== ===== =====
Diluted ................................................... $0.31 $0.12 $0.87 $(2.82)
===== ===== ===== =====
Net earnings (loss) per share
Basic ..................................................... $0.37 $0.12 $0.74 $(2.82)
===== ===== ===== =====
Diluted ................................................... $0.31 $0.12 $0.68 $(2.82)
===== ===== ===== =====
See accompanying notes to consolidated financial statements.
5
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Nine Months
Ended September 30,
------------------------------
2001 2000
--------- ---------
Cash flows from operating activities:
Net earnings (loss) .......................................................... $ 22,530 $ (57,909)
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Cumulative effect of change in accounting principle ....................... (4,313) --
Equity in net (earnings) loss of Impac Funding Corporation ................ (7,857) 937
Provision for loan losses ................................................. 10,559 17,735
Amortization of loan premiums and securitization costs .................... 9,949 12,147
(Gain) loss on disposition of other real estate owned ..................... (1,584) 1,677
Write-off of securitization costs from senior subordinated debentures ..... 1,006 --
Write-down of investment securities available-for-sale .................... 1,949 53,576
Gain on sale of investment securities available-for-sale .................. (159) --
Net change in accrued interest receivable ................................. 42 (806)
Net change in other assets and liabilities ................................ (26,066) (5,887)
--------- ---------
Net cash provided by operating activities ............................... 6,056 21,470
--------- ---------
Cash flows from investing activities:
Net change in CMO collateral ................................................. (315,015) 173,425
Net change in finance receivables ............................................ (59,671) (170,275)
Net change in mortgage loans held-for-investment ............................. (143,976) (231,246)
Proceeds from sale of other real estate owned, net ........................... 7,980 12,097
Dividend from Impac Funding Corporation ...................................... 6,419 --
Sale of investment securities available-for-sale ............................. 5,154 5,704
Net principal reductions on investment securities available-for-sale ......... 2,660 2,825
--------- ---------
Net cash used in investing activities ................................... (496,449) (207,470)
--------- ---------
Cash flows from financing activities:
Net change in reverse repurchase agreements and other borrowings ............. 193,469 47,010
Proceeds from CMO borrowings ................................................. 758,296 451,950
Repayments of CMO borrowings ................................................. (451,644) (304,028)
Dividends paid ............................................................... (2,363) (10,320)
Retirement of senior subordinated debentures ................................. (7,747) --
Proceeds from exercise of stock options ...................................... 337 --
Advances and reductions on notes receivable-common stock ..................... (28) 5
--------- ---------
Net cash provided by financing activities ............................... 490,320 184,617
--------- ---------
Net change in cash and cash equivalents ........................................ (73) (1,383)
Cash and cash equivalents at beginning of period ............................... 17,944 20,152
--------- ---------
Cash and cash equivalents at end of period ..................................... $ 17,871 $ 18,769
========= =========
See accompanying notes to consolidated financial statements.
6
IMPAC MORTGAGE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Nine Months
Ended September 30,
-----------------------------
2001 2000
----------- ----------
Supplementary information:
Interest paid ............................................................. $ 86,592 $ 83,583
Non-cash transactions:
Transfer of mortgage loans held-for-investment to CMO collateral .......... $ 763,123 $337,016
Dividends declared and unpaid ............................................. 6,708 3,356
Accumulated other comprehensive gain (loss) ............................... (12,040) 8,887
Loans transferred to other real estate owned .............................. 7,793 9,743
Exchange of Series B preferred stock for Series C preferred stock ......... -- 28,658
Redemption of preferred stock into common stock ........................... 28,658 --
See accompanying notes to consolidated financial statements.
7
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
Corp. (IMH Assets), Impac Warehouse Lending Group, Inc. (IWLG), and its
affiliate, Impac Funding Corporation (together with its wholly-owned
subsidiaries, Impac Secured Assets Corp. and Novelle Financial Services, Inc.,
IFC, collectively). References to IMH refer to Impac Mortgage Holdings, Inc. as
a separate entity from IMH Assets, IWLG, and IFC.
1. Basis of Financial Statement Presentation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America (GAAP) for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. Operating results for the three- and nine-month period ended September
30, 2001 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2001. The accompanying consolidated financial
statements should be read in conjunction with the consolidated financial
statements and related notes included in the Company's Annual Report on Form
10-K and Form 10-K/A for the year ended December 31, 2000.
The operations of IMH have been presented in the consolidated financial
statements for the three- and nine- months ended September 30, 2001 and 2000 and
include the financial results of IMH's equity interest in net earnings of IFC
and IMH Assets and IWLG as stand-alone entities. The results of operations of
IFC, of which 99% of the economic interest is owned by IMH, are included in the
results of operations of the Company as "Equity in net earnings (loss) of Impac
Funding Corporation."
2. Organization
The Company is a mortgage real estate investment trust (Mortgage REIT)
which, together with its subsidiaries and IFC, primarily operates three
businesses: (1) the Long-Term Investment Operations, (2) the Mortgage
Operations, and (3) the Warehouse Lending Operations. IMH is organized as a REIT
for federal income tax purposes, which generally allows it to pass through
qualified income to stockholders without federal income tax at the corporate
level, provided that the Company distributes 90% of its taxable income to common
stockholders.
The Long-Term Investment Operations invests primarily in non-conforming
Alt-A residential mortgage loans that are originated and acquired by the
Mortgage Operations and securities backed by such mortgage loans. Alt-A mortgage
loans consist primarily of mortgage loans that are first lien mortgage loans
made to borrowers whose credit is generally within typical Fannie Mae or Freddie
Mac guidelines, but that have loan characteristics that make them non-conforming
under those guidelines.
The Mortgage Operations are comprised of (1) the Conduit Operations, which
primarily purchases non-conforming Alt-A mortgage loans from correspondents and
mortgage brokers, and subsequently sells or securitizes such loans, (2) the
Wholesale and Retail Lending Operations, which allows brokers and retail
customers to access the Company directly to originate, underwrite and fund their
loans and (3) Novelle Financial Services, Inc. (NFS), a B/C mortgage lender.
The Warehouse Lending Operations provides short-term financing to
originators of mortgage loans.
Long-Term Investment Operations
The Long-Term Investment Operations, conducted by IMH and IMH Assets,
invests primarily in non-conforming Alt-A residential mortgage loans and
mortgage-backed securities secured by or representing interests in such loans
and, to a lesser extent, in second mortgage loans. The Long-Term Investment
Operations investment strategy is to only acquire or invest in investment
securities that are secured by mortgage loans underwritten and purchased by IFC
(Impac Securities). Non-conforming Alt-A residential mortgage loans are
mortgages that do not qualify for purchase
8
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 generally for the purpose of debt consolidation, home
improvements, education and a variety of other purposes.
Mortgage Operations
The Conduit Operations, conducted by IFC, purchases primarily
non-conforming Alt-A mortgage loans and, to a lesser extent, second mortgage
loans from its network of mortgage brokers, correspondents and other sellers.
IFC subsequently securitizes or sells such loans to permanent investors,
including the Long-Term Investment Operations. IMH owns 99% of the economic
interest in IFC, while Joseph R. Tomkinson, Chairman and Chief Executive
Officer, William S. Ashmore, President and Chief Operating Officer, and Richard
J. Johnson, Executive Vice President and Chief Financial Officer, are the
holders of all the outstanding voting stock of, and 1% of the economic interest
in, IFC.
The Wholesale and Retail Lending Operations, conducted by Impac Lending
Group (ILG), a division of IFC, markets, underwrites, processes and funds
mortgage loans for both wholesale and retail customers. Through the wholesale
division, ILG allows mortgage brokers to work directly with the Company to
originate, underwrite and fund their mortgage loans. Many of the Company's
wholesale customers cannot conduct business with the Conduit Operations as
correspondent sellers because they do not meet the higher net worth requirements
or do not have the ability to close the loan in their name. Through the retail
division, ILG markets mortgage loans directly to the public. Both the wholesale
and retail mortgage divisions offer all of the loan programs that are offered by
the Conduit Operations.
During the third quarter of 2001, IFC capitalized NFS. NFS is a B/C
mortgage lender which will be separately licensed as a stand-alone entity and
operate as a division of IFC.
Warehouse Lending Operations
The Warehouse Lending Operations, conducted by IWLG, provides financing to
affiliated companies and to approved mortgage bankers to finance mortgage loans
during the time from the closing of the loans to their sale or other settlement
with pre-approved investors. Most of the affiliated companies are correspondents
of IFC.
3. Summary of Significant Accounting Policies
Method of Accounting
The consolidated financial statements are prepared on the accrual basis of
accounting in accordance with GAAP. The preparation of financial statements in
conformity with GAAP requires management to make significant estimates and
assumptions that affect the reported amounts of assets, liabilities and
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results may
differ materially from those estimates.
Reclassifications
Certain amounts in the consolidated financial statements for prior periods
have been reclassified to conform to the current presentation.
Recent Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 140 to replace SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," (SFAS 140). SFAS 140 provides the accounting
and reporting guidance for transfers and servicing of financial assets and
extinguishments of liabilities. SFAS 140 will be the authoritative accounting
literature for: (1) securitization transactions involving financial assets; (2)
sales of financial assets (including loan participations); (3) factoring
transactions; (4) wash sales; (5) servicing assets and liabilities; (6)
collateralized
9
borrowing arrangements; (7) securities lending transactions; (8) repurchase
agreements; and (9) extinguishment of liabilities. The accounting provisions are
effective after June 30, 2001. The reclassification and disclosure provisions
are effective for fiscal years beginning after December 31, 2000. The Company
adopted the disclosure required by SFAS 140 and has included all appropriate and
necessary disclosures required by SFAS 140 in its December 31, 2000 Form 10-K,
as amended. The adoption of the accounting provision is not expected to have a
material impact on the Company's consolidated balance sheet or results of
operations.
In November 1999, the FASB issued Emerging Issues Task Force No. 99-20
(EITF 99-20) "Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets." EITF 99-20 sets
forth the rules for (1) recognizing interest income (including amortization of
premium or discount) on (a) all credit sensitive mortgage assets and
asset-backed securities and (b) certain prepayment-sensitive securities and (2)
determining whether these securities must be written down to fair value due to
impairment. EITF 99-20 is effective for the Company after March 31, 2001. The
adoption of EITF 99-20 did not have a material impact on the Company's
consolidated balance sheet or results of operations.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" (SFAS
141) and SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142).
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. The use of the
pooling-of-interests method will be prohibited. The adoption of SFAS 141 is not
expected to have a material impact on the Company's consolidated balance sheet
or results of operations.
SFAS 142 applies to all acquired intangible assets whether acquired
singularly, as a part of a group, or in a business combination. SFAS 142
supercedes APB Opinion No. 17, "Intangible Assets," and will carry forward
provisions in AFB Opinion No. 17 related to internally developed intangible
assets. SFAS 142 changes the accounting for goodwill from an amortization method
to an impairment-only approach. Goodwill should no longer be amortized, but
instead tested for impairment at least annually at the reporting unit level. The
accounting provisions are effective for fiscal years beginning after December
31, 2001. The adoption of SFAS 142 is not expected to have a material impact on
the Company's consolidated balance sheet or results of operations.
4. Accounting for Derivatives Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138
(collectively, SFAS 133). SFAS 133 establishes accounting and reporting
standards for derivative instruments, including a number of derivative
instruments embedded in other contracts, collectively referred to as
derivatives, and for hedging activities. It requires that an entity recognizes
all derivatives as either assets or liabilities in the balance sheet and
measures those instruments at fair value. The accounting for gains and losses
associated with changes in the fair value of the derivatives are reported in
current earnings or other comprehensive income, depending on whether they
qualify for hedge accounting and whether the hedge is highly effective in
achieving offsetting changes in the fair value or cash flows of the asset or
liability hedged. If specific conditions are met, a derivative may be
specifically designated as: (1) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment; (2)
a hedge of the exposure to variable cash flows of a forecasted transaction; or
(3) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available for sale security or a
foreign-currency-denominated forecasted transaction. Under SFAS 133, an entity
that elects to apply hedge accounting is required to establish at the inception
of the hedge the method it will use for assessing the effectiveness of the
hedging derivative and the measurement and approach for determining the
ineffective aspect of the hedge. Those methods must be consistent with the
entity's approach to managing risk. The Company adopted SFAS 133 on January 1,
2001, and recorded a transition amount of $4.3 million associated with
establishing the fair values of the derivative instruments as of December 31,
2000.
As part of the Company's secondary marketing activities, it purchases
various derivative instruments to hedge against adverse changes in interest
rates. In general, the derivative instruments are allocated to existing or
forecasted CMOs to provide a hedge against a rise in interest rates. On January
1, 2001, the Company adopted SFAS 133, and at that time, designated the
derivative instruments in accordance with the requirements of the new standard.
These cash flow derivative instruments hedge the variability of forecasted cash
flows attributable to interest rate risk. The accounting for gains and losses
associated with changes in the fair value are reported in current earnings or
other comprehensive income depending on whether they qualify for hedge
accounting and whether the hedge is highly
10
effective in achieving offsetting changes in the fair value of cash flows of the
asset or liability hedged. Hedging gains and losses deemed to be ineffective in
hedging the change in expected cash flows of the hedged item are recognized
immediately in the statement of operations as an increase or decrease to current
earnings. Hedging gains or losses deemed to be effective are recorded in other
comprehensive income as an increase or decrease to stockholders equity.
With the implementation of SFAS 133, the Company recorded transition
amounts associated with establishing the fair values of the derivative
instruments as of December 31, 2000 as a decrease to net earnings of $4.3
million and reflected as a cumulative change in accounting principle in the
Company's statement of operations. During three-and nine months ended September
30, 2001, the Company recorded a cumulative mark-to-market loss of $2.3 million
and $3.7 million, respectively, when establishing the fair market valuation of
derivative instruments.
During the first nine months of 2001, the Company purchased derivative
instruments to protect itself against fluctuations in interest rates on existing
CMO collateral and borrowings. The objective was to lock in a steady stream of
cash flows when interest rates fall below or above certain levels. When interest
rates rise, our CMO borrowing expense increases at a greater speed than the
underlying collateral of loans. The hedging instruments will protect the Company
by providing cash flows at certain triggers during changing interest rate
environments. Cash flow hedges are accounted for by recording the value of the
derivative instrument on the balance sheet as either an asset or liability with
a corresponding offset recorded in other comprehensive income (loss) within
stockholders' equity. Any ineffective portion of the hedge is included in
current earnings. Approximately $13.5 million of expense reported in accumulated
comprehensive loss will be reclassified into earnings within the next twelve
months.
5. Other Comprehensive Income
Current period unrealized gains or losses on investment securities
available-for-sale and the effective hedging component of derivative instruments
are reported as other comprehensive income as an increase or decrease to
stockholders equity. The following table presents the components of other
comprehensive income for the periods shown (in thousands):
September 30, December 31,
2001 2000
------------- ------------
Unrealized gain on investment securities available-for-sale $ 6,232 $(568)
Unrealized loss on derivative instruments (1) ............. (23,740) --
Unrealized gain on IMH common stock owned by IFC (2) ...... 4,900 --
-------- -----
Total other comprehensive income (loss) ................. $(12,608) $(568)
======== =====
(1) Represents changes in the fair market valuation of the effective hedging
component of derivative instruments.
(2) Represents the Company's investment in the unrealized gain on IMH common
stock owned by IFC.
6. Net Earnings (Loss) per Share
The following table presents the computation of basic and diluted net
earnings (loss) per share for the periods shown, as if all stock options and
10.5% Cumulative Convertible Preferred Stock (Preferred Stock), if dilutive,
were outstanding for these periods (in thousands, except per share data):
For the Three Months
Ended September 30,
--------------------
2001 2000
------- --------
Numerator for earnings per share:
Earnings before extraordinary item ........................................... $ 8,291 $ 3,299
Less: Dividends paid to preferred stockholders .............................. -- (788)
------- -------
Net earnings available to common stockholders ............................. $ 8,291 $ 2,511
======= =======
Denominator for earnings per share:
Basic weighted average number of common shares outstanding during the period . 22,687 21,401
Diluted weighted average number of common shares outstanding during the period 26,823 21,401
Impact of assumed conversion of Preferred Stock .............................. -- 6,356
Net effect of dilutive stock options ......................................... 361 --
------- -------
Diluted weighted average common and common equivalent shares .............. 27,184 27,757
======= =======
Net earnings per share:
Basic ..................................................................... $ 0.37 $ 0.12
======= =======
Diluted ................................................................... $ 0.31 $ 0.12
======= =======
11
The Company had 560,978 and 769,146 stock options for the quarter ended
September 30, 2001 and September 30, 2000, respectively, that were not
considered in the dilutive calculation of earnings per share as the exercise
price was higher than the market price for the period. In August 2001, 1,200,000
shares of preferred stock were converted into 6,355,932 shares of common stock.
The antidilutive effects of outstanding Preferred Stock as of September 30, 2001
and September 30, 2000 was none and 6,355,932 shares, respectively.
For the Nine Months
Ended September 30,
----------------------
2001 2000
-------- --------
Numerator for earnings per share:
Earnings (loss) before extraordinary item and cumulative effect of
change in accounting principle ............................................ $ 23,536 $(57,909)
Extraordinary item ........................................................... (1,006) --
Cumulative effect of change in accounting principle .......................... (4,313) --
-------- --------
Earnings (loss) after extraordinary item and cumulative effect of change
in accounting principle ................................................. 18,217 (57,909)
Less: Dividends paid to preferred stockholders .............................. (1,575) (2,363)
-------- ---------
Net earnings (loss) available to common stockholders ...................... $ 16,642 $(60,272)
======== =========
Denominator for earnings per share:
Basic weighted average number of common shares outstanding during the period . 22,573 21,401
Diluted weighted average number of common shares outstanding during the period 26,793 21,401
Net effect of dilutive stock options ......................................... 174 --
-------- --------
Diluted weighted average common and common equivalent shares .............. 26,967 21,401
======== ========
Net earnings (loss) per share before extraordinary item and cumulative
effect of change in accounting principle:
Basic ..................................................................... $ 0.97 $ (2.82)
======== ========
Diluted ................................................................... $ 0.87 $ (2.82)
======== ========
Net earnings (loss) per share:
Basic ..................................................................... $ 0.74 $ (2.82)
======== ========
Diluted ................................................................... $ 0.68 $ (2.82)
======== ========
The Company had 195,277 and 769,146 stock options for the nine-months ended
September 30, 2001 and September 30, 2000, respectively, that were not
considered in the dilutive calculation of earnings per share as the exercise
price was higher than the market price for the period. In August 2001, 1,200,000
shares of preferred stock were converted into 6,355,932 shares of common stock.
The antidilutive effects of outstanding Preferred Stock as of September 30, 2001
and September 30, 2000 was none and 6,355,932 shares, respectively.
7. Mortgage Assets
Mortgage Assets consist of investment securities available-for-sale,
mortgage loans held-for-investment, CMO collateral and finance receivables. At
September 30, 2001 and December 31, 2000, Mortgage Assets consisted of the
following (in thousands):
September 30, December 31,
2001 2000
------------- ------------
Investment securities available-for-sale:
Subordinated securities collateralized by mortgages ........ $ 28,280 $ 37,920
Net unrealized gain (loss) ................................. 6,049 (999)
----------- -----------
Carrying value of investment securities available-for-sale 34,329 36,921
----------- -----------
Loan Receivables:
CMO collateral--
CMO collateral, unpaid principal balance ................... 1,642,051 1,333,487
Unamortized net premiums on loans .......................... 26,117 22,759
Securitization expenses .................................... 10,012 14,123
Hedging instruments allocated to CMO collateral ............ (5,599) 2,627
----------- -----------
Carrying value of CMO collateral ......................... 1,672,581 1,372,996
Finance receivables--
Due from affiliates ........................................ 233,621 267,033
Due from other mortgage banking companies .................. 230,882 138,405
----------- -----------
Carrying value of finance receivables .................... 464,503 405,438
Mortgage loans held-for-investment--
Mortgage loans held-for-investment, unpaid principal balance 149,227 16,928
Unamortized net premiums (discounts) on loans .............. 2,056 (208)
----------- -----------
Carrying value of mortgage loans held-for-investment ..... 151,283 16,720
Carrying value of Gross Loan Receivables ...................... 2,288,367 1,795,154
Allowance for loan losses .................................. (7,942) (5,090)
----------- -----------
Carrying value of Net Loan Receivables ................... 2,280,425 1,790,064
----------- -----------
Total carrying value of Mortgage Assets .................... $ 2,314,754 $ 1,826,985
=========== ===========
12
8. Allowance for Loan Losses
The Company makes a monthly provision for estimated loan losses on its
long-term investment portfolio as an increase to allowance for loan losses. The
provision for estimated loan losses is primarily based on a migration analysis
based on historical loss statistics, including cumulative loss percentages and
loss severity, of similar loans in the Company's long-term investment portfolio.
The loss percentage is used to determine the estimated inherent losses in the
investment portfolio. Provision for loan losses is also based on management's
judgment of net loss potential, including specific allowances for known impaired
loans, changes in the nature and volume of the portfolio, the value of the
collateral and current economic conditions that may affect the borrowers'
ability to pay.
The adequacy of the allowance for loan losses is evaluated on a monthly
basis by management to maintain the allowance at levels sufficient to provide
for inherent losses. The migration system analyzes historical migration of
mortgage loans from original current status to 30-, 60- and 90-day delinquency,
foreclosure, other real estate owned and paid. The principal balance of all
loans currently in the long-term investment portfolio are included in the
migration analysis until the principal balance of loans either become real
estate owned or are paid in full. The statistics generated by the migration
analysis are used to establish the general valuation for loan losses.
Activity for allowance for loan losses was as follows (in thousands):
For the Three Months Ended,
-----------------------------------------
September 30, June 30, March 31,
2001 2001 2001
------------- -------- ---------
Balance, beginning of period ...... $ 7,817 $ 6,295 $ 5,090
Provision for loan losses ......... 2,615 3,905 4,038
Charge-offs, net of recoveries .... (2,490) (2,383) (2,833)
------- ------- -------
Balance, end of period ............ $ 7,942 $ 7,817 $ 6,295
======= ======= =======
For the Three Months Ended,
-----------------------------------------
September 30, June 30, March 31,
2000 2000 2000
------------- -------- ---------
Balance, beginning of period ... $ 12,867 $ 12,768 $ 4,029
Provision for loan losses ...... 1,247 3,304 13,184
Charge-offs, net of recoveries . (5,259) (3,205) (4,445)
-------- -------- --------
Balance, end of period ......... $ 8,855 $ 12,867 $ 12,768
======== ======== ========
13
9. Segment Reporting
The basis for the Company's segments is to separate its entities as
follows: segments that derive income from investment in long-term Mortgage
Assets, segments that derive income by providing short-term financing and
segments that derive income from the purchase and sale or securitization of
mortgage loans.
The Company internally reviews and analyzes its segments as follows:
o The Long-Term Investment Operations, conducted by IMH and IMH Assets,
invests primarily in non-conforming Alt-A residential mortgage loans
and mortgage-backed securities secured by or representing interests in
such loans and in second mortgage loans.
o The Warehouse Lending Operations, conducted by IWLG, provides
warehouse and repurchase financing to affiliated companies and to
approved mortgage banks, most of which are correspondents of IFC, to
finance mortgage loans.
o The Mortgage Operations, conducted by IFC, ILG and NFS, purchases and
originates non-conforming Alt-A mortgage loans and second mortgage
loans from its network of correspondent sellers, wholesale brokers and
retail customers.
The following table shows the Company's reporting segments as of and for
the nine months ended September 30, 2001 (in thousands):
Long-Term Warehouse
Investment Lending (a)
Operations Operations Eliminations Consolidated
----------- ---------- ------------ ------------
Balance Sheet Items
CMO collateral $1,672,581 $ -- $ -- $1,672,581
Total assets 2,020,644 669,628 (293,530) 2,396,742
Total stockholders' equity 264,164 70,065 (157,638) 176,591
Income Statement Items
Interest income $ 89,380 $ 34,266 $ (7,614) $ 116,032
Interest expense 67,260 25,556 (7,614) 85,202
Equity interest in net earnings
of IFC (b) -- -- 7,857 7,857
Net earnings 2,591 7,769 7,857 18,217
The following table shows the Company's reporting segments for the three
months ended September 30, 2001 (in thousands):
Income Statement Items
Interest income $ 30,975 $ 11,003 $ (3,010) $ 38,968
Interest expense 22,899 7,692 (3,010) 27,581
Equity interest in net earnings
of IFC (b) -- -- 3,039 3,039
Net earnings 2,339 2,913 3,039 8,291
The following table shows the Company's reporting segments as of and for
the nine months ended September 30, 2000 (in thousands):
Long-Term Warehouse
Investment Lending (a)
Operations Operations Eliminations Consolidated
----------- ---------- ------------ ------------
Balance Sheet Items
CMO collateral $ 1,094,083 $ -- $ -- $ 1,094,083
Total assets 1,520,496 652,769 (365,674) 1,807,591
Total stockholders' equity 246,403 58,293 (124,975) 179,721
Income Statement Items
Interest income $ 76,586 $ 36,951 $ (6,895) $ 106,642
Interest expense 69,882 26,525 (6,895) 89,512
Equity interest in net loss
of IFC (b) -- -- (937) (937)
Net earnings (loss) (66,581) 9,609 (937) (57,909)
14
The following table shows the Company's reporting segments for the three
months ended September 30, 2000 (in thousands):
Income Statement Items
Interest income $ 25,910 $15,686 $(3,624) $37,972
Interest expense 24,543 11,676 (3,624) 32,595
Equity interest in net earnings
of IFC (b) -- -- 143 143
Net earnings (loss) (696) 3,852 143 3,299
(a) Elimination of inter-segment balance sheet and income statement items.
(b) The Mortgage Operations are accounted for using the equity method and is an
unconsolidated qualified REIT subsidiary of the Company.
10. 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, December 31,
2001 2000
------------- ------------
ASSETS
Cash $ 12,749 $ 8,281
Investment securities available-for-sale 15,147 266
Mortgage loans held-for-sale 244,762 275,570
Mortgage servicing rights 10,365 10,938
Premises and equipment, net 5,284 5,037
Accrued interest receivable 190 1,040
Other assets 8,064 16,031
--------- ---------
Total assets $ 296,561 $ 317,163
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Borrowings from IWLG $ 234,827 $ 266,994
Due to affiliates 14,500 14,500
Deferred revenue 5,462 5,026
Accrued interest expense 515 2,176
Other liabilities 18,920 12,546
--------- ---------
Total liabilities 274,224 301,242
--------- ---------
Shareholders' Equity:
Preferred stock 18,053 18,053
Common stock 182 182
Retained earnings (accumulated deficit) 5,637 (2,300)
Cumulative dividends declared (6,484) --
Accumulated other comprehensive gain (loss) 4,949 (14)
--------- ---------
Total shareholders' equity 22,337 15,921
--------- ---------
Total liabilities and shareholders' equity $ 296,561 $ 317,163
========= =========
15
STATEMENTS OF OPERATIONS
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------- -----------------------
2001 2000 2001 2000
-------- ------- -------- --------
Interest income $ 5,569 $ 8,063 $ 18,314 $ 20,116
Interest expense 4,629 8,388 16,601 21,063
-------- ------- -------- --------
Net interest income (expense) 940 (325) 1,713 (947)
Gain on sale of loans 12,423 3,793 32,947 13,163
Loan servicing income 507 2,310 2,308 4,858
Other non-interest income 210 188 319 595
-------- ------- -------- --------
Total non-interest income 13,140 6,291 35,574 18,616
Personnel expense 4,138 2,370 10,776 6,950
General and administrative and other expense 2,844 2,048 8,500 6,954
Amortization of mortgage servicing rights 1,313 1,294 3,757 3,751
Provision for repurchases 501 5 515 77
Write-down on investment securities available-for-sale -- -- -- 1,537
Mark-to-market gain - FAS 133 (62) -- (45) --
-------- ------- -------- --------
Total non-interest expense 8,734 5,717 23,503 19,269
Earnings (loss) before income taxes and cumulative effect
Of change in accounting principle 5,346 249 13,784 (1,600)
Income taxes (benefit) 2,257 105 5,865 (651)
-------- ------- -------- --------
Earnings (loss) before cumulative effect of change
in accounting principle 3,089 144 7,919 (949)
Cumulative effect of change in accounting principle -- -- 17 --
-------- ------- -------- --------
Net earnings (loss) 3,089 144 7,936 (949)
Less: Cash dividends on preferred stock (2,000) -- (6,464) --
-------- ------- -------- --------
Net earnings (loss) available to common stockholders $ 1,089 $ 144 $ 1,472 $ (949)
======== ======= ======== ========
11. Stockholders' Equity
During the nine months ended September 30, 2001, accumulated other
comprehensive loss increased by $12.0 million primarily due to changes in the
fair market value of derivative instruments.
During the third quarter of 2001, 1,200,000 shares of Series C 10.5%
Cumulative Convertible Preferred Stock were converted into 6,355,932 shares of
common stock.
On September 25, 2001, the Company declared a third quarter cash dividend
of $0.25 per common share payable in two installments. The first installment of
$3.5 million, or $0.13 per common share, was paid on October 15, 2001 to common
stockholders of record on October 1, 2001. The second installment of $0.12 per
common share is payable on November 15, 2001 to common stockholders of record on
November 1, 2001.
On June 26, 2001, the Company declared a second quarter cash dividend of
$788,000, or $0.65625 per share, to preferred stockholders. This dividend was
paid on July 24, 2001.
On March 27, 2001, the Company declared a first quarter cash dividend of
$788,000, or $0.65625 per share, to preferred stockholders. This dividend was
paid on April 24, 2001.
On February 20, 2001, IFC purchased $5.0 million of the Company's Preferred
Stock from LBP, Inc. (LBPI) at cost plus accumulated dividends. On March 27,
2001, IFC purchased an additional $5.0 million of the Company's Preferred Stock
from LBPI for $5.25 million plus accumulated dividends.
16
12. Subsequent Events
On October 30, 2001, the Company completed a CMO for $400.5 million, which
was collateralized by $403.5 million of primarily non-conforming, Alt-A
residential mortgages.
In October 2001, the Company issued 5,100,000 shares of common stock at a
price of $7.05 per share and received net proceeds of approximately $33.8
million. In addition, as part of the same common stock offering, IFC sold
1,400,000 shares of IMH common stock and received net proceeds of approximately
$9.3 million.
17
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. Forward-looking statements, some of which are based on various
assumptions and events that are beyond the Company's control, may be identified
by reference to a future period or periods or by the use of forward-looking
terminology, such as may, will, believe, expect, anticipate, continue, or
similar terms or variations on those terms or the negative of those terms. The
Company's actual results could differ materially from those contained in the
forward-looking statements due to a variety of factors, including, but not
limited to adverse economic conditions, changes in interest rates, changes in
yield curves, changes in prepayment rates, the availability of financing and, if
available, the terms of any financing, and other factors referenced in this
report and other reports filed by the Company with the SEC, including its Annual
Report on Form 10-K and Form 10-K/A.
SIGNIFICANT TRANSACTIONS
On September 25, 2001, the Board of Directors declared a third quarter
dividend of $0.25 per share. The Company is paying the dividend in two
installments. The first installment of $0.13 per share was paid on October 15,
2001 to common stockholders of record on October 1, 2001. The second installment
of $0.12 per share is payable on November 15, 2001 to common stockholders of
record on November 1, 2001.
On August 30, 2001, 1,200,000 shares of Series C 10.5% Cumulative
Convertible Preferred Stock ("Preferred Stock") were converted into 6,355,932
shares of common stock.
On June 20, 2001, the Company retired its 11% senior subordinated
debentures and wrote-off $1.0 million of discounts and securitization costs
related to the debentures.
On February 20, 2001, IFC purchased $5.0 million of the Company's Preferred
Stock from LBP, Inc. ("LBPI") at cost plus accumulated dividends. On March 27,
2001, IFC purchased an additional $5.0 million of the Company's Preferred Stock
from LBPI for $5.25 million plus accumulated dividends.
BUSINESS OPERATIONS
Long-Term Investment Operations: During the first nine months of 2001, the
Long-Term Investment Operations acquired $922.4 million of primarily
adjustable-rate mortgages ("ARMs") secured by first liens on residential
property from IFC as compared to $282.3 million of mortgages acquired during the
same period in 2000. Of the mortgages acquired during 2001, 59% were acquired
with prepayment penalty features and with a weighted average Fair Isaac Credit
Score ("FICO") of 680. The Company generally considers prime, or "A" credit
quality loans, to have a FICO of 640 or better, and "Alt-A" credit quality loans
generally have a FICO of 600 or better. The FICO was developed by Fair Isaac
Company, Inc. and is an electronic evaluation of past and present credit
accounts on the borrower's credit bureau report. Alt-A mortgage loans primarily
consist of mortgage loans that are first lien mortgage loans made to borrowers
whose credit is generally within typical Fannie Mae or Freddie Mac guidelines,
but that have loan characteristics, such as lack of documentation or
verifications, that make them ineligible under their guidelines. As of September
30, 2001, the Long-Term Investment Operations' portfolio of mortgage loans
consisted of $1.7 billion of mortgage loans held in trust as collateral for CMOs
and $151.3 million of mortgage loans held-for-investment, of which approximately
15% were fixed-rate mortgages ("FRMs") and 85% were ARMs. The weighted average
coupon of the Long-Term Investment Operations portfolio of mortgage loans was
8.52% at September 30, 2001 with a weighted average margin of 3.68%. During the
first nine months of 2001, IMH Assets issued two Collateralized Mortgage
Obligations ("CMO") for $758.3 million as compared to a CMO totaling $452.0
million during the same period in 2000. As of September 30, 2001, over 95% of
CMO collateral were Alt-A mortgages acquired or originated by the Mortgage
Operations, of which 44% had active prepayment penalties with a weighted average
FICO of 677.
Mortgage Operations: Loan production by the Mortgage Operations increased
47% to $2.2 billion during the first nine months of 2001 as compared to $1.5
billion during the same period in 2000. During the first nine months of 2001,
correspondent mortgage acquisitions were $1.7 billion, or 77% of total
production, and wholesale loan originations were $491.3 million, or 22% of total
production, as compared to $1.2 billion, or 80% of total production,
18
and $174.8 million, or 12% of total production, respectively, during the same
period of 2000. Of mortgages acquired or originated during the first nine months
of 2001, $1.4 billion, or 65% of total production, had prepayment penalty
features as compared to $720.0 million, or 49% of total production, during the
same period in 2000. The Mortgage Operations issued six real estate mortgage
investment conduits ("REMICs"), for a total of $1.3 billion, which contributed
to gain on sale of loans of $32.9 million, during the first nine months of 2001.
This compares to three REMICs for $885.9 million, contributing to gain on sale
of loans of $13.2 million, during the same period in 2000. Additionally, the
Mortgage Operations sold $29.3 million of mortgages to first party investors and
$907.8 million of mortgages to IMH during the first nine months of 2001 as
compared to $46.9 million and $303.3 million, respectively, during the first
nine months of 2000. The master servicing portfolio increased 28% to $5.1
billion at September 30, 2001 as compared to $4.0 billion at December 31, 2000.
The loan delinquency rate of mortgages in the master servicing portfolio which
were 60 or more days past due, inclusive of foreclosures and delinquent
bankruptcies, was 5.41% at September 30, 2001 as compared to 4.24% at December
31, 2000.
Warehouse Lending Operations: As of September 30, 2001, the Warehouse
Lending Operations had $408.0 million of short-term warehouse lines of credit
available to 55 non-affiliated customers, of which $230.9 million was
outstanding.
RESULTS OF OPERATIONS--IMPAC MORTGAGE HOLDINGS, INC.
For the Three Months Ended September 30, 2001 as compared to the Three Months
Ended September 30, 2000
Results of Operations
Reported net earnings per generally accepted accounting principles ("GAAP")
increased to $8.3 million, or $0.31 per diluted common share, for the third
quarter of 2001 as compared to $3.3 million, or $0.12 per diluted common share,
for the third quarter of 2000. The increase in net earnings was primarily due to
a $6.0 million increase in net interest income and a $2.9 million increase in
equity in net earnings of IFC. The increases to net earnings were partially
offset by a $2.3 million mark-to-market loss recorded on derivative and a $1.8
million write-down on investment securities available-for-sale.
Net interest income increased to $11.4 million during the third quarter of
2001 as compared to $5.4 million during the third quarter of 2000 as the Federal
Reserve Bank reduced short-term interest rates during 2001, which significantly
reduced the Company's financing costs on CMO borrowings. The yield on CMO
financing costs decreased 222 basis points to 5.36% during the third quarter of
2001 as compared to 7.58% during the third quarter of 2000. Additionally, net
interest income increased as average Mortgage Assets increased 22% to $2.2
billion during the third quarter of 2001 as compared to $1.8 billion during the
third quarter of 2000. Mortgage Assets include CMO collateral, mortgage loans
held-for-investment, finance receivables and investment securities. Average
Mortgage Assets increased as the Long-Term Investment Operations acquired $922.4
million of primarily ARMs secured by first liens on residential property from
the Mortgage Operations during the first nine months of 2001 as compared to
$282.3 million of mortgages acquired during the same period in 2000. The
increased acquisition of mortgages during the first nine months of 2001 resulted
in average CMO collateral of $1.5 billion during the third quarter of 2001 as
compared to $1.1 billion during the third quarter of 2000.
Equity in net earnings of IFC increased to $3.0 million during the third
quarter of 2001 as compared to $143,000 during the third quarter of 2000. Net
earnings of IFC increased primarily as a result of an increase in gain on sale
of loans to $12.4 million during the third quarter of 2001 as compared to $3.8
million during the third quarter of 2000. Refer to "Result of Operations--Impac
Funding Corporation" for additional information regarding operating results of
IFC.
During the third quarter of 2001, the Company recognized a current loss to
earnings of $2.3 million as a fair market valuation of the Company's derivative
instruments in accordance with Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS
133"). As part of the Company's secondary marketing activities, it purchases
derivative instruments as a hedge against adverse changes in interest rates and
the corresponding adverse effect on net interest margins. The primary effect of
SFAS 133 on the Company's financial position is to change the prior accounting
treatment, which amortized the cost of derivative instruments over its life, to
recording only the change in the fair market value of the derivative instruments
as an adjustment to current earnings. During the third quarter of 2001, the
effect of the fair market valuation was a loss of $2.3 million as compared to
$1.1 million of amortization of interest rate cap costs, which prior to SFAS
133, would
19
have been recorded as interest expense. Since the implementation of SFAS 133,
net interest margins do not reflect the amortization of interest rate cap costs.
The Company does not intend to change its interest rate hedge policy. Net
earnings in the future may experience some level of volatility from quarter to
quarter due to the timing and expense recognition of hedge activity by the
Company as a result of implementation of SFAS 133.
Diluted book value was $6.58 per common share at September 30, 2001 as
compared to $6.67 per common share at December 31, 2000. Book value decreased as
of September 30, 2001 as a result of marking to market hedging instruments that
protect the Company from adverse changes in interest rates. Excluding the effect
of SFAS 133, the Company's diluted book value per share at September 30, 2001
was $7.47, an increase of 12% as compared to December 31, 2000.
Core Operating Earnings. Core operating earnings were $11.3 million, or
$0.42 per diluted common share, for the third quarter of 2001 as compared to
core operating earnings of $3.5 million, or $0.13 per diluted common share, for
the third quarter of 2000. Core operating earnings during the third quarter of
2001 excludes the current effect of a $2.3 million mark-to-market loss on
derivative instruments and a $1.8 million write-down on investment securities
available-for-sale. Core operating earnings during the third quarter of 2000
excludes a $171,000 write-down on investment securities available-for-sale.
RECONCILATION OF REPORTABLE EARNINGS TO CORE OPERATING EARNINGS
(in thousands, expect per share amounts)
For the Three Months
Ended September 30,
----------------------
2001 2000
-------- -------
Reportable net earnings ................................... $ 8,291 $ 3,299
Add:
Mark-to-market loss - FAS 133 .......................... 2,269 --
Write-down on investment securities available-for-sale . 1,841 171
Less:
Amortization of costs associated with the acquisition
of hedging instruments not included in interest expense
due to the implementation of SFAS 133 ................. (1,096) --
-------- -------
Core operating earnings ................................... $ 11,305 $ 3,470
======== =======
Core operating earnings per share ......................... $ 0.42 $ 0.13
======== =======
Diluted weighted average shares outstanding used for
Calculation of core earnings per share ................. 27,184 27,757
======== =======
Taxable Earnings. Estimated taxable earnings increased 20% to $11.0
million, or $0.40 per diluted share, for the third quarter of 2001 as compared
to estimated taxable earnings of $158,000, or $0.01 per diluted share, for the
third quarter of 2000. As a result of higher than anticipated estimated taxable
earnings during the first nine months of 2001, the Board of Directors returned
to regular dividends by declaring a third quarter dividend of $0.25 per share.
The Company is paying the dividend in two installments. The first installment of
$0.13 per share was paid on October 15, 2001 to common stockholders of record on
October 1, 2001. The second installment of $0.12 per share is payable on
November 15, 2001 to common stockholders of record on November 1, 2001.
Net Interest Income
Net interest income increased 111% to $11.4 million during the third
quarter of 2001 as compared to $5.4 million during the third quarter of 2000.
Net interest income increased as a result of decreased borrowing costs and wider
net interest margins as interest rates on adjustable rate CMO borrowings
continued to decline due to short-term interest rate reductions by the Federal
Reserve Bank. However, in anticipation of the likelihood that short-term
interest rates may rise sometime in the future, the Company purchased derivative
instruments during the first nine months of 2001 to mitigate possible adverse
changes in net interest margins.
20
During the third quarter of 2001, net interest income increased as net
interest margins on Mortgage Assets increased 76 basis points to 1.96% as
compared to 1.20% during the third quarter of 2000. Net interest margins on
Mortgage Assets increased during the third quarter of 2001 primarily as a result
of average CMO borrowing costs decreasing 222 basis points to 5.36% during the
third quarter of 2001 as compared to 7.58% during the third quarter of 2000.
Borrowing costs on CMO financing continued to trend lower as interest rate
reductions by the Federal Reserve Bank improved net interest margins during the
third quarter of 2001.
Because a significant portion of CMO collateral includes prepayment
penalties, the Company believes that the effect of early prepayments on net
interest income due to refinance activity will be partially mitigated. As of
September 30, 2001, 44% of the Company's CMO collateral had prepayment penalties
with a weighted average life to prepayment penalty expiration of approximately
24 months. During the third quarter of 2001, the Company completed a CMO for
$400.5 million of which approximately 57% of mortgage collateral included
prepayment penalties.
Net interest income also increased as average Mortgage Assets increased 22%
to $2.2 billion during the third quarter of 2001 as compared to $1.8 billion
during the third quarter of 2000. The increase in Mortgage Assets was primarily
the result of a $370.3 million increase in average CMO collateral and mortgage
loans held-for investment. CMO collateral and mortgage loans held-for investment
increased during the third quarter of 2001 as the Company acquired $922.4
million of primarily ARMs from the Mortgage Operations during the first nine
months of 2001 as compared to $282.3 million during the same period of 2000.
The following table summarizes average balance, interest and weighted
average yield on Mortgage Assets and borrowings on Mortgage Assets for the third
quarters of 2001 and 2000 and includes interest income on Mortgage Assets and
interest expense related to borrowings on Mortgage Assets only (dollars in
thousands):
For the Three Months For the Three Months
Ended September 30, 2001 Ended September 30, 2000
------------------------------------- --------------------------------------
Average Wtd. Avg Average Wtd Avg
Balance Interest Yield Balance Interest Yield
------------------------------------- --------------------------------------
MORTGAGE ASSETS
---------------
Investment securities available-for-sale:
Securities collateralized by mortgages .... $ 33,491 $ 679 8.11% $ 39,899 $ 1,630 16.34%
Securities collateralized by other loans .. -- -- -- 159 -- --
----------------------- -----------------------
Total investment securities ............. 33,491 679 8.11 40,058 1,630 16.28
----------------------- -----------------------
Loan receivables:
CMO collateral ............................ 1,515,450 27,219 7.18 1,145,119 20,842 7.28
Mortgage loans held-for-investment ........ 195,891 2,529 5.16 153,213 3,226 8.42
Finance receivables:
Affiliated .............................. 251,140 4,027 6.41 316,044 7,875 9.97
Non-affiliated .......................... 208,164 3,901 7.50 152,679 4,138 10.84
----------------------- -----------------------
Total finance receivables .............. 459,304 7,928 6.90 468,723 12,013 10.25
----------------------- -----------------------
Total Loan receivables ............... 2,170,645 37,676 6.94 1,767,055 36,081 8.17
----------------------- -----------------------
Total Mortgage Assets ..................... $2,204,136 $38,355 6.96% $1,807,113 $37,711 8.35%
======================= =======================
BORROWINGS
----------
CMO borrowings ............................ $1,435,864 $19,249 5.36% $1,046,699 $19,839 7.58%
Reverse repurchase agreements - mortgages . 633,248 7,688 4.86 598,306 11,677 7.81
Borrowings secured by investment securities 16,183 620 15.32 25,022 765 12.23
----------------------- -----------------------
Total Borrowings on Mortgage Assets ....... $2,085,295 $27,557 5.29% $1,670,027 $32,281 7.73%
======================= =======================
Net Interest Spread (1) 1.67% 0.62%
Net Interest Margin (2) 1.96% 1.20%
(1) Net interest spread is calculated by subtracting the weighted average yield
on total borrowings on Mortgage Assets from the weighted average yield on total
Mortgage Assets.
21
(2) Net interest margin is calculated by subtracting interest expense on total
borrowings on Mortgage Assets from interest income on total Mortgage Assets and
then dividing by the total average balance for Mortgage Assets.
Interest Income on Mortgage Assets
Interest income on CMO collateral increased 31% to $27.2 million during the
third quarter of 2001 as compared to $20.8 million during the third quarter of
2000 as average CMO collateral increased 36% to $1.5 billion as compared to $1.1
billion, respectively. Interest income on CMO collateral increased as the
Company issued CMOs for $1.2 billion since the end of the third quarter of 2000.
During the third quarter of 2001, constant prepayment rates ("CPR") on CMO
collateral increased to 36% as compared to 25% during the third quarter of 2000.
CPR results from the unscheduled principal pay down or payoff of mortgage loans
prior to the contractual maturity date or contractual payment schedule of the
mortgage loan. Although interest rates continued to decrease during the third
quarter of 2001, an increase in loans acquired from the Mortgage Operations with
prepayment penalties should partially mitigate increased CPR and corresponding
premium amortization. In addition, the Company reduced its exposure to premium
amortization as total capitalized premiums were 159 basis points of outstanding
CMO collateral at September 30, 2001 as compared to 217 basis points of
outstanding CMO collateral at September 30, 2000. Loan premiums paid for
acquiring mortgage loans are amortized to interest income over the estimated
lives of the mortgage loans. The weighted average yield on CMO collateral
decreased to 7.18% during the third quarter of 2001 as compared to 7.28% during
the third quarter of 2000 due to increased prepayment rates, downward adjustment
of interest rates on ARMs and the acquisition of new mortgages with lower
coupons.
Interest income on mortgage loans held-for-investment decreased 22% to $2.5
million during the third quarter of 2001 as compared to $3.2 million during the
third quarter of 2000 as average mortgage loans held-for-investment increased
28% to $195.9 million as compared to $153.2 million, respectively. The Long-Term
Investment Operations acquired $366.9 million of mortgages during the third
quarter of 2001 as compared to $126.2 million of mortgages during the third
quarter of 2000. The weighted average yield on mortgage loans
held-for-investment decreased to 5.16% during the third quarter of 2001 as
compared to 8.42% during the third quarter of 2000 as new mortgages were
acquired with lower coupons and non-performing mortgage loans remained from
previously collapsed CMO collateral.
Interest income on total finance receivables decreased 34% to $7.9 million
during the third quarter of 2001 as compared to $12.0 million during the third
quarter of 2000 as average total finance receivables decreased 2% to $459.3
million as compared to $468.7 million, respectively. The weighted average yield
on total finance receivables decreased to 6.90% during the third quarter of 2001
as compared to 10.25% during the third quarter of 2000. The decrease in yield
was primarily due to a reduction in Bank of America's prime rate ("Prime"),
which is the index used to determine interest rates on finance receivables, and
a 50 basis point decrease in the spread indexed to Prime on warehouse lines made
available to affiliates by the Warehouse Lending Operations.
Interest income on finance receivables to affiliates decreased 49% to $4.0
million during the third quarter of 2001 as compared to $7.9 million during the
third quarter of 2000 as average finance receivables to affiliated companies
decreased 21% to $251.1 million as compared to $316.0 million, respectively. The
decrease in average affiliate finance receivables was primarily due to
accelerated securitizations by the Mortgage Operations during 2001 as compared
to 2000 and the corresponding shorter accumulation and holding period of loans
held-for-sale. The weighted average yield on affiliated finance receivables
decreased to 6.41% during the third quarter of 2001 as compared to 9.97% during
the third quarter of 2000 primarily due to a decrease in Prime and a 50 basis
point decrease in the spread indexed to Prime on warehouse lines with the
Warehouse Lending Operations.
Interest income on finance receivables to non-affiliated mortgage banking
companies decreased 5% to $3.9 million during the third quarter of 2001 as
compared to $4.1 million during the third quarter of 2000 as average finance
receivables outstanding to non-affiliated mortgage banking companies increased
36% to $208.2 million as compared to $152.7 million, respectively. Average
finance receivables to non-affiliates increased during the third quarter of 2001
as compared to the third quarter of 2000 primarily due to increased usage of
short-term warehouse lines of credit and the addition of new customers. The
weighted average yield on non-affiliated finance receivables decreased to 7.50%
during the third quarter of 2001 as compared to 10.84% during the third quarter
of 2000 primarily due to the aforementioned decrease in Prime.
Interest income on investment securities decreased 58% to $679,000 during
the third quarter of 2001 as compared to $1.6 million during the third quarter
of 2000 as average investment securities decreased 16% to $33.5 million as
22
compared to $40.1 million, respectively. Average investment securities decreased
as the Company wrote-off $52.6 million of investment securities during the first
half of 2000. The weighted average yield on investment securities decreased to
8.11% during the third quarter of 2001 as compared to 16.28% during the third
quarter of 2000 as primarily non-Impac investment securities were written-off
during the first half of 2000.
Interest Expense on Mortgage Assets
Interest expense on CMO borrowings decreased 3% to $19.2 million during the
third quarter of 2001 as compared to $19.8 million during the third quarter of
2000 as average borrowings on CMO collateral increased 40% to $1.4 billion as
compared to $1.0 billion, respectively. The decrease in interest expense on CMO
borrowings was primarily attributable to the reduction in short-term interest
rates by the Federal Reserve Bank during the first nine months of 2001. As a
result, one-month LIBOR, which is the index used to re-price the Company's
adjustable-rate CMO borrowings, decreased to an average of 3.55% during the
third quarter of 2001 as compared to 6.62% during the third quarter of 2000.
Short-term interest rate reductions caused CMO borrowing costs to decrease 222
basis points to 5.36% during the third quarter of 2001 as compared to 7.58%
during the third quarter of 2000. In addition, the Company reduced its exposure
to securitization cost amortization as total capitalized securitization costs
were 61 basis points of outstanding CMO collateral at September 30, 2001 as
compared to 133 basis points of outstanding CMO collateral at September 30,
2000. Securitization costs are incurred when CMOs are issued and amortized to
interest expense over the estimated lives of the mortgage loans.
Interest expense on reverse repurchase agreements used to fund the
acquisition of mortgage loans and finance receivables decreased 34% to $7.7
million during the third quarter of 2001 as compared to $11.7 million during the
third quarter of 2000 as average reverse repurchase agreements increased 6% to
$633.2 million as compared to $598.3 million, respectively. The decrease in
interest expense on reverse repurchase agreements was primarily the result of a
reduction in short-term interest rates by the Federal Reserve Bank, which
decreased the weighted average yield on reverse repurchase agreements to 4.86%
during the third quarter of 2001 as compared to 7.81% during the third quarter
of 2000.
The Company also uses mortgage-backed securities as collateral to borrow
and fund the purchase of mortgage assets and to act as an additional source of
liquidity for the Company's operations. Interest expense on borrowings secured
by investment securities decreased 19% to $620,000 during the third quarter of
2001 as compared to $765,000 during the third quarter of 2000 as the average
balance on these borrowings decreased 35% to $16.2 million as compared to $25.0
million, respectively. The weighted average yield of these borrowings increased
to 15.32% during the third quarter of 2001 as compared 12.23% during the third
quarter of 2000 primarily as the Company re-securitized a portion of its
investment securities portfolio with long-term financing at a higher interest
rate, as opposed to short-term reverse repurchase financing which are subject to
margin calls. The Company did not have short-term reverse repurchase financing
collateralized by investment securities outstanding at September 30, 2001.
Provision for Loan Losses
The Company's total allowance for loan losses expressed as a percentage of
Gross Loan Receivables, which includes loans held-for-investment, CMO collateral
and finance receivables, increased to 0.35% at September 30, 2001 as compared to
0.28% at December 31, 2000. During the third quarter of 2001, the Company added
provision for loan losses of $2.6 million as compared to $1.2 million during the
third quarter of 2000, which increased the allowance for loan losses by 55% to
$7.9 million as of September 30, 2001 as compared to $5.1 million as of December
31, 2000. The Company recorded net charge-offs of $2.5 million during the third
quarter of 2001 as the Company continued to liquidate its non-performing
mortgage loans that remained from previously collapsed CMO collateral. Total
non-performing loans, including 90 days past due, foreclosures and other real
estate owned increased to 2.53% of total assets at September 30, 2001 as
compared to 2.30% of total assets at December 31, 2000. The loan delinquency
rate of mortgages in the long-term investment portfolio which were 60 or more
days past due, inclusive of foreclosures and delinquent bankruptcies, decreased
to 4.15% at September 30, 2001 as compared to 5.11% at December 31, 2000. The
unpaid principal balance of mortgage loans in the long-term investment portfolio
at September 30, 2001 was $1.7 billion as compared to $1.3 billion at December
31, 2000.
Non-Interest Income
During the third quarter of 2001, non-interest income was $4.4 million as
compared to $886,000 during the third quarter of 2000. Non-interest income
includes equity in net earnings (loss) of IFC and other non-interest income,
23
primarily loan servicing fees and fees associated with the Warehouse Lending
Operations. The increase in non-interest income was primarily due to an increase
of $2.9 million in equity in net earnings (loss) of IFC to $3.0 million during
the third quarter of 2001 as compared to $143,000 during the third quarter of
2000. IFC's net earnings increased primarily as a result of an increase of $8.6
million in gain on sale of loans. The Company records 99% of the earnings or
losses from IFC as the Company owns 100% of IFC's preferred stock, which
represents 99% of the economic interest in IFC. Refer to "Results of
Operations--Impac Funding Corporation" for additional information regarding
operating results of IFC. In addition, loan servicing fees and other income
increased to $1.3 million during the third quarter of 2001 as compared to
$743,000 during the third quarter of 2000 as volume on non-affiliate warehouse
lines increased as a result of increased line usage and the addition of new
customers.
Non-Interest Expense
During the third quarter of 2001, non-interest expense increased to $4.8
million as compared to $1.7 million during the third quarter of 2000. Excluding
write-down on investment securities and mark-to-market loss as a result of SFAS
133, non-interest expense decreased to $732,000 during the third quarter of 2001
as compared to $1.5 million during the third quarter of 2000. This decrease was
primarily the result of a $1.0 million decrease in disposition of other real
estate owned to a gain of $619,000 during the third quarter of 2001 as compared
to a loss on disposition real estate owned of $369,000 during the third quarter
of 2000.
RESULTS OF OPERATIONS-- IMPAC FUNDING CORPORATION
For the Three Months Ended September 30, 2001 as compared to the Three
Months Ended September 30, 2000
Results of Operations
Net earnings increased to $3.1 million during the third quarter of 2001 as
compared to $144,000 during the third quarter of 2000. The increase in net
earnings was primarily the result of an $8.6 million increase in gain on sale of
loans and a $1.3 million increase in net interest income. The increase in gain
on sale of loans was the result of selling and securitizing a larger volume of
loans at increased profit margins as well as selling the corresponding mortgage
servicing rights on REMIC and CMO securitizations. The increase in net interest
income was the result of a 50 basis point decrease in the index used to price
warehouse borrowings and a reduction of short-term interest rates.
Loan acquisitions and originations by the Mortgage Operations increased 39%
to $828.3 million during the third quarter of 2001 as compared to $594.7 million
during the third quarter of 2000. Loan production during the third quarter of
2001 was driven by lower interest rates, niche Alt-A loan programs offered to
correspondent and wholesale customers and IDASL, the Company's web-based
automated underwriting system, which enhances the origination process. IDASL
stands for Impac Direct Access System for Lending and can be viewed on the
Company's website at www.impaccompanies.com.
LOAN PRODUCTION SUMMARY
(in thousands)
For the Three Months
Ended September 30,
--------------------------
2001 2000
------- -------
Balance % Balance %
------- - ------- -
Volume by Product (excludes premiums paid):
Fixed rate ......................................... $335,256 41 $417,459 72
Adjustable rate .................................... 470,176 58 147,717 25
Second trust deeds ................................. 10,083 1 19,129 3
-------- --------
Total Loan Production ............................ $815,515 $584,305
======== ========
Volume by Business Line (excludes premiums paid):
Correspondent acquisitions ......................... $606,905 74 $481,882 83
Wholesale and retail originations .................. 188,629 23 94,935 16
Novelle Financial Services ......................... 19,981 3 --
Bulk acquisitions .................................. -- 7,488 1
-------- --------
Total Loan Production ............................ $815,515 $584,305
======== ========
Volume by Purpose (excludes premiums paid):
Purchase ........................................... $531,935 65 $494,801 85
Refinance .......................................... 283,580 35 89,504 15
-------- --------
Total Loan Production ............................ $815,515 $584,305
======== ========
Volume by Prepayment Penalty (excludes premiums paid):
With prepayment penalty ............................ $515,814 63 $344,787 59
Without prepayment penalty ......................... 299,701 37 239,518 41
-------- --------
Total Loan Production ............................ $815,515 $584,305
======== ========
24
Net Interest Income
Net interest income increased to $940,000 during the third quarter of 2001
as compared to net interest expense of $325,000 during the third quarter of
2000. The increase in net interest income was the result of a decrease in the
interest rate spread to Prime, which was reduced from Prime to Prime minus 50
basis points during the first quarter of 2001, and the decrease in short-term
interest rates. Average Prime decreased to 6.58% during the third quarter of
2001 as compared to 9.00% during the third quarter of 2000.
Non-Interest Income
During the third quarter of 2001, non-interest income increased to $13.1
million as compared to $6.3 million during the third quarter of 2000. The
increase was primarily due to an $8.6 million increase in gain on sale of loans
as a result of selling and securitizing a larger volume of loans, on a servicing
released basis, at more favorable profit margins than during the third quarter
of 2000. During the third quarter of 2001, IFC securitized $407.9 million of
mortgages contributing to a gain on sale of $12.4 million as compared to $344.7
million and $3.8 million, respectively, during the third quarter of 2000. IFC
sold loans on a servicing released basis during the third quarter of 2001 as
compared to loan sales on a servicing retained basis during the third quarter of
2000. The Mortgage Operations anticipates that it will continue to sell related
loan servicing rights from the securitization of its loans and will continue to
act as master servicer on all its securitizations. IFC completed two REMICs
during the third quarter of 2001 and anticipates completing two REMICs during
the fourth quarter of 2001. By securitizing loans more frequently, less capital
is required, higher liquidity is maintained and less interest rate and price
volatility during the mortgage loan accumulation period results.
Non-Interest Expense
During the third quarter of 2001, non-interest expense increased to $8.7
million as compared to $5.7 million during the third quarter of 2000. Personnel
expense accounted for the primary increase in non-interest expense during the
third quarter of 2001 as it increased 71% to $4.1 million as compared to $2.4
million during the third quarter of 2000. Staff in the conduit and wholesale
lending operations rose to 251 employees at September 30, 2001 as compared to
194 employees at September 30, 2000 as the Mortgage Operations increased
personnel to handle the increase in loan volume. Total staff at the Mortgage
Operations at September 30, 2001 was 326 employees, which includes 75 employees
at NFS that were compensated during September 2001, the first month of
operations. Personnel expense also increased during the third quarter of 2001 as
executive bonus compensation was paid as profitability goals were met as
compared to no executive bonus compensation paid during the third quarter of
2000.
Effect of SFAS 133
As part of IFC's secondary marketing activities, IFC utilizes options and
futures contracts to hedge the value of its mortgage pipeline against adverse
changes in interest rates. IFC did not experience any material impact during the
third quarter of 2001 related to the adoption of SFAS 133 in its mortgage
pipeline hedging activities. IFC does not hedge mortgage servicing rights,
however, valuation changes in mortgage servicing rights continue to be recorded
against current earnings. Net earnings in the future will experience some level
of volatility from quarter to quarter due to the timing and expense recognition
of hedge activity by IFC as a result of implementation of SFAS 133.
25
RESULTS OF OPERATIONS--IMPAC MORTGAGE HOLDINGS, INC.
For the Nine Months Ended September 30, 2001 as compared to the Nine Months
Ended September 30, 2000
Results of Operations
Reported net earnings per GAAP increased to $18.2 million, or $0.87 per
diluted common share, for the first nine months of 2001 as compared to a net
loss of $(57.9) million, or $(2.82) per diluted common share, for the same
period of 2000. Net earnings increased during the first nine months of 2001 as
the Company recorded non-cash, non-recurring accounting charges ("accounting
charges") of $68.9 million during the first nine months of 2000. Of the $68.9
million accounting charges the Company recognized during the first nine months
of 2000, $52.6 million was related to write-downs on investment securities
available-for-sale and $14.5 million was provided for additional increases in
the Company's allowance for loan losses related to its high loan-to-value second
trust deed portfolio.
Net earnings were also positively affected by a $13.7 million increase in
net interest income, a $7.2 million decrease in provision for loan losses and an
$8.8 million increase in equity in net earnings of IFC. The increases to net
earnings were partially offset by a $4.3 million transition adjustment as a
result of implementation of SFAS 133, a $3.7 million mark-to-market loss
recorded on derivative instruments, a $1.9 million write-down on investment
securities available-for-sale and a $1.0 million extraordinary item that
resulted from the write-off of discounts from the retirement of senior
subordinated debt.
Net interest income increased to $30.8 million during the first nine months
of 2001 as compared to $17.1 million during the same period of 2000 as the
Federal Reserve Bank reduced short-term interest rates during 2001, which
significantly reduced the Company's financing costs on CMO borrowings. The yield
on CMO financing costs decreased 143 basis points to 5.81% during the first nine
months of 2001 as compared to 7.24% during the same period of 2000.
Additionally, net interest income increased as average Mortgage Assets increased
11% to $2.0 billion during the first nine months of 2001 as compared to $1.8
billion during the same period of 2000. Average Mortgage Assets increased as the
Long-Term Investment Operations acquired $922.4 million of primarily ARMs
secured by first liens on residential property from the Mortgage Operations
during the first nine months of 2001 as compared to $282.3 million of mortgages
acquired during the same period in 2000. The increased acquisition of mortgages
during the first nine months of 2001 resulted in average CMO collateral of $1.4
billion during the first nine months of 2001 as compared to $1.2 billion during
the same period of 2000.
Equity in net earnings of IFC increased to $7.9 million during the first
nine months of 2001 as compared to a net loss of $(937,000) during the same
period of 2000. Net earnings of IFC increased primarily as a result of an
increase in gain on sale of loans to $32.9 million during the first nine months
of 2001 as compared to $13.2 million during the same period of 2000. Refer to
"Result of Operations--Impac Funding Corporation" for additional information
regarding operating results of IFC.
During the first nine months of 2001, the Company recognized a transition
adjustment of $4.3 million as a result of implementing SFAS 133 and a cumulative
loss to earnings of $3.7 million as a fair market valuation of derivative
instruments. During the first nine months of 2001, the effect of the fair market
valuation loss was $3.7 million as compared to $3.4 million of amortization of
interest rate cap costs, which prior to SFAS 133, would have been recorded as
interest expense. Since the implementation of SFAS 133, net interest margins do
not reflect the amortization of interest rate cap costs.
Core Operating Earnings. Core operating earnings increased 115% to $25.8
million, or $0.96 per diluted common share, for the first nine months of 2001 as
compared to core operating earnings of $12.0 million, or $0.43 per diluted
common share, for the same period of 2000. Core operating earnings during the
first nine months of 2001 excludes the cumulative effects of change in
accounting principle of $4.3 million as a result of SFAS 133, the cumulative
effect of a $3.7 million mark-to-market loss on derivative instruments, a $1.9
million write-down on investment securities available-for-sale and a $1.0
million extraordinary item. Core operating earnings during the first nine months
of 2000 excludes write-down on investment securities of $53.6 million, excess
loan loss provisions to charge-off primarily high loan to value second trust
deeds of $14.5 million and a $1.8 million tax effected write-down of investment
securities owned by IFC and write-off of bank related expenses capitalized by
IFC.
26
RECONCILATION OF REPORTABLE EARNINGS TO CORE OPERATING EARNINGS
(in thousands, expect per share amounts)
For the Nine Months
Ended September 30,
-----------------------
2001 2000
-------- --------
Reportable net earnings .................................................... $ 18,217 $(57,909)
Add:
Mark-to-market loss - FAS 133 ........................................... 3,713 --
Write-down on investment securities available-for-sale .................. 1,949 53,576
Cumulative effect of change in accounting principle ..................... 4,313 --
Extraordinary item ...................................................... 1,006 --
Excess loan loss provision to allow for charge-off of primarily
high loan to value second trust deeds ................................. -- 14,499
Tax effected write-down of investment securities owned by IFC and
bank related expenses capitalized by IFC .............................. -- 1,836
Less:
Amortization of costs associated with the acquisition
of hedging instruments not included in interest expense
due to the implementation of SFAS 133 .................................. (3,366) --
-------- --------
Core operating earnings .................................................... $ 25,832 $ 12,002
======== ========
Core operating earnings per share .......................................... $ 0.96 $ 0.43
======== ========
Diluted weighted average shares outstanding used for
calculation of core earnings per share .................................. 26,967 27,757
======== ========
Taxable Earnings. Estimated taxable earnings increased to $27.7 million, or
$1.03 per diluted share, for the first nine months of 2001 as compared to
estimated taxable earnings of $2.1 million, or $0.08 per diluted share, for the
same period of 2000.
Net Interest Income
Net interest income increased 80% to $30.8 million during the first nine
months of 2001 as compared to $17.1 million during the same period of 2000. Net
interest income increased as a result of decreased borrowing costs and wider net
interest margins as interest rates on adjustable CMO borrowings declined due to
short-term interest rate reductions by the Federal Reserve Bank. However, in
anticipation of the likelihood that short-term interest rates may rise sometime
in the future, the Company purchased interest rate sensitive financial
instruments during the first nine months of 2001 to mitigate possible adverse
changes in net interest margins.
During the first nine months of 2001, net interest income increased as net
interest margins on Mortgage Assets increased to 1.95% as compared to 1.24%
during the same period of 2000. Net interest margins on Mortgage Assets
increased during the first nine months of 2001 primarily as a result of average
CMO borrowing costs decreasing 143 basis points to 5.81% as compared to 7.24%
during the same period of 2000. Borrowing costs on CMO financing continued to
trend lower as interest rate reductions by the Federal Reserve Bank during the
first nine months of 2001 improved net interest margins. Because a significant
portion of CMO collateral includes prepayment penalties, the effect of early
prepayments on net interest income due to refinance activity will be partially
mitigated.
Net interest income also increased as average Mortgage Assets increased 11%
to $2.0 billion during the first nine months of 2001 as compared to $1.8 billion
during the first nine months of 2000. The increase in Mortgage Assets was
primarily the result of a $247.5 million increase in average CMO collateral and
mortgage loans held-for investment. CMO collateral and mortgage loans held-for
investment increased during the first nine months of 2001 as the Company
acquired $922.4 million of primarily ARMs from the Mortgage Operations as
compared to $282.3 million during the same period of 2000.
The following table summarizes average balance, interest and weighted
average yield on Mortgage Assets and borrowings on Mortgage Assets for the first
nine months of 2001 and 2000 and includes interest income on Mortgage Assets and
interest expense related to borrowings on Mortgage Assets only (dollars in
thousands):
27
For the Nine Months For the Nine Months
Ended September 30, 2001 Ended September 30, 2000
--------------------------------------- ----------------------------------------
Average Wtd Avg Average Wtd Avg
Balance Interest Yield Balance Interest Yield
--------------------------------------- -----------------------------------------
MORTGAGE ASSETS
---------------
Investment securities:
Securities collateralized by mortgages ...... $ 34,181 $ 2,997 11.69% $ 63,839 $ 6,020 12.57%
Securities collateralized by other loans .... -- -- 3,817 273 9.54
------------------------ ------------------------
Total investment securities ................. 34,181 2,997 11.69 67,656 6,293 12.40
------------------------ ------------------------
Loan receivables:
CMO collateral .............................. 1,387,641 77,540 7.45 1,197,580 63,149 7.03
Mortgage loans held-for-investment .......... 154,678 7,115 6.13 97,196 5,514 7.56
Finance receivables:
Affiliated ................................. 262,002 14,809 7.54 264,084 19,591 9.89
Non-affiliated ............................. 191,563 11,696 8.14 130,489 10,346 10.57
------------------------ ------------------------
Total finance receivables ................. 453,565 26,505 7.79 394,573 29,937 10.12
------------------------ ------------------------
Total Loan receivables ................. 1,995,884 111,160 7.43 1,689,349 98,600 7.78
------------------------ ------------------------
Total Mortgage Assets ....................... $2,030,065 $114,157 7.50% $1,757,005 $104,893 7.96%
======================== ========================
Total Mortgage Assets
BORROWINGS
----------
CMO borrowings .............................. $1,309,069 $ 57,016 5.81% $1,096,430 $ 59,548 7.24%
Reverse repurchase agreements - mortgages ... 578,021 25,485 5.88 469,649 26,518 7.53
Borrowings secured by investment securities . 18,219 1,958 14.33 27,605 2,457 11.87
------------------------ ------------------------
Total Borrowings on Mortgage Assets ......... $1,905,309 $ 84,459 5.91% $1,593,684 $ 88,523 7.41%
======================== ========================
Net Interest Spread (1) 1.59% 0.55%
Net Interest Margin (2) 1.95% 1.24%
(1) Net interest spread is calculated by subtracting the weighted average yield
on total borrowings on Mortgage Assets from the weighted average yield on total
Mortgage Assets.
(2) Net interest margin is calculated by subtracting interest expense on total
borrowings on Mortgage Assets from interest income on total Mortgage Assets and
then dividing by the total average balance for Mortgage Assets.
Interest Income on Mortgage Assets
Interest income on CMO collateral increased 23% to $77.5 million during the
first nine months of 2001 as compared to $63.1 million during the first nine
months of 2000 as average CMO collateral increased 17% to $1.4 billion as
compared to $1.2 billion, respectively. Interest income on CMO collateral
increased primarily as the Company issued two CMOs for $758.3 million during the
first nine months of 2001. During the first nine months of 2001, CPR on CMO
collateral increased to 33% as compared to 27% during the first nine months of
2000. Although interest rates continued to decrease during the first nine months
of 2001, an increase in loans acquired from the Mortgage Operations with
prepayment penalties should partially mitigate increased CPR and corresponding
premium amortization. In addition, the Company reduced its exposure to premium
amortization as total capitalized premiums were 159 basis points of outstanding
CMO collateral at September 30, 2001 as compared to 217 basis points of
outstanding CMO collateral at September 30, 2000. The weighted average yield on
CMO collateral increased to 7.45% during the first nine months of 2001 as
compared to 7.03% during the first nine months of 2000.
Interest income on mortgage loans held-for-investment increased 29% to $7.1
million during the first nine months of 2001 as compared to $5.5 million during
the first nine months of 2000 as average mortgage loans held-for-investment
increased 59% to $154.7 million as compared to $97.2 million, respectively. The
Long-Term Investment Operations acquired $922.4 million of mortgages during the
first nine months of 2001 as compared to $282.3 million of mortgages during the
first nine months of 2000. The weighted average yield on mortgage loans
held-for-investment decreased to 6.13% during the first nine months of 2001 as
compared to 7.56% during the first nine months of 2000 as
28
mortgage interest rates declined during the first nine months of 2001 and
non-performing mortgage loans remained from previously collapsed CMO collateral.
Interest income on total finance receivables decreased 11% to $26.5 million
during the first nine months of 2001 as compared to $29.9 million during the
first nine months of 2000 as average total finance receivables increased 15% to
$453.6 million as compared to $394.6 million, respectively. The weighted average
yield on total finance receivables decreased to 7.79% during the first nine
months of 2001 as compared to 10.12% during the first nine months of 2000. The
decrease in yield was primarily due to a reduction in Prime and a 50 basis point
decrease in the spread indexed to Prime on warehouse lines made available to
affiliates by the Warehouse Lending Operations.
Interest income on finance receivables to affiliates decreased 24% to $14.8
million during the first nine months of 2001 as compared to $19.6 million during
the first nine months of 2000 as average finance receivables to affiliated
companies decreased $262.0 million as compared to $264.1 million, respectively.
The decrease in average affiliate finance receivables was primarily due to
accelerated securitizations during the first nine months of 2001. The weighted
average yield on affiliated finance receivables decreased to 7.54% during the
first nine months of 2001 as compared to 9.89% during the first nine months of
2000 primarily due to a decrease in Prime and a 50 basis point decrease in the
spread indexed to Prime on warehouse lines with the Warehouse Lending
Operations.
Interest income on finance receivables to non-affiliated mortgage banking
companies increased 14% to $11.7 million during the first nine months of 2001 as
compared to $10.3 million during the first nine months of 2000 as average
finance receivables outstanding to non-affiliated mortgage banking companies
increased 47% to $191.6 million as compared to $130.5 million, respectively.
Average finance receivables to non-affiliates increased during the first nine
months of 2001 primarily due to increased usage of short-term warehouse lines of
credit and the addition of new customers. The weighted average yield on
non-affiliated finance receivables decreased to 8.14% during the first nine
months of 2001 as compared to 10.57% during the first nine months of 2000
primarily due to the aforementioned decrease in Prime.
Interest income on investment securities decreased 52% to $3.0 million
during the first nine months of 2001 as compared to $6.3 million during the
first nine months of 2000 as average investment securities decreased 49% to
$34.2 million as compared to $67.7 million, respectively. Average investment
securities decreased as the Company wrote-off $52.6 million of investment
securities during the first half of 2000. The weighted average yield on
investment securities decreased to 11.69% during the first nine months of 2001
as compared to 12.40% during the first nine months of 2000 as primarily
non-Impac investment securities were written-off during the first half of 2000.
Interest Expense on Mortgage Assets
Interest expense on CMO borrowings decreased 4% to $57.0 million during the
first nine months of 2001 as compared to $59.5 million during the first nine
months of 2000 as average borrowings on CMO collateral increased 18% to $1.3
billion as compared to $1.1 billion, respectively. The decrease in interest
expense on CMO borrowings was primarily attributable to the reduction in
short-term interest rates by the Federal Reserve Bank during the nine months of
2001. As a result, one-month LIBOR, which is the index used to re-price the
Company's adjustable-rate CMO borrowings, decreased to an average of 4.45%
during the first nine months of 2001 as compared to 6.33% during the first nine
months of 2000. Short-term interest rate reductions caused CMO borrowing costs
to decrease 143 basis points to 5.81% during the first nine months of 2001 as
compared to 7.24% during the first nine months of 2000. In addition, the Company
reduced its exposure to securitization cost amortization as total capitalized
securitization costs were 61 basis points of outstanding CMO collateral at
September 30, 2001 as compared to 133 basis points of outstanding CMO collateral
at September 30, 2000. Securitization costs are incurred when CMOs are issued
and amortized to interest expense over the estimated lives of the mortgage
loans.
Interest expense on reverse repurchase agreements decreased 4% to $25.5
million during the first nine months of 2001 as compared to $26.5 million during
the first nine months of 2000 as average reverse repurchase agreements increased
23% to $578.0 million as compared to $469.6 million, respectively. The decrease
in interest expense on reverse repurchase agreements was primarily the result of
a decrease in short-term interest rates, which was partially offset by an
increase in average non-affiliate finance receivables as the Warehouse Lending
Operations added customers during the first nine months of 2001. The weighted
average yield on reverse repurchase agreements decreased to 5.88% during the
first nine months of 2001 as compared 7.53% during the first nine months of 2000
as a result of short-term interest rate reductions.
29
Interest expense on borrowings secured by investment securities decreased
20% to $2.0 million during the first nine months of 2001 as compared to $2.5
million during the first nine months of 2000 as the average balance on these
borrowings decreased 34% to $18.2 million as compared to $27.6 million,
respectively. The weighted average yield of these borrowings increased to 14.33%
during the first nine months of 2001 as compared 11.87% during the first nine
months of 2000 primarily as the Company re-securitized a portion of its
investment securities portfolio with long-term financing at a higher interest
rate, as opposed to short-term reverse repurchase financing which are subject to
margin calls. The Company did not have short-term reverse repurchase financing
collateralized by investment securities outstanding at September 30, 2001.
Provision for Loan Losses
During the first nine months of 2001, the Company added provision for loan
losses of $10.6 million as compared to $17.7 million during the first nine
months of 2000 as the Company added $14.5 million during the first nine months
of 2000 to provide for higher than expected delinquencies and losses in the HLTV
portfolio. Excluding additional loan loss provisions for the HLTV portfolio,
provision for loan losses increased to $10.6 million during the first nine
months of 2001 as compared to $3.2 million during the same period of 2000. The
Company recorded net charge-offs of $7.7 million during the first nine months as
compared to $12.9 million during the same period of 2000. During the first nine
months of 2001, the Company continued to liquidate its non-performing mortgage
loans that remained from previously collapsed CMO collateral.
Non-Interest Income
During the first nine months of 2001, non-interest income was $11.3 million
as compared to $1.2 million during the first nine months of 2000. Non-interest
income includes equity in net earnings (loss) of IFC and other non-interest
income, primarily loan servicing fees and fees associated with the Warehouse
Lending Operations. The increase in non-interest income was primarily due to an
increase of $8.8 million in equity in net earnings (loss) of IFC to $7.9 million
during the first nine months of 2001 from $(937,000) during the first nine
months of 2000. IFC's net earnings increased primarily as a result of an
increase of $19.8 million in gain on sale of loans. The Company records 99% of
the earnings or losses from IFC as the Company owns 100% of IFC's preferred
stock, which represents 99% of the economic interest in IFC. Refer to "Results
of Operations--Impac Funding Corporation" for additional information regarding
the operating results of IFC.
Non-Interest Expense
During the first nine months of 2001, non-interest expense decreased to
$8.0 million as compared to $58.5 million during the first nine months of 2000.
Excluding write-down on investment securities and mark-to-market loss as a
result of SFAS 133, non-interest expense decreased to $2.3 million during the
first nine months of 2001 as compared to $4.9 million during the first nine
months of 2000. This decrease was primarily the result of a $3.3 million
decrease in disposition of other real estate owned to a gain of $1.6 million
during the first nine months of 2001 as compared to loss on disposition of other
real estate owned of $1.7 million during the first nine months of 2000.
RESULTS OF OPERATIONS-- IMPAC FUNDING CORPORATION
For the Nine Months Ended September 30, 2001 as compared to the Nine Months
Ended September 30, 2000
Results of Operations
Net earnings increased to $7.9 million during the first nine months of 2001
as compared to a net loss of $(949,000) during the first nine months of 2000.
The increase in net earnings was primarily the result of a $19.8 million
increase in gain on sale of loans and a $2.7 million increase in net interest
income. The increase in gain on sale of loans was the result of selling and
securitizing a larger volume of loans at increased profit margins as well as
selling the corresponding mortgage servicing rights on REMIC and CMO
securitizations. The increase in net interest income was the result of a 50
basis point decrease in the index used to price warehouse borrowings and a
reduction of short-term interest rates.
Loan acquisitions and originations by the Mortgage Operations increased 47%
to $2.2 billion during the first nine months of 2001 as compared to $1.5 billion
during the same period of 2000. Loan production during the first nine
30
months of 2001 was driven by lower interest rates, niche Alt-A loan programs
offered to correspondent and wholesale customers and IDASL.
LOAN PRODUCTION SUMMARY
(in thousands)
For the Nine Months
Ended September 30,
-----------------------------------------
2001 2000
----------------- -----------------
Balance % Balance %
------- - ------- -
Volume by Product (excludes premiums paid):
Fixed rate ................................................... $1,169,007 54 $1,004,849 69
Adjustable rate .............................................. 978,666 45 418,595 29
Second trust deeds ........................................... 29,879 1 34,150 2
---------- ----------
Total Loan Production ...................................... $2,177,552 $1,457,594
========== ==========
Volume by Business Line (excludes premiums paid):
Correspondent acquisitions ................................... $1,667,374 77 $1,211,365 83
Wholesale and retail originations ............................ 490,197 22 174,946 12
Novelle Financial Services ................................... 19,981 1 -- 0
Bulk acquisitions ............................................ -- 0 71,283 5
---------- ----------
Total Loan Production ...................................... $2,177,552 $1,457,594
========== ==========
Volume by Purpose (excludes premiums paid):
Purchase ..................................................... $1,373,171 63 $1,201,725 82
Refinance .................................................... 804,381 37 255,869 18
---------- ----------
Total Loan Production ...................................... $2,177,552 $1,457,594
========== ==========
Volume by Prepayment Penalty (excludes premiums paid):
With prepayment penalty ...................................... $1,407,519 65 $ 719,967 49
Without prepayment penalty ................................... 770,033 35 737,627 51
---------- ----------
Total Loan Production ...................................... $2,177,552 $1,457,594
========== ==========
Net Interest Income
Net interest income increased to $1.7 million during the first nine months
of 2001 as compared to net interest expense of $947,000 during the same period
of 2000. The increase in net interest income was the result of a decrease in the
interest rate spread to Prime, which was reduced from Prime to Prime minus 50
basis points during the first quarter of 2001, and the decrease of short-term
interest rates. Average Prime decreased to 7.51% during the first nine months of
2001 as compared to 9.14% during the same period of 2000.
Non-Interest Income
During the first nine months of 2001, non-interest income increased to
$35.6 million as compared to $18.6 million during the same period of 2000. The
increase was primarily due to an $19.8 million increase in gain on sale of loans
as a result of selling and securitizing a larger volume of loans, on a servicing
released basis, at more favorable profit margins than during the first nine
months of 2000. During the first nine months of 2001, IFC securitized $1.3
billion of mortgages contributing to a gain on sale of $32.9 million as compared
to $885.9 million and $13.2 million, respectively, during the same period of
2000. IFC sold loans on a servicing released basis during the first nine months
of 2001 as compared to loan sales on a servicing retained basis during the same
period of 2000.
Non-Interest Expense
During the first nine months of 2001, non-interest expense increased to
$23.5 million as compared to $19.3 million during the same period of 2000.
Excluding write-down on investment securities and write-off of capitalized bank
related costs recorded during the first nine months of 2000, non-interest
expense increased 33% to $23.5 million during the first nine months of 2001 as
compared to $17.7 million during the first nine months of 2000. Personnel
expense accounted for the primary increase in non-interest expense during the
first nine months of 2001 as it increased 54% to $10.8 million as compared to
$7.0 million during the same period of 2000. Personnel expense increased as
staffing rose to handle the increase in loan production. Personnel expense also
increased during the first
31
nine months of 2001 as executive bonus compensation was paid as profitability
goals were met as compared to no executive bonus compensation paid during the
first nine months of 2000.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Historically, the Company's business operations are primarily funded from
monthly interest and principal payments from its mortgage loan and investment
securities portfolios, adjustable- and fixed-rate CMO financing, reverse
repurchase agreements secured by mortgage loans, borrowings secured by
mortgage-backed securities, proceeds from the sale of mortgage loans and the
issuance of REMICs and proceeds from the issuance of common stock. The
acquisition of mortgage loans and mortgage-backed securities by the Long-Term
Investment Operations are primarily funded from monthly principal and interest
payments, reverse repurchase agreements, CMO financing, and proceeds from the
sale of common stock. The issuance of CMO financing provides the Long-Term
Investment Operations with immediate liquidity, a relatively stable interest
rate spread and eliminates the Company's exposure to margin calls on such loans.
The acquisition of mortgage loans by the Mortgage Operations are funded from
reverse repurchase agreements, the sale of mortgage loans and mortgage-backed
securities and the issuance of REMICs. Short-term warehouse financing provided
by the Warehouse Lending Operations are primarily funded from reverse repurchase
agreements.
The Company's ability to meet its long-term liquidity requirements is
subject to the renewal of its credit and repurchase facilities and/or obtaining
other sources of financing, including additional debt or equity from time to
time. Any decision by the Company's lenders and/or investors to make additional
funds available to the Company in the future will depend upon a number of
factors, such as the Company's compliance with the terms of its existing credit
arrangements, the Company's financial performance, industry and market trends in
the Company's various businesses, the general availability of and rates
applicable to financing and investments, such lenders' and/or investors' own
resources and policies concerning loans and investments, and the relative
attractiveness of alternative investment or lending opportunities. The Company
believes that current liquidity levels, available financing facilities, proceeds
from the issuance of common stock, and liquidity provided by operating
activities will adequately provide for projected funding needs, asset growth and
the payment of dividends for the near term. The Company is continuously
exploring alternatives for increasing liquidity and monitors current and future
cash requirements through its asset/liability committee ("ALCO"). However, no
assurances can be given that such alternatives will be available, or if
available, under comparable rates and terms as currently exist.
Long-Term Investment Operations
Primary Source of Funds
The Long-Term Investment Operations uses CMO borrowings and reverse
repurchase agreements to finance substantially its entire mortgage loan
portfolio. As the Long-Term Investment Operations accumulates mortgage loans in
its long-term investment portfolio, the Company may issue CMOs secured by such
loans as a means of financing its Long-Term Investment Operations. The decision
to issue CMOs is based on the Company's current and future investment needs,
market conditions and other factors. Each issue of CMOs is fully payable from
the principal and interest payments on the underlying mortgage loans
collateralizing such debt, any cash or other collateral required to be pledged
as a condition to receiving the desired rating on the debt, and any investment
income on such collateral. The maturity of each CMO class is directly affected
by the rate of principal prepayments on the related collateral. Equity in the
CMOs is established at the time the CMOs are issued at levels sufficient to
achieve desired credit ratings on the securities from rating agencies. The
amount of equity invested in CMOs by the Long-Term Investment Operations is also
determined by the Company based upon the anticipated return on equity as
compared to the estimated proceeds from additional debt issuance. Total credit
loss exposure is limited to the equity invested in the CMOs at any point in
time. For the first nine months of 2001, the Company issued two CMOs for $758.3
million. At September 30, 2001, the Long-Term Investment Operations had $1.6
billion of CMO borrowings used to finance $1.7 billion of CMO collateral.
The Long-Term Investment Operations may pledge mortgage-backed securities as
collateral to borrow funds under short-term reverse repurchase agreements. The
terms under these reverse repurchase agreements are generally for 30 days with
interest rates ranging from the one-month LIBOR plus a spread depending on the
type of collateral
32
provided. As of September 30, 2001, the Long-Term Investment Operations had no
amounts outstanding under short-term reverse repurchase agreements secured by
investment securities.
Primary Use of Funds
During the first nine months of 2001, the Long-Term Investment Operations
acquired $922.4 million in mortgage loans from the Mortgage Operations, retired
$7.7 million of senior subordinated debt and paid preferred dividends of $2.4
million.
Warehouse Lending Operations
Primary Source of Funds
The Warehouse Lending Operations finances the acquisition of mortgage loans
by the Long-Term Investment Operations and Mortgage Operations primarily through
borrowings on reverse repurchase agreements with first party lenders. IWLG has
obtained reverse repurchase facilities from major investment banks to provide
financing as needed. Terms of the reverse repurchase agreements require that the
mortgages be held by an independent first party custodian giving the Warehouse
Lending Operations the ability to borrow against the collateral as a percentage
of the outstanding principal balance. The borrowing rates vary from 85 basis
points to 200 basis points over one-month LIBOR, depending on the type of
collateral provided. The advance rates on the reverse repurchase agreements are
based on the type of mortgage collateral used and generally range from 75% to
101% of the fair market value of the collateral. At September 30, 2001, the
Warehouse Lending Operations had $598.2 million outstanding on uncommitted
reverse repurchase agreements at a rate of one-month LIBOR plus 0.85% to 2.00%.
Primary Use of Funds
During the first nine months of 2001, the Warehouse Lending Operations
increased outstanding finance receivables by $59.7 million.
Mortgage Operations
Primary Source of Funds
The Mortgage Operations has entered into reverse repurchase agreements to
obtain financing of up to $600.0 million from the Warehouse Lending Operations
to provide IFC mortgage loan financing during the period that mortgage loans are
accumulated and until the mortgage loans are securitized and/or sold. The
margins on the reverse repurchase agreements are based on the type of collateral
provided and generally range from 95% to 100% of the fair market value of the
collateral. Interest rates on the borrowings are indexed to Prime, which was
6.00% at September 30, 2001, minus 50 basis points. At September 30, 2001, the
Mortgage Operations had $234.8 million outstanding under reverse repurchase
agreements.
During the first nine months of 2001, the Mortgage Operations sold $29.3
million in principal balance of primarily FRMs to first party investors. In
addition, IFC sold $922.4 million of primarily ARMs to the Long-Term Investment
Operations during the first nine months of 2001. Since the fourth quarter of
2000, the Mortgage Operations accelerated the frequency of REMIC securitizations
to two per quarter. By securitizing loans more frequently, less capital is
required and higher levels of liquidity are maintained during the mortgage loan
accumulation period. By securitizing and selling loans on a periodic and
consistent basis, reverse repurchase agreements were sufficient to handle
liquidity needs during the nine months ended September 30, 2001.
Primary Use of Funds
During the first nine months of 2001, the Mortgage Operations acquired and
originated $2.2 billion of mortgage loans.
33
Cash Flows
Operating Activities - During the first nine months of 2001, net cash
provided by operating activities was $6.1 million. Net cash was provided as the
Company recorded net earnings of $18.2 million during the first nine months of
2001.
Investing Activities - During the first nine months of 2001, net cash used
in investing activities was $496.4 million. Net cash used in investing
activities was primarily due to $459.0 million increase in CMO collateral and
mortgage loans held-for-investment as the Long-Term Investment Operations
purchased and retained mortgage loans from the Mortgage Operations.
Financing Activities - During the first nine months of 2001, net cash
provided by financing activities was $490.3 million. Net cash provided by
financing activities was primarily the result of proceeds from the issuance of
two CMOs for $758.3 million and an increase in reverse repurchase agreements and
other borrowings of $193.5 million. Net cash provided was partially offset by
the repayment of CMO borrowings of $451.6 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.
34
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Securitizations/Sales -- Hedging Interest Rate Risk. The most significant
variable in the determination of gain on sale in a securitization is the spread
between the weighted average coupon on the securitized loans and the
pass-through interest rate. In the interim period between loan origination or
purchase and securitization or sale of such loans, the Company is exposed to
interest rate risk. Most of the loans are securitized or sold within 45 to 90
days of origination of purchase. However, a portion of the loans are
held-for-sale or securitization for as long as 12 months (or longer, in very
limited circumstances) prior to securitization or sale. If interest rates rise
during the period that the mortgage loans are held, in the case of a
securitization, the spread between the weighted average interest rate on the
loans to be securitized and the pass-through interest rates on the securities to
be sold (the latter having increased as a result of market rate movements) would
narrow. Upon securitization or sale, this would result in a reduction of the
Company's related gain or an increase in the Company's loss on sale.
Interest- and Principal-Only Strips. The Company had interest- and
principal-only strips of $5.5 million and $7.7 million outstanding at September
30, 2001 and December 31, 2000, respectively. These instruments are carried at
market value at September 30, 2001 and December 31, 2000. The Company values
these assets based on the present value of future cash flow streams net of
expenses using various assumptions.
These assets are subject to risk of accelerated mortgage prepayment or
losses in excess of assumptions used in valuation. Ultimate cash flows realized
from these assets would be reduced should prepayments or losses exceed
assumptions used in the valuation. Conversely, cash flows realized would be
greater should prepayments or losses be below expectations.
35
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On October 10, 2001 a complaint captioned Hayes v Impac Funding
Corporation, et al was filed in the Circuit Court of Vanderburgh County, Indiana
as case No. 82C01-0110-CP580. This is stated as a purported class action lawsuit
alleging a violation of the Indiana Uniform Consumer Credit code when the loans
were originated. A description of similar litigation purporting class action
lawsuits is reported and incorporated by reference in the Company's Annual
Report on Form 10-K/A for the year ended December 31, 2001 and as filed with the
Securities and Exchange Commission on October 17, 2001.
All of the purported class action lawsuits are similar in nature in that
they allege that the mortgage loan originators violated the respective state's
statutes by charging excessive fees and costs when making second mortgage loans
on residential real estate. The complaints allege that IFC was a purchaser and
was a holder, along with other IMH related entities, of second mortgages loans
originated by other lenders. The plaintiffs in the lawsuits are seeking damages
that include disgorgement, restitution, rescission, actual damages, statutory
damages, and exemplary damages. Damages are unspecified in each of the
complaints. The Company believes that it has meritorious defenses to such claims
and intends to defend these claims vigorously. Nevertheless, litigation is
uncertain and the Company may not prevail in the lawsuits and can express no
opinion as to their ultimate outcome.
The company is a party to litigation and claims, which are normal in the
course of its operations. While the results of such litigation and claims cannot
be predicted with certainty, the Company believes the final outcome of such
matters will not have a material adverse effect on the Company.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 24, 2001, the Company held its annual meeting of stockholders. Of
20,385,456 shares eligible to vote, 19,678,091 votes were returned, or 97%,
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 LLP. Proposal
III - Approval of the Company's 2001 Stock Option, Deferred Stock, and
Restricted Stock Plan.
The results of voting on these proposals are as follows:
Proposal I - Election of Directors:
Director For Against Elected
-------- --- ------- -------
Joseph R. Tomkinson 19,276,556 401,534 Yes
William S. Ashmore 19,286,056 392,034 Yes
James Walsh 19,346,098 331,992 Yes
Frank P. Filipps 19,344,918 333,172 Yes
Stephan R. Peers 19,345,728 332,362 Yes
William E. Rose 19,342,157 335,933 Yes
Leigh J. Abrams 19,350,807 327,283 Yes
All directors are elected annually at the Company's annual stockholders
meeting.
36
Proposal II - Appointment of independent auditors:
Proposal II was approved with 19,531,436 shares voted for, 76,322 voted
against, and 70,330 abstained from voting thereby ratifying the appointment of
KPMG LLP as the Company's independent auditors.
Proposal III - Approval of the Company's 2001 Stock Option, Deferred Stock, and
Restricted Stock Plan:
Proposal III was approved with 17,759,301 shares voted for, 1,613,821 voted
against, and 304,962 abstained from voting thereby approving the Company's 2001
Stock Option, Deferred Stock, and Restricted Stock Plan.
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K:
1. Form 8-K reporting Item 9 filed on July 31, 2001
2. Form 8-K reporting Item 9 filed on August 31, 2001
3. Form 8-K reporting Item 9 filed on September 5, 2001
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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 14 , 2001
38